And, you know, some of the consumer staples were rallying off of this on this idea that you wouldn't see as much in terms of cutbacks and snap benefits or other spending measures.

Well, I think the big threat to the budget was if we had another round of big fiscal stimulus.

I mean, the president, we must remember, ran on a promise of $5,000 checks for every U.S. citizen, which would have been a huge budget buster.

Now, I didn't really think that was going to go through, but even a more modest stimulus, I think, is now very unlikely.

because the Democrats would likely only agree to further fiscal stimulus if it was funded by higher taxes on the rich and corporations, which the Republicans won't agree to.

So you've got this stalemate, this gridlock, but gridlock will probably do more to hold the budget in balance than one-party government would have done.

done.

Is there anything they can possibly do legislative wise to alleviate that?

Are you all in on this being the next industrial revolution? Do you believe that the productivity impacts will be significant? And do you think they are starting to show up today?

Well, we're just in the midst of the finishing touches in our long-term capital market assumptions, and AI features very heavily throughout that.

So AI is affecting productivity in multiple ways right now.

One is simply a surge in capital spending, which is pushing of GDP relative to slow growing labor markets.

So because of that, you're ending up with strong productivity numbers in the last two years anyway.

So that's one part of it.

Second, that capital spending is increasing the capital labor ratio.

When you're looking at markets today, and you're talking to institutional and private investors all the time, are you concerned about the level of exposure and the level of potential earnings euphoria we see in parts of the market around the AI boom?

[laughs]

... not as fast as it feels on Wall Street because on Wall Street we're looking at the AI boom.

Uh, but if you look at the rest of the economy, uh, we've got ...

This is the sixth month in a row in which real wage growth year over year will be negative.

Uh, we've got very little job growth.

We've averaged about 50,000 jobs per month for the last two years, and actually for the last three months also.

So there, there's not a lot going on i- in the, in the rest of the economy.

Right

David Kelly, jump in here.

Yeah, I'm not sure the economy is quite as strong as, you know, we did get a benefit in the third quarter out of balanced inventories after inventories fell for five quarters.

And also we still have the income tax refunds, which actually fed into consumer spending.

But what I think is really interesting here is this 12-0 vote.

That may give people the impression the Fed is really hawkish.

I don't think it is, though.

I think what happened here is that the committee rallied around Kevin Warsh.

David Kelly.

And what about lessons for investors? What are some common takeaways here?

Well, I think one of the things I am a little conscious of is because there's lots of excitement in disaster.

And so what we've had is a long period of rising markets with intermittent disasters.

And it so happens the five episodes we talk about this season are five disasters.

But I am conscious of the fact that if you go all the way back, if you go 100 years ago, go back to the mid-1920s, if you'd invest in common stocks then and reinvested the dividends, you'd have made about 10% per year over the last 100 years, which is extraordinary.

And if you go back over just the last 40 years, you make about 11% per year.

So even though we've had these intermittent crises and there are lots of words of warning in these crises, I think it's important for people to be long-term investors.

And I think in the here and now, we do often get the question, well, do any of these resemble where we are right now? Is there anything that's a bit concerning for the moment?

Is that enough to get it done next week?

Uh, it's, it's very close.

I mean, if we, if we come in a tenth, a full tenth lower than consensus on headline and core, if that happens, then I think the Fed is on hold.

If, if we come in at, um, at consensus, typ- you know, it's a jump ball, and then if we come in high, of course, th- they will raise rates.

I don't think they should.

I mean, I think the, I think the, uh, I think f- first of all, this oil thing, even though we are a net exporter of oil, if you get a lot of oil revenue in, it's helping very rich oil producers in the United States.

It is not trickling down to the average American.

Why do you disagree with that?

What do you make of the numbers we saw?

I'm not shocked.

We get very big bounces one way or the other in payroll employment.

And if you look at the non-seasonally adjusted numbers, we frequently have moves of plus 600,000, minus 800,000.

So over the summer, it's kind of hard to seasonally adjust.

And if you look at leisure and hospitality, And education, employment, those are two classic areas where over the summer you can get a seasonal problem.

So look at the last three months, 70,000 jobs per month.

Going back to your comment on the wage stickiness, how much of that do you think is obfuscated by maybe higher paying jobs in information services and financial services being weaker than those maybe that are lower paying jobs?

I asked Dr. David Kelly, chief global strategist at J.P. Morgan Funds, what he'll be listening for in Warsh's remarks.

Well, I think Kevin Warsh in particular will try not to say too much about upcoming Fed policy.

I think a lot of the big decisions about the Federal Reserve going forward have been relegated to his task forces who are not in a position to report as of yet.

But I don't think he can help giving some indication on Fed policy.

And I suspect he will note some satisfaction that inflation is gradually easing here.

There doesn't seem to be much inflation coming out of the labour market yet.

And if he makes any comment like that at all, I think it will increase the market's conviction that there won't be an increase in interest rates in September or indeed any time this year.

I asked Dr. David Kelly, chief global strategist at J.P. Morgan Funds, what he'll be listening for in Warsh's remarks.

