Speaker 1: This is Bloomberg Surveillance with Tom Keane, Jonathan Verrow, and
Speaker 1: Lisa Bramowitz on Bloomberg Radio.
Speaker 2: That is it for the main new conference of the
Speaker 2: Federal Reserve with Chairman Jaypowe. They're following a twenty five
Speaker 2: basis point increase. Looking ahead on the economy, this is
Speaker 2: what he had to say. His forecast is for modest growth,
Speaker 2: not a recession. On policy, he was asked, is this
Speaker 2: a pause? We're getting closer? We maybe there, We discussed it,
Speaker 2: but here's the important But a decision on a pause
Speaker 2: was not taken today. Are we sufficiently restrictive? That's going
Speaker 2: to be an ongoing assessment on cuts. Mike McKee pushing
Speaker 2: hard on that in the news conference the fmc's inflation
Speaker 2: out note Tom doesn't support raycuts.
Speaker 1: The only one in the conference where there was really
Speaker 1: a stumble. Once again, always McKey, always.
Speaker 2: If you are just tuning in on TV and radio.
Speaker 2: And this is a special edition of Bloomberg Surveillance covering
Speaker 2: the Federal Reserve's latest interest rate increase with Tom Keane,
Speaker 2: who wants to go home, alongside Lisa Bradbits'm Jonathan Ferroll,
Speaker 2: who is very happy to stay with you. If you
Speaker 2: are just tuning in, Welcome to the program. This is
Speaker 2: what the Chairman had to say.
Speaker 3: With our monetary policy, we're trying. We're in to reach
Speaker 3: then and then stay at a for an extended period,
Speaker 3: a level of policy, a policy stance that's sufficiently restrictive
Speaker 3: to bring inflation out in two percent over time. We
Speaker 3: always have to balance the risk of not doing enough
Speaker 3: and not getting inflation under control, against the risk of
Speaker 3: maybe slowing down economic activity too much. And we thought
Speaker 3: that this rate hike, along with the meaningful change in
Speaker 3: our policy statement, was the right way to balance that.
Speaker 3: This assessment will be an ongoing one.
Speaker 2: The Chairman of the Federal Reserve said policy was tight.
Speaker 2: You put credit tightening on top of that, throwing QT.
Speaker 2: We may not be far off or possibly even at
Speaker 2: that level. When you get closer and closer to being
Speaker 2: sufficiently restrictive. I think Tom the Chairman is struggling to
Speaker 2: reflect there a consensus on the committee without drowning out
Speaker 2: that consensus of the committee with his own personal view.
Speaker 2: You can sense hows than he was addressing that question,
Speaker 2: And for those of you.
Speaker 1: On radio, there's a time where he looks down and
Speaker 1: reads the prepared comments, and we saw that three, four
Speaker 1: or five times, it seemed throughout. What I would really emphasize,
Speaker 1: besides the decline we see down on two hundred SPX
Speaker 1: down eighteen, is how little the market moved during the
Speaker 1: press conference compared to the last four or five six
Speaker 1: press conferences. I don't think there was a gyrations the
Speaker 1: emotion within the conference.
Speaker 2: Initially people Tom described it as dubvish. At least I
Speaker 2: have to say, listening to that news conference, that's not
Speaker 2: my personal assessment of what I heard over the last
Speaker 2: fifty minutes.
Speaker 4: Inflation is a preeminent concern, and that's clear. That said,
Speaker 4: the market has not shifted in its view that this
Speaker 4: will be the last cut in this raid hiking cycle
Speaker 4: that has been the fastest going back to nine to
Speaker 4: eighty one. We just witnessed it according to market pricing,
Speaker 4: and that from here the next move will likely be
Speaker 4: a cut and it could come as soon as September.
Speaker 4: And perhaps he had no conviction about pretty much anything,
Speaker 4: but he did sort of reflect the seesaw underpinning the
Speaker 4: debates at the to reserve at the FMC. That just
Speaker 4: gave confirmation to Marketshay.
Speaker 2: Told you what that new focus was though, right, yeah,
Speaker 2: credit tigning Tom. It's going to be a big focus
Speaker 2: for this committee.
