Pod Insights Prof G Markets Your Bills Are About to Go Up — The Fed Can’t Stop It About this episode Ed Elson speaks with Michael Gapen and Robert Armstrong about the Federal Reserve’s interest rate decision and what to expect from inflation for the rest of the year. They discuss how households will be impacted by the war in Iran, whether stagflation is on the table, and give the health of the economy a grade.
Michael Gapen is the Chief US Economist at Morgan Stanley. Robert Armstrong is a financial commentator for the Financial Times and author of the Unhedged Newsletter.
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Transcript 5,573 words · 13 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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2:00 Ed Elson? Welcome to Profty Markets. I'm Ed Elson. It is March 19th. Let's check in on yesterday's market vitals. The major indices fell as the Federal Reserve announced its interest rate decision. More on that in a moment. Treasury yields climbed. Meanwhile, Brent crude prices jumped after an airstrike on Iran hit one of the world's biggest gas fields.
2:25 Ed Elson? Okay, what else is happening? The Federal Reserve has decided to hold rates steady. That outcome was widely expected. Calci put the odds of a hold at 99%. In its statement, the Fed noted that the economic implications of war with Iran were "uncertain". Meanwhile, recent inflation data has been discouraging. The producer price index rose 3.4% year over year. That was its biggest annual gain in a year. And core PPI, which excludes food and energy, came in at 3.9%. Personal consumption expenditures told a similar story last week. Core inflation rose 0.4% in January alone and 3.1% year over year.
3:08 Ed Elson? And remember, these reports only offer a rearview mirror. What is ahead is looking even worse, at least for now, since the US struck Iran on February 28th. The price of oil is up 40% and gas prices have risen more than 30%. As price increases are also hitting other industries such as agriculture, where the cost of fertilizer has risen 25%. So the bottom line is, our bills are probably going to go up even more. Here to discuss the inflation outlook for 2026, we're joined by another panel of experts. Today, we have Michael Gapen, chief US economist at Morgan Stanley, and also Robert Armstrong,
3:50 Ed Elson? financial commentator for the Financial Times and author of the Unhedged newsletter. Michael, Robert, thank you both very much for joining us. Michael, I'm going to start with you. We got the Fed decision. Rates remain where they are. Everyone expected that. Was there anything else we found out, anything that is perhaps unusual, interesting, or maybe changes the situation in any way?
4:15 Michael Gapen? Wouldn't say that there was anything unusual because the standard playbook for the Federal Reserve in a situation of getting an oil price shock is to be predisposed to want to look through any increase in headline inflation. But so I think what I heard a lot of, though, and you noted it... The repetition of uncertainty, uncertainty, uncertainty. Writing down a forecast at this point in time, very difficult. Powell said, take our forecasts with a grain of salt. And he said, this is one of those moments where probably not submitting a forecast would have been easier than than submitting one. And so I think, yes, the Fed is saying, okay, headline inflation will be rising, but that's only
5:00 Michael Gapen? part of the story. This is another supply shock that puts upward pressure on both inflation and the unemployment rate. So that leaves our goals in tension. So to know what to do, we probably need to see some more data. And so I think he gave what a balanced view of the outlook. Could be higher inflation, could be weaker labor markets. And and then interjected a little uncertainty and caution. And I think that's the appropriate response. So I wouldn't say a lot new.
5:31 Michael Gapen? But just the reemphasis on uncertainty tells you again, it's, you know, the Fed would like to see progress on inflation. But now there's kind of another hurdle that it has to to overcome this year.
5:44 Ed Elson? What about looking forward in terms of rate cuts, Robert? What did we learn, if anything, about what we're going to see in 2026 from the Fed?
5:56 Robert Armstrong? I mean, if you look at the notorious dot plot, and I do want to take on board Michael's comment that this is the Chair Powell and the Fed was obviously not very pleased at having to have give to to give projections this time around, given that we've rolled the iron dice and there's so much war uncertainty. But if you do look at that dot plot, which shows the projections for appropriate rate policy this year, there was kind of a bit of compression. Now, nobody is looking for rates to be increased again this year, but the tail of people who think there should be several cuts pushed up as well.
