RenMac Off-Script: Clarida Gives RenMac Clarity

RenMac Offscript originated as a weekly internal research meeting designed to summarize and discuss what happened in Washington, the markets, and the economic data over the past week. It was always intended to be and remains a free-flowing conversation with no discernible objective other than to extract the wisdom and opinion of our analysts and their expertise. This is a conversation among colleagues.

Individual circumstances are unique and nuanced. Do not mistake these conversations for investment advice because it's not. Here we go.

All right, welcome to Ren Mac Offscript, where we openly discuss markets, economics, policy, history, and life. It's Friday, April 10th, 2026. I'm Steve Duttenhoffer. I'm Jeff DeGraff. Altyazı M.K. I'm Steve Pavlick. And I'm Rich Clareto. Rich, thanks for joining us this morning. Very excited to have you on. I'm looking forward to it, fellows.

So Ridge Claret, a former vice chairman and member of the Federal Reserve, an Assistant Secretary of the Treasury for Economic Policy and now a global econom economic advisor at uh PIMCO. has had a long and distinguished career in finance. Uh pretty sure you're the only one on this pod that's been honored by the Museum of American Finance. Congratulations. Thank you.

He's uh he's been the center of US monetary policy during uh critical periods of the economy. Not only has studied it, but has said it as well, uh and probably no one better to help us think through where the Fed goes uh from here. Right. Uh thanks again for uh for joining us. Delighted to have you on. Yeah, I'm glad to be glad to be here.

Can I just interject one second because I think there is something very important that was missed here which is a little bit more than a little bit of a mister Clarida is also a singer songwriter with published material, correct? I I have an album on Spotify, Apple Music stream for free on YouTube and I'm at work finishing up the second album, yes. Is that right? Wow.

Is this uh I I know a a little bluesy, I believe, right,'cause I I listened to it. Is that is that your is that your Chicago roots showing or your Illinois root showing or what songwriters, no matter how old they are, basically are influenced by what they were thinking about when they were twenty two years old. So it's definitely of of its time. It's it's what I would call Uh folk rock, melodic uh uh folk rock, maybe a little blues uh in it for sure.

I'd also like to add he's he's the only Fed speaker I listened to at the Cornell Club that didn't make me fall asleep in my seat. So The album is called uh Time No Changes. We're gonna put it in the show notes so people can uh stream that. Every coin can address. Next one. Yep, you bet. Excellent.

So Rich, let's start with the Fed. Um, what do you think the markets are misreading right now from the Fed? I think there are a couple things going on. Um I I think that in my I've been a Fed follower since the the handoff from Miller to Volcker and when I was in college. Um, and typically um there is some turbulence in a Fed uh transition. Today we talk about potentially a change in the reaction.

Uh function. Uh uh and so I think some of that it is inevitable. Obviously, it's more elevated now given the circumstances under which it's uh happening, but I think it's in the same category, which is that markets are torn between whether or not they should use the PALFED reaction function and dots in communication. uh or or or Walsh, but of course uh Walsh is not yet Fed share and moreover he spent fifteen years saying the Fed talks too much. And so I think I think there is an issue about

What is the Fed reaction function for uh the remainder of this year and obviously over the next uh four uh years? I guess where I come down on on that um is uh the dots will give you sort of a a sense of where the committee um is, the range of views on the committee. A lot of reserve bank presidents tell you what what they what they think. And so that gives useful information about views on the committee that Warsh

uh will uh uh uh inherit. But it's going to be the Worsh fed when when he arrives. And so I think that's probably uh the biggest challenge right now is getting a sense not only on a complex macro environment, but but what is the Fed uh reaction function. So so Rich, um I read your piece about Kevin Walsh and um it seemed I I don't know, is it is it is it is it fair to say it was um an endorsement or um

or uh you know, a new a new communication strategy. But I I think I remembered uh you saying once that the power of the Fed chair is the power of persuasion. Oh yeah! And so to that end, do you think that Kevin Walsh will be able to convince the colleagues around the FOMC table that we're kind of in a golden age of The economy and that gives the Fed kind of room to lower interest rates. I mean, that seems to be where they're at. I mean, certainly Hassett.

And I assume that's part of the reason why Trump nominated Walsh is is that he wants someone to convince everyone around the table of that outcome. Uh do you think he's do you think the the committee's gonna be able to get there? And is he the right person to kind of Persuade people to do it to get there. Okay, c couple of things, just to r uh remind the the listeners, viewers, um, and and I do this myself. We talk about the Volker Fed.

Bernanke, Greenspan, Fed. But by statute, policy decisions are made by a committee. And so there are twelve folks on the committee and so you need seven votes and the chair only has one. Um and and so that's what I meant when I said ultimately the power of the Fed share is the power of uh uh persuasion. He doesn't need unanimity, and so to be blunt, the real question when when wars arrives.

if, as I expect, eventually, although maybe not at his first meeting, he's going to try to to to to cut rates. Um and of course that the timing will depend on the macro um environment. um uh then he is gonna have to persuade, you know, uh s six other people uh uh who are voting. Um and doesn't need unanimity. Um I think depending on the macro circumstances, and the important point right now, Neil, is again the dots are an imperfect uh vessel.

Uh and I spent some time as Vice Chair thinking of ways either to change the dots or to deemphasize the dots. But I also believe that if we have just a ch one choice, which is either no dots or dots, I'd rather have the dots because you at least get some sense of of central tendency and and disagreement. And what those dots show is that

You know, a majority, if not a unanimous block on the committee thinks a couple more rate cuts eventually will be appropriate. Again, that's conditional on the evolution of the economy for some of those folks. And so I do believe eventually he will be able to pull together a sufficient coalition uh to deliver at least a couple more rate uh uh cuts.

Um, you know, the president has talked about he'd like interest rates of one percent. You know, that that's not going to happen absent a deep uh uh recession. But in sort of a soft landing scenario. Um I I think he'll be able to do that given what we know about the positions of the existing members of the uh uh of the committee.

