- 7/24/2025
Eric Winograd, Chief Economist, AllianceBernstein, discusses what to expect from next week's Fed meeting.
Category
🥇
SportsTranscript
00:00I am joined by Eric Winograd, Chief Economist at Alliance Bernstein.
00:04Eric, great to have you here at the desk.
00:05Thanks for having me. It's great to be here.
00:07So we're talking all things Fed in anticipation of the meeting next week.
00:11Phyllison, what are you expecting in terms of interest rates?
00:14What are you expecting to hear from Chair Powell?
00:16So I think in terms of expectations for interest rates, it's pretty straightforward.
00:19We don't expect the Fed to cut rates next week.
00:22I don't think the consensus expects the Fed to cut rates.
00:24I think that when he starts to talk, he will sound much more open to the idea of rate cuts
00:29going forward than he has.
00:31He's talked about it being too early, being premature.
00:34And while he might say that, I expect him to soften that a little bit
00:37and to sound more open to the idea that if the economy continues to evolve the way that it has,
00:42they could well be cutting rates by the fall, which indeed is what we expect them to be doing.
00:46If the economy continues to evolve as it has,
00:49are you saying that the economy is slowing and that warrants rate cuts?
00:54I think the economy is slowing enough that it makes rate cuts an appealing prospect,
00:58especially when the policy rate right now is above the Fed's estimate of neutral.
01:03Different members of the Fed have described policy as either moderately restrictive or somewhat restrictive.
01:08That's a cue from them that over time they expect rates to come down.
01:12The question really has been when.
01:14And the reason they haven't so far is that they're hanging their hat on this idea
01:18that tariffs could push prices higher.
01:21They don't know how consumers will respond to that in terms of inflation expectations.
01:24And so they want to be a little bit more patient.
01:27But look, the evolution of the economy this year has not included inflation really moving meaningfully higher.
01:33I pretty firmly believe that if it weren't for tariff-related uncertainty,
01:37the Fed would already be cutting rates.
01:38And so by the time they get to their September meeting,
01:40if we haven't seen a meaningful impact on inflation,
01:43and more importantly on inflation expectations,
01:45I think they'll be ready to cut.
01:46Well, we do have that August 1st tariff deadline approaching.
01:50We don't know if the can is just going to be kicked down the road even further.
01:55Do you expect tariffs to ultimately have an inflationary impact, though?
01:59Because, you know, we are hearing potentially 15% with certain countries.
02:03There are sectoral tariffs that are even higher than that.
02:05But we haven't really seen it hit the data yet.
02:08And the Fed is data dependent.
02:09Yeah, so I want to be very careful in the way that I say this.
02:12I absolutely expect that tariffs will push prices higher.
02:15But I don't think of that as being really inflation.
02:18Inflation in the context of monetary policy is sustainable.
02:22It's durable.
02:23It's something that persists over multiple quarters and years.
02:26Tariffs, like other tax increases, tend to have sort of a one-off impact on prices.
02:31And so I think tariffs will raise the price level.
02:33That will impact the way inflation is calculated this year.
02:37But unless it impacts inflation expectations,
02:40unless businesses and households expect that to persist,
02:43I don't think that will stop the Fed from cutting rates.
02:47Break that down for us.
02:49What does that look like, the price increases, in terms of the data?
02:52Does that mean just one or two months of a higher CPI?
02:57What does that actually look like?
02:58So we generally look at CPI over a 12-month time horizon.
03:02So if during any 12 months you get one of these one-off price shocks,
03:06that will impact the data for that 12-month period.
03:08So let's say that we get a 15% increase in tariffs starting in August.
03:14That will pass through to the inflation basket to one degree or another.
03:17And for the next 12 months, it will keep CPI elevated,
03:22even once the rate of change in prices has normalized.
03:25So let's say prices go up in August.
03:27They won't go up then again in September, again in October.
03:30We're oversimplifying here because it isn't quite that easy.
03:33But that's the basic intuition.
03:34And by the time we get to next year, that will fall out of the calculation altogether
03:38because, again, inflation measures the rate of change, not the level.
03:43And what the Fed's uncertain about is the extent of that pass-through.
03:46We're all uncertain about that.
03:48And how it will impact expectations.
