Daily News 19

Tag: PCE inflation

  • Markets Eye Federal Reserve: Goolsbee on Inflation, Bessent on Warsh

    Markets Eye Federal Reserve: Goolsbee on Inflation, Bessent on Warsh

    Key Highlights

    • Chicago Fed President Austan Goolsbee signaled openness to rate cuts if inflation meaningfully decelerates toward the 2% target, while emphasizing the need for decisive action against price pressures.
    • U.S. Treasury Secretary Scott Bessent expressed confidence in Fed Chairman Kevin Warsh and noted President Donald Trump shares that confidence, alongside an expansion of the Treasury’s bond repurchase program.
    • With U.S. PCE inflation at 3.7% as of July, Goolsbee stressed that reaching the 2% goal depends on easing supply constraints and distinguishing between supply-driven and demand-driven inflation components.

    Goolsbee Outlines Conditional Path for Rate Cuts Amid Inflation Fight

    Chicago Federal Reserve President Austan Goolsbee delivered a nuanced assessment of monetary policy during a meeting in London, stating that the central bank would not oppose interest rate reductions if inflation slows significantly toward its 2% target. His remarks come on the heels of the Fed’s 25 basis point rate increase last week—the first hike since 2023—with markets now pricing potential further increases in October or December. Goolsbee emphasized that the Federal Reserve must have the courage to respond forcefully to inflation when necessary, expressing optimism that the 2% goal remains achievable provided there are no signs of overheating demand.

    Disentangling Supply Shocks from Demand Pressures

    Central to Goolsbee’s analysis is the ongoing effort to parse how much of current inflation stems from supply disruptions versus demand strength. He pointed specifically to robust investment in artificial intelligence as a factor supporting demand, while noting that persistent supply shocks continue to exert upward pressure on prices. As of July, U.S. personal consumption expenditures (PCE) inflation stood at 3.7%, and Goolsbee underscored that returning to the 2% target hinges on the easing of supply-side constraints. Officials, he said, are still analyzing the relative contributions of supply and demand dynamics to the current inflation picture.

    Bessent Backs Warsh, Highlights Treasury Market Operations

    Following the Fed’s latest rate decision, U.S. Treasury Secretary Scott Bessent appeared on CNBC to convey a message of stability regarding Fed leadership. Bessent reiterated his confidence in Federal Reserve Chairman Kevin Warsh and added that President Donald Trump also maintains confidence in Warsh’s stewardship of monetary policy. The Treasury chief also addressed market liquidity conditions, disclosing that the department has increased the size of its bond repurchase program—a move aimed at supporting smooth functioning in the government securities market.

    Central Bank Independence Takes Center Stage

    Goolsbee waded into the institutional dimension of monetary policy, arguing that expectations for the Fed to lower federal government borrowing costs underscore the critical importance of central bank independence. He emphasized that the Federal Reserve must set monetary policy strictly in line with its inflation mandate, free from fiscal dominance considerations. The comments arrive at a moment when the interplay between U.S. monetary policy and Treasury market interventions is under intense scrutiny from investors and policymakers alike.

    Why This Matters

    The divergent but complementary signals from the Fed and Treasury reflect a delicate balancing act as policymakers navigate the final stretch of 2026. Goolsbee’s conditional dovishness—openness to cuts only if inflation data cooperates—signals that the Fed remains data-dependent despite the recent hike. Meanwhile, Bessent’s public backing of Chairman Warsh and the expansion of the Treasury’s buyback operation aim to anchor market confidence in both leadership continuity and plumbing liquidity. With PCE inflation still nearly double the target and AI-driven investment bolstering demand, the path to 2% remains contingent on supply-side normalization, making upcoming inflation prints and Fed communications pivotal for market pricing through year-end.

    Frequently Asked Questions

    What conditions would prompt the Fed to consider rate cuts according to Goolsbee?