6:41 Robert Armstrong? So the the plot for 2026 kind of compressed. And partly, that's an expression of uncertainty. And partly, it's saying, we are stuck here with these, what Powell describes as modestly restrictive rates, and we're stuck between the two ends of our mandate. And what are we gonna do? We're gonna sit and wait until something happens.
7:04 Robert Armstrong? And I don't know what else in their position. I don't know that there's anything smarter to do than that.
7:09 Ed Elson? Well, I think for consumers and for observers, I mean, my intro there basically said it, which is inflation appears to be set to rise. And that's what we're all worried about. And so I guess the question was something that I was expecting was for them to say, yeah, this is something we're quite worried about, too. And it sounds like what we heard was we don't really want to say anything about it. We're going to acknowledge the elephant in the room, which is that Iran is happening and that that's going to have an effect on on oil prices, it's going to have an effect on gas prices. In fact, we're already seeing it. But even when you look at, you know, what the members of the FOMC predicted, 12 of them said, yeah, we're going to get at least a cut in 2026,
7:54 Ed Elson? which I guess to me, I'm kind of like, well, aren't prices set to rise quite dramatically? Michael, what do you make of the possibility that we could have quite rampant inflation now that the Iran war is kind of well underway?
8:11 Michael Gapen? So you're right that there is already clear evidence that prices will go higher. We're seeing it in gasoline prices that are up 50 cents to a dollar per gallon nationwide. And oil is, and its byproducts are inputs into things like fertilizer and diesel fuel and airline prices. So you will see it. And yes, we are already seeing it. The question from the point of view of the policymaker or the Fed is, well, how long will oil stay elevated? If there is a, let's call it fairly quick, you can be subjective about your definition of that. If there's some fairly quick resolution to this and oil is back down to a $60 to $70
8:55 Michael Gapen? range where it was going into this, say, in May. It's hard to argue that the broad outlook for the United States has changed a lot. But it could be that oil prices stay elevated much longer than that, or even move higher from here. And so, yes, you could get a prolonged inflation shock. But the higher oil prices go, it also means demand is weaker and labor markets are likely to be weaker. So I think that I think the Fed did acknowledge today and Powell acknowledged today and their forecast acknowledged inflation will be higher.
9:29 Ed Elson? Yeah.
9:30 Michael Gapen? But the uncertainty part of this as well, it depends on how long this geopolitical uncertainty in the Middle East lasts. And the Fed's know better at predicting that than than I think anybody else. So I think that's the dilemma they're in.
9:44 Ed Elson? It seems like the future of our economy right now, of inflation right now, is basically entirely dependent on how long do we stay in Iran and how how long until this situation is pretty much resolved. And I guess that's on the president. I mean, it's it's not clear to me how any of us have any sway over how this is resolved. But is, I mean, that's what we're talking about here, right? This all reverse engineers to like, how long we we lost in Iran?
10:19 Robert Armstrong? I think the real problem for the policymaker, as Michael suggested, is that rate increases are a terrible tool for dealing with high energy prices.
10:29 Ed Elson? Right.
10:30 Robert Armstrong? Like, if you're going to control high energy prices, you're going to have to do so much damage to demand with higher rates that you're going to wish you didn't do it in the first place. Right? That's why the the Fed policymaker wants to look through this stuff. I would note, however, that in this meeting today, the long running inflation dramas did come up. Namely, are we gonna see the half a percentage point of inflation that we think is coming from good tariff tariffs on goods? Is that gonna go away as we all think? Chair Powell sure hopes so, and so did the rest of us. But and it was interesting, when he was asked, the first question he was asked was
11:16 Robert Armstrong? Do we look through oil price inflation? And his answer was, the first thing I'm looking for is for tariff inflation to go away.
11:22 Ed Elson? Right.
11:23 Robert Armstrong? You know, I mean, and once we get that dealt with, I'll be able to worry about oil.
