Speaker 1: Bloomberg Audio Studios, podcasts, radio news, short and simple.
Speaker 2: A change in the statement, but no change in rates.
Speaker 3: The economic overview remains the same word for word, with
Speaker 3: solid growth, strong job gains, and inflation that's eased over
Speaker 3: the past year but remains elevated and then a new line.
Speaker 3: In recent months, there has been a lack of further
Speaker 3: progress toward the Committee's two percent inflation objective. Still, the
Speaker 3: statement says risks to achieving its employment and inflation goals
Speaker 3: have quote moved toward better balance over the past year,
Speaker 3: putting the assessment in the past tense and adding over
Speaker 3: the past year. The additions to the statement would seem
Speaker 3: to ratify the markets view that there will not be
Speaker 3: three rate cuts this year, if any at all. The
Speaker 3: statement's view that the Committee does not believe it would
Speaker 3: be appropriate to reduce rates until it's gained further confidence
Speaker 3: inflation is moving toward target is unchanged.
Speaker 2: Now the long awaited balance sheet taper is here.
Speaker 3: The treasury roll off cap will drop from sixty billion
Speaker 3: to twenty five billion a month starting on June first.
Speaker 3: Officials had suggested it we'd be lowered to thirty billion
Speaker 3: as expected. No change in the thirty five billion dollar
Speaker 3: cap on mortgage backed securities. However, any maturing securities over
Speaker 3: the cap will be reinvested in treasuries rather than mbs.
Speaker 2: The vote unanimous, and that's it.
Speaker 4: Mike McKay, Thank you, sir, Stay close. Let's run through
Speaker 4: this price action. Mike McKy is going to run into
Speaker 4: that news conference in just a moment. Equity is recovering
Speaker 4: just a little bit, still down on the session by
Speaker 4: a tenth of one percent. Retention, of course, immediately turning
Speaker 4: to what's happening in the bond market. In the bond
Speaker 4: market at the moment the rally sticks you'l to lower
Speaker 4: by four basis points on a ten year four to
Speaker 4: sixty four on a two year down three, just about
Speaker 4: holding on to that five percent level. Lots of attention
Speaker 4: in the FX market, what's happening with Dolly Yen. But
Speaker 4: again strength off the back of this Dolly En backdown
Speaker 4: to one to fifty seven fifty four. It was always
Speaker 4: going to be difficult to out hawk what was already
Speaker 4: very hawkish pricing in this market. Bear in mind, though
Speaker 4: this is the first act of a two part story.
Speaker 4: The other act is in about twenty eight minutes time
Speaker 4: when we hear from the Federal Reserve chairman. So do
Speaker 4: you want to play compare and contrast? I think we
Speaker 4: could do that, Bramo. Briefly, I'll go through this. It
Speaker 4: might sound a little boring, but every word seems to matter.
Speaker 4: The last statement the first paragraph read as follows. Recent
Speaker 4: indicator suggests that economic activity has been expanding at a
Speaker 4: solid pace. Job gains have remained strong, and the unemployment
Speaker 4: rate has remained low. Inflation has eased over the past year,
Speaker 4: but remains elevated. That first paragraph has changed. This is
Speaker 4: how it reads now. Recent indicator suggests that economic activity
Speaker 4: has continued to expand at a solid pace. Job gains
Speaker 4: have remained strong, and the unemployment rate has remained low.
Speaker 4: Inflation has eased over the past year, but remains elevated.
Speaker 4: In recent months, there has been a lack of further
Speaker 4: progress towards the committee's two percent inflation objective. I just
Speaker 4: wonder how long the conversation was Bramo. In the f
Speaker 4: WEMC so agreed to that last line of that first paragraph.
Speaker 1: You know, I wonder because the discussion among Fed officials
Speaker 1: who did speak in the week before the quiet period
Speaker 1: was more hawkish people seemed genuinely concerned. I don't think
Speaker 1: that maybe there was disagreement with this. I just wonder
Speaker 1: how much conviction feed Scher Powell will have in this
Speaker 1: news conference to really build on that and say just
Speaker 1: how much less conviction they have and just how much
Speaker 1: they are going to do to offset some of the
Speaker 1: lack of progress.
Speaker 5: I think they've got away for more economic data. In
Speaker 5: the bottom line, John, you tool it off jobs Day?
