As all METARs know, there has been a tremendous amount of news flowing out of Washington, DC over the past month.
Much of it is political. Some could potentially have Macroeconomic impact. Announcements are different than execution. Some might happen, some might not.
Some of the topics include:
- The White House attempting to control the Federal Reserve using a strategy similar to the takeover of other independent federal agencies. If it succeeds, sure to be inflationary.
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Tariff policy which changes by the day. Guaranteed to increase inflation by raising consumer prices.
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Immigration policies. It’s not clear yet how many immigrants, illegal and legal, criminal and law-abiding, will be deported. Or how the agriculture, hospitality and personal care segments will be impacted since Americans won’t do these jobs (at least not for the same wages as immigrants). Sure to be inflationary.
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Employment situation after mass layoffs of federal workers and potential impact of supply chain to federal government.
https://www.wsj.com/economy/jobs/what-do-mass-federal-layoffs-mean-for-the-labor-market-33515410?mod=economy_lead_pos1 -
Rapprochement to Russia which may invite U.S. oil companies. (Fool me once, shame on you. Fool me twice, shame on me. But the force of greed is strong.)
https://www.nytimes.com/2025/02/23/business/russia-sanctions-oil-gas-energy.html -
The rewriting of the 2017 tax law which expires in 2025. This ball is in Congress’ court and the betting is that the tax cuts will be extended and maybe even increased. The budget deficit will continue to grow, which is inflationary since much of government spending goes directly to consumers (either directly or as employees).
The University of Michigan Survey of Consumers shows that, as of February 2025, long-run inflation expectations have risen in recent months to a median of 3.5%. These are elevated relative to the two years pre-pandemic, but remain below peak readings during the post-pandemic inflationary episode. They exhibit substantial uncertainty, particularly in light of policy changes under the new presidential administration.
Elevated inflation expectations, if they become entrenched, could lead to the wage-price spiral seen in the 1970s. Higher inflation leads to higher interest rates. The 30 year TIPS is yielding 2.39% (plus inflation).
The stock market was down last week (VIX rose slightly) but it could be noise. Given the very high market valuations and the level of uncertainty I’m surprised at how steady the market is.
The Treasury yield curve fell a little in flight-to-safety buying. National financial conditions are very loose, as loose as 2021.
The Fear & Greed Index was in Fear. The market is risk-off as stocks and junk bonds fell while Treasury prices rose. Oil prices rose but this is noise within a long-term falling channel. Gold finished near $2950, an all-time high.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 was 2.3 percent on February 19. This is a good, sustainable growth rate which would not cause the Fed to cut the fed funds rate.
Initial unemployment claims are low. Even if government employees are laid off they can’t collect unemployment until finalized which apparently won’t be until fall. Clearly, some regions (such as Washington, DC) have many more government employees than others and will feel the impact most severely.
The METAR for next week is cloudy. With all these pins poking at the bubble it is showing amazing toughness. There are abundant factors that could burst the bubble and more coming every day. Will the market hold steady, continue to rise or finally break? The easiest prediction is noise – small ups and downs. Nobody can predict the bursting of a bubble any more than an earthquake.
Wendy