The Federal Reserve vs. The Supreme Court

No, I'm not proposing pitting these two institutions against each other. Though a tug-of-war between the Federal Open Market Committee (FOMC, the rate-setting body of the Fed) and the SCOTUS might be entertaining. Then again, the SCOTUS has an unfair advantage: they could anchor their team with Justice Sotomayor. (I know, I know, that was mean. But she's got to be good for something.)

What I'm referring to is an informal Facebook survey I recently posted, in which I asked the following question:

"Which is more important, independence of the Federal Reserve Board, or independence of the Supreme Court? Let me state it another way: which is the greater overall threat: the perception of a threat to the Fed's independence, or, say, "stacking" the Supreme Court?"

Everyone who responded said the greater threat was to the Supreme Court (except for one friend who hedged his bet and said "both." My wife didn't participate in the survey, but I asked her the question a couple of days before I posted it. And she's the only person who answered correctly:

The greater threat is the threat to the Fed's independence. Let me explain why.

There are basically two reasons. One is that the Fed's decisions have global implications, whereas the decisions made by the SCOTUS largely do not. So the overall threat is greater where the Fed is concerned (unless you're an isolationist, and I'll get to that later).

The second is that the SCOTUS is part of an ecosystem of checks and balances that include the Legislative and Executive branches. Thus much of what the SCOTUS decides could be countervailed by legislative or executive action. And then there are the states; the SCOTUS can interpret the Constitution, but the states can make some exceptions to what the SCOTUS decides.

Let's unpack all of this.

The Importance of the Federal Reserve

First, let me state this up front: the Federal Reserve is the single most powerful entity in the world.

As Kevin Bacon said in "A Few Good Men," "These are the facts, and they are undisputed."

The Fed Chairman can basically fart, and billions of dollars change hands across the globe. Every institutional investor in the world can name the Fed Chairman. I'm a pretty savvy guy; I'm in the markets every day, and I spent 25 years in institutional portfolio management, and I can barely name the current Chairman of the ECB.

Do you even know what the ECB is?

In 1998, a global hedge fund called Long-Term Capital Management (LTCM) began suffering losses. LTCM was highly leveraged (i.e., its assets were supported by large debt positions), and it had been achieving returns as high as 40%. But it began engaging in riskier and riskier strategies, and the returns evaporated. As a result, it began to experience significant outflows of invested funds. But due to its heavy leverage, it risked insolvency.

The problem was that every large financial institution in the world had lent money to LTCM. And if it collapsed, their loans would be worth pennies on the dollar, causing massive losses to the global financial system.

Who did the world's banks - including banks from across Europe - turn to to coordinate a bailout? Not the ECB (that's the European Central Bank, by the way). The Federal Reserve Bank of New York brokered the bailout. And to grease the skids, the FOMC cut rates by 75 basis points (bp - one basis point is 1/100 of one percent) over the course of six weeks. (One of those cuts was made between regularly scheduled FOMC meetings, which is rarely done.) It was an unprecedented move, at a time when rates didn't need to be cut for economic reasons.

Even though bailing out hedge funds is not part of the Fed's dual policy mandate of stable prices and full employment, when the global financial system was on the brink of disaster, it turned to the U.S. central bank.

That's how important the Fed is.

That happened again in 2008-09, when the housing bubble burst and threatened to take down the U.S. financial system, and with it, the global financial system. The Fed bailed out the global financial system and the global economy with an unprecedented package of financial assistance, zero interest rate policy (ZIRP), and Quantitative Easing (QE).

Imagine you had a nationalistic President in 1998 who controlled the Fed. He or she might have said, "Screw you" to the global banks in the face of the LTCM melt-down. Then what? Or what if you had a Fed controlled by the Executive branch during the financial crisis of 2008-09? (I'll close this post with a final cautionary set of examples.)

Now, you may argue that these interventions were unnecessary, from a free market perspective, and/or that the Fed took them too far, and in so doing inflated asset bubbles. You'd be right, but I'm not going to address that here. Actually, that's the topic of a book I plan to write when I retire.

So the Fed is not only the U.S. central bank, it is in effect the world's central bank. Sure, every country has its own central bank. But most countries' central banks aren't large enough to handle a true global financial crisis, and the sheer size of global multinational financial institutions is beyond the scope of every central bank except the Fed.

