Historic day at the Fed with Danielle DiMartino Booth

0:10Danielle DiMartino Booth on what she has already called a historic day. Welcome to day one of the Fed meeting mid-September. Welcome back to Investing Experts. It is great to be here on this day where history has been made. Stephen Myron is now officially a Board of Governors governor. Yes, we have some answers. Talk to us. Were you, I know that this was a question mark. How surprised were you? Were you surprised Lisa Cook is going to be sitting around the table as far as I've understood it? Talk to us about where and how you're understanding these decisions. It's really interesting that Myron, who has literally been sworn in on day one of the meeting, this is the fastest in U.S.

0:58history that they've ever had somebody confirmed by the U.S. Senate. Remember, this went on. The vote didn't take place until eight o 'clock Eastern time last night, and it was strictly divided along partisan lines, 48 to 47. That is not historically what is preferred because the Federal Reserve, as we have been told ad infinitum, is an independent entity, an independent federal agency where theoretically governors should get a sweeping majority of the Senate at least a two-thirds vote. It certainly has changed in recent years as appointees, as nominees have become increasingly more partisan. In fact, speaking of Lisa Cook as well, it took the tie-breaking vote of then Vice President Kamala Harris in order to get her nomination through the Senate when the time came because her politics were seen as being so very progressive.

2:00Lots of division around that gigantic oval table. Of course, now the fate of Lisa Cook is in the hands of the Supreme Court, and the ruling could have far-reaching effects for future administrations of both parties. If they if future presidents have more latitude to for whatever reason they deem, they don't like whoever's running the Federal Trade Commission, let's say, or the FDA, whatever it may be. if the Supreme Court decides to rule in favor of allowing President Trump to fire Lisa Cook for cause, that in and of itself will be very historic. It will overturn a Supreme Court ruling that dates back to the 1930s that found against then President Roosevelt and his ability to fire the head of a federal agency.

3:04So we are seriously witnessing history and the future as well right now with what is going on on the Federal Reserve Board. To swing back to Stephen Myron for just a moment, it is unheard of in Federal Reserve history for an individual to maintain a position in the administration while, not getting a paycheck for a few months and planning to step back into a position in the administration, which would seem to fly in the face of Myron's ability to be fully impartial and independent as he has just sworn to do so. So you would think that he would have fully embraced the honor of becoming a governor at the Federal Reserve.

3:54I heard on our Wall Street Breakfast podcast this morning that that was also not since 1935. Also, has there been somebody sitting in the White House and also on the Board of Governors at the Fed? You've been around a while. You've seen some things. You've gained some wisdom and insight and the skill set to articulate it. And it seems that a lot of what we talk about in Wall Street Breakfast and in general are these unprecedented times. You're talking about some right now. I mean, I don't know. What do we say about these unprecedented times? How do we as observers, as market participants, how do we keep rolling along all these changes?

4:36I guess kind of what would you bring to the table in terms of your experience and wisdom? What would you say to investors, to observers a bit nervous about the shaky ground that they're standing on? And I would say that the entire country right now is also standing on shaky ground. Decisions that are undertaken that pertain to an economy that in the views, especially of younger Americans, has shut them out. is it's a heady proposition right now with so much of the anger element, so much of the nihilism being grounded in a lack of economic opportunity. And these are the moments that we have to appreciate in a historic context, as Peggy Noonan in the Wall Street Journal wrote beautifully over the weekend, you know, the difference between the late 1960s and today was that the younger were less apt to simply act on the thoughts.

5:50That the country was divided in being horrified at the assassination of Martin Luther King, of JFK, of his brother, and that the country was able to come together at the time. Again, if you look at the causes of war throughout U.S. history, and I'm not trying to be hyperbolic here at all, but the basis for so much conflict going back through history has been economics and inequality and a lot of the elements right now that are amplifying the anger element. So I would hope that all Federal Reserve officials would have a deep appreciation for the role that they're playing today in setting monetary policy at a time when June of 2025, that's the most real-time indicator that we've gotten absent these massive annual revisions.

