WEBVTT - Breaking Down Jackson Hole and Jay Powell (Podcast) 0:00:00.840 --> 0:00:02.560 Welcome to the Bloomberg Markets Podcast. 0:00:02.720 --> 0:00:05.240 I'm Paul Sweeney. Alongside my co host Matt Miller. 0:00:05.640 --> 0:00:09.600 Every business day we bring you interviews from CEOs, market pros, 0:00:09.720 --> 0:00:14.400 and Bloomberg experts, along with essential market moven News. Find 0:00:14.400 --> 0:00:17.479 the Bloomberg Markets podcast called Apple Podcasts or wherever you 0:00:17.520 --> 0:00:20.520 listen to podcasts, and at Bloomberg dot com slash podcast. 0:00:20.880 --> 0:00:24.360 Let's bring in Liz McCormick. She is our chief correspondent 0:00:24.720 --> 0:00:28.640 for Global macro markets over at Bloomberg News and Joe 0:00:28.640 --> 0:00:31.000 Wisenthal host You know him as the host of the 0:00:31.040 --> 0:00:34.080 Odd Lots podcast. I know I'm as the host of 0:00:34.120 --> 0:00:37.640 What You Miss. It's a show I deeply miss. That's 0:00:37.680 --> 0:00:42.479 what I miss is that show. In any case, I 0:00:42.479 --> 0:00:45.080 want to get the take of both of you. Liz, 0:00:45.120 --> 0:00:47.760 I'll ask you first because I couldn't sleep last night. 0:00:47.840 --> 0:00:50.000 I woke up, like in the middle of the night 0:00:50.080 --> 0:00:53.960 and I read your fantastic story on the increasing and 0:00:53.960 --> 0:00:57.480 increasingly scary government deficits and interest payments. 0:00:57.680 --> 0:00:59.520 What do you think about Powell speech? 0:01:00.440 --> 0:01:02.680 Well, I think pal, like you guys were saying, I 0:01:02.720 --> 0:01:04.399 think he did what he wanted. He wants to leave 0:01:04.440 --> 0:01:08.399 himself like Muhammad al Arian said full optionality. He's not 0:01:08.480 --> 0:01:11.559 boxing himself into a corner. He didn't give at all 0:01:11.600 --> 0:01:13.360 on you know, they're going to give up on the 0:01:13.400 --> 0:01:16.440 two percent target. The job isn't done. He noted a 0:01:16.480 --> 0:01:19.440 few good things, you know where inflations come down. But 0:01:19.520 --> 0:01:22.480 I think he just he doesn't want to give any signal, 0:01:22.600 --> 0:01:25.000 you know, like markets pricing. He's not going to do 0:01:25.040 --> 0:01:28.320 anything in September, him and his folks, but that there 0:01:28.480 --> 0:01:30.480 could be more. And I think him saying, you know, 0:01:30.720 --> 0:01:33.480 if the if things remain resilient, we could do more. 0:01:33.920 --> 0:01:35.800 It just kind of goes in line with I just 0:01:36.160 --> 0:01:39.520 all these predictions. I think, you know, we will see 0:01:39.520 --> 0:01:41.760 what happens. And it's all about the data, right. If 0:01:41.800 --> 0:01:45.240 the data comes out stronger, inflation picks up, they could 0:01:45.240 --> 0:01:47.440 do more. Like Craig Torus always tells me, they'll do 0:01:47.480 --> 0:01:48.200 whatever they want. 0:01:48.400 --> 0:01:50.960 You know, Well, I want to talk there was We 0:01:51.040 --> 0:01:55.520 had a story out from our Ruth Carson about the 0:01:55.880 --> 0:01:59.640 the r start, the theoretical level at which rate schnyder 0:01:59.720 --> 0:02:04.120 st emulate nor restrict and economy and j Pell did 0:02:04.160 --> 0:02:07.240 have something tiny to say about that. He said, we 0:02:07.280 --> 0:02:11.440 cannot identify the certainty, with certainty the neutral rate of 0:02:11.600 --> 0:02:13.320 interest And. 0:02:13.280 --> 0:02:15.399 We've never been able to write never. 0:02:15.600 --> 0:02:16.840 It's an abstract number. 0:02:16.840 --> 0:02:18.639 It's theoretical, it's ephemeral. 0:02:18.800 --> 0:02:21.240 I mean, all of a sudden, people are acting like 0:02:21.360 --> 0:02:22.920 our star is calculable. 0:02:23.480 --> 0:02:25.480 Well, I didn't understand what this debate. 0:02:25.520 --> 0:02:28.680 Where has this debate coming from? Well, Joe, that's why 0:02:28.680 --> 0:02:29.440 I want to bring you in. 0:02:29.880 --> 0:02:31.960 Get what what is the what is the rate of 0:02:32.240 --> 0:02:32.959 the neutral? 