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* FIEND'S SUPERBEAR MARKET REPORT *

* September 14, 2026 *

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* e-mail: fiendbear@fiendbear.com *

* web address: http://www.fiendbear.com *

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Fiend Commentary
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Ninety Percent and Still a Coin Toss

The Federal Reserve has spent most of 2026 waiting for inflation to give it permission to do nothing.

It may finally have run out of time.

Friday's CPI report was not a disaster. Headline consumer prices rose 0.4% in August and 3.4% from a year earlier, roughly where economists expected them to land. That was enough for Wall Street to breathe a brief sigh of relief after Thursday's PPI report and send stocks sharply higher.

But "about as expected" is not the same thing as good.

Core CPI increased 0.3%, a little more than expected, while producer prices had already risen 0.4% for the month and 5.4% over the past year. Inflation is no longer accelerating at the frightening pace seen earlier in the decade, but neither is it convincingly returning to the Fed's 2% target.

And the August inflation reports have another problem.

They are looking backward at an oil shock that has become considerably worse since the month ended.

Brent crude was back above $107 early Monday after additional attacks threatened Gulf shipping routes. WTI was near $103. Gasoline and diesel prices have already jumped sharply, transportation costs are rising and the increase will eventually work its way through everything from food distribution to airline tickets.

The Fed is therefore being asked to decide whether inflation is under control using data that only partially reflects the latest inflation shock.

That is not a comfortable position.

The Real Rate Isn't Very Real

There is another way to look at the Fed's predicament that receives surprisingly little attention.

The current federal funds target is 3.50% to 3.75%. Use the midpoint of 3.625% and compare it with the 3.4% headline CPI rate.

That leaves a real policy rate of only about 0.2%.

There are obviously more sophisticated ways to calculate the real interest rate. The Fed prefers PCE inflation, economists look at expected rather than backward-looking inflation, and core inflation excludes volatile food and energy prices.

But the simple calculation makes an important point.

The Fed does not currently have much cushion.

If headline inflation moves from 3.4% toward 4% because oil remains above $100, the real federal funds rate becomes negative again even if Warsh never cuts rates.

In other words, doing nothing can become an easing policy all by itself.

That was much less important when oil was falling and inflation was gradually moving lower. It becomes much more important when the energy shock is pushing in the opposite direction.

Warsh can leave the nominal rate unchanged.

He cannot leave the real rate unchanged if inflation keeps rising.

The Bond Market Has Already Done the Fed's Job

The long end of the Treasury market seems to understand the problem.

The 10-year Treasury yield came within a whisker of 5% last week, briefly reaching roughly 4.99%. The 30-year pushed above 5.35%, returning to levels associated with 2007.

Those are not small moves.

The 10-year was around 4.5% only a few months ago. Mortgage rates have climbed back toward 7%. Corporate borrowers face higher refinancing costs. Commercial real estate gets another turn of the screw. The federal government's enormous interest bill keeps getting larger as old debt matures and has to be refinanced at higher rates.

Wall Street keeps asking whether Warsh will raise rates by 25 basis points.

The bond market has already raised them by considerably more.

That creates one of the stranger possibilities surrounding Wednesday's meeting.

A Fed rate hike could actually push long-term rates lower.

Normally higher Fed rates are described as bearish for bonds. But if investors believe a quarter-point hike demonstrates that the Fed is finally serious about preventing another inflation cycle, inflation expectations could ease and the long end could rally.

The opposite could also happen.

If the Fed refuses to hike after the market has priced nearly a 90% probability, investors may conclude that political considerations have overwhelmed monetary policy.

Warsh saves 25 basis points at the short end.

The Treasury market adds another 20 or 30 at the long end.

That would not be much of a victory.

Forty Trillion Dollars Apparently Wasn't Enough

Then there is the fiscal side of the equation.

The federal debt recently passed $40 trillion.

The number is so large that another trillion dollars barely sounds dramatic anymore. Perhaps Washington has finally found the solution to that problem.

Spend another trillion.

President Trump is now promising a $5,000 payment to every American adult if Republicans retain control of Congress in November. Estimates put the potential cost near $1.35 trillion.

Trump said over the weekend that the payments would be "easy" to fit into the federal budget.

Easy is an interesting word.

The government is already running enormous deficits during what is supposedly a healthy economy. Interest expense is consuming an increasingly large share of federal revenue. Treasury investors are demanding yields near 5% to hold long-term government debt.

And now the proposed solution to voter unhappiness over inflation is to distribute another $1.35 trillion.

There are obviously political obstacles. Congress would have to approve the checks, and even Republican lawmakers have expressed reservations.

But the proposal matters even if it never becomes law because it tells the bond market something about Washington's priorities.

There is still almost no political constituency for spending less.

Republicans want tax cuts and checks.

Democrats have their own spending priorities.

