The latest US rates and macro outlook from Robert Sockin, Chief US Economist at PGIM
Jackson Hole
Chairman Warsh’s Jackson Hole remarks were almost universally hawkish. He focused much of his speech on major debates surrounding AI, defended his “less is more” approach to Fed communication, and outlined his key principles for monetary policy. In the current context, Warsh’s guiding principles look hawkish across the board: focus on trends over isolated data points, reassert the Fed’s commitment to 2% PCE inflation, and highlight that the Fed remains focused on maximum employment, while recognizing that high inflation can damage this part of the mandate.
Warsh offered his most concerned assessment of inflation to date. He showed no concern about GDP growth or the labor market, and even noted that the economy appears to have strengthened. On inflation, he pushed back systematically on dovish arguments against raising rates, citing 6-month and 12-month trends, dismissing a few months of softer inflation prints, and warning that inflation expectations can appear stable until they shift.
Fed rate outlook
We still expect three 25 bp rate hikes this year, starting this month. This has been our call since roughly one week before Chairman Warsh started his tenure at the Fed in June. Our view is unchanged despite Governor Waller’s more dovish remarks last week, as we do not think he will be the deciding vote on the FOMC. Still, the September decision will hinge on the August inflation data released just before the meeting. Those data will be firm enough for the FOMC to move. If the Fed ultimately holds rates this month, we would expect a tightening cycle to begin in December instead given the mid-term elections.
US Treasury
A more active and interventionist Treasury looks here to stay, but its tools and their effectiveness in influencing deficits and yields are limited. Treasury’s buyback plan represents a small share of the overall market and may eventually add issuance pressure at the short end. This approach also carries risks, as it shows the Treasury is concerned about yield levels but has no durable solution to address them. Treasury cannot print money, meaning its “backstop” does not have the same power as “don’t fight the Fed.” We expect limited impact from any fiscal consolidation efforts by the Administration that do not involve Congress. Along these lines, we have seen little appetite in Congress for fiscal restraint in recent years.
US tariffs
While collected tariffs have fallen from around 12% to around 7% following the Supreme Court ruling against the administration’s use of the IEEPA authority, our base case is that tariffs return to roughly 12%. We expect further tariffs from the US administration over the next few months and into next year, which could drive another round of inflation in the US. Recent developments suggest that the administration is very committed to its tariff policy, despite the legal setback.
US economic outlook
The recent string of U.S. data has not changed our core descriptions for the economy: solid GDP growth, a labor market that is somewhere between stabilization and acceleration, and elevated inflation that is unlikely to converge to the Fed’s 2% target without tighter monetary policy.
On GDP, consumer goods spending in July was soft, but momentum remains intact. AI investment momentum also remains robust, as reflected in strong data center construction prints as well as firm trends in shipments and orders of AI-related products. In addition, the “soft” data for Q3 have been firm almost across the board. Taken together, Q3 GDP growth looks to be tracking around trend, and domestic demand is likely to expand at a well-above-trend pace for the quarter.
The August jobs report was strong. Payroll growth has accelerated relative to last year and the breadth of job gains has improved. Job growth has been strong enough to put downward pressure on the unemployment rate over time. Labor supply remains constrained due to an aging population and tighter immigration policies. Wage growth remains moderate but could pick up in coming quarters, especially as the unemployment rate (currently at 4.1%) is likely to be 4.0% by year-end. Overall, the broad universe of labor market data continues to indicate that this labor market, if not accelerating, is at worst stable.
We expect inflation to reassert itself in August and continue to see elevated pressures over the medium term. In our view, solid GDP growth will continue to collide with supply constraints in technology, energy, labor, climate, and trade. Moreover, if inflation numbers like the moderately warm data we saw in July persist, they would still imply an inflation rate closer to 3% than 2%. Chairman Warsh, as noted above, was also hawkish on recent inflation data, saying they do not show that the underlying trend is improving, particularly because the number of items showing inflation rates above 3% remains historically elevated.
