Pro Perspectives 8/20/25

 

 

 

 

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August 20, 2025

The pressure on the Fed continues, with another Fed Governor now in Trump's crosshairs.
 
As we head into Powell's Jackson Hole speech on Friday, let's take a look at how the Fed's overly restrictive policy stance is impacting consumer rates.
 
The average 30-year fixed mortgage rate is 6.6%. Relative to the 10-year yield, the spread is about 230 basis points. Historically, that spread has run closer to 150-175 basis points — which would put mortgage rates more like 5.7%–6%. 
 

 

 

Average credit cards rates are 17 percentage points above the 10-year yield.  It's historically closer to a spread of 10. 

 

 

So, there's a premium in both of these key consumer debt markets relative to the historical average.

 

But it's not about credit worthiness.  That's at record highs …  

 

It’s about perception. 

 

And that perception has been shaped by the Fed, through "forward guidance."

 

By continuing to talk UP the risks of tariffs, inflation, and higher-for-longer rates, it appears that they’ve effectively convinced lenders to demand a higher premium than the data would otherwise justify. 

 

Pro Perspectives 8/19/25

 

 
 

 

 

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August 19, 2025

Home Depot is a bellwether stock on the consumer, housing market health and construction/ building activity.

They reported this morning.  Let’s talk about the takeaways …

On tariffs, HD is pulling back promotions in tariffed categories while negotiating lower vendor costs elsewhere — effectively absorbing tariff pressure before it hits the customer.

That said, importantly, HD margins are holding steady.  So, they are successfully mitigating the price pressures, for the customer and the company.

As for business activity, small projects are strong.  But big projects have stalled. Debt-financed projects are on hold, because of rates.

Bottom line from HD:  The economy is steady.  Employment, wage gains and home equity are keeping homeowners spending, but big ticket items remain hostage to rates.

The resumption of the Fed easing cycle is the release valve.

Will we get a “release valve” signal on Friday?

As we’ve discussed, the annual economic symposium in Jackson Hole has historically served as a platform for central bankers to communicate important signals regarding policy adjustments.

Jerome Powell will give a prepared speech Friday morning titled, “Economic Outlook and Framework Review.”

Now, it’s possible that this could deliver the opposite of the what the market is looking for.

This “Framework Review” is a review of the Fed’s 2012 monetary policy framework, where they established the 2% inflation target.

They “reviewed” this framework in 2019-2020, where they added some flexibility that they thought they needed after dealing with the decade-long, post-GFC economic malaise (persistent low growth and low inflation, even with monetary policy at full throttle).

They thought this malaise was “the new normal.”  So, in 2020, when inflation was still sub-2%, Jerome Powell formally amended the inflation target criteria, saying they are just looking to “average” 2% over time.

He was signaling that they would let the economy run hot (for an unspecified period of time), letting inflation run above 2%, to make up for the decade of below target inflation.’

They also adjusted the way they respond to the labor market.

Before 2020, the Fed viewed a tight labor market as inflationary.

As part of the framework review, they abandoned that as a hard and fast rule — saying that low unemployment alone would no longer be enough to justify tightening.

This was all an effort to signal to markets that they were determined to keep policy ultra-easy, in order to sustainably escape from the sluggish, deflationary economic conditions of the post-crisis era.

Then came the pandemic.  The pandemic response.  And four decade high inflation.

With all of that in mind, in a speech three months ago, Powell telegraphed the return to the normal settings on the framework (i.e. back to the strict 2% target, and back to assessing a tight labor market as inflationary).

If this is codified in the speech on Friday, this would not be the “relenting to White House pressure on rates” the market is hoping for.

 

Pro Perspectives 8/18/25

 

 

 

 

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August 18, 2025

I've heard some of the inflation hawks in the investment community citing this new record high in money supply …
 
 
The high of 2022 was surpassed a few months ago.
 
Does that mean raging inflation will re-emerge?   
 
No. This is the chart that matters for inflationary pressures. 
 
  
It's about rate-of-change.
 
