Construction junction

Add photos of Federal Reserve Chair Powell and President Trump in construction hard hats to the list of his desperate attempts to influence US monetary policy.

As is well known, Trump has been bullying the Fed to lower interests for some time but has upped the ante in the last few months. His case is that restrictive monetary policy, especially tighter than other major central banks, hurts the US economy. Powell thinks the greater threat is the potential that inflation could re-accelerate if rates are cut.

Trump’s latest tactic is the suggestion Powell committed fraud when he approved additional spending on the restoration and expansion of its headquarters in Washington, D.C., without informing Congress. That might allow Trump to dismiss Powell “for cause,” the only way the Supreme Court said was possible. This is highly unlikely, yet the president decided to bring more attention to it by touring the site last week. Reports are he needled Powell to try to influence him ahead of the July Federal Open Market Committee meeting. This “nice visit,” as Powell described it at the meeting’s press conference Wednesday, wasn’t going to change the result, proof of which came when policymakers kept rates in the 4.25-4.5% target range. Fed Governors Christopher Waller and Michelle Bowman dissented in favor of a 25 basis-point cut. It’s been more than thirty years since two sitting Governors dissented, but that doesn’t carry as much implication as it once might have as Waller is openly auditioning for Fed Chair.

The FOMC statement acknowledged a moderation in growth, but Powell stood his ground at the press conference, maintaining the wait-and-see stance. At issue, of course, is how inflationary the tariffs will be. While they are starting to show up in prices of some consumer goods, Powell's base case is that they are a one-time adjustment. The data-dependent Fed will have a slew of just that, including two jobs reports, before convening in September. It’s anyone’s guess if they will cut. It’s probably best to evaluate it after Powell’s keynote address at the Fed’s monetary policy symposium in Jackson Hole, Wyo., later this month. After all, last year he primed the markets by saying “the time has come” for a cut.

Treasury floodgates opening

When the US federal debt limit was reinstated in January, the Treasury Department’s use of extraordinary measures commenced (political gamesmanship has made this quite ordinary, unfortunately). This allowed it to tap federal retirement funds and its own cash balance to manage interest and repaying maturing securities while meeting its other financial obligations. Since Congress finally raised the debt ceiling as part of the One Big Beautiful Bill Act last month, the Treasury has issued net new bill supply of approximately $200 billion and is expected to continue at a robust pace with an additional $400 billion through September.

What does this substantial supply mean to the money markets? Simply that the government will have to offer higher interest rates to ensure demand. That, in turn, should put upward pressure on the yields of liquidity products. With the Fed on hold for at least another month, the environment should remain attractive to investors. The popularity of money market funds—hitting nearly $7.5 trillion in assets under management in June (government data)—implies just that. I’d like to note that institutional prime money funds continue to regain assets despite the latest round of regulations. We thought a gradual return was in store, as was the case following the 2016 “reforms.” Investors still appreciate their value.