FOMC Preview for September 16: Recent data back Warsh tightening hints

Warsh’s Jackson Hole speech on August 28 read like a clear case for tightening. He saw the labor market as consistent with full employment and recent signs of improvement in the economy, giving a broadly positive assessment outside housing and agriculture, and finding it hard to see financial conditions as restrictive. Q3 GDP is shaping up to be a strong quarter with the Atlanta Fed’s nowcast at 4.4% annualized. Warsh then went on to describe price data as concerning, going into the details of recent PCE prices and downplaying subdued wages and inflation expectations as signals. Even with some recent signs of slowing in core inflation (yr/yr core CPI at 2.4% is the slowest since March 2021), failing to tighten after saying all that would strain Warsh’s credibility. Warsh may also feel that pausing in September could leave strong pressure for a move on October 28 if subsequent data comes in strong. Warsh may prefer to risk the ire of Trump in September rather than go into the October 28 meeting under potential pressure from the markets for a move shortly before the midterm elections.

There is a case for optimism on core inflation, with trend showing signs of peaking with the tariff impact likely to have done so. There is also the possibility of core PCE price inflation being revised down when annual revisions are released on September 30, as signaled by recent comments from Fed Governor Waller. Such a revision would move PCE prices more into line with CPI, which has seen its core rate unusually running below core PCE prices in recent months. However the situation in the Middle East continues to pose inflationary risks which have escalated recently. A strong August employment report is also a factor for the FOMC to note, if on the margins in a close call.

In the vote, we would expect three of the four rotating district presidents (Cleveland Fed’s Hammack, Minneapolis Fed’s Kashkari and Dallas Fed’s Logan) to continue to push for tightening. After Warsh’s speech three permanent voters, Waller, New York Fed’s Williams and even the sometimes hawkish Barr suggested a September move was still data-dependent, particularly on inflation, and most others may see things the same way. However, if Warsh decides to back a tightening, we would expect Barr and most others to back him, particularly after a slightly stronger than expected 0.3% August core CPI increase, though Governor Bowman as well as Williams and Waller are potential dovish dissents. The statement is likely to be brief. If tightening is delivered the press conference may not be too eventful, as Warsh’s August 28 speech has already made a clear case for such a move. If there is a surprise hold, he will struggle to ease suspicions that the decision was influenced by President Trump.

This meeting will see the dots updated. The June median for 2026 was 3.75%, with nine out of eighteen at 3.625% or lower and nine at 3.875% or higher. We expect the 2026 median to move to 3.875%, which would imply no further moves after a September tightening, though we expect a larger minority than June’s six to see at least one further move this year. We expect the 2027 median dot to remain at 3.625% and that for 2028 to remain at 3.375%, thus implying 25bps of easing in each year but it would not take much to shift these medians 25bps higher. We will see 2029 dots for the first time, and we expect this will see another 25bps easing, taking the median dot to 3.125%, which is where June’s dots saw the long term neutral rate. This is unlikely to change.

The FOMC will also update its economic forecasts. While revisions are unlikely to be dramatic prospects for a strong Q3 argue for an upward revision to the GDP view, and continued low unemployment argues for a downward revision to the unemployment view. Core PCE prices may be revised slightly lower given recent data and prospects for downward revisions, but overall PCE prices are likely to be left as they were given that Middle East risks remain significant. However we expect the 2.0% core PCE price target will not be seen reached until 2029, with 2028 remaining at 2.1%.