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Instant Reaction: The Fed Cuts Rates 50-Basis-Points · Bloomberg Intelligence

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News, You.
0:07
Speaker 2: Fed Decision with Mi McKay.
0:10
Speaker 3: It's fifty and the promise of another fifty basis points
0:13
Speaker 3: and cuts by the end of the year, and another
0:15
Speaker 3: one hundred basis points in twenty twenty five, which would
0:19
Speaker 3: put the nation's benchmark rate at three point four percent.
0:23
Speaker 3: It's projected to fall another fifty basis points in twenty
0:27
Speaker 3: twenty six, which would put the rate at two point
0:30
Speaker 3: nine percent, which is now the Fed's median forecast for
0:34
Speaker 3: the neutral rate. That is up a tenth from June.
0:37
Speaker 3: The consensus is GDP will rise two percent this year,
0:40
Speaker 3: down a tenth from the June forecast. Growth will be
0:43
Speaker 3: the same in twenty five and twenty six. Unemployment will
0:46
Speaker 3: hit four point four percent this year, that's an increase
0:50
Speaker 3: from the June figure. It will fall to four point
0:53
Speaker 3: three percent in twenty twenty six. PCEE inflation of two
0:57
Speaker 3: point three percent this year falls to two point one
0:59
Speaker 3: next year and hits the two percent target in twenty
1:02
Speaker 3: twenty six. Though inflation remains quote somewhat elevated. The statement
1:07
Speaker 3: says they cut because they now have greater confidence inflation
1:11
Speaker 3: is moving sustainably toward their two percent target, and the
1:14
Speaker 3: risks to inflation and the labor market are roughly balanced.
1:18
Speaker 3: While they do not explain why they decided on a
1:21
Speaker 3: half point reduction, the statement says the Committee is strongly
1:25
Speaker 3: committed to supporting maximum employment and remember in Jackson Hole,
1:29
Speaker 3: Chairman Poll said any deterioration in the labor market would
1:33
Speaker 3: be unwelcome. There was one descent from Governor Mickey Bowman.
1:37
Speaker 3: It's the first descent by a FED governor since two
1:41
Speaker 3: and five. It is the first ascent by any member
1:44
Speaker 3: of the Committee since twenty twenty two. The statement adjusted
1:48
Speaker 3: to say the Committee will as always carefully assess incoming data.
1:53
Speaker 3: Quote in considering additional adjustments. There's no changes guys to
1:58
Speaker 3: the QT portion over Fed's pause.
2:01
Speaker 4: My McKee stay closed, will come back to you. Here's
2:03
Speaker 4: the price sanction in response to it. Knee jerk reaction
2:06
Speaker 4: is the first move might not stick, but this is
2:08
Speaker 4: the move so far. By eight tens of one percent
2:10
Speaker 4: on the S and P five hundred, the overwhelming out
2:12
Speaker 4: performance on a russell the small caps now up by
2:15
Speaker 4: one point seven percent in the bond market, just bear
2:18
Speaker 4: in mind we've come a long long way and we've
2:20
Speaker 4: priced in a lot to this yield curve. The two
2:23
Speaker 4: year just climbing just a little bit to one change
2:25
Speaker 4: the three point sixty at the moment at the front
2:27
Speaker 4: end of the yield curve and in the FX market,
2:30
Speaker 4: dolly and dropping back by about point seven percent. So
2:32
Speaker 4: that's a weaker dollar, a stronger japanesey and Lisa forty
2:35
Speaker 4: one on that currency pair.
2:36
Speaker 1: Yeah, now over the Bank of Japan. And if they
2:38
Speaker 1: hike how much does that divergence continue. I also want
2:40
Speaker 1: to point out gold. You're seeing a bid into gold
2:43
Speaker 1: right now we start to look for some of the
2:45
Speaker 1: inflation proxies, So will this sort of feed into that idea?
2:48
Speaker 1: I thought it was interesting the long end of the
2:49
Speaker 1: yeld curve, just on the margins not significantly yields to
2:52
Speaker 1: slightly up on this idea that they're going to go
2:54
Speaker 1: bigger and potentially even more down the line.
2:57
Speaker 4: So the media and dock can master some disagreement beneath
3:00
Speaker 4: the surface. So let's talk about the range and not
3:02
Speaker 4: just the median at the f WEBC the median dot
3:04
Speaker 4: for twenty twenty five in the projection materials that were
3:07
Speaker 4: just published is three point four percent. The range for
3:10
Speaker 4: twenty twenty five is anywhere from two point nine to
3:13
Speaker 4: four point one. Two point nine to four point one.
3:15
Speaker 4: That's quite a range on this f WEBC. And I
3:18
Speaker 4: think for the first time at a long time, we
3:20
Speaker 4: have some descent playing gap publicly as well, the first
3:22
Speaker 4: descent from a sitting governor on the f WEBC since
3:25
Speaker 4: two thousand and five.
3:27
Speaker 2: This was not a unanimous decision, and it.
3:29
Speaker 1: Really highlights why this actually became such a knife edge
3:33
Speaker 1: kind of decision. Just to add to that, ten officials
3:36
Speaker 1: penciled in one hundred basis points or more of cuts
3:38
Speaker 1: for this year. Nine officials penciled in seventy five basis
3:41
Speaker 1: points or less for this year. It actually matters quite
3:44
Speaker 1: a bit for market expectations, especially given some of the
3:47
Speaker 1: policy uncertainty next year.
