WEBVTT - Fed Favors Reducing Monthly Asset Runoff Pace by Roughly Half 0:00:02.920 --> 0:00:07.240 Bloomberg Audio Studios, Podcasts, radio news. 0:00:08.520 --> 0:00:13.400 This is Bloomberg BusinessWeek Inside from the reporters and editors 0:00:13.440 --> 0:00:17.680 who bring you America's most trusted business magazine, plus global business, 0:00:17.720 --> 0:00:21.880 finance and tech news. The Bloomberg Business Week Podcast with 0:00:22.000 --> 0:00:25.800 Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:27.120 --> 0:00:30.760 All right, now, let's get to those minutes from that 0:00:30.840 --> 0:00:33.239 last FED meeting, which was, of course March twentieth. We 0:00:33.280 --> 0:00:35.680 want to head over to Bloomberg News International Economics and 0:00:35.680 --> 0:00:39.720 Policy correspondent Michael McKee. Mike is live in Washington, DC 0:00:39.960 --> 0:00:41.080 at the Federal Reserve. 0:00:41.240 --> 0:00:45.120 Mike Well, recent data, including today's CPI reports, have eclipsed 0:00:45.120 --> 0:00:47.800 the value of the Minutes in terms of monetary policy. 0:00:48.280 --> 0:00:52.680 They show, as expected, great concern and uncertainty among officials 0:00:52.880 --> 0:00:56.120 about the path of inflation, the outlook for the labor 0:00:56.160 --> 0:01:01.040 market and growth. Participants generally noted their uncertainty about the 0:01:01.040 --> 0:01:04.400 persistence of high inflation the Minute say, and expressed the 0:01:04.480 --> 0:01:08.160 view that recent data did not increase their confidence that 0:01:08.240 --> 0:01:12.080 inflation was moving sustainably down to two percent. Of course, 0:01:12.120 --> 0:01:15.759 today's CPI reading will contribute to that. There was even 0:01:15.760 --> 0:01:20.319 some disagreement about rate cuts this year. Almost all participants 0:01:20.400 --> 0:01:23.280 judged that it would be appropriate to move policy to 0:01:23.400 --> 0:01:26.919 a less restrictive stance at some point this year. Almost 0:01:27.000 --> 0:01:29.600 all is fed speak for all but one or two, 0:01:29.720 --> 0:01:33.080 so at least a couple of people disagreed. The news 0:01:33.200 --> 0:01:36.640 in the minutes actually comes from the committee's discussion of 0:01:36.720 --> 0:01:40.920 the balance sheet. The staff presented a number of scenarios 0:01:40.959 --> 0:01:44.959 for reducing the six point nine trillion dollar level of holdings. 0:01:45.920 --> 0:01:50.360 The participants generally favored reducing the monthly pace of treasury 0:01:50.360 --> 0:01:55.160 holdings runoff by a roughly half of the sixty billion 0:01:55.200 --> 0:01:59.240 a month current cap. Because mortgage bound runoff runs well 0:01:59.280 --> 0:02:02.880 below the thirty five billion dollar monthly cap, the participants 0:02:02.880 --> 0:02:09.440 saw no need to trim that. The participants judged it 0:02:09.480 --> 0:02:12.400 would be prudent to begin slowing the pace of runoff 0:02:12.600 --> 0:02:16.960 fairly soon, because there was great concern about repeating the 0:02:17.040 --> 0:02:21.320 experience of twenty nineteen when runoff went too far disrupting 0:02:21.639 --> 0:02:26.639 money markets. A few participants indicated they preferred to continue 0:02:27.000 --> 0:02:29.880 with the current pace of balance sheet runoff until market 0:02:29.880 --> 0:02:34.480 indicators begin to show signs that reserves are approaching an 0:02:34.560 --> 0:02:38.239 ample level. Now no decisions were made, but it does 0:02:38.400 --> 0:02:40.640 sound a little bit like we might see the FED 0:02:41.040 --> 0:02:45.680 start to trim its reserve holdings and slow QT before 0:02:45.680 --> 0:02:46.799 we even get rate cuts. 0:02:47.880 --> 0:02:49.200 So Mike, we're going to give you a moment just 0:02:49.200 --> 0:02:51.520 to think about all those headlines. But just real quickly, 0:02:51.840 --> 0:02:53.960 let's update everybody on the market. You've got the S 0:02:54.000 --> 0:02:56.760 and P five hundred still down about fifty one points, 0:02:56.760 --> 0:02:59.680 so just shy of one percent. Here the