Federal Reserve Chair Kevin Warsh started his fight against inflation with jawboning during June’s decision on monetary policy. The performance was all words, many task forces, and no action. Warsh doubled down on the jawboning for July’s decision. The Chair expressed even more resolve for hitting the 2% inflation target while making the measuring stick provisional. PCE remains the benchmark for now, but Warsh suggested the task forces could change that strategy after January and declined to identify the broader set of inflation data informing his judgment.

Warsh doubled down on jawboning by describing a contentious policy meeting while also sidestepping a request to explain the decision to hold rates unchanged. Warsh also refused to provide any insight on the dissent from the three of twelve voting FOMC members who each voted for a quarter-point rate hike (Beth M. Hammack, Neel Kashkari, and Lorie K. Logan). He even declared as a counterpoint that there was “a lot of agreement on the hard questions.” He also heard a lot of “commonality” on the key questions he mentioned at the top of the press conference; the answers just had different “leans.”

Finally, Warsh further extended his brand of opaque Fedspeak by countering the image of a Fed fighting over rate hikes with the unanimity on a metaphorical vote for a period of “watchful thinking not watchful waiting.” In either sense of watchfulness, Warsh did not provide specifics about what the Fed is actually prepared to do to finally bring inflation back to target.

The statement itself made the decision to hold rates steady even harder to explain. The FOMC described economic activity as expanding at a solid pace, productivity and capital investment as strong, job gains as keeping pace with the workforce, and unemployment as little changed. At the same time, inflation remained elevated. Yet, the Committee offered no explanation for why this combination of solid growth, stable employment, and above-target inflation justified leaving rates unchanged. Instead, the statement jumped from attributing some price increases to supply shocks straight into more jawboning: “The Committee will deliver price stability.”

Warsh’s declarations about inflation were all the more awkward given he continued to imply that the Fed before his tenure was not serious enough about its inflation target. For context, Warsh consistently describes inflation as a choice, a claim predating his appointment to the Chair. However, he has yet to specify the choices the Fed needs to make beyond the potential recommendations from his various task forces. Instead, he is keen to point out distinctions between the current FOMC and prior ones: “we have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks—or by a single month of modest price decreases.”

Warsh introduced one more potential choice without making it specific: the balance sheet. He asked how much accommodation it is still providing even if interest-rate policy remains the Fed’s primary instrument. As with the inflation framework, Warsh posed the question without providing an answer, an intended adjustment, or a timetable.

Passing the Inflation Fight to the Bond Market

One emergent choice could be passing the inflation-fighting baton to financial markets. In his opening statement, Warsh anticipated questions about what the Fed did to fight inflation between the June and July meetings. He pointed out that the Fed’s retreat from the business of forecasting and forward guidance allowed financial markets to react to data instead of the Fed. The result? Higher bond yields that have tightened financial conditions. He used a sports metaphor to emphasize the change in the game: “market participants are learning to play the ball, not the referee—and market prices will continue to respond in the direction and magnitude they see fit.”

While Warsh insisted that “where necessary and appropriate, we will not hesitate to act,” he declined to clarify the conditions under which the FOMC would actually do something about inflation. Still, toward the end of the press conference, Warsh acknowledged that the bond market’s tightening of financial conditions provides “some comfort that we’ve got the ability and capability to deliver.” The coded language suggests that the Fed is willing to let the bond market do part of the inflation-fighting work while the FOMC waits for results.

One perplexed reporter pointed out that the bond market’s higher rates suggested the Fed was falling behind on hiking its own rates. Another befuddled reporter bluntly asked, “Why should rates not be higher today?” Warsh deftly avoided referencing the Fed funds rate and instead chose to point out the “market’s judgement” to take nominal rates higher along the Treasury curve. While the Fed will not allow the market to dictate its actions, the Fed is “observing” markets.

Warsh next pointed out that both the Fed and markets have upcoming decisions to make about interest rates. He tried to make it plain: “Monetary policy matters not just by what we say, or even what we do. Monetary policy matters by how it affects the real economy.” Of all the Warshspeak on the day, that statement stood out to me as the clearest declaration of the Fed’s modality for action in the Warsh era. If the Fed concludes that market is tightening financial conditions in response to inflationary pressures, the Fed will be content to wait for inflation to respond accordingly.

