Countdown to the Fed Decision 9/16/26

0:00How do you turn your strategy into action and action into impact? Bold leaders do it through transformative strategy and transactions. One's that work in practice, not just on paper. At EY Parthenon, we use an investor mindset to help you create value. How? By combining deep sector experience with AI Power Technology, so you can reimagine your business for tomorrow while building it today. Shape your future with EY Parthenon. Learn more today. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Landsford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at Schwab.com slash Market Update Podcast or find Schwab Market Update wherever you get your podcasts. You're listening to the Exchange.

1:00Here's today's show. Thank you very much, Scott, and welcome to our special two-hour fed coverage live from Washington, DC. Today, I'm Kelly Evans and I'm Brian Sullivan. The markets they are expecting a quarter point interest rate hike. And ahead of that, the stock market mostly higher. Along with the actual rate call today, you will also hopefully get guidance on if we get more rate hikes. Or if this is one and done, Kelly, there's also the big issue. I mean, trillion dollar issue of the balance sheet. Some say don't expect much, but we will talk to a guest who says maybe we could have some news on that. Look, quick look at your screen. You can see the Dow fractionally lower today. But the S&P is positive three-tenths. The NASDAQ leading the way up seven-tenths crude oil down about three percent to one of two in the 10-year treasury at 4.95. We've got a busy and full lineup for you for the next 90 minutes until the press conference from market heavyweights to former fed governors and influential lawmakers who by the way are about to head back home

2:03until after election day. But first, let's begin with CNBC senior economic reporter Steve Leesman. He is a cross-town at the Fed with the final setup, Steve. Kelly, thank you. We're either on the verge of the first rate hike since 2023. Or if not, one of the biggest fed surprises in a very long time. We go into this meeting with probabilities with a 91 percent chance of a rate hike at this meeting. And then there's more to come, a 78 percent probability of one in December. And a third one perhaps by March of 2020. So not one in done is what the markets expecting, expecting market pricing. Always meaningful to the Fed, but to Fed Chairman Kevin Worsh, he has said specifically he's looking to the markets for signals about where to put rates. That signal seems clearly the signal for higher interest rates now and maybe depending on the data in the future. Reasons to hike, well you've got that inflation number above 2 percent. In fact, now it's above 3 percent. That's the Fed's preferred measure. Been above 2 percent for five years now. And signs of it being broader than just an energy problem. Surging oil and diesel prices threaten more inflation than the months ahead.

3:06And the Fed can't look through multiple supply stocks, according to at least some Fed members. From the other side, there are those who argue that rate hacks won't do any good for the inflation problem because it's oil and rate hikes don't produce oil, but they have been driving the 10 year. The notion that there were reasons to stand that could limit the guidance about the Fed's next move in a world where Worsh doesn't want to say very much about where things are going. It could be one in done guys or it could maybe just be one and mom. I love that. And I want to get to the fed rate hikes don't produce oil. They don't, but can fed rate hikes reduce oil? Because wouldn't that by cutting demand reduce some of that inflationary pressure? And isn't that the entire point of an interest rate hike? Well, there you go, Brian. Now you're qualified to be a senior economic supporter because that's exactly the way the mechanism works. You all the Fed can do is attack the aggregate demand side. It can curtail a little bit on the supply side, but it really has a biggest impact on the demand side. And so by hiking interest rates there,

4:07attempt is to slow the economies at least somewhat, not obviously to do a recession. I want to avoid that, but to try to take some of the pressure off of inflation and perhaps off of things like the demand for oil. Steve, thank you very much. We'll see you in about an hour. Steve Liesman, our senior economics reporter. Let's turn back to our esteemed panel now as we question whether this is one and done for rate hikes or the start of a new tightening cycle. Stephen Whiting is chief investment strategist at CIO group. Patrick Harker is the former president of the Philadelphia Fed and currently a professor at the Wharton School. And Lizanne Saunders is the chief investment strategist at the Schwab Center for financial research. Welcome to all of you. Steve, okay? Don't make me knock over in my water here all over the laptop. Right. You think they might and possibly even should raise by half a point today? Well, they've really gone a long way to argue. And again, if it was a different situation, if we weren't in the middle of an energy supply shock, maybe you could be patient, but they've argued that we've been above target inflation for a long,

5:09long time and they've made the choice not to be patient any longer. You know, I would point out for everybody that every Fed tightening cycle in history has been a yield curve flattening cycle. If they were not to act today after all of that rhetoric, you probably see it being somewhat destabilizing for the currency, for the long end of the bond market. You know, now they've gone in this path. They're going to do more than what just 25 basis points we talk about. You know, what impact it might be. Let's remember that yields have risen a hundred basis points this year. We've priced in three Fed tightening cycles and to move now and to say that we're going to do something to take the inflation target seriously is real tightening. I just find it so frustrating that people keep saying it's been five years above that. That has to do with the mistakes they made three, four and five years ago. And we're making progress now. Absolutely. Look, cornflation on CPI to four. If you want to look at PC, E core, or be a little lower, it's been gradually coming down. I think chair Warsh has made an active decision.

