Inflation Is Cooling, So Why Is the Fed Running Hot? | Macro Mondays

Andreas Steno argues that the probability of a Goldilocks regime, defined as inflation falling while growth recovers simultaneously, has risen over the past month and now ranks as the second most likely outcome in his nowcasting framework. He describes this as a rare late-cycle mix and says it would wrong-foot pundits who have persistently cited the Iran War as a driver of sustained inflation.

The nowcasting model assigns a very low probability to inflation increasing in the US, while growth probability rebounded after a weak July that coincided with a momentum rout in financial markets. Steno argues the combination of low inflation and mediocre growth will leave the Fed wrong-footed for the rest of the year, with markets repricing the Fed in a dovish direction as a result. He notes the Fed highlighted inflation risks on the way up but is not symmetrically penciling in disinflation on the way down.

Several specific disinflationary forces are identified. Consumer goods in the PPI fell roughly 75 basis points in a single month, the category most exposed to indirect tariff pressures. Corporations receiving tariff rebates from the US Treasury have little PR incentive to raise consumer prices, which Steno describes as an underreported reason for flat price trends. The shelter component of CPI has printed soft for three consecutive months, partly attributed to lodging away from home and World Cup price front-loading, and partly to the immigration policy shift toward flat net zero or net outflow affecting rental markets, though the immigration effect is still working through with a lag. An energy price spike in March and April tied to the Iran War has since peaked in its rate of change, and Steno predicts the energy inflation impulse will turn outright negative into early next year, creating a meaningful drag on the headline inflation print.

Consumer sentiment surveys are described as unreliable for business cycle analysis since approximately 2021 due to COVID-related distortions. Steno says the current disconnect between survey pessimism and actual conditions is the largest in the history of the Consumer Sentiment Survey. Consumers are reporting extreme pessimism while continuing to spend, equities are performing well, unemployment is low, and the New York Manufacturing Empire PMI confirmed the economy is still accelerating. Steno attributes the survey distortion to tribalism that intensified since Trump returned to office, noting that when Trump mentioned tariffs, the consumer inflation survey spiked sharply even though the inflation never materialized.

On the dollar, Steno describes a weaker dollar as his highest conviction call from the nowcasting work, a position taken six to seven weeks prior. The Eurodollar broke higher on the day of recording, and Steno predicts investors are in for a treat in the fourth quarter if the dollar turns, noting that a weaker dollar carries mostly positive repercussions for global financial markets.

Steno identifies the memory trade as the best performing trade over roughly the past week and argues HBM memory is now arguably as important as or more important than GPUs for AI buildout. JP Morgan raised its price target for Micron from 500 dollars to 1,550 dollars, more than tripling the prior target. CoreWeave disclosed during its earnings call that it has rented out A100 GPUs for another three years, chips already five to six years old and past typical depreciation periods, which Steno uses to argue that current analyst assumptions for hyperscalers and memory hardware manufacturers remain conservative. He predicts the AI cycle has not yet reached a euphoric phase and argues investors should not avoid exposure ahead of that phase. Memory prices have increased 10 to 15 times but this inflation does not appear meaningfully in CPI because consumer electronics represent roughly one percent of a typical Western consumer's consumption basket, which Steno describes as a favorable investment sweet spot that does not affect the Fed reaction function.

A Trump-Xi summit is scheduled for September 24th, though reports from China about which official is preparing for the meeting are described as mostly rumors, and Scott Bessent is said to likely not yet be involved. Steno predicts the meeting could produce more surprises than the prior month's meeting. He also flags that South Korea is a critical backstop of the US AI supply chain, with the majority of its HBM memory exports going to Taiwan within the US AI supply line and some routed through Malaysia, which Steno theorizes is being used as an intermediary to supply Chinese data centers in a pattern similar to how smaller countries acted as conduits during Russia and Iran sanctions. The US banned HBM imports to China in approximately late 2024 or early 2025, and Samsung and Hynix factory developments in China, where production is running exactly to demand for flash drives, are described as a factor leading into the Trump-Xi summit.