Stagflation Keeps The Fed's Hands Tied As Trump Slings Insults

As widely expected, the Federal Reserve maintained its wait-and-see position, taking no interest rate action during the recent July FOMC meeting.

However, there were some evident cracks in the committee as two members dissented from the majority decision. It was the first time multiple committee members opposed the majority since late 1993.

Until at least September, the federal funds rate will remain set between 4.25% and 4.5%.

The messaging coming out of the meeting was similar to the mantra last month. Inflation remains somewhat elevated. The economy is still strong. We don’t know the impact of tariffs. It’s a time to wait and see.

However, there was a subtle shift in the official FOMC statement that could be taken as more dovish. The committee said the “growth of economic activity moderated in the first half of the year.” The FOMC statement also said, “Uncertainty about the economic outlook remains elevated.”

During his post-meeting press conference, Powell said the committee decided to hold its policy rate where it’s been, which he characterized as "modestly restrictive."

Many market observers read this as a hawkish signal that the central bank may not cut in September either. Stocks took a dip in the wake of Powell’s comments because markets seem to think that Powell pushed back on a September rate cut.

It’s clear that the majority of the FOMC remains worried about price inflation. Based on the CPI, price inflation heated up in June. Powell said that tariffs have begun to impact the prices of some goods but claimed it is too early to determine their overall effect.

Meanwhile, President Donald Trump has been pushing hard for rate cuts, and he took to social media to make his displeasure known, calling Jerome Powell a total loser who's harming the country.

Now for those of you scoring at home, a month ago Trump merely called Powell a stupid person – so many of you, like me, may recognize that the recent insult upgrade of the Fed Chairman now being called a “total loser” does represent a bit of a shift that we do need to take note of. We’ll be sure to keep you updated on new developments or additional jabs or barbs the President may sling in Powell’s direction in the coming weeks, so stay tuned.

Now, looking at history, the current interest rate level isn’t high at all.

So, why are so many people clamoring for rate cuts?

Because decades of artificially low rates and multiple rounds of quantitative easing since the 2008 financial crisis have addicted the economy to easy money. Fed policy incentivized a borrowing spree, and the economy is loaded up with debt. A debt-riddled economy can’t operate in an even modestly higher rate environment.

On the other side of the coin, you have inflation.

While the Federal Reserve tightened monetary policy enough to rein in rising prices, it never did enough to slay the inflation dragon.

When you break down the Fed’s messaging, it’s clear they’re torn between two worries. They know the economy is getting shaky, but they are also aware that inflation isn’t dead.

And what do we call high inflation coupled with low growth?

Stagflation. A word we keep coming back to.

It appears the plan is to stand pat and then address whichever side of the coin gets ugly first. If the CPI surges, rates will remain elevated, but if the economy begins to wobble, you can expect fast and aggressive cuts.

The Fed’s current inaction is exactly what you would expect given the Catch-22 it finds itself in. It simultaneously needs to cut rates to prop up the easy money-addicted economy and hold rates steady (or even raise them) to keep inflation at bay.

What is a central banker to do? Well, simply wait and see.

And lastly, before we get to this week’s interview let’s take a look at the weekly market action. Gold is rebounding here today after suffering a bit earlier in the week. A soft U.S. jobs report today buoyed gold and it’s now anticipated that it increases the possibility of a September rate cut. The yellow metal is now up about $5 or 0.15% on the week to trade at $3,355 an ounce as of this Friday late morning recording.

Turning the white metals, silver is having a bit of a rough week having experienced a big mid-week drop but it has since stabilized a bit, off now by $1.30 an ounce this week to check in at $37.06 an ounce and a 3.4% weekly decline.

Platinum is off more than $100 this week and checks in at $1,318 an ounce, off 7.2% since last Friday’s close. Palladium is down 3.9% and sits at $1,228.

And finally, there were some major fireworks in the copper market this week. The industrial metal, which was pushing up towards $6 a pound a week ago, is down 25% this week and currently trades at just $4.42. The news surrounding tariffs has greatly affected Dr Copper, which fell 20% in a single day earlier this week.

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