Monetary Policy

Labor supply is not meaningfully boosting inflation today, but the net exit of unauthorized immigrants has lowered the bar for stronger labor demand to turn inflationary. Hawkish monetary policy surprises over the coming year are possible.

The Fed is unanimous in expecting a mild tightening cycle of no more than 75 bps, but that outcome is contingent on a rapid drop in core inflation in 2027.

Scott Bessent’s attempts to suppress yields while financing large twin deficits risk crashing foreign inflows, the dollar, US bonds, and equities. Without a major equity selloff or large-scale commercial bank purchases of Treasurys, the bond selloff will persist – producing a major equity drawdown and a lower dollar.

August’s 0.3% increase in core CPI breaks inflation’s 3-month downtrend and is likely hot enough for the Fed to hike rates when it meets next week.