The Bond Market Hears Warsh Loud and Clear

The bond market seemed to get the point. Long-duration Treasury bonds sold off sharply as soon as the Fed’s statement hit the wires and barely stopped to catch a breath for the rest of the regular trading day.

The reaction function for stocks was much more volatile. The S&P 500 (SPY) rallied into and through the statement until someone tapped stocks on the proverbial shoulder and turned attention to the bond sell-off. The S&P 500 sold off sharply in the last hour of trading, falling from a marginal 0.4% gain intraday to a 1.5% loss at the close.

The subtle frustration from the press intensified with every unanswered question. One reporter almost pleaded with Warsh. The reporter pointed out his repeated claims about intolerance for above target inflation while his Fed has yet to take action. In response to the reporter’s request to clarify what he means by “no tolerance for inflation” and the plans to act, Warsh responded by acknowledging the impatience he had heard about this situation. Yet, he still only offered the same menu of jawboning by declaring this Fed is “on the job. We will deliver.” First, the Fed needs to answer a series of hard questions in order to deliver on its remit.

The press’s frustration symbolically boiled over in the last question: “You said you’d be open to having press conferences when there’s news to make. Today, no change in rates. No forward guidance. For the average household, what was the news today?” Warsh’s final non-answer was telling. Warsh first reiterated his commitment to the existing press conference schedule for 2026. He went on to assure the audience that the Fed is “on the case”, and his confidence in the Fed’s ability to deliver on its inflation target was even stronger than when he took the Chair position. He concluded the session by leaving the audience with “the optimism of a new central banker that we’re committed as ever to deliver and to offer an assurance we will.” And with that doubling down, the jawboning came to an end.

Be careful out there!

Full disclosure: long TLT

The post Warsh Doubled Down On Jawboning Even As the Fed Fights Over Rate Hikes appeared first on Inflation Watch.

In his first press conference as Fed Chair, Kevin Warsh found another way to talk up and reaffirm the Fed’s credibility on inflation. He shortened the policy statement to focus on what he called the ”facts,” removed forward guidance, repeatedly invoked the Fed’s commitment to “price stability,” and launched task forces designed to produce strategic and operational reforms for some time in the future.

Fighting Inflation With Jawboning

In his opening remarks, Warsh insisted that “members of the FOMC are unambiguous and unanimous. This Committee will deliver price stability.” He returned to the same jawboning when asked about inflation and the Fed’s ability to bring inflation back to target: “Today, I am announcing that this Committee has unambiguously and unanimously decided that we are going to deliver on that.”

Given the lack of forward guidance, Warsh’s repetition and reemphasis came without defining what the commitment means for the next rate decision. This approach is classic central-bank jawboning. The posturing gives Warsh room to maintain hawkish credibility without committing the FOMC to a near-term rate hike.

The most revealing moments came when Warsh responded to questions about the restrictiveness of current policy. He described monetary policy’s restrictiveness as “uneven.”

“If I look at the housing market as one example,” Warsh said, “Fed policy is not the single determinant of the state of the housing market, but broadly, I would say Fed policy appears to be somewhat restrictive there.” Warsh contrasted housing with financial markets. “I would have a hard time saying those words if I were looking at what is happening in financial markets.” That observation alone could have been sufficient to knock the S&P 500 (SPY) down 1.2% on the day and position it for another test of its uptrending 50-day moving average (DMA) support (the red line below).

Warsh made a similar point later in the press conference: “I do see some restrictiveness in things like housing. It is hard to use those same words anywhere else.” In other words, there is little to no case for cutting rates when the majority of the economy and financial markets are not behaving as if monetary policy is restrictive.

And for Further Emphasis…

In response to a question about underlying inflation pressures in the economy, Warsh pointedly emphasized the message from the statement on monetary policy: “…to be clear, the Fed will deliver price stability.” He again described the Fed’s commitment to price stability as “strong, unanimous, and unambiguous.” Warsh called this commitment “an important message we have missed for five years” and promised, “we are going to fix that.”