6:11Let's stop being patient with this and it will see what the committee says. Patrick, there's a lot of smart commentary on both sides. But in your mind, why does the Federal Reserve have to raise rates today? Yeah, I think it's very simple. You think about the 10 year, the 30 year, we talk about term premium, risk premium, there's also a credibility premium. The Fed has to act to maintain credibility. And I think that's at risk. I think that's it. Who and if they do with the market. Okay. So if they don't raise rates, do you believe because the market's effectively pricing in a 92 or I think whatever. Yeah, yeah. It's just so if they don't raise rates today, just the market revolt. Oh, yeah. I think so. Absolutely because the Fed as we were just saying that Fed has been on the sidelines now for a while. Look, 25 basis points, even 50 basis points is not going to make a dent in inflation because the long end of the curve has already gone up. It is possible. This is on Orthodox, but it's possible that with this increase and

7:15keep and the Fed reasserting its credibility that the market comes down. That goes up. So the president may get what he wants, you know, a lot way by the Fed funds rate going up. Right. Which meaning lower, lower, longer term. Yes, real potential. Yeah, Lizanne, what do you think? Well, I think the current inflation problem is not just a vestige of the Fed waiting too long to start raising interest rates after the spike in 2022. We've obviously got the more recent supply side problems, but there's also some demand side inflation here. There is some tightness in labor market. See, NFIB latest data that came out shows that small businesses say their number one problem now is quality of labor. And you look at the AI CapEx boom. That brings it in a demand side inflation. So that's where the Fed can have some success. They can indirectly have success to the point guys made earlier on reigning in demand, which would be inclusive of demand for energy.

8:16But I also think there's that potential necessity of bringing some demand down because not only are we seeing some demand side inflation, another example would be ISM services prices paid has been accelerating. And that's a big chunk of the economy. So I just don't see this persistence in terms of a disinflationary trend. And I think the Fed has to add. You know, the only thing Lizanne is when we talk about reigning in demand, it's going to be reigning in demand among middle and lower income Americans. This could benefit those with more. Because they're either going to be kind of agnostic to it or they own yields, they own treasuries, they own interest bearing things where they're getting a nice kind of payment from that already. So you have the lower and middle income Americans who are facing high gasoline prices, soaring diesel prices, elevated pressures and parts of the food chain. And now on top of that, we're going to go and give them some rate hikes. Well, it gets it depends on where you sit on the borrowing end of the spectrum. If you're on the lower end and you're looking to buy a home, it's certainly to the detriment. But if it ultimately brings down particularly the the non discretionary

9:20components of inflation, which is really what's biting the lower end, you know, the upper end consumer tends to spend a disproportionate share of their income on items that are more discretionary in nature. And that's where the inflation rate has been a bit lower. It's that non discretionary inflation rate that has been troubling in a somewhat stagnant income environment. And then you add that inflation piece, you know, real incomes have been quite stagnant. And the lower income people, they live in breathe this every day. We can talk about core versus headline piece, the E versus CPI. But the average consumer up and down the spectrum thinks of inflation as stuff is more expensive now than it was, you know, X number of years ago, quite simply that. And that is why sentiment is so depressed. But Patrick, sort of to your point before, and I think this is critical to borrowing costs, not going to do anything about food. I get that or insurance or some of these other things. But I think you would agree with a lot of people in the market, which is that if we get a rate hike, and I know it's completely counterintuitive and

10:21Stephen jump in as well. If we get an interest rate hike today, borrowing costs could actually go down that is extremely countered. Maybe not right away or they let or how about this? They love they stop going. Is that fair? Yeah, that's fair. Explain how that could actually happen because it all comes down to the credibility of the Fed and expectations of inflation. If people feel if they don't raise today, the markets are going to say the Fed is not serious. They talk the right words, but they're not taking action. And that is why I think they have to raise now, whether it's two or three. We'll see. So Brian, I would just think that if the Federal Reserve were not to act today, the longer to the bond market is just going to say it might be more later, right? There's going to be more uncertainty about what they let it get out of control or something. Correct. And look, we're not at zero going to five and a half as we had to do a few years ago. But you think about this.

11:22We're not going to knock the cost of energy or food down quickly here by any means. What you have though is you've had the whole term premium across the yield curve, a hundred basis point rise and buying costs that will outlast the energy shock as they usually have in the past. Is that because they're signaling that they're going to raise rates? In other words, if he said we're not hiking in respect that we've we're pricing in now according to Deutsche Bank, a hundred basis points of tightening. So a full post you're saying yields have gone up a full point. We're expecting a full point of tightening couldn't wash. What if he comes out of the press conference and says that more rate hikes are not a guarantee. What kind of reaction would that have? You know, this Fed chair says he doesn't want to be the signal. He wants to take the signal. So there's a chance that you can't communicate this well at the press conference. But obviously, when you actually have tightened, you've seen so much happen. He referred to this in July. Hey, I didn't do nothing. I actually, you know, we've actually had tightening here. So again, telling everyone that the Federal Reserve will do a credible job of preserving the internal value of the dollar. That's better than the alternative.

