How Trump, Nvidia CEO, and Fed Chair may influence U.S. economy

[Music] hey there my invest in Curious friends welcome to opening bid I'm Brian sazy Yahoo finance's executive editor thank you for joining us either on YouTube Yahoo finance or Spotify now let's make some money and get a lot smarter joining me today is Deutsche Bank chief us Economist Matthew LTI Mech good to see you thanks for having me it's good be here yeah we're uh look friend of the show you've always uh been on Yahoo finance but I've never I've never actually asked you to walk me through your what is a top Economist day like in an environment where stock markets are are volatile uh views are changing about the economy take me through all right it's 6: amm what are you doing yeah so I I I think this is this week especially is probably a good example um you have a jobs report on Friday you have the FED on Wednesday you have really important data releases through throughout the week and so I think my my job depends week to week this week it is highly focused on what's happening with the data what's happening with monetary policy in the FED being able respond to those things for our clients and and uh internal stakeholders in real time other weeks where there's less data less fed speak you know I'm able to focus a little bit more on Research bigger picture ideas you know think about inflation the fed's balance sheet monetary policy so really week by week day by day it's different it's Dynamic it keeps me interested that's what I really like about it all right well hang with me there for a sec because I I do want to mention a couple topics we do have off the top really I I personally crafted these for you uh Matt first uh views on on stack inflation and potential for 8% rates uh we have potential changes at the Federal Reserve if there is a change in the White House and the third one Nvidia CEO uh and potential AI job loss but let me get back to your um your job Matt so when you you meet with Traders you meet with stakeholders in Deutsche Bank what are some of the biggest questions you're getting right now yeah I think you know the FED monetary policy in the US has been driving substantially markets certainly R markets as you look at the front end of the curve long end uh but also you know risk in equity market so a lot of what I focus on is is thinking about the nitty-gritty of what's going into the fed's monetary policy decisions you know we have to forecast inflation we have to think about where that's going that's the most important thing for the FED uh as they think about monetary policy we have to think about the labor market you know how how that's going to evolve or we going to eventually get weakness there as many have anticipated or is the labor market just going to continue to chug along um so from from my perspective it is often times fed reaction function to different macroeconomic scenarios you know we all have baselines we all have kind of modal outcomes but what we've learned over the past two or three years is you know those modal outcomes don't often get realized and it's all about risk scenarios did you did you start working at the FED I did so my my career I started at the federal Reser Bank of Philadelphia as as a macro research analyst there what was that like it was great I I was right out of uh undergrad um I think at the time I thought I wanted to go get a PhD or be the the FED share at some point right maybe maybe but but you know coming out of out of undergrad you have pretty uh far more marginal goals at that at that point in time um you know wanted to go and and uh go go and get a PhD but didn't really know what was about had to kind of be beef up on math classes starting off at a regional Fed was was really a fantastic way to to do that so let's uh dive into this first topic because we have seen uh growth slow uh we had that most recent GDP report and then we have some top leaders like a Jamie Diamond at uh at JP Morgan suggesting 8% interest rates over the long term are we in a inflationary environment let's start there yeah I don't think so so you know last week certainly we got a a GDP report that showed 1.6% growth it was disappointing relative to expectations but but let's both look into those data a little bit more deeply and and take a step back you know if you look at at 2023 we had above 3% growth you had disinflation that was substantial over the last year core PC was what the FED focuses on was below 2% over the back half of last year and really if you look back to 2023 it was the best possible outcome that the FED could have hoped for when they were embarking on this really aggressive basically their job was too easy last year last year was I think that we're finding we're all finding out that it's not as easy as it looked last year I think but but that GDP report last last week I think probably overstated the weakness you know often times as an economist I would look at what is the domestic private sector economy doing so what's consumption doing what's housing doing and what are businesses doing in terms of investment and cap backs that part of the economy grew 3% in in q1 it was it was very resilient very robust a lot of lot of the weakness came out of these more volatile items inventories trade they don't really tell you too much about the future so I actually took uh kind of a solid reading about the O economy away from that GDP report let me push back on the stack inflation point because