I hate to break it to you, but the Fed quietly gave up on 2% inflation. They're just not talking about it anymore.

This morning's CPI report - 3% annual, down from 2.9% in August - gave everyone the warm fuzzies. Markets are screaming higher. Russell 2000 popping. S&P pushing above 6,800 on futures.

But let me walk you through what's really happening here, because this is the macro story everyone's missing.

The Great Goalpost Migration

Powell said in 2021 we weren't gonna get to 2% until 2025. Here we are in 2025. Now he's saying we won't hit it until 2027.

They gave up. They're not even talking about it anymore.

You want proof? Last year, Lael Brainard and Paul Krugman - two very different people with very different platforms - both came out and said the Fed needs to move to a 3% inflation rate and just deal with that.

I think they were effectively announcing that the Fed was already doing this. Not suggesting it. Announcing it.

Why My $35 Haircut Explains Everything

My haircut went from $22 to $26 to $30 and now $35. It's not because my barber got better. In fact, Don would argue that it got worse.

That's services inflation - 3.5% ex-energy - and it's wage driven. This is why the Fed focuses on core services and shelter, which make up over 60% of the CPI basket.

Shelter up 3.6%, sticky as hell. This is a supply side issue. We have 25,000 regulatory groups in the United States that oversee housing construction.

Monetary policy can't fix this. They need to go fix the regulatory maze.

The New 3% Reality

Today's numbers paint the Fed in a corner. We're looking at 96% odds for December rate cuts. I still argue they should go 50 basis points, but I don't vote.

The market's missing this: 3% annual inflation keeps the Fed cautious but not panicked. Inflation is cooling slightly, but it remains sticky in services.

Gasoline up 4.1% in September. Energy moving higher because of Trump's Russia sanctions. Services ex-energy at 3.5% - much better than the 4% we were seeing, but it's the new floor.

What This Really Means

I don't believe the Fed will get back to 2%, barring some significant deflationary event.

Think about it: if they really believed they could hit 2%, why keep moving the timeline? Why would two major Fed voices float 3% as the new target in media?

The reality: 3% annual inflation is the dream scenario now. That's what everybody wants. That's it.

The Trading Implications

Growth stocks benefit from slower inflation expectations - that's why Nvidia's looking stronger, why it might hit 200 within two weeks.

Energy complex remains strong. A week ago, banks were calling $55 Brent, $52 WTI. Today: $62 WTI, $66 Brent. Funny how that works.

Dollar outlook becomes range-bound. Persistent inflation supports the dollar, but slower CPI tempers hawkish bets.

The Bottom Line

If 3% is the new 2%, everything you think you know about Fed policy is wrong.

We're not in a disinflationary cycle heading back to normal. We're in a managed inflation cycle where 3% IS normal.

Different sector rotations. Different duration trades. Different currency implications.

The market's celebration today might be missing the bigger picture. Yes, slower inflation helps growth stocks and rate cut expectations.

But we're permanently resetting what "normal" looks like. Most people haven't figured that out yet.

The Fed moved the goalposts again. This time, I don't think they're moving them back.

Stay Positive,

Garrett Baldwin

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