Speaker 5: Do we link right now to Friday's Jobs Day? I'm
Speaker 5: sorry we do. There's no real indication here of the
Speaker 5: labor market cracking. Jolt survey today was a little week.
Speaker 5: Bob Michael mentioned that, but I just think they have
Speaker 5: to wait there. In massively expost.
Speaker 4: Position fantastic lineup. Gonn gets to the news conference. Bob
Speaker 4: michae is still with us, joining us now a place
Speaker 4: to say, good friend of this program, good friend of ours.
Speaker 4: Mohammed Aaron of Queen's College, Cambridge. Mohamed, You've had a
Speaker 4: few minutes to go over this one. What jumps out.
Speaker 6: Three things, John, One is the characterization of growth is
Speaker 6: stronger than I would have expected. Two is the reduction
Speaker 6: in QE is larger than I expected. And then finally
Speaker 6: that additional sentence they've put in about inflation is going
Speaker 6: to put chair pal in a difficult situation the press
Speaker 6: conference because people are going to say, okay, finish the sentence.
Speaker 6: It's been two the progress hasn't been achieved. Why is
Speaker 6: it something temporary? Is it something structural? So they've left
Speaker 6: wide open the question of why has progress been less
Speaker 6: than they expected on the inflation front?
Speaker 5: Mohammed, if I look at this press conference, this is
Speaker 5: a central banker with an original script and not much
Speaker 5: theory involved at all. Can you get out front of
Speaker 5: the debate ex ante or is this an ex post discussion?
Speaker 2: Tom? I'm really glad you raise it.
Speaker 6: This is an ex post discussion. This is a fed that,
Speaker 6: having been burnt by trying to be the ex anti
Speaker 6: back in twenty twenty one, has become totally exposed, totally
Speaker 6: data dependent, totally we active, and that is a problem
Speaker 6: for the economy. That is a real problem for the economy.
Speaker 6: So no, he's going to remain exposed. We're going to
Speaker 6: hear data dependency I don't know how many times during
Speaker 6: the press conference.
Speaker 1: Which raises this question which data matters more? We were
Speaker 1: talking about data that we got earlier this morning about
Speaker 1: ism manufacturing showing weakening activity to your point about the
Speaker 1: surprise and how much they had conviction and strength, but
Speaker 1: also stickier inflation that came in higher than expected with
Speaker 1: prices paid. How will this fed view that data that
Speaker 1: I don't want to say stagflation because I've said it
Speaker 1: so many times and I'm sure people will be making
Speaker 1: fun of me for that, but I am wondering if
Speaker 1: this is sort of not ideal for them, and if
Speaker 1: there was respond more to the inflation side or the
Speaker 1: economy side.
Speaker 6: So I call it tagflationary wins.
Speaker 1: Thank you.
Speaker 6: I mean, I can live with taxflation or light that
Speaker 6: you used inflationary when they're not going to acknowledge that,
Speaker 6: because it puts a question front and center, which is
Speaker 6: what is the right inflation target for an economy that's
Speaker 6: going through fundamental supply side changes. You know, if you
Speaker 6: look at what is sticking in inflation, it's not particularly
Speaker 6: responsive to higher interest rate for longer.
Speaker 2: It really isn't.
Speaker 6: So if they acknowledge the softer economy, they end up
Speaker 6: having to then discuss, at least internally, whether two percent
Speaker 6: is right inflation target and a phrase that John did
Speaker 6: not read out in the statement is they are strongly committed,
Speaker 6: strongly committed to returning inflation to a two percent target.
Speaker 4: Give me a chance, Mohammed. I was just itching to
Speaker 4: get to you, to get a reaction from Michael with
Speaker 4: us as well, you're going to rite.
Speaker 5: Just threw you under the fail giant.
Speaker 2: We got Mohammed back up. Always got a sense but.
Speaker 7: The state.
Speaker 4: But that was in it before.
Speaker 1: It wasn't the more notable thing. It wasn't struck out.
Speaker 1: It didn't change John. That's the reason why, in fact.
Speaker 5: I've never read a statement continue.
Speaker 4: You didn't even need to tell us that, Hammud, What
Speaker 4: are you doing to me? I don't know. Bob, Michael
Speaker 4: a great friend of this program. To see you, Bobby,
Speaker 4: your thoughts on this one.
