Independence cannot exist with accountability. No, I think those two have to come together and I think right now the DC bubble is too much on the independence without accountability, whereas, potentially the Trump administration, Trump himself just want to do what he wants. I think it's always good when you have two extremes tugging at each other because then it will generate a medium solution, which is what you want, rather than one way or another.

Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen.

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunne.

Thanks for the introduction, Niels. Today I'm delighted to be joined by Anna Wong. Anna is chief US economist at Bloomberg. She was previously an economist at the Federal Reserve Board and prior to that served on the Council of Economic Advisors at the White House, and also served as an economist at the treasury in the Office of International Affairs, earlier in her career. Anna, great to have you on. How are you today?

Good, happy to be here, Alan.

Great. Well, there's an awful lot to talk about in the US economy and policy world, so I'm sure we're going to have a great conversation. Would you like to start off by getting a sense of our guest’s background? Obviously, you've been a career economist. I guess. What got you interested in economics in the first place?

Financial crisis. So, when I was young… So, I actually was born in Hong Kong, and the Asian financial crisis, in the late 1990s, really defined the livelihood of people around me and also the whole economy and environment I grew up in. And also, when I was an undergraduate (I went to UC Berkeley), my most exciting economic courses were international finance. And it was happening in the context… I was taking the class in the context of the Argentina currency board crisis in 2001 as well. So international finance was what got me interested in economics in the beginning.

Good stuff. Well, we've had some of your contemporaries from Berkeley on as well, Barry Eichengreen, as well, in the past.

He was my thesis advisor.

Oh great. Well, there you go. That's an interesting link. Yeah, we've had Barry Eichengreen two times, at this stage, so definitely one of our favorites. But yeah, as I say, I mean you're on at a very interesting juncture here in terms of the US economy. I guess it's always interesting. There's always something to debate, but particularly at the moment we're just coming out of Jackson Hole and I guess there is an expectation now that the Fed is inching towards an easing. Now I saw you on X saying your sense was that maybe Powell wasn't as dovish as maybe the consensus read. Is that correct?

Correct.

And tell us more. I mean, I thought it did mark a bit of a shift from maybe the last press conference, but my reading of your comments is you still see it as being very much data dependent, is that right?

Yes. So, I think the market was really fixated on a couple phrases in Powell's Jackson Hole speech. He said the risks, the balance of risks, has shifted. And he also mentioned that there is a curious balance in the labor market, downside risk for employment has increased. So, seen individually, these sentences look quite dovish. But when you read these sentences in the context of last year's Powell’s Jackson Hole speech where he mistakenly greenlighted a rate cut, and also seen in the context of the words that Fed speak used, usually Fed officials use to make things more confusing. I think there is actually a lot of escape clause in this speech, so to speak, where he's not really saying that this is a sure thing. Although today I see that markets have now priced in 94% of a rate cut in September. So, it will, indeed, take a lot for the jobs data we will get this Friday, and also CPI data next on the 11th, to reduce the pricing probability to say 60%, 55%. I think if, if market's probability for a rate cut for September from here on out were to move down to 60% to 55% for whatever, for any, you know, data release reasons, then it will become more of a toss-up.

Okay. Yeah. And I mean, we've kind of got two views emerging from the Fed. I mean, we've had the line that Powell has been pushing for a while now that it's too early to say what the impact of tariffs will be. There's a lot of uncertainty, and also that the labor market is in balance, broadly, albeit with weaker demand. And then against that, Chris Waller, he's kind of been very forthright, I think it's fair to say, and seems to be backing his view quite strongly. I mean he came out and he argued for a rate cut previously, and it was the right call, which was quite blunt. And he's doubling down on that view now and he's very much of the view that there's a risk of the US economy going to a stall speed and slipping into recession. So, I mean, which view has more merits in your opinion?

