Lots More With Neil Dutta on a Looming Fed Policy Error

SPEAKER_1 (0:03)

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Joe Weisenthal (0:10)

Should we start?

Tracy Alloway (0:12)

I'm not signed in.

Joe Weisenthal (0:13)

That's all right.

Tracy Alloway (0:15)

Thanks, Jeff. I need the emotional comfort of being signed in to my Bloomberg terminal.

Joe Weisenthal (0:24)

I did a deadlift. One, two, three.

One, two.

Tracy Alloway (0:31)

Barges.

Joe Weisenthal (0:31)

This is an after school special, except.

Tracy Alloway (0:33)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Joe Weisenthal (0:39)

Where's the best squid ink pasta?

Tracy Alloway (0:41)

These are the important questions. Is it robots taking over the world?

Joe Weisenthal (0:44)

No. I think that in a couple of years, the AI will do a really good job of making the Odd Lots podcast.

And people will say, I don't really need to listen to Joe and Tracy anymore. We do have Cha-ching, the perfect guest.

Tracy Alloway (0:59)

You're listening to Lots More, where we catch up with friends about what's going on right now.

Joe Weisenthal (1:04)

Because even when the Odd Lots is over, there's always Lots More.

Tracy Alloway (1:07)

And we really do have the perfect guest.

Joe Weisenthal (1:13)

I think it's kind of weird to be worried about some sort of recession or policy error on a day when the market is basically at all-time highs. Don't you think that's a little strange?

Tracy Alloway (1:24)

No.

Joe Weisenthal (1:25)

Really? I feel like normally we have these conversations about something's going bad and the market's down 15%.

Tracy Alloway (1:31)

Yeah, but the market's not that prescient all the time. And as we've been discussing on the podcast, a lot of what's going on in the S&P 500, a huge portion of that is just driven by a handful of companies.

Joe Weisenthal (1:48)

Well, this is definitely true. The market is definitely not prescient all the time. But normally, chatter follows the market.

Tracy Alloway (1:54)

Yeah, that's true.

Joe Weisenthal (1:56)

But more and more people are talking about some sort of recession or policy mistake by the Fed where they don't cut soon enough.

Tracy Alloway (2:03)

Yes, this is definitely true. So we have seen a little bit of softening in the labor market. We've seen inflation start to come down. And there's a lot of discussion about how durable that trend actually is.

And yet, if you look at, especially Fed speak, if you look at Fed speak, they seem very hawkish.

Joe Weisenthal (2:23)

I generally would agree. So here's the weird thing. Here's the thing that really freaks me out, which is that one of our friends of the pod, Neil Dutta, who has been really sunny and is always smiling and is always slaying the bears is a little nervous. Neil, why are you nervous? That freaks me out that you're anxious.

Neil Dutta (2:43)

Well, I just think it's important to look at the realized data, right? Everyone's looking at what's the outlook and if they cut once, is that going to reignite the entire economy and inflation? I mean, let's just look at the realized data, the information as it's been coming in.

I don't think forecasting is particularly useful when all the Fed does all day long is talking about how uncertain everything is. So just focus on what's actually happened. And what we know about what's actually happened is that the unemployment rate has jumped 60 basis points from its low point. It's rising at about 30 basis points every five months. If you look at what's happened so far this year, which puts it on track to go up to 4.4% by year's end. That's higher than where the Fed believes it's going to stay. And core inflation after a bumpy first quarter, that by the way is still edging lower. It's likely that in May over the last year, core inflation would have run 2.5%.

So when you think about like a rules-based framework, I think it's important to sort of just acknowledge that across a variety of monetary policy rules, it all suggests that a less restrictive stance of policy is required. And I mean, obviously back during the post-GFC era, there was all this talk about, well, we don't want to run policy based on like a computer. What's the point of having it?

Like, you need to have some judgment. Well, if you're always uncertain about everything and you can't actually think and you don't want to actually apply any judgment, maybe you should go to the rules. And the rules are basically telling you one thing, which is cut and do it relatively soon.