Warsh's Credibility Test: Politics, Inflation, and the Data in Between

• Warsh’s comments this week will likely be spun as hawkish.

• Inflation growth continues to cool, easing the rate hike outlook.

• The Fed should continue to have room to stay on hold.

The Fed faces a credibility test just as inflation cools and the media narrative keeps running hot…

This week brings another key update for investors as it relates to the monetary policy outlook. On Thursday, the Federal Reserve Bank of Kansas City’s Economic Policy Symposium kicks off in Jackson Hole, Wyoming. The event is typically filled with speeches by key decision makers in the finance world.

The moment that Wall Street will be paying attention to is the keynote address by new Fed Chairman Kevin Warsh on Friday morning. He has traditionally been viewed as a hawk, or an official inclined to raise rates. Yet, since he was appointed by President Donald Trump, investors are worried Warsh will be inclined toward lowering rates. So, institutions have been selling the 10-year U.S. Treasury bonds and driving up interest rates to try to send a message…

It’s not uncommon for Wall Street to question a new governor. Typically, it takes time for them to become comfortable with the type of language and nuance the individual in charge will use. Until that is ascertained, institutional investors can sometimes sell first, and ask questions later, creating financial market volatility in the process.

Well, don’t be surprised if Warsh feeds into the hawkish policy narrative when he speaks later this week. He may not give any official guidance around rates, but he’s likely to reaffirm the central bank’s commitment to bringing inflation back down to the 2% target. Based on the data I track, the Fed can't afford to cut rates anytime soon. That may stoke bombastic media headlines, but with no hikes on the table either, a steady policy backdrop should support a continued rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

If we want to understand how the Federal Reserve views inflation, we need to step outside the seasonally adjusted headlines and look at the raw numbers. That's because the Fed's 2% target is measured on an annualized, non-seasonally adjusted (NSA) basis. It's how the yearly total gets tallied.

Look at the Consumer Price Index (“CPI”) over the last twelve months:

Add it up and you get an annualized CPI growth rate of 3.4%. But the real story isn't the headline number, it's how we got there. The stretch from March through May alone accounts for 2.5 percentage points of that 3.4% total. The other nine months combined? Just 0.9%, or roughly 0.1% of monthly growth on average.

In other words, inflation ran hot for one stretch this year, and everything else has been remarkably tame. That's encouraging on its own. But it also means a central bank looking for room to cut rates must be patient. Those hot spring prints need to roll off the trailing twelve-month total before the annualized number can meaningfully improve.

Now let's see how that lines up with the typical seasonal pattern…

Since 2000, the calendar has a consistent rhythm: inflation tends to run hottest early in the year, cool as spring turns to summer, and go negative by the time we reach the fourth quarter. What we're seeing right now is starting to come back to script.

After the noticeable surge in late spring and summer, the pace of monthly price growth is cooling once more. June and July combined saw prices contract 0.3%, compared with a typical combined gain of roughly 0.4% for those two months. That's a meaningful shift back toward normal.

There are other encouraging signs on the horizon, too. Fuel costs have been the single biggest driver of this year's inflation surge, and the latest data from the U.S. Energy Information Administration ("EIA") shows prices at the pump starting to move back in line with typical seasonality....

The chart above tracks the average monthly price for a gallon of gas across all grades, so it captures the full picture rather than just one segment of the market. According to the EIA, prices have averaged $4.18 so far in August, up 0.5% from July, just above the average monthly gain of 0.2% for August since 2000. That's a sharp deceleration from the double-digit monthly increases we saw earlier this year, and it marks the second straight month gas prices have moved back toward their longer-term seasonal trend.

Bottom Line

Put it together, and the inflation picture looks less alarming than the annualized headline suggests. The hot months are behind us, the seasonal pattern is reasserting itself, and the commodity that did the most damage this year is cooling off.

There's also a geopolitical wildcard that could accelerate that trend. Pakistani negotiators said this week they've made progress in talks with Iran. That included discussions on a path back to June's memorandum of understanding. If that materializes, it should ease pressure on oil prices, and by extension, on the broader inflation and interest-rate outlook.

The combination of cooling seasonal inflation, falling energy costs, and a diplomatic off-ramp in the Middle East, would give Warsh and the rest of the Fed all the cover they need to hold rates steady instead of raising them. And a Fed on hold should be enough to underpin a steady, long-term rally in the S&P 500.

Five Stories Moving the Market:

Pakistan’s Interior Minister Mohsin Naqvi said it made “significant progress” in talks with Iran focused on the US-Israeli war, regional tensions, and a possible path towards lasting peace; Naqvi accompanied Field Marshal Syed Asim Munir during his one-day visit to Tehran, where they held a key meeting with Iranian President Masoud Pezeshkian - Reuters. (Why you should care – the two sides are said to have discussed the potential steps forward to get all sides to return to the June Memorandum of Understanding)

Iran and Oman met to negotiate a temporary joint shipping corridor through the Strait of Hormuz, along with a mission to clear mines from the critical oil export route; Omani Foreign Minister Sayyid Badr bin Hamad Albusaidi expressed optimism that a temporary corridor and "practical arrangements to restore safe navigation" would be unveiled in short order – Yahoo Finance. (Why you should care – increased shipping passage through the Strait should boost the outlook for global energy supplies, weighing on prices)

Oil loadings from Iraq’s export installations in the Persian Gulf jumped, with seven tankers collecting the nation’s cargoes, the latest sign that regional flows might be climbing – Bloomberg. (Why you should care – the ships involved are estimated to have an oil cargo capacity of 13 million barrels)

Intuit forecast annual revenue below Wall Street expectations, as the TurboTax maker said ​its push for customer growth and market-share gains would weigh on ‌near-term sales – Reuters. (Why you should care – the enterprise software provider forecast fiscal 2027 revenue growth of 9% to 10% compared to the 16% total in 2026)

U.S. Treasury Secretary Scott Bessent's bond buyback plan may be controversial, but market metrics show it's working; benchmark U.S. yields have drifted lower after initially see-sawing in the wake of the government’s plan to “at least double” its buybacks of longer-dated bonds – Bloomberg. (Why you should care – Commodity Trading Advisors, or CTAs, are maximum short global sovereign bonds, likely fueling demand for the securities)

Economic Calendar:

Earnings: A, ANF, CRWD, NVDA, OKTA, SJM, SNPS, URBN, WSM

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – GDP Second Take for Q2 (8:30 a.m.)

U.S. – PCE Price Index for July (8:30 a.m.)

U.S. – Personal Income, Spending for July (8:30 a.m.)

U.S. – Real Personal Consumption for July (8:30 a.m.)

U.S. – Dallas Fed Trimmed Mean PCE for July (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Treasury Auctions $28Billion in 2-Year Floating Rate Notes (11:30 a.m.)

Treasury Auctions $70Billion in 5-Year Notes (1 p.m.)