0:02:33.040 --> 0:02:33.440 Right here? 0:02:34.880 --> 0:02:36.320 Are you ready for my big number? 0:02:36.320 --> 0:02:37.160 I'm gonna reveal. 0:02:37.440 --> 0:02:39.239 I'm going to reveal the news I heard it was 0:02:39.280 --> 0:02:41.160 two point five I think it may be two point 0:02:41.280 --> 0:02:42.120 five five percent. 0:02:42.240 --> 0:02:43.520 Now, no, I have no idea. 0:02:43.760 --> 0:02:46.000 But you know what's interesting to me is that it's 0:02:46.040 --> 0:02:48.160 prior to the speech. You know, everyone's like, well, what's 0:02:48.160 --> 0:02:50.120 the buzzers in checkson hole? What do people talk about? 0:02:50.320 --> 0:02:51.639 And people are like, oh, is he going to give 0:02:51.639 --> 0:02:55.120 a speech about like where our star is now and 0:02:55.200 --> 0:02:58.880 some thing theoretical and or is he going to maybe 0:02:58.919 --> 0:03:01.120 talk about productivity game? And it's like, you know, this 0:03:01.160 --> 0:03:05.040 is an academic conference in theory. Last year he sort 0:03:05.040 --> 0:03:08.440 of pollow speech was like almost infamously short, like eight minutes, 0:03:08.480 --> 0:03:10.440 and he's just like we're not here to make friends. 0:03:10.480 --> 0:03:12.800 We're just here to you know, get inflation down. And 0:03:12.840 --> 0:03:15.919 so this year was like basically the same thing, and 0:03:15.919 --> 0:03:18.880 it's once again he's sort of passed on the opportunity 0:03:19.040 --> 0:03:23.280 to deliver some like theoretical academic monetary policy speech and 0:03:23.320 --> 0:03:26.560 he basically said, this time in a few more words, 0:03:26.880 --> 0:03:29.480 but not, you know, we're still just our job is 0:03:29.520 --> 0:03:32.639 to get inflation down. And you know, there's some progress 0:03:32.680 --> 0:03:34.800 and there's some signs of encouragement, but it's still too 0:03:34.840 --> 0:03:36.760 high and there's still more work to do. So I 0:03:36.760 --> 0:03:39.200 do think it's interesting that while people have these discussions 0:03:39.240 --> 0:03:40.880 about what is our star and can we know it 0:03:40.880 --> 0:03:43.920 in real time? And is this a useful guide, that 0:03:44.440 --> 0:03:47.080 he did not come here to address that question. And 0:03:47.120 --> 0:03:49.120 to the extent he did talk about stars, he's like, well, 0:03:49.120 --> 0:03:50.880 it's a cloudy sky, so we probably can't see the 0:03:50.920 --> 0:03:51.560 stars anyway. 0:03:51.960 --> 0:03:54.080 But Joe, we know what we don't know, right, We 0:03:54.120 --> 0:03:57.440 know we can't know our star in real time. Everyone like, 0:03:58.480 --> 0:04:01.600 I've never thought of this as an number someone could pinpoint. 0:04:01.680 --> 0:04:07.840 Even he's not a theoretical academic j Powell, So especially 0:04:07.920 --> 0:04:09.320 he doesn't know what it is. 0:04:09.680 --> 0:04:11.000 Well, you know, bond investors. 0:04:11.040 --> 0:04:11.760 That's what they do. 0:04:11.880 --> 0:04:13.600 They would say, Hey, we're trying to figure out our 0:04:13.640 --> 0:04:16.440 bond math, you know, you know, this is what we 0:04:16.520 --> 0:04:19.040 price off of, is our biz, you know, so we're 0:04:19.080 --> 0:04:21.640 going to make an estimate people are watching. I think 0:04:21.720 --> 0:04:23.080 Joe has talked about this before. 0:04:23.440 --> 0:04:24.240 You know, the dots. 0:04:24.320 --> 0:04:26.160 You know, we know the median has stayed at two 0:04:26.200 --> 0:04:29.120 and a half and that's the nominal neutral rate, but 0:04:29.240 --> 0:04:30.600 the average is moving up. 0:04:30.800 --> 0:04:33.480 So that's what bond people do. Right, there's supposed to 0:04:33.520 --> 0:04:34.160 be ahead of the game. 0:04:34.200 --> 0:04:34.920 But I think you're right. 