Danielle DiMartino Booth: 'Flirting With a Liquidity Crisis' – Non-Banks Now Too Big to Fail
Summary
Fed Leadership: Powell’s decision to remain as governor is framed as protecting Fed independence while giving Kevin Warsh room to build consensus and modernize data inputs.
Higher for Longer: Persistently elevated rates and a 10-year yield above ~4.4% are seen as amplifying credit stress, exposing “cockroaches,” and risking a liquidity crunch.
Liquidity Crisis Risk: The guest repeatedly warns that rising rates and widening stress in private credit could tip markets into a liquidity crisis that overrides macro data.
Energy Inflation: Expectation of persistently high oil prices due to Middle East disruptions keeps goods inflation sticky while forcing demand destruction elsewhere.
Housing Downturn: High mortgage rates, more sellers than buyers, flat-to-negative price prints, and rising relistings threaten consumption via housing’s broad ripple effects.
Commercial Real Estate & Banks: CRE refinancing pressure and CMBS losses may force banks to recognize losses and tighten lending standards, spreading stress to consumers and small businesses.
Private Credit Stress: Non-bank/private equity players are characterized as too big to fail, with potential spillovers into the regulated banking system creating systemic risk.
Policy Outlook: While the guest favored a rate cut, she expects Warsh to push alternative data and refocus on the employment mandate, potentially altering the future rate path.
Transcript
Hey everyone, welcome back to another in-person episode of the Julia LRO show coming to you on Fed Day with none other than Danielle D. Martino Booth, CEO and chief strategist at Qi Research, author of the book Fed Up. Danielle, great to see you as always on Fed Day. >> And on this Fed day, I'm a little bit less fed up. >> I can tell. Um, all right, let's break it down because this is a Super Bowl for you. We had Fed chair uh pals last time at the podium during the presser. takeaways for you from today. >> So, in 1948, President Truman was really excited that Eckle's four-year term as chair was ending. And he was like, "And there's the door." And at the time, the Fed building was called the Fed building. Now, it's called the Eckles building. Why? Because he stayed on as governor to ensure that Truman's wishes did not come true. that the Treasury effectively be able to take over the Fed >> and control monetary policy. >> And he basically said, "I'm going to exercise my right to finish my term as governor and make sure that you don't get your wish." Um, obviously today's situation is is different, but Jay Powell knows his history. Jay Powell is a lawyer first and foremost, Esquire. and knowing that he would have no leverage if he was to not be on the Federal Reserve Board and that they could reopen the criminal investigation the minute he walked out the door. Um, it showed that he had respect for his family, respect for the legacy of the independence of the Fed, and he's exhausted. and he indicated that he was happy he was no longer going to be behind the podium. Um he didn't say how long he was going to stay and you know should things turn south and politics become even more of an issue at the Fed, he may exercise his right to stay on through January of 2028. We don't know. But the point is I do not agree have not agreed for some time with his policy. I think that the Fed is falling down on its employment mandate. We've spoken about this a lot. Um, but it is with full respect today that I think Jay Powell put up a victory for integrity. H you mentioned today that you're less fed up of course referencing the title of your book and >> um there have been times where you've been critical of the Fed on this show and other times where you'll say you know they've gotten that right. Why why are you less fed up today? Is it specifically the PAL move? It is all about the PAL move. >> Okay. So, um, shortly after my former boss, Richard Fischer, and I both retired from the Dallas Fed at the same time, I ran out the door behind him because I was world's worst bureaucrat. Uh, we ran into each other at a football game. >> Mh. >> And uh, he said, "I want you to pay attention to one person, and only one person who's left on that board who is against the idea of quantitative easing. He does not like the zero bound. His name is J Pal and we're very good friends. And I said, "How am I supposed to pay attention to somebody who is the least public? He likes being in the media the least. He makes the fewest speeches of all 19 members of the Federal Open Market Committee. He was a very quiet governor." And what he said at the podium today was, "I fully respect my role as governor, and I will go back to being just a governor and give Kevin Worsh the latitude that he needs to form his own consensus and establish his own leadership as chair." And I thought that that was very gracious of him to effectively say, I'm not going to take the position of being an effective shadow fed chair. >> Is there a risk though that he could still be perceived as a shadow fed chair like internally? like you know the inner workings much better than I do. But >> I mean I think um you know even when Jay Powell in 2012 totally disagreed with the Fed um pursuing yet another round of quantitative easing, he went with a consensus. He respected the chair. He respected Ben Bernaki. He did not disscent. He regretted not dissenting. But he understands the import of dissent. So I think if he was to come out of the gate as a governor and start dissenting left and right, then I think that that would be perceived as being overtly political on his part. But if he just goes back to being data dependent, I think he'd be relieved if Kevin Worsh's um plans to institute a broader array of alternative data sources into monetary policym. I think he would applaud that. Um remember he's not a PhD in economics. >> Um he was more doubbish about the labor market uh than um some of the other hawks. Of course he had a triple hawkish descent today. >> Yeah. >> Beth Hammock, Lori Logan, Neil Qashqari all saying that they disapproved of leaving any easing language in the statement. Um, and in fact a quadruple descent because Myron said that they should be lowering by 25 basis points. Um, so I I I do I do see Myron as being much more of a political plant than Worsh even though I respect some of his views and I certainly respect his dissenting on not lowering interest rates given the gravity of what we're seeing in the job market right now. H um as you just note the 84 the descent we this is a we haven't seen this in what 30 years this kind of level of descent >> you don't read into it that it's already like early signs of like resistance or anything >> um it it could be >> it could be um we have to bear in mind that that Jay Powell is castigated because he was transitory for too long, but people forget that he was in that position because he had not been confirmed, excuse me, reconfirmed by the Senate. He was being held hostage by the fact that there was a power struggle going on. The Biden administration would have preferred to put La Brainard in as chair of the Fed. They held his vote over his head and the day of his confirmation he came out on NPR and said 2% is the inflation target and we're headed right there. And from then on out he he went down that path. >> Mhm. And it really wasn't until kind of the overt attack on him personally by the current administration that Powell started himself acting politically. >> So I again I think as a governor he's going to step back into into the background. It is interesting your question though because it it might be a warning for Worsh. If you're going to come in and be a political