Steven Blitz is not only certain the Federal Reserve is going to follow up its September rate cut with another 25bps rate drop at its coming October meeting this, week but also betting it will will communicate it may make another such move in December as officials worry more about weakening in the labor market than they do about inflation continuing to run well above its 2% target.
”They’re looking at…the employment numbers, right? That’s what they’re focused on and everybody understands that inflation is a lagging indicator. Inflation tends to lag by as much as a year,” Steve says. “By focusing policy on inflation….when there are obvious signs of weakening employment risks having a policy that unduly creates a recession.”
”Even though there’s a lot of things that tell you there’s no recession out there, or that you don’t have that weakening, Powell’s Fed has been fairly consistent, from its early beginnings starting in 2019, <with> a bias to employment versus inflation, as long as inflation’s not problematic.”
Steve, who is the is chief U.S. Economist at GlobalData TS Lombard, started his career on Wall Street as an economist and portfolio manager more than four decades ago. So he has the skills and experience to analyse not only the forces driving the Fed now, but also an historial perspective on how the Fed’s monetary policy has evolved and changed from the days of Paul Volcker and Alan Greenspan to what’s driving the Jay Powell Fed now.
”This isn’t the Volcker years, or the Greenspan years, where the head of the central bank could say, look, maybe not publicly, but privately, to the White House, to congressional leadership on both sides of the aisle, say, look, we’re going to get inflation <down to> 2%, that’s going to give us a small contraction, and the unemployment rate’s going to go, using current numbers, from 4.3 to 5.3, but then we’ll be back at 2%,” Steve says. For that “they have zero political…support from both sides of the aisle”
He argues that “the Fed’s job, as <it’s> being pressured by the White House, is to make sure that it doesn’t run a policy that inadvertently creates a contraction. They’re pressured to ease.”
Steve is also certain that the Fed will follow up on a speech Powell gave last week saying the time is drawing closer to the point when it will end quantitative tightening, the sale of bonds in its portfolio. “I think they will give notice that QT is coming to an end, the shrinking of the Fed balance sheet… to help alleviate… that repo and other things are trading above the fed funds rate.. and they’ll lower the rate they pay to banks on reserves…it’s more…easing…because they are pushing more liquidy into the system.”
”And that means banks <may> start dumping reserves and start making loans, and the banks have the firepower to do that, and that sets off the potential for an inflationary cycle,” he concludes.
So dive in and hear what Steve has to say not only about the reasoning driving Fed policy now, but also how shifting political sands at the White House are driving it too.
Fed is focused on job numbers 00:01:05.700
Well, I think that, you know, they’re looking at…the employment numbers, right? That’s what they’re focused on. And everybody understands that inflation is a lagging indicator, right? Inflation tends to lag by as much as a year. You know, so… By focusing policy on inflation….when there are obvious signs of weakening employment. risks having a policy that unduly creates a recession. And even though there’s a lot of things that tell you there’s no recession out there, or that you don’t have that weakening, this Fed has been pretty consistent starting… really Powell’s Fed has been fairly consistent. From its early beginnings starting 2019, a bias to employment versus inflation. As long as inflation’s not problematic.
It’s inflation but No Problema…?? 00:02:07.060
And to the point of the data that came out today, what it’s telling you is that it’s not problematic, right? That it’s kind of… It’s probably hit its peak. I look… I look at a… I do a diffusion index, you know, like, how much is higher than what… what 3-month rates are higher than the 12-month rates, what percentage is the opposite, and it tells me that you’re at 50-50. And it’s been that way now for several months. So you’re not in an inflationary trend, you’re not yet in a disinflationary trend, but the fact that you’re not in an inflationary trend with weakening employment, that gives them confidence that they can drop rates.
