WEBVTT - Powell Buys Time on Inflation 

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. You're listening to Bloomberg

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<v Speaker 1>Business Week with Carol Masser and Tim Steneveek on Bloomberg Radio.

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<v Speaker 2>We got from j Powell in his testimony to the

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<v Speaker 2>Senate Banking Committee today quite a bit. He said the

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<v Speaker 2>Fed doesn't need to rush to adjust interest rates, again,

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<v Speaker 2>signaling that officials will be patient before lowering borrowing costs. Further,

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<v Speaker 2>I'm wondering if it changes Joy Swang's view at all.

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<v Speaker 2>She's vice president and senior client portfolio manager at American

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<v Speaker 2>Century Investment. She joins us here in the Bloomberg Interactive

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<v Speaker 2>Broker's studio. Before Powell spoke, you sent some notes over

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<v Speaker 2>to our team. You said, we expect two to three

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<v Speaker 2>rate cuts this year. Did Powell change your mind?

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<v Speaker 3>No, We were always pricing in the rate cuts towards

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<v Speaker 3>the back end of the year, and because we know

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<v Speaker 3>that there's a lot of uncertainty around what Trump's policies

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<v Speaker 3>are going to be, how the market's going to react

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<v Speaker 3>to them, what sort of counter tariffs we might incur,

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<v Speaker 3>So we thought that the Fed has the ability to

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<v Speaker 3>be patient. Jay Powell re emphasized that today, highlighting the

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<v Speaker 3>strength of the US economy.

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<v Speaker 2>So no, so what happens between now and those rate cuts,

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<v Speaker 2>does inflation rear It's ugly head again.

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<v Speaker 3>So this is something that I've actually spent a long

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<v Speaker 3>time talking about last year, and a lot of people

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<v Speaker 3>were thinking, you know, it's kind of like chicken little,

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<v Speaker 3>but I think actually inflation is one of the bigger

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<v Speaker 3>risks to the market, because people dismissed it all last year,

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<v Speaker 3>and I was always thinking, you know, if I go

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<v Speaker 3>to the store, prices are the same or higher, and

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<v Speaker 3>the way consumers are affected by inflation, that's going to

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<v Speaker 3>affect their buying power and their confidence, and that we

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<v Speaker 3>know drove most of US GDP growth last year. And

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<v Speaker 3>so if the consumer starts to slow and weaken, there

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<v Speaker 3>goes the US economy.

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<v Speaker 4>Yeah, it's kind of interesting, although the consumer continues to

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<v Speaker 4>kind of surprise us by holding up here. Well, is

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<v Speaker 4>it a case Joyce that we think that inflation or

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<v Speaker 4>I think about the Fed's target rate that we just

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<v Speaker 4>need to settle above that there's just stuff going on

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<v Speaker 4>in the economy that that two percent target I think

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<v Speaker 4>about that the fedes to get to. It's just not

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<v Speaker 4>realistic anymore.

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<v Speaker 3>Yeah, that's going to be interesting how they kind of

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<v Speaker 3>maintain that two percent or is it hires at two

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<v Speaker 3>and a half. I think Jpal did buy himself some

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<v Speaker 3>time by talking about an average two percent inflation target

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<v Speaker 3>rather than sort of that hard ceiling or floor that

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<v Speaker 3>they were targeting. So I do think he has a

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<v Speaker 3>little bit of time. But if you think about how

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<v Speaker 3>hot inflation has been running the last few years, to

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<v Speaker 3>get back to two percent, we'd actually have to see

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<v Speaker 3>inflation lower than two percent, which we haven't seen since

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<v Speaker 3>prior to the coronavirus pandemic.

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<v Speaker 2>As I mentioned, we're a waiting comments from President Trump.

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<v Speaker 2>I wonder, Joyce, how you look at the comments from

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<v Speaker 2>the President that we get each and every day in

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<v Speaker 2>terms of thinking about your approach to investing, separating the

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<v Speaker 2>signal from the noise, and what actually he is going

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<v Speaker 2>to act on versus talking about because there is a

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<v Speaker 2>delta there and a lot of people have pointed to that.

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<v Speaker 3>Yes, absolutely, And you know, going into this year, honestly,

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<v Speaker 3>we thought that the tariffs would have been either done

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<v Speaker 3>on day one as he mentioned earlier, or kind of

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<v Speaker 3>pushed out, and he sort of didn't. In between where

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<v Speaker 3>he did come out with the tariffs, but then delayed

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<v Speaker 3>them kind of on the same day on Canada and Mexico.

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<v Speaker 3>And so it'll be determined to see once we get

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<v Speaker 3>to the end of that probationary period how he ends

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<v Speaker 3>up following up on those tariffs. But I do think

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<v Speaker 3>as longer term investors, what we're focusing on is more

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<v Speaker 3>of our strategic position. One thing that at American Century

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<v Speaker 3>we've been talking more about within our investment committee this

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<v Speaker 3>year though, is taking advantage of some of those tactical signals,

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<v Speaker 3>so being a little more active on things like increasing

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<v Speaker 3>credit risk when spreads widen, being a little more active

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<v Speaker 3>on duration, and at our size, we're able to be

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<v Speaker 3>very nimble in the market.

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<v Speaker 4>Well, that's what I was going to say. You guys

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<v Speaker 4>have a lot, a lot of money under management, and

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<v Speaker 4>I am curious. I just want to go there. How

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<v Speaker 4>much What are you seeing in terms of flows coming in?

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<v Speaker 4>You know, investors feeling confident about putting new money to work,

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<v Speaker 4>and if so, how do they want it played. I'm

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<v Speaker 4>just curious the guy that you get from them, are

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<v Speaker 4>they willing to take on more risk? Do they want

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<v Speaker 4>to be more cautionary?