First, I want to say Chris Waller has a very impressive track record as a forecaster. And very early on he took the view against the, I believe the Fed staff internally, in the vote forward, which is that tariffs will be very inflationary before July. Most people, back in March or April, were thinking that the inflation print would be quite elevated by May, by June, by July. It's been postponing every month, but most people said by May. But Chris Waller thought that the impact on inflation from tariff would be about 0.3 percentage points on core PCE deflator this year. It so happened that that was our forecast too. We actually also took this view very early on that the tariffs would not be so inflationary, at least not this year. And I think that, because our forecast is similar to Waller, I can explain the reasoning on why we find that convincing. Well, first of all, the US economy is a service driven economy. In the CPI basket, over 70% of the stuff are services, whereas goods comprise of only 25% or less of the CPI basket. And Even within that 25% only about 12% were really exposed to tariffs. By that I meant scaled by the share of imports times the tariff shock. The shock is greater than 10 percentage points since Liberation Day. So really, we're talking about a very small, like 12% of the basket that's tariff driven. And, and so even within this basket, when you look at these 12% of goods, what is the stuff which is being potentially being driven up in prices by tariffs? They’re clothing, sporting goods, audio equipment, computer equipment, window coverings, indoor plants, and stuff like that. And when you look at these, you get the sense that these are rather discretionary goods. Auxiliary goods, that people actually could… You can wear your clothes for longer. You don't need to go and upgrade your clothes every month. In fact, Temu and Shein are kind of training Americans to buy clothes every month. Another factor we consider is that many of these goods that are really exposed to tariffs, very interestingly and counter intuitively, if you look at the inflation of these tariff exposed goods, they actually have an inverse correlation with the tariff shock they receive. Meaning that if you look at the 12-month inflation of all these goods exposed to tariff, the more tariff they got, the more deflationary they had been in the last 12 months. And this is a kind of important point because it tells you that the tariff shock is not random. The tariffs are being applied to the goods that tended to be more deflationary in the past. And why? Because they came from China. And that tells you, because China has been going through deflationary pressure in the past year. And deflationary pressures are very hard to get out of, as we could see from Japan. And when you are in a deflationary environment, firms try to out compete each other by bidding the prices lower, and lower, and lower, undercutting each other. Which is why, you see… I thought one of the most important international monetary policies we have seen in the last two months is the Chinese government announcing this involution campaign where they're cracking down on price cutting behavior that I just described. It is all in the context of deflationary spiral. And this really affects US CPI because as you could see, it means that the tariff would not be as inflationary because they're precisely coming from a place that's increasingly deflationary, kind of offsetting that. So, both of these, these two reasons, are reasons that consumers would cut back. These are the income and price of elastic goods. Second, the origin of these goods experiencing deflationary pressure was the reason why I found the idea that tariff would not be as inflationary. But going to the point of services first, and because the tariff was such a shock to the economy back in April, on Liberation Day, the stock market plunged in April by what, I don't know, 20%? And that wealth effect… So basically, the top 20%, by income of households in the US, owns 90% of the stock market. The stock market Correction hit these 20% of Americans hard. And they are the ones who are driving these airfares and hotel prices and personal services prices down. And these things comprise a large portion and account for the variance of month-to-month changes in the CPI by a lot. And that's what has driven the CPI to the downside in the last four months. Now moving forward, looking forward, I think I would say that now is the time where I actually think the tariff pass-through could actually be brisker because the stock market has, since April, early April, rallied over 30%. And I expect that mechanically the stock rally will add to core PCE inflation. Well, it already has added 0.3 percentage point of core PCE inflation from June to August. It will, once you see the August report, and then it will continue to pressure core PCE in September through October. Because the way that a stock market rally appeared in inflation data, it has about a three month lag. So that piece, with these financial conditions loosening, is going to mechanically translate to inflation already. But on top of that there is still multiplier effect of how it affects people's behavior. Now we are seeing airfare prices are going back up, hotel prices are going back up, and people are traveling again. People are feeling better. Consumer sentiment is also improving. So, I think firms are finding the opportunity to pass through the prices. They always try. They could try, and then if it doesn't work they cut back the prices. But what I think we could see, as we come to the end of this year, is okay, many of these trade policy uncertainties are being resolved. So, that's one tailwind on investment. Firms are no longer holding back investment. The tax policy uncertainty is also over with the passage of One Big Beautiful Bill. And people are already moving on, pricing the boost to many stock market firms on the basis of One Big Beautiful Bill. And on top of that you have this improved consumer sentiment, which means that firms could be maybe more successful in passing through the tariff. So, I actually think that if the Fed decides to cut in September, we're going to see a flare up in inflation.

Okay, interesting. When you talk about that kind of pass-through from the stock market into core PCE, I mean, obviously you're talking about the wealth effect being indirect. Are you talking about a direct effect because there was an impact on, was it kind of asset management?

Exactly. I'm talking about the direct effect, yes. There's a component there called PPI Portfolio Management Fees, which can be proxied very well by S&P 500. So, it mechanically translates into inflation.

I mean, what you say is interesting, as you say, the uncertainty is diminishing, the consumer sentiment is stabilizing. Against that, I mean, obviously the Waller view is also that the labor market is weakening and the demand side is weakening there. I know you're very close and do a lot of analysis on the labor market data, and obviously, we've had JOLTS data out today, early September when we're recording. There’s nothing interesting in that, but we've got obviously payrolls and revisions coming. But taking a step back, what's your read on the labor market, you know, both from a supply and demand perspective?

