It will be a stretch for the Fed to pause for many reasons, not just the CPI.
The Fed’s preferred measure of inflation is the Personal Consumption Expenditures (PCE) price index, specifically core PCE, not the CPI.
However, the next FOMC rate decision meeting is September 16, but the August PCE report is not until September 30.
Therefore, the CPI announcement on September 11 and the Jobs report on September 4 are going to determine whether or not the Fed hikes or remains on pause.
CPI and PCE Year-Over-Year Percent Change plus Projections
CPI and PCE Year-Over-Year Projections
- CPI: 3.37 percent, unchanged
- Core CPI: 2.38 percent, down from 2.48 percent
- PCE: 3.79 percent, up from 3.70 percent
- Core PCE: 3.40 percent, up from 3.34 percent
The only measure that remotely supports a pause is core CPI. But after being reliant on PCE for decades, that would be quite the switch.
Month-Over-Month Details
There is nothing about month-over-month details that suggest the Fed should pause.
The CPI moved from -0.42 percent to 0.07 percent to a projected 0.36 percent. That’s an annualized 4.41 percent.
Core CPI at 0.20 percent is 2.43 percent, still substantially above Fed target.
The PCE projections are on the hot side, but we won’t see them in time.
Cleveland Fed Accuracy
The Cleveland Fed Inflation Nowcast is widely recognized as one of the most reliable real-time tracking models for U.S. inflation. Historical evaluations by the Federal Reserve Bank of Cleveland and independent market researchers show it consistently rivals or outperforms major alternatives.
- Outperforms Professional Forecasters: Long-term data shows the Cleveland Fed model regularly yields smaller prediction errors than the consensus from the Blue Chip Economic Indicators Survey and the median forecasts from the Philadelphia Fed’s Survey of Professional Forecasters (SPF).
- Strong Headline Inflation Accuracy: The model is particularly dominant at projecting Headline CPI and PCE. It synthesizes daily shifts in high-frequency data—like oil spot prices and retail gasoline tracking—giving it a substantial edge over sticky multi-week survey groups.
- Competitive Core Performance: For Core CPI and Core PCE, its accuracy is roughly neck-and-neck with top Wall Street economists. Because core metrics strip out volatile food and energy, high-frequency updates add less massive variance advantages month-to-month, but it remains an elite baseline.
- The Timeliness Advantage: Because it updates every single business day, its accuracy increases as the target month progresses. A Nowcast generated on August 30th for the August cycle carries immense statistical weight because nearly all intra-month agricultural, energy, and primary consumer data have already been logged.
CME Fedwatch Odds
The CME Fedwatch rate hike odds are 59.7 percent. The odds jumped from under 40 percent on Fed Chair Kevin Warsh’s Jackson Hole speech on August 28.
Odd Too High or Too Low?
Because I expect the Cleveland Fed to be close on its inflation nowcast, I believe those odds favor a rate hike.
A decision to hike also depends on the jobs report on Friday September 4. If the report is OK to strong, the Fed will have more reason to hike.
But even if the report is weak, a headline CPI of 0.4 percent will be hard for the Fed to ignore.
Politics is another huge hurdle that will force a hike sooner rather that later. But first let’s discuss Jim Bianco’s take.
Bianco’s Take
Bianco Part II
Hints from Warsh
On August 28, I commented Expect a Fed Rate Hike. Odds Jump to 60 Percent on Warsh’s Speech
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” he said in his first speech as Fed chairman, a highly anticipated debut at the Kansas City Fed’s annual symposium in Wyoming.
“I would be hard-pressed to describe broad financial conditions as restrictive,” said Warsh.
Indeed!
The Final Hurdle is Political
While macro indicators including credit and the strong Cleveland Fed Nowcast provide the fundamental backdrop for a rate hike, the final hurdle is purely political and institutional.
Jim Bianco’s tracking model places the FOMC in a rigid 5-5 gridlock, thrusting former Chair Jay Powell out of the background and directly into the role of the ultimate swing vote.
However, treating Powell as a true ‘unknown’ ignores deep-seated institutional inertia. Historically, Powell has fiercely defended committee cohesion and has never dissented against a sitting Chair. For the Fed to project long-term stability under newly minted Chair Warsh, a public fracture between current and former leadership is a line the committee will desperately want to avoid crossing.
Consequently, if the incoming September 4 labor report shows basic stability, Chair Warsh will have the necessary data to leverage his executive influence. When the most influential person in the room pushes for an inflation-fighting hike, historical precedent dictates that Powell will fall in line to preserve institutional unity.