Speaker 7: As Michael McKee was reading through the commentary, I thought, boy,
Speaker 7: this is really good for the markets, because here's a
Speaker 7: FED that's telling us look at the longer term, look
Speaker 7: where inflation was, and look where we've gotten it to.
Speaker 7: Don't worry about the last couple of months. We'll see
Speaker 7: what happens there. I actually think that's the right message.
Speaker 7: I don't believe the law of long and variable lags
Speaker 7: has been repealed. I think they've been delayed because of
Speaker 7: all the physical stimulus that's still on the pipeline, but
Speaker 7: they're still there. You are seeing some pressures on the economy.
Speaker 7: Like Muhammad, the only thing I was surprised about is
Speaker 7: that they characterized the economy as still solid.
Speaker 5: I look, Muhammad, I want to bring this up everybody
Speaker 5: up earlier with Bob.
Speaker 7: Mike.
Speaker 5: Come to do with you right now. I don't know
Speaker 5: where you were in nineteen ninety five, maybe at the
Speaker 5: White House, Muhammed, maybe IMF. But the answer is Bob
Speaker 5: Michael says, there's whispers here of nineteen ninety five. The
Speaker 5: stack market was a moonshot off of the success of
Speaker 5: nineteen ninety five. Is that what we are prepared for
Speaker 5: here that they may get this right, we may have
Speaker 5: a constructive nineteen ninety five and up we go.
Speaker 6: So where I agree with Bob without any qualifications, is
Speaker 6: that this particular statement is something that the markets will like.
Speaker 6: It's exactly what the market wanted as to are we
Speaker 6: going to repeat ninety five in terms of market reaction?
Speaker 6: Tom What I'm worried about because I truly believe that
Speaker 6: this is not about lags, that there are structural aspects
Speaker 6: that are running the equilibrium inflation rate higher than it
Speaker 6: has been in the past. I worry that the it's
Speaker 6: going to be overtight this year. I worry that the
Speaker 6: FED is not going to end up cutting because they're
Speaker 6: going to be so data dependent, so reactive, that they're
Speaker 6: not going to look at the weakness that's coming. In fact,
Speaker 6: if you simply read the earnings reports of McDonald's, Starbucks, PepsiCo, Nestley,
Speaker 6: the list goes on. There is no doubt that low
Speaker 6: income consumers are struggling, that balance sheet effects have gone
Speaker 6: from positive to negatives, the pandemic savings are run down,
Speaker 6: that credit card balances are high. They rely entirely on
Speaker 6: the labor market, entirely on wage income, and if something
Speaker 6: goes wrong in that labor market, we are going to
Speaker 6: see this economy slow, much faster than anybody would like
Speaker 6: it to slow.
Speaker 4: Well might as well talking about a loss of pricing power.
Speaker 4: Have been talking about that over the last few months
Speaker 4: or so. But Michael and place that Tom brought up
Speaker 4: the mid nineties, you've talked about the mid two thousands.
Speaker 4: You share those concerns about economic weakness cracks's time to build.
Speaker 4: Yet you are still bullish, as bullish as you have
Speaker 4: been since the two thousands. Could you explain why?
Speaker 7: Well, I think Muhammed's right. I think you have to
Speaker 7: watch how businesses are reacting in this environment, and there
Speaker 7: are some pressures. I think what we need to watch
Speaker 7: is the unemployment rate does not start to go above
Speaker 7: four percent, and certainly at four point two percent, it
Speaker 7: would get the Fed's attention and they would do something
Speaker 7: as long as inflation is reasonable. And what they did
Speaker 7: in ninety five is come in and cut rates three times.
Speaker 7: As I said, that's the one soft landing that I've
Speaker 7: lived through in my forty plus years in the market.
Speaker 7: It looks like it's doable again, but it can't be
Speaker 7: a FED that sits on the sidelines the entire year
Speaker 7: and leaves real yields where they are.
Speaker 1: I have to give you a victory Lapbob, because you've
Speaker 1: basically said that this is what they might do to
Speaker 1: kind of give a nod to a little bit more
Speaker 1: of a dubish stance while having a more hawkish stance
Speaker 1: in the actual statement, which is maybe essentially what they're doing,
Speaker 1: which is the reason why the market might like this.
Speaker 1: I am wondering that Muhammed's point about stagflation light or
Speaker 1: the wins of stagflation, that they're not going to address this.
