Latest / Bloomberg Intelligence / Instant Reaction: Powell Defends 50 Point Rate Cut

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Instant Reaction: Powell Defends 50 Point Rate Cut · Bloomberg Intelligence

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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  Speaker 2: Good afternoon for our audience worldwide, Welcome to the program,
• 0:15
  Speaker 2: a special edition of Bloomberg Surveillance on a Federal Reserve decision.
• 0:19
  Speaker 2: The decision as follows, a fifty basis point cut with
• 0:22
  Speaker 2: a sprinkle of descent. Your ecory market on the S
• 0:25
  Speaker 2: and P five hundreds still just about firmer. But rolling
• 0:27
  Speaker 2: over in that news conference, we're now firmer by just
• 0:29
  Speaker 2: a quarter of one percent on a Russell, still elevated
• 0:32
  Speaker 2: up by more than one full percentage point straight out
• 0:35
  Speaker 2: of the gate in that news conference. Framing policy recalibration
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  Speaker 2: something he said multiple times, a process that evolves over time.
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  Speaker 2: Take a listen to what the Chairman had to say
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  Speaker 2: on the path forward.
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  Speaker 3: I do not think that anyone should look at this
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  Speaker 3: and say, oh, this is the new pace. You know,
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  Speaker 3: you have to have to think about it in terms
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  Speaker 3: of the base case. Of course, what happens will happen.
• 1:00
  Speaker 3: In the base case. What you see is look at
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  Speaker 3: the SEP. You see cuts moving along. The sense of
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  Speaker 3: this is we're recalibrating policy down over time to a
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  Speaker 3: more neutral level, and we're moving at the pace that
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  Speaker 3: we think is.
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  Speaker 2: Appropriate recalibration on repeat, Lisa looking forward to meeting by mating,
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  Speaker 2: this is not the new pace. That's something he puts
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  Speaker 2: some weights on, some emphasis in that news conference.
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  Speaker 1: And if you were basically judging his news conference based
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  Speaker 1: on the stock reaction, there's a little wobble after that statement,
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  Speaker 1: and even more of a wabble after you really addressed
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  Speaker 1: the idea of a neutral race. He told it a
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  Speaker 1: sense of neutral, whatever that may be. And he said
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  Speaker 1: that my own sense is we're not going back to
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  Speaker 1: that nehru time or that negative rate, very low rate time.
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  Speaker 1: Neutral rate is probably much higher. You saw a reaction there,
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  Speaker 1: but then people shook it off and said, hey, he's
• 1:52
  Speaker 1: got our back.
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  Speaker 4: I look, John, I strapped a fibonacci across this, and
• 1:56
  Speaker 4: from where we were to the midpoint of the pandemic
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  Speaker 4: low is two and seven eighths. He is correct. It's
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  Speaker 4: just a nudge in the distance to travel just to
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  Speaker 4: get back to the midpoint.
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  Speaker 5: Call it normal.
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  Speaker 4: It's a lot longer than the job owning in the
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  Speaker 4: press conference that we just saw.
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  Speaker 2: We're lucky to have Mohammad alongside us. He won't say
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  Speaker 2: mission accomplished. He refused to say in this news conference,
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  Speaker 2: But we've got to ask, isn't it implied?
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  Speaker 6: Listen to this.
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  Speaker 2: The labor market conditions are pretty close to maximum employment.
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  Speaker 2: Retail sales GDPs show the economy is growing at a
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  Speaker 2: solid pace. We're not seeing rising layoffs or hearing it
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  Speaker 2: from companies. It's time to support the labor market when
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  Speaker 2: it's strong. That's what we're trying to do. Is that
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  Speaker 2: mission accomplished? Isn't it implied?
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  Speaker 7: Yeah?
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  Speaker 6: I mean Jason Furman put it as well as anybody
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  Speaker 6: can when he said if you look at the projection,
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  Speaker 6: and now if you listen to his statement, it is
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  Speaker 6: and I'm quoting him, just about the closest thing to
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  Speaker 6: mission accomplished banner that you can imagine them unfiling. So
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  Speaker 6: I think it is the hard thing for Power is
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  Speaker 6: that we're not just recalibrating policy. We're recalibrating what we
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  Speaker 6: mean by a fifty basis point cut. You don't start
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  Speaker 6: a fifty basis point cycle with a fifty basis point
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  Speaker 6: cut and say at the same time, the economy is
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  Speaker 6: in good place. And that's what he had to navigate
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  Speaker 6: all the time. If the economy is in a good place,
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  Speaker 6: why are starting with fifty basis points? And it was
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  Speaker 6: harder for him to reconcile it too, because he didn't
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  Speaker 6: want to acknowledge that keeping weights unchanged in July was
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  Speaker 6: a mistake. So that's the tension that played throughout the
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  Speaker 6: press conference.
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  Speaker 2: He did mention that if they had that Job's report
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  Speaker 2: before that mating in July, that maybe they would have
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  Speaker 2: gone twenty five at that mate, take what did you
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  Speaker 2: make of that?
