WEBVTT - Fed Decision Day 0:00:02.400 --> 0:00:08.520 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.800 --> 0:00:14.880 This is the Bloomberg Surveillance Podcast. I'm Paul Sweeney along 0:00:14.880 --> 0:00:17.240 with Tom Keene. Join us each day for insight from 0:00:17.239 --> 0:00:20.760 the best in economics, geopolitics, finance, and investment. You can 0:00:20.800 --> 0:00:24.439 also watch the show live on YouTube. Visit the Bloomberg 0:00:24.480 --> 0:00:27.760 Podcast channel on YouTube to see the show weekday mornings 0:00:27.760 --> 0:00:30.360 from seven to ten Eastern Remark Global Headquarters in New 0:00:30.480 --> 0:00:33.720 York City. Subscribe to the podcast on Apple, Spotify, or 0:00:33.760 --> 0:00:36.800 anywhere else you listen, and as always on Bloomberg Radio, 0:00:36.840 --> 0:00:38.960 the Bloomberg Terminal, and the Bloomberg Business app. 0:00:40.040 --> 0:00:42.360 Bob Michael joints is here. He's always focused. 0:00:42.360 --> 0:00:45.000 Bob Michael, He's the CIO and head of Global Fixed Income, 0:00:45.040 --> 0:00:48.520 Currency and Commodities Group at JP Morgan Asset Management. 0:00:49.040 --> 0:00:50.080 He joins us here in our studio. 0:00:50.159 --> 0:00:53.159 We appreciate that, Bob. Thanks for coming in from then. 0:00:53.200 --> 0:00:55.160 You're like forty eighth Street down there, kind of where 0:00:55.160 --> 0:00:57.320 the JP Morgan folks are the building, that new building, 0:00:57.320 --> 0:00:57.680 which is. 0:00:57.640 --> 0:00:59.400 Going to be awesome. I can't wait to check that out. 0:01:00.040 --> 0:01:00.240 Bob. 0:01:00.240 --> 0:01:02.279 What are you thinking about your Federal Reserve today? I'm 0:01:02.280 --> 0:01:05.080 calling to get your Federal Reserve, two o'clock. What are 0:01:05.120 --> 0:01:06.440 we gonna hear from your chairman. 0:01:06.600 --> 0:01:09.640 Well, there's the top down in the micro From the 0:01:09.680 --> 0:01:12.280 top down, I want them to get in and out 0:01:12.319 --> 0:01:15.680 in two hours and do as little to disrupt the markets. 0:01:15.720 --> 0:01:19.440 It should be a simple, easy meeting. Make it that way. 0:01:19.920 --> 0:01:22.319 Go in and say, you know what, we're still looking 0:01:22.360 --> 0:01:25.039 at stuff. Things are going pretty much in our direction. 0:01:25.520 --> 0:01:29.119 Couple mixed signals. Maybe unemployment popped up a little bit, 0:01:29.440 --> 0:01:33.479 maybe inflation's a little stickier. Nothing's ever a smooth past. 0:01:33.840 --> 0:01:36.520 You're gonna get some bumps, but we're confident where we are. 0:01:36.920 --> 0:01:39.560 See you in a few months. That would be ideal. 0:01:40.160 --> 0:01:45.160 I think Jennifer is right. Welcome Jennifer. How nice these 0:01:45.200 --> 0:01:48.200 two they're looking right at you. 0:01:49.000 --> 0:01:49.880 I am not Tom. 0:01:51.160 --> 0:01:54.920 I can see that it's in the dots, right, it's 0:01:55.040 --> 0:01:59.680 in the dots. They probably have to move the dots 0:01:59.720 --> 0:02:04.240 down to two easings this year from three because inflation 0:02:04.720 --> 0:02:08.840 is looking a bit stickier. What we're interested in is 0:02:08.880 --> 0:02:12.680 that long term median neutral dot. Is it really going 0:02:12.760 --> 0:02:15.360 to stay at two and a half percent or is 0:02:15.360 --> 0:02:16.760 that going to drift up a little bit? 0:02:17.360 --> 0:02:20.320 I mean, okay, yes, I can see your ideal world 0:02:20.360 --> 0:02:22.000 that we get in and we get out and nobody 0:02:22.000 --> 0:02:25.040 gets hurt out of the conference after the meeting, But 0:02:25.600 --> 0:02:27.639 we're going to have to get some sort of signaling 0:02:27.760 --> 0:02:31.200 out of this man after you're through speaking, and you know, 0:02:32.360 --> 0:02:34.480 how are we going to be fixed? If he does 0:02:34.520 --> 0:02:37.000 a Bank of Japan and has no change but is 0:02:37.080 --> 0:02:40.720 still a little bit hawkish because of all the upside 0:02:40.760 --> 0:02:42.200 surprises we've had in inflation. 