WEBVTT - Vincent Reinhart on the Fed Decision (Audio) 0:00:01.920 --> 0:00:04.920 You're listening to taking stuff with Kathleen Hayes and Pim 0:00:05.000 --> 0:00:09.200 Fox on Bloomberg Radio. The Federal Reserve and led by 0:00:09.240 --> 0:00:12.959 FED Chair Janet Yellen, may have opened the door even 0:00:13.039 --> 0:00:17.599 wider to an interest rate increase in December. However, they 0:00:17.760 --> 0:00:20.560 narrowed that they shut that door a little bit more 0:00:20.640 --> 0:00:24.680 on aggressive rate hikes in two seventeen, as their so 0:00:24.840 --> 0:00:28.159 called dot plots show that the median forecast from the 0:00:28.160 --> 0:00:31.400 Federal Open Market Committee is for just to interest rate 0:00:31.440 --> 0:00:35.280 increases next year instead of three markets in rally mode. 0:00:35.880 --> 0:00:39.040 Is UH this the correct response or should the markets 0:00:39.080 --> 0:00:41.159 be focusing on the fact that a majority of Fed 0:00:41.240 --> 0:00:44.199 officials still see a rate hike this year. Vincent Reinhardt 0:00:44.280 --> 0:00:48.560 joins US now. He's chief economist at Standishmellon Asset Management 0:00:48.640 --> 0:00:52.640 in Boston, home of Bloomberg Radio twelve hundred. He started 0:00:52.640 --> 0:00:55.160 his career at the New York Federal Reserve Bank. He 0:00:55.680 --> 0:00:58.240 worked at the Board of Governors and the divisions of 0:00:58.280 --> 0:01:01.120 Monetary Affairs and International Finance, and during the last six 0:01:01.200 --> 0:01:04.000 years of his careers at the FED Secretary and Economist 0:01:04.040 --> 0:01:06.760 of the FLMC the Federal Open Market Committee. So Vince 0:01:06.840 --> 0:01:12.960 understands very well how these policy statements, decisions are decided on, 0:01:13.480 --> 0:01:18.280 orchestrated and communicated. Vince, welcome back to the show. Thank you. Kathleen, 0:01:18.680 --> 0:01:22.959 Hi bim And he's right there saying Hellovian. So what 0:01:23.120 --> 0:01:25.720 is your take on what we got from the Fed yesterday? 0:01:26.560 --> 0:01:29.759 So essentially it was a compromise and a divided committee. 0:01:30.160 --> 0:01:37.880 My model of the FLMC decision process is that um A, 0:01:38.760 --> 0:01:42.759 the committee has to pull along a reluctant chair. Janet 0:01:42.800 --> 0:01:46.080 Yellen is really dubage. She does want to test to 0:01:46.120 --> 0:01:49.360 see how low the unemployment rate can go, and in 0:01:49.400 --> 0:01:53.840 that environment, she also appreciates that you can keep the 0:01:53.840 --> 0:01:58.200 funds rate lower for longer by sometimes agreeing to tighten 0:01:58.560 --> 0:02:03.440 monetary policy, because never saying yes means you'll lose your 0:02:03.480 --> 0:02:08.040 committee and you have to compromise. They said no yesterday 0:02:08.320 --> 0:02:14.600 with the promise of yes in December. Vincent Reinhardt, Okay, hello, No, 0:02:14.800 --> 0:02:17.079 I was I was waiting for Kathleen there, but because 0:02:17.200 --> 0:02:19.239 you know, we were both looking at these dot plots 0:02:19.240 --> 0:02:21.480 and I got to confess, they kind of looked like 0:02:21.520 --> 0:02:25.480 a bad pac Man game, and uh, if you could 0:02:25.520 --> 0:02:29.320 just go through them, because you write in your note 0:02:29.320 --> 0:02:35.080 here that three of the voting members, uh three, all 0:02:35.120 --> 0:02:37.960 but three of them view at least one quarter point 0:02:38.040 --> 0:02:40.640 tightening by the end of this year as appropriate. Right, 0:02:40.680 --> 0:02:42.799 So that's done and went December, So we should get 0:02:42.840 --> 0:02:46.320 used to twenty five basis points in December. That's right. 