Hi Traders,

Going into Wednesday, nobody knew what kind of Fed we had.

I don't blame Warsh for that. He just got the job, and he told everyone from day one that he won't forecast his next move.

He said it in June, he said it at Jackson Hole, and he said it again Wednesday, almost word for word: "I'm not in the forward guidance business."

Nobody has run the Fed that way in 30 years. Greenspan, Bernanke, Yellen and Powell all telegraphed their moves. Traders got used to knowing what came next, and they don't get that anymore.

The hike itself surprised no one. Futures priced it at better than 90%. I wanted to see his reaction function (what data makes this chair move, and how hard).

Wednesday gave me the answer. Employment looks healthy and inflation sits above where the Fed wants it. He hiked a quarter point to a range of 3.75% to four percent on a unanimous vote, and the statement ended with a sentence I circled: "The Committee will deliver price stability."

"I am not a Wall Street newsletter"

Reporters asked him about Trump three different ways, and he gave them nothing each time. "I've got nothing for you on a discussion with the President. And I am not a Wall Street newsletter."

Then he added this: "Independence is a two-way street. We let people that do trade policy and fiscal policy stay in their lane, too."

I respect that more than anything else he did Wednesday. A chair the President picked exercised the Fed's independence in front of the whole world and didn't flinch. That earns credibility, and bonds showed it.

Two-year yields jumped while long-term yields held steady (traders trust him to keep inflation from running years out). He did the job exactly as he promised, and he deserves respect for it.

A Rate Hike Doesn't Pump Oil

And I've said so for months. Higher rates push against demand. This inflation comes from supply: diesel at six bucks, jet fuel, and the cost of running every truck and train in the supply chain. The war in the Middle East shows up in your grocery bill.

Warsh knows that. In his chair, I wouldn't want to hike here, because a hike doesn't fix the actual problem. But with full employment and inflation above the Fed's two percent target for more than five years, he pretty much had to.

By refusing to forecast, he keeps the option to pause if crude breaks, so I won't play for three more hikes. The last two times the Fed started hiking, in 2015 and 2022, more hikes followed. I see a real chance of one hike and a pause this time.

Not What Trump Wanted

Trump posted after the decision. Rates should sit at one percent or less, he said, because we have the best credit in the world. Then: "LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!"

He can want that.

But the Fed can't lower rates until inflation comes down, inflation can't come down until oil comes down, and oil can't come down until the Strait of Hormuz opens. Warsh controls none of that, and Trump does.

Right as I sat down to write this, two headlines crossed: "Trump expected to meet with GCC leaders next week" (the Gulf Cooperation Council, the bloc of Gulf oil states) and "War will end soon because Iran can't go on." S&P futures rallied almost half a percent on them. He knows where the pressure valve sits.

That puts the decision on him. If he wants lower rates, he has to end this war.

The One Chart That Didn't Blink

The dollar.

The euro never bounced, the yen never bounced, and the dollar index (the dollar against a basket of major currencies) never gave back a tick of its rally, even on the 5-minute chart. When the dollar catches a bid (buyers show up) on a Fed day, the market prices in more hikes, and that works against stocks.

I also watch the VIX (Wall Street's fear gauge). It should print lows and grind lower, and it hasn't. Crude hangs over this market, and that fear stays until oil breaks.

If Trump wants lower rates and all-time highs in stocks, he needs to finish the Iran conflict. Words have bought him about all the time they can.

Stocks have put up with crude past $102, gas well over $4, a 10-year yield that touched 5%, and now a unanimous hike from a chair who says he'll deliver price stability.

How much more patience does the stock market have for words? Mine has worn thin.

Enjoy the journey,

Tim