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Instant Reaction: The Fed Decides · Bloomberg Intelligence

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
0:13
Speaker 2: The Federal Reserve decision we're looking for is an interest
0:16
Speaker 2: rate cut on the FMC of about twenty five basis points.
0:19
Speaker 2: With that decision is Mike mckayth you.
0:22
Speaker 3: Got it, John, A quarter point cut in the Fed
0:24
Speaker 3: spencemark interest rate. A few changes to this statement, and
0:28
Speaker 3: that's about it from the Fed. The target range now
0:30
Speaker 3: four and a half to four and three quarters percent.
0:33
Speaker 3: There is no change to balance sheet policy. The decision
0:36
Speaker 3: this time unanimous, as September dissenter Mickey Bowman voted for
0:41
Speaker 3: this rate cut. Inflation, the statement says, has made progress,
0:46
Speaker 3: dropping the word further toward the two percent target, but
0:49
Speaker 3: remains somewhat elevated. No longer included the assertion that the
0:54
Speaker 3: Committee has gained greater confidence that inflation is moving sustainably
0:58
Speaker 3: toward two percent. The economic assessment suggests a slightly weaker
1:03
Speaker 3: labor market, noting that since earlier this year, labor market
1:07
Speaker 3: conditions have generally eased and the unemployment rate has moved
1:11
Speaker 3: up but remains low still. The statement repeats September's view
1:15
Speaker 3: that risks to achieving its employment and inflation goals are
1:20
Speaker 3: roughly in balance. The rate cut today is in support
1:24
Speaker 3: of its goals instead of September's in light of the
1:27
Speaker 3: progress on inflation and the balance of risks. Policymakers note
1:32
Speaker 3: again they will consider additional adjustments to their benchmark rate,
1:36
Speaker 3: but offer no further guidance beyond that. There is no
1:40
Speaker 3: mention of politics in the statement. That will be up
1:43
Speaker 3: to Chairman Powell in about a half hour.
1:45
Speaker 2: Am I McKay. It'll be up to you, sir, to
1:47
Speaker 2: ask the questions. How many questions do you expect are
1:49
Speaker 2: going to be leading with the events of this week
1:51
Speaker 2: and not this decision? How much of this is going
1:53
Speaker 2: to be about the politics at two thirty, Mic, I.
1:56
Speaker 3: Would imagine quite a bit would be, and maybe we
1:59
Speaker 3: want to check the law vegas over underline for that.
2:02
Speaker 3: But he's not going to say anything. He's not going
2:04
Speaker 3: to respond. So the question is how many different ways
2:06
Speaker 3: can we ask and how many different ways will he
2:09
Speaker 3: parry the question?
2:10
Speaker 2: Sixty minutes of that looking forward to it, Michael McKee,
2:12
Speaker 2: you've got to run. I know that news conference begins
2:14
Speaker 2: in about twenty eight minutes time, So no big changes
2:16
Speaker 2: to the statement. Twenty five basis point Raika as expected,
2:19
Speaker 2: and when you see something like that, you're not looking
2:21
Speaker 2: for a big change in the market either. We stay
2:23
Speaker 2: higher on a SMP five hundred by about six tens
2:26
Speaker 2: of one percent, yields are still a little bit lower.
2:28
Speaker 2: On a ten year, we're still down by eight basis
2:30
Speaker 2: points four thirty five. And in foreign exchange, the euro
2:33
Speaker 2: gives up a little bit of the move, but still
2:35
Speaker 2: positive on the session at least, so one oh seven
2:37
Speaker 2: eighty four on euro dollar.
2:38
Speaker 1: I think it's interesting that he that the Federal Reserve
2:41
Speaker 1: moved a reference to gaining confidence in inflation and saying
2:44
Speaker 1: that labor market conditions have generally eased. Honestly, to me,
2:48
Speaker 1: you're looking at this and on the margins, just setting
2:51
Speaker 1: the stage to potentially feel a little less dubvish. And
2:55
Speaker 1: that is a tone that I really curious to hear
2:57
Speaker 1: in the press conference.
2:58
Speaker 2: With a surround the table by Michael of JPMUL and
3:00
Speaker 2: a man who's seen it oh before, the former Fed
3:01
Speaker 2: Vice chair Rich clouder Rich. Want to start with you
3:04
Speaker 2: and not on the twenty five basis point right cut,
3:06
Speaker 2: you lift the tariff, You lift the tariffs of Trump.
3:09
Speaker 2: In Volume one on the Federal Reserve, how did you
3:13
Speaker 2: handle it then? How much scenario analysis do you did
3:15
Speaker 2: you do ahead of time? How do you think this
3:17
Speaker 2: chairman's going to handle it in a months to come.
3:20
Speaker 4: Well, the staff did good work, and some of that's
3:22
Speaker 4: in the public domain now comes out every five years.
3:26
Speaker 4: The reality is in during my time at the FED,
3:29
Speaker 4: inflation was running a little bit below target. The tariffs
3:32
Speaker 4: that were put in place made the headlines, but they
3:34
Speaker 4: didn't really push up inflation very much. You know, the
3:37
Speaker 4: devil will be in the details, I think, both on
3:39
Speaker 4: trade policy and physical policy, and I don't think they
3:43
Speaker 4: need to make any big decisions at this meeting or
3:45
Speaker 4: the next meeting about how they'll strategize for twenty twenty five.
