The Anguish of Central Banking… the ghost of Arthur Burns is returning to haunt us
September 28, 2025 – Weekly Comment
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Arthur Burns was the Fed Chair from 1970 to 1978. Fifty years ago. In September of 1979, he gave an address titled The Anguish of Central Banking. Here’s the link:
https://fraser.stlouisfed.org/files/docs/publications/FRB/pages/1985-1989/32252_1985-1989.pdf
It’s well worth reading due to today’s parallels. I have excerpted several passages that are at the end of this note, but in the interest of brevity I am going to summarize the main points. With respect to the persistent inflation of his tenure, Burns, in part, points to a transformation in the role of gov’t “…to solve problems and relieve hardships—not only for society at large but also for troubled industries, regions, occupations, or social groups—a great and growing body of problems and hardships became candidates for governmental solution.” He deflects criticism of the Fed by noting that sharp monetary restraint to fight inflation would be “frustrating the will of Congress.”
As the Federal Reserve, for example, kept testing and probing the limits of its freedom to undernourish the inflation, it repeatedly evoked violent criticism from both the Executive Branch and the Congress and therefore had to devote much of its energy to warding off legislation that could destroy any hope of ending inflation.
My conclusion that it is illusory to expect central banks to put an end to the inflation that now afflicts the industrial democracies does not mean that central banks are incapable of stabilizing actions; it simply means that their practical capacity for curbing an inflation that is continually driven by political forces is very limited.
We’re going to be yearning for the steady hand of Jerome Powell in the years to come. In my opinion, the overwhelming risk is that the next Fed will spark huge inflationary fires with the tacit approval of a Congress that knows no restraint, and an executive branch that skirts the rules and indulges in fanciful policy pronouncements with little regard for consequences, inflationary or otherwise.
As we run into another budget wall, both sides in Congress simply want more. New polling says that Gen Z and Millennials want socialism. (According to a COMPLETELY UNBIASED poll funded by Democratic Socialists of America). The 2% inflation goal is in the rearview mirror. It’s no coincidence that the last time gold soared to spectacular new highs was in the late 1970’s to 1980.
Odds of a government shutdown appear to be receding on betting sites, though it would probably be best if the 400 generals summoned by Defense Sec’y Hegseth bought round-trip tickets so they don’t get stuck in Quantico. Maybe they’re being deployed to Portland. Or Venezuela. If the gov’t does shut down at the end of Tuesday then Friday’s employment data will likely not be released.
In terms of a bond market reflecting fiscal stress, France 10y made a new high for the move last week at 3.60% (high since 2011). The spread to Germany had been 45 to 60 bps from 2022 to Q1 2024, but ended Friday above 82 bps (high this year according to BBG is 86.3). Chance of ECB buying French bonds to stabilize spreads?
From an article by Lance Roberts, “The clearest sign of [US] economic deceleration is the Conference Board’s Leading Economic Index (LEI), which has declined for 17 consecutive months. That’s not a rounding error; that’s the longest losing streak since the 2008 financial crisis. The LEI includes forward-looking components like new orders, jobless claims, building permits, and consumer expectations.” [link below] If the Leading Index is correctly foreshadowing a recession, then the Fed will almost certainly restart QE. The endgame appears to be a plan to repress US rates while letting inflation run hot. In the Biden years the idea was fiscal dominance, but now the economic hand-off is to AI investment dominance (with an equally uncertain payoff).
