Fed Expected to Keep Interest Rates Unchanged as Inflation Eases

Traders have barely changed their expectations for the Federal Reserve’s decision at its September meeting after the release of July inflation data. The figures published on Wednesday showed that U.S. consumer prices rose in line with forecasts, so market participants still lean—by a narrow margin—toward keeping interest rates unchanged.

After the report, Fed funds futures put the probability of keeping the target range at 3.50–3.75% at the September 15–16 meeting at about 55%. That is only slightly more than half, indicating the market is nearly evenly split between a hold and a hike. Expectations had been roughly the same even before the data were released.

The July consumer price index rose 3.4% year over year after a 3.5% increase in June. The result matched economists’ expectations. Core CPI, which excludes food and energy, slowed from 2.6% to 2.5% year over year. Inflation has therefore declined for a second consecutive month.

At the end of July, the Federal Reserve kept the rate in the 3.50–3.75% range. The decision was approved by a 9–3 vote. Several regional Federal Reserve Bank presidents said afterward that inflation remains too high and may require an increase in borrowing costs. This indicates that significant disagreements within the Fed remain over the future course of monetary policy.