Fresh inflation data released this week has shifted market expectations toward the Federal Reserve holding interest rates steady at its September meeting, with traders no longer fully pricing in a rate hike this year.

The Labor Department reported on Thursday that producer prices were unchanged month-over-month in July. A day earlier, the department said consumer prices barely rose in July, after having fallen in June.

The readings came as a relief to markets. Traders had been worried that a spike in energy prices, driven by the U.S.-Israeli war with Iran, could force the Fed to raise rates. The stakes extend well beyond trading desks: the federal funds rate serves as the baseline for borrowing costs across the economy, from credit cards and auto loans to mortgages and corporate debt, so even a quarter-point move touches household and business finances.

Market pricing has moved accordingly, as flagged by Walter Bloomberg on X:

🇺🇸 TRADERS NO LONGER FULLY PRICE IN A FED RATE HIKE THIS YEAR

Prediction markets now see a 70% chance the Fed holds rates steady in September, versus 29% odds of a 25bp hike.

A 25bp cut is priced at just 2%.

Markets are increasingly betting the Fed can remain on hold as… pic.twitter.com/UyVoLzGrso

— *Walter Bloomberg (@DeItaone) August 13, 2026

What the Data Shows

The headline consumer price index eased to 3.4% year-on-year in July, down from 3.5% in June. Month-on-month, it rose just 0.1%.

Energy prices fell 1.5% on a monthly basis, helped by easing oil prices despite ongoing tensions in the Middle East. Gasoline dropped 2.9%, marking a second straight monthly decline and pulling the overall reading lower.

Core inflation, which strips out food and energy, rose 0.2% on the month and 2.5% on the year — both in line with forecasts.

Even with the July cooling, price growth remains well above the Fed's 2% goal on the measures the central bank formally targets, leaving policymakers little room to declare victory.

Analysts at Citi told clients the data gives the Fed no new reason to take a harder line on rates, describing July's CPI report as “benign and largely uneventful.”

According to CME FedWatch, there is now roughly a 71% chance the Fed holds rates at its September 15-16 meeting, with about a 28% chance of a hike.

Fed Still Divided

Not everyone at the central bank is comfortable staying put. Cleveland Fed President Beth Hammack was one of three policymakers who voted to raise rates last month, when the Fed left its policy rate unchanged in the 3.50% to 3.75% range.

Hammack pointed to businesses already raising prices in anticipation of future cost pressures. She argued the Fed needs to act now to bring inflation back to its 2% target faster.

Richmond Fed President Thomas Barkin took a more cautious view. He said much of the recent inflation stemmed from temporary shocks such as tariffs, higher oil prices, and the artificial intelligence investment boom, all of which should ease over time. He also noted that headlines showing inflation coming down can help keep public expectations in check, reducing the need for rate hikes.

Fed Chair Kevin Warsh, who took over in May, has not given any public guidance on his plans. President Trump, for his part, has continued to push for lower rates, blaming Fed officials for blocking cuts.

The Fed will issue new economic projections after the September meeting, the first update to those forecasts since June. As of June, most officials expected inflation to remain between 2.2% and 2.5% through the end of 2027. Inflation, as measured by the Personal Consumption Expenditures index that the Fed targets, stood at 3.7% in June — well above that projected path and the central bank's 2% goal.

Between now and the decision, policymakers will weigh the next round of monthly employment and inflation releases, which will show whether July's cooling carried into August.

The Fed's next meeting is scheduled for September 15-16.

Source: CoinCentral