Fed Rate Debate and AI Sell-Off at the Shadow Fed Conference 10/30/26

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0:51Thank you very much, Scott, and welcome to a very special show today. We are coming to you live from the Shadow Fed Conference in Midtown Manhattan. In fact, I should keep my voice down because they're right behind me. This is an independent group of economists that provide external perspectives on Fed policy choices. And what a perfect time to be here as Fed Chair Kevin Warsh held off on a rate hike earlier this week and signaled fewer live Fed meetings in the years to come. We'll be hearing from Oak Tree Capital's Howard Marks. He's sitting right next to me. Economist Lou Crandall, known as the Fed's shadow forecaster.

1:21Former Fed officials James Bullard and Jeffrey Lacker, who is just on stage behind me. Jason Trenert is also here. He's the chairman of Bear Strategies. There are a lot of other people behind me as well I might have to grab given the sell-off. As for the markets today, we do have some scary moves in tech. Let's just quickly show you what's happening. The Nasdaq is down nearly 3 % right now. We're basically at session lows. 1.8 % drop for the S &P. And Intel down almost 30 % right now after weak guidance last night. It's the stock's worst day since 1974. Memory costs, supply constraints hurting its profits, and the PC market's hurting demand.

1:54It's also the neoclouds, by the way. The chips themselves, memory, everyone causing this problem is also selling off today. So go figure. They're down 11%. Sandisk down 13%. Coal, we've down 11.5%. Mega Cap tech is seeing some losses as well. To cap off a rough week, Amazon, Meta, and Alphabet have lost$750 billion in combined market cap just since Monday. You can see the charts there, Google especially. Let's kick things off this hour with Oak Tree Capital's co-founder and co-chairman Howard Marks. Howard, it is great to have you here. Thank you for making the time. Always a pleasure. You see the big scary graphic.

2:27What do you make of the market sell-off today? You know, one of my favorite memos of my own was written in 2015. It's called, What Does the Market Know? And, you know, people in my business, we're here to take advantage when we know more than the market. So we shouldn't take our signals from the market. The market exaggerates everything. So you think that the market doesn't know anything that smart participants don't right now? Well, I think that's essentially true. I am, I must say, I find the AI daunting because it is, in my opinion, the least knowable, least predictable thing I've ever witnessed in my career.

3:08I don't think I don't know how you can figure out, given any one company, how their product will be used five years from now, how many of it they'll sell, at what price, at what cost, what the profit margin will be, which companies will win and lose. You know, I mean, we have unusual uncertainty. I've never seen anything like it. And others might say unusual potential upside. Yes. So you guys have to commit capital every day, backing companies across all parts of the economy. Where do you feel comfortable that there will be the ability to repay? And where would you step back and say, for instance, with software, I don't know, that we're not so sure?

3:50There are great companies. There are lesser companies. I think the important thing about AI is, and I said this in a memo in December, if you want to invest in AI, you should probably buy the stocks. At least with the stocks, if things go right, you get a lot of upside. Do you mean the stocks, for instance, Anthropic and OpenAI aren't public yet? So do you mean stocks of those people who are making AI models or just people in the value chain? I don't know enough about it to get specific enough as to which companies. But the issue is that when you buy debt, you have no upside. The best thing that can happen is you get the interest and principal repayment that you bargained for.

4:36After that, it's all different degrees of downside. So you should only make loans if you're highly confident that you'll be repaid and if the yield compensates for the uncertainty. But if you're going into a very uncertain situation where you can't say that you're highly likely to get paid, don't lend the money. If you want to play, buy the stocks. At least then you have the upside. But where, I mean, I think of your firm as the opposite. I think of your firm as being a credit firm. We are a credit firm. So we're only playing in special situations, mostly relating to AI infrastructure, things like data centers and AI factories.

5:15Are you still backing AI data centers? Do you back NeoCloud business models? That's different. NeoClouds are tenants. We're backing long-term projects. The creation of the data centers. Yes, and we're trying to do it in places which are less crowded, where there are inhibitions to the construction of too many data centers. You know, we're now part of Brookfield, and Brookfield has a great niche in power. And I think power is going to be a real bottleneck when, you know, they want to increase the data, the infrastructure three to ten times in the coming years. Where are they going to get three to ten times as much power?

6:02So I think that's an example. Everything you want to do in the investment business, there are ways to do it safer and less safe. The less safe ones are usually the ones that offer maximum upside. The safer ones, because they're safe, don't have to offer so much upside to attract capital. But that's a fundamental choice. And with something as uncertain as AI, despite its great potential, I'm biased to playing it the safer ways. But you are playing it, which is to say you don't think the whole thing is necessarily a bubble or an area that is so risky with the build out that your firm needs to steer entirely clear.

