New data released on Wednesday showed the core PCE — the Fed's preferred inflation gauge — rose 0.3% month-over-month in July, above the 0.2% consensus forecast. The annual rate held steady at 2.6%, stubbornly above the Fed's 2% target. The headline PCE, which includes volatile food and energy prices, accelerated to 2.8% year-over-year, driven by rising services costs.
The figures land as Federal Reserve officials gather in Jackson Hole, Wyoming, for the central bank's annual economic policy symposium, often used to signal major policy shifts. This year's theme, "Rethinking the Resilience of the Global Economy," has taken on added urgency as the Fed navigates a path between reining in persistent inflation and avoiding a recession.
The division within the Federal Open Market Committee (FOMC) is now laid bare. Minneapolis Fed President Neel Kashkari, a noted hawk, described the PCE report as "disappointing" and warned that "premature rate cuts could embed inflation well above target." By contrast, Chicago Fed President Austan Goolsbee argued that "with the labor market normalizing, the risk of overtightening is now real," suggesting the Fed should begin cutting rates as early as September.
Market participants are now pricing in a roughly 60% chance of a quarter-point cut at the September FOMC meeting, down from 70% before the PCE release. Futures markets see a total of 75 basis points of cuts by year-end, but some analysts warn that a hotter-than-expected August CPI report could derail that timeline.
Economists are watching for any signal from Fed Chair Jerome Powell's keynote address on Friday. Powell has recently stressed that policy decisions remain "data-dependent," but the hawkish camp has gained fresh ammunition. "Sticky services inflation, coupled with solid wage growth, suggests the last mile of disinflation will be the hardest," said Diane Swonk, chief economist at KPMG US. "The Fed can't declare victory yet."
The debate is not purely about inflation. Consumer spending, while still positive, has slowed, with July's retail sales figures showing a dip in discretionary categories. The labor market is also cooling, with the unemployment rate ticking up to 4.1% in July. A growing number of Democratic senators have called on Powell to cut rates to protect jobs, adding political pressure to the economic calculus.