Listening to central bankers is like trying to date an emotionally reserved girl - you can talk and listen all you want, but you will never hear the words of commitment. But while it is perpetually frustrating to not be able to get assurances about the future of rates, it is done by design.

Market watches all the time - one word too much and your commitment gets priced in instantly. Just like at Jackson Hole. Powell only mentioned that job numbers revision may signify a weakening labor market and in a second markets priced in an 80% chance of a 25bps rate cut.

Yeah, well done mate, we can pat ourselves on the back and move on to October meeting, right? Not really. To understand the direction of central bankers moves, you need to meticulously dissect their speeches. And that’s what I will do today. I will analyze Powell’s speeches, FOMC minutes and data in the context of Fed’s dual mandate to see where we really stand and if there is money to be made. Hit that subscribe button and see for yourself.

Jackson Hole

Powell started his speech in a very curious manner, by taking a trip down memory lane to the last time the Fed decided to cut rates. He said that back then the economy was at an inflection point:

• 5.25-5.50% restrictive rate stood for over a year unchanged (he said it was appropriate),
• inflation moved much closer to Fed’s objective over the course of that time,
• the labor market had cooled from its much overheated state,
• upside risks to inflation had diminished,
• “but unemployment has increased by almost a full percentage point, a development that historically has not occurred outside recession”.

That’s the picture he drew that in his mind justified the 3-session cutting cycle (50bps in September, 25bps in October and 25bps in November) to bring down the interest rates by 1 percentage point. This set the stage for the labor market to remain in balance, near maximum employment over the past year.

But what he also did here was pointing us to how he approaches a decision to change interest rates. And translating to english, he said that after seeing several data points over the course of the year, he saw that inflation is moving down (along with expectations) and unemployment is moving up. Thus the change.

Then he proceeded to describe the current economic situation, noting that while both unemployment is stable and inflation expectations are well anchored, there is a downside risk to labor market in the context of revised jobs number and upside risk to inflation in the context of ever-changing tariff rates and an uptick in PCE (Fed’s favorite measure of inflation).

And finally he said that:

• stability of labor market and
• 100bps closer rate to neutral rate (vs one year ago)

allows the Fed to proceed carefully. But nonetheless with rates in restrictive territory, the baseline outlook (ie. potentially weakening labor market) and the shifting balance of risk may warrant adjusting their policy stance.

This last sentence is the reason for this:

The sharp change on the right of the chart happened within a second of him saying this.

Translating from Fedspeak to English, Powell opened the door for a rate cut for the first time in close to a year.

What I get from this speech? Powell is pointing our attention to signs of weakness in the labor market. The adjusted jobs number in particular has made him attentive to the downside risks there.

Supply & Demand

Supply and demand of the labor market was a key topic of his July speech. He said that the Fed was attentive to the balance of the two while making a decision around robustness of the labor market.

So:

1. Demand for work: we see a weakening there that on it’s own would suggest that the monetary policy is too restrictive.
2. Supply of work: on it’s own, it’s hardly something that Fed can influence, in our case the cause is a restrictive immigration policy.
3. In tandem, the actually balance the labor market, thus the low unemployment rate.

In the end, I believe that Powell indicated that he will be looking at the unemployment rate to see if low job creation is starting to have an adverse effect. At the same time he will be looking at PCE (to see if it’s rising) and inflation expectations (to check if they are still well anchored).

The Voters

But Powell doesn’t make decisions on his own. There are 11 other people voting and they need to reach consensus.

Last time, the no change was voted in 9-2 favor. Adriana Kugler was absent as she resigned from the board and now Stephen Miran is nominated to temporarily take her place. However there are doubts he will be able to join the September meeting. For now there is no market on this, but I proposed one and hope it will be approved to inform us on what the market thinks.

However, even with Stephen in place, at least 3 other voters needs to flip. For now we heard opinions of most of them:

1. Williams: will be looking at August data to inform his decision, but believes that market reaction to Powell’s speech is directionally correct.
2. Collins: a little bit more hawkish, is open to cut only if the current situation of labor vs inflation deteriorates further in August data.
3. Goolsbee: very focused on inflation, even with labor market showing increased weakness he won’t be willing to cut.
4. Musalem: doesn’t see labor market weakness yet, will need to see August data to decide, but is not willing to cut now.
5. Schmid: believes that labor market is solid, business has good outlook for the rest of the year and inflation is still closer to 3% vs 2% target.
6. Cook: labor data adjustment is concerning, however now with the Trump drama she might be willing to stick it to him in my opinion.
7. Barr: no recent comments.
8. Jefferson: no recent comments.

