I left the Federal Reserve’s latest decision on monetary policy with three simple observations besides the decide to pause the rate cut cycle:

Taken together, the Fed looks resolute about what Powell explained in the press conference as “we see things as in a really good place for policy and for the economy and so we feel like we don’t need to be in a hurry to make any adjustments.” However, this decision sure felt like the calm before the storm given the bookends to this meeting with big AI headlines and tariffs.Inflation Floating Into Tariff PressuresInflation’s profile continues to give the Fed reason to pause. However, Powell said the Fed sees a “pathway” for inflation getting to target. The current downtrend in inflation for owner’s equivalent rent and housing services continues to exert downward pressure on overall inflation. However, for now, the downtrends in core CPI and PCE have essentially stalled since last summer. Powell is fond of explaining “we want to see further progress on inflation” and further progress has not happened for several months.Core CPI and PCE have remained flat and above target for many months.Sources: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis. January 31, 2025.While there is reason for optimism that inflation will eventually float downward to target, other forces are brewing that could disrupt the narrative. At the time of writing, the U.S. announced blanket tariffs on three of its major trading partners. Starting February 4, the U.S. will charge Canadian and Mexican imports a 25% tariff, with a reduction to 10% for Canadian oil. Chinese imports will have a 10% tariff. The announcement even includes an escalator in case of retaliation. Canada has already promised retaliation with a 25% tariff on various U.S. goods. While there is some unconventional thinking out there about the economic impact of such broad-based tariffs, I am leaning toward more, not less, inflation from all this economic warfare.Bond Vigilantes Calm for NowIn my last post, I referred to the reaction of the bond market to monetary policy. In this latest decision, Powell was very clear that term premium, the additional return that investors demand based on perceived risks, is driving up long-term rates. He insisted these yields are not going up because of inflation expectations or policy expectations. Thus, Powell is instead blaming unsustainable deficits and expectations for future massive bond issuance. However, the jury is still out. The bond market responded to the last two cuts with swift increases in long-term yields. This time, with no rate cut, the bond yields remained well-behaved.The reaction to tariffs will be interesting. Yields could decrease because of anticipated economic weakness. Yields could increase because of anticipated inflationary pressures. Of course, sitting in the middle is stagflation. Either way, my trading strategy to fade rallies in iShares 20+ Year Treasury Bond ETF (TLT) does not look nearly as good as before!The iShares 20+ Year Treasury Bond ETF (TLT) held mostly steady for the week right under resistance from the bottom of the previous trading range.The Canadian Dollar In A StormThere is a lot to say about the U.S. dollar and the current volatility in currency markets. The Canadian dollar (FXC) is particularly interesting because I thought by now USD/CAD would have broken through major resistance from a major double top. Instead, USD/CAD has churned in a wide trading range. After wild trading on Thursday and Friday tariff headlines, USD/CAD settled just above the top of that range. I decided to take profits and just wait to get back in on a fresh breakout and clear trend.Be careful out there!More By This Author:A Fresh Opportunity To Fade Bonds As A Marginal Change In Inflation Ignites A Near Oversold Market
The Federal Reserve’s “Hawkishness” Finally Gets The Stock Market’s Attention
Bonds Try To Weigh On A Market Trying To Look Past Stabilizing Inflation