Jackson Hole Speech Preview: Is the Fed Looking for Reasons to Raise Rates?

On Tuesday evening, Boston Fed President Susan Collins published an article on the Boston Fed website: "If evidence of sustained inflation decline does not appear, I believe it would be appropriate to tighten policy as soon as possible."

Richmond Fed President Tom Barkin, at an event in Charlotte, North Carolina, was asked about the U.S. public debt surpassing $40 trillion. He said: "There will be a reckoning, but no one can tell you when."

IMF President Kristalina Georgieva told reporters in Washington: "All countries need to address their fiscal issues, and central banks must focus like a laser on price stability."

On the same day at 10 a.m., the Conference Board released the August Consumer Confidence Index: 89.4, the lowest in seven months.

What did the officials actually say?

Let’s first look at Collins's original words, as her phrasing is measured.

She supports keeping interest rates steady temporarily, but this support is conditional: "Maintaining the current target range for the federal funds rate will require sustained evidence that inflation is indeed declining." If this evidence does not appear, "I believe it would be appropriate to tighten policy as soon as possible to ensure we achieve price stability within a reasonable timeframe."

She stated that recent inflation data is "slightly encouraging," but monthly readings can fluctuate, and "whether the recent improvement can be sustained remains to be seen."

A more weighty statement is: Inflation has been above target for more than five years, and the Fed cannot wait indefinitely. She is concerned that a persistent deviation from the target will change consumer expectations, and once expectations change, achieving that target will become more difficult.

Collins is not a voting member this year. But this is not just her position—at the July meeting, the Fed held rates steady for the fifth consecutive time, but three officials voted against it, advocating for a 25 basis point hike, and two non-voting members also expressed support for a rate increase. The policy rate has remained in the 3.5% to 3.75% range since last December.

Barkin's remark about "reckoning" is worth quoting in full: "As things move forward, there will be a reckoning. No one can tell you when. We are a global currency, with the rule of law—all these are reasons people continue to buy our debt. But, you know, at some point, people will stop buying your debt, and that’s the risk out there."

He later told reporters that the July rate decision was a "difficult choice." The reason for waiting is practical: before the next meeting on September 15-16, two more months of data will be available. "So far, we have a complete set of data, and we will get another complete set to see what we can learn."

What is pushing inflation up?

This is the key to the entire piece, as it determines whether raising rates is effective.

Let’s first look at where this line has gone. The inflation indicator the Fed cares most about is the PCE price index. When Trump took office in January 2025, it was 2.5%; by February 28 this year, just before the Iran war broke out, it was 2.8%; it surged to 4.1% in May; and fell back to 3.7% in June. The policy target is 2%.

The three reasons cited by Fed officials are: the Trump administration's import tariffs, the oil prices driven up by the Iran war, and the current massive AI investments.

Among these three, Collins believes the first two are receding. She assesses that the transmission of previous tariffs has largely run its course, and the impact of rising oil prices on inflation should also begin to weaken.

But the third factor is one she specifically mentioned in her article:

"Regarding economic activity being stronger than expected, I want to point out that AI development seems to be putting upward pressure on core goods inflation."

Looking at these three factors, the awkwardness of using rate hikes as a tool becomes apparent.

The transmission path of rate hikes is singular: increase the cost of borrowing → suppress demand → as demand decreases, prices will fall. It addresses the first half of the phrase "too much money, too few goods."

However, tariffs are set by policy, and rate hikes cannot change that. The passage conditions in the Strait of Hormuz are determined by the situation in the Middle East, which rate hikes also cannot alter. As for AI development, the $730 billion in data center expenditures and those orders for power, transformers, and memory are occurring in an environment where rates are already not low, and they are far less sensitive to funding costs than ordinary business investments.

IMF President Georgieva provided the simplest framework for this chaos.

