Fed Governor Proposes Dovish Policy Amidst Inflation and Investment Concerns - Episode Hero Image

Fed Governor Proposes Dovish Policy Amidst Inflation and Investment Concerns

Bloomberg Surveillance · · Listen to Original Episode →
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TL;DR

  • Federal Reserve Governor Stephen Myron advocates for 1.5% interest rate cuts in 2026, arguing that measured inflation is artificially high due to lagging shelter costs and portfolio management fees.
  • Myron contends that underlying inflation is near the Fed's target, and a 4.6% unemployment rate indicates room for job growth without inflationary pressure, justifying accommodative policy.
  • Policy lags necessitate proactive rate cuts; keeping rates too tight for the past year risks underperforming future growth and inflation projections, necessitating accommodation.
  • Myron's forecast hinges on shelter inflation declining as market rents suggest; a pickup in market rents would invalidate his disinflationary outlook and warrant reassessment.
  • Seema Shah notes that government intervention in areas like housing and tariffs may deter investors and create policy volatility, potentially disrupting anticipated market stability for 2026.
  • Jim Zelter emphasizes a more cautious investment approach, likening the current environment to a challenging US Open golf course with narrow fairways and punitive rough, requiring careful execution.
  • Zelter highlights that while the US economy is resilient, geopolitical risks and inflation concerns have grown, necessitating well-structured investments with downside protection.

Deep Dive

Federal Reserve Governor Stephen Miran advocates for a significantly more dovish monetary policy than his colleagues, proposing cuts totaling 1.5% in 2026. His rationale centers on his belief that current inflation metrics are artificially inflated by lagging shelter costs and portfolio management fees, arguing that underlying inflation, excluding these factors, is running at 2.3%, within the Fed's target. This perspective suggests that maintaining restrictive policy is unnecessarily harming the labor market, citing an unemployment rate of 4.6% as evidence of a million "unnecessary" job losses. Miran's view implies a direct trade-off: accommodative policy for wage growth versus current restrictive measures that, in his opinion, hinder economic potential without a clear inflation threat.

The implications of Miran's stance are twofold. Firstly, if his inflation assessment is correct and the Fed were to follow his recommendation, it could lead to an undershooting of the inflation target, creating a "two-sided risk" where inflation falls too low. This could necessitate a more aggressive policy reversal later. Secondly, his emphasis on the labor market suggests a view that the Fed's mandate includes actively supporting full employment, even if it means accepting slightly higher inflation or taking a less cautious approach to disinflation. This contrasts with a more inflation-centric view, potentially creating internal friction within the Fed and uncertainty for markets about the central bank's reaction function. His conviction stems from specific data points, particularly the mechanical pass-through of market rents to measured shelter inflation, which he views with high confidence, unlike other inflation components like goods prices.

Seema Shah, Chief Global Strategist at Principal Asset Management, expresses caution regarding increased government intervention and fiscal stimulus in the U.S., particularly in light of recent policy rhetoric. She notes that actions such as pushing back on executive pay and capital returns, while not necessarily having an immediate impact, introduce policy upheaval that contradicts market expectations of a smoother 2026. This interventionist approach, she argues, could give international investors pause, potentially slowing capital allocation to the U.S. and contributing to a global diversification trend. Shah highlights that while strong corporate earnings and a robust market have masked underlying issues like low consumer sentiment, the political environment suggests a potential shift towards policies less favorable to risk assets. The expansion of the fiscal deficit, if policies proposed by the administration are enacted, is identified as a key risk for bond markets, as it would necessitate increased issuance and could pressure bond yields, hindering equity return expectations.

The second-order implications of this interventionist trend are significant for market stability and international capital flows. Shah suggests that the belief that such policies will not pass Congress is what currently prevents a material reaction in fiscal markets. However, the persistent rhetoric, especially ahead of midterms, creates an environment of uncertainty. For international investors, this perceived volatility and intervention in the U.S. market enhances the attractiveness of other global markets, suggesting a gradual shift away from the U.S. as a sole investment destination. This could lead to a recalibration of global portfolio allocations, impacting U.S. asset valuations and potentially dampening the "bull market" narrative if policy uncertainty escalates.

