The Road to Target Inflation Will Be Bumpy

The Weekend Edition is pulled from the daily Stansberry Digest.

Jerome Powell is disputing inflation again...

The Federal Reserve's preferred inflation gauge ran at a nearly 5% annual rate through the first two months of 2024.

Yes, 5%. That's a long way from the Fed's 2% target.

However, on Wednesday, Fed Chair Jerome Powell gave a keynote speech at a conference at Stanford University. Here's what he said about inflation...

It is too soon to say whether the recent readings represent more than just a bump.

Now, to be fair, it is too soon to say... Two months is admittedly a small sample. But the inflation numbers have been high enough to push back Fed rate-cut expectations further into the year (again). Futures traders are now betting on June at the earliest.

Haven't we heard this story before?

Like when inflation was supposedly "transitory" in 2021? (It wasn't.)

Or when European Central Bank President Christine Lagarde described inflation as a "hump" that would go down in 2022? (It didn't... It grew into a mountain.)

Or how about when people were counting on a central-bank "pivot" throughout 2022? (It never came... We got a bear market instead.)

Or consider what we've seen for much of the past four months... Powell has promised cuts this year. In March, he said the federal-funds rate is "likely at its peak for this tightening cycle." Yet, market expectations for rate cuts have only been pushed back...

There's a trend in progress here. And as I'll detail today, it's wise to pay attention to it.

Let's get an opinion from a noted hawk...

Atlanta Fed President Raphael Bostic got his monetary-policy feelings off his chest on Wednesday. And it sounded a lot like an outlook not quite "priced in" to the market yet.

In an interview on CNBC, Bostic – who is one of the more "hawkish" (inclined to favor tighter policy) Fed members and, importantly, not the Fed chair – said strong productivity, a rebound in the supply chain, and a resilient labor market tell him that inflation is going to decline "much slower than what many have expected."

In other words, a voting member of the Fed's policy committee is saying the current environment might result in just one cut this year, sometime in the fourth quarter.

According to the CME Group's FedWatch Tool, only around 25% of fed-funds futures traders are betting on that scenario today... which leaves room for expectations to adjust – or, in other words, volatility. Bostic said...

If the economy evolves as I expect – and that's going to be seeing continued robustness in GDP, unemployment, and a slow decline of inflation through the course of the year – I think it would be appropriate for us to start moving down at the end of this year, the fourth quarter... We'll just have to see where the data come in.

Bostic then acknowledged what we've been saying recently about a rebound in the Fed's preferred inflation gauge, saying...

The road is going to be bumpy, and I think if you've looked over the last several months, inflation hasn't moved very much relative to where we were at the end of 2023. There are some secondary measures in the inflation numbers that have gotten me a bit concerned that things may move even slower.

Then, on Thursday, Minneapolis Fed President Neel Kashkari appeared to single-handedly turn the market lower... He suggested the central bank might not cut rates at all in 2024 should the current pace of inflation keep up.

Meanwhile, the jobs market still looks strong. A report from payroll company ADP this week said U.S. private-sector employment rose by 184,000 jobs in March, above Wall Street expectations of 148,000.

Pay gains for job changers also rose by an average of 10%. The biggest gains came from manufacturing, construction, and financial services.

And yesterday, we received the "nonfarm payrolls" report for March. Uncle Sam reported a slightly lower unemployment rate of 3.8%, down from 3.9% a month ago.

But let's get back to Powell for a moment...

Powell also shared a few interesting takes on the jobs market last week that we haven't heard from him before.

During a Q&A session about the labor market, Powell said that a rebound of the supply side in the economy... plus a "significant bump" in immigration into the U.S. in 2023... were big reasons why GDP grew by about 3%, even though interest rates went from near zero to around 5%. He said...

a situation where productive capacity is going up even more than actual output. The economy actually isn't becoming tighter... It's actually becoming a little looser, and you're seeing inflation come down. Very unusual situation. The pandemic has been a textbook of unusual, unexpected developments and situations.

That really is the story... The question is: How much more are we going to get out of the supply-side recovery?... We just don't know the answer...

This combination of factors was a surprise – and it may have helped kick the recession "can" further down the road. Powell said...

That actually explains what we've been asking ourselves... Almost every outside economist was forecasting a recession for 2023... Not only did that not happen, we had better than 3% growth. Really a remarkable performance. Some part of that is there are significantly more people working in the country, but then how does inflation come down? It's because potential capacity of the economy has actually moved up perhaps more than the actual output.

It's a bigger economy but not a tighter one – an unexpected and unusual thing. We don't make judgment calls, but that's what we're seeing.

So that's why he hasn't taken credit for the "soft landing"... He just didn't see it coming.

In the end, the Fed has kept interest rates where they are since last July. And central banks around the world are projecting lower rates by the end of the year.

I'm becoming more skeptical that will actually happen, but I could be wrong.

Let me reiterate a point I made recently in the Digest...

A continued "Fed pause" could be good for stocks...

That's as long as most investors believe that the end result will be rate cuts, as Fed Chair Jerome Powell has promised. That appears to be why stocks have churned higher even as market expectations for cuts keep moving further into the future.

But if prevailing expectations that the central bank's next move to cut rates shifts to the thought that it might raise them first (because of higher inflation), it would be a dramatic change – and probably cause volatility for more than a day or two.

We're not there yet. But we'll continue to monitor the situation in the coming weeks and months.

Before I sign off, I want to touch on a big moment that's coming for cryptos...

We've written about the bull market in bitcoin and other cryptocurrencies through the first quarter of this year. And we told you to expect more analysis from our Crypto Capital editor, Eric Wade, and his team...

Well, it's about that time...

On Tuesday, April 9 at 10 a.m. Eastern time, Eric is going live with a new, free presentation to discuss all things cryptocurrencies.

He'll explain the details about a "reboot" in bitcoin that will happen later this month... which could push the price of the world's most popular crypto to $100,000... and send the prices of other small "altcoins" soaring by thousands of percent.

If you're interested in cryptos at all, or even if you haven't been but want to get up to speed, this a must-watch event.

And just for tuning in, you'll get a free recommendation from Eric on his No. 1 "altcoin" to buy right now, in addition to Eric's suggestions on how to get ready for what's coming next for cryptos.

Remember, back in January, Eric called for a major crypto bull market in 2024. He said cryptos could deliver the most lucrative gains of any asset class this year. This prediction has played out so far, so you'll want to hear what he's saying now.

You don't want to miss what Eric has to say. Click here to learn the full story.

All the best,

Corey McLaughlin

Editor's note: A massive melt-up event is coming to the crypto market this month. And it all starts on April 19 – when bitcoin is 100% guaranteed to "reboot." This once-in-four-years moment could make you more money than any stock, bond, or other asset right now. But this opportunity won't last forever.

It's time to get in position before the big "reboot." Eric is sharing this story in a free online event this Tuesday at 10 a.m. Eastern time... Click here to get the details.