Inflation Wild Cards at Home and Abroad

The Weekend Edition is pulled from the daily Stansberry Digest.

A 19-year first...

When the Federal Reserve announced its 50-basis-point interest-rate cut last month, a small acknowledgment was tucked near the bottom of the statement...

Michelle Bowman, one of the 12 voting members of the Fed, disagreed strongly enough with her fellow members to "dissent" to the Fed's policy announcement. Bowman voted for a 25-point cut instead.

A 25-point difference in opinion on monetary "easing" might not sound like much. But the message matters. It was the first public dissent of a Fed's policy announcement since 2005.

Bowman, who occupies a seat on the Fed board representing community banks, elaborated on her disagreement nearly a week later at a bankers' conference in Hot Springs, Virginia.

First, she said she was concerned about sending the wrong message to the market – that the Fed sees "fragility" in the economy (which she doesn't see).

Second, she feared the market would expect similar 50-basis-point cuts in the future when they might not happen.

Finally, she's concerned about "reigniting inflationary pressures." As Bowman said on September 24...

I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment.

Although the labor market data have been showing signs of cooling in recent months, still-elevated wage growth, solid consumer spending, and resilient GDP growth are not consistent with a material economic weakening or fragility...

I am taking less signal from the recent labor market data until there are clear trends indicating that both spending growth and the labor market have materially weakened.

So Bowman has a more optimistic view of today's economy and less conviction about its future path than her colleagues. This view may or may not be proved right.

On the one hand, you could criticize Bowman for "slow" Fed thinking if the economy worsens into early 2025. On the other, Bowman is likely right to worry about reigniting inflation.

Now, given the rising unemployment rate and other pre-recession or recession signals we've seen lately, I see the Fed's case for the 50-basis-point cut. Either way, though, Bowman brings up a great point to consider...

There are always second-order consequences to a Fed move...

We like to consider these because they can "surprise" the market in the future and lead to volatility.

For example, 40-year-high inflation emerged after the central bank's consensus view of "transitory" inflation in 2021. Interest rates had to go higher afterward, which crushed the value of bonds (and stocks) in 2022. But the Fed never entirely told anyone this would probably happen.

Today, Bowman is a lone Fed voice reminding people about the possibility of high(er) inflation again due to Fed decisions. My gosh, is that some public self-awareness?! There's value in that.

Long story short: If the pace of inflation picks up again, it won't surprise us.

The interest-rate path might not live up to most people's hopes...

On Monday, Fed Chair Jerome Powell made some headlines at an event hosted by the National Association for Business Economics in Nashville, Tennessee... He suggested that the central bank is not in a rush to cut rates further.

It's "not something that we need to go fast on," Powell said, and made his plans explicit...

If the economy performs as expected, that would mean two more cuts this year, a total of 50 more [basis points].

The Associated Press said that Powell's comments "disappointed the hopes of many investors that the Fed would implement another steep half-point reduction in its key rate before the end of the year."

To which we first say, be careful what you wish for. Bigger rate cuts could mean the economy is taking a turn for the worse... Alternatively, if the Fed is wrong about its policy (again), excess rate cuts could spark higher inflation (again) down the road.

Second, if anything, I take Powell's comments as an acknowledgment that he may have heard what the market has been saying recently. Longer-term bond yields (and inflation expectations) rose after the Fed's 50-basis-point rate cut in mid-September.

But most important...

If you're interested in the future path of monetary policy, you're probably better off watching what the economy is doing than anything the Fed is saying. As usual, the Fed is chasing reality.

What Powell said Monday probably won't matter all that much by the Fed's next meeting in November.

The market is likely to take its cues from the economic numbers, even if they will be "revised" later. The Fed is following, too. Because remember, on the day of the Fed's 50-basis-point-cut decision, Powell said what might come next from the central bank...

The actual things that we do will depend on how the economy evolves.

Eventually, stronger-than-expected jobs numbers could upend all the prevailing narratives in the market today – including the idea that inflation is continuing to ease.

We've recently seen a few early signs of this...

Tuesday's Job Openings and Labor Turnover Survey ("JOLTS") report showed that the number of job openings in the U.S. increased to 8 million, from 7.7 million a month before.

Wednesday's private-payrolls report from payroll-processing firm ADP reported 143,000 jobs being added in September, which was higher than economists' consensus expectations of 128,000.

The job gains were widespread across industries, led by leisure and hospitality (34,000), construction (26,000), education and health services (24,000), and professional and business services (20,000).

And on Friday, we got the "nonfarm payrolls" report and updated unemployment rate...

It showed that the labor market added 254,000 jobs last month, handily beating the 150,000 additions that economists expected.

Plus, revisions to both the July and August reports showed the economy added 72,000 more jobs during those two months than previously thought... Yet even with those higher revisions from summer, the September job additions still blew past the 159,000 payrolls added in August.

The overall unemployment rate also fell to 4.1%, down from 4.2% in August.

At the same time, other recent data suggests a hiring slowdown in the U.S. economy and pre-recession reactions in the market... So we'll want to keep watching.

Moving ahead, if the labor market doesn't keep weakening, the Fed's rate-cut "cycle" could – or should – finish early.

Then again, the central bank is typically slow to react. So the current rate-cut track could go on as planned until another "surprise" – like if high(er) inflation numbers again return to prominence. Such is the trouble with trying to manipulate a $27 trillion economy.

A wild card and a recipe...

War surely isn't deescalating in the Middle East...

That's important. War is inherently inflationary. Depending on how it develops, the crisis could impact energy supply from major oil-producing countries and additional supply-chain concerns in the region... stoking inflation further.

Remember, the Houthis are still attacking freighters in the Red Sea. And Iran is home to significant oil-production facilities that could be targets of Israeli retaliatory strikes.

That said, in a world where inflation is already a reality – and we're willing to bet it will be in some form for our entire lifetime – you'll want to have a recipe to protect and grow your hard-earned wealth.

Here's ours: buy shares of high-quality businesses at reasonable prices... own inflation hedges such as gold... and be ready for the inevitable next credit-related crisis – both to protect yourself and to seize the risk-reward opportunities that emerge during a panic.

Good investing,

Corey McLaughlin

Editor's note: By the way... our founder Porter Stansberry has warned that we might be weeks away from a crisis that could threaten your hard-earned wealth. It could begin the moment the polls close on November 5... And whoever wins the election will be powerless to stop this new financial force that's about to divide America in two.

That's why Porter recently went on camera to help you ensure that you're on the right side of this divide. If you're prepared, it could be the greatest wealth-building opportunity of your lifetime... Get the details here.