Tug of War

‍

Dual Mandate: Two Kids Walk into a Bar…

‍

Soundbite: Chair Powell summarized 2025 monetary policy: “All year, our policy rate was tight, because inflation was above its target and employment was very solid. Over the summer, payroll jobs dropped a lot, so having a tight focus on inflation must moderate for the two goals to become more balanced.” We think we can simplify it further: Think about the inflation and full employment mandates as two kids who often misbehave. Inflation was out of control, stomping on top of the bar and kicking over glasses, while employment was spinning around on the barstool quietly. Now, employment has fallen off the stool and is in danger of rolling onto the broken glass. This situation is not the mirror image of what was seen earlier in the year, when inflation was unruly and employment was “solid.” We agree employment is now a problem child, but inflation is still up on the bar. Expecting a stream of rate cuts may not be the path of least resistance.

Undoubtedly, we have experienced a significant shift in focus from inflation being the sole story to suddenly focusing on employment because a steady downturn in payrolls accelerated lower on downward revisions.

Bowman stated she is “concerned that the labor market could enter into a precarious phase and there is a risk that a shock could tip it into a sudden and significant deterioration.” That led her to what we think is the erroneous conclusion that “monetary policy should de-emphasize inflation.”

Yes, the risks to employment are a concern. We have been looking for such a negative labor outcome to unfold. Given the lags inherent in monetary policy, the central bank should be forward-looking and ease, under normal circumstances.

Ay, there is the rub. We are not operating under normal circumstances. Near-term risks to inflation are still tilted to the upside.

It is precisely because the central bank is forward-looking that it cannot ignore future inflation. Because its dual mandate is pulled in both directions, the Committee should not cut too aggressively. One example of the cost of leaning one way at the expense of the other mandate is outlined in our next Point.

‍

How Forgetting the Past Can Cause a 50 Percent Market Crash

‍

Soundbite: We were shaken when we realized how deep the parallels ran to the 1970s. First, CPI from 1968 through 1972 is analogous to the last five-year inflation pattern. Second, the 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. Despite moving in lockstep with the past, the administration hopes that hyper-growth will compensate; otherwise, we risk 1970s-style inflation.

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 bullsh*t, [it] isn’t growing fast enough.” It does not take much imagination to picture the same line coming from today’s Oval Office.

Burns was worried: “I don’t want to see interest rates exploding…I could lose control of my Board.” After Nixon appointed Robert Holland as a new Fed Governor, Burns “glowed because…he will control him, just absolutely.” Treasury Secretary George Schultz was recorded as saying, “Burns would like to get Brimmer off the Board.” Brimmer was a Harvard PhD, a Democrat, and the first African American to serve as Federal Reserve Governor, who thankfully finished his full term.

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.” [emphasis added].

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

‍

Soundbite: 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 with 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 speech laid out a plan to downgrade inflation concerns, allowing for lower rates to accommodate our enormous $36 trillion debt overhang. This playbook has been followed by other countries and has one outcome: higher future inflation.

Stephen Miran’s conclusion in his 2024 article was “Rate cuts would embed higher inflation expectations into long-term economic outlooks, so rates will remain high.” We agreed with him then, and his argument remains valid today.

The Trump appointee explained that tariffs will improve our fiscal situation, pushing down interest rates by decreasing the deficit and dropping the Treasury supply needed to finance a smaller budget shortfall. 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.” For that to be true, the U.S. would be forced to produce substitutes for everything we export. The only other way exporters cut the price of goods that have added tariffs is if we are in a recession, and demand falls to the point where exporters have no other option but sell goods below their cost.

From our perspective, we believe U.S. importers, manufacturers, and retailers will soon need to pass through tariffs, and the fact that this will happen over time will push inflation expectations higher. We are also in the camp that tariffs push productivity lower, dampening tax revenues. His forecast also hinges on immigration outflows that crush rental inflation. We are convinced the main impact of negative net migration is labor supply contraction, and that will be a major depressant on overall growth. Similar to his assumption that export prices will fall, if rents fall, it will be due to deteriorating economic conditions.

The dramatic flip in Miran’s logic could be a sign of what a Trump-controlled FOMC consensus could become. It is clear that 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.

‍

What to Look for This Week

(All times E.S.T.)

‍

1. Friday, October 3 at 8:30 a.m. September Employment Situation. The 70,000 consensus is a return toward July’s four-month high. Because June was revised down to -13,000, the first thing we will look for is whether July’s 79,000 is revised down, and if August’s 22,000 will be revised to another negative reading. Because the Fed is confident that shrinking labor supply is capping the rise in the unemployment rate, if there is another uptick to a near four-year high of 4.4%, that could shake confidence.

2. Tuesday, September 30, at 10:00 a.m. August Job Openings and Labor Turnover Survey. JOLTS Hiring Rate will be a major focus for investors after Powell said last Tuesday, “People have stopped hiring, and when you don’t hire, through attrition, your labor force shrinks, and you save money that way. That may be a way of passing on tariff costs.” The Hires Rate has sat at decade lows of 3.3% for the last two months (April 2020 3.1%). If it makes a new low, but the market reaction is muted or even slightly positive, it could forecast a positive reaction for next Friday’s payrolls. A weak employment number could spark buying because it will raise the odds of a sustained easing campaign by the Fed, assuming the unemployment rate does not exceed the 4.3% consensus.

3. Wednesday, October 1, and Friday, October 3, at 10:00 a.m. ISM Manufacturing and Non-Manufacturing PMI for September. The data that matters is prices paid, especially for Friday Services PMI because it leads CPI by three months. While August dropped to 69.2 from July’s 69.9 high, August is still the highest reading since November 2022 when CPI was above 6%. The consensus is for another drop to 68.8, which would relieve some of our concern if September does not surprise to the upside for the Prices Paid subcomponent.

FOMC Voters Speaking: Monday, September 29 at 1:30 p.m., St. Louis Fed President Alberto Musalem speaks. Tuesday, September 30 at 6:00 a.m. Fed Governor Phillip Jefferson speaks, but he rarely makes market-moving comments. Chicago Fed President Austan Goolsbee speaks the same day at 1:30 p.m. and we will be looking for comments about the importance of the inflation mandate. He speaks again at 8:30 p.m. Also on Tuesday at 1:00 p.m. Chicago Fed President Austin Goolsbee speaks. New York Fed President John Williams speaks on Friday October 3 at 6:05 a.m. before the payroll data. Jefferson is the only FOMC member scheduled to talk after payrolls on Friday at 1:40 p.m. on the Economic Outlook. We will be following that one closely.

Earnings: OK, season really ending, but we reset for the next round starting October 14 with the money center banks. Monday, September 29, before the market opens, Carnival CCL reports, shedding more light on the consumer, and same for Tuesday September 30 after market for Nike.

‍

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.