Recap | 20 August 2025
- Edward von der Schmidt
- 12 minutes ago
- 6 min read
Left out, Russia objects to discussions involving security guarantees for Ukraine.
Texas House passes redistricting legislation as national gerrymandering fight kicks off.
The minutes from the July FOMC suggest that the Fed is more worried about inflation and less ready to cut in September than markets and forecasters expect.
Apple issued a critical security update to address a major flaw present in all of its currently supported operating systems.
Facts in print. Thoughts in italics.
EDWARD VON DER SCHMIDT
Headlines
Security Guarantees?:
Notwithstanding Wednesday's NATO virtual summit that its military committee chair deemed a "great, candid discussion" about Ukrainian defense, member countries have encountered misgivings and apprehension regarding potential troop deployments. Italy has suggested a collective defense provision akin to NATO's Article 5 that would allow for 24 hours to determine whether to respond to a given attack. Russia's Foreign Minister Lavrov took issue with discussions about security guarantees that did not involve them, referring to the planning as a "road to nowhere". Russia has also pushed for China as a security guarantor and is effectively demanding a veto. (Reuters, Bloomberg)
The West has finally hit a nerve. There is a rich irony in Russia condemning discussions of security guarantees for Ukraine that exclude Russia, given that Russia has invaded them and has no intention of including Ukraine in discussions about ceding its own territory. That may be because Putin's regime ultimately does not believe in an independent Ukraine but rather that it is rightfully a part of Russia with a shared historical legacy dating back centuries. Even meeting Zelenskyy would undermine Russia's contention that he is an illegitimate head of a state whose sovereignty it does not respect.
That said, Russia's concerns about the deployment of NATO-member troops in Ukraine are worth considering. Would attacking British or French troops stationed there trigger NATO's collective defense clause and invite a kinetic response? Involving NATO in a country already at war is not without risk, even if Europe's security concerns are shared with Ukraine and may be existential.
Texas v. California:
The Texas House finally passed a redistricting bill designed to gain five projected seats in Congress for the GOP. The California legislature will push a November ballot measure to do away with the state's independent redistricting commission in order to nullify Texas's redrawn maps ahead of the 2026 midterms. (AP)
Gerrymandering is a race to the bottom for representative democracy, regardless of where it is done or the political considerations at play. Redistricting can also have unpredictable consequences for races once thought to be safe.
Around the World
Poland:
Officials accused Russia of provocation after a suspected Russian drone crashed in eastern Poland. (Reuters)
Iran:
Iran's navy began the country's first military drills since a devastating 12-day war that decimated its nuclear program ended in June. (Reuters)
China:
According to Reuters' sources, China's State Council will review and may approve a plan to allow stablecoins backed by the yuan later in August. China had banned cryptocurrencies in 2021 due to financial stability concerns. (Reuters)
Stablecoins may be the key to widespread cryptocurrency adoption. Only "stable" in the sense that their value is pegged to a unit of fiat currency ostensibly backed by reserves, stablecoins are principally a means of exchanging value with the convenience of distributed ledger technology.
Macro
FOMC Minutes:
The minutes for the July 29-30 FOMC revealed that inflation concerns were still far more prevalent than perceptions of labor market weakness at the time of the meeting. With modal and market expectations of one or two 25bp cuts by year-end, stalling disinflation and the emergence of tariff-driven goods inflation outweighed slowing private demand and investment growth or the noticeable deceleration in private payrolls already underway. Note that Chair Powell may well have had advance access to that Friday's payrolls data in time for the monetary policy discussion two days before the public release.
Tepid GDP projections owed more to weaker consumer spending and declining immigration than import costs as financial conditions actually eased. Although downward payrolls revisions later prompted widespread calls for a September cut, a more holistic view that considered unemployment and participation rates, employment-to-population and job-vacancies-to-unemployed-workers ratios, and average hourly earnings still pointed to a solid if uneasy labor market that remained near maximum employment.
