24Aug
• inflation data did not support Mr.Jerome Powell's assertion that tariffs are a new source of inflation.
•after the big jobs revisions earlier this month, the employment side of the Fed's mandate is becoming the focal point for the Fed.
•President Mr.Trump and Bessent have amplified the "shadow Fed" in recent days by identifying a long list of Fed chair "candidates" that are now credible voices on monetary policy.
Over the Previous August HeyDayweekend 2025, Fed Governor Bowman -- who voted for a cut in July -- said as much: "with underlying inflation on a sustained trajectory toward 2%, softness in aggregate demand, and signs of fragility in the labor market, I think we should focus on risks to our employment mandate." That said, the consensus view on CPI tomorrow is for a slight uptick.
Given the events surrounding the Fed over the previous month, if it comes in cooler, expect the (relative) inflation hawks at the Fed to start signaling the resumption of the easing cycle. One is on the "CalDurator" to speak tomorrow afternoon.
Specifically On the Fed chair search, it was reported initially that the President Mr.Trump team (led by Mr. Bessent) is widening the candidate list. Bowman was among those named. Other indicated names were two Fed officials that are (relative) hawks. This significantly looks like Bessent is taking the opportunity to use the interview process as an excuse to get one-on-ones with current and soon-to-be Fed voters.''Smart''.
Q2 earnings season is almost done. We headed into it with the market looking for 4.9% earnings growth. We're coming out north of 11%. What about margins, in a world spooked by tariffs? Profit margins broadly expanded, across the majority of sectors, at 12.8%. That's better than last quarter, better than the year ago quarter, and better than the 5-year average.
MeanWhile,the cracks in the labor market, this environment where fiscal and industrial policy has a foot on the gas pedal, while monetary policy has had a foot on the brake, is about to change. The market reaction the inflation report was decisive. The S&P 500 and Nasdaq closed on new record highs. And small caps had a huge day.The Russell closed just shy of the big 2300 level.
Recent chart has Logically indicated the tested level a few times during the previous month and perhaps failed. Which is the level from which things broke more combasome in previous February;big decline was triggered by a weak University of Michigan report -- on "tariff and inflation fears."
This started a 24% correction over about six weeks, which, of course, culminated with the official launch and then pause of tariffs.Which now we're back to this key technical area.
The markets now have clarity (at least, visibility) on policy. Inflation has not reignited. And the trade deal deadline that really matters, with China, has been pushed for another 90 days. Potential greenlight for this index to return to record highs (8% higher) and beyond.
We've talked about names like Mr.Kevin Hassett and Mr.Kevin Warsh in recent weeks, and now we're hearing from others -- all are publicly articulating the case for lower rates.
Reported candidate Mr.Rick Rieder, Blackrock CIO, said the Fed could afford to get rates down by 100 bps quickly.
Candidate Mr.Jim Bullard, former Fed President, said rates could be 100 bps lower by this time next year (a statement that probably doesn't get him the job).
Add to that, there's pro-growth tax and industrial policy and regulatory relief in the Treasury market. We have a resumption of the easing cycle coming in this second half of the year. And the infrastructure buildout to support the technology revolution which is just getting underway. On the fiscal side, the tariff revenue is on a pace to reduce the budget deficit by 1 full percentage point.
And a full point cut in the Fed Funds rate, which would materially lower interest costs, would lower the deficit by another full percentage point -- taking it to the low 4% area. The 50-year average is 3.7%. We have a formula for higher growth, higher revenues and lower costs, which drives down debt-to-gdp.
Reported candidate Mr.David Zervos, strategist at Jeffries/former Fed economist; said there's a case for significant rate cuts, and even suggested the Fed should re-examine their decision to hold, given the new information on the labor market (implying an intermeeting cut).
And apprehently, Scott Bessent himself, the Treasury Secretary, who perhaps has the most powerful opinion inprospective to who will become the next Fed Chair, said today that the Fed is behind, based on the soft labor data, and "could" start with a 50 bps cut in September. And he said we should probably be 150-175 basis points lower.
And remember, Mr.DonaldTrump has expantiated many times over the previous month that rates should be much lower, like 3 points lower (close to 1%).
His argument is that U.S. rates should be the lowest in the world, because it's the safest, most liquid borrower in the world, with the reserve-currency, rich asset base and perfect debt-service record.
Precisely hasn't been taken seriously;maybe it should be because it's the President, reframing the Fed's mandate to permanently price U.S. short term borrowing off its hegemonic credit profile.
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