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MOOSPEAK: AUG.29.2025
Quiet PCE Inflation
The Fed’s favorite inflation indicator, core PCE. was in line with expectations on Friday. The July data came in at 2.6% year-on-year, up 0.3% for the month, same as in June. That’s still above the nominal 2% Fed target but given the very weak July jobs report we saw earlier this month CME futures are still expecting a Fed rate cut (87%) at the next FOMC meeting on September 18. Next Friday, however, we get August jobs, and an unexpectedly strong number could still put the kibosh on a rate cut. (The real question, if you’ve been paying attention for the last couple of years is whether the Bureau of Labor Statistics has any clue whatsoever, about how many jobs were created in any given month.)
To periodically answer that question, the Federal Reserve incorporates—or “aligns”—BLS employment data with tax-based data sources (like state unemployment insurance tax records). The annual benchmark alignment occurs in March, but a preliminary update tied to quarterly state unemployment insurance is expected on September 9, 2025.
The August BLS report then is more current but less accurate, and the Fed re-alignment is more accurate but rearward-looking. Both will be factored into the Fed decision on the 18th. The August jobs number is expected to be below 100K and modestly positive. The Fed quarterly revision is expected to show fewer jobs than originally reported by BLS, but after the major downward BLS revision last month the amount of the divergence is anyone’s guess. If neither of those weak jobs assumptions is effectively reversed by the new data, the expected rate cut is likely.
Our Fed Check (a ratio of the Ryan T-Bond Index and the CRB Index expressed as an oscillator of its 200-day simple moving average) says the Fed should stand pat. US T-Bond prices (promises) are going up a little faster than commodity prices (stuff) these days, suggesting inflation is under control. The Check is leaning toward easing but not enough to merit an actual lowering of the overnight rate just yet. Thing is the Fed Check is a global inflation indicator. Both commodities and US Treasuries trade in Dollars on the global market and Treasuries are a primary reserve asset worldwide as are some commodities (e.g., precious metals).
The global inflation picture is impacted by the monetary and fiscal policies, and trade dynamics of all countries, not just the US. The US is about 25% of global GDP, the largest single chunk of global supply and demand, but other countries and their central banks combined have a larger impact. Just because the Fed Check puts T-Bonds and Commodities in balance globally, doesn’t necessarily mean that rates and inflation are in balance domestically.
In this cycle, for example, virtually all foreign central banks raised rates slower than the Fed. Virtually all stopped raising rates before the Fed stopped; virtually all began cutting rates before the Fed and cut faster than the Fed. When that happens, the onus of the global inflation fight increasingly falls on the US over time. If Japan has a half-percent overnight rate, Europe is at 2%, and the US is over 4%, which country is doing the heavy lifting when it comes to global inflation? Answer: the US.
One could argue that such is the price of having and protecting the world’s primary reserve currency, and of being its biggest marketplace, while experiencing (and having to sell) an explosive surge in US Treasury debt— up 350% in the 17 years since Obama won the White House. Justifiable or not, from a global perspective, a tight US Fed relative to the rest of the world can result in a situation in which the US Fed does right by global inflation but ends up stifling domestic GDP.
The US bond market tends to warn us when that happens. When the cost of borrowing money overnight from the Fed (4.38%) is greater than the yield the government pays on a two-year Treasury note (3.56%) it is a sign that the Fed is charging too much. Moreover, when the cost of overnight money is also greater than the 10-year Treasury yield (4.23%), it confirms it. In this case the Fed rate is 73 basis points or three-fourths of a percent greater than the 2-year and 15 bps greater than the 10-year.
For that the reason many now think the Fed has room for at least three 25 bps rate cuts. Given the Powell Fed’s slow or “cautious” history in helping out President Trump, however, most expect cuts to come one at a time if at all. We'll know in a little over two weeks.
