00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts. 00:00:05 Speaker 3: Radio. 00:00:06 Speaker 4: News. 00:00:09 Speaker 2: This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3,000 journalists and analysts around the world. 00:00:20 Speaker 3: Today's action starts to show we're serious about this. And we will deliver on the price stability objectives. And as the statement said, we'll do it on a timelier basis. 00:00:34 Speaker 2: Fed Chair Kevin Walsh wrapping up the news conference in Washington, D.C., a 25 basis point interest rate hike. The forecast implying there's one more to come later this year and a lean to perhaps even more in 2027. Live from New York City this afternoon. Good afternoon to you all. This is the price action. A hawkish opening statement from a Fed chairman happened to drive equities lower down on the session by 0.4 percent in the bond market. Two's 10s, 30s, just sit on the front end of the curve. Yields up six basis points on twos. We breach 470 on a two-year. We're higher for a seventh consecutive session, the highest yield at the front end of the curve since July 2024. As for the hawkish speak, take a listen to the chairman of the Federal Reserve. 00:01:17 Speaker 3: Inflation remains elevated. Today's policy action will support a timelier return to the committee's 2% goal. I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee. So we removed a dose of accommodation. 00:01:38 Speaker 2: We removed a dose of accommodation. Just a subtle sign that maybe you'll have to do just a little bit more of that. This line from the Fed chairman. Today's action starts to show that we're serious about this. It starts to show that we're serious about this. This market believing there's more action to come from this Fed chair. 00:01:54 Speaker 1: It isn't just a statement of economic projections. 00:01:57 Speaker 5: And Michael McKee asked a great question of how do you reconcile a statement of economic projections that doesn't see inflation increasing? at 2% until 2029. This Fed chair said, those are not my projections. We will deliver price stability. 00:02:10 Speaker 1: Today's action, to your point, starts to show we're serious about this. 00:02:13 Speaker 5: And that is where you saw the inflection lower when it comes to stock valuations and where you saw that inflection higher in the front end of the yield curve. 00:02:20 Speaker 2: So, Stephanie Rotherwold's research standing by. We'll get to her in just a moment. We'll speak to Neil Dutra as well. He's going to jump on for us too. Before we get into all of this, I just want to sit on the tone of the news conference. Sitting at home watching this, you might have noticed a subtle difference here. felt tighter. Q & A, the cadence was different. Mike McKee, before going into this, told us that they weren't allowed to ask follow-up questions to the Fed chair. That's why this lasted only 30 minutes. Everything was tighter. He was far more selective about what he answered. There were a few questions wasted on the president because he was never going to engage in any of that. But a different cadence to this news conference, certainly compared to what we heard last time around back in July. 00:02:57 Speaker 5: Arguably, he was speaking to somebody else as well, because the number of press members from a wider range of press were also called on. 00:03:05 Speaker 1: That was notable. 00:03:06 Speaker 5: To me, it was also interesting that he was trying to retrain people, saying, if you ask two-part questions, I'll pick which part I want to answer. So essentially, that was also a very different tone of tighter with a much clearer message, which is. 00:03:17 Speaker 1: We need to do more. 00:03:18 Speaker 5: And right now, these financial conditions are not restrictive in any way, shape, or form. 00:03:22 Speaker 6: I'm going to keep my opinion out of it because we've got wonderful guests coming up. I will editorialize that was a disaster. And as Lisa's noticed, it moved like a hockey stick move, which is what Ben Bernanke would call it. there was a hockey stick move, and I heard a single sentence, and this is the heart of the matter, and that he said, we're looking at discipline, not a decision. He's running an MBA course out at Stanford, and the rest of the economists are trying to do macroeconomics. 00:03:48 Speaker 1: I'm not sure I would agree. 00:03:49 Speaker 5: I don't know that he would think that this was actually a disaster, because ultimately what you saw is a flattening in the yield curve, and you saw a capping at the long end of yields. 00:03:56 Speaker 6: I got the 30-year real yield at three basis points to a new record high. I got 2.8 standard deviations. on DXY. Those are huge moves. 00:04:06 Speaker 5: If this FOMC committee is truly concerned about inflation, they should not be concerned about the idea that there is a little bit more restrictiveness being baked into financial conditions, which count as lower stock prices and higher bond yields at the front end. 00:04:20 Speaker 1: Ultimately, isn't that exactly what he's calling for? 00:04:22 Speaker 2: A lot of people who criticize this Fed chair for not articulating a reaction function. I think he's given us something here, and he gave us something in Jackson Hole, too. The number of inflation categories that are trading above or printing above 3%. He referenced that once again. That's going to be a key metric for this market every time we get the inflation report. How many inflation categories are still rising more than 3%? Are you seeing an increased decline remain the same? And is that going to be your steer for how hawkish or dovish this Fed chair might be at the upcoming meetings? 