Fed Is Missing the Recession – Massive Policy Error Ahead | Danielle DiMartino Booth

Summary

Highlights

• Fed Chair Jerome Powell's indecisiveness on whether to prioritize inflation or unemployment is causing uncertainty 🤷‍♂️.
• Current economic models aren't reflecting the real-time struggles on Main Street 🏘️.
• Danielle DiMartino Booth predicts multiple rate cuts ahead due to labor market weaknesses 💼.
• Soaring bankruptcies and faltering commercial real estate indicate deeper financial troubles ⚠️.
• The Fed's inaction might lead to significant policy errors, harming the economy further 🚩.

Key Takeaways

• The Federal Reserve is in a fog of uncertainty, unsure whether to tackle inflation or unemployment first 🤔.
• Recession fears are mounting with the introduction of Trump's steep tariffs 📉.
• There's a disconnect between the Fed's model-based forecasts and on-the-ground economic realities 🌍.
• Danielle DiMartino Booth argues that rate cuts could be necessary due to the weakening labor market 🏦.
• The Fed should pay more attention to its internal surveys and the increasing signs of economic distress 📊.

Overview

Chapters

• 00:00 - 00:30: Introduction In the introductory chapter, host Jeremy Saffron discusses the Federal Reserve's current status amidst economic ambiguity. Fed Chair Jerome Powell expressed uncertainty about the central bank's next focus, whether inflation or unemployment, while interest rates remain steady at 4 to 4.5%. The complexities are further compounded by fluctuating tariffs and legislative developments underway in Congress.
• 00:30 - 01:30: Powell's Uncertain Stance In 'Powell's Uncertain Stance', the transcript reveals a sense of indecision regarding the prioritization of dual mandates at the Federal Reserve. Powell acknowledges that both risks to higher employment and inflation have increased since March. However, he does not commit to which of these issues will require more immediate attention, indicating ongoing uncertainty in determining the focus of monetary policy adjustments.
• 01:30 - 03:00: The Fed's Forecast and Economic Indicators This chapter discusses the uncertainties surrounding tariff policies and their potential impact on the economy, growth, and employment. It indicates that until there is more clarity on tariffs, the Federal Reserve believes its current policy rate is appropriate. The policy is described as modestly or moderately restrictive, being 100 basis points.
• 03:00 - 05:00: Implications of Fed's Inaction The central bank is currently in a less restrictive stance compared to last fall, enabling them to adopt a 'wait and see' approach. They do not feel the urgency to make immediate changes and believe they can afford to be patient. The bank is committed to monitoring economic data closely as it evolves, to make informed decisions about monetary policy. The central message is the uncertainty about what the future holds, according to a significant figure in global finance. The markets are left to interpret this stance.
• 05:00 - 10:00: Bankruptcies and Economic Risks In this chapter, the discussion focuses on the economic implications of recent actions by the Federal Reserve and the Trump administration. Federal Reserve Chairman Powell acknowledges that last year's interest rate cuts might have been implemented too late. Additionally, the new tariffs imposed by President Trump are notable for being the highest in over a century. These tariffs are causing concerns about a potential recession and increasing inflation risks. Danielle D. Martino Booth, a former Fed insider and founder of Qi Research, joins the discussion to offer insights into these financial challenges on both Wall Street and Main Street.
• 10:00 - 12:00: Fed's Credibility and Concerns The chapter titled 'Fed's Credibility and Concerns' discusses recent statements by Powell regarding the Federal Reserve's position to be patient amidst economic changes. It highlights the Fed's teal book projections, indicating an upcoming core PC rate of 3.5% by year-end, an unemployment rate rise to 4.7%, and a GDP drop below 1%. These indicators signal potential stagflation, although the speaker notes that forecasts should always be viewed with caution.
• 12:00 - 14:00: China's Economic Moves The chapter titled 'China's Economic Moves' discusses the mixed signals in economic data and predictions, specifically concerning the U.S. Federal Reserve and indications of inflation. It emphasizes the dissonance between predictive models and actual economic indicators such as falling apartment rents, decelerating home price appreciation, and fluctuating oil prices. These elements suggest the Fed is making assumptions potentially misaligned with on-the-ground realities.
• 14:00 - 15:30: Domestic Financial Challenges This chapter discusses the domestic financial challenges focusing on different ways of making economic predictions, particularly concerning inflation and interest rates. The distinction between model-based and market-based constructs is highlighted, with reference to the Federal Reserve's past tendencies to follow market-based core Personal Consumption Expenditure (PCE) metrics, which currently run below the Fed's 2% target. The narrative emphasizes the importance of understanding whether forecasts rely on theoretical models or actual market data.
• 15:30 - 17:30: Predictions and Final Thoughts The chapter discusses the rapidly changing economic landscape, focusing on predictions for Federal Reserve rate cuts. Despite the Fed's current hesitancy, the prediction is for multiple cuts due to risks in both inflation and unemployment. The conversation highlights the formation of economic 'cracks' at a swift pace and suggests that while macroeconomic data is pending, significant shifts are anticipated.
• 17:30 - 18:00: Conclusion and Sign-Off In the chapter titled 'Conclusion and Sign-Off', the discussion focuses on recent changes and statements from the Federal Open Market Committee (FOMC). The main point of change is an acknowledgment of upside risks to unemployment and inflation, differing slightly from previous statements. Furthermore, Chair Powell mentions that the Federal Reserve is prepared to adjust its actions based on upcoming data, potentially as soon as June. This implies a readiness to either delay or expedite their economic decisions as needed.

