LARRY KUDLOW: Prosperity is as American as apple pie

The Federal Reserve unanimously raised its federal-funds target range by 25bps to 3.75%-4.00%, citing inflation that remains too high, with August headline PCE estimated at about 3.6%, core PCE at 3.2%, and CPI at 2.4%. The article argues the economy remains robust, pointing to Atlanta Fed GDPNow growth of 5.1% for Q3, retail sales up 6% year over year, and more than 4% growth in real domestic private sales last quarter. It frames tax cuts, deregulation, immediate capital-expensing provisions, and productivity growth above 3% annually as supporting noninflationary, business-led expansion despite the Fed's tightening stance.

Analysis

The investable implication is a higher-for-longer real-rate regime rather than a broad “pro-growth” equity signal. Fiscal incentives that pull forward equipment and data-center spending can support orders for ETN, PWR, VRT and CAT, but they also extend demand for capital and labor, keeping the policy rate and long-end term premium elevated. That combination favors companies with visible backlog and pricing power over long-duration software and unprofitable growth, whose multiples remain highly sensitive to real yields.

The key second-order risk is that accelerated expensing improves reported cash economics for capex-heavy firms while reducing near-term federal receipts; stronger private demand plus wider fiscal deficits can steepen the curve even if headline inflation eases. Regional banks face a mixed outcome: loan growth improves, but renewed duration losses and higher deposit betas can pressure capital and NIM, favoring JPM and C over KRE. Homebuilders are a likely loser at the margin if mortgage rates remain constrained by the 10-year yield rather than the policy rate.

Consensus may be too quick to equate productivity-led growth with a clean disinflationary outcome. Productivity gains lower unit labor costs only if they are broad-based; concentrated AI/infrastructure investment can instead create bottlenecks in power, transformers, skilled construction and semiconductors. Over the next 1-3 months, inflation breadth and the 10-year real yield matter more for equities than another strong activity print; over 6-18 months, sustained investment would validate industrial-electrification beneficiaries but increase fiscal/term-premium risk.

Falsification: a sustained decline in core services inflation and the 10-year real yield below 1.5% would weaken the higher-for-longer positioning. Conversely, a 10-year Treasury break above 5%, widening investment-grade spreads, or downward revisions to capex guidance would signal that financing costs are overwhelming the growth impulse.

Key Decisions for Investors

• Initiate a 1-3 month pair: long PWR and VRT / short IGV. Target 10-15% relative upside if infrastructure spending and real yields stay firm; exit if the 10-year real yield falls below 1.5% or either company cuts backlog/order guidance.
• Maintain an overweight in large money-center banks JPM and C versus KRE for the next quarter. The trade captures stronger nominal loan demand while avoiding the balance-sheet and deposit-cost sensitivity of smaller banks; reassess if the curve bull-steepens through falling front-end rates rather than rising long yields.
• Use TLT puts or a modest short TLT hedge against long equity beta over 1-3 months, with a defined-risk structure such as 3-month 2-3% out-of-the-money puts. The payoff is strongest if fiscal supply and sticky inflation push the 10-year yield toward or above 5%; cap exposure because a growth scare would reverse yields sharply.
• Avoid adding to rate-sensitive homebuilders ITB and highly levered commercial real-estate proxies until mortgage-rate direction decouples positively from Treasury yields. Upgrade this view only after housing affordability data improves alongside a durable decline in long-end yields.