Will Fed Hike Rates This Year, Crash Markets? Economist Reveals Next Move | Komal Sri-Kumar
Summary
Fed Outlook: A deeply divided FOMC held rates steady, with notable dissents signaling obstacles to future cuts and a more contentious policy path ahead.
Inflation and Oil: Persistent inflation and higher oil from Middle East tensions were highlighted as key pressures, drawing parallels to 1970s policy errors if easing is premature.
Energy Overweight: The guest explicitly favors the Energy sector, citing further upside in oil prices as a catalyst for continued outperformance.
AI and Data Centers: Strong demand for AI and Data Centers is acknowledged, but the guest warns of overinvestment and stresses careful security selection over broad exposure.
Gold and Dollar: Gold’s outlook is conditional on the Fed; a firmer dollar and steady/higher rates could pressure bullion, while easier policy would be supportive.
Bonds and Curve: Long-end yields may stabilize if cuts are deferred, but front-loaded easing could steepen the curve as markets price inflation risk.
Consumer Divergence: Upper-income spending remains resilient, while lower- and middle-income consumers face pressure, aligning with weak sentiment data.
Market Moves: Immediate reactions saw modest gains in the S&P 500 and QQQ, with rate volatility underscoring sensitivity to Fed communication.
Transcript
It's Wednesday, April 29th, and the FOMC held rates steady today. >> Today, the FOMC decided to leave our policy rate unchanged. We see the current stance of monetary policy as appropriate to promote progress toward our maximum employment and 2% inflation goals. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook, and we will remain attentive to risks to both sides of our dual mandate. >> During the press conference, the S&P 500 rose 0.28% to 8% and the QQQ rose roughly 45 basis points. Bitcoin rose 75 basis points despite the S&P and NASDAQ falling intraday. Now the 10-year yield shot up about 45 basis points immediately gave up the gains before the speech concluded by Jerome Pal. We'll talk about uh why the Fed did what it did. go over some important highlights of the FOMC pesh conference as well as give an outlook for the economy now with our next guest Kumal Sri Kumar president of Sri Kumar global strategies welcome back Sri good to see you as always >> David good to be back with you always an interesting discussion >> always interesting things to discuss with you Sri today's uh meeting was marked by the highest number of dissents since 1992 an unusually divided Federal Reserve held its key interest rate steady was one of the key talking points or headlines from CNBC today. We had four members, four descents and this has been um something we haven't seen in uh in the last 30 something years 8 to four. What does this signal to you? >> Two things. One, as you correctly said, David, we have not had so many descents since October of 1992. So, it's a very rare event. Second, one of the four descents is going to disappear soon. That is going to be Steven Myan who is a former advisor to Trump in the on the economic side and he will have to give up his governorship soon so that Kevin Walsh can take that position. Since we have heard that Trump that Powell is not going to leave, you're going to have the two three other people who dissented who did not want to say that interest rates are more likely to be cut in the future to keep it open. Those three regional bank presidents are going to stay. What does it signify? You have a situation where Kevin Walsh has said in the past that he would like to break heads in the Federal Reserve. He wants to change the way they do things. And so these three people are giving him a signal that you cannot take them for granted. They are not going to simply go by and he cut rates in the future as President Trump wants. So as far as WSH is concerned, he has to see how he can deliver to Trump on his promise to cut interest rates even as three at least three regional bank presidents disagree with him. >> So this is um what happened. This is from CNBC. Like you said, Steven Myron uh voted or dissented. The other three no votes came from regional presidents Beth Hammock of Cleveland, Neil Kashkari of Minneapolis, and Lorie Logan of Dallas. They said they agreed with the hold but did not support the inclusion of an easing bias in the statement at this time. Uh this was the statement in consider in considering the extent and timing of additional adjustments to the target range for the federal fund uh for the federal funds rate. The committee will carefully assess incoming data, the evolving outlook, and the balance of risks. It sounds like, according to uh this article, that the no votes come from the fact that they don't want the Fed to even consider easing, not that they don't necessarily agree with the hold to begin with. So, does that tell you that the Federal Reserve is going to remain very hawkish for the foreseeable future? What it says to me is not so much that the Fed is going to remain hawkish David as much as there is going to be a lot of opposition to Kevin Walsh in terms of his wanting to cut rates. >> Okay. So if if he is doing that and three members are going to vote in the future not to do it and since he will not have any other person joining him here. Uh keep in mind that Lisa Cook, another governor who President Trump has tried to remove is still on the board. She is probably going to vote against Kevin Walsh. So he is going to have a difficult situation getting a majority together to cut rates and that is where I think the real problem is going to come. A lot of dissension in the future Fed. >> Why would Kevin Walsh want to cut rates? Are economic conditions necessary for him to cut rates? Uh Kevin Walsh repeatedly has said since last September that he wants to cut rates and Trump said he chose Walsh only because he wants to cut rates and if he had said that he is going to raise rates wash would not have been chosen. So if Wash goes ahead and changes the tune again and once again says, "Oh, I think I should keep the interest rates high or even raise them with oil prices going up." The president is going to use all kinds of epithets with him. Uh call him a call him stupid as he did with the outgoing chairman. That is the risk Wash runs. She's not in a safe situation either way, whether he decides to abide by what Trump wants or whether he wants to go with the remaining members of the board. >> Let's assume Kevin Walsh is not selected by Trump because of his, I guess, feelalty or loyalty to the Trump administration. Let's just take this for at face value. Should the next Federal Reserve chair consider rate cuts in today's environment industry? According to your analysis, >> according to my analysis, the next chair should not be looking at it. I have been writing in my weekend writeups that the even before the Iran war began, David, that the Fed should consider potentially increasing the interest rate. And the reason for saying that is that they have not met their inflation target even once in last in the last five years. And the 2% inflation target is essentially a mockery. It has never been met. They keep repeating it every time as if they are somehow going to go back to it. And instead the inflation is moving away toward the 3 to 3 12% range. So it is for that reason that I think the Fed has to be very careful how to deal with it before inflation expectations get carried away and they can't bring it down again. >> Before we continue with the video, let's talk about your most important asset, your personal data and privacy. Now your personal data is constantly being collected and sold and exposed online from places like shady data broker sites and even big data breaches. So, your private information, like your name, address, and phone number, is out there on the internet, and it's easier to find than you actually think. That's why I recommend today's sponsor, Delete Me. It takes a few minutes to set up, and they handle the entire process. They find where your information appears, verify those listings, and submit