Author: Zhao Ying, Wall Street News
U.S. July inflation data met expectations, neither cold enough to rule out rate hikes entirely, nor hot enough to force the Federal Reserve into immediate action, providing it with temporary breathing room before the September meeting. However, deeper policy disagreements and uncertainties remain unresolved.
Nick Timiraos, a Wall Street Journal reporter known as the "New Fed Correspondent," wrote on Thursday that the July inflation report was largely in line with expectations, somewhat easing pressure on the Fed to hike rates next month. But for the longer-term outlook, this data did not provide a clear answer. At the same time, last week's jobs report also showed no reacceleration in labor demand, further weakening the case for additional policy tightening.
According to the report, CME Group data shows that after the July CPI data release, market expectations for a Fed rate hike in September have fallen below 50%. Nevertheless, the hawk-dove divide within the Fed continues, with several officials holding starkly different views on the policy path, leaving the outcome of the September 15-16 meeting full of variables.
Data Meets Expectations, Rate Hike Pressure Temporarily Eases
July core CPI (excluding food and energy) rose 0.2% month-over-month, matching market expectations, with a year-over-year increase of 2.5%.
Neil Dutta, an analyst at Renaissance Macro, stated this outcome "hurts the hawks more than the doves." He believes that because the inflation data is not decisive, the outcome of the next few meetings is roughly akin to a "coin toss." He also noted that if the Fed can get through the fall without taking action, the data by then might be good enough to justify continued inaction.
Fed officials will receive another inflation report before the September meeting—the August CPI report will be released on September 11, one week before the meeting convenes. Additionally, the PCE inflation measure, which the Fed actually references, will be released later this month. This indicator has consistently been higher than CPI, with core PCE rising 3.3% year-over-year in June.
Internal Divergence Intensifies, Policy Path Under Debate
Nick Timiraos noted that although the July meeting ultimately chose to hold rates steady, divisions within the Fed were already quite apparent. Among the 12 voting members, at least six have recently signaled potential support for a rate hike, with three directly voting for an increase at the July meeting.
The majority's stance is based on the judgment that current interest rate levels are sufficiently restrictive to bring inflation back to the 2% target, and that persistent high inflation stems from temporary factors like tariff shocks and energy prices, rather than overly loose policy. However, this judgment is facing increasing challenges—these shocks not only persist but also overlap with surging demand driven by AI infrastructure development, pushing up prices for tech equipment and software.
Cleveland Fed President Beth Hammack, who voted for a hike in July, stated this week that a single 25-basis-point hike "probably won't do much for the economy," and the Fed may need to adjust multiple times in succession. She likened this choice to braking—a gentle tap earlier can avoid slamming the brakes hard later.
San Francisco Fed President: More Significant Action May Be Needed
Nick Timiraos pointed out that comments from San Francisco Fed President Mary Daly further complicate policy decisions. In a speech in Japan last week, she outlined two possible economic scenarios: first, recent shocks gradually fade, allowing the Fed to hold rates steady; second, shocks persist and compound, allowing inflation to build self-reinforcing momentum. She said the first scenario remains her baseline, but the gap between the two scenarios has been narrowing.
Daly noted that if the second scenario materializes, the required policy response could exceed the Fed's typical 25-basis-point increments. She stated that small, incremental adjustments would be insufficient to address "underlying dynamics that need to be confronted head-on," and asked directly: "If we saw the second scenario taking shape, why would we move incrementally?"
This statement essentially raises the bar for the decision itself—if the response after misjudging the economic situation is at least 50 basis points, some officials naturally want to be more confident before acting.
Chair's Attitude Unclear, Market Searches for Signals
Against this backdrop, Fed Chair Wash's stance has become increasingly elusive. Last month, he gradually stepped back from forward guidance for the market and expressed skepticism about the Fed's ability to fine-tune the economy precisely, bluntly stating, "I don't think we're good at fine-tuning."
As the Chair reduces public remarks, investors are turning to other Fed officials for clues. Several officials previously hinted that inflation data would dictate the September decision. Following the July CPI data release, market probability for a September hike has fallen below 50%. However, the final answer might not be revealed until the August inflation data is released on September 11.
