Minutes Show FOMC Split Over Inflation Concerns

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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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