Speaker 1: Doves fly at the Fed as official signal they are
Speaker 1: done raising rates, instead raising the number of rate cuts
Speaker 1: they see next year. Officials left the overnight rate unchanged
Speaker 1: at five and a quarter to five and a half percent,
Speaker 1: but they essentially confirm that's it. The money quote from
Speaker 1: the statement gets a one word addition in determining the
Speaker 1: extent of any additional policy firming that may be appropriate
Speaker 1: to return inflation to two percent. The dot plot meanwhile
Speaker 1: sees seventy five basis points of cuts next year, one
Speaker 1: more move than they saw in September. The dispersion is wide, however,
Speaker 1: with eight seeing fewer than those three cuts, five seeing
Speaker 1: more than three. In twenty twenty five, they see an
Speaker 1: additional four rate cuts, one down from September and two
Speaker 1: more in twenty twenty six. The longer run neutral rate
Speaker 1: remains at two and a half percent. Their move comes
Speaker 1: as they significantly lower their median headline inflation forecast this
Speaker 1: year to two point eight percent. As the statement notes,
Speaker 1: inflation has eased over the past year but remains elevated
Speaker 1: in the median forecast. It falls further in twenty twenty
Speaker 1: four to two point four percent two point one percent
Speaker 1: in twenty twenty five and two percent. Finally, in twenty
Speaker 1: twenty six, core pcee inflation three point two percent this year,
Speaker 1: down from September's forecast of three point seven percent. It
Speaker 1: keeps falling, hitting two percent also in twenty twenty six.
Speaker 1: The statement says, quote growth of economic activity has slowed
Speaker 1: from its strong pace in the third quarter, but they
Speaker 1: still revise their median forecast for GDP growth this year
Speaker 1: significantly to two point six percent from two point one
Speaker 1: percent in September. It falls to just one point four
Speaker 1: percent next year. Potential growth in the longer run is
Speaker 1: seen at one point eight percent. No change in their
Speaker 1: unemployment forecast of three point eight percent this year, which
Speaker 1: implies the jobless rate moves up in December because it's
Speaker 1: three point seven percent right now. The next three years,
Speaker 1: the median unemployment rate will come in at four point
Speaker 1: one percent. The decision guys again unanimous.
Speaker 2: Mike McKay, Thank you sir. Let's make it very simple.
Speaker 2: The twenty twenty four dot implying three cuts next year
Speaker 2: from this federal reserve. It doesn't meet the market, but
Speaker 2: it closes the gap and endorses the direction of travel
Speaker 2: over the last four to six weeks in the bond market.
Speaker 2: This is what's falling right now, yields and falling hard.
Speaker 2: We're down nineteen call it twenty basis points lower at
Speaker 2: the front end of the curve on a two year,
Speaker 2: four fifty three. On a ten year, down thirteen at
Speaker 2: four point zero seven percent. Once you figure out where
Speaker 2: the bond market is, take a guess where the FX
Speaker 2: market is. The dollar looks a little something like this
Speaker 2: against the Euro at the moment, weaker, the euro stronger,
Speaker 2: one away forty five. And if you look into equities,
Speaker 2: we endorse move higher by a half of one percent
Speaker 2: this morning on a S and P five hundred, up
Speaker 2: again this afternoon on the Nasdaq by four tenths of
Speaker 2: one percent, Lisa, the rally moves on.
Speaker 3: We could end up getting a sub four percent tenure
Speaker 3: yield by the end of this trading session. As the
Speaker 3: AS people pass through this to me, the fact that
Speaker 3: this is unequivocally dubvish, that they endorse the Fed's idea,
Speaker 3: that the market's idea of rate cuts and then some
Speaker 3: really speaks to a question of is there going to
Speaker 3: be clean up acted on I on one or is
Speaker 3: this going to be Fed chair Powell saying, we're just
Speaker 3: responding to the data in front of us, and it
Speaker 3: looks pretty good.
Speaker 2: Well, we talk about tom, the risks, the potential of
Speaker 2: being whip swored by Chairman Powell at about twenty seven
Speaker 2: minutes time. The early take, and we'll see if it sticks.
Speaker 2: The early take is this. Ultimately you're looking for three
Speaker 2: cuts next year. Our four or five cuts no longer
Speaker 2: stands that ridiculous. Now you come closer and closer to
Speaker 2: where we were before no hedging here.