Speaker 1: Is the overlay of all these other events that are
Speaker 1: happening banking, commercial, real estate, et cetera. What does that effect?
Speaker 1: I'm restrictive, and I've repeated this I think twice today.
Speaker 1: It goes back to constant at Missoulo in this phrase
Speaker 1: super restrictive. How restrictive are we now? And some would
Speaker 1: suggest more restrictive than we imagine just looking at the data.
Speaker 4: I'm just going to put this out there. I suspect
Speaker 4: that the Senior Loan Officer Opinion survey is going to
Speaker 4: be really boring. And the reason why is because he
Speaker 4: made it sound that way. He had a written statement.
Speaker 4: When someone asked him what.
Speaker 5: Does it say?
Speaker 4: And he looks down, He's like, oh, I can't give
Speaker 4: you any preview, but just to think it's in line,
Speaker 4: and it's you know, probably we've seen this tightening since
Speaker 4: the second half of last year and it's been on going,
Speaker 4: et cetera.
Speaker 6: So you enjoyed the last fifty minutes.
Speaker 4: I mean I just was thinking to myself, all these
Speaker 4: people trying to get him to say something, and he's
Speaker 4: just like, look, we don't know, and we're doing the
Speaker 4: best that we can. I think the economy is a
Speaker 4: better shape than my colleagues. We all agree though in
Speaker 4: yeah Kumbaya.
Speaker 2: Importent headline from the whole thing looking ahead, we would
Speaker 2: take a date dependent approach, predicted that we will be judge,
Speaker 2: we will be date to dependent.
Speaker 1: Yeah, well, also do this right now. Let us jump
Speaker 1: to someone who's absolutely been out front on the trajectory
Speaker 1: of the FED, and that is William Dudley. He's, yes,
Speaker 1: a Bloomberg opinion columnist, Yes, a former president of the
Speaker 1: New York FED, but far more gentleman of Berkeley, steeped
Speaker 1: in our economic history, Bill Dudley, I've been dying to
Speaker 1: ask you this question. This word pause has come up
Speaker 1: and the arch question to me to get to June
Speaker 1: and on to the rest of what we observe in
Speaker 1: twenty twenty three. If they pause, is it asymmetric or symmetric?
Speaker 1: Does a pause mean rate cuts to come? Or they
Speaker 1: can say we're going to pause and we can go
Speaker 1: either way. The historians John Taylor of Stanford across the
Speaker 1: pond from your Berkeley, Barry Ikengreen and others, would they
Speaker 1: say there's a precedent to analyzing asymmetric or symmetric pausing.
Speaker 7: Well, I think they can pause and then continue to
Speaker 7: tighten again if the data turns out to support that.
Speaker 7: But obviously when they do pause, they're making a pretty
Speaker 7: strong statement that they've gotten enough information that they're confident
Speaker 7: that policy is sufficiently restrictive to use German policy terms
Speaker 7: to bring inflation down to two percent over time. So
Speaker 7: a pause is going to be a pretty significant event
Speaker 7: from the FED. Now, obviously contact matters that we're in
Speaker 7: the middle of a debt limit ceiling fight at the
Speaker 7: time of the June FMC meeting. You might take a
Speaker 7: pause for other reasons, but I would say a pause
Speaker 7: will be pretty important event. What the FED was trying
Speaker 7: to do today was say, look, we don't know if
Speaker 7: we're going to pause or not at this point. The message,
Speaker 7: I think in the statement and in the prescotte is
Speaker 7: pretty clear. We think we're getting close to a level
Speaker 7: that's sufficient restrictive. We're not absolutely certain the data is.
Speaker 8: Going to do that.
Speaker 7: We have to do a little bit more. We're clearly
Speaker 7: not going to cut yet. So I think the pushback
Speaker 7: that the FED is making relate to the markets pricing
Speaker 7: and rate cuts. The FED thinks that the process of
Speaker 7: getting inflation down to two percent.
Speaker 8: Is going to take some time, a lot longer than
Speaker 8: what the market thinks.
