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Joining us now from the Peterson Institute, the Pride of Brookline, Massachusetts, Adam Posen. Adam, first of all, thank you for your important comments at Jackson Hall. Lisa and I really appreciate that. What's changed in four or five days Adam Posen from Jackson Hall in this FED debate.
Thank you Tom for having me back both there with you and Lisa and today with you and Paul Jay A lot has changed. Three things. First, is that the tax on Governor Cook, as Paul Krugman and Larry Summers and many others have pointed out, have shifted into law fair meaning using the powers of the government to go after individual officials with quasi legal means. And as Krugman I think put it very well on his sub stack a few days ago, this is about personal intimidation, and
to doctor Cook's credit, she's not giving into that. Second, something that was you were aware of and I was aware of, but we were sort of being discouraged from talking about too openly. Is now front and center, which is the renewal as you were just discussing with my renewal of the Reserve Bank presidents at the end of February, and so whatever happens with Governor Cook, the question is do you have a majority of Trump appointees who are willing to really mess with that process by the end
of February. And the third, sorry, the third thing is there's just been such a limited market response right the event.
You mentioned doctor Posen that the markets seem to ignore the moment, at least in the United States. Do you anticipate I don't want you to make a market call, but you anticipate that the president is unmindful that the markets end up telling authorities what to do. That's usually in history how it's worked.
Yeah, Tom, I think the current president is either falsely
overconfident or unmindful. I mean, we all heard the stories about Secretary of Descent and NEC director has it going through this whole elaborate thing in April to get the president to focus on the day that the treasury market started going down a lot because of the China trade war, and all that illustrates, even if you buy it entirely at face value, is that the President wasn't thinking about that, and he wasn't asking for percent or has its advice,
or he wasn't listening to present and has its advice before that happened. So I think it's very clear that he is ignoring the markets. And I think he and his team have told themselves as well as others, a story that a variety of things they're doing, including the forthcoming issuance of stable coins creating demand for US treasuries, mean that they're not going to have to worry about this. And the other thing is, of course the market is
playing along. Now. Fixed income market in the US generally tends to be both more important and more savvy than the equity market. The equity market, about these things is driven by other factors and so shouldn't be read as much of a verdict on these issues, these being inflation, central bank independence, fiscal policy.
Sorry, no, go ahead, go ahead, ata, no, no.
All I was just going to say is you know, we're having a very lively internal discussion at the Peterson Institute about why the markets aren't reacting and why, for example, they are reacting so negatively to France. It's not so much that we don't think the situation is very serious in France. It's just okay, why is the situation not at all serious in the US? And we're having trouble understanding.
That, Adam, there are those that say that maybe the Federal Reserve does need some changes to be affected there, that maybe they have not performed effectively over the last years, if not even longer.
How do you how do you think about that?
My view is that as I've gone on the record on the program with you all saying I think they did screw up by not changing monetary policy in early twenty twenty one, when the labor market turned around quickly and when the Democratic Congress passed additional unnecessary fiscal stimulus, I mean they have screwed up. I think they've screwed
up more on the financial supervisory side. What happened with Silicon Valley Bank and the other mid sized banks that got a carve out and light touch supervision a few years ago was really bad. What they did and failed to do in six seven eight was really bad. So but the question is does that get addressed. Do either of those get addressed by undermining FED independence politicizing the appointments creating frankly likely more lacks supervision rather than I don't think so.
And I'm out a private conversation with Jackson all of the leading banker. I'm not going to say who does. Folks, it doesn't matter. You have the advantage of Olivia Blanchard's perspective at Peterson Institute. This banker was heated that America taught the other banks independence. It is central bank for mere mortals. Our listeners are viewers, restate why we're going through this, Why this independence of a central bank is
so important? Unlike the Bank of England years ago, unlike the Bundesbank, and unlike otmar Issing's new fangled ecbank.
Okay, I think it is a fair point that the FED was the example and the loadstar on a lot of this about the German buness Bank and the Swiss National Bank too. The rationales are They are four big rationales for why it's in the public interest for central bank to have operational independence, meaning getting to set interest
rates and monetary policy on its own. The first is the argument made by the brilliant Ken Rogoff in nineteen eighty six that there's inherently an inflation bias to various degrees in monetary policy, because if you pump up the economy, at least temporarily, you get some growth, but in the
end all you get is the inflation. Whence people expect that, and so the point of the independence is to anchor expectations, as the saying goes, so you basically get rid of this extra inflation that's totally avoidable, and all the data suggests this is right, that you get a lower average inflation rate with an independent central bank at no costs.
