Warsh Dumps Water on Rate Cut Hopes

Rate-Cut Hopes Fade

Rate markets didn’t love what the Federal Reserve (Fed) Chairman Kevin Warsh had to say during his speech at the Jackson Hole Symposium on Friday. His tone was definitely hawkish (leaning towards keeping rates high). He stated that the Fed was not confident that inflation was moving towards its 2% goal, which is fixed and firm. They have more work to do. Markets interpreted that to mean rate hikes. Even with recent cooler inflation readings, the Fed wants to see the underlying trends meaningfully improve. He believes that the economy is strengthening, consumer demand is healthy, and that broader financial conditions are not restrictive. On the labor market, he believes that the unemployment rate at 4.1% and low jobless claims are consistent with full employment, the other half of the Fed’s dual mandate.

He reminded everyone that he believes the Fed is better able to meet its objectives by remaining quiet and not providing forward guidance. He does not believe in making big commitments that can inhibit the Fed’s freedom to make the right call. He said, “We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.” The Fed futures market’s implied odds of a September rate hike jumped from 35% before the speech to 46% after it. The pricing faces a100% chance of a rate hike by the end of the year.

Hammack Pushes Immediate Rate Hike

We heard from Cleveland Fed President and voting member Beth Hammack. She was one of the dissenters at the prior meeting. She thinks a rate hike is needed immediately to fight inflation. Despite the recent slowing inflation reports, she is concerned that inflation is having a big impact on household budgets. We should point out that raising the Fed Funds Rate and Prime Rate will cause many consumer debt payments like credit cards, car loans, and others to go up and will not have a direct effect on oil/gasoline costs.

PCE Report: Inflation Concentrated In Few Areas

One of the better inflation reports that Chairman Warsh was referencing was the July Personal Consumption Expenditures (PCE) report that was released this week. Headline all‑in inflation rose 0.2% during the month, but unrounded, it was 0.16%. This annualizes to exactly 2%. Year over year it was unchanged at 3.7%, as markets expected. The Core reading, stripping out volatile food and energy prices, rose 0.24%, rounding down to 0.2%. Year over year, it remained at 3.3%, as markets expected.

Looking into what prices are actually contributing to this increase, we see that almost all of it came from four categories: Shelter, Healthcare, Portfolio Management, and Video/Audio/Photo. We discuss shelter regularly and know there is a significant lag here as actual shelter costs have been flat or declining. Healthcare is almost 19% of Core PCE. We have highlighted how portfolio management increases are really misleading and are going to be adjusted by the Bureau of Economic Analysis (BEA), which publishes the PCE, in their August report (releasing in September). Just because money managers make more revenue due to increasing portfolio sizes doesn’t mean the cost has gone up.

It means people have built more wealth. Yearly, portfolio management has contributed almost 0.5% to Core PCE, a huge portion of the 3.3%. The video/audio/photo component is up due to AI and higher microchip costs. It is important to reiterate that a Fed rate hike is not going to cause shelter, healthcare, and the demand for AI.

QCEW Data Undercuts Prior Jobs Reports

We received new information from the Quarterly Census of Employment and Wages (QCEW) for Q1 2025 to Q1 2026. We have highlighted this report several times as it has shown how significantly wrong the monthly Bureau of Labor Statistics (BLS) Jobs Reports are when compared to the real data published in the QCEW. You may remember that in December 2025 we discussed that the BLS had overstated jobs by 1.503 million compared to their original estimate (Q2 2024 to Q2 2025). This report doesn’t move the market as it reflects old data. It does give us insight into the validity of the BLS data that does move markets. Interestingly, the BLS is who publishes the QCEW.

The BLS originally reported 273,000 jobs created during this yearly period. In this QCEW report, they revised it lower by an additional 79,000 jobs. That is an additional 30% reduction. So, during these 12 months only 16,000 jobs were created on average, a very anemic number. Interestingly, government jobs were revised higher by 99,000, but private sector jobs were lowered by 178,000. Goldman Sachs and other forecasters actually expected a positive upward revision of 50,000–450,000 jobs, not 79,000 lower. This was not a picture of a healthy job market.

Looking Ahead: Key Labor Market Data

Next week is September, and it’s Jobs week.

• Tuesday, September 1: Job Openings and Labor Turnover (JOLTS)
• Wednesday, September 2: ADP Weekly Employment
• Thursday, September 3: Jobless Claims
• Friday, September 4: BLS Jobs Report