Power Lunch - Countdown To The Fed 6/11/24

Episode Date: June 11, 2024

The Fed’s latest decision on interest rates is now less than a day away. And when the year began, many experts were expecting several rate cuts this year. And now we may not even get one.One criticism of the FOMC: it’s made up of only economists. So we put together our own “Mock Fed” consisting of market experts, former Fed officials and a real estate mogul. We’ll reveal what THEY think should happen with monetary policy right now. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome everybody to power launch alongside Kelly Evans. I'm Tyler Matheson. Glad you could join us. We are 24 hours now from the Fed's decision on interest rates. And we've created our own version of the Fed to discuss what they would do on rates. Not what they think the Fed's going to do, what they would do. More on that coming up. Looking forward to it. But first, let's get a check on the market. It's about 24 hours away from that Fed decision. And the Dow, while it's down by half a percent, Apple is helping it by 70 points. The S&P, by the way, down to the market. three, the NASDAQ in the green right now. And look at shares of Apple up six percent on a delayed positive. It's like the Fed meeting. Sometimes it takes 24 hours for the big reaction. And here we have it today. Apple shares up six percent to a record high. Now, ahead of the Fed decision, financials are dragging the broader averages lower. Goldman, Amex, JPMorgan, having the most negative impact on the Dow. Well, the Fed decision on interest rates is less than a day away, as we mentioned. And when the year started, we had some investors expecting, or more like hoping maybe,

for several rate cuts this year. And now we may not get even one. One criticism of the Fed is it is run only or largely by economists. So what if business owners, market investors, economists all had a say in monetary policy? Well, we are going to answer that question right here, right now, today. We have put together our own mock Fed consisting of market experts, former Fed officials, economists, and a real estate giant. Don Peebles, William Lee, Julia Coronado, Roger Ferguson, David Zervos, Claudia Somm, and Paul McCulley. And we asked them to vote as a mock Fed governor would and decide whether to cut, to hold, or hike based on their areas of expertise

and how they see the economy. And here's their decision. With the exception of one person, Don Peebles, the mock Fed has overwhelmingly voted to keep rates right where they are right now. Let's bring in some of the members of our mock fed panel now to get them to share on why they voted the way they did. Don Peebles, I'm going to start with you as the outlier. You say cut rates.

Don't just leave them where they are. Explain your reasoning and get the conversation going. Well, great. The first two reasons why is the consumers who make two major purchases in their lifetime, and that's a home and it's a car. They do it with debt. So up until 1983, the cost of capital interest rates, were included in the calculation of inflation.

And since then, they haven't. And as a result, we've used interest rates to kind of manipulate inflation. Now, let's think, for example, also what's happening is that the commercial real estate industry has hit an unanticipated snag, which was the impact of COVID. People are working remotely.

And so it has decimated the office building market and the commercial real estate market. And as a result, it is having a devastating impact on local and regional banks. And so by keeping these rates high as they are, the Fed is creating a banking crisis that is going to percolate into the big money center banks as well. Bill Lee, why don't you answer? Let's pretend that you're in the room discussing what to do with interest rates right now. Why don't you respond to what Don just said in his argument?

Don has a fantastic set of arguments for each of the sectors he mentioned. I absolutely agree with him that a lot of the hurt is in the consumers and commercial real estate sector. But I want to remind Don that we, the FMC, have to worry about the overall economy. The overall economy itself is doing very well. Inflation, unfortunately, stays stubbornly high. Service sector inflation stays stubbornly high at 4%. And if we let up now, one of the bad things about policy is that it's asymmetric. It's very hard to get inflation to come down as we see.

But it's easier for us to quickly lower rates if there's something that really goes wrong. So given the asymmetric risk, I think the best decision now is the whole thing. tight until we are clear that inflation is going down to 2% on a decidedly downward path. It takes three to five data points to determine to be sure whether or not we're going on that right path. And as I said, with the unemployment rate below 4%, the economy is doing quite well. Don, I want to come back quickly to you, and I don't mean to put words in your mouth, but you seem to come very close to saying that rising interest rates were inflationary

in and of themselves because they pushed prices on certain things higher than they otherwise would be. Am I understanding you correctly and that you believe, therefore, that cutting rates might be deflationary or disinflationary? Yes, exactly. Americans, the two biggest purchases are homes and cars, and both of them, now the cost of them in the last three years has doubled. And so as a result, their buying power has been diminished significantly. Groceries and other things like that are important, but also,

I mean, we're talking about jobs, too. Jobs are beginning to get cut. Corporations and banks are cutting. Financial services, businesses are cutting, and we're going to see more of it. But to destabilize our banking industry for the sake of protecting against inflation is a mistake. And we've seen this in the early 90s with the junk bond prices. And it looks like it again, Jamie Diamond was just comparing where we are today with the junk bond prices. I love that point.

