This week’s Non-farm Payrolls and PCE to be released; U.S. economic resilience may further boost rate hike expectations

According to Zhitong Finance APP, several key economic reports set to be released this week are expected to further confirm the strengthening of the U.S. economy, providing support for the argument by several Federal Reserve officials that interest rates should remain higher. Following recent data showing a sharp rise in U.S. retail sales in August and the fastest growth in business activity in over five years in September, market expectations for another rate hike as soon as October have intensified.

The good news on growth comes with a sting: inflation remains above the Federal Reserve’s 2% target, forcing the central bank to again pressure households and businesses with higher rates following its first hike in over three years earlier this month. Tensions are heightened as the Fed's next rate decision will come just days before the high-profile midterm elections. Data released this week could tip the scales in this debate.

Economists expect that data released on Wednesday will show that inflation-adjusted consumer spending in August posted the largest increase of the year. Although a methodological adjustment to the core inflation index preferred by the Fed is expected to lower the year-on-year reading by up to 0.3 percentage points, the monthly picture is less reassuring. The core Personal Consumption Expenditure (PCE) price index, which excludes food and energy, is expected to rise 0.3% month-on-month, up from the previous two months.

The latest non-farm payroll data will follow on Friday, expected to show continued robust job growth. As of Friday, economists forecast that employers added about 90,000 jobs in September, with the unemployment rate holding at 4.1%.

Michael Feroli, chief U.S. economist at JPMorgan, said that if businesses keep hiring at the current pace, the outlook for a slow rise in rates could change.

“In recent years, inflation seemed to be driven by supply shocks,” Feroli said, “but if the labor market tightens and wage growth accelerates, then I think we’ll begin to feel that the good news on growth might be a bit too much.”

Several Federal Reserve officials used speeches and public appearances last week to repeatedly warn that inflation remains excessively high. Fed Governor Michael Barr said that further rate increases may be necessary to cool prices; Chicago Fed President Austan Goolsbee warned that the road back to the central bank’s 2% target will not be painless.

Goolsbee, Richmond Fed President Tom Barkin, Beth Hammack from the Cleveland Fed, and Anna Paulson from the Philadelphia Fed also noted that the overall economy is building momentum—even if only incrementally.

“The concern is whether we’re going to see things heat up,” Hammack said last Friday. “What I’m hearing on regional visits and in discussions with businesses is that spending remains very resilient.”

A historic boom in artificial intelligence is powering the construction and manufacturing industries, and despite soaring oil prices related to the war with Iran, businesses and households continue to spend.

Bond yields are another factor for policymakers to consider, as investors are betting that the central bank will raise rates at least one more time this year. At the time of writing, federal funds futures pricing indicates about a 70% probability of an October rate hike.

“Some of the inflation we’re seeing now is precisely because the economy is so strong,” said Bank of America chief economist Beth Ann Bovino. “The likelihood of another rate hike is becoming very real.”

Vulnerable American Households and Businesses

It should be noted that not all sectors of the economy are booming, and heavy reliance on the AI boom could itself become a liability. Former Philadelphia Fed President Patrick Harker, now at the Wharton School of the University of Pennsylvania, warned that higher borrowing costs will expose certain underlying vulnerabilities, particularly among fragile households.

“I do think we have to be careful,” Harker said. He stated that the economy is “being powered by a very large engine—data center construction and the accompanying electric grid. The rest of the economy seems to be coasting, not really doing much.”

In the real economy, higher borrowing costs have real weight. Data from the New York Fed shows that credit card and auto loan delinquencies have been rising steadily in recent years. In the first quarter of this year, credit card delinquencies reached their highest level since 2011 and remained elevated in the second quarter. The housing market has been held back by mortgage rates—which have climbed to their highest point in over two years.

Those Impacted by Rate Hikes

As an example, one person feeling the squeeze is Aurelius Chaves, president and owner of Midland Machinery, a Tonawanda, New York-based road-building equipment manufacturer. He has had to cope with sharply rising costs, from employee health insurance to corporate insurance. When the Fed raises rates, it impacts not only his own borrowing costs but also those of the equipment dealers who purchase his products.

“My sales go through the dealer network, so when their costs rise, they start cutting back on inventory,” Chaves said. “I know exactly how much each 25 basis point rate hike next year will cost me in extra interest.”

For now, Chaves says overall business remains supported, and this sentiment is corroborated by other indicators. The “Orange Book,” an institutional industry research publication, found that in recent earnings calls, over two-thirds of sectors cited an accelerating economic recovery, with most attributing it to the AI investment boom.

Fed Chairman Kevin Warsh referenced this strength, attributing the central bank’s recent rate hike decision in part to optimism about accelerating growth. “When you consider the geopolitical landscape, tangled with shocks and uncertainties, you start to appreciate the resilience of the U.S. economy,” Warsh told reporters on September 16th.

If policymakers decide to raise rates again on October 28—less than a week before the key midterm elections—Warsh will face the challenge of explaining this decision to those who put him in the role.

Although President Donald Trump has dialed down his sharp criticism of the Fed, he made his views clear at Warsh’s swearing-in ceremony in May. “Unlike some of his predecessors, Kevin understands that a booming economy is a good thing,” Trump said. “We don’t have to go crazy, just let it prosper.”