6:44First of all, when people say to me, is it a bubble? I say to them, what it do you have in mind? Is AI an illusion? No, AI is a real thing that's going to make a real change in our lives for better and or worse. is the amount of money that the companies are investing a bubble? I don't know, because I don't know what their revenues will be and what rate of return that implies. Are the investments that individuals can make a bubble? Are they overpriced? Is there too much eagerness? Again, I don't know, But, you know, until recently, I mean, when you see market wobbles like today, what it tells you, in my opinion, is that there was a lot of optimism, some of which just got deflated.

7:36What about the size with which these tech companies are coming to the market for debt? Has that created any problems for investment grade or high yield credit markets? Has it widened spreads? Do you think it will widen spreads? Or is this, as I think Rick Reeder put it the other day, the opportunity of a lifetime? Because if you're a credit investor, you have more to pick from than ever with some companies that many would say seem unlikely to ever default. But that said, you have the example of a meta, which has risked its various points, 70 percent of revenues for this build out. So the amount of debt coming into the credit markets from the tech companies, how are you thinking about that?

8:14Well, I think it does give you a lot of a lot of choices. I think that most of the obviously safe payers aren't offering that much return, you know? So they still involve some technology risk, and I'm not sure that their credits are a giveaway. Do you have a point of view on where the Fed takes rates from here, one that you either came into this gathering with, or are they at risk? because Warsh kind of said this on Wednesday in response to a question. He said, you know, our rate hike in, I think it was September, predated the sell-off in the neoclouds. And perhaps that tightening of conditions did help to take a little bit of froth out of the AI bubble.

9:00So do you expect more rate hikes? Do you think that's appropriate for the economy or for where we are with what's happening with AI? Well, you know, I don't make predictions and I don't believe in predictions, especially my own. I think the important thing to note is that we're, And I don't care about one increase or where it is. The question that's important in my mind is over the next few years, will we be much below this around here or much above? I'm pretty sure we're not going to be much below because I think inflation is still a concern. And I think that the low rates of the, let's say, 09 to 21 period were really an aberration.

9:38We're not going back there. And that's been my thesis now for four years. But we could be a little higher if the inflation concerns remain. We could level out if some wobbles in the environment reduce the risk of overheating. I don't think it's, you know, look, if rates should be much higher, they probably would be higher by now. So I think there's nothing intelligent to be said about rates. I think they're going to stay around here. Where do you think, you know, we've been thinking a lot about Greenspan lately and his approach to forecasting. Like you said, you're not that big a fan of it. Neither was he.

10:18He often tried to understand business cycles. And we're clearly in the midst of a big business cycle right now with AI. We've seen the White House pointing to the investment numbers as a sign of, you know, just what's happening with the economy. So it's clear something unusual is going on right now. How would you, if you, you know, if someone came to you and said, OK, Howard, where are we in the AI business cycle? Can you describe or give us a sense of where you think we are? I think we're pretty close to the beginning. Wow. Because, you know, people have been building for future demand. That future demand keeps arriving.

10:59There's still a very strong demand for compute. There are big plans to build more. So, you know, and again, there are all these questions that are unanswered. How will it be used? What will it do for companies' profitability? What will it do for the profitability of the companies that provide it? Who will be the winners and losers? So, you know, I think we're in the, maybe we're in the third inning in that famous analogy. Two more questions. One is, do you use tools like Claude yourselves at the firm? If so, how much? What's your experience been like? Well, I've been using it. When I wrote my memo about AI in February, I fed it to Claude.

11:54I said, what's your reaction? He gave me some suggestions and said, most of it's really good. So the next time I said, please be hypercritical. And he wrote back, do you want me to be hypercritical or hypocritical? So he's making jokes at my expense. But I think it's great. And I love to iterate on that. Can you give us any insight into, is it big enough that you know about token usage at the firm and things like that? Or is this more of just a kind of one-off experience? No, no. We're using it at the firm. I mean, how can you not be using it now to organize data? And, you know, there are a lot of functions like coding.

12:36You don't have to do that stuff. The key is not in doing a better job of coding or spreadsheeting. The key is in reaching better conclusions based on the spreadsheet, and we're not handing that over to anybody. So you still need that human element to take the data? If you're going to be superior in anything in the years ahead, where is that superiority going to come from? And I think best I can figure out, everybody will have access to models of the same capability. The question will still be who does the best things with them. That has the best human capital, because I was going to ask if your firm or if you think that this is happening across the country where these budgets going to AI and we see this more at the big coders like a Microsoft are literally, you know, are we cutting workforce because of that?