Fed Is Missing the Recession – Massive Policy Error Ahead | Danielle DiMartino Booth Transcription

• 00:00 - 00:30 All right, is the Federal Reserve lost in the fog of economic uncertainty? Welcome back to the program. I'm Jeremy Saffron. Today, after holding interest rates steady at 4 and a/4 to 4 1/2%, Fed chair Jerome Powell admitted he doesn't know what the central bank will be fixing next, inflation or unemployment. Let's take a listen. Um, a lot has happened uh since the last meeting. There's been tariffs put on, tariffs taken off, and meanwhile, there's a bill advancing in Congress. And I just wonder
• 00:30 - 01:00 if I could press you on the last part of your statement. Are you any closer now to deciding which side of the mandate is going to need urgent care first? Well, um, so as as we noted in our u in our statement, postmeating statement, we've judged that the risks to higher employment and higher inflation have both risen. And this by the way of course is compared to uh March. So that's what we can say. I don't think we can say uh you know which way this will
• 01:00 - 01:30 shake out. I think there's a great deal of uncertainty about for example where tariff policies are going to to settle out and also when they do settle out what will be the implications for the economy for growth and for employment. I think it's too early to know that. So I mean ultimately we think our policy rate is in a is in a good place to uh to stay as we await further clarity on tariffs and and ultimately there are implications for the economy. Our policy is sort of modestly or moderately uh restrictive. It's it's 100 basis points
• 01:30 - 02:00 less restrictive than it was last fall. And so we think that leaves us in a good place to wait and see. We we don't think we need to be in a hurry. We think we can be patient. We're going to be watching the data. the data may move quickly or slowly, but we do think we're in a good position where we are to to let things evolve um and and and become clearer in terms of what what should be the monetary policy response. All right, we just don't know. That is today's message from the world's most powerful central banker. Markets are
• 02:00 - 02:30 still pricing in three rate cuts this year. And for the first time publicly, Powell is now admitting last year's rate cuts may have come a little too late. Meanwhile, President Trump's new tariffs, the steepest in over a century, are already fueling recession fears and inflation risks at the same time. Here to break it down with us is Danielle D. Martino Booth, founder of Qi Research, former Fed insider, and one of the sharpest voices on Wall Street and Main Street alike. Danielle, thank you for being here. Thank you so much for having me on this Fed day. Yeah, on the Fed day. Uh I speaking of which, I saw you on Fox. You've been working all day and
• 02:30 - 03:00 I know that we don't have you for that much time. So, let's get really started with this one. I mean, Powell says that the Fed is well positioned to wait, but the Fed's own teal book reportedly shows core PC now headed to 3 and a half by percent by year end. Unemployment up to 4.7% GDP slashed to under one. Isn't this the classic stagflation in motion? Well, it it certainly could be, but just bear in mind uh like any forecast, uh the only thing that you should read
• 03:00 - 03:30 through to the Fed anticipating rising inflation is that which a model has produced. So when you look at actually what's happening here on the ground, when you see that apartment rents keep falling, of course shelters the largest input, when you see that home prices have begun to uh decelerate in rapidly in terms of of of the appreciation versus what we were seeing just a year ago, when you see what's happening with the price of oil, all of these suggest again that the Fed is basing their
• 03:30 - 04:00 prediction, basing their forecast on a model as opposed to a different construct. a marketbased construct and in fact the Fed has followed the what they call marketbased core PCE in the past and that metric now is running below the Fed's 2% target. So it really depends again on whether you're following a model and economist predictions which is what you're talking about or whether you're following what's actually happening here on the ground.
