Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: As Federal Reserve policymakers meet this week in Washington, they're
Speaker 2: coming to terms with the fact that their fight against
Speaker 2: high inflation has gotten harder and more complicated. That's because
Speaker 2: of new economic data showing persistent inflation, sure, but it's
Speaker 2: also because of something FED shaired Jerome Powell did, or
Speaker 2: rather something he said to reporters at the end of
Speaker 2: a previous meeting back in December.
Speaker 3: The question of when will it become appropriate to begin
Speaker 3: dialing back the amount of policy restraint in place that
Speaker 3: begins to come into view and is clearly a discushed
Speaker 3: topic of discussion now in the world, and also a
Speaker 3: discussion for us at our meeting today.
Speaker 1: We thought, wow, that's pretty explicit.
Speaker 2: That's Kate Davidson. She oversees Bloomberg's coverage of the FED.
Speaker 1: The fact that he was sort of so clear that
Speaker 1: they were at this turning point. It did surprise all
Speaker 1: of us.
Speaker 2: That admission in December that Powell and his colleagues felt
Speaker 2: comfortable enough about what they'd achieved to talk about cutting
Speaker 2: interest rates also surprised Wall Street and investors welcomed that
Speaker 2: change in tone from the FED chair.
Speaker 4: There is plenty of fuel for optimism in the US market,
Speaker 4: with the Federal Reserve signaling this week that it is
Speaker 4: in fact ready to start thinking about cutting interest rates
Speaker 4: next year.
Speaker 2: At a time when many economists expected the US was
Speaker 2: headed for a recession, j Powell pivoted, and in a
Speaker 2: new analysis, Bloomberg Economics says the FED Chair did that
Speaker 2: at the perfect moment to stave off a recession, but
Speaker 2: that pivot in retrospect also had other consequences. That's because
Speaker 2: the boost to growth, which was good news, also gave
Speaker 2: a bump up to inflation, which is bad news. Powell
Speaker 2: is in a tough position trying to pivot again under
Speaker 2: difficult circumstances, and if he's not successful, forget the elusive
Speaker 2: economic software landing. Bloomberg Economics says the outcome of the
Speaker 2: Fed's fight is likely to be harder and bumpier than
Speaker 2: many in the markets expect. A two day meeting of
Speaker 2: the twelve person Federal Open Market Committee is underway, and
Speaker 2: after it ends on Wednesday, Jay Powell will take questions
Speaker 2: from reporters. Wall Street is going to scrutinize everything the
Speaker 2: FED chair says about what he and his colleagues are
Speaker 2: thinking about the economy and what's next. On today's show,
Speaker 2: I talked to editor Kate Davidson and Anna Wong of
Speaker 2: Bloomberg Economics about how that surprise pivot may lead to
Speaker 2: another one that challenges the FED chair faces and what
Speaker 2: to listen for when he speaks. This is the Big
Speaker 2: Take from Bloomberg News. I'm David Gera.
Speaker 1: In December. I think most people were quite surprised when
Speaker 1: he came out and gave a pretty clear indication that
Speaker 1: FED policymakers were starting to think about cutting rates.
Speaker 2: Kate Davidson of Bloomberg News. A big pivot I've seen
Speaker 2: referred to as a Dovish pivot. And for those of
Speaker 2: us who don't cover the FED day in and day out,
Speaker 2: what is a Douvish pivot?
Speaker 1: Right? So, Hawks, when we're talking about the Fed, hawks
Speaker 1: tend to favor higher borrowing costs to make sure we're
Speaker 1: getting inflation down. Dubvish means that you might be thinking
Speaker 1: a little bit more about the labor market and wanting
Speaker 1: to make sure that borrowing costs interest rates are not
Speaker 1: so high that they're starting to lead to an undue
Speaker 1: rise in unemployment. So when we say that FED officials
Speaker 1: are become and charge your own pal is becoming more dubvish,
Speaker 1: that means that we are seeing the attention turning toward
Speaker 1: the possibility of lowering those borrowing costs to make sure
Speaker 1: that the economy doesn't tip over into a recession.
