Komal Sri-Kumar got his Ph.D. in economics at Columbia University with nobel Prize winning economist Robert Mundell - known for his work in monetary dynamics and currency areas - as his dissertation supervisor. He started his career at Drexel Burnham Lambert in Los Angeles, went on to work at Trust Company of the West - TCW - for 22 years including his final years there as the firm’s chief Global Strategist, and founded Sri-Kumar Global Strategies in 2013 which he continues to run as president to this day.
So he not only is schooled in macroeconomics and the forces that drive monetary policy making, he has for decades used this knowledge to set investment strategies through the thick and thin of several major Federal Reserve policy cycles. And right now, as the Fed sends signals it is ready to make another 25 bps rate cut at its meeting next week, Sri-Kumar sees policy makers about to make a big mistake.
First and foremost he sees a labor market that far from weakening as so many Fed officials, Wall Street economists, and investment managers say it is, the latest weekly jobless claims falling to their lowest in more than four years is showing that “the labor market…is in no need of monetary stimulus.”
Second he notes that there are growing expectations that many of President Trump’s tariffs may get cancelled by a Supreme Court judgment. If that happens he said not only will many tariffs be gone but also another impediment affecting the employment picture is going to be gone too.
Finally he hearkens back to the words of noted monetarist economist Milton Friedman, that inflation is always and everywhere a monetary phenomenon that won’t be changed by a 25bps- or even a 50bps rate cut under current circumstances
”So you have these issues and what the Administration and the Fed are trying to do is to correct a structural problem by monetary means and that doesn’t work.”
Sri-Kumar goes over many issues, many concerns about where the Fed is heading, the risks ahead, the damage that can be done. Why the Fed’s rate cuts that don’t stop inflation ultimately are hurting lower- and even middle-income households that don’t own stocks and are not benefitting from the stock market rally that helps higher-income households who have the means to invest.
As the world waits for President Trump to announce the person to replace Jay Powell as the next Fed Chair, Sri-Kumar is worried that if the nod goes to Kevin Hassett, widely believed to be the person who is favored now, it will lead to a very divided policymaking Federal Open Market Committee and even a decision by Powell to stay on the Board of Governors until the end of his term in 2028. He predicts moves like this will unsettle investors and at the very least steepen the U.S. yield curve.
And just in case you are a bond market watcher whose focus has turned to the latest surge in Japanese government bond yields, hear why Sri-Kumar says this is a major move that is going to affect U.S. and European bonds too.
Jobless claims fall to 191K… 00:02:21.630
It’s a very clear situation, Kathleen, to me. There is no doubt in my mind that the labor market is relatively robust. Today is even stronger than I had anticipated, but the fact that the initial jobless claims came out at the lowest level since September of 2022 says to me that it is in no need of monetary stimulus. That’s the first part. The second part is there is expectation that many of the tariffs that the Trump administration has introduced may… either all of them or many of them may get canceled due to a Supreme Court judgment based upon their initial results. And if that happens, the tariffs are also going to be gone, and we are also going to have one more big impediment of what is affecting the employment picture. The last point I would make here, Kathleen is there are monetary factors, and as Milton Friedman said, inflation is a monetary phenomenon. On the other hand, employment reacts to other factors, like tariffs, expectations of the people who own businesses. And because you lower the interest rate by a quarter point or a half a point, they’re not going to increase work, hiring, phenomenally as a result of that. So, you have these issues, and what the administration and the Fed are trying to do is to correct a structural problem by monetary means, and that doesn’t work.
ADP weak not decisive: last BLS reading was quite good 00:05:23.270
We have had this… this is a history. The ADP numbers have quite often not corresponded to what you get on the non-farm payroll that comes from the Bureau of Labor Statistics. So this is not the first time that you have this. And my expectation is that I can’t explain why it is that the ADP numbers often get changed when you look at the noun farm payroll. But the non-farm payroll, number, Kathleen, the latest one for September, is up 119,000 jobs. So the government numbers are not suggesting to me any weakness at all, one after the other, and today’s initial jobless claims is another data point here. So I would say even the ADP has shown previously that jobs were created. on a week-to-week basis in a new series that they introduced. So, my guess is this is a number which is just off, somewhat off kilter in terms of where they are. And if you look at the monthly ADP numbers, they go down, and then they go up, and you can’t make a decision simply based on one single data point that they show you.
