Market Snapshot: Is Productivity Driving Growth? Featuring Tom Porcelli, Wells Fargo

In Episode 03 of Market Snapshot, SIFMA President and CEO Kenneth E. Bentsen, Jr. and Head of Research Heidi Learner are joined by Tom Porcelli, Chief Economist at Wells Fargo, to discuss the latest forces shaping markets. Against the backdrop of a surprise CPI release and Fed Chair Kevin Warsh’s first congressional testimony, the conversation explores the underlying strength of the labor market, inflation dynamics, the path for monetary policy, and what current Treasury yields suggest about growth, fiscal risk, and market expectations. Porcelli also discusses whether recent productivity gains are being driven more by reduced hours worked than by AI, and what investors and policymakers should watch in the months ahead.

You can listen to this conversation by following “The SIFMA Podcast” on Apple, Spotify, YouTube, or wherever you get your podcasts. Sign up to receive new episodes, delivered right to your inbox.

In This Episode

• What the latest labor market data is signaling
• AI’s role in productivity and economic growth
• Inflation trends and the Federal Reserve outlook
• The outlook for interest rates and Treasury yields
• Fiscal policy and long-term market dynamics
• The key economic risks to watch in the months ahead

Featured Guest

Transcript

Kenneth E. Bentsen Jr.: Hello, and thank you for joining us for the July edition of the Market Snapshot podcast. I’m your host, Ken Benson, president and CEO of SIFMA. Market Snapshot is a monthly podcast that takes a concise look at what moved markets and what to watch next. I’m pleased to be joined by my co-host, Heidi Lerner, SIFMA’s Director of Research. We’re grateful to be joined by Tom Perselli, Chief Economist at Wells Fargo. Tom, thank you for joining us today. So comments and questions are welcome. Listeners can reach us at digital at SIFMA.org. So let’s go right at it. First, a quick recap on the markets. We are recording this on Tuesday, July 14th. The U.S. economy continues to expand, but at a noticeably slower pace. June payrolls rose just 57,000, roughly half of expectations, while unemployment held at 4.2%. Labor participation fell to 61.5%, the lowest since 1976 outside the pandemic, as 720,000 people left the labor force. Inflation remains the Fed’s main constraint. Even as CPI fell from 4.2% year-over-year growth rate in May to 3.5% in June, marking the first decline in six years due to a drop in gas prices, core measures remained elevated, with core CPA, CPI still at 2.6% year over year and core PCE at 3.4% in May, still well above the Fed’s 2% target. Economists are divided on what the new Federal Reserve Chairman Kevin Warsh will do today, who’s actually testifying before Congress today and tomorrow. So with that, Heidi, despite recent market volatility fueling concerns over equity valuations, your research found strength in market fundamentals. Can you elaborate on what you covered in the latest edition of SIFMA Insight Market Metrics and Trends report?

Heidi Learner: Sure. We took a deep dive into SP revenues, earnings, and profit margins and found that across almost all sectors were at or near historical highs on these metrics. Our work suggests that market strength is currently supported by both higher valuation multiples and robust underlying fundamentals, and that fears of overvaluation are largely misplaced.

Bentsen: So maybe turning to our discussion at hand today, let’s start with the labor report. Payroll growth has slowed, but the unemployment rate remains low by historical standards. What does that tell you about the underlying health of the labor market?

Tom Porcelli: Yeah, look, I think the labor market actually is fairly healthy. I mean, I think, you know, we all have these these numbers in our mind, right? Like, you know, payrolls are supposed to grow at X number. Um, but I think what what we’ve seen over recent months is that there’s been a lot of volatility from a payroll perspective. We’re averaging what about 100,000 jobs over the last handful of months. And I think that that actually is right where we’re probably supposed to be, sort of given underlying economic fundamentals, right? Like this is an economy that’s not too hot or not too cold. And so you know, in and around this 100,000 zone makes makes a lot of sense to us.

Learner: I was I was gonna ask, when you look below that headline payroll number, how much of today’s job growth is being driven by just a few sectors, particularly if we look at healthcare. And what does the labor market look like if we strip those categories out?