00:04:52 Speaker 5: Especially as it pertains to geopolitics. He talked about geopolitics. They can't control oil prices. they can control second-order effects. Where does that come through? In the broadening out of inflation metrics. He also said, I'm not waiting breathlessly on any particular data point. What he is doing is looking at the trend lines, and that broadening out is a key one. 00:05:10 Speaker 2: You know that meme? Sure, Jan. We discuss it often. 00:05:13 Speaker 1: Yes. 00:05:13 Speaker 2: I have to say, come on, that was a ridiculous statement to make. 00:05:16 Speaker 1: It was. 00:05:17 Speaker 2: Because for the first time in a long time, there was a feeling that the only thing that mattered with regards to this decision was the inflation print just in the last week. And the difference between being a 0.2 and a 0.3 was a market that was either going to price a hike or price a hold. 00:05:31 Speaker 5: Maybe Kevin Warsh wasn't waiting breathlessly, but everybody in the market was. And ultimately, they traded on that. And ultimately, the Fed came through with what the market was deciding. 00:05:39 Speaker 2: Mike McKee was in the news conference. We've all got a home bias, of course. Mike McKee always asks the best question in the news conference. Mike, you nailed it. Before we get to that, I want to talk about the difference in the cadence. This was a different performance. It was a different setup. It was a very different news conference compared to what we heard at the end of July. Mike, you were in it. What changed? Well, a lot changed. 00:05:59 Speaker 7: They changed the seating chart for one thing and moved reporters all around by alphabetical order, an effort, they say, to give more fairness. And they certainly called on a lot of different reporters this time. But you notice that Kevin Warsh was much more direct, and he spoke in very short sound bites. He did not give us long answers about what they thought or what they think the economy is doing. 00:06:22 Speaker 2: He was just very direct. 00:06:24 Speaker 7: Also, I think that he is trying very hard not to give us anything to hang on, although he did in his statement, which is a little more direct than he did in July, say, as you mentioned, that he is worried about the breadth of inflation. 00:06:39 Speaker 2: So a different style. 00:06:41 Speaker 7: It was much shorter, only 30 minutes, and a different kind of questioning was sort of brought forth. 00:06:48 Speaker 2: Mike, that word timelier. to get inflation back to target in a timelier manner. You indicated, you pointed out, you highlighted it immediately. You don't see it in the forecast. Were you satisfied with his response to your question? 00:07:01 Speaker 8: No, I wasn't. 00:07:02 Speaker 7: And unfortunately, they don't allow follow-up questions because I would have followed up on that point. It's not a question of whether he submitted a forecast or not. And it may be the other 18 people who did, who put that at 2029 to reach 2%, but he's still the chairman and he's still responsible for the statement, which said they're going to bring inflation down in a timelier manner. And then they say they're not. So how they square that, I don't know. I would have also liked to ask him where they see inflation that the Fed can affect, because obviously they can't affect the price of oil and other commodities. 00:07:42 Speaker 3: Mike. 00:07:42 Speaker 2: Thank you, buddy. Stay close. We'll come back to you in the next 30 minutes or so. Mike McKee breaking it down. Last point is a really important point. How much influence do they have over the dominant sources of inflation right now? I think of one, which is oil and energy, and they don't have much influence over that at all. 00:07:57 Speaker 5: Which is the reason why they're looking at the broadening out the second, the third order affairs. I will say we didn't hear from Kevin Warsh how he squares that circle. We will hear from all the other Fed officials as they. 00:08:07 Speaker 1: Speak in the upcoming weeks. 00:08:08 Speaker 5: And ultimately, this is a great question to ask them. And we will get their sense of what timeliness really means. 00:08:13 Speaker 2: I think we've got Governor Mickey Bowman coming up on Friday, don't we? 00:08:16 Speaker 1: I think she'll have words. 00:08:16 Speaker 2: Friday morning, going into the weekend, she'll have some things to say. We've got Stephanie Rothawolf Research with us around the table. Let's start there. Stephanie, good afternoon. Hello. What was your takeaway from this decision this afternoon? It was a hawkish one. 00:08:28 Speaker 4: And it was consistent with his comments at Jackson Hole. There was a question about whether he really believed them or to what extent that was just fixing prior communications. But he kept coming back to financial conditions and talking about, you know, alluding that they're not really restrictive at this point. And it was a very believable delivery of a relatively hawkish hike. 00:08:47 Speaker 5: What did you make of the commentary about how removing some of the accommodation was is how he views today's move and the idea that this is the start of an ongoing deliberate effort to get serious about price stability. 