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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best an economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App.

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Speaker 2: We are about to get some words from the Federal

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Speaker 2: Reserve as they embark on a pivot point of potential inflation, disinflation,

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Speaker 2: and then potentially the end of a hiking cycle after

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Speaker 2: raising rates by five hundred basis points.

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Speaker 3: Let's head over to Michael McKean. Now with the latest mic.

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Speaker 4: We have a super hawkish skip a unanimous Fed notice

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Speaker 4: sense leaves the benchmark rate at five to five and

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Speaker 4: a quarter percent. However, the new dot plot shows a

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Speaker 4: new terminal rate of five point six percent, which would

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Speaker 4: be two to twenty five basis point moves, or at

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Speaker 4: least one point fifty Twelve of the eighteen members of

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Speaker 4: the committee see rates at that level or above. One

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Speaker 4: sees six and a quarter percent, four rates moving up

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Speaker 4: only twenty five basis points, but only two see no

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Speaker 4: change between now and the end of the year. In

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Speaker 4: their statement, the officials say holding the target range steady

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Speaker 4: at this meeting allows the Committee to assess additional information

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Speaker 4: and its implications for monetary policy, but the very next

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Speaker 4: sentence leads us into it with saying instead of saying

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Speaker 4: in determining the extent to which additional firming may be appropriated,

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Speaker 4: now reads in determining the extent of additional policy firming

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Speaker 4: that may be appropriate. There are also significant changes to

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Speaker 4: the economic assumptions. Unemployment this year projected to reach only

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Speaker 4: four point one percent, down from four point five four

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Speaker 4: point five percent next year and in twenty twenty five,

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Speaker 4: down from four point six. Growth revised up this year

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Speaker 4: to one percent from four tenths and lowered by a

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Speaker 4: tenth in the next two years. PCEE inflation forecast at

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Speaker 4: three point two percent, down from three point three percent

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Speaker 4: this year. Core PCEE is revised up this year to

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Speaker 4: three nine from three to six. There are almost no

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Speaker 4: significant changes in inflation for the next two years. The

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Speaker 4: federal funds rate will be cut, but not until next year.

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Speaker 4: The summary shows it will be a big cut as

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Speaker 4: well a full percentage point in twenty twenty four, going

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Speaker 4: to four point six percent by the end of next year.

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Speaker 4: They see rates falling to three point four percent in

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Speaker 4: twenty twenty five. The statement says the economy has continued

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Speaker 4: to expand at a modest pace, but job gains have

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Speaker 4: been robust and inflation remains elevated. While the banking system

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Speaker 4: is sound and resilient, they do expect tighter credit conditions

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Speaker 4: will weigh on economic activity, hiring, and inflation. The extent

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Speaker 4: of those effects remains uncertain, it says, And finally, there

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Speaker 4: are no changes to QT the ninety five billion dollars

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Speaker 4: a month roll off to repo or reverse repo rates

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Speaker 4: or to counter party caps.

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Speaker 1: I think what's important here, folks. In the multiple decades

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Speaker 1: that I've known Michael McKee, rarely if I heard that

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Speaker 1: tone of the McKee voice. He has huge perspective on this.

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Speaker 1: And to see the two year yield, Karen, if you

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Speaker 1: can't bring up the two year yield right now, which

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Speaker 1: only can be captured by a fourteen basis point move

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Speaker 1: to high yields, the y axis on the two year

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Speaker 1: yield right now, extraordinary equities give back fractionally. But the

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Speaker 1: yield move here, Lisa is, Mike, stay with us. The

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Speaker 1: yield move here, Lisa's extraordinary.

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Speaker 3: They're getting the message loud and clear.

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Speaker 2: The FED wants to go again, and quite maybe quite significantly.

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Speaker 2: But this from Drew Mattis of MetLife. He writes it

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Speaker 2: and says, if they knew they were going to be

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Speaker 2: able to go, they would have gone. If they were

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Speaker 2: so convinced that they would need to raise rate significantly higher,

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Speaker 2: why not today?

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Speaker 1: I mean, Michael McKee with then we're really an historic

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Speaker 1: dot plot and projection study that you just said. Can

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Speaker 1: you say that this is the first time, Michael McKee,

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Speaker 1: where we begin to frame something in the vicinity of

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Speaker 1: six percent for short paper.

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Speaker 4: Well, it's the first time you get anybody suggesting that

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Speaker 4: we're now over six percent to six and a quarter

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Speaker 4: for at least one member and two think we're going

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Speaker 4: to go somewhere in between that. So it does look

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Speaker 4: like we're putting it into the ballpark. But still the

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Speaker 4: majority think we're going to end up at five point six,

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Speaker 4: which is still a significant two moves.

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Speaker 3: Honestly, I just keep going back to this idea.

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Speaker 2: If they wanted to hike eventually and possibly twice more.

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Speaker 2: Why not today the reassessment and potentially the concern out there,

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Speaker 2: Michael McKee, stick with us, will be coming back to

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Speaker 2: you as we do see markets on the move very much,

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Speaker 2: readjusting to a reality where they possibly want to raise rates.

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Speaker 3: By two more times.

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Speaker 2: Just to put this in a perspective, this is the

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Speaker 2: first pause in FED policy in fifteen months. That is

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Speaker 2: where we are starting on March twenty twenty two and

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Speaker 2: having raised five hundred basis points. They did not raise

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Speaker 2: rates tom and you are seeing though their indications of

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Speaker 2: further rate hikes being bled out into markets setting them lower.

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Speaker 1: And there's what we talked about this morning as well.

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Speaker 1: This afternoon, the FED says the FOMC vote was unanimous.