we have growth that's slowed but we have inflation that is still it's sticky uh you know I talked to PepsiCo CEO Ramon magar and he was outlining that he doesn't see the potential for him to lower prices in the back half of the Year why because his prices or implus costs are still high to that stag flation what are we missing yeah so I I think that that's the inflation part of it and and there I I kind of do agree we've seen far more stickiness in inflation over the past several months at least in the data that we were anticipating you know we've gotten three straight CPI reports that that were stronger than expected um I'm expecting over the next few months you do continue to see these these reports that are uncomfortable for the FED that are uncomfortable for markets so I I do think the markets coming around to the view that inflation is going to be a little bit stickier the other side of stagflation is that you get have a high unemployment rate you have weak growth that's the area that I don't see that's a disaster playing out exactly you know that's an outcome as you go back to kind of the 1970s period you had very elevated unemployment rates you had H happening at the same time as very elevated inflation rates we're currently sitting here with an unemployment rate below 4% for the longest time that we've seen on record with growth that looks looks pretty resilient to that person the average person discovering the opening bid podcast YouTube Spotify you name it or watching on Yahoo finance help them understand what is c causing inflation to stay at these levels I think we were led to believe many folks were led to believe coming this year we would get a consistent path down a lot of folks going to the supermarkets I just spent $11 on some Primal kitchen avocado man mayonnaise that was not normal but I bought it anyway because it's really good like why aren't these prices coming down yeah I think as as we've gone back and and you look over time there's been different factors that have driven it the early part of the inflation shock that we had um you know going back to 2021 you know it started off as the relatively narrowly focused thing on a few items that had very clear supply chain issues that were taking place you know we all thought talked about used cars or Commodities or food that that that was happening you know then it evolved to broaden out very substantially across services and goods that part I think maybe there were some supply chain issues as part of it but we also had very robust fiscal stimulus we had very easy monetary policy you know we had excess savings for households that our metric was well above $2 trillion so you've had you know about 10% of GDP in terms of excess savings so there is a really important demand component to this that has made things sticky you know ultimately that's why we think the FED rais rates as aggressively as they did and we thought you for a while that that was going to lead to weaker economic outcomes and that that would ultimately bring inflation down so far that has that part hasn't happened you haven't had these very weak economic outcomes the key question I think for the macro environment now is are those weaker ma those weaker outcomes necessary to bring inflation down from the fed's perspective over the past year they've um I think signed on to this Goldilocks idea where they can bring inflation down without much pain the past few months are are starting to question that a little bit well that that Mayo really cost some pain in my wallet man that's really brutal so three weeks ago uh in our in one of our morning meetings here I I mentioned to the group maybe the FED hikes rates my group laughed at me and they continue to laugh at me now since then uh the past week and a half we have seen some murmurs of a one more potential rate hike is that crazy thinking do we get one more rate hike to just eviscerate all inflation out there yeah I don't it certainly doesn't seem as crazy as it did a few months ago so see like I like I mentioned in episode two we do this in front a little bit of a live audience the Y Finance Newsroom so you hear that mat Matthew Lizetti suggests maybe a rate hike would be you know not too crazy it's not too crazy you can you can think about outcomes over the next year thank you I'm just call it this absolutely thank and and and part of what I have to do is is maybe think about what those outcomes are that could get you there you know we we think about risk scenarios we have to write about risk scenarios scenario I don't want to be there I don't need higher rates I already don't own a home but we'll we'll leave that off that's a a discussion for a second day go ahead yeah I don't I don't think anybody wants to be in in a world or environment where the FED is rethinking hiking rates at this point in time but but the reality is look inflation does look like it's it's stickier the FED I believe is is kind of firmly committed to getting inflation down to Target um and the question would be what what do they need to to get there you know if you think about scenarios that would get you to another Fed rate hike I think it's that core PC inflation has to accelerate above 3% you know it has to look like not only that that progress is stalling out because the FED has told us that stalling out says that they just keep rates where they are for longer but that it's accelerating in in kind of an adverse way now now does that happen