Andrew Cates

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Many economists are now looking to non-traditional real-time data sources to get a bearing on the economic temperature. That's partly because of the normal lags that exist between the period to which traditional data sources pertain and their publication. Since economic temperatures are changing so rapidly, not least during the current pandemic, these traditional data sources could be losing some relevance. There are in addition arguably now many complicating factors in how we interpret traditional data sources at present that have been generated by the pandemic. For example, how should we interpret data on the ‘food away from home' component of consumer price indices in a period when most restaurants have been closed?

Recent trends in two non-traditional data sources are highlighted in the charts above. The first shows some daily mobility data from Apple for the use of public transport (transit). This offers a good gauge of the readiness of the public to emerge from a lockdown scenario and travel to/from work or for leisure. The latest data for a few selected economies show a much greater readiness of the German public to travel again compared with, say, the US, UK or Canada.

Similarly daily data from Opentable for restaurant bookings – another helpful high-frequency gauge of consumer confidence – appear to be bouncing back strongly from their lockdown-induced slump in Germany and Australia. Some signs of life can also be seen in the data for the US and Canada.


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Both these data sets serve to illustrate that the likely strength of an economy's recovery in the period ahead will be driven by the degree to which lockdown measures are being eased. Latest data from the University of Oxford accordingly show that lockdown policies in Germany and to a lesser extent Australia are now less stringent than in many other major developed economies, as evidenced in the final chart.

Apple's mobility data can be accessed via Haver's Transportation database (TRANSPRT), OpenTable's data for restaurant bookings can be accessed via the Global Daily (INTDAILY) database and Oxford University's indicators of Lockdown stringency can be accessed via the Environment, Social and Governance indicators database (ESG).

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Many economists are now looking to non-traditional real-time data sources to get a bearing on the economic temperature. That's partly because of the normal lags that exist between the period to which traditional data sources pertain [...]

Taking the Temperature with Non-traditional Data

Joseph G. Carson

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The Bureau of Labor Statistics (BLS) first commissioner Mr. Carroll D. Wright described the agency mandate, "Fearless Publication of the Facts". By its admission, BLS failed to live up to its mandate as it published two employment reports for April and May filled with distorted and corrupt data.

Substantial misclassifications of people working and not produced a "false narrative" about jobs and unemployment in April and May. The pandemic of 2020 will stand alone in American history, triggering the steepest economic contraction but without an accurate statistical record of job loss and the level of unemployment.

In April, BLS found that 8.1 million people were wrongly classified as employed. In May, even with additional guidance to Census interviewers, BLS said 5.4 million people that were classified as employed but should have been classified as unemployed.

The misclassification of people working and not working corrupted the reported numbers. For example, if employed workers were properly classified, as unemployed on temporary layoff, household employment for April and May would show a cumulative loss of approximately 32 million versus the published numbers of 18.5 million. The level of unemployment in May would stand close to 30 million, and the jobless rates for April and May would be 19.7% and 16.3%, respectively. The published unemployment rates are 14.7% for May and 13.3% for April.

BLS decision to publish distorted and misleading figures is based on a long-standing policy. BLS stated, "According to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reassign survey responses."

Defending "data integrity" is important, but defending a statistical system that has produced grossly inaccurate statistics is wrong. Even if adjusted numbers are only a "rough estimate" of the labor markets they portray a more accurate picture of what happened versus the published figures. What good is it to have more accurate statistics of the employment situation buried in an addendum out of sight of most users?

Former BLS Commissioner Ms. Janet Norwood said, "Change is a necessary part of a good statistical system, and we should not fear it. Just as there is no absolute certainty in statistical estimation, there is no absolute perfection in statistical methodology". BLS is defending a statistical process that failed.

The employment situation for April and May is far worse than the reported statistics. Investors, analysts, and politicians should look at the published data with a skeptical eye.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The Bureau of Labor Statistics (BLS) first commissioner Mr. Carroll D. Wright described the agency mandate, "Fearless Publication of the Facts". By its admission, BLS failed to live up to its mandate as it published two employment [...]

BLS Failed Its Mandate: "Fearless Publication of the Facts"

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The Bureau of Labor Statistics (BLS) reported that the jobless rate fell 1.4 percentage points to 13.3%. The May numbers bettered consensus expectations by the largest margin in history as analysts (including me) expected the jobless rate to rise to near 20%. The question on the mind of many analysts is how can the jobless rate decline when many millions more filed new jobless claims? Not sure there is a good explanation.

