0:05 spk_0
Welcome to Stocks in Translation, Yahoo Finance’s video podcast that cuts through the market mayhem, the noisy numbers, and the hyperbole to give you the information you need to make the right trade for your portfolio. I’m your host Ali Cannell in for Jared Blakey, and with me today, as always, is Sydney Freed, AKA the voice of the people. Kindly like, subscribe, and comment on stocks and translation on Spotify, Apple Music, Amazon, or YouTub.Time to kick things off with our main focus of the day, the Fed. This week, Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee announcing Fed rates are on hold for the time being. During the start of his two-day testimony, Powell said, quote, We are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance. He also dismissed pressure from President.Trump to lower interest rates. So sticking with the Fed theme, the episode is brought to you by the number 4.5%. That’s the top of the Fed’s current interest rate range. And joining us to discuss this all is RBC Capital Markets senior US economist Mike Reed. So Mike, welcome to the show. Before we get into the nitty gritty, the thick of it, what’s your take on where the economy stands right now in the Fed’s position?
1:14 spk_1
Sure, thanks for having me. SoI, I think, uh, Chairman Powell is right, the, the economy is in good shape right now. That being said, there’s a lot of questions around where the economy will be in the next 3 to 6 months. And so that’s really going to determine what the Fed does as they react to the incoming data.
1:32 spk_0
And there’s a lot of debate about when we could see that next interest rate cut. Markets are pricing in September, but it seems like July has not been firmly put off the table at this point. I don’t think we’re gonna see a rate cut in July. Am I missing something here?
1:47 spk_1
I don’t think you are, uh, that’s not our call either. We’re expecting a September cut. That being said, when you look at some of the data, um, you could find some weakness in there, and what I mean by that is, uh, certainly when you look at the soft data, things like consumer sentiment, whether that’s the University of Michigan, uh, consumer sentiment or conference board.Uh, those are signaling that consumers aren’t really feeling good about the economy right now and in particular, um, the, the labor market differential, which is kind of the difference between, uh, people who see jobs as being easy to get versus jobs being hard to get, um, that’s falling, meaning jobs are harder to find right now.
2:25 spk_2
Uh, I just wantedto ask quickly, July, September, doesn’t matter. Like. Yeah.
2:31 spk_1
Well, you know, it does, and the, I think the worry is you are looking at a situation right now that feels like the labor market is starting to weaken, and we see that in some hard data too, in continuing claims, and those are moving higher those represent people who for multiple weeks, um, have been drawing jobless benefits.And so when you think about the, the weakening labor market, typically the Fed is, is very sensitive to that. But on the other hand, their other mandate is prices, right, the price levels. And there’s a real fear that what’s going on with tariffs right now is going to add additional upward pressure.To consumer prices, and that’s likely to come later this year, uh, and, and hit more so in the fall.
3:18 spk_2
What’sthe big signal that the labor market, it would be weakening to a point that we don’t want it to go to?
3:25 spk_1
So, if we see things likeThe payroll report, if we start to see hiring slow, probably under 100,000, that’s concerning. Um, I say 100,000 just because what we’ve seen over the last year or so is you have one sector, the healthcare sector really adding a majority of the jobs, and that’s usually good for around 70 to 80,000 jobs per month. So if you get closer to that 1000 or below, that means you only really have that one sector hiring meaningfully.And that would really mean the rest of the economy has kind of ground to a halt in terms of hiring.
4:01 spk_0
So there’s this tension between the dual mandates, right? The inflation side of the story, the labor market side of the story. At this point, is there one that you think the Fed is prioritizing more? It feels like to me it’sThe labor market, if we do see the unemployment rate skyrocket, if we do see, as you were saying, a payroll number that comes in below 100,000, the Fed would be quicker to react if we see that rise in inflation because the Fed has said that we can maybe look through that if tariff inflation is temporary, which is a big TBD.
4:34 spk_1
Yeah, and this is really what the debate within the Fed is all about. If you look at uh what they put out in their summary of economic projections, it’s called the SAP, uh, last month, they, they kind of show a divide in terms of that thinking. There were several folks on the committee who signaled they expected to see.Two cuts this year. On the other side, there were, there were several members who expect no cuts. Uh, the folks who expect no cuts would be more sensitive to a potential re-acceleration in inflation as a result of tariffs. Um, those who are penciling in cuts would be more sensitive to a rise in the unemployment rate.
5:09 spk_2
Just for people who don’t necessarily know, we’re currently pricing in a 25 basis point cut, uh, in September, what would cause that to become like 50 or do you think that there’s
5:19 spk_0
nothing that, right? That was a jumbo.
5:25 spk_1
I mean, look, the Fed is going to react in a way that they think is appropriate and if we see something like the unemployment rate accelerate to say 4.4% or even 4.5% by that September meeting.Uh, that may mean they feel like they’re behind the ball, and that would necessitate a cut of 50 basis points.