A number of factors contributed to the lagging influence of tariffs on prices, including stockpiling, slow pass-through of input costs, gradual updates to contract prices, customer retention considerations, delays in tariff collection, and ongoing trade negotiations. Nevertheless, the Fed largely saw pass-though to consumers as a matter of when not if. Officials continued to emphasize the importance of keeping longer-term expectations anchored: "Various participants emphasized the central role of monetary policy in ensuring that tariff effects did not lead to persistently higher expected and realized inflation."
Three critical excerpts of the July meeting encapsulate the Committee's policy calculus looking ahead to September:
"Participants generally pointed to risks to both sides of the Committee's dual mandate, emphasizing upside risk to inflation and downside risk to employment. A majority of participants judged the upside risk to inflation as the greater of these two risks, while several participants viewed the two risks as roughly balanced, and a couple of participants considered downside risk to employment the more salient risk."
[...]
"Participants noted that, if this year's higher tariffs were to generate a larger-than-expected or a more-persistent-than-anticipated increase in inflation, or if medium- or longer-term inflation expectations were to increase notably, then it would be appropriate to maintain a more restrictive stance of monetary policy than would otherwise be the case, especially if labor market conditions remained solid. By contrast, if labor market conditions were to weaken materially or if inflation were to come down further and inflation expectations remained well anchored, then it would be appropriate to establish a less restrictive stance of monetary policy than would otherwise be the case."
"Participants noted that the Committee might face difficult tradeoffs if elevated inflation proved to be more persistent while the outlook for the labor market weakened. Participants agreed that, if that situation were to occur, they would consider each variable's distance from the Committee's goal and the potentially different time horizons over which those respective gaps would be anticipated to close. Participants noted that, in this context, it was especially important to ensure that longer-term inflation expectations remained well anchored."
Taken together, the Fed clearly believed that inflation was the more pressing concern that demanded its attention. Unless the next employment report is catastrophic, that assessment is unlikely to change enough to prompt a move lower. Containing nascent price pressures is viewed as the institution's raison d'être and of greater concern than preemptively supporting labor markets - barring serious employment weakness that is unmistakable.
The Fed is further away from cutting than markets and professional forecasters are prepared for. The bar is high to shift a majority of the Committee's views toward a more balanced assessment of risks that would call for a cut at the next meeting. Even then, any adjustment would likely be modest given the perceived proximity to neutral rates. Another round of payrolls data and inflation readings will shape the September policy debate so a cut is still possible. With the Fed's inflation-fighting credibility on the line, however, the impetus to hold is strong.
Targeting Fed Officials:
The White House called for the resignation of Governor Cook, whose term runs until 2038, in response to allegations of mortgage fraud for claiming two primary residences on 2021 applications. In a statement, Governor Cook responded, "I have no intention of being bullied to step down from my opposition because of some questions raised in a tweet." (AP)
This administration is not above innuendo or directing investigations to establish pretext for cause to fire officials in its way. Targeting Governor Cook is a first step toward replacing Board members with loyalists such that the White House could rely on the subservience of a majority of the FOMC or at least of the Board of Governors, who hold long-term permanent voting positions on the Committee, to compel looser monetary policy.
The Treasury intends to ramp-up short-term bill issuance to finance its spending and tax cuts. The administration desires lower policy rates to reduce its near-term interest obligations without regard for future inflation costs, namely because profligate officials will not be around to own the consequences or pay the bills. This marks another direct assault on the Fed's independence with potentially disastrous implications for the institution's credibility if the scheme is fulfilled.
Finding Footing:
Dramatic sell-offs in technology names finally abated and reversed before Wednesday's close to attenuate index losses. (AP)
Cyber
Malicious Image Processing on Apple Devices:
Apple issued a Rapid Security Response update for all of its supported devices and operating systems. Malicious image files could be used to corrupt memory when processed.
This is a serious security flaw - update your devices promptly. If you don't, intruders can glean your operating system or software version from your browser traffic or application usage and automatically determine which known vulnerabilities you are still exposed to. Once these exploits are announced, everyone finds out another way to compromise an outdated version of software and it will be open season on those who fail to update in a timely way.
Note that image files do not have to be rendered such that you can see them. Nearly every email you receive from a company contains a 1x1 transparent tracking pixel that loads code from an external server. Companies also hide code in their banner fields. If you want to be safer, disable external image loading, automatic downloads, and Javascript.