Porcelli: Yeah, I think you know this gets to, I think really the heart of the challenge as it relates to the labor backdrop. I mean, we’ve we’ve sort of called the labor backdrop a one-trick pony to some extent, right? Because it really you’re seeing it dominated by healthcare jobs. Um, we like to look at something called cyclical hiring. So Kumka hiring is basically just taking private jobs, tripping out healthcare jobs. And when you do that, it actually looks fairly soft, right? I mean, it’s in this, you know, sort of 50,000 zone, even a little less, um, depending how far back you want to take the average. Um, and that is, I think, going to be a challenge from a growth perspective, meaning if you’re growing in this like one and a half to two percent zone, it’s gonna be really hard to break out of that unless you really see some upward drift from a labor market perspective. And as I started out by saying, I just I don’t think that we’re there. I think that this is a labor market that’s sort of moving sideways.

Bentsen: And and sort of following up on that, um yeah, yeah, I think you I think you, if I recall, you threw out the number of maybe at a a break-even rate of maybe a hundred thousand. Is are we seeing that because you talk about slower growth, but also immigration dynamics and demographic trends?

Porcelli: Yeah, I think all of that is playing into it. I mean, it’s funny, Ken, when I think about the breakeven rate, the range on this, and you all know this probably better than me. You get to hear what all these other economists are saying. But my impression is that the breakeven range right now is sort of, you know, there’s a massive gap between the low and the high. I mean, I’ve heard estimates as low as zero, and I’ve heard estimates as high as, you know, 100 and even more than that. I I think that it’s really hard for people to know with any degree of precision where that is. What I would say is this the you know, we’re printing what, about 100,000 jobs or so um over the last handful of months, and the unemployment rate is moving sideways. I mean, I think that that’s probably a fair starting point for where breakeven probably is.

Bentsen: What about labor supply? I mean, we had according to now 720, almost three-quarters of a million people, you know, left the workforce in the last month survey. Is labor supply adequate today? Or is it being constrained and is it putting a constraint on growth? Do we think yeah?

Porcelli: I mean, look, I think the proof is in the pudding on that one, right? I mean, you’re just not seeing a lot of real sort of demand for for these jobs, you know, and you can see that in an assortment of different places, right? Like, you know, you could look at something like as simple as job openings, which which by the way in itself is can be quite volatile. But I think if there was a real sort of lack of supply, I think it would be showing up in an assortment of different areas, not the least of which would be wages. Um, and you know, all we’ve seen from the wage front over the last what year and even more at this point is is wages continue to slow down. So we’re probably pretty um sort of properly balanced at this point, just given that the demand dynamic.

Bentsen: And and you know, I know Heidi, and some of the surveys that we’ve done of our economist roundtable, you know, looking forward at you know potential growth rate, you know, you know, you know, maybe at a two and a half percent real GDP growth rate, you know, what what do we think is driving outlook? How much of this in thinking about the labor labor market is is tied to productivity? And and I’d ask both of you, what what are we what do we think we’re seeing in terms of productivity? Obviously, we have some data. There’s a lot of discussion about AI is is having a promise of of enhanced productivity going forward. But what are we seeing right now and what do we think matters?

Learner: I think to a large extent the productivity gains have been driven a lot by reducing the number of workers to date and then the associated worker hours rather than any immediate gains that we can see from AI. I think it’s a little bit too soon to tell, much lik we saw the arrival of the internet around 1999, 2000. It took a while to see the numbers and the data. So I think to date, we’re probably seeing productivity gains from a reduced number of workers. But Tom, I don’t know, I don’t know if you have any other thoughts.

