WEBVTT - Instant Reaction: The Fed Decides 0:00:02.520 --> 0:00:07.040 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.200 --> 0:00:13.840 This is a breaking news update from Bloomberg instant reaction 0:00:14.120 --> 0:00:17.959 and analysis from our three thousand journalists and analysts around 0:00:17.960 --> 0:00:18.439 the world. 0:00:19.480 --> 0:00:22.560 The most divided FED since before the pandemic voted to 0:00:22.560 --> 0:00:25.040 lower the benchmark rate by twenty five basis points, as 0:00:25.120 --> 0:00:28.760 investors expected, but there were three descents for the first 0:00:28.760 --> 0:00:32.040 time since twenty nineteen, and on the dot plot, a 0:00:32.120 --> 0:00:35.239 total of six members of the committee suggested they were 0:00:35.280 --> 0:00:38.680 not in favor of lowering rates. There's also a hawkish 0:00:38.720 --> 0:00:42.159 line in the statement in considering the extent and timing 0:00:42.200 --> 0:00:46.040 of additional adjustments to the target range, bringing back language 0:00:46.040 --> 0:00:48.360 from a year ago when they paused their first round 0:00:48.440 --> 0:00:51.920 of rate cuts. No surprise, Stephen Myron wanted a half 0:00:51.960 --> 0:00:55.280 point reduction, but in something of a surprise, Austin Gouldsby 0:00:55.440 --> 0:00:59.000 joined Jeffrey Schmid in dissenting for no cut at all. 0:01:00.280 --> 0:01:04.639 Dot plot suggests just one cut coming. Seven members want 0:01:04.680 --> 0:01:08.440 no move, however, including three who think the rate might 0:01:08.480 --> 0:01:12.080 go up. The committee statement says economic activity has been 0:01:12.200 --> 0:01:15.959 expanding at a moderate pace and the latest forecasts show 0:01:16.200 --> 0:01:19.440 a consensus GDP figure of one point seven percent for 0:01:19.520 --> 0:01:22.039 this year, but in a big move up. They have 0:01:22.200 --> 0:01:26.199 revised growth forecasts for twenty twenty six to two point 0:01:26.319 --> 0:01:30.080 three percent. Unemployment forecasts to finish this year at four 0:01:30.080 --> 0:01:32.360 and a half percent will fall back to four point 0:01:32.400 --> 0:01:36.440 four percent next year. Using identical language from October, the 0:01:36.440 --> 0:01:39.120 statement says job gains have slowed this year and the 0:01:39.240 --> 0:01:43.760 unemployment rate has edged up through September. Nodding to the 0:01:43.760 --> 0:01:47.360 government's shutdown caused absence of data, the statement repeats that 0:01:47.560 --> 0:01:51.800 more recent indicators are consistent with these developments. There's no 0:01:51.920 --> 0:01:54.800 change in the inflation assessment. It has moved up since 0:01:54.840 --> 0:01:58.480 earlier in the year and remains somewhat elevated. However, it 0:01:58.560 --> 0:02:02.480 is seen slowing market next year. PCE headline from two 0:02:02.520 --> 0:02:05.240 point nine percent this year to two point four percent 0:02:05.280 --> 0:02:08.760 in twenty twenty six, and as always, they won't reach 0:02:08.840 --> 0:02:11.760 their two percent target for two more years. In twenty 0:02:11.840 --> 0:02:15.120 twenty eight, core PCE will finish the year at three percent, 0:02:15.400 --> 0:02:18.560 falling to two and a half percent next year. As 0:02:18.600 --> 0:02:22.200 for the balance sheet, the statement now says reserve balances 0:02:22.280 --> 0:02:25.880 have declined to ample levels. The Fed will buy shorter 0:02:25.960 --> 0:02:28.680 term treasuries, mostly bills, but up to three year notes 0:02:29.080 --> 0:02:33.079 as needed to maintain that ample supply. The first operation 0:02:33.240 --> 0:02:36.720 will be announced tomorrow, with the first purchases on a 0:02:36.880 --> 0:02:41.160 Friday of approximately forty billion dollars in treasury bills. 0:02:41.200 --> 0:02:44.320 Guys, Michael McKee, stay close as we parse through this. 0:02:44.520 --> 0:02:46.720 Right now, what you see in markets is a collective cheer. 