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  Speaker 1: I made of that this idea that what does he
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  Speaker 1: mean about the totality of data? And he didn't talk
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  Speaker 1: about data dependency in quite the same way when he started.
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  Speaker 1: When he was asked by our own Michael McKee about
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  Speaker 1: what he was looking for and how much he seems
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  Speaker 1: to be reconciling something, he didn't have a real clear
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  Speaker 1: view on that. What is the data we're looking at now?
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  Speaker 1: Is it basically revisions to the jobs numbers that we're getting,
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  Speaker 1: as well as potentially the Beige Book.
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  Speaker 2: You've said this a few times. Revisions seems to be
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  Speaker 2: more weight now in revisions, and I think over the
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  Speaker 2: last few news conferences now he's basically said, whatever payrolls is,
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  Speaker 2: he thinks he's overstating jobs growth in this country, which.
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  Speaker 1: Has been just the truth over the past couple of
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  Speaker 1: months and frankly more than a year. Typically, when you
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  Speaker 1: get a weakening labor market, the data that you get
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  Speaker 1: initially is stronger than what you get on the revisions downward.
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  Speaker 1: But just to build the idea of mission accomplished, he
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  Speaker 1: kept saying that the only reason he could really make
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  Speaker 1: a commitment to fifty basis points is we are committed
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  Speaker 1: to coming up with a good outcome. He came up
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  Speaker 1: with lots of He went to the thesaurus of outsoft landing,
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  Speaker 1: but that was really where he was heading.
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  Speaker 2: Joining us now to discuss the continue the conversation built
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  Speaker 2: down to be the former New York Fed president and
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  Speaker 2: Bloomberg Economics senior advisor, billing your piece before this decision
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  Speaker 2: on Bloomberg opinion, you said the Fed should go big.
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  Speaker 2: Now I think it will it did. What did you
• 5:02
  Speaker 2: think of what you heard this afternoon?
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  Speaker 7: It's pretty much what I was expecting in the sense
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  Speaker 7: that one of the issues that Paul had is how
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  Speaker 7: do you two fifty without scaring people that you know
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  Speaker 7: something bad about the economy? And I think he did
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  Speaker 7: that very well. He basically said we're doing this because
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  Speaker 7: the news is good. We've made progress on inflation, as
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  Speaker 7: opposed we're doing this because the news is bad. So
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  Speaker 7: I thought it was a very uh, you know, providing
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  Speaker 7: reassurance to people that thinks that they've they've got it.
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  Speaker 7: You also, you know, when he's asked about, you know,
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  Speaker 7: the Sam rule and the risks that the unemployment rate
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  Speaker 7: could go up by quite a bit, more pretty reassuring
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  Speaker 7: on that. You know, thinks that the labyer market can
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  Speaker 7: stabilize close to where we are today, and that's really
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  Speaker 7: hugely important because you know, if the layer of market
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  Speaker 7: doesn't stabilize, then we will have them out recession and
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  Speaker 7: then the FED will have to ease a lot more So,
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  Speaker 7: I thought the general tone of the of the press
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  Speaker 7: conference and the statement was we've got that, We've got it.
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  Speaker 4: Bill. Congratulations your essay today. You think you were one
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  Speaker 4: of the Fed whispers everybody's talking about out there right now.
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  Speaker 4: Bill Dudley, I look at where we are and where
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  Speaker 4: we're heading, and it simply comes down to the strength
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  Speaker 4: of the American economy. Forgetting about the theater of recession.
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  Speaker 4: Where does GDP settle, whether real GDP or nominal GDP.
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  Speaker 4: How do you envision that in a year or even
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  Speaker 4: two years.
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  Speaker 7: I think if you look at the Fed's forecast and
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  Speaker 7: look at how that growth affects the unemploying rate, the
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  Speaker 7: FED thinks that, you know, growth in the medium term
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  Speaker 7: is going to be two percent two percent plus at
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  Speaker 7: annual which rates. So and that's sort of what we're
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  Speaker 7: doing right now. So you know, the FED got a
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  Speaker 7: sort of soft landing in place. If the commy continues
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  Speaker 7: to growth at the same pace as it's doing right now,
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  Speaker 7: the unemploying rate will stay relatively stable. You know, you
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  Speaker 7: saw in the Summary of Economic Projections, the FED shows
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  Speaker 7: a modest, very modest, further increase in the unemploying rate
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  Speaker 7: of from four point two today to four point four percent,
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  Speaker 7: but you know, nothing beyond that. So it's sort of
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  Speaker 7: a soft you know, if you look at their forecast,
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  Speaker 7: it's a soft landing kind of story, and you know,
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  Speaker 7: I hope they could pull it off.
