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.

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.

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.

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.

The post The Fed’s Labor Market Divide Is Hardening Against Rate Cuts appeared first on Inflation Watch.

With so much dissension and disagreement in the Federal Open Market Committee (FOMC), the minutes of recent meetings have become more revealing. The minutes from the December Fed meeting shed more light on the character of those disagreements than Powell was willing or able to share at the press conference. During that press conference, Powell emphasized consensus amid uncertainty and portrayed disagreement within the Fed as a natural consequence of a multidimensional policy environment. Read alongside those remarks, the minutes reveal a more fractious narrative, one marked by deep and structural differences that are likely to shape monetary policy well into 2026. Powell framed disagreement as technical. The minutes suggest it is structural.

A Committee Without An Anchor

As a reminder, the FOMC members displayed striking dispersion with their votes. While the nine votes in favor of a 1/4 percentage rate cut were sufficient to carry the decision, the minutes indicated that a few of the yes votes came from FOMC members who “indicated that the decision was finely balanced or that they could have supported keeping the target range unchanged”. Two votes opposed the rate cut outright and wanted to leave rates unchanged. The third opposing vote wanted a 1/2 percentage point cut. Specifically, in favor were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Stephen I. Miran wanted the deeper cut. Austan D. Goolsbee and Jeffrey R. Schmid wanted no change.

Powell’s Consensus Narrative vs. the Reality in the Minutes

Powell framed the lack of unanimity as a question of risk-weighting rather than disagreement over fundamentals. “Everyone around the table agrees that inflation is too high and that we want it to come down,” he said, adding that officials also agree the labor market has softened. Where views diverge, Powell claimed, is “how do you weight those risks and what does your forecast look like,” describing the decision as a “close call” driven by the “complicated, unusual, difficult situation” tugging on the Fed’s dual mandates. Powell’s claim about inflation attitudes is particularly important given the Fed will likely spend a lot of time talking up its inflation-fighting credibility even as it cuts rates this year due to political and economic pressures.

The minutes suggest that the tension is forcing the Fed to confront a confluence of opposing economic views that resists clean consensus and raises the odds of persistent dissension. Importantly, a tension between inflation rhetoric and employment risk runs through the minutes.

Inflation: Confidence in Theory, Unease in Practice

Powell expressed confidence that inflation will continue to move lower over time. In aggregate, the minutes reflect that view. However, “a majority of participants remarked that overall inflation had been above target for some time and had not moved closer to the 2 percent objective over the past year”. The Fed’s staff reinforced these concerns by concluding that the upside risk to inflation has become more precarious given that inflation has remained above the Fed’s 2% target for four straight years. Still, some participants claimed that those upside risks have declined.

In a likely reference to the Fed’s Beige Book (which in 2025 was full of vivid descriptions of inflation pressures), the minutes reported that “some participants stated that their business contacts had reported persistent input cost pressures unrelated to tariffs”. Several of these participants in turn reported that “weaker demand limited the ability of some firms to raise prices or that business productivity gains might enable some firms to manage these cost pressures”. 

The minutes reported that “some participants highlighted the risk that elevated inflation might prove more persistent than expected”. These fears likely stem from the lingering and uncomfortable uncertainty about the ultimate impact of a fluid tariff regime. The minutes reported that a majority of participants expected disinflation in housing services to continue while a few participants also saw ongoing disinflation in core nonhousing services. As usual, this suggests the Fed finds plenty of comfort in the relatively tame long-term expectations for inflation based on survey and market data. As usual, these assessments suggest the Fed finds plenty of comfort in relatively tame long-term inflation expectations based on survey and market data.

If inflation will actually making a soft landing to the Fed’s 2% target in 2027 and 2028 as the current central tendency in the projections insists, the journey will likely continue to feature sticky inflation… and plenty of jawboning to convince financial markets the Fed will not allow tariffs, for example, to cascade into persistently high inflation. According to the minutes, “some participants noted concerns that a more prolonged period of above-target inflation could risk an increase in longer-run expectations”. Four years already seems like a prolonged period, so I am not convinced that a few more years above 2% will dissuade the Fed from continuing to cut rates to try to address weakness in the labor market.

Taken together, the minutes show a Fed that is far more concerned about labor-market fragility than its public messaging suggests. By incorporating that calculus, the bar for another rate cut looks lower than current market pricing implies”.

