Speaker 1: This is the sixth meeting of the FOMC. It's done.
Speaker 2: To him, it is done. And we just wrapped up
Speaker 2: listening to Fed Shair J. Powell talking about the decision
Speaker 2: and the economy and what's to come. Well, you know what, Carol,
Speaker 2: The Fed leaves rates unchanged, signals one more rate hike
Speaker 2: this year. Power says Central Bank to proceed carefully on
Speaker 2: a rate path, carefully how many?
Speaker 1: It was like a drinking game every time he said
Speaker 1: careful or careful.
Speaker 2: Hope you weren't drinking during that.
Speaker 1: Wow, maybe some water you had.
Speaker 2: Been you would be drinking a lot. And then to
Speaker 2: your treasury yields, they went flat after that initial surge.
Speaker 1: Unbelievable. All right, So let's get to it.
Speaker 3: I will say, the Fed chief saying that there's so
Speaker 3: much uncertainty around the timing of rate cuts, and that
Speaker 3: was something I felt like in the press conference that
Speaker 3: reporters were trying to pin him down to and he
Speaker 3: would not be pinned. Although it does feel like higher
Speaker 3: for longer, all right, So let's get to it. Let's
Speaker 3: get some analysis, because we did get an upbeat, upbeat,
Speaker 3: I should say, an update on those economic projections from
Speaker 3: the Federal Reserve, and that was certainly something we were
Speaker 3: all focused on what we have with us or who
Speaker 3: we have this a former Bloomberg colleague, Eylanina Shalaeva, senior
Speaker 3: US economist at BNP, parried about on zoom in New
Speaker 3: York City and in Bloomberg Economics US economist Stuart Paul.
Speaker 3: He's here in our Bloomberg Interactive Broker studio, Stuart, I
Speaker 3: do want to start with you. What are or were
Speaker 3: the key points of today's decision and what Jay Powell
Speaker 3: chose to stress in that press conference.
Speaker 4: So Powell is definitely stressing that he's going to be
Speaker 4: maintaining a higher for longer posture. I think that some
Speaker 4: of the confusion that came from the press conferences that
Speaker 4: this is just a generally hawkish summary of economic projections.
Speaker 4: That's really the content of today's F ONEC decision is
Speaker 4: the summary of economic projections showing far fewer cuts in
Speaker 4: twenty twenty four, more optimistic GDP growth path. But for
Speaker 4: some reason, Powell, when he took to the podium, said
Speaker 4: that a soft lending is not his base case. It's
Speaker 4: almost as I was very surprised.
Speaker 1: What does that mean? That means things are better.
Speaker 2: It's tim I mean, I took it as bad news.
Speaker 2: I took it as you know, think aren't as good
Speaker 2: as people think.
Speaker 4: Well, we hear Bloomberg Economics think that there is some
Speaker 4: softness underneath the surface. I think that if we're trying
Speaker 4: to analyze the intent of the FED chairman here, we
Speaker 4: have to think that he's trying to invoke some sort
Speaker 4: of a memory of vulgar which is that he's willing
Speaker 4: to do what's necessary to break the back of inflation. Yes,
Speaker 4: he's optimistic about growth. That's why we or the median
Speaker 4: member of the FMC at least is optimistic about growth.
Speaker 4: That's what helps to explain the median projection for the
Speaker 4: FED funds rate maintaining that higher for longer posture ending
Speaker 4: twenty twenty four at five point one percent five to
Speaker 4: five and a quarter range. And if the Fed is
Speaker 4: ever going to have to rain in inflation, maybe something
Speaker 4: might have to crack. That's what I think that he
Speaker 4: was alluding to when he says that a soft landing
Speaker 4: isn't necessarily his base case.
Speaker 3: In Bloomberger Economic Sana Wong writing officials also completely scrapped
Speaker 3: a recession forecast for this year, so definitely taking that
Speaker 3: off the table.
Speaker 2: Heyil Initialieteva, come on in here a senior US economist
Speaker 2: at BNPP, but also our former colleague here at Bloomberg, Leane,
Speaker 2: how did you read into that comment from Fed J Powell?
Speaker 2: He would not call this soft landing a baseline expectation.