Porcelli: Yeah, I mean for sure. I think that uh, you know, when I look at when I look at productivity now, I mean, I think we also we always have to take a step back, right? Like uh, you know, be be as first principles as as we can on on some of this. And and so when when we take a step back, what we see is that, you know, if you just look at sort of the the basic construct for uh productivity, um, you know, it’s basically it’s it’s it’s output in hours. Uh and we know that output is sort of moving along at a, again, as we highlighted earlier, at a pretty reasonable clip. Um, but what we’ve seen is that hours have actually been reduced in a fairly notable way, particularly over recent years. And I think that’s still, you know, sort of right sizing, sort of post-post, um, post-pandemic. Um, and so when I look at the lift in productivity, the lift is really coming from from the hour side of the equation. Um, and I know a lot of people will say, yeah, but you know, couldn’t some of that be AI’d? And I guess what I would say is I don’t discount that some of it could be, but you know, when we when we look at the detail, um, and this goes back uh to sort of our labor market discussion, you know, when we looked at the detail, it it doesn’t seem like that’s actually happening right now. So so how can how can we know this? If if we look at something like um AI usage by by sector, um, and we look at the change in jobs by sector, and we overlay that on, say, like a scatter chart, you know, what we would see is that this the dots are literally all over the all over the place, um, which, you know, statistically speaking, means like, you know, the R is basically zero. So you’re not really seeing it show up yet. I don’t doubt for a second that that it will over time, um, but it’s just it’s it’s not in the data yet.

Bentsen: I want to shift to inflation, but before I do, I want to go back to one thing and and think about productivity and and you know, uh, as I noted at the outset, um, you know, labor force utilizations at, I think 61.5% in the last reading, which is the lowest in in quite some time. And, you know, I’m old enough to remember that there was a time when, you know, that that was a key statistic that uh policymakers would look at it of whether or not uh the economy was getting too hot when you saw uh in you know uh uh a higher, a much higher uh labor force utilization. Is there are we is there anything we can take in the current environment? Because we did go through productivity waves, obviously, you know, uh 20 years ago, uh, you know, perhaps now. Should we be focused on labor force utilization or or or not as much?

Porcelli: Yeah, look from from our perspective, you you know, the answer is a resounding yes. Uh, I think, you know, we have to uh um I think always have that on our radar. I think there’s also countless ways of slicing it up. Um, because Ken, I think you’re quite right. Um, if you just look at like headline participation, headline participation was uh, I think, uh acutely soft uh in the most recent report. But I think again, it goes back to something we we talked about earlier. There’s been a lot of volatility in in not just um uh the the payroll report, but I think in in a in a lot of um different economic uh um reports. So, you know, you sort of you take these sort of big monthly moves with a with a bit of a pinch of salt. Uh, because I think um what really matters is sort of what is like what is like the sort of the longer term, you know, so prognosis for this. Um and the reality is in an aging population dynamic, you know, you’re you’re probably supposed to see the the participation rate um slow down to some extent, which is why we try to encourage people again to the idea of you can slice this stuff up in an assortment of ways. We try to encourage people to really look at the prime age participation rate, um, which you know can sometimes tell a very different story. Again, the the monthly volatility notwithstanding, um, but prime age uh participation is uh is still running at uh I would argue a pretty reasonable um run rate at this point.

Bentsen: So let’s let’s turn to inflation and and love to hear from both of you on this. Um as I mentioned, uh, you know, today we got uh you know the the uh the June CPI report. It was it was definitely down uh from the you know from the May report, uh, you know, uh down uh 3.5, down from 4.2. Um uh uh core inflation, those still seem uh uh pretty strong. Um what’s your outlook over the balance of the year? And what are you thinking in terms of uh of the economy being on a path towards the Fed’s uh 2% uh target? And maybe start, you know, start with you, Tom, and then and then yeah, for sure, Ken.