00:09:02 Speaker 4: Yeah, I think that was one of the single most important lines in what we heard today and one of the reasons why you're seeing markets react the way they are that this is certainly not a one and done, so that's over. I think the data will ultimately look a little bit better such that they can probably just end up hiking twice, but it certainly suggests that there's a lot more, or considerable more accommodation to be removed. 00:09:24 Speaker 6: I got eight ways to go here, but I've got to go right now to what the markets are voting on as we speak. These are seismic moves. I have a hockey stick move on the 10-year real yield at the new highs, the 30-year real yield at three basis points, and the DXY is popping 2.8 standard deviation strong dollar. What's the market voting on right now based off what they heard? 00:09:47 Speaker 4: The market's expecting they're going to do a string of hikes more than certainly the- Or is. 00:09:51 Speaker 6: It a lack of confidence in the chairman's tone where he's looking at process and not decision? 00:09:57 Speaker 2: I think it's more of the former. 00:09:59 Speaker 4: I think the market is just expecting that he sounded a lot more hawkish than they expected. Now we have to price in a greater string of hikes. I don't think it's necessarily a lack of credibility comment here. I think it's more about they're going to do more than certainly many expected before the meeting. 00:10:17 Speaker 2: Let's just unpack inflation. So he's given us a metric now. there's a target to focus on. It's the amount of inflation categories above and more than 3%. So we'll all look at that. What's influencing that? What are the dominant causes of inflation right now? Let's just start there. What are they? 00:10:31 Speaker 4: I mean, I would say there's three main categories of inflation that's driving above-trend inflation. It's been The Rand War, which you talked about in terms of geopolitics driving yields higher. It's been the chip shortage, which I would argue is the most important one to keep an eye on because that's something that hasn't gone away. And then the combination of the tariffs that have went into place. Now, those are going to be very much rolling off, right? So when we're thinking about what's the inflation and the percentage of inflation categories that are going to be above 3% in a couple months' time, when we forecast that out, those metrics are going to look a lot lower in a couple months' time. He's been talking about the 6- and 12-month trend of that. 00:11:15 Speaker 1: If you look at the 3-month, it's down a lot. 00:11:17 Speaker 4: The 6- and 12-month are going to follow. So because of those three categories, you're going to see it look a lot better now. 00:11:23 Speaker 1: In a couple months time. 00:11:23 Speaker 2: It's obvious why I just asked that question. You identified three things that have absolutely nothing to do with rate policy at the Federal Reserve. All three of them. What influence do they have over any of those things? 00:11:34 Speaker 1: Not that much, realistically. 00:11:36 Speaker 2: So why are we doing this this afternoon for anything other than just a credibility hike at this institution? What is it really about? What does it achieve? 00:11:45 Speaker 4: I mean, to some extent, it is a credibility hike. But if you talk about what we were discussing a couple days ago, it was, you know, are they going to hike? 00:11:52 Speaker 2: Are they not going to hike? 00:11:53 Speaker 1: It's going to depend on a. 00:11:53 Speaker 4: Couple basis points at CorePCE. And then, of course, today they deliver a much more hawkish hike. The data didn't act. CorePCE was tracking about 0.23% based on our numbers today. for the month of August, which is kind of in line with what Waller said was an area where they could sit back and hold reliably. But the market took them there. The market wanted them to hike, and they had to deliver it. 00:12:16 Speaker 5: Earlier this year, it seemed like the majority of the Federal Reserve Committee was saying that rates were moderately restrictive. That changed too. We're not sure. Let's check it out. And then quickly, that they are accommodative and that ultimately the implication is they need to take back those 75 basis points of insurance cuts from last year. One thing that Fed Chair Kevin Walsh said that I thought was really important was my suspicion coming into the committee was that the U.S. economy was strengthening. The underlying growth was higher than people think. Do people have to start thinking about a higher neutral rate and the persistence of this, not only as a new normal, but potentially significantly higher in the foreseeable future? 