Fed Braces For Crisis 'Not Seen In 50 Years' Reveals Economist | Komal Sri-Kumar
Summary
Monetary Policy and Stagflation: The podcast discusses the potential for stagflation, a situation not seen in 50 years, characterized by rising inflation and recession, and the challenges it poses for monetary policy.
Federal Reserve's Interest Rate Strategy: There is speculation about upcoming interest rate cuts, with concerns that such cuts could exacerbate inflationary pressures, especially given the current economic conditions.
Impact of Tariffs: Tariffs are highlighted as a significant risk, contributing to inflationary pressures and affecting labor markets, particularly in sectors like agriculture and construction.
Labor Market Dynamics: The podcast notes a curious balance in the labor market, with both supply and demand for workers slowing, raising concerns about potential layoffs and rising unemployment.
Investment Strategies: In anticipation of stagflation, the podcast suggests investing in short-dated treasury bills, gold, and well-managed global real estate as protective measures.
Political Influence on the Fed: The discussion touches on the political motivations behind interest rate decisions, with potential changes in Fed leadership and the influence of presidential preferences on monetary policy.
Economic Growth Outlook: The GDP growth is expected to stabilize around 1.5%, but stagflation could lead to negative growth in upcoming quarters, complicating monetary policy decisions.
Fiscal vs. Monetary Policy: The podcast concludes that fiscal policy currently has a more significant impact on economic growth, while monetary policy primarily influences inflation.
Transcript
what you're going to be watching for in 2026 starting with January by then you will have the name of a new chairman and so you have to but between now and January 1st we will get the pronouncements of the chairman designate what he or she says will be the policy that will be followed after Powell leaves what typically does happen to markets during times of stagflation eyes were on Jerome Powell at Jackson Hole last week, the global summit for central bankers held at Jackson Hole. We'll be talking about what's next for monetary policy, what's next for the economy, how many rate cuts can we realistically expect this year. These are the questions on everybody's minds and what markets are thinking. So, we'll dissect this with our next guest uh president of Sri Kumar Global Strategies. He is Dr. Kumal Sri Kumar, a regular on the show. Thank you very much for coming back, Sri. Always a pleasure to host you. David, thank you so much for having me again. and have always enjoyed my discussion with you. Thank you very much. Uh an honor to host you as always. Jackson Hole Powerbuckles is the name of your Substack post that you released on um on your Substack. I encourage everyone to check out.com.substack link down below. Uh we'll go over uh some of your uh thoughts today. So let's start with a few clips of Powell talking at the event. Um and I'll just get your reaction. So starting with the first one here where he announced his policy. Take a listen and we will react together. In the near term, risks to inflation are tilted to the upside and risks to employment to the downside. A challenging situation. When our goals are intention like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago. and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance. Those are the key words may warrant adjusting our policy stance. Markets interpret that as saying that he may likely cut by September. But I'll let you evaluate that statement as well as his earlier statement which is that risks for inflation on the upside, risk for employment on the downside. Um, again, I would refer uh the listeners back to what happened in September of 2024, David, almost a year ago when he claimed again that employment was the area that needed most of his help. The fight against inflation had been won. Recall that. and the fact that he cut interest rates by not 25 basis point but by 50 basis points and then between September and December 31st of 2024 the interest rates had gone down cumulatively by 1 percentage point and so he was wrong he has to retrace it he again has says now that inflation is where he is going to be uh fighting but one part of the statement is similar to one year ago namely that employment needs help and he said that then and one year later the unemployment rate is still 4.2%. He does not have a great record of forecasting either inflation or employment. And I think this is one more instance of that. And the other thing to keep in mind is what happened when he cut interest rate by 1 percentage point in the final four months of last year. The 10-year yield went up significantly. Also during the same time period, he did not get a lower 10-year yield. He only got a lower federal funds rate and my concern is that it's going to repeat itself this time. Also, why do you think he quote unquote got it wrong? Was it solely because of tariffs that threw perhaps him and the the other FOMC colleagues off guard? He did that in September. I think I have written repeatedly that the Fed is actually a political entity. They claimed to be politically independent, but the reason they did it was because it was seven weeks before the presidential elections and we all knew that there was no love lost between Powell and Trump at the end of the Trump first term. So clearly he was not going to be renominated but if Trump got reelected last November, his chances were significantly better if Kamala Harris came to office. So I think it was a move which was done close to the elections. There was no indication that the economy urgently needed a 50 basis point cut but he did it. I think there was a significant amount of political motivation in addition to a wrong calculation about inflation. They were all related factors. So the question now is does the economy warrant an emergency or not just emergency but a 50 basis point cut today? Is it more warranted today than one year ago? Sri I don't think the economy needs any cut at all at this time. And the reason for that is that inflation is edging up. We are going to see that I think happen again on Friday with the Fed's favorite measure the PCE core inflation rate which is going to show an increase and the second half of this year is when we are going to see most of the increase from tariffs taking place before you know what the impact is you cannot cut interest rates and make the inflation situation worse. If you do that and this has been the point I have repeated in my street economics thesis as well that you referred to David is that when that happens you're going to see stagflation inflation is going to pick up at the same time you're going to have a recession and a stagflation is something that we have not seen in 50 years we we are going to see that again if that's the policy he's going to follow here's his quote on challenges the economy faces. Take a listen. The economy has faced new challenges. Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. there is significant uncertainty about where all of these policies will eventually settle and what their lasting effects on the economy will be. Can you uh comment on this? Are these actual significant risks for you as well? Uh the first two are especially important risks and what are they? Tariffs, they are comprehensive. They are against a whole set of countries and very many products are affected. So I think tariffs are going to have a highly inflationary impact. Powell is correct in saying that the full impact is yet unknown and yet he has given a signal that you should expect a rate cut in September. So that is a problematical issue for me. Second, he referred to immigration and the deportation of undocumented workers and the fact that immigration has been significantly restricted means that the supply of labor has gone down. And this is especially valid in some areas like agriculture construction areas. It's very important in construction for instance since I live in the fire affected area of Pacific Palisades. David, we know that construction workers are afraid of coming to work to do the refurbishment work because they are afraid of being swooped upon and held away even if they hold a green card or if they are US citizens. So that means the supply of labor has gone down. Why is that significant? If you have a low amount of job creation like we had in May, June and July, that doesn't mean that the labor market is slackening off. It means fewer people are also coming and seeking jobs because they are not out in the open. in which case the supply demand equilibrium on the labor market takes place at a much lower level. That is also a significant factor. But he has not taken that into account when he says that the labor market is in trouble and needs his help in cutting interest rates. Perfect segue. Here's here is his exact quote on the labor market. Let's take a listen. While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment. Of course, before we continue with the video, let me tell you about a very serious threat that you're facing every day that you may not even be aware of. Most people have no idea how much of their personal information is floating around on the internet. Your address, phone number, and email can be found and sold by data brokers without you even knowing. That's why I use today's sponsor, Delete Me. It scans data broker sites for your personal information and removes it. And it doesn't stop there. It keeps checking and clearing new listings throughout the year. Once you sign up, you'll get a privacy report within a week showing you exactly where your data was found and what's been taken down. It's a straightforward way to protect your privacy without having to chase every site yourself. Go to joindeme.com/david and use promo code davidin at checkout or scan the QR code on screen right here to get 20% off all US plans. Take control of your personal data before somebody else does. What's he referring to? Sharply higher layoffs. Are we seeing evidence of that at all right now? I don't think so at all. You see, the initial jobless claims are continuing to remain very low. That's the first part. And employers are hesitating to hire because they are unsure of the impact of tariffs. When that is the case, Powell cannot make it up by easing monetary policy when businesses who should be hiring are afraid to do so because of tariffs. They are the reason why there is hesitation on the part of businesses and monetary policy cannot make up for exorbitantly increased tariffs. That's the principle point I want to make. Okay. Let's turn now to what you wrote in your Substack. Um, and I encourage people to read the entire article. In particular, let's focus on well, let's start by talking about this paragraph. There's nothing in recent data to suddenly suggest that inflationary pressures of the tariffs are a oneoff shock. But POW pointed to the fallout in job creation during the past 3 months to express his concern that the job market was weakening. We talked about the job market just now. Uh, is inflation a one-off shock? We have seen the CPI rise though in recent months. It's it's been ticking up. What what has been happening? Inflation has been ticking up. the F Fed's favorite measure the PCE inflation measure which will come out this Friday that is also inching up and at some you are also getting anecdotal information companies like Walmart which are again big retailers suggesting that they are suffering cost increases due to tariffs and that they have to increase their prices. All of those say to me that you're going to have higher inflation in the coming months of this uh half of the year and perhaps at the beginning of 2026. So I think there is every indication that inflation is headed up and I think given that you need to wait to understand the full impact of it before increasing uh before cutting the interest rates as he's planning to do now. Okay. So here here is a another key paragraph in your report. Trump's loyal official Steven Mirren could become a new Fed governor even before the September 1617 meeting if the Senate fasttracks his confirmation. In addition to Mirren's likely vote to lower the policy rate, the other two governors other sorry two other governors have already dissented at the July meeting and suggested that they would prefer to reduce the rate immediately. If it is indeed true that uh Powell and yourself are both right, you both see upside risk to inflation, why are they cutting rates now? Is it purely a political action? The reason they are cutting a rate is I don't think it is a political action because I think Powell has done very well and courageously until now in holding on to the interest rate despite being badgered repeatedly to cut rates being called all kinds of epithets by the president and he has still continued to keep the interest rates uh level rather than cut them. So clearly I would give him a high grade for political courage until now. Why is the situation changing? Why is the way in which he speaks or signals diff changing from before? I think the reason for that is that you have two descents already among his existing governors. A third governor who is going to come in, Steven Miran, is also going to descent. And we have not had three dissents in the Federal Reserve since May of 1987 when Paul Wulkar was outvoted in a vote when the chairman lost it. Now the other thing that is happening is Trump has said I haven't decided who to nominate as the next chairman but he or she is going to be a rate cutter has to believe in cutting rates and that's the person I will nominate to it. So that puts the carrot in front of very many Fed governors and regional bank presidents who say I would like to become chairman but in that case I need to show that I want to cut interest rates and I'm concerned that Powell may at some point lose the vote himself. He may have a majority voting against him. That I think explains why he's going ahead of the curve and suggesting lower interest rates rather than be forced to do so by losing a vote in the Federal Open Market Committee. Are you concerned a rate cut now in September and perhaps even further rate cuts would exacerbate inflationary pressures even further? I do fear that very much. Where does that my where does my fear come from? that the initial jobless claims are low, unemployment is low, which both say to me that the labor market is in relatively good shape. On the other hand, the last two months of retail sales have been very strong month- on month. That says to me that consumers have enough spending power and cutting interest rates will put even more money into their wallets and more spending and therefore push up the prices even higher. So those are all the reasons