Speaker 4: I was going back and forth with a professor at
Speaker 4: the University of Cambridge and two standard deviations down on
Speaker 4: tenure yield. John, we almost came to it. We came
Speaker 4: very very close to a four point eight percent, four
Speaker 4: point oh seven head four six. Well, to see what
Speaker 4: plays out with the press conference. But this is frankly
Speaker 4: more than we expected. We also expect wonderful conversation at
Speaker 4: this moment with Diane Swarks, she's chief economist at KPMG. Dan,
Speaker 4: you know, the interest space is the litmus paper of
Speaker 4: our economic and our FED system. Are we seeing a
Speaker 4: constructive reduction in yields or does this signal slower economic growth?
Speaker 5: Well?
Speaker 6: I think what we're seeing is that the bond market
Speaker 6: is leaning into the concept of the fact that inflation
Speaker 6: has plummeted so rapidly. I think this is a full
Speaker 6: inflation story. There's no question that the Fed has showed
Speaker 6: its cards here. They're very excited about the fact that
Speaker 6: inflation has come down at its fastest pace outside of
Speaker 6: World War Two, the Korean War, and the Vulcar recessions.
Speaker 6: That is really stunning given we've not seeing a major
Speaker 6: increase in unemployment with that, and they're feeling good about it.
Speaker 6: And I think you're going to see some of that
Speaker 6: euphoria from Chairman Powell as well. It's more than we
Speaker 6: expected that. It is important to remember that remember last
Speaker 6: time they had a rate hike Pope before the end
Speaker 6: of the year, So just by removing one rate hike
Speaker 6: out of it, that puts one more cut into twenty
Speaker 6: twenty four as well. And I think that sort of
Speaker 6: nuance is lost in translation, but it is part of
Speaker 6: the story as well. As they're not really backing off
Speaker 6: higher for a period of time. The next question is
Speaker 6: higher for how long? Some big things thinks we might
Speaker 6: be close to higher for long enough.
Speaker 2: Some big moves in this bond market right now, we're
Speaker 2: down seventeen basis points on a front end, or a
Speaker 2: two year at four fifty six on a ten year,
Speaker 2: down eleven to four point zero nine percent alongside down
Speaker 2: swamp and place asch Greg Peters of PGM jumps in
Speaker 2: front of the camera. Greg, let's talk about it in
Speaker 2: about twenty four minutes time. Chairman Power has an opportunity
Speaker 2: to clarify some of this. Do you think it needs to.
Speaker 7: Well, well, I'm not sure there's much you can do
Speaker 7: at this point. I mean, the market just absolutely loved,
Speaker 7: loved this result. I thought the market was already leaning
Speaker 7: a little too much. Evidently that wasn't the case. We
Speaker 7: weren't leaning enough. So, you know, doves fly and bulls
Speaker 7: run after this, and I think it's really hard for
Speaker 7: how to put that genie back in the bottle.
Speaker 3: Sees that give you a sense doves flying and bulls running,
Speaker 3: the idea of FOMO and just how much that's taken
Speaker 3: over the market after so many people missed out in
Speaker 3: five percent tenure yields.
Speaker 7: I think that's just artifact of the current market, right.
Speaker 7: I mean, the markets are much more volatile, They moved
Speaker 7: much more powerfully. I think that's just the construct right
Speaker 7: with CTAs and al those and other sorts of things.
Speaker 7: And I think this is the world that we live in, honestly,
Speaker 7: So I don't think this is a unique feature anymore.
Speaker 7: I think this is quite commonplace.
Speaker 4: Ye, Dan Swank, I did the nominal GDP math here
Speaker 4: on the inflation gestament and the growth gestament, and boy,
Speaker 4: it sure looks to me like a four percent nominal
Speaker 4: GDP even south of that modeled out over the next
Speaker 4: twenty four months. How do our viewers and listeners react
Speaker 4: to that? If our animal spirit post pandemic diminishes down
Speaker 4: sub four percent?
Speaker 6: We know what's interesting about it is also the part
Speaker 6: that we didn't talk about in the SEPs is that
Speaker 6: the Fed's long term estimates of what the neutral rate
Speaker 6: on the FED funds rate, if you look at their ranges,
Speaker 6: that has actually continued to move up. And so I
Speaker 6: think what you're seeing here is an economy that the
Speaker 6: FED expects to cool below potential unemployment to come up
Speaker 6: a little bit, although we might not. The consumer has
Speaker 6: really taken everything the Fed's tried to deal them, and
Speaker 6: you know, taking it with stride and kept on going
Speaker 6: and I think that may mean some upside risk to
Speaker 6: the economic growth side of this situation. But it's really
Speaker 6: interesting that the Fed's terminal rates now look like they're
Speaker 6: starting to move up even more than they were last time,
Speaker 6: and that seems to have gotten lost in translation.