0:02:43.080 --> 0:02:46.359 Well, I think he got burned on the pivot in 0:02:46.440 --> 0:02:50.560 December because the data that's come out since December has 0:02:50.600 --> 0:02:55.239 shown both an economic resilience and a little flare up 0:02:55.400 --> 0:02:58.520 in inflationary pressures. So I think he's going to be 0:02:58.560 --> 0:03:01.960 careful not to pivot again. And I think there is 0:03:02.000 --> 0:03:05.320 an opportunity to just back up and say, hey, the 0:03:05.480 --> 0:03:09.560 data will be mixed, we're confident of our policy. We're 0:03:09.560 --> 0:03:12.440 going to watch things. Nothing's carved in stone. 0:03:13.440 --> 0:03:16.079 So I guess that kind of goes to the issue 0:03:16.080 --> 0:03:18.640 a lot of folks are having, which is with the inflation. 0:03:18.720 --> 0:03:20.880 This lasts maybe three percent to. 0:03:20.800 --> 0:03:23.560 Two percent inflation, that's gonna be a little bit harder 0:03:23.600 --> 0:03:26.120 than coming from eight or nine percent down to three percent. 0:03:26.919 --> 0:03:29.000 Does he frame that is like, we're okay with that. 0:03:29.080 --> 0:03:31.760 We understand that we're still on our path. We're okay 0:03:31.800 --> 0:03:33.160 with some of the recent data we've seen. 0:03:34.040 --> 0:03:37.120 I think he can There was some expectation that the 0:03:37.160 --> 0:03:40.680 start of the year you get slightly hotter inflation prints. 0:03:40.680 --> 0:03:44.160 It happened last year and then tailed off. I think 0:03:44.200 --> 0:03:47.800 the bigger thing for them to address are the significant 0:03:47.840 --> 0:03:52.960 loosening in financial conditions indicators. The market has pretty much 0:03:53.040 --> 0:03:57.280 done a couple easings for them, and that's percolating through 0:03:57.320 --> 0:04:00.560 the system and it's doing a lot of things. It's 0:04:00.680 --> 0:04:05.040 elevated equity prices. I know you commented that bonds were boring. 0:04:05.120 --> 0:04:05.480 They're not. 0:04:05.680 --> 0:04:09.280 They're roaring ahead. When we look at credit spreads, they've 0:04:09.400 --> 0:04:12.240 narrowed a lot. Those are things that I'd like to 0:04:12.280 --> 0:04:14.240 see him comment on at the press. 0:04:15.200 --> 0:04:17.440 But I guess where are the balance of risks now 0:04:17.480 --> 0:04:20.760 for the FED and either moving too slowly or moving too. 0:04:20.680 --> 0:04:23.680 Quickly exactly, those are the balance. 0:04:23.960 --> 0:04:24.600 Great, thank you. 0:04:26.000 --> 0:04:28.880 I think it's a really tough one because you could 0:04:28.920 --> 0:04:32.800 sit here and pretty much make any case that we're 0:04:32.800 --> 0:04:35.560 in a soft landing right now that should continue for 0:04:35.640 --> 0:04:39.440 the year. Yet we are seeing some tightness in the 0:04:39.560 --> 0:04:43.719 labor market. We were looking at travel and leisure yesterday 0:04:43.720 --> 0:04:45.920 it was the first day of spring at JPM Morgan. 0:04:46.160 --> 0:04:50.000 We brought the travel and leisure analyst in from the 0:04:50.040 --> 0:04:53.560 equity and credit research teams. They were all talking about 0:04:53.560 --> 0:04:56.560 the tightness in airlines. It's not just so much the planes, 0:04:56.920 --> 0:05:01.720 but it's the shortage of pilots, of crew, of airport's 0:05:01.839 --> 0:05:04.960 maintenance staff. You look at hotels, they're starting to pick 0:05:05.040 --> 0:05:09.039 up again. There's a lot of resiliency in consumer services. 0:05:09.200 --> 0:05:11.960 I think that's got to be some of their concern 0:05:12.480 --> 0:05:14.719 is that things start to accelerate again. 