Everyone’s Pricing a Fed Rate Cut. Here’s Why They Might Be Wrong

Transcript

Holy cow. I think last week has to have been one of the most consequential weeks this year so far for both macro and crypto. It was really quite epic. Let's start with the macro stuff and the FOMC as you mentioned Steve was no surprise except for the two descents. Now again not really a surprise but it is a big deal. The last time we had two descents was I think in 2020 was quite a while ago. 2020 I think it was >> actually I think it was 1993.

>> No, that was the last time we had two descents from governors which is why it's significant. >> I shouldn't be on this. I'm sorry. >> It is more and the reason that's significant is that a descent from a governor carries more weight than a disscent from a fed president. And why? because governors are always on the committee. Whereas Fed presidents rotate in and out. There's four every year and they just rotate. Now, so if a Fed president descents like Hammock did, I think it was in January, well, you know, she's going to rotate out soon. You can sort of grin and bear it if you really disagree with her. But if you have a governor descent, then that governor is there forever and will continue to descent until either the governor changes his or her mind or the FOMC starts to converge to that opinion. when

you have two descent that again that's a very different message. So um unusual as well and this is another reason why it's relevant. I'm not going to go off track here but it's worth pointing out that the fact that we have not had very many descents since the beginning of the century really is a testament to how coherent or cohesive I should say cohesive the FOMC has become. Descents used to be a lot more common. They're not so common now to the fact that we're even talking about it. And is that a good thing or uh do we want more debate within the rate setting committee of the largest economy in the world? Would it be susceptible to group think otherwise?

Maybe that's part of its malaise recently. But then again, disscent does create uncertainty in the market which is also not really a great thing. So those are some philosophical debates uh takeaways from the FOMC last week. There was one thing that I took away from the FMC that's very relevant to what I'm going to get to next, which is the jobs data. And you had Powell himself saying that he doesn't pay much attention to the payrolls number because it is noisy. He pays attention to the unemployment rate and that is in balance. He think I think he said that like seven times or something like that. The unemployment rate shows that the job market is in balance. And that's very important

because that's their mandate. Inbalance employment, keep inflation controlled. And that's why I am still convinced there's no rate cut coming in September because the jobs numbers that we got on Friday don't debank that. They don't they don't show uh that the job market isn't in balance. Yes, there was a miss to the downside. 73,000 payrolls jobs added for July versus the 106,000 was the consensus estimate. Bloomberg, Anna Wong at Bloomberg is usually spot on. She was going for 160,000 added and we saw the ADP earlier that week earlier last week adding uh 104,000 I think it was. So for such a low read,

73,000 from the BLS, that was a surprise. But what what was a total shock was the downward revision of the previous month and that of May. The total downward revision for the two months came to 258,000. Jobs revised downwards as in no we didn't get this addition that we thought we had. And that's we haven't had a downward revision like that since 2020. And so that is that was a shock. And um well then we had the whole drama of Trump blaming the BLS commissioner and firing her similarly. I'll get to that in a second because that I think is the most dangerous thing that's happened for quite a while. But to come back to the actual numbers themselves. We are

looking at this the wrong way. We know they're noisy. We know the Fed thinks they're noisy. And do you remember way back when, Steve, I think it was two years ago when we started to see the job numbers padded by government jobs being added? And this continued all the way through to the end of the Biden term. Most of the payroll additions were coming from government jobs for many many of the months that I looked at closely. And that obviously, you know, uh produced some good figures and obviously when Trump took office that ended. So we know this. So let's strip out the government jobs from the numbers that we saw. There was a downward miss as well. And there were downward

divisions in previous months, but not as much as you would expect. Private non-farm payrolls. And again, let's smooth a little bit more. Let's go for the threemonth moving average. Private non-farm payrolls three-month moving average rose by the lowest amount since last August, which is really not that long ago. In other words, private new payrolls are stable. Now, also let's go back to last August. Do you remember we had a bad jobs report uh which was a shock to the market. We also had a scare from Japan and the market freaked out much like it freaked out on Friday. We had smart economists last August calling