Speaker 5: That's not what the market's focused.
Speaker 6: On right now, But I think the FED is looking
Speaker 6: at an economy that's more resilient and that will take
Speaker 6: off more rapidly as rates come down.
Speaker 3: Does that co here with what you think that basically
Speaker 3: we're talking about a higher neutral rate as we have
Speaker 3: no landing or a very very soft one.
Speaker 5: Exactly.
Speaker 6: I think we are at a higher non inflationary rate,
Speaker 6: and I think that's something you see it just in
Speaker 6: the slowness with which the FED puts out its cuts
Speaker 6: and not getting back The scent on rates is not
Speaker 6: as rapid as the accent on rates and the need.
Speaker 6: You see it in their long term forecast. Even as
Speaker 6: all this good news has come in, it's come in
Speaker 6: and it's really shifted the narrative in terms of, you know,
Speaker 6: we're trying so hard to get up to in inflation
Speaker 6: target for so long, the FED does still believe that
Speaker 6: we're in a world, and it sort of was illustrated
Speaker 6: by the volatility and the bond market. We're just talking
Speaker 6: about that we're in a world that's more susceptible to
Speaker 6: external shocks and.
Speaker 8: It once was.
Speaker 6: We've also gotten incredibly good news on oil prices coming down,
Speaker 6: helping to spill over into inflation.
Speaker 5: All of that's great.
Speaker 6: It doesn't mean that we're going into the world of
Speaker 6: subpar growth, of inability to get inflation up that we
Speaker 6: left in the twenty tens. We have healed balance sheets
Speaker 6: except for the federal government, quite significantly since then, and
Speaker 6: I think that's where the paradigm shift is.
Speaker 2: Diane, Let's go through the projections together. The median for
Speaker 2: twenty twenty four GDP one point four percent, unemployment four
Speaker 2: point one, core PCE two point four, Fed funds four
Speaker 2: point six.
Speaker 9: Dan.
Speaker 2: Not so long ago you and I used to talk
Speaker 2: about this being aspirational. How realistic is it now?
Speaker 6: It now seems entirely possible. And you know what, more
Speaker 6: things than I can list have surprised me about this
Speaker 6: economy and this is not where we thought we'd be.
Speaker 6: But how glorious it is that we're here. It's not
Speaker 6: been easy. It's not as if interest rate sectors aren't
Speaker 6: feeling pain.
Speaker 5: They are.
Speaker 6: The housing market is still stuck in a mortgage winter,
Speaker 6: even though rates are coming down. This will help out
Speaker 6: unlock some demand, but prices are still too high and
Speaker 6: the supply of homes is still too much in a shortage,
Speaker 6: especially in the single family home market. So we know
Speaker 6: there's still strains in this economy. But the good news
Speaker 6: is we didn't have to get here without the kind
Speaker 6: of pain that you know. I think back on that
Speaker 6: speech eight minutes, thirty four seconds August twenty twenty two.
Speaker 5: It was like a bucket of ice.
Speaker 6: You know, whether cha Chairman Powell really believed we would
Speaker 6: have to go through a recession in order to rid
Speaker 6: ourselves of this inflation and that's just not been the case.
Speaker 6: Much more of it was supply chains uncurling and the
Speaker 6: problems that we had there, along with some time to
Speaker 6: let demand the production pick up with demand, and I
Speaker 6: think that's important.
Speaker 3: Otherwise known as transitory, just not called transitory, Greg, could
Speaker 3: you buy into this this.
Speaker 6: Was that we're transitory over a much longer period of time.
Speaker 3: But Peters, can you weigh in a little bit on
Speaker 3: whether you think this is plausible, or whether you would
Speaker 3: lean against us right now, or whether you would actually
Speaker 3: even sell and wait for a better buying moment.
