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Speaker 2: writing it would take a lot to not get account
Speaker 2: in September. The FED is more focused on labor in
Speaker 2: the near term, but over the next few meetings, I
Speaker 2: suspect the focus will shift to inflation.
Speaker 3: Litz joins us.
Speaker 2: Now for more, let's welcome, let's build on some of that,
Speaker 2: the shift back to inflation.
Speaker 3: What's going to bring that about?
Speaker 4: Well, when you think about where we are right now,
Speaker 4: First of all, the message that we receive from the
Speaker 4: FED on Friday was that the labor market had cooled.
Speaker 4: There's this average of thirty five thousand jobs added per
Speaker 4: month over the prior three months, which is a number
Speaker 4: that at least concerns them and they want to make
Speaker 4: sure that they don't.
Speaker 5: Lose track of that.
Speaker 4: But I think what will happen as time goes on
Speaker 4: is us knowing and the realization in markets that there's
Speaker 4: no room to hike rates. There's a little bit of
Speaker 4: room for the labor market to cool before the FED
Speaker 4: and before really the economy is going to look like
Speaker 4: it's in a lot of pain. We've got an unemployment
Speaker 4: rate still at four point two percent, and the expectation
Speaker 4: as of now is that it'll stay at four point
Speaker 4: two percent, So there's a little bit of room there
Speaker 4: for the labor market.
Speaker 5: Still to cool off.
Speaker 4: There's definitely not room to go back and have to
Speaker 4: hike rates if we lose control of inflation. But the
Speaker 4: other message that I think was very clear from the
Speaker 4: FED on Friday was that yes, we expect some effect
Speaker 4: from tariffs on inflation, but we're not going to see
Speaker 4: it immediately, and we're not sure if it's going to
Speaker 4: be just a one time or if it's going to
Speaker 4: take a little bit longer. So that's why I say
Speaker 4: over the next few meetings, I think that the focus
Speaker 4: will shift back to inflation as some of that data
Speaker 4: comes through, and if they can get confirmation that tariffs
Speaker 4: were just a one time shock.
Speaker 2: Liz, do you still see it though, in the same
Speaker 2: way the market is so on Friday that the chairman's
Speaker 2: current reaction function, the policy bias, is a pro risk one.
Speaker 4: Well, on Friday, what happened I think that surprised markets
Speaker 4: was that he pretty much confirmed as long as things
Speaker 4: continue in this fashion, we're getting a cut in September.
Speaker 4: He didn't say that explicitly, but that was the interpretation.
Speaker 4: The other thing that happened on Friday that I think
Speaker 4: is a little bit lost in the huge rally is
Speaker 4: that before that speech occurred, markets had gotten down to
Speaker 4: less than seventy percent chance of a cut. So a
Speaker 4: lot of that was just repricing back up to I
Speaker 4: believe it hit a high on Friday of maybe ninety
Speaker 4: one percent ninety three percent chance of a cut, So
Speaker 4: the repricing from sixty five ish percent back up to
Speaker 4: the low ninety percent was a lot of that rally.
Speaker 4: So just sort of a rejiggering of our expectations. Again,
Speaker 4: is this a sentiment shift to back to risk on?
Speaker 4: It was risk on already. I think where we're at now,
Speaker 4: as we're back to having priced in this first cut
Speaker 4: and really wondering does that mean that there's another one
Speaker 4: to come? Is this the beginning of a cutting cycle,
Speaker 4: and how aggressive will this cutting cycle be. I still
Speaker 4: think that the job's data next Friday is going to
Speaker 4: decide for sure whether or not we're getting that first cut.
Speaker 4: If it comes in at expectations even slightly weak, that
Speaker 4: cut will be all but baked in. We're actually below
Speaker 4: ninety percent chance right now, but that cut would get
Speaker 4: all but baked in, maybe even another sniff of fifty
Speaker 4: basis points, which I don't think is likely. But in
Speaker 4: the near term, yes, this is positive for risk assets.
Speaker 4: At some point, if this is the beginning of a
Speaker 4: cutting site, and if it starts to be in response
Speaker 4: to weak data, the market will have to digest the
Speaker 4: fact that, Okay, the economy is now cooling quite a bit.
Speaker 4: We were cutting because we could, Now we're cutting because
Speaker 4: we're trying to prevent further weakness.
