Moody's Talks - Inside Economics - Focus on the Fed

Episode Date: May 15, 2026

On this momentous day at the Federal Reserve, with Jay Powell handing over the chair to Kevin Warsh, the Inside Economics team, along with guest Julia Coronado, Founder of Macropolicy Perspectives, and colleague Martin Wurm, consider all things related to the venerable institution. There’s, of course, the issue of Fed independence, and beyond that, what changes the new Fed chair may champion. And soaring stock prices and bond yields, and what they mean for the economy, couldn’t help but be topics of conversation. Guest: Julia Coronado, President and Founder of Macropolicy Perspectives Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics Follow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Marissa Dina Tally, Chris DeRees. Hi, guys. Hi, Mark. Hey, Mark. How's your week been, guys?

All good? Good. I'm up in Silicon Valley with tech folks for Moody's ratings event that I spoke at yesterday. For the tech industry? For the tech industry, yeah. How are they feeling up there in Northern California? They're very bullish.

I bet they're feeling good. They're feeling really good. And that's Julia Coronado, our guest. Hey, Julia. Hi, how are you? Good to see you. Good to see you. Thanks for joining.

Julia is the founder of macro policy perspectives. How long has the firm been in business, Julia? Nine years. We are embarking on our 10th year. Can you believe it? It's amazing. Congratulations. Thank you.

Thank you. All is going well. Are you headquartered in, I'm guessing you're virtual, but you live and operate from Austin, Texas, correct? Austin, Texas. Yep, yep. Used to be a New Yorker, but moved down there before the pandemic, and it kind of stuck. Well, it's a nice place. It is a nice, nice.

You've been on the podcast before, I believe. A couple years ago, I think. Is it a couple years ago now? Okay. And before that, you had a number of stints in different. B&P Perryby saw. Yes, yes. Yes, Barclays Capital.

Barclays, yep. Federal Reserve Board. And then you were at the Fed for a number of years. Yes. What did you do at the Fed? I was a staff economist. I got hired out of my PhD program and worked in the flow of funds section. Oh, cool.

Actually, looking at household balance sheets and some issues. You still call it the flow funds? Well, no, it's the financial accounts. the United States, but once a flow of funds person, always a flow of funds. I'm with you. I'm with you on that. Yeah. Yeah. Yeah. So it was actually a very good training because then I went to Wall Street just before the GFC and, of course, understanding balance sheets and how they interact with the economy turned out to be extremely useful experience to have. Right. Oh, so you were at the Fed as a researcher during the GFC? Right before. No, so I went to Barclays in 2006.

Great timing on my part, you know, to leave the comfort of public service, go to the private sector just in time for the biggest financial crisis since the Great Depression. But, you know, all's well that ends well. And here I am, still standing. Yep, very good. And we're going to talk a lot about the Fed because today is May 15th. It's kind of a big day, isn't it? In Fedland? We have a new Fed chair. We have a new Fed chair. It is the last day of Jerome Powell's tenure. It expires at midnight, and presumably today or Monday or in the next few days, Kevin Warsh will be sworn in as the new Fed chair. Yeah. And before we move on, though, let me bring in one more of the participants today. That's Martin Warren. Martin, how are you? I'm good. A little chilly. Martin's one of our colleagues. You've been on, how many times you've been on? You've been on a number of times.

A number of times. Number of times. Number, you're going to say four maybe. Yeah, something like that. Yeah, yeah. And of course, Martin's our Fed expert at Moody's Analytics. And so I thought that's where we would begin, Julia. And just to kind of provide a bit of context, you and I are in New York together.

You're in one room. I'm in another room. I don't know why we had to do that, but yeah. The engine is. We're at Moody's HQ, seven world trade. And just we were both at a conference, or conference is not the right word, a convening of economists. Yeah, meeting of the conference of business economists. Yeah, right. And we do this every two or three times a year.

And last night we had John Williams as our guest. We did. Yeah, and it was live streamed. And we had a number of them, my colleagues were up there, up here, able to see him. and we had a lively discussion with him. We did. Yeah. Chardonnay in hand and everything.

That was not John. That was me. I had to be. John was dutifully drinking water. He was a responsible central banker. You and I, perhaps a little less so. Yeah, yeah, so funny. Yeah, so funny.

But I think the chardonnay really helped me. What did you learn from that conversation with John? John was, you know, of course, his usual very careful self. And I don't think he really broke a lot of new ground. But I think he did kind of entertain some, you know, you did some good questioning of Fed independence, of where we stand on policy and the challenge. as they're confronting, he took a few questions, you know, and this is a group of economists.

