Inflation’s Tightrope: Why the Fed’s Plan May Not Land Softly

Eric Chemi 0:05
Welcome to Wealthion. I’m your host, Eric Chemi. Today we are joined by Robert Brusca. He is the chief economist of fact and opinion economics based out of New York City. He’s a longtime commentator on the markets on macroeconomics, you know, central bank policy. What are we seeing right now with interest rates, the Fed’s path and all of that. Robert, on your bio, it says, you were the very first guest on the very first day of CNBC going back like 30 years, is that true? How is that possible?

Robert Brusca 0:34
Well, it’s true it that’s true, because I’m old. I’m an old guy. I’ve been around for a long time. My first job was in New York at the Fed. I worked for Paul Volcker in 1977, at the New York Fed. So I’ve been doing this for a while. But yeah, I was interviewed and CNBC studios when they were in Fort Lee, New Jersey, and the studio wasn’t built. I was interviewed by the Neil Cavuto who cannot come over from NPR was Sue Herrera sitting at the anchor desk. We were going to view it on folding chairs because the studio wasn’t ready. And Bob Wright, the president of NBC was in some side sensory deprivation booth soundproof booth where he was talking about what it was. And then I did my interview, I was the first guest on the first day on CNBC

Eric Chemi 1:19
Folding chairs and going back to your work with Paul Volcker. I didn’t realize that so tell me about what was that like, right? Because Paul Volcker got such a, it feels like a bad rap at the time for jacking up rates doing what he needed to do to really kill inflation. I think history has proven him. Right. But I think at the time, it was, you know, a little bit hard to manage the manage the messaging, the PR spin of all of that. What do you think his legacy is now having been on the inside and maybe seeing that, that disconnect from what the what public or politicians would have wanted to what he was actually trying to accomplish?

Robert Brusca 1:54
Oh, well, I kind of disagree with your take on this. I mean, I realized there were people who were upset by what he did, but I think it was recognized that he was doing something that needed to be done. I don’t think that his legacy was one of somebody who ran roughshod over the economy, there was a tremendous price that we paid for getting inflation under control. But I think it’s well recognized that inflation had been out of control for over a decade. And what happened was Jimmy Carter came in as president, and he made G. William Miller, the chairman of the Fed, former CEO of Textron, and I been in an elevator at the board with, with Miller, who was reading in this crowded elevator, and it was a really short guy, you know, you can just look over his shoulder. And he’s reading this eyes only document in a very crowded elevator, which I found to be very strange. So, Miller did not exactly have a lot of respect for fed culture. And he wasn’t a real popular guy. And inflation was still under our control. And at some point, kind of realized that Well, maybe he liked this guy, perfect chair. But this was the wrong pic. But of course, Fed chairman can’t be easily removed. And so Carter came up with this idea of moving him over to Treasury to make him Treasury Secretary where he could fiddle with the tax code, which is something he wanted to reform. And so he offered him that and Miller bit and went to Treasury. And so then the question is who becomes the Fed chair. And Paul Volcker was the obvious person to come in and be a tight money guy. But Carter was warned by his people that if you put Paul Volcker in that slot, that he would likely not be reelected as president that do build one term precedent, and says, This is why I have great respect for Jimmy Carter. You know, Jimmy Carter is not recognized as one of our great presidents. But to me, Jimmy Carter was a great man. And this was a very important thing that he did, he put the needs of the country ahead of himself, he realized that this was probably going to be a decision that would cause him to be not reelected. And that was true. And he put Paul Volcker in that position. And frankly, I can’t think of any politician today, who I would trust to make that same sort of decision.

Eric Chemi 4:08
Well, that’s what gets me to, what do you see today, right? We’ve been having these issues, whether inflation is transitory or not, right, what, what are we doing about are we going to keep these 5% rates are going to start bringing them down? If we won that one inflation, it feels much more political. Now it feels much more about people’s reputation, their optics getting reelected, you know, across the across the aisle across whatever type of job that you may have, whether it’s appointed or elected. Everyone wants to keep that job. Do you feel that this modern version of the Fed is not as good as the version that you would have worked for?

Robert Brusca 4:43
Well, I think is different, different and I think it’s hard to make the comparison. As I just spoke about Paul Volcker right. He came in office after a decade of inflation getting out of control. Right. It started with the 1969 was session then the 7375 recession and in those two recessions, inflation went up, and at the end of the recession was higher than when it started. So they really had a hard time getting control. And so what Volcker came in, he had a mandate to stop inflation. Okay. Now, Powell took office, in a very different environment with price stability. Prices have been stable, we’ve had a low inflation environment again for a decade or longer. And so inflation has been stable, and all of a sudden, it picks up, and he doesn’t have the same mandate to go after inflation and to kill it. In fact, most people think, Oh, well, this is inflation, you know, it’s going to go away. It’s going to be transitory. Why? Because you’ll have professionals. You know, people probably watching this podcast, have been in the business for 10 to 15 years, and have never seen inflation before. You know, it’s like going to the zoo. Hey, Martha, there’s some inflation, it’s over there in the cage. Isn’t that what it looks like? Yeah. And so they think that this is going to pass. And when it’s done, inflation will go back down to 2%. And everything will be fine. I come from a different generation, right? I got my PhD in 1977. Went to work for the Fed and the middle of a period when inflation was still roaring away.

