Steven Blitz is a veteran Federal Reserve watcher and chief U.S. economist at Global Data TS Lombard, where he specializes in macroeconomic analysis and alternative investments. Now, as Steve joins me to dissect the June jobs report, where the payroll rise was a much weaker than expected, 57,000 workers, he still forecasts an eventual Fed rate hike this year, albeit via a very strategic Kevin Warsh policy path.
Steve sets the stage by chalking up the weakness in June payrolls to a 40,000 worker drop in restaurant workers, caused by big increase in gasoline prices. “Now whenever gasoline prices go up, the initial consumer reaction is people eat out less,” he says.
“With gasoline prices now coming down, people on the road and traveling, I think you get a flip right now in a rebound in hiring and that sector come July,” he says. ”I look at this and I think the characterization of a steady employment market, I think is fair.”
So what does this mean for Fed action or inaction on interest rates now?
”I think it gives Warsh exactly what he wants, which is that he wants a runway to have no rate changes through September,” Steve says.
“Now, come December, you're after the midterms. And I know historically the midterms, the Fed's done whatever it's needed to do,” he adds. “But I think he would prefer his first three meetings not to have to hike rates.”
So dive in and here why a key part of Steve’s Fed forecast depends on what he sees as Warsh’s preferred scenario ahead: of moderate job gains and declining inflation, reminiscent of the late 1990s.
Spoiler alert: Steve sees this as key part of the new Fed’s chair’s strategy: “if Warsh feels like ‘if I can get over the next few months, you know, a 50,000 to 100,000 kind of employment every month... and I’ve got top line inflation now coming down... then at least for the next several months, I can sell my perspective to the rest of the committee. And they can sit on their hands right now.’ ”
High oil prices hurt the restaurant business and workers 00:01:39:12
Well, I think the headline here to me, especially for June, blame it on oil…. All right. Because you see a -40,000 in restaurant workers. Now historically whenever gasoline prices go up, the initial consumer reaction is people eat out less. Right. And we saw a little bit of that in the May retail sales numbers where we saw 3.5% increase in gasoline spending, spending of gas stations and a -0.1% in at restaurants and bars. Now, remember, these are all nominal numbers, right? So you got a seasonal lift. The normal not normal. But I did get a seasonal lift in employment in June at restaurants and bars. Apparently the World Cup and the Knicks were not enough to push that seasonal hiring over the top to get it back to counter the oil numbers.
Relief is on the way? Employment market is still steady 00:02:48:06
And so you ended up with a -39,500. With gasoline prices now coming down, people on the road and traveling, I think you get a flip right now in a rebound in hiring and that sector come July. I think if you just took that retail, I’m sorry if you just took that hiring number and made it zero on restaurants, you get about 80,000 private sector, which is kind of like where we’ve been running. I look at this and I think the characterization of a steady employment market, I think is, is fair.
Wage numbers reflect composition of hiring more than inflation 00:04:04:24
Well, I think the wage numbers, you know, always reflects on who’s getting hired, right. So restaurant workers are real low and worker. So in terms of wages. And so if they drop out that you’re going to get a natural lift up. But 3.5% year over year, you know, it’s almost just keeping up with real inflation. Right. So you’re really getting zero wage increases.
Growth seems steady 00:04:32:04
Most of the gains in spending that we’re seeing are coming from the fact that more people are employed rather than wages themselves, real wages growing. So again, I think all of this stuff adds up to an economy that’s growing around 2%, maybe better than 2% if you’re adding CapEx spending, which you know, you don’t see in these monthly numbers, and, and hiring that, you know, there’s a volatility month to month in all of these numbers, you know, and some of it is just random. And then you get the downward adjustments to April and May
Better headline inflation numbers coming 00:05:27:00
If you look at they all said (in Sintra, Portugal) the same thing, right? Which is that markets fluctuate with the data. Right. And it’s markets just a public opinion polling at the moment. And that the data that you have to look at is a trend and not a particular point. And so and listen this is not new news < Less talk and less central bank guidance>. It may be new news to the current crop of people, but it’s not new news. We always used to look at data on a rolling three-month moving average basis to sort of best understand how the Fed was seeing things. And what we see on a rolling three-month basis is an economy that’s growing around 2.0% -25% with inflation that’s too high, but you’re going to see some really good disinflationary headline numbers, and with the lagging core numbers over the next several months as the jump in prices unwinds – well, has unwound - to a large extent, and I’m going to presume it’s going to stay unwound over the next several months…We’re in the 70s/barrel for oil… or whatever.
