Reaccelerating economy is a problem for the Fed, says Apollo's Chief Economist

Our next guest sees a re accelerating economy as a problem for the Federal Reserve. Torsten Slack is the Chief economist at Apollo Global Management. Torsten, great to have you with us before we get to the Fed and and what you think which is no cuts in 2024. I do want to ask your thoughts about about this sort of thesis that higher rates are actually good and and good for the consumer net net. Is that true? Well, I think there’s some very important nuances in that discussion. If you owe money to someone then higher rates is not good. If you own fixed income then higher rates is good. So that’s why there’s a bifurcation when it comes to consumers in terms of who is it that’s being impacted by rates going up. Yes, if you have fixed income assets, if you live all fixed income, then higher rates is certainly most helpful. Whereas if you owe money on your car, if you owe money on your credit card, if you owe money on your house, which generally it tends to be younger households because they generally have higher debt when you’re young. That means that younger demographics, and this is what the New York FIT data is showing, they are absolutely being negatively impacted by seeing delinquency rates going up on auto loans, delinquency rates going up on credit cards. So it is a bit of a double hit where some parts of consumers are benefiting, some parts of consumers are being hit, while at the same time you also have had because of the Fed changing their message in November and December that asset prices have gone up. That adds the additional dimension that is not only about my cash flow as a household, it’s also about your assets and the very significant increase that we have seen in the stock market since the Fed on November the first meeting began to say, well now we are cutting rates. We have seen a $10 trillion increase in the market cap of the SP500. That is a significant tailwind to consumer spending. That’s the reason why the economy is re accelerating. Retail sales has been strong, hiring has been strong, inflation has been strong. These are not just statistical flukes. This is absolutely because of the tailwind coming in particular because of the stock migrant going up, home prices going up and also these cash flows that are coming in particular to Midland high income households. So I think it’s interesting that you think the economy is re accelerating. It is very strong because basically the data points that the Fed saw in and interpreted initially as a bump in inflation, you actually see that as a beginning of a trend. Absolutely. Because I do think that the communication from the Fed basically for 1 1/2 years before the December FOMC meeting was that interest rates are going higher, higher, higher, higher. That meant that there was no PE deal activity on the exit side. There was very little issuance in IG, very little issuance in high yield, very little IPO activity, very little activity in M&E. So that’s why the consequence of now them saying, well, now rates are about to go down. It was that we got a boost to financial conditions. And as you can see in the chart, the implication is that the Fed now needs to work even more on getting inflation under control. So Melissa, to your question, I do believe that rates are going to stay higher for longer. And you can see market pricing in this picture here is telling you that, yes, rates may be eventually coming down a bit, but we’re still going to stick at a level between 4 and 5%, which is dramatically higher than the 0 essentially that we had from 2008 to 2022. Torsten, it’s Karen. Thanks for being on. So what would you put as the likelihood of a cut versus a hike from the Fed as the next move? Well, let’s first talk about what the market pricing is saying. And as you know, the market is now pricing, that the first cut will come in September, but the market is actually the beginning to price, admittedly in small single digits that there will actually be a hike already at the meeting in May. And what is the market thinking? Well, the Fed fund futures curve is telling us that, well, maybe the Fed could be for actively saying, hey, we got to do more. So I don’t think they will hike in the May meeting. But it’s very interesting that the distribution of what the Fed will do is beginning to tilt more towards rate hikes coming. I don’t think as you also talked about earlier that we will get any more hikes during this cycle for a lot of different reasons, partly because of course the election is upcoming, but also because of the base effects on inflation are that there is more lift in inflation in the second-half of this year that comes off when we get to December and into next year. So I do think the Fed will be articulating the way that Jay Paul did yesterday of saying we will just stay higher for longer and we’ll just have to wait a little while longer before we ultimately get what we will see. So what I view at the moment to back to Melissa as about before, what we’re seeing today is really a sugar high coming as a result of this boost from the stock market going up again, $10 trillion added to household balances. Remember, consumer spending in 2023 was about 19 trillion. So we have added in wealth roughly half of consumption last year. It has a significant tailwind to restaurants, hotels, airlines, concerts, sporting events. Across the board. Consumer spending continues to really look good when it comes to the next several quarters.