Countdown to the Fed Decision 9/16/26

0:00From the producers of The Traitors, The Circle returns with bigger twists and higher stakes. Contestants compete for popularity without ever meeting. Some are celebrities, some are regular people, and some are catfishing the competition. And now audience voting will influence the game. You decide who has what it takes to win in The Circle. Watch the Hulu original series The Circle on November 17th, streaming on Hulu and on Hulu on Disney Plus for bundle subscribers. Terms apply. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S.

0:42and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts. You're listening to The Exchange. Here's today's show.

1:10Thank you very much, Scott, and welcome to our special two-hour Fed coverage live from Washington, D.C. today. I'm Kelly Evans. And I'm Brian Sullivan. The markets, they are expecting a quarter point interest rate hike. And ahead of that, the stock market mostly higher. Along with the actual rate call today, you will also hopefully get guidance on if we get more rate hikes. Or if this is one and done, Kelly, there's also the big issue, I mean, trillion-dollar issue of the balance sheet. Some say don't expect much, but we will talk to a guest who says maybe we could have some news on that. Quick look at your screen.

1:42You can see the Dow fractionally lower today. But the S &P is positive three-tenths, the Nasdaq leading the way up seven-tenths, crude oil down about 3 % to 102 in the 10-year Treasury at$4.95. We've got a busy and full lineup for you for the next 90 minutes until the press conference. From market heavyweights to former Fed governors and influential lawmakers who, by the way, are about to head back home until after Election Day. But first, let's begin with CNBC senior economics reporter Steve Leisman. He is across town at the Fed with the final setup. Steve? Kelly, thank you. We're either on the verge of the first rate hike since 2023, or if not, one of the biggest Fed surprises in a very long time.

2:20We go into this meeting with probabilities with a 91 % chance of a rate hike at this meeting. And then there's more to come, a 78 % probability of one in December and a third one perhaps by March of 2027. So not one and done is what the market's expecting. Market pricing always meaningful to the Fed, but to Fed Chairman Kevin Warsh, he has said specifically he's looking to the markets for signals about where to put rates. That signal seems clearly the signal for higher interest rates now and maybe depending on the data in the future. Reasons to hike? Well, you've got that inflation number above 2%.

2:53In fact, now it's above 3%. That's the Fed's preferred measure. Been above 2 % for five years now. And signs of it being broader than just an energy problem. Surging oil and diesel prices threaten more inflation in the months ahead. And the Fed can't look through multiple supply stocks, according to at least some Fed members. From the other side, there are those who've argued that rate hikes won't do any good for the inflation problem because it's oil and rate hikes don't produce oil, but they have been driving the 10-year. The notion that there were reasons to stand pat could limit the guidance about the Fed's next move in a world where Warsh doesn't want to say very much about where things are going.

3:27It could be one and done, guys, or it could maybe just be one and mum. I love that. And I want to get to the Fed rate hikes don't produce oil. They don't. But can Fed rate hikes reduce oil? Because wouldn't that, by cutting demand, reduce some of that inflationary pressure? And isn't that the entire point of an interest rate hike? Well, there you go, Brian. Now you're qualified to be a senior economics reporter because that's exactly the way the mechanism works. All the Fed can do is attack the aggregate demand side. It can curtail a little bit on the supply side, but it really has the biggest impact on the demand side.

4:04And so by hiking interest rates, their attempt is to slow the economy at least somewhat, not obviously to a recession. It wants to avoid that, but to try to take some of the pressure off of inflation and perhaps off of things like the demand for oil. Steve, thank you very much. We'll see you in about an hour. Steve Leisman, our senior economics reporter. Let's turn back to our esteemed panel now as we question whether this is one and done for rate hikes or the start of a new tightening cycle. Stephen Whiting is chief investment strategist at CIO Group. Patrick Harker is the former president of the Philadelphia Fed and currently a professor at the Wharton School.

4:39And Lizanne Saunders is the chief investment strategist at the Schwab Center for Financial Research. Welcome to all of you. Steve, don't don't make me knock over my water here all over the laptop. All right. You think they might and possibly even should raise by half a point today? Well, they've really gone a long way to argue. And again, if it was a different situation, if we weren't in the middle of an energy supply shock, maybe you could be patient. But they've argued that we've been above target inflation for a long time and they've made the choice not to be patient any longer. You know, I would point out for everybody that every Fed tightening cycle in history has been a yield curve flattening cycle.

5:19If they were not to act today after all of that rhetoric, you'd probably see it being somewhat destabilizing for the currency, for the long end of the bond market. You know, now they've gone on this path. They're going to do more than what just 25 basis points. We talk about, you know, what impact it might be. Let's remember that yields have risen 100 basis points this year. We've priced in three Fed tightening cycles. And to move now and to say that we're going to do something to take the inflation target seriously is real tightening. I just find it so frustrating that people keep saying it's been five years.

