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Hey everybody, welcome to another episode of Accrued Interest, PIMCO's podcast dedicated to serving financial advisers and their clients. My name is Greg Hall. I head the wealth management business for PIMCO here in the United States, and as always, I'll be your host. It's Fed day. It's September 17th, 2025. This is the meeting that we have all been waiting for, the lead-up to which has been perhaps more dramatic than these meetings tend to be. And so we are fortunate enough in today's conversation to have Rich Clarida. Dr. Clarida, you may remember from our February episode, is a global economic advisor for PIMCO. He served as vice chair of the Fed with Jay Powell until 2022, and prior to that, stints at the Treasury Department, a long career of both government service as well as education. He's a professor as well, and we get to that over the course of the conversation.
The meat of the conversation today is, as you'd expect, a rundown and reaction of today's Fed meeting, the quarter-point cut, the implications for the months ahead of us, as well as Rich's analysis of how that decision probably came to be and what some of the individual votes of the Fed governors might mean for predicting that body's development, both from an economic standpoint and a political standpoint, given the fairly unique circumstances we find ourselves in today. We talk a little bit about, for lack of a better word, the palace intrigue around some of the governors themselves and what may or may not be politically motivated attempts to steer the Fed's direction, and the broad state of Fed independence at this point.
And then finally, and I'm not just saying this because we put a lot of time and effort into the podcast, but I'd encourage you to stick around to the end. We got into a philosophical conversation that turned into a historical conversation, where Rich really explains some of the tensions that the Fed needs to balance in pursuit of its mandate, and also some of the events under previous administrations and previous points in history that actually led to the decisions that set up the modern Fed as it exists today. And it's for any of you who are fans of economics and economic history, it's an opportunity to sit in class with Professor Clarida and learn a lot about some of the principles and the antecedents that lead to today's Fed. So, I hope you enjoy it.
I would be remiss if I didn't ask you to please, if you're enjoying the podcast, hit like, subscribe, let us know that you're out there. If you'd like to learn more about any of the comments or views that were expressed in today's podcast, please visit us. Our website's pimco.com here in the US. And if you identify yourself as a financial adviser, you'll be taken to Advisor Forum. That is our destination for you as financial advisers to get the information that you need from us as quickly and practically as possible and to send you on your way armed to do a great job on behalf of your clients. Thanks so much. And here's my conversation with Rich. Hey Rich, great to see you. Thanks for joining us.
Pretty busy day for you, I'm sure, as Fed days always are. Appreciate you carving time out of your schedule. I know you are busy advising our portfolio management teams, I'm sure, speaking directly to clients as well, and in between all that, no doubt, digesting the news yourself and coming to your own conclusions.
That's right. And also did the typical IC discussion right after the press conference as well.
All right. Good. Well, so we're catching you hot off the presses with your up-to-date takes on what we heard from today. So, why don't we just get right into it. I mean, with all the drama leading up to the meeting, it seemed to me, as a more casual observer than you, certainly, that we got pretty much as expected a result. What was your take?
Well, yes, the rate cut of 25 was telegraphed, so that was as expected, but there were a fair number of surprises. How can there be surprises if we knew the decision? Well, there were just surprises in terms of the vote. So for example, there was only one dissent, which everyone expected that Steve Miran, once he got sworn in, which happened hours ago, that he would dissent, and he did dissent in favor of 50. I was surprised that that was the only dissent. I thought that we could get a dissent from Waller and potentially Bowman for also a 50 basis point cut, and we didn't.
And they were the ones who had dissented in July. Am I remembering that? Yeah. Okay.
Yeah. And then importantly, I also thought we could get at least one dissent in favor of no cut. In the end, that did not happen. So I think that was a surprise. The other thing that was a bit of a surprise, although it was a close call, is that the infamous dot plot showed that you had a very slim majority of 10 of the 19 folks around the table indicating two more cuts this year, so for a total of 75 this year. And we had really been on the bubble about whether or not the dots would show a total of two or three cuts for the year. So that was also interesting as well.
