US Economy: The Fed Gains Time, but No Certainty

WASHINGTON, August 14, 2026 – The latest inflation data from the United States are giving the Federal Reserve some breathing room ahead of its next interest rate decision. Both consumer and producer prices developed more favorably in July than had been feared only a few months ago. At the same time, the U.S. labor market is losing momentum. For the central bank, this combination initially argues for leaving its policy rate unchanged in September. But there can be no talk of a return to price stability.

The economic policy picture is further complicated by two factors that are largely beyond the Fed’s direct control: President Donald Trump’s administration is continuing its aggressive tariff policy, while energy prices remain elevated as a result of the conflicts in the Middle East. At the same time, the investment boom surrounding artificial intelligence is continuing, creating new demand for energy, data centers, construction services and skilled workers.

The U.S. economy therefore finds itself in an unusual constellation. Inflation is declining but remains above the Federal Reserve’s target. The labor market is weakening without having slipped into a pronounced downturn so far. At the same time, the stock market is at record levels. And while the Fed tries to align its monetary policy with these conflicting signals, the White House is pressing ahead with its realignment of trade policy.

Consumer prices rise only slightly in July

The most important relief this week came from the Bureau of Labor Statistics. The consumer price index rose by just 0.1 percent in July from the previous month. In June, prices had fallen by 0.4 percent. Compared with the same month a year earlier, the inflation rate was 3.4 percent in July.

Inflation therefore remains well above the level that would be consistent with the Federal Reserve’s two-percent target. However, the trend was more moderate than in the spring, when energy and trade shocks had heightened fears of a new wave of inflation.

The trend in gasoline prices was particularly important. They fell by 2.9 percent in July, after already dropping by 9.7 percent in June. Food prices rose by only 0.1 percent. Retail food prices even declined slightly. Housing costs rose by 0.1 percent and, according to the Bureau of Labor Statistics, accounted for around two-thirds of the total monthly increase in the consumer price index.

The picture for core inflation was also comparatively moderate. The index excluding the volatile food and energy components rose by 0.2 percent from June and by 2.5 percent from a year earlier.t.

The picture for core inflation was also comparatively moderate. The index excluding the volatile food and energy components rose by 0.2 percent from June and by 2.5 percent from a year earlier.

Scott Anderson, chief U.S. economist at BMO Capital Markets, told Reuters that the report was likely to further reduce the Fed’s concerns about an energy-driven inflationary spiral. At the same time, he warned against drawing far-reaching conclusions from a single monthly report. The central bank needed further evidence that inflation, particularly in services, was declining on a sustained basis.

Producer prices also provide a signal of easing

One day after the consumer price data, a second release favorable to the Fed followed. The producer price index for final demand was unchanged in July from the previous month. In June, it had fallen by 0.1 percent according to revised data. Economists polled by Reuters had expected an increase of 0.2 percent for July.

The headline figure, however, conceals substantial differences. Goods prices fell by 0.7 percent, while services became 0.2 percent more expensive. Compared with a year earlier, producer prices were still 4.7 percent higher. In June, the rate had been 5.5 percent.

Price pressures at the corporate level are therefore easing but remain high. There is also a statistical issue: a large share of the data is collected early in each month. The sharp rise in oil prices toward the end of July is therefore unlikely to be fully reflected in the figures yet.

This point is crucial for monetary policy. Temporary relief from lower energy prices can quickly reverse if crude oil, transportation and other inputs become more expensive again. Businesses must then decide what share of their higher costs to absorb through their margins and what share to pass on to their customers.

This is precisely where monetary and trade policy overlap. Tariffs directly increase the cost of certain imported intermediate goods. Whether they result in permanently higher consumer prices depends, among other things, on exchange rates, supply chains, profit margins and the strength of demand.

The labor market sends a warning signal

At the same time, the Fed must pay attention to the other side of its statutory dual mandate: maximum employment.

The labor market report for July was significantly weaker than expected. Nonfarm payroll employment fell by 23,000 jobs. The unemployment rate was 4.1 percent. According to the Bureau of Labor Statistics, jobs were lost particularly in education at the local government level and in retail trade, while health care continued to add jobs.

A single negative monthly reading does not yet mean a recession. Nevertheless, it changes the monetary policy assessment of risk. An interest rate increase that, with a robust labor market, would primarily serve to fight inflation could cause greater economic costs when employment is weakening.

