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.

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.

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.

Each Federal Reserve district or region faces slightly different economic issues and opportunities based on the qualitative evidence presented in the Beige Book. Still, each provides an important piece of the puzzle for the direction of inflation. The Fed Presidents take the observations from their districts into the FOMC meetings. Given the concerning signals about inflation in these observations, I strongly suspect the September meeting will produce lively debate and perhaps more dissenting votes than the last decision on monetary policy.

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

Boston

Boston produced benign inflation commentary a month ago. This time around, the district noted tariff-driven reasons for increased prices for clothing and manufacturing. However, in signs of capped pricing power, home furnishings retailers noted their manufacturers absorbed more tariff costs than expected. Domestic manufacturers did not pass on the full costs of tariffs for fear of losing business. The prognosis for future inflation is not clear: “A few contacts expected further cost and price increases in the coming months, but most did not comment on the outlook for prices”.

New York

This district delivered some of the sharpest inflationary commentary a month ago. Inflationary pressures remain strong in New York: “Pricing pressures continued to rise during the reporting period, driven mostly by tariff-related costs. Selling prices rose moderately, marking some acceleration since the previous period. Input prices continued to rise at a strong pace.” Not only are businesses planning to pass on increased costs from tariffs, but also they increasingly expect “a pickup in the pace of price growth in the months ahead”.

Philadelphia

Inflation expectations are up significantly year-over-year in the Philadelphia district. Most concerning is the impact of inflation on lower-income households whose incomes are increasingly falling behind rising prices.

Cleveland

Cleveland continues to get hit hard by cost pressures: “nonlabor input costs continued to rise at a robust pace in recent weeks…Contacts generally expected costs to grow at a strong pace in the coming months”. Narratives of tariff-related impacts ran throughout the descriptions of cost increases except for the IT-related pricing pressures. Plans for passing along increased prices to customers ranged from 100%, to slow increases, to a wait-and-see approach given tariff uncertainties. Pricing power actually decreased for some contacts with metal manufacturers even cutting prices to remain competitive. Reduced pricing power and increasing input costs will translate into lower margins and slower hiring.

Richmond

Richmond previously had little to say about prices. For the September Beige Book, Richmond reported significantly higher price increases for non-manufacturers than for manufacturers. Tariff-related impacts had an outsized influence on pricing pressures: “the firms that reported the largest increases in year-over-year prices received generally had higher exposure to tariffs”.

Atlanta

Small businesses are particularly suffering from inflationary pressures in Atlanta. They must have minimal pricing power given they are cost-cutting and changing product mix to cope with higher costs. Inflationary pressures, including tariff-related impacts, are expected to persist: “many contacts expect to realize inflationary impacts from tariffs through the second half of this year and into 2026, and even those with little or no tariff pressure anticipate increasing prices to offset other costs”. The cost and price pressures unrelated to tariffs present a major wildcard for monetary policy since there is little rational (yet?) to simply look past these pressures.

Chicago

Businesses in Chicago experienced and expect the same moderate pace of price increases. Interestingly, some retailers are holding off on passing along tariff-related costs until early next year. The timing of price hikes presents yet one more wildcard for monetary policy.

St. Louis

Business in St. Louis reported increasing inflation (a faster pace of price increases). Businesses reported a mix of fears that customers will soon no longer accept or afford price increases. Some are conducting price experiments to test customer’s price sensitivity. On the other hand, business reported price increases from tariff impacts AND “market opportunities to improve profit margins”.

Minneapolis

Inflation no longer sounds benign in Minneapolis. Half of survey respondents experienced price increases from the previous month and a quarter reported charging higher prices to their customers. As In Boston, competition in home furnishings will tightly cap price increases in that sector.

Kansas City

Businesses in Kansas City continue to experience pressure on profit margins from increased costs and the inability to pass on costs to customers. Some increases in input costs have become sticky as prices failed to respond to the removal of select tariffs.

Dallas

In June, 12-month expectations for price increases subsided a bit. In August, half of survey respondents reported negative impacts from tariffs including price increases. Plans to pass through these costs were “mixed”.

San Francisco

Once again, higher prices broadly hit the San Francisco district. However, lower demand in construction drove prices lower in that sector. Tariffs drove higher prices of “most inputs”. While many costs were passed along to customers, “in some instances, such as in food services and accommodations, weaker consumer demand led companies to absorb the higher costs”.