You asked him a question. What did you ask him? You asked him a question. I asked him about the inflation that we're starting to see that is related to the AI buildout. So we've got a number of sources of what we think will maybe be transitory inflation. The tariff shock is probably mostly through the pipeline. Now we have the oil shock and some, you know, associated price developments. But there's a new front of inflation that's creeping in tied to the buildout of AI. And it's going, it's so big and it's going so fast that it's really pressuring things like the memory chips and other inputs. So we kind of see software and hardware prices creeping up. And there's a number of measurement issues around that. But I asked him, you know, are you watching that?

what do you make of that? And, you know, he kind of, he acknowledged that they are, in fact, watching that. They are well aware of this new element of inflation and that that will go in the bucket with everything else in terms of balancing the tensions to their mandates. I mean, it's the only answer he can give. But it's nice to know that they're in the weeds enough to notice that this is yet another sort of independent source of inflation pressure. Yeah, so AI is juicing up demand more than supply at this point. I mean, through the data centers and investment and through the wealth effects, which we're going to come back to because you've done some really good research there recently.

And that's outstripped the productivity gains, which so far seem pretty modest. It's the other thing I've been learning, you know, with some of the folks here. And so you're saying that's inflationary. electricity prices are up, that would be the poster child, but, you know, chip prices are up. And that goes into everything and driving up costs. And that's what you're suggesting. Exactly. It's more, I mean, if we think about the J curve with any new technology and how there's the investment phase where you're actually, you know, it's reducing productivity because you have to pay up front for the investment and work through the adoption. and then the dividends are realized over time. So I think we see that same footprint in inflation

where, you know, the investment is pressuring the supply side before it yields the dividends. And then there's other issues with AI, with software in particular around quality adjustment. So we don't quality adjust software. That's something the Bureau of Labor Statistics should think about. But, you know, that would require resources in time, and we know that they are short on both. But it is a new measurement of AI in GDP, in inflation, is another front of analysis that we all are going to have to confront, whether it's the statistical agencies, economists like ourselves, or Fed officials.

Are we measuring this properly? Where are the gaps? And how should we adjust the numbers that we're looking at accordingly? Yeah, the conversation with John also began. I interviewed him, you know, and began with Fed Independence. I thought that was, I pointed out

that John has been with the Federal Reserve System since his start of his career, so over 30 years. He was a Fed researcher at San Francisco. then became the president of CEO of the San Francisco Fed. And now, of course, he's the CEO and president of the New York Fed and said, okay, you love the, you love the institution. How do you feel about bed independence and the context of all the things that are going on? Let me ask you the same question, Julie.

How do you feel about Fed independence and the context of all the things that are going on? And obviously, this is an important day for that, right? I can be a little bit more forthcoming. I mean, I think you asked a very good question of John, and that is, how do you define Fed independence? And he defined it as the ability to make decisions free of political pressure and in a rigorous manner consistent with, you know, good, deep analysis and a focus on the medium-term outlook for the economy.

So that's a pretty good definition. he, you know, his answer to you was, you can trust us. We're still doing the job the way we've always done it, which I don't doubt is correct. But the threats are coming from outside, not within. And they are creeping in through personnel changes. And we already have seen that a bit with Governor Myron, who, you know, actually did the unusual thing of keeping his job at the Council of Economic Advisers while he was a lot. a Fed governor, kind of an overtly political tension there. And then Kevin Warsh, you know, his confirmation hearings, he was trying to walk this tightrope between promising to be independent, but also, you know, kind of not saying anything that would make Donald Trump angry, including not even admitting that lowering interest rates would, you know, risk pushing up inflation. And so, you know, we are at this very strange crossroads. I think the risks to Fed independence are real. I think that's why Chair Powell decided to stay on as Fed

Governor. So I don't think we can take for granted that it is eroding. I think the fact that we already have had this, the most partisan confirmation vote of a Fed Chair ever. Oh, I didn't know that. Is that right? Yeah. Yeah. Yeah. So. It's 54-45 or wasn't it? something like that. Yes. And I're saying that's the closest vote for Fed chair in history. That is the most divided vote for Fed chair ever. And even for Volker.

So even for Volker's second term. So, you know, I think that really speaks to the moment we're in. We are in a moment of deeply divided partisan politics. And that is and not just that, but the administration right now is very, clearly overtly, explicitly interested in reducing Fed independence and having more executive authority. And they don't really hide that, that desire, that strategy. And so I think that the system is working really hard to stick to its principles for, you know, how they make policy. But we're entering a whole new era with the Warsh Fed. We're really hard. We're really,

really going to have to see how he manages his job, how he interacts with his colleagues, how he communicates with markets and the public, and what kind of policy decisions he makes. Yeah, I want to come back to some of the things he's proposed. But before that, let me bring in Martin and Marissa and Chris. Martin, how do you feel about Fed independence and the ability for the Fed to to maintain their ability, the focus on policy as opposed of being influenced by politics.