5:53That has to do with the mistakes they made three, four and five years ago. And we're making progress now. Absolutely. Look, core inflation on CPI to four. If you want to look at PC e-core, it'll be a little lower. It's been gradually coming down. I think Chair Warsh has made an active decision. Let's stop being patient with this and we'll see what the committee says. Patrick, there's a lot of smart commentary on both sides. But in your mind, why does the Federal Reserve have to raise rates today? Yeah, I think it's very simple. You think about the 10-year, the 30-year. We talk about term premia, risk premia.

6:33There's also a credibility premia. The Fed has to act to maintain credibility. And I think that's at risk. Credibility with who? With the markets. Okay, so if they don't raise rates, do you believe, because the market's effectively pricing in a 92, I think, whatever. So if they don't raise rates today, does the market revolt? Oh, yeah, I think so. Absolutely. Because the Fed, as we were just saying, the Fed has been on the sidelines now for a while. Look, 25 basis points, even 50 basis points is not going to make a dent in inflation because the long end of the curve has already gone up. It is possible this is unorthodox, but it's possible that with this increase and the Fed reasserting its credibility that the market comes down, not goes up.

7:21So the president may get what he wants in an odd way by the Fed funds rate going up. Right, which meaning lower, longer term. Yeah, potentially. Yeah. Lizanne, what do you think? Well, I think that the current inflation problem is not just a vestige of the Fed waiting too long to start raising interest rates after the spike in 2022. We've obviously got the more recent supply side problems, but there's also some demand side inflation here. There is some tightness in labor markets. The NFIB latest data that came out shows that small businesses say their number one problem now is quality of labor.

7:57And you look at the A.I. CapEx boom that brings in a demand side inflation. So that's where the Fed can have some success. They can indirectly have success to the point you guys made earlier on reigning in demand, which would be inclusive of demand for energy. But I also think there's that potential necessity of bringing some demand down because not only are we seeing some demand side inflation. Another example would be ISM services prices paid has been accelerating. And that's a big chunk of the economy. So I just don't see this persistence in terms of a disinflationary trend. And I think that that has to.

8:37You know, the only thing, Lizanne, is when we talk about reigning in demand, it's going to be reigning in demand among middle and lower income Americans. This could benefit those with more income. They're either going to be kind of agnostic to it or they own yields, they own treasuries, they own interest-bearing things where they're getting a nice kind of payment from that already. So you have the lower and middle income Americans who are facing high gasoline prices, soaring diesel prices, elevated pressures in parts of the food chain. And now on top of that, we're going to go and give them some rate hikes.

9:06Well, I guess it depends on where you sit on the borrowing end of the spectrum. If you're on the lower end and you're looking to buy a home, it's certainly to the detriment. But if it ultimately brings down particularly the non-discretionary components of inflation, which is really what's biting the lower end, you know, the upper end consumer tends to spend a disproportionate share of their income on items that are more discretionary in nature. And that's where the inflation rate has been a bit lower. It's that non-discretionary inflation rate that has been troubling in a somewhat stagnant income environment.

9:42And then you add that inflation piece, you know, real incomes have been quite stagnant. And the lower income people, they live and breathe this every day. We can talk about core versus headline, PCE versus CPI. But the average consumer up and down the spectrum thinks of inflation as stuff is more expensive now than it was, you know, X number of years ago. Quite simply that. And that is why sentiment is so depressed. But Patrick, sort of to your point before, and I think this is critical to borrowing costs, not going to do anything about food. I get that or insurance or some of these other things.

10:14But I think you would agree with a lot of people in the market, which is that if we get a rate hike, and I know it's completely counterintuitive and Stephen jumping as well. If we get an interest rate hike today, borrowing costs could actually go down. That is extremely counter. Maybe not right away. Or they level off. Or how about this? They stop. going on. Is that fair? Yeah, that's fair. Explain how that could actually happen. Because it all comes down to the credibility of the Fed and expectations of inflation. If people feel if they don't raise today, the markets are going to say the Fed is not serious.

10:52They talk the right words, but they're not taking action. And that is why I think they have to raise now, whether it's two or three. We'll see. So, Brian, I would just think that if the The Federal Reserve were not to act today. The longer the bond market is just going to say it might be more later. There's going to be more uncertainty about. Like they let it get out of control or something. Correct. And look, we're not at zero going to five and a half as we had to do a few years ago. But you think about this. We're not going to knock the cost of energy or food down quickly here by any means. What you have, though, is you've had the whole term premium across the yield curve, 100 basis point rise in borrowing costs.

11:33that will outlast the energy shock as they usually have in the past. But is that because they're signaling that they're going to raise rates? In other words, if he said we're not hiking in respect, that we're pricing in now, according to Deutsche Bank, 100 basis points of tightening. So you're saying yields have gone up a full point. We're expecting a full point of tightening. Couldn't Warsh? What if he comes out of the press conference and says more rate hikes are not a guarantee? What kind of reaction would that have? This Fed chair says he doesn't want to be the signal. He wants to take the signal.