Warsh’s insistence and emphasis build the credibility behind the jawboning. The end of forward guidance avoids pre-committing to a rate path that at this time would have to point to higher rates. Warsh wants to pre-commit to an outcome. The outcome is 2% inflation. The path is deliberately unspecified except through the work of task forces.

There’s A Task Force for That

The task forces were a pillar of Warsh’s first press conference. He announced the launch of five task forces: Fed communications, the Fed’s balance sheet, data sources, productivity and jobs in an era of technological transformation, and inflation frameworks. Warsh said the groups will “start with first principles, ask hard questions, examine current practice, consider alternatives, and ultimately propose next steps for policymaker consideration.”

The inflation task force bolstered the jawboning on inflation. Warsh said, “The last task force, the one on inflation frameworks, will examine the drivers of inflation, first principles, and weigh the full range of ideas for delivering price stability in a changing economy.” Since the Fed already wields substantial inflation expertise in the Cleveland Fed’s Center for Inflation Research, I am keenly interested in the makeup of this task force and the institutional response to its work. I also wonder whether Warsh will advocate for delays in changing monetary policy until this task force completes its work.

Warsh even deferred to the task force when asked whether he still believes AI-driven productivity gains pave the way to rate cuts. When asked whether productivity could justify lower rates, he shifted the issue to the new productivity and jobs task force. He said the task force will examine “timing, scale, speed, implications for output and employment.”

Confidence In Price Stability, Not the Path to Get There

Ironically, Warsh sounded most confident when discussing the things he believes the Fed can control, and least confident when discussing forecasts. He repeatedly showed confidence in the Fed’s ability to deliver price stability. He expressed little confidence in the effectiveness of the Fed’s rate projections.

That contrast may define his chairmanship. Forecasts are uncertain. Dots can be erased. Forward guidance can mislead. But inflation, in Warsh’s telling, is ultimately a monetary-policy choice.

“You bet it is,” he said when discussing the idea that inflation is primarily determined by monetary policy. “I’ve said for years, inflation is a choice. You bet it is.”

Once again, Warsh postured as hawkish without overtly committing to rate hikes. If inflation is a choice, and inflation remains above target, then the Fed is responsible for choosing differently. Rate cuts do not bring inflation down (just ask the Turkish Central Bank).

Reporters tried repeatedly to nudge Warsh into acknowledging rates must go higher. He steadfastly refused each time. For example, when asked why the Fed did not raise rates given the inflation risks, he answered curtly: “I’ve got nothing more to say than the statement itself.”

Still, when asked whether there was any discussion of a rate cut, Warsh dismissed the idea quickly: “There was one proposal on the table. There was no discussion of any other proposals. The discussion on that proposal was, I would say, quite limited. The group was unanimous and unambiguous on it.” Any lingering hopes for a rate-cut narrative officially died at that point. Perhaps the new narrative is possible now that the FOMC does not include a voting member who requests rate cuts no matter what the data say.

Conclusion

Warsh is targeting inflation credibility through communication before leaning on the interest-rate weapon. He seems to be buying time for inflation to cool on its own accord (transitory without calling it transitory). However, given inflation has remained sticky for years and is now creeping higher, time is not on his or the Fed’s side.

Yet, the latest Summary of Economic Projections (SEP) projects a Fed-standard glide path to the Fed’s target in another two years…

Regardless, toward the end of the press conference Warsh proclaimed a credibility argument underlined the jawboning: “When we deliver on our price-stability objectives, which we will, the American people will feel as though the hardships they have been living through, in part because of inflation over the last five years, are in the rearview mirror. That credibility will have dividends across what we do.”

The market question is whether Warsh can make this promise credible without first proving he and the FOMC are willing to raise rates. I am betting they continue to find ways to avoid rate hikes for the rest of the year absent a calamitous turn of monetary events.

Warsh’s war on inflation started with jawboning and the new Fed Chair used his first press conference to establish inflation-fighting seriousness without directly threatening tighter policy.

