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.

In his latest press conference on monetary policy, Federal Reserve Chair Jerome Powell reaffirmed the central bank’s dominant message: tariff-driven inflation must not evolve into persistent price pressure. The Fed must ensure tariffs result in no more than a one-time price shock, as has so often been advertised. The Fed is maintaining a restrictive policy stance, “modest” in Powell’s opinion, not to suppress growth unnecessarily, but to guard against the risk that a one-time shock becomes embedded in inflation expectations.

Powell described a uniquely difficult moment for the Fed and monetary policy. “This is a special situation with risks to both of the goals,” he said, referring to the Fed’s dual mandate of maximum employment (currently met) and price stability (inflation remains above target). The policy response: stay in position, gather more data, and avoid premature action. “We see our current policy stance as appropriate to guard against inflation risks,” as Powell stated in his prepared remarks.

These stances form “Powell’s promises.”

Tariff Inflation: Short-Lived or Sticky?

During the press conference, Powell made clear that the central bank does not see inflation from tariffs as systemic, but it must remain vigilant. “Higher tariffs have begun to show through more clearly to prices of some goods,” he acknowledged. While the base case remains a one-time price level shift, Powell acknowledged, “it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”

That task—managing a potentially durable inflationary impulse from trade policy—is Powell’s focus, along with the majority of the Fed. The Fed is collecting evidence as companies pass costs to consumers, raising the risk that inflation expectations begin to drift. “Near-term measures of inflation expectations have moved up… on news about tariffs,” Powell noted, though longer-term expectations remain anchored for now.

In the press conference Q&A, Powell was more direct:

“A pretty reasonable base case is that this is a one-time price increase. We will make sure that’s the case.”

Policy Outlook: Restrictive, Yet Watchful

In support of its goals, the Federal Open Market Committee (FOMC) left the federal funds rate unchanged at 4¼ to 4½ percent, and continued its balance sheet reduction plans. Powell emphasized that this positioning is intended to give the Fed space to observe, not react hastily, a message consistent with past meetings:

“For the time being, we are well positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance.”

Although the Committee’s policy rate remains in “modestly restrictive” territory, Powell flagged a disconnect by observing that “financial conditions are accommodative.” In other words, the economy is not acting as if monetary policy is holding the economy back. (I wish Powell spent more time unpacking this apparent paradox). When a reporter pointed out weakness in the housing market, Powell reminded the audience that the Fed looks at the economy’s performance as a whole, in its totality. However, his claim that the Fed cannot impact housing supply is only partially true. High loan costs can undermine the economics of some housing projects. These loan costs usually follow the Fed funds rate.

A Measured Mandate: No Rush to Cut

Despite the slowing of inflation from its mid-2022 peak, Powell emphasized that it “remains somewhat elevated.” Core PCE inflation rose 2.7 percent over the 12 months ending in June—nearly unchanged since the start of the year. While services inflation continues to ease, goods prices are rising under tariff pressure, motivating the majority of the Fed to hold rates steady.

In response to dissenting votes from two members (Bowman and Waller, who preferred a rate cut), Powell praised the clarity of the debate:

“What you hope is that people explain their positions clearly and that’s what we had. We had one of our better meetings…This was a good meeting today.”

Powell offered high praise for this meeting—likely an effort to stave off media speculation about Fed acrimony or debilitating disagreements. Powell emphasized that “the majority of the committee is of the view inflation is above target and employment at target, so policy should be more restrictive.” He reiterated this simple formula to make the case plain. He deferred to the dissenters to make their cases in coming days.

To further underscore the majority’s case, Powell suggested that the Fed is already “looking through” goods inflation simply by not raising rates. I am sure that commentary raised at least a few eyebrows given how hawkish it sounds at a time when everyone is looking for the date rate cuts resume. Ultimately, Powell insisted that tariffs “will not turn into inflation, as we will make sure it won’t.” He also cautioned that the Fed must act “efficiently”. If the Fed cuts too soon, a resurgence of inflation would sent the Fed scrambling to raise rates again (a scenario that does not concern dissenter Waller). If the Fed waits too long, then it will allow unnecessary damage to the labor market (this is the scenario that concerns Waller most).

The Renovation Sideshow

The press of course had a questions about the tensions with President Trump and a gathering cacophony of his administration. Powell, as always, was quite dignified in his responses. However, his description of Trump’s recent (and awkward) visit the suddenly controversial renovations contained some backhanded commentary. Powell called the visit a good one, an honor. He added that it is not often a President comes by the Fed for a visit, especially to see a building. In other words, not only was Trump’s visit unusual, but also it was a bit comical. I wish the occasion allowed Powell to smile and crack more direct jokes.

A week and a half ago, the Federal Reserve posted a short video explaining the renovations. A lot of the work involves upgrades to meet government safety and security standards (like blast proof windows) and to preserve historic features. Who knew such work could create such a stir and build a case for firing a Fed Chair?