Yeah, I think I agree more with Powell's portrayal of the labor market and the Jackson Hole speech which is that labor supply and demand are pretty close and they're in a curious sort of balance. Which is why I found the sentence that he put in after this part, the curious balance sentence, quite curious myself, because that wouldn't lead you to conclude that the employment situation faces enhanced downside risk. He just said there's a balance there, so why would there be suddenly a downside risk? So, you know, many people in the US were talking about the immigration crackdown and how that's creating a downside risk to employment. But last year we looked into what sectors do undocumented immigrants tend to work in, and we found they tend to be in construction, leisure and hospitality, and some services - personal services, jobs such as hairdressers, things like that. Yeah, so these three sectors, for example, are also the ones that are facing enhanced labor demand, Leisure and hospitality, decreased tourism in the US; construction worker, high interest rate and housing market cooling in the United States. In fact, the housing market is going into a negative, contracting now. It's very rare to have multi-month contraction in home prices. That's what's happening in the US right now. And so, I do think that labor demand and supply are roughly in balance. So, another thing in the Jackson Hole speech. So, Powell unveiled the revisions to the longer run goals of the Fed. And there are a lot of very significant things in there. And one of the most important things is they talked about the situation when the price stability and full employment goals are in conflict with each other - how they assessed the situation. And in the new version he brings back the word balanced. So, they're going to pursue a balanced approach where they will be weighing both mandates according to how far they are from their targets. And also, in the speech Powell also mentioned he'll consider the speed at which he thinks that the gap would close for each of those mandates and the distance from it. And so, if you take him by his word, we have precisely the situation right now. How would he think about the departure of the inflation and the labor market goals? Well, unemployment rate is 4.2 right now. The Fed, the summary of economic projections back in June have the Fed forecasting the FOMC forecasting 4.4 at the end of this year going to 4.5 maybe next year. So, basically, we are on track and even conditional on getting to 4.4. The Fed officials also see the natural rate of unemployment at 4.2. So, 4.4 versus 4.2 is a very small distance. And Powell himself also characterizes unemployment rate as still historically low. So, in terms of distance from the target and also the time at which it would take to close, according to the Fed projections themselves, it will close pretty soon. So, where's inflation? Core PCE inflation, and Powell said in that speech, a one-time price level increase, from tariff pass-through, does not mean all at once. That is code word for persistent inflation. And in fact, I think that matched what I would forecast in terms of inflation. I just said that we won't see much of inflation this year from tariffs but it's slowly coming in, and the firms are finding the right opportunity to opportunistically pass-through. And by next year's time the One Big Beautiful Bill, according to our estimate, will produce a 0.4 percentage point expansionary fiscal impulse in April as people get their tax rebates and things like that. That would be a tailwind for suddenly an income increase. And this is where the tariff pass-through will succeed is when it happens, when firms are raising prices just as people are getting a positive income shock. This year the tariff alone is equivalent to a tax increase of 1 percentage point. And there's not much offsetting positive income balance except for the resolution of trade and tax policy and the stock market. The stock market and easing of financial conditions is one factor that helps offset the consumption tax from tariffs. So, the stock market improved because they think that the Fed is there to put a bottom in the market and quickly put a bottom on the labor market. The stock market will provide this income boost to the top 20% and those 20% will drive the services inflation up in the rest of the year and also allow certain product tariffs to be passed through on the more auxiliary products.

I mean a lot of the points and the concern around the tariffs impact on inflation is on inflation expectations. And you know, I suppose the point has been made that because we had the inflation surge during COVID and afterwards that now consumers are much more sensitive to rising prices. So, the fear is if we see rising prices now, people will assume that this will be more persistent. This is the argument. Your forecast for higher inflation isn't even taking that into account. It's a separate factor. Are you sympathetic to that argument, or is it too vague, or what do you think on that view?

I think that the way that Powell, and several on the Fed, have been using that argument kind of has some circular logic to it and doesn't really make sense to me or requires some kind of leap of logic. Assuming that inflation expectations are anchored, are well anchored now, as Powell repeatedly said they are, then they shouldn't be fearing that there would be pass-through because then it will surely be a one-time increase. So, Chris Waller, in that sense, is the most logical. I mean all his steps follow the previous argument. So, inflation expectations are already unanchored because only if they're already unanchored can this argument that ‘oh, people will be more sensitive to prices’ be right. I think it's more likely that inflation expectations are already unanchored and they're already at, say, 2.8 as opposed to 2. And the Fed once again is showing why inflation expectations are slowly unanchoring toward the 3% range. It's because they're so quick to respond to a little bit of labor market deterioration. And keep in mind, core PCE has been above target for almost 5 years. And if the FOMC forecast and the SCP is right, it will be seven and a half years before it closes. So, seven and a half years of above expectations, above target, of course will cause inflation expectations to drift up. So, I just find the argument of forecasting inflation rise because expectations are unanchored is kind of weird. And to assume that people will bid up wages because they have higher inflation expectations, well, then you should be acting today. You should be in fact hiking now.

Yeah, I mean, you’ve kind of given Chris Waller a lot of praise there in his analysis and his logic. Do you think he's been influenced by the current political environment and positioning for the Fed chair role in his views?

No. So, I thought that all his speeches showed that he has done the homework. I mean, I also kind of agree with him that the time to cut probably was earlier. I mean, I think that there was a narrow window of time back in June and July where they could cut because all the data cooperated. You know, inflation data was weak, employment was weak. everything was, you know, weak.

Yeah.

So, it would be entirely consistent, with the Fed's reaction function and also what they say about being data dependent, to cut then. But now we are actually moving. Suppose that we do get a hot CPI on September 11th. Are they really going to cut if you get a 0.4% CPI report?

Yeah.

How could you possibly cut? But I think markets do think that, if they get a 0.4%, they will cut on the assumption that the 0.4% would be a one-time, one-off transitory inflation. I think a 4.4% inflation print would really scare the heck out of Fed officials.

Yeah, but I mean, maybe not Chris Waller because he is expecting higher inflation, isn't he? But he's saying you should ignore that, isn't that right?

So, by the way, Chris Waller also referenced this weekly ADP based employment series that he has been watching. So, this is something that staff at the Fed board gets. It's like a high frequency weekly ADP series that we don't have. And he mentioned that he saw, even after the reference period in July, ADP series is showing a brisker pace of deterioration. So, that was the basis for why he said he could still see the case for a rate cut. But the reason why we think this Friday's payroll would be stronger than what the consensus believes is because of local government hiring. I do think that local government hiring has picked up over the months. There was a, you know, Trump administration freeze of the funds for K to 12th grade early in July but then they released all those funds towards the end of July. And so, we are seeing some evidence that, as a result, there's some catch up hiring in the local government. And local government is not captured in the data that Chris Waller is watching which is based on private sector. I do think that, overall, most labor market indicators and also economic indicators suggest that the worst appears to be over in June, and things have been improving since early July.

I mean, you mentioned housing there and that, for other forecasters, is one of the weak spots in the economy that's causing concern. You mentioned, obviously, housing activity has slowed. House prices have started to come off, you mentioned. Is that a concern, or do you see that stabilizing, or how do you see the housing cycling out?

So, we have a fancy model. So, a persistent decline in housing price is really a left tail event. So, housing prices are not a normal distribution curve. It's actually one with long left tail. And so, we model it in this nonlinear way to capture the entire nonlinear path of price growth. And what we found is that there are 2 out of 3 chances that housing prices, by the end of this year, would still be in contractionary mode. And then we do see better chances that housing prices will return to positive by mid next year, 2026, with only a 15% chance of negative price growth by mid 2026. All these are conditional on today's data. But at the end of the day, the housing market is really related to the unemployment rate and also income of people. If the unemployment rate stabilizes at 4.2, and goes no higher than 4.4, it will be a very shallow housing market decline, as the model would suggest. But if the unemployment rate were to swiftly deteriorate to, say, 4.8, 4.7, and rates continue to be higher (because right now there's a global sell-off on the longer ends of bonds just happening, unfolding, in the last couple of days, which means mortgage rates would continue to stay high), then I could see that negative price growth for housing could persist through next year.

Okay. The other factor, in terms of the unemployment rate in labor market, is AI. And I mean, increasingly we're in anecdotes about it’s tough for new grads to find jobs because some of the work is being done by AI. What are you seeing on that side? Is that a real phenomenon? And do you think this will be an increasingly important phenomenon impacting the labor market or not?

I'm glad you asked that question, Alan, because that's completely real. You know, there are two ongoing potential explanations for what's going on in the US labor market. One is the immigration crackdown generating downside risk to employment. And the other is AI. We have found very little evidence of the immigration crackdown hypothesis. However, we have found lots of evidence of the youth employment. So, the labor force participation rate has been falling for the last three months or four months. And that is contrary to what CBO had forecasted last year. CBO actually forecasted that labor participation rate should be on track to increase throughout this year. So, we're going the opposite direction. And when you look into details of who's dropping off from this labor force, in the last four or five months, it is the people who are age 16 to 19 and from early 20s to mid 20s. And why are they dropping out? The data suggests that they're discouraged – they’re discouraged workers. So, I think there seems to be something there about why is this drop-off in labor participation rate mostly hitting the younger folks as opposed to other demographics group. And I think AI is a very likely candidate. Yeah. And particularly, if you look at the non-farm payrolls in the establishment surveys, the sectors that are very weak in hiring, that see weak hiring are business and professional services – white-collar jobs. So, that’s when you look at both the demographics and the white-collar jobs hiring weakness. And also, by the way, St. Louis Fed had done a little study on looking at rise in unemployment rate of various sectors versus AI exposure. And they found the 0.5 correlation between AI exposure and increase in unemployment rate. AI affects both layoffs and also a slowdown in hiring, which leads to a swelling of unemployment rate, and it's also highly correlated. So, I have to say, AI is the most compelling explanation for why we're seeing the slowdown in hiring for youth.

Okay, interesting. We might come back to the longer-term implications, but I definitely want to talk a bit more about the future direction of the Fed. And we've talked about Chris Waller a lot. He's one of the three favorites, I guess, Kevin Hassett and Kevin Warsh are the other two that are most prominent in the betting markets at least. If you are having a bet at the moment, who's your money on, and who's the most consequential candidate, or would be the most consequential selection?

Yeah, I've consistently predicted that it would be Kevin Hassett. And my reasoning is that Trump and Susie Wiles have known Kevin Hassett for a long time. Kevin Hassett led the CEA in the first Trump administration. He demonstrated his loyalty over and over again. He really helped push through the first tax cuts and jobs act in the beginning. He was the one who played a key role in designing the tariff schedule in the First Trump administration to minimize inflation impact. Then he had a mini heart attack and he drove himself to the hospital, on the job, because he didn't want more media fanfare. And then he left the job because, you know, a White House job is an 80 hour business. It's like nonstop. And then when Covid hit, he volunteered and voluntarily came back to help out the White House. And after the Trump administration he joined the American First Institute, I think American First Policy Institute. And that's basically the incubator pretty much all the officials you see in the second Trump. And that's the place where they continue to build the relationship. So, I think, I think Kevin has a long-standing relationship with Trump himself and the administration. And he is also one of the few who have the most mainstream economic credentials. And when you talk to some senior Fed officials, they have good things to say about Kevin Hassett. Also, many people thought that he has been pretty biased since he joined the second Trump administration because he is the NEC director and his job now is to go on TV and defend Trump. He is a person, I think, who is actually a very open-minded person and unconventional, but also has mainstream training and credentials. So, I think he's most likely, given his history with the administration. Kevin Warsh has been known as a hawk and he himself said he won't be pushed around. And I think there would be skepticism among the Trump circles that he may be dovish or not. He could be dovish. And who's the third? Chris Waller. So, I think Chris Waller is a dark horse. There may be some odd circumstances that may suddenly elevate Chris Waller's chances. The fact is, I think if Trump spent more time with Chris Waller he would grow to like him as well because they both like wrestling or X fighting (I don't know what's the difference between wrestling and X fighting). But I mean, Chris Waller is a blue-collar governor. He has a very interesting background. He started off as like working in a warehouse. He came from the middle America and speaks like a straight-talking person. He doesn't give you the vibes of an elite economist. But so is Kevin Hassett, Kevin Hassett also came from a pretty blue-collar family. With Chris Waller, I do have to wonder whether Trump will take the chance because Trump took the chance with Powell, he liked him, and then he felt betrayed thereafter.

I mean, he did go with the kind of the market friendly choice with Scott Bessent, which the market likes. But I mean, you see, Scott Bessent is as much of a cheerleader now as Kevin Hassett is. I mean, I suppose the question is if Kevin Hassett is Fed Chair, is he going to be susceptible to persuasion and lower rates? I mean, or will he be purely independent? What do you think?

Well, Kevin Hassett did not come from entirely outside of the Fed world. He was a Fed economist once upon a time and he did have mainstream training. He was a senior fellow at AI, which is pretty mainstream Republican camp before he joined the Maga world. I think that history tells us that whoever the President thought would be in his camp, once they get into the Fed, they will be subsumed by the Fed culture and they will be a different person. So, I don't want to prejudge him because I don't think he is a person who would be subservient. I don't think he would be that type of person.

Interesting. I mean, there's a lot of people calling for dramatic change at the Fed. Obviously Scott Bessent has called for review. Kevin Warsh has also called for regime change, I think. You've had other kinds of economists… Jeremy Siegel is saying they should abandon kind of ample reserves. Larry Lindsay I saw saying, the Fed's been terrible at forecasts. Everybody's lining up to criticize the Fed and say we need a new direction. Do you think we'll see some, a change of approach, change of direction with the new Chair?

Yeah, I think, actually, change is good. The Fed has some of the smartest people I've ever worked with. They are really smart and their training is superb. So, we do not have a lack of smart people at the Fed. But what the Fed does not have, I think, is a balanced view of the world. Economics, at the end of the day, is very much a normative science in the sense that it's not a pure science where there's an objective, truth of right or wrong, or black or white. For example, when the staff have to forecast what might be the impact of this tax policy on the economy, the general equilibrium model, with hundreds of equations, only spits out the kind of assumptions you make. Like, you could assume what is the fiscal multiplier of this tax cut? If your a priori bias is that, oh, it's low and then you'll put in a very low multiplier, then you'll see that tax cut produce very low growth. It will worsen the debt trajectory, or it will just…. So, it's many economic models precisely reflects the modelers assumptions of the world. It is not an objective truth. And so often, in economics, we treat it as a science because it has 200 equations in it. It's creating a false sense of positions. If you look at Washington D.C.'s political affiliation, you will see that over 95% of the voters vote Democrat in Washington D.C. It's like a little bubble here and is extremely to one-sided of the political affiliation. Ideally, economic policy and forecast should be made in a 50/50, so that people could argue against each other. And I think the Fed often falls into a ‘group think’ situation because of these implicit assumptions, reflecting people's a priori ideas of what should be. It is a good thing for somebody to look at it because I don't feel like Powell's explanation of why their forecast missed in 2021 is sufficient enough, if you look at this framework review. He often said most people in the market consensus forecast blue chip forecast missed as well. But some people didn't miss. And why was it that the Fed was so slow to recognize that the expanded unemployment insurance would provide incentive for people not to work and therefore causing the labor market to overheat? Like why were they so slow to recognize it when other people have already recognized it long before, for example. I know in the CEA, because I was at the CEA in 2019 and 2020 in the middle of the pandemic, we have a staff of 30 people, economists in CEA, and my colleagues already showed that the expanded unemployment insurance would cover more than 54% of the labor employment income. So, meaning 54% of the workers have more income from UI than working. Of course, that is so clear that it is going to overheat the market. So, I think it is kind of good for the Fed to do some honest review.

Was that an error of, do you think, ‘group think’ at the Fed, or just the personalities? I mean, if Alan Greenspan had been there would it have been different or it was like a failing of Jerome Powell versus, say, Bernanke or do you think regardless of who is in that seat? Because the analysis is driven by the Fed staffers and that's the analysis he's been given. So, it's inevitable that's going to be the policy.

Well, that would be too speculative of me to say. But I will say that Powell is not an economist by training. He was a lawyer. But he's very open-minded. Powell had been with the Fed for over a decade and one of his previous portfolios was emerging markets. Even so, he had seen a lot. But I don't think he's the type who would challenge academic forecasts too much. However, the person on the Fed that I remember, who actually did challenge many staff, was Rich Clarida who was the one who brought up the question of how about these excess savings, how are they going to affect inflation? And Rich Clarida is a Republican nominee. So, this is an example where I do think that some review on how the forecast would be improved rather than just saying that, well, because the rest of Wall Street thinks this way. I have to say that Wall Street also has such biases.

Yeah, yeah, well, I mean obviously we're starting to see a change in the conversation. Obviously, we're waiting for a new Fed Chair, but obviously we've got the likes of Steve Miran now coming onto the FOMC as well. You know, you said he expected Kevin Hassett to be engulfed by the Fed kind of thinking. Do you think Steve Miran, he's been pretty vocal in favor of low rates, would you expect that, that to continue once he comes on?

Okay. Steve Miran is a very interesting individual. So, he did not have a Fed background. He did not come from the mold of the Fed. He entirely came from the outside. So, his paper on Fed reform, what I thought is that he's a very bold and creative thinker and he has out of the box ideas. But I'm not sure that the ideas he recommended in the paper treated the core of the problem which is the ‘group think’. He proposes federalism, which is to have state governors appoint the regional Fed presidents and have the regional president vote every time. Therefore, regional Fed voices are larger than the Fed board voices, and you can get more balance. I don't think that's where the lack of balance is. I think the lack of balance is something more ingrained in how forecast is made, by whom those forecasts are made. So, I think Steve probably has ideas of his own. He's a very independent thinker and probably he was selected by Trump. He got Trump's ear. Trump decided to go with him because Trump likes his bold ideas. It seems like Trump, he likes disruptive ideas and Steve Miran has it. So, I think Steve Miran would go into the Fed, will be learning a lot of how the Fed actually will work, and he will, potentially, have revisions to his ideas. But I think he's going to see and see a lot of things that he didn't consider before. And I don't know what Steve Miran will be like in six months time. He's adaptable, he's very smart, and also very possibly stubborn, I don't know. But he has ideas of his own. But we'll see.

Yeah, we've had him on here as well. He was very interesting last year. It sounds like overall you're not overly concerned about Fed independence is what I'm hearing from you. Chris Waller is obviously a strong candidate. Kevin Hassett, you don't think he's going to suddenly turn Maga dovish, now. Obviously, Trump bullet pointed more Fed officials over time. We've got the attack on Lisa Cook, but I mean, outside of monetary policy, do you think, with more Trump representatives at the Fed, will we see significant changes elsewhere, say, in relation to bank regulation or any other aspect of the Fed's work?

Alan, let me clarify. I am concerned about Fed independence. I mean, so far, I'm just giving the Trump administration the benefit of the doubt. I mean, I think the intention seems pretty clear on why they made their accusations on Lisa Cook. However, if Lisa Cook indeed has been proven guilty in the courts of the judiciary system and had a fair trial and was found indeed to have committed mortgage fraud, then I think it would be untenable for Lisa Cook to stay on because other Fed presidents have been gone for lesser crimes, you know, for minor trading scandal. And you just have to be peachy clean if you are going to be on the highest governing board of financial system supervision. That said, I'm giving the Trump administration the benefit of the doubt on what they will actually do if they do have the majority of seats on the Fed board. Because number one, I don't think Chris Waller will undermine the Fed independence. He's just that guy who would do what's right. I think this is a guy who would do what's right. And I also do not have such a dire perception of Kevin Hassett or Steve Miran, if I think that… If you read Steve Miran 's paper, he actually couched the opening paragraph of his thing on how to improve that independence, because independence cannot exist with accountability. And I think in a way, how is it that when you asked an institution for accountability, it becomes, you know, undermining, intense? No, I think those two have to come together, and I think, right now, the DC bubble is too much on the independence without accountability, whereas potentially the Trump administration, Trump himself just wants to do what he wants. And. But other people who actually govern the Fed, the ultimate outcome might be somewhere in between. I think it's always good when you have two extremes tugging at each other because then it will generate a medium solution, which is what you want, rather than one way or another.

Yeah, as you say, I mean, it seems clear that the objective here is to get lower rates. And all of this is in the context of high debt levels. And so, everybody's talking about fiscal dominance. I mean it's been talked about like it's here already. I'm not sure if that's actually the case, but it's certainly a big theme in markets. You mentioned how bond yields have been rising the last few days, more overseas outside the US than in the US. I mean, 30-year yields have been edging higher, but 10-year yields are still pretty much in a range. And we had the Big Beautiful Bill that you touched on. I mean the longer-term fiscal trajectory in the US looks bad. I think everybody agrees. But the bond market so far has digested that fine. I mean, how do you see this playing out on a kind of a multi-year basis? Do you think deficits will be addressed eventually or are we now in the era of fiscal dominance or will monetary policy at some point be directed towards making sure debt levels are sustainable?

I think that one reason why I had thought that the trade policy tariffs will stick around was to pay for fiscal. And I also think one reason why the market the last couple of months, during the passage of funding the Big Beautiful Bill which was not really concerned with the 3.4 trillion price tag of funding Beautiful Bill, was because of the tariff revenues. And CPO has now forecast that the tariff revenues will generate US$4 trillion of revenues in 10 years and will pay for the One Big Beautiful Bill. And perhaps it's not a coincidence that the rise in longer yields happened just as the appeals court ruled Trump's tariffs illegal over the last weekend. And so, , it's kind of odd that maybe markets do think that the tariff is… Because I think last couple of months, the place where the market was is that they have moved past the tariffs. They have kind of accepted that 15% of tariff is doable - could be absorbed by the market. And, in fact, the US$330 billion per year in tariff revenues is good for fiscal. I think that was where the status quo was. And lately that status quo has been disrupted by all these policy rulings. And so, that could be one catalyst. I would rather think that that was the catalyst rather than Lisa Cook, and the Fed concerns about Fed independence. And of course, as you mentioned, it's a global phenomenon too.

Do you see a scenario of yields rising and getting into kind of a spiral of rising yields, obviously leading to more concerns about that sustainability, etc. What might be the catalyst for that? Obviously, you say, possibly, if the tariffs got unwound, I guess. Is that it?

Okay, so, my team did a deep dive, over the last 30, 40 years, to look at the debt trajectory to see what tends to move the debt trajectory suddenly higher. And you know, early in my career, when I was just got out of my PhD program, it was 2012 and we had the fiscal cliff then as well in the US, and even at that time I remember, when we were at treasury, we're thinking about the messaging on US fiscal situation in G20 meetings because everyone's saying our debt trajectory is unsustainable. And the forecast is that it's going really high. And then these concerns pop up from time to time. But ultimately, 10 years later, we're still fine. And I think that looking at the 40 years of debt to GDP forecast, I've found that the pattern is that what tends to move the trajectory significantly higher is recessions or financial crisis. Every time, even just garden variety recessions, you could have a 10 percentage point increase in debt trajectory immediately. So, I think the overwhelmingly most important thing to avoid, in order to have a sustainable fiscal trajectory, is a growth slowdown. So, to think about what five year fiscal situation in US would look like, one will have to think about really focusing, really, on growth prospect in the next five years.

Obviously, that is the hope that maybe AI can fuel stronger economic growth, and the debt will be more sustainable. Is that plausible? Obviously, you talked about that you're seeing evidence of AI in the labor market. So, presumably companies are realizing productivity gains. I don't know if that's in the productivity numbers yet, but is that your read? And then presumably, if we went into a downturn, that would become an even greater theme.

Yeah, so we actually found that AI had significantly contributed to GDP growth already this year. So, you know GDP growth in the first quarter was negative 0.5%. It turns out that out of that negative 0.5% GDP growth in the first quarter, AI related industry has contributed 1 percentage point. So yeah, already AI is contributing 1 percentage point.

But is that, is that the CapEx spending in relation to AI build out or the implementation of AI? It's the CapEx, isn't it?

Right, CapEx.

CapEx, yeah, yeah.

And from the Cap Ex plans of the hyper-scalers (so the hyper-scalers are Meta, Google, Microsoft and those guys), it didn't look like they're slowing down the investment in data centers anytime soon. So, we are continuing to project this positive linear growth in Cap Ex over time. And even if the investment in data infrastructure slows, the next phase of the AI boom, which is adoption, still needs these data centers and semiconductors. So, you do see still a very long runway for investment in data centers.

Okay. I know you were at the Treasury and International Affairs earlier in your career, which I guess is responsible for dollar policy. The suspicion is that the administration likes a weaker dollar. I mean, Trump hasn't said it so overtly, lately.

Lately.

I mean he has in the past.

Yeah, consistently in the past.

I mean, but he hasn't come out kind of bashing China or Japan of late. Is that the bias do you think? I mean, obviously, Steve Miran had his paper on reforming the international system and all of those recommendations, the Mar A Lago Accord, which never came to pass. What's your read on what they want to achieve with the dollar or is it a priority at the moment?

Yeah, I think that Trump himself really wants a weak dollar. That's what he wants.

Yeah.

And we were talking about consistency of a policy package. With a policy package that is consistent with the goal of bringing manufacturing back onshore you do want a weak dollar, and that's what he wants. But he also wants other things that are not consistent with the weak dollar, which are lower treasury yields, lower Fed funds rate, and the dollar continuing to be a reserve currency. So, he's trying to stop people from diversifying away from the dollar while having a weak dollar.

Yeah.

So, I think at some point he might have to figure out, you know, the dollar. Ultimately something has to give.

Yeah, I mean, obviously a Mar A Lago Accord is not really an undercurrent anytime soon.

Yeah, I would just wonder that the Mar A Lago Accord already happened. I mean, the goal of the Mar a Lago Accord is to get other countries to appreciate their currencies. The dollar has depreciated by 10% since February.

I mean, just finally putting that all together, I mean, most of the economists are focused on kind of forecasting payrolls on Friday, or GDP for the next six months or a year, whatever. Looking at the picture for the next number of years, given AI, given all of the kind of structural trends we're seeing in the world, deglobalization, tariffs now, etc., I mean, are you more optimistic or pessimistic on GDP growth for the next number of years say versus the last five or ten years?

I'm more optimistic. I'm optimistic because I could see the potential of AI. I mean AI seems to be already… You know, innovations usually take a long time to filter into productivity and into adoption. It's like a decades long process. But I could see AI as happening really fast. And in that sense, I see an engine of growth. And you know, the advanced countries, not just the United States, but many advanced countries have been stuck in a low productivity regime for a decade, since the Great Recession in 2008. And it seems like we are on the verge of getting out of that low productivity regime thanks to AI. And on top of that, I do think that the one silver lining of the tariffs is that I finally see the light, I mean, some light to the fiscal situation in the US. If you assume that neither Republicans or Democrats will ever have the political will to cut spending, then the only way you can generate more is revenues. And tariffs are a way to generate revenues and it's generating. Maybe another political party would talk about raising taxes on the wealthiest, but that will also cause the wealthiest to flee. They find tax loopholes, which are always what they could find, and reduce the taxable tax basis. So, I think it is a solution. I don't know if it’s the best solution for tariffs to generate the revenue. But US$4 trillion, over 10 years, is not nothing. And hopefully, with AI being the engine of growth in the next five to six years, you can stabilize that dynamic. I don't know.

Interesting. Well, on that optimistic note, thanks very much for coming on Anna. So, make sure to follow Anna's work. She's a regular poster on social media, on X, etc., so, you can follow her there. And from all of us here on Top Traders Unplugged, thanks for tuning in and we'll be back again soon with more content.

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