00:12:55 Speaker 4: I mean, I think that is what markets and to some extent that the Fed was telling you today because they shifted up their long run. I don't think that's ultimately going to be how this plays out. I mean, you consistently hear people talking about 6.5% nominal GDP growth and concerned about is 5% actually the right level of the 10-year given where nominal GDP growth is going to be. If you fast forward a couple of quarters, that's going to be a lot slower than where we are today. 00:13:18 Speaker 6: Drew Mattis emailing in from MetLife with all of his work at UBS, John, over the years. Long end rates rose equals failure. And where the markets are placing right now, particularly the correlated markets away from the basic five things we look at, Some of these are shocking moves that we're seeing. I have real trouble believing it's just about the data. To the restrictive point, it's about this booming nominal GDP economy. He did allude to that to give him credit. 00:13:44 Speaker 2: If you want some tough moves in a market today, check out the equity market, lift the lid on things, and look at the banks. Banks are getting knocked about off the back of this decision. They've had some difficult guidance from the likes of Bank of America more recently, too. But I just noticed Goldman. on the Bloomberg drop in some four or five percentage points this afternoon, Brammo, going into the close in the next 45 minutes or so. Banks have held up really well through the year so far. In fact, they've traded really well because nominal GDP is so strong. Off the back of that hawkish Fed speed, just started to see those banks slide in response to that move. 00:14:13 Speaker 5: I want to go to something Brian Moynihan said recently, which is that as rates and rate volatility increased, a lot of issuers have held back in some of the deals they were planning to transact in. And that slowed some of the capital markets activity. At what point is that the one channel? that the FOMC can actually affect, which is the financial conditions as expressed in all of the issuance that we have seen so far this year. 00:14:37 Speaker 1: Ultimately, how much are the banks an expression of that? 00:14:40 Speaker 2: Check out the yield curve. Just bring up the bonds board. Twos, tens, thirties. We'll just take a sneak peek at things right now. Yields down at the long end, up at the front end. That's a flatter curve. Up by six or seven basis points on twos. So that's the highest yield at the front end of the curve going back to July 24. Seven days of this now, Brammo, at the front end of the curve. Something we've seen just a little hint of, a flatter curve, starting to see it even more so this afternoon. I wonder if that's the start of a bigger trend here for this market, that flatter curve driven not just by the front end, but also at the long end as well. 00:15:10 Speaker 1: There is an expression that this is the new neutral, right? 00:15:12 Speaker 5: That rates are not going to come down materially, even if the Fed does hike rates by three more times this year. 00:15:19 Speaker 1: And ultimately... How much do you see. 00:15:20 Speaker 5: That as the expression of 5 percent 10-year yields, even with potentially a pretty hawkish tone? 00:15:25 Speaker 6: We had Lucas before, Charles Goodhart, Hugh von Steenis writing up on Goodhart in the FT, I believe it was. Today, our historic moment today was Newt Vixell, 1898, where he trotted it out as some form of academics of the real rate. I would love to know what John Williams thought about this press conference. When I was with Waller— A number of months ago, my question that stopped him was, are there two real rates for America? The haves have a real rate, and the have-nots have a real rate. John Williams basically codified the real rate, and this guy's quoting Newt Vixell. The only one I know that can quote 1898 intelligently is John Writing. That's it. I mean, this ability for him to trot out, who's going to be the next historic moment he's going to trot out? I'll let you pick, John. 00:16:09 Speaker 2: Mike McKee. Mike, bring us some history right now. He wants to add into this conversation. Mike, welcome back in. What have you got to add? 00:16:16 Speaker 7: Well, I want to point out what you were just talking about in terms of there being a higher neutral rate. They did forecast that in the median dot. They raised it to 3.2% from 3.1%. And it was 3% last year. So they have been moving up the neutral rate. And that may be one reason that they felt they wanted to increase rates this time because neutral is higher. And we've seen that reflected in real rates. You look at the 10-year Treasury real rate, and it's basically at an 18-year high. So at this point, it may not be as much inflation as it is just a reordering of the economy. 