Jay Powell Just Made Kamala Happy And Trump Angry
But neither of them really understands what he did
Welcome to Macro Mashup, the weekly newsletter that distills the content from key voices on macroeconomics, geopolitics, and energy in less than 10 minutes. Thank you for subscribing!
Macro Mashup aims to bring together the greatest minds in Finance and Economics who care deeply about current U.S. and international affairs. We study the latest news and laws that affect our economy, money, and lives so you don't have to. Tune in to our channels and join our newsletter, podcast, or community to stay informed so you can make smarter decisions to protect your wealth.
This week, I am going to take a look at the Federal Reserve's decision to lower interest rates:
Why 0.5% (or 50 bps)?
Why now?
What the political impact is
What the impact on the economy is
How people feel about it
What is going to happen next?
This was the week the market had been waiting for: Federal Open Market Committee decision on the Federal Funds Rate target.
The market has been betting since Powell indicated his willingness to move rates down in Jackson Hole, whether to 25 bps (0.25%) or 50 bps (0.5%).
It was 50 bps. On the same day, I heard market commentators say it was good that the market was kept guessing and bad that it was kept guessing.
The Federal Reserve has a few ways to signal its moves:
One is through forward guidance, where it tells the market what it is aiming for so that the market can adjust in advance.
Another is to say it is “data dependent”, so the market can look at the data and know that when certain benchmarks are hit, the Fed will do something.
The other is to give some back-channel guidance to certain members of the press, who then leak this out through articles - and look smart in the process!
So, Why Is Harris Happy And Trump Angry?
Trump seems to feel that he can govern the country even when he is not in office, issuing veiled threats to politicians who are in office (he did this on a Bipartisan-supported Immigration Bill) and officials who hold offices that could be terminated if Trump were elected—Jay Powell.
He has suggested that the Federal Reserve should remain neutral and not be political about interest rates.
He believes that reducing interest rates will create the perception—and perhaps also the reality—of positive economic outcomes, making voters feel better about the Biden-Harris administration and thus making them more likely to vote Democrat.
Presumably, Harris feels the same way.
The concern of both Harris and Trump at this point is simply what they can do to bribe the most voters to vote their way.
It is unlikely that Harris could ever get a tax on unrealized capital gains, a wealth tax, or price controls passed into law, but they poll well among a target demographic she cares about.
Similarly, Trump’s tariff proposals against people who ‘shun the US Dollar’ are nonsensical and will amount to nothing. Also, his proposal to repeal the SALT limitation—the provision that limits the deductibility of state and local taxes to $10,000—would mean repealing a law he enacted. And yet, he thinks this will play well in New York, where he has no chance of winning.
I have to score this one as a win for Harris. If she can get credit for a perceived or real improvement in economic conditions flowing from a reduction in the Federal Funds Rate, it will get her votes.
And What Is The Actual Impact?
This one is less certain, but here are some thoughts:
Jay Powell and Janet Yellen probably have a better chance of keeping their jobs and having an easier life if Harris is in the White House and not Trump - they almost certainly know that
The Fed is in a tough position: if it annoys roughly half the market and pleases the other half, that may be the best it can hope for.
One narrative says the Fed is too late because the economy is already in recession—we don’t have the official pronouncement yet, and we will only get confirmation a long time after the fact.
Another narrative says things are just fine, and a rate cut risks re-igniting inflation.
Where, as one of my colleagues used to say, does reality trade?
This one is fascinating, so stay with me for some macroeconomic gymnastics.
The US fiscal situation is getting worse.
These charts are worrying but speak to the post-election problem for whoever is elected.
Look at the shape and level of the US Treasury Yield Curve over the last two years.
Notice how the yield curve inverted as the Federal Reserve started raising interest rates towards the end of 2022.
Notice how the sweet spot for short-term investing has been 3-4 months for the last year, with the absolute level at 5.0-5.5%.
This week, the curve began to flatten, and the 3-4-month rate has dipped below 5%.
Where Does America Think Reality Trades?
There was recently a spirited, respectful, and good-natured debate hosted on The Free Press podcast Honestly on whether the American dream is alive and well.
Before the debate, 71% of the audience believed the American Dream was alive and well. After the debate,
I listened to the debate. Economists Tyler Cowen and Katherine Mangu-Ward argued that the dream is alive. The opposition comprised David Leonhardt and Bhaskar Sunkara.
I like Tyler Cowen, but I agree that he is a little quirky, so perhaps less relatable. I didn’t care for Bhaskar Sunkara: his prescriptions tend towards socialism-not my favorite economic system.