12:23He's not going to give forward guidance, but there are 18 other people who will do where he's going to advocate leadership. I understand he's got a perspective at a point of view and I respect that. But I think the market's going to teach him that he needs to be the leader. Not the father. I think the market is going to teach him eventually whether that's this today. I don't know. Lizanne Saunders, my 100% Norwegian friend. It's great to have you on the program this morning. Ron Barron on Squawk Box. He was asked by Becky. He said she said we got a Fed rate decision today. Ron Barron, who's famously invested in a lot of high growth stocks, said I don't care because for his investments, the Federal Reserve wasn't that important for you and the Schwab clients. How relevant is what the Fed does today or the guidance they give to all the trillions of dollars of investment money that you help oversee and manage for the Schwab family? Well, if you're focused more on short-term volatility, I think what the Fed does on a day like today matters. But ultimately, it's the 10-year yield that has the most relevance both

13:28to the economy and the equity market. And I think what's lost in all this will they want they, you know, today at 2 PM Eastern time is that we've reverted back to an inverse correlation between bond yields and stock prices. And that came after about a 20 plus 20 to 25 year period during the great moderation where bond yields and stock prices moved in the same direction because bond yields were keying more off the growth side of the equation than the inflation side of the equation. We're back in negative correlation territory. That's akin to what we had for 30 years prior to the great moderation, where bond yields were keying more off the inflation side of the equation. Aflation was much more volatile and you saw that inverse relationship, which also means that bond prices and stock prices move in the same direction. Did that in the 30 years prior to the great moderation? They moved in opposite directions during the great moderation. Now moving in the same direction again, it changes the landscape from a diversification standpoint. I think that's the more important subject we should be focused on than just what the Fed will do today.

14:29Well, quickly on that to follow up then. So you don't think that rates at these levels or a Fed interest rate at these levels or the tenure at these levels, whatever it is is going to kill AI. It's not going to kill healthcare. I know energy is a tiny part of the market, but obviously energy has gone up. So I five percent of the S&P sounds like you believe that the stock market rally can continue, even if rates were to continue to stay where they are right now. Well, stay. Yes, I think stability and rates for whatever it's worth. The five handle on the 10 year has not been met with great equity market performance, much more volatility. I would expect that. But I think ultimately where we are now at 5 percent, it's reflective of where nominal growth is. It's reflective inflation. We've sort of normalized if things were to become disorderly and you were really to see things become unencurd in the speed of a move, say, in the 10 year, were to pick up. Then I think it causes more trouble than just the level and what that represents. All right. I know we have to go just see how much of this is global. Is it is it more than well yields up 90 basis points across the world?

15:30Are they hiking in response to a global bond shock? Well, the thing that's changed regime wise that Lizan just mentioned is that oil and yields are now moving together. And that's new because central banks are no longer looking through supply shocks. All right. Thank you. I really appreciate it guys. Thanks. And Patrick, you're not going to Steven, Lizan. Thank you very much. Patrick, Parker, we're going to milky for all your worth. They're going to stay here with us. We appreciate it. Thank you very much. Why folks? This is your countdown to the Fed and ahead. We're going to dig into some of the politics. Yeah. Politics around the rate call with Congressman Josh Godheimer, by the way, also very powerful in AI. So we'll ask him, Kelly, I think he's actually your congressperson. What he thinks about all of this. Well, I don't know. We're going to I'm actually going to ask it. He's certainly CNBC's congressman. How about that? Stocks are mostly higher with the NASDAQ leading the way oil backing off its highest level since mid May, the 10 year at 495, 495, 5 to be exact, 46 minutes to go until the Fed's decision on rates and our special live coverage from Washington continues

16:31after this. September's always busy. Whole Foods market can help their September stock up event makes it easy to load your pantry and freezer with flavorful nourishing food. Even better, there are hundreds of sales. Get dinner going with canned soups and veggies. Lean on frozen pizzas, pastas and seafood. Everyone loves their build your own family meals feeds for for just $35 stock up at Whole Foods market. Adventure global. We think about what can be done. Not what's usually done. Through innovation, venture global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time. So while others are busy talking, we're busy building.