The next two are very straightforward. When you have a politician who wants to have a rate cut time for a particular initiative or ahead of an election, out of whack with what the economic fundamentals are, that's bad. When you have a government that wants the central bank to directly finance its debts so that it doesn't the government doesn't have to behave in a responsible way, that's bad. We saw that in Italy, we saw that in Argentina, we saw it to a limited degree in Britain in
the seventies. It's bad news. And so this election cycle installation, this prevention of of fiscal dominance is the other two main reasons why you do central bank independence. Again, I want to stress the late Stan Fisher, former or vice chair of the FED, former Government Bank of Israel, stress the distinction between operational independence and goal independence. It's still the Congress, the legislature that sets what ultimately is the Fed's goal, whether it's in the Humphrey Hawkins Act or
two percent inflation or whatever, and evaluates that. But the day to day means the month independence is what we're talking about. And then finally the issue is just the same way that the Trump administration is gutting expertise and technocrafts and bureaucrats have experienced throughout the government, they're now doing the same thing to the FED, and that just makes policy making worse.
So individual FED employees here, how does it, I mean, how does it impact the day to day? Do you think?
I mean, does an impact the analysis do they do? The data is the data. I guess I can interpret data how they want, but the data is the data.
Yeah, I think that's fair, and they certainly are going to try. I think what's happening which is happening again at the Bureau of Labor Statistics, at the National Institute for Health, at the EPA, at a whole range of government agencies in the US right now is a combination
of demoralization and depression. Demoralization that the experts who try to do the right thing and do all the hard work of trying to interpret the data and verify the data and come up with good sources of the data and improve the data get ignored more and more and they amount of funding they get. I mean, nonsense about a marble building and all that you lose people because your salaries aren't competitive, the building is crappy place to work,
and so that's demoralizing. And then you have the issue that you know think, I mean you would never experience this, but think about having a bad boss. I mean, if you have a boss who you can present pros and cons and sometimes she listens to you, and sometimes she doesn't find but generally actually values a debate. And suddenly you have a boss that listens to you know, one particular shareholder that's pretty bad.
And we got to run. I got one final question for you, folks. I want to really lay this out because I think it's really eclectic. The Peterson Institute like they have Jed Coco's and non resident senior Fellow is really strange. Wonderful economists. A guy named Nick Lardie who's pretty good on China, Mary Lovely, a guy named Firm and up school up in Boston. It's called Harvard. I think he's Furman's up there. It's the list of quality.
One of my heroes, William Klein, Shedbone Blenchard. As I mentioned, when you all sit around, doctor Posen, are you just consuming a new embedded inflation, not like vocar eighties?
But are we to a new regime of inflation?
Well, Tom has always I'm grateful to your appreciation and amplification of what our team does. I'm very proud of them. We literally sit around once a week with a lot of the non resident people join twenty twenty five people joining us online and our twenty people in the room and have a working lunch meeting. Sometimes it's about research. Is literally yesterday it's on Tuesdays was about this, and like I said, we're wrestling with why the markets aren't reacting,
what the inflation outlooks going to be, how soon? How bad? I think we're all pretty convinced that the tariffs and especially anti migration is going to pass through to higher inflation over the next six to nine months, meaningfully higher
like four or five percent. Wow. And we are worried that the FED will change, and we're very worried about the Reserve Bank presence because as Jason Furman, who you mentioned, and other FED alums like Karen Dinan and David Wilcox and so I have argued, if the Committee is still the committee, there's a limit on how much they can
screw up on inflation, no matter who Trumpet points. But if suddenly we swing to a number of the Reserve Bank presidents are not reappointed and they either don't get the vote or they're replaced by cronies, then that goes out the window that guard rails.
We got to run. Adam Posen, thank you so much, to take away their folks. As if we get four to five percent Adam Posen and inflation, guess what the dialogue changes. It's just as simple as that doctor Posen from Jackson Hole and from the Peterson Institute in Washington, Thank you so much. Stay with us. More from Bloomberg Surveillance coming up after this.
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Mandeep Singh is global head of Tech Research as well. So in the mystery of pre conference call for you is in a study of unit dynamics within the different divisions of Nvidia, including data center. Is it a line on the income statement? What's the man deep sing mystery that you're going to be looking at?
I mean, right now, it's about the data center revenue because at revenue, earnings will come simply because this company has a monopoly when it comes to the GPUs that they're making, they can charge whatever margins they want and that.
Has been the case. So it's a question of top line.
So in technology they can hold price or even increase price.
Well, they keep releasing new architectures. So with Blackwell, they will increase price. With the new architecture that's upcoming in twenty twenty six, they will increase price, and the lower skws that are outdated will be sold at a lower prices compared to that.
Mandy Tom just forwarded me some research from Rob Shiftman Bloomberg Intelligence credit analysts, who covers the technology space from a credit perspective. Is that man, he's got a lot of pretty pictures, which I like. But what it shows is just these huge capex for all these companies and the bomb market I guess is fine with it. But I mean, is somebody asking a question like, are you guys getting any return on this capex?
Well, the cloud companies have shown return.
We saw Microsoft's Azure segment growth increase to thirty nine percent. Okay, seventeen percent of that growth was AI workload driven. So from that perspective, the cloud companies have shown the ROI for sure. It's the other smaller software companies.
They are the.
Ones who are still struggling to figure out what's the right product based on LLM, how much do we charge the customer?
And can we increase our margins.
Shiffment's core theme, I know you two never talk. Shiffman's core theme is that investor payouts display strength, not strain. Why is the Amazon He's got this fancy man deep singh bar chart here. Amazon's not participating in dividends and share buybacks are.
They they're not.
But look, when you are at the scale that Amazon, Microsoft and Google are, it doesn't matter you know they are doing dividends or not because they are growing top At the scale at Amazon is you know, five hundred billion plus in revenue. If you are growing top line double digits, that's huge and that's what investors care about. The free cash flows will come. It's just a matter of turning on the show.
It's all going to end.
It's all going to end.
Is there lighten up on the meg seven?
Exactly?
Is there a bare case for Nvidia out there? Like when you go out there and talk to institutional investors, what do they push back on anything?
Oh?
Absolutely?
I mean, uh, and Vidia is not the same company as it was eight quarters ago when everyone underestimated the size of this market. Now the expectations have gone to a point where everyone expects them to beate and raised by three billion for next quarter. And look, if you are a software company right now, you're trying to optimize, what are the type of use cases where I need to use nvideo, GPUs and others where I don't. There
is no one size fits all here. You want to optimize for token pricing, which is a key metric in AI, and that's where I think there is a bear case that you can build around invidious growth expectations being too high.
Okay, here's our plan.
We want you in every day this week bandeep, so you could rocket Thursday and Friday. I'll be your Saturday. If you want to commit, I can join us. Monday Labor Day. Already I have no life, is it?
Yeah, it's early labor. I'll here Monday.
You go to the open tom there's so much.
Did you go yesterday?
No, I'm going this weekend, so you'll have to excuse me on one of these days.
Paul, I had your twenty three dollars beverage so you don't.
Have to buy itey he made honey do Yeah, commitment.
To it, Mandy City, Thank you so much.
Stay with us. More from Bloomberg Surveillance coming up after this.
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You're thrilled to bring you, Amanda Agatti. She is with P and C Bank. Amanda, let's just start with the why why are stacks ignoring the Trump Cook battle?
Well, good morning, guys, it's always great to be with you. I think the equity market is really largely ignoring it. One because it's starting to get conditioned to a lot of this purple haze, a policy uncertainty, but two because I think the bottom line is rate cuts are more likely than not regardless of what ultimately happens with Cook, and I think that is the most important thing for the equity markets path forward.
So the equity markets, so they hinge around meg seven and in Nvidia performance or do you see a legitimate rotation at P and C Bank.
Well, it's hard to bet against the mag seven, and certainly it is in Nvidia earnings day. So everybody's focused on how strong results are likely to be. But we actually have seen in expanding market breadth over the course of the summer, and a lot of it's been fueled by how strong Q two earning season actually was. It wasn't just about the top seven or the top ten names and when we look at revisions for Q three and even in the balance of the year, we're seeing
that breath story take hold. So I think that's a really important fundamental and healthy aspect of the market rally, even as it's stalled out here into the end of the summer a little bit. But given where valuations are, it's healthy. We're not hanging our hat on just one name, even though today is a big day for sure.
So today's a big day, Amanda, as you mentioned in Nvidia, but took to us about just earnings in general. The second quote, earnings came in much better than expected, I think, And the question is for a lot of folks, is that enough to continue to push this market higher?
How do you think about earnings?
Well, Q two, there's no question Q two results were a monster relative to where we started.
Now.
