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The bond market especially fascinating in the last twenty four hours in the aftermath of the first FED decision made under the new chair Kevin Walsh. The market clearly was expecting something a little bit more dubbish than what it received, in the form of a dot plot in which about half of the members of the FMC suggested they would like to see or expect to see a rate hike this year. That's why we saw the two year yield yesterday jump to the highest level since April of twenty
twenty five. But of course, as Charlie mentioned, we are seeing yields a bit lower today, including on the two year, by about three basis points. Of course, as I reference that dot plot we got yesterday, Kevin worsh himself did not contribute a dot as we know, and as he discussed in the press conference, he isn't really a fan of the FED providing forward guidance. He also seems to suggest that financial markets shouldn't need forward guidance from the FED.
Maybe the guiding should be going in the other direction. Let's remind ourselves of what the chairman said at the press conference yesterday.
The more that markets are paying attention to what's happening in the real economy, deciding what's good data and what's less good data, the more financial markets can price what they believe is the most likely. Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we've said, then we're taking the most important source of information and we're being blind to it.
So let's talk to one for central banker. The former vice chair of the Federal Reserve in fact, and the former director of the National Economic Council under the Biden administration, Lael Brainerd is joining us now on Bloomberg TV and radio. She's now Distinguished Fellow at the Georgetown Saras Center for Financial Markets and Policy. Welcome back to Bloomberg. Director. It's good to see you. I wonder what you made overall of Kevin worsh and his first press conference yesterday.
Did he surprise you well, it was a very interesting press conference. He stayed true to his vow not to really communicate his own views about policy or any sense
of where policy might be going. The result of that was he really let the summary of economic projections do all the talking, and I think the markets really reacted because you had half of those projections didn't include his projection, but half of those projections saying that inflation is going to be a lot higher this year, ending the year at three point three percent core, and that would warrant one or more rate hikes, and that's why you saw
that big move in the two year. The other thing that was notable is that both in the statement and in his discussion, he really emphasized price stability and made it sound like a one mandate central banks. So those were the things that I think moved the direction of the market in a very hawk as shift. That's not actually what his comments, the sort of subtext suggested, but those were the main messages.
Well, so talk about his comments on what we just heard him say about financial markets receiving guidance from the FED in particular, I wonder if you have sympathy with the view that maybe the markets should be the one interpreting data on their own rather than interpreting the Fed's interpretation of said data.
Well, I think the difficulty here is that the market needs to and the public need to understand not forward guidance in the sense that I think he is objecting to, which is suggesting, here's what our action will be if inflation and unemployment come in at these levels. But at least a sense of how the Fed's policy is seeing current inflation unemployment, and that gives both the markets and the public a sense of where policy might be heading.
So what was interesting yesterday is he really didn't even want to provide a sense of what a lot of people call a reaction function, but his own biases seemed to be a sort of subtext in some of his comments. He noted that half of the people who did submit projections didn't see a rate hike this year. He said there was no cruel choice between inflation and the labor market. So there were a few things that he said that might have pushed back in the other direction.
Well, and of course, as we consider what it said or what will be said going forward, we know there's going to be a whole task force on communications, There's going to be a lot of tax forces under this new chairman. Has he asked you to sit on any of them? He said, was still making calls.
No.
I think what was interesting about the task forces we knew there would be a review of balance sheet policy, we knew there would be a review of communications. But I think what was interesting is the task forces on data sources, the task forces on the inflation framework, and the task forces on productivity all could be ways that, even while emphasizing price stability, he tries to move the
committee in a more dubvish direction. So those were the areas that I think we just don't know where he's headed. But what we do know is that half of the committee is very worried about inflation, and that is consistent with the data we've seen.
So let's talk about that inflation framework. Because he was asked specifically whether the FED is going to be reconsidering the two percent target, and while he reiterated he's more focused on the two not what comes after the decimal point, he also said he sees no reason to change from two percent right now. Do you anticipate he could get there?
So what was interesting is that there are a number of things he said which suggest that he may not wish to stick with core PCEE as the inflation target. He's talked about trim mean inflation when he is now referencing a task force on the inflation framework that two provides some wiggle room for potentially moving away from getting core PCE back down to two percent, and his comments on what's on the left side of the decimal point suggested that anything from two point five down to two
might be acceptable. So all of those gave some suggestion that he might be looking for wiggle room. And that is not what we saw from half of the members who submitted projections where they saw inflation core inflation still at three point three percent at the end of this year, sixth year in a row of inflation well above target, new inflation pressures coming not just from oil but now from AI, and saw the case for a right hike or more.
Well so on those inflation pressures. We obviously now have at least the beginnings of the reopening of the straight of wour moves via this memorandum of understanding between the US and Iran. The US naval wil Kate is now officially over, and Iran is supposed to allow the toll free of transit of vessels over the next sixty days. How quickly is that able to translate into lower energy prices that we have seen bleeding into other core inflation metrics.
So I think the question is when will consumers really see it at the pump, because that has a huge effect on consumers perceptions of the economy, and right now consumer sentiment is at rock bottom because they are so unhappy with high inflation. It will take some time buffers have really been used up during this transitional period. It will take time for production to come back online, for that strait of horror moves to fully clear, and so how much it still is going to move and lift
core inflation. I think there's still some sense that core inflation could be given an uplift from oil for at least several months. And of course we now have inflation coming from AI in electronics. We heard Apple's announcement, and so these are successive waves of inflation that are really likely to keep core inflation high through the end of the year.
I do want to ask you about AI, but the way you're talking about inflation right now lends me to believe you might have been one of those dots that sees a rate hike by the end of this year.
Yesterday? Is that the case?
So I believe that conditions have really changed. Then we saw when the FEDS started doing its easing cycle back in the fall. We've seen a tightening in the labor market. But what is really noticeable is that core inflation was actually rising before the oil shock, and we are now seeing new sources of core inflation from the AI data boom.
And that's on the demand side. And so for all those reasons, given that we've had five years of above two percent inflation, I would probably be quite cautious about insisting that the Federal Reserve has to get inflation back to two percent.
So on AI. And we are actually going to speak with the chair of firk Up next on this program about data centers connecting to the grid what it will all mean for rate payers. Are you in the camp that sees AI firmly as inflationary because of higher energy costs because of the actual infrastructure build out we are seeing, or that it eventually will be disinflationary because of increased productivity. Worsh's answer yesterday was I have a task force for that.
So both I think are likely to be the case. It's clear today that AI is pulling forward demand for this just incredible data center build out, levels of investment that are equal to total fixed investment non residential in past years devoted to data centers, and of course that means chips, and those are chips that would otherwise have been going into electronics and other parts of the economy.
So because it's really pulling forward demand, we're seeing a near term inflationary impulse and that is likely to lift core inflation on the back half of this year. That's fully consistent with AI becoming a disinflationary force as business models really transform and the broader economy starts to really become more productive as a result of using generative AI.
In our final thirty seconds here, we're also obviously seeing AI help bolster stock market and therefore the wealth of people who find themselves at the upper end of the K. What happens if these market gains start to dissipate at some.
Point, Well, AI is really driving the stock market. There's a lot of credit in the AI space, there's a lot of leverage, and so if we see a really big piece of data that suggests that revenues are not going to justify these valuations, you could see a pretty big correction