Thank you both for joining us and thanks everyone for coming. Peter, I want to start with you. You made a fairly contrarian prediction back in January that we'd see inflation at 4% this year. That was before the war, before the energy shock. Care to update it?
I think it's looking increasingly like we will be right. This was with Adam Posen at the Peterson Institute. If you look at the price index for personal consumption expenditures out last week covering the period before the war started, goods inflation was 7% in a month. And that was one of the points that we were making. And the lesson there is supply shocks take a very long time to feed through into prices. That was true for COVID. It's true with regard to tariffs. It will be true with regard to the Middle East.
Do you think if we had seen tariffs play out the way they were launched into the world a year ago and not walked back and subsequently revised, the criticism is that, well, the economists were wrong because it didn't turn out to be that bad. Do you think if it had continued to play through, we'd start to be seeing it by now?
I think we are seeing it now. That was the point, which is these things take a long time. First you have to figure out what's happening. Then you burn through your inventory. And then only then do you fully pass along prices to consumers. And the reason I cited the goods inflation from February is I think a lot of that has to do with companies finally passing through the full impact of tariffs. And again, I think we're going to see the same thing with a lag with regard to aluminum, helium, the impact of fertilizer, and a lot of other things that are now getting interrupted. Supply disruptions or supply shocks like tariffs take a long time to feed through. They don't happen like that.
One more for you. What does that mean for rates? We have a new Fed chair coming in with pretty explicit orders, but that requires consensus.
I think if inflation keeps going the way it is, you know, three, three and a half percent, I don't think there will be a majority on the... I don't think you'll get a majority of governors in favor of a rate cut. And if you did cut rates in that environment, all that would happen is the yield curve would steepen. So it's sort of what are you trying to accomplish?
Michelle, higher rates are generally good for the investing business and the spread business. What does a higher-for-longer world look like for MetLife?
Yeah. Well, I mean, we sort of lived and operated in a lower-for-longer environment. Generally speaking, higher rates with a steeper yield curve is constructive for the life insurance industry. You know, MetLife is much less sensitive today to rates and markets than it was maybe a decade ago, but not totally immune. You know, we try to run our business with the expectation that we need to sort of have all-weather performance across environments. But directionally, you know, rates where they are today with a steeper yield curve is more favorable.
But we have seen big financial institutions get rates very wrong. European insurers blew it. Early 2010s, Silicon Valley Bank very famously blew it. How do you make sure that, you know, when you have economic conditions that might suggest one path on rates, political pressures somewhere else, how do you try to hedge for that?
Yeah, we don't, you know, we don't plan nor strategize based on any deterministic scenarios. Basically, we, you know, I think our understanding is that we're going to continue to operate in a highly uncertain environment. We're not assuming that that's going to go away anytime soon. We think this is going to be, this is the new normal basically. So we need to plan and strategize based on a number of scenarios, including ones that assume higher rates, including higher from where they are today.
Peter, you were Obama's budget director. You know better than almost anyone what the national debt looks like from the inside. It's now $38 trillion. Where are we today? The publicly held debt is around 30, which is a better metric, but okay, we're quibbling.
DOGE did not touch it. We are increasing defense spending.
Are we just in for the mother of all tax increases, or is the plan that AI bails us out and we grow like crazy?
What I would say is the thing that is saving the US fiscal trajectory is the reserve currency status of the dollar. Without that, we would likely already have had a fiscal crisis. With it, it provides a kind of buffer or protection. So from that perspective, the most interesting development to be watching is what's happening in stablecoin and the ongoing role of expanding the role of the dollar versus things that may be threatening the role of the dollar. Because if we were to lose that special status and we have a 7 to 7.5% of GDP deficit, polarized political environment, questions over the independence of the central bank and so on, you'd be in a much more challenging situation.
Do you think that's partly why the administration has pushed stablecoins and allowed them to grow, that they are the marginal buyer of Treasury bonds?
Well, there are multiple motivations. I think beyond just the demand for Treasuries, there is what's been called the underground empire of being able to project power by having the rails of the financial system run through the United States. And we are undergoing a transition from basically an analog type system to a digital payment stack. And I think there are multiple motivations. There's a raging debate about exactly how much demand for Treasuries is added by stablecoins. And it comes back to the debate about where a dollar of stablecoins comes from. Is it just new demand from abroad, or is it being pulled out of money markets and bank deposits?
Michelle, when you are out there in the world talking to global investors, are they less enthused about owning Treasuries? Do you see them walking away from dollar assets?
We're not really seeing that, you know, at the moment. I think, to Peter's point, I think, you know, the dollar remains the reserve currency of the world for the time being, which is a good thing and long may it continue. So we're not seeing that. But that's not to say that, you know, it's not something that, you know, might happen down the road. You know, I think generally speaking, the, you know, the risks today, especially the tails, are much, much greater than they've ever been in the past. And I think that's sort of top of mind for a lot of investors. And, you know, we're sort of, we're of the same view basically. It's not just that we're dealing with uncertainty today, but, you know, the tails are much fatter now when you think about risks.
I agree with that. I mean, I call this contextual alpha, which is if you're in a boardroom or you're an investor, you can't just look at the alpha part, the spreadsheet of the individual investment. You have to take into account the contextual part, which is the geopolitical, the macro, the regulatory, because it has such an effect on the direct business or investment decisions, more so today than 20 years ago on average.
You've got offices, people in the Middle East, you've got clients in the Middle East. What are you hearing right now?
Look, I think I'll say two things. One is when it became apparent that the hope that there'd be a domestic uprising did not occur, at that point you were in a little bit of a box because either you're going — the three triangles are either you're going to do a ground operation and force the outcome that you want, which isn't going to happen, or you're going to have a negotiated settlement, which probably requires Chinese involvement and empowering the Chinese on the world stage, or you're going to declare victory without the strait being fully reopened, which would just empower the Iranians. So you're sort of stuck in that triangle, and I think one of the ways of interpreting the blockade is to try to lean more on the Chinese leg of that triangle, which I think is the most auspicious one, but it will have the effect of raising China's prominence or role in the world economy to the extent that they're the sort of backdoor power broker.
Michelle, this is, you know, Western, particularly financial firms have rushed into the Gulf, you know, the last 10 years, which looking back historically has been a pretty benign time in the region. You are Lebanese. Not to pigeonhole you, but do you think there's something about the region that the West has failed to appreciate in their enthusiasm for deals?
I mean, we've been operating in the Gulf for over 50 years. So MetLife has been there for a very long time. You know, there are, you know, I think emerging markets in general come with certain risks associated with those markets. I think you have to assume that some of those risks exist. You know, I think the challenge today is that the Gulf in particular, if you think about the UAE, it's built its economy, its brand on stability, on prosperity, on, you know, a place that is safe, that is conducive to doing business, to investing. I wouldn't say that's shattered today, but certainly that's a bit in question. And I think therein lies the, you know, the bigger question in terms of how are these economies going to recover and come out from this.
