That era has ended.

Three demographic forces that powered two centuries of growth have simultaneously reversed. Women’s labour force participation plateaued at 61 per cent in 1997 and has drifted to 57.2 per cent as of October 2025. Male participation has collapsed from 83 per cent in 1950 to 68.4 per cent—15 percentage points representing roughly 11m missing workers. Life expectancy gains have stalled while the population ages rapidly. Immigration has been restricted precisely when demographic need is greatest.

According to research published this month by Stefania Albanesi at the Federal Reserve Bank of Minneapolis, just the stalling of female participation has already cost the US economy approximately $2tn in foregone output since 1993. That figure is trivial compared to what’s coming.

The research reveals what economists missed for decades: American economic dominance wasn’t primarily about superior institutions, better policy, or exceptional innovation. It was about demographics. The US had more workers, added workers faster, and extracted more labour from its population than competitors. That advantage is gone and won’t return.

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The US central bank is cutting interest rates again—gingerly. On September 17, 2025, the Federal Open Market Committee trimmed its policy range by 25 basis points to 4.00–4.25%, its first step down after an extended hold. The statement was careful, almost legalistic, about “the balance of risks.” But the numbers tell a different story: core PCE inflation hovering around 2.6–2.9% year-over-year since April, real GDP contracting at –0.5% annualised in Q1 before rebounding to +3.3% in Q2, and a Bureau of Labor Statistics benchmark revision showing 911,000 fewer payroll jobs than previously counted. Meanwhile, the White House’s …

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Today’s report comes from weeks of conversations with law enforcement officials in Washington and across the country, as well as analysts and policy advisers who follow the sector closely. We wanted to understand how Axon — the company once known simply for the Taser — has transformed itself into the dominant technology platform in American policing. What follows is the story of that evolution, and the larger question of whether law enforcement is on the verge of its own “ChatGPT moment.”

On August 10, 2025, shares in Axon Enterprise reached $885.85, capping a run that multiplied the company’s market value tenfold in five years. For a business founded three decades ago as Taser International, the milestone marked more than just investor enthusiasm. It confirmed Axon’s transformation from a hardware supplier into the central software-and-data platform for US policing. Annual recurring revenue now exceeds $1.1 billion, up 34 per cent year on year, with more than $10 billion …

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Today, as geopolitical tensions escalate and economic power shifts eastward, we appear to be witnessing the early stages of a return to that more distributed currency system—where the answer to "which currency will dominate" becomes, simply: none of the above.

"We're entering an era where the dollar's exorbitant privilege can no longer be taken for granted," explains a senior advisor at one…

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The mechanism behind this deluge wasn't just clever marketing or efficient logistics; it was rooted in a little-noticed provision of U.S. trade law, Section 321 of the Tariff Act of 1930, commonly known as the "de minimis" rule. An obscure regulation, designed decades ago for administrative convenience, became the linchpin of a multibillion-dollar strategy that bypassed tariffs and fundamentally altered the competitive landscape of American retail.

Now, that linchpin has been remove…

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The Fall of a Silicon Valley Icon

Intel's troubles came to a head last October when it reported a staggering $16.6 billion quarterly loss—the largest in its 56-year history. This financial calamity was compounded by a 60% stock price collapse since Pat Gelsinger assumed the CEO role in February 2021, culminating in his forced departure in December.
"The burn rate became simply unsustainable," says a senior semiconductor analyst who requested anonymity. "Intel was spending billions on new fabs and R&D while its cash-generating businesses faced intense competitive pressure from all sides. It became a race against time that Gelsinger ultimately lost."

The company's manufacturing difficulties have been particularly damaging. While Intel once led the industry in process technology, it has fallen significantly behind Taiwan Semiconductor Manufacturing Company (TSMC). According to an industry official briefed on Intel's progress, its most advanced processes are yielding functional chips at rates below 10%, compared to TSMC's 30% for comparable technology.
"The yield gap is devastating to Intel's economics," explains a veteran semiconductor equipment executive. "At those rates, manufacturing costs become prohibitive regardless of government subsidies."

