LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Every week we analyze what's happening in the markets and discuss how it might affect your investments.

So hi, folks. Normally this is where you'd hear Kathy's voice, but she is out this week, and filling in for her is our colleague Kevin Gordon, whom our listeners all know, I hope. And next week I will be out on the road, and Kathy will be joined by her colleague, our colleague, I should say, Collin Martin. So lots of travel between now and the end of the year. But on with today's show. Kevin, thanks for joining me today.

KEVIN: Yeah, thanks for having me, Liz Ann. Always great to be back and have these discussions.

LIZ ANN: Fabulous, so let's jump right in, and let me ask you about your thoughts on how the markets are reacting to the government shutdown or maybe not reacting and also your thoughts on the latest news out of tariff land.

KEVIN: Yeah, so I was looking at some performance this morning, month-to-date, because actually that perfectly lines up with when the government did start the shutdown. So if you look at the S&P 500®, it's down a bit, down almost 0.7%. Of course, before last week when we got the announcement from President Trump about potential new tariffs on China and some of this retaliation and a re-escalation of some of the trade dispute, the S&P 500 was up a little bit more. So that clearly took some of the steam out of the rally. So you could say the markets haven't reacted well, but you could also say up until that news, the markets have been reacting well. So I think that if you look at it in its entirety, though, so far, even with some of the trade disruption, there has been this this notion or this essence of the markets kind of taking it in stride, especially if you look at fixed income, or if you look at some of the foreign exchange markets, there hasn't been too much disruption. 

I think that's for a number of reasons. Number one, you know, the Fed, you know, from a monetary policy perspective, the Fed seemed to be pretty solidified in its view that it was going to continue to ease policy for the next couple of meetings. I know we'll talk about that in a little bit, especially with the guest that you have on the show today, but also, you know, that the economy was in a relatively solid spot. We had gotten some pretty positive revisions for GDP, you know, heading into the shutdown. Different story for the labor market, but that was also sort of this known factor that most of the labor slowdown has been driven by the supply side, not as much the demand side. The unemployment rate has still been relatively low. So there are, I think, a number of factors that may be provided some degree of comfort. 

I will say, though, I think that the longer this drags on and the longer we go without getting some of these key economic data points, I do think that it could become more of a pressure point for the market. And the last thing I'll say is that, as we get closer to November, and especially in this current week where we're now in the reference period for the October payrolls report from the Bureau of Labor Statistics, if we don't get that data, if the BLS doesn't get a chance to collect that data, we're not going to have data for the October jobs report. And that sort of compounds the issue of not getting September and also not getting revisions for August, which tends to be the most heavily revised month. So I do think that the longer it goes on and the more we are in the dark, I think it will become a little bit more of an issue for the market.

But how about you, Liz Ann? What's your take on what we're seeing right now?

LIZ ANN: Instead of answering that really broadly, Kevin, let me just touch on a couple of more, I don't want to say micro-level things, but maybe some interesting stats that tie into where we sit right now, which is at the start of third-quarter earnings season. And there's too few companies that have reported so far to establish a trend, but so far so good in terms of companies that have beaten estimates. The blended growth rate, which includes just a very small number of companies that have reported with the consensus for the remainder of companies to report is running at more than 9% right now. And it wouldn't surprise me to see that trend a little bit higher. But I think what's going to be more important, especially in light of the, yet again, escalation in terms of tariffs, what companies are saying about the impact of tariffs on their business and how they're thinking about ultimately pass-through to consumers. Is there any potential eating of it by the companies and impacting profit margins? So that's on my radar in the near term. 

In addition, there's what you mentioned, the positive revision to GDP. Sometimes lost when we get these GDP revisions, and admittedly, the positive revision was for second quarter, so that is very much in the rearview mirror, but there was a sort of a nugget within that release that I think has some bearing on how we think about the profitability landscape. So when GDP is released, and when you get the subsequent revisions to GDP, part of that includes the National Income and Product Accounts version of corporate profits. So NIPA for short, N-I-P-A, and it's millions of companies that they are tracking. So it goes well down the size spectrum into smaller companies, into S-corps. So it is a much more comprehensive measure than, say, the S&P 500. And when we got that positive revision to GDP, along with it came actually a negative revision to after-tax corporate profits, slight negatives for both the first and the second quarter. And for what it's worth, you're at inflection points, or you're in the process maybe of a slowdown in the economy, or the same way, in a pickup in the economy, it's often picked up initially with that NIPA-version of profits, which tend to lead S&P profits by a couple of quarters. There have been exceptions to that, including a somewhat recent exception in 2018 where you saw a deterioration in NIPA-based profits, and ultimately you did not see a commensurate fall in S&P profits until the pandemic hit, which obviously was specific to the pandemic, not necessarily a sign that, yet again, NIPA picked up that coming turn down, but it's just something to keep back of mind. 

