The Fed, 3rd Mandate, and 1st Amendment
Doug Nolan
The market came into the week pricing a 3.63% year-end Fed policy rate.
After Wednesday’s 25 bps rate cut, the market ended the week pricing the same 3.63% rate.
Wall Street received the cut they beckoned for.
Job growth has slowed meaningfully, while inflation remains significantly above target.
As Chair Powell put it: “So we have a situation where we have two-sided risk, and that means there’s no risk-free path.
And, so, it’s quite a difficult situation for policymakers.”
History may not repeat, but it’s that rhyming thing.
Parallels to the culmination of the “Roaring Twenties” are as fascinating as they are unnerving.
Revisionists (i.e., Milton Friedman and Ben Bernanke) have argued that the Fed’s overly restrictive rate policy was a defining contributor to the economic downturn and 1929 crash.
Contemporaneous analyses and commentary share a very different experience.
Credit growth and speculative excess pointed to destabilizing late cycle loose conditions.
Fed officials were understandably mindful that easier monetary policy would only stoke precarious financial excess.
My analytical framework is unequivocal: prolonging “Terminal Phase” excess is today a much greater risk to system (i.e., market, financial, economic, social, political, geopolitical) stability than higher unemployment and/or consumer price inflation.
The Fed erred with late last year’s Bubble-stoking 100 bps of cuts.
It miscalculated again this week, further loosening monetary policy despite a backdrop of precariously loose conditions and market excess.
For the record, the Fed cut rates with the S&P500 trading at record highs, with a price/earnings (P/E) ratio of 25.3.
Also at all-time highs, the NASDAQ100 trades with a 32.7 P/E (“MAG7” P/E 37.22).
Surging to an all-time high this week, the small cap Russell 2000 sports a P/E of 34.72.
Indicative of the intensity of speculative excess, the Goldman Sachs Most Short Index surged 12% in seven sessions.
September 14 – Bloomberg (Paul J. Davies):
“‘This is one of my new phrases,’ Dan Simkowitz, co-president of Morgan Stanley, told an investor conference...
‘There’s ‘derivative-ization’ – that’s not a real word but it’s a Dan word – all around the world.’
Everyone hates a clunky neologism, but occasionally one clarifies something important, or names a force in business or finance.
Simkowitz, who runs trading and investment banking at Morgan Stanley, did both.
He was talking about the bank’s equities business, but his idea helps explain why the entire industry’s markets revenue has recovered from the long malaise it had fallen into in the years before 2020.
It also shows how non-banks like Jane Street LLC and Citadel Securities have bloomed without eating into Wall Street’s income.”
The Fed cut rates in the face of the type of systemic derivatives market excess that has repeatedly culminated in financial crisis.
Arguably, the broad scope of today’s excesses is without precedent.
Options markets now captivate millions of online traders, while myriad derivative strategies become only more integral to institutional managers and the leveraged speculating community.
The Fed cut rates this week despite unprecedented speculative leverage – “basis trades,” “carry trades,” derivatives, and levered securities holdings more generally.
Money Market Fund Assets inflated over $1 TN (16%) over the past year, while the “repo” market and Broker/Dealer assets continue their historic ballooning.
Investment-grade spreads to Treasuries ended the week at 72 bps, the narrowest since the exuberant market environment (June 1998) that presaged the Russia/LTCM financial crisis.
At 2.62 percentage points, high yield spreads traded this week to lows since February – and within nine bps of the narrowest level back to pre-subprime blowup, June 2007.
Junk bond yields dropped to lows since April 2022.
JPMorgan CDS ended the week within a fraction of lows back to pre-Covid February 2020.
September 19 – Bloomberg (James Crombie):
“High-grade bond spreads ratcheted to a fresh 27-year low and can go tighter as demand outstrips supply.
That pushes investors deeper into private markets for yield, further sapping public issuance and shrouding corporate credit risk in mystery.”
