The Fed's Rug Pull is 24 Hours Away.
Overall Thesis
The Federal Reserve is likely to raise rates tomorrow amid strong labor market data and accelerating pricing pressures, creating economic headwinds despite oil supply constraints.
Narratives
Kevin argues the Fed is very likely to hike rates due to strong super-core inflation, a stabilizing labor market, and Richmond Fed commentary on oil-shock policy responses. He warns that if the Fed fails to hike, the 10-year Treasury yield could spike sharply as inflation expectations become unanchored.
Key Arguments
- Super core inflation annualized at 6.1% suggests oil-shock cost pressures are flowing through to core prices
- ADP weekly labor data shows a bullish stabilization, reducing the employment-side justification for holding rates
- Richmond Fed research argues central banks should act on oil shocks rather than look through them, given inflation-expectation risk
- White House signaling it will 'respect' the Fed's decision implies political cover for a hike
Predictions (1)
Kevin discusses an ongoing oil supply shock (tied to tensions in Iran/Hormuz and Red Sea shipping disruptions) and its inflationary knock-on effects, but does not give a specific price target for oil or USO shares. He frames the oil shock as a key reason the Fed may hike despite oil supply being unaffected by rate policy.
Key Arguments
- The oil shock is described as a classic supply-driven shock originating from tensions involving Iran
- Diesel and gas cost increases are shown flowing through into core and super-core inflation data (e.g., trash collection, wireless service costs)
- The Richmond Fed piece cited argues oil shocks take 3 to 6 months to reach peak effect on core inflation, and March's shock is now showing up in September data
Hedges & Caveats
- Empire Manufacturing Survey is volatile on a monthly basis
- ADP employment data is from private source, not government data
- Fed decision pending - analysis based on pre-decision data
- Historical labor market weakness noted at end of previous year