On Tuesday night, Boston Fed President Susan Collins posted an article on the Boston Fed website: If evidence of a continued decline in inflation does not materialize, "I believe that it would be appropriate to tighten policy sooner rather than later."
Richmond Fed President Tom Barkin, speaking at an event in Charlotte, North Carolina, was asked about the U.S. public debt surpassing $40 trillion. He said: There will be a reckoning on that, and no one can tell you when.
IMF Managing Director Kristalina Georgieva told reporters in Washington: All countries need to address their fiscal challenges, and central banks around the world must focus laser-like on price stability.
At the same time, at ten o'clock in the morning, the World Business Federation released the August Consumer Confidence Index: 89.4, the lowest in seven months.
What Did the Officials Really Say?
Let's start with Collins' exact words, as the wording is precise.
She supports temporarily holding rates steady, but this support is conditional: "Sustaining the current federal funds rate target range will require persistent evidence that inflation is indeed moving down." If this evidence does not emerge, "I believe that it would be appropriate to tighten policy soon to ensure that we achieve price stability within a reasonable time frame."
She said recent inflation data is "slightly encouraging," but monthly readings can be volatile, and "the sustainability of the recent improvement remains to be seen."
A weightier statement is: Inflation has been above target for over five years, and the Fed cannot wait indefinitely. She is concerned that a persistent miss of the target will change consumer expectations, and once expectations change, the target itself will be harder to achieve.
Collins is not a voting member this year. But this is not just her stance—during the July meeting, the Fed kept rates unchanged for the fifth consecutive time, with three officials dissenting and advocating for a 25-basis-point hike, while two non-voters also expressed support for a hike. The policy rate has been unchanged at 3.5% to 3.75% since December of last year.
Barkin's "reckoning" statement is worth quoting in full: "As things move ahead, there will be a reckoning on that. No one can tell you when. We are a global currency, a rule-of-law place—all the reasons people keep buying our debt. But, you know, at some point, people will stop buying your debt, and that's the risk out there."
After the meeting, he told reporters that the interest rate decision in July was a "difficult choice." The reason for the wait was quite practical: before the next meeting on September 15-16, there would be two more months of data available. "So far, we have received a complete set of data, and we will receive another set to see what we can learn."
What Is Driving Inflation?
This is the key to the whole article because it determines whether raising interest rates will be effective.
First, let's see where this line has reached. The inflation indicator most valued by the Fed is the PCE Price Index. When Trump took office in January 2025, it was 2.5%; before the Iran War broke out on February 28 this year, it was 2.8%; it spiked to 4.1% in May; and dropped to 3.7% in June. The policy target is 2%.
Three reasons listed by Fed officials themselves are: the Trump administration's import tariffs, the oil price spike due to the Iran War, and the current large-scale AI investment.
Among these three, Collins believes the first two are on the decline. She judges that the pass-through of previous tariffs has basically been completed, and the impact of rising oil prices on inflation should also begin to weaken.
But the third, which she specifically mentioned in the article, is:
"Regarding the point that economic activity is stronger than expected, I would like to point out that AI development seems to be exerting upward pressure on core goods inflation."
When we look at these three factors separately, the awkwardness of using interest rate hikes as a tool becomes apparent.
There is only one transmission path for interest rate hikes: raise the cost of borrowing → suppress demand → as demand goes down, prices go down. It tackles the first part of the "too much money, too few things" issue.
However, tariffs have a policy-set price that interest rate hikes cannot change. The passage conditions of the Strait of Hormuz are determined by the Middle East situation, which interest rate hikes also cannot change. As for AI development, the $730 billion data center expenditures, the orders snatching up electricity, transformers, and memory, are occurring in an environment where interest rates are already not low, and their sensitivity to funding costs is much lower than regular business investments.
IMF Managing Director Georgieva provided the most concise framework for this turmoil.
She said the global economy has so far withstood the pressure, with much credit due to the surge in AI investment. The energy shock caused by the closure of the Strait of Hormuz was better than previously feared, relying on countries tapping into oil and gas reserves, non-Gulf energy supply increases, energy demand decrease, renewable energy production ramp-up, some regions returning to coal.
However, she said uncertainty remains high, evidenced in two places: rising bond yields and stagnating inflation. In a recent interview, she said, "We are undeniably in a tug of war. The negative supply shock from the Middle East and the positive demand shock from AI."
This is also the Fed's dilemma. One end of the rope is pulling up prices, the other end is pulling up growth, and it only has one hammer to hit demand with.
Georgieva's list of risks also includes: shrinking oil and gas reserves as the Northern Hemisphere enters winter, a looming strong El Niño that could worsen food insecurity, and the impact of AI on financial stability. Her conclusion left no room for doubt: "None of this is cause for complacency; that is my key message. We are not doing badly, but that should not be a reason to say 'well, everything is going smoothly, it's easy'."
In July, the IMF kept its global growth forecast for 2026 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 out of reach of the interest rate hammer. It can only hit demand.
And on the demand side, it's already faltering.
Consumers are Already Struggling
In August, the consumer confidence index was 89.4, down 0.8 points from the revised 90.2 in July, hitting a seven-month low and below the expected 90.2 by economists.
Breaking it down, this data is mixed.
Assessments of the present are improving: the present situation index rose by 6.8 points to 121.2, the first improvement in four months. Perceptions of employment are also improving—those saying jobs are "plentiful" rose from 24.4% to 27%, and the gap between those seeing jobs as plentiful and those seeing jobs as hard to get increased to 7.5%, the first increase in three months (the July reading was the lowest in over five years).
Expectations for the future are crumbling: the expectations index fell by 5.8 points to 68.2, the lowest since January, a 7.8% drop. Only 14.6% of people expect more jobs in the next six months, down from 16.4% last month.
Dana Peterson, Chief Economist at the Conference Board, summed it up: "Consumers are more pessimistic about business and labor market conditions over the next six months."
One number explains why. The survey was conducted from August 3 to 16, during which the average U.S. gasoline price stayed above $4 per gallon—due to escalating tensions between the U.S. and Iran pushing up oil prices. And consumers themselves expect inflation to accelerate to 5.8% in the next 12 months, up from 5.6% in July.
Other confirmations are also pointing in the same direction: the largest drop in US retail sales in over a year in July; an unexpected stagnation in the job market with employers cutting a net 23,000 positions, and the Labor Department revising down employment numbers for May and June by 103,000; the unemployment rate fell to 4.1%, but for the wrong reasons — thousands of people simply dropped out of the labor force, reducing the labor market's competitiveness. The University of Michigan's Consumer Sentiment Index also saw its first decline in three months in August.
After five years of high inflation, Americans' patience is wearing thin. And the midterm elections are less than 70 days away.
Friday Outlook: Two Key Things to Watch Next
First is the release of July's PCE data. Economists surveyed by Reuters expect core PCE to be 3.3% year-over-year, unchanged from the previous month; The Wall Street Journal's survey anticipates overall PCE to be at 3.6%. Regardless of the measure, both are well above the 2% target.
Next is Friday's Jackson Hole. Kevin Warsh will deliver his first major speech since becoming Fed Chair. The criticism he faces is that he has not been forthcoming about his views on the economy. Georgieva will also make her first trip to Jackson Hole this week.
The market's pricing is currently contradictory: futures indicate a 75% probability of a rate hike in December, while IG's Chris Beauchamp says the likelihood of a hold in September is "firmly around 60%" and believes this speech won't change much — as Warsh prefers to "keep his cards close to his chest."
One thing, however, has already provided an answer. Gold is near $4660, approaching a three-month high, with a weekly gain of over 7%.
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