Yeah, so I agree with Julia that the pressures are definitely real. I mean, that's very public. I think in the near term, the Fed will still be able to maintain its independent, largely based on the personnel that's currently on the Fed. The FMC has been pushing back pretty hard

against the outside influences. Jerome Powell's staying on is one example. I think the recent descent on FMC language from some of the regional presidents also speaks in that direction. But of course, people, you know, they rotate out. Over time, the longer war stays on, the Fed composition is going to change. And we'll see how that plays out. I think in a near term, he's going to have to work with the OMC rather than against it.

He seems very combative. That's sort of his style. But the reality is he doesn't immediately have the votes to change things very dramatically. I think that's sort of my sense on that. So, Marissa, Chris, do you want to take the other side of this? Anything you'd like to add, Chris? I'll take the other side, even though I largely agree. How about this?

You know, presidents, this is not unheard of. Presidents have often expressed an opinion historically about interest rates and fed policy. So, you know, yeah, maybe it's a little bit more aggressive or more. in your face, but has something fundamentally changed here that really should alarm us, right? Still seeing as Martin is presenting here, we still have, you know, 12 votes out there. It's just one vote. You know, are we overstating the case here in terms of the threat to independence or that would be my counter. And Julia, John was kind of, he didn't say that exactly, but that was some, like a sentiment that was coming through to some degree, wasn't it?

because he harking back to history. Yeah. So, yes, he was sort of saying, all is well, don't worry so much. Yeah, right. We got this. And I agree with Martin. The structure of the institution was designed to withstand political influence, and at least in the near term, I believe it will.

The difference is, per Chris's questioning, I think the difference, And this is, Powell delineated this at his press conference very, very elegantly, which is everybody job owns. Everybody, you know, not everybody, you know, but some, it's not unusual for presidents to job own the Fed and, you know, express what they would like to see happen with monetary policy. The difference is the lawsuits. Never before has a president actively sought to fire a sitting connection. confirmed official on largely flimsy grounds. I'm talking now about Lisa Cook, but also Chair Powell, the subpoenas. So if there was one, Trump took one run at it last July, and then kind of that died down. I think the team, the Treasury team kind of pushed back on that and it didn't really

go over well. Then he went with the lawsuit against Lisa Cook. And that, you know, over time did not seem to go in his direction. So then the DOJ did the investigation and the subpoenas into Powell. And that's very aggressive. That's way, way, way over the line of anything, any other president has ever done. Even when there was conflicts with Truman and the Fed, when the Fed was battling for independence that led up to the Fed. Treasury Accord, there wasn't this like almost personal attacks on sitting Fed officials. This is quite extraordinary.

And I think that the Fed's first reaction, because that's how they operate is to assume that this will die down. We'll keep our heads low. We'll get through this. It'll blow over. He'll calm down. But no, there's a term that we use in markets, talk. Trump always chickens out. But there's another term that Ethan Harris, another economist, who is now retired, but he writes on LinkedIn. And I've always loved Ethan. He's very colorful. Bank of America. Yeah. Good writer. Yeah, former. I worked with him at Barclay's Capitol during the road. Yeah, great guy. So we've got some history. And I like reading his thoughts. And he says, it's actually Tata. Trump always tries again. And I actually, you know, have mentioned that to folks.

officials like don't don't assume that this is all going to blow over you cannot assume that he will come back for you uh and he will try again and he will try a new lawsuit or a new avenue and he's going to keep running at the wall uh and and and i think that that ultimately and and and powell said as much in his press conference he is staying because he's like yeah because of you guys you know if you if you want me to leave you should have just kept your mouth shut and kept your law lawsuits in the drawer and instead he can't resist. And here we are. So I think it's quite a bit different from prior presidents, actually. Yeah. Vers anything to weigh in on here? Anything to add? I'm worried, but I'm a little less, I'm a little less worried than I was maybe a year ago. I mean,

I think at least at least the Supreme Court and a lot of the courts seem to be on the side of that independence, that gives me a little bit of solace, that I agree. He'll try to come back and do it again, but it seems like that is a very unpopular route to go. Yes. So there seems to be some resistance there, even from the side of the aisle that typically, you know, would agree with him. That typically agrees with Trump. No, that's an excellent point, I think, Marissa. I think, and this also speaks, I think, to some dividends that Powell is reaping from work he's done over the years building those relationships. Powell had a very explicit strategy to keep very open lines of communication with both Republicans and Democrats, and his focus has always been on Congress. Congress is the Fed's boss.

