Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, we're here in Jackson Hole.
Speaker 3: It's nice to be back.
Speaker 2: It's really nice to be back. So this is the
Speaker 2: second year we've come to the Big Kansas City FED
Speaker 2: Economic Policy Symposium, and I think it's fair to say,
Speaker 2: you know, we heard Powell this morning, there's a certain
Speaker 2: era of like victory.
Speaker 3: Right, Yeah, the vibe has shifted. I think last year
Speaker 3: there was a little bit more I guess comfort with
Speaker 3: the idea of inflation coming down, at least compared to
Speaker 3: the year before. So remember two years ago was the
Speaker 3: famous Powell speech here in Jackson Hole where he stood
Speaker 3: up and he basically said there's no way we're going
Speaker 3: to get inflation down without a degree of economic pain,
Speaker 3: i e. A pickup in the unemployment rate, job losses,
Speaker 3: that sort of thing. And now fast forward two years
Speaker 3: and he basically announced that it's time for rate cuts.
Speaker 3: And it wasn't a victory lap necessarily, but he sort
Speaker 3: of walked through how and why he thinks inflation has
Speaker 3: come down without those job losses.
Speaker 2: That's right, and of course we've seen that tick up
Speaker 2: in the unemployment rate, not through big layoffs however, so
Speaker 2: there's not been a major degree of cuts. But the
Speaker 2: other aspect of that is, like, you know, there was
Speaker 2: some expectation that to balance the economy achieve the inflation mandate,
Speaker 2: there would have to be some loosening of the labor market.
Speaker 2: But what he said, and I think it was the
Speaker 2: second line of the whole speech, is we don't want
Speaker 2: to see anymore we're good ones at this point. The
Speaker 2: risks to the labor market are what we're primarily concerned with,
Speaker 2: and we do not need to see any more weakness
Speaker 2: to be confident that inflation is no longer a major risk.
Speaker 3: Yeah, so the focus has certainly shifted from upside inflation
Speaker 3: risk to downside labor market risk. But this opens up
Speaker 3: a whole new set of issues and things that we
Speaker 3: need to discuss, and I guess everyone's going to be
Speaker 3: focused on a slightly different set of economic indicators going forward.
Speaker 2: Right, So now the question is like, okay, if you
Speaker 2: accept that the primary risk for the FED and Paul
Speaker 2: s edit, so it is is now protecting against further
Speaker 2: weakness in the labor market. What does that look like?
Speaker 2: Because yes, we know now basically for certain data rate
Speaker 2: cut is coming in September, but there are still all
Speaker 2: types of questions about the size of the cut, how
Speaker 2: many cuts, the sequencing, et cetera. And from a market
Speaker 2: perspective in particular, I would say this is actually still
Speaker 2: a very live and open question.
Speaker 3: No, absolutely, and the other thing that's happening, and we
Speaker 3: should get into this. But the FED has said so
Speaker 3: many times that it's data dependent now, and so if
Speaker 3: you say you're data dependent and you're really focused on
Speaker 3: what's going on in the labor market, then that's like
Speaker 3: a combination for everyone to be watching that next jobs
Speaker 3: report as an indicator of whether or not we get
Speaker 3: twenty five or fifty BIPs, or if it comes in
Speaker 3: better than expected, maybe you don't get a rate cut
Speaker 3: at all. I don't know.
Speaker 2: I guess nothing is locked in stone.
Speaker 3: Everything is possible.
Speaker 2: Anyway, I'm very excited. We have the perfect guest today,
Speaker 2: someone that we have had on odd lots several years
Speaker 2: ago talking about similar stuff, including I think it was
Speaker 2: a discussion about how you even ascertained the neutral rate
Speaker 2: of interest. But we're going to be talking about the
Speaker 2: question of what will this rate cut cycle look like
Speaker 2: that we're all expecting. So we were speaking with Peter Williams.