Speaker 6: If this is the start of a cutting cycle, though,
Speaker 6: how could it be when the chairman himself said the
Speaker 6: tariff effects will be accumulating overcoming months with high uncertainty
Speaker 6: be about timing and amounts.
Speaker 4: Well, that's what I think the market's going to have
Speaker 4: to figure out. Right now, we're acting as if it
Speaker 4: is the beginning of a cutting cycle, and this is
Speaker 4: going to be a slow message to keep going down
Speaker 4: further and further as the year goes on. We're pricing
Speaker 4: in a little bit more than two cuts right now
Speaker 4: before the end of the year. If you look at
Speaker 4: the time period when it might take tariffs to actually
Speaker 4: work their way into the data. And when I say
Speaker 4: the data, we've already seen some effective tariffs in PPI data.
Speaker 4: We're looking for it in consumer price data, so CPI
Speaker 4: and PCE, and it'll take a little bit longer to
Speaker 4: get there because if the companies are not passing it
Speaker 4: through on the PPI side, on the wholesale side, it's
Speaker 4: going to take a little while to see that in
Speaker 4: the consumer side to the end result. So usually, let's
Speaker 4: say it takes four to six months for that to
Speaker 4: actually work its way all the way through the system.
Speaker 4: The FED knows that, so they're buying themselves some time
Speaker 4: to say, okay, let's watch and see what happens over
Speaker 4: the next few months of inflation reports on the consumer
Speaker 4: side before we signal anything, promise anything to markets that
Speaker 4: this is going to be a slow cutting cycle that
Speaker 4: will continue.
Speaker 3: Liz, what are you.
Speaker 6: Looking for in terms of the data we have yet
Speaker 6: to see when it comes to the August payrolls and
Speaker 6: CPI report that could maybe make j Powell walk back
Speaker 6: this idea of a cut in September.
Speaker 4: Well, one of the things that I had been saying
Speaker 4: even before Jackson Hole was we're getting really excited about
Speaker 4: a cut in September when we've got a lot of
Speaker 4: data still to come. So we know that the CPI
Speaker 4: and the PPI data was a little conflicting. CPI came
Speaker 4: in okay, if not slightly weak. PPI came in really hot,
Speaker 4: So there is already some conflicting message coming from the data.
Speaker 4: We've got another CPI report, We've got the jobs report obviously,
Speaker 4: which everybody will be watching with baited breath. We've got
Speaker 4: a PCE report, so there's still a lot to come.
Speaker 4: If some of those come in hot, especially hot, then
Speaker 4: I think we're going to see a lot more uncertainty
Speaker 4: before that meeting. But I do believe that it would
Speaker 4: have to be a series of hot data, So it
Speaker 4: wouldn't just be a one time pop in CPI, a
Speaker 4: one time pop in PCEE, because they've already messaged to
Speaker 4: us that that might happen anyway.
Speaker 5: So I think unless.
Speaker 4: This job's report comes in really, really hot, I think
Speaker 4: we're getting that cut.
Speaker 2: The jobs report is what I want to talk about, Liz.
Speaker 2: The prospect of an activity rebound. Can we just get
Speaker 2: into that a little bit more. I've seen that from
Speaker 2: Bank for America on Friday, heard Mazoo talk about it too.
Speaker 2: Jordan Rochester said, it's hard to get too duvish if
Speaker 2: US growth momentum from PMIS is real. How do you
Speaker 2: think about the prospect of a growth rebound as we
Speaker 2: work our way through September into year end.
Speaker 4: Well, I think that's part of what the market is
Speaker 4: coning on with this broadening out trade that it started
Speaker 4: to do over the last couple of weeks. You're seeing
Speaker 4: some strength out of smaller cap names. You're seeing strength
Speaker 4: out of other sectors besides communications and tech, and even
Speaker 4: outside of industrials, which has been one of the top
Speaker 4: sectors this year. So the broadening out trade is enthusiasm
Speaker 4: that we will have some sort of growth rebound. Activity
Speaker 4: rebound that's durable and can reach into other parts of
Speaker 4: the economy. I think it's possible, but it's too early
Speaker 4: to say, Okay, this is a growth rebound that's going
Speaker 4: to look like early parts of a cycle, because if
Speaker 4: we're just embarking on a cutting cycle again during this period,
Speaker 4: we have to really wait for confirmation of some of
Speaker 4: that activity. And the reality is that the data had
Speaker 4: been moving in the opposite direction coming into this, hadn't
Speaker 4: been moving in a terrible direction, but things were cooling off.