why I worry about higher inflation to come. It's not going to be as bad as 2021, right? I hope it will not be. But if you have a stagflationary situation, David, there is all bets are off because you this is something that happens and then suddenly the inflation picks up. Remember that even in 2020 2021 it the inflation would not have been that high had the balance sheet of the Federal Reserve not doubled. It went doubled in 2 years from the beginning of 2020 to the beginning of 2022 and interest rates were kept at close to zero even though it was clear in 2021 that the economy was starting to recover. those were ignored and the Federal Reserve decided it needed to keep EC monetary policy. So if that's what Powell does until he leaves the office in May and if the new chairman does that after May of 2026, you could have a repeat of what you saw in 2020 and 2021. It depends upon how the people act to what happens with inflation. There is a view um that a rate cut may be bullish for equities. Here is something published by uh market watch. Investors are betting that the Federal Reserve will resume interest rate cuts in September, 9 months after its last reduction. It then quoted an analyst on X um about this issue. Such a long pause could be particularly bullish for equities. So this is what the original post said. The wait is the hardest part. Looks like a cut is coming in September according to Ryan uh Dietrich, which could mean that we had to wait. Well, which means we have to wait nine months in between cuts. Long waits can be a good thing. 5 to 12 month weights between cuts have seen the S&P 500 higher a year later n uh 10 times out of 11 times according to historical analysis. Uh can you comment on this? I can comment on it. Clearly um long wait can be quite bullish but on the other hand look at the dates on which um uh the the table shows you what happened between 1970 and 1971 the number of months which were taken between cuts but that was also the period of stagflation that we had before so I don't think it is conclusive that you're going to have a a stock market which is headed upward Because if you do have cuts and even if they are spaced 5 to 12 months away, that is itself in doubt because there is going to be presidential pressure for either Powell or his successor to cut uh rates either at successive meetings or cut them by a huge 50 or 75 basis points at one go. So first of all that goes against history. The secondly the situation today you talked about how it has worked out 10 times out of 11. This may be the 11th time. So keep in mind that stagflation is a very rare phenomenon. It does not happen in every economic cycle. What typically does happen to markets during times of stagflation. If I don't know how many examples in history we can draw from but I'll let you comment on that. Uh we don't have too many examples from history. The last example is actually from the late 1970s. And what caused it? One, you had a situation where oil prices uh quadrupled at the beginning of this uh decade, 1973. They went from $3 a barrel to $12 a barrel. At the same time, uh, the Nixon administration was again bullying this Federal Reserve chairman, author Burns, to increase the money supply and keep interest rates low because the president needed the money to fight the Vietnam War. So all of those led to the fact that you had a very easy monetary policy and they were waiting to actually help him in the 1972 and 1976 presidential elections. The but despite all that happening you had um again a recession take place. Why? And here is the similarity with today. In 1973 oil did not have any substitutes. There was no solar energy, no electrical energy. You depended on oil very much with no substitute for it. So when the price went up, the consumers still demanded the energy. They still needed gasoline for the cars irrespective of the price. That pushed up inflation. That also meant that they did not have enough resources and other directions and that led to a recession. That's how you have the simultaneous presence of both. Today what is happening? You don't have one commodity in short supply. Energy is actually cheap in comparison with the others. But a whole range of commodities have been tariffed by this administration. Which means it is not as if you can substitute one good for the other at a lower cost. Uh because that is not possible because the president has increased the tariffs on a whole lot of different commodities, whole lot of different countries. So that is where the similarity comes to it and that that that is the reason why I think today you have a similarity with that situation. The other the final point to make is that it typically involves the president dominating over the Federal Reserve chairman and that is what happened in 19 in the 1970s. Today you have a Federal Reserve chairman who until now has resisted that kind of bullying, badgering. But if he goes and the next chairman is almost certainly going to be an a follower of Donald Trump's measures and you're going to have significant cuts in interest rates once the chairman takes office. That's why it is similar to what you had in the 1970s as well. What should investors do then to protect themselves from stagflation? Great question. How do you protect yourself? What are what is at risk? If in fact inflation picks up, then the longdated uh treasury yields, longdated fixed income instruments are all going to suffer losses. So if you are in 10-year treasuries, 30-year treasuries, I think you're going to take a hit on on your investment returns and your capital losses. Uh however, where do you get money? You uh you should be in shortdated instruments 3 months, 6 month, 12 month treasury bills because there there is no duration risk and you can get something like 4.3 to 4.5% until until the storm passes. That's one way to do it. Second, gold has uh gone through a significant increase in price. I think there is still an increase coming in the price of gold and I've been saying that when it was at the beginning of the year it was about 2600 an ounce and we are about $800 higher and I still find it very attractive in terms of where they can go. Third area you can hide in alternatives. Find managers of well-managed global real estate for example and go into those where you can look at good property you are going to be in it for 5 years or 7 years without looking at the net asset value on a daily basis that again can also provide you protection. These are some of the areas where you can be hiding but equities will be hit and longdated fixed income will also suffer losses. Last time on my show, which was a few months ago, you had said that equities could tank in a big way. Currently, if uh at the time of 145% China tariffs uh remain and uh we can see um these tariffs persist. Since then, there's been a huge reduction in tariffs globally overall, although base tariffs still remain. Is it fair to say then you are slightly less cautious on equities given that tariffs and the trade war have slightly deescalated since April? Uh the compared with April the uh tariffs have clearly deescalated that is one. On the other hand, the escalation in prices that we have had or tariffs that we have had from about 2% is the average tariff that is measured before Donald Trump assumed office to about 18% or so today. You have gone up significantly in the average tariff level despite the deescalation, David. And