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Instant Reaction: The Fed Decides · Bloomberg Intelligence

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: With your Federo SEF decision This afternoon, we can cross
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Speaker 2: the DC with Mi mckath.
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Speaker 3: The fancies higher growth, stronger inflation, and slightly lower unemployment
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Speaker 3: for twenty twenty four, but officials still barely see a
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Speaker 3: median of three rate cuts for twenty twenty four. Nine
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Speaker 3: of the nineteen members, however, said they thought two or
0:34
Speaker 3: fewer rate cuts would be appropriate, ten saw three or more.
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Speaker 3: They did not change rates today. The dots move up
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Speaker 3: a little bit next year. The median sees two cuts
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Speaker 3: to three point nine percent in twenty twenty five instead
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Speaker 3: of three cuts three more to three point one percent
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Speaker 3: in twenty twenty six, a slightly shallower path the committee's
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Speaker 3: media long run. The natural rate also moves up to
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Speaker 3: two point zero six percent. GDP is projected to increase
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Speaker 3: two point one percent this year, significant upgrade from the
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Speaker 3: one point four percent in the December forecast. Growth is
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Speaker 3: also higher in twenty twenty five and twenty twenty six.
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Speaker 3: Unemployment will end this year at four percent, FED officials
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Speaker 3: now say instead of four point one percent, and core
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Speaker 3: PCEE inflation will fall, but only to two point six
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Speaker 3: percent instead of the two point four percent seen in December.
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Speaker 3: Headline inflation unchanged at two point four percent. The only
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Speaker 3: change to the statement is job growth is no longer
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Speaker 3: characterized as moderating language about considering any adjustment to the
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Speaker 3: target rate. Commitment to the two percent inflation target is
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Speaker 3: the same. The decision was unanimous, and finally, there was
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Speaker 3: no mention of the balance sheet in the statement, beyond
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Speaker 3: keeping the ninety five billion dollars in treasury and mortgage
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Speaker 3: rate caps each month.
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Speaker 2: Mi McKay, I'm going to turn to the price sanction
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Speaker 2: the moment, but I've got one question I need to
2:02
Speaker 2: ask you right now. Let's go through what you just
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Speaker 2: said again. So faster growth, lower unemployment, higher core inflation.
2:09
Speaker 2: Then something jumps off the page. It's exactly the same
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Speaker 2: median dot with some changes around the surface. I know,
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Speaker 2: in and around it's more nuanced than that, but ultimately
2:18
Speaker 2: the exact same median dot than December as December.
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Speaker 4: Mike.
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Speaker 2: Can you make sense of that? How have we just
2:24
Speaker 2: revised growth higher, revised unemployment lower, and core inflation up
2:29
Speaker 2: for twenty four and left the median dot unchanged.
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Speaker 3: Well, you have to look at it as the median dot,
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Speaker 3: because others did change their views around that dot, but
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Speaker 3: nobody moved significantly higher to push rates up. One person did.
2:44
Speaker 3: They needed two to move it up to move the
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Speaker 3: median rate up. But as I noted, nine of the
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Speaker 3: ten now say two cuts or less. So it is
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Speaker 3: certainly possible if we see similar inflation and jobs numbers
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Speaker 3: going forward, that this could change again. And at the
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Speaker 3: next meeting in June, when they put out a new forecast,
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Speaker 3: they could go to two.
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Speaker 2: I guess I wonder people at barn stocks right now
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Speaker 2: might will come back to you in just a moment.
3:09
Speaker 2: On the S and P five hundred positive by a
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Speaker 2: third of one percent. Here's the price action four your
3:13
Speaker 2: stocks higher on the NASDA cup by zero point four percent.
3:16
Speaker 2: In the bond market rally at the front end, we're
3:18
Speaker 2: down about four basis points to four sixty four on
3:22
Speaker 2: a US two year yield, and the dollar a little
3:24
Speaker 2: bit weaker here the euro at one away eighty five.
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Speaker 5: Bro.
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Speaker 2: My first reaction to this just to see faster growth
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Speaker 2: for twenty twenty four, lower unemployment and higher core inflation
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Speaker 2: and a median dot, and we can get into the
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Speaker 2: changes beneath the service. I know, but a median dot
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Speaker 2: that's unchanged in the face of all of that. If
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Speaker 2: your inequities at the moment, that sounds pretty bullish to me,
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Speaker 2: doesn't it.
3:42
Speaker 1: This is a federal reserve that suddenly, under the hood
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Speaker 1: seems to be accepting higher than expected inflation for a
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Speaker 1: longer period of time, taking longer to get down to
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Speaker 1: that neutral rate, because there is no other way to
3:55
Speaker 1: interpret all the numbers that you just laid out. Harder
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Speaker 1: inflation than expected for the next couple of years, faster growth,
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Speaker 1: and the fact that they're still planning for similar types
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Speaker 1: of cuts highlights where the bias is right now for
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Speaker 1: a federal reserve that still does want to cut rates.
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Speaker 2: If you're just change again, joining us around the table,
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Speaker 2: Muhammad el Are, and it is alongside us together with
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Speaker 2: Prayer Misra, fixed income portfolio manager at JP Morgan Asset Management. Prayer,
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Speaker 2: I want to cross cyber to you just your first
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Speaker 2: thoughts on the projections in the statement that we got
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Speaker 2: just moments ago.
