Latest / Bloomberg Intelligence / Instant Reaction: The Fed Decides

Transcript

Instant Reaction: The Fed Decides · Bloomberg Intelligence

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
0:13
Speaker 2: With your FEDERALZEV decision. The overwhelming consensus saying a twenty
0:16
Speaker 2: five basis point count is Mike mccaith.
0:21
Speaker 3: It is a twenty five basis point cut, and the
0:23
Speaker 3: number of cuts forecast for next year has been cut
0:26
Speaker 3: in half to just two. Another two are seen in
0:30
Speaker 3: twenty twenty six and one in twenty twenty seven. And
0:34
Speaker 3: as the long run FED funds rate expectation rises to
0:38
Speaker 3: three percent, if that's basically seen as Fed officials view
0:42
Speaker 3: of the neutral rate, they won't get there under this
0:44
Speaker 3: dot pot until twenty twenty eight. We have one descent.
0:48
Speaker 3: New Cleveland Fed President Beth Hammick casts her first, preferring
0:52
Speaker 3: to leave rates unchanged. Interestingly, three other members of the committee,
0:57
Speaker 3: presumably non voters, agreed with her. Ten members see two
1:02
Speaker 3: cuts next year five C three or more three forecast one,
1:06
Speaker 3: and there's one member who thinks optimal policy would be
1:09
Speaker 3: de levee rates unchanged. All of twenty twenty six and
1:12
Speaker 3: twenty five, there is only one change to this statement.
1:16
Speaker 3: They now promise to carefully assess incoming data quote in
1:19
Speaker 3: considering the extent and timing of additional adjustments to the
1:24
Speaker 3: target range for the federal funds rate. There's no change
1:27
Speaker 3: to the committee's view of inflation, which has quote made
1:30
Speaker 3: progress toward the committee's two percent objective but remains somewhat elevated.
1:35
Speaker 3: The new economic forecasts, however, show both PCE headline and
1:39
Speaker 3: core inflation forecasts revised up significantly. Headline will be two
1:43
Speaker 3: and a half percent at the end of next year,
1:45
Speaker 3: up from two point one forecast in September. The core
1:49
Speaker 3: also two and a half percent, up from two point
1:52
Speaker 3: two percent. They do see unemployment at four point three
1:55
Speaker 3: percent at the end of next year, which is down
1:57
Speaker 3: to tenth from September. The economy will end this year
2:01
Speaker 3: with GDP up two and a half percent, that's a
2:03
Speaker 3: half percentage point jump from their September outlook, and it
2:08
Speaker 3: is going to grow two point one percent in twenty
2:11
Speaker 3: twenty six, a significant slowdown. In one technical note, the
2:15
Speaker 3: FED did lower the offering rate for overnight reverse repurchase
2:18
Speaker 3: agreements by thirty basis points to four point twenty five percent.
2:21
Speaker 3: That's the same as the Fed's target range.
2:24
Speaker 2: Lower bound Guys, Mike McKee, thank you, sir. There's so
2:27
Speaker 2: much to one pack here, so let's just go with
2:29
Speaker 2: twenty twenty five and go to the forecasts, so we
2:31
Speaker 2: get a twenty five basis point cut, and then they
2:34
Speaker 2: do this for twenty twenty five. GDP revised higher, unemployment
2:38
Speaker 2: revised just a little bit lower. Then go to PCEE
2:41
Speaker 2: once again, revise just that little bit higher. So what
2:43
Speaker 2: you get for the top plot, the medium dot was
2:46
Speaker 2: actually pointing towards four cuts for twenty twenty five. They've
2:49
Speaker 2: cut that in half to two, which basically marks the
2:52
Speaker 2: whole thing to market. This is where the market was
2:55
Speaker 2: looking for two cuts in twenty twenty five, and this
2:57
Speaker 2: is what the Fed is projecting. If you consider this
3:00
Speaker 2: in the medium dot, turn into the price section. Off
3:02
Speaker 2: the back of this, we unlock another dose of dollar strength.
3:06
Speaker 2: You're a dollar breaking down to one oh four forty
3:08
Speaker 2: four off the back of that move in the bond
3:10
Speaker 2: market with the your tar at the front end of
3:12
Speaker 2: the curve on a two year up by three basis
3:13
Speaker 2: points to four twenty eight on a ten year up
3:16
Speaker 2: by single basis point to four forty one, and the
3:18
Speaker 2: equity market off the back of that, we come off
3:20
Speaker 2: session highs. On I guess and P five hundred, we
3:22
Speaker 2: are just about unchanged. So if you are just joining us,
3:24
Speaker 2: welcome to the program. It's a twenty five basis point
3:27
Speaker 2: reduction from the federal serve with a sprinkle of descent
3:30
Speaker 2: and some big changes leased to the forecasts for twenty
3:32
Speaker 2: five and beyond.
3:33
Speaker 1: And what you can see is basically the market readjusting,
3:35
Speaker 1: but not necessarily of freaking out. I think it's fascinating
3:38
Speaker 1: the idea that Beth Hammock, the new Cleveland FED President,
3:41
Speaker 1: is the loan dissenter three non voting members, as Michael
3:45
Speaker 1: McKee said, seem.
3:46
Speaker 4: To have agreed with her.
3:47
Speaker 1: To me, this is the definition of a hawkish cut.
