The U.S. August CPI report due later today is being treated as the key data point for next week’s Federal Reserve decision. Goldman Sachs warned that if the data come in benign and the Fed still chooses to hold rates steady, bond-market concern over a 「policy error」 could be greater than the damage caused by hiking in response to above-target inflation.
The piece was written by Xu Chao for Wallstreetcn. Money markets are currently pricing roughly a 70% probability of a 25-basis-point rate increase at the Sept. 16 FOMC meeting. Strong nonfarm payrolls last week, along with rising geopolitical tensions in the Middle East, have pushed hawkish expectations higher.
Federal Reserve Governor Christopher Waller has laid out what markets see as a relatively clear reaction function: if the August inflation data show disinflation is continuing, he would lean toward leaving rates unchanged; if the numbers run hot, he would support a hike. Fed Chair Warsh struck a more hawkish tone at Jackson Hole, saying policy work is not finished unless inflation moves back toward the 2% target at a sufficiently fast pace.
Decimal points in core CPI are driving pricing across markets
Wall Street’s consensus sits near a 0.2% month-on-month increase in core CPI, but that is also the range markets are finding hardest to price. JPMorgan’s market intelligence team said 0.2%, after rounding, points to a hold, while 0.3% points to a hike.
Bloomberg Chief U.S. Economist Anna Wong said her team is calculating PCE inflation projections to the third decimal place to gauge the policy implications of what she called one of the most closely watched CPI reports on record. Tonight’s release is expected to reshape pricing for September, October and December.
Major banks are clustered near the same CPI number, but the policy read-through differs
Forecasts for August core CPI are tightly packed, though the small differences matter.
- JPMorgan expects core CPI to rise 0.21% month on month, equivalent to about 2.37% annualized and only barely holding at 2.4% after rounding. It sees core PCE rising 0.20% month on month and 3.2% year on year. The bank also said 13 of the last 17 CPI prints came in below expectations, and that the current inflation surprise index is in the weakest 10% of the past decade, supporting its below-consensus call and its short position.
- BofA Securities forecasts core CPI at 0.22% month on month and core PCE at 0.24%, equivalent to about 2.9% annualized, with year-on-year core PCE seen rising to 3.4%. Economist Stephen Juneau said that result would not give the Fed enough comfort on the inflation trend and would be sufficient to support another hike at the September meeting.
- Goldman Sachs expects core CPI to rise 0.22% month on month and sees that feeding through to a 0.22% increase in core PCE. Goldman highlighted three key components: used car prices rising 0.5%; owners’ equivalent rent and rent increasing 0.22% and 0.23%, respectively; and airline fares jumping 4.0%, reflecting the continuing pass-through from jet fuel costs.
- Citi is more dovish, forecasting core CPI at 0.18% and core PCE at 0.19%, and saying that outcome would support a pause in September.
- Polymarket data show economists’ median forecast at 2.4% year on year, with the market assigning a noticeably higher probability to an undershoot at 2.3% or below than to an upside surprise at 2.5% or above.
Warsh and Waller have given markets two very different signals
Differences inside the Fed have made the CPI print harder to interpret.
Warsh’s Jackson Hole remarks were read as hawkish. He said clearly that unless core inflation is moving back toward the 2% target at a sufficiently fast pace, the Fed still has more work to do. Markets took that as a sign of very low tolerance for inflation persistence.
Waller’s comments were more measured. He said signs of cooling inflation are emerging and that three-month core inflation has improved meaningfully. If the August data extend that cooling trend, he would support holding rates steady in September.
He also gave a specific reference point: if three-month annualized core inflation falls to 2.8%, 「that is acceptable.」 At the same time, he kept open the option of supporting a hike if the data run hot. Waller also played down the inflationary effects of energy prices and tariffs, said wage growth is consistent with a path back to target, and argued that core PCE may not be the best measure of the inflation trend, adding that underlying inflation is actually 「performing better than」 the core figures suggest.
Goldman Sachs FICC co-head Anshul Sehgal described the remarks from Warsh and Waller as 「two completely different interpretations.」 He said it is still unclear whether this cycle needs another hike and that the answer depends heavily on energy prices and geopolitical developments. In his view, the cycle is unlikely to include more than three hikes, and pricing of 435 basis points in the one-year, one-year forward rate implies roughly two and a half hikes, which he said 「sounds broadly reasonable.」
Treasury traders are focused on the threshold around 0.25%
Rate traders are paying close attention to the exact decimal in core CPI.
