Fed Cuts Rates For First Time This Year & Winners and Losers of a TikTok Deal

0:00The support for the show comes from Attio. Attio is an AI native CRM built for the next era of companies. Its powerful data structure adapts to your business models, syncs in all of your contacts in minutes, and enriches your business with actionable data. Attio also allows you to create email sequences, real-time reports, and powerful automations, all to help you build what matters, your company. Join industry leaders including Flatfile, Replicate, Modal, and more. You can go to attio.com slash propg, and you'll get 15 % off your first year. That's attio.com slash propg.

0:35Support for the show comes from Workday. New people to develop, new products to launch, new goals to crush. Workday Go is designed for smaller mid-sized businesses because there's never a dull moment and it can be a lot to keep up with. With HR and finance on one AI platform, you'll have everything you need to think big, go big, and grow big and go live in as little as 30 to 60 business days. Simplify your SMB with Workday Go. Find out what Workday Go can do for you. Visit workday.com slash go to learn more.

1:06Rinse takes your laundry and hand delivers it to your door, expertly cleaned and folded, so you could take the time once spent folding and sorting and waiting to finally pursue a whole new version of you, like tea time you. Mmm. Or this tea time you. Or even this tea time you. So did you hear about Dave? Or even tea time, tea time, tea time you. Mmm. So update on Dave. It's up to you. We'll take the laundry. Rinse. It's time to be great. Today's number, 16. That's how many hours people spent waiting in line for Shakespeare in the Park in New York this summer. One of the longest waits ever. That is 960 minutes of small talk with theater kids, or as some people are calling it, the seventh ring of hell.

1:58Money market's mad. If money is evil, then that building is hell. The show goes on!

2:07Welcome to Prof G Markets. I'm Ed Elson. As you can see from my background, I am not in the studio right now. I am in what is known as the eighth ring of hell. I'm in Las Vegas at the moment, doing a talk tomorrow, which will be very fun. But lots of news to get into. So let's get into the show. It is September 18th. Let's check in on yesterday's market vitals. The S &P 500 and the Nasdaq closed slightly lower following the Fed's interest rate decision. Meanwhile, the Dow hit an intraday record and ended the day in the green. Treasury yields rose slightly, along with the dollar. And finally, Nvidia shares fell nearly 3 % after China banned its tech companies from buying Nvidia chips.

2:51OK, what's happening? For the first time in nine months, the Federal Reserve is cutting rates. As expected, Jerome Powell slashed interest rates by 25 basis points yesterday, citing a weakening labor market. Fed officials also penciled in cuts for the two remaining meetings this year. The lone dissenting vote at the meeting was the Fed's newest member, Stephen Myron, who favored a 50 basis point cut. All the other governors voted for 25 basis points. Markets initially rallied in response, but ended the day mixed. So to help us break down what this decision means for the economy and what we can expect for the rest of the year, we have our favorite financial commentator from the Financial Times.

3:36We have the one and only Robert Armstrong. Rob, thank you so much for joining us again on Profit Markets. It's great to be here. Very interesting meeting. A lot to say. Yes. Let's just start with your initial reactions. What did you think? I think there were two things that jumped out at me. One was, you know, the Fed is stuck between its mandate right at the top of the press release. They said inflation is rising. Job creation is falling. They are being pulled in two opposite directions. And the statement was very clear. And Chair Powell was very clear. We're leaning towards the employment side of our mandate of our job.

4:21And so that should be a good message for markets, right? Like we're, okay, we're cutting and we're, we're kind of more worried about growth than inflation, broadly speaking. And that was kind of interesting. And that message came through much or a bit more clearly than I expected. I expected a little bit more of a, you know, six of one, half a dozen of the other. The second interesting thing was, of course, the issue of independence. So it is not often that the statement of economic projections, which is this little folder full of charts that the Fed hands out before every meeting, which shows what the different members expect about this and this, this or that economic variable, actually makes you laugh.

