Slowing corporate earnings
In a surprising move, Adriana Kugler, a Federal Reserve governor, announced her resignation five months before the end of her term. This development, if it occurs, could potentially reshape the monetary policy landscape.
The impending vacancy could lead to a weaker dollar, lower short rates, and higher long-end rates due to concerns around politicized monetary policy and inflation. A possible Trump loyalist pick to replace Kugler might help alleviate some of these concerns, but would not necessarily make up a majority within the 12-member Federal Open Market Committee (FOMC).
The FOMC consists of the seven-member Fed Board of Governors, the president of the New York Fed, and a rotating cast of four of the remaining 11 regional Fed presidents. Even with a loyalist pick, the committee's balance would still lean towards maintaining the Fed's independence, as enshrined in its mandate.
The Fed is built to withstand attacks on its independence, and the seven governors have oversight of the regional Fed banks, with veto power over the regional Fed bank appointments.
Moving away from the Federal Reserve, let's turn our attention to corporate profits. Recent data suggests that corporate profits hardly grew in the second quarter compared to the year before, breaking a recent pattern of growth in the mid-single digits.
The sales and operating profits of S&P 500 companies that have reported second-quarter earnings, excluding financial companies and energy groups, show a mixed picture. Sales look fine for the group, but the trend in operating profit is poor. Falling reported operating profits seem clustered in consumer discretionary and consumer staples sectors.
This trend has raised concerns about the momentum of US corporate profits. However, it's important to note that these figures are based on preliminary data and may change as more companies report their earnings.
On a positive note, American Eagle Outfitters' shares rose nearly 24% yesterday, following the success of their advertising campaign, which President Donald Trump called "the 'HOTTEST' ad out there". The campaign, featuring Sydney Sweeney, who is registered to vote as a Republican, has garnered significant attention.
As we delve deeper into the economic landscape, it's worth noting that small businesses in Australia, while facing pressure on profitability due to slowing demand and elevated input costs, are managing to maintain profit margins around pre-pandemic averages, according to the Reserve Bank of Australia's July 2025 bulletin.
For current and specific analysis on US corporate profits and their impact on small businesses, consulting the latest Financial Times newsletter or their official website would be necessary.
In a potential "doomsday scenario", the board could force out and replace heads of the regional banks to place like-minded individuals on the FOMC. However, such a move would face significant opposition and could potentially undermine the Fed's independence and effectiveness.
We invite our readers to share their thoughts and feedback on these developments by sending an email to unhedged@our website.
[1] Source: Reserve Bank of Australia's July 2025 bulletin.
- The impending vacancy at the Federal Reserve due to Adriana Kugler's resignation could potentially lead to a weaker dollar, lower short rates, and higher long-end rates because of concerns around politicized monetary policy and inflation.
- even with a possible Trump loyalist pick to replace Kugler, the balance of the Federal Open Market Committee (FOMC) would still lean towards maintaining the Fed's independence, as enshrined in its mandate.
- Moving beyond the Federal Reserve, American Eagle Outfitters' shares rose nearly 24% due to the success of their advertising campaign, which President Donald Trump called "the 'HOTTEST' ad out there".
- Australian small businesses, despite facing pressure on profitability due to slowing demand and elevated input costs, are managing to maintain profit margins around pre-pandemic averages.
- In a potential "doomsday scenario", the board could force out and replace heads of the regional banks to place like-minded individuals on the FOMC, a move that could face significant opposition and potentially undermine the Fed's independence and effectiveness.
