President Trump's incoming economic team is sketching out a path to a global economic order that will be radically different from before. A key goal of the team is to create jobs and ensure supply chain security by revitalizing American manufacturing. The team attributes the decline of U.S. manufacturing to an overvalued dollar, but is not looking to use FX intervention as its primary tool. Instead they prefer to negotiate with other nations by offering […]
Markets look to be much more turbulent next year as a likely dovish shift in market pricing would paradoxically lead to a decline in risk assets. The market's current pricing of just two cuts next year looks highly unlikely amidst the Fed's clear emphasis on employment and the potential for significant trade disruption. A more aggressively dovish path of policy would lead to a weaker dollar, which has remained strong largely on account of higher […]
Recent changes in the composition of the U.S. labor force suggest that the unemployment rate can rise faster than expected and lead to a faster cutting cycle. While a precise estimate is impossible, many indicators suggests that the population increased by at least several million the last few years due to illegal immigration. A surge in immigration was also seen in other Western countries, but largely through legal channels. Data from those other countries show […]
The Fed's signal of a 5bps technical adjustment in the RRP offering rate suggests a slightly longer QT time frame as it would mute upward pressure in money market rates. Technical adjustments are small changes in administered interest rates that can shift key overnight rates upwards or downwards. The recent upward pressure in repo rates appears to have caught the attention of enough Fed officials to telegraph an upcoming 5bps downward adjustment that would slightly […]
A new round of tariffs is much more likely to prompt a dovish monetary policy response on concerns of higher unemployment than a hawkish response on concerns of inflation. Higher tariffs could raise prices, but the inflationary impact would in part be tempered by a strengthening dollar and lower business margins. Most importantly, the Fed would likely be looked through any price increases as transitory. Tariffs are more likely to slow economic growth and dent […]
The incoming Trump Administration does not control monetary policy, but they can still effectively loosen financial conditions by adjusting a range of regulations. Banking regulations can directly influence the amount of loans made by adjusting bank capital costs, which have been steadily rising in the past decade. Some regulatory changes could also directly lower Treasury yields by encouraging banks to widen swap spreads. In addition, government sponsored enterprises like the Federal Home Loan Bank system […]