0:02:46.840 --> 0:02:49.320 Perhaps this was supposed to be a hawkish cut. The 0:02:49.360 --> 0:02:53.080 market is taking it slightly differently, as MPPI had been lower. 0:02:53.160 --> 0:02:55.600 Now it is positive by almost two tounts of percent. 0:02:55.639 --> 0:02:59.160 Euro dollar euro climbing dollar falling on the heels of 0:02:59.200 --> 0:03:01.840 what does seem to be like more FED cuts, and 0:03:01.880 --> 0:03:04.560 across the board tuesd tens, and thirties, you are seeing 0:03:04.600 --> 0:03:07.200 a bid into bonds with this feeling that this is 0:03:07.200 --> 0:03:09.079 a FED that not only is going to support rates 0:03:09.120 --> 0:03:12.240 with further rate cuts, but also with additional bond purchases time. 0:03:12.360 --> 0:03:15.080 To me, the most interesting nuance here is the descent 0:03:15.280 --> 0:03:18.600 of the gentleman from Chicago. This is brilliant academics out 0:03:18.600 --> 0:03:22.640 of Milton Yale and the Massachusetts Institute of Technology. Austin 0:03:22.680 --> 0:03:28.440 Goulesby is basically our technology president. He's wired into the Internet, 0:03:28.480 --> 0:03:31.280 wired into the computers and I'd love to know if 0:03:31.280 --> 0:03:34.880 his descent has to do with the vibrancy of AI 0:03:35.240 --> 0:03:38.440 which leads to a better productivity, a better GDP. Let's 0:03:38.480 --> 0:03:39.440 be careful what we do. 0:03:39.600 --> 0:03:43.040 Yeah, right now we're looking at nine votes, four and 0:03:43.080 --> 0:03:46.360 three descents. Bob Michael of JP Morgan with us here, 0:03:46.640 --> 0:03:48.680 what's your first reaction of this decision? 0:03:49.920 --> 0:03:52.040 Not as bad as it could have been. There could 0:03:52.080 --> 0:03:56.360 have been a lot more descents in favor of rate cuts. 0:03:56.600 --> 0:04:01.640 When we look at things like PCE. We expected they 0:04:01.680 --> 0:04:04.600 would lower core PCE by a tenth. They did that. 0:04:05.040 --> 0:04:08.520 They left the unemployment rate for next year roughly where 0:04:08.520 --> 0:04:11.920 it was last year. They did raise their expectation of 0:04:11.960 --> 0:04:14.800 GDP a couple of tenths from where it was. So 0:04:15.160 --> 0:04:17.680 to me, that seems to be, if you want to 0:04:17.720 --> 0:04:20.520 call it, a hawkish tilt, the one hawkish tilt, and 0:04:20.560 --> 0:04:24.200 of course, adding the extent and timing of additional adjustments 0:04:24.960 --> 0:04:29.240 to rate policy going forward, that was pretty much in 0:04:29.320 --> 0:04:32.279 the market. So I think, mostly as the market expect 0:04:32.320 --> 0:04:34.560 and nowhere near as bad as the market feared. 0:04:34.680 --> 0:04:36.839 So not maybe as hawkish of a cut as people 0:04:36.839 --> 0:04:38.640 thought it might have been. Joining us now, as Jim 0:04:38.640 --> 0:04:42.240 Bianco of Bianco Research. Jim, what's your first reaction to 0:04:42.440 --> 0:04:44.720 this decision, which, as Bob was saying, isn't as bad 0:04:44.720 --> 0:04:46.120 as it could have been. It could have been four 0:04:46.160 --> 0:04:48.680 decents or five descents, only three decents. Is this a 0:04:48.720 --> 0:04:51.360 victory for Jerome Powell. 0:04:51.400 --> 0:04:53.919 It's a victory for Jerome. But I'll take the other side, Bob. 0:04:53.960 --> 0:04:55.640 I'll say that it's not as good as it could 0:04:55.680 --> 0:04:58.600 have been. I was hoping for a seven to five vote. 0:04:58.960 --> 0:05:01.440 I was hoping for FED that was more divided, that 0:05:01.600 --> 0:05:04.960 was more independent, that was going to send a message 0:05:05.040 --> 0:05:08.000 to the administration. You could put a guy in that 0:05:08.160 --> 0:05:10.640 wants to go to one percent, but he's not going 0:05:10.680 --> 0:05:13.880 to bully us to cut rates next year just because 0:05:13.880 --> 0:05:16.719 he's the FED chairman. They kind of left the door open. 0:05:16.839 --> 0:05:18.960 I think that the FED can be bullied by the 0:05:19.000 --> 0:05:22.240 next FED chairman to do the bidding of President Trump. 