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For the Fed, the destination matters much more than the pace

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For the Fed, the destination matters much more than the pace

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Good morning. I assume that clever companies with bad news to share issue stealthy news releases at 2.35pm on Fed meeting days, knowing that all the financial journalists will be dialled into the Jay Powell show. Let us know if we missed anything juicy yesterday: robert.armstrong@ft.com and aiden.reiter@ft.com.

50 basis points, followed by nothing

Headlines were flashed; pundits smeared on make-up and appeared on cable TV; side wagers proliferated; column inches stretched to the moon; analyst notes accumulated in teetering piles; social media lit up like a video game. And in the end the market was hilariously unimpressed. We got our big-boy 50bp cut, and equities, bonds and currencies all shrugged contemptuously, in what appeared to be a deliberate effort to humiliate the financial punditocracy.

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This indifference was not just funny. It was also a fitting end to the will-it-be-25-or-will-it-be-50 kerfuffle. As soon as the Fed had decisively signalled its pivot to cutting, what mattered most was not pace, but destination. A quarter-point difference to a single short-term interest rate is, in isolation, of little significance to the wider economy. What matters about the size of a particular cut at a particular time is what it signals about the central bank’s extended journey: where it thinks rates need to be, and when it thinks it needs to get there.

Which brings us to the neutral rate (or r*, if you like jargon): the unobservable level of rates that is consistent with full employment and low inflation. “We know it only by its works,” Chair Powell likes to say, misquoting the gospel of Matthew. He said it twice at his press conference yesterday. You’ve fallen below the neutral rate when inflation leaps; you’ve risen above it when risk assets wilt and unemployment jumps. In between, you are walking in the dark, speculating about when you might fall off a ledge or, alternately, hit your head. Central bankers generally can’t stand still, either. Economies have momentum, and policy works with a lag. The Fed must make an estimate and stumble towards it. 

The Fed’s current estimate for the neutral rate is 2.9 per cent, according to its summary of economic projections, up a tenth of a percentage point from the last SEP in June. This may not sound like much of a change, but if you look over a slightly longer timeframe, the Fed has shifted its view considerably:

This shift is in line with an emerging economic consensus that fiscal and monetary largesse, an ageing population, deglobalisation, higher productivity and assorted other factors are pushing the neutral rate up. The practical importance of the change is that the Fed does not have all that far to go to reach what it thinks (as of now) is the destination. If it moves at a brisk 50bp per meeting, it will be almost at target in March of next year (of course the intention is to go at a much more stately pace, if circumstances allow).   

If the neutral rate is closer now, why move by 50bp? The Fed’s answer yesterday: because we can. The theme of the press release and the press conference was that excellent progress of inflation allowed for a big but pre-emptive cut. We think the labour market is just fine, and because inflation is all but whipped, we can act to make sure it stays that way. Unhedged, for its part, thinks the Fed is right about this. It is likely that inflation is all but whipped, and that the economy is just fine, so a 50bp cut by itself carries little risk. But we don’t know, and probably no one knows, where the neutral rate is. All we know is we are 50bp closer to it now, and closing. 

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For most investors, this matters primarily because of the possibility of a Fed mistake. If the Fed goes too far, inflation reignites, and it comes clear the Fed is going to have to raise rates again, one will want to own (to simplify grossly) equities rather than Treasuries. If it doesn’t go far enough, and falling employment leads to a recession, the opposite bet is correct. Active investors have no choice, at this point in the cycle, to have their own view of where the neutral rate is, so they can decide which kind of mistake the Fed is more likely to make. This is much more important than the size of the next cut. But 25 vs 50 is a nice, clearly defined debate, whereas estimating the neutral rate is a university economics seminar where the syllabus is a secret, the exam date is unknown and your grade determines your salary.   

The stakes are particularly high now because risk asset prices are so stretched. Stocks, especially big US stocks, are at high multiples of earnings, and credit spreads are about as tight as they get. This means things are priced for stability, and a central bank that has to change course quickly because it has over- or undershot the neutral rate is the very opposite of stability. You are making a bet on r*, whether you know it or not. 

One good read

Spies on ice.

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Brass bands in Beijing make way for sticker shock at home as Trump returns to escalating inflation

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Brass bands in Beijing make way for sticker shock at home as Trump returns to escalating inflation

WASHINGTON (AP) — President Donald Trump returned from the spectacle of a Chinese state visit to a less than welcoming U.S. economy — with the military band and garden tour in Beijing giving way to pressure over how to fix America’s escalating inflation rate.

Consumer inflation in the United States increased to 3.8% annually in April, higher than what he inherited as the Iran war and the Republican president’s own tariffs have pushed up prices. Inflation is now outpacing wage gains and effectively making workers poorer. The Cleveland Federal Reserve estimates that annual inflation could reach 4.2% in May as the war has kept oil and gasoline prices high.