5:10but if this one did make me laugh because they have what they call the dot plot which is one dot on a sort of chart of expected rate policy at the end of this year and so the 19 people on the committee and the 12 who vote put their dots on there and all the dots were all like in this little group together like a group of happy children but then there was one dot that was the unhappy, lonely child that had been rejected by the group way at the bottom of the chart. And that dot could only have come from one person, which is the new member of the committee, Mr. Marin. Exactly. Representative on the committee of the White House.

5:56Second day on the job. Second day on the job. And in the press conference, Powell got some very fair questions from the journalists, which were along the lines of, you rattle on no end about the importance of independence, but you have somebody who literally has a job in the White House sitting on the committee, and we all know whose dot that lonely little dot is. What do you say about that? And he said, basically, two things. One, independence is good. I won't comment on Mr. Miran's presence specifically, and two, one member of the committee can't sway it because the 12 people vote, which is, I guess, a fair answer.

6:37But what about two people or three? You know, that's the kind of implied when he says one person isn't enough. Well, you know, White House trying to get rid of Lisa Cook, then you have two, right? I mean, can two sway the committee? These are good questions. Yeah, I don't mean to. I know you might have different questions, but there was one other point relative to this. Yeah, please. Which were the very interesting votes of the two dissenters last time, Bowman and Waller. So last time, these two Fed governors, both Trump appointees, in the last meeting when they didn't cut, they dissented and said, we think the committee should have cut 25 basis points.

7:22There was a lot of chitter chatter ahead of this meeting that there might be a three-person dissenting block, Bowman, Waller, and Marin, right? But this time, one dissenter, Marin, Bowman, and Waller did not dissent. They were with the committee at 25 basis points. Now, the question that forces us to ask is, were they making a statement there? Were they saying, look, there's not a Trump block. This institution is still independent of the president. I mean, maybe they just thought 25 was the right amount this time. Right. Who knows? I cannot look into the hearts of men and women. However, it's impossible not to think maybe these two Trump appointees were making a statement along the lines of, you don't own me.

8:11You don't own the committee. Even if you have three members on it, we're not a block. We're not with the new guy, right? Yeah. Which is promising. Yeah, that's promising. That's a win for the institution or the institutional lists, I would say. Yes. So just to quote the statement from this Fed meeting, quote, job gains have slowed and the unemployment rate has edged up. Inflation has moved up and remains somewhat elevated. Yes. So to me, I read that. I think that's sort of the definition of stagflation. It is. We're seeing slowing growth and we're seeing inflation move up and, quote, remain elevated.

8:51And the question is then, why are we cutting rates right now? And, you know, it was assumed by Wall Street and by all of us that we were going to have a 25 basis point cut. But, you know, is that necessarily the right decision? I mean, I read that. They're saying we've got this inflation problem. It's going up. It's staying up. And yet we're going to cut rates. And I think the question becomes, OK, why are they doing that? Is it, one, because this employment thing is such an important thing? Or then there's this sort of more insidious reading, which is maybe the pressure got to him. Maybe everything Trump has been saying actually did influence this Fed decision.

9:35OK, to credit Chair Powell. He did say, the mandate is pulling us in both directions. And no path is without risk. So he acknowledged the point that you just made, that this is not an easy decision. But when pressed on this issue, I think what he's, his view is that the persistence of inflation is due to tariffs. It's on the good side. It's due to tariffs. And our best guess is that's temporary. Right? So the reason we can err on the side of growth is because we think the primary cause of inflation above target is something that won't last. And we can have a debate about that, but that's his answer there.

10:22Now, he also said something that I happen to disagree with. He also said there's disinflation on the services side. I don't happen to believe that. I don't see it in the numbers. I think services inflation is stuck at three and maybe even rising a little bit in some important categories. So I don't feel as confident as the committee does about services inflation. But he did give a coherent answer. We think the tariff thing is going to be like the pig that passes through the snake eventually. And if it's not, we'll have to make that assessment later. Yeah. Yeah. I just want to gather one of your quotes because you wrote an article about this.

