Anna Wong on Inflation, Fed Policy, and U.S. Economy Outlook | Global Macro | Ep.87
Summary
Fed Policy and Market Expectations: Anna Wong discusses the market's expectation of a Fed rate cut, highlighting that Jerome Powell's recent speech was not as dovish as perceived, emphasizing a data-dependent approach.
Inflation and Tariffs: Wong argues that tariffs have not been as inflationary as expected due to the deflationary pressures from China and the discretionary nature of affected goods, but warns of potential inflationary pressures from stock market gains.
Labor Market Dynamics: The labor market is described as being in a "curious balance," with Wong noting that AI is impacting youth employment, contributing to a decline in labor force participation among younger demographics.
Housing Market Outlook: Wong predicts a continued contraction in housing prices, contingent on unemployment rates and mortgage rates, with a potential recovery by mid-2026 if economic conditions stabilize.
AI's Economic Impact: AI is already contributing to GDP growth through increased capex in data centers, with expectations of continued investment and productivity gains driving future economic growth.
Fed Leadership and Independence: The discussion covers potential Fed chair candidates, with Wong expressing confidence in their ability to maintain Fed independence despite political pressures.
Fiscal Policy and Debt Trajectory: Wong highlights the importance of avoiding recessions to maintain a sustainable debt trajectory, noting that tariffs could help offset fiscal deficits.
Long-term Economic Optimism: Wong is optimistic about future GDP growth driven by AI and potential fiscal improvements through tariff revenues, suggesting a shift away from the low productivity regime of the past decade.
Transcript
[Music] independence cannot exist with accountability. No, I think those two have to come together and I think right now um the DC bubble is too much on the independence without accountability. Um whereas potentially the Trump administration or Trump himself just want to do what he wants. I think it's always good when you have two extremes tugging at each other because then it will generate a medium solution which is what you want rather than one way or another. >> Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Kstrop Larson. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macrodriven world may look like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn. [Music] Thanks for the introduction, Niels. Today I'm delighted to be joined by Anna Wong. Anna is chief US economist at Bloomberg. She was previously an economist at the Federal Reserve Board and prior to that served on the council of economic adviserss at the White House. uh and also served as an economist at the Treasury in the Office of International Affairs earlier in her career. Anna, great to have you on. How are you today? >> Good. Happy to be here, Alan. >> Great. Well, uh there's an awful lot to talk about in in US economy and policy world. So, I'm sure uh we're going to have a great conversation. Would you like to start off by getting a sense of our guests uh background? Uh obviously, you've uh been a career economist, I guess. uh what got you interested in economics in the first place? >> Financial crisis. >> So when I was uh and when I was young, so I actually was born in Hong Kong and the Asian financial crisis in late 1990s really defined um you know the livelihood of of people around me and also the whole economy and environment I grew up in. And also when I was in an undergraduate I went to UC Berkeley. my my most exciting uh economic courses was international finance and it was happening in the context I was taking the class in the context of the Argentina currency board crisis in 2000 or 2001 as well. So all international finance was what got me in interested in economics from the beginning. >> Good stuff. Well, we've had some of your uh contemporaries from from Berkeley on as well, Barry Iiken Green as well in the past. So, um, >> he was my thesis advisor. >> Oh, great. Well, there you go. That's an interesting uh interesting link. Yeah, we've had Barry Action Green on two times at at this stage. So, definitely one of our favorites. Um, but um yeah, as I say, I mean, you're you're you're on at a very interesting uh juncture here in terms of the US economy. I guess it's always interesting. There's always something to debate, but particularly at the moment, we're just coming out of uh Jackson hole and um you know, I guess there is an expectation now that the Fed is inching towards uh an an easing. Now, I I saw you um on X saying your your sense was that maybe POW wasn't as dovish as maybe the consensus read. Um is that correct? >> Correct. >> And tell us more. I mean I thought it did mark a bit of a shift from from maybe the last press conference. Um but but I'm my reading of your comments is you still see it as being very much uh data dependent. Is that right? >> Yes. So I think the market was really fixated on a couple phrases in Pal's Jackson Hall speech. He said the risks the balance of risks have shifted and he also mentioned that uh um there there's a curious balance in the labor market downside risk for employment have increased. So, you know, seen individually, these sentences look quite delvish, >> but when you when you see read these sentences in the context of last year's uh Powell's Jackson Hall speech where he unmistakenly uh green light a a rate cut and also seen in the context of uh the the words that Fed speaks to usually Fed officials use to uh make things more confusing. I think there are actually a lot of e you know escape clause in this speech so to speak >> where he's not you know really say that this is a sure thing although today I see that markets have now >> uh priced in 94% of a rate cut in September. So it will indeed uh take a lot for the jobs data we will get this Friday and also CPI data next um on on the 11th to uh to reduce these uh pricing probability to say 60 55. I think if if market's probability for a rate cut for September from here on out were to move down to 60 to 55 for whatever for any you know data release reasons then it will will be become more of a tossup. >> Okay. Yeah. And I mean we've kind of got two views emerging from the Fed. I mean we've had the line that Powell has been pushing for a while now that it's too early to say um you know what the impact of tariffs will be. there's a lot of uncertainty and also that the labor market is in balance uh broadly albeit uh with weaker demand. H and then against that Chris Waller he's kind of been very fortright I think it's fair to say and seems to be backing his view quite strongly. I mean he came out and said he he he argued for a rate cut previously and it was the right call which was quite blunt. um and he's doubling down on that view now and and he's very much of the view that you know that there's a risk of the US economy going to a stall speed and slipping into recession. So I mean which do you think which view has more merit in your opinion? >> So first I want to say Chris Waller has a very uh impressive track record as a forecaster. Um a and um his he he very early on he took the view against the uh I I believe the Fed staff internally in the in the board which is that tariff will be very inflationary before July like most people um back in March or or April were thinking that the inflation print would be quite elevated by May by June by July it's been postponing every month but but most people said by by May but but Chris Waller thought that the you know impact on inflation from tariff would be about.3 percentage points on core PCE deflator this year. It so happened that that was our forecast too. We actually also took this view very early on that uh the tariffs would not be so inflationary at least you know not not this year. Um and and and I think that because because our forecast is similar to Waller, I can explain the reasoning why on why we find that convincing. Well, first of all, the the US economy is a servicedriven economy. In the CPI basket, over 70% of the stuff are services whereas goods comprise of only 25% or less of the CPI basket. And even within that 25% only about 12% were really exposed to tariffs. By by that I'm and I meant scaled by the share of imports times the tariff shock. it's uh what the shock uh is greater than 10 percentage point you know since liberation day. So really we're talking about a very small uh like 12% of the basket that's that's uh tariff driven. Um and and so even within this basket when you look at these 12% of goods what are stuff which is being potentially uh being driven up in prices by tariff there are clothing sports uh sports I mean sporting goods and uh audio equipments computer equipments and uh window coverings um indoor plants stuff like that is it's Yeah. >> And when you look at these, you get the you get the sense that these are rather discretionary goods uh that auxiliary uh that people actually could, you know, you can wear your clothes for longer. You don't need to go and upgrade your clothes every month. In fact, Timu and Sheen is kind of training Americans to buy clothes every month. Um but um so another factor we consider is that many of these uh goods that are really exposed to tariff very interestingly and counterintuitively if you look at the inflation of these tariff exposed goods they actually have an inverse correlation with the tariff shock they received meaning that if you look at the 12 month inflation of all these uh goods exposed to tariff the more tariff they got the more deflationary they had been in the last 12 months. And this is a kind of important point because it tells you that the tariff shock is not random. The tariffs are being applied to the goods that tended to be more deflationary in the past. And why? Because they came from China. And that tells you because China has been going through a deflationary pressure in the past year. And deflationary pressures is very hard to get get out of as we could see from Japan. And when you are in a deflationary environment, firms try to out compete each other by bidding the prices lower and lower and lower undercutting each other. Which is why you see um I thought one of the most important uh international monetary policy we have seen in the last two months is the Chinese government announcing this involution campaign where they're cracking down on price cutting behavior that I just described. It is all in a context of deflationary spiral and this really affect US CPI because as you could see it means that the tariff would not be as inflationary because they're precisely coming from a place that's increasingly deflationary kind of offsetting that. So both of these are these two reasons uh that um you know consumers would cut back on these these are really income and price elastic goods. Second, these the origin of these goods is is experiencing deflationary pressure was the reason why I found the idea that tariff would not be as inflationary. But going to the point of services first and and because the tariff was such a shock to the economy back in April on liberation day, the stock market plunged uh plunged in April by I I don't know 20%. um and that wealth effect. So basically the the top 20% of by income in uh of household in the US owns 90% of the stock market. The stock market correction hit these 20% of Americans hard and they are the ones who are driving these airfares and hotel prices and personal services prices down and these things comprise a large portion and account for the uh variance of month-to-month changes in the CPI by a lot and that's what's drive the CPI to the downside in the last four months. Now moving back, moving forward, looking forward, I think I would say that now is the time where I actually think the tariff uh pass through could be even uh could actually be brisker. Uh because the stock market has since April, early April rallied over 30%. And I expect that mechanically this stock rally will add to core PCE uh inflation. Well, it already has added.3 percentage point of core PCE inflation from June to August. It will once you see the August report and then it will continue to pressure core PCE in September through October because the way that a stock market rally appeared in inflation data it it has about a 3 month lag. So that piece with this this financial conditions loosening is are going to mechanically translate to inflation already. But on top of that there's those multiplier effect of how it affects people's behavior. Now we are see seeing airfares prices are going back up, hotel prices are going back up. Um and people are traveling again. Uh people are feeling better. Consumer sentiment is also improving. So I think firms are finding the opportunity they to to pass through the prices. They're they're they always try. If if they don't try if they could try and then if it doesn't work, they cut back the prices. But what I think we could see as we come to the end of this year is okay many of these trade policy