Fed to Cut Rates ASAP | JULY CUTS

today suggested the potential in this

interview we're about to play for cuts

starting as soon as July. Now, this

actually has some historical precedent

and it's worth just briefly talking

about some of this historical precedent

because even Nick Te's talked about it.

But in environments where the Federal

Reserve starts to become concerned that

the labor market is going to weaken,

yes, the Federal Reserve can not only

look forward, but they can act forward.

This is why I've been in this confusing,

conflicted place personally where I've

said, "Look, if I were in the Fed, I'd

already be cutting because I'm worried

about the labor market collapsing later

in the year, especially over the next 3

to four months." Nick T wrote a

fantastic post and it's worth paying

attention to exactly what he said. Uh

Nick T told us, "Hey, back in 2021, it

was actually normal for the Fed to work

ahead of policy." Take a look at this.

The Fed was cutting ahead of the

contraction in payrolls in January of

2021. They did 150 basis points of cuts,

350 basis point cuts before they got a

negative payroll print. In other words,

they saw the pain coming in the labor

market and they moved ahead of the pain.

This is critical because if you move

ahead of the pain, you could soften some

of the pain. Don't get me wrong, though.

Markets didn't bottom in January of

2021. Markets bottom at the end of 2022

and March of 2003. And I want you to

understand the difference between rate

cuts and why markets bottom. The Federal

Reserve began cutting January 3rd. They

cut 50 basis points. Unemployment

numbers about 105,000. What's our

average right now? About 130,000. Fed

cuts again Jan 31st minus 50 basis

points. The Jan 3rd cut was actually

intermediating.

Payrolls in February come in high 268 uh

with uh uh to for for January with a

revision in December to uh uh up 19,000.

So very strong job numbers over here.

Payrolls come in at 135 roughly the

average we have here in March. They end

up still cutting 50 basis points March

20th. Then we get our first negative

payroll print April 6th86,000.

As soon as you go under a h 100,000, you

usually get nervous because that's when

you can actually revise down. So we get

our negative payrolls print April 6,

2001. What happens? Boom. Every single

meeting, there are eight meetings a

year. They do 50 basis point cuts plus

another 50 basis point cut after 9/11.

Now rates started higher then than

roughly where they are today. But the

problem is or or I think the indicator

here is a the Fed has been willing to

cut preemptively in the past. The

problem was the bottom didn't coincide

with the Fed starting to cut. The bottom

of the market actually coincided with

the Federal Reserve saying, "Okay, it's

time to basically, you know, institute

the Fed put." And the Fed put wasn't

instituted until March of 2003.

So, you basically had a year and a half

of that dot bubble blowing uh before you

really got uh a bottom that consistently

you could grow out of. It was

approximately you kind of had a double

bottom October of 2002 to the beginning

about March of 2003 and then you were

able to really grow all the way through

about 2007. A nice four-year rally

before you got the dot crisis. But the

Waller interview was really the first of

of any kind of interviews where we're

starting to see some potential interest

in preemptive cuts. JPOW talked about

how they have to use data that they're

getting now and concerns for tariff

inflation uh over the next three months

as a reason why they need to wait. The

problem is JPA isn't factoring in that

you can have tariffs uh show up in

margin compression at corporations and

margin compression may lead to layoffs

which is why you would want to cut ahead

of time. Margin compression isn't

inflationary. It is a negative to

employment. Uh so let's listen to El

interview and see what we can glean from

Steve. You know, as I've been saying for

probably a year, I think the important

thing for central banks to do is to look

through tariff effects on inflation.

This is a longstanding view going back

40, 50 years. So any tariff inflation we

should see and I've given various

estimates that I don't think it's going

to be that big. And we should just look

through it in terms of setting policy

and look at the kind of underlying trend

of inflation. And right now the data the

last few months has been showing that

trend inflation is looking pretty good

even on this guy is a dove in fairness.

