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Why the Fed isn't cutting rates despite cooling inflation · The Financial Exchange Show

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  Speaker 1: Armstrong and Mark Vandetti.
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  Speaker 2: Good morning, Mark morning, Tucker, Good morning listeners. We were
• 1:21
  Speaker 2: heading into a shortened trading week. Marks are closed this
• 1:24
  Speaker 2: Thursday for the Juneteenth holiday. Equities are down in early
• 1:28
  Speaker 2: trading on a few different pieces of news stories, although
• 1:32
  Speaker 2: they were off more in pre markets. We have President
• 1:34
  Speaker 2: Trump departing the G seven early on. I guess more
• 1:39
  Speaker 2: just rumors of tensions and resolutions in the Middle East,
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  Speaker 2: although it's unclear which direction the President is trying to
• 1:45
  Speaker 2: go on that and if that was the real reason
• 1:48
  Speaker 2: that he left the G seven. We have retail sales
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  Speaker 2: that were released this morning at eight point thirty. We
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  Speaker 2: also had the kickoff of the two day Federal Reserve
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  Speaker 2: meeting occurring, the press conference on which will be occurring
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  Speaker 2: tomorrow at two thirty pm. Their decision itself will be
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  Speaker 2: released at two pm. We'll be talking about all of
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  Speaker 2: those throughout the show. But I think where do you
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  Speaker 2: want to start mark, Either retail sales or tension in
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  Speaker 2: the Middle East.
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  Speaker 3: Yeah, the news is retail sales, I think.
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  Speaker 2: So let's go there. Eight thirty am you had retail
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  Speaker 2: sales get released and they were pretty bad. Expectations were
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  Speaker 2: for a decline in retail sales. Why it's been estimated
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  Speaker 2: a lot of people pulled those purchases forward in February, March,
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  Speaker 2: and April in reaction to pending tariffs that were to
• 2:38
  Speaker 2: go in place. So whether it was shoes, cars, all
• 2:40
  Speaker 2: sorts of things, we saw an uptick in those retail
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  Speaker 2: sales numbers earlier this year, and this represented a pretty
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  Speaker 2: big draw down from those numbers, just to give you
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  Speaker 2: a sense of it. In February we saw a point
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  Speaker 2: one two percent mon month increase in retail sales, point
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  Speaker 2: three six percent in March April, you know, showed a
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  Speaker 2: decline off those really hot numbers. But the main numbers
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  Speaker 2: that we saw were for a decline of zero point
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  Speaker 2: nine percent month over month on the retail sales numbers,
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  Speaker 2: still better than where we were a year ago. But
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  Speaker 2: even if you strip autos out of there, which we
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  Speaker 2: often do just to you know, there's such massive purchases
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  Speaker 2: that they often get stripped at and looked at separately,
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  Speaker 2: sales still fell a zero point three percent, which was
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  Speaker 2: once again worse than estimates here. And so I don't
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  Speaker 2: think this falls way out of line with what we've
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  Speaker 2: been hearing about the consumer and what we've been hearing
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  Speaker 2: from people generally, which are, hey, you know, we're feeling
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  Speaker 2: a bit cash strapped, but certainly not a great indicator
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  Speaker 2: of where things are right now for the average consumer
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  Speaker 2: and the average and the average retailer at the moment. Yeah.
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  Speaker 4: I don't think this is indicative necessarily of a change
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  Speaker 4: in the trend in consum sumption spending.
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  Speaker 3: I would for economic growth.
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  Speaker 2: This could just be a snapback.
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  Speaker 4: I yeah, I think that's I think that's probably the
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  Speaker 4: right read. At least people that specialize in this series
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  Speaker 4: seem to think that's the right way to think about it.
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  Speaker 4: It is kind of all little for me, though. It
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  Speaker 4: underscores how helter skelter tariff policy FUTS is with expectations
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  Speaker 4: what we think.
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  Speaker 2: Glad you went with FUTS is there. It's a bit nervous.
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  Speaker 5: My finger was hovering.
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  Speaker 2: There's there's another start with FUTS that I was worried
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  Speaker 2: you might go.
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  Speaker 3: And I can't imagine what you mean by that.
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  Speaker 2: I'm glad you went in that direction.
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  Speaker 4: It it interferes with people's plans. We don't know what
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  Speaker 4: the tariffon cars is going to be in a month.
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  Speaker 4: We don't know what the tariffon you name it is
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  Speaker 4: going to be. And if you're a producer, if you're
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  Speaker 4: a business, it's it's a lot worse. The price you
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  Speaker 4: pay for your inputs is more uncertain, far more uncertain
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  Speaker 4: than is typical. So for me, this underscores how erratic
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  Speaker 4: tariff policy translates into erratic economic data. And until there's
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  Speaker 4: a resolution to this, and there may not be, this
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  Speaker 4: may go on for years, we're going to get, on average,
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  Speaker 4: more volatile and lower growth.
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  Speaker 2: Yeah, you know, for retailer or for consumers rather, it
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  Speaker 2: just hasn't been that big of an issue. We have
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  Speaker 2: not seen inflation spike during any of this, although that
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  Speaker 2: could come later. You know, there has been some pulling
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  Speaker 2: forward of purchases, but for retailers themselves who have been
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  Speaker 2: dealing with these different teriff rates and trying to guess
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  Speaker 2: what they're going to end up paying, it's been pretty ugly.
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  Speaker 2: We had the announcement, I think late last night that
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  Speaker 2: at home, a real discount retailer in the home to
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  Speaker 2: corese spaces declaring bankruptcy and liquidating in some cases. We
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  Speaker 2: have one nearby to home, and my wife pointed it
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  Speaker 2: out to me, and so I think regardless of where
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  Speaker 2: those terrifts go, I think there could be still, you know,
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  Speaker 2: bodies pulled out here from retailers that aren't able to
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  Speaker 2: handle the uncertainty of the policy. Where I take some
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  Speaker 2: degree of encouragement is that the trend line on all
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  Speaker 2: the policy for the last several months now has been
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  Speaker 2: generally towards fewer tariffs. I fully acknowledge that could fully
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  Speaker 2: reverse itself sometime soon, but I think that's been my takeaway.
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  Speaker 2: And whether it's because the Trump administration sees them as
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  Speaker 2: an unsuccessful tool that hurts the markets, whether it's because
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  Speaker 2: they are acknowledging that they might not be legal in
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  Speaker 2: some way and the Supreme Court's about to shut them down.
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  Speaker 2: I'm not going to try and put myself in the
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  Speaker 2: shoes of the white officials in the White House. I
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  Speaker 2: don't really know, but that has been the trend line
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  Speaker 2: over the last several weeks, and we continue to hear
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  Speaker 2: language from President Trump of de escalation on that front.
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  Speaker 4: Yeah, the policy uncertainty remains, though, the most important precondition
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  Speaker 4: for economic growth. And I'm not just talking about today,
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  Speaker 4: I'm talking about at any point in history. If you
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  Speaker 4: look at prosperous civilizations or periods of prosperity. They've generally coincided,
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  Speaker 4: not coincidentally, with stability, stability in terms of norms and
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  Speaker 4: policies and regimes. And I mean, you name it, whether
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  Speaker 4: it's you know, ancient times or the British Empire that
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  Speaker 4: ensured peace, stability, prosperity follows. We are entering not just
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  Speaker 4: here but globally, I think because the things that are
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  Speaker 4: happening here are happening elsewhere, to the rise of populism,
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  Speaker 4: hostility to free trade, and some other common threads, we're
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  Speaker 4: entering a period of policy and institutional uncertainty, one that
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  Speaker 4: none of us are, at least not me, are accustomed to.
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  Speaker 4: That probably means and I hate to keep beating the
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  Speaker 4: same drum, but I think it's all that matters for
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  Speaker 4: long term investors. Lower economic growth, more volatile economic growth,
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  Speaker 4: and thus lower economic growth on average, and probably lower
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  Speaker 4: returns from riskier assets to because their returns are tied
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  Speaker 4: to economic growth. So I'm trying to interpret rather than
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  Speaker 4: get rattled by the day to day because it's very
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  Speaker 4: disconcerting the news is coming out as fast and furious
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  Speaker 4: tariff's are on tariffs are off. War in the Middle East,
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  Speaker 4: We're voting with Russia at the UN We're gonna sanction Russia.
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  Speaker 4: We're not gonna I don't know what way, what end
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  Speaker 4: is up right now. I do know that the fact
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  Speaker 4: that I don't know it in spite of my best efforts,
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  Speaker 4: and maybe I'm worse than the average person at interpreting them,
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  Speaker 4: I don't know. But this uncertainty will have real economic
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  Speaker 4: consequences in the medium and long term and maybe even
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  Speaker 4: in the short term. Is as witnessed by today's retail
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  Speaker 4: sales report.
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  Speaker 2: As we sometimes do getting into the weeds of this report,
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  Speaker 2: you did see motor vehicle and parts dealers. Their sales
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  Speaker 2: are down three and a half percent month over month.
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  Speaker 2: When you look at gas stations and other area that's
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  Speaker 2: been a drag on this report for several months given
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  Speaker 2: gas prices, those were down two percent month over month.
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  Speaker 2: And then interestingly, you had clothing retailers actually doing fairly
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  Speaker 2: well during the most recent where we're we with clothing
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  Speaker 2: up zero point eight percent, sporting goods up one point
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  Speaker 2: three percent, miscellaneous store retailers I'm thinking that's something like
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  Speaker 2: seven to eleven and those types of stores up to
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  Speaker 2: point nine percent, but food service and drinking places seeing
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  Speaker 2: a point nine percent hit in the month of May
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  Speaker 2: compared to April, which I don't really look at that
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  Speaker 2: as a tariff related one. That one speaks more to
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  Speaker 2: me from a customer customer demand for getting out there
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  Speaker 2: is weakening in some degree. Again, when you strip out
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  Speaker 2: you know, the gas piece, when you strip out the
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  Speaker 2: motor vehicle piece, we are still in a weaker point
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  Speaker 2: than we were last month. Those are far more muted,
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  Speaker 2: but we are still in a weaker place than we
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  Speaker 2: were from the retail consumer than we were in the
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  Speaker 2: month of April. And so again probably to me, just
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  Speaker 2: a snap back to the trend where we were beforehand.
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  Speaker 2: With you know, when you dramatically increase these sales in
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  Speaker 2: March because of concerns about tariffs, then you have a
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  Speaker 2: bit of a snapback when that comes back down to earth.
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  Speaker 2: But you have to see this play out for a
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  Speaker 2: few more months before you decide if there's any sort
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  Speaker 2: of trend.
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  Speaker 4: Yeah, let's see what this does to estimates of current
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  Speaker 4: GDP growth, real time estimates like GDP now and some
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  Speaker 4: of the others. There are people with big, sophisticated models
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  Speaker 4: of which there is a component. Let's see what this
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  Speaker 4: implies for that.
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  Speaker 2: Yeah, and the bigger question is, hey, you know, for
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  Speaker 2: the last year or so, we've seen retail sales generally
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  Speaker 2: bumping up at three to three and a half percent.
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  Speaker 2: If you exclude the you know, the downward effective gasoline,
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  Speaker 2: it's been even stronger at four point one percent. Can
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  Speaker 2: that continue going forward? Is the more important question, because
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  Speaker 2: that's what we'll drive GDP, It'll drive earnings growth, it'll
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  Speaker 2: drive a whole lot of things. And it's also what
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  Speaker 2: everybody's been focusing on is what is the state of
• 10:45
  Speaker 2: the consumer given everything that's been going on. Let's take
• 10:49
  Speaker 2: a quick break. When we come back, more on the
• 10:51
  Speaker 2: Iran Israel potential truce and ongoing tensions. That's next here
• 10:55
  Speaker 2: on the Financial Exchange.
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  Speaker 2: Market Tucker, do you too know how the conflict between
• 12:02
  Speaker 2: Iran and Israel is going to resolve itself? No? No,
• 12:08
  Speaker 2: don't so yeah, I don't either. Obviously, the President left
• 12:12
  Speaker 2: the G seven meeting early, allegedly to go work on
• 12:17
  Speaker 2: that agreement and find some resolution. I think I'm willing
• 12:20
  Speaker 2: to admit that I have no special advantage on figuring
• 12:23
  Speaker 2: out how that's going to work itself out. But the
• 12:26
  Speaker 2: thing that matters with all of this, I think is
• 12:28
  Speaker 2: very clear, at least Sorry, if you are living in
• 12:32
  Speaker 2: Israeli era or Iran, what matters to you about this
• 12:35
  Speaker 2: is your safety and survive, you know, surviving the crisis.
• 12:39
  Speaker 2: For US Americans that live here domestically, we care probably
• 12:42
  Speaker 2: a little bit about that, and then also about the
• 12:44
  Speaker 2: market and economic effect. I was being a little bit
• 12:46
  Speaker 2: heartless there, so I tried to try to have some
• 12:49
  Speaker 2: sense of, you know, actually calling out the human side
• 12:53
  Speaker 2: of this. Oil prices today are moving up again. We've
• 12:56
  Speaker 2: got a West Texas crew sitting at seventy three bucks
• 12:59
  Speaker 2: a barrel. Let's up to and a quarter percent after
• 13:02
  Speaker 2: Trump pretty much President Trump pretty much called for the
• 13:05
  Speaker 2: evacuation of Tehran.
• 13:06
  Speaker 3: Six million people in the city of Tehran.
• 13:08
  Speaker 2: You are currently seeing accidents all out of the one
• 13:12
  Speaker 2: highway that goes in and out of this out of
• 13:14
  Speaker 2: the city of Tehran. It's it's been turned into a
• 13:18
  Speaker 2: one direction highway. But obviously, when you have six million
• 13:21
  Speaker 2: people trying to flee a city, they run out of gas,
• 13:23
  Speaker 2: their car break down, breaks down, you get an accidents.
• 13:26
  Speaker 2: It's creating a crisis in and of itself. Here, let's
• 13:32
  Speaker 2: hone in on, you know, a couple potential outcomes here.
• 13:36
  Speaker 2: One FEDS in their meeting process right now, what does
• 13:41
  Speaker 2: this do to influence anything that they are doing? Because
• 13:44
  Speaker 2: I would say not really front and center, but obviously
• 13:47
  Speaker 2: it is the last time there was a global war breakout.
• 13:50
  Speaker 2: The FED specifically spoke to it during their meeting. That
• 13:53
  Speaker 2: was the Russian invasion of Ukraine. How does the Fed,
• 13:56
  Speaker 2: you know, take this one and look at the impact.
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  Speaker 4: Well, on the surface, the inflation situation looks stable, certainly
• 14:03
  Speaker 4: much better than it did a couple of years ago.
• 14:05
  Speaker 4: We got a report last week that told us in
• 14:06
  Speaker 4: the last year, headline inflation all items is up about
• 14:11
  Speaker 4: two point one three percent. I meant, just round up
• 14:13
  Speaker 4: and call it shour and a half, much better than
• 14:16
  Speaker 4: the nearly nine percent that we experienced in mid twenty
• 14:19
  Speaker 4: twenty three. Was twenty twenty two, excuse twenty two, yep.
• 14:25
  Speaker 4: So where are we today? Inflation seems to have returned
• 14:30
  Speaker 4: to a level that's more or less consistent with the
• 14:32
  Speaker 4: Fed's objective of low inflation. Is it stable though? This
• 14:37
  Speaker 4: is where the FED probably has doubts. There are measures
• 14:40
  Speaker 4: of underlying inflation, which tries to get at the trend
• 14:43
  Speaker 4: in inflation, which is very hard to do in real time.
• 14:45
  Speaker 4: That suggests inflation remains elevated somewhere in the threes, not
• 14:48
  Speaker 4: on the twos. That's a function of how hot the
• 14:51
  Speaker 4: economy is running relative to its potential. So you've got
• 14:54
  Speaker 4: that issue elevated. I'll just call it elevated core inflation.
• 14:58
  Speaker 4: FED is well aware of this. Another recent, more recent
• 15:01
  Speaker 4: problem is that inflation expectations have been rising, and when
• 15:04
  Speaker 4: people think prices are going to go up more than
• 15:07
  Speaker 4: say the pace that they've been going up over the
• 15:09
  Speaker 4: past several months or year or whatever, they act accordingly.
• 15:12
  Speaker 4: That makes to some degree inflation expectations self fulfilling. Rising inflation.
• 15:18
  Speaker 4: Rising expected inflation also decreases the real that is, the
• 15:22
  Speaker 4: after inflation FED funds rate. So it may seem like
• 15:25
  Speaker 4: FED policy is too tight, but when inflation expectations go up,
• 15:28
  Speaker 4: FED policy gets looser without the FED doing anything. Compound
• 15:33
  Speaker 4: those with war in the Middle East, which historically, even
• 15:36
  Speaker 4: though our economy is less oil dependent than it was
• 15:38
  Speaker 4: in the nineteen seventies, historically war in the Middle East
• 15:41
  Speaker 4: is exacerbated as amplified inflationary tendencies in the economy. And
• 15:46
  Speaker 4: then on top of all that, you've got tariffs, which
• 15:48
  Speaker 4: will raise average prices at least for a time whatever
• 15:52
  Speaker 4: politicians say, it absolutely will, it has to. That's the
• 15:55
  Speaker 4: whole point of tariffs. So you've got these variables. I'll
• 15:59
  Speaker 4: to say that in flux right now, but not exactly
• 16:03
  Speaker 4: pointing in terms of the direction in which they're going,
• 16:07
  Speaker 4: pointing to being helpful for inflation that the Fed's dealing with,
• 16:09
  Speaker 4: which is why they're not eager to lower their target
• 16:13
  Speaker 4: interest rate.
• 16:14
  Speaker 2: I'm not going to try and draw comparisons between today's
• 16:18
  Speaker 2: inflation outlook and twenty twenty two is inflation outlook. I
• 16:20
  Speaker 2: think it's fair to say that they are quite a
• 16:23
  Speaker 2: bit different. You know, March of twenty twenty two compared
• 16:26
  Speaker 2: to June of twenty twenty five, would you generally agree.
• 16:29
  Speaker 3: The out loud or the status or the state of things?
• 16:32
  Speaker 4: See?
• 16:33
  Speaker 2: I guess both the state of things in the outlook on.
• 16:36
  Speaker 3: Yeah, the situation was very grim. Then.
