November 2025 Commentary And Economic Outlook

2025-11-21 04:25:00 ET

Economy:

• We expect the Fed to pause at their next meeting due to their flawed monetary framework where they use an arbitrarily low target, fail to adjust the price index for anomalies, and use flawed Keynesian models to forecast inflation. The Fed will only potentially cut if the November employment report is very weak.

• As expected, the Fed cut rates by 25bp and announced the end of its balance sheet reduction. There was a surprise dissent to the cut from Jeffrey Schmid of the Kansas City Fed and an expected dissent favoring a 50bp cut from Stephen Miran. The statement was largely unchanged with no indication of future rate cuts. Due to the surprise dissent, the bond market traded off slightly while the stock market was largely unchanged. We continue to expect a December rate cut and three more cuts in 2026 to get the Fed funds rate to the neutral rate of 2.75%. We project that core PCE will decline to the 2% area by the end of 2026 as the shelter component of CPI has finally started to reflect the decline in market rents. In fact, our real time measure of inflation utilizing market rents already has declined to the 2% area for core PCE.

• The last inflation report was very bullish as the critical owner’s equivalent rent component declined to only .1% compared to .4% the prior month and 3.8% Y/Y. This decline is critical as it reflects market rent declines and implies that core PCE will decline to the Fed’s arbitrary 2% target by the end of 2026. Our CPI-R indicator, which uses real-time rents, has consistently shown that inflation is below the Fed’s target and that shelter inflation is falling.

• The monetary base is the critical leading indicator of inflation and GDP growth. M1 and M2 have become outdated indicators after the GFC as banks now have massive excess reserves, so the Fed can no longer control the size of bank balance sheets to restrict credit. In addition, non-bank lending has grown exponentially, further limiting the importance of M1 and M2 relative to the monetary base.

  • The monetary base has shrunk by over 6% Y/Y vs. a normal growth rate of 5%, which is very deflationary and could lead to a recession.

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