Fed Hawk-Dove Divide Deepens as Wall Street Banks Split on Hikes Versus Holding Steady
Market expectations for a Federal Reserve rate hike have continued to cool after the Fed released unexpectedly weak nonfarm payrolls and relatively mild inflation data over the past several days. At the same time, the divide between hawkish and dovish officials is widening: moderate policymakers appear more confident, while some hawks remain firmly opposed to easing their stance. Chicago Fed President Austan Goolsbee said Thursday that the latest U.S. inflation data had improved "slightly." He said he hoped inflation would continue to improve as the effects of tariffs and higher oil prices caused by the war in Iran gradually faded. "If these disturbances become a thing of the past, then I think we can get back onto what I call the 'golden path'—inflation returning to 2%," Goolsbee said in an interview. "Overall inflation is still around 3%, which is too high and not ideal. The good news is that the latest data have improved slightly." "Inflation has been too high, our progress stalled for a while, and we even went backward," Goolsbee said Thursday. "But the data we've received in recent months have improved, and I hope that trend continues. We are currently in a delicate phase—the overall economy feels fairly stable, and our main focus is inflation." Goolsbee's hawkish stance appeared to soften somewhat after the latest Consumer Price Index report, although he continued to stress that inflation remained too high. In a video released earlier this week, he had said bluntly that inflation was the biggest problem facing the economy. "The biggest problem facing the U.S. economy right now is not an industrial collapse or an employment collapse, but prices rising too quickly. We do have an inflation problem, and people hate inflation," Goolsbee said at the time. The Fed kept its short-term policy rate in a 3.50%-3.75% range last month. Based on the vote at that meeting and public comments since then, at least 5 of the central bank's 19 policymakers favored a rate hike. The Fed tends to use the core Personal Consumption Expenditures Price Index as its primary gauge of inflation. U.S. PCE inflation was 3.7% in June, down from a recent high of 4.1% in May. As recently as last week, market traders were betting that the Fed could raise rates as soon as September. But two reports released this week showed relatively mild consumer and producer price inflation in July, and the weak employment report released last Friday has largely erased expectations that the Fed will take any action in the near term. The divide inside the Fed is becoming more pronounced. Richmond Fed President Barkin explained Thursday why he favors keeping rates unchanged. He said it remains unresolved whether a rate hike is needed to achieve the inflation target, while warning that inflation could prove persistent. Barkin said it was still unclear whether the Fed needed to raise rates to bring inflation back to its 2% target. He also cited several reasons why price pressures could ease on their own. At the same time, he warned that above-target inflation could become "more entrenched," that supply-chain problems could persist, and that AI investment could continue for long enough to keep pushing prices higher. By contrast, Cleveland Fed President Beth Hammack maintained her hawkish position after the mild inflation data and argued that rate hikes should begin soon. Hammack said Thursday that the Fed should raise rates immediately to bring down inflation that is too high and restrain companies from expanding and investing too rapidly. She also said that although inflation data had improved over the past two months, the change was not enough to convince her that the inflation trend had turned, particularly because the Fed has failed to reach its 2% inflation target for more than five years. At the Fed's policy meeting last month, Hammack joined two other officials in dissenting from the decision to leave rates unchanged and called for a rate hike. The officials' public comments have increased uncertainty over what action the Fed may take at its September policy meeting. Wall Street is divided as well. Most investment banks expect the Fed to wait, but Bank of America's view is notably more aggressive. After the July CPI report, Bank of America economist Aditya Bhave reiterated his view that the Fed is likely to raise rates three times this year, with the first hike expected in September. Bhave said the Fed cut rates too aggressively last year to guard against a sharp weakening in the labor market, a risk that did not materialize. He said the Federal Open Market Committee now needs to reverse the 75 basis points in cumulative rate cuts made previously. He also warned that if the Fed holds off on raising rates now, long-term U.S. Treasury yields could become unanchored if inflation accelerates again. By contrast, Goldman Sachs, Wells Fargo and JPMorgan Asset Management all forecast that the Fed will leave rates unchanged for the remainder of 2026. Goldman Sachs analyst Robert Kaplan said the Fed's decision not to raise rates in July was "absolutely" correct. He urged policymakers to remain open-minded before September, saying the factors affecting inflation are complex and rigid forward guidance could backfire. David Kelly, chief global strategist at JPMorgan Asset Management, said the Fed should keep rates unchanged. He expects inflation to gradually fall as more evidence shows that a persistent wage-price spiral will not develop. According to CME FedWatch, the probability that the Fed will leave rates unchanged through September is currently 65.2%, while the probability of a cumulative 25-basis-point hike is 34.8%. Through October, the probability of unchanged rates is 50.1%, the probability of a cumulative 25-basis-point hike is 41.8%, and the probability of a cumulative 50-basis-point hike is 8.1%.
