The Fed Holds the Line Against Washington

Editor's note: Every Friday, we showcase a featured topic from our YouTube show, Altimetry Authority.

This week, we tackle themes from today's episode, which airs at 8 a.m. Eastern time.

Read on below to learn about the ongoing fight between the president and the chair of the Federal Reserve...

Pressure is mounting on all sides... But Jerome Powell isn't blinking...

Cracks are starting to show in the U.S. economic engine. Retail and food-services sales data from the Chicago Federal Reserve showed a 0.3% drop in real terms for the last week of July.

That may not sound like much. But it's still a sign that the consumer is slowing down.

Then came an even bigger shock. Revisions to the Quarterly Census of Employment and Wages ("QCEW") suggest job growth for 2024 may have been overstated by as much as 75,000 jobs per month.

This massive gap is casting doubt on the "resilient labor market" narrative that has been driving bullish sentiment.

Even as the data cools, political heat is rising. President Donald Trump and Fed Chair Jerome Powell have been making headlines for clashes at the Fed's headquarters.

Trump is publicly pushing hard for interest-rate cuts – and as you'll see, Powell isn't budging.

Inflation and speculation are keeping Powell on edge...

Despite the softening in recent data, inflation remains sticky. The Fed's target inflation rate is 2%. But core inflation, excluding volatile food and energy components, remains above that threshold.

Combined with the Fed's benchmark bank-lending rate range of 4.25% to 4.5%, the real interest rate is only modestly restrictive.

That's a key point for Powell. He has often said that cutting rates too soon risks reigniting inflation. And he has reason to be cautious.

We still don't really know whether tariffs hurt inflation... although recent results suggest they at least somewhat add to it.

But speculative behavior has returned in full force. Investor optimism and abundant liquidity have caused a resurgence in meme stocks, cryptocurrencies, and other risk assets.

If Powell cuts rates prematurely, that froth could expand into dangerous territory.

On the other side, Trump and his allies point to a weakening labor market as justification for immediate cuts...

And the revised payroll data from the QCEW supports their argument. If job growth is slowing more than headline reports suggest, the Fed risks overtightening.

Powell is also losing support from within.

Fed Governors Michelle Bowman and Christopher Waller voted against the central bank's decision to keep rates steady at last month's meeting.

It was the first double dissent in more than 30 years. 

Still, Powell and many others on the Federal Open Market Committee aren't convinced. While the July retail decline was concerning, it was still a modest drop. Wage growth has slowed, but unemployment remains low relative to history.

That's why Powell continues to hold steady... even as the pressure mounts. But he risks losing more support within the Fed with this stance.

Investors want to believe rate cuts are imminent...

They're buying risk assets aggressively, betting that the Fed will budge.

But Powell has shown time and again that he's willing to endure pain in the name of stability. The labor market hasn't broken. Inflation hasn't cooled enough to give him confidence.

Until that changes, expect a longer period of tight policy.

Political pressure, Fed dissent, and softening data may all grab headlines... But it doesn't seem like anything will force Powell's hand unless the numbers fall further.

Regards,

Joel Litman
August 22, 2025

P.S. We'll dive deeper into Trump versus Powell in today's episode of Altimetry Authority. New episodes air every Tuesday and Friday at 8 a.m. Eastern time.

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