The post Warsh’s War On Inflation Starts With Jawboning appeared first on Inflation Watch.

A decline in the price of housing services has been at the center of the long-standing narrative dismissing the significance of this years long stickiness in inflation. Unfortunately, those hopes are less tenable than ever in this cycle. In April, housing experienced its highest month-over-month PCE increase since at least the beginning of 2025. This sticky inflation is unlikely to cool while housing inflation remains elevated.

Thus, the long-awaited rate cuts that new Federal Reserve Chair Kevin Warsh was supposed to deliver for the President seem quite remote. Financial markets do not even have a rate cut among the range of possibilities this year. The CME FedWatch tool shows the odds of a rate cut at less than 1% going all the way out to July, 2027. The odds of a rate HIKE push above 50% starting with the January, 2027 meeting (see the red circle in the upper right corner of the chart below).

Meanwhile, loose financial conditions per the Adjusted National Financial Conditions Index (ANFCI) suggest the case for rate cuts remains quite weak.

Bonds Push Gold to the Sidelines

Typically, this is the point where I celebrate gold as a good buy in the face of increasing inflation risks. However, the bond market woke up to increasing inflation risks after the war started. For example, a day after the iShares 20+ Year Treasury Bond ETF (TLT) broke down from a 4-month high on the first wartime trading day, SPDR Gold Shares (GLD) also broke down.

Both TLT and GLD have been in downtrends ever since the war started (interest rates increase when bond prices decrease). While TLT printed a sharp bottom last week thanks to a sudden drop in oil prices, gold continued to fall.

As long as financial markets expect the Fed’s next move to be a rate hike, I expect GLD to trade poorly. Right now, GLD is precariously perched at an important support formed from the convergence of the 200-day moving average (DMA) (the blue line above) and GLD’s former all-time high from October, 2025. GLD experienced an impressive bounce off the horizontal support line in late March. However, given the definitive failure at resistance at the 50DMA (the red line), I expect the current tepid bounce to give way to continued weakness in GLD.

Thus, I am staying away from buying back into GLD until it can achieve a breakout above 50DMA resistance. In the meantime, I continue to accumulate TLT in anticipation of a day off in the future when yields come down definitively.

Be careful out there!

Full disclosure: long TLT

The post From Sticky to Streaky, Inflation Looms Larger appeared first on Inflation Watch.

Inflation Drivers

Inflation remains above target and is being driven by identifiable, but still unresolved, forces. Tariffs account for a significant share of core inflation and are taking longer than expected to pass through the economy. According to Powell, goods inflation has shifted from being flat or negative before tariffs to running around 2%, with tariffs contributing approximately 0.5 to 0.75 percentage points to the ongoing inflation overshoot.

Inflation has now run above target for five years, increasing concern as a new price shock from war has pushed oil prices higher. Powell acknowledged that the war against Iran has pushed up near-term inflation expectations. He also cautioned that the size and duration of oil’s impact on inflation is uncertain.

Powell expressed frustration with the stickiness of core non-housing services inflation. The labor market is no longer generating inflationary pressure yet services inflation has not declined accordingly.

The added uncertainty from war and oil reduces confidence in any forecasts. Powell acknowledged the lack of confidence behind them, noting that participants are effectively making estimates without strong conviction. He quipped that “you gotta write something down.” He even shared that someone on the FOMC joked that “This is one of those SEPs [Summary of Economic Projections], where if we were ever to skip an SEP, this would be a good one.”

Powell summarized the situation plainly: “the thing I really want to emphasize is that nobody knows.”

(Uncertain) Economic Backdrop

Still, Powell insisted that the broader economy remains resilient, with steady growth and stable unemployment. Longer-term inflation expectations remain anchored near 2%, which continues to provide an important foundation for policy.

The current SEP reflects low conviction and high uncertainty. Inflation’s trajectory will depend on how tariff effects resolve, how energy prices evolve, and whether services inflation begins to improve.

In the meantime, the Fed as a group still has core PCE (Personal Consumption Expenditure) inflation gliding comfortably to the Fed’s target of 2% by 2028 despite the recent updrift in the Fed’s preferred inflation gauge. Thus, the Fed remains confident in the path for the economy despite the lack of conviction in the forecasts.

