Speaker 1: Rich Clarendo, Global Economic Advisor of HIMCO. Of course, former
Speaker 1: feder Reserve Vice chair joins us now from Zerich. Rich,
Speaker 1: great to see you, perfect person to talk to. What
Speaker 1: did you make of yesterday in aggregate.
Speaker 2: Well, it was an interesting meeting. Obviously, no great decision.
Speaker 2: I think the DOTS came in on the hawkish side,
Speaker 2: with only one cut penciled in this year versus three
Speaker 2: in March.
Speaker 3: That's what I thought going.
Speaker 2: Into the meeting was more likely.
Speaker 3: I thought it would be a cross close calls. It was.
Speaker 2: Obviously in some ways the Fed got trumped yesterday by
Speaker 2: the data. The CPI numbers were very FED friendly. The
Speaker 2: core number was soft, headline was around zero, and so
Speaker 2: it's interesting that even though you could argue the Fed
Speaker 2: on net was hawkish, it was on Netta Davis day
Speaker 2: in markets given the CPI report.
Speaker 1: So is are the dots old news given the fact
Speaker 1: that we've got updated CPI which is maybe a little
Speaker 1: bit more benign and positive.
Speaker 3: Great question. You know, they could be they could be stale. Now.
Speaker 2: The Chair did acknowledge, as certainly was the case when
Speaker 2: I was there, that members of the committee do have
Speaker 2: a chance on the day of the meeting, and yesterday
Speaker 2: after the CPI number came out to revise their dots.
Speaker 3: If they choose to.
Speaker 2: He didn't want to go into whether or not folks
Speaker 2: actually had to the extent they didn't. And certainly if
Speaker 2: we get more numbers like this than they could be
Speaker 2: a stale. But I more or less think that right
Speaker 2: now they are in data dependent mode. I know it
Speaker 2: sounds tripe, but I think they need to see a
Speaker 2: lot more good inflation data to have the confidence to cut.
Speaker 1: How far through that journey do you think we all, though,
Speaker 1: rich We've talked about and Chris Wallace talks about this,
Speaker 1: the need to see a series of data prints that
Speaker 1: are pointing in the right direction to take us in
Speaker 1: the right direction.
Speaker 3: How big a tick in the.
Speaker 1: Bulx kind of down that road are we given the
Speaker 1: CPI data that we got yesterday.
Speaker 2: Well, I certainly think we're going to need a guy.
Speaker 2: We're going to need They are going to need more
Speaker 2: data than just the one more set of print will
Speaker 2: get before the July meeting, which I believe is July
Speaker 2: thirty first, And since there's no meeting in August, I
Speaker 2: think the soonest practical time to even think about a
Speaker 2: possible rate cut would be the September meeting, and then
Speaker 2: my own judgment is a lot would have to go
Speaker 2: right between. Then we'll get numbers for June and July
Speaker 2: and CPI for August, and so if you had three
Speaker 2: more numbers like what we got yesterday, then September could
Speaker 2: be could be possible. But I think barring that, we're
Speaker 2: probably looking at either November or December, and that's more
Speaker 2: or less I think where market pricing is.
Speaker 1: Right now, I'm assuming December is probably more likely given
Speaker 1: the politics that's going to be happening in November. Yeah,
Speaker 1: that'd be correct.
Speaker 2: Yeah, Indeed, the November meeting if I look at the
Speaker 2: calendar correctly, Guy, the November meeting this year is the
Speaker 2: day after the election, which obviously could make sense if
Speaker 2: it's a close call to do that in December.
Speaker 3: Yeah.
Speaker 1: In terms of how we think of this in aggregate reach,
Speaker 1: the sort of the totality of the cuts while the
Speaker 1: cuts come later, seems to be largely intact. We're going
Speaker 1: to get to the same place, We're just going to
Speaker 1: take longer to get there. Is that the right way
Speaker 1: of thinking about this?
Speaker 2: Yeah, that was exactly And indeed the Chair more or
Speaker 2: less made that point yesterday in the press conference. It's
Speaker 2: fewer cuts this year than they thought in March, but
Speaker 2: they added an additional cut to twenty twenty five and
Speaker 2: an additional cut to twenty twenty six, so they actually
Speaker 2: end up now Again, the further out you go in
Speaker 2: the projections really the less informative they are. And so
Speaker 2: and you saw the chair yesterday and the press conference
Speaker 2: sort of remind folks of that of that point. But yes,
Speaker 2: if you just take the dots literally, they literally get
Speaker 2: to the same place they did in March, but just
Speaker 2: with more of it back loaded, and again assuming that
Speaker 2: the inflation data does break their way Ageah. The other
Speaker 2: interesting thing about yesterday, when I think he was pressed
Speaker 2: by a reporter about cutting with inflation running at two
Speaker 2: point six or two point seven percent, I think what
Speaker 2: they had was inflation running at two point eight by
Speaker 2: the end of the year. You know, the Chair made
Speaker 2: some reference to that on the exact quote. You know,
Speaker 2: that would be a pretty good place to be. Now,
Speaker 2: obviously the Fed is targeting two percent inflation, but it
Speaker 2: does reinforce this message. We've had a PIMCO for some time,
Speaker 2: not only for the Fed but the ECB and the
Speaker 2: Bank of England and others that they're really operating in
Speaker 2: a two point something range on inflation, and once it
Speaker 2: gets there and they think it's falling, they can begin
Speaker 2: to cut and cut in tandem with declining inflation.
