Fed Watch – 9/4/2026

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Last week, I called my shot for no hike in September. and it might have blown up in my face. We’ll see. This is ITR Economics FedWatch Thank you for joining us for this September 4th edition. I’m Connor Lokar So last week I took a little bit of a risk by recording before Kevin Walsh’s speech came out on Friday, and I compounded that risk by more or less putting myself out there saying that we were not going to get an interest rate hike in September. So, of course, Kevin Warsh comes out with a pretty broadly hawkish speech that markets ultimately took to price in a hike for September. Before the speech at my recording last week, we were holding at about a 60/40 market implied odds in terms of sixty in favor of a hold versus forty percent chance of a hike. And futures markets since the speech have moved the other way, we’re now looking at 60/40 hike versus hold.

Now, with that said, I don’t know that I’m ready to abandon ship on my hold call just yet, but it’s certainly gotten more interesting, than where we were early last week. So in this speech, Kevin Warsh doubled down on inflation being, the immediate priority, for the Fed in his comments, which is always nice to hear, also acknowledging that PCE based inflation is well above target. More on that in a minute. And he also left the door open pretty wide for a hike in September, which the markets have responded to. And he also acknowledged weakness in housing and Ag And that’s two areas. Our clients here at ITR economics have really been struggling with the residential markets and agricultural markets.

So I always think that’s nice when a government officials acknowledge that not everything everywhere is perfect and that actually a few things are going wrong. So that was nice too. But there’s really a couple of notable quotes that I want to isolate on from the Jackson Hole speech last week. and I think the biggest one is the quote or outcome, we’ll call it the two percent is an objective. and it’s a firm fixed target. Uh, so let’s take a look at that quote. So Kevin Warsh was quoted as saying there should be no misunderstanding the Fed’s price stability objective of two percent, as measured by the Personal Consumption Expenditures. Price index is a firm and fixed target. Let’s be equally clear about another aspect of the objective. Price stability is not self-executing, nor is inflation necessarily mean reverting.

It is the Fed’s job to deliver stable prices. So that quote I think tells us a lot. So, you know, the question becomes I think for me is by which metric are we defining two percent? Now, it would seem anyway that in that quote, obviously they favor PCE versus CPI based inflation metrics. But his mention of the trimmed mean inflation rate earlier this year that we’ve talked about here on this program has this a little bit cloudy for me. But in this speech and that quote specifically, it’s centered around the headline PCE, which he acknowledged is at a three point seven percent annualized rate versus the much more favorable near two percent, one month annualized trimmed mean inflation rate, which is actually pretty close to two percent, which we’ve talked about. So if that’s what we’re going off, I think we can practically pencil in a hike for September. Maybe you don’t even use a pencil. Just use pen.

But then there’s another part of the speech just after that three point seven percent PCE acknowledgement where he stated, and I quote, the job for policy makers is to capture underlying trend inflation. That is the generalized change in prices in the economy, unaffected by idiosyncratic factors, idiosyncratic factors like, say, oil. And so is this a tell that? Well, yes, inflation is above target and he acknowledges as much. But we maybe on the Fed’s side, they don’t want to use short term rates as a club against a quagmire and supply side issue in the Middle East, which has been a thread I’ve been tugging at here for the last couple of weeks. So obviously time will tell. I think popular narrative and futures markets seem to think that it’s it’s hike time here in September. I don’t know if I’m ready to quite hop aboard just yet.

I think there might still be enough ambiguity in there. And maybe that’s just the inner contrarian in me, at this point, but it certainly seems like we’re going in that direction, if not September. I do feel it’s probable that we get at least one hike before the end of the year. Uh, at any rate, but that that idiosyncratic factors comment to me felt like a little bit of a back door anyway to, uh, an out or at least a waiting out of some of those headline, uh, CPE figures. So ultimately, time will tell. We’ll look forward to that meeting later this month. And I would say, I will see you next week, but I’m going to be out next week. because I’m going to be gone. I’m going to be out west. I’m going to be channeling my inner Kevin Warsh, and I’m heading out to Montana. So it’s it’s not quite Jackson Hole, but it’s close enough coming from New Hampshire anyway. So maybe I’ll give a speech, uh, you know, to some elk or something. So I’ll see you in a couple of weeks right here on Fed Watch.