Right.

And what I would argue here is that the market has been saying that if the Democrats have complete control, then it's much more likely that they're gonna be able to get policy passed, and the reason for that is that the Democrats will control the budget, and when you have the budget, you have real leverage.

So if you think about two thousand six, the Democrats won both the House and the Senate.

They went to George W. Bush and they said, "We know you need money for Iraq.

Um, we're against the Iraq war, but we'll give you the money for Iraq.

But in exchange, you have to give us a minimum wage increase.

You have to give us student loan reform.

What do you think here in terms of these, uh, data centers and the election and how that might impact CapEx for those AI spenders, particularly the hyperscalers and the equities of those shops?

So to finish up, what el- what else should we talk about?

Well, I think, you know, there, there's an enormous amount of fiscal policy that's out there right now that I think is underappreciated.

And it's not just, you know, the tax cuts from OBB.

The Fed balance sheet's been expanding since December.

We have $700 billion of new bank deposits that's out there.

I talked about the tariff refunds previously, right? So there's just a lot of stimulus out there, and I do believe that the 10-year yield is moving with these higher growth expectations and less on the inflation expectation.

So very different than what you read in the mainstream financial press.

Is 'cause that's coming through

Uh, how do you expect that to play out? Is the president gonna win and get this bill passed?

Well, we think the bill will wind up becoming law one way or another.

Uh, this is a never-ending drama issue, Kelly.

Uh, this bill was on a pa- path to passage earlier this year.

The president said, "Nope, I wanna put an institutional ban on private equity from owning homes." That process had to restart.

It's taken several months.

It's now passed both chambers of Congress, and I think Emily did a great job of explaining what those options are.

So if he continues to put that first and foremost, what else might not happen or might need to happen?

Actually, th- they shouldn't do any forecasting at all, 'cause they always get it wrong, Dan.

Well, Larry, first, great to see you.

And I, I would just argue that, uh, you have a new chairman, and a new chairman's gonna get immediate reforms in there.

I'll, I'll give you one example.

Vice Chair Bowman put through financial deregulation that's working its way through the process.

That's absolutely critical for Warsh to get his priorities through.

Because if you can unlock all that dead bank capital sitting on their balance sheets, it will allow the Fed balance sheet to start to come down.

Hmm

And now, of course, as we count down to this self-imposed deadline tomorrow night.

That's absolutely right.

I mean, this was one of the biggest events in the five week conflict that we saw play out over the weekend.

I mean, if Iran had gotten control of a U.S. soldier, the level of propaganda that would have been used.

And the narrative here is that the U.S. could be headed for a military victory, but a strategic defeat.

And I think that would have only added to it.

It would have thrown the kind of.

How to think about the budget and where we go moving forward, where spending is going to happen and perhaps just as importantly, more importantly, what it's going to take to get Congress on board.

Um, at some point, I mean, maybe we should just supply them and peace can reign.

Right.

Uh, well first, thank you for having me back.

You know, last week it was pretty clear the president was setting the tone at his State of the Union to do something in Iran, and obviously we got that this weekend.

But I think there's a larger story here.

The president's goals are very clear in terms of what the four things he wants to do.

He wants to take out the ballistic missiles, the nuclear weapons, uh, and, uh, and dismantle the leadership.

[upbeat music]

Right.

It's, it's really ama- if, if you haven't taken a tour down there, it's really worth the tour, but then go in the diner right down the street from the Micron factory that this is all building around.

It's a very MAGA, very, very Trump-oriented diner where you feel the local opposition.

And so what I'm arguing is, what did the energy industry do to ultimately win on fracking? They got ahead of this.

They were able to tout the benefits of it.

They were able to bring out supporters of it, and what we're finding is that the energy industry was way ahead of the debate.

They understood that there was risk.

[laughing]

Is this a trillion dollars we already know about, or is there new, new details, new information, new things in here?

Yeah, I thought the president's speech last night, a theme of that speech was, "We did a lot in 2025, and you're gonna start getting the benefits of that in 2026." So I- you know, he passed one big, beautiful bill.

The income tax rate was not cut, so people are gonna get that in a tax refund as they file their taxes here in February, March, and April, and it's really large.

It's $150 billion of new tax cuts for American workers that they're gonna feel this year, and you have 100% expensing of capital equipment, and R&D, and property, so you're gonna get about $200 billion on the business investment side.

I saw the headline coming out of that reporters' lunch about tax cuts, and my view was this isn't gonna be income or corporate.

They don't have the capacity or the votes to do it.

But will the president put out zero capital gains taxes on inflation-

So first, on Iran.