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Speaker 1: At this historic moment, it is good to speak with

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Speaker 1: Diane Swanck, Chief Economists KPMG, with all sorts of experience

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Speaker 1: here out of Michigan and Midwestern Chicago at economics, Dan,

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Speaker 1: what in God's name is going on? Should they have

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Speaker 1: just raised rates?

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Speaker 5: I actually think that they're really concerned. Its attention within

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Speaker 5: the Fed that Julia referred to earlier in terms of

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Speaker 5: the diversity of views. Chairman Powell is a much more

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Speaker 5: skittish about what's going to happen in the financial markets

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Speaker 5: and stresses in the financial sector, of the banking sector

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Speaker 5: in particular, and not wanting to go too far. That said,

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Speaker 5: this is a FED that is committed to additional rate hikes.

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Speaker 5: The tricky part of this pause or skip the waller

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Speaker 5: skip as we call it, messaging it and this was

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Speaker 5: a very effective way to message we're going to assess

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Speaker 5: what tightening is out there and how much additional tightening

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Speaker 5: is needed. I want to add that much of financial

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Speaker 5: markets have ignored that many central banks around the world

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Speaker 5: that had paused have had to reassess and go back

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Speaker 5: in Bank of Australia, the Reserve Bank of Australia, the

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Speaker 5: Bank of Canada in the recent week ECB, all of

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Speaker 5: these banks looking to think that they were close to

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Speaker 5: a terminal rate now reassessing that. And I think the

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Speaker 5: FED doesn't want to look like any pause that it

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Speaker 5: takes is behind the curve and not continuing that products

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Speaker 5: and the blur.

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Speaker 1: Of emotion there from Mike McKee and the data of

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Speaker 1: the projections Diane Swank, was this a Fed of a

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Speaker 1: single mandate? Have they basically said, we can't opine on

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Speaker 1: labor because we're solidly under four percent.

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Speaker 5: There is clearly of you that labor markets are extremely tight.

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Speaker 5: They acknowledge that I'm not at Also, heis by the

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Speaker 5: upward revisions to the forecasting growth, the idea that they're

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Speaker 5: still going to get to four and a half percent

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Speaker 5: on the unemployment rate, although mild recession is still this

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Speaker 5: sort of softish landing kind of scenario they're trying to

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Speaker 5: reach for. But when you start looking at the other

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Speaker 5: issues on rate hikes, on how many great hikes are

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Speaker 5: up are even an excess of a half percent in

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Speaker 5: this year, that really gets to the core of the

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Speaker 5: issue of how hawkish they think they're going to have

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Speaker 5: to be to t rail what's become a more persistent

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Speaker 5: global inflation underline inflation.

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Speaker 1: After the shock of these folks, equities deteriorate down negative

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Speaker 1: three to four. It's okay, Dan, I cough like that

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Speaker 1: all the time. SPX down a half a percent, and

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Speaker 1: I really want to say that the two year yield

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Speaker 1: my litmus paper this afternoon, continues to move to a

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Speaker 1: higher yield. We've got a shocking sixteen almost seventeen basis

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Speaker 1: point move. That's a ginormous move for those keeping score at.

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Speaker 2: Home, Lisa, and I'm watching real yields, basically inflation adjusted

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Speaker 2: or the market's perception of inflation over two years, surging

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Speaker 2: to the highest going back to two thousand and nine,

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Speaker 2: nearly two point seven percent in terms of real yields,

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Speaker 2: So it gives you a sense of the tightening as

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Speaker 2: we move forward.

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Speaker 3: Diane, we were talking about how Chair.

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Speaker 2: Powell doesn't necessarily want to fractionalize his committee. He wants

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Speaker 2: to keep people on the same page, and because of

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Speaker 2: the varying views was why they didn't go. Is that

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Speaker 2: uncertainty good or is it bad for a federal reserve

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Speaker 2: setting policy at such an uncertain time.

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Speaker 5: I think I actually agree with Julia on this. I

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Speaker 5: mean the idea of having First of all, he's been

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Speaker 5: remarkably successful at corralling the cats. That's just something he.

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Speaker 3: Is very good at doing.

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Speaker 5: That said, the diversity of views when you're trying to

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Speaker 5: calibrate policy very hard to do, and given the uncertainties

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Speaker 5: we phase is healthy. And I think what Julia pointed out,

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Speaker 5: if we had gotten a descent, what we did is

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Speaker 5: he you served a descent by making this a very

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Speaker 5: hawkish statement. Basically, give guarantee a July rate hike as well.

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Speaker 3: That was his way of buying time.

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Speaker 5: That was a compromise cut, so he did not get

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Speaker 5: a ascent at this meeting. But I do think it

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Speaker 5: is healthy to understand where the spectrum of views are

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Speaker 5: given the uncertainty and the unprecedented nature. Are hete even

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Speaker 5: using that word anymore, but we all know it. Julia

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Speaker 5: did a very good job of saying how many things

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Speaker 5: that were all integrating to try to understand this environment.

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Speaker 5: But having that spectrum of views on the bed and

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Speaker 5: the diversity of views within the Federal Reserve is a

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Speaker 5: strength of the FED, not a weakness.

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Speaker 2: Just to rehash if you're just joining us now. The

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Speaker 2: Fed did not hike, but it was a super hawkish skip.

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Speaker 2: According to Michael McKee, looking at a median rate forecast

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Speaker 2: for the end of this year five point six percent,

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Speaker 2: that is up from about five percent right now. It

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Speaker 2: also sees the end of twenty twenty four rates being

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Speaker 2: at four point six percent. Definitely seeing a tilt upwards

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Speaker 2: as they signal two more rate hikes by your end, Diane,

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Speaker 2: I'm curious from your van point does that seem realistic

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Speaker 2: based on the economic slowing and the disinflation that you're seeing,

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Speaker 2: that that is what's required to truly bring inflation to

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Speaker 2: the two percent target.