The Fed’s tilt to the labor objective and less secret sauce 00:04:01.490
Yeah, well, that’s always a great question to ask, and I think I’m going to… answer it this way. I think if you go back pre-COVID. You realize that the real… the secret sauce of low inflation that we had was the good side that we were importing deflation, disinflation. We had 30 years where CPI goods, ex-food and energy had zero increase. So… services, a lot of that is rent, a lot of that’s medical services, can run a little hotter than your target, because the mix of the two brought you back under 2%. So, when I look at it, then that takes me to, well, you’ve disrupted trade, disrupted the dollar, you’ve disrupted everything, and so can you really assume here, going forward, that you’re going to get the same good news out of goods prices that you have in the past, and I would argue, probably not.
A changed Fed; no political support for tight money 00:05:04.130
But the Fed has changed, you made an interesting point here. The Fed is charged with stable prices. The 2% number is a number they made up, and look, I think it’s… there’s a rational, good reason to say there’s a number, it becomes like a gold standard kind of thing, we’re always going to get back to this number. But even going back into the Biden years, which is when they’re tightening and their lagging inflation, etc, became, problematic. And they did, obviously, hike, even though they hiked rather slowly. If you look at it from that perspective, and now here we are…no… this isn’t the Volcker years, or the Greenspan years, where the head of the central bank could say, look, maybe not publicly, but privately, to the White House, to congressional leadership on both sides of the aisle, say, look, we’re going to get inflation out 2%, that’s going to give us a small contraction, and the unemployment rate’s going to go, using current numbers, from 4.3 to 5-3, but then we’ll be back at 2%. They have zero political…support from both sides of the aisle. Let’s be real fair about this. They have zero… they have zero… Elizabeth Warren, and Ted Cruz, and you pick the senators on both sides of the aisles, none of them. Are going to stand up and say that’s acceptable.
De facto policy is about ‘price stability’ more than about 2% 00:06:41.050
And Trump is… has been railing for the Fed to cut, cut, cut… So, if prices are stable, at around 2.5-3%, and everything tells me they are stable at around 2.5-3%. The fact that it’s above target. But the Fed becomes less meaningful. And an environment where the employment data is weakening... Right? If the employment data was, say, accelerating at this moment. I don’t think they would be cutting at all. Right? And we would still hear about the 2% and all that, but that’s the mix, you know, and that’s just… that’s just the way life is.
The rent quandary…is a quandary 00:08:01.460
Well, I mean, it’s just one month, right? And one month doesn’t make a trend, and we know that how, the BLS collects this rent data, there’s a long lag, and Myron and others have been looking at that other BLS index on rents, and shows that rents have…You know, new contracts, you know, releases have shown a sharp drop. And… to me, rather than focus, again, on the inflation side of that, what is that saying? Historically. Rent inflation goes down, rent deflation occurs when employment suffers. Now, some people will say this is because you’re losing, you know, you’re losing workers, deportations, and all this kind of stuff, and… and honestly, we don’t really know what those numbers are, but…
Fed makes policy under pressure- that explains it 00:08:57.810
I would say I look at slow payroll growth, I look at slow, profit growth based on, tax payments, to the federal government from corporations in September, and I look at the slowdown on the, on the population side. So, to me, it tells me the… yes. It tells me there’s a weaker inflation number, but more critically, that sheltered inflation tells me that it’s a weaker economy on the labor side. And again, that brings up the point That, rather than running policy against the lagging indicator, which is inflation, you need to look… since your job here, not you or my job, but the Fed’s job. as being pressured by the White House is to make sure that it doesn’t run a policy that inadvertently creates a contraction. They’re pressured to ease.
No political backing for austerity 00:11:27.510
I want to circle back to, the point I made about there being no political consensus. To slow this economy, to get inflation from 2.5%, 3%, To one and a half percent, two percent…. Right, and so that last mile, which is the sort of overused expression at this point, so… yes, I think regardless who is in the White House right now. Now, you wouldn’t necessarily have the same set of external circumstances, because if Harris had won, you wouldn’t have all these tariffs and all these other disruptions. But let’s just play this out for the moment, and simply say that if you had a slowing economy and weakening employment growth. And inflation was steady at 2.5% or 3%, Harris would not be as… no one… no president either… would be as overt as Trump! But they would be quietly pressuring the Fed to cut rates. So, I think that you’re right, that the politics of it and the loss of any backing…. They have no political capital to sit there and just say, no, no, no, no, no. Remember Greenspan in 91, right? We got a recession. Inflation was creeping back up again, and he came in there, and… and George H.W. Bush forever blamed him for not getting re-elected. … but he said, no, this is the right thing to do, and, you know, the 70s was still in recent memory.
