What Trump’s policies could mean for the Fed
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When people asked me about my job, I often say I have the best job at goon sex, and that's honestly no joke. And one of the things I love the most about my job is that IT gives me the chance to speak to some of the most interesting and insightful people in business, economics and finance. And today's guests certainly qualifies.

Rob cabin were on the dallas fed from twenty fifteen thousand and twenty one. Before that, he was a professor, harvard business school and the global code ad of investment banking here at goon sax. Earlier this year, he rejoined goon sax as vice chairman, so I am proud to call him my colleague again today. Rob is joining me from our dallas office to speak about the third right cutting cycle, the interplay between monitoring physical policy and what investors might be missing about this unique economic moment. Rob, thanks for being here.

Ready to be here with you.

The fed is continuing its cutting cycle. As we all know, IT brought down the fed funds rate by another twenty five basis points last week, and IT continues to try to walk this tight rope of bringing down inflation without tanking the will get your views on what could be ahead. But let me first ask how good of a job you think the fed has done so far in orchestrating a .

soft landing. It's done a good job in orchestrating a soft landing. Part of the thing that help them orchestrate that soft landing is that fiscal policy has been dramatically more a data more stimulative than we are accustom to.

We've done n from pro with seventy percent of GDP to one hundred percent of GDP debt of the U. S. government. But people have to realize host covet twenty one, twenty two and twenty three. We've had outsize fiscal spending, particularly these very large directed programs like the inflation reduction act and infrastructure act that is help the fed now on the other hand, is caused the fed to go higher than they thought that need to. Five and quarter five IT caused them to stay there longer and it's been sticky here and slower for them to cut that they would have otherwise.

But as of now, the economy is still growing even in this high rate environment. So would you judge IT as generally .

a success for financial market people and more fluent people? It's been a success for something like sixty five or seventy million workers in this country that go paycheck to paycheck make probably fifty, fifty five thousand dollars year or less the accumulative rate of Price increases matters more than whether we're having a soft landing right now and heading toward two percent for then, we've lost twenty, twenty five percent purchasing hour and their wages have not kept up and they're struggling to make ends meet.

And we saw that play out to some extent in this election this week. They probably would not give the fed as high, agreed. So I would say being slowed to race rates and stopped them on buying, they get a low grade for that. But I think once they did the pivot in one eighty to start raising rates to run down the baLanced, I personally think theyve done a good job, but they can get away from that first areas. But I think it's still causing struggles for a lot of the workforce.

understood. You just mentioned, of course, the big event in the last week, which has been the reelection of Donald trump, you bring the dallas fed during his first term. So let me first ask what that was like to be a sitting fetish with trumpet, the helm of our government.

But which I have to learn to do is be prepared to assess new fiscal policies, excuse terms and others, and try to in collbran them in your outlook. The one thing that does change the with administration and is political is supervision. And we had, I think, more constructive than I supervision. During sixteen to twenty, we had more stepped up supervision after that. And so that was we also had to adapt to.

So just to clarify your term, actually spend into the biden administration so you could tell the difference and supervision was stricter or more stringent in biden verses.

trump is actually instead obama, then trump, then biden. And yes, where's our approach to rate setting was very similar. The supervisory approach changed when the administration changed, and people should be aware of that. And that does affect art of your job as a fed president.

But you said you were able to essentially block out a lot of the ways. How convinced that you that's going to remain the case. They're some discussion that trump will not reappoint to your power and may try to influence fed to some extent. How do you view the prospect of fed independence ahead .

on the weight setting process? I'm confident under j powers leadership, they will try to make decisions without regarding political influence or political pressure. They'll have to, though adapt, which I know will talk about in a few minutes, new policies, understanding with some structural shifts, and i'll have to adapt to that.

And you'll see regulatory policy change again. And I think in between those two will probably be some discussion of the baLance sheet and that the fed has had very strong autonomy and how to use the baLance sheet. I think there might be more debate about whether the treasury should have more power on the baLance sheet as well as the fed, but i'd say that's a debate that you had to come interesting.

So let's get into some of that. After the election result was known, we saw investor's expectations shift toward fewer rate cuts in twenty twenty five. And the presumption being that policies that will be implemented will on that be inflationary. So you've located to this even in our comments in the last few minutes, how does the fed in bed potential policy shifts in its expectations? What does that process look like?

So start with three election. My own view, and you public, you've heard me say I felt even under the bite administration, the continuation of the haris administration, if that had happened, I think there are two phases to rate cutting. And I think this is the mindset of the fed before the election phase.

One is they can get the fed funds rate down to four and a quarter to four and a half if inflation is running around two and a half. However, I think IT was going to be sticker that the markets may have expected to get below foreign or foreign a unless service sector inflation particularly moderated somewhat more. And the question was, with all these these open ended fiscal spending programs and with seven percent of GDP deficits, would service sector inflation moderate? We know goods are differing, but services of in sticks.

So that's per election, host election. You've got those questions still, but I think you're going to see some changes. And here's how the fed is LED by predominantly P H D economists, hd economists, not exclusively but heavily look at cyclical factors.

And they like to use models. When you have a new administration, you're gone to get structural changes may not be amenable to a model. So let me give you the structural changes were likely adding into and I think this will get into the fed thinking heavy regulation currently versus the past in the U. S. Economy, not just in the financial sector, but more broadly, we've had a excess supply of labor force growth mainly do the immigration that's going to change most likely.

In addition, you've got these deleted government programs I talked about that are sizeable that are beating directly on labor inflation, production act, infrastructure chip sec and that labor they're bidding on tense to create jobs at thirty five, thirty seven, fifty an hour for people that maybe before that, we're making twenty or twenty two dollars. Now it's affecting service sector inflation. We're shifting now toward probably a regulatory review with intention of creating more productivity growth.