that's not our base case we do think that the FED could probably cut rates once this year at the end of the year in December as they get this inflation progress but the possibility that inflation could Accelerate from here is is definitely more real than it looked three or four months ago so you're still looking for one rate cut end of this year that's our Baseline what what is is the era of ultra low interest rates is it over of course we're the FED has raised what rates consistently since 2022 of course so we're in a higher rate environment by extension but you know look back a decade ago rates were low for various reasons is that just done and never to come back again yeah I think that there is something that does look kind of persistently or structurally different relative to that you period between the GFC and the pandemic if you think about what happened during that post G C world you had significant private sector deleveraging in the US and elsewhere something that historically just very rarely happens you had fiscal policy in the US that was actually contractionary for a period of time fiscal policy looks very very different today running very large far large budget deficits you had you know Euro area crises you had negative interest rate policies across the globe all that was feeding through into the US yield curve leading to historically low interest rates I do think that that period is is behind us you know all those things that I just mentioned in terms of being being key factors most of them have gone away most of them have reversed as we look ahead and you know just evidence of that is if you ask most you know economists when If the Fed were going to raise rates by over 500 basis points what would happen to the economy we all kind of thought that you'd see this greater softening and weakening that would take place perhaps a mild recession that didn't play out it does tell you that the economy can take these higher rates uh at this point in time you mentioned uh deficits I think you and I are around the same age is it our generation that's going to Bear the Brunt of all of the Decades of just free willing government spending I mean that the the national debt is just a major problem and maybe it is starting to be uh become reflected in treasury yields yeah you you had a period last year um it was a short period but it was basically July to November where I received almost entirely questions about who was going to buy us treasury debt and wasn't just from us-based investors it was it was Global Investors it was the key question for markets and you saw that it royed risk assets it royed Equity markets as the 5e the 10-year treasury yield hit hit 5% um and then what you had is is early November uh the treasury came out said we're going to issue a little bit less at the long end of the curve you had the FED sound more doish and that gave Global Investors a lot of confidence to come in and take what looked like a juicy 5% treasury yield that has you know I think moderated things but as you look longer term it's just undeniable I mean debt ratios are rising if you look at deficits relative to GDP we're running at 5 to 7% as far as the I can see that probably understates things because for example um the Trump tax cuts are assumed to expire under the current legislation so yeah I think this will be a persistent story for markets it's always hard to predict you know when it becomes a story when markets will focus on it when you have risk premium built in but but it hasn't been resolved uh if you're watching uh on our streaming platforms we're heading for a quick break everyone else stay with us we are still rocking our 24 minutes today as usual [Music] all right welcome back to opening bid now you mentioned um the Trump tax cuts and I think that Segways nicely into this next uh next topic uh interesting Wall Street Journal story uh recently about potential changes to the Federal Reserve if president Trump does win a second term how important is Federal Reserve Independence to markets in the economy I think it's absolutely critical um you know as you think about Central Bank you know one of the main things that kind of academic Lit Literature and practice that we've learned over time is that Central Bank Independence is just crucial for achieving price stability you know getting inflation in check um creating a backdrop for markets where they can trust that inflation will come down over time creating a backdrop for consumers and businesses that they can trust that inflation will come down over time and you know chair pal says often that that getting to um you maximum employment getting keeping low uh unemployment rates requires that they achieve price stability so you know I think as as we look ahead and you know you kind of contemplate how how things might evolve the market I do think will be a big disciplinary action on what happens in terms of thinking about the FED share changes to to monetary policy because if you you know if you have an environment in which people are you cutting rates um in order to juice the economy uh but are not thinking about inflation that as we were just kind of talking about that inflation risk pay gets built into markets the long end of the curve does rise that impacts risk assets it impacts you know pensions and and things that everybody everybody holds so you can't just keep the the the front end of the curve down you know markets will respond and react and building