00:00Let me first ask about Kevin Warsh. I was looking at our on the Bloomberg we have a Fed spectrometer
00:06FDSP and I was surprised to see that we've ranked him at the most dovish possible at a minus two.
00:13Although you know you have known Kevin for a long time. You've worked with him. He seemed to me to
00:18be more hawkish. How do you expect him to conduct himself today?
00:22But his signature, you know, going back to 2010, 11 was more hawkish right now.
00:33What you're going to see today. And that's why the press conference is very important. I think he's going to
00:39need to lay out a little bit of his philosophy.
00:42I think it would be wise to acknowledge that inflation has been above target for five years and has been
00:49sticky.
00:49And I would hope what he'll communicate is if it if if if inflation remains persistently above target, he'll be
00:59prepared to act.
01:00But he's also going to argue that some patience is appropriate. You've got the Strait of Hormuz opening.
01:06You've got an A.I. adoption phase that should be disinflationary. You've got Chinese overcapacity and manufacturing, which should help.
01:15And so he needs to lay out today who he is and where he's coming from. But but I think
01:22he'll be more neutral.
01:24I don't think it would be wise to come across as dovish today.
01:28There's one aspect of this meeting, which is the one we're all discussing, just how dovish or hawkish he is.
01:34Rob, the other one is just his communication style. How different do you expect it to be from a chair
01:40Powell?
01:40Well, Jay Powell is a good communicator. Kevin Warsh is a good communicator.
01:47I think the difference will be Kevin has felt and has said for some time he'd like to see the
01:53Fed doing less prognosticating.
01:55He wants to take it meeting to meeting. He wants to have serious debates within the meeting.
02:02But he's a little nervous about predictions, the dot plot, other speeches that predict what the Fed might do because
02:11he's worried that it boxes them in rhetorically.
02:15And he's going to want to avoid that. But I think he otherwise I think he should be able to
02:20be a straightforward communicator.
02:22But he's going to be clear. He's he wants to get out of the prediction business and more in the
02:27policymaking risk management business.
02:29Rob, that's all well and good. But what happened doesn't he essentially just seed leadership and communication to other Fed
02:36members?
02:37I mean, he might stop. But who's to say that the other presidents and governors aren't going to get out
02:41there and hit the communication circuits and basically,
02:43I don't know, overtake the chair is communicating policy to these markets.
02:48So I think that he'll he's going to want to not be predicting, but I think he is going to
02:57want to be communicating his philosophy on how they make policy.
03:02Give a little sense of their reaction function.
03:05I would think if I were in my former seat at the Dallas Fed and if Kevin Worsh said to
03:11me, listen, go out and make speeches if you want.
03:13But I don't want you to make predictions about what what we're going to do in the future.
03:18I think Fed members around the table will listen to that.
03:21I don't think that's that hard to to come to an agreement on.
03:26But but I do think he's going to have to find a way to to explain his philosophy and what
03:32the reaction function of this Fed is going to be.
03:36And I think that's what the market is going to be listening for today and in the future.
03:40I want to ask about inflation, your view on it.
03:44Clearly, we've seen tariffs and immigration policy, whether or not you agree with it,
03:51drive inflation higher. And then this war in Iran, boosting us another leg to a point where CPI was at
03:58four point two.
03:59So more than twice the Fed's target.
04:03And but now that it seems like the war is over and the Strait of Hormuz is going to open
04:08up again.
04:08Oil has dropped. The gas price has come down considerably.
04:11Now we're at four dollar four dollar national average.
04:14Is inflation no longer a concern for this country?
04:16It's not. It's not that straightforward, but the Strait being open oil prices being down will absolutely help
04:24because I think there was a bleed from high oil prices into other items.
04:29And I think that bleed will stop. Here's here's the structural issue.
04:32We are in the midst of a historic CapEx boom in the United States driven by infrastructure for AI data
04:43centers, power creating compute.
04:46And at the same time, as you mentioned, we've got this infrastructure boom that creates demand for materials and labor.
04:55We've got constraints because of tariffs to some extent, and we have constraints because of sluggish, very little labor force
05:02growth.
05:03And so that is naturally creates some inflationary dynamic.
05:09The thing that oil coming down will do, it will help get goods inflation back to hopefully where it was
05:18several months ago.
