Fed Won't Halt Rate Hikes Despite Lower Inflation Reading

The recent inflation reading of 3.4% in August, as measured by the Federal Reserve's preferred gauge, may have brought some relief to Wall Street, but it's unlikely to halt further interest rate hikes.

This week's report showed a slight decrease in prices, with the core Personal Consumption Expenditures (PCE) inflation rate falling 0.2% on the month and annualizing at 3%. However, these numbers are still well above the Fed's target of 2%, and economists had expected changes to how the Bureau of Economic Analysis measures certain parts of the index to knock two or three tenths of a percentage point off annual inflation.

Kevin Warsh, a former Fed governor, made it clear at Jackson Hole that the 2% target is firm and fixed, and the central bank judges trends rather than isolated data points. The Fed has already backed its words with action by raising rates to 3.75-4%, and most policymakers expect at least one more hike before the end of 2026.

The biggest concern remains energy prices, which have been kept under pressure due to the conflict involving Iran, leading to diesel costs above $6.50 a gallon, up around 75% in a year. This will continue to feed into almost everything from food and shipping costs, making it likely that future inflation readings could look less friendly than this one.