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Speaker 3: A new fed chair in a new era.
Speaker 4: As we do parse through some of the commentary, the
Speaker 4: Kevin Warresh Fedder Reserve is a very different federal reserve
Speaker 4: than the Drome Powell of Federal Reserve. Not only are
Speaker 4: we looking at a statement that was only one hundred
Speaker 4: and thirty two words versus one hundred and seventy five
Speaker 4: words at the April FMC meeting, we're talking about a
Speaker 4: new framework, a new regime, and not giving enemy forward
Speaker 4: guidance because guess what, there's a task force for that
Speaker 4: right now. If you take a look of the reaction
Speaker 4: in Marcus, they are taking this hawkish tilt and they
Speaker 4: are running with it. You can see across the board
Speaker 4: declines on the S and P and the Russell two
Speaker 4: thousand NAZAC now a little changed as they parse through
Speaker 4: all of the reactions. When you take a look at
Speaker 4: the yield space, that's where some of the fireworks are happening.
Speaker 4: It is yield curve compression time in a massive, massive way.
Speaker 4: Thirteen basis point rise on the two year to four
Speaker 4: point one point eight percent. Suddenly the idea of one
Speaker 4: rate hike or even more is on the table. As
Speaker 4: this FED share talks about how this Federal Reserve has
Speaker 4: a commitment to the American people to get price stability
Speaker 4: and that is their goal. He s poo pooed some
Speaker 4: of the dual mandate the thirty year yields. They like
Speaker 4: that down two basis points and it is dollar strength
Speaker 4: across the board. A big question, Scarlett foo was would
Speaker 4: the President have any commentary on this, And it turns
Speaker 4: out that he does.
Speaker 5: He does.
Speaker 6: He's spoken to reporters several times today he's at the
Speaker 6: G seven in France, and he had said that it's
Speaker 6: all right that they held rates whatever.
Speaker 5: He also said that the Fed raising.
Speaker 6: Rates is a possibility, It's possible it could happen, So
Speaker 6: no sign of anger from him. We do know that
Speaker 6: Scott Besson, the Treasury Secretary, had kind of eased the
Speaker 6: path there. He had been talking about the prospect of
Speaker 6: the FED not being able to cut rates as the
Speaker 6: President would want, and that inflation oil prices remains top
Speaker 6: of mind. So we did just listen to Fed Shair
Speaker 6: Kevin Warre, speaking moments ago, is you any kind of
Speaker 6: forward guidance, Where did you put your potential dot if
Speaker 6: you were to have a dot?
Speaker 3: Well, he has an answer for that.
Speaker 1: I'm appointing a task force in each of five areas
Speaker 1: that are central to the broad conduct of monetary policy. First,
Speaker 1: FED communications, second the fed's balance sheet, Third, our use
Speaker 1: and reliance on existing data sources, Fourth, productivity and jobs
Speaker 1: in an era of transformation, and last the fed's inflation frameworks.
Speaker 1: My expectation, I'm still in the business of recruiting and
Speaker 1: finalizing them. My expectation is the task forces will begin
Speaker 1: work in the next couple of weeks and we'll start
Speaker 1: to get some more information from them, some more framing
Speaker 1: of how they see things, starting in the fall end,
Speaker 1: hopefully most if not all of them, concluding by year end.
Speaker 4: Joining us now to discuss is Kate Moore of City
Speaker 4: and Jim Bianco of Bianco Research, or either of you
Speaker 4: being recruited for the task force.
Speaker 3: We'll start with that.
Speaker 7: I just texted my text messages and nothing came through yet,
Speaker 7: so but it's still early at the profressor. All right,
Speaker 7: what's your first reaction to what we just heard, Kate, Well,
Speaker 7: a couple things. Number One, there was broad acknowledgement that
Speaker 7: the economy is in good shape. There's also broad acknowledgement
Speaker 7: that the rates as they currently stand are not actually
Speaker 7: restricting any major sector outside of course housing, which worsh mentioned.
Speaker 3: And there was like a lot.
Speaker 7: Of collegial talk about, you know, how well the FED
Speaker 7: is working together, how well they're communicating, how welcoming Warshfeldt,
Speaker 7: you know, in his new chair position. So there was
Speaker 7: actually kind of a positive tone about both the economy
Speaker 7: and the functioning of the institution and in.
Speaker 5: Terms of changes that he's made.
Speaker 6: Lisa, you already highlighted the fact that the statement was
Speaker 6: much shorter.
Speaker 5: The news conference was sugar.
Speaker 6: As well, and we definitely heard a different side to
Speaker 6: these Fed news conferences, Jim. One thing that Kevin Morshman
Speaker 6: clear was that for longer term changes, including communications, including.
Speaker 5: The dot plot, there's going to be a task force
Speaker 5: for that.
Speaker 6: How do you anticipate that kind of information to come out?
Speaker 6: Is that going to be a surprise when it just
Speaker 6: comes out, or is he the FED going to give
Speaker 6: markets time to digest all of them.
