Speaker 1: Let's head over to Bloomberg's Michael McKee with the headlines mic.
Speaker 2: No surprises, no news, a few new words. In a
Speaker 2: unanimous decision, the Fed retains its five and a quarter
Speaker 2: to five and a half percent target range for its
Speaker 2: benchmark borrowing rate, and retains its language about determining the
Speaker 2: extent of additional policy firming that may be appropriate. The
Speaker 2: Policymaker's assessment of the economy contains some new adjectives, but
Speaker 2: no new information. Activity expanded at a strong pace in
Speaker 2: the third quarter, and instead of solid job gains have
Speaker 2: moderated instead of slowed, Inflation remains elevated. The statement says
Speaker 2: tighter financial and credit conditions for households and businesses are
Speaker 2: likely to weigh on economic activity. That adds the words
Speaker 2: financial to this sentence, and it may be a nod
Speaker 2: to the idea expressed by many Fed officials that raising
Speaker 2: market rates are doing some of the Fed's work for
Speaker 2: it a reason not to have raised rates today. This
Speaker 2: is the second meeting in a row that the Fed
Speaker 2: has held rates unchanged, and although the dot plot suggests
Speaker 2: one more move by the end of the year, the
Speaker 2: markets may interpret today's decision as confirming that rates have peaked.
Speaker 2: That's going to be a key question for Chairman J.
Speaker 2: Powell coming up.
Speaker 3: You'll see, Mike McKee. We want to get to you
Speaker 3: quickly here. But we see the market moving lifting up.
Speaker 3: Equity's lifting up higher right now, with the Dow up
Speaker 3: eighty points two tenths of a percent, Nazek one hundred,
Speaker 3: do a tear up eight tenths of a percent as well?
Speaker 3: The tenure yield comes in ever lower bond prices up,
Speaker 3: yields down on the tenure yield four point seventy nine percent,
Speaker 3: distant from the five percent yield. Mike, the statement is here,
Speaker 3: and maybe it's a preparation for December fifteenth, but it
Speaker 3: seems to be a preparation for a presumed slower American
Speaker 3: economy into this press conference. Do you assume we go
Speaker 3: from four point x percent Q three down to something
Speaker 3: dramatically weaker in this present quarter.
Speaker 2: I don't think the Fed is going to put it
Speaker 2: that way. They took recession out of their forecast a
Speaker 2: meeting or two ago and basically have said that the
Speaker 2: economy can grow at a reasonable rate without without going
Speaker 2: into recession. Now J Powell has suggested we still need
Speaker 2: a period of below trend growth. We're nowhere near that now.
Speaker 2: If we do see it slow down, the question is
Speaker 2: does it go too far too fast right now? All
Speaker 2: indications are it wouldn't that we could see slower growth
Speaker 2: without seeing recession, and we could see inflation continue to
Speaker 2: come down. But that's a question for them. There are
Speaker 2: they in damaged control right now making sure that they
Speaker 2: don't go too far because they think the economy is
Speaker 2: going to slow or do they think they've done enough
Speaker 2: at this point.
Speaker 1: Michael McKeith, thank you so much. We'll be catching up
Speaker 1: with you throughout the afternoon, just taking a look at
Speaker 1: what's going on. The two year yields to me, Tom
Speaker 1: really stands out sharply down below five percent. As really
Speaker 1: to Mike's point, the market is taking this is the
Speaker 1: FED has done hiking rates for this ect already.
Speaker 3: Headlines out now. Mike mckeel have much more on this
Speaker 3: as well as our guest. But low Brainerd showed up
Speaker 3: for the FED meet today. She's at the white outs
Speaker 3: now holding Quota's national Economic advisor. And let me read
Speaker 3: this headline. It's a brainer headline. FED repeats it will
Speaker 3: take a cumulative tightening and lags into account. Drogy would
Speaker 3: have just said, we're going out to twenty twenty five.
Speaker 1: Well, and we're not going to hike anymore, because if
Speaker 1: you think about the cumulative rate hikes, have we seen
Speaker 1: enough from what already has been done? Or is this
Speaker 1: the long and variable lags that a lot of people
Speaker 1: are talking about.