Speaker 1: They're going to talk about strength in the economy, so
Speaker 1: they don't have to address that. Maybe they're looking at
Speaker 1: a three percent target of inflation rather than two.
Speaker 7: Pal's probably laughing every time he hears stagflation because he
Speaker 7: remembers and he's probably thinking, what I am a vulgar?
Speaker 7: Here go two point eight percent core PCE year over year.
Speaker 7: I would take that in as second. And if you
Speaker 7: go back to ninety five to ninety eight, which Tom
Speaker 7: points out was great for markets, inflation traded between two
Speaker 7: and a half three percent. It was a pretty vibrant economy.
Speaker 7: I don't know what markets will do. I think that
Speaker 7: kind of economic scenario is really.
Speaker 5: Let me joh on next moon exit nineteen ninety eight
Speaker 5: was a moonshot, the that one from four thousand, ten thousand,
Speaker 5: just you know.
Speaker 7: I remember somebody's looking to get out of triple eleven.
Speaker 8: That's what I'm I'm.
Speaker 2: Looking for the first tra triple leverage.
Speaker 4: Today's the days, Today the day Buff's got some buns
Speaker 4: to sound and I swung to and just now chief
Speaker 4: economists the KPMG, Mohammed and Bob are going to be
Speaker 4: sticking with us. Dan, you've had eleven twelve minutes to
Speaker 4: go over this, going against the news conference with Chairman
Speaker 4: Pou eighteen minutes away. What's your big question for him
Speaker 4: after reading that statement.
Speaker 9: Well, one of the things that I'm surprised at that
Speaker 9: they could have gone more hawkish on, and I think
Speaker 9: the nod to inflation picking up more recently was the
Speaker 9: compromise is that they left that they're waiting to decide
Speaker 9: when to reduce rates. And you've got to believe within
Speaker 9: that meeting, given that we've heard that it's a possibility
Speaker 9: that we could see rate hikes if inflation persists, from
Speaker 9: FED leadership themselves that to keep that line reduce rates
Speaker 9: when they're going to reduce rates, that they still think
Speaker 9: the threshold to raise rates is much higher than the
Speaker 9: threshold to cut rates. I think that's where the bias
Speaker 9: is within the FED. However, what I'll be looking for
Speaker 9: in the conference the press conference is was their debate
Speaker 9: and in the minutes to this meeting, was their debate
Speaker 9: about the possibility that they might need to raise rates now.
Speaker 9: I think the move up in inflation we've seen is been,
Speaker 9: you know, somewhat overstated. We know there's some residual seasonality
Speaker 9: somewhere between the fourth quarter and the first quarter's reality
Speaker 9: that's still too hot.
Speaker 8: And there are what we.
Speaker 9: Saw in inflation was much more broad based inflation in
Speaker 9: the service sector, things like home maintenance, car maintenance. It
Speaker 9: wasn't insurance as much this month, but those are things
Speaker 9: that are the things that Muhammad talks about less retractable
Speaker 9: and also more systemic. But there was service sector inflation
Speaker 9: in the employment costs index as well. Not in the
Speaker 9: lowest wage jobs, particularly in food services and accommodation, where
Speaker 9: they've been decelerating quite rapidly and are now trailing overall
Speaker 9: inflation numbers, but in the overall services sector, where we
Speaker 9: do have some labor shortages still pretty acute, there is
Speaker 9: wage pressures there, and that's what the Fed's going to
Speaker 9: be focused on.
Speaker 5: Diane. You know that, Diane smart arm As you're not
Speaker 5: living within three zip codes, there's some fancy university in
Speaker 5: the United Kingdom. Diane, just simply put, if you drive
Speaker 5: seven hours south of Chicago, what's it like right now,
Speaker 5: because I see you with all the mail I get.
Speaker 5: What you get out on LinkedIn is there's a massive
Speaker 5: divide right now between the financial people and the rest
Speaker 5: of America.
Speaker 2: What's like south of Illinois.