But I agree with him like we are going

back to the great moderation. And again

consumer prices are still way higher

than 2019. But you should know if you're

looking at Fed policy, there's a

difference between what prices are today

and inflation. Remember this cup of

coffee in 2019 was a dollar. Okay, I'm

making it up. The same cup of coffee

today costs you $10. Okay, I'm making up

the numbers. Okay, as long as the next

cup of coffee isn't more than roughly a

dollar, $10.20, 20 cents were good. It's

still way more than it was in 2019,

right? But that's not what the Fed cares

about on a 12-month basis. So, uh, I

labeled these good news rate cuts. When

if inflation comes down to target, we

can actually bring rates down. I've been

saying this since about November of 23.

So, I think we're in that position

that we could do this in as early as

July. Woo.

Do you think you could cut rates as

early as July? By the way, that would be

very bullish for me. Like one of the

things that makes me a little like fussy

is I think JPA's he's he Okay, I don't

want to sound like Trump, but he is a

little too late. Okay, like I I'm not

saying that because of Trump. I'm saying

that because I understand what JPAL's

doing. He doesn't want to repeat the

1970s. He's really concerned if you if

you lose the very little credibility

that they have left by repeating the

1970s, you could truly destroy the

economy and it becomes almost impossible

for the Fed to ever gain respect again.

If they repeat the 1970s, the Fed will

close down. They will shut down the Fed

and you will have no central banks.

Honestly, you know, maybe there's maybe

there's a case for that. I'm just saying

it it would create massive economic

upheaval in in the short term. it would

be very very very bad. Uh and it would

hurt a lot of people. And that's what

JPAL's trying to prevent because he's

more worried about preventing inflation

than he is about job loss. At least for

now. Once they realize we're back on the

trend of the great moderation, it's not

going to worry. Cut, cut, cut, baby.

Well, I remember also I think in by

2032, we will be back at negative

interest rates. You might not remember

this, but before COVID in Germany, we

actually had negative interest rates

where if you put $1,000 into a bank, one

year later, you'd have like $990.

They would charge you for not spending

your damn money. I think I that would be

my view whether the committee would go

along with it or not, but I think we

Sorry to keep interrupting. Somebody in

the chat says, "Can you please explain

the double cut before election?" Yes,

the labor market, the labor, you should

look at the labor data. Not only were

six-month unemployed numbers

skyrocketing, which have since leveled

out, but we were also getting some

pretty ugly and low reads that were

close to potentially being revised

towards the negative territory. The

labor market was freaking out. Labor

market had a gorgeous rebound under

Trump's uh sort of election, you know,

before he was even in office. It's

unclear if that Trump bump lasts. That's

what people were worried about, right?

Are in the position that the data is

good. GDP growth is going to be near

target, our long run target in the first

half of this year. Unemployment's at our

long run target. Inflation's running

very close to target. Yet, we're 125 to

150 basis points above where the median

uh long run neutral policy rate is. So,

I think we've got room to bring it down.

And then we can kind of see what happens

with inflation. If it got at really bad

and people got very nervous, you could

just pause. But I think we're in a good

spot right now for talking about

bringing the rate down.

Would you want to begin a process of

bringing rates down by 125 or 150 basis

points now? No, I think you'd want to

start slow and bring them down just to

make sure that there's no big surprises,

but start the pro. that that would be a

fair I mean frankly like what's 25 basis

points really going to do if and this is

why I mean to me they're going to be too

late. It's going to be September or

November before they decide and it'll be

based on jobs data. Uh and they'll

probably end up going 50 or 75 if the

jobs data rolls over. They might even go

a full point fast because remember

JPAL's mindset. JPAL doesn't think like

Waller. Waller's thinking, hey, let's

just slowly start ratcheting down 25 25.

JPEL is more of like, no, let's just

wait to see what happens with inflation,

and if over the next four meetings we

realize we need to bring rates down,

we'll just drop rates 1%. We could

always rapidly drop rates. And in

fairness, I see both sides of that

argument. I do.

Oh, by the way, this is why, and I I'm

promise I'm not trying to like shill

this, okay? This is this is just I want

you to know where my head is, okay?

