Original Title: PCE Inflation Data Sets High Bar For Warsh's Jackson Hole Speech
Original Author: Jed Graham, Investor's Business Daily
Translation: BlockBeats
Editor's Note: The U.S. July PCE inflation data released on August 26 did not give the Federal Reserve much breathing room. The overall PCE rose by 0.2% month-over-month and 3.7% year-over-year, while the core PCE remained at 3.3% year-over-year. Meanwhile, although second-quarter GDP growth remained at 1.5%, both consumption and private domestic demand were revised up, indicating continued resilience in underlying economic demand.
This has shifted the market's focus to this Friday's Jackson Hole meeting. According to the Fed's schedule, Fed Chair Kevin Warsh will deliver a keynote speech on August 28. More importantly, during the July FOMC meeting, when the Fed maintained the federal funds rate range at 3.5%–3.75%, three members dissented and advocated for a 25-basis-point rate hike.
Therefore, this article from IBD is truly not just about a set of PCE data but about how Warsh will define the Fed's policy reaction function going forward: when inflation remains above target and demand does not show signs of slowing significantly, what exactly does the Fed need to see to hold steady, and what would prompt a rate hike.
This will also determine the market implications of Friday's speech. If Warsh continues to emphasize inflation risks, the market may further price in a rate hike in September or even October. If he attempts to downplay recent inflation, he will need to explain why the current data is not sufficient to change the policy stance. Rather than a specific rate hint, the market needs to confirm from this speech how the Fed under Warsh's leadership is prepared to balance growth, inflation, and financial conditions.
The following is the compiled translation of the original article:
The latest U.S. inflation data did not significantly ease the price pressure faced by the Federal Reserve, and it raised the bar for Fed Chair Kevin Warsh's speech at Jackson Hole this Friday.
Data released by the Bureau of Economic Analysis (BEA) on August 26 showed that the July PCE price index rose by 0.2% month-over-month, surpassing the market's previous expectation of 0.1%. The year-over-year increase remained at 3.7%, also higher than the expected 3.6%.
The core PCE, excluding food and energy, rose by 0.2% month-over-month and 3.3% year-over-year, in line with market expectations. Personal income grew by 0.4% month-over-month, above the expected 0.2%, while personal consumption expenditure increased by 0.2%, surpassing the 0.1% expectation.
Following the data release, IBD referenced CME FedWatch data stating that the market's probability of a Fed rate hike on September 16 increased from 36% to 40%; the probability of at least one rate hike by the end of the October 28 meeting also rose from 50% to 55%.
PCE Appears in Line with Expectations, But Inflation Has Not Truly Relaxed
If we only look at the rounded core PCE data, July's inflation does not seem to have significantly deteriorated: core PCE remained at 0.2% month-over-month and stood at 3.3% year-over-year.
However, IBD pointed out that the unrounded data revealed that the core PCE in July actually rose by about 0.246% month-over-month, approaching 0.3% closely; the year-over-year increase was around 3.344%, residing at a relatively high position within the market's predicted range.
Nevertheless, the details of inflation are not as hawkish as the headline figures suggest.
The article notes that the Fed is more focused on price categories directly priced by the market. According to IBD's calculations, the market-based core prices in July only rose by about 0.15% month-over-month and around 3.03% year-over-year. Some inflation in that month came from non-market-priced items such as portfolio management fees, which are influenced by asset price changes like the S&P 500 index.
In other words, the July data neither convincingly shows a significant re-acceleration of inflation nor strongly supports the judgment that "price pressures are under control."
For Powell, this situation is rather tricky: Inflation remains significantly above the Fed's 2% long-term target, but the data has not worsened to the extent that an immediate policy tightening is necessary.
GDP at Only 1.5%, But Underlying Demand Stronger Than the Headline
At the same time, U.S. economic growth data did not provide a clear "the economy is clearly cooling down" signal to the Fed.
The BEA's second estimate of second-quarter GDP showed that the U.S. real GDP grew at an annual rate of 1.5%, unchanged from the initial estimate, indicating a slowdown from the first quarter's 2.1% pace.