03:50And expectations here are really, really critical
03:53because they tend to be self-fulfilling.
03:55If you expect the price of something to go up next week,
03:58you have more incentive to buy it today.
04:00And so if it starts to change behavior,
04:01that risk is what's restraining the Fed right now.
04:04If we see that price shock in the August data,
04:07do you think that keeps the Fed from cutting in September, though?
04:10So I think it depends also on what's going on
04:13with the other side of the Fed's mandate, the labor market.
04:15Right now, the labor market is stable and solid.
04:18And as long as that's the case, the Fed won't face any urgency to cut rates.
04:21They can afford to be patient in their phrasing of it.
04:24If the labor market starts to weaken,
04:27then they will need to move with a little more alacrity.
04:30They'll feel a little more urgency.
04:32My own expectation is that we will see some weakening
04:34of the labor market over the course of this year
04:36that will prompt them into action,
04:37even if inflation goes up for a time.
04:40I'd love to do a bit of an economic check-in, if you will,
04:43kind of an economic report card heading into this Fed meeting.
04:48Kind of broadly speaking,
04:49if you had to give the overall economy a letter grade
04:53in terms of how it's faring right now,
04:55what would you give it?
04:55So in outright terms, I would say from a level perspective,
04:58you're looking at a B or something like that.
05:01Growth is slowing.
05:02It's slower than it was last year.
05:04And I expect that consumption will continue to slow.
05:07There is a lot of uncertainty among households,
05:09and particularly those at the lower end of the income strata
05:12are showing some signs of stress.
05:14But the labor market has held in.
05:16Generally speaking, in aggregate, income is solid,
05:18and that's keeping things moving.
05:20Inflation has not come all the way back to the Fed's target,
05:22but underlying progress is moving in that direction.
05:25So, you know, again, in outright terms, it's a B.
05:28Relative to expectations, it's a lot better than that.
05:31If we had come into this year at the beginning of the year
05:33and said, hey, we're going to face the possibility
05:35of a 15% universal tariff,
05:37plus all the geopolitical risk,
05:39plus the policy volatility and federal layoffs
05:41and all of these other things,
05:43I don't think very many people would have expected
05:44the economy to perform as well as it has.
05:47Okay, so you talk about the labor market being stable.
05:49What letter grade would that be?
05:50Again, a B. The labor market looks like
05:52it's just kind of hanging out in equilibrium, right?
05:55We're adding jobs at a remarkably steady pace
05:58given the volatility in terms of policy.
06:01Wage growth is still comfortably beating inflation in aggregate.
06:05It's normalizing.
06:06It's at a level that's close to being where the Fed would want it
06:09to achieve the inflation target over time.
06:12You are seeing some cracks emerge.
06:14When people lose jobs, it's taking them longer to find a new one.
06:17Continuing claims, which we got this morning, for example,
06:20are at cycle highs, but initial claims are quite low.
06:24We are not seeing layoffs.
06:25So you can't give it a poor grade.
06:27People aren't losing jobs.
06:28It's not accelerating, so you don't want to give it an A.
06:30I'm just left sort of with this idea of equilibrium, average,
06:34whatever average is for grades these days.
06:36I would assume you would give the consumer a B then, too.
06:39Pretty resilient, though.
06:40What about the housing market?
06:41Because the latest data points to signs of strain in the housing market.
06:45Mortgage rates are high.
06:47Inventories are still pretty low.
06:49And we're just not seeing the housing data outperformed by any means.
06:53Well, you're right to point that out.
06:54And I assume it's not a coincidence since we got more data on that this morning.
06:57The housing sector doesn't get a B.
06:58I'm not sure what letter grade to give it.
07:00The trajectory, though, isn't favorable.
07:03Obviously, house prices have gone up a lot and mortgage rates are elevated.
07:06They're hovering just below 7%.
07:08That has apparently resulted in a weakness in demand.
07:13You combine that with a little bit of oversupply, particularly of new homes.
07:17If you think back to the beginning of next year,
07:19builders were very optimistic because we all thought that the Fed would cut rates more aggressively,
07:23that mortgage rates would come down.
07:25They ramped up their construction activity, and then mortgage rates went up.
07:28And so they're left sitting on inventory.
