The week of October 27, 2025: The Fed’s rate cut, climate policy, the FTC, tariffs, and much, much more.
The week of October 27, 2025: The Fed’s rate cut, climate policy, the FTC, tariffs, and much, much more.
A few days have passed since the Fed announced that it was cutting rates by 25 basis points (0.25 percent), but the argument for that cut does not look any better than when it was announced. As I wrote at the time:
[D]ivisions within the central bank (one vote for a bigger cut, and one for no cut at all) and more hawkish comments than expected from Fed Chairman Powell only reinforced the case (at least for me) that there should not have been a cut. To be sure, there are some signs of a weakening labor market — the core of the argument for a cut — but there’s nothing to suggest that 2 percent inflation, the Fed’s supposed target, is anywhere in sight.
Indeed not, and the exuberance in certain asset classes only reinforces that argument.
The Wall Street Journal (October 24):
Is “three” the new “two?” Consumer prices notched another 3% year-on-year increase in September, according to data published Friday from the Bureau of Labor Statistics. No one in Washington seems bothered that this remains well above the Federal Reserve’s 2% inflation target.
The headline measure of consumer-price inflation rose 0.3% from August to September, with so-called core prices excluding food and energy increasing 0.2%. But core inflation also hit 3% year-on-year, a signal that households’ purchasing power continues to drop at a rapid pace. The White House press office hailed this as an anti-inflation triumph.
There’s always some excuse or explanation that politicians and Wall Street offer to say this is no big deal. One month it was healthcare costs, another month shelter, and so on. This month the blame goes to energy prices, which rose 1.5% from August to September. But at some point you have to admit all these add up to a persistent inflation problem. At a 3% inflation rate, the value of a dollar today would be 73.74 cents in 10 years.
There’s plenty of blame to go around. It’s obvious now that Chairman Jerome Powell’s declaration of mission-accomplished in September 2024 was premature when he began the Fed’s interest-rate cuts this cycle.
FWIW, we had our doubts at the time.
But back to now, and Bloomberg (October 31):
Three US central bank officials said they did not support a decision to cut interest rates this week, underscoring Federal Reserve Chair Jerome Powell’s warning Wednesday that another reduction in December is far from guaranteed.
Dallas Fed President Lorie Logan and her Cleveland counterpart, Beth Hammack, said Friday they would have preferred to hold rates steady. Both were speaking at a conference in Dallas, following a statement earlier in the day from Kansas City Fed President Jeff Schmid outlining the reasons for his dissent against Wednesday’s rate cut.
The Daily Telegraph’s Ambrose Evans-Pritchard is not known for his cheery perspectives, so consider yourselves warned. In a commentary on the Fed’s decision, he drew attention to its somewhat overlooked element, the decision to end quantitative tightening. QT, begun in 2022, has been the process by which the Fed had reversed (or, more accurately, partly reversed) the expansion of its balance sheet through quantitative easing (buying treasuries and mortgage-backed securities) during the pandemic era and afterwards. The Fed’s balance sheet had expanded from about $4 trillion prior to the pandemic to nearly $9 trillion before QT began. It currently stands at $6.6 trillion.
The reason given (in so many words) for the reversal of the reversal (or at least halting of the reversal) was evidence of tightening liquidity within the system, as evidenced by rising short-term borrowing costs. Evans-Pritchard concedes that that is part of the story but wonders if more is not afoot. Some of his concerns — that the massive growth in money market funds (which can only buy short-dated treasuries of a type that the Treasury is currently very keen to issue) is a form of debt monetization by the government — strike me as a stretch. Nevertheless, it is hard not to think that some of the maneuvering by the Fed and Treasury is being driven by the need to fund a deficit that has grown dangerously large.
Under the circumstances, the spectacle of the Fed buying more treasuries will be disquieting, even if the rationale is “technical.”
Evans-Pritchard:
Mark Cabana, who managed QE at the New York Fed before joining Bank of America, says liquidity has dried up and the Fed will soon have to buy $150bn of debt to stabilize the money markets…. Cabana said fresh bond purchases by the Fed would not be QE but the markets might well conclude that it is. The spectacle of the treasury issuing more T-bills that are instantly snapped up by the Fed “may look coordinated” and smack of “financial repression”, even if that is not the intention.
Financial repression is a term that sounds menacing but is in fact not menacing enough. It describes actions taken by a government to keep interest rates artificially low, which can come in handy when its debts are high. It can often “involve” (I’ll stick with that neutral word) tolerating inflation as another way of taking the edge off a pile of debt. That $150 billion (small change, I tell you, in the scheme of such things) could conceivably trigger worries that such a move was heralding a more significant bout of QE is an indication of the market unease over the levels of U.S. government debt, debt that continues to pile up.
Under the circumstances, it is somewhat surprising that thirty-year Treasuries only yield about 4.7 percent, and completely unsurprising that Evans-Pritchard writes that “the debasement trade is young yet.”
The debasement trade?
