The Federal Reserve is under pressure to cut interest rates.
During its last rate-setting meeting, the Fed kept rates on hold at a range of 4.25–4.50%. The U.S. policy rate remains the highest among developed economies.
And Fed Chair Jerome Powell is repeating a familiar message.
Powell wants to evaluate the impact of tariffs on inflation in the coming months. After all, the 90-day pause on reciprocal tariffs ends in just nine days. And it’s not clear if President Trump will move the deadline again.
But while tariffs are grabbing the inflation headlines, a much bigger risk for the inflation outlook is lurking.
One chart in particular could ignite inflation, and it has little to do with tariffs…
Commodities Are Heating Up
Commodity prices and inflation go hand in hand.
Many commodities are inputs for producing goods and services. For example, we use oil in plastics and fuel. So companies often pass along rising commodity prices to consumers in the form of higher prices (i.e., inflation).
But commodities can also be a leading indicator of inflation.
An economic shock from a supply disruption or a sudden new source of demand can show up in commodity prices quickly. Rallying commodity prices can signal rising inflation ahead.
This might also help explain why commodities outperform during periods of rising inflation.
Take a look at the chart below:
From 1970 to 2020, commodities returned an annualized real return of 14.6% during periods of rising inflation.
That’s the best of the major asset classes by far – including stocks and bonds.
So we should keep a close eye on commodity indexes. The charts can tip what’s in store.
And there’s one commodity in particular you need to focus on right now…
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Watch Copper’s Chart
Oil might be grabbing the headlines following the conflict in the Middle East. But you should follow copper more closely than any other commodity right now.
I showed you above how commodities perform well during periods of rising inflation historically.
Well, copper also has one of the highest correlations to long-term inflation expectations. And the current chart setup in copper looks rather ominous for inflation.
Take a look at the chart below:
Copper is forming a pattern called an “ascending triangle.” That happens when the price makes higher lows while encountering price resistance at the same level.
The lower dashed line shows the higher lows taking place. The upper dashed line shows where copper is finding resistance around the $5 per pound level.
This tends to be a bullish chart pattern. We can expect prices to break out as the pullbacks keep getting smaller.
But a breakout in copper would be anything but bullish for the stock market.
Rising copper prices signal more inflation ahead… regardless of what happens with tariffs. That could keep the Fed on hold and force the central bank to maintain interest rates at high levels for longer than it wants.
High rates negatively impact the economy and put pressure on stock market valuations. That’s not good news for a market that’s currently more than priced for perfection.
Yet very few are paying attention to this. When investors finally catch on, we can expect volatility to return to the stock market…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. The upcoming Fed meetings will remain contentious events… We can certainly expect more sparring between the White House and Fed Chair Jerome Powell.
Yet that tension is creating a favorable backdrop for one of my favorite trading strategies. I explained how last Thursday… and the replay is going offline very soon.
If you want to learn how you can use market chaos to potentially make $597, $1,340, or $2,010 in as little as a day, go here now to watch.
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