Economists at TD Securities are betting that next month's Consumer Price Index reading for August will look tame enough to let the Federal Reserve leave interest rates untouched at its September meeting, even as they flag a real risk that a hotter-than-expected inflation number could tip the central bank toward raising rates rather than holding them steady.
What the CPI-to-PCE math is showing
The Federal Reserve leans more heavily on the Personal Consumption Expenditures index, or PCE, than on the CPI when it sets policy. TD Securities economists Oscar Munoz and Eli Nir translated their expected August CPI print into that PCE framework to see what it implies for the Fed's preferred gauge. Their conclusion is that if their forecast holds, core PCE inflation would come in at a modest 0.18% month-on-month, while the market-based measure, which strips out harder-to-observe imputed costs, would be even softer at 0.13%. Numbers that low, they argue, would be a welcome sight for the more centrist voices on the Fed's rate-setting committee, the FOMC, particularly Governor Waller and Williams. In TD Securities' view, a reading like that would be enough on its own to keep the Fed on hold in September.
Why Waller's stance matters so much
TD Securities specifically called out Fed Governor Waller's position, noting his preference to keep rates on hold for as long as incoming data allow it. That matters because the economists place Waller among the more centrist members of the FOMC, a group whose votes often determine which way a closely balanced committee leans. If the CPI-to-PCE translation genuinely shows contained underlying inflation, it directly reinforces the case that officials like Waller have been making for patience. That is a key reason TD Securities believes the committee will choose to leave rates exactly where they are in September rather than move in either direction.
A stabilized labor market shifts the Fed's focus
Looking beyond the September meeting, TD Securities said it expects the Fed to remain on hold across its entire forecast horizon. The economists project that inflation will stay elevated for the rest of the year, while the labor market has already stabilized. The Fed operates under a dual mandate, balancing price stability against employment, and a steadier jobs market gives the FOMC room to concentrate on its inflation goal without worrying as much about the labor side of that equation. TD Securities frames this as exactly the dynamic now playing out, which is why the committee's attention is increasingly fixed on where inflation data land in the months ahead.
If the Fed moves at all, expect a hike, not a cut
Even with a base case of no change in September, TD Securities was explicit that an upside inflation surprise could still force the Fed's hand. As the economists put it, "If the Fed were to move this year, we believe that move is more likely to be a hike than a cut." That view runs counter to expectations elsewhere in the market that have leaned toward rate cuts, and it signals that if the Fed does eventually depart from its holding pattern, TD Securities expects the next step to be tighter policy rather than a easing move.
