Fed's Warsh Gets A Break As Inflation Eases

Federal Reserve Chair Kevin Warsh is boxed in by two forces: colleagues who have grown increasingly worried that they’ll need to hike interest rates to fight inflation and President Donald Trump, who wants to see borrowing costs go down.

The best-case scenario for Warsh is a middle path, where prices stay tame enough for the central bank to hold rates steady. New data suggests he might be in luck, with inflation cooling last month.

The consumer price index rose 3.4 percent over the 12 months ending in July, as oil prices eased on hopes for a deal between the U.S. and Iran over the conflict in the Middle East. But even excluding more volatile food and energy costs, prices showed signs of being contained. So-called core inflation rose 2.5 percent over the past year, slightly lower than the annual number in June.

That encouraging data comes alongside a lackluster jobs report for July, where the U.S. economy actually shed jobs and participation in the labor force dropped. Together, those factors reduce the pressure for a rate hike in September, though the Fed will get another month’s data before it has to make that decision.

“Today’s CPI print, alongside July’s drop in payrolls, should lower expectations for a September hike, but does not put it completely to bed,” Seema Shah, chief global strategist at Principal Asset Management, said in a statement. “Unless August’s inflation print also shows subdued price pressures, a September hike is a clear risk.”

July’s softer inflation numbers will set the tone heading into a key speech from Warsh later this month at the Fed’s annual conference in Jackson Hole, Wyoming. The new Fed chair has firmly avoided giving guidance about what might prompt the central bank to hike rates, and tamer inflation will reduce the stakes if he continues to make that decision.

Still, Warsh has also emphasized that the Fed should not fixate on one month’s data but instead watch the overall trend — and inflation has been above the central bank’s target since 2021.

Global disruptions caused by the Covid-19 pandemic mixed with elevated government spending led to the initial burst of inflation that eventually faded. But it never entirely cooled back to the Fed’s target before being pushed up again by tariffs, a boom in investment tied to the build-out of artificial intelligence infrastructure, the war in Iran, and resilient consumers, who have continued to spend even as prices have risen.

In the meantime, workers’ inflation-adjusted pay has ticked down over the past year. Real average hourly earnings dropped 0.2 percent from July 2025 to July 2026, the Labor Department reported Wednesday.