0:04:34.960 --> 0:04:37.839 I mean I come from a math background. Things like 0:04:37.880 --> 0:04:40.880 even term premium is a residual stuff. That's you know 0:04:41.200 --> 0:04:44.360 that you can't point put pinpoint estimate. But the bond people, 0:04:44.400 --> 0:04:47.679 that's what they're about, kind of speculating and doing their 0:04:47.720 --> 0:04:48.719 models and whatnot. 0:04:48.920 --> 0:04:52.159 Yeah, was there any sign that like the long term 0:04:52.240 --> 0:04:55.480 dot plot has changed at all in this speech? 0:04:55.640 --> 0:04:58.120 Well no, not in this speech, but I will say, 0:04:58.120 --> 0:05:02.240 you know, the quarterly the economic figures they put out 0:05:02.279 --> 0:05:05.480 with the dot plot, people have looked at you know, 0:05:05.680 --> 0:05:08.520 we always flash the median is two and a half, 0:05:08.560 --> 0:05:10.240 has stayed there for a bit now, but. 0:05:10.279 --> 0:05:12.320 That the average if you take the average. 0:05:12.360 --> 0:05:14.760 There's a few more policy makers that have bumped it 0:05:14.839 --> 0:05:17.120 up a little, like Joe saying two point five to five. 0:05:17.360 --> 0:05:19.480 You know, so it's but you're taking what the median 0:05:19.560 --> 0:05:21.280 dot and then taking out inflation. 0:05:22.200 --> 0:05:24.159 Well, yeah, so if you take the median dot, which 0:05:24.200 --> 0:05:25.960 is a nominal rate in two and a. 0:05:25.960 --> 0:05:28.800 Half, which usually and you say the fits to your end. 0:05:28.960 --> 0:05:31.040 Yeah, but if you say the fits two percent inflation, 0:05:31.200 --> 0:05:34.680 that's like a neutral real rate of about fifty basis 0:05:34.680 --> 0:05:37.240 points right, that's kind of the going rate. So bond 0:05:37.279 --> 0:05:39.359 people are saying, maybe it's gonna tick up a little 0:05:39.440 --> 0:05:41.760 higher with the long run dot to show us maybe 0:05:41.760 --> 0:05:45.279 they think neutral is higher. Who knows, but I think 0:05:45.400 --> 0:05:47.920 you know, I said, we have to talk about this 0:05:48.040 --> 0:05:51.479 because nothing against stock people, but everybody and their brother 0:05:51.640 --> 0:05:54.280 stock people, you name it, are talking about our star. 0:05:54.480 --> 0:05:56.800 Like you said it something like no one gave a 0:05:56.839 --> 0:05:59.520 hoot about it. I always try and guess on the 0:05:59.520 --> 0:06:02.920 Bloomber terminal. We have a great tailor rule function and 0:06:03.000 --> 0:06:06.559 you have to put in your neutral real rate guestimate there, 0:06:06.720 --> 0:06:08.800 which is part of the fun of it and also 0:06:09.000 --> 0:06:11.920 mos most the most infuriating part of it. I think 0:06:12.040 --> 0:06:14.920 the nehru too, Like it's another one of those numbers 0:06:14.960 --> 0:06:16.960 that we just don't really know, right Joe. 0:06:17.560 --> 0:06:20.960 But yeah, I mean, look, you will not get any 0:06:21.040 --> 0:06:25.200 real disagreement anyone's like, oh, like, no one. You'd be 0:06:25.240 --> 0:06:27.240 hard pressed to find someone who could like really say, oh, 0:06:27.279 --> 0:06:28.960 this is the number and we know it in real time, etc. 0:06:29.440 --> 0:06:31.360 But in the defense, if I were gonna like mount 0:06:31.440 --> 0:06:34.080 some sort of defense of the concept, it's like, well, 0:06:34.120 --> 0:06:37.320 the economy feels different today in twenty twenty three than 0:06:37.320 --> 0:06:41.360 it did in twenty thirteen, and what are some reasons. Well, 0:06:41.400 --> 0:06:44.880 we did get this like really different fiscal response to 0:06:44.960 --> 0:06:48.719 the crisis that we saw, you know, of COVID versus 0:06:48.760 --> 0:06:51.120 the fiscal response that we got to the Great Financial 0:06:51.160 --> 0:06:54.760 Crisis and so forth. So there are some structural differences. 