Watch the conversation below between Hedgeye CEO Keith McCullough and former Fed advisor Danielle DiMartino Booth (CEO of Quill Intelligence) in this exclusive investing webcast. The duo discuss the outlook for Fed policy, U.S. economy, markets and much more.
Trust us, this is a must-watch. But don’t take our word for it. Read the excerpt we’ve transcribed below.
Keith McCullough: Hi, I'm Keith McCullough. I want to welcome you back to another Real Conversation where one of my favorite Fed people, Danielle DiMartino Booth and going to talk about the Fed. And we're going to get right into it no holds barred, as you usually would Danielle. You're not going to hold anything back.
Danielle DiMartino Booth: Not Holding back. Sorry. No.
McCullough: Good, good, good. So it’s 73% today. That’s the probability the Fed Funds are assigning to the probability of a rate cut. Do agree with that?
DiMartino Booth: That's what you get from one down day in the market? Seriously. Wow.
McCullough: So how do you think about that? Do you think that that's just the beginning?
DiMartino Booth: Powell is serious about rewriting the rules completely. I mean you, you've got Lael Brainard on the wires. Nobody from the Fed is randomly speaking these days about anything. It is all strategic talk. Fed speak is something that we would prefer to disregard. Don't do it.
So Brainard is talking about not having a set level of QE once we hit the zero bound. Okay, so that's broadcast. That's end of story. We're going back to zero. That's A). B) She's saying we'll just target where we want rates to be, whether it's the one-year or the two-year rate. That's what Japan is doing today and that's what they're discussing at the Fed.
McCullough: So interest rate targeting effectively. This is what people love about you. You know all the ins and outs of all these different characters at the Fed. Lael Brainard, maybe contextualize who she is and who she might become.
DiMartino Booth: So she would have been Treasury Secretary under Hillary Clinton. It is a matter of public record, I find to be a very questionable behavior from being a former Fed insider myself to publicly donate to a presidential campaign.
McCullough: Is that what she did? Wow.
DiMartino Booth: Oh, that's a matter of public record period end.
McCullough: That's sketchy.
DiMartino Booth: So we knew she would have been Treasury Secretary. We know she's got tremendous power. We know she's got huge ambitions for the future. There's no doubt about it. Um, she wasn't necessarily loved by yelling, which is interesting to me given their so dovish, the two of them,
McCullough: It's probably because she's so political. I mean Yellen was just like literally a weenie bin academic, raging labor economist.
DiMartino Booth: I don't take it away from Brainard that she's overtly political because to me that’s at least as a little bit more intellectually honest, than Yellen. Yellen said she was not political while keeping rates for too low for too long and not understanding that at the same time she was financing Uncle Sam's borrowing rates and letting Congress basically not do their job because they just were able to hand it off to the Fed. So it's called the sin of omission. But I'd rather have the politicking be overt. So I'll give that to Brainard.
McCullough: Now, let’s set politics aside. I don't want to upset people out there that are political.
DiMartino Booth: I'm not making a political statement. I'm just saying that the Economist putting on the front cover of their magazine a few weeks ago, that Fed independence is at risk. I mean, come on man, please. The Fed has been political since Volcker walked out of the door.
It is also a matter of public record that Alan Greenspan, after 1987 and the meltdown in stocks, fed information via the New York Fed on liquidity injections into the bond market to bond traders prior to the Fed’s moves. That's called front-running the Fed. You can't tell me that's not political.
McCullough: Okay. Let’s just say there's at least a 50% chance that the Democrats roll in with their new team in the upcoming elections. What is the percentage chance of Lael Brainard being a central part of that team?
DiMartino Booth: I think it's a 100% chance.
McCullough: So she really does matter?
DiMartino Booth: Oh, absolutely. And, what also matters is, we would have MMT overnight.
McCullough: I want to get into your definition of MMT because there are so many different rabbit holes we can go down. But the Hoover Institute had their big monetary policy conference. Were you there by any chance?
DiMartino Booth: No.
McCullough: I certainly wouldn't be invited to that.
DiMartino Booth: I’m thinking they would probably bar me at the doors.
McCullough: They invited Darius Dale, Senior analyst on the Macro team and he sat at the same table as our friend Steve Liesman. So that’ll be the end of his invitations.
But anyway, at the Hoover Institute they were all basically saying, “What can we do to redefine the zero bound and how fast can we go there?” How fast is this happening? Is this literally everyone joining arms now at the Fed, no matter what your rank, and having Powell say, “Look, I'm in. I'll be the guy to redefine it and go to MMT or whatever.”
