The Federal Reserve Bank of Cleveland released its August inflation forecast on August 6, projecting that inflation will reaccelerate after cooling in June. The forecast lands as the Federal Open Market Committee remains split over whether to raise interest rates at its September meeting, with money markets now treating the decision as close to a coin flip.
Key Takeaways
- The Federal Reserve Bank of Cleveland released its August inflation forecast on August 6, projecting inflation will reaccelerate after cooling in June.
- Three of twelve FOMC voting members dissented in favor of a rate hike at the July meeting, exposing a rare split inside the committee.
- CME Group’s FedWatch tool showed a 55% probability of a quarter-point rate hike in September as of August 6, versus a 45% chance rates hold steady.
- Fed Chair Kevin Warsh made conflicting statements during his post-meeting press conference about how inflation should be measured.
- The Fed cut rates last year over labor market concerns but has held rates steady since, leaving little room to maneuver before September.
The forecast matters because it arrives at the exact moment the FOMC needs clarity most and instead gets a mixed signal. A rebound in inflation after a soft June complicates the case for holding rates steady, and it hands ammunition to the three voting members who already dissented in favor of a hike at the July meeting.
What the Cleveland Fed’s Nowcast Actually Shows
The Federal Reserve Bank of Cleveland maintains a running projection tool known as Inflation Nowcasting, which produces near-term estimates of inflation gauges before official government data is released. The August update points to a pickup in price pressure following a June reading that had cooled from prior months.
That reversal is the headline detail. Inflation slowing in June had given the case for a September rate cut or hold some momentum. A reacceleration in the Cleveland Fed’s nowcast erases some of that cushion just weeks before the FOMC has to vote.
July’s Dissent Foreshadowed This Fight
The tension did not start with this forecast. At the FOMC’s July meeting, three of the twelve voting members dissented in favor of raising rates, a rare three-way split that signaled real disagreement inside the committee well before the August inflation data arrived.
Fed Chair Kevin Warsh added to the confusion rather than resolving it. During his post-meeting press conference, Warsh made conflicting statements about how inflation should even be measured leaving traders and economists without a clear read on his own framework. He has consistently said prices remain too high without settling on which gauge he is using to make that judgment.
Markets Are Already Pricing a Coin-Flip Decision
Money markets have not waited for more clarity to start pricing outcomes. As of August 6, CME Group’s FedWatch tool showed a 55% likelihood that the FOMC raises rates by a quarter point in September, against a 45% chance the committee holds steady. That gap is thin enough that the September meeting counts as a genuine toss-up rather than a foregone conclusion in either direction.
| Scenario | Probability as of August 6 |
|---|---|
| Quarter-point rate hike in September | 55% |
| Rates held steady in September | 45% |
A move that close means every data release between now and the meeting carries outsized weight. Employment and inflation figures released in the coming weeks will likely determine which side of that 55-45 split the committee will favor.
Why the Fed Is Still This Cautious About Inflation
Context helps explain why a single reacceleration signal can move markets this much. Inflation soared in 2022, forcing the FOMC into multiple jumbo rate hikes once officials recognized they had fallen behind the curve. That episode still shapes how the committee reacts to any sign of inflation turning back up, even a modest one buried in a regional nowcast.
Inflation has slowed considerably since that 2022 peak but remains above the Fed’s 2% target, which is the reason the committee has been unwilling to declare victory. The Fed lowered interest rates last year on concerns about a deteriorating labor market, then held rates steady since, a pause that has left it with little room to maneuver if inflation and employment data start pointing in opposite directions.
What Happens Between Now and September
The unresolved question is which data series wins the argument inside the FOMC. Warsh’s own ambiguity about how to measure inflation means the committee lacks a shared yardstick heading into a vote that is already split three ways from July.
Employment and inflation data due before the September meeting will be the deciding factor, and neither the Cleveland Fed’s forecast nor the FedWatch odds guarantee which way the vote breaks. What the August 6 numbers do confirm is that the committee is walking into its next meeting with less consensus, not more, than it had a month earlier. That divide, more than any single data point, is what will define the September decision.
FAQs
What Is the Cleveland Fed’s Inflation Nowcasting Tool?
It is a running projection maintained by the Federal Reserve Bank of Cleveland that produces near-term estimates of inflation gauges before official government data is released. The August update pointed to a reacceleration in inflation following a cooler reading in June.
Why Did Three FOMC Members Dissent in July?
Three of the twelve voting members favored raising rates at the July meeting rather than holding steady, signaling disagreement inside the committee about how much of a threat inflation still poses. That split occurred before the August inflation forecast was even released.
What Did Kevin Warsh Say About Inflation Measurement?
During his post-meeting press conference, Federal Reserve Chair Kevin Warsh made conflicting statements about how inflation should be measured, without settling on a single consistent gauge. He has repeatedly said prices remain too high but has left markets uncertain about his underlying framework.
What Are the Odds of a September Rate Hike?
As of August 6, CME Group’s FedWatch tool showed a 55% likelihood the FOMC raises rates by a quarter point in September, against a 45% chance it holds rates steady. That makes the meeting close to a coin-flip outcome.
Why Did the Fed Cut Rates Last Year?
The Fed lowered interest rates last year because of concerns about a deteriorating labor market. It has held rates steady since that cut, waiting for clearer signals on both employment and inflation before making another move.
Is Inflation Still Above the Fed’s Target?
Yes. Inflation has slowed considerably since its 2022 peak but remains above the Federal Reserve’s 2% target, which is why the FOMC continues to weigh further rate hikes despite months of cooling data.
What Data Will Matter Most Before the September Meeting?
Employment and inflation data released between now and the September FOMC meeting will be vital in determining which way the committee votes. Given the current 55-45 split in market pricing, any surprise in those reports could shift the outcome.