17:32That's venture global. That's unstoppable energy. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Landsford for this information packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions and key results and statistics that may impact your trading. Download the latest episode and subscribe at Schwab.com slash Market Update podcast or find Schwab Market Update wherever you get your podcasts. That building America's capital literally is right over our shoulder Kelly and I are live here in DC today where the Federal Reserve is getting all the headlines rightfully so, but you're in investment dollars. Maybe more impacted going forward by what happens with AI and data centers with

18:35trillions in spending planned over the next couple of years, spending around AI is not only the theme for years to come, but arguably one of the biggest and most impactful spending sprees in modern history, but they're growing calls to balance that growth with safety and make sure that AI doesn't, you know, kill us all. For more, we're joined by New Jersey Congressman Josh, Godhammer. He's also co-chair of the House Democratic Commission on AI. We'll talk a lot about AI first. I want to talk about the Federal Reserve Congressman. Thank you for joining us. Thanks for having us. It's great to see District Congressman, I know, the meat here in New Jersey. Exactly. You should get back to Jersey soon. So tonight, we're getting there. We'll chase them off already. All right, here you go. So Kevin Worsh, the Fed chair, how much of a rock in a hard place is he and because if he raises rates, there's a guy at 1600 Pennsylvania Avenue, he's not going to be very happy about that. But if he doesn't raise rates, the stock market is not going to be very happy about that.

19:35What do you think? What do you want to be Kevin today? I certainly wouldn't have to go to the White House today. As a member of Congress, let me just tell you, from Jersey's perspective, we don't like higher rates. We want, we're for affordability, we do everything we can to keep costs down, mortgages, credit cards. So obviously, I know the market's one point of view. I'll tell you where most members of Congress are. I know of me. So you guys all agree with the President that we need lower interest rates? Well, I think we're not for higher interest rates. But that's really nice. I miss one, I agree with them. Why? Because people would say if you're worried about if this is the line, if you're worried about inflation, you have to raise interest rates because that will cool inflation. Well, I think a lot of reasons why we've got to make sure we get rates down. One of them is our debt, which is continued to be a huge issue. You're looking at the numbers right now. We should be focused on that and making life, I'm going to try to do everything to make life more affordable. But you've got a lot of issues where we have not taken on the tough challenges in this current Congress. And I'm hoping when the Democrats are in a majority, we take on some of the big issues

20:35like health care costs and other cost crushing people. But what are people talking to me about at back home? Just going to say, I hear people on the campaign trail campaigning on Medicare for all. And I think to myself, I don't know if that's going to lower health care costs. It's not where I am. It's not where I am. I'm just saying, you know that's where the discussion is. It's very vibrant in that direction. Yeah, I'm listening. There's a lot of people who have a lot of opinions that I'm not necessarily with, including Democratic socialists and others who've got views like, you know, they want to shut down the United States Senate here in the Supreme Court. And so they also want to defund police and open all the borders. You know, we've got different perspectives. But what I'll tell you is we've got to do everything we can to get cost down for people and people getting crushed. And we just haven't taken on many of us have tried, but you know, have not gotten traction under this Republican majority to take on some of those tougher issues. And I think, you know, that's one of the things we've got to do day one of a new Congress after the election. I ran an expul because that's how you do things these days. Congress went about what sort of cost do people face at the can't control that has the

21:40most sort of inflationary impact on their family? Gasoline food insurance electricity. Gasoline was only third. Food was 41 percent. Insurance 36 percent and gasoline and electricity. Is there anything that this Federal Reserve or this Congress can do to bring down the cost of food to bring down the cost of it? Well, first of all, our elector electricity, right? We live to your point. To your point. Yeah, I mean, the electricity is buying 45 percent in the last two years. Right. We used to be a huge importer and now we're a huge importer. It's killing us. We've got to get these utility bills down. I'm hoping in the lame duck after the election, we take permitting reform. That's something we could do to actually help build more electricity, more all the above approach, actually get those costs down and get supply up. That's something that's on the table in front of us. A lot of bipartisan support for. You know what? Listen, AI, which I know is a huge topic and something that uses a lot of electricity, if you're going to talk about electricity. And that's what I'm hearing a lot about back home right now, right?

22:40You're hearing about... You're hearing about 450 gas in Jersey. You know, nearly $4.50. You got diesel prices. I've been with a lot of my Republican colleagues this morning. They're saying we got 625 diesel. Their farmers are flipping out. That is not good for the Republicans, right? You've got a lot of pressure and an AI back home. Some people talking about this all the time, about the danger side of it. But the reality is AI is here. So from my perspective, the key is how do we do this in a smart way? How do we do this in the right way? Are there data centers in New Jersey? Sure. How many are there a lot or a few? Small. I mean, compared to Ohio and other places, fewer. But by the way, a lot of towns have been considering it over time. You've got a lot of people saying, wait, wait, hold on a second on the data centers. And my view is you can't get rid of data centers, but you got to do it the right way, right? People's electric bills and their water bills should go down, right? They should not be giving tax breaks out to people building data centers. You got to protect the water. You got to only do them in communities that want them.