13:33I think we're in the early days of that. And, you know, I think that as I understand it, the use of compute is concentrated in a small number of firms. I think somebody told me the other day that the S &P 500 companies as a whole are spending a tenth of a percent of their revenues. It's not a big deal widespread yet. And, you know, there are obstacles to innovation that occur in big companies. And we're talking about big companies. So they're going to do it cautiously. And they have to retool in many ways to make broad use. I think their use will increase a lot. I can't tell you how much. And it depends on whether you know it's going to cost a lot.

14:28Are there going to be identifiable gains from it? Right. I'm curious, you having been through the cycle of the 90s, how would you compare now with then? Obviously, the big difference in terms of that was a lot of startups with huge valuations and not a lot of profits. But I guess I mean more about the evolution of this. Can we prevent it from becoming a bubble? Can we prevent the eventual collapse? Should the Fed try to play some role in that? I don't think so. I don't think so. I don't think the Fed's job is to protect people from making mistakes. And, you know, if a bubble can be defined as irrational exuberance, which I think is a useful definition, how can you prevent people from becoming irrationally exuberant?

15:08The best prevention for irrational exuberance is an occasional hiccup like we've been seeing, you know. And there have been hiccups in our markets starting, I don't know, let's say over the last year, year and a half. But certainly this apocalypse was one example. What we lived through two weeks ago was one. What we lived through this week is another. These are healthy because, you see, the worst bubbles and the worst rational exuberance come into existence when everybody says, well, there's no such thing as being unsuccessful. Nothing to worry about. Nothing to worry about. Last question. Is there anywhere specifically by company, if you feel comfortable saying so, where you differ from the market?

15:50I'm thinking of everything from the telcos to the software names to power. I don't know. You name it. You know, Mark Twain said it ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't true. There's nothing I know for certain on this subject. And there's very little I know. So I don't claim to know enough to differ with anybody. You're not making any bold bets until we have more information. Exactly. Howard, it's been great to have you here today. Thanks for making the time. Thank you. Really appreciate it. Howard Marks, he is Oak Tree's co-founder and co-chair.

16:23Still a lot ahead of us today. Coming up, we'll hear from one of the Treasury market's most trusted voices, Luke Randall, plus former Fed officials Jeffrey Lacker and James Bullard later this hour, and Baird strategist Jason Trenert on today's market sell-off. Our live coverage from the Shadow Fed Conference continues after this. This is The Exchange on CNBC.

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18:24Welcome back to our shadow fed coverage. As the sell-off in tech stocks continues today, By the way, it's lowering the odds of additional rate hikes. The odds of a third hike next year are now below 50 percent, less than a coin flip. So can the Treasury market breathe a sigh of relief? Let's ask someone who has covered the Fed and Treasuries for over 44 years and is one of the most trusted voices in Fed forecasting in all the markets. Luke Crandall is the chief economist at Rights and ICAP, and it's great to have you here with me. Thank you. Thanks for inviting me on. Thanks for making the time.

18:55Let's start with a very kind of unusual period with some of the interventions we've seen in the Treasury market by the Treasury this year and that sort of thing. Starting with maybe to boil it down to the level of the five-year Treasury, do you have a fundamental sense of kind of where we go? Are the highs in? Could 6 % still be on the table? I'd love to know how you're thinking about that. I've enjoyed being in this business for 44 years by talking about how much the Treasury will sell, not at what price. I don't really have a strong view about that. I think there's upside risk and yields, but I don't have a price target.

19:28So how much are they going to sell? And look, the refunding announcement, the quarterly one, I believe you said, is next Wednesday. And going back a year probably or two, we've seen these be huge market-moving events when the public is sort of taken aback by how much borrowing there may be. So what are your expectations? Well, it's very hard to form an expectation right now because the Treasury ripped up its playbook in August and decided to announce completely out of the normal announcement cadence that it was going to triple the size of long-end buybacks. That's extraordinarily out of character for the Treasury.

20:08And there's a reason why they've always tried to be regular and predictable. They sell the largest amounts of debt of anyone in the world. And you need to work with your investors and not try to game them on it. And the fact that they abandoned the regular and playbook, or at least put it on the shelf temporarily, we're all hoping to go back to something that's more predictable. It doesn't mean the Treasury debt management has to stay the same. We just have to have a sense of what the parameters are in order to be able to absorb it. Now, given that backdrop, You know, next week's announcement is much more of a wild card than usual.

20:50You know, historically, you would have said that the most they could do next week is say, by the first quarter, we may have to consider increasing auction sizes, which would probably be a good thing to do. But in this environment, you can't rule out the possibility they'll just move to that immediately. I'm going to guess that they want to reestablish a reputation for communicating clearly with the investor base. But we are at a point where it's time to start thinking about changing some note and bond offering sizes that haven't been changed in a long time. Is that because our deficits are so high?

21:29It's because we haven't increased them in a while. And with these sustained high deficits, the amount of bill financing has risen significantly. It's not a risk, you know, a structural risk, but the bill sector is showing some signs of indigestion. And there's a reason. Do you see that in higher yields? Higher yields relative to other money market rates. So given that, if this hadn't been such a tense year, frankly, they probably would have done it already. A quarter here, a quarter there doesn't make that much difference. They will not be increasing. I think it's a virtual certainty that they won't be increasing coupon offering sizes across the board.

22:19There's a lot of room to increase their workhorse monthly, two-year, three-year, five-year auctions. Not only does the administration have no political desire to increase its long-term issuance, it shouldn't at this point in the cycle. This is not a good time. Because of where rates are? Because of where rates are. These aren't rates you, you know, a lot of homeowners don't want to lock in these mortgage rates themselves. Treasurers shouldn't be locking them in. Do you think the buyback made sense, given that they're buying back paper that had a much lower yield? Well, they're buying it back at a significant discount.

22:55So, you know, that helps at the, you know, it helps with the maturity adjustment to an extent. I don't think it helped as much as the Treasury was probably hoping. You know, they are buying this stuff back at steeply discounted prices. They're buying$6 billion, but the cash value in par value terms, but the cash value that they're buying is more in the$3 to$4 billion range. So, you know, in terms of the impact it has on financing in other sectors, it's not a big deal. Why do you think participants haven't offered up as much as maybe they would have expected or hoped? Why participants? Those who are holding the debt.

23:40You know, some of the initial buybacks, there wasn't that much interest. Yeah, it was, I think people had a hard, you know, for a dealer that's involved in these, it's all about the market spreads at that moment in time. And I think people were just uncertain how the process was going to work, and it was difficult to position for it. After the first couple got out of the way, we just saw massive amounts being offered. You know, in the first one, you know, the Treasury had to buy many small bits of many more individual bonds than it ever had. More recent ones, they've been buying big chunks of just two or three of the bonds that are farther down the curve at that particular moment when the buyback happens.

24:21Do you think they're going to continue so that they say, well, this tool started in 2024? Well, yeah, but that wasn't that long ago, you know. And much like QE, does this now become a regular part? So are we going to sunset all of this? Could they do something like retire the 20-year auction? Are there other ways in hindsight to have done less creation of more programs? I have absolutely no objection to much larger buybacks at the long end. They're the poster child for why the Treasury created the program. If the Treasury had said in August, oh, by the way, even if they had said we're doing it immediately, as long as you do it on the day when you tell the market, you know, be at your desks, there's an announcement at 830, be prepared.

25:04You're allowed to change course on those days. What you're not allowed to do is drop a tape rom on the morning when the street is already set up for a 20-year bond auction. That just decimated confidence. But to your point, you know, I think the buybacks are great, and I always have. They take illiquid securities off the market, free up balance sheet, and you can make up the financing with new issues that are more liquid and more in demand. Let me sneak in a quick final one. On the very big picture, do you worry about something like a new Treasury-Fed accord that is, in effect, kind of monetizing the debt?

25:48Or do you think, and there's a lot of talk about this, it's all over the internet. I mean, if you don't share that fear, why not? Why do you think we could come out of this with these? I was frankly terrified by comments by Chairman Warsh before he was confirmed about a new Fed Treasury Accord. You know, the original accord was a divorce decree that the Fed sued for and obtained. it's not that often that you want to go hook, you know, re-up with your ex. Maintaining at a time where the nature of monetary policy implementation around the world involves greater coordination between central banks and finance ministries, the two are inextricably linked.

26:35And everything they can to maintain the appearance and just the protocols of independence is important. probably would help market, probably would help rates, yields at the end of the day. Yield, I called you yield-crandled. Maybe that's appropriate. Lou, thank you very, very much for making the time. Thank you. Real pleasure. Coming up, let's check on shares of Intel, plunging nearly 30 % for its worst day in 52 years. Speaking of throwbacks, after giving weaker than expected guidance, we'll have more details and the fallout next.

27:35We'll be right back. Gemini at go.gle slash workspace with Gemini.

27:44Oh, look, you just got added to a meeting about coordinating another meeting to prepare for the pre-meeting ahead of the follow-up meeting, which will, of course, require a recap meeting and then another meeting. It's your booking point. book with Southwest and enter airplane mode.