Speaker 2: He is the managing director of macro Research and Central
Speaker 2: Bank Policy at twenty two V Research. Previously he had
Speaker 2: been at the IMF, he was at Evercore. He lives
Speaker 2: in Bozeman, Montana. He just sort of drove down here
Speaker 2: to meet with us, do some fly fishing here in
Speaker 2: Jackson Hole, and also meet with us. She was not
Speaker 2: in the room, but Tracy and I weren in the
Speaker 2: room either. So we're all reading this speech. So Peter,
Speaker 2: thank you so much for coming on out locked. It's
Speaker 2: nice to meet you here. It's nice to see you here.
Speaker 4: Nice to meet you guys. Nice to be down and.
Speaker 2: We an intermitted person right before it was the first.
Speaker 4: Time we got We had to meet on a fishing
Speaker 4: boat ramp.
Speaker 2: Not so bad, Yeah, not too bad. So you've been
Speaker 2: writing even prior to the speech this morning, talking about like, okay,
Speaker 2: the rate cut cycle is clearly coming into view. How
Speaker 2: do you begin to think about the question? You know,
Speaker 2: twenty five fifty both seem kind of live at this point.
Speaker 2: How do you start trying to ascertain like what this
Speaker 2: looks like.
Speaker 4: Yeah, so I think you know the starting point is,
Speaker 4: you know, Powell says, obviously we're getting some cuts. They're
Speaker 4: starting soon. I would say, while Tracy wants to keep
Speaker 4: every possibility open, they're going to cut in September, and realistically,
Speaker 4: in the vast majority of cases, they're also probably cutting
Speaker 4: in November and December two. I think just penciling in
Speaker 4: some degree of front loading, because when you're in a
Speaker 4: risk management mode usually you move a little bit more
Speaker 4: aggressively than when you're in just kind of minding the
Speaker 4: base case. We were minding the base case in like
Speaker 4: twenty seventeen, twenty eighteen, policy was slow gradual the last
Speaker 4: three and a half years, right since COVID hit in
Speaker 4: different ways, you've been minding the extreme tales in both directions,
Speaker 4: and now we're starting to worry more about the downside.
Speaker 4: So you know, maybe base case from listening to thegitality
Speaker 4: of FED speak besides just Powell kind of still sounds
Speaker 4: like a fit a twenty five, but especially if the
Speaker 4: labor market data comes in a little bit softer than expected.
Speaker 4: All eyes on this sort of August payroll print for sure,
Speaker 4: but also the job was claims data as well, sort
Speaker 4: of cumulating over time. Yeah, I think it's a fifty
Speaker 4: certainly seems very possible and maybe even prudent. But I'm
Speaker 4: also not the guy in the room making the decisions.
Speaker 3: Well, just on that note, are there pros and cons
Speaker 3: to twenty five BIPs versus fifty BIPs? So, for instance,
Speaker 3: maybe you want to be early and proactive, so you
Speaker 3: cut by fifty bases points. But on the other hand,
Speaker 3: I might imagine that there would be some investors or
Speaker 3: some people in the market who think, oh, the Fed's
Speaker 3: really worried about the labor market and that's why they're
Speaker 3: cutting so dramatically in September. It seems like there are
Speaker 3: benefits and all so downsides for each of those moves.
Speaker 4: Yeah, I think at this point, with Powis saying that
Speaker 4: we're no longer really worried about inflation on the inflation
Speaker 4: expectation side or labor market driven inflation, the case for
Speaker 4: sort of not fifty to some extent, like not pretty
Speaker 4: aggressively front loading, you know, largely boils down to sort
Speaker 4: of institutional inertia. They tend to move relatively slowly unless
Speaker 4: you're in the midst of a very deep financial crisis
Speaker 4: or something like COVID. You know, these mid cycle adjustments,
Speaker 4: at least hopefully that's what this is that we've had
Speaker 4: before have tended to be relatively gradual and small in nature,
Speaker 4: so like you don't often get these very large drops
Speaker 4: and rates in relatively stable times. But against that is,
Speaker 4: we know rates are very high, we know interest rate
Speaker 4: sensitive parts of the economy have been struggling for a
Speaker 4: year and a half or two years now, and so
Speaker 4: the case sort of against fifty feels more of like
Speaker 4: an institutional one and sort of a desire not to
Speaker 4: spook market participants. But like we all kind of see
Speaker 4: the same data. If it is a little bit of
Speaker 4: private data we don't see, but we see the big data.