3:50
Speaker 1: We now have one hundred basis points of rate cuts
3:52
Speaker 1: since that September meeting. Now they seem to be only
3:56
Speaker 1: bigging in two rate cuts, as you said, And it
3:58
Speaker 1: raises a question of what the parameters are, what the
4:01
Speaker 1: message you will be from FED Chair Jpowell.
4:03
Speaker 2: Compare the September forecast to the forecast we just got.
4:06
Speaker 2: Where they thought FED funds would be at the end
4:08
Speaker 2: of next year, is now where they think FED funds
4:10
Speaker 2: will be at the end of twenty twenty six. They've
4:13
Speaker 2: pushed the whole thing out twelve months now, the debate
4:16
Speaker 2: we're going to have, and no doubt the debate they'll
4:17
Speaker 2: have in the news conference with Sham and Powell and
4:19
Speaker 2: the journalists. How much of this is about realized data,
4:22
Speaker 2: the data we've had since the September meeting, and how
4:25
Speaker 2: much of this is about assuming, speculating, guessing what's about
4:30
Speaker 2: to happen with policy well.
4:31
Speaker 1: And ultimately, how much can they divorce the two if
4:34
Speaker 1: they're looking for signals from the collective vetting agency, the
4:37
Speaker 1: collective wisdom of the crowds of markets.
4:39
Speaker 4: At a certain point, they have been.
4:41
Speaker 1: Following the market in certain aspects, and in this case,
4:43
Speaker 1: the market is inferring certain things about policies and the
4:47
Speaker 1: FED cannot ignore that. But I want to hear from
4:50
Speaker 1: Fedchair Powell this afternoon, in just about twenty five minutes time.
4:54
Speaker 4: What is your scenario analysis?
4:56
Speaker 1: How do you take in two stride the prospect of
4:59
Speaker 1: both tariffs as well as potential changes to immigration.
5:02
Speaker 5: To me, the character of the descent's interesting. I don't
5:04
Speaker 5: have time to study it, but the uniqueness of you know,
5:07
Speaker 5: she's quantitative economics out of Stanford. She certainly knows her
5:10
Speaker 5: where around the block. But that's something your first meeting,
5:13
Speaker 5: and you descent. I mean, what would Allen Greenspan say
5:15
Speaker 5: to that? That's like Lawrence Meyer one oh one. But
5:18
Speaker 5: the answer here is the markets are moving. I'm looking
5:20
Speaker 5: at yen out to a one point fifty four level.
5:23
Speaker 5: Damien would look at it eight different ways. But the
5:25
Speaker 5: answer is this is not a snoozefest, and there's a
5:28
Speaker 5: lot going on here in a more than expected hawkish cut.
5:32
Speaker 2: This is what they call a hawkish cut. I could
5:34
Speaker 2: not agree more. And that's judged by what's happening at
5:36
Speaker 2: the front end of the curve. Even if they reduce
5:37
Speaker 2: interest rates by twenty five basis points, the two years
5:40
Speaker 2: higher by seven basis points, we're back through four thirty.
5:43
Speaker 2: Bob Michael JP. Morgan's had some time to go over
5:45
Speaker 2: the statement, to go over the projections and the market reaction.
5:48
Speaker 2: What do you make of this one?
5:50
Speaker 6: Well, I think they have an incredible sense of self
5:52
Speaker 6: awareness that the economy looks great. The fourth quarter is
5:55
Speaker 6: going to come in around four percent. You've got unemployment
5:59
Speaker 6: at four point two percent. They'll take the side of
6:02
Speaker 6: it that says that's a pretty good level to be at.
6:05
Speaker 6: Inflations a little bit above their target. What's the rush
6:08
Speaker 6: to keep cutting rates. Let's just back up a little bit.
6:12
Speaker 6: I think also they do have to listen to what's
6:16
Speaker 6: being talked about at Mara a Lago, and there is
6:19
Speaker 6: a lot being talked about. Not any of it is
6:23
Speaker 6: going to be disinflationary or a headwind to growth, and
6:28
Speaker 6: they have to begin to model that in. I actually
6:31
Speaker 6: think they did the right thing. I'm pleasantly surprised they
6:35
Speaker 6: went to two cuts next year instead of three. We'll
6:39
Speaker 6: see what happens.
6:40
Speaker 5: And do they model in does the Trump administration model
6:42
Speaker 5: in his behavior, his statements on strong dollar that we
6:46
Speaker 5: saw eight years ago, whatever the math is, or is
6:49
Speaker 5: there going to be a different discussion about the efficacy
6:53
Speaker 5: of a strong dollar For President Trump, he's going to
6:55
Speaker 5: demand a week dollar. We got to have exports up
6:57
Speaker 5: ers or new behavior.
7:00
Speaker 6: I think that's something we're just going to have to
7:01
Speaker 6: wish see. I think there's still a view that the
7:05
Speaker 6: exceptionalism of the dollar is another one of these things
7:09
Speaker 6: that's potentially over invested in. And suddenly if you see
7:13
Speaker 6: policies coming out of the administration on Tara said aren't
7:17
Speaker 6: as severe as expected, then you're going to see a
7:20
Speaker 6: lot of the foreign economies, a lot of the currencies
7:24
Speaker 6: and bond markets start to appreciate a bit.
7:27
Speaker 4: Do you think that it was a mistake?
7:29
Speaker 1: And essentially this is the FED walking back what fedshir
7:32
Speaker 1: Powell said about we will not welcome any further weakening
7:35
Speaker 1: in the labor market.