Eric Chemi 6:09
It doesn’t you grew up with it, when you grew up with the opposite environment that that people get if you get a PhD today, you’ve never seen inflation in your life, basically.

Robert Brusca 6:18
But yeah, very possibly, very possibly. And I grew up in Detroit. So I knew about business cycles, right? I worked on actually worked on the assembly line, I dropped her axles on trucks for Dodge truck in order to make money and go to graduate school and did my undergraduate degree. And so I saw business cycles, I saw the auto companies have to shut down plans. So that was one summer where I couldn’t get my summer job at the plant, because that was 1969 when we were in recession, and they weren’t really hiring people in the summer. So you know, I had experienced that firsthand. But not we’ve got people who think that inflation is just low, and it’s always going to be low. And I don’t think it’s true. And in fact, when you take a look at what’s happened, it’s a it’s a strange set of circumstances because inflation came up because of COVID. Right? We didn’t have inflation getting wild beforehand,

Eric Chemi 7:08
Because of the stimulus, right didn’t come because of COVID a kid because we put you trillions of dollars into the economy right now

Robert Brusca 7:14
No right, no true. True. I mean, COVID was not a disease that caused inflation. So you correct me That’s That’s true. And it was the policies pursued. Too much fiscal policy, too much monetary policy, too much of it at one time. And and then the Federal Reserve waiting a year after inflation accelerated above their target, they waited a year before they began raising rates. Now that’s that’s the thing that has to stick in your Craw, because why did they wait so long? Now again, the The Volcker fed never would have waited that long. In fact, most Feds prior to that never would have waited that long.

Eric Chemi 7:45
So why? That’s what I’m curious about. What was the difference from the Volcker fed that you were with to this current fed? Why did they wait so long? If we’ve got all these bright people, it’s really hard to get one of these jobs. They’re, they’re at the top of their game. You know, they both have enough PhDs. And these are economics experts. How can as a group, all of them make that mistake?

Robert Brusca 8:07
Well, there are a lot of reasons. And there are things we can speculate about. One thing we can recognize is that policy had come to be made by looking at models. And in the wake of COVID, you couldn’t really trust models to give you the right answer, because so much in the economy had changed. So they lost one of the main tools that they leaned on. Also, there was politics, right? We’d had this tremendous system between Democrats and Republicans. And during this period, Donald Trump was vying for reelection, the economy was being killed by COVID. And the reactions to COVID. And, and chair Powell was up for re nomination. And he was being pressured, particularly by Elizabeth Warren, who at one point told the President not to reappoint him because under any circumstances, because he just oppose what he did and thought he was a tool of Wall Street. Well, in the event, of course, Powell did get re appointed by President Biden. And he did what Elizabeth Warren wanted him to do, which was to not be pre emptive. With interest rates, they waited for inflation, to come up before they raised interest rates, and they waited for inflation. For far, far too long, inflation got far too high. And, you know, it’s hard to argue that Powell didn’t do this, because he wanted to get renominated. And no one will ever prove that. Powell has been asked that question, he said it wasn’t politics. And the Fed has a number of very, as far as I’m thinking very strange, strange technical arguments. Chris Waller, for example, tells his story about how there were these revisions to the job numbers that the economy was looking weaker, and then there were revised. We look at the data now and they’re stronger. Well, that’s true, but I mean, inflation was headed up this, you know, seven 8%, and more on the CPI, and the Fed was sitting on its hands. The problem was that the Fed had been in this long period of price stability, with interest rates below the inflation rate for a long time, which is something they never would have done, and yet inflation wasn’t picking up. So once inflation picked up, the Fed was already behind the eight ball. Now the real interest rate was negative and it became more negative. And the Fed still waited and waited, we had, if I recall this calculation correctly, we had 14 of the 20 most deeply negative real Fed Funds rates that we had since the 1960s. In this last business cycle 14 of the 20 Lowest real Fed Funds rates by month in one economic period. This is stunning. So the Fed policy was very late and moving. But they eventually got it moving. And they eventually got rates up. And they did it very quickly. And we have these tremendous 75 basis point rate hikes lumped on top of one another we’d never seen that before. And so the Fed finally got its religion after Mr. Powell was reappointed. And, but then when they got the, the real interest rate near zero, where they got the federal funds rate, basically up to the level of the inflation rate, instead of pushing it up to make it more restrictive, they stopped, they waited. And subsequent to that what happened was, inflation in the goods sector began to come down good sector, inflation had soared, it was in fact, transitory it was related to a lot of these supply problems. And as a supply chain began to be repaired goods inflation went from being extremely high down to where it is today, which is zero. And the CPI core goods inflation is 0.1% over the last 12 months, so core goods, inflation is gone, it was transitory, however, the bigger wait and the CPI is from services. And the core service sector inflation rate is still running in the neighborhood of 5% or so. And so the Fed has to decide what to do about this people who look at the overall inflation rate, and think that inflation is going to fall in the next 12 months wave did in the previous 12 months, they’re wrong. Because the goods inflation rate spiked very quickly, it came down very quickly. And that’s done now. So now you’re stuck with the service sector where prices move much more slowly, where the inflation rate is much higher, and where it’s much more stubborn. And so I’m very concerned about this view that the Fed is going to be cutting rates a lot this year, because service sector inflation is still high. And although it’s been coming down, it’s not going to come down very fast. And so I think if you’re looking at the overall core inflation rate, you’re going to be looking at something that looks a little bit more tame. But in the services sector, it’s still too high. And it has to come down to a great deal in order to get us to the Feds 2% target. And so all this talk about soft landing was really what bothers me because I think it’s the wrong place for Fed policy to be right now.

