Welcome back to another episode of what the heck is Jerome Powell going to say to ruin markets this time or make markets this time? That's because hedge fund positioning is pretty dang bearish with both the long and short funds. Well, that's the same kind of fun basically cutting their exposure to equities going into the FED meeting, pairing their uh, rally based exposure, and maybe even doubling down on some of their shorts after having previously covered, we're seeing a lot of disappointment setting up or a very bearish tilt. I Should say for what Jerome Powell has to say today, expectations are uh, leading probably about 20 percent more bearish than they are bullish and a lot of that has to do with some hot data that we've gotten from after. Jerome Powell's a latest conversation.

First, we had a Hot Jobs report, but following that Hot Jobs report which suggested a way more jobs created than expected by nearly a factor of of eight the massive Miss we uh, have reports that the Manheim Used Vehicle Index has officially increased two and a half percent in January This is the largest month-over-month increase that we've seen since the end of 2001. I'll show that to you. charted here: Car dealership got posted a chart on it I'll hide myself for a moment here and you can see the chart of used vehicle prices here. really explosive.

And this explosion here and used vehicle prices really led to a lot of excitement, especially companies like Hertz which ended up going through bankruptcy during this run-up which made their asset book extremely valuable. Uh and uh. we've been declining which has been creating this disinflationary force. Uh, and now we've got a little bit of a pop off again now.

We did have a previous sort of fake out where it sort of went down or it had flattened in the past and then picked up again. I'll tell you where that is on the month over month basis in a moment. That way we can, we can somewhat compare uh, how that is relative to where we stand today. Uh, in terms of what month do we tend to get those little pop-ups? But there are a few things that are happening in the economy that suggest, hey, maybe Jerome Powell's got to be a little bit more hawkish today, so we'll see.

Jerome Powell is scheduled to speak in about 10 minutes. This is at the Washington DC Economic Club now. Last time he spoke at the Economic Club of Washington DC he, uh, he was actually pretty insightful. Uh, I mean I went through some of his prior speeches at this and he's pretty dang willing to talk about monetary policy about, uh, projections, uh, the economy where he thinks things are heading.

So if you're seeing any tentativeness right now in the stock market, that's probably because rightfully so people expect some bombs to be dropped by J-pal here and we're not quite sure if the those are going to remain that sort of a bullish Powell style commentary that we saw last week or if we're going to be looking at a a reformed Jerome Powell one who's realizing that hey, you know what? Maybe it's not all up and maybe we've got to tighten Financial condition today. Who knows. maybe that'll lead markets to tank. Either way, markets tentative right now and we want to take a look at that Used Vehicle index as we wait here for Jerome Powell just to maybe get a little bit of an insight into the latest.

I Wouldn't be surprised if Jerome Powell ends up talking about the Used Vehicle index as well as obviously everybody's waiting to see what happens with that Jobs report. What does this take on that Jobs report? Is it just a seasonal adjustment? Uh, that led to this. this massive increase. It was it more immigration that came in and all of a sudden the immigration, uh, that we saw led to some form of explosion in workers.

Uh, that wasn't. There was a population adjustment made. Uh, who knows. Who knows.

But what we do know is that the prior flattening of the used Vehicle index occurred between August and January of 2021. So August of 2020 through January of 2021, you had a flat period there, then you had a decline period between May and August, and now you've got this sort of Spike over here in January. So I Don't know that you can necessarily say there's something in the calendar that always leads to, uh, this thing spiking or anything. So uh, those are those are going to be interesting developments To pay attention to.

What happens with that used vehicle index? Do we just have a sort of a a one-time pop Or why all of a sudden is that used vehicle index coming up? Keep in mind that the next inflation forecasts are starting to look a little hotter than what we've previously had. Oop, Are we getting started over here standby and it looks like we've started playing music at the event where Jerome Powell is expected to speak, they have not actually started? Uh, the event. You could see individuals here Gathering So nothing happening yet. just keep that on mute in the background while we wait.

Uh, but uh yeah. look I mean a lot of forward-looking signs are very, very clear. We have uh signs that look forward that say look, we're in a situation where we should be experiencing, uh, very, very loose Supply chains. We talked a lot about Supply chains this morning and uh, indicators are that Supply chains are in the path of loosening.

Almost no tightening to be noticed even if you look at the Chinese reopening. Oh oh, tightening is just something we're not seeing in supply chain. uh, Supply chains or shipping chains or rail or Freight or ocean transport. We're not seeing any of that right now.

We don't appear to be seeing the uh qualms of potentially a wage price spiral, which is good because we we don't want a wage price spiral. Obviously, we don't expect to be seeing any of that, but obviously, if we got any kind of indicators of a wage price spiral, you could better believe that Jerome Powell is going to be pretty darn quick. Uh, to start Hawking again. and I think that's what everybody's looking to avoid.

Another hawkish cycle from good old J-pal So uh, we'll see. Right now, it looks like we have uh, the NASDAQ sitting up about uh, 0.3 and uh, there's hope that maybe, just maybe we could actually hold on to uh, some kind of green today and some of the levels that we've rallied to over the past week. So uh, we'll see enthusiasm and hopium though. I'll tell you for the last year has been something that has gotten sold over and over and over again.

so we'll see. We shall see. Uh, but anyway, Jerome Powell is scheduled to speak in about six minutes, so we still have some time again. Things We're looking at: Used vehicle prices.

We are looking at. uh, labor inflation, any potential signs or red flags that we are facing some form of Labor inflation. Big deal. Obviously, if we do, uh, we want to hear about it.

and uh, so far, looking at earnings calls, we don't see a lot of that. kind of fear. Of course, more and more earnings expected this week, as well as next week Still waiting for the transcripts for the earnings calls on things like Spirit and Royal Caribbean Spirit and Royal Caribbean releasing earnings over the last 12 hours here. Royal Caribbean Pretty excited about uh, their, uh, their, their revenue beats and people still spending money on travel.