Trump’s time with Chinese leader Xi Jinping appears unlikely to help the U.S. economy much, despite Trump’s claims of coming trade deals. The trip occurred as many people are voting in primaries leading into the November general election while having to absorb the rising costs of gasoline, groceries, utility bills, jewelry, women’s clothing, airplane tickets and delivery services. Democrats see the moment as a political opportunity.

“He’s returning to a dumpster fire,” said Lindsay Owens, executive director of Groundwork Collaborative, a liberal think tank focused on economic issues. “The president will not have the faith and confidence of the American people — the economy is their top issue and the president is saying, ‘You’re on your own.’”

The president’s trip to Beijing and his recent comments that indicated a tone-deafness to voters’ concerns about rising prices have suggested his focus is not on the American public and have undermined Republicans who had intended to campaign on last year’s tax cuts as helping families.

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Trump described the trip as a victory, saying on social media that Xi “congratulated me on so many tremendous successes,” as the U.S. president has praised their relationship.

Trump told reporters that Boeing would be selling 200 aircraft — and maybe even 750 “if they do a good job” — to the Chinese. He said American farmers would be “very happy” because China would be “buying billions of dollars of soybeans.”

“We had an amazing time,” Trump said as he flew home on Air Force One, and told Fox News’ Bret Baier in an interview that gasoline prices were just some “short-term pain” and would “drop like a rock” once the war ends.

Inflationary pain is not a factor in how Trump handles Iran

Trump departed from the White House for China by saying the negotiations over the Iran war depended on stopping Tehran from developing nuclear weapons. “I don’t think about Americans’ financial situation. I don’t think about anybody. I think about one thing: We cannot let Iran have a nuclear weapon,” Trump said.

That remark prompted blowback because it suggested to some that Trump cared more about challenging Iran than fighting inflation at home. Trump defended his words, telling Fox News: “That’s a perfect statement. I’d make it again.”

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The White House has since stressed that Trump is focused on inflation.

Asked later about the president’s words, Vice President JD Vance said there had been a “misrepresentation” of the remarks. White House spokesman Kush Desai said the “administration remains laser-focused on delivering growth and affordability on the homefront” while indicating actions would be taken on grocery prices.

But as Trump appeared alongside Xi, new reports back home showed inflation rising for businesses and interest rates climbing on U.S. government debt.

His comments that Boeing would sell 200 jets to China caused the company’s stock price to fall because investors had expected a larger number. There was little concrete information offered about any trade agreements reached during the summit, including Chinese purchases of U.S. exports such as liquefied natural gas and beef.

“Foreign policy wins can matter politically, but only if voters feel stability and affordability in their daily lives,” said Brittany Martinez, a former Republican congressional aide who is the executive director of Principles First, a center-right advocacy group focused on democracy issues.

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“Midterms are almost always a referendum on cost of living and public frustration, and Republicans are not immune from the same inflation and affordability pressures that hurt Democrats in recent cycles,” she added.

Democrats see Trump as vulnerable

Democratic lawmakers are seizing on Trump’s comments before his trip as proof of his indifference to lowering costs. There is potential staying power of his remarks as Americans head into Memorial Day weekend facing rising prices for the hamburgers and hot dogs to be grilled.

“What Americans do not see is any sympathy, any support, or any plan from Trump and congressional Republicans to lower costs – in fact, they see the opposite,” Senate Democratic leader Chuck Schumer of New York said Thursday.

Vance faulted the Biden administration for the inflation problem even though the inflation rate is now higher than it was when Trump returned to the White House in January 2025 with a specific mandate to fix it.

“The inflation number last month was not great,” Vance said Wednesday, but he then stressed, “We’re not seeing anything like what we saw under the Biden administration.”

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Inflation peaked at 9.1% in June 2022 under Biden, a Democrat. By the time Trump took the oath of office, it was a far more modest 3%.

Trump’s inflation challenge could get harder

The data tells a different story as higher inflation is spreading into the cost of servicing the national debt.

Over the past week, the interest rate charged on 10-year U.S. government debt jumped from 4.36% to 4.6%, an increase that implies higher costs for auto loans and mortgages.

“My fear is that the layers of supply shocks that are affecting the U.S. economy will only further feed into inflationary pressures,” said Gregory Daco, chief economist at EY-Parthenon.

Daco noted that last year’s tariff increases were now translating into higher clothing prices. With the Supreme Court ruling against Trump’s ability to impose tariffs by declaring an economic emergency, his administration is preparing a new set of import taxes for this summer.

