Trump Yields to Keeping Powell, Suit Challenges Chair, Union Pacific Merger on Track
Let's look at the pressure around the Fed chair's job, a potential UNP acquisition plan, Skydance's OK to buy Paramount Global, and what's up with Azoria Capital.
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I'm sure you have some cosmic rationale
Well, here you are, in the ninth
Two men out and three men on
Nowhere to look, but inside
Where we all respond to pressure
- "Pressure" Billy Joel (1982)
It was just the fourth visit to the Federal Reserve's historic Eccles Building in our nation's capital by a sitting U.S. president since 1937. Pres. Trump toured the premises, walking side by side with Fed Chair Jerome Powell. Along for the stroll were South Carolina Sen. Tim Scott, North Carolina Sen. Thom Tillis, Office of Management and Budget Director Russ Vought and Federal Housing Finance Agency Director Bill Pulte. The reason, at least at surface level, was the controversial and costly renovation of the central bank's headquarters.
The real reason, one might think, was the dispute between the two men on just where short-term interest rates should be in this economic environment. When asked by a member of the media what could get him to leave Powell alone for now, the president said, "Well, I'd love him to lower interest rates. Other than that, what can I tell him?"
Toward the end of the visit, the president tried again, adding "I just want to see one thing happen, very simple, interest rates have to come down."
When reporters then peppered the president with questions concerning the short-term job security of the Fed Chair, the president responded that he believed that Powell or the FOMC would "Do the right thing." Specifically, on potentially firing Powell, Pres. Trump added, "To do that is a big move and I don't think that's necessary."
The Real Deal
Readers are reminded that back in mid-June, the Supreme Court upheld the president's authority to terminate the employment of members of certain "independent" agencies, but made the point of implying that this power does not extend to the central bank. The central bank supposedly remains insulated from the president's control, though some legal scholars have stated that this June release does not exactly make that legally clear.
As I have stated in the recent past, as an economist, I do disagree with the Fed's decision to keep rates where they are for so long. My argument is simple. If the U.S. Ten-Year Note pays 4.41% and the U.S. Three-Month T-Bill pays 4.36%, then, in a pro-growth environment, one of them is surely mispriced. Either longer-term yields must rise, which should have happened naturally, or shorter-term rates must move lower. Unless the whole system broke down, that would have to come about through a change in policy.
The reason for this is easily understood. Rates at the long end of the curve are derived through free market price discovery and rates at the short end are artificially controlled by the central bank. For that reason, I believe that rates at the short-end are more likely to be mispriced than are rates at the long-end.
Therefore, my conclusion in brief format, though I could get wonky and turn this into a thesis, is that the target range for the Fed Funds Rate is probably close to a full percentage point higher than it should be. But through understanding this, I also believe that even if monetary policy is currently being conducted erroneously, that is the result of opinion, and such disagreement is not sufficient cause to relieve the Fed chair of his position.
Interesting
Azoria Capital, the hedge fund led by James Fishbeck, has filed suit against Fed Chair Jerome Powell among several Fed officials over FOMC policy meetings being held behind closed doors. Documents filed by Azoria Capital read as follows: "Azoria is deeply concerned that the FOMC, under Chair Jerome Powell, is maintaining high interest rates to undermine President Trump and his economic agenda, to the detriment of American citizens and the American economy." The Fed has not commented on the lawsuit.
Fed Funds Futures
The Federal Open Market Committee will publish the committee's next policy statement this coming Wednesday afternoon. Currently, according to Fed Funds futures markets trading in Chicago, there is a 97.4% likelihood that no action is taken concerning short-term rates. That said, there will almost certainly be at least two (Waller and Bowman) and possibly as many as four dissensions when that decision is made. What is clear is that the FOMC is breaking into factions over the future of the target for the Fed Funds rate.
At this time, there is a 60% probability priced in for a quarter-percentage point rate cut at the next meeting after this Wednesday, which will culminate on Sept. 17. There is also a 59% probability for a second quarter-point rate cut priced in before year's end. These markets are also now pricing in an additional half point worth of rate cuts by July 2026.
Yes, that means that futures traders are expecting a quarter point worth of rate cuts over the next 12 months. This is exactly where I told you that I thought the target range for the Fed Funds Rate should be based on both the economic environment and the current slope of the curve from the belly out to the long end.
Marketplace
Thursday was a rather sloppy day for U.S. financial markets. Yields moved slightly higher as what macroeconomic data that did hit the tape, was semi-strong. Initial jobless claims dropped from the prior week. Continuing claims climbed, but less than expected. The S&P Global flash PMIs contradict one another as services heated up and manufacturing cooled. In aggregate, the composite flash PMI beat Wall Street.
Stocks were broadly negative on Thursday, despite that both the S&P 500 and Nasdaq Composite posted tiny gains. Small and mid-cap stocks were roasted as the Dow Transports and KBW Banks also sold off. Eight of the 11 S&P sector SPDR ETFs closed out the session in the red, led lower by the Discretionaries XLY and the Materials XLB. Weakness across the materials was the result of a U.S. Dollar Index rallied throughout the session. Energy XLE, however, led the winners in spite of that stronger dollar.
Losers beat winners by nearly a 2-to-1 margin at both the NYSE and the Nasdaq. Advancing volume took just a 31.6% share of composite NYSE-listed trade, but a surprising 62.1% share of composite Nasdaq-listed activity. Aggregate trading volume decreased across NYSE-listings, and across the membership of the S&P 500 but increased across Nasdaq-listings thanks to some churn in the new meme names.
News
- Union Pacific UNP, while releasing second-quarter earnings on Thursday, confirmed that it was indeed in merger talks with rival Norfolk Southern NSC. This news had been rumored for about a week already. A key benefit for Union Pacific by acquiring Norfolk Southern's assets would be the ability to bypass Chicago for transcontinental rail shipments. Just getting through the Chicago interchange can currently add up to two days to any coast-to-coast rail-based delivery.
Does this deal get through? There's not a lot of large railroads left in this country, so I do not know. Canadian Pacific CP acquired Kansas City Southern in 2023, leaving just Union Pacific, Norfolk Southern, CSX CSX and BNSF (the old Burlington Northern Santa Fe) which is owned and operated by Berkshire Hathaway BRK.A, BRK.B. Canadian National Railway CNI is still independent as well.
- Late Thursday, news broke that the FCC had approved the acquisition of Paramount Global PARA by Skydance. PARA shares are up 1.7% overnight. This approval followed written commitments made by Skydance to clean up CBS News with a commitment to "fair, unbiased and fact-based" reporting. Paramount Global, readers will recall, settled a lawsuit with Pres. Trump for $16 million after evidence had surfaced that an interview with former vice president and presidential candidate Kamala Harris that appeared on 60 Minutes had been heavily edited in order to make the former vice president appear more electable than she actually was.
Economics
(All Times Eastern)
08:30 - Durable Goods Orders (Jun): Expecting -10.1% m/m, Last 16.4% m/m.
08:30 - ex-Transportation (Jun): Expecting -0.1% m/m, Last 0.5% m/m.
08:30 - ex-Defense (Jun): Expecting -6.0% m/m, Last 15.5% m/m.
08:30 - Core Capital Goods (Jun): Expecting 0.1% m/m, Last 1.7% m/m.
1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 544.
1:00 - Baker Hughes Oil Rig Count (Weekly): Last 422.
The Fed
(All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights
(Consensus EPS Expectations)
Before the Open: AN (4.70), CHTR (9.77), HCA (6.29)
At the time of publication, Guilfoyle had no position in any security mentioned.