Conclusion: One Shot at Containing Price Pressure

Powell’s framing of the Fed’s challenge is both strategic and cautionary. Tariff inflation must remain a one-time shock, not a repeat offense. At the same time, the Fed cannot overlook the labor market’s fragility.

“Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”

With risks pressing on both sides of the mandate, the Fed’s current posture is one of active restraint—willing to move, but unwilling to guess.

The post Powell’s Promises: Containing Tariff-Driven Inflation and Risks to Dual Mandate appeared first on Inflation Watch.

In a recent interview, Fundstrat Co-founder and Head of Research Tom Lee made a convincing but incomplete argument for team non-inflationary when describing the economic impacts of tariffs. From Lee’s perspective, a tariff is a tax that simply reallocates money in the economy. Money transfers from companies and/or consumers in the supply chain to the government. That money goes right back into the economy through government spending. Thus, money just flows from one set of hands to another. This argument seems to rely on a monetary theory of inflation, where an increase in the money supply is the main driver of inflation; tariffs do not increase the money supply.

The Limits of Monetarism in Today’s Economy

Milton Friedman made monetary theory, or monetarism, famous through quotes like: “Inflation is always and everywhere a monetary phenomenon.” Monetarism seemed to work well to explain the economy of the 1970s and 1980s but waned over time according to the IMF. Still, given the fluid and dynamic nature of today’s economies, I am fully willing to accept that monetarism can and will become relevant under the right circumstances. Today’s tariff regime is not creating the right circumstances.

Tariffs, Wages, and Supply Chain Reactions

Because Lee thinks of tariffs as a transfer of money from people and companies to the government, he implied that instead of hiking rates to counteract inflationary effects, the Fed should cut rates in order to counteract a drop in demand from higher prices. However, Lee does not explicitly account for the potential responses to tariffs across the supply chain. As prices rise, consumers may ask for higher wages to cover increased costs in the economy. These higher wages are in turn paid for with higher prices. And so on. Federal Reserve Governor Christopher Waller countered this fear by insisting that today’s economy does not grant workers such economic power, certainly not like they had in the immediate wake of the pandemic. However, as strict immigration policy tightens the U.S. workforce, remaining workers in significant portions of the economy could find themselves with renewed economic power to demand higher wages to offset any real or perceived tariff-driven cost increases. The final or net impacts are hard to predict.

Demand Destruction and Fed Caution

Consumers will find little comfort or relief knowing that their higher costs boost government coffers. For example, the recent budget bill held as a premise that money is better left in consumer pockets and corporate treasuries than in government accounts. Thus, a tariff-induced price hike will induce responses from the payers of that tax in order to offset real economic impacts. In the interview, Lee appears to lean toward demand destruction as the deflationary counterbalance that can relieve pressure on consumers. Yet, with the looming uncertainty about the path of tariff policy and its eventual impacts, the Federal Reserve is well-served to proceed with caution. For example, cutting rates to offset demand destruction could entrench the inflationary impulse that pressured demand. In the optimistic scenario, the Fed could do well to wait on businesses and suppliers to work out efficiencies to avoid passing on tariff costs into the rest of the economy.

The Inflationary Impact Is Real and Already Here

In the middle of all the swirl on inflationary impacts from tariffs comes a recent Federal Reserve study that has already detected inflationary impacts from the current tariff regime and has concluded that the first trade war with China from 2018–2019 also boosted inflation. From “Detecting Tariff Effects on Consumer Prices in Real Time“:

“…we find that US import tariffs led to a statistically significant increase in consumer goods prices. For the 2018–19 tariffs, our local-projections approach reveals that tariff changes were passed through fully and quickly—within two months of tariff implementation—to consumer goods prices. For the February and March 2025 tariffs implemented on imports from China, we find that tariffs have already passed through partially to the consumer goods prices that we can observe through March. Our results indicate that the 2025 tariffs have so far led to a 0.3 percent increase in core goods PCE prices, contributing to a 0.1 percent increase in core PCE prices (goods and services prices, excluding food and energy) as a whole.”

An illustrative research paper from the San Francisco Federal Reserve, “The Effects of Tariffs on Inflation and Production Costs” by Bart Hobijn and Fernanda Nechio, makes an even more stark case for the inflationary impacts of tariffs:

“Estimates suggest that the impact on prices for investment goods is likely to be much larger than for consumption goods. For example, if an across-the-board 25% tariff is fully passed through to finished goods, near-term price increases are estimated to be about 9.5% for investment goods and 2.2% for consumption goods.”

Hobijn and Nechio further explain that “the import content is much larger for investment goods than for consumption goods. This is because domestic markups tend to be smaller for investment goods than for consumer goods, making the import content of their costs much larger.”

Thus, even if aggregate inflation somehow sustains minimal impact because of fortuitous offsets, significant parts of the economy could suffer. Without tariffs, the inflation rates in both periods could have been lower. With inflation still above the Fed’s 2.0% target, a cut in rates in the middle of so much uncertainty carries all types of risks.