This is very similar to what you're actually getting in uh China A lot of people spending money on travel travel travel. that seems to be the name of the game right now, which is actually to some degree, uh, good because you're not actually putting that substantial pressure on uh on Goods However, does increase. obviously pressure on Services It is a lower wage style of service, but it's still one that we want to be concerned with. So Jerome Powell uh, any moment now actually scheduled for within five minutes.

So I suppose we've got about five more minutes to go before a Jerome power comes out to talk dirty to us and we'll see what he says. You know, last time I think everyone was relatively pleasantly surprised to see how Uh Dovish Jerome Powell was. In fact, we ran a poll before the Federal Open Market Committee uh press conference and most people seem to be positioned either neutral or bearish. Nobody was really expecting Jerome Powell to to come Out Swinging with with some optimism and hope and that's actually exactly what we got.

So we'll see if that continues now. in the face of those higher used vehicle prices and in the face of that Jobs Report for January which at least based on its initial readings. Oh boy, it was strong. We had a strong read uh, but again, we'll see if any of that can be explained away.

We actually have a report from Bank of America that gave us a little bit of data on the uh, let's see here. This morning we did a bunch of analysis by the way on end phase and phase reports today. but I want to get that Bank of America piece stun by and Bank of America labor report? Here we go. So some commentary here from Bank of America uh Bank of America indicating that significant balances remain in the labor market and the labor Market's basically still going through this rebalancing cycle.

That non-farm payroll exceeded expectations substantially. We already knew that Services were what grew the most nearly 400 000 jobs in January Uh, it's pretty darn strong. But some things to keep an eye on here are: there were weather factors. There were immigration factors.

There was a strike that ended with the UC system in late December You had a much more mild winter than usual. Maybe in a normal winter, a more normal winter, you would actually have more uh, weather or cold weather. Essentially, that would have led to more layoffs. And because we had a more mild winter, maybe we didn't actually see all of that uh, potential pain in job layoffs.

At least that's a that's a thesis that's held. So excuse me a lot of potential factors that could have really skewed the labor report one way or another. again. whether it was strikes, seasonal factors, immigration, weather, uh, who knows.

Either way, it it's very difficult to try to explain away that. Strong Jobs report Very, very difficult. and uh, it's It's quite probable that uh, the uh, the economy is just not doing as bad as people think. uh, and I find it so remarkable that we could actually have a pretty strong economy.

Uh, and uh, folks who are who are upset about that, because really, the concern is, hey, well, if we have a strong economy, we're going to see more inflation, right? That's at least the concern. But we could have a strong economy and inflation. Uh, that. Trends away.

Uh, that is possible. Uh, you know many people will say, well, it's not likely Kevin and I suppose that's where you place your bats, you place your bets. Do you go? Do you go long? Basically. Uh, which is, uh, in the transitory inflation camp and that's what you're in if you're going long stocks right now.

Long: I'm not talking about trading stocks here. I'm talking about going long stocks, you're in Camp transitory. The long-term version of Camp transitory says that. Look, this is a 40-year great moderation cycle that we're in.

We printed our way to Oblivion essentially and uh, wow, what a surprise. we created some temporary inflation Supply chains are back in line and as long as we don't have a wage price spiral, we should be able to eliminate any concerns around uh, inflation popping back up and in which case, you'd probably want to go long because if this is not a V-shaped recovery which we don't think it is and this is more of a, uh, more of a Nike Swoosh style recovery where you come down quickly and you sort of Bob up. Well, you don't want to be that person who's constantly complaining about a double dip recession coming and then you just totally miss the market recovery and then you're going to be that person. in three years, that's like wow, I missed out on you know, a 3X on a bunch of stocks and you're going to be that person that's like it's gonna crash again.

Of course I mean at some point it's always going to crash again, right? So we don't know I mean that could end up being correct or it could be very correct that the the grain that we've seen in January just ends up being some form of bear Market rally and basically just prep and an opportunity to reload on the shorts and to ride another leg down. Nobody really knows. uh, but uh, we will see. Uh, we will definitely see.

Yeah, so it's it's uh, it's quite. uh, quite exciting. I Would say no matter which way you go, probably the best thing to do is just avoid margin, avoid debt avoiding. uh, avoid getting into too much speculation.

All right, let's get started here we go: David Rubinstein Let's go to the economic Club of Washington DC So as I think everybody knows, our special guest is the Chairman of the Federal Reserve board who has now completed five years as chairman as of two days ago your fifth year and now been on the FED board for almost 12 years. So Jay Um, thank you very much for being here. And why don't we start with an easy question. So you made a speech last week commenting on the Fomc's decision to raise the FED discount rate by um, a small amount relatively speaking, 25 basis points.

Some people would say that was small, but at the time it wasn't clear that the Jobs report would be as strong as it turned out to be. Subsequently, had you known that the Jobs report was going to be as strong, would you have done 25 basis points or something different? David Thank you for that question and thank you thank you for inviting me here today. It's great to be here. Uh, so we don't get to play it that way.

Unfortunately, we have to. uh, but I'll I'll take it this way. So the message we were sending at the Fomc meeting last Wednesday was really that, um, the disinflationary process. The process of getting inflation down has begun.

and it's begun in the good sector, which is about a quarter of our economy. but it has a long way to go. These are the very early stages of disinflation. So the services sector, really, except for Housing Services pardon me, is not really showing any any disinflation yet.

So our message really was: This process is likely to take quite a bit of time. Uh, it's not going to be. We don't think smooth, it's probably going to be bumpy. And so we think that we're going to need to do further rate increases as we said.

And we we think that we'll need to hold policy at a restrictive level for a period of time. Then comes the the Labor Market Report for January And it's very strong. It's certainly stronger than anyone I know, expected and so. but but I would say we didn't expect it to be this strong.

but I would say it. It kind of shows you why we think that this will be a process that takes a significant period of time. The the labor Market's extraordinarily strong. and by the way, it's good.

