Speaker 1: You're listening to taking stuff with Kathleen Hayes and Pim
Speaker 1: Fox on Bloomberg Radio. The Federal Reserve and led by
Speaker 1: FED Chair Janet Yellen, may have opened the door even
Speaker 1: wider to an interest rate increase in December. However, they
Speaker 1: narrowed that they shut that door a little bit more
Speaker 1: on aggressive rate hikes in two seventeen, as their so
Speaker 1: called dot plots show that the median forecast from the
Speaker 1: Federal Open Market Committee is for just to interest rate
Speaker 1: increases next year instead of three markets in rally mode.
Speaker 1: Is UH this the correct response or should the markets
Speaker 1: be focusing on the fact that a majority of Fed
Speaker 1: officials still see a rate hike this year. Vincent Reinhardt
Speaker 1: joins US now. He's chief economist at Standishmellon Asset Management
Speaker 1: in Boston, home of Bloomberg Radio twelve hundred. He started
Speaker 1: his career at the New York Federal Reserve Bank. He
Speaker 1: worked at the Board of Governors and the divisions of
Speaker 1: Monetary Affairs and International Finance, and during the last six
Speaker 1: years of his careers at the FED Secretary and Economist
Speaker 1: of the FLMC the Federal Open Market Committee. So Vince
Speaker 1: understands very well how these policy statements, decisions are decided on,
Speaker 1: orchestrated and communicated. Vince, welcome back to the show. Thank you. Kathleen,
Speaker 1: Hi bim And he's right there saying Hellovian. So what
Speaker 1: is your take on what we got from the Fed yesterday?
Speaker 1: So essentially it was a compromise and a divided committee.
Speaker 1: My model of the FLMC decision process is that um A,
Speaker 1: the committee has to pull along a reluctant chair. Janet
Speaker 1: Yellen is really dubage. She does want to test to
Speaker 1: see how low the unemployment rate can go, and in
Speaker 1: that environment, she also appreciates that you can keep the
Speaker 1: funds rate lower for longer by sometimes agreeing to tighten
Speaker 1: monetary policy, because never saying yes means you'll lose your
Speaker 1: committee and you have to compromise. They said no yesterday
Speaker 1: with the promise of yes in December. Vincent Reinhardt, Okay, hello, No,
Speaker 1: I was I was waiting for Kathleen there, but because
Speaker 1: you know, we were both looking at these dot plots
Speaker 1: and I got to confess, they kind of looked like
Speaker 1: a bad pac Man game, and uh, if you could
Speaker 1: just go through them, because you write in your note
Speaker 1: here that three of the voting members, uh three, all
Speaker 1: but three of them view at least one quarter point
Speaker 1: tightening by the end of this year as appropriate. Right,
Speaker 1: So that's done and went December, So we should get
Speaker 1: used to twenty five basis points in December. That's right.
Speaker 1: And I do admit it looks like eighties video game.
Speaker 1: There's a their two gang of threes to think about. First,
Speaker 1: in the statement, three bank presidents dissented in favor of
Speaker 1: rates rising immediately, and in the dot plot three unknown participants.
Speaker 1: I think I know who they are. Three unknown participants, uh,
Speaker 1: demured from tightening policy in two thousand sixteen. Well, i'll
Speaker 1: tell you my three for the because because I cheated,
Speaker 1: I already read your note. I'll tell you my three
Speaker 1: for the descents. Right, three descents to the statement, and
Speaker 1: we know that that's Esther, George right, and Mester as
Speaker 1: well as Rosencrant. That's right, okay, And I think the
Speaker 1: three dots UH in favor of not changing rates this year,
Speaker 1: probably two governors, Governor Brainerd and Taruo, and then Bank
Speaker 1: President Evans, who earlier this year said he was not
Speaker 1: in favor of raising rates. It's interesting to me, vince,
Speaker 1: because listening to Janet Yellen at the press conference yesterday,
Speaker 1: and on the one hand, she speaks for the entire committee.
Speaker 1: That's what the fedcher always has to do, represent where
Speaker 1: the you know, the bulk of the consensus is. And
Speaker 1: of course she mentioned that yes, case for rate hiker strengthen,
Speaker 1: as I said in Jackson Halls repeated that, and yes
Speaker 1: inflation is going to move higher. But you know, in
Speaker 1: all the things she talked about there, you still got
Speaker 1: a sense, at least I do, that she's not the
Speaker 1: one leading the charge for the next interest rate increase.
Speaker 1: She talked in fact about the participation rate and showing
Speaker 1: that maybe discouraged workers are coming back in is as
Speaker 1: a reason to give the economy room to run. That
Speaker 1: doesn't sound like an urgency to raise the rate. Oh,
Speaker 1: I think the committee has to pull her along when
Speaker 1: enough participants get rest of get talk at uh in
Speaker 1: public about the need to tighten policy. Well, it's stinking
Speaker 1: about the Jackson Hole speeches. Yes, she said the words
Speaker 1: there's a need for tightening, but it was timeless in
Speaker 1: the sense that she didn't put put a date to it.
Speaker 1: If she had wanted to put tightening on the table.
