The Federal Reserve favors a slightly higher-than-expected PCE inflation gauge while core PCE remains stagnant, making Warsh's speech on Friday even more anticipated given the uncertainty surrounding a September rate hike.

The cooling of US inflation has not yet completely reassured the Federal Reserve. The Fed's preferred indicators show that annualized inflation has been significantly above the Fed's long-term target of 2% for 65 consecutive months.

Data released by the U.S. Commerce Department on Wednesday, July 26, showed that the Personal Consumption Expenditures (PCE) price index rose 3.7% year-on-year in July, unchanged from June and higher than the market expectation of 3.6%. The index rose 0.2% month-on-month, also higher than the market expectation of 0.1%. Excluding food and energy, the core PCE rose 3.3% year-on-year, unchanged from June, and rose 0.2% month-on-month, higher than June's 0.1%, both in line with market expectations.

Meanwhile, consumption growth slowed. Personal consumption expenditure rose only 0.2% month-on-month in July, while real personal consumption expenditure remained basically flat; personal income grew by 0.4%, higher than the growth rate of consumption.

The revised second-quarter GDP data released on Wednesday also showed that the US economy remains resilient, with the annualized growth rate of real GDP remaining at 1.5%. However, the growth rate of consumption in the second quarter was revised upward from the initial value of 3.2% to 3.4%, and the growth rate of private domestic final purchases was revised upward from 3.9% to 4.2%.

Slightly higher-than-expected PCE figures and continued stagnation in core PCE inflation have heightened market speculation about a September rate hike by the Federal Reserve. Media reports indicate that after the July PCE data release, federal funds futures reflected a roughly 40% probability of a rate hike at the September Fed meeting, up from approximately 36% before the data release.

With Federal Reserve Chairman Warsh set to deliver his first major speech in Jackson Hole this Friday, the market is now more focused on how Warsh will explain the still-stubborn inflation and what kind of data would prompt the Fed to restart rate hikes, rather than just whether there will be a rate hike in September.

PCE was slightly higher than expected, but core inflation remained stubbornly high.

Looking at the monthly data, the PCE in July did not show a particularly strong rebound in inflation, but the problem is that the downward trend in inflation still lacks further progress.

July's PCE rose 3.7% year-on-year, marking the 65th consecutive month above the Federal Reserve's 2% target; core PCE rose 3.3% year-on-year, also well above the 2% target. July's PCE rose 0.2% month-on-month, the highest monthly increase since April of this year; core PCE also rose 0.2% month-on-month, higher than June's 0.1%.

More noteworthy are the different time windows for core PCE.

Nick Timiraos, chief economics reporter for The Wall Street Journal, often referred to as the "new Fed mouthpiece," analyzed the data on social media, stating that the core PCE rose by about 0.25% month-on-month in July, which translates to an annualized rate of about 2.99%, roughly the same as in July 2025; the year-on-year increase in core PCE remained at 3.34%, significantly higher than the 2.86% in July 2025.

Looking at a longer timeframe, the annualized growth rate of core PCE is approximately 3.0% over three months and 3.5% over six months.

In other words, short-term inflation has not gotten out of control, but in the long run, core inflation is still at around 3% or even higher, which is still far from the 2% target.

Timiraos further broke it down, stating that in July, core goods prices rose 0.15% month-on-month and 2.3% year-on-year; housing prices rose 0.26% month-on-month and 3.2% year-on-year; and core services prices excluding housing rose 0.28% month-on-month and 3.8% year-on-year.

Among these, core services warrant particular attention. While commodity inflation has become relatively moderate, core non-housing service prices still rose 3.8% year-on-year, indicating that more persistent inflationary pressures have not yet fully subsided.

Wall Street Divided: Data Moderate, But Far From Enough to Reassure the Federal Reserve

Bloomberg economists Troy Durie, Andrew Sacher, and Anna Wong believe the main message from the July personal income and spending report is that underlying inflation is relatively moderate, while actual consumption is weak . Based on this assessment, they expect the Federal Reserve to keep interest rates unchanged for the remainder of the year.

However, the market is not without its concerns.

Richard Moody, chief economist at Regions Financial, pointed out that although the July inflation readings were “moderate,” the only problem for the Federal Reserve is that inflation is still above target; even if inflation doesn’t look like it will accelerate further, it doesn’t look like it will fall back to the target level.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, believes that this data is not enough to change the policy balance at the September Federal Reserve meeting, but if subsequent data continues to move in the same direction, policymakers may face greater pressure to end their current wait-and-see approach.

Zentner stated that the latest economic data is not the outcome the market wants to see, given that investors are highly sensitive to any factors that could push up interest rate expectations.

This constitutes the core contradiction facing the Fed's current policy: inflation has not accelerated significantly again, but it has not continued to move toward the 2% target; consumption has cooled somewhat, but economic activity remains resilient.

The probability of a September rate hike has risen to about 40%, and the market has begun to repric.

The direct impact of PCE data on the market is already reflected in interest rate expectations.

Reuters reported that after July's PCE overall inflation came in higher than expected, federal funds futures prices indicated that the probability of the Federal Reserve raising interest rates at its September 15-16 meeting was about 40%, up from about 36% before the data was released.

In other words, a relatively minor PCE "better-than-expected" figure led to a roughly 4 percentage point increase in market pricing for a September rate hike.

This does not mean the market has already judged that the Fed will definitely raise interest rates in September. On the contrary, the approximately 40% probability means that raising interest rates is still just a policy option that has not yet become the dominant one.