6:55But June of 2025 is in the history books already as having seen net job losses. The pandemic aside, we're talking about the first time since September of 2010. So there is an awareness out there. There is a residual continuing inflation bite that piles onto the 65 % of Americans queried by the University of Michigan who foresee the unemployment rate continuing to rise. These are levels that are being recorded, 65%. We've never seen these unless we're deep in recession or coming out of recession. Of course, the unemployment rate is a lagging indicator. Again, it is incumbent upon Federal Reserve officials to appreciate the role that they're playing right now at a time of deep economic divisiveness in the United States.

7:54So it's clear that there's going to be a rate cut. What is your sense, given this depressing economic data that we're seeing, that it's been depressing for longer than we even thought before? What is your sense in terms of how deep the cuts are? And what's your sense of how much who's sitting where at the table affects that decision and how much pressure is being put on that decision? So it's a great question because we've just had fairly strong retail sales come out. There was a great, great article in the Wall Street Journal last week that was called the Buy Now, Pay Later Economy. So even when we get reassuring news out of certain data points, we know that so much of the consumption, so much of the spending is dependent upon accessing easy to have credit And or, as Moody's reported just this morning, we now have a fresh record high in terms of the percent of consumption that is attributable to the top 10 % of earners.

9:05And we saw that in the retail sales data. We saw online sales had gone, were very strong, and we saw eating out was very strong. So the have-nots, the lower and middle income Americans, they're online searching for the best possible deals that they can get. The haves, they're ordering Wagyu beef and lobster tails. So let them eat cake. Let them eat cake. And so that feeling of economic despair is going to be voiced by, of course, it's going to be voiced by Stephen Myron to the extent that he finds his voice. A very awkward, uncomfortable Federal Reserve meeting, if I could only imagine what it's like in that room today.

9:53But individuals such as Christopher Waller as well as Michelle Bowman, you know, they both dissented in the July meeting in favor of starting rate cuts in July. Meaning if the unemployment data continued to weaken, that they would presumably be in favor of a 50 basis point rate cut. In fact, Waller made a statement to that effect. And that was before the shocking unemployment news hit the wires. Austin Goolsbee of the Chicago Fed, you know, he does not vote until this coming January of 2026. Will he be a voice of dissent around the table as well? Because he said if we see weakening in the job market before, again, this latest round of very weak jobs data came out, that he would be in favor of being more aggressive in the easing stance.

10:47So you could easily among the voters see a triple dissent tomorrow on September the 17th. You could see Waller, Myron and Bowman all dissented in favor of a larger rate cut at the September meeting. We'll be zero focused. We'll just be honing right in on the dot plot. and how many are, I'm just going to say it, how many are with the dissenters and how many are against them? How many people feel that if not September, then we need an unusually large 50 basis point rate cut in October and for that to be followed right away in December? I went into the year, QI research went into the year, our official policy stance was that we would see for rate cuts this year, and that that would be justified by the economic data.

11:33We now know that May, June, July, and August were all weak. Job market data upon being revised, we've had three months in a row of construction job losses, things that a few months ago we were saying, well, the construction sector is still one of the pillars of strength in the economy. Okay, that's been revised away. The manufacturing sector, the job losses there are deepening. So yeah, it's going to be, I doubt that five years from now, when we see the 2025 FOMC transcripts that we'll see or read or appreciate the nervousness in the room, the awkwardness in the room and the hostility around that table.

12:18Yeah. There used to be that line or there still is that line. If you don't have a seat at the table, you're probably on the menu. And it feels like at this point, even if you have a seat at the table, you might still be on the menu. It's interesting times for sure. Okay. So Federal Reserve balance sheet dot plot. What else would you say about that in terms of what you're looking for these next 24 to 48 hours? And what is your expectation? How should investors be parsing through this data? Well, you know, it'll be interesting to see because we did see weakening producer prices. And yet we saw, you know, kind of hotter than expected consumer prices.