0:05:22.520 --> 0:05:25.839 Bobby, you were saying that you wanted to respond, not 0:05:25.960 --> 0:05:28.359 as good as it could have been with more descents. 0:05:28.440 --> 0:05:31.880 I think if you're the administration and you're invested in 0:05:31.920 --> 0:05:35.080 this market, this is pretty much as good as it 0:05:35.120 --> 0:05:38.040 could have been. Other than no descents, I'm not sure 0:05:38.040 --> 0:05:40.000 how additional descents make this better? 0:05:40.080 --> 0:05:41.839 Well, McKey descent at the press conference. 0:05:41.880 --> 0:05:44.320 Well, let's find out, Mike, you were parsing through this, 0:05:44.400 --> 0:05:46.479 you've got something to add? What do you see? 0:05:46.960 --> 0:05:48.960 Yeah, Well, the point I'd like to make is that 0:05:49.040 --> 0:05:51.440 the SEP shows that growth is going to pick up 0:05:51.480 --> 0:05:54.560 significantly next year, unemployment is going to go down, and 0:05:54.600 --> 0:05:57.400 inflation is going to go down significantly next year. So 0:05:57.960 --> 0:06:00.360 what was the rush to cut rates today if they 0:06:00.400 --> 0:06:02.520 think that's the track that we're on. I think that's 0:06:02.560 --> 0:06:04.960 going to be a key question for JPOW in the 0:06:05.000 --> 0:06:09.200 news conference. Does this raise the possibility that they could 0:06:09.200 --> 0:06:11.880 be going the wrong direction with rates? There were some 0:06:11.920 --> 0:06:15.200 people who made that case before we went into today's meeting, 0:06:15.360 --> 0:06:18.280 and they're going to be still raising questions about it 0:06:18.320 --> 0:06:18.880 going forward. 0:06:19.000 --> 0:06:21.239 Michael McKee, thank you so much. We will be catching 0:06:21.279 --> 0:06:23.799 up with you and of course listening to your questions. Jim, 0:06:23.920 --> 0:06:25.920 this is something that is near and dear to your heart, 0:06:25.960 --> 0:06:28.760 as you call yourself a self dove inflationista, do you 0:06:28.800 --> 0:06:31.720 think that this really adds to that inflationary pressure if 0:06:31.760 --> 0:06:34.599 the FED essentially is accepting that they're not going to 0:06:34.600 --> 0:06:38.040 get down to their inflation target for six seven potentially 0:06:38.080 --> 0:06:38.880 even eight years. 0:06:40.480 --> 0:06:42.479 I agree. I think that the FED has to be 0:06:42.560 --> 0:06:45.839 very worried about that. We're worried about affordability right now. 0:06:46.279 --> 0:06:49.279 The CPI is up twenty seven percent since the end 0:06:49.360 --> 0:06:51.800 of COVID, and that's what people are upset about. How 0:06:51.800 --> 0:06:54.599 do we fix that. We need the inflation rate to 0:06:54.680 --> 0:06:57.480 run below two percent for a while so that wages 0:06:57.520 --> 0:06:59.880 can catch up. If the inflation rate is going to 0:07:00.200 --> 0:07:02.560 at three and moderate to two and a half, that 0:07:02.720 --> 0:07:05.840 is going to keep the affordability anger white hot over 0:07:05.880 --> 0:07:08.040 the next year to year and a half or so. 0:07:08.600 --> 0:07:12.480 And so I don't think that accommodating that by cutting 0:07:12.520 --> 0:07:14.760 interest rates is going to help. And that's the question 0:07:14.840 --> 0:07:18.080 I hope the chairman gets is, how are you helping 0:07:18.080 --> 0:07:20.640 affordability with one hundred and seventy five bases points of 0:07:20.680 --> 0:07:21.840 cuts in the last fourteen months. 0:07:21.920 --> 0:07:23.960 Jim, We've got to review the past. Here you were 0:07:24.040 --> 0:07:27.040 a leader on saying that inflation would be sticky. It 0:07:27.080 --> 0:07:30.200 was a lonely call years and years ago, and Bianco 0:07:30.280 --> 0:07:32.520 of Chicago said, you know what, folks were not falling 0:07:32.600 --> 0:07:35.960 down to two percent. So here we are, Jim Bianco, 0:07:36.520 --> 0:07:39.040 I just want to know the efficacy Jim Bianco where 0:07:39.040 --> 0:07:42.560 he says in the press conference, basically, one and done. 0:07:42.680 --> 0:07:45.520 We made a rate cut. Maybe we will have