Federal Reserve officials delivered mixed signals on the inflation outlook during Thursday's sessions, with some policymakers advocating for further interest rate hikes to curb price pressures while others adopted a more cautious stance. This internal division comes just ahead of Fed Chair Kevin Warsh's scheduled keynote address at the annual central bank symposium in Jackson Hole, Wyoming, on Friday morning.
The divergence within the Fed is clear: hawks argue for continued rate increases, while some policymakers prefer to wait. Kansas City Fed President Jeff Schmid stated that the central bank's current interest rate policy has not been restraining the U.S. economy. Cleveland Fed President Beth Hammack, who was among the officials who voted against holding rates steady last month, echoed that view. Both explicitly suggested that rates should be raised if inflation is to be brought back to the 2% target within a reasonable timeframe.
"To me, short-term rates may still be relatively accommodative. So we have a lot of work to do," Schmid said in an interview. Hammack expressed a similar sentiment, arguing that current rates are not restrictive enough to allow price pressures to cool on their own. "We should apply some restraint to help inflation return to target. The longer inflation stays above target, the harder it will be to bring it down," Hammack noted.
Other Fed officials, however, are taking a more measured approach. Boston Fed President Susan Collins believes there is still evidence that the Fed's current policy is at least partially restraining the economy and helping to slow inflation. "I still feel that rates are somewhat restrictive," Collins said. Chicago Fed President Austan Goolsbee stated he is still evaluating the inflation outlook. "I need evidence that this inflation shock won't persist. I can wait for that evidence to emerge," he said. "But if the data starts to rebound, especially in the services sector — for instance, if inflation stays high, heads in the wrong direction, or progress stalls — then I would start to get nervous."
This divergence signals that no consensus on the rate path has yet formed within the Fed, and markets are watching to see whether Friday's speech by Warsh will provide clearer directional signals.
Economists also split on the rate debate
Beyond the Fed itself, economists are also divided on whether rate hikes are needed in the coming months to contain inflation. Notably, U.S. inflation has now remained above the Fed's 2% target for 65 consecutive months. Latest price data released Wednesday showed that the Fed's preferred inflation gauge — the core personal consumption expenditures (PCE) price index — rose 3.7% year-over-year in July, unchanged from June, while analysts had expected 3.6%.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said after the July PCE report that the modest upside surprise in inflation data, coupled with relatively strong economic performance, is "not what investors or the Fed wanted to see," but the data set is "not enough to tip the scales at the September FOMC meeting," with a pause remaining the most likely outcome. She added that if subsequent data continues to show sticky inflation, "the Fed may feel more pressure to act."
Ariana Curtis, senior economist at Capital Economics, believes the July PCE data is "not sufficient to push the Fed to hike in September." However, she stressed that core PCE remains elevated at 3.3% year-over-year, well above the Fed's 2% target, and with economic growth resilience and a relatively strong labor market, the downward path for inflation faces significant resistance. She issued a clear warning: "It's a matter of when, not if, rates are hiked — we expect a 25 basis point hike in December and another early next year."
Jan Hatzius, chief economist at Goldman Sachs, said earlier this month that market pricing for further Fed hikes remains "too hawkish," and a September hike has become "very unlikely." Goldman Sachs' base case remains that the Fed holds rates steady through the end of 2026. According to federal funds futures data, investors currently see roughly a 36% probability of a rate hike in September.
Warsh's reform proposal gains initial support: FOMC meetings could be cut to six per year
Additionally, both Schmid and Goolsbee are open to a reform proposal put forward by Warsh — reducing the Federal Open Market Committee's (FOMC) annual policy meetings from eight to six. Warsh has already solicited input from the committee on this matter. Goolsbee called the suggestion "worth considering" and deserving of discussion. Schmid noted that new technologies mean policymakers may be able to assess economic conditions more quickly. "If information becomes more timely, fewer meetings could actually make us more efficient. But that information needs to be more real-time than it currently is," he said.
Warsh is scheduled to deliver his speech at 10 a.m. New York time on Friday. Since taking office, Warsh has adopted a "listen more, talk less" communication style, emphasizing a reduction in forward guidance and letting markets rely more on hard data rather than official rhetoric to gauge policy direction. While this strategy grants the Fed greater policy flexibility, it has also left investors increasingly perplexed about the interest rate outlook.
Markets are focused on how Warsh will articulate his views on the economy, inflation, and the rate outlook at Jackson Hole, and whether he will signal a new direction for policy. Apollo Global Management believes Warsh will deliver an economic outlook with a "hawkish tilt" during his Jackson Hole speech on Friday, aiming to keep long-term yields in check. "Warsh is absolutely right that forward guidance is not a good idea," said Torsten Slok, chief economist at Apollo. "But most people also agree that framework guidance is a good idea, and now we need some framework guidance from him." TD Securities analysts warned that a wholesale shift in Warsh's communication strategy is unlikely, and the risk of market disappointment is high.
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