The Fed cut rates irrespective of a historic late-cycle boom in high-risk lending.
A sampling of the week’s “private Credit” headlines:
“Apollo’s $10 Billion Wizardry to Woo Insurer Cash.”
“Apollo’s Insurer Athene Embraces Private Credit.”
“Blackstone Sees Tight Credit Spreads Fueling Private Debt Boom.”
“Blackstone Says Private Credit Pays More.”
“Private Credit Firms Eye Public Companies as Their Next Target.”
“Inside the Big Boom in ‘Business Development Companies.”
“Private Credit to Boom Even as Bank Credit Growth Softens: S&P Global.”
Powell:
“So what will we do?
We’ll do what we need to do.
But we have two mandates, and we try to balance them. For a long time, our framework says that when our two goals are in tension – this is quite an unusual situation – how do we decide what to do?
Because our tools can’t do two things at once.
What we do is we ask, how far is each from the goal and how long is it expected to get to the goal?
And then we think about those things, and as I mentioned, our policy had been really skewed toward inflation for a long time, really.
Now we see that there’s downside risk clearly in the labor market. And, so, we’re moving in a direction of more neutral policy.”
Reasonable enough, but nonetheless deficient.
When the Fed’s two congressional mandates are “in tension,” the FOMC should defer to its overarching responsibility for safeguarding financial stability.
Powell stated that “you could think of this in a way as a risk management cut.”
But proper focus on financial stability and risk management would suggest caution in lowering rates in an environment of exceptionally loose conditions and speculative excess.
Powell:
“What we can say is this, that over the course of this year we’ve kept our policy at a restrictive level – and people have different views, but a clearly restrictive level, I would say.”
The U.S. “Bubble Economy” these days suffers extreme imbalances and divergences.
Some sectors are booming, while others are deflating.
In such a backdrop, loose conditions and liquidity excess will gravitate to sectors demonstrating strong “inflationary biases” – that are expanding, rewarding, and enticing.
Loosening monetary policy in such a backdrop will only stoke the boom, further incentivize excess, and exacerbate imbalances.
The Fed Chair sent a subtle warning to the consensus view that a series of rate cuts are baked in the cake.
“It’s gratifying to see that economic activity is holding.”
“Consumer spending numbers were well above expectations.”
“I think the economy is – it’s moving along.”
“A fairly narrow sector is producing a lot of economic activity, which is the AI build-out and business investment.”
“Forecasts have been coming up.”
It’s worth noting that the Fed executed its “risk management cut” with the Atlanta Fed GDPNow Forecast at 3.34%.
The Fed is heavily leaning on its “full employment” mandate.
August's 4.3% unemployment rate compares to a 50-year average of 6.1%.
Powell acknowledges today’s unusual analytical challenges.
“Payroll job gains have slowed significantly… A good part of the slowing likely reflects a decline in the growth of the labor force, due to lower immigration and lower labor force participation.”
“So, the supply of workers has, obviously, come way down.
There’s very little growth, if any, in the supply of workers, and at the same time demand for workers has also come down quite sharply and to the point where we see what I’ve called a curious balance.”
The confluence of waning new worker supply and a highly imbalanced economy argues for caution in terms of wage pressures and inflation more generally.
Powell:
“Core PCE prices rose to 2.9%.”
“Near-term measures of inflation expectations have moved up…”
“A reasonable base case is that the effects on inflation will be relatively short-lived—a one-time shift in the price level.
But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.
Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem.”
“The median projection in the SEP for total PCE inflation is 3.0% this year and falls to 2.6% in 2026 and to 2.1% in 2027.”
The Fed cut rates while the median “dot” in the Summary of Economic Projections for 2026 Core PCE Inflation rose two tenths to 2.6%.
Median 2026 Real GDP increased two-tenths to 1.9%.
The Fed cut rates with the ISM Services Prices component at a highly elevated - just off a three-year high - 69.2.