5:46 spk_0
And beyond what we might see over the next few months, Fed Chair Jerome Powell, his term is coming to an end. Donald Trump came out and said that he’s considering 3 or 4 candidates. There’s been rumblings out there that may be Fed Governor Chris Waller, Michelle Bowman, that they could be jockeying for the job. What sticks out to you here?
6:04 spk_1
Well, I think first and foremost, uh, Chairman Powell has been focused on what’s going on now, and I think that’s kind of the appropriate stance. Um, I, I think it’s fair to say that this committee is not focused on what’s going to be happening in a year, but, you know, the next few months. So I, I, I think that is what’s most important. As for the next, uh, chair, I, I think there are several good options, um.What you have to consider is their previous experience, whether or not they’re kind of an insider, meaning they’re currently on the board, you mentioned a couple of names there, um, or potentially if they pull someone from outside of the board, uh, that would be an interesting, interesting dynamic, um, just given kind of how close the, the, um, FOMC committee that that they’ve kind of, um, worked together over the past, you know, couple of years.Coming out of this, this unprecedented kind of COVID uh cycle. Um, so I think their, their views have been very closely knit, and if you start to see kind of more outsiders come in, it could just introduce more uncertainty, uh, with respect to monetary policy.
7:07 spk_0
It’s interesting you say their views have been closely knit, but as you were just talking about in the summary of economic projections, we had those 8 officials thinking 2 cuts, 7 officials thinking no cuts. So it does seem like we’re entering this time period where maybe there is more divergence, maybe more opposition within the Fed itself, and at the same time, there’s been a lot of talk about Fed independence that’s made a lot of headlines. Are we beyond those risks at this point? Is the Fed truly independent?
7:35 spk_1
Absolutely. The Fed is, um, I think Chairman Powell has been very clear about that. He, uh, is consistent in that messaging andYou know, what they do, uh, is really based on the data. They, they’re very consistent with that. Uh, they’re going to react to the data. They’re not going to react to outside forces to determine the path of, of monetarypolicy.
7:56 spk_0
And that comes down to picking the Fed chair as well, right? I mean, you would hope that the FOMC members are not just calling for rate cuts just because they would like a job down theline.
8:05 spk_1
I think that.That’s, um, to that point, uh, everyone on the committee really is focused on doing what is best for the economy. And, and I just think what’s interesting is they all have different views about what’s ahead. And that’s why you do have those diverging opinions that you mentioned earlier. Um, ultimately though, I think they’re trying to make a decision for what’s best in terms of that dual
8:27 spk_0
mandate. And what the data shows us now.
8:29 spk_2
I have a general question about the data, perfect transition, like as an economist, how do you balance looking at soft data, something like sentiment with hard data like the jobs report, and how is the Fed thinking about it as well?
8:43 spk_1
It’s a great question and it’s when we get a lot. Um, I’ll be honest, I’m a hard data guy through and through. You’re like the fed.I, I think, but part of thestruggle with the soft data, um, over the past couple of years has been, it’s broken away from, from being a strong signal for what the hard data will be.And by that I mean, when you look at, you know, those surveys I mentioned earlier, whether it’s conference board or University of Michigan, uh, it is signaling a lot of pain, um perhaps a lot of struggle for folks, whether it’s, you know, things they want to buy but can’t, uh, finding a job or finding a better job than they currently have, and that is really showing up in that soft data.But at the end of the day, when you look at the hard labor market data, the economy is adding jobs at a very rapid clip. Uh, I will add that even though payrolls have slowed, uh, one thing that’s worth noting, and we can talk more about this, um, isThe wave of retirements that we’ve had. And so you have to interpret the hard data a bit differently than we did prior to COVID. Uh, you know, this record number of retirements is something that the labor market has never seen before.And on top of that, we’re still sitting at an unemployment rate that is historically very low. So at 4.2%, um, most everybody who wants a job does have one.
10:04 spk_0
Is there any concern that expectations could eventually turn into reality if we continue to see this soft data, people think inflation is going to go higher, they think they’re going to lose their jobs. Does that transition and bleed through into their behavior? Do they start to pull back on purchases? Do they start to save a little more, and then in an indirect kind of way that could impact GDP and the hard data side.
