WALLER WALLS-IN WAFFLES
EDU DDA Aug. 29. 2025
Summary: The media keeps trying to make us care about Fed “independence” or just the Fed at all when current events merely affirm how there is no reason to. The dollar is rising again. Canada’s GDP plunged despite BoC rate cuts. South Korea is trying offset the eurodollar’s work. Most of all, though, Fed Governor Christopher Waller isn’t just recommending rate cuts, he’s carrying the FOMC by actually making sense. That’s never a good sign, for the Fed or anyone else.
WHEN I START MAKING A LOT OF SENSE, THAT’S WHEN YOU REALLY KNOW…
Canadian GDP was wiped out by more than tariff distortions. South Korea may have intervened in the currency market to halt a growing fall in the won. The financial media really wants us to care about Lisa Cook. All three are really the same thing from different sides of globally synchronized.
The last of those shows how upside down the world has become. Confronting any challenge, we’re conditioned to immediately look to a government or central bank as if either has the tool and capability to fix it. The real job of any modern central bank has nothing to do with monetary policy, since there is no money in it.
These agencies are purely intended to maintain the status quo by appearing powerful and effective, therefore why the media is so intent on selling a skeptical public the Federal Reserve’s “independence” is at stake. No one cares. The markets sure don’t, no matter how many times Bloomberg writes the menace is real and attributes rising rates that aren’t really rising to this political drama.
NO ONE CARES!!!
It persists just like the idea that Treasury auctions are poor and pointing toward an incoming defunct government bond marketplace. Such superstitions are impossible to kill because, as Upton Sinclair pointed out, you can’t get someone to understand a world his paycheck pays him not to.
Remember, tariffs were going to be inflationary and rate cuts would keep the labor market solid. Neither are working out that way. One of the most ominous signs we have on that score, apart from prices and spreads, is when central bankers start making a lot of sense. They all have a deep institutional bias toward inflation, so overcoming it is no easy task.
Fed Governor Christopher Waller’s speech yesterday nearly sounded like it was written by someone here at Eurodollar University, at least as far as his analysis of the risks and situation in the United States. He not only opened the door to a rate cut, the governor also raised the possibility of a September fifty while simultaneously nailing the reasons why.
Once the Fed does go, a few others will follow. First up, the Bank of Canada which has been on hold since March for the same reasons as Jay Powell has given – uncertainty over “tariff inflation.” The Canadian economy has instead tumbled.
Also, the Bank of Korea. BoK held its policy rate steady last night yet was accused of having intervened in KRW. Furthermore, five of its six voting officials indicated they were open and ready to lower rates again…if the Fed does.
What is independent here? How independent is the Federal Reserve if all it does is follow the markets? This is another reason why policymakers hate rate cuts, since their own actions simply do what the markets have already said they would. As much as there are reasons to suspect Jay Powell has been “hawkish” for non-economic reasons, such as his running battle with President Trump or preserving his legacy, that last one would also implicitly contain a final F-you to the marketplace.
See, you bondholders were wrong on rates and inflation. I was right, inflation was the bigger threat after all and we had to hold rates rather than plunge them down. We are independent in more than politics!
Except, no. Not only did Powell cave at Jackson Hole, he’s got Waller and other central bankers around the world nipping at his heels to just accept the Federal Reserve doesn’t really matter. Or, at least the consequences of that.
Top men
If the Fed doesn’t matter, why do we keep talking about it? Because, as discussed the past few days, the institution holds the unfortunate ability to interfere with market rates. Not via a printing press, only messing around with fed funds. Their manipulation, mind you, comes with an expiration, one they don’t control.
We know central bankers will ultimately give in, so in that sense over the longer term the policy interference eventually disappears. When and how, however, are indeed up to these empty suits and so that’s what we are forced to focus on. Exhaustively. The “central bank’s” entire existence has been narrowed down to just this one case (see: Greenspan 1991).
To give a recent yet historical example, during 2011’s “unexpected” reignited bank (collateral) crisis, the one which happened to hit the eurodollar world in spite of $1.6 trillion in newly “printed” bank reserves from two QEs. Officials were debating on finding a way to raise that level even higher (always more cowbell) through yet another program, but didn’t want it to go back to a third QE coming so soon (mere months) after the second one had finished.
That might have given the public the “wrong” impression all this bond-buying from the Fed didn’t accomplish anything, that the agency and its bank reserves don’t truly matter. Think about it this way: they just did two rounds of “money printing” which were supposed to spark recovery and inflation, instead there was only deflation and a clear lack of recovery. Within a few months of completing the second, officials come out with yet another one?
What they came up with instead was Operation Twist. Yes, this is where Twist really came from (for those of you old enough to remember; it has been almost a decade and a half since the fiasco). While discussing all this, it was then-Dallas Fed President Richard Fisher, of all people, who questioned what it is they were doing:
One of the emptiest suits to ever suit up for the FOMC, it was perma-hawk Dick Fisher who finally pointed out the absurdity of it all, how “monetary policy” really was nothing more than performative theater. But all they really could do was what the market already did.
