In his speech at the annual Jackson Hole confab, Powell acknowledged that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance” (emphasis mine). In normal times, with this ever so slight tweak in Powell’s inclinations and probabilities coming at the end of a long explanation of the balance of risks to inflation, employment, and the economy, this concession could be interpreted as another tease in the on-going suspense and fight over rate cuts. Instead, a stock market ever more eager for rate cuts built a temple from a single stair step and responded with one of the biggest expansions in market breadth that I have ever seen.

Maintaining high odds of a September rate cut will effectively force the Fed to cut. However, if Powell stays on message – “monetary policy is not on a preset course” – then the September rate cut could easily lead to a major disappointment. The Fed’s voting majority may not be ready to promise a sustained rate cutting cycle because inflation remains a nagging problem for the Fed.

Even before the tariff drama, trauma, and noise, inflation was proving itself sticky and stubborn. Now, core CPI (Consumer Price Index) and core PCE (Personal Consumption Expenditures), the Fed’s preferred inflation measure, look like they have bottomed. Core CPI has even started heading upward largely thanks to a lift in services inflation. As a result, not only is the Fed looking to cut rates well short of its 2% (core PCE) target but also just as inflation’s downtrend is taking an extended pause.

Source: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED; U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis, August 25, 2025.

A suddenly very hot Producer Price Index (PPI) from July promises that subsequent CPI reads will not deliver inflation relief.

Moreover, tariff-driven inflation is already showing up both in the anecdotes from business leaders, earnings reports, and the Fed’s own research. Moreover, even though the Fed Funds rate is still in restrictive territory, financial conditions are not tight. In fact, financial conditions were last this loose right before the Fed belatedly started hiking rates in early 2022.

All together, these stories provide cautionary tales for rate cuts. The confidence I observe in the “rate-cutters” shows insufficient deference to the stagflationary possibilities in the economy. Powell characterized the potential as “a challenging situation” after he finished explaining how “in the near term, risks to inflation are tilted to the upside, and risks to employment to the downside”. This position between a rock and a hard place motivates me to tighten my grip on my position in Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP).

A Swirl Of Claims and Counterclaims

At this point, every one has an opinion on what the Fed needs to do. I have taken note of some key interviews and speeches to portray the painful complexity of the task ahead for the Federal Reserve. Anyone who claims with confidence that the Fed should do “X” is glossing over some part of this picture.

Cleveland President Beth Hammack Leans Against A Rate Cut

Interviews like the one with Cleveland President Beth Hammack formed part of the reason the stock market got caught leaning away from Powell’s first step on the stairs of hopeful monetary policy. A day before Powell’s speech, Hammack insisted that “with the data in hand right now, if the meeting was tomorrow, I would not see a case for reducing interest rates”. She warned that her “biggest concern is that inflation has been too high for the past 4 years. And right now it has been trending in the wrong direction [see chart above]. It’s important we stay modestly restrictive to make sure inflation is brought back under control” (Hammack’s predecessor expressed similar concerns earlier in the month).

Hammack also worried that the inflationary impact of tariffs are just getting started and will continue into Q1 and Q2 of next year given the timing of contract renewals. These worries did not sound like the setup for an incrementally conciliatory Powell.

Hammack also stated that “financial conditions are broadly supportive of the economy” (consistent with the ANFCI). Moreover, she is “not hearing interest rates are a huge problem”. The builders and businesses building new plants in Hammack’s district are complaining just as much about the cost of materials and labor as they are about high interest rates. In a case for future inflationary pressures, manufacturers in the Cleveland district have been buffering price increases but cannot not sustain the hits “forever”.

I surmise Hammack will vote against a rate hike in September. Will she suddenly find herself on the dissenting side of the ledger?

Former St. Louis Fed President Jim Bullard Bolsters Candidacy As Next Fed Chair

Candidates for position of the next Fed Chair share a common trait. They think tariffs will not cause lasting inflation and support cutting rates right away. Former St. Louis Fed President Jim Bullard is a recent add to the candidate list. In a CNBC interview on August 12, Bullard insisted tariffs do not cause inflation. Tariffs are a tax and taxes do not cause inflation (a common equivalence). He pointed to data showing very muted effects and claimed that tariffs are not interrupting the longer-term trend to 2% inflation. Like other supporters of rate cuts, Bullard is looking well beyond the current swirl of data and glancing at the top of the stairs of hopeful monetary policy.