Jim Zelter, President of Apollo Global Management, describes the current U.S. economic environment as "stagflationary" with expectations for higher-for-longer interest rates. He characterizes the investment landscape as a "US Open" scenario, with narrow fairways and punitive rough, necessitating disciplined investing and a higher bar for approving new deals. While acknowledging strong economic fundamentals like CapEx cycles and consumer health, Zelter emphasizes the growing "left tail" risks from geopolitics, inflation concerns, and the uncertain returns on AI investments. Apollo is actively deploying capital, but with a focus on well-structured, downside-protected investments, particularly in larger companies involved in a "global industrial renaissance." He notes that while the U.S. economy has shown remarkable resilience, the risk of geopolitical events or policy shifts, like those seen recently with housing, requires careful long-term investment strategy.

The implications of Apollo's strategy highlight a broader shift in investment philosophy. The "fairway getting narrower" analogy suggests that the era of indiscriminate risk-taking yielding high returns is over. Investors must be more selective, focusing on credit quality and downside protection, especially as government and corporate debt issuance reaches record levels. Zelter's caution implies that the market's ability to absorb this debt, while currently supported by relatively high real yields and investor demand for duration, faces an eventual limit. Furthermore, his observation about the changing transmission mechanism of monetary policy--where the Fed's actions have a less immediate impact due to factors like the prevalence of long-term fixed-rate mortgages in the U.S.--suggests that economic cycles may be harder to predict and manage, reinforcing the need for a more cautious, measured approach to capital deployment.

Action Items

  • Audit inflation calculation: For 2-3 key inflation components (e.g., shelter, portfolio fees), analyze methodology for potential biases or lags impacting policy decisions.
  • Measure labor market slack: Calculate the number of unemployed individuals (approx. 1 million) relative to potential job creation without causing inflation, to inform policy stance.
  • Track market rent trends: Monitor 3-5 key urban and suburban markets for changes in market rents to forecast shelter inflation's impact on overall inflation.
  • Analyze fiscal stimulus impact: For 2-3 proposed fiscal policies, assess potential effects on aggregate demand, inflation, and bond yields.
  • Evaluate investment risk tolerance: For 3-5 asset classes, quantify the impact of geopolitical risks and policy volatility on expected returns and capital preservation.

Related Episodes

Key Quotes

"My view is that almost all of the excess inflation over target is due to quirks of how we calculate inflation. As you have talked about with many of your guests many times before, shelter inflation really, really lags a lot. And because average tenant rents have caught up to new tenant rents, because market rents have been running at a 1% rate for a couple of years now, I think it's appropriate to think about underlying inflation as abstracting from that a little bit."

Fed Governor Stephen Myron argues that current inflation figures are skewed by how shelter costs are calculated, suggesting that underlying inflation is closer to the Fed's target. Myron believes that by adjusting for the lag in shelter inflation and portfolio management fees, the true inflation rate is around 2.3%. This perspective forms the basis for his call for more aggressive interest rate cuts.

"But then the unemployment rate is 4.6%, right? So that means that there's about a million Americans who don't have jobs who could have jobs without causing unwanted inflation, without causing unwanted upward pressure on inflation. I don't think it's right to tell those people that they shouldn't have jobs because we're just mechanically calculating inflation in some silly way. I just don't think that makes a lot of sense."

Governor Myron emphasizes the labor market's condition as a key factor in his dovish stance, arguing that the current unemployment rate indicates room for job growth without triggering inflation. Myron believes that maintaining restrictive monetary policy, which keeps people from obtaining jobs, is not justifiable when inflation is not a significant concern. He advocates for a more accommodative policy to support employment.

"The other thing about this as well is that coming into 2026, there's obviously been a lot of optimism. One of the things that's been on people's assumptions is that policy upheaval, volatility is going to be a little bit less than what we had last year. And of course, as you said, the last 48 hours suggest the exact opposite. So I think that there's some things in here which may not have immediate impact, but certainly from an investor standpoint, this is a moment of pause that maybe 2026 is not going to be as smooth as a lot of people are anticipating."