And what are you thinking?

Well, great to see you, Kelly.

Well, first, this is an unforced error.

The downside was much greater than the upside of being able to do this.

And I always thought that there was an informal agreement since last summer between Trump and Powell that if Powell agrees to leave the Fed when his chairmanship ends in May, then Trump will not bring up the construction project anymore.

And that line was crossed on Sunday one way or another.

And that has all sorts of implications.

Exactly.

Dovish on the margin? And is the market kind of responding? I wonder, even literally the 10-year dropping a bit today, is that because his odds seem to be down in the prediction markets as well?

Well, first, Kelly, thank you for having me on.

I think the conversation we're going to have on the Fed chair is very much related to the conversation you just had with Steve and Diane about what's going to happen on economic growth next year.

And we do anticipate that GDP will accelerate.

We have $400 billion of fiscal policy.

Fed's cutting rates.

It's expanding its balance sheet.

What do you think, then, are there differences on the balance sheet?

But do you know what I mean? Like there's something here where you go, hey, the broader economy is looking OK at this point.

Well, first, Kelly, welcome back.

It's great to see you.

And thank you for having me on.

Thank you.

As you know, at the beginning of the year, we were talking about rates going to 4 percent when they were at 4.8.

Some of that was temporary.

But does the picture look a lot better for 2026, whether in terms of the budget or the economy or other things, or do you still see some problems?

Let's start right there with trade and all of these headlines.

Yeah, so first, thanks for having me on.

I think we're going through a pretty significant couple weeks here on policy where you got trade, the Fed, the shutdown.

But on trade first, if you just think about China, I think there was a risk a couple weeks ago where China was talking about pulling those supply chains on rare earths.

The U.S. was talking about high tariffs.

What you're facing here is a status quo type of an agreement where they're going to delay their rare earth restrictions.

The US is not going to put tariffs in there.

You make the argument that the math is not making sense here the longer we stay shut down.

Our next guest says that's because investors are paying attention to different things in D.C., fiscal and monetary policy, which I think Dan Clifton, head of policy research at Strategas Research, which is a Baird company, both of those are gonna be positive, I think, at least for GDP, aren't they, Dan? There's some serious scratch coming our way in the economy from these things.

Absolutely, Joe, great to see you.

I mean, there's a lot of noise here from Washington and there are some real risks, China, what's going on in Russia.

Those are definitely risks.

But when you look at the pipeline of fiscal and monetary stimulus coming down the road, companies just received $100 billion, the first tranche of the one big, beautiful bill tax cuts for making investments in America.

You're going to get a hundred and fifty billion dollars of tax refunds on the consumer side in February, March and April.

And it's clear now the Fed is more worried about employment than they are about inflation and that there seems to be a Fed rate cutting cycle come in.

Do we just basically freeze the airline? Could that happen near term? That's not good for the economy.

Dan, kind of jump in here and what were your thoughts and what do you think we learned from Warsh's comments this morning?

Well, first, I think he's advocating where the president is coming from.

I don't take positions one way or another.

I just try and take what's in front of us right now.

What I see in front of us is that the Trump administration is worried that the ECB funds rate is about 225 bps over the Fed funds rate.

They would like to get that about probably 100 basis points lower.

They're worried that Powell is going to stay on the Fed when his chairmanship ends in May because he could stay on for another two years and work as sort of a shadow chair against the current Fed chair once they get that slot.

Just talk a little bit about why that could be part of what the president sees and is frustrated with as the Fed and the FOMC writ large and not just the chair.

And why do you think the market continues to completely shrug these headlines off?

Yeah, I mean, if you think about what the president has done in the last 10 days is he's increased tariffs by about $167 billion.

So about a 60% increase on where we were before the one big beautiful bill passed.

And what you see is that the president's imposing tariffs because he believes that he has a cushion now.

In a series of policy victories, he's got this big fiscal policy sterilization.

Stocks are at an all-time high.

He's pressing his bet to be able to get a better deal ahead of those August 1st deadlines.

And I do love watching this play out quasi publicly that are contributing to these market reactions.

I hadn't really thought about, you know, it seems obvious to say, I guess more defense spending could be a problem for the U.S. bill, but seems to be the one area where there's global consensus right now.

Yeah, so Kelly, first, thank you for having me.

You know, in 2003, the Congress was trying to pass a big tax bill right in the middle of the Iraq war, and they cut down the size of that tax bill.

So getting this ceasefire overnight was very, very important because it's taking that geopolitical conflict and at least freezing that, and it's allowing Congress now to debate on the tax bill.