Speaker 4: We all see the employment report, we all see claims,
Speaker 4: we all see inflation. And if you're just looking at
Speaker 4: that data, it's sort of harder to make a case
Speaker 4: that you shouldn't just front load, you know, the initial
Speaker 4: part of the rate cutting cycle, and then from there
Speaker 4: you can kind of move into like weight and see
Speaker 4: mode or just pause, see what happens in twenty twenty five,
Speaker 4: But at least early on payback, some of the hawkish
Speaker 4: insurance they took out in late twenty two and over
Speaker 4: the course of twenty twenty three, and you can be
Speaker 4: a bit more level set.
Speaker 2: You know, every cycle is different, But what do past
Speaker 2: rate cut cycles generally say about the way the Fed
Speaker 2: approaches it. I mean, it's different because the economy more
Speaker 2: or less seems fine. There is not, certainly not a
Speaker 2: consensus that we're in a recession currently. We're not in
Speaker 2: a financial crisis currently. But what does history say about
Speaker 2: how rate cut cycles work?
Speaker 4: So you basically get two versions. There's a sort of
Speaker 4: mid cycle correction which ninety five, ninety six, ninety seven,
Speaker 4: ninety eight around LTCM and then arguably although people might
Speaker 4: have different views, instead of twenty eighteen nineteen yeah as well,
Speaker 4: and those tend to be relatively moderate in sort of
Speaker 4: cumulative size, like seventy five maybe one hundred basis points.
Speaker 4: And then on the other hand, you ever sessions, and
Speaker 4: these are basically the two varieties of rate cutting cycles
Speaker 4: we've had in the sort of modern, kind of post
Speaker 4: vulgar era of FED central banking. And so I think
Speaker 4: even now it feels a little bit different because compared
Speaker 4: to those prior periods. You know, the assumptions about where
Speaker 4: interest rate should be in the long run, especially from
Speaker 4: the Fed's perspective. I think market participants probably thin they're
Speaker 4: a little bit higher, but from most people the Fed,
Speaker 4: you know, the comedian still says two eight, and we're
Speaker 4: sort of looking at a pretty large gap to that
Speaker 4: compared to a lot of those other prior mid cycle corrections.
Speaker 4: So you're, you know, you're seeing a somewhat different sort
Speaker 4: of base rate on how far you might normally expect
Speaker 4: to cut. So the sample size of history is in
Speaker 4: a somewhat structurally different world.
Speaker 3: Yes, So the other thing I've been sort of thinking about,
Speaker 3: and it's kind of remarkable about the current cycle, But
Speaker 3: you know, just a week or so ago, I think
Speaker 3: on August thirteenth, Bostic for instance, was talking about how
Speaker 3: the FED needs to see a little bit more data
Speaker 3: before it decides on rate cuts. And then fast forward.
Speaker 2: To literally ten days later, yeah.
Speaker 3: Exactly, he was talking about the potential for a fifty
Speaker 3: basis point cut. And then today at Jackson Hole we
Speaker 3: see Pow come out with an extremely ubbish speech where
Speaker 3: he puts the emphasis on the labor market and says
Speaker 3: we don't want to see further weakening. What happened in
Speaker 3: this sort of like two week period, Well, I.
Speaker 4: Think part of it is for a lot of the
Speaker 4: more hawkish committee members, you've seen better inflation data. You know,
Speaker 4: the Q one shock looks a little bit farther in
Speaker 4: the rear of your mirror. Now you have relatively more confidence.