3:48
Speaker 4: So TK we get fifty, we get fifty, and now
3:51
Speaker 4: we're waiting for the next act as a news conference
3:53
Speaker 4: in twenty six minutes time.
3:54
Speaker 5: I think it's a surprise within the zeitgeist. This is
3:56
Speaker 5: to the edge of surprise. I think Powell maybe alluded
3:59
Speaker 5: to this with this enthusiasms at Jackson. Oh, you touched
4:03
Speaker 5: on something. Jason Furman touched on this morning, which is,
4:06
Speaker 5: don't forget the dollar, and Muhammad Larian, I'm going to
4:09
Speaker 5: be as direct as I can. It's the great unknown
4:12
Speaker 5: unknown here, a dollar weakness that anybody with our great
4:16
Speaker 5: hair doesn't know.
4:18
Speaker 6: That we may not know. I think we've seen it before.
4:21
Speaker 6: I remember, I remember periods of dollar weakness. But it
4:24
Speaker 6: is dollar weakness. This is not just a fifty basis
4:27
Speaker 6: point cut. This is the Duvish fifty bass point cut. Well,
4:31
Speaker 6: I mean, if now I agree with you John that
4:35
Speaker 6: the Duvish pot comes from the median dots. But if
4:38
Speaker 6: you look at the range, it doesn't look at douvies.
4:40
Speaker 6: But that's not what the mark is going to hit.
4:42
Speaker 6: The mark is going to look at the median dot,
4:43
Speaker 6: and we'll interpret this as a Douvish fifty basis points scut.
4:47
Speaker 6: And the first reaction was actually steepening of both two
4:50
Speaker 6: stands and twos thirties, which tells you something about what
4:55
Speaker 6: people are worried about.
4:57
Speaker 4: To some extent, this median dot validates market pricing and
4:59
Speaker 4: cut again to this decision.
5:01
Speaker 2: Is that sufficient?
5:02
Speaker 4: I'm looking at equity market reaction right now, we're up
5:04
Speaker 4: by half of one percent. We've still got a news conference,
5:07
Speaker 4: a question we've asked for the last several weeks into this.
5:10
Speaker 4: Are we going to end up with disappointment on the
5:12
Speaker 4: other side of this news conference with Chairman Powell?
5:14
Speaker 2: What would your question be now?
5:16
Speaker 6: So, first of all, normally he's more dubvish than the statement,
5:19
Speaker 6: so that's going to be pretty hard to do this time.
5:22
Speaker 2: But let's wait.
5:24
Speaker 6: You know, my question will be what has changed since
5:28
Speaker 6: July when you decided not to cut weights and now
5:31
Speaker 6: there's this very aggressive cut and aggressive signaling.
5:35
Speaker 4: What has changed The speech in CenTra Portugal at the
5:37
Speaker 4: start of summer very different to what we're hearing from
5:40
Speaker 4: the FMC just several months later. Joining us now to
5:42
Speaker 4: discuss is Bob Michael, a JP Morgan Asset Management. He
5:45
Speaker 4: joins us out of London this afternoon. Bob, we just
5:47
Speaker 4: won your first impression to the decision. What do you
5:49
Speaker 4: make of it?
5:51
Speaker 7: It hit on pretty much everything we were looking for,
5:55
Speaker 7: probably a little less dubvish than we thought. In two instances,
5:59
Speaker 7: one there was a just so it was in a
6:01
Speaker 7: slam dunk and we would have liked to have seen
6:04
Speaker 7: the median dot for the end of next year somewhere
6:07
Speaker 7: around two and three quarters to three percent. But otherwise,
6:10
Speaker 7: as we had been guided over the last week, nothing
6:12
Speaker 7: to quibble about.
6:14
Speaker 5: Bob, which bond series or individual bond provides the most
6:18
Speaker 5: information right now?
6:20
Speaker 6: Is it a real yield?
6:21
Speaker 5: Is it the nominal full faith and credit? What's the
6:24
Speaker 5: most valued, Abob Michael? Right now?
6:27
Speaker 7: Credit spreads? Credit spreads will tell us whether investors believe
6:33
Speaker 7: the economy is in die or shape and this was
6:35
Speaker 7: an emergency fifty basis point cut, or whether this is
6:39
Speaker 7: just a fed a long way from neutral, perhaps as
6:42
Speaker 7: Muhammad hit it a meeting or two away from where
6:45
Speaker 7: they should have started the cycle, so they're starting to
6:48
Speaker 7: get towards neutral.
6:50
Speaker 1: All is well, okay, all as well? And yet we
6:53
Speaker 1: saw earlier this morning was an increase in mortgage applications.
6:56
Speaker 1: What we've seen is already the bond market pricing in
6:59
Speaker 1: all of this and then some. And basically the statement
7:02
Speaker 1: only encourages that even more. Do not see a risk
7:05
Speaker 1: of potentially reignited inflation Moob, that we could potentially see
7:09
Speaker 1: expressed in the long end, as Muhammad is mentioning, we
7:12
Speaker 1: are seeing that yield curve steepening in a way that
7:15
Speaker 1: hints that something else is amiss, especially impaired with gold.
7:19
Speaker 7: WHOA, We're a long way away from that. We're looking
7:23
Speaker 7: at the three month annualized rate of core PCE running
7:28
Speaker 7: at one point seven percent, so that's not inflationary. There's
7:32
Speaker 7: signs of disinflation everywhere. When you look at the labor market.