Speaker 3: He was cooling off.
Speaker 5: A little bit.
Speaker 4: The labor market has really been stagnant, a in a
Speaker 4: solid place, stagnant in a place of strength, but stagnant
Speaker 4: for a long time. So there would it would take
Speaker 4: some really exciting news or some shift in economic developments
Speaker 4: to I think broaden out the growth in a durable way.
Speaker 2: Right now, stay with us, mul Bloomberg surveillance coming up
Speaker 2: after this.
Speaker 3: Step.
Speaker 2: A shooter of Missoula isn't convinced it's needed right in
Speaker 2: the following should the Feedi's policy, as the Markets Expect
Speaker 2: analysis suggests, the primary risk of the economy is a
Speaker 2: backup in long term interest rate. Steve joined us now
Speaker 2: for more, Steve, good morning, Good morning. Just tell us
Speaker 2: what do you think is brewing?
Speaker 1: Care Well, I.
Speaker 7: Think there's a bit of political pressure building. I think
Speaker 7: there's a bit of dovishness within this committee that has
Speaker 7: been brewing over years, and I think when you combine
Speaker 7: it with a misperception as to how restrictive monetary policy is,
Speaker 7: you wind up in a situation where you get a
Speaker 7: chairman making a statement like this, leaving a door open
Speaker 7: to a rate cut when he himself and his own
Speaker 7: balance of risks is completely balanced. The risk to the
Speaker 7: upside on inflation, The risk of inflation is to the upside.
Speaker 7: The risk to employment is to the downside. Well, okay,
Speaker 7: what are you supposed to do?
Speaker 8: Well?
Speaker 7: The answer is, if I think it's restrictive, maybe I
Speaker 7: can cut rates. If I don't think it's restrictive, then
Speaker 7: I should be doing nothing. How do we define restrictive?
Speaker 7: That becomes the problem are they thinking at the moment?
Speaker 2: Appears to be that, yes, we're facing upside risk to
Speaker 2: inflation and downside risk to employment. But the downside risk
Speaker 2: to employment are more important because the upside risk to
Speaker 2: inflation won't be as pervasive When we won't see the
Speaker 2: second round effects because of the downside risk to employment.
Speaker 2: How do you think about that, assue, you have to show.
Speaker 1: Me that's the case historically.
Speaker 7: Yes, there are important transitions that take place in terms
Speaker 7: of the labor market that happened more quickly than on
Speaker 7: the inflation side of the equation. Don't argue with that.
Speaker 7: Is this one of those conditions. The answer is no.
Speaker 7: You have an economy that is fundamentally healthy. You've got
Speaker 7: an economy that accelerated or rebounded right and I very
Speaker 7: very sharply after the second quarter GDP. You've got an
Speaker 7: economy that's showing you have healthy consumer demand. You have
Speaker 7: an economy that is going to be above trend economic
Speaker 7: growth in the current quarter against the backdrop of a
Speaker 7: consensus forecast of zero point nine percent growth. And so
Speaker 7: therefore there's a disconnect between the reality and the perceptions,
Speaker 7: and I think that's part of the problem.
Speaker 1: The other thing, I think when you're.
Speaker 7: Looking at the coverage of this, everyone's focused in on
Speaker 7: the opening up the door to a rate cut.
Speaker 1: The Chairman has said a couple of things.
Speaker 7: One was that basically that he didn't think policy was
Speaker 7: that restrictive. Yet the market has five rate cuts price day.
Speaker 1: That's number one.
Speaker 7: Number two, if you look at the framework changes, everything
Speaker 7: they did in twenty twenty, which was adopting a style
Speaker 7: of monetary policy is gone, and they've readopted a tailor
Speaker 7: rule approach to monetary policy, which is a symmetric monetary
Speaker 7: policy guide frame. And when you look at the tailor
Speaker 7: rule type models, monetary policy is not restrictive.
Speaker 6: So you mentioned though at the start, because one of
Speaker 6: them dimension happening here, you said it is a little political.
