WEBVTT - Instant Reaction: The Fed Decides 0:00:02.560 --> 0:00:07.040 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.200 --> 0:00:13.840 This is a breaking news update from Bloomberg instant reaction 0:00:14.120 --> 0:00:17.959 and analysis from our three thousand journalists and analysts around 0:00:18.000 --> 0:00:18.480 the world. 0:00:19.280 --> 0:00:22.640 The warsh FED holds the benchmark rate to three and 0:00:22.720 --> 0:00:26.639 a half to three point seven five percent, significantly changes 0:00:26.680 --> 0:00:29.280 the statement and splits evenly over whether there will be 0:00:29.320 --> 0:00:32.240 a rate cut this year. They see a rate increase 0:00:32.320 --> 0:00:35.080 this year, they see one cut each. In twenty twenty 0:00:35.080 --> 0:00:38.640 seven and twenty twenty eight. Nine members see at least 0:00:38.720 --> 0:00:42.440 one increase this year, with six of them seeing two moves, 0:00:42.840 --> 0:00:46.080 but nine see no moves or a cut. The median 0:00:46.120 --> 0:00:48.440 dot this year does move to three point seventy five 0:00:48.520 --> 0:00:52.800 percent from three point three seven five percent. However, for 0:00:52.920 --> 0:00:56.400 twenty twenty six there are only eighteen dots, suggesting the 0:00:56.440 --> 0:00:59.840 Fed chairman did not enter one. He said he doesn't 0:01:00.120 --> 0:01:03.560 leave in the dot plot. Two members did not submit 0:01:03.640 --> 0:01:06.920 a dot. For twenty twenty eight, the statement was cut 0:01:06.959 --> 0:01:11.200 to four paragraphs, the first the vote unanimous, then the decision, 0:01:11.319 --> 0:01:14.360 along with the statement that the Committee reaffirmed its policy 0:01:14.360 --> 0:01:18.360 of maintaining ample reserves in the banking system. The second 0:01:18.360 --> 0:01:22.200 and third graphs are the economic assessment activity is expanding 0:01:22.240 --> 0:01:26.039 at a solid pace, despite elevated uncertainty that owes in 0:01:26.080 --> 0:01:29.440 part to conflict of the Middle East. Productivity growth and 0:01:29.600 --> 0:01:33.080 capital investment are strong. Job gains have kept pace with 0:01:33.160 --> 0:01:37.240 the workforce, and the unemployment rate has changed little. Inflation 0:01:37.360 --> 0:01:41.160 remains elevated relative to the committee's two percent goal, in 0:01:41.200 --> 0:01:45.280 part reflecting supply shocks that have driven price increases in 0:01:45.360 --> 0:01:50.160 certain sectors, including energy. There is no balance of risks anymore. 0:01:50.440 --> 0:01:54.960 The statement concludes, the Committee will deliver price stability. All 0:01:55.040 --> 0:01:59.720 nineteen members of the Committee did submit economic forecasts GDP 0:02:00.120 --> 0:02:03.400 this year two point two percent, down two tenths from March. 0:02:03.640 --> 0:02:06.880 Unemployment will be four point three percent, up a tenth. 0:02:07.320 --> 0:02:11.080 PCEE headline inflation will come in at three point six percent, 0:02:11.400 --> 0:02:15.079 significantly increased from two point seven percent in their March projection. 0:02:15.680 --> 0:02:18.960 Core similarly moves much higher to three point three percent 0:02:19.000 --> 0:02:23.000 from two point seven percent. Growth and unemployment for twenty 0:02:23.040 --> 0:02:27.200 twenty seven are unchanged from March, while PCEE inflation falls 0:02:27.240 --> 0:02:30.480 back to two point three percent and CORE two and 0:02:30.520 --> 0:02:34.400 a half. So some significant changes already under the warsh Fed. 0:02:34.840 --> 0:02:37.359 We'll see what the Chair has to say, coming up 0:02:37.520 --> 0:02:38.760 in about a half an hour. 0:02:38.560 --> 0:02:41.880 Michael McKay stay close, definitely putting his mark on this 0:02:41.960 --> 0:02:44.560 federal reserve. Just to underscore what Mike was just saying, 0:02:44.880 --> 0:02:48.280 it looks like potentially FED share. Kevin worsh did not 0:02:48.400 --> 0:02:51.440 put a dot. That is speculation. There were only eighteen dots. 0:02:51.480 --> 0:02:55.480 There are nineteen members and mean mile. You're looking at 0:02:55.880 --> 0:02:59.840 nine of eighteen FMC participants penciling in a twenty twenty 0:02:59.880 --> 0:03:02.320 six rate hike. When you take a look at what 0:03:02.400 --> 0:03:05.520 that is in markets, you can see a huge shift 0:03:05.600 --> 0:03:07.960 up in the two year yield, a market shift of 0:03:08.080 --> 0:03:11.960 about seven basis points to four point one three percent. 