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Speaker 1: and welcome back to the Bloomberg Benchmark podcast show about
Speaker 1: the global economy. It's July. I'm Scott Landman and economics
Speaker 1: editor for Bloomberg News in Washington. Today we're bringing you
Speaker 1: a special bonus edition devoted to the Federal Reserves meeting
Speaker 1: this week. Joining me in our DC studio are my
Speaker 1: colleagues Chris Condon and Ginas Smilek, who cover the Federal Reserve.
Speaker 1: Al Right, the Federal release its interest rate decision on Wednesday. Now,
Speaker 1: no rate hike is expected, and we're just going to
Speaker 1: get a statement with no press conference from Chair Janet Yellen.
Speaker 1: So what should we care about? We're going to tell
Speaker 1: you the five things you need to know. Chris, you
Speaker 1: lead off with number one, jobs and the economy. So
Speaker 1: right off the top of the statement, we're going to
Speaker 1: get this usual assessment of the economic conditions, and I
Speaker 1: think right there we're gonna start with a pretty positive
Speaker 1: note overall economic conditions. Now, remember, I think it's important
Speaker 1: to remember the first quarter of this year was pretty disappointing.
Speaker 1: The second quarter was a fairly good rebound, and already
Speaker 1: by June we saw the Committee saying that economic activity
Speaker 1: appeared to have picked up. They have more reason for
Speaker 1: a little more confidence, I think now this meeting Scott,
Speaker 1: from the numbers, we're seeing growth on an annualized basis
Speaker 1: in the second quarter could be over two percent, and
Speaker 1: some of the initial indications are that the third quarter
Speaker 1: is also going pretty well. So there again we're going
Speaker 1: to see something positive on the job side, to again
Speaker 1: a positive signal. Again, let's step back. May was an
Speaker 1: absolutely stinker of an employment report, what eleven thousand new
Speaker 1: jobs in that month, but rebounded very strongly in June
Speaker 1: two eighty seven thousand. Now, the Committee is not likely
Speaker 1: to sort of swing wildly from one reaction to another.
Speaker 1: There more likely to somehow acknowledge that the trend, looking
Speaker 1: at all of these, while slowing down a bit, is
Speaker 1: still pretty positive, still strong enough to add jobs in
Speaker 1: lower unemployment. So the takeaway from that is that that's
Speaker 1: a sign that they that they might actually raise interest
Speaker 1: rates this year, right, that would push them in that direction.
Speaker 1: That's right, all right, Gina. Number two, what do they
Speaker 1: say about global developments now that Brexit has shaken things up?
Speaker 1: So the global outlook is going to be a major
Speaker 1: focal point at this meeting, And like you said, because
Speaker 1: of Brexit, what we saw in the June meeting is
Speaker 1: the FED was giving us an indication that is going
Speaker 1: to continue to closely monitor global developments. Now we've since
Speaker 1: that meeting, we've had the Brexit, so British vote to
Speaker 1: exit the European Union, and we know that that could
Speaker 1: introduce a lot of uncertainty going forward because obviously they
Speaker 1: still have to negotiate the terms of that now. At
Speaker 1: the same time, we've heard from quite a few FED
Speaker 1: officials that they're not overly concerned about Brexit, you know,
Speaker 1: they think it could be sort of something marginal to
Speaker 1: the U. S economy, but it does introduce a lot
Speaker 1: of uncertainty into the outlook. So I think what kind
Speaker 1: of indication we see around Brexit, whether there's any sort
Speaker 1: of explicit reference to it, is going to be a
Speaker 1: really strong either devish or hawkish signal. Okay, let's go
Speaker 1: back to Christopher number three, what do they say about
Speaker 1: the pace of rate hikes and their timing? Right? So here,
Speaker 1: I think we're gonna run up into the problem of
Speaker 1: very short and rather vague, sometimes purposefully vague statement. What
Speaker 1: do we see in June? We saw this that the
Speaker 1: committee expects that anomic conditions will evolve in a manner
Speaker 1: that will warrant only gradual increases in federal funds rate.