Speaker 7: I mean, I do think the markets are really pushing
Speaker 7: the limits here. There's so much good news being priced in,
Speaker 7: whether it's inflation, whether it's growth. You know, the yield
Speaker 7: curve is still inverted, right, and so like, how do
Speaker 7: you reconcile the fact that investors are feeling really good
Speaker 7: about the growth outlook, inflation's coming down, and the curves inverted,
Speaker 7: and so I think there's still some repricing ahead. I
Speaker 7: think there's still quite bumpy elements.
Speaker 9: In the road ahead.
Speaker 7: And so yeah, I'm I'm kind of thinking the market
Speaker 7: is really taking this to the brank here, and I'm
Speaker 7: and I would be inclined to go the other way, Greg.
Speaker 4: I'm looking at money market funds five percent and all
Speaker 4: the other stuff we blather about each and every day.
Speaker 4: And I know we get convexity in the stock market,
Speaker 4: do we get convexity in the bond market? When I
Speaker 4: got a ten year old yield poping to one point
Speaker 4: nine to one, I got the ten year yield on
Speaker 4: plus excuse me, minus two standard deviations right down on
Speaker 4: four point ho six percent. Can there be such a
Speaker 4: thing as momentum in the bond market? Price up, yield down?
Speaker 9: Yeah, I think you're saying it, Tom.
Speaker 7: I mean, if you look at the total return in
Speaker 7: the bond market over the past month or so, it's
Speaker 7: been you know, quite astounding, right know, anywhere from five
Speaker 7: to you know, eight percent.
Speaker 9: That's real money, right, And so you've seen it.
Speaker 7: And so there has been some quote unquote positive convexity
Speaker 7: just given the low level of prices.
Speaker 9: Right. But but you know, the real question is not
Speaker 9: what happened, but where are we going?
Speaker 7: And so you know, once again I worry about, you know,
Speaker 7: the current market really squeezing a lot of the total
Speaker 7: return out of the market way too soon.
Speaker 2: Well, look at the move this afternoon. It's a monster move.
Speaker 2: We're down almost twenty basis points at the front end
Speaker 2: of the curve. And let me to share a quote
Speaker 2: with you. It would be premature to conclude with confidence
Speaker 2: that we've achieved a sufficiently restrictive stance or to speculate
Speaker 2: on when policy might ease. Chairman Pal not even two
Speaker 2: weeks ago on December one, Diane swam In fifteen sixteen
Speaker 2: seventeen minutes time when we hear from the chairman again,
Speaker 2: why would the message be any different.
Speaker 6: Well, I think he's still going to be cautious in
Speaker 6: his messaging. But you know, you saw a little bit
Speaker 6: of the lightness in his step. And we saw the
Speaker 6: bond market rally November first, even though we had what
Speaker 6: was a hawkish set of you know, in September, a
Speaker 6: hawkish outlook. By November one, you saw the market unwined
Speaker 6: significantly since then because of how you four and a
Speaker 6: little bit excited that Terre Powell was in that press conference,
Speaker 6: and so I think it's going to be hard for
Speaker 6: him to walk back a lot at this point in time.
Speaker 6: I think it would do him good to be cautious
Speaker 6: and to be a little bit you know, contingent on
Speaker 6: you know, we're excited, but here's the risks.
Speaker 5: But I think it's going to be hard.
Speaker 6: Given they signed off on this statement, and they signed
Speaker 6: off on this forecast, and this is a dubbish is
Speaker 6: about as dubbish as we could have expected. I this
Speaker 6: is more than I expected in terms of dubbishness. And
Speaker 6: I think it's hard for him to walk it back.
Speaker 6: And I don't think he would be walking it back
Speaker 6: all that much given the fact that they all.
Speaker 3: Signed off on it, which is the reason why you're
Speaker 3: seeing it.
Speaker 5: I going to add to it.
Speaker 6: Yeah, he's not going to push back too.
Speaker 5: Much, which is the reason why.
Speaker 3: It's a good point that you're seeing an eighteen basis
Speaker 3: point drop in the two year yield as time goes on,
Speaker 3: five point four point five to four percent. Greg you
Speaker 3: said you'd push back against this. The market's really taking
Speaker 3: this to the brink. What makes you feel that way?
Speaker 3: And what could you hear from share Powell that could
Speaker 3: change your mind?
Speaker 9: Well, so, I'm not sure I'm going to hear much
Speaker 9: from CAA. Powell.
Speaker 7: You know, as I mentioned, I think the genies out
Speaker 7: of the bottle. I think it's hard to walk this back.
