Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

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Paul L. Kasriel

With the passage of the One Big Beautiful Bill Act (OBBBA) of 2025, already high US federal budget deficits will rise even higher than projected by the Congressional Budget Office (CBO) at the beginning of the year. One element contributing to the rise in the deficits will be interest on the public debt. With the Treasury’s policy of shortening the maturity of the public debt and the politicization of the Fed, I fear that the US government will effectively default on its debt via inflation.

Plotted in the chart below are fiscal year (FY) ratios of federal net interest payments on the public debt to federal net revenues (blue bars) along with end-of-quarter 3-month Treasury bill rates and 10-year Treasury yields. In FY 2025, the ratio of net interest on the public debt to federal net revenues was 5.4, the lowest in the post-WWII era and the lowest since FY 1991, when interest rates were almost twice the level they are now. You can think of the ratio of net interest to net revenues as similar to a corporation’s interest coverage. The CBO forecasts that with the passage of OBBBA, net interest will increase by $4.7 trillion starting in FY 2026 through FY 2029. Unless there is a Festivus miracle resulting in a commensurate increase in federal net revenues, the federal government’s interest coverage will fall below that of an already low FY 2025’s.

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The CBO is forecasting that the yields on Treasury 3-month constant maturity and 10-year constant maturity securities will average in calendar year 2028 3.2% and 3.9% respectively. On December 2026, 2025, the Treasury 3-month and 10-year securities closed at 3.64% and 4.14%, respectively. So, the CBO is forecasting a decline in the interest rates at which the Treasury will have to pay on its new and refunded debt it will issue in the next few years. And still, the CBO projects that net interest on the public debt will increase by $4.7 trillion over the next four fiscal years.

Now, let’s talk about Treasury debt management. At the Federal Reserve Bank of New York Treasury Market Conference on November 12, 2025, Treasury Secretary Bessent said that the Treasury was expanding its buyback program of longer-maturity off-the-run Treasury securities allegedly to enhance the liquidity of the overall Treasury securities market. Although Secretary Bessent did not say what maturity of securities the Treasury was selling to replace the securities being replaced, it is a good bet it is shorter-maturity securities. Secretary Bessent said that the Treasury is playing close attention to what maturity securities the market is seeking to purchase. To that point, he mentioned the increased demand for Treasury bills coming from the current and expected growth in the Stable Coin market, banks relief from supplementary leverage ratios and the Fed’s return to Treasury bills to manage bank reserves. I still do not understand the demand for Stable Coins. Why would I purchase a Stable Coin for one dollar for a promise by the issuer to pay me back one dollar on demand at some time in the future. Meanwhile, the Stable Coin issuer buys Treasury bills, money market funds and who knows what else, earning the interest. Why wouldn’t I just purchase Treasury bills or money market funds and collect the interest instead of the Stable Coin issuer unless I were going to use the Stable Coins for illegal transactions? But I digress. I think the essence of Bessent’s comments is that the Treasury is intent on shortening the maturity of the public debt. Why? **Perhaps to ameliorate the interest expense on the massive amount of new debt and debt to be rolled over in the coming years, assuming short-maturity interest rates do not increase much.** Increased interest expense can cause the amount of debt outstanding to explode. The Treasury would be borrowing more not only to fund the primary budget deficit (the deficit excluding net interest) but the increased net-interest expense. It is similar to household borrowing from another source to pay the rising interest on the outstanding balance on a credit card.

This is where the Fed enters the picture. The president has made no secret of his desire to see the federal funds rate move lower. The president has had the opportunity to appoint one new member to the Board of Governors, Stephen Miran, the genius behind the tariff increases. His term terminates on January 31, 2026. Whether Governor Miran is re-nominated to stay on the Board depends on a number of things, including whether Chairman Powell announces whether he will stay on the Board as a common governor after his chairmanship terminates (he will not be re-nominated as chair) and whether the president nominates a new chairman from among the current Board members or chooses someone not currently on the Board. Regardless, Governor Miran knows which side his bread is buttered on and has been outspoken in his desire to see the federal funds rate cut even more than the 75 basis that has occurred starting on September 18, 2025. A majority of the Federal Open Market Committee (FOMC) has voted for the three 25 basis-point cuts in federal funds rate starting on September 18 regardless of (in spite of) the incoming data pertaining to the US economy. I can’t help but believe that some members of the FOMC voting to cut the federal funds rate are “auditioning” for a chairmanship nomination.