Labor Markets: Where the Fed’s Anxiety Really Shows

The FOMC sounded more unified about the employment picture. As a result, I expect in due time the Fed will give sway to cutting rates again sooner than later, as soon as January. According to the CME’s FedWatch tool, the current odds for a rate cut sit at a paltry 15% for the January 28th meeting, so I realize my perspective is an outlier. However, in a coming year that should deliver its share of outlier events, I think a January rate cut will be the least of the economic and financial surprises.

In December’s press conference, Powell acknowledged labor market softening. Powell said the Committee agreed that “the labor market has softened” and emphasized that employment faced “further risk”. However, he downplayed the urgency of the perceived deterioration. By contrast, the minutes uncovered some deeper anxieties about the employment picture and now give me further reason to believe in the high possibility for a January rate cut. For example, the minutes reported that several participants presented a case of potential signals of “greater fragility in the labor market”.

Why I am Expecting a January Rate Cut

The minutes reported that “participants generally assessed that, under appropriate monetary policy, the labor market likely would stabilize next year.” This conditional framing supports my expectation for more rate cuts than the market currently assumes. Notably, the central tendency of the Fed’s projections pegs 2025 as the peak year for unemployment. Any negative divergence from that assumption would strengthen the case for additional rate cuts.

Conclusion

The Fed as a group positions its statements for downside risks to employment and upside risks to inflation. However, the balance of its attention suggests the Fed is prepared to act as though inflation is well under control and employment is the more fragile component of the economic picture. I assume the stock market’s complete comfort with the current tensions comes from an abiding belief in the lower trajectory for interest rates. The market has already been gifted three rate cuts with the indices at or near all-time highs. The central tendency for rates in 2026 is 2.9% to 3.6%. The non-zero possibility that the Fed does not cut rates at all this year looks to me like window dressing meant to preserve the Fed’s inflation-fighting credibility.

I am betting on rate cuts to continue in January and an still positioned in the Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) as a main hedge against the stagflationary potential for more rate cuts in the face of sticky inflation. GTIP currently yields 4.2% and gained 1.9% in 2025. GTIP is down about 17% from its 2021 all-time high.

Be careful out there!

Full disclosure: long GTIP

The post Lessons from the Fed Minutes: Why Division and Dissension Are Likely to Dominate Monetary Policy in 2026 appeared first on Inflation Watch.

Still, after the dust settles on this meeting, I fully expect the Fed to stay the course with a rate cut in December. Powell’s statements belie a Fed that is both gradually (some reluctantly?) accepting the case for looking through inflationary pressures and getting incrementally more worried about the labor market.

Division Translates Into Balking

Powell acknowledged strong disagreements among the Committee members. He teased a reveal in the upcoming minutes from the meeting, but the Fed vote says plenty. Recent appointee Stephen Miran unsurprisingly wanted a 50 basis point cut in a repeat of his dissent in the September meeting. Kansas City Fed governor Jeffrey R. Schmid delivered a dissent at the other end with a vote for leaving rates unchanged. Thus, it is easy to imagine the Fed currently holds a broad enough range of opinions on the direction for monetary policy to cause a pause in December.

In response to a reporter’s question about division in the Fed, Powell pointed out that Committee members have different forecasts and different levels of risk tolerances which come through in their speeches. Most importantly, Powell revealed that “there is a feeling in some we should wait.” Since there was just one vote for waiting during the latest meeting, I assume Powell referred to waiting instead of cutting in December – a not so subtle hint that the Fed as a group may already prefer not to cut in December.

The Case for A December Cut Still Looms

However, the hesitancy to cut in December directly contradicts Powell’s assessment of the economic situation. Powell noted that the current rate is above the neutral rate (“wherever it is”). Thus, policy is technically restrictive. Importantly, Powell ascribed the cooling in the labor market and the economy to restrictive policy. So if the Fed has truly adopted the mission to focus on addressing the downside risks in the economy, the Fed must stay biased to cut rates. At this point, the Fed will have a very difficult time explaining how it can “stand by” and watch a weakening economy and labor market.

While there remains upside risk to the Fed’s inflation mandate, Powell makes a weaker and weaker case every meeting that the Fed is truly concerned about that risk. He said plenty to indicate that the prospects for inflation are contained and even tame. Here were his main points on inflation:

• Most measures of long-run inflation expectations remain consistent with the Fed’s 2% inflation target.
• Services inflation is coming down
• Higher tariffs are pushing up inflation as one-time increase in the price level (the base case)
• The core PCE (personal consumption expenditures, the Fed’s preferred measure of inflation) without tariffs would be 2.3% or 2.4% without tariffs, not far from the 2% target.
• The tariff-driven increase in goods prices is happening within the longer-term context of goods deflation.