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  Speaker 1: Right now, the stock market and the bod market are
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  Speaker 1: trying to understand what the reaction function of the Federal
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  Speaker 1: Reserve actually is and to which data they're going to
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  Speaker 1: look at. It seemed like there was a renewed focus
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  Speaker 1: on both jobs revisions as well as the Beige Book,
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  Speaker 1: which was the input to potentially some of the heavier
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  Speaker 1: weight on fifty basis points. Do you view that now
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  Speaker 1: so as sort of these data points is taking on
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  Speaker 1: outsized importance.
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  Speaker 7: I think they are more focused on the liver market
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  Speaker 7: because there has been deterioration in the labor market. I
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  Speaker 7: think there are much more confident than inflation is going
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  Speaker 7: to continue to come down because they've seen more slack
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  Speaker 7: in the economy and the labor market. They've seen inflation
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  Speaker 7: progress that we've already had, they've seen wage inflation moderating.
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  Speaker 7: So I think their concerns are very much on the
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  Speaker 7: labor market side.
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  Speaker 8: So when I'm looking at the economic data right now,
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  Speaker 8: I'm focused on the liver market data, and that will
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  Speaker 8: determine whether, you know, we just get continued at a
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  Speaker 8: relatively modest pace after this the twenty five basis point reductions,
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  Speaker 8: which is essentially what was implied in the summary of
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  Speaker 8: economic projections, or whether they'll become more concerned about downside
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  Speaker 8: risk and then we'll have to get thrown a few fifties.
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  Speaker 7: Bill.
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  Speaker 6: Congratulations both on what you said they should do. And
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  Speaker 6: what you said they would do. And part of your
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  Speaker 6: argument was on the unemployment rate. So I want to
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  Speaker 6: go back to that. There revision up to four point
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  Speaker 6: four percent by the end of this year, stays at
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  Speaker 6: four point four percent at the end of twenty twenty five.
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  Speaker 6: Are you comfortable that we can stabilize here without the
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  Speaker 6: tipping points that you were so worried about.
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  Speaker 7: That's well, we're going to find out over the next year.
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  Speaker 7: I mean, the somils are very simple, you know, tells
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  Speaker 7: us a very simple story. When the unemployment rises beyond
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  Speaker 7: a certain threshold, the next stop is a full long recession.
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  Speaker 7: The question is what's the right threshold. Historically, the Sambrell
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  Speaker 7: threshold has been a half a point rise in the
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  Speaker 7: unemploying rate on a three month moving average basis over
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  Speaker 7: the over twelve period. And we've already pierced that threshold.
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  Speaker 7: So you have to believe that, you know, there is
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  Speaker 7: some risk here. You know, Paul was asked about the
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  Speaker 7: risk and you know, downside risk to the labor market,
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  Speaker 7: and you sort of, you know, mostly dismissed that. But
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  Speaker 7: I do think that I actually do think the risks
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  Speaker 7: are you know, maybe at best they're balanced, But I
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  Speaker 7: would actually be more concerned about the downside risk to
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  Speaker 7: the labor market now than thee risk to inflation.
• 9:24
  Speaker 2: Bill, You'll always find a politician that's unhappy. I found one,
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  Speaker 2: Senator Warren. This kind of interest rates has yet another
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  Speaker 2: acknowledgement that power waited too long to reduce interest rates.
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  Speaker 2: I do think the politics are relevant here. November seventh
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  Speaker 2: will be the next meeting. We might have a decision
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  Speaker 2: in hand by the American public as to who they'd
• 9:41
  Speaker 2: like the next president of the United States to be.
• 9:43
  Speaker 2: We might know the makeup of Congress as well. We
• 9:45
  Speaker 2: might have a better idea of what policy looks like
• 9:47
  Speaker 2: in twenty twenty five.
• 9:48
  Speaker 5: Bill, you've lift this.
• 9:49
  Speaker 2: You were on the FMC back in twenty sixteen, I believe,
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  Speaker 2: can you walk me through your experience back then and
• 9:55
  Speaker 2: whether the same applies this time around.
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  Speaker 7: I would be very surprised that the election outcome affected
• 10:01
  Speaker 7: what the FED does over the near term, because you know,
• 10:04
  Speaker 7: an election outcome is one thing, but what that incoming
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  Speaker 7: president will be able to do with you know, as
• 10:09
  Speaker 7: closely divided Congress, Congress remains very uncertain, and so I
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  Speaker 7: think the FED reacts to the world as it is
• 10:16
  Speaker 7: as opposed to speculates about how the world could be.
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  Speaker 7: So I would be I would be very surprised if
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  Speaker 7: the Fed doesn't cut rates at the November meeting. I mean,
• 10:25
  Speaker 7: if they don't cut rates of the November meeting, it's
• 10:27
  Speaker 7: because the economy is bounced back and very strong, or
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  Speaker 7: the inflation news is really bad between now and then,
• 10:34
  Speaker 7: and that's not something I expect at this point. I
• 10:35
  Speaker 7: don't think that Powell expects it. I think, you know,
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  Speaker 7: the odds of a twenty five basic point rate cut
• 10:40
  Speaker 7: in November are very very high, and if the economy shows,
• 10:44
  Speaker 7: you know, more weakness than maybe even fifty basis points.