One would traditionally monitor a mosaic of indicators for gauging the appropriateness of monetary policy.
Gold traded Fed Wednesday at a record $3,708, with a y-t-d gain of 40% and a 19-month surge of 83%.
Silver and Platinum sport 2025 gains of 49% and 55%.
The Dollar Index has depreciated 10% y-t-d.
Curiously, newly appointed governor Stephen Miran provided the meeting’s lone dissent.
After July’s dissents, governors Christopher Waller and Michelle Bowman voted with the majority.
I’ve downgraded what I had viewed as slim odds Waller would be Trump’s pick to replace Powell.
September 15 – Wall Street Journal (Sam Goldfarb and Matt Grossman):
“Two years ago, Stephen Miran’s career in finance seemed to reach a dead end.
The investment firm he co-founded was closing, having never really gotten off the ground.
Now he is at the forefront of President Trump’s bid to remake the Federal Reserve.
Miran, chair of the White House’s Council of Economic Advisers, is poised to join the Fed’s board of governors…
It would be the first time since the creation of the modern Fed in the 1930s that a sitting member of the executive branch would also serve at the central bank.
Miran, who previously criticized a ‘revolving door’ between the Fed and the executive branch, has said he would take a leave from the council, but won’t resign, while he serves a four-month Fed term that could potentially extend beyond its official end date.”
Difficult to imagine a Federal Reserve official more beholden to a President.
And Miran confirmed Friday that the outlier “dot” – a year-end projection of a 2.75%-3.0% policy rate – was his.
The only rationalization for such aggressive rate cuts is that they would appease our impetuous President.
This week’s meeting may have lacked some of the anticipated drama.
Give it time.
September 17 – Axios (Claire Jones and Kate Duguid):
“It is rare for four words — in a confirmation hearing for a single Federal Reserve governor, for a term that expires in just a few months — to get the attention of bond markets.
But these are not normal times.
Stephen Miran’s testimony before the Senate Banking Committee two weeks ago hinted that he and other President Trump appointees will view the Fed’s assignment differently than past officials.
Miran did not refer to the often-discussed ‘dual mandate’ Congress has assigned the Fed, of stable prices and maximum employment.
Instead, he said that ‘Congress wisely tasked the Fed with pursuing price stability, maximum employment, and moderate long-term interest rates’ — adding the third, more rarely noted, mandate contained in the Federal Reserve Act.
That emphasis could imply the Fed looking to directly affect long-term borrowing costs, in contrast to the traditional view that low long-term rates are the happy result of achieving the other goals, particularly low inflation.”
September 16 – Bloomberg (Michael MacKenzie):
“For generations on Wall Street, it was a statement of fact: The Federal Reserve’s ‘dual mandate’ of price stability and maximum employment governed how it set interest rates, invoked time and again from Alan Greenspan to Jerome Powell.
So when Donald Trump’s latest pick for Fed governor, Stephen Miran, cited a third mandate — that it must also pursue ‘moderate long-term interest rates,’ chatter lit up on bond trading desks as analysts debated what it all meant.
To the surprise of many, it turns out that Miran was simply quoting a long-forgotten part of the Fed’s statute in full.
But for market veterans like Andrew Brenner, the import for financial markets was clear — and alarming, with the potential to upend portfolios.
As Brenner sees it, the fact that Miran, of ‘Mar-a-Lago Accord’ fame and a newly minted Fed official, saw fit to mention the ‘third mandate’ in congressional testimony is one of the clearest signs yet that the administration intends to wield monetary policy to influence longer-term bond yields, using the central bank’s own bylaws as cover.”
“One of the clearest signs yet that the administration intends to wield monetary policy to influence longer-term bond yields.”
The White House may have paused their plan to force Powell out, while the courts have stymied their attempt to oust Governor Lisa Cook.
I expect only steely resolve in the pursuit of their primary objective of wresting control over the Federal Reserve.
They want lower rates.
