Hung Jury

‍

Newton’s Third Law is Playing Out at the Fed

‍

Soundbite: The external tension between the administration and the Federal Reserve has come to nest internally at the FOMC, creating a divide. Jerome Powell said that given the current conflict between their unemployment and inflation mandates, the 19 FOMC participants displayed “strongly differing views about how to proceed in December…We have not made a decision about December. I always say we don’t make decisions in advance, but I am saying something different here.” September’s dot plot showed that half the Committee expected no further cuts this year, while the other half expected two cuts. Powell’s comment now gives credibility to two rival camps at the Fed. Internal dialog is welcome, but voters at loggerheads is not positive for risk markets.

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.

Chair Powell cited some of the reasons for the internal debate about next steps: the cumulative 150 basis points in rate cuts have pushed the 3¾-4% funds target close enough to neutral to warrant “waiting a cycle.” He added that the pause would be helpful in determining the legitimacy of the downside risk to the labor market and, alternatively, in assessing whether the recent economic uptick is real.

Importantly, Powell explained the reasons behind the divide as “Some of it lies in different forecasts, but some of it is due to different risk tolerances to the two separate [mandates] and that leads to disparate views.” The risk tolerance description is a direct result of Governor Miran’s radical views, which are at odds with the Fed's tradition of treading slowly when uncertainty rises. 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 of 19 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. We heard them in the September 16-17 Minutes:

“Participants stated there was merit in keeping the federal funds rate unchanged at this [September] meeting… emphasized that progress of inflation toward the Committee’s 2 percent objective had stalled…expressed concern that longer-term inflation expectations may rise if inflation does not return to its objective in a timely manner.”

We will know more about the internal dialogue at the FOMC on Wednesday, November 19 when the Minutes are released.

Fixed income traders are no longer as certain about a December cut, and we believe expectations should trend toward no cut at all unless the economic situation begins to accelerate downward. Either development will be equity negative into the December 10 rate announcement. This new pushback on rate cuts could create more drastic measures from the administration to control the Fed, which would be another depressing factor for risk assets.

‍

Crude Economics

‍

Soundbite: The International Energy Agency warned “the global oil market may be at a tipping point as signs of a significant supply glut emerge.” The problem occurred after the quick unwind of the OPEC+ voluntary production cuts added to surging U.S. Production, leading the IEA to quadruple its 2026 supply forecast to an impossibly high level. This situation is unsustainable, and given that consumption levels are very insensitive to price, the only way for demand meets supply is for a rapid pullback in production. Lower prices will lead to significant U.S shale production cuts, and could further weigh on energy sector employment, which is already in a downtrend.

Markets are dealing with massive extremes of an enormous potential supply overhang that can last well into next year. This has pushed sentiment to pessimistic extremes, which could be the biggest potential upside. From the CFTC’s Commitment of Traders report, institutional money managers have reduced their net longs down to almost flat. This is a level we have not seen since the 2008 lows when crude fell to $32 after crashing from $145 highs five months earlier.

U.S. producers are being pressed by Washington to continue to produce at full throttle, but they are dealing with this huge excess supply, the potential for OPEC+ to continue to unwind production cuts, and the trade war overhang. The reality is that the government wants even lower prices, which will reduce revenues as tariffs raise drilling costs. It seems inevitable that drilling activity will tail off.

The energy analytics firm Enverus puts the breakeven for new shale wells at $70, forecasting no relief in breakevens through 2030. If WTI crude remains below $60, expect widespread drops in U.S. production. The Dallas Fed Q3 Energy Survey is negative, with weakness in Business Activity, Company Outlook. Development Costs and Lease Operating Expenses have surged as Capital Expenditure Plans have dropped. It is no surprise that the BLS reports oil and gas extraction employment has fallen steadily since May to two-year lows.

Coincidentally, the Baker Hughes oil rig count has dropped in parallel with the Fed’s balance sheet, peaking in 2022 and falling over 25% to four-year lows.

U.S oil inventories are low relative to the past, and that has helped support prices in the near term, but the amount of oil transported or stored on water is now over 100 million barrels, the highest number since the pandemic. As that product is unloaded, crude stocks will rise further, putting more downward pressure on crude.