So he would go up to Capitol Hill and sit down with them and, and, uh, and, uh, and his focus has always been on Congress. to Capitol Hill and sit down with them and they knew who he was. So when he got those subpoenas, he had them on speed dial and he could raise the alarm bells and they already had that working relationship and that trust. And, you know, I think, look, we all know when you start messing with Fed independence, you're messing with the stability of financial markets, you're messing with the dollar, you're messing with everybody's retirement savings, you know, it gets real serious, real fast. So, yeah, I think this is one area that has even in Congress has shown some degree of backbone and willingness to push back. But, you know, at the end of the day,

one thing that we've heard in our discussions with people on Capitol Hill and on both sides of the aisle is that they do now understand very clearly that the intent of the administration is to get a majority on the Federal Reserve Board so that they can reform or, you know, reduce the power of the regional Fed system and align monetary policy more closely with the executive branch. It's no, it's no secret. It's no secret in D.C. And so that means that we'll be there as long as Trump is in office and therefore, you know, a choice like Powell's to stay on while unusual and sort of maybe not fitting with Fed decorum according to prior norms is actually, you know, to many, to many of us a great relief that he gets it and won't take that for granted. Well, I like Tata. I hadn't heard that. I got to read it. Yeah, it's not good. That's Ethan. He's always got a good quip. Yeah. I'm, you know, obviously we've got to remain vigilant in here and clearly fed independence is under unusual pressure. But I feel much better about it than I did three months ago because Powell is going to stay on for as long as he needs to. And his term doesn't end until 2028. So that's an important date. And to Mercer's point, the courts do seem to be carving out the Fed as a different type of agency that, you know, does require independence. So I take a lot of those on that. Let me, let's one more thing on

the Fed before we move on and talk about markets and the work on the wealth effects. Kevin Warsh to now, the new Fed chair, is kind of put forward a bunch of different reforms, changes. And I just want to get your sense of what you think is most important in terms of those changes. So, for example, it's everything from, I think we should be looking at the dreamed mean measure of inflation, not the consumer expense. Look over here, look over here, you know, because it's a slower rate of inflation. To, you know, maybe we don't need press conferences, you know, after every Fed meeting, which signals, you know, less training. transparency and forward guidance to the balance sheet.

You know, I want to reduce the size of the balance sheet. The Fed has expanded its balance sheet since the GFC adopted a new way of kind of managing monetary policy, you know, ample reserve system. Right. Kind of going back to the future for lots of different reasons. So that's just a few. There's a bunch of other different things that's forward. Of all those things, which do you think is most important?

What should we focus on the most? I think probably the most important is communication. Communication. We've been through a, like, since Volker, from Greenspan to Bernanke to Yellen to Powell, everybody has taken a step to expand transparency, you know, given especially the extraordinary. I mean, part of this came from what Volcker did and some of the public backlash to the decisions he felt he had to make. And then, you know, things like 1994 when the Fed raised, raised really quickly and a few things broke, like Orange County, like Mexico. And after that, they started adopting statements and then with a little forward guidance and then press conferences and then the summary of economic projections and then more press conferences.

conferences and then, you know, minutes released on a more timelier, but just many, many, many steps to make the Fed more and more transparent. The idea being we work, our policy works by markets and consumers and businesses understanding what we're doing and why. And verse, but the critique of that, and Warsh has, you know, expressed this. is that you've done too much. You're holding the market's hand. You know, let there be some volatility, let there be some uncertainty. And so that would be a big change if he peels back transparency in any meaningful way. There's a lot of adjustments. I mean, there's lots of critiques of the summary of economic projections. There's kind of this vague sense that Fed officials talk too much. that, you know, there's debates around forward guidance and whether you should be providing very much of it in an uncertain world. So I think there's legitimate conversations that can be had and adjustments that can be made. And, you know, Powell said that in his recent press conference.

They welcome some review and discussion. But I think it could be a meaningful change if we do really take major steps to reduce transparency. or reduce communication, markets haven't been used to that in a long time. And so I think it would be a change in environments without saying whether that's going to be good or bad. It certainly would be a very different environment than the one that we've grown accustomed to over the last few decades. And so if you think about it in terms of who's investing in markets and who's trading in markets now, well, they weren't around in the old days when there was no. transparency. They're used to transparency. And we are, if anything, the Fed has only gotten more and more

important as keeper of the global reserve currency. And so, you know, that to me is the most salient, you know, change that could impact the way monetary policy works. And yeah, I think the other thing is it's likely to happen, right? I mean, because he doesn't want to work. He was pretty clear about it. Way more clear than I expect. He controls that. He controls some elements of that. And there's a lot of gray areas here, though. He controls press conferences.

He can cancel those tomorrow if he wants. And of course, he doesn't want to communicate if he has to tell the world that I'm not going to cut interest rates. Right, right, right. I've been putting an impossible situation and I really don't want to take your questions on it. Yeah, I really don't want to answer that question. So therefore, I'm not even going to take the question. Yeah. Yeah.

So I don't know if he'll do that as soon. June, but I mean, I, you know, I don't think so, but I can't rule it out. He could definitely pair back the statement. He could, he could, he could. That's already pretty parsimonious, though. The statement is, it's already gotten pretty parsimonious. It's a debate around, you know. There's all extraneous words in that statement, so I don't know. Yeah, yeah, yeah. No, that was then, that was Powell. Janet was a very, you know, she had a fulsome statement, and then Powell's like, we're going to cut a bunch of words out. And so, you know, Warsh will have hit, leave his mark, but, you know, the set interesting question, the summary of economic projections, which everybody gets to speak. And, you know, the regionals like this.