psychist from within, >> but I don't expect that of >> Worsh. Um, let's stay on Pal for a bit. What do you think? We often talk about legacy or like how he'll be remembered for the legacy. >> What do you think his legacy will be? And has it has it altered for you at all? >> I think he changed his legacy today. >> I do. >> Um when he said that he was basically happy that he'd never have to be up at that podium again, he was communicating that he's exhausted. >> Yeah. And yet to to indemnify the institution's independence despite being exhausted, he's staying on. And until these criminal until any potential criminal charges or threat in the future of them are dropped, it's it's likely that he will stay on as governor. If Trump starts to berate him for staying on as a governor and naming people that he'd rather have be in place of Jay Powell, that alone could also compel Powell to stay on >> if he felt like his vacating his position as governor early uh was going to open the door for some kind of a packed Fed. >> Yeah, >> we just don't know his We don't know. We didn't know Eckle's legacy in 1948. We didn't know Eckle's legacy until after he stayed on as governor in the actions that he took. That is when he established his legacy. >> That is a fascinating parallel too. Okay. It's what he did while he was governor. So that's >> correct. >> Not when he was chair. When he was chair, he was under tremendous pressure by President Truman to lower interest rates. And Eckles resisted that and Eckles refused to be basically a party to the Treasury taking over the Fed and and becoming the de facto controlling party of monetary policy. He refused to let that happen. And in staying on as governor, that is how he established his legacy. So, we don't know. Had JPAL walked out the door and said, "I'm a card carrying member of the Chbut Country Club. I've got a tea time tomorrow. Goodbye everybody." Or on May 15th. That would be one thing, but that's not what he's doing. >> And to use a word I don't think is too powerful that's probably going to get me all manner of hate mail, which I could care less. I think what he did today was patriotic. Why? >> Because he knows that the institution is under attack. It's aware to anybody. It's aware to everybody knows that the instit that the institution is is under attack. >> And having an independent central bank, as long as we're still a republic, is pretty important. And if if he's going to stay on in order to help ensure that independence remains, that's a patriotic thing to do. Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. What is your read on Kevin Walsh? >> Now, I thought Powell when he came into office in 2018 was a rock star. His first congressional testimony. You know, I don't care about the stock market. We don't make monetary policy for investors. Uh we're just going to be data dependent. And then the world economy got hit with the liquidity crisis. >> So I agree with Kevin Worsh. I think we need a lot less in the way of Fed communication. I don't think we need the the dot plot. I do think we need to completely dispose of all mortgage back securities from the Fed's balance sheet. I agree with him that quantitative easing was a failure. I agree with what he said in the past that quantitative easing was Robin Hood for the rich. I agree that he believes that the that that zero interest rate policy was also a failure. Let's see what happens though if there's a liquidity crisis. >> What do you mean by that? Like what do you just like to test him with these ideas or >> Well, liquidity crises take precedence over every single bit of macroeconomic data. There's not much you can do as the head of the world's most important central bank if there's a risk that the global financial system is going to collapse. >> There's it's it's like Mike Tyson said, you you know, we all have a plan until we get until we get punched in the mouth. Mhm. >> And it wasn't until J. Powell got punched in the mouth in 2018 and it looked like systemic risk was coming unglued that he was forced to embrace quantitative easing even though in his heart of hearts he was never an advocate of it. >> Yeah. Um you get tested once you're in that position. Of course last night you put out a note of you said 0% chance of a rate cut. Um, spot on obviously. Should they have cut though? >> I think they should have. Yes. >> Okay. >> The University of Michigan's perceptions of job insecurity are not at recessionary levels, which would be at the 50% line of people thinking that higher unemployment expectations are are mo most probable in in the next 6 months. Once you cross 50% of Americans who believe that the unemployment rate is going to rise, you're typically in recession. We're at 68%. It came down in the second reading after it looked like there was going to be a ceasefire of some kind to 64%. But my point is, we've been north of 60% for months and months and months. parallels that only align with past recessions and not nice recessions either, ugly ones. >> So, can we make the case that the Feds failed its employment mandate then or is it too early? >> Absolutely. >> Okay. >> That's why I'm saying I I fully applaud Jay Powell's actions that he took today on behalf of his personal integrity and on behalf of Fed independence being under attack. But I do not agree with the policy right now that the Fed is not lowering interest rates. I understand that oil prices, in fact, I don't think the market is properly pricing in how persistently high interest rates are going to oil prices are going to stay, meaning put upward pressure on goods inflation. I don't think the market is fully priced in the destruction to the infrastructure in the Middle East and how long it's going to take to get energy prices back down. I had a friend of mine in New York tell me that his utility bill doubled. So, these are real the threat to inflation is is real. >> It's existential. But at the same time, home prices are falling, rents are falling, Americans planned intentions to take vacations are almost at cycle lows right now. So services disinflation, which by the way, Powell has advocated for since he invented the term super core. That's coming down pretty hard. Meaning if Americans are paying up more at the gas pump, they have less to spend on everything else. We saw food at home inflation in the consumer price index flatline 0.0%. When gasoline prices went through the roof, there's a very simple interpretation. I'm spending more on gas >> less. >> I'm spending less on food. So do you think people have that backwards where they automatically think okay oil what is it's above $100 a barrel today 108 >> 107 107 >> they automatically assume that means that translates to inflation elsewhere because of all the inputs it's important critical component >> that's true >> that's true >> but there's also a disinflationary component because of the demand destruction like what is >> there's a disinflationary impact because bankruptcies have not slowed down. Interest rates are rising. >> Mhm. >> Which means that the bankruptcy cycle is going to accelerate more, which means that layoffs are going to increase to the extent that companies are not able to pass along higher input prices because of these higher energy prices. To the extent that they're not going to be able to pass them along, their profit margins will get further squeezed. And the only cost that they're able to control in such environments is the biggest cost that they shoulder which is that of labor. >> So you also mentioned like home prices are falling. >> Mhm. >> And when I think of when I think of inflation, I think of shelter. >> Yeah. >> Biggest input. >> Yeah. Huh. So we kind of have this we're not thinking about