00:16:52 Speaker 6: Stay with us. More from Bloomberg Surveillance coming up after this. 00:16:58 Speaker 2: Just to reset, if you're just joining us, welcome to the program live on TV and radio. This, of course, is Bloomberg's Surveillance of Fed special. Tuning in after a 25 basis point interest rate hike from the Federal Reserve, implied by their own forecast, maybe one 25 basis point interest rate hike still to come before year end and the possibility, the potential there is more to come in 2027. Off the back of that and a rather hawkish opening statement from the Federal Reserve chair in the news conference, equities declining Going into the close, we're down by about three quarters of 1% now on the S & P 500 rolling over. You'll see in the bond market, two-year yields are elevated off the back of this as well. The two-year at the front end of the curve up by six basis points to about 472. The long end coming in, we're starting to see that curve flatter. Again, we're down by about two basis points on 30s at about 535. The chairman of the Federal Reserve with a few things to say about where monetary policy is and isn't right now. Take a listen to what he had to say about the start potentially of a process. 00:17:57 Speaker 3: My commitment in June was to reaffirm to the American people, to anyone listening, that we will deliver price stability. My commitment in July was to say we want to buy a little bit of time. We want to evaluate what's happening across a range of dimensions. And what I said in Jackson Hole in August is we're committed to a discipline, not to a decision. Today's action starts to show we're serious about this and we will deliver on the price stability objective. 00:18:29 Speaker 2: This chairman was direct and intentional throughout this news conference. His responses were tight. They were tailored for certain audiences at certain times. This line jumped out to me. Today's action starts to show, starts to show we are serious about this and we will deliver on the price stability objective. Neil Dutter of Renmac joins us now for more. Neil, good afternoon, buddy. Good to see you. 25 basis points. I assume if you think there's more to go. 00:18:53 Speaker 8: Yeah, I do. I mean, I think there's certainly more to go. I'm a little skeptical that it's just going to be one more. I think the Fed will end up delivering more than that. But if you look at their forecast revisions, I mean, what do people really expect? I mean, the unemployment rate was revised down, core inflation was revised up. I mean, to the extent that they raised their longer-run estimate, that means they're kind of moving the policy rate in tandem with that. So the overall level of the policy stance, restrictive, accommodative, doesn't really change. And I think the bigger question that markets need to deal with here is, Do you actually need to cool the economy down to get inflation to 2%? There's a lot of people that don't seem to think that. And I don't know. And so that's kind of where I'm at right now. I mean, I think a lot of the sort of one and done kind of, discussion that we saw going into this is really just it's sort of like the nature of the sell side. 00:19:54 Speaker 4: Right. 00:19:54 Speaker 8: Like a few weeks ago, no one even thought that they would hike in September. Some people thought the next move would be a cut. 00:20:00 Speaker 5: Right. 00:20:00 Speaker 8: So. You kind of have to mark to market your forecast, and now you have to start to think a little bit about where we're going to go over the next three to six months. And my general sense is we know that labor market conditions have stabilized at the margin. The fact that employment is running above break-even implies that the bias for the unemployment rate, at least over the next couple of months, is lower. And they're still passed through from all the things the Fed has highlighted in the minutes, right? AI is putting upward pressure on, you know, prices for computer electronics, consumer electronics. Obviously, oil and gas prices rising at a time they normally go down. Food prices likely to accelerate. So there's a lot to be concerned about, I think, at least over the next few months. And that's one of the reasons why I think hikes are more likely than not. 00:20:52 Speaker 5: Neil, do you think that this is going to torpedo the momentum that we've seen in equities? Or do you think that people will be able to take this in stride as the market has been, frankly, over the past. 00:21:01 Speaker 1: Couple of months? 00:21:03 Speaker 2: No, I mean, I'm concerned. 00:21:04 Speaker 8: I mean, I think there's reasons to expect the consumer to slow from here. We probably hit the high watermark already. There's reasons to think the Fed's going to keep hiking. I don't know why that's a good setup for equities. 00:21:15 Speaker 6: Neil, I got a new Fed. I got a new tone, certainly, out of him now after what, John, helping your three press conferences? 00:21:23 Speaker 2: I think that's three and counting. 00:21:26 Speaker 6: Help me here with the tone that we're getting from this guy. It's radically different to me than what we've heard from previous chairmen of the Federal Reserve System. 00:21:34 Speaker 8: I don't know. I heard Kevin Walsh somewhat more hawkish than his colleagues. How is that especially surprising? 00:21:42 Speaker 6: I mean, the sequence here, no follow-up questions, move the seats around, we're worried about this, that, and that. Claudia, so I'm screaming about tell us what you really think. I didn't hear much about what he. 00:21:51 Speaker 2: Really thinks today, John. Let's get into what Neil really thinks. I'm thinking back to something that Neil said when this Fed chair was appointed. Neil, do you think this Fed chair duped the president? 