So, we have 4 voters (Collins, Goolsbee, Musalem and Schmid) that are strongly leaning to not cut, 3 voters that are waiting for data, but slightly leaning towards a cut (Powell, Williams and Cook) and 2 voters that didn’t make any public comments, but are usually aligned with Powell.

Ultimately, it’s all about the data.

Data

Let’s look at both mandates projections.

Labor Market

I like this Adjacent chart as it allows me to compare both Polymarket and Kalshi odds. These are comparable, but since questions are different, in tandem they offer better perspective.

After a 73k increase in July and a close to stable adjusted print from May and June, the markets generally expect to see between 25k and 75k jobs added, which I would deem an overall stable print, in line with July print. Also there is close to 0 chance we will see a negative print that would all but ensure a rate cut.

We are (as always recently) looking at a downward revision of the July jobs data, but there is actually more chance we will see an upward revision of 10k vs a downward revision of at least 50k. I can safely assume the print, after adjustment, will be better than May and June.

Moving to unemployment:

Another awesome chart from Adjacent! Between Polymarket and Kalshi data, we can expect to see between 4.2% and 4.3% unemployment vs 4.2% in July and 4.1% in June. While a 4.2% or lower print would indicate a stable labor market, a 4.3% or higher print could spark a debate among the voters.

As Powell indicated, he looks at both supply and demand and called a current labor market condition a curious balance. But balance it is.

Inflation

Here I’m similar to Powell - I also like to look at longer term trends. Here I am especially concerned about the upward trend in the Above 3% (Polymarket) market. In the recent months Polymarket data started to front-run the markets and for me it indicates rising inflation expectations in the medium to long term.

Additionally the core PCE is beating forecasts in the recent months:

While I believe that forecasts now take into account that core PCE is trending slightly higher, a print that matches or runs hotter would clearly indicate that inflation pressure is still there.

Conclusion

We are essentially looking at two scenarios that create a dilemma for the Fed:

1. If PCE is on par / hotter than expected, the Fed will need to consider a stubborn inflation in their decision, even with less solid labor market.
2. If labour market shows *more* weakness the Fed could:
   1. cut if PCE is flat or cold,
   2. have a proper dilemma if PCE is hot.

Additionally we need to take into account that Powell likes to move slowly only after gaining significant confidence about the change in underlying economic conditions.

Prediction Markets

Regardless of the small differences in incoming data, we are looking at a divided Fed. I believe that the market is too confident in a rate cut based on a single sentence of Powell and doesn’t take into account the weight of the data as well as slowness strategic indecision of Powell. In my opinion current odds should be close to 50/50 with no change slightly under considering Powell’s openness to cutting.

My gameplan is following:

I acquired ca. 6k shares on Yes for no change (ca. 4% of my bankroll) ahead of tomorrow’s PCE print. I expect PCE to be on par with forecast or higher based on the inflation markets trends. This should produce some more hawkish comments from the voters and increase the odds of no change to 40/60 ahead of the jobs data dump on September 5th. Also the slight increase in odds today (16c vs 19c) shows that some whales are looking at, let’s say, warm PCE.

By September 5th I plan to partially divest from no change and realize some gains, however I’m tentatively expecting a fairly stable jobs data at which point we should move to 60/40 split on no change vs 25bps cut or higher for no change. Markets are not expecting an extremely weak print there with unemployment being fairly stable. Then it’s all in the hands of FOMC and the price will move according to interviews ahead of the meeting.

Depending on the data and indications from voters I will either exit fully or maintain my position.

I will be updating you on my course of action here as it goes. The downside risk is definitely there in case of a flat / cold PCE print. We are looking at no change at 10c if that happens, but still a robust job data print in that case would make for a difficult decision for the Fed and odds going back even to the low 30s.

However this scenario is the least likely and I’d probably try to exit my position at that point.

Wrap up

And that’s all for today. As you see I’m foremost betting on stubborn PCE as it comes first, but ultimately it will be the labor market data that will decide the fate of the rates.

While this thesis has more downside risk that I am used to (ie. my certainty about incoming data is obviously limited), I do believe that the no change market is currently undervalued as people are too eager for a cut amid Trump’s pressure and everlasting bull market.

Derivative markets (inflation, jobs) show that inflation has a high chance of being stubborn while the job market, although weaker than before, will be solid enough.

Stay strong and see you soon!