Earlier this month, Federal Reserve Chairman Jerome Powell opened the door for a possible September rate cut. This announcement has set off colorful and raucous debates among professional economists and financial analysts. Powell’s remarks illustrate both his willingness to consider this course of action. As he indicates, legal and economic considerations will be key to how this ultimately plays out. The continuing Trump-Cook saga is underlying how Powell’s story is being drawn. In consequence, many are anticipating considerable prudence in whatever changes lie ahead in monetary policy.
Powell is crystal clear. We hope that he takes responsibility for ensuring that all of the Federal Reserve’s actions are grounded in solid legal justifications. In particular, he encouraged everyone to insist on answers to the question, “Show me the legal authority for this action.” Until Trump’s officials offer a better basis, he must signal that, in his judgment, Cook is no Fed governor. This underscores the complicated tightrope Powell will need to walk as he considers competing demands from the political and economic landscapes.
Current Economic Indicators
Unfortunately, the current economic picture creates both opportunity and obfuscation. The yield on the 10-year U.S. government bond is around 4.3% today. In fact, it should be falling to around 4.1% or possibly even 3.9% any time now, according to experts. A future decline in yields would be good news for borrowers. It can be a sign of concern over long-term economic expansion.
Rising inflation rates have quickly become a hot topic. Recent industry numbers have pointed to renewed inflationary pressures, with consumer price inflation at 2.9%, the highest level since February and almost a full percentage point above the Federal Reserve’s target. Economists are still split on whether this inflation is transitory or a sign of something more troubling underneath the surface of our economy. Powell has previously asserted that inflation may be a one-time effect, hinting at his belief that it could stabilize rather than spiral out of control.
Just take a look at the CME FedWatch tool which shows an 84.2% likelihood for a rate cut. Traders are clearly speculating on a pivot in monetary policy. For now, Powell will probably hold rates steady, as he begins to take the measure of the changing economic landscape.
Labor Market Dynamics
The U.S. labor market is indeed in crisis. An ongoing worker shortage is compounded by draconian immigration policies. While companies are not firing workers in droves, they are too fearful to hire, leading to a sort of purgatory for a labor market. The long-term jobless rate, as measured by continuing claims, is increasing sharply. Indeed, it has recently achieved its highest level in more than three years.
This unwillingness to hire, even in the face of a historic labor shortage, threatens long-term economic growth to catastrophic degrees. Analysts sounded the alarm that for companies, the time to hire is now. If they fail, productivity will stagnate and economic growth will be curtailed. The signal that Powell’s interest rate decision will send will have a direct, strong impact on business sentiment. This continued influence will encourage firms to increase their hiring pushes.
Implications of Political Context
Only one thing is certain — the political climate around Powell’s leadership will continue to be tumultuous. With President Trump potentially set to name Powell’s successor within the next month or two, there are concerns regarding how this transition could impact Federal Reserve policies. Critics caution that Powell should resist political incentives at all costs. If the Supreme Court rubber stamps what most agree are Trump’s illegal proclamations, the implications would be catastrophic.
The Rockefeller Morning Briefing cautioned, “If Powell caves, or the Supreme Court acts supine again and validates Trump’s illegal declaration, the implications will be profound and disastrous. The United States will be well on its way to becoming Turkey, where an authoritarian ruler imposed his crackpot economics on the central bank, sending inflation soaring to 80 percent.”
These remarks highlight just how alarming the state of political discourse has become, and what that will mean for future impacts to monetary policy.