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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 3: It's time for some calm.
Speaker 2: Joining us now the seventy ninth Secretary of the Treasury,
Speaker 2: Skill Besson. Mister Secretary, welcome to the program sir. Let's
Speaker 2: pick up on that theme, not you calm in the markets,
Speaker 2: but on inflation and where rates should be. As Amori
Speaker 2: pointed out, we've had a string of softer th expected
Speaker 2: inflation reads in this country. We've had four, we might
Speaker 2: get five at a thirty Eastern time. Why do you
Speaker 2: believe that's signal and non noise?
Speaker 1: Well, I mean there's some persistence there, Jonathan. And look,
Speaker 1: I do have access to the number of the night before,
Speaker 1: but when I'm coming on TV. I don't look at it,
Speaker 1: so I don't know what the number is going to
Speaker 1: be at eight thirty, and I wouldn't. I don't know
Speaker 1: whether it's going to be down, up, or flat, but
Speaker 1: I wouldn't put too much emphasis on one number. I
Speaker 1: think it's the trend. And I think one thing that
Speaker 1: Wall Street, a lot of economist market in general got
Speaker 1: wrong early on was that tariffs were going to cause
Speaker 1: a substantial price level rise, which just hasn't happened.
Speaker 2: And there are some people on the FMC the Federal
Speaker 2: Reserve still worried about the prospect of that happening. Through
Speaker 2: the summer, We've all sensed the frustration from the White
Speaker 2: House across the administration with FED Chair J Powell, and
Speaker 2: a lot of confusion. I think at this point that
Speaker 2: maybe we can address in this conversation, is firing the
Speaker 2: Federal Reserve Chair under active consideration in the White in
Speaker 2: the Treasury in your administration.
Speaker 1: President Trump said numerous times he's not going to fire J. Powell.
Speaker 1: You know, he's working the refs. And I've said before
Speaker 1: I'm a basketball fan. There are two schools of working
Speaker 1: the refs. There's the Bobby Knight school, and there's the
Speaker 1: Dean Smith School. President Trump seems to prefer the Bobby
Speaker 1: Knight school. And I'll tell you, I went back over
Speaker 1: the weekend and looked, and Bobby Knight won three NCAA championships.
Speaker 3: My hero Dean Smith only won two.
Speaker 2: Then Seat Director Kevin Hassett, I'm not sure what you'd
Speaker 2: call him, but he was asked over the weekend, can
Speaker 2: the FED chair be fired? He said, that's the thing
Speaker 2: this being looked into. How should we understand those comments?
Speaker 1: Look? And I will point out Kevin was a collegiate
Speaker 1: basketball player. And I think, as President Trump said, he's
Speaker 1: not looking to fire Chair Powell. And as I've said,
Speaker 1: I'm not going to come. I'm not going to comment
Speaker 1: on future policy or future mistakes the federal make. I'll
Speaker 1: only comment on past mistakes. And look, they've had some
Speaker 1: big forecasting errors and this may be one.
Speaker 2: Now is there a reason for not firing Kim? And
Speaker 2: I asked that question because the presidents also said that
Speaker 2: his term is about to expire in May of next year.
Speaker 2: Is that the reason to ultimately just wait? Or is
Speaker 2: it something come? So you convinced by the negative consequences
Speaker 2: associates it with such a move.
Speaker 1: Look, I think an independent central bank is very important
Speaker 1: for the conduct of monetary policy, and we can see
Speaker 1: that in terms of both the financial markets, the term
Speaker 1: premium and longer term debt.
Speaker 2: You said previously the interview process would begin later on
Speaker 2: in the fall. There's been plenty of speculation as to
Speaker 2: whether that process would be brought forward, Missus Secretary, do
Speaker 2: you still, as far as you understand, believe that's when
Speaker 2: the interview process to replace the feed che will begin
Speaker 2: in the fall, or as a formal process already started.
Speaker 1: Well, look, there's a formal process that's already starting. There
Speaker 1: are a lot of great candidates, and we'll see how
Speaker 1: rapidly it progresses. It's President Trump's decision and it will
Speaker 1: move at his speed.
Speaker 2: Do you see any merits at all and selecting maybe
Speaker 2: a candidate that's already on the committee on the FMC
Speaker 2: versus taking a look at someone outside of the Federal Reserve.
Speaker 1: Again, there are a lot of good candidates inside and
Speaker 1: outside the Federal Reserve.
Speaker 2: Jonathan has the chairman himself the Fed shat Jake Paw,
Speaker 2: given you any indication whatsoever as to what he would
Speaker 2: do once his term has expired, WILLI f ak as
Speaker 2: the governor at the Federal Reserve.