Speaker 8: Well, he also said that the task force might include
Speaker 8: people outside the FED, so I would assume that you're
Speaker 8: going to have leaks, so you might as well be
Speaker 8: doing it almost in real time, telling us what's happening,
Speaker 8: because there's going to be some people outside the FED.
Speaker 8: But in general, I think that this is a welcome thing.
Speaker 8: The FED needed to change. This communication style that they
Speaker 8: have now is about twenty years old, and the world
Speaker 8: has changed. Communication has changed, the role of the FED
Speaker 8: has changed, and so it is a positive thing. I'll
Speaker 8: also mentioned that one of the things that Walsh talked
Speaker 8: about before you was chairman was all of these prognostications
Speaker 8: the Fed's going to cut rates carding to the dot plot.
Speaker 8: He pointed out it very rarely happens the way that
Speaker 8: they say it's going to be. So it was always
Speaker 8: an institution that was giving an inaccurate forecast, and we
Speaker 8: were over relying on that inaccurate forecast, and maybe it
Speaker 8: is time that they try a different approach.
Speaker 6: Kate is chair Kevin Worsh kind of consistent with what
Speaker 6: former governor Fed Governor Kevin Worsh sounded.
Speaker 7: Like, I mean, I'm going to go back to this world.
Speaker 7: I just mentioned a moment ago collegial. I mean, it
Speaker 7: really felt like that was the sort of the overall tone.
Speaker 7: And I think something is very important here, which is
Speaker 7: that we are having more consistency of policy here between
Speaker 7: last meeting with Chair Powell and Chare Wosh, which I
Speaker 7: think is going to be comforting to the markets, even
Speaker 7: if risk assets, you know, dip.
Speaker 9: A little bit on this news.
Speaker 7: It's just kind of reiterating what we already know though,
Speaker 7: right that inflation has been warmer, spicier than many people
Speaker 7: had expected, certainly even pre the Iran conflict, and we
Speaker 7: know that there's been a broadening out of some of
Speaker 7: these price pressures while the labor market had been solid.
Speaker 7: I just felt like, you know, Chair Worsh made those points,
Speaker 7: conceded that, and so was consistent with the person that
Speaker 7: he has always been, which is someone who's really grounded
Speaker 7: in data.
Speaker 4: There's also been a comment and I thought that his
Speaker 4: answer to one of the questions was really interesting about
Speaker 4: why he thinks that this shouldn't be an overly communicative fed,
Speaker 4: how the data and how the market responds to the
Speaker 4: data should be done more purely.
Speaker 3: Take a listen to exactly what he had to say.
Speaker 1: I think financial markets perform best when they react to
Speaker 1: incoming data. I think the financial markets work less efficiently
Speaker 1: when they ask a question, how will the Federal Reserve
Speaker 1: react to that incoming information. The more that markets are
Speaker 1: paying attention to what's happening in the real economy, deciding
Speaker 1: what's good data and what's less good data, the more
Speaker 1: financial markets can price what they believe is the most
Speaker 1: likely and what are the tail risks.
Speaker 4: This actually, to me, I highlighted a real question that's.
Speaker 3: Been asked Jim. Is this sort of codifying the fact
Speaker 3: that the Fed's going to follow the market.
Speaker 4: So the market is going to be sort of the
Speaker 4: arbitrator of what the FED should do because it is
Speaker 4: a pure indicator of the collective wisdom of crowds.
Speaker 8: I think the market should be the thing that the
Speaker 8: FED follows.
Speaker 2: His statement reminded me.
Speaker 8: Of that famous line from the economist Charles Goodheart. When
Speaker 8: a measure becomes a target, it seeks being a measure.
Speaker 8: Meaning if the FED has already decided what they're going
Speaker 8: to do, then we can ignore the pay or report.
Speaker 8: We could ignore the CPI. Maybe we shouldn't. Maybe we
Speaker 8: should be reacting to all of this and having the
Speaker 8: market express its best judgment and then letting the FED
Speaker 8: bring in that information that I agree with him is
Speaker 8: the proper way for things to be done. Then them
Speaker 8: to just summarily decide what they're going to do, say
Speaker 8: they care about the data, but they've already made.
Speaker 5: Up their mind.
Speaker 3: Kate, do you agree?
Speaker 7: Yeah, I think that makes a lot of sense, right,
Speaker 7: the market being an important signal, an important source of
Speaker 7: data for the FED instead of this kind of manipulation.
Speaker 7: It is really hard, though, as market participants not to
Speaker 7: try and to anticipate what other market participants or other
Speaker 7: policy makers or other people making decisions are doing or
Speaker 7: interpreting with the data. And that is part of the
Speaker 7: game and part of the behavioral side of things that
Speaker 7: we all incorporate into our process. But I think, you know,
Speaker 7: Chairworsh's point was very clear that the market and that mechanism, Jim,
Speaker 7: as you're pointing out, is a really powerful mechanism and
Speaker 7: we shouldn't fait it right now.
Speaker 3: We want to get back with a part of the
Speaker 3: task force.
