Everyone’s betting on cuts, but Powell isn’t moving. What if he’s the only one reading the right chart?
The Market is Misreading Powell — Again
While headlines circle around the dollar’s decline and social feeds celebrate BRICS’ token summits, Jerome Powell is looking at something very different: the 1970s. He’s not cheering the temporary cooling in CPI. He’s not turning dovish. And he’s certainly not following the market’s lead. Powell is gearing up for a second inflation shock — and he’s fighting to prevent the Fed from walking into the same trap twice.
At the July 30 FOMC, Powell issued the clearest warning yet: “We see our current policy stance as appropriate to guard against inflation risks.” That wasn’t just hawkish filler. That was doctrine. For Powell, the real danger isn’t stagnation — it’s complacency. Inflation hasn’t been defeated — it’s hiding. And if the Fed cuts too early, the cost won’t be a mild correction. It’ll be a systemic failure.
The ghost of the ’70s still haunts the Fed
Powell isn’t guessing. He’s watching history. In the 1970s, inflation came in three brutal waves. After the first peak, the Fed celebrated too soon, cut rates, and inflation exploded again — this time worse. Each successive wave required more pain to suppress. By the early ’80s, the U.S. was drowning in double-digit rates and recession. The central bank lost credibility. The dollar lost trust.
Powell knows the script. He knows that if he blinks now — if the Fed responds to political pressure or recession fears before inflation is actually dead — the next wave could hit even harder. And this time, there’s no Paul Volcker waiting in the wings.
Inflation is back, and the labor market can’t absorb it
The signs are already flashing. In June, headline CPI reaccelerated to 2.7%, up from 2.4% just two months earlier. Core PCE — Powell’s preferred inflation gauge — remained elevated near 2.8%, with no signs of a sustained downtrend. That’s not victory. That’s a stall-out.
US CPI and Core PCE
The Fed has been clear: any sign of persistent inflationary pressure — especially in core metrics — invalidates the case for rate cuts. And that’s exactly what we’re seeing. Inflation is oscillating, and that’s a dangerous place to be.
But what makes this worse is what’s happening underneath: the labor market is fracturing. Wage growth remains sticky — holding above 4.9% — while NFPs are plunging. In July, the US economy added just 73,000 jobs, down sharply from the 300k+ prints in Q4 2024. This is the classic stagflation cocktail: soft employment, firm wages, and no productivity surge to absorb the cost pressure.
US Wage Worth and NFP
For Powell, this is the nightmare setup. In the 1970s, the Fed mistook weak jobs for an excuse to cut — only to watch inflation reignite from wage-cost stickiness. Powell has referenced this mistake repeatedly. And in his July 30 remarks, he made it explicit: “We see current labor trends as consistent with inflationary risk, not relief.”
Markets, however, are pricing in rate cuts anyway — ignoring the divergence between inflation stickiness and employment weakness. That’s not just wishful thinking. That’s front-running policy in a stagflation regime. And every time the data contradicts those bets, the dollar rallies and equities stumble.
Markets are betting on a pivot — but Powell isn’t flinching
This is where Powell diverges from market sentiment. Investors continue to price in rate cuts for late 2025, believing that growth concerns will force the Fed’s hand. But Powell is playing the long game. For him, cutting now isn’t just premature — it’s dangerous. Every upside surprise in CPI, every stubborn wage print, every geopolitical flare-up that lifts commodity prices is another reason to hold the line. And right now, he’s holding it with force.
Oil shock 2.0: The most predictable surprise
The oil market adds another layer of risk. In the 1970s, it was the energy shock that reignited inflation. prices quadrupled in two years — first from around $3 to $12 during the 1973–74 embargo, and then to nearly $40 by 1979. Today’s dynamic is eerily similar. has already doubled from its post-COVID lows and was hovering near $80 at the beginning of 2025.
