00:00Joining us is KPMG Chief Economist Diane Swank. Diane, I would just love to hear what you make
00:05of Kevin Warsh yesterday. There's a Fed chair who's tried not to tip it or show his hand very
00:10much in how he's going to be reacting to the data, but he did give us somewhat of a clue
00:13saying
00:14the CPI does not suggest mission accomplished. Well, and that's absolutely right. And I think,
00:20you know, even though you want to get away, he wants to get away from forward guidance,
00:24the bottom line is right now inflation appears to be the larger concern for the Fed.
00:28We're five years in and we still have inflation. It's not all of the Federal Reserve's fault.
00:33There's a lot of reasons. We got close to a soft landing. But at the end of the day,
00:37the Federal Reserve is the only institution that is charged with derailing inflation.
00:41And it's become too much of a problem for too many. And I think that's where we are right now.
00:47It is no longer price stability as Greenspan wants to find it, which Kevin Warsh has said he has his
00:53admiration for. And that is that prices no longer factor in our front of mind when you're walking
00:59down the grocery store aisles or in any store and how you're making your decisions. You want prices
01:04to be out of the front of your mind, not making trade-offs every day where the majority of U
01:09.S.
01:09consumers are feeling those trade-offs in every financial decision they make.
01:15Diane, was there something troubling about the PPI data today? I mean, you know, on the face of it,
01:19it looks benign. It was better than expected. And yet the market does seem to be reacting somewhat
01:24negatively. Actually, the components that feed into the PCE are not quite as good as those for
01:32the CPI. And so that actually suggests a higher level of inflation than the CPI. And this is,
01:38of course, the Fed's targeted index. So those components suggest that there's still a lingering
01:43inflation most importantly in core services inflation. That has been the stickiest out
01:49there. And it looks like from this data that goes into that, that we're still going to see a very
01:55sticky number in the month of June as well for that data. And that's, you know, of course, is the
02:00end of
02:01the Fed meeting in July. So I think that's very important to remember is that we're still seeing
02:05stickiness in inflation where it's been the most worrisome and where it was worrisome prior to
02:11the Strait of Hormuz being closed in early, in late February, early March. And that's really
02:18important because this data was starting to come out and confirm to the Fed the battle that they
02:23thought they had won in terms of inflation was not won prior to the increases in energy prices.
02:31The increases in energy prices now amplify that. And of course, as we stand today with tensions still
02:37flaring in the Strait of Hormuz and the war ongoing, that means additional price hikes from energy
02:44prices adding to that muscle memory that we're starting to develop. Something that the Fed is
02:50charged to get rid of in the overall economy is exactly that muscle memory.
02:56Even so, Brent is still well below its peak of this year. I mean, we went months above $100 a
03:01barrel
03:01and we're struggling now to even get back above $86 a barrel. The market, too, Diane, didn't react
03:06until we got something closer to $110 a barrel. So is this a market that's more immune to oil prices
03:13that we're seeing at this moment? What does it actually take to get you concerned that energy
03:18is resurging and will have follow-through effects through higher inflation, through ancillary measures?
03:25Well, actually, I'm very concerned about the lags implicit in the global food stock. It's already
03:30hitting emerging Asia. And a lot of that flies underneath the radar screen, where actual rice
03:36can't be harvested because of the high cost of diesel prices and of rationing in emerging markets.
03:42That doesn't hit us as much initially. But the global food stocks are going to be hit by the higher
03:49prices
03:49of fertilizer and higher prices of diesel and reduced crop yields. Then you throw into that an El Nino
03:56this year, which is further complicating global food stocks. And that feeds right into 2027 as well.
04:04We get the spring harvest season. The planting for that starts in September and October. And so
04:11you're going to get still higher prices if this is not resolved by then, which does not seem likely,
04:16that you're going to see some kind of elevated increases in those input costs spill into that
04:21as well. And why is that so important? Because food is one of the most salient prices. It's up
04:27there with the price of gasoline. We strip it out to look at the core to see what underlying prices
04:32are doing. But prices at the grocery store really matter to consumers. And they set consumer expectations,
04:39much like prices at the pump.
04:41Diane, how concerned are you about this most recent escalation? I mean,
04:44four straight days now of strikes on Iran. Iran is not doing anything to reopen the strait.
04:51The U.S. seems to be just getting in deeper and deeper. And if we have more of a spike,
04:55won't it be worse this time, given that SPRs were being drawn down and tanks were already close to
05:02bottom? Well, you know, for me, this is not my decision to make. But I can tell you the economic
05:09effects are real. They're affecting low and middle income households much more than higher income
05:14households. And in an economy where higher income households do more of a huge heavy lifting
05:20and inequality is so high, that masks that underlying pain that I think is very important.
05:26And I talk to a lot of retailers across the economic spectrum. And except for the extreme luxury,
05:32the ultra-wealthy are spending with abandon. There is a huge amount of strain out there.
