Federal Reserve Chair Kevin Warsh started his fight against inflation with jawboning during June’s decision on monetary policy. The performance was all words, many task forces, and no action. Warsh doubled down on the jawboning for July’s decision. The Chair expressed even more resolve for hitting the 2% inflation target while making the measuring stick provisional. PCE remains the benchmark for now, but Warsh suggested the task forces could change that strategy after January and declined to identify the broader set of inflation data informing his judgment.

Warsh doubled down on jawboning by describing a contentious policy meeting while also sidestepping a request to explain the decision to hold rates unchanged. Warsh also refused to provide any insight on the dissent from the three of twelve voting FOMC members who each voted for a quarter-point rate hike (Beth M. Hammack, Neel Kashkari, and Lorie K. Logan). He even declared as a counterpoint that there was “a lot of agreement on the hard questions.” He also heard a lot of “commonality” on the key questions he mentioned at the top of the press conference; the answers just had different “leans.”

Finally, Warsh further extended his brand of opaque Fedspeak by countering the image of a Fed fighting over rate hikes with the unanimity on a metaphorical vote for a period of “watchful thinking not watchful waiting.” In either sense of watchfulness, Warsh did not provide specifics about what the Fed is actually prepared to do to finally bring inflation back to target.

The statement itself made the decision to hold rates steady even harder to explain. The FOMC described economic activity as expanding at a solid pace, productivity and capital investment as strong, job gains as keeping pace with the workforce, and unemployment as little changed. At the same time, inflation remained elevated. Yet, the Committee offered no explanation for why this combination of solid growth, stable employment, and above-target inflation justified leaving rates unchanged. Instead, the statement jumped from attributing some price increases to supply shocks straight into more jawboning: “The Committee will deliver price stability.”

Warsh’s declarations about inflation were all the more awkward given he continued to imply that the Fed before his tenure was not serious enough about its inflation target. For context, Warsh consistently describes inflation as a choice, a claim predating his appointment to the Chair. However, he has yet to specify the choices the Fed needs to make beyond the potential recommendations from his various task forces. Instead, he is keen to point out distinctions between the current FOMC and prior ones: “we have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks—or by a single month of modest price decreases.”

Warsh introduced one more potential choice without making it specific: the balance sheet. He asked how much accommodation it is still providing even if interest-rate policy remains the Fed’s primary instrument. As with the inflation framework, Warsh posed the question without providing an answer, an intended adjustment, or a timetable.

Passing the Inflation Fight to the Bond Market

One emergent choice could be passing the inflation-fighting baton to financial markets. In his opening statement, Warsh anticipated questions about what the Fed did to fight inflation between the June and July meetings. He pointed out that the Fed’s retreat from the business of forecasting and forward guidance allowed financial markets to react to data instead of the Fed. The result? Higher bond yields that have tightened financial conditions. He used a sports metaphor to emphasize the change in the game: “market participants are learning to play the ball, not the referee—and market prices will continue to respond in the direction and magnitude they see fit.”

While Warsh insisted that “where necessary and appropriate, we will not hesitate to act,” he declined to clarify the conditions under which the FOMC would actually do something about inflation. Still, toward the end of the press conference, Warsh acknowledged that the bond market’s tightening of financial conditions provides “some comfort that we’ve got the ability and capability to deliver.” The coded language suggests that the Fed is willing to let the bond market do part of the inflation-fighting work while the FOMC waits for results.

One perplexed reporter pointed out that the bond market’s higher rates suggested the Fed was falling behind on hiking its own rates. Another befuddled reporter bluntly asked, “Why should rates not be higher today?” Warsh deftly avoided referencing the Fed funds rate and instead chose to point out the “market’s judgement” to take nominal rates higher along the Treasury curve. While the Fed will not allow the market to dictate its actions, the Fed is “observing” markets.

Warsh next pointed out that both the Fed and markets have upcoming decisions to make about interest rates. He tried to make it plain: “Monetary policy matters not just by what we say, or even what we do. Monetary policy matters by how it affects the real economy.” Of all the Warshspeak on the day, that statement stood out to me as the clearest declaration of the Fed’s modality for action in the Warsh era. If the Fed concludes that market is tightening financial conditions in response to inflationary pressures, the Fed will be content to wait for inflation to respond accordingly.

The Bond Market Hears Warsh Loud and Clear

The bond market seemed to get the point. Long-duration Treasury bonds sold off sharply as soon as the Fed’s statement hit the wires and barely stopped to catch a breath for the rest of the regular trading day.

The reaction function for stocks was much more volatile. The S&P 500 (SPY) rallied into and through the statement until someone tapped stocks on the proverbial shoulder and turned attention to the bond sell-off. The S&P 500 sold off sharply in the last hour of trading, falling from a marginal 0.4% gain intraday to a 1.5% loss at the close.