Council of Economic Advisers Chair Stephen Miran Asks “What Inflation”?

Council of Economic Advisers Chair Stephen Miran is also on the list of potential candidates to next head the Fed. Miran appeared on CNBC the same day as Bullard to discuss the economy. By narrowing his view to inflation since inauguration, Miran calculated a 1.9% annualized rate of inflation (I assume this was a reference to headline inflation). He further insisted that there “continues to be no evidence whatsoever of tariff-induced inflation”, and he implied that there will be no evidence for future impacts either. Ultimately, exporters will bear the cost of tariffs because they are the least flexible part of the supply chain; Americans will just buy elsewhere or make formerly imported goods domestically (do exporting countries doing deals understand their ultimate doom?).

When asked about the bottoming in core inflation, Miran dismissed the dynamic because tariffs are not the culprit. Miran pointed to used cars and airfares as core drivers. He went on to finger illegal immigration for boosting rents by 4-5%. Thus, net services inflation will go to zero because of the current crackdown on illegal residency.

Miran stands confidently at the top of the stairs of hopeful monetary policy. I am guessing he is a front-runner in the race for Fed Chair.

Gold Paralyzed With Indecision?

The price of gold has largely stopped responding to the back and forth in inflation-related data and opinions on monetary policy. While the SPDR Gold Trust (GLD) increased 1.1% in the wake of Powell’s first step on the stairs of hopeful monetary policy, GLD remains firmly stuck in a 4-month trading range. A technical “bearish engulfing” pattern in April continues to loom over the trading action as a top. Still, I am betting on GLD responding bullishly to the next rate cut just as it did to the last one. GLD is up 30% after initially selling off in response to what was thought to be a hawkish rate cut at the time.

I have been holding a GLD calendar call spread for the last half or so of this trading range while rolling forward the expiring short ends of the spread. I plan to convert this position to an outright call spread ahead of the September Fed meeting.

Be careful out there!

The post Powell Places His First Step On the Stairs Of Hopeful Monetary Policy appeared first on Inflation Watch.

Waller’s Case: Tariff-Driven Inflation Is Transitory

Just two days after Federal Reserve Chair Jerome Powell insisted that meaningful inflation is coming, Fed Governor Christopher J. Waller shared a nearly polar opposite narrative. Of course, given Waller may be on the short list of the President’s next pick to head the Federal Reserve, he has a built-in motivation to speak with authority in support of the administration’s claims that tariffs are not a threat to inflation. During a CNBC interview, Waller made the case for transitory and immaterial inflationary impacts from tariffs that would allow the Fed to start cutting rates as early as the July meeting. Waller explained that the Fed had paused for six months fearing inflationary impacts from tariffs that have yet to materialize. He chose to look through the ongoing uncertainty on tariff levels, timing, and frequency of change, as well as the recent Beige Book, which was full of accounts of businesses preparing for or already responding to tariff risks. Moreover, Waller claimed that only about 10% of the price index comes from imports (which made me wonder why there is any fuss over tariffs!). Instead, Waller expressed greater concern about the potential economic weakness caused by tariffs and stated he does not want to wait to cut until “we see a crash.”

Waller also referred to a speech he gave in South Korea in early June that laid out the detailed economic case for looking through tariffs as a one-time price shock. In “The Effects of Tariffs on the Three I’s: Inflation, Inflation Persistence, and Inflation Expectations,” Waller concluded that “the economics behind a tariff increase implies it should have a transitory effect on prices—tariffs raise prices once, but those prices don’t keep going up.” This conclusion holds if tariffs are hiked all at once in a one-and-done fashion. Otherwise, this reassurance reinforces the same argument Treasury Secretary Bessent made at the beginning of the tariff drama, trauma, and noise. Assuming that long-term inflation expectations remain anchored (as they are in market-based measures and professional forecasters, not in consumer-level surveys), Waller concluded “the tariff-induced inflation will be transitory and [the Fed] should look through it when setting policy.”

