The Federal Reserve is facing growing internal debate over whether to resume interest rate increases, as the U.S. economy shows resilience and inflation pressures persist. The upcoming congressional testimony by new Fed Chair Kevin Warsh is widely seen as a critical window for assessing the central bank's future policy direction.

Last month, the Federal Open Market Committee unanimously decided to keep the federal funds rate target range unchanged at 3.5% to 3.75%. However, the internal policy consensus is now under significant strain. Several Fed officials have expressed heightened concerns about the inflation outlook and are planning to advocate for putting 'rate hikes' back on the table at the policy meeting scheduled for July 28-29.

This shift in stance among Fed policymakers is driven primarily by the unexpected strength of the U.S. labor market and a change in the nature of inflation. The Fed cut rates three times last year due to concerns about a weakening job market, but recent data indicates the labor market has stabilized significantly. With actual inflation persistently running between 3% and 4%, the Fed's current nominal interest rate, after adjusting for inflation, is near zero or even negative, effectively creating excessive economic stimulus. The Fed's recent semi-annual monetary policy report assessed that current wage growth is broadly consistent with the long-term 2% inflation target. This suggests the primary drivers of current price increases are not originating from the labor market but are instead highly structural and specific in nature.

Neel Kashkari, President of the Minneapolis Fed, noted that most of the Fed's conventional analytical models focus on the labor market to gauge inflation. However, the labor market is not the root cause of inflation this time, creating unprecedented challenges for policy formulation. Analysts widely believe that supply chain disruptions from geopolitical conflicts, the pass-through effects of import tariffs, and a surge of tens of billions of dollars in capital expenditures for artificial intelligence (AI) infrastructure are becoming the dominant factors supporting overall industrial demand and driving inflation higher.

In response to this environment, the internal struggle between 'hawkish' and 'dovish' factions within the Fed is intensifying. Hawkish officials, represented by Fed Governor Christopher Waller, argue that the 'insurance' rate cuts previously taken to guard against unemployment risks are no longer necessary, and policy focus must shift entirely to guarding against inflation risks. New York Fed President John Williams represents a more cautious, moderate stance. He emphasizes that soaring prices for semiconductors and electrical equipment are indeed creating sustained demand pulses. He stated that if the month-over-month growth rate of 'core inflation'—which excludes food and energy—does not fall below 0.2% in the second half of the year, monetary policy will have to respond with tightening. However, if external shocks gradually fade, the current level of interest rates could remain appropriate.

Market analysts generally point out that the upcoming release of the June U.S. Consumer Price Index (CPI) data this Tuesday will provide direct evidence for both sides of the debate. Given the lack of consensus within the Fed on a July rate hike, Chair Kevin Warsh's remarks during his congressional testimony and his defense of the Fed's future policy independence will be crucial for international financial markets to determine a potential turning point in the U.S. monetary policy cycle.