Hikes and Haircuts

0:00Welcome to Inside Economics. I'm Mark Sandi, the Chief Economist of Moody's Analytics, and I'm joined by a bunch of my colleagues, my two co-hosts, Trustee Coz, Chris Derees, Dena Talley. Hi guys. Hi Mark. Good morning. Good morning. Good morning. Good morning. And we have other colleagues, regulars, I'd say, at this point. We've got Matt Collier. Hey, Matt. Hey, Mark, how's it going? Matt, Matt's our man on inflation and pretty much everything else too. You're the man for everything. So glad to glad your with us. We've got Martin, Mark Worm. Everyone knows Martin. He follows the Fed and all things Fed and all things financial system and all things financial institutions. Hey, Martin, how are you? Good. I'm having a bad hair day. Really?

1:04Good. I did. I did not notice. What makes for a bad hair? It's hard to see, but what makes for a bad hair day in your book? I've been wrestling with different headphones and how it's just everywhere. You know, at my age, you know, I'm very happy to have any hair at all. So there's no such thing as a bad hair day. Anyway, but good to have you on board. We have Justin, Justin Beggley. Hey, Justin. Hey, Mark. How are you? I on the opposite hand have a very good hair day because I just got a haircut. Justin, how often do you get your hair cut? Is that too personal question or I get cut again, I get it cut once a month, once a month, once a month. That's free. It's high regularity. Yeah. It seems like well, you know, everything's got to be shaped properly. Yeah. And you got a good hair. If it gets too long, then I can't, I can't design it well. So what about you, Matt? How often do you get your hair cut? Hair is a touchy subject. Really?

2:06Really? Why is that touchy? It's just sparse. It's increasing. No, you look at the car. Yeah, that you look great. It's a receding hairline. It's more scalp than I'm comfortable with. So it's getting shorter and shorter. But my wife gives me honest feedback, which is nice. So anyway, you're supporting a new haircut. It's shorter if you might notice. Yeah. Yeah, it's okay. I'm comfortable with balding and happens with age, but it's, you know, actually, the Chris has the best hair of any of us by orders of magnitude. Don't you think? I don't think I think Marissa takes the cake. I like it's fair to. I like Martin's long hair back in the day. I did too. I missed that. Yeah. I can't grow it back out. I'm gonna be a hair. It must be nice. Yeah. That's good. All right. Just for us, talk about inflation though. Haircuts are expensive. Oh, yeah. Oh, is that right? Oh my gosh. Oh, yeah. I think I was paying about $18 a haircut. Oh, my. Now it's like $38. I'm like, oh, my gosh.

3:13More than double. Yeah. Marissa. Marissa. When you said $18, I know. I know. When I go get my haircut, it is, I want to say it's $150 now. Whoa. I heard it cut like half an inch off my hair. What's that? I'm about to get a color. It's like $250 for the whole thing. And you're there all day. That's insane. When my wife goes to get her hair done. Yeah, but you don't tell me tell me what it cost. But you get you, you have to get this maybe too personal, but how did you get your cut? It can't be every month. No, I mean, for me. Yeah, it's got to be. No, no, it's every six weeks. Oh, it is every six weeks. Okay. Yeah, every six or seven weeks. I get it cut. Okay. Well, actually, if we really want to get into this, no, and now I'm getting it cut like every 12 weeks, I'm getting it colored every six weeks. So it's always like well over $200,

4:16no matter what I do. Right. Right. Is that inflation related? Are you? It's got it has certainly gone up. Yes. But it's, I mean, for women's, women's hair is, I mean, I think that's pretty typical. So I'm really wanting to get my planning about your $30 haircut. I'm sure. I remember back to the pandemic when we weren't getting our haircut. My wife would try to, if I said, very funny, I see what got my hair. My daughter came home after a few months, she looked like you have a mushroom on your head. Very, very funny. Don't tell my wife I said that. I was very appreciative of the haircuts I got. Anyway, we should move on. We should get down to business. And of course, this past week, the big news was the Fed meeting. The EpoMC met. They raised interest rates. Let me turn to you, Matt, because you cover it, the Fed for us on economic view. You want to give us the run-down,

5:17the nuts and bolts of what they did. Yeah. So at a high level, 25 basis point increased to the federal funds rate anticipated beforehand by bond markets. I think in the days leading up, we knew that was what was coming, even if that wasn't our most recent baseline. We can talk about why that changed, but primarily hotter inflation day to day in August, a little bit of change atone from chairwarsh. Consensus expectations leading up to the meeting, we're going to get this first rate hike, first rate hike since 2023, when the Fed, after the pandemic, bad inflation stopped all the policy tightening that they did then. As far as the statement goes, as far as the press conference goes after we're getting used to more Spartan communication from the Fed, and that's what we got. It's not a ton to dig into there, but the most important communication, the most important data, most interesting, would be the updated projections from Fed policy makers

6:18that we get every other meeting. The summary of economic projections was released in September, and there we get a sense of what policy makers are thinking about in terms of the rest of this year, is there more cuts or more hikes coming? What about next year? We're rising growth, unemployment, inflation outlooks, what's the evolution of thinking there? There's a ton to one pack, as well as just the rationale given by chairwarsh afterwards in the press conference about why now. The only other tip I would say is that the unanimity of the decision, I think there's a little bit of word ambiguity there too, in the release statement, this statement was released with 12 to zero. The voting members all agreed to release the statement. Does that mean that they're all 100% on board with a rate hike? We can debate that, but they were all okay with the statement being released and that statement included the rate hike. That's the general synopsis market reaction.

