The US July inflation data will be released on Wednesday, a report regarded as a critical factor determining the Federal Reserve’s next policy path. Markets generally expect the Consumer Price Index (CPI) to edge up slightly in July. In line with forecasts, it may buy the Fed more time to observe interest rate trends. However, if inflation rebounds, the question of a rate hike at the September meeting will return to the spotlight.
Markets Bet on Mild Rise in July CPI
The U.S. Bureau of Labor Statistics (BLS) will publish the July CPI at 8:30 a.m. Eastern Time on Wednesday. The Dow Jones consensus forecast calls for a 0.1% month-on-month increase in headline CPI and a 0.2% month-on-month rise in core CPI excluding food and energy. On an annual bASIs, headline and core CPI are projected at 3.4% and 2.5% respectively, both down 0.1 percentage points from June.
Although these figures remain markedly above the Fed’s 2% inflation target, two consecutive months of moderate monthly prints could grant the Federal Open Market Committee (FOMC) greater leeway on interest rate adjustments. Joe Brusuelas, Chief Economist at RSM, stated that if July CPI lands close to his forecast, most committee members would “look through” supply shocks, and the Fed would likely stay on hold for the rest of the year.
PeRSIstent Divisions Within the Federal Reserve
At the Fed’s July meeting, the FOMC voted 9-3 to keep the benchmark lending rate steady in the 3.5%–3.75% range. The three dissenting members all backed a 25-bASIs-point rate increase. Fed Governor Lisa Cook recently also indicated that a rate hike would be necessary if inflation fails to cool.
Brusuelas added that the latest inflation print will offer some backing to Fed Chairman Kevin Warsh, who has faced substantial policy pressure since taking office in May this year.
Nevertheless, a string of soft recent data plus mixed signals of eASIng tensions in the Middle East have driven market repricing. The CME FedWatch Tool shows traders now price in a 50-50 chance of a September hike, with higher odds assigned to rate increases in October or December.
Uncertainties Still Loom Over the September Policy Meeting
Fed policymakers will review both July and August inflation readings ahead of the next rate-setting meeting. The Fed has no scheduled gathering in August, while the Federal Reserve Bank of Kansas City will host its annual economic symposium in Jackson Hole, Wyoming.
Brusuelas remarked: “If you’re not confused, you haven’t been paying close attention.” He described this as an accurate portrayal of market and policy conditions in mid-August.
June data had delivered tentative disinflation signals: headline CPI fell 0.4% month-on-month and core CPI was flat, driven by lower energy prices and moderating housing costs. Meanwhile, last Friday’s release showed nonfarm payrolls dropped by 23,000 in July, yet the unemployment rate edged down to 4.1%.
Despite signs of a cooling labor market, some economists warn July inflation could surprise to the upside, or at least prove sticky enough to force the Fed’s hand.
Divergent Institutional Views: September Set to Be the Critical Decision Month
Bank of America still projects three rate hikes in the coming months. In a client note, its economists argued the July jobs report did not alter the broader labor market landscape. “The labor market remains solid. More importantly, as recent Fed official remarks underscore, the Fed’s reaction function is heavily tilted toward inflation prints.”
Bank of America outlined its baseline: if the Fed’s key inflation gauge rises an average of 0.25% per month over the next two months, “a September rate hike is all but locked in.” Should the average monthly gain fall below 0.2%, tightening will be delayed. A reading between the two would render September a coin flip, hinging on whether Warsh follows through on hawkish comments about willingness to hike when needed or adheres to the more dovish tone from his July press conference.
The bank also warned that hot inflation data could trigger multiple rounds of tightening rather than a single hike. The Fed rarely adjusts monetary policy in just one isolated move.
Expectations of Multiple Consecutive Hikes Heat Up
Beth Hammack, President of the Federal Reserve Bank of Cleveland and one of the three dissenters at the June meeting, said on Monday she anticipates several rate increases may ultimately be required.
In an interview with Yahoo Finance, she commented: “I don’t know where the terminal rate will land. I generally say a single 25-bASIs-point adjustment would have limited economic impact, so a series of moves is more likely, though I won’t prejudge the exact number.” She added she is “very focused” on pulling inflation back to target while keeping the labor market stable.
All told, the July CPI release will serve as the decisive evidence for whether the Fed can afford to stay on hold. A continued slowdown in inflation would further pare market bets on a September hike. Conversely, hotter-than-expected data would amplify volatility across the rate path, US Dollar and Treasury yields.