What to expect ahead of the Fed's September interest rate decision

00:00 Host

We have a key Fed meeting later this week, guys. Come on. I mean, it’s coming. Fed Chair Kevin Warsh is in quite the pickle. Piss off the president by hiking interest rates, or piss off the public by letting inflation get even more out of hand by standing pat on interest rates. Here’s what billionaire Carlyle founder, uh, David Rubenstein told me about Warsh in a new episode of my Power Plays podcast.

00:23 David Rubenstein

What you’re going to do is you have interest rates go up, it makes it more expensive for housing, more expensive to borrow money, more expensive for credit cards. So in the reason the president wanted to lower interest rates is obviously people are happier with lower interest rates and the economy will grow better with lower interest rates, but it’s hard to get them right now. And I I would say the Federal Reserve has not yet lowered interest rates under the new chair.

00:52 Host

Kevin, let’s say the Fed does raise interest rates by 25 basis points at the meeting this week. That’s not going to solve getting more ships through the straight of Hormuz. I guess the point I’m trying to make here quickly is that it doesn’t solve the inflation problem.

01:14 Kevin

Uh no, it certainly doesn’t solve a lot of the supply issues, but as a lot of members have have uh, you know, I think rightly pointed out that we’ve had we’ve been living through these successive supply shocks for for years now. And the more that happens and you don’t necessarily have a monetary policy response, that does risk the the the notion and the and the potential that inflation starts to run away a bit. And then ultimately, I think what the Fed fears the most, inflation expectations really start to pick up and and stay elevated. That’s really the dynamic that they’re trying to that they’re trying to to solve for at least not to happen. But I, you know, I think that it’s important to keep in mind that the Fed’s mandate is really just broadly price stability and and full employment. So it’s not as if they are charged with specifically targeting a portion of the economy because there are always different drivers of inflation. It’s just they have to calibrate policy to a to a place where they think it can be restrictive enough over time to gradually bring inflation back down. So, it’s not as if they’re going to solve for some of these supply issues or they’re going to directly target, you know, some of the inflation that’s coming from everything on the capex side of things. You have to think about it more broadly in this perspective of how can they get conditions right for inflation at least to get back on that path towards 2% because as of right now, when you look at specifically the PPI components that map to PCE, there’s really not a whole lot that tells you and convinces you that you’re getting back on the durable path to 2%.

02:43 Host

And it cost me $65 to fill up my car this past weekend.

02:48 Ness

Well, which one of your cars? So That’s not the point.

02:51 Host

That’s not the point here, Ness. You got a collection over there. That’s not the point. We’re not talking about that. All we need to know is that it cost me $65 to fill up one car.

03:03 Ness

And you true, and it cost me $50. It used to cost me before $35 at one point last year. So, look, um, yes, uh, gasoline prices are at uh record highs for what for this time of year, and you’ve got diesel at record highs. And uh inflation doesn’t seem to be going away. The question is, yes, what will a 25 basis point hike do much? Is this a one and done? And as Goldman Sachs, which is one of the firms that was latest to really say, okay, fine, yes, they will now cut rates. We do now think that they will cut rates next, uh, on Wednesday. Um, it’s it it really is, what will happen if they don’t? I mean, what would happen if they don’t? That’s what’s basically their their point. They’re saying they don’t need to uh raise rates, excuse me, raise rates, but what will the market reaction be if they don’t? So they will.

04:02 Host

Gil, what’s the, when you talk to clients, uh, right now, what’s the level of concern about a rate hike and that impact on on multiples for tech stocks?

04:13 Gil

Yeah, by definition, if you increase the discount rate, you’re lowering the value of the cash flow. So it’s it’s negative, especially for long duration equities, which most growth stocks are. Uh so there’s going to be an impact there. And then the point is, we just talked about the fact CoreWeave is financing data center build out with debt, Oracle’s financing data center build out with debt. Others will increasingly fund it with debt. If you make the debt more expensive, we’ll build less data centers. So that is the mechanism which would slow down growth uh for the AI complex and and again, increase the discount rate for those long duration cash flows so impact growth stocks as well. So that’s that’s the calculus there is that uh higher interest rates would put pressure on tech stocks.