Bostic Speaks for Team Inflation

In commentary hearkening back to the warning signs from the last Beige Book, Raphael Bostic, President of the Atlanta Federal Reserve, cautioned in a CNBC International interview that the Fed’s business contacts have clearly signaled their willingness and readiness to raise prices in response to tariffs. In commentary that could be referencing the recent Fed study, Bostic also claimed that inflation is already showing up in current tariffs. Most interesting to me in this inflationary story is Bostic’s counter to the theory posed by Waller and others that tariffs create a one-time price shock and then inflation just goes back to normal (emphasis mine):

“The textbook story for economics is if you do tariffs, it’s a one-time shift. It happens quickly. Everyone understands what’s going on and then the world goes back to how it was before. So you should look through that. What we are seeing today though is not just a one-time shift. It’s actually something that’s being stretched out over a much longer period of time. I think that runs the risk that people start to feel like inflation is always with them. This elevated level of inflation is always with them. And that then runs the risk that there might be some structural changes that businesses and consumers, for that matter, make in terms of how they respond and how they engage in the marketplace.”

Bostic sums up very well why the Fed must proceed with caution. Without clarity on the shape, timing, or magnitude of tariff policy, predictions and models are precarious. Rushing to cut rates risks worsening any upcoming inflation surprises.

Bostic also has support in other economic research. The following quote from an NBER working paper, “Tariffs As Cost-Push Shocks: Implications for Optimal Monetary Policy” by Iván Werning, Guido Lorenzoni, and Veronica Guerrieri, suggests that calls to “see through” tariff shocks represent more economic bravery than some may admit (emphasis mine):

“A widely held tenet in the practice of central banking is that a shock like a tariff shock, that entails a mechanical increase in some prices, is a shock that requires the central bank to “see through it”, in other words, to let the mechanical effect of the tariff in prices to affect the overall price level, but avoid
larger increase in prices. To be fair, this is a rule of thumb which, as far as we know, does not correspond to any result in economic theory.”

Conclusion: Stagflation at the Center

Ultimately, all this back and forth on the potential inflationary impact of tariffs tells me that stagflation remains front and center in the economic window. The Fed is right to remain cautious, but as time drags on, economic risks increase for both inflation from tariffs and for an economic slowdown from demand destruction or even ongoing cyclical factors. Today’s predictions will turn out wrong in surprising ways. The Federal Reserve is caught in a tough position where it needs to wait but may find the rising risks and costs of waiting increasingly difficult to absorb.

The staglfationary risks and dilemmas come through in the following quote from the NBER working paper:

“Is a tariff expansionary or contractionary? The answer depends on how monetary policy responds… Based on our equivalence result, a tariff is best understood as a supply-side disturbance—not a demand-side disturbance—that introduces a trade-off for monetary policy. If the central bank prioritizes price stability, the tariff will lead to a sharp short-run contraction. Alternatively, the central bank can offset this contraction by pursuing an expansionary response. In sum, the notion of a “neutral” monetary policy is not well defined.”

In the meantime, I remain committed to Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) as my hedge on the Fed’s increasingly precarious stagflationary bind. For now, the ETF has bounced around at the whims of long-term Treasury bonds, vacillating from nervousness over the U.S.’s ballooning debt to reassurances over the economy to mild flight-to-safety flows.

Source: Tradingview.com

Be careful out there!

Full disclosure: long GTIP

Tom Lee’s inflation commentary comes at the 7:25 mark in the video below…

The post Tom Lee Dismisses Tariff Inflation — But Data, Theory, and Research Say Otherwise appeared first on Inflation Watch.

While it is far from clear how tariff-driven price hikes will eventually shake out, the Fed districts offered sufficient evidence of businesses who have price hikes waiting in the wings.

In Boston, a clothing retailer retagged products for sale this summer with higher prices than planned before tariffs.

In New York, manufacturers claimed they plan to pass along most or all of tariff-driven price increases. Moreover, “businesses continued to expect substantial increases in input prices in the months ahead.”

In Philadelphia, “more than two-thirds of the surveyed firms anticipated increased costs and expected their competitors to increase prices in as little as two months.” Yet, about half of Philadelphia respondents reported increased price sensitivity amongst its customers.

In Cleveland, businesses expect a “strong pace” of growth in costs”, particularly with nonlabor input costs rising “at a robust pace in recent weeks.”

Firms in Richmond expect prices to rise faster in the coming 6 months.

In Atlanta, some firms pushed through price increases despite softening demand, a troubling prospect of potential stagflation. Most interesting are the firms using “a multi-pronged approach to managing tariffs, including pushing costs back to suppliers, reconfiguring supply chains, absorbing costs in margins, and passing costs through to customers.”

In Chicago, businesses expect higher inflation over the next 12 months.