removal requests to hundreds of data broker websites. They also continue monitoring over time since this data can resurface and reappear. I've been using it for over a year and they have reviewed over 325 listings for my information. The reports show exactly what was found and what was removed which makes the process transparent. Check it out now. Scan the QR code on the screen or go to jointdeleteme.com/david link in the description down below and use my code davidin for 20% off. Take control of your privacy today. Now back to the video. What other Fed tools uh are at their disposal for easing monetary policy? Should the other Fed governors vote to not lower rates? Can they do anything else to maintain easing? >> There are two major instruments. One is the rate increasing or decreasing and second is what the Fed does to the size of its balance sheet. Whether that is going to be increased or decreased with the passage of time. uh an increase in the Fed's balance sheet is considered to be an easing of policy. It typically goes hand inhand with a cut in interest rate. Whereas a reduction in the balance sheet, which is to say the Fed steps into the market uh and then says that they want to sell their securities and take in cash, that is considered contractionary or a hardening of policy. Now what Kevin Walsh has said is that he will make up for the lower interest rate by reducing the balance sheet of the Federal Reserve. Keep in mind what it is suggesting to you. Every time the Fed has tried to cut in to cut the balance sheet, it has happened twice before. once in September 2019 and a second time in March 2023 that they ran into difficulty with the cash shortage, a regional banking crisis and they quickly had to revert away from a quantitative tightening or balance sheet reduction to increasing the balance sheet again. Right now, this Fed, the outgoing Fed is actually increasing the balance sheet of the Fed and you are going to have Kevin Wash come in and reduce it. And the reduction typically gives rise to cash shortage because all the financial institutions have got used to a very easy Fed and they also know that they would get bailed out in case of difficulties as happened with the March 2023 banking crisis. all the all the depositors who were bailed out of Silicon Valley Bank, not just ones who were protected by the deposit insurance. >> I want to play for you a few clips of the FOMC uh conference itself. But let's talk about before we do that, let's talk about Kevin Worsh a little bit more. Um it's been brought to the public's attention during the uh the hearing uh Kevin Worsh's confirmation hearing. He was pressed several times about his family's relationship with Trump. He's married to Jane Lauder, who is a daughter of Ronald Lauder, billionaire heir to the Estee Lauder Empire. Ronald Lauder and Trump go back decades. They've been personal friends. Lauder has personally sponsored and donated to the Trump um uh campaigns. And so now the question is, is the Fed truly independent? The president literally appointed or nominated the son-in-law to a personal friend of his. Well, you can always have relationships because in camp you do nominate campaign contributors for instance, David, as an ambassador to a country to plump jobs. That by itself would not say to me that Kevin Walsh is not going to be an independent person. But I look at his past. I look at the fact that in 2010 2011 when he was a member of the board of governors, he was very hawkish. And in September of 2009, when we were still suffering the aftermath of the global financial crisis and when unemployment rate was still quite elevated, he was criticizing the Fed of which he was a part at that time for actually increasing the balance sheet and thought that the balance sheet should be reduced. That is a very hawkish position to take for him in the midst of the crisis. But last year he completely reversed and said federal interest the interest rates of the federal uh reserve board has to be reduced. Now how did he come to the conclusion? Very conveniently it was also the position taken by President Trump. So she has to get over the fact that he's not independent because of the fact that he changed his position. He has to convince everybody that it was not career advancement which lead him to change his mind that he really had a reason to do so and he has yet to prove that point. >> Let's play a few clips from the uh press conference from reporters. This one goes back to what I asked you earlier about whether or not the Fed is now more hawkish. Uh you answered that, but let's hear how uh Jerome Pow answered that. Take a listen. Are we right to assume that the hawkish outcome for the Fed is still one in which the committee just extends the pause in rate cuts? And to what extent is there a growing sense within the committee that monetary policy really isn't just restrictive at all right now? Um the economy is holding up relatively well despite this major energy shock. The unemployment rate has ticked lower. Inflation was moving sideways even before the war and is now moving higher. Um so so where is the committee at on that debate? where we're at is we think our pol really we think our policy rate is in a good place. Um if we need to hike, we will we will certainly signal that and we will and we will certainly do it. And if we need to to cut, then if it's appropriate to cut, then we'll we'll signal the opposite. I think we because we feel like we're we're in a good place to move in either direction. Um nobody's calling for a hike right now. >> No hike right now. But would the conditions be necessary? Will conditions be there for the Fed to seriously consider a hike later on in the year? Do you think? >> I think the conditions are already there for the Fed to consider a hike in interest rate with inflation going up. The reason they do not do that is once again presidential pressure. They they think staying at staying at the same position is being hawkish. I would say hawkish is when you actually increase the interest rate. Number one. Second, the Fed is also currently increasing the balance sheet which is also an easing measure and as long as that continues, it is going to be difficult to convince everybody that the Fed is being hawkish. So the change has to come in the future and if they do that uh as I said before they will incre incur the wrath of the president and whether they still going go ahead with it is the real question mark here >> what a hike or even just keeping rates steady would that damage the labor market the unemployment rate is at 4.3% it's low by historic standards but it's been rising uh the economy did gain some jobs in the last payroll numbers However, economists have described the current labor market as a no hiring, no firing phase. So, how weak or strong is the labor market in your assessment? >> The labor market, as you quite correctly said, has signs of weakness because there is very little of hiring that is taking place. And with the artificial intelligence coming and taking an important role in the economy, David, you're going to find the 20 to 25 year old people who are trying to enter the job force are going to have a very difficult time because people who are either legal assistants, computer assistants, medical assistants trying to get their first job are going to find AI replaces them and many of the jobs are going to go away. Here is the issue. Will if you cut interest rates by one quarter point or half a point, will you get the job that you didn't get before? My answer is that is a structural issue. When the structure does not permit you to get employment lower interest rates is not going to make up for that. It has to be through a reduction in tariffs. It has to be through investment incentives and which are very different from cutting interest rate. Right now the higher level of tariffs is affecting employment and so the employer is not going to hire more workers just because interest rates went down by a quarter point. So interest rate changes, balance sheet changes should be oriented only toward inflation control. Whereas you need fiscal policy by the US Treasury which should be used to direct employment and growth where the government wants it to go to. >> You wrote a couple of months ago that uh should Worsh take the easy way which is the path of least resistance and start uh delivering large front loaded rate cuts perhaps 50 basis points at his first FOMC meeting. Markets are likely to do the tightening for him. inflation expectations would rise and the yield curve would steepen. Do you still hold this view? This was written before the Iran war broke out and oil spiked. >> You uh I still hold that view and I think you mentioned it at the beginning of our discussion. >> You talked about how the 10-year yield is shot up today. It started to increase even before uh before the decision by the FOMC was announced. It happened before uh Powell spoke and you saw that going up and the reason for that is because the long end of the yield curve is not controlled by the Federal Reserve. So if in fact Walsh is going to cut interest rates in his new Fed then the yield curve is going to steepen the short end comes down and the long end goes up. Right now today, even the 2-year yield, which is supposed to be a predictor of the federal funds rate, actually rose. And the reason it rose along with the press conference is the fact that the market doesn't believe that the Fed can even cut rates given the circumstances with the oil and given what is happening to overall inflation. >> Okay, let let me play for you another clip from the Federal Reserve and we can react together. This one has to do with uh the bias towards cuts, which I alluded to earlier. Take a listen to Jabone Powell's comments. We'll react together. >> So, does the majority of the committee still have a bias towards cuts at this point or has the bias on the committee shifted away from cuts towards holding or hikes if that was needed? >> I so I think that you know the the center is moving toward a more neutral place and that's sort of what markets are saying too. I just think, you know, uh there's a lot of signaling going on when you change guidance like that. And so we we just I guess the major a majority of us didn't feel like we needed to send a signal on that right now. Uh and but maybe it'll come to that. And and the reason is because, you know, we're kind of waiting to see what happens with with events in the Middle East and what are the implications of those events for the US economy. So there was just a there's a group who feels like we don't need to be in a hurry to do that. We we get it and of course we will move to a hiking bias if we want to hike and we'll move to a new a neutral bias before that. But there was a difference over whether to do it at this meeting at at a meeting at which all but one of us agreed that that the that the rate decision was correct which was not to move. >> If somebody were to ask you Sri uh what the neutral rate should be for the Federal Reserve what how would you answer that question? I would answer that question by saying that the neutral rate should be quite a bit higher than where it is. What does that mean? It means that the federal funds rate today at between 3.5 and 3.75% range is not sufficiently restrictive. We talked about employment remaining relatively strong. economic growth continues and if that is the case you cannot argue that it is restrictive. Second, you have the stock market which has been doing extraordinarily well based on corporate earnings growth because of the uh optimism about the future. That also suggests that the interest rates are not restrictive enough or that the natural rate of interest should be higher than where it is today. This is a an observation by many people uh including this particular economist James Lavish on X. The Federal Reserve has been adding assets to its balance sheet in the last couple months adding about $200 billion of uh US treasuries back onto its balance sheet. Uh you'll recall that uh the end of QT was 2025, the end of 2025. Uh but how would you describe the current regime right now? Why do you think they're adding back assets and would you call this QE? uh I will call it QE even though the Federal Reserve says that they are not buying long-term issues. They are only buying short-term issues and therefore it is not QE or quantitative easing. I think that makes no sense to me. Quantitative easing is when you increase the balance sheet of the Fed no matter whether you do it with a shortdated assets or longdated assets. In either case, you put the equivalent amount of cash into the system and you make the situation easier. You put more cash into the hands of consumers and you're stimulating the economy. So that is what they are doing. You ask me also David why is it they do that? They are concerned that if they did not do that the cash reserves with the banks will go down significantly. That means there'll be a scramble for cash and short-term interest rate would surge. That's what happened in September 2019. They don't want a recurrence of that and that is why they are preempting it by increasing the balance sheet earlier on. And that says to me that they are caught in a trap. They cannot get out of it. They try to get out of it, but every time they do, they are worried about a cash crunch and they go back to quantitative easing. >> Do you think the addition of Fed assets to the balance sheet or treasuries to the balance sheet is contributing to the higher inflation print that we're seeing even though that the headline numbers are mainly driven by oil? But do you think under the surface quantitative easing as you describe it is contributing to inflation? >> Let's go back to history. Let's look at the last 5 years. Before the oil prices shot up, which is after February 28th when the Iran war began, inflation was already on its way up. For 5 years, we have not met the inflation target of 2%. And inflation, if anything, was rising to the 3% or higher level. That says to me that even without the war, we had inflation going up because of the fact of the quantitative easing taking place and because of the fact that interest rates were too low. So the evidence suggests that inflation was rising before and it says to me that the interest rate should have been increased even before the Iran war began. >> I'll play for you one final clip from the FOMC. This is Powell's assessment of the economy. Take a listen. >> How would you describe the economy outside of the misbehaving inflation? I mean, um, it's still awfully resilient given all of the blows. >> I don't know that you can be awfully resilient. So, it's actually quite resilient, I would say, because it's a positive thing if I can if I can have that amendment. Yeah, that the you know, growth is really solid across our economy. Some of that is um that consumer spending is hanging in pretty well. The the most recent data are good and some of it is just the apparently insatiable demand for data centers all over the United States. So a lot of uh business investment going into building data centers and every reason to think that that continues. So you've got an economy that's growing at 2% or better. PDFP which is private domestic final purp purchases that which is really a better signal of of uh of a momentum in the economy is actually higher than that. So that's you know that's a positive thing. >> Would you agree with that assessment three? >> I if if that is the case if Jerome Powell seriously believes that why is it that toward the end of 2025 they cut interest rates. They reduced interest rates three times because Powell said at that time that he is more concerned about employment than inflation. Turned out to be once again a wrong assessment. Inflation was the problem. Employment was not. Now he himself says that the economy is very strong. Employment is he considers as acceptable. Then why is it that interest rates are not being increased in order to bring the inflation down to target? because the Fed has essentially sidelined its inflation expectation. Put it aside because they can focus on growth and that's not what the