Speaker 6: Do you think his speech Friday was political?
Speaker 7: Well, I think they may get into a situation where
Speaker 7: the Chairman said, Okay, I'm going to open the door
Speaker 7: to wait, let's see what the committee does. Because there
Speaker 7: seems to be this perception inside the White House, inside
Speaker 7: the Treasury that the Chairman can determine where monetary policy goes.
Speaker 7: So if the Chairman opens the door to a rate
Speaker 7: cut and the committee votes and doesn't vote for a
Speaker 7: rate cut, then guess what, it's not just one vote.
Speaker 6: Bob Elliott was saying that he potentially was doing this
Speaker 6: to protect the FED as an institution, but it sounds
Speaker 6: like what you're saying, he's protecting himself.
Speaker 7: Well, I again, protecting the FED as an institution.
Speaker 1: Yes, the institutions.
Speaker 7: Seems to be under attacked, but it's always historically been
Speaker 7: under attacked. We went through a very very calm period
Speaker 7: where we did not attack the FED. From basically Paul
Speaker 7: Volker on, We're now back in the more political environment
Speaker 7: of these things, and we've historically faced these dilemmas. I
Speaker 7: think the real real issue for the FED in here
Speaker 7: is not just maintaining its independence, but maintaining its credibility.
Speaker 1: Okay, what is your framework?
Speaker 7: Is your framework a symmetrical monetary policy?
Speaker 3: Okay?
Speaker 7: If it's a symmetrical monetary policy, then live up to
Speaker 7: the symmetrical monetary policy. If it is still a policy
Speaker 7: skew towards the labor market issues, i e. It is
Speaker 7: the more equal of too equal framework our guidelines, then
Speaker 7: be clear about that. And this I think opens up
Speaker 7: the of the dilemma for what we're dealing with today.
Speaker 2: And do you think we could see a repay of
Speaker 2: last year they dropp rights to the front end.
Speaker 3: I mean, it's not saying problems for the long end.
Speaker 7: I think that's really the underlying risk that they face now. Again,
Speaker 7: could that be that a message to people on Capitol
Speaker 7: Hill that believe, well, mint, if you lower short term
Speaker 7: interest rates, long term interistrates to automatically come down. The
Speaker 7: answer is yes that maybe you know what has to
Speaker 7: happen to get it done.
Speaker 1: Is twenty five basis points going to matter one way
Speaker 1: or the other?
Speaker 8: No?
Speaker 7: Well, one hundred and twenty five basis points matter, yes, And.
Speaker 1: That's really really the difference here.
Speaker 7: I don't really care if they cut rags twenty five
Speaker 7: basis points in September.
Speaker 1: I care about what they do with the dots.
Speaker 7: Do they now look at their different framework and say, okay,
Speaker 7: we've back to the pre twenty twenty framework, Well, what
Speaker 7: should the dots then be going forward? Should the dots
Speaker 7: still be for the number of rate cuts we envision
Speaker 7: against an environment where we have an economy that's going
Speaker 7: to continue to grow, and we have inflation in our
Speaker 7: forecast that's one hundred basis points above.
Speaker 3: Our target state. This is really important.
Speaker 2: What I hear from your analysis as a clear distinction
Speaker 2: between whatever they do on September and then the rest,
Speaker 2: and the rest is far more important. Do you see
Speaker 2: scope then for Holkers on a seventeenth Well.
Speaker 7: The problem is the dots because the dots aren't set
Speaker 7: as part of policy. They go into the meeting having
Speaker 7: delivered their dots and their sep and therefore it's just
Speaker 7: a calculation. And unfortunately the market only pays attention to
Speaker 7: the dots. It is the intellectual gravity. Well, okay, once
Speaker 7: you put that dot out there, all thought process in
Speaker 7: the market goes to explaining that dot and forecasting what's
Speaker 7: going to get that dot to happen. Nobody thinks of
Speaker 7: anything else outside of how does that dot get validated?
Speaker 1: And that's where the market is.
Speaker 7: So as long as those dots run the risk of
Speaker 7: being there, I think you might wind up with a
Speaker 7: more graded divergence in the dots in September, and that
Speaker 7: may be the thing that matters.
Speaker 3: Stay with us.