23:41And some of our communities in Jersey have passed resolutions that say, we don't want them here. And I think the people for right to say, we want them, we don't want them. Other places in the country, they do want them. Yeah, really. And because if you're buying electricity as New Jersey does, it's hard to build a data center because you just have to probably buy that power anyway. But to your point about bipartisanship, I know the governor who is a Democrat. She's talking about building two new nuclear power plants in the state of New Jersey. I don't want to focus entirely on New Jersey, but this is a national issue. This is a national issue. What else do you have to fight for? Well, I think we all agree now. We're raising our kids there. So, you know, go Jersey, as we say that from DC. Why is electricity a partisan issue? I don't understand. Well, maybe I get around coal. I can understand that. Maybe fossil fuels and climate. Nuclear should not be a partisan issue, but it is. Like, nuclear, you should, I mean, well, it's less so these days than even a year ago, because people realize, give us some hope that something gets done. All the about permitting much. Permitting much. Permitting reform. Now, I actually very hopeful of permitting reform. Natural gas, more natural gas, more nuclear, more alternative energy.

24:42I'm actually, I think we need it all. We need an all-the-buff approach. I'm very optimistic. Given the demands that we're going to get more. We got to go. I read about you in the Wall Street Journal over the weekend. I thought that was a great anecdote on the front page about people coming up to you with your daughter Sokker name. Oh, my daughter Ellie play. She's a Filthockey player. Thank you. She did go by the way it scored last night. Important. Maybe more important. But in the question now is just shifting in the debate of should AI companies just have to, should, I mean, you can see this from a trial lawyer point of view. You go after these big, deep pocketed AI companies. You say, your products hacked other companies. It was Roger and Mackinamist talking about this morning. We are coming after you. Like you broke the law. You're the products you created broke the law. Is that the direction this is about to go? I think the most important thing we should focus on before we get to that part is when there's a new model, you should have a mandatory review that you just got to submit to the government or the time-manned review to make sure it's safe, right? Because if this is not done the right way, as the anthropic engineer warned, we're going to have huge problems on our hands. You met. But we got to win this race. We just got to do it the right way.

25:43Yes, you can't just say it's the Wild West, go do whatever you want, right? We got to win the race, but we got to do it in a smart way. And some people say get rid of this thing, which is, I don't think, a practical and you can't put this in a boxing chuck and the Hudson. And then you got the other side which says do nothing. Right, let him rip and run, which I also put our national security at risk. And if someone on the Intelligence Committee, let me just tell you, we've got to make sure we do this in a smart way. Otherwise, we're going to- Because of the Chinese threat? Yeah, because of the risk we could put, you know, because your national security is at risk, your cyber security is at risk, your critical infrastructure, your water utilities that were attacked this summer in 10 states at risk. Right, so this is not a joking matter. This is something we were going to take really seriously. But you asked about bipartisan. This looked for huge bipartisan support behind a major effort on AI rules of the road coming up in the next Congress. All right, Congressman, thank you so much for making the time. Appreciate it. Congressman Josh Gottheimer of Yes, New Jersey. Still ahead, he was best since right-hand man, former deputy treasury secretary Michael Falkender will tell us what the markets might be overlooking as we wait for the Fed today.

26:46Yeah, in that decision, he's just about 35 minutes from now, stocks are mostly higher, the Dow is down a bit, but the S&P and the Nasdaq, they are higher, interest rates down about five basis points. All right, 10-year backing off, it's highest level in 19 years. The market wants a rate hike. Will it get one, our special coverage, live from DC right after this? Never bet against American grit or American energy. Through innovation, venture global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time. So while others are busy talking, we're busy building. That's venture global. That's unstoppable energy. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab.

27:50Join host Keith Landsford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results in statistics that may impact your trading. Download the latest episode and subscribe at Schwab.com slash Market Update Podcast or find Schwab Market Update wherever you get your podcasts. Something amazing is happening. This agency is experiencing a cyber attack, but no one is panicking. That's because CDW government secured, optimized, and future-proofed their data with the Dell Technologies Power Store solution. It increases cyber resiliency and improves end-to-end performance. For a secure, scalable solution that doesn't require more physical space, Dell Technologies and CDW government, make amazing happen. Find out more at cdwg.com slash Dell Federal.

28:54Welcome back to the AI supply chain, leading the S&P today, as we have less than half an hour until the next big catalyst, which is the Fed's rate decision. Our next guest says while the Fed would normally look past a supply-driven price shock, like what we're seeing with fuel right now, these aren't normal times. Jason Thomas is head of global research at the Carlyle Group. What do you mean by that, Jason? Welcome. I think the textbook response would be to say the Fed has no policy tool to fix damaged energy infrastructure. If that has no policy tool to open the straight-of-horn moves, so therefore, it shouldn't use a different policy tool to try to address the problem. These aren't normal times. I think in two important respects. First, the cumulative inflation that we've seen has created enormous stress, enormous hardship. I think that we see pricing power. We see wider margins. We see that there's a potential for second order effects. This is... He's getting me going again. Because when we talk about the cumulative inflation, again, that means we're still... The ghosts of what happened post-COVID are still haunting us.