uncertainty are being resolved. So that's one tailwind on investment firms are no longer holding back investment. The tax policy uncertainty is also over with the passage of one big beautiful bill and people are already moving on to you know pricing the boost to many stock market firms on the basis of one big beautiful bill and on top of that you have this improved consumer sentiment which means that firms could be uh maybe more successful in passing through uh the tariff. I I actually think that um if the Fed decide to cut in September, we're going to see a flare up in inflation. >> Okay. And interesting when you talk about that kind of pass through from the stock market into core PCE. I mean obviously you're talking about the wealth effect is indirect. Is there are you talking about a a direct effect? Is that because there was a an impact on was it kind of asset management? Um >> exactly. I'm talking about the direct effect. Yes. there's a component there called PPI portfolio management fees >> um and and which can be proxied uh very well by S&P 500 so it mechanically translate into inflation >> I mean what what you say is interesting as you say the uncertainty is diminishing the um consumer sentiment is stabilizing against that I mean obviously Waller's the Waller view is also that the the labor market is weakening and the demand side is weakening there um is that I I know you you're very close to do a lot of analysis on the labor market data. Um and obviously we've had we had Joel's data out today. No early September we're recording nothing interesting in that. But we've got obviously payrolls and revisions coming. But taking a step back, what's your read on the labor market, you know, both from a supply and demand perspective? Yeah, I I think I think um I agree more with Powell's portrayal of the labor market in the Jackson R speech, which would which is that labor supply and demand are pretty close and they're in a curious sort of balance, >> which is why I found the sentence that he put in after this part, the curious balance sentence, quite curious myself because that wouldn't lead you to conclude that the downside uh the employment situ situation faces uh enhanced downside risk. You just said there's a balance there. So why would there be suddenly a downside risk? So um you know many people in in in the in the US were was talking about the immigration crackdown and how that's creating a downside risk to employment. But last year we looked into where uh what sectors do we uh undocumented immigrants tend to work in and we found they tend to be in construction, leisure and hospitality um and uh some services uh personal services jobs you know such as hairdressers um things like that and uh and also um uh yeah so so these three section ctors for example are also the ones that are facing enhanced labor demand leisure and hospitality you know decreased tourism in the US construction worker high interest rate and housing market cooling in the United States in fact the housing market is going into a negative contracting now it's very rare to have multimon contraction and home price that's what's happening in the US right now um and so so I do think that um labor demand and supply are roughly in balance And when I look at uh so another thing in the Jackson Hole speech, so uh Powell unveiled the revisions to the longer run goals of the Fed and there are a lot of very significant things in there and one of the most important thing is they talked about the situation when the price stability and full employment goals are in conflict with each other. how would they assess this situation and in the new version uh he bring back the word balanced. So they're going to pursue a balanced approach where they will be weighing both mandate according to uh how far they are from their uh targets and also in the speech uh pow also mentioned he'll consider the speed at which he thinks that the gap would close for in each of those mandate and the distance from it and so if you take him by his word we have precisely the situation right now how would he think about the departure of the inflation and the labor market goals. Well, uh unemployment rate is 4.2 right now. The Fed uh the the summary of uh economic projections the uh back in June have the Fed forecasting uh the FOMC forecasting 4.4 at the end of this year going to 4.5 maybe next next year. Right? So basically we're on track and and even conditional on uh you know getting to 4.4 the uh fed officials also see the natural rate of unemployment at 4.2. So 4.4 versus 4.2 is a very small distance and and Powell himself also characterizes unemployment rate as still as as still historically low. So in terms of distance from the target and also the time at which it would take to close according to the Fed projections themselves it will close pretty soon. So where's inflation core PC inflation even and and Powell said in that speech a one-time price level in increase from tariff does not mean all at once. That is code word for persistent inflation and in fact I think that match what I would forecast in terms of inflation. I just said that and I said that we won't see much of inflation this year uh from tariff but it's slowly coming in each and the and the firms are finding the right opportunity to opportunistically pastor >> and by next year's time the one big beautiful bill according to our estimate will produce a point4 percentage point expansionary fiscal impulse in April as people get their tax rebates and things like that that would be a a tailwind for you know suddenly an income uh increase and that this is where the tariff pass through will succeed is when it happens when firms are raising prices just as people are getting a positive income shock. This year the tariff uh alone is equivalent to uh um you know a a tax increase of 1 percentage point and there's not much offsetting a positive income balance except for the resolution of trade and tax policy and the stock market the stock market and a easing of financial conditions is one factor that help offset the you know uh consumption tax from from from tariffs. So as as as the stock market improved because they think the Fed is there to put a l a bottom in the market uh and a bottom on the quickly put a bottom on on the labor market. The stock market will provide this income boost to the top 20% and those 20% will drive the services inflation up in the rest of the year and also allows certain products uh tariff pass through to pass through you know on on the more auxiliary products. I mean a lot of the um points and the concern around the tariffs impact on inflation is on inflation expectations and you know I suppose the point has been made that because we had the inflation surge during co and afterwards that now consumers are much more sensitive to rising prices. So the fear is if we see rising prices now people will assume that this will be more persistent. This is the argument you your forecast for higher inflation isn't even taking that into account. It's a separate factor. Are you sympathetic to that argument or is it too vague or what do you think on that view? I I think that the way that Powell and several and the Fed have been using the argument is kind of has some kind of circular logic to it and doesn't really make sense to me because or or require some kind of leap of logic assuming that inflation expectations are anchored now are well anchored now as Pal repeatedly said they are then they shouldn't be fearing that there would be passed through because then it will surely be a one-time increase. So Chris Waller in that sense is the most logical. I mean all his steps follow the previous argument. So, so either inflation expectations are already unanchored because only if they're already unanchored can this argument that oh people will be more sensitive to prices, right? And I I I think it's more likely that inflation expectations are already unanchored and they're already at say 2.8 >> as opposed to two. And the Fed once again is showing why inflation expectations are slowly on anchoring toward the 3% uh range. It's because they're so quick to respond to a little bit of labor market deterioration and the keep in mind core PCE is now um has been above target for almost 5 years and if the FOMC forecast and the SCP is right it will be 7 and a half year before it closed. So seven and a half year of above expectations above target of course will cause inflation expectations to drift up. So I just find the argument of you know forecasting inflation rates because you know expectations are unanchored or is is kind of weird and to assume that people will bid up wages because uh they have higher inflation expectations. Well then then you should be acting today. you should be in fact hiking now. >> Yeah. I mean you you you've um you're you kind of um given Chris Waller a lot of praise there in his analysis and his logic. Do you think he's been influenced um you know by the current political environment and positioning for the Fed chair role in his views? >> No. So I thought that all his speeches showed that he has done the homework. Um, I mean, I also kind of agree with him that the time to cut probably was earlier. I mean, I think that there was a narrow window of time back in June and July where they could cut because all the data cooperate the, you know, inflation data is weak, employment was weak, everything is doing, you know, weak. >> Yeah. Um so it would be entirely consistent with the Fed's reaction function and also there how what they say about being data dependent to cut then but now we are actually moving suppose that we do get a hot CPI next next on on September 11th are they really going to cut if if you get a 0.4% 4% CPI report. >> Yeah. >> How could you possibly cut >> you know but I think market do think that if they get a 0.4 they will cut on the basis that on the assumption that the 0.4% would be a one time you know oneoff >> transitory inflation. >> I think I think a 4.4 inflation print would really scare the heck out of uh Fed officials. Yeah, but I mean maybe not Chris Waller because he's he is expecting higher inflation, isn't he? And but he's saying you should ignore that. Isn't that right? >> Um so so by the way, Chris Waller also referenced uh this weekly uh ADPbased um employment series that he has been uh watching. >> Um so this is something that uh staff at the Fed board gets. It's like a high frequency weekly ADP series that you know we we don't have and he mentioned that he saw even after the reference period in July ADP series is showing uh a brisker pace of deterioration. Um so that was that that was the basis for why he said he still see the case for a rate uh a rate cut. But the reason why we think this Friday's payroll would be stronger than what the consensus believe is because of local government hiring. I do think that local government hiring has picked up over the months. Uh there was a you know Trump administration freeze the funds for K to 12th grade early in July but then they released all those funds uh towards the end of July. And so we are seeing some evidence that as a result there's some catchup hiring in the local government and and local government is not captured in the data that Chris Waller is watching which is based on private sector. So I I I I do think that overall most labor market indicators and also economic indicators suggest that the worst app here to be over uh in June and things have been improving since early July. [Music] >> I mean you mentioned housing there and that for other forecasters uh is is one of the weak spots in the economy that's causing concern. You me so obviously housing activity has slowed, house prices have started to come off. You mentioned is that a concern or do you see that stabilizing or how do you see the housing side playing out? >> Um so we have a fancy model. We we so we so you know housing price a persistent decline in housing price is really a left tail event. It's not so housing prices are not a normal distribution curve. It's it's actually one with long left tail and and so we model it in this nonlinear way which to capture the entire you know uh non nonlinear path of of uh price growth. And what we found is that there's a two out of three chances that housing price uh by the end of this year would be uh in cont still be in contractionary mode. Um and then we do see uh chance that uh better chances that housing price will return to positive by mid next year uh 2026 um with only 15% chance of um negative price growth by mid 2026. All these is conditional on today's data. But at the end of the day, housing market is really related to unemployment rate and also income of people. >> If unemployment rate stabilize at 4.2 and go no higher than 4.4, it will be a very shallow housing market decline as the model suggests. But if the unemployment rate were to swiftly deteriorate to say 4.8 8 4.7 and rates continue to be higher because right now there's a global selloff on the longer ends of bonds just happening unfolding in the last couple of days which means