CPI data will leave Fed in a cutting bias, says Vanguard's Joe Davis

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joining us right now is joe davis vanguard 's global chief economist global head of investment strategy vanguard recently released its economic outlook for twenty twenty six good morning to you let's talk about the outlook in just one second but CPI what what do you expect what

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what should we be looking for today

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 00:19.050

well i think it's going to be mixed i mean i think we will see a trend that's in some components is coming down but you'll see some pressures you know the areas tied to either tariffs and then the you know some of the food prices that we're all contending with so again i think

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 00:32.010

it'll be a mixed picture it'll leave the fed in a modest you know cutting or easing bias but nevertheless it's it's one of the challenges the economy faces

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and so joe let's let's sort of leveraging sort of where we are right now where obviously almost at the end of the year what is the if we we come back and discuss next christmas what the year was what do you think it'll look like

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 00:56.860

well again there there there are some headwinds that we're still working through i i think the the ultimate factor will be how much AI related investment we will see particularly in the back half of the year we start to see you know upside risk to the US economy that's not to

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 01:13.940

say there's not challenges in the near term i mean the labor market has effectively stalled and is in a holding pattern there's several reasons for that but the swing factor is clearly going to be investment and with that what does it do to job growth that that's the theme of

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 01:28.670

our outlook and so that's where the risks across the world are mixed depending upon the velocity of the investment so

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what do you think is going on in the jobs market right now

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 01:39.460

well there you're just mentioning supply and demand there are both forces at work there's been acceleration in in retirements you know those over the age sixty five in particular obviously immigration has slowed and so that has pushed down the so-called you know like break even

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 01:56.540

rate but we're still working through you know some of the tariff uncertainty which was delayed it was not eliminated it's not AI automation you know some of the job growth is actually strongest occupations that at least right now have high AI exposure and our own four oh one K

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 02:14.550

records that track job growth pretty closely show that you know younger workers it's it's at historical levels i'm not saying it's booming for younger workers but it's not some of the narratives that we hear so it's both coin and you know businesses holding pattern as well as

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 02:31.110

just lower supply of new entrants coming in the market so again investment spending and business confidence will really determine the to the economy in twenty twenty six

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OK but then then speak to the other side of the story which is the inflationary picture how much inflation do you think we're going to see how much of that is the function of tariffs how much you think it's a function of something else

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 02:52.770

i i think there is a lot to be said of tariffs as well as what we what what what we believe we've said pretty strongly for two years the fed is not as restrictive as they think and so you know i i'd say they're fairly neutral i think there's a greater appreciation for that more

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 03:10.690

recently so i think if you put those two together you can get inflation above two percent you know where we go from here i think will be less a productivity story it will be much more more let's settle down in some of the in some of the tariff related uncertainty some of those

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 03:28.230

volatilities and then i think the focus for twenty twenty six believe it or not will be more on the growth than on the inflation side

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and then finally if we could put make you a candidate for the next head of the fed what would you be doing

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 03:45.010

i would be looking at how high productivity could go over the next two or three years i mean there are some strong arguments and we've made it that there's the possibility of a late nineteen nineties you know somewhat of a surge in growth which is non inflationary that has

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 04:00.730

important implications for what the federal reserve should do so that's that's always you know not an easy exercise but i i that's where i would be spending a lot of time because you can have policy that can accommodate higher growth thinking that you don't have to be as

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 04:17.190

restrictive that that's going to be important for the financial

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markets we could you think we could have lower rates without are you suggesting we need lower rates or not then

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 04:26.110

i think you i think you can have our our our research is clear you do not you do not have higher rates with higher growth not if it's given from higher productivity and innovation rates that's what we saw in the late nineties you can have a four percent ten year treasury yield

Joe Davis (Global Chief Economist, Global Head of Investment Strategy) 04:40.470

and have inflation holding pattern yet you can have a a two and a half three percent GDP it's because it's not just demand you're getting higher capacity that's the key area the fed needs to look at for the next two or three years