0:03:12.280 --> 0:03:15.840 You could see stocks rolling over as this continues, people 0:03:15.840 --> 0:03:17.280 bleeding in the idea of a. 0:03:17.200 --> 0:03:18.760 More hawkish central bank. 0:03:18.960 --> 0:03:22.160 Given that an increasing number of FED participants are looking 0:03:22.200 --> 0:03:22.520 at a. 0:03:22.520 --> 0:03:23.680 Rate hike this year. 0:03:23.919 --> 0:03:26.240 When you take a look at the Nasdaq that is 0:03:26.360 --> 0:03:29.040 continuing to decline, the S and P five hundred down 0:03:29.160 --> 0:03:32.480 about half of a percent, Bob, what's your initial reaction, 0:03:32.560 --> 0:03:34.400 And given the fact this does seem to be a 0:03:34.400 --> 0:03:37.440 hawkish tilt on the committee and a very different statement, 0:03:38.520 --> 0:03:38.960 it is. 0:03:38.880 --> 0:03:41.640 A hawkish tilt from the committee. Half of the Committee 0:03:42.000 --> 0:03:46.440 is expecting rate hikes this year, which is I think 0:03:46.960 --> 0:03:50.560 a real shot across the bow to the market. We 0:03:50.560 --> 0:03:53.560 were thinking two, maybe three to be decorative. We didn't 0:03:53.560 --> 0:03:58.000 think half the committee. So you know, it's something quite 0:03:58.080 --> 0:04:03.000 different when you look at the inflation projections. You know, 0:04:03.080 --> 0:04:07.440 we were thinking up a couple tenths. You're up six tenths, 0:04:07.720 --> 0:04:12.280 nine tenths for this year. So nobody at the FOMC 0:04:12.600 --> 0:04:16.800 is thinking that this inflation will be transitory enough and 0:04:16.839 --> 0:04:20.200 we'll see disinflation between now and the end of the year. 0:04:20.320 --> 0:04:24.000 So yeah, I think this is a FED that is 0:04:24.040 --> 0:04:26.960 sending a hawkish message. I think you have a FED 0:04:27.040 --> 0:04:30.360 chair telling us he can't be bothered with the dots. 0:04:30.680 --> 0:04:34.760 I think that's a slap across the face. We'll see 0:04:34.800 --> 0:04:37.680 how he deals with that and the FED going forward. 0:04:37.880 --> 0:04:40.080 Skarli, it seems like this is a real change, both 0:04:40.120 --> 0:04:43.440 in tone, both in substance, and frankly points to a 0:04:43.480 --> 0:04:46.479 hawkish committee and as Bob said, a FED chair that 0:04:46.560 --> 0:04:47.720 is doing away with the dots. 0:04:47.880 --> 0:04:50.279 So it'd be really interesting to see how Kevin worsh 0:04:50.279 --> 0:04:53.080 comes out and frames everything when he does begin speaking, 0:04:53.120 --> 0:04:56.080 because if he leans dubbish it'll certainly be a case 0:04:56.120 --> 0:04:57.280 where he doesn't appear. 0:04:57.040 --> 0:04:58.520 To be speaking on behalf of the committee. 0:04:58.520 --> 0:05:00.279 He's kind of speaking out there on his own own, 0:05:00.520 --> 0:05:04.600 expressing his own views. It's fascinating because again he has 0:05:04.640 --> 0:05:06.760 not said a whole lot about his take on the 0:05:06.760 --> 0:05:10.880 economy aside from his confirmation hearing before the Senate. So 0:05:11.279 --> 0:05:13.599 all this raises a lot of questions. As you mentioned, 0:05:13.640 --> 0:05:16.080 stocks have extended their losses, and now we now see 0:05:16.080 --> 0:05:18.400 the S and P and the NASAC losing two thirds 0:05:18.440 --> 0:05:21.839 of one percent. Yields again have continued to stay higher, 0:05:21.960 --> 0:05:24.600 the two year yield up nine basis points, the ten 0:05:24.680 --> 0:05:26.960 year yield about two basis points. 