Eric Chemi 12:55
You said so much on it, you give me so many questions. And when you talk about people’s experience, maybe what their motivations are for certain policy decisions. And I think about, I think about what you said about your own experience a couple of things. I was having a conversation with someone else who’s been in the business for a long time. And he said, in a lot of jobs, there’s age discrimination, but in certain jobs, you want the oldest people possible, because they’ve seen all the cycles, they’ve been through it, they’ve actually experienced all these things. And you mentioned being in Detroit, seeing business cycles, having a real job, right, not just let’s say a PhD kind of job. Do you think that this current version of the Fed lacks that type of, let’s call it cognitive diversity, that that they’ve never been through, you know, real blue collar jobs working in a factory, like Go Go be that person for real, don’t just talk to them. Don’t just read about them, but have been that person like you’ve been that person. So you understand beyond what the model is set up that this is how it actually works in real life?

Robert Brusca 13:53
Yeah, well, I don’t know what people’s experiences somebody gets a PhD in economics, you know, maybe they always had privileged education, maybe not. Maybe they had a hardscrabble background. You know, I am concerned, I’m concerned more about our politicians. Because I got my undergraduate degree at the University of Michigan where I had this professor who ran campaigns, right. He ran Mitt Romney’s campaign for governor. And then he was also giving advice to Romney when he ran for the for the President, this is this is not MIT. This is George Romney, when he was governor of Michigan. This goes back quite a long time. And my professor was telling us in those days, he said, you know, we’re coming to a time where you are going to have professional politicians. You are going to have people who have done nothing but Ben politicians. Now when I was at Michigan, I had this this this assistantship where I wrote a paper where I looked at legislative compensation in Michigan. So I found all of the bills that raised compensation for legislators, every single one of them was hidden and attached to another bill. No politician in Michigan ever voted to raise his own pay without saying, Well, I voted for that. because it was attached to this other bill, right?

Eric Chemi 15:02
I had no choice. I had to vote for it because we were trying to help you guys out. Yeah.

Robert Brusca 15:06
Yeah so, that’s how it works. So anyhow, over time, the legislator led the legislature used to meet in the summer, they used to meet for a couple of weeks, or maybe a month or something like that, and eventually became a full time job. And I paid like a full time job. And that’s what we are. Now we have people who have never had a real job, but Barack Obama, you know, whose real job was what he worked for that law review at Harvard, and he worked as an organizer for the Democratic Party. Now, this isn’t really a real job to me. There are a lot of people who haven’t had jobs in, in real businesses. And so I’m concerned that they don’t really understand what the real world does, like people at the Fed, have all worked

Eric Chemi 15:47
They’ve all worked for the one company that can’t go bankrupt. They’ve all worked for the government, no other company can just tax people and get your salaries paid, right? There’s, there’s a real big difference between, oh, I had a job where we could actually get laid off. And the company could actually go bankrupt. If you work for the government at any level. That thing has taxing authority, and you’re gonna stay in business.

Robert Brusca 16:07
Right But there are a lot of people who’ve had other jobs.

Eric Chemi 16:11
The politicians that you said, the full time politicians,

Robert Brusca 16:15
This is a very worrisome thing, because they think they think that money comes from raising taxes, and it does, but they don’t realize where that money comes from. It comes from people’s pockets, it comes from people having jobs, it comes from people working and making sacrifices. And so it’s really difficult. When you have people who just said, Well, this is free money, we want money, we just raise taxes, and we have more money, and they don’t realize how it interacts with the economy, and how the economy performs. And the role of the proper tax rate, they just don’t even conceive of it. And so this is a real problem. And we’re seeing this now, with with rampant attempts to have redistribution, this open border policy is a huge economic drain, you know, I’m in New York City. And there is a $53 million pilot program. God only knows what happens if it flies. This is a pilot program to give money to people who are homeless in New York who have come across the border. And this is a big problem. People didn’t want to spend money on Trump’s wall. But the money that we’re spending on these people now was just amazing. There was a story yesterday, you can go to Zero Hedge. And you can find this story about how San Francisco has put their first non citizens on their election committee. They have non citizens on their election committee out in San Francisco, you know, what is going on here? I

Eric Chemi 17:42
What would Paul Volcker have thought I think if this was happening back then what would we you know, how can I manage an economy where I don’t even know where the we’re, we’re really limited because I don’t know where it ends

Robert Brusca 17:53
Well, you know, Volcker was a monetary guy, although there, there was a time where he sometimes threatened Congress, if they didn’t pass a more restrictive budget bill, he wasn’t going to be able to cut interest rates, right. He was formally linking monetary policy to what they did on the fiscal side,

Eric Chemi 18:13
which is the COVID stuff, right? If you just put trillions of dollars out there, then like, how is someone supposed to offset that?

