What would you do if you were Jerome Powell?

What would you do if you were Jerome Powell?

If you were Jay Powell would you cut the Fed funds target rate now? Why? I wonder if anyone noticed that when the media said that the Fed left “rates unchanged” that the bond market rates fell? But yet we are told that the Fed left rates unchanged. What is going on? It is that the market determines interest rates regardless of what the Fed is doing. However, the Fed influences the range within which interest rates move. Currently, the Fed is reluctant to push that range downward stemming from its position that there is too much uncertainty with all the disruption caused by Trump’s policies. Powell as much said so when he said that absent the tariffs it is likely that the Fed funds rate would have been lowered. Back to you Mr President – who responded by calling Powell a moron. Wouldn’t it be nice to have a president who had a little class?

The presidents of the New York, Atlanta and San Francisco reserve banks all say to wait until all the tariff shakedowns have been completed and see what happens to prices. Not any prices mind you because the Fed doesn’t pay attention to the CPI rather it looks at the Personal Consumption Expenditures index or PCE. The CPI is a rather narrow measure of inflation. It looks at a basket of goods purchased by urban household. The PCE is a broader measure of price changes with weights that are different from the CPI. For example housing has a weight of 35 in the CPI but only 15 in the PCE. It is the PCE that just came in 3.4% well above the Fed’s target of 2.0 percent. Hum. Does that mean that the Fed should raise rates?

The Fed has two main objectives of stable prices and full employment. It seldom can do both and I suggest that it abandon the full employment goal. First, we really have no idea of what constitutes full employment. For example, last quarter the employment numbers looked good mainly because workers had dropped out of the work force reducing the labor force participation rate. State and local government hiring drove the numbers while private sector employment fell. I have long suggested that government hiring be excluded from the employment numbers. 

Rather the Fed should concentrate on inflation. Scott Bessent who seems to be Mr Know It All – with apologies to Stevie Wonder – has started criticizing the Fed. He says that AI will ignite a boom in production. Because AI could require fewer human resources, Bessent believes this economic boom could come without reignited inflation. When asked how the country should prepare for such a boom, Bessent said: “If the inflation numbers are low, then we should be cutting rates.” Well Scott the inflation numbers are not low.

However, the economy is showing signs of weakness. Job growth for July was awful. The numbers within the numbers show private sector employment falling. Immigration is taking a toll on businesses yet this may be unreported or underreported if the businesses were hiring illegals. Construction and agriculture are sure to be adversely affected. Consumer buying is slowing. Private domestic investment is falling. All these signs point to the Fed lowering rates. But inflation has started to rise because of the tariffs. If the Fed had lowered rates (by increasing the money supply) then the inflation would be exacerbated and we would have inflationary recession (stagflation). The folks who are now yelling at the Fed to lower rates would then be yelling at the Fed for having lowered rates.

I have heard some people saying that the rates should be lowered to lower mortgage rates. Well most mortgages are fixed rate and those rates are dependent upon the 10 year Treasury and not the Fed funds rate. The adjustable rate mortgages are the ones influenced by changes in Fed funds which mainly affect short term rates, not longer term rates. But don’t you think that Trump’s tariffs on aluminum, steel and especially lumber will affect housing costs more than mortgage rates? If these tariffs mirror those of Trump’s first term then expect the mortgage industry to crater. Anyway, the last time the Fed aggressively cut rates in 2024, fixed term mortgage rates went up.

Trump is trying to have the Fed save him from himself. Right now he has a convenient scapegoat for his policies. And if the Fed lowers the Fed funds rate and inflation rises, it will still be the Fed’s fault. Look back in December when the Fed cut 25 basis points, the market tanked. Then the Fed was criticized for lowering rates in the face of persistent inflation. Now we essentially have higher inflation rates but now the critics want rates even lower. Kindly explain why this makes sense? If the Fed was wrong to lower rates then why should they lower rates now when there is becoming some clarity about the effects of Trump’s tariff follies.

The next Open Market Committee meeting is September 16-17. It will be interesting to see if what the vote will be. If I were Powell I would have the committee lower the rate by 50 basis points just for the hell of it and sit back and see the reaction of the media, the markets, and Trump and his cronies. I bet the stock markets would tank and bond market rates would rise – just the opposite of what Trump wants. But absent that, let’s see what the economic picture looks like then and the predictions going forward.