Fed is supposed to do. >> Well, speaking of growth, this is the Atlanta Fed GDP now. It's currently at 1.2% for the latest um estimate for 2026 Q1 and it'll be updated um by tomorrow. It's down sharply from previous numbers as you can see. Now, important to know that chapter 11 filings across the country have al also risen something like 37% year-over-year. At what point would you start calling this a recession? Sri >> um well recession technical recession is supposed to be when you have two quarters backto back of negative GDP growth whether we actually reach it or not. uh there is a slowdown that is coming but here is a response to what you showed about the Atlanta Fed estimate David that is happening because of tariffs it is happening because of the Iran war and when you have those present I don't think you can offset that simply by cutting interest rates that is what we tried to do in the 1970s oil prices increased very sharply from 1973 onward Word. President Nixon along with author Burns, the chairman of the Federal Reserve, wanted to follow easy monetary policy in order to counteract the impact of higher oil prices. Effectively, what happened was it pushed you into a recession which was very severe and at the same time pushed up inflation as well. That is the risk that we want to avoid in the in the current situation. Let's move on to talk about the Iran war itself. The the fact that the economy as described by POW has not um is still quite resilient. Why do you think that is? People have been talking about how higher oil is going to cause demand destruction. POW commented that the latest uh consumer spending numbers are still strong. Why hasn't the uh consumer collapsed or faltered yet? uh it is not true of consumers as a whole. There is clearly an income distinction. The highlevel income and the super highlevel earners are actually doing very well because the stock market has been going up and they have enough cash to spend on luxury goods and they are doing very well indeed. If you look at the lower and middle inome groups, they are actually suffering the impact of higher prices. They are suffering the impact of the fact that employment has become harder to get. So the difference is that overall consumption spending is large but that is being pushed by higher income earners and so I would maintain that right now you do have the consumer weak at lower income levels. it is already showing up. >> So, summing up what you think the Federal Reserve is going to do and how the economy will progress in the next couple quarters into 2026, let's talk about some asset price uh performance expectations. Starting with bonds, do you expect the long end of the curve to continue going up? Um I think if if in fact as I expect Kevin Walsh at his first meeting in June is going to show that he's not cutting rates. He might if he were to say well I'm watching it. The oil prices are higher but I think I will cut in the future but I'm not going to do today. the bond yields will probably stabilize for that reason because the bonds are expecting him generally to be very doubbish. If he's not doubbish and he actually says he's going to pass, that's going to be good for bond prices, it is going to keep the bond yield down. However, if he finds that the president is pushing him to cut rates immediately and he maintains as he has said when he was looking for the job that cutting the balance sheet will make up for lower interest rates then the 10ear yield is going to go up. So the answer to your question I will be watching until his first meeting. I'll watching I'll be watching for his press conference and if he again indicates that he is ready to cut interest rates then I think that long end is going to go up in terms of yield. >> The Michigan consu uh University of Michigan consumer sentiment index is at an all-time historical low. Do you expect consumer spending which has thus far been quite resilient at least for the uh upper end uh of earners to to taper off a little bit and if so would that mean less discretionary spending and weaker discretionary spending stock performance? >> The upper end is probably going to continue to do well because they have enough of cash reserves. They are not going to be affected. The Michigan sentiment that you pointed to and you're showing on the screen actually reflects what the majority of the population which don't earn too high in income how they are fairing and I don't see the Michigan sentiment index moving up but at the same time I expect consumer spending to be strong which is what we have seen in the recent past. People say how do you put the two together? Because one of them refers to the high income group, the other one refers to the majority of people and how they feel about their living. >> And what about precious metals? Siri moved down during the start of the war. Uh so didn't react as some people would expect as a safe haven asset. What do you think sentiment towards gold will will be for the rest of the year? the once again I would have to defer and say I have to wait to see how Wash behaves in his first meeting. Let's say that he says he's not going to cut interest rates and he doesn't expect to cut rates at all in 2026. If the if he does that gold price may incur more of a hit may go down further because the dollar becomes an effective competitor to gold. People can say I will go into treasuries. I will go into US dollar denominated assets to take refuge. I don't need to go for gold. The reason why gold was doing well in the second half of 2025 is the push at that time for interest rates to remain low indefinitely and the president's criticism of uh uh of Powell for his for keeping interest rates constant. they were causing gold price to go up and the question is does wash continue with that policy or he if does he show as somebody said show a backbone and you're going to show some strength that will cause gold price to go down. So this is something you keep watch for the Fed's behavior before you decide on gold. >> Okay. And finally on the stock market the S&P is at 7100 points. This is the um this is an all-time high stark recovery since it went down following the start of the Iran war. Now Powell alluded to data center construction as being a significant part of uh investment income for companies. Do you expect AI and data center investments to continue pushing up the stock market for the remainder of the year? I have concerns because I I lived through the 1999 situation when you had the dot boom and people said any company with a com after it nothing can ever go wrong with it and then you had the stock market collapse starting about March of 2000 and we had the recession of 2001. What is the parallel here? uh data centers are going to do well, AI is going to do well, but not everybody who calls himself a uh and data center is going to do well. And that is similar to what we had before. There's an excess of investment in data centers, excess of investment in artificial intelligence and quite some of that is going to be wasteful and so I think security selection is going to be very important. Another way of saying the whole asset class is not going to do well only some of them will and that's is going to create a problem as well for investors and for the overall stock market. >> Any particular sectors you think might do better uh considering Fed policy which we talked about considering the ongoing war in Iran that has not yet been resolved considering higher oil. What would you overweight in the S&P? uh and energy I think has clearly more uh leeway to go up because oil prices are going to increase further. So I think they are going to do well. Uh if the war continues defense related industries again should do um to should perform better than the others. Other than that I would say look at basic value stocks. Healthcare is an area which should do well. um technology, AI, be very careful where you invest. They've gone up substantially and they are the ones who can be vulnerable to a decline. >> Thank you very much. S tell us where we can find your work and uh what you're working on right now. Um well on Twitter or X I go by Shriek S R I K Global and then I also put out on a Substack called Sri Economics every Saturday and this deals with the Fed and interest rates and that's something for your listeners also your watchers uh to follow as well. >> All right, excellent. We'll put the links down below. So please do make sure to follow Sri Kumar and uh his Substack and writing there. Thank you very much. We'll speak again soon. Sri, take care for now. >> Thank you, David. Good to talk with you as always. >> Good to talk with you as well. Thank you for watching. Don't forget to like, subscribe,