Speaker 1: Well, traditionally the FED chair also steps down as a governor,
Speaker 1: and there's been a lot of talk of a shadow
Speaker 1: FED chair causing confusion in advance of his or her nomination,
Speaker 1: And I can tell you I think it'd be very
Speaker 1: confusing for the market for a former FED chair to
Speaker 1: stay on.
Speaker 4: Also, mister Treasury Secretary, I love to talk to you
Speaker 4: about what's going on in Video. This morning, Jensen Wang,
Speaker 4: the CEO, out in a blog statement saying that the
Speaker 4: company has quote provided an update to customers, noting that
Speaker 4: in Nvidia is finding applications to sell the H twenty
Speaker 4: GPU again. The US government has assured the company that
Speaker 4: licenses will be granted, and the video hopes to start
Speaker 4: deliveries soon.
Speaker 3: Can you attest whether that.
Speaker 4: That's true or not the United States is willing to
Speaker 4: let Nvidia sell H twenties once again in China?
Speaker 1: Well again, I emrie. I think that'd be a judgment
Speaker 1: that the Chinese indigenous manufacturers, namely Huawei and some others
Speaker 1: already have an equivalent chip. So if there's an equivalent chip,
Speaker 1: then the Nvidia H twenty could be sold because I
Speaker 1: can tell you the one thing that we do not
Speaker 1: want is a digital Belton road springing up around the
Speaker 1: world because other countries or China are substituting for our
Speaker 1: American chip manufacturers.
Speaker 4: This is the same chip though, that the Trump administration
Speaker 4: blocked with export controls in April. So why the change
Speaker 4: in policy now.
Speaker 1: Emery, you might say that that was a negotiating chip
Speaker 1: that we used in Geneva and in London.
Speaker 4: So this was part of the trade talks when it
Speaker 4: comes to Washington and Beijing.
Speaker 3: Yes, was it a quid pro quo then.
Speaker 4: As you said, it wasn't, But was it potentially to
Speaker 4: make sure that you can get the licenses when it
Speaker 4: comes to rare earths.
Speaker 1: I think it was all part of a mosaic. They
Speaker 1: had things we wanted, we have things they wanted, and
Speaker 1: we're in a very good place. I expect to meet
Speaker 1: my Chinese counterpart, the vice premiere, in the next few weeks.
Speaker 4: So when and where will that meeting take place.
Speaker 1: We're still working on that. The Chinese leadership has a
Speaker 1: big conclave at the beginning of August, so we're trying
Speaker 1: to work out whether that could be in a third
Speaker 1: country before or after that conclave.
Speaker 4: Well, the administration released the framework of the Geneva and
Speaker 4: London talks.
Speaker 1: Well, we have released some of it, and I'll tell
Speaker 1: you that now having settled on tariffs on the export controls,
Speaker 1: we can move on to the next stage of talks.
Speaker 1: And I think it's very important both for the global economy,
Speaker 1: for the US economy and for the Chinese economy, for
Speaker 1: US to move on and talk about China opening its
Speaker 1: market and the increase domestic and consumer production.
Speaker 5: There.
Speaker 4: Are you hoping to get to that next phase before
Speaker 4: August twelfth, when that's currently the day taunt between these
Speaker 4: two economies.
Speaker 1: Yeah, Look, I think we're in a very good place.
Speaker 1: And I tell market participants not to worry about August twelfth.
Speaker 5: Should they worry about what's happening with Europe with respect
Speaker 5: to thirty percent teriff rate? They don't seem to be worrying.
Speaker 5: But I'm just curious whether that's the final rate or
Speaker 5: whether the letter was part of a negotiation that Europe
Speaker 5: received from President Trump.
Speaker 1: Well, Lisa, you know what I would say is President
Speaker 1: Trump's able to create a lot of leverage here, a
Speaker 1: lot of leverage because he's indifferent. He's indifferent whether we
Speaker 1: take in the thirty percent rate or whether the Europeans
Speaker 1: come to us with a much better deal. As I've
Speaker 1: been saying for a while that if countries or trading
Speaker 1: blocks don't come with their best deals, then the rates
Speaker 1: could boomerang back. So President Trump's leading this, And what
Speaker 1: I will tell you is that a lot of the deals,
Speaker 1: and this is where his leadership has been invaluable. A
Speaker 1: lot of the deals that I thought were excellent deals
Speaker 1: keep getting improved upon every time he takes up the
Speaker 1: maximum pressure strategy.
Speaker 5: There is a theory in markets, and you don't even
Speaker 5: have to calm them.
Speaker 3: They're pretty calm.
Speaker 5: They're watching all of these rates and they're not freaking
Speaker 5: out in parlance on Wall Street. They're taking this in stride.