• 16:38
  Speaker 4: We didn't know that inflation was going to come down
• 16:41
  Speaker 4: without significant economic pain because that had never happened before.
• 16:44
  Speaker 4: So there was a lot of talk about how much
• 16:45
  Speaker 4: unemployment would have to go up to get inflation down.
• 16:48
  Speaker 4: As it turns out, favorable supply shocks I e. Luck
• 16:51
  Speaker 4: largely did the job for us.
• 16:53
  Speaker 2: One of the key mistakes that I think J. Powell
• 16:56
  Speaker 2: made in twenty twenty two was not raising rates fast enough,
• 17:01
  Speaker 2: and specifically noting that the Russian invasion of Ukraine injected
• 17:06
  Speaker 2: uncertainty into their outlook on inflation, where As I feel
• 17:10
  Speaker 2: as though, in hindsight it was only one thing that
• 17:13
  Speaker 2: that could cause, which was higher inflation. Right when Russia
• 17:17
  Speaker 2: invaded Ukraine, it seemed very obvious, at least in hindsight,
• 17:20
  Speaker 2: that hey, you cut off a bunch of the world's
• 17:22
  Speaker 2: food supply, and yeah, prices are going to continue to
• 17:26
  Speaker 2: go up higher. Do you see any of that uncertainty
• 17:29
  Speaker 2: coming from J. Powell on this one, Like, is there
• 17:32
  Speaker 2: any argument that war between Israel and Iran can bring
• 17:37
  Speaker 2: prices down or you know, change the status of upward inflation?
• 17:42
  Speaker 2: I would think no. That seems one directional to me
• 17:46
  Speaker 2: is if this escalates further, oil prices go up and
• 17:51
  Speaker 2: it makes the case for the Fed lowering rates even weaker.
• 17:55
  Speaker 2: I agree, Okay, I just I look at that as hey,
• 17:57
  Speaker 2: this was a big mistake on the last big war
• 18:00
  Speaker 2: that broke out Somewhere was the FED saying, eh, you know,
• 18:03
  Speaker 2: we were going to raise rates, but this war in
• 18:04
  Speaker 2: Ukraine and Russia seems to change our opinion on things.
• 18:07
  Speaker 2: We're gonna hold off and wait to see how that
• 18:09
  Speaker 2: plays out. That looked like a big mistake in hindsight.
• 18:12
  Speaker 4: The FED is always trying to balance forces that will
• 18:15
  Speaker 4: push prices up against the forces that will push unemployment up.
• 18:18
  Speaker 4: Those two things are intention It's got to make judgment calls.
• 18:21
  Speaker 4: It arguably made the wrong judgment call in early twenty
• 18:24
  Speaker 4: twenty two. It could have prevented inflation from going to nine.
• 18:28
  Speaker 4: It might have only.
• 18:29
  Speaker 2: Put it got to seven rate.
• 18:31
  Speaker 3: It's exactly what I was gonna say.
• 18:34
  Speaker 4: Would that have been worth the trade off of unemployment
• 18:36
  Speaker 4: that stayed at eight or nine?
• 18:39
  Speaker 3: That is the choice before the Fed. It'll be there.
• 18:43
  Speaker 4: Unfortunately, the menu that they're facing again at some point
• 18:45
  Speaker 4: in the near future, it looks like Yeah.
• 18:49
  Speaker 2: So we mentioned the Fed quite a bit here. Because
• 18:52
  Speaker 2: the meeting is ongoing, they will be looking at all
• 18:55
  Speaker 2: of this. There is pressure, renewed pressure coming from the
• 18:58
  Speaker 2: White House two lower interest rates once again. We'll be
• 19:01
  Speaker 2: talking about that a bit more too. But I think
• 19:04
  Speaker 2: what you are likely to hear from j. Powell tomorrow
• 19:07
  Speaker 2: is a very clear message labor market, labor market strong.
• 19:13
  Speaker 2: The very clear messages. Nobody knows any nobody knows not
• 19:15
  Speaker 2: just the labor market remains fine, though showing cracks in
• 19:20
  Speaker 2: the foundation, and they're still risks to the upside of
• 19:22
  Speaker 2: inflation given everything going on. So we're not moving anything
• 19:25
  Speaker 2: quick break Wall Street watches Next.
• 19:40
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:43
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:47
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall Street.
• 19:53
  Speaker 1: Watch a complete look at what's moving market so far
• 19:56
  Speaker 1: today right here on the Financial Exchange Radio Network.
• 20:00
  Speaker 5: After yesterday's gains, markets today are modestly lower as Wall
• 20:04
  Speaker 5: Street continues to keep a close eye in developments between
• 20:07
  Speaker 5: Israel and Iran. Investors are also sifting through a week
• 20:10
  Speaker 5: May retail sales report where retail sales fell zero point
• 20:14
  Speaker 5: nine percent last month, worse than estimates of a drop
• 20:18
  Speaker 5: of zero point six percent. Right now, the Dow is
• 20:20
  Speaker 5: off by forty two points s and P five hundred
• 20:24
  Speaker 5: is down a quarter percent, and the Nasdaq is down
• 20:26
  Speaker 5: by a third of a percent. Rusted two thousand is
• 20:29
  Speaker 5: off by three tenths of one percent. Ten year treasure
• 20:32
  Speaker 5: reeled down by two basis points now at four point
• 20:35
  Speaker 5: four to two percent, and crude oil up over two
• 20:39
  Speaker 5: and a half percent higher, trading at seventy three dollars
• 20:41
  Speaker 5: and sixty seven cents a barrel. Solar stocks taking a
• 20:45
  Speaker 5: big hit today after the Senate's version of Trump's tax
• 20:48
  Speaker 5: bill would phase out renewable energy incentives. En Phase Energy,
• 20:53
  Speaker 5: First Solar, and sun Run among the biggest losers in
• 20:56
  Speaker 5: that sector today. Meanwhile, home builder Lennar posted mixed quarterly
• 21:01
  Speaker 5: results where its revenue came in stronger than expected, sending
• 21:04
  Speaker 5: that stock up by two percent. Elsewhere, Kraft Heinds set
• 21:07
  Speaker 5: of plans to remove artificial dies from its US products
• 21:10
  Speaker 5: before the end of twenty twenty seven. The move comes
• 21:13
  Speaker 5: as the Trump administration is pushing to strip artificial dies
• 21:16
  Speaker 5: from the US food supply. Craft Heind shares are up
• 21:20
  Speaker 5: nearly one percent after its ten percent leap yesterday. Roku
• 21:25
  Speaker 5: shares are down modestly today after Loop Capital upgraded the
• 21:28
  Speaker 5: streaming platform stock to buy from hold, and also increased
• 21:33
  Speaker 5: its price target to one hundred dollars from eighty. Yesterday's
• 21:36
  Speaker 5: games were driven by Roku's new exclusive partnership with Amazon
• 21:41
  Speaker 5: pharmaceutical company Eli Lilly agreed to buy gene editing startup
• 21:45
  Speaker 5: Verve Therapeutics for about one billion dollars. Verve shares are
• 21:49
  Speaker 5: surging seventy five percent on that news, and the Wall
• 21:52
  Speaker 5: Street Journal reported that tensions between Microsoft and OpenAI have
• 21:56
  Speaker 5: reached a boiling point over the future of their AI
• 22:00
  Speaker 5: A partnership. Microsoft shares are down by about a half
• 22:02
  Speaker 5: a percent.