The post Powell: Inflation Is Uncertain and the Forecasts Lack Conviction appeared first on Inflation Watch.

Higher diesel fuel prices increase transportation costs for goods that rely on trucking. However, trucking company stocks have not shown a consistent negative relationship with rising diesel fuel prices in recent years. The next two monthly charts include overlays of red boxes during periods of elevated diesel prices. Note that these periods include strong stock prices for Old Dominion Freight Lines (ODFL) and XPO, Inc (XPO). ODFL is a U.S.-based less-than-truckload (LTL) transportation company that provides regional, inter-regional, and national freight shipping services through an integrated network of service centers. XPO is a U.S.-based transportation company specializing in less-than-truckload (LTL) freight services, operating a large network of terminals that move palletized shipments across regional and national supply chains.

According to FreightWaves, while diesel is roughly 20-25% of the cost of trucking, fuel costs are typically passed through to the shipper. Thus, trucking companies can manage around higher fuel prices unless trucking customers experience demand destruction from the higher prices. FreightWaves notes that “for shippers, rapid increases in fuel prices can wreak havoc on budgets”.

Because goods markets have already adjusted to significant tariff-related cost pressures, suppliers may attempt to delay passing new fuel surcharges through to final consumers. Unfortunately, recent indicators, like the emergency release of oil from the strategic reserves of the International Energy Agency (IEA) and the U.S. suggest that countries are bracing for an extended oil shock. From CNBC:

“The International Energy Agency said on Wednesday that its 32 member countries would release 400 million barrels of crude from strategic reserves, the biggest coordinated drawdown since the agency was created in 1974 after an oil crisis the year before. The U.S. separately said it would tap 172 million barrels from its Strategic Petroleum Reserve as part of the coordinated effort.”

Given oil prices failed to respond to this announcement, analysts quoted in the CNBC article warned that markets are bracing for a protracted war along with the need for countries to refill the petroleum reserves at some point in the future. Shipping has essentially ground to a halt through the Straight of Hormuz. The resulting 15 million barrels per day lost in crude and refined products will push strategic reserves to their limits.

Even after the current oil shock subsides, diesel prices may stabilize near recent levels rather than returning to the much lower ranges seen before 2021. The chart above of diesel prices shows that the lows that held through much of 2025 were far above the lows from 2009 to 2020. Thus, normalization will be a relief, but the price of diesel will remain elevated and create a floor for the input prices of many goods.

Be careful out there!

The post Diesel Fuel Prices Surge Toward Levels Seen in the Last Two Inflation Shocks appeared first on Inflation Watch.

Services was the biggest driver of December’s core PCE with a 3.5% year-over-year jump. Services has been a consistent contributor to inflation’s stickiness. The biggest components within services were housing and utilities, recreation services, and financial services and insurance. Each of these components were also top drivers of services PCE inflation a year ago, so I fully expect them to continue to remain elevated…and worrisome.

Why Does the Fed Prefer PCE over CPI?

The general public and financial media pay much more attention to the CPI than the PCE. So it is easy to understand how a hot PCE number got little attention among the tariff headlines. However, the Fed cares more about PCE because it is a more comprehensive measure of inflation than the CPI. The PCE relies on business surveys that include expenditures made on behalf of consumers. In an explainer, the BEA provides the following example:

“For example, the expenditure weights for medical care services in the CPI are derived only from out-of-pocket expenses paid for by consumers. By contrast, medical care services in the PCE index include those services purchased out of pocket by consumers and those services paid for on behalf of consumers—for example, medical care services paid for by employers through employer-provided health insurance, as well as medical care services paid for by governments…”

This distinction is particularly important since the Fed spends a lot more time talking to businesses (like in the Beige Book) than to consumers.

Gold probably got both messages: sticky/heating inflation and fresh economic chaos. The SPDR Gold Shares (GLD) bounced perfectly off support at its 20-day moving average (DMA) (the dashed line) and followed through with a 2.7% gain to start the trading week.

