Subject: Control Panel: Federal Reserve news
Despite its great impact on the Macro economy the Federal Reserve is supposed to be a quiet analytical institution that doesn't make the news very often, let alone multiple times in a week. In the same way, the President of the United States is supposed to be an executive who follows the Constitution and laws passed by Congress and not a business man who uses the power of the presidency to strong-arm companies into deals.
Federal Reserve News
1. Fed Chair Powell made a speech at the economic symposium in Jackson Hole, Wyoming. The markets interpreted this speech to mean that the FOMC will cut the fed funds rate at their September meeting. The stock market soared to a record.
https://www.federalreserve.gov...
Speech by Chair Jerome H. Powell, August 22, 2025
Monetary Policy and the Fed’s Framework Review
This year, the economy has faced new challenges. Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. There is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be.
Changes in trade and immigration policies are affecting both demand and supply. In this environment, distinguishing cyclical developments from trend, or structural, developments is difficult. This distinction is critical because monetary policy can work to stabilize cyclical fluctuations but can do little to alter structural changes....
Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.
At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024...
The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts....Inflation has been above our target for more than four years and remains a prominent concern for households and businesses. ...
Putting the pieces together, what are the implications for monetary policy? In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation....Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.... [end quote]
It was the bolded phrase that caused the markets to react strongly. Investors and speculators tend to fixate on the fed funds rate even though it is only an overnight rate which doesn't directly impact the economy. The bond market determines the longer-term interest rates -- unless the Federal Reserve meddles in that market.
2. With relatively little fanfare, the Fed revised their Monetary Policy Framework. I wrote about this in detail earlier this week. https://www.shrewdm.com/MB?pid...
The revised document now states more precisely that "the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability." ... The revised statement also notes that maximum employment is "the highest level of employment that can be achieved on a sustained basis in a context of price stability." This focus on promoting a strong labor market underscores the principle that "durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans." ...
We continue to believe that setting a numerical goal for employment is unwise, because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to monetary policy.
We also continue to view a longer-run inflation rate of 2 percent as most consistent with our dual-mandate goals... [end quote]
Translated from Fed-speak, this means that the Fed will use its monetary tools to guide inflation toward 2% even if unemployment rises. This puts them in a bind if/ when a recession arrives while inflation is too high -- stagflation. Powell notes that unemployment could rise rapidly (as it often does at the start of a recession). As an admirer of Fed Chair Paul Volcker, Powell would not cut the fed funds rate in the case of stagflation.
The Fed retained its intention to use all its monetary tools if needed during a future time if the fed funds rate were to be at the "effective lower bound (ELB)" -- that is 0% as it was for 7 years. Powell said nothing about how the Fed's too-low fed funds rate and continued huge book of longer-term bonds inflated asset market bubbles.
3. President Trump continued his attacks on the Federal Reserve. Trump is pushing a specious lie that Powell is responsible for cost over-runs during modernization of a Fed building in order to find cause to fire Powell. Trump has called for the resignation of Federal Reserve Governor Lisa Cook, accusing her of mortgage fraud. (Maybe it's only a coincidence that Ms. Cook is a black woman.) Adriana Kugler, a member of the Federal Reserve Board of Governors, recently resigned from her position, providing an opening for Trump to appoint a stooge.
Switching from Powell to Trump...
The U.S. has taken a 10% stake in Intel (INTC), converting $5.7 billion in unpaid grants from the CHIPS and Science Act and $3.2 billion from the Secure Enclave program into dividend-paying shares purchased at a 20% discount to the market price. This takeover adds to the very unusual deal that has been struck between the U.S. government and chipmakers Nvidia and AMD, allowing them to resume sales of certain AI chips to China. The key condition for this is that the companies must pay the U.S. government 15% of the revenue they generate from those specific sales. The Nvidia deal happened after Trump attacked CEO Jensen Huang on social media followed by a personal meeting at the White House.
The stock market had a positive response to the news. SPX hit a new high and VIX fell. The trade is mildly risk-on. The Fear & Greed Index is in Greed but near Neutral.
Price to earnings ratio of the SPX based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio) was 39 compared with a historic median of 16.
The 3-month Treasury yield fell but the longer-term Treasury yields are climbing off their lows even though they fell on Friday. Yields of the longer maturity bonds are in a gradually declining channel. The 30 year Treasury did not change on Friday.
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, was very loose and getting looser. This provides the lending that helps inflate the asset bubbles.
The Cleveland Fed's Inflation Nowcast report predicts higher-than-desired inflation in 3Q2025.
Quarterly annualized percent change
Quarter CPI Core CPI PCE Core PCE Updated
2025:Q3 2.90 3.11 2.80 3.02 08/22
The Atlanta Fed's GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 was 2.3 percent on August 19. This is a reasonably strong growth rate that should not cause the Fed to cut the fed funds rate.
The options market predicts 75% chance that the FOMC will cut the fed funds rate by 0.25% at the September meeting. This is actually down from 90% a couple of weeks ago.
As always, the METAR is a short-term forecast which doesn't predict anything past the coming week. It doesn't predict what will happen when the tariffs really start to bite. It doesn't predict what interest rates will do under the influence of Trump's intense pressure and the future need for the government to borrow trillions of dollars. It doesn't predict what the asset markets will do if and when the Shadow Banking System locks up and the tsunami of liquidity supporting margin buying and lending suddenly vanishes.
The METAR for next week is sunny.
Wendy
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