However, compared to the previous market discussions about "when to cut interest rates," the question of "whether to raise interest rates again" has now become a serious issue that must be considered.

TradeStation strategist David Russell said that with the economy remaining strong and inflation not declining, Warsh is finding it "increasingly difficult to avoid the issue of interest rate hikes." eToro's Bret Kenwell also stated that inflation remains "uncomfortably high," and the market will be watching whether Warsh will explain at Jackson Hole how the Fed will bring inflation back to its long-term target.

Reuters' summary of the day's economic data is also noteworthy: the latest data adds new variables to the Fed's policy outlook, increases the importance of upcoming economic data, and makes the market more focused on Warsh's speech in Jackson Hole on Friday.

Timiraos retweeted Collins's statement: If inflation does not continue to improve, it is appropriate to raise interest rates "soon".

Just after the PCE data was released, during the early trading session of the US stock market on Wednesday, Timoraos shared a transcript of a speech by Boston Fed President Collins published on Tuesday on the Boston Fed's website, which specifically summarized her assessment of inflation and monetary policy. The Boston Fed's website shows that Collins' speech was titled "Thoughts on the Economy."

Timiraos concluded that Collins considered the June and July inflation reports to be “slightly encouraging,” but without “evidence of sustained improvement in inflation,” then “it would be appropriate to tighten (monetary) policy soon.”

More notably, Timiraos specifically points out that Collins' relatively favorable inflation baseline scenario rests on two important premises: limited future tariff increases and a degree of reopening of the Strait of Hormuz.

This means that Collins's so-called "moderate improvement" is not unconditionally optimistic.

If tariffs continue to push up commodity prices, or if the situation in the Strait of Hormuz pushes up energy prices again, the current improvement in inflation may be reversed; and if inflation fails to show a "sustainable improvement" for a long time, interest rate hikes may once again become the focus of the Federal Reserve's policy discussions.

This statement directly echoes the July PCE data: even if the monthly inflation rate is not sharp, as long as inflation cannot continue to approach 2%, the voices within the Federal Reserve calling for further tightening of policy will not disappear.

The Wall Street Journal pointed out that "inflation remains stubborn," but Warsh's position remains unclear.

Following the release of the PCE data, The Wall Street Journal published a special commentary with the headline: " The Fed's inflation problem remains stubborn in July."

The commentary begins by stating its core assessment: the US economy still has some tailwinds, but it also faces a persistent inflation problem—the very situation Federal Reserve Chairman Warsh faced ahead of his important speech at Jackson Hole on Friday.

The Wall Street Journal points out that the Federal Reserve's preferred PCE price index rose 3.7% year-on-year in July, while the core PCE, excluding food and energy, rose 3.3% year-on-year, and the 2% inflation target remains far from being achieved. Meanwhile, the US economy has not shown significant signs of slowing: the second-quarter growth rate of real private domestic final purchases was revised upward to 4.2%, July consumption grew by 0.2%, and personal income grew by 0.4%.

Therefore, the question facing Walsh is not simply "whether inflation is high or low", but a more complex judgment: is the current inflation mainly caused by one-off shocks such as tariffs and the Iran war, or is it due to strong demand and supply-demand imbalance that allows companies to continue raising prices?

The Wall Street Journal commentary concludes by pointing out precisely the greatest uncertainty posed by Warsh himself: it remains unclear how Warsh views the inflation issue he has taken over . This is because he has not provided his personal interest rate expectations in the Fed's quarterly updated "dot plot," nor has he explicitly stated whether he supports raising interest rates at future meetings—a matter that has become a point of significant disagreement within the Fed.

The night before Jackson Hole: Can Walsh offer his own "inflation answer"?

In fact, just hours before the PCE results were released, Timoraos published an article titled "Fed Chair to Head to Jackson Hole, Inflation Stance Still Unclear."

The article argues that when facing the market and his Fed colleagues at the Jackson Hole central bank symposium this Friday, Warsh's biggest pressure lies in answering a question that will determine the direction of interest rates: Is the current inflation above target a temporary shock, or is the US economy still overheating?

If tariffs, the energy shock from the Iran war, and other factors are merely one-off events, then the Federal Reserve does not need to tighten monetary policy drastically for these short-term shocks. However, if these factors merely mask a deeper supply-demand imbalance, with demand still exceeding supply, then inflation will not subside on its own, and the Federal Reserve will need to take action.

Timiraos points out that the relatively mild price data over the past two months has temporarily eased the pressure on the Fed to raise interest rates in September, but it does not answer another key question: whether the current policy rate of about 3.6% is sufficiently restrictive and can keep inflation low.

This is what truly captivated Walsh's speech on Friday.

At the last FOMC meeting in July, three officials voted against keeping interest rates unchanged in favor of a rate hike, and the minutes showed that more officials within the Fed were open to further tightening policy. Following the release of the PCE data, the probability of a September rate hike, as reflected in the futures market, rose slightly to around 40%, indicating that the market has begun to reprice this policy path.

Therefore, the July PCE figure alone may not be enough for the Fed to raise rates immediately in September, but it further highlights the question Warsh needs to answer on Friday: with core PCE still at 3.3% year-on-year and inflation failing to return to 2%, when and under what conditions is the Fed prepared to tighten policy again?

This has shifted market focus from simply seeking the answer to "to raise or not to raise interest rates" in Warsh's Jackson Hole speech on Friday to looking for his inflation assessment, policy response function, and the decision threshold for September .

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