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.

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.

For three months, the bond market has flagged stabilizing inflation starting with the Fed’s first rate cut of 50 basis points (bps). The stock market continued to rally along its uptrend lines. In parallel, the Federal Reserve signaled its second thoughts about its benigas n projections for inflation in the September Summary of Economic Projections. The stock market failed to listen and even Fed fund futures insisted on forcing the Fed into a December rate cut. The Fed delivered that rate cut with a major caveat in the December Summary of Economic Projections: hotter forecasts for inflation and economic growth and an incrementally hawkish expectation for future monetary policy rates. Accordingly, the Fed finally got the stock market’s attention as the market essentially plunged from euphoria to oversold in one day.

Long-term yields continued to increase the day of the Fed decision and the following day. The iShares 20+ Year Treasury Bond ETF (TLT) sliced right through presumed support and closed right at the low for the year set in April.

I took profits on my latest round of TLT put options last week. I will not chase TLT down here. Instead, I will wait to fade the next relief rally.

Instructive Projections

The Fed’s changes were significant but consistent with the Fed’s smoke signals and the declines in the long-term bond market.

• 2025 PCE inflation of 2.3-2.6% vs. the 2.1-2.2% September projection
• 2025 federal funds rate of 3.6-4.1% vs. the 3.1-3.6% September projection
• 2025 GDP 1.8-2.2% vs. the September projection of 1.8-2.2%

Fed Chair Jerome Powell’s commentary during the press conference was instructive. Powell left no question that the Fed sees higher inflation ahead: “these median projections are somewhat higher than in September consistent with the firmer inflation projection.” He acknowledged that under-estimating inflation this year was a partial driver of higher 2025 expectations: this year’s projections have “fallen apart as we’ve approached the end of the year”. Yet, Powell also laid the foundation and rationale for keeping a bias toward easing. He pointed reiterated that the labor market is no longer contributing to inflationary pressures and its accompanying cooling has gone far enough. Moreover, activity in the housing sector has been “weak”. Accordingly, Powell claimed that “cuts will certainly help to support economic activity and the labor market while we can still make progress on inflation because policy is still meaningfully restrictive.”

I remain skeptical. Is current policy really “meaningfully restrictive”? In his opening statement, Powell declared “with today’s action we have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate.” This claim only weakly translates into “meaningfully restrictive.” Moreover, financial conditions are now almost as loose as they have ever been since the pandemic per the Chicago Fed’s Adjusted National Financial Conditions Index (ANFCI).

Sure, as one reporter in the Q&A pointed out, “we haven’t seen much change in mortgages, auto loan rates, or credit card rates.” Still, the conventional measures of financial conditions are about as good as can be in the post-pandemic era. Thus, the Fed is walking a fine line between the fear of restoking firmer than expected inflation and a labor market that is noticeably cooling. In the middle, the stock market is pricing in a perfect resolution to this dilemma even with the current plunge.

Powell’s Inflation Narrative Still Rests With the Pandemic

At several points during the Q&A portion of the conference call, Powell offered his version of inflation’s recent history, its origins and drivers. I was surprised to hear him claim that the economy is still dealing with pandemic-related disruptions that are propping up inflation. Perhaps this was a thinly veiled attempt to excuse this year’s under-appreciation of inflation’s stickiness. Powell also blamed technical factors for inflation’s stickiness: the way housing rents are calculated, lags in the data, and “temporary factors like fluctuations in used car prices.” As usual, I turned a skeptical ear toward this narrative because Powell, as he consistently does, absolved the Fed of any responsibility in aiding and abetting inflation’s stickiness by keeping rates too low for too long. I reviewed the case for why the Fed should have raised earlier in “Why Monetary Policy Was Late In Responding to the Pandemic-Era Inflation Surge“). At least this year’s experience and the learning response suggests the Fed will be more circumspect. Victory over inflation is not quite at hand yet.

The Fiscal Wildcard

Circumspection and caution should be keywords going into 2025 and beyond given the uncertainties in fiscal policy. A deepening tariff war and significant tax cuts threaten the Federal Reserve’s fragile dance with inflation-fighting. The mix of opinions within the Fed are telling. In describing how individual Fed members incorporated fiscal policy risks into their forecasts, Powell responded that some members chose to try to estimate fiscal impacts, some chose to leave out fiscal impacts, and others chose not to indicate whether they included fiscal policy. That is quite a mix! Powell made it sound like people stubbornly constructed their forecasts. Anyway, this inconsistency means that the reality of fiscal actions could drive inflation estimates even higher and cause even greater caution at the Fed.