Because people always are like, "Oh,

Kevin, you know, what stock you buy? You

what are you doing with your money? What

are you doing?" Okay, I believe you have

to understand this this first. I believe

that we will go back to negative

interest rates in the broader modern uh

democratic economies. So, not China, not

the commies, okay, but Europe and the

United States, the United Kingdom. We're

going back to like negative interest

rates, zero interest rate policy by 2032

at the latest. I've been saying that

since 2022 when we had 9% inflation. I

said, mark the calendar. 10 years from

now, we will be back at zer and negative

interest rates. So, what did I do in

2022 to start positioning for 10 years

from now? This is this it's like all

part of my long-term plan. And my

long-term plan could be totally wrong,

but what did I do in 2022 to literally

align with my 10-year plan? Launched

House Hack. Okay, again, not to be a

pitch here, but I launched a real estate

company. So, here we are 3 years later,

we've got 72, 73ish million, maybe even

74 now, in assets, no bank debt, right?

So, we've got a little bit of

convertible debt. when that converts in,

you know, 27 89, whatever it converts,

uh, or we go public or whatever, uh, we

have this cash cow. Whether we go public

or not, we will at some point. I I

suspect that's my goal. Knock on wood.

Whether we convert or not, we have this

this cash cow of $70 million. We could

go refinance and turn into a quarter of

a billion dollars of assets, right?

75ish million down on on a quarter of

billion dollars of assets. Now we got a

crapload of homes at very very low

rates. 1% appreciation every year is

$2.5 million for the company, right? So

especially in the direction of rates

coming down. We kind of think now we're

kind of building when it's unpopular to

build in real estate and and we're

setting up for the return to zero

interest rate policy. That's that's just

where my head is. So I want you to know

that. Uh any I I think that's useful.

Okay. Anyway, here let's keep going.

That's the key thing. we can start the

process of bringing rates down and then

if there's some big shock due to maybe

the Middle East uh conflict we can pause

you know that's not we paused uh back in

January we've been on pause for 6 months

to wait and see and so far the data has

been fine there hasn't been any reason

to

in my view I shouldn't speak I don't

speak for the committee or the chair but

I don't think we need to wait much

longer because even if the tariffs come

the impacts are still the same. It

should be a one-off level effect and not

cause persistent inflation. Okay, fair.

So, let's talk about this uh uh I guess

difference of opinion with some on the

uh committee. Obviously, uh uh the uh

SCP showed the forecast showed that

seven uh uh members don't want to cut

rates at all. Um what is the urgency

right now in your mind to cut interest

rates?

Why wouldn't you want to just wait and

see what the inflation what happens with

tariffs and inflation in the coming

months before you started cutting

interest rates labor right so we've been

on pause for 6 months thinking that

there was going to be a big tariff shock

to inflation we haven't seen it we

follow the data that is what we do we

look at the data and we should be basing

policy based on the data and as I said

if you look forward to if you think this

inflation is going to hit in August

August or September, it doesn't matter.

It's the same impact. It's just a matter

of timing. And I've been arguing since a

year ago that central banks should be

looking through this. This has been

debated for 50 years in central banking.

And the standard rule of thumb is you

look through these types of price

shocks. And that's what I think I'm

arguing that's what we should do. And so

if that's the case, start moving on

cutting the policy rate.

How can you be so confident, Governor

Waller, that uh a rise in prices from

tariffs won't spill over into other

prices and cause a broader inflation

problem? Correct. And I think this is a

valid concern my colleagues often have

about persistence increasing from this

one-time price effect. And as I said, if

uh if you go back over the last 50

years, this was always the concern that

central banks had when there was an

exchange rate shock, an oil shock, a

shock to I I I think, okay, just add

perspective to this. I think what's

happening is again, you've got Powell

that is worried that even if it's a

one-time price increase, Powell's not

worried about it historically being a

one-time price increase. He's worried

about the potential that that one-time

price increase danchors inflation

expectations. So Waller is not wrong to

say that prices could be a onetime price

increase. However, because these tariffs

are so much larger, we've never had

tariffs like this since the Great

Depression. It is entirely possible that

as Donald Trump assigns new tariff

rates, that this inflation, it

reverberates through supply chains for

upwards of a year. And now all of a

sudden you have inflation anchoring at 3

and a half% for a year instead of 2%.