This is where you get the dot plots and the forecast. The dot plot, the forecast. The whole, you get the whole range. The distribution of answers and. Distribution, the risks. Yeah. Martin looks very carefully at all that stuff. Yeah, no, we love this, of course.

And we wonks love this stuff, right? Can I ask Martin, of all the things that the new Fed chair has proposed, other than communication, what's next in importance in your mind? I mean, the one I'd dislike the most is an attempt to move closer back to the old required reserve system. I think the ample reserve system is pretty well established. I also don't think it's going to happen because I don't think there. his appetite on the Fed to really change that. So, yeah, he's holding some use here that I don't fully understand.

There is this idea that somehow quantitative tightening would lower interest rates, which that doesn't really work because the Fed has to sell bonds to public reserves out of the system that should interest, the increase interest rate pressures. There are some changes on the regulatory side from the Treasury that might help this, so change bank equity requirements, that kind of thing. But broadly speaking, this is a system that's central, of the world have used for decades. The Fed has used this since the global financial crisis.

It's operationally more efficient. It is very effective at establishing the policy rate. So I'm not really sure why you would want to change that. I also, as I said, I don't think that's really going to happen, at least not in the near term. But to that point, I agree with both of you. What he can do is he can change communications. That's what he can do immediately. All the other stuff is aspirational, but change the communication path.

That's really to a large degree up to them. I think it's going to be hard to muzzle some of the other FMC members. Yeah. So I'm not really sure that Chris Waller is going to stop taking interviews as he frequently does. But, you know, there's going to be some pressure, I suspect. Hey, Julie, on the balance sheet, and then I do want to move on quickly because I know we don't have a whole lot of time. You know, what problem is the chair Warsh trying to solve, you know, when he says, I want to roll back the balance sheet? What is he hoping to accomplish there?

I'm confused by that. Yeah, it's not, he hasn't articulated it beyond kind of this general sense that having a big balance sheet is akin to the Fed taking a very active interventionist role in markets and that you should let markets function on their own. The reality, though, and Martin kind of articulated this, the reality of the abundant reserve system and some of the solutions that even, say, Governor Myron has proposed that would allow them to shrink the balance sheet would be that, okay, we don't have abundant reserves, we reduce the reserves outstanding, but we have to meet demands in the funding system. And so then, therefore, the Fed makes more active use of funding facilities around key funding moments like quarter end, year end, et cetera. Well, I mean, that's not more or less interventionist. I mean, you could argue that's more interventionist. I mean, I don't think, like, the reality is that money is a public service. You cannot take the government, the entity that regulates public money out of markets.

Just can't be done. So, you know, I think it's a strange framing. Again, I'm with Martin. I don't, I don't, it's not like I love balance sheet expansion or QE. I think there's problems with it. I think it should be understood and studied better. But I think the articulation that this regime is somehow bad because it's like big government. I don't think that's, I don't buy that. Right. Well, I'm going to ask you a question that you may not have an answer to. But I'm going to ask it anyway. And the reason why you might not have an answer is because I don't, not sure I have an answer. Why? What's going on with this stock market? And now the bond market. I'm looking up today.

I look at the 10-year Treasury here today. We are breaking to the upside at the range it's been in for quite some time. We're now at 4, I think almost 4.6 percent. Talk about volatility. It's been in this range between 4 and 4.5 percent for quite some time. Now we're breaking out to the upside. at the same time, if I told you interest rates are rising, what would you think would be happening with stock prices?

I don't know that you'd be saying it's hitting new record highs. Yeah. I mean, I know the stock market's down today, at least so far, but, you know, it's been on a tear here. Yeah, it has been on a tear. So I guess first question is, let's take those two markets one by one. And maybe you can't do that, but why is the stock market doing what the stock market is doing? You know, what's behind it?

So we have this, we are clearly in the middle of a pretty significant transformation in technology that will affect every sector of the economy, every consumer in unknown ways. So the AI and, you know, in our meetings, Mark, we were looking at numbers that are just gargantuan in terms of the investment over the next few years that's going into building out. this AI capacity. They are so large. And there's just a lot of enthusiasm around that. And we have in our group a lot of a few productivity gurus really and experts that have looked at prior cycles and so on. And, you know, some speculative bubbles are a regular feature of technology leaps forward. And, You know, that part of, it may even be arguably a necessary feature to have that kind of enthusiasm and capital rushing in to build out. And then over time, you sort through the winners and losers and the ROI and there's some volatility and unintended consequences. But I think clearly, I mean, you can look at the market concentration.

The valuations are extraordinarily record, the record amount of concentration in AI and AI related stocks, GDP is being increasingly driven by investment. And so I think that's the stock market story. Okay, well, let me stop you there for a second. So you're saying it's AI, okay, the hyperscalers, anything AI related. And you're saying, it kind of sort of said, but maybe I'm putting words in your mouth, but there's a bit of, you said we use the word excitement, that implies maybe a little bit of frothy. is investors getting ahead of themselves.