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Speaker 5: Well, it is our forecast, so we expect them to

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Speaker 5: raise rates both in July and in September as to

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Speaker 5: that half percent up. And I think that's important because

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Speaker 5: the resilience that we've seen, even though inflation is cooled dramatically,

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Speaker 5: which is wonderful, a lot of it has been concentrated

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Speaker 5: in food and energy prices. Again very important for consumers.

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Speaker 5: But remember why did the Bank of Canada go back

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Speaker 5: in because they saw bottoming in the housing market that

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Speaker 5: could mean additional inflation down the road in shelter costs.

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Speaker 5: We're experiencing something very similar in the United States at

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Speaker 5: the same time that core services inflation has proven sticky,

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Speaker 5: not just in the US but globally, even in Europe

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Speaker 5: where they've had a technical recession.

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Speaker 1: Now just joining US Steian Swan KPMG with us right now,

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Speaker 1: Lisa Brawmwinson, Tom Keen on a meeting that is not

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Speaker 1: a snooze fest. You heard it from our Michael McKee.

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Speaker 1: An extraordinary and truly super hawkish statement. That is mister

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Speaker 1: mckees's language. I'm going to take five point six percent

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Speaker 1: on the terminal rate. Let's round it up collegiately to

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Speaker 1: six percent. You can do that in biology. It's not biology,

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Speaker 1: but we'll go there. Michael Gapin with US US economist

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Speaker 1: Bank of America, and of course Michael Collins Senior. We

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Speaker 1: only booked Michael's today is how it works exactly well,

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Speaker 1: Michael Collins with U A PGM fixed income as well,

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Speaker 1: Michael Gabon. I got to go right to the terminal rate.

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Speaker 1: It seems like we're flying blind. Does Bank of America

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Speaker 1: have to adjust a money market fund a five five

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Speaker 1: point one five point two percent? And are we migrating

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Speaker 1: towards a five point six five point eight Dare I

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Speaker 1: say six percent? Short term piece of paper?

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Speaker 6: It certainly looks that way, Tom. I think you could

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Speaker 6: add to that story a whole bunch of Treasury bill

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Speaker 6: issuans coming in a hurry, so T bill yields as

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Speaker 6: well as other money market yields. Look, I think five

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Speaker 6: point six is where the Fed is wanting to go.

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Speaker 6: I to answer your earlier question, if I may pose

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Speaker 6: it to myself, Yeah, they should have hiked today, but

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Speaker 6: I think they got stuck on timing at the end,

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Speaker 6: and market pricing wasn't where they wanted, and maybe it

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Speaker 6: would have been a little too disruptive to try and

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Speaker 6: squeeze that in at the end. So we get I

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Speaker 6: think what it will be a difficult message, which is

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Speaker 6: for some reason, we saw enough to pause today, but

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Speaker 6: we've also seen enough to tell you we think we

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Speaker 6: need to do two more rate hikes.

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Speaker 1: Michael Collins, I flunk not one, not two, but three

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Speaker 1: exams over the word disintermediation and what that means to

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Speaker 1: me is not chaos but just uncertainty and discontinuities within

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Speaker 1: the global fixed income space. Does the shock of this

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Speaker 1: decision is super hawkish? Does it put a little bit

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Speaker 1: of tension into the fixed income markets?

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Speaker 7: pGEM looks at yeah, absolutely, Tom. You know, we've been

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Speaker 7: thinking the risk to the market pricing, which, as you know,

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Speaker 7: have been pricing in a lot of rate cuts starting

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Speaker 7: by the end of this year. We thought the risk

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Speaker 7: was that those would be taken off the table, and

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Speaker 7: sure enough, this really hawkish forward looking dot plot does that.

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Speaker 7: So the big kind of bear steepening or flattening, we're

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Speaker 7: seeing in the yield curve is lined up with our

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Speaker 7: positioning fortunately and is really to me what the FED

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Speaker 7: should be doing is expected.

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Speaker 2: Michael Gapan, you were talking, first of all, happy birthday

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Speaker 2: on this FED day to you. You were talking about

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Speaker 2: how the FED didn't raise rates because the market wasn't

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Speaker 2: aligned and they kind of ran out of time. Was

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Speaker 2: that the right call given the fact that they want

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Speaker 2: tightening financial conditions to help them get to their goal.

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Speaker 6: Look, I think I think in general, as a policymaker,

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Speaker 6: you do not want to surprise markets with rate hikes.

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Speaker 6: So I think that is the right base point of view.

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Speaker 6: But I also think the data moved quickly against them.

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Speaker 6: Just at the end of the intermeding period. We have

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Speaker 6: upward revisions to construction spending and trade which puts Q

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Speaker 6: one growth at two percent, very strong employment report. You know,

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Speaker 6: I think you have to you're going to get a

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Speaker 6: significant market reaction today. Anyway, you know, I think they

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Speaker 6: probably if they had another week, they would have they

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Speaker 6: would have pushed us all into a hike in June.

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Speaker 2: Michael Collins, I'm looking right now at the projection of

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Speaker 2: five point six percent rates by the end of this year.

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Speaker 2: Two more rate hikes and four point six percent by

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Speaker 2: the end of the following year. I keep asking, this,

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Speaker 2: is this realistic based on the slowdowns that we're seeing

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Speaker 2: in different areas. Do you think that they will actually

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Speaker 2: achieve this? And if they don't, what kind of credibility

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Speaker 2: are they sacrificing.