a 0:07:45.640 --> 0:07:49.360 sequence of future rate cuts, but we really really now 0:07:49.920 --> 0:07:53.560 have to wait and see what the data says. Isn't 0:07:53.600 --> 0:07:56.880 that where we are Jim Bianco, Well, that's if that's 0:07:56.920 --> 0:07:57.679 what he says. 0:07:57.800 --> 0:07:59.880 And again, what I was trying to say before is 0:08:00.000 --> 0:08:03.200 if the chairman imitates that it's one and done, he's 0:08:03.240 --> 0:08:06.000 a chairman's running the show. And in May we're going 0:08:06.040 --> 0:08:09.239 to have a handpicked successor from Donald Trump running the show. 0:08:09.280 --> 0:08:11.560 And we know what Trump thinks about it illustrates and 0:08:11.600 --> 0:08:13.720 that person's going to want to have lower rates. But 0:08:14.040 --> 0:08:16.720 if he does say that, then maybe the market will 0:08:16.760 --> 0:08:19.480 take it a little bit differently. And we'll see if 0:08:19.480 --> 0:08:21.360 he does. But most of the times he'll just say 0:08:21.400 --> 0:08:23.280 he's going to be data dependent, and it depends on 0:08:23.320 --> 0:08:24.360 what the data is. 0:08:24.840 --> 0:08:27.080 This is an important ving at folks that I think 0:08:27.320 --> 0:08:30.440 just so valuable. I'm in a room with Axel Weber, 0:08:30.960 --> 0:08:34.600 Sharkawa of Japan, the wonderful John Lipski with all of 0:08:34.640 --> 0:08:37.640 his work on New York Wall Street, many other worries. 0:08:37.679 --> 0:08:41.160 Tomahonig was there from Kansas City and the room fell silent, 0:08:41.320 --> 0:08:45.200 Bob Michael when they talked about the next regime of 0:08:45.240 --> 0:08:47.960 the FED and the risk here that it would be 0:08:48.040 --> 0:08:51.640 cut cut, cut cut. Is that a legitimate fear that 0:08:51.720 --> 0:08:55.760 the next chairman and the apparatus will allow us to 0:08:55.840 --> 0:08:58.680 go towards some regime of new lo low rates. 0:08:58.880 --> 0:09:02.240 Well, I think you have to look at which FED 0:09:02.320 --> 0:09:07.240 presidents are coming onto the FOMC next year, and they're 0:09:07.280 --> 0:09:10.760 mostly in the hawkish cap. So whoever you put in 0:09:10.800 --> 0:09:14.520 as the FED chair has to be very persuasive. And 0:09:14.600 --> 0:09:18.280 I guarantee you the President isn't looking to appoint the 0:09:18.320 --> 0:09:21.960 next Paul Vulker. They're looking to appoint someone who believes 0:09:22.000 --> 0:09:23.679 in supply side economic. 0:09:23.320 --> 0:09:25.880 And Lisa, this is critical, This is absolutely critical. That 0:09:25.920 --> 0:09:27.840 we have an analog here with the Bank of England 0:09:28.080 --> 0:09:30.600 that over time has told the Governor of the Bank 0:09:30.640 --> 0:09:33.880 of Inland and their chairman equivalent, no, we're not in agreement, 0:09:34.160 --> 0:09:35.840 We're not going to do it. Is that what our 0:09:35.840 --> 0:09:37.480 twenty twenty seven looks like. 0:09:37.600 --> 0:09:39.920 Part of the problem is people get overwhelmed by the 0:09:39.960 --> 0:09:42.120 state of events, and this is something that you talk 0:09:42.120 --> 0:09:44.160 about a lot, and Jim, I'd love your thoughts on 0:09:44.200 --> 0:09:46.880 that this idea, that this is a FED that is 0:09:46.920 --> 0:09:49.920 now buying bonds once more, buying notes once more, and 0:09:49.960 --> 0:09:53.600 they're doing so because of reserves issues and really technical 0:09:53.760 --> 0:09:57.040 considerations for the market. They don't want another repo freak 0:09:57.080 --> 0:09:59.960 out at this point, though, it does indicate a structural 0:10:00.080 --> 0:10:02.760 issue with how much debt is out there, the government 0:10:02.800 --> 0:10:05.480 deficit that's not going down, and a question of the 0:10:05.480 --> 0:10:07.880 Fed's role. Are they being forced to monetize the debt 0:10:08.080 --> 0:10:10.680 in a way that will keep them artificially easy if 0:10:10.720 --> 0:10:14.520 you're just going off the economic outlook, I. 0:10:14.480 --> 0:10:18.120 Think they are at least being force to acknowledge fiscal dominance, 0:10:18.160 --> 0:10:22.640 that the fiscal situation is important. Basically, the funding market, 0:10:22.679 --> 0:10:25.400 the repo market, which funds the thirty eight trillion dollar 0:10:25.480 --> 0:10:28.400 treasury market, is too small. It's too small because the 0:10:28.440 --> 0:10:32.240 Fed has been doing QTE and reducing reserves. Those interest 0:10:32.280 --> 0:10:35.800 rates report rates have been going up. Now. One answer 0:10:35.840 --> 0:10:38.800 could be to tell Congress you can't spend as much money, 0:10:38.800 --> 0:10:41.240 you can't run as big a deficit because the funding 0:10:41.280 --> 0:10:43.960 markets can't handle that size of a market. But if 0:10:44.000 --> 0:10:46.840 the FED wants to elect to, let's expand the funding 0:10:46.880 --> 0:10:49.520 markets to meet the size of the bond market. You're 0:10:49.559 --> 0:10:53.160 telling Congress, go ahead, spend more money, run bigger deficits. 0:10:53.200 --> 0:10:56.160 We've got your back. We'll continue to expand that funding 0:10:56.200 --> 0:10:59.080 market to meet those goals. And the biggest driver of 0:10:59.160 --> 0:11:01.840 inflation will over the last couple of years, other than 0:11:01.880 --> 0:11:04.280 the supply shock that we had in twenty one, has 0:11:04.320 --> 0:11:08.280 been government spending. And they seem to be encouraging more 0:11:08.320 --> 0:11:09.160 government spending. 0:11:09.400 --> 0:11:13.240 Bob, do you agree with that, absolutely, one hundred percent. 0:11:13.320 --> 0:11:17.520 But it doesn't change the fact that that's what's occurring 0:11:17.960 --> 0:11:21.679 and the markets responding to that. I look at everything 0:11:21.760 --> 0:11:24.840 that just happened in the last few minutes, and you know, 0:11:25.080 --> 0:11:28.520 everyone got what they wanted. Those hawks on the Fed 0:11:28.600 --> 0:11:31.840 that didn't want to see a rate cut, they got that. 0:11:31.920 --> 0:11:34.920 When you look at the Fed futures market, we had 0:11:35.040 --> 0:11:38.199 two rate cuts priced for next year, midyear, and the 0:11:38.320 --> 0:11:40.600 end of the year. Now there's only one price for 0:11:40.720 --> 0:11:44.080 next year and it's in the fourth quarter. So you 0:11:44.200 --> 0:11:47.120 got what you wanted. You got the market moving away 0:11:47.480 --> 0:11:51.280 from being in a rate cutting regime going forward. But 0:11:51.679 --> 0:11:54.040 if you look at the doves on the Fed, if 0:11:54.120 --> 0:11:57.440 you think about the administration, they got what they wanted. 0:11:57.440 --> 0:12:00.280 They got another twenty five basis point take and off 0:12:00.280 --> 0:12:03.720 of base rates, and the markets responding positively to that. 0:12:04.040 --> 0:12:07.720 It's rare that everyone gets what they wanted out of 0:12:07.760 --> 0:12:08.959 an FOMC meeting. 0:12:09.160 --> 0:12:11.360 Jim, I love your comments on that, this idea that 0:12:11.440 --> 0:12:14.400 everyone wins. If you do have monetization of the debt, yes, 0:12:14.480 --> 0:12:17.120 you do have ongoing fiscal spending, yes, but that helps 0:12:17.120 --> 0:12:19.560 support the markets. And we're not seeing runaway inflation, so 0:12:19.800 --> 0:12:21.160 what's the problem. 0:12:22.400 --> 0:12:24.400 We're going to get a new FED chairman, that's the 0:12:24.400 --> 0:12:26.440 big issue. And the new FED chairman is going to 0:12:26.440 --> 0:12:29.360 be perceived to be having a political agenda, and you 0:12:29.440 --> 0:12:33.480 were hoping that the current members of the FOMC were 0:12:33.520 --> 0:12:36.600 going to act as an independent break on a political 0:12:36.640 --> 0:12:39.480 agenda that was coming in. And that's why I wanted 0:12:39.480 --> 0:12:43.000 to see more dissents to be signal that they were ready, 0:12:43.040 --> 0:12:46.000 willing and able to be that political break. Now maybe 0:12:46.000 --> 0:12:48.560 they will once we get that new FED chairman, but 0:12:48.600 --> 0:12:51.040 then that looks political that they didn't take the chance 0:12:51.160 --> 0:12:53.280 to do it before the new guy came. 0:12:53.679 --> 0:12:56.400 Jim Bianco, thank you so much, as always for your insights. 