Summary of Key Points
In the second half of 2026, concerns about the U.S. economy shifted from other issues at the beginning of the year to inflation. Whether and when the Federal Reserve will raise interest rates has become a central topic of market discussion. Experts disagree on whether inflation is temporary or persistent: while food and energy costs have been driving inflation recently, these factors may reverse; however, the expansion of core service prices (which are less volatile) is a cause for concern. On the other hand, the slowdown in wage growth supports the view that inflation is temporary. Although economic growth is being supported by factors such as employment and AI investment, most of the benefits have gone to corporate profits, with limited gains for ordinary consumers.
Fed officials have recently been leaning towards a more "hawkish" stance (advocating interest rate hikes to control inflation). Coupled with the impact of conflicts in the Middle East on energy prices, the stakes at this Fed meeting have increased—especially since Chairman Jerome Powell decided to hold a press conference, raising speculation about potential significant policy moves.
1. A Major Shift from "Interest Rate Cut Expectations" to "Interest Rate Hike Suspense"
At the beginning of the year, the market expected the Fed to cut interest rates twice (from 3.5%-3.75% to 3.1%). However, the situation has completely changed: inflation is far higher than the Fed's target of 2%. Experts, such as former White House economic advisor Gary Friedman, have stated that a rate cut this year is almost impossible and that an interest rate hike is more likely, possibly in September or later (the July meeting is not expected to see a raise). Market expectations have also adjusted accordingly; now, it is anticipated that interest rates will rise to 4% by the end of the year, which is much tighter than the initial forecasts—meaning the Fed will be tightening monetary policy and making borrowing more expensive.
2. Inflation: A "Temporary Fluctuation" or a "Long-Term Threat?"
The current overall inflation rate in the U.S. (as measured by the PCE index) is 4.1%, with core inflation (which excludes volatile food and energy costs) at 3.4%, both above the target range.
- Recent Drivers of Inflation: The main factors have been rising food and energy prices, but oil prices have already begun to decline, which could lead to a decrease in this aspect of inflation.
- Concerns: The most worrying trend is the rise in "core service inflation" (such as healthcare, education, and dining), which is not directly linked to commodity prices. Some fear that this is due to a tight labor market forcing companies to raise wages, which in turn drives up prices, creating a vicious cycle of inflation expectations becoming entrenched. However, there are also optimists: wage growth has slowed down, and the current rate of inflation (2.6%) is consistent with this trend; Friedman is among the optimists, suggesting that this inflation may be temporary.
3. Economic Growth: Good Numbers, but Little Benefit for Ordinary Consumers
The U.S. economy is still growing, with a first-quarter GDP growth rate of around 2%. Three factors are supporting this growth:
1. Stable Employment: An additional 92,000 jobs were created each month, more than ten times the 8,000 added in the second half of last year.
2. AI and Stock Market Boost: Increased investment in AI has led to higher stock prices, encouraging consumer spending.
3. Improving External Trade: The balance of imports and exports has improved.
However, most of the benefits of growth have gone to companies. Corporate profits reached record levels in the first quarter, while the real disposable income of ordinary consumers (after adjusting for inflation) has increased by less than 1% year-on-year, indicating that economic growth has primarily benefited businesses rather than individuals.
4. Intense "Hawkish" Signals from the Fed, with a Mysterious Press Conference
Recent statements from Fed officials have been more hawkish:
- Jerome Powell (formerly considered dovish) and Christopher Cook have both indicated that interest rate hikes may be necessary if inflation does not subside.
- Meeting minutes from June show that officials are preparing for a "Plan B," which would involve raising rates if inflation does not decline quickly enough.
- Powell emphasized in Congress that controlling inflation is the top priority, and the slight improvement in inflation in June does not mean the task is completed.
The most significant development is Powell's decision to hold a press conference. He has previously said that such meetings are only held for important announcements. This move could signal an interest rate hike, a stronger commitment to controlling inflation, or it could simply be part of the Fed's communication strategy. Regardless, the suspense is high.
5. The Middle East Conflict as a Complexing Factor: Energy Prices as a "X Variable"
The conflict in the Middle East is not the primary cause of changes in interest rate expectations, but it has made the situation more complicated:
- The ongoing conflicts have diminished the significance of earlier positive news about inflation being lower than expected.
- High energy prices could trigger a "second round effect": companies may raise prices due to increased costs, and workers may demand higher wages, further driving up prices.
- If the conflict continues during the meeting, hawkish officials will have even more reason to advocate for interest rate hikes, as rising oil prices would make it harder to control inflation, increasing the likelihood of the Fed tightening its policies.
In summary, the focus of this Fed meeting is whether to raise interest rates. The persistence of inflation, the quality of economic growth, and the outcome of the Middle East conflict are all key factors affecting the decision-making process. Ordinary consumers should be aware that if interest rates are raised, borrowing costs for mortgages and car loans will increase; if inflation persists, daily expenses will become more expensive—these issues directly affect everyone's financial well-being.