Some highlights from what we have been writing, reading, and talking about in August.

Sep 9th 2026

Chair Warsh’s inaugural Jackson Hole speech was viewed as an important step toward rebuilding Fed credibility and setting the stage for a September rate hike, without explicitly committing to one. Warsh emphasized that inflation has remained above the Fed’s 2% target for five years, unemployment remains low and stable, and financial conditions are difficult to characterize as restrictive, suggesting the economy can withstand—and may require—tighter monetary policy. He firmly reaffirmed the 2% PCE inflation target, described the labor market as “quite stable,” and acknowledged that recent improvements in inflation have not been sufficient to demonstrate a meaningful change in underlying trends. While expressing optimism about the AI-driven investment boom and the economy’s resilience, he also adopted a more cautious and open-minded approach to its uncertain implications. The speech suggests the Fed may now be shifting away from last year’s risk-management cuts, which were intended to protect against labor-market weakness that increasingly appears structural rather than cyclical. As a result, our baseline outlook now calls for a 25bp hike in September and another in December, bringing the fed funds rate to 4.00%–4.25% by year-end, with only significant downside surprises in upcoming employment or inflation data likely to derail September action. Warsh also struck a more collegial and flexible tone on Fed communications and his colleagues’ track record, easing concerns about institutional disruption and Fed independence. Overall, the speech represents a meaningful hawkish policy pivot toward restoring price stability, though Warsh will ultimately need to follow through with action to reinforce that credibility.

The August employment report featured a large upside surprise to hiring after a notable downside surprise in July, with challenges in seasonal adjustment adding to volatility instead of its intended role of smoothing. Doing our best to sort signal from noise it appears underlying hiring trends remain stable to modestly firming amidst notable sectoral rotation. Labor market stability and balance was confirmed by an unemployment rate that remained steady at 4.1% in August.  The decline this year from the recent peak of 4.5% in December primarily reflects declining labor supply rather than increasing demand for workers and the lack of tightening is confirmed by wage growth that continues to decelerate. While the labor market does not look strong enough to propagate supply side inflation pressures, it is also balanced and resilient enough not to dampen or offset them, and a demographically stagnant workforce means conditions are remarkably stable. We think the report bolsters the case for the Fed to follow through with a rate hike at their September meeting.

August inflation is expected to firm at the headline level while core inflation remains relatively steady, interrupting some of the progress seen over the prior two months. Higher energy prices stemming from renewed U.S.-Iran tensions will add renewed upward pressure on headline inflation. Core PCE inflation gains slowed over the last two months and a key question is whether this is evidence of a slowing underlying trend or a low point in a typical seasonal gyration. There is documented residual seasonality in seasonally adjusted core PCE inflation data and August readings tend to be soft. Prior to the pandemic, August readings averaged around 0.10% m/m compared to 0.17% over the last 3 years and 0.28% over the last 5 years.  In our view, an unambiguously “good” August reading would need to round down to a 0.1% to be considered evidence of real progress.  A debatable but still reasonable threshold could be a gain lower than 0.20% m/m. Multiple supply shocks are now blending together, ebbing and flowing alongside volatile post-pandemic seasonal swings making it difficult to track and identify each shock separately. The diffusion of price increases is spreading, raising the risk that inflation is becoming embedded across sectors which could contribute to another round of firm Q1 price increases.

Chart to Watch: 

Reading This Made Us Smarter: 

What are US Treasury markets really telling us?

MPP’s Top Reads:

August CPI Preview: Progress is Neither Linear nor Guaranteed

August Employment Review: No Problem

Jackson Hole Review: Keeping the Horse Close to the Barn

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