13:05So how much worry is there going to be that inflation is not moving towards the Fed's 2 % target? Will we see that play out in the dot plot? Will we see a higher expectation for what the inflation rate at the end of 2025, 2026, or 2027 might be? We've got a 4.3 % unemployment rate. Are we going to have policymakers moving up their expectations for joblessness by the end of this year even? We've still got several unemployment jobless payroll reports to go for the end of 2025? And are they moving it up even more? Are we going to see a 5 % unemployment rate in 2027 by one of the members, as opposed to, you know, what used to look like a flatline on the EKG?

13:53Everybody was kind of similar and the same and no disagreement. Are there going to be people who say, you know, I'm an inflation hawk. I don't think that we should cut rates after September. My dot plot's going to say zero rate cuts for the rest of 2025. And are there going to be individuals whose dot plots, whose dots on the plot reflect that they think there should be three or four more in short order. It's going to be, what we'll be looking at tomorrow is the disparity between the highest and the lowest dots, whether you're talking about inflation, unemployment, or expected rate cuts. And what would you say about the position that Powell himself is in right now?

14:34What would you say about that? Very uncomfortable. I would say he's probably probably in the fetal position right now. He is the one who's going to have to dismiss any speculation and conjecture. He will say that Lisa Cook's fate is in the hands of the Supreme Court, not his. He will say that Stephen Myron, having been confirmed, was the business of the U.S. Senate, which was done legally, and that he therefore had every right to be sitting at that table. But that is a matter for Congress to take up, if anybody has any questions. And then he'll move on. And I can only expect that because, again, inflation is far enough away from the Fed's 2 % target that he will reiterate that every single meeting will be live going forward, that there are no guarantees.

15:22It will depend upon the trajectory of inflation and the balance and tension that we see in future unemployment and payrolls data. I think that will probably not be pleasing to market participants. He will definitely say we're leaning more on our employment mandate. He'll go there, but he's not going to give you any guarantees, I don't think. My opinion, I don't think Powell's going to provide any guarantees outside of we're on a data-dependent path. And anything to add in terms of the stagflation, inflation, conversation, curiosity about where we're at and where we may be headed? So, you know, it's interesting you ask that question, because if you look at the producer price index, there is an actual gauge of margin pressure within that report.

16:16And you could certainly say that at the company level right now, stagflation is extremely real. Don't get me wrong. Companies have a lot of margin cushion after these last few years to burn through. But there's definitely a margin squeeze at the company level. The question is, you know, in the retail sales report, we saw yet another negative sign in front of furniture sales. Bank of America, real-time weekly credit and debit card data shows that there's an absolute collapse in purchases in the home building sector. we're hearing from carrier one of the the largest us hvac uh company that they expect residential construction to be down 40 percent year over year in the third quarter that was from a morgan stanley conference last week um my point to you on the stagflation front is that we're not seeing companies be able to push through price increases to the end consumer in stagflation is defined as highly and persistently high consumer prices accompanied by a rising unemployment rate and slowing growth.

17:26We are not there yet for the consumer, mainly because purchasing power is what is absent. People are struggling with filling up their gas tanks and struggling with putting food on the table that they buy, by the way, at the grocery store if they're not in that Tony top 10 % of earners and the rent's still too high. So these are things that working American men and women are battling with right now, and they simply can't afford to pay up for something that is being affected by tariffs. They don't have money. Anything you would say out of curiosity, there was the announcement yesterday that Trump is thinking about changing the reporting of companies from quarterly to, what is it, twice a year?

18:11Thoughts? Well, see, now I've never been a great big fan of boards of directors incentivizing C-suite occupants with gauging their bonuses based on earnings per share that are reported on a quarterly basis, because then you can't get C-suite occupants to plan for the future and invest in the future. So if you take that pressure off of them, just take the Trump element out of it. Because anytime anybody mentions the president, he could actually say, I'm all for world peace and tell you how to get there. And even if it was world's most salient plan, you'd have 50 percent of the people saying, because he said it, I say no.

