Hi everyone. I'm Andreas Steno and

welcome back to the Real Vision

platform. Today, I'm joined by a true

fan favorite, Jim Bianco. It's good to

have you back at Real Vision, Jim.

Thanks very much for taking your time.

>> Thanks. Looking forward to the

conversation.

>> You know, Jim, I've actually been

looking very much forward to this one

because, you know, I always love how

outspoken you are about your views and

you never hide and, you know, I think

that's a great characteristic of yours

and it seems like we have a very

different view on this new Federal

Reserve setup.

So, I'm really curious to understand

that today and

I think worse took chair, was it in May,

Jim? And we have had two meetings now

and the pattern is pretty clear, right?

We have no forward guidance,

no dot from the chair, pretty

explicitly.

And this

divided committee,

it already seems like it's very it's

very divided committee, right? So, how

would you characterize this new Fed now

that we're a couple of meetings into it?

>> See, I think that the Fed is is itself

fundamentally changed. And let me just

go back quickly through history. Go back

to early 1986.

There was a meeting to

um

cut the discount rate. And the discount

rate meeting, you could cut the Fed

could cut the discount rate. They don't

really do that anymore with just the

governors voting.

And it was a 4-3 vote to cut the

discount rate and the chairman, Paul

Volcker, was one of the three that voted

to not do it.

Volcker threatened to resign because he

got outvoted.

And the committee got together and said,

"Okay, okay, don't resign. We'll have

another vote." And then they voted to

not cut rates.

From that moment for the next 40 years,

the Fed has been whatever the chairman

decides. And the chairman meets with the

committee with the staff and he

sometimes, you know, converses with the

chairman of the New York president of

the New York Fed or the vice chairman.

And they kind of come out of their

meeting, they tell the rest of the

voters what they're going to do, and

everybody pretty much falls in line with

with it whether they like it or not. And

I've argued that for the last 40 years

that's been wrong. That that produces a

group think, it produces an insular type

of Fed, and it produces a ton of

mistakes.

And so,

I've been always

wondering when the Fed was going to

break from this mode.

Well, thanks to Donald Trump's incessant

attacks on the Fed, he's changed that.

The Fed was so worried about their

independence over the you know, whether

or not the chairman was going to be

beholden to the president or his voters

or his appointees, excuse me, like

Waller and Bowman were going to be

beholden to him

that a lot of the Fed officials have now

taken it upon themselves to act

independently.

And we're starting to see that. We're

seeing more dissents now this year, 10

through the half point of the year than

any point in like the last couple of

decades. We saw more dissents in the

same direction in the last meeting,

three for a rate hike than we've seen at

any point in the last 10 years. And I

think that that is a trend that is going

to continue. So, what I've argued is

this is a committee of 12 independent

voters. That Fed watching now is no

longer what does the chairman think,

parse every syllable that he he says,

and try and divine from his words what

the committee's going to do. It's a

vote-telling exercise. Listen to all

their speeches and put them in the hike,

hold, or cut column. Add it up,

whichever column has a majority, and

that's what they're going to wind up

doing. Now that I've said that,

a lot of these members are going to be

fence-sitters. I could go either way.

So, the chairman will have an outsized

influence on them. If the chairman

doesn't want to hike rates or wants to

hike rates, he could get some of the

fence-sitters to move with him

one way or the other. And then finally,

if we're getting into the weeds about

right now,

Jay Powell is still a Fed governor. He

didn't step down when he was no longer

Fed chairman.

He said he's going to stay in the

background, meaning he's not going to

give any speeches, and he's going to

vote with the chairman. So, the chairman

already has two votes. He has his vote

and he has Powell's vote as well. So, he

does have a big influence on this Fed,

but it's more of an independent type of

Fed right now.

>> Jim, if if policy is now

made by 12 or at least 11 independent

voters, how should investors

trade these upcoming meetings? I mean,

it it's been

interesting to watch the market pricing,

especially of the July meeting, but also

the September meeting that is upcoming,

right? It seems like the market is

really struggling to find the direction

for for the interest rate here. So, so

what's your view on how to trade it or

how to assess it as an investor?

>> Yeah, I think so. You If you remember

going into the July 29th meeting, 2 days

before the meeting, the market was

pricing a 40% chance the Fed would hike

rates, and they didn't.

And it never got above 50, that number.

But I think what we're going to first of

all, what investors are going to have to

understand, or anybody who's interested

in the Fed, is we're not going to go

into many of these meetings with the a

probability of a Fed move being like 98

or two, like we were kind of used to. It

was either they're going to move or

they're not going to move. It's always

going to be somewhere between 33 and 66%

for most of these meetings,

depending on which side you're going to

be on whether they're a move or or not a

move. So, there's going to be a great

deal of uncertainty.

Uh that's because the Fed is no longer

offering forward guidance. Now, let me

give you a definition of forward

guidance. Let me I'm going to tell you

what we're going to do. That's what

forward guidance is.

