Fed Is in 'No Man's Land' Right Now, KPMG's Swonk Says

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00:00Diane, I think we're looking for a little bit more context on this report.

00:03On the headline, I guess it looks good if you are anticipating rate cuts.

00:07But then when you start to go through some of the individual sectors, the individual

00:11actual price increases that we're seeing on certain goods and services,

00:16I'm a little confused because it seems like things are still pricey. Are they not?

00:22They are. And in fact, inflation is 3 percent. That is not 2 percent,

00:27not 2 and a quarter percent on the CPI. That is above the Fed's estimate for price stability and

00:34prices are still front of mind to consumers. And I think what's important about it is we also know

00:39that 40 percent of this survey was imputed. That is hard due to staffing shortages prior to the

00:47government shutdown. That's the most we've seen this year and I think about the most on record

00:51that's been imputed. And that when you impute prices, you're either looking at something that's

00:56a close substitute. It may or may not be. And you don't have the people out in the field doing

01:01the survey like you once would have. And what we don't know is, is that actually capturing the

01:07real time changes we're seeing or is there more out there? We also you look at things like

01:12the elder care and the child care components going up. The child care going up at its third fastest

01:19pace for a month on record. Elder care in home care going up at its fastest pace on record for one

01:26month. Those are things that also include curbs on immigration and the shortage of workers that

01:33we're seeing there. And I think it's a very hard mix for the Federal Reserve. It does get we have a

01:39forecast if that's going to cut a quarter point in October and a quarter point in December. But it makes

01:44next year's forecast a lot dicier. And it's likely that the Fed skips at least one meeting at the

01:51start of the year. I am curious just about how complicated this gets, because the narrative that

01:55the Fed has laid out is this idea of trying to protect the labor market as a way of protecting

01:59the broad economy here as we see it. But then when you look at some of the year-over-year increases

02:04that we're seeing in food prices, meat prices, housing, utilities, autos, etc., it seems like the same

02:10people that would be helped by rate cuts on the labor side would also be hurt if that also leads

02:16to further price appreciation on some of those goods and services. Exactly. And it's one of the

02:22reasons why Jay Powell has been careful about only talking about through the end of this year.

02:27And the Fed is moving with caution, not certitude. I think that's important as well, that the Fed isn't

02:33in a hurry to cut rates. They know the government shut down, usually something that you would just

02:37look through. You wouldn't think that this would be a big event, but it is a big event because it

02:43covers more workers than it ever had, not getting paychecks, and there's spillover effects into the

02:49private sector as well, along with freezes to state and local funding that will have an impact on the

02:55economy and threats of permanent rifts associated with this too. So this is a very difficult situation

03:03for the Fed to be navigating. And it's why they keep saying also there's no risk-free policy,

03:08because if you cut too rapidly, there is no question that low-income households are those

03:14who may get a little bump in employment if they're lucky, or they may not, because we also have AI out

03:20there as a headwind on employment as well right now. But on the flip side of it, inflation really hurts

03:26those households the most. Well, Diane, let's talk a little bit more about the labor market here,

03:33because, okay, we're not getting official data, but then you take a look at some of the corporate

03:37individual stories that we've gotten just in the past week when it comes to layoffs. Amazon, Nestle,

03:42Molson Core's Target, GM, just some of the names that you can see there. So even though we aren't

03:47getting the official data, you add all that together, and it certainly doesn't seem encouraging.

03:52And then you think about some of the folks that were laid off. I think it would be

03:55hard for them to just go flip into another job. That was the narrative around some of the big tech

04:00AI layoffs, not AI, but tech layoffs that we were seeing in the last couple of years.

04:05I mean, when does that question of the labor market and its weakening get more urgent, perhaps

04:10overwhelming the Fed's cautiousness about cutting too aggressively?

04:16Well, it's a good question, and it's a very hard answer because, yes, it's important. And that's

04:22the bet that certainly Chris Waller is making is that, you know, and the Fed's base case is that this

04:27is an inflation that will resolve itself eventually, not as quickly as they'd like because the tariffs

04:33were issued in sequentially and they're still coming through. We've still got six to 18 months tailwind

04:40on a lot of tariffs that just hit in August and October. Some could be as soon as November 1st. So all of

04:47these things together make it a very difficult situation for the Fed. Do they just ignore the

04:52inflation data entirely and think more about the labor market if they did that and they're only focused

04:57on the labor market? I think they'd be cutting by more than a quarter point right now because of the

05:02weakness in the labor market. That said, you don't want that to come back as a more systemic, more

05:09sustained bout of inflation. And it really is a very hard position for them to be in. It leaves them in this

05:15sort of no man's land where no one's happy as well. And Diane, we have less than a minute here,

05:21but I also want to go back to your point that when you think about those lower income households,

05:25inflation, obviously a really painful tax there. That also explains the Fed's positioning towards

05:30rate cuts right now. But that being said, I mean, you could argue too that that's the portion of the

05:35economy that really could use some relief from the rate side, especially when you think about what's

05:40going on with car loans, for example, and some of those subprime borrowers.

05:46There's no question that subprime has gone up. It's the highest level on the car loan since 2010.

05:51That said, the kinds of rate cuts we're talking about, you'd need really big rate cuts to make

05:56a difference for those borrowers because those borrowers have very high rates. So as a percentage

06:01of what the relief they would get is very small and not enough to get them over the finish line and

06:07make those loans not delinquent.

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