Speaker 7: I think at some level he is quite pleased, and
Speaker 7: rightfully so. Right they've seen a tremendous amount of dissemplation
Speaker 7: come through during the course of this year, and that's
Speaker 7: something to be proud of. But I guess just from
Speaker 7: a market pricing fixed the income perspective, you know, do
Speaker 7: we really want to be in an environment where we're
Speaker 7: taking down yields so aggressively, where we're basically to see
Speaker 7: these rate cuts come through and then some in order
Speaker 7: to achieve toald return. So you know, to me, it's
Speaker 7: just a balance about risk reward and what's embedded in
Speaker 7: the price. And I think, quite frankly, there's a lot
Speaker 7: of good news embedded in the price, and that's always
Speaker 7: something that you should, you know, take a step back a.
Speaker 2: Ton of good news price. Then over the last month,
Speaker 2: Greg pay this, Diane swamp to at the very best
Speaker 2: going into this Federal Reserve news conference, Chairman Pound at
Speaker 2: about fourteen minutes time, thanks to both of you, let's
Speaker 2: talk about these moves. No big changes to that statement,
Speaker 2: no change in the decision, but some monster changes to
Speaker 2: the projections. Take twenty twenty four, for instance, FED Funds
Speaker 2: medium dot now four point six percent. Back in September
Speaker 2: that was five point one. This is a FED some
Speaker 2: median dot implying that maybe three cuts are in our
Speaker 2: future from this Federal Reserve. The market maybe fifty basis
Speaker 2: points lower than that. But ultimately, Lisa, we've closed the
Speaker 2: gap and we've endorsed the direction of travel over the
Speaker 2: last six weeks, which is why you've got this monster
Speaker 2: move again on a two year by nineteen basis points
Speaker 2: of four to fifty three. So if you don't stop
Speaker 2: the direction, if you don't stop the momentum, what happens.
Speaker 2: You did more the same day, Lisa, it isn't that what's.
Speaker 3: Happening, Which is what Pria Misra said that this was
Speaker 3: the asymmetry, and this is what Greg Peters as well
Speaker 3: as Diane Swank both said, which is it was more
Speaker 3: than they expected and certainly more than the market expected,
Speaker 3: and the market is cheering. Basically, this message is that
Speaker 3: Chairpower cannot walk this back. The rest of the Fed
Speaker 3: members put this in. So he either leans in, either
Speaker 3: gives an explanation of weakening in the economy that isn't
Speaker 3: seen in the projections, or he kind of equivoquates and
Speaker 3: basically is, you know, circling around with his tail.
Speaker 2: Neil Datta renaissance, macro super modest. Do you want to
Speaker 2: quote complete vindication of a March cut? Ninety five? Is
Speaker 2: a good analog? Surgical cuts are coming. Buckle up, risk,
Speaker 2: appetite has room to run. Well did he nail it?
Speaker 2: He nailed it for sure. Check out the scores going
Speaker 2: into the news conference on the S and P. Five
Speaker 2: hundred and fourth day of gains on the carts unless
Speaker 2: Chairman Powell messes that up for you. On the s
Speaker 2: and P five hundred up zero point six percent on
Speaker 2: the SMP. Into the bond market. I know we've seen
Speaker 2: some big moves in fixed income, but these are big
Speaker 2: moves again. We're down twenty basis points on a two
Speaker 2: year four fifty three fifty three. We've seen big moves
Speaker 2: coming into today's decision. We're down large again. We're down
Speaker 2: twelve on a ten year at four point zero eight percent.
Speaker 2: Let's continue the conversation with Bank for America's Michael Gapan.
Speaker 2: So Batri Jappa of sock gen so Bad refers to you,
Speaker 2: you've had some time to chew over this one.
Speaker 9: What's you take on it?
Speaker 10: Yeah, definitely the dubbishness in the dots caught me by surprise.
Speaker 10: But I think it seems like they're looking at inflation
Speaker 10: starting to come down. Maybe they're looking at three month
Speaker 10: and six month moving averages and doing exactly what they
Speaker 10: did a couple of years back. When you know, they're
Speaker 10: looking at three months and six month moving averages, which
Speaker 10: we're running a lot harder than the market, and so
Speaker 10: they had to come in and start hiking. So I
Speaker 10: think you're looking at a very similar scenario here where
Speaker 10: they're willing it seems to adjust policy.
Speaker 5: Given the data that we have right now on inflation.
