Most of you didn't receive yesterday's note due to a technical issue with my email service. That's fixed now. If you didn't see that note, you can find it here.
Now, we're six days out from the July Fed decision on monetary policy, and Trump tightened the screws on Jerome Powell today with an impromptu, in-person visit (to the Fed).
Still, markets aren't budging. There's effectively zero chance priced in for a cut next week. And the betting markets on an early Powell exit are barely changed, even after Trump outright called for Powell's resignation two weeks ago.
Given the relentless pressure, if Trump is willing to see Powell to the end of his term, the question is, has he boxed him in, to the extent that he can't move without looking like he's folding to the pressure?
Maybe. But Trump's "go big to get small concessions' strategy might be at work. He's said flatly that rates should be 300 basis points lower (which would take the Fed Funds rate down to near 1%).
All of this said, it's fair to ask, what problem is this restrictive fed policy solving for, anyway (i.e. holding rates high)?
It's not "countercyclical policy," in an economy the Fed itself sees growing sub-2% and doing so into perpetuity (the "new normal" theory).
It's not countering an overleveraged consumer, or a banking system that's aggressively making loans.
And it's not "too much money chasing too few goods" — that was years ago, when the government was handing out money and enforcing debt moratoriums well beyond the most severe periods of the pandemic lock downs.
With that, let's go back to the chart on U.S. money supply growth …
As we've discussed over the past few years, we had ten-years worth of money supply growth dumped into the economy over a two-year period (the pandemic response). That combined with supply chain disruptions is textbook, "too much money chasing too few goods" — a recipe for inflation.
But we've since had the persistent disinflationary trend, driven by consecutive quarters of money supply contraction.
And for the past year, money supply growth has normalized.
That's good.
With all of the tailwinds aligning for the economy, where would growth be, if the Fed didn't have its foot on the brake?
