00:00I mean, when we look at inflation, which is really what's driving Fed policy, all the fundamentals to us point
00:06toward upside risk to inflation.
00:08You have above trend GDP growth. We have a labor market we think is heating up.
00:12We have a range of supply side challenges, energy, but also in trade, labor, all these things where you think
00:18are going to keep inflation elevated and the Fed hawkish.
00:20I quoted Orszag and Pozen, I think it was out in January, maybe my note of the year, but they
00:25are with you looking for sustained lift.
00:28Is it because a labor market pulling in to the Orszag, Pozen wage growth that gets us there?
00:35That is part of it. You know, one of the most concerning parts of inflation are what we're seeing in
00:40non-shelter services.
00:41That's the majority of core PCE, which is what the Fed's looking at.
00:45And that's running at high levels, shown no progress over the last year.
00:50And we think the labor market is tightening. Wage growth is going to feel upside pressure.
00:54That's going to put more pressure on those sticky inflation numbers.
00:57That's why I think some Fed officials are starting to talk about with the backdrop that we have now, we
01:02can't be confident we're going to trend back to a 2.0 percent inflation rate.
01:06More like the mid twos, maybe, or high twos.
01:09But we need some rate hikes here, do we think, to bring inflation back to target.
01:13So last week, soft CPI and to a lesser extent PPI data.
01:17Was that more a function of energy prices coming down during the initial days of kind of this memorandum of
01:23understanding kind of thing?
01:24Yeah, I mean, energy prices were a big part of it.
01:27I mean, admittedly, that report was much softer than we were expecting.
01:30It looks very unusual.
01:32You know, there were some big downside movers that month.
01:34If you look at something like the Cleveland Fed's median CPI, that was up closer to 20 basis point month
01:40over month.
01:40You know, core CPI fell in the official reports.
01:43That's a bit odd historically.
01:45We don't think it's going to repeat.
01:47We think it's more of an anomaly.
01:48And we're looking for firmer inflation numbers in the next few months.
01:51Now, if we get a few more months of very soft numbers, we'll have to reconsider our Fed call.
01:56But we think it's an anomaly, not the new rule.
01:59You mentioned that labor market's heating up.
02:01What is your view of the U.S. labor market here?
02:03It feels like we've been at and continue to be pretty darn close to full employment here.
02:07Yeah, I mean, we're looking at payrolls growth over the last few months.
02:10You know, we had some downward revisions, a downside miss a bit in the last report, but we're running over
02:16100,000 jobs per month.
02:18We think that's well above the break-even rate to keep the unemployment rate constant, given that we're having no
02:23or very weak labor supply growth.
02:26And that's putting downward pressure on the unemployment rate.
02:28I think companies, that's very consistent with the above-trend GDP growth that we're seeing this year.
02:33So how do your managers respond to the prima donna walks in the room and says three rate increases, which
02:40is price down, yield up?
02:42I think, you know, we have pretty, we have a lot of debates at work, but pretty broad support.
02:48So you and Greg Peters are going at it.
02:49Yeah, we have pretty great debates.
02:51But I think we're aligned on this view that when you look at inflation over the last several years, you
02:57see it's been well above target.
02:58And these fundamental drivers are going to keep it there.
03:01And when we hear from Chairman Warsh, but the broader Fed, they all sound quite hawkish.
03:06Even after that soft June CPI, you know, the tone across the board, we think, is reaching a hawkish critical
03:14mass.
03:15And that's another way of saying we think the bar for rate hikes is relatively low, and it's only going
03:20to take, you know, somewhat firmer inflation data to get them to move.
03:24Do you think the, what do you take away from Chairman Warsh's comments that we've had?
03:29He spoke in Portugal.
03:32He had his one meeting, Fed meeting.
03:35Can he really go on a rate hiking policy here, given maybe some of the political pressures he has?
03:42Well, you know, I would say two things.
03:44One, you know, my number one takeaway from all of Chairman Warsh's comments so far is this idea of getting
03:51inflation back to 2.0 percent without rounding.
03:56Not in the vicinity of target, but getting inflation back down to target.
03:59And that is why, you know, a major reason we think they're going to hike rates.
04:02Now, on the political front, you're remarkably calm there so far.
04:06We haven't seen much response from the administration.
04:11And, you know, everything that we're seeing and hearing is that, A, Warsh is going to be independent.
04:16And, B, you know, that the administration doesn't seem too perturbed with his communication so far, which has been quite
04:24hawkish.
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