0:05:27.000 --> 0:05:30.320 Right now, joining us now to extend the conversation. Former 0:05:30.320 --> 0:05:33.599 of Advice chair Rich Clarita Rich. Are you surprised that 0:05:33.640 --> 0:05:35.880 it appears that one member of the Fed did not 0:05:35.920 --> 0:05:36.800 submit a dot? 0:05:38.560 --> 0:05:42.000 Well, Lisa, thanks for having me on. I'm actually not surprised. 0:05:42.000 --> 0:05:44.279 I actually was inclined to think that Walsh would not 0:05:44.400 --> 0:05:49.360 submit a DOT. But certainly the news that Mike McKee 0:05:49.400 --> 0:05:52.560 just shared with us that you had nine participants right 0:05:52.560 --> 0:05:55.120 down at ray Hike was certainly above what I've been 0:05:55.160 --> 0:05:57.400 thinking going into this meeting for sure. 0:05:58.720 --> 0:05:59.640 Why do you think that is? 0:05:59.720 --> 0:06:02.240 What is is that that the nine members see that 0:06:02.440 --> 0:06:03.800 has taken the market by surprise. 0:06:03.839 --> 0:06:07.880 Certainly, Well, there was a big markup in core inflation 0:06:08.520 --> 0:06:12.800 projected relative to the March SEP And I think the 0:06:12.839 --> 0:06:17.039 reality is that the pressure and core inflation that we've 0:06:17.040 --> 0:06:19.400 been seeing in recent data is not just to pass 0:06:19.480 --> 0:06:22.719 through from from energy prices, but it does appear to 0:06:22.760 --> 0:06:25.000 be more broadly based, and I think that's probably a 0:06:25.040 --> 0:06:28.960 factor in these in this reassessment. 0:06:29.680 --> 0:06:32.800 Rich The last line of the statement is the committee 0:06:32.839 --> 0:06:38.120 will deliver price stability, nothing about full employment. How do 0:06:38.200 --> 0:06:39.000 you interpret that? 0:06:41.400 --> 0:06:43.480 Well, it's not in front of me here because I'm 0:06:43.480 --> 0:06:46.440 doing your doing your show. But that is an important 0:06:46.800 --> 0:06:49.240 change to the statement. You know, by statute, the FED 0:06:49.320 --> 0:06:53.760 does have a dual mandate and that's also highlighted in 0:06:53.880 --> 0:06:59.279 the firm's policy framework, and I'm sure I hope Kevin 0:06:59.320 --> 0:07:04.320 will be asked to elaborate on that at the press conference. 0:07:04.440 --> 0:07:06.800 We're at a point where we're at full employment, or 0:07:06.839 --> 0:07:10.200 at least close to the FED assessment of maximum employment, 0:07:10.280 --> 0:07:12.800 so I wouldn't read into this that they're abandoning the 0:07:12.840 --> 0:07:18.440 employment on mandate, but clearly some important change in the language, 0:07:18.480 --> 0:07:19.160 for sure. 0:07:19.160 --> 0:07:20.240 Bob, what's your take on that. 0:07:21.880 --> 0:07:25.800 I think they are concerned by the level of inflation. 0:07:26.000 --> 0:07:29.360 They are concerned about what they see in the Kapac cycle. 0:07:29.680 --> 0:07:32.600 They are somewhat scarred for twenty twenty two, and they 0:07:32.680 --> 0:07:35.640 don't want to repeat that mistake again. And they're watching 0:07:35.800 --> 0:07:39.680 other central banks coming out and lifting rates and their 0:07:39.720 --> 0:07:43.920 bond markets responding well to that. So I think they're reconsidering, 0:07:44.120 --> 0:07:47.480 certainly where they were last meeting, and they're getting us 0:07:47.520 --> 0:07:48.480 ready for rate hikes. 0:07:48.760 --> 0:07:51.400 Rich is there anything at all dubvish in any way, 0:07:51.440 --> 0:07:54.320 shape or form of any part of this four paragraph statement, 0:07:58.000 --> 0:07:58.400 Not at. 0:07:58.320 --> 0:08:02.520 First glance or at first listen. Again, at least for 0:08:02.640 --> 0:08:06.760 this meeting, Cher Walsh will have the bully pulpit, and 0:08:06.800 --> 0:08:09.400 I very much will be looking forward to seeing how 0:08:09.400 --> 0:08:13.120 he frames this and provides his own perspective. But certainly 0:08:13.160 --> 0:08:16.120 I think we have an indication here, especially with that sentence, 0:08:17.040 --> 0:08:20.480 the committee will deliver price stability. That sounds like where 0:08:20.480 --> 0:08:22.360 he's going to land, for sure. 0:08:23.720 --> 0:08:26.880 So there's a comment here from Joseph Richter, he's one 0:08:26.880 --> 0:08:29.840 of our editors at Bloomberg Intelligence. On our live blog, 0:08:29.960 --> 0:08:31.760 and he says that those who look for a quiet 0:08:31.760 --> 0:08:36.560 first wash FMC meeting must be disappointed. Rich, what will 0:08:36.600 --> 0:08:39.480 you be listening for, in particular from Kevin Walsh when 0:08:39.520 --> 0:08:41.600 he speaks today. I know you said it'll be interesting 0:08:41.720 --> 0:08:43.320 to see how he frames his thinking. 