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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Right now, we're going to start strong this twenty twenty five.

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Speaker 2: Seth Carpenter manages a heritage at Morgan Stanley.

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Speaker 3: I can't say enough about what Stephen.

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Speaker 2: Roach years ago wrought at Morgan Stanley, where he and

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Speaker 2: Richard Berner said, we're not on one page, We're not

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Speaker 2: a marketing exercise. We're going to argue and it's going

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Speaker 2: to be a constructive, visible argument on domestic and global economics.

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Speaker 2: Seth Carpenter handles that heritage as Morgan Stanley is chief economist. Seth,

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Speaker 2: what's the biggest thing you and your team argue about.

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Speaker 1: Wow, it's hard to narrow it down, but I think

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Speaker 1: right now it is a question about what should our

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Speaker 1: assumptions be for things like tariff policy and how big

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Speaker 1: of an effect is global trade going to be for

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Speaker 1: the global economy across the world in twenty twenty five.

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Speaker 2: What is defuse of technology or Ed Ludlow will speak

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Speaker 2: with Jensen waiting from Nvidia here tomorrow near eleven o'clock.

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Speaker 2: What is a diffusement, as trche would say, the diffusement

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Speaker 2: of productivity from technology.

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Speaker 1: Oh, that's a really critical question. My colleagues, especially in

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Speaker 1: equity research, but across the whole research group here, we've

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Speaker 1: been hyper focused on AI for quite a long time,

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Speaker 1: I have to say, and translating the micro into the

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Speaker 1: macro is super tricky. So some things that people see

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Speaker 1: as clearly increasing productivity, seeing when that's going to show

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Speaker 1: up in the macro data is a little bit tricky. Right.

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Speaker 1: So if you think about my industry, the financial services industry,

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Speaker 1: if a bunch of hedge funds all use large language

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Speaker 1: models and are able to cover a lot more stocks,

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Speaker 1: get more efficient, cover three, four or five times as

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Speaker 1: many stocks as they had historically, I think everyone would

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Speaker 1: think of that as being more productive. And yet if

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Speaker 1: they're competing with each other and they can I'll do it,

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Speaker 1: we might see some of those games get competed away

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Speaker 1: and they still don't show up in the macro data.

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Speaker 1: So translating the micro AI use cases to the macro data,

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Speaker 1: that for me, is a really interesting but super tricky question.

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Speaker 4: So Seth, what are you and your team telling your

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Speaker 4: clients about the incoming Trump administration and the economic policies

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Speaker 4: that may accompany this administration. Is there any way to

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Speaker 4: kind of position for that or is it just too

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Speaker 4: unknown at this point a.

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Speaker 1: Little bit of both. What we've said, you know, usually

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Speaker 1: we do our year ahead forecast and it's supposed to

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Speaker 1: be a bit of a roadmap for people, but now

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Speaker 1: this time around, it's more of a set of risks

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Speaker 1: and how to start to create a framework for those risks.

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Speaker 1: So for economic policies that might move the macro needle,

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Speaker 1: you know, we break it down into trade policy, tariffs,

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Speaker 1: immigration policy, fiscal policy, and then deregulation. And what might

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Speaker 1: be slightly controversial is we've said for those last two

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Speaker 1: fiscal policy and deregulation, maybe move those off the table

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Speaker 1: for twenty twenty five for macro implications. Deregulation I think

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Speaker 1: is going to be huge at a micro level and

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Speaker 1: definitely for individual sectors in parts of the equity market,

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Speaker 1: But in terms of GP inflation, that sort of thing,

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Speaker 1: I'm not convinced it matters at all, at least for

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Speaker 1: twenty twenty five. Similarly, fiscal policy, we're at least for

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Speaker 1: now assuming the Congress spends the better part of the

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Speaker 1: year extending the tax cuts, and so again it takes

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Speaker 1: it off the table for twenty twenty five. So we're

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Speaker 1: really looking at tariff policy and immigration policy as the

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Speaker 1: key factors here, and so that's part of how we're

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Speaker 1: trying to let people sort of narrow down at least

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Speaker 1: a wide range of possible outcomes. Tariffs are push up

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Speaker 1: inflation and they restrict growth. Immigration restriction would do the

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Speaker 1: same thing. It would restrict growth and push up inflation.