A fourth of July gift for Warsh! 00:08:04:17
I think it gives Warsh exactly what he wants, which is that he wants a runway to have no rate changes through September. Now, come December, you’re after the midterms. And I know historically the midterms, the Fed’s done whatever it’s needed to do. But I think he would prefer his first three meetings not to have to hike rates.
Warsh hoping to be able to hang on for a while 00:08:33:00
We all know Kevin. And you know he’s not going to hide from the data. But he does have a perspective here of this sort of late ‘90s growth without inflation. And he feels like if I can get over the next few months, you know, a 50,000 to 100,000 kind of range in employment every month, let’s just say 100,000 a month in employment month.
Top line inflation will fall/ Warsh may rent some time 00:09:01:22
And I’ve got top line inflation now coming down. And then with a lag, the higher energy prices unwinding from some of the, you know, secondary tertiary prices that it impacts, then at least for the next several months, I can sell my perspective to the rest of the committee. And they can sit on their hands right now. And we know, look, we know that he was the dove in the room last meeting...
Family Feud approach… 00:09:38:19
And he talked about the family argument and all that. And I think that’s great, by the way, I am in favor of everyone getting in the room and a lot of intelligent people like-minded in the sense of their objective of what they’re trying the Fed to do, or the Fed to perform in terms of lower inflation and supporting growth and all that.
Debate might favor the let’s wait strategy 00:10:10:16
So they’re all the same mindset that way and arguing the points. And I think that’s and I and I applaud that. You know there’s everything correct about that. But this all helps tilt the argument to Warsh’s side. Now whether later this year or whether 2027 it’s a different story. And he can’t hide and he has to hike. You know I’m more in that camp, right.
The most likely scenario is to string things out 00:10:38:02
But this is not really about what I think the Fed should do. This is really about what I think they will do. And I think over the next couple of meetings at least, you know, if you take a look at the trend in employment, right, and the trend in employment being kind of in this range and this and I don’t see a big trend change in employment in July and August. So and then we know what’s coming on the CPI and the PC inflation data because of the drop in energy prices. Okay. And so he’s got he’s got his runway through September okay. And I think that’s right. Now I think that’s what he wants. And then he gets it later in the year.
And the task forces to come… 00:11:25:05
And he gets a task forces and all that. And we’ll see.
He gets the big bucks for making the tough choices 00:12:37:22
But, you know, you can have a dual mandate. And the problem is, which was something Powell was talking about last year and the year before, where he was talking about the issue, where, well, what do you do if employment is going in one direction, namely weaker, and inflation’s getting hotter. Right. And so how do you how do you balance that?
Everyone must deal with volatility/ for now labor market is fine 00:13:01:12
And he went through a lot of linguistic gymnastics. You know you know there’s press conferences on that. But right now the labor markets. Fine. Right. The labor market is fine. So from a from a look, it could always be better. It could always be this, it can always be that. But there is as I said before, there’s a lot of volatility month-to-month in the data and in hiring and seasonal shift and the seasonal adjustments and the BLS tends to lag that.
The labor market is not exactly where the Fed has impact 00:13:36:00
So I think that if you’re a central banker, you’re going to look at the employment market and say, this is fine, okay. Our issue is inflation right. And so we just need to focus on inflation. But we don’t want to kill employment. And that’s the there’s no left right and center right or center I should say in Washington there is no mandate amongst anyone in Congress or the white House. Right. And that was true when Biden was president. So I want to make sure this is a bipartisan.