0:08:43.400 --> 0:08:44.720 But what will be the one. 0:08:44.600 --> 0:08:46.360 Thing that you want to hear from him? 0:08:47.360 --> 0:08:50.480 Well, let me give you more than one. Certainly I 0:08:50.480 --> 0:08:53.360 would like to have him flesh out how the dual 0:08:53.440 --> 0:08:57.320 mandate fits into this at this at this point. Also importantly, 0:08:57.400 --> 0:09:00.720 you know he's spent the last fifteen years criticizing the 0:09:00.720 --> 0:09:03.760 Fed's big balance sheet. The Fed's growing or expanding its 0:09:03.800 --> 0:09:07.439 balance sheet now, and so perhaps moving beyond this meeting 0:09:07.520 --> 0:09:09.880 to the rest of the year and the next year, 0:09:10.400 --> 0:09:12.520 how he's going to try to change minds on the 0:09:12.559 --> 0:09:15.640 committee about the balance sheet size as well. 0:09:16.160 --> 0:09:20.200 Mike McKee jump in here, Well, I think Rich raises 0:09:20.240 --> 0:09:23.160 an important point. The only reference to the balance sheet 0:09:23.280 --> 0:09:27.840 is the FED reaffirming its commitment to the ample reserves policy, 0:09:28.320 --> 0:09:33.920 which is generic enough to encompass both Warsh's desire for 0:09:33.960 --> 0:09:37.600 a smaller balance sheet and others desire to maintain the 0:09:37.679 --> 0:09:40.480 quarter system that we have now. But the question is 0:09:41.120 --> 0:09:43.320 do they go to that later? Is it just too 0:09:43.360 --> 0:09:46.800 much of a bridge to cross right now? Other points 0:09:46.840 --> 0:09:49.720 that I think are worth making is that while the 0:09:49.760 --> 0:09:53.760 committee dropped the bias statement and doesn't give any quote 0:09:53.800 --> 0:09:58.000 unquote forward guidance in the statement itself, the dot plot 0:09:58.040 --> 0:10:00.480 is forward guidance because all you're talking a about right 0:10:00.480 --> 0:10:02.400 now is the nine people who think that we're going 0:10:02.440 --> 0:10:04.640 to get a rate increase, and that this tells you 0:10:04.679 --> 0:10:08.880 that the Fed is hawkish. So if Kevin worsh wants 0:10:08.920 --> 0:10:10.640 to walk that back, he's going to have to do 0:10:10.679 --> 0:10:13.200 that in the press conference. Otherwise the markets are going 0:10:13.240 --> 0:10:16.640 to be tilting in that direction. It's also interesting that 0:10:16.720 --> 0:10:20.240 they did say they're committed to price stability. What it 0:10:20.280 --> 0:10:23.520 seems like is that the people who were worried about inflation, 0:10:23.640 --> 0:10:27.720 that worry has spread, and as Rich noted, the core 0:10:27.840 --> 0:10:31.800 inflation has broadened out some. And so they are sending 0:10:31.800 --> 0:10:33.600 a message to the markets that we're not going to 0:10:33.679 --> 0:10:35.920 let this get out of control. We're not going to 0:10:35.960 --> 0:10:39.320 repeat what happened in twenty twenty one twenty two. We 0:10:39.400 --> 0:10:42.200 are going to focus on price stability right now. The 0:10:42.280 --> 0:10:46.280 unsaid thing is that we're basically at full employment, so 0:10:46.360 --> 0:10:47.960 we don't have to worry about that for the moment. 