Speaker 2: What's your interpretation of that?
Speaker 5: I think I think, you know, the Chair is alluding
Speaker 5: to some event risk here, and I think there is
Speaker 5: a lot of things that could go wrong from now on. Yes,
Speaker 5: the you know, economic growth looks really strong if you
Speaker 5: look at the recent data, but we have a confluence
Speaker 5: of significant negative risks coming all at the same time
Speaker 5: in the in the fourth quarter of this year, you
Speaker 5: have student loan repayments restart, you have a possible shutdown,
Speaker 5: excess savings are depleting. So there are significant risks to
Speaker 5: the soft lending scenario that is reflected in the summer
Speaker 5: of economic projections. They're really seeing stronger growth, lower unemployment
Speaker 5: rate at the same time, much lower inflation. I think
Speaker 5: the event risks that will make them be cautious at
Speaker 5: the following meeting.
Speaker 3: If you could have asked a question to the FED chair, Ylena,
Speaker 3: what would it have been.
Speaker 5: I think I wanted to hear a much clearer explanation
Speaker 5: of what he thinks about policy legs. He alluded to
Speaker 5: that a little bit in the opening remarks, but you
Speaker 5: know the extent of how much policy previous policy tightening
Speaker 5: impacted economic growth. I would like to get a better
Speaker 5: sense of that. It seems like Chair himself believes that
Speaker 5: policy LICs have not fully percolated through the economy and
Speaker 5: more impact is coming, you know.
Speaker 3: And Stuart, I want to ask you, you know, process of
Speaker 3: getting inflation to two percent has a long way to go.
Speaker 3: So do I read that as yep, we're not at
Speaker 3: two percent yet, so we get that, Chair Powell? Or
Speaker 3: is it that that also means you guys still have
Speaker 3: work to do and so cooler jets everybody who's thinking
Speaker 3: of Fed cuts.
Speaker 4: You know, the projected path for the Fed funds rate
Speaker 4: target range, at least for the median voter on the FMC,
Speaker 4: seems to be almost separate apart from the economic fundamentals
Speaker 4: that they're showing in their projections. We're not getting to
Speaker 4: the two percent core PC target until twenty twenty six.
Speaker 4: So yes, the core PC forecast was modestly revised down
Speaker 4: for twenty twenty three. But we also see growth being
Speaker 4: revised up, we see unemployment being revised down, labor markets
Speaker 4: staying tighter for staying tighter for longer. That's not the
Speaker 4: higher for longer, the tighter for longer that the Fed
Speaker 4: had been looking for. Right, So to those fundamental economic projections,
Speaker 4: those forecasts scream one more rate hike to you. I mean,
Speaker 4: it's seams as though, it's to Lena's point that maybe
Speaker 4: these optimistic projections are just that, maybe they're just a
Speaker 4: little bit of a wish and something or crack in
Speaker 4: the background. Maybe it's something fundamental like Lena was talking
Speaker 4: about that we've written about extensively. Maybe it's something like liquidity,
Speaker 4: and we haven't heard anything about QT in multiple press conference.
Speaker 2: Well, Jelena story rais is a really good point. I mean,
Speaker 2: how seriously can you take the dot plot out two years.
Speaker 2: It's one thing to you know, take the dot plot
Speaker 2: projections out for the remainder of the year, but it's
Speaker 2: an entirely different thing to look at it for the
Speaker 2: end of twenty twenty five. How do you look at
Speaker 2: different times there versus what they're saying.
Speaker 5: I think I think you really have to take it
Speaker 5: with a grain of salt. Even going into the next year.
Speaker 5: You know, we did notice that the range of projections
Speaker 5: for twenty twenty four narrowed, but it's still a very
Speaker 5: wide range of totally different projections. And even this year,
Speaker 5: I think the fact that the fit downgraded inflation projections,
Speaker 5: but they still, I think in all of you are
Speaker 5: very high relative to what will likely happen. So in
Speaker 5: this sense, you know, if inflation surprises to the downside
Speaker 5: closer to the end of the year, that will give
Speaker 5: them a way out of the lost projected hike of
Speaker 5: the cycle. We we think that they will they have
Speaker 5: reached the terminal rate.