The household employment survey is normally conducted through a combination of in-person interviews and telephone interviews. But for the safety of the Census workers, personal interviews were not conducted in May or April for that matter. As a result, the response rate to the household survey in May was exceptionally low at 67%, about 15 percentage points below the average rate prior to the pandemic.

The low response rate does raise questions about the accuracy of the numbers but does not mean the reported numbers are wrong. In the press release, BLS stated that they are investigating a "misclassification error" as a large number of workers temporarily unemployed because of the pandemic were wrongly classified as employed. According to BLS, the jobless rate would have been 3 percentage points higher if these workers would have been properly classified as unemployed. But even an error of 3 percentage points would have resulted in a jobless rate of 16%+, still far below consensus estimates of 19%.

Estimates of a much higher jobless rate were based on the jobless claims data. In mid-May, the four-week level of jobless claims was 5 million higher than the level in mid-April. Logically if millions more are filing new claims it means the jobless rate is rising, not falling, the exact opposite of what happened in May. Jobless claims do reflect "hard data" as each new claim represents an individual stating that they are unemployed.

However, not all jobless claims are legitimate, but one would think the lion share of 5 million in new claims is legit. It is worth noting that filing false claims can lead to serious penalties. The jobless rate, however, is based on the "honor system", as people are asked to state their labor force status. There is no penalty for providing false information. And it would be impossible to prove anyway.

One possible explanation for the gap between the two data series is that people who work for businesses that received government support were told that they are back on the payroll (although not working) but still filed for jobless benefits. I have no proof that this took place. But it appears to be the only logical explanation. Perhaps in the coming days, there will be press reports of double-dipping; that is, people getting paid to not work and filing for jobless benefits at the same time.

The equity market reaction to the May data is not surprising, but seeing the equity market trade up so sharply even before the release of the data does raise questions over possible leaks. Here too I don't have any proof, but isn't it odd that the equity market was trading up so sharply before what everyone expected to be the highest jobless rate since the Great Depression.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The Bureau of Labor Statistics (BLS) reported that the jobless rate fell 1.4 percentage points to 13.3%. The May numbers bettered consensus expectations by the largest margin in history as analysts (including me) expected the jobless [...]

Bombshell---Jobless Rate Falls Even As Millions More File Jobless Claims

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In May, the Institute of Supply Management (ISM) released two surveys on manufacturing. The message is bleak; the contraction in activity remains sharp and firms expect a record decline in revenues and capital expenditures for 2020.

The May composite index for manufacturing rose 1.6 percentage points to 43.1%. The headline reading overstates the activity level in manufacturing. Three key sub-components, new orders, production, and employment, have readings in the low 30s. The low readings on production and jobs speak about the sharp contraction. Pessimism about a recovery is apparent in the low level for new orders.

The ISM manufacturing index was initially created in the early 1980s by Mr. Ted Torda, a colleague of mine at the Office of the Chief Economist at the Department of Commerce. ISM manufacturing index was created to help predict quarterly changes in GDP. The initial launch of the ISM manufacturing index had a weighting scheme of new orders (.3), production (.25), employment (.2), supplier deliveries (.15), and inventories (.1). The current weighting scheme applies equal weights (.2) to the five components.

Using the original weights the May 2020 composite index is estimated at 39.5, up from the 36.9 reading in April. Both readings are about 4 percentage points lower than the published figures.

Why is that important? The ISM composite index is a diffusion index. Both the level and the change in the index level are important. The published figure of 43.1% or the adjusted figure of 39.5% both say the same thing: the manufacturing sector is still contracting.

Yet, the one shortcoming of a diffusion index is that it does not distinguish between the magnitudes of change. That means large declines in one industry could be offset by small increases in another industry and vice versa. Also, declines in activity are not linear any more so than increases. In other words, just because a monthly reading moves up or down from the prior month that has no bearing on the next months reading.

In May, the 30% readings for production, employment and new orders indicate that the manufacturing sector is still experiencing a sharp downturn. And the fact that these readings are marginally above the record lows of April create a false impression that the road to an eventual rebound is just a few months away.

