Rate Hike on Hold?

Markets are treating next week’s Fed rate hike like a foregone conclusion.

But they’re getting ahead of themselves…

Inflation is beginning to cool, Friday’s CPI report could reinforce that trend, and the seemingly strong labor-market data looks much weaker once you dig beneath the headline numbers.

If that combination gives the Fed reason to wait, investors positioned for an immediate hike could be caught flat-footed — setting up a relief rally in both stocks and bonds.

In today’s video, I’m breaking down the numbers I’m watching, why Friday could change the rate outlook and how I’m preparing for what comes next.

Click below to get started…

Video Transcript:

It’s time for Moneyball Economics. I’m your host, Andrew Zatlin.

This week promises to be another volatile week in the markets because next week the Federal Reserve meets again to vote on raising interest rates. And if you’re on Kalshi or Poly markets, you know this is a done deal. They’re going to raise interest rates, but not so fast.

If you’re an institutional investor and a Fed watcher, you know there are lots of reasons to suspect that not only won’t they raise rates next week, they won’t do it next month. They might not do it until November or December, in which case major relief rally is going to happen.

What is going to make the decision to raise rates yes or no? Well, the last time the Fed met two months ago is very different from today. The macroeconomic story is very different. See, at the beginning of the year, the economy was gaining traction and that put the Fed on inflation watch.

When an economy is gaining traction, it’s creating a lot of activity. It tends to create a lot more inflation and the Fed likes to keep inflation tame. Then as the year started to progress, we started a war with Iran, which created an oil shock, which added even more inflation. So two months ago, the inflation story was just way up. We’ll fast-forward. Two months later, the inflation story has shifted. The latest look says not only has it flattened, CPI and PPI are tilting down.

So maybe in fact this inflation story is a lot more transitory than we thought.

And if it is going to go away a lot, then raising interest rates now is not necessarily critical. There’s no urgency. And that brings us full circle to why this week is going to be volatile because on Friday we get another bite of the apple. Consumer inflation comes out, CPI on Friday, and it is going to be heavily watched because it really is going to move the dial in favor of or against a rate hike.

Because if CPI started to go down and it goes down again, hey, it makes sense to hold off rate hikes another month. My bet is you’re going to see CPI go down this week. You’re going to see it again next month tilt down because quite frankly, gas prices and whatever supply chain shocks there were have eased a lot and I think they will continue to ease and we’ll start to see that in all the different metrics and not only ease next month, I think they’re going to ease throughout the year.

So we’re going to continue to have this will they or won’t they situation each month because I think the economic data is going to say economy growing, but not at a level that’s hot and justifies a rate hike. This may seem strange to your ears because it looks like the other set of macroeconomic data says economy strong, time to raise rates, the economy can absorb a rate hike.

And when I say macroeconomic data, I’m kind of specifically talking about the labor data. We’ve got the three horsemen of the apocalypse. We’ve got jobless claims have been seriously low for so long, 200,000 indicating a strong economy. We’ve got unemployment. Unemployment has every month pretty much gone down for almost a year, 4.1%. Again, incredibly low. And payrolls came out last week signifying that August payrolls jumped 162,000.

So if you’re looking at the labor data, it seems to be lining up saying the economy is so strong it may or may not be driving a lot of this inflation story, but it’s pretty evident that demand for workers is super strong. And so if you raise interest rates and that slows the economy down and it slows hiring or even leads to layoffs, that’s okay. We’re in a tight labor market.

Except folks, this story is going to change…

It’s going to change starting next month. So again, if they wait on interest rate hikes this week, well, I think there’s going to be evidence next month from the labor market, not just the inflation story that says, yeah, things are softening. Let me explain why the labor data is not as robust as you might be led to believe. It’s because they fudge the data and when you fudge the data, there’s payback to be seen whether it’s next month or the following month.

Let me explain to you how they fudged the data. It’s kind of scary that they fat fingered it, but nevertheless, let’s start with payrolls. 162,000 in anybody’s book, that’s a great number, except let’s dive into that a little bit. Let’s talk first private sector numbers. That’s 127,000, very respectable, a lot better than what we’ve been seeing. 127,000, but that’s the adjusted number, meaning there’s the raw number and then seasonally adjusted.

And this is where the fudging came in.

If you look at the pre-adjusted number, the raw data, it was 172,000 of payrolls cut, a normal August, nothing unusual about it being negative. That number though, that 172, it’s almost exactly like last year. I think last year was like 168 and then 2024 was 173. Basically the past three years, that raw number has been exactly the same, exactly the same. So you would imagine that the seasonally adjusted number should be pretty much within spitting distance and that’s where you would be wrong.