The Fed is therefore caught between two risks. If it waits too long and inflation proves persistent, higher inflation rates could become embedded in the expectations of businesses and consumers. If, on the other hand, it tightens monetary policy too much, it could place an additional burden on an already weakening labor market.

This trade-off is likely to shape the meeting of the Federal Open Market Committee on September 15 and 16.

Barkin: It remains unclear whether further interest rate increases will be necessary

Richmond Fed President Tom Barkin summed up the dilemma on Thursday in a speech to the Chamber of Commerce in Greenville, South Carolina. The question, he said, was not whether inflation would return to the two-percent target. The FOMC had made clear that it was determined to do so. What remained open, rather, was the path by which that goal would be reached: through further interest rate increases or through a decline in inflationary pressure that was already underway.

Barkin explicitly pointed to several extraordinary factors that had contributed to the currently elevated inflation. These include higher tariffs, oil prices and strong demand for materials and labor to expand infrastructure surrounding artificial intelligence. A substantial portion of the current inflationary pressure was attributable to shocks that could pass, he argued.

At the same time, Barkin warned of the opposite possibility: inflation could be more deeply embedded in the economy than assumed. Supply chain problems could persist, the AI investment boom could last longer, and the inflation expectations of businesses and consumers could shift upward.

The Fed had left its target range for the federal funds rate at 3.50 to 3.75 percent in July. Following the latest inflation and employment data, most investors also expect no change in September. According to Reuters, however, market participants still see the possibility of an interest rate increase in October or December.

This marks a fundamental shift in the debate compared with earlier phases of the rate-cutting cycle. The key question at present is not how quickly the Fed can ease its monetary policy, but whether it must tighten again in order to return inflation sustainably to two percent.

Trump continues to use tariffs as an economic policy instrument

While the Fed is trying to curb inflationary pressure, the Trump administration is continuing its tariff policy. On Thursday, the president announced new levies on imported drones and drone components.

A tariff of 100 percent is to apply to certain larger drones or those considered particularly sensitive from a security standpoint. Smaller drones are to be subject to a levy of 25 percent. According to the White House, a tariff rate of 15 percent is to apply to drones and components from the European Union, Japan, Liechtenstein, South Korea, Switzerland and Taiwan. Imports from the United Kingdom are to be subject to a rate of ten percent. As a general rule, the new levies are to take effect 21 days after the proclamation is signed. Longer transition periods apply to certain components.

Trump justified the move on grounds of national security and excessive U.S. dependence on foreign producers. Following an investigation, Commerce Secretary Howard Lutnick had concluded that import penetration by foreign suppliers was substantial and that the United States was too dependent on foreign sources for drones and their components, the president said.

The measure shows how the administration now links trade policy with industrial and security policy. Tariffs are no longer intended only to reduce trade deficits or build negotiating pressure on other countries. They are also intended specifically to promote production capacity within the United States and reduce dependencies in strategic technologies.

Drones are a particularly clear example of this. The systems play a growing role both in the civilian economy and for armed forces and security agencies. At the same time, the international supply chain is highly fragmented.

Economically, however, the same question remains as with other import tariffs: Who bears the costs? A tariff is initially paid by the importer to the U.S. government. Whether and to what extent these costs are subsequently borne by foreign manufacturers, U.S. importers or end customers depends on the respective market conditions.

For the Fed, every new round of tariffs therefore represents an additional inflation risk.

Courts limit Trump’s trade policy – but not completely

Alongside the economic debate, a legal dispute is underway over how far the president may go in trade policy without congressional approval.

Trump scored a success in that dispute on Thursday. The U.S. Court of International Trade upheld his authority to end early the so-called de minimis exemption for certain low-value imports from China, Mexico and Canada. The exemption had allowed goods worth less than 800 dollars to be imported into the United States duty-free under certain conditions.

Trump called the decision a “big win” and described the exemption as a major loophole for those seeking to evade tariffs.

The decision, however, is not a general carte blanche for the president’s tariff policy. In February, the Supreme Court struck down a large portion of the far-reaching tariffs Trump had imposed under the International Emergency Economic Powers Act. In the view of the nation’s highest court, that law does not allow the president to independently impose sweeping new tariffs on trading partners. The current case, by contrast, concerned the repeal of an existing trade-law privilege.