King Dollar

The U.S. dollar (DXY) was the big post-Fed winner. Fresh strength in the U.S. dollar drove the Invesco CurrencyShares Euro Currency Trust (FXE) to a new 2-year low. This breakdown sets up FXE to eventually retest the lows from 2022. Accordingly, I am finally fully on the strong dollar bandwagon. I also expect the stock market to struggle to hit new all-time highs while the U.S. dollar makes new highs.

Is the Invesco CurrencyShares Euro Currency Trust (FXE) ready to resume a downtrend that started in earnest during the financial crisis?

YouTube video of the December 18th FOMC Press Conference

Be careful out there!

Full disclosure: long SPY put spread

The post The Federal Reserve’s “Hawkishness” Finally Gets the Stock Market’s Attention appeared first on Inflation Watch.

Kashkari’s Confessional

Kashkari sums up the Fed’s collective miss as coming from an over-reliance on traditional Phillips-curve models. These models failed the Fed for this economic cycle:

“In these workhorse models, it is very difficult to generate high inflation: Either we need to assume a very tight labor market combined with nonlinear effects, or we must assume an unanchoring of inflation expectations. That’s it. From what I can tell, our models seem ill-equipped to handle a fundamentally different source of inflation, specifically, in this case, surge pricing inflation.”

No wonder it is easy to maintain a deflationary mindset. The Philips-curve models are biased against inflationary pressures.

Refreshingly, Kashkari is not willing to accept economic shocks as an excuse for missing the seriousness of inflation in this economic cycle. Instead, he cautions that such dismissals impede learning. Moreover, he claims that even a crystal ball on inflation shocks would not have pushed the Philips-curve models to raise an inflation alarm. Since Kashkari makes this claim without evidence, I hope that someone in the Fed is working on a related white paper to advance learning on this topic.

Kashkari went on to observe that the Fed’s policy framework focuses on the labor market and inflation expectations: “If we can deepen our analytical capabilities surrounding other sources and channels of inflation, then we might be able to incorporate whatever lessons we learn into our policy framework going forward.” Yet, in April 2022, I summarized two Fed studies that identified housing as a key source of the inflation problem. At the time, I assume these studies helped guide the Fed’s determination to finally start hiking rates. I do not know how to reconcile these studies with Kashkari’s claim, but I hope he finds his way to this work at some point.

Kashkari concludes by standing firmly behind today’s monetary policy. Without a sense of irony, Kashkari defended the current monetary tightening by using wage pressures as his example.

“One may ask why tightening monetary policy is the right response to what I described as surge pricing inflation. Unfortunately, the initial surge in inflation is leading to broader inflationary pressures that the Federal Reserve must control. For example, nominal wage growth has grown to 5 percent or more, which is inconsistent with our 2 percent inflation target given recent trend productivity growth. Monetary policy is the appropriate tool to bring the labor market back into balance.”

Kashkari is also not interested in cutting rates anytime soon: “consider cutting rates only once we are convinced inflation is well on its way back down to 2 percent.” Seemingly like everyone else on the Fed, he fears the echoes from the 1970s warning that it is all too easy to declare a premature victory over inflation.

Easing Financial Conditions

If bond yields are any indication, the bond market stopped worrying about increasing inflation pressures back in October and November. For example, the iShares 20+ Year Treasury Bond ETF (TLT) not only bottomed but also it rallied 15.5% in just three months (TLT moves inversely to bond yields). Accordingly, I am eager to see whether the next announcement on monetary policy calls out the bond market for prematurely facilitating an easing in financial conditions.

The iShares 20+ Year Treasury Bond ETF (TLT) achieved a higher low at the end of December. It is close to a breakout above tis 200-day moving average (DMA) (the blue line above) which would usher in a new phase of easing of financial conditions. Is the Fed ready for that to happen? (Source: TradingView.com)

The Chicago Federal Reserve’s Adjusted Financial Conditions Index has been consistently easing since a cycle high in October.

Be careful out there!

Full disclosure: no positions

The post Kashkari Acknowledges the Fed’s Inflation Miss. Will the Fed Catch Easing Financial Conditions? appeared first on Inflation Watch.