Morgan Stanley's Jim Caron Talks CPI Report, Fed

Summary

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Podcast Episode Summary

Episode Overview

Podcast: Bloomberg Talks
Episode: Morgan Stanley's Jim Caron Talks CPI Report, Fed
Date: August 10, 2026
Main Theme:
This episode features Morgan Stanley’s Jim Caron (CIO, Cross Asset Solutions), who joins Bloomberg’s Tom Keene and Paul to discuss implications of the latest CPI report, the Federal Reserve’s policy outlook, and how persistent changes in nominal GDP influence markets, asset allocation, and fiscal policy perspectives. The conversation explores the “higher for longer” interest rate environment, inflation sustainability, U.S. debt and deficit management, and tactical shifts in asset allocation strategy.

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Key Discussion Points & Insights

1. The Importance of Nominal GDP to Market Dynamics

• Nominal vs. Real GDP: Jim Caron underscores that what matters for markets—and most people—is nominal GDP since “we all get paid in nominal dollars” (01:02).
• Recent Trends: First quarter nominal GDP was running at 6%, well above the long-run average (~4%). Second quarter, depending on the inflation measure, is even higher (up to 7.9% using the GDP deflator).
• Market Implication: “If you’re in a higher nominal GDP world, you tend to get higher earnings... think about that as higher equity earnings and earnings per share growth.”
  • Quote:
    • Jim Caron (01:45):

      “When I talk about higher nominal GDP, think about that as higher equity earnings and earnings per share growth.”

2. Inflation and the Federal Reserve’s Policy Approach

• Are We in a Higher Inflation World?
  • Current inflation is around 2.5–3%, higher than pre-pandemic targets.
  • Caron posits sustained 2.5%–3% inflation is not “overly corrosive,” provided inflation expectations remain anchored.
  • The Fed is likely to tolerate marginally higher inflation if it’s not “becoming ingrained.”
    • Quote:
      • Jim Caron (02:34):

        “As long as they believe that inflation and inflation expectations are not becoming ingrained... I think it’s sustainable. But I guess we’ll find out more on Wednesday [CPI release].”

3. Interest Rates: “Higher for Longer” World

• Interest Rate Path:
  • Caron believes the U.S. is in a “higher for longer” environment, especially for the 10-year Treasury yield.
  • Rates are expected to remain range-bound absent recessionary conditions; “The ability for rates to move down sharply... is somewhat limited.”
    • Quote:
      • Jim Caron (03:37):

        “We’re in a higher for longer environment.”

• Nominal GDP and 10-Year Yield Correlation:
  • Historically, these two track closely; with higher nominal growth, yields resist significant declines.

4. Fiscal State: Debt, Deficit, and Managing the Burden

• U.S. Fiscal Deficit:
  • Currently, the fiscal deficit is around 6% of GDP; debt-to-GDP is near 120%.
  • Higher nominal growth is the fastest remedy to shrink the deficit, mirroring post-World War II policy:
    • Quote:
      • Jim Caron (04:57):

        “If you have higher nominal growth... that’s what pays down your deficit... that’s what we did after World War II.”

• Historical Context:
  • “We had yield curve control... capped 10-year yields at 2.5% and allowed nominal GDP to get above 6.”

5. Asset Allocation Adjustments in Current Environment

• Equities vs. Fixed Income:

  • Higher nominal growth “tilts me more towards equities,” away from traditional 60/40 equity/fixed income balances.
  • Fixed income faces “somewhat challenged” returns unless interest rates fall sharply.
    • “Equity markets tend to have higher valuations when you have inflation somewhere around 2.5% to 3.5%.”
    • Companies retain margins and pricing power.
      • Quote:
        • Jim Caron (05:58):

          “Equities tend to be the asset class that is in favor in a higher nominal growth world.”

• Role of Dividends & Buybacks:

  • Dividend yield is a “real yield”—equities considered a “nominal asset with real returns.”
  • Buybacks/dividends are constructive for long-term yield.
    • Quote:
      • Jim Caron (06:50):

        “Dividend yields are real yields, right?... The most appreciation in your investment is likely to come from the equity side of the ledger.”

• Fixed Income Still Useful:

  • Maintains role as a hedge and source of income, but must be “balanced properly.”

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Notable Quotes & Memorable Moments

• Nominal World Reality:
  • Jim Caron (01:04):

    “What we observe in the world is a nominal world. We don’t get paid in real dollars.”

• Fed’s Tolerance for Inflation:
  • Jim Caron (02:34):

    “As long as they believe that inflation and inflation expectations are not becoming ingrained... I think it’s sustainable.”

• Debt Reduction Historical Parallel:
  • Jim Caron (04:57):

    “That’s what we did after World War II... we allowed nominal GDP to get above 6, and that’s what paid down the deficit.”

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Timestamps for Important Segments

• [00:38] Introduction of Jim Caron and Nominal GDP Discussion
• [02:10] Inflation Dynamics and Fed’s Response
• [03:12] Higher-for-Longer Interest Rate Environment
• [04:13] U.S. Fiscal Deficit and Debt Management
• [05:30] Asset Allocation Changes and Equities Preference
• [06:33] Role of Dividends, Buybacks, and Fixed Income
• [07:43] Conclusion

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Takeaways

• The sustained high nominal GDP setting supports higher earnings and equity valuations.
• Inflation between 2.5–3% is manageable for now, so long as expectations don’t risk becoming unanchored.
• The Fed’s likely course is to remain on a higher-for-longer rate path unless the economy weakens sharply.
• Elevated nominal growth aids deficit reduction, echoing successful historical strategies.
• Investors may want to tilt portfolios toward equities over fixed income, with dividends and share buybacks seen as key contributors to long-term real returns.