DiMartino Booth: But the Fed is in denial about MMT. They're publicly against MMT. They don't even understand that they created it. They're absolutely in denial. I think that the reason Jay Powell publicly said, “MMT is on its face wrong” is because you cannot have debt increase indefinitely as a nation.
But I think the reason he was trying so hard is because every single security that the Fed purchased in its first three rounds of QE – meaning anything that doesn't get rolled off – is de facto debt monetization. This give MMT’ers license to say ‘If it worked to bail out Wall Street, then it can work to bail out Main Street. It's time for Universal Basic Income. We know that we can print money to kingdom come and never have inflation.’
McCullough: Can you explain to the most layman of laymen that's watching what is MMT?
DiMartino Booth: Modern monetary theory. It sounds so erudite. It was like large scale asset purchases because we're not going to call it QE. So put a fancy name on it. It sounds very viable that way. What it really means is printing money for the purpose of fiscal endeavors. Named that fiscal endeavor, whatever it may be – healthcare for everybody or universal basic income, which under Bernanke he's definition is helicopter money.
You are direct depositing money into every American's bank account indefinitely and indefinitely is the most important aspect of MMT I think people should appreciate. And if inflation does rear its ugly head, according to advocates, then all you do is raise taxes and you reign that in.
So I'm going to take advantage of your goodwill right now and put my new hashtag out there because I have a new hashtag. I have a new acronym. It's called MMT, Modern Meritocracy Theory. Let's instead of paying people to sit on their back sides, with Universal Basic Income, let's reform our education system.
You want to print the money, put it to good use. Bring innovation back. We've got a 68.2% labor force participation rate. 770,000 people have left the workforce since December. So we are back into an atrophying mode. 65% of the jobs created in April were in low paying industries. We're back to an eat, drink and get sick industries that don't pay you anything. Home health care workers, waitresses, bartenders, that's an atrophying work force. Let's make it go the other way. Bring vocational training back like it never left Germany. Why do you think they are a manufacturing and exporting powerhouse?
McCullough: But how would the central banker think about making that switch?
DiMartino Booth: Well this is not a central banker’s business. On the most fundamental level, the problem with the Fed's dual mandate is that in 1977 when they added the employment mandate, that was the beginning of the end. This is when we started to get mission creep. Because if you are a capitalist nation, then by definition you leave the workforce in the hands of the private sector. It's simply one of the rules of the game.
If you want to have creeping socialism, then you hand it to the central bankers. And again, this is not a political statement. It is simply a matter of whether or not we want to be a democracy, whether or not we want to have capitalism in this country or not.
McCullough: So it's the opposite of the current MMT that people are thinking about. That makes sense because currently you're effectively getting the government to fund all of your socialist ideas with MMT.
But let's take the inflation component of the dual mandate or the price stability component. You’ve written about this and have one of the better quotes on that, so I'll just read it, “I see Fed members as hiding behind a broken inflation metric to maintain their dovish stance. We're definitely closer to 2%, but that has nothing to do with where the Fed wants to be.”
DiMartino Booth: The Fed is hiding behind core PCE. It makes the Fed into just a wimp. Tell me, have your healthcare care deductibles gone up in recent years? Has your copay gone up in recent years? I've got four kids. Let me tell you about copays and multiplying them out.
So where is the logic behind using Medicare and Medicaid reimbursement rates to calculate healthcare inflation in America? Because that's what feeds the core PCE. That's like the second largest line item after rent and housing for your average working Joe and your average working Jane. And yet the Fed uses it and the Fed knows it's broken.
This was internally acknowledged when I was there. Stanley Fischer's first FOMC meeting. This is in my book. Fischer stands up and addresses the committee, ‘Why don't you use headline CPI? It's the closest thing we've got to reality. So why not use it? What is this core PCE thing?’ So some brave Fed staffer in the back of the room, shaking, raises their hand and says, ‘If we didn't use core PCE, our models would break.’
So James Bullard, who I've decided has a great sense of humor, it's just a hidden attribute, says ‘Let me get this straight. This is how we make monetary policy? Crap in crap out.’
They know it. They know they're using a broken inflation metric and yet they hide behind it and tell us that they can't hit their target. Maybe we should stay lower for possibly ever. That's a new hashtag. Forget lower for longer. Don't fight the Fed. Lower forever.
