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Gary Cohn talks inflation, Fed policy, the midterm elections, and the impact of the CHIPS Act

Former National Economic Council Director and IBM Vice Chairman Gary Cohn spoke with Yahoo Finance's Seana Smith at Yahoo Finance's 2022 All Markets Summit.

Video Transcript

SEANA SMITH: Welcome back to Yahoo Finance's All Markets Summit. Aggressive Fed policy has put the markets on edge, fueling fears that the economy is headed towards a recession as the Fed remains committed to getting inflation under control. Here to discuss this and much, much more, we want to bring in well-known business and economic policy leader Gary Cohn. He's the Vice Chairman of IBM, former director of the National Economic Council under President Trump.

Gary, it's great to have you. Thanks so much for joining us here in studio.

GARY COHN: Thank you so much for having me.

SEANA SMITH: So let's just start big picture. We have high inflation, Fed saying that's going-- that it remains committed to getting inflation under control, markets are bracing for what's next. What's your assessment of where we stand today?

GARY COHN: I think you sort of summarized it. Everyone's talking about the last CPI report. Obviously, we're 8.2% inflation in the United States here, a totally unacceptable number, a number that really hurts consuming Americans, and it's really regressive inflation.

So you understand from the Fed's standpoint, they have to tackle inflation. They have a blunt instrument. They have a blunt instrument, which is interest rate policy at this point. They're trying to increase rates. They're trying to increase rates to slow demand down, just take demand out of the economy. They really cannot affect the supply side of the equation.

The problem that we have-- or the issue that people are debating now is the Fed started raising rates earlier this year. We've gone through quite a few interest rate rises already, and the economy has not slowed down from an inflationary standpoint. That said, we all know that this monetary policy takes time to feed itself through the economy.

Unfortunately, it hits consumers almost immediately. So if you've got an adjustable rate mortgage, it adjusts the next day. If you've got credit card debt that adjusts, it adjusts the next day. But the real policy effects on slowing down demand, that takes months, and almost a year to a year and a half to feed through the economy.

So there's this discussion going on, has the Fed done enough in interest rates to slow down the economy-- and we don't know because the effects are still being felt of the first rate increases-- or have they not done enough because we continue to see inflation move higher and higher? So I think the Fed is in a very difficult position. They were late to the game. They started raising rates late, which means they're now playing catch up.

I think we all believe that they will raise rates two more times this year at the two more meetings, probably at least 75 basis points in the November meeting, and probably another 50 to 75 basis points at the end of the year. So we will have gone from basically zero Fed fund rates in the United States to well over 4% rates in the course of a year. That's a fairly dramatic move. And we need to understand what impacts that's going to have longer term to the economy.

SEANA SMITH: And what impacts do you think it could potentially have longer term? And are we going to be able to do this without going into a recession?

GARY COHN: Well, the question is, what are the impacts? And as I said, the Fed can try and affect demand, the demand side of the equation. They can make borrowing money more expensive. They can make homes more expensive. They can try and slow consumers down because things are harder to buy because they don't want to finance them. They can't affect the supply side of the equation.

And right now when you look at the data, and you look at what's going on in the inflationary front, a lot of the inflation comes from commodities and commodity inputs. So by raising input-- by raising interest rates, we don't create more oil. We don't create more food. So we're trying to create a balance of oil. We're trying to create a balance of food. We're trying to create a balance of workers back into the labor force.

I think one of the big underlying components of inflation is wage-price inflation. We keep seeing 5-plus percent wage inflation. Wages filter through everything we do. As the economy has shifted during COVID to where we were buying lots of goods because we really couldn't leave our houses-- so we were buying things. We were having them sent to our houses. And we were consuming goods-- we're now back into a more normalized economic cycle.

And a normalized economic cycle, we as Americans, we're good consumers of services. We like to go out. We like to be entertained. We like to travel. We like to go to events. The service economy is all labor. When you go out to a service event, you're really buying mostly labor.