0:12:56.400 --> 0:12:58.160 This really is going to be the debate. How does 0:12:58.160 --> 0:13:01.360 fedhair J. Powell position himself and position the FMC is 0:13:01.400 --> 0:13:05.360 being politically independent at a time that's highly politically charged. 0:13:05.480 --> 0:13:07.760 We hear every single day about the FED share from 0:13:07.840 --> 0:13:08.440 this president. 0:13:08.520 --> 0:13:12.040 The redo of independence is the core issue, particularly of 0:13:12.080 --> 0:13:14.640 the heritage of the fedback to nineteen fifty one, and 0:13:14.720 --> 0:13:17.480 it's under threat, no question about that. It'd be interesting 0:13:17.559 --> 0:13:20.200 to see if the President gives way. Is Bob Michael 0:13:20.240 --> 0:13:23.000 mentioned the FT article today talking about well maybe it 0:13:23.080 --> 0:13:26.760 isn't one hundred percent or ninety percent, doctor Hassett, and 0:13:26.800 --> 0:13:28.720 you get to a point where there's a renewed debate. 0:13:28.800 --> 0:13:30.760 We'll have to see on that. To me, it's a 0:13:30.840 --> 0:13:33.880 Chicago FED meeting. We had Goulesby dissenting, which is a 0:13:33.960 --> 0:13:37.360 shock in itself, and have Jim Bianco with this is wonderful. 0:13:37.760 --> 0:13:40.600 Diane Swank owns the high ground of Middle America with 0:13:40.679 --> 0:13:43.559 kp MG. She's not out of three zip codes in 0:13:43.600 --> 0:13:48.319 Manhattan and joins us this afternoon. I look Diane at 0:13:48.320 --> 0:13:52.280 this moment, and when I see Goulesby's descent, and it's 0:13:52.320 --> 0:13:56.560 sents me a Chicago descent. It's a descent of productivity. 0:13:56.840 --> 0:14:00.560 Do we have any idea with this new AI that 0:14:00.640 --> 0:14:04.320 we have a new productivity that will allow for a 0:14:04.480 --> 0:14:09.559 better real GDP, a more effective and efficient America. 0:14:11.240 --> 0:14:13.200 We don't know that yet. What we do know is 0:14:13.240 --> 0:14:16.679 that productivity growth has moved up, and that's because firms 0:14:16.720 --> 0:14:18.800 are doing more with less. We don't know that it's 0:14:18.800 --> 0:14:22.080 all from AI. We haven't seen enough adoption of AI 0:14:22.160 --> 0:14:24.720 yet to get there. And also what we don't know 0:14:25.040 --> 0:14:28.280 is how AI will be used, whether or not we'll 0:14:28.400 --> 0:14:30.560 see a lot of new jobs from this new innovation. 0:14:30.720 --> 0:14:33.600 That's usually what we see from innovation. Somealy, that's not 0:14:33.680 --> 0:14:36.480 what Silicon Valley is telling us at this point in time. 0:14:36.840 --> 0:14:39.960 And also it matters who the gains of the AI 0:14:40.160 --> 0:14:43.640 actually accrue to. If those productivity gains continue to accrue 0:14:43.960 --> 0:14:47.080 to the owners of capital instead of workers, workers are 0:14:47.120 --> 0:14:50.200 going to feel left behind, and they're already feeling left 0:14:50.200 --> 0:14:53.000 behind because of the fact that the level of prices, 0:14:53.040 --> 0:14:56.360 as Jin pointed out, is just too high. Even if 0:14:56.360 --> 0:15:00.119 inflation were to cool from here, the level of prices 0:15:00.160 --> 0:15:01.000 are still too hot. 0:15:01.160 --> 0:15:03.400 Lisa, I set up that question because I knew what 0:15:03.480 --> 0:15:06.520 doctor Swank would say. Who's going to be the winner 0:15:06.640 --> 0:15:09.840 of productivity? Who are going to be the winners out there, 0:15:09.960 --> 0:15:12.600 and that's the ultimate political tension. 0:15:12.280 --> 0:15:14.520 Which is the reason why the fed's role in this 0:15:14.680 --> 0:15:17.800 is getting increasingly politicized. And i'd love your tech take 0:15:18.200 --> 0:15:21.720 on how this FED is taking into account productivity gains 0:15:21.720 --> 0:15:25.080 of AI and talking about goldilocks, because essentially that is 0:15:25.120 --> 0:15:27.200 the scenario that they laid out in their statement of 0:15:27.200 --> 0:15:28.240 economic projections. 