11:27 Ed Elson? Right.
11:28 Robert Armstrong? And the second long running drama that got mentioned that I thought was interesting is he was talking, the chair was talking, goods inflation, goods inflation, tariffs, tariffs. But he was pushed by one of the journalists who said, well, aren't services inflation? When you take out housing, aren't those kind of sticky at 3% now for quite a long time? And he was kind of like, yeah, that's pretty frustrating too. We wish that wasn't true.
11:55 Robert Armstrong? So like there are, it's not all, it's not all, it's a lot. Oil is, is the headline now and it's a big story.
12:01 Ed Elson? Yeah.
12:01 Robert Armstrong? But you know, the way I look at it, inflation's kind of at three.
12:05 Ed Elson? Right.
12:06 Robert Armstrong? And it's going sideways.
12:07 Ed Elson? Yeah.
12:08 Robert Armstrong? Right. And that was true before we started this. May, you know, you could say it's 2.8 or 3.1 or whatever, a PPI report, whatever, but it's somewhere in there. It's a point above, it's a point above where it should be and it's going sideways. And we don't really know why. I mean, Michael may know why.
12:24 Ed Elson? Well, well, Michael, I mean, when, when we look at the inflation that we already were dealing with, which was, you know, maybe moderating, but still pretty sticky and certainly nowhere near the 2% target. Add on top of it, what's happening to oil? What are your inflation expectations going forward? And for those who, who maybe haven't thought about the connection between oil prices and everything else? How could those prices trickle down through the rest of the economy? How could it show up on, on, on the bills of regular households across America?
13:00 Michael Gapen? Yeah, it was interesting today because obviously this is a meeting where the Fed released its updated projections. And and we looked at them and we said, oh, that's interesting. Their forecasts now look a lot like ours. So I and I think as Rob mentioned, it's it will be an outlook then where headline inflation is close to 3% by the end of this year. And the Fed thinks core inflation, so if you exclude food and energy prices, could be somewhere around, you know, 2.7%. So some diminishment in core goods inflation, but but not a whole lot. So the trajectory is there from the Fed's perspective. It's moving in the right direction still in their forecast, but it's a quite gentle downslope.
13:46 Michael Gapen? Uh, so this is, you know, view that the oil price shock is another hurdle that the Fed will have to overcome in in order to ease rates. And and on your, the second part of your question, yes, oil moves directly from, you know, oil prices to gasoline prices in the U.S. It does that very quickly, usually within about two weeks. And so we see that. So what what they will be worried about is what what we call second round effects, right? Because oil and energy is an input into the production process more broadly. Uh, for example, roughly 40% of the cost of food when you go into the grocery store is related to transportation costs.
14:26 Robert Armstrong? Right.
14:27 Michael Gapen? So you can, you gets, you can get second round effects on inflation. Now, history says you're not likely to. Because the higher oil prices go and the more you and I have to spend on gas, the less we have to spend somewhere else. So there's usually some demand destruction that prevents that second round effect, but there's no guarantee. As Powell said, you know, we're about five years of inflation running above 2% and at least short run inflation expectations have moved higher. So there's no guarantee we won't see second round pass through effects, but history says they should be limited. And as as Rob said, the answer then is you kind of need more time to see what's happening.
15:09 Robert Armstrong? I guess the other point I'd make there, Ed, is that there is this kind of question out there is like, how many times can you kind of punch the economy in the face before it becomes permanently grouchy about the future? And where you have things like. In fact, you know, longer term inflation expectations go up because you get these shocks, whether it's, you know, COVID and then it's tariffs and then it's this war and it's like, you know, you're taking all these hits and at some point you start to think, maybe I'm in a kind of nasty inflationary world and my longer term expectations for inflation
15:50 Robert Armstrong? start to trickle up. I should note that is not happening now. I was looking at five year, five year forward inflation breakevens this morning, which is like a kind of tricky mathematical way of of getting an estimate of what inflation is going to be in the five years, starting in five years, right? So you like subtract various bonds from another. They haven't moved at all, right? No change since the start of the war. So the inflation the market anticipates is all in the short term and that's a good sign so far. What I think would scare me to death and would certainly scare Chair Powell and the rest of his committee to death is if you see someone anchoring at the longer end of the curve, higher term premium, whatever, that would be bad.