0:10:48.280 --> 0:10:50.280 Mike. The other thing that jumped out at me is 0:10:50.360 --> 0:10:53.119 you said that we went from eighteen dots to seventeen 0:10:53.200 --> 0:10:57.319 dots for twenty twenty eight. Is there an undercover supporter 0:10:57.600 --> 0:11:00.480 of Worsh policy in the FOMCS now? 0:11:01.720 --> 0:11:04.199 It does seem like there might be at least someone 0:11:04.200 --> 0:11:06.320 who supports the idea that the dot plot is not 0:11:06.440 --> 0:11:09.840 worth considering. It could also be that one member decided 0:11:09.880 --> 0:11:12.920 that there's just too much uncertainty for twenty twenty eight, 0:11:12.920 --> 0:11:16.800 and why bother to add to that by just guessing 0:11:16.840 --> 0:11:18.559 it where rates are going to be. We've had a 0:11:18.600 --> 0:11:20.640 lot of FED officials over the years tell us that 0:11:20.679 --> 0:11:23.400 they just kind of throw something in for the third 0:11:23.480 --> 0:11:26.640 year out because it's just too hard to project anything 0:11:26.720 --> 0:11:29.000 that far out. I wouldn't read too much into that, 0:11:29.080 --> 0:11:31.720 but the idea that Kevin Worsh did not submitted dot 0:11:32.040 --> 0:11:33.800 kind of tells you that he's going to maybe push 0:11:34.080 --> 0:11:36.720 to do some change to the dot plot going forward. 0:11:37.120 --> 0:11:38.960 If you are just joining us right now. 0:11:39.000 --> 0:11:42.280 We did get a statement that's for paragraphs long, much 0:11:42.320 --> 0:11:47.000 shorter than usual, with no reference to the employment mandate, 0:11:47.280 --> 0:11:51.160 with nine of the eighteen members opting to support some 0:11:51.200 --> 0:11:54.679 sort of rate hike this year, leaving the others either 0:11:54.880 --> 0:11:57.480 in support of just keeping things where they are or 0:11:57.520 --> 0:12:01.360 potentially cutting rates being taken. It's incredibly hawkish. You could 0:12:01.360 --> 0:12:04.040 see the selloff in treasuries extending. You could see two 0:12:04.120 --> 0:12:06.960 year yields now up eight basis points. 0:12:06.679 --> 0:12:08.959 Across the curve, all rising. 0:12:09.040 --> 0:12:12.160 Although this is yield curves flattening this idea that potentially 0:12:12.440 --> 0:12:16.400 there will be some sort of tightening in policy. 0:12:16.559 --> 0:12:20.160 Former Vice Chair Rich Clarita, final for word from you. 0:12:20.360 --> 0:12:23.080 What's your question right now going to be for a 0:12:23.120 --> 0:12:27.040 FED chair Kevin Walsh. 0:12:27.200 --> 0:12:31.840 Kevin, you did not submit a DOT today. There's no 0:12:31.960 --> 0:12:35.640 forward guidance in the statement. The markets are taking the 0:12:35.679 --> 0:12:39.360 information today as hawkish. Would you be prepared to comment? 0:12:40.160 --> 0:12:42.640 Former FED Vice Chair Rich Clarita, who might make a 0:12:42.640 --> 0:12:45.720 sneak appearance because that was pretty good. Thank you so 0:12:45.800 --> 0:12:48.520 much joining us now. Diane Schwalk of KPMG. Diana, what's 0:12:48.520 --> 0:12:49.280 your first take in this? 0:12:51.080 --> 0:12:53.920 Well, I'm actually not all the surprise. We saw a 0:12:54.000 --> 0:12:56.840 major move in the minutes to the last meeting where 0:12:56.880 --> 0:12:59.760 a lot of people were moving towards the hawks Jan 0:13:00.120 --> 0:13:02.800 and saying we may need to consider rate hikes later 0:13:02.880 --> 0:13:05.839 this year and in the interim period. We have seen 0:13:06.160 --> 0:13:09.679 even FED governors, which usually hold their cards a little 0:13:09.720 --> 0:13:12.080 closer to the vest, some of them who have never 0:13:12.200 --> 0:13:16.200 seen actually take a firm stand, talk about how the 0:13:16.240 --> 0:13:19.520 price stability side of the mandate is more important now 0:13:19.840 --> 0:13:23.320 than the employment side of the mandate. And that's exactly 0:13:23.320 --> 0:13:26.360 what you saw with that last sentence in the statement. 