Chicago Federal Reserve President Austan Goolsbee expressed greater concern over inflation being too high compared to any weakness in the labor market. However, it remains unclear whether this concern translates into support for the rate hikes favored by several of his colleagues last month. In a video recorded on June 22 and released Tuesday, Goolsbee stated, "The biggest problem facing our economy right now is not an industrial collapse or a job market collapse, but prices rising too quickly. We have an inflation problem, and people hate inflation." After reviewing indicators such as the unemployment rate, hiring rate, and layoff rate, he noted, "They suggest the labor market is stable鈥攏ot great, that's how I would describe it."
The Federal Reserve held its policy rate steady in the range of 3.50% to 3.75% at its July 29 meeting. Three of the 12 voting policymakers dissented, voting in favor of a rate hike. Goolsbee, who does not have a vote this year, did not disclose whether he supported the decision to hold rates steady amid inflation that has remained above the Fed's 2% target for over five years. Following the release of the latest rate decision late last month, several policymakers warned of persistent inflation risks and signaled openness to tighter monetary policy.
Cleveland Federal Reserve President Beth Hammack said Monday that more than one rate hike may be needed to bring inflation back to the Fed's 2% target. She believes the current interest rate level has not created a "meaningful constraint" on the U.S. economy, and inflation is unlikely to fall back to the target on its own. In an interview Monday, Hammack stated that a single 25-basis-point rate hike may not have a significant impact on the overall economy, so if the Fed needs to further suppress inflation through monetary policy, it may ultimately require a "certain number" of rate hikes. However, she emphasized that she does not want to prejudge how many hikes are needed or set an endpoint for this policy adjustment cycle. Hammack was one of the three dissenting officials who supported a rate hike at the Fed's July meeting. In the post-meeting statement, she warned that the longer inflation remains elevated, the harder it will be to bring it back to the target level in the future.
St. Louis Federal Reserve President Alberto Musalem said last week that with inflation above the Fed's 2% target, policymakers cannot afford to tolerate higher inflation while waiting for the possibility of strong productivity growth. Musalem stated, "In this context, it is crucial that monetary policy effectively curbs inflation, rather than enduring slightly higher inflation today to pursue productivity growth tomorrow." He added, "The central bank's most important contribution to long-term economic growth is to provide a backdrop of price stability, under which businesses can plan investments and innovations that drive growth."
Federal Reserve Governor Lisa Cook also reiterated last week that she is prepared to support further rate hikes if inflation fails to continue slowing, warning that as the period of inflation above the 2% target lengthens, the Fed may not have much time to wait, potentially making it harder to control inflation in the future. Minneapolis Federal Reserve President Neel Kashkari said the Fed should begin gradually raising interest rates to lower inflation, which remains above the target, and avoid the need for more aggressive rate hikes later if inflation becomes more entrenched.
However, some policymakers have urged caution. Fed officials who support waiting argue that some price shocks from tariffs, energy prices, and geopolitical conflicts may be temporary, and that premature rate hikes could put unnecessary pressure on the labor market before inflation naturally subsides.
Critical Inflation Report to Shape Future Rate Path
Every inflation data release could reshape the policy narrative, and this week's CPI and PPI reports are particularly important. Fed officials are divided on the next direction for interest rates. Last week's weak nonfarm payroll report added uncertainty to the policy outlook, with job losses and a slight decline in the unemployment rate sending mixed signals. But given that the Fed currently prioritizes inflation, if data exceeds or even meets expectations, officials may be forced to reconsider tightening policy. The challenge facing the new Fed chair mirrors that of the Powell era. Amid unclear labor market signals (a single month of data is insufficient to determine overheating or cooling), stubborn price pressures will remain a key factor in decision-making.
Bank of America economist Stephen Juneau said last Friday that the previous month's CPI was likely a "one-off" anomaly, and "a report in line with our expectations would strengthen the case for the Fed to raise rates in September." The U.S. July CPI data will be released at 8:30 p.m. Beijing time on Wednesday. Current market consensus expectations show headline CPI is expected to rise 0.1% month-over-month and 3.4% year-over-year, while core CPI is expected to rise 0.2% month-over-month and 2.5% year-over-year. Both year-over-year measures are expected to edge down 0.1 percentage point from June. Notably, the month-over-month growth rate is expected to turn positive from June's -0.4%, reflecting a narrowing decline in energy prices and a rebound in some inflation components. Goldman Sachs' economics team has a more dovish forecast, expecting July core CPI to rise 0.19% month-over-month (below the market consensus of 0.2%) and headline CPI to rise just 0.05%. Goldman Sachs also warned that a rebound in oil prices will make it difficult for markets to fully relax. JPMorgan has outlined five scenarios, with the most likely outcome (40% probability) being core inflation between 0.2% and 0.25%, which is expected to boost the S&P 500 by 0.25% to 0.75%. Deutsche Bank expects CPI to rise 0.15% month-over-month, with core CPI potentially increasing 0.26%. Bank of America analysts believe that if inflation data unexpectedly falls short of expectations, the dollar could react more strongly, as it would largely rule out the possibility of a Fed rate hike in September.
According to the CME's "FedWatch" tool, as of August 12, the market assigns a 50.1% probability of the Fed holding rates steady in September and a 49.9% probability of a 25-basis-point rate hike. This probability, which approached 80% earlier this month, has since gradually declined, now sitting at a critical 50-50 juncture.
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