Markets Fully Price a September Fed Rise. The Fed’s Own Survey Sees No Move Until 2028.
The minutes of the Federal Open Market Committee’s 28 and 29 July meeting, released on 19 August, record a gap between what markets expect and what the Federal Reserve’s own survey respondents expect that is about as wide as it gets. They also show the Committee lowering the condition it has set for its next rate rise.
Start with the divergence, because it is stated plainly. The minutes report that the market was fully pricing a 25 basis point increase by the September meeting, and another by the end of the first quarter of 2027. The median respondent to the New York Fed’s Desk survey, by contrast, expected no change in the policy rate this year or next, and a cut only in early 2028. Those are not shades of the same view. One expects tightening within weeks; the other expects nothing for two years and then easing.
| July meeting, the record | |
|---|---|
| Target range | 3.50% to 3.75%, unchanged since 10 December 2025 |
| Vote | 9 to 3 |
| Voting against | Hammack, Kashkari and Logan, all preferring +25 basis points |
| Market pricing | +25bp fully priced by September, another by end-Q1 2027 |
| Desk survey median | No change in 2026 or 2027, cut in early 2028 |
| Interest on reserve balances | 3.65%, effective 30 July |
| Primary credit rate | 3.75% |
| Next meeting | 15 and 16 September, with projections |
The condition for tightening got easier to satisfy. This is the substantive change and it takes two documents to see. In April, the minutes recorded that a majority of participants highlighted that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent. In July, many participants assessed that policy tightening would likely be necessary if inflation did not decline. Read those side by side. April required inflation to keep running persistently above target. July requires only that it fail to fall. The threshold has moved down, even though the counting word attached to it has softened from a majority to many.
| The conditional bias, April against July | |
|---|---|
| April 2026 | A majority: firming likely appropriate if inflation continues persistently above 2 percent |
| July 2026 | Many: tightening likely necessary if inflation did not decline |
Several participants wanted to move at this meeting. The minutes record that several participants favoured an increase of 25 basis points in July itself, arguing that price pressures appeared broad based and that the Committee should adopt a more restrictive stance to meet its goals on a sustained basis. The document does not identify them, and “participants” covers voters and non-voting Reserve Bank presidents alike, so it does not tell us whether that group was wider than the three who cast recorded dissents. Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas are Reserve Bank presidents rather than governors, and all three hold votes this year.
A few made the cost-of-delay argument. Some of those favouring a rise judged that acting then would help forestall a steeper and potentially more costly sequence of tightening later. Various participants noted that financial conditions had already tightened over the intermeeting period, partly reflecting market expectations that the Committee would move to a more restrictive stance before long. Some commented that financial conditions might not currently be restrictive enough to return inflation to 2 percent.
No one preferred a cut, though the labour market is not without concern. The minutes contain no participant favouring a reduction at this meeting. That said, a few noted lingering signs of softness in the labour market, including the low job-finding rate and a persistently elevated long-term unemployment rate, and a few flagged upside risks to wage growth. The absence of a cut advocate is not the absence of a dovish argument.
Inflation is why, and the composition is what unsettles them. Total PCE inflation moved down in June on a twelve month basis, largely on a sharp fall in energy prices, with core edging down. But several participants noted price increases were broad based across goods and services, some pointed to core services excluding housing, and some observed that even after excluding items most directly affected by tariffs and energy, underlying inflation appeared elevated. Participants named data centre inputs such as chips and steel, alongside smartphones, computer equipment, software and electricity.
Most expect relief; many do not trust it. Most anticipated inflation would step down over the rest of the year as tariff and earlier energy effects wane. Many noted it might prove more persistently elevated. Longer term inflation expectations were judged consistent with the 2 percent objective, but several participants remarked that shorter term survey measures were higher than before the conflict in the Middle East.
The staff risk split is the uncomfortable one. Risks to the forecasts for employment and real output were seen as skewed to the downside. Risks to the inflation forecast were seen as skewed to the upside.
A structural proposal that has drawn almost no attention. The Chairman observed that six scheduled meetings a year, held roughly every two months, would allow more information to accumulate between meetings than the present eight, and give policymakers and staff more time for strategic questions. He asked the Committee for input. No decision was taken, and he indicated any change would not affect the balance of 2026. From a chairman who rewrote the postmeeting statement at his first meeting in June, it is a second proposed change to how the Committee works rather than to what it decides.
Even the language was not unanimous. In June the Committee added that it “will deliver price stability.” The minutes record that almost all members agreed it was appropriate to retain that in July. Almost all is not all.
Balance sheet work is queued, not decided. Most participants commented on balance sheet policy, noting a task force’s findings would feed future deliberations, with issues raised including market functioning, financial stability and the maturity composition of Treasury holdings. Many reaffirmed that the primary means of adjusting policy should remain the target range for the federal funds rate.
Why it matters: The Gulf connection runs through energy and it is in the Fed’s own text. The July statement attributes elevated uncertainty in part to the conflict in the Middle East, participants tied inflation partly to supply shocks including energy, and shorter term inflation expectations are recorded as higher than before that conflict. Across most GCC economies, dollar pegs transmit changes in United States rates into domestic monetary conditions quickly, while Kuwait’s managed basket, in place since May 2007, gives the dinar somewhat more room than a straight dollar peg. So a Federal Reserve that tightens partly because of an energy shock originating in this region passes much of that tightening back into Gulf funding costs, with Kuwait better insulated than most. The lower threshold in the July minutes leaves the September decision unusually sensitive to whether inflation resumes its decline.
Outlook: The Committee next meets on 15 and 16 September with a Summary of Economic Projections. It will be the second projections round under the new chairman, June having been the first, but the first since the vote split. August employment lands on 4 September and August consumer prices on 11 September. Those two prints are what the July condition is written against, and they will also settle which of the two expectations recorded in these minutes, the market’s or the Desk survey’s, was closer to right.
Sources: Federal Reserve, minutes of the Federal Open Market Committee meeting of 28 and 29 July 2026, released 19 August 2026, and the minutes of the meeting of 28 and 29 April 2026 · the postmeeting statements and implementation notes of 29 July and 17 June 2026 · the FOMC meeting calendar identifying the meetings associated with a Summary of Economic Projections · Bureau of Labor Statistics release schedule for September 2026 · Central Bank of Kuwait, exchange rate policy. The comparison of the April and July conditional tightening language, and of market pricing against the Desk survey median, by The Edge Research Team.