And lick, Rich, when you look at the what the markets are are anticipating in terms of the the next cut. It's about a year out. It's between March and and June. Are you are you on board with that or do you see it um do you see it differently? Well, I think what the d the developments in the Middle East are of course um um a very, very significant wild card uh in in all this. Um I was m my base case before February twenty eighth.

uh was that um w was that the economy by the second half of this year would see clear evidence of slowing, at least core inflation. You know, data centers might put some upper pressure on on energy. prices, which which could create political problems, but core inflation would I th I thought would be drifting down into a range that the Warsh Fed uh Warsh would be able to get uh the people on board to begin cutting rates this year.

Uh so I don't think it's incorrect to think that the developments in the Middle East And in particular, if we're looking at a very, very short lived spike in global energy prices or a much more persistent one, um, could could push that uh out. I I did feel

a couple of weeks ago when markets were actually pricing in a rate hike, um, that um that I I did not think that we were gonna get a rate hike at least over the next uh year. Now you have people like Beth Hammock, uh and and we and we know from the minutes Uh uh that you you do have a group on the committee that would like to communicate that the next move could be a high

But Powell has gone out of his way to say that that's not where the committee is now and I don't think it'll be there under Warsh. And so when we were pressing in hikes, I definitely thought it was that that would that was probably something that that was going to to um

that was overshooting and indeed it has, so we now have we now have we now have cuts. And I think whether or not it happens in March of next year or December this year, um, i is really gonna depend on on on how the rest of the year evolves, especially given, you know, developments in uh in the Middle East.

So so Rich, we had a uh we had an inflation print today. Uh it was uh the headline was really hot. Um the core was more restrained. Um I guess I'm curious. You know, you have other central banks like the Bank of Canada, you know, they look at these sort of alternative me core measures, right? Like median CPI and a trim mean. How much salience does that have within the FOMC? Because if if you look at trim mean inflation.

It looks considerably better than even like the traditional core measure. I mean, I think I was looking at uh the Dallas-Fed Tribune PC. It's running at about half the pace of uh of core PC over the last few months. Um So I guess my question is

Is the is the sort of inflation the disinflation process actually largely intact and we're just kind of uh uh and uh d do you think that there might be some risk? I mean, if I was Warsh, I'd probably be making this argument in the committee. Yeah. Or Myron, I'm sure. Um I mean do you like how how much uh sort of emphasis do'cause I mean with the with the SCP, right, it's it's it's basically unemployment.

PCE, core PCE. Like that's what they're looking at. Um, so I guess my question is how much sort of emphasis do they put on trim mean? Well, I think, you know, there are nineteen folks, um but certainly in terms of the briefing books that the the committee gets at each FOMC meeting, there are you know

a a wide range of of uh measures of underlying inflation that are presented and tracked and and uh uh uh discussed. Um, you know, I myself began to highlight during my time as vice chair, especially in twenty twenty one. um uh that um that I was putting a lot of weight on on Dallas Fed Trim Mean and other measures just because um you know you get a little um little uncomfortable Um, especially in in volatile periods um where sometimes there's a temptation to

uh to sort of fall into what I what I call the quote, one damn thing after another theory of inflation. You know, and Chris Waller's talked about this as well. Like so one month it's used cars, the next month it's uh, you know, recreational activities and uh

And and and uh and and so the the advantage of trimmed mean measures is that they're using a statistical procedure to to give you the underlying signal in the data. So I I do think they're very valuable. I would go beyond that though, Neil. I mean if you look If you look at where the economy was in twenty twenty two, twenty three, you had an unemployment rate in the mid threes.

You had wages going up at four, five percent above productivity. You had housing um uh inflation, and of course there are problems in measurement, uh, but just spot rents. And you look at where the economy was at the time of the first cut in um September of twenty twenty four, core had gone down from five and a half to to two and a half.

Which in US macro data is remarkable to get a a three point decline in core in in basically two years without a huge rise in in in in unemployment. And you saw similar moves in in these other measures. Moreover, since then wage inflation has downshifted to the point that adjusted for productivity.

Uh it's completely in line with the two percent inflation target. You've seen the housing and rental inflation now uh roll over. Um and so I think if you look at a you know if We always have to be aware of confirmation bias, but when you look at trim mean measures, when you look at wage dynamics, when you look at um when you look at housing

Um I think I think Warsh or or a more dovish member of the committee will be able to make an affirmative uh case that underlying inflation uh is is moving in the right uh to Myers, as everyone knows.

I wish Rich was still at the Fed, to be honest. I can go back into that. I'm enjoying what I'm doing now. I don't miss it. I know, I know. But I mean I I feel like it's um Were you surprised, I guess, by um You know, I mean obviously m you know, it feels like Myron's in there to play a role, you know, but were you surprised, I guess, by by Chris Waller kind of Folding in March.

Uh I I I I wouldn't put it that way. I got to know Chris. I I really didn't know Chris before he joined the committee. I knew of his academic uh work um and of course he was at the St. Louis Fed, but But uh I'm a huge Chris Waller fan. He's a very good economist. He's a great communicator. He's a clear thinker. Um he also he also has had some really good macro calls. In pr in particular, I would remind folks that back in 2022, when core was at five and a half, headline was at seven.

and you had this scalding hot uh labor market. You know, Chris was out there saying that the economy could adjust back towards um the Fed's goals of price stability and maximum employment by essentially moving down the beverage uh uh curve without without the need uh for you know a big big big rise in in in unemployment and some very very prominent economists basically called him an idiot um and then a couple years later one of those prominent economists Well,

I'll say it for Rich. It's Bill Dudley and Larry Summers. One of those prominent economists uh said uh Chris was right. Um and um because we did get the we did get the adjustment in the economy. um uh i i more or less in the way that he described. So n so I wouldn't I wouldn't characterize anything Chris does as as folding. I think he calls it um uh a a as he sees it.