Well, I, I think Kevin Warsh, uh, in particular will try not to say too much about upcoming Fed policy.

I think a lot of the big decisions about the Federal Reserve going forward have been, uh, relegated to his task forces, who are not in a position to report, uh, as of yet.

Uh, but I don't think he can help giving some indication on Fed policy, and I suspect he will note some satisfaction that, uh, inflation is gradually easing here.

There doesn't seem to be much inflation coming out of the labor market.

And if he makes any comment like that at all, I think it will increase the market's conviction that there won't be an increase in interest rates in September or indeed any time this year.

And so o-overall, I think we'll get some forward guidance even from a Fed chair who's determined not to give forward guidance.

What impact have retaliatory tariffs had on the U.S. in the past? Well,

since the start of the trade war, really back early last year, countries have generally been fairly slow to impose retaliatory tariffs in the United States.

You know, tariffs tend to hurt both sides.

They hurt the country that's imposing them and the country upon whom they were imposed.

And so, you know, Canadians don't want to actually make their own economic situation worse by going overboard.

But still, I think they have to retaliate in some way, and I think that they will do so.

Ultimately, I think this will result in a new trade agreement.

How effective do you think these latest moves are going to be in bringing Iran back to the table?

What impact have retaliatory tariffs had on the U.S. in the past? Well,

since the start of the trade war, really back early last year, countries have generally been fairly slow to impose retaliatory tariffs in the United States.

You know, tariffs tend to hurt both sides.

They hurt the country that's imposing them and the country upon whom they are imposed.

And so, you know, Canadians don't want to actually make their own economic situation worse by going overboard.

But still, I think they have to retaliate in some way, and I think that they will do so.

Ultimately, I think this will result in a new trade agreement.

How effective do you think these latest moves are going to be in bringing Iran back to the table?

It makes the mould shine a lot more.

It does.

I mean, the white on the bottom of the legs is just...

The fact that they've gone for that nice deep navy blue and then with a contrast of a baby blue, it just feels more...

I mean, the only criticism you could have is that perhaps the alt mode could have done a little bit of that white on the nose cone, but...

Yeah, yeah, that's fair.

Everything else, I mean, the head looks more defined because there's more paint on the face plate, so you can tell.

the

so consensus for CPI next week is relatively tame, I would say, right? A tenth, maybe?

Yeah, and also, I mean, yeah, we saw that big drop off in gasoline prices.

Now it's kind of half reversed.

But overall, look, inflation is going to come down slowly.

It takes 12 months to fix a year-over-year problem.

And we've got a year-over-year problem, which was really from the start of the Iran war.

If we get some normality through the Strait of Hormuz, and if wage growth stays slower than it has, then inflation will gradually sink down to about 3% by the end of the year, down to below 2% on the one-year anniversary of that spike in May.

And the market doesn't seem to care at all.

wants them to price a rate hike in September and they continue to not deliver it.

But he also wants credibility.

That's exactly the way to destroy credibility.

So I think he's going to have to – he's got an interesting dance at this press conference.

He's going to have to try and explain why, if they really want price stability, they still see wisdom in not – I mean, I agree they shouldn't be cutting rates, but not by his framework.

His framework says they should be raising rates at this point.

And he needs to explain why that is.

In other words, so I'm just curious when we talk about this, one of the things that makes it so hard when it's the price of oil and when it's the lagging effect of all these increases, it takes longer for the market to work in certain areas than it does in others.

How is the economic data we've received since the last FOMC meeting in mid-June playing into the Fed's decision-making process this week?

Well, I think it is important.

We've seen a slowdown in job growth.

So we saw slower job growth in June than we'd seen in May.

And that's one thing.

And then we also saw inflation come down a little faster in the June reading than they had thought or we had thought.

So overall, the numbers show a little less inflation pressure, a little less economic growth than the Fed was seeing in the middle of June.

What is so special about the Fed's 2% target when it comes to inflation?

How is the economic data we've received since the last FOMC meeting in mid-June playing into the Fed's decision-making process this week?

Well, I think it is important.

We've seen a slowdown in job growth.

So we saw slower job growth in June than we'd seen in May.

And that's one thing.

And then we also saw inflation come down a little faster in the June reading than they had thought or we had thought.

So overall, the numbers show a little less inflation pressure, a little less economic growth than the Fed was seeing in the middle of June.

What is so special about the Fed's 2% target when it comes to inflation?

What do you think they've learned from their experiences?

Well, I think one thing that's happened is that over time, the Federal Reserve has gotten much more power.

Uh, so you know, if you go back to the 1929 crisis, they really couldn't do anything.

I mean, they weren't, uh, they could...

They, they made loans to member banks, but they weren't really involved in Wall Street at all.

Um, they had, they didn't have any ability to, uh, set margin requirements.

That didn't come until the 1930s.

Yeah.

Well, you know, what's your take on all this interplay with the economic data we got today, what it tells us about the macro and then how the markets are digesting it?

