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00:00Welcome back, sir. It's good to see you. How's the process going? Let's start there and then we can get into all the other good stuff. How's the interview process going? It's going well. As far as I can tell, the secretary has a very systematic way of going down the list and doing the interviews. As I said the other week, I had a great interview with Secretary Besant. Talked a lot about economics, Fed policy, the Fed, balance sheet, just general stuff in the economy and financial markets. It went very quick. It was about an hour and 45 minutes. The next thing I knew was over.
00:29So it was a great conversation. Of course, I love those kind of conversations. I can do that all day long.
00:34The Treasury Secretary has spoken about in the past he wants almost a visionary, someone who looks forward, like an Alan Greenspan type, open-minded. Do you get a sense of what he means by that?
00:45I think it's the idea of if you're looking at the data and it's always looking back at the data, the data is always kind of old and you have to think forward, like where are you going with this stuff?
00:55I've managed to do that a couple of times with thinking about this beverage curve argument back in May of 22, that we could have the soft landing earlier this summer with the weakness in the labor market, which turned out to be true.
01:08People doubted it at the time I said it.
01:10So I think it's, I don't want to brag, but it's that kind of being able to look at the data and see forward where things are going. And I think that's a critical thing he's looking for.
01:20You were certainly vindicated. The president was obviously excited about the fact the Fed finally was cutting interest rates. Have you spoken to him at all?
01:27No, I have not. I have not. Is that on the schedule? I don't know. That's up to Secretary Besant.
01:32We're going to find out soon, hopefully. We'll talk to the man himself, the Treasury Secretary, hopefully later on in a month.
01:37I want to talk about the meeting that takes place at the end of this month as well. You were pretty clear going into the last meeting.
01:42You delivered a speech and I believe the title was, let's get on with it. Are you advocating for the same thing at this meeting?
01:47Yeah, I think it's the right thing to do. Back then, there was an issue of whether you go 50 or 25.
01:54And I argued we could do 25 and see how the data comes in. Of course, we're not getting much data.
02:00And then we can think about the next 25. So in the last six weeks, I don't think a lot has changed.
02:05We're not getting the public data, but all the private sector data that we're getting, beige book yesterday,
02:11everything we're getting is telling roughly the same story. The labor market's weak.
02:16Growth seems to be on the stronger side, which is a bit of a puzzle right now,
02:19because you can't have a really strong growing economy and negative job growth or zero job growth.
02:26And, you know, people talk about productivity, but AI hasn't had that effect yet on the labor market or productivity.
02:31It will down the road, I think, but not right away. So I don't think that's the story that's driving it.
02:37So in that case, one of these things has to move, right?
02:39Either GDP numbers start coming back down or the labor market rebounds.
02:44You just can't have growing economy and, you know, very weak labor market.
02:49They just don't go together.
02:50In the meantime, do you just continue to reduce interest rates meeting by meeting as you wait to see what's going on?
02:56What's your overall approach?
02:57Yeah.
02:57Think about that.
02:58That's exactly what I've been arguing.
03:00Since we don't know which way this is going to break, if the labor market rebounds,
03:03there's less of pressure for cutting rates.
03:06If the growth comes back down, there's more pressure for cutting rates.
03:09You don't want to make a mistake.
03:11So the way to avoid that is to go, you know, cautiously or carefully and do 25, wait and see what happens.
03:18And then you can get a better idea of what to do.
03:20But if you've already started the process, you're providing whatever initial support for the labor market that you feel is necessary.
03:27So we've had this obvious step down in payroll growth.
03:29It's pretty clear.
03:30It feels like that alone, though, might be an outlier compared to everything else that's going on in the economy.
03:35You yourself just acknowledged that.
03:37What do you think is behind that?
03:38And can that persist?
03:41You know, when I've talked to private sector CEOs about hiring, I mean, we typically get a couple of things.
03:46Maybe early part of the summer, there was a lot of uncertainty about tariffs.
03:50We're just holding off on doing anything.
03:52One of the things I heard is firms were going to have to pay the tariffs.
03:55One easy way to do that is just not hire.
03:58Take all the labor savings to pay off to whatever the tariffs were.
04:01So that was one thing.
04:02Then you have this AI story, which was people like, we don't know if we're going to need to hire, but we're going to wait and find out.
04:10We're not going to go out and hire a lot of people right away.
04:13So I think tariff uncertainty, paying for tariffs, trying to sort out what AI really is going to do, kind of put firms on their back foot.
04:21Now, that's what I mean.
04:23Either they decide the AI is not going to be in the near term, the big job replacement that they thought, and they're going to have to start hiring, and it comes back.
04:31Tariff uncertainty goes down.
04:34All of those things could lead to a rebound.
04:36On the other hand, you know, if GDP starts softening, it's not as strong as we think that somehow the data is a kind of a mirage right now.
04:42Then the labor market is telling you things are just not as good as you think.
04:45Now, the financial markets are the big puzzle.
04:48I mean, I'm not the only one.