It's allowing the president to continue to push for higher NATO spending at the NATO meeting, where he's very likely going to get that 5% of GDP target.

And I think the key moment here was the Trump-Zelensky meeting that happened in late February, where Europe looked at that and said, we can't rely on the U.S. anymore.

So now we got to do our own defense spending and we got to do our own infrastructure spending.

I mean, those are all so, so politicized, so polarizing.

First of all, does the price tag of the Senate bill come down? Do we know yet?

Well, it's going to be roughly in line with what the House bill is going to be, but the allocation, Kelly, will change.

What this bill does is it makes all the business tax cuts permanent, but it actually gets rid of some of the short-term stimulus for the consumer.

Higher child tax credit reduces no small business deduction at a higher rate of 23%.

So what you'll see is a more level type of budget deficit over 10 years.

But overall, the price tag won't be meaningfully different than what the House bill was.

So they're consistent in that respect.

Speaking of which, on that front, a couple of weeks to go until the tariffs are potentially going back up to those Liberation Day levels.

Dan, great to have you here, especially to dive into this interplay between tariffs and the revenue loss that we might be seeing now, right as they're trying to get the one big, beautiful bill across the finish line.

Yeah, so first, thank you for having me.

I mean, this is a big decision.

At the end of the day, tariffs probably aren't going to change very much.

We think Trump has legal authorities to reimpose these tariffs, particularly through the 1930 Tariff Act.

But now there's a host of uncertainty, and that will have ripple effects until we get clarity on where we're headed, whether there's going to be a stay from the appeals court or whether Trump is going to pursue a new set of different tariffs.

I think the point that you're raising, Kelly, is the right one, is that you get this tax bill coming through Congress just as you got uncertainty around tariffs.

I mean, do you think he is able to kind of keep that revenue coming in by issuing these tariffs in a different form?

And so progress here or what? Do you really think the downgrade will have a big role in possibly holding this up?

Well, anything that moves the ball forward is progress, Kelly, right? And they were able to move the ball forward.

It was done with some present votes.

And I do think that they wouldn't have agreed to move forward unless there wasn't a commitment to make changes.

What are some of those commitments? Possibly moving up the Medicaid work requirements by a year, changing some of the phase-outs of the clean energy provisions.

But as you know, when you make a move one way to secure votes, you could be losing votes in another direction.

And that, with the 30-seat majority, wouldn't be a big issue.

And that deficit went from 8 percent to about 3 percent of GDP by 2015.

And so progress here or what? Do you really think the downgrade will have a big role in possibly holding this up?

Well, anything that moves the ball forward is progress, Kelly, right? And they were able to move the ball forward.

It was done with some present votes.

And I do think that they wouldn't have agreed to move forward unless there wasn't a commitment to make changes.

What are some of those commitments? Possibly moving up the Medicaid work requirements by a year, changing some of the phase-outs of the clean energy provisions.

But as you know, when you make a move one way to secure votes, you could be losing votes in another direction.

And that, with the 30-seat majority, wouldn't be a big issue.

And that deficit went from 8 percent to about 3 percent of GDP by 2015.

And striking a bit more cautious note at this point, why?

Well, you know, I love that comment that the Citigroup CEO just made.

We'll be OK.

Why do we need to be OK? Why can't we be great? Right.

And so we have some challenges in front of us.

This is a pretty large consumption based tax that was put on American consumers.

I'm OK with that as long as you're reducing taxes on savings and investment.

And you're hearing this more and more, that all of these companies and businesses are going, you know what, maybe they'll just punt on all of this.

Dan, where to begin? Is it significant to you that they're able to advance this bill with all the potential blowback right now against the tariffs?

Yeah, I would caution on the blowback on the tariffs.

Obviously, there's going to be messaging issues around Canada.

Nothing is going to pass into law.

You would have to get something passed in the Senate, the House, and then to the president's desk.

And that seems very, very unlikely.

So the cracks are definitely there over the trade policy, but it's not something that I think is going to be reversed.

It's like, first of all, do they still have the ability to pass through the extension or further tax cuts without increasing the deficit and using reconciliation?

And what do you think is brewing?

Well, Kelly, it's so great to be with you.

If you look at the president's election, he won on a campaign of immigration and inflation.

And I think his first day reflected that, that he did not want to step on those major issues.

And that's why he emphasized both immigration and energy yesterday.

He believes getting energy costs down is going to bring inflation down.

And number one was sealing off the border.

Do you think something like that is likely to emerge on the China front? What do you think is going to happen specifically there?