The Federal Reserve's August meeting minutes revealed a surprisingly hawkish tilt, showing more than three members favored a rate hike, while the ongoing bond market turmoil has sparked speculation about a "passive tightening" scenario—raising the question: will the Fed defy a 40-year historical pattern by turning hawkish in the second half of an election year?

Market pricing currently indicates roughly a 55% probability of a 25-basis-point rate hike by the Fed before the October 2026 FOMC meeting, reflecting concerns over persistent inflation and doubts about the Fed's credibility in fighting price pressures following the July meeting. However, according to the latest research from Nomura, recent inflation data has shown notable cooling—June core PCE rose just 0.132% month-over-month, and July CPI and PPI figures also point to another moderate reading—which objectively gives the Fed "the luxury of waiting." Nomura maintains its base case that the Fed will hold rates steady.

The Nomura report also notes that the election calendar marginally supports the "hold steady" judgment. Since 1990, the Fed has never turned hawkish in the second half of an election year—meaning a shift from easing to tightening. Combined with current moderating inflation momentum and cooling employment and consumption data, Nomura believes the probability of the Fed keeping rates unchanged through the midterm election period is rising, and the market's current pricing of a rate hike appears overestimated.

Historical Pattern: No Hawkish Turn in the Second Half of Election Years

Nomura economists Aichi Amemiya, Ruchir Sharma, and Jeremy Schwartz analyzed the Fed's policy behavior around election years since 1990 in their August 19 research report. The data shows that, whether in presidential or midterm election years, the Fed has never initiated a policy pivot—switching from an easing cycle to a tightening one—in the second half of an election year. The frequency of tightening actions such as rate hikes, quantitative tightening, or QE tapering in the months leading up to the October and November national elections is also notably low.

Nomura specifically highlights that the current situation differs fundamentally from past tightening cycles. The November 2022 rate hike occurred six days before the midterm elections, but at that time the tightening cycle was already well underway, and there was broad consensus among FOMC members on continued hikes. The current scenario is starkly different—if the Fed were to hike now, it would mark a genuine "hawkish turn" after two years of continuous rate cuts, something with no historical precedent.

Echoes from History: Election Considerations in FOMC Minutes

Nomura cites multiple historical FOMC meeting records as direct evidence that policymakers have explicitly weighed election timing in their decisions. At the November 2016 FOMC meeting, held six days before the presidential election, then-New York Fed President Dudley argued that hiking with "one week to go before the election" would send an urgency signal inconsistent with the economic data; Philadelphia Fed President Harker explicitly stated, "Given the timing of this meeting, we should probably wait until December." The committee ultimately held rates steady and hiked in December.

The September 1994 case provides the closest midterm election reference to the current situation. Despite multiple officials advocating for a hike at that meeting, the committee ultimately chose to keep rates unchanged. Boston Fed President Minehan explicitly noted that the timing of further hikes involved both "economic factors" and "political factors." One week after the election, the committee hiked by 75 basis points.

The September 24, 2002 FOMC meeting also offers valuable insight. The next scheduled meeting fell on November 6, the day after the midterm elections. Then-Fed Chairman Greenspan stated that the Fed does not consider political factors, but acknowledged the public would make such associations, adding, "If the meeting were the day before the election, we'd be in trouble." The Fed ultimately waited until November 6 to announce a 50-basis-point rate cut.

Data Gives the Fed "the Luxury of Waiting"

The Fed's July FOMC minutes released a rare hawkish signal: not only did three voting members formally support a rate hike, but the minutes also showed that "several" participants favored a 25-basis-point increase during the meeting. "New Fed whisperer" Nick Timiraos interpreted this as the hike gaining "broader support." Meanwhile, the global bond market storm has created new external pressure—Goldman Sachs' European trading desk head Privorotsky stated bluntly that bond supply pressure is so significant it could force the Fed to "hike even as data weakens to anchor long-end rates."

Although voices questioning whether "historical patterns will hold this time" are growing louder, Nomura believes current inflation and employment data provide the Fed with objective grounds to remain on hold without damaging its credibility. On inflation, the June core PCE month-over-month growth slowed to 0.132%, a clear deceleration; July CPI and PPI data point to a moderate core PCE reading of approximately 0.226%. Nomura notes that, according to recent Fed official statements, monthly core PCE growth of 0.1% to 0.2% is viewed as a positive signal of progress toward the 2% target. Despite volatility in gasoline and food prices, longer-term inflation expectations remain broadly stable.

On employment and consumption, the July nonfarm payroll report shows the labor market stabilizing rather than re-accelerating, easing concerns about wage-driven inflation; July retail sales data also indicates consumer spending normalizing after strong second-quarter growth. Nomura expects inflation momentum to continue weakening as tariff impacts fade, wage growth slows, and residual seasonal price factors turn negative in the second half of the year. Additionally, methodology adjustments to certain PCE components are scheduled before year-end, which is expected to modestly lower the year-over-year core PCE reading on a technical basis.

Waiting Itself Reinforces the "Hold Steady" Logic

Nomura's core judgment is that the longer the Fed delays action, the more confidence it gains in the sustained decline of inflation, and the lower the eventual necessity for tightening becomes. The firm believes core PCE year-over-year growth may have already peaked. Combining economic data trends with the midterm election calendar, the Fed will most likely keep rates unchanged for the next four months or so. If inflation and economic data evolve as expected, this "pause" could extend into an indefinite hold, at which point the market's current tightening expectations would be fully unwound.

Nomura emphasizes that its Fed forecast is based primarily on the inflation outlook rather than the election cycle. However, the historical election-year pattern marginally reinforces the firm's "hold steady" call and could slightly reduce the probability of Fed action at upcoming meetings.