Jackson Hole Preview: Is the Fed Looking for Reasons to Hike?

On Tuesday evening, Boston Fed President Susan Collins published an article on the Boston Fed's website: If evidence that inflation is sustainably declining does not appear, "I think it will be appropriate to tighten policy sooner rather than later."

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

IMF Managing Director Kristalina Georgieva told reporters in Washington: All countries need to address their own fiscal issues, and central banks must be laser-focused on price stability.

At 10 a.m. the same morning, the Conference Board released the August consumer confidence index: 89.4, the lowest in seven months.

What exactly did officials say?

Let's look at Collins' exact words, because the phrasing is nuanced.

She supports holding rates steady for now, but that support is conditional: "Maintaining the current target range for the federal funds rate will require continued evidence that inflation is actually declining." If that evidence does not appear, "I think it will be appropriate to tighten policy sooner rather than later to ensure we achieve price stability within a reasonable timeframe."

She said recent inflation data is "somewhat encouraging," but monthly readings can be volatile, and "whether the recent improvement can be sustained remains to be seen."

A more weighty statement: Inflation has been above target for more than five years, and the Fed cannot wait forever. She worries that persistent deviation from target will change consumer expectations, and once expectations shift, the target itself becomes harder to achieve.

Collins is not a voting member this year. But this is not her position alone—at the July meeting, the Fed held rates steady for the fifth consecutive time, yet three officials dissented in favor of a 25-basis-point hike, and two non-voting members also expressed support for a hike. The policy rate now stands at 3.5% to 3.75%, unchanged since last December.

Barkin's "reckoning" comment deserves full quotation: "As things move forward, there will be a reckoning on this. No one can tell you when. We are the global currency, we have rule of law—all those things 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 told reporters after the event that the July rate decision was a "tough call." The reason for waiting is practical: before the next meeting on September 15-16, they will get two more months of data. "We've gotten one full set of data so far, and we'll get another full set, and see what we learn."

What is actually pushing inflation up?

This is the crux of the whole piece, because it determines whether rate hikes are useful.

First, let's see where this line has gone. The Fed's preferred inflation gauge is the PCE price index. When Trump took office in January 2025, it was 2.5%; by February 28 this year, before the Iran war began, it was 2.8%; in May it spiked to 4.1%; in June it fell back to 3.7%. The policy target is 2%.

Fed officials themselves list three reasons: the Trump administration's import tariffs, oil prices pushed up by the Iran war, and now the massive AI investment.

Of the three, Collins believes the first two are fading. She judges that the pass-through of previous tariffs has largely run its course, and the impact of oil price increases on inflation should also begin to weaken.

But the third one, she names in her own article:

"Regarding stronger-than-expected economic activity, I would note that AI construction appears to be putting upward pressure on core goods inflation."

Lay these three out, and the awkwardness of rate hikes as a tool becomes clear.

The transmission path of rate hikes is only one: raise the cost of borrowing → suppress demand → when demand falls, prices fall. It addresses the first half of "too much money, too few goods."

But tariffs are prices set by policy; rate hikes cannot change them. The passage conditions in the Strait of Hormuz are determined by the Middle East situation; rate hikes cannot change that either. As for AI construction, that $730 billion in data center spending, those orders competing for electricity, transformers, and memory, are happening in an environment where interest rates are already not low, and their sensitivity to funding costs is far lower than ordinary corporate investment.

IMF Managing Director Georgieva provided the simplest framework for this mess.

She said the global economy has so far withstood the pressure, thanks in large part to the surge in AI investment. The energy shock from the Strait of Hormuz closure has also been better than feared, thanks to countries tapping oil and gas reserves, increased non-Gulf energy supply, falling energy demand, rising renewable capacity, and some regions turning back to coal.

But she said uncertainty remains high, and the evidence is in two places: rising bond yields and stalled disinflation. In a recent interview, she said: "We are truly in a tug of war. Negative supply shocks from the Middle East, positive demand shocks from AI."

This is exactly the Fed's situation. One end of the rope is pulling prices up, the other is pulling growth up, and all it has in hand is a hammer that can crush demand.

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

The IMF in July kept its 2026 global growth forecast basically at 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 beyond the reach of the interest-rate hammer. All it can smash is demand.

And on the demand side, it is already buckling.

Consumers are already buckling

The August consumer confidence index came in at 89.4, down 0.8 points from July's downwardly revised 90.2, hitting a seven-month low and below economists' expectations of 90.2.

Breaking it down, the data is split.

Assessment of the present is improving: the present situation index rose 6.8 points to 121.2, the first improvement in four months. Labor market perceptions are also getting better—the share saying jobs are "plentiful" rose from 24.4% to 27%, and the difference between those saying jobs are plentiful and those saying jobs are hard to get rose to 7.5%, the first increase in three months (the July reading was the lowest in more than five years).

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

Conference Board Chief Economist Dana Peterson said: "Consumers are more pessimistic about business conditions and the labor market over the next six months."

One figure explains why. The survey was conducted from August 3 to 16, during which the average U.S. gasoline price stayed above $4 per gallon—because renewed U.S.-Iran conflict pushed up oil prices. And consumers themselves expect inflation to accelerate to 5.8% over the next 12 months, up from their July expectation of 5.6%.

Other corroborating evidence points in the same direction: U.S. retail sales in July posted their biggest drop in more than a year; the July job market unexpectedly stalled, with employers net cutting 23,000 jobs, and the Labor Department revised down May and June payrolls by 103,000; the unemployment rate fell to 4.1%, but for the wrong reason—several thousand people simply left the labor force, so fewer people were competing. The University of Michigan consumer sentiment index also fell in August for the first time in three months.

After five years of high inflation, Americans' patience is running out. And the midterm elections are fewer than 70 days away.

Friday preview: two things to watch next

First, the release of July PCE data. Economists surveyed by Reuters expect core PCE at 3.3% year-over-year, unchanged from the previous month; the Wall Street Journal survey's headline PCE expectation is 3.6%. Either way, it remains well above the 2% target.

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

Market pricing is currently mixed: futures show a roughly 75% probability of a December rate hike, while IG's Chris Beauchamp says the probability of holding steady in September is "firmly at around 60%," and he thinks this speech won't change much—because Warsh prefers to "keep his cards close to the vest."

One thing has already provided an answer. Gold is trading around $4,660, near a three-month high, up more than 7% for the week.