Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This week brings us
Speaker 1: a big moment for markets, for the economy, for all
Speaker 1: of us. On Wednesday, the Feeder Reserve is expected to
Speaker 1: cut interest rates for the first time in more than
Speaker 1: four years.
Speaker 2: The time has come for policy to adjust.
Speaker 1: Fedjer Jerome Powell signaled his readiness to cut rates a
Speaker 1: few weeks ago in a big speech he gave at
Speaker 1: a gathering of economists and central bankers in Jackson Hole, Wyoming.
Speaker 2: The direction of travel is clear in the timing and
Speaker 2: case of rate cuts will depend on incoming data, the
Speaker 2: evolving outlook, and the balance of risks.
Speaker 1: Powell and his colleagues have said over and over and
Speaker 1: over again that it's the economic data driving their decision making,
Speaker 1: and lately they've seen inflation significantly lower than where it
Speaker 1: was at its post pandemic peak, and signs the job
Speaker 1: market is starting to strain under elevated interest rates.
Speaker 2: We do not seek or welcome further cooling and labor
Speaker 2: market conditions, So that right there, that language is very important.
Speaker 1: Kate Davidson is an editor at Bloomberg who oversees our
Speaker 1: coverage of the US economy.
Speaker 2: It kind of harkens back to language that Fed officials
Speaker 2: have used in years past to basically say, Okay, we've
Speaker 2: seen enough, we are ready to step in here, and
Speaker 2: we're ready to provide some relief.
Speaker 1: Wall Street is taking Powell at his word that the
Speaker 1: Fed Reserve is ready to cut interest rates, but there's
Speaker 1: a debate about how big that cut will be. I'm
Speaker 1: David Gera, and this is the big take from Bloomberg
Speaker 1: News today on the show, a turning point for the Fed,
Speaker 1: how much the size of the cut matters, how quickly
Speaker 1: it will be felt, and what else we're going to
Speaker 1: learn this week about what the Fed has in mind
Speaker 1: for the future. So, Kate, we've been at this period
Speaker 1: with pretty high interest rates, at least historically. How big
Speaker 1: a deal is it? What's going to happen this week?
Speaker 2: I think it is a big deal. I mean, interest
Speaker 2: rates where they are right now are the highest that
Speaker 2: they've been in more than two decades. And they've been
Speaker 2: at this level for more than a year, and Fed
Speaker 2: officials ratcheted them up right during twenty twenty two and
Speaker 2: twenty twenty three because they were so worried about inflation.
Speaker 2: Prices were rising rapidly and they came in in a
Speaker 2: very aggressive way to stop that, and we are seeing
Speaker 2: the effect of that, right. We're seeing the labor markets
Speaker 2: starting to cool and cooling pretty quickly. We're starting to
Speaker 2: see delinquencies rise. We're seeing that American households are feeling
Speaker 2: the effects of high rates now and so when the
Speaker 2: FED starts lowering them, that's going to provide some relief
Speaker 2: to all Americans.
Speaker 1: Let's talk about the labor market for a minute. What
Speaker 1: have we been seeing there recently that the Fed's been watching.
Speaker 2: So there was the big pandemic shock of course, where
Speaker 2: many many people lost their jobs, and then they all
Speaker 2: came back to work, and we actually saw the sort
Speaker 2: of you know, inverse situation where employers were having of
Speaker 2: hard time finding workers, they were having to offer people
Speaker 2: higher wages, and they were really struggling to fill positions.
Speaker 2: They had a lot of vacancies. We have seen a
Speaker 2: lot of that real pretty much come back to normal,
Speaker 2: and even we've started to see the unemployment rate ticking
Speaker 2: up a little bit, which is worrisome to FED officials.
Speaker 1: Let's move to the other side of the Fed's dual mandate.
Speaker 1: They focus on jobs, but they also focus on inflation,
Speaker 1: and that's what this fight has been about from the
Speaker 1: get go, getting high inflation under control. Where are we
Speaker 1: now in that fight and how much farther does the
Speaker 1: Fed have to go or want to go before they
Speaker 1: can kind of declare victory on this.
