In the third quarter, the US economy showed an encouraging scenario regarding inflation, consumption and growth projections. However, the loss of rates remains the favorite stage.
The US economy started the third quarter, after closing the second (+3.3%) better than estimated. The consumer distrusts, and much, but holds his expense. And in July it increased it 0.3%. What fears most is the rise in inflation. Will it reach 4.8% to a year seen as they say in the surveys? Clearly, exaggerates. In July, the PCE measurement that follows the Federal Reserve (FED), remained at 2.6%. The core inflation did rise, although only one tenth already 2.9%. It is the record that, a week ago, the president of the Central Bank, Jay Powell, said in Jackson Hole. The Fed discounts that inflation will continue on the rise – from the hand of tariff frenzy – but estimates that it will be reversed next year when the effect of increased pricing is dissipated only once. In its June projections, the core inflation climbs to 3.1% towards December and falls to 2.4% at the end of 2026. And this is compatible with two casualties of interest rates – by half a point in total – before it ends 2025. That is, without the need to corroborate that inflation sticks the return. In this critical front, then, there were no news.
What changed in the last week, from Jackson Hole?
Two important dynamics, and very aggressively. Economic, the GDP growth forecast in real time of the Atlanta Fed (recognized volatile) jumped from 2.2% to 3.5% for the current quarter. Politically, La Perla, very serious, was the direct interference of President Trump in the formation of the Board of Governors of the Fed. Trump demanded the resignation of Governor Lisa Cook, one of her seven members (including Powell, her holder). It alleges a “potentially criminal” behavior for alleged irregularities in the management of two personal mortgages. As he received a resounding non -response, then, he fired it through a post in the Truth network, “with immediate effect.” Never in the 111 years of Fed history, the Executive had removed a governor. The independence of the Central Bank was never so visibly threatened. The outcome, however, remains open.
Cook, appointed by President Biden with the Senate Agreement, resists in his position, and demanded Trump for his attempt to dismiss before justice. And he warned that he will also do it with any of his colleagues if they were called to retire. Federal Judge Jia Cobb, on Friday, held a first hearing with the lawyers of Cook and the Department of Justice, although he still did not make a decision. Can you vote at the next meeting of the open market committee? He should be able, but he still did not receive the benefit of a precautionary measure that clear any doubt about the validity of his actions.
Lisa Cook
Neither Powell nor any other Central Bank official poured comment. The markets did not exhibit shock either. They had done it fleetingly weeks ago when Trump slipped to his legislators who had resolved to say goodbye to Powell (then denied by the president himself). Does the White House offensive be careful to control and decide monetary policy? The one who shut up, gives. Just justice remains, then, to ratify the independence of the Fed with respect to the Executive and set explicit limits to abuse. In that sense, the Court of Appeals of the Federal Circuit of the US did the same with the “reciprocal” tariffs established Trump. They are invalid, he ruled, because “the executive orders exceed the delegated authority to the President.” The White House will resort to the Supreme Court.
And it is the Supreme Court that described the Central Bank as a “quasi-private entity of unique structure, which follows the particular historical tradition of the first and second bank of the United States”, institutions that preceded the Fed in the seventeenth and XLX centuries. Both banks succumbed in paths, destroyed precisely by political interference and party disputes. Hence, the design of the central bank independent of the political power of the day, although completely subordinate to Congress (which created it, can reform it or even decide its abolition; that defines its objectives and their appointments; and that it is to whom he must account for).
The economy sets vigor signals. Inflation and expense rise hand in hand. Politics breathes in the neck to the fed. Wall Street made his August and added new records and no concern. Is it necessary to lower the fees on 16 and 17? Nothing what happened altered his chances. Chicago futures estimate 86.4% of probabilities versus 84.7% a week ago.
Should Powell harden to preserve the credibility of the Fed?
No one thinks so. And bond markets do not demand it. The data will have the last word. A sharp jump from August inflation would force a rethinking. But it is more likely that it is the labor market that facilitates the decision. It is the variable that most pushes the rate cut.
This Friday the August labor report will be known (and the corrections of July and June). However, Tuesday 9 is the date underlined in red. The annual review of employment figures promises to be the crucial letter. A substantial decrease is in the cat. Governor Waller estimates that about 60,000 monthly jobs will disappear from current statistics. And that it is likely to be in light an effective destruction of private employment for the last three months. It will be simple, if confirmed, obtain a unanimous vote of the Fed in favor of a rates of rates that underpin labor demand. Although the reworking of the figures does not modify the balance of greater solidity that the complete panoramic view of the economy from July. And that, according to the PMI report, it accelerated significantly in August.
Source: Ambito