Robert Brusca 18:19
Well, that was one up, you know, I mean, that was big fiscal stimulus. And so the Fed had been monetary stimulus. And, you know, the thing about the monetary stimulus that bothers me the most is that even when this was going on, I got to ask a question about fed official about why they cut interest rates. I mean, we were being trapped in our houses, we were told to stay at home, we couldn’t go out. So why cut interest rates? What was cutting the interest rate going to do well, according to their models, and had this net effect, but of course, the models don’t really work. And one of the answers that I got, well, they thought that was slightly lower interest rates, it might encourage some investment to occur somewhere, well, maybe. But that very low interest rate policy turned out to be terrible, because let me explain what happened. The Fed pumped up money supply, terminate, we had record growth in money supply. And that’s given way now to the first contraction of money supply that we’ve seen since at least the 1950s. I don’t know how far my dad had don’t go back any farther. So I don’t know how long since the money supply contract it. But now we’re seeing money supply contract. But previously, we saw it boom. And we thought boom was such a tremendous extent it was the strongest money supply growth we’ve seen in over 60 years. And what does that mean? Money supply? What is money? Money supply contains mostly bank liabilities. What does that mean? Well, it means that deposits in banks are growing like gangbusters. So what does that mean? Well, that means that banks are flush with money, but we have people locked in their houses. So people don’t want to borrow a lot of people aren’t working. So banks really don’t want to lend to them. So what did the banks do? The banks bought the only asset that they could buy in bulk and those were government securities. So around The time the money supply was booming at these tremendous growth rates. The yield on the two year note, you remember where it was 25 basis points. And so we’re buying these securities with yields of 25 basis points. Now, if they bought anything, they wanted a higher yield, they had to commit themselves to a longer tenure, not just two years, five years or 10 years, and so on. But the Fed was saying, Don’t worry, the inflation is transitory, transitory, we’re not going to raise rates, we’re going to keep rates low for a long period of time. And then oops, oops, the inflation rate went up and it went up more, and it went up even more, and it went up so much. Maybe it is a transitory, you know, maybe we have to raise rates, but the banks couldn’t go back and undo by a 25 basis point two year. And so this is why when a bank like Silicon Valley Bank fails, you know, my expression for it is, you know, and I’m gonna apologize to them. I’m a Catholic guy, it’s a very Catholic phrase, but that Silicon Valley Bank died for the Fed since

Eric Chemi 21:00
I like that

Robert Brusca 21:02
So the Fed didn’t realize that banks have these deep losses on Treasury securities, one of the reasons the bank examiners are always told up Federal Reserve. government securities are golden, you know, you don’t ever have to worry about them. Because when we have a financial crisis, interest rates go down on the price on those things goes up, and there’s no credit and so you never have to worry about them. So the bank examiners never really looked very closely at the Treasury securities. And so when Silicon Valley Bank got into trouble, and they had losses on these securities, well, they’d set them aside in the special hold to maturity basis, which meant they did not have to mark them to market. But they still had to report it. So there was a footnote item that got reported. And one of their investors noticed that there was a big loss, that would wipe out most of their capital, they had to sell the securities, but they didn’t have to sell the securities. But this created pressure and a runoff on the bank. And then the bank had some investments that were illiquid, and they couldn’t get back having to do with some technical things with the Federal Home Loan banking system, the Fed found that it really couldn’t get money to them. And this is why after Silicon Valley Bank failed, that the Federal Reserve began loaning against all collateral without it being marked to market, the Fed took everything at face value. And we’re still in that world today. And there’s a question about where we go next with this, and whether the federal people renewing that. So Fed policy, actually, with all this stimulus put the banking sector behind the eight ball, because Silicon Valley Bank isn’t the only bank that had problems with that, you know, we had a Swiss bank that failed. After these interest rates went up, we had another bank failure in New York. And we had a securities firm that I don’t want to mention, because they kind of they were in the muck, and they’re out of it. But who had the same problem with investors, their stock price fell very sharply, because they also had a lot of Holton majorities that people saw had big losses on them, and it caused their stock to be marked down. So Fed policy, my mother used to say that, you know, the road to hell is paved with good intentions. The Fed has good intentions. But the problem is that good intentions can go bad. And this help during the COVID period was too much of the wrong kind of help. We’ve got an overdose. And the banking system is still grappling with that. And it’s one of the reasons I think, why the Fed wants to cut rates on the early side, because they want to get back some relief.