Another thing that I've been focused on a little bit is—we're in earnings season—is obviously what we're going to hear in the AI space, not just the hyperscalers and the companies directly involved in the picks and shovels of AI, but how companies are utilizing AI, whether they're starting to put any meat on the bones of the impact on productivity. 

Because one of the things that you and I wrote about a couple of weeks ago when talking about AI was the recent MIT study that showed that, so far, the vast majority of companies are saying they're incorporating it, but it's not yet manifesting itself in concrete benefits to things like productivity measures. And then the last thing I'd say is that with ongoing continued focus on AI, the Magnificent Seven group of stocks, which we talk about a lot on this program, represents now a third of all S&P capital spending. But interestingly, for that same cohort, free cash-flow growth in the last five quarters has gone from up more than 60% now down to slight negative territory. And that may be one of the reasons why you're seeing some of the deals that have been announced have been debt-finance deals. This is a boom that so far has been largely equity financed, which is one of the differentiators relative to the late 1990s. I would just think to be on our radar is whether you see an increasing number of debt-financed deals. So that's something a little more micro level. 

One other thing I wanted to toss back to you, Kevin, is this, before we introduce our guest, is you were at the NABE meeting this week, the National Association of Business, what, economists? Did I get the full descriptor?

KEVIN: National Association for Business Economics.

LIZ ANN: For business economics, all right, thanks for … You were just there. So I figured you had the, you know, we all try to keep up with the acronyms here. What were your primary takeaways from that?

KEVIN: Yeah, it was a great meeting. I'm a newly minted member of NABE, so shoutout to the organization. It was a great meeting. I'm glad that you brought up AI because, of course, it's not that nobody's talking about it, but it was such a big focus of the conference, from a productivity and labor perspective, because maybe surprising to some viewers, but not as surprising to some economists who have started to look towards things beyond tariffs, in terms of the impacts to the economy and what is going to be top of mind as we head into next year, there was a bit less focus on tariffs as a driver of growth and more of a focus on the labor market. And in particular, how are we going to solve for more of this downward pressure on labor because we've seen such a slowdown, essentially no flow of immigration. And then we've also seen it continue to pick up in deportations. 

So with that constraint, of course, you're going to suppress potential GDP growth. However, if you have a surge in productivity growth that happens at the same time, presumably because of a lot of this technology, that can lift you out of some of the rut, the GDP slowdown that is associated with slower labor-force growth. So that was a really big topic, but a lot of focus, sort of the root of that being some of this concern over labor. And I think also what was interesting was that this is not just, and you and I talk about this a lot, whether it's just to each other or at client events. But this is not just a U.S.-specific phenomenon, this aging crisis we have, and to some extent actually, you know, a little bit of a pushback on some immigration. This is not just a thing that's happening in the U.S. 

So I think understanding the global perspective of that and hearing about that, especially from, you know, some individuals like Catherine Mann, who used to be the global chief economist at Citi, and now she's an external policy member at the Bank of England. She was really taking an interesting look at this and how some of these instances can be described as termites in the economy, where over time they kind of weaken some of the structures and some of the pillars, especially when you have a narrower base of growth like we do in the United States, everything focused on tech investment and AI capex. 

And that itself doesn't necessarily deliver this massive blow to the economy, but it can weaken things over time, where if you do get some sort of negative catalyst, that does act as a bigger impulse than that can drag you into recession, or it can at least result in a broader slowdown. So I thought that was a really interesting point in talking about and thinking about how this labor problem, whether it's a demographic issue and aging, and/or it's this issue of just slower immigration and slower flows into the labor force. It was really interesting to look at that in a global context. 