0:06:54.839 --> 0:06:57.880 It would seem the labor market was really tons of 0:06:57.920 --> 0:07:01.320 slack over the twenty tens. Now about labor marketing tightness, 0:07:01.400 --> 0:07:04.839 maybe some demographic changes, maybe some changes in the nature 0:07:04.839 --> 0:07:08.200 of world trade and whether you know, you know, whether 0:07:08.240 --> 0:07:11.560 there's this sort of ongoing disinflationary trend. So I don't 0:07:11.600 --> 0:07:13.760 think it's many people are going to say, Okay, we 0:07:13.920 --> 0:07:18.200 know this number in real time but is an exercise 0:07:18.240 --> 0:07:21.960 to think, well, could we have structurally higher rates because 0:07:21.960 --> 0:07:26.440 of some fundamental difference in macro, particularly around globalization, particularly 0:07:26.480 --> 0:07:29.640 around fiscal I don't think that's like a crazy conversation 0:07:29.840 --> 0:07:33.480 to have that. And also, furthermore, this idea that maybe, 0:07:33.520 --> 0:07:35.320 like you know, we sort of got anchored to this 0:07:35.400 --> 0:07:38.160 zerup era in our minds where everyone's like, well that 0:07:38.240 --> 0:07:39.880 was the normal and rates are going to come down. 0:07:40.200 --> 0:07:42.040 And of course, you know, like we know the twenty 0:07:42.080 --> 0:07:45.000 tens were sort of a historical aberration. Maybe it could 0:07:45.040 --> 0:07:46.520 be more like the eighties, Maybe it could be more 0:07:46.560 --> 0:07:47.760 like the nineties. 0:07:47.800 --> 0:07:48.200 We don't know. 0:07:48.640 --> 0:07:51.960 So I think maybe there is some value in discussing 0:07:52.200 --> 0:07:56.080 did something structural change about the macron landscape globally or 0:07:56.200 --> 0:07:58.160 in the United States that would say, you know what, 0:07:58.160 --> 0:07:59.960 we are going to have higher rates for longer than 0:08:00.040 --> 0:08:02.720 we would have expected. What are those conditions? And maybe 0:08:02.760 --> 0:08:04.360 that is a fruitful conversation I have. 0:08:04.560 --> 0:08:05.760 Of course that's fair. 0:08:05.840 --> 0:08:07.920 And I think I can't remember the name exactly of 0:08:07.920 --> 0:08:10.480 the Jackson Hole Symposium, but it's like, I think the 0:08:10.560 --> 0:08:14.120 name out, I think structural change, structural And you know, 0:08:14.440 --> 0:08:17.960 we heard Jim Bullard talking to Mike McKee yesterday, and 0:08:18.040 --> 0:08:20.160 he did say he thinks we're in a new and 0:08:20.720 --> 0:08:24.320 a new inflation regime, a new interest rate regime. 0:08:24.640 --> 0:08:26.560 But I think we all agree on that already. 0:08:26.640 --> 0:08:30.000 I thought, you know, yes, our star thing Cloudy Assam 0:08:30.160 --> 0:08:32.200 told Tom Keen a couple of days ago she of 0:08:32.240 --> 0:08:35.000 the psalm rule. I can't remember where she went to 0:08:35.000 --> 0:08:37.240 grad school, but she went to Denise University, which makes 0:08:37.280 --> 0:08:37.960 me pretty proud. 0:08:38.200 --> 0:08:39.760 But she said that was to her. 0:08:39.800 --> 0:08:42.920 The most interesting debate at jacksonvill was where is our start? 0:08:42.960 --> 0:08:45.080 And that's when I started to think things are getting 0:08:45.080 --> 0:08:45.920 a little weird. 0:08:46.000 --> 0:08:48.280 Well, I mean, you talk about a paradigm shift. Though 0:08:49.400 --> 0:08:52.920 I was looking at the thirty year yield and we're 0:08:52.920 --> 0:08:57.719 back close to where we were in twenty eleven. I mean, 0:08:57.880 --> 0:09:02.040 are we just going back like a decade plus but 0:09:02.440 --> 0:09:05.720 not to the nineties or to the eighties, if that's 0:09:05.760 --> 0:09:08.520 where we're talking about where long term yields are. And 0:09:08.559 --> 0:09:10.240 maybe put this in the context. 0:09:09.840 --> 0:09:13.000 Mortgage rates are where they were when was more the 0:09:13.080 --> 0:09:14.880 mortgage rate lasted seven and a half. 0:09:15.000 --> 0:09:18.640 I think that was early two thousands. I forget which year, 0:09:18.679 --> 0:09:23.040 but I mean, is there a prospect that we as 0:09:23.080 --> 0:09:28.120 with as with home buyers, simply a just slowly over 0:09:28.200 --> 0:09:32.400 time to like slightly higher rates. And what does that mean? 0:09:32.520 --> 0:09:33.400 What do you think that means? 