• 10:47
  Speaker 2: I bill appreciate it as always built upley of Bloomberg
• 10:50
  Speaker 2: opinion the Fed should go big now I think it will.
• 10:53
  Speaker 2: It did it did about an hour and thirty minutes ago.
• 10:56
  Speaker 2: Let's bring Gid Michael McKee. He was in the news conference.
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  Speaker 2: Mike McKee, I want your thoughts on that press conference
• 11:01
  Speaker 2: where there was a little bit of tension for you.
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  Speaker 2: How did you walk out of this one?
• 11:06
  Speaker 9: Well, I don't think there was a huge amount of tension,
• 11:08
  Speaker 9: except for the fact that as you were just talking
• 11:11
  Speaker 9: about with Bill Dudley the idea that there is probably
• 11:14
  Speaker 9: more risk to the labor department, to the labor market
• 11:17
  Speaker 9: than the FED is letting on. And that's the concern.
• 11:21
  Speaker 9: And to get to my question at Lisa mentioned the
• 11:24
  Speaker 9: FED was data dependent until they were confident that inflation.
• 11:29
  Speaker 6: Was going to be down to target.
• 11:31
  Speaker 9: But how can they be data dependent on the unemployment rate?
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  Speaker 9: We don't know what it's going to be, and as
• 11:36
  Speaker 9: Bill suggested, it could go up rapidly. Do we get
• 11:40
  Speaker 9: a rapid response then, especially since policy works with a lag,
• 11:43
  Speaker 9: it's a little unclear what their reaction function is going
• 11:46
  Speaker 9: to be going forward.
• 11:47
  Speaker 2: Might looking forward to catching up with you tomorrow. Lots
• 11:50
  Speaker 2: to talk about plenty more data just in the next
• 11:52
  Speaker 2: week or so. Equities right now on the SMP Lisa
• 11:54
  Speaker 2: firma by four tenths of one percent, the unperformance on
• 11:57
  Speaker 2: the small camps that you might expect.
• 11:59
  Speaker 1: Yeah, and the Fed basically gave this market what it
• 12:01
  Speaker 1: was looking for, and then some a question now of
• 12:03
  Speaker 1: just how much this market has moved ahead of what
• 12:06
  Speaker 1: the Fed has said. Mohammed, I would love your thoughts
• 12:10
  Speaker 1: on what the new data dependency actually is given the
• 12:13
  Speaker 1: fact that people are looking for a litmus test to
• 12:16
  Speaker 1: understand what the reaction function is of a FED. That
• 12:19
  Speaker 1: kind of is playing with what they get, which is
• 12:23
  Speaker 1: the same lack of clarity that we have.
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  Speaker 6: Yeah, I think the data dependence all comes down to
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  Speaker 6: the labor market, and he went through in detail a
• 12:32
  Speaker 6: number of indicators he looks at and when he says
• 12:35
  Speaker 6: the totality of the data, I think he really means
• 12:37
  Speaker 6: it when it comes to the labor market. Lisa, I'm
• 12:41
  Speaker 6: surprised you haven't picked up on the fixed income market
• 12:43
  Speaker 6: and what has happened to treasuries that they're now higher
• 12:46
  Speaker 6: on the day. There's been quite a move when this
• 12:49
  Speaker 6: statement was announced. The tenure went down to three sixty
• 12:53
  Speaker 6: four is currently trading at three seventy.
• 12:55
  Speaker 2: It's up six spaces points space. What do you think
• 12:58
  Speaker 2: that is?
• 12:59
  Speaker 6: I think they some and the curve has steepened. Two
• 13:03
  Speaker 6: stands are now nine basis points. I think there is
• 13:06
  Speaker 6: some concern as what does it mean longer term for inflation.
• 13:10
  Speaker 6: That's the only thing I can think of. But the
• 13:13
  Speaker 6: action has been really interesting, and once again you end
• 13:16
  Speaker 6: up in a different place after the press conference than
• 13:19
  Speaker 6: you wear after the statement.
• 13:21
  Speaker 4: Yes, no question about that I think of David Kelly
• 13:24
  Speaker 4: is JP Morgan. You know John, He's been very good
• 13:27
  Speaker 4: about a vector of nonfirm payrolls that gets you to
• 13:30
  Speaker 4: a negative statistic three month moving average about one hundred
• 13:33
  Speaker 4: and sixteen thousand. Nobody's modeling in here if this job
• 13:38
  Speaker 4: economy USANA one talks about continues to deteriorate.
• 13:41
  Speaker 2: So what are we saying here, Muhammed, We're willing to
• 13:44
  Speaker 2: accept three the high twos, or we're worried about going
• 13:47
  Speaker 2: back to three point five push in four? What's the
• 13:50
  Speaker 2: story here?
• 13:51
  Speaker 6: So we cannot answer that story without bringing in fiscal policy,
• 13:54
  Speaker 6: without bringing in structural reforms. I mean, that's the trap
• 13:56
  Speaker 6: we have all fallen into. That we still think of
• 13:59
  Speaker 6: the FED is the only game in town. But does
• 14:01
  Speaker 6: other things happening that that speak to? What is that weight?
