Inflation has remained sticky, and the Personal Consumption Expenditures Price Index data for July may add to the sense that even if prices are likely to ease on their own, it will happen at too glacial a pace for the Fed to stay on the sidelines. After the data was released on Wednesday, investors nudged up bets the Fed might raise rates as soon as the September 15-16 meeting and would definitely do so by the end of 2026.
At the July 28-29 session, three policymakers dissented against the decision to keep the policy rate steady in the current 3.50%-3.75% range in favor of a rate hike. The minutes of that meeting indicated broader sentiment for an increase, and several officials have made clear their patience is on a clock.
The Fed officials' concern is that their own credibility, considered a key central bank asset in fighting inflation, will be at risk if they don't back up promises of reaching the 2% target with rate increases — or at least the prospect of them if inflation data does not start to come into line reasonably soon.
Recent moves by Bessent to cap rising yields on long-term U.S. Treasury bonds, meanwhile, have made the landscape even more complicated for Warsh, whose stated desire to let bond investors set prices free of government "handholding" seemed undermined by the Treasury secretary's sudden lean into market activism.
After a steady recent rise in what global investors are charging to lend the U.S. money to fund budget deficits running at nearly 6% of gross domestic product — a lofty level outside of periods when governments ramp up spending to fight a recession — Bessent in a surprise move last week said the Treasury would increase a previously announced debt buyback program.
"Warsh made a big deal about wanting to hear what markets had to say. Well, the markets spoke and Bessent shut it down," Steven Blitz, chief U.S. economist for TS Lombard, wrote ahead of the Jackson Hole conference. "This is all about yields normalizing against a backdrop of too much federal debt, too little real growth for the effort, and the need for foreign capital," with federal spending helping keep inflation high but beyond the Fed's influence, Blitz wrote.
Only one more employment report and a read on August inflation data will be released before the Fed's meeting next month.
For policymakers worried the central bank's inflation overshoot has gone on so long that it risks unmooring public trust, time is short.
"Should evidence of sustained inflation progress not materialize, I believe it will be appropriate to tighten policy soon to ensure we deliver price stability in a reasonable time frame," Boston Fed President Susan Collins said on Wednesday, with a further hold on rates requiring "continued evidence that inflation is indeed coming down."
"Today's data doesn't meet that test," said Karim Basta, chief economist for III Capital Management, a fact that Fed policymakers may begin to gravitate towards with or without Warsh's support.
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