Sticky 3.7% Inflation Pushes Warsh Toward September Hike

Sticky 3.7% inflation and a Treasury defending the long end of the curve put Fed Chair Kevin Warsh on course for a September hike, with CME FedWatch pricing a 40 percent chance of a move.

"There is no soft inflation target. There's only a target, and it's 2 percent," Warsh has said, though he has yet to lay out a route as five internal task forces review how the Fed operates. Goldman Sachs has argued against a September move, pointing to softer monthly readings over the summer.

The personal consumption expenditures index, the Fed's preferred gauge, rose 0.2 percent in July against expectations of 0.1 percent, leaving the annual rate at 3.7 percent rather than easing to the 3.6 percent forecast. Core prices rose 0.2 percent on the month and 3.3 percent over the year, both in line, keeping core inflation above the 2 percent target for a 65th consecutive month. The Federal Open Market Committee held rates at 3.50 percent to 3.75 percent in July, but three regional Fed presidents dissented in favor of a quarter-point increase, the most dissents in one direction since September 2016.

The pressure point is at the long end of the curve. US national debt has passed $40 trillion, and yields on 10 and 30-year Treasuries have climbed to their highest since 2007, pushing up borrowing costs across the economy and forcing Treasury Secretary Scott Bessent to step into the bond market.

The bond market is the real test

Bessent announced plans to at least double buybacks of 10 to 30-year bonds, from $2 billion to $4 billion per operation, reducing the supply of long-dated paper to support prices and pull yields lower. The market was unconvinced as yields subsequently rose back above where they stood before the announcement, prompting Bessent to state publicly that the Treasury is ready to intervene with much higher, undefined amounts.

That creates an unusual tension: the Treasury is suppressing long-term yields at precisely the moment the Fed chair appears content to let market forces do the tightening work.

The debasement trade

When investors suspect a government cannot manage its debts without allowing inflation to erode them, they buy assets that cannot be created at will. Gold has gained roughly 15 percent so far in August and, with only days of trading left, is on track for its strongest month since 1999, trading near $4,713 an ounce. Bitcoin is up over 25 percent this month, its best in around two years, pushing above $80,000. The dollar has moved the other way, with the index measuring it against six major peers heading for a third consecutive monthly loss.

Hard assets rising, the currency falling and long-term borrowing costs stubbornly high point in the same direction. If Warsh reads market prices as information, as he has suggested he does, the message is that policy is too loose.

Europe's stake in Wyoming

The ECB will also be represented at Jackson Hole. Executive board member Isabel Schnabel takes part in a panel on Friday at 17:55 CET, addressing the payments and financial innovation theme rather than the immediate policy outlook. The ECB publishes the account of its July 22-23 meeting on Thursday, and its next rate decision falls on September 10, days before the Fed's own September meeting.

A hawkish signal from Warsh would strengthen the dollar and tighten global financial conditions, complicating the calculation in Frankfurt, where policymakers are already managing energy-driven inflation and now face food price pressure building into 2027.

Either way, Friday is no longer a routine central banking speech. It is a test of whether the Fed can persuade markets that 2 percent remains a genuine destination, and that it has a credible way of getting there.

This article is for informational purposes only and does not constitute investment advice.