Unless we see a shift in data center energy consumption from natural gas, nuclear, and wind to crude, the demand outlook is bleak. Crude oil demand is driven at the margin by gasoline use, which has seen a sharp decline, pushing global oil use far below its historical trend through year end 2026. The IEA reports petrochemical consumption is capped by “a harsher macro climate, increasing vehicle efficiencies and robust electric vehicle sales.”

The crude market is lurching toward an equilibrium. When conditions are this stretched, they are brittle and prone to rapid shifts, so we are open to change.

‍

Where Did the Money Go?

‍

Soundbite: A discussion about the Fed balance sheet is anything but scintillating, but given recent events, it is reluctantly necessary. Chair Powell said Wednesday the Fed will freeze its balance sheet, ending three years of Quantitative Tightening. Powell mentioned that the recent stress in the repo rate market caused them to stop withdrawing liquidity through shrinking their balance sheet. He also mentioned a duration mismatch in their balance sheet, requiring a shift into more Treasury Bills. This creates two problems: if the fiscal deficit grows, repo financing grows, and repo rates will move up even though the balance sheet is frozen. Secondly, if the central bank sells longer term assets to cut its bond portfolio duration, it will depress equities because long-term rates will rise on that liquidity withdrawal. This will also be unwelcome news for the administration.

The balance sheet is interesting again.

Jerome Powell and others at the FOMC have supported changing the maturity mix in the Fed’s portfolio of Treasury securities to better match its liabilities. Throughout Quantitative Easing, the central bank bought longer term assets to influence yields farther out along the curve. Those actions pushed the amount of notes and bonds (including mortgage-backed securities) above what was required to fund their longer-term liabilities.

The liabilities of the Fed’s balance sheet are divided between currency outstanding, the Treasury General Account, and bank reserves. Half of the central bank’s liabilities are represented by currency and the TGA, over which the Fed has no control. This is important to understand because these two factors add to well over $3 trillion, making it impossible for the Fed to shrink its balance sheet dramatically below its current level of $6.5 trillion. Currencies do not pay interest, so they are matched with long-term assets.

The TGA is the Treasury’s checking account at the Fed. Bank reserves are the banking system’s checking account at the Fed. Reserves are used to conduct payments between banks and are the most liquid asset in the financial system. Both the TGA and bank reserves are short-term liabilities, and that creates the asset-liability gap.

Longer duration assets introduce interest rate risk onto the Fed balance sheet when the central bank uses short-term reserves to buy them. The mismatch is not optimal, which explains the desire to sell notes and bonds and ramp up the amount of T-Bills. That will alleviate the current problem of higher rates pushing the interest owed on reserves above what is earned on Treasury notes and bonds purchased at lower yields following COVID.

Specifically, Governor Christopher Waller has advocated for a 50% allocation to T-Bills to correct the discrepancy and bring the balance sheet into alignment. To do so means increasing Bill holdings in the Fed’s $4.2 trillion portfolio from $200 billion to $2 trillion. A less dramatic approach is to have the Treasury securities portfolio echo the market, which translates into a 20% T-Bill weighting, or $840 billion. Even that more conservative approach quadruples the amount of T-Bills currently held and would force a reduction in Notes and Bonds of over 15%, or $640 billion.

Moves of this magnitude require proceeding at a glacial pace to minimize the market impact. When the Fed sells 10-year notes, the increased supply raises longer term interest rates. This would work counter to the Treasury’s and administration’s wishes because it will hit housing and other durables purchases that are financed in the longer end of what would become a steepening yield curve.

‍

What to Look for This Week

(All times D.S.T.)

‍

1. Wednesday, November 5 at 8:15 a.m. October ADP Employment Change Report. The major revisions from the QCEW (Quarterly Consensus of Employment and Wages) cut the data down to adjust for their 911,000 change to the benchmark. The trend has not changed, but it was the first time since the pandemic with two consecutive monthly negative readings. ADP is introducing a weekly series that was released showing 14,250 weekly increase in employment in the four weeks into October 11. The next weekly release will be November 11, and we will be able to see weekly data from that date onward. There is not a weekly release for the first week of every month, since ADP releases the monthly report.