Speaker 3: Is there a word that you seize on in terms
Speaker 3: of what came out of J. Powell's mouth today, Elena?
Speaker 5: In a sense.
Speaker 3: You know, you know, sometimes he uses a word over
Speaker 3: and over. Sometimes there's a phrase and we all kind
Speaker 3: of you know, that's to be transitory, It used to
Speaker 3: be transitory data dependent.
Speaker 6: Right.
Speaker 3: How many times have we said that? Is there anything
Speaker 3: that came out of his mouth that you thought, Okay,
Speaker 3: this is kind of where.
Speaker 5: Dake a dependency? But that has been their mantra for
Speaker 5: for quite some time. I think that they just want
Speaker 5: to be cautious with those, you know, steaky words.
Speaker 3: How about for your Stewart, Was there something there?
Speaker 7: No?
Speaker 4: The thing that really stood out to me was that
Speaker 4: that J. Pewell didn't seem to strike, at least not
Speaker 4: to me, a single hawkish or dubbish tone. Usually, at
Speaker 4: least over the past few years, when the FOMC makes
Speaker 4: a decision, so in this case, the hold rate steady,
Speaker 4: he'll end up striking a more hawkish tone to compensate
Speaker 4: for the pause and raids, or if they were to hike,
Speaker 4: he ends up coming out a little bit dubvish during
Speaker 4: the press conference to sort of tone down any sort
Speaker 4: of market reaction to the actual decision itself. That was
Speaker 4: not the case today during the press conference, at least
Speaker 4: not to my ear.
Speaker 2: What did you hear? To my ear?
Speaker 4: He sounded a little bit cautious. He used the word
Speaker 4: cautious multiple times, and they were just the same way
Speaker 4: that we see this sort of break between the fomc's
Speaker 4: medium forecast for the funds rate itself and it's forecast
Speaker 4: for the economic projections. It seems that there wasn't a
Speaker 4: cohesive narrative at least not to me when I was
Speaker 4: listening to the Price conference.
Speaker 7: It's interesting, right, Okay, to Stewart's point, if I mean,
Speaker 7: there's a lot of risk management approach in what they're
Speaker 7: doing right now, not that they have achieved the goal,
Speaker 7: but they're very cautiously moving along.
Speaker 5: It's risk management that is driving the decision at the point.
Speaker 3: All right, So okay, where do we go from here?
Speaker 3: And I guess it's you know, Elena, what are the
Speaker 3: next kind of focal points for you? Is it just
Speaker 3: we're going to go from data point to data point?
Speaker 3: I mean, how do you think about November?
Speaker 5: So we only get one with cpr CPI report and
Speaker 5: one more PEDROLS report before the November meetings. So I
Speaker 5: mean they're saying they're data dependent, but there's really not
Speaker 5: that much data they're going to get. I think what
Speaker 5: will keep them on hold at the next meeting is
Speaker 5: really the event risk. So again I mentioned a lot
Speaker 5: of things that are coming that could influence the decision
Speaker 5: to be even more cautious in the medium to in
Speaker 5: the near term. But I think by the time they
Speaker 5: get to the end of the year to the December meeting,
Speaker 5: they will we will probably get a lot of data
Speaker 5: showing a significant slow down in economic roles in and
Speaker 5: even further slow down in the labor market, and eventually
Speaker 5: that would stop them from going another time as they
Speaker 5: are projecting in the Summary of Economic Projections.
Speaker 2: Stuet I like the way that Yolena described event risk,
Speaker 2: these things that we talk about that the Fed absolutely
Speaker 2: has no control over.
Speaker 6: Something that J.
Speaker 2: Powell said, you know, higher oil prices, u AW strikes,
Speaker 2: student loan payments starting up. Once again, what's the biggest
Speaker 2: event risk on your radar right now?
Speaker 4: Well, I'm not sure this is entirely an event itself.
