Chapter 1: What is the main topic discussed in this episode?
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The chairman of the Federal Reserve, if there was a good meeting to scrap the forecast, then this one was probably it. The chairman de-emphasizing the projections, re-emphasizing the uncertainty, focused on the shock in the Middle East. We had one question. How would they respond to it? Would they look through it? The answer, it's not possible.
that simple equities in response negative this session lows right now down one percent on the s&p 500 likewise on the nasdaq in the bond market twos tens and thirties yields higher particularly at the front end of the yield curve up by seven basis points on a two-year 375 if you like me thought this would be boring this was not a snooze the federal reserve chair asked about succession take a listen to what he had to say
If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed. I have no intention of leaving the board until the investigation is well and truly over with transparency and finality.
On the question of whether I will then continue to serve as a governor after my term ends and after the investigation is over, I have not made that decision yet. Three points from the chairman of the Federal Reserve. Let's go through them individually. Point one, I will stay on as chair until a successor is confirmed.
Point two, I have no intention of leaving the Fed while the DOJ investigation is ongoing. And point three, even after that is complete, I haven't made a decision on how long I'll stay on. A big headline in that news conference. He actually engaged with the question. We all were wondering whether he would give some sort of clarity, and we've got it.
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Chapter 2: What were the key points from Jay Powell's remarks on the Fed decision?
And that's off the back of the shock of the Middle East. And that's more than notable. Governor Chris Waller, I think, is arguably the most interesting person on the Fed right now in terms of what his decision actually was driven by. I'm curious if he comes out and says he is getting spooked by the direction of core PCE. He's getting spooked by the component of what oil prices do to that.
And we talk about wage inflation. Wage inflation is still running above where it was in the pre-pandemic period. John, I was looking at F1 in Japan here and you said do something serious. So I looked at the price of oil here, as you mentioned earlier. Brent crude up 81 percent from whatever the bottom was. Saudi light Persian Gulf, the physical hundred and forty five percent. Same number.
Chapter 3: How does the Fed view the current economic uncertainty due to the Middle East crisis?
80 percent, 145. It's the point that Jeff Curry of Carlyle was making a little bit earlier on this morning. There's a big gap right now between the physical market where spot is trading and the paper market. And he thinks it needs to close. He thinks the paper market needs to wake up to the real risk emerging in the Middle East. That's one opinion, one view. Other people aren't as concerned.
But ultimately, that's his opinion. Every oil strategist that comes on says, why is everybody else so complacent? What we're seeing is really a different scenario than we've ever seen before. And a lot of people say, yeah, yeah, yeah, you guys always get it wrong. And so ultimately, this debate will continue to play out. What did we say a few weeks ago?
If you want to make a fool of someone on Wall Street, ask for a crude forecast. That's always been the way. It's the hardest thing to forecast. Thorsten Slocke is not a fool. He joins us from Apollo. Thorsten, good afternoon. Good to see you. You've had some time to go through this one. Your big reaction, please.
Well, I think one interesting thing here is that if we begin to describe everything as another shock, there's another shock, there's another shock, and we're looking through that, it almost makes it sound like, well, I don't really have to react to anything because I've identified, well, now there's just another shock coming along on all the prices. There was another shock from trade war.
There was another shock from COVID. It makes it sound like that you should never do anything as a central banker. So now we have a shock that is very serious. And it's very, very clear that they decided to just basically completely ignore the Middle Eastern shock that we're facing here.
So from that perspective, it is quite interesting, as Lisa is saying, why was it that Waller suddenly changed his mind? Because it must be that he did put more weight on the Middle East and on the Iranian shock than what the average committee member did here.
Do you think that you can infer anything from the price action, as John was laying out, the idea that two-year yields and 10-year yields inflected upward, as Fed Chair Jay Powell said that he planned to stay on should there not be another Fed chair nominated and in the seat by the time his term expired? Absolutely. Let's just talk about it the way it is.
At the last meeting, there were 10 people voting for interest rates to stay unchanged. At this meeting, there were now 11 people voting for interest rates to stay unchanged. It's very clear Steve Miran at both meetings voted for rates being lower.
But at this instance, when he suddenly now says, I may be staying on until this is well and truly investigated and complete, the risk is beginning to rise that, well, maybe we'll have another hawkish member sitting for a longer period.
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Chapter 4: What did Jay Powell say about his future as Fed Chair?
And now we hear if it's weeks and not months, it's OK. When is it not OK? Well, the next one will probably people saying if it's months, it's not quarters, then we will also have a change. So you're absolutely right. The fear is, of course, that if it does continue at the Fed level, if you put this into purpose, the Fed's model of the US economy, it has to last at least one quarter.
because that's the only way you can get a real serious shock to begin to feed through. If it begins to last, of course, several quarters, then it's a much more serious effect. But it is ultimately about that duration question. And that's what the market is trying to figure out. And the Fed very clearly told you today that they do not think that this is going to last a long time.
Mike McKee in the news conference. He's run back out for us. Mike, welcome back to the program. Some key headlines in that news conference. What jumped out for you? I think two things, John. One, there was a sort of more humble aspect to what Jay Powell was saying when it came to tariff price inflation.
He was conceding that it wasn't doing what they thought it would do, lasting longer than they had anticipated. And now layer on top of that inflation that will come into the energy markets and perhaps others because of oil. And so he he was less saying the idea that, well, we're prepared to go either way, depending on what happens with the economy.
as he was saying, we've been fooled and we're not going to put ourselves in that position. We're going to sit back and wait so that we don't react wrong because we've been wrong. The other thing, of course, was what Powell said about whether he's staying on or not, because he's refused to talk about that so far.
