9-10-26 What Will Inflation Data Do for the Fed?

The speakers distinguish a potentially misleading headline-inflation surge from underlying pressure: monthly headline CPI around 0.4% would annualize to nearly 5%, but oil-driven increases could be temporary, core CPI around 0.2% would annualize to roughly 2.4%, and homeowners’ equivalent rent—about 42% to 43% of CPI—could offset some energy pressure. They argue the Fed should not respond to a temporary oil supply shock with rate hikes when underlying inflation is near its 2% target.

The case for holding rates rests on a weakening labor market and limited evidence of persistent inflation: monthly payroll gains are described at roughly 50,000 to 70,000 versus 150,000 to 250,000 previously, while downward revisions and trimmed-mean CPI near 2.3% weaken the case for tightening. The speakers say hikes would be more defensible only if inflation stayed elevated or a sustained growth surge, such as an AI-driven expansion, created persistent pressure.

The episode frames a possible policy mistake in which the Fed hikes to protect its credibility and later reverses course: Darius Dale expects two hikes this year followed by cuts throughout next year, while the speakers argue that credibility alone is not sufficient justification for tightening. Kevin Warsh’s opposition to quantitative easing and preference for a smaller Fed balance sheet could also face pressure from Scott Bessent or President Trump, potentially damaging Warsh’s credibility if he adopts QE.

Near-term equity risk is tied to the inflation data, but the market also has conditions for a relief rally. After three straight declines, the market was near its 50-day moving average and hedge-fund technology positioning was meaningfully oversold; however, materially hotter inflation reports could drive a roughly 3% to 4% decline toward the 100-day moving average near 7,550 and potentially the mid-July lows around 7,400.