Our buddy Jerome Powell sat before congress this week to perform his two-day semiannual monetary policy testimony.

And yes I use the word perform with specific intent…

And for what it’s worth, not a single thing that was said should surprise any of you at this point.

One of the key points that he reiterated is that inflationary pressures are greater than they had anticipated prior to their previous meeting.

The Fed was under the assumption that inflation was falling rapidly so they went with a 25 Basis point rate hike.

Well, they had the first of many gut checks when the January Consumer price index (CPI) and Producer price index (PPI) data came in and the inflation data only fell by an anemic .1%.

On top of that, their favorite set of data – the Personal Consumption Expenditure (PCE) – actually went up… 

They didn’t have this information at that time, so they were operating off of bad data – or at a minimum dated information.

Powell went on to say: “ There’s little signs of disinflation thus far in the category of  core services, which accounts for more than half of core consumer expenditures.”

This means that services inflation is just NOT coming down and they have yet to achieve their goal – or likely even get close.

So what is the Fed to do?

Well, he went on to say: “we need to bring down services inflation by softening labor market conditions.”

So the situation here is that Jerome Powell wants to see the labor market soften by companies reducing their job openings, rather than laying people off. 

But really the easiest way to lessen services inflation is through unemployment going up…

But he can’t just come out and say that because he’s looked at as a political figure – even when he is not a politician.

This is why the market carefully dissects every statement he makes because it indicates the expectation of the Fed and where interest rates are likely to go.

But does he really want to put 2 million Americans out of work this year?   

Of course not, but he understands that the social impact of unemployment going up will be far less than inflation continuing to run rampant.

But after this morning’s Jobs report from the Bureau of Labor Statistics, Mr.Powell is likely shaking in his boots.

Economists were looking for an increase of 205,000 for February.

Well, needless to say, we came in well above expectations with 311,000 new jobs.

This is yet another slap in the face for the Fed as this is proof that the January numbers of over half a million new workers were not just a one-off but we are seeing actual proof that we are seeing an unexpected strength in the economy.

Now the market is looking towards next week as we are getting more inflation data which the head of global rates strategy at TD Securities, Priya Misra is on the record calling it “the most important C.P.I. report — again.”

This is being said over and over again because it will give all of us – the Fed included – critical information about the state of inflation before the Fed makes its final decision.

But the market is already trying to factor all of this into the price to avoid a cataclysmic market event.

And if you have been watching the CME FedWatch Tool I told you about Last Thursday, then you’ve likely seen this shift happen…

If you haven’t been watching it along with me, start… but this is what you’ll see:

The market has shifted to a near-perfect split between a 25 and 50 basis point hike from the Fed at their next meeting.

This is a stark contrast from what we saw just a month ago where there was a 90% chance that we would only see 25 basis points…

Two things come to my mind when I look at this simple graph.

First, the Fed knows that inflation is going to come in red hot next week, and there is plenty of data to back that up such as house values staying high, new and used cars continuing to go higher, and food and energy only lowering slightly.

And the Second option is the market is currently over-correcting as a reaction to the Fed Fund Futures and Jobs report.

If this is the case and we see a CPI and PPI come in and hit their mark on the head they could be a HUGE short-term bullish catalyst for the market and we are going to be ready to trade it…

I’m back with you bright and early Monday morning, don’t forget to change your clocks because we could see the Fed make a hard pivot next week and I don’t want you to be even a second late.


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