3:48
Speaker 5: Vice Chairman, I want to go to the politics of
3:50
Speaker 5: the moment. We're not going to get an answer from
3:52
Speaker 5: Jerome Powell, so we're going to get it from you
3:55
Speaker 5: right now. Harry Truman nineteen fifty before William McChesney Martin
4:01
Speaker 5: saved the day. I quote the President President Truman, I
4:05
Speaker 5: hope the board will not allow the bottom to drop
4:07
Speaker 5: out from under securities. If that happens, that is exactly
4:11
Speaker 5: what mister Stalin wants. We've had this pressure before, and
4:15
Speaker 5: you and your brethren you have the pressure this time
4:18
Speaker 5: from President elect Trump. How does a FED deal with it?
4:21
Speaker 4: I think they deal with it, Tom, the way that
4:23
Speaker 4: they did the last time is just stick your you know,
4:26
Speaker 4: keep your focus on the goals of policy, price stability,
4:29
Speaker 4: maximum employment, and do what you think can best achieve
4:32
Speaker 4: those goals. You know, as you point out, opinions on
4:37
Speaker 4: the FED from including from presidents or not unheard of
4:40
Speaker 4: and so we could see more of that, but I
4:42
Speaker 4: think the power Fed will just keep doing what they're doing.
4:44
Speaker 1: How much is the market, though, speaking, louder than any
4:47
Speaker 1: policy that's going to come down the pike. The fact
4:49
Speaker 1: that we've seen this massive rally in stocks and a
4:51
Speaker 1: sell off from bonds that hasn't really hit risk assets,
4:54
Speaker 1: how much does that have to really cause the FED
4:56
Speaker 1: to pause and even reconsider whether it cut rates to
4:58
Speaker 1: get in December?
5:00
Speaker 4: Good point, you know, I do think financial conditions are
5:03
Speaker 4: obviously an input to policy, but I would hope the
5:06
Speaker 4: FED does not convey the impression that they're too sensitive
5:09
Speaker 4: to financial conditions because they can rise and fall for
5:11
Speaker 4: a number of reasons. My own sense of what we're
5:14
Speaker 4: seeing this week is some of it is not so
5:17
Speaker 4: much more stimulus down the road as more certainty that
5:20
Speaker 4: the existing twenty seventeen tax bill is going to be extended, right,
5:23
Speaker 4: So it's the absence of a tax hike as opposed
5:25
Speaker 4: to necessarily a tax cut. And I do think the
5:29
Speaker 4: deregulation piece of this is also important. So we've certainly
5:32
Speaker 4: seen a level set. I wouldn't necessarily extrapolate this from here.
5:36
Speaker 4: We'll just have to see how this plays out either way.
5:39
Speaker 1: What we've heard is just the deficit is likely to expand,
5:42
Speaker 1: and one of the main stories and consistency throughout all
5:46
Speaker 1: of the analysis, does the FED deal with that at
5:49
Speaker 1: all by signaling what they plan to do with their
5:52
Speaker 1: balance sheet. There is some speculation that they could potentially
5:56
Speaker 1: monetize the debt to keep even keel economic conditions.
6:00
Speaker 4: Well, certainly there would be that pressure, but I have
6:03
Speaker 4: high confidence that they would resist that. Look, the FED
6:06
Speaker 4: is judged on primarily and whether or not it achieves
6:08
Speaker 4: the inflation target, and when inflation is getting to two percent,
6:12
Speaker 4: that's really the focus. I think monetizing the debt is
6:15
Speaker 4: something that I've done on a sustained basis, is inconsistent
6:19
Speaker 4: with the inflation target. You do raise another point, though,
6:22
Speaker 4: which is a good one, Lisa, which is the fact
6:25
Speaker 4: that they are doing QT right now. You know, during
6:27
Speaker 4: my time there, the FED stop QT about the time
6:29
Speaker 4: that it cut rates in twenty nineteen. So the Paler
6:32
Speaker 4: Fed's continuing to shrink the balance sheet. They've given some
6:35
Speaker 4: indication about when they'll stop, but that I think will
6:38
Speaker 4: be a decision they'll need to make next year, and
6:40
Speaker 4: that could be in the context of pretty depressing budget numbers.
6:44
Speaker 5: But mikel all of this seems very predictable. You get
6:47
Speaker 5: this from a former FED official Columbia professor as well.
6:51
Speaker 5: What is the surprise you're worried about into Q one
6:55
Speaker 5: Q two?
6:56
Speaker 6: Well, I guess my question for Rich is what are
6:59
Speaker 6: they model? Are they modeling all the probabilities that fiscal
7:04
Speaker 6: stimulus could look like? Are they modeling the extension of
7:08
Speaker 6: the tax cuts? Are they just modeling the existing economy?
7:12
Speaker 4: Well, I guess the short answer is, I don't know.
7:14
Speaker 4: We'll find out in five years. My sense, though, certainly
7:17
Speaker 4: if I were there, what I would be focused on
7:19
Speaker 4: is a scenario where you may get a tariff, and
7:22
Speaker 4: then the question is is that inflation area, or is
7:25
Speaker 4: it a price level effect? Or in the wonking noition
7:28
Speaker 4: of central bankers are their second round of facts. Chris Waller,
7:31
Speaker 4: who have enormous regard for work with Chris, gave a
7:34
Speaker 4: speech several months ago in which or Q and a
7:37
Speaker 4: Maybe on Bloomberg in which he said, look, a tariff
7:39
Speaker 4: is a one time increase in the price level. It's
7:41
Speaker 4: not necessarily inflationary. So I think if I were there,
7:44
Speaker 4: I'd be wanting to see will that play out in
7:47
Speaker 4: various scenarios, But beyond that the details will matter.