Speaker 4: And while we haven't gotten that much more marginal labor
Speaker 4: market data, none of it looks dramatically better, Like jobless
Speaker 4: claims have been pretty well behaved. The last couple of weeks,
Speaker 4: maybe had these very large downside revisions to sort of
Speaker 4: trend NFP growth from April twenty three to sort of
Speaker 4: March of twenty twenty four, and it just makes the
Speaker 4: economy look a little bit more like it's been enough
Speaker 4: funk for longer. And so that probably helps you reassess,
Speaker 4: like what your view on the medium tournament is, and
Speaker 4: if you're a little bit less optimistic about the steady
Speaker 4: state of where the thing should be headed, maybe you
Speaker 4: should be a little bit more proactive and trying to
Speaker 4: cut off some downside risks there because you've a bit
Speaker 4: less buffer in that sort of a world.
Speaker 2: Does the first move tell us something about what the
Speaker 2: second move will be.
Speaker 4: Yes, more so if it's a fifty, I think because
Speaker 4: either if you'd to fifty, I would say realistically, either
Speaker 4: the August employment report was pretty bad, so the direction
Speaker 4: of the economy walks worse. If you're still trying to
Speaker 4: head off something really bad from happening, you'll be more
Speaker 4: aggressive with it. Or if the August employment report was
Speaker 4: fine and they still go fifty, then that tells you
Speaker 4: something about the reaction function and their desire just to
Speaker 4: be a little bit more proactively cautious in trying to
Speaker 4: get rates down. So I think there if you see
Speaker 4: a fifty in September, realistically you should expect that, like
Speaker 4: the reaction function at least through early twenty five is
Speaker 4: going to be relatively more duffish than otherwise, whether that's
Speaker 4: pusis the data itself, or just the way they're seeing
Speaker 4: the world.
Speaker 3: The other thing I've been thinking about the last time,
Speaker 3: or the first time we had you on all Blots,
Speaker 3: it was to talk about our star or the neutral rate,
Speaker 3: and since then, certainly this year, our star has kind
Speaker 3: of fallen out of favor. So I think the Bank
Speaker 3: for International Settlements came out and they were talking about
Speaker 3: it's better to base policy on observable inputs, like the
Speaker 3: actual data, rather than unobservable models. And I'm trying to
Speaker 3: figure out, like there's so much talk about data dependency.
Speaker 3: Our star is kind of out of fashion, but is
Speaker 3: it still alive and well and sort of in the
Speaker 3: background of Jackson Hole And we're just not talking about
Speaker 3: it because it's no longer fashionable.
Speaker 4: It's certainly not the operative concern for policy, right, Like,
Speaker 4: you know, if the primary motivating force at this point
Speaker 4: is like we don't want to see the labor market
Speaker 4: fall apart, powerful this stuff this morning, this is what's
Speaker 4: driving it, And you know our star maybe helps you
Speaker 4: inform like how restrictive your current policy stance is, but
Speaker 4: on like a quarter by quarter or meeting by meeting basis,
Speaker 4: you just know that rates are substantially higher than they
Speaker 4: were a few years ago. Looking at rates in ceative
Speaker 4: parts of the economy, you know they've growing up, been
Speaker 4: doing great. Overall economic activity has done surprisingly the wall
Speaker 4: over the last couple of years, and suggests that our
Speaker 4: star has probably moved up some post COVID for sure.
Speaker 4: But you don't really want to base Paul, you have
Speaker 4: like a very uncertain structural variable and say like, oh,
Speaker 4: we should only cut you know, fifty basis points because
Speaker 4: we're going to do a much higher our star because
Speaker 4: you can only solve those sort of longer run problems
Speaker 4: a little bit in the future. But like if you
Speaker 4: accidentally create a recession, that's a very persistent problem you
Speaker 4: have to deal with four years after the fact. So
Speaker 4: it's sort of like different horizons for risk management, siness,
Speaker 4: the kind of.
Speaker 2: So we know that the sort of our star is
Speaker 2: this sort of in economics that you can't directly observe it,
Speaker 2: but we believe theoretically exists that there is some rate
Speaker 2: that brings the economy into balance. What is the sort
Speaker 2: of economic explanation for why that changes over time? And
Speaker 2: just to add on to that, like why in twenty
Speaker 2: twenty four do economists believe it's higher than say it
Speaker 2: was in twenty eighteen.