Yeah, I thought it was interesting as well that particularly Bowman and Waller seem to have kind of come back into the fold, if you will. And I do want to talk about the human dynamics of this meeting, but maybe before we move on to that very interesting aspect of this, if we just stick with the fundamentals, did you pick up anything either from the statement or from Powell's press conference afterwards that gave us any additional insight into how he's looking at the data, what we should expect going forward here?
Yeah, absolutely. In fact, in that sense, I think there was a lot of useful information. So both in the FOMC statement and no fewer than six times in the press conference did Powell talk about uncertainty, elevated uncertainty, and also risk management, so downside risk to the employment outlook. So I think if I were going to tie this up in a bow, the justification for this 25 was really a risk management justification. That they still are projecting a relatively low unemployment rate for the rest of the year and they're not really projecting a recession. But nonetheless, they felt that on risk management considerations that they wanted to not only deliver the 25 but also signal an additional 50 basis points of cut.
I would also argue, Greg, there was maybe some risk management behind the scenes, and we'll get to that, in terms of keeping the committee together and really limiting the dissents. My sense is it probably took some work on Jay's part to get that done, but he pulled that off as well.
It's so fascinating and I'm dying to get there. I promised myself we would sort of stick with some of the data and the fundamentals first. When you think about that risk management cut, the way I was thinking about it in my head is basically just trying to cut off that left tail of outcomes, and my sense is that's predominantly because of the weakening employment data that we've seen of late. Was that your sense and is that what we heard?
100%. It is a labor market, as Fed officials will remind you till they and you are blue in the face. The Fed has a dual mandate, which is both price stability and maximum employment. And if they were just doing this solely based on inflation, they wouldn't be cutting because it's obviously close to 3% now. But they are focused on the labor market. We had a very disappointing print for the August release, what we got in September, and then obviously the massive revisions that came out a week ago, which showed that nearly a million jobs that had been counted as created in the last 12 months disappeared. And so you combine those revisions with the very weak number that we got, and I think it was a pretty straightforward call to get at least 25 basis point cuts again on risk management considerations.
Was the only offset to that the potential for inflation coming through because of tariffs, or are there other economic indicators that you think they would have been weighing against the job numbers? I know we had a pretty solid consumer retail sales. Like, I wonder what the histogram of data looks like in addition to just the jobs numbers.
Yeah. Well, when the Fed says they look at everything, it really is true. In fact, especially with regards to the labor market, there are dozens and dozens and scores and scores of graphs and charts and tables and regressions that they'll be looking at in the staff briefing. So it's not just the unemployment rate. Up through the June and July meeting, Powell was actually quite precise in saying, look, yes, employment growth has slowed, but that's also because the growth in the supply of labor has slowed because of the immigration changes in immigration enforcement. And so I think at one point, maybe at Jackson Hole, he talked about a curious balance in the labor market. So I think the combination of that August data and the revisions has pushed Powell and the committee away from the curious balance to an outright risk management cut. And so, but looking at a lot of data, not just the unemployment rate.
Sure. Sure. And it feels like, I mean, I don't know where markets have closed today, but it felt like at least in the immediate aftermath, we saw a little bit of a mixed reaction. Rates sold off, they came back, stocks sold off, they came back. It does seem like the market's treating this more or less like a consensus outcome.
Yes. I think initially rates fell five basis points or so on the 75 for the year and the dots as opposed to the 50, but even going into the press conference that began to reverse. I think the press conference at best was a mixed bag, maybe a bit more hawkish. So I think markets ended more or less close to where they were going into the Fed decision.
Is that kind of because when people hear risk management rate cut, it's not so much that they don't agree with the thesis of risk management, it's kind of what it's not, right? It is not the automatic beginning of a long cycle of deep rate cuts.
Well, and to me here, this was the money quote. So I actually wrote it down, and I'm going to read it now.
At one point, and this is the Jay Powell I know well, he said, quote, "It's not incredibly obvious what the Fed should do next." And so if you wanted a way to sort of tamper enthusiasm for a bunch of rate cuts down the road, that's what you would say.