Speaker 3: Richard Clareda with us still he is with PIMCO and
Speaker 3: Columbia University. Richard Clareda, I look at cumulative and that
Speaker 3: just tells me we're going out there. Drogy would have
Speaker 3: put a date on it. Can Professor Clareda put a
Speaker 3: date on this longer FED at this.
Speaker 4: Level, Well, I don't think so. I think you know
Speaker 4: that language curuity has been in there for several meetings,
Speaker 4: and it does recognize that the path forward depends upon
Speaker 4: how much they've done in the past. As I've said,
Speaker 4: these are always balancing acts. I think the Fed's baseline
Speaker 4: outlook makes a lot of sense. But if there is
Speaker 4: a risk, the risk is that inflation is too stubborn.
Speaker 4: If I were recommending or talking to J. Powell, I
Speaker 4: would recommend that he leaves the door open to doing more.
Speaker 4: It doesn't have to commit to it. Every meeting's live,
Speaker 4: but I definitely don't think he wants to walk away
Speaker 4: today with the markets seeing the headline as FED is done.
Speaker 1: That seems to be certainly, at least the initial read
Speaker 1: on this one line that Michael McKee pulled out was
Speaker 1: the tighter financial as well as credit conditions are set
Speaker 1: to weigh on the economy. They added financial into this.
Speaker 1: How much do you think the Federal Reserve and the
Speaker 1: members are concerned about some of the volatility we've seen
Speaker 1: on the long end of the curve, that maybe it's
Speaker 1: getting to something a little dysfunctional, a little bit less
Speaker 1: just restrictive.
Speaker 4: Yeah, well, you know, the short answer is there's probably
Speaker 4: a range of opinions, but certainly Cha Powell recently and
Speaker 4: Lourie Logan, president of Dallas, have indicated that it reflects
Speaker 4: it is doing some of the Fed's job for it.
Speaker 4: They haven't pushed back against it. I do think that
Speaker 4: the challenge, you know, having word Smith with others some
Speaker 4: of these things, the challenge of putting the financial conditions
Speaker 4: term in this statement is, you know, financial conditions can
Speaker 4: go up and down be vital for a lot of reasons.
Speaker 4: And then at some point they they may regret that
Speaker 4: they included it in the first place.
Speaker 3: A vice chairman, thank you so much. He's a former
Speaker 3: vice chairman of the Federal Reserve. Stress he's going to
Speaker 3: stay with us. Yes, okay, I did not know that.
Speaker 3: That is very good. Rich Claire to thank you for
Speaker 3: the generous time today giving your responsibilities at PIMCO. Joining
Speaker 3: us now. Diane Swank, chief economist KPMG, and Matthew Hornbach
Speaker 3: with his global head of macro strategy, Morgan Stanley Dan Swank.
Speaker 3: We're talking rates, We're talking inflation. I believe there's an
Speaker 3: employment mandate as well, and part of that to all
Speaker 3: of your Midwestern heritage. Are auto workers better paid? How
Speaker 3: do we have wage disinflation if we have unions garnering
Speaker 3: the historic pay raises.
Speaker 5: Well, first of all, I want to echo what Rich
Speaker 5: said is our concern is sort of around May and June.
Speaker 5: Where is the FED going to be? And I think
Speaker 5: the optionality to have rate hikes still on the table,
Speaker 5: and that every meeting's live is really important. So I
Speaker 5: really agree one hundred percent with Rich on that. I
Speaker 5: think the issue on the UAW strikes and what they
Speaker 5: have seemed to have gotten is that, first of all,
Speaker 5: union contracts were lagging private sector contracts during much of
Speaker 5: the expansion and the frenzied hiring boom, and so some
Speaker 5: of this is catch up. I think also it's important
Speaker 5: that there will be spillover effects in the manufacturing setctor.
Speaker 5: More broadly, the key issue is how much will those
Speaker 5: higher wages spill over into other manufacturers. That's yet to see,
Speaker 5: but I do think that's where their tension could show up,
Speaker 5: and it's yet to happen, and so they're going to
Speaker 5: ratify it. These were good contracts and a good win
Speaker 5: for the UAW, harder for the automakers. But I do
Speaker 5: think what's important to understand is that many of these
Speaker 5: contracted wages in the public sector as well are just
Speaker 5: now beginning to reset and catch up to where the
Speaker 5: private sector already was several years ago.