16:31 Ed Elson? Right.
16:32 Robert Armstrong? But so far, it's been amazingly stable out there, right? Like, you know, as he emphasized today, we're not seeing any sign of that, but that would be the bad thing to look for.
16:41 Ed Elson? It's so interesting because, I mean, what we're trying to do here is we're trying to predict the future. We're trying to predict the future of prices. And as we said, kind of at the top of the program, like, that all relates to what happens in Iran, at least for now. That's what the whole question is all about, which means that these analysts and these investors have to try to put on their sort of military strategist hats and try to predict what on earth is going to happen in the Middle East, which seems to me to be a very difficult thing to do and certainly a very difficult thing for investors to do because we're not military experts. So I guess my question to you, Michael, over at Morgan Stanley, where that is the job as the economist of the firm and as the guy
17:26 Ed Elson? whose job it is to figure out what's going to happen, like, how do you think about these issues when they're so specific to geopolitics and to literally military strategy?
17:37 Robert Armstrong? Well, you're putting me on the spot on this one. Yeah, I would, you know, I would say.
17:43 Michael Gapen? Maybe a trite answer. I mean, you do your best, but you you recognize that the error bands, as we would say as in communist lingo, the error bands around your forecasts are a lot wider. So let me let me give you an example. Right now, if you look at options on oil, they're they're they're what we call bimodal. There's kind of a mass of of expectation saying oil's probably going to come back down to around $70 a barrel. And then there's a second mass at around 150. And this gets back to, I think, to your earlier point about a lot of the outlook then depends on how long we sit where we are. The longer the straight is closed, you might see
18:25 Michael Gapen? a shift to 150. If there's a resolution, you can go back to 70. So the answer tends to be, you need to write multiple scenarios of how the world could evolve and then place kind of subjective probabilities on those. So the usefulness of one modal, most likely baseline outlook diminished in this environment. And you have to be a little flexible and say, it could be this, it could be that. Let's sketch out how both of those scenarios work. So that's that's about the best you can the best you can do.
19:00 Ed Elson? Yes, which is, of course, unsatisfying for all of us, but that's what we have to deal with.
19:05 Michael Gapen? It's where it's where we are.
19:07 Ed Elson? This is the life we have chosen, as they said in Godfather.
19:13 Ed Elson? Stay tuned for more of this panel after the break. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.
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21:04 Ed Elson? We're back with our panel. When you think back, Michael, to our previous round of runaway inflation, when you think back to like post-COVID 2021 going into 2022 and the impact that that inflation had, at least that's what's in my mind right now. I mean, we're looking at a situation where we don't know what the inflation picture is going to be, but it's very uncertain and it seems that a runaway situation is on the table because of what we're seeing, not just in America, but also in Europe, which is getting absolutely hammered, at least prices over there, in Asia. It all reminds me of that post-COVID era where everyone's inflation was going out of control. And then suddenly everyone had to figure out how to deal with it.
21:48 Ed Elson? Most decided, okay, we're just gonna raise rates, we're gonna tighten as much as we can. And then we did see a very significant drawdown, more than 20% decline in the S and P. And it was largely a function of this inflation problem that was stemming from supply chain issues because of COVID. I'm just reminded of what happened there when I look at what's happening right now. Is that the right thing to think about or is this just completely different?
22:15 Michael Gapen? I'm I'm going to push back on that and say, I do think it is different.
22:20 Michael Gapen? The COVID story was certainly, obviously, as everyone knows, it was a global pandemic and supply chains globally were were constrained. So you, given the integration of the global economy and the share that goods are in the average person's consumption basket. It's over 10%, up as high as maybe 20%. Now gasoline, for example, is about 2% to 3%. So the magnitudes of the shock here are are very different. So I think the ultimate effect on inflation will be different. And just from a historical perspective, if someone were to say, oh, Michael, but what about the 70s?
