Transcription
We did. Our planning calls were like, "Let's get these two guys to talk about, um, the new War World and what he is dealing with." President Trump said that Kevin Warsh will be able to do his own thing. Mike, let me start with you. Will he be, uh, for a while?
Um, the president has a tendency to say things that either aren't true or change his mind. So I'm not putting a lot of credence in that. But it does give Kevin Warsh a little bit of a runway getting started in terms of not cutting rates, because you can't cut rates with inflation doing what it's doing with the war going on, uh, as it is right now. And it was kind of ironic that, uh, sound from Kevin that you just played because, uh, to do what he's talking about doing may require raising interest rates. And that is the exact opposite of what the president said he wanted in a Fed chair. But maybe he's got best and has convinced the president that it it's better to, uh, not pressure a guy into doing something that everybody knows is wrong.
Well, Stuart, come on in here because Federal Reserve Governor Chris Waller said he supports making clear that the Fed's next move is likely just as likely to be an increase as it is a cut. So, you know, you're now you're hearing starting to hear people say, in addition, traders now betting on this too, that the next move could be higher.
That's right. I mean, there is definitely a bet in the market that the next move is going to be a hike. I'm not entirely convinced the next move is going to be a hike. For one thing, when financial conditions tighten, markets are doing some of the heavy lifting already for the Fed. So at a minimum, it buys the Fed a little bit of time to be more prudent, to be more cautious where it conditions tightening. So we saw twos and fives are up 75 basis points over the last two months. Tens are up 65 basis points. The intersection of financial markets and the real economy is mostly at the long end of the curve, where interest rates start to affect things like, uh, home prices and mortgage rates and so on. We see buying conditions for things like durable goods, things that are financed typically in buying conditions are deteriorating materially. And so when that's the case, the Fed can afford to be a little bit more cautious and prudent.
I just want to hone in a little bit on what we heard from Kevin Warsh. And exactly to Mike's point, I think that the most important line, even the most important phrase is that the Fed has to pursue its dual mandate with independence and resolve. That hits my ears at least a little bit hawkish. So as much as we know that President Trump is, you know, as he was a self-professed low interest rate guy, the world that Kevin Warsh is moving into, I think he even recognizes, requires someone who is both independent and perhaps leaning, temperamentally hawkish. This is a good thing, a really good thing to kind of herd that I want to ask and just throw this out to both of you. We were thinking about, you know, a new Fed chair era. Is this significant, Mike, like, you have covered so many different heads of the Federal Reserve. You've been in Washington, you've questioned them. Um, is it significant when a new Fed chair takes over? Is there also a period where they're kind of learning the ropes a little bit?
Well, yes. Uh, he'll be my fifth Fed chair that I've covered. Uh, but it takes a little while for somebody to settle in. Now, Kevin Warsh worked at the Fed for five years, so he knows basically how the place operates. Much has changed in the 15 years since he's been there, but he will have a much better feel for it than the average person just coming in who who had never been there before. In a way, circumstances are working in his favor because even if he wants to cut rates, there's 18 other people on the Open Market Committee who get a vote on this, and he's got to be able to make a convincing argument to them about whatever monetary policy is going to be. And if they're going to be on hold indefinitely, then he's doesn't have to push something on people or try to get a consensus on something that isn't, uh, very obvious or isn't something that everybody wants to do.
So, dare I ask politically, does that mean he could have it both ways? Yeah, he'll have it both ways for a while. And I because he could personally say, this is what I think we should do, but I can't get everybody. Consensus says, well, I don't think you want to say that right away, because then you're admitting you don't have a lot of influence. Uh, I think he will probably say basically, uh, he doesn't like forward guidance. So they'll probably say we're going to be attentive to what's happening and do what monetary policy must do under the circumstances at which time we're voting.
Let's talk about this practice of issuing forward guidance. President Trump says Kevin Warsh will curtail the Fed's practice of doing so. Stuart, is that good or bad or what does that mean for folks like us who watch it? What does it mean for investors who watch it and economists who watch it?
Frankly, I think it's a good thing for policymakers to preserve some optionality. The more forward guidance they offer, the more they back themselves into a corner. For folks like me who want to understand what the Fed is going to do next. Look, it makes my job a little bit harder, but that's what I'm here to do.
Does this mean no more dot plot?
Well, so I think that he wants to move away from the dot plot. I think he wants to move away from the Summary of Economic Projections. The next dot plot that comes out in June is going to be a very difficult plot to try to explain to the world, especially if the especially if most of the members of the FOMC are going to eliminate any cut that they had marked for this year. So it's going to be a very difficult one to explain under the best of circumstances. And I think that it gives him even more of a reason to want to move away from the dot plot and the broader SEP.
So, Mike, what do you think in terms of the Summary of Economic Projections as has been a good thing? I mean, you've seen several cycles. I don't know. When did it first go into effect?
Uh, it first started under Ben Bernanke, uh, after the start of The Great Financial Crisis. But they've been talking about it for a long time, uh, putting out some kinds of forecasts rather than just the individuals, uh, talking about it in speeches. The thing about the Summary of Economic Projections is it's generally fine. The idea of saying what you think inflation and unemployment and growth are going to be, because those are the elements that are going to make up your decision tree for what you do about rates. The problem is that we have gotten into this situation, and it's partly because they use a lot, and it's partly because of Stuart and my fault that we look to the median, and everybody on Wall Street tends to think the median is a Fed forecast. And it's not. It's 19 different forecasts. And so they do have a problem with the dot plot. But when I talk to other members of the Open Market Committee, a lot of them agree that it's not the best way to present things, but they say we need something. Mhm. And so until you have a better idea of what we could use to kind of give people an idea of the path and why. Uh, we're going to probably have to stick with the dot plot.