Speaker 4: Michael Gape and thrilled to have you with us, particularly
Speaker 4: with the reach of the Bank of America across all
Speaker 4: of America, the consumer, the pulse of our seventy percent consumption.
Speaker 4: Do you buy this idea of the massive potential GDP
Speaker 4: slowdown of the next two years? Sub two percent real
Speaker 4: GDP inflation that's quite acent nominal GDP, it's four percent
Speaker 4: if we're lucky. Is that the evidence that the Bank
Speaker 4: of americacies.
Speaker 9: Unbalance?
Speaker 8: Yes, So our ba A card data has been showing
Speaker 8: resiliency and consumer spending, a pretty good holiday spend. So
Speaker 8: our view is the slowdown, if we get one, is
Speaker 8: going to come in your non consumer related components, business spending,
Speaker 8: the fiscal drag, and so forth. So we think it's possible.
Speaker 8: We think the narrative around the idea that you don't
Speaker 8: need as much labor market pain to bring inflation down.
Speaker 8: The data is kind of confirming that, and it matches
Speaker 8: with what we're seeing from our card data and around
Speaker 8: the health of the consumer.
Speaker 2: So yes, the.
Speaker 8: Economic activity should moderate, even personal consumption spending should slow.
Speaker 8: But we've gotten a lot of evidence here now over
Speaker 8: the past few months that maybe we don't need to
Speaker 8: crimp demand as much to return inflation to two percent,
Speaker 8: and we can allow some of these supply side factors,
Speaker 8: whether it's supply chain or the rebound in the labor
Speaker 8: force to help us out.
Speaker 3: Michael, could this rip boring rally go against that? Could
Speaker 3: it make it more difficult to achieve the actual end
Speaker 3: of the soft landing by rejuvenating certain demand and rejuvenating
Speaker 3: animal spirits.
Speaker 8: Possibly, But I think you know from the FED kind
Speaker 8: of modulates demand right, that they don't really control the
Speaker 8: supply side as much. And so I think what the
Speaker 8: balance here is to say, Okay, maybe demand picks up
Speaker 8: a little bit, but that's probably more about the timing
Speaker 8: of the cuts and the pace of the cuts in
Speaker 8: that end terminal rate rather than the direction of travel.
Speaker 8: So yes, there's a risk that things would ease to quickly.
Speaker 8: The FED prejudges this and they have to come back
Speaker 8: later and backtrack. That's going to be around the wait
Speaker 8: and see and how much confidence that they have in
Speaker 8: order to start a cutting cycle. But I think that's
Speaker 8: more about the timing and the pace of cuts than
Speaker 8: it is about having to.
Speaker 3: Backtrack so badre you and many other people were expecting
Speaker 3: hawkish pushback. That was actually the consensus belief coming into
Speaker 3: this meeting. Does anything about this statement make you rethink
Speaker 3: how you would respond to this that basically load the
Speaker 3: boat fomo is on, let's go.
Speaker 5: Yeah, I know, definitely.
Speaker 10: I mean, I think the Pomo trade has already happened, right,
Speaker 10: We've had ten years declined from five percent all the
Speaker 10: way down to now close to four percent in a
Speaker 10: very short amount of time. So you know, I think
Speaker 10: I would have to agree with the statement you read
Speaker 10: from new data earlier, which is maybe the market is
Speaker 10: looking towards a much more of an adjustment and policy
Speaker 10: as we go along motors OPPRANDI from the Fed.
Speaker 5: I mean, that's not our view.
Speaker 10: We still think that the FED is going to keep
Speaker 10: policy on hold at least till till May, so they
Speaker 10: see a very clear signal that inflation is trending towards
Speaker 10: their two percent target, and we think that the economy
Speaker 10: broadly speaking, should hold up up until that point because
Speaker 10: it's I mean once we get to that point, I
Speaker 10: think the FED can very quickly cut freights innovation amount
Speaker 10: of time if there is a meaningful store on. The
Speaker 10: risk is that if they deliver these cuts too soon,
Speaker 10: then you could see perhaps a resurgence of this sort
Speaker 10: of services side inflation that we've been experiencing over the
Speaker 10: last couple of years.
Speaker 4: John, I'm going to predict that everybody's going to go
Speaker 4: in and they're going to blow up their call. They're
Speaker 4: going to blow up their year end Outlook, I hear
Speaker 4: all this good talk. I think Michael Gabin is absolutely dead.
