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The Domino Effect Of De-Anchored Inflation Expectations
The Powell Fed's in a tough spot.
That's a good early candidate for macro-market understatement of
The Fed probably sees high risk of both inflation and weak employment. Both may develop imminently and the Fed may be forced to choose between its mandates, while responding to market stress.
Trump is trying to set the Fed up as the fall guy. He won’t convince anyone but diehard MAGAs that the Fed is to blame for tariff-driven inflation, but if the Fed raises rates into a developing recession he may have a second chance to deflect blame.
Tariff driven inflation may be beyond the Fed’s ability to tame anyway. If a product comes from China, is tariffed by 50% to 145%, and in the medium term sourcing a substitute from elsewhere will cost 2-3X the China cost, then the price is going up by say 20% to 40% depending on required margin structure, rather independent of whether demand weakens.
And all this could well be “transitory” – not in the economic sense, but in the political sense. Companies and investors get whipsawed and c’est la vie, the Fed gets whipsawed and you’ve got the next Arthur Burns.
Given that, I don’t think it would make sense for the Fed to raise rates in response to rising inflation expectations, and maybe not even actual rising inflation before seeing how employment is responding.
Supply chain lags is probably about 1.5-2 months for shipped shipped by ocean from China, most of which is not electronics temporarily exempted. Some US companies built up inventories in 1Q, smaller ones had less ability to do so. Hence WMT and others warning that shelves may start looking bare in a month or two. Prices are rising now for some things but the broader inflation will show up in the coming couple months.
Employment weakness probably starts showing up in openings and hires over a similar period, with some industries – transportation, etc – leading.
Fed may want to see how that develops before deciding on next steps.
Prophylactic inventory buildups will alter profit performance, depending of how large they are and how long they last. If consumers slow down consumption while inventory builds up for too long profits could well be dented.
Yes, high inventory is usually a leading indicator for profit pressure. In this case . . . not sure. Uncharted waters we sail.
I think that bear needs to be available with the mugs and t-shirts.
The AI image generation is getting so crazy. I showed it my old Twitter banner image today — which was pretty impressive on its own to have come from a robot — and asked it to generate an improved version, and this is what it came up with: https://heisenbergreport.com/wp-content/uploads/2025/04/TwitterBanner22025New_LE_upscale_balanced_x4-scaled.jpg
It took less than five seconds for it to analyze the old banner and produce that new one and notably, I couldn’t critique it. There’s nothing to improve on. And yet, somehow, in a month or two, some new version of the same AI will find a way to make it even better.
Which AI image generator did you use there? Agreed, this stuff is already impressive, and improving rapidly too.
BEI is still anchored
When was the last time you heard a family of four on $75k/year say, “Well, we were worried about inflation, but then we checked our Bloomie and as it turns out, there’s nothing to worry about.”?
Put another way — and somewhat ironically — anyone who knows what BEI stands for doesn’t count in the price formation process, because if you know what BEI stands for, you probably make enough money that you don’t base your consumption decisions on inflation expectations.
I think long before we see real tariff-driven inflation, we are going to need to see real imports and real tariff assessments. Shipping and freight is already gunked up as ports get clogged with empty containers going nowhere, while trade zones and temp warehouses fill up with stuff not willing to be imported without tariff clarity. Lots of truckers getting dead headed on the West Coast dropping stuff off with nothing to bring back. Guessing that less than full load sea and land transportation costs won’t help out on the inflation front, nor the national hit to productivity from just trying to follow the plot line of this circus.
People are throwing the term around more and more, but I doubt Trump will satisfy himself with some run of the mill stagflation. That may actually turn out to be wishful thinking as the world’s greatest dealmaker flirts with Third Worldian slumpflation, coming soon to an urban center near you.