The Frozen Fed and the Thawing Market

in #article12 days ago

The Frozen Fed and the Thawing Market

Powell sits like a sphinx while everything burns around him.

Tuesday's relief rally came courtesy of a tamer inflation print, which makes perfect sense if you believe that one month of data changes the fundamental trajectory of anything. But here we are, watching traders pile back into equities because CPI came in merely terrible instead of apocalyptic.

The Fed's July meeting crystallized everything absurd about our current moment. A divided Federal Reserve held rates steady despite Trump's increasingly vocal demands for aggressive cuts, with two officials dissenting. Powell's maintaining his 4.25-4.5% range like a stubborn mule while the President tweets storm clouds and markets grow increasingly turbulent under the weight of trade war escalation.

This is institutional paralysis dressed up as prudent policy.

Think about the perverse incentives at play. Trump's tariff policies already triggered a February-to-April market decline, yet somehow "fundamental factors like aggregate consumer spending and corporate earnings remain solid" according to U.S. Bank's Bill Merz. Translation: the real economy keeps chugging while financial markets ping-pong between euphoria and terror based on whatever policy chaos emerges from Washington each morning.

The bond market isn't buying this stability theater either. Initial investor flight to bonds pushed yields down, which the Trump administration hilariously spun as evidence that tariffs were reducing borrowing costs. But markets aren't stupid forever. That trend quickly reversed as bond markets began experiencing widespread selling when reality reasserted itself.

What we're witnessing is the slow-motion collapse of the fiction that monetary policy operates in a political vacuum. Powell's independence depends entirely on pretending that fiscal chaos doesn't exist, while Trump's economic agenda demands Fed accommodation whether it makes sense or not. The Fed acknowledges that "recent indicators suggest growth of economic activity moderated in the first half of the year" while maintaining rates as if nothing's changed.

Meanwhile, valuation increases remain concentrated in only five mega-cap stocks, which tells you everything about where the real money thinks this economy is heading. We've created a market structure where the S&P 500 can rally on inflation relief while the underlying economy fragments under trade war pressure.

The cognitive dissonance is breathtaking. Investors celebrate a softer inflation reading while simultaneously pricing in the inflationary consequences of a full-scale tariff regime. Powell holds rates steady while his own colleagues break ranks. The administration claims victory over borrowing costs while systematically demolishing the trade relationships that keep global supply chains functioning.

This isn't monetary policy anymore. It's performance art where everyone pretends the contradictions don't exist until they explode into the next crisis. And when that happens, don't expect the Fed to have any ammunition left beyond theatrical hand-wringing and emergency meetings that accomplish nothing.

The sphinx will keep smiling while Rome burns. Just don't mistake silence for wisdom.

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