With inflation still elevated (and poised to rise, at least on a headline basis and in the near-term) and the US labor market now shedding jobs, the Fed’s goals are at odds.

Just ask Jerome Powell. He’ll tell you all about it using the phrase “in tension.”

What does the dictionary tell us about “tension”? It says it’s “a relationship between ideas or qualities with conflicting demands or implications.”

High inflation “demands” (or at least “implies”) restrictive monetary policy. A labor market that’s losing jobs on net “demands” (or at least “implies”) the opposite, particularly in an economy that lives and dies by consumer spending.

What are American workers when they aren’t working? They’re miserable alcoholics and suicidal opioid addicts. Wait. Sorry. I thought I was writing a Monthly Letter there for a minute. They’re consumers. Workers are consumers when they aren’t working.

If workers lose their paycheck, they won’t be able to serve the consumption function anymore, which is problematic for an economy that (setting aside AI data center investment) lives and dies almost entirely by consumer spending.

This is why, if your economy’s already losing jobs (Trump’s is) and inflation’s elevated (it is) and it’s an election year (it is) and you’ve made an enemy of the central bank chief (Trump has) you should think twice about plunging headlong into an armed conflict with the potential to close off the world’s most important oil chokepoint.

If you don’t think twice (Trump didn’t) and you do plunge headlong into that armed conflict (Trump did) here’s what could happen: Oil prices could soar, gas prices could rise, spending on things other than gas could drop, lost demand could lead to more job losses and a lame duck Fed Chair who resents you could cite high inflation while refusing to lower rates.

The figure on the left, below, shows you the market pricing that chain of events in real time. As documented at some length in the latest Weekly, twos sold off by nearly 40bps during the first nine days of the war while an equity market proxy for growth (cyclicals versus defensives) took a header.

“The market has recently priced both a deterioration in the outlook for economic growth and a less friendly path of monetary policy,” Goldman’s Ben Snider sighed, in his latest.

As he went on to point out — and this is critical — “the rotations between cyclical and defensive industries began to signal a weakening economic outlook in early February, even prior to the spike in oil prices,” but that deterioration was accompanied initially by a rally in twos (i.e., lower yields) which in turn lent support to the overall equity market.

Now, with the war raging, the specter of an oil-driven inflation shock has forced markets to reprice monetary policy expectations, thereby leaving investors almost completely the lurch — reliant entirely on the “offsetting” effect of divergent single-stock moves to keep realized volatility contained and praying for “TACO.”

“As oil has spiked during the past two weeks, the continued decline in economic growth pricing has been exacerbated by a steep climb in short-term yields,” Snider went on.

Market-based proxies for the US growth impulse are now below blue-chip consensus, below trend and, with allowances for definitional ambiguity, not consistent with any conventional idea of a “golden age.”

But hey, look at the bright side. Snider did. “Today, the market appears to be pricing an outlook for roughly 1.5% GDP growth” which, while not gangbusters, is nevertheless “above the lows reached in April [of] 2025.”

In other words, it could be worse. It could be “Liberation Day.”