Nasdaq one 0:02:59.720 --> 0:03:02.080 hundred a decline of one hundred and seventy six points, 0:03:02.120 --> 0:03:06.079 so it too is shy of a one percent decline, 0:03:06.120 --> 0:03:09.440 but definitely off some of the earlier levels that we 0:03:09.480 --> 0:03:11.840 saw today. And you still have what a ten year 0:03:11.919 --> 0:03:14.080 tim that's at four point fifty two, and looking at 0:03:14.120 --> 0:03:16.919 the shorter end of the yeld curve, most sensitive often 0:03:16.960 --> 0:03:18.920 to what the FED might do, and you're looking at 0:03:18.919 --> 0:03:20.280 a two year net with the yield of four at 0:03:20.320 --> 0:03:21.119 ninety three. 0:03:21.040 --> 0:03:24.680 Ye that's right, that two year yield up nineteen point 0:03:24.840 --> 0:03:27.960 seven basis points and the ten year yield up sixteen 0:03:27.960 --> 0:03:31.400 point eight basis points as we speak, Hey, Mike McKey, 0:03:31.919 --> 0:03:33.320 I want to talk a little bit about the data 0:03:33.360 --> 0:03:35.720 that we've gotten since the latest FED meeting. The hotter 0:03:35.760 --> 0:03:39.040 than expected jobs report, the hotter than expected CPI report, 0:03:39.600 --> 0:03:42.920 in your mind, does that change at all what these 0:03:42.960 --> 0:03:45.440 members of the Federal Reserve see as the path to 0:03:45.480 --> 0:03:46.600 cut rates moving forward. 0:03:47.960 --> 0:03:50.360 Well, it's a good question. We can look back three 0:03:50.400 --> 0:03:52.320 weeks and see what they saw then, and there was 0:03:52.320 --> 0:03:55.240 great uncertainty then, but they were leaning in the direction 0:03:55.480 --> 0:03:58.120 of still being able to cut rates this year and 0:03:58.160 --> 0:04:02.400 still thinking that disinflation would continue. Those lines are in 0:04:02.640 --> 0:04:05.560 the minutes, but now that may not be the case. 0:04:05.840 --> 0:04:09.480 They were looking then at January and February numbers that 0:04:09.600 --> 0:04:13.120 suggested to them that there might have been some seasonality problems, 0:04:13.360 --> 0:04:16.560 there might have been some problems with the way the 0:04:16.640 --> 0:04:19.599 data were put together. But today you have a third 0:04:19.680 --> 0:04:23.520 CPI reading that suggests that no, there is a stickiness 0:04:23.560 --> 0:04:27.400 to inflation that they hadn't counted on. We won't get 0:04:27.480 --> 0:04:30.640 a complete read at the May first meeting because they 0:04:30.640 --> 0:04:33.440 don't put out a new summary of economic projections and 0:04:33.480 --> 0:04:36.080 they don't do a new dot plot. But I'm fairly 0:04:36.120 --> 0:04:39.840 certain that between now and then, and of course between 0:04:39.839 --> 0:04:41.880 now and the June meeting, we will hear a lot 0:04:41.880 --> 0:04:44.560 from them about the possibility of holding back. 0:04:44.680 --> 0:04:46.360 All right, Mike, as you stated, and as we went 0:04:46.400 --> 0:04:50.520 through those headlines, those FOMC meeting minutes from that March nineteenth, 0:04:50.520 --> 0:04:52.400 twentieth meeting, I'm just looking to you at our right 0:04:52.480 --> 0:04:55.960 throw right through, if you will, showed almost all official 0:04:56.080 --> 0:04:58.320 judging it would be appropriate to begin lowering boring costs 0:04:58.400 --> 0:05:02.520 at some point this year. Again, that caveat inflation data 0:05:02.560 --> 0:05:05.359 since then has upended expectations for three interest rate cuts 0:05:05.360 --> 0:05:10.000 this year. Could those expectations in terms of rate cuts 0:05:10.000 --> 0:05:13.240 continue to be upended if the data continues to come 0:05:13.240 --> 0:05:16.160 in strong, particularly the inflation data. 0:05:16.320 --> 0:05:18.440 Oh certainly, I mean we've seen that in the markets 0:05:18.480 --> 0:05:21.400 today now. We at least when we went into the 0:05:21.880 --> 0:05:24.680 minutes lock up, the betting was that there would be 0:05:24.680 --> 0:05:28.320 no rate cuts until November. So we're starting to see 0:05:28.320 --> 0:05:31.480 this pushed out. And of course, before the FED