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Speaker 2: the table to break this down. Missoo Steve rashutto JP
Speaker 2: Morgan's David Kelly. Steve's been talking about the FED wanting
Speaker 2: to cut, but the data is not cooperating. David Kelly,
Speaker 2: is this data cooperating?
Speaker 3: Nope.
Speaker 4: No.
Speaker 3: The sound that you heard there was the door of
Speaker 3: slamming on the June Reid cut. That's gone.
Speaker 5: I think the problem is the Federal Reserve and JP
Speaker 5: Howell wants to achieve consensus. He's only had eight meetings
Speaker 5: at fifty one meetings in which there's even being a descent,
Speaker 5: and so he's going to try and convince the committee,
Speaker 5: but he can't convince the committee of something that the
Speaker 5: committee doesn't on average want to believe. And so so
Speaker 5: he's not going to be able to get consensus around
Speaker 5: at June rate cause I don't you know if he'd
Speaker 5: even want to push one at this stage. So unless
Speaker 5: there's something very weird in these data, I'd love to
Speaker 5: see what exactly is pushing this, because there's some you know,
Speaker 5: there may be things like tobacco price or something pushing this.
Speaker 3: I don't know.
Speaker 5: It sounds pretty high, but it's it's definitely more inflation
Speaker 5: than FED once. I still think that they ought to
Speaker 5: normalize rates over time. I'd be happy enough if they
Speaker 5: start start to cut rates in June, but I think
Speaker 5: this means that they won't.
Speaker 2: The words of Chairman Powell, it's too soon to say
Speaker 2: whether the recent ratings represent more than just a bump
Speaker 2: chairman power in the last few weeks stave domined to
Speaker 2: change that assessment of this stinks.
Speaker 6: I think they they're you know, creating a problem for
Speaker 6: themselves in terms of the promises of right cuts. The
Speaker 6: inability to actually execute on him their fell would guidance
Speaker 6: has lock them into something because they want to do
Speaker 6: something that the data is not allowing them to do.
Speaker 6: I think they ought to change it. Whether they will
Speaker 6: or not becomes an interesting question. I think there's enough
Speaker 6: doves on the committee that that will be a difficult
Speaker 6: thing to sell. I think, as you know, Mike mentioned,
Speaker 6: they're more likely to hold status quo and just you know,
Speaker 6: allow the markets to do the effective adjustment for them
Speaker 6: and wait till they get to the June meeting to
Speaker 6: make any changes.
Speaker 1: I'm struck by the fact that core inflation came in
Speaker 1: harder than expected, as well as everything else, at a
Speaker 1: time when we're seeing oil prices, when we're seeing more
Speaker 1: broad commodities increase, craises question of how much more could
Speaker 1: inflation rise. I'm wondering, from your per perspective, Steve, do
Speaker 1: you think that this data raises the proposition of a
Speaker 1: hard landing because it forces the FED to stay high
Speaker 1: even if you see some weakening on the margins.
Speaker 6: Well, I think the answer to your question is very simple.
Speaker 6: I defined it as a hot landing, an environment in
Speaker 6: which the economy slows back towards you know, two point
Speaker 6: three two in a quarter type environment which is still
Speaker 6: above the revised CBO trend.
Speaker 3: They don't know if anybody knows that.
Speaker 7: But CBO raised its.
Speaker 6: Underlying trend growth really growth from the economy from one
Speaker 6: than three quarters to two percent.
Speaker 3: So my two and a.
Speaker 6: Quarter two thirty lumber is still above trend. That gives
Speaker 6: you a tight labor market environment. And it certainly suggests
Speaker 6: it's going to be very hard to get inflation to
Speaker 6: the two percent level. So could inflation wind up settling
Speaker 6: somewhere around three as opposed to two, Yes, so that
Speaker 6: to me would be a hot landing, not a hard landing,
Speaker 6: But it still keeps the inflation percolating.
Speaker 2: Check out this market move. Let's start with equity's equity futures,
Speaker 2: the Russell getting absolutely slammed down by more than three percent,
Speaker 2: or I gues s and P five hundred down by
Speaker 2: more than one percent David Kelly just months ago, the
Speaker 2: sound of the door slamming shut on a June rate cut.
Speaker 2: If you're just joining us right now, zero point four
Speaker 2: percent is the number. The estimate with zero point three
Speaker 2: might be key down in Washington, d C. Might I
Speaker 2: find a bit of time to chew over these numbers?
Speaker 2: What it's underpinning this one?