It's a good thing that inflation has started to come down without it. That has not happened at the cost of strong labor markets. So and of course, since then, labor Market sorry Financial conditions have tightened significantly since then, so let me ask it another way. Um, so by the way, when the numbers coming out the jobs numbers 519 000 jobs does anybody call you up in the government give you a little heads up this is going to happen or they never do that.

So on on some Um data. Sometimes we get data just the night before and it's only me, only me and uh so, but not on all pieces of data. It's it's A. It's A.

It's a fairly small amount of data and we get it just just the night before. For example, if we if we were going to get a big piece of data in the middle of an Fomc meeting as often happens on the day of an FMC meeting, it will help me to to know it the night before. Okay, so the markets. Um, after your speech last week, the markets assumed that therefore there would probably be another 25 basis point increase in your next Fomc meeting.

Um, was that a bad assumption by the markets? So what again what we said at the meeting was was that uh, we we believe that we anticipate is what we said that, uh, ongoing rate increases will be appropriate. Uh, and the reason is we're trying to achieve a stance of policy that is sufficiently restrictive to bring inflation down to two percent over time and we don't think we've achieved that yet. So we said that. Uh, and I And you know now you see the Labor Market Report and I think again.

Financial Conditions are are more well aligned with that than they were before. So the Assumption when you made your speech was that. Probably their Fed might even consider Uh decreasing rates by the end of this year and the markets no longer assume that you think the markets are wrong. Well, so let me say these are, um, all of these numbers that we're throwing around here are conditional on incoming data and what happens.

So we never say this is this is what we think will happen. You know we? We make a tentative forecast and then we let the data come in. For example, if the data were to continue to come in stronger than we expect and we were to conclude that we needed to raise rates more than is priced into the markets. Or then we wrote down at our last group of forecasts in December, then we would certainly do that.

We would certainly raise rates more. Okay, so um, today, for people who aren't familiar with the Fomc who is actually is on the Fomc, So there. uh, the U.S Central Bank consists of a Board of Governors. Here in Washington, there are seven Governors.

those governors are nominated by the President and Uh confirmed by the Senate and we serve terms that are that are not synced up with the election cycle. So we're we're independent. There are also 12 reserve banks around the country which have a degree of Independence and they're so the So. each each Reserve Bank is led by a President who works there full-time All 12 of them sit on the Fomc so that's 19 people sit on the FMC So it's quite a large Committee of which 12 vote in any given year The Reserve Bank President's vote on a rotating basis except New York which votes every year.

So when you vote, um, do you vote at the beginning of an Fomc meeting and then just kind of have discussions afterwards. Or do you wait till the very end and then you vote? No, we vote at the end. I mean the whole the Fomc meeting process takes you know more than a full week. I'm talking to all of the participants all night.

all the 18 other ones and staff has sent around memos and there's something called the Teal Book which is the staff's assessment of the Uh. you know of the economy and an international economy and monetary policy and all that. Then we we have an extensive discussion on the morning of the first day about the economy. Everybody talks about that.

On the second day we talk about monetary policy and then we vote on monetary policy at around noon on the second day. so does the chairman of the Federal Reserve board speak first and say here's what I think and or does he wait until the end and say, well, thanks for what you think But let me tell you what I think What do you do Different chairs have done it different ways and so I I tend I've tended to do what my prede media predecessor did: I Think Well, this is what I do I I speak last on the sort of the economic go around so everyone else talks about what they think about the economy and in their district. For example of The Reserve Bank president and I listened to all that and then I give my comments at the end and I kind of sum up what people have said and then I speak first on monetary policy. Okay, so you've said that inflation rate target is two percent.

Um, but why two percent and not three percent? Three percent you know could be tolerable. Really I mean most, For most of organized history, three percent is considered okay. Why do you want two percent? So two percent is the global standard and that is our objective. two percent peace as measured by the the Pce index.

And that's just. that's not something we're looking at changing that isn't going to change. It's that's not going to change. Not going to change now.

But okay, so you need to get the two percent and your goal to get there is by what period of time would you like to get there. Well, we say we say that we're using our tools to get there over time. and if you look at our forecasts, we expect 2023 to be a year of significant declines in inflation. And it's actually our job to make sure that that's the case.

But I would tell you that, Uh, you know, with inflation headline headline Pce inflation is running about five percent. This is on a 12-month basis. Core is running it at 4.4 My guess is it will take certainly into not just this year, but next year to get down close to two percent. Okay, so two percent is firm.

That's you're not going to get off that. Yes, Okay, so flexible. The theory of raising interest rates is that it will decrease economic activity and increase unemployment. But you've been increasing interest rates for a while and unemployment is now at a record low.

So what's wrong with the theory? Why is unemployment not going higher? Wasn't The labor market is strong, because the economy is strong. And as I mentioned, it's a good thing that we've been able to see the beginnings of disinflation without seeing the labor market weaken. Um, it's just that. uh, there's a lot of demand for workers.

In fact, if you, if you look at the supply of workers versus demand for workers, demand for for U.S Workers is now more than 5 million greater than the available Supply. And the available Supply consists of people who are either working or actively looking for a job. So this this is. This was not the case before the pandemic.

The pandemic really had a significant left a list lasting Mark so far on labor. Supply In the United States Labor First Participation rate came down and there now is a shortage of workers and it it feels it almost feels more structural than cyclical. So that that's a that's a significant issue Now you've resisted. I Think saying what unemployment rate would be acceptable to you I Think But is there an unemployed climate rate that you think would moderate inflation such that you would tolerate unemployment at four percent? Five percent, Six percent I guess I Think about it this way.

Um, you know our we have two goals that Congress has assigned us: maximum employment and price stability. Price Stability, as we've agreed is two percent inflation. Maximum employment means if you want a job you can get one. So right now the labor market is at least at maximum employment.

but many would say that it that it is out of balance with more demand than there is Supply. So what we're trying to do is get inflation down. We're not. We're not targeting uh, you know, a different uh unemployment rate.