Speaker 4: It is a catalyst at starting, but it's well signaled,
Speaker 4: right we know that it's in loan repay are going
Speaker 4: to be starting. In fact, student borrowers have started those
Speaker 4: repayments already, and flows into the Department of Education's coffers
Speaker 4: within the Treasury have already reached pre pandemic flows, so
Speaker 4: that typically shaved that should based on typical flows into
Speaker 4: the Department of Education shave off something like fifty basis
Speaker 4: points from PC spending on a monthly basis. I think
Speaker 4: that that's probably I think that that's what's biggest to
Speaker 4: me other things like the UAW strike. Imagine that that's
Speaker 4: temporary shave something like one percentage point off of industrial production.
Speaker 4: That's the sort of thing that you get back though
Speaker 4: when they fire up the assembly lines again. Same thing
Speaker 4: goes with the government shutdown. We would not even see
Speaker 4: that show up in the establishment survey if if any
Speaker 4: sort of federal agency still keeps workers on its payrolls,
Speaker 4: at least insofar as those workers will receive back pay
Speaker 4: when they are brought back to work at the end
Speaker 4: of a shutdown. Even a government shutdown wouldn't wouldn't hurt
Speaker 4: nonfarm payroll growth that much. But the extent to look
Speaker 4: the Board of Governors is sitting there on Constitution Avenue.
Speaker 4: It's the sort of thing that they would see firsthand
Speaker 4: when economic activity within the district slows to a halt
Speaker 4: during a government shutdown. So it's the sort of thing
Speaker 4: they can feel very scary to policymakers, right.
Speaker 3: I always think about with these kind of things, it's
Speaker 3: either kind of a one off if it ends quickly. Right.
Speaker 3: The longer these things lag on, I assume the economic
Speaker 3: impact is so much greater. Elan It was kind of fun,
Speaker 3: I guess to kind of watch J Powell deal with,
Speaker 3: you know, trying to be pressured into like when do
Speaker 3: we cut rates? Like when does it come? He says,
Speaker 3: going into twenty twenty four. The time will come at
Speaker 3: some point, and I'm not saying when to cut interest rates,
Speaker 3: So he's very careful about that. How do you think
Speaker 3: about when we will start to cut rates?
Speaker 5: So in all of you, you know, we will sleep
Speaker 5: into a recession, and that will be a modest recession
Speaker 5: in our view, but still that should push the FED
Speaker 5: to start cutting rates. Another consideration is something that came
Speaker 5: up during the press conference is the level of real rates.
Speaker 5: So if inflation continues to slow down and it falls rapidly,
Speaker 5: that would push real rates much higher from where they
Speaker 5: are right now. They're already in a restrictive territory, and
Speaker 5: the FED will just not want to keep pushing real
Speaker 5: rates even higher into the restrictive policy stands. So at
Speaker 5: some point the FED will have to cut nominal rates
Speaker 5: just to keep real rates from rising further. So and
Speaker 5: we think that that time will come sometime in the
Speaker 5: middle of next year.
Speaker 4: I think that that's generally right. I think it's in
Speaker 4: the middle of next year. I wouldn't be surprised to
Speaker 4: see something like twenty five basis points of meetings starting
Speaker 4: from June July. And it's exactly that. It's to maintain
Speaker 4: that constant spread between printed inflation and nominal policy rates,
Speaker 4: so that monetary policy stays sufficiently restricted but not excessively restrictive.
Speaker 4: I think that just tim to your question earlier, thinking
Speaker 4: about any sort of catalyst that could be shocking, that
Speaker 4: could materially change policy decisions. It seems as though people
Speaker 4: have entirely stopped discussing liquidity, and they entirely stopped discussing
Speaker 4: the consequences of QT. But the bank term funding program
Speaker 4: has maintained essentially a constant balance. Banks are still continuing
Speaker 4: to borrow from the federal home loan banks, and we're
Speaker 4: still seeing we're still seeing deposits leaving the banking system
Speaker 4: because rates are materially higher.
Speaker 2: If you're talking about the out, the fallout from the
Speaker 2: regional bank crisis.
Speaker 4: Well even preceding the regional bank crisis is a consequence
Speaker 4: of quantitative tightening. The other aspect of monitor Harry policy
Speaker 4: that's operating just sort of in the background. There is
Speaker 4: an attempt to soak up liquidity at the FED. And
Speaker 4: though we always focus on the Fed's dual mandate price
Speaker 4: stability in full employment or maximum employment, the sort of
Speaker 4: thing that could pop up in the background is a
Speaker 4: liquidity event, and those sort of events tend to be
Speaker 4: pretty convex. We don't really have the foresight of saying,
Speaker 4: you know, student loan payments are starting in October.