• 14:06
  Speaker 6: And that's why the wage is so wide?
• 14:08
  Speaker 1: You brought this up actually when j Powell said this
• 14:11
  Speaker 1: over time and we're going to get down to two
• 14:13
  Speaker 1: percent over time, it raises this question, especially as he
• 14:17
  Speaker 1: talks about not mission accomplished but sort of you know,
• 14:21
  Speaker 1: wishing to wash plist.
• 14:22
  Speaker 5: But this idea that we could I'm going to ask
• 14:26
  Speaker 5: you to say that again.
• 14:27
  Speaker 1: Please, but this idea that you know, he's so excited
• 14:31
  Speaker 1: about the idea of a soft landing that it will okay,
• 14:35
  Speaker 1: it's okay for it to take a number of years
• 14:37
  Speaker 1: to get back to that two percent target.
• 14:39
  Speaker 6: And that's in the projections. I'm going to have him
• 14:40
  Speaker 6: in front of me, he said, co PC Right now,
• 14:42
  Speaker 6: it's two point seven. They're projected at two point six
• 14:45
  Speaker 6: at the end of this year, two point two at
• 14:48
  Speaker 6: then of next year, and two by twenty twenty six.
• 14:50
  Speaker 6: We basically pushed back the target.
• 14:53
  Speaker 4: I like what you said about mission accomplish, and it's
• 14:55
  Speaker 4: this terror of getting this wrong, whether you're a governor
• 14:59
  Speaker 4: or president. Chairman. Jason Furman out teaching AC ten up
• 15:04
  Speaker 4: at Harvard and he was lectured by his daughter John.
• 15:07
  Speaker 4: We got a tweet out from Jason Furman where his
• 15:09
  Speaker 4: daughter walked in and said to Professor Furman, you were wrong.
• 15:13
  Speaker 4: There's a lot of that going on right now.
• 15:15
  Speaker 2: A lot of people were wrong. I think we should
• 15:16
  Speaker 2: pointing this out. The market was priced for something closer
• 15:19
  Speaker 2: to fifty than twenty five. The overwhelming majority of economists
• 15:22
  Speaker 2: in our survey, and we surveyed more than one hundred
• 15:25
  Speaker 2: not even ten percent of them saw fifty. So shout
• 15:28
  Speaker 2: out Mike Faroli over a JP Morgan, one of the
• 15:30
  Speaker 2: very few together without a one guy belief over at
• 15:32
  Speaker 2: Bloomberg Economics, who we're looking for that fifty today.
• 15:35
  Speaker 6: Yeah.
• 15:35
  Speaker 1: Deutsche Back actually did an informal survey also that they
• 15:38
  Speaker 1: put out today, and something like sixty one percent roughly
• 15:40
  Speaker 1: and plus remnus a half a percent came out saying
• 15:43
  Speaker 1: that it was twenty five basis points. So this really
• 15:45
  Speaker 1: was kind of on the back foot.
• 15:47
  Speaker 4: I kept it quiet. Nobody cares what they think, but
• 15:49
  Speaker 4: the fact is I was wrong.
• 15:51
  Speaker 2: Jeff Rosenberger black Rock joins us now for more. He
• 15:53
  Speaker 2: wasn't wrong if you were waiting impatiently to give us
• 15:55
  Speaker 2: his views on this. Jeff, let's talk about the bond market,
• 15:57
  Speaker 2: and you can throw in your thoughts on this Federal Reserve.
• 15:59
  Speaker 2: To say, the projections in the news conference as well,
• 16:02
  Speaker 2: the botmarket's sunning golf. The thirty years up seven basis points,
• 16:05
  Speaker 2: the ten year is up six. What do you think
• 16:07
  Speaker 2: that signal was?
• 16:08
  Speaker 5: Jeff?
• 16:09
  Speaker 10: Yeah, I think the important point here is that there's
• 16:13
  Speaker 10: the action and the fifty basis points, and then there's
• 16:16
  Speaker 10: the expectation and what was priced in. And so while
• 16:19
  Speaker 10: the bond market was leaning towards the fifty basis points,
• 16:22
  Speaker 10: it was really more about that segment Jonathan of the
• 16:25
  Speaker 10: press conference that you highlighted.
• 16:27
  Speaker 5: I had it written in my.
• 16:28
  Speaker 10: Notes as well, the interchange where Powell said, you know,
• 16:31
  Speaker 10: don't take that fifty basis points as the new you
• 16:34
  Speaker 10: know pace, and he pushed back against you know, this
• 16:38
  Speaker 10: is going to be followed by he got several questions
• 16:40
  Speaker 10: on more fifties the problem, and I think to I
• 16:42
  Speaker 10: answer a bit of Muhammad's question, your question to Muhammad
• 16:45
  Speaker 10: and that interchange is that the bond market was pricing
• 16:49
  Speaker 10: in more subsequent fifties and into twenty twenty five still
• 16:54
  Speaker 10: is pricing in bigger increases than what you're getting in
• 16:57
  Speaker 10: the sep and Powell and the press conference really pushed
• 17:00
  Speaker 10: back against that.