Don, it's definitely worth reflecting on. Julia, are we doing the dots here? because I note that your dots might be a little bit more dovish than some other members. Explain. Well, so I agree that the bar should not be excessively high to move forward with a sequence of adjustments. I think we're now nearing the territory where we're going to have to decide about if you start earlier, you can have the luxury of going slower versus waiting for real signs of weakness in the labor market when you might have to play catch-up and cut more aggressively. So I think I'd like to see if, few more prints on inflation. On my baseline, I'd be writing down probably two cuts, but maybe three,

depending on the CPI on Wednesday. If we see a step down in housing inflation in the CPI and get a low 0.2 print on core inflation, then I think that's pretty good indication that that key element of inflation is moving into a lower range, and we can have that elusive confidence that inflation is moving in the right direction. In that case, I might even write down three cuts just as a way of injecting some diversity of opinion on the committee and make sure that we keep those tradeoffs firmly in mind and not just follow the most lagging indicator that we have. The unemployment rate hitting 4% for me is significant. Significantly high, worrisome. Yeah, I mean, it's a big change from the low. It's not hitting the SOM rule yet, but, you know, the direction of travel is pretty

consistent. It's not just about one month of noise. There is definitely some loosening in labor market conditions. Sounds like you're not far off from joining Don Peebles in the cut camp. Not terribly far. I think June is very prudent to hold. But again, I think we should be making good on the promise that was May. We're going to keep rates high and then we're going to move it down with inflation. And so far, they keep sort of shifting the bar because the labor market has been strong. Fair enough. But again, we're nearing tougher tradeoffs. We have the SOM rule herself on this mock Fed panel. I think we've heard about this rule about eight times in the past hour and Ms. Somm, Professor Somm, interestingly enough, the last time

we spoke, you didn't want to listen to your own rule. Where are you on that now? But at any point in time, we should look at the totality of data, as Chair Powell says over and over again. I would not want to use one indicator, even if it has my name attached, to assess the economy. Now, I absolutely agree with you. We have seen moderation. If we look over several months, if we look over labor market, if we look over inflation, as the world moderates, the Fed should be moderating as well. And so it's setting up that path. And I think it would be too disruptive to cut interest rates tomorrow, even if I think that might be the right thing to do. It's important for the Fed to shift its rhetoric and really embrace. We are on a path to moderate and make sure we get,

if nothing adds a verbal easing of interest rates before the Fed starts to act. Paul McCulley, it sounds like it, who is going to jump in there? I was, it's Don Peebles. I just want to say something about labor. Let's just think about the impact immigration that's had on labor. I mean, we have, we are, our country needs an influx of immigration, legal immigration, but we need them to come in to expand as our economy continues to expand. And I think a big issue here that we haven't looked at, and the Fed's not,

looking at is the impact that these difficult immigration policies have had on the workforce. And I think that's what is making unemployment a bit more stubborn. Paul, it sounds like Claudia and Julia are a couple of steps away from Don Peebles, who's forging the head in the cut rates area. What do you think? How do you respond to what you've heard so far? and if you were on the inside of the FOMC having this very debate, what would you be saying we should do?

And if you wouldn't mind, react to this idea. I'm hearing some of the folks say, hey, we're at the point where the economy is starting to show some signs of softening and that that may be where we get that last tick down in inflation comes from. I think you'll hear a lot of amen from me from the standpoint of what we've heard. heard so far. I think two cuts in the dot plot is where I would come out, and I think that's where the FOMC will come out, down from three in March to reflect essentially the bad inflation data that we've had in the context of a sturdy labor market. But I would not move down from

three to one on the year end dot, because I think that the economy, moderating is coming into better balance and very much agree with the notion that inflation is coming down and we're hung up on the OER. So I would want to have lean on the Dovish side looking at December. So two looks about right for me. And I actually agree with Don that the rate is too high for a longer period of time than the immediate weeks and ahead, predominantly because the yield curve is inverted, which I look at as a tax on credit creation by the banking system. So I think

we're broadly in alignment here so far. We're looking forward to what the rest of the panel is saying. But I don't think we're slowing precipitously. I think we're in alignment. I think we're in a soft landing. And I think they can stand pat tomorrow, move the year-end dot from three to two, and then let Chair Powell, a wonderful storyteller, manage the market at the press conference.