0:09:33.440 --> 0:09:36.080 Liz, Yeah, I think I think I was gonna bring 0:09:36.120 --> 0:09:38.440 that up that I think that's the broader picture besides 0:09:38.440 --> 0:09:41.960 this our star gazing is that there's a lot of people, 0:09:41.960 --> 0:09:45.439 like Bill Dudley has written about that feel like overall 0:09:45.520 --> 0:09:49.480 the system is going to have structurally higher rates for longer, 0:09:49.600 --> 0:09:51.720 meaning you know, we're not going to go like so 0:09:51.960 --> 0:09:54.600 we're saying, oh, we're at the highest rates since two 0:09:54.640 --> 0:09:57.600 thousand and seven, and certain tenors and treasuries and whatnot, 0:09:57.679 --> 0:10:01.280 but you know that maybe we're we're supposed to be there, 0:10:01.320 --> 0:10:03.200 that things have changed part of a little bit what 0:10:03.280 --> 0:10:06.200 Joe was saying, that we're you know, maybe inflation is. 0:10:06.200 --> 0:10:08.000 Going to stay sticky. Even in the Fed's. 0:10:07.720 --> 0:10:09.840 Forecast, they don't get to their two percent goal for 0:10:10.080 --> 0:10:13.600 several years, right, So if rates have to stay higher, 0:10:13.800 --> 0:10:15.720 that may be that we all have to get used 0:10:15.720 --> 0:10:18.600 to saying, oh, my home equity line is now at 0:10:18.920 --> 0:10:20.280 seven and three quarters. 0:10:20.720 --> 0:10:23.679 You know it's not seventeen twenty percent were in the 0:10:23.960 --> 0:10:25.000 well that's eighty. 0:10:24.880 --> 0:10:26.400 Right, that's what I mean, you're just going to just 0:10:26.480 --> 0:10:28.959 and say maybe I'll do these three things in my house, 0:10:28.960 --> 0:10:32.319 but not that one. But you know, some people are 0:10:32.400 --> 0:10:34.280 you know, it depends on where you are. Some people 0:10:34.320 --> 0:10:37.880 are having trouble keeping up with things, of course, you know, Joe. 0:10:37.920 --> 0:10:41.120 What I think is most interesting is a debate about 0:10:41.120 --> 0:10:41.520 what the. 0:10:43.040 --> 0:10:44.560 Inflation target should be. 0:10:45.120 --> 0:10:47.880 And I'm not saying I think it should change because 0:10:48.679 --> 0:10:51.720 or or that it's really a special number at two percent. 0:10:51.800 --> 0:10:53.679 I just think it's interesting when people talk about it. 0:10:54.200 --> 0:10:56.920 I think, uh, you know, I don't like inflation. I 0:10:56.920 --> 0:11:00.720 think it's a regressive tax. But that's just my opinion. 0:11:01.120 --> 0:11:02.760 It could be any any target. 0:11:02.800 --> 0:11:03.640 What do you think. 0:11:05.240 --> 0:11:07.280 Yeah, I think it's a really interesting question. I mean, 0:11:07.320 --> 0:11:09.920 Powell is sort of adamant today that he's like, we're 0:11:10.000 --> 0:11:12.800 not changing the inflation target, probably because of buzz of 0:11:12.840 --> 0:11:15.439 people in the media. You know, there's adjacent Ferman columni. 0:11:15.440 --> 0:11:18.400 It's like, maybe we should go to three percent. It 0:11:18.559 --> 0:11:21.640 feels kind of academic, and I think they're in terms 0:11:21.640 --> 0:11:23.920 of like, look, the way I think about it is 0:11:23.960 --> 0:11:27.040 this three years ago at Jackson Hall. It was virtual 0:11:27.120 --> 0:11:29.280 that year in twenty twenty, but three years ago at 0:11:29.360 --> 0:11:31.600 Jackson Hall, the FED laid out it's a new framework, 0:11:31.720 --> 0:11:36.280 flexible average inflation targeting, which essentially said that we're willing 0:11:36.280 --> 0:11:38.440 to accept some trade off. We're willing to accept some 0:11:38.520 --> 0:11:41.800 higher inflation in exchange for a more rapid pace of 0:11:41.920 --> 0:11:45.000 