12:01So there's a chance that you can't communicate this well at the press conference. But obviously, when you actually have tightened and you've seen so much happen, he referred to this in July. Hey, I didn't do nothing. I actually, you know, we've actually had tightening here. So, again, telling everyone that the Federal Reserve will do a credible job of preserving the internal value of the dollar, that's better than the alternative. He's not going to give forward guidance, but there are 18 other people who will. So where he's going to abdicate leadership, I understand he's got a perspective and a point of view, and I respect that.

12:33But I think the market's going to teach him that he needs to be the leader, not the father. I think the market is going to teach him eventually. Whether that's this today, I don't know. Lizanne Saunders, my 100 percent Norwegian friend. It's great to have you on the program this morning. Ron Barron on Squawk Box, he was asked by Becky, said she said we had a Fed rate decision today. And Ron Barron, who's famously invested in a lot of high-growth stocks, said, I don't care. Because for his investments, the Federal Reserve wasn't that important. For you and the Schwab clients, how relevant is what the Fed does today or the guidance they give to all the trillions of dollars of investment money that you help oversee and manage for the Schwab family?

13:16Well, if you're focused more on short-term volatility, I think what the Fed does on a day like today matters. But ultimately, it's the 10-year yield that has the most relevance both to the economy and the equity market. And I think what's lost in all this will-they-won't-they today at 2 p.m. Eastern time is that we've reverted back to an inverse correlation between bond yields and stock prices. And that came after about a 20-plus, 20-to-25-year period during the Great Moderation where bond yields and stock prices moved in the same direction. because bond yields were keying more off the growth side of the equation than the inflation side of the equation.

13:55We're back in negative correlation territory. That's akin to what we had for 30 years prior to the great moderation, where bond yields were keying more off the inflation side of the equation. Inflation was much more volatile. And you saw that inverse relationship, which also means that bond prices and stock prices move in the same direction. Did that in the 30 years prior to the great moderation. They moved in opposite directions during the great moderation, now moving in the same direction again. It changes the landscape from a diversification standpoint. I think that's the more important subject we should be focused on than just what the Fed will do today.

14:29Quickly on that, to follow up then. So you don't think that rates at these levels or Fed interest rate at these levels or the tenure at these levels, whatever it is, is going to kill AI. It's not going to kill health care. I know energy is a tiny part of the market, but obviously energy has gone up. It's only 5 percent of the S &P. Sounds like you believe that the stock market rally can continue even if rates were to continue to stay where they are right now. Well, stay. Yes, I think stability in rates for whatever it's worth. The five handle on the 10 year has not been met with great equity market performance, much more volatility.

15:02I would expect that. But I think ultimately where we are now at five percent, it's reflective of where nominal growth is. It's reflective of inflation. We've sort of normalized if things were to become disorderly and you were really to see things become unencadrified. or in the speed of a move, say, in the 10-year, were to pick up, then I think it causes more trouble than just the level and what that represents. All right. I know we have to go. Just, Steve, how much of this is global? Is it more than... Well, yields are up 90 basis points across the world. Are they hiking in response to a global bond shock?

15:32Well, the thing that's changed regime-wise that Lizanne just mentioned is that oil and yields are now moving together. And that's new because central banks are no longer looking through supply shocks. All right. Thank you all. Really appreciate it, guys. Thanks. And Patrick, you're not going anywhere. Stephen, Lizanne, thank you very much. Patrick Harker, we're going to milk you for all your worth. They're going to stay here with us. We appreciate it. Sure. Thank you very much. All right, folks, this is your countdown to the Fed. And ahead, we're going to dig into some of the politics. Yeah, politics around the rate call with Congressman Josh Gottheimer, by the way, also very powerful in AI.

16:06So we'll ask him, Kelly, I think he's actually your congressperson, what he thinks about all of this. Well, I don't know. No, we're going to I'm actually going to ask him. He's certainly CNBC's congressman. How about that? Stocks are mostly higher with the Nasdaq leading the way. Oil backing off its highest level since mid-May. The 10 year at four ninety five four nine five five to be exact. Forty six minutes to go until the Fed's decision on rates. And our special live coverage from Washington continues after this.

16:42Ever notice how every new AI tool asks you to explain your business to it all over again? Google Workspace with Gemini skips that. You get Google's AI built right into the premium versions of Gmail, Docs, Sheets, and more. No new tools, no extra logins, just one subscription that gives you personalized AI right inside your actual workflow. Make work less work. Try Google Workspace with Gemini at goo.gle slash workspace with Gemini. Welcome to The Circle. In this game, you never meet the other players. Your goal is simple, become the most popular. But should you play as yourself or catfish as someone else?

17:23With the new host, celebrity contestants, and this time, audience voting will influence the game, you decide who has what it takes to win. Watch the Hulu original series The Circle on November 17th, streaming on Hulu and Hulu on Disney Plus for bundle subscribers. Terms apply. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading.

18:01Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts.