Uh and I and I'll just leave it at um I'll just leave it at but I'll put it this way, the Fed the Fed is really lucky to have Chris on on the um on the committee and I and I and I certainly hope and expect that that Kevin Warsh will will come to the same uh come to the same uh a view.

So that that's a good segue. I mean, when do you think Kevin Walsh actually chairs his first meeting? Well, you know, uh we don't know, uh because uh just maybe some of your listeners aren't following this day to day. So to become Fed Chair you need to be confirmed by the Senate. And to be confirmed by the Senate you need to have an affirmative vote out of the Senate Banking Committee.

And there's a member of the Senate banking committee, Senator Tillis, uh from North Carolina who has said, I think Kevin Warsh is a great choice, but I'm not going to support any Trump nominee for Fed chair until the Justice Department criminal investigation of Jay Powell is uh uh is dropped. Um and and right now it has not been drawn.

Um and and and thus, uh although there's some discussion that Walsh may have his he hearing, uh you can always have your hearing, but there but there will not be an affirmative vote out of the committee. I don't see Senator Tillas blinking. Um and so this is going to have to get uh r uh resolved and I don't have any particular crystal ball, but uh m my thinking until recently had been this would be resolved in time so that so that Kevin Walsh could preside over the June uh meeting.

Um, and I guess that would still be my modal case, but there's a pretty fat tail that this could spill into the summer. And then, of course, the additional wrinkle. um, is that under statute Jay Powell can remain on the Fed as governor even when his term as chair

uh uh concludes. Uh there is precedent for that. Mariner Eccles back in the nineteen uh forties remained on the committee as governor after his term as chair, uh uh concluded Uh and and so we definitely could have the prospect of Jay Powell continuing to chair the F O M C um until Kevin Warsh arrives and then potentially also Jay Powell remaining on the board of governors uh as as as a mere governor um uh for some time uh

Almost a shadow fed chair, could you say? Could you call it a fashion could you call it a shadow fed chair? I mean what do you think the likelihood is? think that's I mean I I I think that will be what the financial press would would would call it and and and and and then there would certainly be some merit uh to um uh uh to that. I would point out we only have one historical precedent which is

Which is Eccles, and of course Esp Eccles is a very important figure in Fed history. He's so important he has a building named after him, the Eccles Building. Um and um the interesting thing about Eccles is that he was an FDR appointee. And then when Harry Truman became president, Harry Truman wanted his own guy in the Fed. Sounds familiar.

And then Eccles said, Well, okay, but I'm just gonna stay on as governor, which he did for four years, and he turned out to be a real thorn in the side of the Truman uh administration. And indeed it was Eccles who brokered the famous Treasury Fed Accord in nineteen uh fifty fifty uh one.

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From a um from a policy timeline or political timeline, uh is June or July in your wheelhouse in terms of confirmation? And if we don't get it by then, is it too late? I don't know if it's too late. Uh I guess, you know, if I had to pick the two, you'd feel probably more confident about July than June. Uh but let's Rich said, you know, I don't have any crystal bowl either with respect to

w how the Justice Department's gonna proceed. I'll point out we do have now a change in leadership, although I ex suspect that acting Attorney General Blanche would to take the direction from the White House regarding something like this. Uh so you know, absent any change there. I just don't know that to Rich's point Tillis is gonna move. Uh and until that happens, the situation is what it is. I do believe it's been reported uh that the hearing or th the hearing for next week, not the vote

But the hearing may be delayed due to some paperwork issues, which isn't uncommon. I when I was at Treasury and doing nominations that happened more often than not, so I wouldn't ask people to read too much into that. Uh but again if you're delaying the hearing, that just suggests that it's gonna be very difficult to have a new Fed chair in place by May fifteenth. And um, you know, it's at at this point I'd probably take the the over. One other little historical tidbit I'll just

introduce into the conversation. And I don't think it will happen, but There's a distinction between the chairman of the Federal Reserve Board of Governors, which is a presidential appointment with Senate confirmation. And there's a distinct job, which is the chairman of the Federal Open Market Committee. Now, historically those have always been held by the same person. The difference is that the chair of the Federal Open Market Committee is selected by the committee each year.

Um and um and and so in January of this year the committee selected Jay Powell to be uh its chair. I fully expect that when Warsh does arrive uh the committee will vote uh to make uh Kevin Walsh uh its new chair of the Federal Open Market Committee, but that is an elective decision and vote they will need to take. It will not transfer automatically when Walsh becomes uh Federal Reserve. board of uh gov uh uh chairman of the of the board of governors.

Rich, when you uh when you look at this, um, you know, obviously uh Secretary Bessent and Kevin Warsh know each other. How d how do you see that interaction playing out? Uh in in mo more favorably, less favorably? Any thoughts on that? The relationship between the Treasury and the Fed is important and it would just be unrealistic and and naive.

even for those who are completely focused on the importance of Fed independence to pretend um uh otherwise. The f the the Fed is the Treasury's uh fiscal uh agent. Um it and and and historically the connectivity between the two institutions on monetary policy uh has been informal. Um there's a long tradition, I don't know how far it goes back.

Um but but it goes back at least twenty five years of the Treasury Secretary and the Fed Chair having a regular, I think weekly breakfast, uh the location basically uh uh rotates between the Fed and the and the Treasury. When I worked at Treasury under Paul O'Neill and Jon Snow, that was the custom. And then when I worked with Jay Powell, that that that was the custom. So there's there's a

high level degree of of of communication. Also there's now the Fe the Financial Stability Oversight Council, which is a statutory creation in Dodd Frank and and and and the Fed obviously is part of that larger group that is chaired by the Treasury.

Secretary. And then thirdly, of course, in financial uh uh uh banking uh uh regulation. Uh we we made we've made a decision in this country decades ago that it made sense to split bank regulation among Um three different agencies, the Fed, the controller of the currency, which is within Treasury, and the and the f FDIC and so on. Anything involving uh uh bank regulation, the the Fed has to work closely with with Treasury and and and FD uh F D I C

Um so that's all sort of like status quo. Where where could the Bessent Walsh relationship uh uh come to some agreement in which current practice would evolve? Um and both Borsch um and Bessent um have publicly criticized um the size of the Fed's balance sheet um and the composition of the Fed's uh uh uh balance sheet. Um and and so and there's a lot of activity today, both among outside academics like Daryl Duffy and folks within the Fed like Steve Myron and and Fed staff who have been

who have been writing recently um about ways in which the Fed could shrink its um shrink its balance sheet. Importantly That is a decision that has to be made by the committee. Uh, that's not something Kevin Warsh can't come in on day one and say I'm gonna sell.

treasuries and MBS. Um the commit that's a committee decision. So again, he'll have to use the power of of persuasion. Uh it would have to be done over time. It would have to be done, I think, with pretty explicit uh coordination uh with with um uh w w with the with the Treasury.

Um and of course in December of last year the Fed moved in the opposite direction, began to grow its balance sheet again through the uh reserve management purchases. Um, you know, longer term An issue um that uh is something that that that uh that Bess and and Walsh could discuss is they've both expressed unhappiness uh with the fact that the Fed holds two trillion dollars in mortgage back. uh securities. Over the years at various times

Fed has actually talked about selling mortgages. Right now the mortgage portfolio rolls off passively. Um and those are very long duration assets, and so uh they're not gonna roll off for a long time. It won't take thirty years, but it'll take a long time. I'd love to see it. Both of them explained to daddy that they want to get rid of mortgages off the There's there's an additional complication.

uh which is the fact that after August of oh eight, when Fanny and Freddie were put into conservatorship by Secretary Paulson, um, you know, there are strict caps on the size of their retained So I went back and looked at the numbers. So before oh eight Fanny and Freddie retained portfolio were like one point five trillion dollars. Um, and they got down to about two or three hundred.

I think we're back now, sorry. They got back to about two or three hundred and now they're they're they're moving up again. So anything that would involve a smaller Fed mortgage portfolio w at some point realistically would have to get the agencies um uh engaged uh presumably in in essentially uh you know backstopping or or shifting those holdings to the agencies from the

the Fed. And so here, whether or not you're talking about the size of the Fed's balance sheet or uh the the composition These are the sort of things that sound good in sound bites or in op-eds or when you go on C and B C but but the details are going to be incredibly um uh important because as you say you know, any rash or sudden uh move uh would would likely trigger, you know, the mother of and father of all taper tantrums. I I went back and reminded myself, you know, we were all in markets

The taper tantrum was only about a hundred basis point move into so, you know, it's not like the taper tantrum was five or six hundred basis points. It was one hundred basis point move over six or eight months from a very low level to a still low uh uh level. Um so and you know, and that was obviously something that caused consternation in in markets. So the bottom line is there's a lot they could talk about. There nothing is eminent.

Um and they will have to proceed uh with uh and I would expect they will proceed uh with with with with care, uh and certainly nothing on on on day one and and maybe not even in calendar year one.

You you had mentioned uh Myron's uh piece on shrinking the balance sheet. I would just encourage our our viewers to also take a look at what Lori Logan had to say about the issue earlier this month. I thought it was uh, you know, she kinda laid out The arguments reasonably well. That came out earlier this month if people want to take a look.

Maybe the other thing I'll I'll put on the table here, which is related but distinct, is for any given size balance sheet, uh, and let's make it even simpler, for any given size Treasury portfolio. Um, you know, the Fed has an elective decision to make about the maturity composition of of its retained portfolio. It's very long duration now, not surprisingly as a result of all the QE uh uh programs.

Um but if you go back and look at the maturity composition of the Fed's portfolio before the global financial crisis, um it was much more skewed to the front end of the curve. I think something like Um half of the Fed's portfolio was in one year maturity or less, and maybe seventy percent was at five years or less. So put it this way, were I back on the committee, I would definitely be in the camp of wanting the Fed to move um

uh as quickly as as possible towards uh a much shorter duration uh uh portfolio uh for any given uh size. And then of course, you know, what that means is that with that if that were telegraphed and the Fed moved to a shorter maturity portfolio, then Bessent and the Treasury would want to and need to take that into account in terms of their issuance calendar as as a as well.

Just real quick, I was just gonna ask, if you look at the auctions recently, Rich, they've been relatively weak. How concerned are you, or do you think that that's just uh a war premium question mark, uh, you know, anything to read into that? Yeah, I do, you know, that I do follow that. I get that those emails every you know, when they come out and I I I I I do I do follow that. I it's it's clearly not I think right now because folks are worried that that Bessant is gonna increase

uh issuance a lot in in notes and and and bonds, you know, all his his signaling has gone the other way, right? Um in fact talking up, maybe issuing even more bills So I don't think it's a s it it's a supply issue in terms of the uh of the issuance calendar in terms of maturities. Um it it could be, you know, one of several and luckily it's also not that long dated inflation expectations are have moved up. You know, we did see a pretty pronounced move in real rates in in the sell off.

uh after February uh uh twenty eight. Um pretty rapid route, pretty sharp move. Um and and so to some extent I think the the auction the auctions that uh that you that you mentioned are probably reflecting just the uh the rapid and volatile moves that we had in rates uh uh over the last uh several uh weeks.

Yeah, we we mentioned last week or maybe it was even two weeks ago how the long term inflation expectations of five year, five year forwards are, you know, really pinned very close to the Fed's uh you know, man mandated or stated goals I guess at uh two percent and it was really all real rates, which, you know, in a way makes bonds uh quote unquote a value here. If you look at uh you know how much how much uh premium there is in those in those real rates.

Uh as you look at the inflation mandate uh of two percent, I don't know if that's a mandate but the the rule, um the sense that the Fed, you know, being an insider is less committed to that in the near term kinda has uh an eye on it, but uh you know, is is willing to let it run a little hotter just to make sure that uh the stability is is there. How do you feel about that and and maybe the evolution of that number uh over the last five years or so?

Yeah, so uh this this is uh this is a topic on which I have been uh very perhaps neurotically consistent, and so I'll stick with it. But in one of the first speeches I gave after I left the Fed in twenty twenty two, and this is when when headline PCE was at seven. Um and I was asked about the Fed's inflation target. I said the Fed has a two point something inflation target. Yeah.

which is um the they'll hike and they'll jawbone when inflation seven, six, five, four, maybe a little bit less when it's three. And when inflation gets to two point something, they can start talking about rate cuts or hunting mission accomplished. And I mentioned that of course m that's the way it has turned out.

The Fed still targets inflation, but I think implicitly they're targeting expected inflation. The th th the the Fed's comfort with two point something as an outcome would would would I think disappear or certainly be eroded if we began to see inflation expectations uh drifting uh up, you know, they're market based, they're survey based, there's Michigan, there's professional forecaster. So you look across a number of of of those.

Um and you might say, well, how can you both be okay with inflation at in the twos um but be focused on in inflation expectations? Well, the Fed was in a was in a situation back in the decade before the pandemic when inflation was consistently below two percent. In fact, I think when I arrived at the Fed in in September of twenty eighteen, I did a calculation

Um and in the 120 months before I arrived, year over year, PCE inflation had been at or above two for I think three of those months. And so we had a decade when at least smoothing over twelve months, inflation was always below. To um and and the Fed then was saying, well, our policies will get us up to two. So I think as a practical matter.

Um central banks are and this is based on academic work I did twenty five years ago with Mark Gertler and Jordy Galley. I think it's a practical matter, central banks are really always inflation forecast targeters. And that The analogy I like to give is is suppose you have a central banker and at each and every uh meeting at which he presided, uh inflation was either two point one percent or one point nine percent.

We would not say that was a terrible central banker because he or she failed to hit the inflation target. We would say that's one of the that that's like the Mount Rushmore central bankers. And so implicitly there are always going to be shocks. I one thing I will say that I don't know if I've s I've said before, but I I think it's important to note is I do think there is some asymmetry in the way central banks communicate about supply shocks.

The US economy and other economies get favorable supply shock. The price of cell phones goes down, the price of computer chips uh goes down, you know, quality adjusted housing uh prices go down and all the rest. Um and and it seems to me when both when I was at the Fed and I've observed central banks that when you get favorable supply shocks and inflation and that lowers inflation, you tend to talk less about the s the supply

shock is the source and good monetary policy. And when supply shocks go the other way, you tend to talk about supply shocks. So I think I would be in favor of of of some more symmetry and and transparency on on both sides of it. But that's a long winded way of saying They're not going to raise the official inflation target.

Um they demonstrably began to cut rates, as did the Bank of England and the ECB, before actual inflation got to target. They they all more or less, as they got close to two from above, they all more or less said it's time to ease. uh policy. Um and um and so I think that's basically where where where we are with the Fed as it's as we're transitioning from from PAL to um uh PAL to Warsh.

So y so you just you just pulled on the Schumpeter string there a little bit, so I I wanna pull on that a little harder. Хаую фільбат um Or how does the committee feel uh about AI, the impacts on the global economy or maybe just the US economy? Obviously inflation, it's probably massively deflationary. Um, and then employment. I mean, you know, these are three things right in the Fed's wheelhouse and I'm sure there's some sweaty palms there. Any any thoughts on

on this uh I mean we just had what uh Treasury Secretary last night uh convene the the the banks because of these new models, right? I mean it's really it's it's it's astounding what some of the stuff can do. Any thoughts there? Yeah, well I'll I'll just stick to the to the macroeconomics of of of AI because I'm not a I'm not a tech uh Yeah. uh person. Um the the macroeconomics of of AI are actually

Somewhat complicated in the following sense. Let's stipulate, and I believe that that AI is a transformative. technology. It it it is the big deal. It's not the next pets dot com. It really will transform the economy. Um so we're not gonna get into this issue of of That. Okay. But what are the macroeconomics in a world where where AI boosts the level of productivity? Well first

As we all know, you don't get that productivity by just, you know, reading a a a book. You actually need capital spending to train the models and and and and and reinforce do reinforcement learning with the the models. Um and and and so eventually you may get more supply, you may get more output per worker, but initially to build the data centers That's shifting the demand in the economy and in and some and al along a lot of dimensions

in the o in an old economy direction. You need construction workers, you need concrete, you need power plants, you need to build roads, right? There are servers and their NVIDIA chips as well. Um and so there's a demand piece of it, which if anything is is potentially putting upper pressure on on prices. Uh and then eventually the supply will come, will lift the rising, you know, tide is gonna lift the boats. It's not clear it's gonna lift lift all boats.

And that that would tend to be disinflationary, uh, if you have have more goods in the economy. But you're not there yet. You know, we've had a a welcome increase in productivity in the US. uh in the last five, ten years, uh not related to AI, just I think from from other uh uh uh factors. And then finally, the macroeconomics of productivity growth and rates as uh both in economic history and in um

And in theory, you would tend to think there's a positive relationship between growth rates and real interest rates. And so um even if you stipulate that AI is a big deal, it's not clear to me macroeconomically if the effect over the next five years is to put upward pressure on rates or downward pressure on rates, or upward pressure on inflation or downward pressure. on on inflation. Um and and in particular I know Kevin uh Warsh in in in the last year or so

sort of came down on the side that AI is going to generate a lot of disinflation. Um and that could happen. I think eventually it it may well happen, but but over the next three to five years, I think it's a much a much closer uh call.