Speaker 3: Matt hornback, what all that Lisa and I have done today?
Speaker 3: The single moment for me was your Seth Carpenter explaining
Speaker 3: the Zetner deceleration in this economy from four point x
Speaker 3: percent I know inventories in that down to something sub
Speaker 3: one percent in the Q four. What do our markets
Speaker 3: do with that deceleration presumed in real GDP.
Speaker 6: Yeah, well, thanks for having me on the program, Tom.
Speaker 6: I do think that the deceleration will be important and
Speaker 6: factor into how the FED thinks about this higher for
Speaker 6: longer mantra.
Speaker 1: I mean, it's.
Speaker 6: True that the meeting today didn't really offer too many surprises,
Speaker 6: but we do have one more meeting before the end
Speaker 6: of the year, and even though we don't expect the
Speaker 6: Fed to be hiking rates at that meeting, there is
Speaker 6: an open question about what they do with their guidance
Speaker 6: that comes in the dot plot that I do think
Speaker 6: is going to be levered to the growth outlook, and
Speaker 6: if we do get this deceleration that Ellen and Seth
Speaker 6: are looking for, then we do I would suspect that
Speaker 6: the Fed may have to take a slightly more dovish
Speaker 6: approach to their outlook for interest rates in twenty twenty
Speaker 6: four and beyond.
Speaker 3: Very importantly, Lisa, the two year yield breaks down to
Speaker 3: a new lull on the two year yield, as you
Speaker 3: mentioned earlier in ten basis points, now in round it
Speaker 3: up on eleven basis points four point ninety percent.
Speaker 1: This raises this question, how do you have a hawkish
Speaker 1: pause if a pause is a pause. Matt, Oh, what's
Speaker 1: your view? I mean, how much can really Fetcher J.
Speaker 1: Powell lean into this idea that they may not be
Speaker 1: done without the market saying yeah, you've been following us
Speaker 1: all year.
Speaker 5: Yeah, Lisa.
Speaker 6: I think that what will be key is Powell focusing
Speaker 6: on the data dependence of the Fed. We just got
Speaker 6: through a pretty strong round of data for the month
Speaker 6: of September. We've got two more months of data before
Speaker 6: the FED convenes in December, and then again that dot plot,
Speaker 6: I do think is going to be an important signaling mechanism.
Speaker 6: To the extent that they are done hiking rates, they
Speaker 6: can always double down on the higher for longer theme
Speaker 6: by taking all of the rate cuts out of twenty
Speaker 6: twenty four. So that's going to be an important variable
Speaker 6: that investors will be paying attention to.
Speaker 1: Diane, how much are you looking at the reliance on
Speaker 1: financial markets to do the work for them at a
Speaker 1: time things are volatile and to Rich Clarreta's point, financial
Speaker 1: conditions can change. How much is that not exactly comfortable
Speaker 1: place for the Federal Reserve to be in?
Speaker 3: Well?
Speaker 5: I agree one hundred percent with Rich on that, and
Speaker 5: so I guess Rich and I are just in one
Speaker 5: hundred percent agreement today, But I think that is going
Speaker 5: to be a danger for the FED because they're looking
Speaker 5: for this doing the heavy lifting forum. It is obviously
Speaker 5: already throwing a bucket of ice on the housing market
Speaker 5: that's going to come up in the fourth quarter. That said,
Speaker 5: the consumer is remarkably resilient. We've got double the savings
Speaker 5: we thought we had with the benchmark revisions, and it's
Speaker 5: getting interest paid on it now. That is really important
Speaker 5: to take into account. And the strength of the economy.