7:38
Speaker 6: I think there's some of that, and I think they
7:40
Speaker 6: looked at the totality of the data. I started by saying,
7:45
Speaker 6: when they look at everything, it's the perfect soft landing.
7:49
Speaker 6: They're looking for a resting spot. They don't think it's
7:52
Speaker 6: three or four rate cuts away. They think it's somewhere
7:55
Speaker 6: around two more rate cuts away.
7:57
Speaker 4: Do you think that.
7:57
Speaker 1: It's good that there's more descent now at a time
8:00
Speaker 1: when there is so much dissent and disagreement just about
8:03
Speaker 1: understanding where we are currently.
8:06
Speaker 6: I love it. I think it's ideal. You heard the
8:09
Speaker 6: conversation with Ellen. She's sitting there looking at things are
8:13
Speaker 6: about as perfect as you can get them. I try
8:15
Speaker 6: to point out housing and she smacks it away. And
8:19
Speaker 6: I think that's what you're getting at the FAD, which is,
8:22
Speaker 6: you know what, inflation's a little higher than we want.
8:25
Speaker 6: Growth is a little bit firmer than we thought. The
8:28
Speaker 6: labor market looks pretty healthy. And by the way, has
8:30
Speaker 6: anyone talked about holiday sales? The consumers looked pretty good.
8:35
Speaker 6: What are we doing cutting rates further?
8:37
Speaker 5: Yeah, look at this John and all the things moving
8:39
Speaker 5: across the Bloomberg launch pad. Canadian dollars extraordinary. We're not
8:43
Speaker 5: nearer one forty four, but it's a jump condition. Unlike others,
8:48
Speaker 5: which you're just pushing up as well.
8:49
Speaker 2: They've got their own true day shape problems TUMP, and
8:51
Speaker 2: Europe's got their own problems too. You're at dollar right
8:54
Speaker 2: now breaking down, So one O four twenty just about
8:56
Speaker 2: holding on now it's a one A four handle. There's
8:58
Speaker 2: one question I've got for you. By it's a forecast.
9:01
Speaker 2: We haven't talked about the longer run DOUP. It is
9:03
Speaker 2: inched up by like that much from two point nine
9:07
Speaker 2: to three. Is there not a bigger realization going on
9:09
Speaker 2: in the committee that that needs to come up a
9:12
Speaker 2: whole lot more? Why is this taken so long to
9:14
Speaker 2: draw that conclusion?
9:16
Speaker 5: Yeah?
9:16
Speaker 6: I think the realization is setting in, and I think
9:20
Speaker 6: having a dissenter on board is going to help drive
9:23
Speaker 6: that conversation. But if you step back and think where
9:27
Speaker 6: three percent is relative to a few years ago. That
9:31
Speaker 6: does seem pretty high. We had negative real FET funds
9:35
Speaker 6: rates for a long period of time. The very first
9:38
Speaker 6: stop back in twenty twelve was four and a quarter percent.
9:42
Speaker 6: Now we're right about that four and a quarter percent.
9:45
Speaker 6: Why not just sit there and say we can get
9:48
Speaker 6: to around two percent inflation? About one percent of a
9:51
Speaker 6: real Fed funds rate is about the right level of pressure.
9:54
Speaker 6: I still think it's going higher.
9:56
Speaker 2: The chairman talked about a recalibration. We've had three meetings
9:59
Speaker 2: on basis points of cuts across three meetings. Was that
10:02
Speaker 2: the recalibration? Have we had it now?
10:05
Speaker 6: I think that's some of it. I think that's only
10:08
Speaker 6: part of it. Yeah, I think that's only part of it.
10:12
Speaker 6: It just takes a week labor print over the next
10:15
Speaker 6: month or so. It takes a surprise to the downside
10:19
Speaker 6: in core PCE. One of those things to remind the
10:23
Speaker 6: Fed that this level of rates with a four handle
10:26
Speaker 6: in this economy that's come from zero interest rates is
10:30
Speaker 6: still somewhat restrictive and there's more work to do.
10:33
Speaker 2: If you are just joining us, welcome to the program.
10:35
Speaker 2: Ten minutes ago, a twenty five basis point reduction from
10:38
Speaker 2: the Federal Reserve a sprinkle of descent. But that's not
10:41
Speaker 2: where the headlines are. The headlines are in the Summary
10:43
Speaker 2: of Economic Projections released alongside the statement from the Federal Reserve,
10:47
Speaker 2: where they improved increase their forecast for GDP for twenty five,
10:51
Speaker 2: They took down their unemployment rate forecast. They pushed up
10:55
Speaker 2: their forecast for PCE, and they did this with interest rates,
10:58
Speaker 2: projecting rates would drop only to three ninety when previously
11:01
Speaker 2: they were looking for three forty. So the Federal Reserve,
11:03
Speaker 2: essentially for the median dot has gone from projecting four
11:06
Speaker 2: cuts in twenty twenty five to just two. Off the
11:09
Speaker 2: back of that, in the bond market yields a higher
11:11
Speaker 2: the dollars stronger, and equity is a rolling Going from
11:14
Speaker 2: the S and P five hundred, we are down by
11:16
Speaker 2: zero point six percent. So weigh in on this. Dane
11:18
Speaker 2: Swamp of KPMG joined us. Now, Dan, you've had some
11:21
Speaker 2: time to pour over all of this. Let's start with
11:23
Speaker 2: those projections. Was that in line with what you were
11:25
Speaker 2: looking for?
