Persistent Inflation and the Fed’s New Stance on Interest Rates

With Fed Chair Kevin Warsh now signaling that rate hikes remain on the table, the structural question is no longer whether inflation has cooled at the margin, but whether the underlying trends have meaningfully shifted at all.

The data and its discontents

The PCE gauge, the measure the Fed actually tracks, ran hotter than the more widely followed consumer price index. The mechanics are not mysterious: PCE puts substantially less weight on shelter costs, which have been the single most reliable cooling component in the broader inflation picture over recent months. Strip out that shelter drag, and the residual price pressure across goods and services remains stubbornly elevated. Annual inflation stood at 2.9% before the late-February US–Israel strikes on Iran, then climbed in the months that followed. That sequencing matters for the diagnosis. The impulse is not merely a relic of pandemic-era supply distortions or labor-market tightness — it sits on top of a new geopolitical premium layered into energy and traded goods. The feedback loop between commodity prices and core inflation is precisely the channel that conventional monetary tools struggle to dampen, and it is the channel that has done the most damage to the Fed's preferred narrative of a "last mile" glide back to target.

The Warsh signal

At the Jackson Hole symposium on Friday, August 28, Warsh delivered his first high-profile speech as chair and used the platform to reset expectations across markets and across the FOMC. Recent data, he acknowledged, show inflation has cooled somewhat — but, in his words, "they do not tell me that underlying trends have meaningfully improved." He framed the policy choice in equally austere terms: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." Read closely, that is a hawkish signal wrapped in conditional language — deliberate ambiguity that lets the chair preserve optionality while preparing the public for a possible tightening cycle rather than the cut most pricing had assumed coming into the symposium.

What to watch

Three structural checkpoints will determine whether the next move is a cut, a hold, or a hike, and we should weigh each against the others rather than in isolation. First, the trajectory of core services ex-shelter, which captures the wage-price feedback loop the Fed has been trying to break for two years. Second, the pass-through of any renewed energy shock into headline numbers, particularly through transportation and food at retail, where households feel it fastest. Third, the labor market — not the headline payroll figure, but the wage growth and quits series that signal whether the supply side of the economy remains tight enough to sustain services inflation. The PCE report tells us where the economy stands today. The Warsh speech tells us where the bar sits for policy action. The gap between the two is the next story worth tracking.