Speaker 1: I heard one word in the beginning of the comments,
Speaker 1: and it echoed from Lyle Brainerd. I believe she's at
Speaker 1: sixteen hundred Pennsylvania this week, and the former vice chair
Speaker 1: would suggest cumulative What is a cumulative effect of where
Speaker 1: we are right now, given how you nailed the need
Speaker 1: for higher rates to fight inflation.
Speaker 7: Well, we're certainly in the vicinity of what's sufficient. I
Speaker 7: think in my mind whether they have to do another
Speaker 7: you know, increase or two it's hard to say.
Speaker 8: At this point.
Speaker 7: We've come a long way in the last year, as
Speaker 7: Pope Chair Paul said in his pres coms, you five
Speaker 7: hundred basis point five percent increase in short term rates.
Speaker 8: That's a lot in a year.
Speaker 7: And we're also starting to see some of the effects
Speaker 7: of that on the banking system, so that the FED
Speaker 7: has a whole nother source of restraint, which is credit
Speaker 7: conditions are going to tighten because some banks are going
Speaker 7: to pull up.
Speaker 8: Now the hard part is, he said in his press
Speaker 8: conference it's very hard to access. How important that channel
Speaker 8: is going to be.
Speaker 7: My own personal view is it's going to be fairly
Speaker 7: weak because the problems that these banks face were not
Speaker 7: that they went out and made bad loans. The problem
Speaker 7: that these banks faces they went out and took a
Speaker 7: lot of interest rate risks.
Speaker 4: Bill, were you satisfied with the explanations or the answers
Speaker 4: to the questions about the supervisory of some of these
Speaker 4: banking institutions that have failed.
Speaker 7: Well, I don't think the FED is you know, taking
Speaker 7: the full responsibility for being pretty slow on this process.
Speaker 7: I mean, if you go back and look at the
Speaker 7: November Financial Stability Report, which I did this morning, there's
Speaker 7: there's basically no mention of any kind of you know,
Speaker 7: interest rate risk mismatch, any prime kind of potential liquidity
Speaker 7: problem in the bank. So it wasn't just a question
Speaker 7: of the supervision not being more aggressive with Silicon Valley Bank.
Speaker 7: I think the FED basically missed the risk here that
Speaker 7: deposits could flow out very very quickly because of the
Speaker 7: marked market losses on some of these banks balance sheets.
Speaker 4: Do you think, then, Bill, they're still missing it that
Speaker 4: they don't appreciate the full extent of it, based on,
Speaker 4: for example, the preliminary look that they got to the
Speaker 4: Senior Loan Officer Opinion survey, which seemed to indicate just
Speaker 4: an ongoing trend of what they had seen. Are then
Speaker 4: underappreciating a new pressure in the market.
Speaker 7: I think that his answer on the Senior Loan Officers
Speaker 7: survey was that it's moving in the same direction that
Speaker 7: it was upward in the tightening of credit conditions, but
Speaker 7: not in a way that would suggest that the problems
Speaker 7: of the banking system since mid March have led to
Speaker 7: a significant further tightening of credit conditions. So I think
Speaker 7: he's basically saying there's not really any new information in
Speaker 7: the Senior Loan Officers survey.
Speaker 8: That was my sense of his response to that question.
Speaker 1: Doctor Dudley, what you just said is extraordinary. You said, basically,
Speaker 1: the FED missed the ramifications of new digital technology the
Speaker 1: speed with which we can move deposits out a delicate question,
Speaker 1: if I may, Bill, and that is basically they want
Speaker 1: Mary Daily's head. There's no other way to put it nicely.
Speaker 1: You've had experience being a president of a FED. Do
Speaker 1: you go after the president of any given regional FRED
Speaker 1: when there's a major blow up like this, or is
Speaker 1: it much more down the food chain looking at the
Speaker 1: process of supervision and regulation.