mortgage rates will continue to stay high then I could see that uh negative price growth for housing could persist through next year. >> Okay. Um the other factor in terms of the unemployment rate in labor market is AI and I mean increasingly we're hearing anecdotes about you know tough for new grads to find jobs because some of the work has been done by AI. What are you seeing on that side? Is that a is that a real phenomenon and do you think this will be an increasingly important phenomenon impacting the labor market or not? >> I'm glad you asked that question Alan because that's completely real. uh you know there there are two ongoing um potential explanations for what's going on in the US uh labor market. One is the immigration crackdown >> generating downside risk to employment and the other is AI. We have found very little evidence of the immigration crackdown hypothesis. However, we have found lots of evidence of the youth uh employment. So the labor force participation rate has been falling for the last three three months or four months and and and that is contrary from what uh CBO would had forecasted last year. CBO actually forecasted that labor particip participation rate should be on track to increase throughout this year. So we're going the opposite direction. And when you look into the details of what who's dropping off from this labor force in the last four or five months, it is the people who are age 16 to 19 and from early 20s to mid20s. >> Um, and why are they dropping out? The data suggests that they're discouraged >> and discouraged workers. Um, so I think there seems to be something there about why is this drop off in labor participation rate mostly hitting the younger folks as opposed to other you know demographics group um and I think AI is a very likely candidate. Um yeah and partic particularly um the if you look at the non-farm payrolls in the in the in the establishment surveys the sectors that are very weak in hiring there see kind of weak hiring are business and professional services white collar jobs. >> So when you um look at both the demographics in the white collar jobs hiring weakness and also um by the way St. Lewis Fed had done a little study on whether the rise looking at rise in unemployment rate of various sectors versus AI exposure and they found the 0.5 correlation between AI exposure and increase in unemployment rate because AI affects both layoffs and also a slowdown in hiring which leads to a swelling of unemployment rate right and it's it's also highly correlated so I have to say AI is the most compelling uh explanation for why we're seeing the slowdown in hiring for youth. >> Okay, interesting. Um we might come back to the longer term implications. Um but I definitely want to hear talk to a bit more about the future direction of the Fed and we've talked about Chris Waller a lot. Um, I mean, he's one of the the three favorites, I guess. Um, Kevin Hass and Kevin Walsh, the other two that are most prominent in the betting markets at least. Um, if you were having a bet at the moment, um, who who's your money on and and who's the most consequential uh, candidate or would be the most con consequential selection? >> Yeah, I've consistently predicted that it would be Kevin Hasset. Um, and my reasoning is that um, Trump and Susie Wales have known Kevin Hasset for a long time. Uh, Kevin Hassid uh, led the CEA in the first Trump administration. He demonstrated his loyalty over and over again. He he really helped push through the first tax cuts and jobs act in the beginning. um he was the one who designed uh who played a key role in designing the tariff schedule in the first Trump administration to minimize inflation impact. Then he had a mini heart attack and he drove himself to the hospital on the job because he didn't want more media fanfare and then he you know then he he uh left the job because you know a White House job is a 80hour business. It's like non-stop. And then when COVID hit, he volunteered and c voluntarily came back to help out the the White House. And after the Trump administration, um he joined the American First Institute, American I think American first policy institute. Um and that's basically the incubator for all the pretty much all the officials you see in the second term. And that's the place where you know they continue to to build the relation. So so I think I think Kevin has has a longstanding uh relationship with the Trump and Trump himself and the administration and he is also one of the few who who has the most mainstream economic credentials. Um and when you talk to some senior Fed officials who senior Fed staff officials, they have good things to say about Kevin Hasset, you know, he he even though um also many people thought that he he uh he he has been pretty biased since he joined the second Trump administration because he is the NAC director and his job now is to go on TV and defend Trump. uh he as a person I think is actually a very open-minded person uh and unconventional but also have mainstream training and credentials. Um so I think he's most likely given his history with the administration. Kevin Walsh um has has a you know has been known as a hawk and he himself said he's uh he won't be pushed around and I think there would be skepticism among the Trump circles that he may be dovish or he he could be dovish um and uh who's the third Chris Waller so I think Chris Waller is a dark horse um he there may be some odd cir circumstances that may suddenly elevate Chris Waller's chances. The fact is, I think if Trump spent more time with Chris Waller, he will grow to like him as well. Uh, but whether because they both like these uh wrestling or exciting. I I I don't know what's the difference between wrestling and fighting, but uh um I mean Chris Waller is a bluecollar governor. His is he has a very interesting background. He started off as like working in a warehouse and you know he came from the from the uh middle America and speaks like a a straight talking uh person doesn't doesn't give you the vibes of a a elite you know economist. Um but so is Kevin has Kevin H also came from a you know pretty bluecollar family. So, but Chris Waller uh but I don't I I do have to wonder whether Trump will take the chance because Trump took the chance with Powell. Uh him liked him and then he felt betrayed thereafter. So, >> I mean he he did go with the kind of the market friendly choice with Scott Bessant um which the market liked but now I mean you see Scott Bessant is as much of a cheerleader now as uh Kevin Hassid is. Um I mean I suppose the question is if Kevin Hassid is Fed chair is he going to um be be susceptible to persuasion and lower rates? I mean would or will he be purely independent? What do you think? >> Well, so so Kevin Hasset is not did not came entirely outside of the Fed world. He was a Fed economist once upon a time and and he did have mainstream training. He was a senior fellow at AI, which is pretty mainstream Republican camp before he joined the mega world. I think that history tells us that whoever who the president thought would be on his camp once they get into the Fed, they will be subsumed by the Fed culture and they will be a different person. So I I don't want to prejudge him because uh I don't think he is a person who would be subservient. I I don't think he would would be that type of person. >> Interesting. I mean there's a lot of people calling for dramatic change at the Fed. Obviously Scott Besson has called for review. Kevin War has also called for regime change. I think um you've had other kind of economists um Jeremy Seagull saying they should abandon kind of ample reserves uh Larry Lindseay I saw saying you know Fed's been terrible at forecast everybody's lining up to criticize the Fed and F we need a new direction do you think we'll see some a change of approach change of direction with the new ter >> yeah I think actually change is good the Fed has some of the smartest people I've ever worked with smart and their training is suburb. So we do not have a lack of smart people at the Fed. But what the Fed does not have I think is a balanced view of the world. And economics at the end of the day is very much a normative science in the sense that it's not a pure science where there's a objective >> truth of you know right or wrong or black or white. When you for example when the staff have to forecast what's might be the impact of this tax policy on the economy the the general equilibrium model of hundreds of equation will only spits out the kind of assumptions you make like you could assume what is the uh fiscal multiplier of this tax cut. If your app priori biases is that oh it's low and then you'll put in a very low multiplier then you'll see that tax cut produce very low growth uh it will worsen the debt trajectory or it will it will just uh right uh so it's many economic models is precisely uh reflect the moners assumptions of the world. It is not an objective truth. And so often in economics, we treat it as if it's a science because it has 200 equations in it. And you think there's it's creating a false sense of positions. If you look at Washington DC's political affiliation, you would see over 95% of voters vote Democrat in in Washington DC. It's like a little bubble here is extremely um to to one side of the political affiliation. Ideally um economic policy and forecast should be made in a 50/50 kind of like so so that people could argue against each other and I think the Fed often fall into a group think uh situation because of these implicit you know assumptions of how because reflecting people's arriori ideas of what should be >> it is a good thing for somebody to look at it because I I don't feel like Powell's explanation of why their forecast missed in 2021 is sufficient enough. If you look at this framework review, he he he often said most people in the con in the market consensus forecast, blue chip forecast missed as well. But some people didn't miss. And you know, and why was it that some people why why was it that the Fed was so slow to recognize that the expanded unemployment insurance would provide incentive for people not to work and therefore causing the labor market to overheat? Like why were they so slow to recognize it when other people have already recognized it long before it? For example, >> yes, >> I know in the CA I was at the CA in 2019 and 2020 in the middle of the pandemic, we have a staff of 30 people economists in the CA. And my colleagues already showed showed that the expanded uh unemployment insurance would cover more than 54% of the labor employment income. So meaning 54% of the population of the workers have more income from UI than working. of course that is so clear that it it is going to overheat the market. So I think it it is u kind of um good for the Fed to do some re honest review. Was that a was that an error of do you think group think at the Fed or just the personalities? I mean if Alan Greenspan had have been there would have been different or was like a failing of Jerome Pal versus say Bernani or or do you think regardless of who who was in that seat because it's been driven by the analysis is driven by the Fed staffers and that's the analysis he's been given. So what you know it's inevitable that's going to be the policy. Well, that that would be too speculative of me to to to say, but I I will say that Powell is not an economist by trading. He was a lawyer, right? But he's very um open-minded also. Powell has, you know, Powell had been with the Fed for over a decade and one of his previous portfolio was the emerging markets even. No, he had he had seen a lot, but he's he's also I don't think he's the type who would challenge academic forecasts too much, right? Because um however, the person on the Fed I that I remember who actually did challenge many staff was Rich Clarity uh who who was the one who brought up the uh the question of how about these excess savings? What are they going to how are they going to affect >> um inflation? So and and Rich Clara was a is a Republican nominee. So this is an example where I do think that some review on how the forecast would be improved uh rather than just saying that well because the rest of Wall Street um thinks this way. I have to say the Wall Street also have such biases. >> Yeah. Yeah. Well um I mean obviously we're starting to see a change in the composition. Obviously, we're waiting for a new Fed here, but obviously we've got the likes of Steve Moran now coming onto the onto the FOMC as well. You know, you said he expected Kevin Hid to be engulfed by the Fed kind of thinking. Do you think Steve Moran, he he's been pretty vocal in favor of low rates? Would you expect that that to continue once he comes on? >> Okay. Steve Moran is a very interesting uh individual. So, he did not have a Fed background. He did not come from the mold of the Fed. He entirely came from the outside. So his paper on fed reform what I thought is that he's a very bold and creative thinker and he has out of the box idea but I'm not sure that the ideas he recommended