We're trying. We're trying to use our tools to get inflation to come down over time. In hindsight, would you say that when Kobe hit the economy and we injected five trillion dollars of fiscal policy uh into the economy? and the FED did? uh. Quantitative easing and other related things kept interest rates very low.

Would you say in hindsight, that was a mistake or was the right policy at the time? So I think you have to go back to the decisions that were made in real time and it was something nobody had ever seen. The global economy came to a virtual standstill. People were talking about depression, people were talking and we didn't think we. we had no idea when we would get um, vaccines that worked.

So Congress took very strong measures and we took very strong measures. And you see where the economy is. You've got a very, very strong labor market, but you have high inflation. As I mentioned, we're at the beginning of getting that down.

If you look around the world though, at other countries, they're also experiencing High inflation including countries that didn't that didn't do as much as we did either from a fiscal or monetary standpoint. So that that tells you though that a big part of this inflation is actually related to the the you know, the the pandemic itself, the shutdown, and then the reopening. That's a big part of it. Now the quantitative using program has increased the balance sheet.

I Guess of the Fed and what is your balance sheet now I Think it's 8.4 trillion dollars. It must sound like you know. All right, sounds 8.4 trillion. That was yesterday's number.

Okay, all right. Eight Point Four trillion. Um, what would you like it to get down to over the next year or two? Is there some lower number? So we are in the process of shrinking the balance sheet actively actually, uh, passively as I should say. So what happens is as treasury Securities on our balance sheet mature up to a cap a monthly cap, we we that the balance sheet shrinks in that amount.

same thing with mortgage-backed Securities as they are prepaid or so. So we we, um, the balance sheet is shaking in terms of the target level of it. We haven't put a specific dollar number on it. The idea is we're in a regime of ample reserves.

Reserves are uh, basically deposits at the at the reserve banks and when we get close to that level where we feel that we're we're reserves our ample kind of where we were before the pandemic. Then we'll slow down and we'll sort of test where we are and it. but it'll be a couple of years we think till we get to that level. The FED does not, uh, sell.

Securities that waits for them to mature and then you just, uh, cash them in, right? you don't? You're not in the market selling securities that are not yet mature. Is that correct? That is correct. It's also correct though that we've said we would consider sales of mortgage-backed Securities but I will tell you that's that's not something That is on the on the list of active things things being actively considered. So some people that are worried about the federal debt limit and that we might not be able to extend it on time we have 31.4 trillion dollars of debt.

Are you a little worried about the debt limit not getting extended? So the debt limit is really something for the fiscal authorities to deal with. the FED Our only role in this is that we're that we're the Fiscal Agent of the Treasury Department We're not a policy maker on that and I will just say this: this can this really can only end one way. and that is with Congress raising the debt ceiling in a timely fashion so that the U.S can pay all of its bills when it has do that to happen. And if that doesn't happen, no one should think that the FED has the ability to Shield the financial markets or the economy from the consequences of of moving too slow so you don't have any program in place ready to go if in fact the that limit isn't passed in time.

This is something that Congress has to deal with. and the the so-called trillion Dollar Gold coin solution is not one year in favor of I. Guess I As I said, this ends in only one way. and that way is Congress voting to raise the debt ceiling so that the U.S can pay all of our bills.

Okay, in terms of consultation. Um, do you consult regularly with the Treasury Secretary Terry or the head of the National Economic Council or the president? United States How do you kind of relate to the administration for a long, long time? You know 60 or 70 years there's I think there's been a weekly breakfast or lunch with the Treasury Secretary and the Fed chair and that's what I've had with with Uh Treasury secretaries that I've had as Fed chair. I've also had a regular Oracle I call it irregular lunches with the head of the NEC. We also have regular regularly scheduled lunches with the Council of economic advisors and that's that's really the that's that's the institutional structure of our of our contacts with the administration.

So in the way the Fed works today, If You Could reconstruct the operations of the Fed. you know, would you change the legislation anyway? Would you think the FED operates in a in a way that's as efficient as you can realistically operate? We're not looking for any changes to the Federal Reserve Act I mean I Think it does work the the structure that I discussed earlier where you've got the 12 Reserve Bank presidents coming in. What that assures Really, it institutionalizes diversity of thought. So we get different people coming in who've got different backgrounds, different careers.

and they and they think different ways. And I think that's enormously beneficial to our decision-making process. So there has been discussion recently about the FED. Some Fed members spread board presidents selling their Securities and maybe not doing everything they were supposed to do in terms of disclosing it.

What have you done To fix that process? we put a new system and a new set of rules in place which I think are best in class for a public institution like the Fed. and uh you know the the Innovations were that that if someone wants to sell something that they own or buy something, they have to clear that in advance with with staff at the Board of Governors and then you've got to wait 45 days for that to execute. Also, you can't own individual stocks and they're they're you can only do these. You can only authorize these transactions or execute them during specific times.

Um and it you know it's it's A and we just of course all of these are are disclosed. If if your your idea is to go to trade things, buy and sell them because you think you know you think this stock is cheap and that kind of thing. that's just not something that will work. What is the salary of the chairman of the Federal Reserve board? It's um it's around 190 000 I believe.

Okay so you live on 190 000. If you need to sell something, what do you do You have to clear it for 45 days. Sure that's right we we've you know too, if we have family expenses that if we have them that exceed my salary, then we have to sell and that's I Think that's a fair salary for the job or I do? Yes, Yeah, Okay, so today, um, how do you coordinate with uh, central banks? Let's say in England or Japan or or China do you have regular conversations with them about what they're doing? We do, you know and I meet six times a year in Switzerland with the heads of all the of many, many central banks You know, even even the small and medium-sized ones in Basel at the Bank for International Settlements. In addition, among the major central banks I have regular dialogues going with with most of them.