I want to go back to your point about the dot plot getting rolled out under Ben Bernanke. Its real value to policymakers was to indicate that they had no intention of raising rates in the future, and so they could flatten the curve through their communications process. That was really the use of the SEP when it was rolled out. When you have a period of high inflation, when you have a period of uncertainty, when you're going through global shocks that have nothing to do with monetary policy, and that really can't be addressed by policy, like a global pandemic meant like a pandemic, like shutting down the Strait of Hormuz. Like supply chain snarls and lack of access to aluminum in North America. When you have things like that, the SEP just constrains your opportunity set. It doesn't help to provide any sort of communication that's valuable for addressing rates further out the curve. And I think that that's something that Warsh definitely recognizes. And he doesn't want to be backed into a corner.
Yeah. One problem too with the QP is that the Fed does it four times a year. And markets recalibrate the economy four times a second. So the narrated narrative on Wall Street is always that the Fed is behind the curve. And so even if Fed officials want to change their forecast, it's harder to get that across. As uh, Stewart was saying, you got um, oh, you've got this as SEP out there. And people may think that they're constrained by it. Now, an individual bank president might say, I'm not constrained because I've changed my mind, but people don't necessarily know that. So they're thinking that this is where they're going to be.
I want to shift a little bit and just talk about the economic landscape right now in the US consumer. We're going to be speaking in kind of doing a deep dive on retail and the consumer in the 3:00 hour. And the picture has emerged as some of the big box retailers have reported this week, is that there's a worry that their customers are really starting to feel strain as a result of higher gas prices. So, Mike, how does Warsh come in, Fed, Fed chair Warsh come in and address a consumer, a portion of consumers that are starting to feel under pressure in a more inflationary environment when there's sort of uncertainty around the end of a war and when that will actually bring fuel prices down?
Well, there's not enough not a lot he can say, because the Fed's goal is going to be stable prices, which means probably they might have to raise rates. But inflation is going up. He can do what Jay Powell does in every press conference and come out and say, we recognize that this is very important to Americans and the pain people are feeling. Beginning at the end of every press conference. But there isn't much he can say about what the Fed can do to help people at this point. It's it's not in their power. They can raise or lower interest rates, and that's about it.
Yeah. Well, you know, there's going to be a lot that actually happens before the first FOMC meeting that Kevin Warsh um, presides over. That's June 17th. We're going to get data points on jobs, CPI, PPI, um all before the next Fed meeting. I'm just thinking about in terms of the data right now and what it shows. And what are the drivers in particular of inflation. Um, I was reading about the build of I, the cost of chips and how that plays into it. The higher energy prices, of course, because of the U.S. war in Iran. You know, what is temporary? What is the real inflation story right now, Mike, when it comes to the U.S.?
There is still higher inflation, right? When you add it all up and when you talk to Fed officials, they're noting that the inflation has started to broaden out some. And you're seeing it in, uh, service areas that people thought were done. And the idea that tariffs were going to we'd seen the peak and we were going to see things go down. That may not be the case because we've got more tariffs coming up. So they are concerned about it now. In general, the Iran war is driving the headline numbers because of energy prices. So if that starts to come down, if the war ends, then Warsh has the opportunity to say, uh, you know, Mr. President, I can't cut rates today, but we're on a path to be able to do it. And maybe that is the best he can hope for.
Look, I think that what's interesting is that Kevin Warsh is in a position where he has said himself that inflation is a choice that central bankers make. And we're living in a world where there are a lot of supply shocks, and there are a lot of fiscal policy decisions that are taking place that are themselves inflationary. So the only extent to which Kevin Warsh has any control over the decision about inflation is to lean against demand, which is not something that he wants to do. We heard just this morning that he wants to deliver more growth, that he wants to deliver higher real wage growth. And basically he needs to wait for the inflation pressures to dissipate. And so what does it end up meaning for him? It is just a waiting game. He needs to see low aggregate labor income and low aggregate wait. And low real wage growth starts stifling that broadening of inflation pressures that Mike was just alluding to. We know that policymakers are worried about that broadening of inflation pressures that's being facilitated by things like elevated tax reform. And until we start to see a narrowing of the breadth of inflation pressures, uh, Kevin Warsh is going to have to stay on hold.
30s from each of you. Um, there's also that, uh, guy in the background. What's his name? Oh. Jay Powell. What's the impact of that? Like you said, uh, Fed Friday, I was thinking Freaky Friday. Kevin Warsh and Jay Powell wake up in different bodies in each other's body. Uh, Jay Powell, you're not going to hear much from him or see much from him, but he is going to stay as low per low profile guy. But he's a presence there at the Fed. He's a presence in the media. And it is going to be a little harder for Kevin Warsh, because he's got to deal with him in the room when they're all talking, right. You don't want to have to face him. You have a public face off.
Look, I don't think that Kevin Warsh is going to be intimidated by Chairman Powell. I don't think that other folks in the committee are going to be swayed by Chairman Powell. I think that, more importantly, folks in the committee are adequately independent and assertive in their own right, and we know that enough folks on the committee are hawkish enough to prevent any sort of missteps in the dovish direction.