for an intermeating rate cut now. We got to save this thing. Uh we're getting that now also. And the question is, when private payrolls are actually not doing too badly, then what actually is the Fed supposed to do here? A a rate cut isn't going to bring back government jobs. So my point here is that the market is well overreacting. There is nothing on the table to suggest that a rate cut in September is warranted, especially given the mistake the Fed committed last September when it got spooked and delivered a 50 basis point cut. And the 10-year yield is went a went up a 100 basis points over the next four months.

And it's still roughly 70 basis points higher than it was before the September cut. So I don't see Powell and the committee wanting to make the same mistake again. They are cautious by nature. Inflation is creeping up. We saw that with the PCE data last week. And we're going to see, in my opinion, some ugly PC prints and CPI prints in the months to come because the tariffs are not being eaten by the exporters. Now, uh, where was I heading with this? Oh, yes, the BLS commissioner firing is arguably the most dangerous thing to happen so far, whether you blame her or not. And to be honest um this is a problem with the processes has been a problem a long time with the process and they know this which is why they

actually had a committee study a committee of experts from academia and the financial services sector studying how the data collection can be improved. Lutnik like two weeks after he took office he dis he disbanded that committee kicked them out and budget cuts mean that they have the BLS in fact announced last month that it was reducing by 8% the number of um households and businesses surveyed. So data is a problem, but firing the BLS commissioner isn't going to solve it without giving the BLS a lot more budget to invest in upgrading the processes.

But that's not going to happen obviously. And let's say we get a good payroll number in the next read, will we trust it or will we think that it's a politically influenced announcement, a politically influenced report? If it's a bad report, well, we can imagine the BLS commissioner, uh, whoever he or she is, is going to be rushing up his or her CV as well. So, the trust in the payroll's data is out the window, but it doesn't really matter because Powell has said he doesn't really pay attention to that anyway. It's the unemployment rate that is the one to focus on because it's more stable.

>> It's hard to imagine we're going to get a negative jobs report um right after replacing them. >> One more thing on the unemployment rate. Again, another reason why there's no reason to cut rates in September is the unemployment rate is lower now than it was a year ago. Um the bad jobs report I referred to earlier in August 24th that you know threw markets into a total tis. Unemployment had ticked up to 4.3%. It's lower now. It's within range. It's been stable for quite some time. It's lower than the historical average. Over the past 10 years, the average unemployment rate is 4.6%. Okay, there's some high years in there pulling that up. But let's say you want to take a more stable period. Let's say you take the 20 years leading up to the great financial crisis. The average unemployment rate in that period was 5.5.

>> All right. So, so Ben, let's let's come to you. And Noel gave us a lot um to to unpack there. Uh there's there's no one better, frankly, at uh at explaining all this for us. And it looks like Rahm is Rahm is here as well, too. So, uh, so yeah, I'd love to get your reactions and and in particular, I mean, Swan, Bitcoin, I mean, you guys are focused on Bitcoin and when the world's most the world's largest economy, the world's most important economy, and uh, and frankly, one of the world's, I guess, ostensibly most trustworthy governments is now potentially um, finagling with data to make it more politically appealing. that seems to be tailorade for Bitcoin. So, I'd love to just kind

of get your thoughts to all of that. >> Yeah, it absolutely does. And I think that the major theme with all of this is market trust and what is this going to do to market trust? If people start to feel that they're politicizing economic statistics, right? That introduces questions every time you're coming to the release of new data coming into the market. And what that's ultimately going to do with the yields, it's going to bake a risk premium into those. And ultimately you might start seeing people moving towards safe haven assets of which you know we believe Bitcoin is one of them. And it's held up through a lot of market turmoil in the past. You know it was really resilient during the la the initial round of tariffs when everyone was expecting it to ask or to act as this incredibly riskon asset and