11:28
Speaker 7: Actually it is, and I'm glad to see it. I
11:30
Speaker 7: thought that the Fed was going to if they were
11:32
Speaker 7: going to do a quarter point, which was already priced
11:34
Speaker 7: into the market that they had to scale back dramatically,
11:37
Speaker 7: at least by half. They're a forecast for rate cuts
11:40
Speaker 7: next year, which is what they did, and the disagreement
11:43
Speaker 7: within the committee is exactly what you would expect. There's
11:46
Speaker 7: a lot of debate right now about how close are
11:50
Speaker 7: we actually to neutral, and in fact, the new Cleveland
11:53
Speaker 7: Fed President was one of the ones that said we
11:55
Speaker 7: may be closer than you think. So it's not so
11:57
Speaker 7: surprising that she casted as set. Even though it's her
12:00
Speaker 7: first meeting, it's also her last meeting to vote before
12:04
Speaker 7: we see Austin Goilsby roll back onto the committee in
12:07
Speaker 7: January as a voting member. I think it's not surprising
12:11
Speaker 7: at all that there were three participants at the meeting
12:13
Speaker 7: that also agreed that they don't want so many rate
12:16
Speaker 7: cuts next year. The economy they can do it without
12:19
Speaker 7: front running any policies. Right now, the economy has come
12:23
Speaker 7: in much stronger than they expected. There's been upward revisions
12:27
Speaker 7: to both employment and inflation has come in hotter, and
12:30
Speaker 7: the consumer is atlas to the US economy and the
12:34
Speaker 7: world at this point in time, and that's important. I
12:37
Speaker 7: think It's also going to be really important to see
12:40
Speaker 7: in the discussion and in the minutes to this, how
12:43
Speaker 7: much they talked about that consumer sentiment number that showed
12:47
Speaker 7: people buying ahead of price hikes and that hoarding activity,
12:51
Speaker 7: which suggests that perhaps inflation expectations are not as well
12:56
Speaker 7: anchored as they thought, and to become a bit more
12:59
Speaker 7: unmurned moored in the post pandemic economy.
13:03
Speaker 5: Diane, Illinois. You're Illinois is the fifth largest state economy.
13:07
Speaker 5: It would be the eighteenth largest economy if it was
13:11
Speaker 5: a country in the world. And yet we perceive Illinois
13:14
Speaker 5: not flat on its back, but a much more diversified,
13:17
Speaker 5: struggling state. What do you see out there about the
13:21
Speaker 5: two Americas that you would tell Chairman Powell.
13:27
Speaker 7: Well, you know, I don't need to tell Chairman Pouel anything,
13:30
Speaker 7: because he spends a lot of time looking at both Americas.
13:32
Speaker 7: I think people don't realize how much time he spends
13:35
Speaker 7: talking to people who are trying to upscale themselves and
13:40
Speaker 7: get out of being paid by the government and get training,
13:43
Speaker 7: especially single women with children. I know how much he
13:47
Speaker 7: spends time. He doesn't want to spend time just talking
13:49
Speaker 7: to executives when he goes out to all of his
13:51
Speaker 7: regional visits at the FED. He actually asked to see
13:54
Speaker 7: the underbelly, to see where people are struggling, what's really
13:57
Speaker 7: going on. I think what's important. I mean, I think
14:00
Speaker 7: about this in my own situation. My son, when I
14:03
Speaker 7: asked him what he wanted for Christmas, he asked me
14:05
Speaker 7: to donate to the homeless and the working homeless are
14:08
Speaker 7: a real problem, and I think that is one of
14:11
Speaker 7: the issues that we're struggling with. And interest rates alone
14:14
Speaker 7: coming down are not going to change the supply of
14:17
Speaker 7: housing that once was a single lever. We know that
14:20
Speaker 7: affordability has been bid up by a whole host of factors,
14:24
Speaker 7: including scarcity of labor and these recent disasters that we've
14:29
Speaker 7: seen which are pushing up the costs of actually construction.
14:32
Speaker 1: Because of this fragility, and Bob, I'm curious your thoughts.
14:35
Speaker 1: Some people are saying that essentially this is a hawkish tone,
14:39
Speaker 1: but this still is a FED with a pretty low
14:41
Speaker 1: bar to cut again, that is the comment from Neil
14:43
Speaker 1: Dudda as he looks underneath the hood of some of
14:45
Speaker 1: the employment markets that Diane was talking about.
14:48
Speaker 6: Do you agree, I think the bar was low. It
14:53
Speaker 6: got a lot higher because they're telling us they're rethinking
14:58
Speaker 6: how many cuts they have to do. And certainly by
15:00
Speaker 6: the time they meet again at the end of January,
15:03
Speaker 6: they're going to hear a lot more from the administration,
15:07
Speaker 6: and it's going to be the administration, not the incoming administration,
15:11
Speaker 6: and they're clearly going to have to model that in
15:14
Speaker 6: wigh that. So I don't think there's a pretty low
15:16
Speaker 6: bar here. I think it's gotten higher.
15:18
Speaker 2: I'm really pleased you brought up Nil Datta's no if
15:20
Speaker 2: you go to the bottom of this noe Nil from Renmack.
15:22
Speaker 2: Of course, there's an interesting line here on the incoming administration.
15:26
Speaker 2: There is plenty of speculation of what the Trump administration
15:28
Speaker 2: will do, but they have to actually walk through the door.