Speaker 2: Mulblemberg Savannah's coming up off to this. So here's the
Speaker 2: latest this morning. Bon yields plunging on Friday after fed
Speaker 2: cha jypouse sick nor day, possible rate count in September,
Speaker 2: ending an eight month pause. Robert Tip of PGM writing
Speaker 2: the attention to the growth side of the fed's equation
Speaker 2: is also a welcome development, suggesting the FED is a
Speaker 2: tune to downside economic risk. Robert joins us now for more, Robert,
Speaker 2: welcome to the program, sir. Let's just reflect on what
Speaker 2: we heard from Chair and Powell. What is he setting
Speaker 2: us up for going into year end.
Speaker 9: I think he set us up for doing whatever the
Speaker 9: data told him to do. You know, he opened up
Speaker 9: to rate cuts with one sentence. You know, before that
Speaker 9: sentence he was talking about inflation and the concerns on
Speaker 9: the inflation side, which are very real, frankly, and you know,
Speaker 9: he got it wrong on the data, and he really
Speaker 9: pounded the table at his last press conference about how
Speaker 9: decent the labor market was and they weren't cutting.
Speaker 5: And then he got, you.
Speaker 9: Know, three months worth of bad data in one go
Speaker 9: on that Friday.
Speaker 5: So he opened the door to the rate cuts.
Speaker 9: If they got another ratification of the weak data, he's
Speaker 9: opened the door. They can cut rates. He can work
Speaker 9: with his committee. But he bought time, and he bought
Speaker 9: the ability to act independently, because this bet is not
Speaker 9: independent and they have to be very careful, Robert.
Speaker 2: He also redefined what weak data actually was. We'll get
Speaker 2: to central bank independence in a moment. I want to
Speaker 2: sit on the labor market last time around in the
Speaker 2: news conference, he talked about the labor market being solid
Speaker 2: and ank at that view around the unemployment rate almost
Speaker 2: that data point alone, and now he's looking at a
Speaker 2: simultaneous step down in the supply side of the labor
Speaker 2: market and the demand side and putting more weight on
Speaker 2: one versus the other. And I'm just wondering, Robert, why
Speaker 2: you think that's come from.
Speaker 9: Yeah, you know, I think that that data is incredibly
Speaker 9: light in terms of sampling. I'm not a statistician, I'm
Speaker 9: not an economist, but it's not that many households, it's
Speaker 9: not that many businesses, and so you need a couple
Speaker 9: of years before that data begins to settle down with
Speaker 9: all the revisions. And so if you add subtract and
Speaker 9: god forbid, start dividing those numbers and getting unemployment rates,
Speaker 9: you have a tremendous amount of risk in interpreting those.
Speaker 9: So you know, you know, I think the economy is
Speaker 9: doing reasonably well. But to his point, when you get
Speaker 9: downward revisions, they tend to have positive serial correlation.
Speaker 5: You tend to keep seeing them.
Speaker 9: Some research says, you know, that doesn't correlate with recessions.
Speaker 5: Some shows that it does.
Speaker 9: And I think you, and I know that often with recessions,
Speaker 9: you look back, they say, oh, yes, six months ago.
Speaker 5: We were actually in the recession. We didn't know it.
Speaker 9: He's feeling that risk, so he's adjusting. Nobody knows what
Speaker 9: to look at in terms of the data. But I
Speaker 9: think that's why he's struggling and everybody's grappling with that information.
Speaker 6: After this speech, is he's setting up the market to
Speaker 6: pay more attention though to the labor market report that
Speaker 6: comes out.
Speaker 9: I think the market always thought the labor market was
Speaker 9: more important. And in fact, if you just look at
Speaker 9: the COVID experience, as long as they were concerned about
Speaker 9: the labor market, they weren't hiking interest rates until they're
Speaker 9: absolutely sure. Yet labor market's probably okay. And wow, inflation
Speaker 9: is way, way, way too high. So this is a
Speaker 9: FED that has been trained. This is the third FED
Speaker 9: of the United States. And you know, the most public
Speaker 9: strongest opposition to FED independence was probably right in the
Speaker 9: fifties before their independence with Truman, you know, Humphrey Hawkins,
Speaker 9: after a very brief reception in sixty nine. In the
Speaker 9: seventies they wrote this, you know, dual mandate, which actually
Speaker 9: has more parts to it. It's a very employment heavy mandate.