Speaker 5: I think we're going to see a acceleration in the
Speaker 5: it's hard not to from almost five percent in a
Speaker 5: fourth quarter, but the consumer is still going to be
Speaker 5: pretty strong. We're set up to have pretty strong gains
Speaker 5: still with two and a half percent or so gains
Speaker 5: and consumer spending. The strength of the economy justifies higher rates,
Speaker 5: and it also brings into question how much restriction we have,
Speaker 5: and if financial conditions were to unwind and the route
Speaker 5: and the bond market were to un that takes away
Speaker 5: the restriction that's out there, and all of a sudden,
Speaker 5: the FED has to get back in the game, and
Speaker 5: so that optionality of being every meeting live critical.
Speaker 3: Rich Clarina, what's so important to me is again the
Speaker 3: analogue that we're conveniently using of taking Powell back to
Speaker 3: Vulcar and his Bill Dudley Rice an hour ago. For Bloomberg,
Speaker 3: he says, the arch fear was Arthur Burns, who allowed
Speaker 3: inflation to get out of control in the nineteen seventies.
Speaker 3: I believe we have a disinflation vector. But should we
Speaker 3: fear that inflation is out of control?
Speaker 4: Well, the analogy I would use, which I think the
Speaker 4: FED would want to avoid at all costs, is nineteen
Speaker 4: sixty six LBJ had guns and butter. Inflation was moving up.
Speaker 4: The FED hiked and then they blinked and they cut
Speaker 4: in nineteen sixty seven and what we now call the
Speaker 4: Great Inflation I think stems back to a hiking episode
Speaker 4: that got cut short, and the FED did not re
Speaker 4: engage when inflation went up. I don't think the power
Speaker 4: Fed would make the same mistake, But that's the part
Speaker 4: of the history book i'd be looking at and trying
Speaker 4: to avoid.
Speaker 7: Matt.
Speaker 1: When we take a look at how the market is
Speaker 1: handling this, we're not talking at all about the balance sheet.
Speaker 1: Should we be I mean, is that part of the
Speaker 1: discussion in a material way.
Speaker 6: Well, Lisa, I do think that the balance sheet will
Speaker 6: be an important topic to discuss in twenty twenty four,
Speaker 6: but that's to us probably a bit more of a
Speaker 6: second half of next year issue as opposed to a
Speaker 6: first half issue. Nevertheless, you know, we will see the
Speaker 6: Fed's balance sheet continue to shrink in terms of its
Speaker 6: securities holdings. The issue that we would be focused on
Speaker 6: here is what ends up happening with the BTFP, that
Speaker 6: term funding facility that the Fed introduced back in March,
Speaker 6: to see what kind of take up we end up
Speaker 6: getting through the first several months of twenty twenty four.
Speaker 6: I do think that will be an important factor that
Speaker 6: we should all continue to pay attention to.
Speaker 3: Dian swank to pick up on what Matt Hornbook just
Speaker 3: talked about. And of course we see this in Japan
Speaker 3: with the Arch debate even into this evening. Pay attention
Speaker 3: folks Bloomberg Asia, a Don Mann and the rest over
Speaker 3: in Hong Kong following Japan in their odd economic experiment,
Speaker 3: Diane Swanker, are we going to successfully extricate ourselves from
Speaker 3: what did normal were being? You call it? Qi one,
Speaker 3: q E two, QE three, four five six, I mean
Speaker 3: Dian Swank where I mean McKees mcke's encyclopedic on this,
Speaker 3: I don't get it. Are we going to get ourselves
Speaker 3: out of this qwy qt model successfully?
Speaker 5: That's a big question. I'd love to hear Rich's response
Speaker 5: on that one. I think you know what's interesting is
Speaker 5: the FED wants to stop well short, is likely to
Speaker 5: stop short of their objective in terms of how much
Speaker 5: they drain their balance sheet. That said, the quantitative tightening,
Speaker 5: the reductions, and their bloated balance sheet, they're still going
Speaker 5: to stop at a level that's much higher than it
Speaker 5: was in the past. And what we've seen is any
Speaker 5: time there is a financial crisis, this is something that FED.