a risk pram at the long end is it crazy to to just even think of a president whoever might be to have a say on interest rate policy look I I think actually in some of those articles there was this history that was provided in which um you know at times there was you very strong views that that are happening from from the White House or the presidency about what what should happen with interest rate policy I don't know that it's crazy to think that you know President should have a view there's an entirely separate question of whether or not that view is imposed or some way view but not a say not like so the FED comes up with their their rates but they have to get an approval from a president that's just correct I I I think I believe very strongly that fed's Independence in terms of setting monetary policy is critical and I think we've seen that play out over the past you know three years um the FED raised rates very aggressively over the past two years they did four straight 75 basis point rate increases they did what they thought was necessary in order to bring inflation down um and they learned from history which was if you don't tackle these issues early on by by being aggressive it can actually be far more painful as as you look ahead so that Independence I think you know the the importance of it the criticality of it really played out over the past several years what if the FED had to have some form of oversight by the Treasury Department would that upset markets look I I I think markets are comfortable with the status quo they understand what an independent fend does how an independent fend operates how they internalize data how they make monetary policy decisions I think any changes that impose some type of political nature calculus on top of that will be problematic how important is it that Jerome pal uh stays at top the Federal Reserve what his ter term is up in 2026 it is so in 2026 I you know I think it could be um likely that he might be leave at that point in time um I think he views it as being critical to his legacy that he gets inflation down um you know he's talked about that a lot and so far at least you know there's certainly an all the way there we talked about sticky inflation there's still a lot of work left to be done please bring my May prices down jome pal mean he has to do I mean please please just do it most important is avocado we have to bring those prices down um it's platform everybody can get behind um but but you know I think that's that's his legacy his his legacy is is ensuring that when he leaves inflation is pretty close to Target and if he achieves a soft Landing as part of that which now looks most likely a year or two looked very unlikely that's a pretty good Legacy so you know I think as as you look out to 20126 it it seems reasonably likely that we do have another fed share at that point are you getting questions already on who his successor could be we do you you hear and you look at media reports that that that do report those things I think it's very hard to know I mean it's highly conditional on who wins the election the election looks you know um very close at this point in time um and then from there it's hard to know who who might be there um so yeah we do get questions at this point I don't think the market is really pricing anything it's out to 2026 so it's not something that's front and center for for the market at this this point in time but but certainly that's an important consideration for the market and as we get closer to the election and Beyond it markets will F focus on it I want to give a leave a good chunk of time for uh Ai and jobs really Invidia CEO um Jensen Wong hops on 60 Minutes and and he proceeds to say that AI won't be a job Ruiner now I get it I mean he's the CEO of of an AI powered company selling lots of chips one of the most valuable companies in the world I understand his position how do you see it from an economic standpoint yeah I think from from an economic standpoint there there is a long history here I mean this this is not going to be the first labor altering technology that we have and see you know you've had that many times over historically I think as you look at that that history it it's not often that you see the unemployment rate rise in any type of structural way and so I think that makes sense that we don't think of Technology generally as a big job job Destroyer that doesn't mean that it doesn't have you know effects for for certain types of jogs certain occupations certain industries there's a lot of great work being done on you know what type of um jobs have things that can be complemented by AI what types of jobs have things that can be substitutable to Ai and and that really does help inform I think how those effects can can take place but you know I think ultimately the history is is pretty strong technology does not tend to be a big job Destroyer is it a Creator it can easily be a job Creator you know both by introducing new types of jobs you know things like prompt Engineers something nobody knew was the thing you know a year ago is now a a big big job driver by by boosting your productivity you know you can do more demand could be higher you know there there can be some some some job gains that that take place out of that I don't want to downplay you know there's a lot of heterogene it impacts different occupations Industries very differently and you do have big macroeconomic shocks that can you know