Chicago Fed President Austan Goolsbee said Thursday that the latest U.S. inflation data had improved "slightly." He said he hoped inflation would continue to improve as the effects of tariffs and higher oil prices caused by the war in Iran gradually faded.
"If these disturbances become a thing of the past, then I think we can get back onto what I call the 'golden path'—inflation returning to 2%," Goolsbee said in an interview. "Overall inflation is still around 3%, which is too high and not ideal. The good news is that the latest data have improved slightly."
"Inflation has been too high, our progress stalled for a while, and we even went backward," Goolsbee said Thursday. "But the data we've received in recent months have improved, and I hope that trend continues. We are currently in a delicate phase—the overall economy feels fairly stable, and our main focus is inflation."
Goolsbee's hawkish stance appeared to soften somewhat after the latest Consumer Price Index report, although he continued to stress that inflation remained too high. In a video released earlier this week, he had said bluntly that inflation was the biggest problem facing the economy.
"The biggest problem facing the U.S. economy right now is not an industrial collapse or an employment collapse, but prices rising too quickly. We do have an inflation problem, and people hate inflation," Goolsbee said at the time.
The Fed kept its short-term policy rate in a 3.50%-3.75% range last month. Based on the vote at that meeting and public comments since then, at least 5 of the central bank's 19 policymakers favored a rate hike.
The Fed tends to use the core Personal Consumption Expenditures Price Index as its primary gauge of inflation. U.S. PCE inflation was 3.7% in June, down from a recent high of 4.1% in May.
As recently as last week, market traders were betting that the Fed could raise rates as soon as September. But two reports released this week showed relatively mild consumer and producer price inflation in July, and the weak employment report released last Friday has largely erased expectations that the Fed will take any action in the near term.
The divide inside the Fed is becoming more pronounced.
Richmond Fed President Barkin explained Thursday why he favors keeping rates unchanged. He said it remains unresolved whether a rate hike is needed to achieve the inflation target, while warning that inflation could prove persistent.
Barkin said it was still unclear whether the Fed needed to raise rates to bring inflation back to its 2% target. He also cited several reasons why price pressures could ease on their own.
At the same time, he warned that above-target inflation could become "more entrenched," that supply-chain problems could persist, and that AI investment could continue for long enough to keep pushing prices higher.
By contrast, Cleveland Fed President Beth Hammack maintained her hawkish position after the mild inflation data and argued that rate hikes should begin soon.
Hammack said Thursday that the Fed should raise rates immediately to bring down inflation that is too high and restrain companies from expanding and investing too rapidly.
She also said that although inflation data had improved over the past two months, the change was not enough to convince her that the inflation trend had turned, particularly because the Fed has failed to reach its 2% inflation target for more than five years.
At the Fed's policy meeting last month, Hammack joined two other officials in dissenting from the decision to leave rates unchanged and called for a rate hike.
The officials' public comments have increased uncertainty over what action the Fed may take at its September policy meeting.
Wall Street is divided as well. Most investment banks expect the Fed to wait, but Bank of America's view is notably more aggressive.
After the July CPI report, Bank of America economist Aditya Bhave reiterated his view that the Fed is likely to raise rates three times this year, with the first hike expected in September.
Bhave said the Fed cut rates too aggressively last year to guard against a sharp weakening in the labor market, a risk that did not materialize. He said the Federal Open Market Committee now needs to reverse the 75 basis points in cumulative rate cuts made previously. He also warned that if the Fed holds off on raising rates now, long-term U.S. Treasury yields could become unanchored if inflation accelerates again.
By contrast, Goldman Sachs, Wells Fargo and JPMorgan Asset Management all forecast that the Fed will leave rates unchanged for the remainder of 2026.
Goldman Sachs analyst Robert Kaplan said the Fed's decision not to raise rates in July was "absolutely" correct. He urged policymakers to remain open-minded before September, saying the factors affecting inflation are complex and rigid forward guidance could backfire.
David Kelly, chief global strategist at JPMorgan Asset Management, said the Fed should keep rates unchanged. He expects inflation to gradually fall as more evidence shows that a persistent wage-price spiral will not develop.
According to CME FedWatch, the probability that the Fed will leave rates unchanged through September is currently 65.2%, while the probability of a cumulative 25-basis-point hike is 34.8%. Through October, the probability of unchanged rates is 50.1%, the probability of a cumulative 25-basis-point hike is 41.8%, and the probability of a cumulative 50-basis-point hike is 8.1%.