What was also interesting, Liz Ann, is one of the individuals that I saw there, and I didn't make my way over to him. I couldn't get to him in time, but it was your guest this week. So maybe it's a perfect segue to introduce him.

LIZ ANN: Yeah, and I knew after we had our conversation, he mentioned that he was heading over to NABE. So our guest this week, I'm so happy about this, is Pat Harker. Pat, from 2015 until July of this year, so about 10 years, was president and CEO of the Federal Reserve Bank of Philadelphia. And because of that, he did sit on the Federal Open Market Committee, or FOMC. 

Now, prior to that, Pat served as president of the University of Delaware from 2007 to 2015. A bit near and dear to my heart since I'm an undergraduate alum of Delaware, and for 25 years now, I have sat on the Investment Visiting Committee for the university, which helps run the … what is a very growing and large endowment and that's how I met Pat back in 2007. Prior to joining University of Delaware, he was dean of the Wharton School at the University of Pennsylvania. And Pat is now back at Wharton serving as the Rowan Distinguished Professor of Operations, Information, and Decisions. And also as part of his tenure there, he is involved with the Penn Wharton budget model and had some interesting things to say about that as well.

So hi, Pat. It's been a minute, as the kids say these days, but so happy to have you joining us. 

PAT: Thanks for having me.

LIZ ANN: So I think you started at Delaware in '07. And so it was probably not long after that you and I met for the first time. So my bio doesn't get read every single time on these episodes. So for listeners that aren't aware, when Pat was at University of Delaware from '07 to 2015, that was a chunk of the time that I have spent for the last 25 years on what we call the Investment Visiting Committee, helping to run University of Delaware's endowment. I'm an alum, undergraduate alum. So that's when Pat and I first met. 

And I was thrilled and so proud of you for the move to the Philadelphia Fed, which you just ended your 10 years there. So I want to dive in and maybe start with … I was about to say the proverbial elephant in the room, but maybe it's the elephants and donkeys not in the room right now with the government shutdown. And maybe your thoughts on how the Fed, broadly, can operate in a vacuum, in terms of at least government-issued data. So how do you think about that in light of the ongoing shutdown?

PAT: First, I'll just speak as an American. I can't believe that we just can't get our act together and pass a budget and do … this is Congress's job. It's job one in Article One, is to pass a budget. And it's going on and on. And it's causing needless uncertainty for people in the economy who are already facing a lot of uncertainty …

LIZ ANN: Right, as if there wasn't already a lot of uncertainty, yeah.

PAT: Right. So I hope this gets resolved quickly. In terms of data, this has been an ongoing problem well before we had the shutdown. I look at, for example, if you look at the two labor surveys, household and establishment, they should be right on top of each other. They haven't been for a while. They bounce close together and then move back apart. We have problems with these surveys.

People are not responding, just generally. This is a more general issue. People are not responding to surveys like they used to. The establishment survey tends to be one I would rely on more because those firms are more likely to fill out the survey as opposed to a household, particularly a household who may feel threatened in various ways.

LIZ ANN: And let me just, for our listeners, the establishment survey is the survey from which the payroll number is generated, and the household survey, which is a survey of households, is where we get the unemployment rate from. Both are done by the Bureau of Labor Statistics. So continue on.

PAT: So BLS has known for a long time that they've had this problem, but they're under-resourced. It's a difficult problem to solve anyway, but they're under-resourced. So there's that issue. We also have pricing data and pricing information. You know, that's getting more complicated too. So all across the board, the data, you can say, "Well, let's let the private sector solve this problem with ADP data, in case of employment." It's not perfect, either. There's no perfect solution to this problem. Not that the government data was perfect to begin with, but we need to try to come up with a better solution than we have right now. We need to invest in BLS and other statistical agencies so they can keep up.

LIZ ANN: Now, absent that, you mentioned ADP as an alternative source for labor market data. And increasingly, or at least in the last two weeks since the government's been shut down, there have been other private sector sources, Revelio being one. Carlyle, I think, just came out with one. So even when the government opens back up, because of the concerns you expressed, rightly so, that response rates are down, people just aren't answering surveys. But also, I think some concern about efficacy of the data as a result in part due to that, do you think we have sort of a new business being formed in the creation of private sector data sources that have some reliability, at least alongside government data?

