“As a dog returns to its vomit, so a fool repeats his folly.”
– Proverbs 26:11
You’re Fired!
Government officials once believed they had secured their dream jobs, complete with generous salaries, long-term job security, and admirable retirement packages. However, the atmosphere has dramatically shifted, leaving many of them cautiously maneuvering to avoid the ire of President Donald Trump.
Recently, Trump dismissed Bureau of Labor Statistics Commissioner Erika McEntarfer. Recall that he expressed outrage over the adjustments made to the May and June jobs reports, which dramatically reduced job creation figures from 291,000 to a mere 33,000. He accused the numbers of being manipulated for political gain and didn’t hesitate to let McEntarfer go.
Following her departure, Federal Reserve Governor Lisa Cook also saw her tenure come to an end. Cook had reportedly misrepresented her primary residences on mortgage applications in 2021, claiming homes in both Ann Arbor and Atlanta to secure advantageous mortgage terms. Trump deemed this deception a valid reason for her dismissal, a claim Cook contests and is currently addressing with legal counsel.
From our perspective, McEntarfer and Cook were fortunate. Their roles were questionable at best, contributing to the dissemination of misleading data and manipulating interest rates—actions that often lead to more detriment than benefit.
On the bright side, thanks to Trump, they now have the chance to pursue meaningful employment, engaging in work that truly serves society, such as repair jobs or food processing. They should appreciate the opportunity to step away from less valuable roles.
In turn, Trump will likely appoint a successor to Cook—someone entirely aligned with his agenda, poised to cut interest rates and facilitate the Treasury’s ongoing efforts to finance the U.S. government’s substantial deficits.
After months of pressure from Trump, it seems that Fed Chair Jerome Powell is starting to align his views closer to those of the administration…
Transitory Inflation?
If you missed it, the highly anticipated annual gathering of central bankers in Jackson Hole occurred last week. In what may be one of his final appearances as a leading central banker, Powell delivered an insightful speech on August 22, hinting that the Fed might consider a rate cut at the September Federal Open Market Committee (FOMC) meeting.
Powell indicated a shifting balance of economic risks. While the Fed has maintained the federal funds rate within the range of 4.25 to 4.5 percent throughout the year, inflation continues to rise while the job market shows signs of slowing—setting the stage for a potential stagflation scenario.
Since Trump’s presidency began, the Fed’s focus has largely centered on curtailing inflation. Powell’s recent remarks suggest that the Fed may now be more concerned about the risk of economic stagnation than inflation spiraling uncontrollably.
According to Powell, the current situation is “challenging,” with “risks to inflation tilted to the upside, and risks to employment to the downside.”
What does this mean exactly?
On the inflation front, Powell noted that the impact of increased tariffs on trading partners is now evident, leading to higher consumer prices. Nevertheless, he downplayed the long-term implications, stating, “A reasonable base case is that the effects will be relatively short-lived—a one-time shift in the price level. Of course, ‘one-time’ does not mean ‘all at once.’”
This discourse remains speculative. The underlying assumption is that if inflation pressures from tariffs are mere temporary phenomena, the Fed can afford to concentrate on the other aspect of its dual mandate: maximizing employment.
Perhaps this is true. However, it’s worth recalling that the last time Powell insisted inflation was transitory—back in 2021 and 2022—he hesitated to act as consumer prices surged to their highest level in 40 years. Will he make the same mistake again?
Downside Risks to Employment
During his speech, Powell also touched upon the current state of the labor market. Although the unemployment rate remains relatively low at about 4.2 percent, recent job data, including McEntarfer’s downward revisions from previous months, indicate a slowdown in hiring.
Powell described the current job market as a “curious kind of balance,” resulting from a decline in both the supply and demand for workers. He subsequently delivered the statement that stirred market excitement:
“This unusual situation suggests that downside risks to employment are rising. If those risks materialize, they can occur rapidly, leading to increased layoffs and soaring unemployment.”
With the phrase “downside risks to employment are rising,” Powell effectively hinted at an impending rate cut. Consequently, major stock market indexes surged at the end of the week.
What implications does this hold for the upcoming FOMC meeting on September 16 and 17?
Even before Powell’s speech, the likelihood of a 25 basis point rate cut in September was already substantial. Following his comments, those odds climbed dramatically, with futures now indicating it as nearly a certainty, some estimates suggesting a probability close to 90 percent.
The markets perceive Powell’s remarks at Jackson Hole as a precursor to a September cut. By reducing rates now and making borrowing more affordable for consumers and businesses, Powell aims to preemptively address the cooling labor market.
Unless an unexpectedly strong jobs report or a significant inflation spike occurs in August, it is almost a given that a 25 basis point interest rate cut will be enacted in next month’s FOMC meeting.
So, what should we infer from this?
Here Comes the September Swoon
Powell’s dovish shift during Jackson Hole was sufficient to propel markets upward. Investors appear to be “buying the rumor,” driving stock prices higher in anticipation of a rate cut at the imminent September 16 and 17 FOMC meeting. The inevitable “sell the news” phase of this strategy will come later, contingent on various factors.
The market’s reaction has already factored in a high probability of a rate cut. The favorable sentiment has been largely incorporated into stock prices. Therefore, the extent of the cut is crucial. If the Fed surprises markets with a 50 basis point cut, it could trigger a new wave of buying enthusiasm. Conversely, a modest 25 basis point cut, accompanied by a somewhat hawkish statement from the Fed, might lead to a selloff.
Powell emphasized that decisions in the near term are not preordained and will depend on incoming data. Thus, investors and speculators will be closely monitoring future inflation and employment reports leading up to the September meeting.
If these data points exceed expectations, the Fed might find itself compelled to delay a cut, leaving those who invested based on rumors vulnerable to a sudden downturn. Regardless of the outcome, many might opt to liquidate their positions to secure profits immediately after the FOMC meeting, avoiding any potential pitfalls.
In summary, expect considerable market volatility in the upcoming weeks…
…and keep in mind that September has historically been the most challenging month for the U.S. stock market, with the S&P 500 showing negative returns on average since 1926. Therefore, conditions are ripe for a potential September swoon.
Prepare accordingly.
[Editor’s note: Navigating these volatile market shifts can be challenging. Imagine having a structured approach to guide you through it. We developed the Prism Investing Framework to help. It provides a comprehensive view—from macro trends to individual stock analysis—enabling you to make informed decisions and steer clear of common pitfalls. Are you ready to gain a clearer perspective?]
Sincerely,
MN Gordon
for Economic Prism
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