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Introduction

In the corridors of MicroStrategy's Virginia headquarters, software engineering has taken a back seat to financial engineering. The enterprise software company, once known for its business intelligence tools, has transformed itself into what industry observers call a "leveraged Bitcoin fund with a software subsidiary."

"We're looking at a novel form of regulatory arbitrage," says a former SEC enforcement director who requested anonymity due to ongoing matters. "The company appears to be operating as an unregistered investment company while using its software business as regulatory cover."

Michael Saylor, the company's founder and executive chairman, has overseen this transformation through a series of debt offerings and Bitcoin purc…

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The COVID-19 pandemic served as a reminder of government power, prompting citizens worldwide to reassess their relationship with state institutions. While some praised the swift governmental response, others viewed it as an extension of a quarter-century trend of escalating overreach, only briefly interrupted during the first Trump administration.

Yet for many Trump faithful, Trump 1.0 was a lost promise which they hope Trump 2.0 will fulfill. To understand Trump's position, the extent to which he plans reshaping government in his own image, we sat down with a senior campaign official who is currently working on a policy paper that details Trump's regulatory plan. Key points:

1. Trump 2.0 to attack the 9 million strong Federal contract workforce -

2. While most of the focus has been on Section F, which impacts 50-100k salaried employees, the true force of Trump actions will come from its actions around contract and grant workers

3. The official told us there are no holy cows, including defense and highways

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"A government employee costs the economy 3.9 times their direct cost," declares the senior Trump campaign official, highlighting the economic rationale behind their deregulatory push. Our team has obtained and analyzed a draft of an ambitious proposal aimed at overhauling what many consider the world's largest and most sophisticated bureaucracy.

The official elaborates, "We're looking at approximately 2 million federal employees, backed by an additional 7 million grant and contract workers. Add to that the extensive infrastructure required to manage these contracts. The direct cost of federal personnel and support is estimated at no more than $1.2 trillion, even if you add benefits." However, the campaign's analysis suggests a far greater indirect economic burden of "$4 to $5 trillion, attributed largely to inefficiencies and systemic waste."

Central to their argument is the notion that government workers, unlike their private sector counterparts, often generate additional work—both for themselves and the public they serve—perpetuating a cycle of inefficiency. "What Reagan envisioned and Trump's first term initiated, Trump 2.0 will fully realize: a streamlined, frictionless economy," the aide asserts with conviction.

The Deregulation Pendulum

Deregulation has long been viewed as a settled fact of U.S. economic policy—a promise of freer markets, reduced bureaucratic burden, and enhanced efficiency. Both Democrats and Republicans acknowledge that excessive bureaucracy imposes a de facto tax on the economy. The first wave of deregulation was spurred by none other than Jimmy Carter, whose administration pushed through the paperwork reduction act, touted as one of the major wins by Reagan.

Despite wide support from the voters as well as party officials, deregulation often fails to make much inroads.

A senior economist from Harvard offers a sobering perspective: "Deregulation is rarely about relinquishing power; more often, it's about redistributing it, concentrating influence in fewer hands." This paradox lies at the heart of America's ongoing regulatory debate and explains why comprehensive deregulation has struggled to gain traction despite considerable voter support.

What sets the prospect of a second Trump presidency apart, according to its proponents, is Trump's unique relationship with power. "In Trump, we have someone who has shown he can wield influence even when he's not in office. He doesn't need to hoard power by expanding the federal workforce or increasing welfare spending," argues a senior Trump donor who is vying for a potential cabinet position.

Further Reading*:

As the deregulation debate continues to evolve, a wealth of literature offers deeper insights into the complexities of government operations, policy decisions, and their economic impacts. The following works provide a nuanced backdrop to the ongoing discussions:

"The Fifth Risk" by Michael Lewis explores the intricacies of government operations and the impact of policy decisions on crucial agencies. Lewis's work offers a stark reminder of the expertise and institutional memory that underpin federal bureaucracies—factors that deregulation advocates must consider in their pursuit of streamlined governance.

"The Great Deformation: The Corruption of Capitalism in America" by David Stockman, penned by Reagan's budget director, presents a critical view of how deregulation and government intervention have shaped the U.S. economy. Stockman's insider perspective challenges both sides of the regulatory debate, arguing that decades of misguided policies have distorted American capitalism.