Speaker 7: I think it's a much broader issue about supervisors finding
Speaker 7: problems with banks and then not forcing the banks to
Speaker 7: remedy those problems in a timely way. The second issue
Speaker 7: here was I think the FED broadly missed the fact
Speaker 7: that this interest rate risk that they had created by
Speaker 7: being very late to tighten monitary policy, that they created
Speaker 7: by flooding the bank with deposits by doing quantitative easing,
Speaker 7: that they created part of the stress and the banking
Speaker 7: system that arose when they had to tighten monetary policy
Speaker 7: by five percent in a little.
Speaker 8: Over a year.
Speaker 7: So the Federal Reserve has some culpability here, both in
Speaker 7: terms of the monitary policy policies that they pursued over
Speaker 7: the last few years and also on the supervisory.
Speaker 6: So it's certainly culpability.
Speaker 2: They're not really looking to go out and acknowledge in
Speaker 2: a major way, that's for sure, based on some of
Speaker 2: the statements we've heard, they have to a degree.
Speaker 7: I mean, I thought the FED report from Michael Barr
Speaker 7: that came out last week was did acknowledge that there
Speaker 7: was a lot of improvement on the supervisory side that
Speaker 7: that needed to be made. But I don't think the
Speaker 7: FED has acknowledged the fact that the monetary policy regime
Speaker 7: that they followed, which was to be purposely late and
Speaker 7: tightening minetary policy, meant you were encouraging banks to take
Speaker 7: on more interest rate risk, and then those banks got
Speaker 7: caught and the Fed a reserve raised by five hundred
Speaker 7: basis points.
Speaker 2: Well, that's an assessment your successor at the New York
Speaker 2: FED certainlytors in chair based on his most recent comments
Speaker 2: Mike McKay's run out of the news conference to catch
Speaker 2: up with us. My wonderful questioning to the chairman as
Speaker 2: always in the news conference, thank you for that on
Speaker 2: behalf of the whole audience really pressing him on those
Speaker 2: rate cuts. Mike, what was the assessment of what you
Speaker 2: heard in the last sixty minutes?
Speaker 9: Well, I think basically what we heard was the FED
Speaker 9: saying we don't know exactly what we going to do,
Speaker 9: so we're going to play it carefully and we will
Speaker 9: punt on a decision or on forward guidance for now
Speaker 9: until we get a better read on the economy. Powell
Speaker 9: as it pains to say his own personal opinion is
Speaker 9: we're not going to receive a recession. But he also
Speaker 9: ruled out rate cuts in case somebody is thinking that
Speaker 9: they might do that soon. So a very cautious FED here.
Speaker 9: If I could, I'd like to ask Bill Dudley a
Speaker 9: question to be still with us about that. Because the
Speaker 9: data don't change a whole lot in six weeks. What
Speaker 9: would be the bar for the FED, since you've been
Speaker 9: in as meetings for the FED to race rates to
Speaker 9: change its mind to say we need to do more,
Speaker 9: what would they need to see?
Speaker 7: I think they have to see evidence that the economy
Speaker 7: isn't slowing, that the labor markets not loose thing, that
Speaker 7: wages aren't coming down, that core inflation's not falling, you know.
Speaker 7: I mean, at the end of the day, what they're
Speaker 7: trying to do is assess what is sufficiently restrictive in
Speaker 7: order to get inflation back down to two percent. Before
Speaker 7: the banking system problems, they thought sufficiently restricted was higher.
Speaker 8: Than what we are today.
Speaker 7: In fact, Paul was talking about potentially even doing a
Speaker 7: fifty basis point Radhi cut not too long ago, and then.
Speaker 8: The banking problems hit, and so that's caused.
Speaker 7: The BED to lower their estimate of what sufficiently restrictive is.
Speaker 7: So the data will inform them about what's sufficiently restrictive is.
Speaker 7: If the data is really strong, they'll revives up their
Speaker 7: notion of what's sufficiently restrictively.
Speaker 2: Well, Bill, are they going to put more weight on
Speaker 2: financial sector data or are they going to put more
Speaker 2: weight on the data coming from traditional indicators.
Speaker 7: I think they're going to put a lot of weight
Speaker 7: on what they're seeing in terms of the labor market,
Speaker 7: wages and inflation.
Speaker 8: You know, that's really where they haven't made much progress yet.
