Radio Silence at 3.7%

Nine days until the FOMC meets, a blackout already underway, and one Chair who has built a personal brand around saying less. Congratulations, everyone. We have finally achieved the monetary policy of a dial tone.

Let me lay out what the dial tone has to work with. September CPI came in at 3.7% against 3.6% expected. Core printed 2.6%, a tenth hot, and the Beige Book logged the most inflation mentions on record. Then the producer price index arrived like a man falling down the stairs with a tray of glasses: up 1.3% in a month, the biggest jump since March 2022, 6.3% on the year, core up 0.7% on the month and 5.0% on the year. The consensus had been 0.5%. That gap is a different country.

And the bond market, bless it, looked at all this and rallied. The 10-year spiked to roughly 5.32% after CPI, then spent two days sliding to about 5.10%, a 14 basis point drop for the week. Please explain to me what the bond market thinks it knows. Either it believes the Fed will hike into a slowdown and break something, which is a coherent view and a grim one, or it has decided the equity wobble matters more than a 6.3% producer price index. I lean toward the first. I would like to be wrong. I have been wrong about worse.

The silence is a policy

Here is what bugs me. Kevin Warsh took the chair signaling he wants less forward guidance and fewer pressers, and the market has been left to do its own thinking. Fine. Defensible. I have sat through enough dot plot seminars to feel some sympathy.

But a central bank that abandons guidance in a calm market is running an experiment. A central bank that abandons guidance in a market where one unconfirmed rumor about an AI hedge fund can send the VIX from 16 to 22 in an afternoon is running an experiment on live patients. The September meeting hiked to 3.75-4.00% on a 12-0 vote, the dots pencil in at least one more, and since then the market's October hike odds have bounced between roughly 15% and 54% depending on the day and the data vendor. A probability should hold still longer than a mood ring does.

Mary Daly said this week that more tightening is probably needed and that there is no urgency to do it this month. Futures now put an October hold at about three chances in four. And that is the entire official input the market gets between Wednesday's CPI and the October 28 decision, because the blackout began this weekend. Roughly eleven days of the world's most important rate-setter sitting in a dark room with the lights off while energy prices run the table.

Meanwhile, in the economy where people live

Retail sales rose 0.8% in September, a beat against 0.3%. Wonderful. Gas stations accounted for most of it, sales there up 6.4%. The control group, the number that strips out the stuff you buy because you have to, rose 0.1% after 1.2% in August. Real wages have now fallen six months in a row.

Payrolls added 29,000 jobs in September. The headline wage figure runs around 3% against a 3.7% CPI. Do the subtraction. I'll wait.

Social Security announced its 2027 cost-of-living adjustment this week: 3.6%. That is the federal government formally confirming, with a press release, what the CPI already told us, and then adding the cost to the same budget that has to refinance itself with a 10-year yield above 5%.

The 30-year mortgage averaged 7.40% in Freddie Mac's survey, against 6.27% a year ago. The 10-year fell 14 basis points that same week and the mortgage rate did not move. So the bond rally went to the bond holders and the mortgage borrower got a nice view of it from the sidewalk.

Brent closed Friday at $109.86, up 3.7% on the day, WTI above $101. Diesel hit $6.53 a gallon in late September and nothing in the last three weeks has made that number go away. It showed up in September CPI, it showed up in producer prices, it is lurking in the October CPI that arrives in mid-November, safely after voters have been asked how they feel about their lives on November 3.

What I would like to see happen

I would like Warsh to give one speech before the blackout ends, or one sentence, or a facial expression. I would like someone at the Fed to explain why a 5.0% core PPI deserves less commentary than a bad Netflix quarter. I would like the committee to say out loud whether it thinks the energy shock has leaked into core, because the Fed's own staff must be asking, and the answer decides whether a 3.75-4.00% policy rate is restrictive or decorative.

Core CPI at 2.6% with the policy rate at 3.75% says restrictive. Core PPI at 5.0% says the pipeline is full of something the CPI has not digested yet. Those two numbers do not describe the same economy and the Fed knows which one it is afraid of. It simply will not tell us.

So here we are

Tesla and Meta report Wednesday. Netflix on Tuesday. Texas Instruments, Lam Research, Western Digital, Bloom Energy. I expect traders to read every one of them as a message about rate hikes, because there is no other message available. When the central bank goes quiet, every company becomes a Fed speaker. Earnings season becomes forward guidance by other means.

Maybe it works. Maybe the market grows up, absorbs the uncertainty, and the Fed gets credit for building a more resilient price discovery machine. I'll buy the first round if that happens.

My money says the next ten days teach us the old lesson again: a market that is told nothing does not calm down. It makes things up.