07:31We tend to measure the housing market in terms of months of inventory on the market.
07:35And for a new home construction, that inventory is elevated.
07:38What we are seeing now is that sales of existing homes are also low,
07:42and inventory of existing homes is also going up.
07:46Based on the Case-Shiller Index, we've seen prices fall a couple months in a row.
07:50Not by very much, and obviously they're still elevated relative to history.
07:54But it does look like there's weakness in the housing market.
07:56And unless and until mortgage rates come down quite significantly,
07:59I don't expect that we're going to see a real turnaround there.
08:02It's a good reason to expect to slow down in the broader economy in the second half of the year.
08:06There's a big knock-on effect from what goes on in housing to everything else.
08:10And let's wrap that part up just by giving your view on manufacturing right now in terms of how that's performing.
08:15Yeah, look, I'm left as I was with the labor market and the consumer.
08:20It's stable.
08:20We're just kind of hanging out.
08:22And when you listen to what businesses say, when you listen to the anecdotal evidence,
08:26what you get is this perception that they're frozen to a degree by the uncertainty around tariffs.
08:31It's not that business is collapsing, but businesses have been very reluctant,
08:35and understandably so, to undertake major hiring or undertake major capital investments,
08:40because they don't know what the policy regime is going to look like.
08:42We do have the fiscal package sorted out now, so that's one source of uncertainty removed.
08:47If we get through the August 1st deadline, and that seems to be the last word or close to the last word,
08:52that removes another source of uncertainty.
08:54And then businesses can go back to the normal business, if you will, of matching supply and demand
08:59instead of worrying about the policy framework.
09:01And then we'll get a better read on what the outlook is.
09:04But for now, it's holding in, treading water.
09:06So if the overall economy is holding in, doing better than expectations,
09:11it's safe to say the Fed has at least until this point achieved that so-called soft landing?
09:18Yeah, look, I think that at this point the Fed could, they won't, because this isn't their way,
09:22they could absolutely say mission accomplished, we've generated a soft landing,
09:25a very soft landing by historical standards.
09:27They've done an exceptional job managing this part of the cycle.
09:31But now we're into a new world where the policy framework has changed around trade policy in particular,
09:35around government spending and government revenue.
09:38All of those changes move us into a new cycle where they have to do the job again.
09:42The job of monetary policy is never-ending,
09:44and that's why you will never see the Fed stand up and say mission accomplished,
09:47because the mission continues.
09:49And we have a president who has been very critical of Fed Chair Powell.
09:53How would you rate his handling of monetary policy up until this point?
10:00And with, you know, given your expectations for what's going to happen next week,
10:05which is basically nothing.
10:06Yeah. So look, I think you, if you consider Chair Powell's term holistically,
10:12you have to downgrade performance because they were very slow to recognize the inflation
10:16post-pandemic and the way that it would spread through the broader economy.
10:20So no question, that has to impact the way you want to assess the Fed's performance.
10:24Since that time, I think they've done an outstanding job in generating a soft landing,
10:28but that initial mistake was a big one.
10:30And, you know, it had very real-world consequences.
10:34You're correct that President Trump is being critical of the Fed.
10:38He's not the first president to do it, although he is doing it in a unique and idiosyncratic style,
10:43as he does many things.
10:44I don't think that will impact the Fed's deliberations.
10:47They simply can't play politics, both because their congressional mandate prevents them from doing it,
10:53and because it's a losing proposition for them to try.
10:55If they were to cut rates, some people would say, well, they're doing that because of the president.
11:00If they don't cut rates, people will say, well, they're doing that despite the president.
11:03One way or another, you're going to get blamed.
11:06And honestly, getting blamed is a really important part of what the Fed's job is.
11:10That's the price of being independent as a central bank, right?
11:14The reason that they are independent is precisely so that they can do unpopular things
11:18and be blamed for it without facing electoral consequences.
11:22They can do things politicians can't.
11:24Paul Volcker today is revered for having beaten inflation, for having reinforced Fed independence,
11:29for having brought the economy to heel.
11:31If he had to stand for elections, he would not have been able to do that.
11:35And that's why central bank independence is so critical.
11:39But on that note, we've heard a lot of talk, a lot of chatter about the Fed's independence being in jeopardy.
