00:00Let's talk about the data first. It's the data and the reaction function.
00:03Data, the unemployment rate is unchanged from a year ago.
00:07Core PC inflation is about 60 basis points above where it was a year ago,
00:11and only some of that is one-off.
00:15So despite all this, policy is 75 basis points easier than last year.
00:21To us, they're clearly offside.
00:23So our forecast is just that they'll take back the cuts that they did last year.
00:28There were risk management cuts. Those risks around labor have dissipated at this point.
00:33And then in terms of the reaction function, we thought going into June that this was fundamentally a dovish FOMC
00:38that would find reasons to not hike rates.
00:41But the SEP, it's not just about the dot plot.
00:43It's the fact that nine people expect to hike, even though no one has the unemployment rate falling this year.
00:49So that for us is a hawkish shift in the reaction function.
00:51I couldn't believe the guy from South Africa was offside by a toe length.
00:54I saw that.
00:55That was just absolutely ridiculous.
00:58But you don't need replay for this one.
01:00But you don't need a VAR. Kevin Wurst doesn't get a VAR.
01:03What he does get is a nonlinear function.
01:06One rate rise, a second, a third. Wildly nonlinear, correct?
01:11I don't think it's wildly nonlinear.
01:1375 basis points is very normal for a minicycle for the Fed.
01:19So to be clear, we don't think they have as much of an inflation problem as they did back in
01:232022.
01:24Underlying inflation isn't 3.5%.
01:26It's probably closer to, you know, 2.8% or something like that, which is why they don't need to
01:31go back to 5%, right?
01:32At 3.5% core PCE, the Taylor rule would tell you you need to be at 5%.
01:36That's not what we're calling for.
01:38So how's the consumer doing out there?
01:40I mean, better than we think?
01:42How's the consumer doing?
01:43The consumer is doing great.
01:45And we actually have data to back this up.
01:48So the Bank of America data, credit and debit card spending, we report this almost in real time.
01:53We've already published reports through the 20th of June.
01:58And what we're seeing is an acceleration in spending X of gas as gas prices come down, even though you
02:05didn't really see a deceleration X of gas as gas prices went up.
02:10So the consumer is in good shape.
02:12Now, some of this could be a boost from the World Cup that rolls off.
02:16But there's no clear sign, again, that the risks to activity are to the downside.
02:22And just going back to Robert Frost for a second, Tom, he has promises to keep.
02:27Borshaw's promises to keep.
02:29That's a Colby Smith article today.
02:32Amherst, they're still the Lord Jeffs to me.
02:34I'm not going to the whole mammoth thing.
02:36No comment.
02:37No comment.
02:38Talk to us about, so presumably the Fed and this chairman has some political pressure to lower rates.
02:45Boy, if he tries to do three rate hikes this year, the social media posts are going to be fast
02:50and furious.
02:51Does that figure into your calculus at all?
02:53That's a bit outside my wheelhouse.
02:55But what I would say, just as a statement of fact, is that the president noted during the press conference
03:01that he would be OK with the Fed hiking rates.
03:04And honestly, if you think about Chair Worsh's incentives right now, he has a brief window where he can hike
03:12rates and not necessarily take the blame in the sense that the inflation happened under the previous regime.
03:19If he doesn't hike now and inflation doesn't get better over the next year and there's a lot of pressure
03:25from the committee to hike next year, he'll have to own that.
03:29Longer term in terms of inflation, to the extent that this decline of globalization, I'm not sure if you guys
03:35subscribe to that, but this decline of globalization, this America first, the near-shoring, friend-shoring, doesn't that structurally lift
03:43inflation?
03:43It does.
03:44It does.
03:45And we're seeing some of that in the inflation data as well.
03:48If you look at the underlying drivers of inflation, for sure, we don't have a disastrous problem around demand, again,
03:55which is why policy doesn't need to go to 5%, 6%.
03:57But supply drivers are really, really sticky.
04:01And that's not going away, right?
04:03It's just wave after wave of supply shock.
04:06And that's something the Fed will have to contend with.
04:08If you're looking at 5, 10 years of supply-driven inflation just being elevated, then you have to put more
04:15downward pressure on demand or you have to accept that you're always going to miss your target by 50, 70
04:20basis points.
04:20When you talk to your equity people, which are really competent, like a huge Excel spreadsheet quantitative strength, if you
04:27get above A3 rate increases, what does the stock market do?
04:31My sense is it'll be fine.
04:33I mean, look at the fact that we've gone from two cuts priced for this year to a hike and
04:39a half, and equities have navigated that just fine.
04:43So another hike and a half, could that be the straw that breaks the camel's back?
04:47Maybe.
04:48But I don't think that's a slam dunk either.
04:51So for labor, what is the B of A kind of AI call as it relates to the labor market?
04:57Kind of intermediate to long-term, I guess.
04:59Right.
05:00So the longer-term view is that AI will replace tasks more than it will replace jobs.
05:07So ultimately, there's going to be creation of a whole bunch of new jobs that we just can't conceive of
05:15right now.
05:15So I like this statistic.
05:17Something like 60% of jobs that exist today did not exist back in 1940, right?
05:25So I think there's going to be something like that happening down the line.
05:27Now, that said, there is a transition period.
05:29There are going to be winners and losers.
05:31And the speed of that transition is going to matter a lot in the near term for Fed policy.
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