Speaker 9: So I think that the markets already realized the FED
Speaker 9: would lean on that because the Fed's independents can be
Speaker 9: shaken by Congress, and the board itself can be attacked
Speaker 9: as well.
Speaker 6: You said earlier the FED is not independent, do you mean?
Speaker 6: Because their mandate is back to someplace, and that's Congress,
Speaker 6: that's the lawmakers.
Speaker 9: Not only is it made by the lawmakers, they set
Speaker 9: the targets. But this is a president that can legislate effectively.
Speaker 9: I mean we saw this with the budget where he
Speaker 9: pushed something through that touched entitlements in fast, you know,
Speaker 9: lightning speed and vent the budget rules right. And maybe
Speaker 9: I'm not saying whether this is right or wrong. I'm
Speaker 9: just trying to adjust to reality here. What's possible in
Speaker 9: this environment. These people that are voting on the rates
Speaker 9: are under tremendous pressure. They can come under attack from
Speaker 9: the Justice Department. But at its very fundamental basis, the
Speaker 9: Fed's mandate is set by Congress that will reserve Act
Speaker 9: Humphrey Hawk and it can be changed at any time.
Speaker 9: So I thought he was very artful. It wasn't like
Speaker 9: twenty eighteen or a little bit earlier in this cycle
Speaker 9: where he fought on the interest rates, laid out the situation,
Speaker 9: you know, said things that are falling out on the
Speaker 9: size of the side of the ease here.
Speaker 5: And that's the best way to remain maintain the.
Speaker 9: Ability to act independently is to not fight it, go
Speaker 9: with the data, do the right thing in the eyes
Speaker 9: of the CURRENTSIE.
Speaker 2: Guyst Well, Robert, let's talk about what the White House
Speaker 2: ultimately wants. And it's not just about lower interest rates
Speaker 2: to the feder Reserve. It's lower boring costs and lower
Speaker 2: mortgage rates. Robert, If they drop rates of the FMC,
Speaker 2: are they going to get lower borrowing costs and lower
Speaker 2: mortgage rates.
Speaker 9: Well, they had a lot of tools I left that
Speaker 9: actually the shadow tournament of the Fed running the treasury.
Speaker 9: You know, they're pulling in the issuance towards bills, their
Speaker 9: buying back bonds, right, so they can they signal they're
Speaker 9: said in issuing more long term securities.
Speaker 5: They're interested in issuing more team bills.
Speaker 9: So if they can get a lower short term interest
Speaker 9: rate rightly or wrongly and issue more bills, you're not
Speaker 9: going to have a runaway cost of issuance.
Speaker 5: You know over the next three and a half years.
Speaker 2: Are you, as an investor less concerned than about what
Speaker 2: happens at the longer end of a curve.
Speaker 5: I think that if yes.
Speaker 9: I think that if they in fact, you know, run
Speaker 9: policy that's reasonable, which I think they will. As you
Speaker 9: pointed out, there's there's a wide range of people that
Speaker 9: are going to be appointed, have to be confirmed for
Speaker 9: a point.
Speaker 5: In all of that, you're.
Speaker 9: Going to get a reasonable outcome in the back end
Speaker 9: of the curve. I don't think you're going to get
Speaker 9: a drop in long term rates, but you know what,
Speaker 9: you haven't gotten a drop in long term rates. We
Speaker 9: got to foreign a quarter basically three years ago and
Speaker 9: we're still at foreign a quarter.
Speaker 5: We've been plus minus.
Speaker 9: You're going to get a lot of variability in the data,
Speaker 9: but you will get lower short term rates. This is
Speaker 9: very positive for markets. You know, in terms of corporations,
Speaker 9: they can deal with a little bit higher inflation with
Speaker 9: the tariffs, We're going to get a little bit higher inflation.
Speaker 9: But the Fed and the market overall is not going
Speaker 9: to demand higher real rates across the curve because private
Speaker 9: sector conomy.
Speaker 5: Can't pay it. And that's that's what you're seeing.
Speaker 9: I think that's why you had, you know, excess reserves
Speaker 9: piling up, is because nobody wants that money at that rate,
Speaker 9: and that will kind of cap.
