Image source: Wikipedia
 

When Powell announced the resumption of easing monetary policy, he said the balance of economic risks gave the green light for the Federal Reserve to cut rates. The Federal Reserve delivered as promised in September and again at the October policy meeting with 25 basis point cuts that now have the Fed funds rate ranging from 3.75% to 4.0%. However, in his opening statement explaining the latest rate cut, Powell balked (on behalf of the Fed). He cautioned that “a further reduction in the policy rate at the December meeting is not a forgone conclusion” and just in case anyone doubted the weight of his words, he added “far from it” for emphasis. Financial markets promptly responded negatively to this single sentence and the odds for a December rate cut declined accordingly.

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.
 

SPDR Gold Trust (GLD)

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!

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