JPMorgan Private Bank's Jacob Manoukian says the Fed will tolerate inflation above 2 percent rather than pay to force it down, a framework shift that pressures long-duration bonds and favors gold-linked assets.
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JPMorgan Strategist Says Fed Surrendered 2% Target, Reshaping Bond Bets
A JPMorgan strategist's claim that the Federal Reserve has quietly abandoned its 2 percent inflation target reframes fixed-income portfolios, with the 10-year Treasury yield at a 52-week high of 4.79 percent and spot gold near $4,477 an ounce.
"Our overall thesis is that they're willing to tolerate inflation at these levels. They won't find the cost of getting inflation back to the 2% target as being worth it," Jacob Manoukian, head of U.S. investment strategy at JPMorgan Private Bank, told CNBC on Sept. 3.
The data supports the diagnosis. Core PCE, the Fed's preferred gauge, printed at 130.66 in July, its high for the trailing year and in the 90.9th percentile of the past 12 months of readings. Headline CPI sits at 332.8, near its cycle high. The 10-year Treasury yield closed at 4.79 percent on Sept. 2, its 52-week high and up about 5 basis points from the start of August, even as CNBC flagged Treasury Secretary intervention in bond markets to keep rates from rising further.
Manoukian's logic is arithmetic on the national debt. "You can drive nominal GDP growth. So that seems to be the least politically costly policy. So if you can drive nominal GDP growth higher you can correct the debt to GDP ratio," he said, adding that the trade-off is being "a little more tolerant of inflation." If the Fed will not bear the cost of hitting its target, it does not really have that target anymore, and every portfolio built for a 2 percent return is mispriced.
Manoukian offered Japan as a template for tolerating inflation to erode debt. That comparison deserves a harder look: Japan ran the playbook with a shrinking labor force and a domestic buyer base that willingly held its own government paper at negative real yields. The U.S. has neither. The bond market appears to sense the difference, with the 10-year yield's climb to 4.79 percent marking its highest in a year even as the Treasury stepped in to smooth the curve.
Manoukian did not treat the overshoot as bearish for stocks. "In this regime of inflation overshoot it probably means a little bit more elevated bond market volatility. It probably gives the green light to equity investors to expect a continued rally and continued strong earnings growth environment," he said. The catch is that nominal earnings growth in an inflationary regime is partly an illusion of the price level. Companies whose input costs rise faster than output prices get squeezed; companies whose output is priced in the very commodity that hedges inflation see the opposite.
Gold's Operating Leverage Is the Trade
That is Newmont's setup. The world's largest gold producer, with a market cap near $137.4 billion, reported Q2 adjusted EPS of $2.10, beating the $1.98 consensus, on revenue of $6.12 billion, up 16 percent year over year. Realized gold came in at a record $4,414 per ounce versus $3,320 a year earlier, while spot gold trades near $4,477. CFO Brian Tabolt noted the realized gold price rose about 33 percent year over year while absolute costs applicable to sales rose just 4 percent, driving record Q2 free cash flow of $2.21 billion. Newmont has repurchased over 100 million shares, roughly 9 percent of the count, since February 2024, with $4.3 billion remaining under a $6 billion authorization. Shares are up 75.15 percent over the past year.
What Would Break the Thesis
The thesis breaks on two developments. A core PCE print that reaccelerates hard enough to force a hike would show the Fed's tolerance has a ceiling, and long-duration assets would bid up before gold does. A failed or badly tailed Treasury auction would be the other tell, stripping the Treasury of its ability to smooth the curve. CNBC flagged that elevated policy rates keep mortgage rates high and the housing market constrained, the household cost of the regime Manoukian describes. For a borrower waiting to refinance, the wait extends.
For investors, the strategist's framing turns a policy debate into a positioning call: if the Fed accepts inflation above target, nominal earners and inflation-linked assets gain ground against fixed coupons. The next core PCE print and the next Treasury auction will test whether that tolerance has a limit.
This article is for informational purposes only and does not constitute investment advice.