7:51
Speaker 5: My chart of the day is Jim Biarco had a
7:53
Speaker 5: fabulous chart showing the inflation Bob Michael coming out of
7:56
Speaker 5: twenty twenty one, twenty two, and yeah, it's a noodle
7:59
Speaker 5: in along right now. The economists like Claire and are
8:02
Speaker 5: looking at the noodle in a lawn right now, and
8:04
Speaker 5: the public that just voted for Donald Trump is looking
8:06
Speaker 5: at the jump condition and inflation on a level change.
8:09
Speaker 5: Where are we going to be in twenty twenty five?
8:11
Speaker 5: Are we going to be looking at level change in
8:13
Speaker 5: the memory of it or are we going to be
8:15
Speaker 5: noodling along feeling happy.
8:17
Speaker 6: Well, we're not going to feel happy because there's no deflation.
8:20
Speaker 6: We're not going to feel happy because by the end
8:23
Speaker 6: of twenty twenty five there will be tariffs and some
8:26
Speaker 6: of that will be passed along to the consumer. We're
8:29
Speaker 6: not going to be happy because I don't think there
8:31
Speaker 6: will be additional tax cuts maybe on tips and overtime
8:36
Speaker 6: and corporate tax cuts in twenty twenty five. I think
8:39
Speaker 6: that's a twenty twenty six issue. So we're not going
8:42
Speaker 6: to be real happy with further improvement and inflation. To me,
8:47
Speaker 6: I took the same thing Lisa took away. They drop
8:50
Speaker 6: gaining confidence in inflation out of the statement. To me,
8:54
Speaker 6: that was an acknowledgement of a change in potential fiscal policy.
8:59
Speaker 1: Do you think that that means potentially they won't cut
9:01
Speaker 1: even in December?
9:03
Speaker 6: No, I think there is how do you get from
9:05
Speaker 6: here to there? It could be a number of quarters.
9:09
Speaker 6: You've got to preserve the economy in some sort of
9:12
Speaker 6: steady state. We're too high right now.
9:15
Speaker 4: If I could jump off preserve I think j Powell
9:17
Speaker 4: will want to preserve optionality. For twenty twenty five, A
9:20
Speaker 4: lot can happen. It'll be more tricky in December because
9:23
Speaker 4: there's the dots and so whatever the dots show, there'll
9:25
Speaker 4: be questions about how confident the FED is on that path.
9:28
Speaker 4: And I would suspect today he will begin to lay
9:31
Speaker 4: out a path to give themselves a lot of optionality
9:34
Speaker 4: in December as well.
9:35
Speaker 2: Rich, This is important. You think they begin to communicate
9:38
Speaker 2: at least open the door to have the option to
9:39
Speaker 2: pause in December, and that starts today.
9:42
Speaker 6: I do.
9:44
Speaker 4: It may be subtle, but I do.
9:47
Speaker 2: Help me understand what that sounds like at two thirty
9:50
Speaker 2: what's SAP today?
9:52
Speaker 4: I would imagine, Well, again, hypotheticals will know hypothetical would
9:56
Speaker 4: be a question about next year, and the chairit will
9:58
Speaker 4: say something along the lines of it too soon to
10:00
Speaker 4: make a judgment, and we'll be looking at the incoming assessment.
10:03
Speaker 4: And he'll remind folks that the rate path in the
10:06
Speaker 4: SEP is conditional on inflation continuing to come down. If
10:09
Speaker 4: there is a risk that it doesn't, that would factor
10:11
Speaker 4: into the rate path. So it's more not so much
10:14
Speaker 4: about getting into scenario details as it is. Look, the
10:16
Speaker 4: rate path depends on continued progress on inflation or disinflation.
10:20
Speaker 2: If you are just joining us, welcome to the program.
10:22
Speaker 2: At twenty five basis point, reduction of the Federal Reserve
10:24
Speaker 2: and news conference with Cham and pal in about twenty
10:26
Speaker 2: minutes time, joining us nas Dyne Swunk of KPMG down
10:29
Speaker 2: a twenty five basis point reduction and welcome to the program.
10:32
Speaker 2: At a time, whether it's eights are still holding up
10:34
Speaker 2: jobs claims are still quite low? Do they have the
10:36
Speaker 2: luxury of waiting of setting up a pause in December?
10:42
Speaker 7: Well, I do think they're going to be as exactly
10:44
Speaker 7: as everyone has said that they want optionality. I think
10:47
Speaker 7: they're still going to cut again in December. That said,
10:51
Speaker 7: the good wants to start talking about calibrating rate cuts
10:54
Speaker 7: to the economy and they're not going to be wanting
10:57
Speaker 7: to pull rate cuts do as cuts sequentially. I think
11:02
Speaker 7: in twenty twenty five, and optionality, as Rich said, is
11:05
Speaker 7: going to be number one issue because they don't know
11:08
Speaker 7: exactly what the policy will be, when policy will change,
11:12
Speaker 7: how it will affect the economy, and that is going
11:15
Speaker 7: to matter exactly as Rick stated that the certainty on
11:19
Speaker 7: the dot plot in December is going to be really uncertainty.
11:22
Speaker 7: And I think one of the greatest challenges that the
11:25
Speaker 7: Fed now faces is communication. This is not a period
11:29
Speaker 7: where you can give a lot of forward guidance because
11:32
Speaker 7: of the uncertainty on the course of policy going forward.
11:35
Speaker 5: Dan swank I was thunderstruck by the shift across the
11:39
Speaker 5: Blue Wall towards mister Trump. We all saw it, frankly,
11:42
Speaker 5: we saw it out in Long Island. Here in New
11:44
Speaker 5: York as well. There seemed to be a halves and
11:47
Speaker 5: a have nots here within the election. How does mister
11:50
Speaker 5: Powell address both groups into twenty twenty five, How does
11:55
Speaker 5: he aggregate and make a constructive policy for the people
12:00
Speaker 5: a lot on their back that voted for Donald Trump.