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Speaker 6: I think this is a feed that really wants that
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Speaker 6: soft landing to continue. They saw a path or that
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Speaker 6: for that soft landing. Now we have had better, better
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Speaker 6: inflation data, higher inflation data than the Fed would have liked,
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Speaker 6: I think the last two months, but it's two months,
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Speaker 6: you know, you just go back four months. We had
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Speaker 6: really weak inflation data November. In December, jan infeb came
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Speaker 6: in a little higher. I mean, it was never going
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Speaker 6: to be a straight line down to two percent. I
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Speaker 6: think the Fed is saying we're going to be patient.
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Speaker 6: There's a long time between now and December those projections
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Speaker 6: and December projections that growth getting higher. I wonder if
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Speaker 6: they're telling you the supply side's working, whether it's population growth,
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Speaker 6: whether it's supply chains coming back, that's allowing growth to
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Speaker 6: be strong, that's allowing the label market to be okay,
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Speaker 6: and the fighter saying be patient, we're going to get
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Speaker 6: close to that two percent might take a little bit longer.
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Speaker 7: We can start normalizing.
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Speaker 2: Well, it's feeling a rally, and gold God is up
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Speaker 2: by zero point six percent of the back of some
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Speaker 2: of this, Mohammed your thoughts on what we've just heard
5:15
Speaker 2: from this Federal Reserve.
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Speaker 8: So I would have agreed with everything that she said,
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Speaker 8: with one exception, which is a revision up in the
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Speaker 8: PCEE core to two point six So that puts me
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Speaker 8: more in Lisa's camp. I think this is a signal
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Speaker 8: and the market is taking it as that that there
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Speaker 8: will tolerate slightly higher inflation for longer.
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Speaker 1: This is a reason why maybe if you look incrementally
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Speaker 1: under the hood, you're seeing some inflation expectations of the
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Speaker 1: longer term start to pick up just a little bit. Priya,
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Speaker 1: from that point of view, does this kind of call,
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Speaker 1: all things being equal, make you less enthusiastic about longer
5:49
Speaker 1: term treasuries if it seems like this is a FED
5:52
Speaker 1: that wants to stick the soft landing, regardless of what
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Speaker 1: the data might be suggesting and even their own projections.
5:58
Speaker 6: I would say the leave of the curve is still
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Speaker 6: the most attractive because you know whether they start, whether
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Speaker 6: they cut two times or three times. Let's look at
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Speaker 6: the total amount of cuts that's priced in. The neutral
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Speaker 6: rate that the market is expecting on the end point
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Speaker 6: is three seventy five. I mean, the FEDS neutral late
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Speaker 6: is two and a half. The market is well north
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Speaker 6: of that. So the part of the curve that's the
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Speaker 6: most i'd say sensitive to the totality of rate cuts
6:22
Speaker 6: is that five to ten year part.
6:23
Speaker 7: You're right going.
6:24
Speaker 6: Out into the thirty year, there's still premium that's supply demand.
6:27
Speaker 6: But I will say if the soft landing continues, that
6:30
Speaker 6: six trillions sitting in money market funds starts to go
6:33
Speaker 6: into bond funds equity funds, that's a positive for duration
6:36
Speaker 6: as well.
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Speaker 1: Mohammed, I have to say this idea of potentially inflation
6:40
Speaker 1: being higher for longer one, is it kind of a
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Speaker 1: sort of tacit acceptance of two points something something you've
6:47
Speaker 1: talked a lot about, rather than looking for two percent
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Speaker 1: is even a goal if it takes ten years, are
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Speaker 1: we talking about two percent as the target anymore?
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Speaker 8: No, if it takes ten years, then we're not talking
6:56
Speaker 8: about two percent anymore. I think you're cutting that ascid
7:00
Speaker 8: agreement that in order to achieve the soft landing, we
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Speaker 8: have to redefine what we think is the inflation rate
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Speaker 8: that goes with that soft landing. It is not two.
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Speaker 8: I think it is nearer to three than it is
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Speaker 8: to two, And I think that this is a first
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Speaker 8: step in this process.
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Speaker 2: I wish that these forecasts came out before the semi
7:16
Speaker 2: annual testimony, because I do wonder how different the questions
7:19
Speaker 2: would have been. There would be serious questions now about
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Speaker 2: how serious they are about getting inflation back down to target. Lisa,
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Speaker 2: I think we have to go through these numbers. If
7:28
Speaker 2: you're just joining us here, they are. So I give
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Speaker 2: you the number now, the forecast for twenty four, and
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Speaker 2: you can compare it to December. As Mike McKee explained
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Speaker 2: quite clearly, these are the median projections two point one
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Speaker 2: percent for GDP for twenty four. In December it was
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Speaker 2: one point four. The unemployment rate for twenty four four
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Speaker 2: percent in December it was four point one PCE two
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Speaker 2: point four December two point four, core PCE two point
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Speaker 2: six December two point four. The medium DOT for this
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Speaker 2: year unchanged at four point six, implying three recuts. Now, Bramo,
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Speaker 2: if you put that in front of any committee, any
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Speaker 2: press conference, the obvious question for any journalist today this
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Speaker 2: afternoon is how serious you are taking it to get
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Speaker 2: it back to two percent? Because based on that, I mean,
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Speaker 2: what are you taking seriously? And I think you absolutely
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Speaker 2: nailed it. Are they beginning to tolerate something a bit above.
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Speaker 1: Target because ultimately they want to prioritize the labor market
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Speaker 1: over inflation data that is noisy, and they've talked about
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Speaker 1: that and higher than expected. It will just say if
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Speaker 1: it came up for semi annual testimony, I wonder if
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Speaker 1: they'll ask about bitcoin, because they probably wouldn't read it
8:32
Speaker 1: and then ask that question. But I'm glad that we
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Speaker 1: have a good journalist who are going to be asking
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Speaker 1: that question in the press.
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Speaker 2: Comp I think Senator Warren also sent another lesson recently
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Speaker 2: saying you should cut rates, like right.
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Speaker 7: Now, maybe they're listening.
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Speaker 2: Yeah, I'm sure that won't come up in the news
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Speaker 2: conference a little bit later. Joining us to discuss this
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Speaker 2: one is Dan Swart, the chief economist the KPMG, alongside
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Speaker 2: Bank of America's Michael Gape. And Dan, i'd love your
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Speaker 2: reaction just to these projections and what you've heard so
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Speaker 2: far from this Federal Reserve.
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Speaker 9: Well, I think a couple of things are really important.
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Speaker 9: First of all, the throw to cut rates is a
9:02
Speaker 9: little higher than many people thought. But also they're not
9:05
Speaker 9: talking about raising rates even though they've had this higher inflation.
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Speaker 9: And I do think remember they're going through their process
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Speaker 9: of reevaluating rates. What is the optimal inflation rate and
9:17
Speaker 9: what is the optimal policy path? And I think on
9:20
Speaker 9: hedging what they're doing right now as they're saying, we're
9:22
Speaker 9: willing to hold it higher for longer to get there.
9:25
Speaker 9: And Jay Paul really made this point that market sort
9:28
Speaker 9: of ran off on in December, is that we don't
9:31
Speaker 9: think we need a recession anymore to get back to
9:33
Speaker 9: our inflation target. They're willing to be patient to get
9:36
Speaker 9: down there. I do think over time there is going
9:39
Speaker 9: to be a debate of what is the optimal inflation rate?
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Speaker 9: Is it two and a half percent? I don't think
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Speaker 9: it's closer to three. But I do think that there
9:47
Speaker 9: is something to the fact that they're willing to tolerate
9:49
Speaker 9: a little higher inflation for a little bit longer rather
9:52
Speaker 9: than higher unemployment. But they also are not willing to
9:57
Speaker 9: raise rates again, and I think that's important too. But
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Speaker 9: the threshold to cut is a little higher than it
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Speaker 9: was prior to this meeting. Dan.
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Speaker 2: Before I get Mike Apen's thoughts, I just want to
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Speaker 2: come back to on something you said, we don't need
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Speaker 2: a recession is very different so we don't want one.
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Speaker 2: Do you think that is the difference this afternoon, is
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Speaker 2: this we don't need a recession to get inflation back
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Speaker 2: to target, or we don't want one.
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Speaker 9: Oh, I think it's that they don't need a recession.
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Speaker 9: They don't believe they need a recession, and they don't
10:24
Speaker 9: want one if they don't need it. So I think
10:27
Speaker 9: that's really the important two pieces to this equation is
10:32
Speaker 9: that if they had to take a recession, you know,
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Speaker 9: August twenty twenty two, bucket of cold ice on us
10:37
Speaker 9: at Jackson Hole, we'll take a recession if we need
10:41
Speaker 9: it to get inflation down. They're wrong. We didn't need it.
10:45
Speaker 9: They got pretty far. We've made enough progress now that
10:49
Speaker 9: to take a recession to make it the last of
10:51
Speaker 9: the last mile on this road on inflation, it's not
10:55
Speaker 9: worth it. And I think that's the hedge that you're
10:58
Speaker 9: seeing played.
10:58
Speaker 7: Out right now.
11:00
Speaker 1: Also has a bit of a shifting in the goalposts,
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Speaker 1: given the fact that we're looking at inflation that's coming
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Speaker 1: down but not coming down to two percent and then
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Speaker 1: that's okay, that is considered success. How much is this
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Speaker 1: statement and these projections really signaling an acceptance of higher
11:14
Speaker 1: inflation for longer to you?
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Speaker 4: So to me, it's not. I mean, I think they're
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Speaker 4: looking at changing policy today or setting policy today and
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Speaker 4: trying to get to their macro objectives over the three
11:26
Speaker 4: or forecast horizon. They're still saying we'll get there in
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Speaker 4: twenty twenty six, which is the same story that they've
11:32
Speaker 4: given in the past. So, yes, they have to tolerate
11:35
Speaker 4: a little higher inflation in the near term this year
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Speaker 4: and next year, but I don't think they're giving up
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Speaker 4: on that two percent goal. I think the flavor to
11:44
Speaker 4: the revisions to me, says the media and member is
11:49
Speaker 4: fully embracing this supply side story and the economy can
11:53
Speaker 4: run faster at least temporarily without generating significant overheating pressures.
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Speaker 4: So to me, that's the main message from the statement.
12:03
Speaker 4: Although I acknowledge with revising up the inflation path two
12:06
Speaker 4: tenths this year one tenth next year does say we
12:09
Speaker 4: may have to have a little higher inflation in the meantime,
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Speaker 4: But I don't think they're giving up on that two
12:14
Speaker 4: percent target.
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Speaker 1: Prier I see vigorously nodding you agree.
12:17
Speaker 7: I completely agree. I think it's the supply side that's
12:19
Speaker 7: the key.
12:20
Speaker 6: I think the entire soft landing was predicated on the
12:23
Speaker 6: FED starting to ease. What they're telling us is that
12:26
Speaker 6: the starting point. I think the starting point matters. We're
12:29
Speaker 6: at five and a half on FED funds. Daniel real
12:31
Speaker 6: rates at two percent, this is restrictive policy. Can they
12:35
Speaker 6: start to normalize, Start to cut a little bit, not
12:38
Speaker 6: the entire cycle. They don't have to cut consecutively all
12:40
Speaker 6: the way down to two and a half percent. Start
12:43
Speaker 6: that process of normalization. If that means inflation's a little
12:46
Speaker 6: higher than their target this year, so be it.
12:49
Speaker 7: We'll get there in the next couple of years.
12:50
Speaker 6: If the supply side is working, it allows growth to
12:53
Speaker 6: be strong without creating inflation. Maybe the target is two
12:56
Speaker 6: to three percent. I don't think they can politically say
12:58
Speaker 6: it or have much credit. It's like me saying I
13:01
Speaker 6: can't run a marathon and I can't run one hundred
13:03
Speaker 6: miles meters.
13:05
Speaker 7: But essentially, you.
13:06
Speaker 6: Know, when you can't reach your target, you should not
13:08
Speaker 6: change the target. But can they act as if you'll
13:12
Speaker 6: get there, we just push out that two percent a
13:15
Speaker 6: year out or two years out. I think that's what
13:17
Speaker 6: they're telling us. They're telling us, let's start. We're not committing.
13:20
Speaker 6: This is a data dependent FED. We can decide twenty
13:23
Speaker 6: five and twenty six cuts. We have a lot of
13:25
Speaker 6: time to do that. Let's just start the process now,
13:27
Speaker 6: because we're in restrictive territory prayer?
13:29
Speaker 2: Is that a reason to buy the tenure treasury or salad.
13:32
Speaker 7: Ah the ten years harder? It's a reason why the
13:35
Speaker 7: five year.
13:37
Speaker 6: For now, I would say buy it because I think
13:40
Speaker 6: this keeps demand coming into fixed income. I think the
13:43
Speaker 6: raids market was actually slightly hawkishly positioned into this meeting
13:46
Speaker 6: because of this debate between two and three cuts. The
13:50
Speaker 6: EU risk assets have been on a tear. I mean,
13:53
Speaker 6: there's been nothing stopping that. I don't think now anything
13:55
Speaker 6: stops it because unless the growth data weakens, the Fed's
13:59
Speaker 6: telling you they're willing to let this run. They're willing
14:01
Speaker 6: to ease, to allow that soft landing to continue.
14:04
Speaker 2: Dan, I'd love your thoughts on how to navigate this
14:06
Speaker 2: news conference when there is such a clear and obvious
14:08
Speaker 2: contradiction in the medium projections for twenty twenty four. How
14:12
Speaker 2: do you think Chairman Power will explore this one in
14:14
Speaker 2: sixteen minutes time.
14:16
Speaker 9: He's going to be straight in and full on and
14:19
Speaker 9: we're still committed to getting to two percent. He will
14:22
Speaker 9: not back off that kind of rhetoric, and I think
14:25
Speaker 9: that's important. He's saying, we're just willing to We've not
14:29
Speaker 9: changed the time frame, it's just going to come down
14:31
Speaker 9: a little slower than we thought. But also there's a tradeoff.
14:34
Speaker 9: You know, are we willing to create unnecessary pain which
14:37
Speaker 9: is the Fed's word for euphanism, euphanism for unemployment for
14:42
Speaker 9: no reason? Do we really need that at this point
14:45
Speaker 9: in time? And I think what they're saying is no.
14:47
Speaker 9: We see even in the labor market, we've seen a
14:50
Speaker 9: surgeon immigration, We've seen rebalancing in the labor market that's continuing.
14:56
Speaker 9: If the labor market were to get significantly softer, they
15:00
Speaker 9: cut more rapidly. I think that's the other side of
15:02
Speaker 9: this that is interesting, is that we were seeing that
15:05
Speaker 9: we saw are starting to see sort of a division
15:07
Speaker 9: within the FED on what are the balance of risks.
15:10
Speaker 9: But at the end of the day, the FED is
15:12
Speaker 9: looking at this saying, we've had a pretty resilient economy
15:16
Speaker 9: and there's no reason to derail a resilient economy. As
15:19
Speaker 9: long as we're moving in the right direction. How fast
15:22
Speaker 9: we get there doesn't matter given the progress we've made.
15:26
Speaker 9: And I think, you know, it does matter if it's
15:28
Speaker 9: ten years, like Mohammad said, yes, then it's not. But
15:31
Speaker 9: I think in the context of where we've been and
15:34
Speaker 9: what we're doing. This is sort of the more the
15:38
Speaker 9: way to think about it as a way to not
15:41
Speaker 9: cause undue pain in the economy for no reason.
15:44
Speaker 8: So then I agree with you, and I think it's
15:46
Speaker 8: important that we're redefining patients going into this meeting. Patients
15:51
Speaker 8: meant there's no rush to cut rates now. Patients means
15:55
Speaker 8: we may have to wait a little bit longer to
15:58
Speaker 8: get to two percent or to paff will be slightly different.
16:02
Speaker 8: But whenever I say that out, the reaction, the pushback
16:06
Speaker 8: I get is but that's going to destabilize inflation expectations.
16:11
Speaker 4: I don't think it will.
16:12
Speaker 8: Do you agree? Do you agree that you will?
16:15
Speaker 9: Yeah, I'm with you, Muhammad on this. I don't think
16:18
Speaker 9: it will because we've seen remarkably anchored inflation expectations throughout
16:23
Speaker 9: all this. Now, if it did begin to the fact,
16:26
Speaker 9: we'd be changing its tune pretty quickly, right, So this
16:29
Speaker 9: is something they're looking at. They're looking at that inflation
16:32
Speaker 9: expectations have been fail well anchored, and that's a good
16:35
Speaker 9: dying for them that this is an okay path to take.
16:38
Speaker 9: But you're absolutely right, if we were to see inflation
16:41
Speaker 9: expectations shift on the basis of this, they'd have to
16:44
Speaker 9: change their tune and their strategy.
16:46
Speaker 2: My cape and I want to give you the final
16:48
Speaker 2: work against this news conference. What would you look for?
16:52
Speaker 4: Well, I think that the balance so what's been discussed
16:55
Speaker 4: here is essentially you know, do you really have a
16:58
Speaker 4: higher bar to start? Are you less confident about starting?
17:01
Speaker 4: We all seem to think that they still have a
17:03
Speaker 4: lot of confidence about disinflation remaining in place. So I
17:06
Speaker 4: would kind of address those those two confidences, and honestly,
17:10
Speaker 4: I would try and tease out any information on the
17:13
Speaker 4: balance sheet discussion. The market I think needs to know
17:17
Speaker 4: that does taper start when overnight reverse repo balances are
17:21
Speaker 4: just low? Or do we have to get to zero?
17:24
Speaker 4: On that? I do think some information there would be helpful.
17:27
Speaker 2: I think we'll beginning some questions on that, no doubt
17:29
Speaker 2: about it. Might GAPE and a Bank for America, the
17:31
Speaker 2: brilliant Dan Swamk of KPMG to the two of you.
17:33
Speaker 2: Thank you if you are just joining us thirteen minutes
17:35
Speaker 2: away from a news conference with Chairjpal of the Federal Reserve.
17:39
Speaker 2: No change to interest rates, plenty of changes to the
17:42
Speaker 2: outlook for twenty twenty four, faster growth, lower unemployment, higher
17:46
Speaker 2: core inflation, and then I guess the news is where
17:49
Speaker 2: there is no change, the medium dot still implying three
17:52
Speaker 2: cuts for twenty twenty four. Now you're all making me
17:55
Speaker 2: feel a little bit uncomfortable because you all agree with
17:57
Speaker 2: each other. So I've got to be that guy, and
17:58
Speaker 2: I think least's on the same page just me. There's
18:00
Speaker 2: going to be a lot of people watching this that
18:02
Speaker 2: just think, well, hang on a minute, there's a huge
18:04
Speaker 2: contradiction in this. In all of this that you've revised
18:07
Speaker 2: higher inflation, revised lower unemployment, you're looking for a faster economy,
18:12
Speaker 2: and your projection for rates stays unchanged. That sounds super davish,
18:16
Speaker 2: and I would say displays a real tolerance for above
18:19
Speaker 2: target inflation with equities at all time highs and credit
18:23
Speaker 2: spreads very very tight. Why are we wrong when people
18:26
Speaker 2: come on this program and say we are sufficiently restrictive.
18:30
Speaker 2: In fact, some people come on this program and say significantly,
18:32
Speaker 2: So where is the evidence of that based on what
18:35
Speaker 2: we're seeing this afternoon? Where is the evidence? Muhammad?
18:39
Speaker 8: So the evidence was given to you earlier by Kathy,
18:43
Speaker 8: which is if you just look at one price, which
18:47
Speaker 8: is where the policy ad is relative to where core
18:52
Speaker 8: PCEE is. That's where you get the restrictive. But I
18:55
Speaker 8: agree with you if you look at the financial conditions
18:56
Speaker 8: as a whole, these are very loose financial conditions that I'm.
19:00
Speaker 1: Looking at in the statement is that the FED took
19:02
Speaker 1: out language saying job gains had moderated. It really was
19:05
Speaker 1: the only change to the statement prea fewer perspective. Everyone's
19:09
Speaker 1: been saying, it's all about the labor market. If we
19:12
Speaker 1: don't see moderation in the labor market, and if it's
19:14
Speaker 1: actually reigniting, how are we going to get down to
19:17
Speaker 1: two percent from here? If maybe people are saying it's restrictive,
19:22
Speaker 1: the equity markets and the credit markets didn't get the message.
19:25
Speaker 6: So I think the labor market is coming in better balance.
19:29
Speaker 6: It is moderating. It may not be moderating in terms
19:31
Speaker 6: of NFP numbers every month. It's moderating in terms of
19:34
Speaker 6: the quit strate. It's moderating in terms of job vacancies
19:38
Speaker 6: or or average our earnings ECI. You look at measures
19:41
Speaker 6: of wage inflation, it is moderating. I think that's what
19:44
Speaker 6: gives the FED comfort that those inflation expectations will be
19:46
Speaker 6: anchored that even if core PC is a little bit higher,
19:49
Speaker 6: that's that's largely due to shelter or medical insurance.
19:53
Speaker 7: There's lots of little components.
19:54
Speaker 6: Of PC that might be keeping it a little bit
19:56
Speaker 6: higher for longer. But as long as the labor markets
19:59
Speaker 6: suggest that weages on moderating, I think it gives the
20:02
Speaker 6: FED that confidence, and I would say for them to
20:05
Speaker 6: start to cut, I think cuts in twenty twenty four
20:08
Speaker 6: are about inflation. A PCE is born from five and
20:11
Speaker 6: a half percent to three percent. That's the reason for
20:14
Speaker 6: them to cut seventy five basis points. Cuts next year
20:16
Speaker 6: are about growth and the label market.
