Fed Watch – 5/29/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Adobe Podcast.

Hi, I’m Lauren Saidel-Baker and thank you so much for joining us for this May 29th edition of Fed Watch.  

More interesting data out this week. The big headline is, of course, the revision to 1Q GDP numbers. Those were revised moderately downward, came in headline 1.6%. I do want to remind our viewers that as an annualized number, that is not how we calculate things here at ITR with 3/12 and 12/12s. But the number that you’re probably seeing in those headlines did go from 2% down to just 1.6%. Now, as far as our forecast goes, this forecast is still very much intact, we’re really running right in range with how we had been expecting evolution across the macro economy. So no risk to ITR forecast with this revision. The decline here, the, the real change from the first advanced estimate to that first revised number, most of it was in the consumer spending category. That’s really not where we want to see a revision of this magnitude.

There was also some amount of business investment. I’m going to talk about that a little bit later in this episode, so let’s put that on the the side for just now. But as far as this consumer spending component went in the first quarter, overall we’re still seeing the consumer hang in there. However, they’re just not quite so robust as we had been seeing. Keep in mind these GDP numbers, they are for the first three months of this year. We already know exactly what incomes we’re doing at that time. It seems like there’s a little bit more of a pull down in savings, perhaps even some additional spending is going in debt fueled metrics, maybe putting that spending on the credit card instead of using incomes or savings to make those purchases. So that’s a factor that we really want to be watching. Overall, still seeing disposable personal income numbers hanging in, again not growing robustly, those growth rates are a little bit lower. If we do start to see inflation outpacing real, or outpacing incomes, essentially, we’re looking at that real personal income measure, that is when we’re going to get worried. We’re not there yet, but it’s something that we’re going to watch going forward.

If this is something that you’re watching and you want to find a more geographical footprint for your local region, city, state, etc., I’m going to refer you again to our webinar that we’re holding on June 17th. We’ll also have a rebroadcast on June 25th with a live Q&A. In both cases, you’ll get the recording, you’ll get the slides, but there’s a lot of detailed analysis that our team is doing right now on just how different parts of the country aren’t performing exactly in the same way. So as I give you all of these GDP readings or disposable personal income, etc., keep in mind that’s at the national level, there’s a lot going on just beneath the surface. And if we’re only taking national medians, national averages, you’re sometimes going to miss that nuance. So please join my colleagues, Grace and Connor, who are putting together some fantastic information for you in June.

But I also want to double back to the other big data headline of the week, that was the PCE data. Core PCE, as you’re I’m sure aware, is the Fed’s preferred inflation metric. Core PCE did reach a headline 3.3% annual rise, overall PCE that was up 3.8%. And yes, oil prices are a big part of this. But that’s not the only thing driving this higher inflation. We do see still moderate increase in housing costs. That’s a pretty big component of this for a lot of consumers. And also a slightly smaller rise, but rise nonetheless in things like the service sector. So this is much more broad based inflation. This is not just oil prices. Yes, we want to see some certainty come to that Strait of Hormuz. I call it the “Will they, won’t they cease fire?” But overall, that is not the only thing holding us back, keeping this inflation more persistent. I mentioned that business investment component earlier. So we saw some durable goods numbers actually very hot in April. Durable goods were up 7.9% year-over-year. That’s a pretty big print even with inflation being as high as it is. And I think part of the business side of the equation that’s happening today is that markets are really starting to accept that we are not getting further rate cuts.

So based on everything I just told you about inflation, balanced with that lackluster yes, but still positive growth in the macro economy that is still supporting the labor market overall and the stability thereof, we do not expect rate cuts coming anytime soon. In fact, if you want to look at not just ITR, but general market consensus, there’s about a 99% chance, it’s actually a little bit north of 99% odds that the fed will hold rates in June. And by the July meeting, the odds of a rate hike are actually slightly higher than the odds of a rate cut. Now, I don’t think we’re getting a rate increase in July, it’s something of an outside case here. But the market is pricing in about one in four odds of a rate hike by the October meeting, and those odds go above 50% by the January 2027 meeting. So as we have been talking about on this show for months and quarters now, we’re starting to see the pendulum swing. It isn’t a matter of when will we get our next rate cut, to me, I don’t even think it’s an if we will get that next rate cut. I’m really looking for this heating up in inflation to cause concern on the side of Fed officials to start to move us more into the rate hike territory rather than the rate cut posturing.

For business investment, that’s an important thing. We are already starting to see CapEx spend picking up. We’re really starting to see companies moving off the sidelines who had just been sitting there for a very long time. In my one-on-one consulting calls, I hear this time and time again, we know there’s activity out there, but they’re just not biting, they’re just not ready to pull the trigger. We’re getting to that point for various reasons that companies really are, they’re saying, we have to do this. We have to move. It’s time to go. Let’s get off the sidelines and move. And I think this interest rate posture is going to add a little bit of, if not urgency, at least it’s taking away the need to wait. Right? We’re not waiting out one more rate cut to get just that much of a better deal on our cost of capital. If anything, if we start to see rates going higher, not lower, that’s an impetus to do things today and not tomorrow.

Again, all of those investment decisions that you’re going to be making, please make them with the context of 2030 looming on the horizon. I’ll point you again to that webinar in June, it’s going to be a great talk about just what to invest, when to invest, how exactly that makes sense on a geographically distributed basis. But if there is something that you need in your business, have that discussion today. It’s past time waiting. We need to run that analysis of will it be worth it? What is that payback period? What do you really need to get out of this to keep your business growing over the next several years and make it more resilient through the end of the decade. As always, we’ll be watching the Fed aspect of that. But if we can help you with any other aspects of those business decisions, please reach out to us here at ITR economics. Until then, we’ll see you next week.