0:05:15.000 --> 0:05:16.880 Yeah, we follow at Lisa in this studio, we follow 0:05:16.880 --> 0:05:18.880 the cruise industry a lot because that's just a great 0:05:18.880 --> 0:05:21.240 barometer of what the consumers are and all the cruise 0:05:21.760 --> 0:05:24.359 CEOs of the C suite folks that we talked to. 0:05:25.120 --> 0:05:27.960 Business is booming the consumers and it seems to be 0:05:28.040 --> 0:05:30.280 continue spending. What do you make of the US consumer here? 0:05:30.960 --> 0:05:34.599 Yeah, I heard that the Icon of the Seas has 0:05:34.640 --> 0:05:40.320 like a triplex that rents out for one hundred thousand 0:05:40.440 --> 0:05:43.279 a week on a cruise and that was book solid 0:05:43.360 --> 0:05:46.680 for the next two years. So there's money out there. 0:05:47.240 --> 0:05:50.640 I think you have to go back to now, what 0:05:50.800 --> 0:05:53.599 is it four years ago March twenty twenty when the 0:05:53.640 --> 0:05:57.279 Cares Act came through, And I think when we look 0:05:57.360 --> 0:05:59.479 back on it ten years from now, we're going to 0:05:59.520 --> 0:06:04.240 realize the amount of liquidity that was unleashed into the system. 0:06:04.640 --> 0:06:08.200 And it feels like it's all slashing around, because how 0:06:08.200 --> 0:06:12.159 can you have things like money market funds continue to 0:06:12.200 --> 0:06:14.800 go up? Your over six trillion, so there's a lot 0:06:14.839 --> 0:06:18.400 of money going into money market funds. The entire treasury 0:06:18.480 --> 0:06:22.000 curve is trading below the FED funds rate, so clearly 0:06:22.080 --> 0:06:25.160 money is going into the bond market. You look at 0:06:25.240 --> 0:06:28.480 equity prices, they continue to set new highs. You look 0:06:28.520 --> 0:06:33.080 at prices out in the consumer area, whether it's groceries 0:06:33.480 --> 0:06:36.840 or houses, those are still high and staying there. Where 0:06:36.920 --> 0:06:40.080 is all this money coming into elevate the price of 0:06:40.360 --> 0:06:43.479 everything that is creating a resilience on the part of 0:06:43.480 --> 0:06:45.880 the consumer. They continue to spend all. 0:06:45.800 --> 0:06:48.520 Right, Bob, So we're gonna have a FED I guess 0:06:48.520 --> 0:06:49.839 we're not going to do a whole lot today. They're 0:06:49.839 --> 0:06:51.159 going to try it, as you mentioned, kind of just 0:06:51.279 --> 0:06:54.200 case a steady is she goes as a fixed income 0:06:54.240 --> 0:06:55.480 guy What. 0:06:55.360 --> 0:06:55.920 Are you doing here? 0:06:55.960 --> 0:06:58.360 You just buying the two year and getting four point 0:06:58.360 --> 0:07:00.920 sixty seven percent of you're going out on some credit risk. 0:07:00.960 --> 0:07:01.800 How much farther out? 0:07:01.839 --> 0:07:05.520 Because last year and in the fixing the space, high 0:07:05.560 --> 0:07:06.560 yield was the place to be. 0:07:07.080 --> 0:07:07.960 What are you doing this year? 0:07:08.839 --> 0:07:14.200 Yeah, it's a good question because like many fixed income investors, 0:07:14.480 --> 0:07:16.600 we want yields to go down, but we want them 0:07:16.600 --> 0:07:18.440 to back up a bit so we can buy a 0:07:18.480 --> 0:07:22.320 bit more. We're looking to buy every backup. We do 0:07:22.400 --> 0:07:25.800 think that ultimately the Fed will be cutting rates this year. 0:07:26.040 --> 0:07:28.880 We still think that regardless of whether they dial it 0:07:28.960 --> 0:07:32.120 back and the dots to two, expect it cuts this year. 0:07:32.160 --> 0:07:35.920 We think they'll do at least three in Inflation is 0:07:36.000 --> 0:07:39.360 still closer to two to three percent than it was 0:07:39.400 --> 0:07:42.640 to seven, and we're nowhere near what they've told us 0:07:42.680 --> 0:07:47.000 they're two and a half percent neutral rate for the 0:07:47.000 --> 0:07:49.800 Fed funds rate is, so we expect ray cuts. That 0:07:49.920 --> 0:07:53.200 gets us to buy duration. Credit's the interesting one because 0:07:53.240 --> 0:07:56.760 you are at the narrower end of their historic range. 0:07:56.800 --> 0:07:59.160 When we look at something like high yield, which you 0:07:59.240 --> 0:08:04.520 mentioned about three hundred and twenty five basis points over treasuries, 0:08:04.680 --> 0:08:07.400 we go back to previous periods. You can stay here 0:08:07.440 --> 0:08:09.800 for a long period of time. You look at the 0:08:09.880 --> 0:08:12.480 period two thousand and four to two thousand and seven, 0:08:13.000 --> 0:08:16.040 you traded either side of three hundred basis points for 0:08:16.200 --> 0:08:19.040 most of that period. You actually got down to two 0:08:19.160 --> 0:08:23.480 hundred and forty one basis points over treasuries. So there's 0:08:23.520 --> 0:08:27.040 still a lot of room for credit to run, particularly 0:08:27.080 --> 0:08:29.640 in a soft landing. You see the same thing in 0:08:29.640 --> 0:08:33.120 investment grade corporates. They traded between eighty and one hundred 0:08:33.200 --> 0:08:36.240 basis points over from two thousand and four to two 0:08:36.280 --> 0:08:38.240 thousand and seven. By the way, that was when we 0:08:38.240 --> 0:08:41.840 were heading barreling into the Great Financial Crisis, So there 0:08:41.840 --> 0:08:45.439 were some stresses in the system. But it just tells 0:08:45.440 --> 0:08:47.800 you when there's money out there and things look stable, 0:08:47.920 --> 0:08:48.960 it will go into credit. 0:08:49.320 --> 0:08:52.400 You know, with things getting so frothy, especially at the 0:08:52.440 --> 0:08:55.240 lower end of the credit spectrum, are you sort of 0:08:55.280 --> 0:08:58.000 starting to have a thought that we might be witnessing 0:08:58.040 --> 0:09:01.080 the seeds of the next crisis. You have things like 0:09:01.480 --> 0:09:04.160 the absence of credit or protections in high yield borrowing, 0:09:04.200 --> 0:09:08.280 for example, or very risky credit, very risky mortgage securities 0:09:08.280 --> 0:09:11.920 getting packaged into clos is that actually going to end 0:09:12.000 --> 0:09:12.640 well for us. 0:09:14.000 --> 0:09:18.480 Well, it's surprising that it's lasted this long. Because we 0:09:18.600 --> 0:09:21.920 have had a five hundred and twenty five basis point 0:09:21.960 --> 0:09:25.360 ray shot and we broke the regional banking system. We 0:09:25.400 --> 0:09:27.200 thought there would have been more of a knock on 0:09:27.640 --> 0:09:30.679 effect across credit. But when you look at the public 0:09:30.720 --> 0:09:34.600 credit markets, they actually look pretty clean. When you talk 0:09:34.679 --> 0:09:37.679 to our credit teams, the kind of issuance that they 0:09:37.720 --> 0:09:40.520 would have historically seen at this part of the cycle 0:09:40.559 --> 0:09:43.800 they haven't seen. And we think it's because the private 0:09:43.840 --> 0:09:47.760 credit markets have grown to be so large they're effectively 0:09:48.000 --> 0:09:52.040 absorbing the marginal buyer borrower that would be in the 0:09:52.080 --> 0:09:55.280 public markets. If we go back to two thousand and seven, 0:09:55.960 --> 0:09:59.120 the private credit markets didn't exist. It was all about 0:09:59.200 --> 0:10:03.680 hedge funds leverage. Today the private credit market is about 0:10:03.679 --> 0:10:07.520 one point seven trillion. It's actually just slightly larger than 0:10:07.559 --> 0:10:11.040 the one point six trillion value of the public high 0:10:11.080 --> 0:10:14.320 yield market. It's in a way acting as a form 0:10:14.360 --> 0:10:16.800 of reinsurance to the public credit markets. 0:10:17.120 --> 0:10:20.200 Do you get so, does JP Morgan play in that 0:10:20.240 --> 0:10:23.280 private credit business at all? I mean, that's that's silly, separate. 0:10:23.040 --> 0:10:29.679 From your world it's within our asset and wealth management businesses, 0:10:30.040 --> 0:10:32.480 so we do have teams that look through it. They 0:10:32.520 --> 0:10:37.840 see a lot of opportunity. They're looking at core opportunities 0:10:37.880 --> 0:10:41.080 that are between nine and eleven percent, so first five 0:10:41.120 --> 0:10:44.360 and three eighths, and credit spreads are four to five percent. 0:10:45.600 --> 0:10:48.440 You're getting it largely from the increase in the Fed 0:10:48.480 --> 0:10:52.839 funds rate, and then for the more marginal story borrowers, 0:10:52.840 --> 0:10:56.520 you're looking at twelve to fifteen percent. You can escape it. 0:10:56.640 --> 0:10:59.640 You have to realize that a new source of non 0:10:59.679 --> 0:11:04.000 bank lending has been created since the start of the pandemic. 0:11:04.520 --> 0:11:05.559 I tay you in that part. 0:11:05.600 --> 0:11:07.520 Like when I was at the chaseman Aden Bank in 0:11:07.559 --> 0:11:10.680 the media group, we lean against cashlow no asset values. 0:11:10.960 --> 0:11:12.480 So to go to our credit committee and say we're 0:11:12.559 --> 0:11:16.480 lending against airwaves, say for a cellular company, was crazy, 0:11:16.840 --> 0:11:20.280 But that's leverage lending to me, and that was hugely profitable. 0:11:20.440 --> 0:11:22.600 I'm surprised the banks have allowed that business to kind 0:11:22.600 --> 0:11:25.640 of kind of go away from them in this private well. 0:11:25.880 --> 0:11:29.640 I'm sure the regulators have had a hand in that. 0:11:30.400 --> 0:11:37.080 But your conversation about Chase Manhattan about making loans, you 0:11:37.200 --> 0:11:40.120 go back to the way the Fed traditionally operate it 0:11:40.200 --> 0:11:43.480 was to lower rates, create some stimulus in the system, 0:11:44.040 --> 0:11:48.280 create more lending into the system. This sort of extension 0:11:48.280 --> 0:11:51.440 of credit, the credit multiplier. Well, that's what you see 0:11:51.480 --> 0:11:54.600 in private credit now. It's an extension of credit into 0:11:54.640 --> 0:11:57.840 the system. That one point seven trillion that's out there. 0:11:58.040 --> 0:12:00.920 Regardless of how much of that's actually and tapped and lent, 0:12:01.320 --> 0:12:05.000 it's still going to businesses who are using it. They're 0:12:05.160 --> 0:12:10.760 hiring people, they're contracting for facilities, for goods and services. 0:12:11.040 --> 0:12:13.320 That's going into the economy. It's real. 0:12:14.000 --> 0:12:17.760 When is the new JP Morgan Chase building on Park 0:12:17.760 --> 0:12:19.679 Avene going to be open? Because I've been watching that 0:12:19.880 --> 0:12:22.480 since day one? And folks, next time you come to 0:12:22.480 --> 0:12:25.160 the city Park Avenue like forty eighth Street, forty whatever, 0:12:25.160 --> 0:12:26.720 it is, awesome building. 0:12:26.760 --> 0:12:27.600 Once's it gonna be ready. 0:12:27.679 --> 0:12:29.640 You're an alum, you should come back. I have a 0:12:29.679 --> 0:12:32.600 look August twenty twenty five. Put it on your calendar 0:12:33.400 --> 0:12:37.000 just paying me or Diamond Comma Jay and say you 0:12:37.040 --> 0:12:37.600 were an alum. 0:12:37.720 --> 0:12:38.920 Now this is what we get in. This is what 0:12:39.040 --> 0:12:40.319 we're gonna do. We're gonna do Rich Meg. 0:12:40.360 --> 0:12:42.160 Put this in the calendar for August twenty twenty five, 0:12:42.200 --> 0:12:45.679 Bloomberg Surveillance remote broadcast for the opening day of the 0:12:45.760 --> 0:12:48.320 JP Marsham Let's chase, are think gonna bring everybody back 0:12:48.320 --> 0:12:50.840 together again, hopefully in this building, because you guys are 0:12:50.880 --> 0:12:51.679 all over the place now. 0:12:51.800 --> 0:12:56.559 Yeah, we're across three buildings. We refer to it as 0:12:56.600 --> 0:13:01.920 our Midtown campus. Oh okay, some are better buildings than others. 0:13:02.840 --> 0:13:05.640 Some were in buildings that their glory years were about 0:13:05.760 --> 0:13:09.840 fifty years ago. Yeah, so there's a lot of anxiousness 0:13:09.880 --> 0:13:11.920 to just move around and get to the right place 0:13:11.960 --> 0:13:12.400 sooner than that. 0:13:12.520 --> 0:13:14.199 All right, I'm sure Jamie Diamond is driving a bus 0:13:14.280 --> 0:13:16.240 on that one as usual. Bob Michael, thanks so much 0:13:16.280 --> 0:13:18.280 for joining us. Bob Michael, he's the CIO. He's a 0:13:18.320 --> 0:13:21.080 head of Global fixed income, Currency and Commodities Grow. We 0:13:21.120 --> 0:13:24.440 call that thick here in the biz, JP Morgan, as imagine. 