PAT: So what's the analogy? When the pandemic hit, we were all scrambling for data, right? More real-time data where we could get a sense of the pulse of the economy. So we were looking at commuting patterns. We were looking at OpenTable reservations. We were scouring the world for all sorts of data to try to put together a picture of where the economy was. So I think this may be a moment where we're going to do the same thing. Again, none of those single sources tends to be the solution.

But I do think that there's some combination of those that start to create the picture that you want to create of where the economy is. Again, not perfect, but we still, the benchmark, unemployment rate, the JOLTS data, those are still critical for us, even with all that other information.

LIZ ANN: Yeah, and the JOLTS data, by the way, listeners, is the Job Opening and Labor Turnover Survey, also data that we're not getting in light of the shutdown. Another big picture question: How concerned are you, and has it changed over the last several months, about any meaningful threats to the independence of the Federal Reserve?

PAT: I think I'm very concerned about it. I'm concerned about it in a couple of ways. One, the Fed does have to respond and is accountable to Congress. Congress created the Fed. It's not like the Fed is out there doing its own thing with no oversight. And Congress could change the Fed. It is their right to change the Fed, right? But start with the headline. There is no example of, either in this country or around the world, where the wall of independence has been breached between the fiscal side and the monetary-policy side that has turned out well. It's human nature. I mean, let's be honest. Politicians want to get elected, re-elected or elected. To get re-elected, they need an economy that's hot so they can say it's hot and "Look what I've done."

So they want to juice the economy, and well, if there's inflation later, oh well. That's a dangerous place to be. What I worry about right now is … look, and by the way, on the regulatory side of the house, that's not the kind of independence we're talking about. And again, the Fed, that's a different animal in terms of the Fed's regulatory responsibilities and the accountability to the administration and to Congress.

But when it comes to monetary-policy decisions, we know the job of the Fed, the job of any central bank, is to do things that people may not like in the short run. But they sure as heck don't like it when inflation runs out of control. And right now, we are stuck. Inflation is not moving. Now there's lot of impact, there are impacts of the tariffs in all this, but inflation is just simply stuck. It's not at the 2% target.

And the holy grail of macroeconomic policy is making sure that inflation expectations, what people expect inflation to be, that that is anchored, that that is not running amok. And we're not there. I don't think we're there right now. But you run that risk if the Fed is seen as not doing what it has to do to keep inflation under control.

LIZ ANN: So how do you think about maybe the, to use a technical term here, the pickle that the Fed is in in the current environment of having different messages coming from the two sides of the dual mandate? And I want to ask you further on your thoughts on the data suggesting we have a weakening in the labor market. You've got a weakening in the labor market, ostensibly suggesting easier policy might make sense, versus, to your point, Pat, that inflation is sticky.

So it's somewhat uncommon to have this sort of bifurcation or dichotomy in the two sides of the mandate. So how do you think … it sounds like your bias is a little more toward the inflation side of the mandate, but it seems the Fed, very recently, seems to be biased a little more toward the employment side of the mandate.

PAT: Yeah, for a couple reasons. One, I do think we run the risk of having a stagflation-like economy. We're not talking about the '70s. It's not that bad. But I think Nick Timiraos coined the phrase "stagflation-like" in Wall Street Journal. And I like that phrase. Yeah. 

LIZ ANN: Yeah, I've been saying stagflation with a lowercase s, not uppercase '70s. I agree, yeah.

PAT: Yeah. So that's what it feels like we're going into right now. But you've got this hope that AI is going to change all that. So we'll see. 

On the employment side of things, yeah, there's a risk there. I mean, there's a clear risk of it falling off. But there's also this risk of inflation. Look, with the tariffs, it's not just a one-off event. These are dripping into prices. Firms are taking their time. They're trying to see … get some clarity on what these tariffs are. But if we go through with something that is draconian as the China tariffs, you're going to see prices continue to rise. And that's going to take a while. It's going to filter through the economy. And so that's the fear that people are going to continue to face pretty significant inflation. You can see the core even going up to like 3.5%. I mean, that's possible, right? 

So that's the challenge the Fed has. Look, when you only have one side of the mandate that's problematic, whether it's inflation or unemployment, things are easy, right? You know which way to go. And you don't need precision on the data. But when you have to balance these two off, you need as much precision as you can get. Never perfect, but as much precision as you can get on the data. And we simply don't have it right now. This is a really bad time not to have that data.