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Speaker 7: Yeah. I think what they really need to do, Lisa

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Speaker 7: is try to convince the markets that they'll at least

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Speaker 7: keep this funds rate where it is somewhere in the

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Speaker 7: low to mid fives for longer than the markets are

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Speaker 7: pricing in. Sending this more more hawkish message certainly does

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Speaker 7: that right, and the markets are readjusting, as Tom said,

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Speaker 7: to this higher yielding world. So I think that's the

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Speaker 7: right message, the right move. But ultimately I don't think

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Speaker 7: they'll be able to get two more rate hikes off. Ultimately,

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Speaker 7: I don't think they'll be able to have a FED

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Speaker 7: funds rate, you know, in the mid to high fours

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Speaker 7: or fives for more than the next year or so.

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Speaker 7: So I think ultimately you will see more cuts. But

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Speaker 7: for now, I mean rates are going to stay higher

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Speaker 7: for a little longer than was priced in. I think

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Speaker 7: that's the right message.

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Speaker 1: Dane Swank with us as well. I want to go

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Speaker 1: to all three of you on this. I think it's

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Speaker 1: so important. Swank. I want to look at the dot plot,

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Speaker 1: and you know, I'm not a fan of it. I

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Speaker 1: took Richard Berner one on one and I'm just not

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Speaker 1: a fan of all this verbiage. I look at twenty three,

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Speaker 1: I'm okay, there's sort of a cohesion, cohesion to it.

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Speaker 1: I look at twenty five, it's a lesser cohesion. The

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Speaker 1: dot plot right now in twenty twenty five, Diane Swank

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Speaker 1: is a complete mess. There's no cohesion. It's basically a

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Speaker 1: linear point estimate from low to high. Dian Swank is

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Speaker 1: a dot plot broken.

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Speaker 5: I think the dot poll has been broken for a

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Speaker 5: long time. I don't think it's the most effective thing,

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Speaker 5: and I think the Fed now it's really more short

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Speaker 5: term than long term, but it really underscores the uncertainty

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Speaker 5: that we face out there. And I will add one

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Speaker 5: more reason of why the Fed paused at this particular meeting,

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Speaker 5: that Treasury issuance issue. That is something they wanted to

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Speaker 5: get over the hump on. And remember, we start to

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Speaker 5: get corporate tax revenues in tomorrow, which may be able

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Speaker 5: depending on how you know a day before the Fed

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Speaker 5: makes this decision on how fast treasury issuans have to go.

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Speaker 5: This is another thing that the chair Powell himself, I think,

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Speaker 5: was working to get some space around. But I also

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Speaker 5: think it's really important to understand that so far around

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Speaker 5: the world, central banks have underestimated the ability of the

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Speaker 5: transmission effect of higher rates and their economies. Their economies

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Speaker 5: have proven much more resistant to rate hikes than they

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Speaker 5: thought they were. They thought they'd happen on a real

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Speaker 5: time basis. There were estimates out there that this would

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Speaker 5: be almost real time in the legs would disappear. Two

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Speaker 5: things are happening. One is governments intervene to dampen the effect.

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Speaker 5: Particular have to Russia invaded Ukraine of higher inflation, which

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Speaker 5: extended out the period of inflation and dampen the effect

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Speaker 5: of higher rates. But it also has put us in

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Speaker 5: this situation where central banks are now having to go

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Speaker 5: back in and the concern is that we could get

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Speaker 5: a reacceleration or more entrenched inflation. And that's why this

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Speaker 5: is so hawkish.

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Speaker 1: Michael Gaban when you're right about this, and again I'm

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Speaker 1: going to go out eighteen months to the craziness of

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Speaker 1: beginning twenty twenty five with a dot pot that's absolutely

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Speaker 1: original and from I'm going to call it buller to

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Speaker 1: high to whoever low goules, be low whatever. I'm just

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Speaker 1: guessing their folks. But Michael gaban as you right for

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Speaker 1: the Bank of America, what's the single biggest mystery to

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Speaker 1: you in the GDP equation. What's the mystery that's going

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Speaker 1: to come out of this press.

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Speaker 6: Conference in the short run. I would say that what

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Speaker 6: surprised me and I think others has been how much

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Speaker 6: labor supply has grown and responded in twenty twenty three,

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Speaker 6: the massive surgeon immigration, the pickup and late in the

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Speaker 6: labor force. The shortfall between labor supply and labor demand

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Speaker 6: has narrowed quickly. As Diana said, it's meant the labor

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Speaker 6: market is held up, spending is held up, and there's

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Speaker 6: a lot more resilience in the economy. And as Lisa mentioned,

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Speaker 6: maybe it's even adding to that excess saving argument just

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Speaker 6: because of higher income. The further we go to we

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Speaker 6: go out, it's we don't know how quickly inflation is

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Speaker 6: going to come down. And I think that twenty twenty

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Speaker 6: five distribution tells you the median of that means absolutely nothing.

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Speaker 6: There's no weight to that middle. The committee simply doesn't know.

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Speaker 1: We're on radio and television. We welcome all of you

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Speaker 1: across this nation and worldwide. Michael McKee has gone into

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Speaker 1: the hermetically sealed press conference and i'll see that in

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Speaker 1: about eleven maybe twelve minutes. Here, Lisa, we've not talked

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Speaker 1: about something. Lisia, you and thank you so much hitsf

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Speaker 1: for bringing this up out on Twitter. The steepening of

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Speaker 1: a prea misra like twos tens spread here out to

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Speaker 1: ninety three basis points. Let's remind ourselves of how this

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Speaker 1: is a Michael mc gapein taught me this word. It's

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Speaker 1: a ginormous curve in version that we see redone today, redone.