Eric Chemi 23:32
I think about that COVID period and like you said, everyone was stuck in their homes. I didn’t connect all these dots until November it was stuck in their homes. While that’s cutting rates, and I remember at least that’s a my demographic, what was everyone doing? They were on their phone. They were gambling on sports, they were buying options when sports was close, and they moved into Options gambling, you know, options, trading or gambling mean stocks. It was all the crazy stuff people did with I’ve got a bunch of money and I’m stuck at home. So I’m gonna get on my phone and I’m just gonna gamble whatever I can gamble, you call it trading, you call it investing, but it was a lot of short term. You know, you know, it’s going to the moon kind of stuff on the mean stocks right and then and I think about the liquidity like the the bank dining for the Fed says I remember we had John Maxfield on he’s a bank historian. And he said, if you look at the history of bank failures over the time, of course, the United States, anytime there’s been a rush of too much liquidity in the banks, then the Unwind results in banks blowing up and and what you’re saying exactly is that, oh, we have all this money, we got to put it in something. Now that two years at 25 bibs, boom, that doesn’t work. So we’re and so I think it does connect a lot of dots and what you’re saying so, you know, now having all that backstory, and I want to get into what we’re looking at going forward, but I think about are these the kinds of mistakes that over time, go back to the 70s go back to Volkers period where they were having problems for 10 years, right. He took that office with we’ve had him for Question for 10 years, and now I need to do something about it. Are we setting ourselves up for that same thing? Is it going to be? Hey, it’s the year 2030. And we got an entire decade of the 2020s, where they couldn’t figure out how to get this right.

Robert Brusca 25:11
Yeah, well, we’ve come through that. Remember, when Volker was where they had the SNL crisis, because there had been had been interest rates, ceilings before the Fed, engaged in these new operating procedures. And until banks had a ceiling on what they could pay for money. So the way monetary policies to work it’s a process called disintermediation, market, interest rates could go up above the interest rate ceiling, and banks wouldn’t be able to attract money anymore, because those securities are going to pay a higher interest rate. Banks couldn’t pay that much. And so money would go elsewhere. So if you wanted to buy a house, you’d go to your bank, and your bank would say, well, we don’t have money to lend you a bank, they didn’t have money to lend you. It couldn’t get money. So it was disintermediation. So it worked in a different way. So eventually, when they when they raise those interest rate ceilings, then one of the consequences of that is, well, you have banks who have they have assets and liabilities, right? They already have a lot of mortgages on their books, and they were made under the old rules. And so the interest rates are all low. And now you’re gonna raise market rates tremendously what’s going to happen to all the assets they have on their books? Well, they’re going to show losses, guess what, in whole period, there’s nothing they can do. I mean, you could argue, well, if they knew that you were going to do this, they could have gone out and sold futures contracts to beat the band. But every SNL in the United States couldn’t do that. And in fact, they may not even have been approved to dabble in futures contracts in those days. So the Fed engaged in a policy that put the banking part of the banking system really up against the wall. And similarly, what the Fed did this time, although not because of banking regulations, but just because of the quickness of the way that rates moved, put banks once again, up against a wall. So it looks at the event through the worst of that there may be some lingering problems. But what we’re facing now was just an unknown future where we have a lot of inflation optimise. On the other hand, we still have a lot of lingering inflation. Later on inflation is very high in the services sector. It’s low in the goods sector. And so people can kind of cherry pick what they think is gonna happen in the future. And this is, I think, potentially a dangerous situation.

Eric Chemi 27:18
So where do you see the next, let’s say, 12 months? What should investors be worried about? What what data should they be looking at? Because I think it’s tricky for a lot of people who point out, let’s say rightfully everything you’re looking at, right? Hey, I see tax policy, that’s kind of a mess. I see open borders, that’s clearly not working in the money that’s coming out of my pocket to spend on that. But I see markets at all time highs, and yet the richest companies in the world, even even the rich tech companies are doing layoffs. So there’s layoffs all over the place. But we’re at all time highs, I don’t trust the Fed. If they start to cut, what does that mean? Maybe we’re not ready for that. With services, inflation. A lot of people are really confused right now as to what they should do. And a lot of them have that viewpoint that you have, which is I don’t really trust. I don’t trust what they’re doing. And I look at one of the articles you wrote on Seeking Alpha. Does the Fed have a clue what makes inflation or what or what removes it? Or another article? Has the Fed just declared victory or accepted defeat? And then why do people feel so bad with the economy doing so? Well? So that that’s I think, what you’re getting at, is this this conflict, this moral dilemma of where are we in? How should I think about the country right now?