15:31
Speaker 2: The FED ought to focus on the here and now.
15:33
Speaker 2: The risk is now that the economy slows and the
15:35
Speaker 2: FED is passively tightening by doing nothing. And here's the kicker.
15:39
Speaker 2: I think the punchline curious that the FED was about
15:41
Speaker 2: to cut a hundred basis points and then all of
15:43
Speaker 2: a sudden stops as Trump walks through the door. Diane,
15:47
Speaker 2: how much of these moves, the change to the forecast
15:49
Speaker 2: that we're seeing are about the incoming data since September,
15:53
Speaker 2: and how much of it is about expected changes to
15:56
Speaker 2: policy that will shape that data in the years to come.
16:01
Speaker 7: Well, we do know that with the continuing resolution that
16:04
Speaker 7: they're talking about a fairly large increase in bailout funds
16:09
Speaker 7: for the affected states from the two hurricanes. That will
16:12
Speaker 7: boost growth at the beginning of the year, and it
16:14
Speaker 7: is inflationary at the same time, So that is sort
16:18
Speaker 7: of already baked into the cake. Are they doing scenarios,
16:21
Speaker 7: Of course they are, but they can couch certainly. I
16:24
Speaker 7: think you're going to see Powell couch very much and
16:26
Speaker 7: be very cautious to say they're not front running any policy.
16:30
Speaker 7: They did cut at this meeting. If they were front
16:32
Speaker 7: running policy, they wouldn't have cut at this meeting. And
16:35
Speaker 7: I think that's what Powell wanted to say, even with
16:38
Speaker 7: the descent, with this hawkish tone, this is sort of
16:41
Speaker 7: the perfect way for him to say, we're doing our job.
16:44
Speaker 7: We're looking at the data. It's coming in stronger, the
16:47
Speaker 7: economy is solid, and it justifies higher rates. Now, you
16:51
Speaker 7: always worry about what's going to break going forward. The
16:55
Speaker 7: administration coming in, they will have more information on it,
16:58
Speaker 7: but even tariffs take quite a while to kick in.
17:01
Speaker 7: They don't kick in overnight, and I think people forget
17:04
Speaker 7: about that and we don't know what Not only will
17:07
Speaker 7: the tariffs completely look like we have ideas and we
17:10
Speaker 7: can model out scenarios, but retaliation will be designed to
17:14
Speaker 7: disrupt supply chains. That's very important because when you're thinking
17:19
Speaker 7: about it that way, that is inflationary and we're in
17:22
Speaker 7: a much more fragile supply chain environment, which we've already seen.
17:26
Speaker 7: Vehicle prices have already gone up again just in response
17:30
Speaker 7: to the damages and the buying ahead of additional price
17:33
Speaker 7: hikes due to two monster hurricanes. So we're in a
17:37
Speaker 7: situation where we have much more fragile supply chains with
17:41
Speaker 7: the embers of inflation still smoldering. That's just not a
17:46
Speaker 7: situation you want to add fuel to the fire on
17:49
Speaker 7: you want to keep the lid on inflation. And I
17:52
Speaker 7: think the FED is still hoping to hit that soft landing.
17:55
Speaker 7: But a soft landing, really they will not declare victory.
17:58
Speaker 7: And this will not be Chairman Powell that we saw
18:00
Speaker 7: a year ago, who was pretty jubulant a year ago
18:04
Speaker 7: when we were sitting in this exact spot. I think
18:06
Speaker 7: you're going to see a Chairman Powell that is cautious
18:09
Speaker 7: optimistic about the economy, talking about the strength of the economy.
18:13
Speaker 7: That's why they're doing what they're doing. That's why the
18:16
Speaker 7: outlook looks like it is not front running policy.
18:19
Speaker 5: Michael, I got a ten year yield move and the
18:21
Speaker 5: real yield, the real yield was a two five two,
18:24
Speaker 5: all of a sudden popping four basis points rounded up
18:27
Speaker 5: about the two point one to three percent. What does
18:30
Speaker 5: that signal to your bond market? What does that signal
18:33
Speaker 5: the business? Just to see the real yield Butcher's up
18:36
Speaker 5: write against recent husbec six months.
18:39
Speaker 6: It tells me that investors might have been tilted the
18:43
Speaker 6: wrong way coming into the FOMC decision, and they're unwinding
18:48
Speaker 6: some of that. We'll see where it closes. I'm pretty
18:51
Speaker 6: optimistic things will settle down. I think Diane said it
18:55
Speaker 6: correctly that this is still a FED that cut rates
18:59
Speaker 6: in front of incoming policies. So they must see something
19:04
Speaker 6: in the improvement in inflation that they like, and they
19:07
Speaker 6: must see something in the labor market that they want
19:10
Speaker 6: to make sure it doesn't metastasize.
19:12
Speaker 2: We'll find out more in about eleven minutes time. In
19:14
Speaker 2: this news conference, stants a special thanks to Dan Swamp
19:16
Speaker 2: of KPMG. Want to draw your attention to what's developing
19:19
Speaker 2: in the FX market and elsewear. So we're starting the
19:21
Speaker 2: bond market just a flavor of that yields up on
19:24
Speaker 2: a front end by seven basis points the two year
19:26
Speaker 2: back through four p thirty. If you take that move,
19:29
Speaker 2: just push it through foreign exchange. What do you expect
19:31
Speaker 2: bit of moves in G ten the dollars stronger against
19:34
Speaker 2: absolutely everything, against the majors in G ten. Beyond that,
19:37
Speaker 2: in em tom two percent move against Brazil two again negative,
19:41
Speaker 2: that's another two each of them.