7:20We can get into what it means for our forecasts, for the next couple meetings, what we think is going to happen. I think is up for debate, but that's my read of it. You're taking my job, Matt. What the heck? Too much. Well, yeah, no, you're kind of saying this is what we're going to do. That's what I do for living here. It's my job, but you did a pretty good job at it. Yeah, yeah, you kind of nailed it. So the Fed raised rates of quarter point. The target range is now what, three and three quarters to four percent. With this decision, we get three pieces of information, broadly speaking. One is the statement that we get with the decision to change interest rates. The second is the press conference that happened right after the release of the statement. By the way, did you watch the the press conference? Of course. Yeah. Who else watched? Martin, did you watch? Did you got anybody else watched? Yeah. It wasn't really much to watch though, right? I mean,

8:28it was very short, very terse. I'm not sure I learned anything from either the statement or the press conference. Was there anything in the statement of the press conference that were you learned, Matt? No, there's definitely a consistent emphasis that Chair Warsh has in not saying what data points matter the most and not saying anything. I think this is debatable, but not saying anything that could be interpreted as a reaction function. I'd go say it's not saying anything, right? Did he say anything? I think the most interesting thing that I was focused on is that he said that everybody supported the rate hike in a way that was more explicit and that's not verbatim, but in a way that was more explicit than what was in this statement because I don't take that statement to read previous statements. So in the pal Fed, you'd have voting for this rate hike were XYZ voting members, voting against that were these three or these one or two. These are the

9:28dissents. We don't have that as clear now. So I was really focused on whether he said that everyone thought of rate hike was appropriate. I thought he hinted towards that, but here we are. We're reading tea leaves and trying to interpret stuff that's just way less transparent than what we had before. So on the whole, no, I don't think we learned a ton in the press conference and maybe some sense that it's just an inflationary story is what's happening here. We can think about that more in depth, but yeah, generally kind of more. You listen to the press conference. Did you learn anything? Yeah, I do want to say one thing to this. I mean, there's obviously a very historic shift here in between Jerome Powell and Kevin Worst. Jerome Powell would walk us through the details of what's happening economy and what the committee thinks about the various factors. The one thing that Kevin Worst keeps saying over and over again from Jackson Hall to the press conference, those as commitment to price stability. And I do think the market reads that in. There is sort of a sense that the Fed potentially has become a little bit more hawkish instead of to expect this cut ahead of the actual meeting beyond that. I don't think we learned that much. I mean, I think

10:32if Kevin Worst came out and said about a sudden, I'm really worried about the unemployment rate that would cause a shift, but that really hasn't happened. The theme has always been price stability really from beginning. Got it. Okay. And then the other piece of information we always get, well, once a quarter is the, uh, set the summary of economic projections. And we know what I find bizarre there is I, you know, I never really used to look at that dot plot very, very often. I mean, I looked at it, but I didn't really kind of spend a whole lot of time on it. Now that's the only thing we got basically. Isn't it Matt? I mean, yeah, it's, there's a kind of irony there that in pulling back how much the Fed is revealing their forcing market participants, forcing people like us to emphasize things to a greater degree and kind of make their own assumptions. That's certainly seems to be what's happening. And the dot plot, it was interesting. So the dot plot is just a visualization of where policy makers and the FOMF, FOMC are expecting various, well, for the

11:33dot plot, it's the Fed funds rate, but we get similar projections in different formats for other key variables. But the key takeaway there is that they pretty, you know, really clear majority of FOMC members expect at least another rate hike this year. Next year, not so much, not on a ton of activity. It looks like, but for this year, and there's two meetings left, a very clear majority expects at least one with four members assuming two rate hikes this year, only two assumed, and these are anonymous, but only two of those FOMC members assumed were okay, as is. And there's no future rate hikes coming. Yeah, and of course, they don't tell us when, you know, whether it's going to be a October meeting or the December meeting, we don't know, but we know that they're saying, the clear majority are saying one more quarter point rate hike before the end of the year. That's what we know from the dot plot, that's right. And the other key piece of information in the set, the summary of economic projections is their forecasts for the funds rate, the,

12:36the, you know, I should say real GDP grows, the unemployment rate inflation and the funds rate. You learn anything from that. The GDP and unemployment both look marginally better. We're talking tenths of a percentage point in the direction you want to see, but nothing meaningful, I would say there. The inflationary outlooks both worsened by about a tenth of a percentage point. So expectation 3.7% year over year, PC inflation in Q4 of 2026, core PC 3.4%. And then, modicent, pretty solid improvement towards the Fed's target by, by 2028. But in general, that's not where I found the story to be so much as it's, you know, the rate path. I should say on that dot going back to the dot plot, Kevin Warsch made it clear that he did not participate in that exercise. So there's no dot that represents his views in that. Right. It's back to his view that the Fed should be less transparent about, you know, providing that kind of information.

13:37Hey, Chris, did you watch, did you have a, or Marissa, Justin, did you guys have a chance to watch the press conference? Did any of you guys watch it? I didn't get to watch it. You did not. What about, I read this thing, but yeah, Chris, did you see it? Yeah, same. I was traveling. So, Justin, did you have a chance? No, I didn't get to watch it. Okay. You missed nothing. I'm just saying. Yeah, it was brief. It was literally a half hour and he spent no more than 30 seconds. 16 questions. How many? I heard it was 16 questions. And that interesting factoid is that the journalists are now put in alphabetical order. Oh, is that what was going on? I was wondering. That was bothering me watching that all like the Wall Street Journal, the financial times people that are in the front row or not. So it's, it's a lot more difficult. What's that usually? Yeah, typically they put a higher profile journalist in the front. But oh, how do you interpret that? What is that change on the guard, I guess? I think he's a big axiose fan and, you know, okay. Political Atlantic man. I don't know. I guess it's a nod towards some objectivity that they're not

14:44playing favorites. It's just right. I don't know. Interesting. Interesting. Okay. So the interpretation of all this, Martin, what do you think? How do you interpret what's going on here and what it all means for future monetary policy? Yeah, it's an interesting hike in the sense that the economic stones scream hiking. Inflation certainly is running above target house for some time. But if you look at longer term inflation expectations, there's really no unencaring at risk like we saw in 2021. We have an oil price shock, which is a temporary shock. Usually the wisdom for central bank is to say, well, we see it through. All the prices come up today and someone the future come back down again. There's not really a reason to hike. And at the same time, the labor market is much more than equilibrium than it was in 2021. So unemployment is at or maybe a little bit above sort of equilibrium unemployment is not a whole load of wage pressure. So it doesn't really feel like the Fed has to hike in the scenario. It certainly is not a scenario where the Fed will hike 10, 10, 12 times like it was in 2021. That's certainly a difference here.