Rich, in a in a genuine uh Productivity boom. I mean ultimately the point of the investment is to lift household living standards, right? Yeah, yeah, so... How do you reconcile um I mean, just what's happened in the near term, right? I mean, we've seen some rebound in productivity over the last couple of years, but real income growth. has been anemic. Right? So, I mean, it looks like most of the productivity tailwind has really just flowed to the profit margins of firms.

Um so how do you reconcile that? I mean, is there is there a delay?'Cause in the nineties, for example, I mean, you had spectacular growth in real income alongside spectacular growth in productivity. Um So what what what's the what's the productivity about right now, is I guess is my question. Is it about AI? Is it like total factor productivity or is it just is it something else? Like just kind of like a statistical artifact, you know, we're

Yeah. So so there are a couple of things uh going going on. One is um if you look at the productivity data and the real wage data in the five years before the pandemic, um It was also beginning to pick up, and one of the things that we were quite um uh quite focused on during my first two years at the Fed was.

We had a decline in the unemployment rate, which a lot of models, including the Fed's model, said we shouldn't allow'cause it would cause inflation, and the POW Fed basically accommodated unemployment falling down to I think three point eight percent. it real wage gains were were healthy and especially at the lower end of the income distribution. Um and and so we we saw an economy not that long ago in which productivity growth was was beginning to to be to be shared.

Uh obviously the pandemic was a once in a century catastrophe. Hopefully it'll be another century before the next one.

Uh real wages went up a lot for those people who were working in twenty twenty. And then there was the the surge in inflation that eroded real incomes in twenty one and twenty two, uh and real wage gains were were decent, I think, beginning in in twenty four and twenty five, but you know, digging out of a hole from that uh from from from that from that inflation in twenty one and in in and twenty two.

Um so I think I think it's too soon to tell. Um uh I the other the other sort of a technical uh point um is if you um is if it well there there are two issues. One about the sh sort of share of income that goes to workers versus goes to to capital. Um uh in th in terms of those calculations, you y you also need to figure out figure in that a lot of folks are neither in are not of folks are not in a corporate in uh environment that they're in they're they're in a in a partnership.

And so there's a whole issue of labor versus capital measurement uh there. Um and then you also get into the issue, which is that the pri the GDP deflator is different from the consumer deflator. And so you can make some adjustments to the data. that that make them seem less inconsistent between compensation and and and output, but it doesn't close all the gaps. So I I accept the thrust of your point. Maybe one last comment on on the labor market.

Um this th this again is an area which could prove tricky for the Fed in the next three to five years, um, in the sense that if there is some sectoral job dislocation uh that is accelerated because of of AI.

You know, computer programmers don't overnight become structure construction workers. Remember we used to say ten years ago, construction workers don't become computer programmers. Now it's going the other now it's going the other way. And so you could have some Some sectoral shifts in the labor market. that that do push up um unemployment. And then of course the Fed will need to to make a decision on on how it reacts to to that. M my my strong sense based upon what folks have said is

they're not going to get too pedantic or scientific. If they see a rise in the unemployment rate, they're probably going to cut rates, um uh even though some of it may be more structural than than than cyclical.

Let's um let's move to the mailbag. Uh Gary, good good morning. Uh as listeners know, if you submit a question and we use it on this podcast, we'll send you a nice uh Renmac gift. Normally it's a trucker hat, but because it's the Masters weekend We're sending out golf balls. So Harry, good morning. What do you got for us? Good morning, everybody.

Uh today we have the question come from Arnor Rosenblum. His question is in this environment in which the CPI is facing upward pressure due to the mid eastward. Do you folks believe short to intermediate term TIFS, not a TIPS fund would act as a solid hedge against equity and bond market volatility? If so, how far out in terms of maturities would you be comfortable with? Thanks so much for your attention. Well I'll I'll I'll let you folks I'll let you folks handle um handle that one.

And Jeff, you're on mute. I I feel like you're about to say something great. It's not investment advice. Let's put it out there for the first uh the first side. Um Look I think uh I think tips and where inflation expectations are today in the belly of the curve, um

I think there's actually value. We talked about that in real yields. Uh I don't think you have to uh look at the tips as as finding the the real value there. So I actually think the belly of the curve, you know, call it five years out is is relatively attractive, uh, given where

the five year, five year forward inflation expectations are from there, right? And if you kind of think about averages, you can't just jump, you know, within the last month and and give that to you. So I I'm less uh I'm less inclined to be all in on tips here. uh and um and ri Richard hit it on the spot, which are real rates are really the key driver and that's why we've seen gold um I don't want to say collapse, but certainly correct here, uh, because gold is, you know, the ultimate non

uh interest bearing, cash flow bearing instrument. And so as real rates go up and make uh other things more attractive, gold becomes a lot less attractive because you can actually get some cash flow. So uh I'd be personally I'm I'm more careful with the tips than I am and the belly of the curve. Rich, you wanna make any comments around that? You're welcome to Not that all sounds sensible to me. I'm nothing to add to that.

So Jeff, let's uh keep it there on the markets. We had a busy week uh this past week. Uh what are your thoughts? On the equity front. You know, the the the rally obviously has taken us to the fifty day moving average and beyond that, that was kind of a natural point of resistance just from a, you know, old salt technician like myself. Um and to Rich's point and and the point that we made a couple of weeks ago, we do think that that's gonna require

requires for sustainability a contraction in real rates to to to move things higher to get the growth back in. Uh and part of that's the Fed and the Fed function and the expectations around the Fed. So going from a raise to a cut, even though that's a year out, um, certainly helps in that uh in that process. But um look when we look at breadth, when we look at the things, the the telltale signs for us that the market's coming back

with meaningful momentum, what we call escape velocity. Um, we haven't seen that. You know, the beth bre best breath day we had was about eighty two percent advancers. That's okay. There's you know, that's I don't wanna Uh I I I don't want to throw any shade on that other than it's uh you know, it's a B to a B plus student, right? I mean when we were coming out of the

of the tariff tantrum um back a year ago, we were seeing plus ninety percent days. Th those that that is escape velocity that has long duration to it. Um and so, you know, I thought what was interesting is the big day, which I guess was Wednesday, Um the big day, the the best uh the best breadth that we saw was actually out of financials. Now that's that's good, not bad, but it wasn't out of tech, it wasn't out of industrials, it wasn't out of the the uber cyclicality of the market.

