Higher Inflation Is Putting the Fed in a Tough Spot
The Weekend Edition is pulled from the daily Stansberry Digest.
Some of this week's inflation news...
On Tuesday morning, the Bureau of Labor Statistics ("BLS") released its Consumer Price Index ("CPI") for July. On the surface, the data was exactly what investors wanted to hear...
The benchmark measure of prices rose 0.2% last month and increased 2.7% year over year. The one-month change matched Wall Street's estimate, while the year-over-year number came in slightly below the expected 2.8% increase.
A 9.5% year-over-year drop in gasoline prices helped offset a 5.5% jump in electricity costs. Aside from gasoline and oil, apparel was the only sector to record a year-over-year decline.
While the headline CPI was "good" news, "core" inflation – which strips out energy and food prices – rose 3.1% year over year, more than Wall Street's estimate of 3%. It hit its highest level since February.
More than two-thirds of the CPI's components are now rising faster than 2% – the Federal Reserve's inflation "target." So higher inflation is sticking around for now.
Still, markets loved the report. All three major U.S. indexes rose more than 1%, with the Nasdaq 100 and S&P 500 both reaching new highs on Tuesday.
The Market Is Still Expecting a Rate Cut
What this means for the Federal Reserve's next move...
In a Truth Social post that morning, President Donald Trump (again) demanded that Federal Reserve Chair Jerome Powell cut interest rates now.
The market is betting on Trump getting his wish – even with higher inflation data.
Prior to the CPI report, fed-funds futures traders had 88% odds on a rate cut at the central bank's next meeting on September 17. After the report, those odds increased to 94%.
In a speech in Colorado last Saturday, Fed Governor Michelle Bowman said she's in favor of three interest-rate cuts by the end of 2025 to avoid a "deterioration" in the job market.
Bowman was one of two Fed voters who called for a rate cut at the July meeting. So it's not a surprise that she's calling for cuts in 2025 – even though she was against the large cut in September 2024 for fears of reigniting inflation.
But she sees the labor market as a bigger risk than inflation. As we wrote in the August 4 Digest...
[T]he report showed that the U.S. economy added just 73,000 jobs in July... the unemployment rate ticked higher to 4.2%... and most notably, hiring totals for May and June were revised down dramatically – with a combined 258,000 fewer jobs than initially reported. The new numbers said just 19,000 jobs were added in May and only 14,000 in June, compared to the 125,000 and 147,000 previously stated, respectively.
On Thursday, the new producer price index ("PPI") release showed much higher-than-expected inflation. It was the biggest "miss" for Wall Street's PPI expectations since February 2021... right before the notorious inflation spike that ran throughout 2021 and 2022.
PPI measures prices paid by manufacturing, mining, and service businesses in nearly every industry. And it can be a precursor to consumer prices...
Only time will tell if these higher costs stick around, get passed on to consumers, and show up in consumer inflation data.
There's still one more inflation report to come before the Fed's September meeting. But if it shows another uptick in inflation, that could put the Fed in a tough spot.
In its June "Summary of Economic Projections," the Fed predicted higher inflation and unemployment for 2025. Those factors require different responses – rate cuts to help the labor market or rate hikes to tame inflation.
Right now, it looks like the Fed is more concerned about the job market. And it may be willing to tolerate higher inflation (for a time) to try and boost hiring in the labor market. The Fed may even consider cutting rates before its next meeting. But a weakening jobs market doesn't exactly portend continued strength for the economy. And a mid-meeting rate cut could raise fears that the economy needs emergency help.
Washington's Crypto Agenda
Pivoting to the crypto space...
On August 8, Trump signed his latest executive order on cryptocurrencies.
The "Democratizing Access to Alternative Assets for 401(k) Investors" order allows retirement accounts to hold investments like real estate, private equity, commodities, and digital assets.
Our colleague and Crypto Capital editor Eric Wade explained what this means for cryptocurrencies in his August 8 weekly update...
That means billions of dollars could soon move into the crypto space, creating a steady influx of new money into the industry.
According to the Investment Company Institute, Americans have more than $43 trillion in retirement assets. So even a small fraction of those funds moving into cryptocurrencies could be a huge boon for the space.
Still, 401(k) investments in crypto don't come without strings attached. Here's more from Eric...
It also could mean that there's people getting themselves in over their heads as far as risk and reward goes.
But Eric says the top five or 10 cryptos by market cap, the "blue chips" as he calls them, will be the first to be investable in 401(k)s.
What's next for Washington's crypto goals...
Trump has called himself the most pro-crypto president, so we're betting this won't be the last crypto executive order to come from the White House.
And Congress is making moves, too – like passing the GENIUS Act for stablecoins as part of three bills focused on providing a clear regulatory framework for cryptocurrencies.
Eric believes the next move could come as soon as next week...
You see, in May, Eric attended a financial conclave with billionaires and White House insiders, including the Trump family and JD Vance. That's where he first learned about what could become "the biggest trade in history."
Eric says it's a radical plan to reboot America's financial system. And he also says it has plenty of big names behind it, such as Paul Tudor Jones, Ray Dalio, Larry Fink, and Stanley Druckenmiller.
Trump's family and the son of Secretary of Commerce Howard Lutnick have also put billions of dollars into this project.
This week, Eric went public with a special video presentation to unveil the financial maneuver that he says could stun the market... while offering a rare chance to potentially make 10 times your money or more. But you must act soon.
If you didn't catch Tuesday's presentation, you can watch a replay of the event and get all the details right here.
Good investing,
Nick Koziol
Editor's note: On May 29, many of the world's richest investors flew to the middle of the desert to discuss a controversial plan to reboot America's financial system. And today, Eric Wade is pulling back the curtain to reveal what could be the biggest trade of all time... with 10 times potential gains. Market insiders are already positioning themselves – and your window to join them is closing fast.