Inflation Will Stay Resilient

Just like a month ago when I used the Beige Book to support the case for a bottoming in core CPI, the latest Beige Book reinforces that bottom with higher inflation to come in the short-term. With the Federal Reserve on track to push through rate cuts anyway, gold’s breakout (see below) makes plenty of sense. Stagflation remains in the realm of potential outcomes given the various reports of slow and slowing economic activity alongside pricing pressures.

On the other hand, the current rally in the bod market suggests market participants are much more worried about slowing growth than inflation. I continue to manage my risks on the inflationary side of the ledger and accumulated Oct $87 puts on iShares 20+ Year Treasury Bond ETF (TLT) ahead of the CPI report for August….despite the bullish breakout for TLT.

Be careful out there!

Full disclosure: long GLD call spread, long TLT puts

The post August Beige Book Points Toward Higher Inflation to Come 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.

Tariffs Create Inflation Risk

While the administration goes back and forth on whether tariffs will create price increases, Powell is quite clear: “If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation”. Powell further warned that these large tariffs will also likely lead to “a slowdown in economic growth, and an increase in unemployment”. This cocktail is the very definition of stagflation. Powell reinforced his implicit plea to end the tariff war by repeating his warnings during the Q&A session. For example, he emphasized that “given the scope and scale of the tariffs…certainly the risk to higher inflation, higher unemployment have increased.” As a result, the Fed “won’t see further progress toward our goals, but we might see a delay in that.”

To add credibility to the concerns, Powell referenced the consensus (emphasis mine): “If you look at where forecasters are, they’re all forecasting an increase in inflation.” Without admitting he fears the potential of a recession, Powell followed up by referencing “forecasts of weakening in the economy and some have recession forecast.”

Thus, if Powell was in charge of trade policy, he would not go down the current path of large tariff increases. The risks to inflation and of a weaker economy – aka stagflation – are too great.

These admonishments are made more remarkable given the on-going (and one-way) spat that President Trump has with Powell. Trump now calls the Fed Chair “too late Powell”. Trump piled on by calling Powell a fool after the latest stall on rate cuts. I suspect Trump sees the hidden messages in Powell’s commentary.

Waiting As Leverage

Given the standoff in risks, the Fed has no choice but to sit on the sidelines of policy. Firstly, the trade policies are uncertain and in flux. During the current 90-day pause, anything can happen, including a sudden collapse in the ceasefire or another 90-day pause to avoid all-out economic warfare. Once these uncertainties clear up, the Fed next must wait to see impact from the policies before it can venture to take action.

Yet, I think the Fed would be cutting rates if not for the tariff risks. During the Q&A, Powell let slip that the Fed could have been late in cutting rates last year: “I wouldn’t say that what we did last fall was at all preemptive. If anything, it was a little late.” Ironically, the tariff risks will definitely make the Fed late again. By the time the dust settles enough for the Fed to be confident in more rate cuts, the economy could be deep in the throes of weakness.

Still, there is an interesting angle in the Fed’s insistence on waiting. The U.S.’s massive budget deficits need to be financed at lower rates. This more favorable financing likely needs the assistance of the Fed, whether by coaxing the long-end of the bond market to come down with “follow the leader” federal fund rate cuts or something more direct like “Operation Twist.” The longer higher rates persist, the harder it will be for the U.S. to take major fiscal action like extending the massive tax cuts from 2017. Powell has insisted since the first pause on rate cuts that the Fed can afford to wait. In the latest meeting, Powell further emphasized the Fed can afford to wait. I counted 21 times Powell used the word “wait” or “await”, 3 times Powell referenced no need to “hurry”, and another 4 times Powell insisted on exercising patience. I see a Fed in stagflation planning mode when Powell insists “for the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”

The message to the White House? Provide clarity post haste. All this waiting is the Federal Reserve’s way of exercising leverage while disavowing interest in advising on policy.

Markets React: The Dollar, Gold, and Bond Yields

After the Federal Reserve’s statement, the U.S. dollar strengthened, gold weakened, and long-term bond yields went higher for the rest of the week.