labor market healing. That's basically what it was. And so 0:11:45.080 --> 0:11:47.680 I think when you see these conversations about a higher 0:11:47.800 --> 0:11:50.559 inflation target and whether the FED should tolerate three percent 0:11:50.640 --> 0:11:53.280 or two and a half percent, etcetera, it's essentially asking 0:11:53.320 --> 0:11:55.559 the same question, which is, we have a good labor 0:11:55.559 --> 0:11:58.079 market right now. We have it's great three and a 0:11:58.080 --> 0:12:01.880 half percent unemployment, that's really encouraging. The spread between black 0:12:01.920 --> 0:12:05.560 and white employment. Unemployment has narrowed quite a bit. Wages 0:12:05.600 --> 0:12:08.280 at the low end of the income scale are growing 0:12:08.320 --> 0:12:10.840 faster than high high end. These are all things that 0:12:10.880 --> 0:12:13.040 I think people generally wanted to see for a while. 0:12:13.320 --> 0:12:15.800 So when I when the conversation happens about should we 0:12:15.800 --> 0:12:19.080 tolerate higher inflation, to me, the real question is like 0:12:19.400 --> 0:12:22.800 how much are we willing to sacrifice on the inflation 0:12:22.920 --> 0:12:25.360 side in order to keep the good news on the 0:12:25.360 --> 0:12:27.680 employment side. And so I think that is sort of 0:12:27.720 --> 0:12:30.360 what this question is about. It's like two percent isn't 0:12:30.440 --> 0:12:33.280 fixed in stone, it's ex sense of like what low 0:12:33.320 --> 0:12:37.000 and stable inflation looks like. But given where we are unemployment, 0:12:37.400 --> 0:12:40.600 should we tolerate how stressed should we be about some 0:12:40.640 --> 0:12:42.280 periods where we're a little bit above that or three 0:12:42.320 --> 0:12:44.640 percent three and a half percent? Do we want to 0:12:44.679 --> 0:12:47.120 preserve what we have in the labor market? And this, 0:12:47.200 --> 0:12:49.360 I think is the sort of real question. How much 0:12:49.440 --> 0:12:51.200 do we how much are we willing to sacrifice of 0:12:51.240 --> 0:12:54.280 what we've achieved on the labor market side to get 0:12:54.280 --> 0:12:56.680 back to two percent? Is like, to me, the question 0:12:56.880 --> 0:12:59.479 that really we're trying, we're really that we're really discussing 0:12:59.559 --> 0:13:01.480 when we talk talk about raising the inflation target. 0:13:01.640 --> 0:13:03.719 Joe, great talking to you, Thanks so much for joining us. 0:13:04.000 --> 0:13:07.280 Joe Wisenthal, who co hosts odd Lots of Course with 0:13:07.360 --> 0:13:10.320 Tracy Alloy Liz McCormick. Always a pleasure to have you 0:13:10.320 --> 0:13:10.840 in the studio. 0:13:11.880 --> 0:13:15.280 You're listening to the team. Ken's a live program Bloomberg 0:13:15.320 --> 0:13:18.640 Markets weekdays at ten am Eastern on Bloomberg dot com, 0:13:18.760 --> 0:13:21.920 the iHeartRadio app, and the Bloomberg Business app, or listen 0:13:22.000 --> 0:13:24.600 on demand wherever you get your podcast. 0:13:25.840 --> 0:13:28.600 Let's bring in someone who does this for a living. RJ. Gallo, 0:13:28.720 --> 0:13:32.200 senior portfolio manager at Federated Hermes, joins us am I 0:13:32.240 --> 0:13:37.120 being too glib, Rj. Because it doesn't seem like Powell 0:13:37.160 --> 0:13:41.640 moved markets much. And he, I mean, my opinion of 0:13:41.679 --> 0:13:44.040 what the Fed is going to do, my guess, my 0:13:44.120 --> 0:13:46.880 forecast is just the same today as it was yesterday. 0:13:49.080 --> 0:13:51.600 I think that the anticipation for the speech was that 0:13:51.720 --> 0:13:55.920 it wouldn't necessarily be a seminal message like it was 0:13:56.280 --> 0:14:00.480 a year ago, which was a really aggressive and powerful 0:14:00.520 --> 0:14:02.760 message to the markets that we're tightening, and we're tightening 0:14:02.800 --> 0:14:06.959 a lot that was a year ago intended to rebuild 0:14:06.960 --> 0:14:09.079 their credibility as an inflation fighter, and I think that 0:14:09.440 --> 0:14:11.960 has worked. Here we are in August of twenty twenty three. 