“Will they, or won’t they?”
It’s the defining question of 2026 for financial markets.
Will the US Federal Reserve cut rates … or will they raise them?
Because this decision is upstream if virtually everything else in the world of American investing. Even just a nudge, a change of half a percent in one direction or the other, could have sweeping implications for stocks, bonds, gold and crypto.
And tomorrow, on August 26, we’re finally getting our answer.
Watch today’s Moneyball Economics to find out which side of the trade you should be on:
Video Transcript:
It’s time for Moneyball Economics!
I’m Andrew Zatlin, and I’m here today to give you a heads up…
You can expect to see a lot of market volatility on Wednesday.
Because on Wednesday, we’re getting a major economic data dump. And this particular set of economic data has been highlighted by the Federal Reserve as being the main driver behind their interest rate decisions.
So we know that right now the Fed governors are inclined to raise interest rates. It’s just a question of when. So every month that goes by, the markets are getting tenser and tenser. Will they or won’t they? And the next meeting is in September. And you’ve been told that this Wednesday, the data that decides a rate hike is getting released. You just don’t know what to expect.
And that’s why the market is evenly split. 40% of the market expects there to be a rate hike, 60% does not.
Well, I’m here today to tell you what that data is that’s coming out and what you should expect, because if the data comes out in one way and you’ve got 40% of the market having to unwind their position because it doesn’t look like we’re going to see rate hikes, you can see the markets surging because those folks have to cover their positions. And the opposite is also true. If the data comes out on Wednesday and it reinforces the need for a rate hike, then you’ve got 60% of the market having to unwind their positions and basically dump the market.
One way or another, the market’s either going to surge or collapse. I want to share with you what the data is and what I expect to see. I am talking about something called PCE, or personal consumption expenditures. It tracks what happens as households get money coming in from work and then how it gets distributed until finally what they’re able to spend on.
So it gives you a really cool consumer snapshot. Are they spending more? Are they spending faster or not? And to cut to the chase, right now the consumer looks like they’re under strain. Over the past few months, they have been able to spend less and less unless they tap into their savings.
That’s not a good sign.
Now we know a lot of that has to do, quite frankly, with the Iran war and the way gas prices have moved up and trickled throughout the rest of the economy.
But one way to alleviate some of this consumer strain would be to raise interest rates and tamp down inflation, which is eating into the discretionary part of their ability to spend. And that is where the Fed focuses. They look at what’s going on with inflation as measured within PCE. It’s a different way to measure inflation than CPI.
So let’s talk about some of the key differences…
One is that CPI only looks at major cities, PCE looks at everything, but it really comes down to some of the components and more critically how they’re measured. All right. So on the one hand, when we look at CPI, one third of CPI inflation is driven by housing. It’s pretty big. And especially because we know housing inflation just continues to be at the higher end of the range.
At the same time, PCE keeps housing and shelter less than 10% of the total inflation gauge. That’s pretty important. Instead, they tend to highlight healthcare and healthcare services.
Well, guess what? That has been slowing down. In fact, you might’ve heard President Trump kind of try to do a victory lap when he said medications, cost of medications have fallen already 3% year over year.
Sounds like he’s got some inside skinny on what’s going on with the inflation measurements and that they’re going down.
We’ll come back to that in a minute.
To me, the biggest important difference between the CPI measurement of inflation and the PCE measurement is that the PCE one’s dynamic. It’s more reflective of what consumers are really doing. See, when they measure CPI, they take this basket of goods and they say, that’s it.
Every month consumers buy four dozen eggs and this much steak and so forth. But the PCE one says, no, if steak gets too expensive, consumers are going to buy fish or chicken. And so we should take a look at the prices of fish and chicken too, because they’re also dynamic.
So you have a much more dynamic and quite frankly, I think a little bit more honest take of what the consumers really are facing when it comes to inflation. All right, that’s the background of why the Fed likes PCE inflation versus CPI.
Both of them have been kind of sort of telling the same story, which is the Iran conflict has been inflationary. Oil prices zipped up and it trickled through the economy and created higher inflation stresses. But they’ve also said that over the past month, it’s peaked and it’s slowing down, meaning the inflation stress has slowed.
When you look at the PCE inflation, for example, month in, month out, it was really high. But then the latest measurement, it came down and was almost totally flat. I think in the next read of inflation PCE that comes out Wednesday, we can expect to see a continuation of a downturn in that inflation of less inflation.
So let’s go back to what the markets are expecting. They’re very much on edge and we get a data point on Wednesday that indicates inflationary stresses are easing a little bit. That suddenly throws the September rate decision all the way up again.
It’s a maybe, maybe not, which means 40% of the market, which is gambling on definitively seeing a rate hike, well, they’re going to unwind their positions. They’re going to buy the stock market. They’re going to buy the bond market, sending them up.
That’s what I think is going to happen on Wednesday. And you can play this maybe by buying the VIX, which says we don’t care up or down if there’s movement high volume, that’s what we’re going to win on. But I happen to think we’re going to see something moving up on Wednesday.
Whatever the case, folks, make your moves.
Be prepared because we are in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics