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Instant Reaction: Fed Chair Kevin Warsh's News Conference · Bloomberg Intelligence

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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Speaker 2: This is a breaking news update from Bloomberg instant reaction
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Speaker 2: and analysis from our three thousand journalists and analysts around
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Speaker 2: the world.
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Speaker 3: I'm going to start with a quote from a lay
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Speaker 3: fed chair This one from Anna Greenspan.
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Speaker 2: I know you think you understand.
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Speaker 3: What you thought I said, but I'm not sure you
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Speaker 3: realize that what you heard is not what I meant.
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Speaker 3: I don't think anyone really understood much the last forty
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Speaker 3: five minutes in the market right now, still trying to
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Speaker 3: figure it out. The chairman talked about this market move
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Speaker 3: we've seen in between meetings. This market is playing the
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Speaker 3: ball and not the referee. Take a listen.
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Speaker 4: Nominal and real yields are materially higher across the treasury curve.
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Speaker 4: In fact, some of the increases in market interest rates
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Speaker 4: between FMC meetings are among the most significant in the
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Speaker 4: last last two decades. In the inter meeting period, market
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Speaker 4: attention centered on real data and real economic developments. Prices
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Speaker 4: reacted in real time to incoming information, and the reduction
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Speaker 4: in forward guidance may have been a factor. Market participants
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Speaker 4: are learning to play the ball, not the referee, and
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Speaker 4: market prices will continue to respond in the direction and
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Speaker 4: magnitude they see fit.
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Speaker 3: So it's the FED chair outsourcing monetment policy to the market.
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Speaker 3: And if it is, is this market starting to wonder
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Speaker 3: whether this FED will actually follow through the most important
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Speaker 3: part of this move today in this market, crossessor is
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Speaker 3: in the bond market.
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Speaker 2: Check this out.
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Speaker 3: Look at the yield curve two year yields questioning whether
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Speaker 3: this FED will actually follow through on an interest rate
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Speaker 3: high yields dropping at the front end by six basis points,
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Speaker 3: and with that questioning the conviction to actually do something
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Speaker 3: about the inflation that the chairman is telling you they
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Speaker 3: will do something about. Look at the longer end of
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Speaker 3: the yield curve, thirties untethered yields up by seven basis
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Speaker 3: points five p. Sixteen on thirties, Lisa, that's an interesting
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Speaker 3: market reaction to a FED share that for many was
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Speaker 3: confusing over the past forty five minutes.
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Speaker 5: Frankly, he came out said that he was really happy
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Speaker 5: to have the input of the market, but he wasn't
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Speaker 5: outsourcing the Fed's decision to the market. He talked about
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Speaker 5: these four goals, these deep questions that we talk about
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Speaker 5: every single day, but gave no conclusion as to direction.
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Speaker 5: You talked about a divided committee as not divided but
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Speaker 5: united in a determination to bring down inflation, and this
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Speaker 5: market said, you know what, we're going to call bs
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Speaker 5: on this, and you're not going to hike rates and
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Speaker 5: you're going to try to job on us, and you
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Speaker 5: think that we're going to do the job for you,
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Speaker 5: and so they're calling the bluff.
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Speaker 6: I would like us to extend the show to five PM. Frankly, John,
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Speaker 6: I know you got early hours tomorrow morning, but that
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Speaker 6: was in historic press conference. There was all sorts of
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Speaker 6: little tidbits there, and we've got wonderful guests to talk
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Speaker 6: to about this, but every sense of that was radically
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Speaker 6: different than anything we've seen in recent.
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Speaker 3: And allow me to quote another central banker, and this
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Speaker 3: is the FED governor on the board right now, Chris Waller,
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Speaker 3: going into the quiet period, he made this statement, Stanley's
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Speaker 3: staring at inflation until it mounts before our withering gaze
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Speaker 3: is not an option, Bramo, Is it an option?
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Speaker 5: So what I love from Renaissance and Macro from Neil
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Speaker 5: Duddy came over and he said, worsh judgment is this
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Speaker 5: is a period of watchful thinking. So I guess the
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Speaker 5: withering gaze is an option. Because ultimately, Kevin worsh could
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Speaker 5: not answer the question, if you still believe that inflation
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Speaker 5: is a problem, why did you not hike today? He
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Speaker 5: could not answer that question, what would make you hike?
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Speaker 2: Reaction function?
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Speaker 5: Reaction function is just guidance, is just a prediction hidden
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Speaker 5: in that?
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Speaker 7: Is that true?
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Speaker 5: No, it's an understanding of which data and what can
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Speaker 5: potentially make you pull the trigger. What I also think
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Speaker 5: was interesting he kept saying that the market is a
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Speaker 5: pure input into what the market believes, that the data
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Speaker 5: showing us no. And Neildta points this out too. It
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Speaker 5: was a reaction to Fed speeches. They were indicating they
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Speaker 5: were moving any more hawkish direction. This is very difficult
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Speaker 5: to say that this market is just playing the ball
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Speaker 5: and not the referee.
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Speaker 2: Three descents.
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Speaker 3: At this Federal Reserve meeting, Race kept unchanged the confusing
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Speaker 3: news conference for the past forty five minutes. Bramo, did
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Speaker 3: you nail it?
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Speaker 5: I missed and missed by twenty seconds. I believe no, no, no,
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Speaker 5: by by seventeenth.
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Speaker 3: On how much this news conference would last, I came
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Speaker 3: pretty close.
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Speaker 7: Forty five thirty two.
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Speaker 6: It was a forty five play the Ball from Caddyshack.
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Speaker 2: You're not sure where that quote is from? Play the Ball,
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Speaker 2: not the referee? Wow, Like, well, no, I think so,
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Speaker 2: from the world. Yeah, I think so.
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Speaker 6: It was from the rural.