    Goolsbee stated the Fed would not oppose rate cuts if inflation slows significantly toward the 2% target, provided there are no signs of overheating demand and supply pressures continue to ease.

    What is the current level of U.S. PCE inflation and the Fed’s target?

    As of July, U.S. PCE inflation was at 3.7%, while the Federal Reserve’s target remains 2%.

    What actions has the Treasury taken to support market liquidity?

    Treasury Secretary Scott Bessent announced an increase in the size of the Treasury’s bond repurchase program to address liquidity conditions in the government securities market.

  • Fedwatch Turns Hawkish as Odds of a September Rate Increase Reach 57%

    Fedwatch Turns Hawkish as Odds of a September Rate Increase Reach 57%

    The focus has shifted to the Federal Reserve’s September 16 federal funds rate decision. CME’s FedWatch Tool, which converts federal funds futures trading into implied policy probabilities, currently gives a 57% chance of a 25-basis-point rate hike that would lift the target range to 3.75%-4%. The probability of holding rates at the current 3.5%-3.75% range stands at 43%. With uncertainty elevated, forecasts for the next Federal Open Market Committee decision remain highly divided.

    September Fed Rate Hike Bets Rise Sharply

    The shift is even more striking compared with trader expectations just one week earlier. CME data showed that the probability of a rate hike was only 39.9% on Aug. 21. By Aug. 28, following the Jackson Hole speech, that figure had climbed to 57%, while bets on a September rate cut had almost disappeared.

    Prediction markets have not fully embraced the hawkish outlook. As of this weekend, Polymarket traders assigned a 52% probability to the Fed holding rates and 48% to a 25-basis-point hike. More than $66.6 million has changed hands on the wager, while the once-common rate-cut position now carries odds of just 1%.

    Traders on the prediction marketplace Kalshi are seeing similarly close odds. Its September Fed market, with more than $23.8 million in volume, puts the probability of no change at 52%, compared with 48% for a quarter-point hike.

    Another Kalshi betting contract gives the Fed a 67% chance of raising the federal funds rate at some point before 2027.

    Warsh Highlights Persistent Inflation Risks

    The market probabilities shifted significantly after Warsh’s keynote at the Jackson Hole Economic Policy Symposium. He avoided promising a September rate hike but repeatedly emphasized persistent inflation and the Federal Reserve’s responsibility to restore price stability.

    “There should be no misunderstanding: The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target,” Warsh stressed.

    He also made clear that short-term interest rates remain the Fed’s primary tool for achieving that objective.

    The inflation figures Warsh cited help explain why traders interpreted his remarks as hawkish. The Fed’s preferred 12-month PCE inflation measure is running at 3.7%, while the six-month reading is higher at 4.1%. Neither figure is close to the central bank’s fixed 2% target, although some Fed critics believe that level will never be reached again.

    Warsh also described an economy that gives policymakers little reason to fear the effects of higher interest rates. Business investment is rising rapidly, particularly in the artificial intelligence (AI) sector. S&P 500 profits have increased more than 20% over the past year, while real consumer spending has grown more than 2% over four quarters. Unemployment remains at 4.1%.

    Markets Face a Close September Fed Decision

    That combination of persistent inflation and solid economic growth creates a difficult environment for federal funds rate doves. Higher rates can cool demand and inflation, while continued growth and employment give policymakers more room to tighten monetary policy without immediately damaging the labor market.

    Warsh still declined to commit to a rate hike, saying:

    “I stand here today committed to a discipline, not to a decision.”

    The message was deliberate: Markets can speculate about September, but the Federal Reserve does not intend to provide traders with an answer weeks before the meeting. For investors, the decision has become a genuine coin toss, with substantial money positioned on both outcomes. CME futures currently favor a hike, while Polymarket and Kalshi narrowly lean toward a rate hold.

    Inflation and labor-market reports will now carry even greater weight, and either could shift the balance before Fed officials meet in mid-September.

    Source: cryptonews.net