15:49So there is a sense that for one, it's a bit of a signal. So Kevin Worsh comes in, he presents himself as a hawk. Inflation is above target. There is some concern about Fed independence that's been circulating. And if the Fed now unanimously, I get definitely sits, sends a signal to Marigasel. We are committed to inflation. We committed to price stability. We're going to continue to keep the boat to ball really running, if you will. The other sort of potential explanation is to say, well, we're sort of thinking about the stance of monetary policy. There is all this growth in the economy. Productivity growth has taken up as AI. Maybe the neutral rate has increased a little bit. And monetary policy isn't quite as restrictive as we previously thought. In that case, it sort of might not just been in that direction. I think both of these explanations have something right here. What it definitely isn't, it's not an emergency scenario. It's not that inflation is running way into the Fed has to hike in this particular moment. Right. So can you just explain the neutral rate for the listener? What is the neutral rate?

16:49The neutral rate is the rate at which monetary policy needs to stimulate economic activity, nor dampens on economic activity. It is not something that we know. It is something that we have to estimate. It depends broadly speaking on really underlying deep fundamentals of the economy. It's like how quickly are we growing potentially? That determines the rate of return on capital and equilibrium. If the Fed wants to dampen demand, it will raise the rate above that. That exists inflationary. If the Fed wants to stimulate demand, tipping a recession, it lowers the rate below that. And that will act, they will stimulate demand will act a little bit inflationary. And if you're above inflation, what you want to do is you want to keep the rate a little bit higher than that to make sure that you come back to target inflation. Now the neutral rate is not known. It is something that we have to estimate. Historically, I would say coming out of the pandemic, the Fed would have said it's something around 3%. There again is a bit of an indication the SAP there, the Fed has not sort of brought it up a little bit of a time. It's really related to the study of AI growth causing higher productivity growth. Maybe rates need to be a little bit higher

17:54to rate an inflationary. Right. So the SAP, the summary of economic projections, that's the last time I'll say that. It's the SAP. It showed that the members that provided their forecast now think the neutral rate, I think is 3.25%. It had been 3. It's been pushing up over the last couple of meetings and now at 3.25%. As you know, the target now is 3.25 to 4. So that would suggest that monetary policy, according to the consensus view on the FOMC, is restrictive. That is working to restrict economic activity. Do I have that right? That appears to be the consensus. We could go into the detail of that rate that people list their release, the neutral rate, because it just says the long-term rate, which is maybe not the same thing, right? It depends on how you interpret that. But generally, this is how markets tend to read it. There are some members of the FOMC, like Kashkari and so forth,

18:55who think the neutral rate is much higher than that, but that's not the consensus view. That's a good point. It says long run forecast. The long run forecast. Yeah, well, that means. It feels like that should be the neutral rate, but it could be the long run. It doesn't necessarily mean that's the neutral rate today. That's a good point. Hey, Justin, what was your interpretation of all this? You heard Martin's perspective, anything to add or push back on? Well, nothing to push back on. It's just been interesting to me. I was pretty in favor of the argument that where inflationary pressures are coming from that monetary policy is not the best instrument to deal with supply side shocks, input taxes from tariffs that are driving up prices. The hawkish turn that the Fed has taken is somewhat interesting. It almost has been discussed and has the top lot suggests. It almost demands another cut because what is 25 basis points do in to bring down prices. But I am interesting to see where the Fed ends up

20:02turning when it comes to what they think the neutral rate actually is because I think that will be determinative. If they think that monetary policy can really slow the inflation pressures that the economy is currently facing, then it will be revealing about how much they think that they have to raise rates right now. Plot suggests anywhere from 25 to 50 basis points more over the next, I would say, by six to 10 months. We'll see where it goes. But I'm not so sure how good of a tool monetary policy is to just deal with the current inflationary pressures. So if you were on the FMC, Justin, how would you have voted here? Would you have gone with the the rest of the committee and voted to raise rates or not? For credibility, I probably would have voted to to raise the rate. It's hard to be that one kind of outstanding no votes. But in that kind of speaks to why the Fed might even be raising rates at all. Namely,

21:07they have to take note of the markets that they're taking inflation seriously. As the economy looks like from an unemployment perspective, and we can debate how valid the unemployment rate actually is given the labor supply issues. But from an unemployment perspective, the economy looks like it's at one employment. We got a good jobs number in August. And that might continue going forward. But inflation is accelerating. So you have to signal to markets that you're taking the seriously and that you're going to get inflation on a control, even if that's just by raising 50 or so basis points over the next couple of months. Got it. Got it. So you're saying based on the economics, you might not have voted to raise but given the need to establish or reaffirm credibility, you would vote for a rate increase. Yeah. And that's circumstantial, right? Because maybe that wouldn't be necessary if there wasn't a transition at the chair. But since there was, and there was speculation about

22:08Fed independence, this kind of helps solidify some of that. Martin, back to you, if you were on the FMC, what would you have done here? You were going to ask me that. I've said this before, I lean more hawkish than the rest of the group. I would have hiked, but I would have done it anyway. And that has largely to do with the fact that I just probably weight-priced stability a little bit more heavily in reaction function. Maybe it's because I'm German. I'm going to copy the reason. Yeah, the point is, but I just think all these things, right? These rates, yeah, for sure. I do think we are just a little inflation has not been coming in for the past two years in the way that it needed to really. If we really target 2% inflation and the labor market's not so out of sync that I think the rate is too high. Well, what about Justin's argument that rate hike isn't going to solve the run war? Or the tariffs? No, no, it isn't. It isn't the run war, but it is out of stuff going on. In 2025, even before all this started, we were in a target then and we weren't moving towards target. It's tariffs or uncertainty, whatever.