Speaker 5: Once we get down to the zero boundary, we have
Speaker 5: to rely on now. The one thing that might be
Speaker 5: hopeful for the future is that it looks like the
Speaker 5: non inflationary rate is rising and that we're no longer
Speaker 5: coming out of a global financial crisis. And if we
Speaker 5: can avoid another major financial crisis where we literally have
Speaker 5: to go back down to the zero boundary, we've got
Speaker 5: a lot of room to stimulate now without going back
Speaker 5: into the balance sheet. That's for now, and it looks
Speaker 5: like we'll have some cushion and the descent on rates
Speaker 5: is going to be significantly slower and end up at
Speaker 5: a much higher level than we entered the situation at
Speaker 5: in twenty twenty.
Speaker 1: Matt, I want to pick up on what you were
Speaker 1: talking about with the funding program that the FED is
Speaker 1: set up for the banks. How much are you seeing
Speaker 1: signs that there would be serious financial distress if the
Speaker 1: FED were to wean the market from this backstop that
Speaker 1: they created after SVB.
Speaker 6: Well, Lisa, I mean, banks, of course have the ability
Speaker 6: to raise funding in other ways. Is but it's clear
Speaker 6: from the weekly take up at this facility that there
Speaker 6: are certain institutions out there in the market that feel
Speaker 6: it's in their best interest to continue to tap this facility.
Speaker 6: We wouldn't expect the facility to go away in March,
Speaker 6: but it is something that we carefully monitor. In addition,
Speaker 6: you know, when you look at the amount of reserves
Speaker 6: in the banking system, you know they've been resisting falling
Speaker 6: from their current levels, and so in some ways, I
Speaker 6: think what the system is telling us is that the
Speaker 6: FED may have already reached the minimum level of reserves
Speaker 6: that are required for these banks to continue to conduct
Speaker 6: their businesses. So we're kind of trying to monitor all
Speaker 6: of these various signs and what we see does concern us.
Speaker 1: I have to say, Matt Harnbach, We're going to have
Speaker 1: to finish that conversation another time. Diane Song to both
Speaker 1: of you, thank you so much for taking the time
Speaker 1: on this FED day. And I've got to say, we
Speaker 1: have such an ace panel with us, Tom, the fact
Speaker 1: that we have such incredible names, Matt Hornback, Diane swank
Speaker 1: Rich Clarita who is sticking with us, and we are
Speaker 1: grateful for that joining us Now to the conversation. Greg
Speaker 1: Peters Cocio at PGM Fixed Income and Kathy Jones, chief
Speaker 1: fixed income strategist at Charles Schwab. And to that point, Greg,
Speaker 1: do you see things starting to break in the financial
Speaker 1: sphere that the FED is kind of papering over with
Speaker 1: some of the programs that'll be key to watch.
Speaker 8: Oh, I don't think so. I mean, I think those
Speaker 8: backstops are just that their backstops. I think there is
Speaker 8: this persistent worry around the proper function of the treasury market,
Speaker 8: so regulators are vigilant around that as is the FED.
Speaker 8: So no, I don't think anything's breaking at this point.
Speaker 8: And if you just take the data on balance, it's
Speaker 8: actually reasonably good. So there's this whole sky is falling
Speaker 8: mentality out there, and you know, preparing for a rainy
Speaker 8: day is important, of course, but out of the right
Speaker 8: now it's pretty bright and side.
Speaker 3: Greg Peters, where's an appropriate inflation adjusted rate? If I
Speaker 3: look at the ten year real yield two point five
Speaker 3: zero earli early this morning. I know you came in
Speaker 3: late today, Greg, right now two point three nine percent.
Speaker 3: We've seen a reduction there, but still way elevated over
Speaker 3: two years ago. Where's the appropriate real yield? Yeah?
Speaker 8: So, I mean I think we've been so stuck in
Speaker 8: this central bank dominant world where everything was topsy turvy
Speaker 8: upside down, where actually negative real yields was an inducement, right,
Speaker 8: and that was a far cry. And how we thought
Speaker 8: about real yields in the past, right, really yield our
Speaker 8: function of you know, pretty strong growth, stable growth, and
Speaker 8: you know, a little inflation. So I think we're in
Speaker 8: a much more normal environment today. And quite frankly, Tom,
Speaker 8: I think we're so jaded by this recency bias when
Speaker 8: the FED just dominated the game and pushed real yields
Speaker 8: to really kind of unpactors flee life levels.
