Markets bet on a pause for September, but Fed hawks may not be swayed ahead of Jackson Hole

Markets bet on a pause for September, but Fed hawks may not be swayed ahead of Jackson Hole

Jennifer Schonberger · Senior Reporter

Fri, August 14, 2026 at 8:59 PM GMT+3 6 min read

When Federal Reserve officials gather in Jackson Hole in two weeks, they will confront a decisive moment for the US economy. While stubborn inflation plagued the first half of the year, last month's cooling prices raise a critical question: Can the central bank afford to hold interest rates steady in September, or are these early signs of inflation relief just a head fake?

All eyes will be on Chairman Kevin Warsh's speech — his first as Fed chair — to see whether he addresses the economic outlook, inflation, and monetary policy. Fed chairs have historically used the Jackson Hole forum to set the table for upcoming September policy actions or announce major structural shifts.

The speech arrives at a time of deep market anxiety. Confusion and concern have been swirling on Wall Street and in bond markets about whether the central bank possesses a credible strategy to bring down inflation. After the Fed's July 29 meeting, calls for the central bank to act reached a fever pitch as bond yields soared and markets aggressively priced in more than two interest rate hikes.

"This is a fairly tense moment, it seems to me, that's developing in September," Dennis Lockhart, former president of the Atlanta Federal Reserve, said in an interview. "You've got the economic situation, which is fraught with uncertainty and ambiguity; you've got the market reaction to the July press conference, a fractured committee, and lots of questions about Warsh and his early performance."

At his press conference, Warsh repeatedly deflected questions about why the Fed wasn't raising rates, pointing to the bond yields that had shot materially higher since the previous meeting. He suggested it was a good thing and implied that the Fed welcomes the higher yields as a way to raise borrowing costs and tighten policy through markets. That led to confusion in markets and caused some loss of confidence in whether there's a credible strategy to bring down inflation.

Since then, relatively benign inflation readings have eased the pressure somewhat. The Consumer Price Index (CPI) on a "core" basis — which excludes volatile food and energy costs — rose 2.5% in July, marking the second straight month of cooling inflation, down from 2.6% in June and 2.9% in May.

However, the latest data on producer prices was mixed. Wholesale prices were unchanged last month as energy prices edged down, but the data showed businesses are still grappling with higher underlying costs that they may struggle to pass on to consumers. The Producer Price Index (PPI) minus food, energy, and trade services advanced 4.7% in July — slightly hotter than the 4.6% expected, but down from 5.1% in June. On a month-over-month basis, core PPI rose 0.2%, cooling from an upwardly revised 0.4% pace in June.

Economists and Fed officials watch CPI and PPI closely because their underlying components are used to calculate the Personal Consumption Expenditures (PCE) price index, the Fed's longstanding inflation gauge. Official PCE data will be released on Aug. 26, just ahead of the Jackson Hole confab.

Using the latest CPI and PPI prints, Wall Street economists project that core PCE rose by 0.2% to 0.3% in July.

"Overall, the combination of CPI and PPI data would support keeping rates unchanged at the September Fed meeting, but a hike is still in play," said Marco Casiraghi, economics and central bank strategy analyst for Evercore ISI, who estimates core PCE at 0.24%. "We see risks that could move the Committee closer to raising rates."

Read more: How jobs, inflation, and the Fed are all related

Diane Swonk, chief economist for KPMG US, estimates that core PCE rose approximately 0.3% month over month, which would hold the year-over-year core number sticky at 3.3%.

"Moral of the story: The cooler CPI reading doesn't take September out of play for a rate hike by the Fed," Swonk wrote on X. "This number could not only harden the resolve of hawks but coalesce more in the ranks of Fed leadership to favor a hike."

Other analysts see a clearer runway for a pause. EY-Parthenon chief economist Gregory Daco noted that the data suggests inflation is stabilizing and moving back in the right direction following oil price spikes tied to the recent Iran conflict.

"This is consistent with our view that the supply-driven inflation peak associated with tariffs and the oil shock is likely behind us," Daco said, adding that it offers support for Fed patience. "We continue to expect the Fed to remain on hold through year-end. That said, core inflation remains too firm for comfort ... leaving the door open to additional tightening if price pressures reaccelerate."

Stephen Brown, chief North America economist for Capital Economics, estimates core PCE dropped to a soft 0.16% in July. He argues that would pull the three-month annualized rate of core PCE inflation down to 2.5% and lower the annual rate to 3.2%.

"That means that a September interest rate hike — as we've been forecasting — is now looking unlikely," Brown said.

Read more: How the Federal Reserve shapes consumer loan rates

What Fed members say

New York Fed president John Williams has previously indicated that if monthly core PCE consistently clocks in at 0.2% in the second half of the year, it would signal inflation is returning to the Fed's 2% target on its own.

Williams isn't alone in that thinking, but a watch-and-see mood is prevailing.

"Some are arguing that disinflation and a convergence to the 2% target will happen naturally with the passing of the tariffs and the resolution of the Strait of Hormuz and passing of the lettuce supply shock," Lockhart said. "That to me is a bet; and, I think there are participants who are rightly cautious or even skeptical of using that as a basis for a whole decision."

While July's data shows progress in the right direction, central bank hawks are widely expected to demand more sustained proof before taking rate hikes completely off the table.

One of those hawks, Cleveland Fed president Beth Hammack, who dissented in favor of hiking rates at the last meeting, reiterated after the CPI report that she believes the central bank needs to raise rates now to bring inflation back down. Her comments came after she told Yahoo Finance on Monday that the economy needs more than one rate hike to tame inflation.

Lockhart noted that one way Fed officials operate is to think in terms of an economic narrative and whether each data point changes that narrative.

"I don't think the recent encouraging inflation prints necessarily change the basic narrative," said Lockhart, who pointed to inflation remaining elevated for more than five years and the risk of it becoming entrenched, coupled with what he called a job market close to full employment.

"One or two months of softness isn't persuasive evidence that the employment picture is cracking," he said.

While this week brought welcome inflation news for July, the Fed's puzzle is far from solved. Policymakers will receive the volatile August CPI print just days before their September meeting, leaving the near-term future of monetary policy entirely data-dependent.

"I think it's premature to react to what we have in hand already," Lockhart said. "I think we need to wait and see what those other reports show."

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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