Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Watches the Consumer Stress Signal in July 2026
Transcript
- Lucas: So the Fed's Beige Book came out last week, and buried in the usual 'modest to moderate growth' language was something that caught my eye. They specifically called out the World Cup giving bars and restaurants a temporary boost, but then added that consumers are starting to flash warning signs. Luna: Right, I saw that. The phrase 'flashing warning signs' is pretty direct for a Fed document. They don't usually sound that alarmed. Lucas: Exactly. And I think that's the kind of signal the market should be paying more attention to right now. Because official numbers like CPI and PCE are backward-looking. By the time we get the June CPI print — which showed all-items CPI at 332.6, down from 333.98 in May — the economy has already moved on. Luna: So you're saying the Beige Book gives a more real-time pulse than the CPI report? Lucas: In some ways, yes. The Beige Book collects anecdotes from business contacts across all twelve Fed districts. So when restaurant owners in multiple districts say that post-World Cup customer traffic is falling off, and that diners are trading down on menu items, that tells the Fed something that a lagging price index can't. Luna: And it's not just restaurants. I was reading the summary and they also mentioned retailers seeing more price-sensitive shoppers, and some auto dealers reporting slower foot traffic. Lucas: Right. And this is happening against a backdrop where the effective fed funds rate is sitting at 3.63% — flat since June. The Fed hasn't moved, but they're clearly watching for cracks. The ten-year breakeven inflation rate ticked up to 2.28% on July 22, so inflation expectations aren't collapsing. But the real-time stress from consumers suggests the economy might be softer than the headline numbers imply. Luna: And then you have that import price data from China. The cost of goods from China hit the highest since 2008, which is wild. If tariffs are pushing those prices up, that could feed into consumer inflation even as domestic demand weakens. Lucas: That's the stagflationary vibe that some Fed watchers are worried about. Higher input costs from China tariffs, plus a consumer that's pulling back. It's a tough combo. The Fed has to decide whether to hold rates steady or even cut if the economy slows more sharply. But if import prices keep rising, cutting could reignite inflation. Luna: So what do you think the Fed is actually watching more closely right now — the consumer stress signals or the import price data? Lucas: I think they're watching both, but the consumer side might be the deciding factor. Because the Fed has a dual mandate — price stability and maximum employment. If consumers pull back enough to slow hiring, that tips the scale toward cutting. But they need to see a sustained trend, not just one Beige Book. Luna: And the Beige Book is anecdotal, so it's not like a hard data point. But it's still valuable because it's forward-looking. Businesses are telling the Fed what they expect, not just what happened last month. Lucas: Exactly. And the July Beige Book was collected before the latest import price surge, so the next one could show even more stress if those higher costs get passed through. I'm watching for the August Beige Book, due out in early September. That will cover the post-World Cup period and include any impact from the tariff news. Luna: Speaking of things that are forward-looking, there's also the fact that the yield curve has been inverted for a while now. The two-year note is around 4.46%, the ten-year at 4.70% — so it's only mildly inverted now, but that's still a recession signal historically. Lucas: Right. But the curve has been less inverted recently as the ten-year actually rose. The ten-year yield went up 3.5% over the past five days alone, to 4.70%. That's partly due to the breakeven tick-up, which suggests inflation expectations are sticky. So the bond market is pricing in some inflation risk even as the economy slows. Luna: That's the exact tension the Fed has to navigate. If they cut rates because the consumer is weak, but inflation expectations stay elevated, they risk losing credibility. But if they hold tight and the consumer actually falls off a cliff, they waited too long. Lucas: And that's why I think the Beige Book is getting more attention than usual. It's one of the few real-time reads the Fed has that isn't just a lagging number. The July 2026 edition is actually the first one that fully captures the post-World Cup demand pullback, and it's painting a picture of a consumer that's cautious but not panicking. Luna: So the key line from the Beige Book might be that the World Cup gave a temporary boost, but the underlying trends are still soft. That's a subtle signal, but for the Fed, it matters. Lucas: Exactly. And it's not just the Fed. If you're an investor or a business owner, this kind of anecdotal data can help you position ahead of the official numbers. Because by the time the GDP report or the jobs number confirms a slowdown, it's already happened. Luna: Right. So what should listeners be watching for in the next few weeks to gauge whether the consumer is actually weakening? Lucas: I'd look at weekly initial jobless claims — if they start trending above 250,000, that's a warning. Also, retail sales ex-autos and gas. And of course, the next Beige Book in September. But also, pay attention to corporate earnings calls. Companies like restaurant chains and retailers will give real-time commentary on customer behavior. Luna: Yeah, and we've already started hearing some of that. A few big fast-food chains mentioned softer traffic in their last earnings. It's not a crisis yet, but it's a pattern. Lucas: And that pattern is exactly what the Fed is watching. They don't want to overreact to one data point, but they also don't want to be caught off guard. The July 2026 Beige Book is basically them saying: we see what you're seeing, and we're taking notes. Luna: So if the consumer really does pull back, do you think the Fed would cut rates before the next scheduled meeting, or wait until September? Lucas: I think they'd wait until September unless something dramatic happens. They have the Jackson Hole symposium in late August, which is usually a platform for signaling a policy shift. So if Chair Powell uses that speech to hint at a cut, then September becomes very likely. But an inter-meeting cut would require something like a sudden spike in jobless claims or a market disruption. Luna: That makes sense. Jackson Hole is going to be huge this year. Everyone will be parsing every word for any hint of a pivot. Lucas: And that's actually a good segue to something I wanted to mention. If you find these kinds of deep dives into Fed thinking helpful — if walking through the economy with us has made something click — honestly, if today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. It keeps the show independent and ad-free, and it's totally optional. No pressure. Luna: Yeah, we really appreciate anyone who chips in. It helps us keep doing these deep dives without having to chase sponsors. And we're always grateful. Lucas: So back to the Fed — one other thing I'd flag is the Fed's own internal projections. The dot plot from June showed the median FOMC member expecting one or two cuts this year. But that was before the July Beige Book and the import price spike. So those projections could shift by the September meeting. Luna: Right. And the market is currently pricing in a roughly 60% chance of a cut by September, if I remember correctly from the fed funds futures. Lucas: Yeah, the CME FedWatch tool was showing about a 62% probability of a quarter-point cut at the September meeting as of yesterday. So the market is leaning that way, but it's not a sure thing. The Fed has been data-dependent, and the data is still mixed. Luna: So to sum up: the Fed is watching consumer stress signals from the Beige Book, import prices from China, and sticky inflation expectations. The next big milestone is Jackson Hole in late August, then the September meeting. A lot could change between now and then. Lucas: Exactly. And I think the key takeaway for listeners is that the official numbers don't tell the whole story. Sometimes the best signal is what people in the real economy are experiencing. The Fed knows that, and the Beige Book is their way of capturing it. For now, the consumer is hanging in there, but they're not as strong as they were a year ago. Luna: And that might be exactly what the Fed needs to see to finally pull the trigger on a cut. We'll know more in a few weeks. Lucas: Yeah. For now, keep an eye on those jobless claims and retail sales. And if you want to support the show, the link is buy me a coffee dot com slash fexingo. Thanks for listening. Luna: We'll be back next week with another episode. Until then, keep questioning the numbers.