7:36
Speaker 7: They talked about full employment, well the low and unemployment
7:41
Speaker 7: was three point four percent. A couple months ago was
7:43
Speaker 7: four point three percent. That's up nine tenths of a percent.
7:46
Speaker 7: You only see that when there's threat of recession. That's
7:50
Speaker 7: characteristic of that. They've highlighted to us that the neutral
7:54
Speaker 7: Fed funds rate is somewhere around three percent. That's a
7:58
Speaker 7: debate we could have for a long time, but it's
8:00
Speaker 7: nowhere near five and a quarter five and a half percent,
8:03
Speaker 7: so they can start taking pressure off of businesses and
8:06
Speaker 7: households without reigniting inflation.
8:10
Speaker 6: Bob, I know they call you Bob Michael, but you
8:12
Speaker 6: told me earlier was Bob Michelle's I'm going to stick
8:14
Speaker 6: to Bob Michelle. Bob Smith.
8:18
Speaker 7: I came to London because I thought we were going
8:20
Speaker 7: to QPR Millwall on Saturday. Now you're in New York
8:24
Speaker 7: on me.
8:24
Speaker 3: I am.
8:25
Speaker 6: I'll be in London tomorrow, So Bob speak a little
8:29
Speaker 6: bit to the revisions and their projections and particularly unemployment.
8:33
Speaker 6: What do you make of that?
8:35
Speaker 7: I didn't catch them.
8:36
Speaker 6: What did they do? They pushed it up?
8:41
Speaker 7: Yeah, I think they have to. I think they have
8:45
Speaker 7: to acknowledge that we're at a challenging time, that there
8:50
Speaker 7: are new entrants to the labor market, but those are
8:54
Speaker 7: still unemployed US workers, and they have to acknowledge that
8:59
Speaker 7: we're not below four percent anymore. We're heading a little
9:02
Speaker 7: bit higher. And that's why you need the policy response
9:06
Speaker 7: to start with fifty basis points. I'm okay with that.
9:09
Speaker 4: Yeah, but Bob, but I think we've got to talk
9:10
Speaker 4: about this a little bit more. And I'm pleased we
9:12
Speaker 4: went to unemployment. Unemployment right now in America is at
9:15
Speaker 4: four point two percent. These are the FETs projections out
9:18
Speaker 4: in twenty twenty four year end out to twenty five
9:20
Speaker 4: and beyond, they've got projections of four point four percent.
9:23
Speaker 4: The medium projection for unemployment this year. Next year, they've
9:26
Speaker 4: got it at four point four percent. Given the move
9:29
Speaker 4: we've seen over the last twelve months, Bob, how aspirational
9:33
Speaker 4: is that?
9:33
Speaker 2: How realistic?
9:34
Speaker 4: Is it that we just kind of pause around these
9:36
Speaker 4: levels for the next eighteen months.
9:40
Speaker 7: Well, we very well could. I if we get two
9:44
Speaker 7: twenty five's over the next two meetings and we bring
9:47
Speaker 7: rates down one hundred basis points. What we know is
9:51
Speaker 7: there's still a shortage of housing. There are first time
9:54
Speaker 7: home buyers queued up to buy homes, so bringing rates
9:59
Speaker 7: down could bring those buyers into the market. We also
10:02
Speaker 7: know that a lot of businesses don't fund themselves in
10:06
Speaker 7: the public bond market. They fund themselves through bank loans,
10:10
Speaker 7: through private credit. Those are floating rate loans. Those are
10:14
Speaker 7: anywhere starting with SOFA at five and three eighty percent.
10:17
Speaker 7: You take one hundred basis points off of that. That
10:20
Speaker 7: could help to stabilize things as well. Just because unemployment
10:24
Speaker 7: has headed up over the last year doesn't mean it
10:27
Speaker 7: has to keep going. It can certainly flatten out here
10:31
Speaker 7: if the Fed does its job.
10:32
Speaker 4: Hey, Bob, appreciate catching up as always, Bob Michael There
10:35
Speaker 4: of JP Morganes and management, there's a couple of moves
10:37
Speaker 4: in this market that I think are very very interesting.
10:39
Speaker 4: We've just gone fifty and in some ways the dot
10:42
Speaker 4: plot is validating what we were pricing in this market
10:44
Speaker 4: ahead of time as well. And what you're saying at
10:46
Speaker 4: the long end is the long bond sell off and
10:48
Speaker 4: yields climb by two basis points. It's not a big move,
10:51
Speaker 4: but it's notable by two on tens, on thirties, we're
10:54
Speaker 4: up by three. And at the same time we've got
10:56
Speaker 4: gold at all time highs. What is this market sniffing out, Well.
11:01
Speaker 1: It's sniffing out on the margins a greater inflationary risks
11:04
Speaker 1: than otherwise priced in. Look, I can make an argument
11:06
Speaker 1: about how it might mean that we're going to suddenly
11:07
Speaker 1: get run away into somebody style inflation. That's not what
11:09
Speaker 1: it's saying. But what it is saying is that on
11:11
Speaker 1: the margins, the idea of a bigger and frankly a
11:14
Speaker 1: Dubvish fifty basis point rate cut really highlights how inflation
11:19
Speaker 1: is still back on the table, at least on the margins.
