Two Inflation Reports Will Determine Whether the Fed Raises Rates in September
Alina Collins
July's CPI and core PCE — both due within a month — will directly determine whether the Fed hikes or holds in September. Chair Warsh's ambiguous stance last time has already shaken market confidence in the Fed's resolve to fight inflation.
What exactly do these two reports measure?
July core CPI — consumer prices excluding food and energy — lands Wednesday. Economists expect a month-on-month gain of 0.2%.
0.2% is the dividing line. At or below that, inflation is tracking back toward the Fed's 2% target. Above it, price pressure is still alive.
The Fed's own preferred gauge, core PCE — personal consumption expenditures price index — came in at 3.3% year-on-year in June, up from 2.8% a year earlier. This means → inflation has not just stalled — it has reversed course.
What did Warsh say, and why did the market push back?
Chair Kevin Warsh has long argued the Fed should not be hostage to any single month's data. Yet his post-meeting remarks in July left markets more confused, not less.
Asked whether he would raise rates if inflation failed to ease, Warsh said a hike "could be part of the solution, but perhaps not the main part," hinted that rising bond yields had already done some tightening for the Fed, and alluded to possibly redefining the inflation target.
In plain terms = the market heard a Fed chair who was not sure he wanted to act. The 30-year Treasury yield rose during his remarks and never came back down. James Egelhof, chief U.S. economist at BNP Paribas, said this reflects "some deeper shift in how markets perceive the Fed under Warsh."
How divided is the Fed internally?
Of the 19 officials at the July meeting, 10 spoke publicly within days — filling in the rationale Warsh had failed to articulate.
Among the 12 voting members, at least 6 have stated they could support a rate hike if inflation does not improve. Three voted for a hike outright at the July meeting.
This means → half the voting committee is already on the "ready to act" side. Warsh's ambiguity does not speak for the whole Fed.
Why has inflation been so persistent?
The answer is multiple shocks stacking up: tariffs pushing import prices higher, energy prices diverging from forecasts, and AI infrastructure buildout lifting tech-equipment and software costs.
Some officials previously judged these shocks to be transitory. The upcoming data will test whether that call still holds.
Yet there are also reasons to wait: labor costs relative to productivity growth remain moderate, reducing the risk of a full-blown spiral; tariff-related price contributions appear to be fading; and a methodology revision in September is expected to revise core PCE readings lower.
What comes next?
Paul McCulley, former chief economist at PIMCO, put it bluntly: "He staked out such a high-profile posture that, in practical terms, he has already narrowed his own options."
The market's next focal point is Warsh's speech this month at the Jackson Hole symposium — whether he delivers a clearer stance than in July will be the key leading signal for September meeting pricing.
In plain terms = the two inflation prints set the direction, Jackson Hole sets the tone, and the September meeting is the final showdown.
Content is for reference only, not financial advice.