But the story doesn’t end there. Starting in September, new OPEC+ supply cuts are set to kick in — and that could easily send prices back toward $110 or even $120. Meanwhile, the United States’ own Strategic Petroleum Reserve is near its lowest level since the 1980s. 
US Strategic Petroleum Reserve
The White House used most of its ammunition during the 2022 energy crunch. Now, if oil spikes again, there’s no easy fix. And that means inflation, once again, could come roaring back — and the Fed would have to react from behind.
QT continues, M2 is creeping up — and that’s a problem
Despite rate hikes and balance sheet runoff, inflationary pressure hasn’t vanished. Quantitative Tightening has already removed nearly $500 billion from the system in just 12 months — a historically aggressive pace. But while monetary conditions are tightening, fiscal conditions aren’t. The M2 money supply rose by $1 trillion, fueled by increased budget spending and growing deficit commitments. 
FRED Total Assets and M2
This is the worst of both worlds: the Fed is draining liquidity, while Congress pumps new cash into circulation. It’s a dynamic Powell must watch closely. Because if M2 rises faster than the Fed tightens, inflation expectations could unanchor again.
Tariffs are fueling the fire
On August 1, a sweeping set of US trade tariffs came into effect, targeting imports from China, India, Brazil, the European Union, and other regions. These are not marginal measures. Tariff rates range from 10% to 50% — real numbers with real consequences. 
Trump’s August tariffs
Retailers are adjusting too. US clothing and electronics chains are warning of possible price hikes ahead of the holiday season. In its August earnings call, Walmart (NYSE:) flagged “upstream cost pressure” in categories affected by tariffs. This isn’t just a forecast — it’s inflation already in motion.
Markets reacted quickly: treasury yields jumped after the announcement — 2Y rose by 2.17%, 10Y rose by 1.53%, DXY snapped back above 100, and Q4 CPI forecasts have been revised up to 3.2%.
Powell wasn’t surprised. He called tariffs “inherently inflationary” and repeated the Fed’s message: there will be no rate cuts unless inflation stays low consistently.
US–EU megadeal: a new source of dollar demand
On July 28, the United States and European Union signed a long-term trade and industrial agreement worth more than $1.35 trillion. It includes $750 billion in energy purchase commitments from the EU and $600 billion in planned investment into US infrastructure, manufacturing, and defense by 2028.
These deals aren’t just political — they’re capital flows locked into USD for years. Europe may talk diversification, but it just bet $1.3 trillion on the dollar. Every purchase, every project, every contract denominated in USD adds structural demand for the greenback. While emerging markets talk about moving away from the dollar, the world’s second-largest trading bloc just bet its industrial future on it.
“America First” = more dollars coming home.
Domestically, reshoring is ramping up. TSMC’s $40 billion Arizona plant is scheduled to start production in 2026. Trump has pledged a new $100 billion investment push from Apple (NASDAQ:) and other multinationals. CHIPS Act disbursements are scaling up, and US industrial policy is aligning behind one goal: bring production back.
But that reshoring process comes with a monetary side effect. Dollars must return home, capital must be repatriated, and corporate treasuries must shift liquidity back into US accounts. The result is another wave of demand — not speculative, but transactional for USD.
DXY: Powell’s policy is visible on the chart
While social media obsesses over de-dollarization, the chart is telling a different story. DXY is now testing a structural support zone near 97–100, reinforced by a rising trendline that has held since the 2008 bottom. It is the chart-level reflection of Powell’s entire inflation strategy: high rates, QT, and no pivot. The same zone triggered dollar rallies in 2021-2022 — each one backed by policy tightening.
DXY Monthly Chart
After sweeping liquidity below 100, DXY is showing early signs of reversal. If it reclaims the 104–105 area, the path toward the 118–120 resistance zone — opens up.
In this regime, dollar strength isn’t a reaction to Fed rhetoric. It’s a repricing of risk, policy divergence, and structural demand. The market is just starting to catch up.