But the Fed matters? The institution’s “powerful levers” must remain forever free from political interference? Please.
Again, no one truly cares. Not even stocks are concerned about Lisa Cook, and the so-called punchbowl is still believed to be a big deal at the NYSE and for the NASDAQ. That’s the thing about superstitions; they don’t need to be grounded in reality.
At times, though, policymakers have little choice but to start making some sense like Mr. Fisher had in September ’11. Reality intrudes so much, platitudes, attitudes, and wrongheaded assumptions have to be cast aside. Those are the times to start paying attention as a signal. After all, when Fisher questioned Twist the economy was a step away from the 2012 downturn that was the final nail (just ask Xi Jinping) in the global recovery coffin from the Great not-Recession, and which also ended up with the Fed doing two more QEs anyway.
Top men. Powerful levers.
Waller walls-in waffles
The Fed governor was here in South Florida yesterday, down in Miami (for those who might not know, I’m a little north in Palm Beach County). Having mocked him last summer for his constant flip-flopping between inflation and payroll weakness, Mr. Waller appears to have found his own lever which has switched on rational thinking this year.
Waller began by calling out his fellow wafflers, coming out swinging, too, saying I-told-you-so on “tariff inflation.”
In July, I argued that, looking through tariff effects, with underlying inflation near target and the upside risks to inflation limited, the Federal Open Market Committee (FOMC) should not wait until the labor market deteriorates before we cut the policy rate. Based on all the data in hand, I believe this argument is even stronger today, and that the downside risks to the labor market have increased.
This is how overwhelming the evidence has gotten to be. There are tariffs being applied and those are raising costs at places in the supply chain. They are not becoming broad-based price increases (let alone inflation, which is something entirely different anyway). Today’s report from the BEA on monthly deflators further confirms as much.
Core rates do remain elevated, in fact rising but for base effects (being compared to last summer’s marching band of red flags) rather than percolating pricing pressures. If anything, the core deflator is “sticky” right around 2.90% annual, hardly the stuff of “tariff inflation” fears.
THERE’S NO SUBTLETY IN HIS TITLE, EITHER
The reason they can’t break out is simply that businesses are finding whenever they do attempt to pass along higher charges volume disappears. Disappearing buyers or diminishing margins, those easily explain the next part:
In July, I warned that job creation was weaker than it seemed in the payroll numbers and that data due in early September would indicate that payroll growth will be significantly lowered when annual revisions are made next spring. But even before then, job creation came in soft in the employment report for July, and May and June were revised down sharply, for a three-month average pace for total nonfarm payroll growth of only 35,000. After accounting for these revisions and what we will learn in a couple of weeks, the data are likely to indicate that employment actually shrank over those three months.
See what I mean? I’ve been saying all along that there was a far better than even chance payrolls were outright negative those past few months. There was no stroke of genius in recognizing what was plainly obvious, yet when an FOMC member does so it emphasis the degree of seriousness.
Waller is also referring to the QCEW and its likely benchmark changes to be released on September 9, before the next Fed meeting yet after the August payroll estimates. As noted here a couple weeks ago, the release will update its own employment stats for the first quarter of this year and then publish a preliminary estimate for benchmark revisions to the Establishment Survey.
But only through March 2025.
All Waller is doing is extrapolating in the same manner I already did. It doesn’t take a math whiz to see where employment is going and how the CES has wildly overstated employment strength. Simply drawing a straight line from where it left off shows it is very likely payrolls would have been shrinking at some point by mid-year, which already fits with labor stats in hand.
Employment in the US almost certainly shrank May, June and July.
Governor Waller went one further, though, stating he also expects the August report will likewise come out as weak. “Returning to the labor market, risks are continuing to build. In my July 17 speech, I said that private-sector job creation was nearing stall speed, and the data received since then have put an exclamation point on this statement.”
This is the view gaining traction at the committee rather than the hawkish one defying markets. Powell himself signaled at Jackson Hole how, at the very least, he’s not going to stand in the way. To begin with, if Powell did he wouldn’t want to be the first Fed Chair to dissent from the minority since it would conclusively show he had lost total control and all influence.
Dollar back
Too much has been said about the US dollar’s trajectory since April. Its “weakness” has been held out as proof the world is rejecting the currency along with Treasuries and everything America. “Sell America” was all the rage there for a while. You might have noticed not so much recently (other than “dismal” auctions, of course).
While the dollar isn’t screaming higher by any means, there are clear enough moves across the spectrum. The euro, which had been basically the entire basis for “sell America”, is now sideways to lower going on two months. Other currencies are behaving similarly, to put it mildly.
