00:00So those durably elevated oil prices, obviously not too much impact on core inflation.
00:05But what does that mean for inflation overall, potentially, and just the health of the U.S. consumer?
00:12I think the bottom line here is that we could easily see headline inflation over the next few months move
00:22up and maybe even move up by half a percentage point.
00:25So we're knocking on the door of a 12-month change around 3 percent rather than 2.5 percent, as
00:34in this report.
00:35I think there's also a little bit of risk that we've got to monitor as to what it means for
00:40core goods.
00:41We've recently seen an increase in core goods inflation as a result of the tariffs.
00:47And just as some of that inflation may be getting to a point where it's going to come off,
00:51now there could be a boost from higher oil prices and challenges with supply chains and the like.
00:58And putting all that together, I think it's another risk for the economy, for the consumer, and for the Federal
01:04Reserve.
01:05Well, let me follow up on that last point because, you know, if we're talking in the ballpark of half
01:10a percentage point or so,
01:12the obvious question is what does that mean for the Fed?
01:14We know that the Federal Reserve, the administration, would certainly like to see them lower interest rates.
01:21I have to imagine that gets harder to do.
01:25The Fed's playbook is in the face of supply shocks and particularly in the face of oil shocks.
01:33What you do to a first order is you watch and you wait and you see will the inflation effects
01:42associated with this shock dominate
01:44or will the growth effects of the shock dominate?
01:48And I think that the implication is for the next meeting or two, it's going to be really hard for
01:55the Fed to cut.
01:57And they're likely to be watching and waiting through the first half of the year.
02:02Well, go back, though, to last week when we got that jobs report, because, I mean, some people would point
02:07to that and say,
02:07OK, well, maybe there is ammunition for an argument that maybe the Fed should be a little bit more accommodative.
02:13When you saw the jobs report and you saw the weakness there, did you dismiss that as just kind of
02:18temporary factors as a lot of people did?
02:19I was I was inclined to want to average the February report and the January report
02:26and say that on balance, what we're seeing is a softer labor market, but not a collapsing labor market.
02:32We're seeing weakness in supply and and demand as well.
02:38And so I think it was important not to overreact to that to that result.
02:44Having said that, we know that there are some members of the Federal Reserve Board,
02:49like Governor Waller, that are more worried about the labor market.
02:52And I think in the absence of the higher oil price, the developments in Iran,
02:57that the Fed would have had a debate about the possibility of cutting at this meeting.
03:02I think it would have been very much on the table.
03:05I personally would have been surprised if they had gone in that direction.
03:08But it would have been a real option.
03:10It also raises a question as to what the public communication is going to be next Wednesday
03:15and in the days that follow as the other Fed members speak,
03:17because even if that debate does take place, there's still this big unknown,
03:21not only with where this war goes, where oil prices go, but also the potentially lasting impact of some of
03:28that.
03:28And not just here in the U.S., but obviously a bigger impact overseas.
03:31But, of course, we're not completely disconnected from the rest of the globe.
03:35J-PAL has got to make clear in the press conference that the FOMC is watching and is waiting
03:42and is prepared to move in whatever direction is necessary to defend its dual mandate.
03:48And I think he might tip his hand, so to speak, a little bit in the direction of perhaps needing
03:55to cut,
03:56given the concerns about the labor market that I described.
03:59But if ever there was a time for the Federal Reserve to be vigilant
04:04and to be prepared to move in a variety of ways, now is that time.
04:12I wonder how this potentially sets up Kevin Walsh.
04:15Obviously, that is President Trump's pick to lead the Federal Reserve next,
04:19supposed to take over in May here.
04:22If the Fed remains on hold until we get to May, I mean,
04:26what does this potentially mean for a Walsh-led Fed?
04:29And if we are in a situation where the backdrop doesn't really communicate the need for a cut
04:37and we go ahead and see a cut, I mean, how do you think the bond market reacts?
04:40Just speaking hypothetically, if we were in a world where oil prices were higher and volatile
04:47through the first half of the year, and that's broadly our expectation at Citi,
04:54and some of those pressures abated come mid-year in the second half,
04:58and as a result of that, the Federal Reserve wasn't able to cut further,
05:03given those pressures in the oil market.
05:07I think that a Walsh-led Fed might see that as an opportunity in that if the Fed's not cutting
05:14at the next couple of meetings, a cut at the June meeting and maybe another one later in the year
05:20is going to be a lot easier of a case to make.
05:23So I think it opens the door for a Walsh-led Fed to cut, which probably will not be seen
05:28as bad news.
05:29I know this has been a big focus on the monetary policy response,
05:33but I'm curious as to whether you and your team have actually started to model in the possibility
05:36of a fiscal response should this actually continue.
05:39Oh, my.
05:40So I am hesitant to want to think too hard about the fiscal tools,
05:46given that we're already looking at 6% of GDP budget deficits as far as the eye can see
05:53and soaring debt levels.
05:56So I do think there's a threshold and a pain point where Congress starts thinking about additional fiscal.
06:02I don't think we're there yet.
06:04Maybe if we saw oil at $120 a barrel for three or four months,
06:09maybe that would galvanize Congress, but I don't think we're at that threshold yet.
06:13And given debt levels, I think that's probably a good thing.
06:17And Nathan, not a ton of time left, but I do want to talk a little bit more about the
06:20U.S. consumer.
06:21We were having the conversation of what elevated crude prices mean for prices paid at the pump.
06:27And then Oliver Chen at TD Cowan made the good point that, you know,
06:30you think about rising gas prices, that obviously hits discretionary categories.
06:36I mean, can you draw back to any other period in time where you've had an oil shock such as
06:41this
06:41and what the read-through is to actually the shoppers in this economy?
06:44Yeah, I think pretty clearly the higher oil price as it interacts with the K-shaped economy
06:52is very bad news for the lower part of the distribution, that lower leg of the K.
06:59They're already squeezed and a further shock to real incomes in that part of the distribution
07:07is likely to be quite painful.
07:08So I think that there could be some meaningful downside risks for consumption
07:14and retail sales in this environment.
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