Moneybeat: One tool, two risks

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MARY REICHARD, HOST: Next up 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: David, let’s talk about the Fed. Its last interest-rate meeting of the year was last week. The Fed was very divided on making the cut, and of course Chairman Jay Powell was asked about that in his press availability at the conclusion of the meeting. He seemed pretty candid and revealing ... explaining that the division had to do with the dual nature of the Fed’s mandate and which economic risk was the bigger one, to hear him tell it. Some officials are more concerned about the labor market. Others think inflation is still the greater danger. Powell said it was as close you'll come to a coin flip.

Have a listen—

POWELL: I could make a case for either, for either side. I mean, I could make that case. It's a close call. You'll see that a very large number of participants agree that risks are to the upside for unemployment and to the upside for inflation. So what do you do? You've got one tool. You can't do two things at once.

But he also talked about where policy is currently set and made the point that the interest rate was a touch closer to neutral—but still in that zone of restrictive. But you'll also basically hear him saying, if I'm reading him right, that the Fed has done its part to tame inflation and what inflation there is is related to tariffs.

Here's one more clip.

POWELL: I'd call it in a broad range of plausible estimates of neutral. At the same time, policy is still in a place where it's not accommodative, and we feel like we feel like we have made progress this year in non tariff related inflation. But as I said, we're well placed to wait and see how that turns out.

All right, dive on in here, David. How do you see it?

BAHNSEN: Well, this was certainly the most Trump-friendly Powell press conference that he has had, I think, all year. Based on the way last month’s press conference went—October 29—where there was some surprise in the hawkish tone, the dovish tone of this one was even more of a surprise because it moved so much the other way.

You could talk about this divide between the inflation concern, the price-stability concern, and the labor-market health or economic-growth health as one person versus another person. But it also is true of those things being an internal tension just for one individual.

So it not only pits Person A on the FOMC who voted no against a rate cut against Person B on the FOMC who voted for it, but in theory it should be pitting people themselves in terms of an internal tension. That is the point of a dual mandate. Right now, more than at most points, they are wrestling with two competing economic issues that create tension.

If it creates a tension internally for a voter, it obviously is going to create tensions across the totality of the voters. In this case, it ended up being nine to three. I do not find that hyper-divisive. There were two no votes on a cut, and then the other no vote—Stephen Myron—was because he wanted to cut more. He wanted to cut 50 basis points.

So I thought that Jay Powell’s comments that we are near the neutral rate were actually dovish, because I would argue—or at least some could argue—that you are at the neutral rate. By saying we are near it, it implies we might even have further to go.

They give away the store a little bit. Their dot plots say we predict one rate cut next year, and the futures market says there is going to be at least two rate cuts next year, with a pretty decent chance—over 30 percent—of three rate cuts next year.

That is where I think things stand. It looks like you might get another cut before Powell leaves, and most people believe you are certainly going to get another cut or two after he leaves, when the president has his own person in. As we know, Jay Powell is leaving in May.

EICHER: David, let me stay with the Fed for a moment, because there’s also been a notable shift here since the last time we talked.

Just last week, we reported that the White House had canceled additional interviews for the Fed chair job, and the sense at the time was that Kevin Hassett was essentially a lock.

But now that’s changed. President Trump has told The Wall Street Journal he’s leaning toward either Kevin Hassett or Kevin Warsh—which puts us back where we were months ago, with two very different “Kevins” in the frame.

Kevin Warsh, of course, is a former Fed governor. He served during the financial crisis and was interviewed for the job the last time around. And at the same time, the president has been very clear about wanting much lower interest rates.

So what do you make of the back and forth here?

BAHNSEN: Well, I have two thoughts. I wish I knew the answer, Nick, because I do not know that anything has changed.

It is entirely possible that the White House is doing a diversion here, a kind of pump fake, to not make it appear that everything is already set as Kevin Hassett. By now opening the door to the trial balloon that Kevin Warsh is back in the running, they may be faking it. I hope that is not the case.

I would very much love to see Kevin Warsh selected, and it is possible that they have flipped a little bit. But no one really knows the internal imaginations.

You are exactly right that a week ago the White House was flat-out telegraphing that they had selected Hassett, and now, a week later, they are flat-out saying they have not, and that Warsh is back in the lead position, or at least near the lead.

Look, the only person who I suspect actually knows is President Trump, with the possible exception of Secretary Bessent. I will stand by my prior claims that I think it is going to be one of the Kevins, and there is one of the Kevins I would rather see than the other.

EICHER: David, I want to shift gears a bit: There was a striking development this week involving a major climate-economics study—one that projected catastrophic long-term damage to global GDP and that had been widely cited by central banks, regulators, and policymakers. The paper has now been withdrawn after serious data errors were discovered, and once those errors were corrected, the projected economic damage dropped dramatically.

This was not a small tweak at the margins—it was a foundational error—and yet the study had already been absorbed into policy conversations.

When you look at something like that, what does it tell you about how economic models—especially in areas like the environment—can be shaped not just by uncertainty, but by bias and incentives, and then presented with far more confidence than they deserve?

BAHNSEN: First of all, we should be clear that this kind of thing happens all the time, and it is only not more scandalous more frequently because a lot of them do not see the light of day.

There is a human element where certain studies can indeed have mistakes, but there is also a sense in which oftentimes reports like this get adopted, circulated, distributed, and utilized for no other reason than that the people doing so want it to be true, and there is an inadequate amount of vetting.

The folks doing that are not neutral actors. They have an agenda. They have an ax to grind. If they get the semblance of an academic study that comes along to validate their priors, they have a real incentive to run with it.

Oftentimes these things are subpar. A lot of times they are subpar, but it never really gets discovered or outed. There is a subjectivity to some of what I am calling subpar, and this has been the case, by the way, with a lot of climate studies that have been accepted without adequate scrutiny.

That does not mean they are always wrong. It means there is more opinion than fact, and they have a way of being presented as objective when they are much more subjective.

This one had some pretty embarrassing errors in it, and they had to walk it back. That is in line, Nick, with a lot of other issues that have been going on with some of the climate studies.

You now have a pretty left-wing, climate-oriented, very high-profile person like Bill Gates who has recently come out and said, “Look, a lot of the assumptions we have had about where various concerns in climate are going were wrong,” and has made the case—I would not call it a mea culpa—but an admission that more prudence and a measured approach are needed.

There are trade-offs here. There is a timeline that is not going to allow people to make the improvements they want in carbon emissions without doing such significant economic damage that it becomes counterproductive.

A lot of us have been arguing something similar to that for a long time. There have been various actors in this debate over the last 10 and 20 years that have been much more reasonable, but it is interesting to see some of the gatekeepers coming along and saying the same thing.

EICHER: All right. David Bahnsen—founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. David, hope you have a great week.

BAHNSEN: Thanks so much, Nick.

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