Speaker 1: If she wanted expectations about action in September, she could
Speaker 1: have done it with about three words inserted into exactly
Speaker 1: the same speech she decided not to vincent reinhard. Is
Speaker 1: this a dry I'm behind the scenes? Is there any
Speaker 1: soap opera behind all this? Could this ever get turned
Speaker 1: into a Netflix you know series? Because it seems as
Speaker 1: though you're talking about these are still you know individuals,
Speaker 1: and you've got the twelve members, and then the seven
Speaker 1: members of the Board of Governors are the governors of
Speaker 1: the Federal Reserves, and then the president of the New
Speaker 1: York Fed. Maybe just tell us about the personalities involved.
Speaker 1: Uh so you can find in the fo m C
Speaker 1: transcript me telling the committee at one point. Don't you
Speaker 1: understand I work for nineteen people who couldn't agree on
Speaker 1: the color of an orange. So yes, I feel you're
Speaker 1: paying pim. But part of the I think the real
Speaker 1: answer is we don't know, because for the entire tenure
Speaker 1: of Janet Yell in his chair, markets have been more
Speaker 1: devilish than their own rate guides. You're focusing a lot
Speaker 1: on the dots, but the your dollar curve still lies
Speaker 1: everywhere below. What the f MC is projecting as the
Speaker 1: path for rates. If you're if you're you're a chair.
Speaker 1: That's an easy problem because markets are not testing you.
Speaker 1: They may test them right well, Vince, you know, Uh,
Speaker 1: And of course, Uh, the market reaction is interesting today
Speaker 1: because the dollar has weakened a lot of people are
Speaker 1: looking again at the dot plots for next year coming
Speaker 1: down a bit. Stocks are rolling, bonds are rolling. And
Speaker 1: one of our stories, uh sums it up more or
Speaker 1: less as the divergence bet, the bet that's been on
Speaker 1: there's supposed to strengthen the dollar of the Federal raise
Speaker 1: rates this year and other central banks will remain easier.
Speaker 1: Use further is weakening because now the Fed has you know,
Speaker 1: punted again. They say they're going to raise rates at
Speaker 1: the end of the year. We've seen this happen again.
Speaker 1: So what do you make of that part of the analysis? Oh,
Speaker 1: I think that's exactly right that at the beginning of
Speaker 1: the year. I think it would be right to depict
Speaker 1: policy rates across the advanced economies is defining a channel
Speaker 1: at the bottom or the EC being the bank in
Speaker 1: Japan and a few other at zero or negative at
Speaker 1: the top or small advanced economies like Australia or New
Speaker 1: Zealand and Canada, uh and who had rates around two
Speaker 1: and the said was going to be seen as moving
Speaker 1: from the bottom of the channel to the top of
Speaker 1: the channel. In doing so, it gives the pre appreciation
Speaker 1: of the dollar, giving some relief to the Japanese and
Speaker 1: in the Euro area from their problems was dealing with
Speaker 1: disinflation as it got closer to the top end of
Speaker 1: the band, the Canadian dollar, the New Zealand dollar, the
Speaker 1: Australian dollar would depreciate. That would mean they wouldn't have
Speaker 1: to ease. What's happened is the feeder reserved isn't moving
Speaker 1: up that card or in the carridor's collapsing. Those other
Speaker 1: central banks are tired of waiting for the said, and
Speaker 1: they've been easing their own rates. Well, I'm just noting here, Vincent,
Speaker 1: just to give you the numbers, and you comment or
Speaker 1: break in whenever you know you've got a thought, because
Speaker 1: I'm looking at, for example, a can dollar versus the
Speaker 1: US dollar one thirty or if you do it the
Speaker 1: other way, zero point seven six, but also the end
Speaker 1: one hundred against the dollar. The euro at at one
Speaker 1: twelve sterling at at one thirty. Any thoughts, So one
Speaker 1: thing to do is just type up W I R
Speaker 1: P on your Bloomberg terminal and you'll see the real
Speaker 1: test of the Fed market participants only put a fifty
Speaker 1: eight percent probability of policy action by December. So despite
Speaker 1: the dot plot, despite what you know, how the the
Speaker 1: statement was designed to induce expectations of policy tightening. Uh,
Speaker 1: market participants don't believe me yet. Just quickly, we've got
Speaker 1: about forty seconds left here. Bank of Japan wanting to
Speaker 1: steep in the yield curves and tweaks this week. I
Speaker 1: guess that's the other part of the dollar weaker equation.
Speaker 1: What do you make of the Bank of Japan's move?
Speaker 1: The theory is, if you build it, they will come
Speaker 1: i E. They're putting in place an automatic mechanism to
Speaker 1: be very accommodated if in lation and inflation expectations rise,
Speaker 1: because they will be defending the tenure yielded zero i
Speaker 1: E rates will be more negative. UH. Problem news. They
Speaker 1: don't have a mechanism right now to spur inflation, and
Speaker 1: that's been their problem for a while. So in some sense,
Speaker 1: they punted on the big issue. But They made sure
Speaker 1: that if inflation does not rise, they can sustain it.
Speaker 1: I want to thank you very much for spending time
Speaker 1: with us. Boy, that's a that's a real education. Vincent Reinhardt,
Speaker 1: he is the chief economist that standish Melon Asset Management.
Speaker 1: Joining us from Boston, of course, home to Bloomberg. This
Speaker 1: is taking Stock. I'm pim Fox. My co host Kathleen Hayes,
Speaker 1: this is Bloomberg.