Fed is behind income distribution disruption 00:07:38.420
I think there is an explanation for the retail sales remaining strong, and at the same time, the lower-income people having difficulty purchasing. How do you put them both together? There has clearly been a shift in income distribution from the lower and middle-income groups to the higher income groups. If you look at the so-called Genie coefficient. Whenever the Fed intervenes, it disrupts the situation. With the Ben Bernanke 2008 quantitative easing start after the Lehman Brothers bankruptcy, what you had was a deterioration in the Gini coefficient. In other words, there was more income distributed from the lower-income group to the higher income groups. Because interest rates that you could earn on your bank deposit was close to zero. And you, as a lower-income person, could not afford to go into the stock market, so the people who invested in the stock market did very well, so the income distribution worsened. And look at when that situation changed. Do you know when?
Inflation also an issue, hurst the poor more 00:08:45.430
After COVID. 2020, when there were huge fiscal stimulus measures that were given, and benefit payments paid. That is when the income distribution improved, and the Gini coefficient showed income distribution actually becoming more egalitarian. So, it is again deteriorating, and we will find that two years from now that that is happening. So, what… why do I say all this? All this means is. Inflation is much more of an issue than we have acknowledged. Lower income groups are suffering more from it. The higher income groups, they don’t care because it is more than made up by stock market gains.
One mandate 00:09:29:390
So, when that is the fact, my point has been that the central bank should focus only on one mandate, inflation. And to look at inflation and employment, you not only cloud up the situation, you muddy up your own objectives, and you don’t achieve anything properly.
Not for rate cuts now/ Fed is Data ‘Independent’ 00:10:42.560
I’m not for rate cuts right now at all, and the reason why the Fed wants to cut rates, and now we are talking about a 90% probability of a rate cut next Wednesday, the reason that is happening is because this Fed is a data-independent Fed. Exactly, Independent! They do what they want, data be damned. It doesn’t matter what the data show you.
Inflation was, is, and will be… persistent 00:11:08.490
And that is exactly what happened. 2020, I wrote in my weekly pieces that Jerome Powell is wrong, and inflation is not going to be transitory. Why? Because there was a huge increase in fiscal spending. Interest rates were lowered to close to zero. And the balance sheet of the Federal Reserve, already bloated after the Lehman Brothers fiasco. Between 2008 and the beginning of 2020, it had quadrupled And then, again, we increased it from $4 trillion to close to $9 trillion between 2020 and 2022. That was, to me, a signal that inflation was going to be persistent. A central bank chairman talking about it and calling it transitory is not going to make it that way. So, the issue here is…once again, this inflation is not going to be transitory, and you asked about what to do about employment. Leave it to the Treasury, leave it to the fiscal side to worry about employment. Let monetary policy focus only on inflation.
Not at all clear what the Fed’s objective is for rate cuts 00:13:39.390
That… but that is not what the Fed has done. They have done two (rate cuts), and they are going to do one more next Wednesday. So, rather than cut once, they cut four times in the last half portion of 2024. And particularly in anticipation of the political, of the November 2024 presidential elections. So that takes me, Kathleen, to say that, one, the Fed is not cutting just once and seeing, let’s see what happens to the ADP numbers if we cut once. They are cut… they’ll be… they’ll be cutting next Wednesday for the seventh time in… in about 14 months. And what are they going to achieve out of it? It’s not clear to me that they are going to offset the impact of tariffs on employment.
Worried about inflation in 2026 00:14:30.690
And if that is the case, the only other impact that those cuts are going to have will be on inflation. And I am really scared about 2026, and what the inflationary consequences of the Fed policy would be. So, we have already heard Jerome Powell call inflation transitory. He may simply make one other statement. I have decided those things simply don’t make sense anymore. Stick to the fundamentals.
Even if Supreme Court kills tariffs the impact will be toxic 00:15:42.170
There are two or three consequences I can see. Let’s assume for a second that the Supreme Court decides against the president and the tariffs. If that… because the initial discussions they have had, they showed skepticism about the government’s arguments, and if they stick with it and they actually do not let the tariffs stay. The president and his team, they are going to try to replace it with some other sectoral tariffs. They are not going to give up and walk away from it. They’ll try to find a replacement. So the impact on the market is going to be further uncertainty. You do not know what the ultimate, landing is going to be for tariffs. If the president is able to find some way of getting it done, some loophole that will be acceptable to the Supreme Court. So, during that period, if I were running a firm. and I have employees, and I’m thinking about whether to expand or not, I’m not going to expand. I’m going to sit still.
Labor market stasis- uneasy stasis 00:16:46.280
And today’s initial jobless claims, Kathleen, supports my expectation. What’s happening here? I am not going to lay off workers either. Because I may not be able to get them back. So, at this time, the initial jobless claims are low, because I’m not letting go of them so easily, but I’m not hiring either.