Speaker 1: Probably reasonable to expect that they're going to keep that
Speaker 1: exact language in there, so we don't learn anything explicitly new.
Speaker 1: But at the same time, we know that there will
Speaker 1: be a debate going on about how many times they
Speaker 1: should be prepared to raise interest rates this year, with
Speaker 1: some of the Hawks arguing, like Esther George from Kansas
Speaker 1: City Loretta Master from Cleveland, who are both voters this year,
Speaker 1: they'll likely be urging the committee to keep the door
Speaker 1: open for a September rate increase. Others will be arguing
Speaker 1: more dubbish ly that perhaps the Fed may not be
Speaker 1: able to raise at all this year. Where does the
Speaker 1: center of the committee fall, Where does chair yell and fall?
Speaker 1: We don't really know, and we're unlikely to learn anything
Speaker 1: very specific from the state. One thing we do know
Speaker 1: about this committee under Janet Yellen, they do like to
Speaker 1: keep their options open. So I think it's fair to
Speaker 1: expect that we're not going to get language that rules
Speaker 1: out September. But neither are we going to get language
Speaker 1: that explicitly signals us that they're likely to move in September.
Speaker 1: But if they don't change the language at all, then
Speaker 1: people are going to take If they don't actively signal
Speaker 1: that they're probably going to move in September, people are
Speaker 1: probably going to think that they're going to skip that, right,
Speaker 1: They could well do that. One thing to bear in mind, though,
Speaker 1: if additional really strong data does come in after this
Speaker 1: meeting and the Fed thinks that they're going to have
Speaker 1: to prepare the markets for a move in September. Janet
Speaker 1: Yellen is scheduled to speak in late August in Jackson Hole,
Speaker 1: Wyoming at the Kansas City FEDS Annual Symposium. That will
Speaker 1: be very closely watched. She'll have all the opportunity in
Speaker 1: the world to give a different and signal. At that point, Gina,
Speaker 1: you're up for number four. Inflation is still low and
Speaker 1: bond yields have fallen even further since the last meeting,
Speaker 1: What could they say about this? You know, the fact,
Speaker 1: as you mentioned, inflation is still low, bond yields have
Speaker 1: fallen lower. I think that gives them a lot of room,
Speaker 1: um to remain cautious about inflation. UM. So we have
Speaker 1: seen a core inflation in particular start to move up
Speaker 1: a little bit. But in their past statement they mentioned that,
Speaker 1: you know, inflation has continued to run below the committees
Speaker 1: to percent longer run objective, and you know that allowed
Speaker 1: them to sort of still take their time with hiking.
Speaker 1: And I think that that status quo sort of still
Speaker 1: stands because even as core inflation moves up, there are
Speaker 1: all these factors that are keeping it down on the
Speaker 1: edges um, and I think that they're going to take
Speaker 1: all the room and back and give them. So that
Speaker 1: would probably be a factor in not raising rates any
Speaker 1: time immediately, right right, absolutely. I think in a world
Speaker 1: where you're worried about job growth, you're worried about the
Speaker 1: global economic outlook, the fact that inflation still remains subdued
Speaker 1: means that you don't have to be in any hurry
Speaker 1: to move those rates up really quickly. All right. Finally,
Speaker 1: number five, the actual vote it was unanimous last time
Speaker 1: in favor of leaving rates unchanged. What do you think
Speaker 1: is going to happen this time? I think many people
Speaker 1: will expect the previous dissenter, Esther George to return to
Speaker 1: that column. I in fact, was out to Lake Ozark,
Speaker 1: Missouri a couple of weeks ago and heard her speak. Um.
Speaker 1: That was after the June meeting, and Esther acknowledged that
Speaker 1: at that June meeting she she voted with the rest
Speaker 1: of the committee out of her concerns about the main
Speaker 1: jobs report and the then pending Brexit vote. Um. But
Speaker 1: since those things, because of the June jobs report, because
Speaker 1: of how markets had calmed down after the vote in
Speaker 1: the UK, that she was back basically to her usual
Speaker 1: stump speech about the risks of moving too late. So
Speaker 1: I think it's fairly reasonable to expect a descent from her.