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Speaker 2: Okay, all right?
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Speaker 6: Two?
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Speaker 3: Your yearlds down by seven basis points. Stopped to running
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Speaker 3: the program Towston's Slock of Apolo where it's around the
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Speaker 3: table Tilston, Good afternoon, for a big challenge for you, buddy.
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Speaker 3: First up, translate the last forty five minutes. What did
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Speaker 3: your land?
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Speaker 8: Well, the first observation is that pol action you also
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Speaker 8: had three descents in April, and you also have three
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Speaker 8: descents in December, so having descents is not unusual. That's
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Speaker 8: not a watsht thing. We also had that on the Powell.
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Speaker 8: But that being said, there's very little to hang your
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Speaker 8: hat on in the market. We didn't get any guidance
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Speaker 8: in any direction, and it was also a little bit
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Speaker 8: complicated to figure out what was the basis for the
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Speaker 8: decision today, in the sense of when Mike McKee asked, well,
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Speaker 8: what are we waiting for? We didn't get a clear
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Speaker 8: answer for what exactly are we waiting for? Which was
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Speaker 8: of course, was a subtle way to try to get
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Speaker 8: some forward guidance.
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Speaker 7: But this is the part of the challenge.
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Speaker 8: We're not delivering forward guidance that when Mike and others
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Speaker 8: ask about what is it that you're watching, what exactly
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Speaker 8: should we be watching, then the answer is that we're
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Speaker 8: not really giving any guidance and the market can figure
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Speaker 8: it out on their own.
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Speaker 3: The price for that is volatility, and you could see
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Speaker 3: that in the swing in the market over the last
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Speaker 3: hour or so. Equities were positive, if they turned negative again,
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Speaker 3: bring up the bondboard if we can, and just look
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Speaker 3: at twos, tens, and thirties. This move in the yield
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Speaker 3: curve toss And I'd love to get your reaction to this,
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Speaker 3: because you were watching this closely throughout the news conference,
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Speaker 3: this move of the front end and how it informs
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Speaker 3: this move at the long end of the curve.
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Speaker 8: Well, what was interesting was that tenure rates really went
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Speaker 8: up and down like a yo yo better part of
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Speaker 8: the conference.
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Speaker 7: That's a little bit unusual.
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Speaker 8: Normally ten ure rates take a step either up or
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Speaker 8: down as we move forward in the press conference. But
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Speaker 8: the fact that there was such a swing it is
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Speaker 8: also telling you that markets are trying to figure out
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Speaker 8: are they hiking at the next meeting. So yes, from
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Speaker 8: Futures are saying now there's a seventy percent chance that
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Speaker 8: they will hike at the next meeting. But what was
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Speaker 8: also the interesting question is when he was asked about, well,
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Speaker 8: if markets are not predicting, say eighty percent ninety percent
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Speaker 8: chance of a hike going into a meeting, are you
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Speaker 8: going to deliver on that, And the answer was no,
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Speaker 8: we're not going to deliver on that. It will all
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Speaker 8: be contingent on the debate that we're having, and markets
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Speaker 8: may be pricing what they're pricing, but we're still going
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Speaker 8: to go with just what the committee is thinking. So
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Speaker 8: in that sense, the market pricing in some sense is helpful.
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Speaker 8: But at the same time, we in markets can't really
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Speaker 8: even rely on that if pictations are saying we're getting
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Speaker 8: a hike at the next meeting, that we are actually
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Speaker 8: getting a hike.
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Speaker 5: What this market is saying right now is that he's bluffing,
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Speaker 5: because if you take a look at it, it was
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Speaker 5: seventy percent chance of a September rate hike. Now it's
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Speaker 5: fifty percent chance of a September rate hike, and dropping
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Speaker 5: in real time. How much do you view the thirty
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Speaker 5: is the real tell in terms of what the market
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Speaker 5: is taking from this fad, which is potentially you're not
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Speaker 5: going to hike rates and you're going to hope that
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Speaker 5: job owning is just going to.
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Speaker 6: Do the job.
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Speaker 8: Yeah, because thirty r rates are basically saying, if you're
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Speaker 8: not hiding rates, then we are hiking rates. And that's
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Speaker 8: why thirty hour rates have just made it much more
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Speaker 8: expensive to borrow to buy a house. And as a
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Speaker 8: result of that, financial conditions are tightening. And he didn't
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Speaker 8: tighten financial conditions, but the market decided to say, well,
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Speaker 8: then we think it's time to tighten financial And.
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Speaker 6: John, I know you've got a question. The key thing
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Speaker 6: to meet John is thirty yr rates. Five twenty is
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Speaker 6: a key print. We're at five seventeen. Five twenty is
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Speaker 6: an OMG print.
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Speaker 3: The price of volatility is that what we're learning, the
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Speaker 3: price of reducing guidance, reducing communication, being very very unclear
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Speaker 3: about what on earth they're going to do with policy,
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Speaker 3: and we pin the price this morning, in this afternoon.
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Speaker 8: But that's why the task forces will be very very
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Speaker 8: interesting because they will certainly also on their communication task force.
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Speaker 8: They will have to discuss what is the best approach.
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Speaker 8: Is it the best approach to have no forward guidance?
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Speaker 8: Is it a better approach to have forward guidance. If
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Speaker 8: you do not have forward guidance, you do have more volatility.
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Speaker 8: But in fairness to Kevin Watsh's point, it did say that, well,
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Speaker 8: when we don't say anything, Margat's reacting to the data
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Speaker 8: as we go along. But the risk, of course is
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Speaker 8: that if de marget is only reacting to some data,
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Speaker 8: that then also needs to be resolved in the task
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Speaker 8: force on communication, namely, is that the right way to
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Speaker 8: do it because it runs the risk, as you're saying, John,
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Speaker 8: that you will get had mobile.
