Politics gets weird at the Fed—but don’t let it distract you from what really matters.
KEY TAKEAWAYS
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The viral video of Trump and Powell was real—not AI-generated
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The President is using public pressure—aka jawboning—to push for rate cuts
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Tariffs are why the Fed is still holding rates steady
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A 25 bps rate cut would mainly benefit government debt service costs
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Investors should focus on data and earnings—not political theater
MY HOT TAKES
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That video was peak political cringe
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Jawboning is legal–and Trump is taking it to the next level
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Tight policy to fight transitory tariff inflation is like antibiotics for a virus, ineffective
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Rate cuts won’t fix much–but they will help Washington’s bottom line
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Powell’s vote is just one of twelve–Trump can’t force a cut on his own
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You can quote me: “Two grown men–quite possibly the most powerful men on the planet–having a high-stakes pillow fight.”
Cringe. I was doing my typical post-market routine yesterday when I saw it. My first thought was that it must have been AI-generated–fake. It had that kind of quality where the heads didn’t quite look proportional to the bodies. And then there was the dialogue. 😖
It was a post from Yahoo Finance and I know–personally–the journalists there, and I am confident that they wouldn’t post a video from a questionable source. I thought, perhaps they are highlighting the dangers of AI-generated content, or maybe highlighting the meme-stock traders that have recently snuck their way back into the news cycle. I searched for more clues.
I noticed that there was a Reuters bug on the video (“bug” is the industry term for a logo overlay). Reuters would certainly not publish a fake video, but it would be easy to fake the logo as well.
I turned up the volume and went back to the beginning of the video and re-watched it twice. On my second viewing I came to realize that, in fact, the video was real. The video showed President Trump and Fed Chairman Jerome Powell, both donning hardhats. Politicians in suits with hardhats are typically found at groundbreaking ceremonies, but this was clearly not one.
Let’s take a step back. Seeing a President chatting with a sitting Fed Chair, is in of itself, noteworthy. That meeting, which took place at the Fed’s headquarters, was yet more conspicuous. I think I saw a statistic yesterday that it had been 20 years since a President visited the Fed’s homebase. Then, there was the dialogue.
I can only describe it as… well, outright cringy. The President was roasting Powell about construction cost overruns and delivery slippages. The President, a real estate veteran, was peppering the Chairman of the world's most powerful financial organization with construction-talk. At one point, President Trump even pulled a piece of paper from his breast pocket which detailed budgets. On it, was presumably… um, numbers… dollar figures. Now that is something that big banker Powell knew something about.
Powell, looked at the paper, and in a very Powell-way called BS 🐂💩 on a number which included past and completed projects. The President didn’t relent, intent on getting in the final word. BUT NEITHER DID Powell. The barbs being traded were overt with an indescribable tone. Two grown men, quite possibly the most powerful men on the planet having a high stakes pillow fight. I stopped the video after watching it at least three more times–I couldn’t take the cringe-factor any more.
I realized that this was just another tactic in the President’s masterclass in jawboning that has been playing out even before he was in the White House. Now, this folks was certainly not your father’s jawboning from days past. Jawboning is completely legal and has been around forever. Quick reminder: jawboning is the jargon used to describe political pressure applied to political figures to cause them to take some sort of action. In this case, it is the entire Trump Administration along with the Commander in Chief, himself, hard-pressing the Chairman of the Federal Reserve Bank to lower the Fed Funds Rate.
The current Fed Funds Rate target is 4.5%, where it has been since the Fed last cut rates in December of last year. At the time economic conditions were, well, slightly better than they are today, though one can hardly describe current conditions as being bad. Since then, inflation has come down. Remember it was inflation that led the Fed to keep rates restrictive for so long. That inflation, a remnant of the pandemic–supply chain problems and massive fiscal stimulus, can hardly be found anymore, but for housing which remains elevated, but disinflating slowly.
So why has the Fed not continued to normalize rates? Why has the Fed left rates restrictive? And, mind you, the Fed is still running off its balance sheet, which is technically monetary tightening. The Fed’s reason for the wait-and-see all comes down to tariffs. Tariffs are unquestionably inflationary, and the President has made mission #1 to levy tariffs. So, logically, the Fed reasons, it could take its time to see how the expected tariff-borne inflation plays out.
As I detailed earlier this week, price increases will certainly come as a result of tariffs, but they would be one-time increases–transitory. That is bad, but it is not one that warrants restrictive rates. Tight monetary policy to fight transitory inflation is kind of like prescribing antibiotics for a viral infection. In case you didn’t know, antibiotics fight bacterial infections; they are ineffective against viruses. THE FED KNOWS THIS, so why won’t it simply resume its rate-cutting?
That very question has vexed the President to the point at which he was willing to waste an afternoon and fight DC traffic in the sweltering summer heat to visit possibly the most boring building in the capitol and take a tour with possibly the most boring guy in town. Why does the President want lower rates so badly?
Well, if you think that Trump wants lower rates to make your life better, I am sorry, that is not the reason. A 25 basis point rate cut will neither impact your monthly budget nor will it cause stocks to rally explosively. Well then, who will be affected by it?
Fed Funds is an overnight lending rate between banks. Bond yields at the very front-end of the yield curve are most sensitive to Fed Funds. T-bills and to a lesser extent, note yields up to 2 years can be materially affected by moves in the Fed Funds Rate. If those yields are lower, the Treasury will have to pay lower interest on borrowing. In other words, the Government can save billions of dollars if yields–impacted by the FED–are lower. That is the primary reason for the President’s focus.
To be clear, there are certainly other positives beyond the Federal budget. SOFR, Secured Overnight Financing Rate, is closely tied to Fed Funds. SOFR is used for Adjustable-rate mortgages, business loans, and some types of corporate debt. So, if you have an ARM about to re-adjust, it may help. It can help commercial real estate developers and borrowers, but it would probably take a much bigger move to have a stimulative effect, but that whole sector is in a massive slump, so everything helps.
Look, at the end of the day, the economy is not crumbling, inflation is not parabolic, and markets are at all-time highs. Do we even need lower rates at this point? Would lower rates be bad? The answers to those questions are NO and NO. That would make all that political maneuvering playing out in the media… well, just that, political maneuvering. My message to you is, don’t let it distract you. Your job is to pay attention to earnings season and economic numbers. Those, not the President's pressure on Jerome Powell, will not only impact your portfolio, but also rate policy. Powell OR HIS SUCCESSOR only gets 1 vote of 12 on rate policy.
I did finally come across a version of that video with a slate at the beginning indicating that it came from the Associated Press. It flashed by so fast that I couldn’t make out the slug which probably said something like “Pres beating up Powell, policy unchanged.” (Slate and Slug are video production terms).
YESTERDAY’S MARKETS
Markets closed mixed to slightly higher as stocks struggled to stay positive in response to mixed earnings and economic numbers. Manufacturing sentiment slipped this month according to the latest flash PMIs–to be expected. Weekly employment numbers came in stronger than expected and New Home Sales came in weak.
NEXT UP
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Durable Goods Orders (June) may have fallen by -10.7% after jumping by 16.4%. Big numbers, but trade policy is causing all sorts of odd purchase patterns.
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Next week we get tons of important earnings announcements in addition to more housing numbers, JOLTS Job Openings, Consumer Confidence, GDP, PCE Price Index, Personal Spending, monthly employment numbers, and an FOMC meeting. That is a lot to juggle. To make sure you don’t drop any balls, check back on Monday to get all the details you need for the week, including calendars.
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