00:00I think they descend but I think the Fed does not move. I think the Fed is going to be
00:03on hold
00:03through the rest of the year. The reason being that if you look at the inflation developments
00:07even though patience is running thin amongst all on the committee, you are in this environment
00:12where you have some disinflationary currents that are likely to carry the way through the end of the
00:17year. Tariff pressures are past their peak. You're seeing still the effect, the pass-through of lower
00:23energy prices even though we've seen this re-acceleration in oil prices and gasoline prices
00:28but there's still a disinflationary effect there. And then very importantly, the labour market is
00:33not inflationary. Wage growth is still trending down towards 3.5%. That's not inflationary. That
00:39should not be a source of inflation going forward. There are risks however and I think that's very
00:43important to keep in mind. September, very much a live meeting and the next meetings after that,
00:48October, November and December, will also be live meetings. But I think the Fed will eventually end
00:53up on the side of not tightening monetary policy this year. Do you think if we get those dissents
00:57that they compromise the leadership of the new Fed chair or do they actually do him a little bit of
01:01a favour through the summer? I think that's very important to keep in mind because during his
01:05testimony, two days of testimony, he said a lot but very little in terms of his views on inflation,
01:10his views on monetary policy. He was cryptic at best. He did not say whether inflation was this
01:15number or that number, which for a Fed chair you would expect at least to express one view of a
01:20number,
01:20a gauge of inflation. He did not express any views as to whether he thought there was
01:25disinflation in the pipeline. He did not express any views as to whether the AI-led investment boom
01:31is inflationary in the short run. These are all topics that the Fed chair should be addressing.
01:35So I'm thinking that he's trying to hide in some ways behind the committee and that even if the
01:40committee were to push for a rate hike in September, he might take that as a view of saying,
01:46well, actually, I was in favour of maintaining monetary policy and I was not in favour of raising rates,
01:51but I did vote with the committee because that's the right thing to do.
01:54Bill Dudley came out with a Bloomberg opinion piece where he said that the Fed should tighten
01:58at this point. He said there's little evidence that monetary policy is currently restrictive.
02:02Do you agree, particularly as evidenced by what we're seeing in capital markets?
02:06I think you have to distinguish two things, right? You have to distinguish the real economy
02:09from capital markets. And when it comes to how tight monetary policy is, I think for some sectors,
02:14it is relatively strict. If you take us back to where we were back in March,
02:18before the onset of the conflict in the Middle East, you were seeing ongoing disinflationary
02:23pressures. We were heading towards that 2% target. So it wasn't as if there were inflationary
02:28pressures that were coming from strong demand and strong economic activity. When you look at
02:32capital markets, when you look at the equity market in particular, you are seeing a lot of
02:36forward momentum, which tells you that financial conditions are not restrictive. So I think you have
02:40to disentangle the two and depart from one view being tight for everything versus one view being tight
02:47for one thing versus the other. The other aspect of Bill Dudley's point is that there's a credibility
02:52issue here for the Federal Reserve, that they can talk a big game, but if they don't execute some
02:56sort of action, then ultimately it will fall on deaf ears. Do you agree with that? I agree with that.
03:00I mean, resolute commitment, as Chair Warsh said a few times, is not enough to convince everyone that
03:06there is the possibility of the Fed tightening. If you are really having that resolute commitment,
03:11you have to act upon your words. You can't just use words. And one paradox here is that Chair Warsh
03:17has been very critical of the prior Fed. He said that inflation has been a choice and that policy
03:23mistakes were part of the reason why we had a prolonged period of elevated inflation. If that is
03:29the case, then you have to act upon the higher inflation that you see and you have to bring inflation
03:34back down towards 2% in a rather rapid way. The key question here is, does tightening help alleviate
03:41the demand-driven pressures? That's really the key question, because we have pressures from the
03:45supply side. The Fed can't really do much about the supply side pressures, oil prices, tariffs. It can't
03:50do much about that. The key question is whether demand-driven inflation from AI is something the Fed
03:55can address. I don't think higher interest rates detracts hyperscalers from investing and continuing to put
04:01that upward pressure on inflation. But if you do raise rates, you tend to tamp down demand across
04:07other sectors. And that's where you can get some disinflationary pressures. But does the Fed want to
04:12sacrifice other sectors in the meantime, while you're seeing a lot of investment in AI continuing to
04:17drive inflation? That's really a hard trade-off for a lot of policymakers. Greg, it's good to see you.
04:22Always is. Thank you, sir. Greg Dacco there of EY Parthenon, looking ahead to that Fed decision a week or
04:27so away next Wednesday.
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