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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: As Federal Reserve policymakers meet this week in Washington, they're

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Speaker 2: coming to terms with the fact that their fight against

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Speaker 2: high inflation has gotten harder and more complicated. That's because

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Speaker 2: of new economic data showing persistent inflation, sure, but it's

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Speaker 2: also because of something FED shaired Jerome Powell did, or

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Speaker 2: rather something he said to reporters at the end of

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Speaker 2: a previous meeting back in December.

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Speaker 3: The question of when will it become appropriate to begin

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Speaker 3: dialing back the amount of policy restraint in place that

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Speaker 3: begins to come into view and is clearly a discushed

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Speaker 3: topic of discussion now in the world, and also a

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Speaker 3: discussion for us at our meeting today.

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Speaker 1: We thought, wow, that's pretty explicit.

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Speaker 2: That's Kate Davidson. She oversees Bloomberg's coverage of the FED.

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Speaker 1: The fact that he was sort of so clear that

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Speaker 1: they were at this turning point. It did surprise all

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Speaker 1: of us.

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Speaker 2: That admission in December that Powell and his colleagues felt

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Speaker 2: comfortable enough about what they'd achieved to talk about cutting

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Speaker 2: interest rates also surprised Wall Street and investors welcomed that

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Speaker 2: change in tone from the FED chair.

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Speaker 4: There is plenty of fuel for optimism in the US market,

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Speaker 4: with the Federal Reserve signaling this week that it is

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Speaker 4: in fact ready to start thinking about cutting interest rates

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Speaker 4: next year.

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Speaker 2: At a time when many economists expected the US was

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Speaker 2: headed for a recession, j Powell pivoted, and in a

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Speaker 2: new analysis, Bloomberg Economics says the FED Chair did that

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Speaker 2: at the perfect moment to stave off a recession, but

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Speaker 2: that pivot in retrospect also had other consequences. That's because

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Speaker 2: the boost to growth, which was good news, also gave

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Speaker 2: a bump up to inflation, which is bad news. Powell

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Speaker 2: is in a tough position trying to pivot again under

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Speaker 2: difficult circumstances, and if he's not successful, forget the elusive

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Speaker 2: economic software landing. Bloomberg Economics says the outcome of the

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Speaker 2: Fed's fight is likely to be harder and bumpier than

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Speaker 2: many in the markets expect. A two day meeting of

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Speaker 2: the twelve person Federal Open Market Committee is underway, and

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Speaker 2: after it ends on Wednesday, Jay Powell will take questions

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Speaker 2: from reporters. Wall Street is going to scrutinize everything the

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Speaker 2: FED chair says about what he and his colleagues are

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Speaker 2: thinking about the economy and what's next. On today's show,

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Speaker 2: I talked to editor Kate Davidson and Anna Wong of

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Speaker 2: Bloomberg Economics about how that surprise pivot may lead to

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Speaker 2: another one that challenges the FED chair faces and what

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Speaker 2: to listen for when he speaks. This is the Big

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Speaker 2: Take from Bloomberg News. I'm David Gera.

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Speaker 1: In December. I think most people were quite surprised when

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Speaker 1: he came out and gave a pretty clear indication that

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Speaker 1: FED policymakers were starting to think about cutting rates.

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Speaker 2: Kate Davidson of Bloomberg News. A big pivot I've seen

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Speaker 2: referred to as a Dovish pivot. And for those of

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Speaker 2: us who don't cover the FED day in and day out,

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Speaker 2: what is a Douvish pivot?

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Speaker 1: Right? So, Hawks, when we're talking about the Fed, hawks

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Speaker 1: tend to favor higher borrowing costs to make sure we're

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Speaker 1: getting inflation down. Dubvish means that you might be thinking

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Speaker 1: a little bit more about the labor market and wanting

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Speaker 1: to make sure that borrowing costs interest rates are not

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Speaker 1: so high that they're starting to lead to an undue

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Speaker 1: rise in unemployment. So when we say that FED officials

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Speaker 1: are become and charge your own pal is becoming more dubvish,

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Speaker 1: that means that we are seeing the attention turning toward

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Speaker 1: the possibility of lowering those borrowing costs to make sure

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Speaker 1: that the economy doesn't tip over into a recession.