LIZ ANN: You know, let's stay on the subject of tariffs, and what you've said already, I completely agree with. This is not one-off in nature. I also somewhat disagree with the notion, I guess the pro-tariff folks say, that it would just be a one-time level reset in prices. 

First of all, the rollout of these tariffs has been anything but one time. So you can sort of debunk that theory just by virtue of the fits and starts going back to early April and the escalations and de-escalations and delays and upped levels and, not to mention the fact that there's ripple effects. 

So I don't know whether you were in the market for a washer and dryer back in 2018, but that was used as an anecdote of the ripple effects. There was 25% tariffs on washing machines, but the retailers, guess what they did? They raised them on dryers too, because they're sold as a pair. But I also think it's important that the consumer actually thinks about inflation as "Stuff is more expensive now than it was before." So even if it turns out to be it's more around a level reset, that impacts consumers. That impacts inflation expectations. You and I might live in the weeds of core versus headline, month-over-month versus year-over-year, all the various component parts, but consumers think of inflation in level terms. So that matters.

PAT: Absolutely. You walk into the grocery store, and you get sticker shock. I mean, complete sticker shock. And how can that cost so much? And that clearly affects the psyche of the American consumer. So you know, that's the challenge. The Fed does not have an easy job right now. But here's the other point I want to make. So say the Fed cuts 25, 50 basis points. Let's remember what they're cutting. They're cutting the overnight rate, the rate that banks borrow from each other, the fed funds rate. What's happening to the longer end of the yield curve? Five-year, 10-year, it's not moving that much because there are broad, global issues that are affecting that. And we are issuing a heck of a lot of debt, right? 

My friends here at the Penn Wharton budget model have done their analysis. These others have done analyses, but we're looking at an additional, over a decade, another $3.5 trillion of debt. That has to go somewhere. And so that is going to keep those rates relatively high. And they're the rates that American consumers care about. They don't care about the fed funds rate. They care about their auto loan rate, their mortgage, etc. And so I think we're in a situation that I wrote a little piece recently on this.

John Cochrane at the Hoover Institution has a paper he gave in the spring on fiscal-monetary interaction. And he's right. I mean, you have to have a coordinated approach. The fiscal side cannot work against the monetary side. The monetary side, the Fed, can only do so much. And I titled the little article I wrote, "Stop Asking the Fed to Do the Impossible." It can't, on its own, move those rates in the long run.

LIZ ANN: To your point, I want to pull on a couple of threads based on some of what you just talked about. Memories are short. It was just a year ago that the Fed embarked on what everyone assumed would be a cycle of cuts. And there ended up being three cuts, with the first being 50 basis points and then two 25s. Yet over that period, when the fed funds rate went down by a percentage point, the 10-year yield went up by a percentage point. So do you think we're at risk of the same backdrop and maybe in advance of answering that, what would you vote for the October meeting? Another cut?

PAT: I would actually vote for a hold right now. 

LIZ ANN: A hold. 

PAT: I would not cut. I mean, so I'm going to go back. I'm dating myself. My last SEP, my last dot plot, my last Survey of Economic Projections was June, and I had two cuts, 25-basis-point cuts, penciled in. I think that's still probably appropriate. I don't think we should get into a rate-cutting cycle of cut, cut, cut, cut, cut. Honestly, I don't think it's going to make a whole lot of difference. Because what's dragging down the labor market … I've not heard one of my contacts, one firm, say, "Oh, my problem is the cost of capital is too high, so I can't do this or that." You just don't hear that. It's just not happening. So I don't think it'll have a big effect, even if they made the cuts. I think the issues are on the fiscal side. And that's where, you know, a couple months ago, I couldn't say anything about the fiscal side. Right now, I want to say as loudly as I can that the fiscal side of the house has to get their act together, or this economy will not flourish.

LIZ ANN: Speaking of the fiscal side and discipline or lack thereof. You mentioned deficits and debt. I can't I can't get through the first three minutes of Q&A, when I do a client event, without a question coming up about the sustainability there. Often the question is phrased in some form of "When are we reaching a tipping point? What's the end game?" You know, some version, big picture, so talk longer term about the … if there's such a thing as a solution to this problem of an ever-rising burden of debt courtesy of running massive deficits on an annual basis.

