Rate disputes

July 26 – August 1 2025

Big news. The US Federal Reserve did not change monetary policy, but already 2 members of the board voted for its easing; such a divergence was last observed 32 years ago. The assessment of economic growth has worsened.

The conflict between Trump and Powell before the decision intensified, Powell’s reaction in the final section of the Review. Here we will only note that the head of the Federal Reserve was much more intelligible than usual and clearly explained what, from his point of view, the problems were. Well, at least some benefit for the listeners, although our readers already know everything.

Macroeconomics. GDP of Germany and Italy in Q2 fell by 0.1% per quarter:

The decline in foreign direct investment in the Chinese economy continues to accelerate, at -15.2% per year in the first half of the year:

And the PMI (an expert index of the state of the industry; its value below 50 means stagnation and decline) in China in all sectors of the economy are sluggishly fluctuating in the stagnation/recession zone:

The number of bankrupt companies in Germany is at its highest in 10 years; among corporations alone (excluding small businesses, etc.), the figure is at its highest since 2009. It is already threatening to surpass the numbers of that time and reach the peaks since 2005:

The number of new buildings in Japan is rapidly declining:

Its absolute value has been at a record low in recent months, much weaker than the levels of 2008/11:

Pending US Existing Home Sales Hover Near Record Lows:

US construction spending fails to rise month-on-month for 10 straight months (9 minuses, 1 zero):

The value of single-family homes in the U.S. secured by mortgages guaranteed by quasi-government agencies has shown a modest gain of +2.8% per year, the lowest since April 2012:

The ratio of the number of vacancies to the number of applicants for them is the lowest in 10 years (excluding Covid):

The number of unemployed in Germany has been growing monthly for 31 months in a row:

And it remains at a 14-year high:

Layoff announcements in the US are +140% y/y, overall since the beginning of the year they are at their peak since the Covid times:

US labor force participation rate hits 48-year low (excluding Covid):

The July report from the US Department of Labor is really bad; the negativity is masked by the almost meaningless Establishment survey, which calculates the number of jobs using some crooked models. The more realistic Household survey (also included in this report) shows a decline in employment of 260 thousand per month and an increase in the number of unemployed by 221 thousand. But even the main indicators look bad: for example, the unemployment rate is at an 8-year peak:

The same picture is for those who cannot find a job in six months, their share is at its maximum since 2017:Такая же картина для тех, кто не может найти работу за полгода, их доля на максимуме с 2017-го года:

Canada’s central bank left rates unchanged, expects GDP to decline. Brazil’s central bank kept the rate at a 19-year high:

The Bank of Japan also has no policy changes; inflation and GDP forecasts have been raised. The Bank of South Africa has cut its key interest rate by 0.25% to 7.00%.

Main conclusions. The Fed and Powell personally have given a very extensive material this time. The Fed’s cover letter to the decision to keep the rate:

▪️Economic activity growth slowed in H1 2025.

▪️Unemployment remains low, labor market stable.

▪️Inflation remains moderately elevated.

▪️The Fed removed the wording about reducing the level of uncertainty in the US economy – now it “remains elevated”.

▪️The Fed is attentive to risks in both areas of the mandate (inflation/employment).

▪️The target rate was kept at 4.25-4.5%.

▪️The Fed will continue to reduce the balance sheet (sale of government bonds and MBS).

▪️Future rate decisions will depend on data, forecast and risks.

▪️The Fed is ready to adjust the monetary policy if threats to the targets appear.

▪️The assessment includes the labor market, inflation, expectations, finances, and geopolitics.

Jerome Powell’s press conference:

▪️The economy remains resilient.

▪️Inflation remains slightly above target.

▪️I expect U.S. inflation to continue to decline.

▪️I forecast the PCE index to rise by 2.5% and the core index by 2.7% over 12 months.

▪️Tariffs do raise prices of individual goods.

▪️Most measures of long-term inflation expectations remain within the Fed’s target.