Beneath the GDP figure, private demand saw an upward revision.
Second-quarter consumer spending growth was revised up to 3.4%. The "real final sales to private domestic purchasers," which better reflects the U.S. private sector's internal demand, had its annualized growth rate revised up from 3.9% to 4.2% from the initial estimate. This metric is primarily composed of consumer spending and private fixed investment, with relatively minor impacts from inventory, trade, and government spending fluctuations.
This has led to a somewhat contradictory scenario in the second-quarter economy: overall GDP growth is not strong, but private demand is not weak.
July durable goods orders also showed a similar situation. According to IBD, durable goods orders increased by 1.1% compared to the previous month, higher than the market's expectation of 0.5%; however, excluding defense and aircraft, core capital goods orders only grew by 0.2%, below the expected 0.9%. Meanwhile, the growth rate of core capital goods orders for June was significantly revised upward to 1.7%.
Therefore, this set of data is difficult to simply categorize as "overheating" or "rapid cooling" of the economy. More accurately, U.S. demand still has enough resilience, making it difficult for the Federal Reserve to shift to a more accommodative policy stance based solely on slowing growth.
Three Dissenting Votes Making Powell Face More Than Just the Market
More important than PCE itself is the backdrop of increasing internal dissent within the Federal Reserve.
At the FOMC meeting on July 28th and 29th, the Federal Reserve voted 9-3 to keep the federal funds rate target range at 3.5%—3.75%. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan, who voted against keeping the rate unchanged, all advocated for a 25-basis-point rate hike.
This means that Powell on Friday needs to influence not only the financial markets. If he wishes to maintain the current rate level, he will need to address the voices within the FOMC that have openly called for further policy tightening; if he significantly leans towards a hawkish stance, he may further increase market expectations for a rate hike in September, affecting long-term U.S. Treasury yields and financial conditions.
IBD also specifically mentioned that after the late July FOMC press conference, U.S. long-term bond yields rose sharply, bringing Powell's influence on the financial markets into focus.
This makes the Jackson Hole speech a crucial test of the policy reaction function. The policy reaction function, simply put, is the market's attempt to assess: what policy actions will the Fed take when inflation, employment, growth, and financial conditions change.
What the market truly needs to find from Powell's speech may not be a clear answer like "whether there will be a rate hike in September," but rather which variables he is prepared to give more weight to.
What We Really Need to Hear on Friday is How Powell Defines "Can Hold Off on Hiking Rates"
The current macroeconomic mix has not given Powell an easy policy choice.
Inflation remains well above the 2% target, private demand remains robust, and three FOMC members have already called for a rate hike; however, on the other hand, core inflation has not shown clear signs of overheating, and the overall economic growth rate has fallen to 1.5%.
Therefore, there are three key aspects to watch for in Friday's speech.
First, how will Warsh describe the current inflation? If he emphasizes core inflation of over 3% and the persistence of price pressures, the market may further raise the probability of multiple rate hikes in upcoming meetings; if he focuses more on the slowdown in market-based core prices, it would indicate a relatively mild interpretation of recent PCE data.
Second, how will he assess economic demand? With second-quarter GDP at only 1.5% and private domestic demand growing at 4.2%, which number Warsh chooses to emphasize will directly impact the market's understanding of the Fed's future tightening path.
Lastly, and perhaps most crucially, is whether he will further delineate the Fed's policy thresholds—when the current rate is deemed tight enough, and when inflation pressures will force the Fed to resume hiking rates.
The Federal Reserve's next monetary policy meeting will be held on September 15th and 16th, when they will also update their economic projections. Until then, changes in employment, inflation, and financial conditions could still readjust market expectations.
Therefore, the core question of Jackson Hole may not be whether Warsh will signal a September rate hike directly, but whether the market can discern a more crucial matter from his speech: under conditions of elevated inflation and no clear economic slowdown, what actions is the Warsh-led Fed prepared to take.