Speaker 4: Out of that, I think in the sort of post
Speaker 4: GFC decade, you had, you know, a banking system that
Speaker 4: was having to sort of you know, re solidify its
Speaker 4: balance sheets. There was a lot of new regulation about
Speaker 4: the banks making them kind of de risk. You had
Speaker 4: fiscal policy that after sort of the Obama Ryan deal
Speaker 4: was in much more restrictive territory given where the sort
Speaker 4: of business cycle was, and you had, you know, sentiment
Speaker 4: generally speaking, like on a corporate perspective, was just quite
Speaker 4: subdued for a long time. Afterwards, you'd had this massive shock,
Speaker 4: and I think a lot of these very persistent but
Speaker 4: not necessarily permanent forces were dragging it down. You used
Speaker 4: to have like longer run forces like productivity and demographics
Speaker 4: that are sort of weighing on our star. But all
Speaker 4: of this sort of persistent but not permanent stuff has
Speaker 4: now sort of faded out, especially because the post COVID
Speaker 4: experience was the exact opposite of all those things. It
Speaker 4: was massive, fiscal policy was very loose. Financial conditions, it
Speaker 4: was an absence of spending restraint on the part of
Speaker 4: households and the government were large.
Speaker 3: So the other noteworthy change between this year's Jackson Hole
Speaker 3: and last year is last year, even though the trajectory
Speaker 3: or the momentum overall on inflation was good, it was
Speaker 3: coming down. There was a lot of talk about the
Speaker 3: idea that, well, there's always the possibility that it comes
Speaker 3: rearing back, and this could be the nineteen seventies all
Speaker 3: over again where it comes down dramatically and then it
Speaker 3: spikes a little bit later on. This year, it feels
Speaker 3: like there's not much talk about that. There isn't even
Speaker 3: that much talk about inflation expectations being embedded, like all
Speaker 3: of that seems to have gone in the rear view
Speaker 3: mirror and it's all about the labor market. Do you
Speaker 3: think consideration of the return of inflation is warranted here?
Speaker 3: Should there be more discussion about the potential for inflation
Speaker 3: to come back.
Speaker 4: Over the medium term? I think, you know, post COVID
Speaker 4: and especially you know during the contrast with the sort
Speaker 4: of like post GFC era, you know, inflation, that trend
Speaker 4: in inflation seems like it has moved somewhat higher. Trying
Speaker 4: to pin it down seems like kind of a fraud endeavor,
Speaker 4: but it certainly moved higher. There it was it was
Speaker 4: sort of substantially too low after the GFC. Now it's
Speaker 4: preps a little bit too high, but it's not so
Speaker 4: high that it's obviously a problem for the FED, because
Speaker 4: I don't think most people notice if core PCE is
Speaker 4: two and are quarter percent or two percent or one
Speaker 4: point nine. Realistically, as long as like the labor market
Speaker 4: is okay, and that's sort of a world It like
Speaker 4: adds a little bit of a bias towards policy over
Speaker 4: the medium term. And they've definitely been you know, some
Speaker 4: structural shifts post COVID that seems somewhat inflationary, but in general,
Speaker 4: at the moment, it's not really the operative concern as
Speaker 4: we had into like twenty five or twenty six. If
Speaker 4: the economy really reheats, that could be a problem down
Speaker 4: the road, but that's a problem for a very optimistic
Speaker 4: view of the world two plus years from now, not today.