11:21
Speaker 4: They're talking about a dual mandate imbalance. Mohammed, your impression
11:24
Speaker 4: is that it's a single man date central bank now,
11:27
Speaker 4: and you don't think we should take our eyes off
11:28
Speaker 4: the other side of the mandate in the market. Speaking
11:30
Speaker 4: to that, just on the margin, this afternoon.
11:33
Speaker 6: I think at the margin, yes, but I do think
11:35
Speaker 6: that this is the reaction of a single mandate FED
11:37
Speaker 6: right now, especially if you believe two percent is your
11:40
Speaker 6: inflation target.
11:42
Speaker 4: Let's cross Ouf it's a Diian swamp and bring her
11:44
Speaker 4: in a KPMG. Dan, we'd love your thoughts on the
11:46
Speaker 4: decision and that we can get into the nuances. What
11:48
Speaker 4: do you make of the fifty instead of the twenty five.
11:52
Speaker 8: This was a huge victory for j Powell, who really
11:55
Speaker 8: laid out at his Jackson Hall speech that he was
11:58
Speaker 8: worried about employment and that is what this is about.
12:01
Speaker 8: And Mickey Bowman doing a discent. Powell willing to take
12:05
Speaker 8: a descent among the board members as opposed to among
12:08
Speaker 8: a president. That is how much he wanted this half
12:12
Speaker 8: percent rate cut. And I think that's very important. I
12:15
Speaker 8: think you're going to see it. Couch and explained within
12:18
Speaker 8: the context of several participants at the July meeting thought
12:21
Speaker 8: they were ready to go ahead and cut. So this
12:23
Speaker 8: is a bit of a catch up to that, and
12:25
Speaker 8: so that should help temper a little bit this Duvish
12:28
Speaker 8: read on it. I was surprised that they kept the
12:31
Speaker 8: risk balanced, although clearly the focus is now unemployment and
12:35
Speaker 8: not allowing the situation and employment to become much worse. Remember,
12:40
Speaker 8: we're at one hundred and sixteen thousand payroll gains three
12:44
Speaker 8: month moving average as of August. That's not statistically different
12:47
Speaker 8: from zero. Combined with the downward revisions we saw on
12:51
Speaker 8: August twenty first, the day before Powell gave his remarks
12:54
Speaker 8: at Jackson Hole, those downward revisions record downward revisions. Even
12:59
Speaker 8: if they're not as as large as they appeared because
13:01
Speaker 8: of some immigration that we're not capturing, they're still large.
13:05
Speaker 8: And it means the birth and death rate, the death
13:07
Speaker 8: rate of firms has picked up and their small businesses
13:11
Speaker 8: aren't hiring as much as well, which could mean actually
13:15
Speaker 8: the payroll data for this year also gets revised down.
13:18
Speaker 8: And that's what they're worried about.
13:20
Speaker 5: Dan, your workout on LinkedIn has been just hugely beneficial,
13:24
Speaker 5: a really holistic view of the US economy. I have
13:27
Speaker 5: a Dow Jones industrial leavage, bottom of the pandemic up
13:30
Speaker 5: one hundred and twenty eight percent twenty one percent per year.
13:34
Speaker 5: I've got debt and deficit that hal Bronner and Bernstein
13:37
Speaker 5: never dreamed of. Diane Swank Is this a FED just
13:40
Speaker 5: dealing with our stimuli? Is this a FED just dealing
13:44
Speaker 5: with debt and deficit to the sky.
13:49
Speaker 8: You know, we've had everything you could possibly imagine pushed
13:52
Speaker 8: up inflation, and now we're seeing it come down despite
13:55
Speaker 8: the fact that we still have a lot of debt.
13:58
Speaker 8: So you know that on the margin, yes, we do
14:01
Speaker 8: have high debts, and I do believe we need to
14:03
Speaker 8: deal with that at some point in time, and I
14:05
Speaker 8: don't think we have anyone who's willing to talk about
14:07
Speaker 8: it on either side of the aisle, which is another issue.
14:10
Speaker 8: We can talk about that at a later date. But
14:13
Speaker 8: right now we've got a federal reserve that's no longer
14:15
Speaker 8: buying that debt, and you've got a federal reserve that
14:19
Speaker 8: is seeing inflation come down despite the fact that we
14:22
Speaker 8: have high debt. And that's because on the margin, after
14:26
Speaker 8: we get past the sort of six months that we
14:28
Speaker 8: put a whole year budget into from March into October, first,
14:33
Speaker 8: you get a continuing resolution at best through your end,
14:37
Speaker 8: and you're going to get more constraints on spending. I
14:41
Speaker 8: think as we get into twenty twenty five, Diane.
14:44
Speaker 1: One reason why this comes as a surprise this decision.
14:47
Speaker 1: One reason why is because they could have telegraphed this
14:49
Speaker 1: more carefully. There was no data that really moved the
14:52
Speaker 1: needle between the time when the quiet period began and
14:56
Speaker 1: now that would chip us toward fifty Why do you
14:58
Speaker 1: think there wasn't more clue communication that this was a
15:01
Speaker 1: Federal Reserve ready to cut rates by fifty basis points.