Credit market risks seem to be non-existent. BBB/Baa spread to tens is less than 100 bps, at the lows of the past five years. Of course, in 2007 the spread was also quite low at 120 bps, but then exploded to nearly 600 bps by the start of 2009. Stock prices of the TBTF banks are making new highs: JPM, BAC, WFC, C, MS, GS. I would put BLK in this category as well. However, some of the largest players in private equity are lagging. For example, KKR is well below the January high, and dropped 5.5% on Wednesday. Same with Apollo (APO). Blackstone (BX) looks better but still seems to have heavy resistance around January highs. Blue Owl (OWL) has been sideways since May and dropped 6.6% on Wednesday. Could the divergence between TBTF and some of the private equity shops give an early warning of credit risks? Not certain but watching. Along the same lines, bitcoin is weakening relative to gold, and MSTR last week traded at the lowest level since mid-April. I perceive gold to be more of a central bank asset, while bitcoin is more speculative with greater embedded leverage. Below is a chart of Bitcoin/gold (XBT/XAU). Trendline off the low of 2023 appears vulnerable.
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Sort of an amusing interview with Cem Karsan of Kai Volatility and a guy named Ben Cahn of stocktwits. Karsan is talking about current overvaluation and comparing it to 2000. (4:09) “The amount of pain in the tech bubble…Nasdaq lost 92% of its value peak to trough. 98% of tech start-ups went bankrupt.” The interviewer Ben appears as if he just can’t process the thought and responds incredulously with, “I can’t imagine that happening again today. It feels like the world will be over.” To which Cem replies simply, “It will.”
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This past week was dominated by huge buying of TY calls covered. Over $150m in premium.
Monday:
+50k TYZ5 114.0c covered 112-275, 31d price 33
+50k TYZ5 114.0c covered 112-255, 29d price 32
+25k TYZ5 114.0c covered 112-240, 28d price 31
Tuesday:
+50k TYZ5 114.0c covered 112-250, 29d price 31
Thursday:
+50k TYZ5 113.5c covered 112-215, 35d price 38
+50k TYZ5 113.5c covered 112-210, 35d price 38
+20k TYZ5 113.5c covered 112-090, 18d (only) price 32
Friday’s settles: Dec options expire 21-Nov.
TYZ5 112-085
TYZ5 113.5c 30, 31d, Open Int 166k
TYZ5 114.0c 23, 24d, Open Int 233k
I marked Friday TYX vol at 5.1 and TYZ at 5.4 (took out weekend time value). These levels are near the year’s low despite the huge call buyer. Liberation Day vol was 8 to 8.5.
One other interesting trade from Friday: +50k US wk1 Tuesday (10/7 expiry) 109p, 1 paid 50k. On BBG symbol is ULIV25P1. Oct 7 is the anniversary of the attack on Israel. I don’t believe I have seen any large Tuesday option trades aside from this one.
OTHER THOUGHTS/ TRADES
Rate futures clearly expect easing, though the magnitude and timing has been pared back in the past week. For example, the high settle of SFRZ5 this month has been 9639 on 9/11, but Friday’s settle was 9627.5. The peak SOFR contract, SFRH7 posted a high settle for this month and calendar year of 9716 on 8-Sept. Friday it ended over ¼% lower at 9688. SFRZ5/Z6 one-year calendar was -80 one month ago, and -59.5 on Friday (9627.5/9687).
My bias is that events may cause the Fed to ease harder and faster than is currently expected. I believe that will cause the forward part of the curve to (re)steepen.
As mentioned during the week, some are thinking that the end of Powell’s term in May will be immediately followed by BIG easing. Therefore, calendars like SFRH6/M6 and H6/U6 have been of interest. However, these spreads have actually rallied over the month. SFRH6/U6 settled -45 on 29-Aug and -35 on Friday (9645.5/9680.5). When the Fed is expected to ease it’s not uncommon to see a THREE-MO spread near -50. Fed comments post-FOMC and some decent data have trimmed easing expectations. I would think H6/U6 could easily trade below -50 in October. Of course, this would be associated with a move to much higher prices; a similar expression using December midcurves would be something like pay 4.0 for 0QZ5 9712.5/9737.5cs for 4.0 (settle 4.25, 7.5 and 3.25).