Speaker 2: Sure, Well, if we think about where price is peaked,
Speaker 2: this was an early twenty twenty two and the Personal
Speaker 2: consumption Expenditures price index, that's a real mouthful, but that
Speaker 2: basically that's the that's the metric that the Fed likes
Speaker 2: to look at. But looking for a minute at PCE
Speaker 2: that peaked at above six percent back in early twenty
Speaker 2: twenty two. Last month it was down at two and
Speaker 2: a half percent, So it's fallen pretty dramatically. A lot
Speaker 2: of that happened in the second half of twenty twenty three.
Speaker 2: So that's why if you remember David at the end
Speaker 2: of last year, heading into this year, there was a
Speaker 2: lot of enthusiasm excitement that Fed officials seemed like they
Speaker 2: were finally ready to start cutting rates at the beginning
Speaker 2: of the year, and then they got a little bit
Speaker 2: of a scare. In the first few months of the year,
Speaker 2: it looked like inflation was starting to reaccelerate. It was
Speaker 2: starting to pick back up, and that's happened to them
Speaker 2: a couple of times, so they were really wary of
Speaker 2: kind of declaring victory, and they probably still haven't exactly
Speaker 2: said the words. Although the fact that they're cutting rates
Speaker 2: is kind of an acknowledgment that they've essentially won this
Speaker 2: inflation battle. But that doesn't mean that they're literally at
Speaker 2: two percent, which is the rate they target. They've still
Speaker 2: got a little ways to go. It just might take
Speaker 2: another year or two, really.
Speaker 1: So there may be some disagreement about the size of
Speaker 1: the cut that we're going to get this week, but
Speaker 1: it does seem like there's near unanimity that there is
Speaker 1: going to be a cut. How is the FED chair,
Speaker 1: how are policymakers thinking through this decision, in particular how
Speaker 1: big that cut should be.
Speaker 2: So the risk is that if you wait too long,
Speaker 2: if you move too slowly, that unemployment rate can start
Speaker 2: to rise very quickly. So that would be the argument
Speaker 2: for going sooner or now in this instance, for going bigger,
Speaker 2: that you want to forestall any dramatic weakening. And I
Speaker 2: think for Fed officials they have so far they look
Speaker 2: they're in a position that no one thought they would
Speaker 2: be in a year or so ago. I mean everyone,
Speaker 2: I shouldn't say everyone, but a lot of people certainly
Speaker 2: thought that they weren't going to be able to bring
Speaker 2: inflation back down without essentially triggering a recession without a
Speaker 2: more pronounced uptick in the unemployment rate. And they've pretty
Speaker 2: much up to this point they've managed to do it.
Speaker 2: They've found this elusive soft landing, and they really don't
Speaker 2: want to screw it up. To put it bluntly, I
Speaker 2: think they want to preserve and protect this economic expansion
Speaker 2: that's happening right now, So why not go big? I
Speaker 2: think the argument would be that it's not going to
Speaker 2: make a huge difference, right start gradually, go at a
Speaker 2: measured pace, and then you can always adjust later if
Speaker 2: you feel like you need to do more to support
Speaker 2: the economy.
Speaker 1: How much does history factor into their thinking here, I
Speaker 1: mean just looking back on past efforts to execute the
Speaker 1: kind of soft landing where they do avoid a recession,
Speaker 1: also where it might have backfired in the past. What
Speaker 1: does history tell them about what they need to do
Speaker 1: and not do in this moment.
Speaker 2: Well, I think that history was a really important guide
Speaker 2: for J. Powell personally early in the inflation fight when
Speaker 2: they finally did start raising rates very aggressively, And I
Speaker 2: think it was an important guide earlier this year when
Speaker 2: they saw that inflation had picked up a little bit.
Speaker 2: I mean, they were very very concerned about backing off
Speaker 2: too soon, in other words, about stopping rate hikes too soon,
Speaker 2: and then about lowering rates too quickly. And I think
Speaker 2: that that was very much guided by what they had
Speaker 2: seen previous FED chairmen struggle with. Before Paul Volker came in,
Speaker 2: and he's, of course the FED chairman who who is
Speaker 2: known for being the one to ultimately win the battle
Speaker 2: over this high inflation of the seventies and eighties, there
Speaker 2: was Fedchair Arthur Burns, and unfortunately he has kind of
Speaker 2: gone down in history as the FED chair that really
Speaker 2: let inflation get out of control. And I think that
Speaker 2: that was very much on j. Powell's mind. Of course,
Speaker 2: he talked a lot about Vulcar and and the tough
Speaker 2: decisions that he had to make, and there's a painful
Speaker 2: recession at that time. So I think, you know, FED officials,
Speaker 2: once they started to realize that they had actually made
Speaker 2: quite a bit of progress and that they didn't see
Speaker 2: a recession as imminent. I think they started realizing that
Speaker 2: this time really could be different, and so they are
Speaker 2: perhaps thinking a little bit differently about how they are
Speaker 2: handling things from here on out now that it seems
Speaker 2: that inflation really is in hand. I think they're feeling
Speaker 2: good about it now and seeing that, Wow, things were
Speaker 2: really were different. We did this in a different way.
