00:00If we have Wall Street instability and fear about this with all your work at Carnegie Mellon, can they ignore those cockroaches?
00:08Well, it gets back to some of the earlier comments about, you know, the questions that he got on on financial conditions.
00:15And, you know, to what extent does financial conditions sort of factor into the Fed's decision?
00:19And I think what we see is an asymmetry here that financial conditions aren't really factoring into their decisions to cut rates here.
00:26Financial conditions, you saw him parry the questions around interest rates and AI, basically, you know, brushing them aside, saying AI financing has nothing to do with rates, which is true on a first order effect, but not necessarily on the second order effect, to the extent that interest rates broadly are creating very easy financial conditions.
00:45And they're contributing to the increase in financial conditions easing, especially that we saw since the Fed pivoted, you know, to the labor market slowdown.
00:56That took us from, you know, measurements that were sort of more optimistic to measurements that were kind of more on the euphoria side.
01:04But I think the asymmetry here is that the Fed will respond to tightening financial conditions after they're realized to the earlier, you know, interchange on, you know, ex-post and data dependence.
01:15This is a Fed that will be reactive.
01:17And I think what's very clear is the Fed's not really paying a lot of attention to financial conditions going into this cycle.
01:25But they will, as they have been, you know, ever since the GFC, that they'll be very responsive if financial conditions for things that have nothing to do with the Fed end up tightening.
01:39The Fed will react into that with a massive cut in interest rates, restoration of zero interest rates, the forward guidance that you just talked about, balance sheet, all the tools that, you know, were once thought as kind of, you know, not normal are part of the normal playbook.
01:57But they'll be in reaction to something that is outside the Fed's control here and a tightening of financial conditions.
02:06Jeff, is that still a green light then, a bright green light, just a state-long risk, state-long equities?
02:12Well, it's a light that says you can't really predict that on a directional basis.
02:18The Fed is supportive here.
02:20That's part of, again, what we saw in kind of the movement in the metrics from optimism to euphoria around August, September.
02:28And the Fed's continuing to send that signal with market pricing coming down a bit, but basically pricing to normalization of 3 percent and the expectation that under any circumstance where the Fed is faced with an outsize.
02:43And you heard in that last question right at the end, you know, the Fed talking about the impact on consumption.
02:49This is understated.
02:51I mean, he said it in a very small way, but a large shock downward has a significant effect on consumption.
02:58And what was a little bit understated here is that the large increase in the wealth effect has been the support for consumption.
03:05It is why we're surprisingly strong.
03:08In addition to the lagged implementation and tariff inflation not being as worrisome, it was really the surge in the wealth effect and consumption that's leading to the upside surprise.
03:18But that has a double-edged sword to a larger decline.
03:23And that's, I think, the concern around financial conditions tightening.
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