this the right way then. >> We're not thinking about it holistically. Okay, we're not thinking about inflation in its entirety. We're thinking about inflation through a very narrow prism of gasoline prices. And given, according to the Atlanta Fed, given wage growth is back to where it was in 2019 prior to CO um given the number of applicants for every gig job has gone through the roof. It's it's in a report that I'm writing right now. >> Um it is patently apparent that Americans are struggling to get by. >> Mhm. >> You probably you just spoke with Mike Green. >> Yep. >> Poverty isn't what the government defines it as being. >> Yeah. >> If you make so little money that you can take, you know, full benefits from the government, great. If you make $100,000 in the state of Texas, good luck. >> We talked about the valley of death being at that level. Yeah. Um Okay. So, with the Fed holding steady >> Mhm. >> Can we just stay higher for longer and then more pain then? >> The risk right now is if the assumption is going to be that even when Kevin Worsh takes over, he's going to have a hard time creating this consensus. And that's why that's why Powell reiterated over and over and over again at the podium today that he would respect Worsh's need to establish himself as a leader and to create a consensus. Um if worse has a very hard time doing that, if interest rates stay high where they are, then all of the cockroaches that we're starting to see with rising credit spreads and the continued distress in the private credit market. None of that's going to improve. Mhm. >> So again, we're flirting with the liquidity crisis right now >> and rising interest rates can only amplify that risk. >> Gosh. Okay. Flirting with the liquidity crisis. Um, building consensus at the Fed. >> As someone who's been a Fed insider, >> this is going to be a really basic question, but how how does that work exactly? Um what are the things that they do to build consensus? So the um we have to bear in mind that that the Federal Reserve Board email addresses end in.gov. >> They're full government employees. The 12 district banks I used to work at one. My email address ended inorg >> but the power base of monetary policym is at the Federal Reserve Board. The chair is the leader of the staff and it is the staff that conducts the research that is directed to be conducted by the chair. So that's inescapable. >> So worse can change on day one the way that monetary policy is made by directing his staff. his staff. He is chair by directing his staff to change the way they analyze the data to modernize it just a little bit which would go a long way. >> Yeah. Hm. Okay. That will be definitely interesting to watch. Um you said flirting with liquidity crisis. How big of a risk do you think that is? >> I mean we're the benchmark 10-year yield is north of 440. Um, these levels of interest rates will not only continue to pummel the housing market and everything you would there thereafter put in a house. It will continue to depress fertility rates and higher for longer interest rates will continue to bring more cockroaches out. as Jamie Diamond suggested would happen. >> Okay. So, pummeling the housing market. I want to explore this idea further with you because >> you were known for your research lead to the financial crisis on housing. Um, >> well, I'm buying a house right now. You know that my excited. >> Do you think like I mean I was kind of looking for lower prices. I feel like I got a good price, but could that also open up some activity? Like because they kind of got way out of control. >> I mean, lower prices would certainly benefit, but again, we're talking about higher interest rates. >> Yeah, that too. >> We're talking about rising mortgage rates. >> Y >> at a time when according to Red Fin, we've never seen this big of a disconnect between the number of sellers and buyers. >> More sellers than buyers right now. more sellers than buyers. >> Yeah. Maybe that's why it was a little Yeah. Okay. >> And according to the latest monthly figures from the FHFA and S&P totality, whatever they've named it this last >> I think it's >> totality that printed negative month overmonth. >> FHF FHFA printed flat as a pancake. And again, inventory is rising, relistings are rising and the largest swing factor for the US economy because there is a ripple effect when a home is purchased because things are purchased to go in the home. >> Oh yeah. And services too. >> And services too. Yep. >> You Yes. Absolutely. So the the impact on consumption could be profound. Right now, we're in the middle of what appears to be kind of a big boom in investment, which is absolutely undeniable. But what if it's companies rebuilding inventories, which they've been doing? What if it's companies trying to get ahead of the continued threat of tariffs plus whatever's happening with oil prices and trying to stockpile in the event that the worst case scenario, the straight of horm stays closed, oil prices go much higher than what they are? What if we're seeing pre-investment panic buying to try and stockpile reasonably priced inputs in front of an even higher level of input costs? >> If we are, what do what what do you think um what does that tell us? >> This economy cannot withstand persistently high oil prices and persistently high interest rates. There's just too much debt. There's too much leverage. There's too much leverage in the system. >> Are you Am I sensing that you're worried? >> Yeah. Well, like you Okay. Because the reason I bring it up is like you again I referenced your research from pre-inancial crisis. Can you kind of contextualize like how you're feeling today? >> Well, I'm writing about commercial real estate this week. Um, you know, there's nothing worse for commercial real estate than rising interest rates when sellers have been waiting for years and years and years for interest rates to fall enough for them to refinance these buildings. There are a few outfits that have figured out how to break the AAA tunch of a commercial mortgage back securities where that AAA tunch, the most recent one, took a 42.9% loss. If banks continue to realize losses on the commercial real estate loans that they've been extending and pretending for five, if not 10 years, if they start to realize those losses, then lending standards will tighten >> and that affects everybody. >> And that affects everybody. It affects small businesses. It affects consumers. It affects people who want to buy cars. the glorified it's going to be the biggest income tax refund season of all time. It the average income tax refund was going to go up $1,000 year overyear according to the one big beautiful bill when it was passed. As of the week ended um April 17th, the average year-over-year increase in tax refunds was $333. And if you can excuse my colorful language, >> I'll let it rip. >> You can piss through that $333 really quickly when the price of essentials and filling up your gas tank has gone up so much. >> Yeah. >> So that big boost that tax refunds usually gives to the economy in the spring, it ain't going to last that long. >> But I this being said, we're so close to the midterms. I I will boldly predict that there's going to be another postponement of forcing people onto harsher repayment plans for their student loans. >> Yeah, definitely watch for the midterms. All right. Um let's talk about a few base cases rest of the year um 2026 with the Fed. Um what do you think with cuts >> again? I think if worsh comes in and establishes through the Fed staff because governors and regional bank presidents come and go. The staff are lifers. if he instructs his staff to conduct research and look at alternative data inputs that clearly demonstrate