Fed Falls Behind the Curve as Inflation Worries Become Priority Over Jobs
Jerome Powell seems to be getting his priorities wrong as the U.S. economy comes into focus.
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Peace through strength. Deterrence.
They both sound great on paper and are great. But they take effort to establish, or re-establish as the case may be. With my work at Academy Securities, we have often discussed the degradation of the fear (and even respect) our adversaries have for us. Too many “lines in the sand” were crossed with no repercussion. “Measured responses” seemed to do little to discourage attacks in the Middle East (from the Houthis, for example).
The events of the weekend go a long way toward reinforcing deterrence and starting to establish peace through strength. Having the capability isn’t enough if your adversaries don’t believe you will use it.
As members of our team who served directly under the president during Donald Trump's first term have stated, he clearly distinguishes between “strikes” and “war.” The use of the “plural” is not by accident. There is a possibility of more strikes, which does fit the narrative of establishing a new “baseline” for our adversaries to deal with.
While there are risks to escalation, Iran has seemed so weak, that risk seems low. Air superiority is clearly in favor of Israel (and the U.S. if we choose to use it again). While Iran may have an arsenal of missiles (which haven’t been as effective as feared) it may be lacking the ability to launch them as their command structure is attacked and the launch systems have also been hit hard.
We see the “good” outcome as being more likely. That “good outcome” is a Middle East that can move beyond conflict into a post fossil fuel economic focus, built on data centers, etc. While this has been an Israel led fight, with the U.S. now joining, the majority of the Middle East has been neutral or even helpful to Israel. The entire region seems to be poised for an end to the threat from Iran.
Asides from being militarily weak (dangerous still, but weak), the Iranian economy needs to ship oil to make money, and it would be shocking if China wasn’t “recommending” they keep shipping oil to China, minimizing the threat of the closure of Hormuz.
We need some time to confirm Iran’s posture, but we're increasingly comfortable that we are on a good path in that respect
Could there be uprisings against the regime? It's possible, though it would have to be an internally led uprising, that grows organically from the situation, than something orchestrated by Israel or the U.S.
I do believe the strike helps with Russia and Ukraine once the administration is able to focus again. We potentially have more options on the table there. Though, in the meantime, both countries are likely to be aggressive to establish the best situation for themselves, if the negotiations are truly about to start.
The Fed Is Behind the Curve
This is beginning to be a battle that I want to fight aggressively. The Fed is too worried about inflation and not worried enough about jobs.
The jobs data (as we’ve highlighted in recent reports), except the headline establishment survey number, has been mediocre to weak and heading in the wrong direction.
At the status quo on tariffs, there will be some inflationary pressure, but this bleeds in over time and won’t be the “full” 10%. And any economic slowdown will also offset some pressures as spending slows.
Wildcards
Some “bizarre” reversal on tariff policy, which is back to an aggressive stance, is the biggest issue out there. I don’t see it happening, but another pause and even some reasonable “sectoral” tariffs would let market breather another sigh of relief.
The biggest positive would be a focus on national production for national security. The last round(s) of China negotiations have to have lit a fire under the administration to process and refine rare earths and critical minerals (but other commodities as well). That will require a change to regulations and longer term commitments to buy. The U.S. cannot be “held hostage” by China on so much. It is the usable versions, not the raw materials, that should be the biggest focus.
The consensus trade that I agree with is that some “decent” version of the big, beautiful bill will pass. It's not obvious why it won’t, but I am keeping one eye on that, as there does seem to be a level of complacency even as complications seem to arise.