18:22That building America's capital literally is right over our shoulder. Kelly and I are live here in D.C. today where the Federal Reserve is getting all the headlines, rightfully so. But your investment dollars may be more impacted going forward by what happens with AI and data centers with trillions in spending planned over the next couple of years. Spending around AI is not only the theme for years to come, but arguably one of the biggest and most impactful spending sprees in modern history. But there are growing calls to balance that growth with safety and make sure that AI doesn't, you know, kill us all.

18:56For more, we're joined by New Jersey Congressman Josh Geidheimer. He's also co-chair of the House Democratic Commission on AI. We'll talk a lot about AI. First, I want to talk about the Federal Reserve. Congressman, thank you for joining us here. Thanks for having me. You're actually the CNBC District Congressman. I know. We have to meet here in New Jersey or in D.C. You should get back to Jersey soon. Tonight. Just take it. We're getting there. We're chasing himself already. All right. Here you go. So Kevin Warsh, the Fed chair, how much of a rock and a hard place is he in? Because if he raises rates, there's a guy at 1600 Pennsylvania Avenue.

19:31He's not going to be very happy about that. But if he doesn't raise rates, the stock market is not going to be very happy about that. What do you think? I mean, I wouldn't want to be Kevin today, and I certainly wouldn't have to go to the White House today. You know, and as a member of Congress, let me just tell you from Jersey's perspective, we don't like higher rates, right? We want, we're for affordability, we're trying to do everything we can to keep costs down, you know, mortgages, credit cards. And so obviously, I know the market's got one point of view. I'll tell you where most members the Congress are.

19:59I know me. So you guys all agree with the president that we need lower interest rates? Well, I think we're not. I think we're not. We're not for higher interest rates. But that's on this one. I agree with them. Like why? Why? Because people would say if you're worried about if this is the line, if you're worried about inflation, you have to raise interest rates because that will cool inflation. Well, I think a lot of reasons why we've got to make sure we get rates down. One of them is our debt and which is continue to be a huge issue. Right. I mean, like you're looking at the numbers right now.

20:24We should be focused on that and making life I'm trying to do everything to make life more affordable. But you've got a lot of issues where we have not taken on the tough challenges in this current Congress. And, you know, I'm hoping when the Democrats are in the majority, we take on some of the big issues like health care costs and other costs crushing people. But what are people talking to me about back home? I'm just going to say, I hear people on the campaign trail campaigning on Medicare for all. And I think to myself, I don't know if that's going to lower health care costs. It's not where I am.

20:52I'm just saying, you know that's where the discussion is very vibrant in that direction. Yeah, I mean, listen, there's a lot of people who have a lot of opinions that I'm not necessarily with, including Democratic socialists and others who've got views like, you know, they want to shut down the United States Senate here and the Supreme Court. And so they also want to defund police and open all the borders. You know, we've got different perspectives. But what I'll tell you is we've got to do everything we can to get cost down for people and people are getting crushed. And this we just haven't taken on.

21:23Many of us have tried, but, you know, have not gotten traction under this Republican majority to take on some of those tougher issues. And I think, you know, that's one of the things we've got to do day one of a new Congress after the election. I ran an ex-poll because that's how you do things these days, Congressman, about what what sort of costs do people face? They can't control that has the most sort of inflationary impact on their family. Gasoline, food, insurance, electricity. Gasoline was only third. Food was 41 percent insurance, 36 percent in gasoline and electricity. Is there anything that this Federal Reserve or this Congress can do to bring down the cost of food, to bring down the cost of insurance?

22:04I mean, first of all, or electricity, right? I mean, to your point, yeah, I mean, this electricity is up 45 percent in the last two years. Right. We used to be a huge importer and now, right, huge exporter. Now we're a huge importer. It's killing us. We've got to get these utility bills down. I'm hoping in the lame duck after the election we take permitting reform. That's something we could do to actually help build more electricity, more all of the above approach, actually get those costs down, get supply up. That's something that's on the table in front of us, a lot of bipartisan support for.

22:34But listen, AI, which I know is a huge topic and something that uses a lot of electricity, if you're going to talk about electricity, and that's what I'm hearing a lot about back home right now. You're hearing about$4.50 gas in Jersey, nearly$4.50. You've got diesel prices. I've been with a lot of my Republican colleagues this morning are saying we've got$6.25 diesel. Their farmers are flipping out. That is not good for the Republicans. You've got a lot of pressure. And at AI back home, some people talk to me about this all the time, about the danger side of it. But the reality is AI is here. So from my perspective, the key is how do we do this in a smart way?

23:12How do we do this in the right way? Are there data centers in New Jersey? Sure. How many? Are there a lot or a few? Small. I mean, compared to Ohio and other places, fewer. But by the way, a lot of towns, you know, have been considering it over time. You've got a lot of people saying, wait, wait, hold on a second on the data centers. And my view is you can't get rid of data centers, but you've got to do it the right way, right? People's electric bills and their water bills should go down, right? They should not be giving tax breaks out to people building data centers. You've got to protect the water.