▪️The slowdown in overall economic growth reflects a decline in consumer spending.

▪️The tariffs have put pressure on prices of a number of goods, but their broader impact remains uncertain.

▪️The most realistic scenario is that the tariffs have a short-term impact on inflation.

▪️I do not rule out that the inflationary effects may be more persistent.

▪️We have not made any decisions on rate cuts in September.

▪️I would characterize the current Fed monetary policy as moderately restrictive.

▪️The level of uncertainty has remained at about the same level since the last FOMC meeting.

▪️The situation in the labor market now is very similar to what we saw a year ago: employment growth has slowed, but the labor supply has also contracted.

▪️There are many uncertainties that still need to be clarified.

▪️When disagreements arise, it is important to get a clear explanation, and today we got one. The participants thought carefully and clearly stated their positions.

▪️We need to understand that it is still early days in assessing the impact of tariffs.

▪️There is a wide range of views on where the neutral rate level is. We will make decisions as more data comes in.

▪️We are already starting to see the impact of tariffs on individual consumer prices. We will have to watch closely and draw conclusions based on the facts.

▪️We still have a long way to go to fully understand what the impact of these measures will be.

▪️I expect the impact of tariffs to be more pronounced in future inflation data.

▪️The pass-through of tariffs to consumer prices may be slower than we initially expected.

▪️Some may argue that by not raising rates, the Fed is ignoring inflation.

▪️The new tax law may have a small stimulatory effect, but in our view it will be small.

▪️Overall, we do not see this fiscal package as particularly stimulatory.

▪️Inflation is almost back to 2%, although there is some lingering pressure from past factors.

▪️Services inflation is gradually declining, while goods prices are showing an increase.

▪️What we are seeing now is just the very first signs of tariff inflation.

▪️It is really difficult to say whether the data will be clear enough for the next meeting.

▪️We are trying to choose the right moment for the next step.

▪️The dollar was not the focus of our discussions.

▪️The market is currently pricing the probability of a rate cut in September at less than 50%.

▪️The latest report shows a slight slowdown in private sector job creation.

▪️Labor inflows have slowed noticeably, largely due to changes in immigration policy.

▪️Overall, labor market data point to stability, although downside risks remain.

▪️During the Fed’s monetary policy discussion, most agreed that inflation is still above target, employment is on target, and monetary policy should remain moderately tight.

▪️I expect dissenting voices to explain their positions in the next day or two.

▪️Before the next meeting, we will receive two reports on the labor market and inflation, let’s see where this leads.

▪️We still believe that the labor market is one of the most reliable and informative sources of data on the state of the economy.

Well, the data on the labor market is given in the second section of the Review. The picture is frankly negative, but since it brings grist to Trump’s mill, Powell interprets the data in the most optimistic way. Actually, his reasoning is not even that interesting, here you need to look at the presentation of the material, how detailed and interestingly he described the situation. In general, truth is born in debates!

And then the most interesting part begins, even if this is no longer macroeconomics. I did not give data on GDP in the second quarter, since the overall figure did not say anything interesting. But Pavel Ryabov studied it in detail. And this is what happened.

“Diving straight into recession? The weakest US GDP data in 15 years

The primary data on US GDP seems to be good – 3% growth q/q SAAR after a decline of 0.5% in 1Q25, but in fact – all this is fiction, deception, this data should not be misleading. Everything is very bad.

The “growth” of the economy is entirely due to a technical issue – the stabilization of imports after record-breaking outstripping purchases in 1Q25 due to fears of large-scale tariffs.

▪️The positive contribution of foreign trade amounted to 4.99 p.p. in the overall economic growth of 3% after a negative contribution of 4.61 p.p. in 1Q25, i.e. there was a stabilization of trade, which was quite expected.

The medium-term rate of the foreign trade effect is exactly 0.0 p.p. (this was the case in 2017-2019), when Trump had not yet lost his mind, and exactly the same (0.0 p.p.) was in 2022-2024, while the quarterly dynamics are extremely volatile.

