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Behind closed doors, Fed Chair Jerome Powell and President Trump just had a meeting that could change everything about monetary policy. While markets obsess over tariff headlines, a deeper economic slowdown is emerging that might force the Fed's hand sooner than anyone expects.
Key Takeaways
- The US housing market is showing significant slowdown signs as yields ramp higher
- Jobs market data indicates meaningful weakening with unemployment claims expectations vs reality diverging sharply
- GDP revisions reveal consumption growth was revised down from 1.7% to 1.2% - well below the 2-2.5% trend
- First quarter GDP was artificially boosted by massive tariff front-running in equipment spending
- Powell-Trump meeting appears to be a "relationship reset" after previous tensions over Fed independence
- The meeting increases probability of July rate cuts as Fed may return to being purely data-driven
- Upcoming NFP jobs report could be the catalyst for policy shift if weakness continues
- Legal challenges to tariffs and Supreme Court rulings are creating additional economic uncertainty
The Housing Market Reality Check
The US housing market is sending clear warning signals that many are missing while focused on political headlines. With the ramp-up in yields over recent months, housing activity is slowing significantly - and this isn't just a temporary blip.
"I think it's pretty clear that the housing market in the US is starting to slow, and maybe fairly significantly," notes economic analyst Andrew in this week-ahead briefing. While housing investment represents only 3-3.5% of GDP, making it less economically critical than in previous cycles, the social implications are severe.
The real issue isn't just economic data points - it's that people fundamentally "can't find homes at rents or prices they are happy to pay or can afford to pay." This affordability crisis is now intersecting with higher borrowing costs to create a perfect storm for housing demand destruction.
- Higher yields are making mortgages unaffordable for marginal buyers
- Existing homeowners are locked into low-rate mortgages, reducing mobility
- New construction economics are deteriorating with higher financing costs
- Rental markets are pricing out middle-class families in many metropolitan areas
What makes this particularly concerning is the speed of the deterioration. Unlike previous housing slowdowns that developed over quarters, the current weakness is emerging rapidly as financial conditions tighten.
The Jobs Market Softening That's Being Underestimated
Perhaps more significant than housing is the emerging weakness in the jobs market - the true linchpin of consumer spending and economic growth. The data divergence is becoming impossible to ignore.
Unemployment claims expectations for the coming week are 300,000, but recent trends tell a different story. The three-month average sits at 155,000, while the six-month average is 193,000. "It is definitely slowing," the analysts note, with hope that "it's not slowing so fast that people actually have to sell their houses because then we are in the recession scenario."
Key Labor Market Indicators Showing Stress:
- How long it takes people to find jobs (duration increasing)
- Primary reasons why people are losing jobs (shifting from voluntary to involuntary)
- Whether people are still entering the labor market (participation changes)
- Business and consumer confidence collapse affecting hiring decisions
The concern is that once labor market weakness accelerates, it creates a self-reinforcing cycle. Consumer income depends primarily on wage income, so labor market slowdowns directly translate to consumption weakness, which then feeds back into business employment decisions.
GDP Revisions Reveal Hidden Economic Weakness
The latest GDP revisions tell a story that's much weaker than headline numbers suggest. Personal consumption - which represents 70% of US GDP - was revised down from 1.7% to 1.2%. This isn't just a minor adjustment; it's a significant downward revision of the economy's primary growth engine.
More importantly, this 1.2% consumption growth is "already below trend" according to the analysis. The long-term consumption trend should be around 2-2.5% (it was 2.5% during the immigration surge period, but 2% is reasonable without new immigration inflows).
The Tariff Front-Running Distortion: What made first quarter GDP particularly misleading was "an absolutely insane increase in equipment spending" due to businesses front-running expected tariffs. Capital expenditure contributed about 1.4% to growth - usually it's around 0.5%.
Recent data confirms this was artificial. Core capital goods orders (excluding defense and transportation/aircraft) came in at -1.3% - "a really low number and well below expectations." This suggests the equipment spending boost was temporary and is now reversing.
The picture that emerges is an economy where:
- Consumers are already spending below trend rates
- Business investment was artificially inflated by tariff fears
- The underlying growth momentum is weaker than surface data suggested
The Powell-Trump Meeting: Relationship Reset or Policy Shift?
The most intriguing development this week was the private meeting between Fed Chair Powell and President Trump. While details remain limited, the meeting's structure and timing suggest significant implications for monetary policy.
Key Details:
- The meeting was requested by President Trump
- Fed released a readout; White House did not
- Fed's readout emphasized no White House influence on monetary policy
- Meeting likely included Treasury Secretary Bessent and other officials
The analysts interpret this as "an attempt to reset the relationship" after previous tensions. Trump had made "fairly aggressive comments" about the Fed, and there were earlier threats about potentially firing Powell. However, the Supreme Court's recent ruling preserved Fed independence, and market reactions to political pressure made clear that Fed independence would be maintained.
"I think the meeting was a way of resetting the relationship," with both sides likely going through "a non-emotional technical description of where they stand" - Powell explaining his data focus, Trump and team explaining their economic objectives.
