WEBVTT - Bloomberg Surveillance: Lara Rhame on 2024 Rate Cuts

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<v Speaker 1>Lara Ram, chief US economist at FF Investment, saying this,

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<v Speaker 1>it is incredible how long it has taken the market

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<v Speaker 1>to let go of hopes for a March rate cut.

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<v Speaker 1>My expectation is that we get two to three rate

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<v Speaker 1>cuts in the second half of this year. Lara's calling

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<v Speaker 1>them surgical rate cuts. Lara and pleased to say, joined

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<v Speaker 1>us now for more. Let's get into what's happening in

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<v Speaker 1>this bond market, Lara. We've had a big reassessment of

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<v Speaker 1>what is happening with the Federal Reserve, and yields have

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<v Speaker 1>climbed on a ten year over the last two sessions

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<v Speaker 1>by double digits. Are you surprised by how little we've moved?

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<v Speaker 1>Do you expect us to move even more based on

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<v Speaker 1>the data we've had so far.

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<v Speaker 2>Yeah, you know, I think it's been a reassessment. But

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<v Speaker 2>given that we were at five percent as recently as October,

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<v Speaker 2>I think there is.

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<v Speaker 3>Room to have even more of a reassessment.

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<v Speaker 2>I think this idea that we're sort of, you know,

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<v Speaker 2>just pushing rate cuts out month by month by month.

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<v Speaker 2>To me, Ben's the question of how we're really stepping

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<v Speaker 2>back and reevaluating as investors the impact of a higher

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<v Speaker 2>yield world, and you know, you add up the you know,

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<v Speaker 2>the sheer supply of treasury coming online, we're gonna be

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<v Speaker 2>able to get those auctions done.

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<v Speaker 3>But all else people, well, that's higher yield.

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<v Speaker 2>The inflation genie is not fitting back in the bottle.

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<v Speaker 2>That's a higher yield story.

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<v Speaker 3>And then the growth. At the end of the day,

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<v Speaker 3>I'm actually surprised yields aren't higher than they are.

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<v Speaker 1>Lara, With that in mind, why do you think is

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<v Speaker 1>better to express the stronger data through the bond market

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<v Speaker 1>the longer ended a curve and not necessarily at the

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<v Speaker 1>front end.

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<v Speaker 2>Well, I think the inversion and the fact that short

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<v Speaker 2>term mualds are so much higher than long term yields

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<v Speaker 2>is really still a signal that the bond market is

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<v Speaker 2>nervous about some coming slow down, or it's also muscle

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<v Speaker 2>memory from the fact that when we do have problems,

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<v Speaker 2>the FED slams rates down to zero. I think the

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<v Speaker 2>FED is in a place, maybe a good place it

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<v Speaker 2>hasn't been in for a long time. If the economy

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<v Speaker 2>slows more more than sort of a Goldilocks landing. And

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<v Speaker 2>I agree with Lisa that phrase is feeling overused at

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<v Speaker 2>this point, the Fed has room to cut rates maybe

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<v Speaker 2>a little bit more, but these six rate cut forecasts,

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<v Speaker 2>to me, it need to come with some more significant

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<v Speaker 2>economic slowdown, which wouldn't be great for equities.

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<v Speaker 4>Laurie, you were talking about higher yields ahead, particularly in

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<v Speaker 4>the long end. How much higher could you foresee at

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<v Speaker 4>a time where a lot of people think we're kind

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<v Speaker 4>of range bound for the foreseeable future.

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<v Speaker 2>You know, you look at long tracks of a history

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<v Speaker 2>when nominal GDP aligned.

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<v Speaker 3>Pretty closely with long term yields.

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<v Speaker 2>I don't want to make some insane forecasts of yields

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<v Speaker 2>going up above six percent, but you look at where

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<v Speaker 2>we're growing today and say we settle around five percent

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<v Speaker 2>nominal GDP growth, I don't think it's out of the

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<v Speaker 2>question that we would hit five percent on the tenure

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<v Speaker 2>at some point this year, and I just don't think

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<v Speaker 2>markets are prepared to that for that. The complacen see

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<v Speaker 2>that we're seeing is coming from two places. It's coming

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<v Speaker 2>from expectations that growth is just going to be very

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<v Speaker 2>optimistic and that inflation's going to come down.

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<v Speaker 3>But it's also coming from complacency that yields are going

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<v Speaker 3>to stay low.