And so we. What we're talking though about is really what's happening in the economy and how are you thinking about policy and that kind of thing? It's very important that that we keep those discussions going, because particularly in a crisis, you're going to need to know each other and you're going to need to know. You're going to be able to trust each other. And do you think the U.S economy is pretty much in control of its own inflation rate? Are there uh, events outside the United States Like what China is doing or the Ukraine war that are affecting inflation and make you nervous about where inflation might be going? We have the tools.

The FED has the tools to achieve our two percent goal over time. but uh in inflation in the United States is of course very closely related to things that happen here including the balance between supply and demand. It's also affected by for example, commodity prices that are really set on the global markets. you know oil and many agricultural Commodities are are priced globally.

so there there are certainly it's an integrated global economy and Global markets and we you know we are part of that. So you get data from all the various government agencies but do you ever use anecdotal things like you go to the supermarket and you see the prices are high and say this price is high or how do you get? do you ever get anecdotal things or people ever call you up or friends and say by the way you should do this or that do you ever get that kind of information as you only get it from the government reports I mostly get uh data but I will say the the I I Do believe that anecdotal information is very useful and one of the things the reserve banks are great at is all 12 of them have big operations where they talk to businesses and non-profits universities, every sector of the of the country and the economy and they bring that back to the Fomc meetings and they talk about what they're seeing because often you know staring at data is is great but you need to. You need to have a story. And and I think hearing the stories that people tell it does help me to sort of, you know, assess what's going on out there.

So as the Chairman of the Federal Reserve is obviously an important job, how do you reduce the stress level you have I mean uh, you can't be on watching economic numbers all the time. So what do you do to relieve the stress other than interviews like this. Yeah, the usual things I I read: uh, pretty light fiction, detective, and spy fiction I Exercise as much as I can as you know I like to ride my bike I play the guitar I play music. Is that safe? Riding a bike? Um, you know, dangerous and it's it's safe.

it's sorry it's safe if you stay on the bike and that's so much, right, you still play the guitar. I Do I do Yeah, your hair is awfully short for playing the guitar and you need longer hair with your hair longer when you were younger greater it's too great too. Okay, so let me ask you uh, about um, the the issue of um, what it's like to be Chairman of the Fed you? you? you can't go. have you know, regular friendship kind of dinners or meetings? Canyon People People treat you much differently I assume than they used to.

Right when you go to a restaurant are people listening to what you're saying or something like that? I I Have always thought that my jokes were funny David but uh no so it yes it's um I I've never been a public figure before like this and it's very different but um you know it's it's a great honor to serve. Uh but yeah, if you go in public places you have to be very careful about and um which is the president United States ever call you with any advice or you don't realize did President Trump ever call you or President Biden or call you or well I Think it's a matter of public record that president Trump did used to call me from time to time. What did he call you to fire him? Um no I I haven't had that kind of I haven't gotten any calls from uh from President Biden Okay, so the biggest challenge you have now is being able to keep a straight face not telling people what you're gonna do in the future and look at the data and then come up with the right solution, right? Yeah, that's mostly it. I Think the biggest challenge we face at the FED is completing the process of getting inflation down to two percent.

and what? What I want to point out is that the we're seeing disinflation in the good sector, we're going. We expect to see it in a Housing Services sector and that's that's these are the three parts of the of the core Pce inflation index that we look at. There's 56 percent of the economy, which is the rest of the services sector. It's the biggest part, obviously.

and we're not seeing disinflation there yet, and that's going to take some time. and I Just we. We need to be patient and we think we're going to need to keep rates at a restrictive level for you know, for a period of time before that comes down. So when you made your speech the other day, when you talked about the discount rate, you use the word disinflation 11 times.

Not that I'm counting, but 11 times. So you were saying that this inflation is beginning to appear. Would you use that word 11 times again today after the Jobs Report or you would be less inclined to use that word so much. I I might use the I might say I would certainly use the word disinflation.

Yes, which means declining inflation and I I would call it declining inflation too. For and uh, today? what about the uh, the debt total debt of the United States which produces some inflation? 31.4 Leaving aside the debt limit. Are you worried about the total indebtedness? United States Reducing inflation? Or you don't think that's a big problem? Yeah, it's not the level of debt it I I would say. the thing I'd say about the level of debt is really, it's not.

First of all, it's not the Fed's job. But I would say that we we we're on an unsustainable fiscal path at the federal government level. That has been the case for some time and it's something we will have to deal with and better to deal with it sooner rather than later. Now many of your predecessors were economists your trained as a lawyer.

Um so um they spoke in what I call Fed speak which is to say incomprehensible kind of economic language which was done intentionally I think sometimes they would say so you tend to speak in English Um has that have been a A Plus you'd say when you're dealing with members of Congress they can understand what you're saying I like to think so you know I've made it a real priority to Um to engage a lot with Congress in our system of government. Unlike the parliamentary system, our accountability is to the legislature. It's to send it in the house and particularly the two oversight committees Senate Banking and House Financial services. And I think it's very important that we respect that and explain what we're doing and listen to their concerns and and share with them how we're thinking about things.

And I think they appreciate that and but that is. you know we have this precious Independence We can't be removed from office. We serve these long terms. The other side of that has to be accountability And the way for us to get accountability is to be as transparent as possible and try to reach you know the people of the United States through their elected representatives.

So this is a very high priority and we're going to keep doing it. So when you testify in front of Congress how much time does it take to prepare for that? Is that a one-hour preparation session? Or is it a one-day session or a one-week session? You know they're supposed to. These are supposed to be monetary policy hearings under the Humphrey Hawkins act and they're actually on any anything that's any political issue. so you it's It's quite extensive.

You have to prepare for everything that the FED is involved in and many things that the FED is not involved in. Uh, so uh, it's it's a lot of preparation. So when you get questions from some members, you have to bite your tongue and say, why are you asking a question like that or you never have that problem. Yes, that never happens, Never happens.

Okay, okay, all right well good. So today as you look at the country's economy, what is the biggest worry you have about inflation? Is it just that, Um, that fiscal policy is not completely under control. We have exogenous events outside. What is your biggest worry about inflation today? Well, it's it's uh, kind of what I was saying earlier.