"The Conservative Sensibility" by George F. Will delves into conservative philosophy, including the delicate balance between government control and market freedom. Will's exploration of how historical shifts in regulation have influenced American society provides crucial context for understanding the ideological underpinnings of deregulation movements.

While not directly addressing federal regulation, "The Power Broker: Robert Moses and the Fall of New York" by Robert A. Caro offers invaluable insights into the interplay of government power, influence, and infrastructure development. Caro's meticulous examination of Moses's reign over New York's urban planning serves as a cautionary tale about the concentration of power, whether in the hands of regulators or deregulated industry leaders.

"The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War" by Robert J. Gordon provides a comprehensive look at the history of American economic growth and the role that government policies, including regulation and deregulation, have played in shaping economic development. Gordon's work challenges readers to consider the long-term implications of regulatory policies on American living standards.

*Includes affiliate links.

While proponents argue for the successes of a lighter regulatory touch, the debate remains complex. "Economists widely agree on the efficiency gains from deregulation, even if we haven't fully quantified the overall payoff," notes a member of the President's Council of Economic Advisers. Still, he tempers his optimism: "The effects of deregulation are visible across various sectors, with both positive and negative outcomes. On the upside, U.S. GDP growth has outpaced that of European economies, accompanied by greater productivity gains. However, the downsides are equally significant." Citing a recent study from the National Bureau of Economic Research reveals that market concentration in the U.S. has surged by 75% across 12 key industries, she continues, "Deregulation has been great for 90%, but there's a significant minority which has been left behind in this constant rush to deregulate."

Public support for deregulation has often been grounded in an aversion to "big government," but remains similarly complex. A senior fellow at the Brookings Institution underscores this tension: “The support isn’t just ideological. It's driven by real economic concerns, the 'bread-and-butter' of American livelihoods. But the oceans aren’t cleaner, and sometimes, the bread isn’t cheaper.”

History of Regulation and Deregulation

Between 1887 and 1917, Congress established 11 regulatory agencies, heralding an era of unprecedented government intervention. Among these was the Sherman Antitrust Act of 1890—a legal framework that remains central to U.S. antitrust enforcement. “The Sherman Act emerged as a response to the unchecked power of trusts and monopolies that dominated the late 19th-century economy,” observes a legal historian from Columbia University. “It laid the foundation for a century of debate over the extent of government control in free markets.”

The fervor for regulation peaked during the Great Depression, exemplified by the Glass-Steagall Act of 1933, which severed commercial banking from investment banking. “This separation was a direct response to the stock market crash of 1929 and the ensuing economic collapse,” notes an economic historian from Yale University. “Glass-Steagall sought to protect depositors from speculative risks, reshaping the American financial sector for decades.”

This regulatory momentum also saw the birth of the Securities and Exchange Commission (SEC) in 1934, creating a new paradigm of financial oversight. “The establishment of the SEC represented a turning point in American markets,” recalls a former SEC chairman. “It brought about a level of transparency and accountability that remains a cornerstone of investor protection.”

Yet, by the late 20th century, the pendulum began to shift. From 1970 to 2000, the U.S. experienced a 67% decrease in industry-specific regulations, as noted by a former chief economist of the International Monetary Fund. “This was driven by a growing belief that markets were more efficient arbiters of their own behavior than federal agencies,” he explains.

This wave of deregulation found its roots in the late 1970s with the Airline Deregulation Act of 1978. “The Act slashed airfares by an average of 50% over two decades when adjusted for inflation,” states a transportation economist from MIT. “However, it also led to significant industry consolidation, reducing the number of major airlines from 11 to just 4 today.”

The momentum carried through to the 1980s, particularly with the breakup of AT&T in 1984, often seen as a transformative moment for the telecommunications industry. “The dismantling of AT&T’s monopoly spurred innovation and competition, setting the stage for the digital communication era,” says a former FCC commissioner.

Not all were convinced of the deregulatory approach, particularly in the Reagan era. “Deregulation didn’t go as far as some expected,” comments a former member of President Reagan’s Council of Economic Advisers. “The opportunity to fundamentally reshape the regulatory landscape was there, but it wasn’t fully seized.”

