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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: note to the impact of the FED cutting one hundred
Speaker 2: basis points, writing, the bottom line is that FED cuts
Speaker 2: and associated developments in financial markets will boost GENIP over
Speaker 2: the coming quarters by one percentage point and boost inflation
Speaker 2: by zero point five.
Speaker 3: Tawston joins us now for more. Torston, good morning morning.
Speaker 2: It's going to see you, sir, and a happy new year.
Speaker 2: You wrote, and I think it's important to recognize they
Speaker 2: cut one hundred basis points in September and year has
Speaker 2: moved one hundred basis points in the other direction.
Speaker 3: What do you think explains that?
Speaker 4: Well, that is really unusual. I mean, normally the textbook
Speaker 4: would say if you cut interest rates, long rates should
Speaker 4: also be going down. So why is it that when
Speaker 4: they have cut one hundred basis points in September, that
Speaker 4: we've now seen long rates go up one hundred basis
Speaker 4: points since September? And that's opened up a lot of
Speaker 4: conversations about is this because FED cuts were not warranted?
Speaker 4: Is that because of fiscal policy, or is it because
Speaker 4: of less demand from abroad? That's just a very important
Speaker 4: quantification debate around why is it long rates are going up?
Speaker 4: And an important part of that question is that the
Speaker 4: term premium has gone up eighty basis points at least
Speaker 4: according to the New York Fed, So using that.
Speaker 3: Measure, eighty percent of the increase.
Speaker 4: In long rates since September has potentially been driven by
Speaker 4: worries about fiscal policy, at least issues that are not
Speaker 4: explained by changing FED expectations.
Speaker 5: So which of the three questions, which are the three
Speaker 5: points that you're making do you lean on as a
Speaker 5: reason behind the rise and yields?
Speaker 4: Well, the challenge is when you do these decompositions and
Speaker 4: trying to quantufy what are the sources of why long
Speaker 4: rates are going up. Is that you don't know this
Speaker 4: unexplained factor in the term premium. What's driving that? Is
Speaker 4: that because of fiscal worries? Is it because of Some
Speaker 4: people say it's just some technical issues with the yelk
Speaker 4: curve steepening. In my view, I think at least it
Speaker 4: tells you that there's something else going on, because if
Speaker 4: you look at the chart, it is just really unusual
Speaker 4: that long rates are going up when the Fed is cutting.
Speaker 4: So that's why. If it is because the market is
Speaker 4: worried about fiscal issues, then of course we need to
Speaker 4: think about, well, what are the consequences as we get
Speaker 4: some fiscal news potentially over the next several weeks.
Speaker 3: A number of.
Speaker 5: People have said this is a good thing and people
Speaker 5: should embrace it. You see an actual normalization of the
Speaker 5: yield curve, and that's fantastic. You have a newly positive
Speaker 5: yield curve two tens now the steepest going back to
Speaker 5: twenty twenty two. Do you think that it is a
Speaker 5: positive development or a negative development?
Speaker 4: Well, I think what's lying underneath this is that the
Speaker 4: expectation was that or when the FED starts cutting, they
Speaker 4: always caught a lot and of course, over the last
Speaker 4: several quarters, the expectation was that the Fed will cut
Speaker 4: a lot more relative to what's priced in at the moment. Now,
Speaker 4: of course markets up pricing that rates will stay higher
Speaker 4: for longer, and therefore we will not get all these cuts.
Speaker 4: So the question therefore is, well, is that good or
Speaker 4: bad news? Well, it's good in this sense that the
Speaker 4: backdrop is that the economy is still strong. But the
Speaker 4: bad news, of course is that rights higher for LONGO
Speaker 4: will continue to weigh in particular on balanties that are weaker,
Speaker 4: companies with a lot of leverage, companies with low converce
Speaker 4: ratios will continue to get hit by rates higher for LONGO,
Speaker 4: So higher for LONGA has a number of consequences that
Speaker 4: are bringing back memories of what we saw in twenty
Speaker 4: twenty two, when you had rates going up and starts
Speaker 4: going down at the same time with yields.