Powell’s Caution: Don’t Rush the Cuts

When Powell appeared on June 24th in front of the House committee to deliver the semiannual monetary policy report before the House Financial Services Committee, he was, of course, peppered with questions about tariffs and inflation. At one juncture, Powell took the opportunity to agree with Waller with an important condition (emphasis mine): “I do agree that basically if things are a one-time increase, then you don’t respond to them. That’s the whole idea if there’s a shock to prices… generally speaking you don’t respond if you are highly confident that it will just be a one-time shock.” Powell went on to caution that this particular situation is “a complicated one,” and said the Fed must make this decision about the timing of rate cuts “with some care.” He added that the Fed has not yet reached a point of price stability, and these large tariffs “raise kind of more concern” given the economy is just a few years out from a highly inflationary environment.

Powell’s caution appears warranted. Attempts to pattern-match to past history are challenging because of the scale and magnitude of the potential tariffs. The volatile implementation of economic policy means the Fed cannot be sure that tariff hikes will be a one-time episode. So, while a coming price shock may move inflation away from target, there remains some uncertainty about whether the Fed will be able to watch inflation settle back to target.

Bowman and Daly Lend Conditional Support

Vice Chair for Supervision Michelle W. Bowman added commentary on monetary policy in a speech the day before Powell’s testimony: “Assessing the Effectiveness of Monetary Policy During and After the COVID-19 Pandemic,” at a research conference sponsored by the International Journal of Central Banking and the Czech National Bank in Prague, Czech Republic. Bowman positioned herself as supportive of imminent rate cuts, although she did not specifically target July. Instead, she outlined broad conditions supportive of rate cuts: “If inflation remains near its current level or continues to move closer to our target, or if the data show signs of weakening in labor market conditions, it would be appropriate to consider lowering the policy rate, moving it closer to a neutral setting.” Bowman shared Waller’s concerns for the economy and stated that inflation appears on a sustained downward path to the 2% target:

“As we think about the path forward, it is time to consider adjusting the policy rate… we should recognize that inflation appears to be on a sustained path toward 2 percent and that there will likely be only minimal impacts on overall core PCE inflation from changes to trade policy. We should also recognize that downside risks to our employment mandate could soon become more salient, given recent softness in spending and signs of fragility in the labor market.”

Bowman expressed reassurance in the lack of inflationary impact from tariffs to date: “It appears that any upward pressure from higher tariffs on goods prices is being offset by other factors and that the underlying trend in core PCE inflation is moving much closer to our 2 percent target than is currently apparent in the data.” While acknowledging some upside risks for inflation, Bowman emphasized that she is “not yet seeing a major concern, as some retailers seem unwilling to raise prices for essentials due to high price sensitivity among low-income consumers and as supply chains appear to be largely unaffected so far.”

On Bloomberg Surveillance, June 26, Federal Reserve Bank of San Francisco President Mary Daly capped the dovish commentary by leaning toward the third of three timing scenarios for inflation:

1. Delayed, tariffs will have some impact and will be more persistent.
2. Delayed but will be one-off.
3. Does not deliver the punch history suggests will come as businesses absorb costs.

Daly stated that her “modal expectation” had been for some time that the Fed would be ready to cut rates in the fall. Thus her current dovishness is consistent with prior stances. Daly acknowledged tariffs “will potentially raise inflation.” However, since the impact should dissipate over time, it should not build into inflation expectations.

Rate Cuts, Politics, and the Fed’s Legacy

As the Fed’s debate about the impact of tariffs on inflation plays out, I am reminded that there is a larger context that influences how the Fed positions itself. The Federal Reserve was slow to respond to inflation in the throes of the pandemic, assuming that the price shock would be “transitory.” Even though he brought back the term “transitory,” even Waller revealed, “I am willing to admit that, at the time, I underappreciated how the large and sustained fiscal response would combine with highly accommodative monetary policy to overstimulate aggregate demand in an economy that quickly recovered from the early effects of the pandemic.” Waller is full steam ahead on team transitory again, while Powell continues to act like someone who still feels the scars. Powell’s caution makes even more sense in this context.

While Powell insists he is ignoring the political noise about his competence, his unwillingness to follow Presidential orders, and public ruminations about his firing or the looming presence of a shadow Fed Chair, Powell’s adamant stance sure has the appearance of someone trying to prove a point of toughness and independence. Thus, I fully expect Powell to be the “last one” to reluctantly move forward with rate cuts. I even expect his messaging at the time of the first rate cut to place responsibility squarely on the broader Fed… and to include some residual hawkishness of his own.

