Two key inflation reports to be released soon will directly determine the direction of the Federal Reserve's interest rate in September—whether it will resume rate hikes or continue the pause cycle. Controlling inflation has been a core policy focus since Warsh took office, and market expectations for this are extremely high. However, after the Fed kept interest rates unchanged last month, Warsh's vague statements and lack of clear policy logic have sparked widespread investor skepticism. When asked about solutions to high inflation, he only stated that interest rate hikes are one solution, not the core measure, while also suggesting that rising Treasury yields have already replaced some of the tightening effect, and even hinting at or redefining the inflation target. This series of statements has left the market confused, with widespread doubts that his efforts to combat inflation are merely lip service, and that he is unwilling to implement substantial interest rate hikes. The Consumer Price Index (CPI) is the core reference indicator for the Federal Reserve's assessment of inflation. Economists predict that the critical value for the core CPI month-on-month increase in July is 0.2%. An increase equal to or below this level means that inflation is steadily declining towards the 2% policy target; if it significantly exceeds this level, it indicates that the cooling process of inflation is hindered and its stickiness is greater than expected. Data shows that the Fed's core preference inflation indicator recorded 3.3% year-on-year in June, a significant increase from 2.8% in the same period last year, highlighting the pressure of a rebound in inflation. The current monthly inflation data has an unprecedented weight, mainly for two reasons. First, many Fed officials previously optimistically predicted that tariffs would only bring a one-time price increase, with the subsequent impact gradually fading. Coupled with the easing of the Middle East situation and the decline in oil prices, inflation would naturally fall back to the 2% target. However, in reality, prices continue to fluctuate, and the expansion of the artificial intelligence industry has led to a surge in the prices of technology equipment and software, adding new inflationary pressures. The upcoming inflation data will directly verify whether the previous predictions are correct. Second, Warsh made combating inflation a core part of his policy, and the market pays close attention to the effectiveness of his policies. Inflation data has become a core benchmark for testing his policy stance. Despite ongoing market debate, the Federal Reserve's decision to maintain interest rates is supported by strong fundamentals. First, labor cost growth is slower than productivity growth, making a widespread price surge unlikely. Second, the short-term price increase effect of tariffs is gradually fading. Finally, the Fed's core inflation indicator will be revised downward in September due to adjustments in statistical methods. However, during Warsh's remarks, the 30-year Treasury yield continued to rise and failed to fall, directly reflecting deep-seated market concerns: if inflation remains high, will the Fed decisively raise interest rates? Internal policy disagreements within the Fed are also intensifying. Of the 19 officials who attended the July policy meeting, 10 publicly elaborated on their policy logic afterward, covering half of the voting members. In recent weeks, at least six voting members have signaled their support for restarting rate hikes if inflation does not improve, and last month, three voting members directly voted against raising rates, indicating initial signs of internal divisions. Two speculations immediately emerged in the market: one, that Warsh was trying to delay the implementation of tightening policies with hawkish rhetoric; and two, that he deliberately downplayed the necessity of interest rate hikes to avoid disagreement with President Trump, who had long pressured the Fed to maintain low interest rates. Former Fed Vice Chairman Donald Cohn stated that market-based inflation expectations indicators had not changed significantly, and the real inflation risk was far lower than the market portrayed. However, the divergence between rising long-term Treasury yields and falling short-term yields already indicated a clear problem in the Fed's policy communication, failing to achieve the desired policy effect. The current market calm is merely a short-term illusion. The volatility caused by the policy expectation divergence in July is still manageable, but if market expectations for a rate hike in September fail to materialize, the Treasury market is highly likely to experience another period of sharp fluctuations. Since taking office, Warsh has been committed to reshaping the Fed's communication model, advocating for less upfront policy guidance and not setting specific thresholds for rate hikes or cuts. He believes this would prevent policy from being constrained by short-term data and better capture the market's true economic expectations. However, the drawbacks of this model are significant. Cohn pointed out that a vague policy thinking and analytical framework makes it difficult for the central bank to judge the market's acceptance of its policies, continuously exacerbating market uncertainty. From a timing perspective, after the September FOMC meeting, the next meeting coincides with the eve of the US midterm elections. Federal Reserve officials are generally reluctant to initiate the first rate hike of this round, meaning that a rate hike decision is likely to be postponed until December. The Fed's policy direction over the next four months will heavily rely on inflation forecasts that remain to be verified. For Warsh, who has consistently opposed "monthly data dominating monetary policy," the fact that short-term inflation data has become the core policy indicator is inherently ironic. Current market trends and asset pricing depend entirely on two possible scenarios for the July inflation data; different data performances will trigger drastically different policy responses and market movements. Scenario 1: High CPI Data Hinders Inflation Cooling Process If the core CPI month-on-month increase in