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Speaker 2: Basically, how quickly did you recognize that the FED shair

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Speaker 2: was speaking in a different way about the economy and

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Speaker 2: the path forward for the FED.

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Speaker 1: It was during right as he kept going, we thought, Wow,

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Speaker 1: that's pretty exc bluss that. I mean something that Jay

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Speaker 1: Powell is known for as being pretty plain spoken, and

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Speaker 1: he wants to make sure that people understand what he's saying.

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Speaker 1: At the same time, usually they like to keep their

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Speaker 1: options open. We assumed he would be a little more vague.

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Speaker 5: FED communications is very nuanced, and you certainly can be

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Speaker 5: an expert of the English language, but you could still

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Speaker 5: not be able to decipher FED speak because the FED

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Speaker 5: speak with a very specific in a very specific way.

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Speaker 2: Anna Wong is the chief US economist at Bloomberg Economics

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Speaker 2: and one of the brains behind Bloomberg Economics is FED

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Speaker 2: Sentiment Index. That's a natural language processing algorithm.

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Speaker 5: You take all these headlines generated by Bloomberg editors and

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Speaker 5: reporters that captured the ke essence of FED officials speeches,

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Speaker 5: scrums or testimony or tweets, you know, the entire universe

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Speaker 5: of fedspeak, and distill it into the core component that

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Speaker 5: market traders need to know.

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Speaker 2: I'd love for you to step back from the model itself,

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Speaker 2: maybe put on your just your your economist had, and

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Speaker 2: just give me a sense of how big a surprise

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Speaker 2: it was that FED cher Jerome Powell changed his tone

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Speaker 2: at that meeting.

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Speaker 5: Well, David, I always wear my economists pack. But however,

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Speaker 5: the size of that Dolvish surprise was surprisingly large in

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Speaker 5: the model. So our model allows us to distill like

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Speaker 5: the relative magnitude of that surprise. And amazingly, that Doulvish

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Speaker 5: surprise is even larger than the Duvish surprise right after

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Speaker 5: the SVB collapse in March of twenty twenty three. So

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Speaker 5: that tells you how big it is. It's one of

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Speaker 5: the biggest Dolwish shock in this entire rike hike cycle.

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Speaker 2: And that shock came at a really critical moment.

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Speaker 5: At that time. There was a split and how market

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Speaker 5: commentators were reading the economy. There's one camp ourselves including

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Speaker 5: in this camp, that thinks that the economy is probably

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Speaker 5: in the midst of a recession starting in October. And

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Speaker 5: then there's the other camp that thinks, in fact, the

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Speaker 5: economy is strong all along and the Fed did not

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Speaker 5: have enough monetary restraint. We did think that if power

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Speaker 5: were to Unleashduvish pivot, that would ease financial conditions and

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Speaker 5: immediately support the economy.

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Speaker 2: The Dubbish pivot effectively had a huge stimulative effect. Here's

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Speaker 2: Kate Davidson again.

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Speaker 1: I think it immediately gave people assurance or reassurance that

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Speaker 1: a recession was not imminent. The Fed had kind of

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Speaker 1: signaled they were willing to do what was necessary to

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Speaker 1: protect the labor market at this moment where people were

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Speaker 1: starting to worry geez rates are very high. There's also

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Speaker 1: this idea that monetary policy it takes a while to

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Speaker 1: work its way through the economy.

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Speaker 2: Could you talk a bit about the way that this

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Speaker 2: is kind of in hindsight, made the Fed's job trickier.

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Speaker 1: Financial conditions loosened quite a bit, and that's always the

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Speaker 1: risk because Fed officials what they think they want to

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Speaker 1: do is they raise interest rates. They tighten financial conditions

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Speaker 1: to get them to a point where they're constraining the economy.

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Speaker 1: But once they had stopped doing that, they kind of

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Speaker 1: want to keep them where they're at right. They don't

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Speaker 1: want them to get too much tighter or too much looser,

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Speaker 1: And so it's a careful it's a very careful balance.

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Speaker 2: So well, that pivot may well have pushed back a recession.