23:10No, we were moving towards target, don't you? Don't you? No? Don't you think? If you go back on and off, I think we were before 2025 for sure. Since 2025, I'm not so sure about that. I think it goes back and forth. Definitely not in 2026. That big part of this is the year-on war I agree. That should be temporary. I will also say that the other sort of big argument, economic argument, rates would be inflation expectations. I think inflation expectations are broadly stable. They are higher than they were before the pandemic, but they're not drifting in the wrong direction. This is why I'm saying it is really more like an optional hike. But if you ask me personally, I'm more agreeing with say, Laurie Lorgan of the Dallas Fed, it says, well, it's been running above inflation. Some would be have to do something. We've been running above target. I find that a weird argument, but okay. Maybe just me. But the inflation expectations, one argument is that if you look at break-even, coming out of the Treasury inflation particular, the securities market or inflation swaps, which I know is your favorite,

24:11it looks like inflation expectations are well anchored, consistent with where you'd want them to be. More or less, one argument is that the only reason why that's the case is because there's expectations the Fed is going to raise interest rates. Is that right? Or it's there were no expectations for rate increases when inflation expectations be where they are or would they be higher? I don't know the answer to that is the short question, but I can talk you through the options here. So what we saw, generally speaking, if it's a supply side charge, and this is what we've seen, the inflation data, short term inflation expectations, hike and long term expectations don't move much, and that definitely happened. So oil price jumps in the second quarter, one, the inflation expectation come up. Ten years doesn't really move that much. If there's a ceasefire, if there's any sort of negotiation, short term inflation expectations come down. And that's really the argument for the Fed, not to hike. I think that's correct. But then in 2021, we made the same argument, and if it goes on long enough, even if it's a supply side

25:11charge, you get to the point where even these long term inflation expectations can become an anchor. I don't think that's the case right now, but it is something that the Fed needs to keep an eye on. That's what I'll say about that. So yes, so to the degree that the Fed is controlling that markets currently think this is going to blow over, they don't think that inflation is going to spiral, and that implies that they think that the Fed is going to do its job. If they didn't think that, it wouldn't be the case. But other things play into this, and specifically what happens in the Middle East. That's not the Fed's doing. Right. Right. Okay, Matt, back to you, and I'm going to understand Chris, I'm coming your way. So stay tuned. But you're on the F1C. What would you have done here, Matt? You had to hike. And I think I put a little bit more emphasis on the independence signal than maybe Justin Martin alluded to. I think just the conditions that got washed into this position, the things he had said and done and seemed to have aligned himself with. I think this was important there in a different world with it, you know, whether it was in a new chair,

26:15you just take the same economic fundamentals. I would argue that this is an energy shock, tariff shock, not a whole lot. It's 25 base points. Not going to open up the straight-of-arms moves any more than it is today or isn't today. So I think it's marginal there, but I do put a lot of emphasis in the signaling effect of the Fed's independence and ability to make a tough call. Great. Yeah, got it. Got it. Okay, Marissa, you're up. Well, first let me ask anything to add about the meeting and the interpretation of what it all means. And what would you have done if you were on the F1C? I think if I was Kevin Warsh, I would have done what he did. Yeah. If I was another member, maybe I would have voted to stay. I think this was purely a signal. I get the sense that he doesn't really believe that this is going to do much or is totally necessary. I think it's more of a signal of independence for him. And I don't

27:18think monetary policy is very restrictive right now. So I don't think it does a lot of harm to hike a quarter point. I do think it's just sort of a more of a symbolic hike than anything that actually is going to move markets here or change the trajectory of inflation. I mean, all the most of what we're seeing with inflation, maybe with the exception of the AI build out, is really policy-induced that could be unwound and could be undone pretty quickly. Okay. So bottom line, you would have voted to hold tight or you would have hold you. Not if I was Kevin Warsh. But if you were on the committee, you're not Kevin. I'm not Kevin. I'm somebody else. If somebody else, you would have voted against the rest of the committee and voted to hold tight. I say that, but maybe that's a difficult thing to do. And maybe that actually doesn't, isn't a good look. So in my heart of hearts, I don't think it was a

28:21necessary hike or is going to do anything effective. That's, I guess that's my point. I think it's more symbolic. Yeah, it makes sense. Okay, Chris, you're up. Anything to add here on the interpretation of what happened and what their decision and how would you have voted? Yeah, well, also based on my Italian roots, I certainly would have voted for a cut. But that's a little, I don't little I don't think they're at Martin, but oh, I see. Oh, I see. I see. I see. Drum in Italian. Yeah, you know, no other European Southern. Yeah, I got it. Never, never saw an interest state that wasn't low enough. Did anyone else get that one right over my head? Did anyone? I was. I already got it. I saw my head. Okay. That's all I need. Okay. But no, more seriously, I would have voted to hike. And I actually put a little more weight on the expectations argument. You write that overall expectations are okay, but the direction of travel over the last few weeks was concerning to me. So you did see the five-year break even, for example,

29:24getting pretty close to two and a half percent within a relatively short period of time. And then as right after the meeting, we saw, we have seen that those expectations have been coming back in. Right. So around 2.3 percent today. So that was my concern. Otherwise, fundamentally, as Merce puts it, you know, or more objectively, I'd say, no, there was no need to do so. But I think going against the market at this point could have had some negative or counterproductive impacts. Yeah, you know, it feels like a credibility hike to me, right? It's all about the credibility. Given all the pressures coming from the President and the Treasury Secretary and the Trump Administration writ large, I think there was some concern, angst at the Fed, that they had to make sure that everyone knew they were independent and thus the increase. Certainly, the unanimous vote,

30:28I think that is clearly to establish credibility. They wanted to vote as a block to make it clear that there was no separation here. You're not going to pick off, you know, other members that were otherwise would have voted to hold. I, I, I, I, I, I, I, I, I, I, I, I, I suspect if we weren't in this situation where the President was putting a lot of pressure on the Fed, there would have been some folks who voted against a rate increase. I'm pretty confident in that. I, you know, if it's purely about, and also the other thing I'd reason why you have to hike is the markets expected it fully, right? I mean, prediction markets, the futures markets, they were at what 95% probability. So I mean, if you didn't hike, then you have a lot of explaining to do. And I don't think anybody want, certainly Kevin Wars, you just want to explain, you know, just normal,

31:28anything that I can't see him wanting him doing that. So, so I, I, I think it was a really very much credibility hike. I don't think the economics make any sense to raise rates, though. I don't see it. I mean, inflation is high and that's a problem, no doubt, but I don't see a one, two, three rate hikes having any impact on the inflation. And, but, and you're, you're also taking some risk here, right? Because the way, correct me if I'm wrong, but the way monetary policy gets inflation down is by weakening the economy, right? And the economy right now, it's okay, but it's growing at its potential, it's 2% GDP growth in recreating some jobs with not a whole lot of jobs. And it's very focused concentrated in one sector, the healthcare sector. Wage growth is decelerating definitively. Real wage growth is flat to down. That's not consistent with even being at full employment. So, you know, if way monetary policy gets inflation down is by weakening growth, you're talking about below potential growth, right? That by definition,

