WEBVTT - Claudia Sahm, New Century Advisors Chief Economist, Talks Jerome Powell, the Fed, Inflation

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>President Trump is ramping up criticism of FED chair Jerome Pal,

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<v Speaker 2>so let's discuss now with Claudia Salm. She's new Century

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<v Speaker 2>Advisor's chief economists and former FED economists. Claudia, great to

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<v Speaker 2>have you with us. There was a note from wynthin

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<v Speaker 2>over at BBH this morning saying that the admission that

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<v Speaker 2>this is being studied at all should be taken very

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<v Speaker 2>seriously and very negatively. And Claudia, I'm curious, how seriously

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<v Speaker 2>are you taking the possibility that we do see Trump

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<v Speaker 2>try to remove your own Pal.

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<v Speaker 3>I take it very seriously, and I you know, this

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<v Speaker 3>administration has taken steps, whether it's with the tariffs or

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<v Speaker 3>with downsides in the government, that really were, you know,

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<v Speaker 3>beyond expectations. So I you know, the unthinkable is thinkable

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<v Speaker 3>with this administration. So it is a risk to take seriously.

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<v Speaker 3>But I do think when the administration sits down and

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<v Speaker 3>studies the options, they'll come to the right conclusion that

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<v Speaker 3>this really isn't the path they want to go down.

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<v Speaker 4>Now.

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<v Speaker 1>I also want to talk about the precedent here because

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<v Speaker 1>people often point to what had happened in the Kennedy

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<v Speaker 1>era in the Johnson era. In the Nixon era, people

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<v Speaker 1>often pointed Nixon burns. The difference now is the amount

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<v Speaker 1>of tools in the toolkit. I think that the FED

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<v Speaker 1>has brought out in terms of quantitative easing, emergency measures

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<v Speaker 1>during crises. The power of the FED has grown. So

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<v Speaker 1>what does this mean to have this kind of political

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<v Speaker 1>pressure on the FED in an era where the economy

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<v Speaker 1>is so fragile?

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<v Speaker 4>Right, So the FED needs to be independent.

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<v Speaker 3>But the FED absolutely must be accountable, and it is

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<v Speaker 3>Congress created the FED.

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<v Speaker 4>It has amended the Federal Reserve Act.

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<v Speaker 3>Over time, the FED has to report to the public,

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<v Speaker 3>report to Congress. And you know, there are times where

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<v Speaker 3>FED has used tools, such as in the Great Financial Crisis,

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<v Speaker 3>they did emergency lending and then after the fact Congress

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<v Speaker 3>said they amended the Federal Reserve Act with the DoD

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<v Speaker 3>Frank and said you know what to do that you're

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<v Speaker 3>going to need treasuries buy in.

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<v Speaker 4>And that happened during COVID.

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<v Speaker 3>So there are times where we watch the powers of

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<v Speaker 3>the FED and Congress, you know, put some controls on them.

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<v Speaker 3>But that operational independence, that ability to set interest rates

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<v Speaker 3>with monetary policy, not just in the US, but around

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<v Speaker 3>the world has been come to be understood as very

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<v Speaker 3>important to keeping inflation low.

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<v Speaker 4>And this is we're seeing it.

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<v Speaker 3>This is the moment why we need FED independence where

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<v Speaker 3>you have strong views kind of clashing between the President.

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<v Speaker 4>And the FED. It's not personal, it's just the experience

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<v Speaker 4>is we need the.

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<v Speaker 3>FED bill to make the decisions that they think are best,

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<v Speaker 3>and we can hold them accountable for that after the fact,

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<v Speaker 3>but like.

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<v Speaker 4>They need to be able to make those decisions.

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<v Speaker 2>It's a good reminder too that we all have bosses,

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<v Speaker 2>including the FED and Jerome Pal's case, it's Congress. But

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<v Speaker 2>I want to go back to what you were saying

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<v Speaker 2>in your first answer, that you think that they're going

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<v Speaker 2>to study the options the administration that is, and that

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<v Speaker 2>they'll arrive at the conclusion and won't go through with this.

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<v Speaker 2>And I'm curious to see the confidence when they look

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<v Speaker 2>at the options. What do you think that they'll see.

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<v Speaker 3>It's in the absolute best interest of the president, with

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<v Speaker 3>his economic agenda that he has set to give the

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<v Speaker 3>FED its face to make its policy decisions. One of

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<v Speaker 3>the things that you know the FED is they're uncertain

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<v Speaker 3>about what happens with inflation, particular becomes embedded.

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<v Speaker 4>So they are.

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<v Speaker 3>Really trying to you know, we're the inflation fighter. We're

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<v Speaker 3>going to be credible on this. We've seen market expectations.