Speaker 2: Basically, how quickly did you recognize that the FED shair
Speaker 2: was speaking in a different way about the economy and
Speaker 2: the path forward for the FED.
Speaker 1: It was during right as he kept going, we thought, Wow,
Speaker 1: that's pretty exc bluss that. I mean something that Jay
Speaker 1: Powell is known for as being pretty plain spoken, and
Speaker 1: he wants to make sure that people understand what he's saying.
Speaker 1: At the same time, usually they like to keep their
Speaker 1: options open. We assumed he would be a little more vague.
Speaker 5: FED communications is very nuanced, and you certainly can be
Speaker 5: an expert of the English language, but you could still
Speaker 5: not be able to decipher FED speak because the FED
Speaker 5: speak with a very specific in a very specific way.
Speaker 2: Anna Wong is the chief US economist at Bloomberg Economics
Speaker 2: and one of the brains behind Bloomberg Economics is FED
Speaker 2: Sentiment Index. That's a natural language processing algorithm.
Speaker 5: You take all these headlines generated by Bloomberg editors and
Speaker 5: reporters that captured the ke essence of FED officials speeches,
Speaker 5: scrums or testimony or tweets, you know, the entire universe
Speaker 5: of fedspeak, and distill it into the core component that
Speaker 5: market traders need to know.
Speaker 2: I'd love for you to step back from the model itself,
Speaker 2: maybe put on your just your your economist had, and
Speaker 2: just give me a sense of how big a surprise
Speaker 2: it was that FED cher Jerome Powell changed his tone
Speaker 2: at that meeting.
Speaker 5: Well, David, I always wear my economists pack. But however,
Speaker 5: the size of that Dolvish surprise was surprisingly large in
Speaker 5: the model. So our model allows us to distill like
Speaker 5: the relative magnitude of that surprise. And amazingly, that Doulvish
Speaker 5: surprise is even larger than the Duvish surprise right after
Speaker 5: the SVB collapse in March of twenty twenty three. So
Speaker 5: that tells you how big it is. It's one of
Speaker 5: the biggest Dolwish shock in this entire rike hike cycle.
Speaker 2: And that shock came at a really critical moment.
Speaker 5: At that time. There was a split and how market
Speaker 5: commentators were reading the economy. There's one camp ourselves including
Speaker 5: in this camp, that thinks that the economy is probably
Speaker 5: in the midst of a recession starting in October. And
Speaker 5: then there's the other camp that thinks, in fact, the
Speaker 5: economy is strong all along and the Fed did not
Speaker 5: have enough monetary restraint. We did think that if power
Speaker 5: were to Unleashduvish pivot, that would ease financial conditions and
Speaker 5: immediately support the economy.
Speaker 2: The Dubbish pivot effectively had a huge stimulative effect. Here's
Speaker 2: Kate Davidson again.
Speaker 1: I think it immediately gave people assurance or reassurance that
Speaker 1: a recession was not imminent. The Fed had kind of
Speaker 1: signaled they were willing to do what was necessary to
Speaker 1: protect the labor market at this moment where people were
Speaker 1: starting to worry geez rates are very high. There's also
Speaker 1: this idea that monetary policy it takes a while to
Speaker 1: work its way through the economy.
Speaker 2: Could you talk a bit about the way that this
Speaker 2: is kind of in hindsight, made the Fed's job trickier.
Speaker 1: Financial conditions loosened quite a bit, and that's always the
Speaker 1: risk because Fed officials what they think they want to
Speaker 1: do is they raise interest rates. They tighten financial conditions
Speaker 1: to get them to a point where they're constraining the economy.
Speaker 1: But once they had stopped doing that, they kind of
Speaker 1: want to keep them where they're at right. They don't
Speaker 1: want them to get too much tighter or too much looser,
Speaker 1: And so it's a careful it's a very careful balance.