Robert Brusca 28:34
Yes, for example, was just looking at the paper recently, my wife and I were looking at some securities firms that were making new stock market predictions. And just a few, just a month or so ago, one of them was was forecasting a much lower stock market by the end of the year than what we have now. But now the market has jumped. And so they’re forecasting an even higher level. And she was pointing out to me that they are saying that it’s going to be higher earnings. And I said to her, Well, what else are they going to say? I mean, you miss the stock price went up more than you thought, your securities firm, you don’t want to tell people that prices are gonna go down because then they won’t be buying stocks from you. So you have to forecast rates are going to be going up, stock prices are gonna go up. And if you forecast that stock prices are gonna go up, well, there has to be a reason for it. So what can you say? Well, you can you can pick the one variable that nobody has a clue what’s going to happen, you can talk about earnings and say earnings are going to be much better growth is going to be much better. Well, is it? You know, it’s very interesting, because over the last year or so, economists are talking about recession, and now we’re talking about another super bulge and growth and continued progressively new highs in the stock market. Now how can people get the economy so wrong? What’s really going to happen? I think the bottom line on this is quite clear. Nobody really knows nobody has a clue. You’re gonna have securities, securities companies economists giving you for it. Pass, but nobody has much confidence in what’s going on. Now, just a year ago, a lot of economists are forecasting recession, and now they’ve taken it off the table. But should they? Aren’t we still really at risk in the job market is really tight. So I’ve mentioned this before, but the Fed is looking for a soft landing. Why in a situation? We’ve got the unemployment rate, basically, as almost as low as it’s been in the last seven years, right? 3.4% were 3.8%. Now, why would you be giving a priority to preserving this very low unemployment rate? That history shows we’ve not been able to keep below 4% for an extended period of time. That’s just history. We’re going to chart on the unemployment rate, look at it yourself. The unemployment rate doesn’t stay below 4% for very long, and we’ve got inflation that’s really overshooting retirement, yet the Fed does not want to be really aggressive, the Fed wants to be kind of passive. When we kind of have the fed funds right now in a place that’s a little bit restrictive. And if the inflation rate comes down, that’s going to make it more restrictive. So then we don’t want to say, Oh, that’s good. Now we’re going to be more restrictive, we’re gonna say, Oh, no. So then we have to cut rates. So we don’t get too restrictive, because you don’t want the unemployment rate to go up? Well, you know, the Fed has a dual objective for policy, and it’s a dual mandate. So the Fed needs to get inflation down to its 2% target, not a 5% target, not a 4% target, not a 3% target and as a 2%. Target. And meanwhile, its other goal is to have maximum sustainable employment, what’s got the unemployment rate down to, I don’t know, 69 year low, and it’s only moved up slightly from that. So why is the Fed still emphasizing the rate of unemployment? And, you know, making the the inflation rate, the stepchild of policy? I don’t understand that.

Eric Chemi 31:49
So why is it? I’m supposed to ask you the questions, you’re supposed to have the answers

Robert Brusca 31:54
I think the reason is that there’s a lot of political pressure on the Fed. Did you know that this was an election year?

Eric Chemi 32:01
You know, now that you mentioned it, I now that you mentioned, I guess that’s true?

Robert Brusca 32:05
Yeah. How about that? And so we’ve got we’ve got all these, when,

Eric Chemi 32:08
But who do they want to win? Who’s the who’s the side of the Fed? Who are they? Who are they trying to help? Are they? Are they generally Democrats, generally Republican? They just do they just want to stay out of it and be like, we’re not going to do anything in an election. What what is their goal, knowing that it’s political, but I don’t know what side they’re on?

Robert Brusca 32:24
Well, the pressure on the Fed always comes from Congress, right? When Volcker was Chairman Henry Gonzales, was in the banking committee, and he was giving Volcker problems. And Volcker had to deal with that. And Henry Gonzalez turned out not to be a problem, because he didn’t get reelected. So he was no longer the chairman of the banking committee. But we’re dealing now with the very aggressive Elizabeth Warren’s of the world. And other people remember, the Fed was created by an act of Congress. People go back to Trump when he was president say, oh, Trump was leaning on the Fed? Well, he was but so what the President has very limited power over the Fed, he can appoint the chair, he can nominate the chairman, he can nominate members. But those numbers have to be vetted and approved in the Senate. And after people are nominated, and said he has no he has no influence over the Fed anymore. It’s Congress that can change everything about the Fed out a blink. So it’s Congress that the Fed has to worry about. And of course, when when Trump was putting pressure on the Fed, it was Congress, it was a Democratic Congress to put their arms around Powell and said, Oh, we’re gonna protect you. And believe me, this, they were putting their arms around him, but putting their hands in his pockets at the same time. And I believe that this is where some of the pressure came from. But Powell is also he’s an investment banking guy. And he’s, you know, he’s not an economist, and he’s not wedded to an economic model. And he’s used to making DLC probably just looks at this as kind of he’s making the deal that he has to make so the Fed can make its best policy. And nobody really knows what the interest rate has to be. So maybe he doesn’t mind the bargaining a little bit more than another Fed chairman would. And I’m concerned about this, you know, I’m concerned about the fact that the Fed has caused all the bank examiners to report to, to the board rather than to the local district banks. This is a centralization of power and control at the Fed. I don’t think this is a good development. I’m, I don’t like the fact that when you had challenges against Rob Kaplan and against Rosengren in the Boston Fed Eric Rosengren that the Fed did not step up and defend them because there was a group at the board as well as at their local district banks that were looking at him vetting these investments. And they were told that they can make the investments that they made, and so they made them and then later that was criticized and so then they were blamed for it. But hey, if you work for an organization, and if you’re told If you make this investment, you have to get permission from that guy. Okay? And you’ll get permission, well, then you’ve got permission. And it doesn’t matter if your trade is coming or not. You’ve gotten permission, so you can make that trade. And so as far as I’m concerned, if there was a problem with the trades, you know that albatross hangs around the neck of the people at the board who are reading it, or at the district banks, who said it was okay not around the guy who made the trades because they did what they were supposed to do. They got cleared them in the trades, and said, Can I do they said Mother, may I? And the Fed said, Yes, you may. So it’s the person who said yes, he made that I think is responsible. But Powell, who also had Lael Brainard, at the Fed, and they were both jockeying for that empty, you know, Fed chair position that was going to be up for grabs. Neither one of them wanted additional scrutiny on the Board of Governors. And so they threw that out to the district banks. So I think we have a lot of examples of the Fed, lacking the kind of leadership it needs to have. And that does bother me, I think that that needs to have leadership, I don’t think the Fed needs to be cutting deals.