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Speaker 7: It's Citizy Turist's thrilled.
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Speaker 6: To have you here with this really odd press conference.
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Speaker 6: There was a bombshell in there where he went back
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Speaker 6: to twenty fourteen and a paper he did on the
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Speaker 6: Lucas critique. It's just slipped in there for a second,
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Speaker 6: but to academic economists that is a bombshell. What he said,
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Speaker 6: and what he's basically saying is the distrust that Robert Lucas,
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Speaker 6: the laureate had of models. Are we you know, I
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Speaker 6: think I Claudia, Sam Lisa, you mentioned this earlier, the
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Speaker 6: idea of reaction functions. Is this a new almost model
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Speaker 6: free federal reserve away to Lucas and even away from
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Speaker 6: the giant Olivia Blanchard.
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Speaker 8: It does lean into the Chicago stand for a school
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Speaker 8: of thinking Nami that when you have a policy that
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Speaker 8: you're changing, you should not run regressions and look historically
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Speaker 8: at the data up to where we are now, because
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Speaker 8: the change in the policy is going to change how
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Speaker 8: people say a new model.
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Speaker 6: Then is there a new fresh Worsh model we need
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Speaker 6: to discover?
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Speaker 8: Yeah, because I think he's saying that you can't just
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Speaker 8: look at all the models that look back, because when
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Speaker 8: we are now changing policy, then forward looking people are
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Speaker 8: going to change behavior.
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Speaker 6: And how do you determine an inflation rate? A process?
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Speaker 6: If you take dsge Richard Claire to Girdler Brown, if
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Speaker 6: you take the mathematics of that, throw it out the
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Speaker 6: window for this show. But the bottom line is inflation
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Speaker 6: is the measurement we use. How will we measure inflation
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Speaker 6: with a new Worsh Lucas model?
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Speaker 7: But that's exactly right, Tom.
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Speaker 8: That's why if you don't have the models that look
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Speaker 8: at the latest data, then what are you then looking at?
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Speaker 8: What are you then relying on for forecasting what inflation
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Speaker 8: will do going forward? So in other ways, if I'm
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Speaker 8: not allowed to look backwards and say this is where
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Speaker 8: the data is coming from, and the trend is whatever,
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Speaker 8: this or that, well, then what am I then.
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Speaker 7: Using as the guidepost?
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Speaker 8: I was thinking about what inflation will do going forward?
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Speaker 3: Basis point move on thirties there it is well most
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Speaker 3: time by eleven basis points and closing in on five nineteen.
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Speaker 3: I'm thinking of all the people that would be unhappy
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Speaker 3: with this news conference in the last sixty minutes. Forget
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Speaker 3: market participants. Imagine being at the Treasury right now and
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Speaker 3: you're Scott Besson and you're seeing yields go higher on tens,
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Speaker 3: materially higher on thirties. And then I'm thinking about the
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Speaker 3: others on the committee. I'm not an establishment guy. I'm
10:28
Speaker 3: very very happy to blow things up and have a
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Speaker 3: new era. I've got no problem with that. I'm open
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Speaker 3: to new ideas. But I just wonder how offended some
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Speaker 3: of the sitting officials might be by how patronizing much
10:40
Speaker 3: of that news conference was over the last sixty minutes.
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Speaker 8: Well, it's clear that the sitting committee that he came
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Speaker 8: into had already thought about basically all areas of the
10:48
Speaker 8: task forces before.
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Speaker 7: So it's clear that the market.
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Speaker 8: Here is saying, well, if we now are getting a
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Speaker 8: day with a no hike, well then the long end
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Speaker 8: of course is moving, basically telling you that, well, this
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Speaker 8: is all about credibilite. Are you really going to follow
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Speaker 8: through on inflation? And that's of course the thing that
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Speaker 8: THEFMC needs to go home and think about. Now. The
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Speaker 8: market reaction speaks very clearly that now we need to
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Speaker 8: talk about what is the credibility of the committee because
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Speaker 8: it cannot only be talk.
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Speaker 7: You will eventually have to follow through.
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Speaker 8: And that's why the probability, given this market reaction now
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Speaker 8: has gone up quite significantly that they will have to
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Speaker 8: move at the next meeting.
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Speaker 2: But this is really important.
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Speaker 5: In other words, you're saying that the reaction the long
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Speaker 5: en of the yield curve has a challenge the credibility
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Speaker 5: of this federal reserve and will force their hand that
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Speaker 5: if they do not hike grate since September, you will
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Speaker 5: see some sort of unmooring of long term yields.
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Speaker 8: Yeah, because The risk is if you keep on just
11:35
Speaker 8: talking tough, tough, tough, and therefore markets end up saying, well,
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Speaker 8: this is just a lot of talk and you don't
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Speaker 8: deliver on that tough talk. The risk is of course
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Speaker 8: that the long end will say, well, if you don't deliver,
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Speaker 8: we worry that you implicity allow inflation to be higher
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Speaker 8: despite the talk about not allowing inflations to be higher,
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Speaker 8: and that is indeed a question about the ultimate credibility.
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Speaker 7: Is the committee ready to vote next time?
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Speaker 8: This was not only Kevin wash This was nine members
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Speaker 8: who voted to keep interest rates at this meeting. So
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Speaker 8: at the next meeting many of them must look at
12:03
Speaker 8: the reactions today and come to the conclusion, if we
12:05
Speaker 8: want to keep our curitybigency, we do have to move
12:08
Speaker 8: to make sure that inflation comes down and therefore ultimately
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Speaker 8: long rates also begin to go down.
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Speaker 3: Michael McKay was in the room. Our colleague joins us
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Speaker 3: snap for more from Washington, d C. Michael McKay, we'd
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Speaker 3: love your review of the last sixty minutes. What's the
12:19
Speaker 3: big tank?
