Back in July, the new Fed Chair, Kevin Warsh, took a beating from the markets. In one of his first appearances as head of the Fed, markets interpreted Warsh as not willing to commit to fighting inflation. He suggested that rising yields on Treasury bonds were doing some of the Fed’s work for it. Warsh’s reluctance to provide guidance on rate increases caused a whiplash in equity and bond markets.
So last week, when Warsh and others gathered in Jackson Hole, Wyoming, for the annual gathering of Fed officials, what else would one expect him to say? He had to redeem himself, and that’s what he did. He was more explicit in the Fed’s commitment to fight inflation and provided guidance that the Fed would be focused on prices. The market reaction was not that severe, suggesting that markets had approved of the purported commitment to price control.
Since that July meeting, yields on both the 10-year and 30-year Treasury bonds have remained elevated. The 10-year yield is around 4.7%, while the 30-year is above 5%. This means higher interest costs for the U.S. government and higher borrowing costs for consumers. Interest on the debt is now the third-largest item in the federal budget, behind only Social Security and Medicare, and is higher than the entire defense budget. Mortgage rates are about where they were in late July, averaging about 6.7%. The goal of Treasury Secretary Scott Bessent to bring long-term Treasury yields down is not moving in the right direction.
It will all depend on the next round of inflation readings. Both the CPI and the preferred Fed indicator, the PCE Price Index, remain above the Fed’s preferred 2% target. However, in the last three months, the CPI puts an annual rate of inflation of less than 2%. And while the labor market remains “strong,” it is showing some signs of renewed weakness. The combination puts the Fed in a tough spot. When it is all said and done, the weaker labor market, if national payrolls continue to undershoot, will take priority over inflation.
A look back shows that payroll growth was even lower in 2025. Preliminary payroll revisions were released last week, and the BLS reported that job growth for most of 2025 and early 2026 was weaker by 79,000 jobs. Had it not been for an increase of government jobs by 99,000, the picture would have been even worse. Private sector payrolls were 178,000 lower than originally reported. That means the previously stated average of 23,000 per month was even less than that.
There continues to be an emerging bright spot in the national economy, and that is manufacturing. This should come as a boon to Indiana and Kentucky. It took more than a year to work through the tariff mess, and that is one of the reasons manufacturing continues to see some pickup. Unfortunately, the latest tariff battle with Canada is not going to help, especially for states with significant trade with the country’s northern neighbor.
Odds are now pointing to a possible hike by the Fed in September. More than likely, the Fed will not move, keeping rates at the current level. Another weak labor report and CPI reports showing a meaningful decline in inflation may even bring about a cut before year end.
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