Economics On Our Minds September 2026 FOMC Preview And So, It Begins

On Our Minds September 2026 FOMC Preview: And So, It Begins

Jan Groen Underlying inflation remains persistently above the Fed’s 2% target, with trend PCE Chief US Economist inflation still running around 2.5-3% despite claims of renewed disinflation. Intermeeting Fed communication has turned notably more hawkish amid concerns about slow progress on inflation and growing doubts that policy is restrictive. In line with our recent change in our Fed call, we expect a 25bp rate hike at the September FOMC meeting, accompanied by a hawkish SEP update that signals further tightening ahead.

The Fed’s Inflation Problem Ever since the Great Inflation Acceleration of 2021-2022 underlying measures of inflation have been suggesting a trend pace of inflation well above 2%. One obvious driver behind this has been non-housing core services inflation (‘Super Core”), which covers close to 60% of the core PCE price basket, which has been structurally higher in the post-COVID era.

Super-Core PCE Inflation Has Been Structurally Higher Underlying Inflation Rates Trending About 3% for PCE Inflation

7 Annualised % Change 3-M Change 4.0 Yr/Yr, % Range of Bias-Adjusted Trimmed Mean Measures 12-M Change Median of Bias-Adjusted Trimmed Mean Measures 6 Av. 1-M Rate Median of Previous Vintage Jan. 2016 - Feb. Core PCE 5 3.5 2020 4

2 Av. 1-M Rate 1 March 2020 - now 2.5

-1 2.0 Jan-16 May-17 Sep-18 Jan-20 May-21 Sep-22 Jan-24 May-25 Jan-24 Jun-24 Nov-24 Apr-25 Sep-25 Feb-26 Jul-26 Source: SG Cross Asset Research/Economics Source: SG Cross Asset Research/Economics

More broadly, trend inflation has been stuck well above the Fed’s 2% target since the Great Inflation Acceleration of 2021-2022. Indeed, measured across a variety of our underlying inflation metrics (discussed in detail here), underlying PCE inflation has clearly been range-bound between 2.5% and 3%, rather than trending towards 2% (right-hand side chart above). So, while recent tariff and energy price shocks have given additional impetus to inflation, the Fed has been complacent in dealing with the lack of progress in achieving a sustainable return of the inflation trend back towards its own inflation target.

Intermeeting Communications While the July FOMC meeting ended up in a hawkish hold. Fed communication turned largely hawkish over the intermeeting period. Fed President Logan, one of the three voters at that meeting that dissented in favour of a rate increase, very eloquently laid out her case: “Inflation does not appear to be on course to sustainably achieve the Federal Open Market Committee’s 2 percent target. […] The FOMC cannot count on unanticipated shocks to achieve its goals and can always adjust policy if unanticipated shocks occur.”

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Other speakers shared similar views as Logan. In a CNBC interview Fed president Musalem made it clear that according to him “underlying inflation is running between 2.5% and 3%, once your strip out supply shocks, which is too high, and we need to bring inflation down to 2% over the next eighteen months.” Another dissenter at the July FOMC meeting, Fed president Hammack, when asked what her reading was of the July PCE report, state “the problem with missing our inflation target for so long is the risk that an inflationary mindset is going to set in with the public”.

In his Jackson Hole speech Chair Warsh also gave an unequivocally hawkish characterization of the economy and at long length talked about elevated inflation, not only recently but over the past year. He pointed out that, at least in the short-term, the Fed’s reaction function has shifted to focus more prominently on inflation concerns: “Inflation is running above our 2 percent target. So, the Fed's predominant focus right now should be on prices.”. Within this context his remarks reflected a frustration about a lack of progress of a return towards a 2% inflation trend in recent years, signalling that there’s a growing contingent of Fed officials that’s losing patience with this lack of progress: “We want to gauge whether underlying inflation is rising, falling, or stuck…