0:14:12.800 --> 0:14:15.720 I think we expected sort of an agnostic, cautious speech. 0:14:15.760 --> 0:14:18.560 I think that's what we got has a little teeny 0:14:18.640 --> 0:14:20.520 bit of a hawkish tilt to it, and as a result, 0:14:20.840 --> 0:14:25.200 two year yields or a little cheaper treasurey occurs a 0:14:25.240 --> 0:14:28.240 little flatter because of that sort of hawkas message. That 0:14:28.280 --> 0:14:30.760 will tighten again if we need to. But it's a 0:14:30.800 --> 0:14:35.120 cautious message because He also emphasizes the risk of doing 0:14:35.160 --> 0:14:37.880 too much versus the risk of doing too little, repeating 0:14:37.960 --> 0:14:40.800 some other messages that he's said before. As you noted, 0:14:41.120 --> 0:14:45.080 I think that there's some information in the speech, maybe 0:14:45.080 --> 0:14:48.560 most notably the line where he basically says the two 0:14:48.560 --> 0:14:52.360 percent inflation target is the two percent inflation target he's 0:14:52.400 --> 0:14:54.600 trying to push back I think on media speculation and 0:14:54.640 --> 0:14:58.240 market speculation that the FED will want to increase its 0:14:58.240 --> 0:15:02.720 inflation target over time. That was probably a subtle but 0:15:02.840 --> 0:15:05.640 important point that was added here for specific purposes. 0:15:05.640 --> 0:15:07.680 I believe one thing. 0:15:07.560 --> 0:15:11.840 That did change the FED swaps beginning to price out 0:15:12.400 --> 0:15:17.680 the first twenty five basis point rate cut, wopping next June, 0:15:18.120 --> 0:15:21.800 moving to next July. And does that change your positioning 0:15:23.080 --> 0:15:25.800 in treasuries at all? Does that make you any less 0:15:26.480 --> 0:15:29.960 eager to purchase I think medium to long term duration 0:15:30.240 --> 0:15:33.360 or is this sort of just all noise here for you? 0:15:35.840 --> 0:15:40.920 I think were living in a challenging time. Many on 0:15:41.000 --> 0:15:44.240 Wall Street, many investors, have been expecting that the cumulative 0:15:44.240 --> 0:15:48.320 impact of the aggressive FED tightening would have produced a 0:15:48.400 --> 0:15:52.760 sharp growth slowdown, perhaps a recession. By now, that had 0:15:52.800 --> 0:15:56.920 been our internal call within Federate Hermey's fixed income. We 0:15:57.080 --> 0:15:59.920 leave positioned to lean a little bit long duration and 0:16:00.120 --> 0:16:03.680 up in quality, reducing weightings in high yield and investment grade, 0:16:03.720 --> 0:16:07.680 for example, to underweight positions in anticipation of that economic outcome. 0:16:07.920 --> 0:16:10.280 And it has not happened. The economy has not just 0:16:10.320 --> 0:16:14.960 been resilient, it's been strong, supported by the consumer, supported 0:16:14.960 --> 0:16:19.160 by government spending. Inflation fortunately has come down. Otherwise yields 0:16:19.160 --> 0:16:20.480 would be a heck of a lot higher than they 0:16:20.480 --> 0:16:23.480 are today. Imagine what yields would look like if inflation 0:16:23.600 --> 0:16:26.360 was still six, seven or eight percent and the economy 0:16:26.440 --> 0:16:29.360 was plugging along at high rates, relatively high rates of growth. 