0:02:46.360 --> 0:02:49.480 And I do admit it looks like eighties video game. 0:02:49.800 --> 0:02:53.160 There's a their two gang of threes to think about. First, 0:02:53.200 --> 0:02:58.240 in the statement, three bank presidents dissented in favor of 0:02:58.360 --> 0:03:04.239 rates rising immediately, and in the dot plot three unknown participants. 0:03:04.240 --> 0:03:07.760 I think I know who they are. Three unknown participants, uh, 0:03:08.760 --> 0:03:12.440 demured from tightening policy in two thousand sixteen. Well, i'll 0:03:12.480 --> 0:03:14.960 tell you my three for the because because I cheated, 0:03:14.960 --> 0:03:18.400 I already read your note. I'll tell you my three 0:03:18.400 --> 0:03:21.079 for the descents. Right, three descents to the statement, and 0:03:21.120 --> 0:03:24.120 we know that that's Esther, George right, and Mester as 0:03:24.120 --> 0:03:28.000 well as Rosencrant. That's right, okay, And I think the 0:03:28.080 --> 0:03:31.839 three dots UH in favor of not changing rates this year, 0:03:32.080 --> 0:03:37.160 probably two governors, Governor Brainerd and Taruo, and then Bank 0:03:37.240 --> 0:03:40.880 President Evans, who earlier this year said he was not 0:03:41.000 --> 0:03:43.680 in favor of raising rates. It's interesting to me, vince, 0:03:43.760 --> 0:03:46.960 because listening to Janet Yellen at the press conference yesterday, 0:03:47.000 --> 0:03:49.360 and on the one hand, she speaks for the entire committee. 0:03:49.360 --> 0:03:52.120 That's what the fedcher always has to do, represent where 0:03:52.120 --> 0:03:55.080 the you know, the bulk of the consensus is. And 0:03:55.120 --> 0:03:59.040 of course she mentioned that yes, case for rate hiker strengthen, 0:03:59.080 --> 0:04:01.800 as I said in Jackson Halls repeated that, and yes 0:04:01.840 --> 0:04:04.200 inflation is going to move higher. But you know, in 0:04:04.560 --> 0:04:07.680 all the things she talked about there, you still got 0:04:07.680 --> 0:04:09.800 a sense, at least I do, that she's not the 0:04:09.840 --> 0:04:12.080 one leading the charge for the next interest rate increase. 0:04:12.120 --> 0:04:14.880 She talked in fact about the participation rate and showing 0:04:14.880 --> 0:04:17.200 that maybe discouraged workers are coming back in is as 0:04:17.200 --> 0:04:20.039 a reason to give the economy room to run. That 0:04:20.080 --> 0:04:22.599 doesn't sound like an urgency to raise the rate. Oh, 0:04:22.640 --> 0:04:25.800 I think the committee has to pull her along when 0:04:26.000 --> 0:04:31.479 enough participants get rest of get talk at uh in 0:04:31.680 --> 0:04:35.120 public about the need to tighten policy. Well, it's stinking 0:04:35.160 --> 0:04:39.080 about the Jackson Hole speeches. Yes, she said the words 0:04:39.080 --> 0:04:42.800 there's a need for tightening, but it was timeless in 0:04:42.839 --> 0:04:45.160 the sense that she didn't put put a date to it. 0:04:45.520 --> 0:04:47.680 If she had wanted to put tightening on the table. 