00:00What did we learn about Kevin Warsh in this meeting?
00:02We learned that he's serious about not wanting to make predictions or give forward guidance.
00:09And he also learned that he's probably even going to be careful about describing the Fed's reaction function.
00:19And then the last thing is, which is not surprising, there are four or five areas, and I think this
00:23is a good thing.
00:24He wants to review practices, and that's why he's setting up these task forces.
00:29And so we learned that he's serious about that.
00:34The drawbacks of that approach or the adjustment the markets are having to make is he didn't really give a
00:41glimpse into the debate.
00:43The statement probably is the best guide you have, and I'll make a comment on that.
00:49It's a tension between an infrastructure boom, CapEx, AI-related, infrastructure-related data center boom in the U.S., which
00:59is probably inflationary and straining resources and labor.
01:06At the same time, over the horizon, we have an AI adoption boom coming, which should be disinflationary.
01:15And we have a war that has been negatively affecting prices that ideally is coming to an end and a
01:22strait being reopened.
01:24And so that's kind of the balance that previous Fed shares would have described.
01:29And I think he's telling us you're going to have to surmise that, but he's not going to take you
01:34through that debate.
01:38Is, I mean, Rob, you're fairly familiar with the reactionary function or sometimes markets being too proactive.
01:47Do you see a scenario where, you know, the new Fed chair will need to at least react to if
01:55markets get it wrong?
01:58He's going to have to react to the following.
02:01If the inflation prints over the summer don't cool a little bit, they can maybe wait past the July meeting.
02:12But I think if they don't cool by September, I think there's going to be a lot of pressure on
02:17the Fed to take action to deliver that promised price stability or to get the Fed closer to delivering on
02:25price stability.
02:27I don't think that's a market pressure.
02:29I think that's a reality pressure.
02:32So they've got some time, but I don't know that they have a lot of time beyond September.
02:39I think even with limited forward guidance, it seems like the rest of the committee is turning more hawkish, Rob.
02:46We see that in the dots.
02:49The traders are already aggressively repricing this now, and they're repricing one rate hike as early as October of this
02:55year.
02:55Do you think markets are getting it right or maybe too hawkish?
02:58Well, here's the caution.
03:01And obviously, I submitted a lot of these SEPs when I was at the Fed.
03:05You work on it last week.
03:07You get it ready to submit by Thursday, Friday of last week.
03:12It's announced over the weekend and clear the war is coming to an end and the strait is being reopened.
03:18And you've already done all your work.
03:22And so could I imagine that if that dot plot was done six weeks from now, you won't get another
03:30one until September, that it might be softer than the rate path, the nine that are suggesting?
03:37That's possible because you've got a lot changing right now.
03:41And if I were in my former seat, I would be urging caution about overinterpreting this dot plot because we
03:48just had a big change.
03:50And I want to give a chance for that to work through the system.
03:53And so that's a caution on this.
03:55And the market only is just reacting to the data it has.
03:59And I think it's worth noting that there ought to be a significant caution on interpreting this dot plot.
04:05Yeah, it's almost like the teacher telling you to turn your papers in and then you suddenly remembered something that
04:11you were going through as you were reviewing for the test, Rob.
04:15So, I mean, the market seemed to suggest that.
04:17And by the way, Kevin, he hinted at it where he said they came in with pencils with big erasers.
04:25I wouldn't mind it if he added one or two more sentences to explain why the erasers were so big.
04:33But I think what he was intimating was this tension I just talked about.
04:38Yeah.
04:38Well, is the bar low to just act hawkish, an insurance hike rather than just seemingly being passive given the
04:46dynamics at work?
04:48What's the bar?
04:50I mean, personally, if inflation prints don't cool between now and we get to September, I actually think the balance
04:58of risk suggests it would be wise to take some action, either in September or in the fall.
05:04I think that would be the wiser thing to do.
05:06I think if inflation stays sticky, it tells me that the stance is accommodative and too accommodative and we need
05:16to take action.
05:17But that's why you have a debate around the table.
05:19You're going to have people who agree with that view.
05:22You'll have people who disagree.
05:23His job is to orchestrate and referee that debate.
05:28There's a difference, Rob, between perhaps an insurance hike and entering a tightening cycle.
05:37Which of the two do you think we're in?
05:38So, just if you go through history, and I've been part of these in the past, it is unusual for
05:46the Fed to act once.
05:49And I think if you go back through the last many years, you're going to see a one-time cut
05:54or hike is unusual.
05:56Normally, these moves come in twos and threes.
05:59And so, I think if you move in September, you need to be prepared.
06:04There could be one or two more.
06:05And that's why I think the market is saying, okay, maybe they'll have to move in September, in which case
06:11they might have to do another one before March.
06:13And that's why the market's reacting that way.
06:17What do you think this new era of Kevin Warsh, what impact do you think is going to have the
06:21bond market, Rob?
06:22I mean, do you think 10-year yields can head higher from here?
06:25Or do you think, you know, we've hit a peak?
06:28Or do you think higher for longer is sort of the reality now, too?
06:31So, in fairness to Kevin Warsh, the Fed really has a disproportionate impact on the front end of the curve.
06:39I actually think at this point, with government debt to GDP over 100 percent, net debt over 100 percent.
06:47Remember, it was mid-70s pre-COVID.
06:49So, we've had a big jump in leverage.
06:51I think the back end of the curve is being driven much more by not the Fed, but by supply
06:58-demand of treasuries and expectations for how big the deficit is going to be.
07:03And are we going to get this deficit under control?
07:06The combination of historically high leverage is not just true in the United States global issue.
07:12With very limited workforce growth means all of our growth for deleveraging has to come from productivity.
07:20And I think the back end of the curve is reacting to that as much or more than it is
07:25to the Fed.
07:26And I think that's worth keeping in mind.
07:28And I think that's worth keeping in mind.
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