Whenever people are in agreement, we like to turn to David Zervos for a different take. And this is the perfect moment. And Dave, I know what I love about you, participate, normally you say to me, I don't want to tell you what they should do. I'm only going to tell you what they're going to do. So clarify for me what exactly you're trying to do here.

And listen, I feel like you're the opposite of Don peoples. Don maybe wanted the cut. I thought maybe you were going to say, I don't know, a hike. You've been more optimistic about the economy thus far and saying, hey, QT, you got to, anyway, go ahead. Tell us your thoughts. You know, Kelly, you took away my line. I was going to make that statement up front of this. This is not what I normally do.

So I like to tell people, I think, how they're going to be a good fiduciary. and knowing what I think they should do isn't going to help them be a better fiduciary, knowing what I think the Fed is going to do, might help them be a, hopefully will be helping to be a good fiduciary. So you put me in a different role, and I promise I will act out in that role accordingly and move toward what I think they should do, which is a role. Actually, I've spent time doing in the past as I was a Fed employee during 2009 and in the early 1990s for three years.

So here, I gave a hold, and I will give a surprisingly to me a more hawkish bent on it, I think the economy has surprised for eight quarters now. We've had eight quarters of on average above 2% growth. The last quarter was the first one below two after some extremely strong acceleration into the end of 2023. Most economic forecasters, including the Fed, but outside private sector as well, and the markets were forecasting recession and cuts all through 23, and they were just wrong. So I think the humbling has to be why, and being careful about not being wrong again for the same reasons.

So to me, this story is really one about being humble with what's happened in the last eight quarters, rampant disinflation, very strong growth, supply side drivers for economic activity, dominating demand side drivers, and really trying to maybe not spend so much time on that demand side because it didn't matter as much. And I think a lot of the arguments for why you cut are demand side arguments. They have very little to do with the strength that we've had on the supply side or the potential for diminishing strength, which would be why cuts might be interesting. I will say encountering to Don, there are lots of sectors that actually really do enjoy higher interest rates and have enjoyed higher interest rates.

The pension funds are loving this. I think the corporate pension plans in the United States, which have been underfunded for three decades, are now fully funded for the first time. Insurance companies, many banks that didn't overinvest in bad commercial real estate are actually kind of enjoying a lot of this higher rate, higher margin world that they live in. The financials have generally enjoyed it and done well. Many of these financial stocks are near their record highs. Elderly people that have savings are certainly enjoying it. There's a lot of folks that actually win in a higher rate environment. And I think we should all be very humbled sitting on a committee like this.

First of all, thanks for having us on here. But second, humbled by what's happened, 525 basis points of rate hikes since March of 22. And really nothing's broken. And if anything, everything's accelerated. And inflation has come down. It hasn't fit the storyline that many thought was the right storyline, which is that unemployment was going to have to go to 6 or 7% to get inflation down to 2 and the Phillips curve somehow still exists, even though we know it doesn't.

So I think staying pat and staying a little more concerned about inflation for longer is the right storyline. And I think that's what Jay will be. We're close to out of time, David. I want to turn back to Don because you addressed him specifically on a couple of points. Don, last word to you. Well, look, there's a quiet before the storm. These banks and many of these pension funds are looking down the barrel of massive losses in commercial real estate.

The good news is that they have diversified, but any public employee pension system, and most of them have invested in real estate, any one of them that has got some big losses coming and have already experienced losses, and they're going to try to get it back from the opportunistic investment of making investments during the carnage that's getting ready to happen. All right, Don Peoples. And thanks to our mock Fed panel. We enjoyed it. I hope you guys did. That was great. Thank you all. And we're going to continue to hear from all of you around future Fed meetings.

This is the first of many meetings to see how your opinions and votes change. Yep. Be sure to tune into our coverage of the Federal Reserve Interest Rate decision here tomorrow, starting at 1 p.m. Eastern with the decision live at 2. And the press, sir, we should always emphasize 2.30 at well. Coming up, snore or score is Apple's AI offering good enough to sell more iPhones? We'll discuss in tech check when we return. Welcome back to Power Lunch and check out shares of Apple today.