If the Fed can be induced to keep the federal funds rate lower than it would otherwise would be in light of economic conditions, especially the inflation rate and the maturity of the public debt is shortening, then the Treasury’s interest expense can be held down. In turn, this can help prevent an explosion of the public debt that would otherwise result from higher interest expenses. But there’s no free lunch here. The cost of the Fed holding the federal funds rate artificially low is higher inflation. This is tantamount to the Treasury defaulting on its debt by reducing the real value of the debt. (Read “The Mandibles” by Lionel Shriver for a fictional dystopian description of this.)

I got a lot of other problems with the Fed, one of which is its use of the core inflation rate in its policy decisions. But I’ll save that for another day. After all, if the president can air his grievances nearly everyday, why can’t I?

But now it’s time to gather around the aluminum (aluminum has a high strength-to-weight ratio), tinsel-less (I find tinsel distracting) Festival pole and sing O’ Festivus (lyrics by Katy Kasriel)


O' Festivus
Lyrics by Katy Kasriel
To the melody of O' Tannenbaum


O' Festivus, O' Festivus,
This one's for all the rest of us.
The worst of us, the best of us,
The shabby and well-dressed of us.
We gather ‘round the ‘luminum pole,
Air grievances that bare the soul.
No slights too small to be expressed,
It's good to get things off our chest.

Festivus 2025 – I Got a Lot of Problems with the Treasury and the Fed

Joel Prakken

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On December 18 the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for November.  In October, when the federal government was partially shut down, BLS did not conduct its survey of prices, leaving most of them unrecorded for that month. Therefore, rather than reporting the usual 1-month percent changes in prices for November, BLS reported 2-month percent changes instead.  For example, from September to November, the core CPI advanced at a 1% annualized rate – a surprisingly benign reading that, if accurate, significantly improves the current narrative on inflation and strengthens the case for easier monetary policy.
 
Unfortunately, the potential impact of the shutdown on both the quality and timing of the November survey raises legitimate concerns about the reliability of its results. One particularly dodgy-looking element of the report was a quite sharp deceleration in the CPI for shelter, the 2-month annualized percent change of which dropped from 3.9% in September to just 1.1% in November (gold line in chart).  An erroneous reading here could be of considerable importance given that shelter costs comprise nearly 18% of “core” personal consumption expenditures.
 
The CPI-shelter reflects rents on tenant- and owner-occupied housing units. Imputed rents on owner-occupied units are inferred from observed rents on nearby comparable tenant-occupied units. Because shelter costs reflect average rents, they are highly inertial, lagging well behind current (i.e., marginal) market conditions for two reasons.  First, rental contracts typically are for one year, requiring twelve months for all contracts to reflect a change in market conditions. Second, the BLS rotates through a panel of renters over a period of six months, adding another half year to the lag between marginal and average rents. 

However, these lags allow one empirically to relate the CPI-shelter to current and past new rental contracts. I did so by estimating a model that explains the CPI-shelter with current and lagged values of Zillow indices of observed newly contracted rents. These indices are available monthly through November. I then used that model to forecast the shelter costs for the months of October and November. The resulting projection of the 2-month change in the CPI-shelter is shown in the blue line in the chart.

The model suggests that from September through November the CPI-shelter grew at an annualized rate of 2.9%, 1.8 percentage points faster than the number published by BLS. To me, the projection seems more believable than the reported figure. Replacing the latter with the former raises the 2-month annualized change in the core CPI by approximately 0.3 percentage points, to 1.3% - still a good reading, but not as good. And, of course, all this makes one wonder about the reliability of estimates of other prices in the report. So, before concluding prematurely that inflation is quiescent, it makes sense for one to await additional months of readings.          

 


A Dodgy CPI-Shelter Reading for November?

For all the talk of a weakening labor market, the wage bill for private nonfarm employees (private nonfarm employees times their average weekly earnings) has risen at annualized rates of 5.85% and 5.91% in October and November, respectively, compared to the median increase of 5.75% in the eleven moths of 2025. _If_ these data are valid, it would seem that labor market earnings are growing relatively fast, especially in light of all the talk of a weak labor market. Why would employers be increasing the labor wage bill so rapidly if labor _demand_ were weak? Perhaps because the labor _supply_ is shrinking.

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How Can The Labor Market Be So Weak When The Wage Bill Is Growing Rapidly?

Viewpoints: 2026

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