One is India’s rupee which just put in another all-time low today even as India reported much stronger than expected GDP (unlike Canada). Some of that is fear over what newly-installed US tariffs might do to economic output moving forward. The rest of INR’s weakness is also the globally synchronized realization belief in trade deal relief might have gone too far in the other direction.
And let’s not forget how the Reserve Bank of India has been intervening with the rupee almost continuously for several years running. They had tried to declare victory earlier this year when INR spiked higher, only to watch it turn right around and go back fundamentally all over again.
You could argue that fears leading up to trade wars had pushed eurodollar conditions too negative, thereby spiking the dollar against nearly everyone. After the deflationary outbreak in April – and even before, in some currencies like INR – the dollar merely backed off from that extreme positioning which was then interpreted (often dishonestly) as “sell America” weakness.
Over the past two months, especially from around mid-July, the dollar has been moving higher again in a warning that fits along with Waller sounding reasonable. While many had held out hope the global economy might stabilize after avoiding what appeared to be some of the worst cases (of trade wars anyway), there is growing recognition that dodging the worst scenarios doesn’t necessary or actually mean getting off totally free.
Canada was reminded of this when earlier today the Canadian government reported a sharp drop in GDP, its worst since mid-2020. While GDP up there was distorted by tariff-beating trade flows (and in the opposite way from the US), underlying data showed/confirmed a number of concerns mainly tied faltering jobs. That’s the threat moving ahead, as if BoC’s rate cuts previous had zero effect.
Disposable income rose just 1.3% during Q2, the lowest rate in more than two years. Employee compensation only increased by 0.2% during the quarter, weakest since 2016 (outside 2020). And while household consumption climbed by a 4.5% rate, like with American consumers their Canadian counterparts have been out buying trucks and SUVs worrying that if they don’t future price hikes will make them even more unaffordable (even if there is no evidence today that will be the case, many consumers in both countries aren’t willing to take the chance).
Combined with slowing overall incomes and worsening jobs and unemployment, there is every reason to suspect more of the same. Even some Canadian Economists are making sense, now, too:
"The most concerning aspect of today's [GDP] report is the seemingly weak momentum that the economy still had towards the end of the quarter and into the start of Q3," wrote Andrew Grantham, a senior economist at CIBC Capital Markets.
Naturally, Mr. Grantham, like anyone looking at the situation uncolored by inflation bias, knows what’s coming next from the Bank of Canada. Despite its “tariff inflation” protestations keeping it on hold since March, officials are backed into a corner and will resume lowering rates and probably aggressively again.
That’s just what the Canadian dollar is looking toward along with maple bond rates, particularly those at the front end. Again, what would be missing if we did away with these central bankers and their “powerful levers?” All they do is hold up markets and being the greatest source of uncertainty in them.
No one won
Like Canada’s dollar, South Korea’s won has been moving steadily though not recklessly lower since the start of July. Having come back within sight of 1400 to the dollar, there have been rumors the Bank of Korea has intervened to keep the currency from falling further. BoK’s Rhee confirmed this was part of the country’s trade deal with the United States, thereby helping the Trump administration fulfil its desire to keep the US$ weaker.
In early July, the finance ministry had previously announced it had introduced “new measures” to boost after-hours trading of the currency. Then local reports referenced outlines of a deal which would have Korea’s central bank actively attempting to strengthen the currency. Until Rhee’s comments yesterday, it was mostly speculation.
Again, it won’t matter.
KRW has tracked a number of other currencies once again demonstrating what really moves money and exchange values has nothing whatsoever to do with governments and central banks. The dollar overall is tracking higher again because that’s where the fundamentals are pushing it. The world had its sigh of relief over trade deals, now it’s back to seeing the reality – and listening to Christopher Waller.
Accordingly, five of the six of BoK’s policy committee are on record (as the central bank asks them to) as being open to a rate cut over the coming three-month period. That’s consistent with KRW’s weakness and not because of the possible central bank move. In fact, Rhee made it clear that the Fed’s likely rate cut next month is a factor in BoK’s decision, hoping to avoid currency weakness over policy differentials when currency weakness is happening anyway because none of these central bank actions are anything more than reacting to the same factors pushing the eurodollar higher against them.
If the Federal Reserve was shut down tomorrow, I’d miss it but for very different reasons than its interference in markets. The only real positive contribution comes from its data collection capabilities, especially where it comes to primary dealers and collateral. The entire point of the weekly Primary Dealer Survey is collateral.
And then policymakers do absolutely nothing with the information as if to demonstrate my point even more.
Outside of traders who mechanically make money arbitraging the Fed as it opens spreads here or there, no one in the market will miss the thing, either. Policymakers are, in the short run, the greatest source of uncertainty. Over the longer term, however, as we keep seeing, these central banks are irrelevant.
Do we really need another Richard Fisher to buy what market participants already are? Of course not, but that’s all what would be missing. We’re reminded of this as more data comes in, market rates turn lower as the US dollar turns higher, and especially as more central bankers like Waller begin to actually and honestly make sense.