Weakness in the manufacturing sector and pessimism on the outlook is also seen the semi-annual survey of manufacturers. According to the survey results released in mid-May, firms expect overall revenue to decline by 10.3% in 2020. But 58% of those surveyed expecting a crash, with revenues off 20%. Plunging sales have forced firms to plan for record layoffs and to cut capital expenditures by a stunning 19%.

The message from manufacturing is that a severe contraction remains in play and a recovery is a long way off. Both view are at odds with the optimism of the equity markets.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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In May, the Institute of Supply Management (ISM) released two surveys on manufacturing. The message is bleak; the contraction in activity remains sharp and firms expect a record decline in revenues and capital expenditures for 2020. [...]

ISM Surveys of Manufacturing: Sharp Contraction Underway & No Sign of Recovery

Charles Steindel

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The April results for the Federal Reserve Bank of Philadelphia's state coincident indexes were as horrid as one would expect. Only 4 states (Arizona, Georgia, Texas, and Nebraska) had one-month declines smaller than 10 percent (Arizona's was 5.5 percent); 8 had drops larger than 30 percent (Michigan was down 44.2 percent). Three-month results were comparable. On its web site the Bank puts up a map illustrating the three-month results. States with declines larger than 1 percent are shown in red, and that is what one sees—all 50 in red.

There is an oddity, though, about the results. There is a separate index for the nation as a whole compiled using the same data and techniques as for each state. The national index fell 12 percent from March to April, which was noticeably better than state norms. Only 8 states had declines less than that; the 4 noted above, as well as Colorado, Florida, Wyoming, and Mississippi. Of course, Texas and Florida are 2 of the 4 largest states, and Georgia is also big, but given the huge declines elsewhere a national drop of as “little” as 12 percent was surprising. In the current environment, though, the margins of error in both state and national results may be much larger than in ordinary times.

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The April results for the Federal Reserve Bank of Philadelphia's state coincident indexes were as horrid as one would expect. Only 4 states (Arizona, Georgia, Texas, and Nebraska) had one-month declines smaller than 10 percent [...]

State Coincident Indexes in April

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The Fed's debt-bridge policy is designed to improve the flow of credit to businesses to avoid a devastating credit crunch. Never before has one of the monetary policy solutions to combat recession been to extend credit to struggling, profit losing businesses.

There is no precedent for record business borrowing during a recession. The scale of business failures during and after the economy exits recession will far exceed that of the Great Financial Recession.



The Fed's Debt-Bridge Policy 

The traditional way for monetary policy to build a bridge from recession to recovery is through the lowering of official interest rates. In time, the reduction of interest rates triggers a refinancing cycle, lowering interest costs, and improving liquidity positions. The "reliquification" process enables firms (and individuals) to exit recession with stronger liquidity and lower debt burdens.

With official interest rates relatively low the "reliquification" process was not a viable policy option to combat the abrupt contraction in the economy. So policymakers were forced to support the flow of credit to the economy by purchasing securities and provide direct financing to sectors where it is not otherwise available or too costly.

So instead of contracting, which is the typical pattern during the recession, the flow of private credit has exploded to the upside.


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Since the start of 2020, commercial and industrial loans have increased over $750 billion to a record $3.1 trillion. That increase nearly matches the cumulative increase in corporate bank borrowing of the past 6 years.

At the same time, US corporations have tapped the capital markets for hundreds of billions of new debt. Through early May corporations have issued nearly $300 billion in new debt, twice as much as the comparable period one year ago.

An addition of $1 trillion of new liabilities over a few months is a big number in the best of times. Yet, record corporate borrowing during bad times increases the risk of business failures and defaults. Here's why.

A Harvard Business study released in 2010 analyzed corporate performance during three global recessions from 1980 to 2000. Sales and profit performance of 4700 public companies were analyzed three years before and three years after the recession.

The findings paint a grim picture of the devastating and lasting impact recession has on corporate performance. To be sure, a shocking seventeen percent of the companies failed were acquired or decided to go private.

Meanwhile, three years after the recession forty percent of the companies hadn't recovered to precession sales and profit levels. And, approximately 80% of public companies had not rebounded to their pre-recession growth rates in sales and profits a full three years after the recession.