Overall, I lean toward Powell’s caution for all the reasons he gave to Congress. The environment remains highly uncertain, and the Fed has not yet reached its price target, even as a large price shock looms. Cutting rates in the midst of this swirling dynamic would signal a high degree of confidence in the post-shock equilibrium. Moreover, the Fed may have fundamentally different reads on the economy. For example, Daly insisted that “there are no warning signs that the economy is weakening, although progressing more slowly than before.” So if the Fed is both hampered by lower-quality data (due to federal budget cuts) and divided on the economy’s health, proceeding with rate cuts sooner rather than later seems doubly risky.

Conclusion

I will be highly surprised by a July price cut. Indeed, the CME FedWatch tool shows just a 21% chance of a cut, while September’s meeting has a 96% chance. These high odds essentially lock the Fed into cutting rates at the September meeting in order to avoid shocking the market. The messaging around that rate cut will be critical. Moreover, will the bond market get spooked and send long-term rates higher, just as it did both times the Fed cut rates last year?

The volatility index (VIX) sure looks incredibly low given the potential fireworks ahead. After breaking support from the dawn of the tariff drama, trauma, and noise, the VIX started this week right on top of that line.

Be careful out there!

Full disclosure: no positions

The post Powell vs. Waller: Divided Fed Faces Tariff-Driven Inflation Uncertainty appeared first on Inflation Watch.

As before, Powell laid the blame for stagflationary impacts on tariffs: “increases in tariffs this year are likely to push up prices and weigh on economic activity.” In a likely reference to a Beige book full of tariff-driven warnings on inflation, Powell also observed the following:

“…we’re beginning to see some [tariff-driven inflationary] effects, and we do expect to see more of them over coming months. We do also see price increases in some of the relevant categories…that are attributable to tariff increases. In addition we look at surveys of businesses…many companies do expect to to put all or or some or all of the effective tariffs through to the next next person in the chain and ultimately to the consumer.”

These expectations for meaningful inflation keep the Fed sitting on its hands. The median expectation for the Federal Funds rate stayed the same for 2025 at 3.9% (the current range is 4.25 to 4.5%) but nudged higher for 2026 from 3.1% to 3.4%. Even 2027 nudged higher from 3.1% to 3.4%.

A Swipe at DOGE?

Powell’s implicit critique of Federal policies did not stop with economic policy this time around. In response to a question about the Federal Reserve’s plans to cut its workforce, Powell was curiously deliberate in explaining the “professional” way to rationalize a Federal workforce:

“This is something you do very carefully, thoughtfully, and you do it respecting that we have critical missions to carry out. I’ve had a lot of experience in my prior careers with headcount reductions and things like that, and this is how you do it professionally. You do it carefully, thoughtfully with a lot of planning, and you do it over a period of time.”

I took note of Powell’s commentary because the Department of Government Efficiency (DOGE) has made a name for itself with swift, sudden, and often deep cuts throughout the Federal government. Powell clearly plans to leave his Chairmanship swinging.

Muted Responses Include A Short-Term Bottom for the U.S. Dollar

While Powell was swinging, financial markets general yawned. The S&P 500 (SPY) did its typical post-Fed fade after erasing all of the morning’s gains. The net impact was a forgettable 0.03% loss on the day. The SPDR Gold Trust (GLD) fell 0.5% on the day as the U.S. dollar index (DXY) resumed its countertrend momentum since bottoming out at a fresh 3-year low and just below the April low. A major test is coming soon with resistance from the downtrending 50-day moving average (DMA) (the red line). I remain bearish on the U.S. dollar as long as that resistance holds.

Source: Tradingview.com

Be careful out there!

Full disclosure: long and short U.S. dollar currency pairs

The post Jerome Powell: Meaningful Inflation Is Coming appeared first on Inflation Watch.

Pandemic-era inflation pressures were not transitory after all. The inflation watchers I follow never believed the narrative given the Fed’s insistence on maintaining historically accommodative policy well past its expiration date. Indeed, the transitory in the economy turned out to be the deflationary psychology of Federal Reserve Chair Jerome Powell.