Be careful out there!

Full disclosure: long GLD calendar call spread

The post The Fed’s Favorite Inflation Measure Leapfrogs the CPI appeared first on Inflation Watch.

Lessons from the 1990s

Daly reached back to the 1990s to demonstrate that the Federal Reserve is well-equipped to manage monetary policy through the coming transformation, whatever shape it takes. Daly noted that Alan Greenspan, Fed chair at the time, used disaggregated micro data to argue that “the burgeoning computer revolution would spur sustained productivity growth, allowing the economy to grow faster without putting upward pressure on prices”. Thus, the Fed could remain patient with monetary policy even as the economy boomed. Daly did not reference or contextualize the financial chaos that engulfed the late 1990s. The global economy had to survive Russian financial crisis, the Asian financial crisis, the collapse of Long-Term Capital Management, and the ballooning of the tech and dot-com bubble which burst in 2000. Depending on your perspective, monetary policy played alternating roles as savior and villain in these economic calamities.

Going forward, Daly promised that the lessons of the 1990s would inform the foundation of monetary policy’s approach to AI’s impacts on the economy. “The willingness to listen to businesses, hear their ideas, use data and evidence to test them, and invite others to do the same,” Daly recounted as ways to maintain a pulse on AI-driven dynamics.

Daly pointed out that AI can deliver one-time efficiency gains by automating parts of a process. However, that productivity boost does not recur on its own. Sustained productivity growth requires broader reorganization and diffusion across industries. Thus, it is difficult to attribute recent productivity strength to AI or to assume its persistence.

I am particularly intrigued by the notion that the Fed may be slow to respond to a heating economy because of AI-driven productivity enhancements. One of my premises for ongoing sticky inflation includes an economy running hot due to fiscal stimulus and substantial investments in infrastructure and manufacturing. Daly implies that the Fed could be cautious about reacting to inflation that may prove temporary if productivity gains materialize.

Daly noted that AI investment can be inflationary in the near term with the investment required to build out capacity, while the disinflationary channel from productivity may arrive later. Accordingly, timing is central to how the Fed interprets sticky inflation alongside AI.

Thus, developments in AI increase the complexity of interpreting the Fed’s objectives and actions.

Augmentation Not Destruction

While AI could inject disinflationary (or even deflationary) forces into the economy, potential job destruction is top of mind for most workers. Job destruction would present the kind of structural economic force that the Fed typically has minimal ability to influence with monetary policy. Thus, Daly’s optimistic outlook on AI as job augmentation and creation would significantly relieve the Fed of a deeply challenging burden.

Daly’s evidence comes from employers in the San Francisco district. During the fireside chat following the introductory remarks, Daly described her team’s latest findings: “what we’re really seeing is AI replacing tasks, augmenting workers.” Daly and her team are collecting data and anecdotes directly from businesses. According to Daly, “most of those firms are saying, ‘I’m augmenting my workforce’.”

Earlier in the fireside chat, Daly made another call to history to support her optimism: “No technology ever reduces net employment. Not in the history of technologies, but it does change what that employment looks like.” Accordingly, Daly suggested that the same relationships should hold for AI. AI is changing the shape of employment first by replacing tasks within a job and next by augmenting the job itself. For Daly, the next phase for AI and the economy is not wholesale employment destruction but job creation. AI will create new jobs that we cannot imagine in this moment.

Keep Up If You Can

Daly delivered one cautionary message for workers. She warned that workers will need to engage with AI and focus on continuous (and rapid) learning. She referred to the leader of a company who had fired workers who were not able to keep pace. Fortunately, that same leader discovered the need to hire more workers because of the opportunities created by AI.

Daly also used prompt engineering as an example of a job type that emerged and faded quickly because of the changing needs and capability of AI. As a result, Daly advised workers to run as fast as they can:

“work forces need to skill in durable skills…be AI ready, be able to use AI to lift yourself in the educational space. You know, use the technologies that are out there to build your skills up because you can learn a lot fast if you train yourself to look at AI…”

In other words, translate AI into a learning advantage instead of treating AI as a threat.

