May 29, 2025

QuickTakes

Checks And Balances

The US is a federal republic. It isn't a democracy, where the majority always rules. The constitutional system was designed by the Founding Fathers, who were mostly lawyers, to provide checks and balances to avert the concentration of political power and to protect the rights of minority parties against abuses by the majority as well as by those in power. The three branches of government were designed to frustrate the ambitions of the powerful on a regular basis.

In other words, "gridlock" is a feature, rather than a bug, of the American constitutional system. Gridlock has generally been viewed as bullish by stock and bond investors. The companies they invest in tend to do best when government is the least meddlesome in their businesses.

The system is working as designed to keep the ambitions of the current administration in check, just as it has those of previous administrations. The latest example is that the future of Trump's tariffs is now in the hands of the courts. On Wednesday, a lower court struck down most of Trump's tariffs. Today, a federal appeals court paused that ruling. The Supreme Court might determine the fate of Trump's tariffs.

The checks-and-balances system applies to the Federal Reserve. President Donald Trump met with Fed Chair Jerome Powell today. The President wants the Fed to lower interest rates immediately. Powell and his colleagues have stated that they are in no rush to do so. That view was reiterated in the minutes of the May 6-7 FOMC minutes released yesterday. Powell said the two discussed "economic developments"—but not his expectations for monetary policy—during the White House meeting called by the President.

The federal funds rate futures market is currently anticipating three 25bps rate cuts over the next 12 months (chart). We remain in the none-and-done camp through the end of this year.

The Fed is in no rush to lower interest rates because the economy remains resilient. The Bureau of Economic Analysis revised its estimate of Q1's real GDP to show the economy shrank at an annual rate of 0.2% (saar), compared with the previously reported 0.3% drop. However, that contraction was attributable to a 42.6% spike in imports—driven largely by companies racing to get ahead of Trump's tariffs (chart).

Final sales to private domestic purchasers rose 2.5%, revised down from 3.0%. Real consumer spending was revised down from 1.8% to 1.2%. However, much of that weakness was caused by unusually cold weather during January and February. The Atlanta Fed's GDPNow model is showing real PCE tracking at 3.7% during Q2!

Initial unemployment claims rose last week to 240,000, but remain low. The four-week moving average, at 230,750, suggests that the unemployment rate remained just above 4.0% in May (chart). Admittedly, continuing unemployment claims increased to 1.919 million from 1.890 million the prior week. The duration of unemployment may be rising.

As the FOMC minutes make clear, with "economic growth and the labor market still solid," Fed officials are "well positioned to wait for more clarity" from data that might change their minds. Odds are, policymakers will still be waiting by the end of this year.

The international scene is flashing its own salutary signals. Take the Bank of Korea (BOK). With its sizable trade-dominated growth engine, South Korea is often the closest thing the global economy has to an early-warning system. On Thursday, when the BOK cut its base rate 25bps to 2.50%, Governor Rhee Chang Yong expressed far less willingness to ease as much as the markets had expected. This may be yet another sign that Trump's trade war is likely to end sooner rather than later and have minimal adverse consequences for the global economy.

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