Speaker 1: Is the focus on inflation the Fed obviously, and you
Speaker 1: reference a couple of other central banks that the FED
Speaker 1: has a dual mandate. Is the focus on inflation? Is
Speaker 1: the balance kind of sixty forty inflation versus what's happening
Speaker 1: with the labor market? How do you think the kind
Speaker 1: of the mix of of inputs there thinking about works
Speaker 1: right now?
Speaker 2: That's a great question, because I actually think it's quite
Speaker 2: important in this cycle. I think it was clear back
Speaker 2: in twenty twenty two and three that when inflation was
Speaker 2: too darn high, they were, in essence a single mandate
Speaker 2: central bank. Charr Pell even acknowledged that Jackson hole in
Speaker 2: twenty two that raising rates could cause us some pain.
Speaker 3: We haven't seen that.
Speaker 2: It's been a very, very rapid and so far painless disinflation.
Speaker 2: And you got a question yesterday about whether or not
Speaker 2: they would cut rates preemptively because they were forecasting a
Speaker 2: softening economy. And arise in the unemployment rate, and he
Speaker 2: didn't commit to doing that. He said they want to
Speaker 2: try to avoid that. On the other hand, they also
Speaker 2: want to avoid a situation where they declare a mission
Speaker 2: accomplished and then have to be hiking rates next year
Speaker 2: because inflation rebounds. And so my guess is that on net,
Speaker 2: they're going to really need to see some tangible evidence
Speaker 2: of economic slowing before they actually cut, absent some better
Speaker 2: news on inflation.
Speaker 1: It's the trade that everybody seems to have on. Is
Speaker 1: the steepener everybody's anticipation we get right cuts the fiscal
Speaker 1: position probably means the back end remains reasonably elevated, and
Speaker 1: that's the trade that everybody seems to want to have on.
Speaker 1: Yet we've seen very little movements in the spread two
Speaker 1: tens for really quite some time. Whilst it is the
Speaker 1: beginning of the year, Really when does that kick off?
Speaker 1: When does that if that trade is the right trade,
Speaker 1: when do you think it starts to really materialize and work.
Speaker 2: Really good point, because we obviously we have an inverted
Speaker 2: curve and we have now for nearly two years, so
Speaker 2: I think that's close to a record at PIMCO. We
Speaker 2: don't believe inverted curves are the new normal. The curve
Speaker 2: will resteeping, So in that sense, it is the good
Speaker 2: trade to have on over the next several years. As
Speaker 2: in anything in financial markets, markets will try to get
Speaker 2: ahead of the inflection point. So sometimes you know, it's
Speaker 2: better to look at those opportunities not so much in
Speaker 2: spot space, but in forward space, so essentially the way
Speaker 2: when our market's pricing them, the curve will steepen, and
Speaker 2: to try to look for opportunities there. But you know,
Speaker 2: there's a lot of money on the sidelines right now,
Speaker 2: for example, in money market mutual funds, and my sense
Speaker 2: is that once we do get that first cut, or
Speaker 2: once it more or less gets priced in one hundred percent,
Speaker 2: you will see you will see start to see a
Speaker 2: lot of moving in the direction of the steepening bias.
Speaker 1: Rich You're in Europe, you're in Zurich. We're watching quite
Speaker 1: a lot of political consternation here in Europe, and I'm
Speaker 1: just wondering how you're thinking about how investors, how portfolio
Speaker 1: managers should be thinking about political risk right now. It
Speaker 1: suddenly seems to have inserted itself into the debate in
Speaker 1: a way that it hasn't for a while. We're sitting
Speaker 1: it in France right now. We've seen in some emerging markets.
Speaker 1: We're all looking so carefully at what is going to
Speaker 1: happen in November in the United States. How are you,
Speaker 1: guys at PIMCO, how are you thinking about kind of
Speaker 1: trying to navigate that and what is the best advice
Speaker 1: you've got? How are you thinking about what that process
Speaker 1: is going to look like?
Speaker 3: Well?
Speaker 2: It certainly it was a focus of our recent secular form.
Speaker 2: You know, we are certainly now moving into a multipolar world.
Speaker 2: More than sixty percent of the world GDP is in
Speaker 2: countries that are having or have had elections.
Speaker 3: This year.
Speaker 2: We've seen surprises on both side. You know, a surprise
Speaker 2: in India where Modi did not get the support expected.
Speaker 2: On the other hand in Mexico where Shinbaum got more
Speaker 2: support than expected. Obviously an early election in the UK
Speaker 2: Macron now indicating elections for the parliament in France, the
Speaker 2: European Parliament.
Speaker 3: We could go on and on for several segments.
Speaker 2: The way we look at it at PIMCO guys that
Speaker 2: there's always some element of geopolitical risk. But I think
Speaker 2: you'd have to argue now, given that we have a
Speaker 2: hot war in Europe and in the Middle East and
Speaker 2: the geopolitical risk, it just emphasizes that this is a volatile,
Speaker 2: uncertain world and what we're doing is trying to put
Speaker 2: together for our clob gcience robust portfolios that that are
Speaker 2: that are that do well in all circumstances. It's a challenge,
Speaker 2: but I think there are opportunities there which.
Speaker 1: I couldn't have thought of a more perfect person to
Speaker 1: talk to, to digest and analyze. Thank you yesterday, CPI
Speaker 1: the Fed genuine pleasure, sir, Thank you very much. Indeed
Speaker 1: we always appreciate your time. Richard Clarida, global Economic Advisor
Speaker 1: at PIMCO and of course former Federal Reserve Vice Chair