that the Fed is failing on its labor mandate, which you read the Daily Feather every day. It's clear >> that it's failing. Kevin Wars is somebody who is savvy enough, shrewd enough to say, "Great, initial jobless claims are really low every single week, but there are more than 7 million unemployed Americans who are actively actively looking for a job, but only one in four is collecting unemployment benefits." >> Yeah, >> he'll recognize that. >> He won't just say in isolation, "Continuing jobless claimed are low." He'll say, "But what are the other 75% of out of work Americans who are actively looking for work? What are they doing to get by?" So if he comes in and tells the staff to stop making monetary policy through a rearview mirror of systematically revised downward data, then you could you could find justification for there to be a more aggressive path of lowering interest rates in 2026. A few months ago, I didn't think that Janine Piro was going to be dropping these criminal charges against Powell. And yet, she has. So, there's not going to be this big pause in between May 15th when Jay Powell is no longer chair and the June 18th FOMC meeting. And there's going to be time once worsh is confirmed by the Senate, which he will by the hair of his chinny chin chin. In 2004, when he when his name went up for vote in the committee, it was 20 to zero vote. Today, it was straight down party lines, >> 13 to1. >> He'll be confirmed by the Senate the same way, straight down party lines. But for now, the GOP controls the Senate. He will be confirmed. He will get into office and he will start shaking things up in terms of how the research is conducted. >> Mhm. Okay. Speaking of how the research is conducted, data sources, data sets, if you were in that room, >> so you're on that staff or you could have that conversation, you could advise, what's one thing you would say to um if Kevin Worsh is in a Fed chair, Kevin Worsh, what would you say to him or advise him on maybe suggest that he looks at? I would say look at the National Federation of Independent Business and the fact that that the metrics that they've have followed for decades and decades show that employment is falling among small businesses. I would say have a look at the bankruptcy cycle. Why don't you look and see where warn notices are, warnings that people are going to get fired? >> Uh why don't you follow the layoff data a little bit more closely? Um, pay attention to the New York Fed's survey of consumer expectations and the acute anxiety that Americans are suffering right now because of job insecurity. Accept the fact that the unemployment rate for recent college graduates is 43 44%. understand the implications and what that means for the US economy while respecting the fact that you don't believe in the zero bound. So if you are going to aggressively lower interest rates based on finally looking at the right data and if you are going to lower interest rates for the love of God stop at 2%. Mhm. Um Danielle, you run a Bloomberg chat with folks. >> Oh yeah. >> What's the spiciest thing happening right now or like interesting hot take these days? Um so right now I I think what what my institutional investors are most focused on are the disconnects. They're the disconnects between what's happening in credit, what's not being reflected in credit spreads because what's happening in credit is overwhelmingly occurring at the moment in private >> credit. They're looking at every time there's a sudden announcement from a private capital firm or a private equity firm, that's what we're talking about, late into the night. um they're following the fact that interest rates worldwide are rising. That you can't contemplate high energy prices in the United States being bad for the United States but much worse for the rest of the world. So you're no longer talking about a US recession, you're talking about a global recession. Those are the kinds of things we talk about. >> Yeah, global. Okay, before I let you go, the two-parter question. What's the risk or worry concern that's keeping you up at night right now? And what's the thing that's making you hopeful or optimistic? So, I'm definitely seeing um through the prism of my oldest who's graduating from from college, I'm definitely seeing an appreciation for I'm young enough that if I need to reskill, I can. I've got a great business degree, but a lot of those entry- level jobs have been replaced by AI. But according to mom and dad, the electrician or the guy who's coming in and putting in a new air conditioning unit or the plumber or the painter, they're all still charging them nosebleleed levels. >> Maybe I can just take all of my business skills and disrupt the skills sector. Maybe I'll go back and take a few shop classes that I didn't take in high school because they got rid of them. I I'm encouraged to see young individuals not just sit back and accept my fate is that I'm not going to be working. I'm going to be an overeducated barista. >> There's a lot of ingenuity going on, a lot of thinking going on right now about how to reinvent the next generation of jobs. And I'm highly encouraged by that. And I think AI can do great things for education. I think AI can do amazing things for healthcare. So there there's a lot of there's a lot of good things going on, >> but I'm worried that there's going to be a liquidity crisis. We have built up so much debt that you're seeing nursing home chains go bankrupt at a time when that should be a bulletproof industry. >> Yeah. that you would think totally >> with the aging of America, but it's because private equity came in, >> fired a lot of people, levered up the company, >> paid themselves handsomely, walked out the door, and there and there it goes. So, what keeps me up at night is that there are too many gigantic players in the non-banking space that are now too big to fail just like banks because some of them are just as big as banks. >> That is a headline right there. Wow. They're not regulated and yet we could not let a handful of them go without implications for the global financial system. >> But I just feel like if you bailed them out, I don't know. Stomaching a bailout. Yeah, >> I get it. >> I'm not a bailout. I'm not a fan of bailouts. What but what I'm saying is I worked at the Fed when all the dominoes were lined up and it looked like all the banks were going to go. That really wasn't an option at the time. >> Yeah. And when you consider the trillions and trillions and trillions of dollars that these non-banks are managing, should one go, the ripple effect, the blowback into the conventional banking system, which is lending to the non-banking system, it becomes a systemic issue. >> Wow. Danielle D. Martina Booth, CEO and chief strategist at Qi Research, author of the book Fed Up, an insider's take on why the Federal Reserve is bad for America, and is that the right title? I got that right. Right. My subtitle. >> Yep. Subtitles right. >> And author of the Daily Feather on Substack. >> Yep. And I just want to give a big big big shout out to my senior in college who's graduating. And to my twin seniors in high school who are also graduating. I'm going to be non-paywalling a tribute that I wrote about the importance of the legacies that we leave behind and the fact that we are not we're never dust in the wind ever. We always leave something behind. Jay Powell will have his legacy. I'm so proud of my own legacy right now. >> So, I'm going to be sharing that with the public >> on Mother's Day and I hope it's read. >> I love that. and we'll encourage our viewers to go to the Daily Feather. Really, really appreciate you taking the time, Danielle. It's always a pleasure having you on. >> Likewise.