00:22:00 Speaker 8: No. I mean, I think, look, in my professional career, Kevin Warsh has always been most comfortable making the hawkish case. Generally speaking, he seems to be, based on the tone of his press conference, somewhat more hawkish on rates. And I think it makes sense because he's more bullish on the economy. So it makes sense. But he's more hawkish on rates. 00:22:26 Speaker 2: Yeah. 00:22:27 Speaker 8: So that's kind of where I'm at with it. I wouldn't say hooped or whatever. I mean, he's always been hawkish. 00:22:31 Speaker 2: He was the wrong guy to sell the WTA. He refuses to engage in the conversation on whether we are restrictive or not. Now, whenever he's asked about it, he always points to financial conditions and says the same thing. That's not the same thing. He's asked about the interest rate and whether he believes we are sufficiently restrictive. If he is as hawkish as you believe he is, why do you think he won't engage that question? 00:22:52 Speaker 8: I mean, you kind of have to, like, he's talking about removing a dose of accommodations. So presumably that means the economy's, that the sense of policy is still accommodative, right? I mean, so I kind of look at it that way. He's very bullish on the economy. If he's bullish on the economy, how can policy be restrictive? So, I mean, I appreciate that, you know, it's sort of, we're kind of back to, it's like trying to game out what he's really thinking with these sort of secret, you know, second order signals. But that was my take on it. 00:23:24 Speaker 1: You can't expect a straight answer. 00:23:25 Speaker 8: You kind of have to think about just focus on what he's doing, right? I mean, he's hiking rates. 00:23:30 Speaker 5: Neil, you made a pretty bold comment that you don't think this is going to be good for equities and you don't think this is going to be good for the economy and the growth that we've seen. 00:23:38 Speaker 1: Stephanie Roth's still with us. Do you agree with that? 00:23:40 Speaker 5: Do you think that this economy could potentially not roll over but slow to a crawl. 00:23:45 Speaker 1: In the face of three rate hikes? 00:23:47 Speaker 3: I don't know if. 00:23:49 Speaker 4: I don't think the rate hikes will do it. There's so much going on that's not really so rate sensitive, especially on the AI side. Of course, there are parts of the economy like housing market, which has been struggling and will continue to be challenged by this. I think what's going to end up happening, though, is the inflation data will come in softer and they're not going to have to deliver quite as many hikes as what's in the price now. 00:24:09 Speaker 5: Were you surprised at all, Neil, when we heard from Fed Chair Kevin Warsh that when he came into the job, his underlying feeling was that ultimately the U.S. economy was accelerating and that it was a lot stronger than people previously thought? 00:24:24 Speaker 1: Did that surprise you? 00:24:24 Speaker 8: I mean, I don't know. I mean, he's been bullish on the economy. I would say that the bullishness isn't a function of the stuff that he's generally talked about, which is this sort of AI-driven productivity golden age. There's not really much evidence. I mean, the statement talks about how productivity is strong. I must tell you, I don't really see that, at least not for the first couple of quarters for which we have data. But yeah, I mean, he's an economic optimist. But the reasons for optimism is not really about the kind of supply-driven, positive supply shock story that he's been touting through his nominating process and up to pretty recently. 00:25:04 Speaker 2: Just a headline to back up. That statement by Neil Dutta, this line from the Fed chair, the American economy appears to be strengthening. Not that it's strong. It appears to be strengthening. That's an interesting line. In the face of yields that are picking up, not stalling out, yields have risen by a big amount over the last year or so, 100 basis points at the front end of the curve year to date. In the face of much higher crude prices, too. The chairman's talking about going into year end strengthening, not with strength, but strengthening. I think that's quite a statement from the Fed chair. And we shouldn't gloss over that. Not at all. 00:25:35 Speaker 5: And that's the reason why it's all the more pertinent that he talked about removing accommodation with rate hikes and that potentially more rate hikes are necessary to remove accommodation. I will say that is supported by earnings, which have accelerated beyond the most bullish expectations of everybody out there. 00:25:50 Speaker 1: At what point? 00:25:50 Speaker 5: Do the earnings of corporate America reflect the underlying economy versus reflect something different that's happening in corporate America that's tied to capital markets? 00:25:58 Speaker 6: And away from the animal spirit and nominal, real inflation-adjusted GDP, I think of Michael Ferroli at J.P. Morgan, who lifted his Q3 ending September 30th. 00:26:08 Speaker 1: Real GDP. 00:26:10 Speaker 6: And you go, well, can we carry that over into Q4? And certainly the tone of the meeting and everything about it is yes. 00:26:16 Speaker 2: Equity is going into the close, 35 minutes away, by the way, down in this session. We're negative by 0.9 percent on the S & P 500, still elevated at the front end of the yield curve up by seven basis points, now 473 on twos. Mike McHugh is still standing by. Mike, you were in the news conference. You heard that line as he characterized the U.S. economy, not just as strong, but strengthening. What were you thinking at that point? 