0:16:29.920 --> 0:16:33.280 So the inflation story has worked, but the recession outcome 0:16:33.280 --> 0:16:36.920 has not. Our vue is ultimately we are going to 0:16:36.920 --> 0:16:40.720 see some diminished growth path. We keep pushing that back. 0:16:41.920 --> 0:16:45.360 Today's news doesn't change our positioning per se, but I 0:16:45.480 --> 0:16:48.880 think it does emphasize the agree to which the Fed 0:16:49.040 --> 0:16:51.960 is very committed to seeing inflation return back close to 0:16:51.960 --> 0:16:55.080 its sup percent target. And that means they're not in 0:16:55.080 --> 0:16:58.480 a hurry to ease. They anticipate there'll be some easing 0:16:58.520 --> 0:17:01.640 and growth. Powell explicitly talked about jolts weakening. In his 0:17:01.720 --> 0:17:05.320 comments today, he also talked about the lower rated non 0:17:05.320 --> 0:17:09.560 farm payroll job creation that we've been seeing recently. Positive, yes, 0:17:09.600 --> 0:17:13.600 but at lower lower pace. And I think on net 0:17:14.240 --> 0:17:17.600 you know this is the news today. Was not hugely 0:17:17.680 --> 0:17:20.600 marketing movement, but it doesn't change our view. We still 0:17:20.640 --> 0:17:22.320 lean a little long. We're still up in quality. We 0:17:22.359 --> 0:17:23.720 think that growth slowdown will come. 0:17:24.200 --> 0:17:26.359 Yeah. A couple of days ago, I was talking to 0:17:26.400 --> 0:17:28.480 Michael Dardo over at MKM and he said we were 0:17:28.520 --> 0:17:31.119 talking about high yield. He said he thinks junk is 0:17:32.800 --> 0:17:37.160 his words, insanely expensive. And when I look at delinquencies 0:17:38.000 --> 0:17:41.679 any chart, or or or you know, credit card usage, 0:17:41.760 --> 0:17:44.840 it just goes up into the right recently. Are you 0:17:44.960 --> 0:17:50.320 expecting to see more default? Shouldn't investors get more risk, sorry, 0:17:50.359 --> 0:17:52.120 more reward for that kind of risk. 0:17:53.800 --> 0:17:55.720 That's part of the reason why we are in fact 0:17:55.800 --> 0:17:58.760 up in quality. We think on the on the macro front, 0:17:58.840 --> 0:18:01.520 the consumer has been spending at a breakneck pace, and 0:18:01.560 --> 0:18:06.080 they're pulling down on the COVID era access savings I 0:18:06.080 --> 0:18:08.440 think we call it these days. Eventually that's going to 0:18:08.560 --> 0:18:12.400 run pretty thin for mid and lower income households. We're 0:18:12.400 --> 0:18:14.760 bringing back the student loan payments. That's going to have 0:18:14.840 --> 0:18:17.000 some impact. So we think the consumer is going to 0:18:17.040 --> 0:18:20.600 fade with respect to high yield. We think the evaluations 0:18:21.320 --> 0:18:24.160 are too tight. We were underweight during the rally. We've 0:18:24.200 --> 0:18:26.520 missed some of that, ad Midley, but we're not going 0:18:26.560 --> 0:18:29.400 to chase it now. We think that because the fundamentals 0:18:29.440 --> 0:18:31.320 should weaken and we think there will be some uptick 0:18:31.359 --> 0:18:34.240 in defaults that we want to see wider spreads before 0:18:34.280 --> 0:18:37.160 we start getting back more constructive on high yield. 0:18:38.119 --> 0:18:41.959 You know, we were talking with our chief economics correspondent 0:18:42.080 --> 0:18:44.879 or I think that's her title, Liz McCormick, just a 0:18:44.880 --> 0:18:46.960 few minutes ago, and she had a great piece out 0:18:47.000 --> 0:18:51.640 about how US budget deficits exploding no end in sight, 0:18:51.680 --> 0:18:56.280 and there are economists very worried about the potential for 0:18:56.400 --> 0:19:00.800 that to drive up treasure yields in the long term. 0:19:00.840 --> 0:19:02.879 But there's sort of this interplay right around what the 0:19:02.920 --> 0:19:06.800 Fed wants to do versus the US fiscal health. I mean, 0:19:06.800 --> 0:19:10.920 do you see that having any impact when you think 0:19:10.920 --> 0:19:13.920 about the kinds of risk you're taking in the long term? 0:19:15.480 --> 0:19:15.959 Yeah, I know. 0:19:16.000 --> 0:19:18.960 We when we develop our duration Callum, the head of 0:19:19.000 --> 0:19:22.240 our Duration Committee, and our duration call expressed as a 0:19:22.280 --> 0:19:26.800 percentage of index long or short, is predicated clearly on 0:19:26.840 --> 0:19:29.560 our monetary policy outlook. But fiscal policy is another key 0:19:29.680 --> 0:19:33.959 ingredient in the discussions about how we're going to manage duration. 0:19:34.160 --> 0:19:37.440