that's why my expectation is that that will have to translate itself into prices. On the other hand, Steven Miran says tariffs are actually disinflationary. There is nothing in economic theory which would support that point of view. He believes that because of the tariffs, people will switch the demand from imported goods to domestically produced goods. But the domestically produced goods are also going to go up in prices because there's going to be much more demand. So tariffs are always inflationary and that is what you have. You have had an 18% tariff level compared with 2% before and I think it will take time to show itself maybe 6 or 9 months but it is going to happen. So I don't think I am less cautious than I was in April. The timing may be uncertain. Uh the president may impose a tariff and pull it back. But eventually if the tariffs settle down, they are going to be inflationary and they are going to be detrimental to bond yields as well as to equities. Are you of the opinion that uh a tight labor market could lead to higher inflation? The theory is that if the labor supply is short, uh employers may need to pay higher wages. uh to to compensate workers who may leave and or perhaps uh overall there's going to be uh higher demand for labor and so that feeds into the prices of goods sold. Does that make sense? Is there evidence for that happening? Uh yes, it makes sense. I think a wage cost is a significant portion of total cost for a number of American firms. So that uh will feed into prices and wages are now rising at about 3.9% uh year on year and inflation target is 2%. So if you have such a significant increase in real wages taking place on a regular basis that will eventually get reflected in terms of uh the firms's cost and the employer and the cost of products. What do you think is going to happen uh post January? What key post or signpost rather do we as investors, economists need to look for to determine what the Fed may do post September, after October, one or two cuts, whatever the case may be. What's next for key milestones? What you're going to be watching for in 2026, starting with January, by then you will have the name of a new chairman. And so you have to but between now and January 1st we will get the pronouncements of the chairman designate what he or she says will be the policy that will be followed after Powell leaves uh the chairmanship in May. The second unknown is what is going to happen to Jerome Powell as a governor of the Federal Reserve. Keep in mind that he still can be in office till 2028 as a governor. So if he continues to stay on the board, he will be a thorn in the flesh as far as the president is concerned and he is going to be giving his pronouncements and he's going to be speaking in uh to the press and he will be listened to intently even though he would not be chairman. that again will cause a lot of uncertainty volatility in the markets. So what you're looking for from now to January and again January to May is the who the identity of the next chair that's one and secondly how much of uncertainty is caused in the market because you don't know whether interest rates are going to be maintained if they are going to be cut by 50 or 75 basis points and if so is the long yield going to rise significantly as it did in the final months of 2024. Do you have any idea? Of course, nobody knows for sure, but do you have any idea who may be the best runner up or the highest contender for the next fetch here? I do not because so many people are being mentioned number one and second the president has essentially put put them into competition because each one seems to be outrunning the other. Take the case of Kevin Hasset and Kevin Walsh for instance. that at one point in time they were talked about as only the only two candidates out in the field and each one seemed to be again beating the other talking about how much he would cut the interest rates if nominated as chairman. Now we are told that there may be as many as 11 candidates for that position. some from the private sector, some who are already governors in the in the Federal Reserve Board. I wouldn't be surprised if somebody comes out of the blue and says, "I am ready to cut interest rates by 1 percentage point and then the president loves that person and then says that person is also a candidate for the Federal Reserve." So, it is very murky at the moment. So, I would hardly hazard a guess as to who it's going to be next time around. Sri, final question for you and then uh we'll end the discussion here. GDP advanced uh Q2 GDP uh real GDP is 3%. Um that is a huge increase since Q1 which was negative. Um you know people were commenting on why Q1 was negative. It had to do with net imports being negative, not really overall growth being negative. But I'll let you comment on this huge gap and where you think GDP may be headed from here. Yeah, I think the second and third quarters uh essentially offset each other and the third quarter was partly a reflection as you said about imports causing a big drop in the second quarter and then being offset in the next quarter in the first quarter being uh changed. I think as I look into the future I see it in the short term at around 1 and a half% growth. We are going to have the GDP number come out on Thursday. That would be my expectation. But in the future, if you have stagflation, then you are talking about one or two quarters of negative growth take place during a stagflationary period. By the way, we talked about stagflation. I should also point to the fact that stagflation is pernicious because the monetary policy you do not know how to react to it. Do you cut interest rates because there is recession or do you raise interest rates because inflation is picking up and if you do one or the other you're always going to harm the other side of the mandate which is in fact before we conclude it's important to say that I've long believed that having two mandates rather than one is just illogical. There is something called a tinburgen rule named after Yan Tinberen the the Dutch Nobel laurate economist and he basically said with one instrument you can control only one target at the most and so if you are man manipulating interest rate up and down all you can get out of it is either inflation or employment not both so I think the Federal Reserve should control the inflation portion and leave employment to the Treasury in terms of spending to do it. Uh the Fed cannot achieve both of them. Ultimately, what has more impact on growth and uh economic performance right now? Fiscal or monetary policies? I think fiscal policy has more of an impact monetary policy has a much sherer and much clearer impact on inflation. Okay, good. Thank you very much. Sri, we'll uh end it here. Where can people follow you and read your work? Um I I am on Twitter. I it is @ shriek go global at s r i kg l o b a l that is on Twitter and as you mentioned before I have sri economics at substack substacks economics.com where I put out my Saturday morning pieces. Okay. Excellent. Thank you very much Sri. We'll uh put the links down below. So make sure to follow his Substack and uh X accounts there. Uh appreciate your time as always. We'll speak next time. Thank you. Wonderful. Thank you so much, David. Always great to talk with you. Thank you very much. An honor to host you as always. And thank you for watching. Don't forget to like and subscribe.
