00:00The Chicago Fed President Austin Galsby had this to say this week. We've got an inflation problem
00:04in this country. We've got to get it back down. Lindsay, how serious are things?
00:10I think it's very concerning. When we look at yesterday's numbers coming in hotter than
00:14expected, it's very clear that consumers are already facing massive price pressures. But
00:19what's more concerning is this morning's report suggests that the brunt of the pain has not yet
00:23been felt, that further inflationary pressures are coming down the pipeline and are yet to be
00:28passed on to the consumers. We look out to the May and June data. So I would agree we do
00:34have an
00:35inflationary problem. But remember, this is a Fed that has been tolerant of above target price
00:40pressures for years. So any indication that this is going to be a painful but temporary impact on
00:47prices may keep the Fed simply sidelined. Now, I do think the conversation for additional rate,
00:53excuse me, not additional, but new rate hikes may be opening. But I think first and foremost,
01:00the Fed is going to remove some of that easing bias language from the statement and reaffirm their
01:05position on the sideline at the current Fed funds target rate. Lindsay, if we don't see a further oil
01:10price spike higher, do you think that we're peaking out here at these levels? Well, given the lag between
01:16oil prices and gas prices, I do think, again, as I mentioned, for the broader inflationary impact,
01:23there's still price pressures coming down the pipeline. So I suspect that the peak in prices
01:27is still yet to come, perhaps in the May or June data. So consumers are still going to face several
01:35months of intense pain, not just at the pump, but as we see these prices filter out into other
01:41segments of the economy via transportation and food. Remember, 80% of the fruit and dairy and
01:48vegetables that we consume has to be shipped to groceries and restaurants now at a higher cost.
01:54And as we see in the PPI, this is also filtering into the broader manufacturing chain as crude is a
02:00vital input into many of the things that we consume on a daily basis, everything from tires to crayons.
02:06So we've already felt, again, this massive increase in prices, but there's more pain yet to come.
02:13How much, Lindsay, do you see the consumer accepting this? There's a tension right now between
02:17companies reporting much better earnings and profits than many people expected,
02:22and the ability for consumers to keep shouldering that by the way of passing along some of these
02:28higher costs to them. What's your sense of that?
02:31Well, I think we need to compare it to what we saw last year with the onset of the tariffs.
02:35Businesses were very cognizant of the fact that consumers were strapped with years of price
02:40increases, and they were hesitant to pass on additional cost increases. And so when we look
02:44at the pass-through rate of tariffs, early on, it was sub-20%. And even as we moved to the
02:49end of
02:49the year, it rose to only about 40%, 50%. So businesses were really turning to ramping up inventories and
02:57willing to reduce margins in order to protect their consumer, certainly not out of benevolence,
03:02but out of risk of losing market share. But now stockpiles have been drawn down. Margins have
03:08been compressed. And so there is going to be a lot more pressure on businesses this year to pass on
03:14any additional cost increases, be that via tariffs or the international crisis. So the consumer is going
03:20to have to foot a lot more of this price increase than they did in 2025.
03:24Lindsay, how comfortable would you be with an argument to reduce interest rates
03:28at a policy meeting next month with a new Fed chair?
03:32To reduce interest rates, I think that's going to be very difficult, a difficult argument to make.
03:37And we saw that at the latest meeting with a rising number of dissents pushing GAN against not just the
03:43decision to hold rates steady, but as I mentioned, maintaining that easing bias. So I think at the
03:48very least, this cohort of dissents really sends a signal to the market and maybe more importantly,
03:54to that incoming leadership, that there's a growing faction of the Fed that sees the data, be that
03:59stable job creation, positive GDP, and rapidly rising inflation do not support any additional
04:08accommodation. And again, I think many would support the notion of increasing the conversation
04:13for a near term change in policy reversal in course with rate hikes.
04:18Redefining dovishness of the Federal Reserve. Can we talk about the prospect of hikes? Just finish on
04:22this. I've sat in this chair before. You have as well. We've heard these arguments about transitory
04:28and why inflation is about to peak in the next couple of months. It'll come down.
04:31Don't worry about it. Do you think it is different this time?
04:35Well, I do think that the Fed made a mistake the first time around using transitory. Had they done
04:40their job and raised rates to a sufficiently restrictive level, we wouldn't have had this elevated
04:44baseline to start addressing this energy price shock. So it's going to be increasingly more
04:50dangerous this time around to reintroduce that notion of transitory and allow further price pressures
04:56to become ingrained in the economy. Now, again, to Lisa's point, I think the first step
05:02is removing that easing bias from the statement, sending the signal to the market that rate cuts
05:07are off the table. And should we see sustained elevated price pressures, the next move would be
05:13a rate hike.
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