Eyes of Silver: Seeing through the hawkish narrative
August 27, 2026
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2 min
August 2026 highlights
The Master: Consumption may have rebounded in the second quarter, growing just over 3%, but be careful extrapolating that strength through the balance of the year. The consumer has been remarkably resilient this year, perhaps even to a fault as nominal consumption has grown nearly 7% over the past three months while nominal income less of transfers has grown just over 3%. With consumption outpacing incomes to a sharp degree and first half tailwinds giving way to second half headwinds consumption looks primed to moderate in the back half of the year.
Black Water: One of the notable tailwinds that helped to offset the rise in energy prices this year has been the much-discussed fiscal impulse thanks to the Big Beautiful Bill. But the modest fiscal lift those tax cuts provided is now firmly in the rearview mirror with the bill’s payfors set to kick in as we push through the balance of the year. Fiscal boost is giving way to fiscal drag, adding another headwind to consumption in the coming quarters and keeping the economy on track for ho-hum growth for the foreseeable future.
Listen to the Music: While the Fed continues to sound a hawkish tone, the data continues to support the idea that we may once again be past peak hawkishness. Indeed, the inflation data has taken a turn for the worst through the first half of the year, but recent prints have begun to give the doves more solid footing as underlying inflation trends appear to be turning sharply lower. Should that pipeline of disinflation continue to reassert itself, the hawks’ grip on the committee is likely to continue weakening giving way to an extended hold.
Long Train Runnin’: Amidst all the concern around inflation, there’s been growing chatter regarding the end of the disinflationary tailwind emanating from the housing market. But don’t be fooled by those pointing to stabilizing market rents. The pipeline of disinflation remains alive and well even if we are approaching the end of the long normalization in shelter costs. And while market rents have shown early signs of stabilization, benign shelter costs are set to remain in the picture well into 2027, helping to support a continued gradual easing in inflation in the quarters to come.
It Won’t Be Right: While recent data has helped to rein in the consensus pricing of hikes, the distribution of outcomes remains heavily skewed toward the right tail, as stabilization in the labor market and firmer inflation has led to a sharp compression in the left tail of the distribution. Given a string of softer inflation prints and labor market data that is casting plenty of doubt on the reaccelerating labor market narrative, the right tail continues to look far to fat relative to the underlying trends for both sides of the Fed’s dual mandate. Should income labor market data remain soft as inflation prints remain benign, the center of that distribution looks set to grow and shift modestly back to the left, helping to fuel a rally in out the curve in the process.