Will Fed Hike Rates This Year, Crash Markets? Economist Reveals Next Move | Komal Sri-Kumar
Summary
Transcript
It's Wednesday, April 29th, and the FOMC held rates steady today. >> Today, the FOMC decided to leave our policy rate unchanged. We see the current stance of monetary policy as appropriate to promote progress toward our maximum employment and 2% inflation goals. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook, and we will remain attentive to risks to both sides of our dual mandate. >> During the press conference, the S&P 500 rose 0.28% to 8% and the QQQ rose roughly 45 basis points. Bitcoin rose 75 basis points despite the S&P and NASDAQ falling intraday. Now the 10-year yield shot up about 45 basis points immediately gave up the gains before the speech concluded by Jerome Pal. We'll talk about uh why the Fed did what it did. go over some important highlights of the FOMC pesh conference as well as give an outlook for the economy now with our next guest Kumal Sri Kumar president of Sri Kumar global strategies welcome back Sri good to see you as always >> David good to be back with you always an interesting discussion >> always interesting things to discuss with you Sri today's uh meeting was marked by the highest number of dissents since 1992 an unusually divided Federal Reserve held its key interest rate steady was one of the key talking points or headlines from CNBC today. We had four members, four descents and this has been um something we haven't seen in uh in the last 30 something years 8 to four. What does this signal to you? >> Two things. One, as you correctly said, David, we have not had so many descents since October of 1992. So, it's a very rare event. Second, one of the four descents is going to disappear soon. That is going to be Steven Myan who is a former advisor to Trump in the on the economic side and he will have to give up his governorship soon so that Kevin Walsh can take that position. Since we have heard that Trump that Powell is not going to leave, you're going to have the two three other people who dissented who did not want to say that interest rates are more likely to be cut in the future to keep it open. Those three regional bank presidents are going to stay. What does it signify? You have a situation where Kevin Walsh has said in the past that he would like to break heads in the Federal Reserve. He wants to change the way they do things. And so these three people are giving him a signal that you cannot take them for granted. They are not going to simply go by and he cut rates in the future as President Trump wants. So as far as WSH is concerned, he has to see how he can deliver to Trump on his promise to cut interest rates even as three at least three regional bank presidents disagree with him. >> So this is um what happened. This is from CNBC. Like you said, Steven Myron uh voted or dissented. The other three no votes came from regional presidents Beth Hammock of Cleveland, Neil Kashkari of Minneapolis, and Lorie Logan of Dallas. They said they agreed with the hold but did not support the inclusion of an easing bias in the statement at this time. Uh this was the statement in consider in considering the extent and timing of additional adjustments to the target range for the federal fund uh for the federal funds rate. The committee will carefully assess incoming data, the evolving outlook, and the balance of risks. It sounds like, according to uh this article, that the no votes come from the fact that they don't want the Fed to even consider easing, not that they don't necessarily agree with the hold to begin with. So, does that tell you that the Federal Reserve is going to remain very hawkish for the foreseeable future? What it says to me is not so much that the Fed is going to remain hawkish David as much as there is going to be a lot of opposition to Kevin Walsh in terms of his wanting to cut rates. >> Okay. So if if he is doing that and three members are going to vote in the future not to do it and since he will not have any other person joining him here. Uh keep in mind that Lisa Cook, another governor who President Trump has tried to remove is still on the board. She is probably going to vote against Kevin Walsh. So he is going to have a difficult situation getting a majority together to cut rates and that is where I think the real problem is going to come. A lot of dissension in the future Fed. >> Why would Kevin Walsh want to cut rates? Are economic conditions necessary for him to cut rates? Uh Kevin Walsh repeatedly has said since last September that he wants to cut rates and Trump said he chose Walsh only because he wants to cut rates and if he had said that he is going to raise rates wash would not have been chosen. So if Wash goes ahead and changes the tune again and once again says, "Oh, I think I should keep the interest rates high or even raise them with oil prices going up." The president is going to use all kinds of epithets with him. Uh call him a call him stupid as he did with the outgoing chairman. That is the risk Wash runs. She's not in a safe situation either way, whether he decides to abide by what Trump wants or whether he wants to go with the remaining members of the board. >> Let's assume Kevin Walsh is not selected by Trump because of his, I guess, feelalty or loyalty to the Trump administration. Let's just take this for at face value. Should the next Federal Reserve chair consider rate cuts in today's environment industry? According to your analysis, >> according to my analysis, the next chair should not be looking at it. I have been writing in my weekend writeups that the even before the Iran war began, David, that the Fed should consider potentially increasing the interest rate. And the reason for saying that is that they have not met their inflation target even once in last in the last five years. And the 2% inflation target is essentially a mockery. It has never been met. They keep repeating it every time as if they are somehow going to go back to it. And instead the inflation is moving away toward the 3 to 3 12% range. So it is for that reason that I think the Fed has to be very careful how to deal with it before inflation expectations get carried away and they can't bring it down again. >> Before we continue with the video, let's talk about your most important asset, your personal data and privacy. Now your personal data is constantly being collected and sold and exposed online from places like shady data broker sites and even big data breaches. So, your private information, like your name, address, and phone number, is out there on the internet, and it's easier to find than you actually think. That's why I recommend today's sponsor, Delete Me. It takes a few minutes to set up, and they handle the entire process. They find where your information appears, verify those listings, and submit removal requests to hundreds of data broker websites. They also continue monitoring over time since this data can resurface and reappear. I've been using it for over a year and they have reviewed over 325 listings for my information. The reports show exactly what was found and what was removed which makes the process transparent. Check it out now. Scan the QR code on the screen or go to jointdeleteme.com/david link in the description down below and use my code davidin for 20% off. Take control of your privacy today. Now back to the video. What other Fed tools uh are at their disposal for easing monetary policy? Should the