WEBVTT - Former Fed Vice Chair Lael Brainard Talks Warsh's First Fed Meeting

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

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<v Speaker 2>The bond market especially fascinating in the last twenty four

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<v Speaker 2>hours in the aftermath of the first FED decision made

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<v Speaker 2>under the new chair Kevin Walsh. The market clearly was

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<v Speaker 2>expecting something a little bit more dubbish than what it received,

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<v Speaker 2>in the form of a dot plot in which about

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<v Speaker 2>half of the members of the FMC suggested they would

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<v Speaker 2>like to see or expect to see a rate hike

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<v Speaker 2>this year. That's why we saw the two year yield

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<v Speaker 2>yesterday jump to the highest level since April of twenty

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<v Speaker 2>twenty five. But of course, as Charlie mentioned, we are

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<v Speaker 2>seeing yields a bit lower today, including on the two year,

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<v Speaker 2>by about three basis points. Of course, as I reference

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<v Speaker 2>that dot plot we got yesterday, Kevin worsh himself did

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<v Speaker 2>not contribute a dot as we know, and as he

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<v Speaker 2>discussed in the press conference, he isn't really a fan

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<v Speaker 2>of the FED providing forward guidance. He also seems to

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<v Speaker 2>suggest that financial markets shouldn't need forward guidance from the FED.

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<v Speaker 2>Maybe the guiding should be going in the other direction.

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<v Speaker 2>Let's remind ourselves of what the chairman said at the

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<v Speaker 2>press conference yesterday.

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<v Speaker 1>The more that markets are paying attention to what's happening

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<v Speaker 1>in the real economy, deciding what's good data and what's

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<v Speaker 1>less good data, the more financial markets can price what

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<v Speaker 1>they believe is the most likely. Financial market prices are

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<v Speaker 1>probably the most important source of information to guide central bankers.

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<v Speaker 1>But when all the financial markets are doing is reflecting

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<v Speaker 1>back what we've said, then we're taking the most important

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<v Speaker 1>source of information and we're being blind to it.

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<v Speaker 2>So let's talk to one for central banker. The former

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<v Speaker 2>vice chair of the Federal Reserve in fact, and the

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<v Speaker 2>former director of the National Economic Council under the Biden administration,

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<v Speaker 2>Lael Brainerd is joining us now on Bloomberg TV and radio.

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<v Speaker 2>She's now Distinguished Fellow at the Georgetown Saras Center for

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<v Speaker 2>Financial Markets and Policy. Welcome back to Bloomberg. Director. It's

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<v Speaker 2>good to see you. I wonder what you made overall

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<v Speaker 2>of Kevin worsh and his first press conference yesterday.

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<v Speaker 3>Did he surprise you well, it was a very interesting

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<v Speaker 3>press conference. He stayed true to his vow not to

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<v Speaker 3>really communicate his own views about policy or any sense

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<v Speaker 3>of where policy might be going. The result of that

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<v Speaker 3>was he really let the summary of economic projections do

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<v Speaker 3>all the talking, and I think the markets really reacted

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<v Speaker 3>because you had half of those projections didn't include his projection,

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<v Speaker 3>but half of those projections saying that inflation is going

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<v Speaker 3>to be a lot higher this year, ending the year

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<v Speaker 3>at three point three percent core, and that would warrant

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<v Speaker 3>one or more rate hikes, and that's why you saw

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<v Speaker 3>that big move in the two year. The other thing

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<v Speaker 3>that was notable is that both in the statement and

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<v Speaker 3>in his discussion, he really emphasized price stability and made

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<v Speaker 3>it sound like a one mandate central banks. So those

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<v Speaker 3>were the things that I think moved the direction of

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<v Speaker 3>the market in a very hawk as shift. That's not

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<v Speaker 3>actually what his comments, the sort of subtext suggested, but

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<v Speaker 3>those were the main messages.

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<v Speaker 2>Well, so talk about his comments on what we just

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<v Speaker 2>heard him say about financial markets receiving guidance from the

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<v Speaker 2>FED in particular, I wonder if you have sympathy with

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<v Speaker 2>the view that maybe the markets should be the one

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<v Speaker 2>interpreting data on their own rather than interpreting the Fed's

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<v Speaker 2>interpretation of said data.