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Speaker 2: That new analysis by Bloomberg Economics concludes it raised the

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Speaker 2: rate of inflation by half a percentage point. That's after

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Speaker 2: the break. We've been discussing the Federal Reserve's latest moves

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Speaker 2: and what to expect from policymakers this week with Anna

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Speaker 2: Wong of Bloomberg Economics and Kate Davidson of Bloomberg News. Kate,

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Speaker 2: what were the first signs in twenty twenty four that

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Speaker 2: maybe FED chair Powell had made a mistake, that he'd

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Speaker 2: pivoted too early.

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Speaker 1: Well, it's hard to say, because as economists often say,

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Speaker 1: and as economics reporters we sort of subscribe to this

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Speaker 1: that you can't take a lot from one data point.

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Speaker 1: So we did see that, you know, inflation in January

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Speaker 1: was a little firmer, firmer than people expected, saw that

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Speaker 1: again in February, saw that again in March, and then

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Speaker 1: I think it's like three, you know, three points it

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Speaker 1: can be connected to make a trend. And late last

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Speaker 1: year Chair Powell and some of his colleagues that had

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Speaker 1: said things like, look, we don't have to see a

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Speaker 1: better number every single month, month to month, but we

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Speaker 1: have to continue to see more of what we've seen.

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Speaker 2: And it looks like the FED chair has started to

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Speaker 2: pivot again already. Two weeks ago, at an event on

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Speaker 2: the sidelines of the International Monetary Fund Spring meetings in Washington,

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Speaker 2: Powell said this.

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Speaker 3: The recent data have clearly not given us greater confidence

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Speaker 3: and instead indicate that it's likely to take longer than

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Speaker 3: expected to achieve that confidence.

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Speaker 1: If they've effectively reset the clock on rate cuts because

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Speaker 1: they want to see better inflation data, presumably they want

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Speaker 1: to see a few months of data, what.

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Speaker 2: Economists and investors will be listening for on Wednesday is

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Speaker 2: for the FED chair to pivot even more. It's a

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Speaker 2: big opportunity for him to do that.

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Speaker 1: I think people will be listening closely for how much

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Speaker 1: more data? How do you want to see before your

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Speaker 1: comfortable cutting rates? But if he says something like three months.

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Speaker 1: I mean May, June, and July. There's not a lot

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Speaker 1: of time for them to make that decision. So the

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Speaker 1: question is is that enough to give them enough confidence?

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Speaker 1: But if they don't have that confidence by July, then

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Speaker 1: you have Jackson Hole in August, where the FED chair

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Speaker 1: typically makes a big speech. That'll be a moment for

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Speaker 1: him to kind of potentially signal one way or another

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Speaker 1: whether they're ready. And then September that's awfully close to

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Speaker 1: the president dential election.

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Speaker 2: Okay, how good is the insulation the FED has from

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Speaker 2: the politics? What's your sense of how much pressure this

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Speaker 2: institution is under and how much more that pressure is

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Speaker 2: likely to build as we get closer to November.

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Speaker 1: I do think the pressure is going to build, and

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Speaker 1: I think it's important to note that it's not just

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Speaker 1: coming from the right. I mean, there are Democratic lawmakers

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Speaker 1: who have complained that the FED should be cutting interest rates.

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Speaker 1: So I think that that will definitely pick up from

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Speaker 1: both sides as we get closer to November. But I

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Speaker 1: think that Cher Powell has shown that he is pretty

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Speaker 1: good at navigating all of that. Something. Let's say that

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Speaker 1: he has put a lot of time and effort into

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Speaker 1: is building relationships with lawmakers on Capitol Hill, and that

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Speaker 1: was hugely to his benefit during the Trump administration because

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Speaker 1: even while he was taking a lot of incoming from

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Speaker 1: the White House, Republicans on Capitol Hill defended him. Essentially,

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Speaker 1: they had his back, and I think that that was

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Speaker 1: a big help because ultimately the FED was created by

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Speaker 1: CONGRESSNG Griss oversees the institution and that's who Powell has

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Speaker 1: to answer to. The FED Chair is nominated by the President,

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Speaker 1: and Chair Powell was nominated by President Trump, but he's

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Speaker 1: confirmed by the Senate.