11:05It was called What the Fed Should Do. And you basically went through all of the different arguments why you would go with a 50 basis point cut or a 25 or why you would keep rates where they are. Yeah. And you actually said, you said, quote, we're with the hawks. You said, you're basically on the side of keep rates where they are. You said, quote, resurgent inflation is the scariest risk right now. And not just in the sense that inflation eats away at purchasing power and grinds down in sentiment, we think another bout of inflation could cause a market crash. So I understand you don't think that this is like Armageddon, that we have a 25 basis point cut.

11:41No, it's not. But you do see, it seems as though you, you would, you believe that this isn't necessarily the right decision here. I mean, I think his decision is the 25 basis point decision. This is a bit hard to, kind of subtle view and it's hard to express, but let me give it a shot. In the center of the probability curve, I think a 25 % basis point cut is probably fine or even the right decision. I just see this big whopping low probability risk at the right side of the curve, which is markets overheat even more, inflation gets going, rates rise, and the higher rates crack the market, and we have a market crash.

12:30That is a low probability event, but it's so awful that you kind of have to weight it a bit more heavily, even though it's low probability, just because it would stink so bad. And I think as a markets person, those are the kind of events that I worry about. Economists think more about the center of the curve or the center of the distribution. I'm more freaked out about the tails. So that might explain my disagreement with, you know, both the chair and what the committee decided today. Yeah. So we all going to have this. If I can just add one thing, if I can just add one thing, if you look at the expectation, that dot plot that I talked about earlier, which says for each member of the committee, what do they think is the appropriate, will be the appropriate level of the federal funds rate at the end of the year.

13:25It's very split between people who think like almost half of the committee doesn't think another rate cut is going to be necessary this year. Right. Right. That's significant. There about this year, especially there was significant disagreement at the Fed, right. Which tells you that the stuff that you're talking about, the worries you just expressed, ed those worries are on the mind of the committee as a collective and they have the upper hand with certain members of the committee yes we saw the the markets reaction first the sp and the nasdaq initially popped then they fell as powell was speaking i assume that is because of that caution that we saw they decided to cut but then they said but hold on yeah i think yeah i I think it was like, yay.

14:14And then they were like, you could sort of see the market paging through that statement of economic projections and maybe looking at that page about, you know, 2026 rate expectations and being like, whoa, whoa, whoa. We don't love this. You know what I mean? But, you know, the first day reactions, Ed, to these things are not usually great indicators. It takes time for the market. It takes a day or two for the market to digest this stuff. Yes, exactly. come to a consensus. Yeah. So we will get this rate cut. Going back to the dual mandate, you've got this unemployment problem and you've got this inflation problem.

14:54And the idea is you cut rates, you start to fix the unemployment problem. You raise rates or you keep rates the same, you start to address the inflation problem. And I think everyone knows that. What I think a lot of people probably don't have sorted out in their head is like, why that is. And could you just tell us what the economics are of this? Why is it that cutting rates will help with the job market? Why is that? What is actually happening in the economy there? A crucial element of growth in any economy is the ease with which both households and companies, but especially companies can borrow.

15:41So if at the margin you make debt cheaper, you make it easier for a company to borrow money to expand its business or buy a new piece of equipment or hire new people or all of this kind of stuff. But on that basis, and the chair acknowledged this today, rightly, a quarter of a point interest rate change isn't going to make a big difference. You know, like it may not even filter through to mortgage rates at all, which is the main channel of transmission to households. Right. If households have cheaper mortgage, they refinance, they have more money on hand. They spend they consume more because their their housing costs are lower, et cetera.

16:25But there is this very powerful signaling effect, which is that the Fed almost has this totemic or magical status in financial markets where people, when the Fed is in cutting mode, people think kind of good times are here and the vibes are positive. And that flows over to, you know, greater wealth effects, enthusiasm, animal spirits and all that stuff. So that's the tricky thing that the Fed has to manage. It's not only controlling this one interest rate, it's got this weird job managing vibes. Yes. And that's what makes it so unpredictable, right? Because the vibes part is actually more important than the interest rate part.