23:41You've got to only do them in communities that want them. And some of our communities in Jersey have passed resolutions that say, we don't want them here. And I think the people have a right to say we want them, we don't want them. In other places in the country, they do want them. Yeah, really, because if you're buying electricity, as New Jersey does, it's hard to build a data center because you just have to probably buy that power anyway. But to your point about bipartisanship, I know the governor, who is a Democrat, she's talking about building two new nuclear power plants in the state of New Jersey.

24:06I don't want to focus entirely on New Jersey, but this is a national issue. I mean, it's God's country. What else do you need to focus on? I think we all agree now, raising our kids there. So, you know, go Jersey, as we say that from D.C. Why is electricity a partisan issue? I don't understand. Maybe I get around coal. I can understand that. Maybe fossil fuels and climate. Nuclear should not be a partisan issue, but it is. Like nuclear, you should. Well, it's less so these days than even a year ago, because people realize. Give us some hope that something gets done. All the above. Permitting reform gets done.

24:37Permitting reform. Now, I'm actually very hopeful about permitting reform. natural gas, more natural gas, more nuclear, more alternative energy. I'm actually, I think we need it all. We need an all the above approach. And I'm very optimistic given the demands that we're going to get more. We got to go. I read about you in the Wall Street Journal over the weekend. I thought that was a great anecdote on the front page about people coming up to you at your daughter's soccer games. She's a field hockey player. Thank you. She did, by the way, scored last night. Important, maybe more important. But in the question now, which is shifting in the debate of should AI companies just have to, should, I mean, you can see this from a trial lawyer point of view.

25:11You go after these big, deep-pocketed AI companies. You say, your products hacked other companies, which Roger McElroy was talking about this morning. We are coming after you. Like, you broke the law. The products you created broke the law. Is that the direction this is about to go? I think the most important thing we should focus on before we get to that part is when there's a new model, you should have a mandatory review that you've just got to submit to the government with a time-banded review to make sure it's safe, right? Because if this is not done the right way, as the anthropic engineer warned, we're going to have huge problems on our hands.

25:42But we've got to win this race. We've just got to do it the right way. And yes, you can't just say it's the Wild West, go do whatever you want, right? We've got to win the race, but we've got to do it in a smart way. And some people say get rid of this thing, which is, I don't think, practical, and you can't put this in a boxing chuck in the Hudson. And then you've got the other side, which says do nothing, right? Let them rip and run, which also puts our national security at risk. And as someone on the Intelligence Committee, let me just tell you, we've got to make sure we do this in a smart way.

26:09Because of the Chinese threat? Yeah, because of the risk we could pose, you know, because your national security is at risk, your cyber security is at risk, your critical infrastructure, your water utilities that were attacked this summer in 10 states at risk. Right. So this is not a joking matter. This is something we have to take really seriously. But you asked about bipartisan. This look for huge bipartisan support behind a major effort on AI rules of the road coming up in the next Congress. All right. Congressman, thank you so much for making the time. Appreciate it. Congressman Josh Gottheimer of, yes, New Jersey.

26:40Still ahead, he was Besant's right hand man. Former Deputy Treasury Secretary Michael Falkender will tell us what the markets might be overlooking as we wait for the Fed today. Yeah. And that decision in just about 35 minutes from now, stocks are mostly higher. The Dow is down a bit, but the S &P and the Nasdaq, they are higher. Interest rates down about five basis points. All right. Ten year backing off its highest level in 19 years. The market wants a rate hike. Will it get one? Our special coverage live from D.C. right after this.

27:16Ever notice how every new A.I. tool asks you to explain your business to it all over again? Google Workspace with Gemini skips that. You get Google's AI built right into the premium versions of Gmail, Docs, Sheets, and more. No new tools. No extra logins. Just one subscription that gives you personalized AI right inside your actual workflow. Make work less work. Try Google Workspace with Gemini at goo.gle slash workspace with Gemini. From the producers of The Traders, the circle returns with bigger twists and higher stakes. Contestants compete for popularity without ever meeting. Some are celebrities, some are regular people, and some are catfishing the competition.

27:59And now audience voting will influence the game. You decide who has what it takes to win in The Circle. Watch the Hulu original series The Circle on November 17th, streaming on Hulu and on Hulu on Disney Plus for bundle subscribers. Terms apply. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts.

28:56Welcome back. Some names in the AI supply chain are leading the S &P today, as we have less than half an hour until the next big catalyst, which is the Fed's rate decision. And our next guest says while the Fed would normally look past a supply-driven price shock like what we're seeing with fuel right now, well, these aren't normal times. Jason Thomas is head of global research at the Carlyle Group. What do you mean by that, Jason? Welcome. Well, I think the textbook response would be to say, you know, the Fed has no policy tool to fix damaged energy infrastructure. The Fed has no policy tool to open the Strait of Hormuz.

29:26So therefore, it shouldn't use a different policy tool to try to address the problem. But these aren't normal times, I think, in two important respects. First, the cumulative inflation that we've seen has created enormous stress, enormous hardship. And I think that we see pricing power. We see wider margins. We see that there's a potential for second order effects. But it's just he's getting me going again, because when we talk about the cumulative inflation, again, that means we're still the ghosts of what happened post covid are still haunting us. And yes, that's true for consumers, but it doesn't mean the right reaction to that is to raise borrowing costs.

