The Federal Reserve's rate-cutting cycle has paused. Fed Chair Jerome Powell's term is up in May and his remaining Federal Open Market Committee meetings are unlikely to lead to lower rates, but the markets will be watching closely. Sean Snaith, Director of the Institute for Economic Forecasting at the University of Central Florida, provides insight into the meeting, the new Summary of Economic Projections and Powell's press conference. Register now to join us live on March 19 at 1 p.m., Eastern, for a discussion monetary policy.
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Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Gary Siegel (00:08):
Hi, welcome to another Bond Buyer Leaders event. I'm your host, Bond Buyer Managing Editor, Gary Siegel. Today we're going to discuss the Federal Open Market Committee's meeting and monetary policy. My guest is Sean Snaith, Director of the Institute of Economic Forecasting at the University of Central Florida. Sean, welcome and thank you for joining us.
Sean Snaith (00:35):
My pleasure. Thank you for having me.
Gary Siegel (00:40):
So just for the audience, put in your questions anytime. There won't be a specific question and answer period. We'll get to them if they're on topic as soon as possible, otherwise at the end of the session. Sean, was there anything in the post-meeting statement, the summary of economic projections or Federal Reserve Chair Jerome Powell's press conference that surprised you or grabbed your attention?
Sean Snaith (01:09):
Well, I think some of the more ... There's been a slight easing of dovishness and from the most dovish member of the committee, still calling or still expecting a full percentage point cut before the year's over, but that was down from a point and a half, I think, at the December meeting. So I think that to me is a sign that there's some increased concern here regarding inflation. I think the Iran War has really thrown a whole another heap of uncertainty onto the economy. And it was by no means a certain environment. We spent all of 2025 with the tariffs back and forth and almost day-to-day, if not hour to hour, change in stance coming out of the executive branch. And I think probably the best example of that was the tariffs that were levied on the country of Columbia, which lasted for a total of four hours.
(02:36):
The president of Columbia was refusing, I think, a plane load of Colombian citizens that were being deported back to Columbia. And so President Trump comes out and says, "Well, 25% tariff on everything from Columbia." Four hours later, the President of Columbia sends his own jet to pick up his citizens and bring them back to the country. And I thought, wow boy, that doesn't sum up the state of this craziness. I don't know what does. And then I also, I feel bad about the guy that actually imported something during that four hours and had to pay the tariff. He's probably kicking himself if he just waited till after lunch. But yeah, I think the uncertainty with the Iran War is, again, that it happened suddenly. I think it was sudden in many ways. I mean, we did have this attack supposedly that set back their nuclear capabilities and that seemed like, well, maybe that's the end of that.
(03:44):
Now it's a full-on air attack and we don't know really where it's going to go from here. Iran's retaliation to different countries and different bases in the region, the impact it's having on the straightforward moves, the impact on oil, natural gas, all these products that are derivatives of oil and natural gas, things like fertilizer. So I think there's just a mounting level of uncertainty that probably justifies the Fed, at least taking a breath in terms of making any policy decisions. And then on top of that, we've got a change in leadership coming.
(04:35):
So I wasn't really anticipating anything until Powell stepped down as far as any moves. I think, again, with all this Iran uncertainty, this could change tomorrow, but I think maybe one or two cuts by the end of the year, I think there's going to be pressure with the new leadership to cut rates, to at least keep President Trump from unleashing more brow meeting at the start of Kevin's term. But I just can't see any more aggressive action in either direction until we get some sense of what the heck is going to happen here with this Iran war.
Gary Siegel (05:33):
So when asked about the war and oil prices and inflation, Chair Powell seemed to say that the inflation projections weren't only affected by the oil prices because he noticed that the core prices also went up and oil isn't included in core. So did you have any take on that as to whether he was suggesting that we're going to see higher inflation in the future other than oil?
Sean Snaith (06:08):
Well, they have not been able to get to the target inflation rate. Many other countries did and did so in a much more expeditious fashion. The Fed is still not there, as he noted. And yet oil's one component and it is volatile as our food prices, which is why we look at the core measures of inflation to strip out those sectors that may not have anything to do with the underlying rate of inflation in the overall economy. So I've had the passing thought that maybe the goalposts get moved at some point because it is a little bit mealy mouth right now. It's the longer rate, longer run average-ish of inflation should be around 2%.
