US August CPI rose 3.4% year-on-year; markets expect the Fed to hike rates twice before year-end—how should we interpret this?

The trimmed-mean PCE index sends a signal in the opposite direction. The 12-month rolling trimmed-mean PCE through July stood at 2.3%, close to the 2% target. In fact, the trimmed-mean PCE is relatively dovish. Impact of BEA’s Methodology Revision The U.S. Bureau of Economic Analysis (BEA) has announced methodological revisions to three categories—portfolio management services, computer software and peripherals, and legal services—to take effect on September 30. [1] UBS estimates that the new methodology will reduce the contribution to inflation by approximately 0.21%; Goldman Sachs expects the core PCE year-on-year figure to be revised downward by about 0.2%. Overall, all institutions agree that the BEA’s revisions will lower core PCE. In a public speech on September 3, Fed Governor Christopher Waller explicitly referenced the BEA revision as one reason he favors waiting until the next meeting—but Waller’s view does not represent the FOMC’s collective stance. Overall, ahead of the September meeting, clear divisions have emerged within the Fed: hawkish, dovish, and centrist camps. Hawks—including Harker and Barr—argue for immediate action, while doves—including Waller and Williams—advocate waiting for more data. Notably, even officials inclined to hold rates steady generally agree that further tightening would become necessary if inflation fails to recede—indicating that the disagreement centers primarily on timing, not policy direction. Political Constraints With only about seven weeks remaining before the midterm elections, former President Trump, Vice President Vance, and Treasury Secretary Bessent have all publicly urged the Fed not to raise rates. Prior to the release of the August CPI data, Bloomberg surveyed 48 economists from September 4–9; 35 expected no rate change, citing political constraints tied to the midterm elections as their main rationale. Harvard Professor Rogoff recommends postponing controversial actions until after the election to safeguard institutional independence, whereas economist Sahm—who devised the Sahm Rule for recession detection—opposes this view. The Fed has never let electoral cycles influence its decisions.

Bessent hints at the Fed’s future direction: an inflation ‘range-based’ framework, scrapping the ‘dot plot,’ supporting the Treasury, and returning to a ‘behind-the-scenes’ role.

U.S. Treasury Secretary Bessent recently suggested that the Federal Reserve’s policy framework may undergo major adjustments—including replacing the fixed point target with an inflation ‘range-based’ approach and eliminating the widely watched interest-rate path ‘dot plot.’ He advocates that the central bank narrow the scope of its economic intervention, revert to a more traditional behind-the-scenes role, and coordinate fiscal and monetary policy more effectively with the Treasury Department. In a discussion on the All In podcast, released on December 23, Bessent emphasized that adjusting the target before inflation definitively returns to 2% would undermine credibility—but he explicitly stated that once inflation is under control, he supports adopting a ‘range’ concept (e.g., 1.5%–2.5% or 1%–3%). He argued that economic systems resemble ‘biology’ rather than physics or mathematics, and pursuing decimal-point precision is absurd. Additionally, he revealed that current interim Fed Governor Kevin Miran may return to the White House in February or March—a timeframe the market interprets as aligning with the decision window for the next Fed Chair nomination. Bessent further noted that the next Fed Chair may consider scrapping the ‘dot plot,’ a long-standing tool embedded in the quarterly Summary of Economic Projections (SEP) used to guide market expectations on interest-rate trajectories. Among potential candidates he cited—Kevin Warsh, Kevin Hassett, and Chris Waller—are figures broadly inclined to scale back the Fed’s institutional scope and functions, aiming to end so-called ‘gain-of-function’ monetary policy—i.e., moving away from positioning the central bank as the undisputed protagonist of the economic stage—and to reduce excessive market overreaction to individual policymakers’ offhand remarks, thereby enhancing the predictability of the policymaking process. Proposing an Inflation Range Framework and Scrapping the ‘Dot Plot’ Bessent questioned the Fed’s existing inflation-targeting framework. While acknowledging that the ‘2%’ target is now an established standard—and that altering it prematurely while inflation remains above that level would amount to ‘cheating’ and damage central bank credibility—he contends that the future direction should be a more flexible range-based approach. He points out that markets and economies are nonlinear, complex systems, and anchoring policy to a single precise number contradicts how real-world economies actually function. On communication tools, Bessent criticized the ‘dot plot.’ He hinted that, with future leadership changes at the Fed, this long-standing market barometer may be abolished. Such a move aims to reduce excessive market reliance on the central bank’s short-term rate forecasts, making the transmission of policy intent more direct and transparent. Moreover, Bessent mentioned several current candidates under consideration for Fed Chair—including Warsh, Hassett, and Waller—highlighting that they broadly seek to downsize the Fed’s institutional footprint and mandate, ending what he calls ‘gain-of-function’ monetary policy, i.e., no longer allowing the central bank to dominate the economic stage.

Bessent Urges Fed to Keep Open Mind on US Inflation Outlook

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Treasury Secretary Bessent urged the Fed to maintain flexibility on interest rates, citing AI productivity against rising fuel costs from Middle East conflicts. He also forecast Iranian oil deliveries to China will stop within two weeks.

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