Speaker 2: So in Q one of this year, we did get
Speaker 2: warmer than expected data. You know, one point that we
Speaker 2: was talking about there are a lot of people thought
Speaker 2: the rate cutting cycle was going to start in March,
Speaker 2: and then we got that warmer than expected data to
Speaker 2: start the year, and then they had to push that back. So, okay,
Speaker 2: what if we have like another period just to you know,
Speaker 2: for whatever reason, some component or something, you know, let's
Speaker 2: say Q four does run on the warm side, and
Speaker 2: they feel, you know, there's some let's say, questions emerge
Speaker 2: about whether they should continue the rate cut cycle in
Speaker 2: the face of this data. You know, let's say the
Speaker 2: job's coming strong and suddenly things look warmer in the
Speaker 2: short term, not twenty twenty five, twenty twenty six. What
Speaker 2: are the costs for the FED if the rate cut
Speaker 2: cycle is you know, sort of aborted so to speak,
Speaker 2: I mean, or if they feel, you know, it's like
Speaker 2: you're like, you know what, actually, we don't want to
Speaker 2: be cutting rates as fast for whatever because the data
Speaker 2: does not come into way they expect.
Speaker 4: Well, if you get surprised by the data, you should
Speaker 4: respond to it. And I think fundamentally the issue that
Speaker 4: I've had with a lot of some of the FED
Speaker 4: speakers recently is that they're sort of premising this notion
Speaker 4: on doing the appropriate thing now about something that eventually
Speaker 4: down the future could maybe be a surprise. Yeah, and like,
Speaker 4: you know, some part of policy needs to be consistent
Speaker 4: over time, but you know a lot of shocks happen
Speaker 4: in the economy. It's always evolving. And I think the
Speaker 4: notion that like, you can't do something today for the
Speaker 4: most predominant risk because you might get a little bit
Speaker 4: of a surprise direction a year, for an hour, six
Speaker 4: months from now.
Speaker 2: People really do talk about this. They like there's like, oh,
Speaker 2: the Oh, the worst thing that would happen is they
Speaker 2: have to backtrack or something. And I'm trying to understand, like, okay,
Speaker 2: if that's so bad, what exacts is so bad about it?
Speaker 4: I think there's a fear that by changing your mind,
Speaker 4: maybe you you know, elevate risk premium, you make markets
Speaker 4: a little bit less certain.
Speaker 3: But I mean we did just see massive drama in
Speaker 3: the market. Yeah, because of like a reconsideration what the
Speaker 3: FED was doing.
Speaker 4: Yeah. True, It's just I think, you know, the worst
Speaker 4: thing rather than not respond, you know, if you're worried
Speaker 4: that like you might have to change your mind, but
Speaker 4: it's much worse to not respond, I think, you know, fundamentally,
Speaker 4: Like yes, maybe it shifts you in a little bit
Speaker 4: on the margin of like well we should do a
Speaker 4: little bit less because of the medium the inflation story
Speaker 4: or something. But the softening in the labor market, you see,
Speaker 4: power was very clear, Like that's in the data. You
Speaker 4: can interpret it in different ways, but like the labor
Speaker 4: market is back to normal, maybe even a little bit soft.
Speaker 4: And if you're worried about that as the sort of
Speaker 4: dominant kind of breaking things risk because you know, presumably
Speaker 4: once recessions start, they get going pretty darn quick. That's
Speaker 4: something you really have to sort of trunkate away pretty quickly, like, okay,
Speaker 4: it didn't happen, Well, okay, that's fine. You can sort
Speaker 4: of move on. It's like, you know, you buy a
Speaker 4: bunch of insurance for your house and then like the
Speaker 4: wildfire doesn't come. There are worse fates.
Speaker 3: I mean, I still think it's a pretty big shift.
Speaker 3: Post financial crisis, it was very much about forward guidance
Speaker 3: and sort of trying to pin yields to where you
Speaker 3: wanted them, and then I think it was twenty twenty
Speaker 3: two it moved to the data dependency very very short term.
Speaker 3: It does feel to me that there's a downside here
Speaker 3: to saying that we're going to react to every data point,
Speaker 3: especially when there's still big question marks over the quality
Speaker 3: of the data. And we just had that BLS revision
Speaker 3: that everyone was talking about.