If Reagan had his missed chances he didn't say. The modern era of deregulation, beginning with President Reagan, has been marked by significant shifts in economic policy and regulatory philosophy. Reagan’s tenure laid the groundwork for a transformative approach to government oversight, rooted in the belief that "Government is not the solution to our problem; government is the problem." This mindset drove a sharp reduction in federal regulations, evidenced by a 4.7% annual decrease in the number of pages in the Federal Register during his administration, as noted by a former Reagan economic advisor.

From Reagan to Trump: The Modern Era of Deregulation

Bush Sr. briefly promised a "gentler" or in other terms "bigger" government.

After a brief hiatus in deregulatory fervor, the torch was passed on to Clinton. A critical turning point came with the repeal of the Glass-Steagall Act in 1999. The move was lauded at the time as a victory for financial efficiency, with senior Treasury officials claiming savings of up to $15 billion annually for the financial services industry. Yet, the long-term consequences are still being debated: “The repeal of Glass-Steagall contributed to a 37% spike in risky lending practices,” asserts a Federal Reserve economist, linking the deregulation directly to the financial crisis of 2008, which obliterated an estimated $19.2 trillion in household wealth.

The Bush wars, no child left behind, ACA, Dodd-Frank - 2000's were not great for small government proponents.

“Dodd-Frank represents the most significant regulatory overhaul since the Great Depression,” explains a former Chair of the Council of Economic Advisers. The legislation sought to prevent another crisis by increasing capital requirements for banks by an average of 50%, reinforcing the regulatory firewall between commercial and speculative financial activities.

However, the momentum of regulation and big government was once again curtailed under the Trump administration. “For every new regulation, two old regulations must be eliminated,” Trump vowed, a pledge that was nearly met as an analysis by the Brookings Institution showed a 1.9-to-1 ratio of deregulation to new rule-making. This approach was characterized by a belief in market self-regulation, a philosophy resonating across various sectors, from finance to environmental policy.

With an eye on the future, the potential for a second Trump term could bring even more profound shifts. A number of policy papers have been floating around, most famously Project 2025. “Project 2025 aims to fundamentally rework the regulatory state,” asserts a senior Trump campaign advisor. A centerpiece of this vision is Schedule F—a proposal to reclassify tens of thousands of federal policy-making employees, stripping them of their civil service protections. This could lead to a 35% turnover in key policy-making positions, representing a structural change to federal agencies not seen since the Pendleton Act of 1883.

The senior Trump campaign official we sat down with dismisses the proposal as a distraction. "They are rehashing old ideas. What we are planning is much more concrete. There are no laws nor the courts that will support turning over 35% of the salaried workforce." Or not. "If there is something concrete, we will take that as a part of the plan. They are on the same side."

In contrast, the Harris campaign argues for targeted regulation rather than broad deregulatory sweeps. “Smart regulation is not about strangling markets, but ensuring they serve the public interest,” says a campaign policy director. Plans for a 15% increase in enforcement budgets across key regulatory bodies underscore a commitment to proactive oversight.

The stakes are significant, and the challenges for any administration are complex. “Regulatory complexity has surged by 22% since 2016,” notes a regulatory affairs specialist. “The ultimate test of effective deregulation isn’t about cutting rules; it’s about crafting an environment where innovation can thrive without jeopardizing market stability and public welfare.”

Trump's Regulatory Vision: Past and Future

The Trump administration's approach to regulation represented a significant departure from previous norms, characterized by a sweeping effort to reduce federal oversight across numerous sectors. "We're here today for one single reason: to cut the red tape of regulation," President Trump declared in 2018, setting the stage for an ambitious regulatory rollback agenda.

This initiative was executed swiftly. A senior official from the Office of Information and Regulatory Affairs remarked, "Within the first 11 months, over 1,500 planned regulatory actions were either canceled or delayed—a rate unparalleled in modern history." These actions led to a 22% reduction in the regulatory pipeline compared to the previous administration.

Despite the rhetoric, the reality was more complex. The Brookings Institution found that while the Trump administration made strides in slowing the introduction of new regulations, it fell short of its "two-for-one" goal, achieving a 1.7-to-1 ratio of deregulatory actions to new regulations.

