While top Fed officials disagree on outlook, data over the next 10 days will be closely watched

After Federal Reserve Chairman Kevin Warsh spoke last week from Jackson Hole, Wyo., markets were pretty convinced that the central bank would raise interest rates in September. But comments Thursday from one of Warsh's most influential colleagues are raising fresh doubts about the central bank's plans.

In a speech Thursday morning, Fed governor Christopher Waller made a strong case for the Fed to hold rates steady.

Waller said he was leaning against supporting a rate hike in September because it looked as if inflation was finally starting to trend lower.

If that softening trend continues in next week's inflation data, there won't be a need to hike rates, Waller said. The speech set a high bar for making any changes to rate policy.

Traders in derivative markets immediately reacted by lowering the odds of a rate hike to just under 50% from 65% after Warsh spoke. Investors saw his comments as good news, with stocks moving higher.

Rate hikes can slow the economy and can cause stock markets to drop.

While Waller said he was pleased that inflation had moved down over the summer, Warsh told the Jackson Hole audience that recent inflation readings "do not tell me that underlying trends have meaningfully improved."

Warsh also said he would be closely watching the pace of softening inflation.

"The difference in interpretation of the inflation data between Waller and Warsh is big. They don't agree," said Claudia Sahm, chief economist at New Century Advisors. The market's view that there's a 50% chance is probably right given the clear difference of opinions on big issues, she said.

Matthew Luzzetti, chief economist at Deutsche Bank, said that he thought Warsh had made a case for a September rate hike that would not be swayed by data over the next two weeks. But Waller's remarks show that the data over the next two weeks will determine the outcome of many officials' votes.

The government will release the August job report on Friday. Separate reports on consumer and wholesale inflation will come next week. Economists can use those reports to calculate the Fed's favorite inflation gauge, the personal consumption expenditure index.

Fed officials will stop talking publicly about the economy and interest-rate outlook at the end of the week before meeting on Sept. 15-16.

At the July meeting, nine top Fed officials were in the hold camp and three dissented in favor of a rate hike. Over the past six weeks, other Fed officials have indicated they were at least open to a rate hike in September.

"Almost all officials now are suggesting that they could be open to raising rates at the September meeting, but some officials probably have higher bars on what the data need to show over the next two weeks versus others," Luzzetti said.

"There is likely to be a broader active debate about what is the appropriate policy decision in September, of course depending on what happens over the next two weeks with the jobs report and CPI data," he added.

Deutsche Bank forecasts that the Fed will decide to raise rates in September.

Economists said investors will generally have to get used to going into Fed meetings without knowing the outcome.

Under Fed Chairman Jerome Powell, top Fed officials often telegraphed decisions to the markets ahead of the meeting.

-Greg Robb