(07:14):
So could that be, well, okay, two and a half isn't so bad. Maybe we settle in on there. It's not clear. I mean, I think the Fed in general, and I hate to be a Monday morning central banker, but I can't help myself, I think the Fed in general has botched monetary policy in this COVID and post- COVID era, beginning with resorting to the 2008, 2009 policy stance, which was, I think, appropriate given the financial crisis, the seizing up of credit markets, and the whole global fallout from the housing bubble and its collapse. But to redo that exact same policy because of a public health situation, I think most would agree, maybe not the Fed, but it's a mistake. Credit markets weren't seized up. We just freaked out about COVID, shut down the economy, plunged us into the deepest recession since the Great Depression, and also the shortest recession.
(08:31):
After two months, we came a little bit to our census and opened the economy back up and it took off. I mean, it roared back to life, but here we were with zero interest rates, here we were with more quantitative easing, and that allowed and aided and abetted, of course, by a rampant spending in Washington, DC that allowed inflation to take off. And we had 40-year highs in inflation rates. So I blame them for that. I think when they switched into inflation fighting mode, I think they were not aggressive enough. I think that they pulled off the brake too soon. And so now we've been sort of in this limbo and inflation's drifting down, but it never really got to the target rate. So I'm not even sure what I was ranting about exactly here, Gary, but the Fed I think has certainly made some mistakes.
(09:38):
Where they go from here, I think we're going to have to wait for the transition to take over for Powell to step out of the role as chair and I guess see what's happening with the investigation and all that noise that also is surrounding the Federal Reserve and monetary policy. I mean, monetary policy shouldn't be this drama filled. I mean, it should be kind of a boring vanilla thing, but everything that's like a telenovella, it's just so much drama. So once we move past that, and I think his comments you didn't ask, but I'll mention it about staying on until the whole investigation is over. Is that a thumbing of the nose to the executive branch? Is it a smart legal strategy because maybe he has some protections while he remains in the position and maybe access to legal support that you wouldn't have necessarily as a citizen.
(10:59):
So I think who knows what's all in there, but I think once we get past that, then the Fed will do something in the second half of the year, but I just don't think it's going to be dramatic. And quite frankly, Iran can, this could go sideways in a million different ways, and the consequences could be quite significant for the US economy, for the global economy as well.
Gary Siegel (11:35):
So you mentioned Jerome Powell saying he's going to stay on the board until the investigation into him for the building renovations is complete. Do you think that gives a hint into whether he stays on as governor after we have a new chair?
Sean Snaith (11:55):
I think this was sort of the ultimatum like, "Hey, let's get this investigation finished, whatever. We'll choose a different type of flooring and buy less expensive rugs, whatever it takes to get this fixed." And then he'll step away. I think it would be unusual for him to stay on for the rest of his time on the board. It's just you want your previous CEO in the board meeting with you as the new CEO hanging out, maybe judging you or whatever. I think it's kind of awkward. I think it'd be better just to have that transition be a little cleaner. And I think the sideshow with the renovations and the Fed, I think he just wants ... I'm doing mind reading here, but I think he wants that resolved before stepping down, which is probably the right thing to do because if he's got to pay legal fees and continue to deal with depositions and this and that, that could be a major burden for a private citizen.
(13:13):
Yeah.
Gary Siegel (13:16):
So now that we know that Kevin Walsh will follow Jerome Powell unless something crazy happens and Kevin Walsh has a track record, what are your expectations once he takes over? Will he be more likely to cut rates than Powell or just for a while or not at all?
Sean Snaith (13:42):
I think there's got to be a cut. Like I said, one, maybe two, you're getting hired and you're getting selected by essentially a boss that's been clamoring for interest rate cuts. So I don't think you're going to come in and you want to disappoint the boss, independence of the Fed aside, but I also think this isn't his first rodeo. I think markets ... There was some fear when different names were being bandied about who would be the next Fed. I mean, do you really want a Trump Tote running the Fed that's going to just take orders from the White House? I mean, one thing I think monetary economists can all agree on is that you want a central bank that's independent of the central government.
(14:49):
In the most dramatic cases where the central government completely controlled the central bank, you saw devastating outcomes in Germany, Wimart, Germany, and Zimbabwe, just explosive hyperinflation and the economy just collapses. Prices are doubling on a daily basis. Money no longer functions as a store of value. These economies resort back to barter and just devastating consequences. So I think this independence is very important. That being said, I'm back in my armchair central banking seat. Independence should not be an excuse for a lack of accountability. It should not be a shield against criticism. So there's a line here, and I hear the Fed in commentary coming out of the Fed, waiving this independence flag. And yes, it's very important, but hey, you also should be able to ... And more than just the occasional Capitol Hill soundbite shows, there should be some accountability. What was done? Did it work?
