July 24, 2026
The Federal Reserve meets again this coming week to set monetary policy for the next six weeks. Most economists expect the Fed to hold rates steady at this meeting but pave the way for a 0.25% rate hike in September. Maybe. But we are leaning toward a rate hike at this particular meeting. Why wait? What do Fed officials expect? Do they think inflation will return to a 2.0% pace on its own without a little push?. Unlikely. If they wait until mid-September they will be getting close to the mid-term elections and, historically, the Fed would prefer not to be a factor in an election year. Our sense is that if Fed Chair Warsh is serious about getting inflation back to the 2.0% mark why not get started sooner rather than later?
The FOMC meeting will be on Tuesday and Wednesday, July 28-29. One day later on July 30 we will get our first look at second quarter GDP growth which we expect to be 1.8%. The consensus appears to be for something similar. While GDP will be released one day after the meeting, the Fed will know that number in advance. While 1.8% growth is a bit on the slow side, it would be a huge mistake to view that reading as “weak”. That is because the trade sector is likely to subtract 1.2% or so from growth in that quarter. American consumers and businesses are still buying goods and services at a brisk pace, but many of their purchases are being purchased overseas. In other words, domestic purchases in the second quarter are likely to rise at a steamy 3.0% pace.
Furthermore, with jobs growth returning there is good chance that second half GDP growth will be about 2.5% which is faster than it was in the first half. In the first half of this year payroll employment on average rose 92 thousand per month. In 2025, employment growth averaged 10 thousand per month. With faster growth in employment comes faster growth in consumer income which gives consumers a bit more ammo to quicken their pace of spending. There is no reason to postpone a rate hike because there is some possibility that GDP growth might be slowing down. It is not.
On the inflation front the Fed got a reprieve from the relentless upward pressure on the inflation rate with a 0.4% decline in the overall CPI for June and no change in the core rate. The CPI for July will not be available for several weeks, but it seems likely that the overall rate will be unchanged in that month with a 0.2% increase in the core rate. If so, the year-over-year increase for the overall rate would be 3.2% and the core CPI would be 2.5%. But that will be the end of the gasoline-related declines that occurred in those two months. This leaves the Fed with an inflation problem which is unlikely to improve much between now and yearend. In our opinion, this continuation of the inflation rate remaining high for the foreseeable future justifies an immediate rate hike.
The funds rate currently is pegged in a range from 3.5-3.75%. A 0.25% rate hike would boost that to 3.75%-4.0%. According to the Fed’s so-called “dot plots” the median neutral funds rate today is estimated to be 3.0%. However, at the last FOMC meeting 7 of 18 voting Fed officials thought the neutral rate was 3.75% or higher so a 0.25% rate hike would be perfectly consistent with their longer-run view of a neutral funds rate.
Some Fed officials may point out that the M-2 measure of the money supply has grown at a modest 5.6% pace in the past year which is somewhat below the 6.2% pace that existed for the 10-year period prior to the COVID recession in 2020. As long as that continues there is no need to raise the funds rate. The inflation rate will remain subdued and should eventually get back to the desired 2.0% pace. We happen to believe that will happen eventually, but it will not happen as long as oil prices remain elevated. Better to give it a nudge in the downward direction.
The bottom line is that you can make a reasonable case for either no change in the funds rate at this upcoming meeting, or a 0.25% rate hike. We happen to come down on the side of an immediate rate hike but we will not argue endlessly with those folks who are looking for no change now with a 0.25% rate hike later in the year. Any way one slices it the funds rate is close to a neutral rate and a 0.25% rate hike in July or September will not significantly alter the economic landscape.
Stephen Slifer
NumberNomics
Charleston, S.C.
Follow Me