The U.S. dollar index (DXY) is still rebounding off a 3-year low. So for now I am assuming that the dollar’s strength for the rest of the week was a residual from this bounce from “oversold conditions”. Currency traders are likely waiting for the next dramatic tariff headlines to resume selling the dollar. (I currently hold a mix of long and short dollar bets). The weekly chart below shows that at the peak of the tariff trauma and drama that the dollar index reached a level last seen in March, 2022.

Gold is even more intriguing. The SPDR Gold Trust (GLD) went on a near parabolic run for a week and a half in April. Such runs usually come to climactic ends. In GLD’s case, a bearish engulfing topping pattern signaled the end of the run. GLD attempted a rebound from support at its 20-day moving average (DMA) (the dotted line below), but it stopped cold right at its all-time high. Fed day brought GLD right back down to its 20DMA support. I suspect this support will eventually give way as the Fed’s latest insistence on patience translates into a slightly lower enthusiasm in buying gold as a hedge against a Fed forced to cut rates right into the teeth of tariff-driven inflationary pressures. Waning enthusiasm is likely only worth a test of uptrending 50DMA support (the red line).

Long-term rates have chopped around since December. However, based on the “heavy” technicals for iShares 20+ Year Treasury Bond ETF (TLT), rates look poised to head higher at some point. TLT is just one more bout of economic chaos away from a fresh swoosh downward. The lows of the year coincided with levels last seen in November, 2023.

Stuck Until Further Notice

By the time of the next Fed meeting in June, we should have a better idea about the success or lack thereof for the 90-day tariff pause. The pressure will only increase on Powell to speak clarity into monetary policy. If more economic and sentiment indicators are flagging increasing stagflationary pressures while trade policy remains uncertain, I expect Powell to get more strident in his warnings (in Powell’s mild-mannered way of course). In the meantime, the stock market looks poised to join the Federal Reserve in getting stuck. The S&P 500 (SPY) is in a cliffhanger trading right below 200DMA resistance for the month of May.

Be careful out there!

The post Powell’s (Not So) Hidden Plea to End the U.S.’s Tariff War appeared first on Inflation Watch.

As the stock market has careened into a bear market amid growing economic anxieties and uncertainties, financial markets have started to return to the old standby to save the day: interest rate cuts from the Federal Reserve. Expectations have definitively brought forward the timing for the next rate cut from July to June. The table below the chart of the market’s target probabilities for the June Fed meeting show the change in probabilities starting one month ago. The odds for the Fed maintaining its target rate range at 4.25% to 4.5% have plunged from 49.6% a month ago to 18.3% a week ago and 18.8% yesterday. While those odds moved slightly higher to 23.1% as of the time of writing, the odds for a 25 basis point cut still increased from 56.2% to 58.1% from yesterday to now.

Of course, if the market continues to roil and sink deeper into a bear market, financial markets may become too restless with a June timetable. However, as we saw last year, just the expectation for imminent rate cuts can be enough to keep spirits lifted in financial markets.

Even if the Fed wants to placate markets and play its modern role as market hero, consumer’s rising expectations for inflation should force the Fed to remain patient and measured. March’s preliminary read for the Surveys of Consumers from the University of Michigan showed yet another increase for both short-term and long-term inflation expectations. There is already a definite upward trend in long-run expectations and short-run expectations soared. From the University of Michigan:

“Year-ahead inflation expectations jumped up from 4.3% last month to 4.9% this month, the highest reading since November 2022 and marking three consecutive months of unusually large increases of 0.5 percentage points or more. This month’s rise was seen across all three political affiliations. Long-run inflation expectations surged from 3.5% in February to 3.9% in March. This is the largest month-over-month increase seen since 1993, stemming from a sizable rise among Independents, and followed an already-large increase in February.”

In parallel with the troubling trends on inflation expectations, consumer’s expectations for more unemployment are soaring. Take together, consumers are increasingly fearing a stagflationary economic environment.

Thus, the Fed faces maximum pressure. No matter what the Fed decides or says in next week’s decision on monetary policy, major disappointment and/or jitters are bound to rise from some significant portion of observers. In turn, elevated volatility could remain elevated and translate into more pressure on stock prices. Either the Fed will be taken to task for changing a re-ignition of realized inflationary pressures, or the Fed will be criticized moving too slowly to stave off a recession.