Speaker 7: They're also going to probably take some signal by what's
Speaker 7: happening in the housing sector, because if you look at
Speaker 7: the single family housing sector, it looks like it's actually stabilizing.
Speaker 7: So the policy restraint that's already been put in place
Speaker 7: looks like it's the effects of that on housing are
Speaker 7: starting to fade.
Speaker 2: A butot just a fine question from a soul. This
Speaker 2: is something the case brought up over the last week
Speaker 2: in my car conversations with him. Whether this would be
Speaker 2: a nod to June two thousand and six. You obviously
Speaker 2: have a deep understanding of the history of the Federal
Speaker 2: Reserve back in June O six. They wrote in the statement,
Speaker 2: the extent and timing of any additional firming that maybe
Speaker 2: needed to address these risks will depend on the evolution
Speaker 2: of the outlook and et cetera, et cetera, inflation and
Speaker 2: economic growth implied by incoming information. Now, Bill, do you
Speaker 2: think it's a deliberate nod to Juneo six when essentially
Speaker 2: that decision ended up being a pause.
Speaker 7: No. I don't think they know yet, And I think
Speaker 7: Power is being true, very honest when he said that
Speaker 7: we haven't made any decision about whether we're going to
Speaker 7: pause yet. I think they think that the probability is
Speaker 7: higher that they're going to pause, but they haven't actually
Speaker 7: got there yet.
Speaker 6: Bill, Thanks for that. Wonderful to get your perspective.
Speaker 2: Bill Dundley there on the latest from Bloomberg Opinion and
Speaker 2: of course the former New York Fed President on this
Speaker 2: Federal Reserve decision. If you are just tuning in, welcome
Speaker 2: to the program on TV and radio. Special coverage here
Speaker 2: Bloomberg Surveillance After Hours, late, very late, Tom Keane, Lisa Brammitts,
Speaker 2: Jonathan Farrow after aur at like three pm, which is
Speaker 2: bed time.
Speaker 1: What you may all being. We got a pop turnel.
Speaker 2: React marketing negative zero point six percent on the smp
Speaker 2: TK and upon market that's seven basis points now but
Speaker 2: two year right now, three eighty eight.
Speaker 1: Not what he's giveaway. There's no question about it. I've
Speaker 1: been looking at Apple. We'll get to that tomorrow. But John,
Speaker 1: what doctor Dudley said there is extraordinary. He did not
Speaker 1: mince any words about this institution missing the effect, the
Speaker 1: slew that the Newtonian rates of change of the interest
Speaker 1: rate movement hasn't been enough talk about this. You can
Speaker 1: do it on the Bloomberg terminal. It's in your face.
Speaker 1: And to hear that from Bill Dudley, I don't care
Speaker 1: that he's an ex official. That was a scathing rebuke
Speaker 1: of his institution.
Speaker 2: Feut On regultary I have signed to some extent. It's
Speaker 2: been an acknowledgment of that in the most recent one.
Speaker 6: But two.
Speaker 2: To your point, they increased interest rates aggressively from zero
Speaker 2: to five. They went fromt loading. They were catching up,
Speaker 2: and because they had to catch up, you've had this
Speaker 2: rate shock, and that's what Bill Dupley is talking about.
Speaker 1: We're going to at the Jeff Rosenberg. But basically, folks,
Speaker 1: this is Bramo and Farrell all wound up and me
Speaker 1: and McKee are more institutionally friendly. I'm sorry some of
Speaker 1: the people that.
Speaker 2: Let me clean up what you just said? What you
Speaker 2: mean by that, and I'll leave my count of it
Speaker 2: is that you have the establishment view.
Speaker 6: Yeah, and that's way questioning.
Speaker 1: You know, it's like twenty twenty they like everybody else.
Speaker 1: But the bottom line is, here's a guy with immense experience.
Speaker 1: Bill was in my book blah blah blah, great, he
Speaker 1: was scathing about his institution.
