The Outsider Perspective Issue 422 | The Beltway Outsiders

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Good Friday Morning! Except to the internet influencers making this Christmas season’s hot beverage of choice: hot Dr. Pepper. When I say “hot Dr. Pepper,” I don’t mean a bottle or can at room temperature. I mean, literally heating it up and gulping it down.

One woman “posted a tutorial showing users how to make hot Dr. Pepper, emptying a two-liter bottle of the pop into her crockpot and adding sliced lemons.” Additionally, “She recommended heating the Dr. Pepper so that it is slightly simmering but not boiling, before fresh lemon slices. In a separate clip, she revealed the ‘lazy’ way to make hot Dr. Pepper: microwaving a mug full of the stuff and adding in a sprinkle of crystallized lemon.”

Apparently, this isn’t new, as Baby Boomers started sharing ads in the 1960s when “hot Dr. Pepper” was a thing. Just because it was a thing doesn’t mean it should be. This is the same generation that gave “ring-around-the-tuna,” which is a tuna salad made with green jello.

And I’m old enough to have been through a few church potluck lines to have seen that creation. Hot Dr. Pepper is new to me. What wasn’t new to me this week is the growing problems at the Federal Reserve regarding inflation. Remember that pesky problem? It’s not over. I’ll cover that more—links to follow.

Quick Hits:

Friday will be a mad scramble to see if the Republican House can pass anything that would get agreed to in the Senate and signed by Biden. So far, Republicans have voted against the first CR and also against a slimmed-down Trump-backed CR. Speaker Johnson has tried everything to no avail. Brit Hume of Fox News summed things up well, “Speaker Mike Johnson would have loved simply to pass a barebones CR to keep the government open until the new year. But there is a group of House Republicans who absolutely will not vote for any CR, clean or otherwise. So he was forced to negotiate with the Democrats to get just enough of their votes to pass the bill, which contains among many other things billions in relief for storm victims in NC and elsewhere. Now the whole thing has collapsed amid a public outcry, fanned in part by Elon Musk, to the extraneous spending Democrats demanded as a price for their votes. Trump, who had supported Johnson in this until Wednesday, pulled the plug and now demands a “clean” CR. Except Trump also wants the storm relief funding and he wants the debt limit raised so he won’t have to do it next year. Now big parts of the government could shut down Friday night, storm-ravaged areas will not get their relief, the public won’t like it, and Republicans will get the blame because they always do.“
For all the reporting that ABC News’s George Stephanopoulos was livid over the decision of his network to settle the defamation case with Trump, it seems potential discovery in the case would have been bad for him. The New York Post reports that Stephanopoulos was warned repeatedly not to use the word “rape” by his producer when describing Trump’s conduct. The network knew the truth and knew Stephanopoulos wanted to say it. According to the Post, Stephanopoulos ignored that advice. That’d be lousy evidence for him in a defamation case.
Politico’s Jonathan Martin published a piece this week telling the Trump campaign’s side of the election story. In it, he cozies up to the camping leaders of Trump’s campaign. Martin was a helpful barometer for what the Biden White House believed at any given time, including when he loudly shouted down anyone claiming Biden would step down. Like a lot of journalists, he needs a new beat. I read this piece as his version of the Morning Joe crew from MSNBC going to Mar-A-Lago.

Where you can find me this week

Please subscribe, rate, and review The Horse Race on YouTube — the reviews help listeners, and readers like you find me. Make sure to sign up for the Conservative Institute’s daily newsletter.

Horse Race Ep. 018: Biden’s Pardon Crisis | Trump Transition Is Popular | Dems Civil War Brewing…

Biden Creates Mistrust Over Drone Stories In New Jersey – Conservative Institute

Stephanopoulos Gets Humiliated While ABC News Pivots To Trump – Conservative Institute

Joe Biden’s Vanishing Last Day As President – Conservative Institute

The Fight Over Inflation Is Not Over

Markets puked this week, culminating in a significant drop on Wednesday after the Federal Reserve cut rates again. While the big drop on Wednesday made the news, it was more notable that there were ten consecutive days of market declines (the worst such mark in 50 years), which mainly reflected everyone realizing we’re getting fewer rate cuts.

Since the rate cut cycle began, the Fed has cut interest rates by 100 basis points, or a full point. Markets had positioned themselves for a year of active rate cuts, and that dream has popped in the post-election atmosphere.

Here’s why: neither the Federal Reserve nor its watchers know if the Fed has defeated inflation or if the economy will stay under control if further cuts happen. Nick Timiraos in the Wall Street Journal sets up the debate inside the Fed:

Investors shuddered on Wednesday after Chair Jerome Powell suggested the Federal Reserve was ready to take a break from cutting rates—and that the total quantity of reductions might be shallower than previously thought.

Powell has described recent rate reductions as an effort to recalibrate borrowing costs to a more “neutral” setting. His framing raises a question that hasn’t been relevant until now: What, exactly, is “neutral” in the post-pandemic economy?

