Will Fed Hike Rates This Year, Crash Markets? Economist Reveals Next Move | Komal Sri-Kumar

[0:00]It's Wednesday, April 29th and the FOMC held rates steady today. Today, the FOMC decided to leave our policy rate unchanged. We see the current stance of monetary policy as appropriate to promote progress toward our maximum employment and 2% inflation goals. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook, and we will remain attentive to risks to both sides of our dual mandate. During the press conference, the S&P 500 rose 0.28% and the QQQ rose roughly 45 basis points. Bitcoin rose 75 basis points, despite the S&P and Nasdaq falling intraday. Now, the 10-year yield shot up about 45 basis points, immediately gave up the gains before the speech concluded by Jerome Powell. We'll talk about why the Fed did what it did, go over some important highlights of the FOMC press conference, as well as give an outlook for the economy. Now with our next guest, Komal Sri-Kumar, President of Sri-Kumar Global Strategies. Welcome back, Sri. Good to see you as always. David, good to be back with you. Always an interesting discussion. Always interesting things to discuss with you, Sri. Today's meeting was marked by the highest number of dissents since 1992. An unusually divided Federal Reserve held its key interest rate steady, was one of the key talking points or headlines from CNBC today. We had four members, four dissents. And this has been something we haven't seen in the last 30 something years. 8 to 4. What does this signal to you? Two things. One, as you correctly said, David, we have not had so many dissents since October of 1992. So it's a very rare event. Second, one of the four dissents is going to disappear soon. That is going to be Steven Mnuchin, who is a former adviser to Trump on the economic side, and he will have to give up his governorship soon so that Kevin Warsh can take that position. Since we have heard that Trump that Powell is not going to leave, you are going to have the two, three other people who dissented, who did not want to say that interest rates are more likely to be cut in the future to keep it open. Those three regional bank presidents are going to stay. What does it signify? You have a situation where Kevin Warsh has said in the past that he would like to break heads in the Federal Reserve. He wants to change the way they do things. And so these three people are giving him a signal that you cannot take them for granted. They are not going to simply go by and he cut rate in the future as President Trump wants. So as far as Warsh is concerned, he has to see how he can deliver to Trump on his promise to cut interest rates, even as three, at least three, regional bank presidents disagree with him. So this is what happened. This is from CNBC. Like you said, Steven Miran voted or dissented. The other three no votes came from regional President Beth Hammack of Cleveland, Neil Kashkari of Minneapolis, and Lori Logan of Dallas. They said they agreed with the hold but did not support the inclusion of an easing bias in the statement at this time. Uh this was the statement. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

[3:44]It sounds like according to this article that the no votes come from the fact that they don't want the Fed to even consider easing, not that they don't necessarily agree with the hold to begin with. So, does that tell you that the Federal Reserve is going to remain very hawkish for the foreseeable future, Sri? What it says to me is not so much that the Fed is going to remain hawkish, David, as much as there is going to be a lot of opposition to Kevin Warsh in terms of his wanting to cut rates. Okay. So if if he is doing that and three members are going to vote in the future not to do it, and since he will not have any other person joining him here, keep in mind that Lisa Cook, another governor who President Trump has tried to remove is still on the board. She's probably going to vote against Kevin Warsh, so he's going to have a difficult situation getting a majority together to cut rates and that is where I think the real problem is going to come. a lot of dissension in the future fed. Why would Kevin Warsh want to cut rates? Are economic conditions necessary for him to cut rates? Uh Kevin Warsh repeatedly has said since last September that he wants to cut rates. And Trump said he chose Warsh only because he wants to cut rates. And if he had said that he is going to raise rates, Warsh would not have been chosen. So, if Warsh goes ahead and changes the tune again and once again says, "Oh, I think I should keep the interest rates high, or even raise them with oil prices going up," the President is going to use all kinds of epithets with him, uh call him a moron, call him stupid, as he did with the outgoing chairman. That is the risk Warsh runs. He's not in a safe situation either way, whether he decides to abide by what Trump wants, or whether he wants to go with the remaining members of the board. Let's assume Kevin Warsh is not selected by Trump because of his, I guess, fealty or loyalty to the Trump administration. Let's just take this for at face value. Should the next Federal Reserve Chair consider rate cuts in today's environment, Sri, according to your analysis? According to my analysis, the next chair should not be looking at it. I have been writing in my weekend write-ups that the even before the Iran war began, David, that the Fed should consider potentially increasing the interest rate. And the reason for saying that is that they have not met their inflation target even once in last in the last five years. And 2% inflation target is essentially a mockery. It is never been met. They keep repeating it every time as if they have somehow going to go back to it. And instead the inflation is moving away toward the three to three and a half percent range. So it is for that reason that