12:04
Speaker 7: Well, at the end of the day, Riches made this
12:07
Speaker 7: point and I agree with them. At the end of
12:09
Speaker 7: the day, the Fed's job is price stability. There is
12:13
Speaker 7: deflation in some goods prices, so some goods prices are
12:16
Speaker 7: coming down, they're still elevated from where they were. I
12:20
Speaker 7: do worry about shelter costs and whether or not those
12:23
Speaker 7: can really come down like many would like, and that
12:27
Speaker 7: is a problem, and also insurance costs. Those are more
12:29
Speaker 7: structural in nature. But at the end of the day,
12:32
Speaker 7: it's the Fed's job, one way or the other to
12:34
Speaker 7: get enough prices to fall to get to that price stability,
12:38
Speaker 7: but to get inflation to no longer be number one issue,
12:42
Speaker 7: I think that's going to be more challenging as we
12:44
Speaker 7: get into twenty twenty six. I agree wholeheartedly that the
12:48
Speaker 7: bulk of the policy shifts that we see, especially in
12:51
Speaker 7: terms of fiscal policy, are not likely to hit till
12:54
Speaker 7: twenty twenty six, and I don't expect a lot more
12:58
Speaker 7: than the extension of the tax cuts that we had,
13:01
Speaker 7: with maybe some additional corporate text cuts. But we will see,
13:05
Speaker 7: and I think it will take some time. I don't
13:06
Speaker 7: think it's all going to be done in the first
13:08
Speaker 7: hundred days. The tariffs, as Rich said, are issues that
13:12
Speaker 7: can be a level change, but if you combine them
13:14
Speaker 7: with curbs and immigration at this time and actually have
13:18
Speaker 7: any kind of deportations along with that, that tends to
13:22
Speaker 7: both stem growth and stoke inflation. In this environment, we
13:26
Speaker 7: are not where we were a pre pandemic, and certainly
13:29
Speaker 7: tariffs in sequential order along with retaliatory tariffs, that kind
13:35
Speaker 7: of a situation would be much harder for the Photo
13:37
Speaker 7: Reserve to deal with, and the pressure on the FED
13:40
Speaker 7: is going to intensify if that occurs.
13:43
Speaker 1: There's a lot of nodding around the table. I find
13:45
Speaker 1: it fascinating how little we understand inflation and exactly what's
13:49
Speaker 1: going to cause a real surge in it. And I
13:51
Speaker 1: do have to wonder and Bobb, I'll throw this to you,
13:53
Speaker 1: because I know you think that the Fed should keep
13:54
Speaker 1: cutting and that there is weakness to be addressing. I
13:58
Speaker 1: am struck by the fact that there hasn't been a
14:01
Speaker 1: more market slowdown in any of the economic data, with
14:04
Speaker 1: high yields, with rates at the long end as high
14:07
Speaker 1: as they've gotten, doesn't that tell us something about how
14:11
Speaker 1: restrictive or not that restrictive policy actually is at this level.
14:16
Speaker 6: Well, I think it's unfair to say there are no
14:19
Speaker 6: signs of a slowdown. As I said, you look at
14:22
Speaker 6: new and existing home sales, those are purely dependent on
14:26
Speaker 6: the level of rates currently because we know home prices
14:30
Speaker 6: aren't going to come back and they're quite high, and
14:33
Speaker 6: so new and existing home sales are down. They're going
14:35
Speaker 6: to decline further with this pop up in rates. And
14:39
Speaker 6: as I said, in corporate America, you look at the
14:42
Speaker 6: amount of amended and extent and pick there is a
14:45
Speaker 6: lot of corporate America that's struggling with the higher cost
14:49
Speaker 6: of funding, and a lot of that is floating rate.
14:51
Speaker 6: So for me, if you're at the FED, you've got
14:54
Speaker 6: to step back and say, okay, we're also looking at
14:57
Speaker 6: performance of credit cards and audit loans and other things.
15:01
Speaker 6: We do continue to need to take some of the
15:04
Speaker 6: pressure off to ensure we have a soft lining. I'm
15:07
Speaker 6: not talking about going to zero, two or three percent,
15:10
Speaker 6: just saying where we are currently around five percent is
15:13
Speaker 6: still a little bit too high.
15:15
Speaker 5: I'm going to be the rude one today. The former
15:17
Speaker 5: vice chairman of the Fuller Reserve System. This is Kylo
15:19
Speaker 5: tash Over at C and N. Michael McKee passes it's
15:21
Speaker 5: on to us. McKee insists that I'm as rude as
15:24
Speaker 5: I can be. To Richard Clarita, there's speculation here after
15:28
Speaker 5: the Powell term, your name is not mentioned. That's I
15:32
Speaker 5: guess the good news. There's Kevin Hassett and Kevin Walsh
15:35
Speaker 5: as well. Those are two very different people. What kind
15:38
Speaker 5: of person do we need to run the FED into
15:41
Speaker 5: the Trump administration? Do we need a monetary expert like
15:44
Speaker 5: you on DSGE or can we use someone like worsh
15:47
Speaker 5: who's more a part of the regulatory and wall street system.
15:51
Speaker 4: Well, and also I would also throw on Chris Waller's
15:54
Speaker 4: name as well as certainly beyond my life throwing rich. Look,
16:01
Speaker 4: I think that there is no one cookie cutter job description.
16:06
Speaker 4: I think that Jay Pal's been an incredibly successful FED chair,
16:09
Speaker 4: Ben Burnankee Janet Yellen, so you can certainly come from
16:12
Speaker 4: a background. What I would say about it is that
16:14
Speaker 4: in the world today, it's not just hiking and lowering rates.