23:04 Michael Gapen? That was more like a 400% increase in oil, right? So that that's kind of like oil going from 60 to 250. Right? Okay, then I'm then I'm with you. It's much bigger problem. It'll downstream into other things. That's your literal stagflation scenario, but I don't think the oil shock we're seeing now is reminiscent of that. And last point, I'll turn it back to you or Rob for comments. We were at about $120 a barrel in in 2022.
23:32 Ed Elson? Right.
23:32 Michael Gapen? When when Russia invaded Ukraine. So we're we've been in this territory for a while and it didn't entirely derail the US economy. So yes, it pushed prices higher.
23:43 Michael Gapen? I agree with that, but you know, I think we're better at dealing with this than a global pandemic.
23:48 Ed Elson? Rob, what do you make of that?
23:49 Robert Armstrong? Only things I can. I think that's exactly. Michael's got it exactly right, as far as I can see. Only things I would add is, you know, back post-COVID, tight job market. Now we've got kind of a squishy one. And I wish it wasn't squishy, but that'll help on the inflation front. In theory, it should. And also back then, you know, we had the government putting dollars into people's pockets. Now we have the gas pump taking dollars out of people's pockets. Again, that should be a bit deflationary. So but I think Michael has the picture right. I mean, by the way.
24:21 Robert Armstrong? Two hundred dollar oil is not a scenario we should completely dismiss. I think it's over in one of the tails. But uh, the, you know, again, we all become emergency experts on things. But you know, in the last week, I've become more of an emergency expert on the, on the kind of oil inventories. The longer the straight of Hormuz stays closed, it's not like there's a linear increase in the price of oil. You know, world, global inventories start to get down, the well starts to dry and you have a geometric increase in prices. So I'm not saying we're going to get two hundred dollar oil. I'm just saying, uh, I'm not laughing at the very suggestion.
24:59 Ed Elson? Right. Yeah, two hundred dollars a barrel is something that I think needs to be at least in people's models. You need to like entertain the possibilities. And then the other word that I keep on hearing is stagflation, which is a word that I, we, it comes up every now and then, but it's a very scary word. Uh, and it's now kind of a little bit more in vogue. Uh, Rob, is stagflation, one, what is stagflation? And two, is stagflation something that is genuinely or potentially on the horizon here?
25:35 Robert Armstrong? Uh, well, Powell was asked about stagflation today and he said stagflation is something that happens in the 1970s, where you have a massive increase in unemployment. You have 10% unemployment and you have inflation at 10% or something. And it's like, you're really getting it from both sides, but you can get a micro stagflation, which is, you know, the, the Fed being stuck. Inflation is too high for you to really stimulate, but uh, the economy is slowing down. So you want to stimulate and what can you do? And, you know, to a certain degree, by that more modest or small definition, definition of stagflation, it's already happening now.
26:15 Robert Armstrong? You get the, the economy is pulling in both directions and you know, that can get worse. And what's miserable about it is that it's not clear what the policy response is. What do you do about it? You know, so uh we'll knock on wood, you know?
26:33 Ed Elson? Yeah.
26:33 Robert Armstrong? Let's not do an experiment in that.
26:35 Ed Elson? You know, let's please not.
26:37 Robert Armstrong? I don't know if Michael is I'm old enough to just barely remember the seventies stagflation. And in particular, its effect on the price of candy bars uh and the general mood around my house. And uh it was bad.
26:54 Ed Elson? Yeah, Michael, what what do you think about that comparison? I mean, are we close or are we getting close to a stagflationary scenario here? Or or is that far off?
