Inflation cooled, the hawks are unconvinced and the White House wants cuts: why the Fed may still hold in September
The latest data eased immediate pressure for another increase, but divided officials and conflicting signals from prices, wages and employment leave the September meeting finely balanced.
Recent inflation readings have weakened the internal hawkish argument that prices cannot cool without another increase in interest rates. The Labor Department reported that the producer price index was unexpectedly flat in July. Data released a day earlier showed consumer prices rising only slightly after a decline in June.
Signs of weakness in the labor market had appeared even before those releases. Inflation-adjusted wages have fallen over the past six months and job growth has been modest at best. The unemployment rate, however, remains historically low at 4.1% and does not yet signal a clear recession.
Energy prices surged earlier this year after the U.S.–Israeli conflict with Iran. The personal consumption expenditures price index — the Fed's preferred inflation gauge — reached 4.1% in May before easing to 3.7% in June. The latest improvement therefore reduces immediate pressure but does not erase the earlier rise.
Traders sharply reduced bets on a rate increase at the Fed's September 15–16 meeting after the soft July price data and a recent wave of unexpected layoffs. With neither inflation nor unemployment deteriorating to an extreme, policymakers have a growing incentive to wait.
Christopher Hodge, chief U.S. economist at Natixis, said the Fed would have to absorb surprises at each coming meeting. With inflation slowly moving toward target, consumption cooling and employment prospects tightening, he said the central bank could narrowly avoid a rate increase.
The fear that inflation becomes entrenched
Whether the current 3.50%–3.75% policy range is restrictive enough has become a central point of disagreement. Richmond Fed President Thomas Barkin said the level should be sufficient to bring inflation down. He argued that the recent acceleration came largely from shocks including high tariffs, oil prices and the artificial-intelligence investment boom, all of which should eventually fade.
Barkin also stressed the role of public expectations, saying that more headlines declaring inflation is falling could help keep those expectations under control. Hawks reject that comfort. They worry that five years of above-target inflation are allowing expectations of further price increases to take root.
Tim Duy, chief U.S. economist at SGH Macro Advisors, warned that the Fed's target ultimately depends on people's everyday expectations. The longer inflation remains elevated, the harder disinflation becomes, the less credible the 2% target appears and the more costly it will be to restore.
Pressure from hawks and the White House
Cleveland Fed President Beth Hammack was one of three policymakers who dissented when the Fed left rates unchanged last month. She said action was needed now to return inflation to the 2% target faster than the long decline implied by current rates. Using a Cincinnati retailer as an example, she said businesses were raising prices defensively because they did not know where the next cost pressure would come from.
Two non-voting regional Fed presidents have also backed an increase. Governors Christopher Waller and Lisa Cook have warned that they would support higher rates if inflation fails to cool quickly. July's softer data may ease the pressure, but may not be enough to satisfy officials arguing for a hike.
Political pressure is moving in the opposite direction. President Donald Trump continues to demand much lower rates and has accused Fed Chair Kevin Warsh's “hostile” colleagues of blocking cuts. Warsh has kept his own plan private and avoided forward guidance.
The Fed will publish new economic projections after next month's meeting. Forecasts from mid-June showed most policymakers expecting PCE inflation to fall to 2.2%–2.5% by the end of 2027. Only half believed at least one 25-basis-point increase would be needed by the end of this year. CME's FedWatch pricing nevertheless still put the probability of a rate increase before year-end above 90%.
The Fed is caught between allowing inflation expectations to harden and raising borrowing costs enough to cause more job losses. Softer prices give it room to wait, while weaker employment and wages raise the cost of tightening. Holding rates steady in September may be the most likely outcome — not because the argument is over, but because the evidence is pulling policy in opposite directions.