Inflation & Tariffs Test The Fed
Weekly Investment Update | By Brian Schreiner
Last week stocks were up, bonds were flat, gold and commodities were down, and bitcoin moved higher.
Inflation Elevated
In last week’s highly anticipated inflation report, the Consumer Price Index (CPI) rose to an annualized rate of 2.7%. Core CPI, which excludes food and energy, rose to 3.1%. Another measure of inflation, producer price inflation (PPI) rose a blistering 0.9%, way above consensus estimate of 0.2%, to an annualized rate of 3.3%. The monthly increase was the largest since early 2022.
The Fed’s preferred gauge, the Personal Consumption Expenditures Price Index (PCE), posted a stronger-than-expected increase to 2.6%, in June, well above the Fed’s 2% target. Still, the consensus on Wall Street is that the Fed will cut rates in September. I disagree.
The Fed has two mandates: stable prices and maximum employment. Job market numbers are good; the unemployment rate is 4.2%. The last Gross Domestic Product (GDP) reading was 3% in the second quarter. And the Fed Governors know that the price impacts of Trump’s tariff increases have not yet been realized in the economy.
Tariff Impacts
The impact of tariffs on pricing has not been seen across the board yet because products are sitting in inventory. Companies pushed ahead orders for peak seasons upwards of three months early, and those products are sitting in warehouses and distribution centers.
Lowering interest rates in September would be an aggressive and potentially dangerous move by the Fed. A good argument can be made that the Fed should increase rates, but I believe they will ultimately leave rates unchanged at the conclusion of their next meeting on September 17.
Major Banks Expand Crypto Services
As new laws pave the way for stablecoins to be used for payments and settlement, Citigroup has joined other major banks in exploring providing currency custody and other services. Today, Citi offers tokenized U.S. dollar payments that use a blockchain network to transfer dollars between accounts in New York, London, and Hong Kong 24 hours a day and the bank is developing services to allow clients to send stablecoins between accounts or to convert them to dollars to make instant payments.
Bitcoin hit a new record high last Wednesday and Ethereum nearly matched its all-time high reached back in 2021. α
Interesting things I came across this week…
AI conversations don’t have legal privilege protections. (Sam Altman)
Tourism is down in Las Vegas this year. (The Wall Street Journal)
Alcohol consumption in America hits a record low. (CBS News)
Only 25% of meals sold by restaurants are consumed on premises, the remaining 75% are delivery orders. (Apollo)
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