Speaker 4: Debt crises always happened in the instruments that are thought
Speaker 4: of as safe. That is always what has happened. Back
Speaker 4: in two thousand and seven, two thousand and eight, it
Speaker 4: was the triple A rated or debt that was tied
Speaker 4: to mortgage mortgages that were basically bundled together. So here's
Speaker 4: the question. Has this Federal Reserve and frankly regulators generally
Speaker 4: just let me finish.
Speaker 6: Have they basically.
Speaker 4: Assumed a complete lack of risk in some of the
Speaker 4: benchmark treasuries that they're using as like the safety pools,
Speaker 4: as the buffers, and this really if it's not appreciated.
Speaker 4: How much further does it potentially got light?
Speaker 6: You know, I'm slowly losing it with ut campecific.
Speaker 1: West specific West easing into the clothes. I'm sorry, Pacific
Speaker 1: West has given me a seven down to six point
Speaker 1: five to two. And when you see people like this
Speaker 1: with this language, it's enough to make you know, Jeff
Speaker 1: Rosenberg's gonna get his first gray hair.
Speaker 6: Jeff's waiting for us. That's why it's agent.
Speaker 2: Jeff Blackcock joined us right now. Jeff, you've got all
Speaker 2: of that, not this, all of that made in the
Speaker 2: news conference with him and power. Jeff, you take away please?
Speaker 10: Yeah, I've got three key takeaways here.
Speaker 7: You know.
Speaker 10: First thing is when you just look at the totality
Speaker 10: of this, this is pretty much on uh spot on
Speaker 10: for market expectations. The statement all but basically admits to
Speaker 10: this is a pause. In the press conference, he tried
Speaker 10: really hard to not say that, but to say that,
Speaker 10: and I think it's pretty clear that that's that's where
Speaker 10: we're at.
Speaker 5: Second thing that I took away.
Speaker 10: I'll call it the new Powell arithmetic as to how
Speaker 10: he gets to the pause in that policy is sufficiently restrictive,
Speaker 10: and so what is that new arithmetic, it's the nominal
Speaker 10: rate minus three percent inflation gets you to a two
Speaker 10: percent real rate. Add to that credit tightening and add
Speaker 10: to that QT, and that's how.
Speaker 5: He gets to sufficiently restrictive.
Speaker 10: And so I think when we look forward, it's really
Speaker 10: going to be the assessment on this arithmetic towards sufficiently restrictive.
Speaker 10: First of all, is three percent the right inflation rate
Speaker 10: to subtract from that nominal rate? If inflation stays high,
Speaker 10: that real rate isn't as tight as he's implying. Second
Speaker 10: piece is and he admitted this, we don't really know
Speaker 10: the magnitude of this credit tightening.
Speaker 5: We only know the directionality.
Speaker 10: And the third piece is how much is QT really
Speaker 10: generating sufficient tightening in the real economy remains kind of
Speaker 10: very unclear. And the third key takeaway here and he
Speaker 10: talked about this and McKee great question because you got
Speaker 10: this out of him. You know what about rate cuts
Speaker 10: in the market, and he highlighted that's the difference between
Speaker 10: the market inflation forecast, which is a very aggressive decline
Speaker 10: back down to two percent, versus the Fed's forecast, which
Speaker 10: is for a much more gradual inflation for decline and
Speaker 10: that's what separates market expectations for FED cuts from the
Speaker 10: fed's reiteration again here that they will hold rates at
Speaker 10: this level for a long period of time in contrast
Speaker 10: to market expectations. So it gets us back to a
Speaker 10: focus on the inflation data.
Speaker 4: Is your sense, Jeff, that we just witnessed the last
Speaker 4: rate hike in this cycle?
Speaker 10: Well, I think we've seen the last rate hike in
Speaker 10: the consecutive rate hikes.
Speaker 5: I think there's a pause, and now it's a pause.
