>>> WELCOME BACK, EVERYBODY. MARKETS ARE AWAITING THE KEY CPI REPORT DUE LATER THIS MORNING. CONSUMER INFLATION IS EXPECTED TO SHOW A SLIGHT INCREASE ON A MONTHLY BASIS AND A RISE OF 3.4% ON AN ANNUAL BASIS. THAT WOULD BE SIMILAR TO THE INCREASE WE SAW IN APRIL. FOR MORE ON THAT AND TODAY'S FED DECISION, WE WANT TO BRING IN IAN SHEPHERDSON. HE'S CHIEF ECONOMIST AT PANTHEON. YOU EXPECT THINGS TO BE IN LEIN AT 3.6%. WHAT DO YOU EXPECT? >> WHAT WE LEARNED OVER THE LAST COUPLE OF YEARS IS THESE NUMBERS CAN SHOW UP SURPRISES. SO IF A CORE READING SHOWS UP A 0.4 INSTEAD OF 0.3, MARKETS WILL BE UNHAPPY. THE FED CHAIRMAN POWELL WILL HAVE TO EXPLAIN THINGS. I HAVE NEVER RULED IT OUT. THERE'S A LOT OF STUFF AHEAD OF THE NUMBER WE JUST DON'T KNOW. THERE'S A SORT OF BLACK BOX WE HAVE TO GUESS AT. IT HAS MISS BEHAVED OVER THE LAST COUPLE OF YEARS AND YOU HAVE TO BE A BIT CAREFUL. >> EVEN IF IT'S IN LINE ON AN ANNUALIZED BASIS, 3.3% IS HIGHER. THEY WANT TO SEE 3%. HOW WOULD THAT GO TOWARD CUTTING RATES? >> IT'S ABOUT A COUPLE OF THINGS, IT'S ABOUT DIRECTION AND THAT IT WILL REMAIN ON A DOWNWARD TRACK. IT'S BUMPY. WE CAN'T EXPECT IT TO GET BETTER EVERY MONTH. BUT AS LONG AS THEY BELIEVE THE CAUSES THAT CAUSED INFLATION TO GO AWAY, THEY'LL EVENTUALLY GET THROUGH TO THE NUMBERS THAT MATTER, AND THE FED HAVE TO BE AWARE OF THE DANGERS. IF THEY WAIT UNTIL INFLATION GETS BACK TO THE TARGET AND THEY WAIT. THEY'LL HAVE LEFT IT TOO LATE. IF YOU WAIT UNTIL YOU'RE ABSOLUTELY CERTAIN, THEN BY DEFINITION YOU'RE TOO LATE BECAUSE POLICY TAKES TOO LONG. SO THEY NEED TO MAKE A JUDGMENT ABOUT WHETHER THE TRAJECTORY IS GOOD ENOUGH EVEN IF YOU'RE NOT OF THE DESTINATION YOU WANT TO BE AT. >> IF YOU'RE WRONG, IT CUTS IN AND IT TURNS OUT, OH, MY GOSH, WE SHOULDN'T HAVE DONE THAT. THE PATH OF LEAST RESISTANCE IS TO DO NOTHING. >> OF COURSE. THEY'RE VERY COGNIZANT OF IT WHEN THEY THOUGHT THE INFLATION SPIKE WOULD BE BRIEF AND IT WASN'T AND THAT PROVED TO BE DISASTROUS. THEY HAVE A COLLECTIVE REPUTATION, MARKET CONFIDENCE WAS LOST. THEY CAN'T AFFORD TO BE WRONG AGAIN IN THE SAME CYCLE IN THE SAME DIRECTION. SO THIS HAS MADE THEM A LOT MORE CAUTIOUS THAN PREVIOUS FEDDING WOULD HAVE BUN. THEY STARTED TO CUT RATES BEFORE INFLATION BECAUSE THEY KNOW WHAT THEY'VE DONE BY RAISING RATES WILL BRING IT BACK DOWN. >> WHY ARE YOU SO CONVINCED? WHEN