Speaker 9: Well, you know what's really interesting is they've just done
Speaker 9: a study on this in terms of how different people
Speaker 9: view what the inflation problem is. Wealthy households, those in
Speaker 9: the urban areas, they tend to view the entire inflation
Speaker 9: problem as completely the fault of the Fed. Those who
Speaker 9: are less wealthy see this as price gouging. They see
Speaker 9: this as an inequality issue. And we still have gross
Speaker 9: inequalities even though we had this massive leveling up of wages,
Speaker 9: even for low wage workers. As I've said before, they
Speaker 9: move from the shadows of the economy into the sun,
Speaker 9: only to be burned by inflation and that inequality. And
Speaker 9: even though wealth picked up, we saw a cross income
Speaker 9: strata that wasn't enough, because inequality continued to worsen. And
Speaker 9: I think that's what you see when you're dealing with
Speaker 9: this kind of inflation, even though it's at a low grade,
Speaker 9: and I wouldn't compare it to nineteen ninety five. Nineteen
Speaker 9: ninety five the food was wrong. In nineteen ninety four,
Speaker 9: Chairman Greenspan had a checklist I remember it well, and
Speaker 9: it filled it out, and he thought he could preempt
Speaker 9: inflation and he was wrong, and he nearly derailed the
Speaker 9: economy that was not coming off an inflationary kind of
Speaker 9: situation that we have today. It's just not comparable.
Speaker 1: This race is his question, and Mohammed, I'd love to
Speaker 1: get your answer. Since you live within a couple of
Speaker 1: zip codes of a fancy UK college that Tom was maligning,
Speaker 1: I will say I want to hear what you have
Speaker 1: to say about this idea of the messaging of fed
Speaker 1: share Powell in the press conference, do you think he
Speaker 1: needs to be hawkish, that he needs to keep the
Speaker 1: market under pressure in order to keep them on this
Speaker 1: goal of at least even having the covered cut rates
Speaker 1: here as you think is necessary, as they want to do,
Speaker 1: but under the aspis of data dependency is difficult without.
Speaker 2: Some more cracking.
Speaker 6: I think the most important thing, Lisa, for him is
Speaker 6: to stick to what actually happened in the meetings and
Speaker 6: not end up like we have in the past, where
Speaker 6: his messaging is different from the messaging from the minutes
Speaker 6: that we're going to get in a few weeks, because
Speaker 6: if that happens, that is going to cause too much
Speaker 6: volatility yet again confusion, and is going to erode forward
Speaker 6: policy guidance. If what he says is in fact what
Speaker 6: was said in the meeting and is confirmed by the minutes,
Speaker 6: then what he should do is stick to where he
Speaker 6: is right now, which is not validate the amount of
Speaker 6: the hawkish pivot. If you like that, the market has done,
Speaker 6: not go all the way, but goes some of the way.
Speaker 6: My concern is ultimately he may end up more hawkish
Speaker 6: than he needs to be for the well being of
Speaker 6: the economy, but that's more for the next meeting than.
Speaker 2: It is for this meeting.
Speaker 1: Diane, your view on that, Do you think that he's
Speaker 1: going to come out maybe more hawkish that he needs
Speaker 1: to be as well?
Speaker 5: I think he is.
Speaker 9: I think that is the risk, and it's because the
Speaker 9: risk has been on the other side. And Muhammed's exactly right.
Speaker 9: It's very hard these press conferences, having them every single meeting.
Speaker 9: There is a downside to transparency. We see all the
Speaker 9: sausage being made, but you also see individual personality of
Speaker 9: the chairman himself and his own views and how that
Speaker 9: gets translated and gets muddled in terms of what the
Speaker 9: overall messaging is. And it's not that he's a bad communicator,
Speaker 9: but it is that this is really hard. I think
Speaker 9: one of the things that I get really frustrated with
Speaker 9: is how little uncertainty the leaders ship of the Federal
Speaker 9: Reserve have really shown about the economy. I think Chair
Speaker 9: Powell has actually been more humble in that regard because
Speaker 9: he's had to eat crow in public on this issue.
Speaker 9: But the humility in uncertainty we face is very high.
Speaker 9: And that is the sort of you know, coming out
Speaker 9: and making statements following the meeting to counter or to
Speaker 9: change the message reflect the message that was in the
Speaker 9: meeting I think is not productive. But it's also the
Speaker 9: certainty with which some of these comments are made is
Speaker 9: really not helpful either, because there is a lot of uncertainty.
