Rate Cut & Labor Market Cracks: Is the Fed Risking a Recession?

Sean Brazney: Fed’s do a mandate, when it talks about jobs and inflation. We’ve seen some jobs reports come out lately, whether we, you know, how much we read into that, where that data comes from, we’ve seen some inflation numbers come out, the PCE, right, comes out by the Fed. We just got past unemployment here, I think, last week and there’s some things that are coming up in this data that I’m sure we’ll get together on a monthly basis and talk more about it, but when you think about jobs still kind of being robust and a long-term continuing claim, or if you kind of keep going up, how much of that is government compared to private sector? You look at, the overall hiring based on non-farm payrolls. You’ve actually seen a big spike in native-born workers and you’ve seen a drop off in foreign-born workers. It seems like that might be kind of healthy in some ways for America. You think about this mandate… is what I’m trying to get, I guess what I’m trying to get to is, is it seems like there’s enough story there for growth, economic growth, and that inflation is not really going down if anything is still kind of hanging out. What are the odds of the Fed not cutting and actually raising rates sooner than people think?

Jeffrey Christian: Interesting. I think it’s shifted in the last three or four months. I think at the beginning of 2025, it was quite clear that the Fed Chairman Powell and a lot of the other people within the Fed, the economists, as well as, the FOMC members, were concerned that the economy could be too strong, if you will, you know, that you could see upward pressures on inflation, because there was strength in the economy. Over the last, over the first six months of this year, the economy has shown a real weird mixture and there are still pockets of strength, like the jobs reports, but there are increasing signs of economic weakness. A plunge in people looking to buy houses, a plunge in home sales, a skyrocket in the number of people looking to sell their houses, job formation, plant and equipment, expenditures, new construction for non-residential housing, auto sales. There’s been a lot of signs of weakness and I think that over the first quarter, one of the reasons why the Fed was hesitant to lower interest rates was, because it was concerned that the economy could be too strong. In April, by April, you start seeing that change and you saw the initial flash real GDP negative 0.2. Ultimately, it came out in June as negative 0.5% contraction in economic activity in the United States. Again, most of that had to do with imports. Very little of it had to do with actual economic activity in the United States. So, now we’re waiting for the second quarter data to show up, and I think that over the course of the second quarter into July, you’ve seen the Fed shift its weight from one foot to the other, and whereas in early 2025, they were saying, “Hey, we may actually have to raise interest rates this year.” I think they’re quite convinced now that they will be lowering rates later this year, because the economy is going to be showing greater weakness. Now that could reverse, because they are very data driven and if we’re waiting to see what the second and third quarters are going to look like, there are expectations that things get worse and worse. But if you look at some of the factors that are going on, they haven’t really kicked in. So, people keep saying, “Well, the tariffs aren’t showing up in inflation.” Well, that’s because most of the tariffs have only existed on the threat level. Most of the tariffs have yet to actually be imposed and there’s a lag between the time when a raw material or import is tariffed and shipped and the time when a consumer is buying the product. So, in April, May, and June, you didn’t necessarily see products that were being imported under tariffs showing up. So, the inflation pressure was not there, and I think that all has to come through, and it will come through in the second half of this year, and I think that the Fed is picking up on all of that. And as I said, they’re shifting, whereas, they were a little bit concerned that they might have to raise rates in the first quarter of this year. I think, they’re much more convinced now that they will be lowering interest rates in the second half, because the overall economy will look weaker and inflation may not fall, but it probably isn’t going to collapse. So, I think that they’re probably going to be saying, we probably need to do things to stimulate the economy.

Sean Brazney: When it comes to Fed funds rate, I mean, it’s really a, it’s between banks, right, overnight lending. It doesn’t do a lot for the long-term lending rates like the 10-year, the 30-year. Don’t we need government spending to go down in order to really bring the longer-term rates down? What are the prospects of that even being real or possible?

Jeffrey Christian: There’s some really strange things going on. Yes, you’re right. We do need to see government spending come down. It seems almost impossible. It’s even the most recent go round with the agenda bill. It’s just a nightmare, government spending, and there’s no restraint there, but there’s also all kinds of weird things. So, you’ve seen the spread between government rates and corporate rates very narrow for an extended period of time, which does not make sense to me, because I would think that given the economic risks abroad in the economy, the corporate rates should be higher than they are relative to the Fed’s rates. But yeah, the Fed funds rate, the Fed manages and influences short term rates. The long-term rates are more influenced by government expenditures, government budget deficits, government debt, and overall longer term real economic activity in terms of supply and demand of goods and services. That rate’s holding up partly because, while there’s increased risks and hesitancies, some companies are still investing, and there are pockets of strength in the economy. You’re still seeing people borrow more money to live the lifestyles that they’ve been accustomed to, perhaps with increased vigor, because they feel that they may not be able to do that next year.

Sean Brazney: Interesting. That’s an interesting point. Get it now while you can. The debt’s such a big number, and it continues to grow, and deficits continue to grow. When you think about mounting debt, deficits growing, it’s got to impact the dollar somewhere, right? It’s got to be hitting the dollar and people have to look at this as, I guess they don’t have to, but when you think about the need for precious metals: gold, silver, tangible assets based on the dollar as a currency, where we live and have to deal with here in the States, and all this debt, we now have all three rating agencies right now that have downgraded the US debt. They’re all in par now together. Where is the rush to hedge yourself and get precious metals, because of what’s going on out there?

Jeffrey Christian: I think you are seeing increased demand for precious metals as a portfolio diversifier and a hedge against currencies, but there’s this weird thing that if you owe a bank enough, you own it, and if the US owes the world enough, it controls it. What you’re finding is around the world, investors and governments and corporations have an enormous amount of money in cash. They say, “Where do I put this?” When they look at the risks, even though the treasuries have been downgraded, they still have a better rating than most other assets. So, the US government, as the most profligate borrower, has created this problem of debt exploding. Other central banks are doing the same thing, but not as much as we are, because we have 80% of the currency in circulation in dollars. The US Treasury creates this problem and investors, corporations, central banks around the world say, “I have to protect myself from this gathering debt storm and the best place to do that is with US Treasuries.” So, they invest in the dollar. The US economy for all of its warts, still has all kinds of competitive advantages over other parts of the world. So, you say, “I’ve got all of this money sloshing around. Where am I going to put it?” “Well, I’m going to put it in Treasuries. I’m going to invest in the US real estate. I’m going to invest in US equities, and I’m going to invest in gold and silver.” I saw a number yesterday, 29% of the houses purchased in the first quarter of this year, were purchased by investors as opposed to dwellers. So, there’s this tremendous amount of money pouring into the US economy and US Treasuries and the US dollar, you need dollars to do all of this investing, and it’s a direct result of the profligacy of the US economy and government.

Sean Brazney: Piling it on as future laborers, right, our children to be reckoned with another day, I guess.

Jeffrey Christian: As somebody once said to me, “It’s good, until it’s not.”