00:00Is it inflation is going to firm up now, but unemployment rises next year?
00:04Could that be a plausible scenario? No cuts till next year?
00:08You know, it could be a plausible scenario. Our baseline view, Alex and Romaine, is we'll begin to see a pickup in the unemployment rate later this year.
00:19And that will put the Fed into the mode of cutting rates.
00:22But it's entirely possible that the Fed does not cut until the end of J-PAL's term.
00:27It's going to be very data dependent. They're not going to be preemptive and try to get ahead of the curve this time.
00:33So I think wait and see is the message out of the Fed right now.
00:37And they've been making that loud and clear.
00:39Would you guys think that the Fed is really leading when it comes to market reaction and the economy?
00:44Or is it really going to be tariffs and the tax bill?
00:48It's tariffs. It's the tax bill. And of course, every week we get new information on the tariff.
00:53There are some deals announced. There are some other indications that other countries may be hit with an additional tariff.
00:59So there's a lot of uncertainty. I think that the thing to remember is that in the past, including, you know, during my time with the Fed in 2019,
01:06the Fed had the room to act preemptively.
01:09You know, we cut rates in 2019 based upon a forecast of a slowdown.
01:13The difference now, of course, is inflation is above target and has been above target for four years.
01:18And I think you add the uncertainty on top of that, and that gives you the Fed on hold situation that we see today.
01:24But don't we have a sense, Rich, that we kind of know to a certain extent kind of where some of these metrics are going to go over the next few months?
01:32And we may not know exactly what it's looked like, but I think most people understand that inflation probably is going to be higher over the next few prints than what it was in the past couple of prints.
01:40And we could even see some potential weakness in the labor market.
01:44And I know that that's not enough for the Fed to preemptively act.
01:48But at what point when you guys are all in that room, do you kind of say, OK, this is now starting to add up to something?
01:55Yeah, well, of course, I'm not in that room anymore. I can speculate.
01:58Yeah, certainly what I what I believe is, is if we get an increase in the unemployment rate, say, to four point seven, four point eight, I think that would be enough to get them off the dime.
02:11There are others who think maybe somewhat less of a rise in the unemployment rate.
02:16Remember, they've already looked through what was the negative print on GDP growth in the first quarter.
02:20I think they understand that that really understated the economy's strength.
02:24And importantly, the economy came into the year, you know, with a very good situation in the labor market and in the economy.
02:32So there is that momentum as well.
02:35With regards to the tariffs and the potential impact on the economy, on supply chains, et cetera,
02:41I thought some of the comments from the New York Fed president, John Williams, the other day were interesting because he kind of said, look, you know,
02:46in his view, he said maybe September will have a better look at what that impact is, which, you know, for the market almost seems like, you know,
02:52might as well, he said 10 years from now, but it gets to this idea.
02:56And I think we all sort of think back to the pandemic and the supply chain disruptions there.
03:01And now the Fed was saying, look, this might be transitory.
03:04Let's wait and see. Let's wait and see.
03:05And we know with the benefit of hindsight that they were wrong on some of those issues.
03:08And I'm curious if there's that same impetus to not be wrong maybe this time around and not repeat that same mistake.
03:15Rafael, I think I think that's a fair point.
03:18I think that there is some path dependence in monetary policy.
03:22I think in particular because and I was there, of course, in twenty twenty one and in particular because inflation remained above the two percent target in twenty two, twenty three, twenty four.
03:34And I think we're also seeing, for example, in some of the survey estimates an increase in expected inflation.
03:41I think all those factors put together does put the Fed in a wait and see mode, whereas in the past they might have been more preemptive.
03:49You know, Rich, I just want to point out real quickly here.
03:52You call me Rafael.
03:53And let me just say, if I'm going to be confused with anybody, I'm glad I had that.
03:57I'm sorry you had that on the.
03:59Yes, you've mentioned Boston.
04:00That's fine.
04:01I'm glad you conflated me with somebody way smarter than I am.
04:04So anyway, it's all good, Alex.
04:06OK, well, I'll take that into account next time.
04:08All right.
04:09Hey, Rich, we also can't ignore what's happening with the deficit as well as the budget bill and the tax plan.
04:15That's going through Congress at the moment.
04:17The Committee for a Responsible Budget is saying that the net effect would add something like three point three trillion dollars to the federal government debt over a decade.
04:25How does that need to factor in to the market, to the economy?
04:30What what's the real impact?
04:33Well, obviously, the U.S. is and has been on an unsustainable fiscal path.
04:39And I think that in some ways this is not a lot of news.
04:42I think the markets were already expecting an increase in deficits relative to the baseline path and probably the Fed as well.
04:51I think an important offset, however, is if the 10 percent tariffs do stay on and the Trump folks are saying that they have no intention to move away from the across the board 10 percent tariff.
05:02That's going to raise, you know, according to some estimates, you know, nearly three trillion dollars over 10 years.
05:08And so this is a very complex package.
05:10It's a big package. It's got tax cuts.
05:13It's got some cuts in spending and the tariffs, which are not directly factored into that analysis, are also going to be relevant as well.
05:20Well, also, it's the idea that if we take default for the U.S. off the table, right, we're always going to pay our bills.
05:26There will always be people who buy U.S. treasuries and investors who buy U.S. treasuries.
05:29But at what price?
05:31Yeah.
05:31And I'm just wondering, at what price do things get get a little sticky in the economy?
05:36Five percent in the 30 years, six percent?
05:39Well, Alex, I'll put it this way.
05:41A term that we've used for a long time at PIMCO when it comes to treasuries is that they're the cleanest dirty shirt in the sovereign deck closet.
05:50And so the reality is there was a global market for fixed income.
05:56And if you look at most major countries in the world, Japan, most countries in Europe, unfortunately, they've got fiscal pictures that look about as bad as the U.S.
06:06So, you know, our baseline view is the dollar remains the global reserve currency and treasuries remain the global reserve asset, in part because there aren't a lot of viable alternatives.
06:16But you are correct.
06:18You know, rates are higher now than they were before the pandemic.
06:20And I think that does reflect the required extra premium that people require to hold treasury duration.
06:27Does that constrain, though, the Fed?
06:29I mean, if we do get to a point where maybe we do need a little bit of economic support, does that constrain the Fed?
06:34It's an interesting question because certainly in theory it should.
06:40If 10-year yields go up because the Treasury is having to pay more to borrow to roll over its debt, other things being equal, that slows the economy.
06:50And I think the Fed would factor that in.
06:52Indeed, I remember in November of 2023, the chair and the Fed more or less said that one reason they were staying on hold is that bond yields had gone up in that time.
07:02So long as it's reflecting an increase in the real borrowing cost and not expected inflation, I think at the margin it is a factor for the Fed.
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