They are up 6% to a new all-time high. All of this optimism now after those AI announcements yesterday. It seemed kind of, I don't know, sleepy at the time, but not today. The stock hitting a new all-time high sitting at $3.1 trillion in market cap. Steve Kovac is joining us now. And Steve, why the delayed reaction? Yeah, Kelly, well, what a difference a day makes. Apple shares up, like you said, about 6% today.

after falling 2% yesterday immediately after that long anticipated AI reveal. So the question is, like you said, what changed overnight? Well, a slew of bullish Wall Street commentary this morning about how all those Apple AI features will drive hardware sales later this year. That's because if folks want to use those new AI features, they need last year's iPhone 15 Pro or presumably the next iPhone model coming in a few months. Let's call it the AI iPhone FOMO effect. Here's a taste of some of the streets more bullish commentary of what we heard at WWDC.

Goldman analysts in a note this morning saying the AI features, quote, should help to drive demand for products, also raised their price target, implying a 23% upside over the next 12 months. And Morgan Stanley's Eric Woodring echoed that in his note this morning, saying the hardware requirements will speed up iPhone upgrades. And that's really just a thesis for now, though, but this is not going to be put to a test for a few more months. months when we're expecting the next iPhone model. Most iPhone owners in the install base right now

of more than one million devices will not have access to Apple's AI. So we'll have to wait and see in a few more months if they spring for an upgrade earlier than they planned just for the AI guys. And now we have Elon Musk kind of reacting quite strongly to suggest maybe he's not going to let the new iPhone come into his offices if he thinks it might let out trade secrets to open AI. Yeah, here's a shocker, Kelly. Elon, Musk probably doesn't know what he's talking about here and he's just tweeting through it. I don't know what he was watching yesterday, but it was not the same presentation I was at in person, and it's not, doesn't jive with what Apple executives told me yesterday following the events.

The chat GPT slice of this is an optional feature. Sometimes if you have Apple intelligence on your device and you ask you a question, it may prompt you and say, hey, do you want to try and use ChatTBTPT for this query instead? You don't have to do that. Most of what was announced yesterday, just the vast, vast, vast majority of what we saw is running on Apple's proprietary AI technology. Now, you can be skeptical and say you don't believe Apple's privacy. Here's the thing.

Just to jump in for a moment, so we spoke with David Kennedy, who you know last hour about this, and he thought it was a legitimate concern. And he pointed specifically to when you ask Syria a question, and she asks, do you want to answer on chat GPT? In other words, taking kind of the spoken or, written command and then feeding it back into open AI, which could then expose it and kind of get it outside of Apple's more closed ecosystem. It doesn't do that unless you tell it you want it to do that. So that that's the, it's not just sending it willy nilly, Kelly.

Sure, but what if an employee is sitting there and so like, as we all get accustomed to use as either, the employees in the cafeteria and he says, what was the score of the basketball game last night? And for some reason, Siri can't answer it and says, do you want cheap cheap to eat and he says, sure. Okay. Okay. Then. Yeah, well, then the data goes. So that In that case, first of all, you're giving permission to do that. And it's being very clear. This is not Apple's technology doing it. It's just like using the chat cheap BT app on your iPhone.

It's just, but skinned differently on the interface built natively in iOS. This is not everything you do on your iPhone going off to Open AI so they can analyze it and train their data on your data and so forth. You'd have to ask it something more like, you know, specific to your company's trade secrets, I suppose. But then there are those of us who know, well, Siri seems to be listening all the time. Yeah, exactly. Can Apple assure us she's not going to just auto backend something to, you know, open AI or chat, GPT that we don't insist. I can totally guarantee you the researchers are eager, and there are already some commenting on this, Kelly. Cybersecurity researchers, like the one you had on last hour and so many more are dying to get their hands on this to see if that what you just described is happening.

Again, you have to put a little trust in faith in Apple to believe it, and you're totally right to be skeptical because this is unproven technology and so forth. But, you know, my read into the must situation was, you know, first of all, his tweets were wrong about the way this product works. And second of all, you know, it comes off as sour grapes. Let's be honest. He does not like Open AI. He is suing the company over the fact that they're not, you know, fulfilling their nonprofit mission or whatever. We've since seen in emails and so forth that he actually wanted Open AI to become a profitable business and have a bigger stake and all that kind of stuff and raise more money and so forth. So it's kind of hard to take him seriously when he says stuff like this.