impact certain sectors in certain occupations historically you don't want to downplay those things um but from an aggregate perspective they tend to be positive I thought my job was safe doing this until I saw Reed Hoffman LinkedIn uh linkedin's uh founder posted something uh an AI version of himself a couple days ago went viral it sounded like Reed it looked like Reed I'm like wow maybe my job isn't safe but do you see AI being a real productivity unlock is there going to be a new productivity Miracle yeah first I don't think AI can replace you you're just saying that cuz you're on opening bid I mean come on I appreciate that man worries look I I think we're from productivity perspective we are very constructive on on what AI can do there but taking a step back I don't think you need to have a strong view on AI to think that productivity growth over the next several years could be very strong and and the reason is historically when you have tight labor markets productivity growth tends to follow it and and the logic is if employment is costly and employment is difficult to find as it has been over much of the past several years it incentivizes firms to do productivity enhancing things to do capex Capital deepening optimize your inputs and you tend to see historically that that productivity growth follows that over the past three quarters we've had very robust productivity gains I don't think that's a fluke I think that's something that continues has it AI changed your job and what your teams do not not functionally yet I think we're still in the the process of figuring out um kind of how safely we can implement it use it in real time for you know the job that I do you know certainly I think that there are is going to be scope for over time for it to be quite complimentary to to things we do hopefully compliment you can't be place you're not going to not substitutable but I I I try to leave the last couple minutes for the uh on the podcast to you know help Inspire new investors out there or people just getting into the investing game and it's not often they get direct access to folks like you Matt what in terms of best advice to someone sitting at home they're new to the market how could they study the economy like you that maybe don't have the tools and access and things that you you have yeah so you know I at it from probably a different perspective than a lot of your guests you know I have a background at the fed I'm I'm an economist I I I went and kind of did a PhD and economics so the way that I approach things is going to be quite different and it's going to be very macro focused um and from that perspective I I do think what is great today that we probably haven't had for for a long time is how much research we get from the FED how much access we get from them how many alternative is that a good is that a good thing I I I think that all these pal speeches and all this fed spe think the research that we had is is is fantastic um you know certainly you do have a lot of fed speak that that can tend to move markets um but but I think the research that you get kind of the alternative data series that we get is is hugely helpful I mean just just one example now is we have all these private sector estimates of rental price inflation something that we didn't have for for kind of decades before I think it's been critical in setting monetary policy because if you look at where shelter inflation is today rent owner equivalent rent it's still very very elevated and If the Fed didn't have some confidence that that was going to come down they would sound far more hawkish I think today I think they may have raised rates even further and so finding the data that's out there that can kind of provide you with unique insights is important and we have a lot greater access to it today the most important economic indicator that someone at home should be studying regularly so I'll do maybe one that's a little bit different than than I think today it's all about inflation but I don't want to talk about inflation as much I think if you look um at the quits rate in the US economy so this is the percentage of people that are actually actively quitting their jobs it's just remarkable how that has been the best indicator for labor market slack it's the best leading indicator for wage growth is kind of this great summary statistic for how you should think about the labor market um Janet Yellen used to talk about it when she she was Fed chair we're get we'll get an update of it this week with with the joltz data and I really do think it's important for thinking about the economy right now because right now it's telling you that wage growth should normalize over the next several quarters if that happens I think the FED feels a lot more comfortable with potentially easing off rates at some point at some point in time but if it reverses when inflation's already high showing a tightening labor market accelerating wage growth that'd be really problematic uh the next time I see you will my Mayo be $8 I hope not for you you want me to keep pay $1 no I don't for your case I hope it is oh $8 is good $8 is good okay all right we'll leave it there uh Deutsche Bank chief us Economist Matthew LTI thanks for always uh making time for ya finance and welcome to the opening bidf we appreciate it thanks for having me [Music]

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Length: 24min 1sec (1441 seconds)

Published: Mon Apr 29 2024