Steven Blitz has been working on Wall Street since the 1970’s doing everything from creating interest rate and FX derivatives strategies at Salomon Brothers back in the day, to his current position as Chief U.S. Economist at Global Data TSLombard. In other words, he’s a seasoned pro who can look at everything from the Federal Reserve’s likely monetary policy moves to the the federal governments expected lack of restrictive fiscal policy moves to come up with views and forecasts on the U.S. economy and inflation. And the expected resulting moves in the U.S. bond market.
He joins me after the April PCE (Personal Consumption Expenditures) report showed a slowdown in consumer spending in the first month of the second quarter after Trump’s Liberation Day tariffs threatened to boost prices and hit consumer confidence hard. The report also showed that the closely-watched inflation indicators in the report, the headline and core PCE deflators, have edged down a bit to 2.1% and 2.5% respectively.
So after a PCE (Personal Consumption Expenditures) report for the month of April that showed softer consumer spending, which pulled back from hotter March gains, and slightly lower inflation numbers in the PCE deflator data, 2.1% annualized for the headline number and 2.5% for the core, is Steve ready to call for the Fed to cut rates now?
Not at all. As he says, he’s not a fan of the year-over-year inflation rates most often cited in media reports and by economists and importantly Fed officials. “Year over year is meaningless to me. I look at rolling 3 month inflation rates, and they're all sitting between 2 and a half and 3%.”
Steve says tariffs are also clouding the latest inflation and spending numbers. Number One the inflation numbers came out “before the tariffs hit prices… Number Two…you got a slowdown in spending but that…came after a big surge in spending because people were buying in advance of the tariffs
So dive in and hear more about why Steve is not expecting Fed rate cuts now as inflation stops falling, and the economy faces the risk of only a brief recession. And why he doesn’t expect Fed hikes now even if inflation starts rising because officials will blame it on tariffs and opt for a continued wait-and-see stance this year.
And get his take on why he sees a risk of an increase in Treasury bond issuace by mid-summer that leads to volatility as banks try to readjust their expectations and portfolios.
Trump Pressure the Fed Chair? As natural as air 00:02:09.610
The President will always pressures a fed chair to lower interest rates.and I think that's been true ever since the Federal Reserve started in 1914. So I don't think Trump is. He may be unusual in how he delivers the message, but I don't think the message in and of itself is that unusual?
Not a fan of year-over-year inflation 00:02:46.140
…Year over year is meaningless to me. I look at rolling 3 month inflation rates, and they're all sitting between 2 and a half and 3%.. And if you take 2, 7, 2, 8, which is where they are, and you throw them into a Taylor rule. You get a funds rate essentially where it is. In fact, you could even argue that the funds rates a little lower than it should be by, you know, 10 -20-basis points, and not enough for the Fed to do anything.
Fed is in the right spot 00:03:17.610
We have that inflation number before the tariffs at prices. So that's where we are. That's number one. Number 2, yeah, you got a slow down in spending. But that slowdown in spending really came after a big surge in spending, because people were buying in advance of the tariffs. So you can't really read from month-to-month. But on a rolling 3-month basis you could say you're still in this… what I like to call… a time capsule of economic data. Right? It's interesting. You see it. But given all the changes coming, it really doesn't give you much idea over what's to come. Okay? So the Fed's kind of in the right spot.
Tariffs…Supply Shock? Tax on Profits? 00:04:33.090
Well, it's more of tariffs hitting growth consumer. So here's what we don't know. And honestly, firms don't know. Okay. So the way I have always looked at these tariffs. People like say, it's a supply shock. Okay? To me, it's a tax on profits.
What can business absorb and at what consequence? 00:05:05.740
How much of that tax can a business push forward onto the consumer? We are in the process, and they're going to now be in the process of figuring that out to the extent to what extent they can do that's going to determine how much of that margin hit they're willing to accept. And, more importantly, how much, therefore, do they need to adjust payrolls? Right? Because if if my margin is half of what it was. I can't continue to employ the same number of people. I gotta… I’ve got to find a cost someplace.
Uncertainty puts expansion hold 00:06:22.540
Well for now, right? So I think what you could say is that if you're running a business right now, you're not going to be adding workers, right? I mean, you may just as a general sense. Yes, if you're starting a new division or you buy, you know whatever. But you know, from a general sense, you're not going to be adding to payrolls here. And you're right. It's expensive to lay people off, and then, if you're wrong, it's expensive to hire them back, so businesses are at this moment
One type of cost or the other 00:07:19.080
There's no way you can be optimistic on growth and still price in some disinflationary path for prices, so that the Fed's going to still have this runway to just downward the funds rate, as they did say in January, pre. Trump and pre all the tariffs and everything else right? So the fed is more likely. Therefore, the markets are mispriced.
So far so good does not mean everything is fine 00:09:21.350
People are still employed that's still growing. Real incomes are still growing so in that backdrop. Yes, you got month to month volatility and spending tied to tariffs and all that. But the general course of the consumer remains positive and strong. And that's why I said, but that tells us nothing about what's going to happen. 2, 3 months from now, when suddenly they go in a store to buy things. And suddenly things are 4 times more expensive. I don't know if it'll be 4 times. I'm just making <it up> saying something to make a point we don't. We don't know. And honestly, firms don't know. They're going to test.