0:13:35.760 --> 0:13:37.840 All right, let's check in with somebody who's also gonna 0:13:37.840 --> 0:13:39.439 be paying attention to the FED today. 0:13:39.440 --> 0:13:40.319 That's Dennis Lockhart. 0:13:40.640 --> 0:13:45.280 He's a former president of the Federal Reserve Bank of Atlanta. Dennis, 0:13:45.280 --> 0:13:47.439 thanks so much for joining us here. What do you 0:13:47.480 --> 0:13:50.480 expect your former colleagues at the Fed to do today. 0:13:50.520 --> 0:13:52.920 What's going to be a good day for the Fed today. 0:13:53.800 --> 0:13:56.240 Good day would probably be not to make too much news. 0:13:56.720 --> 0:14:01.880 I think they will certainly will be no policy action today. 0:14:03.160 --> 0:14:08.320 I think the attention will be on the summary of 0:14:08.320 --> 0:14:14.080 economic projections that's so called dot plot, and that could 0:14:14.200 --> 0:14:18.360 move from the December dot plot in such a way 0:14:18.440 --> 0:14:22.560 that the markets will react and the public will take 0:14:22.640 --> 0:14:26.960 notice of. Probably fewer rate cuts would be the signal, 0:14:27.000 --> 0:14:29.720 but I'm not one hundred percent sure that's going to 0:14:29.760 --> 0:14:33.440 happen in in Powell's press conference, I think he will 0:14:34.120 --> 0:14:37.400 stay very close to what he said in the recent testimony, 0:14:38.080 --> 0:14:43.920 and therefore he's going to be noncommittal about June and 0:14:44.840 --> 0:14:48.320 probably just repeat some of the themes that they still 0:14:48.400 --> 0:14:52.720 expect to cut rates this year, but you know they're 0:14:52.720 --> 0:14:55.120 not giving any indication of when that would start. 0:14:56.400 --> 0:14:58.520 Let's go back to your comment on the dot plot, 0:14:58.560 --> 0:15:00.880 because what I think a lot investors are going to 0:15:00.920 --> 0:15:02.400 want to know is are we going to get two 0:15:02.440 --> 0:15:04.800 cuts or three cuts? So what's going to be the 0:15:04.920 --> 0:15:07.480 key factors do you think that policymakers are going to 0:15:07.520 --> 0:15:10.360 have in mind when they consider either sticking with their 0:15:11.320 --> 0:15:14.280 current dots or perhaps some people changing their tune and 0:15:14.360 --> 0:15:15.960 shifting to two cuts this year. 0:15:16.480 --> 0:15:18.840 I think what's on the mind of those who might 0:15:18.960 --> 0:15:25.240 consider moving their dot to perhaps to lower that that 0:15:25.280 --> 0:15:28.360 would be four to three and three to two. Is 0:15:28.440 --> 0:15:36.440 the recent inflation picture, with disappointing inflation reports recently, and 0:15:36.680 --> 0:15:41.800 the producer price index really actually jumped, it was quite hot, 0:15:42.960 --> 0:15:46.440 and I think that just raises doubts in their minds 0:15:47.280 --> 0:15:52.840 as to whether the relentless disinflation is going to continue, 0:15:52.920 --> 0:15:55.520 or whether we're seeing a stall out of some kind, 0:15:56.320 --> 0:16:02.920 possibly even the indications of some resurgence and inflation. All 0:16:02.960 --> 0:16:07.280 of those are open questions, but they are questions on 0:16:07.360 --> 0:16:10.000 the mind of committee members, and they're going to have 0:16:10.080 --> 0:16:15.120 to think about whether they have effectively reset the clock 0:16:15.280 --> 0:16:20.200 in order to get confident that disinflation will continue. 0:16:20.800 --> 0:16:23.480 I've heard a couple of different camps out there. One is, oh, 0:16:23.520 --> 0:16:25.800 it's just kind of seasonal beginning of the year, a 0:16:25.840 --> 0:16:27.880 little pop up in inflation, don't worry about it. The 0:16:27.920 --> 0:16:30.880 trend is still down, where some others are saying, hey, 0:16:31.240 --> 0:16:33.640 it kind of feels like inflation's kind of reasserting itself 0:16:33.640 --> 0:16:34.240 a little bit here. 0:16:34.600 --> 0:16:35.960 How do you interpret the data. 0:16:35.880 --> 0:16:40.080 Well, I'm very attuned to the quirkiness of the first quarter. 