10:31 spk_1
I think where I would look for the most and where the Fed is most concerned is in the wage data and wage growth. So if consumers expect inflation is going to re-accelerate, and they are out looking for jobs or finding a new job, um, they may ask for a higher wage than they would have otherwise absent a a tariff shock. So that can tend to lead to something like we saw during COVID where, you know, prices moved higher and as a result, wages also moved higher.Outside of that though, I think.You know, when you’re talking about consumers making purchases, the, the soft data doesn’t always lead the hard data. You know, at the end of the day, it might not be a good time to buy a car right now, but if something happens, if my car breaks down and I need one, you know, ultimately you’re gonna have to go and make that purchase. If your refrigerator breaks, you’re going to go out and buy a new refrigerator. It’s not gonna feel good, it’s going to cost more, you may have to cut back elsewhere, um, but you are still going to make those purchases.And what’s important isWhen people have jobs and they have a steady income, it makes those types of purchases just a little bit easier. Uh, I think the fear would be if you start to see job losses pile up, that becomes uh more of of theKind of mentality where people pull back meaningfully on their spending, uh, and not just the people who lose their jobs and incomes, but, you know, maybe you see a friend or a neighbor lose their job and you say, oh, maybe I’ll start to, um, cut back on some of my spending and you see things like the personal savings rates start to go up.
12:08 spk_2
So hard data camp, then what is the soft data good for? Like, what would you use it for? Should we do away with some of these surveys?
12:17 spk_1
I think in a, in a normal economic cycle, they can be very useful and there are still a lot of surveys out there that we look into, for example, uh the ISM surveys for manufacturing and for services.Those have uh a few different components, but one area I like to read the most is the comments from the survey respondents and just talks about what they’re worried about, how they’re thinking, um, why they’re answering the way they are. And so that can help inform why that data is moving the way it is.Um, you also have different, um, soft data indicators that are catered towards specific segments of, of the economy. For example, we have the NFIB, uh, which is representative of small businesses. So it gives you a sense of maybe if small businesses are struggling, uh, that can be true at the same time, larger businesses may be doing just fine.
13:11 spk_0
Reading through the tea leaves. I’m a big uh comment reader as well, so, uh, I approve of that, but we need to take a short break at this point. We’ll be right back with Mike and more stocks in translation next.Welcome back to Stocks and Translation. We’re here with RBC Capital Markets senior US economist Mike Reed. So, Mike, uh, we were just talking a lot about the Fed, and I want to get into the housing market because we’ve seen a very wonky housing environment. Mortgage rates are still high, the homes aren’t selling. We’re in this priced out, locked in sort of dynamic. Where does the housing market go from here?
13:59 spk_1
We think it stays in this kind of um low level kind of frozen environment for for a while. And what I mean by that is it’s going to take a significant correction in housing prices to improve affordability, or you’re gonna need to see really long and rates come down much, much lower uh from where they are.Uh, and right now, given what’s going on between uh the budget, the, the uncertainty around trade, that’s not likely to happen. So, you know, over the next year, we just don’t expect a meaningful improvement in the housing market.
14:34 spk_2
Explain to us, like economically how it would work for housing prices to come down. What needs to happen.
14:41 spk_1
So to get back to to a level of affordability that’s in line with historic norms, uh, which would be roughly, you know, a, aMortgage, a monthly mortgage payment around 20% of your household income, you would need to see a correction of around 15%, meaning housing prices would have to drop by 15%.And the problem right now is we’re in this environment where so many people are locked in at very favorable mortgage rates. Nobody wants to leave. And so what that does is it restricts the supply.Of, of existing homes, uh, and you still have some demand even though it’s not the most affordable market, you still have people that want to buy homes. At the same time, when you look atYou know, new home construction and new home sales, um, those are subject to this higher rate environment that we’re seeing. It costs more to build homes. Uh, we saw today the new home sales number, for example, this below consensus, um, just signaling that it’s a market that struggles, um, with everything going on, especially as it relates to the higher mortgage rates.
15:47 spk_0
And you said just a bit ago about how we will be frozen for a long time. What do you define as for a long time?
15:55 spk_1
Well, uh, it’s, I don’t want to be too dark here, but it’s really a demographic story. And so when you think about kind of the life cycle of, of what’s going on, uh, right now, the average age of a home buyer has increased significantly over the past couple of years. Uh, so really the, the folks who are driving all of the activity in the housing market, uh, tend to be much older, like 40, 50, 60 plus, um.When you start to see uh baby boomers who are now retiring shift their housing demand, you know, maybe from where they live now to uh potentially where they retire to, um, that could start to swing the market, but I think you’re still talking, um, you know, another kind of demographic shift whenThe baby boomers start to pass on and there’s this wealth transfer um to their children. That’s when I think the market really starts to to shift more significantly. All right,
16:50 spk_2
Mike, I’m going to get dramatic for a second. Bear with me. Is the American dream of owning a home dead then?
16:57 spk_1
I don’t think so. I think it’s just gonna take a bit more time for the people who want a house now.Um, you know, again, if you think about, if you have the patience to wait maybe 10 years, uh, we, we could be in a very different environment then, uh, certainly a lot can happen, uh, over the next 10 years, but, uh, I, I think at some point, the Fed relative to where they are now, is going to want to cut back to more neutral rates. Uh, I, I think that’s a, a generally a consensus view.And as I mentioned, you have dynamics that could come into play, uh, that will make housing more affordable. It’s just not going to happen in the next year or so. Just
17:36 spk_0
a quick 10 years, Sid. OK, yeah, right, you got it.