PAT: Yeah, where do we spend our money? Right? As you know, over 80% of the federal budget is three things. It's entitlements, interest on the debt, and defense. That's it, right? So we talk a lot about the 20%, the old Pareto's law, right? 80-20 rule. Pretty much applies here, too. So we spend a lot of time talking about the 20%, but it's not going to solve the fundamental problem. And interest on the debt is just derivative of us borrowing too much, right? 

LIZ ANN: Right. 

PAT: So we really need to address the entitlement issue. I mean that is critical. What we need to do is address that, or raise more revenue, or do both, basically. You can do both. You can't do the latter, though, and crush growth, because you need to not have rates that are so high that it stifles the economy. So this is where you need a careful balance. And again, my friends here at the Penn Wharton Budget Model have done an interesting analysis on this. And there's a set of things you can do, practical, pragmatic things you can do to move the needle on the deficit. Not solve the problem completely, but definitely bend the cost-curve down, the growth curve of the deficit.

These are things like some changes in tax policy, dealing with Social Security and maybe opening up the aperture to allow more than just Treasuries to be invested in the trust fund, etc. There's a host of things. And immigration. I mean, we are going in the wrong direction. And I'm not talking about the politics of immigration. It's just the economics of it.

We are moving in the wrong direction if we want growth. And one of the most fundamental equations in economics …

LIZ ANN: I know where you're going.

PAT: … is you either get more output per worker and machine, or you get more workers or machines. That's all you can do. 

LIZ ANN: Productivity times the labor force. 

PAT: Productivity, yep, that's all you got. That's it. And so we're betting a lot on productivity with AI. Jury's still out on that. I mean, there's going to be some increase. And there's estimates are all over the map on this. But we'll see some increase over the next decade. But it's not going to be forever. I mean, it'll get a bump up. And then we'll absorb that general-purpose technology like we have many other general-purpose technologies throughout our history. And then we'll learn to deal with that. And it's not going to solve the long-term fundamental problem. It will help in the short run, but not in the long run.

LIZ ANN: So how much would you tie the recent downward revisions to the payroll data when we were getting it, not to mention the preliminary estimate of what's called the annual benchmark revisions that come from the quarterly census? That was that big downward adjustment of 911,000 payroll jobs for the 12 months ending this past March. There's some thought that that is largely a function of the constraints on immigration and that the break-even rate, the number of payroll jobs that needs to be created on a monthly basis in order to keep the unemployment rate from rising, I've seen it … I get a sense that the consensus is somewhere around … it used to be about 150, and now it's about 50. Do you have your own calculation of what that break-even rate is?

PAT: Yeah, it's definitely downshifted. I think 50 is probably a little low in my mind, but it's definitely not 150. It's probably closer to 100 or less. We are seeing a significant downshift in the labor market because people can't find … I have a friend who runs an assisted-living facilities, a network of facilities, nursing and assisted. It's killing them. I mean, he can't find certified nurse assistants and so forth. These are entry-level jobs, often done by immigrants because these are hard jobs. 

You're hearing from the farmers the same problem. We're hearing … and there's a myth that this won't affect higher-income people. In fact, the analysis is the opposite. When you restrict immigration significantly, it actually helps the low-wage worker some. It does do that. But the higher-wage person, like my friend running these facilities, he can't admit as many residents. So his revenue's down, so his income's down. You see that across the board. It actually affects the income of higher-wage people. They should care about the immigration question.

LIZ ANN: Another thread I want to pull on based on what you said is that the Fed's lack of direct control over longer-term interest rates. So obviously the Fed's balance sheet has been shrinking, but it's, I guess, somewhat counterintuitive to be easing policy at the fed funds rate level and still allowing bonds to run off. What are your thoughts on quantitative tightening, or QT, and both near-term trajectory there?

PAT: So I actually think they should stop the runoff right now. And I've been an advocate of this now for a while. I mean, the whole idea of this runoff process was that you'd start shrinking the balance sheet, get to a point that you think is enough, that is ample reserves.