Neither party seems particularly interested in telling voters that a $40 trillion debt eventually requires somebody to receive less or pay more.

Bond investors get to do the unpleasant arithmetic instead.

They are doing it at 5%.

Trump Wants the World's Lowest Interest Rates

The fiscal contradiction becomes even more remarkable when monetary policy is added.

Trump said again over the weekend that the United States should have the lowest interest rates in the world.

Not lower rates.

The lowest.

At the same time, his administration is presiding over a $40 trillion national debt, oil above $100, inflation running at 3.4%, producer inflation above 5%, and a proposal to distribute another $1.35 trillion to consumers.

There is no economic law saying large deficits must immediately create inflation. There is also no law saying a president cannot advocate lower interest rates.

But eventually the combination becomes difficult to reconcile.

Borrow enormous amounts of money.

Stimulate consumer demand.

Keep monetary policy loose.

And then ask lenders to accept lower returns.

The Treasury market appears increasingly unwilling to participate.

That may be one reason Trump is so openly frustrated with Warsh.

A president facing midterm elections naturally wants cheaper mortgages, lower credit-card rates, stronger stocks and an economy running as fast as possible.

A central bank confronting persistent inflation is supposed to want something else.

This is exactly why the Federal Reserve was made politically independent in the first place.

Eighty-Seven Percent Is Not Ninety Percent

The CME FedWatch Tool now puts the probability of a quarter-point increase at approximately 87%.

Goldman Sachs finally moved into the hike camp over the weekend. JPMorgan now expects a hike Wednesday and another in December.

If this were almost any other Fed chairman, an 87% probability two days before the meeting would probably settle the matter.

Warsh makes it more interesting.

We have watched this movie before.

Warsh talks tough.

Inflation remains above target.

The bond market becomes nervous.

A Fed meeting approaches.

And somehow another reason appears to wait.

That is how WACO — Warsh Always Chickens Out — was born.

The market says the probability of a hike is nearly 90%.

We would still put it much closer to a coin toss.

That is not because the economic case for a hike is weak.

It is because the political case for avoiding one is so strong.

Trump does not merely prefer lower rates. He has made lower rates a centerpiece of his economic argument. A hike less than two months before the midterm elections would produce an immediate reaction from the White House.

Warsh knows that.

Bond traders know that Warsh knows it.

And that is precisely where credibility enters the calculation.

One Last Number

There is one meaningful report remaining before the Fed announces its decision.

August retail sales arrive Wednesday morning.

That gives policymakers a final look at the consumer only a few hours before the 2 p.m. announcement.

A spectacular collapse in spending could complicate the decision. A huge upside surprise could make a hike even easier to justify.

Anything remotely normal probably changes very little.

The Fed already has the information that matters most.

Employment has remained firm.

CPI is running at 3.4%.

PPI is running at 5.4%.

Oil is above $100.

The 10-year is essentially at 5%.

The 30-year is above 5.3%.

The federal debt has crossed $40 trillion.

The president wants dramatically lower interest rates.

And financial markets overwhelmingly expect the Fed to move in the opposite direction.

There isn't much more data left to hide behind.

The First Hike May Be the Easy Part

Even if Warsh raises rates Wednesday, the more important question comes afterward.

Is this a one-and-done insurance hike?

Or has the Fed finally concluded that monetary policy is too loose for an economy where inflation is no longer moving convincingly toward 2%?

The market has already begun pricing further tightening.

That could make Warsh's press conference more important than the 25 basis points themselves.

A hike accompanied by language suggesting no additional action is likely could be interpreted as dovish. Stocks might rally. Bonds might initially rally. Gold could recover after being battered by rising rate expectations.

A hike accompanied by a warning that inflation risks have shifted materially upward would be something very different.

That would mean WACO has been suspended.

It would also mean markets have to contemplate an actual tightening cycle for the first time in several years.

The September Fed meeting may therefore produce one of the strangest outcomes imaginable.

Wall Street could get exactly the rate hike it expects and still discover that it had priced the meeting incorrectly.

Warsh's Moment Finally Arrives

Warsh was brought in partly because Trump wanted a different Federal Reserve.

He may now have to prove that by doing something Trump very clearly does not want.

There is considerable irony in that.

For months, the new Fed chairman has argued that inflation remained too high and monetary credibility mattered. Until now, the economy kept giving him enough ambiguity to talk like a hawk while behaving like a dove.

That ambiguity is disappearing.

A 25-basis-point hike will not bring oil back below $80.

It will not erase the federal deficit.

It will not make $40 trillion of debt disappear.

It certainly will not bring inflation immediately back to 2%.

But it would tell the bond market that there is at least one institution in Washington willing to lean against inflation instead of adding to it.

Doing nothing would send another message.

CME says the odds are nearly 90%.

The FiendBear says it is still closer to 50-50.

The bond market seems to be saying something simpler.

Time's up.

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