began 0:05:32.240 --> 0:05:36.240 its meetings, we'd heard a number of people say that, 0:05:36.480 --> 0:05:39.040 or since they began, we've heard a number of members 0:05:39.040 --> 0:05:41.880 say that they might think we would do fewer rate cuts. 0:05:41.920 --> 0:05:45.359 Of course, off Albostic saying that he was in favorab 0:05:45.360 --> 0:05:48.920 only one Neil Cashkari saying there is a possibility they 0:05:48.960 --> 0:05:52.400 wouldn't do any So the markets are now going to 0:05:52.400 --> 0:05:56.359 be perhaps positioned for the idea of few or no 0:05:56.800 --> 0:05:58.440 rate cuts this year going forward. 0:05:58.839 --> 0:06:00.720 They were certainly seeing something that play out in the 0:06:00.800 --> 0:06:02.920 rates market. The front end of the yield curve two 0:06:02.960 --> 0:06:05.320 year higher by twenty basis points right now, the ten 0:06:05.400 --> 0:06:07.640 year higher by seventeen basis points. I want to bring 0:06:07.640 --> 0:06:10.880 in Ira Jersey, who's standing by in our Bloomberg Intelligence 0:06:10.880 --> 0:06:14.000 headquarters in Princeton, New Jersey. He's chief interest rates strategist 0:06:14.040 --> 0:06:18.480 here at Bloomberg Intelligence. Ira, when you see yields shoot 0:06:18.520 --> 0:06:21.680 up like this across the curve, what's the signal that 0:06:21.720 --> 0:06:24.919 it's sending you about the path of interest rate policy 0:06:25.040 --> 0:06:26.000 for the remainder of the year. 0:06:26.920 --> 0:06:29.760 Well, it's up because of the path of industry policy. Right, 0:06:30.120 --> 0:06:33.440 So when you look at the when you look at 0:06:33.480 --> 0:06:35.720 the short term interest rate markets, you know, we've been 0:06:35.760 --> 0:06:39.520 pricing out more and more of those six six or 0:06:39.560 --> 0:06:42.040 seven twenty five base point interest rate cuts that were 0:06:42.080 --> 0:06:44.360 priced in a couple of months ago. And when you 0:06:44.480 --> 0:06:47.960 keep on getting this relatively strong data, it's hard to 0:06:48.120 --> 0:06:49.920 kind of get in front of that. And you know 0:06:50.000 --> 0:06:52.520 think that the Federal Reserve is going to be able 0:06:52.560 --> 0:06:54.359 to cut rates, you know, you know, there's a whole 0:06:54.920 --> 0:06:58.080 group of investors who are concerned that the Federal Reserve 0:06:58.160 --> 0:07:00.600 may actually have to increase interest rates. That from some 0:07:00.640 --> 0:07:04.880 former policy officials as well. I personally am not in 0:07:04.920 --> 0:07:07.520 the camp that thinks that they necessarily have to increase 0:07:07.560 --> 0:07:10.040 interest rates in order to slow the economy. But but 0:07:10.080 --> 0:07:12.320 the idea because and one of the reasons is is 0:07:12.320 --> 0:07:13.840 that first you have to get rid of all these 0:07:13.840 --> 0:07:16.520 cuts that are being priced into the market, and doing that, 0:07:16.760 --> 0:07:20.520 you are effectively tightening monetary policy. Because the you know, 0:07:20.640 --> 0:07:22.560 longer term interest rates are now higher than they were 0:07:22.640 --> 0:07:25.480 just a couple of weeks ago. So you know, there's 0:07:25.480 --> 0:07:27.640 a lot of data and information that came out today 0:07:27.680 --> 0:07:30.400 and that including a pretty bad actually the worst tenure 0:07:30.440 --> 0:07:33.520 auction that we've had in about two years. So you 0:07:33.520 --> 0:07:37.760 know that that was a the astounding, you know, revelation 0:07:37.960 --> 0:07:39.440 that demand just isn't very strong. 0:07:39.520 --> 0:07:42.000 Could is that because investors assume that it's going to 0:07:42.040 --> 0:07:44.480 go even higher in terms of the rate the rate outlook? 