• 22:03
  Speaker 3: I'm Tucker Silvan.
• 22:04
  Speaker 5: That is Wallstree watch Mark.
• 22:07
  Speaker 2: Earlier this week, the President was quoted saying, I would
• 22:11
  Speaker 2: like to get this guy to lower interest rates because
• 22:13
  Speaker 2: if he doesn't, we have to pay. What he is
• 22:16
  Speaker 2: referring to there is the cost of our national debt,
• 22:19
  Speaker 2: which I don't have the current tally on. Hold on,
• 22:22
  Speaker 2: let me get the debt clock as you play the
• 22:26
  Speaker 2: TTOK clock. Hold on. The US national debt as of
• 22:31
  Speaker 2: this moment sits at thirty almost thirty seven trillion dollars
• 22:35
  Speaker 2: in total encounting. And what he's referring to there is, Hey, yeah,
• 22:42
  Speaker 2: if you could find a way to bring down the
• 22:43
  Speaker 2: interest rates on new debt that we have to issue,
• 22:46
  Speaker 2: such as thirty year treasury bonds, then you would save
• 22:50
  Speaker 2: a lot of money on the interest payments going forward.
• 22:53
  Speaker 2: If we could find a way to, say, get the
• 22:55
  Speaker 2: ten year treasury yield, which is hanging out in the
• 22:58
  Speaker 2: mid fours down to the mid twos, that is true.
• 23:01
  Speaker 2: It's also has nothing to do with what the Federal
• 23:03
  Speaker 2: Reserve does. And so I think we have to get
• 23:05
  Speaker 2: a bit technical here for a moment and talk about
• 23:08
  Speaker 2: what it is that the Federal Reserve does and does
• 23:12
  Speaker 2: not do, for which I apologize, but I think it's
• 23:14
  Speaker 2: important to actually understand this stuff. So when we talk
• 23:17
  Speaker 2: about the FED and their interest rates setting tools, they
• 23:22
  Speaker 2: are currently targeting an interest rate of somewhere between four
• 23:26
  Speaker 2: and a quarter and four and a half percent. They
• 23:28
  Speaker 2: don't even target a precise interest rate. They give a
• 23:31
  Speaker 2: range of, Hey, this is where we're trying to keep
• 23:34
  Speaker 2: interest rates. What interest rates are they referring to when
• 23:36
  Speaker 2: they talk about the FED.
• 23:37
  Speaker 4: It's called the Fed funds rate. They also control another
• 23:40
  Speaker 4: called the discount rate. We don't have to talk about that.
• 23:43
  Speaker 4: Fed funds is the important rate. It's the rate that
• 23:45
  Speaker 4: banks lend to one another at over very short term
• 23:48
  Speaker 4: periods of time, like overnight, so that they can meet
• 23:51
  Speaker 4: their reserve requirements. And as you say, the FED targets
• 23:54
  Speaker 4: the rate because it can't control interest rates, but it
• 23:56
  Speaker 4: can control the money supply, so it'll print when a
• 23:59
  Speaker 4: FED wants the lower rates, it prints the money up
• 24:02
  Speaker 4: and it credits that money to banks balance sheets, which
• 24:05
  Speaker 4: they in turn can loan to other banks. And the
• 24:08
  Speaker 4: more they've got on their balance sheets which the FED
• 24:10
  Speaker 4: can infuse with cash, then it prints the lower the
• 24:13
  Speaker 4: rate that they charge one another for these overnight loans.
• 24:16
  Speaker 4: That's the federal funds market now.
• 24:18
  Speaker 2: At times in the past, is it fair to say
• 24:20
  Speaker 2: during crisis the FED has also targeted bringing down some
• 24:23
  Speaker 2: longer term interest rates like when.
• 24:25
  Speaker 4: Look, the Fed can target any nominal quantity. Sorry that
• 24:28
  Speaker 4: sounds a little technical. They could target the money supply
• 24:30
  Speaker 4: they did in the late seventies relationships broke down that
• 24:33
  Speaker 4: didn't work out well. They could target stock prices. They
• 24:36
  Speaker 4: could target CPI, which they do in directly.
• 24:39
  Speaker 3: The point is the.
• 24:39
  Speaker 4: FED decides what to what their goals should be, and
• 24:43
  Speaker 4: how that goal should be defined and how they operationalize it. So, yes,
• 24:47
  Speaker 4: the FED after World War Two held down long term
• 24:49
  Speaker 4: rates by buying longer term securities at two to two
• 24:52
  Speaker 4: and a half percent or something on the ten year
• 24:55
  Speaker 4: was the target. In the modern era, the FED target
• 24:58
  Speaker 4: has been Fed funds, not because it's easy to target it,
• 25:02
  Speaker 4: but because that has the tightest relationship with what they
• 25:05
  Speaker 4: really want to try to control which is overall demand
• 25:09
  Speaker 4: in the economy.
• 25:09
  Speaker 2: So practically speaking, when the Fed does bring down rates,
• 25:12
  Speaker 2: what we're talking about is them targeting a very short
• 25:15
  Speaker 2: term rate that is used to base a lot of
• 25:18
  Speaker 2: different things on such as home acuity, lines of credit.
