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00:00Who wants to take it first? What were your initial impressions? Were we surprised? Not surprised?
00:04Well, I'll jump in. Look, I expected Kevin Warsh to come out swinging to be rather hawkish. So
00:08that's when the first thing that we saw was the FOMC statement. I was actually a little bit
00:13surprised. Most of the text of the FOMC statement, at least on my read, was rather dovish. He was
00:21focusing, or I should say the committee itself was focusing on supply side factors that are
00:26contributing to inflation. The committee was focused on the fact that the labor market is
00:33relatively unchanged. It was not saying that there's any progress or any strength in the
00:39labor market, for example. The one hawkish line in the statement is just that the Fed is committed
00:45to its 2% inflation target, basically. So that took me a little bit by surprise, but the dots
00:53really do all the talking that we needed to see today. The ones that are there. That's
00:58right. The dots that we received today spoke volumes, said far more than the FOMC statement
01:04really ever could. And obviously that's what markets are indexing on. Andrew? Yeah, it was
01:11certainly a very hawkish dot plot and certainly a very hawkish press conference. I guess the question
01:17for markets is still, is this a lot of bark so you don't actually have to bite later? Basically,
01:23are you trying to tighten financial conditions now? Are you trying to threaten with rate hikes,
01:28which you know will ultimately combat inflation more than if you come out and say, and it also
01:32gives you credibility. This is your first press conference. You need to come in. You don't want
01:35to seem like a puppet of the administration. So you come out and you talk extremely hawkishly.
01:40Are you going to follow through on it? That's still to be determined, but I think you did your job
01:43in the
01:43first press conference by giving yourself some credibility. Now we'll see. Again, six weeks
01:48from now, are you still going to be talking this way? I think right now it's easy to talk and
01:53obviously risk assets are kind of falling on this news, but I'd like to see if they actually
01:58follow through. The reaction in the front end of the bond market, 16 basis points higher on the two
02:04year, does that surprise you and do you think that holds? Yeah, no, it's certainly surprising me
02:08because I wasn't expecting there to be eight, nine FOMC members who were projecting a hike
02:13as the next move. And, you know, there was talk of three or four. And so I think that's where
02:19the big surprise was. And look, as a bond investor now, you have to kind of increase that probability
02:25that that is the next move. Again, this is a very divided Fed. You can see that with half the
02:30committee thinking hikes and half the committee thinking cuts, like there's not very often that
02:34we're at that place. And so I think that time will tell. I do think that there's some tailwinds
02:40that are going to help new chair Warsh, which is, look, oil's just fallen $35. Six weeks from now,
02:46we get another a couple of CPIs. Things could be going your direction where headlines coming down
02:52because gas prices oil. And so you can say this now and then, look, you have some time to kind
02:57of
02:57figure it out without actually hiking. Although we did see a little bit of shakiness after the president
03:01said, if Iran doesn't agree to those terms, that, you know, he's going to go back to bombing them again.
03:05We did see that reflected in the markets and Brent and WTI a little bit this afternoon. Stuart, Warsh
03:10also said there was limited discussion about a rate cut today with one proposal. Do we think that was his
03:16proposal? Do we think he was a limited discussion? No, I don't think that he was offering anything in terms
03:22of cuts when his real opportunity today was behind that pulpit. It was behind that podium using the bully pulpit
03:30to his best advantage. And he put basically no emphasis on the labor market at all. Anytime he
03:36brought up the remit from Congress, he did not bring up a dual mandate. He focused entirely on
03:41price stability. So I don't think that any of the discussion around the table by anyone with regard
03:47to cuts was being encouraged by Kevin Warsh today. I think that we saw pretty vintage Kevin Warsh behind
03:54the podium. And I imagine that he was the same way in the room. What I'm a little bit interested
03:59in,
03:59and Christina, this is to your point, we have seen energy prices coming down pretty substantially. Andrew,
04:06you mentioned this as well. When we see the move in markets following both the FOMC decision and the
04:14press conference, we saw long term rates floating up a little bit, but we saw break evens falling. So
04:21literally throughout the entire curve, they're viewing this as hawkish, but not necessarily
04:25hawkish. I guess just real rates are still rising throughout the curve. Is this indicative of just
04:31some sort of a regime change everywhere? I mean, I'm interested to hear your thoughts, Andrew.
04:35No, it's a good question. I think one of the things for the bond market for real yields is that
04:41this, when you're talking about the amount of communication we're going to get from the Fed,
04:46it seems like if they're going to be less communicative, then volatility is going to be
04:51higher. But I think that Chair Warsh's sole focus on inflation, and this is like inflation's a choice,
04:58all these things should certainly be, you know, compressed break evens and give bond investors
05:03the confidence, look, short term pain, long term gain as far as where yields can go. If you basically
05:07can speak hawkish now and say you're going to combat inflation, that's good ultimately. And you're
05:12obviously seeing it in the 30 year where yields are actually down, despite the move in the front
05:16end. Like this is one of the biggest flattening days we've seen in some time. You know, I think
05:20that break evens are ultimately going to follow oil in the short term. If this, you know, truce with
05:26Iran is longer lasting, then I think you'll continue to see break evens come down. And again, they've come
05:31down 50, 60 basis points at the front end just in the last month or so. And that's all related
05:36to oil.