0:07:45.160 --> 0:07:46.080 You think that's part of it. 0:07:46.120 --> 0:07:48.000 I think it was also Yet you know, you know, 0:07:48.040 --> 0:07:50.800 obviously you had Carol, you had the really you know, 0:07:50.840 --> 0:07:53.400 good inflation number. This more high inflation number this morning, 0:07:53.400 --> 0:07:55.640 which was bad for the market and keyed off the 0:07:55.960 --> 0:07:58.040 sell off. I think also, you know, it was an 0:07:58.040 --> 0:08:00.360 hour before we got the minutes that you I still 0:08:00.400 --> 0:08:02.640 am only about a quarter of the way he finished reading, 0:08:03.840 --> 0:08:06.680 so we have, you know, so it's hard to get 0:08:06.720 --> 0:08:08.880 in front of some of that news cycle. There was 0:08:08.880 --> 0:08:11.120 also a lot more market risk today. So yesterday's three 0:08:11.200 --> 0:08:14.040 year auction was okay, but today's tenure was absolutely bysmal. 0:08:14.360 --> 0:08:17.080 Tomorrow we have thirty year bonds. It'll be really interesting 0:08:17.080 --> 0:08:18.880 to see if people say, oh, look at these higher 0:08:18.960 --> 0:08:21.800 yields at four point six percent, four point seven percent 0:08:21.800 --> 0:08:25.480 wherever we end up at auction time tomorrow, is that 0:08:25.560 --> 0:08:28.440 going to draw in some buyers just thinking, hey, I 0:08:28.480 --> 0:08:31.160 want to get these yields while I can, Or are 0:08:31.160 --> 0:08:33.440 they going to stay away because they are worried that, hey, 0:08:33.520 --> 0:08:36.520 inflation is going to remain kind of at these reasonably 0:08:36.600 --> 0:08:38.480 high levels and the Fed's going to be on hold, 0:08:38.480 --> 0:08:40.920 so I can get even better returns later if I 0:08:41.000 --> 0:08:41.920 just wait a little bit. 0:08:42.000 --> 0:08:42.160 Well. 0:08:42.200 --> 0:08:45.439 One of the former officials Treasury, former Treasury Secretory Larry Summer, 0:08:45.480 --> 0:08:48.120 saying that hot US consumer price inflation report for March 0:08:48.200 --> 0:08:50.520 means that the risk case of the next FED move 0:08:50.600 --> 0:08:53.800 is to move to be an increase must be taken seriously. 0:08:53.840 --> 0:08:56.160 He also talked about the idea of a rate cut. 0:08:56.200 --> 0:08:57.600 Here's what he said earlier on Bloomberg. 0:08:58.000 --> 0:09:01.920 A rate cut in June. It seems to me would 0:09:01.920 --> 0:09:08.000 be a dangerous and egregious error, comparable to the errors 0:09:08.040 --> 0:09:13.080 the FED was making in the summer of twenty twenty 0:09:13.160 --> 0:09:17.640 one when it just didn't get the thread on inflation. 0:09:18.200 --> 0:09:20.000 Mike, I want to bring you in one last question 0:09:20.040 --> 0:09:22.920 from you. Would it be a dangerous and egregious era 0:09:24.440 --> 0:09:26.120 if the FED did any kind of rate cut in 0:09:26.160 --> 0:09:27.760 gum Based on what you're seeing. 0:09:29.320 --> 0:09:33.320 Well, dangerous and egregious might be a little strong words 0:09:33.400 --> 0:09:35.120 for it, but I don't think the FED is going 0:09:35.160 --> 0:09:37.600 to be rushing into anything like that. Remember, what we're 0:09:37.600 --> 0:09:41.680 seeing is the markets move, and commentators talking about what 0:09:41.720 --> 0:09:44.280 the markets are doing. They're not talking about what the 0:09:44.320 --> 0:09:47.760 Fed's doing, because the FED hasn't done anything. July twenty 0:09:47.800 --> 0:09:50.320 twenty three was the last time they moved interest rates, 0:09:50.600 --> 0:09:52.720 and while we've had speeches about what they may or 0:09:52.720 --> 0:09:56.160 may not do, they haven't done anything. I did want 0:09:56.160 --> 0:09:58.080 to point out one thing that might be important if 0:09:58.120 --> 0:10:00.560 you still have IRA there, and that is that they 0:10:00.559 --> 0:10:03.959 did have this discussion about the balance sheet and the 0:10:04.000 --> 0:10:09.840 idea of trimming starting to run off their balance sheet 0:10:10.240 --> 0:10:13.400 run down to about half thirty billion a month instead 0:10:13.440 --> 0:10:16.120 of sixty billion a month caps and leaving mortgages at 0:10:16.120 --> 0:10:19.840 thirty five because nobody is really prepaying at this point. 