15:07
Speaker 8: Well, Frankly, I don't think that Jay Powell, by the
15:09
Speaker 8: time the blackout period hit had the votes in his
15:11
Speaker 8: pocket to be able to do that, and I think
15:14
Speaker 8: we saw that in some of the mixed messages. Even
15:17
Speaker 8: the day of the blackout period, Chris Waller, governor on
15:20
Speaker 8: the Federal Reserve, had said, you know, you'd be open
15:22
Speaker 8: to a more aggressive rate cut, but he didn't seem
15:24
Speaker 8: to be really ready to do it. In September, we
15:27
Speaker 8: saw John Williams come out that same day and sort
15:30
Speaker 8: of talking about more cautious rate cuts, more of a
15:33
Speaker 8: quarter point kind of rate cuts. So they didn't telegraph
15:36
Speaker 8: it because he hadn't crowded the cats. But this really
15:40
Speaker 8: does speak to the fact that he does have an
15:42
Speaker 8: extraordinary ability to actually do just that.
15:45
Speaker 4: Let's get to this quote from no data of Runmack
15:48
Speaker 4: just down at the moment.
15:49
Speaker 2: Here's the issue.
15:50
Speaker 4: The balance of risks have changed and June most saret
15:52
Speaker 4: balanced risk to un employment. Right now this is completely
15:54
Speaker 4: flipped mostly risk to one employed skews to the upside.
15:57
Speaker 4: This will not be the last time we see a
15:59
Speaker 4: fifty in our opinion, Lacy, your thoughts.
16:02
Speaker 1: This is basically being priced into this year. I mean,
16:05
Speaker 1: how else do they get to more than one hundred
16:07
Speaker 1: basis points potentially by the end of this year. And
16:09
Speaker 1: if you think about it, it raises a lot of
16:12
Speaker 1: questions about what they are seeing that suddenly makes that
16:16
Speaker 1: such a consensus. Given that we've gotten a lot of
16:18
Speaker 1: mixed messaging.
16:19
Speaker 4: Let's head back to London and catch up with Bob
16:21
Speaker 4: Michael at JPMorgan Asset Management. Bob, I'm sitting there in cash.
16:24
Speaker 4: I've been sat here for a long time. You've been
16:26
Speaker 4: wanting me for a long time that I face real
16:28
Speaker 4: reinvestment risk. The fence just cut fifty and I'm freaking out.
16:31
Speaker 2: I give you a call.
16:32
Speaker 4: I'm now worried about another fifty and maybe another fifty
16:35
Speaker 4: after that. What are you buying on my behalf?
16:39
Speaker 7: We're telling clients just get into the bond market. Just
16:43
Speaker 7: get into a general bond fund. It could be an
16:46
Speaker 7: aggregate investment grade bond fund, could be a core plus
16:49
Speaker 7: bond fund. If you're in a high tax bracket, get
16:52
Speaker 7: into a general municipal bond fund. Yields are coming down.
16:56
Speaker 7: Yields are at this level with six point three trillion
17:00
Speaker 7: dollars in cash building up and most people not liking
17:04
Speaker 7: the bond market. Some buying has brought it down here,
17:08
Speaker 7: and this money will come in because they're going to
17:11
Speaker 7: watch the return on cash go down like power windows.
17:15
Speaker 1: I got to say, Muhammad, this goes to the point
17:17
Speaker 1: that you were making. I love your comments on this,
17:19
Speaker 1: this idea that the Fed was seeing something that ndeim
17:23
Speaker 1: shifts his view, and what we're seeing right now is
17:26
Speaker 1: that maybe he just didn't have the votes. I'm just
17:27
Speaker 1: trying to wrap my head around what that means going forward,
17:30
Speaker 1: that maybe they're going to be even more aggressive than
17:33
Speaker 1: the market previously thought, and that maybe it is appropriate
17:36
Speaker 1: to price in even more spread compression, even more yields
17:40
Speaker 1: going lower.
17:41
Speaker 6: So it would not surprise me if that is the
17:43
Speaker 6: market reaction. It would not surprise me at all, because
17:46
Speaker 6: the market has been conditioned to ask for more and
17:50
Speaker 6: more and gets more and more. So when't surprise me
17:53
Speaker 6: if that, If that is what happens, I will go
17:56
Speaker 6: back to the significant dispersion in people in FMC members
18:02
Speaker 6: view as to what the destination looks like, and that
18:06
Speaker 6: discussion has got to be reconciled over time. So I
18:08
Speaker 6: don't think it is as clear cut as the market
18:12
Speaker 6: will make it seem.
18:14
Speaker 5: Diane Swarck, I got eight ways to go here. Let's
18:17
Speaker 5: try this. You've got a wonderful reading of America away
18:21
Speaker 5: from three zip codes in Manhattan, the quadrants of Washington, DC.
18:26
Speaker 5: This rate cut, how does it affect America that are
18:29
Speaker 5: not the elites, not the people enjoying Nvidia to the moon.
18:36
Speaker 8: Well, this is really important because the rate cuts, the
18:39
Speaker 8: short term rate cuts, are what comes through on loans
18:42
Speaker 8: that consumers take out. This is beyond the mortgage rate situation.