12:19
Speaker 6: Kawai?
12:20
Speaker 9: I think it's very similar to yours. A lot of words,
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Speaker 9: not much information, and the FED chair leaves with markets
12:26
Speaker 9: probably going the wrong way from what he would like
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Speaker 9: to see at this point. The thing he wouldn't answer
12:33
Speaker 9: is what they actually did today. He talked a lot
12:36
Speaker 9: about talking, but when are they actually going to do something,
12:39
Speaker 9: whether it is acknowledging that the three and a half
12:43
Speaker 9: to three seven five rate range is adequate for the
12:47
Speaker 9: job they want, or it's not and they need to
12:51
Speaker 9: raise interest rates, And there was no acknowledgment of what
12:54
Speaker 9: the case was really on either side. It was a
12:56
Speaker 9: lot of talk about while we're talking, and that don't
13:00
Speaker 9: get the markets anywhere, and people aren't going to be
13:02
Speaker 9: very happy with what they heard.
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Speaker 3: I think, Mike, there was an interesting exchange and you
13:06
Speaker 3: were part of it too when he was asked why
13:08
Speaker 3: didn't you raise interest rates and he basically said, well,
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Speaker 3: I think rates did rise, and he talked about the
13:13
Speaker 3: move in the last forty two days, and Mike, rates
13:16
Speaker 3: rose because for many people they thought this FED might
13:19
Speaker 3: follow through on the data that we've been seeing over
13:22
Speaker 3: the subsequent few weeks, follow through on some of the
13:26
Speaker 3: FED speak that we'd seen from the likes of Walla,
13:28
Speaker 3: the likes of Hammack and others too, and Mike and
13:30
Speaker 3: then it got to this moment where I just thought, Okay,
13:33
Speaker 3: is the FED share outsource in monetary policy to the market,
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Speaker 3: And if he is, but I don't think he's going
13:38
Speaker 3: to hike interest rates. We'll take all that back and Mike,
13:40
Speaker 3: then we see this move in the bond market, and
13:42
Speaker 3: I don't want to have made too much of a
13:43
Speaker 3: big deal of this move. We can take it back
13:44
Speaker 3: tomorrow and the next week or so, but it's material.
13:47
Speaker 3: You're up eleven basis points at the long end of
13:49
Speaker 3: the curve on thirties. And Mike, the conversation we're having
13:51
Speaker 3: around the table, do you believe that is a market
13:55
Speaker 3: beginning to question the credibility of this institution.
14:00
Speaker 9: I don't know if that's necessarily true because it's still
14:02
Speaker 9: so early in his chairmanship, but it is an indication
14:07
Speaker 9: that the market disagrees with what the FED is doing.
14:10
Speaker 9: The market thinks at this point that interest rates should
14:12
Speaker 9: be higher. And whether or not you believe it's because
14:16
Speaker 9: they're only looking at the data, it is telling the
14:21
Speaker 9: market something that data.
14:22
Speaker 2: I suspect that the markets are still.
14:25
Speaker 9: Looking at the data and putting it in context of, well,
14:28
Speaker 9: what's the FED going to do?
14:29
Speaker 6: About it.
14:29
Speaker 9: Because the FED controls the benchmark lending rate for the country.
14:33
Speaker 9: The markets don't. The markets react, the markets move around,
14:36
Speaker 9: but the benchmark rate is going to be set by
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Speaker 9: the Fed, and the Fed is going to be reacting
14:40
Speaker 9: to the conditions in the economy. And we got nothing
14:43
Speaker 9: on what he thought the conditions in the economy are
14:46
Speaker 9: or would be. And we got nothing basically on why
14:50
Speaker 9: the markets might be right or wrong and whether that's
14:53
Speaker 9: an adequate response, an adequate measure to keep inflation under control.
14:59
Speaker 2: Thank you about it.
15:00
Speaker 3: These comments from the president certainly want how so, we've
15:02
Speaker 3: got the White House review of things they've just published.
15:04
Speaker 3: This is from the president. Kevin Walsh is fantastic. Wash
15:08
Speaker 3: has a board. It's a political one. Wassh would love
15:11
Speaker 3: to see lower interest rates. Given the move we're seeing
15:14
Speaker 3: on the screen right now, thirty yields up by eleven
15:17
Speaker 3: basis points. Those comments from the President this afternoon will
15:21
Speaker 3: not help.
15:22
Speaker 5: Thirty year yields have just broken through the highest levels
15:24
Speaker 5: going back to two thousand and seven. Just to give
15:26
Speaker 5: you a sense right now of the bond vigilanteism that
15:28
Speaker 5: you're seeing in bond markets, because they are seeing a
15:31
Speaker 5: more potentially politically motivated, not necessarily that being the case,
15:36
Speaker 5: but given the lack of clarity, a lot of circular talk,
15:40
Speaker 5: the lack of any kind of straight answers about reaction function,
15:44
Speaker 5: are exactly why they remained on hold. And then the
15:46
Speaker 5: president's comments are not a good brew.
15:49
Speaker 3: For this particular lime Attol and Bremo to your point,
15:51
Speaker 3: I think we're both on the same page about this.
15:53
Speaker 3: I don't believe that Kevin Wassh is doing the president's
15:56
Speaker 3: bidding right now. He's widely backed by several establishment figures
16:00
Speaker 3: when he got the nomination for this job.
16:01
Speaker 2: I'm thinking of one.