Speaker 3: This morning.
Speaker 8: Well, the interesting thing is that there isn't any huge
Speaker 8: jump in any category except motor vehicle insurance up two
Speaker 8: point eight percent. It doesn't have a huge wig, but
Speaker 8: it does figure into core services and that's pushed the
Speaker 8: numbers up. What you're seeing is a lot of slight
Speaker 8: increases in a lot of different areas. Rent up five
Speaker 8: tenths after four tenths last month. They were the owners
Speaker 8: you could rent the housing component unchanged at four tenths,
Speaker 8: so that's still an upward weight on the overall numbers.
Speaker 8: And we're seeing the same sorts of things throughout this
Speaker 8: seven tenths gained for apparel, you know, things that go
Speaker 8: over one percent, very little, but a lot of things
Speaker 8: moved up a tenth or two during the month, and
Speaker 8: that seems to be what's pushing this higher, and that
Speaker 8: would make the Fed concern because it suggests a broader
Speaker 8: base for inflation than just a few outliers like we've
Speaker 8: seen in the past.
Speaker 1: Mike, thank you so much. And I'm looking right now
Speaker 1: at supercore. Someone noting that it's at four point eight
Speaker 1: percent not exactly what this Federal Reserve wants to see.
Speaker 1: David Kelly, I know that You've been really big on
Speaker 1: the inflation, the immaculatus inflation, this idea that we were
Speaker 1: going to get a landing and that it was just
Speaker 1: sort of this natural base effects that would take hold.
Speaker 1: Do you question some of that now?
Speaker 5: Well, actually, what Michael was just saying makes me feel
Speaker 5: a little bit better about the situation. That two point
Speaker 5: eight percent in auto insurance, that's probably not.
Speaker 3: A real number.
Speaker 5: I mean, I mean the day last month they were
Speaker 5: saying that auto insurance rates were up twenty point six
Speaker 5: percent a year over year.
Speaker 3: Now I know they're up.
Speaker 5: I don't believe the negotiated auto insurance rates on a
Speaker 5: month's month basis are actually that going up that much
Speaker 5: at this stage. I also don't believe that a year
Speaker 5: from now we'd be seeing also twenty point six percent
Speaker 5: on auto insurance. We must have gone up some more.
Speaker 5: And then also, if you know rents are up, then
Speaker 5: the owner's equipment brand is up also, So that it
Speaker 5: sounds like it's still the same problem of you know,
Speaker 5: over eighty percent of the year over year inflation that
Speaker 5: we're seeing is coming from auto insurance and the government's
Speaker 5: measure of shelter costs, and both of those are very smooth,
Speaker 5: badly measured issue in things which should come down over time.
Speaker 5: I will admit that if has come you know, if
Speaker 5: this is this is too much for the FED, and
Speaker 5: they're good, they don't want to They won't want to
Speaker 5: look into more details to find a reason to custom.
Speaker 3: The long n place that's coming down.
Speaker 6: Is a lot of these components aren't even seasonally adjusted
Speaker 6: at the atyl micro level and the macro level. They're
Speaker 6: aggregated so we can get proper seasonal adjustment behind it.
Speaker 6: There's lots of components in the CPI, the fact that
Speaker 6: some components go one way, some components go the other way.
Speaker 6: That's why we have an index. So I don't really
Speaker 6: look into the details. I'll look at the major aggregates
Speaker 6: and the components, and what they're telling me it's inflation
Speaker 6: is not doing what they wanted on average, and this
Speaker 6: is a problem for them. You know, they've laid out
Speaker 6: a scenario and they actually lowered the bar at the
Speaker 6: March meeting to cutting rates, and the reality is the
Speaker 6: economy isn't even meeting that lower bar for them. So
Speaker 6: this becomes an ongoing quandary for them because they've created
Speaker 6: a financial market environment that's much too accommodative for what
Speaker 6: their macro scenario is and what their desire to cut
Speaker 6: rates are. And therefore they've created a problem for themselves
Speaker 6: because their forward guidance is keeping the labor market tighter
Speaker 6: than it would normally have been if they didn't have
Speaker 6: this degree of forward guidance. The dots are a bad concept.
Speaker 6: They shouldn't be there. They lead the market in a
Speaker 6: direction that they should not go. This has been a
Speaker 6: mistake since it was created by Janney Yellen. Nobody at
Speaker 6: the Fed is backed away from it the realities. I
Speaker 6: hope when they sit down and review it next year
Speaker 6: they realize this is a dumb thing and they walk
Speaker 6: away from it.