• 04:00 - 04:30 Yeah. Yeah. And it seems like the the the cracks are starting to form at a very quickly pace. Uh before we get into some of that macro data that you're talking about, you forecasted up to five rate cuts this year based on the weakening labor market, but the Fed has already held steady. Uh has anything changed in your outlook? Do you see multiple cuts ahead despite this Fed's hesitation here? I do. I do see multiple cuts ahead. I I think that uh that the Fed nodding to the fact that both inflation and unemployment uh have have further risk
• 04:30 - 05:00 to the upside and that's about the only thing that they changed in this statement. This statement was almost an exact copy of what we saw in the prior FOMC meeting. But because they have flagged upside risks to unemployment and inflation and because Chair Powell also said that the Fed was prepared to either delay or act more quickly depending on how the data play out going forward that we could indeed see the Fed moving as soon as June. And in fact, that is what
• 05:00 - 05:30 a lot of economists right now foresee in the future that we are going to see much more upside in the unemployment rate before we start to see any kind of an impact of the tariffs on inflation. Okay, interesting. So, if the Fed doesn't move till quarter three, what kind of consumer damage are we risking by then? I I think if you're actually talking about the Fed not moving in July, not moving in in or or in June sooner that you really could start to see some some
• 05:30 - 06:00 major blowback from the Fed being too high for too long. Uh in in fact, if if you just read the Beige book and you run the Beige book through natural language uh I think it's natural language processing, natural processing language. I'm showing my age here, but if you run it through um a program and and just looking at the words of the Beige Book, right now the economy is actually in worse shape than it was prior to last September's meeting when the Fed had to
• 06:00 - 06:30 push through with a 50 basis point rate cut because it had failed to do so at the prior July meeting. I see a similar setup now given what we're continuing to see with companies reporting layoffs that are not abating as well as a fast quickening bankruptcy cycle. Yeah, let's let's get into some of that research. I mean, you've said repeatedly Main Street feels pain long before Wall Street blinks. I mean, we continue to deal with that on this show. Labor force participation still below pre-COVID levels and sentiment is collapsing in
• 06:30 - 07:00 surveys. What are you seeing on the ground in QI data that the Fed is missing? Well, I think the Fed is leaning much too hard on hard data that is very lagged in nature that also does not reflect the sheer number millions and millions of Americans who are working side jobs, gig uh jobs, Uber drivers, Door Dash drivers, because what they can make working part-time is so much more than what they could make collecting
• 07:00 - 07:30 unemployment benefits. So, I think it is to the Fed's detriment that the Fed is being willfully blind right now if they don't acknowledge what several Fed policy makers have. And in fact, we've got six Fed speakers uh slated for this Friday. But several Fed members have begun to say we need to pay closer attention to the survey data because we've never had this wide of a disconnect between the hard data and what Americans on the ground are telling
• 07:30 - 08:00 us. What the fact that internships have really collapsed the availability of them going into this summer. The fact that the class of 2025 graduating from college is saying that it's even worse than what it was in 2024. There's plenty of anecdot again the Fed's own beige book that suggests that the Fed is is to its detriment ignoring what's being seen in the soft survey data. Yeah. You know, you've been vocal about the Fed losing credibility. Many have. It's been turning a little bit political. Powell
• 08:00 - 08:30 admitted today that the fall of 2024 when those cuts, they weren't preemptive. He said if anything, they came in a little bit too late. How damaging is that admission in your view? Well, it's it's going to be more damaging in hindsight, and it's certainly going to be more damaging if we see uh as many economists, including Bloomberg's Anna Wong, if we see this violent pendulum swing back, layoffs that we're seeing in freight and transportation, leading cyclical sectors
