Brian Sozzi: All right. Thanks so much, Josh. Torsten, good to see you here. Normally, I would start this getting a reaction on why the markets are ripping higher, the Fed cut rates. But I'm listening to the Fed chair, Torsten. I came away thinking this is the first meeting where the Fed chair is worried about the impact to the labor market because of the AI expansion in the U.S. and around the world. Is AI about to, I guess, just put a bowling ball through the labor market next year?

Torsten Slok: Well, he was asked that question by a number of the reporters, and this continues to be a very, very important issue because we just don't know quite yet how AI is going to impact the economy. We all know from our daily lives, AI is certainly helpful through Large Language Models. That does increase productivity and how we do things, including here at Apollo.

But it still is the case from a macro perspective that we just have to wait a little bit longer before we actually understand is it going to create an increase in unemployment rate because we're just not seeing that yet. J. Powell also highlighted jobless claims have been very low. The unemployment rate has gone up a little bit, but it's not the case that we're seeing dramatic productivity increases. It's not the case that we're seeing a dramatic increase in the unemployment rate.

So we still have to stay tuned a little while longer while we wait to see what the impact is of AI on the broader economy.

Brian Sozzi: But a good number of jobs, and you heard, I think the Fed chair hinted this, a good number of jobs could just completely vanish.

Torsten Slok: Yeah. There are a number of occupations, of course, that are vulnerable. Of course, tailor marketers have often been mentioned. There's a number of things when we go down and buy our Big Mac at McDonald's, you now buy that on the screen instead of buying it with a human being. So there's a number of ways that this is being implemented that will absolutely create some very significant productivity gains, especially for some companies that are able to implement and do this in the right way.

But at the macro level, and in particular from a Fed view, we just don't know quite yet what's going to happen, especially here in 2026, because we just don't know what the implementation degree and the adoption rate will be as we look ahead. It's all looking very positive, but at this point, it still remains highly uncertain what the impact is going to be on the economy.

Brian Sozzi: Torst, I know Josh back in the studio had a couple questions for you too.

Josh Lipton: Yeah, Torsten, I wanted to talk to you about this issue of affordability. This issue of economic anxiety Torsten that clearly a lot of Americans feel, it has become politically very sensitive. You see President Trump zeroed in on it now. Greg Ipp had this piece in The Journal Torsten recently, and Greg kind of suggested when we talk about affordability, it's almost a state of mind as it is anything else.

I'm interested as an economist, Torsten, how do you think about the issue of affordability? How do you define it? Are we, do you think, in some type of affordability crisis? And what is the Fed's role here, Torsten, in tackling that?

Torsten Slok: Yeah, those are some really important questions because if you think about the basket of goods that we are all consuming, it is absolutely the case that the price of education has increased in the last decade. The price of healthcare has increased, the price of housing has increased. And if you add these three components together, you do get that they make up a bigger share of our consumer spending. So that's another way of saying, if I need to spend more money on healthcare, on housing, on education, well, that means that there's less money left to go on vacation, to eat at restaurants, to buy a new car.

So that's why from a simple CPI or consumption basket perspective, it is absolutely the case that there is just more money going now to the basic needs such as healthcare and housing that we just didn't have to the same degree earlier.

To your question about what the Federal Reserve can do about this, this is a really difficult problem to solve because essentially it's saying that some of the things that we are buying have just gotten more expensive. And if something has gone up in price, how does the Federal Reserve lower the price of those specific goods? That's just really difficult. There's actually not much they can do about that. Take, for example, one of them in housing. If you begin to see the Fed lower interest rates, that's probably going to increase home prices even more. So in that sense, the Fed doesn't really have any tools to solve their affordability crisis.

So from that perspective, it remains a real challenge as J. Powell was also asked about here in the press conference for them to really solve this problem that we all talking about so much every day.

Josh Lipton: So let me ask you, Torsten, if the Fed doesn't have the tools, who does have the tools? Is it the president? Is it Congress, lawmakers?

Torsten Slok: Yeah, it is fiscal policy and therefore, of course, also very importantly Congress, because Congress could begin to do things to potentially cut prices in different ways. For example, of goods and food, this is exactly what the president has been doing. That's also what Congress has been moving direction of saying maybe we should roll back some of the tariffs, especially on food, because this has of course turned out to be a very important area where we have seen some inflation.

So for example, tariffs could be lowered, which would then have the impact of lowering prices of food. You could also see other initiatives that could actually also have impact on the housing market where housing would become cheaper. For example, it could be that you could give some different subsidies or different tax incentives for households that then would have a more easy time to enter in the housing market.

For example, first time home buyers, as also was discussed in the press conference, now their media and age is about 40 years old. Well, if you now then try to lower home prices, not so much by lowering interest rates, but simply by giving tax subsidies to those who want to buy a home, then you could say, "Well, we're going to give 5,000 or $10,000, or it could be more or less to those who want to buy a house." That could also be one way to help affordability.

So the bottom line to your question is that there are things that could be done, but most of those things are absolutely on the fiscal side, meaning exactly to your point here. The question is, namely, is Congress going to do something on that and will we see that? And that's of course where some of the action could be coming in order to get some things done in terms of affordability.

Brian Sozzi: Torsten, we've got now a series of rate cuts from the Federal Reserve. We're just talking about AI driving more productivity. And I love what you have written recently saying that we could have an inflation mountain. Are we looking at an inflation mountain? Rate cuts, AI productivity? And if so, where are we at in that mountain?

