Jackson Hole takeaway: Inflation is still too high; rates are likely to stay elevated

Recent inflation data: stalled, not reversed

• July PCE’s headline came in +3.7% Y/Y with core at +3.3% Y/Y. Core PCE has printed 3.3%, 3.5%, 3.3%, 3.3% YoY across April to July 2026. This represents the last four months with zero net progress.

• Fed chair Warsh disaggregated all 199 individual components of the PCE basket: 54% showed price increases above 3% over the past 12 months (down from a post-pandemic peak of ~77%, but still well above the pre-pandemic norm of ~32%). His point was that even as the headline Y/Y figure looks better, the breadth of price pressure across the basket hasn’t genuinely narrowed.

• Although oil has slipped over the last week as the US pivoted toward economic pressure on Iran (instead of increased military presence), the crack spread and gasoline prices remain elevated. Fresh US-Canada tariffs, with retaliation expected, and with the administration weighing increased semiconductor tariffs, represent potential continued price pressure.

• Recent US economic data remains resilient beneath a softer headline: Q2 GDP rose 1.5% annualised, a dip from Q1's 2.1%, but Warsh pointed to private domestic final purchases (PDFP) — consumption plus investment, stripped of trade and inventory noise — which he described as a measure that "typically carries more signal than GDP." PDFP has run at nearly 3% so far this year, with real consumer spending up over 2% across the past four quarters and business capex (equipment and intangibles) growing ~9% Y/Y, the fastest pace since 2021, more than half of it is AI-related. AI capex and affluent-household spending carried the expansion. July payrolls came in -23k vs +80k expected, while the figures from May/June were revised down a combined -103k. As stated in our latest FOMC update, the participation rate is the lowest since Feb 2021 (61.4%), which resulted in a low unemployment rate of 4.1%. That said, Warsh stated that the economy is at full employment and that inflation figures were the more concerning of the Fed’s dual mandate.

• Warsh said that inflation is the priority: summer prints were lower than expected but don’t underpin any meaningful underlying trends. He reiterated that the Fed must be confident underlying inflation is moving to target clearly and at sufficient speed; otherwise “we have work to do”.

• Critically, he believes that current rates are not restrictive; in our view, this is the closest thing to a hike case he has made – if policy rates are not restrictive and inflation is not falling, the direction of rates is up. He said both Main Street and Wall Street have been remarkably resilient, with business capex growing 9% Y/Y and the S&P 500 profits up over 20% Y/Y with profit margins historically elevated. Notably, credit spreads for corporate bonds and leveraged loan credit spreads remain tight, near the low-end of historical ranges.  Nevertheless, consistent with his stance, Warsh refused to provide forward guidance for September, reiterating that markets should not be primarily looking to the Fed for their next trade.

• Notably, the Fed chair did not comment on the Treasury buyback intervention, term premium or the relations between the Fed and Treasury.

• Market reaction: US equities sold off with the S&P, Russell, Dow and the Nasdaq in the red. Oil was slightly down given Iran’s statement that the crisis can be resolved only if the conflicts around the Middle East (Gaza) are resolved. Precious metals (Gold, Silver) and copper are down. Looking at rates, the US2Y spiked from 4.25% to 4.35% as the market is pricing in a close to 50-50 chance that the Fed will hike in September. Similarly, the US10y is up 5bps to 4.72%, and the US30y is up to ~5.2%.

• Do remember that Warsh only has one vote, and the rest of the committee is far from unified. Cleveland’s Hammack (July dissenter) said outright “now is the time to act”, and Kansas City’s Schmid called current rates “very accommodative”, separately dismissing the Treasury buybacks as immaterial. On the other side, Chicago’s Goolsbee gave a more balanced read, pointing to energy and tariffs (rather than core demand) as the amplifiers of the recent inflation prints, while Boston’s Collins attributed part of the hot headline print to base effects. We’ll continue to monitor Fed and other central bank commentary into September, since the balance of opinion (not just Warsh’s) will ultimately decide the outcome of the upcoming September FOMC.

• Recommendation: we continue to espouse our view from the latest FOMC in July (July FOMC recap: The Fed holds, but the long end isn’t convinced). Rates are expected to remain elevated, particularly the 10y and beyond. On balance, we favour short-to-medium bonds (3-8y) and recommend keeping your fixed-income exposure to instruments that remain within this range or shorter (money market funds / short-duration bond funds). 

Table: Recommendations

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.