0:15:30.560 --> 0:15:34.120 Well, the Goldilock scenario really requires with productivity growth it 0:15:34.160 --> 0:15:37.400 to be broad based. And actually people always forget this 0:15:37.520 --> 0:15:40.160 part of it. If productivity growth, they raise their growth 0:15:40.240 --> 0:15:45.040 rates for next year. If productivity growth is driving gains 0:15:45.120 --> 0:15:47.800 in overall economic growth, it means we can actually have 0:15:48.240 --> 0:15:52.120 higher break evens on the FED funds rate because the 0:15:52.160 --> 0:15:55.840 economy can grow more rapidly without having to lower rates. 0:15:55.880 --> 0:15:59.120 And I think that's important as well. And so we've 0:15:59.160 --> 0:16:01.360 really not seen all this yet and I think it's 0:16:01.400 --> 0:16:03.880 still ahead of us. I am worried about the fact 0:16:03.920 --> 0:16:07.440 that we're getting fiscal stimulus in the form of the 0:16:07.600 --> 0:16:11.320 largest tax refunds surge on record in the first and 0:16:11.400 --> 0:16:14.680 second quarter we'll hit between March and May, and we 0:16:14.800 --> 0:16:17.920 know that those tax refunds are treated like windfall gains 0:16:18.200 --> 0:16:21.400 due to the expansions of tax cuts passed in July 0:16:21.520 --> 0:16:25.600 of last year. They're retroactive to beginning of twenty twenty five, 0:16:25.960 --> 0:16:28.480 and that's going to be a big bump in fiscal 0:16:28.480 --> 0:16:32.480 stimulus at a time when we're still feeling the inflation 0:16:32.640 --> 0:16:36.280 from both tariffs and changes in immigration policy, and I 0:16:36.280 --> 0:16:39.640 think that's really important. We're seeing service sector inflation pick 0:16:39.720 --> 0:16:40.360 up as well. 0:16:40.560 --> 0:16:42.720 If that's the case, dine, why are not forward break 0:16:42.760 --> 0:16:45.840 even rates rising substantially. I was looking just now at 0:16:45.880 --> 0:16:48.760 the five year five year forward break even rates, and 0:16:48.840 --> 0:16:51.640 they actually went down after this FED decision, not up, 0:16:51.760 --> 0:16:54.520 even though exactly what you're saying, if you do believe 0:16:54.560 --> 0:16:57.320 that there will be something additional fiscal stimulus that would 0:16:57.320 --> 0:17:00.400 be inflationary, you would think that this rate decision would 0:17:00.400 --> 0:17:02.120 only encourage those inflation fears. 0:17:04.520 --> 0:17:06.320 I don't think. I think we've seen some of it 0:17:06.400 --> 0:17:09.160 in financial markets already. The fact that it's not happening 0:17:09.200 --> 0:17:12.280 today doesn't mean it won't happen. And we've already seen 0:17:12.320 --> 0:17:16.439 some nervousness in the bond market, skidtishness about the size 0:17:16.440 --> 0:17:19.359 of debt that they have to absorb, the mega merger 0:17:19.400 --> 0:17:22.320 deals that are coming out that are also financed by debt. 0:17:22.720 --> 0:17:25.600 All of that together along with the fact that we're 0:17:25.600 --> 0:17:29.160 now going to see in twenty twenty six, the government 0:17:29.280 --> 0:17:32.280 debt is going to eclipse the size of the economy. 0:17:32.480 --> 0:17:35.159 It has not done that since World War Two, and 0:17:35.240 --> 0:17:38.159 so we're moving into new territory, and I think a 0:17:38.200 --> 0:17:40.159 lot of things people are sort of looking at the 0:17:40.160 --> 0:17:43.880 way the world was rather than what's changing, and things 0:17:43.960 --> 0:17:45.400 are changing very rapidly. 0:17:45.520 --> 0:17:47.239 If you are just joining us. We did get that 0:17:47.359 --> 0:17:49.800 FEDER rate decision. They did lower by twenty five basis 0:17:49.800 --> 0:17:54.200 points as widely as expected, nine to three vote three descents. 