rather it did the opposite and it maintained incredible stability. But, you know, I think that this is going to be a major shock wave in the markets here because when you have a firing of someone in the position that we just saw, you know, that's going to have impacts for the Fed and what they're going to do for rates, right? They rely very heavily on the BLS data. And I know Powell says that he discounts a lot of it. But if credibility gets questioned, sometimes what that makes you do is pause and do nothing. And right now it seems the market's consistently waiting for rate cuts to show up. A lot of people even think that they're really late, even if a lot of the economic data is still coming in rather strong and not necessarily supporting it just on a data

driven approach. But if you can introduce uncertainty into that data, it's going to bring that uncertainty back into the markets. And when market trust erodess, the markets begin to act erratically. So, I think that we're gearing up for a period of time here where we're going to see a lot more volatility entering the markets. You know, I don't think we're entering a stable period and this is going to take some time to settle. This isn't something that washes over overnight. So, anytime you have something this core to the economic data and to the actions that are taking to stabilize the economy, you've got to keep your head on a swivel because this is going to result in a lot of movements. And until we see a few cycles go by where we're getting new data and they're introducing more

transparency into the metrics that are coming out, investors just simply aren't going to trust it and they may choose to start opting out of that and moving into more of the safe haven assets while they wait for this all to get settled. >> Ram, I want to Yeah, I want to come to you. Um, and uh I just to kind of build on what Noel and Ben had been saying. Um, one thing we didn't get a chance to discuss yet is the fact that, uh, Trump is going to be able to replace a Fed governor months before I think he expected to. Uh, we all know who some of the main candidates are, Kevin Worsh, um, uh, Kevin Hassid. Uh, I'd love for you to talk about what that might mean from a signaling point of view for the Fed because I know I think investors

were worried about a potential shadow Fed governor. Um, and then also, I mean, just your general thoughts on what's happened last week. I'll start with uh the whole BLS data. Look, this is a nothing burger. Once again, this is the year of the nothing burger. I just shared my screen here. This is a guy on Poly Market who essentially has made the bet that nothing ever happens. I love this idea. It's a meme. It's a nothing ever happens bet. Drone Powell out as Fedure in 2025. No. Ukraine recognized Russian sovereignty. No. US National Reserve. No. Russia Ukraine ceasefire.

No. Nothing ever happens. So no, I think this is a nothing burger. I think the people that perceive those fears, they sold their stock on Friday. Someone else bought that stock and in that moment in that exchange that risk was priced in. Do I like what's happening? No, of course not. Of course not. Would I prefer wasn't happening? Of course. Is it a nothing burger? Yes, it is. So, uh, Trump repositioned two nuclear submarines off the coast of Russia. So what? doesn't matter. Nothing burger. The time to have risk off was last week when no one saw any risks. So on the Fed governor appointment, this is

just a more televised TV. The broader story is that Trump has a pressure campaign to get rates going down. The successor to power will be dovish. And that's bullish for risk assets, especially rate sensitive names, especially high loads of debt names. It's going to be bullish for commercial real estate. It'll be bullish for small caps. It'll be bullish for junk stocks. Be bullish for digital assets. It'll be bullish for animal spirits. And next year you've got the World Cup coming and elections midterms. So next year you'll be seeing significant, you know, movements higher in risk assets. I I think that we all can acknowledge at

this point in time that you know everything becomes politically charged right now and that amplifies a lot of these messages even if the broader impact isn't going to be substantial. You know anything that has any potential politically charged mo or movements behind it or motives you know it results in the media picking it up running with it and pushing it incredibly hard. And we see this and that's probably why that bet works so well. I think that's an amazing B. >> It's right curve, right curve. Like left curve says Trump make market go up. Number go up, market go up, >> right?