20:18
Speaker 1: To me, Muhammad, this all goes back to your point,
20:20
Speaker 1: which is is this a federal reserve. This is operating
20:23
Speaker 1: without an overarching kind of thesis. They're basically just trying
20:27
Speaker 1: to cobble together people's different opinions and putting something out there,
20:30
Speaker 1: and then it sends us all on a tailspin trying
20:31
Speaker 1: to explain some sort of cohesive theory behind it. And
20:34
Speaker 1: where we're going is that what this smells like, we're
20:36
Speaker 1: trying to sort of rationalize and come up with a
20:38
Speaker 1: theory behind this when it's really this person thinks this,
20:40
Speaker 1: this person thinks this, this is a good kind.
20:41
Speaker 7: Of happy medium.
20:42
Speaker 1: Go figure out what's what to do with this.
20:44
Speaker 8: So, if you want to be generous, you'd say, this
20:46
Speaker 8: is such an uncertain economy, there's so many things changing
20:49
Speaker 8: on the structural side that they had no choice but
20:52
Speaker 8: to behave like their behaving. If one would be less generous,
20:55
Speaker 8: you'll say, this is a FED that actually took a
20:57
Speaker 8: view it looks through data one and ended up really
21:02
Speaker 8: undermining its credibility, and therefore it is very hesitant to
21:07
Speaker 8: do anything more than simply look at past data. So
21:10
Speaker 8: it's up to you whether you want to be generous
21:12
Speaker 8: or less generous.
21:13
Speaker 2: Data decision nine minutes away, we'll find out if Robert T.
21:15
Speaker 2: SIPPs fit and generous of pay Jim he joins us. Now, Robert,
21:18
Speaker 2: you've had about twenty minutes that you over this one.
21:20
Speaker 2: Your thoughts on it.
21:21
Speaker 5: Yeah, I mean I think that in terms of supporting
21:24
Speaker 5: what they've done, the rate of growth of the economy
21:28
Speaker 5: has been firm, the rate of inflation has calm down
21:32
Speaker 5: at a headline basis by you know, five six percent,
21:36
Speaker 5: by nearly three percent on a core basis. The question
21:40
Speaker 5: came up earlier do they want a recession? I think
21:43
Speaker 5: they want a soft landing, and they got conditions restrictive
21:47
Speaker 5: enough to bring down inflation quite a bit. Wage growth
21:51
Speaker 5: is accelerated and they managed to do that keep while
21:55
Speaker 5: unemployment has remained low, growth has continued. So I think
21:59
Speaker 5: it's it's been a very successful go. Did they start late?
22:04
Speaker 5: They did start late, but I think their pandemic practice,
22:08
Speaker 5: you know, was a little bit late. I don't think
22:10
Speaker 5: we have a lot of active central banker data points
22:13
Speaker 5: in terms of how you're supposed to do it. So
22:15
Speaker 5: I think so far is so good, and I think
22:17
Speaker 5: they're trying to hone the message so far here.
22:21
Speaker 1: You said very positive on all of this. Does that
22:23
Speaker 1: mean that you're a buyer of bonds of alterations because
22:25
Speaker 1: you think that ultimately they will get to the goal
22:28
Speaker 1: that they're looking for, along with the soft landing that's
22:31
Speaker 1: always been called sort of the unicorn that never arrives.
22:36
Speaker 5: Well, I think the unicorn arrived in twenty nineteen. After
22:39
Speaker 5: the twenty eighteen cycle. We were on our way to
22:41
Speaker 5: a soft landing that was interrupted by pandemics. So maybe
22:45
Speaker 5: not the late nineties and other soft landing after the
22:48
Speaker 5: ninety four cycles, so I think they are there. I
22:51
Speaker 5: think the problem is a lot of people saw the
22:55
Speaker 5: dot com bubble burst, they saw the GFC burst. We
23:00
Speaker 5: don't have that kind of a backdrop now, and a
23:01
Speaker 5: lot of people are used to seeing funds rate up,
23:04
Speaker 5: funds rate down, crash, big problems. They're not used to
23:07
Speaker 5: seeing it. It doesn't mean it never happened. So it
23:10
Speaker 5: has happened and looks like we're on our way. There
23:13
Speaker 5: is this a bypoint for fixed income. It is strategically
23:17
Speaker 5: when you get to the end of the FED rate
23:20
Speaker 5: hiking cycle, that's where you're going to be seeing the
23:22
Speaker 5: peak and interest rates. That was probably at the end
23:24
Speaker 5: of September last year. We're getting into that bison at
23:28
Speaker 5: the end of twenty twenty two we remain there. Now
23:31
Speaker 5: we're seeing a lot of support for the market. I
23:33
Speaker 5: think that's why the risk premiums in the market are
23:37
Speaker 5: so narrow, but they're likely to remain narrow. But I
23:39
Speaker 5: think overall they're managing a very successful course here.
23:43
Speaker 8: So Robert, clearly a soft landing is your baseline, So
23:47
Speaker 8: speak a little bit to your level of confidence in
23:50
Speaker 8: that and what do details look like if the FED
23:53
Speaker 8: were to end up making a mistake, and we hope
23:55
Speaker 8: the FED doesn't make a mistake, but if it were,
23:58
Speaker 8: what do you think the most likely mistake would be?
24:01
Speaker 9: Right?
24:02
Speaker 5: Well, I think the data has not only bifurcated, it's trifurcated. Right,
24:07
Speaker 5: So when you look at the employment I was a
24:09
Speaker 5: little surprised that they went, you know, uni dimensional that
24:12
Speaker 5: it's you know, a supe employment market. I mean, the
24:15
Speaker 5: household survey has been flat for a few months, unemployment
24:19
Speaker 5: rate is inched higher. Job as claims at a state
24:22
Speaker 5: level have gone higher, triggering some people to wonder about
24:26
Speaker 5: whether the Salm rule is kicking and signaling a potential recession.
24:29
Speaker 5: And of course recessions are very hard to spot. So
24:34
Speaker 5: I think if there was going to be a problem here,
24:35
Speaker 5: you're not going to wake up one day and see
24:37
Speaker 5: data consistent with a three and a half percent growth.
24:40
Speaker 5: But is it possible that we could have downshifted to
24:42
Speaker 5: a half percent or a percent, that job growth has
24:46
Speaker 5: really dropped off here and you've lost a little bit
24:49
Speaker 5: of momentum. I think that's the more likely side that
24:52
Speaker 5: things could break on. Having said that, they're at five
24:56
Speaker 5: point three percent. They have tightened in real terms, They've
24:59
Speaker 5: made the case they didn't really want to do that.
25:03
Speaker 5: Now they're making the case they want more information. I
25:06
Speaker 5: think if they see slower data, that would you know,
25:09
Speaker 5: trigger them to make some cuts, which would end up,
25:12
Speaker 5: you know, probably preempting a recession. So the most likely
25:16
Speaker 5: restate would be a mistake would be kind of a
25:18
Speaker 5: growth recession. I would think that'd be the next most
25:21
Speaker 5: likely scenario.
25:22
Speaker 1: There is there a downside to keeping inflation hotter for longer,
25:27
Speaker 1: in the idea that this is actually really problematic for
25:29
Speaker 1: particularly lower income households, as Muhamma and I we were
25:32
Speaker 1: talking about before the show, that this is sort of,
25:34
Speaker 1: you know, very much attacks on particularly people with lower income,
25:38
Speaker 1: specifically for those who are not in the market and
25:40
Speaker 1: can't capitalize on some of the gains that we see
25:42
Speaker 1: in the equity markets, and could have a drag on
25:44
Speaker 1: the economy.
25:45
Speaker 6: Sure, I think as long as the job market is
25:47
Speaker 6: fine and wages are running above inflation, so you talk
25:50
Speaker 6: about that inflation number being high where a wages, If
25:53
Speaker 6: wages are running four percent and inflations are two and
25:56
Speaker 6: a half, there's still positive real income growth. So I
25:59
Speaker 6: think as long as you have positive real income growth,
26:01
Speaker 6: that danger that you talk about is less of an issue.
26:04
Speaker 6: I do worry about the danger from is the FED
26:07
Speaker 6: easy for too long or does it let the market
26:09
Speaker 6: run on this narrative of rate cuts. If inflation stay
26:12
Speaker 6: is high enough, at some point the Fed's idea of
26:16
Speaker 6: continuous rate cuts is going to get questioned.
26:18
Speaker 7: And I think that no market is pricing that in
26:20
Speaker 7: I think.
26:21
Speaker 6: Risk assets are expecting rate cuts this year, rate cuts
26:23
Speaker 6: next year. So if that inflation tends to be that
26:25
Speaker 6: last mile problem actually exists and we find we're unable
26:29
Speaker 6: to get close to two percent, I think then we
26:32
Speaker 6: should reprice all those long end rates higher, which is
26:35
Speaker 6: a problem for you keep talking about credit spreads. Is
26:38
Speaker 6: that a problem for spreads or overall risk assets. I
26:41
Speaker 6: think that's the danger I worry about. I don't think
26:43
Speaker 6: we're there yet. It's still it's noisy data, but I
26:47
Speaker 6: think that is something we should watch as we see
26:49
Speaker 6: the totality. And I hope chef al was asked about
26:51
Speaker 6: that is a three month moving average? Is it core
26:54
Speaker 6: super core shelter? I mean we have so many weariables,
26:57
Speaker 6: we look at revisions, wages, so hopefully he's asked exactly
27:01
Speaker 6: you know, and I'm sure he's going to give a
27:03
Speaker 6: non answer answer, which is everything, but maybe some nuggets
27:06
Speaker 6: in there. It's core and super core that we look at.
27:09
Speaker 6: I think just a sense of what gives them that
27:11
Speaker 6: confidence that overall we're going.
27:13
Speaker 7: To get to do this.
27:13
Speaker 2: Francis down of Manual Life was on the program earlier
27:15
Speaker 2: on this morning. She said exactly the same thing. Just
27:17
Speaker 2: tell us what you're looking at. Seems to change from
27:19
Speaker 2: meeting to meeting, Robert, I know you've got to go.
27:21
Speaker 2: It's going to catch up, sir, Robert tip of pagim
27:23
Speaker 2: going against this news conference? How much? What you want
27:25
Speaker 2: to hear from the chairman in this news conference? What
27:27
Speaker 2: do you want to hear him address?
27:29
Speaker 8: Well, I'd like him is to come across as steady,
27:32
Speaker 8: to not get the market excited, to not cause undue volatility.
27:36
Speaker 2: That's what you want? What do you expect?
27:38
Speaker 7: It's hard.
27:39
Speaker 8: I would not like to be at I would not
27:41
Speaker 8: like to be at that podium after this outcome. I
27:43
Speaker 8: really would not like to be there.