0:17:54.320 --> 0:17:57.560 The news really is that Austin Goolsby joined FED the 0:17:57.560 --> 0:18:01.240 Fed Schmidt in dissenting saying that they should not lower rates, 0:18:01.240 --> 0:18:04.280 who of course had Stephen Myron, a FED governor, talking 0:18:04.280 --> 0:18:07.600 about a fifty basis point cut dissenting on the other side. 0:18:07.600 --> 0:18:10.080 Not as many descents as people had expected. The Fed 0:18:10.119 --> 0:18:13.080 did revert back to what we saw in the October statement, 0:18:13.200 --> 0:18:17.679 using language used just before pausing rate cuts, so potentially 0:18:17.720 --> 0:18:21.080 the last FED rate cut for a long time by 0:18:21.119 --> 0:18:21.680 this chair. J. 0:18:21.880 --> 0:18:22.200 Powell. 0:18:22.280 --> 0:18:24.800 I'm just wondering, Bob, if you think that right now 0:18:24.840 --> 0:18:27.080 this market is saying they are okay to do this, 0:18:27.160 --> 0:18:30.480 that the data that is available really doesn't signal that 0:18:30.560 --> 0:18:33.000 this cut and then maybe one more next year really 0:18:33.040 --> 0:18:34.240 is going to be inflationary. 0:18:35.119 --> 0:18:38.399 Well, I think that's what the market's hoping for. I 0:18:38.440 --> 0:18:41.000 think there are a lot of businesses that we invest 0:18:41.040 --> 0:18:45.399 in where we do see the productivity gains from AI already. 0:18:46.280 --> 0:18:49.720 We also know within our own bank there are significant 0:18:49.920 --> 0:18:53.680 productivity gains, so some of that is already out there. 0:18:54.080 --> 0:18:58.520 The unfortunate price reset from pre COVID levels to today 0:18:59.080 --> 0:19:02.440 is also a problem. I get that, but that's damp 0:19:02.480 --> 0:19:06.040 and aggregate final demand. What do we want going forward? 0:19:06.119 --> 0:19:09.360 Do we want the disinflation we seem to be in 0:19:09.720 --> 0:19:12.480 and what the FED is projecting, or do we want 0:19:12.520 --> 0:19:15.960 deflation where prices come down. I would argue we still 0:19:16.000 --> 0:19:19.760 want disinflation, and hopefully there will be a point in 0:19:19.840 --> 0:19:23.080 time in the not too distant future where wage growth 0:19:23.160 --> 0:19:26.760 and the trend in disinflation will normalize prices again. But 0:19:26.960 --> 0:19:29.840 all of that still is a headwind to consumption, so 0:19:29.960 --> 0:19:34.480 businesses are very careful how much cost increases they push through. 0:19:34.560 --> 0:19:38.560 Now, can I do a counterfactual, please, Diane Swank if 0:19:38.560 --> 0:19:42.840 we got a fifty beep Myron cut, what would happen 0:19:42.880 --> 0:19:47.000 to the American economy now? With the financialization of the 0:19:47.000 --> 0:19:50.640 American system, If you gave us a fifty beep cut now, 0:19:51.000 --> 0:19:56.119 it'd be a veritable banking explosion, wouldn't it. 0:19:56.119 --> 0:19:58.760 It would certainly add a lot more stimulus to what 0:19:58.800 --> 0:20:02.160 we're already seeing. And stimulus is heat. Heat is inflation 0:20:02.480 --> 0:20:05.520 unless you can really get all those offsets from AI 0:20:06.000 --> 0:20:08.920 in the right places. And I think that's the hard 0:20:08.920 --> 0:20:12.480 part is the old economy is where the tariffs are 0:20:12.520 --> 0:20:16.399 hitting the hardest in manufacturing activity, and we are seeing 0:20:16.400 --> 0:20:19.160 it come through in prices. And we're also seeing labor 0:20:19.200 --> 0:20:22.680 shortages even as the labor market weekends in pockets where 0:20:22.720 --> 0:20:26.479 immigrants have dominated. That's showing up in prices as well. 0:20:26.680 --> 0:20:30.800 In Howmelda Care childcare costs all soaring. That was just 0:20:30.840 --> 0:20:35.160 in September, and those shortages have only gotten worse since then. 0:20:35.359 --> 0:20:37.600 Lisa, two twenty twenty. I looked at the clock right 0:20:37.640 --> 0:20:41.399 when Diane Swank said tariffs one. First time we got 0:20:41.440 --> 0:20:45.119 the tariffs was twenty minutes into the show. For most 0:20:45.200 --> 0:20:48.840 of our audience, tariffs are a big deal they're affecting 0:20:48.880 --> 0:20:52.360