So that is radical transparency. It's good to lead with vulnerability and admit when you don't know. Although I guess he's been very forward about not wanting to be predisposed to an outcome. He wants to let the data determine the path. And maybe on the data point, and especially you guys having just maybe had some conversations in the IC, do we think Powell's interpreting the data that we have been? And what do you think we'll be looking at in the data in the next coming months to sort of see how much conviction we want to put into that dot plot? If it's a little bit uncertain right now, how do you think we're going to gain certainty around it?
I think our focus and the Fed's will be on the labor market data. I think the inflation numbers are coming in probably better than folks thought on Liberation Day, but more or less in line with where we've been since the summer. So I think at the margin, the marginal data that could influence decisions are going to be the labor market data. You know, that being said, Atlanta Fed tracking and other tracking, the retail sales numbers that we got are pretty darn healthy. You know, GDP growth in the first half of the year averaged about one and a half percent. Some folks have the Q3 number, and of course we won't get that data till the end of October, have the Q3 number somewhere in the high twos or some even close to three annualized.
And then of course, as we discussed at our cyclical forum, and we'll be obviously talking about that more in coming weeks, there is strong spending in capex, especially data centers and tech spending. There will be refund checks that start to get sent out in 2026. And then a lot of companies, as part of the trade negotiations with the White House, have promised to make capital spending, plant equipment investment in the US. And so, as you look out longer term into the end of this year and into 2026, then there's a lot of data, not just the labor market, that becomes a focus as well.
Any additional thoughts on, I think the last time we spoke to you was well before Liberation Day. We haven't really had a chance to catch up with you at least in this format since. Any additional thoughts on why inflation isn't more apparent given the fact that even we haven't had the draconian tariffs that were pushed out on Liberation Day, but we've certainly raised the average level pretty significantly? And I know everybody's waiting for GDP, you know, it just doesn't seem to show up. Any thoughts there?
So there are a couple of things. It is true that overall inflation has not moved up. And that's what Bessent and others make reference to. But the reason why the overall inflation rate has not increased is because the increase in goods price inflation that you can attribute to tariffs has been offset by a decline in inflation in the services part of the economy. So the counterfactual, I think, would be that if we had no tariffs right now, then probably we would have seen inflation actually coming down, not just staying the same. So I think that's basically the story. It is showing up in goods price inflation, but not in an extreme way. So certainly if you and I had done this podcast on Liberation Day, when we're talking 20 and 30%...
I'm glad we didn't do that to you, Rich. I think that would have been a tough one to be accurate with.
But so part of it is simply that the ultimate tariffs, in particular the headline tariff on Canada and Mexico, is off the charts, but most of it is exempt because of the prior trade deals. And so that's part of it. The other part, and you know, Tiffany and Allison Boxer and our team have done a good job in this, the other part is that it has been absorbed either in profit margins or it's actually been absorbed in terms of scaling back in employment. So companies are adjusting to tariffs, but they are, at least in the aggregate, not passing it all through to the final consumer. You know, there are some well-known cases, in particular some big box retailers have been highlighting that in particular.
Sure. Sure. And some folks have been chastised as well for claiming that they would need to pass those price increases on. So you referenced Tiffany Wilding and Allison Boxer on our macroeconomic team, and we'll link to some of their recent research in the show notes here. It's a really interesting, and we can't dwell on it today, but I think it's just a really interesting dynamic to think about how the potential price increases work their way through inventories that were accumulated because the tariffs were well heralded. And so accumulated inventories, and then how much can companies take in terms of profit squeeze. And I hadn't thought about it, but of course you're right to point out that part of a company's cost structure is labor, and so job reduction helps or at least a slowdown in employment growth.
Or at least a slowdown in employment growth. Yeah. Yeah.
Sure. Sure. So that'll be a fascinating thing to watch unfold in the coming months. I noticed in Powell's statement, the tariff, the T-word as they say, did not appear, but he did reference goods inflation, right, which I would imagine is a fairly calculated decision on his part.