In St. Louis, “most contacts expecting nonlabor costs to increase next quarter reported that they would pass along the costs to customers within three months.”

In Minneapolis, more than half of surveyed business claimed they plan to increase prices in the coming future.

Kansas City businesses “generally [anticipate] higher input and output prices in the coming months.” Cost increases from the surge in demand for shipping products ahead of tariffs will be passed on to customers in the next 12 months.

Oilfield services firms in Dallas are having trouble passing along higher costs to customers. Of the Texas businesses who feel able to pass along tariff-related costs, “about 60 percent are doing so within a month of the tariff taking effect, and 90 percent are doing so within three months.”

San Francisco did not provide anecdotes or data on planned price hikes. However, one alarming anecdote came from a business which noted that tariff-related price hikes were not rolled back along with the related rescinded tariff. This inflation “stickiness” is a worrying indicator of how tariff-driven price hikes can cause lasting, cascading price pressures in the economy.

Given these consistent and confirming anecdotes and data points, the CPI looks set to bottom out in coming months if not in the very next report. With Beige Book in hand, the Fed is unlikely to cut rates ahead of more certainty on tariff policy. These reports from the Federal Reserve’s districts underline Jerome Powell’s core desire to see the economic warfare, primarily through tariffs, come to an end.

The Downtrending CPI Is Also Colliding With A Weakening U.S. Dollar

While May’s CPI came in softer than “expected”, its descent still slowed since March’s big drop. The reports from the Beige book suggest that this downtrend could continue if not for tariff-driven price pressures. Instead, fresh inflation agitation likely awaits.

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; 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. June 12, 2025.

In the meantime, the U.S. dollar continues to weaken. At the time of writing, the U.S. dollar index (DXY0) briefly broke down below its 3-year low set back in April. A weaker dollar means imported goods become more expensive, all else being equal. Thus, the weaker currency will translate into higher inflation in the U.S. except to the extent demand for imported goods falls along with the dollar.

Source: TradingView

Be careful out there!

The post A Calm Before Fresh Inflation Agitation? appeared first on Inflation Watch.

(Source: Australian National Accounts: National Income, Expenditure and Product. Complete statistical tables available from the Australian Bureau of Statistics)

In cutting its cash rate for the second time during this easing cycle, Bullock called the move a “confident” cut. As the chart below demonstrates (Source: The Reserve Bank of Australia, Consumer Price Inflation – G1), Australia’s inflation has returned to pre-pandemic norms. Bullock described a broad-based slowing in price increases, leading to a forecast for “the underlying pulse of inflation around the midpoint of the 2 to 3 per cent range over the next year or so.” With that trend firmly in place, she concluded: “with inflation declining and the unemployment rate relatively low, we’re well positioned to deal with” the challenges presented by the U.S.’s trade war with the rest of the world.

(Full inflation data at Consumer Price Index, Australia)

Stable Inflation Enables Renewed Easing of Monetary Policy

The U.S.’s trade war threatens renewed inflation pressures through global supply chain disruptions. The RBA is monitoring these developments closely, forecasting “growth in our major trading partners slowing over the remainder of this year and next year.” At the same time, it has revised its domestic growth forecast expecting the economy to grow “a little more slowly,” and sees “global trade developments” as mostly deflationary—aside from inflationary supply shocks from the trade war. These factors underlie the RBA’s confidence in continuing the rate-cutting cycle.

The RBA has also been transparent about its easing bias. Bullock noted: “if we were just looking at where the domestic economy was at the moment, would we be looking at lowering rates or not, and as I said earlier with inflation in the band and also employment doing pretty well, we think there is a bit of scope to lower interest rates.” Even with labor market tightness, she added, “it does seem that inflation is continuing to come down notwithstanding a bit of tightness in the labour market.” Moreover, “inflation is right on target from a six-month annualised point of view.”

Looking ahead, the RBA sees conditional room for further easing: “I think if we continue to observe inflation coming down and staying down sustainably, then to the extent that we think there’s still restrictiveness in monetary policy—and we think there is a bit—then that would give us opportunities to lower the interest rate further.” However, Bullock acknowledged that renewed strength in consumer demand could change the equation: “If it looks like things pick up much more quickly than we thought they would… then all the cost pressures that the businesses are saying, well, they might be able to pass them on. That might be the risk on the upside, and the question there would be for us: are we still restrictive enough to keep that under control or do we need a bit more restrictiveness?”

Risks: A Fog of Unpredictability

Still, global and domestic risks remain. Bullock was frank about the external backdrop: “the situation we’re in is it’s not just uncertain, it’s actually unpredictable.” While the Federal Reserve has remained frozen—on high alert for stagflation—Australia is benefitting from a policy window (that may close in unpredictable ways).