| 9/19/2025 | 9/26/2025 | chg | ||
| UST 2Y | 357.8 | 364.3 | 6.5 | |
| UST 5Y | 368.6 | 376.9 | 8.3 | |
| UST 10Y | 413.3 | 418.3 | 5.0 | |
| UST 30Y | 475.3 | 476.3 | 1.0 | |
| GERM 2Y | 201.9 | 202.7 | 0.8 | |
| GERM 10Y | 274.6 | 274.5 | -0.1 | |
| JPN 20Y | 262.9 | 262.2 | -0.7 | |
| CHINA 10Y | 179.2 | 187.4 | 8.2 | |
| SOFR Z5/Z6 | -64.5 | -59.5 | 5.0 | |
| SOFR Z6/Z7 | 10.5 | 9.5 | -1.0 | |
| SOFR Z7/Z8 | 19.5 | 18.0 | -1.5 | |
| EUR | 117.46 | 117.03 | -0.43 | |
| CRUDE (CLZ5) | 61.98 | 65.14 | 3.16 | |
| SPX | 6664.36 | 6643.70 | -20.66 | -0.3% |
| VIX | 15.45 | 15.29 | -0.16 | |
| MOVE | 72.51 | 74.38 | 1.87 | |
https://realinvestmentadvice.com/resources/blog/slowdown-signals-are-leading-indicators-flashing-red
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EXCERPTS FROM ARTHUR BURNS’ 1979 SPEECH (emphasis added)
I believe that such analyses overlook a more fundamental factor: the persistent inflationary bias that has emerged from the philosophic and political currents that have been transforming economic life in the United States and elsewhere since the 1930s. The essence of the unique inflation of our times and the reason central bankers have been ineffective in dealing with it can be understood only in terms of those currents of thought and the political environment they have created.
And beyond these innovative actions, the federal government greatly extended the range of its regulatory activities. It intervened massively in the securities market, in banking, in the public utilities industry, in the housing market, and in the farm sector; and it gave labor unions broad new rights and powers.
Once it was established that the key function of government was to solve problems and relieve hardships—not only for society at large but also for troubled industries, regions, occupations, or social groups—a great and growing body of problems and hardships became candidates for governmental solution. New techniques for bringing pressure on the Congress— and also on the state legislatures and other elected officials—were developed, refined, and exploited. The Congress responded by pouring out a broad stream of measures that involved government spending, special tax relief, or regulations mandating private spending.
Traditional ways of protecting particular groups against competition— such as raising farm price supports, increasing minimum wages, and imposing import quotas— did not lose their appeal as inflation kept soaring.
Viewed in the abstract, the Federal Reserve System had the power to abort the inflation at its incipient stage fifteen years ago or at any later point, and it has the power to end it today. At any time within that period, it could have restricted the money supply and created sufficient strains in financial and industrial markets to terminate inflation with little delay. It did not do so because the Federal Reserve was itself caught up in the philosophic and political currents that were transforming American life and culture.
If the Federal Reserve then sought to create a monetary environment that fell seriously short of accommodating the upward pressures on prices that were being released or reinforced by governmental action, severe difficulties could be quickly produced in the economy. Not only that, the Federal Reserve would be frustrating the will of the Congress, to which it was responsible—a Congress that was intent on providing additional services to the electorate and on assuring that jobs and incomes were maintained, particularly in the short run.
As the Federal Reserve, for example, kept testing and probing the limits of its freedom to undernourish the inflation, it repeatedly evoked violent criticism from both the Executive Branch and the Congress and therefore had to devote much of its energy to warding off legislation that could destroy any hope of ending inflation. This testing process necessarily involved political judgments, and the Federal Reserve may at times have overestimated the risks attaching to additional monetary restraint.
My conclusion that it is illusory to expect central banks to put an end to the inflation that now afflicts the industrial democracies does not mean that central banks are incapable of stabilizing actions; it simply means that their practical capacity for curbing an inflation that is continually driven by political forces is very limited.