Thus, once the base case of a one-time effect laps the inflation readings, the Fed should be comfortably close to its target.

While Powell reiterated that the Fed is determined to make sure that the inflationary impact of tariffs is indeed a one-time increase in the price level, the overall picture painted by Powell makes inflation look well-contained. The implied upside risk from the uncertainties in tariff policy hardly seem noteworthy in Powell’s updated narrative.

On the other hand, Powell claims there is “no significant deterioration” in the economic data. While Powell pointed out that the downside risks to employment have risen, he did not express any concern for the highly publicized mass layoffs from big companies like Amazon.com (AMZN) and United Parcel Services (UPS). In response to a question about these layoffs, Powell only said that the Fed is watching these developments, and the layoffs do not yet show up in the initial claims data (of course not – these layoffs are recent announcements).

Overall, Powell sums up the labor issue as low hiring and low firing in the context of immigration policies shrinking the labor supply and a cyclical drop in the participation rate in the workforce. When asked how then will rate cuts help the job market, Powell responded that cuts will make sure the “labor market doesn’t get worse.” Upon hearing that explanation, I felt tingles of recessionary risks.

Inflation Warnings from Overseas?

While Americans are mostly focused on the inflation risks from tariffs, inflation is also proving stubbornly sticky in other major economies who are not at war with the global economy. For example, with inflation at 3.8% in the United Kingdom, the Bank of England is further away from its 2% inflation target than the Federal Reserve is from its target. In its last letter explaining the on-going inability to hit the target, the BoE reported:

“The recent increase in CPI inflation has owed largely to food prices and administered prices, including water bills and Vehicle Excise Duty. A reduction in total labour cost growth also appears to have been delayed by the increase in employer National Insurance Contributions (NICs) and pay growth in sectors with a large share of employees at or close to the National Living Wage (NLW).”

Yet, the BoE expects this year’s inflation increase to peak in September. The combination of a weakening labor market and restrictive policy is expected to help push inflation toward the 2% target next year. This is the UK version of hopeful monetary policy. The BoE just made its last rate cut in August, going from 4.25% to 4.0%. The policy rate was left unchanged in the last meeting.

Earlier this week, inflation in Australia hit its highest point in over a year. With inflation now above the Reserve Bank of Australia’s target band of 2-3%, the RBA will likely need to put a pause on its easing cycle. The Australian Bureau of Statistics identified housing, recreation and culture, and transport as the main drivers of inflationary pressures. A likely pause in easing further strengthened my case to stay long the Australian dollar (FXA).

I am now on heightened alert for sticky inflation becoming a global problem that justifies an extended run for the debasement trade.

A Pause in the Debasement Trade

As the Fed expresses hesitancy about cutting rates again in December, the debasement trade took a major pause going into the Fed meeting, perhaps in anticipation of a less dovish Fed. Given I think the Fed will feel compelled to proceed with cuts in December, I consider the pause in the debasement trade to be even more temporary than the inflationary pressure from tariffs. I have treated this sharp pullback as the buying opportunity I have (mostly) patiently waited for. When parabolic rallies finally lose steam, the pullbacks are often swift and steep. I am looking for support to hold for the SPDR Gold Shares (GLD) by the $350 level where the 50-day moving average (DMA) (the red line in the chart below) awaits testing.

Bond yields understandably spiked higher in response to the Fed’s balk on rate cuts. However, I am no longer interested in trying to fade rallies in the iShares 20+ Year Treasury Bond ETF as I now accept that the bond market’s overall trajectory is to worry much more about imminent economic weakness than lingering inflationary pressures.

The bond market is giving the Fed a green light for rate cuts. Thus, today’s balking should gradually transition to acceptance in the coming weeks.

Be careful out there!

Full disclosure: short GLD put, long GLD calendar call spread, long UPS, long AMZN put spread

The post Powell Balks At the Next Step of Hopeful Monetary Policy appeared first on Inflation Watch.

Manufacturing is experiencing the greatest price pressures. Consumer-facing companies, like retailers, are staring down customers who are increasingly unwilling to pay higher prices. These mounting pressures have yet to drag on the stock market. For example, even after Caterpillar (CAT) changed its guidance to incorporate higher estimated tariff costs, the stock pulled back slightly for a very brief period before rallying sharply.