The bottom line is this: there are no checks and balances to protect us from a Fed that could come under the influence of the Executive branch; therefore its independence is sacrosanct. (And if you're a conspiracy theorist who's read "The Creature From Jekyll Island," fear not: Congress still has the power to abolish the Fed if it felt the need.) There are checks and balances on a politicized SCOTUS, in the form of the other two branches and the states.

For these reasons, Fed independence is critical to global financial order. If other countries perceive that the Fed is controlled by the Executive branch, they lose confidence in the U.S. as the center of global financial power. When that happens, the collapse of dollar hegemony follows - faster than you might think. And when the dollar loses its sovereignty, we lose our position as the dominant global economic - and military - power.

In other words, if you don't think Fed independence is a big deal, brush up on your Mandarin.

(Sidebar: a friend who responded to my Facebook survey commented that I'm "passionate about the Fed." I'd never considered myself to be so; I'm passionate about economics, but not so much about the Fed per se. I do have a deep understanding of the role, significance, scope, and function of the Fed. I know what open market operations are and how they're carried out. I know what QE, QT, ZIRP, and reverse repos are, and what they do. As such, I'd guess I know more about the Fed than the average person. That may look like passion to some, but to me, it's just dispassionate knowledge. I don't believe I'm any more passionate about the Fed than I am about SCOTUS - and I have a strong understanding of the role, significance, and scope of SCOTUS, too.)

The Scope of SCOTUS

Now let's look at SCOTUS. Let's say the Dems take control of the White House and Congress, and stack the Court, and Dobbs gets overturned. (Dobbs vs. Jackson Women's Health Organization was the Supreme Court case that overturned Roe v. Wade, which made abortion legal; Dobbs handed the abortion question back to the states. And by the way, I'm "picking on" the Dems here because the GOP currently has control of the White House and Congress, and the Court has a conservative majority.)

For those of us who are conservative, opposed to abortion, and understand the Constitution, that would be a bad thing. However, it wouldn't be as bad as a loss of global confidence in the U.S. financial system. (I know, I know, tell that to the babies ... I get it - but so do you. The repercussions of Dobbs being overturned wouldn't mean a thing to the majority of people in, say, Germany - but the loss of Fed independence would.)

Now, there are greater threats to the Constitution than the overturning of Dobbs, to be sure. But there are also those checks and balances. Let's say Dobbs gets overturned. Then the GOP eventually wins back both houses of Congress and the White House. The Legislative branch takes over, and makes abortion illegal by law. (Remember, SCOTUS doesn't make laws, it interprets them - the Legislative branch makes the laws.) The President signs the bill, and voila. SCOTUS' decision is effectively nullified. (You'll argue that this is highly unlikely, and I'll agree - Roe wouldn't have stood for 50 years if the abortion question could have been so easily addressed through legislation.)

There's also the matter of the states. If Dobbs were overturned, abortion could still be illegal in states that chose to make it so, just as it's legal in some states now (that was the premise of Dobbs - and of the Constitution: it's a states' rights issue; it's up to each state to decide the legality).

I suppose there are those who will argue that there could eventually be a scenario whereby the Democrats achieve a permanent majority and make it impossible for Republicans to ever win another Presidential or Congressional election, and they stack the Court, so that they control all three branches in perpetuity, and effectively achieve a dictatorship.

If we want to engage in such conspiratorial fantasies, I guess we can. At that point, the Fed would likely be under control of the dictators too. But let's bring the curtain down on that movie. It might sell tickets, but it isn't very realistic, if for no other reason than the fact that both parties benefit from the current system of slim majorities. (And the Democrats are scared of the exact opposite scenario.)

The reach of the SCOTUS is largely domestic. The primary exception is in its interpretation of immigration law, and I doubt that many countries make policy based on the U.S. Supreme Court's interpretation of U.S. immigration law. (Queue up the conspiracy theories about threat actors making policy regarding sending agents into the U.S. based on how lax our immigration laws are - but make sure you don't conflate enforcement with laws on the books.)

The Isolationist Exception

You may say, "I don't care about the effect on other countries - I'm America-first. To me, the threat of stacking SCOTUS is the greater threat, because of the implications for the Constitution. To hell with other countries' perception of the Fed."