• 25:22
  Speaker 2: I've seen margin loans and someone's client portfolio be based
• 25:26
  Speaker 2: off FED funds rate.
• 25:28
  Speaker 4: Yeah, prime rate, I think go moves one for one
• 25:30
  Speaker 4: with FED funds. So if you have seen that, if
• 25:33
  Speaker 4: your reference rate is prime, it's going to move one
• 25:36
  Speaker 4: for one with FED funds.
• 25:38
  Speaker 2: And those have moved down over the course of the
• 25:40
  Speaker 2: last year, and therefore other things like short term CDs
• 25:44
  Speaker 2: and money market rates also moved down with those. If
• 25:49
  Speaker 2: the Fed were to do what the President is asking here,
• 25:52
  Speaker 2: which is, you know, a demand for lower interest rates,
• 25:55
  Speaker 2: I think there is a very compelling argument that what
• 25:58
  Speaker 2: you would get is the opposite. Do you agree? Am I?
• 26:03
  Speaker 2: Am I?
• 26:04
  Speaker 3: You know?
• 26:04
  Speaker 2: Am I? You know? Spitting into the wind here? Am
• 26:06
  Speaker 2: I completely off base on this? Or So Let's say
• 26:09
  Speaker 2: that the Fed tomorrow during their policy says, yeah, we
• 26:12
  Speaker 2: were targeting four in a quarter to four and a half,
• 26:14
  Speaker 2: but the President really wants us to lower rate. So
• 26:16
  Speaker 2: we're bringing that down to two and a quarter two
• 26:18
  Speaker 2: and a half percent. I want to run through the
• 26:20
  Speaker 2: sure market.
• 26:21
  Speaker 4: Infer to do that, you need a framework, and this
• 26:23
  Speaker 4: is where you get into a little bit of finance
• 26:25
  Speaker 4: theory and economics. You can't avoid it if you assume
• 26:28
  Speaker 4: longer term Let's just suppose there are two interest rates
• 26:30
  Speaker 4: in the economy. A short term rate let's call that
• 26:32
  Speaker 4: FED funds, because that's real. A longer term rate, let's
• 26:36
  Speaker 4: call it the ten year treasury. What's going to happen
• 26:38
  Speaker 4: to ten year treasury if I, as you say, lower
• 26:40
  Speaker 4: Fed funds? What is the ten year treasury? What what
• 26:42
  Speaker 4: comprises it? It's the sum of expected future short term rates. Naturally,
• 26:50
  Speaker 4: finance people call that the expectations theory of the They
• 26:54
  Speaker 4: of the of the treasury.
• 26:55
  Speaker 3: You'l curve.
• 26:56
  Speaker 4: We're just assuming in this simple example there's only one
• 26:58
  Speaker 4: long term interest rates. So if by lowering short term
• 27:02
  Speaker 4: interest rates, the Fed overheats the economy, inflation expectations will
• 27:05
  Speaker 4: go up.
• 27:06
  Speaker 3: That will raise future.
• 27:08
  Speaker 2: Why would the Fed cutting rates heat up inflation?
• 27:11
  Speaker 4: I've got Let's assume the economy's running at capacity today
• 27:14
  Speaker 4: on employments at four point two percent GDP had been
• 27:16
  Speaker 4: growing strongly until the first quarter when it reversed. But
• 27:19
  Speaker 4: let's suppose we're back on trend. There's no obvious reason
• 27:23
  Speaker 4: for the Fed to goose demand right now, which is
• 27:25
  Speaker 4: ultimately what they try to do through monetary policy. If
• 27:27
  Speaker 4: they so, if they did prematurely or ill advisedly cut rates,
• 27:32
  Speaker 4: that could cause the economy to overheat. It will raise
• 27:34
  Speaker 4: inflation expectations and in turn raise expectations of future short
• 27:39
  Speaker 4: term interest rates, which again don't forget by the expectations
• 27:42
  Speaker 4: theory of the Treasury eal curve, will push up longer
• 27:44
  Speaker 4: term interest rates.
• 27:45
  Speaker 2: We don't need to spend that too much time on why,
• 27:47
  Speaker 2: but just think about it logically, right, If you have
• 27:49
  Speaker 2: money in a savings account and the interest rate gets
• 27:51
  Speaker 2: cut in half, you're likely to do something else with
• 27:53
  Speaker 2: that money. You might go say I'm gonna buy stocks instead,
• 27:56
  Speaker 2: I might go invest it elsewhere. I might go spend
• 27:58
  Speaker 2: it somewhere because I'm not geting in the same savings rate. Likewise,
• 28:01
  Speaker 2: if I am borrowing money based on FED funds and
• 28:04
  Speaker 2: my borrowing costs come down, I suddenly have more cash
• 28:07
  Speaker 2: in my pocket. It injects money into the economy when
• 28:09
  Speaker 2: you lower the interest rates that quickly, which can cause inflation,
• 28:12
  Speaker 2: And indeed it is the case.
• 28:14
  Speaker 4: Researchers have looked extensively at the effects of a FED
• 28:16
  Speaker 4: rate cut on rates all across the so called yield
• 28:19
  Speaker 4: curve from very short to long term. As often as not,
• 28:23
  Speaker 4: long term rates go up when the FED cuts because
• 28:27
  Speaker 4: short term future, short term expected that's a little redundant.
• 28:31
  Speaker 4: You could just say expected expected short term rates go
• 28:34
  Speaker 4: up because people assume that the FED will at some
• 28:37
  Speaker 4: point have to tighten in response to and overheating economy
• 28:40
  Speaker 4: and inflation that gets.
• 28:41
  Speaker 2: Out of control. So the overall point that we're making
• 28:44
  Speaker 2: here is cutting interest rates is good policy when the
• 28:47
  Speaker 2: economy is falling apart and unemployment is rising and you
• 28:50
  Speaker 2: are no longer concerned about inflation risk. If you were
• 28:53
  Speaker 2: to do so today, there is a very compelling case
• 28:57
  Speaker 2: that it would in fact make the cost of our
• 28:59
  Speaker 2: government debt more expensive because of inflation.
• 29:02
  Speaker 4: Just keeping I'm not saying the president is right here.
