00:00I want to start just by asking you your take on the economy and whether you were surprised by the
00:06relatively weak labor market report and then the very much in line yet confusing CPI report.
00:12What I'm seeing in the economy, if it's associated with the AI infrastructure build or AI adoption,
00:20then it's strong. What I hear from a number of companies who are more tied to housing,
00:28autos, the strength of the low moderate income consumer, I would say they describe the economy as
00:36okay, not great, somewhat sluggish. And so in that regard, the job market report kind of was in line
00:46with that. You don't see aggressive hiring, but you don't see aggressive firing. And I still think
00:52we're several months or a year away from companies having enough confidence in the AI use cases to
01:00more aggressively use AI to replace people. But that is likely to happen. I think there'll be new
01:07jobs created also. But the point is, unit labor costs are very well behaved. And I think you and
01:14I have talked about this. The share of GDP going to profit is increasing. The share going to labor
01:21is more muted. What's the Fed's role given this backdrop right now? So you've got a lot of cross
01:29currents. And in fairness, if we didn't have the war in Iran and the spike in oil prices,
01:38which I think has raised headline inflation and bleeds into other items, my guess is we might not
01:44even be talking about the prospect of a rate increase. And I think the Fed's role here should
01:50be to try to understand these cross currents. The AI infrastructure build is probably inflationary.
01:58And you've got tariffs, labor constraints, oil spike that exacerbate that. On the other hand,
02:05AI adoption should ultimately be disinflationary. Chinese overcapacity should be disinflationary.
02:12And so it's not surprising to me that there's a lot of debate and they're trying to weave through
02:17this. I think what I would be doing in my former seat is I would not have raised rates in
02:22July. I
02:22think they made absolutely the right decision. I probably wouldn't have cut in December either,
02:28by the way, that last cut I would not have done. And I would be keeping an open mind between
02:32now and
02:33September. If I see meaningful improvement, I might be willing to kick the can and do nothing.
02:38But I want to take every bit of time between now and September before I make a judgment
02:43improvement and avoid being rigid or predetermined in assessing this.
02:47People talk about the death of forward guidance in part. Forward guidance has no role at a time
02:52where no one knows what's going to happen. And it's very hard to predetermine what exactly could
02:56transpire. At the same time, reaction function does seem to be important. And from your vantage point,
03:01Rob, what would you be looking for to see that there is some sort of departure from this sort of
03:07mess, this muddle to something that is more of a protracted, persistent inflation?
03:13So the term forward guidance gets used very broadly. What it started out as is I'm going to make a
03:19current
03:19commitment today to a future action. Bernanke used it during the Great Recession. We, I think,
03:30overused it in the fall of 2020 and into 21 in committing to keep rates low until we reach full
03:38employment. I dissented on that. But I think the Fed has learned its lesson there and is much more
03:45reluctant to use that type of forward guidance. Now what forward guidance seems to mean is I don't
03:49want to, I don't want to over predict. I agree with that too. And I always say the Fed's job
03:56is to be
03:56a risk manager, not a prognosticator. Having said all that, I do think in the press conferences,
04:03you ought to be able to explain why you made the decision you made and describe what the pros and
04:09cons and what the debate was. And I would probably like to see that more in future press conferences.
04:15And I think that would illuminate the debate that's going on. And I think that would be useful.
04:22And I don't think that box is in the Fed at all.
04:25Do you think that there's a understanding of the reactionary function right now of this Federal
04:30Reserve? I think the understanding comes from individuals giving speeches about their reaction
04:37function. And I actually think, in fairness to Chair Warsh, he's been gently counseling people
04:46on the committee, don't over predict what you're thinking. Don't over explain it. You're going to box
04:51yourself. I actually think that's good advice. I think in the future, I think a little bit more
04:59explanation from the chair to help frame all this, I think would be useful. And I would think and hope
05:08over the next several months, you probably will get that.
05:10Do you think there's now more emphasis around his Jackson Hole speech given all of this?
05:19Listen, anytime Fed chair speaks, there's a lot of attention. The Jackson Hole speech historically is a
05:26little bit of a 500,000 foot philosophical speech. I think because of his confirmation hearings and what
05:33he's done in the first two press conferences, you've already gotten a lot of philosophical views from
05:39Chair Warsh. So I think in this speech, I would give some of the philosophical, but I might do a
05:46little
05:47bit of, if it were me, and he may not follow this, I might insert four sentences to explain why
05:53we made the
05:53decision in July that we made. You know, we thought inflation readings were cooling. We're aware that this
06:00is not an excess demand situation. That's my view in the economy. It's more of a supply driven,
06:06capex driven. And in that regard, and we have the special situation of the war. And in that regard,
06:13a majority of the voters decided on the committee decided it would be best to be patient,
06:17but we'll remain vigilant. I would insert something like that to just so we can get the framing and
06:23the July decision out there. But that's me. Otherwise, I don't think it's going to get any
06:32more attention than any other Jackson Hole speech, which always gets a lot of attention.
06:36Rob, how worried are you about today's 30-year auction coming out, the $25 billion of 30-year
06:40notes sold by the Treasury Department?
06:42Yeah, so this is where you've got diverging paths. There's the debate at the Fed, and as gee,
06:49is the Fed funds rate ultimately need to be somewhat higher. But if it needs to be higher,
06:54we're talking about over the next year to, you know, 50, I don't know, 50, 75 base points, we'll see.
07:01The Fed will figure it out. May not be pretty, but they'll figure it out. The part that I'm struggling
07:07with more, and I think the markets are struggling with, the long end of the Treasury curve, this is
07:12true of government bond curves globally, I think are struggling with something else. They're struggling
07:18with supply demand of Treasuries, the size of these deficits. Are the deficits going to start
07:25moderating? In a solid economy, you would normally think that deficits would moderate somewhat. These
07:32deficits are not moderating. And I think you're seeing a global backup, not just U.S., global backup
07:39of the long end of the curve. Some people have attributed to the Fed, but I actually don't think so.
07:45I think this is a different, this is a structural dynamic. And normally, when the economy weakens,
07:52you would typically expect the long end of the Treasury curve to rally. Or if there's a geopolitical
07:57event, you expect a flight to quality and a rally. Hasn't been acting as much that way, I would argue,
08:03in the last year and a half, two years. I think we have a new structural development. And I think
08:10it's appropriate to be wrestling with that a little bit. Just real quick here, Rob, what would you be
08:15more bullish on going into the next year, bonds or stocks? Well, there is a great, as you've been
08:22reporting and we're seeing it, there is a great earnings story that's unfolding. And the economy,
08:31yes, is being stimulated by AI infrastructure. But broadly, every company I talk with has got 12
08:38to 15 use cases on AI adoption and is optimistic that they're going to find ways to improve margins,
08:46improve their business, improve productivity. And so I think the S&P broad earnings story is alive and
08:53well for not just this year, but into the future. I'm a little more nervous about whether we can get
08:59these deficits under control and what's going to happen to the long end of the government.
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