Fair enough. I also consider myself "America-first." However, that phrase in and of itself implies that there is something other than America, does it not? In other words, how can we place America "first" if there are no other countries to be positioned after America in our cardinal ordering?

I recognize the importance of America's place in the global constellation. Without other countries, there is no trade, there are no allies (or enemies). Without other countries, there is no America - remember how this country was founded?

But let's take "America-first" to the extreme of isolationism: "We don't need other countries; we're here now, we're established, we're the greatest nation and the strongest military and the largest economy on earth. That makes the SCOTUS paramount, and the Fed secondary - in fact, it may argue that the Fed should be controlled, or at least influenced, by the White House."

Okay, let's be isolationist. Let's close our borders. Let's slap 100% tariffs on everything. Let's manufacture everything from cars to microchips to sneakers to t-shirts right here in the U.S.A. Let's mine our own rare earths. Say hello to persistent record-high, double-digit inflation (at which point you'll be praying for Fed intervention to bring it down, but there'll be nothing they can do).

And kiss the sovereignty of the dollar goodbye. Within a decade or less, we'll no longer be the world's reserve currency - or the world's dominant economic or military power. We'd be a global pariah.

I don't think anybody wants that. So yeah, the global picture matters - and that means the Fed matters. A lot.

Lensing Bias

As for the reaction to the survey I posted on Facebook, my guess is that the framing of the question may have introduced the risk of partisan lensing bias. What do I mean by that?

Today, the Court has a conservative majority (though conservatives grumble every time Justice Roberts or Justice Barrett votes with the liberal justices). The GOP controls the White House, and both the House and the Senate, albeit narrowly. So conservatives are pretty happy with the current state of affairs.

For that reason, if you ask conservatives what the greater threat is, a threat to the structure of the SCOTUS or to the independence of the Fed, their partisan bias is going to naturally lead them to answer, "SCOTUS." Why?

Because as the Court is structured today, a change to its structure (e.g., stacking the Court) would be effected by the Democrats. In other words, it would mean the Democrats taking control of the Executive and Legislative branches and adding seats to the SCOTUS to appoint more liberal justices, thereby achieving a liberal majority on the Court. And conservatives wouldn't like that.

Conversely, President Trump is currently trying to exert influence over the Fed. He's not being subtle about it. He's openly threatened to fire Chairman Powell, and called him schoolyard names. Now, he's going after another voting FOMC member. He sent a letter in the middle of the night firing her for allegations of mortgage fraud, even though she has yet to be accused of a crime by the Justice Department (though she is under investigation).

But let's face it: the President doesn't really care that she's under investigation for mortgage fraud. Members of his first administration did worse. If she had voted to cut rates, he wouldn't be going after her. But at every FOMC meeting, she votes with Powell to hold rates steady, and that makes the President mad. (Add to her sins that she's a Biden appointee.) So he wants her fired, and he'd replace her with someone who pledges to vote to cut rates. The matter is currently in the courts; stay tuned.

(To my conservative friends: if it sounds like I'm Trump-bashing here, please keep your powder dry. I'll explain myself - as if I needed to.)

Many (most?) conservatives agree with pretty much everything President Trump does. So if he's going after the Fed, they believe he must be justified in doing so. If he wants to control the Fed, they want him to. So again, their bias leads them to conclude that Executive branch influence over or control of the Fed isn't a threat, because their President is trying to achieve it, and whatever he does is right.

Well, I'm sorry, but "Trump said it, I believe it, that settles it" is bad politics. It may play better in theology, but political leaders aren't gods, even with a lower-case "g."

The problem is exacerbated by the fact that many believe that the Fed should cut rates. It's a view that's widely held on Wall Street and in mainstream economic circles. I happen to agree with it.

Do you? Now, ask yourself why: why should the Fed cut rates? What's the economic argument?

Is it because President Trump says the Fed should cut rates? Wrong answer. I doubt that President Trump could explain the economic reasons why the Fed should cut rates, other than that it would benefit his presidency by boosting growth (though there could be a cost to that, which he probably isn't considering). If he is aware of the reasons, it's because his economic team told him. He's a smart guy, but he's no economist.

