Inflation drifts lower but remains too high
The Fed is likely to station itself on the sidelines for now.
Published: AUG 24, 2026
How might Americans be thinking about their investments at this moment of economic uncertainty? Inflation appears to be headed in the right direction, though that could easily change. The Federal Reserve (Fed) doesn’t yet have a clear signal on whether to raise rates or cut them or stand pat. The Iran war could cause that to change, if prices on oil resume their march higher.
The Fed’s next meeting is in September, and it isn’t particularly likely that the central bank would hike into the teeth of the elections. So it might be that the Fed has several months of watchful waiting to see if inflation’s path will better declare itself. The annual summer retreat at Jackson Hole will at least give Chair Warsh the opportunity to offer some color on where he thinks the central bank should be heading.
In the meantime, long-term bonds have seen their yields spike higher lately, causing the Treasury to increase buybacks of longer-dated bonds. As for equities, index returns and recent earnings seasons suggest the US economy is in at least reasonable health.
Given this, it seems likely that equity markets could stomach at least a hike or two from here (albeit reluctantly). After all, they’re rallying right now even in the midst of forecasts for rate hikes this year. If, on the other hand, rates are held steady or even cut, then the outlook for equities would be more favorable still. The weak July jobs report together with restrained inflation readings have made many onlookers marginally less hawkish. Soon enough – though probably not very soon – we will learn where the Fed itself stands.
Our outlook:
Yields on shorter-duration bonds are fairly attractive, but they have a potential advantage in more than one scenario: they should escape some of the volatility to which uncertainty exposes longer-duration bonds. Historically, equities have tended to perform well in sticky soft-landing scenarios and held up reasonably well amid persistent inflation.
- Sticky soft landing — Inflation moderates gradually, growth slows but stays positive, and the labor market cools but remains healthy. Potential portfolio considerations: Diversified equities may be well- positioned in this scenario, with a tilt toward large-cap quality and international names potentially benefiting from stable global growth; small caps may have less support without a stronger growth catalyst. In fixed income, short-duration strategies (roughly one to three years) may allow a more nimble stance without betting on rate-cut timing, and investment-grade credit is favored over high yield given the expectation for moderate growth and contained spreads. Emerging market debt could perform reasonably well if the dollar stays range bound.
- Inflation persistence (stagflation lite) — Growth weakens while inflation remains sticky from energy, wages, tariffs, and geopolitics. Potential portfolio considerations: Large-cap, quality stocks with pricing power may hold up better against margin pressure, value could outperform growth, and small caps may be more vulnerable to tightening conditions. Ultra-short and floating-rate fixed income should reprice more quickly if the Fed hikes, which may offer a partial hedge, while investment-grade credit may be preferred over high yield for its stronger balance sheets. Emerging market debt is likely to lag, as sticky inflation and a firmer dollar could work against it.
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
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