The subtle frustration from the press intensified with every unanswered question. One reporter almost pleaded with Warsh. The reporter pointed out his repeated claims about intolerance for above target inflation while his Fed has yet to take action. In response to the reporter’s request to clarify what he means by “no tolerance for inflation” and the plans to act, Warsh responded by acknowledging the impatience he had heard about this situation. Yet, he still only offered the same menu of jawboning by declaring this Fed is “on the job. We will deliver.” First, the Fed needs to answer a series of hard questions in order to deliver on its remit.

The press’s frustration symbolically boiled over in the last question: “You said you’d be open to having press conferences when there’s news to make. Today, no change in rates. No forward guidance. For the average household, what was the news today?” Warsh’s final non-answer was telling. Warsh first reiterated his commitment to the existing press conference schedule for 2026. He went on to assure the audience that the Fed is “on the case”, and his confidence in the Fed’s ability to deliver on its inflation target was even stronger than when he took the Chair position. He concluded the session by leaving the audience with “the optimism of a new central banker that we’re committed as ever to deliver and to offer an assurance we will.” And with that doubling down, the jawboning came to an end.

Be careful out there!

Full disclosure: long TLT

The post Warsh Doubled Down On Jawboning Even As the Fed Fights Over Rate Hikes appeared first on Inflation Watch.

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.

The CPI components suggest that inflation’s glide path through the “final mile” will remain sticky. Services less energy services rose 0.4% in January and are up 2.9% year-over-year. Shelter increased 0.2% on the month and 3.0% over the past year. Medical care services rose 0.3% in January and are up 3.9% year-over-year. These service categories continue to keep core inflation above the Fed’s target.

Progress is real. The chart below shows core CPI has finally taken an incremental step to a lower inflationary regime. Yet the path lower remains gradual and sticky.

The Tariff Effect on Core Goods

The CPI for commodities less food and energy commodities increased 1.1% year-over-year and remains a key contributor to overall disinflation. This category could contribute to even lower inflation this year if the U.S. avoids enacting new tariffs.

In Liberty Street Economics, the New York Federal Reserve published a quick study that demonstrates a tariff incidence of roughly “94 percent” in the first eight months of 2025 and “86 percent” by November, meaning the vast majority of tariff costs showed up in import prices paid by U.S. consumers. The average tariff rate rose to about 13 percent, and tariffed goods experienced price increases of roughly 11 percent relative to comparable untariffed goods. Fed Chair Jerome Powell noted at the January press conference on monetary policy that inflation could be closer to target absent tariff effects. This study provides supporting data.

However, from a policy of economic warfare, tariffs have likely achieved a primary aim: a significant reduction in imports from China. The study pointed out that “in the first eleven months of 2025, China’s share of U.S. imports fell by another 5 percentage points, slipping below 10 percent”. Chinese imports accounted for nearly 25% of U.S. imports in 2017 and declined to around 15% in 2024 following the tariff increases implemented in 2018 and 2019.

The inflationary consequences of tariffs could be secondary to this strategic goal. Importers have shifted supply chains to blunt the otherwise inflationary impact of the higher tariffs. The general disinflationary environment during the first round of tariffs also likely helped embolden today’s heightened tariff regimes.

The strategic objective may be clear. The inflationary implications are less so.

Are Tariffs an Enduring Inflationary Force?

The New York Fed study does not argue that tariffs create a self-sustaining inflation spiral. It documents substantial pass-through into prices during 2025. If no new tariffs are enacted, year-over-year comparisons will eventually absorb this price shock. Base effects alone would allow the tariff impulse to fade.

However, continued or expanded tariffs would introduce new price-level increases. Repeated rounds would transform a one-time adjustment into recurring upward pressure on core goods. Ongoing uncertainty around tariff policy remains a significant wildcard. Persistent uncertainty could encourage firms to raise prices preemptively in anticipation of future cost increases.

Reluctant Disinflation

Disinflation is underway, but the path for the final mile to 2% remains sticky. This phase can best be described as reluctant disinflation, the mirror image of sticky inflation.

The bond market remains broadly unconcerned about renewed inflationary pressure. Bond prices rose following the CPI release. After gaining 1.3% ahead of the report amid rising equity volatility, the iShares 20+ Year Treasury Bond ETF (TLT) added another 0.5% after the data. With TLT trading well above its upper Bollinger Band – a signal of short-term extension – I took profits on a large TLT position.

In recent weeks, I have shifted toward buying dips and selling rallies in TLT rather than fading strength. As long as the bond market remains confident that inflation will continue moderating, my inflation hedge remains concentrated in commodities as the U.S. in particular positions itself to run the economy hot with lower interest rates, high investment, and fiscal stimulus.