29:57And yes, that's true for consumers, but it doesn't mean the right reaction to that is to raise borrowing costs. Well, I would disagree. And I think that what we've seen from our portfolio, and we own over 300 companies, 168 companies of control positions, or get data every day, but more importantly, discussions with management teams. A lot of these management teams, prior to the pandemic, went their entire career, maybe 20 years in their business, never raising a price. Thinking it was not possible to do so. If you raise prices, you just shed market share. It would be self-defeating. Then, all of a sudden, you had a supply chain crisis. The same company, the same people raising prices 20, 30%. And... And it starts doing it. This is... To me, this has a dust story. Now you're getting me fired up. Which is... That's $12 burger five years ago, it goes down 20. And guess what? The demand for that burger has not gone down. This is what I am constantly amazed, confused, shocked by, is that higher prices. Which for... I understand there's things like car insurance you have to have it. They're going to charge you what you want.

30:58You have to eat it. I get it. But for discretionary things, it doesn't seem to have had an impact. How come? That's the issue. That does suggest that you have trend demand that is in excess of the productive capacity of the economy. That is the implication. If you continue to have inflation rates after a 27% in cumulative increase, that is still above target. Let me ask you about this. You look at the core PCE trends this year. We've gone from 4.4% to 3-month annualized. 4.4% in April, possibly to around 2.9% in August. That is a disinflationary core trend in the face of this energy price shock and to your point about auto insurance. Up 45% from 2022 to 2024, down 6% this year. So those areas which were responding to what happened during COVID are moving finally in the right direction. So again, if the point is your right direction from 4.4%. But do you think that market forces reassert themselves? So the price wars that we know made auto insurance a terrible investment for years in a time

31:59in the past, does that not reassert itself? Is that not what's beginning to happen here? I may be beginning, but again, I think that rolling the dice with the, again, cumulative inflation, that matters. What does it matter? Because people are angry. We just had primary campaigns across the country that were waged on the issue of affordability. And many of the candidates who won had a critique that the problem with these cumulative increase in prices was because of a market failure, a failure of the system that can only be remedied through, in some cases, fairly radical proposals. So I think that when you let inflation run like this, oh, there's some good signs we should let this go, you're opening the door to a more radical politics. No, I agree with you, but I'm saying the error was post-COVID. The error was post-COVID. It played out for years. And so what are we going to do now? We're going to, we're always fighting the last war. I think the, what to do now is, maybe the last war, but it's to take back some of the rate cuts that occurred in 2025 that may, you know, just looking retrospectively may not

33:03have been needed. There was some volatility in labor markets for sure last fall. And I think it was a question is this related to more aggressive immigration enforcement? Is this a labor demand issue? There was uncertainty. It wasn't crazy for the Fed to, to enact some insurance cuts. But I think with the benefit of hindsight, we can say that the labor market didn't really weaken. There weren't the downward trends. The Fed screwed up because the economy I traveled over the country during COVID, the economy was booming outside of DC, Chicago, San Francisco, and they treated it like the entire economy was locked down. It's not the case. That's not why we're here. So Vaughan does, how about this? Does the Fed's decision today, whether they raise or they don't, does it impact those 300 plus companies that are in the Carlisle Group's portfolio? Does it change their business outlook? No, I mean, well, first, of course, there's the need for hedging in your interest expense. I meant their core business. No, no, no, no. Not at all. I think, again, the basic, no one is concerned about a 25 basis point hike.

34:06No one is really that concerned. If the Fed takes away all three of those cuts that were enacted in 2025, if we're back to 4.5% base rates, it's not the end of the world because nominal growth is as strong as it is. And again, when you look at margins, when you look at profitability expectations, the idea that people are panicking about a couple of rate hikes, it just seems so disconnected. It's a panic. Well, I mean, the people that are so worried about the direction of rates. Again, I think that investors need to understand there are worse policy outcomes in the world than 4.5% Fed funds rates. And that is, again, opening the door to, too, much more aggressive policy actions. All right. Jason, thanks so much. It's really good to check in with you today. Thanks for coming. Jason Thomas from the Carlisle Group. So is there a better way the Federal Reserve can signal? It is serious about fighting inflation. Well, former deputy treasury secretary Michael Falkinger thinks so, and he will join us with his ideas. Next. All right, welcome back to our, I guess, breaking news coverage of the Federal Reserve

35:13here from Washington, DC. All right. Here's where things stand with about 17 and a half minutes to go. Tenier yield hovering just under 5%. Folks, it here only nearly two decade high of 5.04% yesterday, the highest since 2007. So that move among other things has a sort of collectively asking. Did Scott Bessett, the treasury secretary, his enhanced treasury buyback program actually make the Fed share Kevin Worsh's job tougher. Let's bring in former deputy treasury secretary Michael Falkinger, who served under Bessett. He's now a finance professor at the University of Maryland Smith School of Business. Michael, professor, good to have you on the program. Did that buyback make it harder for Kevin Worsh to raise or keep rates the same? I don't think so at all, because the buyback program is the purpose of it is to replace a liquid bond with more liquid ones. It will help us lower debt service costs because if we can buy back bonds at a discount

