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Today’s Points:

• The godfather of the Mar-a-Lago Accord is going to the Fed.
• Investors can live with central bank ructions because the economy still looks OK.
• They can also live with Tuesday’s expected rise in CPI back above 3%.
• US financial deregulation is taking shape — which is good for banks elsewhere.
• AND: Time to celebrate the Weimar Republic.

Miran-culous Work at the Fed

Stephen Miran, who has been nominated to serve as a Federal Reserve governor until the end of the year, is a placeholder. He isn’t a candidate for the chairmanship. which falls vacant next May. But as placeholders go, he’s a very interesting one, and not just for his authorship of a now-notorious “User’s Guide” to restructuring global trade that has guided US tariff policy.

As chairman of President Donald Trump’s Council of Economic Advisers, Miran has shown great loyalty as a spokesman for tariff policy. That is doubtless his chief appeal. He can be expected to vote for a rate cut as soon as he can join the Federal Open Market Committee, along with the two Trump appointees who dissented by voting for a cut last month. He won’t have time to make any substantive difference, but his Manhattan Institute paper published last year calling to reform the Fed’s governance, and attacking the status quo for encouraging “groupthink,” suggests that pressure for radical change will intensify.

The range of Miran’s proposals for the Fed is almost as breathtakingly ambitious as his plans for world trade, which involved charging foreigners a fee for investing in the US and a possible “Mar-a-Lago Accord” to coordinate a weakening of the dollar. Those plans have gone very quiet as the dollar has fallen on its own while bond investors have been restive. His ideas for the Fed center on “monetary federalism” with more power for the regional Fed presidents and less direct influence for the FOMC; and as they don’t involve dealing with other countries, they have a better chance of happening.

Trump’s choice not to name a potential next chairman to the role suggests that he now accepts that displacing incumbent Jerome Powell would be an unnecessary risk. Instead, there is a race straight out of reality television, with four candidates taking a lead since June on the Kalshi prediction market:

Everything will come to an Apprentice-like denouement when Trump makes his pick. After the shock of the Aug. 1 revisions to US unemployment data, showing far weaker employment than initially reported, this seems a recipe for uncertainty and upheaval. None of this is showing up in markets. 

To explain why, look at the Bank of England. The UK economy is in far worse shape than the US. Both unemployment and inflation are higher:

It also boasts an almost comically divided Monetary Policy Committee at the BOE. Two dissents came as a shock at the Fed; such an outcome would have been an outbreak of harmony in Threadneedle Street. Last week’s MPC held two votes after the first resulted in a tie — four to hold, four to cut by 25 basis points, and one to cut by 50. Cutting by 25 basis points eventually won 5-4.

This has had no appreciable impact on rate expectations. According to overnight index swaps, the projected Bank Rate for the end of this year has been more stable than fed funds, even though the Fed maintained unanimity until July:

The UK experience reflects good economists grappling with an extremely difficult situation. The market view of their likely path has reflected traders’ attempts to wrestle with the same issues. Even though the Fed has been far more united and clear in its guidance, that has added up to a bumpier road — because of the imponderable effect of tariffs, the political uncertainties, and then the shocking payroll revision. 

Dissent is not in itself damaging. Miran will be a dove, but his vote won’t swing the committee, and the balance of evidence is in any case shifting toward the doves. The jobs revision brought inflation forecasts, a potential barrier to rate cuts, back into line:

July’s consumer price inflation, due Tuesday, is the next potential impediment. Almost all economists surveyed by Bloomberg expect a rise to or slightly beyond the Fed’s 3% upper-bound target. Nobody expects much worse than that. These forecasts overlap with total confidence in a September Fed cut, with or without Miran:

That helps explain the greatest reason why markets are treating the upheavals with equanimity: The numbers aren’t that bad, even after the jobs revision (equivalent to only about 0.15% of the US workforce). David Roberts, head of fixed income at Nedgroup Investments, offers some cold water:

OK, so there were some downward revisions to prior numbers. The current figures were a rounding error below consensus. Average earnings exceeded expectations, the unemployment rate was unchanged, and those employed worked LONGER than normal. Sure, the numbers ain't great — it's in my interests as a bond guy to talk the economy down. But dire? Not even close. 

Daniel Von Ahlen of TS Lombard says the US labor market is in “a low-hiring, low-firing equilibrium.” He adds that there has been no credit boom and no obvious macro malinvestment; private-sector balance sheets are in robust health and real incomes are growing too fast for a recession (even if they have moderated).

On the stock market, near record highs, cyclicals are beating defensive stocks to a record extent, despite sluggish signals from Institute of Supply Managers data. “One interpretation is that they are being complacent,” says John Higgins of Capital Economics. “Another is that the economic outlook is better than the ISM surveys suggest.”

Absent evidence to the contrary, the market will allow the turbulence at the Fed to continue without complaint. But everyone, not just Miran, should be aware that that could change if the economy unambiguously weakens.