Gyrating imports and spending confuse the trend 00:14:57.300
You end up with a weaker. Q-2. Now. how weak is weaker? Q-2: It's hard even to say, because so much of the lot, just like with the importers. You got a lot of buying pulled forward into Q-1. So my guess is what you're supposed to do. Come July, when we get Q. 2 numbers is you should average Q-1 and Q-2 for business and consumer spending. See where that is obviously seasonally adjusted over the last 6 months of 2024. And my guess is it's going to be pretty much on target. I'm not trying to forecast a number, but I think it's going to be somewhere in the 2.2% to 2.5% range, and it'll be fine
The quarter of reckoning: Q3 00:17:21.880
But in the 3rd quarter Treasury is going to start issuing debt again, not only to pay for the current quarter, but they're going to start issuing debt to put money back in the savings account, so you could see a trillion $2 trillion, I mean, we'll see what they what he comes up with in terms of refinancing, and that money is real, and that's going to. So now you're going to see upward pressure on yields, especially real yields of that in the 3rd quarter, and you're losing a tailwind to growth. And so this, and at the same time, that's the moment when firms are going to have a much clearer idea of exactly how much they can push forward on these tariffs how much margin they have to eat. They're going to begin to really get a sense that plus we should have some sense of what these tariffs are going to settle on, although I think that might be a heroic assumption.
Inflation problem more than recession 00:19:21.820
Right. I would say that I think that when I look at these numbers the tariff numbers, I've gone from a recessionary view to less, so that, and therefore much more of an inflationary outlook. And I would say, even if we got a recession, it would be very short lived the fed would cut a lot very fast, more than what the market is priced at, and we don't have the imbalances in terms of debt that you would normally get heading into a recession that would make it more of a contraction.
The sun never sets on a popular tax break 00:20:51.760
I've got for the next several years. Okay, nobody should be fooled by this budget. All this idea that you know. Oh, it's only X amount over 10 years. That's because he's sunsetting all these cuts. You tell me, who's going to run in 2028 and say, elect me. And I am going to end this. the the fact that you don't have to pay income taxes on taxes on the tips or overtime. I want to meet that candidate, Republican or Democrat. Okay, these things are not going away so.
On this Fed policy tilt we clearly get inflation 00:21:24.110
We have an increased budget deficit. We have a Fed that's going to be reluctant is reluctant to hike. It's going to look past any jump in prices. It's not going to <hike rates easily>. It'll trigger a cut if there's a reduction in employment. But it's not going to trigger hike if there's a jump in prices, because you can say, Well, this is that one time tariff thing. So you don't want to hit it. Okay? So I've got a Fed that's biased to let inflation run. They already are biased that way. If I look at the 3-month rolling, rates of inflation they're going up, not down, especially for goods, right? They were deflating until the middle of last year, and now they've been steadily increasing. I've got an unemployment rate below the considered NAIRU, the non-inflationary rate of unemployment. I've got an expanding budget deficit and I've got tariffs hitting.
Who will buy the long end? 00:26:05.900
So right now…banks only own about 6% of outstanding treasuries which is high for them. Given recent history, but it's very low, given their long history, and so but to the point about the 10-year, if we want banks to buy more bonds, don't buy the 10-year. Historically, the 5-year is the longest security the bank will buy and given how they have. If you look at their mark to market losses on their securities which the FDIC tracks. and look at that number against their actual P&L. Right. They don't have to report that as a loss because it's an investment account. There's no credit risk. It matures apart. So. But if you look at that, you know, the profits are here, and the losses are here, so the banks aren't going to sit there and buy more fives <five year notes>. where are they going to buy? They're going to buy the short end of the curve. So who's buying the long end?
Fed is back to supporting Treasury issuance 00:31:07.850
After so many years of the Treasury, Fed Accord in ‘51 which basically broke treasury from the fed in terms of the fed supporting. And you know, the financing of the of the government has been erased. We're back where we were. The fed and the Treasury financing are now back, being there, inextricably linked.
Fun, fun, fun ‘til the Fed take the punchbowl away but will it? 00:34:33.170
The Fed's primary role is not inflation and employment. That's an objective. Their primary role is to make sure that markets work, that markets intermediate funds more importantly, that the banking system intermediates funds. And that's their primary role. And if, because of a lack of foreign buyers and a lot of debt, and the market is seizing up and it's not working, that is the Fed's job in concert with Treasury. To make sure these markets, that depositors, in effect, cash is getting allocated out wherever, right? So we'll see fun times.
Steven Blitz
Global Data TS Lombard
Managing Director Global Macro
Chief US Economist
Steven Blitz joined Global Data TSLombard in 2017. He is now Managing Director Global Macro and Chief U.S. economist at the firm
His professional experience as economist and portfolio manager began in the late 1970s.It includes econometric modelling at Data Resources Inc., creating interest rate and FX derivatives strategies at Salomon Brothers, managing US and global fixed-income oportfolios at OFFITBANK, being global head of fixed-income at Lazard Asset Management and, more recently, as Chief Economist at M Science he developed “big data” to underpin his analysis of the economy, central bank policies, and capital market pricing.
Aside from his extensive client-facing work, Steven is a well-known commentator on economic and financial issues, is frequently quoted in the financial press, appearing on TV and radio, and writing guest columns for financial publications.
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