19:43
Speaker 5: Yeah, but each of them are radiosyncredits on.
19:44
Speaker 2: The top of the twenty so far this ye, yeah, she.
19:46
Speaker 5: Got Turkish lera popping through thirty five today finally. But
19:50
Speaker 5: they're each a different story. But as Damian Sasomer says
19:53
Speaker 5: his expert on this, it is a flat out six
19:56
Speaker 5: percent depreciation an them currencies, and John, I'm looking at
19:59
Speaker 5: the drawer and the standard of course five hundred. I'm
20:02
Speaker 5: not using the dow here in the SPX is we
20:05
Speaker 5: have a drawdown a negative one point five percent.
20:08
Speaker 2: Sessions carnage of the session line with down about point
20:10
Speaker 2: seven percent on the session. On the SMP, Mattless seti
20:13
Speaker 2: off Deutsche Bank joined US now and we tased this
20:15
Speaker 2: one U Matt a little bit earlier in the program,
20:17
Speaker 2: we said, Mattless, Eddi is looking for one more Cup
20:19
Speaker 2: said it was a close call for December, and then
20:21
Speaker 2: ultimately you think they're done for twenty twenty five. Matt,
20:25
Speaker 2: Are they getting close into your world?
20:27
Speaker 6: Well?
20:28
Speaker 8: Yeah, I mean you have to to say that the
20:29
Speaker 8: dots move closer to that world today, I think really
20:32
Speaker 8: importantly within the SVP. You know, obviously a lot of
20:35
Speaker 8: focus on the dot plot, but what drove that was
20:38
Speaker 8: this big upwardess assessment in inflation. They moved up their
20:41
Speaker 8: core PC inflation forecast to two and a half percent
20:43
Speaker 8: next year. That's closer to our own view. They moved
20:46
Speaker 8: up their core PC inflation forecast for two point two
20:49
Speaker 8: percent in twenty twenty six. Really takes till twenty twenty
20:52
Speaker 8: seven really to get back to their inflation target of
20:55
Speaker 8: two percent. And then there was a big reassessment of
20:57
Speaker 8: the risk assessment around both the labor marketing and inflation
21:01
Speaker 8: risks to the upside of inflation, everybody kind of anticipates
21:04
Speaker 8: and move back to in that direction, and they're much
21:06
Speaker 8: more balanced risks to the labor market. So it's kind
21:09
Speaker 8: of an sep from a forecast perspective and from a
21:12
Speaker 8: risk assessment perspective that looks a lot more like it
21:14
Speaker 8: did in June than September.
21:16
Speaker 1: Matt, how much do you think this really is stemming
21:18
Speaker 1: from the data that we've gotten of late versus just
21:21
Speaker 1: a promise change in policies next year? In other words,
21:24
Speaker 1: is this as Neil Dutta says that they cut by
21:27
Speaker 1: one hundred basis points and then Trump walked in the door.
21:31
Speaker 8: I think a lot of this is just the incoming
21:33
Speaker 8: data that we've seen. You know, they marked up their
21:35
Speaker 8: growth forecast as everybody else has, by about fifty basis
21:38
Speaker 8: points since the September meeting. They marked up their inflation
21:41
Speaker 8: forecast just given the incoming data by twenty basis points
21:43
Speaker 8: since the September meeting, marked down their labor market forecast
21:46
Speaker 8: by twenty basis since the September meeting. I think the
21:48
Speaker 8: data since the September meeting confirmed a few things. One,
21:51
Speaker 8: growth is robust to the downside, risks to the labor
21:54
Speaker 8: market and consumer are less than they were three months ago,
21:57
Speaker 8: and three there are risks that inflation is just year
22:00
Speaker 8: than many anticipated. Just put into some context, core PC
22:04
Speaker 8: ended last year at three percent, it's likely an end
22:06
Speaker 8: of this year at two point eight or two point
22:07
Speaker 8: nine percent. That's very little progress over the course of
22:10
Speaker 8: this year, and they basis points despite that.
22:12
Speaker 5: Matt Jason Furman just publishes up at Harvard Teaching at
22:16
Speaker 5: ten his first sentence mad as simple. I don't know
22:20
Speaker 5: why the FED cut. Matt Lazzetti, Why did the FED cut?
22:25
Speaker 8: I think it's a great question, and I you know,
22:27
Speaker 8: as you know, it was kind of discussed. We thought
22:30
Speaker 8: that there was a lot of good reasons not to cut.
22:33
Speaker 8: I think when Chair Palace asked this question is going
22:35
Speaker 8: to be difficult one for him. But the way that
22:36
Speaker 8: I think he'll frame it is they still believe that
22:38
Speaker 8: they were restrictive, and we still believe that they are
22:41
Speaker 8: as well, and that even with a twenty five basis
22:43
Speaker 8: point cut, they maintained that level of restriction and that
22:47
Speaker 8: they're still kind of being able to balance the risks
22:49
Speaker 8: assessment from a labor market inflation perspective. At this point
22:52
Speaker 8: in time, So I think that'll be the argument at
22:54
Speaker 8: this At this point. That said, I think the signal
22:56
Speaker 8: from them is that they're not just on this regular
22:58
Speaker 8: cadence of ray cuts. They're not just kind of on
23:01
Speaker 8: a path a smooth passed down to a neutral rate
23:04
Speaker 8: that is kind of uncertain. That it does look like
23:07
Speaker 8: they are going to be pausing for a bit longer here,
23:09
Speaker 8: given their baseline forecast for the data, and that's in
23:12
Speaker 8: line with their own expectations that the data flow, we
23:15
Speaker 8: think over the coming months and then coming quarters will
23:17
Speaker 8: just not be consistent with dialing back more restraint.
