This week, nonfarm payrolls and PCE will be released; the resilience of the U.S. economy may once again push up expectations for rate hikes.

Several key economic reports due this week are expected to further demonstrate that the U.S. economy is strengthening, supporting the arguments of several Federal Reserve officials that interest rates should be higher. After recent data showed that U.S. retail sales rose sharply in August and business activity in September grew at the fastest pace in more than five years, market expectations for another rate hike as early as October have already heated up. The good news on growth comes with a sting: inflation remains above the Fed's 2% target, forcing the central bank to once again pressure households and businesses with a rate hike after raising rates earlier this month for the first time in more than three years. Making the situation more tense is that the Fed's next rate decision will be announced just days before the closely watched midterm elections. This week's data may tip the scales in that debate. Economists expect data released on Wednesday to show that inflation-adjusted consumer spending in August posted the largest increase of the year. Although a recalculation of the core inflation measure favored by the Fed is expected to lower the year-over-year reading by as much as 0.3 percentage points, the monthly picture is less reassuring. The core personal consumption expenditures (PCE) price index, which excludes food and energy, is expected to rise 0.3% month over month, faster than in the previous two months. The latest nonfarm payrolls data will follow on Friday, and is expected to show that job growth remains solid. As of Friday, economists expect employers to have added about 90,000 workers in September, with the unemployment rate holding at 4.1%. JPMorgan chief U.S. economist Michael Feroli said that if businesses continue to hire at their recent pace, the picture of slowly rising interest rates could change. "Over the past few years, inflation appears to have been driven by supply shocks," Feroli said. "But if the labor market tightens and wage growth accelerates, then I think we will start to feel that the good news on growth is a bit too much." Several Fed officials used speeches and public appearances last week to warn in succession that inflation is still too high. Fed Governor Michael Barr said further rate hikes may be needed to cool prices; Chicago Fed President Austan Goolsbee warned that the path back to the central bank's 2% target will not be painless. Goolsbee, Richmond Fed President Tom Barkin, Cleveland Fed's Beth Hammack and Philadelphia Fed's Anna Paulson also pointed out that the overall economy is gaining momentum even if only gradually. "The concern is, will we see things heat up?" Hammack said Friday. "Right now, when I travel around the district and talk with businesses, what I hear is that spending is very resilient." A historic artificial intelligence boom is powering construction and manufacturing, while businesses and households continue to spend in the face of an oil price surge related to the war with Iran. Bond yields are another factor policymakers need to consider, with investors betting that the central bank will raise rates at least once more this year. As of press time, federal funds futures pricing showed about a 70% probability of a rate hike in October. "Some of the inflation we are seeing now is precisely because the economy is so strong," said Bank of America chief economist Beth Ann Bovino. "The possibility of another rate hike is becoming very real." Fragile U.S. Households and Businesses It should be noted that not the entire economy is booming, and heavy reliance on the AI boom could itself become a burden. Former Philadelphia Fed President Patrick Harker, now at the University of Pennsylvania's Wharton School, warned that higher borrowing costs will expose an underlying vulnerability, especially among fragile households. "I do think we have to be careful," Harker said. He said the economy is "running on one very large engine data center construction, and the power grid construction that comes with it. Other parts of the economy seem to be gliding, not really doing much." In the real economy, higher borrowing costs carry weight. Data from the New York Fed show that credit card and auto loan delinquency rates have continued to rise in recent years. In the first quarter of this year, the credit card delinquency rate rose to its highest since 2011 and remained elevated in the second quarter. The housing market has already been held back by mortgage rates which have risen to their highest level in more than two years. Those Hit by Rates One person who has felt the sting, in a microcosm of the broader trend, is Aurelius Chaves president and owner of Midland Machinery, a road-building equipment manufacturer in Tonawanda, New York. He has had to contend with sharply rising costs, from employee health insurance to business insurance. When the Fed raises rates, the impact hits both the cost of his own loans and the equipment dealers who buy his products. "My sales go through the dealer network, so when their costs rise, they start cutting inventory," Chaves said. "I know exactly how much more interest each 25 basis point rate hike will cost me next year." For now, Chaves said overall business is still holding up, a sentiment echoed by other readings. The "Orange Book" compiled by institutional industry research found that in recent earnings calls, more than two-thirds of industries mentioned that the economic recovery is accelerating, with most attributing it to the AI investment boom. Fed Chair Kevin Warsh cited this strength, attributing the central bank's recent rate hike decision in part to an optimistic outlook for accelerating growth. "Think about the geopolitical landscape marked by shocks and uncertainty, and you begin to appreciate the resilience of the U.S. economy," Warsh told reporters on Sept. 16. If policymakers decide to raise rates again on Oct. 28 less than a week before the key midterm elections Warsh's challenge will be how to package that message to the people who put him in this position. Although President Donald Trump has toned down his sharp criticism of the Fed, he made his attitude clear at Warsh's swearing-in ceremony in May. "Unlike some of his predecessors, Kevin understands that when the economy is booming, that's a good thing," Trump said. "We don't have to go crazy. Just let it boom."