(16:18):
What didn't work? And this goes back really even to the financial crisis, all these various programs to purchase collateralized debt, who ran them, how much was made, how much was spent? There needs to be some greater, in my opinion, openness about what the Fed does, how it does it. I understand that it can't ...
(16:53):
Some of this stuff has to be outside of the view of markets when these decisions are being made. But I think after the fact, why isn't everything an open book? The decision's been made. Now let's look at the past. Was this the right one? Why wasn't it? So anyway, back to your original question. Yeah, after Warsh gets in. I think he's probably going to make a cut. The longer in the tooth I get, the longer winded I've become, Gary, I want to just let you know and apologize for that. But yeah, I think he's going to get in there. I can see a cut or two. I don't see right now the case for anything more aggressive. I think the giant oil tanker in the room is what's happening with Iran and where are we going to be? I mean, I don't think many people expected us to be where we are today just a couple months ago, and so who knows where we'll be two months from now and in June when this transfer of leadership takes place.
Gary Siegel (18:07):
So the Fed chair has a lot of influence, but we've seen a lot of dissent in the past year. Can you see a time where Warsh wants to lower rates because of pressure from the White House and the rest of the voters disagree or most of the voters disagree with them?
Sean Snaith (18:31):
Yeah, I mean, I think the Fed has traditionally tried to keep family disputes within the House, that there's consensus building that takes place over the course of the meetings and the lead up to the meetings, but it's not the first time that a committee member has disagreed with the policy decision. In some cases, we've had a few bank presidents, regional bank presidents that were kind of vocal about their disagreement, aired the dirty laundry on CNBC. So yeah, I could see that happening. But I think the reality, and as you know, and as I'm sure the listeners, viewers know, the Fed doesn't control all interest rates in the economy. I mean, they have a tremendous way over short-term interest rates. We get that, but we don't have to look too far back to see in 2024 when the Fed, again, somehow was seeing weakness in the economy that I couldn't quite see myself, but I'm not the sharpest tool in the shed either.
(19:55):
They cut interest rates by a full percentage point. What happened? Well, long-term rates went up. I mean, the 10-year bond, I think went up by about 80 basis points. So Trump thinks, okay, the Fed's going to cut rates now all interest rates in the economy and are going to suddenly go down in concert with that decision. And I hope he doesn't think that, but maybe he does. Who knows? But with this added pressure, with energy prices in the war, the spending that's going to take place or has taken place with the war that's stimulative as well, $39 trillion in debt and still climbing, there's no guarantee that we're going to get movement in long-term rates. And as I said, in 2024, we got just the opposite. So the market, I think, needs to have confidence about inflation, that it is going to continue towards that goal, that it's not going to be unleashed by Iran or any other forces, and cutting the federal funds rate doesn't guarantee any of that will take place, and maybe just the opposite if markets don't have faith.
Gary Siegel (21:28):
When asked about stagflation, Jerome Powell went on missive to dismiss it, saying that we're nowhere near we were in the '70s. What is your view? Are you worried at all about stagflation, Sean?
Sean Snaith (21:50):
Yeah, it seems back to my aging thing, it feels like I've seen all this before. Everything seems to be a rerun. And so yeah, there are some similarities to what the economy went through in the 1970s and what potentially could happen here if this Iran war spirals further out of control. Are we in a situation where I think stagflation is present? No, I don't believe that to be the case. I mean, unemployment rate is still low, historically low, and has been pretty stable with that regard. Now, the hiring has ground to a near hope, but there's no hiring or there's not much hiring, but there's not much firing either. And so the labor market still is a solid foundation for the economy. Consumers who were battered by inflation, particularly middle and lower income households, that paychecks were not covering all their monthly expenses. And even though wages were rising, the cost of living was rising more quickly.
(23:17):
And so a lot of these households have run up credit card debt, which now nationally is in excess of a trillion dollars. And the average rate on these credit cards is north of 20%. So there's some damage to household financial ships, financial positions, balance sheets, but more so middle, lower income class. And the good news is now wage growth, and it's been a while, maybe going on close to a year, wage growth is now faster than the rise in the cost of living. It's faster than inflation. So real income, real wages, as we call it in the biz, are rising again. So that I think can help alleviate a lot of the burden that these households have been faced with and give them at least the opportunity to try to work down some of that debt that they were forced into during inflation. But is it the 1970s?