other Fed governors vote to not lower rates? Can they do anything else to maintain easing? >> There are two major instruments. One is the rate increasing or decreasing and second is what the Fed does to the size of its balance sheet. Whether that is going to be increased or decreased with the passage of time. uh an increase in the Fed's balance sheet is considered to be an easing of policy. It typically goes hand inhand with a cut in interest rate. Whereas a reduction in the balance sheet, which is to say the Fed steps into the market uh and then says that they want to sell their securities and take in cash, that is considered contractionary or a hardening of policy. Now what Kevin Walsh has said is that he will make up for the lower interest rate by reducing the balance sheet of the Federal Reserve. Keep in mind what it is suggesting to you. Every time the Fed has tried to cut in to cut the balance sheet, it has happened twice before. once in September 2019 and a second time in March 2023 that they ran into difficulty with the cash shortage, a regional banking crisis and they quickly had to revert away from a quantitative tightening or balance sheet reduction to increasing the balance sheet again. Right now, this Fed, the outgoing Fed is actually increasing the balance sheet of the Fed and you are going to have Kevin Wash come in and reduce it. And the reduction typically gives rise to cash shortage because all the financial institutions have got used to a very easy Fed and they also know that they would get bailed out in case of difficulties as happened with the March 2023 banking crisis. all the all the depositors who were bailed out of Silicon Valley Bank, not just ones who were protected by the deposit insurance. >> I want to play for you a few clips of the FOMC uh conference itself. But let's talk about before we do that, let's talk about Kevin Worsh a little bit more. Um it's been brought to the public's attention during the uh the hearing uh Kevin Worsh's confirmation hearing. He was pressed several times about his family's relationship with Trump. He's married to Jane Lauder, who is a daughter of Ronald Lauder, billionaire heir to the Estee Lauder Empire. Ronald Lauder and Trump go back decades. They've been personal friends. Lauder has personally sponsored and donated to the Trump um uh campaigns. And so now the question is, is the Fed truly independent? The president literally appointed or nominated the son-in-law to a personal friend of his. Well, you can always have relationships because in camp you do nominate campaign contributors for instance, David, as an ambassador to a country to plump jobs. That by itself would not say to me that Kevin Walsh is not going to be an independent person. But I look at his past. I look at the fact that in 2010 2011 when he was a member of the board of governors, he was very hawkish. And in September of 2009, when we were still suffering the aftermath of the global financial crisis and when unemployment rate was still quite elevated, he was criticizing the Fed of which he was a part at that time for actually increasing the balance sheet and thought that the balance sheet should be reduced. That is a very hawkish position to take for him in the midst of the crisis. But last year he completely reversed and said federal interest the interest rates of the federal uh reserve board has to be reduced. Now how did he come to the conclusion? Very conveniently it was also the position taken by President Trump. So she has to get over the fact that he's not independent because of the fact that he changed his position. He has to convince everybody that it was not career advancement which lead him to change his mind that he really had a reason to do so and he has yet to prove that point. >> Let's play a few clips from the uh press conference from reporters. This one goes back to what I asked you earlier about whether or not the Fed is now more hawkish. Uh you answered that, but let's hear how uh Jerome Pow answered that. Take a listen. Are we right to assume that the hawkish outcome for the Fed is still one in which the committee just extends the pause in rate cuts? And to what extent is there a growing sense within the committee that monetary policy really isn't just restrictive at all right now? Um the economy is holding up relatively well despite this major energy shock. The unemployment rate has ticked lower. Inflation was moving sideways even before the war and is now moving higher. Um so so where is the committee at on that debate? where we're at is we think our pol really we think our policy rate is in a good place. Um if we need to hike, we will we will certainly signal that and we will and we will certainly do it. And if we need to to cut, then if it's appropriate to cut, then we'll we'll signal the opposite. I think we because we feel like we're we're in a good place to move in either direction. Um nobody's calling for a hike right now. >> No hike right now. But would the conditions be necessary? Will conditions be there for the Fed to seriously consider a hike later on in the year? Do you think? >> I think the conditions are already there for the Fed to consider a hike in interest rate with inflation going up. The reason they do not do that is once again presidential pressure. They they think staying at staying at the same position is being hawkish. I would say hawkish is when you actually increase the interest rate. Number one. Second, the Fed is also currently increasing the balance sheet which is also an easing measure and as long as that continues, it is going to be difficult to convince everybody that the Fed is being hawkish. So the change has to come in the future and if they do that uh as I said before they will incre incur the wrath of the president and whether they still going go ahead with it is the real question mark here >> what a hike or even just keeping rates steady would that damage the labor market the unemployment rate is at 4.3% it's low by historic standards but it's been rising uh the economy did gain some jobs in the last payroll numbers However, economists have described the current labor market as a no hiring, no firing phase. So, how weak or strong is the labor market in your assessment? >> The labor market, as you quite correctly said, has signs of weakness because there is very little of hiring that is taking place. And with the artificial intelligence coming and taking an important role in the economy, David, you're going to find the 20 to 25 year old people who are trying to enter the job force are going to have a very difficult time because people who are either legal assistants, computer assistants, medical assistants trying to get their first job are going to find AI replaces them and many of the jobs are going to go away. Here is the issue. Will if you cut interest rates by one quarter point or half a point, will you get the job that you didn't get before? My answer is that is a structural issue. When the structure does not permit you to get employment lower interest rates is not going to make up for that. It has to be through a reduction in tariffs. It has to be through investment incentives and which are very different from cutting interest rate. Right now the higher level of tariffs is affecting employment and so the employer is not going to hire more workers just because interest rates went down by a quarter point. So interest rate changes, balance sheet changes should be oriented only toward inflation control. Whereas you need fiscal policy by the US Treasury which should be used to direct employment and growth where the government wants it to go to. >> You wrote a couple of months ago that uh should Worsh take the easy way which is the path of least resistance and start uh delivering large front loaded rate cuts perhaps 50 basis points at his first FOMC meeting. Markets are likely to do the tightening for him. inflation expectations would rise and the yield curve would steepen. Do you still hold this view? This was written before the Iran war broke out and oil spiked. >> You uh I still hold that view and I think you mentioned