28:12Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop, web, and mobile. For faster trades anywhere you go, try the all-new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at fidelity.com slash trader plus. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSE SIPC. Welcome back to the exchange as markets are near session lows. Tough day. Tech is the worst performing sector as the NASDAQ is down 3 % right now. The Dow is down 495, a 1.8 % drop for the S &P.

28:53Take a look at some of the names which are weighing on the tech sector. Worst day since June, by the way. We've got Twilio, Sandisk, and Coherent all dropping. I mean, Twilio's down 17%. Take-Two, AppLovin, Coinbase, and Reddit, all of those names at new 50 two-week lows. Reddit down 30%. That was another company with some tough results last night. You can see the action there on your screens. On the flip side, it's not all bad news. If you're in healthcare, energy, consumer staples, those defensive areas are bucking the downtrend somewhat. In fact, it hit new all-time highs today. And we have four Dow components also at record highs.

29:26That's Chevron, Visa, Amgen, and J &J. And now let's get to my friend Steve Leisman with some breaking news on the Fed from six inches away from me. Steve, what's happening? Hey, Kelly. Dallas Fed President Lori Logan saying the Federal Reserve needs at least two quarter point rate hikes, calls for a pause after the Fed increases 50 basis points. She said Fed policy should become modestly restrictive. She says it is not right now. the Fed funds rate, she says, at least 50 basis points below the restrictive level or the level needed to bring inflation back down to target. Without monetary policy restraint, Logan says, inflation will continue to run above target in her estimation.

30:06Skipping a meeting, she points out, does not change the monetary policy destination. The importance of that is she was expected to possibly dissent in this meeting, as she explained, because of the volatility in the market was one reason why she felt it okay to pause the level of inflation she calls unacceptable. Economic growth, meanwhile, she says, is strong. Consumer spending is solid. The labor market balance, perhaps even a little bit of tightening, which is interesting. The economy says that maximum employment data shows broad price pressures across many goods and services. She said it's not just energy and it's not just tariffs pushing up prices.

30:42Financial conditions, meanwhile, are providing a tailwind to the economy. I'll leave it there. Kelly, except to point out that she is the third Fed speaker, and the third Fed Speaker to talk about raising rates. So I was, guys, give me 30 seconds. We've had her. We've had Musala behind us, who, if I'm not mistaken, also said that, I mean, it read a little hawkish to me. You should read hawkish to you. If you think hawkish, she says his headline today was additional firmament monetary policy will be necessary, comma, and soon. And then Barkin said the destination is clear, but talks about the idea that the pace of is what's in question.

31:20All right, there you have it. Market didn't necessarily need this today on top of everything else, but the message is pretty clear to the extent that they're able to give us one these days. Let's get to Leslie Picker for the CNBC News update. Leslie. Hey, Kelly, Binance, the world's largest crypto exchange, announced overnight it had been hit by a$6.3 billion heist, the largest crypto hack on record. The company says it has begun recovering assets impacted by the breach and has pledged to cover losses using its Secure Assets Fund for users, which it created in 2018 as protection in the event of a hack.

31:56It is not clear who is responsible for the breach, but blockchain intelligence and AI investigations company TRM Labs pointed to North Korean hackers as the potential culprits. Evacuees from the Russian-occupied city of Oleshki began their journey out of the frontline region today in bus convoys. It came on the fourth day of a local ceasefire in the region, which is due to expire on Sunday. And prosecutors in Florida dropped a felony charge against rapper Rick Ross following his arrest earlier this month for domestic violence. In a filing, they said they had insufficient evidence. Ross, who has pleaded not guilty, still faces a misdemeanor charge.

32:37Back over to you. Thank you, Leslie. Coming up, Will fewer Fed decisions next year create more market volatility? Baird Strategist Chair Jason Trenner, he still sees the S &P climbing perhaps over 8 ,100 in the next six months or so. We'll get an update on that, his thoughts about the Fed and this market sell-off next.

32:59Welcome back. We're live at the Shadow Fed Conference in Manhattan today, featuring sessions on everything from private credit, which, by the way, a lot of intent to dispel some of the worries there to stablecoins going on behind me right now. Jason Trenert is here on set with me. He's Baird Strategas chairman and CEO. And it's great to have you here on a tough day, Jason, for the markets. It's been a tough stretch now for tech all of a sudden for some of these AI trades. Do you have any thoughts on that? Yeah. I mean, it's a strange market because I think six months from now, if the market goes down, bears could say, well, how did you miss Fed tightening and higher long-term interest rates?