05:36And I think that I don't think we have that big of an inflation problem if the war in Iran
05:41is over
05:41and oil is going to resume. It's kind of, you know, March. Yeah. So it's a big if. Exactly. It's
05:47a
05:47big if. And I think this would have been a much tougher meeting for Chair Warsh three weeks ago,
05:52four weeks ago, when all of a sudden oil is at 110, 115. I think that's a situation where,
05:56you know, we didn't know if oil was going to 150 next or 200. The Strait of Hormuz is still
06:01closed,
06:01but oil is at, you know, 75, 76 dollars. I think it's easy to talk like this now. This could
06:05have been
06:06a much tougher meeting just a few weeks ago. When you look at their approach and we're saying
06:10that he's likely going to be less communicative and you have all these, not working group,
06:15task force, so many task force to talk about the communication. Is there a risk? And one of our
06:20colleagues posed this question, but is there a risk that if the Fed, to your point, is communicating
06:24less in a time of market volatility, that silence is going to get filled somewhere and they could lose
06:30track of the narrative and almost be less influential if other people are filling that void
06:35that they would expect the chair to fill? I'm not entirely that worried. From a monetary policy
06:41making perspective, communications as a tool for conducting monetary policy is asymmetric. It's
06:48really valuable if you're constrained by the zero lower bound and you're trying to talk down the
06:52curve. You're trying to give some sort of a credible commitment that you will not raise rates.
06:56Instead, we're in this moment where risk is somewhat two-sided. Policymakers are divided on
07:01whether they want to stay still at least through this year and then deliver some sort of a cut or
07:06hike before a year end. And when that's the case, offering any sort of forward guidance is just
07:11unnecessary hand binding by the Fed. And so I'm not sure they're entirely worried about losing control
07:18over the narrative. Instead, I think that at least it sounds like from Kevin Warsh, it's a good thing to
07:24remove oneself from crafting the narrative, to let markets digest information as it becomes available
07:30and the Fed will deliver the policy that it thinks is necessary and appropriate. And the objective of
07:38guiding markets expectations is less valuable than establishing, let's say, independence, both from the
07:46market and from political pressures. Andrew, what do you think? Because you're someone in the markets, how are you going
07:52to, I mean,
07:53is there an information void now? And if you think there is, how are you going to determine the path
08:00of
08:00Fed policy ahead if you have that lack of guidance? Are there other signals you're going to pay more attention
08:05to?
08:05No, look, I think you'll read more of the speeches that are kind of inter-meeting and see what different
08:10FOMC members are saying.
08:12I think Stuart makes a great point where a lot of times the Fed is talking for the sake of
08:16talking, but you don't have much to say.
08:17It's like if we're on a pause for six or 12 months and you're just, you know, doing this press
08:21conference, you know, I do think it's going to be tough to kind of walk it backwards.
08:26And then just what are you going to have, like an impromptu press conference every time you hike or cut?
08:31It's going to be tough to keep those things quiet. And there's always things that are going to kind of
08:35leak through the system.
08:36So I think that it's something that markets crave information. And as, you know, as you were saying earlier, like
08:42there's going to be, if there is some information void, people are going to look to somewhere else.
08:46You know, again, there's a task force. We'll see, you know, if the task force ultimately decides this is in
08:51the best interest, then maybe we keep them.
08:53I think that, you know, are you going to go to every other meeting? Is it going to be, what
08:56are you going to do if not, you know, at every meeting?
09:00It's kind of obviously we used to be there, but I think that it ultimately may end up staying in
09:06the long run, but we'll see.
09:08So to clarify, I just want to recap because we haven't actually said it.
09:11So in his prepared remarks, he announced four task force, one on communications, one on the Fed's balance sheet, one
09:18on the use and reliance of existing data sources, and one on productivity and jobs.
09:22I'm sorry, you were going to say something.
09:23Well, it's interesting that you bring up the idea that, yes, there are all these task force that are going
09:28to be rolled out to perhaps offer some additional information.
09:31Yes, if you had prepped a Kevin Warshfed drinking game and task force had been on it, we would all
09:36be in very bad shape right now.
09:37That's right. Task force was where price stability would have been another, you know, would have been on the bingo
09:42card also.
09:42So we're going to get some additional information from these task force.
09:48Andrew, to your point, that in the absence of formal communications from the FOMC, markets are going to be looking
09:53for that information elsewhere.
09:55The thing that I'm a little bit hung up on is that maybe that information doesn't come from a person.
09:59Maybe we go back to circumstances where that information is provided by the data.
10:03That information is provided by evolving global conditions.
10:08And I think that that's something that would definitely be welcomed by the Fed.
10:11But where that intersects with these task force is interesting.