Speaker 5: We're close to all time highs, if not at all
Speaker 5: time highs. Do you see this as giving a green
Speaker 5: light to Trump? To President Trump to keep going, to
Speaker 5: take hardline approaches and to keep trying to get better
Speaker 5: and better deals.
Speaker 1: Look, I think this narrative of this subsessive focus on
Speaker 1: the market isn't right. President Trump views this as a
Speaker 1: generational opportunity to reset trade in a fair and sound
Speaker 1: manner for the American people. So the idea that some
Speaker 1: market ups or downs are going to be the deciding
Speaker 1: factor here. What we are concerned about, and President Trump
Speaker 1: is laser focused on, is getting the best deals because
Speaker 1: we were not having fair trade and now we're seeing
Speaker 1: with these countries coming to the table, the quality of
Speaker 1: the deals gets better and better. So we're not going
Speaker 1: to rush just because of some market deadline. Now. I
Speaker 1: think what the market's seeing is market's willing to look
Speaker 1: forward three, six, twelve months and this is going to
Speaker 1: be good for the US, is going to be good
Speaker 1: for the global economy.
Speaker 5: If you do get some sort of signal from the
Speaker 5: market though that this isn't going to be good for
Speaker 5: the US economy, Is there a trigger point? Is there
Speaker 5: sort of a sense at which it acts as a
Speaker 5: gut check and sort of pulls back some of them
Speaker 5: to negotiating tactics.
Speaker 1: Look, I think that the market understands what we're doing.
Speaker 1: Sometimes individual market people don't. Sometimes the television personalities don't.
Speaker 1: But good thing about President Trump is he always tells
Speaker 1: you what he wants and what he wants this fair
Speaker 1: trade here.
Speaker 4: I won't take that as a slight on me and
Speaker 4: my colleagues around the table, mister Treasury Secretary, But you
Speaker 4: did tell me on April second, on Liberation Day, that
Speaker 4: this was the ceiling when it comes to those rates.
Speaker 4: But since then we have actually had some tariff rates
Speaker 4: the President announced in letters higher than those rates he
Speaker 4: announced on that big chart on April second. So is
Speaker 4: there no longer a ceiling when it comes to tariff rates?
Speaker 4: When you are dealing with trading partners.
Speaker 1: I think that I said, if they come and they
Speaker 1: negotiate in good faith in those are ceilings. And some
Speaker 1: of the talks got off to very slow starts.
Speaker 4: So who's negotiating good faith at this moment? Who's not?
Speaker 1: Again? I congratulated the UK the other day, as I
Speaker 1: told many of our trading partners, and Anne Marie I
Speaker 1: may have said on that day or a few days
Speaker 1: after April second, I'd advise countries to move quickly because
Speaker 1: the President Trump the first deals are usually the best deals,
Speaker 1: and the UK came in early, they got a great deal,
Speaker 1: and everybody else is kind of dragging right now.
Speaker 4: Well, when it comes to Japan, you're headed there at
Speaker 4: the end of this week, do you expect to come
Speaker 4: back with a deal.
Speaker 1: I'm going to Japan to represent the United States government
Speaker 1: and the American people at the International Expo, which we
Speaker 1: used to know as the World's Fairs. So this coming
Speaker 1: Saturday is going to be America's Day and I'll be
Speaker 1: taking a delegation includes the Labor Secretary, Deputy Secretary of
Speaker 1: State will be representing the US. So this is a
Speaker 1: celebration of the US more than trade.
Speaker 3: Talks, MISSUS Secretary.
Speaker 2: Before you go, just to final question, I'm embarrassed to
Speaker 2: say that my knowledge of college basketball is nothing like yours,
Speaker 2: but I can tell you back in the nineties in
Speaker 2: English football, there used to be a concept of player managers.
Speaker 2: There used to be certain managers of football teams that
Speaker 2: also put themselves on the field, and they play too effectively.
Speaker 3: They had two jobs.
Speaker 2: And I'm wondering, from your perspective, whether that's something you'd
Speaker 2: be interested in.
Speaker 3: We've seen that throughout the administration.
Speaker 2: Is that something you think that you could pursue both
Speaker 2: the Treasury Secretary and the Fed chap.
Speaker 1: Look, I think I have the best job in town.
Speaker 1: I will do what President Trump wants. We got a
Speaker 1: lot of great fed candidates, and I'm confident it's going
Speaker 1: to be a robot process.
Speaker 2: Jonathan has he asked you, what's that? Has he asked you?
Speaker 2: Are you part of the process.
Speaker 1: I am part of the decision making process, but again
Speaker 1: it's the final decision is going to be President Trump's.