0:04:47.720 --> 0:04:51.680 If she wanted expectations about action in September, she could 0:04:51.680 --> 0:04:54.560 have done it with about three words inserted into exactly 0:04:54.600 --> 0:04:58.960 the same speech she decided not to vincent reinhard. Is 0:04:59.000 --> 0:05:01.760 this a dry I'm behind the scenes? Is there any 0:05:01.839 --> 0:05:04.480 soap opera behind all this? Could this ever get turned 0:05:04.520 --> 0:05:07.640 into a Netflix you know series? Because it seems as 0:05:07.680 --> 0:05:10.360 though you're talking about these are still you know individuals, 0:05:10.400 --> 0:05:12.479 and you've got the twelve members, and then the seven 0:05:12.480 --> 0:05:15.320 members of the Board of Governors are the governors of 0:05:15.360 --> 0:05:17.160 the Federal Reserves, and then the president of the New 0:05:17.240 --> 0:05:20.000 York Fed. Maybe just tell us about the personalities involved. 0:05:20.800 --> 0:05:23.600 Uh so you can find in the fo m C 0:05:23.839 --> 0:05:27.600 transcript me telling the committee at one point. Don't you 0:05:27.720 --> 0:05:31.120 understand I work for nineteen people who couldn't agree on 0:05:31.160 --> 0:05:36.200 the color of an orange. So yes, I feel you're 0:05:36.240 --> 0:05:39.320 paying pim. But part of the I think the real 0:05:39.400 --> 0:05:44.240 answer is we don't know, because for the entire tenure 0:05:44.279 --> 0:05:47.560 of Janet Yell in his chair, markets have been more 0:05:47.640 --> 0:05:50.480 devilish than their own rate guides. You're focusing a lot 0:05:50.520 --> 0:05:53.400 on the dots, but the your dollar curve still lies 0:05:53.520 --> 0:05:57.200 everywhere below. What the f MC is projecting as the 0:05:57.240 --> 0:06:00.920 path for rates. If you're if you're you're a chair. 0:06:01.040 --> 0:06:05.320 That's an easy problem because markets are not testing you. 0:06:06.279 --> 0:06:09.720 They may test them right well, Vince, you know, Uh, 0:06:09.880 --> 0:06:13.040 And of course, Uh, the market reaction is interesting today 0:06:13.040 --> 0:06:15.280 because the dollar has weakened a lot of people are 0:06:15.320 --> 0:06:17.360 looking again at the dot plots for next year coming 0:06:17.400 --> 0:06:20.800 down a bit. Stocks are rolling, bonds are rolling. And 0:06:20.839 --> 0:06:23.440 one of our stories, uh sums it up more or 0:06:23.520 --> 0:06:27.120 less as the divergence bet, the bet that's been on 0:06:27.160 --> 0:06:29.080 there's supposed to strengthen the dollar of the Federal raise 0:06:29.200 --> 0:06:32.039 rates this year and other central banks will remain easier. 0:06:32.160 --> 0:06:36.160 Use further is weakening because now the Fed has you know, 0:06:36.480 --> 0:06:38.680 punted again. They say they're going to raise rates at 0:06:38.680 --> 0:06:40.240 the end of the year. We've seen this happen again. 0:06:40.720 --> 0:06:45.160 So what do you make of that part of the analysis? Oh, 0:06:45.240 --> 0:06:48.080 I think that's exactly right that at the beginning of 0:06:48.120 --> 0:06:50.880 the year. I think it would be right to depict 0:06:51.600 --> 0:06:55.359 policy rates across the advanced economies is defining a channel 0:06:55.720 --> 0:06:58.320 at the bottom or the EC being the bank in 0:06:58.400 --> 0:07:02.120 Japan and a few other at zero or negative at 0:07:02.160 --> 0:07:07.280 the top or small advanced economies like Australia or New 0:07:07.360 --> 0:07:12.560 Zealand and Canada, uh and who had rates around two 0:07:13.040 --> 0:07:14.920 and the said was going to be seen as moving 0:07:14.960 --> 0:07:17.040 from the bottom of the channel to the top of 0:07:17.080 --> 0:07:21.840 the channel. In doing so, it gives the