Latest / Bloomberg Intelligence / Warsh Says Inflation Isn’t Slowing, Vows to Reach 2% Target

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Warsh Says Inflation Isn’t Slowing, Vows to Reach 2% Target · Bloomberg Intelligence

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  Speaker 2: Mr.
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  Speaker 6: Warsh finished with his speech out there in Jackson Hole.
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  Speaker 6: I guess the feedback would be he got his message across.
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  Speaker 6: He's hawkish, still focused on that 2% rate like a hawk.
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  Speaker 6: And that's kind of the way that's the message. And
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  Speaker 6: you better get used to it. Tom Orlick, he joins
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  Speaker 6: us here, chief economist for Bloomberg Economics. Tom, love to
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  Speaker 6: get your thoughts on this speech. You've heard them all
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  Speaker 6: for many, many years. What'd you take away from this speech?
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  Speaker 3: Well, great to be here, Paul.
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  Speaker 2: So, Walsh went into this Jackson Hole with a challenge.
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  Speaker 2: He has expressed a kind of philosophical opposition to the
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  Speaker 2: idea of forward guidance, telling the market what to expect
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  Speaker 2: from the Fed. But that was running into a collision
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  Speaker 2: course with the market's demand for a Fed chairman who
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  Speaker 2: can clearly articulate how the Fed is going to respond
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  Speaker 2: to five years of inflation above target. So that was
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  Speaker 2: the tension heading into this meeting. Now, in his speech,
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  Speaker 2: Walsh reiterated his philosophical opposition to forward guidance. He said
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  Speaker 2: he doesn't like it. But he did provide the market
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  Speaker 2: with a little bit more clarity about how he's thinking
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  Speaker 2: about inflation and what that means for the immediate rates outlook.
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  Speaker 2: I'm going to get the quote a Financial conditions aren't
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  Speaker 2: currently restrictive. I don't believe, I don't see the trend
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  Speaker 2: for inflation moving clearly in the right direction. And if
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  Speaker 2: the trend for inflation doesn't move clearly in the right direction,
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  Speaker 2: we've got some work to do. Now, the markets interpreted that,
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  Speaker 2: and we've interpreted that as a pretty clear signal that
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  Speaker 2: the chances of a rate hike in September have moved up.
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  Speaker 7: At the same time, we're looking at weaker retail sales.
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  Speaker 7: We're looking at job numbers being softer than we'd like.
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  Speaker 7: How difficult, in your opinion, is the Fed's decision if
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  Speaker 7: growth keeps slowing but inflation stays above target?
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  Speaker 2: So the growth numbers this year, certainly there are some
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  Speaker 2: soft spots. Certainly there are some areas of concern. But
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  Speaker 2: my view, and I think the Fed's view, is that
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  Speaker 2: actually the main story of growth for the U.S. economy
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  Speaker 2: this year has been a somewhat surprising resilience. All of
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  Speaker 2: that excitement about AI, all of that CAPEX going into
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  Speaker 2: AI data centers, offsetting the drag from the war in
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  Speaker 2: Iran and higher oil prices. I think the collision course
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  Speaker 2: which the Fed and Walsh may now be on is
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  Speaker 2: not between their inflation mandates and concerns about softening growth.
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  Speaker 2: It's between their inflation mandate and what President Trump wants, right?
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  Speaker 2: President Trump has been very clear that he wants lower
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  Speaker 2: interest rates. The midterms are coming. A Fed which hikes
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  Speaker 2: in September ahead of the midterms is going to put
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  Speaker 2: itself on a collision course with President Trump. And it's possible,
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  Speaker 2: just speculating here, that Chairman Walsh could find himself with
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  Speaker 2: some of those intense political problems, which his predecessor, Chair Powell, encountered.
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  Speaker 6: Tom, another aspect that Mark was trying to get some
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  Speaker 6: clarity on is the reaction function for this chairman in
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  Speaker 6: this Federal Reserve.
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  Speaker 8: Did we get any clarity on that point?
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  Speaker 3: So, again.