Speaker 2: Mister Secretary. I appreciate time. Thank you, the Treasury Secretary.
Speaker 2: There scale beston on a range of issues, including trade
Speaker 2: and the future of this Federal Reserve. Inflation data too
Speaker 2: at eight thirty Eastern time, about an hour away joining
Speaker 2: us now as Sarah Hunt of Alpine Saxon words, Sarah
Speaker 2: and Mornic.
Speaker 6: Good morning.
Speaker 3: Is inflation dead?
Speaker 6: I think it's quiet at the moment, but I wouldn't
Speaker 6: completely rule it out. I think that there's some possibilities
Speaker 6: that it could pick its head up. But I think
Speaker 6: that it's hard for people to anticipate data when we
Speaker 6: spend a whole lot of time anticipating a bunch of
Speaker 6: stuff that didn't happen. So I think there's a little
Speaker 6: bit of fatigue there. So it's hard to say right now.
Speaker 2: It's difficult to forecast. There's still some debate over the data.
Speaker 2: We've already had, what's underpinning the softer than expected reads
Speaker 2: and why won't it last?
Speaker 6: So if we think about whether or not companies did
Speaker 6: pull a huge full of inventory forward and or people
Speaker 6: started changing their behavior because they knew what was coming,
Speaker 6: you can argue why that's soft now and why it
Speaker 6: should rise if the rates are going higher. But you
Speaker 6: still see these moving of the goalposts in terms of timing,
Speaker 6: which allows companies to bring inventories back in again and
Speaker 6: refresh that. So I could see a lot of bumpiness
Speaker 6: in the data. And I also think that companies have
Speaker 6: had a lot of time to prepare for this. And
Speaker 6: if I'm sitting there, I want my margins to stay
Speaker 6: where they are, so I'm going to try to do
Speaker 6: whatever substituting i can. So I also think that there's
Speaker 6: probably a lack of understanding how much of that substitution
Speaker 6: has gone on, and I think that that is why
Speaker 6: it could be bumpier and less dramatically higher than people
Speaker 6: are expecting because they're expecting a really fast move.
Speaker 5: I just wonder, can we expect immaculate disinflation ongoing immaculate
Speaker 5: disinflation where there is no pain in the overall economy
Speaker 5: at the same time that inflation is dead. Does that
Speaker 5: seem consistent with you or is there kind of a
Speaker 5: tension right now between employment data that's pretty okay, albeit
Speaker 5: with very slow activity, and inflation that seems to be maybe,
Speaker 5: if not dead in hospice.
Speaker 6: It is one of those periods of time wherein figuring
Speaker 6: out what that data means is going to be tricky.
Speaker 6: It remains tricky. The earnings are going to matter for
Speaker 6: the stock market. Inflation's going to matter to some degree,
Speaker 6: but only if it's really surprising or gets much higher
Speaker 6: than people are looking for, and then people start to
Speaker 6: investors really start to worry. The question is what are
Speaker 6: those trends look like. I mean, to Treasury Secretary Vessin's point,
Speaker 6: it's not just about one number. It's about where the
Speaker 6: trend is going. If it looks like the trend is reversing,
Speaker 6: investors are going to like that a whole lot less.
Speaker 5: Do you just not pay attention to the data at all?
Speaker 5: And by ai Biden video and just you know, call
Speaker 5: it a day.
Speaker 6: It would have been the good trade for this year, right.
Speaker 6: I mean, that's sort of what happened, is that you
Speaker 6: had alldes concern about II going into the beginning of
Speaker 6: the year. Then you had the trade situation. Everybody started
Speaker 6: looking at every single earnings call from Microsoft or every
Speaker 6: hyperscaler to parse exactly what they're spending was going to be.
Speaker 3: There was this little bit of.
Speaker 6: Freak out and then everybody got over it really quickly.
Speaker 6: So that would have been that reversal, and that goes
Speaker 6: back to the idea that the companies that have growth
Speaker 6: and the companies that generate a ton of cash and
Speaker 6: have good margins are the places that they end up
Speaker 6: performing better than the rest of the market.
Speaker 4: Anyway, it would have been good to get in on
Speaker 4: Nvidia just last night, given the fact that they have
Speaker 4: a blog post out saying that those eight twenty chips
Speaker 4: at this administration and blocked are now going to be
Speaker 4: able to go to China.
Speaker 3: How do you.
Speaker 4: Deal with this basically flip flop almost within weeks or
Speaker 4: months of this administration when you're trying to direct what
Speaker 4: to do in a portfolio.