23:20
Speaker 4: Tom.
23:20
Speaker 1: I thought that was a great question, and I'd like
23:22
Speaker 1: Bob's answer because honestly, I think that that really is
23:24
Speaker 1: a key question, and it's going to be very difficult
23:26
Speaker 1: for this FED chair to really answer. If you actually
23:29
Speaker 1: are upgrading your expectation for core PCEE, why did you
23:32
Speaker 1: cut at all this meeting?
23:34
Speaker 6: Yeah, and so Matt may eventually be right that this
23:38
Speaker 6: was the last one. As he was talking, I was thinking, bohy,
23:41
Speaker 6: this is really reminiscent of nineteen ninety five when they
23:45
Speaker 6: had pike rates from three to six percent. Everyone thought
23:48
Speaker 6: they'd have to cut rates to four. They did seventy
23:51
Speaker 6: five basis points. That was it five and a quarter,
23:54
Speaker 6: and then they came back shortly there after starting the
23:57
Speaker 6: hike rates. You do look around and do see that
24:01
Speaker 6: actually the economy's doing pretty well. Now there are things
24:05
Speaker 6: below the surface in the labor market they have to
24:07
Speaker 6: be concerned about. There is a nine tenths of a
24:10
Speaker 6: percent increase in the unemployment rate. You've never had that
24:14
Speaker 6: without a recession. We look at job gains and look
24:17
Speaker 6: at the six month moving average one hundred and eight thousand,
24:20
Speaker 6: haven't seen that since twenty ten. So why not continue
24:24
Speaker 6: to take a little pressure off of businesses in house?
24:28
Speaker 2: Given everything we've learned in the last twenty four minutes,
24:30
Speaker 2: does it make you more or less comfortable in pricing
24:32
Speaker 2: risk this afternoon?
24:34
Speaker 6: It makes me more comfortable. I think the Fed sees
24:39
Speaker 6: what we see, which is, hey, this is a pretty
24:41
Speaker 6: good economy. We'll see what policies look like. Let's find
24:45
Speaker 6: a place to rest for a bit. We're not going
24:47
Speaker 6: to break anything. And it could be with a couple
24:50
Speaker 6: more rate cuts, and that's it. Matt could be right,
24:53
Speaker 6: It could be here. We'll find that out by March.
24:55
Speaker 5: Now, Zodie, what's the elasticity here? The Atlanta GDP statistic
24:59
Speaker 5: is three points one percent. Can this suddenly saved your
25:02
Speaker 5: own power? Can we get a suddenly so slower economy
25:06
Speaker 5: or do you really have to glide out to the
25:08
Speaker 5: same middle of next year?
25:11
Speaker 8: Look, the slower economy is something that you know, we
25:14
Speaker 8: in consensitive have been expecting for the past several years.
25:17
Speaker 8: It just has not come at all. You see the
25:19
Speaker 8: past several quarters two point eight percent growth in Q three,
25:22
Speaker 8: as you mentioned Q four, tracking at you know, about
25:26
Speaker 8: three percent at this point in time. Our own growth
25:28
Speaker 8: forecast is for two and a half percent growth next year.
25:32
Speaker 8: But that's a deceleration relative to where we are. Financial
25:34
Speaker 8: conditions are easy, credit conditions have the sentiment has improved.
25:38
Speaker 8: So I do think that this economy has a substantial
25:42
Speaker 8: momentum behind it, and I think can give you strong
25:45
Speaker 8: growth outcomes. One thing I'm a little bit surprised about
25:47
Speaker 8: is actually their potential growth estimate remained at one point
25:49
Speaker 8: eight percent. They've been talking so much about productivity growth,
25:53
Speaker 8: the supply side of the economy. I thought that that
25:55
Speaker 8: would begin to manifest in a higher potential growth rate
25:57
Speaker 8: in their forecasts. Didn't happen today, but maybe that's an
26:00
Speaker 8: coming quarters.
26:00
Speaker 1: Matt, what would you want to ask j Powell at
26:02
Speaker 1: a time when everyone's going to try to get him
26:04
Speaker 1: to comment on Trump policies and everyone's going to try
26:07
Speaker 1: to understand just how high the bar is to cut again.
26:12
Speaker 8: Yeah, so I think you know, I was going to
26:13
Speaker 8: ask about kind of the level of restriction if they
26:15
Speaker 8: had three cuts baked in, But I think it's more
26:18
Speaker 8: about understanding how they how they think about a few
26:20
Speaker 8: things in the labor market. Bob mentioned, you know, some
26:22
Speaker 8: weakness in the labor market. I'd be interested in whether
26:25
Speaker 8: or not the rise of the unemployment today they would
26:27
Speaker 8: view similarly to the rise through the summer. I think
26:29
Speaker 8: there's many reasons for them not to payrel games are stronger,
26:32
Speaker 8: the quits rate has moved higher, the hiring rate has
26:35
Speaker 8: stabilized a little bit, job openings have picked up. But
26:37
Speaker 8: are they as concerned about this rise in the unemployment
26:40
Speaker 8: rate as they were during the summer. Second question I
26:42
Speaker 8: think is on shelter inflation. We did have this big
26:44
Speaker 8: downdraft in the latest print that went against chair palacing
26:47
Speaker 8: that it's going to be a very slow progress on
26:49
Speaker 8: this front. How are they just thinking about over the
26:51
Speaker 8: next several months. I think it's an important question for
26:53
Speaker 8: them as well.