Speaker 3: Kathy Jones with us of Charles Schwab and her recency
Speaker 3: bias is clients going, should I buy a money market
Speaker 3: funder an eight year CD? Kathy Jones, You know, I
Speaker 3: look at the moment that Greg Peters was just describing
Speaker 3: just simply, all it comes down to me is what
Speaker 3: do I do with five percent cash? What are you
Speaker 3: seeing at Schwab? What are people doing off of the
Speaker 3: FED action with a money market fund? And I'm going
Speaker 3: to call it five and a half percent?
Speaker 7: Well, we're saying again clients do lots of different things
Speaker 7: that have lots of different clients, but we are seeing
Speaker 7: a lot of interest in say CD ladders, treasury bill ladders,
Speaker 7: treasury bond ladders. As people look at where the yields
Speaker 7: are and the real yields, which we've been pointing out
Speaker 7: have been pretty attractive, they're starting to sort of tiptoe
Speaker 7: out the curve. We don't have a lot of interest
Speaker 7: in going very long on the curve, but I think
Speaker 7: the idea of capturing four or five six percent, depending
Speaker 7: on what instruments you're in yields going over the next
Speaker 7: five to seven years is looking more attractive. So we're
Speaker 7: starting to see a little bit of that action. A
Speaker 7: lot of louder securities though, is a way to kind
Speaker 7: of average into the market. But I do think we
Speaker 7: the longer we can hold in some sort of a
Speaker 7: range and stabilize, and the more we can get a
Speaker 7: signal from the FAT that maybe there's not a lot
Speaker 7: more common in the way of tightening, you know, the
Speaker 7: more people will get up the courage to extend out
Speaker 7: a little bit in duration.
Speaker 1: Kathy, I know that you're very interested in the balance
Speaker 1: sheet and hearing about what the FED has to say,
Speaker 1: and we did just here from Matt Hornback that he
Speaker 1: thinks that the FED has hit the minimum amount required
Speaker 1: of reserves, that basically we're bumping up against the size
Speaker 1: maybe the balance sheet needs to be.
Speaker 7: Do you agree with that? Yeah, you know, I have
Speaker 7: only done a small amount of work on it, which
Speaker 7: is why I want to hear what the FED has
Speaker 7: to say about it, because I like to know what
Speaker 7: their thoughts are, and we really haven't gotten them to
Speaker 7: talk about what's the optimal size. We've had some estimates
Speaker 7: of twenty to twenty five percent of g If you
Speaker 7: do that, you're going back. You know, we're going down
Speaker 7: quite a bit more. Put that against where you know
Speaker 7: reserve requirements should be, and you know you're you're kind
Speaker 7: of at odds. Which is why I find this question
Speaker 7: of the FED continuing QT even when they eventually shift
Speaker 7: to easier policy. I find that to be a big
Speaker 7: question mark in my mind as to how back can
Speaker 7: those two policies can kind of coexist smoothly. So I
Speaker 7: don't know that we're at the minimum level yet. I
Speaker 7: think there's some room to go from here, but I
Speaker 7: am concerned. I would like to know what they're a
Speaker 7: deeper thought process than the little information should we've been given.
Speaker 3: You know, Rich Clarina, what's so important here? And I'm
Speaker 3: thinking of your conversations and your council, to the portfolio
Speaker 3: managers at PIMCO, and in the moment we're in there
Speaker 3: are select people out there saying bonds out immaturity are
Speaker 3: a screaming buy. How do you frame that at PIMCO?
Speaker 3: Given what the FED is doing post pandemic. Can you
Speaker 3: say price up, yield down and go out in maturities
Speaker 3: to get total return.
Speaker 4: Well, that's what exactly, in the sense that investors can
Speaker 4: earn returns that they would have been drooling over three
Speaker 4: years ago by not moving all that far out on
Speaker 4: the on the curve, certainly if you look at investment
Speaker 4: grade corporate or or or mortgage backed security. So what
Speaker 4: we're saying is that there is a menu of opportunities
Speaker 4: available to investors. But when you can get returns real
Speaker 4: rates where they are now, and because we're in the
Speaker 4: camp that thinks the FED will succeed in ultimately bringing
Speaker 4: down inflation, but this is at a great entry level
Speaker 4: and you don't have to take a lot of duration risks.
