Weekly global economic update

Week of September 1, 2025

• Potential changes to the Fed
• A pivot toward state capitalism in the United States

Potential changes to the Fed

• President Trump’s recent announcement that he intends to remove Fed Governor Lisa Cook led to a decline in the yield on the two-year bond (signaling an expectation of a looser monetary policy) and an increase in the yield on the 10-year bond (signaling an expectation of higher inflation). Cook has indicated that she will fight the effort to remove her.

The President has said that the benchmark interest rate should be cut by 300 basis points while Treasury Secretary Bessent said it should be cut by 150 basis points. Either way, this would lead to a sharply negative inflation-adjusted rate at a time when inflation is rising. That would be highly unusual. Theoretically, lower rates could boost the economy, at least temporarily.  

As a recap, the primary policymaking body at the Fed is the Federal Open Market Committee (FOMC). It is composed of the seven members of the Board of Governors (all of whom are appointed by the President and confirmed by the Senate, and who serve staggered 14-year terms) as well as a rotating group of five of the 12 presidents of regional Federal Reserve Banks. The regional presidents are chosen by the commercial banks that are members of the Federal Reserve system but must be approved by the Board. In addition, the law allows the Board to remove regional presidents. Several regional president’s terms expire in 2026.  

Aside from Chairman Powell, who was originally appointed by Trump and then re-appointed by President Biden, two members of the Board were appointed by Trump: Christopher Waller and Michelle Bowman. Recently, board member Adriana Kugler resigned and Trump appointed Stephen Miran to replace her. He has not yet been confirmed by the Senate. If Cook is removed, Trump will then appoint a replacement for Cook and will have appointed four members. Next year, he will have the opportunity to replace Powell.

Christopher Waller, a member of the Board of Governors of the Federal Reserve, is considered one of the candidates to replace Chair Powell next year. In the past, he seemed predisposed toward a focus on minimizing inflation by keeping interest rates higher than otherwise. Yet in the most recent meeting of the FOMC, he was one of only two members who supported cutting rates. He indicated that he could potentially support a “jumbo” cut to interest rates in September. This could suggest that the Fed will soon move toward a far easier monetary policy.

Specifically, although Waller said that he did not “believe that a cut of larger than [0.25 percentage points] is needed in September,” he nevertheless said that his view “could change if the employment report for August, due out [soon], points to a substantially weakening economy and inflation remains well contained.” Waller added that “in July, I argued that, looking through tariff effects, with underlying inflation near target and the upside risks to inflation limited, the FOMC should not wait until the labour market deteriorates before we cut the policy rate. Based on all the data in hand, I believe this argument is even stronger today, and that the downside risks to the labour market have increased.”  

Although it appears that the Fed will cut its benchmark rate in September, the bigger question involves what the Fed is likely to do in the months to follow.

A pivot toward state capitalism in the United States

• Two weeks ago, the US government took a 10% stake in the largest US-based producer of semiconductors, which has lost market share to foreign competitors. Under the Biden-era CHIPS Act, the US government promised the US-based chip maker grants and loans of as much as US$20 billion, meant to help it boost investment in the United States. This, along with subsidies for other companies, was meant to revitalize US chip-making so that the country would be less dependent on Asia.

  Will this investment be successful? It is not clear. One estimate suggests the chipmaker will need US$50 billion over the next few years to develop appropriate capacity. At the same time, foreign competitors are making big investments in fabrication plants in the United States, using CHIPS Act subsidies, but are not likely to sell shares to the US government. Meanwhile, chip fabricators in the United States already face a serious shortage of labor with the required skills. One foreign chipmaker is reported to be bringing its own workers to the fabrication plant it developed in the United States.

  If the investment were a one-off event, it would not necessarily generate much controversy. In 2008, the Bush Administration injected equity into several large banks, the aim of which was to prevent a complete meltdown of the financial system. In 2009, the Obama Administration injected equity in automakers, the goal of which was to prevent a collapse of the US automotive industry. In both cases, the government got out quickly. What the current administration is doing is different.

  President Trump, speaking about the latest transaction, said, “I will make deals like that for our country all day long. I will also help those companies that make such lucrative deals with the United States.” He described his economic strategy as “to get as much as I can.”

  Other people within the Administration have offered similar sentiments. Secretary of Commerce Howard Lutnick said that defense contractors could be targeted. Speaking about a large defense contractor, he said: “It makes 97% of their revenue from the federal government. If we are adding fundamental value to your business, I think it's fair for Donald Trump to think about the American people.” Kevin Hassett, director of Trump’s National Economic Council, said, “I'm sure that at some point there will be more transactions, if not in this industry in other industries.” He suggested that such transactions could be the first step toward creating a US government sovereign wealth fund (SWF). The president has said he wants one and has expressed admiration for the SWFs in the Middle East.

  Meanwhile, the chip transaction is not the only event involving greater US government intervention in the private sector. The government only approved of a Japanese takeover of an American steel company after the company gave the United States a “golden share,” thereby giving the government some influence in the company’s decisions. In addition, the Pentagon has taken a 15% stake in a company that produces a mineral used in high strength magnets. The United States also allowed two US tech companies to sell advanced technology to China if they share the revenue with the US government. Finally, tariffs, and especially tariff exemptions, put the government in a position to influence the private sector.

  If the US government becomes a shareholder in companies, what are the implications? For example, in China the state-run sector is widely seen as being less innovative and productive than the private sector. There may be constraints on the ability of such companies to dismiss workers, shut down facilities, or offer competitive compensation to executives. Government ownership may influence government decision-making, with the government favoring its own companies over others.

  If the United States creates an SWF, then it could effectively become operator of something akin to a private equity firm. This means picking investments on behalf of taxpayers. The long US history of a robust and independent private sector has often been seen as one of the sterling attributes of the US economy. Changing it has considerable risks.