32:31isn't it a total logical on most? And if you're going to be growing below potential, then you run the risk of things going kind of off the rails, right? You can start seeing layoffs and get into kind of a self-reinforcing negative cycle. So, it's not like this is without risk, you know, if in fact you're working to lower inflation in a definitive way. So, you know, and I think financial conditions, it's hard to argue that they're, they're, that they're, that they're, they're easy. I mean, you know, the, you bond yields are now up to 5%, the fixed mortgage rates over 7%, stock markets kind of gone sideways here. You know, it just doesn't feel like credit crosses, okay, it's fine, but it doesn't feel like it's, you know, out of bounds in any significant way. So, you look at all the things that the Fed looks at, I, I have a hard time coming to the conclusion based on the economics alone that you would raise interest rates. I, you know, I would have argued to keep them the same, but having said that, like you, all the rest of you, you know, I would have folded, you know, because how could you,

33:33I mean, again, going back to, you know, you want to show an united front, right? I mean, I think you want to make it very clear that you got Chair Warsha's back, you know, he's taking it, you know, seems like what seems like a, a bit of a political risk, you know, given the pressure from the executive branch and you want to show a united front and I'm, I'm, I'm, I get that, you know, I'm there, you know, on that. Okay. Okay, we're going to come back to, oh, I want to go to the market reaction, then I want to do the game, and then I want to come back to the forecast, because the next question immediately is, okay, you know, what's next, you know, where are we going to go from here and that goes to our own forecast? But the market reaction, Chris, what was it? And, and, you know, we're things now a day later, a day or two later. Yeah, so the immediate reaction in terms of US equity stock markets was, it was, it was pretty violent, it was, they fell kind of across the board, the Dow is down over 800 points at one point, NASS that close to, or I'm sorry, the S&P 500 close to a 1% decline. So, you know, clear the

34:40hawkish statement, the no prospect for a rate cut anytime soon, certainly a factor, then, but then it rebounded pretty quickly, right? So it was, you know, out of a short lived type of reaction and maybe down a little bit from, from where it was before the press conference, but a fairly unchanged at this point is perhaps other things have settled in here, a lot more attention perhaps to oil prices and the overall inflation outlook. That feeds into what happened to the bond prices. So yields climbed on the, the two year treasury, it's about close to four and three quarters, the 10 year, as I think most folks know, immediately didn't show much of a reaction. Now, we're back up to about 5% kind of hovering around there. So, again, I think some concerns about that higher terminal rate from the dot plot, inflationary concerns out there, supporting those, those levels. And then we can turn to the, the out, I think we already touched on the outlook for

35:45future rate spikes. Those, you know, the probabilities certainly have risen over the last month. I don't know that they changed all that much. There was already pretty high for additional rate hikes. And if I look out 12 months and Martin, of course, will caution that, you know, that's kind of pushing the, the, the, the envelope in terms of credibility, but the market seems to be pricing at about three additional two to three additional hikes over that time period. So given all that, it's, you know, a market that's digesting. And I, I guess, is taking the Fed at its word that it is on the case, and certainly much more hawkish tilt than in in previous months. So, so the, futures are saying what for the month of October, the meeting at the end of October, are they saying, what's the probability? Last I check was close to 50, 50, 50. If I look out to December, it's an almost a 90% chance that we'll get at least one more hike. And then October's 50, 50, and then

36:51it's 58% for October. Oh, 58% for October. Okay. And, and you're saying, if I look out a year and it could be all the caveats, it's pricing in two, maybe even three more. So probably closer to there, there's certainly a closer to three. Some scenarios for four or more, right? Yeah. You do see some pricing around that. But again, to Martin's point, it's a pretty thin market when you get that far out. Clear of the tilt is towards more. Not fewer. I didn't see any. I don't think there's any probability on actual rate cut if you look out that far. Right. So the FMC in the dot plot is saying one more rate hike. That's what they're saying. Before the end of the year, you're saying markets are saying, well, that's not the end of the story. There might be another one or two or three, even three after that. Correct. Okay. All right. Got it. In overall markets, kind of were unsettled in the immediate wake of the decision in the press conference, particularly the equity market.

37:51But you said two year yields, which is kind of a window into expectations from the policy, all reacted. But they've all kind of settled back in here now on a Friday, the Friday, two days after the meeting. Right. That's right. Got it. That's right. Okay. All right. Martin, any or Matt or Justin Mercedes-Benz, I had on the market reaction. What about the president's reaction? I was going to say that. Okay. Go ahead. Yeah. Well, I mean, according to the president, he told Kevin Warsh that he could do whatever he wanted to do and he'd have his back. Right. Okay. He told him to vote. I also like, hey, they're the rest of these political actors on the FMC are going to vote to raise. Anyway, so your vote's not going to matter. So you might as well do it. I think that pushes back on your unified front theory, whether you believe that or not, I tend to have a sense to not believe that. But the idea that this is a political independence or unified front against pressure from the executive branch, it's not that easy, I think in 2026. So I'm confused. What are you saying?

38:54That as much as a hike would have appeared like Warsh, distancing himself from the president, later that day, you get true social posts that say, I told Kevin Warsh that it's okay to go and join the rest of these FMC members and raise rates because you're one vote of 12 is not going to matter anyway. Right. So I just think the stink of concerns about independence is not going away, just given the kind of incessant communication coming from the markets. Oh, okay. Yeah. It's not over what you're saying. No, no, no, if anything, it's actually backsliding. I mean, it's just trying to undermine the appearance of independence when he gets a chance to. Yeah. It's kind of an unwinnable game, really. Which seems like a mistake because by the president, that conversation didn't happen. I agree. But he has to make the case to voters because Kevin washes his guy. He's has to make the case to voters that his guy is still the right person for the

39:57job that he did make the right choice, but that his hands were tied. And so he's going to signal that to, especially since we're so close to the midterm elections, people who are upset about tightening up the economy through rate hikes and increasing pressures on household budgets, maybe through higher borrowing costs or whatever. You have to buy back some of that credibility among voters. And so, you know, that, but at the same time, you're also undermining, or further undermining the appearance of independence, which I, which obviously I think is a mistake. What is the fed actually raises rates in October like markets expect? I mean, what's the president going to say that again? Is that copy and paste? We copy before the midterms. Yeah. Yeah. Maybe. He's simply reversing the errors of the Powell cuts from last year. That's where's the way to spin it. I'm sure there is. I'm sure there is. But you're saying Matt, you're saying this credibility issue.