Conclusion

Overall, Daly struck a positive tone on the current “AI Moment”. While the path forward is uncertain, Daly made the case for a kind of resilience informed by direct experience with AI. Workers need to engage with AI using a growth mindset, looking for opportunities while avoiding threats. In the meantime, the Federal Reserve will remain forward-looking and evidence-driven, monitoring whether AI’s anticipated effects are materializing in productivity, prices, and employment before adjusting policy.

The post San Francisco Fed’s Daly: AI’s Future Is Job Augmentation and Creation, Not Destruction appeared first on Inflation Watch.

The CPI components suggest that inflation’s glide path through the “final mile” will remain sticky. Services less energy services rose 0.4% in January and are up 2.9% year-over-year. Shelter increased 0.2% on the month and 3.0% over the past year. Medical care services rose 0.3% in January and are up 3.9% year-over-year. These service categories continue to keep core inflation above the Fed’s target.

Progress is real. The chart below shows core CPI has finally taken an incremental step to a lower inflationary regime. Yet the path lower remains gradual and sticky.

The Tariff Effect on Core Goods

The CPI for commodities less food and energy commodities increased 1.1% year-over-year and remains a key contributor to overall disinflation. This category could contribute to even lower inflation this year if the U.S. avoids enacting new tariffs.

In Liberty Street Economics, the New York Federal Reserve published a quick study that demonstrates a tariff incidence of roughly “94 percent” in the first eight months of 2025 and “86 percent” by November, meaning the vast majority of tariff costs showed up in import prices paid by U.S. consumers. The average tariff rate rose to about 13 percent, and tariffed goods experienced price increases of roughly 11 percent relative to comparable untariffed goods. Fed Chair Jerome Powell noted at the January press conference on monetary policy that inflation could be closer to target absent tariff effects. This study provides supporting data.

However, from a policy of economic warfare, tariffs have likely achieved a primary aim: a significant reduction in imports from China. The study pointed out that “in the first eleven months of 2025, China’s share of U.S. imports fell by another 5 percentage points, slipping below 10 percent”. Chinese imports accounted for nearly 25% of U.S. imports in 2017 and declined to around 15% in 2024 following the tariff increases implemented in 2018 and 2019.

The inflationary consequences of tariffs could be secondary to this strategic goal. Importers have shifted supply chains to blunt the otherwise inflationary impact of the higher tariffs. The general disinflationary environment during the first round of tariffs also likely helped embolden today’s heightened tariff regimes.

The strategic objective may be clear. The inflationary implications are less so.

Are Tariffs an Enduring Inflationary Force?

The New York Fed study does not argue that tariffs create a self-sustaining inflation spiral. It documents substantial pass-through into prices during 2025. If no new tariffs are enacted, year-over-year comparisons will eventually absorb this price shock. Base effects alone would allow the tariff impulse to fade.

However, continued or expanded tariffs would introduce new price-level increases. Repeated rounds would transform a one-time adjustment into recurring upward pressure on core goods. Ongoing uncertainty around tariff policy remains a significant wildcard. Persistent uncertainty could encourage firms to raise prices preemptively in anticipation of future cost increases.

Reluctant Disinflation

Disinflation is underway, but the path for the final mile to 2% remains sticky. This phase can best be described as reluctant disinflation, the mirror image of sticky inflation.

The bond market remains broadly unconcerned about renewed inflationary pressure. Bond prices rose following the CPI release. After gaining 1.3% ahead of the report amid rising equity volatility, the iShares 20+ Year Treasury Bond ETF (TLT) added another 0.5% after the data. With TLT trading well above its upper Bollinger Band – a signal of short-term extension – I took profits on a large TLT position.

In recent weeks, I have shifted toward buying dips and selling rallies in TLT rather than fading strength. As long as the bond market remains confident that inflation will continue moderating, my inflation hedge remains concentrated in commodities as the U.S. in particular positions itself to run the economy hot with lower interest rates, high investment, and fiscal stimulus.

Be careful out there!

The post Core Inflation Softens, but the Final Mile to 2% Remains Sticky appeared first on Inflation Watch.

