Weekly Update: The Free Ride Is Over
Good evening, and welcome to this week’s edition of Stealth Trades!
The new Fed Chairman just blamed the Federal Reserve for the inflation of the last five and a half years.
Not supply chains. Not the pandemic. Not Congress.
The Fed.
Kevin Warsh gave his first Jackson Hole keynote as Chairman on Friday, and buried in the middle of it was a sentence no sitting Fed chief has ever said out loud:
“There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.”
He took the blame for all of it. And I don’t think he would start his term that way unless you intend to be the guy who ends it.
Here is why that matters for your money.
The market has spent this entire year pricing in rate cuts. As of Friday, the odds of a cut at the September meeting are under 2%. The odds of a rate hike moved from 35% to 46% in the hour after he spoke.
And the inflation numbers are even worse than the headlines
12-month PCE increase: 3.7%.
6-month PCE increase: 4.1%.
Inflation is NOT cooling off. It is reaccelerating.
Warsh took it even further. He broke the PCE basket into its 199 individual components and counted how many are rising faster than 3% a year.
The answer is 54%.
Before the pandemic, that number averaged 32%.
For four years, every hot inflation print got explained away. It’s used cars. It’s eggs. It’s shipping containers. It’s one weird category dragging up the average.
That excuse is dead. When more than half of everything you buy is running above 3%, it is not eggs.
Policy is not tight, and he said so clearly.
This is the part that should reset your expectations.
Warsh said he would be hard pressed to describe broad financial conditions as restrictive.
He even brought receipts…
Business capital spending is up around 9% over the past four quarters, the fastest since 2021.
S&P 500 corporate profits are up more than 20% in a year.
Corporate credit spreads sit near the low end of their historical range with heavy issuance.
Banks even told the Fed in July that lending standards for commercial and industrial loans are on the EASY end of their range.
Even equity volatility is low.
Here is the simplest way to see it. The effective fed funds rate is 3.63%. Inflation is 3.7%.
After inflation, the Fed is charging nothing. Wall Street banks have been getting free money.
The “restrictive” policy they like to complain about is anything but.
So, the business environment is strong. Unemployment claims are low. But inflation is still too high. And that is his top priority.
Gee… I wonder what he will do?
He couldn’t have made it any clearer. He is not going to cut rates. He’s going to raise them. And he will keep raising them until we finally see, for the first time in six years, sub-2% annual inflation.
Fed chairmen tend to sort of pick a team. Either they are focused on the stock market and keeping the business environment competitive, or they are focused on everyday citizens and prioritize keeping prices stable.
They have a mandate to do both. But that is easier said than done. At some point, they have to make a decision. And Warsh just told you which way he will go when pressed.
The next Fed meeting is September 16th.
Warsh revealed his standard in this morning’s speech. He said he must be confident inflation is moving to target clearly, and at sufficient speed. Otherwise, in his words, they have work to do.
“Work to do” does not mean cutting. It does not mean looser financial conditions. It means tighter ones.
Warsh has no plans to use unconventional policy tools. He made clear they should be used sparingly, if at all.
He will not be riding to the rescue the first time the stock market has a bad month.
The rescue window is closing. And the stock market will not be propped up by artificially low rates.
Best wishes for your trading,