The huge spread of indicators in 2025 also levels out closer to zero.

▪️ The strongly positive contribution of the foreign trade effect was offset by the negative contribution of the change in inventories by 3.17 p.p. after a positive contribution of 2.59 p.p. in 1Q25. This is due to the fact that economic agents worked for the warehouse in 1Q25, greatly accelerating imports, and in 2Q25 they emptied warehouses/inventories, stabilizing imports.

The medium-term norm for reserves, as well as for foreign trade, is 0.0 p.p. in 2017-2019 and minus 0.3 p.p. in 2022-2024 (the effect of distribution of excess reserves 2020-2021).

These data allow us to conclude that the reserves formed at the beginning of 2025 have already been distributed, and what will this lead to? That’s right, to an increase in inflation, since new supplies will already be at higher prices (tariffs from April and stricter tariffs from August, plus a weakening dollar).

I have clarified the situation with this, and now to the main thing – how does the economy work without the effect of foreign trade and reserves?

▪️Consumer demand + private sector investment in fixed assets + government consumption and government investment provided a total positive contribution of only 1.14 p.p. (minimum since Q3 22 – 0.95 p.p.) after +1.52 p.p. in Q1 25.

This is a very low growth rate. For 1H25, on average, 1.33 p.p. positive contribution to GDP, which is the minimum since 2H22 – 1.15 p.p. compared to 3.08 p.p. in 2024, 3.48 p.p. in 2023 and 1.39 p.p. in 2022, i.e. the economy is in the weakest condition since 2022, but then there was an active structural post-COVID transformation.

In 2017-2019, the average contribution of domestic demand was 2.9 p.p., and in 2010-2019, on average, 2.5 p.p., and approximately the same from 2022 to 2024 – 2.65 p.p.

Accordingly, at the beginning of 2025, the economy has growth rates that are twice as low as the normalized rates in accordance with the medium-term and long-term trend. The last time such a low growth rate was in 2H12 (1 p.p.) and 1H11 (0.55 p.p.), i.e. almost 15 years ago.

How did growth slow down to a 1.14 p.p. contribution in 2Q25?

▪️Consumer demand provided 0.98 p.p. after 0.31 p.p. in Q1 25 vs. 2.04 p.p. in 2023-2024, 1.78 p.p. in 2017-2019 and 1.62 p.p. in 2010-2019. In H1 25, demand was three times weaker than the medium-term norm.

▪️Investments in fixed capital practically zeroed out – 0.08 p.p. in Q2 25 after 1.31 p.p. in Q1 25 vs. 0.6 p.p. in 2023-2024, 0.68 p.p. in 2017-2019 and 0.95 p.p. in 2010-2019. In 1H25, investments are in line with the norm, but due to a strong 1Q25, while in the conditions of tariff chaos, companies put investments on hold and this is one of the main conclusions of these statistics.

Moreover, investments in housing were negative (-0.19 p.p.), as well as commercial and industrial real estate (-0.33 p.p.), while the situation was saved by machinery and equipment (+0.26 p.p.) and intellectual property (mainly software and IT) with a contribution of +0.34 p.p.

▪️ The public sector provided +0.08 p.p. in 2Q25 after (-0.1 p.p.) in 1Q25 vs. +0.2 p.p. in 2023-2024, +0.19 p.p. in 2017-2019 and (-0.02 p.p.) in 2010-2019.

Trump is clearly driving the economy into recession through investment paralysis (primarily in infrastructure) and weak consumer demand (three times lower than normal).”

Well, the reference to Trump in this case is not essential, but the analysis yields very interesting conclusions. In fact, we are talking about the fact that investments in the real sector are insufficient, that is, the figures confirm the thesis that we voice literally every month.

Since there is no reason to believe that the situation will change in the near future (this is possible only after a significant reduction in financial markets), the US resource for controlling the world will constantly shrink. This is what we warn our readers about, wishing them a pleasant weekend and a calm vacation!