Kevin Khang, Chief International Economist at Vanguard, joins J.D. Durkin to unpack why Jerome Powell announced no changes to interest rates. Watch!
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00:00The U.S. Central Bank officially holding interest rates steady this week.
00:03Maybe not the biggest or most surprising news of the week,
00:06but still a very important update from Jerome Powell and his colleagues at the FOMC
00:11as many Americans continue to brace for the economic unknown.
00:15Joining us now is Senior International Economist at Vanguard, Kevin Kang.
00:19Kevin, it is really good to have your perspective.
00:21So we heard from Powell this week, holding rates steady.
00:24He did flag the risk of higher inflation and higher unemployment,
00:27but overall it seems to me as if wait and see is the theme of the moment.
00:32What did you learn on Wednesday?
00:34Yeah, I mean, so in terms of the outcome, I think you're absolutely right.
00:38You know, the decision to hold the rate was widely expected, so that's what we got out of.
00:45In terms of what I, you know, took away from the press conference and his remarks,
00:50was just a, you know, reaffirmation that this Fed's objective is dual mandated.
00:55So it's price stability, but it's also full employment.
00:58And, you know, where we are in this cycle is such that, you know,
01:03the optionality of just holding and then not moving forward and not leaning in any direction
01:08is really the right move for the Fed, and again, given where the economy is.
01:14So that's what I took away from it.
01:15And from this point on, it'll be very much data dependent
01:18as well as judgment dependent going forward.
01:21The second thing that I would, you know, just add quickly to that is maybe just a reminder
01:27that this, you know, what you said earlier about, you know, this unknown nature of what
01:33we're about to go through.
01:34We haven't seen this much tariffs in place, you know, at this level of just scope.
01:41So, you know, that's another thing to just kind of keep in mind that, you know,
01:45we're kind of walking into this uncharted territory for, you know, as far as the economy is concerned.
01:49And that, again, affirms and supports the decision to hold the rate for now.
01:55Kevin, how do you suspect the Fed may decide if tariff-related inflation is a one-time shock
02:02or something that lingers a bit longer?
02:05So I think that's going to be very much data dependent as well as, again, as I mentioned
02:12earlier, judgment dependent.
02:13So there was a question during the press conference about, you know, aren't we just going to see
02:18something to the effect of, aren't we just going to see a one-time price increase in goods?
02:23And that may be true in textbook and in theory.
02:27But our view is that a lot of that, whether it's going to be a one-time price shock
02:32or whether there's going to be some sort of a more of a persistent momentum set in motion,
02:37starting with that one-time price shock, will depend on what happens with the trade negotiations
02:42and what the kind of final trading arrangement outcome looks like.
02:47And at this point, we're still very much in the fog.
02:50You know, sitting here, we're just hearing about the UK and US trade deal announcement,
02:56you know, I guess imminent announcement on that.
02:58So that's just only the first one to come.
03:01And then I feel that we're going to have a lot to learn, a lot to absorb.
03:05And from a business, you know, leaders, you know, from the business's point of view,
03:11they're going to have to figure out what to do with the price increases.
03:14So, again, the one-time price shock works in theory.
03:19But in reality and in practice, I think a lot will depend on where we settle on the policy.
03:26You mentioned data dependent.
03:27I know that that's a favorite phrase for Chairman Jerome Powell.
03:31But as you know, Kevin, there is a difference between hard data, the employment figures,
03:35the inflation data, and so-called soft data, market sentiment, confidence surveys.
03:41Those two things paint a very different picture right now.
03:43How would you expect the soft data, which appears a lot more bearish, a lot more skeptical about the road forward,
03:50play a role into the Fed's decision-making?
03:54I feel that it has already weighed in to a degree, meaning that, you know, in this type of environment,
04:00where, again, we're just about to really walk into what the actual effects of tariffs that are in place,
04:07currently in place, on the economy is.
04:09And we're about to see, and there's always, you know, lag in getting the actual data.
04:14So that's why, for now, all we could really consult was a lot of soft data.
04:18And then we're about to see, even starting with the CPI report next week,
04:22we might be starting to see some signs of how that really is trickling through the economy.
04:27But coming back to your question about soft data and sentiment, for now,
04:32if you look at a lot of the corporate guidance, and then not just look at the, you know, earnings guidance,
04:36but the, you know, the verbal and qualitative guidance that are coming from the S&P 500 and 100 companies,
04:44consumers are showing an enormous amount of resilience.
04:47And that, again, maybe is also affirmed by, you know, the first quarter GDP numbers,
04:51where you kind of look at the numbers, you know, taking out the net exports and inventories
04:56and government spending.
04:58So when you look at the hard data, you can kind of look at then, you know,
05:03it looks like soft data seems a little kind of blown out of proportion.
05:08Although I think having lived through April, none of us will feel, you know,
05:12quite confident to just dismiss that.
05:15So there's a tension between that sentiment and then the hard data.
05:20And then at the end of the day, it's going to be a judgment call.
05:23But our view is that hard data will have to start showing up.
05:27And this is where it'll really depend on what type of hypothesis or path or economic channels
05:34people have in mind through which, you know, you will see tariffs actually having an impact on the economy.
05:41So that's where, you know, judgment will need to come in, in our view.
05:48The president referred to the chairman of the central bank as too late.
05:52Trump going on to say Powell doesn't have a clue.
05:54But adding, for whatever it's worth, that other than that, quote, I like him very much.
05:59It's an odd dynamic, Kevin.
06:01I wonder what you make of it economically, what those economic repercussions could be,
06:06given this somewhat of a public tension between the Oval Office and the chairman of the Fed.
06:10You know, we'd like to think that that is behind us at this point.
06:16And, you know, with a chairman, Powell term left, you know, maybe about a year left from this point on.
06:22I feel like, again, from yesterday's press conference, he made a couple of, you know,
06:27responses to a question that is, you know, largely about that.
06:31I'm saying that, you know, and I probably agree with where he is, which is the job that they have right now,
06:38which is an enormously difficult job, especially given the difficulty of the tricky environment they're in,
06:44really demands more than, you know, more than 100 percent of their attention.
06:48So our view is that that's what they should continue to do, because that's the mandate for the Fed.
06:55And hopefully that'll allow them and enable them to make good decisions along the way.
07:00But maybe going back to your question or point, there's really no doubt and mistaking that, you know,
07:07the White House, as well as all the other countries that the White House is negotiating trade negotiations,
07:15doing the trade negotiations with certainly holds a key to where we ultimately land in terms of this,
07:22you know, trading related situation.
07:25Kevin, I'm about out of time.
07:27How realistic is it that the central bank may be compelled to raise interest rates again,
07:33not lower, but raise in response to tariff induced inflation?
07:36That doesn't seem to be that that doesn't seem to be in the consensus thinking just yet.
07:46I think in order for something like that to, you know, for people to start entertaining that possibility,
07:53we'd probably need to see, you know, above consensus, above kind of expectation level of price increase
08:00and then a decent amount of persistence in that.
08:05And then maybe, maybe again, you know, at this point I'm imagining,
08:09but then we would also need to see some type of price increase getting very sticky and spreading across the economy.
08:18So that type of environment is what we would need to see in order for us to imagine Fed raising the rates again.
08:28All right.
08:28Kevin Kang is Senior International Economist at Vanguard.
08:32Kevin, really grateful for your time and perspective,
08:34helping us make a little bit of sense out of everything we heard from the chairman of the central bank yesterday.
08:39Kevin, thank you so much.
08:40Thank you for having me.