Which is, um, we're just at the beginning of this process, right? Goods Inflation? So we need that process to continue Goods that the whole thing began. The inflation began with people not being able to buy Services instead buying goods and then Global Supply chains collapsing and so you couldn't get goods and prices of goods went up and that's where it started. But that is now starting to get better as Supply chains are improving and as people are rotating their purchases back to Services you move on Though we're not seeing it yet in Housing Services which is either rent or or the ownership that the imputed costs of house ownership. but we expect to see that so we need that to happen.

That's another big part of the economy. It's got to come. It should come in the second half of this year, then the biggest piece of it. And what I worry about the most is when are we going to see distance, inflation or declining inflation in core Services X housing.

So that's what I worry about. The last thing I worry about is just another exogenous event. It's a risky world out there. Uh, get you know, with the war in Ukraine and the reopening of China and you know we've there, there, those are things that can affect our economy and the path of inflation, right? So the balloon was not your worry.

though, you don't care about the balloon, it's not not within our Ambit Okay, so today, um, the Federal Reserve gets data from all over the country and um, are you convinced that you get the best data? You have the best data collection methods. Uh or do you think it's not as uh modern as what Wall Street gets? We so most of the data that we get are just the same. You know we don't collect the data on unemployment or inflation or most things. so most of that's just government data and a lot of that's for example very high quality.

The labor market data is very high quality. We what we get which I think is better and different from what everybody else gets is what I mentioned earlier and that is the reserve banks putting together the the um yeah, the beige no not the beige book. the um yeah, the beige book putting together the beige book and also coming in and and you know, sharing the anecdotes and you know what they're hearing. what's happening with each district is different.

You have agricultural districts, districts, and energy districts and so that I think our anecdotal but also just the Hall of information we get through that through that network is is I don't I don't think anybody else has that. So do you consult regularly with some of your predecessors? I mean obviously one is Secretary of the Treasury now, but uh Ben Bernanke for example or I do I talked to uh former chairman Bernanke I talked to you know, uh secretary Yellen I still talk to Alan Greenspan now and again and um, when you're dealing with this but the your colleagues on the FED board and you disagree with them, do you say look, I'm the chairman of the FED I am the person who has to make the final decision and this is what we should do or you don't quite do it that way. It's a it's a process of reaching uh agreement and um I hear what people have to say I tell them what I think and then I'm the one who has to bring a proposal in front of the full committee, not just the board in front of the full committee on Monetary policy and it works. You know we have to reach an agreement and uh, you know we get to a place.

I I Think you can tell Today we are blessed with a diversity of perspectives on the Fomc. With 19 people of course we are, but you you have one thing that unites all of us and that is a very strong commitment to getting inflation down. So in some parts of Washington people say if you give me this I'll give you that I'll trade this for that. You never do that at the FED when you're coming up with a decision I'll do what you want if you do what I want that doesn't happen ever.

Not really. No Oh no. okay, it's like you mean a better office or something like that. Uh well.

just uh. you know I'll say what you want me to say if you say what I want you to say or something and that never happens, right? No, no, it doesn't happen I mean and when you want to talk to members of the of the board of the Federal Reserve board, do you go to their office or they come to your office I like to do both I mean I Really don't like to sit in my office all day and and have just have people come to see me I like to go barge in on people and you know I think it's much better to get up and walk around and see people. The FED has been pretty good at, uh, avoiding leaks of its decisions. Uh, how do you do that? Because most people in Washington are not so good at that.

How do you avoid leaks? We do have. you know, we've got very strict rules around confidentiality, particularly around the written materials that we have. You know, we publish these things internally for for the FMC meeting, the memos, and the teal book and all that. Um.

but the other thing to remember though is you know we're not trying to hide our decisions from the public. We actually in in the modern in modern monetary policy. we want the public to understand how we think, how we're thinking and and you know if markets really understand how you're thinking in a new a new piece of data comes in. The markets will go where they're going to do this.

and it sort of happens organically. and that happened all last year as we were. You know, talking about raising rates. The market priced in rate increases long before we actually enacted them, so it's not.

We want to be transparent. We're not looking to surprise markets with these decisions. but from the time that you make your decision on the Fomc, whatever time it is at the end of the day, and you your press conference at two o'clock or something like that, 2, 30, 2, 30. now your decision is made by two o'clock or whatever it is or something like that.

So you got a half hour. But you have to avoid leaks during that half hour because that's very Market sensitive information. How do you make sure nobody is calling their spouse and saying, guess what we're going to do? Well, We. You know, we people take this very seriously.

Then none of that happens. You know I mean you're taking your professional life in your hands if you do something like that I Think people have a sense of self-preservation so they're You know people are very careful about about this information. There is a period of a couple of hours after the meeting and until we announced the decision. But we actually we announced the decision at two.

The press conference is at 2 30. So I think you know it's a fairly small group of senior staff and policy makers that that kind of know what happened and what we're going to say. and I just think everybody understands that that you've just got to be really careful with that to go back to the jobs discussion. If next month you had another 519 000 jobs created net jobs.

Would that be good or bad? from your point of view, Have we got a lot of people working but maybe producing more inflation so we we don't? We don't have the luxury of thinking about good or bad, it just is what it is. So but I I would say again, we most most analysts, most economists would say that to get inflation down from high levels that we've had, if you look at history, there is some softening in labor market conditions that goes along with that And that is still you know, very possible and indeed likely here, some softing and labor market conditions. However, this cycle is different from other Cycles because of where it came from and it's just confounded all all sorts of attempts to predict what it would do. So it is good that we have seen very strong labor market, but at the same time we're seeing wages moderating.

Wages are still wage increases are still very high, but wage increases have come down to a level that is closer to what would be sustainable. still well above what would be sustainable. with two percent inflation. and same thing with inflation.