Speaker 1: Higher over the past since the Fed has been cutting,
Speaker 1: and you're saying some of this is driven by fiscal
Speaker 1: we haven't gotten the fiscal package yet, but the Trump
Speaker 1: incoming trub administration has made it clear in the first
Speaker 1: one hundred days they want to see something, whether or
Speaker 1: not it's one reconciliation bill or two. So basically is
Speaker 1: that just saying to the Fed, you're on pause until
Speaker 1: we see exactly what comes out of this proposal.
Speaker 4: Well, and I think also to your important point here
Speaker 4: that it used to be that these bills would be
Speaker 4: two separate bills, one with border and security in the
Speaker 4: first bill that will be deal with first, and then
Speaker 4: later we'll deal with what's going on in the tax front.
Speaker 4: But combining all this, of course raises the risk that
Speaker 4: I will get a bloomberg headline saying some pretty significant
Speaker 4: number in terms of what the deficit impact is. So
Speaker 4: if you do have a bigger risk of a higher
Speaker 4: headline number, that also raise at least modestly the probability
Speaker 4: that we'll get some at least potential list trust moment
Speaker 4: where we could see a fairly significant number coming out
Speaker 4: where instead of doing it drip wise throughout the year,
Speaker 4: having a big number where suddenly markets say, wow, there's
Speaker 4: already QT going on, there's a stock of T pills
Speaker 4: that need to be rolled over, and on some of that,
Speaker 4: we already have a sixty seven percent budget deficit. All
Speaker 4: that combine means that treasury issuance continues to be a
Speaker 4: very important topic.
Speaker 1: What does that Liz trust moment look like in the
Speaker 1: United States.
Speaker 4: Well, the risk, of course is that if there is
Speaker 4: still very significant budget deficit, and if we still have
Speaker 4: significant issues with again the number of T bills outstanding,
Speaker 4: any short dated debt that needs to be rolled over,
Speaker 4: we still have QT there's a lot of conversations about
Speaker 4: when that potentially will end. And on top of that,
Speaker 4: if we do have new fiscal deficit spending and a
Speaker 4: number that's much bigger than what the market is expecting,
Speaker 4: that certainly raises their probability at least that we might
Speaker 4: have some situation where the markets are saying, wow, that's
Speaker 4: a lot of treasury issues. We already have discussions literally
Speaker 4: every day when we have a treasury auction around hey,
Speaker 4: what was the metrics on the auctions and what are
Speaker 4: these numbers telling us? In terms of the overall physical sustainability,
Speaker 4: which j. Powell of course always keeps on pointing out
Speaker 4: is already unsustainable.
Speaker 2: Leasa mentioned it already this morning we get a ten
Speaker 2: year A little bit later you wrote about it's close
Speaker 2: down twenty four the risk of a twenty twenty two
Speaker 2: repeat in the market.
Speaker 3: How great is that risk.
Speaker 4: I think that is much higher than what the market is.
Speaker 4: The probabilities of the markets are signing at the moment,
Speaker 4: because remember the key issue in twenty twenty two was
Speaker 4: that the sixty to forty portfolio really underperformed because rates
Speaker 4: went up because inflation was going up, and at the
Speaker 4: same time, starks went down.
Speaker 3: And now we've had.
Speaker 4: The Nike sworsh has been flatten.
Speaker 3: Out on FED expectations.
Speaker 4: So therefore, if we're now getting back through FED expectations
Speaker 4: being roughly flat, we have a few cuts priced in.
Speaker 4: Imagine if suddenly those expectations start to move up that
Speaker 4: people are saying, well, maybe we'll get another hike. I
Speaker 4: do think you a lot of equity investors will be
Speaker 4: looking at that and saying, well, in that case, you
Speaker 4: already had the trailing pe on Tesla at almost two hundred.
