00:00This data is stale because it's from November. The PPI, the retail sales, yet they do help kind of paint a picture of the U.S. economy, which continues to show that it's doing well. It's holding up.
00:13Exactly. Consumers continue to spend even as we saw over the summer. Consumers spent even though aggregate incomes actually declined a bit and we dipped into savings.
00:22We have a lot of wealth effects blowing those gains. And I think that's very important is that we went into the holiday season still with spending holding up even through the government shutdown.
00:33And these are things that we're looking at. The real GDP in the fourth quarter close to three and a half percent. You have to take out the gold effects obviously on the narrowing of the trade deficit.
00:42But still it's going to be extremely solid quarter of gains in the third quarter underpinned by continued strength in consumer spending.
00:50The interesting thing on the PPI data was, of course, the upward revisions to the September data, even though we didn't have as bad a data once you stripped out energy costs.
01:01Energy costs are starting to show up in the service sector as well in terms of energy services. Once you strip those out, we still have some goods inflation.
01:10The underlying momentum in the data is still enough to keep the Fed on the sidelines, which they've already made very clear at their January meeting.
01:19Yeah, some goods inflation, but prices for services were largely unchanged according to the latest PPI data. I mean, on the whole, inflation has not really shown up in the way that a lot of people feared it would have.
01:31What is your confidence that the worst of the tariffs have already been absorbed by companies and by the economy?
01:36Well, what we've seen from the most part for tariffs and the margin compression that does show up in the PPI is that a lot of them were absorbed by companies and it showed up as weaker employment growth from April on.
01:53Basically, we had almost no gains, virtual standstill and employment gains since May. And I think that's very important to remember. And we have seen the goods prices show up.
02:04What we're hearing from our own clients is there is a tipping point and they're now at the point where they don't want to cut anymore. They're trying to figure out how much they pass along.
02:13And with no decision coming out from the Supreme Court on the emergency use powers that the president used for tariffs, which we expect the administration to quickly reinstate tariffs, even if they were ruled illegally.
02:25But no ruling on that right now means that some firms are going to have to be passing along those price increases in January. The good news is we've got shelter costs not being the pressure that it was on CPI and the PCE, but that's a smaller component of the PCE going forward.
02:44So what we're worried about is fiscal stimulus coming in. We've been on this before. We've seen this movie. And that could make some of the inflationary pressures that we see in the first quarter linger a little longer than we'd like.
02:58Right. And that is always something to keep in mind as well as we see the benefits of the one big beautiful bill kind of flow through the economy overall.
03:05We also got existing home sales. And, you know, that number was better than expected as well with existing home sales jumping 5.1% for the month of December.
03:15So it's a little more current than the wholesale inflation and retail sales to a 4.35 million annual pace. The president has made affordability kind of the centerpiece of his platform for 2028,
03:27which is 2026, which, of course, is a midterm election year. The idea to have Fannie and Freddie buy 200 billion of mortgage-backed securities and these other initiatives that he keeps announcing,
03:42does that move the needle at all for existing home sales?
03:46Well, one of the biggest issues on existing home sales has been, of course, the affordability crisis and the level of prices.
03:53Just even as prices have cooled, they're not going up on a year-over-year basis like they had been. And that's good news for consumers without them falling through the floor either for those people who own a home.
04:06But I think this is one of the key issues is that the affordability crisis in housing goes far beyond what those purchases by Fannie and Freddie that helps to narrow the spreads relative to treasuries.
04:18It matters if we have inflation. It matters what the treasury bond market still does.
04:22But more importantly, insurance costs have gone up for housing along with other home association fees.
04:29And all of those things together are undermining affordability even when interest rates come down.
04:35Right. Absolutely. And, you know, this idea that perhaps making sure institutional investors don't buy single-family rental homes doesn't address the supply side of the equation at all,
04:45which is there's still a shortage of affordable homes for Americans to purchase right now. And these initiatives don't really tackle that, at least at the moment.
04:53I want to get your take, Diane, also on the drama that we're seeing at the Federal Reserve, because Jay Powell did something that is very uncharacteristic of him this week,
05:02which is speak out and push back against President Trump, linking the action that the DOJ took to a political motivation to reduce interest rates.
05:12That was surprising to me. Where do you see this going from here? Is he going to not testify before Congress, as Congressman French Hill has suggested?
05:23I have no idea what his decision will be on that. But I do think this does up the ante that he stays on as Federal Reserve governor beyond May.
05:36And that's important. He's got his governor position is not lapsed until January of 2028.
05:42And so that may be something that he feels he needs to do. It's not unprecedented. We've seen Federal Reserve chairmen stay on when they were worried about the independence of the Federal Reserve.
05:53And we all know, you know, by decades and decades of research and everything out there, emerging markets, they know this lesson so well that they were the first ones to not see the post-pandemic inflation as transitory
06:06and to raise rates earlier than developing economies. And as a result, we're in better shape.
06:11And I think that's some lessons that history has just taught us that at the end of the day, you want to make sure that you get tame inflation, because if you don't tame inflation, you cannot sustain full employment.
06:25That's what all of the decades of research have told us in in, you know, year in and year out.
06:30Every single country who's had a central bank that bends to political whims in an aggressive way has much more inflation problem.
06:40And that's at this particular stage worrisome. And that's not what we want for an outcome.
06:46The biggest regressive tax for anyone in the U.S. economy is inflation.
06:53Yeah, this is something that Jamie Dimon, the CEO of JP Morgan, has also pointed out during the bank's earnings call yesterday.
06:59What does the episode at the Federal Reserve, this subpoenaing of the Federal Reserve, mean for Kevin Hassett's odds to be nominated and confirmed as Fed chair?
07:10He is seen as the current frontrunner right now, in part because he is seen as being very willing to do what the president wants.
07:19You know, I really don't know who the president's going to nominate.
07:22There's a long list of people that he's talking to that are highly qualified.
07:26And I'm going to hope that that is what he does, is pick someone who's going to be independent when they get at the Federal Reserve.
07:33And we will see that. It's kind of been interesting that we've not seen an announcement yet.
07:38And that is something that is in flux clearly at the moment.
07:43What does that tell you? What do you think Scott Besson, for instance, is advising the president?
07:47I know we're being speculative here, but what would be the best advice someone in the markets could offer to the president right now, given where we're at?
07:56Well, I think the markets have been pretty clear on this.
07:59The markets got a little bit shaken by what happened on before the markets opened on Sunday night in Asia.
08:06That is something that the Fed chairman does not use that window of opportunity very often, unless something is very concerning to the Federal Reserve.
08:17And I think that's what we're seeing out there. But right now, certainly the markets have not changed their pricing on what the Federal Reserve is going to do in terms of rate cuts this year.
08:26We have three rate cuts ourselves starting in June, and the market has not changed their pricing on that, which tells you that the market is betting that the Federal Reserve retains its independence.
08:35We have three rates of interest in the markets.
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