it at the beginning of our discussion. >> You talked about how the 10-year yield is shot up today. It started to increase even before uh before the decision by the FOMC was announced. It happened before uh Powell spoke and you saw that going up and the reason for that is because the long end of the yield curve is not controlled by the Federal Reserve. So if in fact Walsh is going to cut interest rates in his new Fed then the yield curve is going to steepen the short end comes down and the long end goes up. Right now today, even the 2-year yield, which is supposed to be a predictor of the federal funds rate, actually rose. And the reason it rose along with the press conference is the fact that the market doesn't believe that the Fed can even cut rates given the circumstances with the oil and given what is happening to overall inflation. >> Okay, let let me play for you another clip from the Federal Reserve and we can react together. This one has to do with uh the bias towards cuts, which I alluded to earlier. Take a listen to Jabone Powell's comments. We'll react together. >> So, does the majority of the committee still have a bias towards cuts at this point or has the bias on the committee shifted away from cuts towards holding or hikes if that was needed? >> I so I think that you know the the center is moving toward a more neutral place and that's sort of what markets are saying too. I just think, you know, uh there's a lot of signaling going on when you change guidance like that. And so we we just I guess the major a majority of us didn't feel like we needed to send a signal on that right now. Uh and but maybe it'll come to that. And and the reason is because, you know, we're kind of waiting to see what happens with with events in the Middle East and what are the implications of those events for the US economy. So there was just a there's a group who feels like we don't need to be in a hurry to do that. We we get it and of course we will move to a hiking bias if we want to hike and we'll move to a new a neutral bias before that. But there was a difference over whether to do it at this meeting at at a meeting at which all but one of us agreed that that the that the rate decision was correct which was not to move. >> If somebody were to ask you Sri uh what the neutral rate should be for the Federal Reserve what how would you answer that question? I would answer that question by saying that the neutral rate should be quite a bit higher than where it is. What does that mean? It means that the federal funds rate today at between 3.5 and 3.75% range is not sufficiently restrictive. We talked about employment remaining relatively strong. economic growth continues and if that is the case you cannot argue that it is restrictive. Second, you have the stock market which has been doing extraordinarily well based on corporate earnings growth because of the uh optimism about the future. That also suggests that the interest rates are not restrictive enough or that the natural rate of interest should be higher than where it is today. This is a an observation by many people uh including this particular economist James Lavish on X. The Federal Reserve has been adding assets to its balance sheet in the last couple months adding about $200 billion of uh US treasuries back onto its balance sheet. Uh you'll recall that uh the end of QT was 2025, the end of 2025. Uh but how would you describe the current regime right now? Why do you think they're adding back assets and would you call this QE? uh I will call it QE even though the Federal Reserve says that they are not buying long-term issues. They are only buying short-term issues and therefore it is not QE or quantitative easing. I think that makes no sense to me. Quantitative easing is when you increase the balance sheet of the Fed no matter whether you do it with a shortdated assets or longdated assets. In either case, you put the equivalent amount of cash into the system and you make the situation easier. You put more cash into the hands of consumers and you're stimulating the economy. So that is what they are doing. You ask me also David why is it they do that? They are concerned that if they did not do that the cash reserves with the banks will go down significantly. That means there'll be a scramble for cash and short-term interest rate would surge. That's what happened in September 2019. They don't want a recurrence of that and that is why they are preempting it by increasing the balance sheet earlier on. And that says to me that they are caught in a trap. They cannot get out of it. They try to get out of it, but every time they do, they are worried about a cash crunch and they go back to quantitative easing. >> Do you think the addition of Fed assets to the balance sheet or treasuries to the balance sheet is contributing to the higher inflation print that we're seeing even though that the headline numbers are mainly driven by oil? But do you think under the surface quantitative easing as you describe it is contributing to inflation? >> Let's go back to history. Let's look at the last 5 years. Before the oil prices shot up, which is after February 28th when the Iran war began, inflation was already on its way up. For 5 years, we have not met the inflation target of 2%. And inflation, if anything, was rising to the 3% or higher level. That says to me that even without the war, we had inflation going up because of the fact of the quantitative easing taking place and because of the fact that interest rates were too low. So the evidence suggests that inflation was rising before and it says to me that the interest rate should have been increased even before the Iran war began. >> I'll play for you one final clip from the FOMC. This is Powell's assessment of the economy. Take a listen. >> How would you describe the economy outside of the misbehaving inflation? I mean, um, it's still awfully resilient given all of the blows. >> I don't know that you can be awfully resilient. So, it's actually quite resilient, I would say, because it's a positive thing if I can if I can have that amendment. Yeah, that the you know, growth is really solid across our economy. Some of that is um that consumer spending is hanging in pretty well. The the most recent data are good and some of it is just the apparently insatiable demand for data centers all over the United States. So a lot of uh business investment going into building data centers and every reason to think that that continues. So you've got an economy that's growing at 2% or better. PDFP which is private domestic final purp purchases that which is really a better signal of of uh of a momentum in the economy is actually higher than that. So that's you know that's a positive thing. >> Would you agree with that assessment three? >> I if if that is the case if Jerome Powell seriously believes that why is it that toward the end of 2025 they cut interest rates. They reduced interest rates three times because Powell said at that time that he is more concerned about employment than inflation. Turned out to be once again a wrong assessment. Inflation was the problem. Employment was not. Now he himself says that the economy is very strong. Employment is he considers as acceptable. Then why is it that interest rates are not being increased in order to bring the inflation down to target? because the Fed has essentially sidelined its inflation expectation. Put it aside because they can focus on growth and that's not what the Fed is supposed to do. >> Well, speaking of growth, this is the Atlanta Fed GDP now. It's currently at 1.2% for the latest um estimate for 2026 Q1 and it'll be updated um by tomorrow. It's down sharply from previous numbers as you can see. Now, important to know that chapter 11 filings across the country have al also risen something like 37% year-over-year. At what point would you start calling this a recession? Sri >> um well recession technical recession is supposed to be when you have two quarters backto back of negative GDP growth whether we actually reach it or not. uh there is a slowdown that is coming but here is a