Speaker 4: I don't believe he actually has been appointed to a
Speaker 4: task force. He is officially the Bloomberg Task Force on
Speaker 4: the federers or of Bloomberg's Michael McKee, You are in
Speaker 4: the room, and the press conference actually went on a
Speaker 4: little bit longer than some people had expected. The commitment
Speaker 4: to a press conference, though not exactly concrete. His answer
Speaker 4: to you is really interesting. What was your takeaway from
Speaker 4: this conference?
Speaker 10: Well, the answer, of course, like almost all of his answers,
Speaker 10: ended with there's a task force for that. But basically
Speaker 10: they're going to look at all communications, and he did
Speaker 10: express the idea that he doesn't necessarily think you should
Speaker 10: have a press conference after every meeting if you don't
Speaker 10: have something to say now, that's going to be the
Speaker 10: thing that the task force is going to have to
Speaker 10: look at, is what qualified is something important to say today? Obviously,
Speaker 10: but if you're in a situation where you don't know
Speaker 10: where inflation's going, where you're going to vote the whole
Speaker 10: rates where they are, does that require a meet a
Speaker 10: press conference? If not, then how do the markets react?
Speaker 10: The FED there is kind of leading the markets, and
Speaker 10: if they come to you and say, hey, come on over,
Speaker 10: we're gonna have a press conference today, then they're also
Speaker 10: leading the markets. So it's a difficult needle to thread
Speaker 10: at this point.
Speaker 2: I think for Walsh to.
Speaker 10: Try to get out of this, to put that genie
Speaker 10: back in the bottle. But we'll see what the task
Speaker 10: force comes up with. He was very, very complimentary of
Speaker 10: Fed officials today, and he basically framed this all as
Speaker 10: we're all working together to make this work better for
Speaker 10: monetary policy. So it's going to be we're all going
Speaker 10: to be sitting back and waiting for these task force reports.
Speaker 2: To come out.
Speaker 4: Michael McKee, thanks so much for all of your work
Speaker 4: and insight today.
Speaker 3: Just real quick here.
Speaker 4: It does see him alike the market he's not necessarily
Speaker 4: paying attention to. In the initial salvos of the reaction,
Speaker 4: he went on and said, honestly, I'm not that concerned
Speaker 4: in the first hours that said, the idea that they
Speaker 4: dropped any kind of commentary on the labor market, and
Speaker 4: the fact that he said we've missed for five years
Speaker 4: our inflation target and we.
Speaker 3: Are going to fix that.
Speaker 4: Is there any other way to interpret this other kate
Speaker 4: than unabashedly hawkish.
Speaker 9: I mean, look, here's what I would say.
Speaker 7: The fact that he repeated that we have been overshooting
Speaker 7: the target for five years, something our team talks.
Speaker 9: About all of the time.
Speaker 7: I thought was incredibly important and actually was a comfort
Speaker 7: to me, this acknowledgment that policy is going to be
Speaker 7: really active in terms of getting us to the goal.
Speaker 7: I thought that other comedy made around paying attention to
Speaker 7: the left of the decimal point versus the right, that
Speaker 7: the target is two, not too in something sort of
Speaker 7: reaffirms that commitment and the way that he'll work with
Speaker 7: the Committee frankly to get policy in a place that
Speaker 7: we go closer to target over time. So it's hard
Speaker 7: not to interpret that where we are today as a
Speaker 7: little bit more hawkish than otherwise people might have expected.
Speaker 6: But also that's thinking perhaps more clearly than perhaps what
Speaker 6: we had heard in the past. Right, there's no two issh,
Speaker 6: it's just two. And he's happy with that. I'm curious.
Speaker 6: In terms of the labor market, there was a question
Speaker 6: posed about what the Committee thinks of the labor market Jim,
Speaker 6: and he said trends matter more than data points. The
Speaker 6: job data has been moving in a good direction. It
Speaker 6: feels like that's all he said about the labor market.
Speaker 6: He's not concerned with it one way or another.
Speaker 8: Yeah, And if you go back to the statement, they
Speaker 8: didn't put anything in the statement in the one question
Speaker 8: he said, we're not worried about the labor market.
Speaker 2: Okay, that is not a problem.
Speaker 8: The problem seems to be the inflation problem, and that's
Speaker 8: what they addressed. So I almost suspect that this statement
Speaker 8: is going to be flexible. So today, now it's inflation.
Speaker 8: I could see a statement in you know, six months
Speaker 8: a year where there's no mention of inflation and it's
Speaker 8: all about the labor market, it's all about real growth.
Speaker 4: Then at that point, Yeah, and he said that it
Speaker 4: wasn't necessarily in conflict with each other. Right now, let's
Speaker 4: bring in Stephanie Rotha Research, who's been listening to all
Speaker 4: of this. Stephanie, your first take and what we just
Speaker 4: heard from fed share Kevin.
Speaker 11: Worsh Yeah, I mean it was he's setting up to
Speaker 11: be a very credible fed He seems to be very
Speaker 11: smart about getting everybody on his side and getting the consensus.
Speaker 11: It seems well he was not in favor of a
Speaker 11: hike today. You know, that could very much change with
Speaker 11: the incoming data. So it was certainly more hawkish than
Speaker 11: what some people had thought. Some people thought he would
Speaker 11: just come in and try to push through rake cuts,
Speaker 11: because that's what the president wants, and that wouldn't necessarily,
Speaker 11: quite frankly, be very good for markets anyway. So this
Speaker 11: was a very deliberate and patient approach, and we'll see,
Speaker 11: you know, through the path of incoming data how this plays.
Speaker 11: At our base case is that inflation will cool enough,
Speaker 11: labor market will show some signs of softening such that
Speaker 11: in the coming weeks they don't actually have to hike.
Speaker 11: But certainly the odds have risen after this.
Speaker 5: Meeting, Stephanie.
Speaker 6: Does this silence the critics who thought that we would
Speaker 6: not have an independent FED under Kevin worsh Yes.
Speaker 11: I think it absolutely does. He is, you know, looking
Speaker 11: at the incoming data. He doesn't seem to be somebody
Speaker 11: who was scared to be hiking if we don't actually
Speaker 11: get closer to the inflation goal than would otherwise be
Speaker 11: the case. He doesn't seem to be giving way to
Speaker 11: any sort of pressure. So I mean that's a very
Speaker 11: good thing for markets. The markets should want an independent FED.
Speaker 11: So just pushing through rates for the sake of appeasing
Speaker 11: the president is not something that will ultimately result in
Speaker 11: a better economy or markets at the end of the day.
Speaker 11: And I think we should all feel better about that
Speaker 11: after what we heard today.
Speaker 6: How do you anticipate economists to respond or to react
Speaker 6: to the fact that nine of the members want a hike?
Speaker 6: I mean, how is this going to adjust what Wall
Speaker 6: Street thinks is going to happen with inflation?
Speaker 11: Yeah, and you're seeing that in markets today. You know,
Speaker 11: the shorter end of the curve rates are significantly and
Speaker 11: you have to raise your odds of a near term hike.
Speaker 11: Knowing that many more FOMC members than was generally expected
Speaker 11: or looking for a hike before this meeting, I would
Speaker 11: say somewhere between. The expectation was somewhere between three and
Speaker 11: six members were expected to be penciling in a hike.
Speaker 11: Now you're substantially above that. So now we're talking about
Speaker 11: about half the many is very much interested in hiking
Speaker 11: rates given the data that we have today. So whatever
Speaker 11: your odds were of a hike you know before today,
Speaker 11: you know it certainly has to be to be rising.
Speaker 4: If you are just joining us. We're parsing through a
Speaker 4: very noteworthy FED meeting, the first for Kevin worsh as chairman,
Speaker 4: and he made a lot of changes.
Speaker 3: I did want to make one correction.
Speaker 4: I said that there were one hundred and seventy five
Speaker 4: words in the April statement. It was actually three hundred
Speaker 4: and forty one words versus the one hundred and thirty
Speaker 4: one words in this latest statement. As we've been mentioning
Speaker 4: in markets, you can see a real hawkish tilt that
Speaker 4: is filtering through markets. I'm wondering, Jim, from your perspective,
Speaker 4: do you like long bonds better given what we just heard?
Speaker 3: I mean, does this actually give you.
Speaker 4: More confidence that this is a federal reserve that wants
Speaker 4: to anchor inflation expectations at.
Speaker 3: Two point zho not two points something?
Speaker 8: It should The old Wall Street adage that as a
Speaker 8: bond investor, I can stop panicking when the FED starts
Speaker 8: panicking really applies. If the FED is going to vigilant
Speaker 8: about inflation, that in all of it self should be
Speaker 8: positive for bonds. Now today it's positive for bonds with
Speaker 8: the yield curve flattening because they're not rising and yield as.
Speaker 2: Much as the front end of the curve.
Speaker 8: But yes, you know, if you want to go back
Speaker 8: to twenty twenty two, to give another example, the infliction
Speaker 8: rate hit nine percent, but with the FED raising rates
Speaker 8: seventy five basis points of her meeting.
Speaker 2: It never got above four and a quarter the entire year.
Speaker 2: The FED was in full panic mode.
Speaker 8: Bond investors on a relative base is held in Kate.
Speaker 7: You agree, ah man, we have been very underweight duration
Speaker 7: for like the duration of my time here in the city,
Speaker 7: to be fair, and we have debated over and over again,
Speaker 7: what is it going to be that lets us kind
Speaker 7: of extend duration in portfolios? But I just can't get there.
Speaker 7: I mean, our view as at inflation is going to
Speaker 7: be more persistent and broader than a lot of people
Speaker 7: expected for quarters to come. So even against that backdrop,
Speaker 7: against the comments from I'm chair warsh and from kind
Speaker 7: of the tone of the FMC, you know, we're just
Speaker 7: not in a place yet more we're buyers.