41:06You know, it's not going away. It's going to be, it cannot go away. In Justin's point, I take, but it's like to say that it's his guy. I mean, being in the business of having the fed share be your guy and be so closely tethered you was a mistake. And then, right, you know, later on, a bunch of inflationary policies at the same time, you're that that's unwinnable. And, yeah, it's not going to go away. And at least not for a couple of years. This is your own Powell with this guy too. Right. Yeah, true. Until he was. How that ended. Right. Right. You know, very true. Okay. So let's play the anything else on the on the fed up to this point. We're going to do the forecast after we do the game. But anything else, did I miss anything? Anything that you want to bring up? Okay. Okay. Very good. Okay. Let's play the stats game. We each before the stat. The rest of the group tries to figure it out. Clues, questions, deducted reasoning. The best stat is one that's not so easy. We get it right away. One that's not so hard we never get it. And if it's apropos to the topic at hand, it doesn't have to be. But obviously, the topic is the fed, then all the better. And Marissa, you're up. You're a tradition to go with

42:11you first. And so we're going with you first. All right. 1.1%. That's retail sales ex-cassaline. Whoa. No. That's my stat. I mean, it made it. That's my stat. Yeah. Confident as you could get. That was nice. Yeah. All right. That is not what I had in mind. But you've got to find a new stat. You're saying Chris retail sales were up strongly in the month of August 1.1%. Up from the year before it. That's right. That's that's excluding gasoline, you said? Excluding gasoline. Because it's a price effect. Okay. Anything you want to say about that before we go back to Marissa in the 1.1. All right. It's very strong. Let's just move on to that stat. It's not a reverse July. The consumer is not dead. Right. It's not just a gasoline effect. Right. Right. It was a pretty good month for retail sales. Even obviously it's reduced by inflation. No doubt about it across the board. And vehicle sales were pretty strong in the month. But none

43:12the last. And it is back from back. Bit of payback. Right. So for July. Still feels like underlying real consumer spending and obviously we'll see. But it feels still like it's still around 2%. But the consumers hanging in there. They're not giving up. That's for sure. Right. So back to Marissa 1.1. We established that's a percent. It is a percent. Yes. And is it related to the Federal Reserve in some way? Not really. No. Oh, bummer. Is it housing? Pummer. Housing related? No. It's an economic statistic that came out this past week. Yes. Oh. Is it house price growth? No. Oh, it's not housing related. Sorry. Is it inflation related? No. Is it job related? Yeah. Oh. Unemployment insurance claims 1.1 percent. What else came on? Is it related to UI claims?

44:13Yes. Oh, it is. Oh, 1.1 percent. Like an insurance or an insured unemployment rate. Yes. Yes. Yes. Yes. Okay. Which is down. It fell over the week at its lowest point in a couple months. Jobless claims fell under 200,000 on the week. They're down to their lowest level since April. So back to this argument that. And I should say what the insured unemployment rate is and how that differs from the regular unemployment rate. It's the percentage of people receiving unemployment insurance over everybody that's covered by the UI system. So to the point that the Fed, I don't think is worried about the labor market. I mean, maybe they should be a little bit more than they appear to be, but we're still not seeing any layoffs or pick up in layoffs. At least not if you look at the Joltz data or you look at the UI data.

45:16You know, that goes brings us back to the Fed and Kevin Moore. She did make a point more than once in the press conference and I did watch the press conference that the economy is, I think he said, re-accelerating. It's re-accelerating. And of course, the retail sales numbers, Chris just mentioned and the UI claims, numbers you just point you to would kind of fit in that narrative that the economy is re-accelerating. Do you guys think it is re-accelerating? Mercer, do you think it's re-accelerating? Fundamentally, I mean, abstracting from the month to month or quarter to quarter, you know, kind of underlying growth is re-accelerating. Do you sense that? No. And I'm being wishy-washy because I don't think there's a lot of evidence that I've seen that there's some... There were getting up 2% or re-acceleration. Yeah, I mean, yes, there was a good jobs report last month in a string of pretty lousy ones. So I don't make too much out of one

46:22single month to say that we're on this upward trajectory. I mean, I would wait and see before I proclaim that it's re-accelerating. It's stepped up to some higher level. Got it. Anyone out any of you guys would take Kevin Wars' perspective and say the economy feels like it's re-accelerating? I think... Man, I got that right, right? Did he use that word re-accelerating? I think he did. I think he's just strengthening. I think he... Yeah, it doesn't acknowledge that it was... Right. ...we're in a weak spot, really. Right. You're putting pushback on that? I mean, it's possible. I mean, I would pushback on some of the doom saying that we're constantly about to fall off a cliff and then... I think that we're in the US economy's in better shape than I think some people, some significant portion of people would describe it as. No, it's not strong, and I wouldn't say that we're on some steady uptick. We could get a job number in September. The way that the job reports have been whipsalling back and forth, but this entire narrative could flip

47:24on its head in two weeks. Right. I think that's... And that signals how tenuous it always and how cautious any kind of confidence should be about where we are. But I would put it as lukewarm mediocre, but that's my general synopsis. Yeah. I mean, I can't get my mind around how the economy could strengthen or re-accelerate fundamentally, given that interest rates are higher, you know, fixed mortgage rates, again, over 7%. In wage growth, real wage growth are broadening out real after-tax income growth. That's flat at best and down. Saving rates are low. I mean, it doesn't feel like that's the kind of fodder for a strengthening economic activity. Just saying. Hard to say it. Okay, let's go on. Who has a good stat? Justin, do you have a good stat?

48:25Or do you want to... I actually did think of a statistic. Okay, great. Okay, good. Yeah, it's relevant to the conversation, but it did not necessarily come out this week, but it did come out this month. So maybe the number is 3.6%. 3.6%. Yes, it's a percent. And it came out in the last month, you were saying? Yes. Is it... Is something related to inflation? No. Interest rates? It's an interest rate. Oh, it is an interest rate. Chris, what is it? 3.6%. Martin, what is it? 3.6%. I can give a hand. I've mentioned it several times, at least to the three to Martin, Matt, and Mark and the last one. That would be the effective federal fund rate target. The effective federal fund rate. The target is 3.5 to 3.4. The effective rate, probably 3.6. Not what I have in mind.