36:14and replace them with bonds that were issued at par, then at lower debt service costs. But again, the magnitude of the buyback program last week, I don't think it had a, you know, to 6 billion program instead of normally a 2 billion program, I don't think that that's a sufficient size. When you look at everything else that was going on in the last week since the announcement of the buyback program, I don't think you can look at it as being the cause of the big change in rates. Pretty bad 20-year auction yesterday, probably saw. It gave it like a D, my, you know, D plus C minus something like that. It doesn't really matter. 20-year yields always the highest part of the curve. It's the least liquid. Kind of was why some people joking, not joking, say, just get rid of it. It's the smallest auction we do. Yeah, what other kinds of measures could be used? And does, do these measures not blur the lines between fiscal and monetary policy? I don't think that the treasury coming in and changing the weighted average maturity of bonds outstanding. I mean, last time I checked that is a fiscal policy decision. If anything, it was the Fed engaging in QE in the first place 15 years ago that blurred

37:20monetary policy coming into fiscal policy. So I don't see the buyback policy as in any way impairing the ability of the Fed to conduct monetary policy. What happens today? I think that they are going to raise rates because I think that the votes out, I think Kevin would like to keep rates where they're at, but I think the votes are going to force him to vote with the majority of the rates. So you had three that voted for a rate hike at the last meeting. But I think there's more. There's more sort of in the wings. What if it's, this is bizarre. I don't think we've ever had a situation. What if it was all of them buttwashed voting for the rate hike? They have to raise rates, but if the chair is not voting for, we could get that today. I don't think so. No. At Kevin's third meeting let alone at any of Kevin's meetings, I don't think that he is going to set the precedent. He would go with the group. He would go with the group. He would. Even if he didn't want to. I think that's part of engaging in a consensus-based organization like the Fed is. But I think that there are entirely rational reasons to say that if you look at where the inflationary pressure is coming from, it is not things that are responsive to marginal

38:20changes and interest rates. If you look at why the CPI report from last week, again, if you take out the direct energy component and then you take out what I consider the indirect fossil fuel items like airline fares, like motor oil. If you take those out, we were at, I believe, 2.1 on the 12-year. Excuse me, on the 12-month CPI read. That seems to suggest that monetary policy is where it needs to be. The change recently has been the run-up in oil prices and diesel prices, which again, changes in monetary policy are not going to all of a sudden cause truckers to stop taking goods to market. It's not going to cause people to stop driving to work. You and Jason Thomas, who's our previous guest, he thinks it's inflation. We need to push back against it. You made a case for that. I just wanted to ask if you still think the balance sheet factors in today, at all, in terms of how Worsh might choose to express if you about tightening or just cleaning up the balance sheet in general. I ultimately think that the balance sheet is a more appropriate mechanism to go after demonstrating that you are an inflation hawk, because ultimately it is too much money

39:25flowing during the pandemic. I think that really gave rise to the inflation that we are still witnessing. I don't think Kevin is going to be ready to move on that. Certainly, the board is not ready to move on that until the task force comes back with its review and recommendation. It's already back to 20% of GDP. I don't know how much you could shrink it now without it. It's dramatically reducing demand for bankers, and all of that. Maybe that's ultimately part of the plan. I do recognize that if anything, it potentially hurts Secretary Bussen's efforts to worry about the long yield because the way that you would bring down the balance sheet is that you would start selling the mortgage-backed security portfolio and some of the long-dated coupons that they're holding, which is just going to put pressure on long rates, which I understand is maybe not what the Secretary wants, but if you are going to tell the market that you are an inflation hawk and that you are not going to monetize future budget deficits, the balance sheet in my mind is the way to go. I just don't know respectfully to however powerful the Federal Reserve is, and they've got a balance sheet that's what, like, two times larger than the Federal budget of the

40:30United States or something. That's very trillion. One and a half, I mean, it's literally like a group of unelected women and men run a balance sheet larger than the budget of the United States government. That aside, what can they do about energy supply shocks? What can the Federal Reserve do to create peace around Hormuz? What can the Federal Reserve do to bring down the exorbitant auto insurance rates that all of our viewers and listeners are paying? What can the Federal Reserve do to bring down health care insurance? That's exactly why I don't think that the way you respond to supply shocks is by trying to raise interest rates to curtail demand. That's just... But they're going to do it. They're going to do it, but I think they're going to do it to try to signal credibility as opposed to actually having a real economic impact. I think that's how you lose credibility in the long run. I agree with you, which is why I think you should... I think that they need to accelerate the work of these task forces in order to start opening up some of the other avenues that so far we haven't been discussing like the balance sheet.