I think the Fed has to be very careful how to deal with it. Before inflation expectations get carried away and they can't bring it down again. Before we continue with the video, let's talk about your most important asset, your personal data and privacy. Now, your personal data is constantly being collected and sold and exposed online from places like shady data broker sites and even big data breaches. So, your private information like your name, address, and phone number is out there on the internet and it's easier to find than you actually think. That's why I recommend today's sponsor DeleteMe. It takes a few minutes to set up and they handle the entire process. They find where your information appears, verify those listings, and submit removal requests to hundreds of data broker websites. They also continue monitoring over time, since this data can resurface and reappear. I've been using it for over a year, and they have reviewed over 325 listings for my information. The reports show exactly what was found and what was removed, which makes the process transparent. Check it out now. Scan the QR code on the screen or go to joindeleteme.com/davidlin. Link in the description down below, and use my code DAVIDLIN for 20% off. Take control of your privacy today. Now back to the video. What other Fed tools are at their disposal for easy monetary policy should the other Fed governors vote to not lower rates? Can they do anything else to maintain easing? There are two major instruments. One is the rates increasing or decreasing. And second is what the Fed does to the size of its balance sheet. Whether that is going to be increased or decreased with the passage of time. An increase in the Fed's balance sheet is considered to be an easing of policy. It typically goes hand-in-hand with a cut in interest rate. Whereas a reduction in the balance sheet, which is to say the Fed steps into the market, and then says that they want to sell their securities and take in cash. That is considered contractionary or a hardening of policy. Now, what Kevin Warsh has said is that he will make up for the lower interest rate by reducing the balance sheet of the Federal Reserve. Keep in mind what it is suggesting to you. Every time the Fed has tried to cut in to cut the balance sheet, it has happened twice before. Once in September 2019 and a second time in March 2023, that they ran into difficulty with the cash shortage, a regional banking crisis. And they quickly had to revert away from quantitative tightening or balance sheet reduction to increasing the balance sheet again. Right now, this Fed, the outgoing Fed, is actually increasing the balance sheet of the Fed. And you are going to have Kevin Warsh coming in and reduce it, and the reduction typically gives rise to cash shortage, because all the financial institutions are got used to a very easy Fed. And they also know that they will get bailed out in case of difficulties as happened with the March 2023 banking crisis. All the all the depositors were bailed out of Silicon Valley Bank, not just once who were protected by the deposit insurance. I want to play for you a few clips of the FOMC, uh, conference itself, but let's talk about, before we do that, let's talk about Kevin Warsh a little bit more. Uh it's been brought to public's attention during the, uh, the hearing, uh, Kevin Warsh's confirmation hearing. He was pressed several times about his family's relationship with Trump. He's married to Jane Lauder, who is the daughter of Ronald Lauder, billionaire heir to the Estee Lauder Empire. Ronald Lauder and Trump go back decades. They've been personal friends. Lauder has personally sponsored and donated to the Trump, um, uh, campaigns. And so now the question is, is the Fed truly independent? The President literally appointed or nominated the son-in-law to a personal friend of his. Well, you can always have relationships because in camp you do nominate campaign contributors, for instance, David, as an ambassador to a country to plum jobs. That by itself would not say to me that Kevin Warsh is not going to be an independent person. But I look at his past. I look at the fact that in 2010, 2011, when he was a member of the Board of Governors, he was very hawkish. And in September of 2009, when we were still suffering the aftermath of the global financial crisis, and when unemployment rate was still quite elevated, he was criticizing the Fed of which he was a part at that time for actually increasing the balance sheet and thought that the balance sheet should be reduced. That is a very hawkish position to take for him in the midst of the crisis. But last year, he completely reversed and said Federal interest the interest rates of the Federal Reserve Board has to be reduced. Now, how did he come to the conclusion? Very conveniently, it was also the position taken by President Trump. So, he has to get over the fact that he's not independent, because of the fact that he changed his position. He has to convince everybody that it was not career advancement, which lead him to change his mind, that he really had a reason to do so, and he has yet to prove that point. Let's play a few clips from the press conference from reporters. This one goes back to what I asked you earlier about whether or not the Fed is now more hawkish. Uh you answered that, but let's hear how Jerome Powell answered that. Take a listen. Are we right to assume that the hawkish outcome for the Fed is still one in which the committee just extends the pause in rate cuts? And to what extent is there a growing sense within the committee that monetary policy really isn't just restrictive at all right now? Um the economy is holding up relatively well despite this major energy shock, the unemployment rate has ticked lower, inflation was moving sideways even before the war and is now moving higher. Um so so where is the committee at on that debate?