Speaker 9: David, do you agree, Do the dots just create this,
Speaker 9: you know, problems within the financial markets?
Speaker 5: No, I don't really. I don't have a problem with
Speaker 5: with their transparency. I do have a problem with over
Speaker 5: the active monetary policy. I think that we assume, you know,
Speaker 5: I mean, Steve, you were talking about how their monetary
Speaker 5: policy has kept the other forward guidance has kept unemployment tight.
Speaker 5: I don't think that there's their forward guidance and rates
Speaker 5: is having that much of an impact on actual macroeconomic
Speaker 5: GDP growth, because if that were the case, the fact
Speaker 5: that they've raised rates so much over the last two
Speaker 5: years autosow GDP growth down, and it didn't. So I
Speaker 5: don't think I think the FED has a big effect
Speaker 5: on financial markets. You can see that today. I don't
Speaker 5: think they're having a huge effect on the economy. I
Speaker 5: do think that some of the ways that the Labor Department,
Speaker 5: despite the fact that it's and index the way they
Speaker 5: measure inflation, is adding some bumps to the bumpiness here.
Speaker 5: These are manufactured bumps. It's kind of like you know,
Speaker 5: roadworks in New York City. It's not just podles, it's
Speaker 5: actually roadworks that's creating these bumps. So I think the
Speaker 5: Bureau of Labor Statistics themselves are responsible for some of
Speaker 5: the bumps here. I do, though, think this is a
Speaker 5: fundamentally disinflationary economy. Inflation is coming down slowly, and I
Speaker 5: just worry about an overactive monetary policy, which you've had
Speaker 5: for many years, which basically distorts financial markets for no
Speaker 5: good economic purpose.
Speaker 9: And you talk about running a marathon, you have to
Speaker 9: fuel yourself before you break down. So if June is
Speaker 9: slamming the door. You think you slam the door against June.
Speaker 9: When do you think the FED should.
Speaker 3: Have to slip in?
Speaker 5: Well, I mean I personally, I think i'd rather them
Speaker 5: get going slowly and sort of send the message. So
Speaker 5: please pay no attention to this. We're just bringing, We're
Speaker 5: not easing, we're just normalizing.
Speaker 3: I'd like them to get to sort of message that way.
Speaker 5: But yes, I do think that they also tried to
Speaker 5: get to normal before they need to, because someday we're
Speaker 5: going to be sitting around this table and the FED
Speaker 5: is going to be at a high level and suddenly
Speaker 5: the floor has fallen out for some shock or something,
Speaker 5: and so we're facing the possibility recession. Then the FED says, oh,
Speaker 5: we've got lots of ammunition, we can get rates fast.
Speaker 5: But I have never seen that one work out well.
Speaker 5: If the FED has to cut rates a lot in
Speaker 5: an inn aggressive responsive way, it always hurts the economies.
Speaker 5: I'd rather they just gradually get back to a normal place.
Speaker 5: But obviously this morning's data doesn't help them do that.
Speaker 1: I keep watching the markets right now, and after we
Speaker 1: got this out of an expected print across the board,
Speaker 1: yields continuing to climb almost really pushing up toward that
Speaker 1: five percent level, four point ninety three percent the highs
Speaker 1: of twenty twenty four. I'm also watching the Rustle two
Speaker 1: thousand and Steve, I love your idea of this. You say,
Speaker 1: a hot landing, and this raises a question of what
Speaker 1: this landing is going to look like if you do
Speaker 1: see some of the smaller companies continuing to be pressured
Speaker 1: given the fact that the FED really just lost their
Speaker 1: excuse to cut in June. As we heard from David,
Speaker 1: that was a sound of the door slamming shot on
Speaker 1: a June rate cut.
Speaker 6: Yeah, again, this is the problem the Fed's created. So
Speaker 6: the reality is smaller companies get squeezed because they don't
Speaker 6: have the pricing power, but they're getting cost in the
Speaker 6: wage cost environment, and that's squeezing the profitability. And this
Speaker 6: is something I think the FED really thinks they're attempting
Speaker 6: to do. They're attempting to create an environment where, you know,
Speaker 6: David kind of I'm in the camptend.
Speaker 3: Longer term, there.
Speaker 6: Are global deflationary stories. The problem is there are a
Speaker 6: lot of domestic cyclical inflationary stories, and it's a battle
Speaker 6: between the global deflation versus the domestic cyclical, and this
Speaker 6: is a battle that's been going on, and the currency
Speaker 6: has been somewhat of equilibrated between the two of them.