Speaker 6: Well, I mean, flip flop is an interesting term. I
Speaker 6: think it's more about I mean, again to Treasury point,
Speaker 6: it's changing those dynamics may have been part of that
Speaker 6: discussion all along. So you have to assume that some
Speaker 6: of the things that are coming out as X or
Speaker 6: Y maybe x or Y under certain circumstances. But if
Speaker 6: I change my mind, they're going to be different. So
Speaker 6: that's got to be And I don't think that that's
Speaker 6: entirely different from things that the way the world works anyway,
Speaker 6: but I think that certainly in the near term, this
Speaker 6: administration has been much different about market changes than other administrations.
Speaker 2: It's not just in Nvidia, it's AMD, just Crossing resuming
Speaker 2: ship chip shipments to China, wants their license clears that
Speaker 2: stock is off in the free market as well.
Speaker 5: Look, China's a big business for all of these chip providers,
Speaker 5: and the key question is can they understand the rules
Speaker 5: of the game enough to create chips that are compliant
Speaker 5: with some of the constraints that have been put on
Speaker 5: them from the US government.
Speaker 2: Sarah, it's good to see you, Sarah Hunt, Vampoint, Snacks
Speaker 2: and Woods. I want to bring a NILT data of
Speaker 2: Renaissance Macro Neil. Welcome to the program, sir. That's not four,
Speaker 2: it's five. Why is that signal and not noise?
Speaker 7: Well, I mean I think look, we're obviously tariff revenues
Speaker 7: are going up, right, and the effective tariff rate is rising.
Speaker 7: That was the case in June. And despite that, inflation
Speaker 7: missed expectations. So that means that I mean tariff's increased costs.
Speaker 7: We all know that who ends up bearing the cost
Speaker 7: is where the debate is. And you know, I think
Speaker 7: at the margin, this probably reflects more of a margin
Speaker 7: squeeze than anything else. It's not like prices for core
Speaker 7: goods aren't going up. They are, but you have you know,
Speaker 7: I mean, I was just looking at the data. You
Speaker 7: see big increases in appliances, you see big increases in
Speaker 7: all sorts of household furnishing and supplies. But it's also
Speaker 7: important to remember that service sector inflation. Service sector prices
Speaker 7: represents the lion's share of what people spend their money on,
Speaker 7: and prices in those areas continue to go down. You know,
Speaker 7: ultimately it's going to come down to nominal dollars spent, right,
Speaker 7: So to the extent that people shift more of their
Speaker 7: household budgets towards goods because the prices of those things
Speaker 7: are going up, they'll have less leftover to spend elsewhere,
Speaker 7: and that means that services are at risk and that's
Speaker 7: why they'll ultimately see the prices for those things coming down.
Speaker 7: So that to me seems to be what's going on.
Speaker 7: The nominal anchor isn't changing to tariffs are resulting in
Speaker 7: a relative price shift that's pushing up the prices for
Speaker 7: consumer goods. That is clear if you look at the data.
Speaker 7: That's obvious. Look at just look at household furnishings in
Speaker 7: the latest report. But services are providing an important offset.
Speaker 2: No is that a good enough reason for two FED
Speaker 2: governors on the FMC later on this month to shake
Speaker 2: their hand up and say, I think we should count rights.
Speaker 7: I mean, I don't think they'll be as noisy about
Speaker 7: it in July, only because you know, the last employment
Speaker 7: report gave them some colm, right, because the unemployment rate
Speaker 7: went down. But you know, ultimately, you know, for me,
Speaker 7: it's about you know, what is nominal income doing. When
Speaker 7: you take like the sum product of jobs, hours and
Speaker 7: earnings and you look at it over the last several months,
Speaker 7: it doesn't look particularly encouraging. At the same time, you've
Speaker 7: seen the work week decline, particularly in the areas that
Speaker 7: are seeing the most robust jobs growth, like education and health. Right,
Speaker 7: So if you start to see jobs in those areas
Speaker 7: slow down what's left, So you know, I still continue
Speaker 7: to have like concerns about the job market over the summer,
Speaker 7: but that just reinforces this weakness and nomenal income that
Speaker 7: we've seen. So ultimately, you know, it all comes down
Speaker 7: to like the household budget constraint and to the extent
Speaker 7: that prices arising in one area, that means that quantity
Speaker 7: is going to go down in other areas.
Speaker 5: So Neil, just to sort of sum up what you've
Speaker 5: been talking about, I think it's really interesting that you
Speaker 5: see these numbers as not representing strength in the economy,
Speaker 5: but a sign of weakness in places like services that
Speaker 5: is bringing down the overall inflation rate that otherwise is
Speaker 5: getting inflated by certain goods prices going up like home appliances.
Speaker 5: At what point is that weakness necessary to keep inflation low?