The effects of deregulation were pronounced across different sectors. "Over 100 environmental rules were revised or rolled back," notes a former EPA administrator. In the financial sector, a former Federal Reserve economist observed, "Relaxations of Dodd-Frank rules led to a 15% increase in lending by mid-sized banks."

Critics argue that this approach often prioritized immediate economic gains over long-term stability and public welfare. However, proponents assert that the regulatory cutbacks were instrumental in fostering economic growth. "Our reforms led to the creation of nearly 7 million jobs and added $3.1 trillion to household net worth," claims a former White House economic advisor.

Looking ahead to a potential second Trump term, a senior campaign official outlines their plan: "Trump 2.0 will drastically cut both regulations and the federal workforce. We aim to restructure the entire system." This time, the focus extends beyond just federal employees to include the vast network of contractors and grant workers that has evolved over time.

This "blended workforce" has expanded the government's reach far beyond official headcounts. Recent estimates suggest this hidden workforce numbers between seven and nine million people—more than triple the number of official federal employees. The Trump official states, "This shadow government of nine million contractors is choking American progress. We will expose this hidden workforce and significantly reduce it."

The roots of this blended workforce trace back to the evolution of federal governance over the last century. By 2010, the ratio surged to 3.4 contractors and grant workers for every federal employee—a three-decade high driven by post-9/11 defense spending, wars in Iraq and Afghanistan, and economic stimulus policies.

"Eisenhower's warning about the military-industrial complex has become reality," the Trump official says. "Trump 2.0 will dismantle this complex. We plan to cut the overall government workforce, including contractors and grant workers, by at least 50%."

This aggressive approach stands in contrast to previous administrations' efforts. For instance, President Clinton, despite being an advocate of reducing "big government," paradoxically led to an increase in contract and grant employees through his efforts to streamline the federal workforce.

The Trump campaign's white paper suggests a 50% reduction in the contract and grant workforce, potentially affecting 4-5 million contract workers. "We'll audit every department, contract, and grant. Our goal is to bring the ratio back to at least 1:1, possibly lower," the official adds.

"The complexity and size of this blended workforce create challenges for transparency, efficiency, and accountability," states a senior fellow at the Brookings Institution. As policy debates center around the appropriate size and function of government, the reality of who actually implements federal policy often goes unnoticed, hidden beneath layers of contracts, grants, and evolving workforce needs.

The campaign official concludes: "Trump 2.0 will expose the full extent of government overreach and systematically reduce it. We envision a small, efficient government that truly serves the people."

Trump 2.0: The Promise of Radical Deregulation

With the 2024 election less than 30 days away, the Trump campaign's regulatory agenda promises an unprecedented dismantling of federal oversight. In March 2023, Trump announced, "Here's my plan to dismantle the deep state and reclaim our democracy from Washington corruption once and for all," outlining a strategy to reshape the federal government's role in American life.

It's a foregone conclusion that of Schedule F, a plan to reclassify tens of thousands of federal employees in policy-making roles into the "excepted service" will be revived. A senior Trump campaign advisor explains, "This initiative would allow for rapid and substantial turnover within key policy-making roles, impacting up to 50,000 federal positions. The goal isn't to dismantle salaried ranks, but to ensure we control the temporal hiring, which is where the contract workforce comes in."

The potential impact is significant. A public policy expert from Georgetown University cautions, "If this plan is implemented, we could see a 50% turnover rate in these key roles across federal agencies. This level of disruption in the federal workforce has not been seen since the civil service reforms of the late 19th century."

To prepare for these changes, the Trump team has created a shadow team which has been meeting for past several months with plans to execute the changes immediately as Trump takes over. A spokesperson explains, "It's a policy roadmap and a personnel pipeline designed to ensure swift implementation of a second Trump administration's deregulatory vision."

Economic forecasts for the proposed deregulatory measures vary widely. A conservative think tank projects that "full implementation of Trump's regulatory agenda could boost GDP by 13% over the next four years." Conversely, progressive policy institutes argue that "environmental and financial deregulation could incur long-term costs that outweigh short-term economic gains, potentially at a ratio of 2-to-1."

