Trump's moves signal increasing interference in the Fed

Our weekly podcast by Kevin Lings

Positive SA government revenue and expenditure data

In this podcast, STANLIB Chief Economist, Kevin Lings, talks about revenue and expenditure data for July, with revenue holding up well and expenditure slightly behind budget. He also discusses concerns that the US’s 30% tariff could hurt SA’s export performance.

The focus areas during the week included

The US S&P 500 equity index ended the week down 0.1%, hurt by a decline of 0.6% on Friday. Economic news was relatively light, especially early in the week, with the market focused on NVIDIA’s earnings release and on US President Donald Trump’s ongoing efforts to undermine the Federal Reserve’s independence. For the month of August, the S&P 500 was up 1.9%, its fourth consecutive monthly gain. Year-to-date, the S&P 500 is up 9.8%, while the Nasdaq is up 11.4%.

The STOXX Europe 600 Index ended the week down 2.0%, hurt by renewed tariff uncertainty, political instability in France, and fading hopes of a peace deal between Russia and Ukraine. Year-to-date, the STOXX 600 is up a very respectable 8.4%. The SA All Share Index also struggled during the week, losing 0.9% of its value, but it is still up more than 20% year-to-date.

Longer-dated US bond yields were relatively steady during the week, with the 10-year government bond yield hovering around 4.25%. The market is currently pricing an 86% chance of the Fed cutting rates by 25bps on 17 September 2025.

In August, the rand was (again) boosted by the carry trade (especially since the Fed signalled a likely rate cut on 17 September) as well as a further improvement in SA’s terms of trade. During August the rand gained 2.3% against the US dollar, which lost 2.2% against the euro. The dollar remains vulnerable to the “policy uncertainty” associated with Trump’s presidency.

During the week, Trump announced on social media that he would remove Lisa Cook from the seven-member Federal Reserve Board of Governors due to alleged mortgage fraud. Cook has indicated that she will challenge this move in the courts, setting up a potentially lengthy legal battle (Cook filed a lawsuit seeking to block the firing on Thursday, and a Fed spokesperson said the central bank will abide by any court decision). The outcome of this case is uncertain, with a recent Supreme Court ruling seemingly limiting the ability of the president to remove senior officials at the Fed, and it is not clear whether the allegations meet the threshold of a “for cause” removal of a governor. If successful, the president would have the opportunity to nominate another candidate to the Fed board. Against this backdrop, some analysts have highlighted that the increasing politicisation of the US central bank could lead to lower-than-appropriate interest rates in the short term, resulting in higher inflation and interest rates over the long term.

News reports suggest the Trump administration is looking to exert more influence over Regional Fed presidents. Unlike Fed Board governors, Regional Fed presidents are not currently nominated by the president or confirmed by the Senate. News sources indicate that the president’s team is looking to apply greater scrutiny over these appointments, which are currently coordinated between the private-sector boards of the Fed Banks and the Fed Board of Governors. This is adding to market concerns over greater political involvement in the central bank, with Treasury secretary Scott Bessent repeating his push for a review of the Fed.

On Thursday, Fed Board of Governor’s member Christopher Waller said that he will again support a 25bps interest rate cut at the Fed’s next meeting on 17 September and that he anticipates “additional cuts over the next three to six months,” noting that “the downside risks to the labour market have increased” and that “economic activity has slowed significantly.”

US PCE inflation for July was unchanged at 2.6%y/y, in line with market expectations, while core PCE inflation increased from 2.8% to 2.9%, although this was also in line with the consensus forecast. US goods inflation is still expected to increase meaningfully over the coming months because of the higher import tariffs.

US weekly jobless claims fell to 229 000 this past week, slightly above market estimates for 227 500 claims, but down from a revised 234 000 claims the prior week. Continuing claims, which measure the total number of people receiving unemployment benefits, dropped to 1.95 million from 1.96 million the prior week. The broader trend for jobless claims has been higher this year, indicating that labour market conditions remain healthy, but are softening from a position of strength.

US durable goods orders (excluding the volatile defence and aircraft spending) were up a robust 1.1%m/m in July, well above market expectations for an increase of 0.2%m/m. This is a useful indicator of fixed investment spending on business equipment. However, the data is very erratic from month to month and is best assessed on a trend basis. At this stage, investment spending on equipment remains subdued overall, but with a slight upward bias that is worth monitoring.

In June 2025, US house prices declined by a further 0.3%m/m. This is the fourth consecutive monthly decline. Over the past year, prices have increased by 2.1%, although this is the slowest annual rate of increase in US house prices in two years. The US housing market has been undermined by sustained high mortgage rates, low consumer confidence, and (more recently) rising inventory levels.

On Tuesday, the US Conference Board reported that the consumer confidence index declined by 1.3 index points to 97.4. The decline was driven by increased concerns about job availability as well as future income. The Expectations Index, which measures consumers’ short-term outlook for income, business, and labour market conditions, dropped 1.2 index points to 74.8, below the threshold of 80 that can signal a recession ahead.

The US Bureau of Economic Analysis released the second estimate of gross domestic product (GDP) for Q2 2025. The revised estimate shows that the US economy grew at an annual rate of 3.3% during the second quarter of 2025, up from an initial estimate of 3%. (During Q1 2025 the economy declined by 0.5%q/q). The revision was mainly due to increased business investment activity, as well as consumer spending, which was partly offset by a downward revision to government spending and an upward revision to imports.

SA private sector credit extension rose by only R7.8 billion (0.2%m/m) in July, following a robust increase of 1.4%m/m in June. On an annual basis, the growth in private sector credit extension continued to accelerate, rising by 5.8%y/y, up from 5.0%y/y in June. Although this is the strongest growth in two years, the acceleration was mainly driven by base effects. The monthly breakdown of credit extension shows that corporate credit drove most of the increase, with corporate credit rising by R6.3 billion (+0.2%m/m) during the month. Consumer credit increased by only R1.5 billion (+0.1%) in the month and is up only 3.0% over the past year.

SA National Treasury released its July 2025 statement of revenue, expenditure and borrowing. According to the data, gross tax revenues totalled R121.0 billion in July 2025, an increase of 10.9%y/y, and an improvement from June’s growth of 6.5%y/y. The latest improvement in revenue collection is well above the 7.0% required to achieve the budgeted tax revenue for 2025/26, helped by strong personal income tax and VAT collections. In contrast, government expenditure rose by a much more modest 4.7%y/y in July, up from growth of 1.0%y/y in June but still well below the budgeted increase of 7.8%.

According to the minutes of the European Central Bank (ECB) interest rate meeting in July (the deposit facility interest rate was kept unchanged at 2.0%), the members of the committee were split over the outlook for inflation. Several committee members argued that the inflation risks were tilted to the downside at least for the next two years, citing weaker growth prospects, the impact of US tariffs, and a strong euro exchange rate. In contrast, a few members warned that inflation risks could still be tilted to the upside, especially over the longer term, given uncertainties around energy prices and currency movements. Comments from ECB officials at the Fed’s Jackson Hole symposium on 21 August appeared to indicate that a ninth interest rate cut during the current business cycle remains unlikely, but a discussion about further rate cuts may well resume if the economy weakens appreciably.