So when you go to a concert or you go to a restaurant or you go to a bar, you're buying some inputs, some commodities, but you're buying an awful lot of labor. That labor cost has not come down. And it's another area where the Fed is trying to get some response. They're trying to get businesses to not grow as fast. They're trying to get people-- businesses to not hire as many people.

But we saw-- even in last month's unemployment report, we saw 3 and 1/2% unemployment. We still see nonfarm payrolls growing. So the interest rate impact has not fed through to the business cycle yet. We're going to have to see job destruction if we're really going to see inflation be curtailed.

And I think that's hard because we've gone through a lot of fundamental changes in this country. Prior to COVID, we were all talking about the aging American workforce. Guess what? We're still an aging American workforce. We didn't stop aging during COVID.

Unfortunately during COVID, we lost about 2 million people from the labor force, either through long COVID or, unfortunately, they passed away, which is a horrible event, but we've got to recognize we've lost people from the labor force. And then we had a bunch of people, sort of late in their work cycle, who decided to leave the labor force. So we now have a smaller labor force population in the United States.

So businesses, to attract workers into the labor force, are having to pay more to get workers into the cycle, which is inflationary. Wages go up. They pass those increased wages on to the consumers. And we're in this inflationary cycle. So the Fed's going to continue to keep raising rates to try and break this cycle. They won't know they have broken it til long after it's broken.

SEANA SMITH: So what does this mean then for the equity markets? Because here we stand today, the S&P off more than 20% year-to-date, NASDAQ down more than 30% year-to-date. When you try to gauge that downside risk here for equities, what does that look like?

GARY COHN: So, again, the famous adage don't fight the Fed.


GARY COHN: You know, it's been true for this cycle. It was true for the last cycle when we had a zero interest rate policy. You wanted to own risky assets. When you've got the Fed increasing interest rates and the alternative, the risk-free rate, the rate of return at now sort of 4% for short-duration Treasury bills, that's an attractive rate of return for short-term Treasury bills.

And really what's happening more than anything is the equity market is trying to figure out what are the future earnings of a company? So remember, the value of a stock is the present value of future earnings. So if a company has higher input costs, and it has higher labor costs, and hopefully, if the Fed is successful, lower demand for their goods or services, what does the forward earnings of a company look like, then I could put a multiple on that.

And right now, the market is trying to determine what forward earnings are going to look like and what multiple that should trade at. And as long as the Fed is continuously raising rates, trying to slow down the economy, trying to make things more expensive, trying to make labor more expensive, the market is going to continue to try and find a clearing price for that.

Again, it's like everything else in this world, we won't know we have met that clearing price till long after the bottom is here. We may have met it already. A lot of people think we have not got to that clearing price. But the market right now is trying to figure out what future earnings look like and what multiple we should put on that.

SEANA SMITH: Gary, I'm curious to get your perspective on this. The job that Fed Chair Jay Powell has done so far, are you satisfied with that?

GARY COHN: I think they were late to the game. You know, I don't like to criticize the Fed. I don't think any of us like to criticize the Fed. But they've got a tough job. But they've got an enormous amount of resources at their disposal. They stuck to this transitory inflationary argument way past where I think many of us, myself included, I'll put myself-- I'll make this personal, way past where I thought it was transitory.

Maybe in the beginning as we were bringing production back online, we were bringing supply chains back to normalized level, there was some transitory natures to it. But the Fed stuck to their transitory argument way deeper into the cycle, and it was clearly not transitory.

We clearly had real inflation in the system. We had shortages. We had food shortages. We had energy shortages. We had a tough time getting people back into the labor market. So as I said, the Fed was late. And when you're late, you're playing catch up. And I think they continue to play catch up.

SEANA SMITH: How much of it-- because we know when we look ahead to the midterms, we're 22 days away from midterms right now, Republicans largely running on the fact that high inflation, slowing economy, that's the fault of the Biden administration and Democrats. From your assessment, I guess, how much of it is a result of White House policy versus factors that are just simply out of their control?

GARY COHN: You know, it's never ever one factor. The one thing we learn is when we study the history, we'll know that it wasn't one factor. A lot of people will point to the huge increase in money supply. So as the Biden administration was sending out stimulus checks and they're putting money in the hands of consumers, we were increasing the money supply.