Well, we've got an economy of tremendous divergence.

I mean, the employment report today was a reality check from the real economy.

And this is a tortoise of an economy.

We're seeing low growth.

You know, the Glanta Fed is down to just over 1% growth for the second quarter.

I think that's probably about right.

So, you think today's print puts rate hikes off the tip?

As you were recently sitting down to write our U.S. Economy and Global Economy section, what struck you as the most surprising thing versus what you had written for the year ahead outlook?

Well, a few things.

I think a good way to look at it is at the start of the year, my forecast was 2024, kind of like it was two years ago, which is 2% growth, zero recessions, inflation running at about 2%, and unemployment ending the year at about 4%.

Halfway through, I'm sort of a decade later, I'm 2-0-3-4.

I think we'll still average about 2% growth for the year.

I think we'll still avoid a recession, but for reasons which we'll get into, it looks like inflation will be hotter, so maybe 3% year-over-year on inflation by the end of the year.

And I still think the unemployment rate will come down to 4%.

And David, to wrap things up, when you were writing the global economy piece, what stood out to you in terms of the rest of the world growth, inflation, central banks, and what you think that means for the dollar from here?

Yeah.

I think we'll still average about 2% growth for the year.

Uh, I think, think we still avoid a recession, but for reasons which we'll get into, it looks like inflation will be harder, so maybe 3% year-over-year on inflation by the end of the year.

And I still think the unemployment rate will come down to four.

And in the midst of, you know, with that changing forecast, what really m- move the needle here, I think there were three things.

First of all, income tax refunds weren't quite as strong as we thought.

Now, they were up 18% in terms of the total value of refunds paid out this filing season relative to last year.

For more information on the guide, visit our website at jpmorgan.com/gtm

But how do you expect Walsh to do today?

Well, I think he's going to try and bring consensus, actually, even though he says he likes a bit of a fistfight.

I don't think he really does.

I think you'll see a 12-0 vote in favor of what they do today, which is going to be no change.

I think you start with a summary of economic projections.

The summary of economic projections relative to March is going to say stronger growth.

It's going to say higher inflation.

David Kelly, what are your thoughts?

So is remote work sidelining younger workers? Does that track with what you're seeing in the labor market?

I think it adds to the problems that younger workers are facing.

Uh, we've known ever since the pandemic that while more experienced workers can work from home with less supervision, it was really very important to have the youngest workers, the, the analysts and the, and the research assistants in the office learning the culture, learning from each other.

And so I think a lot of companies are just much more reluctant to hire people fresh out of college, uh, and have them work, uh, from remote locations, and I think that's just adding to the problems that younger workers are having.

And why would that be? They just feel like they can't train people if they're remote?

Well, that's right.

I mean, there's a lot of stuff that you learn intuitively fr- from the office, watching other people doing things, uh, a lot of work habits in term- you know, when you clock in, when you clock out, do you get distracted? Uh, and also just the, the ability of companies to sort of know who they're dealing with and, and what they're dealing with.

And the, the problem is that for younger workers, it's very often their first job.

Right.

And I think that's really important.

I mean, for, for the economy that matter- matters to everybody else, it's, it's, it's bread and butter in terms of, you know, what's, what's my income, uh, how con- how safe do I think my job is, um, you know, what, what's the, what's the rate of inflation? These are the things that average Americans worry about.

But for the market, it's about profits and interest rates, and if you've got strong profit growth and low interest rates, then, then, uh, it's okay.

Now, for consumer sentiment, it is very low.

We hit an all-time record low, uh, during the month of April.

Um, but I think that's partly because of just a trend we've seen for, for a number of years here, where social media is just making people more and more angry and more and more depressed.

And do you think that's a move a lot of investors have already made, David, kind of readjusting portfolios after a very concentrated performance in US equities, or still kind of offside?

David

Kelly.

Well, I think this is a renewed declaration of independence.

I think it is a shot across the bow, as did Kevin Warsh, and it's really saying we're not going to have a situation where consensus is going to just follow the leader here to impose rate cuts which simply aren't justified by the data.

But I think the fact that they took the trouble to dissent really tells me they want to make it clear to the incoming chair that they really don't see a reason to cut rates right now.

They want to send that message out quite clearly in case it's assumed that they will simply acquiesce.

Does it seem to me would make it harder because the Jeff's point, he's coming in to kind of a kind of an angry

family.

And I suppose if it's not inflation prone, is that because you don't see the consumer as being sufficiently robust to drive that demand side inflation? Is it because of deflationary forces that have really been around for years that come and gone? Or are other factors behind that?

It's three big deflationary forces that have been operating over time.

So the first of them is that since the 1980s, the income distribution in America has been getting more and more and more unequal.

The top 10% of households, they control 75% of the wealth.

They control by one measure, 50% of the income.

And that chunk has been getting bigger and bigger and bigger over time.

Now, why is that important? Because the big difference in the consumer behavior of the rich compared to everybody else is the rich actually save some money.

Any thoughts on that rotation from large cap into mid and small?