Last weekend Secretary Bessent wrote an opinion piece for the Wall Street Journal regarding the Federal Reserves’ function that we would like to revisit.

https://www.wsj.com/opinion/the-feds-gain-of-function-monetary-policy-ac0dc38a?st=8dD4Ha&reflink=desktopwebshare_permalink


Some notable quotes:

“Repeated misses demonstrate that the Fed placed too much faith in its own abilities and in expansionary fiscal policy to spur growth. When the Trump administration shifted toward tax cuts and deregulation, the Fed’s forecasts were too pessimistic, underscoring its reliance on flawed models and neglect of supply-side effects.”

“By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen. Its pursuit of a wealth effect to stimulate growth backfired. “Unprecedented inequality is clear proof that the wealth effect is all too effective for the wealthy, but an accelerant to economic hardship for everyone else,” financial analyst Karen Petrou wrote in her book “Engine of Inequality” (2021).”

“Expanded powers have fostered a culture in Washington that relies on the Fed to bail out the government after poor fiscal choices. Instead of accountability, presidents and Congress have expected intervention when their policies falter. This “only game in town” dynamic has created perverse incentives for irresponsibility.”

“At the heart of independence lies credibility and political legitimacy. Both have been jeopardized by the Fed’s expansion beyond its mandate. Heavy intervention has produced severe distributional outcomes, undermined credibility, and threatened independence. Looking ahead, the Fed must scale back the distortions it causes in the economy. Unconventional policies such as quantitative easing should be used only in true emergencies, in coordination with the rest of the federal government. There must also be an honest, independent, nonpartisan review of the entire institution, including monetary policy, regulation, communications, staffing and research.”

Why revisit this article? Well, if the Administration is successful on setting this path for the Federal Reserve going forward how will it impact the markets? Will market forces be unleashed and allowed to impact without intervention?

Reminder of the VIX seasonality over the last 5 years:

ISM Prices

The position the Administration has on Fed Funds rates is well known; they want interest rates lower. Which is the end goal of the above article, but should they be careful about what they are wishing for?

Services make up 61% of the CPI.

The ISM Services Price Index has been creeping higher of late. According to the below charts, there certainly appears to be a correlation between the 2 metrics.

Shorter version

Judge for yourself.


Sentiment

Today the University of Michigan surveys were released.

We have no magic insight into these other than to take a step back and look at where a few of them stand relative to their history.

From a 25-year perspective, things do not look great. But is that relevant to the markets or is it simply a reflection of how people feel right now?


Job Gains

Where are the jobs being gained really coming from?

In August, full-time employment (blue) fell for second consecutive month while part-time employment (orange) rose by most since February.

So, part time jobs are holding up the numbers. But what if people start to lose those full-time jobs?

According to the NY Fed, the probability of finding another job is lower than during the pandemic.

For those just entering the job market things are getting even tougher.

For perspective adding the poster child for AI, NVDA

Coincidence?

While this is occurring, smaller businesses are becoming more concerned about their “Quality of Labor”.

Interesting Charts

Is the US$ about to have a technical breakdown?

Longer term perspective

Lumber

Certainly, the lower lumber prices are helping the homebuilders.


Have a great weekend!

Best

Meraki trading team