Speaker 4: That's why some of these stocks and a trailing pepages
Speaker 4: are incredibly expensive. And if you now have that, well,
Speaker 4: maybe the FED has to do something more meeting high
Speaker 4: rates again. Well, then I do think some of these
Speaker 4: more sensitive names they will certainly see a bigger hit.
Speaker 4: So that's why given all the stocks returns have been
Speaker 4: drawn by a handful of stocks. I do think that
Speaker 4: that makes it much more sensitive to if again the
Speaker 4: Nikes Woll swifts up and we do get a situation
Speaker 4: where the fit is pricing in more hikes.
Speaker 2: Coming tost and a clinic as always going to see us, sir,
Speaker 2: Thank you. Toston's luck there of a Pomo. Donald Trump
Speaker 2: hadding to Capital Hell tomorrow as the president elects purshused
Speaker 2: Republicans to pass a single massive bill concerning his priorities.
Speaker 2: Trump look into secure a houseflow on immigration, energy, and
Speaker 2: extension of the twenty seventeen Trump tax cuts by April.
Speaker 2: The Republican Congressman French Hill of Arkansas. John Desnaphamore Congressman Hill, good.
Speaker 3: To catch up with you.
Speaker 2: As always, we'd love your opinion on what you think
Speaker 2: is the best way to pursue the president's agenda. Is
Speaker 2: it through going off to just one big bill?
Speaker 6: Well, Jonathan, it's great to be with you. Yes, I
Speaker 6: do support one bill because I think that's the easiest
Speaker 6: way to get the votes for the President's priorities in
Speaker 6: the House, which include, as you said, energy, permitting reform,
Speaker 6: securing the border, and of course debating and completing an
Speaker 6: extension of the Trump tax cuts from twenty seventeen.
Speaker 5: Congressman, we've been debating around this table how much the
Speaker 5: ten year yield has a seat at the table when
Speaker 5: deciding what kind of bill and how big it is.
Speaker 5: When the Congress meets and possibly passes this as soon
Speaker 5: as April.
Speaker 3: What's your view on this.
Speaker 5: How much of a veto power does the bond market have?
Speaker 6: Well, Lisa, look, I don't think it makes any difference
Speaker 6: on that point, whether it's one bill or three bills.
Speaker 6: To the point of your previous commentator, what I think
Speaker 6: is concerning to me is that I wish we'd finish
Speaker 6: Fy twenty five spending last Congress. I think that would
Speaker 6: have been in the President's best interest. But instead this
Speaker 6: first quarter, we're going to do both. We're going to
Speaker 6: complete fiscal twenty five spending by the middle of March,
Speaker 6: and we're going to try to do budget reconciliation with
Speaker 6: the House and Senate before early April. That's a big lift,
Speaker 6: and it may demonstrate a little uncertainty on the part
Speaker 6: of the bond market, But I think the real issue
Speaker 6: is let's get spending under control through budget reconciliation. That's
Speaker 6: the purpose of budget reconciliation. It's a procedure by which
Speaker 6: you can do big things in Congress using fifty one
Speaker 6: percent vote margins in the House and Senate. President Obama
Speaker 6: used it to create Obamacare. President Trump in his first
Speaker 6: term used that to reform the tax code. Republicans in
Speaker 6: the House and Senate this year want to use budget
Speaker 6: reconciliation to get federal spending under control, while we also
Speaker 6: extend the pro growth features of the Trump tax cuts.
Speaker 5: Fowers were one of the concerns that we hear from
Speaker 5: a lot of fixed income strategists who come on the
Speaker 5: show is that they're not seeing where the cuts are
Speaker 5: going to come into place in this reconciliation bill. Where
Speaker 5: are they going to come.
Speaker 6: We had a meeting all weekend where we work with
Speaker 6: our committees of jurisdiction on determining cuts and spending across
Speaker 6: the board. With the exceptions of what President Trump has
Speaker 6: taken off the board, which would be Medicare and Social
Speaker 6: Security benefit areas, the rest of it's on track. And
Speaker 6: you know how much spending has gone up, and just
Speaker 6: since the pandemic, we're running a two trillion dollar deficit
Speaker 6: per year. Seven percent of GDP that's the part that's unsustainable.