0:16:40.800 --> 0:16:45.560 I was on the FMC for ten years. Half of 0:16:45.680 --> 0:16:49.640 that time five years. I think we had unusual first 0:16:49.720 --> 0:16:54.400 quarters that didn't allow you to extrapolate from the behavior 0:16:54.440 --> 0:16:57.440 of the economy in the first quarter to the rest 0:16:57.480 --> 0:17:01.280 of the year. So I think there's a reasonable chance 0:17:01.440 --> 0:17:06.960 that these recent inflation numbers are anomalies or they are 0:17:07.240 --> 0:17:11.600 just bumps in the road. They're not necessarily indicating any 0:17:11.840 --> 0:17:16.600 change in the overall trend, and so I would, you know, cautiously, 0:17:16.760 --> 0:17:21.440 remain hopeful that the disinflation should continue as the year 0:17:21.520 --> 0:17:25.320 goes on. Also, there is some indication of the slowing 0:17:25.400 --> 0:17:28.680 of growth, which is part of the pressure that's put 0:17:28.720 --> 0:17:35.120 on prices. The Atlanta Feds GDP now, which is measuring 0:17:35.160 --> 0:17:39.560 the first quarter, is just above two percent or around 0:17:39.600 --> 0:17:44.119 two percent. That's down from from over three percent in 0:17:44.160 --> 0:17:46.440 the fourth quarter and over five percent in the third quarter. 0:17:46.480 --> 0:17:50.600 So there does seem to be a slowing trend, and 0:17:50.960 --> 0:17:54.560 I think that will help on the inflation front as well. 0:17:54.680 --> 0:17:58.280 How do you think Fed officials read the bigger risks 0:17:58.359 --> 0:18:01.840 now for either moving too soon or moving not quickly enough. 0:18:04.359 --> 0:18:09.920 I think they probably at this moment, are more concerned 0:18:09.920 --> 0:18:15.119 with moving too soon than not quickly enough. Having said that, 0:18:15.320 --> 0:18:18.960 they're certainly aware, and there has been some who have 0:18:19.720 --> 0:18:25.680 commented on recession risk. They're certainly aware that if they 0:18:25.800 --> 0:18:30.360 stay too long at these elevated levels of the policy rate, 0:18:31.240 --> 0:18:36.520 they could precipitate a slow down. Whether it would amount 0:18:36.560 --> 0:18:41.440 to a recession, but it could be an unnecessary slow down. 0:18:42.560 --> 0:18:45.080 So they're trying to thread the needle here. They're really 0:18:45.119 --> 0:18:50.200 trying to preserve the soft landing that we're in and 0:18:50.400 --> 0:18:56.720 the employment levels that we're enjoying, without you know, pushing 0:18:56.760 --> 0:19:02.040 the economy into recession. I think at the moment they're 0:19:02.040 --> 0:19:05.080 probably more concerned that they could go too early. 0:19:05.760 --> 0:19:08.240 Dennis, do you think the FED has taken the recession 0:19:08.359 --> 0:19:10.080 risk off the table or do you still think that's 0:19:10.119 --> 0:19:13.600 something they're really actively trying to guard against. 0:19:14.720 --> 0:19:19.679 I think they probably view it as a contingency with 0:19:19.920 --> 0:19:24.879 lower than fifty percent probability, so it's not necessarily something 0:19:24.920 --> 0:19:30.080 that they can see developing in the data. But it's 0:19:30.280 --> 0:19:35.080 always possible that they make a policy error, they stay 0:19:35.119 --> 0:19:38.640 too long, and then they have to play catch up 0:19:39.680 --> 0:19:46.040 and the economy ends up in a cycle that's trending 0:19:47.359 --> 0:19:51.359 more weekly than they really intended. There's always a possibility that. 0:19:51.880 --> 0:19:53.639 All right, Dennis, thank you so much for joining us. 0:19:53.640 --> 0:19:55.800 We really appreciate getting some of your time this morning. 