33:33And then on the other side, people could say, how did you miss 30 % earnings growth? And to me, though, as far as the data center issue is concerned, it's a live issue. I would say four weeks ago, most of the people we talked to thought it was AstroTurf or they thought it was China. And then I was in Texas. No, excuse me. I was speaking with a senator from Texas, and then I also went to Ohio two weeks ago. And it's very much a live issue. There are no two ways about it. It's affecting real people. and real people who understand AI are not particularly for it because it seems great in the abstraction until one's taking shrubs out of your backyard.

34:16So you think that that is throwing sand in the gears a little bit? I think so. It could be the best thing that happens to these companies in a way. Slowing down. Slowing the CapEx down. But by the same token, I do think it's going to slow down a little bit. And also, I would also say that free cash flow is deteriorating, if not negative, in many places. So as we're seeing, the hyperscalers really have to hit the capital markets to keep the spending going. And I like that framing that you had right off the beginning where you said, you know, there's two ways. It's kind of either or. There's a lot of headwinds with the Fed tightening and everything that we've seen.

34:53But there's also the 30 % earnings growth. And when we think about the disasters in the market today, it's Intel. It's Amazon. It's the companies that were, for one reason or another, not able to put up that earnings growth. Right. I think suggests that the place to be most wary of, if you could predict it, is other places that are going to fall short on earnings right now because the market wants nothing to do with that. Yeah, no, I think that's true. I mean, one of the things, because the economy still, I would say, is quite strong. Now, a lot of it, a good portion of it is tied to data center build out and AI.

35:23By the same token, if you look at the national income and product accounts, the profits from that, that's up about 20 % to 25%. And that's big companies and small companies. So it's broader, I think, than people think. We've been telling people this year that they should focus more on the equal weight S &P 500 as opposed to the market cap weight. And that was not – we weren't taking a huge chance on that. It's just largely because the concentration risk in tech and tech-adjacent companies is large. We spoke to Howard Marks at the beginning of the show, and he said, look, if you want exposure to the big upside of AI, you've got to be in equities.

36:03You're not going to get it in credit, for instance. So when you're talking about kind of the concentration risk of being in technology, the flip side is that's also where the upside is. So what do you say to people who are like, yeah, I don't want to lose my capital, but I want the potential for a 10x return in some of these names today still. And so where it is today in that narrative? Well, a 10x return, I think people have to manage their expectations because this is different. It's very rare to have the world's largest company growing revenues at 80 % a year, year or year. That doesn't happen too often.

36:36And I think the next phase of the trade, and just California last week, and just talking to some of the folks out there, the next phase of the trade may be the companies that implement AI in the best way. And that could be everywhere. It could be obviously healthcare, financial services, industrials. And so the hard part about that, of course, is it's harder. It's harder to identify those companies. You have to do a lot of homework to figure out who's doing that and who's doing it well. But in my opinion, that's certainly a safer way to play AI and might have longer legs as well. I mean, I think some of this you've brought a lot of performance forward because there's very long-term expectation that these companies will provide earnings and growth.

37:28And I think they will. It's just that it's what's in the price that's the most important. I guess my last two top-level questions are, what about the midterms next week? And you've kind of talked about that a little bit around the data center risk. But just is there kind of a broad issue for investors there? And then the second one is the Fed. We're at the shadow Fed conference. And I don't want to boil it down yet as to what I'm hearing behind me. But there is some concern about is inflation and nominal GDP growing to such an extent that the Fed needs to be a little bit more reactive to that.

37:58So I guess that's part of the first thing you said, which is we are in a Fed tightening cycle. and the midterms, maybe they're a non-event for investors. Well, so to start with the Fed first, I would say that this is a new regime with Chairman Warsh. He doesn't like the balance sheet as a tool, doesn't like to use the balance sheet as a tool. He thinks it's very regressive, and I agree with him completely on that. And so you're going to have more opacity in a way, but there is really largely a mandate, which is price stability, and then I would say to a lesser extent they're supposed to be equal, but is full employment.

38:39But you're at full employment right now, and you're still at a CPI of 3.7 % year over a year, which, as we know, the Fed's missed the target for five years. So I think there's a sense among Chairman Warsh and his colleagues that the central bank has to kind to take control of the narrative. Especially what oil was, it looked like it is a supply shock, but the longer it goes on, it's just a natural state of affairs. It gets passed through, and then inflationary expectations change. I think you're at the point now where you have to start doing that. As you know, there's almost never just one tightening.

39:19Really the Fed didn't even start making statements until 1994, so you had to intuit what the Fed was doing from open market operations. But since 1994, there's never been just one tightening in a series. And usually, I would say that while it's indeterminate its impact on stocks, it is quite bad for bonds. That is demonstrably true a year out after the first Fed tightening in a series. That's interesting. A lot of people are talking about buying bonds right now. Yeah, from a technical or tactical perspective, I might be able to see that, but I don't think that's a particularly great call for me.