Danielle DiMartino Booth: 'Flirting With a Liquidity Crisis' – Non-Banks Now Too Big to Fail
Summary
Transcript
Hey everyone, welcome back to another in-person episode of the Julia LRO show coming to you on Fed Day with none other than Danielle D. Martino Booth, CEO and chief strategist at Qi Research, author of the book Fed Up. Danielle, great to see you as always on Fed Day. >> And on this Fed day, I'm a little bit less fed up. >> I can tell. Um, all right, let's break it down because this is a Super Bowl for you. We had Fed chair uh pals last time at the podium during the presser. takeaways for you from today. >> So, in 1948, President Truman was really excited that Eckle's four-year term as chair was ending. And he was like, "And there's the door." And at the time, the Fed building was called the Fed building. Now, it's called the Eckles building. Why? Because he stayed on as governor to ensure that Truman's wishes did not come true. that the Treasury effectively be able to take over the Fed >> and control monetary policy. >> And he basically said, "I'm going to exercise my right to finish my term as governor and make sure that you don't get your wish." Um, obviously today's situation is is different, but Jay Powell knows his history. Jay Powell is a lawyer first and foremost, Esquire. and knowing that he would have no leverage if he was to not be on the Federal Reserve Board and that they could reopen the criminal investigation the minute he walked out the door. Um, it showed that he had respect for his family, respect for the legacy of the independence of the Fed, and he's exhausted. and he indicated that he was happy he was no longer going to be behind the podium. Um he didn't say how long he was going to stay and you know should things turn south and politics become even more of an issue at the Fed, he may exercise his right to stay on through January of 2028. We don't know. But the point is I do not agree have not agreed for some time with his policy. I think that the Fed is falling down on its employment mandate. We've spoken about this a lot. Um, but it is with full respect today that I think Jay Powell put up a victory for integrity. H you mentioned today that you're less fed up of course referencing the title of your book and >> um there have been times where you've been critical of the Fed on this show and other times where you'll say you know they've gotten that right. Why why are you less fed up today? Is it specifically the PAL move? It is all about the PAL move. >> Okay. So, um, shortly after my former boss, Richard Fischer, and I both retired from the Dallas Fed at the same time, I ran out the door behind him because I was world's worst bureaucrat. Uh, we ran into each other at a football game. >> Mh. >> And uh, he said, "I want you to pay attention to one person, and only one person who's left on that board who is against the idea of quantitative easing. He does not like the zero bound. His name is J Pal and we're very good friends. And I said, "How am I supposed to pay attention to somebody who is the least public? He likes being in the media the least. He makes the fewest speeches of all 19 members of the Federal Open Market Committee. He was a very quiet governor." And what he said at the podium today was, "I fully respect my role as governor, and I will go back to being just a governor and give Kevin Worsh the latitude that he needs to form his own consensus and establish his own leadership as chair." And I thought that that was very gracious of him to effectively say, I'm not going to take the position of being an effective shadow fed chair. >> Is there a risk though that he could still be perceived as a shadow fed chair like internally? like you know the inner workings much better than I do. But >> I mean I think um you know even when Jay Powell in 2012 totally disagreed with the Fed um pursuing yet another round of quantitative easing, he went with a consensus. He respected the chair. He respected Ben Bernaki. He did not disscent. He regretted not dissenting. But he understands the import of dissent. So I think if he was to come out of the gate as a governor and start dissenting left and right, then I think that that would be perceived as being overtly political on his part. But if he just goes back to being data dependent, I think he'd be relieved if Kevin Worsh's um plans to institute a broader array of alternative data sources into monetary policym. I think he would applaud that. Um remember he's not a PhD in economics. >> Um he was more doubbish about the labor market uh than um some of the other hawks. Of course he had a triple hawkish descent today. >> Yeah. >> Beth Hammock, Lori Logan, Neil Qashqari all saying that they disapproved of leaving any easing language in the statement. Um, and in fact a quadruple descent because Myron said that they should be lowering by 25 basis points. Um, so I I I do I do see Myron as being much more of a political plant than Worsh even though I respect some of his views and I certainly respect his dissenting on not lowering interest rates given the gravity of what we're seeing in the job market right now. H um as you just note the 84 the descent we this is a we haven't seen this in what 30 years this kind of level of descent >> you don't read into it that it's already like early signs of like resistance or anything >> um it it could be >> it could be um we have to bear in mind that that Jay Powell is castigated because he was transitory for too long, but people forget that he was in that position because he had not been confirmed, excuse me, reconfirmed by the Senate. He was being held hostage by the fact that there was a power struggle going on. The Biden administration would have preferred to put La Brainard in as chair of the Fed. They held his vote over his head and the day of his confirmation he came out on NPR and said 2% is the inflation target and we're headed right there. And from then on out he he went down that path. >> Mhm. And it really wasn't until kind of the overt attack on him personally by the current administration that Powell started himself acting politically. >> So I again I think as a governor he's going to step back into into the background. It is interesting your question though because it it might be a warning for Worsh. If you're going to come in and be a political psychist from within, >> but I don't expect that of >> Worsh. Um, let's stay on Pal for a bit. What do you think? We often talk about legacy or like how he'll be remembered for the legacy. >> What do you think his legacy will be? And has it has it altered for you at all? >> I think he changed his legacy today. >> I do. >> Um when he said that he was basically happy that he'd never have to be up at that podium again, he was communicating that he's exhausted. >> Yeah. And yet to to indemnify the institution's independence despite being exhausted, he's staying on. And until these criminal until any potential criminal charges or threat in the future of them are dropped, it's it's likely that he will stay on as governor. If Trump starts to berate him for staying on as a governor and naming people that he'd rather have be in place of Jay Powell, that alone could also compel Powell to stay on >> if he felt like his vacating his position as governor early uh was going to open the door for some kind of a packed Fed. >> Yeah, >> we just don't know