Speaker 4: Some of vextors because of their business model, do have
Speaker 4: more duration risk, but there are opportunities even if you
Speaker 4: don't want to add.
Speaker 2: That this is great.
Speaker 3: The Dean of Columbia Economics is bond manager. I think
Speaker 3: I think Rich claar To just got out of bond
Speaker 3: ticket and said let's go along.
Speaker 1: Which is there reason why va I do want to
Speaker 1: just get a sense from you, Rich about the balance
Speaker 1: seat question about whether the Fed's balance needs to be
Speaker 1: a lot bigger than people have previously had imagined, and
Speaker 1: if we're kind of bumping up against that level.
Speaker 4: I don't think we're bumping up against that level, Lisa. Remember,
Speaker 4: the FED has something another acronym, the reverse Repo Facility program,
Speaker 4: that's got a trillion dollars in it. That money, once
Speaker 4: it leaves that facility will then flow back into reserves.
Speaker 3: So I think if you if you.
Speaker 4: Factor that in, I think there is more road for
Speaker 4: the FED to travel to shrink its its balance sheet.
Speaker 4: I do. I agree with your prior previous guests. It
Speaker 4: is interesting that the FED has talked about continuing QT
Speaker 4: even after they potentially adjust rates. You know, when I
Speaker 4: was there in twenty nineteen, we stopped QT before we
Speaker 4: cut rates, so that would be an interesting difference.
Speaker 3: Professor Claire to thank you for your generous time today
Speaker 3: here at this FED meeting. We're gonna let rich Claire
Speaker 3: to go here six minutes away from this important press
Speaker 3: conference with is Kathy Jones of Schwab and Greg Peters
Speaker 3: of Pigium. Greg, I'm just going to ask you a
Speaker 3: simple question here, and I'm starting to hear it. A
Speaker 3: lot are bonds of screaming buy.
Speaker 8: I think there's a tremendous amount of value in the
Speaker 8: bond market today. But I want to go back to
Speaker 8: you know, do you really want to extend duration. I
Speaker 8: think you do, but you want to do it very carefully.
Speaker 8: So I think the shape of the curve matters a lot.
Speaker 8: You know, Tom, you keep talking about cash and the
Speaker 8: shape of the curb tells you to be defensive, tells
Speaker 8: you to be in cash. So if you subscribe to
Speaker 8: this higher for longer front end rate environment where the
Speaker 8: FED can no longer kind of cut down to zero
Speaker 8: and has that flexibility, then you need to see the
Speaker 8: curve normalize before you really step in and moss out
Speaker 8: the curve. So to me, it's really quite simple. The
Speaker 8: shape of the curve dictates where you want to be
Speaker 8: on the curve. And while there is value, absolutely we're
Speaker 8: excited about it, I don't really see the need to
Speaker 8: rush out and lock in duration here.
Speaker 3: Greg.
Speaker 1: It seems like a year ago, but we got the
Speaker 1: refunding agreement for a funding announcement excuse me from the
Speaker 1: Treasury Department earlier today and it seemed to move the
Speaker 1: market quite a bit. Do you think that we learned
Speaker 1: today that supply right now is trumping any kind of
Speaker 1: fundamental economic read that it really does come down to simply,
Speaker 1: there are not enough buyers to pick up the US
Speaker 1: debt with yields as low as they had been traditionally.
Speaker 8: No, absolutely not, Lisa, what I know you like to
Speaker 8: push that narrative. I don't think that's true. I think
Speaker 8: on the margin, yes, it does put more pressure on
Speaker 8: the back end, but it goes back to the shape
Speaker 8: of the curve. Why is the curb inverted when we're
Speaker 8: printing five percent GDP and inflations around kind of three percent,
Speaker 8: So you know, I think that is really the fundamental
Speaker 8: dictate here, not so much to supply. At some point
Speaker 8: it will map, but I don't think that is the
Speaker 8: driver today. I think that's more of a kind of
Speaker 8: a politically driven red herring than anything else.