• 17:01
  Speaker 5: So I think you have two things going on.
• 17:04
  Speaker 10: I'm very amenable to Mohammad and Lisa's comments that you know,
• 17:08
  Speaker 10: maybe this is a little bit of a sign of
• 17:10
  Speaker 10: inflation and some of those concerns what you're seeing in gold,
• 17:13
  Speaker 10: but it's also I think in the immediacy this is
• 17:16
  Speaker 10: a little bit disappointing relative to what's been built up
• 17:19
  Speaker 10: in bond expectations, and that from a broader perspective is
• 17:22
  Speaker 10: really an important point from an investment perspective that you
• 17:25
  Speaker 10: can have.
• 17:26
  Speaker 5: Here's the headline.
• 17:27
  Speaker 10: Fed cuts interest rates by fifty basis points and the
• 17:30
  Speaker 10: bond market returns are going to be negative today. So
• 17:32
  Speaker 10: it's not just you know, the action I can anticipate,
• 17:36
  Speaker 10: you know, the fence cutting rates.
• 17:37
  Speaker 5: It's time to back up the truck in terms of duration.
• 17:40
  Speaker 10: The problem is it's also a lot in the price,
• 17:43
  Speaker 10: so they've got to over deliver, and they didn't do
• 17:46
  Speaker 10: that relative to bond expectations. And that's why I think
• 17:49
  Speaker 10: you're seeing a little bit of that disappointment out of
• 17:51
  Speaker 10: fixed income markets and they're read on today's decision.
• 17:55
  Speaker 1: Jeff Muhammad scolded me because frankly, I wasn't paying enough
• 17:58
  Speaker 1: attention to the bond market. The bond market is speaking,
• 18:00
  Speaker 1: and the ten year note is speaking, and what it
• 18:02
  Speaker 1: is saying is it at least has a higher yield.
• 18:05
  Speaker 1: But we are speaking to the bond market right now.
• 18:07
  Speaker 1: Jeff Rosenberg, what is your reaction function? Does this make
• 18:10
  Speaker 1: you less interested on the margins in buying ten year
• 18:14
  Speaker 1: or twenty year or thirty year treasuries.
• 18:17
  Speaker 10: Yeah, you know, I've said in lots of different context
• 18:20
  Speaker 10: with you guys that you have to just be careful
• 18:23
  Speaker 10: about where you want to own your fixed income, that
• 18:26
  Speaker 10: the yield curve move can be more important, more determinant
• 18:30
  Speaker 10: to your fixed income returns than just the direction of
• 18:33
  Speaker 10: interest rates. A lot of times we just think about,
• 18:35
  Speaker 10: you want to own bonds when rates are going down
• 18:37
  Speaker 10: when the fed's cutting. You don't want to own bonds
• 18:40
  Speaker 10: when they're hiking. But because the curve is so flat.
• 18:45
  Speaker 5: We're off the peak of inversions.
• 18:46
  Speaker 10: But it's still a historic lack of premium in that
• 18:50
  Speaker 10: back end of the curve. That where you hold your
• 18:53
  Speaker 10: duration is going to matter as much as how much
• 18:55
  Speaker 10: duration you hold. So it's still that story for me.
• 18:58
  Speaker 10: It's still the front end is a little bit better
• 19:01
  Speaker 10: five years and in you want to be careful about
• 19:04
  Speaker 10: that term premium. And the other thing that I'm highlighting
• 19:06
  Speaker 10: here today is you just got to be careful about
• 19:08
  Speaker 10: how much is.
• 19:09
  Speaker 5: Already priced in.
• 19:10
  Speaker 10: This is unique about the beginning of a FED cutting cycle.
• 19:13
  Speaker 10: We're about twice the amount of expected cuts priced at
• 19:17
  Speaker 10: the onset.
• 19:18
  Speaker 5: This was John Otter's article.
• 19:21
  Speaker 10: In Bloomberg, he highlighted this, it's a great chart, about
• 19:23
  Speaker 10: twice the amount of historic FED pricing about over two
• 19:28
  Speaker 10: and a half over two one hundred basis points, whereas
• 19:31
  Speaker 10: historically you come in and there's only about one hundred
• 19:33
  Speaker 10: basis points, so a lot is expected. It raises the
• 19:36
  Speaker 10: bar for subsequent fixed income performance. We've had a great run,
• 19:40
  Speaker 10: but that tells you a lot of the performances in
• 19:42
  Speaker 10: the rear view mirror, and so you got to be
• 19:44
  Speaker 10: more thoughtful about where you own that duration around the
• 19:47
  Speaker 10: curve when we look forward.
• 19:49
  Speaker 1: Does it give you more confidence though to go into risk?