05:19I goods were disinflating. Ground zero is still services.
05:25But but but I think this structural CapEx boom, it's not a consumer spending boom.
05:32It's a CapEx driven boom. I think that's what the Fed's got to be watching and trying to understand whether
05:38its policy setting is appropriate in light of that situation.
05:42I mean, at the end of the day, Rob, you know, considering we have a two percent inflation target that
05:48we haven't got there, are we just sleepwalking into a three percent world, especially with the structural changes that you're
05:54laying out?
05:58So there are some reasons. So I don't think so.
06:01And I think the Fed should not accept a three percent world.
06:04Why is that? There are there are one hundred and thirty four million households in the United States.
06:10The median income is 80,000 a year.
06:12So that's 67 million households that make 80 grand a year or less have very little financial assets.
06:19And if three percent headline inflation is the case, that translates into share of wallet inflation for them, maybe six
06:26or seven percent.
06:27It's unacceptable. They're getting suffocated.
06:30The Fed has got to be determined. And I think they should be reiterating they're committed to two percent.
06:37But you've got these structural factors that we just talked about.
06:41And so I think what what I would do if I were at the Fed and if I were Kevin
06:46Warsh, be clear that if we don't see inflation easing in the next few months,
06:53I'm prepared and we're prepared to act because I think you want to convince the markets that we're still committed
06:59to two percent.
07:00I think they've got a little time. Don't need to act in June. Don't need to act in July.
07:05But by September, if this inflation print stays sticky, they're going to have to demonstrate that they're prepared to act.
07:12And I think that's the that's the tension that you'll be hearing.
07:16It's not, of course, just inflation. Rob, you bring up the A.I. spending boom.
07:21We're talking about trillions of dollars. Right. That's helping to drive earnings 20 percent higher.
07:28That's helping to drive stocks 20 percent higher.
07:31And I imagine like a railroad boom or a wartime, you know, ramp up in industrialization, it's going to drive
07:39the economy higher as well.
07:40Is is the U.S. economy more at risk actually of overheating than of slowing?
07:45Well, let's separate at A.I. into two parts.
07:48There's the infrastructure boom, which is, you know, headline eight hundred billion dollars being spent on infrastructure.
07:55There's the A.I. adoption boom. And a lot of these I won't go into individual companies, but a lot
08:04of the equity offerings, valuations that you're seeing have to do with the adoption boom.
08:10The adoption boom should be disinflationary. That should improve productivity.
08:16The infrastructure boom, ironically, probably puts more strain on inflation.
08:21But over the horizon, adoption, this driver that's improving corporate margins is actually going to be disinflationary.
08:30And this is why you notice labor share of GDP is probably declining. Profit share is increasing.
08:37And unit labor cost has not spiked. It's actually been under pretty good control.
08:43And so I think that the thing we're going to have to understand is how does this A.I. adoption
08:48develop and how disinflationary is it?
08:52And I think at the Fed, you need to separate this into two parts and try to analyze each differently.
08:59Rob, just just before you go, because obviously you've been in the room with many of these meetings and you've
09:04understood various leadership styles and, you know, Kevin Warsh well.
09:08How do you expect this to play out when we maybe have kind of like a two Pope situation, when
09:13you still have Jay Powell in the room as these decisions are being made?
09:18Well, you know, I've said this. Jay Powell, I think, is going to strive to have as little imprint on
09:23the meeting as possible and to be as deferred to Kevin Warsh as much as possible and not not be
09:30a factor.
09:31OK, so here's what I think, though, Kevin Warsh would like in the months and years ahead.
09:38The the the the Powell Fed and the Yellen Fed, which I was a part of the meetings.
09:44We had good discussion, but the meetings were very choreographed.
09:48I actually think Kevin Warsh would like may take a little time to get there, to have more robust debate
09:55and disagreement, less scripted meetings, more debate and disagreement.
10:01And and I think if he needed to create a part of the meeting that didn't have a transcript where
10:06they could have that debate and disagreement, I think he would like that.
10:10But outside the meeting, he's going to want less prognosticating, more less predicting about what they're going to do, but
10:19a lot more debate and disagreement in the room.
10:21And I think that could be a very constructive change.
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