Speaker 5: Private sector yields.
Speaker 9: Treasure yields will push up against that a bit, but
Speaker 9: overall that's an environment where higher yielding fixed income product
Speaker 9: continues to outperforms.
Speaker 5: Are going to get away from us.
Speaker 2: Yeah, stay with US molblindex savannas coming up off to this,
Speaker 2: Let's stick with inflation and the poss forward for the
Speaker 2: Federal Reserve for Onica clock of City righting, the worst
Speaker 2: case scenario for tariff related inflation has been avoided. The
Speaker 2: biggest test of tariff passed through dynamics will likely be
Speaker 2: data from August through October for on Anica joint just
Speaker 2: now for more for Ononica Cood morning, good morning. You
Speaker 2: notice the same line of inflation is transitory back at
Speaker 2: the Federal Reserve, that.
Speaker 8: Word specifically probably not. But yeah, this is a FED
Speaker 8: that's setting up to look through maybe multiple months of
Speaker 8: some stronger inflation data. Obviously, it's going to depend on
Speaker 8: the details. Do we see services inflation slowing, our inflation
Speaker 8: expectations anchored, But yeah, that was a pretty dubvish comment
Speaker 8: from Tripong.
Speaker 6: If they're saying look through it, then basically the market
Speaker 6: is only going to be focused on what the labor market.
Speaker 8: I think that's the most important, and there definitely, you know,
Speaker 8: can be some stronger inflation scenarios. We don't know exactly
Speaker 8: how this will all play out, but I do think
Speaker 8: it's probably the case that demand is soft enough so
Speaker 8: you're not really getting these big price increases all at once.
Speaker 8: This could be somewhat drawn out, and that comes down
Speaker 8: to the demand backdrop, which is the labor market. If
Speaker 8: the labor market is slow, and that's what they're going
Speaker 8: to be much more focused on.
Speaker 6: Based off all of this. In pal speech on Friday,
Speaker 6: is the FED basically accepting that they'll never hit a
Speaker 6: two percent inflation target. Again, I don't leave in the
Speaker 6: foreseable future, yeah, I don't think so.
Speaker 8: I mean, I think at some point, you know, if
Speaker 8: we really are sticky at something like three percent, that
Speaker 8: they won't be comfortable with that. But we will have
Speaker 8: this multiple month period of some stronger data, but it
Speaker 8: won't necessarily be the true persistent kind of inflation that
Speaker 8: would get them concerned. And then maybe a year or
Speaker 8: so from now we're back towards two percent.
Speaker 2: I find the analysis of the labor market slightly more controversial.
Speaker 2: This was an individual the sound of the news conference
Speaker 2: a number of weeks ago pre day CENTFP. Sure, but
Speaker 2: think about what he said of the news conference. Labor
Speaker 2: markets solid anchored the view around the unemployment rate. A
Speaker 2: few days later, what did unemployment do? Not a lot
Speaker 2: compared to the massive negative revisions we saw in payrolls. Now,
Speaker 2: I'll span out basically what he told us on Friday
Speaker 2: and you can give me your analysis of things. Essentially,
Speaker 2: the chairman is saying that, yes, we've had a step
Speaker 2: down and supply and a step down in demand, which
Speaker 2: has kept the unemployment rate pretty stable given everything that's
Speaker 2: been going on. But I'm going to put more weight
Speaker 2: on the step down in demand. Yeah, now that's your
Speaker 2: camp I understand that. But surely for the feeder reserve,
Speaker 2: shouldn't they be focused on measures of slack. Shouldn't they
Speaker 2: be able to sit there and say, yes, demound's seen
Speaker 2: a step down, but measures of slack have remained stable,
Speaker 2: so we can remain on count for inflation.
Speaker 8: Yeah, I think if we don't see the unemployment rate
Speaker 8: moving higher yet will be hard maybe to get certainly bigger,
Speaker 8: you know, cuts all at once. We're not expecting fifties.
Speaker 8: But I think the issue, and Powell did still talk about,
Speaker 8: you know, the labor market this way in July, is
Speaker 8: why is demand weakening?
Speaker 3: What's going to stop that?
Speaker 8: If rates are restrictive, rates are probably not where they
Speaker 8: should be, then.