Corporate America is divided on the issue. A survey of Fortune 500 CEOs reveals that "42% support Trump's deregulatory agenda, primarily for its potential to cut operational costs, while 38% express concern over regulatory uncertainty and the potential for long-term instability in markets."

A regulatory affairs specialist notes, "Since 2016, regulatory complexity has increased by 22%, and the next administration will inherit that burden. The real test will be crafting a balance between the freedom to innovate and the need for structured oversight."

Trump 2.0 represents a vision of radical deregulation—promising to dismantle the "deep state" and fundamentally restructure the federal bureaucracy. As the nation prepares to decide its regulatory future, the debate continues: Will this approach catalyze economic growth or create unprecedented risks?

Our August report accurately predicted the faster-than-expected cooling of inflation, culminating in the Federal Reserve's 0.5% rate cut in September. Most economists at this point were warning about the protracted battle against “sticky” inflation.

This precision underscores a critical insight: while the Fed and other economist have sophisticated models, they often overlook the movement of physical goods and its effect on inflation. We are afraid they are going to make the same mistake again. In this Report, we go behind the scenes to assess the impact of the International Longshoremen's Association (ILA) strike on economy, politics, and markets.

Inflation: A Primer

Before diving into the main story, it's important to recall the rollercoaster decade we’ve just experienced. Post-pandemic, the U.S. economy puzzled everyone—first with its unexpected strength, then…

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In our February analysis, we highlighted Apple's potentially surprising strategy and reported that the company was undervalued at $165, predicting a that the stock would hit $210 by the time of the WWDC and reaching $300 within 12 months.

The initial milestone has been achieved just as we predicted, and today's report goes into the roadmap towards the second target.

As we detailed previously, Apple's strategy hinges on leveraging existing models developed by other companies, with an emphasis on deployment and enhancing user experience. In this vein, Apple is focusing its efforts on controlling aspects of ecosystem that will drive the experience. As we had reported from unnamed resources, Apple had been building capacity for AI on the edge. This was confirmed with the announcement of Private Cloud Compute in June. While Apple is emphasizing privacy, we believe the bigger goal is in ensuring a lock-in of developers building AI apps for its ecosystem, lowering latency, and improving cost to serve.

For this report, we consulted a range of sources including former Apple employees, investors, and seasoned observers of the company.

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Key Highlights of the Apple's Strategy:

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It’s been a while since our last update, and today we’re focusing on a critical yet often overlooked issue: the sharp decline in birth rates across America. Despite its profound implications, this crisis hasn’t received the attention it warrants. What we initially expected to be a routine policy review turned into something far more compelling.

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This Report completes the trifecta of our initial reporting on the big-3 private logistics companies. We will complete this series with our final report on USPS in coming weeks, before we move to the topic of regional and niche players. Those looking for additional insights around parcel shipping would enjoy:

Brown No Longer: UPS Struggle for Relevance.

FedEx: Pursuing a Breakup.

With this report, we are lifting the kimono a little on one of the least understood but most reported logistics story: Amazon. Our key conclusions:

1. Amazon is built on the backs of Government Welfare and Subsidies, rather than innovation as is often reported. It is estimated in our Report that tax-payer subsidies contribute to 60 cents per FulFilment shipment and $1 per transportation shipment Amazon handles, resulting in a drag of roughly $10 to $12 billion. Even if half of these subsidies were to be removed, Amazon Retail wil…

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The numbers from UPS's latest quarterly release paint a stark picture of a company in decline. In the second quarter of 2024, UPS reported consolidated revenues of $21.8 billion, a 1.1% decrease from the same period in 2023. More alarmingly, the company's consolidated operating profit plummeted by 30.1% to $1.9 billion, with adjusted consolidated operating margin at 9.5%. Diluted earnings per share fell to $1.65, with adjusted diluted earnings per share of $1.79 representing a staggering 29.5% drop from $2.54 in the previous year.

Since 2017, UPS has faced a stagnant package profile. While its duopoly with FedEx in the US allowed UPS to grow yields above inflation for most of the last decade, this advantage has evap…

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In this report, we examined extensive federal, state, and local spending records and consulted with a select group of policy experts. The conclusions are clear:

• Biden’s policies have given the economy time to heal, much like Reagan’s policies did in the early 1980s. Biden’s first term is strikingly similar to Reagan’s, except in one significant respect: under Biden, private spending as a percentage of GDP is now higher than it was under Reagan.