49:30Not what you had in mind. Is this deficit related? Kind of. He said in? Oh, I know what it is. I know what it is. It's the average interest rate on all that standing debt. That's exactly right. Yeah. Right. Okay, explain. That's actually a really good statistic. Go ahead. Sure. Yeah. So the yours was badly. So I'm just saying that was just that was really good though. Okay. Glad to come in strong. Yeah. So basically, typically when we talk about debt sustainability, there's often this formula that we use to assess the change in debt ratio. That's a function of the average interest rate on all outstanding debt, nominal GDP growth, and the primary debt and typically when the average interest rate is less than nominal GDP growth, so the economy is growing at a factor rate than our interest in our average interest is set at. That is said to be

50:31more sustainable. Obviously with the federal government running persistent primary deficits, we do kind of have a constant increase in the debt ratio. But actually over the last year or two, we've kind of hovered around around 100% of GDP despite running primary deficits in the three to four percent of GDP range. That's important despite the fact that we've had an increase in interest rates over the last four or so years because of repricing the treasury markets. And that has pushed up that average interest rate on all outstanding debt. It's still not as high as growth in the nominal economy. So that's actually a good news for debt sustainability. Yeah. I think one reason, if I'm wrong, why the rate is as low as it is because the treasury has been issuing a lot of short-term securities. There's been a shift especially as interest rates rose

51:37with a treasury to avoid locking in higher rates longer term has switched to focusing on T-bills. It also helps with liquidity in the market as well. Yeah. And now with the fed raising short-term interest rates, that's going to get increasingly more difficult to do. Right. So it feels like that interest rate is going to start pushing up higher here pretty quickly. And then once you get inflation back down, presumably that's where we're all ahead where we're headed. That means nominal GDP growth is going to slow. So this gap between R and G R being the average interest rate on outstanding debt and G being nominal growth is going to narrow, you know, pretty significantly. Yeah. Got it. Okay. Well, why don't we move forward? Because we're already getting pretty long in the tooth here on the podcast. And go to the forecast. And, you know, we've got some real hard work here to do because we haven't, you know, we did not, when we did our forecast back and early in the month, we decided, and this is before the CPI report and the

52:42inflation statistics, we decided not to include a rate increase. So it was a great debate. You know, it was very close, but we decided not to. And now we have a rate increase. So that then begs the question, what about now? What do you think the forecast should be for for the Fed going forward? And Martin, let me turn to you first because you're all about the Fed forecast and monetary policy. What do you think we should do here in terms of the forecast? So this is a bit preliminary because I'm still waiting to see where bond markets ultimately settle. But over the past couple of days, I'm leaning towards bond additional hike. Still not on the percent sure about the timing. The reason I'm leaning that way is if this is a signal thing, right, if we're really committing to inflation expectations, you'd think that long term yield should stabilize a little bit. And the 10 year did fall a little bit yesterday. It did drop below 5%. It is now back up to 5%. That's sort of an argument to see what, how are markets really going to settle around around where

53:45the Fed is positioning itself? It also feeds into what is discussed earlier this question. Our market is going to expect a hike if they do and the Fed doesn't talk them down from that they probably have to hike. So currently that's pointing from my perspective that's pointing to one additional hike. I'm not 100% sure when. I mean, generally speaking, it's looking more like markets are expecting it to come sooner rather than later, which speaks for October. But a lot of things can happen between unless we get an inflation report, we get a jobs report that can change that again. So that's where I'm still a little bit uncertain, but I think one additional hike is warranted. Okay, so one more rate hike, not two, not three, but one more quarter point rate hike. And right now, you're leaning towards an October late October rate hike. That's kind of your saying. Yeah, but that one narrowly, I would say a little bit, a little bit over 50%. And of course, we don't have to nail weeks before we look at that. Yeah, exactly. And we get a jobs number and other inflation numbers statistics between now and then see what as you say, see what happens in the bond market. Okay, Mercer, what about you? What do you think we should do with the

54:49forecast here? I'm with Martin. You are. Wait and see. Yeah, I think I lean toward one more hike before the end of the year. Not sure if that's October, December, but we have some some weeks here to see what happens. Okay, but one more rate hike before the end of the year quarter point. Yeah. Okay, Chris, barring some very strange thing that happens with shipping our forecast for everything. Right. Yeah, assuming our forecast. Yeah, for the war, for inflation, for growth, for everything, you want more rate increase. Okay, I think it would be weird for them to just do one hike and nothing else right now. Yeah, Matt, let me turn to you because I know even you looked into this. Has there ever been a case where it's been one and done by the Fed? In modern history, so we'll go from 1980 to today, different times that the Fed has started tightening or lifting the interest for federal funds rate once. And that's in 1997. We got from

55:52Cher Greenspan, a 25 basis point hike referred to as an insurance hike. And that was, you might recall, amid a huge energetic, ambitious cat-back spilled out in the form of internet, fiber optic cables, everything was going on at that time and the potential and promise of a lot of incoming strong productivity growth, real real economic GDP growth, really strong. So you get this one. So I say all this and it's probably a little to echoes today a lot. So the more I've read about that, I would say I've become more open to the idea that we might just be getting this one hike and then kind of a sit and wait. Initially, my first reaction was they're not going to do it in front of the midterms and I think by December, that was when it would be, if it does happen, I would feel more confidence to December. But now, you know, you have this precedent in a sense, even if it's just once. And you also have some changes coming to the PC deflator. Inflation's not going to just, you know, cosmetically look so bad. We're going to have close to 3% PC inflation.