Speaker 6: But the reality of the situation is the domestic cyclical
Speaker 6: dominates more than the global deflationary over time. And the
Speaker 6: other thing is the FED keeps on missing the importance
Speaker 6: of fiscal policy in this equation. It's not only monetary
Speaker 6: poles see that continues to stimulate the economy, it's fiscal
Speaker 6: policy that continues to stimulate the economy. And therefore, the
Speaker 6: federal reserves concept of what their neutral rate is the
Speaker 6: natural rate that they're looking for are stored, I think
Speaker 6: is incorrect. I think our start is substantially higher. I
Speaker 6: think the level of rates that needs to be in
Speaker 6: environment in order to bring inflation down is substantially higher
Speaker 6: than the Fed is assuming. And I do believe the
Speaker 6: market prices the dots, and that's a problem. The market
Speaker 6: takes a look at the dots and says, the dots
Speaker 6: are this, and this is what we price in as
Speaker 6: soon as it happens. So the forward structure of rates
Speaker 6: anticipates the dots, and that's a problem, which is why
Speaker 6: they should be eliminated.
Speaker 2: Let's talk about the price of fiscal policy right now.
Speaker 2: Can we bring up the bond board. This move at
Speaker 2: the front end of the yield curve. We're talking about
Speaker 2: a twenty basis point move on a two year yield.
Speaker 2: We took out four rights, we took out four ninety.
Speaker 2: We're at four ninety three forty nine. We're up fourteen
Speaker 2: on a ten year ares year round number four fifty
Speaker 2: on a US tenure this morning, four fifty twenty nine
Speaker 2: past that three to foreign exchange, the dollar is stronger
Speaker 2: against absolutely everything. Dolly m took out one fifty two.
Speaker 2: The europe broke lower to about one oh seven eighty five.
Speaker 2: We're negative zero point seven percent there. And if you
Speaker 2: are just joining guess we said earlier this morning, it's
Speaker 2: quite now wait until late thirty. This one's allowed, David,
Speaker 2: let's talk about it. This is an email I got
Speaker 2: just moments ago. Of course, CPI month of a month
Speaker 2: was point three five nine, which gets rounded up to
Speaker 2: two point four. Yeah, you know, you come in a
Speaker 2: little bit lower. You get rounded down to point three.
Speaker 2: Does that make a difference to you? Does that change
Speaker 2: the conversation in any way, shape or form.
Speaker 5: No, no, But I think the other thing is in
Speaker 5: any inflationary between two and three percent, I on the
Speaker 5: consumption stage, I regard as basically okay. I mean that
Speaker 5: I think the fad is a little too focused on
Speaker 5: getting too precisely two percent, just as I think they
Speaker 5: were in the last deck in trying to raise rate
Speaker 5: it's up to two percent. I think, trying to you know,
Speaker 5: manipulate monetary policy, get rate inflation right down to two percent.
Speaker 5: I think they're a little too forceful in that. So no,
Speaker 5: I don't I don't worry about it too much. What
Speaker 5: I look at two things. One, yes, we've got a
Speaker 5: lot of demand, but we've got tremendous labor supply.
Speaker 3: I mean, we've seen increases.
Speaker 5: We're a fifteen years high on the day before's participation
Speaker 5: rate for the working age population. We've got massive immigration,
Speaker 5: which is generating labor supply.
Speaker 3: Year of year. Wage growth at the slowest level since
Speaker 3: June twenty twenty.
Speaker 5: One, so we don't really have a problem there. And
Speaker 5: then in the longer term, in the quality competition, just
Speaker 5: the and the lack of you know who've had virtually
Speaker 5: no strike so far this year, the lack of any
Speaker 5: union pressure to push up wages. All that suggests to
Speaker 5: me this is fundamentally disinflationary economy. I tend to agree
Speaker 5: with Steve that there are cyclical forces which are making
Speaker 5: it just a little sower coming down. But I know
Speaker 5: I'm fine with the idea that inflation is going to
Speaker 5: be drifting down and there's going to be a time
Speaker 5: when we're all sitting around this table wondering what the
Speaker 5: Fed's going to do to push it up.
Speaker 2: You've said a few times that this disinflationary trend, which
Speaker 2: has hit some bumps in a route over the last
Speaker 2: few months, had nothing to do with the Federal reserve.
Speaker 2: When you just talked about the labor market, you talked
Speaker 2: about forces that had nothing to do with the federal reserve.