• 08:30 - 09:00 of the economy, if we're to see actual layoffs in May and in June. And in fact, she and I both anticipate the very high risk of seeing non-farm payrolls print negative as soon as this upcoming May uh payrolls report, which of course precedes the the Fed's next meeting on June the 18th. You were talking a little bit on today, Charles Payne. I was watching you on the show. I know you've been on air all day and you were talking about these seven uh bankruptcies as of late. Can you get into that a little bit and how bad is it getting here?
• 09:00 - 09:30 Well, just to give you some context, what I mentioned today with Charles is the fact that in the entire month of April, we saw seven large bankruptcies. That would be bankruptcies of companies with 50 million or more in liabilities just 7 days into the month. Uh if you include standard and poor downgrading last night to strategic default um uh an office reit uh with $2.14 billion dollar in debt. Just in the first seven days of
• 09:30 - 10:00 May, we've seen seven large bankruptcies. And by the way, a handful of them have been multi-billion dollar in liabilities. One of them was in the freight sector between 100 and 500 million dollars in liabilities with 5,000 to 10,000 creditors. To back up these major large bankruptcies that we're seeing come through at a much more rapid pace in May. We're also seeing the pace of small business closings pick up appreciably as well as household
• 10:00 - 10:30 bankruptcies being up 16% year-over-year in the month of April. I'm sorry, but these are not these are not subtle signposts. These are definitive signs that the Fed should be lowering rates right now that that Chair Powell and other Fed officials who are leaning too hawkishly should be cognizant of and acknowledging by easing policy. Yeah, you know, the Fed acknowledged, reiterated, I guess, today that the Treasury runoff will continue at just 5 billion per month, meaning any
• 10:30 - 11:00 maturities above that cap will be reinvested. Market watchers are asking here, if the Fed is mechanically rolling off its balance sheet, why did it just buy roughly 35% of both three-year and 10-year Treasury auctions last week? I mean, is the Fed quietly stepping in to stabilize the market here? No, it's not. Um, in fact, I just muted somebody on on my Twitter feed because they insisted that the Fed was relaunching quantitative easing. Um, that is simply not the case. The Fed has publicly stated, as it did in its March meeting
• 11:00 - 11:30 and reiterated today, um that it reduced the the pace of the roll off of its balance sheet to $5 billion a month. And what that means, and the Fed has publicly stated it, is that if there's um if there is more maturity of treasuries than that $5 billion cap, then it is obligated to maintain the size of the balance sheet by reinvesting proceeds of those Treasury maturities. And that's exactly what it is doing. There is no tacit uh quantitative easing
• 11:30 - 12:00 going on. The only way that you could see that would be if the Fed's balance sheet was to stop shrinking. But on a net basis, it is still shrinking by five billion in treasuries a month. And by the way, I would add that we've seen an increase in mortgage prepayments. So we're seeing more mortgage back securities rolling off of the Fed's balance sheet than we were a month, two months, a year ago, up to $35 billion a month. That quantitative tightening has
• 12:00 - 12:30 not been reduced at all. Interesting. Thank you for clearing that up. I was seeing some of that rambling there, too. Uh we got to talk about China. Obviously, we're talking about tariffs. That's been a lot on the conversation. Not quite sure as to what's going to happen there. But China just unleashed a broad monetary easing package. I mean, they're cutting policy rates. They're slashing the reserve requirement ratio and pumping over $130 billion into liquidity just hours before top officials meet with the US Treasury. Does this signal that Beijing is bracing for a deep protracted trade war? I mean, how could this wave of Chinese stimulus
• 12:30 - 13:00 spill over into US markets and complicate the Fed's already fragile outlook? Well, look, the United States is the world's largest economy. China is the world's second largest economy, and just a few days ago when it released its services uh PMI, a gauge of the service sector health, it disappointed to the downside. And even though China has a larger industrial base compared to that of the United States, the fact that both its manufacturing and services sectors are stalling means that the government