Speaker 6: How does this make you think about credit? Would you
Speaker 6: be changing any of your allocation to it or what
Speaker 6: you prefer?
Speaker 7: Yeah, we think about credit a course in the risk
Speaker 7: asset spectrum too, not just in terms of yield. Right,
Speaker 7: And in this case, you know, equities, not credit, have
Speaker 7: had kind of a step down in valuation over the
Speaker 7: course of twenty twenty six because of course earnings have
Speaker 7: been much stronger than the price movement.
Speaker 3: And so you know, we're still close to.
Speaker 7: That kind of fifteen year high in terms of credit valuations,
Speaker 7: but we've come, you know, significantly lower in equities before
Speaker 7: to take our risk asset exposure inequities over credit. We've
Speaker 7: positioned that way over the course of the year. That
Speaker 7: doesn't mean no credit, but we just want to be
Speaker 7: more selective frankly, and I wish I didn't just love
Speaker 7: equities so much and think they're going to go higher.
Speaker 9: Actually a pause to breathe.
Speaker 7: I think, as we've seen over some last trading sessions,
Speaker 7: is a good thing going into the summer. But I
Speaker 7: also wish I could use fixingco more actively in portfolios.
Speaker 7: But given where we are on rates and inflation, as
Speaker 7: I said, we're very underweight duration.
Speaker 6: Staying on that idea, we also heard from Kevin worsh
Speaker 6: Stuffanie about his thought on how restrictive policy is right now,
Speaker 6: and his answer was it's uneven. If you look at housing,
Speaker 6: for instance, FED policy does appears restrictive because you have
Speaker 6: that affordability crisis, not just in the actual housing crisis,
Speaker 6: but in mortgage rates. But he doesn't see that in
Speaker 6: financial markets, noting the record highs that we're seeing inequities
Speaker 6: and the tight spreads that we see in credit.
Speaker 5: How do you think about that?
Speaker 11: Yeah, I mean, so you know, the initial idea, well,
Speaker 11: policy is somewhat uneven. You could initially be interpreted as well,
Speaker 11: that's somewhat of a dubbish comment until he later said,
Speaker 11: you don't really see anywhere outside of housing, So it's
Speaker 11: pointing to that is policy is largely, you know, not
Speaker 11: that restrictive outside of one sector of the economy. So
Speaker 11: once you hear that further information, it suggests that, you know,
Speaker 11: the the economy is certainly running fairly hot relative to
Speaker 11: to sort of where rates are. So, you know, our
Speaker 11: expectation is that was a you know, somewhat somewhat hawkish
Speaker 11: comment after you know, you could initially have been interpreted
Speaker 11: as a little bit more balanced.
Speaker 4: We heard him say confidently Stephanie that he was not
Speaker 4: concerned with how the market was moving in the initial
Speaker 4: aftermath of this press conference. He wouldn't make too much
Speaker 4: of those moves.
Speaker 3: Do you think that that was a mistake.
Speaker 11: No, I mean, I think I think he believes that.
Speaker 11: I think he you know, he he came out and
Speaker 11: delivered a message of you know, credibility, and the market
Speaker 11: is seeing seeing through that. I don't think that was
Speaker 11: something he would wish, you know, wishes wishes, he didn't
Speaker 11: say necessarily. He knew he was going to be coming
Speaker 11: out and delivering, you know, a balance, all though perhaps
Speaker 11: somewhat hawkish message, and that's exactly what he did today.
Speaker 11: He came in there, he painted the FED is a
Speaker 11: very credible institution, one that's working together. He noted, you
Speaker 11: know several times that you know, while they might have
Speaker 11: sort of family FEUs at the table, they're going to
Speaker 11: come out and deliver you know, an important and singular message.
Speaker 11: And that's exactly what he did. So I think he
Speaker 11: you know, came and went exactly as his plan, and
Speaker 11: I think he was very successful in doing so.
Speaker 4: Stephanie just sort of a similar question to what we
Speaker 4: were asking before about whether this gives you more confident
Speaker 4: and some long bonds. Does this make you actually pulled
Speaker 4: down your longer term inflation expectations for the United States
Speaker 4: based on some of the shift and rhetoric.
Speaker 11: Yeah, I think it has to. You know that the
Speaker 11: FED is going to be credible on getting inflation down,
Speaker 11: the market should and we also do take him at
Speaker 11: his word that they are. He's he's planning on getting
Speaker 11: inflation down one way or another. The hope or the
Speaker 11: expectation is you'll get it down through the passage of
Speaker 11: time and inflation naturally coming down because there have been
Speaker 11: shocked to the economy that should eventually fade. But if
Speaker 11: we don't, if that doesn't play out that way, then
Speaker 11: Warsh is certainly going to be behind the Fed hiking
Speaker 11: rates in order to get there. So there are two
Speaker 11: paths to get there, but the end goal is certainly
Speaker 11: going to be that two percent inflation. He very much
Speaker 11: made that clear.
Speaker 3: Stephanie ro thank you so much for your insights.