17:15The long run path of interest rates, of course, matters a lot. But for any one cut, the vibes are more important than the cut itself. Yes, exactly. You once described the position of Fed Chair on this podcast as the high priest of the economy, which I think is exactly right. Not only are you in control of the interest rates, you're also in control of the way people feel about things. And then you have people like us talking on this podcast, figuring out what does this actually mean? The actual downstream effects are almost less of a result of him switching the knob versus him going out there and saying, this is what we're doing.

17:55Yeah. And this is, of course, why the issues of Fed independence are so important. You know, when the market is booming and the economy is basically good, which, by the way, it still basically is, right? The economy is growing. The unemployment rate is low. It's just these things are going in the wrong direction, but they're going in the wrong direction from a pretty solid place. And that's good to keep in mind. But if things get ugly and the high priests and the high temple of our market system has been defiled somehow, then you don't know what's going to happen with vibes, right? And I think you're creating a risk that is hard to predict and possibly hard to control.

18:45So I think it's a very, you know, it's fine to kind of do this Lisa Cook stuff now when things are okay. But when the temperature starts to rise, I think this stuff could matter. Yeah. And I'm worried about it. Yeah. Well, Rob, we really appreciate your time. And we hope to have you on for a longer episode. Love being on the show. Thanks for having me, Ed. After the break, a look at who will control TikTok in the U.S. If you're enjoying the show, give Prof G Markets a follow.

19:24Avoiding your unfinished home projects because you're not sure where to start? Thumbtack knows homes, so you don't have to. Don't know the difference between matte paint finish and satin, or what that clunking sound from your dryer is? With Thumbtack, you don't have to be a home pro. You just have to hire one. You can hire top-rated pros, see price estimates, and read reviews all on the app. Download today. Support for the show comes from Grooms. An apple a day keeps the doctor away, yada, yada, yada. The truth is that even if you enjoy fruits and vegetables, it can still be tedious to get all the nutrients your body needs.

20:00So here's a tip. Add Grooms to the mix. Grooms isn't a multivottomine, a greens gummy, or a prebiotic. It's all of those things and then some at a fraction of the price. And bonus, it tastes great. All Grun's Daily Gummy Snack Packs are vegan, not gluten, dairy-free, with no artificial flavors or colors. And they're packed with more than 20 vitamins and minerals, with more than 60 nutrient-dense ingredients and whole foods. And for a limited time, you can try their Gruny Smith Apple flavor just in time for fall. It's got the same snackable, packable, full-body benefits you've come to expect. But this time, these taste like you're walking through an apple orchard in a cable knit sweater, warm apple cider in hand.

20:39Grab your limited edition Gruny Smith Apple Gruns available only through October. Stock up because they will sell out. Get up to 52 % off when you go to gruns.co and use the code markets.

20:55These days, every business leader is under pressure to save money. But you can't crush the competition just by cutting costs. To win, you need to spend smarter and move faster. You need Brex. Brex is the intelligent finance platform that breaks the tradeoff between control and speed with smart corporate cards, high-yield banking, and AI-powered expense management. Join the 30 ,000 companies that spend smarter and move faster with Brex. Learn more at brex.com slash grow. So,

21:33We're back with Prof G Markets. 242 days after the original deadline for the TikTok ban, a deal to keep the app in the US is finally coming together. According to initial reporting, a consortium of US companies including Oracle, Silver Lake, and Andreessen Horowitz will control roughly 80 % of US TikTok operations. Meanwhile, ByteDance will hold on to the remaining 19.9%, making it the app's largest single shareholder. Still, that should satisfy one condition of the 2024 law that forced the ban or sale of the company in the first place. ByteDance's share of the app needs to fall below 20 % if TikTok is to continue operating in America.