[19:30]I think that you know, the the center is moving toward a more neutral place. And that's sort of what markets are saying too. I just think, you know, uh there's a lot of signaling going on when you change guidance like that. And so we we just I guess the a majority of us didn't feel like we needed to send a signal on that right now. Uh and but maybe it'll come to that. And the reason is because, you know, we're kind of waiting to see what happens with with events in the Middle East and what are the implications of those events for the US economy. So there was just a there's a group who feels like we don't need to be in a hurry to do that. We we get it. And of course we will move to a hiking bias if we want to hike, and we'll move to a new a neutral bias before that. But that was a difference over whether to do it at this meeting, at at a meeting at which all but one of us agreed that that the that the rate decision was correct, which was not the move.

[25:26]Would you agree with that assessment, Sri? I will if if that is the case, if Jerome Powell seriously believes that, why is it that toward the end of 2025 they cut interest rates? They reduced interest rates three times because Powell said at that time that he's more concerned about employment than inflation. Turned out to be once again, a wrong assessment. Inflation was the problem, employment was not. Now, he himself says that the economy is very strong. Employment is he considers as acceptable, then why is it that interest rates are not being increased in order to bring the inflation down to target? Because the Fed has essentially sidelined its inflation expectation, put it aside because they can focus on growth, and that's not what the Fed is supposed to do. Well, speaking of growth, this is the Atlanta Fed GDP Now. It's currently at 1.2% for the latest, um, estimate for 2026 Q1. And it'll be updated, um, by tomorrow. It's down sharply from previous numbers, as you can see. Now, important to note that Chapter 11 filings across the country have also risen something like 37% year-over-year. At what point would you start calling this a recession, Sri? Um, well, recession, technical recession is supposed to be when you have two quarters back-to-back of negative GDP growth. Whether they actually reach it or not, there is a slowdown that is coming. But here is the response to what you showed about the Atlanta Fed estimate, David. That is happening because of tariffs. It is happening because of the Iran war. And when you have those present, I don't think you can offset that simply by cutting interest rates. That is what we tried to do in the 1970s. Oil prices increased very sharply from 1973 onward. President Nixon, along with Arthur Burns, the chairman of the Federal Reserve, wanted to follow easy monetary policy in order to counteract the impact of higher oil prices. Effectively, what happened was, it pushed you into a recession which was very severe, and at the same time, pushed up inflation as well. That is the risk that we want to avoid in the current situation. Let's move on to talk about the Iran war itself. The the fact that the economy, as described by Powell, has not, um, is still quite resilient. Why do you think that is? People have been talking about how higher oil is going to cause demand destruction. Powell commented that the latest consumer spending numbers are still strong. Why hasn't the consumer collapsed or faltered yet? Uh it is not true of consumers as a whole. There is clearly an income distinction. The high level income and the super high level earners are actually doing very well because the stock market is been going up, and they have enough cash to spend on luxury goods and they are doing very well indeed. If you look at the lower and middle-income groups, they are actually suffering the impact of higher prices. They are suffering the impact of the fact that employment has become harder to get. So the difference is that overall consumption spending is large, but that is being pushed by higher income earners. And so I would maintain that right now you do have the consumer week at lower income levels. It is already showing up. So summing up what you think the Federal Reserve is going to do and how the economy will progress in the next couple quarters into 2026. Let's talk about some asset price performance expectations. Starting with bonds, do you expect the long end of the curve to continue going up, Sri? Um, I think if if in fact, as I expect, Kevin Warsh at his first meeting in June, is going to show that he's not cutting rates. He might, if he were to say, "Well, I'm watching it. The oil prices are higher, but I think I will cut in the future, but I'm not going to do today," the bond yields will probably stabilize for that reason, because the bonds are expecting him generally to be very dovish. If he's not dovish and he actually says he's going to pause, that's going to be good for bond prices. It is going to keep the bond yield down. However, if he finds that the President is pushing him to cut rates immediately, and he maintains as he has said when he was looking for the job, that cutting the balance sheet will make up for lower interest rates, then the 10-year yield is going to go up. So