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  Speaker 2: Walsh has a kind of a philosophical view here that
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  Speaker 2: the world is very complicated. It's more complicated than can
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  Speaker 2: be captured in any simple rule, a reaction function, a
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  Speaker 2: Taylor rule. So part of his speech was kind of
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  Speaker 2: devoted to that kind of philosophical opposition to thinking or
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  Speaker 2: being too kind of presumptuous about how much we can
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  Speaker 2: understand about what's going on in the economy. At the
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  Speaker 2: same time, he also said, well.
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  Speaker 2: Inflation's too high and we need to see it coming
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  Speaker 2: clearly back to target and coming back to target at
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  Speaker 2: the required pace. So I think you can kind of
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  Speaker 2: distill a couple of lessons on his reaction function from that. Firstly,
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  Speaker 2: he doesn't like inflation above target. Secondly, he needs to
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  Speaker 2: see inflation moving back towards target sufficiently clearly and sufficiently rapidly. Otherwise,
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  Speaker 2: as he said himself, the Fed has work to do.
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  Speaker 2: He didn't quite say it, but I think the markets
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  Speaker 2: have interpreted work to do as rate hikes.
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  Speaker 6: And we're certainly seeing that two-year yield up eight basis
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  Speaker 6: points to 4.31%. Tom, thanks so much for joining us.
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  Speaker 6: Really appreciate getting a couple of minutes of your time.
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  Speaker 6: Tom Orlik, he's the chief economist for Bloomberg Economics. He's
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  Speaker 6: based down there in Washington, D.C. Let's head back out
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  Speaker 6: to jackson hole but for a dry jackson hole that's
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  Speaker 6: because tom keen has found shelter he's in from the
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  Speaker 6: elements and he joins us right now tom keen co-host
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  Speaker 6: of bloomberg surveillance tom i'm glad you guys found some
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  Speaker 6: dry ground here i'd love to get your thoughts here
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  Speaker 6: on what was an eventful morning for you guys out
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  Speaker 6: there in jackson hole.
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  Speaker 3: Eventful morning.
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  Speaker 9: I think we've covered it a lot, but what really
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  Speaker 9: matters now, Paul, is the opinion of Wall Street. I'm
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  Speaker 9: reading some of the research notes coming out right now.
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  Speaker 9: Pretty much the same tone, which is this is a
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  Speaker 9: more restrictive Kevin Warsh as chairman. not throwing a bone,
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  Speaker 9: but clearly tilting towards the obvious length of the inflation
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  Speaker 9: trend that we've seen. I'll let the markets decide what
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  Speaker 9: the betting odds are on this meeting or the next
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  Speaker 9: meeting or that. But the clarity here is surely homage
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  Speaker 9: to a more restrictive Fed.
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  Speaker 3: I didn't hear much dovish there this morning.
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  Speaker 7: Tom, quick question about the pricing in of a September
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  Speaker 7: rate hike. So can you talk to me a little
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  Speaker 7: bit about what it would require for that rate hike
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  Speaker 7: to happen or the chances of that rate hike to
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  Speaker 7: go up?
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  Speaker 9: Yeah, this is a really, really important question is if
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  Speaker 9: we've got the betting, the parlor game of what the
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  Speaker 9: Fed is going to do, what's the data that's going
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  Speaker 9: to matter?
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  Speaker 3: There's no question the data... is inflation data.
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  Speaker 9: We had a jobs redo, if you will, today that
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  Speaker 9: didn't even make the headlines.
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  Speaker 3: It was pretty much a non-event.
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  Speaker 9: But clearly there's a tone there of a fully employed America,
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  Speaker 9: which so many of our listeners and viewers would aggressively
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  Speaker 9: disagree with. I had a kid last night point blank
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  Speaker 9: tell me how difficult it is for recent college graduates
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  Speaker 9: to get jobs. So they're going to look at the
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  Speaker 9: inflation data here to confirm an excuse to stay where they.
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  Speaker 3: Are or maybe even to raise rates.
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  Speaker 9: We certainly heard from many, including the president of the
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  Speaker 9: Cleveland Fed, raise them right now.
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  Speaker 6: Tom, one of the, I think, objectives a lot of
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  Speaker 6: folks hoped that Mr. Warsh would achieve with the speech
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  Speaker 6: is to maybe regain a little bit of the credibility
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  Speaker 6: that he may have lost in some people's minds from
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  Speaker 6: his initial communications with the market. From the folks you're
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  Speaker 6: chatting with out there, do you think he did regain
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  Speaker 6: some of the credibility that perhaps may have been lost? Yes.
