00:00So the picture that this paints of the U.S. economy is one in which perhaps the labor market is
00:05not really in question,
00:06but inflation remains a key, key sticking point here and certainly above what the Fed would like to see, which
00:13is that 2 percent target.
00:14What does this mean for incoming Fed chair Kevin Warsh?
00:20It's a very hard situation for any Fed chair, especially a new Fed chair coming in that's likely to be
00:25tested by financial markets.
00:27We're now starting to see financial markets pivot from pricing and additional cuts to now pricing in hikes,
00:33which we actually think will occur by the end of the year by the Federal Reserve.
00:37The resilience of the U.S. economy on paper is continuing to propel the economy forward.
00:43The idea that inflation is not also a labor market problem because it goes into input costs is wrong.
00:49And inflation is the most regressive tax for the U.S. economy.
00:53It hits those who can afford at least the hardest.
00:56And what we saw was prior to the crisis, the data that was coming in.
01:00And one of the reasons why we've seen sort of a shift within the Federal Reserve in terms of hawks
01:06versus doves is because we've seen sticky inflation in the service sector.
01:10And that's not going away and being added on to the additional shock from the straighter humus, which is more
01:17than just an energy shock.
01:18This is roiling supply chains the world over and pushing up input costs with long legs that are going to
01:26affect inflation and buoy inflation well into the end of 2026,
01:31even if the straight were to open tomorrow and into even 2027.
01:36And that's something that is now starting to catch the attention of the majority within the FOMC and in the
01:43Fed's leadership in those meetings.
01:45Absolutely. I think about the minutes from the FOMC, which we got out yesterday.
01:49Ira Jersey, our chief interest rate strategist, says it was the most hawkish since the rate hike campaign, you know,
01:55in the wake of the pandemic.
01:57Kevin Warsh needs to build consensus among the Fed officials.
02:01How does he do that when the majority of Fed officials are warning that the central bank may need to
02:06consider hiking rates if inflation holds above that 2 percent target?
02:10How how much time does he have to build that kind of argument and make it to them?
02:17Well, he's certainly not going to make an easy argument right out of the gate.
02:21They will welcome him. He has been on the board. He knows the Fed staff.
02:25He's not going to be foreign to this process and he knows it's a deliberative process.
02:29He's also very savvy and he does listen to people, so he will listen to those around the table.
02:35I have no doubt about that. That said, he alone does not make the decision, which is important to remember
02:42at this time.
02:43I think at the very least we're going to see the Fed remove the bias to ease out of the
02:48statement, no matter what the Fed chairman feels about that.
02:52And I think you're going to see many on the Fed actually voice their concerns that they're worried about needing
02:58to put in a bias to hike rates going forward.
03:01He'll have some time with some on the Fed still willing to wait and see how this all plays out.
03:07But I think it is a clock that's ticking for the new Fed chairman coming in today.
03:12And that's important because, you know, it's just a very hard time always to have a change in leadership.
03:18This certainly the cards that this Fed chairman has been dealt are not an easy hand.
03:23We're five years into an inflation cycle that has had many, you know, sort of pauses, but not really gotten
03:30back to price stability.
03:32And price stability very simply is, you know, we all think about it as inflation and this economist construct.
03:38The bottom line is the level of prices are too high for too many.
03:41And it's too much front of mind for everyone from firms, front running price increases, future price increases to actually
03:48consumers hoarding as well and having to make difficult tradeoffs in their baskets every day.
03:53That's when we have price stability. Those decisions are not front of mind.
03:57Right. Absolutely.
03:59I just want to bring up a headline that we did get, and this goes hand in hand with the
04:03higher rates as well.
04:04U.S. mortgage rates rising to 6.51 percent. That is the highest level since August.
04:09Diane, that obviously is going to have an impact on existing home sales as well as down the road, the
04:16contracts that people sign.
04:17What does that mean in terms of a driver, a source of resilience for this economy?
04:23Well, it's really been interesting as we've had a horrible housing market really for two years.
04:27It's been in a sort of funk and really very suppressed, and the economy has still managed to power forward.
04:35That powering forward is not felt by all consumers because we're seeing economic strength being driven by gains,
04:43by a fewer number of households, by inequality, with a smaller number of households carrying the overall income gains,
04:49and wealth effects really carrying those income gains, most notably the wealth effects tied to stocks,
04:55and the AI boom really continuing and broadening a bit into the broader manufacturing sector, helping to buoy that as
05:02well.
05:03But again, it's unusual to see an economy where the housing market tends to be the one that leads us
05:09into recovery and leads us into recession.
05:13That has not been the case for over two years now, even though one could argue we've had, I would
05:19think, in 2025, once the final data is out,
05:22it will likely show a payroll recession, which just underscores how extraordinarily unusual the current environment is
05:29and how hard it is for the Federal Reserve to weigh its dual mandate.
05:33But at the end of the day, there is no attaining or sustaining full employment if you do not get
05:39inflation wrestled down and price stability first.
05:43That's why so many central banks only have one mandate and not a dual mandate, because ultimately it comes down
05:49to prices.
Comments