Speaker 2: So well, that pivot may well have pushed back a recession.
Speaker 2: That new analysis by Bloomberg Economics concludes it raised the
Speaker 2: rate of inflation by half a percentage point. That's after
Speaker 2: the break. We've been discussing the Federal Reserve's latest moves
Speaker 2: and what to expect from policymakers this week with Anna
Speaker 2: Wong of Bloomberg Economics and Kate Davidson of Bloomberg News. Kate,
Speaker 2: what were the first signs in twenty twenty four that
Speaker 2: maybe FED chair Powell had made a mistake, that he'd
Speaker 2: pivoted too early.
Speaker 1: Well, it's hard to say, because as economists often say,
Speaker 1: and as economics reporters we sort of subscribe to this
Speaker 1: that you can't take a lot from one data point.
Speaker 1: So we did see that, you know, inflation in January
Speaker 1: was a little firmer, firmer than people expected, saw that
Speaker 1: again in February, saw that again in March, and then
Speaker 1: I think it's like three, you know, three points it
Speaker 1: can be connected to make a trend. And late last
Speaker 1: year Chair Powell and some of his colleagues that had
Speaker 1: said things like, look, we don't have to see a
Speaker 1: better number every single month, month to month, but we
Speaker 1: have to continue to see more of what we've seen.
Speaker 2: And it looks like the FED chair has started to
Speaker 2: pivot again already. Two weeks ago, at an event on
Speaker 2: the sidelines of the International Monetary Fund Spring meetings in Washington,
Speaker 2: Powell said this.
Speaker 3: The recent data have clearly not given us greater confidence
Speaker 3: and instead indicate that it's likely to take longer than
Speaker 3: expected to achieve that confidence.
Speaker 1: If they've effectively reset the clock on rate cuts because
Speaker 1: they want to see better inflation data, presumably they want
Speaker 1: to see a few months of data, what.
Speaker 2: Economists and investors will be listening for on Wednesday is
Speaker 2: for the FED chair to pivot even more. It's a
Speaker 2: big opportunity for him to do that.
Speaker 1: I think people will be listening closely for how much
Speaker 1: more data? How do you want to see before your
Speaker 1: comfortable cutting rates? But if he says something like three months.
Speaker 1: I mean May, June, and July. There's not a lot
Speaker 1: of time for them to make that decision. So the
Speaker 1: question is is that enough to give them enough confidence?
Speaker 1: But if they don't have that confidence by July, then
Speaker 1: you have Jackson Hole in August, where the FED chair
Speaker 1: typically makes a big speech. That'll be a moment for
Speaker 1: him to kind of potentially signal one way or another
Speaker 1: whether they're ready. And then September that's awfully close to
Speaker 1: the president dential election.
Speaker 2: Okay, how good is the insulation the FED has from
Speaker 2: the politics? What's your sense of how much pressure this
Speaker 2: institution is under and how much more that pressure is
Speaker 2: likely to build as we get closer to November.
Speaker 1: I do think the pressure is going to build, and
Speaker 1: I think it's important to note that it's not just
Speaker 1: coming from the right. I mean, there are Democratic lawmakers
Speaker 1: who have complained that the FED should be cutting interest rates.
Speaker 1: So I think that that will definitely pick up from
Speaker 1: both sides as we get closer to November. But I
Speaker 1: think that Cher Powell has shown that he is pretty
Speaker 1: good at navigating all of that. Something. Let's say that
Speaker 1: he has put a lot of time and effort into
Speaker 1: is building relationships with lawmakers on Capitol Hill, and that
Speaker 1: was hugely to his benefit during the Trump administration because
Speaker 1: even while he was taking a lot of incoming from
Speaker 1: the White House, Republicans on Capitol Hill defended him. Essentially,
Speaker 1: they had his back, and I think that that was
Speaker 1: a big help because ultimately the FED was created by
Speaker 1: CONGRESSNG Griss oversees the institution and that's who Powell has
Speaker 1: to answer to. The FED Chair is nominated by the President,
Speaker 1: and Chair Powell was nominated by President Trump, but he's
Speaker 1: confirmed by the Senate.