Speaker 3: Keathy Jhones would be interesting to see how the chairman
Speaker 3: addresses commercial banking. We've been talking all day about the
Speaker 3: Keith Britt Index BKX really having some challenges technically, and
Speaker 3: of course finding a bid has been a challenge, even
Speaker 3: with the Dow up one hundred points, NASDA, GOP eight
Speaker 3: tens of percent, VIC seventeen point four to three. Kathy,
Speaker 3: the heart of the matter is a movement of money
Speaker 3: from deposits to money market funds, and that's the theory
Speaker 3: here of instability that could come. Do you see those
Speaker 3: potential instabilities out there in the trust market between deposits
Speaker 3: and money market funds.
Speaker 7: Well, I think if there's any issue that the FAT
Speaker 7: is now very much focused on and has its arms around,
Speaker 7: it's this one. After what happened in March, I've got
Speaker 7: to believe that the regulators and everyone else that the FAT,
Speaker 7: indeed in the regulatory environment for banking in general, is
Speaker 7: scrutinizing this pretty tightly. So I don't know that this
Speaker 7: is going to be some sort of a trigger for
Speaker 7: crisis so much as something that is going to have
Speaker 7: to be worked out over time. And I think that
Speaker 7: that probably means a lot more mergers among financial institutions
Speaker 7: and recapitalization, et cetera. But it's usually not the things
Speaker 7: that everyone's focused on, that is, you know, bring up
Speaker 7: the crises. It's something that no one's left.
Speaker 3: I can't say enough about this, Lisa, Well, what we've
Speaker 3: done today in with the terrible construction of the Keith
Speaker 3: Breanda Woods chart, it's simply got to come down to
Speaker 3: combinations and transactions. I just see no other way to
Speaker 3: do it.
Speaker 1: Yeah, although we do see a lot of positivity in
Speaker 1: the underlying economy, and we see that with the Ajult
Speaker 1: report wrote earlier today and a whole host of other components.
Speaker 1: Greg Peters really was talking about that. So, Kathy, from
Speaker 1: your vantage point, how much when do we know that
Speaker 1: we are underestimating the strength of the economy and the
Speaker 1: sort of momentum behind this inflation?
Speaker 7: Well, I think west're getting at, Lisa is this question
Speaker 7: of you know, what's the growth rate, what's the underlying
Speaker 7: growth rate going forward? What's our and our star and
Speaker 7: all those questions. I think that that obviously a lot
Speaker 7: of debate around that. There is a strong belief that
Speaker 7: we've moved to a higher level of economic activity for
Speaker 7: a lot of reasons going forward then we've had over
Speaker 7: the past decade or two. And that means that we're
Speaker 7: at higher rates for longer, that the resting place is
Speaker 7: higher than it was before. So, you know, how will
Speaker 7: we know? I think in the labor market is probably
Speaker 7: the key indicator. Right if we start to see at
Speaker 7: acceleration in jobs and you know, real decline in the
Speaker 7: unemployment rate, that would be certainly a big surprise. I
Speaker 7: think expectations are it's going to go the other way
Speaker 7: since we've had so much tightening in this system, so
Speaker 7: it'd be a pretty big shock if we saw that
Speaker 7: component of the economic environment shift upward. I don't anticipate
Speaker 7: that that will happen, but I think that that would
Speaker 7: be the big surprise.
Speaker 1: Kathy Jones and Greg Peters, both of you, thank you
Speaker 1: so much for being with us on the playoffs game
Speaker 1: equivalent in the economics sphere. Subscribe the Bloomberg Surveillance podcast
Speaker 1: on Apple, Spotify, and anywhere else you get your podcasts.
Speaker 1: Listen live every weekday starting at seven am Eastern on
Speaker 1: Bloomberg dot Com, the iHeartRadio app tune In, and the
Speaker 1: Bloomberg Business app. You can watch us live on Bloomberg
Speaker 1: Television and always on the Bloomberg Terminal. Thanks for listening.
Speaker 1: I'm Lisa Abramowitz, and this is Bloomberg