(24:26):
Again, I hope not. That was an extreme supply shock with the OPEC embargoes. And as many on this call, but maybe not all, remember the rationing of gasoline, the long lines to get gasoline. And even if it was your day, there was no guarantee there'd be any in the pump by the time you pulled to the front of the line. And also back in that time, the amount of oil or fossil fuels per unit of GDP was much higher. Fossil fuels were a far more important driver of the economy than is necessarily the case today. So do I have concerns? Yeah, I do have concerns that the Middle East situation can get much worse than it currently is. And that potentially ... If we see oil at $150 a barrel and gasoline goes up above $5 again, this can start to shake the consumer. This could begin to have more of an impact on the economy than it is right now.
(25:49):
And so then the specter of stagflation, I think, becomes more of a risk. But long answer long, I'd agree with Bao that we're not there yet.
Gary Siegel (26:04):
Which part of the dual mandate are you more concerned about inflation or the labor market?
Sean Snaith (26:14):
I think right now inflation, and again, it's because why aren't we there yet? Other central banks are able to get down to their target rate of inflation. What's taken the Fed so long? And what impact does that have on credibility? I mean, is the Fed not capable of hitting that price stability target? The longer it takes, I think that erodes confidence that they can do it at all. And as we mentioned earlier, maybe the goalposts start to shift at some point, and that'll have implications certainly for markets if we lose that faith and that credibility is diminished. But there's a chance here, we're resetting leadership, so it's got a new coach coming in to run the team. This year's going to be a better season. Maybe some of that could be recovered, but I just am just been disappointed in their ability to get inflation down to its target level.
(27:31):
And I think that's really more important if you want to bring down long-term interest rates than it is for any sort of FOMC cuts.
Gary Siegel (27:44):
Well, if you think back a few years, the Fed spent years trying to get the interest rates up to 2%. So is that just a sign that they aren't as effective as they used to be or are there various other-
Sean Snaith (28:07):
I think monetary policy post-financial crisis has gotten more complex. Back in the day when we're teaching the monetary policy and money in banking class, it was like banks don't hold excess reserves and the Fed can push reserves into the banking system. The banking system turns around and loans them out. And the levers I think were a little more clearer than where they are now. So I think it's a more challenging environment for central banking in general than it has been historically. I think the global links are much stronger and much more rapid than was the case decades ago. So I guess I'm taking it easy on the Fed here after getting kind of harsh earlier. But yeah, I think it's more challenging in today's economic environment, and I don't think it's going to get any easier here in the near term.
Gary Siegel (29:27):
Fair enough. So Sean, what do you think are the implications of artificial intelligence for the economy and for the bond market?
Sean Snaith (29:42):
Yeah, this is back to that. I feel like I've seen this show before. AI reminds me quite a bit of the whole dotcom era, and by no means my expert in artificial intelligence and I don't even have much by way of natural intelligence, but the hype that was part of the dotcom bubble, the media coverage of it, the venture capitalists pushing, the internet was going to change everything. And so we saw, I mean, virtually any half-baked idea that was related to the internet, you could get 10 or 20 million in startup capital. And so the money was flowing and the hype was quite big and loud. And what we saw also early in that cycle was this triangular relationship between the manufacturers of the hardware that ran the internet, the routers, the servers, the fiber, all that stuff, investing in dot com companies, dot com companies then having to purchase the internet service from internet service providers who in turn needed to buy the equipment to ramp up the ability to provide the internet service.
(31:31):
And so a similar thing is happening now. You've got Nvidia, the big maker of the chips and the hardware that runs artificial intelligence, they invested, I don't know how much was $100 billion in OpenAI.
(31:55):
OpenAI then in turn enters into a service contract with Oracle to provide the behind the scenes power to power the AI. And then Oracle, of course, has to increase its capacity. So they place an order with Nvidia to get the equipment to do that. And so that's the same thing that happened during the. Com bubble. That being said, I won't go quite full Krugman. Paul Krugren, who you might recall famously said that he thought the net impact of the internet on the economy would be the equivalent of the fax machine. So I'm not going to go quite that far. I think AI is important. I think it's going to change the economy in ways we probably can't see right now. Is it going to be the be all, end all of anything and everything? I wouldn't go that far yet. I mean, we know these didn't come from the sky.
(33:07):
These AI models are built, they're trained on data, they're governed by rules. And depending on what that data is and what those rules are, AI could be flawed in many ways. So I think right now, I think that it's a lot of hype. It's shaking out. I think it's going to be important. Is it going to put all of us out of work anytime soon? I don't know if I buy that. I see it as a productivity increasing tool. Will there be some jobs lost? Yeah, I think so. I think so. But that's kind of the creative destruction cycle and market-driven economies. At one point, there were people that made a good living, installing and repairing payphones. Well, the cell phone put an end to that. Is that necessarily bad? Well, it was hard for the payphone people to transition. And I think we'll see some of this with AI, but I think right now we're in that super hype phase.
