Economic Tug-of-War: Inflation vs. Employment

Let's get to the big story breakdown.

While the Senate Finance Committee unveiled changes to the House passed version of President Trump's big beautiful bill.

The Senate's proposal includes extending the 2017 Trump tax cuts and debt limit increase to prevent default and also cuts to Medicaid.

Meanwhile, the Fed Reserve is expected to increase its holding of US debt, raising questions about how its actions impact the government spending, and this does come as the Fed is expected to increase its debt.

Well, joining me on that day is Danielle De Martino Booth, CEO and chief strategist of QI Research.

Good morning.

Thank you so much for joining me on Fed Day and thank you for having me.

This is like Super Bowl Sunday 8 times a year.

Absolutely.

So you're joining me at a time when geopolitics, as well as tariffs are also competing for center stage here.

So given that Powell has a very interesting task, what do you expect to hear from him?

So I think Powell is going to lean harder on the fact that since the last time he was at the podium, we have even more uncertainty in the outlook, and he really wants that uncertainty factor to be able to say we're not going to be able to take any moves.

We might even see the dot plot go from 2 expected rate cuts this year to 1 when we see the summary of economic projections come out, and I think that he wants to keep kind of market participants on edge and guessing, so I think he will really lean hard on.

I can't make any commitments.

We're data dependent.

Come back and talk to me in a few weeks.

And of course when it comes to the economic data, we continue to parse through the finer details.

So where are the bright spots in the data right now?

And since we're trying to figure out the implications of tariffs, what could happen?

And given that Powell has to decide what to do in addition to the additional FOMC members, what could happen?

So I think um I think what is leaning towards investors' favor right now is not that the data are necessarily improving, but, but that they're slowly.

Getting worse and I because I think investors need the certainty with other global central banks already in easing mode that at some point the Fed's going to follow.

So when you see something like the 4 week moving average of initial jobless claims really hitting the highest since the summer of 2023, which was the post pandemic high.

I think investors are again are a little encouraged that the data are less uncertain because at some point I think Powell's going to have to choose between that employment mandate and that inflation mandate, and I think investors want for him to get off the fence.

It's not going to happen today, but I think that we really are beginning to price in September certainty if nothing else.

And Danielle, I know that you parsed through all the economic data, you used to work for the Fed as well.

So when it comes to the government debt here, give us an understanding of how Fed policies as well as rates affect not just Wall Street but also Main Street.

So um there's something to be said for prohibitively high borrowing costs for small companies and I think that they're expressing that when they're surveyed that it's very hard to get financing if you're not kind of one of the largest companies and then there's the US government as well and the more money that we that we spend on on services.

In the debt north of $1 trillion on a per annum basis, really the less you have to help Main Street in the event that the slowdown that we're in right now becomes a recession, and I think that that's a concern going forward, especially because the Fed has stubbornly been at this level, really we went from higher for longer to high for longer, but we really haven't accelerated into an actual easing mode which again other central banks have.

Yeah, and you've mentioned the other central banks.

We're keeping an eye on rate differentials.

This week is a big week for global central banks, but of course the focus is on geopolitics.

So when it comes to de-risking and what's going on in global bond markets, not just in the US, what do we have to pay attention to?

So I think um We saw something interesting.

We saw services disappoint in China.

We saw services disappoint in Germany, and that even though everybody's on the same bandwagon right now of sell the dollar, sell the dollar, sell US assets, sell US assets, we've quietly seen the United States go back to.

Being the outperformer on the global stage because we know that if the United States catches, if the United States sneezes, the rest of the world's going to catch a cold.

That's the old adage we're starting to see that play out in the 2nd and 3rd largest economies in the world, and I think that we have to pay attention again to the differentials that you mentioned and the fact that there is probably more downside than more.

Factoring in right now on the global stage outside of the United States because the United States is slowing.

I don't mean to be talking in circles, but it's very difficult to speak about the global economy in isolation one country at a time.

So are you basically saying that the story of American exceptionalism does still remain dominant here?

I think America as the backstop is what remains dominant.

We've seen the US stock market resume um kind of its pole position.

Among global stock markets and I think that until proven otherwise, as exciting as it is to talk about switching the global reserve currency from one currency to another.

I think again the higher the uncertainty, the more we've actually started to see flows back into the United States.

We'll get the TIS data out this afternoon and see exactly what foreigners have been doing with a lag in terms of buying US Treasuries, buying US mortgage backed securities, corporate bonds, equities.

And finally later on this afternoon, we'll be hearing from Feter Powell and we'll be monitoring the language coming out from Powell's mouth and given that it's Trump 2.0, the landscape is quite different.

He does have a tough task.

So what are you listening out for, Danielle?

So I'm really going to be seeing if he's going to be talking about data dependence or if he's going to use words more like premature.

Um, I think, I think if he says that it's too early to say and that they're going to, that's going to be interpreted as we might wait all the way until December before we contemplate a break cut.

I think that markets would perceive that as being very hawkish as opposed to him saying we're truly in a data dependent mode, meaning.

If the data continues to degradate on the labor front, then we'll be prompted to move sooner.

So people will be paying attention to every single word that Jay Powell says today.

OK, Danielle, well, I appreciate your time.

Thank you so much for joining me on and thank you for having me.

Thank you.