Latest / The Issue at Hand by Madison Investments / Market Brief: Previewing a Pivotal FOMC Meeting
Transcript
- speaker-0: Today we're going to be discussing the upcoming FOMC meeting. That's the Federal Open Market Committee meeting that's going to be taking place on Wednesday, June 17th. So essentially what we're going to be discussing is there's a lot of noise, there's a lot of pundits, there's a lot of talk going about what's going to be happening on this one because there's a lot of good news. The new Fed chair is going to be starting worse. And then we also have the old Fed chair who's still going be present. So that's going to be interesting with all that noise going on. But I think what our job here today is going to be to separate that noise From the substance. So what Mike, I guess what we want to start off with is let's start with the basics. What is the Fed trying to accomplish with these meetings and what is their goal? speaker-1: Yeah, so the Fed has a dual mandate. It's full employment and stable prices, which is loosely defined as two percent kind of core PCE personal consumption expenditures. And that's what they're when they're looking at policy decisions ⁓ during these meetings, it's really about achieving those goals and seeing if one of them is ⁓ outside kind of the target target number that they're looking for. And that's really what's getting discussed and what the policy actions are trying to focus on. speaker-0: Mean speaking of those outside numbers, I mean, if I can quote some current statistics to you, some of the things that I that I was very shocked by, so inflation came in four point two percent for May, which was higher than three point eight percent for April, which is the third consecutive month of acceleration. Then we look at the jobs number that came in that kind of crushed expectations, which came in at a hundred and seventy two thousand. So I guess what I want people to understand and what we should be on the lookout for is should we be expecting cut? Or should we be expecting hikes from this upcoming meeting? Yeah. speaker-1: I think neither, actually. I think there's gonna be no decision or ⁓ you know they're gonna keep rates the speaker-0: Great, great answer there. speaker-1: I mean i just kinda going back to the data, right? The not not only was the this this past month's number ⁓ strong, but the prior number was revised up. And then on the inflation side, you know, you were quoting headline, you know, the Fed cares maybe a little bit more about core and core was, you know, around three percent. So, you know, adjusting for those yeah, adjusting for the the differences in PCE versus CPI, it's still above their two percent target. So, you know, i if if you think about the Fed's mandate, dual mandate, and unemployment rate, you know, was four point three percent. So the dual mandate is showing that inflation is still above ⁓ their targeted level, and the emplo unemployment rate is kind of staying the same, so so stable. So given the current environment, I think the Fed will do nothing and watch just given what maybe some of the drivers of that inflation currently are. speaker-0: I guess that'll be interesting. We'll see, 'cause you're right, the data is pointing to where we have no idea where it's gonna go. It should stay the same, but we'll see what they end up doing. I guess that brings up a good point though, in terms of what they're gonna be doing is let's talk about Fed independence. So one of the things that's been talked about, I I don't want to say recently a lot, is the current administration's goal of trying to get the Fed to have cuts. And essentially what they're trying to do is they wanna spur growth. Now, the new Fed chump Fed share coming in, that was kind of the expectation that was coming. So I guess When I pose this question to you about Fed independence, is there a chance that they're gonna remain independent or is it gonna be kind of going with what the administration kind of wants? speaker-1: I I think the they'll s remain independent. You know, again it's Worsh is one vote of of many and so he needs to build consensus to actually have policy shifts in you know, like I said, the the data right now speaks to maybe a little bit more concern on the inflation side, or they could you could argue where that inflation is coming from. It's not really coming from wage growth. So is the Fed gonna react to speaker-0: I a lot of it's gonna be energy. speaker-1: And and you know the AI demand is is inelastic. That's not going to change by twenty-five basis points of of a of a hike. And so I I I I just don't see Walsh coming in and trying to, at least during you know, the the QA afterwards, trying to really push this dovish con is this dovish environment because I think that's gonna really harm his long term credibility. If he comes out and you know this Talking differently than what maybe the statement that was kind of discussed by the entire committee, and he's talking a little bit more dovish, when in reality you could argue that they need to be neutral or hawkish. Long-term credibility for him is going to take a hit. And you probably see that getting impacted out the yield curve. ⁓ because if the Fed does move rates or they somehow can push through rates cuts in this environment, I don't think that's the case. I think that has pretty big implications ⁓ for like longer term, longer term major. Yeah. speaker-0: So guess your expectation is we should say he should say status quo essentially. I think let's let's not let's not kind of br like rot the boat. speaker-1: Yeah, if if I were to say, you know, you have dovish, neutral, and hawkish, he needs to be neutral to slightly hawkish. Just given all the commentary from the Fed officials, they're definitely you know they want to remove specific language, they want to ch you know, tweak ⁓ the verbiage, if you will. You can't come in and then talk about cutting interest rates when every other official seems to be at the neutral to higher interest rate leading. speaker-0: Well, that makes sense. I guess down the road, maybe not this meeting, but maybe some of the next meetings, maybe in the next six months, what are the what do you need to see, I guess, in the data to make you think that we're gonna have either hikes or cuts? And I guess like how does that impact bond investors from a risk perspective? speaker-1: Yeah, so we can paint two different kind of scenarios. So the in the hiking scenario down the road, I think you really have to see inflation start to creep into some of the core services than you do have in the goods area. I think that's where, you know, maybe wage induced inflation ⁓ is gonna be concerning from the Fed. Yeah, long term inflation expectations are still anchored. ⁓ but if those start to creep higher and you start seeing inflation in other areas maybe that weren't directly Impacted by and sustained inflation directly impacted by energy prices, that's when the Fed's going to get concerned. They're going have to seriously consider increasing interest rates. On the flip side, for the Fed to cut rates, you're really going to have to see a deterioration in the labor market, which again seems to me we're not that. speaker-0: Yeah. speaker-1: Yeah, I it it thro we've always thought that the Fed would be quick to, you know, aggressively cut rates or even not aggressively, just cut rates if they saw cracks in the labor market. ⁓ until you see that, if you're gonna s stick around sub four and a half percent unemployment rate, ⁓ you know, the non farm payroll data. the break evens lower because of immigration. But if you start you know you see that staying consistently at fifty ish, give or take, you know, and plus four and a half percent unemployment rate, Fed's not gonna move. But if you start seeing those numbers falling and the rate going higher, I think it's in play for further cuts. ⁓ speaker-0: Well I guess when you say it like that, I guess how should how y how should bond investors again, as I mentioned in the r in the the opening question was a risk, like how should we be positioned given those expectations? speaker-1: Yeah, I I I think If I was the you know looking at the curve, you know, there's still a lot of uncertainty out the yield curve given some of the fiscal issues and the inflation issues. So just be a little wary of of what you're owning out the curve, I guess from from our perspective. ⁓ there's still, you know, from s a spread perspective, we talked about you know all the risks in fixed income investing. and and spreads are fairly snug, at least how we measure them. And so just be very, very aware because you know, market price. and the data can change very, very, very quickly. And you just have to make sure wherever you're going to buy fixed income, you need to understand what risks you're getting exposure to. And that's going to definitely drive returns. speaker-0: Well, I think that about wraps it up. I think it's gonna be an interesting Fed meeting to say the least on Wednesday the seventeenth. Please join us next time where we're gonna recap exactly what was said and expectations going forward. If you have any other questions or need any other information, please visit Madison Investments dot com. Take care.