For Every Action

Soundbite: While we experienced a range of emotions upon hearing about the Department of Justice’s criminal investigation into Jerome Powell’s handling of the Fed’s headquarters’ renovation, surprise was not one of them. We decided to republish excerpts below from four of last year’s Points about the tension between the Fed and the administration. We do so to illustrate our earlier concern about the potential for drastic action coming from a frustrated Executive Branch.

Attacks from the administration on the Fed are not unique, but this time we expect reflexive action from the other two branches of government now that the Department of Justice has become involved. The administration was already frustrated last month by the unanimous reappointment of all existing Federal Reserve Bank presidents. More disappointment could come if there is pushback by the Senate and the Supreme Court. Last night, Republican Senator Thom Tillis (who sits on the Senate Banking Committee and has chosen not to run for re-election) stated he will oppose any Fed nominee including the Chair unless the DOJ case is dropped. We believe the Supreme Court will also be motivated to rule in favor of Fed Governor Lisa Cook in light of the legal assault on Powell.

If the resulting impact is the opposite of the administration’s objective for a dependent Fed, then this would be bullish for risk assets and the dollar. Unfortunately, that scenario will not relieve the pressure on the Fed coming out of the Executive Branch. Note: we are still awaiting the Supreme Court’s decision on the legality of Trump’s Tariffs.

Newton’s Third Law is Playing Out at the Fed

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‍The external tension between the administration and the Federal Reserve has come to nest internally at the FOMC, creating a divide. There are two rival camps at the Fed: September’s dot plot showed that half the Committee expected no further cuts this year, while the other half expected two cuts.

If Sir Isaac had been an economist today, he would certainly be seeing his “For every action there is an equal and opposite reaction” at play in Powell’s Fed. As the Chair said, things really are different, and that makes us look for what has changed. Our only conclusion is that the polarizing presence of Stephen Miran aggravated a tolerable difference at the central bank into something contentious.​​

Miran insists that the central bank risks recession if it does not swiftly lower interest rates. He dismisses the inflation mandate, citing his belief that tariffs will be borne by foreign exporters and that immigration outflows will curb rental inflation.

Governor Miran is acting as a foil for the other 18 FOMC participants, and especially for those who believed the September cut to be the last rate reduction of 2025. He is undoubtedly causing one half the Committee to dig in their heels.

How Forgetting the Past Can Cause a 50 Percent Market Crash

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We were shaken when we realized how deep the parallels ran to the 1970s. The two administration's demands to deliver excessive stimulus at the expense of higher inflation read from the same script. In 1971, unemployment was rising, and Richard Nixon pressured his Fed appointee to lower rates. Fed Chair Arthur Burns was a Republican with a history of loyalty to the president.

Nixon was paranoid that he would lose the 1972 election due to a weak economy, as he had in 1960, and pressed Burns to lower rates. Burns consented to Nixon’s demands and pushed rates down aggressively. That policy expanded the money supply in 1972, and real GDP hit 7.7%. That overheating caused CPI to rise sharply and stocks to rally into the January 1973 peak. Inflation continued to rise, and Burns was forced to raise rates into a bear market that ended in October 1974 after a 50 percent decline.

The Nixon tapes from the 1970s caught numerous conversations between the president and Arthur Burns. Reading them was a revelation. Nixon’s appointed Fed Chair told the president that there was “a liquidity problem” because banks were awash with cash. Nixon snapped, “liquidity problem is just bulls**t, [it] isn’t growing fast enough.” It does not take much imagination to picture the same line coming from today’s Oval Office.

Regarding Trump labelling the Fed Chairman “Too Late” Powell, we discovered this gem in a conversation with Burns: “My relations with the Fed,” Nixon said, “will be different than they were with [previous Fed Chair] Bill Martin there. He was always six months too late doing anything.”

Perhaps the current administration is using the Nixon era as a blueprint. If true, what struck me in reading the tape transcripts was Nixon’s unrelenting impatience, which suggests that we should not be surprised by further rash actions from the administration.

We believe the president may be better served if his staff reminds him how that movie ended. Of course, things are not the same now as then, but Hubris has been a tripwire since Athens.

Reading the Fed its Miran(da) Rights‍

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Stephen Miran’s first speech gave us a peek into what a Trump-controlled Fed would look like. The newly minted Fed Governor had laid out a detailed view last year in Barron’s that concluded the neutral, or equilibrium, Fed funds rate was too low, and monetary policy was not restrictive enough. He argued that in 2024, enormous fiscal stimulus, lower household debt-to-GDP, strong AI capex spend, and the need to rebuild supply chains due to the end of globalization were structural changes that pushed demand and the neutral rate higher. The convergence of those four forces made monetary policy not restrictive, but relatively easy.

