Postcards: Three Clues to the Fed's New Mandate... And What to Buy

[Postcards: Three Clues to the Fed's New Mandate... And What to Buy](#) What if we were right about the Fed's inflation target the whole time... Garrett {NAME} OCT 30 [Icon]([Icon]([Icon]([Icon]( Dear Fellow Expat: I've been stuck in the house, coughing and waiting. My diagnosis is to wait eight weeks for the next CT scan to determine if this is viral... or something else. I have another week of antibiotics. Today, I needed to get out. So at 10:30, I drove to a diner – looking for a far booth, where no one can see me. But everywhere was packed. Cars were backed on the road up for a farmer's market. Every seat in the diner was taken. There was even a six-car line at Jiffy Lube. I'm confused... I was under the impression that the unemployment rate was 4%. Are folks skipping work for pancakes? Or is it possible that the underemployment rate (not the official employment rate) [is somewhere around the 23.9% level, as the Ludwig Institute suggests](? Based on today's red-hot jobs report, you'd have thought they'd be working. Instead – they're part of something big in America. And no one's officially realized it... yet. Jobs, Inflation, and Gold The Federal Reserve slashed rates by 50 basis points in September, its largest cut in 16 years. The cut suggested that the Fed was reducing rates in the face of weaker job numbers, falling inflation rates, and a suffering economy. But that's not what's happening... This morning, ADP released the October private jobs report. This is a good precursor to the bigger monthly jobs report on Friday. And the private figure blew estimates out of the water. [undefined] That means Friday's report could also come in red-hot. And tomorrow might also reveal a surprise uptick around inflation. Those would be two big positive moves for employment and inflation (the Fed's mandate) and raise questions about whether the Fed should be cutting interest rates anymore. In addition, the economy has shrugged off two hurricanes, an East Coast port shutdown, the Boeing strike, and plenty of geopolitical tension this month. The 10-year U.S. Treasury Bond has soared to three-month highs, while gold and Bitcoin prices have reached all-time highs. What gives? That's where the Fed abandoning its 2% inflation target – a topic [I started discussing in August 2023]( – returns to the forefront. What's the Fed's Mandate? The Fed's mandate is maximum employment (in the official 4% to 5% range) and target inflation around 2%. The problem is that core services inflation – basically all services that don't include goods – food and energy – has stayed elevated. This sticky inflation creates problems... raising rates too much can create a financial crisis. That happened in England during a pension blowup called the Gilt Crisis in October 2022. The Fed wants to avoid another liquidity event, and the Treasury wants to encourage investment in long-term duration bonds to keep the fiscal circus going. That's why we're focusing on three clues that suggest the Fed may be in process of increasing its inflation target to 3%... Step one of this process came last year, as inflation was dropping to around 3%, [Paul Krugman and other wealthy Ivy League economists]( argued the Fed should "declare victory" on inflation at that 3% target. People have forgotten how bad this situation could be if Paul Krugman gets his way... The next clue came from Mohamed El-Erian, chief economic advisor at Allianz. As he [said in April](: "The way you discuss it politely is you don't say 'let's change the inflation target,' you say 'let's get to 2% somewhere in the future. Let's have a trajectory.' ... It may well prove that the economy is stable nearer to 3%. I don't think that's going to de-anchor inflation expectations." El-Erian is the ultimate monetary policy insider. He is a legendary former leader of PIMCO and worked at the International Monetary Fund. He knows how the central bankers think. The third clue was that when the Fed finally made its cuts, it hinted it was turning its attention to unemployment. "This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained," Powell told reporters after the September Fed rate announcement. At the same time, Powell suggested that they hoped inflation would keep falling. As of today... it isn't. And bond yields are pressing higher. So... what would be our confirmation that the Fed has moved to a higher target – if only unofficially? That comes next week. The market is pricing at a 96% likelihood of a rate cut by 25 basis points next week. If core inflation is high and the jobs market is rock solid on Friday, pay close attention to those odds. If the market is STILL pricing in that cut... and the Fed does STILL cut in the face of sticky inflation and a stronger economy... Then I think it's fair to say that they no longer care about getting to 2%. And people need to stop pretending otherwise. It wouldn't be the first time the Fed said one thing and did the opposite. The entire premise of inflation targeting was [conjured up in the early 1990s](. While other central banks around the globe admitted to the practice, it took nearly two decades for former Fed Chair Ben Bernanke to even officially mention the practice. Would the Fed say, "We're at 3% on inflation targeting now?" No way. Powell couldn't [even explain the 2% target to Congress last August](. There'd be an even bigger run on gold, a bigger move higher on term duration, and another rip higher by the market – especially in inflation-absorbing stocks. What to Own We wrote the [Hedge of Tomorrow]( in March, a free report outlining the case for gold, recommending Bitcoin, and highlighting stocks central to addressing monetary inflation. That was before all this madness accelerated. It was clear that monetary inflation would remain the core theme of the next few years. Anyone who is still sitting on the sidelines will wonder why the value of their money keeps eroding so quickly. But I want to stress the obvious. If you don't already, you should own... - Gold and real assets like land and prime REITs - Bitcoin - High-quality stocks that have little debt and can absorb inflation. It helps if they have a moat and are part of monopolies or duopolies. - [Banks and closed-end funds](, and - Index covered calls Once you've absorbed this menu on the future hedge of higher inflation, prepare for a new word to enter our mathematical conversations about fiscal spending. That word is... Quadrillion. More on that tomorrow, Stay positive, Garrett {NAME} Secretary of Inflation [Icon]([Icon]([Icon]([Icon]( [Logo Image](#) Postcards from the Republic 1125 N. Charles St. Baltimore, MD 21202 This email was sent to you because you subscribed to this publication via FinPub. To stop receiving these emails from Postcards from the Republic, Please click [unsubscribe](. © 2024 Postcards from the Republic, All Rights Reserved. Any reproduction, copying, or distribution, in whole or in part, is prohibited without permission from the publisher. Financial Disclaimer: Nothing in this email should be considered personalized financial advice. Do not consider any communication between you and Postcards from the Republic and its employees or writers as financial advice. The communication in this email is for information and educational purposes only. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools. 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