>> Right curve says economy is fine. This is noise. Earning growth is higher. >> Midcurve says, >> you know, uh Trump derangement syndrome. I'm not saying you have that. I'm just trying to like what Trump is doing is bad, bad, bad. Stock market go down, down, down, down. Nope, that's not what's going to happen. >> Quite frankly, we've seen that we have an incredibly resilient stock market. I mean, just look at the performance over the last year. I mean, everything's been incredibly resilient despite the constant barrage of what would normally be perceived as very bad news, >> and it's been amplified louder and louder, and the stock market has continued to, you know, waver in the moment and then shrug it off after.

>> Actually, can I throw a question at Ben? Uh, Ben, what what do you think would change that? Well, quite frankly, I think we're getting fear fatigue out here and that's starting to change it on its own. I don't think you see a period in time where narratives aren't getting amplified quickly. I think that that's a part of capturing attention. It's part of the business model, right, in the media in terms of how they're going to capture the attention of readers and watchers and listeners. And so, I think that over time it's taken more and more chaos to attract eyeballs or ears. And but I think over time the investing community is starting to look at all of these events and they don't have these longtail impacts that they were told

that they were going to have. And so you take a step back and you start to look at the broader macro environment and just look at what's really happening and try to see is there anything dire that breaks the system. It can shake the system, right? That's okay. The system gets shaken every week with something. But there hasn't been anything systemic that's breaking it yet. And I think because of that, investors are starting to shrug off news and, you know, they're going into a well, we'll see type of a mentality. They're not going to overreact anymore. There used to be the periods where you would see the whipssawing performance in the S&P 500 as anything would come out. Markets would react incredibly negatively or incredibly positively and it seemed like we had this period in time where we were just whipssawing with price action and

that started to stabilize. You're still seeing movements, but not the same amplitude of those movements. So, I think investors are simply fatigued from fear. Everything is supposed to scare you. Everything is supposed to make you go to cash. And they're not seeing that happen. And anyone that's sitting on the sidelines and staying out of the markets entirely is falling behind. So, it's becoming riskier to take all of these narratives at face value and assume the worst from everything. So, I do think you're starting to see a shift in investor behavior with all this news. I just think they've simply seen too much of it and now they've got a pretty good data set to show that this doesn't end up having the doom and gloom scenarios materialize that they were promised.

>> If I could push back maybe a little bit, Ben, and also Ron Ram, for what you said, uh I I can certainly subscribe to the belief that Trump derangement syndrome is a real thing. Uh I like people who have followed the show long enough know that I I have some strong opinions about Trump's politics and policies. Uh and when Pete takes us when he was doing that briefing about how the Iranian strikes occurred and he was like scolding the media like you guys want Trump to fail, you guys want Trump to fail. There is a a strong contingent of the American population that wants to see the worst anything he does the worst possible light and and say every single thing is the end of democracy, the end of Armageddon. So trying to say that you're firing the the BLS commissioner

like maybe that doesn't quite fit the bill, but it I don't necessarily believe it's completely a nothing burger either. It just is covering it could cover up other weaknesses. I mean, we've seen like in some of the earnings that have come out. Um I see a lot of especially like like consumer focused businesses eating the tariffs right now. They're they're starting to pass through some prices, but the profits are going down. There's only one way that's happening. um there is a little bit of weakness there even though in the well as you mentioned and um the labor market is still relatively strong notwithstanding everything else and I mean look at the Greek example from from over a decade ago when when statistics if statistics start covering up weakness that creates the potential for like high impact

events that you don't know quite when they're going to happen and I think that the economy the stock market in particular right now it keeps setting highs it's I don't think it's too risky to say it's being really been it's being brought or driven by the tech stocks by the AI stocks and still covering up a lot of weakness and if this weakness is going to be extended because of poor data and I I have sympathy for whoever is going to be the BLS commissioner next because for one thing who's going to trust that data and for another thing as you said Noel you don't have to have the resources to get the data the same issue with the CPI [Music]