Fed Braces For Crisis 'Not Seen In 50 Years' Reveals Economist | Komal Sri-Kumar
Summary
Transcript
what you're going to be watching for in 2026 starting with January by then you will have the name of a new chairman and so you have to but between now and January 1st we will get the pronouncements of the chairman designate what he or she says will be the policy that will be followed after Powell leaves what typically does happen to markets during times of stagflation eyes were on Jerome Powell at Jackson Hole last week, the global summit for central bankers held at Jackson Hole. We'll be talking about what's next for monetary policy, what's next for the economy, how many rate cuts can we realistically expect this year. These are the questions on everybody's minds and what markets are thinking. So, we'll dissect this with our next guest uh president of Sri Kumar Global Strategies. He is Dr. Kumal Sri Kumar, a regular on the show. Thank you very much for coming back, Sri. Always a pleasure to host you. David, thank you so much for having me again. and have always enjoyed my discussion with you. Thank you very much. Uh an honor to host you as always. Jackson Hole Powerbuckles is the name of your Substack post that you released on um on your Substack. I encourage everyone to check out.com.substack link down below. Uh we'll go over uh some of your uh thoughts today. So let's start with a few clips of Powell talking at the event. Um and I'll just get your reaction. So starting with the first one here where he announced his policy. Take a listen and we will react together. In the near term, risks to inflation are tilted to the upside and risks to employment to the downside. A challenging situation. When our goals are intention like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago. and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance. Those are the key words may warrant adjusting our policy stance. Markets interpret that as saying that he may likely cut by September. But I'll let you evaluate that statement as well as his earlier statement which is that risks for inflation on the upside, risk for employment on the downside. Um, again, I would refer uh the listeners back to what happened in September of 2024, David, almost a year ago when he claimed again that employment was the area that needed most of his help. The fight against inflation had been won. Recall that. and the fact that he cut interest rates by not 25 basis point but by 50 basis points and then between September and December 31st of 2024 the interest rates had gone down cumulatively by 1 percentage point and so he was wrong he has to retrace it he again has says now that inflation is where he is going to be uh fighting but one part of the statement is similar to one year ago namely that employment needs help and he said that then and one year later the unemployment rate is still 4.2%. He does not have a great record of forecasting either inflation or employment. And I think this is one more instance of that. And the other thing to keep in mind is what happened when he cut interest rate by 1 percentage point in the final four months of last year. The 10-year yield went up significantly. Also during the same time period, he did not get a lower 10-year yield. He only got a lower federal funds rate and my concern is that it's going to repeat itself this time. Also, why do you think he quote unquote got it wrong? Was it solely because of tariffs that threw perhaps him and the the other FOMC colleagues off guard? He did that in September. I think I have written repeatedly that the Fed is actually a political entity. They claimed to be politically independent, but the reason they did it was because it was seven weeks before the presidential elections and we all knew that there was no love lost between Powell and Trump at the end of the Trump first term. So clearly he was not going to be renominated but if Trump got reelected last November, his chances were significantly better if Kamala Harris came to office. So I think it was a move which was done close to the elections. There was no indication that the economy urgently needed a 50 basis point cut but he did it. I think there was a significant amount of political motivation in addition to a wrong calculation about inflation. They were all related factors. So the question now is does the economy warrant an emergency or not just emergency but a 50 basis point cut today? Is it more warranted today than one year ago? Sri I don't think the economy needs any cut at all at this time. And the reason for that is that inflation is edging up. We are going to see that I think happen again on Friday with the Fed's favorite measure the PCE core inflation rate which is going to show an increase and the second half of this year is when we are going to see most of the increase from tariffs taking place before you know what the impact is you cannot cut interest rates and make the inflation situation worse. If you do that and this has been the point I have repeated in my street economics thesis as well that you referred to David is that when that happens you're going to see stagflation inflation is going to pick up at the same time you're going to have a recession and a stagflation is something that we have not seen in 50 years we we are going to see that again if that's the policy he's going to follow here's his quote on challenges the economy faces. Take a listen. The economy has faced new challenges. Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. there is significant uncertainty about where all of these policies will eventually settle and what their lasting effects on the economy will be. Can you uh comment on this? Are these actual significant risks for you as well? Uh the first two are especially important risks and what are they? Tariffs, they are comprehensive. They are against a whole set of countries and very many products are affected. So I think tariffs are going to have a highly inflationary impact. Powell is correct in saying that the full impact is yet unknown and yet he has given a signal that you should expect a rate cut in September. So that is a problematical issue for me. Second, he referred to immigration and the deportation of undocumented workers and the fact that immigration has been significantly restricted means that the supply of labor has gone down. And this is especially valid in some areas like agriculture construction areas. It's very important in construction for instance since I live in the fire affected area of Pacific Palisades. David, we know that construction workers are afraid of coming to work to do the refurbishment work because they are afraid of being swooped upon and held away even if they hold a green card or if they are US citizens. So that means the supply of labor has gone down. Why is that significant? If you have a low amount of job creation like we had in May, June and July, that doesn't mean that the labor market is slackening off. It means fewer people are also coming and seeking jobs because they