Economic data released between Federal Reserve meetings has been limited but leans dovish overall, providing a window for the central bank to pause. Natixis economists Christopher Hodge and Aker anticipate the Fed will maintain its current interest rate at next week's meeting and throughout 2026, as recent figures give the Federal Open Market Committee (FOMC) more time to assess the situation.
The cooling of June's inflation reduces the immediate need for the Fed to adjust its policy rate, according to Natixis. The bank expects the decision to hold rates steady in July may not be unanimous. Dallas Fed President Lorie Logan is currently the only FOMC voter publicly advocating for a rate hike.
Internal Divergence on the FOMC
"So far, the only FOMC voter advocating for a hike is Dallas Fed President Lorie Logan, and we doubt she will dissent from the committee's decision to hold," the economists wrote. They added that Cleveland Fed President Beth Hammack and Minneapolis Fed President Neel Kashkari might align with her stance. Other officials remain skeptical about the sustainability of the inflation slowdown but are willing to wait for more data. Hodge and Aker believe policymakers like Christopher Waller and Lisa Cook fall into this camp. "We guess that given the better-than-expected June inflation data, these voters will support holding rates steady," they stated. The economists also predict the meeting statement "will be little changed from the streamlined version released at the June meeting."
Jobs and Inflation Data Provide a Pause
"Since the June meeting, the only employment report was mixed but slightly softer than previous data, with non-farm payrolls increasing by 57,000 in June, following an average of 164,000 jobs per month over the prior three months," the economists noted. Natixis also highlighted the composition of the decline in the labor force. In recent years, the labor force participation rate has edged down, mainly due to older Americans leaving the workforce after significant asset price gains. However, the June report's decline in participation was driven by the core 25-54 age group. If this trend continues, Natixis warns it would be a more concerning signal, indicating frustration among the country's largest labor force segment in their job search.
June's inflation data was more encouraging. The overall Consumer Price Index (CPI) fell 0.4% month-over-month, largely due to a rapid drop in energy prices following a ceasefire agreement between the U.S. and Iran. "More notably, the core CPI was flat month-over-month, signaling a cooling in inflation," Hodge and Aker said. Sub-items from both the CPI and Producer Price Index (PPI) that feed into the Personal Consumption Expenditures (PCE) price index also point to further disinflation. "The sub-items from CPI and PPI that translate into the Fed's preferred inflation gauge, the PCE price index, suggest that the June reading will come in below the Fed's 2% target," the two economists indicated.
Hawkish Rhetoric Doesn't Alter Long Pause View
Since the June meeting, Fed communication has been mixed but generally hawkish. Waller, Logan, Hammack, and Kashkari have all expressed concerns about inflation. New York Fed President John Williams was the only notably dovish official, stating that the current policy stance is "appropriate" and that there are "encouraging reasons to expect inflation has peaked and should ease over the coming quarters."
Fed Chair Jerome Powell, in his congressional testimony last week, said the Fed would not tolerate "persistently high inflation," while also describing the AI buildout as a factor that could create one-time price pressures. "This suggests policymakers are at least willing to overlook near-term inflation effects and expect them to prove temporary," Hodge and Aker noted. They believe hawkish members still lean toward future rate hikes, but more influential voices within the committee prefer to wait. The soft June inflation data provides a basis for inaction.
Natixis holds a cautiously optimistic view on the path of inflation. Key drivers that have pushed prices higher in recent years, including high wage growth and housing inflation, are likely to slow in coming quarters. "We also believe the labor market, while stable, is not generating inflationary impulses," the economists said. The key to the policy outlook lies in the speed and stability of disinflation, and how the Fed responds if inflation does not cool quickly enough. "We think the key to avoiding a rate hike in the near term is further weakening in inflation data, which is our forecast," the authors wrote.
Natixis believes June's inflation data, though far below consensus and somewhat unusual in its magnitude, is not anomalous in signaling a return of inflation toward the 2% target. Key risks to this forecast include the possibility of new tariffs and a resurgence in energy prices if the U.S.-Iran memorandum of understanding collapses. If inflation unexpectedly rises or remains too high for too long, Powell may need to hike rates to maintain his credibility. Conversely, continued decline in domestic price pressures would allow the Fed to avoid a near-term hike. The two economists concluded, "If consumption slows as we predict, the likelihood of the Fed cutting its policy rate increases, but this scenario likely won't become clear until next year. We expect the Fed to wait for clearer evidence that inflation pressures are driven by cyclical rather than exogenous forces. Since we do not anticipate a re-acceleration of inflation, we expect a prolonged period of inaction."
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