Drones launched from Iraq hit Saudi Arabia's East-West pipeline on Thursday, which carries 7 million barrels a day around the Strait of Hormuz. WTI has broken above $100 /barrel, while USO has taken out the May high. Near term, this pushes yields higher, particularly in the front end, as expectations for Fed hikes rise.
Friday's August CPI landed with core at 0.3% on the month, a touch above consensus. The Headline CPI rose by 0.4% MoM, or 3.4% YoY. This puts the Fed in a bind. The market expects the Fed to hike on Wednesday, even if one can blame inflation on the energy supply shock from the war. If they don’t hike this week, Warsh will lose credibility straight away and will only be kicking a bigger can down the road.
The “transitory” inflation story that caught the Fed off guard and led to late reactions happened only five years ago. Warsh’s number 1 attack on Powell’s Fed is that the Fed has not done a good enough job of bringing inflation back to target. Pausing today would risk repeating the Fed of 2021 and make Warsh a hypocrite. I’m sure he’s motivated to avoid that, even if he has Trump’s trust.
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This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities.
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