Inflation is starting to come down and the labor market hasn't softened. We do expect that it will soften Um, but you know it will do what it will do. Our job is to get inflation down to two percent and preserve maximum employment. So when the Fomc meets as it does regularly eight times a year, yes, eight times, you pretty much know how the decision is going to come out before you actually get together because you've been talking to each other.

Or does the meeting of the Flomc changed Minds in ways that you might not have expected before the meeting started. It depends on the meeting, you know. I Do I Talk to each of the 18 other participants at least once and we go through everything. What? You know? What's your analysis of the economy? We'll have everything about monetary policy.

How are you thinking about the path forward and all of that? So um, in some some meetings I will say some of the time you get into a discussion at the meeting which suggests that maybe you should communicate differently and then we'll think about that and we might actually take a break in the middle of the meeting and then go off with a smaller group and think about that and come back and make changes. Sometimes though, everything plays out as expected and when you're having these episodes meetings I Assume somebody sweeps the room to make sure there's no bugs and anything else. All that, oh no leaks, no. Okay, and today, Um, as you look forward as we are going forward for the next remainder of this year, your basic view would be you'd be happy if the inflation rate were to get down by the end of the year to two percent may be unrealistic, but your core inflation now, or overall inflation you think is about four, four and a half percent.

Something like that, or what would you say it is, it's it's in that range. There are different measures, right? Yes, we we expect. you know significant progress on inflation this year and again, it's our job to produce it And and I want to I want to say again? You know we put we throw these numbers around, but the reality is, we're going to react to the data. So if we continue to get for example, strong labor market uh reports or higher higher inflation reports, it may well be the case that we have to do more and raise Heights more than it's priced in.

So if I wanted to go get a mortgage on a house I was going to buy for example, uh, you would say I'm not going to be any better off waiting to next year than now because rates aren't going to come down that much at the beginning of next year. So I might as well go to the house now. Mortgage: Surprisingly enough, I get a lot of requests for advice on those kind of things and you don't give any. and I I but I really can't Okay, I can't really can't respond so uh, okay.

so on the whole, to summarize where you are, you're basically saying that the jobs data was that came out was a little bit surprising, but in the end, you're taking you've taken into account and you're pretty comfortable with the guidance you gave last time. and you're not prepared to give anything that's completely different guidance than you gave last week. I mean this is a world in which we've had the the inflate sorry, the the Labor Market Report and I think that does I think it underscores the message that I was sending at the at the Um press conference and in the meeting that we have a significant road ahead to get inflation down to two percent. and and I think there's been an expectation that it'll that'll go away quickly, uh, and painlessly.

and I don't think that's at all guaranteed. that's not the base case. The base cases it will for me is that it will take some time and we will have to do more rate increases and they'll want to look around and see whether we've done enough. Okay, and and Two Percent is the rate we have for the last 25 years before inflation came along.

But prior to that for most of U.S history we were higher than two percent Is that that two percent is. we're now uh, so used to two percent after 25 years of it that you think that's the appropriate level. So for we went through this long period where inflation was was really anchored around two percent. and we we think that.

and you know economists think that that's because people start to expect two percent inflation and inflation. It's in in a way. If people, if everyone expects that prices are going to go up, prices and wages are going to go up two percent per year then plus productivity in the case of wages then it will. That's what will happen.

Having that, having price stability real price stability from extended period of time is just enormously beneficial to the public. because you can Then on the back of that you can build a very strong labor market. As we had, we had a labor market with really three and a half percent unemployment in 2018 and 19. and we had inflation running.

You know, just barely getting to two percent wages moving up the most for people at the lower end of the of the spectrum. And so this was a we all want to get back to that place. but the the Bedrock of the whole thing is to get inflation under control. The unemployment rate hasn't come down as much as people are going up as much as people thought.

In part, some people say because we don't have as many immigrants coming to the country, legal immigrants coming in taking some of the jobs they otherwise would take. You think immigration is an issue in terms of giving us more labor uh, workers or you think that's not a factor. So just as a matter of arithmetic, it was a factor because there was very little migration across borders during the pandemic. Uh, and that was part of of what was happening, particularly in certain sectors like the agricultural sector and food service and things like that where there just weren't the people.

However, just just very recently here the the immigration data have turned up again and so and I think that may be part of why people are feeling somewhat less pressure in the labor market to find workers. This is an issue, not for the feather. This is immigration is obviously a political issue. We do not seek to be a player on this, but it's just a fact though that that, um, you know right now the United States has has fewer available workers than it has Jobs Plus job openings.

and when you increase interest rates, the traditional effect is to increase the value of the dollar versus other currencies. Do you have any concern about the value of the dollar going up too much? or that's not something you comment on? So the the actually the responsibility for the for the change rate is really rests with the treasury Department and the administration. not with us. Of course that's another.

that's another Financial variable that goes into every economic model, but we don't. We don't look at it as something that we're working on. All right. Well I think I haven't been able to get you to say anything you didn't want to say.

so um, you know I would say Jay I I've known you a long time I think you've done a great job uh in a difficult situation I appreciate your service to the country At a 180 000 a year or whatever. the salary is something like that. So thanks very much for being here and thank you for your service. Thank you David Great to see you Thank you! Uh, we're gonna do a wrap up here one second.

Yeah, no okay I just want to make sure they didn't do any q a Okay, let me give you a summary of kind of my entire thesis on on what just happened here. Uh, okay, stand by five seconds. Here's everything you need to know about what's your own. Powell Just said at the Washington DC Economic uh Summit with Dave Rubinstein The message here was a reiteration of what we got at the Fomc meeting with some small adjustments and these adjustments are really, really interesting before Jerome Powell came out to speak I actually pulled up this document from Bank of America and it talked about why it could be that this unemployment report came in so hot for January that all of a sudden we had so many more jobs and where did they all come from and everybody thought that Jerome Powell was going to freak out and have to raise rates substantially and aggressively re-posture because of this report that came up.

but he actually said something phenomenal that was also pointed out in this report. Jerome Powell Talked about this increase in Immigration and it's literally what Bank of America here talked about. Who knows? maybe Uh, Jerome Powell Read this report but this year is update in the increase of Civilian non-institutional population of 954 000 was driven almost entirely by an 853 000 person increase in the population of men over 20.. while we can't say with absolute certainty, we suspect this increase was driven by a recovery in net international migration and that's exactly what Jerome Powell actually ended on drum.

