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00:00It appears Walsh has sort of shifted the Fed's gears in the terms of how they're looking at inflation
00:06and highlighting the view that underlying inflation is higher than they want it to be.
00:14And prior to Walsh, Powell would have had a view that underlying inflation was actually relatively low
00:18and we're just dealing with a lot of shocks that are going through the system.
00:22So Walsh has a different view on inflation, it would appear, from Jackson Hole.
00:25In your beautiful note, folks, get the constant parchment, get it from Mizzou, we are not going to give you
00:30that,
00:31we protect the copyright of all of our guests.
00:33Your distinction here is Walsh is conventional with a vector or trend analysis,
00:39he's committed to a higher inflation, where Powell and now the proxy, the game theorist from Washington State,
00:46Waller, is saying, no, this is a shock moment.
00:49Why can't we be patient, given the war shocks and the rest out there?
00:54Well, I mean, I think the Powell Fed, you know, did have the view that you could be patient,
00:59but the trouble with patience is if it goes on sort of too long and you keep waiting, waiting,
01:03then basically those shocks get embedded into the trend is kind of the issue.
01:08And I think Walsh is sort of highlighting that he feels that sort of has happened already.
01:13And so we're taking him at face value.
01:14And the idea is, yes, I mean, this isn't like one or two insurance hikes.
01:18This is a series of hikes.
01:20Three is reasonable.
01:21It could be four.
01:22But the market will certainly price for what I would call a proper tightening cycle.
01:27And that's what we're in the process of doing.
01:29Dominic, how important, Dominic, is it tomorrow for the Fed to show the market a unified kind of stance here?
01:39I think it's pretty important.
01:40I think Walsh will bring along the kind of Powell Fed sort of holdout, so to speak.
01:47So I think it will be a pretty much unanimous move, assuming they do hike.
01:52It would then signal some sort of commitment to bring down inflation in a fairly timely way.
01:59And I would, I think, they should just basically get it over and done with.
02:02I mean, people say Walsh is quite political.
02:05Well, you know, you've got the midterms, which obviously complicates, you know, an October hike, for example.
02:10But by the end of the day, just get it all over and done with by early next year and
02:14slow the economy.
02:15And then you can set yourselves up for some re-acceleration and growth in 2028.
02:21That's the way I would think the politics should work.
02:23Speaking of the politics, Treasury Secretary Besant came out several weeks ago and said,
02:28I want to get long-term rates down.
02:30That hasn't really happened, has it?
02:32What's going on there?
02:33Well, I mean, a couple of things.
02:35It's obviously, I mean, the idea had been, had Walsh not been so apparently committed to raising rates,
02:42then the long end was obviously going to have trouble stabilizing in this elevated inflation world.
02:47So the idea for Besant was to basically try and sort of lean against the moves higher in rates by
02:52doing something.
02:53He could cut supply.
02:54He could increase buybacks.
02:56He obviously signaled this sort of a potentially aggressive buyback strategy.
02:59The problem, if you like, was that although this number was quite large, almost $6 billion in the last buyback,
03:06they didn't really buy through the market.
03:08They didn't buy, they still bought bonds at a discount.
03:11So if you want to really stabilize rates, we'd argue they'd probably have to be a bit more aggressive in
03:16their buybacks
03:16and basically buy through the market, buy prices higher than mid, basically.
03:20And they didn't do that.
03:21Across America, the way you choose to listen to us.
03:23Good morning, 92.9 FM Boston, 99.1 Nathan Hager Radio in Washington.
03:29Good morning in a beautiful New York, Bloomberg 11.
03:32If you're a dominant constant within with the ZOO, George Noble will join us here at some point this morning
03:38as well.
03:40Dominic, I want to pile into one thing you said there about a good economy,
03:45and that we have a nominal GDP of a banana republic.
03:48Now, there's a set of solutions.
03:51I'm going to call it a four-box outcome, whatever.
03:53There's a set of solutions to how you bring nominal down.
03:57What is the most efficacious way for the Fed to assist to bring nominal GDP down to something, quote-unquote,
04:06normal?
04:06Well, a lot of the nominal GDP growth is oil.
04:09I mean, a lot of the contribution, for example, was very strong state and local government spending, and that was
04:15oil.
04:15I spoke to the BA about that, and they're basically deflators they use that really drive that up.
04:21So I do think it's mainly an oil issue.
04:24Ironically, it kind of is vaguely helpful in terms of debt GDP to have an elevated nominal GDP.
04:29The real concern, I think, is the real GDP, and that if the Fed's hiking to slow the economy and
04:35bring inflation down,
04:37the consumer is kind of teetering a little bit here because they've cut their savings rates so much to accommodate
04:44the oil price rise.
04:45They can't really cut it anymore.
04:47So where are you?
04:47Ferole over at J.P. Morgan.
04:49He's from Chicago.
04:50That's an economic school out there.
04:53It's West Dominic.
04:55Ferole's at 2.75%.
04:57Others are looking for a buoyant consumer.
05:00How quickly and in what level, magnitude, does the consumer crash given the higher rates?
05:06Well, I think a consumer necessarily needs to slow down significantly, and a 100-base point tightening, for example, in
05:12our estimates, would definitely do that.