Speaker 6: Everyone in Congress knows that. So we've got to get
Speaker 6: our spending on a more sustained, predictable front. I think
Speaker 6: that would benefit the bond market if they saw that
Speaker 6: kind of work on the part of Congress.
Speaker 1: Well, we have the CBO talking about at least one
Speaker 1: point of that one big beautiful reconciliation potential bill, which
Speaker 1: would be just extending TCAJA over the upcoming decade, would
Speaker 1: cost four trillion dollars. On top of that, the President
Speaker 1: elect continues to talk about no tax on tips. How
Speaker 1: much do you think can actually get through this Congress.
Speaker 6: Well, look, am Marie, you had CBO also say that
Speaker 6: the Tax Cuts and Jobs Act, when they did not
Speaker 6: dynamically score it, would not produce increased revenues over a
Speaker 6: ten year budget window. And in fact, since twenty seventeen,
Speaker 6: you've seen record federal revenue pour into the country from
Speaker 6: no more reversions, people bringing taxable income back, the investments
Speaker 6: that were made. GDP growth, job growth, wage growth was
Speaker 6: all up in those years following the Tax Cuts and
Speaker 6: Jobs Act, but before the impact of the pandemic. So
Speaker 6: I don't believe House Republicans are governed completely by the
Speaker 6: opinions of CBO exclusively, even though that's an incredibly important
Speaker 6: component because we've seen how in error estimates are from
Speaker 6: the Joint Tax Committee and from CBO, not recently, but
Speaker 6: for the past fifty years.
Speaker 1: Congressman, you're also now the chair of a very powerful committee,
Speaker 1: the House Financial Services Committee, and we see a number
Speaker 1: of representatives going to mar Lago this upcoming weekend. Will
Speaker 1: you be there and if so, what do you plan
Speaker 1: to discuss with President Electrump.
Speaker 4: Well?
Speaker 6: President Trump has invited the committee chairs to a dinner
Speaker 6: and we'll be talking about our priorities that we have
Speaker 6: for the first few months of his administration and getting
Speaker 6: his views on those.
Speaker 1: What are your priorities specifically for the Financial Services Committee.
Speaker 6: Well, you know we've talked about that many times. I've
Speaker 6: got three big priorities. First, I want to right size
Speaker 6: the regulatory system for particularly community banks. We think that's
Speaker 6: an important feature that's gotten off track, particularly in the
Speaker 6: Biden Harris administration. We want to make sure the SEC
Speaker 6: is focused on capital formation and investor protection and orderly
Speaker 6: markets and not a political agenda that former soon to
Speaker 6: be former chairman Gary Ginsler had and finally, we want
Speaker 6: to have a market structure for innovation in this country
Speaker 6: where people can use blockchain, can use digital currencies and
Speaker 6: digital assets to advance their business mission and make sure
Speaker 6: that the US is a leader around the world in
Speaker 6: this new Web three innovative technology.
Speaker 1: Corson, we also need to talk about the FED. Yesterday
Speaker 1: Michael Barr stepping down. You welcomed that. This morning the
Speaker 1: Wall Street Journal in an editorial is talking about that
Speaker 1: maybe a replacement for Michael Barr will meet Governor Bowman.
Speaker 3: Would you welcome that.
Speaker 6: Mickey Bowman's done an outstanding job as a governor on
Speaker 6: the Federal Reserve. She comes to the Federal Reserve with
Speaker 6: tactical experience both as a bank commissioner in Kansas as
Speaker 6: well as a family connected to community banking business there
Speaker 6: in the Heartland. She has been a great voice for
Speaker 6: common sense and tailoring and regulation, and I think she
Speaker 6: would be if President Trump made that decision, that would be,
Speaker 6: in MA view, a good one.
Speaker 2: Congressman, We're seeing some big shifts in corporate America as well.