Speaker 2: Why doesn't that play into what Governor Water is saying,
Speaker 2: which is based I mean, why do any think it's
Speaker 2: all what Kashgari is saying it white cup rights this year?
Speaker 2: Why doesn't that just plan to that idea.
Speaker 3: Because you're starting the wrong place.
Speaker 5: If the federal reserve was at a neutral level, I
Speaker 5: think the neutral level of federal fund rate is a
Speaker 5: lot higher than two point six percent, But if they
Speaker 5: were at say four, then yeah, they should just focus
Speaker 5: on their golfkin. They do not have as much impact
Speaker 5: on the economy.
Speaker 3: Day to day as they think.
Speaker 5: They spent a decade try to speed the economy up, failed,
Speaker 5: then they now they've been trying to sew the economy
Speaker 5: down failed. It's clear that they're in a very rough
Speaker 5: stream with a very tiny paddle, and they are really
Speaker 5: not moving the boat at all. And so what they
Speaker 5: can do though, with a lot of this active monetary
Speaker 5: policy is just rough. Financial markets miss priced assets last decade.
Speaker 5: We miss priced housing terribly, and now a large chunk
Speaker 5: of younger Americans can never buy a house because home
Speaker 5: prices are just too high.
Speaker 3: But we've got normal mortgage rates.
Speaker 5: We've mispriced a lot of speculative assets, you know, meme
Speaker 5: stocks and megacap stocks of some kinds, and you know,
Speaker 5: and cryptocurrencies all were you know, these things were funded
Speaker 5: because the carrying cost of crazy it was zero. So
Speaker 5: I wish the Federal Reserve would pay more attention to
Speaker 5: what they do to financial markets with their manipulation of
Speaker 5: interest rates, and let's worry too much about what they're
Speaker 5: doing to the economy.
Speaker 2: That effect, we played the ship game. Can we play
Speaker 2: the will gang? What do you think they will do?
Speaker 2: I think they'll I think they'll skip. I think they'll
Speaker 2: skip in June.
Speaker 5: I think they will set that up and then probably
Speaker 5: at the moment, I think they probably set up for
Speaker 5: September and December two rate cuts this year.
Speaker 6: Can I just jump in there because I think I
Speaker 6: totally disagree with David just said a minute ago in
Speaker 6: terms of what's driving this thing and about monetary policy
Speaker 6: returning to some natural rate or neutral rate, and what
Speaker 6: that neutral rate should be. The reality is the Federal
Speaker 6: Reserve was trying to stimulate the economy when there was
Speaker 6: a dead overhang. The dead overhang was weighing heavily on
Speaker 6: the economy, and Federal Reserve is doing what it was
Speaker 6: supposed to do off setting that dead overhang with very
Speaker 6: very low subsidy levels of interest rates. COVID cleaned out
Speaker 6: that dead overhang. Now there is no dead overhang. Balance
Speaker 6: sheets are exceptionally healthy. The economy has back its animals,
Speaker 6: and therefore the Federal Reserve needs to be taming back
Speaker 6: on those animal spirits by keeping the level of short
Speaker 6: term interest rates high enough not to allow the economy
Speaker 6: to get too excessive in its growth rate to create
Speaker 6: a substantially higher rate of inflation that then gets embedded
Speaker 6: in the system. This is the mistake the Federal Reserve
Speaker 6: made in the sixties that created the seventies. And I
Speaker 6: think they've learned from that, and hopefully they've learned from
Speaker 6: that and realized not to succumb to the idea that
Speaker 6: there is some natural rate or some neutral rate that
Speaker 6: we have to get back to, where if monetary policy
Speaker 6: just gets back to some lower level, we're all fine.
Speaker 6: The reality is they have to fight against the animal
Speaker 6: spirits that are created from an economy that has very
Speaker 6: healthy balance sheets, low corporate debt servicing burdens, low household
Speaker 6: debt servicing burdens, and a tight labor market that's feeding
Speaker 6: the engine of the consumer economy.
Speaker 5: David, I think you're talking about Wall Street animals and
Speaker 5: mainStreet animals.
Speaker 6: I mean, I think that think it is main Street.
Speaker 6: I hate to tell you a lot of it has
Speaker 6: the same effect. The companies drive their share prices, they
Speaker 6: keep their employees. All those things matter. What happens in
Speaker 6: terms of the start hat matters. What happens in terms
Speaker 6: of Main Street.