04:50How much of this is just a big boom in AI and everything else is marginal?
04:57I've kind of been arguing there's a big difference between the financial conditions for corporate America and financial conditions for Main Street America.
05:03If you're Main Street America, you're looking at mortgages over 6%, very expensive housing, car loans over 7%, credit card interest rates of the 20s.
05:13These are not loose financial conditions for American households.
05:16So when we look at the financial markets, you're seeing a lot of when people talk about credit spreads and all that.
05:21I don't think most American households care what the credit spread between corporates and treasuries are.
05:25That doesn't really, unless it shows up in mortgages.
05:28So I think there's this, it's one of the things that I find kind of puzzling right now is there are just always these dichotomies between things.
05:36If you look at AI, if you take out anything data center AI related, business fixed investment is turning down.
05:41It's not widespread.
05:43All this investment is not widespread across.
05:45There's a real reallocation from kind of everything else into AI.
05:49So there's this bifurcation in so many ways that make kind of reading the economy tough right now.
05:54How much influence do you have on one versus the other?
05:57Financial conditions on Main Street versus Wall Street.
06:00Wall Street's immediate.
06:01Wall Street's gone.
06:02It's off to the races.
06:03Can you really influence financial conditions on Main Street?
06:05Well, that's kind of what we hope.
06:07If you think about cutting rates, which we're doing and I think we'll continue doing, that does have a pass through to the tenure.
06:15And the tenure is often the anchor for pricing mortgages.
06:19So the tenure is down to like 4%.
06:21It's come down from 4.5%.
06:22That's about a half a percent off.
06:24If it were to continue drifting below 4%, you'll start seeing some downward pressure for certainly mortgages.
06:30Auto loans are kind of a different thing.
06:32They're trying to figure out how to deal with tariffs on the auto industry.
06:35One thing I've heard is they got rid of a lot of cheap financing that they used to subsidize for consumers.
06:40That's going to raise the cost of financing.
06:42All these things are more tightening for a mainstream America.
06:44So hopefully these things, as we go on through the rest of the year, start loosening up some.
06:48You've been watching the program, so you know some of the things that people say on the show.
06:52I'll just go over it briefly.
06:54Ultimately, equities are all-time highs.
06:56Gold's ripped 60% this year.
06:57You mentioned credit spreads.
06:59Yep.
06:59IG credit spreads are multi-decade tights.
07:01High-yield spreads near the tights of the year.
07:03And there's a theory out there that the Federal Reserve and some officials on the Fed, perhaps yourself included,
07:09have anchored their view of this economy around the step-down in payrolls growth
07:12and are going to be lulled into reducing interest rates when maybe they shouldn't.
07:16And all that's going to do is fuel financial market excess.
07:20Just to give you the chance to respond to that, how would you respond to that,
07:24this idea that you run the risk of being lulled into reducing rates when maybe you shouldn't?
07:28Well, the mandate I have from Congress is maximum employment stable prices.
07:33It's not the financial markets.
07:34So I look at, that's why I'm looking at the labor market.
07:38The labor market is weak.
07:39If all these loose financial conditions are going to cause a boom in excess in the U.S.,
07:43we should start seeing some of that in the labor market.
07:46We're not seeing it.
07:47So a lot of this is, I think, just, this is where the AI thing is.
07:50There's so much speculation on AI that it's kind of, again, this dichotomy.
07:56It's kind of overshadowing everything else that's going on.
08:00And like I said, my job is unemployment and price stability.
08:04And I think inflation will be okay.
08:06It's on up, but some of the tariff effects will come back off.
08:09But my job is about the labor market, and it's not good.
08:12So if you want me to go to Congress and say,
08:15hey, tell me to start worrying about financial conditions,
08:17and that's how I should set policy, let me know.
08:19But until they do that, I'm going to keep focusing on that.
08:21Well, let's go with the dual mandate, and let's stay with AI.
08:23And the potential that introduces some additional tension into the dual mandate,
08:27that it holds back employment, but also boosts prices.
08:31And Marie was talking about what it could do to energy,
08:33all the spending, resource intensive.
08:35We had a guest on the program talking about the same thing.
08:38Would you see that as a potential that it introduces some additional risk
08:41into the dual mandate?
08:42Well, in terms of inflation, I mean, one of the things,
08:46I was asked this question by some people in the AI sector.
08:49It's like, isn't this inflationary, all the spending we're doing?
08:52I said, yeah, but you're taking it away from other sectors.
08:56So those other sectors are seeing less demand.
08:58So this is, in my view, a lot of this is a sectoral reallocation.
09:02And if that's the case, then the increase in AI is going to be offset by other things.
09:06Now, true, energy may have a bump up, but then you just look at core,
09:10because you kind of knock out the energy part of it.
09:12And that's really what you want to do.
09:14That's why we kind of knock off energy.
09:16It's just so volatile, it gives you the wrong signals.
09:19When we look forward, excuse me, when we're just looking forward.