11:45And we have President Trump potentially meeting with Fed chair power, at least the Fed, later today,
11:51the first president to do so in some 20 years.
11:53How concerned are you that Fed chair Powell's job is at jeopardy,
11:58but even more so that the independence of the Fed could be at risk here?
12:03I'm not a legal expert.
12:04I can't tell you.
12:05It appears that the president cannot fire chair Powell.
12:08But this administration has found ways to circumvent court decisions in the past.
12:13One never knows.
12:14Certainly, I think, like most market participants, I would hope that that is not the case,
12:18because an independent Fed is so critically important.
12:22The pressure campaign isn't helpful.
12:24But look, if the president were to remove Powell, or as you say, let's broaden it out and say what if the Fed's independence is called into question,
12:32I think that has the potential to be very disruptive, particularly in fixed income markets.
12:36And the reason is that, historically, central banks that aren't independent accommodate and tolerate higher inflation.
12:43Doing what is politically expedient usually means stimulating growth, and stimulating growth can be inappropriate depending on the circumstances of the economy.
12:52And so I would expect in that world that bond market investors would have to put additional inflation premium into bond markets,
12:59and that would likely push longer-dated yields up, sort of contrary to the administration's objectives of lowering yields, right?
13:06I think that if they were able to remove chair Powell or compromise the Fed's independence, it might be counterproductive from their point of view.
13:13We talked about mortgage rates, right?
13:15Mortgage rates are indexed to longer-dated bond yields, and if bond yields go up, so too do mortgage rates.
13:21And if you reduce the Fed's independence and inflation expectations go up, that's exactly what happens.
13:25So ultimately, we might not get rate cuts anyway.
13:28Well, I think you would get the rate cuts, right?
13:29If you were able to, if the president were able to put his person in at the Fed, the probability of rate cuts would certainly go up.
13:36But the long end of the curve might sell off anyway because of additional inflation expectations.
13:41And, you know, you would look, I would look at least, if that were to happen, to see other inflation assets that people think of as inflation hedges go up,
13:49so gold or Bitcoin or whatever, even as the yield curve steepens quite significantly.
13:54Okay. One final thing that we haven't talked about yet is the likelihood of a recession.
14:00We've been waiting for this recession that so many forecasts a couple of years ago to hit.
14:05And, you know, to your point, the economy has remained very resilient.
14:10What is the likelihood at this point that the economy, I know the economy is cyclical, at some point the recession will come and, you know, the bearers will be right.
14:17But what's the likelihood of the U.S. economy entering a recession?
14:20So I've seen a lot of recession probability calculators that different sell-side banks put out.
14:24They're all nonsense because we don't have enough data.
14:27We don't have enough historical evidence, you know, to really calculate this with any precision.
14:32So I'm not going to try to be precise about it.
14:34But are there any signs that the U.S. economy could be on the brink of something worse?
14:39No, not right now.
14:40And that's not atypical, right?
14:41The last several recessions have not been business cycles-driven recessions.
14:46You know, the textbook recession is one where the central bank over-tightens and the cost of credit goes up and demand slows in the economy.
14:53The last few recessions haven't been that at all.
14:55One was the COVID pandemic.
14:57One was the financial crisis.
14:58One was the tech bubble bursting.
15:01One was the savings and loan crisis.
15:03You have to get all the way back to the 80s before we have sort of a typical recession.
15:07So it's not at all unusual that on the eve of a recession, you would look at the data and think everything is more or less okay.
15:13When we look at the data right now, you think everything is more or less okay.
15:17If you knew nothing else, you would say that the odds of a recession on any 12-month period are about one in eight.
15:23One in every eight years is a recession.
15:25I think you have to observe the risk of that is probably somewhat higher right now, given the policy volatility, trade policy with monetary policy somewhat restrictive.
15:33Does that get it to, you know, I don't know, 25 percent, 20 percent?
15:39Something like that seems reasonable.
15:40So higher than your, you know, normal probability, but not so high that I think we should be losing sleep about it right now.
15:47Okay, we'll leave it there.
15:48Eric, really appreciate your insights.
15:50Thank you so much.
15:52That's Eric Winograd of Alliance Bernstein.
Recommended
1:47
|
Up next
1:43
0:58
1:40
17:00