30:02Well, I would I would disagree. and I think that what we've seen from our portfolio, and we own over 300 companies, 168 companies of control positions who get data every day, but more importantly, discussions with management teams. A lot of these management teams, prior to the pandemic, went their entire career, maybe 20 years in their business, never raising a price, thinking it was not possible to do so. If you raise prices, you just shed market share. It would be self-defeating. Then all of a sudden, you had a supply chain crisis. These same companies, same people, Raising prices 20, 30 percent.

30:37And it's not doing it. This is to me. This is the story. Now you're getting me fired up, which is that$12 burger five years ago is down 20. And guess what? The demand for that burger has not gone down. This is what I am constantly amazed, confused, shocked by is that higher prices, which I understand there's things like car insurance. You have to have it. They're going to charge you what you want. You have to eat it. I get it. But for discretionary things, it doesn't seem to have had an impact. How come? That's the issue. That does suggest that you have trend demand that is in excess of the productive capacity of the economy.

31:12That is the implication. If you continue to have inflation rates after a 27 percent cumulative increase, that is still above target. Let me ask you about this. You look at the core PCE trends this year. We've gone from 4.4 percent in April, it's a three-month annualized, 4.4 in April, possibly to around 2.8, 2.9 percent in August. That is a disinflationary core trend in the face of this energy price shock. And to your point about auto insurance, up 45 percent from 2022 to 2024, down 6 percent this year. So those areas which were responding to what happened during COVID are moving finally in the right direction.

31:50So again, if the point is to squeeze... The right direction from 4.4 percent. But do you want, I mean, do you think that market forces reassert themselves? So the price wars that we know made auto insurance a terrible investment for years at a time in the past. Does that not reassert itself? Is that not what's beginning to happen here? It may be beginning, but again, I think that rolling the dice with, again, cumulative inflation, that matters. Why does it matter? Because people are angry. We just had primary campaigns across the country that were waged on the issue of affordability. And many of the candidates who won had a critique that the problem with this cumulative increase in prices was because of a market failure, a failure of the system that can only be remedied through, in some cases, fairly radical proposals.

32:35So I think that when you let inflation run like this, there's some good signs we should let this go, you're opening the door to a more radical politics. No, I agree with you, but I'm saying the error was post-COVID. The error was post-COVID. It played out for years. And so what are we going to do now? We're always fighting the last war. Well, I think what to do now is maybe the last war, but it's to take back some of the rate cuts that occurred in 2025 that may, you know, just looking retrospectively, may not have been needed. There was some volatility in the labor markets, for sure, last fall.

33:09And I think it was a question, is this related to more aggressive immigration enforcement? Is this a labor demand issue? There was uncertainty. It wasn't crazy for the Fed to enact some insurance cuts. But I think with the benefit of hindsight, we can say that the labor market didn't really weaken. There weren't the downward. The Fed screwed up because the economy I traveled all over the country during covid. The economy was booming outside of D.C., Chicago, San Francisco, and they treated it like the entire economy was locked down. It's not the case. That's not why we're here. Let's move on. Does how about this?

33:39Does the Fed's decision today, whether they raise or they don't, does it impact those 300 plus companies that are in the Carlisle Group's portfolio? Does it change their business outlook? No, I mean, well, first, of course, there's the need for hedging in the interest expense. I meant their core business. Does it do their business? Not at all. I think, again, the basic, no one is concerned about a 25 basis point hike. No one is really that concerned if the Fed takes away all three of those cuts that were enacted in 2025. If we're back to four and a half percent base rates, it's not the end of the world because nominal growth is as strong as it is.

34:18And again, when you look at margins, when you look at profitability expectations, the idea that people are panicking about a couple of rate hikes, it just seems so disconnected. Who's panicking? Well, I mean, the people that are so worried about the direction of rates. Again, I think that investors need to understand there are worse policy outcomes in the world than 4.5 % Fed funds rates. And that is, again, opening the door to much more aggressive policy actions. All right. Jason, thanks so much. It's really good to check in with you today. Thanks for having me. Jason Thomas from the Carlisle Group.

34:50So is there a better way the Federal Reserve can signal it is serious about fighting inflation? Well, former Deputy Treasury Secretary Michael Falkander thinks so, and he will join us with his ideas next.

35:11Welcome back to our, I guess, breaking news coverage of the Federal Reserve here from Washington, D.C. All right, here's where things stand with about 17 and a half minutes to go. Ten-year yield hovering just under 5 percent. But, folks, it nearly two-decade high of 5.04 percent yesterday, the highest since 2007. So that move, among other things, has us sort of collectively asking, did Scott Bessett, the Treasury Secretary, his enhanced Treasury buyback program, actually make the Fed Chair Kevin Walsh's job tougher? Let's bring in former Deputy Treasurer Secretary Michael Falkender, who served under Bessett.