No one want to buy lower inflation with higher unemployment 00:14:25:13
There is no there is no mandate to get unemployment from 4 to to 5 two in order to get inflation down to two. No, no one no one wants that. And that was the constraint under which Powell was working. Right. And to a large extent, that is one of several constraints that Warsh is working under.
Warsh promotes price stability not a number… 00:15:37:07
But do you find it interesting that he doesn’t talk about getting inflation back to 2%. He talks about price <stability> right. And that’s true if you look at the mandate that’s the mandate. 2% is not the mandate right.
The Fed’s 2% target- can it call something else price stability? 00:16:03:18
Right. And there was there was some rationale for that for having a target. But the but the point of price stability, as I think Greenspan’s characterized it, is that when inflation is not the reason why businesses and people make decisions, that’s when you have an inflation problem. But if you don’t have that and people are just making business decisions based on and personal finance decisions based on other things, then you have price stability. So if you’re saying it’s an if it’s a hypothetical here, if prices are stable at 3% and the economy is growing at two and a half and unemployment is trending around 4%, right. And let’s say everything is stasis that way. And we know that it’s never really going to be status that way, but let’s just do it for the moment that it is by hike.
Bernanke endorsed slow methodical rate hikes 00:18:31:10
I see, at least for the Fed, that forward guidance as it became much more explicit. Right. You know kind of started when Bernanke put in his rate hikes and he didn’t believe in sharp hikes. He wanted to do slow 25 per meeting and then to some terminal rate. And everybody was guessing the terminal rate. And he would do it slowly. And there was a lot of criticism at the time that you lose some impact when you do it so slowly, because everything, you know, floats, on both sides of the balance sheet. But I think that the real point about forward guidance to me came. As part of the large balance sheet.
Fed needs a large balance sheet? 00:19:18:13
The challenge for me as a central banker with the large balance sheet, right, is having the forward rates set in a way that against the interest that I’m paying on reserves, that banks are not incentivized to take money out of the Fed and go elsewhere with it. Right, because there are now the way I can guarantee that if I’m running, like in the teens, a large balance sheet where I don’t want that money to leave, I need that large balances I need to if I give forward guidance. And say I’m not hiking. If you remember 2021, I’m not hiking for five years. Right. And the street bought into this hook, line and sinker, I never did, but the street bought into this hook, line and sinker. And what that does is it flattens the curve. And now I’ve got these huge balances sitting at the Fed and the banks are stuck.
Powell’s policy 00:21:27:00
And so if I end forward guidance and I end this flood of liquidity at the short end to just keep the stack of rates frozen where I want them, which was Powell’s way of doing things, and that’s what he did. Remember at the end of last year,
Should focus on reaction function 00:21:52:15
So I think that in the forward guidance to me is not a problem. Understanding what the reaction function is, I think it’s something that should be known and will be as time goes on. And I think that he is like I said, I think he is preparing the markets and the banks to reduce the size of the Fed’s balance sheet.
Deregulation is a key part of balance sheet shrinkage 00:22:21:02
And deregulation of the banks is also part of that. You know, it’s not just a one magic wand event. There’s a lot of involved in that.
Different from when reserves were scarce- 00:23:28:06 -
Yeah, yeah, I go back I mean, I go back to the time when we were just watching reserves, when you had a scarcity of reserves against bank lending and then and the funds rate and if the funds rate was getting pushed up high, right, because banks needed reserves, because they were making a lot of loans, creating a lot of deposits that gave you information and you could tell, well, the Fed, what’s the Fed going to do with that?
When bank funding was a signal 00:23:58:17
And the Fed is going to either add or subtract or do nothing. And you read all of this. And the point of the story is, which is a world that Warsh would like to go back to. I don’t know if it’s possible to go back. There is where the banking system is creating the deposits through its lending activity, and that is giving you information, and that is impacting the level of short rates, because it’s telling you how much they need of short-term liabilities.
The reserve market used to tell a story 00:24:31:04
Right now, they’re flooded with liabilities. That’s why they still pay zero on deposits. So it like to see all of that unwound back to where we were and then you don’t need forward guidance because you can look at inflation. You can look at lending. You can look at the positive growth. And all of a sudden you can you can add it up and say, oh yeah.