The pandemic-era inflation shock came from the explosion in the rate-of-change in money supply.  We had a decade's worth of money supply growth dumped onto the economy over a two-year period.  That gave us the spike in the chart above.  
 
Subsequently, we had 15 consecutive months of contraction in money supply.  And with that, we had the disinflation trend that took the inflation rate back under 3%.  
 
And now, money supply growth has normalized.  In fact, it's still running slightly below the average rate of the 35-year period before the pandemic. 
 
So, that is the inflation story.  Tame.
 
 

Pro Perspectives 8/14/25

 

 

 

 

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August 14, 2025

Today, we had one of the more talked about producer price reports in recent memory.
 
That said, the hotter PPI numbers will have little effect on the Fed's most important inflation data point, when it's reported at the end of the month.  
 
June PCE was 2.6%.  And with components of CPI and PPI now in, July headline PCE (which is the stated measure for the Fed's 2% inflation target) should be little change from last month (around 2.6%).  
 
Here's what that looks like relative to the past twenty-four months …
 
 
So, the media spent the day touting the PPI report and pushing back on Trump's campaign for rate cuts.  But the interest rate market continues to price in a September cut, and about a coin flips chance for three by the end of the year.
 
With that, the annual economic symposium in Jackson Hole is a week away, and has historically served as a platform for central bankers to communicate important signals regarding policy adjustments. 
 
Jerome Powell is on the calendar for Friday, August 22nd, to give a speech titled, "Economic Outlook and Framework Review."  
 

Pro Perspectives 8/13/25

 

 
 

 

 

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August 13, 2025

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.

We’ve talked about names like Kevin Hassett and Kevin Warsh in recent weeks, and now we’re hearing from others — all are publicly articulating the case for lower rates.

Reported candidate Rick Rieder, Blackrock CIO, said the Fed could afford to get rates down by 100 bps quickly.

Candidate 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).

Reported candidate 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 Scott Bessent himself, the Treasury Secretary, who maybe has the most powerful opinion on 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, Trump has said many times over the past 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.

This hasn’t been taken seriously, but 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.

 

 

Pro Perspectives 8/12/25

 

 

 

 

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August 12, 2025

The inflation data this morning did not support Jerome Powell's assertion that tariffs are a new source of inflation.
 
With that, and given 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 closes today just shy of the big 2300 level. 
 
As you can see in the chart below, we've tested this level a few times over the past month and failed.  And if you look to the left, this is the level from which things broke down in late February.  
 
That 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.
 
So, 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. 
 
This is a greenlight for this index to return to record highs (8% higher) and beyond.
 

Pro Perspectives 8/11/25

 

 

 

 

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August 11, 2025

We get CPI tomorrow.
 
But after the big jobs revisions earlier this month, the employment side of the Fed's mandate is becoming the focal point for the Fed.
 
Over the weekend, 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 past 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 calendar to speak tomorrow afternoon.
 
On the Fed chair search, it was reported today that the Trump team (led by Bessent) is widening the candidate list. Bowman was among those named.  But also named were two Fed officials that are (relative) hawks.  This 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.
 
Add to that, we have pro-growth tax and industrial policy.  We have 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 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%.
 
So, we have a formula for higher growth, higher revenues and lower costs, which drives down debt-to-gdp.     
 
The U.S. economic position, relative to the rest of the world is getting very strong. 
 
That's pro-global capital inflows, pro-dollar assets.          
 

Pro Perspectives 8/7/25

 

 

 

 

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August 7, 2025

Trump announced this afternoon that Stephen Miran will take the Fed seat vacated by Adriana Kugler.
 
We've talked a lot about Miran's paper on restructuring global trade.  He's Trump's Chairman of the Council of Economic Advisors, and he wrote the blueprint for the tariff strategy. 
 
And most recently, we've talked about his view on the role of the exporting country's currency in absorbing the tariff blow.
 
In short, exporters devalue, their goods stay competitive, U.S. consumers avoid price hikes — and the pain hits the foreign economies via loss of global purchasing power and real wealth.
 
That's the "burden sharing" that is core to Miran's strategy to realign global trade.
 