• 19:51
  Speaker 10: Jeff, Well, you know, I think the FED did its best.
• 19:56
  Speaker 10: And that was the interchange you just had with Dudley
• 19:58
  Speaker 10: the press conference.
• 19:59
  Speaker 5: Channel lenge was.
• 20:00
  Speaker 10: Give fifty without spooking the market. I think they're successful
• 20:05
  Speaker 10: today in there. That's the response in terms of small caps.
• 20:09
  Speaker 10: You only buy small caps when the fence cutting rates,
• 20:12
  Speaker 10: when you believe in the soft landing and the denominator effect,
• 20:15
  Speaker 10: the discount rate is dominating, you know, any of your
• 20:18
  Speaker 10: concerns in terms of growth.
• 20:19
  Speaker 5: So I think they navigated that pretty well.
• 20:22
  Speaker 10: I think when you go forward, you know it is
• 20:24
  Speaker 10: a soft landing baseline. I think that's exactly what the
• 20:28
  Speaker 10: SEP is saying. When you look at all of the
• 20:31
  Speaker 10: other economic data outside of the labor market data, you know,
• 20:34
  Speaker 10: it's all very good. It's all very supportive for risky
• 20:37
  Speaker 10: assets and the fixed income side. That's a carry story.
• 20:41
  Speaker 10: We're pretty comfortable with that. You got to be a
• 20:44
  Speaker 10: little bit careful that it's a symmetric that a very
• 20:46
  Speaker 10: tight spreads any sign of recession.
• 20:49
  Speaker 5: And I don't think we're really seeing.
• 20:51
  Speaker 10: The recessionary signs out of the labor markets, but you
• 20:54
  Speaker 10: have to be cogniz of it that that is the
• 20:56
  Speaker 10: one place where you're seeing some weakness.
• 20:59
  Speaker 5: But I think this is still supportive to risky assets.
• 21:01
  Speaker 2: It just quickly Jeff November seventh, how different is that
• 21:04
  Speaker 2: committee meeting going to be compared to this one?
• 21:08
  Speaker 10: Well, you know, as you pointed out, you know you're
• 21:11
  Speaker 10: coming on the back side of the election. But you know,
• 21:14
  Speaker 10: as Powell answered, they're going to try to avoid any
• 21:17
  Speaker 10: kind of discussion on that. It's really going to be
• 21:19
  Speaker 10: about the evolution of the data. You know, the interesting
• 21:21
  Speaker 10: data point in terms of revisions. You know, we talk
• 21:23
  Speaker 10: about data dependence The problem is that data we're dependent
• 21:27
  Speaker 10: on is not very dependable.
• 21:29
  Speaker 5: Try that out slowly.
• 21:31
  Speaker 10: But that's the payroll data, right, and so the revisions
• 21:33
  Speaker 10: are going to be important.
• 21:34
  Speaker 5: We're going to have another one that's going.
• 21:36
  Speaker 10: To dictate a lot of the discussion without a deceleration.
• 21:40
  Speaker 10: I don't think you're going to be talking about fifties,
• 21:42
  Speaker 10: but they've clearly laid the groundwork here for a twenty
• 21:45
  Speaker 10: five in November, twenty five in December. That's what I
• 21:48
  Speaker 10: think is will price back into the bond market. That's
• 21:51
  Speaker 10: why you're seeing a little bit higher rates. If they
• 21:53
  Speaker 10: deliver on that, then there won't be as much surprise
• 21:56
  Speaker 10: or anticipation as we had in this meeting.
• 21:58
  Speaker 6: So Jeff, let me ask the question that I suspect
• 22:00
  Speaker 6: you hate being asked. And let's assume that you're being
• 22:05
  Speaker 6: asked for a retail investor sixty forty simple portfolio. What
• 22:08
  Speaker 6: should they do now given everything you've.
• 22:11
  Speaker 10: Just said, Yeah, I mean, the part of this discussion
• 22:15
  Speaker 10: around the forty, around the fixed income piece, Mohammed is
• 22:18
  Speaker 10: is that it's not the old sixty forty. It's not
• 22:21
  Speaker 10: this era where bond volatility is three percent. Bond volatility
• 22:26
  Speaker 10: is six to eight percent in the post COVID environment.
• 22:30
  Speaker 10: So the forty side is really where we've got to
• 22:33
  Speaker 10: do some rethinking, and that's where we talk about.
• 22:35
  Speaker 5: Diversifying your diversifiers.
• 22:37
  Speaker 10: Thinking about different ways of finding ballast in your portfolio
• 22:41
  Speaker 10: because of the uncertainty of how duration and risk free
• 22:44
  Speaker 10: rates are going to perform in a more inflation uncertain environment.
• 22:47
  Speaker 10: That's the points about the yield curve and what's already
• 22:50
  Speaker 10: priced in. So I think in that sixty forty it's
• 22:52
  Speaker 10: really about, you know, using different ways to find diversification
• 22:57
  Speaker 10: and diversifying that forty bucket away from kind of just
• 23:01
  Speaker 10: piling into traditional duration.
