Sticky PCE inflation divides Federal Reserve ahead of Jackson Hole retreat

The Federal Reserve’s preferred inflation gauge came in hotter than Wall Street expected, and the timing could not be worse for a central bank already at war with itself.

July’s Personal Consumption Expenditures price index rose 3.7% year-over-year, overshooting the 3.6% consensus estimate. Core PCE, which strips out food and energy, matched forecasts at 3.3% annually and 0.2% on a monthly basis. Both readings remain uncomfortably far from the Fed’s 2% target.

A central bank split down the middle

The inflation data drops into an already fractured Federal Open Market Committee. Three members dissented at the July meeting, pushing for a rate hike rather than holding the federal funds rate at its current 3.50% to 3.75% range.

The hawkish camp has recognizable faces. Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari have all made the case for tighter policy. Their argument boils down to a simple observation: core PCE has been stuck above 3% for an extended stretch, and the gap between where inflation sits and where the Fed wants it to be is not closing fast enough.

On the other side, New York Fed President John Williams has argued that current policy is already restrictive enough to do the job, just not overnight.

Personal income rose 0.4% in July, but real consumer spending was flat.

Warsh’s Jackson Hole debut

New Fed Chair Kevin Warsh will deliver the keynote address at the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium on August 28. The event runs from August 27 to 29, and Warsh’s speech will be his first major public address from the Jackson Hole podium as chair.

The leadership transition itself has amplified the discord. Three dissents at a single meeting suggest Warsh faces a caucus management challenge before he even gets to the substance of rate policy.

What markets are doing with this information

The initial reaction to the PCE print was surprisingly muted. Treasury yields held relatively stable, and equity markets showed limited movement.

The bond market’s steadiness also reflects a structural reality: long-term yields have already been elevated, and much of the tightening effect is being delivered through financial conditions rather than through the fed funds rate alone.

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