Federal Reserve officials are not mincing words: The central bank and its chair, Jerome Powell, believe the 2% inflation target is sacrosanct and will risk a recession and bear market to get there.

So why are markets rallying hard — as if Powell is about to soon cut interest rates, not raise them?

The answer is that many traders and investors are convinced what was once the least political layer of government — the Fed — has become among the most politicized. Powell, whose main job is to keep inflation low, will jettison the inflation target for something much more palatable to appease Dems in Congress and economists in the Biden administration.

It is fashionable in left-wing circles to accept inflation as necessary. Rising prices don’t matter so long as government budgets keep getting bigger.

How soon they forget the dreadful stagflation of the 1970s where the economy slowed while prices soared. It didn’t matter if you had a job. You couldn’t afford to put enough food on the table and gas in your car, much less buy a new one or eat in a restaurant.

So where is Powell’s head at? 

Stock traders say Powell’s history of monetary accommodation and recent dovish statements are sure signs he will cave on the 2% target for something higher, maybe much higher. So they’re in a buying mood.

Conversely, Fed watchers who have sources in Powell’s inner circle tell me the central bank understands the need to make inflation go away. That means higher rates, market declines and a possible recession.

Neel Kashkari, the voluble president of the Minneapolis Fed, echoed much of this sentiment at the Aspen Institute Conference last week. Sure, he and his colleagues like the Consumer Price Index direction, falling to 8.5% in July from 9.1% the month prior. Yet he made clear the Fed is “far, far away from declaring victory” on inflation.

In the meantime, what we have is a classic market disconnect, which is never a good thing because shareholders might not recognize the tsunami heading their way. It’s rooted, unfortunately, in Powell’s dwindling credibility as an inflation fighter, I am told. He’s derisively known as “Blinky” on trading desks and not because there’s something wrong with his vision.

Based on his record, the belief on trading desks is that Powell is looking for a way out of his rate hikes. He will soon “blink” and rationalize a higher inflation target rather than become the target of the powerful leftist contingent that currently runs President Biden’s economic policy.

The July inflation drop, however minuscule, gives him the cover to begin reversing course.

Of course, stock traders have been wrong before and in colossal fashion. In late 2007, the Dow hit a then-record of around 14,000, pricing in an economic recovery. A financial crisis and the Great ­Recession soon followed.

They could be wrong again, unless Blinky blinks. It might be good for the markets in the short run. The rest of us, not so much.

AMC ‘gift’ to the ‘Apes’

Adam Aron, the CEO of AMC Theaters, has a tough job. Streaming was already putting pressure on his business long before it was shut down by COVID. With the pandemic largely a bad memory, and box office hits like “Top Gun: Maverick,” his company still loses money.

Plus his investors are a bunch of retail traders who engage in conspiracy theories. They call themselves the “Apes” for reasons best known to themselves. They think they’re going to get rich buying shares of AMC because they discovered an evil cabal of short sellers who want to destroy the company.

If they buy enough of it, they’ll crush the shorts and make a mint.

Crazy, yes, but Aron needs the crazy Apes to keep buying his stock because they’re the only thing standing between AMC and a significant chance of a Chapter 11 restructuring. To that end, he is hawking a plan to get the Apes more hungry for his stock with a gift of a special dividend in the form of a new preferred share.

Once that happens, he says the company will thrive through a financial technique known as “good dilution.”

The Apes love what they’re hearing. Aron is affectionately known among the peeps as the “silverback,” and shares are up 31% since the announcement.  

“AMC stock which was trading at $3.19 on March 16, 2020 — the day the pandemic forced the closure of its theaters — closed Thursday at $25.46. That is an increase of 698%,” Aron tells me.

OK, but shares are also down around 66% from their high last year, and don’t try and look up the term “good dilution” on Investopedia because it doesn’t exist. There’s just dilution and that means your holdings are worth less because there’s more stock floating around.

Also dig deeper into Aron’s plan, as professional traders like Marc Cohodes did, and you find there’s an interesting transfer of wealth going down with all this “good dilution.”

Once Aron issues the new shares, Cohodes points out, the Apes will be handing Aron and bondholders a check. That check will help him pay down debt benefiting the large institutions who hold AMC’s debt as the Apes keep AMC out of bankruptcy.

Perhaps the real definition of “good dilution” is “bailout.”