16:02
Speaker 3: I can't think of anyone more establishment than Mark Calmy,
16:05
Speaker 3: the Canadian Prime minister, who gave him a pretty fantastic
16:09
Speaker 3: endorsement when he got selected for the position. I don't
16:11
Speaker 3: think he's doing the president's bidding, but the optics of
16:14
Speaker 3: it absolutely stink. When you have a problem with inflation
16:17
Speaker 3: and you're saying you're committed to doing something about it,
16:20
Speaker 3: but don't follow through and then highlight the market that's
16:22
Speaker 3: doing the work for you, and now the market is
16:24
Speaker 3: beginning to push back, and at the same time, the
16:25
Speaker 3: President's putting out words saying that this is actually what
16:29
Speaker 3: Kevin Wassh wants.
16:29
Speaker 2: The optics of that, the backdrop for it not.
16:32
Speaker 5: A good one, and conflicting the idea of a FED
16:35
Speaker 5: funds rate with the market rate, and saying that there
16:38
Speaker 5: was something that happened and that we have done something
16:40
Speaker 5: because that moved the market, saying we're not that silly,
16:44
Speaker 5: we're not that ignorant.
16:45
Speaker 2: We know how this is done.
16:46
Speaker 5: It was an anticipatory It was an anticipatory market and
16:50
Speaker 5: if you're not going to make good on that, we're
16:51
Speaker 5: going to call your bluff.
16:53
Speaker 6: Jen, this is an historic more. But the charts I'm
16:55
Speaker 6: seeing on the screen right now, John, I've never seen
16:58
Speaker 6: this is basically was called a rever vers operation twist
17:01
Speaker 6: in real time. We've never seen it in what's key here?
17:05
Speaker 6: Which tourist and I know you've got Stephanie Roth and Deeck.
17:08
Speaker 6: The first and second derivatives of this move have to
17:11
Speaker 6: be digested by a huge body of the American economy.
17:16
Speaker 6: Let's just start with a housing market as just one example.
17:19
Speaker 3: Well, let's just start with what we thought this was
17:21
Speaker 3: all about. There was a belief that we were reducing
17:24
Speaker 3: forward guidance so that we could introduce some volatility into
17:27
Speaker 3: the front end of the curve, which would help cap
17:30
Speaker 3: longer end yields. That you'd start to be more uncertain
17:33
Speaker 3: about what this fed might do, but in a different
17:35
Speaker 3: way that maybe the outcome would be more hawkish than
17:38
Speaker 3: it would have been otherwise. And what we saw more recently, Lisa,
17:41
Speaker 3: was that dynamic people were talking about it. This would
17:43
Speaker 3: contribute to longer yields over time at the longer end
17:46
Speaker 3: of the curve, lower yields over time.
17:49
Speaker 2: That's not what you see this afternoon.
17:50
Speaker 3: When you drop by five basis points at the front
17:53
Speaker 3: end and you are seeing a move of eleven at
17:56
Speaker 3: the long end through five twenty on thirties.
17:59
Speaker 2: That's not good. But that is not the outcome people
18:01
Speaker 2: we're looking for. No volatility.
18:03
Speaker 5: If you truly are potentially on the fence and are
18:05
Speaker 5: going to move, is one thing. But if you've got
18:07
Speaker 5: a parent who's saying, if you do that again, I'm
18:09
Speaker 5: going to turn the car right around and go home,
18:10
Speaker 5: and the kids keeps doing that, and the parent keeps
18:13
Speaker 5: driving straight to go to the amusement park, well guess what,
18:15
Speaker 5: the kid's going to keep goofing around in the back seat,
18:17
Speaker 5: and that's what's going to keep happening, because ultimately, if
18:19
Speaker 5: you don't believe that they're actually going to do anything,
18:22
Speaker 5: why should you start to prepare and price that in.
18:24
Speaker 2: That right there, that's experience, take case, that's experience. That's
18:27
Speaker 2: whys real world experience.
18:29
Speaker 6: When you're driving and you lean over to.
18:34
Speaker 2: More than one need to have.
18:38
Speaker 3: Definitely, Wroth of Wolf Research joins a snaff and more. Stephanie, welcome.
18:41
Speaker 3: It's a confusing one. Sometimes this is straightforward. The last
18:45
Speaker 3: hour is anything. But what's your take away?
18:47
Speaker 10: Yeah, I mean, I think markets just don't believe them.
18:49
Speaker 1: The thing is, I do think that the FED will
18:51
Speaker 1: ultimate that the data will ultimately bail out the FED
18:53
Speaker 1: to some extent, because the market saying we don't believe
18:56
Speaker 1: that the FED is necessarily going to be hiking in September,
18:59
Speaker 1: you know, the raises his inflation expectations. That does exactly
19:02
Speaker 1: the opposite of exactly what worsh had set out to do.
19:04
Speaker 10: Today. If we do end up seeing inflation data come
19:07
Speaker 10: in a little bit softer, that might bail him out.
19:09
Speaker 1: He's basically rather than doing latchful thinking, he's really doing
19:12
Speaker 1: wishful thinking. If the data ends up coming in line
19:14
Speaker 1: with his side. This may all work out, but if not,
19:17
Speaker 1: it could end pretty poorly.
19:18
Speaker 5: You said his side, and this is important, Stephanie. It
19:21
Speaker 5: seems like the takeaway is that Kevin worsh is much
19:24
Speaker 5: more dubbish than people previously thought. Do you think that
19:26
Speaker 5: that's the correct interpretation.
19:28
Speaker 7: Yeah.
19:28
Speaker 1: I think he didn't want to say anything because he
19:30
Speaker 1: didn't want to make it clear that he is, you know,
19:33
Speaker 1: in favor of staying unfold.
19:34
Speaker 10: He wants to make to have markets do the work
19:37
Speaker 10: for him.
19:37
Speaker 1: The problem is, like you all were talking about earlier,
19:40
Speaker 1: that might have worked up until now being at being
19:43
Speaker 1: following what we've heard today, the markets are going to
19:45
Speaker 1: be the exact opposite.
