2026 FOMC voter and Cleveland Fed President Beth Hammack has questioned the sustainability of recent signs of cooling inflation in the United States, reiterating her call for an immediate benchmark interest rate increase. However, Wall Street titan Goldman Sachs and some dovish FOMC voters argue that with a softening labor market and modestly declining core inflation, the key issue is not whether inflation has returned to the 2% target, but whether supply shocks from oil prices and tariffs have created genuine "second-round effects." They believe the Fed is better suited to hold rates steady to achieve an economic "soft landing."
Hammack stated on Thursday, "I'm pleased to see this data, especially concerning prices declining—that's a good thing—but I lack confidence that we will continue to see this trend, or that the data will be low enough to bring inflation back to the 2% level." Speaking at a Dayton Area Chamber of Commerce event in Kettering, Ohio, she added, "I believe we need to act on interest rates now." Hammack voted against the Fed's decision to hold rates steady last month, indicating she would have preferred a 25-basis-point increase. In a media interview on Monday, she noted that current rates are not "substantively restrictive" on the economy and that "several" adjustments might be needed to bring inflation back to target, though she declined to prejudge the final level of rates.
Official U.S. CPI data released Wednesday showed the core consumer price index, which excludes volatile food and energy categories, rose just 0.2% month-over-month. Economists widely view this as a relatively modest increase, reducing pressure on policymakers to raise rates. Market expectations for the Fed's rate path have shifted from "whether further tightening is needed" to a phase where "hawks must provide more evidence to justify a hike." However, Goldman Sachs's forecast of "no change for the year" is not unconditional. With July PPI still at 4.7% year-over-year, and Reuters estimating core PCE at around 3.3% based on the latest data, risks from Middle East geopolitical tensions, dual energy chokepoint threats in the Strait of Hormuz and Bab el-Mandeb, and a potential resurgence in crude oil prices could reignite inflation in August-September. If core inflation picks up to around 0.3% month-over-month or higher for the next two or three months, the hawkish rate hike path could revive.
The odds of the Fed holding rates steady for the remainder of the year have increased. Following the July CPI and Thursday's PPI data, the scenario of the Fed maintaining the 3.50%-3.75% range for the rest of 2026 appears more suitable as a baseline than a renewed rate hike cycle, though the advantage is not yet large enough to completely rule out a hike. July headline CPI rose only 0.1% month-over-month, with core CPI up just 0.2% and 2.5% year-over-year, aligning with interest rate futures market expectations of modestly cooling inflation. July PPI came in at 0.0% month-over-month, significantly below the market consensus of 0.2%, with the year-over-year rate dropping from 5.5% in June to 4.7%. Core PPI rose only 0.2% month-over-month, with the annual rate falling from 4.7% to about 4.2%. Meanwhile, July nonfarm payrolls unexpectedly declined by 23,000.
This latest set of economic data suggests the Fed is no longer facing a scenario of "excess demand plus accelerating inflation," but rather one where inflation remains above target but is marginally cooling, while employment is losing momentum. Under the Dual Mandate framework, the threshold for immediate further tightening has significantly risen. Following the CPI release, the probability of a September rate hike fell from about 54% to around 40%. After the softer PPI data, market pricing has largely shifted to about a 65% probability of the Fed holding steady in September.
This also strengthens the predictive logic of Goldman Sachs senior economist Matheus Dibo's forecast that the "Fed will hold steady for the full year," which has become more compelling than just a few days ago. The core issue is not whether inflation has returned to 2%, but whether supply shocks from oil prices and tariffs have generated genuine "second-round effects." Dibo believes housing inflation has room to decline further, the labor market is not overheated, and a wage-price spiral has not formed, giving the Fed time to wait for more data. The latest CPI and PPI data precisely reinforce this assessment. Notably, this is not an isolated contrarian view from Goldman Sachs. A Bloomberg Intelligence survey of economists found the median forecast remains that the Fed will keep rates unchanged for the remainder of 2026. In contrast, voters Hammack, Kashkari, and Logan, who advocated for a 25bp hike in a 9-3 vote at the July FOMC meeting, still believe policy is not sufficiently restrictive and that action should be taken "now."
Comments