Speaker 10: For validation to what I was just describing. Is this
Speaker 10: really sufficiently restrictive? There was some acknowledgment by the Chairman
Speaker 10: in the data that suggests some uncertainty that we're not
Speaker 10: seeing the degree of tightening in the labor market commensurate
Speaker 10: with a five percent increase in interest rates. We're not
Speaker 10: yet seeing critical measures of inflation in that services X
Speaker 10: housing inflation coming down at a pace consistent with the
Speaker 10: attainment of a two percent goal. So these are kind
Speaker 10: of the cautionary tales around. And even the statement in
Speaker 10: the language says, you know, we're not moving towards cuts next,
Speaker 10: we're just pausing. But that doesn't mean that the full
Speaker 10: cycle is ended and we can claim success.
Speaker 5: That is going to be about the evolution and the data.
Speaker 4: Jeff, do you have confidence that the FED truly does
Speaker 4: have a handle on what's going on in the regional
Speaker 4: banks given what they acknowledge was some pretty significant oversights
Speaker 4: and based on what you see in the granular data
Speaker 4: that you study every single day in order to make trades.
Speaker 10: Well, I think, you know, the anatomy of a banking
Speaker 10: crisis is very hard to assess, you know, whether it's done.
Speaker 10: He got the question. He was very careful about answering it.
Speaker 7: You know.
Speaker 10: I think it's clear that this first phase, when he
Speaker 10: identified the three problematic banks now being under resolution, that
Speaker 10: putting sort of a line under the first phase, you know,
Speaker 10: And I think that's the case. We can see that
Speaker 10: in the data. You can see you can see that
Speaker 10: in the deposit flows.
Speaker 5: I think he's very.
Speaker 10: Reticent to make too big and too large of a
Speaker 10: blanket statement on that, given the uncertainties that we associate
Speaker 10: with banking crises. I think the second thing is really
Speaker 10: the critical one, and that is not the direction of
Speaker 10: credit tightening.
Speaker 5: Yes, this is tighten credit.
Speaker 10: It's important to note, and he highlighted this in the
Speaker 10: upcoming sluice as well as in the Beijes book data.
Speaker 10: We had seen tightening in credit conditions already in place before.
Speaker 5: The March banking crisis.
Speaker 10: What's unclear here and very hard to measure, is what
Speaker 10: on the margin has this done to accelerate that relative
Speaker 10: to trends that were already in place for a five
Speaker 10: hundred basis point tightening. And, as he admitted, with honesty
Speaker 10: and humility, very hard to make that assessment.
Speaker 5: And I think that's the right assessment in terms of.
Speaker 10: The magnitude of the quantity of the credit tightening.
Speaker 1: And Jefferson, the banks roll over here as well, Keith
Speaker 1: briet and Woods index moves down to new lows, back
Speaker 1: to twenty twenty. And I also point PacWest moving over
Speaker 1: just as one of the banks having a tough afternoon
Speaker 1: of it. Jeff Rosenberg, The fact is what I'm looking
Speaker 1: at is a three month ten year spread the short
Speaker 1: short t bill versus the benchmarkets. In truly in the
Speaker 1: cliches uncharted territory, it is out five point four fitted
Speaker 1: standard deviations with a velocity to an ever greater inversion,
Speaker 1: which part of that Barbell matters. Looking at the three
Speaker 1: months dynamic or look looking at the ten year dynamic.
Speaker 10: You're gonna hate this answer, Tom, but you know, both matter,
Speaker 10: and they're they're telling you different stories. Right The front
Speaker 10: end is telling you about the extent of where we
Speaker 10: are in terms of policy and the tightening that has happened.
Speaker 10: The long end is telling you about the confidence in
Speaker 10: the market forecast for inflation to turn right back down
Speaker 10: to two percent. You can also argue, and I think
Speaker 10: there's merit to these arguments, that there's some risk premium
Speaker 10: in there. There's some tail risk scenarios that are reflected
Speaker 10: in the ten year there is the expectation for the
Speaker 10: Fed to react to those kind of growth shock, tail
Speaker 10: risk shock by easing monetary policy. And there's a forecast
Speaker 10: here that inflation goes right back down to two percent
Speaker 10: pretty pretty aggressively. So I think that's what's the message
Speaker 10: of that deep inversion. You know, you can also say
Speaker 10: that that's telling you that you're not going to get
Speaker 10: that inflation decline without a deeper recession than safe Howell
Speaker 10: is forecasting. So all those things are implicit in that
Speaker 10: amount of curve.
