From the US Market Desk: Now…We Wait…

by Rick Polsinello, Chris Galipeau of Franklin Templeton, 8/31/26

now-we-wait

Macro

  • Our real gross domestic product (GDP) forecast for 2026 is 2.5% (based on our Global Investment Management Survey) versus the Federal Reserve’s (Fed's) forecast of 2.2% and the Wall Street consensus of around 2%. The economy remains resilient and the consumer is strong. The only thing that could throw us a curveball would be a policy mistake by the Fed. We do not anticipate that. I hesitate to even mention this because the data whips around so fast I don’t glean much from it, but the latest Atlanta Fed GDPNow forecast is now up to 4.6%.
  • The core Personal Consumption Expenditures (PCE) price index was one of the big data points this week and came in at 3.3% as expected for July, which was also in line with our year-end forecasted range of 3.0% - 3.5%. This gauge of core inflation is the Fed’s preferred measure; however, the Fed won’t ignore the 3.7% increase in headline inflation, as the continued US conflict with Iran has caused energy prices to remain elevated (and volatile).
  • Given our central bank’s dual mandate, the somewhat unexpected 4,000 fall in this week’s initial jobless claims numbers is also noteworthy. Unemployment ticked lower in July, to 4.1%.
  • Fed policymakers met in Jackson Hole, Wyoming this week for their policy symposium, and new Fed Chair Kevin Warsh used most of his time at the podium on Friday morning to reinforce what he’s been communicating to the market the past couple of months. Specifically, his belief that our economy is doing well and our labor market is healthy, but that the central bank is serious about achieving the Fed’s 2% core inflation goal and that short-term rates are the primary tool to do it. He also said that a quieter Fed which provides less forward guidance is probably better and gives them more flexibility in making monetary policy decisions.
  • The US two-year Treasury note yield ticked up a couple basis points this week and currently sits at 4.22%, still about 40 basis points (bps) over the federal funds rate but off the boil. Remember, the bond market leads the Fed, not the other way around.
  • Treasury Secretary Scott Bessent seems to have brought back “Operation Twist” last week. He announced that the Treasury will double the size of its monthly purchases of long bonds for at least a few months beginning in September, from $2 billion to $4 billion, to “improve liquidity.” The additional nominal dollar amount of $2 billion is not significant, but this could be a signaling event for markets. As our Head of Research Larry Hathaway noted to us, the risk is that the peashooter becomes a bazooka. Markets reacted modestly on the news.
  • Meanwhile, the fed funds futures market is indicating there is now only a 35% chance of a 25-bps hike in September and a hike fully priced in by the last policy Fed policy meeting of the year in December. This data moves very fast, so this picture can and will change quickly depending on incoming data.
  • On the currency front, we are expecting the US dollar to be essentially flat for the year despite the recent volatility. The US Dollar Index is trading at 99.11, slightly higher over the past week but still slightly lower than following the “Operation Twist” announcement on August 19. We expect the relative strength of the US dollar will continue to be rangebound, as it has been for the last year and a half.