BofA rate strategist Meghan Swiber said that if core CPI rises 0.1% month on month, the 2-year Treasury yield could fall 5 to 10 basis points. If the reading is 0.2%, moves would likely stay within plus or minus 5 basis points. If it comes in at 0.3%, the 2-year yield could rise 5 to 8 basis points. She added that a softer print could trigger a larger rally than the selloff caused by a hotter print, because hike expectations are already fairly well priced and overall market positioning remains heavily short.
Goldman macro trader Brian Bingham said the Fed is in its 「most contradictory position」 and could end up making policy based on how government data are rounded. He also warned that if the data are benign and the Fed still stands pat, concern over a 「policy error」 in the bond market would far outweigh the damage from hiking in response to above-target inflation.
Historical data cited by BofA Securities show that 90% of the Fed’s hawkish surprise moves occurred when markets were pricing within 3 basis points two days before the meeting. That means if pricing is too aggressive into the decision, a decision not to hike could become the bigger surprise.
The dollar enters the release near a four-month low
In foreign exchange, the dollar is heading into the report close to its weakest level in nearly four months.
Goldman head of FX strategy Mike Cahill said that if the data run hot, around 0.25% month on month with broad-based strength, the Fed will have difficulty avoiding a hike because that would break above the range outlined by Williams and Waller. If the reading is softer, at 0.18% to 0.20%, the Fed can stay on hold without causing an adverse market reaction.
Cahill attributed recent dollar weakness to three factors: a more dovish Fed tilt, a Treasury preference for exchange rates to bear part of the adjustment burden, and greater independence in currencies such as the yuan, yen and won.
BofA FX strategist Alex Cohen said that under the consensus scenario of 0.2% month-on-month core CPI, the dollar would likely trade in both directions because September remains undecided. If the data come in soft, the dollar’s decline could exceed the gain seen in a hot-data scenario, with DXY estimated to fall at least 0.5% to 0.75%, while October and December hike expectations would retreat sharply. If the data come in hot, the probability of a hike could move toward 90% and the dollar could bounce first. But if the Fed then fails to follow through, damage to dollar credibility would deepen, and the currency could weaken alongside long-dated Treasuries.
On the yen, after USD/JPY recently broke below the 155 area, Goldman G10 spot trader Luke Molyneux said a reading that supports a hold could extend the move lower toward 152.10. A hotter print could trigger a brief rebound to the 157.50 to 158.00 range, though he said the market would still see that as a selling opportunity.
Equities and other risk assets still have upside, but volatility remains
In equities, JPMorgan’s market strategy team said the overall risk-reward still tilts to the upside.
If the data support a hold, or a hawkish hold, technology, momentum and cyclical sectors could lead a rebound. JPMorgan’s positioning tracker showed hedge funds increased overall exposure for four straight trading days over the past week, with the weekly net increase reaching the highest level since late June at +1.3 standard deviations. The bank said room for releveraging remains available and could act as a catalyst.
At the same time, JPMorgan said trading is likely to stay choppy ahead of the release, which is why it recently shifted its short-term view to tactical neutral. The options market is currently implying about a 1.0% one-day move for contracts expiring on Sept. 11.
The biggest tail risk, in JPMorgan’s view, is a core inflation print that comes in well above expectations. If that happens, October and December hike expectations would be repriced quickly from current levels of about 27% and 54%, creating real pressure on equities.
A stress test for data-dependent policy
The report also highlights something broader: an extreme stress test for data-dependent monetary policy itself.
Anna Wong wrote that her team has pushed core PCE projections out to the third decimal place to judge which side the rate decision should favor. FX trader Brent Donnelly cited that work and contrasted it with an earlier comment from Warsh. In a 2025 speech, Warsh criticized the value of data-dependent policy, saying that excessive focus on the second decimal place in government statistics reflects 「false precision and analytical laziness.」
As Donnelly put it, 「we are in exactly that place now.」 Tonight’s number may become one of the most fine-grained tests yet of the Fed’s policy credibility against market expectations.