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<v Speaker 3>Well, I think the difficulty here is that the market

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<v Speaker 3>needs to and the public need to understand not forward

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<v Speaker 3>guidance in the sense that I think he is objecting to,

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<v Speaker 3>which is suggesting, here's what our action will be if

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<v Speaker 3>inflation and unemployment come in at these levels. But at

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<v Speaker 3>least a sense of how the Fed's policy is seeing

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<v Speaker 3>current inflation unemployment, and that gives both the markets and

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<v Speaker 3>the public a sense of where policy might be heading.

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<v Speaker 3>So what was interesting yesterday is he really didn't even

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<v Speaker 3>want to provide a sense of what a lot of

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<v Speaker 3>people call a reaction function, but his own biases seemed

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<v Speaker 3>to be a sort of subtext in some of his comments.

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<v Speaker 3>He noted that half of the people who did submit

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<v Speaker 3>projections didn't see a rate hike this year. He said

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<v Speaker 3>there was no cruel choice between inflation and the labor market.

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<v Speaker 3>So there were a few things that he said that

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<v Speaker 3>might have pushed back in the other direction.

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<v Speaker 2>Well, and of course, as we consider what it said

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<v Speaker 2>or what will be said going forward, we know there's

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<v Speaker 2>going to be a whole task force on communications, There's

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<v Speaker 2>going to be a lot of tax forces under this

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<v Speaker 2>new chairman. Has he asked you to sit on any

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<v Speaker 2>of them? He said, was still making calls.

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<v Speaker 1>No.

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<v Speaker 3>I think what was interesting about the task forces we

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<v Speaker 3>knew there would be a review of balance sheet policy,

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<v Speaker 3>we knew there would be a review of communications. But

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<v Speaker 3>I think what was interesting is the task forces on

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<v Speaker 3>data sources, the task forces on the inflation framework, and

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<v Speaker 3>the task forces on productivity all could be ways that,

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<v Speaker 3>even while emphasizing price stability, he tries to move the

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<v Speaker 3>committee in a more dubvish direction. So those were the

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<v Speaker 3>areas that I think we just don't know where he's headed.

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<v Speaker 3>But what we do know is that half of the

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<v Speaker 3>committee is very worried about inflation, and that is consistent

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<v Speaker 3>with the data we've seen.

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<v Speaker 2>So let's talk about that inflation framework. Because he was

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<v Speaker 2>asked specifically whether the FED is going to be reconsidering

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<v Speaker 2>the two percent target, and while he reiterated he's more

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<v Speaker 2>focused on the two not what comes after the decimal point,

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<v Speaker 2>he also said he sees no reason to change from

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<v Speaker 2>two percent right now. Do you anticipate he could get there?

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<v Speaker 3>So what was interesting is that there are a number

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<v Speaker 3>of things he said which suggest that he may not

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<v Speaker 3>wish to stick with core PCEE as the inflation target.

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<v Speaker 3>He's talked about trim mean inflation when he is now

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<v Speaker 3>referencing a task force on the inflation framework that two

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<v Speaker 3>provides some wiggle room for potentially moving away from getting

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<v Speaker 3>core PCE back down to two percent, and his comments

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<v Speaker 3>on what's on the left side of the decimal point

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<v Speaker 3>suggested that anything from two point five down to two

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<v Speaker 3>might be acceptable. So all of those gave some suggestion

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<v Speaker 3>that he might be looking for wiggle room. And that

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<v Speaker 3>is not what we saw from half of the members

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<v Speaker 3>who submitted projections where they saw inflation core inflation still

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<v Speaker 3>at three point three percent at the end of this year,

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<v Speaker 3>sixth year in a row of inflation well above target,

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<v Speaker 3>new inflation pressures coming not just from oil but now

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<v Speaker 3>from AI, and saw the case for a right hike

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<v Speaker 3>or more.

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<v Speaker 2>Well so on those inflation pressures. We obviously now have

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<v Speaker 2>at least the beginnings of the reopening of the straight

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<v Speaker 2>of wour moves via this memorandum of understanding between the

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<v Speaker 2>US and Iran. The US naval wil Kate is now

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<v Speaker 2>officially over, and Iran is supposed to allow the toll

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<v Speaker 2>free of transit of vessels over the next sixty days.