19:46
Speaker 10: And then what is he going to say in September?
19:47
Speaker 1: So I think this is the market realizing that the
19:51
Speaker 1: first FMC was him trying to establish credibility, trying to
19:54
Speaker 1: come across as hawkish, and now Marcus are just not
19:57
Speaker 1: buying it.
19:58
Speaker 6: Tursted Sluck. I've got the thirty year at a five
20:00
Speaker 6: point two zero rounded up to five point two to one.
20:03
Speaker 6: We can do that this late in the day. I
20:06
Speaker 6: have us moved into thirty years old. I'm up to
20:08
Speaker 6: standard deviations. How will finance obviously your good people will apollow,
20:14
Speaker 6: but how will finance adapt to what they heard, adapt
20:18
Speaker 6: to this reverse twist? I've never seen it? How do
20:21
Speaker 6: you adapt tomorrow morning?
20:23
Speaker 8: Well, this is a very historic day in the sense
20:25
Speaker 8: that we have seen a very significant steepening of the
20:27
Speaker 8: curve that is quite dramatic. I'm trying to think back
20:30
Speaker 8: when we've ever seen like twenty basis points move in
20:32
Speaker 8: the curve in this deepness like this.
20:34
Speaker 7: It is really unusual.
20:35
Speaker 8: And the answer to your question is that there's sensitive
20:37
Speaker 8: components of GDP that are interest sensitive. Of course, housing
20:40
Speaker 8: and autos will probably continue to struggle. They have struggled
20:44
Speaker 8: for quite some time when interest rates up in high
20:46
Speaker 8: but the tailwinds to growth coming from AI spending, coming
20:48
Speaker 8: from the one pepot of a bill coming from the
20:50
Speaker 8: home shoring, those things will still continue to see tailwind
20:53
Speaker 8: That's why we might get in the next half hour
20:56
Speaker 8: when the news come from both the hyperscalers today and tomorrow.
20:59
Speaker 8: This would also create more volatility because that will also
21:01
Speaker 8: begin to become a macro event. If that does begin
21:03
Speaker 8: to send signals around what is the outpoot for the
21:06
Speaker 8: broad economy, especially around the data center.
21:08
Speaker 3: Build out Tustin, Can we talk about the price of
21:10
Speaker 3: the data center build out and the capital raising that
21:13
Speaker 3: we're saying worldwide right now, thirty eight yields up eleven
21:16
Speaker 3: basis points. That's before we even find out the capex
21:19
Speaker 3: and tentions of some major companies in the next twenty
21:21
Speaker 3: four hours or so. How much price heer does the
21:24
Speaker 3: cost of capital get with this federal reserve.
21:27
Speaker 8: Well, that's exactly the discussion because not only, of course,
21:29
Speaker 8: have spreads on hyperscalers widen out and CDs as also
21:32
Speaker 8: widened out.
21:32
Speaker 7: Now the base rate has also moved up and in this.
21:34
Speaker 8: Case actually much more than spreads and widen out, So
21:37
Speaker 8: they're all in yield for financings. Of course, in the
21:40
Speaker 8: public market for hyperscalers have definitely increased quite significantly. The
21:44
Speaker 8: issue now becomes, well, if your returns in ai I
21:47
Speaker 8: expect it to be like ten fifteen percent or higher, Well,
21:50
Speaker 8: then these things are relatively small peanuts relative to the
21:52
Speaker 8: big picture of the returns that are going to come along.
21:55
Speaker 8: But ultimately that discussion is all about the economics one
21:58
Speaker 8: on one, namely, what is the marginal revenue you expect
22:00
Speaker 8: to generate and what is the module cost of producing
22:03
Speaker 8: that piece of revenue.
22:04
Speaker 7: So, for compute, the debate is.
22:06
Speaker 8: Around, well, now that rates have gone up and all
22:08
Speaker 8: in yields have gone up, is the case that we're
22:11
Speaker 8: reaching a level of all in yields or all in
22:13
Speaker 8: cost of capsule that's beginning to become more problematic for
22:15
Speaker 8: the hyperscaler.
22:16
Speaker 7: So far that has not been the case.
22:18
Speaker 8: But the question is, of course, over the next twenty
22:20
Speaker 8: four hours whether we get any either confirmation that that's happening,
22:23
Speaker 8: or whether we in the contrary, beginning to see still
22:26
Speaker 8: more upside risks to more data center build out just continuing.
22:30
Speaker 2: And this is the reason why.
22:31
Speaker 5: And Stephani, I'd love your thought and what Torsen said
22:33
Speaker 5: earlier that all of this is not a virtuous cycle
22:36
Speaker 5: and it's not something that FED wants to see. And
22:38
Speaker 5: so Torsen was saying that he thinks that the probability
22:40
Speaker 5: of a September rate hike is even greater now to
22:43
Speaker 5: try to control the long end of the yield curve
22:45
Speaker 5: and prevent this sort of higher borrowing costs for some
22:48
Speaker 5: of these hyperscalers in the build out.
22:50
Speaker 2: Do you agree with that, I.
22:52
Speaker 10: Mean, I do if the data don't improve.
22:53
Speaker 1: So if we're sitting here in September and the data
22:57
Speaker 1: just continue to remain firm, especially on the inflation side,
23:00
Speaker 1: also on the growth in the kepex data in terms
23:02
Speaker 1: of capa AI related catbec just continuing to move higher,
23:07
Speaker 1: then yeah, absolutely that increases the odds that they're going
23:09
Speaker 1: to ultimately be hiking.
23:11
Speaker 10: I do think that we'll see seasonality and the inflation.