are not out in the open. in which case the supply demand equilibrium on the labor market takes place at a much lower level. That is also a significant factor. But he has not taken that into account when he says that the labor market is in trouble and needs his help in cutting interest rates. Perfect segue. Here's here is his exact quote on the labor market. Let's take a listen. While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment. Of course, before we continue with the video, let me tell you about a very serious threat that you're facing every day that you may not even be aware of. Most people have no idea how much of their personal information is floating around on the internet. Your address, phone number, and email can be found and sold by data brokers without you even knowing. That's why I use today's sponsor, Delete Me. It scans data broker sites for your personal information and removes it. And it doesn't stop there. It keeps checking and clearing new listings throughout the year. Once you sign up, you'll get a privacy report within a week showing you exactly where your data was found and what's been taken down. It's a straightforward way to protect your privacy without having to chase every site yourself. Go to joindeme.com/david and use promo code davidin at checkout or scan the QR code on screen right here to get 20% off all US plans. Take control of your personal data before somebody else does. What's he referring to? Sharply higher layoffs. Are we seeing evidence of that at all right now? I don't think so at all. You see, the initial jobless claims are continuing to remain very low. That's the first part. And employers are hesitating to hire because they are unsure of the impact of tariffs. When that is the case, Powell cannot make it up by easing monetary policy when businesses who should be hiring are afraid to do so because of tariffs. They are the reason why there is hesitation on the part of businesses and monetary policy cannot make up for exorbitantly increased tariffs. That's the principle point I want to make. Okay. Let's turn now to what you wrote in your Substack. Um, and I encourage people to read the entire article. In particular, let's focus on well, let's start by talking about this paragraph. There's nothing in recent data to suddenly suggest that inflationary pressures of the tariffs are a oneoff shock. But POW pointed to the fallout in job creation during the past 3 months to express his concern that the job market was weakening. We talked about the job market just now. Uh, is inflation a one-off shock? We have seen the CPI rise though in recent months. It's it's been ticking up. What what has been happening? Inflation has been ticking up. the F Fed's favorite measure the PCE inflation measure which will come out this Friday that is also inching up and at some you are also getting anecdotal information companies like Walmart which are again big retailers suggesting that they are suffering cost increases due to tariffs and that they have to increase their prices. All of those say to me that you're going to have higher inflation in the coming months of this uh half of the year and perhaps at the beginning of 2026. So I think there is every indication that inflation is headed up and I think given that you need to wait to understand the full impact of it before increasing uh before cutting the interest rates as he's planning to do now. Okay. So here here is a another key paragraph in your report. Trump's loyal official Steven Mirren could become a new Fed governor even before the September 1617 meeting if the Senate fasttracks his confirmation. In addition to Mirren's likely vote to lower the policy rate, the other two governors other sorry two other governors have already dissented at the July meeting and suggested that they would prefer to reduce the rate immediately. If it is indeed true that uh Powell and yourself are both right, you both see upside risk to inflation, why are they cutting rates now? Is it purely a political action? The reason they are cutting a rate is I don't think it is a political action because I think Powell has done very well and courageously until now in holding on to the interest rate despite being badgered repeatedly to cut rates being called all kinds of epithets by the president and he has still continued to keep the interest rates uh level rather than cut them. So clearly I would give him a high grade for political courage until now. Why is the situation changing? Why is the way in which he speaks or signals diff changing from before? I think the reason for that is that you have two descents already among his existing governors. A third governor who is going to come in, Steven Miran, is also going to descent. And we have not had three dissents in the Federal Reserve since May of 1987 when Paul Wulkar was outvoted in a vote when the chairman lost it. Now the other thing that is happening is Trump has said I haven't decided who to nominate as the next chairman but he or she is going to be a rate cutter has to believe in cutting rates and that's the person I will nominate to it. So that puts the carrot in front of very many Fed governors and regional bank presidents who say I would like to become chairman but in that case I need to show that I want to cut interest rates and I'm concerned that Powell may at some point lose the vote himself. He may have a majority voting against him. That I think explains why he's going ahead of the curve and suggesting lower interest rates rather than be forced to do so by losing a vote in the Federal Open Market Committee. Are you concerned a rate cut now in September and perhaps even further rate cuts would exacerbate inflationary pressures even further? I do fear that very much. Where does that my where does my fear come from? that the initial jobless claims are low, unemployment is low, which both say to me that the labor market is in relatively good shape. On the other hand, the last two months of retail sales have been very strong month- on month. That says to me that consumers have enough spending power and cutting interest rates will put even more money into their wallets and more spending and therefore push up the prices even higher. So those are all the reasons why I worry about higher inflation to come. It's not going to be as bad as 2021, right? I hope it will not be. But if you have a stagflationary situation, David, there is all bets are off because you this is something that happens and then suddenly the inflation picks up. Remember that even in 2020 2021 it the inflation would not have been that high had the balance sheet of the Federal Reserve not doubled. It went doubled in 2 years from the beginning of 2020 to the beginning of 2022 and interest rates were kept at close to zero even though it was clear in 2021 that the economy was starting to recover. those were ignored and the Federal Reserve decided it needed to keep EC monetary policy. So if that's what Powell does until he leaves the office in May and if the new chairman does that after May of 2026, you could have a repeat of what you saw in 2020 and 2021. It depends upon how the people act to what happens with inflation. There is a view um that a rate cut may be bullish for equities. Here is something published by uh market watch. Investors are betting that the Federal Reserve will resume interest rate cuts in September, 9 months after its last reduction. It then quoted an analyst on X um about this issue. Such a long pause could be particularly bullish for equities. So this is what the original post said. The wait is the hardest part. Looks like a cut is coming in September according to Ryan uh Dietrich, which could mean that we had to wait. Well, which means we have to wait nine months in between cuts. Long waits can be a good thing. 