Improving inflation data and a softening labor market are further reducing expectations for a Federal Reserve interest rate increase.
Following the release of the latest Consumer Price Index (CPI) data, Chicago Fed President Austan Goolsbee appears to have softened his hawkish stance. In an interview on August 13, he stated that the latest U.S. inflation figures show a "slight improvement," suggesting that if the impacts of tariffs and energy prices fade, inflation could return to a "golden path" toward 2%. However, he also emphasized that the overall inflation rate remains around 3%, which is "still too high."
Richmond Fed President Thomas Barkin said on the same day that the need for a rate hike to achieve the inflation target is "still up in the air," though he also warned of the risk of persistent inflation. In contrast, Cleveland Fed President Beth Hammack maintained her hawkish stance, advocating for an immediate rate increase.
This division within the Fed is mirrored on Wall Street. Economists at Bank of America expect the Fed to implement three rate hikes this year, with the first potentially coming in September. Meanwhile, Goldman Sachs and J.P. Morgan Asset Management predict that interest rates will remain unchanged for the rest of 2026. Goldman Sachs analyst Robert Kaplan stated that the Fed's decision not to raise rates in July was "absolutely" correct, urging policymakers to keep an open mind before September, as the factors influencing inflation are complex and rigid forward guidance could be counterproductive.
Despite these disagreements, the July CPI and Producer Price Index (PPI) both came in below expectations, following last week's weak nonfarm payrolls report. As a result, market expectations for a near-term Fed rate hike have largely dissipated. As of August 14, market pricing shows a 65.2% probability that the Fed will hold rates steady in September, with a 34.8% probability of a rate hike.
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