40:00As far as the midterm elections, we have a second to talk about that.

40:08But I think if it goes the wrong way, let's say, and anti-data center politicians win on Tuesday, that's a bad development because there'll be more anti-data center politicians. You know, I don't think there's a lot of profiles and courage down there. I think on this issue, I think people are going to go where the voters are. And from my understanding, data centers are underwater 80-20. AI is underwater 70-30 with the American public. And so it's tough to stand in the pocket, even though it might be the right thing to do. I'm not so sure there's going to be a lot of politicians that do that. And I think it's a reminder that today's action sometimes is about things that are bigger even than just what Amazon or Intel might have said.

40:52True. Jason, thanks. Thank you. Appreciate it today. I appreciate it. Jason Trenner of Strategas. Coming up, the market spoke and they listened. After expectations for a rate hike sunk, the Fed stood path this week despite inflation remaining pretty high. We'll talk about that. Was it the right move and what pushed them to a hold? We'll talk to two former Fed presidents next.

41:15Two Fed officials dissented in favor of a quarter point hike on Wednesday at the Fed's latest decision. Cleveland Fed President Beth Hammock and Federal Reserve Board Governor Lisa Cook, making her the first ever dissent since joining the Board of Governors in 2022. and with inflation still above the Fed's 2 % target, what do those dissents tell us about the debate? I think Warsh said it was a good family fight. I haven't been through a few of those. That means it was, you know, and the path for rates. Joining me now are two people who know that debate from the inside, Jeffrey Lacker, former Richmond Fed president, and James Bullard, the former St.

41:48Louis Fed president. It's really great to have you both here. Thank you. Great to be here. Thank you for the time. President Lacker, just starting with you. You've been a big supporter of Warsh's kind of as he's taken the helm. But I think you had a little bit, some questions about why they didn't hike on Wednesday. Is that right? Yeah. So I've been surprised at the lack of urgency. Inflation's been high around 3%, 3.5 % for so long. I would have thought that before now, earlier this year, they would have questioned the presumption they seem to have had in this whole episode about inflation coming back to 2 % rapidly and taking stronger action with more alacrity.

42:23Maybe they'll come around in the next couple of meetings, but I've been surprised at the lack of urgency. I don't know why I feel a little stuck on this point. I want to hear what you think. And there are some measures of inflation that look like what we're dealing with is more a relic than it is necessarily an impulse of inflation that's still to come or a little bit of supply side. Broaden out your sense of inflation, if you could, especially if you were at a conference where they're trying to do that. I mean, it's clear that what we have falls a little short of understanding where future inflation is going.

42:55What would you say are the best ways to tell? Are they market-based? Are they data-based? You know, is it the Beige Book? I mean, what helps inform your sense of inflation is going to still be a problem, let's say, a year from now. So the breadth across categories is one thing. But then you look at nominal spending, nominal GDP. Those figures are growing well above rates that are consistent with 2 % inflation. So you get the sense that there's just more dollars being spent than the economy can supply a 2 % price growth. It needs 3 % supply growth in order to supply that many dollars with what they're asking for.

43:32And you mentioned this, President Bullard, earlier. He said nominal GDP targeting you thought might play a bigger role in the future. Yeah, I think it could. It's been always around, I would say, in the academic literature and in the policy discussion. but maybe it's time to take more center stage than it has historically. But isn't it as hard to, you know, all targets imply a degree of forecasting when you're trying to think about how we're getting from here to there. How do we do that? I mean, that's still kind of hard to do. The Fed devotes a lot of resources to forecasting. I always kind of think that there's a good forecast.

44:09There's as good a forecast as you can make at a point in time. I think they're probably pretty close to that, But there's a certain amount of ambient noise in the system, and you're never going to be able to get rid of that. So I think you do the best you can, and you try to make the best policy you can based on the forecast. Steve Myron has recently been talking, again, about the balance sheet or maybe monetary. I guess there's these like Delaria aggregates that try to do a better job than just M2 measures. But do we need something more like that? There's still people in the crypto world, for instance, who talk a lot about M2.

44:38M2 is just an imperfect measure of the kind of thing we're trying to get at. So do we need updated measures of that, or do you think this is all in 1970s? You probably do need to update. That's why it's a good time for the community to review this kind of stuff. I think you've got private money issuance, for instance, that you didn't have in the past, and you've got other types of nominal assets being issued all over the world. So I think a lot of that needs a rethink. You can't just go back to the way we thought about it in the earlier era, earlier post-war era. Do you have a point of view on the decision to skip a meeting this week?