Powell ended on this idea that hey, maybe one of the reasons we are seeing that companies are having an easier time and there's a less pressure for a hiring workers is because we are seeing more immigration because recently immigration data has come up again. That was his quote Now at the same time as he talked about hey, maybe this jobs report is being explained away basically by immigration. He also when he was asked hey, would you change your position of what you said then versus now and he based basically said hey, Well after the report came out Financial conditions tightened. He basically said without saying hey, the market already did my job for me.

Remember the morning of Jerome Powell's talk? Uh, and the afternoon of Jerome Powell's talk, the 10-year treasury yield fell to 3.38 Think about that, it was under 3.4 percent. 3.38 Well after the Jobs report and today, look where it sits now 3.63 In other words, it's up over 25 basis points. It's up a quarter of a percent. And Jerome Powell In this press conference today, even though he didn't directly say it, he said look, we know things are going to be bumpy.

We know the data is going to come out, You know, Left Right Center All it's going to come in all over the place. But you have to realize the market has already significantly tightened since that Jobs Report came out. Those were his words. The market has significantly tightened since then.

That's what he said. And when you look at the Goldman uh, the Goldman Sachs Financial Conditions index. the same time you saw that Jobs report come in is the same time you saw the 10-year treasury. You'll jump 25 basis points is the same time you saw a jump in the goal.

Goldman Sachs Financial Conditions index. You know Jay Powell sits with the Bloomberg terminal in his office or refinitive or cap. IQ were one of these and he's sitting there studying the markets the same way we are. and he actually explains away this jobs report not just by suggesting hey, well, we had more immigration which is exactly what Bank of America saw, which just reiterates the Bank of America report.

But he also explains the way the jobs report by saying yeah, you know we seem to be on the right path because even though we had something that came in a little bit hotter, guess what happened boom Market Adjusted instantly. he's like, huh, barely have to do anything. It's basically kind of the way he's coming across. So now he does say that look, it's obviously going to be bumpy.

We're going to get some data that comes in strong, some data that comes in Weak That's the way it is now. One of the things that I thought was incredibly bullish that he talked about was this idea that a few months ago, probably about six months ago, he's like, look, we want the jolt spread between, uh, the jolts is the measure of job openings and labor turnover. uh, survey and we want that spread to be in line. So basically zero spread.

So in other words, if there are 11 million jobs, we want there to be, uh, maybe six million jobs available. Because that would line up with 6 million unemployed people right now, we're at almost a ratio of two to one, which is too high. Originally Jerome Powell Wanted to see this go down to one, but it hasn't gone down to one. So what did? Jerome Powell Do he goes? Eh, He gave up on the indicator.

That's an indicator. Why did he do that? Well, He finally gave us a rationale for that today. He said today that the difference in the jolts spread, which used to sit around 2 million that is. there were about 2 million more openings than there were unemployed people.

That difference is now 5 million two and a half times as large. And he says that actually quote feels structural. That is actually a bullish statement because it's basically a way of saying, you know and I hate using this phrase. But it's basically Jerome Powell used it himself.

He basically said, look, this time's just different. The pandemic basically created so many dislocations in the marketplace that people don't really know what they want to do. And so everybody's kind of rejiggering. Like do we like work from home? Do we like in the office more? And all of this re-jiggering is creating This Disaster in the labor market.

And it's one of the reasons we've had the supply chain nightmares that we've had. now. This morning, we talked in depth about Supply chains and how Supply chains are substantially loose right now. Goldman Sachs on a scale of one to ten, one being the loosest, 10 being the tightest puts us on a two for a very, very loose and open Supply chains right now.

but we still have to see the next two factors of inflation come down. Unfortunately, these sectors lag like crazy. Jerome Powell Made it very clear as he's made many a time before. The good Service: Goods Inflation is already coming down.

Fantastic. We're already winning on that disinflation is present and he reiterated that that is likely to continue. However, we need to see housing disinflation come in. The problem is that stuff lags a lot even.

Jerome Powell Said himself. We don't expect to see the housing disinflation of owner's equivalent rents falling until the second half of the Year Well, I Hate to say it, folks. we're barely in the second month of the year. That means we got another four months to go.

Before you see that, housing disinflation number three. you've got to see Services come down, which are heavily driven by wages. They make up 56 percent of inflation reports and that 56 percent is heavily driven by services. But if immigration is helping keep a lid on wage inflation, Jerome Powell does not need to kill the labor market.

Uh, by forcing a recession. As long as inflation goes down and wages stay stable, we don't want wages to go down. We just want wages to be stable. As long as wages are stable, he does not need to destroy people's jobs and livelihoods by crashing the economy.

And I think that's why you're getting at least a slightly more bullish uh Jerome Powell and you're getting a slightly positive reaction from markets. Markets aren't as jubilant as they were when he started talking, but net net they're higher than where they were when he, uh, before he started talking. Now, when he was asked multiple, he was asked at least three times about look, how would you change your mind if you had the jobs data beforehand and he's like, hey, look, you know what basically says this cycle is different Okay, so in other words it kind of suggests. Look, it's been explained away.

We've got the immigration, the economy is our markets are already pricing it in and he was pretty clear that look, it seems like we're on the right path and now the goal is stay the course and let's see what the data brings. And so far the leading indicators not the lagging indicators. The lagging indicators are actually what's happening in service, inflation, and what's happening in the housing market, right? The leading indicators are very, very clear and you can see those very clearly by actually reading the earnings calls of businesses that are hiring peopl