Speaker 3: We just disagree.
Speaker 5: I don't think the monetary policy is as effective on
Speaker 5: the economy as I But.
Speaker 1: Let's talk about where Wall Street meets Main Street, right
Speaker 1: they we're going to have a real Wall Street response
Speaker 1: to this. We already are seeing it right now, and
Speaker 1: there's going to be a one two punch because we
Speaker 1: see the price action right now, and then at one
Speaker 1: pm we're going to get an auction of ten year notes.
Speaker 1: It's really going to test the appetite of a market
Speaker 1: that's looking very skittish. Steve, how vulnerable is this market
Speaker 1: to a real upset that will actually disrupt some of
Speaker 1: this easy money conditions and this sort of happy talk
Speaker 1: that we've been hearing all year.
Speaker 6: Well, the reality is these moves tend to be somewhat
Speaker 6: partially reversed out by the end of the day. I
Speaker 6: understand the ten year auction is coming and it will
Speaker 6: probably be a sloppy auction as a result of it.
Speaker 6: But I think the more important point to understand is
Speaker 6: what this says to the average CEO in this country
Speaker 6: is inflation is hot. Why am I not raising my prices? Okay,
Speaker 6: I maybe getting squeezed on my margins. I've got to
Speaker 6: get double digit earnings I've got a tight labor market,
Speaker 6: inflation is up, other people are raising theirs.
Speaker 7: Why don't I just raise my prices?
Speaker 3: You know?
Speaker 6: And that becomes the self fulfilling prophecy of creating the
Speaker 6: inflation environment. And this is where the rubber actually meets
Speaker 6: the road, because if I'm sitting there in that executive
Speaker 6: office and I'm looking at my stock getting hit, I
Speaker 6: want to drive up my stock price. How do I
Speaker 6: drive up my stock price? Do I go out and
Speaker 6: suddenly start firing workers?
Speaker 3: What do I say?
Speaker 6: Everybody else is raising prices?
Speaker 2: Why or I?
Speaker 1: And this really feeds to this question, David, that a
Speaker 1: lot of people are expecting margin expansion this year and
Speaker 1: where is it going to come from. It's going to
Speaker 1: come from some of these price increases. So is that
Speaker 1: one of the theses kind of underpinning some of the
Speaker 1: rally that we've seen inequities?
Speaker 5: Well, I hope not, because it would lead to higher inflation.
Speaker 5: If CEOs do that and they say, Okay, now's the
Speaker 5: time to raise prices, or if workers ay, now's the
Speaker 5: time to demodo age increase, the thing is, we wouldn't
Speaker 5: have come down from nine percent to three percent on
Speaker 5: three point four percent three point five percent at CPI.
Speaker 5: That wouldn't have occurred if businesses were actually able to
Speaker 5: do this and workers were actually able to do that.
Speaker 5: What was seeing if you look at the infliction when
Speaker 5: we get the data and we look carefully here, or
Speaker 5: we're still going to be in a situation we're eighty
Speaker 5: percent of that inflation that we're looking at right now
Speaker 5: is simply the government's measure of shelter costs and auto insurance.
Speaker 5: You look at energy, food goods, everything else. It's not
Speaker 5: particularly inflationary. And that has to say that we've got
Speaker 5: a competitive economy in which, yes, everybody wants to raise
Speaker 5: the priceis that are scared to.
Speaker 2: It's fantastic conversation, Steve. I'm afraid I've got to wrap
Speaker 2: it up for getting the Stavis plan, David Kelly to
Speaker 2: the both of you, Thank you. Prime Minister Kashida arriving
Speaker 2: in Washington for the country's first state visit to the
Speaker 2: US in nine years. Hanging over the visit, Nippon Steel's
Speaker 2: plan taker over of US steel Tomy Marcus of Wolf
Speaker 2: Research Rights. In this, Japanese officials suggests they believe their
Speaker 2: best play is the state quiet and work with the
Speaker 2: Committee on Foreign Investment to try to secure a positive recommendation,
Speaker 2: avoid putting Biden on the defensive, and see if the
Speaker 2: situation improves after the election. Tobin joins us now for
Speaker 2: more that's hope, and as we know, a big element
Speaker 2: of this is to try and secure the vote in
Speaker 2: places like Pennsylvania. Is that working.
Speaker 7: At the moment, I would say it's not working yet.
Speaker 4: Biden's still behind in the polls across the blue Wall
Speaker 4: states that he needs to win, pulling very tight in
Speaker 4: Pennsylvania and Wisconsin, a little bit more pro Trump in Michigan.