More importantly, their sights are fixated on the so-called “third mandate” – aka yield control (“Yield Curve Control”).
To secure a boom through the midterms and beyond requires mechanisms that would thwart any destabilizing spike in market yields.
Essentially, their pro-growth/pro-Bubble agenda of ongoing massive deficit spending, deregulation, AI/crypto/energy/manufacturing investment booms, and an aggressive tariff regime comes with risks of higher inflation and massive debt issuance.
Control of the Fed (and its balance sheet) is fundamental to the ability to orchestrate boom-sustaining bond market manipulation.
September 12 – Bloomberg (Saleha Mohsin):
“BlackRock Inc. executive Rick Rieder is rising up the list of contenders to serve as the next chair of the Federal Reserve after Jerome Powell’s term expires in May, according to an administration official.
In a wide-ranging interview that lasted for two hours on Friday…, Treasury Secretary Scott Bessent and Rieder discussed monetary policy, the Fed’s organizational structure and regulatory policy…
Rieder told CNBC earlier this week that he thinks the Fed should cut interest rates by 50 bps based on his reading of economic indicators…
‘Moving 25 bps in the overnight funding rate is not that exciting,’ Rieder said…
The Fed could look at ‘how to use the balance sheet, how to use liquidity, where the yield curve is.’”
“Founded in 1988, initially as an enterprise risk management and fixed income institutional asset manager, BlackRock is the world’s largest asset manager, with US$12.5 trillion in assets under management as of 2025.”
Blackrock’s Rick Rieder:
“Whoever ends up being the Fed chair, there’s so many innovative things.”
Music to the ears of President Trump, Secretary Bessent, Stephen Miller, and the leveraged speculating community.
Yet “how to use the balance sheet, how to use liquidity, where the yield curve is” and the Fed doing “so many innovative things” are what got us into the monumental mess we’re in.
But let me tell you, if I were masterminding a grand strategy for bond and financial market manipulation (to win elections and further my agenda), I’d camp out in the C-suite interviewing the top brass at Blackrock’s NYC headquarters.
It all seems crazy wacko stuff.
Initially, analysis that the Trump administration would replicate Viktor Orban’s autocratic playbook seemed the height of Wackoism.
September 18 – CNN (Brian Stelter):
“Weaponize the levers of government for partisan political gain.
Pressure privately owned media companies to toe the party line.
Punish the owners who resist and reward the ones who acquiesce.
That’s how Hungarian prime minister Viktor Orbán consolidated control of the media in his country, according to scholars who witnessed Hungary’s democratic backsliding firsthand.
President Trump and his allies appear to be running the same playbook against media outlets in the US.
Using legal maneuvers, financial incentives and public pressure campaigns, Trump is persuading companies to make changes that benefit his party and bolster his own power…
Gábor Scheiring, who experienced Orbán’s autocratic power plays firsthand as a member of the Hungarian parliament, told CNN that ‘this story is very familiar.’
Scheiring said that both ABC’s decision-making about Kimmel and last July’s move by CBS to cancel ‘The Late Show with Stephen Colbert’ reek of what is sometimes called ‘Orbanism.’
Scheiring, now an assistant professor at Georgetown University Qatar, said Orbán weakened public broadcasting, muzzled independent media through ‘autocratic carrots and sticks,’ and incentivized owners to fall in line.
‘A key underlying story is that media owners, both foreign and domestic, largely capitulated individually rather than mounting collective resistance, which enabled Orbán’s systematic capture strategy,’ he said.”
It was clear within hours of the horrific assassination that Charlie Kirk’s death would be used to further the administration’s political agenda.
As I noted last week, “they” didn’t assassinate Charlie Kirk.
Tyler Robinson committed this heinous murder.
“I think when people do this – I guess they do know the extreme hate that they must have for him and his family to commit such an act.
But justice will be served…
They thought they could silence Charlie.
All of this chatter - all of this hate.