• 23:02
  Speaker 6: Did I hear you say a more inflation uncertain environment?
• 23:06
  Speaker 5: That is what I said.
• 23:07
  Speaker 6: Yes, I don't think that's what Pole thinks.
• 23:11
  Speaker 10: There's greater confidence that inflation is on a path to
• 23:15
  Speaker 10: returning to two percent, but we're not at two percent
• 23:18
  Speaker 10: and that path, as we saw in the interchange, the
• 23:21
  Speaker 10: shelter inflation, the uncertainty around how far we're going, and
• 23:25
  Speaker 10: the wage inflation picture. Right, there's a lot of confidence
• 23:29
  Speaker 10: that we're moving towards there, but we're not quite there yet.
• 23:32
  Speaker 10: That's the point about a more uncertain inflationary environment, and
• 23:36
  Speaker 10: with respect to kind of negative stockbond correlation, which is
• 23:40
  Speaker 10: really the.
• 23:40
  Speaker 5: Driver of the sixty forty part.
• 23:43
  Speaker 10: The challenge is that was really working well in your
• 23:46
  Speaker 10: portfolio when inflation was missing from below. Inflation is still
• 23:50
  Speaker 10: missing from above, and until you get back to the
• 23:53
  Speaker 10: period where we have too little inflation, you're not really
• 23:56
  Speaker 10: back to that halcyon days of fixed income in sixty forty.
• 24:00
  Speaker 2: Jeff, this was perfect. Thank you, sir, Jeff Rosenberg. There
• 24:03
  Speaker 2: of black rock on the Federal Reserve decision. If you
• 24:05
  Speaker 2: are just joining us, welcome to the program. It's a
• 24:07
  Speaker 2: fifty basis point CUD from the Federal Reserve with some descent,
• 24:10
  Speaker 2: the first descent we've seen from a sitting governor on
• 24:13
  Speaker 2: the FMC going all the way back to two thousand
• 24:16
  Speaker 2: and five Governor Mickey Bowman. Not a surprise for many
• 24:19
  Speaker 2: of you who's followed some of those speeches over the
• 24:21
  Speaker 2: last month or so. If you're looking at the equity market,
• 24:23
  Speaker 2: just about just about attempting to hold on to an
• 24:26
  Speaker 2: eighth day of gains on a S and P five hundred,
• 24:29
  Speaker 2: and it's a struggle. We turned slightly negative on the
• 24:31
  Speaker 2: SMP on the NASNAK one hundred, we're negative by zero
• 24:34
  Speaker 2: point zero five percent. Mohammed, just a final thought what
• 24:37
  Speaker 2: I heard from you, then, if you have any confidence
• 24:40
  Speaker 2: the inflation story is done, that we're on a one
• 24:43
  Speaker 2: way trip now back to neutral, which might be around
• 24:45
  Speaker 2: three percent, are you suggesting that confidence might be misplaced?
• 24:48
  Speaker 6: I think it's too early to declare mission accomplished. We've
• 24:51
  Speaker 6: come a long way, but their inherent contradiction that still
• 24:55
  Speaker 6: have to be sorted. John, this was historic. I mean,
• 24:58
  Speaker 6: we're going to look back on this day not only
• 25:00
  Speaker 6: as the beginning of the cutting cycle, but as having
• 25:04
  Speaker 6: we calibrated what we mean by fifty basis point start
• 25:09
  Speaker 6: to a cutting cycle. And we're going to look back
• 25:11
  Speaker 6: and either this will be the absolutely white bet, which
• 25:14
  Speaker 6: is be preemptive on the labor market after you were
• 25:18
  Speaker 6: reactive to inflation this is a fundamental change in their
• 25:21
  Speaker 6: reaction function. Or alternatively, we will look at this as
• 25:25
  Speaker 6: being too aggressive. I'm hoping that it will be the first,
• 25:29
  Speaker 6: because we all want the labor market to do well.
• 25:32
  Speaker 1: Of course, Michael B. Key asked for about being preemptive,
• 25:34
  Speaker 1: and he said data dependency or the totality of data
• 25:37
  Speaker 1: My big issue coming out of this is do we
• 25:39
  Speaker 1: understand the fed's reaction function more or do we understand
• 25:42
  Speaker 1: it less than we did before.
• 25:43
  Speaker 2: I think we've got a lot of questions that still
• 25:45
  Speaker 2: demand answers, and hopefully we'll get them over the next
• 25:47
  Speaker 2: few weeks, but I doubt it once that data starts
• 25:49
  Speaker 2: to come in. I'm looking forward to hearing from the
• 25:51
  Speaker 2: rest of the committee, aren't you. Oh yeah, over the
• 25:53
  Speaker 2: next few days.
• 25:54
  Speaker 1: It's quiet a sense.
• 25:55
  Speaker 2: Yeah, let's just see how close some of them were
• 25:58
  Speaker 2: to actually gun twenty five, not the fifty Mohammed Thank you,