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Speaker 2: Today, ninety two basis points of inversion that we're looking

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Speaker 2: at right now. Not quite the record high or record low,

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Speaker 2: i should say, for the cycle of one hundred and seven,

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Speaker 2: nonetheless highlighting how higher near term rates are really not

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Speaker 2: coherent with the long term rates that are going down.

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Speaker 2: I'm also looking at the rate expectations going out by

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Speaker 2: September five point three percent by January now the implied

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Speaker 2: FED funds rate is five point two percent.

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Speaker 3: Michael Collins, how do you play this?

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Speaker 2: Do you lean into the long term yield story with

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Speaker 2: this idea that the Fed will necessarily bring inflation down

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Speaker 2: at whatever cost to growth?

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Speaker 7: Absolutely, a really hawkish Fed, Lisa, this late in the cycle,

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Speaker 7: when you're already seeing evidence of growth and demand and

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Speaker 7: inflation lowing is definitely bullish for the long end. It

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Speaker 7: means that they will by hooker by crook control inflation, right.

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Speaker 7: They are adamant about that. I think they're very convincing

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Speaker 7: to the market. So this big kind of flattening we're

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Speaker 7: seeing in the market is definitely evidence of that. And

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Speaker 7: I think, you know, long term rates are pretty much

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Speaker 7: capped here.

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Speaker 2: Do you think, Michael Collins, that there is going to

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Speaker 2: be an issue with riskier credit as the Fed does

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Speaker 2: double down and as you start to see pretty significant

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Speaker 2: refinancing costs as time goes on.

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Speaker 7: Yeah, no doubt right. I mean this does take a

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Speaker 7: little bit of time, right. The long these high rates

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Speaker 7: for longer will eventually bite is more and more companies,

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Speaker 7: more and more commercial you know, real estate mortgages, more

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Speaker 7: and more individuals, more and more governments, have to refinance

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Speaker 7: their debt at these higher rates. You will see tremendous

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Speaker 7: dispersion in the markets. You'll see weaker credits, more levered companies,

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Speaker 7: companies exposed to floating rate dat really start to suffer here.

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Speaker 7: And that's that's part of the Fed's intention, really right,

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Speaker 7: to weaken demand and weaken the economy. And you'll see

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Speaker 7: it in the lower end consumers, lower end corporations, and

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Speaker 7: you're going to see that disparsion really accelerate late in cycle.

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Speaker 1: Here, zidegeist check on a Wednesday afternoon, if you're just

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Speaker 1: joining us nine minutes away from the McKee press conference,

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Speaker 1: and this I just think is great. I guess I

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Speaker 1: brought it up in a question to someone. I can't

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Speaker 1: I can't remember what I did five minutes before. Folks,

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Speaker 1: Drew Mattis, you said, was listening over at met Life,

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Speaker 1: and here's Andrew Hollendhorst. Of course, has been historic and

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Speaker 1: calling for a higher rate regime memo. Hollendhorst looks like

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Speaker 1: a genius this afternoon. May I quote the gentleman from

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Speaker 1: UCLA seconding mister Mattis, why not just hike exclamation point?

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Speaker 1: Thank you Andrew for watching a.

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Speaker 2: Big question, Diane Swank, do you want to take that

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Speaker 2: What is the indication here? Is it that they just

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Speaker 2: didn't have the consensus or is this something more? And

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Speaker 2: does this basically mean, especially they do raise rates, that

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Speaker 2: a soft landing looks a little less likely today than

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Speaker 2: it did yesterday.

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Speaker 5: I think all of the above. I think the reason

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Speaker 5: that they took a pause is because the chairman himself

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Speaker 5: is getting more skittish about this, and we saw that

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Speaker 5: come out in the May press conference. I think he

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Speaker 5: got a lot of pushback within his committee, and that's

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Speaker 5: what we're seeing is that pushback. I do think the

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Speaker 5: time ran out on them in terms of shaping market expectations.

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Speaker 5: Their last part of their open period where they could comment,

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Speaker 5: they basically said we're going to skip that shape market expectation.

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Speaker 5: So it would have been a surprise to rates here

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Speaker 5: that said it does not preclude a half percent hike

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Speaker 5: in July instead of a quarter percent hike in July.

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Speaker 5: And I think that's something we're going to see come

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Speaker 5: out in the press conference today as well. The biggest

435
00:22:47,320 --> 00:22:49,520
Speaker 5: question out there will be why didn't you do it today.

436
00:22:49,800 --> 00:22:52,520
Speaker 5: I do think that the Federal also chairman Powell will

437
00:22:52,560 --> 00:22:57,560
Speaker 5: talk about the Treasury issuances and that extraordinary going on,

438
00:22:57,720 --> 00:23:01,760
Speaker 5: those extraordinaraytions is against the back of quantitative tightening. People

439
00:23:01,800 --> 00:23:05,800
Speaker 5: forget that the FED did not stop quantitative tightening, and

440
00:23:05,840 --> 00:23:08,560
Speaker 5: this is something that we really don't know the interaction of.

441
00:23:08,640 --> 00:23:11,919
Speaker 5: We've never done this experiment, and that is also something

442
00:23:11,960 --> 00:23:13,920
Speaker 5: that's in the back of his mind, and I would

443
00:23:13,920 --> 00:23:17,560
Speaker 5: expect that he'll emphasize that we're still being restrictive by

444
00:23:17,560 --> 00:23:21,520
Speaker 5: also continuing quantitative tightening at the same time that Treasury

445
00:23:21,720 --> 00:23:23,800
Speaker 5: has to do this massive debt issuance.

446
00:23:23,920 --> 00:23:28,320
Speaker 2: We're looking at equities off pretty considerably after this release.