Speaker 4: But I think all well within kind of competition distance
Speaker 4: for both candidates.
Speaker 7: So you know, it has not worked yet, but it
Speaker 7: is understandable. I think that the Biden and the Biden.
Speaker 4: Campaign are looking at that swath of political territory with
Speaker 4: a very keen.
Speaker 3: Eye to hope.
Speaker 2: Do you sense these Japanese understand or are we at
Speaker 2: risk of isolating some of our allies?
Speaker 7: I think they get it.
Speaker 4: I mean, I think that we've seen in the response
Speaker 4: to this situation from Prime Minister Kashia and officials around him,
Speaker 4: in the wake of Biden coming out sort of surprisingly
Speaker 4: strongly against the deal a few weeks ago that they
Speaker 4: understand there's no real percentage in pressing him on it.
Speaker 4: At this point, the company is still very gung ho
Speaker 4: on the deal. I mean, you know, you're still seeing
Speaker 4: lots and lots of you know, advertising lobbying focused on
Speaker 4: on DC types kind of touting the economic benefits of
Speaker 4: the deal. They're continuing to try and engage with the union,
Speaker 4: even though the USW seems very dead set against the deal.
Speaker 4: So it's not as if the Japanese side in general
Speaker 4: has given up, but I think you are seeing at
Speaker 4: the governmental level they're not making it their number one priority.
Speaker 4: The summit this week is much more focused on security
Speaker 4: issues and defense cooperation, where I think the mutual interests
Speaker 4: are more aligned, and you know they will try to
Speaker 4: get a good outcome here, but know.
Speaker 7: That it's not a foregone conclusion.
Speaker 9: When it comes to the SAFIUS review, what the ministration
Speaker 9: is looking at is whether or not there is this
Speaker 9: connection to China. Do you think that's warranted?
Speaker 7: I think this is all downstream of politics.
Speaker 4: I think if you were doing a purely neutral, staff
Speaker 4: driven Safeists review with no concerns about politics whatsoever, if
Speaker 4: this were a company that did not have United States
Speaker 4: in the name, that had a kind of iconic legacy
Speaker 4: to it. I don't think authentically that there would be problems.
Speaker 4: I mean, as we're seeing in the summit. More broadly,
Speaker 4: Japan is probably our most important ally in the Indo Pacific,
Speaker 4: one of our most important allies globally. I think Japanese
Speaker 4: control of US companies in general is not a big
Speaker 4: security concern.
Speaker 7: Steal a little bit of a special case, but I do.
Speaker 4: Mostly think that we are seeing an exercise in mitigating
Speaker 4: the kind of potential political liability of allowing this again.
Speaker 7: Quote unquote iconic US company.
Speaker 4: To be acquired by foreign entity, regardless of where that's domicile.
Speaker 9: And when you talk to Japanese officials, they say, actually
Speaker 9: uniting these two companies would be a force against China.
Speaker 9: So we're at risk in Washington to create this boy
Speaker 9: that cried wolf situation when it comes to national security concerns.
Speaker 4: Yeah, I mean, you heard rom talking about this a
Speaker 4: moment ago, and the clip that you played like, it's
Speaker 4: not unique to the US.
Speaker 7: It's not unique to this situation. For there to be
Speaker 7: a political.
Speaker 4: Considerations or you know, even economic considerations around protecting kind
Speaker 4: of domestic champions and various sifting industries.
Speaker 7: So you know, again it's not I think the ideal situation.
Speaker 4: It's not what you'd want as you're trying to deepen
Speaker 4: both economic and security cooperation with Japan.
Speaker 7: But I do think that they that they get it.
Speaker 4: It's not derailing the other efforts to knit a tighter relationship. Again,
Speaker 4: the sort of suite of deliverables that are being rolled
Speaker 4: out around the summit, I think both sides feel quite
Speaker 4: good about in terms of Japan's you know, sort of
Speaker 4: continued shift towards being a full spector and geopolitical actor
Speaker 4: in the Ino Pacific, you know, sort of undergoing their
Speaker 4: own military modernization and preparing to cooperate a lot more
Speaker 4: with the US and to touring China.
Speaker 1: Tovid it's getting a lot harder to distinguish politics from
Speaker 1: policy at this point, and I do want to get
Speaker 1: your thoughts ahead of an interview that we have later
Speaker 1: on with an analyst for strtigis where he came out
Speaker 1: and John mentioned this quote. It's fascinating to me Washington
Speaker 1: has committed to run the economy at full employment at
Speaker 1: all costs until the election and the FED is looking
Speaker 1: for every excuse possible to cut to aid this cast.