Financial Liberation

The Fed’s well-advertised pivot to light-touch regulation was gathering momentum even before the Miran appointment. The new risk-based capital rule, which simplifies how banks calculate the capital buffer they must hold, could arrive as soon as the first quarter of 2026. That’s a significant setback to the Fed’s 1,087-page Basel III endgame proposal, launched after the 2023 banking crisis. Michelle Bowman, the new vice chair for supervision, is leading the charge, which is crucial to the aggressive Trump 2.0 deregulation agenda. 

Treasury Secretary Scott Bessent says that “the growth of private credit tells me the regulated banking system has been too tightly constrained.” It might also imply that private credit hasn’t been constrained enough, but his approach implies that both profits and share prices could benefit from deregulation. 

This goes beyond bank capital. Gavekal Research’s Tan Kai Xian points out that April’s relaxation of crypto guidelines for banks and the lift for stablecoins underscore Bessent’s influence. Liberalizing 401(k)s should also boost the financial sector, with the president signing an order last week to allow pension plans to invest in private assets, including crypto. The move raises potential returns and risks for savers, while substantially helping quoted financial groups’ quest for profits.

The forceful deregulation pivot is reminiscent of the landmark reforms by the Carter, Reagan and Clinton administrations — which spurred huge activity on Wall Street and arguably led to the Global Financial Crisis.

Financials already have momentum from robust second-quarter earnings growth, which jumped to over 15% from about 4% in the prior quarter. The sector’s projected 20.4% year-on-year EPS gain ranks second only to tech. As a result, bank shares have mended much of the damage caused by the Silicon Valley Bank collapse in 2023, although they have lagged the rest of the market in the last few weeks:

This leaves room for optimism on US bank stocks. Relative to the market, they have started a fitful rise from multi-decade lows — but remain far from mending the damage done by the GFC. This chart is from Societe Generale’s Manish Kabra:

Source: Societe Generale

Their balance sheets have been tested twice, in 2020 during the pandemic and again during the crisis two years ago, which underscores the significance of the recent strong earnings. Confidence in the numbers on their books now appears to be total. The standard metric for the sector, the multiple of price-to-book value (assets minus liabilities) is now higher for US banks than it was before the GFC. The same is not true of banks in the rest of the developed world:

Bank shares’ underperformance thus reflects weaker profitability, rather than concerns about their soundness or asset quality. Kabra therefore argues that deregulation should help them catch up with the higher-risk part of the sector, which it has lagged since 2023:

Financials remain our key overweight, and we expect the current backdrop to be conducive to further outperformance of the higher-beta part of the sector. The context should also favor small and mid caps given their higher domestic US exposure, and we would expect them to outperform, especially those with exposure to financials and industrials.

Smaller banks would appear to be particularly interesting because they have failed to recover from the regional banking crisis:

Source: Societe Generale

Deregulation should free up excess capital, allowing swifter clearance of bank mergers and acquisitions such as the approval of Capital One’s acquisition of Discover Financial Services in April.

Past liberalizations of the financial sector are contentious, to put it mildly. Regulators elsewhere don’t have the same zeal for easing bank rules, but if the US program succeeds, they may hold off from planned tightenings, and ease other post-GFC banking rules as former IMF Chief Economist Maurice Obstfeld notes in this paper. Historically, US financial deregulation has fueled global competition:

Where the US leads, other jurisdictions may follow. Notably, the European Union, the UK, and Canada have all delayed their implementation of more stringent bank capital standards under the Basel III “endgame” framework while they wait to see in what form the US goes ahead with the new rules, or whether it will ditch the plan altogether.

Counterintuitively, Europe’s banks might benefit most from US deregulation. Fiscal stimulus in Europe and China is poised to be stronger than in the US. Further, tariffs will be inflationary in the US and deflationary everywhere else — giving other central banks greater scope to cut rates. The weakening dollar has already helped them to a great rally this year:

Ultimately, bank deregulation, combined with fiscal expansion and monetary easing, should support global growth and help to offset tariffs, at least in the short term. It is up to regulators, and the self-control of financiers, to avoid a longer-term repeat of the speculative disaster of 2008.

—Richard Abbey

Survival Tips

Aug. 11 is the anniversary of the 1919 founding of Germany’s Weimar Republic, so I’d like to recommend reading Babylon Berlin by Volker Kutscher. It’s set in 1929 Berlin; it has communists, Nazis, transvestites, drugs, lots of murders, a fantastic convoluted plot, the works. It’s also a TV show — glorious noir fiction recommended by Points of Return readers. Thanks for the tip, and have a great week everyone.

More From Bloomberg Opinion

• Robert Burgess: The Fed Needs Economists Who Aren’t Politicians
• Matthew Yglesias: Tim Cook’s White House Visit Shows the True Cost of Tariffs
• Claudia Sahm: The BLS Can’t Be Replaced by the Private Sector

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