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Speaker 2: Kate Davidson and her team of reporters are covering this

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Speaker 2: week's meeting, and they're also keeping an eye on how

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Speaker 2: Wall Street reacts at this moment. With this FED meeting underway,

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Speaker 2: what are markets expecting now about what the FED is

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Speaker 2: going to do in the remainder of twenty twenty four.

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Speaker 1: So this is actually really interesting. Markets have dialed back

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Speaker 1: expectations a lot. They were almost more hawkish than the

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Speaker 1: FED itself was, at least when officials met in March.

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Speaker 1: So markets now see between one and two cuts in

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Speaker 1: twenty twenty four, and they don't expect the first cut

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Speaker 1: to come until much later in the year. And that

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Speaker 1: is I think in large part because of this sort

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Speaker 1: of surprising, surprisingly strong, surprisingly hot inflation data that we've

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Speaker 1: gotten at the beginning of the year.

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Speaker 2: What do you listening for? What do you expect the

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Speaker 2: FED chair to say when he addresses reporters on Wednesday?

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Speaker 1: Well, I think the thing about this meeting in May

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Speaker 1: is that FED officials don't have to put down on

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Speaker 1: paper where they see rates heading. They don't think that

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Speaker 1: he's going to commit one way or the other. He's

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Speaker 1: going to lean heavily into the idea that they just

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Speaker 1: have to see what the data show, which is something

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Speaker 1: It feels like it's kind of like a broken record.

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Speaker 1: He has said it over and over and over and

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Speaker 1: over again. This time he doesn't have to say anything else.

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Speaker 1: I think he's going to not commit to a plan

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Speaker 1: one way or the other.

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Speaker 2: And you mentioned that your model is predictive. What is

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Speaker 2: it telling you now?

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Speaker 5: The model is saying that if the if Powell does

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Speaker 5: not do a hawkish pivot to reverse his December pivot,

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Speaker 5: then unemployment rate would be declining and inflation will be

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Speaker 5: a point five percentage point higher. However, if he does

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Speaker 5: decide to do at hawkish prices that in the next

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Speaker 5: two months then unemployment rate would be back on track

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Speaker 5: to rise towards four point five percent at the end

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Speaker 5: of the year.

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Speaker 2: Is it accurate to say that the change in tone

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Speaker 2: in December made the Fed's job more difficult, made this

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Speaker 2: fight against time inflation more difficult.

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Speaker 5: Yes, As a policymakers, you really don't want to turn

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Speaker 5: the economy into like a yo yo ball, where like

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Speaker 5: it's never good when the asset market is like running

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Speaker 5: up by a crazy amount, and then you have to

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Speaker 5: do something to burst this bubble because bursting the bubble

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Speaker 5: create volatilities, create uncertainty, and it's it's a path where

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Speaker 5: things are moving gradually is always profitable to things going

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Speaker 5: up and down and up and down. Right, So I

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Speaker 5: think from the Fed's perspective, this is this is not

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Speaker 5: a good sign. And inflation also has an inertial of

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Speaker 5: its own. And so if if the longer that inflation

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Speaker 5: is away from the FEDS two percent, the more entrenched

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Speaker 5: inflation will be in p people's mind and later on, oh,

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Speaker 5: it will be harder for the FED to bring inflation

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Speaker 5: back down to two percent. So there is actually a

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Speaker 5: clock ticking in terms of bringing inflation back to two percent.

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Speaker 2: Thanks for listening to The Big Take podcast from Bloomberg News.

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Speaker 2: I'm David Gura. This episode was produced by Jessica Beck

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Speaker 2: and Thomas lou It was edited by Naomi Shavin, Tom Orlick,

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Speaker 2: and Chris Antsy. It was mixed by Blake Maples and

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Speaker 2: fact check by Alex Sagura. Our senior editor is Elizabeth Ponso.

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Speaker 2: Nicole Beamster Boor is our executive producer. Sage Bauman is

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Speaker 2: Bloomberg's head of Podcasts. Please subscribe and review The Big

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