Rules Vs discretion? or Vs fed employment? 00:17:38.310
If I were… I mean, this is never going to be done by the Fed, so I can… this is my wish list, and I will tell you, and it’ll probably be between you, me, and the watchers, but nobody else is going to do anything about it. And that is, as a student of John Taylor’s for my PhD, and one of my professors, for the PhD dissertation, I am a strong believer in rules, like a Taylor rule.. Do something very clearly, there is no doubt for market players. They know exactly what the Fed is going to do, because they can run the equation themselves. Why isn’t that done? Fed is a bureaucracy. They perpetuate themselves, and all the voting members can go home. You can have a couple of computers there doing that work put the equation in, come out of… let’s see what comes out of it, and we don’t need all of you to be employed and making speeches on TV and to the newspapers. But that’s not what they are going to be deciding on. They want to be in the limelight.
Discretion bounces us from crisis to crisis 00:19:08.180
They want to move interest rates up and down and cost a few roar in the markets, and that’s what they are achieving. They are causing volatility. The Fed goes from one financial crisis to the next financial crisis.
Market has issues with Hasset as Fed chair… 00:22:20.620
I think there is a lot of concern in the bond market about Kevin Hassett becoming the next chairman of the Federal Reserve. Again, rather than look at his past as an economist with different points of view, and not always correct. And remember, just at the eve of the day a dot-com bust. he was looking for the Dow Jones Industrial Average to increase by 2 or 3 times, and that was his forecast, and soon after he said it, the market collapsed. So, we have all made mistakes, he… that is, I wouldn’t hold that against him However, more recently, he has been completely, toeing the line of the president in terms of expectation. And he also knows the experience of what has happened between Steve Mnuchin and Jerome Powell in the first term. Mnuchin suggested Powell to Trump, who nominated him, and was disappointed, and was attacking his Treasury Secretary for having given the choice to him. Now, Scott Besant, I think, is going to be in a similar, unfortunate situation in 2026. Because inflation is going to stay above, well above the 2% Fed target.
Coming soon…a chaotic Fed policy? 00:23:39.290
Any reasonable Federal Reserve cannot keep on cutting interest rates under that situation. But the president cares only about cutting interest rates. And therefore, Kevin Hassett, assuming he’s the next Fed chair, has two choices. Either he keeps cutting interest rates, with or without the support of the entire board, you’re going to have a very divided board in 2026. Even if he manages to cut interest rates, he’s not going to be able to carry a consensus with him. So, you’re probably going to have a 2- or 3-way division at every meeting. That causes confusion and volatility in the market itself.
Or… possibility #2 further adventure in bond-land 00:24:24.190
Second, suppose, on the other hand, he stands firm, rather than toe the line of the president. And remember, 2026 is a midterm election year. And if he doesn’t cut interest rates sufficiently before November, the president is not going to be happy. And you’re going to see him attacking both Scott Besant and Kevin Bassett, sorry, Kevin Hassett, the next chairman, in public for not cutting rates enough. And the markets are going to be essentially roiled by this dispute between the two of them. So that’s what I anticipate for 2026. And it’s not going to be smooth sailing for Kevin Hassett at all. Especially if Jerome Powell continues to stay on the board and does not leave in May. And he stays on the board and expresses his dissent. And like other governors, talks in public and disagrees with the new chairman, you’re going to have a very interesting time in the bond market.
Powell could stay on after term as chair ends 00:26:19.380
Here is the reason why that can happen. Look at the recent history. When the president started attacking Powell intensely, calling him all kinds of epithets, every time, stupid, and the latest being a stubborn ox, which is the latest reference earlier in the week. Despite all that, Powell has stayed on in his job. And he told us famously, it is by law that I am staying, and you simply cannot push me out, you cannot fire me from the job. And so, that being the case, I can’t see him, in May simply walking away completely from the Federal Reserve. Why not say, I’m supposed to be here until 2028 as the governor on the board? And the president cannot fire me. And I’m going to continue to stay. So, in line with what he has done over the past year, it would suggest to me that he’s probably going to stay on and be a thorn in the flesh, in terms of expressing his decision, as well as speaking in public. That is why I think it’s more likely than not…you will have Jerome Powell to deal with for another two, two and a half years.