• 29:04
  Speaker 4: I think he's wrong. I think he should keep his
• 29:06
  Speaker 4: nose out of monetary policy. These institutional arrangements have worked
• 29:09
  Speaker 4: really well for the better part of a half century.
• 29:11
  Speaker 4: I think it's a huge mistake to start fusing with it,
• 29:15
  Speaker 4: to use my little word.
• 29:16
  Speaker 2: Of the day.
• 29:17
  Speaker 4: But the President's going to do that because that's his personality.
• 29:20
  Speaker 4: The risk here is that him even animating that he
• 29:23
  Speaker 4: wants more control will raise inflation expectations, therefore raising long
• 29:27
  Speaker 4: term interest rates, the exact opposite effect of what he
• 29:30
  Speaker 4: wants to achieve. That said, there is an argument for
• 29:32
  Speaker 4: cutting rates today. I'm not sure I subscribe to it.
• 29:35
  Speaker 4: But because cutting rates works on the real economy with
• 29:38
  Speaker 4: a long lag maybe a couple quarters, maybe several, I
• 29:41
  Speaker 4: don't know, depends on the structure of the economy, which
• 29:43
  Speaker 4: nobody knows in real time, there's actually an argument, maybe
• 29:45
  Speaker 4: even a good one, for cutting rates today.
• 29:47
  Speaker 2: I agree, there's indications that the labor market is weakening,
• 29:50
  Speaker 2: and that in of itself, Yeah.
• 29:52
  Speaker 3: That, in a nutshell, is the argument.
• 29:53
  Speaker 2: But that doesn't go Mike, Sorry, no, finish.
• 29:56
  Speaker 4: That doesn't mean the president or whoever should be sticking
• 29:59
  Speaker 4: their no, that as the exact opposite of the intended effect.
• 30:03
  Speaker 2: Let's take a quick break. When we come back Senate,
• 30:06
  Speaker 2: continuing to do work on the big beautiful tax bill,
• 30:11
  Speaker 2: we'll cover what seems to be the changes that are
• 30:13
  Speaker 2: coalescing in the Senate next year on the Financial Exchange.
• 30:16
  Speaker 1: The Financial Exchange streams live on YouTube. Like our page
• 30:20
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• 30:22
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• 30:27
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• 30:30
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• 30:34
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• 30:37
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• 30:52
  Speaker 2: Well, we seem to be getting somewhat closer to a
• 30:57
  Speaker 2: final tax bill, although I still have some doubts that
• 30:59
  Speaker 2: we're gonna get this thing done by the July fourth
• 31:01
  Speaker 2: holiday as the President would like. There are a few
• 31:04
  Speaker 2: major differences between the House version and the Senate version.
• 31:09
  Speaker 2: If you've been personally tracking this, and I know a
• 31:11
  Speaker 2: lot of folks, if you're in the high tax Northeast,
• 31:14
  Speaker 2: probably have the House version increased the salt cap that's
• 31:18
  Speaker 2: your state and local taxes cap deduction at forty thousand
• 31:23
  Speaker 2: dollars per year. The Senate couldn't really resolve that and
• 31:27
  Speaker 2: they kept it at ten thousand dollars. So that's going
• 31:29
  Speaker 2: to be a battle because there are a number of
• 31:31
  Speaker 2: House Republicans that are needed to pass the bill that
• 31:33
  Speaker 2: will not vote for the bill at ten thousand dollars
• 31:36
  Speaker 2: would be my guest. So I think that we're going
• 31:38
  Speaker 2: to be higher than ten. But where it goes is
• 31:40
  Speaker 2: a good question. Tucker earlier covered number of solar energy
• 31:45
  Speaker 2: companies are selling off today on news that the Senate
• 31:49
  Speaker 2: made some changes but pretty much reaffirmed the House's version
• 31:53
  Speaker 2: here of doing away with a number of clean energy
• 31:56
  Speaker 2: tax credits that were put in place as part of
• 31:58
  Speaker 2: the Biden administrations Inflation Reduction Act. Those are now going
• 32:03
  Speaker 2: to phase out by twenty twenty eight. Why twenty twenty eight,
• 32:08
  Speaker 2: Probably because a whole bunch of Senators and House Republicans
• 32:11
  Speaker 2: have projects going on in their districts that need to
• 32:14
  Speaker 2: get finished to get these credits done, and they don't
• 32:17
  Speaker 2: want to see those projects get blown up. So that's
• 32:20
  Speaker 2: been what I've been reading on there. There's some changes
• 32:22
  Speaker 2: in terms of how Medicaid reform is going to get
• 32:26
  Speaker 2: done in the Senate versus the House bill. Quite honestly,
• 32:30
  Speaker 2: I just don't feel qualified enough to talk through and
• 32:32
  Speaker 2: understand what exactly is going to happen there, other than
• 32:35
  Speaker 2: to say there are a bunch of rules that state
• 32:37
  Speaker 2: is state's employed to get federal funding that are going
• 32:39
  Speaker 2: to come under increased scrutiny under either of these two bills.
• 32:44
  Speaker 2: Business tax breaks in the Senate version are not quite
• 32:47
  Speaker 2: as good as they were in the House version, so
• 32:49
  Speaker 2: that pass through deduction is going to be lower than
• 32:52
  Speaker 2: the House wanted, and the taxes on university endowments are
• 32:56
  Speaker 2: also looking like they're going to go up a lot
• 32:58
  Speaker 2: less than what the House wanted. So currently, if you're
• 33:00
  Speaker 2: a university endowment, you face a tax rate of one
• 33:03
  Speaker 2: point four percent today House wanted twenty one percent. Senate's
• 33:06
  Speaker 2: saying eight, So an increase nonetheless, but looking like a
• 33:12
  Speaker 2: lower amount. It looks like there's going to be some
• 33:14
  Speaker 2: charitable deductions allowed for people that do not itemize on
• 33:17
  Speaker 2: their returns and some caps in there. There's also going
• 33:21
  Speaker 2: to be some taxes that the are going to be
• 33:25
  Speaker 2: increased deductions for senior citizens, and then the no tax
• 33:30
  Speaker 2: on tips deduction is going to be severely limited under
• 33:33
  Speaker 2: all of this. So Mark, you seem to be very enthusias.
