00:00Neil Dutter of Renmack, not seeing a reason to wait to hike rates.
00:03He writes the following, if you have one good month of inflation data,
00:06but you know the next two months will be bad, you might as well.
00:09Just do it now.
00:10Neil joins us now for more.
00:12Neil, provocative piece this week.
00:13Appreciate your time and thanks for coming on.
00:14Walk us through the setup for next week and why you think tactically
00:17this might be the right window to hike rates.
00:20Well, I think following with what Mike said, the sort of checking of the boxes,
00:25I mean, I almost feel like, guys, it's sort of hiding there in plain sight in the minutes, right?
00:31So you kind of have the AI demand piece.
00:35You know, we see that hyperscaler CapEx continues to moonshot.
00:39You have the oil piece.
00:41And while it's encouraging that oil is down today, I mean, it does feel like the conflict is ongoing.
00:48And so I think it's possible that that's fleeting.
00:51But we do know that no matter what, gas prices probably go up into August.
00:57And, you know, lastly, tariffs.
01:01The president is doing what the president does with tariffs.
01:04So it's kind of you just go down the list.
01:06Now, if you're if you're Kevin Warsh, I think.
01:10It's important to go hike when you can and maintain some modicum of control over the committee than to hike
01:18when you must.
01:19I mean, can you imagine a situation where he I mean, if he wanted to, he could probably get the
01:23committee to get on board for a hold in July.
01:27By September, he may not be so fortunate.
01:29So if you're him, do you really want to have to deal with that?
01:34That would make him look, I think, like a much weaker Fed chair.
01:37So I think tactically, just give it to the hawks now.
01:41And if the data kind of improve, the war ends, oil falls, you know, you kind of see a renewed
01:48disinflation from the housing market, maybe.
01:52Then you can go tell them to pound sand.
01:54But, you know, I think you kind of have to fight one thing at a time.
01:58And I think the risk reward is, you know, go now as opposed to having to go a lot more
02:05later.
02:05Now, we've known each other a long time.
02:06You know how much I enjoy your research.
02:08And one thing I think that you're fantastic at, even though you have very strong feelings about a moment, is
02:12separating what you think a Fed should do from what you think the Fed will do.
02:16I'd love to ask, though, how wide is the spread right now between what you think they will do and
02:20what you think they should do?
02:21How much daylight is there between the two?
02:25I mean, I think the Fed should say, I mean, to me, I'm more on the dovish side of the
02:30consensus.
02:31And I think that's because I see a relatively uneven economy that's being sort of held up by one area.
02:38I mean, you know, people talk about the broadening out in the capital markets, right, John?
02:43But do you really see a broadening out in the economy?
02:46You don't, actually.
02:47If you look at non-AI-related structures investment, it continues to remain weak.
02:52If you look at residential investment, it's still sluggish.
02:56The high-frequency data that we have, you know, your own Bloomberg second measure for consumer spending, that's actually quite
03:03weak to kick off Q3.
03:04So you don't really see that broadening out in economic activity.
03:08You see a very uneven economy.
03:09And so I think the risk, of course, with aiming policy at one specific area could be problematic because monetary
03:17policy is a blunt tool.
03:19So if all you're really trying to do, and by their own admission, you know, they'd be raising rates to
03:23cool off AI demand, that can exacerbate the stresses in other areas of the economy, like, you know, credit-sensitive
03:29spending, housing, as an example.
03:31So that, to me, is why I'm somewhat, you know, cautious on them hiking.
03:36So it would put me more in a defensive mood if I'm an investor.
03:39But, you know, as you mentioned, I mean, my use case as an analyst is really what's the Fed, what
03:47do I think the Fed's reaction function is?
03:49And I think they're all kind of tiptoeing towards the hike.
03:53I mean, there's not really anyone in there that's making the case that I just made.
03:58And when you think about, you know, just tallying up the votes, that to me is important, but it's also
04:06important to kind of think about it in terms of conviction, right?
04:10Like folks like Beth Hammock and Lori Logan, they have a very high level of conviction.
04:14Folks like Philip Jefferson, Lisa Cook, maybe less so.
04:19But they, I think, are like sort of the, they're price takers, not so much, Logan and Hammock are price
04:25makers.
04:26And so if they can kind of corral the, you know, sort of pull along the rest of the committee,
04:32I think it's possible for them to do so.
04:34And that's kind of why I said, you know, strategically, if you see this kind of debate unfolding in the
04:42committee, if you're Kevin Warsh, you can kind of see the tea leaves.
04:46I mean, even someone like Williams, who Mike McKee said was sort of, you know, signaling a hold, he's not
04:52signaling a hold for long, right?
04:54I mean, he's basically going to get on board for September.
04:57I mean, a bet on no cuts for this year at this point is really a bet that you get
05:01continued weakness and inflation like you saw in June.
05:05Possible, I wouldn't bet my life on it.
05:07And there's a lot of reasons to expect that some of the improvement we saw last month unwinds.
05:12Neil, I am wondering, a lot of people are saying, what will actually a rate hike accomplish?
05:16And you're talking about that, given the fact that there still is a very bifurcated economy.
05:20That said, some people like Megan Swiber of Bank of America just earlier this hour was talking about how it
05:25could cap the long end of the yield curve.
05:27It could potentially dampen longer term inflation expectations enough to create a bit more of a ceiling on some of
05:34those longer term yields.
05:35Do you agree?
05:38I mean, that's part of what I mean, this is this is sort of the same argument that was made
05:42after Kevin Warsh sort of pledged allegiance to the flag of price stability back in June.
05:48And it's just another version of that argument.
05:51Yeah, I mean, it would also mean that the Fed is trying to cool off growth.
05:55And that's why the long end would be coming down also.
05:58Inflation expectations, in my mind, look stable as it is.
06:00I mean, but that's again, part of that is the function of real reals continuing to go up because they're
06:05committed to price stability.
06:06I guess I'd flip this on its head and say if the Fed does not hike rates next week,
06:10does that make you more bullish on going into an equity market that's re-rated on the margins over the
06:15past couple of weeks?
06:19I think based on where clients are right now, where the markets are, I could see a scenario where if
06:24the Fed doesn't hike and they and people read that to mean that they're not hiking for the rest of
06:30the year,
06:30you could see the back end sort of keep pushing higher.
06:34Yeah.
06:35I mean, I think that there's something to that.
06:37Neil, I know that we always talk about what's interesting on Fed Decision Days, how the market reacts to things.
06:43How do you think the president would react if we get a hike?
06:48I think, again, that goes to Enri, the reason why Warsh should do it.
06:52He's got the I mean, it's like it would be like leaving your honeymoon early.
07:00So not good.
07:02Yeah.
07:02So I don't think if you're I mean, what I've found very interesting is how deferential the president has been.
07:09Right.
07:09I mean, I could see a scenario where where Warsh hikes and because Trump has a much bigger fish to
07:15fry at the moment, he kind of gives them a pass by September, October, when you're much closer to the
07:20midterms, maybe he won't feel as as forgiving.
07:23So, again, that's another reason for them to for him to get it out of the way now.
07:28I don't know.
07:28You.
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