16:18
Speaker 4: There's the communication piece we talked about. There is the
16:21
Speaker 4: supervision and regulatory piece that is not just only about banks.
16:25
Speaker 4: It's about how the economy functions and so and so.
16:29
Speaker 4: It requires a special skill set and a special person.
16:32
Speaker 4: But all the names you mean I think mentioned would
16:34
Speaker 4: be good choices.
16:35
Speaker 2: I just wanted to cross side of today and Swunk
16:36
Speaker 2: just to fit in a final question before you run Awhite, Diane,
16:39
Speaker 2: we always answer this question. If you had a question
16:41
Speaker 2: for the chairman today in the news conference, Dan, what
16:43
Speaker 2: would it be?
16:46
Speaker 7: It would be how much discussion was there about the
16:50
Speaker 7: labor market and the recent inflation numbers. I mean, that
16:54
Speaker 7: is where the tire meets the road in terms of
16:57
Speaker 7: where the next rate cut is going to be and
16:59
Speaker 7: how much much are they secure in the labor market
17:03
Speaker 7: weakness that we saw being transitory with regard to hurricanes
17:07
Speaker 7: and strikes. We know that part is transitory, but there
17:10
Speaker 7: is some signs that the labor market is slowing and
17:13
Speaker 7: how concerned are they on that. The other issue I
17:15
Speaker 7: think is really important one that we talk about all
17:17
Speaker 7: the time. That word that's out there, nonlinearity, what the
17:21
Speaker 7: FED always worries about. And this gets to the issue
17:24
Speaker 7: of you know, when do rates have a bigger impact
17:27
Speaker 7: on the economy? Is the nonlinear effects I think in
17:31
Speaker 7: both delinquencies but also particularly in the business sector where
17:36
Speaker 7: we do see some floating rates out there. There is
17:39
Speaker 7: some stress now starting to show in the business sector,
17:42
Speaker 7: and I think that's a very important issue.
17:44
Speaker 2: Dan, you're one of the best. It is always greats get
17:46
Speaker 2: some time with the Dan Swunk the of KPMG if
17:48
Speaker 2: you want, just joining us about twelve thirteen minutes away
17:51
Speaker 2: from a news conference with Chairman Powell. Equities at the moment,
17:54
Speaker 2: Stone ass session highs at all time highs on the
17:56
Speaker 2: S and P five hundred one point four percent on
17:58
Speaker 2: the mat snack that is south as of rerec called
18:00
Speaker 2: as well following a twenty five basis point reduction of
18:02
Speaker 2: the Federal Reserve equity stay elevated. Not much price section
18:05
Speaker 2: off the back of this decision this afternoon though, Joining
18:08
Speaker 2: us now is Matt Lazeti over at Deutsche Bank. Matt,
18:10
Speaker 2: I want your thoughts on the outlook and Matt, welcome
18:12
Speaker 2: to the program. Have you made any changes since the
18:15
Speaker 2: election this week, and if so, how many?
18:19
Speaker 8: Yeah, thanks for having me. So we haven't really made
18:21
Speaker 8: any official changes to the OUTLOK at this point. I think,
18:23
Speaker 8: you know, we need to get in clarity on a
18:25
Speaker 8: number of things. You know, how we're thinking about tax policy,
18:28
Speaker 8: the sequencing of that between trade and tariffs will be
18:31
Speaker 8: really important. But we did publish a note just given
18:34
Speaker 8: kind of a guidepost to where we think the economy
18:36
Speaker 8: may be moving and where the FED outlook may be
18:38
Speaker 8: moving for next year, and in particular, you know, we
18:40
Speaker 8: do think that we could upgrade our growth forecast for
18:42
Speaker 8: next year, probably into the two and a half percent range,
18:45
Speaker 8: give or take, or so. A labor market that is
18:47
Speaker 8: probably going to look a little bit tighter on the
18:49
Speaker 8: back of tax cuts that were likely to see easier
18:53
Speaker 8: financial conditions that were likely to have but also a
18:55
Speaker 8: FED that is likely cutting rates less next year than
18:58
Speaker 8: we previously thought, and so yeah, we are kind of
19:01
Speaker 8: outlined a scenario in which the FED stops cutting rates
19:04
Speaker 8: above four percent next year.
19:06
Speaker 1: Yeah, this is one comment from the recent note that
19:09
Speaker 1: you put out that if it truly is a red
19:11
Speaker 1: sweet and the likelihood is the FED funds rate remains
19:14
Speaker 1: above four percent by the end of next year, with
19:17
Speaker 1: growth and inflation revised upward. Matt, what would you have
19:20
Speaker 1: to see to make that your base case?
19:23
Speaker 8: Look, I think we're close to that. I think it's
19:26
Speaker 8: just getting clarity on how we think the policy outlook
19:28
Speaker 8: is likely to like it to evolve. You know, I
19:30
Speaker 8: think we know a few things since the September meeting. One,
19:33
Speaker 8: labor market data, I think, on balance have come in
19:35
Speaker 8: better and have diminished some of the downside risks that
19:38
Speaker 8: we've been worried about. Two, inflation data have come in
19:41
Speaker 8: hotter than anticipated, and so I think if the Fed
19:43
Speaker 8: were to have revised their forecast today, it's inflation higher,
19:46
Speaker 8: a labor market that is tighter. Three financial conditions have
19:49
Speaker 8: eased considerably since the September meeting, and so I think
19:53
Speaker 8: as you look at all of that and just ignore
19:56
Speaker 8: the election for the time being. You've actually had an
19:59
Speaker 8: evolution in the data financial conditions, which would be hawkers
20:01
Speaker 8: for the FED. Now we overlay on top of that,
20:04
Speaker 8: you know, fiscal stiveness that may come via tax cuts,
20:07
Speaker 8: trade policy that could lift inflation next year, and I think,
20:09
Speaker 8: undeniably together these are just hawkersh developments for the VED.