0:13:26.559 --> 0:13:30.320 Was not that one was that we were not having 0:13:30.480 --> 0:13:33.600 a dual mandate. It's that the focus is on price 0:13:33.640 --> 0:13:37.240 stability given the stability we've seen in the unemployment rate. 0:13:37.480 --> 0:13:40.080 And I think that's very important what the FED is saying, 0:13:40.240 --> 0:13:43.680 we're not going to take the inflation as transitory. What 0:13:44.120 --> 0:13:48.040 concerned so many at the FED meeting in March when 0:13:48.080 --> 0:13:51.360 we saw sort of the initial forecast and there was 0:13:51.400 --> 0:13:54.240 a lot of uncertainty, but the minutes from that meeting 0:13:54.280 --> 0:13:58.560 really revealed how many people but we're already concerned about 0:13:58.640 --> 0:14:02.199 the data that was coming out that suggested that underlying 0:14:02.240 --> 0:14:06.240 core inflation was not only sticky, but maybe reaccelerating again. 0:14:06.559 --> 0:14:09.600 And I think that is where we're seeing this come from. 0:14:09.720 --> 0:14:13.120 It is beyond the energy shock. It is beyond terror 0:14:13.120 --> 0:14:18.080 of shocks. It's in that core super services component of 0:14:18.080 --> 0:14:22.520 inflation that we're seeing get sticky and hot and accelerate 0:14:22.840 --> 0:14:27.040 and not consistent with anything that resembles price stability. 0:14:27.400 --> 0:14:29.360 I want to go back to that idea, Diane, that 0:14:29.760 --> 0:14:32.520 the statement ends with the committee will deliver price stability 0:14:33.480 --> 0:14:36.280 From where you sit. What are the most reliable inflation 0:14:36.520 --> 0:14:39.800 indicators that the committee will then focus on. If it's, 0:14:40.280 --> 0:14:42.360 of course the reported numbers, But when it comes to 0:14:42.360 --> 0:14:45.320 inflation expectations, you've got Marcus based measures, You've got survey 0:14:45.360 --> 0:14:48.200 based measures, you know, and. 0:14:48.800 --> 0:14:51.560 None of these measures they have At times, none of 0:14:51.560 --> 0:14:55.200 the FED will never say inflation expectations are unanchored, and 0:14:55.240 --> 0:14:57.440 I think that's important, and a lot of these inflation 0:14:57.560 --> 0:15:01.840 measures on expectations do not look on anchored. Although consumer 0:15:01.920 --> 0:15:05.000 sentiment certainly is not high at the moment, and I 0:15:05.000 --> 0:15:08.880 think the decoupling we've seen between consumer attitudes and their 0:15:08.920 --> 0:15:13.440 actual spending reflects the burn of inflation, and they're seeing 0:15:13.480 --> 0:15:15.760 that out there. They're also seeing in surveys like the 0:15:15.800 --> 0:15:20.920 Ism survey and the Purchasing Managers surveys, things where manufacturers 0:15:21.000 --> 0:15:25.440 are front running future price hikes. That's the exact behavior 0:15:25.800 --> 0:15:29.720 the Federal Reserve is tasked to prevent because that kind 0:15:29.720 --> 0:15:34.480 of hoarding behavior reinforces its own inflation cycle. So I 0:15:34.520 --> 0:15:37.720 think those kinds of behavioral shifts they're seeing out there, 0:15:37.880 --> 0:15:41.240 they're worried about the muscle memory of inflation. We're five 0:15:41.360 --> 0:15:45.320 years in and inflation is still a problem, whether or 0:15:45.360 --> 0:15:48.200 not it's all the Fed's fault or not. It's only 0:15:48.280 --> 0:15:53.120 one institution's responsibility to derail inflation, and that is the 0:15:53.120 --> 0:15:55.960 Federal Reserve, and that's what you're seeing them sort of 0:15:55.960 --> 0:15:59.400 put their foot down now that the labor market situation, 0:15:59.640 --> 0:16:03.360 although not perfect, is not in the precarious situation it 0:16:03.400 --> 0:16:05.120 appeared to be last fall. 0:16:05.880 --> 0:16:08.080 You've noted, Diane, that one of the largest near term 0:16:08.160 --> 0:16:10.960 hurdles for the Central Bank is the persistence of service 0:16:11.080 --> 0:16:13.800 sector inflation. What has proven to be the most effective 0:16:13.800 --> 0:16:16.640 way to bring down inflation in the services. 0:16:16.200 --> 0:16:21.680 Sector well, sector that has been sort of impervious to 0:16:21.760 --> 0:16:25.160 some of the increases in interest rates we saw. We 0:16:25.280 --> 0:16:27.880 did see wages cool, but they've not cold enough to 0:16:27.920 --> 0:16:29.960 bring it down. And I think part of the problem 0:16:30.040 --> 0:16:33.280 we're finding in the service sector is one demographic and 0:16:33.320 --> 0:16:37.360 the aging demographics and upward pressure on some healthcare costs. 