00:00Eric I do want to start with the state of the consumer and we'll get to inflation in a second.
00:04But I was looking at that retail sales number today that contraction overall gas and autos obviously dragged down a
00:09lot of it online sales too. But I looked at restaurants that was up. So we're still spending somewhere. And
00:14there were a lot of other categories that seem to suggest the consumer is still spending. What does a debate
00:20look like amongst Fed members when you kind of have data even in one report and even the trend line
00:25that seems to kind of let's just say conflict with each other.
00:31So the Fed doesn't focus just on one number. It does tend to focus on a trend. But I think
00:37a weaker retail sales number is consistent with what we've been seeing in consumption for the first half of the
00:44year. So if you look at consumption over the first two quarters it only grew at one and a half
00:49percent. So that's weaker than the overall economy. It's a lot weaker than what's been happening investment. So we have
00:57an economy where kind of AI and tech
00:59investment are driving investment spending. But the consumer has been buffeted by higher oil prices maybe some concerns about what's
01:10going on in the Middle East. And as a result they've been somewhat more reluctant to buy particularly for those
01:16low income individuals who are likely to be more strapped by the oil prices going up.
01:23So I think the picture that this retail sales provides is pretty consistent with consumption that's not really driving the
01:32economy. Right now what's really driving the economy is investment spending.
01:37Well I'm curious does that worry you at all or is this just sort of the natural cycles that the
01:43economy goes through from time to time.
01:47Well if the consumer was a little bit I mean consumption is an important component of GDP. It's roughly two
01:53thirds of spending is two thirds of all GDP.
01:57So anytime consumption slows down economists tend to pay attention. But I think what we have is a somewhat different
02:05balance than we normally see particularly in an environment where the stock market has been going up so strongly.
02:11So the economy is growing probably at the appropriate rate overall maybe a little bit weaker than we'd like. And
02:20a lot of that is because the consumer has
02:23continued to be somewhat lethargic. What about inflation. It's now at around 3.4 percent. I mean that's well above
02:29the Fed's 2 percent target.
02:31How do you make the case of why the Fed should cut rates with inflation this sticky.
02:37So I think the the debate is really going to be about whether the Fed should raise rates or leave
02:43them the same. As you point out the CPI number that came out
02:48the beginning of this week at 3.4 percent is well above the Fed's target. I think those that are
02:55willing to wait are arguing that when you take out food and
03:00energy. Shelter has not been going up nearly as rapidly and it's not widespread increases. So they think as oil
03:08prices come down we'll see the overall inflation rate
03:11come down. I think the other side of the argument is that the Fed has been hoping that inflation would
03:19come down more naturally by waiting for five
03:22years now. And it hasn't happened. And so I think there's a subset of the committee that is concerned that
03:29we keep expecting inflation to come
03:31down. But you know when we get through a couple quarters we find that once again the Fed has missed
03:37its target by a significant amount. So I think
03:41for those that are concerned that inflation has been quite high they're probably still going to have that concern. And
03:49for those who want to wait I think
03:50they're still going to argue that it's being driven primarily by oil prices and that when oil prices come down
03:57that there'll be less
03:59concern about inflation. And you made the point that the Fed usually takes a look at the data in their
04:04totality. But on one hand you have
04:06higher inflation and on the other you have a weakening consumer. Which do you think if you were just to
04:11pick between the two is
04:12scaring the Fed more. Well I think right now they're pretty focused on inflation. So if you look at the
04:19press
04:20conference that the chair provided after the FOMC he emphasized that the committee was quite focused on getting an inflation
04:28rate back to two
04:29percent. So they're never going to be happy when we get weak real economic data. And but I think right
04:36now they're going to be
04:37primarily focused on what are the expectations for how long it takes inflation to come down to the two percent
04:44inflation target. I want to get
04:47your thoughts also on this idea of how the market reacts to this and particularly with some of the the
04:53moves that we've seen in
04:54the bond market particularly on the longer end of the curve with that 30 year yield going up. Obviously a
04:59reflection of longer term
05:01concerns certainly about inflation fiscal deficits and the like here. Does that I mean not to be clib about it
05:07but that does that kind of do
05:09some of the work for the Fed if the bond market continues to reprice down the price down yields up
05:15on the longer end. So it does slow
05:18down the economy if we have higher rates and that's whether the it's initiated by the Fed or other conditions.
05:24But if the reason the long
05:26rate is up is because they're not confident that the Fed will bring inflation down. That's a problem for the
05:32Fed. That's really not the way they
05:34want the market to tighten because they have less confidence in the Fed doing what they're saying they are supposed
05:41to do. I think
05:43that the deficit obviously is an issue. And as we've seen in Japan there's been concern about interest rate differentials
05:53between
05:53the Japanese and the United States. And they're worried that they're going to be selling Treasury securities in order to
05:59be able to defend their currency. So I think there are a
06:03variety of factors going on for why the long end is up. But I don't think it's a little bit
06:09glib to just say that the market is doing the Fed's
06:13work for it. I think you have to interpret why it's moving. And I think the reasons why it's probably
06:21moved up. It started moving up at the press
06:23conference. That was an indication that they weren't as confident that the actions of the Fed were going to be
06:29commensurate with how they've described what they've
06:32planning on doing on inflation. Based on what we learned out of the last meeting with Fed Chair Warsh the
06:38idea is that communication at least
06:39from him is likely to be a little bit less than maybe what we got out of his predecessors. Does
06:44that complicate things for the market
06:46and for that matter in turn back on Kevin Warsh. Well there are other Fed presidents and governors who are
06:54speaking. And I think there were
06:56people speaking on both sides of the last decision. I think the challenge is that there's only one person who
07:03can speak for the entire
07:04committee and that's chair Warsh. And if he doesn't speak for the whole committee then you have a bunch of
07:11people speaking from their own
07:13viewpoint. And I think it would actually be good. You don't have to provide forward guidance but I think it
07:21is important to provide a little bit of context for why
07:24decisions are being made. And since especially coming out of an FOMC meeting I think it's important for the chair
07:32to basically say the reason
07:33the committee made the decision they did is the following. And that doesn't have to be forward looking. It doesn't
07:40have to say anything about what they're going to do in the future.
07:42But I do think it is important to justify what the majority of the committee decided at each meeting.
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