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<v Speaker 3>They don't expect the tariffs maybe to lift inflation this

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<v Speaker 3>year but then come back down. That is exactly I mean,

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<v Speaker 3>that is the path that the President would want to see,

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<v Speaker 3>you know, with the tariffs, not to have it be

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<v Speaker 3>long term inflation.

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<v Speaker 4>So let the FED do their job.

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<v Speaker 3>If the President undercuts this FED, it will not just undercut,

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<v Speaker 3>you know, remove Jay Palette, undercuts any future FED chairs

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<v Speaker 3>that that Trump would put in place, and it really

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<v Speaker 3>could cause a lot of disruptions.

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<v Speaker 4>And if he removes pal he's not going to get

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<v Speaker 4>interest rates down anyways.

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<v Speaker 3>They're going to go because the inflation expectations would go

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<v Speaker 3>go bisarre. So I absolutely understand why the President is

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<v Speaker 3>critical of the Fed's stance right now, but this isn't

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<v Speaker 3>the way to do interact with the FED.

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<v Speaker 2>Well, Claudia, you touched on something that Chanel and I

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<v Speaker 2>were discussing earlier, that you think about Kevin worsh who

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<v Speaker 2>has been reported as in consideration. Other outlets have reported

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<v Speaker 2>that he too, has urged the President not to necessarily

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<v Speaker 2>end Jerome Pal's term early exactly for that reason that

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<v Speaker 2>if he was then made FED chair, that he would

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<v Speaker 2>be dealing with a loss of credibility at the institution itself.

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<v Speaker 3>Right, And we have to look back the credibility that

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<v Speaker 3>the FED gained in terms of being inflation fighting, much

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<v Speaker 3>of that was.

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<v Speaker 4>One during the Pole Vulgar FED and that.

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<v Speaker 3>Was a very severe recession, very high interest rates to

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<v Speaker 3>break the inflation mentality like, we do not want to

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<v Speaker 3>go back, No one wants to go back there.

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<v Speaker 4>So that, Yeah, the.

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<v Speaker 3>FED is an institution, It plays an important role. It

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<v Speaker 3>doesn't always get it right. And the president could be

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<v Speaker 3>and there is a case for preemptive interest rate cuts.

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<v Speaker 3>It's just that's not a case that he should be making.

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<v Speaker 3>And he's in certainly removing or even threatening to remove

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<v Speaker 3>the FED chair. That's just that's creating more uncertainty in

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<v Speaker 3>a world right now that frankly is dealing with a

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<v Speaker 3>lot of uncertainty in terms of the economy and financial market.

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<v Speaker 4>So this would be a great time to de escalate this.

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<v Speaker 1>Well, Claudie, I want to bring up something that was

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<v Speaker 1>brought up befrom Neil Datta of Renaissance Macro this morning.

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<v Speaker 1>This is exactly what he wrote that forget the legal

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<v Speaker 1>obstacles to fire Powell, getting rid of him in such

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<v Speaker 1>a dramatic fashion would upset the bond market. Risk premiums

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<v Speaker 1>would rise sharply as investors questioned the central banks independence,

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<v Speaker 1>and longer run interest rates would surge. That was from

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<v Speaker 1>run Maac this morning. But then you also have this

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<v Speaker 1>morning we were talking about a little ker Katie and

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<v Speaker 1>I were talking about it. You have the president this

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<v Speaker 1>morning not saying he wanted to fire the FED chair.

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<v Speaker 1>He said that he wanted him to lower interest rates.

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<v Speaker 1>You saw on the heels of that just the tenure

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<v Speaker 1>lose some of its selloff. Do you think this is

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<v Speaker 1>turning in to a negotiation tactic more than a reality.

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<v Speaker 4>It's it's really hard. It's hard to.

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<v Speaker 3>Judge, right, Like I don't under you know, know where

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<v Speaker 3>the President is going from this?

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<v Speaker 4>I did.

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<v Speaker 3>It's great to see this morning's message on true social

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<v Speaker 3>did not include a threat of termination.

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<v Speaker 4>It is also problematic.

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<v Speaker 3>To be having this if you call it a negotiation

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<v Speaker 3>in public, right because now it does so.

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<v Speaker 4>Suppose the Fed meets and they cut interest rates? Did

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<v Speaker 4>they do it?

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<v Speaker 3>Because the president told them to, right Like, this is

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<v Speaker 3>just not this is not a healthy.

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<v Speaker 4>Discussion to be having. I mean, I understand it.

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<v Speaker 3>Again, the president at many presidents is nowhere near a

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<v Speaker 3>unique in this.

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<v Speaker 4>Don't like what the FED does?

