DWS Chief US Economist Christian Scherrmann has shared his outlook ahead of the July Federal Open Market Committee (FOMC) meeting. From a data perspective, he states there is no reason for the FOMC to adjust the policy rate at this meeting. Recent inflation has cooled, supported by lower energy prices and fading tariff impacts, while the labor market has not signaled any wage-driven pressures.

However, inflation still remains above the Federal Reserve's target, and the assumptions for further easing are facing new headwinds. After a brief period of calm, market attention has refocused on upside risks from energy prices and tariffs. Regarding tariffs, following a Supreme Court ruling, authorities are expected to "correct course" by adjusting the legal basis for certain tariffs before the deadline. While this may introduce uncertainty, the average tariff rate should not exceed previous highs, meaning tariff factors could still have a cooling effect on inflation.

The oil price situation is more complex. A recent sharp price surge is reminiscent of the volatility seen during the initial stages of the US-Iran conflict. Therefore, the risk of second-round effects on core inflation has certainly not decreased. The disinflationary impact seen in inflation data over the coming months may also be less pronounced than the more dovish June report suggested.

DWS maintains its existing view: raising interest rates would not help resolve overseas oil supply bottlenecks but would instead pressure the domestic real economy. As Fed Chair Christopher Waller has also noted, the negative economic effects of the current high-interest-rate environment are already becoming apparent to some extent.

Another market concern is the inflationary pressure from AI-related spending. Given AI's small weight in inflation indices, its direct impact on the CPI is likely to be limited. Furthermore, the indirect growth effects from AI are unlikely to trigger wage-driven price pressures, as the widespread adoption of AI is not expected to tighten the labor market. Waller acknowledges that AI spending may increase aggregate demand in the short term, but it is more likely to expand the supply side in the medium term. This is a dovish stance, as short-term economic fine-tuning is no longer appropriate.

With inflation receding and the labor market becoming more balanced, the rationale for a rate hike at this meeting appears weaker than at the previous one. However, the softer justifications based on external factor speculation have clearly strengthened. Acting on conviction seems at odds with Waller's vision for a new Fed that emphasizes greater rationality and analysis.

Nevertheless, Waller has yet to clearly explain how external factors, such as tariffs and energy prices, will influence the Fed's policy response. The July meeting might provide more technical details on this issue. Meanwhile, other Fed officials have been more outspoken, even setting conditions for interest rate policy: to keep rates unchanged, inflation must fall further in the coming months. This also implies a low probability of a rate hike this month.

Overall, DWS expects the Fed to continue its "data-dependent" mode, as indicated by Waller, rather than taking concrete action at this meeting. At the same time, dissenting opinions are anticipated, reflecting a shift in the FOMC's internal atmosphere from discussion toward calls for rate hikes. However, based on current information, the new Fed under Waller's leadership remains difficult to predict, making the "hold steady" judgment carry some risk.