his We don't know. We didn't know Eckle's legacy in 1948. We didn't know Eckle's legacy until after he stayed on as governor in the actions that he took. That is when he established his legacy. >> That is a fascinating parallel too. Okay. It's what he did while he was governor. So that's >> correct. >> Not when he was chair. When he was chair, he was under tremendous pressure by President Truman to lower interest rates. And Eckles resisted that and Eckles refused to be basically a party to the Treasury taking over the Fed and and becoming the de facto controlling party of monetary policy. He refused to let that happen. And in staying on as governor, that is how he established his legacy. So, we don't know. Had JPAL walked out the door and said, "I'm a card carrying member of the Chbut Country Club. I've got a tea time tomorrow. Goodbye everybody." Or on May 15th. That would be one thing, but that's not what he's doing. >> And to use a word I don't think is too powerful that's probably going to get me all manner of hate mail, which I could care less. I think what he did today was patriotic. Why? >> Because he knows that the institution is under attack. It's aware to anybody. It's aware to everybody knows that the instit that the institution is is under attack. >> And having an independent central bank, as long as we're still a republic, is pretty important. And if if he's going to stay on in order to help ensure that independence remains, that's a patriotic thing to do. Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. What is your read on Kevin Walsh? >> Now, I thought Powell when he came into office in 2018 was a rock star. His first congressional testimony. You know, I don't care about the stock market. We don't make monetary policy for investors. Uh we're just going to be data dependent. And then the world economy got hit with the liquidity crisis. >> So I agree with Kevin Worsh. I think we need a lot less in the way of Fed communication. I don't think we need the the dot plot. I do think we need to completely dispose of all mortgage back securities from the Fed's balance sheet. I agree with him that quantitative easing was a failure. I agree with what he said in the past that quantitative easing was Robin Hood for the rich. I agree that he believes that the that that zero interest rate policy was also a failure. Let's see what happens though if there's a liquidity crisis. >> What do you mean by that? Like what do you just like to test him with these ideas or >> Well, liquidity crises take precedence over every single bit of macroeconomic data. There's not much you can do as the head of the world's most important central bank if there's a risk that the global financial system is going to collapse. >> There's it's it's like Mike Tyson said, you you know, we all have a plan until we get until we get punched in the mouth. Mhm. >> And it wasn't until J. Powell got punched in the mouth in 2018 and it looked like systemic risk was coming unglued that he was forced to embrace quantitative easing even though in his heart of hearts he was never an advocate of it. >> Yeah. Um you get tested once you're in that position. Of course last night you put out a note of you said 0% chance of a rate cut. Um, spot on obviously. Should they have cut though? >> I think they should have. Yes. >> Okay. >> The University of Michigan's perceptions of job insecurity are not at recessionary levels, which would be at the 50% line of people thinking that higher unemployment expectations are are mo most probable in in the next 6 months. Once you cross 50% of Americans who believe that the unemployment rate is going to rise, you're typically in recession. We're at 68%. It came down in the second reading after it looked like there was going to be a ceasefire of some kind to 64%. But my point is, we've been north of 60% for months and months and months. parallels that only align with past recessions and not nice recessions either, ugly ones. >> So, can we make the case that the Feds failed its employment mandate then or is it too early? >> Absolutely. >> Okay. >> That's why I'm saying I I fully applaud Jay Powell's actions that he took today on behalf of his personal integrity and on behalf of Fed independence being under attack. But I do not agree with the policy right now that the Fed is not lowering interest rates. I understand that oil prices, in fact, I don't think the market is properly pricing in how persistently high interest rates are going to oil prices are going to stay, meaning put upward pressure on goods inflation. I don't think the market is fully priced in the destruction to the infrastructure in the Middle East and how long it's going to take to get energy prices back down. I had a friend of mine in New York tell me that his utility bill doubled. So, these are real the threat to inflation is is real. >> It's existential. But at the same time, home prices are falling, rents are falling, Americans planned intentions to take vacations are almost at cycle lows right now. So services disinflation, which by the way, Powell has advocated for since he invented the term super core. That's coming down pretty hard. Meaning if Americans are paying up more at the gas pump, they have less to spend on everything else. We saw food at home inflation in the consumer price index flatline 0.0%. When gasoline prices went through the roof, there's a very simple interpretation. I'm spending more on gas >> less. >> I'm spending less on food. So do you think people have that backwards where they automatically think okay oil what is it's above $100 a barrel today 108 >> 107 107 >> they automatically assume that means that translates to inflation elsewhere because of all the inputs it's important critical component >> that's true >> that's true >> but there's also a disinflationary component because of the demand destruction like what is >> there's a disinflationary impact because bankruptcies have not slowed down. Interest rates are rising. >> Mhm. >> Which means that the bankruptcy cycle is going to accelerate more, which means that layoffs are going to increase to the extent that companies are not able to pass along higher input prices because of these higher energy prices. To the extent that they're not going to be able to pass them along, their profit margins will get further squeezed. And the only cost that they're able to control in such environments is the biggest cost that they shoulder which is that of labor. >> So you also mentioned like home prices are falling. >> Mhm. >> And when I think of when I think of inflation, I think of shelter. >> Yeah. >> Biggest input. >> Yeah. Huh. So we kind of have this we're not thinking about this the right way then. >> We're not thinking about it holistically. Okay, we're not thinking about inflation in its entirety. We're thinking about inflation through a very narrow prism of gasoline prices. And given, according to the Atlanta Fed, given wage growth is back to where it was in 2019 prior to CO um given the number of applicants for every gig job has gone through the roof. It's it's in a report that I'm writing right now. >> Um it is patently apparent that Americans are struggling to get by. >> Mhm. >> You probably you just spoke with Mike Green. >> Yep. >> Poverty isn't what the government defines it as being. >> Yeah. >> If you make so little money that you can take, you know, full