Kevin Warsh gives his first Jackson Hole keynote as Federal Reserve chair at 10 a.m. Eastern this morning, and he does it two days after an inflation report that gave him nothing to work with. Core inflation is stuck at 3.3 percent. Headline came in hotter than forecast. And for the first time in years, the market’s question is not how soon the Fed cuts. It is whether the Fed raises.
The Number That Set Up the Morning
The July personal consumption expenditures report, released Wednesday, is the Fed’s preferred inflation gauge, and it landed in the worst possible place: not bad enough to force action, not good enough to allow any.
Core PCE rose 0.2 percent on the month and 3.3 percent on the year, exactly in line with what economists surveyed by Dow Jones expected. Headline PCE rose 0.2 percent on the month and 3.7 percent on the year, above the 0.1 and 3.6 percent consensus. Both annual figures were unchanged from June, which is the real story. Inflation is not falling.
Goods Fell, Services Did Not
Underneath the headline, the split was familiar. Goods prices fell 0.1 percent on the month, helped by a 2.7 percent drop in energy goods and a 0.9 percent decline in furnishings and durable household equipment. Services prices rose 0.3 percent, with financial services and insurance up 1.2 percent and housing up 0.3 percent.
That is the pattern that has frustrated the Fed for three years. The volatile half cooperates. The sticky half does not.
Where the Pressure Is Coming From
Kathy Bostjancic, chief economist at Nationwide Financial, laid out the sources plainly. “The sources of inflation are tariffs, which are pushing up goods prices; AI spending, which is pushing up chips and other AI related equipment; and also energy, which came off in the most recent month but is still a concern with elevated gasoline prices.”
The AI component is not abstract. Capital spending on data center hardware has been running at a scale visible in Nvidia’s first ever full year forecast this week, and that demand shows up in equipment prices across the economy. On the tariff side, US and Canadian trade talks collapsed, 50 percent duties went on a range of Canadian goods, and Canada retaliated Tuesday across more than 700 American products.
The Consumer Is Slowing Down
Personal income rose 0.4 percent in July, a solid gain. Spending rose 0.2 percent in nominal terms, but adjusted for inflation it was effectively flat, down from 0.4 percent growth in June. Services spending rose while goods spending fell.
The saving rate climbed to 3.0 percent from a four year low of 2.6 percent. People earned more and chose not to spend it. Dan North, senior economist at Allianz Trade, read it as hesitation: “It makes me wonder if, finally, consumers are saying, you know, let’s step back for a moment.”
The Market Is Pricing a Hike, Not a Cut
This is the part that has changed. Federal funds futures currently show roughly a one in three chance of a 25 basis point increase at the September 15 and 16 meeting, and essentially no chance of a cut. Estimates vary by outlet and by the hour, but the direction does not.
Omair Sharif, founder of Inflation Insights, put it in one line: “This is data that supports a hike.” The current target range is 3.50 to 3.75 percent, where it has sat all year.
Three Dissenters Already Voted to Raise
At the July 28 and 29 meeting the committee held rates by a vote of nine to three. All three dissents went the same direction, and all three wanted a quarter point increase: Beth Hammack of the Cleveland Fed, Lorie Logan of Dallas, and Neel Kashkari of Minneapolis.
The minutes, released August 19, went further. “Many participants assessed that policy tightening would likely be necessary if inflation did not decline,” they read, with some noting that financial conditions might not be restrictive enough as they stand.
What Warsh Has Already Said
Warsh was confirmed in May and has spent his first months as chair signaling a harder line than his predecessor. At the July press conference he was blunt about the target. “There is no soft inflation target; there is no soft implicit target, not on this Committee’s watch.”
He also reframed the standard central bank posture. “This is a period of watchful thinking, not watchful waiting,” he said, adding that “if inflation continues to be elevated through the forecast period, interest rates could well be part of that solution.” He has additionally moved away from detailed forward guidance, arguing that markets should form their own judgment rather than be spoon fed.
What to Listen For at 10 a.m.
Three things. Whether Warsh treats 3.3 percent core as a plateau or a stall, because the language he chooses will move rates more than any explicit signal. Whether he addresses tariffs directly, which is politically fraught for a Fed chair and analytically unavoidable. And whether he gives the September meeting any shape at all, given his stated preference for withholding guidance.
The backdrop is not simple. Second quarter GDP came in at 1.5 percent, July payrolls fell by 23,000, and unemployment sits at 4.1 percent. A central bank tightening into a slowing labor market is a genuinely difficult position, and the market reaction Wednesday reflected the uncertainty rather than resolving it. The S and P 500 closed down 0.02 percent, the Nasdaq slipped 0.08 percent, and the 10 year Treasury yield edged up to 4.66 percent.
Frequently Asked Questions
What did the July PCE report show?
Core PCE rose 0.2 percent monthly and 3.3 percent annually. Headline PCE rose 0.2 percent monthly and 3.7 percent annually, above forecasts.
Is the Fed expected to cut rates in September?
No. Futures markets currently price essentially zero chance of a cut and roughly a one in three chance of a quarter point increase.
What is the current federal funds rate?
The target range is 3.50 to 3.75 percent, unchanged so far this year.
Who is the Federal Reserve chair?
Kevin Warsh, confirmed by the Senate in May 2026. He delivers his first Jackson Hole keynote as chair on August 28.
When is the next Fed meeting?
The Federal Open Market Committee meets September 15 and 16, 2026.
Why is inflation still elevated?
Economists point to tariffs raising goods prices, heavy AI related equipment spending, and energy costs, alongside persistent services inflation.