20:12
Speaker 5: That was Odie George Saravella's talk to them the other day.
20:15
Speaker 5: He's a little occupied with the collapse of the German government.
20:18
Speaker 5: But what does Deutsche Bank feel about the ability to
20:21
Speaker 5: steer to a weaker dollar or something President Trump would like?
20:26
Speaker 8: Yeah, you know, I'm not sure that that's actually something
20:29
Speaker 8: that's going to be a key policy objective of the
20:31
Speaker 8: Trump administration. I think some of their tone has changed
20:34
Speaker 8: on that. I think that they have emphasized that the
20:36
Speaker 8: reserve currency is a really important part. That they're making
20:39
Speaker 8: the US economy a place for investment is a really
20:42
Speaker 8: important part from a policy perspective. Now, certainly, you know,
20:45
Speaker 8: a weeker dollar could help on some of the trade objectives,
20:47
Speaker 8: but I don't anticipate kind of talking down the dollar
20:50
Speaker 8: is going to be a big part of the next administration.
20:52
Speaker 2: Matt, We've been told so many times by so many
20:54
Speaker 2: people that the decision today was an easy one and
20:57
Speaker 2: then maybe descend but will be an easy one when
20:59
Speaker 2: do they decisions start to get hot?
21:03
Speaker 8: So today was easy, I'm not sure December is going
21:04
Speaker 8: to be as easy. If the incoming data continue to
21:07
Speaker 8: point to a labor market that looks resilient and downside
21:10
Speaker 8: risks have diminished, and if we get inflation data that
21:12
Speaker 8: continue to come in a little bit hotter, along with
21:16
Speaker 8: financial conditions that are easy, you know, we are beginning
21:19
Speaker 8: to approach a range of kind of reasonable estimates of
21:21
Speaker 8: neutral from our perspective. You know, we think neutral from
21:24
Speaker 8: a nominal rate perspective could be anywhere probably between three
21:27
Speaker 8: and a half and four percent. So after this cut,
21:29
Speaker 8: you know, perhaps the December one can come and they
21:32
Speaker 8: can still feel comfortable with that. But I really do
21:34
Speaker 8: think that the December meeting is the first one where
21:36
Speaker 8: we probably have a little bit more contentiousness around it
21:39
Speaker 8: because they're approaching neutral. The data look fine, and you
21:42
Speaker 8: do have risks to the outlook where just from a
21:44
Speaker 8: risk management perspective, it could make some sense to slow
21:47
Speaker 8: the pace of cuts.
21:48
Speaker 1: Which do you agree with that, especially with the fact
21:50
Speaker 1: that they have to come out with a statement of
21:51
Speaker 1: economic projections. How that makes them forces them to really
21:55
Speaker 1: write down, codify this idea of a neutral rate north
21:58
Speaker 1: to four percent.
21:59
Speaker 4: Yes, I think that scenario is certainly a plausible one.
22:03
Speaker 4: The nuance I would offer is I could see a
22:05
Speaker 4: scenario where they get the funds rate down to a
22:07
Speaker 4: round four and stay there, not as neutrals four, but
22:10
Speaker 4: just inflation stuck at two and a half. I don't
22:12
Speaker 4: see the power Fed breaking a lot of China to
22:14
Speaker 4: get inflation down from two and a half to two
22:16
Speaker 4: with raid hikes, but they may just pause at a
22:18
Speaker 4: funds rate in the low force because inflation stuck it
22:21
Speaker 4: at two and a half. So that's another way that
22:24
Speaker 4: delivers Math's scenario.
22:26
Speaker 1: Matt, what do you think of the idea of tariffs
22:28
Speaker 1: being inflationary versus not?
22:30
Speaker 5: Right?
22:30
Speaker 1: I mean, what are you sort of looking at as
22:31
Speaker 1: the most inflationary aspects of policy? That would be maybe
22:35
Speaker 1: a warning side signed for the Federal Reserve.
22:39
Speaker 7: Yeah.
22:39
Speaker 8: I think the complications for the Fed next year could
22:42
Speaker 8: be that we have demand side policy in terms of
22:45
Speaker 8: tax cuts happening with an economy that is already strong,
22:48
Speaker 8: being coupled with supply side policy via tariffs that would
22:52
Speaker 8: lift inflation, and both of those things being kind of
22:54
Speaker 8: giving an inflationary outcome where it makes it difficult to
22:56
Speaker 8: disentangle what's happening from a demand side versus a supply
23:00
Speaker 8: side story. You know, certainly if the VED was able
23:02
Speaker 8: to identify, they could potentially look through the tariff effects
23:05
Speaker 8: on inflation. But I think that they are probably just
23:08
Speaker 8: less prone to do so for a few reasons. One,
23:10
Speaker 8: inflation is already above their target and is continuing to
23:13
Speaker 8: do so. Two, inflation expectations could be at risk of
23:17
Speaker 8: moving higher, and I think that this is primarily or
23:20
Speaker 8: even more so an issue if those tariffs are phased
23:24
Speaker 8: in over time. It makes it more difficult and complicated,
23:27
Speaker 8: I think, to identify the price level shock and makes
23:29
Speaker 8: you a little bit more worried about it factoring into
23:31
Speaker 8: inflation expectations.
23:32
Speaker 5: So about Michael, if I want to affect the Lazetti
23:34
Speaker 5: Claire to move here in bonds, price up, yield down?