In the ensuing year and a half since he wrote the article, the deficit widened, household debt-to-GDP fell further, AI-related capex ramped up, and globalization unraveled at a faster pace. We would have expected Miran to double down on his conviction. To the contrary, Miran claims that the combined expansionary potential of Trump’s tax and deregulation stimulus, plus tariff revenue, will gift the government a reduced deficit. That benefit, plus the disinflationary impact from lower immigration, will force the neutral rate to fall. This is a textbook display of an economist bending logic due to the reality of fiscal dominance, where monetary policy is forced to lower rates to keep spiraling federal debt costs capped.

Stephen Miran’s latest speech was borne more from politics than economics: it laid out a plan to downgrade inflation concerns, allowing for lower rates to accommodate our enormous $36 trillion debt overhang. The Fed Governor also maintained that the tax cuts will not widen the deficit, thanks to their stimulative impact. Finally, his argument expects foreign exporters to absorb 100% of the tariffs, and went one step further, saying “exporting nations will have to lower their selling prices.”

This playbook has been followed by other countries and has one outcome: higher future inflation.

The dramatic flip in Miran’s logic could be a sign of what a Trump-controlled FOMC consensus could become. The administration needs lower rates to keep interest expenses down; otherwise, the deficit will spiral higher. Trump sees the need for a compliant Fed, and we must view his actions in this light. If the Supreme Court bends to even greater expansion of presidential powers, and Lisa Cook can be dismissed, fixed income markets will revolt. The flip side is that the president may do something impulsive if he is thwarted by the Court.

Stephen Miran: Gap and Go

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‍Stephen Miran does not believe he is an outlier at the Fed. He underscores the fact that his long-term rate cuts are consistent with the rest of the FOMC; he “just wants to get there faster.” Miran parts company with the time-honored central bank strategy of cutting rates cautiously in case it turns into a policy mistake. Miran sounded more like a hedge fund manager who realizes he is in a losing trade: “If policy is out of whack, you should adjust it at a reasonably brisk pace” otherwise restrictive policy risks a growth slowdown.

We agree with Bill Dudley, former president of the New York Fed, who responds,” The Fed has plenty of reason to worry, but not enough to act.” We think the harder Miran pushes his agenda, the higher the risk it results in a more unified Fed that opposes his views. Miran’s quick-cutting schedule will run into strong opposition unless the economy quickly heads towards a recession. Miran could soon become frustrated, and that may invite intervention by the White House.

Again, all roads lead to greater conflict ahead.

What to Look for This Week

(All times D.S.T.)

1. Tuesday January 13 at 8:30 a.m. Consumer Price Index for December is released. November core CPI was depressed due to zeroing out certain items and came in at 2.60%. The Bureau of Labor Statistics was unable to collect the data necessary for the October reading, and it is omitted permanently. The December data could move back up to 3.0%, increasing the likelihood of no rate cut at the January FOMC meeting, but the Cleveland Fed Inflation Nowcasting has a forecast for 2.64%, similar to November.
2. Tuesday January 13 at 6:00 a.m. the December release of the National Federation of Independent Business Economic Trends Survey. The December NFIB Jobs Report released last week was steady. The November Optimism report showed a drop in Capital Outlays but an increase in employment plans that will be a focus of ours. At 8:15 the weekly ADP Employment change is also released.  
3. Friday January 16 at 10:15 a.m. Industrial Production and Capacity Utilzation for December. The data is collected and broadcast by the Federal Reserve, which was not affected by the shutdown, and October Industrial Production rose 2.2% and November saw a 2.5% increase, the highest reading in over three years. If this trend continues, the administration will point to its tariff policy as the driver. However, manufacturing employment in the U.S. has been harrowingly weak.

FOMC Voters Speaking: NY Fed President John Williams speaks Monday January 12 at 6:00 p.m. and again on Wednesday January 14 at 2:10 p.m. Also on Wednesday, we hear the first comments from 2026 FOMC voters Philadelphia Fed President Anna Paulson at 9:50 on the Economic Outlook, and  Minneapolis Fed President Neel Kashkari at 12:00 p.m. in a virtual town hall. Fed Governor Stephen Miran also speaks at 10:00 a.m. the same day on Regulation and Monetary Policy. Michael Barr, who is stepping down as Vice Chair for Supervision next month, speaks Thursday January 15 at 11:00 a.m. on Stablecoins. His replacement for Vice Chair, Michelle Bowman, speaks Friday January 16 at  11:00 a.m. on the Economy and Monetary Policy. We are interested in what she has to say since she has been leaning more accommodative.

Earnings: Kicking off Q4 this week in earnest: Tuesday January 13 before market, JP Morgan (JPM), a day before Bank of America (BAC), Wells Fargo (WFC), and Citibank (C) report before Market Wednesday January 14. Thursday January 15 before market, Goldman Sachs (GS) and Morgan Stanley (MS) report with Blackrock (BLK) rounding out the big financial names. Taiwan Semiconductor (TSM) also reports that morning and is worth a look. After market Thursday, JB Hunt Transport Services (JBHT) reports, and we will follow that because trucking data has been weak despite strong outperformance by many trucking stocks. Friday January 16 before market contains some regional bank results, such at PNC Financial (PNC) M&T Bank (MTB) and Regions Financial (RF).

By Peter Corey

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