Fed: It’s a battle between inflation doing okay so far and employment starting to get scary

The Fed begins its meeting today with nobody having any real insight on what it will say tomorrow. It’s a battle between inflation doing okay so far and employment starting to get scary. Here’s the problem: economists are united in saying inflation is not going to stay okay and unemployment is sure to rise due to the slowdown that is not a recession. So the Fed is expected to stay on hold because of forecasts, not actual hard data. Tsk, tsk.

If it were not for the forecasted tariff effect on inflation later, the Fed could cheerfully cut. But what if Trump backs down on tariffs and we don’t get that later inflation effect? The charge of being behind the curve will be true. Or he backs down enough that the tariff-driven inflation is not too bad? So now the poor Fed has to predict how a malevolent narcissist will behave. They need to consult psychiatrists, not economists. 

The WSJ points out that the Fed respects survey showing inflation expectations, lousy.

Though they may be, and offers this chart. And yet the response to pandemic inflation.

Could be overdone considering we had so many years of low inflation and low rates.

Before Covid—survey respondents are stuck in an older mindset. Maybe this is what the.

NY Fed found. This is what Fed chief Williams thinks.

Fed Waller thinks the inflation effect of tariffs will be just a one-time thing “that won’t fundamentally give businesses greater ability to keep raising prices.” We suspect he underestimates greed.

In a nutshell, if the Fed appears dovish tomorrow, it could get sideswiped two months later when tariffs hit the inflation data. Some say it could be hawkish and hint at only one cut later this year instead of the long-expected two. Even one cut is inconsistent with inflation projections but who says the narrative has to be rational? Just look at the BoJ, which “should” have raised rates on the inflation data.

Note that in addition to retail sales and other inputs today, we also get the Atlanta Fed Q2 GDPNow. The last one was 3.8%.

Forecast: Real data is trumped by Trump “data,” much of which is false, including his claim of having done a trade deal with the US at G7. So far he has not been able to shift the Fed, which is more powerful than he is but not helping on the uncertainty front.

The Fed has the ability to move the markets tomorrow. It could hint at only one cut later this year. It could hint at a cut in July but a return to higher rates when tariff effects kick in in Q4. It can say nothing at all to suggest what comes next, the most likely outcome. We’d vote for a July cut but hikes later in the year, in part to keep Trump off Powell’s back, but this is not consistent with Fed behavior, so grain of salt.

A cut or hint of a cut is dollar-negative and talk of a hike is dollar-friendly, but we need to be careful not to hear what we want to hear. Longer tun, the dollar is toast for all the reasons we have been citing since Jan 20, most of them starting with the cursed T word. But a respite is always possible. Don’t bet the ranch.

Tidbit: At the height of the Friday panic about the Isreal-Iran war, when oil rose, gold rose, too—but not the dollar and not bitcoin. In fact, bitcoin is more closely correlated with stock markets than anything else, hence a risk-on trade rather than a hedge against disorderly markets.

A CME article notes that bitcoin is acting like equities rather than a portfolio diversifier or alternative to gold. “In 2020, a significant shift occurred. The relationship between bitcoin and equities turned positive and has remained so over the past five years.” See the correlation chart. And the correlation becomes stronger in times of stress.

The WSJ’s Jakob notes “This isn’t the first time: Back in April, in the week following President Trump’s ‘Liberation Day’ announcement, stocks swooned worldwide. Bitcoin did too, dropping 7.5% in six days. And it was directionless back in February 2022 as Russian troops massed on Ukraine’s border and then invaded. Gold, meanwhile, edged higher as tensions rose and kept climbing when the shooting began.”

So, if you are buying a bitcoin ETF plus one of the S&P ETF’s, you are doubling without knowing it. You are not getting a real asset (like real estate), which is outperforming financial assets, anyway.

Tidbit: The latest estimate of the “No Kings” protest crowds on Saturday is 5 million, while the Army parade itself attracted fewer than 250,000 and the VIP bleachers were barely half-filled. Cable TV was full of hosts dancing for joy.

This is to be celebrated because as Krugman points out, “Right now crowd sizes matter a lot because competitive authoritarianism rests largely on self-fulfilling expectations.” By that he means anti-Trumpists will stick their necks out in a crowd if not singly—there is safety in numbers.

“In other words, the victory or defeat of competitive authoritarianism will depend to a large extent on which side ordinary people believe will win. If Trump looks unstoppable, resistance will wither away and democracy will be lost. On the other hand, if he appears weak and stymied, resistance will grow and — just maybe — American democracy will survive.

“So what we saw on Saturday was more than just the juxtaposition of a poorly attended parade that was supposed to glorify the Leader against massive, enthusiastic protests. We also saw a body blow to Trump’s image of invincibility and a demonstration that millions of Americans are willing to stand up for democracy.” 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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