PCE Hits Target, Waller Nudges Fed Toward Cut, Markets Hold Breath

The July Personal Consumption Expenditures (PCE) report landed squarely in line with expectations, offering little in the way of surprise but enough to keep the Federal Reserve on track toward a September rate cut. Headline inflation rose 0.2% month-over-month and 2.6% year-over-year, while core PCE increased 0.3% on the month and 2.9% on an annual basis. Both measures matched consensus forecasts, with core inflation ticking slightly higher from June’s 2.8%. On the demand side, personal spending rose 0.5% and income climbed 0.4%, both exactly in line with estimates. Real consumer spending advanced 0.3%, doubling June’s pace, pointing to resilient consumption even as tariffs continue to work their way through the system. In short, the report confirmed what markets already anticipated: inflation is running hotter than the Fed’s 2% target but not spiraling, leaving the door wide open for easing.

Market reaction to the release was muted but leaned dovish. CME Fed funds futures ticked higher, with the probability of a quarter-point September cut rising to 87% from 85% pre-release. That incremental shift reflected relief that the data didn’t come in hotter, a scenario that might have complicated the Fed’s easing path. Treasury yields barely moved, with the two-year anchored and the 10-year nudging up only modestly. The dollar index was slightly firmer, up 0.15% on the day, suggesting investors see limited downside in the greenback without a stronger signal for aggressive cuts. Equities were softer into the report, weighed down more by earnings disappointments and tariff headlines than macro data.

The focus quickly shifted to Federal Reserve Governor Christopher Waller, whose Thursday evening speech reinforced the market’s takeaway. Waller made clear that he supports a 25-basis-point rate cut in September, but pushed back against calls for a larger 50-basis-point move. He argued that policy is already moderately restrictive—around 125 to 150 basis points above neutral—and that risk management now requires easing before labor market weakness deepens. He also emphasized that tariff-driven inflation should be “looked through” given anchored long-term expectations and underlying core inflation near 2%. Importantly, Waller left the door open to additional cuts over the next three to six months, but stressed that the pace will depend on incoming data, especially the August jobs report.

Markets interpreted Waller’s remarks as steady and dovish, but not a pivot toward jumbo easing. Futures pricing consolidated around a single 25-basis-point move in September, with limited appetite to price in anything more aggressive absent a shock in labor data. Strategists noted that Waller’s framing—emphasizing labor over inflation—aligns with recent FOMC communication, reinforcing that the Fed sees employment risks as the bigger policy driver at this stage. That consistency helped calm fears of a split committee and provided a modest anchor for risk sentiment heading into next week’s data cycle.

Overlaying the policy narrative is the ongoing legal and political drama surrounding Fed Governor Lisa Cook. On Thursday, Cook filed suit to block President Trump’s attempt to dismiss her, a move that has raised serious questions about Fed independence. A hearing is scheduled for Friday morning, and the case is quickly becoming a flashpoint for institutional credibility. Investors are watching closely because any erosion of Fed autonomy could complicate rate-setting expectations, particularly if political pressure escalates around the September meeting. For now, markets appear to be treating the Cook saga as noise rather than a central driver, but analysts warn that legal escalation could raise volatility in the dollar and Treasuries if confidence in the Fed’s independence erodes further.

Taken together, the PCE report, Waller’s speech, and the Cook dispute paint a picture of cautious stability with a lingering undercurrent of risk. The inflation data offered no surprises, leaving the Fed clear to execute on a modest cut. Waller’s comments gave the market assurance of continuity and data dependence rather than a sharp dovish pivot. And the Cook situation, while troubling from a governance perspective, has not yet rattled assets. In terms of fallout, Fed funds futures leaned marginally more dovish, Treasuries were steady, equities remained pressured by earnings and tariffs, the dollar firmed slightly, and Bitcoin slid more than 2% as hopes for deeper cuts faded.

For investors, the broader takeaway is that policy easing remains the base case, but the scale and speed will hinge on labor market developments rather than inflation. With inflation expectations anchored and consumer spending resilient, the Fed has scope to move cautiously. Still, the convergence of tariff headwinds, political interference, and fragile sentiment around risk assets ensures that volatility will remain elevated into September. The PCE report may have been predictable, but the context surrounding it—Fed messaging, political drama, and global trade frictions—continues to shape a complicated backdrop for markets navigating the next phase of U.S. monetary policy.