She stated that the global economy has so far withstood pressure, largely thanks to the surge in AI investments. The energy shocks caused by the closure of the Strait of Hormuz have also been better than previously feared, relying on countries tapping into oil and gas reserves, increased non-Gulf energy supplies, decreased energy demand, increased renewable production capacity, and some regions reverting to coal.

But she said uncertainty remains high, with evidence lying in two places: rising bond yields and stagnant inflation decline. In a recent interview, she stated: "We are genuinely in a tug-of-war. The negative supply shocks from the Middle East versus the positive demand shocks from AI."

This is also the Fed's predicament. One end of the rope is pulling prices up, while the other is pulling growth up, and it only has a hammer to smash demand.

Georgieva's list of risks also includes: shrinking oil and gas reserves as the Northern Hemisphere enters winter, the strong El Niño potentially exacerbating food insecurity, and the impact of AI on financial stability. Her conclusion left no room for complacency: "All of this should not lead to complacency; that is my core message. We are doing reasonably well, but that should not be a reason to say, 'Okay, everything is fine and easy.'"

In July, the IMF maintained its global growth forecast for 2026 at around 3%, but raised its forecast for global consumer prices, mainly due to energy and food.

In other words, the three walls on the supply side are out of reach of the hammer of interest rates. It can only smash demand.

And on the demand side, it is already struggling to hold up.

Consumers are already unable to hold on

The August Consumer Confidence Index is 89.4, down 0.8 points from the revised 90.2 in July, marking a seven-month low and falling below economists' expectations of 90.2.

Breaking it down, this data is divided.

The current assessment is improving: the present situation index rose 6.8 points to 121.2, marking the first improvement in four months. Employment sentiment is also improving—the proportion of people saying jobs are "plentiful" rose from 24.4% to 27%, and the gap between those who think jobs are plentiful and those who think they are hard to find rose to 7.5%, the first increase in three months (the July reading was the lowest in over five years).

However, the future assessment is collapsing: the expectations index fell 5.8 points to 68.2, the lowest since January, with a drop of 7.8%. Only 14.6% of people expect more jobs in the next six months, down from 16.4% last month.

Dana Peterson, chief economist at the Conference Board, summarized: "Consumers are more pessimistic about the business conditions and labor market in the next six months."

One number explains why. The survey collection period was from August 3 to 16, during which the average oil price in the U.S. remained above $4 per gallon—due to renewed U.S.-Iran conflict pushing oil prices up. Consumers themselves expect inflation to accelerate to 5.8% in the next 12 months, up from 5.6% in July.

Other confirmations are also pointing in the same direction: U.S. retail sales in July saw the largest drop in over a year; the job market unexpectedly stagnated in July, with employers net cutting 23,000 jobs, and the Labor Department revised down employment figures for May and June by 103,000; the unemployment rate fell to 4.1%, but the reason is not right—it’s because thousands of people simply exited the labor market, reducing competition. The University of Michigan's Consumer Confidence Index also fell in August for the first time in three months.

After five years of high inflation, Americans' patience is running thin. And with less than 70 days until the midterm elections.

Looking ahead to Friday, two things to watch

First is the release of July's PCE data. Economists surveyed by Reuters expect core PCE to be 3.3% year-on-year, unchanged from the previous month; the Wall Street Journal survey expects overall PCE to be 3.6%. Regardless of the measure, both are still far above the 2% target.

Then there’s Jackson Hole on Friday. Kevin Warsh will deliver his first major speech since taking office as Fed Chair. The criticism he faces is that he has not been candid about his views on the economy. Georgieva will also attend Jackson Hole for the first time this week.

Market pricing is currently contradictory: futures show a roughly 75% probability of a rate hike in December, while IG's Chris Beauchamp says the probability of holding steady in September "remains firmly around 60%" and believes this speech will not change much—because Warsh prefers to "keep his mouth shut."

However, one thing has already provided an answer. Gold is hovering around $4,660, nearing a three-month high, having risen over 7% in a week.