Seema Shah of Principal Asset Management notes that recent policy actions and rhetoric from Washington are creating investor uncertainty about the anticipated stability in 2026. Shah suggests that the expectation of reduced policy upheaval is being challenged by recent events, leading investors to pause and reconsider their optimistic outlook for the coming year. This shift indicates a potential increase in market volatility.

"Well, I think at the moment one of the considerations is that a lot of this won't get past Congress. So there's enough, I wouldn't say fiscal discipline or considerable concern, but there's enough of a pushback that a lot of this won't come to pass. But I think that you're absolutely right in saying that this is a key risk. When we're looking at the equity market, we feel pretty positive about the macro backdrop and earnings. The one caveat to this though, is that bond yields have to stay fairly well behaved. You cannot see a very significant sell-off against this backdrop."

Seema Shah explains why the bond market is not reacting more strongly to potential fiscal deficit expansion, attributing it to the expectation that much of the proposed spending will not pass Congress. Shah highlights that while the equity market remains positive due to the macro backdrop and earnings, a significant increase in bond yields would pose a hurdle to these expectations. She emphasizes the importance of stable bond yields for sustained equity market performance.

"We, we, we've been, we've been, I would say to account, we've been very vocal and I've been vocal on this, on this program about Europe. You know, we, we, when you look at the, the needs of governments around the globe, especially in Europe, in Germany in particular, and so more so in the UK, the governments' demand for capital far outweighs their ability to participate. And so we want to be part of that renaissance and that part of the globe."

Jim Zelter of Apollo Global Management expresses a strategic focus on Europe, citing a significant demand for capital from European governments that outstrips their current supply. Zelter indicates Apollo's interest in participating in this "renaissance" across Europe, particularly in countries like Germany and the UK. This highlights a global investment strategy that identifies opportunities beyond the United States.

"The reality is in the US today, it's been an extended credit cycle. It's harder to have a real economic recession because of the diversity of funding across the board. We have the healthiest banks in the globe. We have a securitization market that's alive and well and record size of issuance that disperses a lot of risk around the economy in terms of balance sheets. You know, you have a consumer in pretty good shape. You have a housing market where 40% of folks don't have a mortgage. I'm not saying we're not going to have an economic cycle. We will have an economic cycle. We will have a credit cycle. But if the post-SVB environment is any lesson to us all, because of the advances and the evolution of the US economy since the GFC, it's a lot harder to, to push over this machine than it had been in the past."

Jim Zelter explains that the US economy is more resilient to recession due to a robust and diverse funding landscape, healthy banks, and a strong securitization market. Zelter points to the consumer's good shape and a significant portion of homeowners without mortgages as further indicators of this strength. He argues that, drawing lessons from the post-SVB period and economic evolution since the GFC, the US economy is now more difficult to disrupt than in previous cycles.

Resources

External Resources

Books

  • "The Great Leveler" by Walter Scheidel - Mentioned as an example of historical analysis of inequality.

Articles & Papers

  • "The Great Leveler" (Walter Scheidel) - Mentioned as an example of historical analysis of inequality.
  • Research from Goldman Sachs - Mentioned as having a similar view on shelter inflation to Fed Governor Myron.

People

  • Walter Scheidel - Author of "The Great Leveler."
  • Stephen Myron - Fed Governor, discussed his views on interest rate cuts and inflation.
  • Jonathan Ferro - Host of Bloomberg Surveillance.
  • Lisa Abramowitz - Co-host of Bloomberg Surveillance.
  • Amery Hooten - Co-host of Bloomberg Surveillance.
  • Jim Sauter - President of Poly Global Management, discussed investment strategy.
  • Brad Jacobs - Mentioned in relation to a deal in the building products space.
  • Russell Investments - Mentioned in relation to simplifying their capital structure.