Speaker 4: It's not that it's both. This is this is really
Speaker 4: really important. This goes back to Diane swamp Gino, Martin
Speaker 4: Adams and others. This to me is far more a
Speaker 4: real economy analysis redounding back to these dynamics. In the
Speaker 4: last two minutes, John, I got a four oh seven
Speaker 4: retest of the ten year yield down thirteen beefs. If
Speaker 4: that puppy breaks through four point zero six, that is
Speaker 4: a massive signal that everybody has to rip up the
Speaker 4: script this afternoon.
Speaker 2: Reach out to early this morning that if the party
Speaker 2: started at the end of October. Governor Walla bought the
Speaker 2: tequila in the last couple of weeks.
Speaker 9: It's not him.
Speaker 2: I don't think we need to talk about I think
Speaker 2: we need to be talking about New York Fed President
Speaker 2: John Williams.
Speaker 9: Mike.
Speaker 2: I remember when President Williams a number of months ago
Speaker 2: engaged a conversation about reducing interest rates as inflation continued
Speaker 2: to fall, just to keep real rates stable and so
Speaker 2: ensure that things didn't become tighter over time. Is it
Speaker 2: too early, too premature for chairman Power to engage in
Speaker 2: that type of conversation in this news conference.
Speaker 9: I don't.
Speaker 8: I mean, so, maybe I'm a bit of a contrarian here,
Speaker 8: because you know, we thought the medium dot would come
Speaker 8: in at four to six. We expected to shift in communication.
Speaker 8: So what I'm hearing today so far is in line
Speaker 8: with what I thought. So I do think it would
Speaker 8: be a proper first step to get out of a
Speaker 8: hawkish bias and a hiking bias and then start getting
Speaker 8: into a world of you know, talking at least about
Speaker 8: a more balanced reaction function, not ruling out hikes, but
Speaker 8: also talking about conditions under which you might ease. You
Speaker 8: have to start moving in that direction inflation, at least
Speaker 8: at the moment is decelerating fast enough where it's not
Speaker 8: crazy to think you could cut in March if you're
Speaker 8: a committee member based on inflation alone. So there's not
Speaker 8: a lot of time to prepare between now and then.
Speaker 8: So it's something I think you do need to entertain.
Speaker 3: So Aboudra, I'm curious your view on something we were
Speaker 3: hearing from died Swank that this sort of soft landing
Speaker 3: implies actually a higher long term neutral rate, that essentially
Speaker 3: there is more strength in this economy that can handle
Speaker 3: rates at a higher level. Are you seeing that within
Speaker 3: some of these projections and kind of adjusting your expectation
Speaker 3: just for that base of where the Fed's going to
Speaker 3: ultimately cut too.
Speaker 5: Yeah, that's and I completely agree with that.
Speaker 10: I mean, our view is that the FED will cut
Speaker 10: rates by one hundred and fifty basis points next year,
Speaker 10: and there will be more cuts in twenty twenty five,
Speaker 10: with the FED funds rate getting a little bit north
Speaker 10: of three percent, so that's you know, pretty much getting
Speaker 10: down to where they have their long run neutral rate
Speaker 10: of two and a half percent.
Speaker 5: So of trajectory makes sense.
Speaker 10: The question really is what does the curve do under
Speaker 10: the circumstances and that's really where I feel like there's
Speaker 10: the story of the rebuilt in term premier is still
Speaker 10: very much in play because the demand dynamics are still
Speaker 10: very skewed. We still have a decent amount of supply,
Speaker 10: and I think that that could lead to a meaningful
Speaker 10: steepening of the curve.
Speaker 5: That while the cutting happens.
Speaker 4: The sobrieter to the heritage of derivatives at Sakchen where
Speaker 4: I have no idea where this happens. But if we
Speaker 4: have a foot, what does at least the money market
Speaker 4: fund now five point what well, five point five point
Speaker 4: at what points so subted? If we bring the money
Speaker 4: market fund down, does a wall of money try to
Speaker 4: find a new warm place.
Speaker 10: Yeah, that's that's the risk, right. We have almost six
Speaker 10: trillion in money market funds. That money is the returns
Speaker 10: are not attractive. Are going to try to migrate towards
Speaker 10: other parts of the of the ill curve?
Speaker 4: Or give me a level? I mean, this is so important.
Speaker 4: Is this going to happen at four point eight percent?
