00:00Torsten Slock of Apollo writing with geopolitical risk easing and Fed Chair Kevin Warsh focus on simplifying Fed communication.
00:07The number of words in the FOMC statement can move down to levels seen under Alan Greenspan.
00:13Torsten joins us now. OK so a statement comes out. Do I need to read it first or just do
00:17a quick word count?
00:19We certainly need to read it first because the key issue here is of course what style of communication are
00:24we going to get.
00:24And in particular what is the forward guidance? Is there any forward guidance? Is he going to say that we
00:30do not like forward guidance?
00:31This is still a very very unclear area in terms of what is the communication style and what is Kevin
00:37Warsh going to do in terms of what is he going to say at the press conference.
00:40Former Fed Governor Betsy Duke was just on with us and she was talking about how there could be a
00:45complete rewrite of the statement not just a little tweak of the easing bias.
00:50Is that what you're expecting as well?
00:51I think that is something that we should expect as one of the outcomes. We just don't know.
00:55So that's the reason why the market of course has been used to having very well anchored expectations around the
01:01dot plot.
01:02The dot plot has been around now for 15 years almost. The ACP meaning the forecast has been around for
01:07almost 20 years.
01:08So most people in financial markets have grown up with very anchored expectations about the economic outlook and very anchored
01:14expectations about what the Fed will do.
01:15And this discussion about is there an anchor? Is there not an anchor? Of course, it's good to have an
01:21anchor in the sense that that's clear.
01:22Then everyone knows where we're going. But at the same time, if the world changes, then it's not good to
01:27have an anchor.
01:27And this is the debate up on the scale. Namely, do we want to have an anchor or do we
01:31not want to have an anchor that will give more flexibility to the FOMC?
01:33In this very moment, if we remove some of that and we remove some of the forward guidance, does that
01:38not, all things considered, make us a little bit more hawkish?
01:41Because we don't have that residual easing bias that had been there before.
01:45Yes, and it's particularly important if we begin to think about the discussion around rates.
01:50Because Kevin Walsh has also been focusing on shrinking the balance sheet.
01:53And a compromise could potentially be that, well, we're not going to change much communication on rates.
01:58But maybe saying that the balance sheet will be smaller is implicitly also going to be a tightening of policy.
02:03So it all depends on where the committee stands and where they discuss today and what their outcome is in
02:09terms of how should they communicate?
02:10How are they going to signal, to your point, Danny, that there is still some problems with inflation being too
02:15high.
02:15We still have a very strong labor market, which all argues for that the Fed should be tightening financial conditions.
02:20Do you think this is a chair, Walsh, who will want to sort of galvanize a consensus as Powell had?
02:25And how challenging will that be, if so, if he does want to implement something, in his words, of a
02:31regime change for the Fed?
02:33Kevin Walsh knows what he is doing.
02:35But I think what is a very important challenge, of course, for him is that if he wants any changes,
02:39basically he needs to have the other 11 members on the FMC, the voting members, on board with whatever he
02:45wants to change.
02:46So that's why it must be clear also for him he needs to get them on his side in terms
02:51of any decision made.
02:52Because always decisions about not only rates, also about QE, QT, whatever needs to be changed in terms of policy.
02:59There are 12 voting members and they vote about what do they want to change.
03:02And therefore the number of dissents also potentially becomes important when we get the statement tomorrow.
03:07Do you think we get less Fed speak then with Kevin Walsh as the Fed chair?
03:11Well, that's really challenging because telling the regional Fed presidents that they're not allowed to talk more,
03:16even the governors that they're not allowed to talk more, that's just not possible.
03:18And given we have had a history now of a lot of communication, that means also the market has been
03:23putting more weight on the Fed chair.
03:25And I think the market will continue to put most weight on the Fed chair.
03:28And don't you think we've seen more of this robust debate and communication because of Steve Myron, who was a
03:33Trump appointee?
03:34So it would be pretty odd if Kevin Walsh came in and said, actually, stop talking as much.
03:39Yeah, because we've also had some, of course, to your point here, we have some quite diverging views in terms
03:44of the dot plot.
03:45And this is, of course, also why the dot plot creates sometimes a bit more confusion.
03:49Yes, it may be anchoring expectations, but the standard deviation of those expectations also get a lot of attention.
03:54In other words, how divergent are the views in terms of what's going to happen in the future?
03:58And we don't know which dot is the Fed chair dot.
04:01So that also makes it more complicated in terms of the dots coming out actually going to be helpful in
04:06the sense of anchoring expectations.
04:08Or do they raise more questions about the uncertainty of what is the disagreement on the committee?
04:12There's also a debate right now whether or not Kevin Walsh puts a dot on the plot.
04:16Yeah, because he could also decide to, this would be highly unusual, of course, that we'll, of course, decide, he
04:20could decide to say, I'm not going to put in a dot.
04:22He could also decide to say, I'm not going to submit my ACP forecast, meaning his forecast for where he
04:26thinks the economy is going.
04:27That would be pretty dramatic.
04:29So if the goal here for him, remember, the most important job for the Fed chair is really to create
04:33consensus about a decision.
04:35All books written by previous Fed chairs, they all emphasize that a key part of the job is to basically
04:40call around to all the voting FMC members and also the non-voting members and say,
04:45what do you think should be the outcome of this meeting?
04:47What is your view?
04:48And try to come up with some solution and try to come up with some path where he can get
04:53a majority and ideally a big majority for the decision that they're going to take.
04:56It's complicated, but does this week's news on Iran, a deal, a memorandum of understanding being signed on Friday, make
05:01things less complicated for Fed chair Warsh?
05:04Absolutely, because one key issue was that inflation is still at roughly 3% in core PCE and core CPI.
05:11And the problem is when inflation is 3% and the Fed's target is 2%, then now we have at
05:15least one good news is, of course, that we have energy prices coming down.
05:18But we still have a fairly strong economy getting tailwinds from the AI boom, getting tailwinds from the one big
05:23bill of a bill.
05:23And we also at the same time have upward pressure and inflation from tariffs still hanging over and putting upward
05:28pressure, as several Fed posts have been suggesting.
05:31So the key answer to your question is he is absolutely helped.
05:34He's helped by the fact that energy prices are moving lower.
05:37Yeah, he's helped.
05:37But again, to your point, Torsten, there's inflation coming from other parts of this economy.
05:42So if he wants to lean more dovish, if he wants to kind of like fulfill the promise that he
05:46had been talking to from Trump,
05:48what parts of this economy can he point to to say we can still get a cut this year?
05:52Yeah, and the double-edged sword is, of course, that when energy prices go down, then we spend less money
05:56on energy and we spend more money on something else.
05:58And given that literally all high-frequency indicators are still very strong, still very strong data from the TSA, how
06:03many people travel in airplanes,
06:05still very strong data on the weekly data from Redbook on how many people are consuming stuff at Walmart and
06:10Target and TJ Maxx.
06:11And we also have still very strong data when it comes to hotel demand on a weekly basis.
06:14So there just is very little signs.
06:16There are no signs essentially at this point of the economy slowing down.
06:19So too high inflation, strong labor market, that argues, of course, for the Fed needs to move towards a more
06:24hawkish stance.
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