The debasement trade, to over-simplify, is the search for alternate safe havens for investor capital in an era when, as economist Robin Brooks has highlighted, many Organization for Economic Co-operation and Development states are highly indebted (this is not only an American problem). As a result, long-term yields have been rising on their debt. There is a fear that these governments will not only fail to tackle their debt, but attempt (essentially) to inflate a good portion of it away, partly by keeping interest rates down as discussed above examined by The Economist in an article here.
Extract:
Since [1945] has been a norm that advanced economies always repay their bondholders (violated only by Greece and Cyprus in the 2010s). But creditors still get burned. In advanced economies governments spent about half the time between 1945 and 1980 gaining more from inflating away debt than they paid in interest, write Carmen Reinhart of Harvard University and Maria Belen Sbrancia of the IMF. The average annual saving in interest expenses ranged from 1-5% of GDP.
The biggest single episode of debt reduction identified in 220 years of data by Barry Eichengreen of the University of California, Berkeley, and Rui Esteves of the Geneva Graduate Institute occurred in Britain between 1947 and 1956. The country’s debt-to-GDP ratio fell by 131 percentage points. About half of the drop came because inflation exceeded interest rates, though Messrs. Eichengreen and Esteves are at pains to point out that America’s simultaneous debt reduction, of about half the size, relied more heavily on economic growth.
The growing fear is that much of the West, including the U.S., is moving towards an era of “fiscal dominance.” Evans-Pritchard quotes Bernard Connolly, a former Fed adviser best known for his prescient warnings about the euro some years before the EU’s single currency was launched. According to Evans-Pritchard, in Connolly’s view, the Fed is edging “crabwise along the primrose path to fiscal dominance,” something that Connolly believes to be “unavoidable.”
In the end, central banks almost everywhere are going to face the issue of bailing out their governments.
I wrote about fiscal dominance in a Capital Letter last year, borrowing the handy definition provided by Charles Calomiris of the St. Louis Fed in 2023:
Fiscal dominance refers to the possibility that the accumulation of government debt and continuing government deficits can produce increases in inflation that “dominate” central bank intentions to keep inflation low.
To put it another way, a country’s finances have deteriorated so badly that its central bank can no longer keep control.
Calomiris:
The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. The use of non-interest-bearing debt as a means of funding is also known as “inflation taxation.” Fiscal dominance leads governments to rely on inflation taxation by “printing money” (increasing the supply of non-interest-bearing government debt).
When might this happen?
Calomiris (emphasis added):
[I]f global real interest rates returned tomorrow to their historical average of roughly 2 percent, given the existing level of US government debt and large continuing projected deficits, the US would likely experience an immediate fiscal dominance problem. Even if interest rates remain substantially below their historical average, if projected deficits occur as predicted, there is a significant possibility of a fiscal dominance problem within the next decade.
The moment of crisis then occurs “when the bond market begins to believe that government interest-bearing debt is beyond the ceiling of feasibility,” a moment brought closer as the interest rate needed to attract buyers moves up, a process that cannot continue indefinitely. At some point, a government bond auction will “fail” in the sense that the interest rate required by the market on a new bond offering is so high that the government withdraws the offering and turns to money printing as its alternative.
For years, U.S. treasuries have been regarded as safe havens (not least, of course, because of American economic and military strength and legal and political stability) despite the country’s sometimes ropey finances. Nevertheless, they are not immune from the consequences of the failure of successive American governments to, opportunistically or otherwise, pay insufficient attention to fiscal and monetary discipline. It is no coincidence that the gold price began its current extraordinary rise (in dollar terms) in the last year of Joe Biden’s presidency, although, to be fair, rising international tensions played their part too.
The arrival of Donald Trump in the White House has (so far) done little or nothing to soothe market fears about the deficit and/or inflation. The spectacle of fierce White House pressure on the Fed to cut rates is hardly reassuring to the markets and nor are administration or administration-adjacent suggestions that the central bank’s independence should — de jure or de facto — be reined in.
That said, it is worth remembering that even during turbulent times domestically, the dollar, and by extension, Treasuries typically benefit from being, as one senator once put it, the healthiest horse in the glue factory. And so it is less surprising than it might seem that, for all the recent turbulence, foreign ownership of treasuries has increased. Most of the other “horses” are it appears even closer to, so to speak, their sticky end. The euro, for example, is a fundamentally flawed currency, and many EU states are heavily indebted. Japan is battling inflation, and its debt/GDP ratio is over 200 percent. Crypto currencies are what they are (opinions differ). The problem with the Swiss Franc (which has trended up against the dollar for years) is that it is too illiquid (there are not enough Swiss Francs around). The problem with the offshore yuan? Do I really have to explain?
That leaves gold and some proxies (check out silver) in pole position, especially when a number of those who might normally have been drawn to dollar assets as a safe haven do not wish to risk falling foul of Uncle Sam’s increasingly aggressive use of sanctions.
The corollary of all this is that the dollar is seen as a somewhat less safe haven. If that decline in its reputation continues, the higher the price — all other things being equal — the U.S. will have to pay to borrow, and the closer fiscal dominance looms.