05:37You're seeing even higher income households move downstream to get better deals and stretch
05:43their dollars more going into discount stores, off-price retailers. That's all very important
05:48because it's symptoms of an underlying fragility in the economy. We've been remarkably resilient
05:54in the economic aggregates carried by the AI boom and the wealth it generates. And part of the
06:00resilience in the equity markets has been due to that AI boom. Some sort of fragility on the sides
06:08that I'm worried about it being a little frothy. I also worry about, I have a lot to worry about
06:14these days. A lot doesn't let me sleep at night. But I think it's important to think about how many
06:19foreign buyers are coming into the equity market now. They're not buying bonds as much, but they
06:24are buying U.S. equities to be part of that AI boom. And that's helping to buoy prices through what
06:30normally would have been even minor corrections that might be healthy. And I think that's the things that
06:36we have to sort of take into context here is we don't know the actual straw that breaks a camel's
06:42back. I still have a resilient economy in 2026, but at what price? And the price, even though the
06:49inflation data has cooled, it's not cool enough to be back of mind and price stability to be anywhere
06:56near right now where we're standing. It's a very unstable global economic environment.
07:01For those just joining us, we are awaiting a testimony from Kevin Warsh down at the Senate
07:06Banking Hearing Committee. We're currently looking at Tim Scott, the senator from South
07:10Carolina, giving opening remarks, the Senate Banking Committee chairman. Diane, it sounds
07:15like you, again, doesn't sound like you say that you're worried about quite a few things. And I
07:19wonder to what degree can some of those things be solved by a rate hike? It's a market that
07:23completely backed out of pricing for this month to get a rate hike. We're still pricing
07:27one in by your end. Is that necessary from this Federal Reserve?
07:32I actually think two rate heights are necessary by the Federal Reserve. The structural factors,
07:37it's unfortunate that we've got a lot of supply shocks that are pushing up inflation. We've had
07:42repeated ones. In addition to demand over the last five years, you pick a day, you can have a different
07:47set of factors, but all of them lead to the same path. And that's a persistent period of elevated
07:53inflation. And we know post-pandemic, a period of uncertainty, which I argue today has gone from episodic
08:00in the past where you'd have a storm. The damage passed. We all did the repairs and it was over
08:04and you
08:04can move forward to being endemic uncertainty, where you're constantly weighing on big investment
08:11decisions that's causing a hesitation out there. All of that is adding to the inflation environment. We know
08:18in an inflation environment where you have a lot of supply shocks with high levels of uncertainty gives you
08:23more persistent bouts of inflation. That's what the post-pandemic period and the research has now told
08:29us. That's a job, sadly, only the Federal Reserve can fix. And inflation is the most regressive of
08:37all taxes out there. It hits those who can afford at least the hardest. And that's why the Fed has
08:43to
08:43raise rates. It is hard because those people who are affected the least by inflation are also affected
08:50the least by higher interest rates. Yeah, exactly. But, Diane, I mean, if there's one thing we know,
08:55it's that this Fed under Kevin Warsh is on inflation, right? He said it so many times. Inflation is a
09:01choice. He's a conservative economist. He doesn't want inflation past 2 percent, et cetera, et cetera.
09:05What if we also start to see the unemployment rate tick up and those same households that are
09:10suffering from years of inflation start to lose jobs?
09:17Well, that is the challenge. And the lessons of the 1970s were every time that we stopped in the
09:23wake of a supply shock, we ended up trying to stimulate to get employment better. We ended up
09:29with a stagflationary cycle. So you don't want to let that occur. That is much worse than what we have
09:36today. That said, I would argue the 1970s are very different from today in so many ways. And one of
09:44the
09:44most important is inequality. Income inequalities hit a bottom in 1980 from the post-World2 period.
09:52And ever since then, with a brief period in the 1990s, those inequalities have widened. Wealth inequality
10:00was very little in 1980. And that's because we had no equity market gains in the 1970s. That is not
10:07the case today. And so the inequality means that the pain of the 1970s that we saw was an ugly,
10:15horrible
10:15decade of my childhood. It has defined me as an economist. It haunts me to this day, what I saw
10:22growing up in the Detroit area. And it's part of a sort of an arc that has brought us to
10:26where we are.
10:27That said, the pain back then was shared. We understood it. I understood when my best friend
10:34went into poverty and my family did not. I understood that because I saw it firsthand.
10:40I think that's important that that pain is not shared today as well. And that puts even more urgency,
10:47I believe, on the Fed to deal with this inflation and eradicate the inflation we have because it is so
10:54corrosive. And I don't take it lightly. I'm a cancer survivor. But if you let inflation go, it can
11:01metastasize. And it is like a cancer. It is corrosive and can get in your system. And that is not
11:08what we
11:09can afford right now.
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