Almost all business people agree that the current crisis marks an inflection point. The business world has changed and firms need to remake (i.e., downsize) their organizations to fit in the new normal. Companies will operate with a smaller footprint, but more debt.

There is no precedent for record corporate borrowing during a recession. As a result, investors need to brace for an economy unlikely to resemble the one before, with an uneven and slow growth, and record corporate failures.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The Fed's debt-bridge policy is designed to improve the flow of credit to businesses to avoid a devastating credit crunch. Never before has one of the monetary policy solutions to combat recession been to extend credit to struggling, [...]

Something's Wrong: A Debt-Financed Recession

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The debacle was complete. All 50 states (and DC) experienced statistically significant declines in payroll employment and statistically significant increases in their unemployment rate in April. 43 states saw new record highs in unemployment, based on the current series (starting in 1976). Nevada was highest, with a truly staggering 28.2 percent figure. Michigan and Hawaii also had rates above 20 percent. Seven states report rates under 10 percent; Connecticut's 7.9 percent was the lowest. However, with a 7.4 percent drop in its labor force the Nutmeg State really doesn't have much to boost about.

On the job side, Michigan's count fell more than 20 percent. California, New York, Texas, and Florida all shed more than 1 million jobs. The rate of decline was Oklahoma's 7.8 percent; nine other states experienced losses less than 10 percent.

A sharp drop in government employment was noted in the national data. The experience of states varied substantially. Hawaii and Wisconsin shed more than 10 percent of their government jobs, but numbers of other states had losses of less than 3 percent. Leisure and hospitality, of course, fell greatly everywhere. Unsurprisingly, some of the most severely locked-down states, such as Washington, New York, and New Jersey, lost more than half their jobs in this sector (as did Hawaii and few other states—surprisingly, Florida and Nevada were not in this group).

For a second straight month BLS was unable to compile household survey figures for Puerto Rico. The island's job count fell by more than 10 percent.

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The debacle was complete. All 50 states (and DC) experienced statistically significant declines in payroll employment and statistically significant increases in their unemployment rate in April. 43 states saw new record highs in [...]

State Labor Markets in April

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In April, federal withheld income tax collections posted a record drop from year-ago levels. The scale of the decline indicates that the reported figures on job loss and unemployment are understating the
 collapse in labor markets. How many companies have ever stress-tested their sales plans for a 25% to 30% jobless rate? What's the new normal level of consumer spending?

 Federal Tax Receipts Tank 
In April, federal withheld income (gross) tax receipts totaled $79.6 billion, off 30% from year-ago levels. The scale of the decline is the largest on record since the monthly data started
 being reported in 1972. Before the April 2020 tax data was released, the largest monthly year on year decline in
 federal withheld income tax collections occurred in September 2009, off 21.7%, at the end of the Great Financial Recession. April tax receipts indicate that as ugly as last month's jobs report was it may have understated the scale of job loss and rise in unemployment.
 
 In April, the household employment survey showed that 22.4 million people lost their jobs, lifting the unemployment rate to 14.7%, up from 4.4% in March, an increase of 10.3 percentage points in one month. The one-month increase was larger than any annual
 increase on record, even during the years of the Great Depression. One of the curious parts of the April employment report was the exodus of 6.4 million people from the workforce. If people did not exit the workforce in record numbers last month, the jobless
 rate would have topped 18%. Confusion over new federal legislation for unemployment compensation may have led people to misstate their labor force status last month.
 
 Congress passed the Coranavirus Aid, Relief, and Economic Security (CARES) Act in late March. This legislation provided an extra $600 weekly payment in unemployment compensation; increased the number of weeks an individual may receive benefits; and expanded the coverage to self-employed and individual contractors who traditionally were not eligible
 under state law. Initially, states were waiting for updated guidelines from the Labor Department eligibility issue. Now that states and people are better informed about the eligibility issue people that exited in April will need to re-enter to be eligible
 to collect jobless benefits.
 
 As a result, the May jobless rate could spike 10 percentage points to 25% reflecting a surge in re-entrants and new job losers. How many companies have ever stress-tested for 25% unemployment? With record-high joblessness, what's
 the new normal level of consumer demand for vehicles, travel, smartphones, etc? Investors need to rethink company sales and profits expectations based on a much lower level of consumer sales.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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In April, federal withheld income tax collections posted a record drop from year-ago levels. The scale of the decline indicates that the reported figures on job loss and unemployment are understating the collapse in labor markets. How [...]

