Changes Are Coming Soon at the Fed

Commentary

The stock market reverted to its seasonal pattern by closing November up, with the major indexes rising between 3% and 5% last week. This big bounce was fueled by the rising odds for a December 10th key interest rate cut, especially after Fed Governors Mary Daly, Stephen Miran, Christopher Waller, and John Williams all spoke out in favor of a December rate cut due to labor market weakness. Some other Fed officials remain more cautious, such as Boston’s Susan Collins and Chicago’s Austan Goolsbee, but the New York Fed President John Williams has major influence with the Board to cut rates on December 10th.

Fed Chair Powell is now a lame duck, with the next Fed Chair to be nominated soon. Bloomberg reported that Kevin Hassett, currently the head of the Council of Economic Advisors in the Trump administration, is the leading candidate to be nominated as the next Fed Chairman. One thing that I can say about Kevin Hassett is that he always seems to be happy when he talks to the media – and he also explains economics clearly, so it would be interesting if Hassett became the Fed Chair, since he would put a positive spin on things. Kevin is a “glass half full” guy, not a “glass half empty” person. If President Trump nominates Hassett, the president will expect some loyalty, but Hassett could add an upbeat economic tone at the Fed.

Here are the most important developments recently and what they mean:

– The financial markets are largely ignoring the fact that the U.S. Navy is off the coast of Venezuela and continues to sink boats transporting cocaine and other illegal drugs. Venezuelan President Nicolas Maduro has reportedly talked with President Trump, which is raising speculation that he may seek asylum. The U.S. action in Venezuela is expected to be a boon for Venezuela’s domestic oil industry, which has fallen into disrepair, but could boom again with help from U.S. energy companies. Long-term, a resurging Venezuelan energy sector would likely cause crude oil prices to remain soft due to all the new supply that could hit the world market.

– Critics of President Trump, like Colombian President Gustavo Petro, have pointed out that the U.S. action against drug boats is really about exploiting Venezuela’s vast crude oil reserves. Since the U.S. military has also been attacking boats from Colombia transporting drugs, President Petro has been humiliated and is in danger of losing his Presidency.

– This is a good time to point out that the risk of deflation is rising not only due to lower crude oil prices, but also due to the fact that the U.S. is importing deflation from China. If you do not believe me, just go to Best Buy or Costco and check out the price of TCL (Chinese) televisions, where you can buy a 98-inch TCL QLED television for $1,149.99 or a 98-inch TCL mini-LED television for $1,599.99. In case you want a bigger television, TCL also has a 115-inch mini-LED television for $9,999.99 at Best Buy. Just like China dominates batteries, solar panels, and rare earth minerals via TCL, they are also now trying to conquer LG, Samsung, and Sony’s television dominance.

– Despite anticipated Fed key interest rate cuts, home and rental prices remain soft, which should result in lower shelter costs via owner’s equivalent rent, which has been the main inflationary component in the Consumer Price Index (CPI). Although the Labor Department will not be reporting an October CPI due to the federal government shutdown, the November CPI is expected to be soft.

– There have been a lot of reporting around higher electricity prices due to data center demand, but I want to assure you that since the U.S. is the largest natural gas producer in the world, there will be plenty of natural gas to generate electricity for most of the U.S. Natural gas prices are very sensitive to cold weather, since demand soars during cold fronts, so the time is ripe to sell some of the natural gas related stocks during peak winter demand.

– The other deflationary pressure is coming from poor demographics in Asia and Northern Europe, which is resulting in shrinking households and lackluster economic growth. Examples of countries that recently slipped into a recession are New Zealand, Thailand, and Japan. The Bank of Mexico just slashed its annual GDP forecast to 0.3%, down from its previous estimate of 0.6%. Germany is now in its third year of a recession, and hope for a recovery has been hindered after the Green Party forced Chancellor Merz to cut new natural gas plant expansion in half, which is anticipated to perpetuate the high electricity prices that have severely hindered Germany’s manufacturing sector.

– Britain is also expected to slip into a recession after new middle-class tax increases are imposed to fill a larger-than-expected budget deficit, after many wealthy citizens fled Prime Minister Keir Starmer’s tax hikes. Chancellor Rachel Reeves has made it clear that these broad-based tax increases are necessary to keep bond vigilantes happy, but since the government is not as efficient as the private sector, Britain is expected to slide into a recession that will further curtail economic growth and exacerbate its budget deficit woes.

Overall, as you look around the world, the U.S. is the only major economy that is actually growing. The Atlanta Fed is currently estimating 3.9% annual GDP growth that is expected to rise to a 5% annual pace in 2026 as more onshoring naturally boosts economic growth. Although Harvard economist Jason Furman has pointed out that 92% of recent U.S. GDP growth is related to the data center boom, with another Fed key interest rate cut, recent tax cuts, and rising order backlogs for data centers, economic growth is expected to soar in the New Year. This improving economic growth is not expected to be inflationary due to a glut of goods from weak economies overseas.