By Christopher Combs, Chief Investment Officer
Silicon Valley Capital Partners
August 7, 2026
The Federal Reserve entered August facing an unusual policy debate. July’s surprisingly weak employment report reduced expectations for a September rate increase, while inflation remains sufficiently elevated to keep another hike in the discussion.
The coming week could provide considerably more clarity. We see three important points:
- Core CPI Could Reach a Five-Year Low
The most important economic release next week will be Wednesday’s Consumer Price Index.
Core CPI is expected to fall to its lowest year-over-year level since March 2021, while headline CPI could decline to approximately 2.4%. Inflation could moderate further toward 2.2%–2.3% over the following two months.
That would be an important development. Inflation has been the principal argument supporting another Fed rate increase. If CPI continues moving decisively toward the Fed’s long-term objective, the justification for additional monetary tightening becomes considerably weaker.
- The Inflation Picture Is Improving—but Still Complicated
There remains an important contradiction in the inflation data.
While CPI is approaching levels historically consistent with the Fed’s 2% inflation objective, core PCE remains above 3%. The unusually large divergence between CPI and PCE makes it difficult for policymakers to rely on any single inflation measure.
Chairman Kevin Warsh has emphasized evaluating a broad range of economic indicators rather than reacting to one data point. Next week’s CPI and PPI reports should therefore be viewed alongside employment, wages, housing and broader measures of economic activity.
The direction of travel, however, increasingly appears favorable: inflation pressures are moderating rather than accelerating.
- Housing and Employment Argue Against Another Rate Increase
Inflation is only one side of the Fed’s decision.
The July employment report showed meaningful deterioration in labor-market conditions, while housing remains under considerable pressure from elevated mortgage rates. Pending home sales weakened sharply in June, suggesting another soft period for completed transactions.
At the same time, softer housing demand and improving supply should continue reducing home-price pressures.
These developments make another rate increase increasingly difficult to justify. Raising rates into a weakening employment and housing environment would risk unnecessarily slowing economic activity just as inflation appears to be moving in the desired direction.
Bottom Line
The debate over the Federal Reserve’s next move is shifting.
A few weeks ago, persistent inflation made another rate increase appear increasingly possible. Today, weaker employment, softer housing conditions and potentially significant improvement in CPI inflation present a different picture.
Our base case is that the Federal Reserve remains on hold in September.
Next week’s inflation reports could reinforce that view and potentially mark an important transition for markets: from worrying about another round of monetary tightening to recognizing that the current level of interest rates may already be sufficiently restrictive.
For investors, that distinction matters. A Federal Reserve that can remain patient while inflation continues falling would provide a substantially more constructive backdrop for financial markets during the remainder of 2026.