benefits from the government, great. If you make $100,000 in the state of Texas, good luck. >> We talked about the valley of death being at that level. Yeah. Um Okay. So, with the Fed holding steady >> Mhm. >> Can we just stay higher for longer and then more pain then? >> The risk right now is if the assumption is going to be that even when Kevin Worsh takes over, he's going to have a hard time creating this consensus. And that's why that's why Powell reiterated over and over and over again at the podium today that he would respect Worsh's need to establish himself as a leader and to create a consensus. Um if worse has a very hard time doing that, if interest rates stay high where they are, then all of the cockroaches that we're starting to see with rising credit spreads and the continued distress in the private credit market. None of that's going to improve. Mhm. >> So again, we're flirting with the liquidity crisis right now >> and rising interest rates can only amplify that risk. >> Gosh. Okay. Flirting with the liquidity crisis. Um, building consensus at the Fed. >> As someone who's been a Fed insider, >> this is going to be a really basic question, but how how does that work exactly? Um what are the things that they do to build consensus? So the um we have to bear in mind that that the Federal Reserve Board email addresses end in.gov. >> They're full government employees. The 12 district banks I used to work at one. My email address ended inorg >> but the power base of monetary policym is at the Federal Reserve Board. The chair is the leader of the staff and it is the staff that conducts the research that is directed to be conducted by the chair. So that's inescapable. >> So worse can change on day one the way that monetary policy is made by directing his staff. his staff. He is chair by directing his staff to change the way they analyze the data to modernize it just a little bit which would go a long way. >> Yeah. Hm. Okay. That will be definitely interesting to watch. Um you said flirting with liquidity crisis. How big of a risk do you think that is? >> I mean we're the benchmark 10-year yield is north of 440. Um, these levels of interest rates will not only continue to pummel the housing market and everything you would there thereafter put in a house. It will continue to depress fertility rates and higher for longer interest rates will continue to bring more cockroaches out. as Jamie Diamond suggested would happen. >> Okay. So, pummeling the housing market. I want to explore this idea further with you because >> you were known for your research lead to the financial crisis on housing. Um, >> well, I'm buying a house right now. You know that my excited. >> Do you think like I mean I was kind of looking for lower prices. I feel like I got a good price, but could that also open up some activity? Like because they kind of got way out of control. >> I mean, lower prices would certainly benefit, but again, we're talking about higher interest rates. >> Yeah, that too. >> We're talking about rising mortgage rates. >> Y >> at a time when according to Red Fin, we've never seen this big of a disconnect between the number of sellers and buyers. >> More sellers than buyers right now. more sellers than buyers. >> Yeah. Maybe that's why it was a little Yeah. Okay. >> And according to the latest monthly figures from the FHFA and S&P totality, whatever they've named it this last >> I think it's >> totality that printed negative month overmonth. >> FHF FHFA printed flat as a pancake. And again, inventory is rising, relistings are rising and the largest swing factor for the US economy because there is a ripple effect when a home is purchased because things are purchased to go in the home. >> Oh yeah. And services too. >> And services too. Yep. >> You Yes. Absolutely. So the the impact on consumption could be profound. Right now, we're in the middle of what appears to be kind of a big boom in investment, which is absolutely undeniable. But what if it's companies rebuilding inventories, which they've been doing? What if it's companies trying to get ahead of the continued threat of tariffs plus whatever's happening with oil prices and trying to stockpile in the event that the worst case scenario, the straight of horm stays closed, oil prices go much higher than what they are? What if we're seeing pre-investment panic buying to try and stockpile reasonably priced inputs in front of an even higher level of input costs? >> If we are, what do what what do you think um what does that tell us? >> This economy cannot withstand persistently high oil prices and persistently high interest rates. There's just too much debt. There's too much leverage. There's too much leverage in the system. >> Are you Am I sensing that you're worried? >> Yeah. Well, like you Okay. Because the reason I bring it up is like you again I referenced your research from pre-inancial crisis. Can you kind of contextualize like how you're feeling today? >> Well, I'm writing about commercial real estate this week. Um, you know, there's nothing worse for commercial real estate than rising interest rates when sellers have been waiting for years and years and years for interest rates to fall enough for them to refinance these buildings. There are a few outfits that have figured out how to break the AAA tunch of a commercial mortgage back securities where that AAA tunch, the most recent one, took a 42.9% loss. If banks continue to realize losses on the commercial real estate loans that they've been extending and pretending for five, if not 10 years, if they start to realize those losses, then lending standards will tighten >> and that affects everybody. >> And that affects everybody. It affects small businesses. It affects consumers. It affects people who want to buy cars. the glorified it's going to be the biggest income tax refund season of all time. It the average income tax refund was going to go up $1,000 year overyear according to the one big beautiful bill when it was passed. As of the week ended um April 17th, the average year-over-year increase in tax refunds was $333. And if you can excuse my colorful language, >> I'll let it rip. >> You can piss through that $333 really quickly when the price of essentials and filling up your gas tank has gone up so much. >> Yeah. >> So that big boost that tax refunds usually gives to the economy in the spring, it ain't going to last that long. >> But I this being said, we're so close to the midterms. I I will boldly predict that there's going to be another postponement of forcing people onto harsher repayment plans for their student loans. >> Yeah, definitely watch for the midterms. All right. Um let's talk about a few base cases rest of the year um 2026 with the Fed. Um what do you think with cuts >> again? I think if worsh comes in and establishes through the Fed staff because governors and regional bank presidents come and go. The staff are lifers. if he instructs his staff to conduct research and look at alternative data inputs that clearly demonstrate that the Fed is failing on its labor mandate, which you read the Daily Feather every day. It's clear >> that it's failing. Kevin Wars is somebody who is savvy enough, shrewd enough to say, "Great, initial jobless claims are really low every single week, but there are more than 7 million unemployed Americans who are actively actively looking for