There's something palpable in the financial air these days — that peculiar mix of nervous energy and cautious hope that always seems to precede potential Fed pivots. The September FOMC meeting now stands like a looming mountain on the economic horizon, with markets practically penciling in rate cuts as a done deal.
But here's the thing: we've still got two major hurdles to clear before Powell takes the podium.
The PCE Index drops on August 29th, followed by unemployment figures on September 5th. And let me tell you, having covered Fed policy shifts since before the pandemic, these data points aren't just important — they're potential market earthquakes waiting to happen.
Powell's Favorite Inflation Gauge Approaches
The Personal Consumption Expenditures Price Index (I know, a mouthful) isn't just another economic indicator. It's the Fed's darling — their preferred inflation measurement. And its upcoming release might be the most consequential PCE reading we've seen in months.
Why? Because it's the final inflation checkpoint before the September decision.
The July PCE came in at 2.5% year-over-year, with core PCE sitting at 2.6%. Not quite hitting the Fed's magical 2% target, but... close enough to smell it.
Look, we all understand the dance the Fed's been doing — gradually admitting what consumers have felt for months: inflation is cooling. But markets aren't simple creatures that just digest present conditions. They're constantly recalibrating, rethinking, repositioning based on what might happen three, six, even twelve months out.
A hotter-than-expected PCE wouldn't necessarily kill September's cut (that ship has probably sailed). What it would do, though, is cast serious doubt on cuts planned for later this year. The narrative could quickly shift from "easing cycle begins" to "one and done" faster than traders can update their models.
Jobs Report: The Plot Complicator
Then comes the August employment situation — that monthly ritual that seems to send markets into a tizzy regardless of what it shows.
The labor market has been the economic miracle of this cycle. Despite the Fed's aggressive rate hiking campaign (the most aggressive in decades, I might add), employment has remained surprisingly resilient. Until recently, that is.
July's unemployment tick up to 4.3% raised eyebrows across trading floors. It represented the highest rate since October 2021, while nonfarm payrolls increased by just 114,000 — missing expectations and suggesting the cooling many had been predicting might finally be arriving.
So what happens if August confirms this trend? Or rejects it entirely?
A surprisingly strong jobs report combined with stubborn inflation creates that classic paradox where good economic news becomes bad market news. Strong employment plus sticky inflation equals a less aggressive Fed. Simple math, complex market implications.
I've watched traders struggle with this equation for years — the better the economy performs, the less the Fed feels pressured to cut rates. And right now, markets have priced in roughly 100 basis points of easing by year's end. That's a lot of rate cutting that could be thrown into question.
The Four Scenarios (And Your Portfolio)
After speaking with several strategists last week, I've come to see four primary scenarios emerging from these upcoming data releases:
The Goldilocks Path (most likely): PCE moderates further, jobs cool but don't collapse. The Fed cuts 25bp in September and signals openness to continued gradual easing. Markets would probably celebrate this orderly transition.
Sticky Inflation Persists: Higher-than-expected PCE combined with resilient employment would create headaches for the Fed. They'd probably still cut in September (backing out now would shock markets), but would frame it as a "recalibration" rather than the start of an easing cycle. This would disappoint markets that have been pricing in multiple cuts.
Recession Signals Flashing: If PCE behaves but employment deteriorates significantly, we enter different territory. The Fed might even consider a larger initial cut, though I'd still bet against it. Powell doesn't like surprises.
Stagflation Lite: The nightmare scenario no one wants — stubborn inflation alongside weakening employment. This creates a policy dilemma with no good answers. The Fed would likely still cut, but markets would rightfully worry about what comes next.
What This Means For Your Money
September has a reputation for market volatility anyway — something about traders returning from Hamptons vacations with fresh perspectives (and perhaps mild sunburns). This year, throw in a potential Fed pivot, and you've got a recipe for some serious market swings.
Transitions between monetary policy regimes are rarely smooth affairs. I've covered enough of them to know the pattern: anticipation, event, reassessment, volatility.
The most vulnerable assets? Probably those duration-sensitive investments that have rallied hard on rate cut expectations. Any data that suggests fewer cuts than expected could trigger quick profit-taking.
And yet... sometimes the market's reaction surprises even seasoned observers. I recall the December 2018 Fed meeting when Powell's hawkish tone sent markets plunging — only to see the Fed reverse course within weeks. Central banking, like journalism, sometimes requires course corrections.
The waiting game continues. But at least now we know exactly what we're waiting for.