56:56That's a lot better than 3.6, 3.7, 3.5, depending by the time you get to December. So I'm open to the idea that this is a one and done certainly more than I was 40 hours ago. Oh, really? Oh, interesting. Yeah. Yeah. Okay. So if you're putting the forecast to bed right now, you'd say that's it. No more rate increases. Yeah, I would make that argument. Interesting. Okay, very good. I'm surprised to hear that from you. I expect, I expected differently. Yeah. And if you want to store a cast, your forecast is very different. Let me just put it that way. That's interesting. We should put that in the model. Yeah. Yeah. Yeah. Okay. Justin, where do you stand in all this? I'm happy that I am not responsible for setting the Fed Outlook that I stick to fiscal policy. Yeah. I think my default is the lean towards market expectations. That said, so that being another 25 basis point height, that said, I don't think it needs to be

58:01in October. I don't know why you would need to run into another rate hike so quickly without seeing how inflation expectations respond without seeing how the job's number comes in. Then just dealing with all the political blowback of doing a rate hike in October. So I think it'd be perfectly reasonable to raise another 25 basis points in December. The timing would work out well. We would avoid the political issue. You would still signal. All the while, I know this is not really Chairman Warsha's M.O. But all the while, he could be deploying all the other governors out there to say, we're thinking about a hike. Then markets can adjust their expectations for a December. I was just going to say they're going to have to do something like that because the market, if you look at futures, it's saying now over 50-50. I can't get my mind around not trying to influence that if you don't want to raise rates.

59:06Because then your box didn't. I don't know if they were boxed in. They had a union in a decision, but a pretty hard nod to have raised rates given market expectations at the time of the meeting. So they're going to have to do something. They've got to figure out some way to communicate the markets if they're uncomfortable with what the markets are saying. Otherwise, they are boxed in. Probably, yeah. Chris, what about you? What do you think we should do with forecasts? Yeah, so if I had to make the forecast today, I'm probably in Matt's camp. One in done for all the reasons he mentioned. But I feel fairly strong about October that they won't that they won't hike, barring some really negative data given the election fall out. December is more on the table, certainly, so we can wait and see what the data show. But I think Matt has a compelling argument in terms of the good.

1:00:07Let me ask you this. Suppose the PC deflator, which I think we get what next week comes in core PC, consumer expenditure deflator, the measure they said inflation target on comes in at 0.3% for the month, not 0.2, but 0.3. And then we get a job number that's say 75K. And then we get a CPI number that comes in and it's again 0.3. What do you think they would do at the October meeting, which is at the end of the month? Chris. Yeah, that's a reasonable forecast by the way. Those are all reasons. They're not my for that's not my baseline. Yeah, but core PC at 0.3. Yeah. That's the biggest assumption made there, reasonable, but the biggest assumption thing. But but what do you have it at that point? Point 2, too. So it wouldn't be much to be rounded up to 0.3. But I think everything else, 75K jobs, I mean, all that's very very very. Three 100s of the basis point where I point three, right? Yeah, I'm confident my forecast. Okay.

1:01:10Okay. But you also have the CPI. Right. The CPI September coming up. Yeah. Yeah. Well, okay. Under that scenario, then I am more inclined to say, well, they'll probably hide. Okay. So it does depend on the data to some degree. Certainly. Yeah. Well, okay. I think I don't think it's going to be one and done. I mean, I do think this is a credibility. I think what they did here is all about credibility or predominantly about credibility for the middle of the distribution of members. You know, everyone has their own motivation and thinking, but for the kind of the median or the middle of the distribution, I think they raise rates to establish their credibility. And if that if I if that is correct, I think the odds are they they go in October. They don't wait. In fact, it just reinforces things because they're going right before the election. Yeah. Yeah. Yeah. You know, I don't I'm not we don't care at all about. Yeah. Yeah. Politics. Right. Yeah. Yeah. That that would be my sense. And I, you know, this is what I

1:02:11kind of ask about when I kind of pause when we were talking about the president's reaction. You know, why would why does Kevin Worsh even care what the president thinks at this point? Well, you know, what what's the leverage here? I mean, nobody wants to be in a war with any, you know, any lawmaker, but why should he care? I mean, they're the right. Martin, is there any reason that you can think of? So I like other speak to the politics. Institution leader is none. Institution leader is the chairman of the Fed can't not that he can't do whatever he wants, but he's not bound to the president, right? He's bound to the institutions, bound to the FMC in that process. I'm like, what the president says is ultimately does not have to listen to that. If he has personal reasons to that, I don't know. I'm not going to speak to that. That's obviously. Yeah, who knows. But yeah, but institutionally, there's nothing that can be done here. I mean, I guess the president could make life difficult for, I guess, but I'm not sure how you would do that. Well, I mean, they tried it with Powell and didn't really work. And the federal

1:03:15reserve act is pretty strong. The Supreme Court hasn't really supported the efforts there. I do think the pressure is going to be kept up on the Fed, but at the margin, you cannot force the Fed's arm. That's just institutionally not possible. Right. Right. Okay. Fortunately, we have two more weeks, or maybe even three before we have to put just things to bed and nail down our forecast. But I think a bottom line, you know, we're talking on the margin here and another quarter point, we're not talking about three or four any significant. This isn't the beginning of a series of rate increases. No one's saying that right on the team. Nobody's saying that. Okay. Right. Okay. All right. I did want to mention, if you're really interested in this topic about the Fed and interest rates and the bond market and what's going on, we didn't even get to that. But, you know, we did in this, in a webinar, we have taped this week that's going to be released next week.

1:04:17Martin's on that call, Matt's on the call on that webinar, Justin's on that webinar. I'm the MC. And, you know, we go through a bunch of slides and it's just a more formal kind of presentation that kind of reiterates a lot of what we discussed here. But we do also talk about the bond market to a significant degree. I think the webinar is called, which way for interest rates? That gives you a sense of it. So please feel free to participate in that. Guys, anything else before we call it a podcast? Chris, Marissa, you're being my co-host, anything? No. I was going to plug the Washington DC Outlook conference, but I think it sold out. It sold out. If we have the New York conference and we're now getting a lot of registrations for that, I think that's October 22nd, I think. So folks are interested. You know, please feel free to register and we'll hope to see you in DC next week. Yeah, I think no. The week after next. Two weeks of thank you. Yeah. And then most of us are going to be there, right? All of us

1:05:18are going to be there, right? I believe in DC. Martin's not going to be in the I'm about out. I've found the other issues with that potential. Yeah, you've got to know. But I'll be in New York. So it can be in New York. Great. And you'll be in New York too, Martin, right? I will be. Yeah, you'll be in New York with us. Okay, great. Good. Okay. Hearing nothing else. I think it's time to call this a podcast. I hope you enjoyed this year listener. We will talk to you next week. Take care now.