Federal Reserve's "Third-in-Command": The impact of tariffs is gradually fading, and inflation continues to show a downward trend.

As the "third-in-command" of the Federal Reserve with permanent voting rights, New York Fed President John Williams stated that there is evidence showing inflation continues to cool as the impact of tariffs gradually fades, and the rise in energy prices has not spread to other service sectors. In an interview on Wednesday, Williams said, "Recent data is encouraging. In fact, I see inflation trends slowly declining as some of the effects of tariffs are beginning to fade." He added that the biggest factors currently driving inflation remain tariffs and the rise in energy prices caused by conflicts in the Middle East, noting that "there are still some impacts from rising service sector inflation." Meanwhile, Williams supported the Federal Reserve's decision to maintain interest rates at the July Federal Open Market Committee (FOMC) meeting. He stated, "At the end of the last FOMC meeting, interest rates were at a good position," balancing the dual mandate of full employment and price stability. He further mentioned, "We are now collecting a lot of data and must reassess this." In contrast to Williams' relatively dovish comments, Fed Governor Christopher Waller warned that inflation has been persistently above target levels for over five years, and there is a risk of price pressures becoming entrenched. He indicated that he is prepared to support interest rate hikes if U.S. inflation does not further ease. As a Fed governor with permanent voting rights, Waller's policy stance is of significant reference for market assessments of the future interest rate path. His latest remarks suggest that he does not rule out a tightening of monetary policy if inflation continues to fall short of the Fed's target. Following five consecutive months of maintaining interest rates, the Federal Reserve will hold another FOMC meeting from September 15 to 16. After Fed Chair Jerome Powell signaled a hawkish tone at the global central banking conference in Jackson Hole last Friday, market expectations for a rate hike in September have quickly intensified. The CME Group's "FedWatch" tool currently indicates that the market sees a 66% probability of a rate hike this month, up from 38% last week. In addition, the escalation of the situation in the Middle East has further strengthened market expectations for a September rate hike by the Fed. On September 1st at noon local time, the U.S. military launched a new round of airstrikes on targets of the Islamic Revolutionary Guard Corps in southern Iran and around the Strait of Hormuz. This was the second strike against Iran in three days following over a month of military silence and has shifted U.S.-Iran tensions back to a military trajectory after a period of moves toward blockades, sanctions, and negotiations. The Islamic Revolutionary Guard Corps in Iran claimed that in response to the U.S. attack on southern Iran the previous night, Iran launched heavy ballistic missiles at a U.S. Marine base near the port city of Aqaba in Jordan, resulting in "a large number of U.S. military casualties." The IRGC also stated in its announcement that "multiple important facilities and armed helicopters were destroyed," and that retaliation actions are ongoing. As a result, the market is concerned that if military conflicts between the U.S. and Iran escalate further, one of the world's most critical energy transport routesthe Strait of Hormuzcould be affected, leading to further disruption in oil supply and transportation, pushing global energy prices higher, exacerbating inflation risks in the U.S., and forcing the Fed to maintain a tighter monetary policy. Despite the quick rise in expectations for a Fed rate hike this month, some analysts believe that the market's bets on a rate hike may have run ahead of themselves. Before the Fed makes a final decision, it will receive a set of key economic data, and the current inflation and employment performance does not form a clear consensus for an urgent need to raise rates. Among these, the labor market will be one of the most important areas to watch. U.S. non-farm payroll data has shown weakness for three consecutive months. If the non-farm employment data for August, to be released this week, continues to weaken, it will further undermine the Fed's rationale for tightening policy immediately. Inflation data is equally critical. In July, the U.S. PCE price index rose 3.7% year-on-year, with core PCE rising 3.3%; however, the Dallas Fed's measure, which excludes extreme price volatility, was only 2.3%, clearly approaching the 2% policy target. Ahead of the September meeting, the Fed will also receive a series of data including CPI and PPI as well as employment figures. If there are clear signs of cooling in any of these, current rate hike pricing could quickly decline. Regarding the outlook for an interest rate hike by the Fed, France's Industrial Bank expects the Fed to begin raising rates in September, as persistent inflation and an improving labor market are pushing policymakers toward a more hawkish stance. According to the latest report by Jan Grun, the chief U.S. economist at France's Industrial Bank, the bank currently predicts that the Fed will raise rates by 25 basis points in both the September and December meetings, followed by another hike in March 2027. However, the report notes that there is significant uncertainty regarding the timing of the last rate hike. In contrast, Goldman Sachs bets that Waller's hawkish rhetoric will not be backed by hawkish data, thus maintaining a forecast of no action from the Fed. In a report to clients, Goldman Sachs Chief Economist Jan Hatzius stated that Waller's speech in Jackson Hole was the most hawkish appearance since he assumed the Fed chair, but he believes that a change in tone alone is unlikely to trigger a rate hike next month. Hatzius noted that Waller directly responded to a series of encouraging inflation data, acknowledging that this summer's PCE and CPI data exceeded expectations while arguing that these figures do not yet indicate a substantial improvement in underlying price trends. Hatzius pointed out that this statement opens the door for a September rate hike, but this would only occur if the upcoming August CPI and PPI reports exceed expectations. Goldman Sachs' own forecasts suggest that this threshold is unlikely to be surpassed. Hatzius stated that the bank continues to expect that August's core CPI and core PCE inflation rates will fall around 0.2%, a pace insufficient to support the policy response implied by Waller's remarks.