WE LOOK AROUND, IT LOOKS LIKE A LOT OF LIQUIDITY SLOSHING AROUND. YOU LOOK AT MARKETS HITTING NEW HIGHS. YOU LOOK AT THINGS LIKE BITCOIN THAT HAVE BEEN ABOVE $70,000. THAT'S NOT SUCCESSIVE OF A SUPER TIGHT ECONOMY. >> CASH FLOW HAS FINALLY SLOWED. LAST YEAR'S CASH FLOW FOR THE CONSUMER WAS ENORMOUS. IT RAN DOUBLE THE LONG-TERM PACE, BUT THIS YEAR THINGS SLOWED DOWN. THE SOFTNESS IS PROBABLY THE START OF SOMETHING SUSTAINED AFTER A LONG RUN OF UPSIDE SURPRISES, BUT THE IMPORTANT CONTRAST, I THINK, IS BETWEEN THOSE VERY BIG PICTURE FINANCIAL CONDITIONS YOU MENTIONED WITH THE MARKET'S NEW HIGHS. LOOKING AT THE STATE OF THE SMALL BUSINESS SECTOR WHICH INCLUDES HALF OF THE WORK FORCE, BUSINESS OWNERS ARE PAYING 9% FOR THEIR SHORT-TERM MONEY. >> NO ARGUMENT THAT THAT IS A REAL CREDIT CRUNCH, AT LEAST IN AREAS OF THE ECONOMY. IT'S JUST THAT IT HASN'T SPREAD EVERYWHERE YET. >> IT HASN'T, NO. >> WE HAD BANK OF AMERICA ON YESTERDAY. IT'S BEING DRIVEN BY YOUNGER PEOPLE AND CASH ON HACHBLTD CASH BALANCES STILWELL ABOVE WHERE WE WERE BEFORE THE PANDEMIC. >> YEAH. SO I'M NOT SUGGESTING THE ECONOMY IS ROLLING OVER. WHAT I'M SUGGESTING IS THE SLOW GROWTH WE SAW IN THE FIRST QUARTER IS PROBABLY MORE REPRESENTATIVE OF WHAT WE'RE BE IN THE REST OF THE YEAR. BIG SURPRISES TO THE UPSIDE. AN FROM THE FED'S PERSPECTIVE, THAT'S A RISK. THE UNEMPLOYMENT RATE IS CREEPING HIGHER. THE FED DIDN'T THINK WE'D GET THERE UNTIL THE END OF THE YEAR. IT'S KIND OF A WEIRD AND UNUSUAL COMBINATION. THEY HAVE TO BE AWARE OF THE RISK THAT IF THEY LEAVE THAT ON, THEN THE RISE IN UNEMPLOYMENT ACCELERATES, AND BEFORE YOU KNOW WHERE YOU ARE, YOU'RE HEADING THWART A RATE OF 5%. THAT'S TOO HIGH. NOT THIS MONTH, NOT THIS QUARTER, PROBABLY NOT THIS YEAR, BUT NEXT YEAR, AND BECAUSE OF THE LAGS IN MONETARY POLICY, NEXT YEAR IS WHAT THEY NEED TO BE THINKING ABOUT NOW. BARRING SOME SORT OF EXTERNAL SHOCK. NEXT YEAR IN 2026 IS WHEN THEY NEED TO GET THEIR HANDS ON THE POLICIES. THEY NEED TO BE THINKING ABOUT THE FUTURE. >> WHEN DO YOU THINK THEY WILL CUT? >> SEPTEMBER, I HOPE. TWO OR THREE MORE INFLATION REPORTS. I'M EXPECTING A BIG PAYROLL NUMBER TO BE REVISED DOWN. LOOKING ACROSS THE BUSINESS SURVEYS FRMGTS, THE PMI, THEY ALL HAVE EMPLOYMENT MEASURES. EVERY ONE OF THEM HAS WEAKENED OVER THE LAST FEW MONTHS. IF THEY'RE RIGHT IT WILL BE WEAK