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  Speaker 4: Yes.
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  Speaker 9: A good question because it was so dire that he
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  Speaker 9: had nowhere to go but to turn it around. And Paul,
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  Speaker 9: I'll give him immense credit for that. He clearly turned
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  Speaker 9: it around, as Tracy Alloway said, with a record length
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  Speaker 9: of speech here at Jackson Hole. It went on maybe nine,
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  Speaker 9: ten paragraphs more than what I expected. So yes, I
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  Speaker 9: think he improved his credibility, but I did not hear much, Paul,
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  Speaker 9: of process. I didn't hear much about the mechanical nature
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  Speaker 9: of how he wants to take less visibility, less chit-chat,
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  Speaker 9: a quieter Fed, and then what is that process to
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  Speaker 9: get to a decision?
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  Speaker 3: I didn't hear much on that.
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  Speaker 6: And Tom, I guess we didn't hear much on the
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  Speaker 6: various committees, working groups he set up to look at
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  Speaker 6: various working aspects of the Fed.
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  Speaker 8: So that's something I guess we'll have to wait for.
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  Speaker 9: His team was listening to you yesterday, Paul. There was
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  Speaker 9: a dreaded task force that came up. I think I
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  Speaker 9: can state nobody out here is offended that they're not
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  Speaker 9: on a task force. I'm not sure what task force
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  Speaker 9: will do. Of course, you know, Paul, we do have
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  Speaker 9: the surveillance task force led by Alexis Christophorus, which keeps
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  Speaker 9: us on the straight and narrow.
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  Speaker 1: Let's get right to it.
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  Speaker 3: It's Friday.
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  Speaker 8: We do munis like nobody else.
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  Speaker 6: Nick Carollo, municipal finance reporter for Bloomberg News, joins us here. Nick,
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  Speaker 6: thanks so much for joining us here in studio. How's
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  Speaker 6: the muni bond market doing?
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  Speaker 2: This year?
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  Speaker 8: It's doing OK.
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  Speaker 4: Recently, we've been paying pretty close attention to the high
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  Speaker 4: yield market. This is where you're kind of riskier muni
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  Speaker 4: deals or deals that are not, you know, they're based
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  Speaker 4: off of some kind of other form of revenue, not
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  Speaker 4: taxing revenue. And there was a big deal earlier this
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  Speaker 4: month for a mental health provider called QCF, about $ 600
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  Speaker 4: million that bankers tried to bring to the market. It
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  Speaker 4: was unsuccessful. They turned around and offered more yield. It
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  Speaker 4: still was not successful. And this was kind of surprising
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  Speaker 4: to us because there's just not a lot of really
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  Speaker 4: big high-yield deals out in the market right now.
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  Speaker 8: There's a lot of appetite for high-yield paper.
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  Speaker 4: Generally, investors told us that this is something you kind
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  Speaker 4: of would have expected to price and kind of a
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  Speaker 4: a frothier market, and it didn't. So we wanted to
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  Speaker 4: write a story kind of about what high yield is
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  Speaker 4: looking like right now. And it seems like investors are
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  Speaker 4: kind of surprisingly being a bit discerning.
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  Speaker 7: Do you think that this investor caution is a warning
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  Speaker 7: for high yield media bonds in general, or more of
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  Speaker 7: a sign of like a healthier market? People are being
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  Speaker 7: more judicious about their bonds.
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  Speaker 8: Definitely the latter.
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  Speaker 4: I mean, everyone that we talked to basically said that
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  Speaker 4: there's been cycles in the past where their appetite is
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  Speaker 4: just so aggressive that there's deals that are coming to
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  Speaker 4: market that, you know, really went on to default like two,
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  Speaker 4: three years down the road.
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  Speaker 8: Dirt deals, special projects. Most people viewed this kind of
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  Speaker 8: as a sign of health in the market and.
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  Speaker 4: That it's not to say that all high yield deals
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  Speaker 4: are struggling, but, you know, you really have to have
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  Speaker 4: the kind of yield or the interest rate to back
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  Speaker 4: up the financials that your deal has.
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  Speaker 6: Brightline, this is the private railroad company, right? They've got
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  Speaker 6: a railroad line in Florida.