Under the circumstances, cutting the Fed Funds rate could prove a step along the way to an expensive destination.
And that is without thinking about what the implications of a blow-up in, say, AI valuations or the private credit market might be.
But that’s enough gloom for one day.
The Capital Record: Sound & Vision
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which is hosted by financier David L. Bahnsen makes use of another two formats to deliver Capital Matters’ defense of free markets. The original podcast continues, but if you want to watch David talk, please click on the YouTube link.
The 268th episode: (Podcast/YouTube)
The NBA world was rocked as a current head coach, and two players were arrested in a major FBI investigation. The entire matter has led to great consternation over the world of sports betting and the explosive growth of how this is marketed and normalized in society. David does what this podcast exists for him to do: apply first principles to the discussion of sports betting — its pitfalls and boundaries — for those who value free markets but also the virtue and character we want for our society.
The Capital Matters week that was . . .
Climate Policy
The United States should be an international leader in the fight against energy poverty and for energy freedom.
Because, as of now, many countries are using their power through international bodies to impose their harmful, anti-energy climate agenda on countries who don’t share their ideological objectives…
There is no contradiction between recognizing that anthropogenic climate change is real and rejecting the notion that it is an existential threat. There is no contradiction between recognizing that anthropogenic climate change is a problem and believing that the steps being taken in response to it are fundamentally flawed. And there is no contradiction between recognizing that anthropogenic climate change needs addressing but that there are other challenges that are just as, or maybe even more, pressing.
Bill Gates, once a climate doomsayer, seems finally to have understood that there is something to all three of those points…
The problems with EVs noted by Gates might have been reduced had those in charge taken account of a simple principle that Cochrane sets out elsewhere, although doing so would have run against the central planning mindset typical of so much of climate policy…
In his new, much more realistic than hitherto memorandum on climate, Bill Gates discusses the importance of adaptation, especially in poorer parts of the world. There are obvious reasons for that emphasis, partly rooted in geography (many are located in areas believed to be more vulnerable to climate change) and partly rooted in common sense. The wealthier a country, the more easily it can afford to invest in resilience and adaptation. Amsterdam is below sea level, as is most of the port city of Rotterdam. Both cities have thrived for a long time.
Climate policymakers’ fixation on GHG control has not only misdirected “climate” spending from where it can do the most good, but by slowing economic growth has made it more difficult for countries to afford the spending on adaptation they might otherwise have made…
The government had (reportedly) stuck with their estimates until now despite being told by developers, the people who actually know how wind turbines work, that its numbers were “statistically absurd.” Central planners always know best…
The FTC
Nine months have passed since Lina Khan, the Biden-appointed chairwoman of the Federal Trade Commission, left office. But the damage of her legacy lives on, and countless companies are still recovering from the havoc she wreaked.
Lawsuits filed during her tenure that have not already failed are continuing to make their way through the court system. One of those lawsuits, filed in September 2024, deals with a complex set of issues involving insulin prices and pharmacy benefit managers (PBMs) — the companies that employers hire to negotiate and reduce drug prices up the pharmaceutical chain…
Automation
From Amazon: a reminder that labor shortages may be less of a problem than some believe…
The Artisan Economy
The notion of an artisan economy may seem odd in an age dominated by online sales and artificial intelligence. Yet, as Sadeghi points out, this is the opportunity. As we buy routine, depersonalized products online or at a mega retailers such as Target or Costco, there remains a desire for something more human. We seek to connect more closely to the farmer, the maker of products, and to products sourced close to the community…
The Fed
As expected, the Fed cut rates by 25 basis points, to below 4 percent for the first time in three years. But divisions within the central bank (one vote for a bigger cut, and one for no cut at all) and more hawkish comments than expected from Fed Chairman Powell only reinforced the case (at least for me) that there should not have been a cut. To be sure, there are some signs of a weakening labor market — the core of the argument for a cut — but there’s nothing to suggest that 2 percent inflation, the Fed’s supposed target, is anywhere in sight…
Tariffs
Their findings should bury, once and for all, the illusion that tariffs save jobs. The tariffs, which raised import taxes on more than 170 steel products by as much as 30 percent, did not increase employment in steelmaking regions. But they did substantially reduce jobs in steel-using industries (machinery, autos, fabricated metals, transportation equipment), many of which form the core of American manufacturing…
Argentina
There was another big winner. Treasury Secretary Scott Bessent saw his department’s policy vindicated. The Treasury — which invested in peso-denominated instruments just before the election — will likely make a profit as the appreciation of the peso since Milei’s win increases the value of those assets. After the election, Bessent slammed Democratic Senator Elizabeth Warren as an “American Peronist” for her urging U.S. banks to not fund Treasury’s financial support package for Argentina. In another X post, Bessent noted that Milei “won in a landslide with the poorest members of society voting for economic freedom — a notion anathema” to Senator Warren. He concluded: “The message from the ballot box is clear: Argentines support a president who aims to move toward a modern capitalist economy, with the goal of placing the country among those with the highest levels of economic freedom in the world.”
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