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Dear Reader, This morning, Kevin Warsh walks to the podium at Jackson Hole, Wyoming. He gets roughly 20 minutes. And right now, every bond trader on Earth is waiting on a single sentence. Warsh is the new Fed chairman. He took office in May. This is his first major speech. Inflation is stuck at 3.7%. His own committee voted 9 to 3 to hold rates last month. Markets are pricing in a one-in-three shot at a September rate hike. That is not a policy debate. That is a coin flip with your savings on the line. Here is what we are watching today:
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WHAT HAPPENED July's PCE inflation print, released Wednesday, came in at 3.7% year-over-year. That is the Fed's preferred inflation gauge. It has been above 3% for months. The 2% target is not even visible in the rearview mirror. Three FOMC members voted to hike rates at the last meeting. They lost 9 to 3. That kind of split does not happen in a confident committee. It happens in a divided one. Warsh's first move as chair was to stop telegraphing rate decisions ahead of meetings. No forward guidance. No soft signals. "We are not constrained by market prices," he told reporters in July. Bond markets took that as a threat and pushed the 10-year Treasury yield to 4.7%. Now here is the number that stopped us cold when we pulled it this morning. The U.S. Strategic Petroleum Reserve stands at 289.7 million barrels. That is the lowest level since November 1982. It has fallen by more than 125 million barrels since February 28 when the Iran war started. In six months, Washington burned through 30% of its emergency oil buffer. If Warsh goes hawkish today, the dollar surges, oil falls short-term, and the SPR math gets even uglier. If he goes dovish, yields drop, oil stays elevated, and inflation at 3.7% gets a second wind. Hold that thought.
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THE INVESTOR ANGLE Here is the play the mainstream is missing. Warsh hikes: 30-year Treasury yields spike toward 5.5%. That crushes bond portfolios and anything financed with long-duration debt. Real estate, utilities, leveraged companies. The pain is immediate and broad. Warsh holds and goes soft: The September hike odds collapse. Stocks rally. But inflation at 3.7% does not fix itself with soft language. Gold, oil, and hard assets tend to perform in that environment. The third scenario is the one Wall Street is least prepared for: Warsh says nothing decisive. He talks about structural themes. Long-run neutrality. Financial innovation. Markets interpret the silence as weakness. Long-dated bonds sell off anyway. That 5.5% yield target for the 30-year could happen without a single rate hike. Meanwhile, the government is paying $1 trillion a year in interest on $39.89 trillion of debt. Every 25 basis points of rate increase adds tens of billions more to that tab. That is not a policy problem. That is an arithmetic problem. And arithmetic does not care who is speaking in Wyoming today. Watch the 10-year yield this morning. Watch gold. Both will react before the cable networks finish their first commercial break. Stay free. Chris Carroll Publisher, Freedom Financial News |
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