• 13:00 - 13:30 is rightly trying to stimulate the economy and defend it against what it knows is going to happen because of the trade war. Global trade is going to contract for the full year of 2025. this will slow down China's economy and its policy makers are are right to be right now easing uh conditions in the economy. Just because they do though does not necessarily mean that Chinese companies are going to be willing to borrow more just because it's cheaper to do so if they don't foresee going forward that
• 13:30 - 14:00 they're going to have business to back that up. It's all everything is contingent upon exactly how these trade negotiations are going to play out. Yeah. Yeah. Well said. And here back home, we've seen that sharp uptick in commercial bankruptcy bankruptcy rather filings you're talking about, particularly among those midsize firms. Uh with rates still elevated and credit spreads, you know, creeping wider, are we staring down at balance sheet recession? But more importantly, I guess, is it where do you see the first real break? I mean, is it regional banks again or the corporate debt market?
• 14:00 - 14:30 So, we certainly are seeing the first uh cracks, if you will, in the uh regional midsize banking sector, and that has a lot to do with the fact that there are there's a higher uh volume of commercial real estate transactions that are occurring right now. And the higher the volume of commercial real estate transactions, the more price discovery that there's going to be at these banks and the more losses that they're going to have to recognize. So, I think that you're right in saying that that's one of the first places that we're going to
• 14:30 - 15:00 be seeing distress. And because the leading bank in the United States, JP Morgan, has already increased its provisions for losses, increased its credit card charge offs to the extent that it has, the largest bank in the country is also signaling to smaller banks it's time to continue tightening those credit standards at a time when many US households, millions of US households are being faced with being penalized for the first time in 5 years for not repaying their student loans. So there's a lot going on right now that is
• 15:00 - 15:30 going to impair credit to commercial real estate, impair credit to the to corporate America and to US households. Yeah. Final thoughts here. I mean, if PAL waits until September to act and and the tariffs are extended beyond the current 90-day pause, what kind of policy misstep are we setting up for? Well, I think we're setting up for a very large one. And I would be shocked to not see the unemployment rate surpass that right now. It's 4.2%. 2%. The Fed has a year-end target of
• 15:30 - 16:00 4.4%. So, I would be shocked if we were to get to the September meeting without the unemployment rate being well above where the Fed's current dot plot foresees the unemployment rate ending the year again at 4.4%. Yeah. So, that's the blind spot. I mean, the last question, I guess, if you were to advise Powell privately tonight, what would you tell him the Fed's biggest blind spot is right now? that I would say that the Fed's biggest blind spot right now is not paying heed to its own internal research. The Philadelphia Fed has said
• 16:00 - 16:30 for two surveys running that Americans at a record pace are paying the minimum on their credit cards and the Fed's beige book right now is flashing recessionary readings, readings that were associated with the Great Recession. It's their internal data and they should be paying attention to it instead of simply and solely waiting for the hard data reported by the Bureau of Labor Statistics to catch up to what we're seeing in these survey data. Yeah. Yeah. Sure as heck seems more clear now
• 16:30 - 17:00 than ever. All right. Danielle D. Martino Booth, always sharp, always real data first. Thank you for being here with us on this critical post FOMC day. And thank you for having me. Thanks Danielle. You can follow Danielle's latest macro research at QI research for more in-depth interviews and market coverage. Stay with us right here on Kitco News. I'm Jerry Saffron. We'll see you next time.
• 17:00 - 17:30 Heat. Heat.