PCE comes in hot days before Warsh's Jackson Hole test

Inflation data released Wednesday gave Federal Reserve Chair Kevin Warsh an unwelcome number to carry into Friday's Jackson Hole keynote – and left advisors weighing whether a rate cut is now further out of reach than markets had hoped.

PCE, which is the Federal Reserve’s preferred gauge of inflation, rose 3.7% year-over-year in July, holding steady after an annual increase of 3.7% in June, according to the Bureau of Economic Analysis. Economists surveyed by Dow Jones Newswires and the Wall Street Journal were looking for an increase of 3.6%.

From the prior month, PCE rose 0.2% in July, after decreasing 0.1% in June.  Economists were looking for an increase of 0.1%.

The Core PCE price index, which excludes food and energy, rose 0.2% in July, after increasing 0.1% in June. Economists were looking for an increase of 0.2%. On a year-over-year basis, Core PCE rose 3.3%, also in line with economists’ forecast, and remained steady from June's year-over-year number.

“This wasn’t just any PCE report – it was the PCE report before Kevin Warsh’s Jackson Hole keynote, which could make or break the resurrection of the debasement trade,” said Nic Puckrin, macro analyst and founder of Coin Bureau, in a statement, pointing to Federal Reserve Chair Kevin Warsh’s keynote address at the Jackson Hole Economic Policy Symposium Friday. “And today’s numbers should have investors worried.”

The Federal Reserve made its last rate cut in December 2025, but has since kept its policy rate steady at 3.5% to 3.75% despite pressure from President Donald Trump to lower rates.

“The Fed’s preferred inflation measure shows prices remained stubbornly high in July – not the setup for a dovish statement markets were hoping for,” Puckrin said. “If Warsh’s speech on Friday leans hawkish, this could derail the gold and Bitcoin rally we’ve seen over the past week, and put further pressure on the AI trade that’s been propping up the stock market.”

“For borrowers and investors, this isn’t time to panic yet, but it’s worth remaining on your guard,” he added. “A rate hike before the year is out is still more likely than a cut, and that would mean higher borrowing costs and more lackluster returns from risk assets.”

Addison Maier, portfolio manager at Janus Henderson Investors, thinks that we're unlikely to see a rate hike at the next meeting of the central bank. "Inflation has been in line with, if not a bit better than, expectations over June and July which has weakened the case for the Fed to hike at their September 16th meeting," he said, in a statement. "The three big drivers of inflation this year have been energy, tariffs, and AI."

"While energy prices remain volatile, we have seen a modest easing in goods prices as we've lapped last year's tariffs," Maier added.

Nonetheless, minutes from the Federal Open Market Committee's July meeting, released last week, show a contingent of officials ready to push rates higher if inflation doesn't retreat toward the Fed's 2% target. 

Chris Zaccarelli, chief investment officer at Northlight Asset Management thinks that the latest PCE data has bought the Fed some valuable time. "Although many of the PCE numbers were worse than expected, the most important one – YoY Core PCE – held constant and that will give the Fed more time to leave rates on hold," he said, in a statement. "The number of dissenters at the next meeting may grow because the month-over-month readings (headline and core) are getting worse, but we believe enough of the FOMC will want to wait to see more data before making a decision to raise rates next month."

On Wednesday morning, the CME’s FedWatch tool puts the probability of rates being unchanged at 59.6% for September’s Fed meeting. A hike to between 3.75% and 4% has a likelihood of 40.4%, according to the tool, which updates in real time. For the Fed’s December meeting there is a 27.1% chance of rates being unchanged, and a 45.4% chance of rates being increased to between 3.75% and 4%.