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  Speaker 8: Exactly.
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  Speaker 6: What's going on there?
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  Speaker 4: Brightline is kind of one of the trouble children in
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  Speaker 4: the market. It is one of the most important kind
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  Speaker 4: of marquee high-yield deals in munis. And there has just been, uh,
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  Speaker 4: recently a development where Brightline reached an agreement with an
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  Speaker 4: insurer to provide financing, um, in the event that it
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  Speaker 4: were to enter restructuring. So that's not to say that
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  Speaker 4: that's necessarily going to happen, but investors generally see that
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  Speaker 4: as kind of a potential sign of what's to come. And, um,
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  Speaker 4: people are just watching this really closely because Brightline has
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  Speaker 4: over $ 5 billion of debt outstanding. It's a mixture of
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  Speaker 4: corporate and muni bonds and, um, They've been kind of
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  Speaker 4: perpetually struggling. And if they were to restructure, it would
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  Speaker 4: be one of the biggest community restructurings of all time
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  Speaker 4: up there with Detroit or Puerto Rico.
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  Speaker 8: Really?
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  Speaker 6: I mean, it just shows you yet again, like we
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  Speaker 6: needed any more evidence. We don't do the train thing
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  Speaker 6: in this country very well. I mean, I'm on the
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  Speaker 6: train every day for 40 years because I'm New Jersey transit,
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  Speaker 6: but we are by far the minority, man. Nobody uses
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  Speaker 6: the train or even thinks about it. So if you're
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  Speaker 6: in Florida or California.
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  Speaker 8: They're like, no, I'm just driving.
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  Speaker 4: It's a shame. I mean, people in this country love
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  Speaker 4: their cars. Brightline connects Orlando to Miami and I think the,
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  Speaker 4: you know, the ridership numbers have kind of gone up
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  Speaker 4: and down. Um, But yeah, I think creating that kind
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  Speaker 4: of cultural shift is tough, getting people to abandon their
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  Speaker 4: cars and take a train somewhere.
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  Speaker 8: But I would have loved to see it.
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  Speaker 7: When I worked in investment banking at Morgan Stanley and
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  Speaker 7: I was on the Muniz team, there was so much
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  Speaker 7: excitement around Brightline. Because it was right after the pandemic
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  Speaker 7: and there was this sort of flight down to Florida
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  Speaker 7: and people thought, okay, this is the future that we're
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  Speaker 7: going to use this Brightline. It's going to reinvigorate Florida's economy.
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  Speaker 7: So this is so interesting, like how this sort of
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  Speaker 7: reversal of fortune has really taken place. What bearings do
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  Speaker 7: you see this having on the bond market generally, generally,
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  Speaker 7: as it pertains to projects like this, bringing transportation, replace
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  Speaker 7: it to places that don't necessarily, or don't historically use it.
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  Speaker 8: Walk me through that.
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  Speaker 4: Yeah, well, I actually kind of relate to what we
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  Speaker 4: were just talking about. So the, the big investors in
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  Speaker 4: Brightline are firms like Nuveen, Invesco, First Eagle, These are
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  Speaker 4: kind of your principal risk takers in the municipal bond market.
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  Speaker 4: And right now, how that Brightline deal is going to unfold,
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  Speaker 4: what the losses are going to look like for those
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  Speaker 4: investors is.
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  Speaker 8: Still really unclear.
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  Speaker 4: And so we were wondering, is this having some bearing
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  Speaker 4: on the ability of other deals to get done if
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  Speaker 4: that money is tied up in Brightline? So I spoke
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  Speaker 4: to John Miller, who is chief investment officer for munis
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  Speaker 4: at First Eagle, kind of a star high yield muni
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  Speaker 4: trader and one of the big investors in Brightline. And
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  Speaker 4: he did concede that it's possible that because of Brightline,
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  Speaker 4: we're seeing inflows into high yield munis a bit depressed
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  Speaker 4: this year. But on the other hand, that doesn't necessarily
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  Speaker 4: mean that like all these little tiny charter schools, these
• 14:38
  Speaker 4: little tiny senior living facilities that are trying to come
• 14:40
  Speaker 4: to the market, that they would have just been taken up.
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  Speaker 8: No problem.
• 14:44
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