(34:18):
As far as the bond market, now I'm getting a little bit out of my wheelhouse here, but I think number one, the funding of all this investment. I mean, these major companies that are building up all this capacity and issuing debt to finance it, I mean, there's an impact there right away. Then when it gets down to analyzing, trading, I think it's going to be important. I mean, I think that it's a way to take divergent information and process it in ways that we're not much more difficult in absence of these tools that could help traders and investors and portfolio managers pull together and distill a wide variety of information, especially with something that is diverse and heterogeneous is fixed income products. So yeah, I think it'll be there. I think it is changing already just by virtue of supply, bond supply for one. But then as it gets used to do analysis and management over time, I think it's increasingly going to be a driver in that market.
(35:50):
Now, what's the downsides of that? I mean, I don't know. Again, what kind of AI am I using? What kind of AI is this other trader using? Are they similar? Are they different? Are they going to move in a synchronous way that might exaggerate swings in the market? I think that's a possibility as well. But yeah, I think it's having an impact, I think it'll continue to have an impact. I think we're really in the early phase of all of this. And so exactly how this might shake out, I think remains yet to be determined. I think right now it's hard to see through the hype sometimes when it comes to artificial intelligence.
Gary Siegel (36:53):
Do you think the yield curve is still worth watching for clues about future recessions or is that no longer worthwhile?
Sean Snaith (37:06):
I love me some yield curve. We know every recession in at least postwar era was preceded by an inversion of the yield curve. So as a postmortem tool, it's fantastic, but that's only once the body's in the mort. As a predictive tool, it doesn't have that same stellar record. The yield curve has inverted on many occasions and there was no subsequent recession. So I think there's information. I mean, I think prices in general in the economy carry information and transmit information. I mean, that's one of the big functions of prices is to carry information across markets. And so I think movement of the yield curve provides information. Whether or not it's a great predictor as far as when the economy's going to enter into a downturn or not, I think that's beside the point. And when we see divergence between how short-term and long-term rates are moving, that's telling us something about the economy and about what markets think and what markets expect for the economy and the bond market.
Gary Siegel (38:46):
What do you see as the biggest risks to the economy?
Sean Snaith (38:57):
Well, I'm not a doom and gloomer, as I maybe alluded to earlier regarding AI. So I don't see that necessarily as a risk in the sense that it's going to displace a massive number of workers very quickly. I do think there's a risk that this, I'll call it a bubble, but this hype phase of AI is going to eventually end and then there'll be a shakeout and how bad will it be? I guess it sort of depends on how much longer and to what extent this hype continues. I think people are already talking about that, the possibility of the AI bubble kind of bursting here. So I think that's coming.
(39:59):
If I knew when, I wouldn't be sitting in front of a webcam, I could tell you that. I'm a mega yacht, but that is a risk certainly. Again, the whole war situation and the uncertainty surrounding it, I mean, they used to at least come up with reasons to go to war. Now it's just, all right, we're at war with Iran. Why? Oh, I don't know. Nuclear something or other. But that has me worried just because it seems not thought out or at least not explained as to why and what the objectives are, how long this is going to last, and just the real potential to hit some very important economic infrastructure throughout that region and the possibility that could spread beyond the Middle East. So I mean, to me, that's what I'm most worried about in the near term, is the war. In the near to medium term AI, I don't know when that shakeup's going to happen.
(41:25):
They say markets can stay irrational longer than you can stay solvent. So I wouldn't venture a guess as to when the AI shakedown is going to take place. But those are my main concerns really in the short run. Otherwise, again, labor market's on solid ground right now and growth is good. I mean, it's not explosive. I think the numbers got screwed up a lot by the government shutdown, so that super weak fourth quarter number, a lot of that was just federal government was shut down. So that growth should be pushed forward into this year, and I think we'll have a better sense really where the economy is in the second half of the year, at least as far as GDP growth is concerned. And then get past this transition at the Fed. And anything that can bring down some uncertainty, I think is going to be quite beneficial for us and for the US economy.
(42:42):
Right now, I think it's a lot higher than most of us are comfortable with.
Gary Siegel (42:50):
We're out of time, so I'd like to thank the audience for tuning in, and I'd like to thank my guest, Sean Snaith, director of the Institute for Economic Forecasting at the University of Central Florida. Have a good afternoon, everyone.
Sean Snaith (43:05):
Hey, Gary. Thanks for having me.