in the paper treated the core of the problem which is the grip think he he he proposed this uh fed federalism which is to have state governors affect uh uh appoint the regional fed presidents and uh have the regional president vote every time. Therefore, regional Fed voices are larger than the Fed board voices and you can get more balance. I don't think that's where the lack of balance is. I think a lack of balance is something more ingrained in you know how forecast is made by who that that those forecast is made. So I think Steve probably h have you know ideas of his own. He's a very independent thinker and probably he was selected by Trump. He got Trump's ear. Trump decided to go with him because Trump likes his bold idea. It seems like Trump just wants likes to dis he likes disruptive ideas and Steve Moran have it. So I think Steve Moran would go into the Fed will will be learning a lot of how the Fed actually will work and he will he potentially he could have revisions to his idea. But I think he's going to see and and see a lot of things that he he didn't uh consider before. And I don't know what Steve Moran will be like in 6 months time cuz he is he is uh he's adaptable. He's very smart and very also very possibly stubborn. I don't know but uh uh but he has ideas of his own. Um but um we'll see. >> Yeah, we've had him on here as well. He he was very interesting last year. Um it sounds like overall you're not overly concerned about Fed independence is what I'm hearing from you. like Chris Waller is obviously a strong candidate. Kevin Hassid, you you don't think he's going to um suddenly turn mega dovish. Um now obviously if Trump bull appointed more you know Fed officials over time uh we've got the attack on on Lisa Cook but but I mean say outside of monetary policy do you think with more Trump representatives at the Fed will we see significant changes elsewhere say in relation to bank regulation or any any other aspect of of the Fed's work? >> Alan let me clarify I am concerned about Fed independence. I mean, so far I'm just giving the Trump administration the benefit of the doubt. I mean, I I think the the intention seems pretty clear uh on why um um you know, the accusations on Lisa Cook, why they made their uh accusations on Lisa Cook. However, if Lisa Cook indeed has been proven guilty in the courts of the judiciary system and had a fair trial and was found indeed to have committed mortgage fraud, then I think it would be untenable for Lisa Cook to stay on because other Fed presidents have been gone for lesser crime, you know, for minor training scandal and you just have to be peachy clean if you are going to be uh on on a higher governing board of supervision, financial system supervision. Um, that said, I'm giving the Trump administration the benefit of the doubt on what they will actually do if they do have the majority seats on the Fed board. Because number one, I don't think Chris Waller will undermine the Fed independence. He's just that, you know, he's that guy who who would do what's right. I think this is a guy who I I think would do what's right. Um and um I also do not have such a dire perception of Kevin Hatit or Steve Meyer that I think that I mean if you read Steve Myron's paper he actually couched the opening paragraph of his thing on how to improve that independence because independence cannot exist with accountability and I think in a way uh how when is it that when you asked an institution for accountability, it become you know undermining the independence. No, I think those two have to come together and I think right now um the DC bubble is too much on the independence without accountability. Um whereas potentially the Trump administration when Trump himself just want to do what he wants and but other people who will actually govern the Fed the ultimate outcome might be somewhere in between which is with this I think it's always good when you have two extremes tugging at each other because then it will generate a medium solution which is what you want rather than one way or another. >> Yeah. Well, I mean, as you say, I mean, it seems clear that the objective here is to get lower rates and all of this is in the context of high debt levels. And so, everybody's talking about fiscal dominance. I mean, it's been talked about like it here already. I'm not sure if that's actually the case, but it's certainly a big theme in markets. Um, I mean, you you mentioned how bond yields have been rising the last few days, more overseas, outside the US than in the US. I mean 30-year yields have been edging higher, but 10 year yields are still pretty much in a range and we had the big beautiful bill that you touched on. I mean the longerterm fiscal trajectory in the US looks bad. I think everybody agrees but the bond market so far has uh you know um digested that fine. I mean how do you see this playing out on a kind of a multi-year basis? Do you think deficits will be addressed eventually or are we going to are we now in the era of of fiscal dominance or will monetary policy at some point be directed towards um m you know making sure the debt levels are sustainable. I think that one reason why I had thought that the trade policy uh the tariffs will stick around was to pay for the school and I also think one reason why the market uh last couple of months uh during the passage of fundic beautiful bill was not really concerned of the you know 3.4 for trillion price tag upon the beautiful bill is because of the tariff revenues and CBO has now forecast that the tariff revenues will generate 4 trillion of revenues uh in 10 years will pay for one big beautiful bill and perhaps it's not a coincidence that the rise in longer yields happened just as the appeals court uh ruled Trump's tariffs illegal uh over the week over last you last weekend and so it's it's kind of odd that maybe uh markets still think that the tariff is because I think last couple of months the place where the market was is they have moved past the tariff they have kind of accept that 15% of tariff is doable could be uh absorbed that the market and in fact the 330 billion per year in tariff revenues is good for fiscal you know I I think that was where the status quo was and lately that status quo has been disrupted by all these policy rulings and and so that could be one catalyst. I I would rather think that that was the catalyst rather than the Lisa Cook uh the Fed concerns about Fed independence and of course as you mentioned it's a global phenomenon too. But I mean do you see a scenario of um I mean yields rising um and getting into a kind of a a spiral of rising yields obviously concerning leading to more concerns about that sustainability etc. What might um kind of be the catalyst for that? Obviously you say possibly if the tariffs got unwind I guess. Is that is that is that it? Yeah. Okay. >> Okay. So, so um my team did a a deep dive into like over the last 30 40 years to look at the debt trajectory to see what tends to um move the debt trajectory suddenly higher. And you know early in my career when I was just got out of my PhD program it was 2012 and we had the fiscal cliff then as well in the US and and even at that time I remember we when we were treasury we're thinking about the messaging on US fiscal situation in G20 meetings because um everyone is saying our debt trajectory is unsustainable and the forecast is that it's going to you know really high you know and then you know these these these concerns pop pop pop out pop up from time to time but ultimately you know 10 years later we're still fine and but I think that looking at the 40 years of debt to GDP forecast I I have found that the pattern is that what tends to move the trajectory significantly higher is recessions or financial crisis every time even just a garden variety recessions, you could have um 10 percentage point increase in in uh trae in in debt trajectory immediately. So I think the overwhelmingly most important thing to avoid in order to have a sustainable fiscal trajectory is a growth slowdown. So to think about what five years fiscal situation in US look like then one will have to think about really focused really on growth prospect in the next 5 years. >> I know obviously that is the hope that maybe AI can fuel stronger economic growth and the debt will be more sustainable. Um is that plausible? Obviously you talked about you're seeing uh evidence of AI in the labor market. So presumably companies are realizing productivity gains. I don't know if that's in the productivity numbers yet, but is that your read you think? And then presumably if we went into a downturn that would become even u an even greater uh theme. >> Yeah. So we actually found that AI had significantly contributed to GDP growth already this year. So you know uh GDP growth in the first quarter was negative um.5%. Right? It turns out that um out of that negative0.5% GDP growth in first quarter um AI related uh industry has contributed 1 percentage point. So yeah already already AI is contributing one percentage point. But is that is that the capex spending in relation to AI buildout or the implementation of AI? It's the capex, isn't it? >> Capex. Capex. >> Yeah. And from the capex plans of the hyperscalers. So the hyperscalers are Meta, Google, Microsoft and those those guys, it didn't look like they're slowing down the um investment in data center anytime soon. So we are continuing to project this positive leaner growth in capex over time and even if the investment in data in infrastructure slows >> the next phase of the AI boom which is adoption still needs needs data center and semiconductor. So yeah you do see still a very long runway for investment in data center. >> Okay. Um I know you were at the uh Treasury in international affairs in in earlier in your career which I guess is responsible for for for dollar policy. Um the suspicion is that the administration likes to say a weaker dollar. I mean Trump hasn't said it so overtly lately. I mean he has in the past. Yeah. >> Consistently in the past. >> Yeah. I mean but he hasn't come out kind of bashing China or Japan of late. But is that is that the bias? Do you think that do you think I mean obviously Steve Moran had his paper on reforming the international system and all of those recommendations um which you know Maro Laga accord which never came to pass um what's your read on what they want to achieve with the dollar or is it a priority at the moment >> yeah I think I think that uh Trump himself really wants a weak dollar that's what he wants >> and we were talking about consistency of um a policy package package, a policy package that is consistent with the goal of bringing manufacturing back on shore. You do want a weak dollar. That's and that's what what he wants. But you also want other things that is not consistent with the weak dollar, which is >> lower treasury yields, lower bed bonds rate, >> and the dollar continuing to be a reserve currency. So, so he so, so he's trying to >> stop people from diversifying away from dollar, >> you know. >> Yeah. >> While having a weak dollar. So, I think at some point he might have to figure out, you know, the dollar. Ultimately, something have to give. >> Yeah. But yeah, I mean um obviously a Mara Lago accord is not really on the cards in in anytime soon. But >> I would I I just wonder that Mara Lago accord happened. I mean if the goal of Mara Lago accord is to get other countries to appreciate their currencies the dollar has depreciated by 10% >> since Feb since February. I mean taken just uh finally I mean putting that all together I mean most of the economists are focused on kind of forecasting payrolls on Friday or GDP for the next 6 months or a year whatever I mean looking at the picture for the next number of years given AI given all of the kind of structural trends we're seeing in the world delization tariffs now etc. I mean, are you more optimistic or pessimistic on GDP growth for the next number of years, say, versus the last five or or 10 years? >> I'm more optimistic. I I'm optimistic because I I could see the potential of AI. I mean, AI seems to be um already, you know, innovations usually take a long time to filter into productivity and into adoption. It's like a decades long. um process. But I could see AI is happening really fast and in that sense I see an engine of growth and you know the advanced countries not just United States but many advanced countries has been stuck in a low productivity regime for a decade since the great recession in 2008. I mean um and it seems like we are on the verge of getting out of that low productivity regime thanks to AI. And on top of that, I was I I do think that the one silver lining of the tariffs is that I finally see the light I mean some light to the fiscal situation in the US. He is if you assume that neither Republicans or Democrats will ever have the political will to cut spending then the only way you can um generate uh more is revenues and tariff is a way to generate revenues and it's generating you know maybe another political party would talk about raising taxes on on the wealthiest but that will also cause the wealthiest to flee like uh you find tax loophole which are always uh which is always what they could find and reduce the taxable that tax basis. So I think it is a solution don't know if the best solution for tariff to generate the revenue but 4 trillion over 10 years is not nothing. So and hopefully with AI gener being the engine of growth in the next five to six years you can stabilize debt dynamics. I don't know. >> Interesting. Well, on that optimistic note, um thanks very much for for coming on, Anna. Um so, make sure to follow Anna's work. She's a regular um uh poster on social media, on X, etc. So, you can follow her there. Um and from all of us here on Tops Traders Unplugged, thanks for tuning in, and we'll be back again soon with more content. >> Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. [Music]