Speaker 5: In other words, not necessarily a reason for the FED
Speaker 5: to cut, but to hold where they are so that
Speaker 5: you can have that offset in a way that doesn't
Speaker 5: allow inflation to really kick back up.
Speaker 7: I mean, I don't think one rate cuts really going
Speaker 7: to change that in any in any material way. I mean,
Speaker 7: the FED policy is still restrictive. That means they can
Speaker 7: they can start and they'd still be restrictive. It doesn't
Speaker 7: they don't have to promise like a broad sloth of
Speaker 7: raid cuts. In fact, they're not doing that. So you know,
Speaker 7: I don't think a rate cut in July or even
Speaker 7: one in September is going to materially, you know, change
Speaker 7: that dynamic.
Speaker 2: If you are just joining us, welcome to the program.
Speaker 2: Equity is high here the open in about about fifty four
Speaker 2: minutes away MONMTHENTS ago inflation data in the United States
Speaker 2: month of a month headline CPI are from zero point
Speaker 2: one percent the previous month to zero point three, in
Speaker 2: line with expectations. But for cour CPI it's another downside surprise,
Speaker 2: zero point two percent against an expectation of zero point three.
Speaker 2: It's five consecutive months of softer than expected core CPI.
Speaker 2: MI mckey's back with us for more. Mike, you've had
Speaker 2: a second look. What jumps out to you?
Speaker 8: Well, I think Neil pointed out the major tariff implications here.
Speaker 8: We do see a four ten percent rise in apparel
Speaker 8: overall and a significant rise in foot where up seven
Speaker 8: tenths of a percent. Mail footwear in particular. Now those
Speaker 8: things come from China. Other things coming from China that
Speaker 8: go up or from other Asian countries. Furniture, as he mentioned,
Speaker 8: was up four tenths of eight percent, household furnishings up
Speaker 8: one percent, and appliance is up one point nine percent.
Speaker 8: They were up eight tenths of a percent last month.
Speaker 8: A lot of this probably has to do with the
Speaker 8: tariffs on steel. We saw that when we had the
Speaker 8: steel tariffs in the first Trump administration that appliance prices
Speaker 8: went up. Food three tenths of eight percent. Still in line.
Speaker 8: President added extra tariffs on tomatoes yesterday, but in June
Speaker 8: they were down one and a half percent, and I
Speaker 8: know a Marie is anxious to know that eggs were
Speaker 8: down seven point four percent. One other thing that comes
Speaker 8: in for the China aspect of it is toy prices
Speaker 8: up one point eight percent. So we are seeing some
Speaker 8: tariff pass through here. But again I would look at
Speaker 8: what Neil was saying about service prices. They were relatively restrained,
Speaker 8: up three tenths of eight percent. We saw medical care
Speaker 8: and auto insurance prices very tame this month. So some
Speaker 8: of the things that we had seen pushing up inflation
Speaker 8: in the services categories have backed off for a while,
Speaker 8: at least.
Speaker 3: By McKay, Thank you, sir.
Speaker 2: Equity high in response to some of this, we'ren by
Speaker 2: four tenths of one percent on the SMP yields a
Speaker 2: little bit lower. Across the bond market, the yield curve
Speaker 2: looks like this tenure yields this morning, down by two
Speaker 2: basis points, similar move on a thirty. So you don't
Speaker 2: see the tariff inflation on a headline, but you start
Speaker 2: to see it just a little bit beneath the surface, and.
Speaker 5: You start to see what the response function is of
Speaker 5: households that they might be cutting back maybe on eating
Speaker 5: out to compensate for the increased costs elsewhere, which you
Speaker 5: wonder on a compositional level, whether this tamps down overall
Speaker 5: inflation even as you see pockets of higher prices in
Speaker 5: select areas. Is that the path of travel or is
Speaker 5: that just the current state of affairs as people take
Speaker 5: stock of exactly what do scenariois.
Speaker 2: We can have that discussion right now with David Kelly
Speaker 2: of JP Morgan Assa Management. David, Welcome to the program, sir.
Speaker 2: How much comfort can you take from this morning's inflation data.
Speaker 9: And not a lot.
Speaker 10: It's a very interesting report because you can see sort
Speaker 10: of the fading of issues that were causing inflation over
Speaker 10: the last few years, but you can also see the
Speaker 10: beginnings of the inflation problem related to tariffs. So if
Speaker 10: you look at owner's equivalent BREND to auto insurance, those
Speaker 10: are the things that really held inflation up and they're
Speaker 10: going away. And the other thing that really helped this
Speaker 10: report is we had a further decline airline fares, a
Speaker 10: further decline in lodging prices. There's a lot of weakness
Speaker 10: in the tourism industry right now and that's in this report.