18:46
Speaker 8: This also helps the mortgage rate situation obviously, but the
18:51
Speaker 8: real issue for consumers are short term interest rates and
18:55
Speaker 8: how they are priced on their debt. Now, on the
18:57
Speaker 8: credit cards, the average credit card rate is about twenty
18:59
Speaker 8: five percent. This is a rounding era on that. It's
19:02
Speaker 8: not going to help a lot on that. That's just
19:04
Speaker 8: incredible how high those rates are. But when you get
19:07
Speaker 8: into auto loans, when you get into other kinds of
19:10
Speaker 8: loans that consumers take in businesses, middle market through small businesses,
19:15
Speaker 8: it affects all those loans. And right now you can
19:18
Speaker 8: imagine a lot of people are going to get some
19:21
Speaker 8: relief in terms of that. Now, the good news is
19:24
Speaker 8: there's not a lot of overhang of debt for consumers
19:27
Speaker 8: and they can service the debt they've got. But for
19:30
Speaker 8: those lower income households that have already exhausted all of
19:33
Speaker 8: their savings and then some this is good news. They
19:37
Speaker 8: rely on lower rates to buy used vehicles. They can't
19:40
Speaker 8: even afford to buy new vehicles anymore. That goes right
19:43
Speaker 8: up into middle income households. So that's where we'll see
19:46
Speaker 8: some movement, but it's not immediate. You're not going to
19:48
Speaker 8: see that. Also understands there's legs and I think Muhammad
19:52
Speaker 8: Muhammad is right about the issue of the market front running.
19:57
Speaker 8: When the real message here is that this was not
20:01
Speaker 8: signaling that we're ready to cut cut, cut, cut, This
20:04
Speaker 8: is a window of opportunity to cut now catch up
20:08
Speaker 8: on July, that's important, But this isn't a signal that
20:12
Speaker 8: they're ready to go half percent, half percent, half percent
20:15
Speaker 8: sort of continuously. And the election is an uncertainty that
20:19
Speaker 8: is not factoring into the decision today, but it is
20:23
Speaker 8: an uncertainty in terms of policy for twenty twenty five
20:26
Speaker 8: and twenty twenty six, and that could change the trajectory
20:30
Speaker 8: for the Federal Reserve once that cloud of uncertainty regarding
20:34
Speaker 8: the election outcome in you as is lifted.
20:36
Speaker 2: I could not agree more.
20:37
Speaker 4: Dan, just one of the best, as always a clinic
20:39
Speaker 4: Dane swamp there of KPMG November seventh could be a
20:42
Speaker 4: very very different meeting if you are just joining us,
20:45
Speaker 4: Welcome to the program. Twenty five or fifty. We got
20:48
Speaker 4: fifty from this Federal Reserve. The outlook unclear. Ten out
20:52
Speaker 4: of nineteen officials favoring learning interest rates by at least
20:55
Speaker 4: an additional half point over the remaining two meetings of
20:57
Speaker 4: twenty twenty four, and the next meeting in twenty twenty
21:00
Speaker 4: four could be very interesting if we do indeed have
21:03
Speaker 4: in hand the outcome of the presidential election. Mattas eerdiodoutsche
21:07
Speaker 4: Bank joins us now for more. Matt, your first reaction
21:09
Speaker 4: to this one place, sir, we get fifty.
21:12
Speaker 9: Yeah, I think it's all about the messaging that we
21:14
Speaker 9: hear from Chair Powell about the reaction function as we
21:16
Speaker 9: look ahead, you know, as we were thinking through. If
21:19
Speaker 9: they go by fifty basis points, what does the communications
21:21
Speaker 9: challenge for them? I think it's two things. One, they
21:23
Speaker 9: have to project confidence in the economy, positivity in the economy,
21:27
Speaker 9: so they avoid a negative confidence signal. And then two,
21:31
Speaker 9: I think that they want to send a signal that
21:33
Speaker 9: this is not the new norm, that they're going to
21:35
Speaker 9: be ratcheting down at twenty five basis point increments. And
21:38
Speaker 9: as I look at that dot plot and the skew
21:40
Speaker 9: for this year, it does seem that there's a pretty
21:43
Speaker 9: strong kind of consensus around going twenty five basis points
21:45
Speaker 9: from here. I think eighteen out of nineteen dots showed
21:49
Speaker 9: only an expectation of two more twenty five basis point
21:51
Speaker 9: rate cuts are less, and so I think Powell can
21:54
Speaker 9: paint this as a one off. It was meant to
21:56
Speaker 9: right size monetary policy to a lower inflation environment, ensure
21:59
Speaker 9: that the real rate deprize too much, and to really
22:02
Speaker 9: show that kind of actions speak louder than words in
22:04
Speaker 9: providing confidence on the soft lanning, Matt.
22:06
Speaker 5: Lozzetti, The ten year real yield just printed below one
22:09
Speaker 5: point five zero to mean, that's a huge signal coming
22:13
Speaker 5: out of the pandemic. What does a diminished real yield
22:17
Speaker 5: do for American business, American finance and investment.
22:22
Speaker 9: Look, I think we should expect that the goal of
22:25
Speaker 9: this is to keep financial conditions easy, to ensure that
22:28
Speaker 9: financial conditions don't overtighten and put a soft landing in jeopardy.
22:32
Speaker 9: That is ultimately the legacy of chair Pal and I
22:34
Speaker 9: think that he took out some insurance against that. Today.
22:36
Speaker 9: I think that's a good outcome for the economy. Hopefully
22:39
Speaker 9: he can message it in that way, which is they
22:41
Speaker 9: have a positive outlook. This is not the starting of
22:43
Speaker 9: a fifty basis point cutting cycle. And I think if
22:46
Speaker 9: you get that soft lanning, prospects improve financial conditions ease,
22:49
Speaker 9: and we have a very good outcome for the economy.