Should the Fed cut rates to get mortgage rates down? Again, wrong answer. That's not part of the Fed's mandate. Should Fed Chairman Paul Volcker have been cutting rates in the early 1980s, when mortgage rates were nearly 20%? No, he did the right thing by raising short-term rates to 20% in 1981 (which was the reason mortgage rates were so high at the time) in order to bring down persistently high inflation.

I know why the Fed should cut rates, but I'm not going to get into it here, because I'd have to launch into a discourse on interest rate theory, and this post is going to be long enough without going down that rabbit hole. Here's a hint: the ten-year Treasury yield is 4.23%, and the Fed funds target range is 4.25%-4.50%. (I'll also say that there's an argument to be made for holding rates steady, or even raising rates, purely in terms of the Fed's mandate, but that's also beyond the scope of this discussion.)

Because so many knowledgeable people agree with President Trump that the Fed should cut rates, that leads people who aren't knowledgeable to conclude that the President is "right" (he's right, but for the wrong reasons), and that he's thus justified in trying to take control of the Fed (he's not, and it would be downright dangerous if he did).

Now, let me explain myself to my conservative friends. I'm also conservative. I generally support President Trump. I voted for him. I don't like a lot of what he says or how he says it, but I'm in favor of a lot of what he does.

But I'm also capable of independent thought. I call balls and strikes. So I don't agree with everything he (or any other politician) does. I absolutely don't agree with him trying to exert influence over the Fed, though many Presidents have tried to influence the Fed. (With the exception of Nixon, they've done it more subtly, but we know there's nothing subtle about Donald Trump.) And I know - as you do, if you're being honest - that his real reason for trying to fire Fed Governor Cook is not because of anything she did, but to achieve a majority of voting FOMC members who he believes will vote his way. He admitted as much in a Cabinet meeting, on camera. So I'm just calling it like it is; I'm not bashing him.

Final Thoughts

Let's wrap this up with a couple of thoughts. First, for those who believe that Executive branch control of the Fed is no big deal - which, again, I believe is a function of conservative lensing bias - let me pose this question:

What if Gavin Newsom becomes President, and he has control of the Fed? Would that be okay? What if Gavin Newsom had control of the single most powerful entity in the world? What if he controlled the world's central bank? What if he got to determine whether interest rates went up or down, or by how much, according to his priorities?

Be careful what you wish for.

Finally, every country has a central bank, even the poorest countries in Africa. Here's a list of all the countries in the world where the leader, whether elected or a dictator, has de facto control over the Central Bank:

• China
• Saudi Arabia
• Belarus
• Iran
• North Korea
• Venezuela
• Turkey
• Russia
• Zimbabwe
• Eritrea
• Nicaragua
• Egypt
• Ethiopia

Is that a list we want America's name on?

A New Take on The Greater Fool Theory

No, I'm not actually going to delve into the greater fool theory per se, nor am I going to talk about meme stocks, or any other investment.

Much has been made of the weak July jobs report, the significant revisions to the prior two months’ reports, and Pres. Trump’s subsequent announcement that he’s firing the Commissioner of the Bureau of Labor Statistics (BLS).

Those of you on the right believe the firing is a good move, and those of you on the left believe he's wrong to do so.

But I’ll bet all of you hold those opinions merely because of your partisan biases. I’ll bet none of you understand where the jobs report data come from, how they’re calculated, why there are revisions, how the revisions are made, etc. In other words, you’re unaware of the whole process, but you have a strong opinion about the process.

Because I hate to see people make themselves look silly by espousing uninformed opinions, I’m going to provide you with a free education. Let’s jump right in.

Here’s how the nonfarm payroll data (NFP) are actually collected and published each month by the Bureau of Labor Statistics (BLS).

1.     The data come from a survey, not from administrative records.

The BLS does not track every paycheck or tax record, or walk into businesses and count heads. Instead, it conducts a monthly survey of about 119,000 businesses and government agencies, covering over 600,000 individual worksites. This is called the Current Employment Statistics (CES) survey, generally referred to as the “establishment survey.”

These employers report the number of jobs (not people; an important distinction), along with hours and wages. The establishment survey is separate from the household survey, which is used to determine the unemployment rate.

