Market Moves on Fed, Oil, and Tech Earnings

**SPEAKER_1** (0:02)
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**Tom Keene** (0:27)
We're scheduled as Greg Daco. Let me explain this, folks. The National Association for Business Economics, of which I was a member for years, is really viscerally within the economic dialogue of American business. Mr. Daco has served gloriously as president of the shop, and he joins us this morning. Greg, let me start with the boom economy before we get to the Fed. John writing writes to Ethan Harris this morning on LinkedIn, that consumption for its business investment is something like 8% GDP.
Do we have a too boomy of an economy right now? Is it too effervescent?

**Gregory Daco** (1:03)
I don't think it's too effervescent, but we are seeing strong growth in underlying momentum when it comes to consumer spending activity and business investment. I would actually flip it slightly. I would say that we have too much of a concentrated growth environment, because when you look at what's driving growth, it's really more the affluent consumers and AI-driven business investment. If you exclude those, you don't really have much of breadth in terms of economic momentum, and that's really the risk.

**Tom Keene** (1:30)
To get to the press conference disaster that we saw this week, if we see yield shift as they shifted in the press conference, what will that mean for American business?

**Gregory Daco** (1:41)
I think that's a key element to focus on. That's really one of the key points that I've been highlighting with a lot of the CFOs I talked to, which is this notion that the cost of capital is going to be structurally higher going forward, not because of what the Fed's next move is going to be, but because we have fiscal imbalances that are likely to be present for the foreseeable future, because we have a very large pull for private capital that's putting upward pressure on yields, including the big AI investment surge, because we have inflation that is much more volatile in this environment of layered supply shocks, and because we have questions about central bank credibility and those were even more visible after the most recent Fed press conference. Those elements are likely to keep long-term interest rates higher than they've historically been and be a constraint in terms of private sector investment.

**Paul Sweeney** (2:32)
Greg, your higher for longer was echoed by a note from Torsten Slock at Apollo this morning. He's basically said the exact same thing here. We'd love to get your thoughts, Greg, as it relates to what we saw from the Federal Reserve this week, what we saw from Fed Chairman Warsh. What were your takeaways?

**Gregory Daco** (2:46)
I think we have to distinguish two elements here when it comes to the critics as to Fed Chairman Warsh's performance.
You can essentially have a view that maybe a rate hike is not necessary in September. That's very possible. You've seen the likes of Governor Waller, Governor Cook, Vice Chair Jefferson, New York Fed Chair President Williams, all arguing that we'll have to watch the data. If core inflation does not show signs of moving back towards the 2% target, then a tighter monetary policy stance will be required. I think what markets are penalizing right now is essentially the inconsistencies. Having a new Fed Chair that's criticizing the old Fed, but not doing much about it, saying that inflation is a choice, but not doing much about it, that's a risk. Talking about resolute commitment to the 2% inflation target, and then delivering actual thinking, again, an issue. And then finally, saying that you're going to deliver on the 2% target, but then talking about moving the goalposts at the next strategy review is another inconsistency. And those are the real issues, not so much whether you tighten or not in September.

**Tom Keene** (3:48)
You know, I have no idea, folks, the academic credability, I should say, here. Greg Daco came out of Levin in Belgium, and that is where the giant Mark Blogg was on economic epistemology and theory. Let's layer on that, Greg, as one final question here this morning.
The chairman is trying to do economic philosophy. He's trying to do almost economic politics with his comments. Can he get away with that? Or like Claudius Amses, should he just look at inflation in PCE as a data point, a measurement point, and not a lot of Mark Blogg, George Soros theory?

**Gregory Daco** (4:29)
I think you have to be very careful in trying to be too intellectually out there in terms of trying to comment during the press conference in particular. The questions from the journalists, including Mike McKee's question, were very clear. What is your reaction function? How would you react in terms of monetary policy in different circumstances? That's not very complicated. That's the basic for a Fed chair. If inflation moves in one direction, what are you going to be doing? If inflation moves in another direction, what are you going to be doing? You can't hide behind the Lucas critique or potentially the Goodhart's Law. These are valuable laws and valuable theories, but they're not going to help you when it comes to setting policy in the very near term.