Speaker 2: It's been working, and let's just try and keep that going.
Speaker 1: Of course, you've got an election coming up in the
Speaker 1: US just a couple of months, and I wonder how
Speaker 1: that's going to affect the FED this week as it
Speaker 1: makes this decision, and maybe how it'll affect decisions in
Speaker 1: the future.
Speaker 2: So this is always a bit unknown. If you were
Speaker 2: to look back at transcripts from FED meetings in the past,
Speaker 2: they almost never talk about politics, and Jay Powell anytime
Speaker 2: he gets asked about this, will remind people, look at
Speaker 2: the transcripts, we don't take this into account at all.
Speaker 2: And I think that that is probably true to a point.
Speaker 2: I think that probably where it's going to be weighing
Speaker 2: on everyone's mind, even if it's not discussed around the table,
Speaker 2: is that there will be political reaction. This move is
Speaker 2: coming seven weeks before election day, So I think, if
Speaker 2: nothing else, they're probably just bracing themselves a little bit
Speaker 2: for this blowback that I expect they probably will get
Speaker 2: from some people, probably from former President Trump. He's already
Speaker 2: come out previously and said that he thinks that a
Speaker 2: rate cut before the election will be a political move
Speaker 2: by the Fed. And of course, you know the way
Speaker 2: the Fed sees it as they are doing what's best
Speaker 2: for the economy and they really can't change that decision
Speaker 2: based on the timing of the election calendar.
Speaker 1: After the break, how soon will we feel the impact
Speaker 1: of the Fed's actions this week? And what's up with
Speaker 1: the dot plot? Why are people so obsessed with it?
Speaker 1: I've been talking with my colleague Kate Davidson, who oversees
Speaker 1: coverage of the US economy, about the impacts a rate
Speaker 1: cut could have. So, Kate, after the Fed cuts rates
Speaker 1: on Wednesday, presuming they do, what's going to happen. What
Speaker 1: are the immediate effects that we're going to see on
Speaker 1: the economy as a result.
Speaker 2: So I don't think that the rate cut, especially if
Speaker 2: it's a smaller quarter point rate cut, it's not going
Speaker 2: to have a huge effect on actual economic activity. Right,
Speaker 2: the trajectory of jobs added or investment or consumer spending.
Speaker 2: But I do think that, you know, it changes the
Speaker 2: way people feel. I think it maybe changes the way
Speaker 2: that they're planning, if they're business owners or their family
Speaker 2: maybe looking at buying a new house. I think it
Speaker 2: probably will inject some sense of economic optimism that there
Speaker 2: is some relief coming. So I think that it's more
Speaker 2: probably initially about that change in sentiment. But as far
Speaker 2: as the actual economy, I mean, we have already seen
Speaker 2: mortgage rates start to come down in anticipation of this cut,
Speaker 2: so as I think that these things start to filter
Speaker 2: through markets and in turn start to I think filter
Speaker 2: through the economy a little bit sooner than they would
Speaker 2: have in the past.
Speaker 1: We've talked about kind of the economic effects of this,
Speaker 1: but how have markets been approaching this, thinking about this,
Speaker 1: How are they likely to react to the rate cut
Speaker 1: that we get this week.
Speaker 2: Yeah, it's interesting because it's I think markets would prefer
Speaker 2: a bigger rate cut. I think markets are a little
Speaker 2: more on edge, have been a little more on edge
Speaker 2: about the economic data that we've seen, especially we saw
Speaker 2: that not great jobs report that we got in early
Speaker 2: August showing that week hiring in July, and that led
Speaker 2: to some temporary panic over the summer about where the
Speaker 2: labor market was headed. So I think that markets could
Speaker 2: be a little bit disappointed if that officials opt for
Speaker 2: a smaller cut. But there's always the possibility that Japowell
Speaker 2: will come out and we'll reassure them that the FED
Speaker 2: is prepared to go for a bigger cut to lower
Speaker 2: rates more quickly if they start to be more concerned
Speaker 2: about the labor market and the broader economy.