The bar had been set pretty low because everybody was freaked out technical term for you, as it relates to the impact from tariffs and trade potentially hitting in Q two. Of course, it didn't hit squarely in Q two. We punted it a little bit into Q three. So the results came in I think even much better than a very low bar that was set and I think the results continue to suggest that there's still a lot of fundamental strength here. We're not seeing a lot of weakening.
Q three is really what's important in terms of the rally, and revisions have been creeping quite a bit higher.
Bloombergerging twenty four to seven on the Fed Trump uproar. Just three headlines here, Claudia sam publishing Federal reserves shouldn't take the political bait. John Authurs, who's been absolutely brilliant firing Lisa Cook won't be enough for what Trump wants. And Jonathan Levin Powell won't save the FED with silence. Amanda Gotti. Here's Bill Dudley, economist saying markets are too complacent. Even if Trump stands only a small chance of taking
control of the FED, the effort itself is disruptive. So how do you change an equity strategy for our listeners and viewers. You know, whatever the outcome, there's going to be disruption at the FED. Right.
It does seem as if there's going to be a lot of noise at the FED. There's no question about that. I think at the end of the day, though, the forward guidance and the dot plot and the path is really what's going to matter the most. So is it twenty five basis points? Is it fifty? Is it ultimately one hundred? You know, a series of cuts.
INSTRC modeling avestent like for rate cuts, we are looking at potentially one hundred basis points worth of cuts, but not all into the end of this year.
It spills over into early twenty six. But so if that's the path, then we're not pulling the ripcord and raising a ton of cash and moving to the sidelines. That will create a decent amount of support for the market here and certainly for the earnings and backdrop. So we're tweaking positioning. So we've been talking about quality as being a really important place to be for investors all year.
Quality is getting pretty fairly valued or fully valued here, So we are tweaking at the margin, but we're not feeling particularly negative or bearish kind of going into the end of the year if the FED is going to continue to be accommodative.
Amanda, thank you so much.
Amanda Gottia brief here from P ANDC Bank this morning, where she's Coiossey Management.
Stay with us.
More from Bloomberg Surveillance coming up after this.
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Joining us now from Staten Island. Anthony Crescenzi, executive right, was in Pimco. The way he rolls a Staten Island the famp and then he goes down to Latin America.
That actually looks on Argentina paper market.
They say a lot of Italian speakers too, Okay.
And I've had the honor of being in the acclaimed Pimpco meeting a newport, and all these smart guys are in the room, and all I know is Staten Island electricity is up fifty four percent since twenty nineteen.
You are the king of short term paper.
Are you telling me there's no inflation out there?
Well?
There is.
In fact, there are studies that's suggest that indicate that in urban areas, big cities, the inflation rates are higher than other places on Staten Island. By the way, I have a solar roof to power my electric car, so I've kind of escaped the very high rate, almost forty cents of Killoot hours. Elsewhere in the country it's a lot less. The inflation rates are higher, but the inflation expectations are anchored.
Three years ago.
In Jackson Hall, where saw Tom you were last week, Chair Powell gave a speech where he said there's three lessons of history for battling inflation. One of them to take responsibility for the inflation problem. Secondly, to pay attention to inflation expectations, how people feel about it, which Johnny Yellen tells us, and she's an advisor to Pimco is key to the inflation story. And finally, this is very telling.
Powell said, keep at it. That's a direct quote from reference to Chavocoho wrote book called Keeping Out into What Do You Eat?
Clai It has been a huge support of the program our FED day as well, Professor Claired again advising at PIMCO with us from Jackson Hole. None of you have ever modeled the upset in the FED. We have now how does a specific investment management company feel about an unhinged, non independent FED.
Well, as they said that the key lesson of history, as Chair Powell said, is to take responsibility and pay attention to inflation expectations. If anyone, if the members of the Fed collectively decided against that, to decided to persist, to lack, to drop their persistence against the inflation fight, that would be a problem. Now, where this all goes is above all of our heads. It's a matter for
the courts, of course. But what we should expect is something that we all learned in grade school, which is the idea that there's checks and balances, and so so far the checks and balances are working. We know one major check in balance in this whole story will be, of course, the Senate Banking Committee will be very difficulty be Ken Trill. She will tell you that it's just one one one seat majority, two seat majority in the
Senate Banking Committee. Three seat majority in the Senate makes it very difficult to push nominees through and it's proven in fact, in the first Trump administration, five uh suggested appointees did not make it through the Senate. So there are checks and balances here, and so it's part of the reason why markets are even keeled about the story.
They expect those checks and balances to work out, and so we'll have to wait see, and we would expect that will be the case in the end, but one can't know for sure.