A bubble. I didn't say bubble. That's a strong word. It's a strong word. But here's the thing. Here's one other, I'm going to throw in one other factoid and see how you kind of bring that into your explanation is stock markets are up everywhere around the world. And AI is a U.S. phenomenon, maybe China to some degree.

But, you know, go look at Latin American stocks. Look at European stocks. Ah, well, yes. That's a different. Yes. And it can't be interest rates because interest rates aren't going down anywhere. They're generally going up everywhere. Well, let's take Latin America.

Latin America, there's a lot of minerals in Latin America. And those minerals aren't. I think it's an AI story as well. You think it's a AI story? I do. I do. I think it's related. There's also a sort of sidetrack story to the diversification.

So there is a desire. even though the U.S. is still clearly outperforming and they're still capital coming in, there is a lot of diversification desires given that the U.S. is behaving more chaotically than it has in the past. And so there is sort of a, I'm going to still buy the U.S., but I maybe reduce my overweight a little bit and try to diversify. Got it. And, but, you know, also there is some, some AI stories in terms of the inputs around the world that are going to be required. I think the European story last year was primarily the European outperformance was a diversification story, right? You know, story value, right?

Let me just protect my, my investments and hedge a little bit against us. So you're saying it's an AI kind of story emanating from the U.S. And then to, I'm a global investor. I'm kind of looking at relative value. I say, okay, U.S. market looks high, highly valued, maybe even frothy. I still have to invest. I can't not invest. Right, right.

So money is diverting to other parts of the world and other equity markets and lifting all boats. And the U.S. market is by far the largest on the planet and doesn't take a whole lot to lift those other boats. That's kind of really thing. Okay. Yeah. And there is a relationship, too, between the bond market doing so poorly. Right. And that is, you know, again, the U.S. is behaving differently rather than the source of stability.

It is now the source of chaos and supply shocks. There are a lot of questions around the dollar. Some of the traditional correlations between the dollar and rates and rates and equities have kind of broken down because of this nervousness. Obviously, the dollar is still, you know, the dollar and the reserve currency, but there is, the U.S. fiscal picture looks pretty terrible. So there's almost a sense from some investors I talk to that actually owning the S&P 500 is, in some sense, is more of a safe haven than than holding U.S. Treasury. or at least, you know, the difference between the view of stocks as the risky asset and treasuries as the risk-free asset isn't quite the same story as it.

You're saying there's a flight to quality out of treasury bonds and to equity. I think so, I swear to God, I know it sounds crazy. That's what I'm hearing. Okay, all right. That's an explanation. I mean, the S&P, if you think about it, it's, you know, future. and the S&P 500, it's so liquid. You can buy it through a million different channels.

You can get in and out. It's like a treasury bond in terms of liquidity. It gives you some nice return. You can play the AI story and maybe just stay away from some of this risk premia that's creeping into the treasury curve. I don't know. Sounds kind of creepy. Yeah, yeah.

I like that explanation. The other theory I had, and then I'm going to bring Chris and Marissa back in to see if they've got other theories. is it goes back to AI. The R-star, kind of the equilibrium yield, the real yield is higher because people are anticipating these big productivity gains in the future, and all the capital needs that surround that. So, you know, more demand for credit, therefore all else equal, you know,

a higher interest rate. Higher R-star. And maybe the R-Stars rise because of that. Yes, yes, yes. Are you blind to that or anything? I think, yeah, no, I agree with that. I think that that's part of the story, too. I think there's any number of ways in which it looks like the neutral rate is higher than it was before.

Yeah, right. Chris, what do you think? What do you think is going on? The stock versus bond, the stock market and the bond market, you know, try to explain those things. I think it's not related. They feel related in a kind of an unusual way. The way, I hadn't thought of the way Julia explained it. But okay.

I mean, it's definitely a theory. But what do you think, Chris? Kind of along those lines, I give you another T acronym, which is Tina, right? There is no alternative, right? I think that's trying to this, right? So I'm a retiree or even a young saver, whatever it is. Everyone's telling me the bonds are a bad deal, right? Yeah.

So what are my options? I'm going to go towards equities on crypto and other kind of high-flying stuff. because how else am I going to make my yield? So that's my sense of it. Yeah, and Chris has gotten around this Tina Brown by investing in crypto. He's a crypto king. I mean, he flies around. Rumor has that he flies on this jet, you know, all over the world fueled by crypto winnings.

It's true. Nice. Yeah, it's very nice. Indeed. I just do this podcast for fun. For fun, yeah. All right, Marissa, I made you last. and that's a pretty tough place to be.