0:16:37.520 --> 0:16:41.160 But we also have other factors pushing up service sector inflation, 0:16:41.280 --> 0:16:44.560 and that is inequality and the ability of very high 0:16:44.680 --> 0:16:47.680 end consumers to spend up, to buy at the front 0:16:47.720 --> 0:16:50.960 of the airplane and buy first class tickets, to spend 0:16:50.960 --> 0:16:55.040 at high end hotels. All that is blowing inflation at 0:16:55.080 --> 0:16:58.600 a time when many who are on the lower end 0:16:58.720 --> 0:17:01.200 or even in the middle part of the income strata 0:17:01.360 --> 0:17:05.400 are seeing their wages eroded relative to inflation, where we 0:17:05.440 --> 0:17:08.600 know at the highest end of the income strata that 0:17:09.080 --> 0:17:13.040 wages are actually going up more rapidly than inflation. And 0:17:13.119 --> 0:17:16.480 so that's one of the challenges that FED faces is 0:17:16.520 --> 0:17:19.760 they've got a manage to the economic aggregates when the 0:17:19.800 --> 0:17:23.159 devil is in the details underneath those aggregates. 0:17:23.280 --> 0:17:25.000 Bob, you know what strikes me is that if you 0:17:25.000 --> 0:17:27.399 look at some of the economic projections here, a lot 0:17:27.480 --> 0:17:30.240 of people do seem clearly much more concerned about inflation. 0:17:30.520 --> 0:17:34.160 They revised up their core PCEE between three point two 0:17:34.240 --> 0:17:36.080 and three and a half percent for the entirety of 0:17:36.119 --> 0:17:37.680 this year from two and a half to two point 0:17:37.720 --> 0:17:40.160 eight in the previous one. Throughout all of these, even 0:17:40.200 --> 0:17:43.240 the FED Fund's rate central tendency was moved up between 0:17:43.280 --> 0:17:46.960 three point six and four point one. At this point, 0:17:47.520 --> 0:17:49.520 can we say we're at neutral? And can you say 0:17:49.560 --> 0:17:52.680 that right now? This is a FED committee purely trained 0:17:52.760 --> 0:17:56.920 on inflation. Just as Kevin worsh reflected in that statement. 0:17:58.320 --> 0:18:01.879 They're telling us that we're not at neutral, even though 0:18:01.920 --> 0:18:07.720 the median dot there's enough dispersion for higher inflation and 0:18:07.840 --> 0:18:11.560 higher rates. It's telling us that maybe the market was 0:18:11.680 --> 0:18:14.520 right before the meeting, the market was pricing in one 0:18:14.640 --> 0:18:17.960 rate hike over year end into next year. It looks 0:18:18.040 --> 0:18:20.480 like they looked at the market and say, hey, it's 0:18:20.520 --> 0:18:22.920 giving us a rate hike. Inflation's not going to be 0:18:22.960 --> 0:18:25.720 at our target for five years going on to six. 0:18:26.160 --> 0:18:29.040 Maybe this is the opportunity for us to step in 0:18:29.400 --> 0:18:32.040 like every other central bank and high rates. I thought 0:18:32.040 --> 0:18:33.720 we would get there. I didn't think we would get 0:18:33.720 --> 0:18:36.560 there at this meeting. The long end of the market 0:18:36.720 --> 0:18:39.320 likes it. Look at that the front ends up six seven, 0:18:39.359 --> 0:18:42.440 eight basis points, the long ends down a basis point. 0:18:42.680 --> 0:18:45.680 A FED that's vigilant again creates support for the long 0:18:45.800 --> 0:18:46.439 end of the market. 0:18:46.480 --> 0:18:48.960 Well, and actually, Diane do you think that in some ways, 0:18:49.200 --> 0:18:51.680 just to conclude this is actually a way to get 0:18:51.680 --> 0:18:54.320 the ultimate goal of recuts down the road by job 0:18:54.359 --> 0:18:57.000 vowning the market into seeing this as a hawkish fedule reserve. 