The journey has been quite a ride for Fed-speak. In July 2020, Powell reassured an economy in lockdown shock that the Fed is “not thinking about thinking about raising rates.” When murmurs and then gripes about creeping inflation emerged in early 2021, Powell insisted inflation pressures would be transitory. In late April of that year, Powell explained the theory at that time behind transitory inflation. Transitory stretched out longer and longer and longer, until finally in December, 2021 testimony Powell essentially asked everyone to leave him alone about the unfortunate and untimely phrase. Now, with inflationary pressures worsening, Powell has found inflationista fervor. Powell even declared that the Fed is ready to take rates higher than the neutral rate. The mad scramble has begun; the Fed wants to get a raging fire under control.

A Pivotal Speech

Today, March 21, 2022, Powell gave what I think is the pivotal speech of his career as Fed chair. With the appropriately ominous title “Restoring Price Stability“, Powell started with this proclamation to the 38th Annual Economic Policy Conference National Association for Business Economics assembled in Washington, D.C. (emphasis mine):

“…the current picture is plain to see: The labor market is very strong, and inflation is much too high. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability. We are committed to restoring price stability while preserving a strong labor market.”

For the folks who might still be in transitory thinking, Powell went on to clarify “…the inflation outlook had deteriorated significantly this year even before Russia’s invasion of Ukraine.”

In racing against the wildfire, Powell and the Fed have an ambitious goal. They want to avoid a recession by tapping the brakes on excessive demand in the economy just enough to gently match limited supply. The strong labor market is both a blessing and a curse in this effort. Powell did not use the term “wage-price spiral” inflation spiral”, but he essentially described such a potential dynamic for today’s economy. Companies are struggling to hire. Employees are shifting into new jobs to gain higher wages.

“There are far more job openings going unfilled today than before the pandemic, despite today’s unemployment rate being higher. Indeed, there are a record 1.7 posted job openings for each person who is looking for work. Record numbers of people are quitting jobs each month, typically to take another job with higher pay. And nominal wages are rising at the fastest pace in decades, with the gains strongest for those at the lower end of the wage distribution and among production and nonsupervisory workers”

Powell summarized: “Overall, the labor market is strong but showing a clear imbalance of supply and demand.” Thus, the Fed feels compelled to “moderate demand growth.” In the process the Fed hopes that the labor market’s very strength will withstand a period of aggressive monetary tightening.

Powell explained that the big surprise came from the stubborn persistence of “supply-side frictions.” The economy cannot handle the rapacious demand in today’s economy without sending prices ever higher. In turn, spiraling inflation threatens to erode wage gains especially for lower-income workers.

No Time to Wait Anymore

Interestingly, Powell provided automobile prices as a good example of the inflation problem. There was a time when commentators insisted soaring car prices would be transitory. Auto prices are now transitory complete. Powell lamented “production remains below pre-pandemic levels, and an expected sharp decline in prices has been repeatedly postponed.” Prices for new cars soared almost all of last year and suddenly look ready to take off again. Used car prices soared even more and could lift again if new car prices rev up again. Regardless, no “base effects” here as worker’s wage gains look sure to come under more pressure.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: New Vehicles in U.S. City Average [CUSR0000SETA01], retrieved from FRED, Federal Reserve Bank of St. Louis, March 21, 2022.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average [CUSR0000SETA02], retrieved from FRED, Federal Reserve Bank of St. Louis, March 21, 2022.

These mounting pressures have forced the Fed’s hand. The Fed senses it has no time to wait anymore. The Fed is no longer content to wait for the conventional expectations of normalization to bear fruit. In an inflation emergency the Fed needs to act now… (emphasis mine).

“It continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain. In the meantime, as we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief.”

Inflation is so strong now that Powell has to look out 3 years to envision inflation returning to the Fed’s target of 2%: “I believe that these policy actions and those to come will help bring inflation down near 2 percent over the next 3 years.”

Recession? What Recession?

