#1049 Darius Dale On How The Fed Is Losing The War With Inflation

— U.S. inflation reached 9.1% year-over-year in June 2022, but accelerated to 10.6% on a three-month annualized basis, indicating momentum in the wrong direction.

— Median CPI and sticky CPI are accelerating at 7.4% and 7.6% respectively on a three-month annualized basis—the fastest pace since the early 1980s.

— The labor market is overheating by double pre-pandemic trends across private payrolls, average hourly earnings, and aggregate income growth, signaling the Fed must remain aggressive.

— The Fed faces a $900 billion liquidity drain through year-end—more than the entire 21-month QT cycle of 2017–2019 compressed into six months—which will likely break something in markets.

— A recession is necessary to bring inflation down to the Fed's 2.7% core PCE target by end of 2023; the view that the U.S. can avoid recession is incorrect.

— Russia's invasion of Ukraine added roughly 160 basis points to U.S. inflation, but the core inflation problem stems from domestic factors like housing, services, and labor market overheating.

— Expect the Fed to remain aggressive with rate hikes (75–100 basis points at the July FOMC meeting) because labor market and inflation data show no sign of abatement; a mild recession is now necessary to achieve the Fed's inflation targets, not optional.

— Liquidity drying up will hit riskiest assets first (small caps, high-beta cyclicals, speculative growth names) before spreading to core equity markets; position defensively and monitor credit spreads as leading indicators of stress.

— The U.S. inflation problem is primarily domestic (labor, housing, services) rather than sanctions-driven; the 160–170 basis point inflation premium versus the developed world is in the 95th percentile historically, signaling structural imbalances that require painful correction.