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Daco stressed that there have been a series of supply shocks. First, tariffs cut into the supply of imports. In addition, Trump’s immigration crackdown cut into the supply of foreign-born workers. Now, the effective closure of the Strait of Hormuz has cut off the vital waterway used to ship 20% of global oil supplies.

“We’re seeing an erosion of growth,” Daco said.

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Top Drug Regulator Is Fired From the F.D.A.

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Top Drug Regulator Is Fired From the F.D.A.

Dr. Tracy Beth Hoeg, the Food and Drug Administration’s top drug regulator, said she was fired from the agency Friday after she declined to resign.

She said she did not know who had ordered her firing or why, nor whether Health Secretary Robert F. Kennedy Jr. knew of her fate. The Department of Health and Human Services did not immediately respond to a request for comment.

The departure reflected the upheaval at the F.D.A., days after the resignation of Dr. Marty Makary, the agency commissioner. Dr. Makary had become a lightning rod for critics of the agency’s decisions to reject applications for rare disease drugs and to delay a report meant to supply damaging evidence about the abortion drug mifepristone. He also spent months before his departure pushing back on the White House’s requests for him to approve more flavored vapes, the reason he ultimately cited for leaving.

Dr. Hoeg’s hiring had startled public health leaders who were familiar with her track record as a vaccine skeptic, and she played a leading role in some of the agency’s most divisive efforts during her tenure. She worked on a report that purportedly linked the deaths of children and young adults to Covid vaccines, a dossier the agency has not released publicly. She was also the co-author of a document describing Mr. Kennedy’s decision to pare the recommendations for 17 childhood vaccines down to 11.

But in an interview on Friday, Dr. Hoeg said she “stuck with the science.”

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“I am incredibly proud of the work we were doing,” Dr. Hoeg said, adding, “I’m glad that we didn’t give in to any pressures to approve drugs when it wasn’t appropriate.”

As the director of the agency’s Center for Drug Evaluation and Research, she was a political appointee in a role that had been previously occupied by career officials. An epidemiologist who was trained in the United States and Denmark, she worked on efforts to analyze drug safety and on a panel to discuss the use of serotonin reuptake inhibitors, the most widely prescribed class of antidepressants, during pregnancy. She also worked on efforts to reduce animal testing and was the agency’s liaison to an influential vaccine committee.

She made sure that her teams approved drugs only when the risk-benefit balance was favorable, she said.

The firing worsens the leadership vacuum at the F.D.A. and other agencies, with temporary leaders filling the role of commissioner, food chief and the head of the biologics center, which oversees vaccines and gene therapies. The roles of surgeon general and director of the Centers for Disease Control and Prevention are also unfilled.

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Supreme Court is death knell for Virginia’s Democratic-friendly congressional maps

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Supreme Court is death knell for Virginia’s Democratic-friendly congressional maps

The U.S. Supreme Court

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The U.S. Supreme Court refused Friday to allow Virginia to use a new congressional map that favored Democrats in all but one of the state’s U.S. House seats. The map was a key part of Democrats’ effort to counter the Republican redistricting wave set off by President Trump.

The new map was drawn by Democrats and approved by Virginia voters in an April referendum. But on May 8, the Supreme Court of Virginia in a 4-to-3 vote declared the referendum, and by extension the new map, null and void because lawmakers failed to follow the proper procedures to get the issue on the ballot, violating the state constitution.

Virginia Democrats and the state’s attorney general then appealed to the U.S. Supreme Court, seeking to put into effect the map approved by the voters, which yields four more likely Democratic congressional seats. In their emergency application, they argued the Virginia Supreme Court was “deeply mistaken” in its decision on “critical issues of federal law with profound practical importance to the Nation.” Further, they asserted the decision “overrode the will of the people” by ordering Virginia to “conduct its election with the congressional districts that the people rejected.”

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Republican legislators countered that it would be improper for the U.S. Supreme Court to wade into a purely state law controversy — especially since the Democrats had not raised any federal claims in the lower court.

Ultimately, the U.S. Supreme Court sided with Republicans without explanation leaving in place the state court ruling that voided the Democratic-friendly maps.

The court’s decision not to intervene was its latest in emergency requests for intervention on redistricting issues. In December, the high court OK’d Texas using a gerrymandered map that could help the GOP win five more seats in the U.S. House. In February, the court allowed California to use a voter-approved, Democratic-friendly map, adopted to offset Texas’s map. Then in March, the U.S. Supreme Court blocked the redrawing of a New York map expected to flip a Republican congressional district Democratic.

And perhaps most importantly, in April, the high court ruled that a Louisiana congressional map was a racial gerrymander and must be redrawn. That decision immediately set off a flurry of redistricting efforts, particularly in the South, where Republican legislators immediately began redrawing congressional maps to eliminate long established majority Black and Hispanic districts.

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