Speaker 9: Let's face it, We're at two percent on the Fed's
Speaker 9: you know, run rate for three and six months on
Speaker 9: core and overall inflation coming down, and people were arguing
Speaker 9: that they should be cutting like crazy, and the Fed,
Speaker 9: at least in a prescient manner, said let's be cautious here.
Speaker 9: We've been for me once shame on me for me twice.
Speaker 9: Shame on yous fiemy twice, Shame on me. They said, no,
Speaker 9: I'm not going to be headfaked by this again, and
Speaker 9: they held back. That was good to hold back, because
Speaker 9: in fact we have seen an acceleration. It's probably overstated,
Speaker 9: but we've got to see where we're going, and there
Speaker 9: is time with the legs that are already still in
Speaker 9: the market with regard to fed tightening.
Speaker 4: Diane, this was great. Dane swamk KPMG. Dan, thank you
Speaker 4: talking about humility. You've got to remember four months ago
Speaker 4: we have people in this program talking about in March,
Speaker 4: this was a fat that was meant to be already cutting,
Speaker 4: and now there's a conversation about him at least entertaining
Speaker 4: the potential of hiking interest rates. Mike Gape at a
Speaker 4: Bank of America with us now, Michael Gape, and I
Speaker 4: keep hearing that Chairman Pound is going to be hawkish.
Speaker 4: Could you define for us what hawkish will sound like
Speaker 4: in this news conference, given you, like others, think that
Speaker 4: the first cut comes in December, which is not anytime soon.
Speaker 8: I think hawkish today simply simply is a wait and
Speaker 8: see message. A we need, we need to give policy
Speaker 8: more time to work. That's really about as far as
Speaker 8: I think they go today. I think he can repeat
Speaker 8: or will repeat their view that the supply side is
Speaker 8: helping bring inflation down. So inflation is still in a
Speaker 8: downward trend. Progress hasn't been where we wanted it to be,
Speaker 8: but we think our policy stance is tight. So the
Speaker 8: answer is let that type policy work for longer. I
Speaker 8: think that's about as far as they're they're ready to
Speaker 8: go today.
Speaker 2: That's that's hawk may.
Speaker 8: We'll see what hawkish might look like in June.
Speaker 5: Michael, Are we back to normal? Are we beyond the pandemic?
Speaker 5: Are we talking about fixed income dynamics FOBOSEI one oh one,
Speaker 5: it makes sense now post pandemic. Or we still live
Speaker 5: in the debris of what we had for three four years.
Speaker 7: No, we're still in the shadow of COVID strung. There's
Speaker 7: still stimulus that's being distributed. When we talk to our
Speaker 7: municipal research team, they're talking about state and local governments
Speaker 7: accessing it, going out, doing some hiring, and spending it.
Speaker 7: When you talk to businesses, they're talking about accessing some
Speaker 7: of the Infrastructure Act, some of the chips act, so
Speaker 7: that money is still there. When you look at consumer
Speaker 7: balance sheets, deposit balances on averages are still a little
Speaker 7: bit above where they were pre COVID, So it's still
Speaker 7: sloshing around a little bit, but it's coming down pretty quickly.
Speaker 1: Which ray is a question about long and variable lags
Speaker 1: and exactly how the FED views at Michael Gabe, and
Speaker 1: I'm curious about you or review about whether this is
Speaker 1: a FED that has yet abandoned that or not. Considering
Speaker 1: the fact that so many people are saying this is
Speaker 1: an economy that can live with higher rates. This has
Speaker 1: been the evidence of it is the strength and the market,
Speaker 1: the strength and debt markets in general. Do you think
Speaker 1: that they're going to go there that it matters in
Speaker 1: terms of their faith in long and variable lags.
Speaker 8: I don't think they'll go there and say great detail today.
Speaker 8: But I agree with some of the comments that Bob
Speaker 8: made earlier about long and variable lags kind of still
Speaker 8: being in the pipeline. I think some parts of the
Speaker 8: economy reacted very quickly to higher rates. Others it may
Speaker 8: still be in front of us. So things like fixed
Speaker 8: rate mortgages, the effective mortgage rate only rising very little
Speaker 8: corporates needing to refinance at some point there, I think
Speaker 8: you can make a case that some of the monetary
Speaker 8: policy tightening is still in the pipeline. It's just been elongated.
