July's non-farm employment numbers cooled, making it difficult to resolve policy differences. Inflation has exceeded the target for five consecutive years, and the faction supporting interest rate hikes within the Federal Reserve is expanding.

U.S. inflation has exceeded the Federal Reserve's 2% policy target for five consecutive years, continually testing the patience of decision-makers. Although the Federal Reserve maintained interest rates unchanged at its July meeting, an increasing number of officials believe that interest rate hikes should be resumed soon to prevent high inflation from becoming entrenched; another faction argues for continued observation of the data, claiming there is still hope for inflation to decline without further tightening of policies. As the September meeting approaches, divisions within the Federal Reserve regarding whether to raise interest rates have become increasingly evident. With persistent high inflation, the pro-rate hike faction within the Federal Reserve is expanding. In July, the Federal Reserve kept the federal funds target rate range at 3.5%-3.75% for the fifth consecutive time. However, during the meeting, three voting officials supported a 25 basis point increase, and several non-voting officials have also publicly expressed similar views, indicating that the group favoring further tightening of policy is growing. At the same time, officials who support maintaining the status quo believe there is still a chance that inflation could naturally decline over time, although their patience in tolerating price shocks is starting to wane. James Egelhof, Chief Economist for the U.S. at BNP Paribas, stated that the current economic data still presents significant uncertainties, insufficient to prove which scenario is unfolding, but due to the lack of substantial improvement in inflation, the pressure for the Federal Reserve to take action is rising. Cooling employment market has not quelled policy debates. Last week's non-farm payroll data for July showed that U.S. employment unexpectedly decreased by 23,000, while employment figures for the previous two months were also significantly revised down, reigniting market concerns about a weakening labor market. However, this employment report did not provide a clear direction for the Federal Reserve's policy discussions. Richmond Fed President Barkin indicated that the labor market remains in a "fragile balance" that has persisted for the past year and a half and is not the main factor driving inflation. Market attention has shifted to upcoming inflation data in the following weeks, including the Consumer Price Index (CPI) to be released next week, which will serve as a crucial reference before the September meeting. According to the economic forecast released by the Federal Reserve in June, officials still expect inflation to return to the 2% target level by 2028. However, as of June this year, the year-on-year increase in U.S. CPI still stood at 3.5%, and the core PCE year-on-year increase, excluding food and energy, reached 3.3%, leading to heightened market concerns about the Federal Reserve's ability to achieve this goal. "Continue to observe" or "raise rates immediately"? Divergence in official views. Officials favoring the continuation of unchanged rates argue that part of the current inflation pressure may be temporary, and raising rates may not be the best choice. Claudia Sahm, a former Federal Reserve economist and Chief Economist at New Century Advisors, stated that the biggest challenge facing the Federal Reserve now is distinguishing between cyclical factors affecting inflation and employment and structural factors, noting that monetary policy is more suited to address the former. Fed Governor Cook stated this week that some favorable factors for inflation decline have begun to take effect, including the diminishing impact of tariffs, potential future declines in oil prices, and the alleviation of price pressures from AI investment. He cautioned that premature rate hikes could unnecessarily impact the labor market. New York Fed President Williams also stated that he still expects inflation to return to 2% before 2028 and that his overall judgment has not changed significantly. Following the release of weak employment data, the futures market's expectations for a rate hike in September have decreased from over 50% to about 40%. However, officials in favor of rate hikes believe the Federal Reserve has little time left to wait. Minneapolis Fed President Kashkari, Dallas Fed President Logan, and Cleveland Fed President Mester, who voted in favor of a rate hike at the July meeting, all indicated that delaying further might necessitate larger future increases. Additionally, Kansas City Fed President George stated this week that, given the continued strength of consumer demand and business investment, he does not believe current monetary policy is sufficiently restrictive and therefore supports further tightening to curb inflation. Wall Street remains silent; market focuses on the Federal Reserve's policy credibility. In contrast to the increasingly public policy divisions among officials, Federal Reserve Chairman Powell's stance appears more cautious. After the July meeting, Powell reiterated that the Federal Reserve would steadfastly uphold price stability but declined to reveal future interest rate paths or specify under what economic conditions a rate hike might occur. Due to the lack of forward guidance, the market previously sold off long-term U.S. Treasuries, resulting in a noticeable rise in long-term bond yields, and market inflation expectations also increased accordingly. St. Louis Fed President Bullard commented that this market reaction serves as further evidence that the Federal Reserve needs to continuously maintain its policy credibility through effective communication and necessary action. Torsten Slok, Chief Economist at Apollo Global Management, stated that the current issue is no longer just the economic data but also the Federal Reserve's policy credibility. "Since 2021, U.S. inflation has been above target levels, marking a very protracted process for the world's most important central bank." Mark Zandi, Chief Economist at Moody's Analytics, noted that as the Federal Reserve's policy statements have become more streamlined and Powell has disclosed little about policy thinking, it has become more challenging for outsiders to assess the internal stance of the FOMC. With the September meeting approaching and the Jackson Hole global central bank annual meeting occurring at the end of the month, the market anticipates ongoing heated debates within the Federal Reserve regarding whether to raise interest rates.