41:30What James Carville say? You want to come back as the bond market, trying to be like a Cajun Southern accent. But it sounds like peer pressure, Michael, is what you're talking about. Well, that's... Like the Fed's being bullied by the bond market. I think they are, because if you... But Warchester let them believe that. He has not once pushed back on the idea that he wouldn't respond to rising fuel prices with rate hikes. He could have done that, Jackson. He could have laid out an entire case for why he... It was basically a transitory supply side issue. He chose not to do that. He's let the market back him into this corner. Again, I would like to see him come out and say that for the reasons we just discussed that changing interest rates is not going to have a material impact on what's causing the change in inflation or the causing increased prices for American consumers. I don't think it's worse so much has been backed into a corner. I think it's that the fellow members of the FOMC are going to force a rate increase, because they have a different view as to the role of monetary policy and curtailing inflation. They have a different view on the signaling piece.

42:30And Kevin is not in his third meeting possibly ever going to lose a vote on the FOMC. All right, Michael, it's been great to have you here. Thanks so much. Really appreciate it. Michael Falkender. Let's get a quick check on markets with about 10 minutes left until that decision. The Dow is back in the green interestingly. The NASDAQ is up half a percent now. The S&P is a third of 1 percent. And the 10-year yield is below 4.95. We're also keeping an eye on gold. That is moving as well and could be moving more at 2 or 2.30. It's up about 1 percent ahead of the potential price hike. It's up about 10 percent in the past two months on inflation fears. And after crossing 106 of barrel, crude taking a breather today. Look at that. Back down to 102, Brian still a couple bucks above 100. Yeah, and we're just about 15 minutes away until that Fed decision. Actually about 10 minutes away. Let's bring in CBC senior economics writer Matt Peterson, who's joining us here on set. Matt, great to have you as well. You just heard Michael Falkender. We kind of pressed him in. And he sort of said that the Fed agreed. The Fed was sort of being bullied by the bond market.

43:33He might have found the other Fed members were also bully wars into hiking rates. How does that square with what you're reporting? I mean, I think that's a pretty tough look for Kevin Warsh who was very... I think it's true that he's going to get bullied into this. Either by the bond market and or by Tikelli's point, other members of the Fed. Yeah, I mean, we're going to find out, right? I mean, this is exactly... He came out and gave this speech to Jackson Hole that he didn't have to give. He did actually talk about energy prices back when he testified to Congress. He's talked about how they didn't need to cut because they didn't need to hike because of energy prices. And then, after everybody hated that press conference in July, he came out and gave this very hawkish speech, right? So either he falls through or somebody is it is ears? Is it the FOMC? Is it the president? This isn't important, no? Because and banks love to do this. They've made charts of the reaction to Warsh's pressers versus the others. And you can guess who's doing the worst right now. It is him. I don't know if he cares. But so what you're saying is the damage, the sell off that cause when people thought he was too dovish and that initial, what was it, June meeting or July?

44:34June and July. Then he goes in August and gives this hawkish Jackson Hole speech to say, no, no, no, no, like I'm serious about this. And we're all misreading this as now him taking a point of view about inflation that actually he may not want to take. I mean, right. So what is he going to say if he does not hike interest rates? Right? He came out of Jackson Hole and told us, you know, we on the FOMC decided that we needed to see more data showing us that inflation was coming down or else we're going to have to hike. But what do we see between July and September? You know, CPI core CPI was up more than everybody expected. So what's the story that he tells if he holds interest rates? There are plenty of stories he can tell to be clear, but he has none of them are consistent with the story he just told us at Jackson Hole, which is that prices are worry and he thinks you know, we're judged on our actions. That's the only thing here that I can't understand. I could understand him having a different point of view pointing to the data and saying, I see the disinflation, but he's telling a different story.

45:35So you have to take him at his word, I guess. Right. Well, that's very over many, many months that you don't look at just one data point, you look at trends, you know, all these individual readings on the economy like CPI. He thinks they're kind of flawed anyway. So it's not clear that he's a kind of slice and dice guy like Waller. You know, I mean, basically he's going to decide is Kavmorsh in charge of the FOMC or somebody like Chris Waller in charge. Well, we're going to let you go, Matt. We know you got a lot of writing, do listen. Worsh is only been in the job a couple of months. People evolve. Everybody wants to hammer somebody in the first couple months. He may change as he realizes what the market wants to hear. Matt Peterson really appreciate it. Thank you, Matt. All right, folks, so there we go. The stock market is mostly, now I think the Dow is up. So the major indexes are all higher. The Dow is just turned positive by 5, 100 to 1%. We got about six and a half minutes to our Federal Reserve rate decision work, Kelly. We could get the first rate hike in years. And three years after six cuts, the rate decision is coming up right after this. Don't go anywhere.

46:37You've been listening to the exchange. Make sure you're subscribed to get each episode every day. Same time, same place. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at Schwab.com slash Market Update Podcast or find Schwab Market Update wherever you get your podcasts.