Anna Wong on Inflation, Fed Policy, and U.S. Economy Outlook | Global Macro | Ep.87
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[Music] independence cannot exist with accountability. No, I think those two have to come together and I think right now um the DC bubble is too much on the independence without accountability. Um whereas potentially the Trump administration or Trump himself just want to do what he wants. I think it's always good when you have two extremes tugging at each other because then it will generate a medium solution which is what you want rather than one way or another. >> Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neils Kstrop Larson. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macrodriven world may look like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn. [Music] Thanks for the introduction, Niels. Today I'm delighted to be joined by Anna Wong. Anna is chief US economist at Bloomberg. She was previously an economist at the Federal Reserve Board and prior to that served on the council of economic adviserss at the White House. uh and also served as an economist at the Treasury in the Office of International Affairs earlier in her career. Anna, great to have you on. How are you today? >> Good. Happy to be here, Alan. >> Great. Well, uh there's an awful lot to talk about in in US economy and policy world. So, I'm sure uh we're going to have a great conversation. Would you like to start off by getting a sense of our guests uh background? Uh obviously, you've uh been a career economist, I guess. uh what got you interested in economics in the first place? >> Financial crisis. >> So when I was uh and when I was young, so I actually was born in Hong Kong and the Asian financial crisis in late 1990s really defined um you know the livelihood of of people around me and also the whole economy and environment I grew up in. And also when I was in an undergraduate I went to UC Berkeley. my my most exciting uh economic courses was international finance and it was happening in the context I was taking the class in the context of the Argentina currency board crisis in 2000 or 2001 as well. So all international finance was what got me in interested in economics from the beginning. >> Good stuff. Well, we've had some of your uh contemporaries from from Berkeley on as well, Barry Iiken Green as well in the past. So, um, >> he was my thesis advisor. >> Oh, great. Well, there you go. That's an interesting uh interesting link. Yeah, we've had Barry Action Green on two times at at this stage. So, definitely one of our favorites. Um, but um yeah, as I say, I mean, you're you're you're on at a very interesting uh juncture here in terms of the US economy. I guess it's always interesting. There's always something to debate, but particularly at the moment, we're just coming out of uh Jackson hole and um you know, I guess there is an expectation now that the Fed is inching towards uh an an easing. Now, I I saw you um on X saying your your sense was that maybe POW wasn't as dovish as maybe the consensus read. Um is that correct? >> Correct. >> And tell us more. I mean I thought it did mark a bit of a shift from from maybe the last press conference. Um but but I'm my reading of your comments is you still see it as being very much uh data dependent. Is that right? >> Yes. So I think the market was really fixated on a couple phrases in Pal's Jackson Hall speech. He said the risks the balance of risks have shifted and he also mentioned that uh um there there's a curious balance in the labor market downside risk for employment have increased. So, you know, seen individually, these sentences look quite delvish, >> but when you when you see read these sentences in the context of last year's uh Powell's Jackson Hall speech where he unmistakenly uh green light a a rate cut and also seen in the context of uh the the words that Fed speaks to usually Fed officials use to uh make things more confusing. I think there are actually a lot of e you know escape clause in this speech so to speak >> where he's not you know really say that this is a sure thing although today I see that markets have now >> uh priced in 94% of a rate cut in September. So it will indeed uh take a lot for the jobs data we will get this Friday and also CPI data next um on on the 11th to uh to reduce these uh pricing probability to say 60 55. I think if if market's probability for a rate cut for September from here on out were to move down to 60 to 55 for whatever for any you know data release reasons then it will will be become more of a tossup. >> Okay. Yeah. And I mean we've kind of got two views emerging from the Fed. I mean we've had the line that Powell has been pushing for a while now that it's too early to say um you know what the impact of tariffs will be. there's a lot of uncertainty and also that the labor market is in balance uh broadly albeit uh with weaker demand. H and then against that Chris Waller he's kind of been very fortright I think it's fair to say and seems to be backing his view quite strongly. I mean he came out and said he he he argued for a rate cut previously and it was the right call which was quite blunt. um and he's doubling down on that view now and and he's very much of the view that you know that there's a risk of the US economy going to a stall speed and slipping into recession. So I mean which do you think which view has more merit in your opinion? >> So first I want to say Chris Waller has a very uh impressive track record as a forecaster. Um a and um his he he very early on he took the view against the uh I I believe the Fed staff internally in the in the board which is that tariff will be very inflationary before July like most people um back in March or or April were thinking that the inflation print would be quite elevated by May by June by July it's been postponing every month but but most people said by by May but but Chris Waller thought that the you know impact on inflation from tariff would be about.3 percentage points on core PCE deflator this year. It so happened that that was our forecast too. We actually also took this view very early on that uh the tariffs would not be so inflationary at least you know not not this year. Um and and and I think that because because our forecast is similar to Waller, I can explain the reasoning why on why we find that convincing. Well, first of all, the the US economy is a servicedriven economy. In the CPI basket, over 70% of the stuff are services whereas goods comprise of only 25% or less of the CPI basket. And even within that 25% only about 12% were really exposed to tariffs. By by that I'm and I meant scaled by the share of imports times the tariff shock. it's uh what the shock uh is greater than 10 percentage point you know since liberation day. So really we're talking about a very small uh like 12% of the basket that's that's uh tariff driven. Um and and so even within this basket when you look at these 12% of goods what are stuff which is being potentially uh being driven up in prices by tariff there are clothing sports uh sports I mean sporting goods and uh audio equipments computer equipments and uh window coverings um indoor plants stuff like that is it's Yeah. >> And when you look at these, you get the you get the sense that these are rather discretionary goods uh that auxiliary uh that people actually could, you know, you can wear your clothes for longer. You don't need to go and upgrade your clothes every month. In fact, Timu and Sheen is kind of training Americans to buy clothes every month. Um but um so another factor we consider is that many of these uh goods that are really exposed to tariff very interestingly and counterintuitively if you look at the inflation of these tariff exposed goods they actually have an inverse correlation with the tariff shock they received meaning that if you look at the 12 month inflation of all these uh goods exposed to tariff the more tariff they got the more deflationary they had been in the last 12 months. And this is a kind of important point because it tells you that the tariff shock is not random. The tariffs are being applied to the goods that tended to be more deflationary in the past. And why? Because they came from China. And that tells you because China has been going through a deflationary pressure in the past year. And deflationary pressures is very hard to get get out of as we could see from Japan. And when you are in a deflationary environment, firms try to out compete each other by bidding the prices lower and lower and lower undercutting each other. Which is why you see um I thought one of the most important uh international monetary policy we have seen in the last two months is the Chinese government announcing this involution campaign where they're cracking down on price cutting behavior that I just described. It is all in a context of deflationary spiral and this really affect US CPI because as you could see it means that the tariff would not be as inflationary because they're precisely coming from a place that's increasingly deflationary kind of offsetting that. So both of these are these two reasons uh that um you know consumers would cut back on these these are really income and price elastic goods. Second, these the origin of these goods is is experiencing deflationary pressure was the reason why I found the idea that tariff would not be as inflationary. But going to the point of services first and and because the tariff was such a shock to the economy back in April on liberation day, the stock market plunged uh plunged in April by I I don't know 20%. um and that wealth effect. So basically the the top 20% of by income in uh of household in the US owns 90% of the stock market. The stock market correction hit these 20% of Americans hard and they are the ones who are driving these airfares and hotel prices and personal services prices down and these things comprise a large portion and account for the uh variance of month-to-month changes in the CPI by a lot and that's what's drive the CPI to the downside in the last four months. Now moving back, moving forward, looking forward, I think I would say that now is the time where I actually think the tariff uh pass through could be even uh could actually be brisker. Uh because the stock market has since April, early April rallied over 30%. And I expect that mechanically this stock rally will add to core PCE uh inflation. Well, it already has added.3 percentage point of core PCE inflation from June to August. It will once you see the August report and then it will continue to pressure core PCE in September through October because the way that a stock market rally appeared in inflation data it it has about a 3 month lag. So that piece with this this financial conditions loosening is are going to mechanically translate to inflation already. But on top of that there's those multiplier effect of how it affects people's behavior. Now we are see seeing airfares prices are going back up, hotel prices are going back up. Um and people are traveling again. Uh people are feeling better. Consumer sentiment is also improving. So I think firms are finding the opportunity they to to pass through the prices. They're they're they always try. If if they don't try if they could try and then if it doesn't work, they cut back the prices. But what I think we could see as we come to the end of this year is okay many of these trade policy uncertainty are being resolved. So that's one tailwind on investment firms are no longer holding back investment. The tax policy uncertainty is also over with the passage of one big beautiful bill and people are already moving on to you know pricing the boost to many stock market firms on the basis of one big beautiful bill and on top of that you have this improved consumer sentiment which means that firms could be uh maybe more successful in passing through uh the tariff. I I actually think that um if the Fed decide to cut in September, we're going to see a flare up in inflation. >> Okay. And interesting when you talk about that kind of pass through from the stock market into core PCE. I mean obviously you're talking about the wealth effect is indirect. Is