Firing of Cook Positive for Rates and Stock Market

We believe that the removal of Lisa Cook as a Fed Governor is very positive as now Republican’s will have a 4/3 majority on the Federal Reserve Board and the new majority is likely to oppose the prior Fed majorities’ flawed view that Tariffs are not a one-time tax and could, therefore, lead to spiraling inflation. Both the housing sector and construction sectors are already in recession (see figure below).  With the new majority of Republicans on the Board, it is now highly likely that we will get 2-3 rate cuts this year and 2-3 rate cuts next year that will lower the Federal Funds rate to the 3% area which is close to the neutral rate.  A lower Federal Funds rate will lead to lower long-term interest rates as the 10-year normally trades at a 1% premium to the Fed Funds rate during normal interest rate environments.  Lower long-term rates will stimulate the growth of housing and construction and allow US GDP growth to return to its long-term sustainable rate of approximately 3%.

The Federal Reserve has been both highly political and extremely incompetent under Fed Chair Powell.  Specifically, the Fed Chair was a major proponent of massive government spending and has opposed the Trump administration’s tariff policy along with the other Democrats on the Federal Reserve Board.  In addition, the Powell Fed has been highly incompetent as it has adopted the Keynesian Phillips Curve theory of inflation and has completely ignored unprecedented increases in the money supply that are always inflationary.  This flawed economic view led to the disastrous “transitory” theory of inflation advocated by Powell and the Biden administration and led to double digit inflation.  Finally, the Powell Fed has failed to recognize that the BLS estimate of shelter inflation in CPI (CPI-U) lags market measures of shelter costs (CPI-R) by approximately 2 years (see figure below).