An adverse tariff impact is lurking… 00:14:57.320
Look, I think, though, that the cumulative effect of having lower growth in employment. against a retail sector, a sector that sells to consumers, that is geared for a higher level of sales, eventually this mismatch is going to create A sharper slowdown than what markets and people expect… we all learned in school, the first thing we learned in school about business cycles is the inventory cycle. So, you can have a period of much slower growth without, you know, some bank blowing up, or the equity market dropping 40%, or just, you know, just pick it… The key here is, to me is not this near-term issue of a slowdown and a correction. You know, also add in, you’re putting this big weight of tariffs, and it’s disruptive. And right now, people say, oh, everything’s fine, you know, it’s less of an impact than people think. Well, I think there’s a lot of cross-currents, as you said, that it’s really hard… the dust hasn’t settled on that yet. And so, I think it’s a little wishful thinking, and obviously the White House is going to be centered at that wishful thinking, because it’s their tariffs.
Simply fewer options for the Fed 00:17:38.830
I think if the economy slows down here, you know, obviously, there are some bad loans out there, right? We just saw that. So I think that, you know, to say that none of all of this is perfect, and that all these non-bank lenders are perfectly reserved against risk, I think is a heroic assumption. But I think, I think that the idea that I have, the thought that I have, is that, and when I talk about the Fed as having no good options. We’re sitting… the Fed… Balance sheet’s about 20% of GDP… it was 6%. And… They’re going to probably stop now, but there’s a… the perception in the sort of conservative wing Which is the Bessent, Waller, Bowman world that the Fed balance sheet should be a lot closer to 6% than 20%. Now, that does bring up a problem. Who’s going to buy all these treasuries that they’re not buying/holding? And that’s one of the reasons you’re seeing a lot of regulatory effort to make it easier for banks to hold the treasuries and to raise their profile that way. But the real issue… is that…Once you… once that short end of the yield curve, say, overnight to 3 years, flips positive -And we saw this in 2022 -- when you got, like, 200-300 basis points spread from overnight to 3-year…. Loans grew fast. Reserves dropped sharply, and loans grew.
Government spending has been stepping up… 00:19:18.690
Inflation’s always financed. This… that should just be on… that’s the first thing everyone… you wake up in the morning, you’re an economist, you say, inflation is always financed. Well, you know, remember inflation is too much money chasing too few goods, and how do you create too much money? You get people who borrow against existing collateral to create more money for them to buy goods and services. And when you have a rising federal spending, right, expenditures as a percent of GDP, which was kind of flat in the teens. So in the teens you had a pretty… a flat… for a short period of time there, you had a flat…federal expenditure to GDP, Okay. You had household deleveraging, and corporations were not leveraging. Now, going forward. The government expenditures rising faster than GDP?
Inflationary conditions…coming soon 00:20:21.080
Once the curve shifts and everyone’s back being more confident about growth than they are right now. And I got a positive curve incentivizing bank to turn reserves into loan assets, and a regulatory environment that’s encouraging this shift, right? That is an inflationary mix. And add on top of that. What we were talking before about not importing disinflation from the rest of the world, currency, etc. It’s hard to not get an inflationary story down the road.