a job, but only one in four is collecting unemployment benefits." >> Yeah, >> he'll recognize that. >> He won't just say in isolation, "Continuing jobless claimed are low." He'll say, "But what are the other 75% of out of work Americans who are actively looking for work? What are they doing to get by?" So if he comes in and tells the staff to stop making monetary policy through a rearview mirror of systematically revised downward data, then you could you could find justification for there to be a more aggressive path of lowering interest rates in 2026. A few months ago, I didn't think that Janine Piro was going to be dropping these criminal charges against Powell. And yet, she has. So, there's not going to be this big pause in between May 15th when Jay Powell is no longer chair and the June 18th FOMC meeting. And there's going to be time once worsh is confirmed by the Senate, which he will by the hair of his chinny chin chin. In 2004, when he when his name went up for vote in the committee, it was 20 to zero vote. Today, it was straight down party lines, >> 13 to1. >> He'll be confirmed by the Senate the same way, straight down party lines. But for now, the GOP controls the Senate. He will be confirmed. He will get into office and he will start shaking things up in terms of how the research is conducted. >> Mhm. Okay. Speaking of how the research is conducted, data sources, data sets, if you were in that room, >> so you're on that staff or you could have that conversation, you could advise, what's one thing you would say to um if Kevin Worsh is in a Fed chair, Kevin Worsh, what would you say to him or advise him on maybe suggest that he looks at? I would say look at the National Federation of Independent Business and the fact that that the metrics that they've have followed for decades and decades show that employment is falling among small businesses. I would say have a look at the bankruptcy cycle. Why don't you look and see where warn notices are, warnings that people are going to get fired? >> Uh why don't you follow the layoff data a little bit more closely? Um, pay attention to the New York Fed's survey of consumer expectations and the acute anxiety that Americans are suffering right now because of job insecurity. Accept the fact that the unemployment rate for recent college graduates is 43 44%. understand the implications and what that means for the US economy while respecting the fact that you don't believe in the zero bound. So if you are going to aggressively lower interest rates based on finally looking at the right data and if you are going to lower interest rates for the love of God stop at 2%. Mhm. Um Danielle, you run a Bloomberg chat with folks. >> Oh yeah. >> What's the spiciest thing happening right now or like interesting hot take these days? Um so right now I I think what what my institutional investors are most focused on are the disconnects. They're the disconnects between what's happening in credit, what's not being reflected in credit spreads because what's happening in credit is overwhelmingly occurring at the moment in private >> credit. They're looking at every time there's a sudden announcement from a private capital firm or a private equity firm, that's what we're talking about, late into the night. um they're following the fact that interest rates worldwide are rising. That you can't contemplate high energy prices in the United States being bad for the United States but much worse for the rest of the world. So you're no longer talking about a US recession, you're talking about a global recession. Those are the kinds of things we talk about. >> Yeah, global. Okay, before I let you go, the two-parter question. What's the risk or worry concern that's keeping you up at night right now? And what's the thing that's making you hopeful or optimistic? So, I'm definitely seeing um through the prism of my oldest who's graduating from from college, I'm definitely seeing an appreciation for I'm young enough that if I need to reskill, I can. I've got a great business degree, but a lot of those entry- level jobs have been replaced by AI. But according to mom and dad, the electrician or the guy who's coming in and putting in a new air conditioning unit or the plumber or the painter, they're all still charging them nosebleleed levels. >> Maybe I can just take all of my business skills and disrupt the skills sector. Maybe I'll go back and take a few shop classes that I didn't take in high school because they got rid of them. I I'm encouraged to see young individuals not just sit back and accept my fate is that I'm not going to be working. I'm going to be an overeducated barista. >> There's a lot of ingenuity going on, a lot of thinking going on right now about how to reinvent the next generation of jobs. And I'm highly encouraged by that. And I think AI can do great things for education. I think AI can do amazing things for healthcare. So there there's a lot of there's a lot of good things going on, >> but I'm worried that there's going to be a liquidity crisis. We have built up so much debt that you're seeing nursing home chains go bankrupt at a time when that should be a bulletproof industry. >> Yeah. that you would think totally >> with the aging of America, but it's because private equity came in, >> fired a lot of people, levered up the company, >> paid themselves handsomely, walked out the door, and there and there it goes. So, what keeps me up at night is that there are too many gigantic players in the non-banking space that are now too big to fail just like banks because some of them are just as big as banks. >> That is a headline right there. Wow. They're not regulated and yet we could not let a handful of them go without implications for the global financial system. >> But I just feel like if you bailed them out, I don't know. Stomaching a bailout. Yeah, >> I get it. >> I'm not a bailout. I'm not a fan of bailouts. What but what I'm saying is I worked at the Fed when all the dominoes were lined up and it looked like all the banks were going to go. That really wasn't an option at the time. >> Yeah. And when you consider the trillions and trillions and trillions of dollars that these non-banks are managing, should one go, the ripple effect, the blowback into the conventional banking system, which is lending to the non-banking system, it becomes a systemic issue. >> Wow. Danielle D. Martina Booth, CEO and chief strategist at Qi Research, author of the book Fed Up, an insider's take on why the Federal Reserve is bad for America, and is that the right title? I got that right. Right. My subtitle. >> Yep. Subtitles right. >> And author of the Daily Feather on Substack. >> Yep. And I just want to give a big big big shout out to my senior in college who's graduating. And to my twin seniors in high school who are also graduating. I'm going to be non-paywalling a tribute that I wrote about the importance of the legacies that we leave behind and the fact that we are not we're never dust in the wind ever. We always leave something behind. Jay Powell will have his legacy. I'm so proud of my own legacy right now. >> So, I'm going to be sharing that with the public >> on Mother's Day and I hope it's read. >> I love that. and we'll encourage our viewers to go to the Daily Feather. Really, really appreciate you taking the time, Danielle. It's always a pleasure having you on. >> Likewise.