23:38
Speaker 5: How far out unduration do I want to be into
23:41
Speaker 5: twenty twenty five? Do I want to extend duration?
23:45
Speaker 7: Yeah?
23:45
Speaker 6: I think you do. Here, I think there are a
23:46
Speaker 6: lot of things to do. That's kind of interest we're
23:49
Speaker 6: seeing from clients to municipal bond market is a large
23:52
Speaker 6: part of that. A lot of clients owned municipal bonds
23:55
Speaker 6: have ladders. Stuff is rolling off, roll it out to
23:58
Speaker 6: ten years. There's a lot going on in credit. Get
24:01
Speaker 6: out there and invest. You have to recognize there's been
24:04
Speaker 6: a pretty significant backup in yield. We don't know what
24:08
Speaker 6: fiscal policy will look like, and it sure looks like
24:11
Speaker 6: we're not going to see a lot before a year
24:14
Speaker 6: or so.
24:14
Speaker 2: You know, there's some people Bob worried about it by
24:16
Speaker 2: a strike emerging in the bond market, and I just wonder,
24:18
Speaker 2: with yields at these levels, do we just keep sucking
24:20
Speaker 2: capital away from the rest of the world here in
24:22
Speaker 2: the United States, Because if I'm thinking about the policy
24:24
Speaker 2: coming down the pike from my perspective and many others
24:27
Speaker 2: as well, if you're investig in America, there's going to
24:29
Speaker 2: be policies to reward it. If you're exporting it, that's
24:31
Speaker 2: a very very different scenario of trying to export into America.
24:34
Speaker 2: But do we just keep sucking capital away from the
24:37
Speaker 2: rest of the world.
24:38
Speaker 6: Well, yesterday was the perfect evidence of that. There was
24:41
Speaker 6: every reason to hide from the bond market. You had
24:45
Speaker 6: a thirty year auction and it went flawlessly.
24:49
Speaker 4: You see the same thing, Rich, I do, And in particular, look,
24:52
Speaker 4: we focus on the US, but it's a global bond market,
24:54
Speaker 4: and treasure yields four and a half. We saw a year,
24:56
Speaker 4: almost exactly a year ago, treasure yields got to five,
24:59
Speaker 4: and there was a voracious appetite to lock in those
25:02
Speaker 4: those yields. And so I do think there's a range
25:04
Speaker 4: within which the growth and the FED and the fiscal
25:06
Speaker 4: pit plays in. But beyond a certain point, it becomes
25:09
Speaker 4: very attractive to international investors.
25:12
Speaker 2: So we retain the privilege of acting recklessly. Some people
25:14
Speaker 2: might say iolutely.
25:16
Speaker 4: Kicking that can down the road.
25:18
Speaker 1: Yeah, although I do wonder what the consequence is of
25:20
Speaker 1: kicking the can down the road and then Germany saying, hey,
25:23
Speaker 1: they're doing it, so we want to too. You know,
25:26
Speaker 1: this sounds like a good plan France, Hey what about us?
25:28
Speaker 1: And all of a sudden you get yields rising higher?
25:31
Speaker 1: And how much does the bond market suck in the
25:33
Speaker 1: capital away from other risk assets?
25:35
Speaker 8: That's the question.
25:36
Speaker 1: No, I'm serious That's one of my main questions.
25:38
Speaker 2: Some of these European bond markets have learned they're not
25:40
Speaker 2: American and that has been a painful lesson which one
25:43
Speaker 2: you've seen that In the UK you had a little
25:45
Speaker 2: sprinkle of that. In France we still that and the
25:47
Speaker 2: periphery a decade ago.
25:49
Speaker 4: Well, I'm just saying the challenge for many European countries
25:52
Speaker 4: is the countries they'd like to invest on don't have
25:55
Speaker 4: a lot of debt out standing, like Germany and Switzerland,
25:57
Speaker 4: and the countries that want to borrow have to pay
25:59
Speaker 4: a big premium.
26:00
Speaker 2: So yeah, I want to cross back out. It's a MATLAZETI matight,
26:03
Speaker 2: just before you run, what's the best way of getting
26:05
Speaker 2: the chairman to answer a question about the election without
26:07
Speaker 2: answering a question about the election, because that's all every
26:10
Speaker 2: journalist on the planet right now is thinking, and every
26:12
Speaker 2: single journalist in that news conference will be trying to do.
26:16
Speaker 8: Yeah, I think it's a really difficult one. I think
26:18
Speaker 8: at the moment, you know, chair Pal has really no
26:20
Speaker 8: incentive to answer any question about what fiscal policy.
26:22
Speaker 6: Is going to look like.
26:23
Speaker 8: There's so much uncertainty, you know, I think he's going
26:25
Speaker 8: to emphasize data dependence. I guess if you could do
26:27
Speaker 8: it through a few avenues, it would be one, you know,
26:29
Speaker 8: how they think about risks to the outlook as they
26:32
Speaker 8: look ahead, you know, in terms of the policy outlook
26:34
Speaker 8: that has to fact earned out to the thinking about things. Two.
26:37
Speaker 8: I think it was interesting at the September meeting he
26:40
Speaker 8: noted that the neutral rate has risen quote unquote significantly
26:43
Speaker 8: relative to the pre COVID levels, And I would you know,
26:47
Speaker 8: just kind of think, you know, if we're getting additional
26:49
Speaker 8: and fiscal stimulus on that, how would he view the
26:52
Speaker 8: outlook for the neutral rate as evolving in that type
26:54
Speaker 8: of environment. But to be honest, I think it's difficult
26:56
Speaker 8: to get kind of a solid answer for him about
26:58
Speaker 8: what the election could mean for the OUTLOK at this meeting.
