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Let's kick things off to the close with Anne Walsh, chief investment officer of Guggenheim Partners Investment Management. Anne great to have you here on the program.
Anne Walsh: Thank you for having me, Romain.
There is a lot of talk right now about whether right now monetary policy should be considered restrictive or not, and I'm curious as to how you view it from where you sit.
Anne Walsh: So what we've observed for quite some time, actually, we've been in the circumstance for several years now. And that is we have a bifurcated economy. There's the haves and the have nots, small businesses, lower end consumer. They've been suffering. And to them, an interest rate and the interest rate environment is very restrictive. Their cost of borrowing is high. The delinquencies are rising. That's been challenged. On the other hand, companies with access to capital, large issuers, those with more wherewithal and the higher end consumer, it's a totally different story, especially as if it's been we've seen the wealth effect being driven by the stock market performance. And so when, you know, Matt, you're referencing the consumer where the strength is definitely been there at the top 10 percent of wage earners, are consuming at 50 percent of the consumption level. So we're seeing a very different kind of economy depending on where you sit.
Well, it raises a question, though, is monetary policy, at least in this traditional mechanisms, the right way to address some of those disparities. And just earlier today we heard from Lorie Logan, who even raised the prospect, maybe we should rethink what the benchmark rate is even supposed to mean.
Anne Walsh: So I tend to believe that we have more room for cuts. I've been advocating for, rate cuts for a bit of time. I also think rate cuts at this phase of the economic cycle are a bit of a blunt instrument. And I don't think the Fed has used the balance sheet maybe as precisely as they could have used that. There's a different effect on the on the economy. I think rates should be coming down. Even the Taylor Rule suggests that they had 75 basis points of cuts left in the system. We started with 25. We still think that's two cuts left. Before you get to what at least the Taylor rule suggests as neutral at this point in time.
So what, kind of terminal rate do you expect the market is pricing in 3 percent. And to be fair, Miran says he thinks the neutral rate is zero. So, you know, add inflation to that and you get to that, that rate. So I'm, I'm a little bit more middle of the road. I'm certainly not at zero.
Anne Walsh: I think we have a few other aspects to the U.S. economy as well as the global economy that are happening. We're kind of in a bit of a reflationary world, and I don't want to mean inflationary, but there's a lot of positives and there's a lot of growth. You talk about the GDP number that came out today, a surprise on the upside, 3.8 percent. But we have artificial intelligence build out, data center, build out. It's adding a percent to GDP. We're looking at, a tremendous amount of productivity, but all of this does have a somewhat inflationary pressure level to it. In a good way, because it's adding to the growth of the economy. And it's not, again, just in the U.S., this is globally. And so as a result, I think a 3 percent number on, the terminal rate makes sense currently, unless you're to see a slowdown, which isn't really our base case, then we would, you know, reflect at that point in time and say, maybe it's got to be lower than that, maybe 2.5 percent. But I think for the time being, you get a real rate of inflation, a real rate of interest, that you can earn as an investor. And I think that's relative and relevant to investors.
Is it possible and that we get, you know, inflation hovering around that 3 percent, which seems to be where the fed is comfortable. I mean they talk a big game about 2 percent, but we know they don't mean it and that we get growth that's maybe even stronger than the 1–2 percent that people are expecting. Now everyone's waiting for this other shoe to drop from tariffs. But we keep waiting and waiting and waiting. And in the meantime, we're seeing some real economic success.
Anne Walsh: Indeed. And the truth of the matter is, is that, you know, we've got a complex economic story right now. Right. You have tariffs, as you mentioned, the concern of whether or not they're really inflationary or not. I think they tend to have more of a slowing, effect on the economy relative to an inflationary effect. And so we really don't believe we're going to see that much impact from that. Additionally, we do have quite a bit of growth in the system and in areas that we probably didn't take into account as prognosticators, when rates were rising, was the fact that there's a whole savers benefit out there to and benefiting companies with cash on their balance sheet as well as traditional savers, like, maybe older Americans, for example. So there's a lot of tailwinds in the system at this point in time. So let's go back to the question of whether inflation at 3 percent is really the Fed's target now. I would suggest that they've moved slowly and sort of quietly, into a range of inflation that's acceptable, particularly when you have high productivity, which we're starting to see that. And again, the benefits and the and the use cases for artificial intelligence usage are also going to benefit productivity quite a bit. You adjust that 3 percent or you know, sort of in the mid twos. It sounds like it's actually not only achievable but well within what the fed could tolerate.
I am curious if we do sort of are at the start of a prolonged rate cutting cycle, or are they just some sort of prolonged easing here? What does that mean for a lot of the folks who are right now piled into short term Treasurys or short term debt overall, does that rotate out into longer term debt, or does it rotate out of short term debt altogether, out of debt markets altogether, and maybe into something riskier?
Anne Walsh: So we would anticipate that there should be movement into the longer end of the curve. And that would make a lot of sense. You're getting paid as an investor in terms of nominal yields, and even if you look at real yields for the first time, you also get a very nice risk premium relative to, say, equities, where there's no real risk premium at this point in time. So it suggests that of the $7 trillion that sitting on the sidelines, that there would be benefit from extending. Plus we are seeing an increasingly steep yield curve which benefits the longer term investors. So all of that benefits the fixed income extension trade, if you will, and particularly as we see that rates are in a trading range at the longer end of the curve. We're really kind of stuck between mid 30s, mid to high threes, and mid fours. And so that lends some stability for investors as well.
All right. And great stuff as always. Anne Walsh is one of the best in the business. Chief investment officer over at Guggenheim Partners investment Management.