22:51
Speaker 5: Matt.
22:51
Speaker 1: One of the stickiest areas of inflation has been a
22:54
Speaker 1: housing market, and what we've seen there has been recently
22:57
Speaker 1: an uptick in mortgage applications as well as just in
23:00
Speaker 1: general some of the Homelander stocks. How quickly could you
23:03
Speaker 1: see a transition from a market that is completely flat
23:06
Speaker 1: on its back, not shifting around moving at all, to
23:09
Speaker 1: one that is robustly priced, discovering to the upside with
23:12
Speaker 1: people given renewed confidence by lower rates.
23:17
Speaker 9: Yeah, you know, we got mortgage purchase applications this morning
23:19
Speaker 9: and they did show a tick up, more driven by
23:22
Speaker 9: refinancing activity than purchase activity. It does seem to be
23:25
Speaker 9: lagging a little bit to move in the mortgage rates
23:27
Speaker 9: so far. My own view is, I think that's driven
23:29
Speaker 9: by when you look at the University of Michigan or
23:31
Speaker 9: Conference Board, so many consumers expect rates to come down
23:34
Speaker 9: over the next year, and so that has to happen,
23:36
Speaker 9: and maybe as rate cuts happen, and as mortgage rates
23:39
Speaker 9: fall further, that really does unleash activity in the housing
23:41
Speaker 9: market that would present upside risks for the economy. You know,
23:44
Speaker 9: I think the reality is Q two growth was three percent.
23:48
Speaker 9: Q three growth is tracking near three percent. According to
23:50
Speaker 9: the Lanta Fed GDP, we look at consumer spending on
23:53
Speaker 9: a three month anualized rate. It's the highest that we've
23:55
Speaker 9: had since twenty eleven. We got a robust retail sales
23:58
Speaker 9: report this week, so you know, I think Chapell should
24:01
Speaker 9: present a picture where the underlying economy and fundamentals are
24:03
Speaker 9: resilient and strong here, but they were taking decisive action
24:07
Speaker 9: today to ensure that those outcomes continue.
24:09
Speaker 4: Hey, Matt, final round before you go. Question for the
24:12
Speaker 4: chairman in this news conference? What's your number one question?
24:16
Speaker 9: I think it's all about reaction function. So the fact
24:18
Speaker 9: that they went by fifty basis points today before seeing
24:21
Speaker 9: very weak outcomes for the economy will naturally raise questions
24:24
Speaker 9: in the market about what if you get a weaker
24:26
Speaker 9: job support, do they go by seventy five basis points
24:28
Speaker 9: or not? So I think it's all about the reaction
24:30
Speaker 9: function from here, and how does he respond to that?
24:33
Speaker 9: Does he kind of set a high bar either for
24:35
Speaker 9: another fifty basis point or even higher rate cuts?
24:39
Speaker 4: Manas Ddie at Deutsche Bank, Bob Michael JP Morgan assad
24:41
Speaker 4: Management still with us. Bob, you love asking this one too,
24:44
Speaker 4: so I'll ask it for you. What's your question for
24:46
Speaker 4: Mike mccainn this news conference? A little bit likester on
24:48
Speaker 4: this soufternoon.
24:50
Speaker 7: As the concept of an equal labrim long term neutral
24:56
Speaker 7: FED funds rate expire, do we need that any more?
25:00
Speaker 7: Shouldn't they be talking more in terms of a real
25:03
Speaker 7: Fed funds rate maybe minus one percent to plus three percent.
25:07
Speaker 7: I mean, for goodness sakes, in my career, I've seen
25:10
Speaker 7: the Fed funds rate at zero and twenty percent, So
25:14
Speaker 7: trying to target something like that is nonsensical to me.
25:18
Speaker 4: Hi, Bob got to catch up as always, Bob Michael
25:20
Speaker 4: at JP Morgan Asset Management, we get fifty from the
25:22
Speaker 4: Federal Reserve. The price action looks like this, up a
25:25
Speaker 4: half of one percent on the s and P five
25:27
Speaker 4: hundred in the last hour, Lisa printing a new old
25:30
Speaker 4: time high on the SMP.
25:31
Speaker 1: Which really is in line with what some people were expecting,
25:34
Speaker 1: although disappointment they did not get. If you want to
25:37
Speaker 1: take a look at whether this is a Fed that
25:38
Speaker 1: can outdove market expectations, it seems like they did. And
25:41
Speaker 1: the projections going forward really highlight how this market likes
25:44
Speaker 1: to run ahead of even where Fed pricing is. Just
25:48
Speaker 1: look at this. If you take a look at Fed
25:49
Speaker 1: fund future pricing, we're actually pricing in a four point
25:53
Speaker 1: one percent Fed funds rate to end this year, so
25:56
Speaker 1: we're talking about an additional almost one hundred basis of
26:00
Speaker 1: additional cuts from here one hundred and fifty basis points
26:03
Speaker 1: of cuts, which just again points to why a Dubvish
26:06
Speaker 1: fifty basis point cut has made a difference in this market.
26:09
Speaker 4: Mohammad, you alluded to this. If they go fifty, the
26:11
Speaker 4: pressure will build to go fifty again. Is that what's happening.
26:14
Speaker 6: That is what's happening. And the market loves this, and
26:17
Speaker 6: it's been the repeated conditioning of the market. Give it
26:21
Speaker 6: something it will want more.