Speaker 2: We'd love your thoughts just to close up this conversation
Speaker 2: and what we just heard from meta moments ago, and
Speaker 2: if you missed it, because it only broke about fifteen
Speaker 2: minutes ago, I'll give you summary off in this came
Speaker 2: from Meta about fifteen minutes ago. That's starting in the
Speaker 2: United States. They're going to be ending their third party
Speaker 2: fact checking program and moved to a community notes model,
Speaker 2: something we're more familiar with with the likes of X.
Speaker 2: We're seeing some big shifts around corporate America. I think,
Speaker 2: taking note of more conservative voices in the last few months,
Speaker 2: particularly after the election in early November, that note that
Speaker 2: is notable. I think Congressman Hill for corporate America, and
Speaker 2: I just wonder how you're responding to things and what
Speaker 2: you think of that shift.
Speaker 6: Well, Jonathan, over the decade that I've been in Congress
Speaker 6: for basically three decades before that, I was in corporate America,
Speaker 6: both with public companies and private companies, and I've never
Speaker 6: been a big fan for bringing politics, partisanship, and social
Speaker 6: policy fads into the corporate boardroom. I think business should
Speaker 6: be in the business of delivering a product that meets
Speaker 6: the needs of consumers, all consumers, no matter what their
Speaker 6: walk in life is. And so that's why I think
Speaker 6: it's good that business appears to be getting back focused
Speaker 6: on conducting their mission and leave the politics at home
Speaker 6: or out with their friends.
Speaker 2: French Chill affreciated time Congressman French Chaill got good to
Speaker 2: be a vocon sell good to see us at fat
Speaker 2: Governor Lisa Cook saying the FMC can proceed cautiously on
Speaker 2: further rate cuts with inflation precious remaining. The Fullish conto
Speaker 2: FED President Charles Evans writing, I expect inflation will return
Speaker 2: to two percent within the Fed's current timetable. They don't
Speaker 2: want some risk cutting rates and then need to backtrack
Speaker 2: higher if inflation rises again.
Speaker 3: Charles joined us now for more. Charles, welcome to the programs, sir.
Speaker 2: I just want to go through a range of comments
Speaker 2: we've had from FED officials over the past few days.
Speaker 2: Governor Cook said inflation has been stickier. Governor Coogler said,
Speaker 2: obviously our job is not done. Presidents Amy said, we're
Speaker 2: uncomfortably above our target. Why do you suppose, with all
Speaker 2: of that in mind, they reduced interest rates to the
Speaker 2: last meeting.
Speaker 7: Well, I think that the FED has done a readjustment
Speaker 7: and the stance of monetary policy. They've cut rates by
Speaker 7: one hundred basis points. Over the last year since September,
Speaker 7: and the last cut in December was a close call,
Speaker 7: according to char Powell. So I think they're well positioned
Speaker 7: at this point to deal with the risk that they
Speaker 7: expect to be facing this year, and I think they're
Speaker 7: an awful lot of risks. Inflation has been bumpy, and
Speaker 7: their focus is on getting inflation back to two percent.
Speaker 7: They are looking at a projection themselves of core PCEE
Speaker 7: at the end of this year at two and a
Speaker 7: half percent. That's a little bit more than uncomfortably above
Speaker 7: two percent, and they don't give any indication that they're
Speaker 7: willing to sort of say, well, you know, two and
Speaker 7: a half's really not that far above two percent. So
Speaker 7: with their focus on two percent, I think I believe
Speaker 7: the Fed policy makers that they are going to be
Speaker 7: patient in adjusting monetary policy, and they're going to need
Speaker 7: to see improvements and inflation.
Speaker 5: How concerning is it to you that longer term rates
Speaker 5: have risen so much since the Fed finished cutting by
Speaker 5: one hundred basis points last year.
Speaker 7: You know, there are a lot of things going on
Speaker 7: at the same time, and so it is it is
Speaker 7: the case that the FED funds rate is lower though
Speaker 7: would put downward pressure on the tenure rate, for sure.