0:19:55.840 --> 0:19:59.160 Dennis Lockhart, he's a former president of the Federal Reserve 0:19:59.320 --> 0:20:02.080 Bank of Atlanta. We appreciate getting some of this time. 0:20:06.359 --> 0:20:09.359 Francis Donald, Chief Economists and Manual Life Investment Management. She 0:20:09.440 --> 0:20:12.920 joins us here in our Bloomberg Interactive Brokers studio. Francis, 0:20:13.400 --> 0:20:15.320 you know, it's FED Day today, so let's just start 0:20:15.440 --> 0:20:18.080 right there. What do you expect to hear from the 0:20:18.160 --> 0:20:19.280 US Federal Reserve today? 0:20:20.000 --> 0:20:23.440 I don't know. And I think that's the most interesting 0:20:23.480 --> 0:20:25.800 part of this is that we're going into this and 0:20:25.840 --> 0:20:28.840 I think many FED watchers are trying to figure out 0:20:29.280 --> 0:20:32.359 what is the FED going to care about? And one 0:20:32.400 --> 0:20:34.359 of the big problems that we're having is there is 0:20:34.400 --> 0:20:38.200 a whole bunch of data pointing towards softness of inflation 0:20:38.640 --> 0:20:41.639 resilient economy, and then there's other data that says, actually, 0:20:41.720 --> 0:20:44.680 you know, there's weakness in the labor market and inflation 0:20:44.840 --> 0:20:47.520 is too sticky, so you can actually construct whatever narrative 0:20:47.560 --> 0:20:50.480 you want. What's really important from the FED today is 0:20:50.520 --> 0:20:52.959 to find out which data points they are watching. Do 0:20:53.000 --> 0:20:55.639 they care about financial conditions? Again they used to, then 0:20:55.640 --> 0:20:58.720 they didn't. Do they care about core CPI? Do they 0:20:58.720 --> 0:21:01.879 care about PCE shelter? Give us the data points that 0:21:01.920 --> 0:21:04.119 you're watching so that we have an idea of what 0:21:04.119 --> 0:21:06.000 your decision making function is. Right now it's not. 0:21:05.960 --> 0:21:09.240 Clear, but I've been a reporter many a central bank 0:21:09.280 --> 0:21:12.119 press conference, and then what we whenever we ask what 0:21:12.600 --> 0:21:15.399 indicator you're watching? We always get told we watch everything, 0:21:15.440 --> 0:21:18.040 which is not helpful. So what would you like to 0:21:18.200 --> 0:21:20.560 hear from them? What would you want them to be 0:21:20.600 --> 0:21:22.399 their pick? Because you know we always hear them focused 0:21:22.440 --> 0:21:24.800 on core supercore inflation, but what else? 0:21:25.000 --> 0:21:27.440 Well, that's why FED watchers get paid what we do, 0:21:27.520 --> 0:21:29.800 which is that we're supposed to parse the details and 0:21:29.840 --> 0:21:32.760 not necessarily list directly. Now, one of the clues that 0:21:32.800 --> 0:21:34.840 we can use without them actually saying here are the 0:21:34.840 --> 0:21:36.919 three data points we're looking at, is what does that 0:21:36.960 --> 0:21:40.600 dot plot do? Because if we move from three cuts 0:21:40.640 --> 0:21:43.359 this year to two, that's going to signal to us 0:21:43.400 --> 0:21:45.240 that they are putting a little bit more weight on 0:21:45.280 --> 0:21:47.920 some of that sticky inflation. And yet I'm going to 0:21:47.960 --> 0:21:50.600 be watching a lot of the conversation around twenty twenty 0:21:50.600 --> 0:21:53.200 five and twenty twenty six, because we're spending an awful 0:21:53.200 --> 0:21:54.880 lot of time talking about are they going to cut 0:21:54.920 --> 0:21:57.240 in June? Are they going to cut in September? That 0:21:57.359 --> 0:21:59.960 for most of my clients, for our funds is far 0:22:00.200 --> 0:22:03.159 less relevant than what the next eighteen months of cuts 0:22:03.280 --> 0:22:05.600 looks like. Are we in a nineteen ninety five soft 0:22:05.680 --> 0:22:07.959 landing with three or four cuts or are we going 0:22:08.000 --> 0:22:09.879 to be in something that resembles much more of a 0:22:09.880 --> 0:22:13.359 traditional easing cycle, which is hundreds of basis points. That 0:22:13.560 --> 0:22:16.280 story is the core for most investors, not whether they 0:22:16.280 --> 0:22:18.119 start in June to September, not if it's two or 0:22:18.160 --> 0:22:18.719 three cuts. 0:22:19.359 --> 0:22:22.520 Do you think the US feder Reserve is afraid of 0:22:22.560 --> 0:22:24.840