there are you talking about a a direct effect? Is that because there was a an impact on was it kind of asset management? Um >> exactly. I'm talking about the direct effect. Yes. there's a component there called PPI portfolio management fees >> um and and which can be proxied uh very well by S&P 500 so it mechanically translate into inflation >> I mean what what you say is interesting as you say the uncertainty is diminishing the um consumer sentiment is stabilizing against that I mean obviously Waller's the Waller view is also that the the labor market is weakening and the demand side is weakening there um is that I I know you you're very close to do a lot of analysis on the labor market data. Um and obviously we've had we had Joel's data out today. No early September we're recording nothing interesting in that. But we've got obviously payrolls and revisions coming. But taking a step back, what's your read on the labor market, you know, both from a supply and demand perspective? Yeah, I I think I think um I agree more with Powell's portrayal of the labor market in the Jackson R speech, which would which is that labor supply and demand are pretty close and they're in a curious sort of balance, >> which is why I found the sentence that he put in after this part, the curious balance sentence, quite curious myself because that wouldn't lead you to conclude that the downside uh the employment situ situation faces uh enhanced downside risk. You just said there's a balance there. So why would there be suddenly a downside risk? So um you know many people in in in the in the US were was talking about the immigration crackdown and how that's creating a downside risk to employment. But last year we looked into where uh what sectors do we uh undocumented immigrants tend to work in and we found they tend to be in construction, leisure and hospitality um and uh some services uh personal services jobs you know such as hairdressers um things like that and uh and also um uh yeah so so these three section ctors for example are also the ones that are facing enhanced labor demand leisure and hospitality you know decreased tourism in the US construction worker high interest rate and housing market cooling in the United States in fact the housing market is going into a negative contracting now it's very rare to have multimon contraction and home price that's what's happening in the US right now um and so so I do think that um labor demand and supply are roughly in balance And when I look at uh so another thing in the Jackson Hole speech, so uh Powell unveiled the revisions to the longer run goals of the Fed and there are a lot of very significant things in there and one of the most important thing is they talked about the situation when the price stability and full employment goals are in conflict with each other. how would they assess this situation and in the new version uh he bring back the word balanced. So they're going to pursue a balanced approach where they will be weighing both mandate according to uh how far they are from their uh targets and also in the speech uh pow also mentioned he'll consider the speed at which he thinks that the gap would close for in each of those mandate and the distance from it and so if you take him by his word we have precisely the situation right now how would he think about the departure of the inflation and the labor market goals. Well, uh unemployment rate is 4.2 right now. The Fed uh the the summary of uh economic projections the uh back in June have the Fed forecasting uh the FOMC forecasting 4.4 at the end of this year going to 4.5 maybe next next year. Right? So basically we're on track and and even conditional on uh you know getting to 4.4 the uh fed officials also see the natural rate of unemployment at 4.2. So 4.4 versus 4.2 is a very small distance and and Powell himself also characterizes unemployment rate as still as as still historically low. So in terms of distance from the target and also the time at which it would take to close according to the Fed projections themselves it will close pretty soon. So where's inflation core PC inflation even and and Powell said in that speech a one-time price level in increase from tariff does not mean all at once. That is code word for persistent inflation and in fact I think that match what I would forecast in terms of inflation. I just said that and I said that we won't see much of inflation this year uh from tariff but it's slowly coming in each and the and the firms are finding the right opportunity to opportunistically pastor >> and by next year's time the one big beautiful bill according to our estimate will produce a point4 percentage point expansionary fiscal impulse in April as people get their tax rebates and things like that that would be a a tailwind for you know suddenly an income uh increase and that this is where the tariff pass through will succeed is when it happens when firms are raising prices just as people are getting a positive income shock. This year the tariff uh alone is equivalent to uh um you know a a tax increase of 1 percentage point and there's not much offsetting a positive income balance except for the resolution of trade and tax policy and the stock market the stock market and a easing of financial conditions is one factor that help offset the you know uh consumption tax from from from tariffs. So as as as the stock market improved because they think the Fed is there to put a l a bottom in the market uh and a bottom on the quickly put a bottom on on the labor market. The stock market will provide this income boost to the top 20% and those 20% will drive the services inflation up in the rest of the year and also allows certain products uh tariff pass through to pass through you know on on the more auxiliary products. I mean a lot of the um points and the concern around the tariffs impact on inflation is on inflation expectations and you know I suppose the point has been made that because we had the inflation surge during co and afterwards that now consumers are much more sensitive to rising prices. So the fear is if we see rising prices now people will assume that this will be more persistent. This is the argument you your forecast for higher inflation isn't even taking that into account. It's a separate factor. Are you sympathetic to that argument or is it too vague or what do you think on that view? I I think that the way that Powell and several and the Fed have been using the argument is kind of has some kind of circular logic to it and doesn't really make sense to me because or or require some kind of leap of logic assuming that inflation expectations are anchored now are well anchored now as Pal repeatedly said they are then they shouldn't be fearing that there would be passed through because then it will surely be a one-time increase. So Chris Waller in that sense is the most logical. I mean all his steps follow the previous argument. So, so either inflation expectations are already unanchored because only if they're already unanchored can this argument that oh people will be more sensitive to prices, right? And I I I think it's more likely that inflation expectations are already unanchored and they're already at say 2.8 >> as opposed to two. And the Fed once again is showing why inflation expectations are slowly on anchoring toward the 3% uh range. It's because they're so quick to respond to a little bit of labor market deterioration and the keep in mind core PCE is now um has been above target for almost 5 years and if the FOMC forecast and the SCP is right it will be 7 and a half year before it closed. So seven and a half year of above expectations above target of course will cause inflation expectations to drift up. So I just find the argument of you know forecasting inflation rates because you know expectations are unanchored or is is kind of weird and to assume that people will bid up wages because uh they have higher inflation expectations. Well then then you should be acting today. you should be in fact hiking now. >> Yeah. I mean you you you've um you're you kind of um given Chris Waller a lot of praise there in his analysis and his logic. Do you think he's been influenced um you know by the current political environment and positioning for the Fed chair role in his views? >> No. So I thought that all his speeches showed that he has done the homework. Um, I mean, I also kind of agree with him that the time to cut probably was earlier. I mean, I think that there was a narrow window of time back in June and July where they could cut because all the data cooperate the, you know, inflation data is weak, employment was weak, everything is doing, you know, weak. >> Yeah. Um so it would be entirely consistent with the Fed's reaction function and also there how what they say about being data dependent to cut then but now we are actually moving suppose that we do get a hot CPI next next on on September 11th are they really going to cut if if you get a 0.4% 4% CPI report. >> Yeah. >> How could you possibly cut >> you know but I think market do think that if they get a 0.4 they will cut on the basis that on the assumption that the 0.4% would be a one time you know oneoff >> transitory inflation. >> I think I think a 4.4 inflation print would really scare the heck out of uh Fed officials. Yeah, but I mean maybe not Chris Waller because he's he is expecting higher inflation, isn't he? And but he's saying you should ignore that. Isn't that right? >> Um so so by the way, Chris Waller also referenced uh this weekly uh ADPbased um employment series that he has been uh watching. >> Um so this is something that uh staff at the Fed board gets. It's like a high frequency weekly ADP series that you know we we don't have and he mentioned that he saw even after the reference period in July ADP series is showing uh a brisker pace of deterioration. Um so that was that that was the basis for why he said he still see the case for a rate uh a rate cut. But the reason why we think this Friday's payroll would be stronger than what the consensus believe is because of local government hiring. I do think that local government hiring has picked up over the months. Uh there was a you know Trump administration freeze the funds for K to 12th grade early in July but then they released all those funds uh towards the end of July. And so we are seeing some evidence that as a result there's some catchup hiring in the local government and and local government is not captured in the data that Chris Waller is watching which is based on private sector. So I I I I do think that overall most labor market indicators and also economic indicators suggest that the worst app here to be over uh in June and things have been improving since early July. [Music] >> I mean you mentioned housing there and that for other forecasters uh is is one of the weak spots in the economy that's causing concern. You me so obviously housing activity has slowed, house prices have started to come off. You mentioned is that a concern or do you see that stabilizing or how do you see the housing side playing out? >> Um so we have a fancy model. We we so we so you know housing price a persistent decline in housing price is really a left tail event. It's not so housing prices are not a normal distribution curve. It's it's actually one with long left tail and and so we model it in this nonlinear way which to capture the entire you know uh non nonlinear path of of uh price growth. And what we found is that there's a two out of three chances that housing price uh by the end of this year would be uh in cont still be in contractionary mode. Um and then we do see uh chance that uh better chances that housing price will return to positive by mid next year uh 2026 um with only 15% chance of um negative price growth by mid 2026. All these is conditional on today's data. But at the end of the day, housing market is really related to unemployment rate and also income of people. >> If unemployment rate stabilize at 4.2 and go no higher than 4.4, it will be a very shallow housing market decline as the model suggests. But if the unemployment rate were to swiftly deteriorate to say 4.8 8 4.7 and rates continue to be higher because right now there's a global selloff on the longer ends of bonds just happening unfolding in the last couple of days which means mortgage rates will continue to stay high then I could see that uh negative price growth for housing could persist through next year. >> Okay. Um the other factor in terms of the unemployment rate in labor market is AI and I mean increasingly we're hearing anecdotes about you know tough for new grads to find jobs because some of the work has been done by AI. What are you seeing on that side? Is that a is that a real phenomenon and do you think this will be an increasingly important phenomenon impacting the labor market or not? >> I'm glad you asked that question Alan because that's completely real. uh you know there there are two ongoing um potential explanations for what's going on in the US uh labor market. One is the immigration crackdown >> generating