Speaker 10: But when you look at core goods outside of new autos,
Speaker 10: we're seeing those goods prices go up, and that's where
Speaker 10: you're going to see this tariff inflation. And we have
Speaker 10: only seen the thin end of the wedge here. It
Speaker 10: takes a while for the tariffs to get it to
Speaker 10: be implemented, takes a while for the revenue to be collected,
Speaker 10: takes a while for the inventory to make it to
Speaker 10: people's shelves, takes a while for the retailers to say, look,
Speaker 10: I'm going to have to mark it up.
Speaker 9: But it is coming.
Speaker 10: So I fully agree with the Fed's forecast that inflation
Speaker 10: is going to go up between now and the end
Speaker 10: of the year, and they've got to stay on their guard.
Speaker 2: And yet, David, they also believe it starts to come
Speaker 2: back down again. In fact, for that reason, some officials,
Speaker 2: including Governor Waller, believes you can look through it.
Speaker 3: Do you think you can just look through it?
Speaker 10: Not yet, because we also have a lot of fiscal
Speaker 10: sugar in the first half of next year. What's going
Speaker 10: to happen is that we had a lot of temporary
Speaker 10: tax breaks put in for four years, but they start
Speaker 10: at the start of this year. They're not going to
Speaker 10: adjust in contact with holding schedules quickly enough. That means
Speaker 10: a bumper season for refunds early next year. And you know,
Speaker 10: we know from twenty twenty two that you've got supply
Speaker 10: chain issues and then you give consumers a lot of
Speaker 10: extra cash. What happens you end up with inflation. I mean, eventually,
Speaker 10: I think it will fade a long run. I am
Speaker 10: not an inflation hawk in America. I think inflation will fade,
Speaker 10: but I think it's going to be sustained by some
Speaker 10: of the provisions of the OBBBA.
Speaker 9: And because of that, I think the Fed needs to
Speaker 9: hold off here.
Speaker 10: If we got clarity on tariffs, if we could say
Speaker 10: this is what the terror are and they will go
Speaker 10: no higher, then I think that makes it easier for
Speaker 10: the Fed. So, you know, I think the administration really
Speaker 10: needs to think about, Look, could we please whatever the
Speaker 10: tariff policy is, let's make it and be done with it.
Speaker 10: Because this uncertainty is the very thing that's making it
Speaker 10: impossible for the Federal Reserve to say that that we're
Speaker 10: out of the woods or will be out of the woods.
Speaker 5: And inflation, David, is there a sort of a necessary
Speaker 5: weakness that we need to see in consumer spending and
Speaker 5: services at this point to make sure that inflation doesn't
Speaker 5: take off? In other words, that pain that you know
Speaker 5: was talking about, you can start seeing in the data
Speaker 5: on the margins.
Speaker 10: Well, that's a tough way to do it, I mean,
Speaker 10: the way you want to if you're worried about a
Speaker 10: long term inflation problem, it's only going to become because
Speaker 10: wage growth sort of compensate for price increases. Now, we
Speaker 10: still have a relatively weak labor force in terms of
Speaker 10: their ability to demand wage increases. You know, I think again,
Speaker 10: we have to think a little bit about it, how
Speaker 10: immigration is affecting labor supply, and again there's huge question
Speaker 10: marks there. As long as we don't see an acceleration
Speaker 10: in wage growth, the inflation will fade. It's not just
Speaker 10: a matter of consumer spending being weak. So long as
Speaker 10: wage growth is controlled, inflation will fade again. But I
Speaker 10: think it's way too early to say that. You know,
Speaker 10: inflation's coming down to two percent. We've still got to
Speaker 10: get past tariffs. We've got to get past the steamers
Speaker 10: of effects of this fiscal bill, and that's really what's
Speaker 10: causing the delay in any further FED easing.
Speaker 3: No doubts have run MAAX still with us.
Speaker 2: No, today's about prices, Thursdays about spending. Let's talk about
Speaker 2: retail cells. How do you expect some of our understanding
Speaker 2: of prices this morning to show up in spending in
Speaker 2: retail cells light to this week?
Speaker 7: Well, I mean, if goods prices are rising and the
Speaker 7: consensus expects nominal retail sales to rise three tenths, that
Speaker 7: basically tells you that real spending on goods is declining.
