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00:00All right. So let's get to it because we've been trying to give our own Stuart Paul a little bit
00:06of time to get through those Fed minutes. There's a lot there. A lot of times there's not a lot of
00:10new stuff, but sometimes there are some nuances that are really important. He's been poring over
00:15those latest FOMC minutes, as we said, from that Fed meeting on June 18th. Stuart, of course,
00:20is Bloomberg Economics U.S. economist, and he's here in studio. We know you're going through it,
00:25Tim, breaking down some of the headlines. What are you seeing that maybe jumps out that you
00:29think is interesting for the Bloomberg audience? What really matters, as you said,
00:32is the nuance in the minutes. And as Tim pointed out, it was just a couple committee members who
00:38are open to a rate cut at the coming meeting. Okay, so we're most likely not going to get a
00:42cut at the coming meeting. The question is really if we're going to get September and or December.
00:46With some officials, some being more than a couple, some officials seeing no rate cuts this year,
00:52there's more risk that rate cuts will remain on hold. Adding to the idea that rate cuts are going
00:58to remain on hold. Most many officials are saying it's going to take some time for tariffs to raise
01:03prices. And many, which is a significant adjective that's used in these minutes.
01:12We're always looking at the adjectives, right?
01:14That's right. Many are expecting a gradual softening of labor market conditions. So
01:18we know that the members of the committee are putting more weight on the inflation mandate.
01:24They're expecting inflation pressures to become more pronounced. It's going to take some time.
01:29And they are expecting the gradual softening of the labor market, which will allow them to stay
01:35focused on inflation in the near term. Okay, speaking of inflation, officials thought tariffs
01:39are still likely to put upward pressure on prices. Stuart, this coming on a day where we heard from
01:43Stephen Moran, the White House Council of Economic Advisors chairman, who says there's been no evidence
01:48to show that President Trump's tariffs have been inflationary. Do you agree with his assessment?
01:53No. So I poured over the CEA's report. They use basically an imputed price index for imports
02:00separate and apart from what we get from the CPI. So it's not like there is this separate goods or
02:06core goods import price index that persistently has a wedge to the actual CPI figures that we're
02:12talking about and is way too early to say that tariffs have had no effect on import prices. When you
02:18look item by item within the CPI and we'll get CPI data next week, it is evident that there are price
02:24pressures for things like appliances. There are price pressures for things like electronics. And the
02:30members of the Fed are going to be looking at that, as are the staff members. Hold on, explain that again,
02:34because you went over this report from the CEA. Sure. What was the math that the CEA used in order
02:39to come to this conclusion? So the CEA attempts to create its own synthetic imported goods price
02:45index that is separate and apart from the headline figures that we see in the CPI. That imputed price
02:51index looks at the portion of goods that have imported parts. And it then tries to identify a price index
03:00that would apply to that imputed set of goods, that set of categories. And that report showed that there
03:08is a persistent wedge between the headline CPI figures and this goods CPI synthetic index.
03:14But again, it's way too early to use some sort of mathematical model to declare victory over
03:20inflation, say the tariffs won't present any sort of inflation pressures. We know that the Fed's
03:24internal models look top down and say, what is the average effective tariff rate? Which from the time
03:30that these minutes were written to today when they are released, the average effective tariff rate went up,
03:35right? And so we know the Fed's internal models are gonna be marking relatively more inflation today
03:41than they did when they were having these deliberations June 18th. And at the time of the
03:47meeting, staff members were breathing a little bit of sigh of relief reading from the minutes here.
03:51They were marking up their growth forecast and down their inflation forecast relative to what
03:56they saw in May. By the time June came around, they saw things as slightly less stagflationary.
04:03We know that with slightly higher average effective tariff rates today, relative to June 18th,
04:09the Fed's gonna be a little bit less easy in their inflation outlook.
04:12Well, it's also easy. Like I think about our interesting, you think about the last jobs report
04:17showed strength in the labor market, right?
04:20That's right.
04:20So maybe that also reduces that thought of the stagflationary environment too, or what? Like,
04:26how do you kind of continue to layer in everything, Stuart, when tariffs are still a big question?
04:32Well, so we know that many members of the FOMC look at nonfarm payrolls and they discount them
04:37pretty heavily. The members of the FOMC disregard a significant share of payroll growth that we see
04:44because of the BLS's birth-death model, which we've talked about ad nauseum over the past couple
04:49years. The other thing to keep in mind is that members of the FOMC are expecting to see a gradual
04:54softening of labor market conditions. And so you might think, wouldn't they be, you know,
05:00rest assured, everything is great. The unemployment rate ticked down in the latest jobs report,
05:04but it ticked down because of a shrinking labor supply. In the sense of improved balance in the
05:10labor market, maybe they could be breathing a sigh of relief, but I would hardly call that a robust
05:15and dynamic labor market when unemployment is declining because of weaker labor supply.
