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Speaker 1: Nathan Sheets joining us right now in studio to talk

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Speaker 1: a little bit about his assessment of that as well.

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Speaker 1: Global chief economists over at City. Nathan. Great to have

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Speaker 1: here on set, and when you hear Powell, I'll talk

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Speaker 1: about economic conditions and how supportive, at least in his words,

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Speaker 1: they are right now of FED policy. And I guess

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Speaker 1: the cushion that they have to maybe just sit by

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Speaker 1: and see what happens next.

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Speaker 2: Yeah. I think the reality here is over the last

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Speaker 2: few months, in particular, we have seen a very significant

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Speaker 2: upward move and longer term interest rates, and with the

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Speaker 2: FED runs its models when the FED thinks about financial conditions,

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Speaker 2: that longer end of the curve really weighs have laid

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Speaker 2: in economic outcomes. And I think that that has probably

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Speaker 2: given the FED a notch more confidence that the treatment

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Speaker 2: that it is prescribed is getting the traction and we'll

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Speaker 2: ultimately get the traction that they desire. And in the

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Speaker 2: press conference today, J. Powell had numerous opportunities to lean

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Speaker 2: into a twenty five basis point hike in December and

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Speaker 2: he did not take them. And I think the conclusion

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Speaker 2: now that kind of the maintained path of policy in

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Speaker 2: the fed's head, notwithstanding the previous dot plot, is that

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Speaker 2: they've done enough and now we're in the world of

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Speaker 2: higher for longer.

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Speaker 3: So I guess the focus now really turns the dot plot,

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Speaker 3: which and I learned something new here, which is that

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Speaker 3: they lose efficacy the longer the time goes. So they

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Speaker 3: really matter when their first release, but after the next

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Speaker 3: set of data points, they matter less. If the dot

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Speaker 3: plots show any adjustment, people are going to look ahead

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Speaker 3: right away to the pivot.

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Speaker 2: Yeah, very important point. At the December meeting, we will

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Speaker 2: have new projections, we'll have a new dot plot, and

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Speaker 2: at that point the fed's going to have to explicitly

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Speaker 2: address are we hiking at this meeting now? I guess

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Speaker 2: another strategy is to say, well, there's another one out

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Speaker 2: there someplace, and to allude that maybe in the first

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Speaker 2: half the year they'll need to do more. But then

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Speaker 2: what about the cuts that they had in in the

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Speaker 2: back end of the curves. So this next stop plot,

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Speaker 2: I would expect if it goes since they think it will,

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Speaker 2: that they're going to be holding in December, and then

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Speaker 2: maybe that translates into perhaps one less cut in twenty

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Speaker 2: twenty four. Well, in this.

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Speaker 4: Conversation about whether they're going to hike again when we

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Speaker 4: might start to see those cuts. It is interesting to

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Speaker 4: hear Jerome pal say that the Fed is really still

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Speaker 4: trying to gain confidence in what the appropriate stance of

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Speaker 4: policy is. When you think about the different risks out there,

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Speaker 4: the risk of doing too much versus doing too little,

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Speaker 4: where do you think the bigger one is right now?

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Speaker 2: So Pale is struggling with this, with this double reality.

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Speaker 2: On the one hand, has he seen progress absolutely? Core

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Speaker 2: PC eighteen months two years ago is running at five

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Speaker 2: and a half percent or higher. Now it's running at

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Speaker 2: three point seven, and my expectation is in coming months

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Speaker 2: it's likely to fall somewhat further. But at the same token,

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Speaker 2: at the same time, inflation is not back at that

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Speaker 2: two percent level that they desire, and the economy, the

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Speaker 2: labor market continue to seem to be pretty strong. So

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Speaker 2: what he's struggling with here is we see some improvement,

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Speaker 2: we see some momentum in the disinflation process. We know

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Speaker 2: we're tighter, but have we done enough? And I think

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Speaker 2: he's essentially said, well, let's wait.

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Speaker 1: And see the flip side of those whether they've done

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Speaker 1: too much, And he did address the stress in the

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Speaker 1: housing sector from eight percent mortgage rates. He also talked

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Speaker 1: about some of the stress that you're seeing in business

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Speaker 1: investment and refinancing, and that raises a lot of questions

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Speaker 1: about the pace of GDP growth, at least that we

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Speaker 1: saw in the most recent quarter, in the third quarter,

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Speaker 1: whether that's an anomaly and we should expect some sort

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Speaker 1: of leveling out.

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Speaker 2: My sense is, especially coming off that very strong third quarter,

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Speaker 2: and given the momentum that I continue to see in

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Speaker 2: the labor market in particular, that they are at a

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Speaker 2: place where Pale is willing to live with the rest

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Speaker 2: at this stage, given where they are, that they've hiked

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Speaker 2: too much, and if it does seem like some of

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Speaker 2: those some of those pressure points start to manifest themselves,

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Speaker 2: then he's got plenty of room to ease policy. And

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Speaker 2: I do think that he's ready in the fullness of time,

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Speaker 2: if the economy slows more rapidly than he's expecting, I

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Speaker 2: think Pale is more than prepared to say, Okay, we've

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Speaker 2: done enough, maybe we've done more than enough, and we'll

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Speaker 2: start cutting rights.

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Speaker 3: How commited do you think that that is to that

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Speaker 3: two percent inflation target? Is it enough to trigger a

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Speaker 3: recession or will three percent or two ish percent be

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Speaker 3: good enough to signal the all clear if recession is

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Speaker 3: the unavoidable alternative.

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Speaker 2: This is a huge question that I personally struggle with.

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Speaker 2: Sense is that j Powell, especially now that we're looking

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Speaker 2: at three handle inflation rates, that he doesn't want to

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Speaker 2: trigger a recession necessarily to get inflation back down to

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Speaker 2: two percent as long as the market's reviewing FED policy

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Speaker 2: is credible. And I think the measure of their credibility

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Speaker 2: the north star for FED policy through this episode are

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Speaker 2: inflation expectations and particularly the longer term inflation expectations. And

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Speaker 2: the sad reality here is, yeah, I've seen a little

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Speaker 2: bit of nudging up in those, and that is that

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Speaker 2: the markets voting every day on how credible the FED is.

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Speaker 1: Great. Analysis is always, Nathan, great to catch up with you,

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Speaker 1: Nathan Sheets, of course, the chief economists over at City

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Speaker 1: helping us parse some of what we heard from Jay

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Speaker 1: Powell