Porcelli: So um, yeah, it’s uh it’s it’s it is funny that we’re recording this um on a day of you know what was uh I think a pretty a pretty consequential CPI report. Uh and on the same day that uh Fed uh Cheddar Warsh is uh giving his testimony. You know, the um, and so I’m I’m aware of of dating this uh this this show um by getting into too much detail on the on the just released CPI report, but I do think it’s important uh because it it was it it came in. I think that uh I was saying this to uh a bunch of my colleagues, I think that this report was exactly what the market needed, uh, because the core was so soft, right? I mean, core out to the second decimal was actually a negative on the uh from a month-on-month perspective. Uh, and and I think it it it cools down or tamps down um a lot of this discussion around the potential for a July hike uh from the Fed. So I I think this is exactly what what the market needed. Uh, but but again, big picture. Yeah, I do. I think that I think that inflation is gonna drift down toward targeted. But notice how I use these words very purposely toward target. I don’t necessarily think it’s gonna get to target. Um, but I think that also begs the question of sort of what is the Fed really looking for? I think the Fed is looking for number numbers that are much more comfortable because Ken, as you as you really highlighted, uh, you know, we just had a forehandle. The year and your pace just had a forehandle, and now we’re down into sort of the mid-threes. I think what they want to see is inflation moving in the right direction. And I think if that persists, then I think it could cool down some of this conversation around heights. But uh, you know, it’s one of the interesting things uh I I think about this current dynamic is, you know, one thing that um that uh Chair Warsh has said is he really doesn’t want to focus so much on any single monthly payroll report. I think the reality of um you know the lack of real forward guidance means necessarily that we’re gonna be focused on every single monthly uh um you know economic report, including the CPI. So as much as I think that today’s CPI really sort of diminished the the hopes of those people that were looking for a hike at the July meeting, I think the truth is the next CPI report is gonna matter as uh as much as it relates to the FOMC meeting after that. But I think on I think on balance we’re moving in the right direction. We will be moving in the right direction.

Bentsen: And how do you believe that?

Learner: So obviously I think uh it was good news. I mean, even if you take away the dramatic drop in the headline due to the pretty significant decrease in gasoline prices and energy more broadly, um core coming in at zero or a slight negative, as as Tom mentioned, is pretty significant. The last time we were at this level uh was back in January of 2021. So I think it is uh really good news. I guess my question back to you, Tom, would be: are there any certain categories that you’re watching? I know a lot has been made, particularly on the PCE side about services once you strip out energy and even housing costs. But are there any categories uh that you’re watching specifically right now or the risks broadening? Um Yeah.

