We get the May CPI report tomorrow, which should continue to show more of the same: tame inflation.

For the Fed, the inflation data has become less important than the inflation threat of tariffs.  So, they are data-dependent, until it doesn’t fit their preferred policy stance.  Now they are forecast driven.  As the San Francisco Fed president said earlier this month, they have to “look forward” to the potential inflation.

This is the Fed using its favorite policy tool to keep a foot on the economic brake pedal, forward guidance.

So, the Fed continues to hold back the economy with overly restrictive policy, in a time that we need hot nominal growth to grow out of the debt problem.

The last time we had this level of debt, (chart above), the economy grew at an average nominal rate of 19% (in the early 1940s).

What could drive that kind of growth?  The AI revolution.

On that note, Sam Altman, founder of OpenAI, penned a blog post today saying, “we are past the event horizon.”  He means AI has now entered an irreversible acceleration, where the machines will start improving themselves.

The Fed adopted its 2% inflation target back in 2012, and explicitly said it would be measured by the annual change in the price index for personal consumption expenditures.

That’s PCE. Not core PCE, but headline PCE.

And headline PCE for April, as reported this past Friday, was 2.1%.

The other part of the dual mandate, which the Fed says “stands on equal footing with price stability” is maximum employment.

We’ll get the most recent employment data later this week.  The last reading on the unemployment rate was 4.2%.

So, what’s considered maximum employment?

It turns out, a Fed Governor (Kugler) gave a speech on “Assessing Maximum Employment” last month.  What was her assessment?  For the current situation, she said maximum employment is “in the vicinity of 4.2%.”

So, the Fed is “in the vicinity of maximum employment” and a tenth of a percentage point away from its 2% target.  And yet it maintains a policy stance that still puts downward pressure on the economy (downward pressure on inflation, and upward pressure on the unemployment rate).

All along, the Fed has told us they are data dependent.  Policy will follow the data.

Well, the data is now saying: mission accomplished.  And with that, they should be getting policy to the “neutral rate” — neither restrictive nor stimulative to economic activity.

Where is neutral?

According to the Fed’s own Summary of Economic Projections: it’s 3%.

So, why is the Fed still at 4.35%?

In holding rates this high, the Fed is putting undue pressure on the housing market, creating vulnerabilities. They’re subtracting from economic growth, in an era of sub-trend growth.  And they’re adding hundreds of billions of dollars in debt service costs (self-inflicting) at levels of record indebtedness.

Why?

The San Francisco Fed President now suggests the data isn’t really good enough, after all.  She says, “the data is an incomplete picture.”  They have to “look forward.”

So, the goal posts are moving.

What else does this restrictive Fed policy stance do? 

It inflates the CBO deficit/GDP forecasts surrounding the budget.  So, restrictive Fed policy becomes a lever to apply pressure on budget negotiations in Congress.

And keep in mind, this budget dismantles the climate agenda.

Whether intentional or not, the Fed stance indirectly serves as resistance to the rollback of the climate-centered economic model that much of world has committed to, and global central banks have coordinated, over the years, to support.

Nvidia reported this afternoon.

As we’ve discussed, the growth in data center revenue has been on a rhythm of about $4 billion a quarter since the second half of 2023.

For Q1, data center revenue grew by $3.5 billion.  That’s the weakest quarterly growth since Jensen Huang declared the technology revolution was underway two years ago in his May earnings call.

So, this is the lowest quarterly growth in data center despite what is broadly known to be insatiable demand for Nvidia’s GPUs.

Also, margins came in dramatically lower.  Gross margins fell from 73% to 61%.  And net income margin fell from the mid-50s (percent) to 43%.

And (directly related to that margin hit) they spent a lot of time on the call talking about billions of dollars of charge-offs due to restrictions on chip trade with China. 

All of this, yet the stock went up, in after-hours trading. 

Why?

As we’ve discussed over the past several quarters, the Nvidia’s supplier, Taiwan Semiconductor, seems to have hit capacity.  And it seems clear that Nvidia can’t chip away at the backlog of demand until new global capacity comes online (which will be in the U.S., next year). 

But, the data center revenue growth in Q1 was fueled by networking equipment and inferencing.  Both had explosive growth in the quarter, and it’s expected to continue.