Speaker 7: That's not exactly an encouraging situation. So you know, I
Speaker 7: mean the fact that price increases are showing up, and
Speaker 7: you know, it's more or less matching what you see
Speaker 7: in the retail sales data. That base simply tells you
Speaker 7: that the volume of good souls is going down. Look,
Speaker 7: it comes back to P times Q whatever. You know,
Speaker 7: whatever goes into price is going to come out of
Speaker 7: quantity because the nominal anchor hasn't really changed. So you know, look,
Speaker 7: I mean, I think consumers are actually quite resistant to
Speaker 7: higher prices. With the exception of the University of Michigan data,
Speaker 7: if you look at you know, other estimates for inflation expectations,
Speaker 7: whether that's the New York FED Survey of Consumer Expectations,
Speaker 7: Atlanta FED Business Inflation expectations, professional forecasters inflation expectations, it
Speaker 7: suggests that, you know, people are resistant to higher prices
Speaker 7: and they're acting as if you know, if you look
Speaker 7: at the areas where people have been cutting back their consumption,
Speaker 7: those are the areas where the prices have been going
Speaker 7: up the most. So it's not particularly surprising. And the
Speaker 7: labor markets remain still in a tricky spot. You know,
Speaker 7: while the unemployment rate remains low, you still have you know,
Speaker 7: a rising increase in you know, discourage workers, you know,
Speaker 7: people that are out of the workforce but want a job. Now,
Speaker 7: you know, companies are telling you, like the small businesses
Speaker 7: are saying that there's uh, you know, poor sales are
Speaker 7: bigger concerns. So you know, I think that that probably
Speaker 7: reinforces ongoing weakness in wage growth. And you know that
Speaker 7: means that households don't really have the capacity to absorb
Speaker 7: higher prices, and that means that to cut back no, And.
Speaker 3: It's a good point.
Speaker 5: And David, I guess said, if you take what Neil
Speaker 5: is saying, the idea that you do see world price
Speaker 5: resistance by consumers, and if you do see this sort
Speaker 5: of compensating for the extra expense and goods by pulling
Speaker 5: back on services, what would the harm be for the
Speaker 5: FED to cut rates by just twenty five basis points
Speaker 5: or fifty basis points.
Speaker 10: Well, any you know, any problems the economy is facing
Speaker 10: is not really about interest rates being too high.
Speaker 9: And I think that I think, you know, I think
Speaker 9: we have to think carefully.
Speaker 10: About long term policies, about helping the labor force grow,
Speaker 10: about helping free enterprise and reduce regulation and reduce barriers
Speaker 10: to business. And I think we need to focus on that.
Speaker 10: I don't think the interest rates are too high right now.
Speaker 10: I think the Fed's the steward of the dollar and
Speaker 10: of our inflation outlook in the long run, and they've
Speaker 10: said their commisioned to two percent inflation.
Speaker 9: I think they should stick to their guns.
Speaker 10: And you know, if the call them gets into trouble,
Speaker 10: it's not because they kept rates too high.
Speaker 2: No, I just want to give the final word just
Speaker 2: on housing, which is something you've been following now for
Speaker 2: months and months and months and flanking the weakness here.
Speaker 2: Why is that so important to you, Neil.
Speaker 7: Well, because it undercuts the argument that was just made,
Speaker 7: which is that you know that interest rates are fine, right,
Speaker 7: I mean obviously housing isn't weakening because of tariffs or
Speaker 7: anything else. Housing is weakening because rates are too high.
Speaker 7: And you're seeing, you know, a rising pile of completed
Speaker 7: new unsold inventory. I mean that hasn't been as high.
Speaker 7: That's that's been rising, you know, over the last year
Speaker 7: or so, and that's starting to weigh on home prices,
Speaker 7: which we see, so you know, I think think that
Speaker 7: the housing market does provide some evidence that interest rates
Speaker 7: are restraining economic activity.
Speaker 2: Is that the FETs fault, or is that the fault
Speaker 2: of Congress Nail.
Speaker 9: The reason we're seeing that?
Speaker 10: Sorry, sorry, The reason the reason I've got trouble in
Speaker 10: the housing market is not because rates are too high now,
Speaker 10: because rates were way too low for way too long
Speaker 10: after the Great Financial Crisis, causing prices to jack up
Speaker 10: to a level that cannot be supported at normal mortgage ing.
Speaker 10: It's nothing wrong with mortgage it's the problem is home prices,
Speaker 10: which are too high because rates were too low for
Speaker 10: too long.
Speaker 7: Well, mortgage rates are running six and a half to
Speaker 7: seven percent and wage growth is rising just three percent,
Speaker 7: so I think the math is actually getting quite challenging
Speaker 7: for most people. That's why housing is not working.
Speaker 1: Well.
Speaker 10: It's challenging, but only because home prices are the anomaly here.
Speaker 10: They're just too high because rates were too low for
Speaker 10: too long.
Speaker 2: I'm sitting back that, gents, I thought you'd continue no
Speaker 2: doubts of Rammack, David Kelly, a JP Morgan, So the
Speaker 2: two of you appreciate it.
Speaker 3: Thank you.
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