35:47He is now a finance professor at the University of Maryland's Smith School of Business. Michael, professor, good to have you on the program. Did that buyback make it harder for Kevin Warsh to raise or keep rates the same? I don't think so at all, because the buyback program, you know, the purpose of it is to replace illiquid bonds with more liquid ones. It will help us lower debt service costs, because if we can buy back bonds at a discount and replace them with bonds that were issued at par, then it lowers debt service costs. But again, the magnitude of the buyback program last week, I don't think it had a$6 billion program instead of normally a$2 billion program.

36:27I don't think that that's a sufficient size. When you look at everything else that was going on in the last week since the announcement of the buyback program, I don't think you can look at it as being the cause of the big change in rates. Pretty bad 20-year auction yesterday, probably saw. Rick gave it like a D plus, C minus, something like that. Doesn't really matter. 20-year yield is always the highest part of the curve. It's the least liquid. Kind of is why some people joking, not joking, say just get rid of it. It's the smallest auction we do. Yeah. What other kinds of measures could be used?

36:59And do these measures not blur the lines between fiscal and monetary policy? I don't think that the Treasury coming in and changing the weighted average maturity of bonds outstanding. I mean, last time I checked, that is a fiscal policy decision. If anything, it was the Fed engaging in QE in the first place 15 years ago that blurred monetary policy coming into fiscal policy. So I don't see the buyback policy as in any way impairing the ability of the Fed to conduct monetary policy. What happens today? I think that they are going to raise rates because I think that the votes out. I think Kevin would like to keep rates where they're at, but I think the votes are going to force him to vote with the majority to raise rates.

37:40Because we had three that voted for a rate hike at the last meeting. But I think there's more. There's more sort of in the wings. What if it's this is bizarre? I don't think we've ever had a situation. What if it was all of them but Warsh voting for the rate hike? They have to raise rates. But if the chair is not voting, we could get that today. I don't think so. No. At Kevin's third meeting, let alone at any of Kevin's meetings, I don't think that he is going to set the precedent. He would get he would go with the group. He would go with the group. Even if he didn't want to. I think that's part of engaging in a consensus based organization like the Fed is.

38:13But I think that there are entirely rational reasons to say that if you look at where the inflationary pressure is coming from, It is not things that are responsive to marginal changes in interest rates. You know, if you look at why the CPI report from last week, again, if you take out the direct energy component and then you take out what I consider the indirect fossil fuel items like airline fares, like motor oil. If you take those out, we were at, I believe, 2.1 on the 12 year. Excuse me, on the 12 month CPI read. That seems to suggest that monetary policy is where it's where it needs to be.

38:46The change recently has been the run-up in oil prices and diesel prices, which, again, changes in monetary policy are not going to all of a sudden cause truckers to stop taking goods to market. It's not going to cause people to stop driving to work. You and Jason Thomas, who's our previous guest, he thinks it's inflation. We need to push back against it, and he made a case for that. I just wanted to ask if you still think the balance sheet factor is in today at all in terms of how Warsh might choose to express a view about tightening or just cleaning up the balance sheet in general. Yeah, I ultimately think that the balance sheet is a more appropriate mechanism to go after, demonstrating that you are a fiscal, that you are an inflation hawk, because ultimately it is too much money flowing during the pandemic, I think, that really gave rise to the inflation that we are still witnessing.

39:33But I don't think Kevin's going to be ready to move on that. Certainly the board's not ready to move on that until the task force comes back with its review and recommendation. And it's already back to kind of 20 percent of GDP. I don't know how much you could shrink it now without it gets into dramatically reducing demand for bank reserves and all of that. And maybe that's ultimately part of the plan. But I mean, if I do recognize that, if anything, it potentially hurts Treasury Secretary Besson's efforts to to worry about the long yield, because the way that you would bring down the balance sheet is that you would start selling the mortgage backed security portfolio and some of the long dated coupons that they're holding, which is just going to put pressure on long rates, which I understand is maybe not what the secretary want.

40:13But if you are going to tell the market that you are an inflation hawk and that you are not going to monetize future budget deficits, the balance sheet, in my mind, is the way to go. Yeah. And I just don't know respectfully to however powerful the Federal Reserve is. And they've got a balance sheet that's what, like two times larger than the federal budget of the United States or something. trillion one and a half. I mean, it's literally like a group of unelected women and men run a balance sheet larger than the budget of the United States government. That aside, what can they do about energy supply shocks?

40:44What can the Federal Reserve do to create peace around Hormuz? What could the Federal Reserve do to bring down the exorbitant auto insurance rates that all of our viewers and listeners are paying? What can the Federal Reserve do to bring down health care insurance. That's exactly why I don't think that the way you respond to supply shocks is by trying to raise interest rates to curtail demand. That's just they're going to do it. They're going to do it. But I think they're going to do it to try to signal credibility as opposed to it actually having a real economic impact. I think that's how you lose credibility in the long run.