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<v Speaker 3>What are you seeing Yeah, it's been interesting with fixed

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<v Speaker 3>income because if you think back to twenty twenty two,

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<v Speaker 3>I mean, I've spent almost twenty years in fixed income.

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<v Speaker 3>I never thought I'd see a year where core bonds

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<v Speaker 3>were down double digits, right, And so a lot of

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<v Speaker 3>investors have really been scared off of being back in

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<v Speaker 3>fixed income after twenty two and cash is still paying

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<v Speaker 3>for in a quarter, so a lot of people are

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<v Speaker 3>kind of sitting in money market CDs, T bills and

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<v Speaker 3>just rolling their cash waiting. I think if the Fed

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<v Speaker 3>does get to the back half of this year and

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<v Speaker 3>enacts those two or three rate cuts, depending on the

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<v Speaker 3>strength of the economy, we could start to see a

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<v Speaker 3>lot more demand flow go back into fixed income as

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<v Speaker 3>that free money yield is gone on cash.

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<v Speaker 4>But if rates go down, forgive me, I've got it.

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<v Speaker 4>But if rates come down, don't you think that investors

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<v Speaker 4>are more inclined to say, ah, this is going to

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<v Speaker 4>be good for you know, the equity market certainly, those

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<v Speaker 4>higher valuations. That's as long as the economy doesn't fall

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<v Speaker 4>apart and the growth demand you know metrics day, wouldn't

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<v Speaker 4>they rather kind of take that bet?

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<v Speaker 3>I think so, And that's why we actually favored investment

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<v Speaker 3>grade fixed income, so kind of that Barbell, It's like,

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<v Speaker 3>I agree, given how tight spreads are in high yield

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<v Speaker 3>and distressed, it doesn't make sense to try to put

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<v Speaker 3>money to work there. Take more risk on the equity side,

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<v Speaker 3>be more conservative in your fixed income allocation, and stay

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<v Speaker 3>with investment grade.

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<v Speaker 2>Okay, Carol knows. I've just been obsessed. Thanks to Carol

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<v Speaker 2>and also to our colleague, mand are you taking wave again? Well,

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<v Speaker 2>kind of, I'm talking to AI, kind of obsessed with

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<v Speaker 2>bringing into our own workflow. Are you using it at

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<v Speaker 2>all in your day to day?

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<v Speaker 3>We use it a little bit right now. I think

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<v Speaker 3>a lot of asset management companies are trying to figure

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<v Speaker 3>out the best way to start using AI without giving

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<v Speaker 3>away proprietary holdings or processes or things like that, so

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<v Speaker 3>we have to be a little bit careful. I know

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<v Speaker 3>we've been doing a lot of internal, more insular developments

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<v Speaker 3>of AI. One thing we have done is sort of

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<v Speaker 3>in response to the technology and AI is get higher

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<v Speaker 3>frequency signals. So we've been building more proprietary tools in

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<v Speaker 3>house to help us analyze data, newsflow, things like that,

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<v Speaker 3>and AI is a part of that.

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<v Speaker 4>You know, we are waiting a playback from President Trump.

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<v Speaker 4>Just Joyce, I'm just curious how much what do you

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<v Speaker 4>watch out of the news out of the administration in DC,

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<v Speaker 4>And just kind of quickly for.

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<v Speaker 3>Us as fixed income investors, obviously, interest rates are going

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<v Speaker 3>to be the key driver of fixed income returns this year.

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<v Speaker 3>So what we're watching are those tariffs and the inflation story,

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<v Speaker 3>So anything related to that is going to be top

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<v Speaker 3>of mind for me.

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<v Speaker 2>Taxes.

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<v Speaker 3>We assume that the individual taxes will be continued and

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<v Speaker 3>they will reach some sort of deal on the corporate

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<v Speaker 3>tax side, so that's kind of a positive onto risk.

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<v Speaker 2>What is the percentage rate that you see for corporate taxes?

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<v Speaker 3>So I think that he has mentioned trying to cut

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<v Speaker 3>back down to fifteen percent. I don't know if they're

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<v Speaker 3>going to be able to get there, just given the

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<v Speaker 3>deficit concerns. You might actually see the bare steepening of

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<v Speaker 3>the healed curve if that happens, right, because then you

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<v Speaker 3>have the deficit concerns coming to play. You know.

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<v Speaker 2>The tenure is kind of making a nice little appearance

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<v Speaker 2>when it comes to what Scott Bessett has been talking

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<v Speaker 2>about with regard to what the administration is paying attention

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<v Speaker 2>to Uh, what do you see as the direction of

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<v Speaker 2>the ten year. I'm surprised it hasn't moved more exactly.

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<v Speaker 3>And that's actually why we've been recommending investors stay shorter duration,

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<v Speaker 3>because the yield curve has been uninverted from the two tens,

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<v Speaker 3>but it's only by about twenty five basis points as

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<v Speaker 3>of today. So in our minds, there's a lot of

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<v Speaker 3>volatility in the tenure. Like you were saying, it could

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<v Speaker 3>go down before it could go to five. The two

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<v Speaker 3>year point is really anchored to the Fed, and that's

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<v Speaker 3>what Jerome Powell has controlled over and so that's why

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<v Speaker 3>we see less volatility in the two year capture yield,

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<v Speaker 3>stay short duration, don't necessarily position yourself out on the

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<v Speaker 3>ten all.

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<v Speaker 4>Right, we're gonna leave it on that note. Joyce, thank

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<v Speaker 4>you so much, Really appreciate it. Joyce Wang. She's vice

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<v Speaker 4>president and senior client portfolio manager at American Century Investments,

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<v Speaker 4>joining us here in our Bloomberg Interactive Brokers studio. Her focus,

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<v Speaker 4>as you can tell, on fixed income. So great, great chat,