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Speaker 1: The key questions, and this is an area where we

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Speaker 1: say forecast early, but forecast often. Are he's going to

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Speaker 1: come in in one fell swoop? Are they going to

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Speaker 1: get phased in over time over the whole of twenty

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Speaker 1: twenty five or some combination. I think that's where the

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Speaker 1: irreducible uncertainty is.

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Speaker 4: Given that backdrop SETH does the what is your call

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Speaker 4: there for twenty twenty five for this federal reserve given

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Speaker 4: some of those policy unknowns, I.

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Speaker 1: Guess absolutely so. Right now, what we're saying is the

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Speaker 1: Fed is going to cut again in March and then

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Speaker 1: in June. Chair Powell struck a more cautious tone at

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Speaker 1: the December meeting. We think inflation, though, is coming down

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Speaker 1: in the near term, and so that's going to give

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Speaker 1: them a little bit of momentum to keep cutting rates.

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Speaker 1: But you know, we've assumed that the Trump administration is

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Speaker 1: going to restrict immigration over time. It'll be gradual, so

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Speaker 1: a step down for this year, but not a dropping

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Speaker 1: off the cliff. And similarly, we've assumed of gradual phasing

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Speaker 1: in of tariff policy, and so you don't really start

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Speaker 1: to see the effects of that inflation until maybe midway

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Speaker 1: through the year. And that's why we've assumed two very

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Speaker 1: tentative rate cuts from the FED. Much like what they

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Speaker 1: wrote in their toplot at the December meeting.

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Speaker 2: You are a deputy director of the Division of Monetary Fares,

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Speaker 2: which means Seth Carpenter, Doctor Carpenter. Folks had a shingle

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Speaker 2: out front of his door at the FED where it said,

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Speaker 2: this is where we readjust the statistics.

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Speaker 3: Are we going to.

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Speaker 2: Readjust statistics a lot this year, Seth? Are we going

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Speaker 2: to have jobs reports amended? GDP amended? It's it going

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Speaker 2: to be a year of oops, we got it wrong.

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Speaker 1: So I think every year and there's a bit of revision.

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Speaker 1: I suspect there is a good chance that we're going

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Speaker 1: to see a bit more of that. I think in

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Speaker 1: the near dart right over the next three months. That

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Speaker 1: so called residual seasonality that we've seen in the PCEE

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Speaker 1: inflation numbers. I think that's a real possibility here that

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Speaker 1: could throw the throw a real curveball for the FED.

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Speaker 1: I will say the numbers on employment right, given how

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Speaker 1: much immigration we've had over the past couple of years,

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Speaker 1: and as the BLS tries to catch up with sort

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Speaker 1: of their different surveys, I think we could see some

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Speaker 1: more revisions this year. Twenty twenty five is probably the

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Speaker 1: most difficult forecasting year since twenty twenty and maybe early

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Speaker 1: twenty twenty one when we had COVID. I mean, this

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Speaker 1: is a really tricky year for forecasting.

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Speaker 2: It's really important. Folks like Paul, I've got a non

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Speaker 2: firm payrolls. Yeah to twenty seven, a moldy thirty six,

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Speaker 2: two fifty five, a moldy seventy eight. You know it

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Speaker 2: looks like a rorsash test dunk carpenter, and you know you.

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Speaker 3: Got revisions in there as well. What's the real run rate?

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Speaker 1: Now?

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Speaker 3: You know, take a six month moving average. Be Jason

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Speaker 3: Furman for a moment. He was up at a small

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Speaker 3: college north of Princeton.

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Speaker 2: I can't remember I came in, but do a Jason

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Speaker 2: Furman for me right now, Seth Carpenter, And if you

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Speaker 2: got a three months six month annualized non firm payrolls,

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Speaker 2: the answer is it's going to drop down.

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Speaker 3: Is that what I'm hearing?

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Speaker 1: I think that's right. So we're looking at about one

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Speaker 1: seventy or so for Friday's number. Look, the tricky part

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Speaker 1: is immigration has clearly been a big thing. So the

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Speaker 1: monthly run rate that would keep the unemployment rate constant

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Speaker 1: is higher than it was historically. We know, the unemployment

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Speaker 1: rate went off of its lows of about three and

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Speaker 1: a half percent up to about four and a quarter percent.