45:16I don't think skipping a meeting is a good idea. I think you want to keep optionality. And, you know, it's better to think about having a meeting and doing nothing and just saying nothing happened. We're not doing anything. I think that's a perfectly fine way to go. But if you don't have a meeting and then it's a pretty volatile world and you have to act, you're going to have to call a special meeting in that circumstance. which you can do. It is possible. But boy, it's going to be a lot of volatility if you have to do that. Yeah. You're talking about the meeting schedule for next year? Yeah. So now next year, they're going to have one meeting that's not live.

45:52I don't know. Did they say which meeting it was? Maybe the October one? No, they didn't. They said it was going to be in the second half. So we used to have one-day meetings. They used to get everything done in one meeting, and they'd have two meetings a year where they'd cover some special topics. Why can't they just meet three days when they want to cover special topics? Oh, so we do it every six weeks, but at a third day when you want to do a special discussion. Yeah, I'm not sure I understand, but it's up to them, however they want to skin the cat. Well, people have questions, like, for instance, if they stick to the cadence of, and this matters, by the way, to people in the options market, because if they know which meetings are changing, they know the volatility on those days.

46:26You can make a lot of money. I'm not smart enough to figure it out, but so they really want to know what the schedule might look like, which meetings are live, which ones. And once it's priced in, it's priced in. It's kind of a non-thing. But then there's the policymaking point of view, which is if you go three months between meeting, if you stick with the calendar. I don't know. Why can't we have daily resets of Fed policy? Well, some other central banks meet monthly. I mean, if you if you want to take the pressure off individual meetings, have more of them, you know, then each one there's the stakes are lower.

46:55Yeah, I think I think the eight meeting cadence was a good one. It's settled into that over many, many years. And again, I think you just don't want these long dry spells in case something does happen during that period. And again, you can manage that, but you've got to come in with some special meaning. Boy, that's going to rile up the market. What the heck's going on? You're banging the gong, making a big signal. Or you don't meet at all and you just put up with it and now you're too late. And so I think it's a little bit off. Both of you are very familiar with the impact of FedSpeak in the markets.

47:31You were there during a period where this was so important and we journalists loved it, you know, an update into, OK, this person. But then what's their thinking? How does that feel like now? I think it's fair to say, President Bullard, that that Warsh maybe wants less of that and we should expect less of that. Do you think that's a fair statement? And how do you think that also may impact or not impact kind of markets reaction to monetary policy? He said he's going to communicate less. He doesn't want to give forward guidance. I've interpreted that as a certain type of forward guidance where you give a very concrete signal that the Fed is going to do something 90 days from now or 180 days from now.

48:08And then you feel compelled to follow through no matter what the data say. So I think he doesn't like that. And I don't like that either. And so that part, I think, is fine. But you do have to give some indication of what the committee is thinking, how the committee is evaluating the current data. And I think there's no getting around that. And Alberto Muslim here at this conference talked about that, the framework. Do you think they've explained themselves enough? Well, I think they still are because you do have many members talking in venues like this one. So you do get. And I think each each communication is just a small increment.

48:45You know, you're just giving a little bit of information about what that particular person thinks and how they see it. And I think that's a that's a way to keep the markets in sync. with where the committee is? Same question. Yeah, so I think Chair Warsh came in with the right instincts that they need to rethink how they communicate. I think the way they've communicated in the past, particularly the dot plus and the SCP, has placed more weight and emphasis on the most likely outcome and has detracted attention from how future policy is going to vary across possible future circumstances. And so his instinct is to pull back from communication.

49:25He needs to get the committee on board. I think no forward guidance in the intermediate period, we learned, doesn't mean they say nothing about future policy. But I think if they could shift the focus to how they're going to react to future data, and there's some discussion about that at the conference today. Some of us feel as if making a verbal reference to the predictions of policy rules, such as the Taylor rule, would be a constructive step forward. But there's other ways to skin that cat, and I'd like to see them do that. I do want to say one more thing on this. The September meeting actually has the most forward guidance of any meeting, because you've got this dot plot with only a 90-day horizon, and you're basically saying what you're going to do for the rest of the year.

50:13And that has totally affected market pricing in this instance here. So I think that's the kind of thing that Kevin Warsh has wanted to back off. They could tweak that. Put a longer horizon out there. Gentlemen, thank you so much for making the time for having us here. Jeffrey Lacker and James Bullard, of course. We really appreciate it. Thank you. Thanks a lot. And that's it for the exchange. But we are not done just yet at the Shadow Fed Conference. I'll see you on Power Lunch in a couple of minutes with another interview. And Brian Sullivan picks up our coverage of this market sell-off after the break.

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