26:22
Speaker 5: I look at this late in the press conference John,
26:26
Speaker 5: when we get to the political questions, like if I
26:28
Speaker 5: was to parachute John into the Alarian Institute of Behavioral
26:32
Speaker 5: Economics and.
26:32
Speaker 2: Policy, would you behave?
26:34
Speaker 5: The first I would behave? And the answer is there's
26:36
Speaker 5: two United Kingdoms out there, and there's two Americas out there,
26:40
Speaker 5: and he has to address within his neutrality and the
26:44
Speaker 5: political debate those two Americas. It's not just about Bob
26:47
Speaker 5: Michael and the portfolio and Park Avenue trying to figure
26:51
Speaker 5: out what to do next.
26:51
Speaker 2: How does he navigate some of those issues? Muhammad?
26:53
Speaker 4: How difficult is it to set policy for two very
26:56
Speaker 4: different experiences in this economy?
26:57
Speaker 6: It's very difficult. It's even more difficult when politicians are shouting,
27:01
Speaker 6: go seventy five or seventy five, Now it is really difficult.
27:04
Speaker 6: What's not clear to me is if he is actually
27:07
Speaker 6: buying insurance, what is the cost of that insurance? What
27:10
Speaker 6: is the downside of buying insurance? You know, insurance is
27:13
Speaker 6: hardly ever costless. So what is the downside of having
27:17
Speaker 6: brought insurance for the economy? And that's something we'll only
27:20
Speaker 6: find out over time.
27:21
Speaker 1: What's the cost of buying insurance for the economy but
27:24
Speaker 1: also for the FED and for its political independence and
27:28
Speaker 1: this reputation therein I just wonder if it's more difficult
27:31
Speaker 1: to make the decision now in November seventh, now that
27:34
Speaker 1: you've had this initial faithacy basis point rate cut and
27:36
Speaker 1: you have a market that's now saying, yeah, you could
27:38
Speaker 1: do another one in November.
27:40
Speaker 3: Yeah.
27:40
Speaker 6: And that was the argument all along, start in July.
27:44
Speaker 6: Don't get yourself in this situation, but it is what
27:46
Speaker 6: it is. And then now going to have to navigate this.
27:49
Speaker 6: I think power is going to be very clear. He'll
27:51
Speaker 6: say we are not impacted by political issues, just like
27:56
Speaker 6: he will say that he is blessed, to use his word,
27:59
Speaker 6: by loss of opinions from outside, but ultimately it's what
28:01
Speaker 6: they're deciding that.
28:02
Speaker 4: Room, and they will get lots of opinions after this one.
28:04
Speaker 4: In just a moment two minutes away, Chem and Pal,
28:06
Speaker 4: we'll walk into that room and give us a news
28:08
Speaker 4: conference for the next sixty minutes or so. We'll take
28:10
Speaker 4: that in its entirety on Bloomberg TV and on Bloomberg Radio. Lisa,
28:14
Speaker 4: things could be very different. On November seventh, we said
28:17
Speaker 4: that repeatedly. I don't think you can overstate it. Things
28:19
Speaker 4: could be very different. The outlook for twenty twenty five
28:22
Speaker 4: could shape up in a rather different way, dependent on
28:25
Speaker 4: what the complexion of Congress looks like, how divided things
28:28
Speaker 4: are in the nation's capital, and.
28:30
Speaker 1: Whether or not we even know at that point, as
28:32
Speaker 1: Amory likes to say, whether we have a decision just
28:35
Speaker 1: will be interesting. How much this is the three part act.
28:38
Speaker 1: We get the third part of the act coming up
28:40
Speaker 1: moments away. How he characterizes what this insurance policy is
28:45
Speaker 1: really for. Is this because they are seeing true weakening
28:48
Speaker 1: in a labor market that otherwise is kind of hanging
28:51
Speaker 1: in there, And that I think is one of the
28:52
Speaker 1: key questions.
28:52
Speaker 4: How do you expect him to frame it Is this
28:54
Speaker 4: a one off mid cycle adjustment, a wait and see,
28:57
Speaker 4: we'll regroup in November. Or is this the beginning a
29:00
Speaker 4: one way trip back towards what they think is neutral?
29:03
Speaker 1: Can it be both? I mean, right, is there basically?
29:05
Speaker 1: Can everyone have their cake and then eat it too?
29:08
Speaker 1: Because essentially you have inflation coming down and you have
29:11
Speaker 1: an economy that is in a trajectory that typically does
29:15
Speaker 1: lead to further weakening. Is it history that can actually
29:18
Speaker 1: make sense at a time that has defied a lot
29:19
Speaker 1: of historical precedence. It's going to be a really difficult
29:23
Speaker 1: one for him to really, it's.
29:24
Speaker 5: Going to be difficult because they're coming out of a
29:26
Speaker 5: pandemic and they're making it up every meeting and every
29:28
Speaker 5: day and every speech, gen as they go. They're making
29:32
Speaker 5: this up as they go. Today they catch up, maybe
29:35
Speaker 5: is the right way to put it. But the then,
29:37
Speaker 5: what of November and in the twenty twenty five is real?
29:41
Speaker 4: We sent the Oula Gray on that We've said this
29:42
Speaker 4: a few times. We've all been humbled for this pandemic
29:45
Speaker 4: and coming down the other side