• Even more surprising, the speed at which Biden has established federal primacy while avoiding a discussion about it. This is the most important economic policy story that has not been fully reported, even as many have debated increased deficit spending under Biden.

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Some dramatically claim when the Federal Reserve governors meet in September, they will be making making the decision on who wins the Presidential elections come November. Indeed, Trump and Vance have been questioning the Fed's authority to independently determine interest rates which drive much of the US and, perhaps, the world economy.

We will leave the politics aside for a moment, and talk about the second most important decision Federal Reserve will make this September: should it cut the interest rates by 25 or 50 basis points - or in an unlikely event, not at all.

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When the Federal Reserve governors meet this September, they will be grappling with an economic landscape that presents a complex mix of data points and trends. Until July, the U.S. economy had experienced 42 consecutive months of job growth, with unemployment near historic lows. This exceptional recovery, of course hides some undercurrents of weakness: wage growth has moderated, with average hourly earnings increasing by 4.4% year-over-year in July, down from the peak of 5.9% in March 2022. Jobless rate has started picking up, with more disaffected workers reentering the job market, rising to 4.3% in July compared to 3.9% in May. Yet, U.S. GDP grew at an annualized rate of 2.4% in the second quarter of 2023, contrasting with the World Bank’s projection that global growth will slow to 2.1% for the year—the weakest in three decades outside of major crises. But nobody thought we’d go from 10% inflation to 2’s without a recession.

This economic “good news” complicates the Federal Reserve’s decision-making process. Labor productivity surged at a 3.7% annualized rate in the second quarter of 2023, marking the fastest pace since 2020, while the U.S. dollar has strengthened by 6.5% against a basket of major currencies over the past year. At the same time, the federal funds rate is currently at its highest level since 2001, and personal consumption expenditures inflation, as measured by the Fed’s preferred gauge, is running at 2.5%, down significantly from its peak of 7% in June 2022.

"This situation is highly unusual," confides a senior Fed economist, speaking on condition of anonymity. "Typically, we cut rates when the economy falters. But now, with 11.5 million job openings and wage growth at 4.4%, we're debating a move that could further accelerate an already heated economy."

Cue the Fed’s “fairness doctrine.” This new approach, championed by Jerome Powell’s Fed is introducing a new way of thinking about economy - not purely in terms of an economic balance between inflation and jobs, but fairness where a more political Fed pushes aims to create an opportunity for fair economic growth. If the term sounds more political than economic it is. Over the years as Fed has become more powerful, it has taken on more responsibilities traditionally held by political and elected bodies. Many at Fed and those with knowledge suggest that Fairness is at the core of its likely decision to start bringing rates down as soon as September, despite an upcoming election and and economy that doesn’t seem to need the rate cuts.

This unconventional approach, if pursued, would mark a significant departure from the Fed's actions over the past 18 months, during which it raised rates 11 times before pausing, moving from near-zero to the highest level in 22 years.

Echoes of the Past: Comparing Today's Economy to the 1970s

As we covered in our earlier Report, many question both the current strength and potential future weakness in the US economy. These economists believe the economy is built on a house of cards and Fed is deluding itself in thinking it can control an economy where borrowings now exceed its economic output.

Others remind us how asset bubbles are formed. “A rate cut in this climate could propel the S&P 500, already up 17% this year, to new heights, potentially inflating asset bubbles. It might spur a wave of corporate borrowing, adding to the $11.3 trillion of outstanding corporate debt. On the global stage, where the dollar remains the dominant reserve currency – accounting for 58% of global foreign exchange reserves – any shift in U.S. interest rates sends shockwaves through international markets,” notes a senior analyst at a Wall Street bank. “It would be foolhardy to believe Fed can cut interest rates and markets wouldn’t react.”

Perhaps most concerning is the question of future resilience. By deploying rate cuts now, in a time of relative prosperity, the Fed risks depleting its arsenal to combat future economic downturns.