downside risk to employment and the other is AI. We have found very little evidence of the immigration crackdown hypothesis. However, we have found lots of evidence of the youth uh employment. So the labor force participation rate has been falling for the last three three months or four months and and and that is contrary from what uh CBO would had forecasted last year. CBO actually forecasted that labor particip participation rate should be on track to increase throughout this year. So we're going the opposite direction. And when you look into the details of what who's dropping off from this labor force in the last four or five months, it is the people who are age 16 to 19 and from early 20s to mid20s. >> Um, and why are they dropping out? The data suggests that they're discouraged >> and discouraged workers. Um, so I think there seems to be something there about why is this drop off in labor participation rate mostly hitting the younger folks as opposed to other you know demographics group um and I think AI is a very likely candidate. Um yeah and partic particularly um the if you look at the non-farm payrolls in the in the in the establishment surveys the sectors that are very weak in hiring there see kind of weak hiring are business and professional services white collar jobs. >> So when you um look at both the demographics in the white collar jobs hiring weakness and also um by the way St. Lewis Fed had done a little study on whether the rise looking at rise in unemployment rate of various sectors versus AI exposure and they found the 0.5 correlation between AI exposure and increase in unemployment rate because AI affects both layoffs and also a slowdown in hiring which leads to a swelling of unemployment rate right and it's it's also highly correlated so I have to say AI is the most compelling uh explanation for why we're seeing the slowdown in hiring for youth. >> Okay, interesting. Um we might come back to the longer term implications. Um but I definitely want to hear talk to a bit more about the future direction of the Fed and we've talked about Chris Waller a lot. Um, I mean, he's one of the the three favorites, I guess. Um, Kevin Hass and Kevin Walsh, the other two that are most prominent in the betting markets at least. Um, if you were having a bet at the moment, um, who who's your money on and and who's the most consequential uh, candidate or would be the most con consequential selection? >> Yeah, I've consistently predicted that it would be Kevin Hasset. Um, and my reasoning is that um, Trump and Susie Wales have known Kevin Hasset for a long time. Uh, Kevin Hassid uh, led the CEA in the first Trump administration. He demonstrated his loyalty over and over again. He he really helped push through the first tax cuts and jobs act in the beginning. um he was the one who designed uh who played a key role in designing the tariff schedule in the first Trump administration to minimize inflation impact. Then he had a mini heart attack and he drove himself to the hospital on the job because he didn't want more media fanfare and then he you know then he he uh left the job because you know a White House job is a 80hour business. It's like non-stop. And then when COVID hit, he volunteered and c voluntarily came back to help out the the White House. And after the Trump administration, um he joined the American First Institute, American I think American first policy institute. Um and that's basically the incubator for all the pretty much all the officials you see in the second term. And that's the place where you know they continue to to build the relation. So so I think I think Kevin has has a longstanding uh relationship with the Trump and Trump himself and the administration and he is also one of the few who who has the most mainstream economic credentials. Um and when you talk to some senior Fed officials who senior Fed staff officials, they have good things to say about Kevin Hasset, you know, he he even though um also many people thought that he he uh he he has been pretty biased since he joined the second Trump administration because he is the NAC director and his job now is to go on TV and defend Trump. uh he as a person I think is actually a very open-minded person uh and unconventional but also have mainstream training and credentials. Um so I think he's most likely given his history with the administration. Kevin Walsh um has has a you know has been known as a hawk and he himself said he's uh he won't be pushed around and I think there would be skepticism among the Trump circles that he may be dovish or he he could be dovish um and uh who's the third Chris Waller so I think Chris Waller is a dark horse um he there may be some odd cir circumstances that may suddenly elevate Chris Waller's chances. The fact is, I think if Trump spent more time with Chris Waller, he will grow to like him as well. Uh, but whether because they both like these uh wrestling or exciting. I I I don't know what's the difference between wrestling and fighting, but uh um I mean Chris Waller is a bluecollar governor. His is he has a very interesting background. He started off as like working in a warehouse and you know he came from the from the uh middle America and speaks like a a straight talking uh person doesn't doesn't give you the vibes of a a elite you know economist. Um but so is Kevin has Kevin H also came from a you know pretty bluecollar family. So, but Chris Waller uh but I don't I I do have to wonder whether Trump will take the chance because Trump took the chance with Powell. Uh him liked him and then he felt betrayed thereafter. So, >> I mean he he did go with the kind of the market friendly choice with Scott Bessant um which the market liked but now I mean you see Scott Bessant is as much of a cheerleader now as uh Kevin Hassid is. Um I mean I suppose the question is if Kevin Hassid is Fed chair is he going to um be be susceptible to persuasion and lower rates? I mean would or will he be purely independent? What do you think? >> Well, so so Kevin Hasset is not did not came entirely outside of the Fed world. He was a Fed economist once upon a time and and he did have mainstream training. He was a senior fellow at AI, which is pretty mainstream Republican camp before he joined the mega world. I think that history tells us that whoever who the president thought would be on his camp once they get into the Fed, they will be subsumed by the Fed culture and they will be a different person. So I I don't want to prejudge him because uh I don't think he is a person who would be subservient. I I don't think he would would be that type of person. >> Interesting. I mean there's a lot of people calling for dramatic change at the Fed. Obviously Scott Besson has called for review. Kevin War has also called for regime change. I think um you've had other kind of economists um Jeremy Seagull saying they should abandon kind of ample reserves uh Larry Lindseay I saw saying you know Fed's been terrible at forecast everybody's lining up to criticize the Fed and F we need a new direction do you think we'll see some a change of approach change of direction with the new ter >> yeah I think actually change is good the Fed has some of the smartest people I've ever worked with smart and their training is suburb. So we do not have a lack of smart people at the Fed. But what the Fed does not have I think is a balanced view of the world. And economics at the end of the day is very much a normative science in the sense that it's not a pure science where there's a objective >> truth of you know right or wrong or black or white. When you for example when the staff have to forecast what's might be the impact of this tax policy on the economy the the general equilibrium model of hundreds of equation will only spits out the kind of assumptions you make like you could assume what is the uh fiscal multiplier of this tax cut. If your app priori biases is that oh it's low and then you'll put in a very low multiplier then you'll see that tax cut produce very low growth uh it will worsen the debt trajectory or it will it will just uh right uh so it's many economic models is precisely uh reflect the moners assumptions of the world. It is not an objective truth. And so often in economics, we treat it as if it's a science because it has 200 equations in it. And you think there's it's creating a false sense of positions. If you look at Washington DC's political affiliation, you would see over 95% of voters vote Democrat in in Washington DC. It's like a little bubble here is extremely um to to one side of the political affiliation. Ideally um economic policy and forecast should be made in a 50/50 kind of like so so that people could argue against each other and I think the Fed often fall into a group think uh situation because of these implicit you know assumptions of how because reflecting people's arriori ideas of what should be >> it is a good thing for somebody to look at it because I I don't feel like Powell's explanation of why their forecast missed in 2021 is sufficient enough. If you look at this framework review, he he he often said most people in the con in the market consensus forecast, blue chip forecast missed as well. But some people didn't miss. And you know, and why was it that some people why why was it that the Fed was so slow to recognize that the expanded unemployment insurance would provide incentive for people not to work and therefore causing the labor market to overheat? Like why were they so slow to recognize it when other people have already recognized it long before it? For example, >> yes, >> I know in the CA I was at the CA in 2019 and 2020 in the middle of the pandemic, we have a staff of 30 people economists in the CA. And my colleagues already showed showed that the expanded uh unemployment insurance would cover more than 54% of the labor employment income. So meaning 54% of the population of the workers have more income from UI than working. of course that is so clear that it it is going to overheat the market. So I think it it is u kind of um good for the Fed to do some re honest review. Was that a was that an error of do you think group think at the Fed or just the personalities? I mean if Alan Greenspan had have been there would have been different or was like a failing of Jerome Pal versus say Bernani or or do you think regardless of who who was in that seat because it's been driven by the analysis is driven by the Fed staffers and that's the analysis he's been given. So what you know it's inevitable that's going to be the policy. Well, that that would be too speculative of me to to to say, but I I will say that Powell is not an economist by trading. He was a lawyer, right? But he's very um open-minded also. Powell has, you know, Powell had been with the Fed for over a decade and one of his previous portfolio was the emerging markets even. No, he had he had seen a lot, but he's he's also I don't think he's the type who would challenge academic forecasts too much, right? Because um however, the person on the Fed I that I remember who actually did challenge many staff was Rich Clarity uh who who was the one who brought up the uh the question of how about these excess savings? What are they going to how are they going to affect >> um inflation? So and and Rich Clara was a is a Republican nominee. So this is an example where I do think that some review on how the forecast would be improved uh rather than just saying that well because the rest of Wall Street um thinks this way. I have to say the Wall Street also have such biases. >> Yeah. Yeah. Well um I mean obviously we're starting to see a change in the composition. Obviously, we're waiting for a new Fed here, but obviously we've got the likes of Steve Moran now coming onto the onto the FOMC as well. You know, you said he expected Kevin Hid to be engulfed by the Fed kind of thinking. Do you think Steve Moran, he he's been pretty vocal in favor of low rates? Would you expect that that to continue once he comes on? >> Okay. Steve Moran is a very interesting uh individual. So, he did not have a Fed background. He did not come from the mold of the Fed. He entirely came from the outside. So his paper on fed reform what I thought is that he's a very bold and creative thinker and he has out of the box idea but I'm not sure that the ideas he recommended in the paper treated the core of the problem which is the grip think he he he proposed this uh fed federalism which is to have state governors affect uh uh appoint the regional fed presidents and uh have the regional president vote every time. Therefore, regional Fed voices are larger than the Fed board voices and you can get more balance. I don't think that's where the lack of balance is. I think a lack of balance is something more ingrained in you know how forecast is made by who that that those forecast is made. So I think Steve probably h have you know ideas of his own. He's a very independent thinker and probably he was selected by Trump. He got Trump's ear. Trump decided to go with him because Trump likes his bold idea. It seems like Trump just