• 33:37
  Speaker 4: The one issue that politicians should be dealing with is
• 33:40
  Speaker 4: the size of the deficit and the size of the debt.
• 33:42
  Speaker 4: If they want to get interest rates down. They can
• 33:43
  Speaker 4: jawbone at the FED all day and send out tweets
• 33:46
  Speaker 4: and say attention grabbing things about the Federal Reserve, or
• 33:50
  Speaker 4: they could actually cut spending, federal deficits, increase pressure on
• 33:54
  Speaker 4: interest rates because the federal government competes with borrowers for loans.
• 33:58
  Speaker 2: What do you mean, that's what those did. That's whyle
• 34:00
  Speaker 2: you on Musk left.
• 34:01
  Speaker 4: If perhaps if you was done, and perhaps if they'd
• 34:03
  Speaker 4: been allowed to do serious work, and then Congress had
• 34:05
  Speaker 4: taken up the issue because the legislature ultimately ultimately needs
• 34:09
  Speaker 4: to act, it would not have been the failure that
• 34:12
  Speaker 4: it was, the very predictable failure that it was. But
• 34:14
  Speaker 4: the single most important thing right now should be cutting
• 34:17
  Speaker 4: the deficit, and this bill does not do that.
• 34:20
  Speaker 2: No, in fact, the bill itself would increase the debt
• 34:23
  Speaker 2: limit by a five trillion dollars.
• 34:26
  Speaker 4: Every independent researcher that's looked at this, I mean, every
• 34:29
  Speaker 4: single one who's not paid to say differently, has come
• 34:31
  Speaker 4: to that conclusion.
• 34:33
  Speaker 2: Yeah. I'm not saying that any individual piece of this
• 34:36
  Speaker 2: is unworthy of debate. Like you know, these are important
• 34:40
  Speaker 2: priorities that I think every administration should talk about on.
• 34:43
  Speaker 3: Top of another.
• 34:44
  Speaker 4: It's the worst Yeah, but every relation of gimmicks I've
• 34:46
  Speaker 4: ever seen, you think so, Yes, I do. I think
• 34:49
  Speaker 4: it's pathetic, especially coming from a free market party. There's
• 34:52
  Speaker 4: very little to a leance.
• 34:54
  Speaker 2: Let's not confuse the Republican Party.
• 34:55
  Speaker 4: I know they're not a free market party anymore. And
• 34:57
  Speaker 4: I'm stuck in the nineteen nineties, forgive me.
• 35:00
  Speaker 2: But I mean I agree with you. Look this bill.
• 35:03
  Speaker 2: I think is probably important to stabilize tax rates and
• 35:06
  Speaker 2: not increase them on every American in the future.
• 35:08
  Speaker 4: But why Mike, if future rates are gonna have to
• 35:10
  Speaker 4: go up to pay down to pay the exorbitant interest costs,
• 35:13
  Speaker 4: We're almost surely gonna be faced with, is it really
• 35:15
  Speaker 4: lowering taxes? People don't think just one day ahead, they
• 35:18
  Speaker 4: think years ahead.
• 35:20
  Speaker 3: That's my issue.
• 35:22
  Speaker 2: Some are in New England.
• 35:23
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• 35:26
  Speaker 5: the sun doesn't set until after eight, and it's likely
• 35:29
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• 35:33
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• 36:12
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• 36:26
  Speaker 2: Mark. I need you to finish that thoughtcause it was
• 36:28
  Speaker 2: an important one. This bill, by almost anybody that looks
• 36:32
  Speaker 2: at it, including the Senators and House Republicans voting.
• 36:35
  Speaker 3: For every independent researcher.
• 36:37
  Speaker 2: Includes massive increases and deficits over the next decade, plain
• 36:42
  Speaker 2: and simple. You know, the spending cuts that were proposed exist,
• 36:47
  Speaker 2: but they are limited, and this is going to increase
• 36:49
  Speaker 2: net deficits over the next decade. How is that in
• 36:53
  Speaker 2: your mind a kin to way tax increase, because that
• 36:56
  Speaker 2: was the argument that you just made, is, hey, look,
• 36:58
  Speaker 2: we're mortgaging our future.
• 37:00
  Speaker 3: They're just future taxes.
• 37:01
  Speaker 4: They're going to have to be paid off at some
• 37:04
  Speaker 4: point in the interim. They crowd out private sector investment.
• 37:09
  Speaker 2: Clarify that because we've run deficits for the last thirty
• 37:11
  Speaker 2: years and they've never been paid back.
• 37:12
  Speaker 4: Favorable global circumstances, a savings glot elsewhere, think China, think
• 37:17
  Speaker 4: ashed broadly.
• 37:19
  Speaker 2: Yeah, so that would be the argument to demographics here too.
• 37:22
  Speaker 2: By the way, for thirty years we've been able to
• 37:24
  Speaker 2: do this, we've been able to run big deficits without consequences.
• 37:27
  Speaker 2: At some point we won't be able to do that.
• 37:30
  Speaker 2: We will run big deficits and there will be consequences.
• 37:33
  Speaker 2: And where that will show up is in the borrowing
• 37:36
  Speaker 2: costs that we get assessed or in inflation numbers that
• 37:40
  Speaker 2: we see.
• 37:40
  Speaker 3: That's right. You can inflate the debt away too, that's right.
• 37:42
  Speaker 2: Two main ways to deal with it. Either you have
• 37:44
  Speaker 2: to pay it back and raise taxes to do so.
• 37:47
  Speaker 2: In the future, you pay higher interest rates on that
• 37:49
  Speaker 2: debt in the future, or you inflate your way out
• 37:52
  Speaker 2: of it, and we all have dollars that are worth
• 37:54
  Speaker 2: less than what they are today, all of which I
• 37:56
  Speaker 2: would tend to agree with you are just a different
• 37:58
  Speaker 2: form of tax increase. And the reason we're not talking
• 38:01
  Speaker 2: about is because it's somebody else's problem in the future. Yeah,
• 38:04
  Speaker 2: ours ours, but not this president or not this.
• 38:07
  Speaker 3: No, no, they'll be I'll be dead.
• 38:09
  Speaker 2: Let's take a quick break. Markets remain in negative territory.
• 38:12
  Speaker 2: We'll have a full recap when we come back on
• 38:13
  Speaker 2: the financial Exchange