Fed Watch – 8/28/2026

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

Well, this week, PCE inflation data came in cool and home sales data came in cooler than that. This is ITR Economics Fed Watch. Thanks for joining us for this August 28th edition, I’m Connor Lokar. And I think we might be getting close to putting to bed any expectations for a rate hike in September.

Before we get there, following up on last week’s dreadful housing starts number, home sales came out this week and looked similarly abysmal. July came in at 50K home sales, that’s down 5.7% from last July. And last July was a bad month to begin with. And it’s down a whopping 15.3% from the June 2026 level. So that is a month to month decline of 15.3%. Now it’s typical seasonal normal to see home sales decline in July relative to June’s activity levels, but normal would be a 4% decline. Worse than normal would be just under a 10% decline, and we went down north of 15%, so not good, Bob. But this continues to signal that the sectors that are sensitive to long bond yields, longer term interest rates are feeling the squeeze without much relief in sight. Now, looking at the yields themselves, the bond market seems unmoved, I’ll say, by the treasuries market signal from Scott Bessent last week announcing that they were going to increase their long bond buys to control long yields, because yields are sitting right between 4.6, 4.7%. So essentially unchanged from where we were before the announcement. So in a glass half full view they could be worse. But for reference, at this time last year we were sitting at about four and a quarter, so we’re up almost 50 basis points from a year ago, and that’s putting upward pressure on mortgages, which obviously the housing market doesn’t love.

But I suppose really the biggest news this week was that PCE inflation data came out this week. And specifically the US trimmed mean PCE inflation rate on a one month annualized view, that’s a mouthful, came in at 2.2%. So essentially what that’s looking at is this trimmed, which is kind of similar to core CPI, this is call it core PCE, trimmed PCE. So if you if we were to get twelve straight months of what we got this month, it would imply an annualized inflation rate of 2.2%. So in other words, close to the 2% inflation target, and also the lowest level in 58 months for this particular metric. If we are to assume that this particular metric is the one defining the 2% inflation target. Kevin Warsh came out and said as much at the beginning of his tenure earlier this spring, before he was officially on the job, and later that he prefers something like US trimmed mean PCE inflation rates as opposed to headline metrics like your traditional CPI and core CPI numbers that tend to bounce around a little bit more with one time price changes like oil shocks, for example. So as we try to play the market data, instead of dissecting overdone forward guidance, my read would be that Kevin Warsh views this as success, that by this metric, inflation is close enough to that target to warrant a hold on rates in September. But that line of thought also relies on his fellow policymakers agreeing with him, that using this metric is preferred as opposed to others, which TBD on that front.

Now, a trimmed mean view for PCE in my view, is basically has the same flaws as core CPI, which is that it gets to the point that just because you exclude volatile items like food or energy, it doesn’t mean that they don’t exist, right? It just means that we’ve excluded them from the analysis. But in the end, if you want to argue that tightening rates doesn’t fix war in the Middle East or magically increase the beef cattle herd in the United States to address beef prices at the grocery store, I suppose I’d be sympathetic to that argument in the sense that like, well, what does rate hikes actually accomplish in fixing those couple of items? And, you know, just trying to tighten down inflation derived from the supply issue makes sense. You know, I’d be happier to entertain that argument than arguing, hey, we got to 2% because we excluded a bunch of things that we’re just going to pretend aren’t happening. But nonetheless, I think we are tilting in that direction of no hike for September. I’d expect we’re going to see some split opinions among the voting body as we look at futures markets and implied probabilities, we’re looking at about two thirds chance of no hike now, where a month ago we were more like two thirds plus that we would get a hike for September. So we’ll see how it plays out.

Next week we’re going to be dissecting Kevin Warsh’s comments here from the Jackson Hole meetings that are underway today, how the market interprets them, what is the fallout, if any, and what else did we learn? We’re going to do a little bit of, you know, transcript combing, which is always exciting. So we’ll see you there.