Raoul Pal on Kevin Warsh FOMC rates
Raoul Pal wasn't surprised by Kevin Warsh's rate hike at the FOMC, but he thinks it was a mistake. The real play is winning the political battle to prove independence because Warsh is obsessed with productivity, a theme that's played out in the US in recent memory. He argues we don't measure the workforce or CPI properly, so he wants a productivity workforce and a CPI workforce to fix it. You can see where this is going: Warsh needs credibility to anchor the bull market before letting conditions evolve. If oil stays under $100 and CPI numbers drop, the trajectory shifts downward regardless.
Transcript (en)
I didn't think he should have, but he needs to win the political battle that he's independent. But he, when you listen to him, he is a big believer in this productivity boom. This is his whole game. And it's happened in the US in recent memory because that was the internet. When Alan Greenspan was the head of the Federal Reserve, what Alan Greenspan did was nothing. CPI was a bit hot. Core CPI was not, same as it is today. And Greenspan said, productivity is going to carry it and we won't increase core CPI. And he was right. So we had this massive economic boom. And Walsh is saying the same thing. He's like, I want to have a productivity workforce because we don't measure it properly. I want a CPI workforce because we don't measure it properly. You can see where he's going with this. We've got this biggest capex boom of all time in the middle of it. And it should be a massive disinflationary force. And it's going to drive productivity. So his job now is to get credibility, anchor the bond market, and then allow this to play out. Now, as I said, the year on year rate of change of CPI, if oil stays below 100 bucks, starts falling anyway. So the CPI numbers start coming down anyway, and he's got nothing that he has to prove it just happens. So that's what I think. I think, you know, where is the next 100 basis points of rates? I think it's cuts and not hikes. Could they do another 25 maybe, but on the upside, but I think the larger