For now volatility is calming down as fears of a government shutdown subside…

…even as one of my favorite investments and trades, SPDR Gold Trust (GLD), breaks out to fresh all-time highs.

Be careful out there!

Full disclosure: long VXX put options, long GLD shares and call spread

The post Maximum Pressure for the Federal Reserve appeared first on Inflation Watch.

The stock market woke up the next day after the Producer Price Index (PPI) came in hot and suggested once again that underlying price pressures in the economy continue to increase. The S&P 500 gapped down and lost 0.5%. More importantly, TLT lost another 1.2% and confirmed a breakdown below its 50-day moving average (DMA). The core PPI, Final Demand Less Foods and Energy, has trended upwards all year and is now at its highest level since February, 2023 at 3.5%.

Source: U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Final Demand: Final Demand Less Foods and Energy [PPIFES], retrieved from FRED, Federal Reserve Bank of St. Louis, December 12, 2024.

Assuming the Federal Reserve cuts rates next week as expected, I am guessing rate cuts will slow to a crawl if not come to an outright halt for the beginning of 2025. Accordingly, the Fed’s communications to the market will get about as tricky as ever. Fortunately for the bulls the market’s momentum carries a large amount of buffer from current Animal Spirits.

iShares 20+ Year Treasury Bond (TLT)

The fascinating contrast between stubbornly stable inflation and Fed rate cuts continues to keep me fading rallies in TLT. TLT’s earlier breakout above its 50DMA (the red line below) almost fooled me. TLT is now closing the gap up created by Trump’s pick to head the U.S. Treasury department, Scott Bessent. Assuming that gap closes, a true test of the bottom of the presumed trading range should finally unfold.

Gold

While TLT delivered, gold disappointed. I have a live short-term trade in PHYS and call spreads and call options in SPDR Gold Trust (GLD) that orbits my core long-term position in GLD shares. I was encouraged by GLD’s reaction to the CPI and just assumed the rally would continue into at least the end of this week. Instead, GLD reversed right back to 50DMA support. I do not have a ready hypothesis to explain this seemingly contrarian move. (I would love to hear yours!)

What Happens If the Fed Gets “Hawkish”

The Fed is currently dovish. It would not take much for the Fed to sound hawkish. A firm follow-up to the round of Fedspeak attempting to walk back market expectations for rates cuts could set off the alarm bells for the market. At that point, the short-term GLD trade gets less attractive. TLT will probably still be good for fades. The stock market will likely stall for at least the rest of the Santa rally season….just enough time to find the next reason to reinflate Animal Spirits.

The big wildcard for me in a “more hawkish Fed” scenario is the U.S. dollar. There are multiple countervailing catalysts that make the U.S. dollar attractive and unattractive. Thus, it is hard to develop conviction beyond the short-term technicals. Right now, I still like fading the euro against the U.S. dollar. At the same time, I finally gave up trying to catch a pullback in USD/CAD, a strengthening in the Canadian dollar (Invesco CurrencyShares Canadian Dollar Trust (FXC)). I am now playing the major breakout to the long side. USD/CAD is practically making a beeline to test a critical long-term double-top spanning 2016 and 2020.

Be careful out there!

Full disclosure: long USD/CAD, short EUR/USD: long GLD shares, calls, and call spread; long PHYS, long TLT puts

The post Bonds Try to Weigh on A Market Trying Harder to Look Past Stabilizing Inflation appeared first on Inflation Watch.

“A strategy of repeatedly lowering the fed funds target range toward a more neutral level relies on confidence that the neutral level is materially lower than where rates are now. When I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now…ces. I anticipate the FOMC will most likely need more rate cuts to finish the journey. But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.” – Navigating in shallow waters: Monetary policy strategy in a better-balanced economy, Dallas Fed President Lorie K. Logan, November 13, 2024

“Shifting from my baseline to alternative scenarios, recent information suggests to me that the risk of inflation ceasing to converge toward 2%, or moving higher, has risen, while the risk of an unwelcome deterioration in the labor market has remained unchanged or possibly fallen.” – Musalem: Remarks on Monetary Policy and the U.S. Economic Outlook, St. Louis Fed President Alberto Musalem, November 13, 2024

“While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.” – Longer-term Considerations for Growth and Monetary Policy, Federal Reserve Bank of Kansas City President and Chief Executive Officer Jeff Schmid, November 13, 2024

All three speeches included Fedspeak for caution on the pace of rate cuts while maintaining the flexibility to follow the data. These speeches also came on the same day as the release of the October CPI data. This timely convergence of caution and circumspection is important because core CPI maintained the stabilization trend in place since a low in July (see the green line below). Meanwhile, core PCE, the Fed’s favorite indicator of inflation also looks like it is stabilizing. In other words, it seems the Fed is paying attention to stabilizing inflation patterns.