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<v Speaker 2>How quickly is that able to translate into lower energy

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<v Speaker 2>prices that we have seen bleeding into other core inflation metrics.

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<v Speaker 3>So I think the question is when will consumers really

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<v Speaker 3>see it at the pump, because that has a huge

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<v Speaker 3>effect on consumers perceptions of the economy, and right now

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<v Speaker 3>consumer sentiment is at rock bottom because they are so

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<v Speaker 3>unhappy with high inflation. It will take some time buffers

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<v Speaker 3>have really been used up during this transitional period. It

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<v Speaker 3>will take time for production to come back online, for

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<v Speaker 3>that strait of horror moves to fully clear, and so

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<v Speaker 3>how much it still is going to move and lift

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<v Speaker 3>core inflation. I think there's still some sense that core

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<v Speaker 3>inflation could be given an uplift from oil for at

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<v Speaker 3>least several months. And of course we now have inflation

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<v Speaker 3>coming from AI in electronics. We heard Apple's announcement, and

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<v Speaker 3>so these are successive waves of inflation that are really

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<v Speaker 3>likely to keep core inflation high through the end of

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<v Speaker 3>the year.

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<v Speaker 2>I do want to ask you about AI, but the

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<v Speaker 2>way you're talking about inflation right now lends me to

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<v Speaker 2>believe you might have been one of those dots that

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<v Speaker 2>sees a rate hike by the end of this year.

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<v Speaker 1>Yesterday? Is that the case?

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<v Speaker 3>So I believe that conditions have really changed. Then we

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<v Speaker 3>saw when the FEDS started doing its easing cycle back

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<v Speaker 3>in the fall. We've seen a tightening in the labor market.

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<v Speaker 3>But what is really noticeable is that core inflation was

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<v Speaker 3>actually rising before the oil shock, and we are now

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<v Speaker 3>seeing new sources of core inflation from the AI data boom.

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<v Speaker 3>And that's on the demand side. And so for all

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<v Speaker 3>those reasons, given that we've had five years of above

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<v Speaker 3>two percent inflation, I would probably be quite cautious about

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<v Speaker 3>insisting that the Federal Reserve has to get inflation back

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<v Speaker 3>to two percent.

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<v Speaker 2>So on AI. And we are actually going to speak

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<v Speaker 2>with the chair of firk Up next on this program

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<v Speaker 2>about data centers connecting to the grid what it will

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<v Speaker 2>all mean for rate payers. Are you in the camp

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<v Speaker 2>that sees AI firmly as inflationary because of higher energy

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<v Speaker 2>costs because of the actual infrastructure build out we are seeing,

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<v Speaker 2>or that it eventually will be disinflationary because of increased productivity.

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<v Speaker 2>Worsh's answer yesterday was I have a task force for that.

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<v Speaker 3>So both I think are likely to be the case.

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<v Speaker 3>It's clear today that AI is pulling forward demand for

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<v Speaker 3>this just incredible data center build out, levels of investment

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<v Speaker 3>that are equal to total fixed investment non residential in

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<v Speaker 3>past years devoted to data centers, and of course that

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<v Speaker 3>means chips, and those are chips that would otherwise have

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<v Speaker 3>been going into electronics and other parts of the economy.

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<v Speaker 3>So because it's really pulling forward demand, we're seeing a

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<v Speaker 3>near term inflationary impulse and that is likely to lift

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<v Speaker 3>core inflation on the back half of this year. That's

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<v Speaker 3>fully consistent with AI becoming a disinflationary force as business

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<v Speaker 3>models really transform and the broader economy starts to really

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<v Speaker 3>become more productive as a result of using generative AI.

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<v Speaker 2>In our final thirty seconds here, we're also obviously seeing

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<v Speaker 2>AI help bolster stock market and therefore the wealth of

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<v Speaker 2>people who find themselves at the upper end of the K.

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<v Speaker 2>What happens if these market gains start to dissipate at some.

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<v Speaker 3>Point, Well, AI is really driving the stock market. There's

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<v Speaker 3>a lot of credit in the AI space, there's a

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<v Speaker 3>lot of leverage, and so if we see a really

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<v Speaker 3>big piece of data that suggests that revenues are not

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<v Speaker 3>going to justify these valuations, you could see a pretty

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<v Speaker 3>big correction