Fed’s Search for a New Path: Rate Hike Risk Remains on the Table After Inflation Data
The Federal Reserve’s decision to keep the policy rate unchanged at 3.50%-3.75% at its July 28-29 FOMC meeting has brought a persistent question back to the forefront of markets: Will the Fed’s next move be a cut or a hike? The inflation data released on August 12 and a series of hawkish central bank messages suggest that the answer may be shifting in a different direction from what markets previously expected.
July Decision: Divergence Beneath the Surface
The Fed’s decision to hold rates steady at its July meeting was not unanimous, passing by a 9-3 vote. The fact that three committee members voted for a 25-basis-point hike showed that differences of opinion over inflation risks had surfaced within the committee. The meeting minutes, due to be released on August 19, will reveal the reasoning behind this divergence and will be closely watched as a critical data point ahead of September.
CPI Softer Than Expected, But Did Not Change the Picture
The July inflation data released on August 12 presented a mixed picture. Annual CPI edged down to 3.4% from the previous month, while the monthly increase was 0.1%. Core CPI came in at 0.2% month-over-month and 2.5% year-over-year. Ahead of the data, weak employment figures — including a 23,000 decline in July nonfarm payrolls and ADP private-sector employment coming in below expectations — had strengthened expectations that inflation could slow; while the CPI’s moderate reading did not completely remove the hike scenario, according to CME FedWatch, the probability of a September hike fell to 50% from around 60% before the employment data.
Hawkish Camp: Kashkari, Cook and Warsh on the Same Line
Despite inflation losing momentum, the hawkish tone within the Fed has not faded. Minneapolis Fed President Neel Kashkari, one of the three members who voted for a hike at the July meeting, argued that rates should begin to rise gradually now to contain inflation. Fed Governor Lisa Cook delivered a similar message, saying they are prepared to hike if inflation does not slow and emphasizing that policymakers may not have the luxury of waiting for a return to the 2% target.
Fed Chair Kevin Warsh also closed the door on any flexibility around the inflation target; he said there would be no “soft inflation target” or “implicit loose target” approach, with 2% remaining the only reference point. According to the Financial Times, Warsh also signaled that he would be prepared to raise rates at the September meeting if inflation data came in high.
Change in Leadership: From Powell to Warsh
Kevin Warsh became the Fed’s 17th Chair on May 22, 2026, replacing Jerome Powell. His Senate confirmation passed by a narrow 54-45 margin, making the appointment one of the most contentious chair confirmations of the modern era. Warsh was known for his strong criticism of the Fed becoming overly involved in markets and arguing that forward guidance could lead to policy mistakes; sources close to the matter have also confirmed that he has raised the possibility of reducing the frequency of FOMC meetings since taking office.
Trump, meanwhile, said the rate-decision process depends partly, though not entirely, on Warsh, emphasizing that the decision does not belong to him alone.
Jackson Hole in Focus
Investors are now turning their attention to Warsh’s first major speech at the Jackson Hole Economic Policy Symposium. Market participants expect broader and more directional signals from the speech; given Warsh’s distance from forward guidance, he is likely to avoid firm commitments and emphasize data dependence.
Next Stop: September 16
There is no scheduled FOMC meeting in August; the next rate decision will be announced at 21:00 TRT on Wednesday, September 16, following the September 15-16 meeting. This meeting is particularly important because it is one of the four meetings that will include updated economic projections (SEP) and the dot plot.
In summary, the picture is as follows: The moderate CPI reading reduced rate-hike expectations somewhat, but a series of hawkish messages from Kashkari, Cook and Warsh shows that the debate over “rate-hike risk” continues to replace the “rate-cut cycle” scenario that markets had priced in for a long time. The August 19 meeting minutes and Warsh’s Jackson Hole speech will be key in determining the direction before September.