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Transcript

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[Tom Keene]

interview of the day on fixed income James Karen, Jim Carrey and joins us with Morgan Stanley cio, Cross Asset Solutions. Jim, you know, I love your note where you review nominal gdp. When you talk to your accountants, your economists. Excuse me, when you talk to your economists, do you see a sustained nominal GDP or can it come down from the 5% level?

[Jim Carrey]

Good morning, Tom and Paul. Listen, you know, nominal GDP is, is really. If I'm talking to my accountant, he sees only nominal dollars, right? We all get paid in nominal dollars, right? So what we observe in the world is a nominal world. We don't observe like we don't get paid in real dollars. So, you know, the fact that nominal GDP first quarter of this year was running at 6%, which is significantly above the average over the last many years, which was closer to 4. And in the second quarter, nominal GDP, if you look at the GDP deflator, nominal GDP was running closer to 7.9%. If you use PCE as your inflation measure, it's closer to six and a half percent. But the point here, Tom, is that if you're in a higher nominal GDP world, you tend to get higher earnings. No surprise there. We can take a look and see what's going on with second quarter earnings and even with first quarter earnings. And that's the kind of connection that we should draw. So when I talk about higher nominal gdp, think about that as higher equity earnings and earnings per growth and earnings per share growth.

[Paul]

So Jim, how does our Federal Reserve adapt to this type of economic environment and growth environment?

[Jim Carrey]

Well, I mean, you know, part of this is, is, is the inflation element to it, right? You know, so nominal GDP is plus the inflation. So you know what's driving the higher nominal GDP is that we are living in a higher inflation world, somewhere around two and a half, 3%, let's say. Well, I guess we'll find out more on Wednesday. So, you know, the question is, is, is inflation accelerating higher? Can we sustain a 2 and a half percent inflation to 3% for the time being until it settles back down? Yes, I don't think that that is going to be Overly corrosive, you know, for the Fed, as long as they believe that inflation and inflation expectations are not becoming ingrained, where it becomes something that becomes more destructive going forward. But so at this point right now I think it's sustainable. But I guess we'll find out more on Wednesday.

[Paul]

With cpi, how do you expect here just kind of interest rates in general? It just feels like we're higher for longer here. Jim, is that the world you think we're in or are we going to see some moderation?

[Jim Carrey]

Yeah, I do think that we're in a higher for longer environment. So one of the correlations that you can draw and you can go back over a long period of time is nominal GDP versus the 10 year yield. Those two usually sit pretty close to each other. And I'm not calling for 10 year yields to go up significantly. I think that we're primarily in a range and we're going to go pretty much sideways into the end of the year. But the ability for rates to move down sharply right now, particularly at the back end, outside of having a recession or some really sharp slowdown in the economy, I think is somewhat limited because, you know, in the environment that we're in, you know, at the current moment, it just seems that nominal growth is going to be higher, which means that it just, it just alleviates the risk of yields moving down sharply.

[Tom Keene]

So Jim, the gloom crew is going to step in and say, okay, there's all this fancy Jim Carrey and talk, but the question is, the fiscal state we're in, how do you pull in our debt and our deficit into that ancient worry, oops, price down yields up bigly.

[Jim Carrey]

So this is a great question, Tom, so let's connect the dots on this. So the idea is that if you have higher nominal growth, which we do, that's what pays down your deficit, right? That is the number one thing that pays down your deficit. So you're absolutely right. The deficit is too high. It's around 6% of GDP. It's been coming down by some measures it's slightly under 6. I'm sorry, that's the fiscal deficit, not debt to GDP. Debt to GDP is, you know, is still a little bit high depending on what metric you're using, around 120%. Now that's likely to come down as long as you have higher nominal growth. That's what brings that down the fastest. That's what we did after World War II, right. We had yield curve control. We capped, you know, 10 year yields at 2.5% and we allowed nominal GDP to get above 6, and, and that's what paid down the deficit after World War II. So in some ways we're doing something similar to that right now with higher nominal growth.

[Paul]

Jim, how is this kind of world of higher economic growth? Has that changed your asset allocation at all?

[Jim Carrey]

Yeah, absolutely. So basically, if you're at a higher nominal world, you're likely going to favor more equities over fixed income. So when you think of 60, 40, I would say 60% equity, 40% fixed income is a traditional balanced portfolio. I would say that the 40% in fixed income becomes somewhat challenged right now just because you don't have the ability to generate high levels of return without rates moving down very sharply. So the equity markets tend to have higher valuations. When you have inflation somewhere around 2.5 to 3.5%, which is where it is today, valuations tend to be higher and sustainably higher. Companies have margins, they have pricing power, they generate higher earnings. So equities tend to be the asset class that is in favor in a higher nominal growth world. So it tilts me more towards the equity spectrum and a little bit away from fixed income.

[Tom Keene]

So do you look in terms of use of cash, is dividend growth and share buyback to be a constructive yield equivalent forward three or five years?

[Jim Carrey]

Yeah. Yes, you know, absolutely. Because look, you know, dividend yields are real yields, right? You know, that's the yield you get after all the expenses. And inflation is a cost, right? That's what you get back from the, you know, the, you know, the stock that you bought. So what, what you want to have are higher real returning assets, real yields. And as I always like to say that, you know, equities are a nominal asset with real returns, because with equities you get the return after all the expenses, inflation being one of those expenses. So whether it's dividends or if it's buybacks or whatever the case may be, that's where you're likely to see the appreciat appreciation. The most appreciation in your investment is likely to come from the equity side of the ledger as opposed to the fixed income side. That doesn't mean fixed income is important. You still need that as a hedge and it's a good source of income in your portfolios, but you have to balance it properly.

[Tom Keene]

Jim Carrey, thank you. Terrific Monday morning brief with Morgan Stanley. Jim Carrey.

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