The Federal Open Market Committee (FOMC) meeting minutes from July 28-29 were certainly revealing, showcasing a growing sense of urgency to raise interest rates. However, despite the hawkish tone, I firmly believe that a rate hike in 2026 is unlikely.

Declining Inflation: A Key Factor

The minutes highlighted the importance of inflation, stating that ‘many participants assessed that policy tightening would likely be necessary if inflation did not decline.’ However, the data suggests that inflation has indeed declined. The Consumer Price Index (CPI) dropped by 0.4% in June and rose by 0.1% in July, marking the two lowest CPI readings since at least July 2025. Core CPI, which excludes food and energy prices, came in flat in June and rose 0.2% in July.

While energy prices have been volatile, driven by the Iran war, their impact on the overall economy is significant. For instance, food prices are affected by shipping costs, which in turn depend on oil and gas prices. The July jobs report also showed a decline in nonfarm payrolls, with 23,000 jobs lost, well below economists’ estimates. Furthermore, average hourly earnings barely increased during the month, indicating a soft labor market.

The Producer Price Index (PPI), a measure of wholesale prices, rose 0.1% in July, below analyst estimates of 0.2%. Given this soft data, the market has delayed its rate-hike expectations, with the Fed now expected to hold rates steady at both its September and October meetings, although a rate hike is expected in December, according to CME Group’s FedWatch tool.

Why the Fed Will Hold Rates Steady

The Fed’s preference to avoid raising rates in the lead-up to the midterm elections in November is a significant factor. The Federal Reserve Bank of Cleveland’s Nowcasting tool projects core CPI to be 0.2% in August, and the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, is expected to come in at 0.25% in July and 0.27% in August. These projections suggest that a rate hike is unlikely, even with the recent soft data.

The longer rates remain elevated, the more likely the economy is to tip into a recession, something the Fed is acutely aware of. While anything can happen, particularly if the Iran war continues to flare up or hot inflation data emerges, I firmly believe that the Fed will hold rates steady through 2026.

Conclusion

In conclusion, while the FOMC’s July meeting minutes may have hinted at a growing urgency to raise interest rates, the data suggests that a rate hike in 2026 is unlikely. The decline in inflation, soft labor market, and the Fed’s preference to avoid raising rates in the lead-up to the midterm elections all point to a steady interest rate environment through 2026.