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I hate to break it to you, but the Fed quietly gave up on 2% inflation. They're just not talking about it anymore. |
This morning's CPI report - 3% annual, down from 2.9% in August - gave everyone the warm fuzzies. Markets are screaming higher. Russell 2000 popping. S&P pushing above 6,800 on futures. |
But let me walk you through what's really happening here, because this is the macro story everyone's missing. |
The Great Goalpost Migration |
Powell said in 2021 we weren't gonna get to 2% until 2025. Here we are in 2025. Now he's saying we won't hit it until 2027. |
They gave up. They're not even talking about it anymore. |
You want proof? Last year, Lael Brainard and Paul Krugman - two very different people with very different platforms - both came out and said the Fed needs to move to a 3% inflation rate and just deal with that. |
I think they were effectively announcing that the Fed was already doing this. Not suggesting it. Announcing it. |
Why My $35 Haircut Explains Everything |
My haircut went from $22 to $26 to $30 and now $35. It's not because my barber got better. In fact, Don would argue that it got worse. |
That's services inflation - 3.5% ex-energy - and it's wage driven. This is why the Fed focuses on core services and shelter, which make up over 60% of the CPI basket. |
Shelter up 3.6%, sticky as hell. This is a supply side issue. We have 25,000 regulatory groups in the United States that oversee housing construction. |
Monetary policy can't fix this. They need to go fix the regulatory maze. |
The New 3% Reality |
Today's numbers paint the Fed in a corner. We're looking at 96% odds for December rate cuts. I still argue they should go 50 basis points, but I don't vote. |
The market's missing this: 3% annual inflation keeps the Fed cautious but not panicked. Inflation is cooling slightly, but it remains sticky in services. |
Gasoline up 4.1% in September. Energy moving higher because of Trump's Russia sanctions. Services ex-energy at 3.5% - much better than the 4% we were seeing, but it's the new floor. |
What This Really Means |
I don't believe the Fed will get back to 2%, barring some significant deflationary event. |
Think about it: if they really believed they could hit 2%, why keep moving the timeline? Why would two major Fed voices float 3% as the new target in media? |
The reality: 3% annual inflation is the dream scenario now. That's what everybody wants. That's it. |
The Trading Implications |
Growth stocks benefit from slower inflation expectations - that's why Nvidia's looking stronger, why it might hit 200 within two weeks. |
Energy complex remains strong. A week ago, banks were calling $55 Brent, $52 WTI. Today: $62 WTI, $66 Brent. Funny how that works. |
Dollar outlook becomes range-bound. Persistent inflation supports the dollar, but slower CPI tempers hawkish bets. |
The Bottom Line |
If 3% is the new 2%, everything you think you know about Fed policy is wrong. |
We're not in a disinflationary cycle heading back to normal. We're in a managed inflation cycle where 3% IS normal. |
Different sector rotations. Different duration trades. Different currency implications. |
The market's celebration today might be missing the bigger picture. Yes, slower inflation helps growth stocks and rate cut expectations. |
But we're permanently resetting what "normal" looks like. Most people haven't figured that out yet. |
The Fed moved the goalposts again. This time, I don't think they're moving them back. |
Stay Positive, |
Garrett Baldwin |
P.S. I'll be live with you on Monday, starting at 8:45 am ET. It's free to join the session. Click here to RSVP. |
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$370... $331... $302... $248... | All in single trading days. | Friday 2PM: Blake Young reveals the system behind these daily payouts. | This mastermind happens once. | |
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