Moneybeat: Conflicting interests

Editor's note: The following text is a transcript of a podcast story. To listen to the story, click on the arrow beneath the headline above.

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: It’s time now to talk business, markets and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning to you.

DAVID BAHNSEN: Good morning, Nick, good to be with you.

EICHER: The Fed has just cut rates for the first time in nine months, a move it described as a “risk-management cut.” Officials say they want to get away from a restrictive stance toward something more neutral, and I think you should explain what that means in monetary policy. But I’d also ask, at what point does an easing monetary policy shift from one you’d consider prudent into going too far—becoming excessively accommodative?

BAHNSEN: Well, I think the first thing that has to be said is that it’s very unfortunate that we have to speculate about what that is. Having a central bank who is supposed to arbitrarily determine what the neutral rate is is, I think, problematic when I believe market forces are the best adjudicator, and some rules-based system for doing such. We don’t have a rules-based system, and we’ve asked a central bank to set the price of money. Then they have to decide: do they want to set the price of money restrictively, accommodatively, or neutrally, given different shifts in the economy?

They have been consciously setting it restrictively—meaning setting the cost of money so high that it would attempt to slow down economic activity—and they have stated now that they want to move towards a neutral posture, which I believe we ought to be in something more neutral.

And your question then is: when will you know that they’ve gone beyond neutral into something accommodating, easing, trying to stimulate, and indeed perhaps excessively stimulating activity? Well, the question is not so much when we’ll know that happens, as to when it happens whether or not they wanted it to happen. Because if you go into a recession, then they are purposely trying to be beyond neutral into accommodative, using monetary policy consciously, purposely to drive certain levels of economic activity.

And if we are not in a recession, or if there is not an economic reason to try to juice the economy, so to speak, then how do we know that they’ve gone too far? Well, the answer is: you don’t know until you see it. This has been the issue for decades, going back to multiple times throughout the reign of Alan Greenspan as Fed chair.

So financial markets are usually the easiest way to see it, and when you see a lot of speculation and silly leveraged activity—what I refer to as malinvestment—in other words, a low cost of money attracting a lot of capital and a lot of debt and a lot of leverage and a lot of financial decision-making that you would not otherwise be seeing.

We’re not there yet. We’re not at a point where the cost of money is driving malinvestment, but that would be the thing I would look to, Nick, to see when that begins to happen.

EICHER: There’s also the question of credibility of the Fed. The President continues to apply pressure on the Fed chairman, the Lisa Cook removal fight is in the courts, and Stephen Miran has just come in aggressively touting deeper cuts. How solid is the Fed’s credibility right now—is it hanging in there, or starting to erode?

BAHNSEN: Yes, hanging in there and eroding. I do believe that the termination of Lisa Cook was very pretextual, that we had an unqualified Fed governor, so I’m not defending Lisa Cook. I don’t think that the Biden administration should have appointed her, but then the reasons that the Trump administration gave to terminate her, I think, are a very poor rationale. She may very well, by the way, be guilty of it, but she hasn’t even had charges brought against her, let alone been convicted.

And so I just still believe in enough procedural due process that it’s hard to take seriously terminating someone for something that may not even result in charges, let alone a conviction, and the courts have so far ruled that way. Now the administration is asking for the Supreme Court to jump in.

So you have this whole issue with the White House attempting to move out a Fed governor who, by statute in the Federal Reserve Act, can only be terminated for cause. And then now Stephen Miran coming in and being approved by the Senate and sworn in, and then a few minutes later being part of the FOMC meeting this last week and voting for a half-point rate cut—the only one to do so. Which is fine, theoretically, but on the dot plot he indicated he sees one and a half percentage points coming out by the end of the year, where no one else is even close to that.

So you kind of, I think, effectively see somebody campaigning as a Fed governor to be the next Fed chair when Jay Powell’s term ends next year. These things are all a little bit silly.

Now, the reason I say “hanging in there” is you did have a close-to-consensus view here on this single quarter-point cut that took place this last week. And even though there’s a wide dispersion of expectations for where things will be in the next couple meetings, there’s still barely a majority of nine votes indicating two more rate cuts this year, even though there are six people saying no more, and then there’s Stephen Miran saying one and a half.

So you have this kind of division on the Fed that we just haven’t seen much at all in my adult lifetime, and that is eroding credibility. That’s problematic. But it’s hanging in there, so that’s why I kind of answer on both sides of it.

What’s really the thing in front of us now is where we’re headed to new leadership in the Fed in May of next year, and the process by which the President goes to get there. I do believe financial markets will not mind at all someone who’s going to be cutting rates if that’s deemed the right thing to do, and just because the President wants it to happen doesn’t make it the wrong thing. In fact, I think the President’s been right to want rate cuts.

The question for markets and credibility is whether or not the reason someone’s cutting rates is because the President wants it. That’s the issue of credibility—that we want the Fed making the decisions it makes, right or wrong, for the right reason. Not for right or wrong the wrong reason, which would be political pressure.

EICHER: Okay, last question: Jobs growth clearly has slowed down, even if we haven’t seen a lot of layoffs yet. At the same time, the housing market is stuck, with potential sellers frozen into holding on to attractive mortgage rates, because they don’t want to take out new, more expensive mortgages. So between a hiring slowdown and a housing freeze, which is the bigger drag on the economy?

BAHNSEN: Yeah, well, of course it isn’t mutually exclusive. It can be both at the same time. But jobs are always the bigger issue because jobs and the health of the labor market feed so many other elements of the economy—from income to savings to consumption to capital investment to industrial production.

The various categories that drive economic growth really do have at their root a lot of connectivity to the health of the labor market, both in causation and reflection. What I mean by that is that you get a lot of economic activity out of having gainfully employed people, but you also reflect a healthy economy in having gainfully employed people.

So the other component to your question I would point out is that housing is a subset of the labor side as well. If the sellers’ strike in housing—this frozen housing market I refer to—were to continue, it would most certainly bleed into the labor market. There already is a substantial decline in those that are doing real estate agent work, title work, mortgage work, processing, construction.

The construction is also being heavily impacted by tariffs, so you have a lot of adjacent labor sectors that are connected to housing. So there’s a connectivity in all this that I think is important.

EICHER: David Bahnsen, founder, managing partner and Chief Investment Officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thanks, have a great week.

BAHNSEN: Thanks so much, good to be with you.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.