So, clearly this view is that tariffs are not inflationary. 
 
With Miran, Trump has not just replaced a monetary policy hawk (in Kugler) with a dove (in Miran), but the architect of the tariff policies will now be inside the Fed.
 
This is a step toward aligning the Fed with the Trump trade and industrial policy.
 
For markets, it should be a green light for assets that benefit from the U.S. policy position of strength (relative to trading partners):  commodities (on tighter supply and global currency pressures), small caps (protected by tariffs), gold (as global currencies devalue) and industrials (on reshoring).

Pro Perspectives 8/6/25

 

 

 

 

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August 06, 2025

Trump said today he's looking to name a temporary Fed governor, then a permanent one, for the seat to be vacated by Kugler on Friday. 
 
That said, here's what he could do to immediately neuter Powell, and accelerate the easing path. 
 
He could appoint his current National Economic Council Director, Kevin Hassett (his loyal, aligned guy), to fill Kugler's seat.
 
And instead of waiting months for a Senate confirmation hearing, he could install him immediately, via a recess appointment. 
 
Then, declare him the Chair-in-waiting.
 
That would instantly shift power away from Powell, both inside the Fed (where Hassett would have a vote and significant influence) and outside of the Fed, where markets would begin taking cues from the next Chair. 
 
Then Trump could line up a nominee like Judy Shelton for the seat Hassett ultimately vacates to become the official Fed Chair. 
 
A maneuver like this would quickly swing the market view on the rate outlook, and signal the Fed regime change is underway.
 
 

Pro Perspectives 8/5/25

 

 

 

 

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August 5, 2025

We've talked about the "shadow Fed" that has emerged over the past month.  With that, despite a 9-2 vote in favor of holding rates last week, the market is now beginning to price in the chance for three quarter point cuts by year end.  
 
And the 9-2 vote to hold rates steady last week would have been 10-2, had Fed governor Kugler voted.  She was "absent" — didn't vote.  And two days later handed in her resignation. 
 
With that, Trump will get to nominate a new Fed governor.  And he says he will name his Fed Chair nominee, to replace Jerome Powell, by the end of the week. 
 
The current National Economic Council Director, Kevin Hassett, has become the favored pick in the betting markets. 
 
Hassett makes sense.  He's already inside the White House.  He's a trusted member of the Trump team, and has the respect of Trump and Scott Bessent.
 
As for Kugler's replacement, it may be Judy Shelton.  If so, that would signal to markets that Trump is looking to overhaul the Fed — true regime change.
 
She's a Fed reformist.  Her views align closely with Bessent's "Fed review" initiative.  She's also aligned with Bessent's Main Street over Wall Street focus.  She's a sound money advocate.  And she opposes use of tools like QE and forward guidance.
 
On the latter, this is where it gets interesting in this Fed regime change story.  
 
It's important to note, since the Great Financial Crisis, the major global central banks have done nearly everything in coordination.  And they continue to coordinate and collaborate.
 
It's the only way that a major economic price wasn't paid for the global fiscal profligacy that led to the financial crisis (consumer, business and sovereign).  They've absorbed the shocks with QE, and with whatever forms of intervention have been necessary.  And they've had each others backs — importantly, led by the Fed.
 
So, the post-GFC central banking policy is well described in this graphic …
 
 
 
Central bank intervention, in the name of "maintaining stability in the financial system," has only led to more control and more intervention by central banks – a never ending game of plugging new leaks in the global financial system.
 
With this in mind, a regime change at the Fed would mean the era of coordinated global monetary policy is likely over.
 
With that, the focus would quickly turn to Europe, where fragile sovereign debt markets have been explicitly backstopped by the European Central Bank since the summer of 2022.
 
If the Fed no longer has the European Central Bank's back, then the ability of the ECB to backstop European sovereign debt will be tested.
 
And it probably won't go well.  Remember, these EU member states have large scale deficit spending coming down the pike, to fund defense and AI commitments.  And the ECB will be, almost certaintly, back in action to tame the bond yields of the fiscally vulnerable countries.  Without global coordination, the will lack the firepower.