23:13
Speaker 1: Data and a bit of a cooling such a thing
23:17
Speaker 1: that this may all work out, such as that doesn't
23:19
Speaker 1: actually have to cut September, and in that environment, it
23:23
Speaker 1: will do so in an environment that's a little bit
23:25
Speaker 1: more market friendly. But if that forecast is wrong, then
23:27
Speaker 1: absolutely they're going to This makes them even more likely
23:30
Speaker 1: to have to be cutting in September, because it tells
23:32
Speaker 1: you that they're making a policy mistake.
23:33
Speaker 6: I look at this moment, John, of course, I got
23:35
Speaker 6: to go to the quality, full faith, and credit documents.
23:38
Speaker 6: SpaceX is thirty year bond six point sixty five percent.
23:42
Speaker 6: We're enjoying it at seven point eight percent right now,
23:45
Speaker 6: not quite through a new low. But again, the mystery
23:48
Speaker 6: to me is the permeation of this through Wall Street.
23:51
Speaker 6: It's not just about Fom's Lucas critique and all that.
23:55
Speaker 6: What does this do to Wall Street?
23:57
Speaker 2: Starting in Asia here in X number of hours and SpaceX.
24:00
Speaker 3: So they came out with the dead issue in the
24:02
Speaker 3: last month or so, and the demand was softer, below average,
24:07
Speaker 3: and then we had Amazon follow up TK and concessions
24:09
Speaker 3: were larger, and then you start to see spreads widen
24:12
Speaker 3: out in the secondary market to across a number of
24:15
Speaker 3: tech names as well. Tom and We've been talking about
24:17
Speaker 3: this dynamic for a while, the crowding out of the market,
24:21
Speaker 3: that there is a race to raise capital, and that
24:24
Speaker 3: we've been worrying about the additional supply coming from the
24:27
Speaker 3: treasury for the best part of fifteen twenty years.
24:31
Speaker 2: The deficit.
24:32
Speaker 3: It was okay at the time because not everybody else
24:35
Speaker 3: was doing the same thing. Now we talked about this
24:38
Speaker 3: already earlier in the program. Germany has gone away from
24:40
Speaker 3: fiscal prudence to borrowing and spending. Germany has moved onto
24:44
Speaker 3: something else. Japan has as well. They've had decades of deflation.
24:47
Speaker 3: They now have inflation anchors away there for that bond
24:50
Speaker 3: market yields up. We've now got the hyper scalers moving
24:53
Speaker 3: away from buying their own equity to negative free cash
24:57
Speaker 3: flow and now issuing equity and issuing debt. That's a
24:59
Speaker 3: di supply here, there, and everywhere and every way you look.
25:02
Speaker 3: Right now, there are increased capital demands. So to have
25:05
Speaker 3: the fed chare perform in the way he has in
25:07
Speaker 3: the last sixty minutes to see the market reaction to
25:11
Speaker 3: that that's led to high yields at the long end
25:13
Speaker 3: at a curve. To have that in this moment laser
25:16
Speaker 3: things get tied to, things get harder, and yields go up,
25:20
Speaker 3: and the price for capital gets more expensive.
25:22
Speaker 5: The value of the dollar on the global stage goes down,
25:24
Speaker 5: and we're seeing that in a pretty big way. It
25:26
Speaker 5: is notable to see the long end of the yield
25:28
Speaker 5: curve in particular perform this way. And has Torsen made
25:30
Speaker 5: a good point about the hyperscalers. They have been issuing
25:33
Speaker 5: disproportionately at the long end of the yield curve. They
25:35
Speaker 5: have issued more on the long end than the US government,
25:37
Speaker 5: And you have to wonder how much this is going
25:40
Speaker 5: to constrain some of the productivity and the virtuous aspects
25:43
Speaker 5: of what a lot of people are expecting and prolong
25:46
Speaker 5: the uncomfortable mismatch period that he was talking about.
25:49
Speaker 8: That's also the additional challenge that if you take your
25:51
Speaker 8: textbook out and interest rates go up in the long end,
25:54
Speaker 8: the dollars should be going up. So that's why you're
25:56
Speaker 8: in now beginning to ask, well, the's a dollar and
25:57
Speaker 8: our beginning to react to front end rates.
26:00
Speaker 7: It is long end that moves the dollar most.
26:02
Speaker 8: So that's a lot of considerations also around why is
26:04
Speaker 8: the dollar going down so much at the same time
26:07
Speaker 8: while short rates are moving down and long rates are
26:09
Speaker 8: moving up.
26:10
Speaker 3: Stephanie, in the next two weeks will all be very
26:13
Speaker 3: focused on the Fed Speak. We were calling this a
26:16
Speaker 3: three part act all day. The statements one act, the
26:20
Speaker 3: news conference is another. It was quite an act. The
26:23
Speaker 3: third act is going to be the speeches of all
26:25
Speaker 3: the officials that haven't had their say yet. What are
26:29
Speaker 3: you looking for from the Fed speak in the coming weeks.
26:33
Speaker 1: Yeah, so we're certainly going to hear from those that descended,
26:35
Speaker 1: why did they dissent? Because worst certainly didn't really answer
26:38
Speaker 1: that question, So we'll here, we'll certainly hear that argument.
26:42
Speaker 1: And I'm going to be looking for you know, eventually
26:45
Speaker 1: in the next speech by Waller, because that's going to
26:47
Speaker 1: give us a sense of what did the core of
26:48
Speaker 1: the committee actually, what is he thinking. He's been amongst
26:52
Speaker 1: the most transparent and represents more of the middle folks
26:55
Speaker 1: on the committee, and that's going to give us a
26:57
Speaker 1: much better sense of what are they thinking, what are
26:59
Speaker 1: they leaning, and what does he think about what price
27:01
Speaker 1: action is doing? Because he is somebody who's very willing
27:04
Speaker 1: to give his reaction function and his thoughts on what
27:07
Speaker 1: markets and the data are going to do.