0:10:20.280 --> 0:10:21.199 Are you want to come in. 0:10:21.160 --> 0:10:24.520 On that, Yeah, that's that's almost one hundred percent of 0:10:24.559 --> 0:10:27.439 my concentration right now looking at the minutes, because it 0:10:27.880 --> 0:10:30.280 hasn't hasn't aged very well. Right, We've got a lot 0:10:30.280 --> 0:10:34.360 of information and data since that March meeting, so it's 0:10:34.400 --> 0:10:37.480 really how are they going to adjust a balance sheet? Basically, 0:10:37.559 --> 0:10:40.400 they've said that they're going to slow down the amount 0:10:40.440 --> 0:10:42.200 of treasuries that they're going to allow to run off. 0:10:42.840 --> 0:10:44.840 That's in line with what we were expecting, and I 0:10:44.840 --> 0:10:46.760 think that was more or less the consensus. There was 0:10:46.760 --> 0:10:49.600 some nuance around that, but that was broadly the consensus. 0:10:50.240 --> 0:10:51.599 You know, when they're going to start, it's still a 0:10:51.640 --> 0:10:54.320 little bit unclear, but it's probably going to be sooner 0:10:54.360 --> 0:10:56.800 rather than later. And the reason for this is that 0:10:56.880 --> 0:10:59.000 if you know bank reserves are starting to run off 0:10:59.040 --> 0:11:01.199 more quickly now that that we've seen to have found 0:11:01.200 --> 0:11:05.079 a floor for the reverse repo facility, and as reserves 0:11:05.200 --> 0:11:07.520 run off, at some point, they're going to be scarce 0:11:07.840 --> 0:11:10.679 and demand for bank reserve is going to be much 0:11:10.760 --> 0:11:14.319 higher that are out there, and that's what causes a 0:11:14.320 --> 0:11:17.040 lot of volatility like we had in September of twenty nineteen. 0:11:17.320 --> 0:11:18.880 The Fed ones to avoid that or at least be 0:11:18.920 --> 0:11:20.880 able to like, you know, turn off the you know, 0:11:21.120 --> 0:11:24.760 turn off the spickett very quickly and stop the runoff 0:11:25.720 --> 0:11:27.840 more quickly. And they don't want to go cold Turkey 0:11:27.840 --> 0:11:31.440 from sixty billion treasuries a month to zero, so they'll 0:11:31.440 --> 0:11:32.800 go from thirty to zero probably. 0:11:32.880 --> 0:11:34.440 IIRA, we have one more question for you, Mike. We 0:11:34.480 --> 0:11:36.880 know you've got a run, but we always appreciate all 0:11:36.920 --> 0:11:38.400 that you do for us in breaking this all down. 0:11:38.440 --> 0:11:41.640 Are Mike McKee there at the Federal Reserve in Washington, IRA, 0:11:41.760 --> 0:11:43.839 one more for you. I'm thinking, you know, we've got 0:11:43.840 --> 0:11:46.439 a really smart, sophisticated audience here at Bloomberg. There are 0:11:46.440 --> 0:11:48.160 those folks who are like, well, wait a minute, you know, 0:11:48.280 --> 0:11:49.760 are we getting into kind of the weeds when we 0:11:49.800 --> 0:11:52.520 talk about the balance sheet what's the significance when the 0:11:52.520 --> 0:11:55.040 FED comes out and says or that we got revealed 0:11:55.040 --> 0:11:57.520 in these minutes that the runoff they're going to start 0:11:57.559 --> 0:11:59.560 to slow it down. What's the significance of that. 0:12:00.160 --> 0:12:04.040 Yeah, I think there's an acknowledgment that the financial plumbing matters. 0:12:04.040 --> 0:12:06.439 And it's not something that prior to two thousand and 0:12:06.480 --> 0:12:08.840 seven anybody really cared about, but it's really what makes 0:12:08.840 --> 0:12:11.040 a world go round. So when you think about the 0:12:11.600 --> 0:12:14.760 repurchase agreement market, which is the market that helps fund 0:12:15.160 --> 0:12:18.160 treasury dealer desks and hedge funds and other traders in 0:12:18.280 --> 0:12:22.360 treasury securities, if that breaks, then the entire financial sector 0:12:22.440 --> 0:12:26.040 can just break down. And what underlies that kind of 0:12:26.040 --> 0:12:30.160 the grease that allows the wheels to continue turning within 0:12:30.520 --> 0:12:33.920 the short term funding markets ends up being bank reserves. 