There are points in economic cycles where the outcome of any economic decision made becomes a binary choice.
Unfortunately for the American public, the upcoming Federal Reserve Open Market Committee meeting in September is going to anger almost everyone, no matter what decision they elect to make. America is at that point in an aging business cycle, long overdue for a cleansing, where hard choices have to be made so the excesses of the cycle can be wrung out of the economy.
Does America have the financial leadership to make those hard choices?
Time will tell but, the Federal Reserve faces an even more difficult decision on September 16th and 17th as the future of its independence is once again challenged while the economic outcome has become more difficult to discern.
Federal Reserve Chairman Jay Powell has become President Trump’s favorite punching bag flavor of the day. No matter what course Chair Powell chooses, it will either be insufficient or too late in the eyes of the White House. The Fed’s independence however is truly what is at risk and a central bank which works for the Executive branch’s narrow goal of unlimited economic expansion will result in a repeat of the Nixon era under Arthur Burns; if we’re lucky.
The White House likes to blame the Chair for problems his first administration initiated under the March 2020 CARES Act and then followed up with the Coronavirus Response and Relief Supplemental Appropriations Act(CRRSAA) in December of 2020. The total spending along with those two acts was over $3.1 trillion and as a cherry on top, the Congress added a $1.4 trillion omnibus spending package with the CRRSAA. This unhinged spending was justified by the Republicans and Democrats as necessary and the long disproved economic theory that our nation would “grow it’s way out of this” trotted out as the solution to excessive national debt.
This brings the entire drama forward to two events, neither of which the White House is looking forward too thus the narrative to manipulate the public’s ire towards the Federal Reserve. To be brutally honest, this author’s opinion of the Fed has been somewhat just above that of Bernie Madoff but one notch below Charles Ponzi if one has been following my works since 2006. Yet this attempt to deflect blame will backfire as eventually the old statement of the “buck stops here” will come home to roost for the political leadership of our nation.
The Dilemma For The Fed
Currently the CME FedWatch odds have a 92.1% chance for a 25 bps cut at the September FOMC meeting.
While this might seem logical based on the large revisions to the employment data earlier in August which caused the firing of the BLS lead statistician and created a stir in the market that perhaps the economy was not as strong as advertised, the tariff impacts are now starting to filter through to the supply chain creating a dilemma for the Fed that was not present in past cycles to this degree.
The Producer Price Index reading this past Friday came in somewhat hot, but it was the underlying goods inflation which probably set off alarm bells at the Fed. Carl Weinberg the Chief Economist at High Frequency Economics said it best when he stated (via Reuters), “This is a kick in the teeth for anyone who thought that tariffs would not impact domestic prices in the United States economy.”
The same indicator prompted speculation that the Personal Consumption Expenditures (PCE) indicator might well start to move even higher with this month’s report. If core PCE comes in anywhere above 3.0% odds are that whatever course of action speculated after the nonfarm payrolls report might have to be shelved and that brings the stark choices facing the Fed plus the broader economy into sharp focus for the September meeting.
Option #1: The Easy Choice
To be intellectually lazy is always the easy choice. The American public has long stuck its head into the ground while doing this every two years as evidenced by the poor quality of its political leadership selected to represent their interests in Washington, DC for many decades now. The good times have created an era of opulence built on credit and a lack of personal responsibility where the theory is “let someone else handle it.” This has allowed the public to continue mindless pursuits while hopped up illicit substances to defer dealing with the reality that was commonplace reality for the citizenry just a century ago.
The Federal Reserve faces the same dilemma. It has deferred the consequences of its poor economic decisions initiated with Alan Greenspan and accelerated by every Federal Reserve Chair since his retirement. Instead of allowing the big correction to cleanse the system of all of its malinvestment and corrupt influence, the Fed has papered over the problem and engaged in the worst case solution of selective capitalism by picking the winners and losers versus fixing the actual problems.
This is the very same practice that started by the Executive branch under President George W. Bush and institutionalized by Obama, Trump, Biden and Trump again as the General Motors nationalization of 2009 along with actions like Trump’s speculative idea of partial government ownership of Intel.
For the Federal Reserve to take the easy way out would not be unprecedented. The easy way would be to acquiesce to the desires of the markets and the President with a rate cut of 25 basis points or even better, a 50 basis point cut.
This is known as the old “inflate or die” solution because the belief would be that the short term impacts of the tariff price increases would be over within one or two quarters, despite the President promising to impose more tariff increases on selected sectors in the months ahead.
If the Federal Reserve suddenly initiates a 50 bps cut the markets will initially react positively then sell off harshly as they will believe that the Fed’s own economists have detected dramatic underlying weakness in the economy. Worse yet, they might assume the Federal Reserve’s willingness to submit to Trump’s berating as he attempts to LBJ the Chair into doing the irresponsible act and flooding the zone with easy money and promises of Quantitative Easing should the housing market continue to slow.
Option #2: Conflictus Doctus
After twenty years of selecting the easy way out of every financial dilemma the Federal Reserve has begun, I do not know why I would think that Chairman Powell would attempt to emulate Paul Volcker, yet that option is on the table.
The enlightened choice would be to hold rates where they are until all of the tariffs are implemented and the economic impact could be measured. The conflict occurs however due to the politicization of the Fed which has continued off and on unabated since 1948. This current cycle is beginning to look more like the late 1960’s after Nixon won the election and in 1970 with the retirement of Chair Martin, Burns was installed to do President Nixon’s bidding which resulted in a decade of inflation and stagflation.
Based on the fact that the FOMC policy makers are purely reactive, as so wonderfully detailed by Danielle DiMartino Booth in the book “Fed Up,” it makes more sense to buy time and measure versus initiating a new theoretical proactive approach for which the committee is poorly structured to initiate.
Unfortunately an increase in rates of 25 bps, which may well be justified with an increase in PCE next week and a further rise in Supercore CPI in September, might seem illogical but is it? As these pages have been warning via the Atlanta Fed’s Sticky CPI indicator, it is persistently above the historical norms and at some point needs to be forced down to ensure long term price stability for the consumer and small business.
Such a move would be initially berated by equity markets but celebrated by the smart money, aka, the bond market as it would be an indication that the adults in the room might finally be taking charge.
In conclusion, I believe the FOMC will hold rates because of the hotter PCE and increases in September Supercore CPI.
The consequences of this action will be an enraged President Trump initiating the Friday night massacre after US markets close on September 19th where he demotes Chairman Powell to just a regular Fed Governor and then the fun in America will begin. It is not the first time that these pages have theorized about this idea, however this is the first time that I shall venture to guess at a specific date. I also believe that as a sideshow distraction to the FOMC meeting, President Trump will insist and get an accelerated process after Labor Day with a Senate vote for Stephen Miran’s ascension to the Board of Governors on September 17th.
America, you wanted reality television show drama in every aspect of your life, welp, now we are all about to get it.
Right in our wallets.
- – Title Graphic courtesy of @Grok
- – Error in the original story has been corrected. The dates were set incorrectly for the PCE release on my calendar and will not be available until 8/28, after the Jackson Hole meeting.