Porcelli: Yeah, Heidi, uh I it’s you know, again, this we could probably do a you know a 30-minute um discussion just on just on inflation. Exactly. So I’ll but let me let me try to keep it tight just for the sake of time. I I always have a hard time with the idea of you know only looking at sort of one sort of you know grouping of of inflation components, you know, like you know, just looking at um, you know, uh services ex housing uh as an example, uh, to sort of really gauge what underlying inflation is doing. I have a hard time with that for a couple of reasons. One, I think if you challenge people on, hey, what was the you know, the year-on-year run rate um on, you know, sort of let’s just call it core services um pre-COVID, uh, I think most people will probably get the answer wrong, which is to say is running around 3%, um, which, you know, is sort of where we are now. It’s a little north of there, but um, you know, sort of close. Uh um, but two, I think the the you have to think about inflation in terms of the consumable basket. Um, and I think it almost feels slightly disingenuous for us, all of us in the economics community, just to strip out these things that are deflating. Um, because the reality is that’s part of the consumable basket. And that’s what happens when you strip out goods for for the most part. I mean, obviously goods have been um uh shown some some upward pressure of late. But but but again, so my argument is not so much, hey, put it back in there so that it tells a better story. No, I’m simply saying I think we actually need to look at um um inflation more holistically and and of course recognizing there are some categories any given month that can just you know sort of rip. Um and I understand the the notion of wanting to strip some of those out, which is why, by the way, um, you know, a trim mean measure um is actually a sort of a reasonable approach to um trying to get a sense for what’s really happening from from an inflation perspective. Um, but but if I if I take a step back and actually try to go 60,000 feet on this, my my general stance is I I think what we need to ask, because really this question, this question of inflation really comes down to um what is the Fed’s reaction function, right? I mean, I think you know, at the end of the day, that’s really what the question is. And what what I would argue is I think I think monetary policy has to ask um, what are we solving for? Or like is is the inflation that we have in place right now the kind of inflation that we can solve for with higher interest rates? And that answer to me, it’s not an obvious yes, as I think it is for a lot of folks right now. I mean, you think about some of the things that did the lifting from an inflation perspective, uh, and and I’m aware that I said I was going to keep this response tight. I I promise I’ll I’ll get there. Um, so if you just think about like, I don’t know, uh two or three years ago, the things that were doing the driving from an inflation perspective uh was really like you think about like auto insurance and auto repair. I mean, two seemingly, you know, small slash and constant clunking categories, but they were doing a lot of the lifting from an inflation perspective. And I think we need to ask, could could policy have solved for that? I think the answer is it it couldn’t, right? I mean, think about why those things were were rising, because people couldn’t buy new cars, so they had to go buy used cars. Used cars basically need more insurance and more repair, and so those things were lifting. Um, then you fast forward um to uh uh to tariffs, tariffs again, another supply shot. Um, there’s not much the Fed could could could actually do about that. And what I would submit to you is if you think about what um durable goods prices were doing over the window, you know, sort of in it post post-tariffs, they’re rising pretty dramatically, right? Like you know, you think about you think about um durable goods prices, they’re they’re persistently in deflation, right? I mean, that’s that’s like been like you know, sort of the state that they’ve existed in uh for the last 25 years, you know, sort of again, outside of the the COVID window. Um, and today, instead of running at this minus two, minus three percent pace, they’re now running at a plus three percent pace. Now, again, I get it. On the face of it, you might want to say, okay, well, we need to respond to that. But I find it really interesting that if I look at real spending, right, in meaning inflation-adjusted spending on durable goods, it was actually slowing as those prices were rising. I think that’s super interesting because it shows that the consumer was in sort of self-correcting mode. Um, yeah, i.e., like not sure that policy would have had the effect that policymakers would actually want in that context. And the last example I’ll give you is obviously we’re going to a supply shock right now on the energy front. And I know that it bleeds into the core. I think we all sort of appreciate that. Um, and obviously the one area that that really shows up uh is in airfares. But again, I think it’s really interesting. If you look at real spending on air uh on airfares uh or on plane tickets and such, um, it’s actually slowing um as those prices were rising. I mean, the consumers are in sort of self-correcting mode. Uh, and I think that to me is the right way of I don’t have any problem slicing up inflation at at all. I just think we need to sort of do it in the with through the lens of what can policy actually impact? Uh and when I look at inflation today, I’m not sure that policy could actually have that much of an effect, short of causing a recession and you know, basically stopping everyone from from spending, which perversely is what policy is basically designed to do.

Bentsen: So, so I want to I want to shift to the Fed in just a second. And and you’re right. I mean, it it’s it’s rather ironic that the day we scheduled this, we we had both the CPI and and and the and the new chairman making his uh inaugural uh turn on Capitol Hill. Um, but I just one more question around inflation and labor market. We spent a lot of time on labor market as well, but uh and it and and talked about you know some of the softness maybe there. I mean, and we talked a little bit about productivity. Do we do you think, do we think that there’s any pressure, any inflationary pressure that we’re seeing from labor costs at this point in time, or is that kind of going the other direction?

Porcelli: I mean, look again, the proof is in the putting on that. I mean, you’re not really seeing any notable wage pressure in in the aggregate. It’s not to say that there aren’t sectors that are experiencing some wage pressure. Um, and and I again I love how you sort of you know framed it in the context of you know productivity and in AI. I mean, the truth is you are seeing an effect um on the price front as it relates to AI. Again, I would ask is that the kind of thing that the Fed really wants to try to control? Um, because you know, AI is sort of today’s new arms race. Uh, and I don’t know if the Fed wants to insert themselves um into that discussion. Maybe they Do. I mean, in fact, in the FMC minutes recently, they they specifically called out AI um inflation. So maybe they do. I think that that to me warrants a 30-minute discussion, also. Um, but I think that uh to me the right way of thinking about that question that you uh asked, Ken, at the end of the day, is you’re not really seeing any real wage pressure in the aggregate.

Bentsen: Yeah, Heidi, any thoughts on that?