Eric Chemi 35:58
I hear all this. And I agree with you on so many on so many levels. So that generally your your comments, your point of view. And a lot of these things were true. Three months ago, six months ago, nine months ago, 12 months ago, right? This is these are not things that just happened here in February. But if somebody were to take it, you know, too far, let’s say they hear all this and they think, you know, I don’t trust any of this. I don’t believe in this that I’m selling all my stocks all the sudden like that securities from you missed a 20% move in a few months, you you’re you’re behind the eight ball on that you’re you’re very behind. So how should someone think about their investments when we have this litany of problems, and we don’t trust the leadership to fix those problems? But but if you don’t invest, you’re you’re you’re falling behind? You can’t just be making 25 basis points, like in those old two year treasuries, right. So what are people supposed to do? Either in spite of or because of these conditions?

Robert Brusca 36:58
Right? Well, I’m writing this article now about how people should invest. The question is when should you invest for statistics? Should you invest with the political cycle? Archer, you invest on? Hope? You know, there are a lot of people who buy people buy hope stocks, I mean, you know, they’re a tech company, it’s new, I mean, back in its day, and Microsoft, you know, Apple, you want to bet put money in these stocks. I mean, who knows what they’re gonna do? Well, Google, you know, God bless you, if you did, but a lot of people didn’t know what they were, you know, these were, these are fliers, depending on how much you know about tech and other things, maybe you thought it was a safer bet than other people did. But, but who knows, you know, so you know, you can you’re going to invest in in rumor stocks, you can get invested in things that are, and then conditions that are statistically proven to be verifiable, for example, now, I pointed out the unemployment rate, it doesn’t stay below 4%, you know, the unemployment rate is going to go up, the Fed cannot create a soft landing, that’s going to keep it below 4%. That just doesn’t seem possible to me. So what’s going to happen is that the Fed will not raise interest rates enough in this coming year, if they’re gonna cut interest rates, then very likely, we aren’t going to see inflation accelerate. And we’re going to see, eventually that unemployment rate go up, we’re very likely, even though economists aren’t talking about it, headed for recession, because when you stop, when you stop making good monetary policy, that’s what happens. The great irony about the dual mandate at the Fed is that if you want the strongest job market possible, then you need to have price stability. If you sacrifice price stability, to keep the unemployment low, the unemployment rate low, then you’re going to bring more inflation into the picture. And you can try to deny it, but you’re gonna wind up where the Fed was, you know, eventually, after 2021 2022, you’re gonna have to raise rates. And you might have to raise them a lot more. And maybe next time that they have to raise rates more, the economy isn’t going to be quite so resilient, because you’re not going to have all that money pouring in from the federal government. So I’m concerned about that. I think it’s an election year. And I think in the election year, we’re going to basically play into November, things are going to be pretty good, the Fed is going to be careful about what it does. But you know, come November, all bets are off. I think that the Fed probably would have made policy too easy. By that time, they probably will cut rates. And they’re going to do it with the inflation rate too high. And this is the problem. You’re going for a soft landing, what’s a soft landing? First of all, you say that so soft.

Eric Chemi 39:26
What does that even mean? I don’t even know what that supposed to mean. Honestly,

Robert Brusca 39:29
it has no definition. If you look back at the periods that people want to designate as soft landings for the most part, there are periods where the unemployment rate didn’t rise, but the Fed raised interest rates for some reason. Okay. And there’s one in the mid 1990s. That worked out partly because the Fed had cut rates too deeply in the recovery. And so they raised rates, meaning they just brought them back to where they should have been, and they didn’t leave them too low for too long. So we didn’t really get any inflation from it. And they call that a sign Soft landing. But this is not like that, yeah, we’re coming off of real inflation, we have real inflation, we have a situation where the Fed needs to reduce the inflation rate. It needs to reduce the inflation rate. But it’s the unemployment rate that it’s trying to keep from going up. But it needs to reduce the inflation rate. So how can they not raise the unemployment rate and reduce the inflation rate? Well, I think school prayers is not legal. So you can’t get school children to pray for you. You can hope. But this isn’t the right policy. So unless all those people in the market who have 15 years of experience of inflation to 2% are right, and there’s some new gravity model in which inflation is going to magically go back down to 2%, there’s going to be a problem this year, because the Fed is not going to be fighting the evil it needs to fight. And if they achieved their soft landing, here’s the problem, what’s a soft landing, you’ve got a low unemployment rate. And so you get the inflation rate kind of down, but you probably don’t get me the 2%, but you get it kind of down. And so it’s over the target. But it’s not excessive anymore than by that I mean, it’s like 5%, or 7%. But it’s excessive relative to target. But now you’re still at full employment. So you’re still in full employment. So you’ve still got all these tensions in the labor market. And you’ve still got all these pressures on inflation, and you’ve only moved inflation down to maybe 3%, maybe you’re lucky to get it down to two and a half percent. So you’re not in a very good position. So the problem is calling it a soft land, he doesn’t make sense. Because guess what, there’s no airport, you don’t land anywhere, you’re in this very uneven place where the unemployment rate is still going to be threatened. So this is the problem, the soft landing basically is not a destination, the soft landing is a pretend it doesn’t destination, that doesn’t solve the the situation that you want to be solved. It doesn’t create the Nirvana that you want. Unless you think you really are going to get the unemployment rate down below 4%. You’re going to get inflation to 2%. And we’re all going to live happily ever after in a Walt Disney movie.

