Ever been to a party or gathering and just when you’re having the most fun and the music is getting good, the lights come on? That’s kind of how I felt listening to the Federal Reserve Chair, Jerome Powell, last week at the Jackson Hole Economic Symposium. He tossed many dovish contradictions around during his speech which I’ll point out.
Dual mandate…not really
The fed always talks about their “dual mandate” -—pursuing the economic goals of maximum employment and price stability.¹ But on Friday August 22nd, he stated:
"Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," said Jerome Powell, Fed Chair.²
This is fancy talk just to say they’re moving from prioritizing inflation to focusing on a weakening labor market; in other words, they may not be able to achieve both goals. The question here is, why shift now? Maybe it has to do with the significant downward revision on jobs report earlier in August, that prompted President Trump to fire the director of the Bureau of Labor Statistics (BLS). May and June jobs reports were revised down by 258,000 jobs combined ³. As someone who took countless statistics courses during my graduate studies, it’s nearly inconceivable that any reputable statistician can produce such an epic fail in their report. Some blame it to data collection process, others blame it to interpretation, and some economists have come up with migration related explanations. Whatever the reasoning, it’s quite simple: the data is inaccurate and is not producing reliable information. But on the other hand, our team has been pointing out during our review calls this significant downward revision trend that has exacerbated over the last 2 years. These people are either incompetent or deliberately misleading…or both.
Also in 2024, the BLS issued the largest labor statistics downgrade since 2009, when it revised its jobs reporting down by 67,000 jobs per month on average – (30% less job gains than originally reported). ⁴
My point is that the Fed uses this data to make decisions on economic policy and the downward revisions of last year should’ve mattered just as much, regardless if you heard about it on the mainstream media or not. However, what you did hear the most was the Fed talking about inflation and how they’re aiming to achieve their target of 2%. They even said numerous times that the labor market was “strong” and “resilient”, even though the revisions prefaced a different story. And while they insisted that they remain on track to achieve their inflation target, they haven’t. And if they do a rate cut come September, the most likely result will be the opposite.
So, they haven’t achieved their inflation target (or price stability) and they haven’t achieved maximum employment. What have they achieved?
A “booming” economy does not warrant stimulus
The White House issued an article on August 18th titled “Trump Economy Ignites Record-Breaking Earnings Surge, Market Boom”. Here is an excerpt, but you can use the link below to read more: Under President Donald J. Trump’s bold pro-growth policies, American businesses are thriving like never before — shattering earnings forecasts and propelling the stock market to continued record highs….60% of companies “have beaten earnings per share forecasts by more than a standard deviation of estimates,” according to Goldman Sachs…58% of companies increased their full-year guidance for the year, doubling the number from the first quarter.⁵
But I don't think lose money policy is necessary if the economy is indeed "booming" as The White House states. Rather, it needs tightening to prevent a surge in asset prices, or for rates to remain unchanged. Lowering interest rates increases the risk of a spike on inflation and a weakening of the dollar. I guess gold holders may be optimistic about lose money policy, as it does present a potential upside for the monetary metal. On the other hand, we're observing that it presents tremendous risk for an economy that, by the same metrics that policymakers use, is giving an opposite signal to what they're saying.
So, why is the message so conflicting?
I don’t have an answer to this. On the one hand, the Fed appears to be caving to pressure from The White House and Secretary of the Treasury Scott Bessent, who are calling for lower rates, but for a different set of reasons. I think the public believes that rate cuts this time around are intended to give relief to private individuals. But the Fed lowers the overnight rate which, while correlated, does not directly affect the long-term borrowing nor private borrowing as much as it affects government borrowing. However, short-term Treasuries interest payments accounted for $841billion of the federal budget deficit during the fiscal year of 24-25.⁶ That’s the real relief the GOP is looking for, in my opinion.
On the other hand, Fed Chair Powell saw 2 Board Governors dissent on interest rate policy decision at the last FOMC meeting in July. (9 voted for no cuts, 2 voted for a cut – 1 absentee did not vote). This marked the first public double dissent since 1993. ⁷ Personally, I don’t think dissent is bad; I think it’s healthy. And frankly I'm suspicious of a Fed that is in constant unanimous agreement on policy. Jerome Powell could be concerned of a potential 3rd public dissent come the September FOMC meeting, that can shake up the Fed at its core. This is because Federal Reserve Governor Adriana Kugler (who did not vote and was absent at the July meeting) resigned just days after the meeting, creating a vacancy for a President Trump appointee.
Furthermore, the DOJ launched an investigation over alleged mortgage fraud against Federal Reserve Governor Lisa Cook, whom Trump fired on August 25th. While this is still in contention at the time of this writing, it does possibly create yet another opportunity for another new appointee to a Fed Board seat, one that aligns with the President’s view just in-time for the September meeting.
I believe the Fed Chair is officially cornered. And while I agree with him that there shouldn’t be a rate cut at the next meeting, I disagree with his reasoning for keeping rates steady. I don’t find these consumer interest rates high. According to Bankrate.com, in the year 2000 the rate on a 30-year mortgage was 8%, in 2001 it was 7.01%, in 2007 it was 6.40%, and they continued to trend down until 2022 when the Fed began their aggressive tightening cycle. ⁸
It Is my opinion that the reason rates “feel” high is because our dollar has experienced significant devaluation, as described in a research report by Morgan Stanley "The Depreciation of the Dollar", and the Fed has "sold us" on the idea of an “acceptable” inflation rate of 2% target to justify this devaluation and loss of purchasing power of our currency.
When I say "The Party is Over" I mean we're observing that both the Fed and GOP are running out of options on how to mitigate the result of a systemic change to fiat currency (paper money) that we enter in 1971 when Nixon took us off a Gold Backed US Dollar. And if we have indeed run out of options to maintain the current economic system, it is realistic to conclude that a significant economic shift is in the horizon.
¹. The Fed and the Dual Mandate | In Plain English | St. Louis Fed
³. BLS Has Lengthy History of Inaccuracies, Incompetence – The White House
⁴. SHRM: U.S. Employment Gains Revised Down by Over 800K Jobs
⁶. Peter G. Peterson Foundation: Interest Costs on the National Debt
⁷. Fed dissenters appeared alone in favoring rate cut at July meeting, minutes show | Reuters
⁸. Mortgage Rate History: 1970s To 2025 | Bankrate
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