What that number is, we don't exactly know. Last time around when we tried this, we thought we knew what that number was, but we were way off. It was much higher than we anticipated. And you can see that in the churn in the markets, the volatility in the markets when you reach that point, that the kink in the demand curve for reserves, as it's called. So I think you just let it run off, let it just sit there, and liabilities will build, right? Currency liabilities, other liabilities will build, and you'll eventually shrink some more over time. But don't rush into it right now. I don't see any reason why you just wouldn't stop. It doesn't make a whole lot of difference from a macroeconomic point of view. It's not a huge effect. So let's just stop it right now and let's just let it ride.

LIZ ANN: How much does the Fed take into consideration markets, stock market, the bond market, currency markets? Is it just in the periphery or is the inside chatter focused on that as much as we in the markets tend to think about?

PAT: That's a really good question. And it's one where it's a complicated question because the Fed is looking at the markets. Why? Because the markets do the work of monetary policy, right? Again, the Fed's only controlling one rate. We don't have Japanese-style yield curve control, right? So it's … the Fed has to have the markets do the work. So the Fed's looking at the markets, and the markets are looking at the Fed. So it's actually there's this endogeneity in the system where everybody's looking at each other and affect each other. I mean, there's no question about that. Some people say, "No, that's not true." But of course the Fed's looking at the markets. And of course the markets are looking at the Fed.

LIZ ANN: Just one quick question on being president of the Philadelphia Federal Reserve. Are you all buddies? Fed presidents?

PAT: I get this question: "So, do you ever see your fellow presidents?" All the time. Because the other piece of the Fed that the public doesn't see and doesn't really need to see is the Fed is a bank. The Fed is a big bank. And so we, the presidents and our first vice presidents and staff and reserve banks, we run the bank, we run the supervisory side of the house, we run the IT systems, the payment systems. So the Fed runs by committee. And so there are committees and committees and committees that just run the system. So for example, I chaired for quite a while the IT committee in the Fed. I mean. There's a huge number of IT professionals in the Federal Reserve, not only just protecting the system, but also building these payment rails, these payment systems that the financial industry relies on. So yeah, no, you see your fellow presidents all the time, at least some group of them every week.

LIZ ANN: If I asked you, all right, the best thing about your past 10 years and the worst thing about your past 10 years.

PAT: Ah, the worst thing's got to be the pandemic. It was crazy. I mean, we were having emergency FOMC meetings left and right. So just one little story. So I was getting foot surgery, and I'm in pre-op, and I've got stuff stuck in my arm, and my wife's there, my phone's ringing. And I get this, you know, "Jay Powell needs to talk to you right now." Well!

LIZ ANN: Well, you pick up the phone.

PAT: And the nurses are getting quite irritated, by the way, because they're about to wheel me. I mean, it was that kind of pace which was, you know, obviously the country was suffering, but it was just a very difficult time. It wasn't difficult in what to do. It was clear what we had to do. That was not hard. Actually, I think this period is harder. To me, the best part of my job, the stuff I loved, was getting out and about in the communities, these rural communities all throughout Pennsylvania, New Jersey, and Delaware, in cities and urban communities, because it kept it real. 

That's the beauty of the Fed, having this decentralized central bank. I mean, we're out there all the time talking to small-business leaders. And so particularly in times where a turning point in the economy, where the data is backward looking and fuzzy. You know, Bob Solow said the plural of anecdotes is not data. Got it, but getting that real-time feedback from people, that's the part of the job I loved because it gave you the color, texture, to what the economy is. And it reinforced in me the belief that often there's this image of the Fed being the, you know, the masters of the economy, steering the ship of the economy, throttling back and forth. The Fed does not create growth. All those people out there in those communities, community by community, they're the ones that are creating growth. And it's a humbling thing, and it's important to remember that every time you enter the FOMC room and make a decision.

LIZ ANN: Boy, that's such an important comment. All right, so final question. Are you enjoying life now? And tell us a little more about what you're doing with Penn Wharton.

PAT: Yeah, so I immediately jumped back on the faculty here at the Wharton School at the University of Pennsylvania. And part of what my job is, in addition to being a faculty member, is helping build out some academic programs to help influence policy over the long run, short run. Not so much the burning platform of the day, the issue of the day, but what can academic research bring on a regular basis to influence policy? I mentioned the deficit work that the Penn Wharton budget model does, that kind of work and other things.

And I also drunk the Kool-Aid at the Fed. You don't say anything unless you can back it up with facts, data, solid theory. 