He did acknowledge what his lawyers told the Department of Justice in their deposition. But the most interesting thing was he said he's staying as chairman pro tem and that's the law. Well, there's a presidential counsel's office memorandum that says, no, it's the president who can appoint somebody as the chair pro tem.
So we could be looking at another big legal fight down the road if they don't get Kevin Warsh in there by May 15th. Yeah, Mike, this is where the problems arise. with the chairman really engaging in this topic this afternoon, does it provide consistency or just introduce even more controversy?
Well, he's trying to provide consistency, I suppose, by saying not much is going to change until my successor gets here. But whether or not that's a shot at the president or some sort of way to push back on the pressure he's been getting, we don't really know. But at this point, you have to think the White House is going to disagree with that interpretation of Trump. who's chairman pro tem.
Now, it's important to realize, too, that the chairman pro tem of the Board of Governors is largely irrelevant for a short period of time until they get Kevin Warsh confirmed. It's staying as chair of the Open Market Committee that would really bother the president because, as Torsten was just saying, leave somebody who's more hawkish, more likely to vote for a hold on the board.
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Chapter 5: How might the Fed's approach to inflation change after recent developments?
Well, I think that we are moving towards a Fed where the focus will be at the extreme on dissents. Today we had 11 versus 1. That was very clear. But going forward...
We are likely going to have, especially over the next several quarters, as other FOMC members might be leaving, we will have much more scrutiny of what are the existing members saying, what's the difference in speeches, what's the difference in footnotes between someone who was dovish, someone who was hawkish.
We are entering an era of Fed watching where things are getting much more complicated because it has this political dimension of why is this person saying this? Is this person staying on the committee for political reasons? It just opens up a whole different dimension to Fed watching than what we've been used to for a long time. parlor game. But you're an expert at this.
On a global basis, the central banker to the world, to borrow from Bill Rhodes, Jerome Powell has to look at the varying energy intensities with Brent crude at nearly 110 a gallon. We've gone 106 to 109 here right now off headlines on the Bloomberg.
When you look at the way EM is crushed by these prices, food, energy, and the rest that you're expert at, Torsten, does the dialogue just shift from the conventional parlor game? Well, there's been discussion about the swap lines. There's been discussion about, in the broader context of things, what is the Fed's mandate? And is the Fed's mandate to take care of the U.S.
economy and the people who live within the U.S., 50 states? Or is this someone who is supposed to take care of the global economy? And it's very clear that the trend of travel here certainly seems to be that we're moving towards that the Fed should really be caring mainly about the U.S. economic outlook. Is it expressive currency? Is that what we're not seeing in the Q2?
Well, given that foreigners own roughly around 20% of treasuries, 20% of credit, and roughly a third, of course, also of equities, we still have a situation where foreigners do play a very important role in U.S. financial markets. So that key issue of what is the goal of the Fed becomes very, very important. I'm just struck by how historic this is.
The last person to stay on at the Federal Reserve as Fed chair after his term was Mariner Echols. This was in 1948 when his term was up. And he stayed on because he was concerned about the post-Bretton Woods order and an economy that was torn from the war that we had just seen. And he wanted that consistency. That was the last time this happened.
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Chapter 6: What factors are influencing the Fed's interest rate decisions?
And I just am struck by the historical parallel at a time when we are questioning geopolitical alliances, when we're questioning how exactly some of these monetary policies are going to work in an inflationary world at a time of increased government debt. It is interesting that we're dealing with the same discussions. And I think it can't be forgotten, these sort of echoes that we feel from 1948.
I think it's easy to introduce one's opinion into this situation. So I'll just allow the market to guide us. Clearly, the chairman is concerned about a threat to independence. Is he right to be? Look at inflation expectations right now. Market-based inflation expectations have remained really well anchored throughout all of this.
So whether you're concerned about the chairman's attack on the institution or not, let's just focus on the markets. Markets have decided it's not a credible threat. So does the chairman actually have a role here that he needs to play? Is this a card he needs to hand, to hold? I don't really understand that. I'm struggling with that. That's something I'm wrestling with.
My opinion doesn't really matter. The market's telling me there isn't a concern with central bank independence. The market is telling me there isn't a concern with inflation expectations. And the data is telling me that the rest of the world's not worried either, because when I look at foreign ownership of U.S. assets... They are rock solid. And for treasuries, I think they're at all time highs.
At the last data point, I saw Torsten. So is there a problem here that the chairman even needs to address? Well, that's why the key question becomes, what does confidence mean? Is it confidence by Jay Powell? Is it confidence by foreigners? Is it confidence by markets? It does become a very important debate. That's why this discussion around who will be the next fair chair.
Now we know it's Kevin Walsh that was around that time. Also a lot of discussion around it could have been someone else. who might not have been perceived as credible as Kevin is. So for that reason, I completely agree. Who is the judge ultimately of what Fed credibility is? And where do we look and where does the market look for evidence whether Fed credibility is being threatened?
And look how many establishment figures came out when Kevin Walsh was nominated by the president. How many establishment figures? And forgive me if you're insulted by being establishment. Gita Gopinath, formerly of the IMF. I don't think it gets more establishment than that. endorsing Kevin Walsh and saying he'd make a great Fed chair.
Mark Carney of Canada, the former governor of the Bank of England and now prime minister, endorsing Kevin Walsh as a future Fed chair. What exactly is the chairman defending here when it is standard protocol to leave once your term is up? Well, I think that that's a fair question. And ultimately... My personal opinion doesn't matter. Frankly, I don't know what my personal opinion is.
I just think that there is a sense right now in markets to the point that Fed Chair Jay Powell made that even on Congress's level, they have confidence and they would like to see Fed independence continue. And that's you see in Tom Tillis's move. So what would make him stay on? I guess that that's one of the questions.
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Chapter 7: How does the Fed's stance affect market expectations and reactions?
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