Why This Meeting Increases July Rate Cut Probability
Paradoxically, this relationship reset might actually increase the likelihood of earlier rate cuts. The reasoning relates to how political pressure may have artificially kept the Fed hawkish.
Recent Fed statements have been "quite hawkish and quite inconsistent." Fed officials repeatedly say "they've never seen as much uncertainty in their entire life" but then immediately follow with specific timing predictions about when cuts will begin. "They convey a sense of certainty on their forthcoming data when they pick a specific date... and the two things are completely inconsistent."
The Political Hawkishness Theory: The Fed may have adopted "additional hawkishness triggered by the White House attempt to influence the Fed." With the relationship now reset and Fed independence clearly established, the central bank might return to being purely data-driven rather than positioning against political pressure.
If this theory is correct, weakening economic data should now translate more directly into policy accommodation rather than being filtered through political considerations.
Financial Conditions Tightening: Another Argument for Cuts
An alternative perspective suggests the Fed should already be cutting based on financial conditions. "The tightening of financial conditions since the Fed says that financial condition is what transmits policy to the real economy... could have justified a cut."
Current Conditions vs. Previous Easing:
- Unemployment is exactly where it was in August last year
- Inflation is lower than August levels
- There have been "two low points in succession" in inflation data
- Last year, the Fed cut 100 basis points following similar conditions
The 30-year Treasury yield moving up 40 basis points in just over a week represents significant tightening of financial conditions - exactly the transmission mechanism the Fed uses to influence the real economy.
The Upcoming Data Gauntlet
Next week brings critical data that could crystallize the economic slowdown narrative. The key releases include:
PMI Data: While more of a trading event than economic indicator due to "loose relationship with GDP," the data will provide early signals about business conditions.
Non-Farm Payrolls (NFP): This is "actually quite an important NFP print" because it will reveal whether labor market softening is accelerating. Beyond headline numbers, the focus will be on:
- Job search duration trends
- Reasons for job losses (voluntary vs. involuntary)
- Labor force participation changes
- Broader measures of labor market slack
The analysts expect the payrolls number to be "significantly slower, perhaps even below expectations" given the collapse in business and consumer confidence.
Legal and Administrative Uncertainties
Adding to economic uncertainty are ongoing legal challenges to the administration's trade policies. Courts have ruled against certain tariff implementations, and the administration will likely "ask the Supreme Court to extend an administrative stay on the decision of the court that made the tariff illegal."
While the Supreme Court will likely grant the stay, this legal uncertainty creates additional business planning difficulties. Companies are unsure whether to continue front-running tariffs or whether trade policies will be modified or delayed.
Market Implications: Why July Cuts Matter
The combination of economic weakening and potential Fed policy shifts creates significant market implications across asset classes.
Fixed Income: If July cuts become reality, the long end of the curve could rally significantly. Recent weakness in global fixed income markets (particularly US and Japan) could reverse quickly as growth concerns override inflation fears.
Equities: Earlier Fed easing could provide support for equity markets, but this depends on whether cuts are driven by economic weakness or proactive policy. If cuts respond to genuine economic deterioration, equity markets might struggle despite lower rates.
Dollar: Earlier Fed cuts would likely weaken the dollar, particularly against currencies where central banks are maintaining tighter policy stances.
Credit Markets: Corporate credit could benefit from both lower rates and Fed signaling about economic support, but deteriorating fundamentals from slower growth could offset monetary policy benefits.
The Feedback Loop Scenario
What makes the current situation particularly important is the potential for self-reinforcing economic weakness. Consumer spending depends primarily on wage income, so labor market softening directly reduces consumption, which then feeds back into business employment decisions.
"Once we have a slowdown in the labor market, consumer income slows down, consumption slows down and then you start getting the feedback loop from businesses and employment."
This dynamic explains why the upcoming jobs data is so critical. If NFP confirms meaningful labor market weakening, it could trigger the feedback loop that makes deeper economic softening inevitable rather than just possible.
Central Bank Communication Evolution
Looking ahead, the analysts expect to expand their coverage to include more sophisticated analysis of central bank communications, including:
- AI-powered topic modeling of Fed speeches
- Regional Federal Reserve bank analysis
- Broader coverage of global central banks including emerging markets
- Enhanced event analytics for economic data releases
This expansion reflects the growing importance of central bank policy coordination and communication in an increasingly complex global economic environment.
The Week Ahead: Critical Inflection Point
Next week represents a potential inflection point where economic reality might finally align with market pricing. If jobs data confirms the slowdown that housing and consumption data already suggest, the Fed's calculus could shift dramatically.
The Powell-Trump meeting may have removed a significant constraint on Fed policy flexibility. Combined with weakening data and tightening financial conditions, the stage is set for a more accommodative monetary policy stance than markets currently anticipate.
For investors, the key question isn't whether the economy is slowing - the data increasingly confirms that. The question is whether the Fed will get ahead of the slowdown with preemptive easing or wait until weakness becomes severe enough to require emergency action.
The July FOMC meeting, once considered too early for rate cuts, is increasingly looking like the most logical time for the Fed to begin addressing emerging economic weakness before it becomes entrenched.