Maybe he will. Maybe he will fall through, but I don't take it seriously. I think you've sort of given the last word there, but I'm going to let you give another last word and that is this. Wouldn't this a similar problem exist if I were using my iPhone? I got an insufficient answer from Siri, and I went to Google and asked the same, and asked it, because then isn't the data metastasizing over to Google?

And that's happening on your iPhone right now. Yes, that's my point. Yeah, so Google is the default search engine. By the way, you can make it Bing or whatever you like to use. Yes, if Siri can't answer the question, it kicks you over to a traditional web search. This is a different version of that. This is an AI version of that.

It's not necessarily for search inquiries, by the way. It's for other tasks, too, that maybe the AAI model that Apple made can't handle. And isn't it true that if I use Bing? If I use Bing, isn't there a partnership between Bing and OpenAI or ChatGPT? Microsoft and Open AI. And that's the other part of this partnership that's super interesting, Tyler, is that when you do use ChatGBTBT within the iOS ecosystem that I've been talking about, again, optional. And I confirmed this yesterday with Apple.

It's not going to Apple servers. those private servers that talked about, it's going to the Microsoft Cloud. Now you can trust the Microsoft Cloud or not. That's your choice. But it is the same experience or similar experience to what you get with the plain chat GPT app or the web version of ChatGPT today, Tyler. Got to leave it there. Steve, thanks very much. And further ahead, the Treasury formerly launching the process to implement the 1% excise tax on stock buybacks.

This comes during a time when some critics claim corporate stock repurchases have gotten out of control. Power lunch will be right back. Stocks are mostly lower right now. Eight of the 11 S&P 500 sectors are down. I think the S&P is actually a little higher right now, no matter. That includes among those sectors energy, even though oil and natural gas are higher today. Let's turn to Pippa Stevens now for an explanation. Why, why, why? Well, they're bucking the trend today with both oil and not gas and the green. Part of that is thanks to some bullish industry reports, including from the EIA, which just now released its short-term energy outlook, they revised up its demand outlook and revised down. It's supply outlook. So that's

lifting oil. But Nat gas is the big winner here today. It was up 7% last I checked. And that's as the U.S. embraces for extreme temperatures. The cooling degree days, that's an indication of how much AC is going to be used. It's set to surge next week and then stay at record levels through the end of next month. Now, of course, you know, its temperature forecasts are notoriously fickle. But if that does come to fruition, then that could meaningfully reduce some of that elevated inventory we've seen still about 25% above the five-year average. But still, not lifting energy stocks, worst group over the last month. Now, Wolf Research said that they think the overbought consolidation is going to reverse. And they had a little bit of a contrarian call.

They said to fade tech and buy energy. Oh, come. A little bit of a contrarian call. They had a funny call. They said, quote, yeah, we know. But it's the trades that cause you to roll your eyes that end up being the most. profitable. So they are aware. Yes, it's true. You know, you want to buy it when everyone hates it and all the rest of it. This is, you could argue, but a buying point then

for energy for quite a bit. But commodities still are good on a three out of four year basis. Pippa, thank you. Pippa Stevens. Let's get to Contessa Brewer now for the CNBC News Update. Contessa? Kelly's special counsel, David Weiss, who led the investigation and brought charges against Hunter Biden, says today's guilty verdict shows no one in this country is above the law. Biden's attorney also issued a statement saying that he and his client respect the jury process, but will pursue all the legal challenges available. Manufacturing and chemical industry groups are suing to block the new federal rule announced this year to set a standard to protect drinking water from so-called forever chemicals.

Named that because they don't easily break down in people or the environment. The groups say the rules exceed the authority of the Environmental Protection Agency. The EPA has not commented. And Disney today gave a sneak peek at the new attraction coming to its Florida and California parks. Inspired by Disney's first black princess, Tiana's Bayou Adventure, based on the Princess and the Frog, will open June 28th. It replaces Splash Mountain. The previous ride had been themed to a Song of the South. A Disney film criticized for its racist cliches.

