The New World Of “Nonmarket Forces”

By Michael Every of Rabobank

Nonmarket Forces

In a speech titled ‘Nonmonetary Forces and Appropriate Monetary Policy’ at “the Economics Club of New York, New York, New York” — a Frank Sinatra as sung by Jay Powell?– new FOMC member Miran implied from now the Fed needs to see things Trump’s Way. He argued the neutral Fed Funds rate sits around 2.5% due to “nonmonetary forces” and their impact on inflation. He concludes, “That sounds low, but I think it’s important to take [this] seriously, not literally…” while “I suspect existing backward-looking estimates are too high because they insufficiently account for recent changes to fiscal and border policies.” Indeed, he lists the nonmonetary forces to note as:

1. Lower rents driven by a reversal in net US population flows – he expects 2m people to have left the US by end-2025, so rental demand will drop vs supply;
2. Tariffs, as “relatively small changes in some goods prices have led to what I view as unreasonable levels of concern,” and expects exporters will cut prices, while tariff revenues are around $380bn a year, a huge change in fiscal policy;
3. Increased investment due to Trump tax policies and multi-trillion dollar pledges of FDI alongside new trade deals – the Reverse Marshall Plan; and
4. The impact of deregulation and lower energy prices.

Meanwhile, ‘Most CEOs say Trump policy has harmed their businesses, new survey finds’ (Axios) as the ‘Trump admin is to get tough on companies that abuse the H-1B visa’ (Washington Post) but may exempt doctors. Does that all say higher or lower neutral rates if so?

Regardless, nonmonetary –or at least non-market— forces are all around us, if we look.

The Australian Financial Review notes “Nvidia’s OpenAI deal shows how worrying the AI money-go-round is’, arguing “One firm invests $100bn in the other, so it can buy $100bn of chips made by the investor. Welcome to artificial intelligence’s circular economy.” That said, history is replete with markets that see crossholdings work just like that, usually, but not exclusively, as part of economic statecraft.

In geoeconomics US Treasury Secretary Bessent said “All options for stabilization are on the table” for Argentina, which is a “systematically important US ally in Latin America“, adding “Argentina will be Great Again.” He floated using the Treasury’s exchange stabilisation fund, and/or buying Argentinean securities, and/or the use of swaplines. Again, for those who understand economic statecraft, the Monroe Doctrine, this is all very obvious.

South Korea’s president implied the $350bn his country must invest in the US could also require a Fed swapline to avoid the risk of a financial crisis there – now do everyone else who has been forced to make similar pledges, including Europe. That’s as South Korea and BlackRock agreed to set up a “hyperscale” data centre there to meet Asia-Pacific demands, and Secretary of State Rubio said trilateral ties between the US, South Korea, and Japan are “critical” for peace and stability in the Indo-Pacific.

Elsewhere, China’s COSCO took stakes in two Laem Chabang terminals – the port US Navy ships use when visiting major non-NATO US ally Thailand; and the White House is trying to keep Russian airlines from getting their hands on sanctioned parts via Belarus as it agreed to sell 22 787 Boeing Dreamliners to Uzbekistan (not 22,787 as mentioned in the Trump post about it).

Domestically, Trump issued his promised ‘terrorist organization’ designation for Antifa, opening the doors for a crackdown on it and its supporters: where might that trail lead, if anywhere?

Moreover, the Supreme Court allowed Trump to fire the FTC commissioner he wanted to and will rule whether to overrule a past landmark precedent — Humphrey’s Executor — that limits the president’s ability to fire top officials at that and other government agencies. That could allow for even faster, deeper structural changes in the US political economy, if so.

It’s not just a US thing, either – or at least potentially. Poll-leading Reform UK Party leader Farage has pledged to deport hundreds of thousands and to cut off all welfare benefits for non-Britons, which could see a further future clash with the EU, among others. We are years from the next UK general election, but will we see ‘what if’ economic pondering on what that might mean for inflation there following the Miran lead?

In the EU, as Politico puts it, ‘Rome gloats as France becomes Italy and Italy becomes France’ – though of course the ECB has something to do with the latter; and, as the AP notes, ‘Italian workers’ strike in solidarity with Gaza brings disruptions across the country.’

Meanwhile, as the FT notes ‘How Southeast Asia lost its way’ with investors, the South China Morning Post proclaims ‘Why China’s 5-year plan matters – and how it could steer economy in turbulent times’, as “Facing a volatile world, Beijing has renewed its focus on economic and industrial planning.” Which means statecraft, not “because markets.” That’s as Bloomberg notes ‘China floods the world with cheap exports after Trump’s tariffs’, which is “Causing alarm abroad, with governments weighing the potential damage to their domestic industries against the risk of antagonising Beijing.”

So, yes, lots of nonmonetary forces are out there.

And on force itself, Russia’s Putin just proposed a temporary US-Russia nuclear arms control deal while vowing to respond to “any threats” and saying he would deploy intermediate and shorter range missiles, blaming the West for it: militarily, that could force Europe to build a planned eastern defensive shield at an even faster pace and higher price.

In the interim, Poland’s PM Tusk threatened to shoot down Russian jets crossing into his airspace. Yet at time of writing, 50 flights had been cancelled so far and another 50 diverted from Copenhagen Airport due to mysterious drone activity: just coincidence, after Russian aerial incursions over Poland, Romania, and Estonia, and disputed allegations of signal-blocking over Bulgaria?

North Korea’s Kim says he’s open to talking to Trump, whom he recalls “fondly”, if he drops his demands for denuclearisation; reports say former Syrian President Assad was poisoned in Moscow, new President Sharaa baulked at a potential normalisation with Israel; Turkey’s President Erdogan said he doesn’t consider Hamas a terrorist organization ahead of meeting Trump; Hamas penned a letter to Trump offering half the hostages in exchange for a 60-day pause in fighting; a French proposal envisions a multinational Gaza force tasked with gradually disarming Hamas; and the Israeli press says it’s preparing for another attack on Iran if the latter tries to restore its nuclear or missile projects, makes a military buildup, or finances regional terrorism. Lastly, the SCMP reports the landmark launch of China’s J-35 stealth jet from one of its aircraft carriers, seen as “a boost to naval power.”