Speaker 3: That's a fair comment. Just how restrictive are we?
Speaker 4: Then?
Speaker 8: I think rates are restrictive. You know, obviously we look
Speaker 8: at the long run dot you know, like markets, we're
Speaker 8: pricing you that five five more cuts or so. But
Speaker 8: I think if you look at something like housing, that's
Speaker 8: a really good example of you don't even necessarily need
Speaker 8: rates to go higher. You just leave them at restrictive
Speaker 8: levels and you've gotten that contraction. Again.
Speaker 6: John's been bring up the point though, when the Fed
Speaker 6: cut last year, it actually didn't help the housing market
Speaker 6: because mortgage rates actually went up. Yeah, how concerned you
Speaker 6: this is going to happen this time?
Speaker 8: Right?
Speaker 9: Yeah?
Speaker 8: I don't think we're really concerned that, you know, ten
Speaker 8: year yields are going to go too much higher if
Speaker 8: the Fed is really cutting. We saw that on Friday,
Speaker 8: A Duvish chair means means tenure rates lower to.
Speaker 6: You also said we don't expect fifties, meaning do you
Speaker 6: expect a cycle of cuts?
Speaker 8: Yeah, we do. I think it is harder to get
Speaker 8: those big cuts at this stage, at least starting with that.
Speaker 8: You know, obviously rates were at a higher level last year.
Speaker 8: You weren't as concerned on the inflation side of things.
Speaker 8: But I think this is a FED that's going to
Speaker 8: proceed with a series of cuts.
Speaker 2: What do you expect in full twenty twenty six? And
Speaker 2: it's sort a dividing line between what happens before May
Speaker 2: and what happens to Mate.
Speaker 8: Yeah, we are still expecting that this is going to
Speaker 8: be a FED that is data dependent. Obviously they have
Speaker 8: to you know, majority vote to you know, have a
Speaker 8: policy reached. We still think it's it's a consecutive five.
Speaker 2: A consecutive five. So you don't think a whole lot
Speaker 2: changes when we get that new fetch.
Speaker 8: I don't think necessarily, Yeah.
Speaker 3: We'll obviously it can come from.
Speaker 8: I mean, there is obviously a lot of a lot
Speaker 8: of pressure on them, but I think it depends obviously
Speaker 8: on who the chair will be. If it is someone
Speaker 8: like Governor Waller, you know Market's very familiar with him.
Speaker 8: We know exactly how he thinks.
Speaker 2: The Governor Waller would be a super comfortable choice for
Speaker 2: wall Street.
Speaker 3: I think at this point.
Speaker 6: Absolutely he's someone that wall Street really admires and backs
Speaker 6: at this moment, even if they don't agree with his view,
Speaker 6: they think he's credible and he thinks they think he
Speaker 6: can represent an independent FED and not something that's just
Speaker 6: doing White House bidding, like maybe the President's on any
Speaker 6: c director.
Speaker 2: Can we just finish on the Banach shape? What do
Speaker 2: you think the approach of the new FED chair will
Speaker 2: be to the balance shape?
Speaker 8: Yeah, it's really not gotten a lot of attention it is.
Speaker 8: It could be interesting if it's someone like Governor Waller,
Speaker 8: he's been a bit more hawkish on the balance sheet,
Speaker 8: allowing it to run off for longer. But I imagine
Speaker 8: for now it's just as is.
Speaker 2: I've picked up on the same dynamic. I've been very
Speaker 2: surprised sat here that there hasn't been more attention on
Speaker 2: the bannaed sheet. If you listen to what the White
Speaker 2: House wants, it's not just lower rates, it's lower borrowing costs,
Speaker 2: it's lower mortgage rates, which begs the question if you're
Speaker 2: not going to get it through ad justin short term rates,
Speaker 2: you have to get it through.
Speaker 3: Other meats, right right.
Speaker 8: There's really not a lot to talk about that right now,
Speaker 8: but they are very focused on on cuts, especially because
Speaker 8: they are issuing so much in the short end. So
Speaker 8: that really does depend on what the Fed rate itself
Speaker 8: is doing. Obviously, for consumers, you know, ten year mortgage rates,
Speaker 8: all that matters more, but for now, if it's federal
Speaker 8: borrowing costs, that depends on what the Fed's doing.
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