Speaker 7: But it's also the case that you know, their you know,
Speaker 7: fiscal deficits are continuing to be high. You know, there's
Speaker 7: a lot of uncertainty about that. Our investor is going
Speaker 7: to be responding to that, and I think it's natural
Speaker 7: to suspect that funding rates could be higher at the
Speaker 7: long end. It's also the case that productivity is higher.
Speaker 7: AI offers a lot of promise. Growth has been above
Speaker 7: two percent. Our assessments of long run trend tend to
Speaker 7: be about two percent, but if they're higher, that would
Speaker 7: also justify higher long term rates too. So there are
Speaker 7: many things in play, plus all of the uncertainty associated
Speaker 7: with volatility and tariff commentary.
Speaker 5: How much you've concerned about the fact that the Fed
Speaker 5: hasn't really put out a framework for how they're going
Speaker 5: to deal with some of the potential policy changes that
Speaker 5: are coming out. This was something that former New York
Speaker 5: Fed President Bill Dudley was talking about. Do you think
Speaker 5: there needs to be a better communication of scenario analysis
Speaker 5: around tariffs and around potential immigration changes?
Speaker 7: The FED communications is always difficult. It's difficult for central banks,
Speaker 7: it's difficult for any institution that is dealing with uncertainty
Speaker 7: and talking about what they're going to be doing over
Speaker 7: the next six to eight months uncertainty. It is just
Speaker 7: very difficult to describe in a way that you know
Speaker 7: many many readers can can fully appreciate. The FED has
Speaker 7: a number of communications tools. The Summary of Economic Projections
Speaker 7: are one of them, and so you know, by the
Speaker 7: FED Zone take, they've indicated that they're expecting inflation is
Speaker 7: going to be higher than they previously thought for longer
Speaker 7: and they need to take action. You could go through
Speaker 7: a few different scenarios where well, it could be better
Speaker 7: than that, and explain how you know the funds rate
Speaker 7: would fall, or you could say it's going to be
Speaker 7: worse than that. They have internal documents where they go
Speaker 7: through that. I not convinced that the public would be
Speaker 7: able to digest three scenarios when they have as much
Speaker 7: difficulty with one. You'd constantly be going, well, which of
Speaker 7: the three do you really think we should be paying
Speaker 7: attention to?
Speaker 1: Speaker Johnson is talking about this potential one big reconciliation
Speaker 1: bill by May. If that is the case, does the
Speaker 1: FED then just stay on the sideline and wait for
Speaker 1: the policy chatter to become actual legislation.
Speaker 7: Well, I think the typical fed approach Share Powell has
Speaker 7: tried to describe this at the last couple of press conferences,
Speaker 7: which is to you know, you know, observe the legislative process,
Speaker 7: observe the progress. When do they get legislative language, when
Speaker 7: is it about to actually take you know, and be enacted,
Speaker 7: and what actually ends up in the bill. A lot
Speaker 7: of things end up, you know, with the last minute
Speaker 7: and a bill or get taken out, and so it's
Speaker 7: very difficult to have confidence that you know exactly what
Speaker 7: the stance of fiscal policy is until you get you know,
Speaker 7: real language there. And I mean if you just go back,
Speaker 7: you know previously, when you've talked about eliminating the Affordable
Speaker 7: Care Act, that would have huge implications for the economy,
Speaker 7: and it came down to a single vote, and so
Speaker 7: you know, you have have to actually go through the
Speaker 7: process before you can fully appreciate what that's going to
Speaker 7: do the economy. That's part of the uncertainty that I
Speaker 7: was talking about right up until the end. It could
Speaker 7: go either way. Times wanted to conflate with very large
Speaker 7: implications for the path of the.
Speaker 3: Economy you've lived it. We appreciate your experience.
Speaker 2: Former Chicago Fair president Charles Evans on the latest effort
Speaker 2: from the Federal Reserve. This is the Bloomberg Surveillance Podcast,
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