Be careful out there!

The post Core Inflation Softens, but the Final Mile to 2% Remains Sticky 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.

Each Fed region told slightly different stories about their respective inflationary pressures. A few regions are even enjoying some type of price stability for now. Still, the anecdotal evidence on the whole supports the notion that tariffs cause prices to rise and the price impacts can cascade in uncertain ways.

Boston

Boston produced benign inflation commentary. Prices may be stabilizing. According to the Boston observers: “Most contacts expected to hold their own prices steady for the rest of the year, as some perceived strong consumer resistance to further price increases. Tariffs were expected to drive seafood prices higher going forward, but risks of rising inflation were mentioned less frequently than in the previous report.”

New York

The commentary from New York was the exact opposite of Boston. Perhaps reflecting a higher rate of international commerce in the New York region, this region delivered some of the sharpest inflationary commentary: “the pace of input price increases remained steep as tariff-related cost increases were widespread. Many businesses reported continuing to pass on some or all tariff cost increases to their customers.” Tariffs drove up the costs of steel inputs and auto parts. While businesses indicated there are limits to their ability to pass on prices – “businesses expected substantial increases in input prices in the months ahead, but more moderate increases in selling prices” – one retailer reported a creative solution by raising prices on products with inelastic demand. This pricing strategy could gain popularity as tariffs push higher prices across the economy and businesses scramble to accommodate without crushing demand.

Philadelphia

This region reported some pricing pressures in the forms of discounts from the retail, tourism, and residential construction sectors. The pricing pressures facing builders have slowly increased this year. One firm even received price relief on insurance for the first time in a few years. While tariff-related pricing pressures have been lower than expected so far, businesses expect larger tariff impacts in coming months.

Cleveland

Perhaps because of heavy industries with a dependence on highly tariffed inputs, Cleveland seems to be getting hit hard by cost pressures: “contacts’ reports indicated that nonlabor input costs continued to rise at a robust pace in recent weeks and that the cost stabilization seen during 2024 had dissipated.” The strong pace of price increases in imported, tariff-impacted materials and tariff-impacted retailers leads contacts to generally expect “costs to grow at a strong pace in the coming months.” The banking, professional, and business services sectors have even experienced higher costs for technology, including AI and data security. (Cleveland was the only region to report such higher costs, but I doubt they are or will be the only one hit given the broad need for this technology). Firms in Cleveland are raising prices to respond to tariffs, but they are somewhat constrained by price sensitivity in their marketplaces.

Richmond

Richmond had little to say about prices. The most notable comment came from a firm that has suffered increased costs throughout its business: “One manufacturer said that input costs were higher in recent months due in part to tariffs but also from rising regulatory, insurance, and labor costs, including wages and benefits.”

Atlanta

In Atlanta, businesses are trying every trick in the book to manage tariff-related risks and price pressures: sharing costs between suppliers and customers, changing supply chains, drawing down on pre-tariff inventories, pre-emptive price hikes, and wait-and-see. I expect this broad palette of strategies to unfold nationwide.

Chicago

Business in Chicago expected the same pace of inflation going forward as the “moderate” rate they saw from late May to June. Higher material costs were the highlight for manufacturers surveyed in the region.

St. Louis

Businesses surveyed in St. Louis described a mix of absorbing the increased costs of tariffs and passing along higher costs to customers.

Minneapolis

Beating Boston, Minneapolis had the most benign commentary on inflation. Businesses in Minneapolis actually reported a slower pace of inflation than the previous month. This region quantified its survey as follows:

• About a quarter of District firms increased the prices they charged to customers in June from a month earlier.
• About the same percentage anticipated increasing their prices in the month ahead.
• Slightly less than half of respondents reported increased input prices over the previous month.

Kansas City

Profit margins shrank in Kansas City as businesses were not able to pass on the full extent of increased input costs. Companies may have absorbed all they can at this point given “some firms reported they are planning broad-based price increases across product lines to maintain profitability.”

Dallas

Despite a range of reports of higher costs for input materials, “expectations for 12-month price growth eased slightly in June compared to March.”

San Francisco

Inflationary pressures remained the same from the June to the July Beige Book. The pressures are also broad-based: “Price increases were reported across a wide range of industries.”

Inflation Will Stay Resilient

On balance, the Beige Book confirms that, at best, inflation going forward will hang around current levels. Gone is the glide path downward that reassured the Fed about cutting rates. The June CPI report suggests that inflation has bottomed out. A nudge from tariffs could put in place a new uptrend as higher price levels settle out through the country.

The Fed is unlikely to hit its 2% inflation target anytime soon.