Speaker 1: I think do you think that as well? Yeah, I
Speaker 1: think that's accurate. And you know, another person of interest
Speaker 1: at this meeting I think is James Bullard. So he
Speaker 1: at the after the last meeting released a special statement
Speaker 1: where he said, you know, I think we have one
Speaker 1: more rate increase and then we're pretty much on hold.
Speaker 1: And he didn't say when that one rate increase should be.
Speaker 1: And so I was at a press groom with him
Speaker 1: the other day, and you know, he got the question,
Speaker 1: why wait, you know, if you expect one more to
Speaker 1: be necessary, why not just go ahead and do it?
Speaker 1: Um And so I think some some focus is going
Speaker 1: to be focused on him, just you know, is he
Speaker 1: going to be is he going to descend? Is he
Speaker 1: going to say we ought to just go ahead and
Speaker 1: do this one rate increase. But it's interesting because his
Speaker 1: reply to this question was, you know, I move on
Speaker 1: good news. I only move on good news. And it
Speaker 1: seems to me like we haven't had the kind of
Speaker 1: good news he'd be looking for. But it should be
Speaker 1: interesting to watch that vote and how that plays out.
Speaker 1: So in that case, I would say we we kind
Speaker 1: of take in favor of raising rates, uh sooner given
Speaker 1: that if Esther George switches back to it. Is that
Speaker 1: fair marginally? So? Yes? Alright? Well overall, I think from
Speaker 1: that I counted slightly more factors in favor of keeping
Speaker 1: rates on hold for the next meeting or so rather
Speaker 1: than moving closer to a rate increase. Is that fair?
Speaker 1: I think that's what we're hearing and I you know,
Speaker 1: one thing to caution is, no one's really expecting a
Speaker 1: rate increase this month. Obviously, everyone is looking at what
Speaker 1: this is going to mean for September and how it's
Speaker 1: going to set September up. And I think what we're
Speaker 1: hearing is the feed is probably not going to really
Speaker 1: really bring September onto the table. That that's what economists
Speaker 1: are telling me, not yet, and and and don't forget
Speaker 1: they'll repeat their refrain, maybe not in the statement, but
Speaker 1: they'll be very soon repeating their refrain that their data dependent.
Speaker 1: They will want to see more data, and there will
Speaker 1: be some significant economic data coming in between this meeting
Speaker 1: and the meeting in September. And one thing that Chris
Speaker 1: continually cautions me to remember, which is a really good point,
Speaker 1: is while the FED lights to signal rate rate increases
Speaker 1: before they happen, they are going to have Jackson Hole
Speaker 1: to do it this time. So there's no real pressure
Speaker 1: for them to get that in this statement because they'll
Speaker 1: have more messaging time in between now and the next meeting,
Speaker 1: and that takes place in late August, right right exactly, Well,
Speaker 1: that was really fascinating. Uh, we're all going to be
Speaker 1: on the edge of our seats as always this Wednesday
Speaker 1: at exactly two pm when the headlines hit our wire.
Speaker 1: So thanks Chris, thanks Gina for taking the time to
Speaker 1: talk about this today. Awesome, Thanks Guy. Thanks. Benchmark will
Speaker 1: be back with our regular episode later this week, and
Speaker 1: until then, you can find us on the Bloomberg Terminal
Speaker 1: and Bloomberg dot com, as well as on iTunes, pocket casts,
Speaker 1: and Stitcher. You can talk to and follow us on Twitter.
Speaker 1: Chris is at Chris ja Condon, Gina is at at
Speaker 1: Gina Smile s M I A L E K, and
Speaker 1: I'm at Scott Lanman s c O T T L
Speaker 1: A N M A N. See you next time. Bloomberg
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