Now people anchor their inflation

expectations at three and a half%. And

then you have to start raising rates

again to get the three and a half%

inflation down because you started with

the 25 basis point cuts. Then you lose

Fed credibility, then you're in the

Fed's worst case scenario. This is why

yes, what Waller is saying is true. if

we have a weaker labor market coming and

if tariffs prove to be one time. But

Powell is worried about something much

worse, the collapse of the Federal

Reserve. And there is a worst case

scenario where if you do what Waller

says, you end up having to hike again,

inflation expectations are ruined and

you just can't solve it anymore

to the value added tax. And the answer

was, well, but the tariff's a one-time

thing or the whatever the shock is, but

then workers will try to increase their

wage demands to make up for the higher

prices. And that was always the source

of the second round effects. But I just

don't see that happening. Now, I gave a

speech in uh Korea a couple weeks ago

where I laid out why I don't think this

persistence will happen. Mainly, the

labor market's okay, but it's not strong

like it was in 2022. So if you were to

walk in today and you think inflation is

going to be 6 or 7%, your employer is

going to show you the door. They're not

going to give you this. That's that's

not what the concern is though. Waller

is oversimplifying this. So

huge wage increase to make up for

tariffs that aren't even showing up yet.

So I don't think that this wage

mechanism is going to be around to cause

these second round effects. And that's

always the standard channel for

generating persistence. I just don't

think it's going to be there. Okay.

Do you have concerns now for the labor

market? We just talked about the Philly

Fed being ne negative unemployment.

You've had this modest rise in jobless

claims and of course something of a step

down along with recent revisions

downward to the to uh the employment

levels. Do you have concerns for the job

market? Yeah, I'm watching. I mean, it's

solid. It's it's been kind of amazing.

The unemployment rate has stayed right

around 42 to 43 for a year. Just hardly

moving. Yeah, but we are starting to see

things like if you look at the there was

a story in the Wall Street Journal

earlier this week that the unemployment

rate for new graduates is at a 20 or 25

year high. College graduates are not

finding jobs. Their unemployment rate is

7%. In pre- pandemic, it was five. So,

it's that kind of data that's starting

to make me a little worried. We're

seeing job creation coming down. We're

seeing a lot of things like you just

said with the Philly Fed that are

suggesting that maybe there the labor

market's starting to soften more than we

might want it to. Yes. And so in my view

if you're starting to worry about the

downside risk of labor market move now

don't wait. People love to talk about

long and variable L. He is 100% right.

The labor market has been weakening. I

mean postco to some extent it's normal.

You have to remember though what Goulsby

says. Okay, remember like I I try to

study everything the Fed does and just

consolidate and keep it simple for you.

Goulsby has a really good point and he

is historically correct. Okay, I want

you to think about this for a moment. So

COVID, this is going to be the chart.

I'm going to label it UI. I know that's

unemployment insurance, but that's just

the way I label it. Uh so unemployment

uh goes let's go

uh let's go way up and then we start

coming down uh on unemployment and then

unemployment starts coming up again.

This is basically kind of like what you

have, right? So, you've got this sort of

like, you know, very low unemployment

situation to the skyrocketing in

unemployment uh during COVID and then

that slowly comes down to very very low

and depressed levels and then it slowly

starts rising again, right? Usually when

the unemployment rate starts rising, it

doesn't just magically level off. you

know, this this magic level of it like,

you know, oh, everything's going to be

fine. It's just all going to level off.

It usually doesn't happen. It usually

takes a recessionary reset to end this

cycle. So, to end that pain of that

increase, it generally takes a

recessionary cycle. Now, how long is

that going to be? Is it 6 months? Is it

a year? Is it 2 years? 3 years, four

years? Nobody really knows. But this

magical idea that it just ends and

levels off and and everything

normalizes. Yeah, maybe this time is

different and this is just a postcoid

normalization. Maybe is that

historically what happens? No.

Lags. Why do we want to wait until we

actually see a crash before we start

cutting rates? So

should start thinking about cutting the

uh policy rate at the next meeting

because we don't want to wait till the

job market tanks before we start cutting

the policy rate. Yeah, exactly.

At the same time, what's your forecast

for how tariffs affect the inflation

rate? Um it looked like there was some

impact from the tariffs in the May

report. They were offset by other

factors that seem to go negative. H how

much do you think uh tariffs will add to

the CPI or the PCE which you follow?