The Noise

While inflationary pressures build, pressures build on Chair Jerome Powell o resign or get fired. The drumbeat of acrimony now seems like a lot of noise. Like the tariff drama, trauma, and noise, the Powell versus Trump drama is mainly headline fodder until something happens. Wednesday’s (July 16) news was case in point. Headlines screamed Trump was ready to fire Powell, bonds fell, and then Trump refuted the rumor. The iShares 20+ Year Treasury Bond ETF (TLT) almost tested its low for the year before rebounding sharply.

I used the sharp dip to buy TLT $87 call options expiring in August. The trade bets on another relief rally following a sharp sell-off. I expect to return to fading rallies in due time.

Be careful out there!

Full disclosure: long TLT calls

The post July Beige Book Reinforces A Bottoming in CPI 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.

I faded the move in bonds as nothing about the December CPI print changed the fundamental narrative of sticky inflation and a cautious Fed or even the prospect of soaring U.S. budget deficits. I speculated on weekly SPY put options as a hedge. I fully acknowledge that the stock market has spent a year and a half or more adjusting to every hiccup and bout of angst over the inflation narrative.

The chart below demonstrates that the eye must strain hard to see a change in the profile of core CPI. We will have to wait until later this month to see whether the softer than expected core CPI also bends core PCE off its uptrend from its last trough.

Sources: 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; January 15, 2025.

The volatility index (VIX) well represented the stock market’s huge sigh of relief over inflation. The VIX plunged 13.9% and brought an end to the most recent uptrend.

Shelter Inflation Continues Trending Down

Shelter inflation, along with services inflation, has been a key culprit in stubbornly sticky inflation. The National Association of Home Builders (NAHB) pointed out that “the year-over-year change in the shelter index remained below 5% for a fourth straight month and posted its lowest annual gain since January 2022, suggesting a continued moderation in housing inflation.” Shelter inflation has even been on a definitive downtrend since peaking in March, 2023. Unfortunately, the current trajectory may be too slow for comfort in terms of its impact on aggregate core CPI.

Shelter inflation dropped from 7.5% in December, 2022 to 6.2% in December, 2023 and now 4.6% last December. If this nearly linear pace continues, shelter inflation will be around 3.2% next December, right around where core CPI currently sits. Thus, other components will still need to do some heavy-lifting in coming months to meaningfully push core CPI, and presumably core PCE, closer to the Fed’s 2.0% target.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Shelter in U.S. City Average [CUSR0000SAH1], retrieved from FRED, Federal Reserve Bank of St. Louis; January 16, 2025

An Oil Breakout

Oil prices are not part of the core CPI, but its recent breakout has caught my attention. A continued, persistent rise in oil prices could bleed into higher inflation expectations for consumers. Such a dynamic may further motivate the Federal Reserve to sit on its hands with monetary policy. A 3.3% gain in the United States Oil Fund (USO) sent the ETF to a 2 1/2 year high.

A Spike In Short-Term Inflation Expectations?

Every month, the New York Federal Reserve publishes a survey of consumer expectations. This survey includes various measures of inflation expectations. The 1-year median expected inflation rate for consumers stayed around 3.0% for all of 2024, consistent with the narrative of sticky inflation. However, a potentially interesting blip happened in December where the median point prediction jumped from 3.0% to 3.8%. The median point predictions are typically higher than the median expected inflation rate, but they rarely diverge and almost never by such a wide margin. The accompanying press release does not refer to this surprising 1-month behavior, but I cannot help speculating on its significance. I will be watching to see whether this point projection manages to lead the median expected inflation rate higher or whether it snaps back to the typical relationship. Either way, such a jump is surely not positive for inflation in the near-term.

The Trade

I continue to maintain a strategy of fading rallies in TLT. Going into the CPI I owned a single February TLT $85 put option “just in case” CPI produced a fresh upside surprise in inflation. Now I can accumulate TLT put options at more attractive prices. TLT’s rally stopped just short of resistance at the 20-day moving average (DMA) (the dotted line below). A breakout from there will set up even more attractive prices on a test of converging resistance between the downtrending 50DMA (the red line) and the bottom of the former trading range (the thick black line).

Be careful out there!

Full disclosure: long TLT put options, long SPY put options

The post A Fresh Opportunity to Fade Bonds As A Marginal Change in Inflation Ignites A Near Oversold Market appeared first on Inflation Watch.

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

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

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

Instructive Projections

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

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

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

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

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

Powell’s Inflation Narrative Still Rests With the Pandemic

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

The Fiscal Wildcard

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

King Dollar

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

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

YouTube video of the December 18th FOMC Press Conference

Be careful out there!

Full disclosure: long SPY put spread

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