Lee said policymakers should focus more on labour market conditions. “The Fed and the authorities should be worried much more about what’s happening to employment… rather than inflation,” he noted.
On the geopolitical front, tensions linked to Iran could affect oil supply, though alternative routes and sources are emerging. Tanker movements indicate supply chains are adjusting, which may ease disruptions over time.
Below are the edited excerpts of the interview.Q: What have you made of the US economic data? What does it mean for the economy and the Fed’s decision going ahead this year?A: There is no question that we’re going to have higher inflation in the headlines because energy prices have gone up. But I think you have to remember that energy also acts as a tax on consumers, and then again, you would naturally expect consumer confidence to be dropping like a rock at a time when more than 80% of the population in the United States is living paycheck to paycheck because they’re not the owners of the stock market wealth that has appreciated so much over the last several years.
So, the affordability issue, the tax that’s been put on them, which offsets part of the rebate they got from the big, beautiful bill, those are the concerns that are on the downside of the US economy. And you did mention it—let me add the GDP numbers that came out are also a little bit concerning, because growth has gone down from what the Atlanta Fed had projected for the first quarter. That was supposed to be in the high 2.5-3% range, but it came out to 1% GDP growth.
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So even GDP is starting to react downward, moving in a downward direction. And so for me, the concern that I’ve been expressing on your show has been that the Fed and the authorities should be worried much more about what’s happening to employment, income for workers, and their job security, rather than inflation, because prices have gone up, no question.
But if you look at where inflation expectations are, that’s a telling signal. Five-year breakevens, for sure, have gone up by about a quarter, almost half a point. But if you look at the longer-term, five-year, five-year forward inflation rates, those breakevens have been dropping like a rock. They’ve dropped from about 2.25% down to almost 2% – a drop of a quarter percentage point over the last several months.
And I think that’s a very important signal to say that the financial markets are pricing in a spike in prices, a jump in the price level, but not a bout of inflation that could cause the Fed to start to become more stringent. The transitory word I hate to use, but I think the markets are pricing for a temporary spike in price levels, not inflation.
Q: A blockade to end another blockade. What do you make of it?A: When the size of that Iranian team showed up, it really made it very clear to me that there wasn’t going to be much movement, because when they have so many people from Iran watching each other, it’s not clear to me that anyone had the authority to negotiate.
So, it’s certainly not surprising that there wasn’t any movement on the real key issue that the United States was concerned about, which is that we don’t want nuclear weapons in your hands. And the US is willing to say, look, we’ll give you free uranium if you want nuclear power, but just stay away from the refinement of uranium. And they won’t even agree to that.
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So, I think the real issue is, who’s going to hurt more, and how long will it take for the hurt to cause someone to blink? The Iranians are hurting because right now they’re depending very much on the export of oil in the black market to be able to raise revenue. And if the US is successful in blocking off their ability to export oil, it’s going to be hurting on the domestic front.
And whether or not the Iranian Guard and the extremist factions are going to be able to maintain their position comes into question. So, we’ll see who blinks first once the embargo gets in place.
Q: As someone pointed out, for a month, they had this windfall of very high prices, so they have that as a buffer. The point is it’s not just who blinks first—Asia, for example, is largely dependent on oil from the Middle East. So, you already have measures in place. Another month of this is not a good scenario at all.A: Let me also point out that right now, if you look at the way the traffic of all oil tankers is moving, a huge stream of tankers is going around the horn of Africa toward the United States and Latin America. So, the supply of crude will be interrupted temporarily, but the supply lines are starting to get restored.
Alternative sources are being sought, and it’ll take a little bit longer for the crude to get from the United States to other markets in the Philippines and North Asia. But certainly, other supplies are coming online, and I think that will help quite a lot.
For the full interview, watch the accompanying video
Q: What do you make of the Federal Reserve? They want the banks’ information on private credit. They’re keeping an eye on the risk on that front as well. Do you think we’re ignoring one big risk out there, and things could potentially blow up? Because we know the private credit market is rather large in the United States.A: Very much so. And in fact, if there’s any vulnerability out there that we haven’t talked about because of all these Iranian and other issues that have been on the burner, the private credit situation is one of the biggest vulnerabilities in the financial markets right now, because of the lack of transparency and, more importantly, the lack of liquidity for people who want it.
This is characteristic of these private credit markets. But as we talk about opening up private credit as an investment vehicle for retail investors, that is the red line I hope doesn’t get crossed, because I don’t believe retail investors are in a position to use private credit in their investment portfolios the way professionals do.
Even professionals are often caught off guard when they say that, we might be able to get quarterly liquidity for investments that go for five to seven years. That’s ridiculous, and funds that promise quarterly liquidity for those types of investments shouldn’t be around.
So, I think the vulnerability in private credit is a big one, and if there’s going to be a blow-up in the financial markets, I’d be looking there.
When I was at the IMF, I was one of the editors of the Global Financial Stability Report, and there we always talked about liquidity and visibility. Those two things are completely missing with private credit.
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