See, in 2024, it came out to be minus 27,000 jobs were added in August. In 2025, that negative number, that negative 170 was converted to negative 20,000. So basically 150,000 jobs are added when something gets seasonally adjusted. But when your baseline’s at the 170 minus, that extra 150 only barely brings you closer to positive.

You know what it did this year? That minus 170? What you talking about? That’s plus 127.

Yeah, they added another 150 to the 150 that normally gets added in. They baked the cake. Last month was not that strong at all, but they fudged the data. They also fudged the unemployment number. A lot of people took a victory lap. I correctly predicted it would be at 4.15. It came in at 4.14. That’s an important distinction. If it comes in at 4.15 or higher, it gets rounded up to 4.2%. And in the prior month it was 4.1. So if you go from 4.1% to 4.2%, hey, the labor market is starting to soften.

Well, guess what they did to make sure that didn’t happen? Unemployment, let’s put on our math 101. Yeah, back to high school math. A rate is X over Y. It’s two numbers, numerator denominator. In this case, the number of people said they’re unemployed compared to the total number of people who could be employed, who are in the potential labor force.

So one way to keep a number down or to push it down, keep that rate down is you take the numerator and you shrink it. Another is you expand the denominator. You could do one or both. Over the course of the past year, the numerator has been dramatically shrinking, which is how we got down to 4.1%. What would make the number of unemployed people drop?

Well, you might say the economy, dummy, a lot of businesses are hiring. They’re not firing. And I would say no doubt, but that’s not why it shrank almost one million people in a year. It shrank that many because we deported four million people, a lot of whom were on the unemployment roles, a lot of whom were on the jobless claims roles, which is why both of those numbers have come down. We simply have fewer people who are raising their hand and requesting benefits.

So the numerator shrank, but you know what? That four million number, that’s mostly historical. And we’re not really kicking out as many people, which means that numerator has stopped shrinking. And when it stops shrinking, over time it’s going to start growing.

So in fact, that’s what happened last month. The numerator grew and it grew enough to move the unemployment rate from 4.1 solidly above 4.2%. That would’ve said unemployment softening. You don’t need to do a rate hike. You get the inflation story softening, you get the labor data softening. Hey, rate hike is off the table. But this is where it gets really super interesting.

While there was a push from the numerator to push that unemployment rate up, there was an equally offsetting denominator change. When I say equally offsetting, it pushed the number from 4.08, rounded up to 4.1, to 4.14, just missing that 4.2% where you would say it was reported as softening.

It was exactly the number you needed to offset the numerator kind of moving up a little bit. What a coincidence. The denominator, how many people in the workforce grew enough to offset the rising number of unemployed people? Except what is interesting is the way they arrive at the numerator, how many people are unemployed, is they do a survey. The way they arrive at the denominator and how it grew, that’s just backroom modeling management. They made up that number.

What also makes this number very compelling and why I basically am raising my hand saying it was fudged, isn’t just that it was the exact number to prevent it rolling up and rounding up into the zone that they would report. Yeah, guess what? Unemployment’s rising. It wasn’t just that it was the exact number. How convenient. It’s that we have never seen a number this large.

See, in January, they always revise the number and they do it in one lump sum. So you’ll see at best, maybe a million people suddenly get added to that denominator. Last month, almost 800,000 people were added to the denominator. If you’re not standing in January when they do a revision, the highest you’ll see is 500,000, typically 300,000 moving in and out of that denominator, a rounding error.

You never, ever, ever see a number this big. And when you’re talking about a situation where they’re making up the number down below that denominator and they overrode it, well, wouldn’t be the first time. We saw this previously in the run up to the election between Biden and Trump where again, they crushed the unemployment numbers and then after the election, they limped back in and said, “Oh yeah, that number that we put in there, we’re going to revise it down.

It looks like we didn’t see that level of jump.” They’ve done it again. They’ve created a number that says the labor market’s super strong and they’ve done it in a couple different places. And as a result, it creates a lot of push behind raising interest rates. Why would you want to see interest rates go up? I don’t know. I can’t imagine that will help Donald Trump’s election prospects, but let’s say that they have these rates and they don’t revise them down.

Let’s say that the unemployment rate stays where it is. Let’s say the payroll stay where they are. There will be payback next month because it has to reverse in one way, shape or form. You can’t continue to expand this denominator. You can’t continue to fudge the payrolls the way they did. So there’s a reversal waiting in the wings. Let’s see what happens, but do not believe that we are going to see a rate hike next week.

Go on Kalshi, take those crazy bets because you might be making some money. In the meantime, expect a relief rally if I am correct on Friday and CPI comes down. That means positioning for a bull run in the stock market and in the bond market.

We’re in it to win it folks.

Zatlin out.