All right on the beach, the Jersey Shore this weekend, I'm sure many people are going to have a house sale there. You go, are going to come up to me and say, why is it a problem if President Trump stacks the Fed?
Tell me why it's a problem.
I've written for a long time. I've written six books, and one of the first book I wrote two thousand and two, I talked about the key situation in the nineties, nineteen ninety four when Chair Greenspan raised the policy rate to eight percent. I called that tough love medicine, something that's needed to get the interest rate levels down in
the long run. Now take it the opposite way, pull away the medicine, and you have a different story where the disease, inflation, the bold market's nemesis can get out of control. We need keep interest rates at certain levels, as they said, to keep the inflation expectation down, because that's what's embedded in long term interest rates. And Paul
yesterday was a great article by Bloomberg. Simon Flint, I say, run, don't walk, to read it, to talk about the term premium, which is the uncertainty element for longer term rates that affect mortgage rates, that that could rise. He thinks based on the uncertainties that exists today. And so if there's more uncertainty about the future about inflation itself than a lower policy rate in terms of what it might mean for the future, that becomes more uncertain and hence longer
term indust rates might rise, not fall. The opposite of nineteen ninety four, when higher interest rates knock the interest rates down. Even you could even cite the recent example, of course, the Federals raised the policy rates significantly after the pandemic, and it's caused interest rates lately to fall. So you can get that because it's medicine, it's tough love. It's what's needed in the end to keep interest rates down.
What did you take away from Jackson Hole.
Here from Fitzcherirman.
Pell chair, Powell is continuing to heed the lessons of history that he cited in twenty twenty two, and that is very calming. And he does seem to be doing every thing it takes to defend the institution, and that is for a bottom investor, it's highly admirable.
Do you see in the Crescenzi short term paper market any nuances, dynamics, smoke signals like what I'm seeing in Japan twenty thirty, forty, France thirty, Netherlands thirty.
There still seems to be an excess of so called reserves money in the system that's keeping the short term interest rate market relatively stable. Some of that money's going away because the Federal Reserve is shrinking the size of its balance sheet, in other words, taking money out of the system. It had a nine trillion dollar balance sheets moving down toward six trillion. Now it's in the mid sixes.
And that's taking money away day by day. And so we'll have to watch a tom for those signs as the year and approaches, because that's where you get the signs in the year end information in terms of the interest rate for the Distmothy.
First, have you taken Libby Kantrell to Campania? And there is.
An amazing worker, amazing human, and she travels a lot, and so she probably.
To hang out, you know, like she's.
Done some amazing things for the community and for PIMCO, and were great to have.
What's her distinctive Washington take where you lean into the report and read the sentence.
She uses the word perfunctory a lot in her write ups. I'd loved that to make sure I understood exactly what it means, which is to say, this is the Senate won't necessarily give in to President Trump on nominees that he selects to be part of the Federal Reserve. And so that's important. So that's the key word of the day, perfunctory. Don't expect the Senate to just give in to the president's will desires on the Fed. And that's important to investors today.
This is about as good as it gets for you bond guys, is it. I mean he got nice yields, nice paper, I mean things.
Credit quality is pretty good.
I mean, well, it's a nirvana, that's the way I like to call it. Because yields are between five and seven percent high for a double A minus average credit quality double A according to standard and Poo's standing, pores and movies almost met them. Mix them together. They that's a ninety nine point nine eight percent chance of getting your money back. So you need to do a lot in the bond market to obtain a yield that's attracted
relative to history. Expected inflation, which is in the twos and expected volatility, which is in the load to mid single digits.
That's a nice story. And what I worry about most is missing not locking it in.
Is in the same way home owners locked in the low mortgage rate, they should lock in high interest rates on their income.
Okay, one last thing, and we're running out of time. Just because you were here, I took age fifteen, ten year, and thirty year back forever like, back to eighteen twenty two. What I'm kidding, But the answer is we're starting to see a curve steepening in tens thirties.
What does that signal to you?
Is that an unraveling of the long duration market? It is not.
It does reflect, as Simon Flint noted in his article, that some increase in the term period the big story, and we only have a few seconds. The look up World Bank global saving rate. You'll see for the first time in forty years, it's declining because of increased spending on defense, rewiring the global supply chains, tech spending. Money is getting used in places that for decades went toward financial assets, keeping yields down.
He's got solar panels on the roof in Staten Island. It's Crescense against kan Ed. Thank you, Tony CRESSENSEI.
This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal