Boockvar Breaks Down Warsh’s Speech
From Peter Boockvar
Finally a playbook on what will guide policy from here & tackling inflation right now is his main focus
In response to the Warsh speech, Treasury yields are moving higher with the 2 yr in particular up 8 bps from where it stood right before it was released. The 10 yr yield is up just 2 bps and the 30 yr yield is down 1 bp. I believe he did a very good job of laying out a pathway, a framework, a playbook and the rules of his road on what he’s watching out for and what will guide him in terms of properly calibrating monetary policy as best he can. Here are some of the key quotes from it:
“Here is a quick overview of what I’ll cover in my remarks this morning. You can call it an outline . . . you can call it a trail map . . . just don’t call it forward guidance.”
“The potential for substantially higher growth is on the rise. Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts.”
“Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when? Will token usage be complementary or competitive to labor? Will the next generation of AI models demand even greater capital intensity, or will the models themselves help devise a capital-light solution?”
“Among the other yet unknowns is the resulting market structure. It’s not obvious where the returns on capital will land or on what timescale. Early on, how much of the surplus goes to owners of scarce assets—AI labs, chipmakers, energy producers, and cloud providers? Over time, how much of that value accrues to businesses and consumers? What are the broad implications for workers and for the employment side of the Fed’s mandate?”
A jab to Scott Bessent? “To get policy right, we also need to get the relationship right between financial markets and the central bank. The Fed needs clear market signals, as unfiltered as possible . . . from market internals . . . the level and change in asset prices across sectors . . . the prices and trading volumes of Treasury securities. . . the foreign exchange value of the dollar . . . the cost and availability of credit . . . and the price of a broad set of commodities.” I bolded to highlight.
“These and other indicators should inform the Fed’s near-term outlook on economic activity and inflation throughout the business cycle. They should also reveal the state of broader financial conditions . . . and the risks and uncertainties in the financial cycle.”
Here is how he’s currently assessing the economy:
“Business capital expenditures—the seed corn of future economic growth—are rising rapidly…More than half of the cap-ex growth this year can likely be ascribed to the buildout related to AI.”
He even mentioned the stock market, “For firms in the S&P 500, profits have grown by more than 20 percent over the past year. Profit margins are quite elevated, relative to history. Overall equity market volatility is low. We’re staying keenly focused on market internals, watching performance across sectors.”
And further utilizing his markets experience, “Credit spreads on corporate bonds and leveraged loans are near the low ends of their historical ranges, and issuance volumes in these markets have been quite strong this year. Looking beyond fixed-income markets to the banking business, in the July Senior Loan Officer Opinion Survey on Bank Lending Practices, banks tell us that standards for commercial and industrial loans are on the easier end of their historical range. That helps explain the growth we’ve seen this year in those loans. Credit and loan markets are showing few signs of policy restraint.”
“Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.” I highlighted with bold.
“Real consumer spending has been healthy despite the shocks, increasing more than 2 percent over the past four quarters.”
“Labor markets are quite stable. The jobless rate, at 4.1 percent, remains low by historical standards and has not changed much for a couple of years. Unemployment claims, on a four-week average—an empirically robust real-time indicator—are near their lowest level in decades.”
This his main concern, “But on the price-stability side of our mandate, the numbers are more concerning…And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.”
And to those who just look at wage growth to determine their inflation outlook, “The data also show moderate wage growth. But in tracking underlying inflation, wage growth has not proven a reliable indicator of future inflation for a very long time.”
“Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic.”
And something I’m watching closely too, “The recent rise in overall commodity prices also bears watching. What we need to judge is whether trends indicate upside inflation risks.”
And back to using his market chops, “It matters, too, whether the inflation readings of the past five-plus years have seeped into expectations. The good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message.”
His bottom line right now and the place of his main focus, “Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.
Rate hike odds for September have moved up to 48% from 36% yesterday. By year end, odds of one hike are at 100% and the chances of a 2nd at 24%.
Position: None