27:00
Speaker 2: Matt, I appreciate your time, Sir Matta SETI if Deutsche
27:03
Speaker 2: Bank about three minutes ago until this news conference starts,
27:06
Speaker 2: Rich'll perfectly placed to answer that question. What would you
27:08
Speaker 2: lead into in this news conference if you will on
27:10
Speaker 2: the side asking the questions, what would you lean on?
27:14
Speaker 4: I think I'd ask the chair about financial conditions broadly
27:18
Speaker 4: versus the real funds right, because it does seem over
27:21
Speaker 4: the last year the Committee at some points emphasizes tighter
27:24
Speaker 4: financial conditions. We saw that explicitly in the statement in
27:27
Speaker 4: both November and December of last year. More recently they've emphasized, well, look,
27:31
Speaker 4: the funds rates well above the rate of inflation. But
27:35
Speaker 4: at the same time, financial conditions have been getting easier.
27:38
Speaker 4: And it's not necessarily have to pick one or the other,
27:40
Speaker 4: but get a sense of how he and the Committee
27:42
Speaker 4: are thinking about that right right now in a global
27:45
Speaker 4: market and in the US market in which it's definitely
27:48
Speaker 4: risk gone in the last several days and really for
27:52
Speaker 4: some time now.
27:53
Speaker 5: I've asked this before, but I think it's so important.
27:55
Speaker 5: Where's the animal spirit into twenty twenty five? President Trump's
28:00
Speaker 5: going to go, go, go, go go. He's going to
28:02
Speaker 5: do that before January whatever the inauguration. How goosed is
28:07
Speaker 5: the economy economy going to be under Trump?
28:10
Speaker 4: Well, I think there is that element at minimum, because
28:13
Speaker 4: we did resolve some uncertainty. I think about the extension
28:16
Speaker 4: of the existing I would again remind you if we
28:18
Speaker 4: extend the existing tax cuts, it's very expensive in terms
28:21
Speaker 4: of the way it's scored by the CBO, but it
28:23
Speaker 4: doesn't change anybody's you know, tax rates relative to what
28:27
Speaker 4: they're paying paying now. I think the regulation in particular
28:30
Speaker 4: certain sectors energy and perhaps financial services is sort of
28:34
Speaker 4: a one time reassessment. I don't think you can keep
28:38
Speaker 4: that going. I think we are seeing more or less rational,
28:40
Speaker 4: least directionality wise reaction to markets. And to point on
28:45
Speaker 4: the dollar, strong, strong dollar. I know someone like a weaker,
28:48
Speaker 4: but this is the dollar is the sum.
28:50
Speaker 1: Yeah, So, Bob, final question, we're about a minute ninety
28:55
Speaker 1: seconds away from this press conference. How would you get
28:57
Speaker 1: him to answer something about his new risks?
29:00
Speaker 6: You know, I'd ask the question we had gone back
29:03
Speaker 6: and forth on, ask him, what is your staff modeling now?
29:06
Speaker 6: Because there's the current and expect set of data, and
29:10
Speaker 6: there's the majority probability that there's enormous fiscal stimulus coming
29:16
Speaker 6: down the pike a year from now, what do you model?
29:19
Speaker 2: This has been a fantastic conversation, gents, Bob Michael and
29:22
Speaker 2: a former FED Vice chair Richard Cloda, to the two
29:24
Speaker 2: of you, just absolutely brilliant. Just some takeaway from the
29:27
Speaker 2: last thirty minutes if you're just joining us, Richard Cloud,
29:29
Speaker 2: are talking about maybe finding some space to generate some
29:32
Speaker 2: optionality going into twenty twenty five, and if it's a
29:35
Speaker 2: consensus around this table as well, that the decision gets
29:38
Speaker 2: harder once you get to December, and that this one
29:40
Speaker 2: was an easy one and maybe December is a tricky one.
29:43
Speaker 1: My big takeaway is that the FED removed the reference
29:45
Speaker 1: and their statement to gaining confidence on inflation at the
29:48
Speaker 1: same time that our panelists, our Steam panelists, are talking
29:51
Speaker 1: about opening the door in December to either not cutting
29:54
Speaker 1: rates or potentially going forward and maybe not cutting next year.
29:58
Speaker 2: Are you ready for a forty five minute clinic on
30:00
Speaker 2: how to not answer questions? Are you ready for this ex.
30:03
Speaker 8: I'm so excited.
30:04
Speaker 5: Is this a certified snooze first?
30:06
Speaker 1: No, absolutely, not touch It is going to be pretty well.
30:09
Speaker 2: I think it's going to be one of those news
30:10
Speaker 2: conferences and mister Clarenden knows this well, where you have
30:13
Speaker 2: a sheet of paper in front of you, You've got
30:15
Speaker 2: your notes written down, and every time you get that question,
30:18
Speaker 2: different versions off it.
30:19
Speaker 6: That sheet of.
30:19
Speaker 2: Paper comes up and you read it verbatim and hope
30:22
Speaker 2: they get bored of asking.
30:24
Speaker 1: My favorite is when they have multiple sheets when Jay
30:26
Speaker 1: Pall has multiple sheets, and someone asks a question, you
30:28
Speaker 1: see him going through the papers. Wait, where's okay, there's
30:31
Speaker 1: the answer.
30:32
Speaker 5: Have you ever written one of those questions the answer
30:34
Speaker 5: sheets for the chairman.
30:37
Speaker 4: I participated in discussions of press conference briefings.
30:40
Speaker 2: Yes, twenty five bases point reduction over the federerser