Uh-Oh!: Record Drop in Taxes Signal Deep Consumer Recession

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

Resilient US economy is pushing up longer-term inflation expectations and interest rates

Positive US economic data surprises leading to upward adjustment of interest rate expectations

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

Ratio of job openings to the number unemployed in the US now below pre-pandemic level

U.S. layoffs not showing as much cooling in labor markets as unemployment rate

While goods prices have moderated, service price inflation remains elevated and sticky

Since Jan 2023, BCEI US outlook has improved, worsened for Japan and the euro area

Persistent negative US economic surprises leading to big rate-cut expectations

Germany is Euro area weakling

Flash PMIs show good start to Q3 in US; loss of momentum in the euro area

Chinese economy on downtrend could threaten global economy

Working age population labor force participation near all-time high as retirements increase

Blue Chip forecasters look for widespread policy rate cuts just ahead

Flash June PMIs point to a widespread slowdown apart from the US

Announcement of snap French election is causing concern across Europe

The UK economy’s post-pandemic under-performance relative to its pre-pandemic trend

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The Federal Reserve Bank of Philadelphia’s state coincident indexes were again soft in October.. In the one-month changes, South Dakota led with a .67 percent gain, and Connecticut, Ohio, and Delaware had increases above .5 percent. However, the indexes for 13 states declined, with South Carolina and Michigan both down .4 percent (Michigan saw some pronounced retrenchment in autos, and South Carolina would have been hit by the Boeing strike). Over the 3 months ending in September, 12 states were down, with South Carolina (down 1.4 percent) and Massachusetts (off 1.1 percent) once again at the bottom. Connecticut was yet again at the top, with a 1.7 percent increase, with Over the last 12 months, 3 states were down, and 10 saw increases of less than 1 percent. South Carolina’s index was off by 1.2 percent. Arizona had a 4.9 percent increase, and Connecticut was up 4.7 percent, with 7 others up more than 3 percent.

The independently estimated national estimates of growth over the last 3 months (.55 percent) and 12 months (2.55 percent) appear to be roughly in line with the state numbers.

State Coincident Indexes in October 2024

State labor markets were little-changed in October. The Boeing strike, and Hurricane Milton, triggered statistically significant declines in payrolls in Washington and Florida. There were no other statistically significant changes, not even in North Carolina (which did have a insignificant drop). Nonetheless, the sum of payroll changes across the states was -76,400, a clear amount lower than the independent national change of 12,000.

Three states had statistically significant declines in their unemployment rates in October, and one  showed an increase.  None of the changes were larger than .2 percentage point.  The highest unemployment rates were in DC (5.7%),  Nevada (5.7%), California (5.4%), and Illinois (5.3%). No other state had rates as much as a point higher than the national 4.1%. Alabama, Hawaii, Maine, Mississippi, Nebraska, New Hampshire, North Dakota, South Dakota, Vermont, Virginia, and Wisconsin had rates of 3.0% or lower, with South Dakota at 1.9%.

Puerto Rico’s unemployment rate dropped to 5.4%--lower than both DC and Nevada, and matching California--while the island’s job count grew by 2,300.

State Labor Markets in October 2024

The new administration intends to pursue an unconventional fiscal strategy. A key aspect of the strategy involves reducing or abolishing non-defense government agencies in order to create fiscal space to make the current tax law permanent, lower taxes even more, and generate extra revenue through an extensive and significant tariff program.

The success of the fiscal policy of the new administration will depend on the reaction of the bond market, which has historically influenced policy changes. Three decades ago, Bill Clinton pledged a stimulus package if he won the election, but upon taking office, he had to shift towards a "financial market strategy" instead. Stimulus spending was abandoned in favor of a deficit reduction plan to prevent long-term interest rates from increasing. Given the imbalance in the federal budget is much larger today, it is crucial for policy decisions to take into account the bond market's reaction, raising the question whether policymakers will heed the advice as they did in 1993.

The odds are in favor of the opposite happening, as the new administration is not inclined to give in to the pressures of the bond market. If bond yields jump sharply, the administration might urge the Fed to intervene, potentially worsening the situation.