Powell WILL stay on…& will Speak publicly on his views 00:28:31.140
Exactly. That… you… you summarized it very, very well, Kathleen. That’s my expectation. The new chairman, whoever he or she may be, is not going to have an easy job putting it together. The consensus is not going to appear. And now that we have the precedent of board members speaking loudly and clearly, they go to all different corners of the world to make their pronouncements. John Williams was in Santiago, Chile, when he said he should be expecting… we should be expecting a Fed rate cut in December. And others have spoken from other countries, and whenever they go, the press follows them, and they want to make news. So, if Powell is out of his job as chairman. I believe he will still continue to be speaking, and he’ll be a very frequently invited speaker because of his past. And he’s going to explain himself and his disagreement with, again, assuming Kevin Hassett is the new chairman, his policies and the president’s policies, he’s going to tell you why he doesn’t like them. And the markets are going to be confused as to what… where to believe.
Steeper yield curve/ high long term rates ahead 00:29:44.290
Now, the question is, Kathleen, what does it all mean to investors who are listening to your program? And this is something I’ve said, and I’m feeling my views are getting stronger and stronger by the week. I think the yield curve is going to steepen. They are going to cut short-term rates a few more times with Powell and with the new chairman, or chairwoman, who may succeed him. In that case, the short rate is going to go down, and the 10-year and 30-year yield is going to go up. And Scott Bessent told us that what he really cares about is the 10-year yield, not the federal funds rate. If that’s the case, he’s not going to have his wish. The 10-year yield is going to go up. And today, we found in Japan, the 10-year bond yield went to the highest level since 2007. And you know what happened in 2007? It was the year before the Lehman Brothers crisis, and the failure because it was taking… sucking cash out of the United States and going out of the country. And if you repeat that in first half of 2026, it is not going to be a happy situation to watch, as the capital is sucked out, and Japanese yields going higher are one important factor in doing so.
Tally Ho: Yield curve control ahead! 00:32:09.000
…seeing what has happened to Japan, and seeing what happened to yield curve control. by the Bank of Japan that it failed. And the 10-year yield, which they thought would be… remember, not too long ago, the 10-year yield was close to zero. And now we are approaching 2%, and that is a massive movement in the 10-year yield, because the yield curve control stopped. One of the other reasons that they are watching, and this was part of a write-up that I did a few weeks ago, is If the yield curve steepens in the United States. And the 10-year and 30-year yield go up even as the federal funds rate goes down. Over the next several months then there is going to be pressure by the Trump administration and Scott Bessent working more closely with the new chairman, assuming it’s Kevin Hassett. And the two of them are going to work together to bring back yield curve control, because they want to bring down the 10-year yield. And it is not a rare thing that it is not inexplicable that the last time we had yield curve control in the United States was 1942 to 1951, and we have not had that in almost 75 years.
When yield curve control fails ( as it eventually will) 00:33:34.980
Why is that? The reason is, the yield curve control in the United States was a dramatic failure. The expenditure for the Second World War and the Korean War, which put pressure on the Federal Reserve to keep buying treasuries. To keep the yield at a low level simply did not pay off. And when the Fed got its independence in February of 1951, and went its own way. The yields shot up, and people had massive losses. And that’s why that is another danger to watch as you look forward.
Dr. Komal S. Sri-Kumar is President of the Santa Monica, California based Sri-Kumar Global Strategies, Inc., a macroeconomic consulting firm he formed in January 2013 to advise multinational firms and sovereign wealth funds on global risk and opportunities. Prior to founding the firm, Sri worked at the Los Angeles-based Trust Company of the West (TCW) from 1990 to 2012, serving for the last several years as the firm’s Chief Global Strategist.
He was the Chairman of TCW’s Comprehensive Asset Allocation Committee from 1997 to 2015. The Four-Morningstar rated TCW Conservative Asset Allocation Fund that he was a manager of (TGPCX) was rated “Category King” by the W.all Street Journal for performance as of September 30, 2015. The fund was ranked First among 365 similar funds.
Before his work at TCW, Sri was Senior Vice President at the Beverly Hills-based Drexel Burnham Lambert, and Executive Vice President of DBL Americas, specializing in country risk analysis.
He is a Senior Fellow at the Milken Institute, and was a member of the Columbia University Graduate School of Arts and Sciences Alumni Board. He is a member of the Economic Club of New York. His articles and interviews have been published in the Financial Times, Wall Street Journal and the New York Times. He is often interviewed on CNBC, Bloomberg Radio and TV, and Fox Business. Sri is a contributor to Bloomberg View on global macro issues and their impact on markets (www.bloombergview.com).
Sri holds an M.A. in Economics from the Delhi School of Economics, and M.Phil and Ph.D. degrees from Columbia University. His doctoral dissertation at Columbia University was supervised by Robert Mundell, Nobel Laureate in Economics (1999).