Speaker 1: Would you agree with that assessment? Is that kind of
Speaker 1: the feeling that you hear from the clients that you
Speaker 1: speak to.
Speaker 4: So I will say it's a very active debate among
Speaker 4: my clients and other folks in the DC space, the
Speaker 4: extent to which FED decision making this year is politicized.
Speaker 4: I don't really agree with the notion that the FED
Speaker 4: is putting its finger on the scale for the sake
Speaker 4: of an electoral outcome.
Speaker 7: I've sort of heard that talking point a lot. I
Speaker 7: don't really think it's right.
Speaker 4: But I think Powell's very clear political incentive is to
Speaker 4: ride off into the sunset as a person who defeated
Speaker 4: this outburst of inflation. I think he cares a lot
Speaker 4: more about his legacy, about you know, not being the
Speaker 4: next Burns and he does about getting reappointed, or the
Speaker 4: sort of inevitable political attacks that will face from both
Speaker 4: sides depending on when they cut. You know, if they
Speaker 4: cut in June or July, they'll be criticized for cutting
Speaker 4: too early and too much. If they cut in September,
Speaker 4: it will be criticized for cutting too close to the election.
Speaker 4: If they wait until November December, it will be criticized
Speaker 4: for holding rates high, you know, sort of longer than
Speaker 4: necessary in a way that hurts Trump. So if he doesn't,
Speaker 4: damned if he doesn't. I think in terms of the
Speaker 4: political incoming he's going to face, you know, I think
Speaker 4: that their incentive is to try and actually navigate the
Speaker 4: you know, genuinely challenging set of empirical questions that they're
Speaker 4: facing around the appropriate path for rates. Not that they'll
Speaker 4: do it correctly necessarily, but I do think that we
Speaker 4: are seeing their sort of authentic best effort to try
Speaker 4: and manage both sides of the dual mandate.
Speaker 1: There is this question though, of course, of whether the
Speaker 1: FED comes under attack in terms of it's legitimacy in
Speaker 1: another administration, whether it has sort of an incentive to
Speaker 1: preserve more of a status quo.
Speaker 7: Do you believe that?
Speaker 1: I mean, this is sort of one of the theses,
Speaker 1: one of the sort of conspiracy theories underpinning this, which
Speaker 1: is the reason why we hear this so much.
Speaker 4: Right, I mean, you know, if you gave Powell trucierum,
Speaker 4: would he prefer Biden to Trump?
Speaker 7: Probably?
Speaker 4: But I again, I don't he is a registered Republican.
Speaker 4: It's not as if he's sort of somebody whose track
Speaker 4: record would suggest that he's going to sort of move
Speaker 4: heaven and earth to get Biden reelected. Generally, when we
Speaker 4: look backwards at the record of what FED policy has
Speaker 4: actually been in election years in the period since Nixon
Speaker 4: and Burns, we don't see any good evidence that there's
Speaker 4: any sort of historical pattern around election interference. They're no
Speaker 4: more likely to get cuts and hikes in election years,
Speaker 4: you see. You know, the deviation between the tailor rule
Speaker 4: and actual FED fund rates in election years is, you know,
Speaker 4: if anything, more hawkish than than it is in non
Speaker 4: election years. So, you know, I think there's not a
Speaker 4: lot of empirical track record to point you on this,
Speaker 4: and I don't really think it makes sense for Powell.
Speaker 4: You know, again, he's towards the end of his career.
Speaker 4: I'm sure he would like to get reappointed, but I
Speaker 4: do think he cares much more about not sort of
Speaker 4: mismanaging the situation and going down in history as the
Speaker 4: person who allowed like a big reacceleration of inflation totally
Speaker 4: failed at these sort of you know, historically important job
Speaker 4: that he's facing at this kind of inflection point, so
Speaker 4: you know, and again in terms of the legitimacy of
Speaker 4: the FED, they will face quite st our political attacks
Speaker 4: no matter what they do, and so I don't think
Speaker 4: they're trying to solve through that.
Speaker 7: Yew makes a ton of sense, well said, I don't
Speaker 7: buy this.
Speaker 4: I hear it a lot like the theory is definitely
Speaker 4: out there, but I'm not on board.
Speaker 2: Lose lose time of Marcus of Wolf Research, super diplomatic
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