Of course, the market’s general lack of concern for tariff costs, excluding this month’s sharp but brief churn from reigniting US vs China trade tensions, makes the Fed’s job ahead much easier. The market promises to focus on the positives to come from easing monetary policy and to ignore any inflationary impacts.

Here are the price-related highlights from each region that most caught my attention…

Boston

The inflation picture continues to gradually deteriorate in Boston. Boston produced benign inflation commentary in the July report, but several points of inflationary pressure showed up in the August report. Now, “most contacts expected to face at least modest further cost pressures moving forward, and some were concerned about a possible acceleration of prices in 2026.”

New York

This district delivered some of the sharpest inflationary commentary in the July report. In the August Beige Book, the Fed summarized businesses as expecting “a pickup in the pace of price growth in the months ahead” and now for October these firms are warning they “expect significant pricing pressures to persist.” The range of pricing narratives in New York remain the most colorful including one retailer that adjusted prices according to an estimate of demand elasticity for each of its products in an effort to accommodate cost pressures from tariffs.

Philadelphia

Like New York, Philadelphia provided a colorful description of broad-based pricing pressures. While price growth “moderated”, the Fed described some concerning practices in the district including “multiple contacts noted that some suppliers were citing tariffs when raising prices, even if their goods were not subject to increased levies.” This behavior broadens the inflationary impact of tariffs. Weakening economic conditions are pressuring the margins of consumer-facing businesses who are unable to pass along all the increases in input costs with many even “increasing discounts to sustain demand.”

Cleveland

Just as described in the prior Beige book “in general, costs were expected to grow at a strong pace in the coming months.” In recent weeks, “nonlabor input costs rose at a robust pace” with tariffs frequently blamed for the pricing pressures. In a familiar refrain, some retailers chose to discount prices. Some selectively rose prices. Some manufacturers chose market share over profits by holding prices steady despite cost pressures.

Richmond

Richmond returned to sparse commentary on inflation. The Fed reported that “on balance, year-over-year price growth remained moderate this cycle.” The contact-specific reports ranged from little to no price pressures. Some businesses have yet to pass along tariff-related costs.

Atlanta

Higher inflationary pressures are apparently just getting started in Atlanta. According to the Fed, “contacts warned that price pass-through resulting from tariffs has just begun and expect to see prices rise into 2026.” While firms currently use a wide variety of tactics to cope with cost pressures, particularly from tariffs, the “internal cost pressures continued to mount, and firms noted there was little room to cut costs further.”

Chicago

The inflation to come in Chicago is on the retailing side. Retailers are still trying to sit on price increases: “retailers were trying to hold off passing tariff-related cost increases on to consumers for as long as possible, though several smaller retailers reported already raising prices because of tariffs.”

St. Louis

As in Philadelphia, St. Louis reported an incidence of a business opportunistically increases prices where a “suppliers’ costs had increased despite having a primarily domestic supply chain.” As in other regions, St. Louis also called out insurance premiums and utilities as adding to the price pressure from tariffs.

Minneapolis

Minneapolis reported a very specific breakdown of pricing pressures: “One-fifth of District firms increased the prices they charged to customers in September from a month earlier, and a similar share anticipated increasing their prices in the month ahead. More than half of respondents reported increased input prices over the previous month.” Overall, prices increased “moderately” with more pricing pressure from input prices.

Kansas City

According to Kansas City, inflation next year could be higher than this year: “The anticipated acceleration of price growth was expected to be somewhat persistent; most firms reported they anticipate raising selling prices in 2026 at a slightly faster rate than this year.” Manufacturing firms are feeling the highest pressure as input prices push higher.

Dallas

Just as in other regions, manufacturers in Dallas were the hardest hit by input cost pressures. However, going forward, it is service firms that expect higher inflation while manufacturers expect “steady” price growth.

San Francisco

With “somewhat” weakening economic conditions, restaurants and insurance companies faced customer pushback on higher prices. Overall, prices “rose modestly” with retailers passing on increased input cost “mostly in the mid to high-end markets.”

Hedging the Inflation Call

As gold continues to soar, I recognize that the precious metal is serving as much more than a dour inflation hedge (the technicals in the chart below actually suggest a topping process may be unfolding. The recent decline in bond yields (rally in prices) reminds me that the bond market ranks inflation toward the bottom of its worries. Accordingly, I cannot adamantly plant a flag on the field of inflation (for example, I stopped fading the iShares 20+ Treasury Bond ETF). Still, I consider inflation to hold plenty of potential to surprise to the upside given a rate cut cycle has restarted with plenty of inflationary pressures growing, not diminishing, in the economy. The Beige Book is a key tool for sniffing out these pressures.