Domestically, the RBA continues to monitor labor market imbalances. Bullock noted that “employment growth, the participation rate, vacancy rates, all these sorts of things are suggestive of the labour market still being quite tight.” On the other hand, consumption has not yet responded as expected to rising real incomes and falling rates: “We’ve been a little bit surprised that consumption hasn’t recovered as real incomes have started to recover. It’s just a bit softer than we thought it would be if you think about historical relationships. We thought it would have done better. So that’s the risk, that households for some reason are being much more cautious than they have been in the past and that that is a downside for the economy.”

The RBA has also shown intellectual flexibility in revisiting its assumptions: “we are open to the idea that we may be overestimating, or underestimating full employment, and I think that’s a healthy thing for us.”

Even amid these uncertainties, Australia’s anchored inflation and resilient labor conditions help reinforce the Australian dollar’s appeal as a mispriced asset in a volatile global landscape.

Trade Shocks: The Global Wildcard

Although Australia has a handle on its domestic picture, external shocks remain a major variable. Bullock acknowledged that the RBA, “just like everyone else, was completely blown out of the water by the scale and the scope” of the U.S.’s trade war. “So we really had to go back and have a much harder look. So there has been a lot of analysis done… and the Board does have to consider and factor much more of this into their thinking than was the case back before this all happened.”

While the RBA braces for future trade war storms, the U.S. Federal Reserve is in the center of the storm. The Fed is bracing for staglfationary impacts from the trade war and, as a result, remains stuck with inaction even as current inflation falls further from the Fed’s policy rate. Australia, by contrast, enjoys the flexibility of acting on current data and trends.

Conclusion: A Value Currency with Upside

Australia is entering a policy sweet spot: inflation is within target, the labor market remains robust, and GDP growth is beginning to recover. The country’s policy flexibility and economic trajectory stand in contrast to that of the U.S., where a hawkish Fed is constrained by future inflation expectations and geopolitical risk.

From a currency trading perspective, the Australian dollar looks as a value currency—undervalued after years of economic drag and monetary tightening…even with concerns about Chinese growth.

The following weekly chart of Invesco CurrencyShares Australian Dollar Trust (FXA) (currency pair AUD/USD) shows 14-year pressure on the Australian dollar versus the U.S. dollar. assuming the pandemic lows hold, the time looks ripe for a sustained turnaround.

Be careful out there!

Full disclosure: long AUD/USD, long AUD/JPY

The post Inflation at Target and GDP Growth Recovery: A Comeback Case for the Australian Dollar 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.

Source: April 2025 Manufacturing Business Outlook Survey, Federal Reserve Bank Philadelphia

At the same time economic activity fell off a cliff, prices paid accelerated higher. A steady uptrend in prices paid was in place since last year, but in April they jumped to levels last seen in July, 2022. After spiking in January, the prices received flattened out. So the good news, for now, is that firms in aggregate are not passing along the surge in prices paid. Either firms are facing the reality of a loss in pricing power in a softening economic environment, and/or they are trying to wait out the current economic chaos. Either way, the underlying stagflationary pressures are roiling just under the surface for the manufacturing sector.

Note that since these measures are diffusion indices (see definition in the above chart), the magnitude of these effects is not visible. Still, given policymakers closely watch these economic surveys to inform policy, the stagflationary signals are sure to bleed out into monetary policy.

The Fed Trap

Based on the speeches from members of the Federal Reserve, the stagflationary signals are already bleeding into monetary policy. For example, concerns about stagflation appeared in Fed Chair Jerome Powell’s answers to questions in an interview at the Economic Club of Chicago last week.

“the administration…is implementing significant policy changes and particularly trade now is the focus and the effects of that are likely to move us away from our goals. So unemployment is likely to go up as the economy slows in all likelihood and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public. So that’s the strong likelihood…”

This economic bind has the Fed trapped between inflation and economic weakness. For now, all the Fed can do is hope for the best. Hope as monetary policy came through as Powell continued: “…my hope is that we’ll get through this and get back…we’ll be moving away from those goals [of maximum employment and price stability] probably for the balance of this year and then or at least not making any progress and then we’ll resume that progress as we can.”

The Fed is clearly not thinking about responding to the current economic chaos with price cuts. Powell insisted that “our role is to make sure that this will be a one-time increase in prices and not something that turns into an ongoing inflation process.” The Fed cannot contain higher prices and higher inflation expectations with rate cuts. Thus, the Fed will likely sit on its hands as long as possible in the face of weakening employment. I expect the Fed to resort to creative “Fedspeak” in lieu of action in the hopes stagflationary pressures will wind down on their own.

A GTIP Dip

Three weeks ago I made the case for buying the Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) as one way of meeting the investing challenge of a stagflationary environment. GTIP fell soon after that as long-term bond yields suddenly soared with waning confidence in the U.S. economy and the U.S. dollar. I used this period to accumulate GTIP at lower prices since I do not foresee long-term yields going much higher absent an extreme crisis of confidence. GTIP will get its next big test when April’s CPI rolls out next month. Will it demonstrate businesses restraining from passing along tariffs to end consumers? Will it warn of resurgent inflationary pressures? The Federal Reserve Bank of Philadelphia’s April 2025 Manufacturing Business Outlook Survey suggests GTIP has tailwinds.

The Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) briefly dropped toward the bottom of its recent range.

Be careful out there!

Full disclosure: long GTIP

The post An Early Look At Stagflationary Pressures appeared first on Inflation Watch.

Shmid warned that “while in theory, tariffs may have only temporary effects on inflation (although persistent effects on the level of prices) I would be hesitant to take too much solace from theory in this environment”. He tied recent tariff announcements to broader signs of economic stress, including “a decline in consumer sentiment and increases in near-term inflation expectations.” Schmid acknowledged that the current policy environment has become “considerably more complicated,” citing feedback from business contacts who see growing risks on both sides of the Fed’s dual mandate of maximum employment and stable prices.

Schmid’s skepticism around transitory inflation contrasts with recent remarks from Fed Chair Jerome Powell, who has leaned into a more reassuring message about the persistence of tariff-driven price pressures. In “Jerome Powell’s Fed Deftly Maneuvers Through a Stagflationary Minefield“, I admired Powell’s effectiveness in navigating a difficult policy landscape, but I also pointed out the problematic use of “transitory” to describe inflationary effects. Powell argued that “it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us… and that can be the case in the case of tariff inflation.”

That assertion paralleled Treasury Secretary Scott Bessent’s line that tariffs are a “one-time price adjustment.” But as I wrote in “The Sleight of Hand Behind the ‘One-Time Adjustment’ and ‘Transitory’ Tariff Inflation Narrative“, for inflation to be transitory, expectations for price levels would need to revert after the initial tariff shock. Yet, “tariffs make price reversion unlikely by locking in a permanently higher cost base.” In that piece, I also pointed out how structural effects – such as wage responses, supply chain disruptions, and embedded cost pass-through behavior – make inflationary pressures from tariffs more persistent. Outcomes are also hard to anticipate as inflationary pressures cascade through the economy.

Schmid appears attuned to these systemic effects. He described “a marked increase in the upside risks around inflation along with elevated downside risks to the outlook for employment and growth,” and openly questioned the prudence of discounting these risks as fleeting. Unlike Powell, who focused on optionality and emphasized that longer-term inflation expectations remain anchored, Schmid directly acknowledged that business sentiment and price expectations are shifting in ways that could prove difficult to reverse.

Powell’s message was strategically designed to preserve policy flexibility and calm markets in the face of stagflationary fears, and in that moment, Powell succeeded. However, I remain concerned that Powell’s framing underestimates the lasting damage that tariff-related cost increases can impose on the economy. As I wrote in my critique, the idea of a “one-time adjustment” may be statistically correct but economically misleading. A new, higher price level, once established, may not simply fade away. The higher price level could reshape business behavior and household expectations for years to come.

Schmid seems to understand these risks. His closing words underscore the seriousness of the moment (emphasis mine): “With renewed price pressures likely, I am not willing to take any chances when it comes to maintaining the Fed’s credibility on inflation.” That statement signals a shift away from the complacency that defines the transitory inflation narrative on tariffs.

The Last Friendly Report on Inflation?

As the Fed slowly accepts increased inflationary risks in the future, the past provides fleeting reasons for optimism on inflation. While I have stuck by the persistent and sticky narrative on inflation, March’s CPI (Consumer Price Index) report signaled the potential start of the next leg down for core inflation…just in time for tariffs to pressure inflation upward again. From the report:

“The index for all items less food and energy rose 0.1 percent in March, following a 0.2-percent increase in February. Indexes that increased over the month include personal care, medical care, education, apparel, and new vehicles. The indexes for airline fares, motor vehicle insurance, used cars and trucks, and recreation were among the major indexes that decreased in March…

The all items less food and energy index rose 2.8 percent over the last 12 months, the smallest
12-month increase since March 2021.”

Notably, the shelter index was up 4.0% year-over-year.

The chart below suggests that, absent tariff inflationary pressures, core CPI would finally be on its last leg lower toward the Fed’s 2.0% target.

Ironically, this positive development in core CPI could give more confidence to policymakers in pressing forward with inflationary tariffs.

Bostic Concurs

In an interview on Marketplace, president and CEO of the Federal Reserve Bank of Atlanta, Raphael Bostic, appeared to concur with Schmid’s concerns:

“I think the pressures that are out there are not the best for our mandates. All the models say that the introduction to tariffs is going to put upward pressure on prices, and I’ve seen more reports of recession fears in the media and from our business contacts than I’ve heard in a year and a half or two years. And so that’s also going to put pressure on our mandate, the employment mandate, in a way that is not positive.”

Bostic’s tiny source of solace is that “the current environment today might not be the current environment tomorrow.”

