The argument is that the current official inflation data, like the personal-consumption expenditures (PCE) index and the consumer-price index (CPI), are out of date in every way.
And this, he argues, will give Warsh freedom to please Donald Trump and cut short-term rates before the midterms, maybe as early as September.
Warsh, who was appointed chair by President Trump and took over in May, has already launched internal reviews of the Fed's data, and especially its inflation data.
All of this may be helpful in moving the so-called Overton window on inflation data.
To be honest, even I'd be surprised if they tried to change the inflation calculations on existing TIPS bonds (they might do it on TIPS bonds issued in the future), although there are no guarantees.
By Brett Arends
The new jobs report is worse than many people realize
New Federal Reserve Chair Kevin Warsh is reviewing how the central bank calculates inflation.
Buy bonds.
The June jobs report is worse than many people realize. Meanwhile, the campaign is gathering steam to get the Federal Reserve to switch to a new, lower inflation rate - so that new Chair Kevin Warsh can please the president and start cutting interest rates before the midterm elections.
Both of those things are bullish for bonds, which have been lying on the Wall Street unwanted pile pretty much since the bond crash of 2022-23.
Let's start with jobs. The nonfarm-payrolls figure halved between May and June, and the latest job-creation figures were about half Wall Street's estimates. Meanwhile, the figures for people in their prime working age, from 25 to 54, are going backwards. In that group, both the participation rate and the employment rate - two key figures which track the strength of the jobs market - fell last month.
One of the Labor Department's two monthly jobs reports, the more volatile household survey, showed the U.S. actually lost half a million jobs last month.
All this was despite the economic boost from the World Cup, which has brought armies of big-spending fans to multiple American big cities. Somehow, the seasonally adjusted figure for employment in leisure and hospitality actually fell.
And it was despite the continuing economic boost from the federal deficit, which pumps money into the economy. The federal government is spending way more than it takes in via taxes. How do you run a deficit of $4 billion a day, or $700 billion through the first half of the year, and see jobs growth stall out?
The weak jobs numbers come even as company profits are booming. Earnings for companies across the S&P 500 SPX are expected to rise 23% this quarter compared to a year ago, FactSet reports.
Meanwhile Bloomberg's flagship morning radio show, "Surveillance with Tom Keene," on July 2 floated the idea of changing the inflation calculations at the Fed as a serious proposition. Pushing the idea was Peter Tchir, a money manager at Academy Services - but he is hardly alone.
The argument is that the current official inflation data, like the personal-consumption expenditures (PCE) index and the consumer-price index (CPI), are out of date in every way. They are out of date as methods of calculating prices, because they are calculated using old-fashioned, preinternet methods and data. And as a result, their numbers are always out of date by the time they are published, because they are typically reported a month in arrears. Independent companies such as Truflation now use the internet to monitor price changes in almost real time. Why shouldn't the government?
Tchir, among others, argues that new, real-time measures will soon show inflation is running much lower than the official data. And this, he argues, will give Warsh freedom to please Donald Trump and cut short-term rates before the midterms, maybe as early as September.
Warsh, who was appointed chair by President Trump and took over in May, has already launched internal reviews of the Fed's data, and especially its inflation data.
All of this may be helpful in moving the so-called Overton window on inflation data. The Overton window refers to the range of ideas that are generally considered mainstream at any time.
Questioning the traditional methods for calculating inflation is perfectly reasonable in the era of the internet, artificial intelligence and real-time information. The biggest component in the official inflation figures are home costs, and rental-market data are available daily.
The question is how these changes are applied. President Trump and the governing Republican party want to see lower short- and long-term rates, and that either requires a fall in inflation - or a fall in apparent inflation.
All of this could be very bullish for bonds, or at least short- and medium-term bonds. Their regular coupon payments will look increasingly attractive if the Fed starts cutting short-term interest rates, and even more so if the Fed follows Japan - another country with mind-boggling national debt - and suppresses longer-term interest rates to keep the national interest payments affordable.
The problem is that if the Fed lets underlying inflation rise, this will end up hurting longer-term bonds, because the real inflation-adjusted value of future coupons will fall. This is why I prefer inflation-protected Treasury bonds, known as TIPS - though it is always possible the government will try to change the inflation calculations for them too.
If you want to avoid long-term risks, that also means shorter-term bonds. Right now, the 5-year Treasury note BX:TMUBMUSD05Y is yielding 4.22% and the 7-year note BX:TMUBMUSD07Y is yield 4.34%. The April 2029 TIPS bond 912810FH69 will guarantee to pay you inflation (right now, the CPI) plus 2% a year for the next three years, and the April 2032 TIPS bond 912810FQ68 for the next six years. To be honest, even I'd be surprised if they tried to change the inflation calculations on existing TIPS bonds (they might do it on TIPS bonds issued in the future), although there are no guarantees.
I wrote last week about opportunities in closed-end bond funds, particularly some issued by Franklin Resources' Western Asset Management, or Wamco, amid the embarrassment from a recent scandal.
Among the simplest and lowest-risk options, the Vanguard Short-Term Bond ETF BSV invests in a mix of Treasury bonds and investment-grade corporate bonds with an average maturity of less than three years and yields 4.3%. The Vanguard Short-Term Corporate Bond ETF VCSH, which just invests in high-quality corporate bonds, invests in bonds with an average maturity of around three years and yields 4.7%.
If the economy stays sluggish or gets worse and inflation falls, those could look like good deals in short order.
-Brett Arends
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07-04-26 1437ET
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