00:26:39 Speaker 7: Well, you take a look at what the summary of economic projections shows, and it shows that inflation is going to be faster. and that the economy is growing, but not at the particular speed that the president would want. And so I think he's maybe making a little bit of a political statement to balance it out a little bit, because if you go into the midterm elections with the central bank saying inflation is going to keep rising, that's something that could be used by the opposition party against him. So he may be trying to balance that out a little bit by saying the economy is strengthening, because otherwise He might be put he might be lumped into the political category and they certainly don't want to do that. 00:27:18 Speaker 2: No, Mike McKee will get some rest. Fantastic job today, buddy. As always, Mike McKee down the nation's capital in Washington, D.C. The Fed chair was also asked about the elevated long gain yields, too. And he gave the same reasons a lot of our guests give as well. Yields are high for multiple reasons, including a stronger economy. They're also high due to competition for capital. They're also higher due to geopolitics. Brammo, just a string of reasons as to why yields are up. at these levels? 00:27:43 Speaker 5: I was writing down the three reasons and thinking to myself, it was as if he was listening to all of the different analysts that come on every single day that say the same thing. What's notable is if you end up hiking rates and you do believe it is just removing accommodation, that allows the economy to still be strong, which is ultimately maybe what we're seeing reflected. 00:28:01 Speaker 1: In long-term yields. They're not materially dropping. 00:28:03 Speaker 5: The flat yield curve, as you're talking about, Because this is just the new neutral. 00:28:07 Speaker 1: Again, the data is going to have to bear it out. 00:28:09 Speaker 5: We don't have a clear sense of exactly whether this is the actuality or not. 00:28:13 Speaker 1: I think we got a lot of clarity on his worldview. 00:28:15 Speaker 6: I love this. This is from somebody very informed coming in who needs to be private. Unfortunately, he called it a nonsense. 00:28:23 Speaker 2: Oh, reveal your source. 00:28:24 Speaker 6: No, no, it doesn't matter. It's just somebody on the street who follows us a lot. But I think there's more going on here. The markets are speaking right now into the close with a correlated vengeance. 00:28:36 Speaker 2: What didn't they like in the news conference? 00:28:38 Speaker 6: I think this is the new Warsh. I mean, to give the chairman credit, he said, I'm changing things. Guess what? We saw it today. 00:28:46 Speaker 2: I'm not going to elaborate too much on this. I'm just going to give you an initial take on what I see in the price action right now. I don't know if this continues. It's just an early observation. 00:28:54 Speaker 5: Yes, fair. 00:28:55 Speaker 2: Equities are down 1 percent. Banks are getting hammered and the yield curve is flattening. This is the first time really over the last couple of months or so that I'm seeing signs for markets start to price in maybe lower growth, just on the margin, just a little bit more. We haven't seen much of that through the years so far. In fact, as we've described it several times, many times in this show. You've had a massive repricing in energy and rates. You haven't seen that repricing in growth expectations. Growth has been robust. Risk appetite has been buoyant. We have not had a growth scare. But for the first time, equities are session lows. Yield curve is flattening. It's not steepening. You're starting to see banks roll over too. If that continues, and it's only, what, an hour into this. So as I say, I don't extrapolate this out into year end. But that's going to be something to watch in the next few sessions, certainly going into the weekend. 00:29:39 Speaker 5: The one word that's going to continue to stand out from this entire press conference and statement is timelier. If this is a Fed committed to bringing down inflation in a timelier manner, it is difficult to see how they can do that without injecting a little bit more, not pain, but at least softening in the economy, unless there is cooperation on the supply side. 00:29:58 Speaker 1: Which they cannot control. And ultimately, that is the message loud and clear. 00:30:01 Speaker 2: Neil Dutton standing by. Neil, I want to give you a final word before you jump off and speak to clients. What's your final word, please? 