Currency Correction

Typically I conclude these inflation reviews by teasing out some implications and impacts in currency markets via the U.S. dollar. This time around, there are too many tariff-related cross-currents and too much economic chaos to directly connect dots. So, instead, I take this time to describe a “currency correction” I had to make on the Canadian dollar (USD/CAD) and the Mexican peso (USD/MXN).

A month ago I explained:

“I am short USD/MXN out of a belief that economic relations with Mexico are about as bad as they can get. I could of course get proven wrong in due time. On the other hand, I am long USD/CAD because I do not think the market fully appreciates how much weaker the Canadian economy will get as it tries to match the U.S. in this economic warfare.”

I was correct for almost two weeks, but in due time I have been proven wrong. I have now closed out both trades in order to reassess my next moves. Surprisingly, the Canadian dollar has proven quite strong against the Mexican peso. The exact opposite of my expectations. That chart below shows how CAD/MXN is breaking out from an approximate triangle or wedge type pattern.

Even more importantly, USD/CAD has broken below a key support level at the same time the U.S. dollar looks poised for a fresh, major breakout against the Mexican peso. In other words, in the last 2-3 weeks, I could not have been more wrong! (Note how the 25% tariff on Canada and Mexico defined a PEAK for USD/CAD, a classic contrarian move).

While USD/CAD broke support at its 200-day moving average (DMA) (the blue line), USD/MXN HELD 200DMA support. Thus, USD/MXN looks likelyly to head even higher while USD/CAD looks likely to head even lower.

This currency correction took me by surprise. The move likely reflects the effectiveness and the robustness of Canada’s current resistance to U.S. economic warfare. Mark Carney, the new Prime Minister of Canada, has been quite clear in laying out a framework of Canadian resistance. The Governor of the Bank of Canada, Tim Macklem, has been similarly forthright in laying out the implications for monetary policy and bracing Canadians for the economic warfare ahead. Apparently, both men have, so far, succeeded in bolstering Canada’s defenses (symbolically through the Canadian dollar). The implications for inflation both here and in Canada remain to be seen as trade slows down between the two North American neighbors and former allies.

Be careful out there!

Full disclosure: no positions

The post Inflation Concerns Rise at the Federal Reserve Amid Tariff Unease appeared first on Inflation Watch.

TIPS are Treasury Inflation Protected Securities. The name implies that purchasing these bonds provides a way to protect your money from inflation. Per the Treasury website: “As the name implies, TIPS are set up to protect you against inflation…The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation.” A lot of people likely stopped reading there. However, TIPS are still bonds. So when interest rates go up, the value of the bond decreases. The crux of the failure in TIPS in 2022 was a double whammy: the inflation rate peaked along with an aggressive rate hike cycle by the U.S. Federal Reserve. Thus, the rate hikes eroded the bond value faster than inflation increased the value of the bond.

Is It Time to Buy GTIP?

The weekly chart below of the Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) shows how buying in anticipation of inflation made a lot of sense. Now, inflation is proving sticky, and in due time, with the backdrop of slowing growth, the Fed will be under increasing pressure to CUT rates. This stagflationary combination should provide a golden moment for TIPS.

With growth pressures ahead, the Fed is unlikely to hike rates anytime soon. This reality is an important backstop for GTIP. As soon as the Fed started to hike rates in 2022, GTIP topped out. GTIP plunged about 18% before it bottomed in 2022 and did not hit a final bottom until after the Fed’s last rate hike in July, 2023.

Note that GTIP has been on the rise in 2025. With a current yield of 3.5%, GTIP is “close enough” to many high yield savings accounts to make GTIP competitive alternative to cash for the conservative part of a portfolio. Even with tariffs creating a “one-time price adjustment higher” in prices, GTIP should get quite a boost in the coming year. Rate cuts from the Fed will provide an extra kicker. In other words, GTIP looks like a good investment option for the potential stagflationary environment to come. This TIPS instrument could even rival the return for stocks in the coming year or more.

Here Comes RBIL

The podcast “Talk Your Book” had an an excellent discussion on TIPS and potential alternatives to TIPS. In “A Better Money Market Fund“, F/m Investments explained why TIPS failed so spectacularly: “People ignored the fact that real yields can go up too…That real rate rise cannibalized any uptick you had in your inflation accrual…It was just typical bond risk.”

F/m Investments offered up the F/m Ultrashort Treasury Inflation-Protected Security (RBIL) as a an alternative to TIPS. Here is the case the company makes for RBIL (shown in graphical detail on the podcast site):

• A multiple bond portfolio consisting of TIPS maturing in a year which strips out rate duration risk and mainly leaves the principal appreciation from the inflation protection.
• Gives a modest coupon and the CPI appreciation
• Will protect purchasing power
• It is a better money market fund
• Avoids the tax complications of TIPS
• Provides the efficiency of an ETF

RBIL is definitely an interesting alternative to buy TIPS outright. But given RBIL just launched in late February, I prefer to buy GTIP for now, especially given my own inflation and rate expectations. In another year or so, I will check on the relative performance of GTIP vs RBIL and adjust as needed from there.

