Federal Reserve: Inflation scenarios guide rate path – ABN AMRO

ABN AMRO’s Rogier Quaedvlieg reviews the latest United States (US) Consumer Price Index (CPI) downside surprise and its implications for the Federal Reserve (Fed). He highlights that both headline and core inflation fell sharply versus consensus, prompting markets to reprice the odds of future hikes. Drawing on the June Federal Open Market Committee (FOMC) minutes, he outlines two main policy scenarios and concludes the Fed is likely to stay on hold for the rest of 2026.

Two-path framework for Fed policy

"The recently released FOMC minutes for the June meeting provided a useful guide to the FOMC’s reasoning."

"It contained a key paragraph outlining the fact that the FOMC essentially sees two plausible scenarios."

"The first is one where inflation improves ‘soon’, where they deem it appropriate that rates will be held steady in the near term before eventually being cut."

"The second scenario is one of sticky inflation (due to e.g. AI-related demand, the energy shock or tariffs) and a stable labour market, which would require ‘some firming’."

"The source of inflation does not seem to matter, and we see the most likely interpretation of ‘some firming’ as a 25 bps hike in both September and December."