5 to 12 month weights between cuts have seen the S&P 500 higher a year later n uh 10 times out of 11 times according to historical analysis. Uh can you comment on this? I can comment on it. Clearly um long wait can be quite bullish but on the other hand look at the dates on which um uh the the table shows you what happened between 1970 and 1971 the number of months which were taken between cuts but that was also the period of stagflation that we had before so I don't think it is conclusive that you're going to have a a stock market which is headed upward Because if you do have cuts and even if they are spaced 5 to 12 months away, that is itself in doubt because there is going to be presidential pressure for either Powell or his successor to cut uh rates either at successive meetings or cut them by a huge 50 or 75 basis points at one go. So first of all that goes against history. The secondly the situation today you talked about how it has worked out 10 times out of 11. This may be the 11th time. So keep in mind that stagflation is a very rare phenomenon. It does not happen in every economic cycle. What typically does happen to markets during times of stagflation. If I don't know how many examples in history we can draw from but I'll let you comment on that. Uh we don't have too many examples from history. The last example is actually from the late 1970s. And what caused it? One, you had a situation where oil prices uh quadrupled at the beginning of this uh decade, 1973. They went from $3 a barrel to $12 a barrel. At the same time, uh, the Nixon administration was again bullying this Federal Reserve chairman, author Burns, to increase the money supply and keep interest rates low because the president needed the money to fight the Vietnam War. So all of those led to the fact that you had a very easy monetary policy and they were waiting to actually help him in the 1972 and 1976 presidential elections. The but despite all that happening you had um again a recession take place. Why? And here is the similarity with today. In 1973 oil did not have any substitutes. There was no solar energy, no electrical energy. You depended on oil very much with no substitute for it. So when the price went up, the consumers still demanded the energy. They still needed gasoline for the cars irrespective of the price. That pushed up inflation. That also meant that they did not have enough resources and other directions and that led to a recession. That's how you have the simultaneous presence of both. Today what is happening? You don't have one commodity in short supply. Energy is actually cheap in comparison with the others. But a whole range of commodities have been tariffed by this administration. Which means it is not as if you can substitute one good for the other at a lower cost. Uh because that is not possible because the president has increased the tariffs on a whole lot of different commodities, whole lot of different countries. So that is where the similarity comes to it and that that that is the reason why I think today you have a similarity with that situation. The other the final point to make is that it typically involves the president dominating over the Federal Reserve chairman and that is what happened in 19 in the 1970s. Today you have a Federal Reserve chairman who until now has resisted that kind of bullying, badgering. But if he goes and the next chairman is almost certainly going to be an a follower of Donald Trump's measures and you're going to have significant cuts in interest rates once the chairman takes office. That's why it is similar to what you had in the 1970s as well. What should investors do then to protect themselves from stagflation? Great question. How do you protect yourself? What are what is at risk? If in fact inflation picks up, then the longdated uh treasury yields, longdated fixed income instruments are all going to suffer losses. So if you are in 10-year treasuries, 30-year treasuries, I think you're going to take a hit on on your investment returns and your capital losses. Uh however, where do you get money? You uh you should be in shortdated instruments 3 months, 6 month, 12 month treasury bills because there there is no duration risk and you can get something like 4.3 to 4.5% until until the storm passes. That's one way to do it. Second, gold has uh gone through a significant increase in price. I think there is still an increase coming in the price of gold and I've been saying that when it was at the beginning of the year it was about 2600 an ounce and we are about $800 higher and I still find it very attractive in terms of where they can go. Third area you can hide in alternatives. Find managers of well-managed global real estate for example and go into those where you can look at good property you are going to be in it for 5 years or 7 years without looking at the net asset value on a daily basis that again can also provide you protection. These are some of the areas where you can be hiding but equities will be hit and longdated fixed income will also suffer losses. Last time on my show, which was a few months ago, you had said that equities could tank in a big way. Currently, if uh at the time of 145% China tariffs uh remain and uh we can see um these tariffs persist. Since then, there's been a huge reduction in tariffs globally overall, although base tariffs still remain. Is it fair to say then you are slightly less cautious on equities given that tariffs and the trade war have slightly deescalated since April? Uh the compared with April the uh tariffs have clearly deescalated that is one. On the other hand, the escalation in prices that we have had or tariffs that we have had from about 2% is the average tariff that is measured before Donald Trump assumed office to about 18% or so today. You have gone up significantly in the average tariff level despite the deescalation, David. And that's why my expectation is that that will have to translate itself into prices. On the other hand, Steven Miran says tariffs are actually disinflationary. There is nothing in economic theory which would support that point of view. He believes that because of the tariffs, people will switch the demand from imported goods to domestically produced goods. But the domestically produced goods are