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

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.