Speaker 6: Again.
Speaker 4: They happen when they happen, and I'm surprised that it's
Speaker 4: the sort of thing that doesn't come up in press
Speaker 4: conferences anymore.
Speaker 2: I mean, COVID happened when it happened. March twenty twenty
Speaker 2: happened when it happened. These are things that you know,
Speaker 2: if you go back to twenty nineteen and the summary
Speaker 2: of economic projections, then right, nobody was foreseeing something like this,
Speaker 2: an event risk like this causing the FED to drop
Speaker 2: rates to zero.
Speaker 1: No, exactly exactly, I mean, I don't know.
Speaker 3: I mean, you think about this year, y Lane, and
Speaker 3: I feel like we've been all over the map right
Speaker 3: when it comes to we thought kind of the world
Speaker 3: was coming to an end MIDI end, you know, with
Speaker 3: the regional bank crisis.
Speaker 1: But you know, we've dealt with.
Speaker 3: Crypto over the last year. I mean, there's been a
Speaker 3: lot of things that have certainly come at this market.
Speaker 3: But you know, here we have an environment where you
Speaker 3: see certainly equity strategises continuing just to kind of ratchet
Speaker 3: their estimates higher. But at the same time, you know,
Speaker 3: I'm looking at in stocks right now or down to
Speaker 3: their lows of the session, but I'm looking at you know,
Speaker 3: the rate moves today, your two year at five point one, four,
Speaker 3: ten year at four point three, I mean, five years
Speaker 3: at four point what five three? I mean, are these
Speaker 3: the rates that we should anticipate will continue to see
Speaker 3: certainly going into twenty twenty four.
Speaker 5: Well, at some point the fact we'll have to cut
Speaker 5: rates and we will see some movement on that front.
Speaker 6: Right.
Speaker 5: I think one thing I would like to highlight though,
Speaker 5: is all these things that we mentioned in our discussion,
Speaker 5: like such as student loans and strikes and you know,
Speaker 5: the depletion of excess savings. We should not forget about that,
Speaker 5: even though we've been talking about it for a long time.
Speaker 5: Those things make the economy more vulnerable to exogenous shocks.
Speaker 5: So some type of liquidity events and other things that
Speaker 5: Stuart mentioned, so like I think that the slow down
Speaker 5: in the economy to the point at which it approaches
Speaker 5: somewhat some stall speed, that makes the economy really vulnerable
Speaker 5: to something that could happen that we cannot anticipate. And
Speaker 5: that's an important point, and this is something that we
Speaker 5: should be watching.
Speaker 1: Yeah, I mean there's a lot on the place.
Speaker 3: It's certainly a lot covered by j Powell today, but
Speaker 3: a lot for us to kind of continue to moll
Speaker 3: over and we'll see how the financial markets continue to
Speaker 3: read it. Guys, Thank you so much, really appreciate it.
Speaker 3: I know you guys have had a busy afternoon watching
Speaker 3: all of this. So great to get you.
Speaker 2: Was here late last night. I saw you on TV
Speaker 2: late last night. What you were getting?
Speaker 1: Are you doing a.
Speaker 4: Previa Australia Daybreak?
Speaker 2: Oh yeah, somebody's got to do it.
Speaker 1: A lot of central banks right now, right.
Speaker 4: Somebody needs to talk about starts and permit, somebody needs
Speaker 4: to talk about what to anticipate from the face. It's
Speaker 4: been a busy day for us. Lena, we miss you
Speaker 4: here at Bloomberg. Eliza says, hello over there, you guys too, well,
Speaker 4: you know what, we love it when you get to
Speaker 4: join us.
Speaker 2: Lena and on FED Day at any time. So it's
Speaker 2: awesome to have you back with us.
Speaker 1: Totally, totally all right, be well, Kilena Shilett.
Speaker 3: You have a senior US economist at BNP Pariba as
Speaker 3: you know, a former Bloomberg colleague and Stuart Paul, us
Speaker 3: economist at Bloomberg Economics.
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