Uh I've been a fan

of the Fed not doing forward guidance

anymore. Why?

Because the market takes forward

guidance as a promise. When the Fed says

either through its dots or through the

chairman's words, you know, we're

getting ready to hike, we're getting

ready to cut, we're we're not going to

move, the market says, "That's it. Put

it down. They just said that they're

going to do this or do that."

And then the data changes. And then

they're caught in a difficult spot.

Do they upset the market by changing

course, kind of rugging them to use a

crypto term, or do they follow through

on the policy that they already

committed? And we've got examples of

both.

2013,

Bernanke decided to rug everybody by

doing what he what he called what turned

out to be the taper tantrum. He said he

was going to hold, and then he he said

he was going to change, and the market

had a taper tantrum, and 10-year yields

went up 140 basis points in 4 months.

2021,

the chairman decided to not rug the

market by changing the policy, and he

tortured himself with the word

transitory inflation.

And it turned out that the Fed only

started to raise rates in March of '22.

Go back and you look at it, unbelievable

to think about it at this point. The

inflation rate was 8.6% when they

finally started when they finally raised

rates for the first time. They waited

all the way to 8.6%.

So, this policy of forward guidance,

for every time it kind of sets the stage

so that they can change policy or raise

or lower rates, and there isn't drama,

it creates as much drama in other

instances as it prevents. So,

I've always thought it it's not a net

benefit, so go ahead and get rid of it.

Now,

there's one other fancy term we use, and

that's reaction function. And reaction

function is give me the rules of the

road. Don't tell me what you're going to

do, just tell me the rules of the road.

How are we supposed to look at what data

we're supposed to look at? What data do

what what is it supposed to do to say

high, cold, or cut? Now,

Warsh, I will agree, owes us that.

And he hasn't given us any

um reaction function data, how he thinks

about it, largely cuz he's got all these

task forces, and he wants to change the

data that he's looking for. He wants to

change the approach. Well, hurry up,

Kevin, because we're kind of waiting

here for your answer as to how you're

going to do this reaction function

stuff. And then finally,

going back to what I said about an

independent Fed,

even if we don't get forward guidance,

there's clearly 12 reaction functions.

We clearly saw three three members of

the voting committee have a different

reaction function than the other nine

did right now. I would argue to you that

Lisa Cook gave a speech last week, Fed

Governor Lisa Cook in Anchorage, Alaska,

in the middle of the night because it's

so many time zones away,

but she said in that speech, I stand

ready to raise rates. Well, she might be

a fourth dissenter

towards holding policy at the next

meeting. She has a different reaction

function. So, this is where I think

investors are going to have to start to

learn. This is not the Fed that we were

used to under Bernanke, under Yellen,

and under Powell. This is a very

different Fed.

>> So, speaking of the reaction function

and this whole question of forward

guidance,

I think Warsh said something

down the line of play the ball, not the

referee at the last press conference,

right? Uh, but then

some of his lieutenants seem to leak

some sort of light reaction function to

Financial Times. Was it last week,

right? So, has this forward guidance

really been abolished or has it just

become deniable, if you know what I

mean, Joe?

>> Yeah, I know. Uh, first of all, I'm

going to play the play the ball, not the

referee. I mean,

I I know a lot of people have criticized

that that said that the the referee is

the ball in this case, and there is

there is some there is some truth to

that. The Fed's going to It's going to

be a while before they become a pure

referee,

um, at some point.

Um, but to your point, yes, there was a

story and I found it to be,

um, undermining that a bunch of, you

know, it said sources close to the

Federal Reserve chairman says he stands

ready to raise rates in September.

Man, that does That's not good for a Fed

chairman that is trying to get rid of

forward guidance and that they just

offered forward guidance for the

September meeting on his behalf. Now,

there is some scuttlebutt

that those sources close to the Federal

Reserve chairman were named Kevin Warsh,

that it was him personally. God, I hope

not, because after going through all

this drama to try and get rid of forward

guidance, if all you're going to do is

say, "No, I'm not going to answer any

questions at the press conference. I'm

not going to submit a dot, but I will

whisper it into the ear of reporters at

the at the Financial Times." That's the

worst possible way to give forward

guidance. If you're going to at least If

you're going to give it, then do it the

way it's set up. Don't do it this way.

So, I hope it wasn't him, cuz it would

be really dev- devastating for his

credibility. And as far as the people

that are close to him,

I think that he should have a talk with

people that are close to him and say,

"You can't be doing this, because we're

committed to no forward guidance, um, at

this point." So, it just adds to the

confusion as to what what's going to

happen in September, what are the

benchmarks we're supposed to look at,

how do we supposed to figure it out?

We're in a state of flux right now.

>> And then, as you mentioned, Jim, he

wants to, you know, tinker with how

inflation is measured as well, right? I

guess the charitable read here is that

he's cleaning up bad statistics, but

the uncharitable read could be that he's

actually moving the inflation goalposts,

or at least trying to, right? So, where

do you land on that question?