05:13The problem is the savings rate started at 4.4% this year.
05:17It's currently below 3%.
05:18It's never really been this low on a sustained basis.
05:20And when you look at the measures of underlying inflation, there's actually a negative demand price shock going through the
05:28system at the moment.
05:29Those 200 components that Walsh highlights in the PCE, a bunch of them are showing basically below-trend pricing and
05:36below-trend demand.
05:37That's a negative demand shock, and that will get worse.
05:39Why aren't we raising rates per Drew Mattis of that life and Dr. Constam at Mizzou?
05:46Because we're impatient to wait through supply shocks, and we're going to work off this elevated underlying, even if that
05:53comes at the cause of demand.
05:54The real irony is that Walsh sort of says the dual mandate is in conflict.
05:58Well, I'm afraid I think the dual mandate is in conflict.
06:01It's certainly in conflict in the short term.
06:03If you want to bring down underlying inflation, you're going to see that negative demand shock get worse.
06:07You're going to see a slowing economy, and that's why risk assets are kind of on the back foot until
06:11you sort of get through these next few months.
06:16If he comes out and suggests more one-and-done tomorrow, what does that do?
06:21Well, I think it takes 10-year notes on the way to 5.25% and 5.5%.
06:25I think the market will take it very badly.
06:27I think they need to come out unanimous.
06:28They need to either basically say nothing about how much further they're going to go, or they could be clear
06:34and say that, you know, this is a tightening process, and they're going to basically see it through until inflation
06:38comes down.
06:38That's kind of what the market wants, to stabilize the back end.
06:41And if you don't do that, then they're going to have a whole set of problems, and you go back
06:44to Besson, what does he want to do about it?
06:46We've got a lot of – Chair Walsh has set up a lot of committees and commissions and looking at
06:53this and looking at that.
06:53Do you expect any color from that tomorrow?
06:57Well, I mean, okay, so in a funny way, so the reason why these committees, if you like, task forces
07:04were set up, we thought initially, was to buy the Fed time to get over the mid-term elections so
07:08they didn't have to make difficult decisions.
07:10That seems to have sort of, you know, fallen foul basically of the market, so that's why you've got these.
07:15Now, it's just possible.
07:16I mean, what are the chances that the Fed doesn't raise rates tomorrow?
07:19I mean, the market obviously thinks there's at least 90% they will.
07:21There's a small chance they don't.
07:23If they don't, then one of the reasons why may be because he defers to the committees, and that would
07:28be where they'd come in.
07:29Otherwise, I don't think they should really feature.
07:31I just want to point out, I thought Constance would be selected for a task force.
07:35Yeah.
07:36But I think they took Ira Jersey.
07:38I think that's the way they did it.
07:40It was me or Ira, yeah.
07:41The two of you from Credit Suisse years ago.
07:44So, bring this internationally.
07:46I'm looking at German-French spreads, jaw-dropping.
07:50The 10-year Japanese yield well outside to standard deviation move.
07:56I got the idiosyncratic peso, Philippine peso at 63.
08:00What's the contagion effect of everything happening at the Eccles building?
08:05Well, I think in general, there's this sort of people don't like government debt.
08:10You know, the debt ratios have all sort of deteriorated ever since COVID, and there has never been any proper
08:15fiscal tightening.
08:16So, I think term premium are high everywhere, and there's this pressure, if you like, on central banks to kind
08:21of tighten policy and stabilize those yields since the government's sectors aren't going to do it.
08:29They're not going to tighten fiscal policy enough.
08:31And so, that's basically what the U.S. is not alone in this, and that's why there's pricing, tightening pricing
08:37everywhere.
08:37The only thing for the U.S. is they've probably been a bit behind the curve in terms of other
08:41central banks.
08:42Most of the ECB has been a bit more forceful.
08:44The U.K. is finally catching up in terms of pricing.
08:46The BOJ has been a bit behind as well, but they're going to be tightening as well quite aggressively in
08:51the end.
08:51So, what do you think is the message really should be from Chairman Warsh tomorrow?
08:59If he really wants to go out and set a tone here, what do you think that he should say,
09:04do you think?
09:05Well, I think at this stage, he's got to basically kind of go all in.
09:10I mean, he said in Jackson Hole, underlying inflation is too high, and that was a very, very profound thing.
09:15I think the market kind of was a bit slow to understand how important that was.
09:19Assuming that he genuinely believes that, I think he has to go all in and basically say they're going to
09:24raise rates until the job is done,
09:25and you bring down underlying inflation, and that is a proper tightening cycle that will be finished hopefully by, let's
09:32say, the first half of next year.
09:33The distinction of your research note, Dominic Constam, is the supply shocks and demand shocks perceived by Waller of Washington
09:42State, Minnesota,
09:43the governor, and the chairman, Kevin Warsh, I guess of Stanford, to be polite about it, and of Wall Street.
09:51They're starkly different, aren't they?
09:54To Paul's good question on the dissent, why won't they show dissent tomorrow between the Waller world and the Warsh
10:01world?
10:02It's a risk. I mean, it's definitely a risk.
10:05My guess is a war shall be very persuasive and bring them along, and therefore there won't be any dissent.
10:13But it's definitely...
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