Fed to begin new policy steps 00:21:14.730
If… the Fed cuts 25, They’ll never commit to the next 25, but it’ll…it’ll be in the Fed speak that they’re saying they’re inclined in that direction, right? Because they always want to preserve optionality in their decision making. I think they’ll give notice that, QT is coming to an end. the shrinking of the Fed balance sheet. And to also help alleviate… that you’re seeing repo and other things trading above the range of the funds rate. They’ll lower, the interest rate that they pay to banks on reserves. Right now, it’s set at 10 basis points below the top end of the funds rate, so it’s right now it’s at 4.15%. Let’s just say… So, if they cut 25, which they will, you’re at a 3.75% to 4% funds rate. And instead of having a 3.90%, funds rate, interest on reserves, they’ll be at 3.80%. So they’ll be closer to the bottom of the range, and that’ll help push more reserves out, and those reserves will go either… combination, they’ll fund…they’ll fund the repo market, which is really what they wanted to do, or they’ll buy treasury bills. It’s easing… it’s more easing… because they are pushing more liquidity into the system.
Shrink-0-nomics… 00:23:13.470
Think of it this way. If you’re shrinking the balance sheet, You’re now asking the market to buy $5 billion more of treasuries than what Treasury issues per month. That obviously tightens liquidity conditions, right? Because that money has to come from someplace that otherwise would go wherever. When the Fed stops doing QT, or it changes the interest rate that it pays on reserves. it’s… it’s moving that money off the balance sheet, in effect, incentivizing money to come off that balance sheet faster to buy treasuries to go into the reserve market. So, it’s really a halfway house, dropping the rate. You’re not quite there yet, it’s a half step, and then the full step is they just stop QT completely, and then they’re back Buying 100% of what’s rolling off in cash. And then what will be interesting, as long as we’re in the plumbing part of the discussion, then it’ll be interesting in terms of what they buy. And my sense is that they’re going to skew their buying to Treasury bills? For a number of reasons, and the biggest one is that they want… the Fed wants. Their portfolio to look more like a traditional bank portfolio… Federal Reserve Bank portfolio, which at one time was all Treasury bills. But they wanted to get it at least around 20-25% bills, and right now it’s 5% bills. So they wanna… they wanna… they’re not going to do it in a week, but they want to have a policy that slowly but surely drives them to that level.
The Fed remains primed to ease but near the end 00:25:47.060
Yes, < the Fed will continue to lean toward ease and to communicate that>. So, Yes, and I think that, if I can add to that, They need to do that. Because if they… once they start to say. In an environment where we both admit inflation is above target… I think this is the last cut, because the economy’s doing fine, and inflation’s high.
The Fed is playing a control game 00:26:12.680
Instead of the short end of the curve being flat or below where the overnight rates are, it turns in the other direction. And that means the banks start dumping reserves and start making loans. And the banks have the firepower to do that, and that starts to set off the potential for an inflationary cycle. And they don’t want to lose… you know, we could argue whether that would or wouldn’t be inflationary at the moment and all that kind of stuff. But… they lose control and they don’t want to lose control. So in order to keep control, they want to say, you know, economy, not so good, employment, I know inflation’s a little at the high end, it lags. So I think we’re still kind of biased here, and that keeps that short end of the curve where they want it, so the banks are not incentivized to leave the Fed and put their money elsewhere. Right, <keep it here until they don’t> otherwise they have to get back <giving out> the toaster ovens, you know.
Steven Blitz is Chief Economist & Global Managing Director, Macro at Global Data TSLombard, bringing extensive expertise in macroeconomic analysis and financial strategy.
His background reflects a strong focus on economic forecasting and analysis, demonstrated through various chief economist roles. At M Science, he served as Chief Economist within a data-driven research environment. Earlier, as Chief Economist at Rosen Consulting Group, they contributed perspectives on economic data and policies, covering real estate capital markets and forecasting the US economy.
Steven’s experience also encompasses portfolio management and investment strategy. As Global Head of Fixed Income at Lazard Asset Management, he rebuilt the fixed-income department, set investment strategies, and redefined risk parameters. Prior to that, at Offitbank, he served as Investment Chief, Strategist, and Portfolio Manager, managing wealth for a diverse clientele. His work history includes a role as Financial Economist at Data Resources.
Steven holds a Master of Arts from Columbia University and a Bachelor of Arts from New York University. His academic foundation supports his applied knowledge of economic principles and financial markets.