Kelly, I'll send it back to you. Yeah, we're one of the towns affected by that drinking water rule. That's interesting. Contessa, thank you, Contessa Brewer. As we had to break a quick power check on the plus side today in a big way is Apple. Leading the S&P, helping the Dow, it's up 6%. And on the negative side, Nextera Energy. After releasing new 2027 guidance, that's down 6%.

Power Lunch. We'll be right back. All right, welcome back to Power Lunch. Stocks are kind of flattish, a little lower on the industrials, but a little tiny bit higher on the S&P and the NASDAQ. Bond yields have been falling ahead of the Fed meeting. Rick Santelli is in Chicago with more. Hi, Rick.

Hi, Tyler. Indeed. As you look at intradate chart of tens, you can clearly see that even though we've been mostly higher and price, lower and yield prior to that big drop, rates were climbing a bit than 1 o'clock Eastern. The results of $39 billion reopened tens hit the screens, and it was a solid auction. Investors were very pleased to take down 10-year notes at a pace that surprised the market. and you see the big drop.

That drop put us under yesterday's low yields, you see on the next chart, and not only in tens, all maturities, twos through 30s, are trading under yesterday's yields. But here's where it gets interesting. If I now hook in another day to make it a three-day chart,

hooking in Friday's Jobs, Jobs, Jobs Report, we see we're elevated. We're not only elevated on tens. All maturities pretty much look like that chart, which really demonstrates that even though rates have come down a bit, and we're hovering right around 440 and a 10. The low yield before the jobs report came out was under 430.

So we want to pay close attention to that move. And with tomorrow's big decision day with the Fed, nobody expecting much, which is probably why the dollar index looks the way it does. On pace for a one month high close. Remember, the ECB and other central banks of ease, on a relative basis, the dollar should gain some ground, and it really is nothing but buyers today.

Kelly, back to you. All right, they're anticipating a hold like our mock Fed. Rick, thank you. The Fed kicking off its two-day meeting. Today, actually, our next guest feels that what the Fed does this week won't be quite as important as what they say. It's been a common theme lately. Let's bring in Scott Clemens, chief investment strategist at Brown Brothers Harriman. Scott, it's good to see.

Are you talking about Powell specifically at his presser tomorrow? Well, it's not only the press conference tomorrow. It's the release of the statement. And, of course, this is one of those meetings in which the Fed is going to release. some new forecast and outlook, the so-called dot plot. So there's a lot of information. I think it's universally assumed the Fed won't actually take any action, but how they balance out an observation of economic progress plus an observation of inflation progress might give us some indication of if or when the Fed's likely to begin lowering interest rates later this year.

So I think the market has settled on December for the first cut, maybe September. Is that roughly how you expect this to shake out? and what will you be listening for specifically on that? It is. I think the Fed is kind of in central bank purgatory in which there's not enough progress on inflation yet to allow them to lower interest rates, but there's not enough economic challenges yet

to require them to do so. Keep in mind as well, this is an election year. There's no hard fast rule about this, but the Fed historically has been reluctant to alter monetary policy too close to an election. Fortunately, there are only three meetings left between now and the election, including the one this week, which is hard to believe. So the Fed kind of has a free shot, I think, to wait until December.

Our anticipation has a 25 basis point cut in December, no sooner, probably with more to follow in 2025. Do you believe that a slowing consumer or a slowing economy will do the work of the Fed? Tyler, it could bring that rate cut forward. Right now, what's really motivating the Fed, I think, is seeing inflation come back down into their range. But I think there are some cracks in the facade of this consumer-driven economy. And I'll be reading between the lines and of the lines of the Fed statement tomorrow to see if they're seeing some of those same things. Rising debt levels, rising delinquency rates, falling savings rates. There's nothing to worry about at present. The job market is still healthy. We're still adding

a lot of jobs. Wages are growing in advance of inflation. But looking forward, six months, nine months down the road, there's probably a bit more weakness in the consumer part of the sector. to come. So when do you think the Fed might be inclined to cut interest rates? It felt like, as we talked to our mock Fed panel, it was probably one or two cuts late in the year. Is that where you are? That's where the Fed funds futures market is. I tend to think, and this is a supposition, the Fed will err on the side of conservatism, probably wait until December to put that first rate cut on the table. But whether it comes in September, whether it comes in December, I mean, the debate the important thing is the debate is not about which the direction, the next direction is in the Fed rate,

but when the next cut will happen. That's pretty supportive of financial markets, the economy in general. All right, Scott, thanks for your time today. We appreciate it. Anytime. Scott Clemens. All righty, coming up, stock buybacks have helped drive some big market gains, but a new tax could threaten their existence as we know it. We'll get the key details when we return. We'll be right back. Welcome back to Power Lunch. Let's talk buybacks. Shares of General Motors are hitting a two-year high today, in part because the company is buying back $6 billion worth of stock.

