We are confident that we will get another Fed crisis-driven Dollar sell-off

The fallback in yields is a bit mysterious. What has TreasSec Bessent been up to? The NYT reports that on Sunday night he told Trump that the Powell charges were “making a mess.” The rise in yields Monday and Tuesday led Deutsche Bank to write “… the bond market appears to be sending the White House a different message: Don’t mess with the Fed. ‘Ironically, if the ultimate aim is to reduce yields, it could have the opposite impact.’”

The fallback could also be due to the TACO idea rather than any machinations by Bessent, but whatever the reasons, it ain’t over yet. We just saw a mighty Announcement Effect and when the name of Powells’ replacement comes out, we will see another one. Then we could get a steady stream of harassment from the so-called shadow Fed chief. Those tend to diminish in market-moving muscle over time until everyone is thoroughly sick and tired of it, but a relentless drumbeat of “lower, lower, lower” should have the effect of weakening the dollar even in the absence of actual decisions. The Fed is one place where talk is louder than actions much of the time. 

Remember that today we get a fresh GDPNow from the Atlanta Fed. On Friday, it had 5.1% growth for Q4, down from 5.6% the day before, based on a drop in residential investment. We may worry about how this model works, but a reading over 5% is still a blockbuster. Of course you can’t expect falling inflation on such high growth. Talk that CPI inflation is okay neglects to emphasize that the big components of the lower half of the population are getting no relief in housing, food, and medical. 

Forecast

The dollar is retreating but only marginally. At the same time, the rise in the dollar index is struggling and lacks momentum. See also the 10-year chart in the Chart Package. It looks like a test of the 200-day.

We are confident that we will get another Fed crisis-driven dollar sell-off. The timing is unknown. Since just about everyone knows this, the fresh Announcement Effect will be really, really fast, just like this time. The only thing that can prevent a repeat is a Trump TACO. Whether he keeps the head of the Justice Dept is up in the air with rumors swirling all around. Presumably if he fires Bondi, the Powell case can be withdrawn. This would favor a drop in yields and the dollar. Until the next version.  

Food for thought

The Brookings Institution reports the US lost more immigrants than it gained in 2025, exactly as Trump aimed for. See the chart of net immigration, before zero for the first time in 50 years.

Despite the cruel and stupid way Trump got it, this has some benefits as well as drawbacks. Benefits include increasing the labor shortage and raising wages. The “social” side may reduce racial/color prejudice as the population becomes more customed to the ones we already have once the pressure from the flood abates. This suggests there is some optimum immigration rate that does not result in popular protest in the form of prejudice and exclusion. Just ask the Irish, while the Germans and Swedes arriving in lesser numbers got absorbed just fine.  Of the many drawbacks, we can select the Trump attitude that is entirely racist.

More food for thought

According to a deep dive at the Washington Post, “Legal experts warn the Trump administration’s probe of Jerome Powell threatens the rule of law, and economists warn it threatens the stability of the U.S. economy.”

Specifically, the right-wing American Enterprise Institute has an economist who says “A situation in which the president uses the threat of criminal prosecution to attempt to settle legitimate policy debates within the broader government really is an attack on the rule of law, on the institutions and norms that have substantially contributed to long-term prosperity in the U.S.”

The AEI, along with the now-crashing Heritage Foundation, is increasingly questioning Trump’s policy choice. Well, they are not policy choices. They’re whims and impulses.

Trump is increasingly losing support among key sectors of the population (younger white males, suburban moms with teenage boys they don’t want sent to war). Now he is also losing at least some of the institutional support from the cabal of think-tanks and self-appointed policy gurus. Congressional Republicans are still rebelling only behind closed doors.