Torsten Slok: No, you're right because we went through the first mountain was, of course, after COVID where inflation went up to almost 10% and now it's come down again to around 3%. The risk is that there's another mountain because exactly as we're discussing here, you could have growth coming partly because of AI. There's also The One Big Beautiful Bill. The congressional budget office estimates that The One Big Beautiful Bill because one of the important laws in The One Big Beautiful Bill is that you could do immediate expensing of your capital expenditures if you're a company. In other words, if we had a company, we wanted to build a new building or a factory, we could write that down 100% immediately and deduct that from our taxes. Normally you have to do that over several years. If that's the case, you should expect to see a boom coming in the economy, especially when it comes to CapEx, not only in data centers, but also in business spending outside of data centers.

So there are some tailwinds that argue for the risk that there could be another mountain in inflation coming along simply because of the economy picking up in 2026.

Brian Sozzi: Love this topic. Is that why we're seeing the market rally? I'm not going to say skyrocket, but we're seeing a strong rally off of this rate cut because the market is sniffing out we are in the late stages of some form of economic boom and that's going to send more people into Mag 7 stocks. And then I guess are we in the middle of a bubble?

Torsten Slok: I do think that very importantly, the narrative and what you and I have talked about through most of this year is that we had, of course, on Liberation Day that the trade war came along. That was clearly expected to slow things down. And it did slow things down in a certain way, not as much as many people expected, but we did begin to see a slowdown.

But now that negative story, the baton is being handed to a much more bullish story for the economy and therefore also for the market going into next year where again, fiscal policy, The One Big Beautiful Bill is helpful, the data center built out is helpful. Given where stock prices are trading, high end consumers, which was also discussed in the press conference continues to still do well. All those things are building up to now for a narrative where we have been worried about a slowdown in growth to now more of an acceleration in growth.

So we're really beginning to see the U-shaped or the Nike swoosh shape here at the bottom of that begin to appear here in the near term and as we get in particular to the second half of next year, we should begin to see things begin to accelerate.

So in that sense, yes, both the furies about inflation going higher, but also tailwinds to growth and therefore also tailwinds of corporate earnings should begin to pick up as we get into 2026.

Brian Sozzi: I wake up at the crack of dawn, I think it was a week ago, I get an email from you, Five Risks for 2026. And I love this list. I'm big fan of lists, especially the ones that you always put out, but this one caught my attention. The new Fed share lowers interest rates purely for political reasons. What is the risk to the economy from that and what is the risk to the average investor for a move like that?

Torsten Slok: Well, one thing that's very important in financial markets is what's been going on in interest rates. We have seen, of course, the Fed has been signaling rate cuts. We just got a rate cut here, so that means that show rates have been going down. But despite that show rates have gone down since the Fed began cutting in September 2024, long-term interest rates have not gone down. So that's why this issue of when J. Powell steps down in May of 2026, he was just asked about that, "Will you stay on the committee?" He didn't say against it so-

Brian Sozzi: Shocker he don't say anything. Of course.

Torsten Slok: He didn't say anything. "Nothing new to report on that," as he said.

Brian Sozzi: Keep it moving.

Torsten Slok: But the key issue is if the new Fed chair comes in and does begin to lower interest rates and push in that direction, we would have an even steeper yield curve because that is basically saying short-term interest rates will be lower and we should begin to worry about that inflation might be even higher than what we thought just a few months ago.

And adding to that also additional fiscal problems, the answer to your question is that then who in the new Fed chair will be becomes very important because that Fed chair will need to decide how much weight do they want to put on inflation being high and how much weight do they want to put on the weaker labor market. That is really do you like apples and oranges because on the one hand inflation high says that the Fed should keep rates higher and maybe even be hiking. On the other hand, a weaker labor market says that the Fed should be cutting.

So that's why it becomes really a difficult balance for them to figure out what would the new Fed chair do. And if the new Fed chair says, "I'm going to ignore inflation," that's when we in markets, and especially in the equity market, should begin to worry about that maybe there is indeed a higher risk of this second inflation mounting coming next year, simply because of the Fed chair beginning to put more weight on the growth slowdown than on the upside risk to inflation.

Brian Sozzi: For as long as you and I have known each other, we've always, when we talk about the Federal Reserve, we never really talked about it being politicized, but now that could in fact happen for next year. As an economist, how concerned are you that every Federal Reserve meeting could have some form of politics attached to it?

Torsten Slok: Well, the issue is we are already seeing with this meeting, we had today three dissents, two dissents saying that we should be cutting, sorry, should not be cutting rates and one dissent saying we should be cutting more. The fact that we are having descents in either direction is already telling you that the movements are more now moving in opposite directions. Some people saying we should have more cuts. Another saying we should not have cuts.

So we are beginning to enter now 2026 where we will at the next few meetings, I totally agree with what you're saying, begin to see more evidence of just more disagreement. And maybe that's healthy that there is disagreement. You could look at this as democratic debate, but if it has really become so wide that out of the 12 voting members, let's say that they vote seven to five, that they did cut rates or they didn't cut rates, you and I would call each other and say, "Wow, that's really unusual because we have not seen that for a long time." So in that sense, we are entering unchartered territories here where we might begin to see much more disagreement and the question is how equities are going to trade on the back of that if we do not have the clear, strong messaging from the Federal Reserve that we all have been used to.

Brian Sozzi: Torsten, so good to see you. Thank you so much for doing this. I really appreciate it. Very important day.