00:30:07 Speaker 8: Well, my final word is, as much as people want to say Warsh is incoherent, the forecasts, which he doesn't even say he's a part of, are incoherent. The Fed has above-trend growth over the next two years with the inflation rate magically declining a percentage point from now until then. Tell me what model that makes sense. So, you know, look, I mean, at some point you have to kind of just bite the bullet and say, you know, is the 2% always going to be like three years away? And if the Fed's not comfortable with that, that means that they're going to have to engineer weaker economic activity. to meet their goals. And it's irrelevant whether that affects things that are already quite depressed, even more so. I mean, the Fed's job is ultimately to balance aggregate supply and aggregate demand. They can't be picking winners and losers in terms of sectors in the economy. 00:30:59 Speaker 2: It's a rolling three-year target. I think that's something that people are missing right now. It's a rolling three-year target. You know that. Neil, thank you. Neil Dutta there of Ren Mac. It's always a rolling three-year target. It's out there somewhere. We're going to achieve it, Bram. We'll get there someday. 00:31:10 Speaker 5: And evidently, three years is now more timely than three years, three years ago. 00:31:14 Speaker 2: That was the biggest contradiction in all of this. 00:31:15 Speaker 5: Yeah. 00:31:16 Speaker 2: Wasn't it? 00:31:16 Speaker 1: And ultimately, he answered it by saying, well, it's not my contradiction. It's other people's. 00:31:20 Speaker 2: So what's he suggesting? What's he saying? What's his inflation forecast? 00:31:23 Speaker 1: I'm not going to give you forward guidance, John. 00:31:26 Speaker 2: You're not going to get it. You're not a newsletter. I'm not a newsletter. That was my favorite line, too. I actually got a message from a Bloomberg subscriber moments ago saying that was their favorite line as well. I'm not a Wall Street newsletter. 00:31:35 Speaker 1: Exactly. 00:31:35 Speaker 2: I'm the chairman of the Federal Reserve. 00:31:36 Speaker 1: Yeah, to the Washington Exhibitor. It was really interesting. 00:31:38 Speaker 6: One thing I would say, John, important, and folks, this is a pro insight, and that the pros like John Farrow go to spread analysis comparing two yields and those dynamics, which has four outcomes at any given moment. I wonder, John, and I'm not sure as you're not sure after just minutes after this moment that we saw, but I'm not sure where single-point analysis is more germane. And, you know, I'm looking at standard deviation studies just off basic currency moves, but also single-point real yields. That's what I will read into tomorrow morning in the 30-year long-term forever forecast. Real yield is shocking in its move this afternoon. 00:32:19 Speaker 2: Shall we address the elephant in the room? There's one man we haven't heard from so far. 00:32:23 Speaker 1: Yeah. 00:32:23 Speaker 2: The extra Fed official, the chairman of the White House, the president of the United States. Bloomberg Ballots of Power anchor Kelly Lyons standing by. Kelly, you've covered this extensively today. The White House reaction to an interest rate hike by a Fed chair they chose only a number of months ago. 00:32:39 Speaker 5: Mm-hmm. 00:32:41 Speaker 1: That's exactly right. 00:32:42 Speaker 9: Who didn't deliver the decision that President Trump preferred, which, of course, is a rate cut. He's made no secret about that, though he hasn't commented on this decision yet today. We have heard from his special assistant and deputy press secretary, Kush Desai, who spoke on Fox News saying that the rate hike was unfortunate, that it isn't going to do anything to bring oil prices down, though he also added that the president still. respects Fed independence and believes in it. Of course, President Trump, when advocating for a rate cut, comes at it with the frame of reference. 00:33:08 Speaker 1: Of a real estate developer. He sees the U.S. 00:33:11 Speaker 9: As a very creditworthy borrower and therefore deserving of a lower interest rate. Even an economic theory would indicate that's not exactly how that works. He also has suggested that he is willing to give Kevin Warsh as a new chair some room here, blaming instead the other members. 00:33:25 Speaker 1: Of the FOMC. 00:33:26 Speaker 9: He said repeatedly he has another board to deal with, and he has encouraged those other FOMC members to get more patriotic and get on board with a rate cut. 00:33:34 Speaker 1: The other thing I. 00:33:34 Speaker 9: Will say here is, of course, we're 48 days out from the midterm elections, and Trump has made no secret of his view that the cutting cycle that began in September of 2024, about a month and a half out from that election, was politically motivated to help the incumbent Democratic Party who had the White House. Now, at the September meeting, a hiking cycle for whatever duration I wouldn't be surprised to see the president cast that as politically motivated as well. One more thing I will say, if we haven't heard from him on True Social, he is traveling to North Carolina tonight in part to rally for the Republican Senate candidate. 00:34:08 Speaker 1: There, Michael Watley. 00:34:09 Speaker 9: So if we haven't gotten anything on social media in reaction to this decision, I would imagine, guys, that that's. 00:34:14 Speaker 1: Going to be the opportunity. 00:34:15 Speaker 2: It would be shocking if we didn't hear from him on this decision. Katie, looking forward to the program a little bit later alongside Joe Matthew. Kelly Lyons there down in Washington, D.C.,