0:12:34.000 --> 0:12:37.280 So when bank reserves get down to a level that 0:12:38.000 --> 0:12:42.280 is less than what's demanded by banks, then banks suddenly 0:12:42.320 --> 0:12:44.840 have to find reserves from elsewhere, and that's what causes 0:12:44.880 --> 0:12:47.760 interest rates to spike and for the financial plumbing to 0:12:47.760 --> 0:12:50.360 start to seize up a little bit. Again, you saw 0:12:50.400 --> 0:12:54.640 that to some degree in twenty nineteen. Now the Fed's 0:12:54.960 --> 0:12:57.160 done some things to try to mitigate that, like creating 0:12:57.240 --> 0:13:01.160 the standing repurpurchase agreement facility that allows banks whenever they 0:13:01.200 --> 0:13:04.400 need it to inject reserves into the system, as opposed 0:13:04.400 --> 0:13:07.000 to the FED deciding when to do that. But this 0:13:07.320 --> 0:13:10.160 financial plumbing stuff, you cannot completely discount it. It's actually 0:13:10.200 --> 0:13:12.439 way more important than I think most people who get 0:13:12.440 --> 0:13:15.600 their MBA or you know, just study business in school 0:13:15.679 --> 0:13:18.440 or finance, they don't teach this stuff. And this is 0:13:18.480 --> 0:13:21.760 actually the stuff that really really matters to the overall 0:13:22.120 --> 0:13:23.960 market structure and functioning of markets. 0:13:24.000 --> 0:13:26.360 It's why we love having you here, all right, Ari Jersey, 0:13:26.360 --> 0:13:28.319 thank you for our Bloomberg Intelligence team and our think. 0:13:28.360 --> 0:13:31.200 Once again, to Mike McKee out there in Washington, guys, 0:13:31.200 --> 0:13:32.920 thank you. 0:13:32.920 --> 0:13:36.440 You're listening to the Bloomberg Business Week podcast. Catch us 0:13:36.480 --> 0:13:39.720 live weekday afternoons from two to five pm Eastern Listen 0:13:39.760 --> 0:13:41.920 on Apple card Play and then brought auto with a 0:13:41.960 --> 0:13:45.000 Bloomberg Business Act or watch us live on YouTube. 0:13:46.760 --> 0:13:50.280 The private markets, we know, private equity, private credit, They're 0:13:50.320 --> 0:13:53.200 one of the hot topics of investing, especially among the 0:13:53.240 --> 0:13:56.960 institutional set. Bloomberg News reporting just last week how each 0:13:57.000 --> 0:13:59.959 trio of academics says a bold take on the boom. 0:14:00.000 --> 0:14:02.600 I think one point seven trillion dollar private credit market, 0:14:02.640 --> 0:14:06.080 and that is after accounting for additional risks and fees, 0:14:06.440 --> 0:14:11.240 the asset class delivers virtually no extra return to investors. 0:14:11.720 --> 0:14:13.680 So really curious, Carol, what our next guest has to 0:14:13.720 --> 0:14:14.520 say about that. 0:14:14.640 --> 0:14:17.440 All right, we welcome in Hartley Rogers. He's executive co 0:14:17.520 --> 0:14:21.360 chairman at Hamilton Lane, a private markets investment management firm 0:14:21.400 --> 0:14:23.480 with nine hundred and three billion dollars in assets under 0:14:23.520 --> 0:14:26.320 management and supervision. Hartley is joining us from our Bloomberg 0:14:26.360 --> 0:14:29.560 News bureau in Toronto. Hartley, great to have you here 0:14:29.600 --> 0:14:34.760 on Bloomberg Business Week. Like most folks in your world, 0:14:34.840 --> 0:14:36.240 we'd like to start macro. 0:14:36.600 --> 0:14:37.360 When you look at. 0:14:37.240 --> 0:14:40.400 The global environment, where do you see the strengths? Where 0:14:40.400 --> 0:14:42.400 do you see the risks? You know? 0:14:42.520 --> 0:14:44.680 Carol and Tim, first of all, thanks for having me on. 0:14:45.560 --> 0:14:49.200 You know, I think we're pretty bullish in a way 0:14:49.240 --> 0:14:52.880 about private markets right now. I think the data and 0:14:52.960 --> 0:14:56.400 stats show continued out performance in all of the private 0:14:56.440 --> 0:15:00.680 markets segments, including private credit, Tim and and we feel 0:15:00.760 --> 0:15:03.360 pretty good about how things look. We feel like the 0:15:03.440 --> 0:15:07.280 risks of significant interest rate rises are low, and therefore 0:15:07.280 --> 0:15:10.040 there's more predictability as you look out at the world. 