They couldn’t silence Charlie.
What they’ve done is they’ve created an army of people.
I think millions of young people are coming out of the woodwork now…
They thought they silenced him, but it was the opposite.”
Attorney General Pam Bondi, September 15, 2025, The Sean Hannity Show
September 15 – Wall Street Journal (Alex Leary, Aaron Zitner and Siobhan Hughes):
“The White House is moving swiftly to galvanize the outpouring of support for slain conservative activist Charlie Kirk into political momentum, as President Trump’s advisers weigh a slate of executive actions targeting liberal organizations.
Among the actions being discussed by the president’s team: reviewing the tax-exempt status of left-leaning nonprofit groups and targeting them with anticorruption laws, according to administration officials.
The president could begin rolling out the actions as soon as this week, officials said, part of a bid to harness support for Kirk, particularly among young voters, ahead of the midterm elections.
Officials across the administration are working to identify groups suspected of targeting conservatives or causes conservatives support.”
September 18 – Bloomberg (Erika D. Smith):
“Since the murder of conservative influencer Charlie Kirk last week, President Donald Trump has been throwing gasoline on the fires of partisanship, blaming the ‘radical left’ for political violence.
In contrast, Utah Governor Spencer Cox has (mostly) played the man with the fire extinguisher.
‘We can always point the finger at the other side,’ the governor said…
‘And at some point, we have to find an off-ramp or it’s going to get much, much worse.’
He’s right.
This is a dangerous moment for America.
But in a fractured media environment, dominated by politics so polarized that every issue seems to get sucked into existential culture wars, it’s far from certain whether a single voice can cut through the noise and truly make a difference.”
September 18 – Wall Street Journal (Natalie Andrews and Aaron Zitner):
“The Trump administration is putting the weight of the federal government behind a crackdown on political speech it deems objectionable in the aftermath of the fatal shooting of conservative activist Charlie Kirk.
On Wednesday afternoon, the head of the Federal Communications Commission suggested the agency could punish ABC over comments made by comedian Jimmy Kimmel...
By Wednesday evening, Disney, ABC’s parent company, said it was taking Kimmel’s late-night show off the air indefinitely.
Hours later, President Trump said he was labeling antifa—a loose affiliation of far-left activist groups—as ‘a major terrorist organization.’
Earlier this week, Attorney General Pam Bondi raised the prospect of prosecuting people who engage in hate speech.
And behind the scenes, senior administration officials are drawing up plans to take action against left-leaning organizations.
Taken together, the moves appear to mark an escalation of Trump’s efforts to target his perceived opponents and critics.”
September 18 – CNBC (Dan Mangan):
“Federal Communications Commission Chairman Brendan Carr said Thursday that ABC late-night host Jimmy Kimmel appeared to ‘mislead’ the American public about facts regarding conservative activist Charlie Kirk’s killing in the days leading up to his show’s suspension.
Carr also told CNBC… that ‘we’re not done yet’ with the changes in ‘the media ecosystem’ that are consequences of President Donald Trump’s election last fall…
‘This is a very, very serious issue right now for Disney.
We can do this the easy way or the hard way,’ Carr told right-wing commentator Benny Johnson.
‘These companies can find ways to take action on Kimmel, or there is going to be additional work for the FCC ahead.’”
September 19 – Reuters (David Shepardson and Jonathan Allen):
“U.S. Senator Ted Cruz, the Republican who leads oversight of the Federal Communications Commission, joined Democrats… in criticizing FCC Chair Brendan Carr’s recent threats against Disney and local broadcasters for airing ‘Jimmy Kimmel Live.’
The conservative senator from Texas, one of the most powerful Republicans in Congress, said Carr’s threat to fine broadcasters or pull their licenses over the content of their shows was dangerous.
‘I got to say that’s right out of ‘Goodfellas’,’ Cruz said…
‘That’s right out of a mafioso coming into a bar going, 'Nice bar you have here.