Organizations & Institutions

  • Bloomberg - Mentioned as the source of the podcast and television show.
  • Apple - Mentioned as a platform for subscribing to podcasts.
  • Spotify - Mentioned as a platform for subscribing to podcasts.
  • Columbia University - Location where Fed Governor Myron gave a speech.
  • Goldman Sachs - Mentioned for their research on shelter inflation.
  • Poly Global Management - Organization where Jim Sauter is President.
  • Apollo - Organization discussed in relation to investment strategy and risk assessment.
  • Federal Reserve (Fed) - Central bank discussed in relation to monetary policy and interest rates.
  • European Union (EU) - Mentioned in the context of international investment and diversification.
  • United States (US) - Primary focus of economic and market discussions.
  • National Football League (NFL) - Mentioned in the context of sports analytics.
  • Pro Football Focus (PFF) - Mentioned as a data source for player grading.

Websites & Online Resources

  • Bloomberg Terminal - Platform where the show is available.
  • Bloomberg Business App - Platform where the show is available.

Other Resources

  • Barkley's Brief - Podcast from Barkley's Investment Bank, mentioned for market analysis.
  • Dot plot - A chart showing Federal Reserve officials' projections for interest rates.
  • Shelter inflation - A component of inflation related to housing costs, discussed extensively.
  • Goods inflation - Inflation related to physical goods, discussed as a driver of overall inflation.
  • Tariffs - Mentioned as a potential driver of goods inflation.
  • Portfolio management fees - Mentioned as a factor influencing inflation calculations.
  • Monetary policy - The actions undertaken by a central bank to manipulate the money supply and credit conditions.
  • Fiscal stimulus - Government spending intended to boost economic activity.
  • Monetary normalization - The process of a central bank returning its monetary policy to a more normal stance after a period of unconventional measures.
  • AI-driven capex - Capital expenditures driven by investments in artificial intelligence.
  • Executive pay - Compensation for top company executives, discussed in relation to government intervention.
  • Capital return - The ways companies return value to shareholders, such as dividends and buybacks.
  • Corporate housing - Housing provided by companies for employees, discussed in relation to government policy.
  • Defense side - Refers to the defense industry and related investments.
  • Affordability - The ability of consumers to afford goods and services, a key policy concern.
  • Tariff dividend - A potential policy involving tariffs and their impact on consumers.
  • Consumer discretionary - Goods and services that consumers can choose to buy or not buy.
  • Fiscal deficit - The difference between government spending and revenue.
  • Equity market - The market where stocks are traded.
  • Bond markets - Markets where debt securities are traded.
  • Corporate and government bond issuance - The process by which corporations and governments raise money by selling bonds.
  • Net issuance - The total amount of new debt issued minus the amount of debt that matures.
  • High yield market - The market for bonds with lower credit ratings, considered riskier.
  • Leverage loan market - The market for loans made to companies with high levels of debt.
  • Real rates - Interest rates adjusted for inflation.
  • Long duration yield - The return on long-term investments.
  • IPO calendar - A schedule of upcoming initial public offerings.
  • WTI (West Texas Intermediate) - A benchmark grade of crude oil.
  • Triple C LBO buyout - Leveraged buyouts of companies with very low credit ratings.
  • Private credit - Loans provided by non-bank lenders.
  • Payroll growth - The increase in the number of employed individuals.
  • Consumer sentiment - Consumers' overall attitude toward the economy and their personal financial situation.
  • Market structure - The way in which markets are organized and operate.
  • Securitization market - A market where financial assets are pooled and sold as securities.
  • G7 - Group of seven major advanced economies.
  • Stagflationary environment - An economic condition characterized by slow growth, high inflation, and high unemployment.
  • Purchase price matters - An investment principle emphasizing the importance of the price paid for an asset.
  • Alignment with investors - Ensuring that investment strategies are aligned with the goals of investors.
  • Gauntlet for approving investments - The rigorous process for approving investment decisions.
  • Cap x cycle - Capital expenditure cycle, referring to periods of significant investment in fixed assets.
  • Left tail items - Risks that are low probability but high impact.
  • Return of invested capital - The profit or loss generated from an investment.
  • Global industrial renaissance - A resurgence of industrial activity and innovation on a global scale.
  • Building products space - The industry related to materials used in construction.
  • Sale leaseback - A transaction where an asset is sold and then leased back by the seller.
