The Fed adopted its 2% inflation target back in 2012, and explicitly said it would be measured by the annual change in the price index for personal consumption expenditures.

That’s PCE. Not core PCE, but headline PCE.

And headline PCE for April, as reported this past Friday, was 2.1%.

The other part of the dual mandate, which the Fed says “stands on equal footing with price stability” is maximum employment.

We’ll get the most recent employment data later this week.  The last reading on the unemployment rate was 4.2%.

So, what’s considered maximum employment?

It turns out, a Fed Governor (Kugler) gave a speech on “Assessing Maximum Employment” last month.  What was her assessment?  For the current situation, she said maximum employment is “in the vicinity of 4.2%.”

So, the Fed is “in the vicinity of maximum employment” and a tenth of a percentage point away from its 2% target.  And yet it maintains a policy stance that still puts downward pressure on the economy (downward pressure on inflation, and upward pressure on the unemployment rate).

All along, the Fed has told us they are data dependent.  Policy will follow the data.

Well, the data is now saying: mission accomplished.  And with that, they should be getting policy to the “neutral rate” — neither restrictive nor stimulative to economic activity.

Where is neutral?

According to the Fed’s own Summary of Economic Projections: it’s 3%.

So, why is the Fed still at 4.35%?

In holding rates this high, the Fed is putting undue pressure on the housing market, creating vulnerabilities. They’re subtracting from economic growth, in an era of sub-trend growth.  And they’re adding hundreds of billions of dollars in debt service costs (self-inflicting) at levels of record indebtedness.

Why?

The San Francisco Fed President now suggests the data isn’t really good enough, after all.  She says, “the data is an incomplete picture.”  They have to “look forward.”

So, the goal posts are moving.

What else does this restrictive Fed policy stance do? 

It inflates the CBO deficit/GDP forecasts surrounding the budget.  So, restrictive Fed policy becomes a lever to apply pressure on budget negotiations in Congress.

And keep in mind, this budget dismantles the climate agenda.

Whether intentional or not, the Fed stance indirectly serves as resistance to the rollback of the climate-centered economic model that much of world has committed to, and global central banks have coordinated, over the years, to support.

Nvidia reported this afternoon.

As we’ve discussed, the growth in data center revenue has been on a rhythm of about $4 billion a quarter since the second half of 2023.

For Q1, data center revenue grew by $3.5 billion.  That’s the weakest quarterly growth since Jensen Huang declared the technology revolution was underway two years ago in his May earnings call.

So, this is the lowest quarterly growth in data center despite what is broadly known to be insatiable demand for Nvidia’s GPUs.

Also, margins came in dramatically lower.  Gross margins fell from 73% to 61%.  And net income margin fell from the mid-50s (percent) to 43%.

And (directly related to that margin hit) they spent a lot of time on the call talking about billions of dollars of charge-offs due to restrictions on chip trade with China. 

All of this, yet the stock went up, in after-hours trading. 

Why?

As we’ve discussed over the past several quarters, the Nvidia’s supplier, Taiwan Semiconductor, seems to have hit capacity.  And it seems clear that Nvidia can’t chip away at the backlog of demand until new global capacity comes online (which will be in the U.S., next year). 

But, the data center revenue growth in Q1 was fueled by networking equipment and inferencing.  Both had explosive growth in the quarter, and it’s expected to continue.  

We talked about the U.S. government bond market yesterday, where there has been increasing scrutiny about supply outpacing demand – both related to continued government deficit spending.

And this highlights the unsustainability of not just U.S. sovereign debt, but bloated global sovereign debt. 

But as we also discussed, the U.S. is working on a solution that will create a distinct edge, relative to the rest of the world, in ensuring robust demand for its debt.

The solution:  a regulated, Treasury-backed dollar stablecoin.  

The legislation is progressing on this, and it will 1) shore up the dollar’s dominance in the world, AND 2) create a brand new, and very deep source of demand for U.S. Treasuries. 

Not only will this move by Congress ensure the dollar remains the world’s reserve currency, the dollar will become the world’s digital reserve currency.

So, people, businesses and governments from around the world will be able to own U.S. dollar stablecoins (effectively hold U.S. dollars) without the friction of opening a U.S. bank account or going through the U.S. financial system — they get instant and virtually free (no wire fees, no spreads) access to the stability, trust and liquidity of the dollar.

The question is, as global capital will flow into the borderless dollar stablecoin, what will happen to foreign asset markets?  What will happen to bitcoin? 

Over the past two weeks we talked about the signaling by Moody’s that a U.S. credit downgrade was coming.

They assigned a “negative outlook” to the rating in 2023.  That, by their definition, increased the risk of a rating downgrade “over the next one to two years.”

So, we are now two years out, near the end of that time window.  And on cue, in late March they telegraphed the downgrade with a warning that U.S. fiscal strength had “deteriorated further.”

And as we discussed in my May 8th note, that warning came ahead of expected budget and debt ceiling negotiations.

And if we look back at the S&P U.S. credit downgrade in 2011, and the Fitch downgrade in 2023, both surrounded … debt ceiling issues.

Now, interestingly, both of these prior downgrades occurred AFTER the debt ceiling was raised.

In 2011, S&P downgraded U.S. credit three days after the debt ceiling was raised.

In 2023, the debt ceiling was “suspended” which raised the debt limit until January 1 of this year (2025), giving the Yellen-led Treasury license to issue unlimited debt for the next two years (through the end of the Biden first term).  It was two months later that Fitch downgraded U.S. credit.

As for this Moody’s downgrade, not only was the news released Friday after the market closed, it comes while Congress is negotiating the budget and BEFORE the debt ceiling raise.

So, clearly this will create negotiating leverage and public talking points for the members of Congress that oppose the Trump plan.

This reminds me of the 2021 Fed influence on the Biden agenda.

Back in 2021, three trillion dollars of fiscal stimulus was already approved and working through the economy, to such a degree that the economy was already near a full V-shaped recovery (by late January, the time Biden took office).  

And the CBO (Congressional Budget Office) was projecting the economy to grow at a 3.7% annualized rate (hotter than pre-pandemic growth), with falling unemployment.

But the new Biden administration had a huge and very expensive climate agenda to fund.

It included an immediate $1.9 trillion massive spend (quickly approved).  Conveniently, the politicians on Capitol Hill justified it by citing the Fed (its view that inflation wasn’t a threat).

Then the Biden administration lined up another $4.5 trillion in deficit spending — again, justified by the Fed’s “transitory inflation” view, only to be derailed late in the game by a party defector, Manchin.

All of this to say, this downgrade from Moody’s looks politically motivated.

The question is, other than creating an impediment in budget talks, does it matter?

Moody’s is one of the three “Nationally Recognized Statistical Rating Organizations” designated by the SEC.  And it was Moody’s, and its two counterparts (S&P and Fitch) that brought us the real estate bubble, which turned into the global financial crisis.

Yes, that real estate bubble was primarily driven by credit agencies stamping AAA ratings on high risk/high yielding mortgage securities.  These unwarranted ratings were a mix of fraud, mal-incentives and incompetence (on the part of the ratings agencies).

With a AAA rating and a high yield, massive pension funds had no choice, if not an obligation to plow money into those investments.  And with that insatiable demand, mortgage brokers and bankers were incentivized to keep sourcing them and packaging them.  And the bubble was blown.

With that, it’s perplexing that they (the ratings agencies) are still in business, much less have credibility.