It would be a shame if something happened to it’’.”
September 18 – Associated Press (Chris Megerian):
“President Donald Trump has used threats, lawsuits and government pressure as he remakes the American media landscape, unleashing his long-standing grievances against an industry that has mocked, criticized and scorned him for years.
He’s extracted multimillion-dollar settlements, forced companies into costly litigation and prompted changes to programming that he found objectionable.
Now Trump is escalating his campaign of censure and retaliation, invigorated by successful efforts to push ABC late-night host Jimmy Kimmel off the air for his commentary on conservative activist Charlie Kirk’s assassination…
Trump said federal regulators should consider revoking broadcast licenses for networks that ‘give me only bad publicity.’
‘All they do is hit Trump,’ he said.
‘They’re licensed!
They’re not allowed to do that.
They’re an arm of the Democrat Party.’”
September 16 – Associated Press (David Bauder):
“President Donald Trump has added The New York Times to the list of media companies he’s challenged in court, filing a $15 billion defamation lawsuit that targets four of its journalists in a book and three articles published within a two-month period before the last election…
Trump called the Times ‘one of the worst and most degenerate newspapers in the nation’s history’ and a virtual mouthpiece for Democrats.
The Times called the lawsuit meritless and an attempt to discourage independent reporting.
‘The New York Times will not be deterred by intimidation tactics,’ spokesman Charlie Stadtlander said.”
September 16 – Axios (Sara Fischer):
“President Trump’s $15 billion lawsuit against the New York Times — his fifth complaint against a major news company in the past two years — represents a notable shift in conservatives' approach to free speech issues.
For years, conservatives targeted Big Tech firms for alleged censorship, while criticizing newsrooms but mostly avoiding legal action against them.
Now that President Trump has Silicon Valley titans singing his praises, he and other Republicans are shifting their free-speech fight to individuals and news companies.
The latter’s editorial standards give them less flexibility than social media platforms to carry out ad hoc policy changes.
In the wake of Charlie Kirk’s assassination, conservative media activists and Trump officials are going after individuals and journalists, compiling lists of people to target based on their social media posts.”
“Orbanism.”
The first full week after Charlie Kirk’s assassination provided a rather blaring wake-up call.
It’s one thing when the administration’s shakedowns target elite universities and major law firms.
We could only have hoped the ABC and CBS settlements – and the Stephen Colbert cancellation – were one-offs.
While much of the country has been unnerved by the administration’s actions, for the most part it seemed removed from our daily lives.
It’s quite an escalation when Americans fear that the First Amendment right to free speech is now in jeopardy.
I furthermore believe that most of us hold comedy near and dear to our hearts and lives.
Especially during these fraught times, a good laugh can be therapeutic.
Throughout history, comedy has been a defining feature of the American ethos.
Comedians will live on the edge; some will cross the line.
The nature of their craft dictates that they often operate at the “fringe” that - especially with respect to lampooning and criticizing politicians and the government - serves as the core of our First Amendment protections.
There are many that I find objectionable - and choose my sources of laughter and entertainment accordingly.
The last thing I – and I assume most Americans – want is the President of the United States and his administration involved in censoring comedy - or news and entertainment more generally.
Things are turning more “interesting.”
“Orbanism” has corporate executives running scared.
Disney, ABC, CBS, the corporate owners of local broadcast stations, and others have capitulated to White House coercion.
More generally throughout the economy, corporations are succumbing to pressure delivered forcefully by the administration and MAGA, to the detriment of the “silent majority.”
So far, millions of Americans have participated in widespread peaceful protests.
Weeks like this raise the temperature.
I’m not sure why the majority at some point doesn’t push back - attempt to wield the power of its eyes, ears, and formidable pocketbooks.
Obedience and appeasement, it became starkly clear this week, spur only greater authoritarianism.
On multiple levels, our nation’s fissures deepened this week.
0 comments:
Publicar un comentario