Pies warns against Fed hike as July odds hit 36%

Warren Pies of 3Fourteen Research said the Federal Reserve should not raise interest rates at its July 28-29 meeting, pushing back against a growing minority of traders who now price a 36% probability of a hike, up from 4% on July 16.

"I don't think the Fed should be hiking here," Pies, founder at 3Fourteen Research, said Thursday on CNBC's "Closing Bell Overtime." "The data doesn't support it when you look at what's really driving inflation."

The fed funds rate has sat at its current level since the central bank delivered a quarter-point cut in December 2025, when unemployment stood at 4.4%. Since then, the jobless rate has fallen to 4.2% in June, while core consumer prices have held at 2.6% year over year — unchanged from December and still above the Fed's 2% target. Core retail sales climbed 10.1% year over year in June, the ninth consecutive month of double-digit growth, according to the CNBC/NRF Retail Monitor.

The debate carries high stakes for markets. A hike would mark the first tightening since the Fed began cutting rates, potentially upending equity valuations that have priced in a prolonged pause. A hold, by contrast, risks allowing inflation expectations to become unanchored if energy prices spike further as the conflict in the Strait of Hormuz continues, where December WTI futures now trade above $79 a barrel.

Inflation Stays Sticky Above Target

June's consumer price index showed headline inflation cooling to a 3.5% annualized rate, down 40 basis points from May, while core inflation held at 2.6% year over year — the same level as December 2025. The core personal consumption expenditures price index, the Fed's preferred gauge, is expected at 3.4% year over year when it's released July 30, after the Fed's decision.

Kevin Warsh, who took over as Fed chair earlier this year, told Congress this month that the central bank has "no tolerance for persistently elevated inflation" and shares "a resolute commitment to restoring price stability." About half of the 19 Fed policymakers expected higher rates by year-end, according to the central bank's dot plot, while the other half favored holding steady or cutting.

Bank of America Global Economist Claudio Irigoyen expects the Fed to deliver 75 basis points of hikes this year, arguing in a note that "the combination of persistently elevated core inflation and a stable, if not improving, labor market argues for tighter monetary policy." J.P. Morgan analysts, by contrast, see the Fed holding through the end of 2026, with the next move being a rate increase in the third quarter of 2027.

The Case for Patience

Pies' view aligns with those who argue that supply-side factors — not excess demand — are driving the inflation overshoot. Energy prices have whipsawed since the closure of the Strait of Hormuz, and a one-time flood of oil supply during a brief ceasefire temporarily depressed prices before tensions resumed. Fed governors Christopher Waller and John Williams both pointed to the favorable trajectory of oil prices in mid-July speeches, noting futures markets suggested energy costs would ease.

Those observations now look dated. December WTI futures have climbed back above $79 a barrel, just $6 below their 2026 contract high, a sign that market participants expect current shipping disruptions to persist. Ten-year Treasury yields have risen 6 basis points since July 14 as investors shift focus to potential supply chain deterioration.

The labor market, meanwhile, shows no signs of overheating that would force the Fed's hand. Weekly jobless claims hit their lowest level since 1969 in the latest reading, and JPMorgan Chase CFO Jeremy Barnum said during the bank's earnings call that "when it comes to consumer credit performance, it's just about the labor market. And so you're not going to hear anything new or differentiated about the labor market, like we all see the same numbers and it's been surprisingly resilient."

For Pies, that resilience is exactly why the Fed can afford to wait. "The economy is strong enough to handle rates where they are," he said. "Hiking now would be a mistake."

This article is for informational purposes only and does not constitute investment advice.