447
00:23:28,440 --> 00:23:30,679
Speaker 2: We're looking at a NASTAC down seven tenths of a percent.

448
00:23:30,680 --> 00:23:33,159
Speaker 2: Michael Gapan, Do you think the FED is happy to

449
00:23:33,200 --> 00:23:34,800
Speaker 2: see risk acids selling off today?

450
00:23:36,040 --> 00:23:36,359
Speaker 1: Yes?

451
00:23:36,359 --> 00:23:39,480
Speaker 6: In general, I mean, I think financial conditions, they've struggled

452
00:23:39,520 --> 00:23:42,680
Speaker 6: to get them across the board as restrictive as they

453
00:23:42,720 --> 00:23:45,479
Speaker 6: would like, and so I think obviously, if you're if

454
00:23:45,480 --> 00:23:48,480
Speaker 6: you're going to move the dot fifty basis points higher,

455
00:23:48,600 --> 00:23:51,760
Speaker 6: I think the intent is to tighten financial conditions. So yes,

456
00:23:52,040 --> 00:23:54,040
Speaker 6: I think that this is what they would want to see.

457
00:23:54,359 --> 00:23:57,600
Speaker 1: Michael, let me go to this lineup's great today, Michael Collins,

458
00:23:57,640 --> 00:23:59,560
Speaker 1: Michael Gape, and Diane Swank. And of course we'll have

459
00:23:59,640 --> 00:24:01,840
Speaker 1: much more here in six minutes with the press conference

460
00:24:02,359 --> 00:24:04,159
Speaker 1: and Michael Gabe and I'm just going to pick on

461
00:24:04,240 --> 00:24:07,359
Speaker 1: you because of the large platform of Bank of America.

462
00:24:07,720 --> 00:24:10,480
Speaker 1: I'm supposed, you know. I'm with Elizabeth Warren on this.

463
00:24:11,080 --> 00:24:14,160
Speaker 1: I think having a low unemployment rate is generally good

464
00:24:14,200 --> 00:24:17,280
Speaker 1: for society. And are we in a panic about a

465
00:24:17,320 --> 00:24:22,639
Speaker 1: super hawkish FED because just possibly real gd P in

466
00:24:22,680 --> 00:24:28,240
Speaker 1: an overlay of inflation is a buoyant nominal GDP. Are

467
00:24:28,240 --> 00:24:29,159
Speaker 1: they bad things?

468
00:24:30,480 --> 00:24:33,600
Speaker 6: No, maybe it's too much of a good thing, might

469
00:24:33,640 --> 00:24:35,880
Speaker 6: be one of the arguments. I mean, certainly the inflation

470
00:24:36,000 --> 00:24:38,199
Speaker 6: we got tom as you know, wasn't all because of

471
00:24:38,240 --> 00:24:42,439
Speaker 6: a tight labor market. There are other sources that drove it.

472
00:24:42,520 --> 00:24:46,520
Speaker 6: And I would say, in our projection and most people's projections,

473
00:24:47,080 --> 00:24:49,960
Speaker 6: of a so called mild recession or downturn in the

474
00:24:49,960 --> 00:24:52,679
Speaker 6: economy brings the unemployment rate up to the mid floors.

475
00:24:53,400 --> 00:24:56,439
Speaker 6: Very few people are thinking it goes above five. The

476
00:24:56,480 --> 00:25:00,360
Speaker 6: thirty year average unemployment rate is over six. Think we're

477
00:25:00,400 --> 00:25:04,080
Speaker 6: just saying a little less, say buoyancy if you probably

478
00:25:04,119 --> 00:25:07,919
Speaker 6: the right mix for the long run performance. So nobody

479
00:25:08,000 --> 00:25:11,040
Speaker 6: can doubt that a low unemployment rate is good for

480
00:25:11,080 --> 00:25:14,120
Speaker 6: Americans and job seekers. But I think on the balance,

481
00:25:14,760 --> 00:25:17,320
Speaker 6: or I should say, a different balance is probably preferred.

482
00:25:17,920 --> 00:25:20,520
Speaker 1: John from Capri emails and John, thank you for listening

483
00:25:20,560 --> 00:25:22,800
Speaker 1: this afternoon. He says, go to Michael Collins and ask

484
00:25:22,840 --> 00:25:26,800
Speaker 1: a financial question. Michael Collins, you're at PGIM. How will

485
00:25:26,880 --> 00:25:31,800
Speaker 1: chief financial officers react to a super hawkish FED where Holland,

486
00:25:31,800 --> 00:25:33,920
Speaker 1: Horris and Madis are just saying they should have raised

487
00:25:33,960 --> 00:25:38,120
Speaker 1: rates to begin with? Does that goose issuance here through

488
00:25:38,119 --> 00:25:38,640
Speaker 1: the summer?

489
00:25:39,920 --> 00:25:43,080
Speaker 7: You know, no, it's it's actually just the opposite. What

490
00:25:43,119 --> 00:25:46,639
Speaker 7: we're seeing is really encouraging. Right When markets change and

491
00:25:46,680 --> 00:25:50,199
Speaker 7: conditions change, people and companies change their behavior time, and

492
00:25:50,240 --> 00:25:55,080
Speaker 7: we're actually seeing a lot of corporations put off debt issuance.

493
00:25:55,080 --> 00:25:56,680
Speaker 7: In fact, we're seeing a lot of them use their

494
00:25:56,720 --> 00:26:00,000
Speaker 7: free cash flow to pay down debt so they don't

495
00:26:00,119 --> 00:26:03,040
Speaker 7: enough to reissue their debt at a much higher coupon.

