Is Powell Really a 'Stupid Person'?"
Is President Trump justified to be fustrated with the Fed Chair or is the central bank just following the prudent path and its mandate?
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As each day passes this year, President Trump grows more and more frustrated with Fed Chair Jerome Powell. His frustration is not only evidenced with resounding dismissal of his actions, but it has now boiled down to name calling almost akin to a kindergarten playground.
After cutting interest rates by 150 basis last fall into the U.S. election, the Fed has kept rates steady all of this year despite the volatility and uncertainty around U.S. financial conditions, Trump tariffs, the U.S. consumer slowing down and geopolitical shocks. Now Trump is reportedly considering nominating a shadow chair that will "only cut" rates. Is that a sound decision or just for our amusement?
It is no mystery that the U.S. national debt keeps on rising as we await the passage of Trump's "Big Beautiful Bill." According to the Congressional Budget Office (CBO), the Senate version of Trump's tax bill would add about $3.3 trillion to the deficit, $500 billion more than the House version. Regardless of the tax cuts or tariff revenues, the U.S. debt ceiling will have to be raised, again!
About $9 trillion of U.S. debt needs to be refinanced this year, which was originally done with rates much lower around 2%. Today, with U.S. rates around 4.5%, this will be a huge jump in federal interest cost. This is one of the main reasons Trump wants lower rates as it could save about $1.35 trillion over a decade if the Fed cuts.
The dilemma the Fed faces is that it is not in breach of its dual mandate, i.e. tight labor market and inflation around 2%. On Friday, core PCE came in at 0.2% vs. 0.1% with personal income coming in at down 0.4% vs. expectations of up 0.3%.
We are entering stagflation times. Inflation is not below the Fed's 2% target but it seems the economy will start to need more juice with lower rates. This week we will see the non-farm payrolls report and it remains to be seen whether we see a uptick in unemployment or not.
For now, judging by the initial claims, we should expect a robust jobs report, which should allow the Fed to keep rates steady. For if they were to cut preemptively, inflation would not be "transitory" and the bond market vigilantes would take yields back towards 5% as they did last year when the Fed cut prematurely.
The market has rebounded close to 20% and is touching all-time highs of around 6200 on the S&P 500, with "Liberation Day" in April entirely forgotten after Trump's 90-day tariff pause. But we are now inching closer to the July 9th tariff deadline whereby Trump expects countries to sign actual deals, and not just talk. There is a risk that he decides not to postpone or delay and this could cause jitters in the market as most are not assuming any slowdown post tariffs and we still have a minimum of 10% tariffs in place, which is bound to cause a bit of a slowdown.
The market has rallied all the way from the lows on the back of "trade talks going well" and the potential for Fed rate cuts. Of course, oil prices rallying 15% on the back of Israel/Iran tensions caused a short selloff, which has been overcome as crude prices are back down to their lows as supply was never damaged and the rest of OPEC+ members were ready to intervene if there was a disruption in Iranian oil.
With a trailing market P/E of 24x, it seems quite a tall order when debt is still an issue and productivity has yet to fill the debt gap. But then FOMO is a real thing.