27:04 Michael Gapen? I mean, not as Rob says, not the literal definition of stagflation, which which is falling output or negative GDP growth, rising unemployment and rising inflation. But this is a if you if you kind of think just about persistent inflation and sluggish growth, then yes, you could certainly be on the verge of that. What's helping the economy a lot right now, of course, is AI related business spending and some productivity gains. So I mean, you actually saw the Fed revise higher its growth forecast for 2026 today. I suspect it would have been even higher had oil prices not risen. But I mean, just it's I think it's obvious for the the listener how this would
27:47 Michael Gapen? how a stag mini stagflation scenario would play out. If something like you mentioned, one hundred and fifty or two hundred dollars a barrel became a reality, then you're talking five, six dollar gasoline, right? So that will slow things down. I don't have the ability to buy everything I need to buy if I have to pay that much for uh for gasoline. So it dampens growth and real income. It dampens purchasing power. The consumer is seventy percent of the economy.
28:16 Ed Elson? Right.
28:17 Michael Gapen? So if they pull back and save on a precautionary basis, then growth will slow pretty quickly.
28:23 Ed Elson? I think one thing, just as we start to wrap up here, one thing that a lot of people, a lot of Americans are just trying to figure out is like, is the economy doing well or is it doing poorly, especially with the midterms coming up? I mean, this is the big question. And now that we have this. Maybe oil crisis is unfair a word, but something close to it. It seems though, as though the vibe is that the economy is not doing well. The economy is bad. These are obviously kind of ridiculous reductive terms, but it is important, especially when we get into the world of politics, which we are just brushing up against right now.
29:03 Ed Elson? So as we end here, I would like to just get your guys' ratings on the economy. On March 18th, I'll start with you, Rob. How would you rate the economy if you had to categorize it as good or bad? As reductively as you can.
29:22 Robert Armstrong? Okay, reduction is my business, as we say in journalism. Before the shock of this war.
29:31 Robert Armstrong? GDP trend growth was probably at or above potential growth for the economy. Consumption was growing in real terms. Wages were growing in real terms. Unemployment was is below 5%. If this is a bad economy, may all the world have bad economies. You know.
29:55 Robert Armstrong? The only black mark is I wish the job market was a bit dynamic. You know, it was a bit more dynamic than it is now. We have a low unemployment rate, but nobody's hiring anyone.
30:06 Ed Elson? Right.
30:07 Robert Armstrong? And I don't like that. But like on the big stats, unemployment, consumption, output, growth. This is a pretty good economy.
30:17 Ed Elson? Pretty good. Okay, Michael.
30:18 Michael Gapen? So I would agree, I'd be reductive in a grading sense. I'd give it a B plus right now.
30:23 Ed Elson? Yes.
30:24 Michael Gapen? And a B plus on the macro data, because as Rob mentioned, GDP looks pretty good. The unemployment rate's low. Inflation's running three. That's not a disaster. Could be better, but you know, it's not where we were in COVID, for example.
30:37 Ed Elson? Yeah.
30:38 Michael Gapen? But the beauty is in the eye of the beholder. And the vast majority of households in the US, roughly two out of three, if not, you know, 70, 75%.
30:49 Michael Gapen? They consume primarily out of labor market income. Goods are a larger share of their consumption bundle. Gas tends to be a larger share of their consumption bundle. So parts of the US household are stretched. And as Rob mentioned, the labor market is not dynamic. Employment growth is slow, so income and employment prospects are weak for some households. So this is why I think you get a disparity between what the consumer survey says, which is mixed, and what the macro data says, which is, what are you worried about?
31:22 Ed Elson? Right. Okay. Michael Gapen, chief US economist at Morgan Stanley. Robert Armstrong, financial commentator for the Financial Times. Michael, Robert, I appreciate you both. Thank you so much. Fun to be here.
31:35 Michael Gapen? Thank you.
31:36 Ed Elson? Okay. That's it for today. We appreciate you joining us for another Prof G Markets panel. If you have a guest you think we should speak to on this topic, or any other, please drop us a line in the comments or email our producer Claire at [email protected] . We hope to hear from you. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Patterson and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Isabella Kinsel, Kristin O'Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow. I'm Ed Elson and tune in tomorrow for a conversation with Ed Yodden.
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