496
00:26:03,119 --> 00:26:05,480
Speaker 7: And that's really a silver lining here, right. As a

497
00:26:05,520 --> 00:26:09,280
Speaker 7: credit investor, someone investing in corporate debt, you really want

498
00:26:09,320 --> 00:26:11,560
Speaker 7: them to see them pay down debt, and we're actually

499
00:26:11,560 --> 00:26:14,320
Speaker 7: seeing more and more examples of that, So that actually

500
00:26:14,520 --> 00:26:17,160
Speaker 7: might be the thing that saves us here and really

501
00:26:17,359 --> 00:26:21,960
Speaker 7: helps us avoid an existential credit crisis, which which looks

502
00:26:22,000 --> 00:26:23,600
Speaker 7: looks better and better. You know, you won't see a

503
00:26:23,600 --> 00:26:25,919
Speaker 7: big despite spike in de faults because companies are being

504
00:26:25,960 --> 00:26:28,680
Speaker 7: proactive and they see the writing on the wall there

505
00:26:28,720 --> 00:26:30,439
Speaker 7: and they're starting to pay down debt. So this is

506
00:26:30,600 --> 00:26:32,520
Speaker 7: a really good story from a credit perspective.

507
00:26:32,600 --> 00:26:35,159
Speaker 2: Michael Collins, This now becomes a guessing game. What's the

508
00:26:35,200 --> 00:26:37,119
Speaker 2: Fed going to do in July? I oh, yeah, what

509
00:26:37,119 --> 00:26:39,280
Speaker 2: are they going to do in September? And it becomes

510
00:26:39,280 --> 00:26:42,240
Speaker 2: a credibility issue. What will you have to look for

511
00:26:42,320 --> 00:26:44,160
Speaker 2: and what will you have to see to call their

512
00:26:44,200 --> 00:26:46,199
Speaker 2: bluff and say no, you're not You're not going to

513
00:26:46,240 --> 00:26:48,080
Speaker 2: go twice more before year end?

514
00:26:48,960 --> 00:26:50,719
Speaker 7: Yeah, I mean, right now, they're telling us they're going

515
00:26:50,760 --> 00:26:53,840
Speaker 7: to change their policy from hiking at every meeting to

516
00:26:53,960 --> 00:26:57,080
Speaker 7: basically hiking at every other meeting. Right, so they're going

517
00:26:57,160 --> 00:26:59,600
Speaker 7: to hike, you know, twice in the rest of the

518
00:26:59,680 --> 00:27:02,600
Speaker 7: year on a quarter basically slow the pace of hiking

519
00:27:02,680 --> 00:27:05,159
Speaker 7: is what they're telling us. Again, I think it The

520
00:27:05,200 --> 00:27:08,720
Speaker 7: longer they wait, the more evidence will become apparent in

521
00:27:08,800 --> 00:27:12,960
Speaker 7: the markets, in the economy, and in the inflation data

522
00:27:13,280 --> 00:27:15,520
Speaker 7: that will cause them to step to the sidelines and

523
00:27:15,600 --> 00:27:19,000
Speaker 7: probably pull off one more like if that for the

524
00:27:19,040 --> 00:27:19,600
Speaker 7: rest of the year.

525
00:27:19,680 --> 00:27:22,960
Speaker 1: Michael Gabin, what will the real tenure do here? I'm

526
00:27:23,000 --> 00:27:27,400
Speaker 1: absolutely fascinated by the super hawkish nature of the printed

527
00:27:27,440 --> 00:27:30,920
Speaker 1: word and the projections that we saw. Does the tenure

528
00:27:31,920 --> 00:27:35,160
Speaker 1: real yield finally break out from one point six chis

529
00:27:35,280 --> 00:27:38,280
Speaker 1: back to my pre COVID level of say two point

530
00:27:38,359 --> 00:27:40,280
Speaker 1: oh two to two point oh five. Do we get

531
00:27:40,640 --> 00:27:42,400
Speaker 1: finally the real yield to move.

532
00:27:43,280 --> 00:27:46,040
Speaker 6: I mean I certainly in the front end, meaning kind

533
00:27:46,040 --> 00:27:48,200
Speaker 6: of out to five years, I think that real rate

534
00:27:48,280 --> 00:27:51,280
Speaker 6: has to go higher. I'm not you know, I'm not

535
00:27:51,359 --> 00:27:53,359
Speaker 6: yet fully convinced it would have to move in that

536
00:27:53,400 --> 00:27:57,000
Speaker 6: direction for the tenure. Right, If you've become more convinced

537
00:27:57,000 --> 00:28:00,280
Speaker 6: today that the FED, as you mentioned earlier, is just

538
00:28:00,320 --> 00:28:04,360
Speaker 6: really reacting to inflation, not so much economic activity, then

539
00:28:04,480 --> 00:28:06,920
Speaker 6: the message here is they want to bring inflation down,

540
00:28:07,680 --> 00:28:10,240
Speaker 6: so you get kind of the inversion at place. So

541
00:28:10,280 --> 00:28:12,159
Speaker 6: certainly though they're telling you real rates need to be

542
00:28:12,240 --> 00:28:14,280
Speaker 6: higher over the next two to three years.

543
00:28:14,800 --> 00:28:17,399
Speaker 2: Diane, how political do you think the decision will be

544
00:28:17,520 --> 00:28:19,800
Speaker 2: to raise race even further from here, given that the

545
00:28:19,840 --> 00:28:22,280
Speaker 2: focus really is on wages and employment.