Speaker 4: So the way you sort of robustify against that is
Speaker 4: you still have to have some sort of forward looking
Speaker 4: view on a policy relevant horizon. Six or twelve months
Speaker 4: out is typically when you thing like monetary policy can
Speaker 4: really impact the sort of top line kind of macro data, right,
Speaker 4: So you have that sort of view, but you're updating
Speaker 4: it relatively robustly as the new data comes in. But
Speaker 4: the problem, especially over the last year and a half,
Speaker 4: is that different parts of the data have been telling
Speaker 4: you relatively different things, so you sort of have to
Speaker 4: average between them. And the more you get into like
Speaker 4: a sort of risk management driven mode, maybe you'll pay
Speaker 4: a bit more attention to the most pessimistic parts of
Speaker 4: the data right now, the unemployment rate perhaps, or you know,
Speaker 4: if everything else holds up, well, you might shift the
Speaker 4: signals you're paying attention to. If that theory you had
Speaker 4: about the unemployment rates sort of spiraling doesn't come to pass,
Speaker 4: then you'll pay me put one more weight on the
Speaker 4: activity data or the NFP data. Despite the revisions that
Speaker 4: just had still looks okay, if not fantastic.
Speaker 2: What do you think about like the efficacy of cuts,
Speaker 2: because okay, for a while, there was questions about, well,
Speaker 2: what are the efficacy of rate hikes because they didn't
Speaker 2: seem to be doing much for a while, and they
Speaker 2: certainly didn't impact the labor market as people had anticipated,
Speaker 2: and various stories everyone has their mortgages locked in or yes,
Speaker 2: it affected the economy, but only in like real estate
Speaker 2: and like auto loans or you know, much of the
Speaker 2: economy is not rate sensitive and how long are the lags,
Speaker 2: et cetera. So it feels like, to some extent, we
Speaker 2: need to have that version again for the cutting cycle
Speaker 2: and what we expected to do. So from your perspective,
Speaker 2: like let's just say the FED goes fifty or twenty
Speaker 2: five or whatever. In your view, how does that transmit
Speaker 2: to putting that floor under activity and how quickly?
Speaker 4: Yeah, I mean, some of it is just ratifying what's
Speaker 4: already priced in markets. You know, they have pretty strong
Speaker 4: assumptions about cuts over the next year and a half
Speaker 4: or so, So to some extent, you still have to
Speaker 4: do the thing that's priced in, even though like yep,
Speaker 4: you know, long term rates to people borrow it may
Speaker 4: not change that much. But I think a lot of
Speaker 4: it also has to do with a sentiment shift on
Speaker 4: the part of what call them like wes, financially sensitive
Speaker 4: firms and households. We're just seeing headlines about FED rate
Speaker 4: cuts sort of changes the tenor of your business and
Speaker 4: maybe changes some decision making because this comes through in
Speaker 4: a lot of surveys. You know, to an extent that
Speaker 4: often kind of surprises you when you're reading them, but
Speaker 4: there's a pretty large amount of attention paid to just
Speaker 4: the headlines. Yeah. The headline is the Fed's going to
Speaker 4: get your back starting in September.
Speaker 2: Yeah, Tracy. Speaking of the surveys, there were a lot
Speaker 2: of specific comments the last couple of months, I think,
Speaker 2: in like the Dallas FED Manufacturing survey of business owners
Speaker 2: specifically saying like rate cuts please, or we expect things
Speaker 2: to be good assuming they're rate cuts. So people are
Speaker 2: paying attention.
Speaker 3: Yeah, although they were kind of saying the same thing
Speaker 3: a year ago as we I mean, we were talking
Speaker 3: about the VIBE session and some of the stuff you
Speaker 3: read was like, it's an absolute disaster the FED cut.
Speaker 3: Right now, Peter, what's the most interesting thing that you're
Speaker 3: watching now when it comes to the Fed and monetary policy?
Speaker 3: We've had the shift that some people were expecting, the
Speaker 3: emphasis moving from inflation to the labor market. What should
Speaker 3: we be on the lookout for now?
Speaker 4: I hang in the short run, it's sort of rate
Speaker 4: sensitive spending because if you're perhaps a little bit worried
Speaker 4: about the labor market and how activity data is going
Speaker 4: to shake up with rates having been so high for
Speaker 4: so long and like maybe things just tip over on there.