What do you think? I have no idea what's going on with the stock market. I have absolutely no idea. I don't understand why every piece of terrible news is just cast aside after five minutes, and it just keeps going up and up. So I agree. I think globally, I think it is an AI story. I mean, I learned yesterday that our estimates of AI CAPX for 2027 are low.

It's more like a trillion dollars for 2027, which is an insane number. It's an insane number. It's really hard to wrap my head around that. And so I do. I believe the stock market is pretty much all AI. I mean, I would like to tease it out more to see what non-AI segments of the stock market are doing, especially things like consumer disposable goods and that kind of thing, you know, discretionary stuff is probably not doing well, I imagine, but everything is just getting swamped by AI investment. Hey, Martin's the most careful among us. So I'm hesitating to ask him, he's going to say, yeah, yeah, yeah. What are you going to say, Martin?

I'm not going to say anything with a stock market because I don't know anything else. Yeah, I know it. I will add one more thing to the bond market, though. So one of the things that also has changed in the last two years is we've seen inflation. We haven't seen inflation since the 80s. And the reality is long-term bonds are riskier investments, not even necessarily if there is inflation, just if there is the risk of inflation because they make nominal payments. Yeah.

And this shows up in the longer term term premium embedded in these bonds. It shows up in the correlation between bonds returned and stock returns that have really turned positive since 2020, and that hasn't been the case since the 90s. So that speaks a little bit, I think, to why the yields are coming up as much, pretty much anywhere to a couple of countries where that's not the case. Switzerland is doing well if you're looking for a good bond market. And I think that is a bit underappreciated in the bond market story in general, that there is that higher risk in holding these nominal payments.

Does that, we are the stock market, I think that will be a stretch. I mean, it matters a bit of the margins. That's what I would add to this. You were going to say something, Julia? No, I agree with that, and that's actually something. And there's a connection between with what Martin said and what Marissa said. And we just heard this from some of our AI colleagues in the Conference of Business Economists, which is there's a lot of price pressures that come with this build out.

And some of the increase in the CAPEX budgets are not real, but they're not. because the prices, the more there is demand, the more the prices of these chips go up and the components go up. And there's real inflation given the speed and the scale of this investment. And so this is kind of where we started with my question to John Williams. Those capital budgets are going up partly because of real, but partly because prices are going up. prices are, that's just yet another element, keeping inflation stickier and higher. We've been missing on the Fed's target for five years running and there's no end in sight. And yeah, the bond market, I think, you know, we're having conversations with our clients now about when and if and under what circumstances the Fed will raise interest rates.

And I think the notion that the next move is a cut and that it'll come sometime this year is completely priced out of the market right now. Okay, let's end the conversation around a topic. I know you've been spending some time on, and we have as well, the wealth effects. And obviously it fits into this conversation nicely because it used the word bubble, not me, you did. So that would imply the potential to bubble burst, stock prices go down. So we've got all these good fundamental things happening, but investors have discounted all that and a lot more. and that, you know, if they don't get what they expect, we might see a correction. And I think your work on the wealth that suggests that a lot of – this is where the nexus is

with the broader economy, right, because the surge in equity prices has lifted wealth, which is lifted spending by the well-to-do-who own the stock, and that obviously poses a threat if there is a bubble and that does burst. Right. Do I have that roughly right? Yeah, yeah. I mean, we – so, you know, you and we all have similar – machinery for estimating wealth effects and there's these sort of well, uh, well.

And can I ask right off the bat? What is your estimate of the stock wealth effect? Well, that's one of the interesting things. When I was refreshing my, my estimates on this, one thing that has come clear since the pandemic or come through in my estimates is that it's rising again. So there was a, we started this analysis and this framework for thinking about the relationship between wealth and consumer spending back in. in the 90s during the dot-com bubble, turned out to be a bubble, because it was having a meaningful effect on spending in a way that you could identify and measure. And at that time, the consensus was that it's three to five cents per unanticipated dollar of capital gains, we'll find its way

into consumer spending over the next year to year and a half. And then what happened after the global financial crisis is that the dynamic estimates of that wealth effect started going down. And there was some Fed research that kind of looked at that and kind of concluded that that was rising in equality, that, you know, concentration of wealth meant that, you know, the very, very wealthy weren't really spending out of these wealth gains. And another explanation is that, you know, consumers were de-leveraging. And in a de-leveraging cycle, which was the post-GFC cycle, you know, you're just not going to, consumers aren't willing or interested in spending out of wealth the same way. You know, once you've been through two asset bubbles, so the dot-com and then the housing, households might have a lot more caution about, you know,

just marking to market their wealth and going out and spending it. So it went down my dynamic. estimates went down as low as zero. And then they're now back up to three and a half cents. On stock, stock wealth. On net worth. On total net worth. It is being driven by stocks right now. Because home prices are actually appreciating more slowly than income. So that's not driving anything. It is really, and in fact, and there's zero home equity extraction. So it's not at all a housing story. It's all a stock story. And if I take that three and a half cents and I apply it to the last couple of years of data, it hits perfectly. So you see the saving rate declining by a couple of percentage points. You see real disposable income growth has slowed fairly dramatically down to like less than 1% year on year.