wants likes to dis he likes disruptive ideas and Steve Moran have it. So I think Steve Moran would go into the Fed will will be learning a lot of how the Fed actually will work and he will he potentially he could have revisions to his idea. But I think he's going to see and and see a lot of things that he he didn't uh consider before. And I don't know what Steve Moran will be like in 6 months time cuz he is he is uh he's adaptable. He's very smart and very also very possibly stubborn. I don't know but uh uh but he has ideas of his own. Um but um we'll see. >> Yeah, we've had him on here as well. He he was very interesting last year. Um it sounds like overall you're not overly concerned about Fed independence is what I'm hearing from you. like Chris Waller is obviously a strong candidate. Kevin Hassid, you you don't think he's going to um suddenly turn mega dovish. Um now obviously if Trump bull appointed more you know Fed officials over time uh we've got the attack on on Lisa Cook but but I mean say outside of monetary policy do you think with more Trump representatives at the Fed will we see significant changes elsewhere say in relation to bank regulation or any any other aspect of of the Fed's work? >> Alan let me clarify I am concerned about Fed independence. I mean, so far I'm just giving the Trump administration the benefit of the doubt. I mean, I I think the the intention seems pretty clear uh on why um um you know, the accusations on Lisa Cook, why they made their uh accusations on Lisa Cook. However, if Lisa Cook indeed has been proven guilty in the courts of the judiciary system and had a fair trial and was found indeed to have committed mortgage fraud, then I think it would be untenable for Lisa Cook to stay on because other Fed presidents have been gone for lesser crime, you know, for minor training scandal and you just have to be peachy clean if you are going to be uh on on a higher governing board of supervision, financial system supervision. Um, that said, I'm giving the Trump administration the benefit of the doubt on what they will actually do if they do have the majority seats on the Fed board. Because number one, I don't think Chris Waller will undermine the Fed independence. He's just that, you know, he's that guy who who would do what's right. I think this is a guy who I I think would do what's right. Um and um I also do not have such a dire perception of Kevin Hatit or Steve Meyer that I think that I mean if you read Steve Myron's paper he actually couched the opening paragraph of his thing on how to improve that independence because independence cannot exist with accountability and I think in a way uh how when is it that when you asked an institution for accountability, it become you know undermining the independence. No, I think those two have to come together and I think right now um the DC bubble is too much on the independence without accountability. Um whereas potentially the Trump administration when Trump himself just want to do what he wants and but other people who will actually govern the Fed the ultimate outcome might be somewhere in between which is with this I think it's always good when you have two extremes tugging at each other because then it will generate a medium solution which is what you want rather than one way or another. >> Yeah. Well, I mean, as you say, I mean, it seems clear that the objective here is to get lower rates and all of this is in the context of high debt levels. And so, everybody's talking about fiscal dominance. I mean, it's been talked about like it here already. I'm not sure if that's actually the case, but it's certainly a big theme in markets. Um, I mean, you you mentioned how bond yields have been rising the last few days, more overseas, outside the US than in the US. I mean 30-year yields have been edging higher, but 10 year yields are still pretty much in a range and we had the big beautiful bill that you touched on. I mean the longerterm fiscal trajectory in the US looks bad. I think everybody agrees but the bond market so far has uh you know um digested that fine. I mean how do you see this playing out on a kind of a multi-year basis? Do you think deficits will be addressed eventually or are we going to are we now in the era of of fiscal dominance or will monetary policy at some point be directed towards um m you know making sure the debt levels are sustainable. I think that one reason why I had thought that the trade policy uh the tariffs will stick around was to pay for the school and I also think one reason why the market uh last couple of months uh during the passage of fundic beautiful bill was not really concerned of the you know 3.4 for trillion price tag upon the beautiful bill is because of the tariff revenues and CBO has now forecast that the tariff revenues will generate 4 trillion of revenues uh in 10 years will pay for one big beautiful bill and perhaps it's not a coincidence that the rise in longer yields happened just as the appeals court uh ruled Trump's tariffs illegal uh over the week over last you last weekend and so it's it's kind of odd that maybe uh markets still think that the tariff is because I think last couple of months the place where the market was is they have moved past the tariff they have kind of accept that 15% of tariff is doable could be uh absorbed that the market and in fact the 330 billion per year in tariff revenues is good for fiscal you know I I think that was where the status quo was and lately that status quo has been disrupted by all these policy rulings and and so that could be one catalyst. I I would rather think that that was the catalyst rather than the Lisa Cook uh the Fed concerns about Fed independence and of course as you mentioned it's a global phenomenon too. But I mean do you see a scenario of um I mean yields rising um and getting into a kind of a a spiral of rising yields obviously concerning leading to more concerns about that sustainability etc. What might um kind of be the catalyst for that? Obviously you say possibly if the tariffs got unwind I guess. Is that is that is that it? Yeah. Okay. >> Okay. So, so um my team did a a deep dive into like over the last 30 40 years to look at the debt trajectory to see what tends to um move the debt trajectory suddenly higher. And you know early in my career when I was just got out of my PhD program it was 2012 and we had the fiscal cliff then as well in the US and and even at that time I remember we when we were treasury we're thinking about the messaging on US fiscal situation in G20 meetings because um everyone is saying our debt trajectory is unsustainable and the forecast is that it's going to you know really high you know and then you know these these these concerns pop pop pop out pop up from time to time but ultimately you know 10 years later we're still fine and but I think that looking at the 40 years of debt to GDP forecast I I have found that the pattern is that what tends to move the trajectory significantly higher is recessions or financial crisis every time even just a garden variety recessions, you could have um 10 percentage point increase in in uh trae in in debt trajectory immediately. So I think the overwhelmingly most important thing to avoid in order to have a sustainable fiscal trajectory is a growth slowdown. So to think about what five years fiscal situation in US look like then one will have to think about really focused really on growth prospect in the next 5 years. >> I know obviously that is the hope that maybe AI can fuel stronger economic growth and the debt will be more sustainable. Um is that plausible? Obviously you talked about you're seeing uh evidence of AI in the labor market. So presumably companies are realizing productivity gains. I don't know if that's in the productivity numbers yet, but is that your read you think? And then presumably if we went into a downturn that would become even u an even greater uh theme. >> Yeah. So we actually found that AI had significantly contributed to GDP growth already this year. So you know uh GDP growth in the first quarter was negative um.5%. Right? It turns out that um out of that negative0.5% GDP growth in first quarter um AI related uh industry has contributed 1 percentage point. So yeah already already AI is contributing one percentage point. But is that is that the capex spending in relation to AI buildout or the implementation of AI? It's the capex, isn't it? >> Capex. Capex. >> Yeah. And from the capex plans of the hyperscalers. So the hyperscalers are Meta, Google, Microsoft and those those guys, it didn't look like they're slowing down the um investment in data center anytime soon. So we are continuing to project this positive leaner growth in capex over time and even if the investment in data in infrastructure slows >> the next phase of the AI boom which is adoption still needs needs data center and semiconductor. So yeah you do see still a very long runway for investment in data center. >> Okay. Um I know you were at the uh Treasury in international affairs in in earlier in your career which I guess is responsible for for for dollar policy. Um the suspicion is that the administration likes to say a weaker dollar. I mean Trump hasn't said it so overtly lately. I mean he has in the past. Yeah. >> Consistently in the past. >> Yeah. I mean but he hasn't come out kind of bashing China or Japan of late. But is that is that the bias? Do you think that do you think I mean obviously Steve Moran had his paper on reforming the international system and all of those recommendations um which you know Maro Laga accord which never came to pass um what's your read on what they want to achieve with the dollar or is it a priority at the moment >> yeah I think I think that uh Trump himself really wants a weak dollar that's what he wants >> and we were talking about consistency of um a policy package package, a policy package that is consistent with the goal of bringing manufacturing back on shore. You do want a weak dollar. That's and that's what what he wants. But you also want other things that is not consistent with the weak dollar, which is >> lower treasury yields, lower bed bonds rate, >> and the dollar continuing to be a reserve currency. So, so he so, so he's trying to >> stop people from diversifying away from dollar, >> you know. >> Yeah. >> While having a weak dollar. So, I think at some point he might have to figure out, you know, the dollar. Ultimately, something have to give. >> Yeah. But yeah, I mean um obviously a Mara Lago accord is not really on the cards in in anytime soon. But >> I would I I just wonder that Mara Lago accord happened. I mean if the goal of Mara Lago accord is to get other countries to appreciate their currencies the dollar has depreciated by 10% >> since Feb since February. I mean taken just uh finally I mean putting that all together I mean most of the economists are focused on kind of forecasting payrolls on Friday or GDP for the next 6 months or a year whatever I mean looking at the picture for the next number of years given AI given all of the kind of structural trends we're seeing in the world delization tariffs now etc. I mean, are you more optimistic or pessimistic on GDP growth for the next number of years, say, versus the last five or or 10 years? >> I'm more optimistic. I I'm optimistic because I I could see the potential of AI. I mean, AI seems to be um already, you know, innovations usually take a long time to filter into productivity and into adoption. It's like a decades long. um process. But I could see AI is happening really fast and in that sense I see an engine of growth and you know the advanced countries not just United States but many advanced countries has been stuck in a low productivity regime for a decade since the great recession in 2008. I mean um and it seems like we are on the verge of getting out of that low productivity regime thanks to AI. And on top of that, I was I I do think that the one silver lining of the tariffs is that I finally see the light I mean some light to the fiscal situation in the US. He is if you assume that neither Republicans or Democrats will ever have the political will to cut spending then the only way you can um generate uh more is revenues and tariff is a way to generate revenues and it's generating you know maybe another political party would talk about raising taxes on on the wealthiest but that will also cause the wealthiest to flee like uh you find tax loophole which are always uh which is always what they could find and reduce the taxable that tax basis. So I think it is a solution don't know if the best solution for tariff to generate the revenue but 4 trillion over 10 years is not nothing. So and hopefully with AI gener being the engine of growth in the next five to six years you can stabilize debt dynamics. I don't know. >> Interesting. Well, on that optimistic note, um thanks very much for for coming on, Anna. Um so, make sure to follow Anna's work. She's a regular um uh poster on social media, on X, etc. So, you can follow her there. 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