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!

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Apartment vacancies in the U.S. dropped in the second quarter from the previous three months, the first quarterly improvement in two years, as private-sector job growth boosted demand for rental housing, Reis Inc. said.

The vacancy rate for apartment properties was 7.8 percent, down from a 30-year high of 8 percent in the first quarter and up from 7.7 percent a year earlier, according to a report today by the real estate research firm. First-quarter vacancies were the highest since 1980, when Reis began tracking the data.

“The apartment sector is on the path towards recovery,” Victor Calanog, director of research at New York-based Reis, said in today’s report…

Landlords’ asking rents rose 0.4 percent from the first quarter and were down 0.7 percent from a year earlier. Effective rents, or what tenants actually paid, climbed 0.7 percent from the prior quarter and were unchanged from a year earlier.

This won’t come as a surprise to those of you who have been watching residential REIT stocks during the past year or so.

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The Manhattan apartment rental market strengthened in the second quarter as landlords drew confidence from a more robust sale market, but it is still softer than it had been in the past decade.

The average rent per square foot in the second quarter was $49.60, according to a report from brokerage Prudential Douglas Elliman. That is 12.3 percent higher than last year but 7.6 percent lower than the 10-year inflation-adjusted average of $53.67, Elliman said.

Likewise, the number of listings on the market fell 31.8 percent to 4,972. But the average for the 10 years through 2008, when investment bank Lehman Brothers collapsed and sent Manhattan’s real estate market into a tailspin, was nearly 16 percent lower at 4,193.

“What you have is a noticeable improvement from the landlord’s perspective in the second quarter,” said Jonathan Miller of appraisal firm Miller Samuel, who writes the Elliman report. “The perception is that things are not as dire as they were a year ago. That’s causing them to be more firm in their asking rents.”

Also, the article quotes an analyst saying that “Owner-paid concessions are becoming a thing of the past.”

Related: “In Manhattan, most apartments aren’t sitting empty for long: A flurry of lease signings pushed the quarterly vacancy rate below 1% for the first time in nearly three years, leaving few choices for apartment seekers during the prime leasing season.”

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Apartment rents rose during the first quarter, ending five straight quarters of declines and signaling the worst may be over for the hard-hit sector.

Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980.

Reis tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York—all cities that have notched big rental declines in the past year.

Rents increased 1.6% in the first quarter in Miami and 0.9% in New York. The gains came during what is usually a seasonally weak period for apartments and suggested that landlords may have some momentum heading into the peak spring and summer leasing season.

Keep in mind that housing costs currently account for 42 percent of the Consumer Price Index.

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A dramatic decline in U.S. apartment construction could lead to a shortage of rental housing in the years ahead.

This year, developers are expected to start about 87,000 units – less than a third of what they build on average each year. And the outlook for 2011 isn’t much better.

“We will be facing a severe shortage of apartments in the next few years, which will increase the cost of housing for consumers,” Sharon Dworkin Bell, senior staff vice president of the National Association of Home Builders, said at this week’s convention in Las Vegas. “We believe we should have 300,000 starts every year to have a stable market.”

That’s not likely in the foreseeable future.

“We have a combination of limited supply coming on and increased demand when the economy recovers,” Bell said.

Michael Costa, a partner in McFarlane Costa Housing Partners of California, said, “We know that the demand for housing – especially rental housing – is going to be there. Each month we are not able to get our starts going, we fall further and further behind.”

At some point, a lack of rental units will take a bite out of consumers’ pocketbooks. “We are predicting now we may see upwards of double-digit rent increases,” Costa said.

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The average rent for a unit in a large Orange County apartment complex fell to $1,473 a month in the fourth quarter of 2009, the fifth straight quarter to see monthly rents drop.

Apartment tracker RealFacts reports today that numerous empty apartments forced local landlords to cut rent $105 a month on average — 6.7% — vs. the fourth quarter of 2008. And it’s the lowest average rent in 3 1/2 years.

We at Inflation Watch are well aware of rising prices for health insurance, college tuition, food, and many other items. But as long as apartment rents continue to fall, inflation (as measured by the Consumer Price Index) will probably remain quite tame.

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Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates. The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.

Though some observers portayed the situation as dire (“Apartment Rents ‘Plunge’ in the West,” read the headline at Calculated Risk), it is worth noting that occupancy rates reported by RealFacts increased in many locations, including  San Diego, Sonoma County, Marin County, and the huge Inland Empire. This suggests that even in California, with 12.2 percent unemployment, rents may be close to the bottom.

In at least one location — the Tri-Cities area of Washington State — rents have actually begun to rise:

Unlike much of the rest of the nation, the apartment occupancy rate in the Tri-Cities continues to rise — and so does the cost of rent.  “We are in an upward trend,” said Jolene DeGarmo with Kennewick’s Crown Property Management, which conducts an apartment rental survey twice a year…. The latest survey shows occupancy rates are at 98 percent in Kennewick and Richland and 97 percent in Pasco, DeGarmo said.  And that incredibly tight availability of units means they’re renting for premium prices. Sarah Smith, 21, just ended her apartment search after several months of looking. Last year, her one-bedroom apartment cost $400. A friend who recently moved into the same building is paying $465 for a one-bedroom, she said.

For what it’s worth, investors in Real Estate Investment Trusts don’t seem unduly alarmed. Even after a recent pullback, shares in REITs are up nearly 50 percent since mid-July:

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