Zero. Exactly zero. Yeah. Yes. And so like if it were just for income, we would have seen a dramatic slowing in consumer spending. Instead, it's been it's slow. but it's hanging in there around 2% and we just got some solid retail sales numbers

and you really can attribute so my estimates say half of the 2% spending in 2025 came from wealth effects that's a lot and then you know given what we've seen appreciation so far you've got another percent

in the tank for this year So the wealth effects can, and just to be clear, I'm not predicting any imminent popping of this bubble. I do think that, I mean, any metric of valuations I look at makes me uncomfortable for sure. And any, again, cycles, we are in an era of cyclical asset prices and technology turbocharges, that cyclicality. So at some point, there will be some kind of shaking out and reckoning. But when that comes, that's not my expertise. But we are vulnerable. We're to the extent that most of GDP or a lot of GDP is coming from AI,

a lot of the valuations that are driving consumer spending are coming from AI. We're super, super leverage to the AI story delivering. and the entire global economy is. So at the same time, you know, the outlook features this crazy set of risks, these repeated supply chocks from the trade war and now the Iran war. I mean, the energy people we heard from certainly are terrified. Right. And they can't figure.

They're asking us, why is the stock market going up? You know? Why? Well, we ask them why are, and they're asking themselves, why aren't? oil prices higher, you know? And why aren't oil prices even higher? Yeah, exactly, because our estimates of the wealth effect are very similar to yours. Five cents for the stock market, closer to two cents on housing.

So you do take a, they're roughly equal in terms of net worth that it gets you to about three and a half cents. The other thing, Julie, we've found is it's asymmetric. You know, it's less going up than it is going, is bigger than when it's going down because people's nest egg, right? Yeah. Yeah. And think about that from a demographic standpoint.

One of the things that we're also seeing is some wealth effect on retirement, in other words, a big wave of older workers transitioning out of the labor force. Yeah, even more than you might expect from just the demographic trend, suggesting a little bit of pull forward in retirement from the wealth effect. And again, I had done some work back looking at that in the 90s. and we could clearly identify there was a wealth effect on retirement then. But in the demographic moment we're in, if you actually do get a meaningful correction, you've got a bunch of retirees living on their savings, right?

That, you know, it's a more vulnerable moment than I think in the tech moment, because demographically, we were just a lot younger. Okay, we're going to end the conversation, but we're going to end it this way. I'm going to put you on the spot. I'm going to put everyone on the spot first, and then I'm going to put you on the spot. What's the probability of a recession beginning at some point in the next 12 months? What is that? Chris, what is your number?

37%. 37%. 37%. 37%? Marissa. I'm down 5% from last time. A 5 percentage point from last time. I don't, I'm not even going to ask why, but, uh, is very precise.

Yeah. Well, you know, he can go to the fifth significant digit. He just, you know, he's very, very good that way. In the interest of time. What's your number? I'll say 33%. A third. What is this?

Price is right? Now we've got to strategize. You're taking the tail. Martin's not going to give us a number. I can tell. Martin, come on, man. Here's the funny thing about this. I was going to say 35, but because that's split in the middle, I'm going to say,

our model predicts 40% is the best model that's up. Yeah. So that's got to be right. 35. But I honestly, I don't like this game, as you know. Oh, who? Play the game. Yeah.

30, 40%. I say, what did you say? 30 to 40%? Probably 30 more than 40. That's 35. Okay. That's 35. I'm saying 35.

I'm saying 40. My number is 40. That's our model. I was going to say 42. I'll take a little, I'll take the upper tail. I'll take 42. How about that? Oh, okay.

All right. Very, very good. And is that because of the concerns about the equity market? Is that kind of sort of why? The seed of it comes from the straight of Hormuz, which is still closed. And if it stays closed, we will have a global recession and the U.S. can be resilient for a time, but we will not be immune. And then what that could do is you would need a stock, I think you would need a stock market correction to actually see a recession. Yeah.

you know, given how big a role the equity market's been playing. So it would be strict on moods, reckoning, stock market correction, recession. I want to thank you, Julia. You spent a little more than you wanted to with us, I'm sure. I'll have to say, I was pushing John a lot last night, and he was pushing back. You know, you were much nicer on me than John was. John was a lot harder on me. Because I had that chardonnay in my hand.

Yeah, yeah. It was so good to see you. Thanks so much for participating, and we'll have to have me back on. Sure. Anything else, guys, before we call it a podcast? Marissa, anything? No, I'm good. No, Chris, Martin.

No? No, no words of wisdom. Thanks for coming on, Julia. This was great. Yeah, no, it's been fun. I enjoyed it. Okay. Okay, with that, dear listener, we are going to call this.

a podcast take care now talk to you next week