41:20I agree with you, which is why I think you should. I think that they need to accelerate the work of these task forces in order to start opening up some of the other avenues that so far we haven't been discussing, like the balance sheet. What did James Carville say? He wanted to come back as the bond market. I'm trying to do like a Cajun Southern accent. But like, it sounds like peer pressure, Michael, is what you're talking about. Well, that's everyone. Like the Fed's being bullied by the bond market. I think they are, because if you... But Warsh has let them believe that. He has not once pushed back on the idea that he wouldn't respond to rising fuel prices with rate hikes.

41:55He could have done that at Jackson Hole. He could have laid out an entire case for why it was basically a transitory supply side issue. He chose not to do that. He's let the market back him into this corner. Again, I would like to see him come out and say that for the reasons we just discussed, that changing interest rates is not going to have a material impact on what's causing the change in inflation or causing increased prices for American consumers. I don't think it's worse so much as it's been backed into a corner. I think it's that the fellow members of the FOMC are going to force a rate increase because they have a different view as to the role of monetary policy in curtailing inflation.

42:29They have a different view on the signaling piece. And Kevin is not, in his third meeting possibly ever, going to lose a vote on the FOMC. All right, Michael, it's been great to have you here. Thanks so much. Really appreciate it. Michael Falkender. Let's get a quick check on markets with about 10 minutes left until that decision. The Dow is back in the green, interestingly. The Nasdaq's up half a percent. Now the S &P a third of one percent. And the 10-year yield is below 495. We're also keeping an eye on gold. That is moving as well and could be moving more at 2 or 230. It's up about 1 % ahead of the potential price hike.

43:02It's up about 10 % in the past two months on inflation fears. And after crossing 106 a barrel, crude taking a breather today. Look at that. Back down to 102, Brian. Still a couple bucks above 100. Yeah, and we're just about 15 minutes away until that Fed decision. Actually, about 10 minutes away. Let's bring in CNBC senior economics writer Matt Peterson, who's joining us here on set. Matt, great to have you as well. You just heard Michael Falk in. We kind of pressed him. And I think he sort of said that the Fed agreed the Fed was sort of being bullied by the bond market. He made it sound like the other Fed members would also bully Warsh into hiking rates.

43:37How does that square with what you're reporting? I mean, I think that's a pretty tough look for Kevin Warsh, who was... Do you think it's true? That he's going to get bullied into this? Either by the bond market and or by, to Kelly's point, other members of the Fed. Yeah. I mean, we're going to find out, right? I mean, this is exactly... He came out and gave this speech at Jackson Hole that he didn't have to give. He did actually talk about energy prices back when he testified to Congress. He talked about how they didn't need to hike because of energy prices. And then, after everybody hated that press conference in July, he came out and gave this very hawkish speech, right?

44:11So either he follows through or somebody is at his ear. Is it the FOMC? Is it the president? This is important because, and banks love to do this, they've made charts of the reaction to Warsh's pressers versus the others. And you can guess who's doing the worst right now. It is him. I don't know if he cares. But so what you're saying is the damage, the sell off that caused when people thought he was too dovish in that initial, what was it, June meeting or July? June and July. Then he goes in August and gives this hawkish Jackson Hole speech to say, no, no, no, no, no. Like, I'm serious about this.

44:43And we're all misreading this as now him taking a point of view about inflation that actually he may not want to take. I mean. Right. So what is he going to say if he does not hike interest rates? Right. He came out of Jackson Hole and told us, you know, we on the FOMC decided that we needed to see more data showing us that inflation was coming down or else we're going to have to hike. But what do we see between July and September? You know, CPI, core CPI was up more than everybody expected. So what's the story that he tells if he holds interest rates? There are plenty of stories he can tell. He could tell that story, but he hasn't.

45:20But none of them are consistent with the story he just told us at Jackson Hole, which is that prices are a worry and he thinks, you know, we're judged on our actions. That's the only thing here that I can't understand. I could understand him having a different point of view, pointing to the data and saying, I see the disinflation, but he's telling a different story. So you have to take him at his word, I guess. Right. And he told us very over many, many months that, you know, you don't look at just one data point. You look at trends, you know, all these individual readings on the economy like CPI.

45:48He thinks they're kind of flawed anyway. So it's not clear that he's a kind of slice and dice guy like Waller. You know, I mean, basically, he's going to decide, is Kevin Walsh in charge of the FOMC or is somebody like Chris Waller in charge? Well, we're going to let you go, Matt. We know you got a lot of writing to do. Listen, Walsh has only been in the job a couple of months. People evolve. Everybody wants to hammer somebody the first couple of months. He may change as he realizes what the market wants to hear. Matt Peterson, really appreciate it. Thank you, Matt. All right, folks. So there we go.

46:14The stock market is mostly now I think the Dow is up. So the major indexes are all higher. The Dow has just turned positive by five one hundredths of one percent. We got about six and a half minutes to that Federal Reserve rate decision where, Kelly, we could get the first rate hike in years. In three years after six cuts, the rate decision is coming up right after this. Don't go anywhere.

46:44same place.

47:14get your podcasts.