27:45
Speaker 2: Why is that? You think the members have put him
27:47
Speaker 2: in a little bit of a sticky spot. Yeah, to
27:49
Speaker 2: explain this.
27:49
Speaker 8: I mean, you've repeated over and over again that the
27:52
Speaker 8: data revisions and the projection, the revision to the language
27:56
Speaker 8: of productions, the revision to protection are inconsistent with the
28:01
Speaker 8: non change to the great cuts.
28:04
Speaker 2: How difficult is this going to be? Prayer?
28:06
Speaker 7: I think he's pretty good at doing that.
28:08
Speaker 6: I think he might, you know, at least try and
28:11
Speaker 6: get that delicate balance. I mean, he is going to
28:13
Speaker 6: be asked about financial conditions. They've eased a lot. I
28:16
Speaker 6: think explaining that's context dependent. Financial conditions by itself, the
28:20
Speaker 6: Fed should not have a view on.
28:22
Speaker 7: So relative to the economy, we're in.
28:24
Speaker 6: A soft landing. Financial conditions should be easier now. All
28:27
Speaker 6: they can do. All he can do is explain the
28:29
Speaker 6: reaction function. We didn't get any data today. Explain the
28:33
Speaker 6: reaction function. They remain data dependent. I'm also looking for
28:36
Speaker 6: anything on QT. You know, because we have tax season
28:38
Speaker 6: coming up, that overnight reversary pro facility might get to
28:41
Speaker 6: zero in the next two months. What are they doing then?
28:43
Speaker 6: Are they getting close to tapering? They're going to debate
28:46
Speaker 6: this and we get a September nineteen event. That's a
28:49
Speaker 6: big shock to the system. I don't think is Priceton.
28:51
Speaker 1: You know, John, everyone's been talking about the fact that
28:54
Speaker 1: we haven't heard about the balance seet. It wasn't in
28:56
Speaker 1: the statement, And to me, this is actually a wild
28:58
Speaker 1: card because it's this sort of tascit. They're going to
29:01
Speaker 1: allow it to run off for longer than people previously
29:03
Speaker 1: expected because this is one tool that they can do
29:07
Speaker 1: without getting into the rate cutting dance.
29:08
Speaker 2: Does that help him today, considering that he doesn't think
29:11
Speaker 2: is passive time and this is just watching paint try,
29:14
Speaker 2: does that help him well?
29:15
Speaker 1: Based on what Priya was just saying, it sounds like
29:17
Speaker 1: this might be watching paint try as well, because she
29:19
Speaker 1: was basically like, he's not going to give an answer,
29:21
Speaker 1: and what Hammad's like, please don't shake anything up.
29:23
Speaker 2: So there's a reason that we're waiting for these comments
29:25
Speaker 2: though on the bandited sheet, it's because at the last meeting,
29:27
Speaker 2: he sat there in the news conference and told us
29:28
Speaker 2: that would be a big meeting for a conversation about
29:30
Speaker 2: the banned sheets. So maybe you hear about that upfront
29:33
Speaker 2: when these comments begin.
29:34
Speaker 1: Maybe that's one way to kill the mood in the room.
29:36
Speaker 1: Just talk about the balance sheet roll off and just
29:38
Speaker 1: go into exact detail. About what this means. There are
29:40
Speaker 1: a lot of questions. I want to hear financial conditions
29:42
Speaker 1: first and foremost exactly how your response to that does.
29:44
Speaker 1: He brush it off in the same kind of way
29:46
Speaker 1: that he did back in December.
29:47
Speaker 2: It's not a major deal, but it's the beginning of
29:49
Speaker 2: something that could be a big deal. There's just a
29:51
Speaker 2: clear and obvious contradiction in the outlook for twenty twenty four.
29:54
Speaker 2: I think if you see a repeat of that through
29:55
Speaker 2: the year, there's going to be more and more questions
29:57
Speaker 2: about how willing and how they are really focused on
30:01
Speaker 2: whether they are really focused on getting that inflation number
30:04
Speaker 2: back towards two percent exciting.
30:06
Speaker 1: It goes back to Priya's analogy, which is your target
30:09
Speaker 1: can be to run a marathon, but if you don't
30:11
Speaker 1: really run it all, and you just run a mile
30:13
Speaker 1: a day and you don't plan to do it until
30:15
Speaker 1: twenty forty six, is that really your goal anymore? And
30:18
Speaker 1: I think that that's sort of one key question here
30:20
Speaker 1: as we talk about what is an inflation target that
30:23
Speaker 1: we're looking at that's two percent.
30:24
Speaker 2: It's a complicated spot for the chairman. We've got equities
30:27
Speaker 2: at all time highs as he's about to open that
30:29
Speaker 2: door and sit in front of that lectern and talk
30:32
Speaker 2: to us about the outlook for rates equities at all
30:35
Speaker 2: time highs, and at the same time they're revising their
30:37
Speaker 2: inflation protections higher and also still forecasting the same amount
30:42
Speaker 2: of cuts for twenty twenty four. I think that's a
30:45
Speaker 2: sticky spot for any FED chair to walk into any
30:48
Speaker 2: room and speak for sixty minutes on this subject.
30:50
Speaker 1: Which is the reason why he will probably say we're
30:52
Speaker 1: data dependent, which also means nothing to a lot of
30:54
Speaker 1: people who say, what are you looking at? This is
30:56
Speaker 1: a very difficult moment as j. Powell walks to address
30:59
Speaker 1: all of the complexities in your face.
31:05
Speaker 9: Mhmm.