Market got over its skis 00:25:21:16
Yeah. Because the market got itself hyped up. The idea that the Fed was going to hike maybe in July and definite 50-50. They were hiking in September. Right. And I always thought that that was you know, it’s never non-zero. But I always thought that that was just, you know, the market just spinning itself into a frenzy about something.
Employment report cools expectations 00:25:50:02
And this employment report basically cools that. And then when we get the June CPI number and maybe the headline is a negative or it’s a much smaller number, and all of a sudden we see that the unwinding of it in real numbers start to reverse. You’re going to get more of that coming out. Right. So I think it’s the market sort of getting back into recognizing that, you know, it’s getting hyped up from always going to hike tomorrow, which is how they read his press conference, which I thought was wrong.
Markets handicap and assess 00:27:12:04
I’m not going to tell you that, you know, we were better. The bond market was better in the 90s than is today. So in terms of being, you know, look, the markets are simply is a clearing mechanism, right? So it’s just like a point spread talking about sports. It’s just like a point spread. Right. It’s just it’s just a number where the buyers and sellers clear. So it’s the moment of balance between, you know, both sides of an argument. And reality will every day you get different information and that balance shifts. So people are people. What I would say though, to your question is that it’s going to take a long time, right before markets move from, you know, what’s the Fed going to do with this, to sort of thinking about it from a different perspective, which is what are the numbers mean for inflation and numbers mean for growth and all of that.
Policy is beyond generational 00:28:22:12
And that’s you know, you’ve got you know, think about it. Bernanke came in in 2006. It’s 20 years. So that’s a full generation of traders right. Yeah. And investors. So you have at least one generation. And if you even go back into the 90s where you sort of got this, you know, strong dollar and there wasn’t guidance, but there was kind of guys sort of guidance from, from, from Greenspan in a way. And, you know, now you’re talking about almost two generations. Right. So of, of of of traders and investors. So these lessons are not going to be unlearned in a matter of, you know, six weeks.
Sustainable equity market is the key- 00:29:48:14
So I would say this as long as the equity market manages to stay afloat, because to me that is the critical reactionary reaction function for the fed. Right. The equity market. And I’m not predicting this. I’m just saying if the equity market went down 20% tomorrow, the Fed’s cutting. All right. We know that. We all know that. Right. So if the equity market continues to remain afloat, it doesn’t mean it has to go up 20%. It just means it just has to sort of even if it’s just being range bound is good enough, as long as the equity markets where it is and the economy continues to generate profits and you have a positive curve. So, the banks are more than willing to continue to lend, then I think that by December I think it’s open to him to do a hike.
Less pressure on Warsh after mid-terms 00:30:59:10
He’ll be less subject to criticism from the white House after the midterms than it would be before. And so I think after the midterms come, December, I think it’s the first time he could hike. Also understand the Treasury rolls its debt 20%, 20%, 25% instead every three months. So if he hikes, that immediately impacts interest costs. Right now in total of 4% of GDP, the highest it’s been since the mid-80s. And interest rates are about half of what they were at the time. So that’s a problem. And so this is also a constraint on him. And so hiking is not an option as long as he can get away without hiking he’s going to try and get away with it.
A March hike at the earliest? 00:31:57:09
So I think this is the earliest that I would see a hike. To me, March is the more likely first time. And then and then we’ll see. But again, all of this is predicated on an equity market that manages to stay afloat.
Steven Blitz is the Chief US Economist at Global DataTS Lombard, where he specializes in macroeconomic analysis and alternative investments.
Starting in the1970’s his professional experience as economist and portfolio managers includes work at Data Resources Inc., Salomon Brothers, OFFITBANK, Lazard Asset Management and Chief Economist at M Science where he developed “big data” to underpin his analysis of the economy, central bank policies, and capital market pricing. With over 30 years of experience, Blitz is known for providing unique insights that often diverge from consensus views in the financial markets.