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<v Speaker 2>You know, long term meals are going to stay low,

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<v Speaker 2>and I just think we need to prepare ourselves for

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<v Speaker 2>a lot of yield volatility.

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<v Speaker 3>We saw that last year. I think that carries forward.

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<v Speaker 4>One of the big things that people have been struggling

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<v Speaker 4>with is what is the neutral rate?

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<v Speaker 3>Right?

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<v Speaker 4>Because if it is much higher, rates could stay at

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<v Speaker 4>that level for longer and you could see things kind

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<v Speaker 4>of chug along. Do you have a sense of whether

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<v Speaker 4>five percent ten yure yields would be incredibly restrictive? Are

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<v Speaker 4>four percent yields restrictive?

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<v Speaker 3>When do we know? You know?

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<v Speaker 2>This is something that I have debated heavily because to

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<v Speaker 2>a large degree, we don't We can't measure the neutral rate,

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<v Speaker 2>and if you look back at history, we've never actually

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<v Speaker 2>that at a neutral rate for any length of time.

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<v Speaker 2>The Feds always in very restrictive territory. We're always in

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<v Speaker 2>accommodative territory. We don't tend to just hang out around

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<v Speaker 2>two and a half to three and a half percent

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<v Speaker 2>FED funds rate. So I think, you know, every FED

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<v Speaker 2>cycle starts because we've had a shock, either you know,

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<v Speaker 2>a very strong growth shock or a very weak shock.

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<v Speaker 2>And today we're sitting still carrying the momentum from a

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<v Speaker 2>very strong shock. So I think it could be another

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<v Speaker 2>six quarters before we really get a sense of where

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<v Speaker 2>we are. And in the meantime, wow, wage pressure, inflation pressure,

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<v Speaker 2>it's all creeping higher again.

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<v Speaker 1>So, Lara, last year, I remember our conversation. You said

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<v Speaker 1>inflation may not make the last mile. That's what you

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<v Speaker 1>said last year. Here we are you still seem to

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<v Speaker 1>believe that's the case. We could sense with Chairmen Powell

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<v Speaker 1>in the news conference last week, he wasn't quite comfortable

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<v Speaker 1>to say on behalf of the whole committee that they

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<v Speaker 1>had greater confidence that we were indeed heading back towards

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<v Speaker 1>two percent, and they want to see more data, more

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<v Speaker 1>of the same, perhaps not better, just more good data.

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<v Speaker 1>He was concerned that perhaps the that movement we've seen

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<v Speaker 1>over the last six months might have been down to

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<v Speaker 1>one off factors, not as base case, but the concern

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<v Speaker 1>exists clear to me that you may think it is

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<v Speaker 1>actually down to one off factors. What is it about

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<v Speaker 1>the last six months that you see not repeatable in

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<v Speaker 1>the next six months.

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<v Speaker 2>Getting from you know, six percent to three percent I

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<v Speaker 2>think has been a lot easier. I've been sort of

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<v Speaker 2>using that analogy of like a long road trip with

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<v Speaker 2>a bunch of kids in the back of the car.

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<v Speaker 2>If a couple of them start acting up, it makes

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<v Speaker 2>the whole trip really difficult. And I think we're starting

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<v Speaker 2>to see am act up again. And we've just I

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<v Speaker 2>think had a nice period where a short period where

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<v Speaker 2>we were seeing you know, the energy, the goods prices

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<v Speaker 2>and progress on services moving together. But services is starting

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<v Speaker 2>to creep higher.

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<v Speaker 3>I think goods.

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<v Speaker 2>Deflation may have run its course, and I think energy

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<v Speaker 2>is very open to geopolitical risks. There are growing I think,

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<v Speaker 2>you know, influences that are going to cause a couple

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<v Speaker 2>of the kids to throw tantrums in the next six months.

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<v Speaker 1>Journey. Who are the kids in the back of the car?

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<v Speaker 1>Name them fed officials, a handful of them or is

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<v Speaker 1>this market participants?

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<v Speaker 2>No, I think the kids are what's driving inflation higher.

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<v Speaker 2>It's you know, the shipping costs creeping higher. It's services

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<v Speaker 2>wages creeping higher.

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<v Speaker 3>It's coming from.

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<v Speaker 2>The fact that food prices are still I think too

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<v Speaker 2>high for consumer comfort.

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<v Speaker 3>It's coming from a lot of places now.

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<v Speaker 1>Lara Ryan, thank you Lara of FS Investments. That was

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<v Speaker 1>prittiant