US Fed expected to leave rates unchanged next month after soft inflation data

Federal Reserve policymakers are likely to feel little fresh urgency to raise interest rates in September after data on Wednesday showed inflation cooled on a year-over-year basis for a second straight month, but they may take little comfort that monetary policy is tight enough to continue the easing trend. The Consumer Price Index rose 3.4% in the 12 months through July, down from 3.5% ‌in June, the Bureau ⁠of ⁠Labor Statistics reported, in line with economists’ expectations. Excluding the volatile food and energy components, the so-called core CPI increased 2.5% in the 12 months through July after climbing 2.6% in the prior month. Underneath the hood, there were some indications of broadening inflation.

A sharp drop in hotel prices – unlikely to be sustained – drove much of the month-over-month easing in core inflation, ​and there were more categories of core goods that saw prices increasing than in June, said Omair Sharif, the founder of Inflation Insights. Technology prices, driven by demand for artificial intelligence, jumped. Gasoline prices fell, pushing down on overall inflation.

Global fuel prices, however, rose again this month as hostilities in the U.S.-Iran war simmered. The Strait of Hormuz, which accounted for a fifth of the world’s oil supply shipments ⁠before the start ‌of the conflict in late February, remains largely closed. The Fed targets 2% inflation by the 12-month change in the Personal Consumption Expenditures Price Index.

​Sharif and most other analysts estimate that even with the deceleration in year-over-year CPI last month, the Fed’s preferred measure ⁠of underlying inflation, core PCE, still looks on course to be a bit above 3%.

HIGHER RATES ​STILL A POSSIBILITY BY END OF YEAR

Fed policymakers voted 9-3 last month to leave the U.S. ​central bank’s benchmark interest rate in the 3.50%-3.75% range, whereit has been since December. In the two weeks since that decision, the three dissenters at that meeting and a couple of other Fed regional bank presidents who do not have a vote this year on policy have made the case for a rate hike given still-too-high inflation.
John Williams, the influential head of the New York Fed, has said he expects inflation to continue to ease as the effects of last year’s tariff increases and the Middle East war abate, allowing the central bank to keep its policy rate unchanged. Fed Chairman Kevin Warsh has ‌said little about what would move him to support a change in the policy rate. “Without forward guidance, the September decision will likely remain a close call until the very end,” Olu Sonola, head of U.S. economics at Fitch Ratings, wrote in ​a note.”It will not be ​a slam dunk: whether it is ⁠a hold or a hike, both hawks and doves will find enough in the data to make their case.”

After the latest CPI data, traders added to bets favoring no change in rates at the Fed’s September 15-16 meeting, a view that had begun to take hold last Friday after a ​report showed the economy unexpectedly lost jobs last month. Traders, however, are still pricing a 38% chance of a rate hike next month, based on Fed funds futures contracts traded at CME Group, and remain convinced the central bank will need to raise rates by the end of 2026 to bring down inflation that has been running above the 2% target for more than five years.

“The Fed will need to see more evidence in future inflation reports that core services inflation is truly moderating before they take their rate hike threat completely off the table,” Scott Anderson, chief U.S. economist at BMO Capital Markets, wrote in a note.