09:21What I hear from you is you can look through tariff-induced inflation,
09:24you can look at AI-induced inflation.
09:26Is there any inflation out there right now that you see that you are concerned about?
09:30Because we're potentially going to get a pretty hot CPI print at the end of this month.
09:33Well, we'll see.
09:34When we take the data at the board,
09:37and we have various ways we try to tease out the tariff effects,
09:40our estimate is inflation is running about 2.5%,
09:44and we're not seeing anything that's going to explode.
09:47Like I said, all this attention on AI is ignoring the fact that other stuff is softening.
09:52So demand is up in one sector, it's going down in another.
09:55Those things often, not completely, but often offset.
09:58So that's why I'm not really worried about the AI stuff.
10:00And if it really did cause some big problems in energy, like I said,
10:03just if you're thinking about future inflation, just look at core.
10:06Don't bother with headline.
10:07At the end of the month, though, you might not get the labor market report.
10:11Right.
10:11How difficult is it?
10:13And can you even provide outlook meeting by meeting in this environment?
10:18Well, I have this joke that for those who think we're too data-dependent,
10:22you're going to find out what non-data-dependent policy looks like.
10:25I'm excited.
10:27But that's the point.
10:28We do have lots of data.
10:29Like I said, we've got lots of labor market indicators that tell us the same story.
10:33It's just, it's not good.
10:34We don't get a lot of other things as, oh, the labor market's great.
10:38So I think that data from all the sources is telling you the same story.
10:43The labor market's weak.
10:45We're getting this data, conflicting data about GDP.
10:48Like I said, the Beige Book came out.
10:49It was not like everything's rosy and booming.
10:52There could be still in GDP numbers, still a lot of inventory pull forward
10:56that because the China tariffs weren't finalized.
11:00So get them in, you know, get stuff in now.
11:01So it may be that we see, you know, GDP start to pull off at the end of the year.
11:08I think about the tax bill in that there was a lot of incentives for business-fixed investment.
11:14That's great, but that applies equally to AI and non-AI.
11:18So at the end of the day, you're still deciding whether you want to go into AI investment
11:21or non-AI investment.
11:23And the AI is winning.
11:24So I don't know how much of a, how big of a help it's going to be on the non-AI kind
11:29of sectors in the economy.
11:30You've called yourself a techno-optimist.
11:32Enjoyed the speech, by the way.
11:33Oh, thanks.
11:33Yesterday.
11:33Thank you for that.
11:34I just wanted to finish on this before you run.
11:36This feels different to last year.
11:38When you came out last year and you made a big step down in interest rates and cut by
11:41100 basis points off the back of the employment scare through the summer, this feels slightly
11:46different in your approach.
11:47How would you describe the differences between now and the approach of you and what you're advocating
11:51for on the Federal Reserve to what the committee did last year?
11:54Well, last year, we didn't, we didn't have all the tariff uncertainty.
11:57We didn't have this AI thing.
11:59Unemployment was not even remotely talked about.
12:02So I'd say those are the two big differences.
12:04Like I said, I think the tariff stuff will settle out and be okay.
12:08The AI thing is the concern I have with the AI, if it does, and I think it will materialize,
12:14monetary policy is designed to deal with cyclical movements in the labor market, kind of ups
12:18and downs that come with a business cycle.
12:19But this feels like a structural change.
12:22Labor demand just drops and doesn't come back.
12:25That's something I can't do anything about.
12:27The Fed can't kind of adjust policy to deal with structural changes in the economy.
12:31So it's going to be a challenge to say, is anything we're seeing in the labor market from
12:35AI coming down the road, is that something the Fed can do anything about or should do anything
12:39about?
12:40Or are we just seeing kind of a typical cyclical move where there's a hot sector and then it
12:44cools off later and everything's not quite as futuristic as you think it is?
12:49So that's, I think for me, the biggest challenge looking forward is, is this a structural change
12:54or is this just a cyclical change?
12:55Is the prudent thing to do as a risk manager just to assume it might be cyclical and cut
13:00just in case?
13:01Yeah.
13:01I mean, if you cut and it ends up being structural, you cut.
13:06It's not going to undo whatever you did.
13:08But if it is cyclical, then you can help rebound and get the economy back on its feet or the
13:13labor market back on its feet.
13:14No.
13:15No.
13:15No.
13:16No.
13:17No.
13:18No.
13:18No.
13:19No.
13:19The end of theρού study has gone, so I need to play into little camer下
13:23in terms of what we're seeing because it's not easy to do so.
13:25No.
13:26No.
13:27No.
13:28Yes.
13:29There we go.
13:29No.
13:30No.
13:30No.
13:31No.
13:31No.
13:33No.
13:33We're going to get the easiest then.
13:35No.
13:36No.
13:36The end of thex myself in another episode does not allow me, or can't be
13:37a little more.
13:38But like maybe I'm going to share a little suit with just as well.
13:40There we go to the other people doing that or tradicional, there should
13:41we choose within that and then see what sort of caves therening that
13:42so it can fail.
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