Speaker 9: Do we got to wait?
Speaker 4: Wait for three point eight percent? When is the money
Speaker 4: market game over?
Speaker 10: Well, when the curve dis inverts, perhaps at the current
Speaker 10: time two year yields is still higher than where tenure
Speaker 10: yields are, and so you're going to see money continue
Speaker 10: to flow into the into the very front end of
Speaker 10: the yield curve.
Speaker 5: At some point. I think that when the market, when when.
Speaker 10: Cuts have been sufficient, cuts have been delivered, and it's
Speaker 10: been stimulative, I think that you're going to see that
Speaker 10: money migrate towards risky assets or other higher yielding assets.
Speaker 10: But at the current time, you know, with the curve inverted,
Speaker 10: I think that the front end still looks quite attractive
Speaker 10: to us on a duration adjusted basis.
Speaker 2: Let's play questions for Chair and Pound the news conference
Speaker 2: about three minutes away. Michael Gapin, what would you ask today?
Speaker 8: I mean I would ask kind of what you One
Speaker 8: question would be what you're referencing, essentially, is what's the
Speaker 8: purpose of the cutting cycle to get policy easy to
Speaker 8: track a real rate of interest that you think is appropriate.
Speaker 8: If so, what's what's that rate? The second I would
Speaker 8: ask him is policy really restrictive? What evidence outside of
Speaker 8: housing do you have to suggest that that policy is
Speaker 8: currently restrictive? So that'd be a bit of a counterfactual
Speaker 8: to his view, and otherwise the third question I'd ask
Speaker 8: is you know, is it feasible just to make it clear,
Speaker 8: is it feasible to cut on the inflation data alone?
Speaker 8: Or do you need to see weakness and activity in
Speaker 8: the labor market.
Speaker 2: Those are three you don't get through Markey, lucky. If
Speaker 2: you get two, if you might make if you get one,
Speaker 2: Bach give us the final word. What would you ask today?
Speaker 10: I'm curious to see the federal be inclined to deliver
Speaker 10: sort of you know, adjustments in policy like they did
Speaker 10: back in the nineties, because that's something that the market
Speaker 10: is looking towards. This Perhaps they adjust, they stay on hold,
Speaker 10: and then they cut some more if needed. So it's
Speaker 10: not sort of your conventional sacke I think to me
Speaker 10: that's a very underpriced risk in the market is a
Speaker 10: ninety style rate cut cycle.
Speaker 2: So Maatri Jappa, Michael Gapin to the two of you,
Speaker 2: thank you, just put in as always Michael Gapin over
Speaker 2: at Bank of America, back in the seat, and good
Speaker 2: to see. Absolutely now do it looking for three cuts
Speaker 2: to go into that median dot in twenty twenty four
Speaker 2: at least? So I think he's right to talk about
Speaker 2: not just dates but thresholds. What is the bar where
Speaker 2: is the bar or when you start to deliver those cuts,
Speaker 2: what are you looking for? And now you've priced that
Speaker 2: implied that in your projections, have they got to engage
Speaker 2: in that conversation over the next hour.
Speaker 3: It is lower inflation enough, right just by de facto?
Speaker 3: Or do they have to see some other sort of weakness?
Speaker 3: And what are the parameters? What are the levels?
Speaker 5: These are important questions.
Speaker 3: I also just think that right now, what's he going
Speaker 3: to say other than just read it and we've got
Speaker 3: some sort of new sense that we are disinflating and
Speaker 3: it's a positive thing, and we'll be vigilant and watch.
Speaker 5: It and go with where we think.
Speaker 4: It's a brook preserved from our guests. They did not
Speaker 4: expect this. I did not expect this. This is a
Speaker 4: sea change shift back to the regime pre pandemic. And John,
Speaker 4: you nailed it bringing up John Williams and the idea
Speaker 4: months ago of a shocking reset to the our star
Speaker 4: before the pandemic, and today is a massive shift, a
Speaker 4: sea change moment in terms of getting beyond the pandemic.
Speaker 2: I went over this quote a little bit early this
Speaker 2: morning of Chairman POWs not even two weeks ago. It
Speaker 2: would be premature to conclude with confidence that we have
Speaker 2: achieved a sufficiently restrictive stance, or to speculate on when
Speaker 2: policy my aid.
Speaker 4: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 4: I'm Tom Keen, and this is Bloomer