Speaker 6: Just to go back to what President Trump said, he
Speaker 6: was answering a question from our Josh Wingrove about what
Speaker 6: happened with the FED, and his exact quote was, it's
Speaker 6: all right whatever when asked about the Fed's decision to
Speaker 6: hold interest rates stuff.
Speaker 3: Well, there you go.
Speaker 4: It got the endorsement, I guess of the President of
Speaker 4: the United States. Ship do you think that yield kurt
Speaker 4: flattening is the path of travel from here?
Speaker 11: Yeah.
Speaker 8: If the FED is going to be committed to raising
Speaker 8: rates to fighting inflation, the long end again, as they said,
Speaker 8: on a relative basis, should like it more than the
Speaker 8: front end. Front end yields go up. Long end yields
Speaker 8: kind of hold steady or go up a little bit,
Speaker 8: and you get that FED or you get that Kurt
Speaker 8: flattening Kate, What will.
Speaker 6: You be looking for in the FED minutes when those
Speaker 6: come out in three weeks?
Speaker 7: I mean, I guess I'll be looking for that one
Speaker 7: small tiny bit of discussion for the person who was
Speaker 7: suggesting that there would be space for a rate cut.
Speaker 7: ID love to see kind of how fast that discussion
Speaker 7: laws or how it's addressed. I'll also be you know,
Speaker 7: kind of thinking about overall fleetion expectations. This is something
Speaker 7: we want to see. You know, how does the FED
Speaker 7: talk about that? Are they going to be acknowledging if
Speaker 7: we care a lot more about market pricing? You know
Speaker 7: how that reflects back in terms of their overall debate.
Speaker 7: But in general, I think we already know what we
Speaker 7: need to know, which is like, this was a split
Speaker 7: set of decisions the people with varying different degrees of
Speaker 7: interpretation of the inflation data and the economy, how tight
Speaker 7: financial conditions are, how much we need to worry about
Speaker 7: break events. I mean, no, it's all over the map,
Speaker 7: so I'm not sure we're going to get a single
Speaker 7: cohesive special message from the minutes if.
Speaker 2: I jump in on that.
Speaker 8: There's one other thing that we haven't discussed. The FED
Speaker 8: didn't disclose their vote for the first time ever.
Speaker 2: They didn't tell us.
Speaker 5: Whether it was a twelve zero vote or if there was.
Speaker 2: Any dissenter design.
Speaker 8: Yes, by design, So maybe we'll get that out of
Speaker 8: the minutes. But if we don't get it out of
Speaker 8: the minutes, they're going full ECB, which never discloses their vote,
Speaker 8: and that says to me the fed's more independent that
Speaker 8: there's twelve voters across that table, and they don't want
Speaker 8: to be publishing seventy five votes eighty four votes having
Speaker 8: all these descents.
Speaker 2: So, as he said, they'd rather keep it as.
Speaker 8: A family fight, let them all hash it out in
Speaker 8: the meeting, and then come out with a decision later on,
Speaker 8: and not have to have people put out statements two
Speaker 8: days later about why they dissented for these meetings, So
Speaker 8: it's going to be very different thing, and maybe the
Speaker 8: minutes will help de sign that.
Speaker 6: Let's not forget that Jay Powell was part of the discussion.
Speaker 6: He was in the room because he's a member of
Speaker 6: the FED board, even though he's no longer the FED chair,
Speaker 6: which is a highly unusual Lisa, you has to.
Speaker 4: Wonder exactly what's so broken and whether he personally feels
Speaker 4: a little bit of attachment to the old way of communication,
Speaker 4: given that he was really helming that right now, I
Speaker 4: do want to bring in Jeffrey Rosenberg of black Rock.
Speaker 3: There is a sense right.
Speaker 4: Now in markets that this is a FED that is
Speaker 4: newly renewed, really newly renewing their commitment to controlling inflation, clearly,
Speaker 4: yield curve flattening, clearly risk off and stocks.
Speaker 3: Is this signal or is this noise?
Speaker 2: Well, there's there's a lot of both.
Speaker 12: This is quite the change, and I think we're all
Speaker 12: trying to digest what we just heard.
Speaker 2: I think there's a real risk here.
Speaker 12: Jonathan's not on the program, so I'm going to do
Speaker 12: my best interpretation.
Speaker 2: The first reaction is.
Speaker 12: Not always the right reaction, and I think there's a
Speaker 12: risk here of overplaying the yield curve flattening and the
Speaker 12: questioning of the long end that I'm listening to here.
Speaker 12: So first of all, you know, this is a market
Speaker 12: that is sort of split between the old reaction function,
Speaker 12: which really moved on the dot plot. Right, the nine votes,
Speaker 12: the nine dots voting for a hike were well in
Speaker 12: excessive expectations, and that's what moved the market. But then
Speaker 12: you have Warsh basically telling you we're going to get
Speaker 12: rid of the dot plot. I mean, he got you
Speaker 12: all the way. They almost to the goal line, but
Speaker 12: it didn't want to, you know, pre judge the outcome
Speaker 12: of the of the task force. But it's very clear,
Speaker 12: you know, the task force has its job ahead of it,
Speaker 12: so that underminds a little bit of that interpretation.
