U.S. inflation for July matched expectations closely enough to buy the Federal Reserve some time before its September meeting, but not enough to settle the argument over whether rates need to move again.
In a Thursday article, Wall Street Journal reporter Nick Timiraos wrote that the July inflation report eased some of the pressure on the Fed to raise rates next month. Even so, the data did not offer a firm answer on the longer-term policy path. Last week’s employment report also failed to show a renewed pickup in labor demand, weakening the case for more tightening.
Markets pulled back September hike bets after the CPI release
According to the report, CME Group data showed that the market-implied probability of a September rate hike fell below 50% after the July CPI figures were released. That has not removed uncertainty around the Sept. 15-16 meeting, where the outcome remains contested because Fed officials are still split on the path ahead.
July core CPI, which excludes food and energy, rose 0.2% from the previous month, in line with expectations. On a year-over-year basis, it increased 2.5%.
Neil Dutta, an analyst at Renaissance Macro, said the result was 「more damaging to the hawks than to the doves」. He said the inflation numbers were not decisive and that the outcome of the next several meetings was roughly equivalent to 「a coin toss」. He also said that if the Fed can get through the autumn without acting, the data by then may be good enough to justify staying on hold.
Before the September meeting, policymakers will still receive one more inflation reading. The August CPI report is due on Sept. 11, one week before the meeting begins. The Personal Consumption Expenditures price index, the inflation gauge the Fed uses in practice, is also scheduled for release later this month. The report noted that PCE has been running above CPI, with core PCE up 3.3% year over year in June.
Divisions inside the Fed remain visible
Timiraos wrote that although the Fed chose to stay on hold at its July meeting, internal differences have become increasingly clear. Among the 12 voting members, at least six have recently signaled they may support another increase, and three voted in July for higher rates.
The majority view rests on the idea that current rates are already restrictive enough to bring inflation back to the 2% target. Under that framework, inflation staying high is tied to temporary forces such as tariff shocks and energy prices, rather than policy being too loose.
That view is facing more strain. The report said those shocks have not faded and are now being layered on top of demand tied to artificial intelligence infrastructure buildout, pushing up prices for technology equipment and software.
Cleveland Fed President Beth Hammack, who voted for a rate increase at the July meeting, said this week that a single 25 basis-point hike 「may not do much for the economy」. She said the Fed may need a series of moves and compared that approach to braking: the earlier policymakers tap the brakes, the less likely they are to need a hard stop later.
Mary Daly raised the prospect of a larger response
Timiraos said comments from San Francisco Fed President Mary Daly added another layer of complexity. In a speech in Japan last week, she described two possible economic scenarios. In the first, recent shocks gradually fade and the Fed can keep rates unchanged. In the second, those shocks continue to stack up and inflation develops self-reinforcing momentum.
Daly said the first scenario remains her baseline, but the gap between the two has narrowed. She added that if the second scenario takes shape, the policy response required could exceed the Fed’s usual 25 basis points. Incremental moves, she said, would be inadequate for 「the underlying dynamics that need to be confronted directly」, asking: 「If we find that the second scenario is taking shape, why would we still act gradually?」
That framing raises the bar for making the decision. As the report put it, if a policy mistake would require at least a 50 basis-point response, some officials will naturally want greater confidence before they act.
Warsh has turned less explicit, leaving markets to wait for Sept. 11
Against that backdrop, Fed Chair Warsh has become harder to read. The report said he has pulled back from offering forward guidance in recent weeks and has questioned the Fed’s ability to fine-tune the economy, saying plainly: 「I don’t think we are good at fine-tuning.」
With the chair speaking less directly about the outlook, investors have been looking to other Fed officials for clues. Several policymakers had already indicated that inflation data would drive the September decision.
After the July CPI report, market odds of a September hike dropped below 50%. The clearer answer may not arrive until Sept. 11, when the August inflation data is released.