Buybacks have certainly helped shareholders and contributed to the market's big rally, but they've also come under fire because they enriched shareholders. Megan Kasella joins us with a look at the push to implement a tax on buybacks. Megan? Kelly, that tax bill is one step closer to coming due for the 1% stock buyback tax that was passed as part of the Inflation Reduction Act back in 2022. So the Treasury Department's rule is just now in its final stage. and it says the tax will apply to U.S. public companies who bought back stock valued at a million dollars or more. Importantly, it's also going to be backdated applying to all repurchases made since the start of last year. The public comment period on the proposed rule ends today, and once that final rule is published, which I'm told could be within a month or so, the tax payment will be due by the end of the following quarter.

And I want to emphasize here that companies have known that this was coming, but Treasury tells me today that no companies have yet paid this tax. It's on track to kick into effect as buybacks have been rising. Data from Barini Associates shows just over a trillion dollars in repurchases have been made from the start of 2023 through the first quarter of 2024. Q1 of 2024 period in that window with companies spending $242 billion on buybacks. Some of the companies spending the most in that period include Apple, Meta, Disney, Chevron. All of them will have to pay that tax on net buybacks as soon as later this year. And the goal here, guys, is to slow the pace of these repurchases.

But while the numbers might sound big in absolute terms, an S&P analysis shows it would have reduced operating earnings for 2023 by less than half a percent. Kelly. Are there any legal challenges to this? There aren't. There haven't been. And I talked with someone just this morning who's told me he doesn't actually expect any. And that's because this actually is already law.

It's just a quirk in the process that this one isn't in effect yet. So I was talking with this analyst who said, companies may have been keeping their fingers crossed and really hoping that, as with so much else in government, this might have been slowed down, there might have been red tape, maybe they changed their mind and maybe it wouldn't kick into effect. But what we can see now is the process is moving forward. They will have to pay before too long. Would a Trump administration try to undo this? Is this seen as potentially getting caught in the election result? It's definitely possible. This is part of the Inflation Reduction Act,

and we do know that former President Trump has really railed against that program. At the same time, And though, clearly this isn't having much of an impact on companies. If Biden wins, he's already pledged. He wants to actually quadruple this tax. The 1% tax isn't yet in effect. He's already talking about moving it up to 4%. Some of the estimates I've seen are that it would have to hit something like 2 or 2.5% to really start to have an impact on companies.

So it is possible that if Trump's elected, he might like the revenue it raises, realize it doesn't hurt business so much, and says maybe we'll just leave it beat. Interesting. Megan, thank you. Megan, thank you. And coming up, a fresh three-stock lunch. We'll trade some big movers of the day after the break. We'll be right back. Time for today's three-stock lunch here with our trades is a new construct, new construct CEO, David Traynor. David, welcome. First up, let's tackle Goldman Sachs down nearly 2% a day. Concerns about a slowing economy. Lead Goldman and other financial stocks lower. Your trade here on Goldman Sachs, sir? We like Goldman Sachs. We've liked it for a long time. Look, it's the top tier investment bank. It has been for decades. It's got tremendous cash flow. It's still cheap. And we think moving on from Marcus is a bullish sign. Look, they tried the retail product. It didn't work. Goldman is a premier brand. I don't think it was ever really a good fit for retail. So I think it's a positive that they put that in the rearview mirror. And we think it's going to continue just to make a lot of money of all the Wallststststs.

street firms, if you asked me which one would be the last one standing. I would say it's Goldman Sachs. I think generally the investment banking business is sort of in a longer term decline, but Goldman is the best to breed and they're the best position to continue to make money and the stock's still relatively cheap. It's a ringing endorsement. All right, we'll move along to General Motors. We just mentioned this. The board just approved a $6 billion share buyback. The stock is rising today to a 52-week high. You like it? I do, Kelly. And you guys usually give me a hard time for being negative on stocks, but I'm going to give you two buys in a row. I'm surprised. General Motors, yeah. General Motors has been one of our favorite stocks for a long time.