22:15But there is still one big question mark when it comes to the most important condition of all, and that is, who will control the algorithm for TikTok in the US? You'll remember, this algorithm was at the very heart of the TikTok dispute. The main reason the app was banned in the first place was because of these national security concerns. Our government determined that the algorithm could not be left in the hands of a company with ties to the CCP. We couldn't allow ByteDance to manipulate the minds of Americans with their algorithm. So where do we land on this issue under this new framework? Well, according to a top Chinese official, US TikTok operations will license the algorithm from ByteDance.

23:02Again, this is all initial reporting, and the White House said, quote, any details of the TikTok framework are pure speculation. But if we are to take the Chinese official at their word, it does appear the algorithm will remain in the hands of China. The only difference now is that the people profiting off of that algorithm, those people will have changed. It won't be the Chinese anymore. It will be some Americans too, or more specifically, some American friends of the president. But does that fix our national security problem? We're not so sure. However, as we said, nothing is officially confirmed yet.

23:39Trump and Xi are scheduled to have a call on Friday. They will discuss this deal. So we will have to wait and see what else we learn later in the week. In the meantime, let's bring in the man who has been calling for this ban as early as 2023. Let's get Scott on the phone.

23:58Scott, how's it going? It's going really well, Ed. I'm in Midtown, headed to the airport, then going to Nashville for a speaking group tomorrow, then back in New York tomorrow. And yeah, so everything's good. Nashville. That's pretty exciting. Yeah, it's a great city. Have you ever been to Nashville? Never. I can see a guy like you living there. It's one of those cool, kind of up-and-coming cities. Anyways, I think you'd really enjoy it all. You're really selling me on Nashville. It sounds wonderful. I'd love to explore the great state of Tennessee with you as. All right, well, we've got a lot to unpack here.

24:40We've got this consortium of U.S. investors who appear ready to take over TikTok. Um, there's also this larger question of who's actually going to control the algorithm when it's all said and done, but let's just get your initial reactions to what we've seen with this TikTok news. Well, my initial reaction is that this used to be a capitalist country with the rule of law where it wasn't this cronyism that had become almost normalized. I mean, this is, okay, first off, this TikTok or ByteDance was banned. It was passed by both houses of government and the president signed it into law. And then the new president came in and said, I'm not going to enforce the law.

25:20So essentially, our laws, I mean, let's just say if we're going to have a dictatorship or an autocracy, let's just save money and clear out, send senators and Congress home and stop even pretending to have an SEC. Because this is pure. When you get to take a company, and we'll come back to how strong ByteDance is, and just carve it up for your Republican friends. another reason why I want to get involved in Democratic Party politics and help get flip Congress and get the White House back is in addition to returning to the capitalist full-body contact country of rights and capitalism that I love I want to get the president and next Democratic president in office and convince him to ban LVMH and then force them to sell it to me because I'm really into Ramoa, super into Ramoa language, and I would like to own LVMH.

26:13I'd like to own the U.S. license to LVMH. So that is, you know, that sounds comical. It's not. That's what's going on here. He is carving up a company and giving it to his Republican friends instead of, one, it should have been banned, and then he would have been negotiating from a position of strength. And two, they want to also put someone from the U.S. government on the board. What, are we going to have Kash Patel on the board? I mean, it's literally—it's so funny, though. It used to be an insult from the right that we Democrats are socialists. This could not be more socialists. This is—well, it's cronious first and foremost, carving up a company and giving it to your friends instead of getting— That's what they do in Russia.

26:56Yeah, that's what they do in Russia. And then, oh, but we're going to find someone from the government to be on the board. Also what they do in Russia. It is. It is just so. Anyways, I'm not a fan. I'm not a big fan of this deal. I don't think it's probably going to happen. I think she is playing Trump like a fiddle and that it probably I think he's just going to slow ball him. And at the end of the day, the real risk here is that two-thirds of American youth spend one and a half hours a day on TikTok. So this is equivalent to would we have let the Kremlin own CBS, NBC, and ABC in the 60s in the midst of the Cold War?