the answer to your question, I will be watching until his first meeting. I'll watching I'll be watching for his press conference. And if he again indicates that he's ready to cut interest rates, then I think the long end is going to go up in terms of yield. The Michigan consu uh University of Michigan Consumer Sentiment Index is at an all-time historical low. Do you expect consumer spending, which has thus far been quite resilient, at least for the upper end of earners to to taper off a little bit? And if so, would that mean less discretionary spending and weaker discretionary spending stock performance? The upper end is probably going to continue to do well because they have enough of cash reserves. They are not going to be affected. The Michigan sentiment that you pointed to and you're showing on the screen actually reflects what the majority of the population, which don't earn too high an income, how they are fairing. And I don't see the Michigan sentiment index moving up, but at the same time, I expect consumer spending to be strong, which is what we have seen in the recent past. People say, "How do you put the two together?" Because one of them refers to the high-income group, the other one refers to the majority of people and how they feel about their living. And what about precious metals, Sri? Move down during the start of the war, uh so didn't react as some people would expect as a safe haven asset. What do you think sentiment towards gold will will be for the rest of the year? The it once again I would have to differ and say I have to wait to see how Warsh behaves in his first meeting. Let's say that he says he's not going to cut interest rates and he doesn't expect to cut rates at all in 2026. If he does that, gold price may incur more of a hit, may go down further, because the dollar becomes an effective competitor to gold. People can say, "I'll go into Treasuries. I will go into US dollar-denominated assets to take refuge. I don't need to go for gold." The reason why gold was doing well in the second half of 2025 is the push at that time. For interest rates to remain low indefinitely, and the President's criticism of of Powell for his for keeping interest rates constant, they were causing gold price to go up. And the question is, does Warsh continue with that policy, or he if does he show as somebody said, show a backbone and he's going to show some strength? That will cause gold price to go down. So this is something you keep watch for the Fed's behavior before you decide on gold. Okay, and finally on the stock market, the S&P is at 7,100 points. This is the, um, this is an all-time high. Stock recovery since it went down following the start of the Iran War. Now, Powell alluded to data center construction as being a significant part of investment income for companies. Do you expect AI and data center investments to continue pushing up the stock market for the remainder of the year? I have concerns because I I lived through the 1999 situation, when you had the dot-com boom. And people said, any company with a dot-com after it, nothing can ever go wrong with it. And then you had the stock market collapse starting about March of 2000, and we had the recession of 2001. What is the parallel here? Uh data centers are going to do well, AI is going to do well, but not everybody who calls himself for a data center is going to do well. And that is similar to what we had before. There's an excess of investment in data centers, excess of investment in artificial intelligence, and quite some of that is going to be wasteful. And so I think security selection is going to be very important. Another way of saying, the whole asset class is not going to do well, only some of them will. And that is going to create a problem as well for investors and for the overall stock market. Any particular sectors you think might do better, uh considering Fed policy, which we talked about, considering the ongoing war in Iran that has not yet been resolved, considering higher oil, what would you overweigh in the S&P? Uh in energy, I think it has clearly moved, uh, leeway to go up, because oil prices are going to increase further, so I think they are going to do well. Uh if the war continues, defense related industries again should do um to should perform better than the others. Other than that, I would say look at basic value stocks. Health care is an area which should do well. Um, technology AI, be very careful where you invest. They've gone up substantially and they are the ones who can be vulnerable to a decline. Thank you very much, Sri. Tell us where we can find your work and, uh, what you're working on right now. Um, well, on Twitter or X, I go by @SriKGlobal. And then I also put out on Substack called Srikinomics every Saturday. And this deals with the Fed and interest rates. And that's something for your listeners also your watchers are to follow as well. All right, excellent. We'll put the links down below, so please do make sure to follow Sri-Kumar and, uh, his Substack and writing there. Thank you very much. We'll speak again soon, Sri. Take care for now. Thank you, David. Good to talk with you as always. Good to talk with you as well. 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