00:00Traders are putting the odds of a rate hike at the next meeting of the Federal Reserve at about 90%.
00:04That's after a hot CPI print that came out on Friday.
00:07That's right, and Fed Chair Kevin Warsh is still under pressure from the man who gave him his job,
00:12President Trump, to get his fellow policymakers to lower rates.
00:16But Tom Orlick, the chief economist for Bloomberg Economics, argues the world has changed.
00:20He writes, quote,
00:21Cheap money cannot be delivered by changing who runs the Fed.
00:24Tom Orlick joins us now.
00:26All right, Tom, since we have you, what is the conventional wisdom about why bond yields have been continuing to
00:33climb?
00:34So there's no shortage of kind of news-driven drivers, news drivers for higher yields.
00:42The war in Iran continues to roll on and even escalate, pushing oil prices and so also inflation higher.
00:53Fed Chairman Kevin Warsh gave a hawkish speech at Jackson Hole.
00:59And as you mentioned, that has pushed traders towards bets on a hike at the Fed's meeting next week.
01:07The argument we make, though, in research led by my colleague Jamie Rush, published in an essay on the Bloomberg
01:18Terminal and Bloomberg.com this weekend,
01:21and in our book, The Price of Money, is that there's something deeper going on.
01:26There's been a structural shift from a world where there's too much saving, a savings glut, and not enough investment
01:35opportunities,
01:36a world in which too much saving means interest rates are falling,
01:41to a world where there's a dearth of saving, enormous investment opportunities,
01:47and that means structural pressure for interest rates, bond yields, to stay high.
01:54Tom, I admire the shameless plug for the book, again, The Price of Money.
01:57Tom Orlick, Jamie Rush, Stephanie Flanders, get that in there as well.
02:00I don't want to leave Stephanie out of the mix.
02:02Tom, let me ask you about that savings glut.
02:04Why is it going away?
02:05Why is that happening?
02:06What are the consequences for borrowing costs as it goes away?
02:10So, if we spin the pages of the calendar back to the early 2000s, the 2010s,
02:20what was the kind of the world we were living in back then?
02:24Well, firstly, demographic factors.
02:28The baby boomers were still working.
02:31They were saving for retirement, contributing to the global pool of savings.
02:36China and the petrostates had huge trade surpluses,
02:41and they were dumping those surpluses in the U.S. Treasury market.
02:46And back then, strange to remember,
02:50but the world was still enjoying the post-Cold War peace dividend.
02:55There was less concern about war, so there was less need to spend on defense,
03:00so governments weren't borrowing.
03:02U.S. government debt to GDP back in the early 2000s was around 30%,
03:08and the U.S. was running a budget surplus.
03:12Spin the calendar forward to today,
03:14and all of those factors have spun into reverse.
03:18The baby boomers have retired.
03:20They're reading Bloomberg Pursuits to decide where to spend their retirement savings.
03:27The relationship between China and the petrostates and the United States has considerably changed.
03:34They're not putting their money in U.S. Treasuries anymore.
03:38The post-Cold War peace dividend, well, that's disappeared.
03:42We're in a war right now.
03:44Defense spending has surged and contributed to an absolutely enormous increase in government debt.
03:51And, of course, AI is part of the picture.
03:54Trillions and trillions of dollars being spent on the build-out of AI.
03:59So put those pieces together, and that's how we've moved from that world of too much saving
04:04and not enough investment and falling interest rates
04:07to not enough saving, too much investment, and rising interest rates.
04:12Have we just gotten too used to artificially or just situationally low interest rates?
04:18I mean, I remember speaking to my parents who bought a house in the 70s at 16%, 17%, 15%
04:24interest rates.
04:24We had a combination of, you know, the economic crash followed by uncertainty, followed by COVID.
04:30We have had this for a while.
04:32Do we all just need to get used to it and deal with higher interest rates?
04:37So, I mean, I think the sad reality is that, yes, we think that higher interest rates are the new
04:46normal.
04:47The problem is that in the world of low interest rates, government, businesses, households,
04:56all took on a significantly larger debt burden, right, thinking that it was going to be something like a free
05:05lunch, right?
05:06If interest rates are low, why not borrow, right?
05:10There was a moment during the COVID crisis where interest rates were even negative.
05:15People were effectively, governments were effectively being paid to borrow, right?
05:20But now, with interest rates significantly higher, the cost of carrying that debt, the cost of rolling over that debt
05:28is just much, much higher.
05:30I'll give you an example.
05:32U.S. interest payments now account for half of the budget deficit.
05:38And that means interest payments are squeezing out funding which could be used for the military,
05:44could be used for schools, for hospitals, for essential infrastructure improvements.
05:51The bill for what we thought was the debt-free lunch is now falling due.
05:58Tom, I want to ask you about this Fed meeting next week.
06:01Looking again at the work function on the Bloomberg terminal,
06:04it seems like all but a done deal when it comes to a hike at this meeting next week,
06:07at least in terms of traders' expectations of what's going to happen there.
06:10But I'm curious sort of how the chairman's remarks, which we've talked about at Jackson Hole,
06:15colors sort of what you'll be watching for in the remarks that presumably he'll give at the end of that
06:20meeting on Wednesday.
06:22So it's interesting, David.
06:25I mean, Chairman Kevin Walsh spent a lot of time telling us that he needed to be quiet and listen
06:33to the markets
06:34because the markets were going to provide a powerful signal.
06:37Well, the markets have spoken, right?
06:40Bond yields significantly higher, bets on a Fed move next week,
06:48putting it not quite at a certainty but not too far off, right?
06:52So Walsh, in a sense, has painted himself into the corner.
06:56He said he would listen to the markets.
06:58The markets have spoken.
07:00They've told him to hike.
07:02If he doesn't, I think that's going to be a blow to his credibility and a blow to the credibility
07:08of the Fed as an inflation-fighting institution.
07:12The more interesting question, I think, now is what are the politics of this going to look like, right?
07:19President Donald Trump made no secret of the fact that he wants a Fed chairman to come in and cut
07:28interest rates, right?
07:29He said that when Powell was in charge.
07:31He's returned to the charge in recent weeks.
07:34And that means that for Walsh, what makes sense for the economy, what makes sense for the markets,
07:41what makes sense for the credibility of the Fed as an inflation-fighting institution,
07:45is very much an interest rate hike at next week's meeting.
07:49But what makes sense for the White House and President Trump, well, it's quite the reverse.
07:57And so my prediction, with almost as much certainty as the markets are putting on a hike at next week's
08:04meeting,
08:04is that after the hike, there's going to be some significant political blowback for Trump's pick as Fed chair.
08:12I was going to ask you, so if you're Kevin Walsh, what do you do?
08:15If you're serving two masters, do you serve the market or do you serve the president who gave you your
08:19job?
08:19It sounds like you think he will serve the market.
08:22But then what?
08:23I mean, we've already seen the president go after one Fed chair with mixed results.
08:28Do we think it escalates that quickly?
08:29Or do we think, I mean, this president, it's always hard to guess what he does,
08:32but the one place he seems to listen to reason and listen to expertise is sometimes on the markets.
08:38Yeah, I mean, potentially, there's a Goldilocks solution here, right?
08:43Potentially, one of the reasons why bond yields at the long end, 10-year, 30-year yields have been high
08:52in the United States
08:53is because of concern that the Fed is losing credibility as an inflation fighter, right?
09:00And so me...
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