Tariffs Mean Inflation

F/m provided a simpleton’s guide to tariffs and inflation that serves as a summary to their short post on soaring inflation anxieties:

• When you hear tariffs, think inflation.
• When you hear tariffs are delayed or are coming sooner, you have to think more inflation.
• When someone tells you tariffs won’t cause inflation, you have to think Japan….or deep depression.
• We know all the outcomes from tariffs in the short-term will be inflationary – either because they’ve happened, or worse, the fear of coming tariffs drives the hoarding of goods and services which in turn drive short-term prices higher.

Case closed.

Be careful out there!

Full disclosure: no positions

The post Why TIPS Failed Spectacularly In 2022… And Is NOW the Time to Buy? appeared first on Inflation Watch.

• 2025 GDP growth at 1.5-1.9% (down from 1.8-2.2% in December)
• PCE inflation at 2.6-2.9% (up from 2.3-2.6%)
• Federal funds rate at 3.9-4.4% (up from 3.6-4.1%). These adjustments allow for minimal rate cuts this year, preserving flexibility.

Despite rising near-term inflation expectations, Powell reiterated, “We do not need to be in a hurry to adjust our policy stance and we are well positioned to wait for greater clarity.” This approach sought to reassure jittery financial markets while preserving optionality, a critical balancing act as economic chaos and uncertainty intensifies. Specifically, Powell coolly presented two potential scenarios, supposedly neither of which will trip up the Fed:

“If the economy remains strong and inflation does not continue to move sustainably toward 2% we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated we can ease policy accordingly. Our current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”

Powell further argued that inflation expectations – while rising in the short term – are not shifting over the long run:

“We do see increases widely in short-term inflation expectations and people who fill out surveys and answer questionnaires are pointing to tariffs about that. If you look in the survey world, if you look a little further out, you really don’t see much in the way of an increase. Longer-term inflation expectations are mostly well anchored.”

Powell used this argument to suggest that short-term inflationary pressures, including tariffs, should not be mistaken for a structural return to high inflation. By insisting that long-term inflation expectations remain stable, Powell steered the conversation away from stagflation and toward a more benign interpretation of recent inflation trends.

However, Powell extended these reassurances too far by parroting Treasury Secretary Bessent’s claims that tariffs are a one-time and transitory inflationary impact. Powell insisted that “it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us, if it’s transitory…and that can be the case in the case of tariff inflation.” I critiqued this explanation in “The Sleight of Hand Behind the ‘One-Time Adjustment’ and ‘Transitory’ Tariff Inflation Narrative“. While a tariff can impose a one-time price adjustment, that adjustment embeds higher costs into the economy. Powell himself acknowledged that consumers remain deeply frustrated by elevated price levels, stating, “The grocery bill is about past inflation really…they’re unhappy and and they’re not wrong to be unhappy that prices went up quite a bit and they’re paying a lot for those things.” It is exactly the higher price level that formed the core of my critique of dismissing tariffs as transitory. This deft maneuver worked in the moment as no one in the press pushed back and pointed to elevated price levels as being the future concern for tariffs now.

Powell also created uncertainty about the ultimate inflationary impact of tariffs: “we also hear that people are very reluctant to allow prices to go up. At the same time we hear that businesses are intending to pass many of these prices through. So it’s hard to say how this is going to work out.” Given this uncertainty, Powell should not suggest or even hint that tariff-driven inflation could be transitory. After all, the transitory framework failed miserably in 2021.

The market reaction to Powell’s messaging will be crucial in the coming weeks. Will Powell’s deft maneuvering and lack of urgency be sufficient enough to inoculate financial markets against the on-going, surrounding policy and economic chaos of rising inflation expectations, tariff-driven uncertainty, and fragile consumer sentiment? Powell’s ability to maintain flexibility will be tested as market participants digest his messaging. The next few weeks could determine whether his balanced stance reassures investors or leaves them scrambling for clarity all over again. For now, the immediate reaction in the stock market signaled a spark of relief.

The below 15-minute chart of the S&P 500 (SPY) provides the critical price levels traders need to watch in coming days for support and resistance during this bear market. Buyers celebrated with relief upon the release of the statement but ran out of gas at the intraday high of the week as Powell concluded the Q&A with reporters.

Conclusion

Powell successfully maneuvered what could have been a challenging press conference without committing the Fed to a firm policy shift. While he downplayed stagflationary risks and sidestepped concerns about persistently high price levels, worsening economic realities could eventually force Powell and the Fed to recalibrate this strategy under far more difficult market conditions.

Be careful out there!

Full disclosure: long SPY

Note: this post was edited with the help of ChatGPT 4.0

The post Jerome Powell’s Fed Deftly Maneuvers Through a Stagflationary Minefield appeared first on Inflation Watch.