2.     What do employers report?

Each participating employer provides the following information for a specific “reference week” each month (usually the week including the 12^th of the month):

·       Number of employees on the payroll, full-time and part-time

·       Total hours worked (for production/nonsupervisory employees)

·       Earnings for the week (average hourly and weekly earnings)

·       Industry classification (based on NAICS codes)

These are counts of jobs, so if one person has two jobs with two different employers that get included in the survey, both jobs get counted.

3.     Initial estimates involve modeling and imputation (don’t let the fancy words scare ya – this is just statistics, folks, like you use in your fantasy football league)

Because not all 119,000 employers respond on time (and the response rate has deteriorated since covid), the BLS has to impute (estimate) the missing data based on:

·       Historical patterns for late responders

·       Trends from respondents that did submit on time

·       Seasonal adjustment factors (think school years, Christmas holidays, summer retooling for auto manufacturers, etc.)

So when you hear that “payrolls rose by 205,000 in June,” that number is a modeled estimate based on partial survey data and historical assumptions – not a complete census.

4.     Two monthly revisions follow the initial release

Each month’s initial jobs estimate is revised twice:

·       First revision: published one month later, when more survey data have come in

·       Second revision: published two months later, using nearly full survey response

These revisions can be large or small, depending on:

·       Response rates (typically 70-75% at the initial release)

·       Trends in newly reported or corrected data

·       Seasonal adjustment quirks (especially during economic turning points or shocks like covid)

The revision process is not some nefarious, political book-cooking exercise. It happens no matter who is in office, and it happens no matter who runs the BLS. And if Pres. Trump appoints a hand-picked conservative lackey to run the bureau, the revisions will be calculated the exact same way they’ve always been calculated, and if those revisions don’t turn out the way the President likes, he’ll probably fire that person, too.

5.     Annual Benchmarking (Major Revisions)

Once a year – usually in February – the BLS makes a massive adjustment called the benchmark revision, which recalibrates the whole payroll series using actual employment counts from unemployment insurance tax records. (Lots of economic data are subject to annual revisions, btw.) This gives a more accurate picture than the survey-based estimates and can result in large upward or downward revisions going back up to 21 months.

6.     Limitations and Common Misunderstandings

·       The NFP report is not a literal count of all jobs in the country, it’s a statistical sample.

·       Jobs do not equal workers. People with multiple jobs get counted multiple times.

·       It excludes farm workers, the self-employed, and gig workers (unless they’re on a payroll).

·       Response rate matters: early estimates are vulnerable to errors during major trend changes (e.g., recessions, covid rebound)

·       Seasonal adjustment can distort monthly changes, especially around holidays, weather shifts, and school calendars. (This is why the numbers are always skewed when there’s a major winter storm or a hurricane.)

One simple observation is that the cadence of initial release – first revision – second revision is very similar to the cadence of GDP releases, and for similar reasons. The initial GDP estimate released each quarter is based on estimates of the factors of production; then, as more data comes in, more reliable GDP numbers are released in the form of second and third estimates, and long-term adjustments are sometimes made.

And it’s noteworthy that the head of the Bureau of Economic Analysis, who oversees the GDP data, is also a Biden administration appointee. Yet, because Pres. Trump loved the recent second quarter GDP growth figure of 3.0%, that agency head isn’t being fired. Hmmm …

Now that we’ve defined how the NFP data is obtained and calculated, let me make a couple of other observations. First, I’m not a fan of survey-based data. I wish the annual unemployment insurance tax data could be obtained in a monthly manner, because it’s actual hard data, and I can rely on that.

Some other examples of economic surveys are the various consumer confidence or sentiment surveys, and manufacturing surveys like the ISM (Institute of Supply Management) survey. Regarding the former, it’s been demonstrated (by me, among others) that there’s little correlation between consumer sentiment and actual spending. So to gauge how consumers really feel about the economy, I’d rather look at what they’re actually spending than what they think about economic conditions (in part because the average consumer being surveyed doesn’t know jack about economics).

Similarly, rather than ask a bunch of manufacturers how they feel about business conditions in their industry, I’d rather look at how much they’re producing, how much of their capacity they’re utilizing, etc.