Speaker 8: I doubt that the chair is going to get into
Speaker 8: that today, although I think it's a very reasonable question
Speaker 8: to ask him, you know, in lights of inflation and
Speaker 8: re months, is your policy stance as tight as you
Speaker 8: think it is? If not, what are you going to
Speaker 8: do about it?
Speaker 4: Are they sufficiently restrictive? Mike Gape And just a final
Speaker 4: question from me once to explore. I think we spent
Speaker 4: the last month or so trying to work out how
Speaker 4: this Federal Reserve is going to respond every single day
Speaker 4: to website surprises. Could you entertain this just a little bit,
Speaker 4: just indulge me. How reactive will they be to downside surprises?
Speaker 4: I'm trying to understand. You get a downside surprise on Friday,
Speaker 4: how quickly will this conversation change? Will we be sitting
Speaker 4: here talking about cuts all over again?
Speaker 8: I mean, I think you'd probably need a number under
Speaker 8: one fifty to get that discussion on the table. If
Speaker 8: consensus is right in that two forty to two seventy
Speaker 8: five R and you have to majorly undershoot that you
Speaker 8: need something that changes the overall narrative, and people like
Speaker 8: me would need to say it looks like the catch
Speaker 8: up effect and services employment is done is over, so
Speaker 8: the labor market looks fundamentally different. It's a pretty big
Speaker 8: hurdle in my view.
Speaker 4: Mike Gape and a Bank of America, Mike, thank you, sir.
Speaker 4: Great to catch up with you. Mike Capeen and Bank
Speaker 4: of America base case December is going to be that
Speaker 4: first cut. Well, Mohammed, I want to come to you
Speaker 4: on that. You've talked about how sensitive this federal reserve
Speaker 4: is from data point to data point. Do you think
Speaker 4: this has the potential, This conversation has the potential to
Speaker 4: change and change quite fast in the other direction.
Speaker 6: I do, John, because they're so reactive. I mean, the
Speaker 6: one thing we didn't talk about and Tom talked about
Speaker 6: the nineties is the economy is changing, both domestically and internationally.
Speaker 2: The nineties was.
Speaker 6: About deregulation, liberalization, and fiscal prudence. Today it's about reregulation,
Speaker 6: heavier government intervention, and physical irresponsibility. The nineties was about globalization.
Speaker 6: Now it's about fragmentation. This is a significantly different operating environment.
Speaker 6: So the risk is that you miss all those signals
Speaker 6: and you end up reacting too slowly to what's coming up.
Speaker 6: You know, I smiled when I when I heard Bob say, well.
Speaker 2: It's very easy.
Speaker 6: You know, if we get all these bad numbers, the
Speaker 6: FED can simply react, but by the time it reacts,
Speaker 6: the harm has been made. It's a little bit like
Speaker 6: being on a plane where the pilot is reacting to
Speaker 6: past turbulence. He's just going to add to the turbulence
Speaker 6: in the short term. So there is an issue about
Speaker 6: having to step back and ask the question what economy
Speaker 6: we're operating in and where is the balance of risk
Speaker 6: for this economy, which has.
Speaker 1: Been a big debate. Bob, what's your take on that.
Speaker 1: Do you agree with Muhammad that maybe they should move
Speaker 1: quickly if they start to see weakness, unclear what they
Speaker 1: will do.
Speaker 7: It's already there some of the weakness. When you look
Speaker 7: at consumer sentiment, consumers are frustrated, they're having to make
Speaker 7: choices on where their dollar goes. They're going down brand.
Speaker 7: When you look at the housing market, home affordability is
Speaker 7: a train wreck, and you look at existing home sales
Speaker 7: they're low, so the consumer is feeling the pressure. You
Speaker 7: look at middle market corporate America. Their cost of funding
Speaker 7: went from call it six percent to somewhere around ten
Speaker 7: to twelve percent, and that's what they're paying and they're
Speaker 7: feeling the pressure of higher input costs. That's really strangling
Speaker 7: their margins. So a lot of it is there, A
Speaker 7: lot of it is slowing down. Maybe that's some of
Speaker 7: what we saw in first quarter GDP. I don't know,
Speaker 7: but we were going to see more of it. If
Speaker 7: you look at the unemployment number, for me, if that
Speaker 7: starts to go about four percent, that's really going to
Speaker 7: get defence ative.
Speaker 2: He and trek Joe Warren.