18:54This is a rare occasion when I think that Warren Buffett himself would be agreeing with President Trump. that getting off this constant roller coaster, merry-go-round ride of every three months reporting, it certainly would not please the media. The media was like, wait a minute, whoa, whoa, whoa, whoa, whoa, whoa. That's my bread and butter. What are we gonna talk about? What are we gonna talk about every three months? I mean, it's earning season, play ball. So the media certainly is not happy with this, but economists and even investors should be happy with this because if you're an investor, at least if you're a long-term investor and not playing meme stocks, you want for companies to endeavor to become long-term profitable, not just what are my earnings per share tomorrow so that I can beef up my bonus.

19:47Maybe I'll buy back a bunch of shares so that I have fewer shares upon which to gauge those earnings per share. Wee, let's just financialize the balance sheet instead of planning for the future and long-term productivity in the United States economy. But again, I won't say that I agree with President Trump, but I do because I think Warren Buffett here would agree with him as well. And then anything to say about, there's always talk of small caps when we're talking about rate cuts, any talk about looking at the market and I don't know, words to live by or words to avoid for investors? So I got one word for investors that's stronger than it ever was as we ponder rate cuts, and that's dividends.

20:29I don't care where you get them, just get them. That's kind of where I am. Again, until there is purchasing power, you cannot talk about the domestic beneficiaries of lower interest rates because 25 basis points on a mortgage rate that, by the way, is already priced in is not going to move the needle in terms of people saying, it's a 25 basis point decrease in the mortgage rate. I'm going to go buy a mansion. we're not there yet. We need home prices. Home prices are only falling in 80 % of major US metros, according to all the realtor people out there. But they're just beginning to fall. And even in go-go cities like Austin, they're still north of where they were in 2020.

21:12So affordability is still very impaired. And 25 basis points is not going to unleash this incredible wave of buying that benefits small cap companies that rely on the domestic economy and are not exposed to international markets. At the margin, yes, any and all liquidity is a good thing. I get it. There could be a trade in there, but I'm not sure that you're asking me about a trade. No, we're talking investing. Although happy to hear your thoughts on trades if you want to share them. Anything else that you would leave investors with? Any context for dividends, anywhere you can find them or anything else to share about the next day, the next few days, the next couple of weeks?

21:57To the extent that I think energy prices have been really beat to a pulp here. So to the extent that you can find companies like, well, I'm not going to name the company. That's probably against every bylaw that my securities attorneys could throw at me. but there are a lot of energy companies out there that have never cut their dividends. There are also some MLPs out there with nice fat dividends. Again, in these times, you look for sectors that have been beaten up and are still dividend good. So that might also be, I don't know, pharmaceuticals that still pay a nice dividend and are not going to go out of business and are going to continue to be able to throw that cashflow off, not in the form of stock buybacks, but dividends.

22:42So I would, there are a lot of great, oh, I don't know, Seeking Alpha does a damn good job of doing dividend screens every week. I see them myself. And there are some great analysts out there who are digging deep to make sure that the cash flow is not going to be fleeting. Appreciate that. Yeah. Danielle, always appreciate talking to you, especially in these momentous days when so much is coming at us and it's nice to talk to people that understand it more than others. So thank you for sharing your insights with us. Thank you for sharing your time. If you would share with our listeners where else they can find you, where they can get in touch, happy for you to remind our audience of that.

23:23Absolutely. DemartinoBooth.substack.com. We publish the Daily Feather every trading day of the year, which means I never sleep. and if you're an institutional investor running money, please come to QI Research. We publish eight times a week for our institutions and we have a really exciting, fun Bloomberg chat room. And if you don't already follow me on what they now call X, which I'll always call Twitter, at Demartino Booth. Just a reminder, anything you hear on this podcast should not be considered investment advice. This is for entertainment purposes only and you should seek advice from a licensed professional before investing.

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