But there is sill one more wrinkle to discuss, and that is the election.
The Election
Convening less than two months before the November mid-terms, the FOMC will operate under an intense political microscope.
Historically, the central bank prefers to fade into the background during election cycles to avoid accusations of interference. Dovish voters will undoubtedly attempt to weaponize any minor softness in the September 4 payrolls as an excuse to hold steady and dodge political crossfire.
Yet, under Chair Warsh’s newly minted regime, delaying a mathematically justified hike to appease politicians would represent the ultimate failure of institutional independence.
If the Cleveland Fed Nowcast proves accurate, a hot inflation print will effectively strip away the committee’s political cover. In a fractured Fed of 12 independent voters, hiding behind election-year precedent will no longer be an option.
October 28 Rate Hike Odds
Is the Fed really going to hike, not just two months before the election but days before the election?
The Extraordinary Tactical Trap for Warsh
Ignoring politics, the odds of an aggressive policy tightening would be much higher right now. As Jim Bianco explains, the internal fragmentation of twelve independent voters acts as a natural dampener on rapid market repricing.
However, the other, more obvious problem for Chair Warsh is Donald Trump. Warsh was hand-picked by Trump under the explicit expectation that he would cut rates, not hike them. Compounding this personal friction, the midterm election is now just two months away.
That political gravity is why we must heavily discount the odds of the Fed executing two distinct rate hikes before voters head to the polls.
Yet, the CME FedWatch data for the October 28 meeting shows an exceptional 71.3 percent cumulative probability of a higher target rate. The market firmly believes a hike is coming; it is merely unsure of the precise date.
This creates an extraordinary tactical trap for Warsh.
If Warsh postpones a hike in September, but the August and September PCE prints are hot, he will be forced to either hike interest rates six days before the election or freeze policy. Hiking would trigger a huge political firestorm but pausing would look entirely partisan in defense of Trump.
Moreover, there is no meeting in November. Delaying necessary policy tightening until December would allow hot inflation to fester for a full quarter, creating a reputational nightmare. In contrast, hiking would create a political nightmare.
Conclusion: The Strategic Imperative for September
The upcoming September meeting represents the Fed’s cleanest and most viable window to execute.
Unless the jobs report is miserable and the CPI is tame, look for Warsh to hike rates in September.
To avoid any look of politics or uncertainty, I think Bianco will be wrong on the number of dissents, say three or less.
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If the Fed continues to demand independence then it must first BE independent and just do its job. I see absolutely nothing that spells a slowdown in anything that offsets its OBVIOUS need to hike to tamp down inflation — its PRIMARY job. I mean my god if you’ll let a weekly wobble or hiccup of a thousand jobs take you off your PRIMARY mission of price stability of even their ridiculous 2% then just disband them. Prices affect everyone, jobs affect the job holder and MAY eventually be significant enough to affect the economy as a whole, forcing a revisit. But inflation hits everyone every day and the job market has been resilient thus far.
And if they are now worried about the politics of it all then hells bells we have elections every 2 years, the cycle starts earlier, then you have holidays, data is delayed or seasonal or skewed, and you get exogenous events concerning you–you’ll soon be saying that over a 2 year period, factoring out rare between-meeting moves, only have about 8 chances to move the needle instead of 24?
Analyze, come up with words like contained or transitory, engage PR machinery but keep the printer running, refuse to act, find excuses while maintaining intellectual high-horsedness.
My God! Just do your damn job, which on its face now clearly is to:
Enrich those with assets and access to first money by keeping inflation high.
Enable the government to run deficit spending by devaluing the dollar and providing them dollars, keeping inflation running hot. Oh, and the landing place of that deficit spending, which cannot be directly controlled but ultimately ends up right back in the stock market, enriching asset holders yet again or grifting state and local governments which have proven to fraudulently mismange those funds.
Pretend you have any idea what the price of money/credit should be or that your control of it is possible in the long run or that either of those are beneficent in nature.
It is an unabating sure-to-end-the-Empire attack. It’s happening with more frequency and amplitude. Paul Volcker managed to hammer rates to insane levels by today’s standard where apparently 4 is high–I guess 40Trillion in on-book debt and trillions more in off-book, soon-to-be-on-book debt does have a downside? Who knew.
Surely our refusal to do the right thing repeatedly where we had ZIRP enriching and protecting a certain large demographic group not to be named and fueling a inept and lazy Congress is finally boxing the perpetratory (Fed) into the corner it drove itself into.
It wouldn’t be as hard to watch if I could escape being on the US dollar train while living in the US. I guess i needed an exit strategy–but to where?