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<v Speaker 3>Right That's again, that's part of why we need the

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<v Speaker 3>independence of the FED is just having this debate in

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<v Speaker 3>public and putting this pressure on. It's one of those

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<v Speaker 3>be careful what you wish for, right Like, if the

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<v Speaker 3>FED caves, it would be really bad.

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<v Speaker 4>I don't expect the Fed decay on this, but it

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<v Speaker 4>would be really bad.

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<v Speaker 3>And it makes a very complicated policy decisions for the

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<v Speaker 3>FED this year even harder if they have it with

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<v Speaker 3>all of this political tension and these conversations going.

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<v Speaker 1>On To that end, also, how do you see the

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<v Speaker 1>reaction from the bond market, not just in the short

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<v Speaker 1>term but in longer term rates. You think about the

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<v Speaker 1>ten year yield flirting with four point four percent this morning,

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<v Speaker 1>now closer to four point three four percent. Is there

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<v Speaker 1>a risk that a deep recession would drive down those

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<v Speaker 1>longer term bond yields significantly, or that fiscal pressures of

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<v Speaker 1>the United States will supersede all of that, And you

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<v Speaker 1>actually see those longer term rates go higher.

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<v Speaker 3>So everything is on the table as part of the

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<v Speaker 3>problem right now, and there really is a lot of uncertainty.

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<v Speaker 3>We're doing major policy changes from trade to fiscal to immigration,

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<v Speaker 3>and then if you want to put you know, FED

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<v Speaker 3>independence on the table too. It's just a lot for

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<v Speaker 3>anybody who's trying to look out in the future, which

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<v Speaker 3>is exactly what financial markets are trying to do.

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<v Speaker 4>They're trying to look out in the future and price it.

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<v Speaker 3>And honestly, I think the one thing that we should

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<v Speaker 3>be very comfortable with is we're going to see a

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<v Speaker 3>lot of volatility. We're going to see a lot of

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<v Speaker 3>shifting narratives until that uncertainty is pulled out. And the

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<v Speaker 3>president again has a very unique position and that he

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<v Speaker 3>can pull some of that uncertainty out right now.

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<v Speaker 2>Yeah, definitely. I mean a lot of this uncertainty came

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<v Speaker 2>from his desk itself, and obviously, like you say, he

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<v Speaker 2>has the levers to pull to remove that uncertainty. But

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<v Speaker 2>I want to talk about the numbers that the FED

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<v Speaker 2>has in front of them. Politics aside. When Jerome pal

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<v Speaker 2>and his colleagues are sitting down to make policy, they

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<v Speaker 2>have of course inflation. They have what the labor market

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<v Speaker 2>is doing, and they have of course what we're seeing

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<v Speaker 2>in terms of break even inflation expectations. And the President

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<v Speaker 2>Trump in history social post this morning said that you

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<v Speaker 2>have energy costs way down, you have food costs way down.

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<v Speaker 2>You also have most other things trending down. And as

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<v Speaker 2>such he concludes, there's actually no inflation. What are you seeing, though, Claudia,

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<v Speaker 2>what is the actual read on inflation right now? When

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<v Speaker 2>you take a look at this data.

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<v Speaker 3>Well, are broad based measures of inflation, so not just

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<v Speaker 3>picking out particular series like energy. They show that inflation

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<v Speaker 3>continues to be elevated relative to the FEDS two percent target.

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<v Speaker 3>And it's been that way for you know, since twenty

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<v Speaker 3>twenty one.

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<v Speaker 4>We've been making progress.

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<v Speaker 3>And honestly, the conversation we would be having right now

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<v Speaker 3>is about the upcoming FED rate cut because of progress

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<v Speaker 3>on inflation and the good economy if it were not

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<v Speaker 3>for some very big changes that have been made in

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<v Speaker 3>economic policy going forward. Above all else the tariffs, which

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<v Speaker 3>just aren't in the data yet, right, and the Fed

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<v Speaker 3>has to think about that. I mean, the markets are

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<v Speaker 3>thinking about everybody's thinking about what's coming ahead.

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<v Speaker 4>So yes, it is good that we've made progress on inflation.

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<v Speaker 3>That is, that is amazing where labor market is great,

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<v Speaker 3>but that does not tell us necessarily where we are

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<v Speaker 3>going over the coming months. And the FED, with all

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<v Speaker 3>this uncertainty about the policy, is their weight and see

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<v Speaker 3>approach to this I think makes a lot a lot

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<v Speaker 3>of sense. And so we're gonna but they're gonna want

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<v Speaker 3>they need to see the data and above all else.

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<v Speaker 4>They need to see that the inflation stays under control.

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<v Speaker 1>Claudia, we got to leave it there. We thank you

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<v Speaker 1>so much for your time this morning. Claudiasam of New

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<v Speaker 1>Century Advisors