546
00:28:23,920 --> 00:28:26,600
Speaker 5: It's a great question, and I think the political backlash

547
00:28:26,720 --> 00:28:29,840
Speaker 5: is already out there. First of all, the reason we're

548
00:28:29,880 --> 00:28:32,200
Speaker 5: not as euphoric about the low unemployment we have is

549
00:28:32,240 --> 00:28:36,280
Speaker 5: because we've lost living standards and actually lost spending power

550
00:28:36,520 --> 00:28:39,880
Speaker 5: to inflation, and so that's the challenge the Fed's already

551
00:28:39,920 --> 00:28:42,520
Speaker 5: had to face. What's been amazing is, you know, even

552
00:28:42,640 --> 00:28:45,840
Speaker 5: Vulgar blinked back in nineteen eighty and reduced rates that

553
00:28:46,600 --> 00:28:49,160
Speaker 5: mosted them by ten percent to get a second recession

554
00:28:49,200 --> 00:28:52,960
Speaker 5: in nineteen eighty one eight two after the first recession

555
00:28:52,960 --> 00:28:55,000
Speaker 5: in nineteen eighty which was an election year. So I

556
00:28:55,040 --> 00:28:58,200
Speaker 5: do think there is going to be some political backlash

557
00:28:58,560 --> 00:29:02,840
Speaker 5: to this idea of raising unemployment, which is understandable. But

558
00:29:02,960 --> 00:29:04,680
Speaker 5: I think at the end of the day, the FED

559
00:29:04,800 --> 00:29:08,480
Speaker 5: is really concerned about the persistence of inflation, and at

560
00:29:08,480 --> 00:29:10,720
Speaker 5: the Fed's at the right conference, it's not.

561
00:29:10,680 --> 00:29:12,640
Speaker 3: Just why did you not go to day?

562
00:29:13,520 --> 00:29:16,600
Speaker 5: Is the optionality on the table to move a half

563
00:29:16,640 --> 00:29:19,600
Speaker 5: percent again and an upcoming emitting They do not want

564
00:29:19,600 --> 00:29:22,560
Speaker 5: to bake into the cake. This idea that they'll only

565
00:29:22,600 --> 00:29:26,280
Speaker 5: move every other meeting. That messaging is where I'm really

566
00:29:26,320 --> 00:29:28,320
Speaker 5: going to be watching for, because I think the FED

567
00:29:28,400 --> 00:29:30,120
Speaker 5: wants all options on the table.

568
00:29:30,320 --> 00:29:32,760
Speaker 1: The three have been generous with your time. Back to

569
00:29:32,800 --> 00:29:36,040
Speaker 1: your clients at KPMG, at the Bank of America, and

570
00:29:36,080 --> 00:29:39,000
Speaker 1: of course at PGM as well, Diane Swack, Michael Gaban

571
00:29:39,480 --> 00:29:42,560
Speaker 1: and Michael Collins. And all of a sudden the snooze

572
00:29:42,560 --> 00:29:46,040
Speaker 1: fest became and you heard it McKee's voice, you know, McKee, maate,

573
00:29:46,200 --> 00:29:49,600
Speaker 1: you could just hear the shock of the language and

574
00:29:49,640 --> 00:29:53,240
Speaker 1: what we heard from mister Madison, doctor Hollenhorst as well.

575
00:29:53,520 --> 00:29:56,520
Speaker 2: This was surprisingly hawkish, if you want to say so,

576
00:29:56,640 --> 00:29:59,920
Speaker 2: because people were perhaps anticipating a twenty five basis point

577
00:30:00,080 --> 00:30:02,160
Speaker 2: rate hike implied at the July meeting, but not fifty

578
00:30:02,200 --> 00:30:04,920
Speaker 2: basis points of hikes before your end. You're seeing that

579
00:30:05,400 --> 00:30:08,160
Speaker 2: with respect to yields markedly higher to the highest level

580
00:30:08,240 --> 00:30:08,920
Speaker 2: since early March.

581
00:30:09,200 --> 00:30:12,680
Speaker 1: And now the FED decides derby, Well, McKee, have the

582
00:30:12,760 --> 00:30:15,040
Speaker 1: last question of the second to last question.

583
00:30:15,120 --> 00:30:17,640
Speaker 2: I'll have the third from last question. We're gonna definitely,

584
00:30:18,000 --> 00:30:19,880
Speaker 2: We're definitely going to mix things up here. I hear

585
00:30:20,440 --> 00:30:21,720
Speaker 2: that's the whisper.

586
00:30:21,320 --> 00:30:24,000
Speaker 3: From the room. We're also seeing the dollar so off,

587
00:30:24,040 --> 00:30:25,080
Speaker 3: although less than before.

588
00:30:25,280 --> 00:30:28,400
Speaker 2: One oh eight twelve, just to reset, we are about

589
00:30:28,440 --> 00:30:31,480
Speaker 2: to hear from Fedshair J. Powell after they did not

590
00:30:31,560 --> 00:30:34,720
Speaker 2: raise rates for the first time in fifteen months, after

591
00:30:35,000 --> 00:30:39,120
Speaker 2: ten consecutive meetings of rate hikes. Now they are not hiking,

592
00:30:39,360 --> 00:30:41,479
Speaker 2: but they are indicating they are going to hike at

593
00:30:41,560 --> 00:30:44,240
Speaker 2: least twice more before the end of this year.

594
00:30:44,480 --> 00:30:45,640
Speaker 3: Their work is not done.

595
00:30:45,720 --> 00:30:47,920
Speaker 2: That was very clear in their statement, and now the

596
00:30:48,000 --> 00:30:51,560
Speaker 2: question will be why did they not hike today If

597
00:30:51,560 --> 00:30:54,320
Speaker 2: they were so convinced of that momentum, what was the

598
00:30:54,400 --> 00:30:56,520
Speaker 2: hold up as they tried to get consensus