also going to go up in prices because there's going to be much more demand. So tariffs are always inflationary and that is what you have. You have had an 18% tariff level compared with 2% before and I think it will take time to show itself maybe 6 or 9 months but it is going to happen. So I don't think I am less cautious than I was in April. The timing may be uncertain. Uh the president may impose a tariff and pull it back. But eventually if the tariffs settle down, they are going to be inflationary and they are going to be detrimental to bond yields as well as to equities. Are you of the opinion that uh a tight labor market could lead to higher inflation? The theory is that if the labor supply is short, uh employers may need to pay higher wages. uh to to compensate workers who may leave and or perhaps uh overall there's going to be uh higher demand for labor and so that feeds into the prices of goods sold. Does that make sense? Is there evidence for that happening? Uh yes, it makes sense. I think a wage cost is a significant portion of total cost for a number of American firms. So that uh will feed into prices and wages are now rising at about 3.9% uh year on year and inflation target is 2%. So if you have such a significant increase in real wages taking place on a regular basis that will eventually get reflected in terms of uh the firms's cost and the employer and the cost of products. What do you think is going to happen uh post January? What key post or signpost rather do we as investors, economists need to look for to determine what the Fed may do post September, after October, one or two cuts, whatever the case may be. What's next for key milestones? What you're going to be watching for in 2026, starting with January, by then you will have the name of a new chairman. And so you have to but between now and January 1st we will get the pronouncements of the chairman designate what he or she says will be the policy that will be followed after Powell leaves uh the chairmanship in May. The second unknown is what is going to happen to Jerome Powell as a governor of the Federal Reserve. Keep in mind that he still can be in office till 2028 as a governor. So if he continues to stay on the board, he will be a thorn in the flesh as far as the president is concerned and he is going to be giving his pronouncements and he's going to be speaking in uh to the press and he will be listened to intently even though he would not be chairman. that again will cause a lot of uncertainty volatility in the markets. So what you're looking for from now to January and again January to May is the who the identity of the next chair that's one and secondly how much of uncertainty is caused in the market because you don't know whether interest rates are going to be maintained if they are going to be cut by 50 or 75 basis points and if so is the long yield going to rise significantly as it did in the final months of 2024. Do you have any idea? Of course, nobody knows for sure, but do you have any idea who may be the best runner up or the highest contender for the next fetch here? I do not because so many people are being mentioned number one and second the president has essentially put put them into competition because each one seems to be outrunning the other. Take the case of Kevin Hasset and Kevin Walsh for instance. that at one point in time they were talked about as only the only two candidates out in the field and each one seemed to be again beating the other talking about how much he would cut the interest rates if nominated as chairman. Now we are told that there may be as many as 11 candidates for that position. some from the private sector, some who are already governors in the in the Federal Reserve Board. I wouldn't be surprised if somebody comes out of the blue and says, "I am ready to cut interest rates by 1 percentage point and then the president loves that person and then says that person is also a candidate for the Federal Reserve." So, it is very murky at the moment. So, I would hardly hazard a guess as to who it's going to be next time around. Sri, final question for you and then uh we'll end the discussion here. GDP advanced uh Q2 GDP uh real GDP is 3%. Um that is a huge increase since Q1 which was negative. Um you know people were commenting on why Q1 was negative. It had to do with net imports being negative, not really overall growth being negative. But I'll let you comment on this huge gap and where you think GDP may be headed from here. Yeah, I think the second and third quarters uh essentially offset each other and the third quarter was partly a reflection as you said about imports causing a big drop in the second quarter and then being offset in the next quarter in the first quarter being uh changed. I think as I look into the future I see it in the short term at around 1 and a half% growth. We are going to have the GDP number come out on Thursday. That would be my expectation. But in the future, if you have stagflation, then you are talking about one or two quarters of negative growth take place during a stagflationary period. By the way, we talked about stagflation. I should also point to the fact that stagflation is pernicious because the monetary policy you do not know how to react to it. Do you cut interest rates because there is recession or do you raise interest rates because inflation is picking up and if you do one or the other you're always going to harm the other side of the mandate which is in fact before we conclude it's important to say that I've long believed that having two mandates rather than one is just illogical. There is something called a tinburgen rule named after Yan Tinberen the the Dutch Nobel laurate economist and he basically said with one instrument you can control only one target at the most and so if you are man manipulating interest rate up and down all you can get out of it is either inflation or employment not both so I think the Federal Reserve should control the inflation portion and leave employment to the Treasury in terms of spending to do it. Uh the Fed cannot achieve both of them. Ultimately, what has more impact on growth and uh economic performance right now? Fiscal or monetary policies? I think fiscal policy has more of an impact monetary policy has a much sherer and much clearer impact on inflation. Okay, good. Thank you very much. Sri, we'll uh end it here. Where can people follow you and read your work? Um I I am on Twitter. I it is @ shriek go global at s r i kg l o b a l that is on Twitter and as you mentioned before I have sri economics at substack substacks economics.com where I put out my Saturday morning pieces. Okay. Excellent. Thank you very much Sri. We'll uh put the links down below. So make sure to follow his Substack and uh X accounts there. Uh appreciate your time as always. We'll speak next time. Thank you. Wonderful. Thank you so much, David. Always great to talk with you. Thank you very much. An honor to host you as always. And thank you for watching. Don't forget to like and subscribe.