>> Yeah, he, you know, first of all,

you know, a lot of people are worried

that, you know, he's going to come up

with the Kevin Warsh measure that's

going to show what whatever it whatever

it comes up with, it's always going to

show 2% inflation, so that they could

just declare victory, kind of like Trump

with the Strait of Hormuz. Just, you

know, just announce every third day that

it's open and we won the war. Uh, you

know, and and that's what Warsh will do

with inflation. And in fairness to

Warsh, we already had an example of

that. That was Powell with supercore.

That was a measure that he invented out

of whole cloth, and now the Fed kind of

tries to pretend it doesn't exist

anymore, um, at this point. I don't know

what he's going to come up with. He's

got a committee that's or a task force,

excuse me, that's going to try and come

up with this measure. I hope it isn't

that it's just let's invent a measure

that shows that there is no inflation.

It's not going to work because I think

ultimately, at the end of the day, the

market will decide whether or not there

is an inflation problem or isn't an

inflation problem, and you can invent

whatever trim mean PCE number. That's

kind of the rumor that he he's thinking

about using. Trim mean, by the way, if

you're not familiar with it, think

figure skating. You throw out the high

scores and you throw out the low scores.

You throw out the Russian and the French

judges, and you

average the ones in the middle, and

that's kind of what a trim mean is. Um,

and so, that's what they're trying to

maybe possibly looking at. We'll have to

find out. The committee, or excuse me, I

keep calling committee, the task force

is going to report back by the end of

the year and we'll have to see where it

comes. So, in general, if you want to

introduce some new statistics like

supercore, yeah, I'm I'm fine with that.

But if you're going to introduce a new

statistic with the express purpose of

showing see, this there's no inflation.

This new statistic that we invented

shows there's no inflation, I think it's

going to cause you more problems than

it's going to have solved because the

market's not going to buy it. If the

market's worried about inflation,

doesn't care what your statistic is. If

the market's not worried about inflation

and your statistic shows inflation,

kind of like the couple of years ago

with supercore because remember

inflation was falling in like 23, 24 and

supercore was elevated, market didn't

care about supercore. It said, well, you

know, inflation's heading down. So, it

doesn't matter either way.

>> And it kind of leaves leaves us in this

vacuum until we know, right Jim? So, the

next couple of meetings, we won't really

have any news on which inflation

variable to measure and which inflation

variable to assess as an investor ahead

of meetings etc, right? So, given the

data that we have available today, we

had a nasty non-farm payrolls report at

least relative to consensus out in July

and then we had the inflation report out

yesterday which was more or less in line

with the market consensus. So, where do

you think we stand, Jim, based on the

knowledge we have?

>> I'll go with what Warsh said, right? He

called the payroll report echoes of the

past

uh or echoes of history and to be to use

his terminology.

It's only good on the third revision. By

the way, the third revision is 18 months

later. It's one of the benchmark

revisions that come along. So, he seemed

to dismiss

the payroll report and then he He about

the need to have something more real

real time.

And he seemed to be more concerned about

the inflation data

than the payroll report. Remember our

Fed our central bank has a dual mandate,

high employment and low inflation. And

so the standard employment report that

we look at

he's kind of downgrading. So you're

right. What was kind of interesting was

last when we're recording week before

the Friday before we're recording we got

the payroll report minus 23,000 on the

number

of 70 economists on Wall Street, the

lowest guess was plus 40,000. So it was

clearly a miss. It's outside the range

of every economist.

And yet after one day of

bond yields falling

they turned around and they went back up

even higher than they were before the

number. So it was that the market looked

past that payroll report. It might be

because the chairman said that's not

that important because the market's more

worried about monetary policy than it is

about the the state of the labor market.

And it seemed to have a bigger reaction

to what you pointed out was somewhat of

a consensus type of consumer price index

number. Yeah, you could quibble here or

there that some of numbers were a little

bit better, some numbers were a little

bit worse. But it was largely in

consensus and the reaction to that

number seemed to be bigger than the

reaction to the payroll number, meaning

the market's kind of taking I think it's

fear I I excuse me, it's it's lead from

Wash. Inflation data matters more than

the payroll data at least until the task

force. I'm going to use that word a lot,

task force comes back and tells us, you

know, what what we're supposed to think

about this.

>> But Jim, I know you've argued as well

that falling immigration has basically

structured lowered structurally lowered

the break-even growth rate of jobs,

right? So minus 23K a month, does it

even matter?

>> No, it might not. You're right, because

you know, there's two ways you There's

two ways you look at the payroll report,

labor demand and labor supply. Demand,

right? That's we look at the report. How

many hospitality jobs got eliminated

because of the end of the World Cup? How

many government jobs got eliminated

because it's teachers uh and summer

school ended. How many construction jobs

got added? This is labor demand.

And the question you have to ask

yourself is, okay, you've done now all

those exercises.

How many jobs do we need?

>> Before you go, that was just the

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