Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / The Fed's Internal Divide Over Inflation Data
Transcript
- Lucas: There's a phrase you hear a lot from Fed watchers right now: 'a divided Fed.' And it's not just media chatter — you can see it in the data and the speeches. Luna: What exactly is dividing them? The headline numbers look okay — core CPI is down a tick, the Fed funds rate is still at 3.63. Lucas: Right, but look under the hood. The core PCE price index — the Fed's preferred gauge — is actually up. It went from 129.67 in April to 130.1 in May. That's a small move, but it's in the wrong direction. And the 10-year breakeven inflation rate has jumped from 2.20 to 2.26 percent in just a few days. Luna: So one camp says 'inflation is still sticky' and the other says 'cool your jets, the trend is down'? Lucas: Exactly. The hawks — let's call them the 'tighteners' — point to services inflation, especially shelter and medical care, which aren't budging. They also note that the labor market is still tight, with wage growth around 4 percent. The doves — the 'pausers' — counter that goods prices are falling, the economy is slowing, and the full effects of past rate hikes are still working through. Luna: And this division is showing up in the voting members' public comments. I've seen at least three speeches this month where governors emphasized 'patience' and two others warning about 'premature easing.' Lucas: That's the heart of it. When the chair — Jerome Powell — tries to strike a balanced tone, the market interprets it as dovish. But then a hawk like Michelle Bowman speaks, and the two-year yield spikes. The net effect is uncertainty. And uncertainty shows up in the yield curve: the 2-year note is at 3.66 percent, still inverted against the 10-year at 4.62. The market is pricing in a roughly 40 percent chance of a cut by September, but that's been swinging wildly week to week. Luna: So what's the actual risk? Is the Fed going to make a mistake? Lucas: The risk is that they do nothing and fall behind — or that they cut too soon and reignite inflation. Right now, the bar for a cut is high. You need a clear, sustained drop in core PCE. But the doves argue that the lags are long and that waiting too long could cause unnecessary damage. That's the debate. And it's real. Luna: How should an investor think about this? Is it just about watching the dot plot? Lucas: The dot plot from June showed median projection for 2026 at one cut, but with a wide dispersion. Some members saw no cuts; others saw two. The range is unusually wide. So the dot plot doesn't give you clarity — it gives you the range of disagreement. What I'm watching is the bond market breakevens. They've been creeping up, which tells me the bond market is skeptical that inflation is truly licked. That puts pressure on the hawks. Luna: It's like the Fed is talking out of both sides of its mouth, but intentionally. They want to keep all options open. Lucas: Exactly. And that's actually a smart communication strategy — it prevents the market from getting too far in one direction. But for listeners trying to plan their finances, it means you can't rely on a single narrative. You have to be ready for either outcome. Luna: Let's step back for a second. We cover this show because understanding the Fed really matters. And we deliberately don't run ads on these episodes. Lucas: That's a choice we made early on. If walking through the economy with us has made something click — maybe you feel a little less confused about breakeven rates or the yield curve — and you'd like to support that, there's a link. It's buy me a coffee dot com slash fexingo. No pressure, no perks, just a way to keep this ad-free. Luna: Yeah, every little bit helps us keep the podcast independent. And it's easy to find. Now back to the divide — what's the one data point that could break the impasse? Lucas: The August CPI report, due out in mid-September right before the FOMC meeting. If core CPI shows a clear downtrend — say, month-over-month below 0.2 percent — that would give the doves a lot of ammunition. But if it ticks up, even a little, the hawks will dig in. The September meeting is shaping up to be the most consequential in a while. Luna: And the market will be hanging on every word from Powell's press conference. But for now, it's a waiting game. Lucas: Exactly. The Fed is divided, and that division is likely to persist until the data forces a consensus. For investors, that means staying nimble and keeping an eye on those breakeven rates. They might be the canary in the coal mine. Luna: Great perspective as always, Lucas. We'll be watching the August numbers closely. Lucas: So will we. Thanks for listening — and if you want to support the show, remember the link. Otherwise, we'll see you next time.