Practitioners dismiss these worries as academic, a word representing a lack of application. "Their [Fed] goal right now is to keep the soft landing going," observed Julia Coronado, founder of MacroPolicy Perspectives in a New York Times article. "So why risk tightening policy? Now the challenge is balancing risks." This sentiment captures the sentiment pervasive within the practitioners.

In a sharp rebuke to academics projecting a return to 1970s-style high inflation, practitioners argue that the economic landscape today is fundamentally different. A senior economist at the Boston Federal Reserve, who requested anonymity, remarked, "The economic landscape we navigate today shares little with the stagflation-triggering era of the 1970s. We're informed by decades of data and a fundamentally evolved economic structure that were absent in past crises. Unlike the 70’s when an oil embargo crippled the US economy, we now net exporters of energy in the US. At Fed, too, we are no longer working on a hunch and trying to come up with theories. Our decisions are data driven, and data tells us we are making the right and fair call." Data, of course. But - fairness again.

However, this evolving debate also highlights the risks associated with any policy decision, particularly one as consequential as a rate cut. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, warned in a January speech, "Premature rate cuts could unleash a surge in demand that could initiate upward pressure on prices." These cuts that were previously suggested as early as March haven’t come so far as economy continues to surprise with its strength. Economy hasn’t done poorly in past few months, either. Rightly or wrongly, then, many question Fed impartiality in cutting rates so close to elections when economy seems to be doing fine on most measures.

In writing this Report, we had to explore why the Fed is contemplating such an unorthodox step and what it could mean for America's economic and political trajectory. Is Fed political if it makes the decision or apolitical by making a political decision in face of the heat it knows it would face? In an era where the Phillips Curve – the inverse relationship between unemployment and inflation – seems to have broken down, the Fed's next move may well redefine the boundaries of monetary policy for a generation.

Time to Act

The contrast between these strong U.S. indicators and slower global growth is stark. The U.S. economy expanded at an annualized rate of 4.9% from July to September 2023, the strongest pace since 2021, defying earlier predictions of a recession due to the Fed’s aggressive interest rate hikes.

“While this growth has since been moderated, GDP growth rate has continued to surprise on the upside, puzzling many economists. The strength of economy has tested many theories. Of course, the current strength in economy shares that with past bubbles,” warns an economist who recently left Federal Reserve.

These numbers underscore the complexity of the economic puzzle that the Federal Reserve faces as it approaches its September meeting. “Traditional relationships between economic indicators appear to be shifting, challenging conventional models and complicating the Fed’s decision-making process,” the economist continues. “This is what’s so worrying about the current economic environment. While there are no obvious signs, these breakages suggest a larger underlying problem. In economy: everything is fine, till it isn’t.”

A senior economist at the Boston Federal Reserve, speaking on condition of anonymity dismisses these concerns. "Many were fearing Fed actions would trigger a recession. But our close cooperation with Treasury and timely intervention seems to have brought us close to a balanced economy.”

She explained, “The economic challenges we face today are vastly different from the stagflation era of the 1970s. Many academically minded economists learnt their economic lessons in the 70s, but I am afraid many of them have learnt the wrong lessons and started to question American economy a little. The bogies of welfare state, greed, speculation - these are just that, bogies. Given its diversity, US economy has a self healing quality and only needs small nudges from time to time. So long as these ‘nudges’ are timely, they don’t have to be drastic and can be reversed without resulting in catastrophic inflation or other long-term challenges."

This sentiment is widely shared within the Federal Reserve, where many view the current situation as the result of a deliberate and measured effort to steer the economy away from disaster. A former Federal Reserve economist, now leading a quantitative hedge fund, sees the potential rate cut in September as a defining moment: "This isn’t just another policy shift; it's Chair Jerome Powell’s chance to secure his legacy, much like former Fed Chairs Paul Volcker and Alan Greenspan. Successfully navigating this transition could place him among the ranks of the greatest Fed Chairs in history.”

However, caution remains a central theme for others within the institution. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, recently warned, "Premature rate cuts could unleash a surge in demand that could initiate upward pressure on prices." His caution reflects a deep-seated concern that even in a vastly different economic environment, the fundamental risks of inflation remain.

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