10:15If you don't entirely know where the Fed is looking for its inflation information, because that's evolving with these task
10:25forces.
10:27Is it like attorney's general task force? Anyway, continue.
10:30It becomes a little bit more complicated to get any sort of insight into the Fed's reaction function or guidance
10:37for policy.
10:38I think that instead we're going to need to work the other way as economists, at least in my seat.
10:43We're going to need to work the other way as markets evolve, as the data evolves.
10:48What are we thinking about the intersection of, let's say, markets and the real economy?
10:52So over the last several months, we've seen some tightening of financial conditions in the form of higher rates.
10:59And we have at least thought that those higher rates would do some of the heavy lifting for the Fed.
11:04The Fed wouldn't necessarily need to deliver cuts because we've already seen some of the move in markets.
11:09And that would restrain economic activity.
11:13And so it seems like that would be a way that we might have to consider both economic evolution going
11:21forward and financial markets evolving going forward.
11:24Andrew, were you at all concerned?
11:25I don't know.
11:26I guess I've covered Washington long enough.
11:28I always think of that.
11:28If you torture the numbers long enough, they will confess adage.
11:31And when I heard them doing a task force into, quote, the use and reliance on existing data sources, any
11:37concern there that that lends itself to manipulation if that were to be changed too drastically?
11:42And Chair Warsh has spoken before he came into office about some of the inaccuracies in the inflation that are
11:48not inaccuracies, just some of the quirks with the inflation data.
11:51When you look at using OER for housing instead of some other metrics where you have Zillow Rent Index, which
11:58is showing one handle year-over-year inflation in rents and apartment list is showing negative, but owners of global
12:04rent is showing three and a half.
12:06So I think some of these things are a way to actually show that the inflation number is actually lower.
12:12There's metrics out there like Truflation and stuff that are showing a much different inflation picture, but we know we
12:17do have an inflation problem right now.
12:18You know, my view is that it's just solely reliant on the move in oil.
12:23And if oil is coming down, then it'll solve itself.
12:26And that, as Stuart mentioned earlier, like this is a, this is not a demand-driven oil shock.
12:31This is a supply shock.
12:32The central banks, you know, the Fed historically doesn't respond to those.
12:35Obviously, the ECB did.
12:37And if every other central bank in the world does respond to that too, ultimately, you might have a weaker
12:41dollar and then inflation is going up.
12:42So that can actually cause more inflation too.
12:44But I think that it's something over time we're going to see some changes to the inflation data.
12:49I think some of that's welcome, though.
12:50I think some of it's a little bit archaic.
12:52We have, you know, more real-time data sources we can be using.
12:55So I think that that's something that markets would welcome.
12:58You follow the housing market as well.
13:00And there was some talk today about the transmission mechanism and the transmission of monetary policy.
13:05Do you think that we're in a restrictive world where these higher rates that we've now seen for a couple
13:11of years are actually working their way through the real economy?
13:15Yeah.
13:15Look, the one area that obviously higher interest rates impacts the most is in the housing market.
13:20And you've seen that with home building.
13:22You've seen that with home sales, existing home sales, new home sales are quite depressed.
13:25And that's for good reason.
13:27Look, there's a lot of people that have these 2.5% to 3.5% mortgages.
13:31For them to move into a house that's 50% more expensive in price but also has kind of doubled
13:36the mortgage rate just doesn't make sense.
13:38And so I think you're seeing those, you know, people respond accordingly.
13:41I think, look, over time, I think there was this view a couple of years ago where, I mean, I
13:46think even like Quicken Loans had something where, like, buy the home, date the rate.
13:49Well, mortgage rates have now been at 6% plus now for a number of years in a row.
13:54And so I think that's something.
13:55Yeah, that's too much data.
13:56You've got to commit at some point.
13:57So I think that, look, the housing market is weak as it should be, you know, but in the construction
14:02business, there's one thing that actually is filling that void a little bit, which is data center construction.
14:06So I think that's helping on the construction side fill a void that would typically be there for years until
14:11rates came down.
14:12You've led very nicely into my last question, which, Stuart, I'm going to lob over to you.
14:16Worsh was actually also asked about AI, and he said it's the most important change in the economy and business
14:22we've had in our adult lives.
14:24Do you agree with that?
14:24And where is the Fed's role in any of this?
14:28Look, I think that a lot of the supply, a lot of the, I should say, a lot of the
14:32productivity gains that folks are expecting from AI, I think, are probably a little bit overstated.
14:37I think that the way that he danced around Nick Timmeraus' question specifically about the difference between the inflation pressures
14:44from the AI infrastructure buildout and any potential disinflationary forces that come from those efficiency gains, from the implementation of
14:53AI, speak volumes.
14:55He did not want to necessarily answer the question directly, because to do so would require him to get even
15:02more hawkish in a moment where he is tying American prosperity to this idea of AI implementation, which he said
15:12is even a shorthand for American innovation.
15:14So it's something that he's trying to handle really delicately, and because of that, I think that we're not going
15:21to get anything on the Fed policy front tied to AI.
15:25All right.
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