Speaker 1: What's important release is we're going to standard deviation analysis.
Speaker 1: It seems like not every chart, but half the charts
Speaker 1: I'm looking at. I'm now looking at the size of
Speaker 1: the move given the trend, which is what you do
Speaker 1: with standard deviations, and frankly, that's what you do on
Speaker 1: the edge in crisis coming out of crisis. I mean,
Speaker 1: that's sort of the tonier you get again with USPXO
Speaker 1: off twenty.
Speaker 4: Three points and PacWest down four percent, a similar kind
Speaker 4: of move in Western Alliance shares as we degreed heading
Speaker 4: into the close. I do wonder, Jeff, your comment and
Speaker 4: Drew Matis's point. Drew Metis have met life, he wrote
Speaker 4: in saying, what a missed opportunity to provide relief to
Speaker 4: the banks. An unexpected pause could have flushed out shorts
Speaker 4: in the sector and created more breathing room. What is
Speaker 4: your view, Jeff, Do you think that this was a
Speaker 4: missed opportunity to throw a lifeline to some of these
Speaker 4: spiraling prices that we've seen in the regional banking sector.
Speaker 10: You know, he's sort of got that question a little bit,
Speaker 10: you know, when he got the.
Speaker 5: Question, why didn't you pause?
Speaker 10: And he gave an answer that was about getting to
Speaker 10: sufficiently restrictive. But I think the subtext which he didn't discuss,
Speaker 10: but I think it is something that is important, is
Speaker 10: the potential for creating an.
Speaker 5: Overreaction by financial markets.
Speaker 2: Right.
Speaker 10: So he was very much taking pains to not use
Speaker 10: the word pause, leading you basically up to it without
Speaker 10: saying it. And I think that was prescripted again to
Speaker 10: avoid what we had seen in other FMC press conferences,
Speaker 10: an overreaction too large of.
Speaker 5: An easing in financial conditions. Right.
Speaker 10: So, remember the Fed's perspective here is we haven't won
Speaker 10: the battle on inflation.
Speaker 5: Inflation is still well way too high.
Speaker 10: Four point six percent of core pcees. So they don't
Speaker 10: want to give the market any reason to ease the
Speaker 10: financial conditions tightening. And I think the pause in the
Speaker 10: early pause, and yeah, there is a the banking system
Speaker 10: perspective on that, but there's the broader system perspective and
Speaker 10: that the tightening and credit conditions is actually aligned with
Speaker 10: their inflation objectives, and so they don't want to push
Speaker 10: too far back against that and create an unintended easing
Speaker 10: and financial conditions at this point in the inflation fighting,
Speaker 10: which is not yet.
Speaker 2: One you need a PhD in psychology. Jeff Rosenberger Packrock Jeff,
Speaker 2: Thank you, sir, Thank you very much.
Speaker 4: Doug bet you talking about game theory.
Speaker 2: Your recordy market breaking down a little bit here. I've
Speaker 2: got to say Packwest is down about three point eight
Speaker 2: percent or so. Western Alliance is negative as well. We're
Speaker 2: down to there by four percent. The equity market breaking
Speaker 2: down on the S and P by zero point six percent.
Speaker 2: Here's a final line from Thomas Thorndon of Hedge fun Telementary.
Speaker 2: No rate cuts for you seems to be the takeaway
Speaker 2: right now, got into the close.
Speaker 6: Here's some coverage for you.
Speaker 2: Simasha, chief Global strateg just a principal Asset Management alongside
Speaker 2: Scarlett fo and Remain Bussy. Looking forward to their conversation
Speaker 2: tomorrow morning. On Bloomberg Surveillance, Ben Ladler, Jane Fowley, Way Lee,
Speaker 2: we go from the Federal Reserve to the ECB tomorrow,
Speaker 2: Apple after the close on Thursday, then onto payrolls from
Speaker 2: New York City. Thank you for choosing Bloomberg TV and Radio.
Speaker 2: This was Bloomberg Surveillance. This is Bloomberg