FXA rode the economic tailwinds to a breakout for a 15-month high.

Data from the Australian Bureau of Statistics (ABS) suggests that the unemployment rate has likely peaked at October’s 4.4% with December’s reading at 4.1%.

Even more important for monetary policy, the consumer price index (CPI) in Australia is above the RBA’s target 2-3% range. After dropping as low as 1.9% last year, the CPI suddenly rebounded above the RBA’s target range. Improving economic numbers will thus threaten to keep inflation higher than target if the RBA does not pivot to a tighter policy stance.

And then there are commodities, the core of Australia’s economy. Companies like iron ore producer Rio Tinto have enjoyed strong rallies to start the year as investors wake up to the economic realities of massive infrastructure and energy investments to support the AI boom along with the increasing attractiveness of physical assets as major countries pile on more and more debt. I started accumulating RIO in October and included the stock on my shopping list for 2026. So far, the price action has yet to deliver any kind of buyable dip. The strength of these commodity plays suggests that commodity-rich economies are going to experience upward pressure on their currencies. The breakout in RIO aligns well with the breakout in the Australian dollar.

Conclusion

All signs point to continued strength in the Australian dollar. A pivot in monetary policy will all but confirm a bias higher for the currency. Moreover, Australia looks relatively more attractive as a country versus major economies like Japan and the U.S. where policy and political turmoil along with mounting debt levels could keep those respective currencies under constant pressure. My main question now is how and when will fresh buying opportunities come.

Be careful out there!

Full disclosure: long FXA

The post Australian Dollar Breaks Out As Economic Winds Blow Toward Rate Hikes appeared first on Inflation Watch.

Thus, Goolsbee has “put concerns about the job market aside”. His focus is on inflation.

As President of the Chicago District, Goolsbee is reacting to the observations and concerns of his Midwest constituents across Iowa, Illinois, Indiana, Michigan, and Wisconsin. He cited concerns about costs and affordability. However, the January Beige Book entry for Chicago did not describe any notable levels of concern as follows:

“Prices rose moderately on balance in late November and December and contacts expected a similar pace of growth over the next 12 months. Producer prices rose moderately. Nonlabor input costs rose moderately, with contacts highlighting higher costs for energy (particularly electricity) and raw materials. Manufacturing contacts continued to attribute some increases in raw materials prices to tariffs, while a few construction contacts reported little effect of tariffs on their operating costs. Consumer prices rose moderately, and one retail industry analyst said that to date about half of tariff-related cost increases had been passed through to consumers.”

These “moderate” observations from January are almost identical to the descriptions from the November Beige Book.

The Fed’s contacts in the Chicago district appear to support Goolsbee’s lack of concern for the labor market. They expect a slight increase in employment in the next 12 months. So far, gains in hospitality employment have compensated for further contraction in manufacturing employment. Employers are focused on replacing retirees and citing overall sufficient worker availability. In the CNBC interview, Goolsbee pointed squarely at the uncertainty driven by government policies as the source of employment weakness. The Fed cannot address this kind of uncertainty with lower interest rates; monetary policy acts in an economically cyclical way

The Fed is unable to address non-cyclical issues. Goolsbee suggests as much when he points out that “low hiring and slow firing is not what the business cycle looks like”. Instead, a business cycle features high layoffs along with low hiring.

Goolsbee’s observations and assessments clearly plant him firmly against rate cuts for the foreseeable future.

Conclusion

Goolsbee sounds about as entrenched in his position as are the most dovish members of the Fed who believe rate cuts are necessary to support the labor market. Thus, the stage remains set for growing acrimony as monetary policy moves cautiously ahead of the arrival of a new Fed Chair who presumably will be under orders to get rates much lower as a condition for the nomination. The jobs picture as outlined by Goolsbee will make such a dovish push quite difficult to explain.

So while it seems unlikely the Fed will deliver the surprise rate cut this January, I think the overall trajectory of a dovish bias for the Fed keeps expectations solid for an economy running on the hot side with policy combined with a surplus of fiscal stimulus. Thus, I continue to like the commodities portion of my shopping list for 2026.

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