No Federal Reserve has ever predicted a recession. The central agent trying to command the economy has a vested interest in projecting utmost confidence in its navigation abilities. Accordingly, Powell looked to history as proof that the Fed can pull off the spectacle of the soft landing for the economy:

“I believe that the historical record provides some grounds for optimism: Soft, or at least soft-ish, landings have been relatively common in U.S. monetary history. In three episodes—in 1965, 1984, and 1994—the Fed raised the federal funds rate significantly in response to perceived overheating without precipitating a recession…In other cases, recessions chronologically followed the conclusion of a tightening cycle, but the recessions were not apparently due to excessive tightening of monetary policy. For example, the tightening from 2015 to 2019 was followed by the pandemic-induced recession.”

The Fed is also encouraged by an economy “well positioned to handle tighter monetary policy.”

Powell formerly insisted the Fed would hold rates lower for longer in order to achieve an exceptionally low unemployment rate. The current path flips to the opposite direction. The Fed is willing to go right past the point of neutral rates to get the fire under control: “if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

Transitory complete. Bring on the inflation hawks.

Be careful out there!

The post Transitory Complete: Fed Chair Jay Powell Gets Comfortable With the Inflation Hawks appeared first on Inflation Watch.

I was so surprised at all the hand-wringing over a “business as usual” policy statement that I rolled the tape on the press conference. I was wondering what I missed, I actually listened to the conference call a second time (yes, it was painful). The experience made me even more convinced the market over-reacted just as much as it did when Yellen carelessly suggested rates might increase earlier than the late 2015 market projection.

Recent inflation numbers apparently increased expectations that the Fed might show a more hawkish tone. This is reflected best in the first question of the press conference from Steve Liesman of CNBC:

“Is every reason to expect, Madam Chair, that the PCE inflation rate, which is followed by the Fed, looks likely to exceed your 2016 consensus forecast next week? Does this suggest that the Federal Reserve is behind the curve on inflation? And what tolerance is there for higher inflation at the Federal Reserve? And if it’s above the 2 percent target, then how is that not kind of blowing through a target the same way you blew through the six and a half percent unemployment target in that they become these soft targets?”

 

This was a leading question, especially considering that Yellen made it very plain in her introduction that the inflation readings remain benign. Moreover, long-term expectations for inflation remain tame (also see the Fed’s latest projections). Most importantly, the year-over-year change in the PCE, the Personal Consumption Expenditure, reached the 2.0% target in early 2012 only to quickly plunge from there. Not only might it be premature to project a 2% reading for next week’s release, but there is nothing to suggest that this time is different. The Federal Reserve has the least control over the non-core prices of food and energy, so the escalation of violence and turmoil in Iraq is definitely not the kind of event that the Fed would try to offset with monetary policy.

The Fed still can’t tease the market into sustaining pre-recession inflation levels…
Source: St. Louis Federal Reserve

Perhap’s Yellen’s poor response ignited the flames of disappointment. Yellen did not address PCE directly and instead talked about the noise in the Consumer Price Index (CPI) while reiterating the Fed’s standard guidance on inflation:

“So, I think recent readings on, for example, the CPI index have been a bit on the high side, but I think it’s–the data that we’re seeing is noisy. I think it’s important to remember that broadly speaking, inflation is evolving in line with the committee’s expectations. The committee it has expected a gradual return in inflation toward its 2 percent objective. And I think the recent evidence we have seen, abstracting from the noise, suggests that we are moving back gradually over time toward our 2 percent objective and I see things roughly in line with where we expected inflation to be.”

Ironically, Yellen could have just pointed to the longer-term trend in the CPI. This view dominates any shorter-term noise….

The overall trend on CPI continues to point downward
Source: St. Louis Federal Reserve

The most bizarre part of the buzz on the Fed’s supposed willingness to ignore inflation is that Yellen re-affirmed, re-emphasized that the Fed is all about meeting its price target. It will not tolerate deviations in EITHER direction for long:

“…we would not willingly see a prolonged period in which inflation persistently runs below our objective or above our objective and that remains true. So that hasn’t changed at all in terms of the committee’s tolerance for permanent deviations from our objective.”

This was Yellen’s response to Liesman asking about the Fed’s tolerance for higher-than-target inflation.