Speaker 2: I think the second reaction from the.
Speaker 12: Market is just a very clear hawkish statement.
Speaker 2: But I think here.
Speaker 12: There's the possibility here that the market may want to
Speaker 12: rethink or all I'm rethinking. Not I'm talking about the market,
Speaker 12: but you know, is this hawkish for rates? Or is
Speaker 12: this hawkish for the balance sheet? Because if you look
Speaker 12: underneath what he said, there were some very kind of
Speaker 12: telling interchanges there. And when you think about the pat
Speaker 12: dependency of Warsh and his history during.
Speaker 2: The POSTGFC, you know, first you.
Speaker 12: Know, why was it that the communications of the FED
Speaker 12: became paramount for markets. That interchange about why markets stopped
Speaker 12: paying attention to the data and instead of having their
Speaker 12: own reaction function, they were reacting to what they thought
Speaker 12: the fed's reaction function would be. And that's because the
Speaker 12: era of the POSTGFC was the era of we will
Speaker 12: do whatever it takes and believe me, it will be enough.
Speaker 12: That was the quote from the ECB and Droggy when
Speaker 12: he threatened bond markets that the central banks balance sheet
Speaker 12: was bigger than the market's balance sheet and that ushered
Speaker 12: in or was reflective of an where central banks were
Speaker 12: the dominant price makers and he wants to do away
Speaker 12: with that. Well, what's the primary tool for doing away
Speaker 12: with that. It's the balance sheet. So one of those
Speaker 12: tasks for US is maybe more important than the others
Speaker 12: when it comes to markets and market reactions. Then the
Speaker 12: second interchange that was really quite revealing was when asked
Speaker 12: about restrictiveness. It wasn't so much about the unevenness, but
Speaker 12: what he went on to say about what is the
Speaker 12: source of the unevenness. I found that to be the
Speaker 12: most revealing comment because he said that might be due
Speaker 12: to transmission mechanisms, that one might be about the interest rates,
Speaker 12: that's reflective to housing and the other the easiness of
Speaker 12: financial conditions is about the balance sheet. Well, that's about
Speaker 12: some of the risks of running an ample reserve system.
Speaker 2: That maybe here is being hinted at being changed.
Speaker 12: And if you were to change that, what has been
Speaker 12: the biggest beneficiary of the big balance sheet the flattening
Speaker 12: of the term premium, Right, That was a whole point
Speaker 12: of a lot of the bond purchases was to bring
Speaker 12: down that term premium, and we're still seeing the legacy
Speaker 12: of that benefit. So if the signal here is maybe
Speaker 12: we're gonna be hawkish on the balance sheet, I'm not
Speaker 12: sure your reaction is big curve flattening. I get the
Speaker 12: initial reaction hawkish surprise in terms of the focus on
Speaker 12: price stability, but there may be some other second order
Speaker 12: effects here we'll think about that actually will become first order.
Speaker 8: So, Jeffrey, I got a question for you about the
Speaker 8: balance sheet. I agree with a lot of your sentiment
Speaker 8: about it, and.
Speaker 2: I'm thinking back to.
Speaker 8: Earlier with the FED when they adopted inflation targeting. It
Speaker 8: took under BERNANKI five years before we eventually got inflation targeting.
Speaker 8: We're gonna have to wait five years for them to
Speaker 8: change the balance sheet. Can this institution, especially since they've
Speaker 8: got FED Governor Michael Barr who's kind of against it
Speaker 8: in the first place, to move that fast. So while
Speaker 8: I agree with you about the balance sheet, is this
Speaker 8: something that's going to take years to unfold?
Speaker 2: Jim? I wonder you know we're around the same generation.
Speaker 12: My reaction to the statement was, Wow, that looks like
Speaker 12: one of the first statements I saw in my career Feb.
Speaker 12: Ninety four about the same length, similar kind of tonality.
Speaker 2: And how quickly did.
Speaker 12: FED chair Wash change the communications basically on his first
Speaker 12: day on the job. So I don't think from that
Speaker 12: signal we're going to be waiting with this FED and
Speaker 12: this FED share five years to make these kinds of changes.
Speaker 12: And when asked the question, I think he even intimated
Speaker 12: that he expects these committees to come back by the.
Speaker 2: End of the year.
Speaker 3: Well, Jeff, anyway slice it though.
Speaker 4: This isn't great for risk assets, right, I mean, if
Speaker 4: you're trinking the balance sheet, that's tightening and financial conditions.
Speaker 4: If you're hiking interest rates, that's tightening of financial conditions.
Speaker 4: Does this make you rethink some of your risk bet.
Speaker 12: You know, the FED may be less supportive in terms
Speaker 12: of financial conditions, but it's occurring in an environment where
Speaker 12: the contribution, particularly to risky assets, of the fed's role
Speaker 12: is much secondary, much more secondary to what we're seeing
Speaker 12: in the real economy, right, and that's the AI impact,
Speaker 12: the incredible amount of capital expenditures, the incredible amount of
Speaker 12: earnings growth. So it might be an opportunistic moment for
Speaker 12: the FED to take a step back on supportive financial
Speaker 12: conditions when financial conditions can stand on their own.