We think it's been unduly punished because of the whole EV fad and craze. That's starting to unwind now. We're seeing EV sales slow dramatically, and we're shifting more toward hybrids. And at the end of the day, we think that sort of this Tesla phenomenon that has dominated, the automobile industry for so long is going to be in the rearview mirror in the not too distant future. Obviously, negative on Tesla, but that means we can be positive on the incumbents who've got distribution and other long-term competitive advantages that Tesla has really proven now they can't overcome. And so we feel like GE will be just fine when it comes to EVs. They can make them too. They can sell high-priced EVs, but they can sell lower-priced EVs better

than I think Tesla. And so I think long term, we think GM is a great play. They've got to focus on return on invested capital and their executive compensation plan. So, yeah, we're big fans of GM. All right. Let's move on to VF Corp, where the CEO, Daryl Bracken expanded his stake in the company, buying about $997,000 dollars worth of the company's stock shares of VF Corp. Higher by 4% today is a CEO buy a positive sign for this particular stock? Often it can be, sometimes not the so much. Tyler, you know, I'm going to go back to trend here and say, yeah, this is one to hold, possibly sell. Look, I just don't think global apparel businesses have any competitive advantages, sustainable competitive advantages anymore. There's, right, I mean, it's everything is super cheap to make. Nobody has a distribution advantage. You really, I think, to own a stock like this, you've got to hope that they get lucky. And one of their brands comes up with something that catches fire, it becomes a new fad, and they sell more than expected. Otherwise, you know,

clothes, apparel, unless you've got some really premium brand that allows you to exact big premium prices, which VF Corp does not. I just don't see a way that they can keep margins up. We think this business is in a long-term decline. It's great for the CEO to step in and buy some shares. I don't know if that's window dressing or not, but I think the business itself and the stock price Business is in decline. The stock price is expensive. We recommend hold the sell here. All right, David, thanks very much. Appreciate your time today. David, Traynor. Thank you. Two and three ain't bad. Remember, you can always hear our podcast by checking out power lunch on any podcast platform wherever you go. We'll be right back after a break.

Welcome back. Here's a look at markets. We're well off session lows. The Dow only down 150 points right now. Helped in large part by Apple's 6% pop today on a delayed reaction to those announcements yesterday. And by the way, we're looking at possibly record closes for the other major averages as well. The levels to watch there, 5360 for the S&P, 17192 for the NASDAQ. A little more than two minutes left before we hand it off. Several more stories we want to tell you about. Apple Pay users will soon be able to tap into Buy Now Pay Later loans from a firm. That's a leading brand in that space.

Both companies confirming the option will arrive for U.S. Apple Pay users on iPhones and iPads later this year. While Apple already offers its own buy-now pay-later loans, a firm says this will offer users more payment options, including longer-term payment plans. And Affirm shares are up almost 8% on that news. The main passageway into Baltimore's shipping port has officially been restored following the collapse of the Key Bridge in March, which left six people dead. Engineers say the Fort McHenry Federal Channel was brought back to operational capacity last night.

It's amazing how quickly they can clear all of the tonnage of bridge wreckage and containers that were knocked over. Fixing the bridge is another matter. Sure. That's going to take years. Remember when that portion of the highway is well collapsed around Philadelphia, I mean, they can really move quickly when they need to. All right, it's no secret that buying a home is more expensive than ever, but the cost of maintaining one has gotten price here too.

New data from BankRate found the, quote, hidden costs of home ownership, like property taxes, insurance, utilities, upkeep. Now totaled more than $18,000 per year. on average. My wife and I were going over this. In my town, the taxes are very high. It's like more than $2,000 a month, just in taxes. Oh, this is now the new housing crisis that people are talking about.

Forget trying to afford the house, the carrying cost on top of it. It's astronomical. Insurance, too. All right, and major news affecting one of our stopgraft participants, Joey Chestnut, reportedly banned from Nathan's July 4th hot dog eating contest this year. Major League eating, yes, there is such. says Chestnut is endorsing impossible foods and refuse to participate without promoting the non-meat brand. For the record, Chestnut's stock draft entry is flat since our draft he picked Oracle and Starbuffs.

Come on, let him. I'd like to see how many impossible hot dogs he could eat. Let's see. I always want a NASCAR to include an electric card. Like, broaden the tent. Everybody brought in the tent. Let him in. Free the chestnut. All right. Thanks for watching for our life. those right now.