**The Federal Budget**

In the fiscal year 2024, total federal spending reached $6.75 trillion, resulting in a budget deficit of $1.83 trillion. Currently, defense budget and social programs are deemed off-limits, as are interest payments. This shifts the attention towards cutting expenses in non-defense discretionary spending.

During the fiscal year 2024, non-defense discretionary spending amounted to approximately $950 billion. Although non-defense spending had stayed stable in nominal values between 2010 and 2019, it surged in 2020 as a result of economic recovery initiatives through additional legislation. Nevertheless, there is a pattern of downward trend in non-defense expenditure even prior to the upcoming Congressional term, with forecasts indicating a decline to 2.5% of GDP over the next ten years as per the Congressional Budget Office. The smallest proportion of such outlays in the past five decades was 3.1%.

Although additional spending cuts may still occur, the meager budget share allocated to these programs indicates that the extent of budget savings is significantly smaller than advertised. Below are some more reasons why significantly cutting non-defense discretionary spending will pose political challenges.

With a budget of $238 billion, the Department of Education provides support to almost 100,000 public schools through its programs.

With a budget of $106 billion, the Department of Commerce supports research and development in emerging technologies such as artificial intelligence.

With a budget of $460 billion, the Department of Agriculture funds many projects in rural communities, including housing, community facilities, and utilities.

With a budget of $275 billion, the Department of Transportation makes billions of dollars in grants to improve and upgrade all types transportation systems.

Non-defense federal spending plays a critical role in the economy by offering assistance to businesses of different scales and types, along with state and local governments and individuals. This does not imply approval of the Federal budget or its spending preferences, but rather recognizing essential elements concerning federal spending and its economic influence.

Furthermore, handling the distributional effects of significantly reducing non=-defense spending will pose significant controversy and implementation challenges. For example, states in the northeast pay more in federal taxes than they receive in federal spending, while various states in the south, as well as a few in the mid-west and southwest, receive more assistance than they contribute in taxes. This raises the question of whether politicians from states receiving the most aid will support legislation that significantly reduces the assistance provided to their constituents. Every state listed that gets more in federal assistance than they pay in taxes voted for the new administration.

Extending the 2017 tax cuts adds another layer of complexity to the new administrations fiscal plan. The Congressional Budget Office projects that prolonging these tax cuts could result in a $4.6 trillion increase in the deficit over the next ten years. To counterbalance this, Congress would need to enact spending cuts averaging more than $450 billion a year, affecting almost half of non-defense spending. Moreover, there are discussions about proposing further reductions in federal taxes.

Implementing a comprehensive and substantial tariff program could lead to increased revenue. However, the effectiveness of this strategy is uncertain, as it relies on the assumption that foreign trade partners will not retaliate. Additionally, foreign entities play a crucial role in aiding the US in meeting its federal borrowing needs, hence implementing a tariff strategy is like informing your creditor that you intend to cease transactions with them but expect them not to demand repayment of your loans.

The tariff plan could potentially create complications for both the economy and the bond market. Significant risks include the possibility of higher consumer inflation, which may raise the expenses of social programs (such as inflation indexation) and widen the budget deficit. Additionally, it could lead to higher interest rates, affecting policy rates accordingly.

The new administration has expressed interest in influencing the Federal Reserve's interest rate decisions and has even proposed replacing the Fed Chair before his term expires in 2026. Unlike other government agencies that report directly to the President, the Federal Reserve is an independent agency accountable to Congress. Altering the Fed's independence would require legislative action, potentially causing disruption in the financial markets. The odds of changing the status of the Fed is minimal, but that does not mean the new administration will not publicly expressing its views, which pose challenges for the Fed and confusion (volatility) in the financial markets.

The new administration faces a specific challenge when it comes to dealing with the bond market, particularly due to the fact that it is commencing with an excessively large budget deficit that is forecasted to grow over the next decade. The sheer size of the bond market renders it impervious to being swayed solely through rhetoric or public persuasion. Irrespective of the new administration's declarations or viewpoints, the bond market will express its position on fiscal policy. Three decades ago, the Clinton administration changed direction when the bond market rejected a stimulative fiscal plan. If the new administration's fiscal strategy indicates larger budget deficits and increased inflation, the bond market's rejection will be more significant than that of 1993.