Speaker 2: Kate Davidson and her team of reporters are covering this
Speaker 2: week's meeting, and they're also keeping an eye on how
Speaker 2: Wall Street reacts at this moment. With this FED meeting underway,
Speaker 2: what are markets expecting now about what the FED is
Speaker 2: going to do in the remainder of twenty twenty four.
Speaker 1: So this is actually really interesting. Markets have dialed back
Speaker 1: expectations a lot. They were almost more hawkish than the
Speaker 1: FED itself was, at least when officials met in March.
Speaker 1: So markets now see between one and two cuts in
Speaker 1: twenty twenty four, and they don't expect the first cut
Speaker 1: to come until much later in the year. And that
Speaker 1: is I think in large part because of this sort
Speaker 1: of surprising, surprisingly strong, surprisingly hot inflation data that we've
Speaker 1: gotten at the beginning of the year.
Speaker 2: What do you listening for? What do you expect the
Speaker 2: FED chair to say when he addresses reporters on Wednesday?
Speaker 1: Well, I think the thing about this meeting in May
Speaker 1: is that FED officials don't have to put down on
Speaker 1: paper where they see rates heading. They don't think that
Speaker 1: he's going to commit one way or the other. He's
Speaker 1: going to lean heavily into the idea that they just
Speaker 1: have to see what the data show, which is something
Speaker 1: It feels like it's kind of like a broken record.
Speaker 1: He has said it over and over and over and
Speaker 1: over again. This time he doesn't have to say anything else.
Speaker 1: I think he's going to not commit to a plan
Speaker 1: one way or the other.
Speaker 2: And you mentioned that your model is predictive. What is
Speaker 2: it telling you now?
Speaker 5: The model is saying that if the if Powell does
Speaker 5: not do a hawkish pivot to reverse his December pivot,
Speaker 5: then unemployment rate would be declining and inflation will be
Speaker 5: a point five percentage point higher. However, if he does
Speaker 5: decide to do at hawkish prices that in the next
Speaker 5: two months then unemployment rate would be back on track
Speaker 5: to rise towards four point five percent at the end
Speaker 5: of the year.
Speaker 2: Is it accurate to say that the change in tone
Speaker 2: in December made the Fed's job more difficult, made this
Speaker 2: fight against time inflation more difficult.
Speaker 5: Yes, As a policymakers, you really don't want to turn
Speaker 5: the economy into like a yo yo ball, where like
Speaker 5: it's never good when the asset market is like running
Speaker 5: up by a crazy amount, and then you have to
Speaker 5: do something to burst this bubble because bursting the bubble
Speaker 5: create volatilities, create uncertainty, and it's it's a path where
Speaker 5: things are moving gradually is always profitable to things going
Speaker 5: up and down and up and down. Right, So I
Speaker 5: think from the Fed's perspective, this is this is not
Speaker 5: a good sign. And inflation also has an inertial of
Speaker 5: its own. And so if if the longer that inflation
Speaker 5: is away from the FEDS two percent, the more entrenched
Speaker 5: inflation will be in p people's mind and later on, oh,
Speaker 5: it will be harder for the FED to bring inflation
Speaker 5: back down to two percent. So there is actually a
Speaker 5: clock ticking in terms of bringing inflation back to two percent.
Speaker 2: Thanks for listening to The Big Take podcast from Bloomberg News.
Speaker 2: I'm David Gura. This episode was produced by Jessica Beck
Speaker 2: and Thomas lou It was edited by Naomi Shavin, Tom Orlick,
Speaker 2: and Chris Antsy. It was mixed by Blake Maples and
Speaker 2: fact check by Alex Sagura. Our senior editor is Elizabeth Ponso.
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