Speaker 7: Yeah, I mean, Jeff, I couldn't agree with you more
Speaker 7: on this one. What's been driving the equity market, of course,
Speaker 7: has been the earnings in the AI and the AI ecosystem,
Speaker 7: as well as all the capex beneficiaries and the companies
Speaker 7: and the industries that are benefiting from adopting this technology.
Speaker 7: So it's hard to say that earnings are really coupled
Speaker 7: in any way with the rate position at this point.
Speaker 7: And then if we are fundamentally driven, which our team
Speaker 7: certainly is, we have to stay focused on where the
Speaker 7: earnings are going.
Speaker 9: Who's growing them in this case is.
Speaker 7: The US over everywhere else and regardless of where we are,
Speaker 7: and kind of a relative monetary policy. The one thing
Speaker 7: I just would want to highlight though, is that for
Speaker 7: the fringe companies, the smaller companies, those that are reliant
Speaker 7: on borrowing, people had gotten themselves incredibly excited, as you
Speaker 7: remember in the beginning of the year around rate sensitive
Speaker 7: parts of the equity market, like this is a time
Speaker 7: for rotation, We're going to get excited. But now I
Speaker 7: think we're getting a message very clearly from policy makers
Speaker 7: that the rates trajectory is not lower in the near term.
Speaker 7: At best case, we're kind of flat, and that's not
Speaker 7: going to be an environment where companies that need to
Speaker 7: borrow in order to keep up with their large cap
Speaker 7: counterparts are going to be able to do so at
Speaker 7: a very attractive rate. So that needs to be factored
Speaker 7: into people's expectations for margins and then earnings, and if
Speaker 7: you care about earnings in this case, which we really
Speaker 7: certainly do, that should tilt your size overall exposure.
Speaker 6: I wanted to go back to the idea about how
Speaker 6: communications is changing under Fetcher Kevin Worsh. A question from
Speaker 6: Michael McKee was on communications and press conferences, whether Worsh
Speaker 6: would continue holding them after every meeting. He said that
Speaker 6: they can be a useful way to communicate household and businesses,
Speaker 6: but you need to have something to say. So that
Speaker 6: suggests that perhaps it won't be a meeting a news
Speaker 6: conference after every decision. Having said that, if household and
Speaker 6: businesses are learning from this news conference or listening to this, Jeff,
Speaker 6: what do you think they heard from this new FED chair,
Speaker 6: what's the message for them?
Speaker 12: Well, I think he wants us to reiterate the main message,
Speaker 12: right he said. The other useful thing is everyone here
Speaker 12: in the room helps to amplify. I don't know if
Speaker 12: you said that, but I think it was implied you
Speaker 12: help to amplify that message. And the message was the
Speaker 12: recommitment to the fed's stability price stability of Price's goal.
Speaker 12: And I think that's the message that he wanted to
Speaker 12: get out, the recommitment to the attainment of the goal
Speaker 12: and all the task forces and everything else around that
Speaker 12: is really in service of that, in recognition that for
Speaker 12: the past five years there's clearly been a failing on
Speaker 12: that far on that part.
Speaker 4: Jeffrey Rosenberg of Blackrock, thank you so much for being
Speaker 4: with us and breaking it all down. And Kate Moore,
Speaker 4: Jim Bianco you're still here, Jim. Final thoughts on exactly
Speaker 4: what we've experienced in this history making day.
Speaker 8: We're going to see a different type of FED right now,
Speaker 8: with a different type of objective and communication style, and
Speaker 8: that that's not necessarily a bad thing. I think the
Speaker 8: market reaction is appropriate because part of the path that
Speaker 8: they're going to go on is going to follow a
Speaker 8: lot of the other central banks. In the last week,
Speaker 8: the CBS raised rates, the Bank of Japan has raised rates,
Speaker 8: and now the Federal Reserve is suggesting that they're going.
Speaker 2: To raise rates too, so they're all moving in that direction.
Speaker 7: Okay, I love the overall message again around working with
Speaker 7: the rest of the FOMC, around bringing in outside voices
Speaker 7: to these task forces. But I do want to say something.
Speaker 7: It's important to reiterate that commitment to price stability and
Speaker 7: to the target. But there's a phrase I keeps coming
Speaker 7: back into my mind, which is your action speaks so loudly,
Speaker 7: I can't hear what you're saying. So let's see if
Speaker 7: there's follow through in terms of action and not just
Speaker 7: trying to jobble in the market to say, hey, we
Speaker 7: do care about it, not taking the necessary policy actions.
Speaker 9: In order to get us closer to that goal.
Speaker 7: So I'll be watching very closely what happens over kind
Speaker 7: of the next you know, six to twelve weeks, against
Speaker 7: the next couple of meetings.