Charles Payne: Economist Greg Daco. Also with us is Fed expert Director Joe Wang. Let me start with you, Greg, because I really enjoyed your comments on Waller's statements. In a moment, we'll show them to the audience so they can familiarize themselves. You really appreciated what he said. His final remarks demonstrate depth of thought and leadership.

Greg Daco: Yes. Yes, I think that overall Waller essentially described his vision of the US economy today, said what he expects from it in the coming months, and, as a result, what his reaction function is and how he plans to vote on monetary policy. This is exactly the optimal type of discussion that one wants to see from Fed leaders, which we haven't really seen from Fed Chairman Warsh, except most recently at the Jackson Hole symposium.

Charles Payne: So, you have it, but Warsh doesn't...I mean, I don't think he necessarily wants to talk that much. He wants the Fed to be quiet. So how important is it that it's these two? What are Waller and Williams, given their positions at the Federal Reserve.

Greg Daco: This is very important because these are two key politicians. They represent the core of the FOMC and probably give a good idea of ​​where the current discussion at the Fed is about the next step in policy. We have both New York Fed President Williams and Governor Waller saying that if inflation continues to move toward 2%, they see no need to tighten monetary policy, which I think makes a Fed pause at the September meeting very likely.

Charles Payne: So, Joe, let me stay with you for a second, because your thoughts on what you heard from Waller this morning and Williams together, what are the implications from your perspective?

Joe Wang: Well, first of all, I guess it was a little unexpected for me. Waller has been somewhat hawkish in the past, and we came to this after a rather hawkish speech at Jackson Hole. Now, I think Waller's speech today was quite "dovey." As Greg noted, Waller seems to be hinting that if we don't get a better-than-expected CPI next week, he's leaning toward a pause. What struck me most about his comments was that he sees progress on the issue of inflation. And he also noticed something very interesting. In a few weeks, we will change the way we calculate PCE, which is the Fed's inflation target. And after we change the calculation method—which is a change in portfolio management fees, which usually increase as the stock market rises—the PCE index will start to decline. So, if that's the Fed's target, and we expect it to go down a little bit, that's another reason to be more optimistic about the inflation trend.

Charles Payne: Joe, I saw what you said. You thought Waller would up the ante after Jackson Hole. He is in the camp of supporters of the promotion. Does this somehow harm his authority? I mean, I don't think he wanted or wanted to raise the bar. I think he wants to completely overhaul the Fed, start 2027 with new rules that could also imply a lower inflation rate than we are seeing officially now.

Joe Wang: I think Chairman Walsh definitely wants change, but at his last FOMC conference the market didn't take the changes very well. So I think he's going back to a more traditional approach. At the Jacksonville conference, he noted two things that stuck with me. First, the policy is not restrictive. If you follow the Fed, you know: this is a loud signal that we probably need to do something because what we're doing right now isn't working, right? He also mentioned something new: in his opinion, the speed of achieving the goal also matters. I took this as a very "hawkish" speech from the Fed representative. So, this is somewhat at odds with what we're hearing from Williams and Waller now. So we have a very interesting FOMC meeting ahead of us, and a lot will depend on next week's CPI data.

Charles Payne: Greg, this is the table from Apollo that caught my attention, right? Because they say: if you look at this, it's not just about the US, right? Profitability has gone crazy all over the world. In fact, maybe even more. They say that if you look at Japan, Germany and the US, it shows that long-term rates reflect Fed expectations, but not fiscal instability and certainly not confidence in the Fed. So, if that's the case, why was there so much hype around the urgency of raising rates in the first place?

Greg Daco: I think there are two conflicting elements here when it comes to profitability and the factors pushing it up. There is definitely an element of term premium, but it's not just about the last few months. It is precisely in the last couple of years that we have seen the term premium increase, and this is a fairly uniform phenomenon for a number of economies: it reflects structural factors, rising debt burdens, inflation volatility, massive demand for private capital due to the AI ​​investment boom, as well as issues of trust in central banks. But there is also a short-term perspective: the conflict in the Middle East and inflationary expectations, which are driving up yields. So we have two separate elements acting in synchrony, but we have to be very careful in this high interest rate environment because if that translates into a higher discount factor, it could put pressure on equity prices and lead to a significant decline in private sector activity. So it's very important to keep an eye on what's happening with profitability.

Charles Payne: So, Joe, to that question: I have the chart you were using the other day. You say, "Hey, it's pretty simple. The yield on the 10-year Treasury bond skyrocketed as soon as the US attacked Iran." If that's the case, and we somehow come to an agreement, and by the way, I think our situation there is much better than the media is saying. Oil prices will start to fall. Isn't there too much ado about nothing?

Joe Wang: I believe that many factors influence profitability. As Greg mentioned, we have a huge investment boom in AI. As James noted earlier, we have strong growth in the US. But if you look at it more broadly, as you mentioned, Charles, this is a global story. Profitability is increasing worldwide, and I think it's due to a common factor—energy prices, which, as you can see on the chart, started to rise with the start of the war. Now that the war is over, I think they will go down, inflation will fall, and the stock market will skyrocket. Hopefully we'll get some good news on that front, because I think it would really make a difference.

Charles Payne: Right. So before we let you go, Greg, what's the most important thing for us to track? It seems likely that future economic data releases will play an even bigger role than usual. Is there anything else we're not paying attention to that we should be?

Greg Daco: I think, in addition to rates, I'm paying close attention to income growth in the US. Wage growth continues to slow amid high inflation. This means that many people's earning power is limited, and as a result, their purchasing power is also limited. Yes, the stock market still provides a positive wealth effect for high-income earners, but most have to make difficult choices.

Charles Payne: inform the Fed? The Fed knows about this, right? That we will get the employment report tomorrow. Let's say it's very similar to the previous reports, which is what you're talking about, and, you know, that's fine. Maybe more people are leaving the labor market, which is always a red flag for me, but the wage rate is not changing. Does this give the Fed time to consider whether it's worth raising rates when people aren't earning as much?

Joe Wang: I think what Walsh mentioned during the Jackson Hole symposium is very important. He said he doesn't consider the financial conditions restrictive, but it only applies to a certain part of the economy. If you look at the real economy, yes, higher interest rates do hurt the ability to buy housing, expensive things, and corporate investment, except in the field of AI. So, this is a key element to focus on from the Fed's perspective. And in that regard, if I were a Fed policymaker, I would be very cautious about tightening policy in these conditions, which I believe remain disinflationary from a labor market and interest rate perspective.

Charles Payne: I hope they are listening to both of you, especially this is a key point. You know, in our divided country, that's one of the problems, and I think many people feel that the Federal Reserve has not always been on the side of ordinary citizens. This would be a chance for them to perhaps prove otherwise. Thank you very much, Greg. Uh, Joe, thank you very much. Great, guys. Uh, soon, we're going.