Bloomberg Surveillance TV: February 19th, 2026 | Bloomberg Surveillance

Good morning, Jonathan.

There is a case for hawkishness. Now, whether that translates into a hike or not, it certainly will not happen in the next few months. If there is going to be a hike, it's going to be a little bit further down the line this year, maybe in the fourth quarter. But let's talk about why there's a case for hawkishness if not a hike. Optically, this is an economy, the US economy, that has not seen inflation at target for five years. I mean, we have been persistently above that target. The other reason, of course, optically again, is that the unemployment rate is very low. If you consider what the Fed's two mandates are, there is no basis for not being cautious, which can translate as rhetorical hawkishness, as it did in the minutes. So that's the case effectively for a hike if you want to stretch it, but it's certainly the case for hawkishness without even the stretch.

Keep in mind, one of the reasons we weren't surprised that even going into the meeting on January 29th that this would be a hawkish outcome, at least rhetorically, including from the presser that Chair Powell gave on that day, was that the composition of the FOMC changed at the turn of the year, as it always does. Four members left and four members came in, and if you look at the disposition of the four members that came in, marginally more hawkish than the four members that came out, or more cautious certainly. So this is not a surprise that there was a tone in the minutes that stressed the need to maybe even do away with the dovish bias implicit in the policy outlook. Yeah, this is the case effectively.

So, the market certainly believes that it expires, right? If you look at the forward curve right now in the money markets in the US, in overnight index products, it is suggesting that the Fed is going to cut twice. How can you suggest that the Fed is going to cut twice when they just came out with fairly cautious/hawkish minutes, when inflation is still above the target, and when the unemployment rate is very low? And the only conclusion that one can draw from looking at that curve is that the market expects that there will be a structural break in the nature and disposition of the median opinion on the FOMC upon the change in the chairmanship. That's the only way that I can square that circle.

The market certainly believes that he can. There is no way I can explain that implied 50 basis points of cuts this year without the presumption that the market is making that Walsh can convince the committee. Walsh does have help on the committee. Obviously, he has Chris Waller at the very least, potentially Michelle Bowman, who would look things his way when it comes to cutting. I want to make the case though that there is an intellectual basis for a cut as well, just as we just discussed an intellectual basis for a potential hike. And that is the case that Kevin Walsh has been making, which is that let's not look at the data, let's not look at these optics, let's just wonder about and think about what the implications of deregulation will be on the economy, what the implications of the AI revolution will be on the economy potentially, what the implications of reverse migration will be. But the first two things are the most important. The debate at the Fed going forward and the decision it will make will probably turn on what the median voter thinks about the AI revolution. That is going to get a lot more talk. There's going to be a lot more bandwidth at the Fed intellectually about what the long-term implication of this will be for inflation, for employment.

So, I think it's inflationary in the short term, but obviously the promise of a disinflationary trend in the long term, once the investment is in place and it's deployed, is there. I think the people who are being cautious right now, even with respect to AI, let alone the optics of low unemployment and high inflation, are being hawkish because they actually believe that there could be an additional inflationary impulse in the economy over the next few months in view of all of the investment spending. Now, we're obviously already seeing the effects of AI implicitly in the CPI. It's one of the reasons why electricity prices are high. So there is a case to be made for the short term.

I think the doves though, the structural doves, are also saying, hey, let's not — even if inflation is high in the short term, let's not worry about that, because the benefit of running the economy hot for a while in terms of the investment that you get in AI will pay off in spades down the road with the disinflation it's going to create, and the inflation you have to tolerate now is the price you have to pay for the revolution that we're going to see in the next few months. That's another intellectual argument.

Not really. Because in part the bull case on the dollar was not so much based on what the Fed was going to do. It was also based on where the dollar is in valuation terms, which is still very expensive from a long-term historical perspective. And the other case for dollar weakness, if you will, was the idea that the US was disengaging from the rest of the world. And this would attenuate, it would start to fray the view of the US dollar as the reserve currency and the international medium of exchange. If the US re-engages with the rest of the world, I think there's a better case for a strong dollar there than with respect to what the Fed is going to do. And I will highlight that Marco Rubio's speech this past weekend could mark that turn of events that makes the US re-engage with the rest of the world.

That's not a bad way to think about it. I guess what we need to consider here is whether or not Marco Rubio has managed to undo all the consternation that the US received over the past year from its enemies, from its allies, from its erstwhile allies, from its future allies, etc. It's hard to say. We're watching the situation, but we want to see if the administration takes Marco Rubio's words to heart.