July significantly exceeds 0.2%, and inflation stickiness exceeds expectations, Warsh will be forced to break his ambiguous statements and deliver on his anti-inflation promises with concrete actions. Market expectations for rate hikes will quickly reignite, and the probability of rate hikes in September and December will increase significantly. A clear divergence will emerge on the asset side: long-term US Treasury yields will accelerate their rise, continuing the divergence between long-term and short-term yields; the gold rally, previously fueled by easing expectations and safe-haven sentiment, will come to a temporary end, and may even see a deep correction; interest rate-sensitive growth and technology stocks will be under pressure, overall risk appetite in the stock market will decline, and the US dollar will strengthen in the short term. Even if Warsh reiterates that monthly data does not represent the medium-term trend and that US Treasury yields have completed some tightening, it will be difficult to restore market confidence. Instead, it will further reinforce his market label of "tough in words, hesitant in action," which will be interpreted as deliberately delaying tightening and avoiding policy conflict. Internal divisions within the Federal Reserve will widen further. The group of three members who opposed rate hikes last month will likely expand to five or six, forming a rare public policy rift in recent years. At the same time, officials' previous optimistic prediction that "inflation will naturally decline" will be proven false. The new inflationary pressure brought by the expansion of the AI industry will be refocused by the market, completely shattering market expectations of a moderate cooling of inflation. This will accelerate the market's reconstruction of its perception of the Federal Reserve, further compressing Warsh's policy maneuvering space and putting him in a dilemma: raising interest rates would mean a too-rapid policy shift, while not raising rates would further erode the central bank's credibility. The time constraint of the midterm elections will also make his policy path of delaying rate hikes increasingly passive. Scenario Two: Flat CPI Data, Confirmed Cooling Inflation Trend If the core CPI in July remains at a moderate level of 0.2% or below, the cooling inflation trend will be confirmed, and Warsh will completely escape his current policy dilemma. Hawkish Fed officials will lose their core argument for raising interest rates, internal policy disagreements will significantly narrow, voting members who previously hinted at supporting rate hikes will temporarily fall silent, and the number of dissenting votes is expected to decline. The market will quickly price in a "long-term pause in rate hikes," solidifying expectations of maintaining interest rates unchanged in September, leading to a decline and stabilization of long-term US Treasury yields, and a significant reduction in market volatility. Asset-side benefits will become apparent: the gold rally will continue, driven by a shift from policy uncertainty premiums to declining real interest rates and safe-haven demand; valuations of growth stocks and technology stocks will recover, and overall risk appetite in the stock market will rebound. For Warsh, moderate inflation data will greatly alleviate his communication crisis and completely reverse the negative market impression of "inconsistency between words and actions." Through the Jackson Hole symposium, he can fully articulate his policy framework, reiterate his core principles of not being swayed by short-term monthly data and focusing on medium-term economic trends and real market signals, thus implementing his reform intention to reshape the Fed's communication model. At the same time, the Fed's previous policy logic will regain market acceptance; reasons supporting the policy pause, such as matching labor costs with productivity, diminishing tariff effects, and downward revisions to inflation indicators, will regain persuasiveness, and the market's underlying understanding of Fed policy will stabilize. However, residual risks remain in this scenario. First, Warsh's ambiguous communication style has become ingrained in the market; if his symposium speech continues to avoid specific policy triggers, market doubts will be difficult to completely eliminate. Second, structural inflationary factors such as rising AI prices and the residual effects of tariffs still exist; if core PCE data rebounds, easing expectations will quickly reverse. Third, McCully's warning remains valid: consistently strong rhetoric coupled with delayed policy implementation will continue to compress the room for maneuver in subsequent policies, and the market's scrutiny of the Fed's policy consistency and credibility will continue for a long time. Key Comparisons and Outlook Two inflation scenarios will shape drastically different policy and market landscapes. Under a high-inflation scenario, expectations of interest rate hikes will rise, asset volatility will increase, internal divisions within the Federal Reserve will widen, and Warsh's policy credibility will be under pressure. Under a moderate-inflation scenario, expectations of interest rate hikes will cool, market sentiment will recover, internal unity will rebound, and Warsh will have a window of opportunity to implement his policy reform ideas. Regardless of the final outcome of the data, monthly inflation data will become the core anchor for policy in the short term, posing the biggest challenge to Warsh's policy philosophy. Currently, the Fed's policy buffer has diminished, and the market is no longer certain of its policy inclinations. The policy direction and asset price trends in the coming months will largely depend on the results of the two inflation data releases and whether Warsh can clearly and comprehensively explain his policy framework in key situations to rebuild market trust. In the long run, this inflation data game is not a short-term market fluctuation, but a profound test of the Fed's policy resolve, communication skills, and credibility during the Warsh era. The credibility and implementation strength of subsequent policies will continue to dominate the global capital market trend.