26:53
Speaker 7: Matt.
26:54
Speaker 2: There's one problem, one big problem I've got with this decision,
26:56
Speaker 2: and it's the words the chairman used in the last
26:58
Speaker 2: news conference. I guess we don't assume, we don't speculate
27:03
Speaker 2: that inflation forecast, Matt. Are we're sitting here and really
27:06
Speaker 2: saying that that much has changed in two months. The
27:09
Speaker 2: warrants the upgrade to that inflation forecast of the FMC
27:12
Speaker 2: without guessing, speculating or assuming on what policy is going
27:15
Speaker 2: to do.
27:16
Speaker 8: So our own inflation forecast is two point six percent.
27:19
Speaker 8: That builds in about twenty basis points from tariff, So
27:23
Speaker 8: you know, they'd be a little bit more hawkers on
27:24
Speaker 8: the inflation front then then we would be, you know,
27:26
Speaker 8: just going back to twenty nineteen. I don't think they're
27:29
Speaker 8: really building in tariff effects explicitly into the forecast as
27:32
Speaker 8: of yet. I do think that that is factoring into
27:35
Speaker 8: the risk assessments that we see in the back of
27:36
Speaker 8: the SEP where everybody kind of moves shifted back towards
27:39
Speaker 8: upside risks to the inflation front. But that should also
27:42
Speaker 8: make you worry to a certain extent. You know, if
27:44
Speaker 8: their baseline is two and a half percent without tariffs,
27:46
Speaker 8: it'd be even higher than that with tariffs which are
27:48
Speaker 8: likely coming, and therefore they'd probably be taking out even
27:51
Speaker 8: a little bit more of those rate custom that they
27:52
Speaker 8: were anticipating, which was already leaning in a hawker's direction.
27:55
Speaker 2: No doubt you'll hear lots of questions about that. About
27:57
Speaker 2: three minutes time when this news conference starts, Matt will
27:59
Speaker 2: let you Runt of Deutsche Bank No dot sev Renmack
28:02
Speaker 2: writes in talked about him a few times already this afternoon.
28:04
Speaker 2: The Fed is pre judging policy, that's one view. That's
28:08
Speaker 2: Neil's view.
28:08
Speaker 1: Yeah, and he's talking about the fact that there has
28:11
Speaker 1: been such a huge shift without some sort of massive
28:14
Speaker 1: change in the tone of the data that I think
28:16
Speaker 1: people will disagree with. We have some people who say
28:18
Speaker 1: the data has come in a lot hotter. Nonetheless, they
28:21
Speaker 1: have a lot of things to explain in this press conference.
28:24
Speaker 2: Well, Michael, if they speculatink, are they assuming? Are they
28:27
Speaker 2: guessing at the FMC?
28:28
Speaker 6: Do you know what their inflation forecast? Just struck me
28:32
Speaker 6: as frustration, frustration with well with the stickiness of inflation.
28:37
Speaker 6: It should be one point nine to two percent by now.
28:40
Speaker 6: Look at how the labor market has loosened up, look
28:43
Speaker 6: at how growth has slowed down, and here we are
28:46
Speaker 6: still around two and a quarter to two point six percent.
28:49
Speaker 6: I don't read anything into it more than that.
28:52
Speaker 1: So basically, do you think that at this point this
28:54
Speaker 1: is a federal reserve that basically really is just throwing
28:57
Speaker 1: darts at the dark board.
29:00
Speaker 6: I think they have to be because they don't They
29:02
Speaker 6: don't what he's saying, because they don't know what. By
29:07
Speaker 6: the way, back in two thousand and nine, they would
29:09
Speaker 6: have forecast two and a quarter to two and a
29:11
Speaker 6: half because remember they had the flexible average inflation targeting.
29:15
Speaker 6: They wanted higher inflation for a period of time, and
29:18
Speaker 6: that's what existed in ninety five during the last soft landing.
29:23
Speaker 6: They don't guess speculate, but they model, and they've modeled something.
29:28
Speaker 5: Yeah. I brought this, Colin Hurst, Let me bring it
29:31
Speaker 5: up with you. It's real simple. Are they going to
29:33
Speaker 5: stay on an ext post method that they use for
29:35
Speaker 5: four hundred years or are they actually getting out front
29:38
Speaker 5: and predicting. I don't buy it. They got to be exposed.
29:40
Speaker 5: They gotta wait for GDPD crack for unemployment to five percent.
29:44
Speaker 6: Right now, they have the cover of both, don't they.
29:47
Speaker 5: Yeah, exactly. I mean they're just an ex post machine.
29:49
Speaker 5: That's all there is to it.
29:51
Speaker 2: But Michael, this was fun. It's going to see you, sir,
29:53
Speaker 2: almost that almost of the holidays after this. This is
29:56
Speaker 2: like kind of it for many of you, I know,
29:58
Speaker 2: going into YEARN for us included
30:01
Speaker 7: You want to tack to eas