00:00Andrew Hollenhorst of Citigroup is writing is joining us right now and he writes chair Warsh can make a dovish
00:05case at this week's FOMC leaving eventual rate cuts on the table.
00:08Andrew can you make that dovish case because of where oil prices are trading today. Is that part of the
00:14calculus. I think it gives him a lot more flexibility.
00:16This is really a huge deal for oil markets for energy markets but also for interest rates and what the
00:22Fed might do. If you think about the balance of risk around inflation
00:25since late February the discussion has been upside risk to inflation. Energy prices that are moving higher. Energy prices now
00:33down significantly this morning likely to continue to fall.
00:36Gasoline is going to follow oil prices lower. So this inflationary pressure has now reversed and become a deflationary pressure.
00:44Can chair Warsh fully pivot to that all at this meeting is probably going to take a couple of meetings.
00:49It's probably going to take weeks of discussion and rhetoric.
00:52But it gives him that opening this week. If you think he's going to be dovish does that mean they
00:56retain the easing bias.
00:58No I think that they're going to remove the easing bias. I think that their dots are going to show
01:03no cuts this year. That's pretty well expected.
01:06I think that's already in the price. I am interested in how Warsh messages around that there's a hawkish way
01:13to do it where you would say well we're removing the easing bias because we might be hiking.
01:16That would be very hawkish. What I think Warsh will do is say there's tremendous uncertainty. We had oil prices
01:21that went up significantly.
01:23Now there's a possibility that they will come down even more significantly than they already have.
01:28And we just shouldn't be providing this much forward guidance. That's been Warsh's position.
01:32So I think that's the more dovish way to talk about removing that easing bias.
01:36Is that a benefit or is that a bad thing for this market to get less forward guidance, to have
01:43more volatility in it?
01:45Is that a useful tool or is that a problem for this Fed if there is more bond market volatility?
01:50I think forward guidance is really useful when you're stuck at the lower bound on interest rates and you're trying
01:56to guide the market that you're not going to be engaging in more hawkish policy.
02:00You want to ease conditions. That's really why forward guidance was originally envisioned.
02:04That's why it came into the Fed's toolkit. Where we are now, I would kind of agree with the statement
02:10I made about the uncertainty around what's going on in the economy, what's going on with oil prices.
02:15So I think it would actually be good for the Fed to have that flexibility here.
02:18Do you think the entirety of the Fed will be on board with that, with this different style of communication?
02:22Will they listen to a chair Warsh if he says maybe don't go out there and talk to the media
02:26as much?
02:27Yeah, this is not something that Warsh is going to be able to control from the top, just the structure
02:31of the Fed itself, the regional Fed presidents, a lot of independents to go out there and talk.
02:36So I don't think he's going to try to impose kind of a top down constraint on how people talk
02:40about things.
02:41But just in terms of the formal messaging, in terms of what we hear at the press conference, all of
02:45the Fed officials speak.
02:46Chair Warsh speaks with the loudest voice.
02:48Well, but this is something that John has talked about, John Ferris talks about in this program.
02:51If you don't get that clear messaging from the chair, it just is taken up by the mantle of all
02:58the different Fed and regional governors and presidents.
03:00Is that not a risk that he just loses control of the messaging and seeds it to other members of
03:05the FOMC?
03:06Yeah, this is a balance that every new chair needs to figure out in terms of their messaging versus the
03:12individual Fed officials' messaging.
03:14How much will Warsh be reflecting the committee view at this press conference?
03:17How much will he be reflecting his own view?
03:19I think what Warsh is quite adept at doing, and I think what we'll see, is trying to kind of
03:24bring things together into some kind of consensus
03:27and at least be talking about the possibilities of where policy could go from here.
03:31Andrew, the market's looking at hikes.
03:33You still think we're going to get cuts, three cuts this year.
03:36When can we see these cuts start?
03:38I think the only reason we're talking about hikes is because oil prices went higher.
03:42So now that oil prices are going lower, I feel a lot more comfortable that we won't be getting these
03:46hikes.
03:47When we get the cuts, in our base case, we have the Fed cutting in September.
03:50That would involve the labor market data looking significantly softer over the next several months.
03:55That happened in 2024 over the summer, 2025 over the summer.
03:58If that pattern repeats in 2026, that's how we have them cutting this year.
04:02If we don't get that weaker labor market data, I think it probably is a longer discussion.
04:06Those cuts could be coming even in 2027.
04:08Max Layden, our commodity strategist, talking about a surplus of oil in 2027 now.
04:14So we could even get a further disinflation in that year.
04:17What about the fact, though, and Danny's been talking about this a lot, the fact that the AI trade is
04:22inflationary, at least in the beginning?
04:24This is another area where I think Warsh could do something very interesting and nuanced in terms of how he
04:30messages around that.
04:31So, yes, absolutely. Prices for computer memory, for instance, are skyrocketing because this is just in short supply and everybody
04:37wants it right now.
04:39What Warsh can say is, yes, these prices are going up.
04:42The reason these prices are going up is because there is expected stronger productivity growth coming in the future.
04:48You want to invest in these technologies now to drive that future productivity growth.
04:52Ultimately, that's disinflationary.
04:53In the future, when you get the productivity growth, if we can strain investment now, we're actually increasing inflation in
05:00the future by not allowing that productivity to happen.
05:03I mean, he has talked about this point before, about the AI and the productivity and what that means for
05:06the ability to lower rates.
05:08Andrew, this idea has been really swirling around that at some point we need to stop talking about the price
05:13of oil, about what the consumer is doing, that AI is the new macro.
05:18That's all that matters for the overall picture of this economy.
05:20How much do you subscribe to that viewpoint?
05:23It's not all that matters, but it is a big chunk of it right now.
05:26If I look at just GDP growth and I add up the components of GDP growth, about half of it
05:31is accounted for AI-related investment right now.
05:34So that really is driving this economy.
05:36And then in terms of the jobs picture, I think that's just a big unanswered question.
05:40And I don't think any individual economist or maybe all of us together can answer this question.
05:44How quickly will this technology continue to advance?
05:48How will that change the way that people look at hiring in the job market?
05:51This is a big open question.
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