Fed Faces Tough Choices as US Data Shows Mixed Signals

The week's biggest US data release, core PCE inflation, held around 3.3%, while second-quarter GDP slowed to 1.5% from 2.1%. This growth slowdown, combined with still-high inflation, left the Fed with little room for comfort.

Markets trimmed expectations for another immediate rate hike, but stopped short of declaring the tightening cycle over. Treasury yields stayed elevated, the dollar held firm, and investors became cautious about assuming easier policy is around the corner.

At Jackson Hole, Kevin Warsh argued that policymakers should explain how they interpret inflation, employment, and financial conditions without locking themselves into a fixed path. However, the bond market complicates this message, as elevated Treasury yields can be seen as part of the Fed's tightening or a financing risk that needs managing.