The Bond Market Is Trapping The Fed | Weekly Roundup

AI infrastructure investment is decelerating but remains a main economic driver, even as negative public messaging and shifting polls are weakening political support for data centers. The backlash is already reaching governors and midterm candidates who were previously supportive.

The speaker expects Democrats to perform well in the next midterms, with the House likely to change hands and the Senate less certain, adding another layer of uncertainty to the Fed's policy path. The speaker also argues that past political compromises have tended to bring more spending and inflationary, less market-friendly policies.

The episode frames the current inflation problem as a policy conflict: weakening currencies, suppressing bond yields, and supporting asset prices can work against efforts to contain inflation. That tension is compounded by the possibility of oil reaching $100 and by the speaker's forecast that inflation could reach 4%, 5%, or 6% over the next one to two years.

The PPI report was mixed, with core PPI up 0.2% month over month versus 0.3% consensus, but headline PPI hotter and year-over-year inflation near 5%; markets subsequently moved to roughly 70% odds of a Fed hike from about 50-50 a week earlier. The next CPI report was described as decisive, with Waller favoring a hike if CPI exceeds consensus.

The speaker argues that rate hikes are a poor response to an energy supply shock because they do not create more oil and can restrict production; such hikes are often reversed within 12 months. At the same time, suppressing oil prices without changing fundamentals can reduce production incentives and contribute to a later return to high prices.