There were many dueling statistics that were hard to parse.
The Nay side focused on the so-called “vibes recession” and statistics on life expectancy, loneliness, and the difficulty of buying a home and supporting a family on one income.
The Yay side cited statistics on immigration, innovation, and the perception and reality of protected speech. They focused on the fact that, compared with the rest of the world, America is the best place to innovate and thrive.
It is difficult to know what this means without knowing the demographic of the audience—I will get to that in a minute.
I am not sure the 50-bps cut would have moved the needle. Nor did the speakers: there was a one-point move in favor of the Yays over the course of the debate.
Here Is Where I Think Reality Trades
This is an extract from Episode 24 of The Grant Williams Podcast, The Super-Terrific Happy Hour, co-hosted with Stephanie Pomboy.
The guest is Peter Boockvar, Chief Investment Officer of the Bleakley Financial Group. He spends hundreds of hours listening to earnings calls and had the following commentary (emphasis added):
As I said off-air to both you, I’ve never seen more of a mixed and uneven economy that I see now, where on one hand I hear Dollar General tell me that, and this is not the first quarter they’ve done this, but 60% of their customers make under $35,000. And a lot of them now can’t even afford necessities, let alone anything else.
And then I go to a concert like Pearl Jam the other night at Madison Square Garden, and the place is jam packed, and Live Nation full disclosure, we own the stock, is telling us how robust business is.
And I think it all depends on where you are on that income spectrum. Do you own assets? Do you not own assets? How much of you’ve been affected by this rise in inflation? And depending on where you end up there, you’re feeling a different economy.
So in this whole debate, is it a recession, no recession?
Well, for lower and many middle income people, they’re in their own personal recession. The higher income consumer that’s benefiting from 5% interest income on their savings and record high stock prices and still working, well, they don’t know a recession.
Yeah, they see higher prices, they see that $70 filet mignon and their eyes glaze over and like, “Oh my God, I can’t believe I’m about to spend this money for the steak,” But they still do, so it’s just very much a weird dynamic.
And then we can get into more mixed signals. In the housing market you have pace of transactions at 30 year lows, but new builds doing better. But even within the new build market you have big home builders that are taking market share from smaller ones. So smaller ones are having a tough time because they can’t get access to capital, and they’re doing just less activity where the big ones, they can build that entire community with raw land that they just bought, and that provides them with visibility for the next 12 to 24 months.
And then you throw in manufacturing, we know it’s been in a recession for two years now, and not just in the US but globally.
And then on the flip side and everything related to government spending and government’s interest expense is somebody’s interest income, and there’s a lot of interest income being received on that interest expense.
And healthcare, I think 75% of the revenues that come into the healthcare system come from government, and that just is on a straight line higher.
And of course all the legislative initiatives the last couple years that is driving economic growth.
So there’s just very much a weird dynamic, but it’s global too. Germany’s flat lining, but Spain’s economy is growing more strongly. And even Italian economy through tourism is pretty robust to the point where now Spain and Italy want to have tourism taxes, they should rewind the clock to COVID when all they wanted was tourism.
And then you have China’s economy slowing down, but India’s growing robustly, Southeast Asia is doing well.
So it’s just a very weird dynamic, and I do have a sense of how this plays out. And I will tie this into the importance of where the stock market goes is a key determinant on where the economy goes.
So some economists will give me their forecast over the next 12 months and then I’ll ask them, “Where’s the S&P 500 going to be?” And they won’t be able to answer that question because none of us know.
But I tie that into the economy because when you break it down, the only thing keeping US economy alive right now is, as I said, the higher income spending particularly on leisure, hospitality, travel, sports, events, concerts, all the AI spend, government spending, and that’s about it. The rest of the economy is really pretty soft. And I think the Fed’s beige book that we saw was pretty telling, that out of 12 districts nine said that activities flat to down, that’s up from five in the previous one. So to me it’s a death by a thousand cuts type situation.
There are, it appears, several different Americas.
Takeaways
The Federal Reserve had to start lowering short-term rates to ease the burden on the Federal government, which has $15.5T of debt to refinance in the next three years.
This reduction will help, but it may lead to an uninversion of the yield curve, where long-term rates are once more higher than short-term rates.
This more normal yield curve will make it easier for the Treasury to refinance its short-term debt but will make it more expensive to issue long-term - this is not a great situation.
We will see the curve flatten more, with short-term rates dropping by another 150-200 bps over the next year.
We will see long-term rates remain in the 3.5-4% range.
Whoever wins in November will face serious headwinds from the pressures exerted by the $36T of government debt.