These directed programs, I don't know, but that sounds like they may yet stood down a repurposed and IT looks like the immigration growth that we actually benefit from is why we're growing to three percent this year. At best, that will get eliminated. And at worst, you might even see a reduction in the labor force due to some of these new immigration policies that are being discussed.

Those are very significant structural changes. And you're also gonna, by the way, one other in the energy transition, which is very significant, you're likely to see much more pressure or more oil and gas production, lower Prices at the pump again to attend to help low moderate income families make ends me. Those are some pretty substantial changes.

Terms is the one other policy I I ve been talked about. We live with terrorists now. You're likely to see terrorist increase, however, terms early on goods and there is always a consumer response to tariff.

I E, you don't have to buy an important product of IT, still expensive. And so that will work itself out. But the fed is going have to try to assess those terrifying s and what those impacts are on inflation and unemployment.

We're used to cyclical changes in the economy. It's been a while since we've had a range of structural changes now covered and postcode created a set of structural changes which we've been adapting to the last few years. We're now gona go through a new transition where on some of these big issues about labor force growth, technology able disruption, regular tory pendula, globalization versus globalization, the energy transition, government debt spending, those are all big structural drivers. And probably there's going to be changes in every one of them.

So that's a lot. So with the exception of the pressure on energy Prices, downward pressure energy Prices, that sounds like these policies will largely lean towards more inflation, less inflation.

I don't think so. Now I I think i'd be careful. This is you may have heard me say this is a puzzle that will have to fit together.

And let me explain the regulatory review is likely disinflationary. Higher productivity is likely disinflationary is you talked about lower energy Prices as direct lation ary. I'm not sure yet whether the terrace are one time increase in tariff S.

I don't know whether it's gonna an negotiating tool to get more domestic consumption and production or how IT will be used. And again, it's only on g goods and consumers may adjust may not be as inflationary as people think. The big question for me to your point, is what happens with the labor force.

And if you get a meaningful reduction in the labor force that's going in stretch, I would guess, labor costs. They put more pressure on service sector costs. And that's why I think to juries very much out.

Do you see only criminals and people with known records deported may not affect the labor force that much? Are you going to see something much deeper? That's probably number one on the list of things i'm to be watching, and I courage people to watch.

Remember, if you have tariff and encourage more domestic consumption and production, he could actually work if you have more labor. If you have a less labor, IT might actually put even more strain on the labor force. So this is a puzzle that we're gona have to understand how IT fits together, and it's a little unclear at the moment.

interesting. A lot of moving parts. So you don't necessarily then share the markets view that the fed will most likely cut rates less during a trumped administration. Then would have been the case under the hair emendations because we just don't know yet what these look like.

Now my strong advice outside the fed and if I were at the fed is, let's be risk managers, not prognosticators, what's slow down? We are not going to have good clarity on some of these policies maybe until spring of next year. I don't know.

I think the fed does well when IT acts like a risk manager. When IT starts prognosticating, what's an example of a progression transitory was a prognostication. IT gets itself in the trouble.

And I think it's OK the met that there are structural policies. They're going to affect the landscape. And what you may see the fed do, and I might be an advocate for this, i'm not as certain it's likely little cut in december, but i'm not certain yet.

And I think you may see them take a little bit of a pause, depend on how the rest the economy unfolds to try to allow themselves time to understand this Better. And i'd be careful not to be rigid or predetermined. If I were at the fed and .

I let some point point inter spates because I was just about to ask you about what this all means for december and looked to power, I think himself said during the last press conference, he does not want to speculate. So you think there's a moon for them to potentially pause.

I think it's probably still more likely than not they'll cut in december. But if I were in my former sea, I would want to make IT a game time decision. I want to see the november jaw of support, which we're not going to get tolerably december because the hurricane, other weather events may have depressed the last shops report. You may see a rebound will get more clarity over the next month on what new policies might be. And if I were to feed, I D wanted take every bit of the time allowed before I had to make a judgement about december and I and expect you'll see them do that.

So rob, just conclude, help us understand what this all could mean for markets. We've obviously seen a significant move across markets on the election outcome in the equity market, in the bond market. What, if anything, should investors be paying more attention to that, that perhaps under appreciating at this point?

So some of the folks around the new administration have used the term we want to reprivatise the economy observing this. And I think what they mean is you may see less government directed spending. You may see an effort to improve productivity through regulatory reform and an effort to create more organic GDP growth that spread throughout the economy.

What could that mean? I could mean, interestingly, the top line GDP growth might actually be lower. Another words I don't know that we can keep growing at three percent IT might be closer to two and a half than three. However, you might see corporate earning benefit more IT is certainly, if depend on what happens with the tax flaw, that will be a factor also.

And so the one thing I would say if I were advising people would to watch first, second and third to me the labor force and what's done with the labor force is probably right at the top of the list. Harris would come behind that. But if you simply stop the growth in immigration, that's one set of facts.

If you actually reduce the size of the word force, I think you're going to need an adjustment through technology and technology enabled description accelerated with example robo taxi drivers, car. So I think people should be thinking about IT as a puzzle. Don't get hung up on too much on any one policy.

IT needs to fit together. But I think there is a chance that you could see more than a growth, Better earnings from corporate. I used to be positive for the markets, and I think some of the inflationary budget impacts are not yet clear to me, but they'll become clear as policies become clear. Rob.

thanks so much for your time today.

thanks.

This episode of golden sax exchanges was recorded on monday, november eleven, twenty twenty four. I'm your host about and tuning this friday for the first episode of our new four part series on the changing dynamics at the intersection of sports and finance. We'll be discussing the scale of the investment opportunity and here from t owners and leaders who are the forefront of the transformations happening in the industry. Look for IT. Whatever you get your podcast.

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