0:15:10.120 --> 0:15:13.680 It may be, especially given today's inflation print, that rates 0:15:13.720 --> 0:15:15.680 will be a little higher for longer. It may be 0:15:15.840 --> 0:15:18.160 that we'll see some softening in the US economy towards 0:15:18.200 --> 0:15:20.880 the end of the year. But we're pretty constructive about 0:15:20.920 --> 0:15:24.320 the opportunity set, especially in the buy out space. The 0:15:24.320 --> 0:15:27.360 buyout part of the private markets has been the kind 0:15:27.360 --> 0:15:30.040 of stalwarts, strong part of the markets for decades and 0:15:30.080 --> 0:15:31.760 it continues to be that today. 0:15:32.040 --> 0:15:37.360 Why aren't you concerned about rates going up significantly given 0:15:37.360 --> 0:15:39.440 the data that we got today. 0:15:39.400 --> 0:15:42.480 Especially as everybody seems to be pairing bets that the 0:15:42.560 --> 0:15:45.440 FED is going to do cuts. Traders also pairing ECB 0:15:45.760 --> 0:15:49.080 rate cuts after today's CPI print, So it just seem 0:15:49.320 --> 0:15:50.760 feels like the narrative has changed. 0:15:52.000 --> 0:15:55.360 I think that higher for longer certainly is part of 0:15:55.400 --> 0:15:58.040 the narrative today. But remember, if you look back at 0:15:58.040 --> 0:16:00.280 the private markets, private markets have been around for a 0:16:00.280 --> 0:16:03.400 long time, and if you go back twenty twenty five years, 0:16:03.400 --> 0:16:05.800 we were operating in rate environment very similar to the 0:16:05.880 --> 0:16:09.120 rates that we're in today, and private markets did just fine. 0:16:09.200 --> 0:16:13.960 And so I'm not a macroeconomist, but I think the 0:16:14.120 --> 0:16:17.120 As I said, our house view is that the chance 0:16:17.160 --> 0:16:20.440 of rates going up is very low. They may just 0:16:20.440 --> 0:16:22.320 stay where they are for a little bit longer, but 0:16:22.400 --> 0:16:24.520 we don't see that as a significant ahead wind in 0:16:24.560 --> 0:16:25.320 private markets. 0:16:26.400 --> 0:16:29.560 Interesting, I mean, what indication to you out there. I know, 0:16:29.600 --> 0:16:31.600 again you're not macro, but you have to think about 0:16:31.600 --> 0:16:34.680 this macro stuff when you're making investments, when you're raising money, 0:16:36.280 --> 0:16:38.400 is your what is your outlook for then for the 0:16:38.440 --> 0:16:40.280 remainder of the year, what is your outlook when it 0:16:40.320 --> 0:16:43.840 comes to not just the US economy but the global economy. 0:16:44.800 --> 0:16:47.800 Well, I think we feel like there's a chance of 0:16:47.800 --> 0:16:50.320 a soft landing. I think the US consumer has been 0:16:50.440 --> 0:16:53.920 very strong, US corporate profitability has been very strong. US 0:16:54.000 --> 0:16:57.680 productivity is very strong, and so our view is that 0:16:57.720 --> 0:17:01.640 the US remains a robust econom me but potentially with 0:17:01.760 --> 0:17:04.879 a bit of a downdraft towards the soft landing. I 0:17:04.880 --> 0:17:08.520 think globally speaking, there's plenty of opportunity out there. Remember 0:17:08.560 --> 0:17:10.800 I come at this from a private market standpoint. I'm 0:17:10.800 --> 0:17:14.760 not really a public market broad based person. Private markets 0:17:14.800 --> 0:17:17.480 are a growing and important part, but they are far 0:17:17.560 --> 0:17:19.800 from the largest part of the global capital markets, and 0:17:19.840 --> 0:17:24.119 we specialize. Our industry specializes in finding opportunities to invest 0:17:24.160 --> 0:17:27.320 in attractive, growing companies and in places where you can 0:17:27.359 --> 0:17:30.080 make operating improvements, as the industry has always done for 0:17:30.560 --> 0:17:34.199 years through our unique ability to control and influence and 0:17:34.280 --> 0:17:37.720 align the portfolio companies that we own. 0:17:37.720 --> 0:17:39.240 Well and we get it and hardly you know that 0:17:39.280 --> 0:17:42.040 what goes out in the public markets that can impact 0:17:42.119 --> 0:17:44.399 to the upside or to the downside what goes out 0:17:44.440 --> 0:17:46.840 in the private market. So, having said that, based on 0:17:46.880 --> 0:17:50.199 your outlook, where are the opportunities when it comes to 0:17:50.480 --> 0:17:52.800 the who's reaching out to you in terms of the 0:17:52.840 --> 0:17:56.080 private credit and who needs to tap the private credit markets? 