Sources: 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, November 13, 2024. 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, November 13, 2024.

Shelter costs continue to drive the bulk of inflation. For October, shelter costs constituted 65% of the year-over-year increase in the CPI. Housing costs are in a paradoxical juncture where monetary policy could help maintain elevated housing costs no matter where interest rates go. The National Assocation of Homebuilders (NAHB) laments that high interest rates contribute to contraints on supply thourgh an expensive and difficult financing environment for construction loans. On the other hand, looser monetary policy could reignite a housing demand that strains supply further and drives up prices. For now, a surprise rebound in mortgage rates is tamping down housing demand.

A Friendly Message from Gold?

While inflation is stabilizing, gold may have topped out.

Two months ago I interpreted the strength in gold as indicative of a skepticism about the Fed’s implied victory message on inflation. That trend persisted until last week. The resolution of the U.S. presidential election generated a fresh surge in Bitcoin (BTC/USD) and presumably drained interest in gold. The SPDR Gold Trust (GLD) gapped down and lost 3.0%. I was hopeful that the 50-day moving average (DMA) (the red line below) would hold as support. As a (perma) bull on gold, I added call options to supplement my core GLD position. Today’s 1.0% loss in GLD further confirmed a 50DMA breakdown. This bearish technical signal means that I am unlikely to try new short-term trades for a while.

Source for charts: TradingView.com

The new inverse correlation between gold and Bitcoin indicates a sharp shift in preferences with Bitcoin getting an added advantage from expectations of a pro-crypto regulatory regime starting next year.

The Bond Market Remains Wary

Two months ago I claimed that the bond market acted wary about the Fed’s presumed victory over inflation. Sure enough, long-term yields have steadily risen ever since. The iShares 20+ Year Treasury Bond ETF (TLT), which goes up when long-term interest rates go down, is now trading near the bottom of a presumed horizontal trading range. My strategy to fade TLT has worked all the way down.

After TLT gapped up for some reason on the CPI news, I thought I missed my latest profit opportunity. So when TLT faded back to the previous day’s close, I counted myself fortunate and took profits on my latest round of TLT put options. TLT then went on to lose 1.0% for the day.

The U.S. dollar soars

The U.S. dollar index (DXY) has benefited from one tailwind after another. Now, the presumed tailwind comes from the boost it should get with increased tariffs that also promise to prop up inflationary pressures in the economy. Fewer dollars going overseas to buy goods tips the supply/demand balance in favor of a stronger dollar. Two months ago I decided to bet on continues strength in the British pound versus the U.S. dollar by buying shares of Invesco CurrencyShares® British Pound Sterling Trust (FXB). I took the opportunity to buy when FXB tested its uptrending 50DMA. The currency ETF has continued downward from there with little sign of an imminent rebound.

Conclusion

With the Presidential election behind us, the bets on stabilizing (or even stronger) inflation are clarified for now: long Bitcoin, long gold only after Bitcoin enthusiasm wanes somehow, long U.S. dollar, and short TLT. While I sold all my Bitcoin earlier in the day, I will continue to trade by buying dips. I am conflicted on the U.S. dollar as I stubbornly hold some dollar shorts while trading in and out of dollar longs. At some point, I will commit to a dollar long by shorting EUR/USD. Europe stands to lose in the next administration with a weaker NATO, more contentious relationships, and higher tariffs in a weakening economic backdrop.

The Federal Reserve has ahead as precarious a path as ever while it gets increasingly wary about stabilizing inflation!

Full disclosure: long GLD shares and calls, long PHYS, long FXB

The post The Federal Reserve Is Paying Attention to Stabilizing Core Inflation appeared first on Inflation Watch.