TLDR
- Recent inflation data shows consumer and producer prices barely rose in July, reducing pressure on the Fed to hike rates
- Traders now price a 71% chance the Fed holds rates steady at its September meeting
- Core CPI rose just 0.2% monthly and 2.5% annually in July, meeting expectations
- Fed is divided, with some members pushing for rate hikes to get inflation back to 2% faster
- Energy prices fell 1.5% monthly in July, helped by easing oil prices despite ongoing Middle East tensions
Fresh inflation data released this week has shifted expectations toward the Federal Reserve holding interest rates steady at its September meeting.
🇺🇸 TRADERS NO LONGER FULLY PRICE IN A FED RATE HIKE THIS YEAR
Prediction markets now see a 70% chance the Fed holds rates steady in September, versus 29% odds of a 25bp hike.
A 25bp cut is priced at just 2%.
Markets are increasingly betting the Fed can remain on hold as… pic.twitter.com/UyVoLzGrso
— *Walter Bloomberg (@DeItaone) August 13, 2026
The Labor Department reported on Thursday that producer prices were unchanged month-over-month in July. A day earlier, it reported consumer prices barely rose in July, after falling in June.
Those readings came as a relief to markets. Traders had been worried that a spike in energy prices, driven by the U.S.-Israeli war with Iran, could force the Fed to raise rates.
What the Data Shows
The headline consumer price index eased to 3.4% year-on-year in July, down from 3.5% in June. Month-on-month, it rose just 0.1%.
Energy prices fell 1.5% on a monthly basis, with gasoline dropping 2.9% for a second straight month. That helped pull the overall number lower.
Core inflation, which strips out food and energy, rose 0.2% monthly and 2.5% annually, both in line with forecasts.
Analysts at Citi told clients the data gives the Fed no new reason to take a harder line on rates. They described July’s CPI report as “benign and largely uneventful.”
According to CME FedWatch, there is now roughly a 71% chance the Fed holds rates at its September 15-16 meeting, with about a 28% chance of a hike.
Fed Still Divided
Not everyone at the Fed is comfortable staying put. Cleveland Fed President Beth Hammack was one of three policymakers who voted to raise rates last month when the Fed left its policy rate unchanged in the 3.50% to 3.75% range.
Hammack pointed to businesses already raising prices in anticipation of future cost pressures. She said the Fed needs to act now to bring inflation back to 2% faster.
Richmond Fed President Thomas Barkin took a more cautious view. He said much of the recent inflation came from temporary shocks like tariffs, higher oil prices, and the artificial intelligence investment boom, all of which should ease over time.
Barkin also said that inflation headlines showing prices coming down can help keep public expectations in check, reducing the need for rate hikes.
Fed Chair Kevin Warsh, who took over in May, has not given any public guidance on his plans. President Trump has continued to push for lower rates, blaming Fed officials for blocking cuts.
The Fed will issue new economic projections after the September meeting. As of June, most officials expected inflation to remain between 2.2% and 2.5% through the end of 2027.
Inflation, as measured by the Personal Consumption Expenditures index the Fed targets, stood at 3.7% in June.
The Fed’s next meeting is September 15-16.
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