Yeah. So I mean I think Steve you've

said this many times. There's some

things that are going to go up because

of the tariffs but there's other things

that are going to tend to offset it.

That's why you can't just look at one

category of goods and say oh that's

driving everything. And I think that's

what surprised everybody in these last

inflation reports. And I think that kind

of thing will just continue in terms of

it's possible that continues. Remember

what we've seen in the last inflation

reports uh is that we have actually

started seeing a shift where you are

getting that core goods inflation coming

in being masked by services inflation

still coming down and this this rise of

core goods inflation that's what Powell

is going to be paying attention to is

this going to be persistent is it going

to break inflation expectations of

inflation I've long argued that if you

had a if the effective tariff got down

through negotiations to like 1% 10% %

10%

imports make up 10% of the price index.

So a 10% tariff on 10% of the goods is

only a 1% increase in the total price

level. And that's if it's completely

passed through. Yeah. Yeah. Yeah. Yeah.

But but again,

first of all, we're probably not dealing

with a 10% tariff. And costs of goods

sold might not only represent 10% inside

of a company. They could represent as

much as 30% inside of a company. So the

reality is what if you actually have 20%

on 30%. You know, now you're talking

about a 6% increase in prices. This idea

that it's 10 on 10 is really rosy, bro.

I mean, remember, Taco has not made a

single deal with anyone that is a

deficit nation. Uh other than like the

framework with China of like, okay,

we'll take off the most extreme, but we

still haven't actually made like a real

trade deal, right? we've just like

accepted the status quo of 55% tariffs

for now and like kick the can down the

road. So this means we're actually in a

place where we could end up with deals

like Vietnam where we get oh we're going

to go from the 10% reciprocal baseline

during the pause to 20 to 25% tariffs

which are being rumored right now. We've

seen articles on this. That's way higher

than than what you're referring to

Waller. So I could see P like I want you

to look like think of me as sort of like

if I'm like Powell debating Waller here.

This is what that conversation would

look like in the meeting and understand

the Fed chair has a lot of power to sort

of shape where the votes go. We already

know that this is not being completely

passed through as chair Paul was talking

about actually in his press conference.

Everybody has to eat a little bit of the

pain from the tariffs and so not all of

this is going to get passed through. So

you might see the price in level going

up 3/10en to half a percent. But that's

it. It's not going to cause persistent

inflation. And every model I've seen

from private sector forecasters,

everything shows by the middle to end of

the next year, the inflation rate comes

right back down. It's a one-time level

effect.

Chris, which is what I used to call you

when you were the director of senior,

but Chris, Governor Waller, Chris. All

right. Whatever. Um, so the president

said in a tweet over the weekend that

the Fed board is complicit in costing

the US government hundreds of billions

of dollars by keeping rates too high. I

want to know if you want to uh comment

on what the president said, but also on

this notion of whether the Fed should it

take into account the fiscal cost of

servicing the debt by by where it sets

interest rate policy? No. Our mandate

from Congress tells us to worry about

unemployment and price stability and

that's what we're doing. It does not

tell us to provide cheap financing to

the US government. That is really the

job of Congress and the Treasury to make

sure you have a fiscal situation that's

sustainable that will bring the deficits

down and that will put downward pressure

on interest rates all by itself. So

that's the most important and most

effective way to get deficit cost or

financing costs down. It's not from what

I can do with a short-term overnight

interest rate. That's not what's driving

the cost uh for the financing the

deficit. It does. So, one, it's not our

job. Two, there are other mains that you

should be worried about getting that

done. And we're a kind of a distant

third in terms of having any impact. All

right. Whatever. So, okay, that's

basically the end of the interview. Uh,

okay. Look, obviously that doesn't

really matter much here. Point is, yes.

Is there some enthusiasm around that

idea? Yes. Is it realistic that we're

actually going to get what Waller is

saying? No. Uh the bigger deal to me,

why is it doing this? The bigger deal to

me is actually that Waller is telling

you, hey, you know, y'all know how

Kevin's been complaining about the labor

market potentially causing issues.

Y'all should pay attention to that cuz

it is weakening. Now, does that mean it

collapses tomorrow? No, of course not.

But is it something to pay attention to?

Absolutely. So I think that's the bottom

line here.