Speaker 5: I got to be real quick here, but I think
Speaker 5: it's timely. With college protests across America. I'm not sure
Speaker 5: what's going on at Cambridge.
Speaker 2: But I want to be very clear here.
Speaker 5: Mohammed on Joe Stigler's book, The Road to Freedom Economics
Speaker 5: in the Good Society. Is Chairman Powell today going to
Speaker 5: speak to a fractured America, to the polarities of America,
Speaker 5: or is this basically to the financial law audience.
Speaker 6: I think he's going to speak to everybody in the
Speaker 6: beginning when he says that the FED is committed to
Speaker 6: the well being of Americans, all Americans, etc. But he's
Speaker 6: going to stay a mile away from what's going on
Speaker 6: on college campuses.
Speaker 1: Yeah, he might not say a mile away though, of
Speaker 1: the fact that they are not necessarily going to be
Speaker 1: focused on the election. And Bob, do you have the
Speaker 1: sense that they do not cut rates in July. They
Speaker 1: only can go in December because of the potential election
Speaker 1: questions and political interference.
Speaker 7: No, I've had enough conversations with former FED officials that
Speaker 7: if they need to go in September, they will go
Speaker 7: in September.
Speaker 2: What does need to go look like exactly?
Speaker 7: For us? It is rising unemployment. It's something about four points.
Speaker 2: That's the threashout.
Speaker 7: That's it.
Speaker 4: Break into the falls.
Speaker 2: Would you agree with that? I would. I think Bob
Speaker 2: is right, get into the falls.
Speaker 4: They start to cut what twenty five basis points, so
Speaker 4: they start to freak out.
Speaker 7: Well, it depends what else is going on, because Muhammed
Speaker 7: is right, once this starts, it tends to escalate very quickly.
Speaker 7: So if you're going to make that first cut after
Speaker 7: waiting so long, why not do fifty.
Speaker 1: Mohammed I'm just curious what your question would be to
Speaker 1: Fed Shair J. Powell at a time when a lot
Speaker 1: of people are just saying simply, what would it take
Speaker 1: for you to hike rates?
Speaker 2: What would your question be?
Speaker 6: The one thing we haven't talked about at all is
Speaker 6: what is a terminal rate? Where does he think we
Speaker 6: end up? You know, we talk about the journey, but
Speaker 6: will someone tell us where the destination is?
Speaker 4: Will you tell us what you think the destination is?
Speaker 6: Mohammed, I think it's significantly higher than what the Fed
Speaker 6: is saying right now?
Speaker 4: There it what Mohammed? So in something two and a half.
Speaker 6: Oh no, I think we are Bob sweet in terms.
Speaker 4: Of yeah, you think the closet have thought?
Speaker 6: Yes, yes, that's what I think we are, Bob.
Speaker 2: How do you do quickly here, Bob?
Speaker 5: But how do you dovetail with that? With Feruli's potential
Speaker 5: GDP under two percent, how do we have a run
Speaker 5: rate above three percent? Is doctor Larian talks about in
Speaker 5: JP Morgan's publishing out an economy that's a little bit
Speaker 5: beneath that.
Speaker 7: To be kind, everything goes in stages, and a high
Speaker 7: real FED funds rate is going to slow things down.
Speaker 7: The Fed will pull back the FED funds rate. I
Speaker 7: agree with Muhammad, maybe something like in that three and
Speaker 7: a half to four percent bracket. I think two point
Speaker 7: six percent is a fantasy that will create enough stimulus
Speaker 7: that things will pick up again. So it's going to
Speaker 7: come in cycles again as it always does.
Speaker 4: Makes the question it is a fantasy. Why are they
Speaker 4: adjusting that? Do you think that's just something they don't
Speaker 4: want to engage with at the moment. Have a debate
Speaker 4: about where that long dots should be. Is that what
Speaker 4: that's about?
Speaker 7: Well, my question that Mike McKee should be asking is
Speaker 7: have the dots outlive their usefulness? I believe they have.
Speaker 7: I think they should do away with it. I think
Speaker 7: in twenty twelve, when they were in completely uncharted territory,
Speaker 7: they helped for a very brief period of time.
Speaker 4: Bob Michael if JP Morgan's is a brilliant Mohammed al
Speaker 4: Errand of Queen's College, Cambridge that to both of you,
Speaker 4: thank you very much for being with us.