In other words, I’ll always prefer hard data over soft data. But sometimes, you’ve gotta go with what you’ve got, and in the case of jobs data, the NFP survey is pretty much what we’ve got; it’s simply impossible to go in and count every employee at every business in the country every single month.

Now, let’s look at some of the reasons the magnitude of the revisions has increased since covid. First, the survey response rate has declined somewhat since then, so the initial estimate is somewhat less reliable. Second, business churn in the covid aftermath (companies going out of business and new businesses starting – referred to as the birth/death rate) has increased, distorting the models, because that rate is a significant factor in the revision calculations.

However, by late 2023 and early 2024, the adjustments made to the models to compensate for the greater birth/death rate may have overcompensated, especially as job growth began to slow. That led to some of the overstated initial numbers during that period, which later saw massive downward revisions like the one made to the March 2024 data (bookmark that point – I’ll return to it shortly).

More recently, the DOGE cuts have resulted in large job losses at several government agencies (remember that nonfarm payrolls include government employees), but there may not be enough, or the right, personnel left to respond to the CES survey, at least timely. So there may some distortion there. And immigration trends could play a role (we don’t know how much, because we really don’t know how many employers would have actually reported illegal immigrants on their payrolls in 2021-24, when the illegal immigrant population soared). Of course, that trend is reversing in 2025.

Now, I’ll speak to the notion that there’s political bias in the data, and I’ll do it in one word:

Bullshit.

I’ve looked at the monthly revision data trends going back to 2017, and they’re consistent. In other words, even before this “Biden appointee” took over the BLS (and she isn’t the one crunching the numbers, people), the revisions – including those during Trump’s first term – have been substantially similar, especially in light of job growth trends over that period (job growth has slowed gradually post-covid as the labor market has matured and we’ve recovered the jobs lost due to the covid shutdown, including accounting for normal growth that would have occurred had the shutdown not taken place).

And the notion that the revisions are one-sided is patently absurd: the latest annual revision was a massive downward adjustment to the March 2024 data of more than 800,000 jobs. In other words, the BLS determined that jobs in the post-covid years while Biden just happened to be President were over-estimated by that amount, and needed to be adjusted downward. So the revision didn’t “help” Biden, it reduced "his" job growth numbers.

Again, those revisions aren’t manipulated, they come from actual tax records from the Quarterly Census of Employment and Wages (QCEW), which employers are legally required to submit – hard data. The revisions cut both ways, under administrations of both parties, regardless of whether the head of the BLS was appointed by the President in office or a President from the opposition party. There is no trend indicating bias.

I’m going to say that again: there is no trend indicating bias in either the initial NFP releases or the revisions, whether we’re looking at the monthly revisions or the annual adjustments. That’s a factual statement based on an understanding of the methodology, which is fixed and politically agnostic, and a review of the data.

Anyone who knows me, knows two things about me: first, I lean conservative. And second, regardless of my leanings, when it comes to economics and statistics, I call balls and strikes.

In that spirit, Pres. Trump was foolish to fire the Commissioner of the BLS because he doesn’t like the jobs numbers. In fact, those numbers provide him with the strongest argument he could want for Jerome Powell – who’s almost equally foolish – to cut interest rates, because the data indicate that job weakness has gotten ahead of the Fed, just as inflation did in 2021.

The President is the bigger fool because firing any agency head whose agency releases statistically sound data just because the President doesn’t like the way the data makes him look erodes market confidence in all economic data, because it leads market participants to believe that now the data really will be manipulated by Presidential fiat. Just like making up total BS tariff rates that other countries were supposedly charging us caused the markets to lose confidence in April, nearly leading to a bear market. (And no, the market isn't made up of some nebulous "they" who manipulate stock prices to make Trump look bad. The "they" is actually you and me.)

But those who, after reading this, continue to insist that the labor market data is biased, just because they heard it from their favorite media source, despite the fact that they’ve never researched the methodology or the data itself, are the biggest fools of all.

P.S. If you’re reading this, and your own political bias is making you feel smug because you believed all along that Pres. Trump was wrong to fire the BLS Commish, and now you think you’ve been vindicated by what you've just read, remember these two things: first, your belief was no less based on a lack of information than that of those who believed the firing was righteous.

And second, you’re the fools who still have your collective hair on fire because Sydney Sweeney made a jeans ad.