As you increase the money supply, you've got dollars chasing goods. Those dollars are willing to chase the price of goods higher and higher. So we clearly saw some inflationary pressure from the consumer being in a very good position, having very-- very good balance sheets, unlevered. And by the way, we still see that today.

If you see the bank earnings that we saw reported today, the banks were talking about the fact that they still have fairly high deposit rates. The consumers are in still in relatively good shape. Delinquency levels are low. So we still see the US consumer-- this far into the COVID relief, we still see the US consumer with a very good balance sheet, still have the ability to spend, and that clearly is part of the cause of the inflation.

We also had a situation where you could talk about the supply side. We had a change in energy policy, a fairly dramatic change in energy policy. Energy policy drove a lot of this. We've clearly had some unforeseen weather events around the world in the food.

We clearly have a war in Europe where we're having food disruption. So, again, it's hard for me to put my finger on a single event. But all of these definitely have some blame and some huge contribution to why we're having this inflation.

SEANA SMITH: Gary, one of the priorities of the Biden administration has been the chip sector, the passage of the $52 billion CHIPS Act. I knew you, along with some of your colleagues from IBM, made the trip down to DC to help that get over the finish line. From your perspective so far, how is the rollout going of this?

GARY COHN: I think the rollout is going fine. I mean, I can't tell you it's going poorly or great. It's a slower rollout, but we knew that. The Commerce Department right now has been empowered to go out and spend the money that was given to them by the government.

But really, the opportunity there was not just giving the Commerce Department money to spend. If this was going to be successful, it was going to be a huge public-private partnership. And I think we've seen the public and the private get-- and the private sector get together. We've seen the private sector announce massive investment in chips into the United States.

You've seen it in upstate New York. You've seen it in Columbus, Ohio. And these are not small-- small investments. We've seen multiple billions of dollars, $10, $20, $30, $40, $50, $60 billion investments by companies. IBM, last week when the president was there, announced a $20 billion commitment. You've seen Intel announce investments. We've seen multiple companies announce investments.

So the government has done what they needed to do. They got leverage in the system. They talked about the importance of chips in the United States. They talked about being supportive of chips. We've got to get the permitting process sped up. But the private sector is bringing the money to the situation because, ultimately, the money that the government is putting in is just a little tiny down payment on a big, huge issue of being chip independent in this country.

SEANA SMITH: And, Gary, I want to switch gears here just a little bit and talk about a story that's been in the headlines recently in recent weeks, and that's a comment from Kanye West and what he has made public on his social media platforms, his large media presence out there, the anti-Semitic remarks that he has made multiple times. And I bring this up because it's been five years since Charlottesville. And here we are today with similar type of rhetoric, hateful rhetoric that's being said on a platform that has millions and millions of followers. What's your reaction to the remarks that we've heard from Kanye West?

GARY COHN: You know, look, they're just unacceptable. You know, I'll say the same thing about Kanye West's remarks as I said to the president of United States at the time. It's just unacceptable in this day and age in the world that we live in for people in a leadership position with that big of a platform, with that big of a microphone to make those type of comments.

SEANA SMITH: And, Gary, real quick, we tried to ask you this two years ago when you were at AMS, whether or not you were planning to vote for President Trump in the 2020 election. So I'm going to ask this to you, but put it in a slightly different way.

GARY COHN: Did I answer back then?

SEANA SMITH: You didn't answer--


SEANA SMITH: --back then so I'm going to give it another shot here. What would you say to people that might be inclined to support a second term for President Trump?

GARY COHN: Look, it's America. Everyone's entitled to vote for whom they want. That's the greatest part of our democracy is that we allow people to run for public office, and the citizens of the country get to decide who sits in those public offices. We're in the middle of a midterm election right now, and we'll see who takes control of the House and the Senate.

SEANA SMITH: Certainly will. 22 days away from those midterms. Gary Cohn, always great to have you here at Yahoo Finance. Thanks so much for joining us.

GARY COHN: Thanks for having me.