And even yesterday when Breath was about 62% advancers, um, the best breath sector were utilities. So, you know, obviously there's there's kind of a mixed messaging. You look at the you look at the performance of the S P over the last week, you say, good golly, that's great, the market's back, we're in good shape. you start looking at the decomposition of that. And and it's dangerous, believe me, it's dangerous in this business to

find fault with a market that's rising. And I I don't tend to do that, but you know, looking at it from a very holistic perspective, it's not exactly how I'd be scripting it out to say that things are in a great spot here. So I think this is is knee-jerk war reaction, truce reaction, probably has some backing and filling, certainly hasn't given us the escape velocity that we'd say we're back and the the bottom is in.

I think it's probably a bottoming process. I don't know that we'll make, you know, significant undercut lows. I don't see that. Uh, but I do think that you're gonna wanna be more patient with this and look at uh look at some backing and filling. The one thing I would just add, and this is just from thirty six years of experience doing this crazy business, is that it's very um i i i it's it's very easy to fall into the trap of fighting the last war or looking at the last

correction and saying or using that as a blueprint for what's gonna happen. And so there's a lot of focus on what was happening with the taper tantrum back a year ago and saying, well that was a sharp V reversal. You know, you went down, you got oversold, you came back and you you just had to be there.

And we agree a hundred percent. We were there. We talked about it with that escape velocity. At this point yet uh we're just not seeing the same types of internal data uh that gives us that same amount of confidence that we had. We also didn't get as oversold this time around as we were back uh in the the spring of last year. And so I think drawing those parallels and believing that this is just gonna be a replay of the taper tantrum two point oh, I I think is dangerous. Day.

Liberation Day, sorry. Tariff Tantrum. Tariff Tantrum, right. Um and so a as I look at it, it's it's more uh you've got two parties here at least, right, in terms of of coming to some resolution. It's not just waving the magic, you know, tariff

Uh tariffs on, tariffs off, uh and and the administration can do it. So I think it's a more complex issue. I think that's what the market's telling us in breadth, and I think that we've got uh we've got more to go. The best news uh that I've seen in the last coup week and a half is a lot of the sentiment survey data. um has come in pretty rapidly. It's not at the point where we can say just from a contrarian perspective, we're buyers'cause, you know, everybody's everybody's fearful.

Uh but certainly the kind of uh bullishness and this is gonna be over soon has started to dissipate and and that's important that that starts to seep into the market and some doubt starts to creep in. But it's not yet at the point where you can take the other side and just say, Hey

Because the rest of the world's bearish and all the weak hands are gone, we'll take the other side. So uh I I like what we've seen. I don't love what we've seen. I think there's gonna be more more backing and filling. I think this is gonna be more of a process than what we had last year, and um we'll go from there.

So as as you look out uh in the next week, uh Rich w or next two weeks, uh what are you watching closely um for insight into the markets? I think there are three there are three things. Um I want to see both what is resolved and and mostly what will be unresolved after this after this week on weekend in in Islamabad. And paired with that I want to see what the m remark or reaction is to it.

on on either side. I I think the earlier point is exactly right. One one very big difference um between uh now and and a year year ago um is it'll be much it it'd be much more difficult to declare a victory on on uh what's going on in the Middle East as it was to declare a victory on on on tariffs or Liberation Day'cause There they're at least one other party and and other interest at stake. So so the market reaction to what is probably going to be an evolving

geopolitical flow of information and not, you know, a quick uh r resolution. The next thing I'll be looking at relatedly is we have the IMF World Bank meetings next week. Um, and I I um and I think there is a value uh to those um, although uh you know, I'm not a frequent attendee, I'll be going next week. Because it does serve the purpose of of in very efficiently in one week of the year, um uh integrating up what the conventional wisdom, what the what the what the elite policy narrative uh is

Um and and some of that seeps into market pricing and that can provide opportunities um if one one thinks it's either too gloomy or too pessimistic. A concrete example of this is a year ago the IMF meetings were right after Liberation Day, I think two weeks after Liberation Day. And the conventional wisdom at the IMF meetings was sell America

at least the financial market take on on on that. World in recession, inflation going up. Um and of course that was absolutely ex post the wrong way to position for uh May through December of twenty twenty five. So I always look at where the elite conventional financial policy wisdom uh is, uh,'cause I think it can provide some some opportunities if it, you know

could be correct, in which case it gets priced in quickly as as as as as well. Um and then the third thing I'll be looking for is trying to get some better sense of of when we think we're actually gonna know uh when Warsh is going to um Warsh is going to become Fed chair. Is this going to be likely in June or is it going to be likely in, you know, Sep September? And I don't think we'll know for sure, but we may be we may start to get some uh some some signals on that.

Deo, what's on uh your radar? Well, I'm curious to see what happens with Kevin Walsh, of course. Um uh it seems like uh One thing I was thinking about was if Does does President Trump really want Jerome Powell to be in the seat if the Fed does end up cutting rates later this year? Don't you want your guy to be the one to take the uh the victory lap on that. Um so it's sort of interesting where he's kind of dug his heels in on this investigation. He's praising Janine Piro.

