Let's get over to our panel. Sonali Basak is standing by with the CEO of Carlyle, Harvey Schwartz. Sonali, not only are you running one of the most storied private capital firms on the planet, you were also at Goldman where you navigated very tough moments from the C-suite, including in the wake of the 2008 financial crisis. So you've seen a lot in markets, a lot of ups and downs. How do you look at the environment that we're in today?
Well, it's great to be here. Congratulations on what's going to be an extraordinary event. I think it's my birthday next week, I'll turn 61. In my lifetime, the trends geopolitically have been extraordinarily favorable. Certainly some horrific things have happened, but if you think about the Berlin Wall, globalization, I would say that this is the first time we're really entering a period of what I'll call geopolitical economic tension. So let's just pause on that for a second. Coming into the election, there was a lot of uncertainty. It seems like a long time ago now, but if you think back to the fall, there was uncertainty about whether or not we would have an outcome, certainty around who the new administration would be. The administration ran on a policy very pro-business, pro-growth, all the factors that support that, and markets reflected that. There was this huge relief factor in knowing that there was certainty in the administration, a sweeping victory, consolidated government, and an ability to execute. Now tariffs were always in the discussion. What's happened now, and the markets are obviously reacting to it in a fairly material way, is we're starting to see what the full policy mandate is going to look like. The reason I started with geopolitical economic uncertainty is that we've had geopolitical uncertainty with the tragic war in the Middle East and the tragic war in Europe, but the geopolitical economic uncertainty is a bit of new information set. Opinions on tariffs vary from incredibly inflationary to potentially contributing to a recession. So it's a bit of uncertainty now. Originally people grasped to certainty, markets like certainty, and so now we're in a period of uncertainty, and I think you're seeing it in the risk reduction that we've seen over the past several days and obviously this morning.
When you look at what's happening with the tariff strategy, I'm guessing this kind of comes into part of that geopolitical uncertainty. At what point are you worried about it crossing over into a tariff war? Is this all kind of par for the course, what we're seeing right now, or is there a risk of serious escalation?
Tariffs is a complicated subject that doesn't really get unpacked very often, so let's try and do it super fast given the time constraints. If you think of tariffs, let's split the conversation into two things really simply. One would be economic policy intended tariffs, which can make a lot of sense. We have the lowest tariffs in the world relative to other countries. Then you have tariffs that are motivated by political objectives, social objectives. First of all, you have to unpack the two. This bucket I think can be reversed much more quickly. We've seen that in discussions and negotiations. This might be stickier depending on what's happening. Your language was perfect, Sonali, because the real question is: are they inflationary? A one-time tariff, let's just say 25% on a country, is a one-time step up in price acceleration, but it's not sustainably inflationary. Trade wars are sustainably inflationary because then you could perceive a 25% step, 10, 10, 10, and I think that's what the market is now responding to. But what the market's really responding to is increased uncertainty, because we just don't know where the tariff discussions are going to go.
It's too early, to the point you're making on uncertainty and the earliness of the conversation. How do you think about this as it pertains to your business? Do you have to make changes? Are there portfolio companies that are structuring differently? Are there deals that you can't do right now because you don't know what the tariff impact is going to be?
For those not explicitly familiar with Carlyle, we're $440 billion of assets, one of the largest private capital managers in the world, split across real estate, private equity, credit insurance which is our largest segment, and our solutions secondaries and co-invest business. We're micro investors. As micro investors looking to invest capital, whether in private equity or in direct lending, we're looking for opportunities to deploy capital at attractive risk return. We don't seek to avoid risk, we seek to price it correctly. In an environment like this, if you're looking at a portfolio company opportunity, when you think of the value creation plan, you're factoring in the uncertainty, which undoubtedly will impact the extent to which you're willing to pay for that asset. In our existing companies, the vast majority are services companies, and services companies don't have the input issues. When we roll up all this data for all of our portfolio companies, it's quite rich. We have just below a million employees globally. We're 2,300 at Carlyle itself, but in our portfolio companies we roll up this data every month. For example, in the PMI yesterday, the inventory component of PMI was up about four points. I know that's not news that anybody would have focused on, but we could see that happening months ago. Immediately when it looked like the new administration was going to come in and there was the possibility of tariffs, you could see purchasing managers immediately mobilizing to start bringing goods in faster because of the uncertainty factor.
What are the things that you see now that investors are going to see four months later?
Today, nothing about today looks dramatically different than three months ago. By that, what do I mean? GDP growth is quite solid, earnings are quite solid. The factors around input pricing, there's still marginal pricing capacity, and demand seems quite high. The consumer seems quite resilient. I think the administration inherited quite a stable economy. Inflation is obviously not exactly where the Federal Reserve would like it, but it's come down dramatically. The environment feels quite good. In terms of what we're seeing in that data, there's nothing suggesting that the economic underpinnings have shifted dramatically at all. What you're starting to see are preemptive actions around how best to position again around the uncertainty. For a long period of time, geopolitical economic risk tails were very tight. They're just fatter today, and we'll have to see over the next three, six, nine months how the tariff discussions play out and what it means.
This uncertainty factor is affecting markets. You started to hit on this a few minutes ago about inflation and worries about the impacts that tariffs would have on inflation. One-time or more persistent? Where do you see the direction of travel? More recent economic data has created some cause for concern among investors.
First of all, we just came through an unprecedented period. I know the debate around the Federal Reserve happens a lot. It always surprises me because I think the Federal Reserve and Jay Powell have done an extraordinary job navigating a massive spike in inflation. We went through an unprecedented period of rate hikes. There was a big audience calling for rates back to zero. I have no idea why anybody would want rates back to zero. Rates back to zero is not a normal way to run an economy. Getting inflation down is a very difficult thing to do, and I think the Fed has done an extraordinary job. At this point, given we don't exactly know how the tariffs will ultimately settle, I think the inflationary question is a bit uncertain. There is a path where you could see a one-time bump in prices, assuming there's no trade war and no future escalation. That will translate through the system as higher prices. It may also cause some demand destruction, which longer term would be deflationary, and you actually could see the economy experiencing stress as it goes through that. I would say that all the parameters around forecasting inflation, forecasting interest rates, I think we should all buckle up a bit because markets will be more volatile, super data-centric, probably too data-centric because you can't extrapolate one data point to the future, but it's going to be a wait and see. I do think the administration will be very sensitive to pro-growth policies, so they'll be watching also.
With that push-pull going on, what you're looking at is a market that has changed so drastically in terms of rate cut expectations. You had a number of investors feeling like maybe you might get a rate hike this year. Coming into this year, market consensus now has shifted from maybe one rate cut to three. Market pricing overnight went to three rate cuts this year. Does that make sense to you?
We were never in the camp, you and I had this discussion two years ago, we've never been in the camp that the Federal Reserve was going to cut rates aggressively. Our strategic economist has really nailed this, Jason Thomas. If you don't read his work, you really should. He's extraordinary. He has the benefit of rolling up all our data, so he's been saying for a long time rates were stickier. I just spoke to him before I got on the show, and he said it's more complicated now to have a very firm opinion, again a period of uncertainty. But it's not surprising to me that the market has shifted to this because of the unknown around tariffs. I think what the Federal Reserve has proven to us is they're very data-centric because they know they're in a situation that is somewhat novel. They're going to do what they need to do. If you see inflationary pressure, they're going to moderate up. If you see deflationary pressure or slowing of the economy, the Federal Reserve has proven to us for a very long time they know how to cut rates, and they're going to cut rates if they need to. It's not surprising to me that the market is forecasting more of that, but we were sort of shocked when they were forecasting five or six cuts and we were calling for one or two.