Learner: I think it’s a fair point. I mean, I think we have to be careful about the impact of AI um trickling down and affecting electricity prices. And then Tom makes the really good point, you know, is this a supply side or demand side phenomenon? And, you know, to the extent that it’s supply side, it’s really um not something that the Fed can directly control. Um, the question I have for you, Tom, might be where do you stand in terms of the debate as to what the next uh Fed move is? Is it going to be a cut? Is it going to be a hike? And if you had to argue for your opposite view, um, maybe you can give us your view and and why you think that’s the case. But if you had to argue um the opposite, how how would you go about rationalizing that?

Porcelli: Yeah. So I think the argument for for not doing so our call is that the Fed does nothing. They’re they’re supposed to be on hold right now. And the argument is. Yeah, over the, I mean for the foreseeable future. Okay. Um and uh all the arguments for that relate to everything I said about sort of the inflation um setup and you know, what can the Fed control for? That whole discussion relates to why the Fed is supposed to be in hold right now. But Heidi, to your to your other question on, well, you know, what would be the opposite? Um, I think the opposite would be if inflation is is really persistently right persistently rising from here, and it’s not related to supply shocks, right? It’s related to more of a demand dynamic, um, then I think the Fed is absolutely supposed to hike rates in in that scenario. I mean, that to me, I would even argue that’s not really even so debatable. Um that that is a that’s a very easy yes hike rates.

Learner: Is there any one category, just as a quick follow-up that you’d be watching? Is it uh shelter costs, is it medical costs, is it any of the, I’ll say, usual culprits um that you think the Fed would be more reactive to?

Porcelli: No, I don’t think that there’s any single category that you could pinpoint and say this is what the Fed is going to respond to. I think they’re looking for sort of broad-based price gains. Uh, and if you see that, I think that that’s going to be enough.

Bentsen: Do you, Tom, do you, I mean, it this is a fascinating discussion. Um, uh, do you um do you think uh you’ve sort of been, you know, you you’ve injected the supply side view. Well, I let me brief, I’m not trying to label it one way or the other, but you brought up, you know, instead of just thinking about demand side, supply side, and and how does that affect the Fed’s policy making uh uh decisions? Um do you think there’s a shift going on at the Fed that that in taking that into account that you you know, yes, we can we can temper demand side uh uh driven inflation, but maybe supply side we can’t. And and you think that’s a uh you think that thought is going on and and is that new?

Porcelli: I think that thought is supposed to go on. I mean, I think we should all be very disappointed if that was not happening. But I think I think Ken, you’re raising you’re raising a really important idea. So if you consider rate hikes, I think you know, because one of the discussions that that I think people are having within the market is, well, you know, the Fed the Fed should hike rates just to keep inflation expectations anchored. Now, uh the the problem I have with that argument is, well, for starters, inflation expectations actually are anchored, right? I mean, uh, and I’m not talking about the consumer measures of it, I’m talking about the market-based measures, uh, which I think, you know, it doesn’t really matter how you want to slice that up. I I like to look at the five-year, five-year forward, um, you know, sort of inflation swap measure. Uh, and that that that’s basically moving mostly sideways. So inflation expectations, I think, are well anchored. Um, but but but let’s just pretend for a second that that really is part of the the discussion or the argument um that that the Fed is actually having, you know, should we hike rates just to make sure inflation expectations uh remain remain glued? Um I think what we then need to ask is okay, is it costless? Right? Like is raising rates uh costless to to the sort of the broader economic backdrop? And the answer is actually it’s not, right? So if um and and we ran this simulation, if you raise rates by 75 basis points, let’s say the Fed raises rates 75 basis points, you would actually impact inflation again. This is a again, this is in the scenario where it’s more of a sort of a supply side um uh um shock. Um if you raise rate 75 basis points, you would impact inflation by 0.15 percentage points. 0.15 percentage points. So just so we’re all on the same page, that would mean if inflation is running at around 3%, you would it would drift to 2.85 percent. Um okay, so you you get something out of it, but I think we would all acknowledge that that’s like an incredibly modest outcome at the end of the day. Um, but but again, it’s not costless. What is the growth hit on the back of that? And the growth hit is actually 0.3. Now, again, these numbers are all at the end of the day relatively small, but the growth hit is also 2x the inflation improvement that you get. And so that’s why I say it’s it’s a really tricky setup um for the Fed right now if it is simply to try to make sure inflation expectations are anchored. As I said a moment ago, inflation is really becoming unglued. Um, then yeah, the Fed is supposed to hike rates. But right now we see this more as a supply dynamic than a demand one.

