00:00So they hiked once. They've signaled more. Markets think they might go three more into next year.
00:08Your initial take on aggregate.
00:10I think it was a good decision. I think it came off quite well here. I think it was widely
00:15anticipated in financial markets. And the level of hawkishness or dovishness was handled well
00:23with the press conference. So I think this was a pretty good outcome for the Fed. They got their
00:29interest rate increase in, which I think was appropriate. And now we're set up for probably
00:34one more increase before the end of the year. I would put that most likely in December.
00:40But of course, they want to watch the data up until that point.
00:44And with the information we have now, does three more on top of what we had just now seem
00:51appropriate given where inflation has been?
00:55Yeah, three more sounds a little high compared to what the committee seem to be saying.
00:59On the dots, that's right.
01:00They probably want to see more data before they commit to that. I think you could get into next
01:08year and it turns out, well, inflation is turning around and we'll move lower. And then they'd
01:14probably be happy with that and just staying at the higher level for a while.
01:18We were talking about this a few minutes back. The 2% forecast doesn't come until 28, 29.
01:27How do markets interpret that? The commitment to bring it down, but it doesn't seem we'll
01:33get there for another two, three years.
01:35Yeah, I don't know. It's a ways away. It does seem a ways away. I think they're hoping for some
01:42better outcome than that, where you would get to 2% sooner. But they probably didn't want to put
01:49that down in their forecast. And so it's out there in 2029. I don't know how much those longer run
01:56forecasts really matter. All kinds of things will happen between now and then. But it is a little
02:04disturbing that it was farther out there. Yeah. Why has the economy remained extremely resilient
02:10in your views? What's going on there? Well, you've got the AI boom going on, which is a major factor
02:17in the U.S. A lot of that's fueling investment in the U.S. And then on the consumer side,
02:24you've got
02:25very low unemployment, certainly at or below what most people would think is the natural rate of
02:31unemployment. And you've got a level of wealth to disposable income for the upper half of the
02:38income distribution. It's very powerful for consumption. That's right. So both consumption
02:43investment look very strong in the U.S. And I think that's driving growth. Also, the administration's a
02:50very pro-business administration. They're trying to do all kinds of things to drive growth.
02:54So I think in that sense, I think it's not surprising that we have a good growth environment.
03:00But inflation is somewhat too high. So you've got the Fed stepping in with an interest rate increase
03:05at this meeting. Right. And just your advice on how the markets on the communication side of the Fed,
03:11right? And we know Chairman Walsh prefers not to give as much forward guidance or not at all,
03:17depending on the case, of course. So how should markets interpret that?
03:21Yeah, I think he doesn't give forward guidance, but you still have the dot plot. And I was speculating
03:27the dot plot might go away by now, but it's still there. And the September meeting is one where
03:33the dot plot is filled with a lot of forward guidance because it's talking about the end of
03:382026, which is only 100 days away or something. And so the median of the committee said, well,
03:46one more rate increase by the end of the year. That's pretty explicit forward guidance.
03:51Earlier in the year, you've got the horizon shortens up. I don't know if I'm communicating this
03:56right, but as you go through the year, the horizon on the dot plot shortens up.
04:00That's right, because you're moving into the end of the year.
04:01So I've always felt like the September meeting is a weird meeting because you're actually giving a
04:05lot of forward guidance here for the rest of the year.
04:08If not explicitly all the way when you look at December.
04:11But the chairman doesn't want to do that. And to his credit, he stayed away from that in the press
04:16conference.
04:16And the pros and cons of giving markets larger bandwidth to determine policy.
04:23Yeah, I mean, I've always felt like it's a two-way street. You've got the market side and
04:28you've got the Fed side. And it's some combination of those two that determines interest rates.
04:36And I think Chairman Walsh has felt like it can't be 90 percent Fed, 10 percent markets.
04:41It should be 50 percent Fed, 50 percent markets. And that way he can look at what the market is
04:47saying
04:47and get some true market signal as opposed to just looking in the mirror and seeing what the Fed is
04:53saying. So I think that's been his story about why he wants to lighten up a little bit and let
05:00market signals come through.
05:03Right. Now, we were talking about the absolute level of yields in the Treasury market. I think
05:09that 10-year is just above 5 percent at the moment. Does that feature into discussions when you're at
05:16the Fed? In other words, at 25 basis point high, is it a larger hurdle if yields were higher than
05:22they were lower?
05:24Very much feeds into the discussion. The committee has felt that the policy rate was slightly above
05:34the neutral policy rate. Right. And therefore, that policy was somewhat restrictive and therefore
05:40that inflation would come down. But they've, you know, maybe felt like they were overplaying that a
05:47little bit. And now they want to go to a little higher policy rate relative to the neutral rate.
05:52Chairman Walsh said during the press conference that they had removed a little bit of accommodation.
05:57And I think there's some confusion in markets about that. I think he felt that, you know,
06:05it's hard to argue that the Fed is restrictive when you've got arguably a booming economy, low
06:11unemployment, inflation above target, you know, equities near an all-time high. That doesn't sound
06:19very restrictive if you just look at it that way. But traditionally, the committee has looked at the
06:25level of the policy rate relative to some estimate of the neutral policy rate. And the committee has
06:30usually said that they're somewhat restrictive. So this will be debated out here as we go forward.
06:36Yeah. And not to mention as well, with rates already being this high, you're getting this
06:43massive debt boom. I mean, you know, a lot of these hyperscalers, US tech companies, continue to
06:49borrow, if not more money now than they ever have. Yeah. And I wonder, theoretically, do you think
06:56that neutral rate has actually silently shifted? To the point you're making, it doesn't seem like
07:01they are restrictive given everything explicitly that we're seeing happening in the economy.
07:06Yeah. I mean, higher, faster US growth, that would put upward pressure on the neutral rate, but also
07:12this, the tech boom and the borrowing associated with that would put upward pressure. So you're
07:19certainly seeing that in the run-up in, let's say, the 10-year over the last six months or so.
07:25Sure. So we're at 5%. Is there a scenario in which you see the 10-year gravitate towards 5.5%,
07:336%? I know those are just not nice round numbers, but just help us understand maybe the risks to
07:38the bond markets giving way even further. Yeah. I think rates could go somewhat higher
07:44from here. It'll, of course, depend on the data. But the kinds of things that are happening,
07:50this is kind of good news, higher rates, because it's associated with a strongly performing economy.
07:58To the extent the Fed is able to get inflation to come down and turn around a little bit,
08:03that might temper the increase in the policy rate. You've got fiscal deficits in there,
08:09which is a big problem for the US as well. And there doesn't seem to be much of a plan
08:14about
08:15containing fiscal deficits and doesn't seem to even be an issue in the midterm elections on either side
08:22of the aisle. So I think markets are concerned about that. And unfortunately, it doesn't look like
08:29the fiscal situation is going to get fixed anytime soon. So that would put upward pressure on rates,
08:34all other things equal. And as an economist, is that something you think we should be worried about?
08:40Yeah, I think it'd be one thing to say I borrowed $40 trillion, but I have a plan to get
08:49it down.
08:50But you borrowed $40 trillion without much of a plan, and really no one even talking about a plan.
08:56So I think that's really the thing that global markets are looking at, scratching their heads.
09:02I mean, the US is a very powerful economy, has a lot of capacity. So markets have to weigh that
09:09as
09:09well. But still, these seem like outsized fiscal deficits.
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