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Speaker 1: So the run rate then, or the prints that we've

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Speaker 1: been getting have averaged a little bit less than what

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Speaker 1: that run rate is, and so you know, maybe we're

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Speaker 1: falling from the peak of immigration, a run rate of

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Speaker 1: about two hundred and fifty down to something closer to

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Speaker 1: two hundred or one seventy five. We're looking for a

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Speaker 1: roughly stable unemployment rate over the first half of this

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Speaker 1: year because we do think things slowed down a little bit,

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Speaker 1: but the immigration inflows also slowed down a little bit,

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Speaker 1: so you get a bit of a balancing act there.

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Speaker 1: Super tricky times for economics, what has.

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Speaker 4: Been the Morgan Stanley call, your call about immigration and

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Speaker 4: its impact on the labor market, because it seems like

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Speaker 4: no matter how many people come in, this economy absorbs them,

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Speaker 4: they get jobs, they start paying their fight, gad whatever,

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Speaker 4: how's that really impacted? Do we have a good feel

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Speaker 4: for that over the last several years.

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Speaker 1: Yeah, I mean, I think there's a lot of uncertainty,

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Speaker 1: but I think a few things are pretty clear. One,

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Speaker 1: there's been a big increase in labor supply from immigration,

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Speaker 1: and that's part of how we were able to get

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Speaker 1: three percent growth or a little bit more in twenty

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Speaker 1: twenty three, close to three percent growth again in twenty

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Speaker 1: twenty four, and yet inflation kept coming down. So this

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Speaker 1: positive supply shock, I think is valuably there. There's got

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Speaker 1: to be a demand component to it as well, and

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Speaker 1: so all of that means part of the strong growth

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Speaker 1: and yet falling inflation is a parcel this immigration serge.

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Speaker 1: So a restriction of that, especially if you talk to

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Speaker 1: the folks, for instance, done at Brookings, they would say,

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Speaker 1: really good chance we get net immigration at zero or

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Speaker 1: even negative this year. That's a huge advertise to growth.

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Speaker 3: Seth tells us about the dollar dynamics.

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Speaker 2: I've got a two day jump condition here and a

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Speaker 2: managed Chinese red men be resilient.

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Speaker 3: Dollar is well, what.

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Speaker 2: Is the distinction within six seven eight pages of foreign

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Speaker 2: exchange analysis on the dollar?

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Speaker 3: What's the paragraph that matters?

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Speaker 1: I think the paragraph that matters, To come back to

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Speaker 1: one of the uncertaties I was going to say that

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Speaker 1: I was talking about before, is what did tariffs do

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Speaker 1: to the dollar, to currencies and to global growth. So

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Speaker 1: part of our view has been the dollar rallied going

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Speaker 1: into the election. There's been some dollar strength. Is that overdone? Well?

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Speaker 1: Now we're seeing a little bit maybe more of a

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Speaker 1: hawkish fed But I still think the market is wrestling

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Speaker 1: back and forth with what tar are we going to see?

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Speaker 1: Just the movement overnight and this morning after the news

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Speaker 1: reports in the Washington boast about maybe a narrowing in

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Speaker 1: the scope of some of the tariff policies coming out

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Speaker 1: of administration. I think that's the real question there is

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Speaker 1: how much do the tariff slow US growth versus how

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Speaker 1: much do they slow growth in the rest of the world.

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Speaker 2: Seth, They're got to make some news. Has mister called you?

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Speaker 2: This is mister Treasury designate. Has he dialed one to

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Speaker 2: eight hundred Carpenter and said come on board.

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Speaker 1: He has not, he is not. I'm always happy to

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Speaker 1: take calls, though from from the from any public servant,

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Speaker 1: because after my twenty years in Washington, DC, I think

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Speaker 1: the best thing folks in markets can do is to

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Speaker 1: give an unvarnished, arnest opinion of what's going on so

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Speaker 1: that the policymakers can make their best decision.

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Speaker 3: There you go. I'm sure he's listened. Seth Carpenter, Thank

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Speaker 3: you so much. Get the get out the moving vans.

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Speaker 2: Seth Carpenter with Morgan Stanley and their chief economist, and

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Speaker 2: again public service to the nation with a federal Reserve

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Speaker 2: and Treasury as well,