LIZ ANN: What a concept.

PAT: Yeah, right. So I'm trying to bring that to this situation, too. Just come, park ideology on the side. I am an avowed, purposeful pragmatist, I'm calling myself. I just want pragmatic, reasonable stuff to get done. And so we're trying to bring data and facts in a variety of ways to the table and to the people in Washington to influence policy. Again, not today, but over time.

LIZ ANN: Well, this has been a thrill and I'm so happy that you and I got to catch up and that you allowed us to do this on, not on camera, but on audio and let our listeners sort of listen in on our catch-up conversation. But Pat, it's been such a thrill. Thank you so much for taking the time.

PAT: Yeah, thank you for having me.

KEVIN: All right, so, Liz Ann, tell us what you're watching for the coming week.

LIZ ANN: Well, earnings, especially in the absence of government-issued data because, you know, you and I both track all the upcoming data releases and what the consensus was, what the prior reads are. In fact, we post it often on our X feeds, but it's basically a rash of data that is issued by government sources. So we are going to, I guess, get … it'll lease a partial read on the Consumer Price Index, although it won't be released until October 24th. So I think that's nine days after what was supposed to be the release. Is that correct, Kevin? 

KEVIN: Correct.

LIZ ANN: I think the release was supposed to be today as you and I are taping this on Wednesday. So particularly absent government-issued data … oh and by the way, the October jobs report is also not going to be a clean number because of the reference period. So I was on our Schwab Network earlier today, and Collin Martin and I were chatting about it, and you've got the release, whenever we get it, of the September jobs report, which, obviously, is going to come incredibly late, but will actually be fairly clean data because the reference period was covered. 

Now we've had this reference period, which generally goes for about the 12th of the month, in terms of the input of data coming from companies, that is not going to be clean data. So we're sort of at the mercy not only of the shutdown, but the lack of clean data that we're going to get, which I think means that we'll continue to pay a lot of attention to some of these private-sector data sources in parallel form.

But I already mentioned some of the things that I'm going to keep an eye on with regard to second-quarter earnings season, profit margins, impact of tariffs, utilization of AI, but I think analysts are probably going to be asking a lot of more macro-oriented questions as well of companies and that might provide some color in the absence of government-issued data. What's on your radar, Kevin, for the next week or two?

KEVIN: Yeah, I mean nothing too different, just given the number one lack of government data we're going to get, but number two, what you mentioned I really think those are going to be the most important data points. The only other one I would add in terms of labor data is initial jobless claims. We don't get them, of course, at the federal level, you know, what the BLS normally puts out at 8:30 a.m. Eastern on Thursday, but the states, the individual states, do release their data, so there are, you know, lot of sell-side firms that do this quite quickly. 

And we look at it, too, as fast as we can on Thursday morning. But if you aggregate all of that, you can get some kind of sense as to how much claims have risen nationally. It's not a perfect read, but it's sort of the best that we have right now. It's the best way to navigate this data desert that we've been in. But I would emphasize your point on the October jobs report, you know, that not being a clean read, I do think that's going to be crucial because that really means that, assuming the shutdown continues to last and if it does go into November, you probably won't get a clean read on the labor market until the end of the year, if not moving into the beginning of 2026, which is a little unnerving. It can sound unnerving. I don't think it's going to be detrimental or catastrophic, but I think that's going to be a really important thing for folks to understand, especially if it does start to influence monetary policy, in terms of maybe keeping the Fed on hold. Whether that becomes an issue or not, we'll have to explore that down the road, but I think that's a really important point you made.

LIZ ANN: So that's it for us this week. Thanks for listening. As always, you can keep up with us in real time on social media. I'm @LizAnnSonders on X and LinkedIn. Still have just a rash of imposters. So please, please make sure you are following the real me.

KEVIN: And I am @KevRGordon, also on X and LinkedIn.

LIZ ANN: And as a reminder, you can always read all of our written reports—and those always include lots of charts and graphs—at schwab.com/learn. Lots of visuals on our X feeds as well. 

And if you've enjoyed the show, we'd be so grateful if you would leave us a review on Apple Podcasts, a rating on Spotify, or feedback wherever you listen. Or tell a friend or more about the show, and we will be back with a new episode next week.

For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.