0:17:56.119 --> 0:18:01.800 Increasingly well, the private credit market have become a replacement 0:18:01.960 --> 0:18:04.359 over time for the bank markets as you come in 0:18:04.400 --> 0:18:09.320 after the GFC, and they've done very, very well. They 0:18:09.359 --> 0:18:14.359 allow for a different style of investing, both from the 0:18:14.400 --> 0:18:17.959 investors standpoint and from the investee company standpoint. Many of 0:18:18.000 --> 0:18:21.399 our buyout funds that we invest in, and we're you 0:18:21.520 --> 0:18:23.800 know this, but we're one of the very largest investors 0:18:23.840 --> 0:18:26.399 in private equity funds in the world. Many of the 0:18:26.400 --> 0:18:29.639 buyout funds that we invest in tap the private credit 0:18:29.640 --> 0:18:31.800 markets and are happy to do it because they feel 0:18:31.840 --> 0:18:34.119 that they're dealing with people that they can have a 0:18:34.160 --> 0:18:37.920 relationship with, that they can negotiate with. It's more concentrated 0:18:37.960 --> 0:18:40.600 group of owners of private credit than when you have 0:18:40.680 --> 0:18:43.760 a more broadly based financing, and I think they feel 0:18:43.800 --> 0:18:47.119 that that can be very constructive as you're moving a 0:18:47.160 --> 0:18:51.000 company through its private equity ownership phase. On the investing side, 0:18:51.440 --> 0:18:54.639 there's a premium for private credit. There has been for 0:18:54.640 --> 0:18:56.679 a very long time and there continues to be in 0:18:56.720 --> 0:18:59.000 our data. And to remind you, we have a very 0:18:59.080 --> 0:19:01.600 large data set in this area, so we do not 0:19:01.720 --> 0:19:04.960 agree with what insited those professors are saying in terms 0:19:05.040 --> 0:19:07.560 of returns not being there in private credit. 0:19:07.600 --> 0:19:09.240 Well, that's what I wanted to do, And I understand 0:19:09.240 --> 0:19:11.639 there's just so much information maybe you can share or 0:19:11.640 --> 0:19:13.439 want to share, But what kinds of returns are you 0:19:13.480 --> 0:19:15.439 seeing on average when it comes to private credit and 0:19:15.480 --> 0:19:20.600 what is the right metric to compare private credit investments against? 0:19:20.640 --> 0:19:23.080 Right you buy a stock, you're either going to measure 0:19:23.080 --> 0:19:24.680 it against the S and P. You're going to measure 0:19:24.680 --> 0:19:26.720 it against a MidCap or small cap. Like there's so 0:19:26.800 --> 0:19:29.560 many different ways that are more apples to apples, but 0:19:29.760 --> 0:19:32.360 in as you know, in private credit or in private equity, right, 0:19:32.359 --> 0:19:36.920 there's a lot of investments that certainly fill those buckets. 0:19:36.960 --> 0:19:39.840 So what is the kind of returns that you are 0:19:39.880 --> 0:19:41.560 seeing and how do you measure it? What's the right 0:19:41.600 --> 0:19:42.800 metric or benchmark? 0:19:42.880 --> 0:19:46.600 So that's a great question, Carol, and very broad brush, 0:19:46.680 --> 0:19:49.359 we measure private credit against two things. One is the 0:19:49.440 --> 0:19:52.359 leverage loan index and the second is the high yield 0:19:52.400 --> 0:19:55.359 market index, because most of what we do is in 0:19:55.400 --> 0:20:00.119 situations involving some leverage, right, leverage buyouts or buildings that 0:20:00.119 --> 0:20:03.240 are leveraged, or infrastructure investments that are leveraged, things like that, 0:20:03.320 --> 0:20:06.160 and so we try to look depending on what we're 0:20:06.160 --> 0:20:10.080 looking at. Specifically, we'll find a finer tuned index if 0:20:10.080 --> 0:20:12.840 we need it, but broadly speaking, we look at private 0:20:12.840 --> 0:20:15.080 credit against those two things that I mentioned, and I 0:20:15.119 --> 0:20:18.480 would say in today's environment, obviously you've got interest rates 0:20:18.520 --> 0:20:21.280