Eric Chemi 42:06
What would happen if they said, Hey, we want you to join the Fed?

Robert Brusca 42:10
That’s not gonna happen. We know it’s not gonna happen. But what

Eric Chemi 42:13
would you do differently? If you were all of a sudden in charge? Or at least you could vote?

Robert Brusca 42:18
Well, it doesn’t have to be one vote, you know, and if I were a governor, I’d voted every meeting if I were a district Bank President, I vote every once in a while, and it would be a vote, you know, and I would I would speak about the economy i in in what I consider to be more objective fashion. One of the one of the things about the Powell Fed is there’s very little dissent. You don’t see many people dissenting, any fed meetings anymore. Everybody’s together. And I’m not sure exactly what this means. They watered down what they write in their policy statements so much that everybody can agree with it, or are people afraid of dissenting dissent is a good thing. We need

Eric Chemi 43:00
But what happens if you descent, you can’t get fired, right? Powell can’t kick you off, right?

Robert Brusca 43:05
Um, no, but you know, I mean, the Fed is an organization that has always been very collegial. And even people who leave the Fed don’t want to be on bad terms. You don’t see people leaving the Fed, and being highly critical of what they’re doing. Most of the people say, Oh, they’re doing about the right thing. Maybe they could do a little bit more of this, you know, it’s like a chef tasting and other chefs dish and tell you how great it is. Oh, maybe just a touch more Salter maybe just a little more butter. But it’s really very good, right. I mean, they really don’t get in the trenches, they don’t leave and blow things up. Right they put some real characters on the Fed when Paul Volcker was there right Ronald Reagan was upset and you wanted rates cut. And so they they had the people put on the Fed many Johnson, Martha Seeger when Angel, Preston Martin. And they finally they finally put pressure on Volker and outvoted him at one of the board meetings to permit a discount rate cut at the time that Volcker didn’t want rates to go down. And so there was a palace revolt. And that was very much staged by Reagan to try to put pressure on Volcker. So these kinds of things have happened, but one person isn’t going to do anything. And if you go in there as a bull in the china shop, life isn’t gonna be easy for you. You don’t see anybody the Fed acting that way. You see some people who are a little bit more independent. You see some people who are a little bit more hawkish, but people really stick to their knitting. They really stick to their economics. If they’ve got a different point of view, they stick to their models. And you don’t see a lot of really critical stuff. A lot of dissent from within the Fed and right now using very little dissent at the Fed.

Eric Chemi 44:51
There’s so much more we can we can get to but I’m curious where can people find all your work because I know you’ve got you’re on Seeking Alpha you’re on a lot of places. Are you on? Are you on Twitter or other social media? How can they how can they read more about your what’s your writing on an ongoing basis?

Robert Brusca 45:07
I have a substack it’s it’s my name Robert Brusca substack.com And I do write things for for Seeking Alpha and get quoted and some other places I have a LinkedIn page.

Eric Chemi 45:19
Thank you so much for joining me really appreciate you. you sharing your wisdom not being afraid to say what you really think and and really being open and honest with us today. So thank you so much for joining us and we’ll talk to you soon.

Robert Brusca 45:32
Okay, take care.

Eric Chemi 45:34
Thanks again to my guest, Robert brusca, for joining me here on Wealthion today. If you want to check out more information, go to the rest of our channel. Like Subscribe, Share, Comment, all of those things really help get the content out there to as many people as possible and of course, go to Wealthion.com A lot more information there. You can check out all of our other shows, the older episodes, a lot of stuff really good there. You can check out Anthony Scaramucci’s show, submit questions. That’s a live q&a show every Friday at 11. He takes those calls and emails answers your questions every Friday. And of course, if you’re looking for investment advice, looking for professional help you figure out your family’s finances your investment future. We’ve got investment professionals that we endorse, we recommend at Wealthion.com There’s a little short form there to get you connected, no cost, no obligation, no commitment, just something we do as a public service. You can have a conversation, see if that person is right for you. And if not, no worries. Thanks again for watching. I’m Eric Chemi. We’ll see you next time