17:39 spk_2
Everybody’s fine. 10 years, 1 decade, not long,
17:42 spk_0
but hold that thought because it’s now time for a segment. I like to call Lost in translation where we get our guest takes on what the market might be misunders.Standing and I’m keeping it a little bit straightforward today directly from your notes here, Mike, the federal deficit is not easy to fix. I think that’s been lost in translation for a little bit now, and you alluded to this earlier. Obviously this has implications for the broader economy, for the everyday consumer, for interest rates. How are you looking at the federal deficit and why is it so hard?
18:11 spk_1
A lot has to do with entitlement spending, uh, and by that I mean Social Security, um, that’s probably the, the number one, area where, where it’s very difficult, uh, to make changes. As I mentioned, we are now at peak baby boomer retirement age, uh, we’re seeing a record number of people leave the labor market, they’re starting to collect their Social Security benefits.And so when you have um a greater number of people drawing out those benefits, uh, you, we don’t have that population growth at the, the younger end, you know, especially when you account for the slowing of immigration, uh, that’s gonna put a strain on the amount of, of money and the taxes being collected flowing into that system, uh, versus those folks who are pulling it out.And so again, that’s a change in terms of the deficit that will probably take 10 years or so to to kind of course correct.
19:02 spk_0
Is SocialSecurity at risk of being lost completely, or will it be significantly reduced?
19:09 spk_1
I think changes have to be made, um, the projections right now show up running out, or not running out, I should say, I’ll correct myself, um, facing significant cuts in terms of the benefits, I think, uh, a 30% cut, uh, is what I read, meaning, uh, if you were getting say $100 now, um, every week, you would go down to $70 every week.Um, by mid 2030s. So, and, and there are some things that can influence that, but I think at the end of the day, um, there are some changes that can be made, but they’re not easy politically um to pass through. One of the easiest ways would be to raise the retirement age.
19:51 spk_0
Because people are, are, you know, living longer now too.
19:55 spk_1
And that’s, that’s a big part. This whole system was kind of designed when, you know, the retirement age was, was in the 60s and life expectancy was also in late 60s. Now we’re talking about life expectancy running into the 80s and so you, you kind of have to account for that difference between when people start drawing their benefits and uh when they pass on. So, uh.You correct for that by moving that retirement age, but a lot of people, especially if they’re close to retiring, may not like that. And so, you know, that that’s a very big uh voting block right now and I think politically very sensitive. Another easy fix in my opinion, um, would be removing the cap on income that is taxed for the program. And what I mean by that is, uh, right now,You have a cap of roughly $176,000 per year. Uh, once you start earning above that, that additional income is not taxed in terms of Social Security. So, uh, that’s, that’s another area where you could potentially, uh, delay or, or, you know, push back that period that I mentioned earlier in the mid 2030s, uh, to, to kind of help beef up the, the money flowing in there.
21:10 spk_2
Why are all these things so challenging politically?
21:14 spk_1
Because those are two very important voter blocks. And so, uh, when you talk about, you know, from, from kind of the policy side, the political side of things, um, those are ways in which you can find voters to support you.
21:29 spk_2
But withoutit, we’re gonna run out, so it feels like something needs to be done.
21:33 spk_1
Like I said, it’s, it’s a very hard um ship to kind of uh correct uh in the near term, it’s gonna take a lot of time, uh, I think.That, you know, as as an economist, it’s easy to sit here and say, oh, well, it’s easy, here’s what we need to do to fix it. Uh, there’s, there’s probably a lot more again, uh, in terms of the actual beneficiaries, you know, you have to think about too, you can’t just cut benefits. A lot of these folks rely on that income andIf you were to, for example, reduce the amount of benefits they’re receiving, um, that would, would really impact the quality of their lives aswell.
22:12 spk_2
Maybe it’s also like a believe it when I see it thing, like maybe people don’t think it’s as big of a deal because it hasn’t happened yet. It’s like, oh, it’s 10 years away.
22:20 spk_1
Exactly right. It’s kind of like the, the promise for the housing market.
22:26 spk_0
Well, there is so much more that we could discuss, and there’s a lot of things clearly that are challenging politically, especially in this environment right now, but we’re going to have to leave it there for now. We’re winding things down at stocks and translation, but make sure to check out other episodes of our show on the Yahoo Finance site and mobile app. We’re also on all of your favorite podcast platforms, so be sure to like, leave a comment, and subscribe wherever you get your podcast. Mike, thanks so much for joining us today.
22:49 spk_1
Thanks for having me.
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