0:18:59.000 --> 0:19:01.000 I think it is important, and I think it's also 0:19:01.040 --> 0:19:03.880 an acknowledgment, though, I mean the context is important here. 0:19:04.000 --> 0:19:07.680 Five years without hitting its inflation target and five years 0:19:07.680 --> 0:19:11.320 of compounding inflation is a problem for the US economy, 0:19:11.720 --> 0:19:14.600 and they now have more flexibility with the labor market 0:19:14.680 --> 0:19:18.960 showing some signs of finally generating jobs, stable unemployment rate 0:19:19.119 --> 0:19:22.160 for a while now, with the exception of the six 0:19:22.200 --> 0:19:24.760 week government shutdown and the weakness we saw at the 0:19:24.840 --> 0:19:28.000 end of twenty twenty five, And they're squarely focused on 0:19:28.040 --> 0:19:30.680 what they should be focused on. And I agree that 0:19:30.760 --> 0:19:33.560 the neutral rate is actually likely higher than what they 0:19:33.600 --> 0:19:35.720 thought it was. There were some that were moving there 0:19:35.960 --> 0:19:39.280 prior to this meeting as well, which means that in 0:19:39.320 --> 0:19:42.040 and of itself suggests they should have a higher short 0:19:42.119 --> 0:19:45.240 term rate. And on top of that we may need 0:19:45.320 --> 0:19:49.080 another hike as well. I still expect two hikes by 0:19:49.160 --> 0:19:49.600 year end. 0:19:49.840 --> 0:19:52.919 Wow, Diane Swank, thank you so much. Two rate hikes 0:19:52.920 --> 0:19:54.439 by year end. Can you imagine what that would do 0:19:54.440 --> 0:19:54.760 to market. 0:19:54.880 --> 0:19:56.600 So there are a couple of dots that point towards 0:19:56.640 --> 0:19:58.120 that direction, but the majority see one. 0:19:58.240 --> 0:19:59.960 Do you see that in any capacity to rate high 0:20:00.160 --> 0:20:00.560 this year? 0:20:01.040 --> 0:20:04.880 I think it's possible, you do, absolutely. There's a lot 0:20:04.880 --> 0:20:08.320 of underlying growth and cap X in the economy, and 0:20:08.359 --> 0:20:10.960 we don't know whether the Middle East will be worked out. 0:20:11.200 --> 0:20:13.960 It's certainly not impossible. 0:20:13.480 --> 0:20:14.000 Joining us now. 0:20:14.080 --> 0:20:16.399 As Mattlazetti of Deutsche Bank, who's had a few minutes 0:20:16.440 --> 0:20:18.200 to look through this statement, what's. 0:20:18.040 --> 0:20:18.679 Your first reaction? 0:20:18.760 --> 0:20:22.479 Matt, Yeah, I think this was towards the hawkish end 0:20:22.520 --> 0:20:24.119 of what we could have expected. The two things that 0:20:24.160 --> 0:20:26.920 I was focused on ahead of the meeting were one, how. 0:20:26.800 --> 0:20:28.520 Many dots we're going to show hikes this year? 0:20:28.920 --> 0:20:30.800 You have half of the dots, nine of them showing 0:20:30.840 --> 0:20:33.240 rate hikes, six of them is showing fifty basis points 0:20:33.280 --> 0:20:34.720 or more of rate hikes. That has to be towards 0:20:34.720 --> 0:20:37.439 the hawkish end of expectations. The second thing, and what 0:20:37.560 --> 0:20:40.159 drives the hawkishness in the dots, is the upper division 0:20:40.240 --> 0:20:42.480 in their core inflation forecast this year they went up 0:20:42.520 --> 0:20:44.880 to three point three percent. I think really critically next 0:20:44.960 --> 0:20:47.159 year they went up to two point five percent. You 0:20:47.200 --> 0:20:49.639 have a median expectation in the committee that more than 0:20:49.680 --> 0:20:51.879 six years into the inflation shock, inflation has still not 0:20:51.920 --> 0:20:54.400 gotten down to two and a half percent and within 0:20:54.440 --> 0:20:57.000 fifty basis points of their target. That is what's driving 0:20:57.000 --> 0:20:59.399 the necessity for potentially higher rates. 0:21:00.520 --> 0:21:03.000 So one of the comments from Ira Jersey, who's our 0:21:03.040 --> 0:21:06.000 interest rate statategist here at Bloomberg Intelligence, says that Warsh's 0:21:06.040 --> 0:21:08.760 stamp on the statement seems fairly evident, with language moving 0:21:08.760 --> 0:21:12.280 closer to the style used before the global financial crisis? 0:21:12.760 --> 0:21:14.760 Is this a move to make the FED less. 0:21:14.560 --> 0:21:19.280