pre appreciation 0:07:21.880 --> 0:07:25.320 of the dollar, giving some relief to the Japanese and 0:07:25.360 --> 0:07:28.160 in the Euro area from their problems was dealing with 0:07:28.240 --> 0:07:32.000 disinflation as it got closer to the top end of 0:07:32.040 --> 0:07:34.760 the band, the Canadian dollar, the New Zealand dollar, the 0:07:34.760 --> 0:07:37.960 Australian dollar would depreciate. That would mean they wouldn't have 0:07:38.040 --> 0:07:41.600 to ease. What's happened is the feeder reserved isn't moving 0:07:41.640 --> 0:07:44.520 up that card or in the carridor's collapsing. Those other 0:07:44.600 --> 0:07:47.400 central banks are tired of waiting for the said, and 0:07:47.480 --> 0:07:51.600 they've been easing their own rates. Well, I'm just noting here, Vincent, 0:07:51.600 --> 0:07:53.560 just to give you the numbers, and you comment or 0:07:53.600 --> 0:07:55.640 break in whenever you know you've got a thought, because 0:07:55.640 --> 0:07:58.600 I'm looking at, for example, a can dollar versus the 0:07:58.640 --> 0:08:01.840 US dollar one thirty or if you do it the 0:08:01.880 --> 0:08:06.040 other way, zero point seven six, but also the end 0:08:06.240 --> 0:08:09.640 one hundred against the dollar. The euro at at one 0:08:09.680 --> 0:08:13.720 twelve sterling at at one thirty. Any thoughts, So one 0:08:13.760 --> 0:08:16.160 thing to do is just type up W I R 0:08:16.240 --> 0:08:19.160 P on your Bloomberg terminal and you'll see the real 0:08:19.840 --> 0:08:23.520 test of the Fed market participants only put a fifty 0:08:23.520 --> 0:08:28.400 eight percent probability of policy action by December. So despite 0:08:28.440 --> 0:08:32.360 the dot plot, despite what you know, how the the 0:08:32.600 --> 0:08:38.520 statement was designed to induce expectations of policy tightening. Uh, 0:08:38.679 --> 0:08:41.960 market participants don't believe me yet. Just quickly, we've got 0:08:42.000 --> 0:08:45.280 about forty seconds left here. Bank of Japan wanting to 0:08:45.320 --> 0:08:47.480 steep in the yield curves and tweaks this week. I 0:08:47.480 --> 0:08:49.959 guess that's the other part of the dollar weaker equation. 0:08:49.960 --> 0:08:51.440 What do you make of the Bank of Japan's move? 0:08:51.840 --> 0:08:53.640 The theory is, if you build it, they will come 0:08:53.960 --> 0:08:57.760 i E. They're putting in place an automatic mechanism to 0:08:57.880 --> 0:09:02.040 be very accommodated if in lation and inflation expectations rise, 0:09:02.280 --> 0:09:07.079 because they will be defending the tenure yielded zero i 0:09:07.240 --> 0:09:11.880 E rates will be more negative. UH. Problem news. They 0:09:11.880 --> 0:09:15.000 don't have a mechanism right now to spur inflation, and 0:09:15.040 --> 0:09:17.520 that's been their problem for a while. So in some sense, 0:09:17.559 --> 0:09:20.839 they punted on the big issue. But They made sure 0:09:20.920 --> 0:09:23.880 that if inflation does not rise, they can sustain it. 0:09:25.640 --> 0:09:27.439 I want to thank you very much for spending time 0:09:27.480 --> 0:09:30.959 with us. Boy, that's a that's a real education. Vincent Reinhardt, 0:09:31.040 --> 0:09:35.520 he is the chief economist that standish Melon Asset Management. 0:09:35.600 --> 0:09:39.760 Joining us from Boston, of course, home to Bloomberg. This 0:09:39.880 --> 0:09:43.079 is taking Stock. I'm pim Fox. My co host Kathleen Hayes, 0:09:43.520 --> 0:09:44.839 this is Bloomberg.