Be careful out there!

Full disclosure: no positions

The post October Beige Book Includes Signs of Higher Price Pressures in 2026 appeared first on Inflation Watch.

“…shelter costs, a third of the CPI. Think about the chicken and the egg. If if the Fed lowers rates, you wind up having lower mortgage rates. You wind up having lower CPI, right. So for me, they’re enforcing that higher CPI by not cutting rates. So if you could cut rates a third of CPI comes down, a third of CPI comes down….Used car prices. Why aren’t used car prices moving down? Interest rates. So you have mortgage rates, interest rates for used car prices. Everything that the Fed is doing is fostering higher prices”.

Almost as surprising was that no one challenged this flawed understanding except to object to the use of the transitive rule (if A = B and B = C then A = C). Even CNBC’s famous bond expert Rick Santelli joined the discussion and failed to correct these assertions. (Fortunately, he agrees that inflation is a problem for the Federal Reserve). I am guessing these assertions were not ad hoc and came from somewhere that others consider to be an authoritative source, so I feel compelled to offer a correction.

First of all, the U.S. Bureau of Labor and Statistics (BLS) started phasing out financing costs from the CPI in the early 1980s. At the time, the Fed was fighting inflation with aggressive rate hikes and the inclusion of financing costs in the CPI made it hard to explain monetary policy. Thus, the current definitions of items in the CPI exclude financing costs both implicitly and explicitly. The BLS describes the inclusions and exclusions for the CPI in “Consumer Price: Concepts” where it explains that “interest costs and finance charges are…out-of-scope”.

Financing Costs Are Not Consumption Goods

Shelter costs are not based on the price of a home or its financing. Instead, the BLS uses Owner’s Equivalent Rent (OER) which is the amount a household would have to pay to rent their home.

“Using the sample of rental units, the CPI program calculates a measure of price change for each CPI index area for the rent and OER indexes. The first step is standardizing the collected rents so that all rents are on a monthly basis. These standardized rents are called normalized rents. The normalized rents are then adjusted for any quality changes such as an additional bedroom or bathroom, changes to the type of heating and cooling equipment, and changes in extra charges such as an increase in total pet fees. The CPI program also adjusts rents for the effect of aging over time. Rents are collected for the same housing units every 6 months. Consequently, each time the CPI observes the rent of a sample unit, it is 6 months older. To account for this aging, an age-bias factor is applied to the previous rent.”

There is nothing in the definition that mentions mortgage rates. The BLS considers the mortgage as part of capital and not consumption.

“Interest costs (such as mortgage interest), property taxes, real estate fees, most maintenance, and all improvement costs are part of the cost of the capital good and are also not treated as consumption items. These non-consumption costs of owned housing are out of scope for the CPI under the cost-of-living framework that guides the index.”

Similarly then, the cost to finance a car, used or new, is also the cost of the capital good and is excluded from the CPI. Here is the core of the BLS’s explanation for measuring the inflation for new vehicles:

“The new vehicles index is estimated using a transactions dataset purchased from J.D. Power that includes observed transaction-level prices and detailed vehicle information. Each observation includes a transaction price as well as a set of 40 variables including rebate values and vehicle characteristics. Sales tax rates are applied by BLS for index calculation….

The BLS also relies on prices from J.D. Power to calculate an inflation rate for used vehicles and does not include financing costs.

Hot and Sticky Inflation

While various pundits torture the data to make specific points about the insignificance or transitory nature of today’s inflation, the core CPI is actually trending higher. The upward trend confirms the bottom telegraphed by the July Beige Book.

Source: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCEPILFE; 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; https://fred.stlouisfed.org/series/CPILFESL, September 11, 2025.

From my perch, I still see all systems go for hot and sticky inflation. I see only additional inflationary pressures from rate cuts. Turkey learned this lesson, and much of the Federal Reserve acknowledges (or used to acknowledge?) the inflation risks. But we are officially climbing the stairs of hopeful monetary policy…hoping that the rate cuts can heal the employment market faster than it can stoke higher inflation.

Be careful out there!

Full disclosure: no positions

The post Financing Costs Do Not Impact Calculated Inflation appeared first on Inflation Watch.