The neutral rate of interest, or the rate that keeps the economy at full employment with stable inflation, can’t be directly observed. Instead, economists and policymakers infer it from the behavior of the economy. If borrowing and spending are strong and price pressures are rising, the current interest rate must be below neutral. If they are weak and inflation is receding, rates must be above neutral.

Pre-inflation spike, we lived in a near-zero interest rate environment. We’ve had that essentially since the Great Financial Crisis of 2008. The Fed tried to curtail low interest rates in 2018, but markets rejected it, and the economy teetered on the brink of entering a recession. Trump balked at this in particular. The Fed punted and decided to try again later.

Then COVID-19 happened, and the inflation spike followed. The Fed went from near-zero to boost the economy during COVID-19 to ratcheting rates up to the highest point in a generation to tackle inflation.

Where do we go from here? The Fed kept rates high because they believed inflation was still an issue. But they can’t keep rates that high forever; that would trigger a recession if they did. While a recession would end the inflation problem, it would trigger an unemployment crisis via recession, which is painful. See the double-dip recession to begin Ronald Reagan’s first term for evidence.

The Fed targeted 2% inflation as a goal, but as the election neared, they claimed to focus more on the unemployment numbers. Now, we have a U3 unemployment rate of 4.2%, with overall annualized inflation sitting at 2.7%. The unemployment rate is roughly what the Fed wants without going higher, while both inflation and interest rates are higher than the Fed wants.

The solution? Fewer rate cuts. Currently, the Fed is only projecting two more rate cuts in 2025. Powell’s statement was significantly more hawkish. Trump had discussed replacing Jerome Powell but stopped that last week. That may be because Trump’s view aligns with this, or Powell has aligned with Trump.

John Carney had a great piece in Breitbart quoting Trump officials who are terrified the Federal Reserve cutting interest rates would lead to increased inflation. He wrote:

“Powell had better be careful with these rate cuts,” said a person familiar with the team’s thinking. “Bidenflation may not be dead.”

Trump advisers point out that when the Fed started cutting rates, it appeared to believe that the labor market was softening and needed lower rates to keep unemployment low. A few months later, that view now looks mistaken.

The conclusion of his piece really hammers home that Trump’s team is worried about inflation roaring back:

“It’s not clear that monetary policy is tight,” one adviser said. “With growth above potential and wages still climbing, the Fed risks stoking inflation rather than curbing it.”

The stakes are high for Powell, who has worked to navigate competing risks in a divided Federal Open Market Committee. While some officials support further rate cuts, others remain wary of loosening too quickly. Trump’s advisers, for their part, are keeping a close watch on the Fed’s next move. “There’s too much at stake to move blindly,” one person close to the team said. “The risks of cutting too far could be greater than the risks of holding steady.”

Notably, Powell’s remarks perfectly reflected these concerns. In truth, I think Powell and Trump’s team have put their heads together on this and come to similar conclusions. In response, Trump dropped his early demands to replace Powell. I still think Powell leaves at the end of his term, but there won’t be any early pressure, for now, to replace him.

Powell can navigate this tightrope by toying with the term “neutral rate” for the next two years. Timiraos, in the WSJ, points out that it’s an economically nebulous term, and people can define it in many ways. Politically, it means neutral will become whatever the Fed needs to navigate Trump’s economic policy without triggering a new inflation surge.

Biden began his administration by ignoring the inflation threat. For obvious reasons, the Trump team is top of mind about inflation. Inflation will color all of Trump’s economic decisions, from tariffs to tax cuts. The Fed under Powell will shift “neutral rates” as needed.

Links of the week

A Mysterious Health Wave Is Breaking Out Across the U.S. – Derek Thompson, The Atlantic

Argentina Is Responding to Shock Therapy: He comes across like a madman, but Javier Milei is fast becoming the man of the moment. – Quico Toro, Persuasion

Canadian Opposition Leader Poilievre: Government Must Work For The People, Not The Ego Of One Man – RealClearPolitics

How a tiff over tariffs exposed the Canadian government’s fragility: Simmering tensions between Justin Trudeau and former ally Chrystia Freeland erupted Monday. – Vox

Voters Sent Democrats a Clear Message. They Don’t Want to Hear It. Many senior Democrats have decided to ignore the fact that the party is out of touch on a range of cultural issues like race, gender, and immigration – Ruy Teixeira, The Free Press

Trump Should Enjoy a Longer Honeymoon This Time Around: Americans seem willing to give his new administration a fair chance to make improvements on the economy and immigration. – John Halpin, The Liberal Patriot

MSNBC reportedly offers Joy Reid, Stephanie Ruhle pay cuts to stay in anchor chairs – NYPost

Neil Cavuto leaving Fox News after 28 years: I got to do what I love to do’ – NYPost

Abigail Shrier Was Vilified. Now She’s Been Vindicated. The author uncovered the truth about the dangers of transitioning minors—and stood up to bans, boycotts, and smears. – The Free Press

Bluesky Has a Death Threat Problem: It was supposed to be a gentler, left-wing alternative to X. My grim experience proves that just isn’t the case. – Jesse Singal, The Free Press

X/Twitter Thread(s) of the week