05:20And furthermore, when looking at the jobs report and thinking about the minutes that were just
05:24released right now, wage growth slowed, hours work declined, and the aggregate amount of labor
05:32income that was reported in the report based on payroll growth, wage growth, and hours growth
05:37was about zero between May and June. And so softening labor market conditions
05:42are still evident. They should not be necessarily resting easy because of that June report.
05:47All right, so let's get to something that we've all been reading about. First of all,
05:50we know President Trump continuing to criticize Fetcher Jay Powell. Here's, first of all,
05:55what he said from the Oval Office. This was yesterday.
06:02He should resign immediately. We should get somebody in there that's got a lower interest rate.
06:07Why don't you call for his resignation?
06:10Do you want congressional Republicans to investigate and pursue and publish?
06:13It's okay with me. I think he's terrible. He's always late. But he wasn't late with Biden before
06:17the election. He was cutting them like crazy. It didn't help too much, did it?
06:21All right, everybody. That was President Trump yesterday from the Oval Office. And then today,
06:25he was out on social media once again reiterating his call for Fetcher Jay Powell to,
06:29quote unquote, lower the rate and talking about the cost to the U.S. economy by not doing so.
06:33Stuart, he says the Fed's interest rate is at least three points too high. You have emphasized,
06:37right in the past, when he's talked about, what, bringing it down by two or three percent.
06:41Three percent basis points. Go ahead, Carol. Well, I was going to say, based on your analysis
06:48of the U.S. economy, is the Fed behind that much behind the curve in cutting U.S. interest rates?
06:55I don't think so. And if so, if we have to cut that much, aren't we like in a recession depression?
06:59So the argument that someone would have to make for somebody like Trump to make this argument that
07:04the federal funds rate should come down by three hundred basis points, he's really just looking
07:09at something like nominal growth, nominal GDP growth, which was running between six, seven,
07:14seven and a half percent when the Fed was hiking. And in the first quarter registered about three
07:19and a half percent because there was a real contraction, shrinking GDP, and there is still
07:24persistent inflation. But the reality is that private domestic final demand growth is still
07:29running at an annualized pace. So that's consumption and fixed investment. We're ignoring things like
07:34inventories. We're ignoring things like exports, net exports, and the drag from imports.
07:38When you look at private domestic final demand growth, it's still running between one and a
07:42half and two and a half percent over two and a half years. And so with inflation risk still skewed
07:47to the upside, as members of the FOMC are saying in the minute, the broad swath of members of the
07:53FOMC and the staff see inflation risk skewed to the upside. It's no wonder why they're sitting pat.
07:58Domestic fundamentals aren't especially bad. And the inflation risk is skewed to the upside.
08:03And when that's the case, it would be a bit peculiar to cut rates going into what feels like
08:10a persistent expansion. You know, I think about the way that the president does want to control
08:15the Federal Reserve in the rate environment. And I think of a country like Turkey, for example,
08:19at a central bank like Turkey, and we've seen inflation rampant. And Stuart, I wonder just about
08:24sort of like, be careful what you wish for when it comes to a central bank not being independent.
08:29What would happen if the central bank were to lose independence, lose complete control over
08:33the back end of the curve? And that's explain what would happen, though. Yeah. So if the Fed were
08:38to step up and attempt to lower the short to lower short term financing costs, which is really where
08:44they have the most control, and they were to attempt to inject liquidity into the financial system
08:49by, let's say, purchasing bonds, it would ultimately lose confidence of investors more broadly in
08:55the market, which matter most for controlling long term rates. Folks would have to start compensating
09:01for anticipated inflation, which would be running considerably higher. If the Fed loses credibility
09:07that it is committed to its 2% inflation target, investors have to add in additional inflation
09:14compensation to long run rates. And that weighs on financing costs, that weighs on growth, that
09:19weighs on investment prospects.
09:21So the Fed capitulating to political pressure is really, it's an existential crisis for monetary
09:28policymakers. There's a sense in which the President pressuring the Fed has the absolute
09:35opposite of the intended effect. If the Fed Chairman is going to retain any sort of credibility,
09:41the President would be better off by suggesting growth is robust. And so you should keep rates
09:48where they are. If he were to actually want the Fed to cut, he should be trying to persuade
09:52the Fed that, you know, by maintaining your independence, you would be cutting.
09:58Bottom line, not good.
09:59No.
09:59If there's not an independent Fed. I'm going to leave it there. Stuart, thank you so much.
10:03Always, always breaking down.
10:05Dr. Stuart Paul.
10:07Doctor.
10:08Did you get your PhD?
10:09Yeah.
10:09A few years ago, yeah.
10:11Congratulations.
10:12Why did we miss that?
10:13Oh, he's had it. We just don't call him doctor.
10:15Okay.
10:15Yeah.
10:16Doctor.
10:16There's apparently a doctor in the house.
10:18There is. We'll be in touch, Stuart.
10:20Congratulations, Stuart.
10:20Yeah, if only I had the prescription.
10:23Blue Book Economics, U.S. economist, and doctor, Dr. Stuart Paul.
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