27:08
Speaker 6: That's right where I wanted to go. Stephanie Tourresten Slock.
27:11
Speaker 6: How does chairmansh react to what we're seeing on the
27:15
Speaker 6: screen the data And the fact is he's going to
27:19
Speaker 6: have to amend the way he speaks the concepts he
27:22
Speaker 6: speaks the McKinsey mba of it and talk to academic economists.
27:27
Speaker 8: I think that it's not only him, it is the
27:29
Speaker 8: nine versus three on the committee here that there were
27:31
Speaker 8: nine members who voted to keep raids constant today. So
27:34
Speaker 8: the consideration for the whole committee must be to go
27:36
Speaker 8: home and think hard about how do we communicate this?
27:39
Speaker 7: Do we do this before their meeting?
27:41
Speaker 8: What do we say at the press conference, how do
27:43
Speaker 8: you communicate in this statement, because it is clear that
27:46
Speaker 8: this is a somewhat worrying development, especially in the long end.
27:48
Speaker 8: We do have next week nonfarm payrolls. Let's not forget that.
27:51
Speaker 8: So to Stephanie's good point, the data could begin to
27:54
Speaker 8: move in the opposite direction.
27:56
Speaker 7: So who knows.
27:57
Speaker 8: We all have all kinds of views on what might
27:59
Speaker 8: be happening on the late market at the moment. So
28:01
Speaker 8: far it's been read very strong, But you're right, tom
28:03
Speaker 8: at this point it must really inspire them to look
28:07
Speaker 8: themselves in the mirror here and begin to think about
28:09
Speaker 8: how do we think about this situation.
28:11
Speaker 3: And given what just happened to be lots of FED
28:13
Speaker 3: chairs make communication errors, particularly at the start of their term.
28:17
Speaker 3: We've seen that repeatedly and feder Reserve history, this in
28:20
Speaker 3: that way might be no different. We do have to
28:23
Speaker 3: go through this process and start to understand how this
28:25
Speaker 3: new FED chair communicates what it means to markets. And
28:27
Speaker 3: I mentioned this earlier, this move in the bond market.
28:29
Speaker 3: Don't know where it goes. We could take it back tomorrow.
28:31
Speaker 3: That's not really the point. The point is whether this
28:34
Speaker 3: is by design or not Is this the intention? Is
28:37
Speaker 3: this actually what Kevin Wash, the new FED chair, wants
28:40
Speaker 3: to see. Is this the outcome to that news conference
28:43
Speaker 3: that he was looking for.
28:45
Speaker 6: Well, if the.
28:46
Speaker 5: Data is speaking, the market is speaking, and the market
28:48
Speaker 5: is saying, right now, we don't believe you, So does
28:50
Speaker 5: he have to come out and high grates?
28:52
Speaker 7: Who is his audience?
28:54
Speaker 5: Who is he speaking to? I asked that because typically
28:57
Speaker 5: FED chairs have an odd job of try trying to
29:01
Speaker 5: toggle between the broader public and the markets. He wasn't
29:05
Speaker 5: speaking to the markets, or if he was, then he's
29:08
Speaker 5: not getting the reaction. Then necessarily he wants given the
29:10
Speaker 5: fact that they've talked about wanting to bring down mortgage
29:13
Speaker 5: rates in particular, and this is going to move it
29:15
Speaker 5: in the opposite direct.
29:15
Speaker 2: Stephanie, It's good to see. It's always great to catch up.
29:17
Speaker 3: Stephanie Rofair of Wolf Tolson Slock of Apollo wank In
29:21
Speaker 3: on this decision from the FED share Kevin Wash and
29:25
Speaker 3: a decision by the committee to keep interest rates unchanged
29:27
Speaker 3: with three per cents from three regional FED presidents and
29:31
Speaker 3: then a very confusing news conference that has come with
29:34
Speaker 3: the price and that price this afternoon is high Yield
29:37
Speaker 3: to the long end of the curve.
29:38
Speaker 5: Yeah, the highest levels that we've seen since two thousand
29:40
Speaker 5: and seven. At one point in the final moments of
29:43
Speaker 5: the trading session. You have to wonder, to your point,
29:46
Speaker 5: whether he is satisfied, as well as whether he is
29:49
Speaker 5: going to rethink how much information he would like to disclose.
29:52
Speaker 5: It seems like he thinks the less information he gives
29:54
Speaker 5: us a virtue. However, I think a lot of people
29:56
Speaker 5: would say that maybe this is not the controlled kind
29:59
Speaker 5: of response that leads to any kind of predictability.
30:02
Speaker 6: John Quickley, the bank rate thirty year mortgage is six
30:05
Speaker 6: point seven zero percent. Are we going to enjoy an
30:07
Speaker 6: eight percent mortgage soon after?
30:09
Speaker 2: This is going up?
30:10
Speaker 3: I don't know about eight, but it's gone up after this.
30:12
Speaker 3: If this continues, without a doubt, the FED check Kevin
30:15
Speaker 3: Walsh wrapping up his news conference the good news. Maybe
30:17
Speaker 3: it's bad news for you, I don't know, but we'll
30:19
Speaker 3: be here at every meeting because there will be a
30:21
Speaker 3: news conference for the rest of this year after every meeting,
30:24
Speaker 3: a commitment to that from the FED chair.
30:27
Speaker 2: Again, why then.
30:28
Speaker 5: Would it he introduce the idea of not potentially having one.
30:31
Speaker 5: There's so many questions here. The lack of clarity is
30:33
Speaker 5: one thing, if it's instrumental in creating volatility, or if
30:36
Speaker 5: it's lack of clarity for lack of clarity's sake, because
30:39
Speaker 5: ultimately you don't want to put invoke political ire.
30:41
Speaker 2: I don't know, and let's see if these moves stick.