response to what you showed about the Atlanta Fed estimate David that is happening because of tariffs it is happening because of the Iran war and when you have those present I don't think you can offset that simply by cutting interest rates that is what we tried to do in the 1970s oil prices increased very sharply from 1973 onward Word. President Nixon along with author Burns, the chairman of the Federal Reserve, wanted to follow easy monetary policy in order to counteract the impact of higher oil prices. Effectively, what happened was it pushed you into a recession which was very severe and at the same time pushed up inflation as well. That is the risk that we want to avoid in the in the current situation. Let's move on to talk about the Iran war itself. The the fact that the economy as described by POW has not um is still quite resilient. Why do you think that is? People have been talking about how higher oil is going to cause demand destruction. POW commented that the latest uh consumer spending numbers are still strong. Why hasn't the uh consumer collapsed or faltered yet? uh it is not true of consumers as a whole. There is clearly an income distinction. The highlevel income and the super highlevel earners are actually doing very well because the stock market has been going up and they have enough cash to spend on luxury goods and they are doing very well indeed. If you look at the lower and middle inome groups, they are actually suffering the impact of higher prices. They are suffering the impact of the fact that employment has become harder to get. So the difference is that overall consumption spending is large but that is being pushed by higher income earners and so I would maintain that right now you do have the consumer weak at lower income levels. it is already showing up. >> So, summing up what you think the Federal Reserve is going to do and how the economy will progress in the next couple quarters into 2026, let's talk about some asset price uh performance expectations. Starting with bonds, do you expect the long end of the curve to continue going up? Um I think if if in fact as I expect Kevin Walsh at his first meeting in June is going to show that he's not cutting rates. He might if he were to say well I'm watching it. The oil prices are higher but I think I will cut in the future but I'm not going to do today. the bond yields will probably stabilize for that reason because the bonds are expecting him generally to be very doubbish. If he's not doubbish and he actually says he's going to pass, that's going to be good for bond prices, it is going to keep the bond yield down. However, if he finds that the president is pushing him to cut rates immediately and he maintains as he has said when he was looking for the job that cutting the balance sheet will make up for lower interest rates then the 10ear yield is going to go up. So the answer to your question I will be watching until his first meeting. I'll watching I'll be watching for his press conference and if he again indicates that he is ready to cut interest rates then I think that long end is going to go up in terms of yield. >> The Michigan consu uh University of Michigan consumer sentiment index is at an all-time historical low. Do you expect consumer spending which has thus far been quite resilient at least for the uh upper end uh of earners to to taper off a little bit and if so would that mean less discretionary spending and weaker discretionary spending stock performance? >> The upper end is probably going to continue to do well because they have enough of cash reserves. They are not going to be affected. The Michigan sentiment that you pointed to and you're showing on the screen actually reflects what the majority of the population which don't earn too high in income how they are fairing and I don't see the Michigan sentiment index moving up but at the same time I expect consumer spending to be strong which is what we have seen in the recent past. People say how do you put the two together? Because one of them refers to the high income group, the other one refers to the majority of people and how they feel about their living. >> And what about precious metals? Siri moved down during the start of the war. Uh so didn't react as some people would expect as a safe haven asset. What do you think sentiment towards gold will will be for the rest of the year? the once again I would have to defer and say I have to wait to see how Wash behaves in his first meeting. Let's say that he says he's not going to cut interest rates and he doesn't expect to cut rates at all in 2026. If the if he does that gold price may incur more of a hit may go down further because the dollar becomes an effective competitor to gold. People can say I will go into treasuries. I will go into US dollar denominated assets to take refuge. I don't need to go for gold. The reason why gold was doing well in the second half of 2025 is the push at that time for interest rates to remain low indefinitely and the president's criticism of uh uh of Powell for his for keeping interest rates constant. they were causing gold price to go up and the question is does wash continue with that policy or he if does he show as somebody said show a backbone and you're going to show some strength that will cause gold price to go down. So this is something you keep watch for the Fed's behavior before you decide on gold. >> Okay. And finally on the stock market the S&P is at 7100 points. This is the um this is an all-time high stark recovery since it went down following the start of the Iran war. Now Powell alluded to data center construction as being a significant part of uh investment income for companies. Do you expect AI and data center investments to continue pushing up the stock market for the remainder of the year? I have concerns because I I lived through the 1999 situation when you had the dot boom and people said any company with a com after it nothing can ever go wrong with it and then you had the stock market collapse starting about March of 2000 and we had the recession of 2001. What is the parallel here? uh data centers are going to do well, AI is going to do well, but not everybody who calls himself a uh and data center is going to do well. And that is similar to what we had before. There's an excess of investment in data centers, excess of investment in artificial intelligence and quite some of that is going to be wasteful and so I think security selection is going to be very important. Another way of saying the whole asset class is not going to do well only some of them will and that's is going to create a problem as well for investors and for the overall stock market. >> Any particular sectors you think might do better uh considering Fed policy which we talked about considering the ongoing war in Iran that has not yet been resolved considering higher oil. What would you overweight in the S&P? uh and energy I think has clearly more uh leeway to go up because oil prices are going to increase further. So I think they are going to do well. Uh if the war continues defense related industries again should do um to should perform better than the others. Other than that I would say look at basic value stocks. Healthcare is an area which should do well. um technology, AI, be very careful where you invest. They've gone up substantially and they are the ones who can be vulnerable to a decline. >> Thank you very much. S tell us where we can find your work and uh what you're working on right now. Um well on Twitter or X I go by Shriek S R I K Global and then I also put out on a Substack called Sri Economics every Saturday and this deals with the Fed and interest rates and that's something for your listeners also your watchers uh to follow as well. >> All right, excellent. We'll put the links down below. So please do make sure to follow Sri Kumar and uh his Substack and writing there. Thank you very much. We'll speak again soon. Sri, take care for now. >> Thank you, David. Good to talk with you as always. >> Good to talk with you as well. Thank you for watching. Don't forget to like, subscribe,