I feel irony in my skepticism about a Fed ignoring a budding inflation threat: this is the core scenario that has kept me long-term in the gold (GLD) and silver (SLV) trades. My thesis/assumption back in 2009/2010 was that the Federal Reserve would be extremely reluctant to tighten policy even as the economy strengthened out of fear that rate hikes would quickly kill the economy. By the time the Fed was ready to hike rates, the “inflation genie” would already be out the bottle. Granted, I am not nearly as rabid about this view, especially since I have come to appreciate the deep entrenchment of the lingering post-recession deflationist psychology in the economy.

 So, overall, I am very skeptical that this episode is the long-awaited lift-off of inflation and a lagging Fed. I actually think the Fed is right to look through the current “warming” in inflation readings, and I think it will find vindication just as the Bank of England did during a similar episode under former Governor Mervyn King. When the Fed asks “what inflation”, I find myself surprisingly agreeing for now…

To me, the data do not support the notion that broad-based inflation is taking hold in the economy. We do not even have wage pressures, not to mention all the slack that remains in the economy as evidenced in part by extremely low levels of housing production. Just do a web search or read mainstream financial magazines to see anecdotally how many people are still worried about the sustainability of the so far very weak housing recovery. I find it hard to believe we will get strong inflation with all this weakness and deflationary fears. On the commodity side, copper and iron ore have experienced major price declines in recent months that also fly in the face of any kind of sustained inflationary pressure in the economy.

Full disclosure: long GLD, SLV.

The post The Fed Asks “What Inflation?” appeared first on Inflation Watch.

For more details see AP story: “Postal prices going up for express, priority mail.”

The post U.S. Postal Service increases prices an average of 5% for shipping services appeared first on Inflation Watch.

A truly fascinating tale of a completely avoidable bubble in the price of rice.

The post The Rice Panic of 2007 appeared first on Inflation Watch.

Under Alan Greenspan, the Federal Reserve was known to stand on the sidelines while bubbles in asset prices grew and grew. Greenspan had a lot more faith in the Federal Reserve’s ability to mop up the subsequent mess caused by a bubble’s collapse than in its ability to stop a bubble, much less identify one.

It seems times have changed. On October 13, Businessweek chronicled the Fed’s efforts to make sure that soaring prices in agricultural land do not lead to another messy bubble and economic calamity. Prices have indeed soared across the midwestern United States:

“The Kansas City Fed reported land values were 20 percent higher than a year ago. The Chicago Fed reported a 17 percent increase in its district, the fastest increase since the 1970s. Nonirrigated farmland in the Minneapolis Fed district increased 22 percent in price.”

The factors driving these increases are the same as I reported from a related Planet Money piece: “Land prices have doubled in Iowa over the past few years“: “elevated crop prices, soaring farm income, and record-low interest rates.”

As a result, nervous regulators are demanding rigorous stress tests of banks up to their gills in agricultural loans. Businessweek also reports that regulators are “…scrutinizing the lending standards, loan documentation, and risk management at the country’s 2,144 agriculture banks.”

I will be very interested in the outcome of all this scrutiny. The same Federal Reserve that helped create record low interest rates is working to ameliorate the impact of those very same interest rates. This episode is a reminder that flooding an economy with liquidity does not produce equal outcomes for all sectors. Recovery and prosperity does not even need to appear in the sectors most impacted by the malaise the Federal Reserve scrambles to repair. Instead, the money tends to collect where it will generate the highest returns due to other economic factors. Currently, it seems that the bet is on farming. I believe the Federal Reserve was aiming for housing…

The post The Federal Reserve finally tries to fight a bubble…in the price of farmland appeared first on Inflation Watch.

While the city celebrates the extra money it makes, the citizens can only lament the extra inconvenience and hassle of remembering to pay meters on these holidays, not to mention the additional costs in parking. The disparity in fines versus collected fees likely demonstrates (or confirms for me) that parking rules are mainly about generating lucrative fines.

For more details see “Holiday parking enforcement: cash cow for the city“

The post San Francisco earns windfall from driving up the cost of parking on holidays appeared first on Inflation Watch.

For more details see: “Argentina targets news reporting of inflation data.”

Part of the government’s motivation may also be to protect profligate spending that is boosting the economy at least in nominal terms. For more on the aggressive spending programs launched by Fernandez see “Argentine economic plan: Raise spending, salaries.”

The post Argentine government hunts down inflation reporters. Protecting spending programs? appeared first on Inflation Watch.