Part of me is glad we have D Trump. I literally never run out of things to write about, and that makes macro more fun. Without Trump, we’d probably be covering the successful soft landing in the US, just how strong the dollar might get, or US industrial strategy.
Now, literally none of that is relevant. We have all sorts of wild shit going on, with the possibility of some mad tail scenarios, as we discussed in our top ten macro risks.
One of our macro risks was an undermining in Fed independence, which Trump underscored on 16 July in an absolutely baffling press conference. Trump pretty much said he would fire the Fed’s Chair Powell, then TACO’d (chickened out) within 10 minutes. The dollar did this:
Just because Trump baulked at firing Powell on Wednesday doesn’t mean he won’t do it at some point. Polymarket odds put Powell out the door in 2025 at 20% ish, roughly the high point of the year.
Alternatively, Trump could not fire Powell, but confirm Powell’s successor well before Powell’s term ends in May 2026. This would create a “shadow chair” which would be super confusing for monetary policy. Markets might start paying less attention to the guidance of the current Fed board and pay more attention to the presumably more dovish Powell replacement.
This outcome might be getting priced by markets. US short term interest rate futures (SOFR STIRs) are suggesting little in terms of rate cuts during 2025 (around 50bps) before more in 2026 (around 70bps). In the chart below, the purple line is current SOFR, the blue end-2025 pricing and the red end-2026 pricing.
Should it become more likely that Trump will appoint a mini-Trump as Shadow Fed Chair, it would make sense for the differential in SOFR futures pricing to widen, which likely would weaken the dollar further too.
So who might our mini-Trump be?
At present, Polymarket odds put ex-Fed Governor Kevin Warsh in top spot, Treasury Secretary Scott Bessent in second, and Kevin Hasset in third (see below). Warsh is largely a Trump mouth piece now, it would surely be construed as a bad thing by markets to have Bessent out of Treasury and Hasset seems a bit lost at times… For instance, as he tries to explain the tariffs on Brazil here.
However, the fourth place pick has generated the most interest recently. Fed Governor Christopher Waller has suddenly adopted a fairly dovish stance on policy, which is coincidentally just what Trump wants. Waller, a Republican and 2020 Trump appointee, came out with a controversial speech on 17 July, titled “The Case for Cutting Now”, doubling down on dovish comments made in prior weeks. This comes in direct opposition to Powell’s wait and see approach, and makes Waller an unusually vocal dissenter amid what is a typically pliant board of governors. Governor Bowman has also come out in support of cuts, explaining her 1% chance as above.
So how does Waller’s argument in his 17 July speech hold up?
The economics here are actually pretty OK and I have a lot of sympathies with them, at least concerning threats to growth. Waller argues that growth is running at a below potential roughly 1% annualised, with jobs figures flattered by strong additions by the government. This is quite sensible, with my own notes on the last employment release (from when I read it on 9 July) reading “robust but dependence on gov and HC a worry”. It is not controversial to say that growth is weakening and is likely to remain weaker.
Waller:
However, Waller’s argument gets more controversial when he seems to take on faith the idea that tariffs are not going to be so inflationary:
This falls apart in a few points.
First, his assumption appears to be premised on faith that the effective tariff rate will remain contained at around 10%, which contrasts with many Trump threats and his “deals” with Vietnam and the Philippines.
Second, he makes no distinction between tariffs on final goods and intermediate products, with price shifts in the latter being more inflationary.
And finally, there is no evidence that exporters from other countries are paying a third of tariffs as he notes. We know this from BLS import data, which show import prices pre-tariffs. If exporters were discounting products as a means to pay for part of the tariffs, it would show up here. The table below here shows that we have not had the month on month price falls in nonfuel import prices that would have occurred if exporters were footing some of the cost of tariffs.
This is not to say that you cannot make an argument that the economy is weak and tariffs are not going to be very inflationary because the demand backdrop is too weak to support price pressures, so we need to cut. In fact, we theorised something similar a few weeks ago.
The issue here is that no one thinks that Waller actually believes this, because there is clear personal gain for him taking this stance. It is also ridiculous to make claims that you are not going to change your mind, for instance the below from Waller. Bear in mind that inflation expectations are already somewhat unanchored on some measures (UMich, although this did fall in July) and pushing up too high for comfort on others (NY Fed).
A further issue for Waller might be that he is actually trying to reconcile his view with some reasonable economics, at least in his claims about activity (allowing for the fanciful inflation argument). He is not saying that “Biden’s economy was weak” and he is saying that “the economy is weakening”. This might be trouble for his prospects with Trump, who thinks things are going GREAT.
If Trump wants a lap dog, would Waller fit the bill?
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