  • Nvidia chips - Microprocessors manufactured by Nvidia, mentioned in a sale leaseback transaction.
  • Ryder Cup - A golf tournament, used as an analogy for international diversification.
  • Retirement solutions - Financial products and services designed to help individuals save for retirement.
  • Changing banking system - Refers to the evolution and transformation of the banking sector.
  • Emerging markets - Countries with developing economies.
  • Latin America - Mentioned in the context of investment views.
  • G7 - Group of seven major advanced economies.
  • Pensioners - Individuals who receive a pension.
  • Credit - The ability of a borrower to repay a loan.
  • IPO - Initial Public Offering, the process of a private company becoming public.
  • US Open - A major golf tournament, used as an analogy for a challenging investment environment.
  • Liquidity - The ease with which an asset can be converted into cash.
  • Momentum - The tendency for an asset's price to continue moving in its current direction.
  • Risk appetite - The level of risk an investor is willing to take.
  • Europe - Mentioned in the context of government needs for capital and investment.
  • Germany - Mentioned as a country with government demand for capital.
  • United Kingdom (UK) - Mentioned as a country with government demand for capital.
  • Japan - Mentioned as a country with retirement solutions and industrial renaissance.
  • Australia - Mentioned as a country with retirement solutions and industrial renaissance.
  • Developing markets - Countries with economies that are in the process of developing.
  • Emerging markets - Countries with developing economies.
  • Latin America - Mentioned in the context of investment views.
  • G7 - Group of seven major advanced economies.
  • WTI (West Texas Intermediate) - A benchmark grade of crude oil.
  • Triple C LBO buyout - Leveraged buyouts of companies with very low credit ratings.
  • Private credit - Loans provided by non-bank lenders.
  • Payroll growth - The increase in the number of employed individuals.
  • Consumer sentiment - Consumers' overall attitude toward the economy and their personal financial situation.
  • Market structure - The way in which markets are organized and operate.
  • Securitization market - A market where financial assets are pooled and sold as securities.
  • G7 - Group of seven major advanced economies.
  • Stagflationary environment - An economic condition characterized by slow growth, high inflation, and high unemployment.
  • Purchase price matters - An investment principle emphasizing the importance of the price paid for an asset.
  • Alignment with investors - Ensuring that investment strategies are aligned with the goals of investors.
  • Gauntlet for approving investments - The rigorous process for approving investment decisions.
  • Cap x cycle - Capital expenditure cycle, referring to periods of significant investment in fixed assets.
  • Left tail items - Risks that are low probability but high impact.
  • Return of invested capital - The profit or loss generated from an investment.
  • Global industrial renaissance - A resurgence of industrial activity and innovation on a global scale.
  • Building products space - The industry related to materials used in construction.
  • Sale leaseback - A transaction where an asset is sold and then leased back by the seller.
  • Nvidia chips - Microprocessors manufactured by Nvidia, mentioned in a sale leaseback transaction.
  • Ryder Cup - A golf tournament, used as an analogy for international diversification.
  • Retirement solutions - Financial products and services designed to help individuals save for retirement.
  • Changing banking system - Refers to the evolution and transformation of the banking sector.
  • Developing markets - Countries with economies that are in the process of developing.
  • Emerging markets - Countries with developing economies.
  • Latin America - Mentioned in the context of investment views.
  • G7 - Group of seven major advanced economies.
  • Pensioners - Individuals who receive a pension.
  • Credit - The ability of a borrower to repay a loan.
  • IPO - Initial Public Offering, the process of a private company becoming public.
  • US Open - A major golf tournament, used as an analogy for a challenging investment environment.
  • Liquidity - The ease with which an asset can be converted into cash.
  • Momentum - The tendency for an asset's price to continue moving in its current direction.
  • Risk appetite - The level of risk an investor is willing to take.
  • Europe - Mentioned in the context of government needs for capital and investment.
  • Germany - Mentioned as a country with government demand for capital.
  • United Kingdom (UK) - Mentioned as a country with government demand for capital.
  • Japan - Mentioned as a country with retirement solutions and industrial renaissance.
  • Australia - Mentioned as a country with retirement solutions and industrial renaissance.
  • Developing markets - Countries with economies that are in the process of developing.
  • Emerging markets -

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