2. Thursday, November 6 at 7:30 a.m. The October Challenger Job Cut Report. Challenger is perceived as important for layoff data, but they also collect important hiring data. The September publication showed year-to-date hiring plans were the lowest since 2009. September’s report also showed that layoffs for 2025 are 55% higher than last year and the highest since 2009. Holiday hiring was absent, so we will see if retail saw last minute hiring pick up in October.

3. Wednesday, November 5 at 10:00 a.m. ISM Services Purchasing Managers Index for October. Fifteen of Eighteen services industries reported higher prices in September, and none reported declines. That makes us keen on the ISM Services Prices subindex, which has been elevated since May. September was the second highest reading since October 2022 with July 2025 only slightly higher. The prices series is normally an excellent predictor of core inflation data one quarter ahead. 10:00 a.m. ISM Manufacturing PMI is out just before this report on Monday November 3, and Prices Paid has fallen for three consecutive months.

FOMC Voters Speaking: Tuesday, November 4 at 6:35 a.m. Governor Michele Bowman speaks on Monetary Policy. Thursday, November 6 at 11:00 a.m. NY Fed President John Williams speaks, and he can very often give a good overview of the general mood at the Fed, so any comments he makes about division will be important. Also, at 11:00 a.m. on Thursday, Governor Michael Barr speaks, and he has recently been a bit more vocal about policy so we will listen closely. Also on the 6th, 2026 voter Beth Hammack of the Cleveland Reserve Bank speaks at noon. Later that packed day, Waller speaks at 3:30 p.m., Philadelphia President and 2026 voter Anna Paulson speaks at 4:30 p.m. and outgoing voter Alberto Musalem speaks at 5:30 p.m. Friday, November 7 at 3:00 a.m. President Williams speaks in Europe, Vice Chair Phillip Johnson speaks at 7:00 a.m., and at 3:00 p.m. Governor Stephen Miran rounds out the week. Thursday November 6 and they publish their Monetary Policy Report and Monetary Policy Committee meeting minutes.

Earnings: Palantir (PLTR) Monday November 3 after market. Uber (UBER) on November 4, before market Tuesday November 4 and after market Advanced Micro Devices (AMD). AppLovin (APP) QUALCOMM (QCOM) and Robinhood (HOOD) after market Wednesday November 5. Potential highlight: KKR (KKR) before market on Friday November 7 could enlighten investors regarding the world of Private Equity and Credit.

By Peter Corey

‍

Risk Disclosure & Disclaimer

Copyright © 2025 Pave Finance, Inc., LLC and Peter Corey. All rights reserved. 

The attached material is provided in partnership with Pave Investment Advisers, LLC (“Pave”), and is the opinion of Pave and Pave’s Chief Markets Strategist, Peter Corey. Distribution is being provided through a licensing agreement, and any further dissemination is strictly prohibited. 
You are receiving this email because you opted in through our product or website

You can update your preferences or unsubscribe from this list.

For Financial Professional Use Only

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. There is no guarantee any investment recommendations will be successful and there is a risk of losing money.

We take protecting your data and privacy very seriously. Please see our privacy policy here.

Pave Investment Advisors, LLC is an SEC Registered Investment Advisor. Such registration does not imply any level of expertise.

Securities offered through Pave Securities, LLC – New York, NY. Member FINRA/SIPC. You can review Pave Securities LLC with FINRA’s BrokerCheck BrokerCheck.

Advisory Services are only offered through Pave Investment Advisors, LLC., an SEC Registered Investment Advisor which is an affiliate of Pave Securities, LLC.

Pave Securities, LLC and Pave Investment Advisors, LLC do not offer tax or legal advice.

The news, resources and articles available on this site are being presented for educational purposes only and should not be considered specific investment or planning advice applicable to each individual.

Please see ADV Part 2A here and Form CRS here.

For Additional Information and Important Disclosures please click here.