Eying tension at the Fed, an earnings season update and takeaways from crypto week in D.C.
Our longest-serving Federal Reserve chair was William McChesney Martin. He headed the Fed under five different U.S. presidents, from 1951 to 1970. In 1956, he famously described the Fed’s purpose to Congress as “leaning against the winds of deflation or inflation, whichever way they are blowing.”
Like our current Fed chair, Jay Powell, Martin was often in the crosshairs of presidential agendas to reduce interest rates while trying to maintain a steady grip on inflation. Known for his willingness to listen to opposing views, he did not buckle under pressure. In 1951, when Martin kept interest rates high against inflation that was running at 21%, President Truman allegedly called him a traitor.
In 1965, Martin drew President Lyndon Johnson’s ire when the Fed raised rates to counter inflationary pressures caused by spending on the Vietnam War, expanded domestic programs for Johnson’s “Great Society” and a 1964 tax cut. Following the move, it is said Johnson summoned Martin to his Texas ranch, accused him of “running a rapier through me,” and shoved him around his living room, urging him to cut rates and yelling in his face, “Boys are dying in Vietnam and Bill Martin doesn’t care!”
Martin’s refusal to back down was seen as a signature moment defining the importance of the Fed’s independence and the chair’s resolve. However, it must also be remembered it was not enough. Inflation reached an 18-year high of 6% and was still climbing when Martin completed his term in 1970, passing the baton to Arthur Burns, a friend of President Nixon, whose “stop-go” Fed policymaking resulted in a decade of high and persistent inflation, the likes of which had not been experienced since World War I.
So it’s fair to say many presidents and Fed chairs have had complicated relationships, though the current Trump-Powell drama is starting to feel a bit more like an episode of “The Apprentice” than real life. After one of President Trump’s acolytes accused the Fed chair of undertaking an “ostentatious overhaul of your Washington, D.C., headquarters” and misleading Congress about it, Powell snapped back with a point-by-point rebuttal of that claim. He also continues to resist the public taunts of the president and now Treasury Secretary Scott Bessent, who indicated this week the formal process to select Powell’s successor is already underway.
Financial markets have shown some sensitivity to any suggestion of replacing Powell, gyrating a bit over the drama in a week full of other important economic news and earnings reports. The financial markets value Powell’s steady hand and commitment to independence. A president crossing the line to fire a Fed chair and the legal battle likely to follow would be destabilizing. For now, financial markets believe Trump is more bark than bite, using his platform to pressure Powell publicly into submission or resignation. But investors are wary of a change that is not in the normal course and remain uneasy yet not too affected by the drama. However, this tender situation could turn on a dime.
It is especially tenuous to face this what-if scenario now, because inflation is a real worry against the backdrop of tariffs and following the high levels reached in the Covid pandemic era that never quite normalized. This week, the consumer price index report for June was not as benign as hoped, with inflation increasing to a 2.7% annual rate. Excluding food and energy prices, inflation showed a 2.9% annual pace. Driving the uptick were prices for goods that are more sensitive to a rise in tariffs—furniture, apparel, toys, and appliances—which accelerated at the end of the second quarter. This report suggests that at least some businesses are now passing on cost increases to the consumer.
While the producer price index fell to a 2.3% headline year-over-year pace and a 2.6% annualized core increase without food and energy costs in June, the reported decline in input costs all came from the service sector.
Retail sales were ebullient, jumping up 0.6% in June for a 3.9% annualized increase. Sales were strong across the board last month, especially for cars, apparel and miscellaneous goods. Even though prices are higher and tariffs are worrisome, the American consumer remains unstoppable for now.
Corporate earnings are also resilient—the week kicked off with good news from banks and financial services companies, while Taiwan Semiconductor and 3M also lifted market spirits. Less helpful were results from Netflix and Eli Lilly. Even though they had great results, they noted pressures from tariffs and competition. Overall, stocks rallied broadly to new highs for both the S&P 500 index and Nasdaq Composite.
In case you missed it, this week was “crypto week” in Washington, and President Trump will see three bills hit his desk. They include the GENIUS Act, which provides a framework for private companies to issue stablecoins, as well at the CLARITY Act for cryptocurrency regulation and the CBDC Anti-Surveillance State Act, which would prevent the Federal Reserve from issuing a central-bank-backed digital currency. Walmart and Amazon are two of the companies reportedly considering launching their own stablecoins to potentially reduce the billions of dollars the retail titans pay in credit transaction fees if customers switch to using the coins to make purchases.
Next week, be on the lookout for our July monthly newsletter, which will feature a detailed rundown of the One Big Beautiful Bill Act and how your advisory team can help you adjust your tax and financial plans to benefit from its provisions.
For now, I leave you with this Bob Dylan hymn as a theme for the weekend: “Come gather ‘round people/Wherever you roam/And admit that the waters/Around you have grown/And accept it that soon/You’ll be drenched to the bone/If your time to you is worth savin’/And you better start swimmin’/Or you’ll sink like a stone/For the times they are a-changin’.”
Written by a human.