Speaker 1: Kate, there's this meeting, it's been such a big focus.
Speaker 1: Then there's what happens next, what's going to happen at
Speaker 1: future meetings? What are we going to learn on Wednesday
Speaker 1: about the Fed's path forward.
Speaker 2: So on Wednesday, FED officials will release their Summary of
Speaker 2: Economic Projections. It's called it's a quarterly forecast that each
Speaker 2: individual policy maker submits. And it's important to note that
Speaker 2: because it's not a consensus plan. It's not something that
Speaker 2: they all talk through and say, Okay, we're going to
Speaker 2: write down that we think we're going to do this.
Speaker 2: It's basically bringing together all of the different forecasts that
Speaker 2: each FED official submits for where they see the unemployment rate,
Speaker 2: where they see interest rates at the end of the year,
Speaker 2: and in future years where they see inflation. It will
Speaker 2: give us a sense though of where most of them,
Speaker 2: I think, see rates headed through the end of the
Speaker 2: year and into next year.
Speaker 1: Kate, We're going to get these forecasts. In a phrase
Speaker 1: we hear over and over again, is the dot plot?
Speaker 1: What is the dot plot? And how do you sort
Speaker 1: of divine anything out of all of those circles and
Speaker 1: lines that will get from the Fed on Wednesday.
Speaker 2: Yeah, Oh, the dot plot. It's so wonky. We all
Speaker 2: get very excited about it. And what will happen is,
Speaker 2: you know, they distribute this piece of paper and this
Speaker 2: summary of projections, and it shows where each FED official,
Speaker 2: each of them is represented with a dot on a chart,
Speaker 2: and so each dot shows where each policy maker is
Speaker 2: anticipating that rates will end up. And they aren't identified
Speaker 2: by name to be clear, These are anonymised. They are
Speaker 2: meant to signify where rates will be at the end
Speaker 2: of the year. And so I think this year though
Speaker 2: in particular, will be very interesting because we're already in September.
Speaker 2: So that's going to give us a really clear sense
Speaker 2: of I think where various officials think that their rates
Speaker 2: will be, in another word, how how many rate cuts they
Speaker 2: might be expecting to do before December.
Speaker 1: Kate. Lastly, it's become kind of a tradition that you
Speaker 1: and I talk ahead of these big FED meetings, and
Speaker 1: I think I always ask you some version of the
Speaker 1: same question, which is, what are you going to be
Speaker 1: listening for? What are you going to be looking for
Speaker 1: when you see those those data points, that dot plot
Speaker 1: that comes out from the FED.
Speaker 2: Well, I think when we look at the dot plot,
Speaker 2: we will be looking to see how much divergence there
Speaker 2: is among FED officials, you know, how much do they
Speaker 2: seem to mostly be all on the same page or
Speaker 2: is there a big range of views about where reach
Speaker 2: should head over the coming months, Because I think that's
Speaker 2: really important. We know that the chair Powell has been
Speaker 2: very consensus driven. There has not been a descent at
Speaker 2: a FED meeting in a very very long time. And
Speaker 2: as we get into sort of trickier moments where there
Speaker 2: are closer calls, and this is certainly one of them,
Speaker 2: I think that the likelihood of someone voting against an
Speaker 2: action grows, So that will be one thing that I
Speaker 2: think is really important and I think just generally listening
Speaker 2: for how worried he is about the state of the
Speaker 2: labor market. There's been a sense that Powell tends to
Speaker 2: come out in these press conferences and sound a little
Speaker 2: bit more duvish than the dot plot would suggest or
Speaker 2: perhaps in the decision would imply. And so we will
Speaker 2: be listening for that too, basically trying to figure out
Speaker 2: did he want to go fifty or twenty five. That's
Speaker 2: what we're always trying to to sus Us.
Speaker 1: Out, Kate, Thank you very much, Thank you. I'm David Gura,
Speaker 1: and this is the Big Take from Bloomberg News. This
Speaker 1: episode was produced by Thomas lou It was edited by
Speaker 1: Caitlin Kenney. Was fact checked by David Fox. It was
Speaker 1: mixed by Alex Segura. Our senior producer is Naomi Shaven.
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