The distinction is significant for the future course of trade policy. Trump has since relied on other statutory authorities to impose tariffs on a very large share of U.S. imports. These measures are also being challenged in court.

For businesses, this means an additional form of economic uncertainty. They must calculate not only how high a tariff will be, but also whether it will remain in force and what legal authority the administration will invoke for possible replacement measures.

Fed independence remains a field of political conflict

Adding to the economic policy uncertainties is the ongoing conflict between the White House and parts of the Federal Reserve.

Trump has renewed his attempt to remove Fed Governor Lisa Cook from office. In early August, the White House informed Cook that the president was considering dismissing her and demanded a response within three weeks to allegations involving mortgage documents. Cook’s lawyer described the allegations as unfounded.

In June, the Supreme Court had initially blocked an earlier attempt by Trump to remove Cook by a five-to-four vote. Chief Justice John Roberts based the decision in part on the fact that Cook had not been given the opportunities provided by law to adequately challenge the allegations against her. In doing so, the court did not issue a final ruling on the underlying facts.

The case has significance far beyond Cook’s personal position. Since the Federal Reserve was founded in 1913, no president had previously attempted to dismiss a sitting Fed governor. The statutory protections for members of the Board of Governors are among the institutional foundations of the U.S. central bank’s political independence.

Trump had already repeatedly criticized former Fed Chair Jerome Powell over his interest rate policy. Since Kevin Warsh took over the leadership of the central bank in May, political pressure has been directed more strongly at other members of the Board.

The institutional question is especially relevant at a time when the Fed must weigh fighting inflation against labor market risks. Financial markets must be able to assess whether monetary policy decisions are being made on the basis of macroeconomic data or political preferences.

Wall Street is betting on a favorable scenario for now

Optimism has prevailed in the stock markets so far.

The S&P 500 reached a new record high on Thursday and closed 0.65 percent higher at 7,798.99 points. The Nasdaq Composite gained 0.81 percent to 26,803.03 points, while the Dow Jones Industrial Average rose by 0.13 percent and closed at 53,839.99 points. Since the beginning of the year, the S&P 500 is therefore up around 14 percent and the Nasdaq about 15 percent.

The latest inflation data reinforced expectations that the Fed will not have to raise interest rates in September. On Thursday, futures markets were pricing in a probability of around 63 percent that rates would remain unchanged.

In addition, the market continues to be supported by the AI boom. Large technology companies are investing substantial sums in data centers, chips and cloud infrastructure. Strong corporate earnings have so far eased concerns that these investments might not generate sufficient returns in the short term.

The contrast with the real economy is striking. While employment edged down in July and inflation continues to weigh on the purchasing power of many households, major stock indexes are at historic highs.

This is not necessarily a contradiction. Stock markets primarily price expected future corporate profits and financing costs. A combination of falling inflation, no interest rate increases and high technology-sector profits can therefore be positive for stocks even if other parts of the economy weaken.

The next data will be decisiveentscheidend

The current figures reduce short-term pressure on the Federal Reserve but do not resolve its strategic problem.

Consumer price inflation of 3.4 percent remains clearly above a level the Fed is likely to accept on a sustained basis. Producer prices are as much as 4.7 percent higher than a year earlier. At the same time, the labor market is weakening. Added to this are tariff, energy and supply chain risks whose full impact may not yet be visible in the current data.

Before the September meeting, the Fed will receive the inflation and labor market data for August. They will show whether July actually marks the beginning of a more stable trend or was merely a temporary respite.

This creates an economic policy trade-off for the Trump administration. The White House wants to use tariffs to bring production back to the United States, secure strategic supply chains and exert foreign-policy pressure. In the short term, however, the same measures can increase import costs and thereby make the Federal Reserve’s job more difficult.

So far, the latest figures do not point to a new inflationary spiral. But neither do they provide evidence that price pressures have been definitively overcome. U.S. monetary policy therefore remains dependent from month to month on an unusually broad range of risks: the labor market, energy prices, tariffs, AI investment and geopolitical conflicts.

For September, the Fed has therefore gained one thing above all: time. Whether it can use that time without having to raise interest rates again later now depends largely on whether the easing in prices continues – and whether the trade-policy and geopolitical shocks remain contained.