Speaker 4: In accord, you need to see that sort of rate
Speaker 4: sensitive spending in the economy start to kind of recover
Speaker 4: and rebound there. You know, the housing data has been
Speaker 4: relatively soft so far to start the summer since market
Speaker 4: rates started coming down, but as you sort of get
Speaker 4: through into like later this year and into early next year,
Speaker 4: you really need to see that rate sensitive spending part
Speaker 4: of the economy start to rebound because if that doesn't happen,
Speaker 4: to Joe's point a bit ago, the efficacy of police
Speaker 4: on the downside, in addition to the upside, becomes a
Speaker 4: bit more of a concern, and you worry that the
Speaker 4: Fed might not have the economies back in the way
Speaker 4: we all kind of assume right now.
Speaker 2: Peter, so great to meet you in person and run
Speaker 2: into each other here. And Jackson Hall, so thank you
Speaker 2: so much for coming back on outlaws.
Speaker 4: Thanks so much.
Speaker 5: Great to be back again, Tracy.
Speaker 2: I thought that was very helpful. You know, they're obviously
Speaker 2: going to be a number of questions here, but one
Speaker 2: thing that is in particular I thought was interesting was
Speaker 2: this idea that like whether they go twenty five or
Speaker 2: fifty will tell us something more generally about like the
Speaker 2: reaction function and their sensitivity to weakness, what twenty twenty
Speaker 2: five might look like, and so forth.
Speaker 3: Yeah, it does feel like it's a new regime, and
Speaker 3: we're going to learn a lot to your question, which
Speaker 3: I thought was excellent about out the transmission mechanism of
Speaker 3: the interest rate hikes. That's going to be something interesting
Speaker 3: to watch in reverse as well, right, like, okay, well,
Speaker 3: now we're cutting to boost the labor market. Is it
Speaker 3: actually going to work as intended? Or are we going
Speaker 3: to get all these existential questions as we did when
Speaker 3: inflation was high, and you know, there were lots of
Speaker 3: hikes and we were wondering whether or not they worked totally.
Speaker 2: You know, there was a really interesting paragraph in Powell's
Speaker 2: speech where he's like, why did inflation come down? And
Speaker 2: the thing is he said there were essentially transitory factors
Speaker 2: that took longer than expected, and there was the rate
Speaker 2: hikes that depressed demand, But he didn't assign like a
Speaker 2: percentage to either one, So we don't really know, and
Speaker 2: so you have to figure on the way down, we
Speaker 2: really are going to be having all of these same conversations,
Speaker 2: except in reverse.
Speaker 3: We should just record all the or rerun all the
Speaker 3: au thoughts episodes in that verse backwards.
Speaker 2: No, you know, it's like if the story was like, oh,
Speaker 2: the households and the lack of thing and that's why
Speaker 2: it's not working, well, then what's what are the lower
Speaker 2: rates going to do to put that floor underneath activity?
Speaker 4: Well?
Speaker 3: I did notice also he didn't mention it by name,
Speaker 3: but there was this idea of the beverage curve in
Speaker 3: there as well, and so you know, job openings have
Speaker 3: come down without having mass layoffs. But he didn't really
Speaker 3: explain why that had happened. It was just like, you know,
Speaker 3: we thought that this might be a possibility, and if
Speaker 3: it happened, then that would be the key to a
Speaker 3: soft landing. And now it's happened. But he didn't really
Speaker 3: go into why. So I suspect there are still a
Speaker 3: lot of unknowns in how the economy is functioning.
Speaker 2: And he said that too, which is that people will
Speaker 2: be debating these questions until long after we're gone, which
Speaker 2: is like how extraordinary the last four years have been
Speaker 2: will be you know, in the same way they're still
Speaker 2: writing papers about why the Great Depression happened. They're going
Speaker 2: to be writing about what happened from twenty twenty to twenty.
Speaker 3: Four, so something to look forward to.
Speaker 2: Yeah, all right, covering it?
Speaker 3: Shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the All Thoughts. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our guest Peter Williams. He's at Peter D. Williams.
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