High drama!

Late last week, Donald Trump warned Kevin Warsh not to raise rates at this month’s FOMC meeting. To let Fed watchers tell it, the fate of that prospective rate increase hinges entirely on the September 11 inflation update from the BLS.

Technically, Trump demanded a rate cut, lest he should be forced to “stop trading” with countries that run a trade surplus with America — you know, the protect the national interest.

Trump understands Warsh can’t meet that demand. There’ll be no discussion of a cut at this month’s Fed gathering. Last week’s barnburner jobs report recast the debate such that the balance of risks around the dual mandate is even more lopsided than it was prior to September 4: Upside risks to inflation not only outweigh downside labor market risks, the latter aren’t sufficiently material to warrant consideration in the policy discussion.

On the heels of the jobs report, some market commentators were quick to suggest the strong NFP headline and upward revisions sealed the deal on a September hike barring a multi-sigma overshoot from the core CPI print on September 11. Then came Trump’s “truth.”

Make no mistake: Warsh would rather not hike, all Jackson Hole tough talk aside. And Chris Waller’s plainly inclined to hold rates steady if only the inflation tally for August will give him some air cover.

Consensus is looking for 0.2% from the MoM core CPI readout on Friday. An in-line print would find the YoY pace slipping to 2.4%, the slowest since March of 2021, before inflation took off in America. So, for all the Sturm und Drang — and while fully aware this’ll ruffle some reader feathers — core CPI’s actually not meaningfully above target.

Of course, the Fed doesn’t target core CPI, and I’m not suggesting overall measured inflation, let alone “felt” inflation, is tolerable. Rather, my only point is that doves hoping for an excuse to hold rates steady this month don’t need a miracle. A consensus print on core CPI will work.

My sense continues to be that a hold’s significantly more likely than a hike. It’d take at least a convincing 0.3% MoM readout on underlying inflation this Friday to tip the scales, and probably a “high” 0.3% to lock a hike. Otherwise, in my view, September’s a hold.

While I’m not alone in expecting a hold, I’m pretty lonely in thinking the bar’s that high. “At this stage, we see a low bar for the inflation data to favor a rate increase, even as a hawkish hold on the 16th remains our base case scenario,” BMO’s Ian Lyngen said.

In the same note, BMO’s US rates team flagged upcoming changes to the methodology for calculating PCE inflation (the Fed’s preferred measure) which’ll be implemented by the BEA in releases due September 30.

“A third consecutive month of tame underlying inflation that implies a further decline in the three-month annualized pace of core PCE would provide a credible fundamental backdrop for a hold,” the bank said, adding that “as long as August [CPI] inflation isn’t hot, [FOMC] swing voters may have an incentive to stay on hold for another meeting to digest the PCE methodology changes.” Those changes, you’re reminded, are seen by economists lowering YoY core PCE by 0.2ppt.

This should go without saying, but just in case: A hot read on core CPI from the BLS would leave Warsh in a very, very tough spot. As discussed here, he painted himself into a corner in Jackson Hole. You’re either committed to price stability or you aren’t, and with the labor market having just put in its best showing since March, a hot CPI report in the presence of a five-years-and-running inflation overshoot and renewed upward pressure on energy prices means you gotta follow through.

As Lyngen put it, “if short-term annualized measures of underlying inflation cease to signal progress toward 2%, it would be difficult for the Fed to leave rates unchanged in September without risking its inflation-fighting credibility.”

Let’s hope it doesn’t come to that. Because the dilemma for Warsh in such a scenario will be made all the more vexing by Trump’s pressure campaign. A hold in September following i) a hot jobs report, ii) what traders took to be an overtly hawkish Jackson Hole speech and, hypothetically, iii) a warm CPI report, would be seen as evidence of politicization, particularly given the proximity of the mid-terms.

Also on deck in the holiday-shortened US week, in order of importance: PPI (Thursday), University of Michigan sentiment (Friday), existing home sales (Thursday) and the NY Fed’s consumer survey (Tuesday).