Bentsen: Last question on the Fed. Um, how do you all think uh uh the uh Chairman Warsh is sort of, you know, he’s he’s come in with a you know a lot of ideas, interest variants in ideas. He’s set up these task force, brought in some pretty impressive people uh uh to oversee these task force looking at things like policymaking communication, et cetera. How do you see that? You know, and again to be fair to him, he’s been on the job for what, you know, a month, maybe uh two months, uh whatever. Um, you know, so uh, but are we seeing a uh uh a substantial ground shift uh uh underway from you know going from uh Chairman Powell to Chairman Walsh?

Porcelli: I’ll take that first, Look, I think that given the committees, there’s the potential for that, Ken, right? It’s more of a question of what is there, what are the results going to be? Uh and that remains to be seen. But I don’t think that there’s any doubt that the pieces are in place um for there to be a bigger groundshift.

Bentsen: Heidi, any thoughts?

Learner: Well, I was gonna ask what you make of um the market’s focus, let’s say, on yields. Everyone’s very obviously concerned about what uh the policy impact is gonna be. And you just gave that great example um that it’s not without cost to hike by, let’s say, 75 basis points and have a greater impact on growth. Um, you know, to what extent would you say that we’re currently, I think we’re at 457 on tens, the last I looked. To what extent would you say that we’re currently at fair value? And given that your uh rate outlook is for Fed to be on hold, um, do you think we’re at an appropriate uh range today?

Porcelli: I would I would say we we are. Now, I in fairness, I’m an economist and I think about the world in range terms, right? Like I, you know, a strategist uh or trader would have a very different view. Um, but I think as, you know, if like you put a pin, you know, where tens are right now and draw circles, you know, sort of uh pick a pick a number, 25 basis points, you know, or so on either side. Um, I think that that’s probably the right, the right range that you’re supposed to be. And I mean, again, just to be um uh I guess more specific, you know, we we basically have tens moving mostly sideways um over the balance of of the year, you know, and and and I think this this goes to something that that you and I have have talked about in the recent past. Uh look, I think you can get as cute as you want when it comes to trying to forecast where tens are supposed to be. Um, and you know, and I I know that there are a lot of really robust models that, you know, sort of define for all of us, hey, well, 10 should be here. Uh, you know, I think a really sort of a fair way of thinking about this is, you know, well, what should Fed funds average for the next 10 years? I mean, I think that that’s a sort of a very fair starting, I want to stress that’s a fair starting point for the conversation. I’m not saying that’s the only way of tackling this. But I just think in that context, you know, again, in the in the example I used earlier of putting a pin where we are and drawing that circle, that’s probably a pretty fair way of thinking about it.

Bentsen: If you’re looking out 10 years, uh what’s more important than uh, I mean, it would seem to me if you’re looking out 10 years, I mean, obviously uh inflation today and and and hopefully 10 years from now, we’re not talking about the same inflation levels, or if we are, it’s a different cycle. But uh uh, but are are are does does fiscal policy begin to take a larger share of what’s pushing uh or or driving rates at that point in time? And and how much do you think fiscal policy in the current environment is driving the rate environment?

Porcelli: You know, when I when I started in this business in the like late 1990s, um, you know, mid to late 90s, you know, we were we’re on the verge of a surplus. Uh and and I remember, you know, existing in that surplus window, uh, and people at the time saying, oh, well, you know, 5%, you know, can you imagine being in a 5% of deficit to GDP from here? You know, the markets would scream. Um I mean, the markets didn’t really scream, right? I mean, you know, uh it’s it’s only deteriorated, right? The deficit as a as a percent of GDP. So I think it’s very easy for people to say yield should be meaningfully higher on the back of you know, deficit to GDP that that that accelerates from here. And by the way, I think it will. I think, I think, I think the deficit as a percent of GDP will move higher from here. But I think you also have to consider in relative terms, right? I mean, relative to our, you know, these these our other um our other trading partners or just other countries at large. Um, and I think in that context, you know, a lot of these countries are sort of in the the same boat. I mean, you know, we love to talk about the aging population dynamic in the United States. It is not unique to the United States. I mean, it’s really a challenge most of the world over. Um, and so I think in that context, I think it’s gonna be the sort of the the relative that matters uh more than just, hey, what this is what’s happening in the United States alone.

Bentsen: Yeah, I I I agree. Um it’s it’s a question of capacity, maybe, uh long-term uh viability and capacity. And for what it’s worth uh, I I was a policymaker around those times and uh we were we were discussing whether or not if we if you know if we balance the budget and extinguish the debt, what we would use for reference rates, but we don’t have that problem right now. We only have that problem, right?

Porcelli: Yes, I’m totally right. I mean, you know, this and sorry, I uh I’ll say this, I’ll say this one one more thing and and then and then I’ll stop. Um the um I think this also speaks to the the you know the the heart of this is you know, we’re the world’s reserve currency. And I think in some ways, when you’re the world’s reserve currency, I think you get a pass. I want to be clear. I’m not saying that that’s necessarily, you know, the way that it’s supposed to be, but I think when everything is priced in dollars, it means you have a captive audience for for your issuance.

Learner: Good point.

Bentsen: Maybe um uh just as we get to the end of our talk here, um, I’m curious, uh, and this has been outstanding, uh, really, really interesting. And and and and can you say that to all your guests? Simon, definitely I do, but but but but but but this one in particular is incredibly timely and and and uh um we’ll take credit for having done that even though we did um but uh but what you know as you’re looking ahead uh uh just you know over the next month, next couple of months, what do you you know, what are you going to be watching most closely?

Porcelli: I mean, I hate to say this because I I think that this is not the way that we should all be tackling um analysis. But I think that over the next month, to your, I mean, again, to the way you framed your question, over the next month, I think the next CPI report matters. I mean, again, which is it’s an irony for me, you know, because Warsh has told us that uh that’s that’s not what he wants us to do. But I I think out of necessity, I think that that’s what’s gonna matter because I think that that’s what’s gonna dictate for people what happens at the next FMC meeting. Now, again, I want to be clear. Um, I don’t necessarily think that, you know, the next 25 basis points, whether it’s up or down, is really the thing that’s supposed to matter from a bigger picture economic perspective. Um, but I think we’re just we’re caught in this like this this little echo chamber of of really everyone worrying about what’s what’s to come from a Fed perspective. When I look further out, I think, you know, again, outside of the next month, but again, in the next month to answer your question, I think it’s the CPI report um or any inflation measures for that matter. But I think as I look further out, I think, and again, to my point on it’s not to we know we’re not supposed to be so worried about the next 25 basis points. When I look further out beyond that, I think it’s really easy to make the argument that you can actually see rates shift lower, particularly in the front end um over the coming year or more. Because I think the because I think when you think about next year in particular, growth will have slowed down, um, inflation hopefully will have come down. And I think that will lend itself to more of a conversation around um the Fed reducing rates. But again, I think you know, you got to get there. And there’s a lot of ground to cover between now and then.

Bentsen: Great. And Heidi, what are you looking at over the next month before you’re well?

Learner: It’s also, yeah, it’s also timely. So I think CPI and of course uh its counterpart PCE. Um, but I think today is the unofficial start to earnings season. Um we had a number of bank earnings out today. So um I’m gonna continue to be watching earnings to see if they can beat uh what I think are some pretty lofty estimates that are already out there, and also to see um what companies are saying about the balance of the year, where I think there’s um still a little bit of uncertainty.

Bentsen: Well, we will be talking about that in a month. And so with that, that wraps up our discussion today. Tom and Heidi, thank you both for your thoughtful insights and discussion, and thank you for participating and want to thank all our listeners for joining us uh to learn more about SIFMA and our work to promote effective and resilient markets. Please visit uh SIFMA.org. And we’ll look forward to seeing everyone in August for our next market snapshot.