Uh you know, at the margin I think that probably incentivizes Jerome Powell to stick around even longer. Um But at any rate, uh in terms of the economic data, um Yeah, it's a pretty quiet week. I mean we'll get some surveys. Uh I'll be keeping an eye on the uh housing market index. I mean, you know, this is just what's going on right now, I think, is just happening at the worst possible time for housing, right? I mean, it's the spring selling season.

You know, we were kind of right there, you know, right there in February. I mean, mortgage rates were sub four percent. I mean, excuse me, tenure yields were sub four percent. And then this happened and it just came at the worst possible time for for home builders. And remember, home builders, as we've been arguing, have been

not doing all that great going into all this anyway. I mean, uh you know, they they went into the year with the most completed unsold units for sale since twenty ten, and uh they've been having a tough go o' things with uh even with all these affordability adjustments they're doing. And now with mortgage rates having backed up a little bit, I mean they've come in somewhat in the last week, but, you know, at the end of the day

If you wanted to buy a house at six and a quarter mortgages, those people are all all they've already bought. You know, I mean it's so I don't I don't think whatever we're seeing now is gonna do anything for housing. Um so I'm keeping an eye on housing. We'll be getting some data on industrial production. Um but look, you know, I was just on the road with uh with Steve.

Um, it does feel like I get the consensus seems to want to move on from the war. I mean, everyone wants to, but there it does feel like. There's a lot of inconsistencies, right, Steve, within within the way the the kind of uh the consensus is thinking about this. So on the one hand, a lot of people tell me uh, you know, the ceasefire basically marked the low in the market.

Uh a lot of people now think, Well, there's no way we're gonna let them toll the straight. So whatever negotiations we get in Pakistan this week weekend will fail and the ceasefire is gonna fail as as a result of all that. Um but on the other hand, people think like tail scenarios have come in.

And the war's over. So I just I mean a lot of these things are just fundamentally difficult to reconcile in my view. Um And we still have, you know, Rory, uh who was a guest of ours a couple of weeks ago on the uh on the energy markets, continuing to point out the kind of

what's going on in the sort of paper oil markets versus the physical oil markets and and when does that rubber kind of meet the road? So I'm sort of looking at all of that, um, but yeah, I think I'm kind of in the same place Jeff is at, which is I feel a little queasy looking at it all. Mm-hmm. Fund your radar.

You said Roaring you said Roaring and I'm thinking McElroy, I'm just uh but I forgot. Yeah, our our energy guy for sure. Um Look, I I think the the one thing that happens in corrections, even if this is a correction or consolidate w whatever, you know, when when the market's a stock going straight up, the one thing that you can take from it is as you start to kind of work your way through that process, you really

Really want to pay attention to the new high list, you want to pay attention to the new relative strength high list because within that. Are really the seeds of the narrative of what's gonna drive the economy and the market higher from what the market's perspective is, right? And so we've seen it in a lot of the optical names, uh, we've seen it in some of the power names. I've talked about the um we've seen it in the utilities.

Um we've actually seen it in some of the banks, which is interesting because it's been more of the regional kind of lower tier banks, not the big the big heavies of the of the um, you know, Bank Americas or the JP Morgan's of the world, State Street, Bank of New York. Um actually Citigroup is probably the biggest of the or the best looking of the big five, if you will. So it's it's it's interesting just to see, you know, what the characteristics of of these companies are.

uh and what that common thread is because then you can reverse engineer that into what the narrative is of what's likely to be working for the next nine to twelve months. So That's that's been our focus. Um we have seen some improvement in things like ag, ag equip uh ag equipment, um, which has been kinda down and out for a long time and certainly acting better.

Um, interestingly enough, we started to see uh an improvement in some of the brewers and distillers. I'll keep the commentary to myself on that one, but you have seen kind of this troughing out uh in one area of the of the staples there. So Um you know, there's there are some things that are percolating and shifting. It is not just NVIDIA all the time or Broadcom all the time.

um you are seeing differentiation and I think that that's important. Clearly the one thing that you want to really pay attention to and make sure that you're nowhere near are things that are making new lows. as the market's trying to find a bottom, right? Because the the market's obviously well off the low. If you're making a new low right now, there the the market's message is, you know, things are bad and probably not just for your company, but for your industry group. And

You know, what jumps out to me there is software because those made you know, a lot of those made new lows yesterday, you know, in a tape that's actually trying to find some type of of uh of of strength, right? And that's why You know, I thought yesterday's it was interesting in terms of the breadth of of technology within the Russell one. Uh it was about uh sixty six percent uh advancers in technology yesterday, you know, in a fairly in a fairly strong tape. And so

Um clearly there's bifurcation there and that continues to to weigh on it. And I think uh you know, just the impact of of AI. At some point that'll probably get overdone, but um I just don't think we're there yet as you're making new lows when the market's starting to stabilize.

Well that is a uh a great place to wrap. Uh Rich, thank you so much for uh for coming to join us today. I'll remind everybody Time No Changes is the name of the album and we're anticip anticipating the drop of the next one. Take care. There there are the there you go. Well, I'm at Stagecoach next week, Rich. Are you gonna be there by any chance? Somebody see you on the stage up there?

Uh yeah, no, no, you know, uh uh I had to I had to decline Coachella this uh year. Um I'm uh I'm doing surveillance. I c I couldn't do Coachella. This weekend I can live str or some whatever it is, I can live stream it on HBO or whatever, but I'll I'll be watching the Masters uh this uh weekend, sort of a spring uh spring tradition on the big screens. Who do you like? Do you have a uh a favorite?

Yeah, at home we like uh we like Rom, we like Dishambeau. I think probably Root Root and obviously they're on the L I V tour, so uh uh yeah, there's a chance to see'em. Yeah, it's uh it's always a fun weekend. So well uh we'll be back next week. Um Rich, you won't be here, but you're always welcome to come back. But until next week, I'm Steve Duttonhoffer. I'm Jeff DeGraf. Rich Clara. Thanks so much. Have a great week, everybody. Thank you, Rich. Thank you guys.

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