1 00:00:02,560 --> 00:00:04,240 Speaker 1: Bloomberg Audio Studios. 2 00:00:04,720 --> 00:00:05,420 Speaker 2: Podcasts. 3 00:00:05,720 --> 00:00:06,260 Speaker 3: Radio. 4 00:00:06,680 --> 00:00:07,100 Speaker 4: News. 5 00:00:09,200 --> 00:00:13,950 Speaker 5: This is a breaking news update from Bloomberg. Instant reaction 6 00:00:14,210 --> 00:00:18,450 Speaker 5: and analysis from our 3,000 journalists and analysts around the world. 7 00:00:19,510 --> 00:00:22,279 Speaker 6: Down in Washington, D.C. from the nation's capital is Mike McKee. 8 00:00:23,460 --> 00:00:25,599 Speaker 7: It is a rate increase, the first of a cycle, 9 00:00:25,700 --> 00:00:29,160 Speaker 7: a unanimous decision to raise their benchmark rate a quarter 10 00:00:29,220 --> 00:00:32,720 Speaker 7: point to three and three quarters to four percent. Sixteen 11 00:00:32,780 --> 00:00:37,270 Speaker 7: members of the committee anticipate another increase this year. Only 12 00:00:37,370 --> 00:00:40,550 Speaker 7: two would hold here. Kevin Warsh, the chairman, does not 13 00:00:40,630 --> 00:00:46,050 Speaker 7: submit a dot. Eight, almost half. see another rate increase 14 00:00:46,150 --> 00:00:49,909 Speaker 7: next year, while six call for no change. Four see 15 00:00:49,990 --> 00:00:53,580 Speaker 7: rate cuts in 2027. One of them calls for rates 16 00:00:53,620 --> 00:00:58,000 Speaker 7: to fall to 3.25%. Almost as significant, they raise their 17 00:00:58,140 --> 00:01:01,080 Speaker 7: long-run view, essentially the neutral rate, to 3.2% from 3.1% 18 00:01:01,080 --> 00:01:02,840 Speaker 7: in June. The members see faster growth this year and next, 2.3% 19 00:01:02,840 --> 00:01:13,330 Speaker 7: and 2.4%, up a tenth each. from their June forecasts, 20 00:01:13,930 --> 00:01:18,190 Speaker 7: and the economic activity, the statement says, is expanding at 21 00:01:18,270 --> 00:01:22,860 Speaker 7: a solid pace. Unemployment is forecast to remain at 4.1% 22 00:01:22,860 --> 00:01:27,740 Speaker 7: this year and hold at that level through 2029. Job gains, 23 00:01:27,840 --> 00:01:30,480 Speaker 7: the statement says, have kept pace with the workforce, and 24 00:01:30,500 --> 00:01:34,319 Speaker 7: the unemployment rate has changed little. Inflation, though, according to 25 00:01:34,360 --> 00:01:38,260 Speaker 7: the statement, remains elevated. The median outlook is seen higher 26 00:01:38,300 --> 00:01:41,250 Speaker 7: this year. PCE headline at 3.7%, up from 3.6% in June. 27 00:01:41,290 --> 00:01:43,589 Speaker 7: Next year, it falls to 2.3%. Achieving the 2% target 28 00:01:43,610 --> 00:01:45,240 Speaker 7: gets pushed out, as usual, two years to 2029 now. 29 00:01:45,250 --> 00:01:46,240 Speaker 7: Core PCE will be 3.4% at the end of 2026, 30 00:01:46,230 --> 00:02:03,050 Speaker 7: up a tenth. Next year, it's 2.5% unchanged. The statement concludes, 31 00:02:03,450 --> 00:02:07,130 Speaker 7: today's policy action will support a timelier return to the 32 00:02:07,170 --> 00:02:11,750 Speaker 7: committee's 2% goal. The committee will deliver price stability. 33 00:02:12,370 --> 00:02:14,600 Speaker 6: Mike McKee, thank you, sir. You stay close. Let's go 34 00:02:14,620 --> 00:02:17,460 Speaker 6: through the price action. Bonds advancing into the decision. We 35 00:02:17,480 --> 00:02:19,580 Speaker 6: give only just a little bit of that up. Yields 36 00:02:19,620 --> 00:02:21,400 Speaker 6: are lower by two basis points at a front end, 37 00:02:21,460 --> 00:02:23,320 Speaker 6: twos at $ 4. 38 00:02:23,080 --> 00:02:23,200 Speaker 2: 64. 39 00:02:23,200 --> 00:02:26,880 Speaker 6: On tens this afternoon, we're down by $ 5 to $ 4. 40 00:02:25,800 --> 00:02:26,340 Speaker 5: 95. 41 00:02:26,340 --> 00:02:29,280 Speaker 6: Earlier in the week, of course, breaching 5%. a number, 42 00:02:29,540 --> 00:02:31,300 Speaker 6: a level we haven't seen going all the way back 43 00:02:31,500 --> 00:02:34,040 Speaker 6: to 2007, at least earlier this week. In the equity 44 00:02:34,080 --> 00:02:36,440 Speaker 6: market this afternoon, on the S & P 500, on 45 00:02:36,460 --> 00:02:38,800 Speaker 6: the Nasdaq, on small caps, the Russell, we're still advanced. 46 00:02:38,820 --> 00:02:41,380 Speaker 6: We're still just about positive, though we're off session highs, 47 00:02:41,440 --> 00:02:44,359 Speaker 6: up by 0.2% on the S & P. The question 48 00:02:44,400 --> 00:02:46,660 Speaker 6: for the chairman in this news conference, was this a 49 00:02:46,750 --> 00:02:50,490 Speaker 6: one-off tweak? Is it high for longer or higher for longer? 50 00:02:50,550 --> 00:02:53,150 Speaker 6: Is it the start of something more than just 25? 51 00:02:53,150 --> 00:02:54,829 Speaker 8: The word that I think is going to be analyzed 52 00:02:54,850 --> 00:02:59,630 Speaker 8: and overanalyzed will be timelier. a timelier return to 2% inflation. 53 00:02:59,950 --> 00:03:03,290 Speaker 8: The median forecast in the Statement of Economic Projections, granted 54 00:03:03,330 --> 00:03:06,120 Speaker 8: it did not include Fed Chair Kevin Warsh, includes an 55 00:03:06,250 --> 00:03:09,460 Speaker 8: additional 25 basis point hike this year. And as Mike 56 00:03:09,480 --> 00:03:13,320 Speaker 8: was saying, a higher long-term neutral rate. All of this 57 00:03:13,440 --> 00:03:15,880 Speaker 8: speaks to the idea that this is part of a cycle. 58 00:03:16,040 --> 00:03:18,120 Speaker 8: This is not a one-off. and that this is a 59 00:03:18,200 --> 00:03:21,059 Speaker 8: Fed that has run out of patience. The unanimous decision, 60 00:03:21,139 --> 00:03:24,520 Speaker 8: Bob Michael nailed that, was a big tell given how 61 00:03:24,560 --> 00:03:27,640 Speaker 8: many people got on board, including the Fed chair himself. 62 00:03:27,900 --> 00:03:30,780 Speaker 9: I'm absolutely fascinated by the labor call, which I know 63 00:03:30,820 --> 00:03:33,230 Speaker 9: is off the radar right now, but they don't look 64 00:03:33,270 --> 00:03:36,010 Speaker 9: for any change in the labor economy. It seems to 65 00:03:36,030 --> 00:03:39,690 Speaker 9: me they're looking at output to be good and not problematic. 66 00:03:39,710 --> 00:03:42,890 Speaker 9: This is all going to get solved gloriously by inflation 67 00:03:42,970 --> 00:03:45,530 Speaker 9: coming down, and output will be fine. 68 00:03:45,650 --> 00:03:48,580 Speaker 5: Says who? And that's, to me, the huge mystery here. 69 00:03:48,600 --> 00:03:50,520 Speaker 6: Neil Dutter of Ren Mac, the first to respond in 70 00:03:50,560 --> 00:03:52,720 Speaker 6: my inbox, reads as follows. The Fed is not done. 71 00:03:53,280 --> 00:03:56,020 Speaker 6: The odds are they are underestimating just how much work 72 00:03:56,580 --> 00:03:58,760 Speaker 6: they need to do. That also explains the gap between 73 00:03:58,780 --> 00:04:01,150 Speaker 6: the policy rate even now this afternoon and where the 74 00:04:01,230 --> 00:04:04,390 Speaker 6: two-year is currently, because the two-year is materially higher than 75 00:04:04,410 --> 00:04:04,990 Speaker 6: the policy rate. 76 00:04:05,210 --> 00:04:07,990 Speaker 8: Ultimately, do they close the gap of 100 basis points? 77 00:04:08,330 --> 00:04:11,440 Speaker 8: And what direction will that gap be if the Fed 78 00:04:11,560 --> 00:04:13,920 Speaker 8: is further behind the curve than they realize is? then 79 00:04:14,080 --> 00:04:17,780 Speaker 8: is the goal here, given the timelier return to 2% inflation, 80 00:04:17,880 --> 00:04:20,280 Speaker 8: is the goal here to get there more quickly and 81 00:04:20,380 --> 00:04:23,490 Speaker 8: to take out some of the dynamism that we have 82 00:04:23,570 --> 00:04:28,150 Speaker 8: seen in, frankly, capital markets as well as just overall growth? 83 00:04:28,210 --> 00:04:31,029 Speaker 9: With Vice Chairman Clarida coming on, his colleague Ned Phelps, 84 00:04:31,050 --> 00:04:34,700 Speaker 9: the late Ned Phelps of Columbia, that's his favorite word, dynamism. 85 00:04:34,860 --> 00:04:37,260 Speaker 9: I don't hear anything within the comments of Mike McKee 86 00:04:37,860 --> 00:04:41,100 Speaker 9: where there's any planning for a slowdown in the American 87 00:04:41,140 --> 00:04:44,740 Speaker 9: economy right now with half of America basically flat on 88 00:04:44,760 --> 00:04:46,440 Speaker 9: their back from whatever reason. 89 00:04:46,460 --> 00:04:48,230 Speaker 6: Don't see much of that in the forecast. Mike McKee 90 00:04:48,290 --> 00:04:50,890 Speaker 6: is still standing by before he runs into that news conference. Mike, 91 00:04:50,930 --> 00:04:53,790 Speaker 6: what would you point to in the forecast, the projection 92 00:04:53,850 --> 00:04:55,950 Speaker 6: materials that might set the tone for the news conference 93 00:04:56,370 --> 00:04:56,910 Speaker 6: in 25 minutes' time? 94 00:04:58,810 --> 00:05:01,070 Speaker 7: Well, one of the interesting things is they say that 95 00:05:01,230 --> 00:05:06,310 Speaker 7: this move will result in a timelier move to the 2% target, 96 00:05:06,410 --> 00:05:09,409 Speaker 7: and yet they push the 2% target out another two years, 97 00:05:09,510 --> 00:05:12,690 Speaker 7: as they almost always do with these summaries of economic projections, 98 00:05:12,890 --> 00:05:16,530 Speaker 7: to 2029. So I'm not sure what timelier means in 99 00:05:16,570 --> 00:05:20,290 Speaker 7: this case. They also do acknowledge that inflation is higher, 100 00:05:20,370 --> 00:05:23,210 Speaker 7: and I think the move up in the long-run neutral 101 00:05:23,270 --> 00:05:26,279 Speaker 7: rate is important because they've been talking about that, as 102 00:05:26,320 --> 00:05:30,460 Speaker 7: a possibility because of AI and the spending on AI. 103 00:05:30,900 --> 00:05:33,640 Speaker 7: And that could mean that we're in a hire for 104 00:05:33,730 --> 00:05:38,130 Speaker 7: longer kind of environment, a new regime, as it were, 105 00:05:38,450 --> 00:05:41,430 Speaker 7: for interest rates. And we've seen that in real rates, 106 00:05:41,630 --> 00:05:44,169 Speaker 7: echoing the idea that the neutral rate is higher. 107 00:05:44,470 --> 00:05:47,250 Speaker 6: Mike, thank you, sir. Looking forward to your question in 108 00:05:47,270 --> 00:05:49,270 Speaker 6: the news conference a little bit later on this afternoon, 109 00:05:49,290 --> 00:05:50,140 Speaker 6: that news conference at 2.30 p.m. 110 00:05:50,960 --> 00:05:51,460 Speaker 5: Eastern Time. 111 00:05:51,660 --> 00:05:53,080 Speaker 6: Just to build on what Mike was talking about, the 112 00:05:53,120 --> 00:05:56,200 Speaker 6: projections for, let's say, core PCE. Let's take core PCE. 113 00:05:56,540 --> 00:05:59,640 Speaker 6: That's a 3.4 for 26 compared to the June projection 114 00:05:59,660 --> 00:06:03,440 Speaker 6: of 3.3. For next year, 2.5. The June projection was 2.5. 115 00:06:03,440 --> 00:06:06,790 Speaker 6: For the year after Bramow, 2.2. The June projection was 2.1. 116 00:06:06,790 --> 00:06:09,589 Speaker 6: It is an important question. You're saying one thing about 117 00:06:09,630 --> 00:06:11,910 Speaker 6: a timely return to target, and then you look at 118 00:06:11,930 --> 00:06:13,800 Speaker 6: the forecast, and it's not really there, is it? 119 00:06:13,930 --> 00:06:14,050 Speaker 4: Yeah. 120 00:06:14,150 --> 00:06:16,729 Speaker 8: How much are other people on board with this, number one? 121 00:06:16,970 --> 00:06:19,650 Speaker 8: And is it timely as compared to what as compared 122 00:06:19,710 --> 00:06:23,279 Speaker 8: to how much more you see inflation potentially accelerating, considering 123 00:06:23,320 --> 00:06:25,190 Speaker 8: that it's moving in the wrong direction. I also think 124 00:06:25,230 --> 00:06:28,510 Speaker 8: they still see unemployment declining in terms of the unemployment 125 00:06:28,550 --> 00:06:31,550 Speaker 8: rate over this period of time. So economic growth, clearly 126 00:06:31,770 --> 00:06:34,270 Speaker 8: not part of the equation, not a problem to hold 127 00:06:34,310 --> 00:06:37,090 Speaker 8: them back from additional rate hikes. Again, I'm curious how 128 00:06:37,230 --> 00:06:40,089 Speaker 8: unified this FOMC committee really is, given some of the 129 00:06:40,110 --> 00:06:42,390 Speaker 8: rhetoric we've heard. So bring in the speeches that we're 130 00:06:42,410 --> 00:06:44,169 Speaker 8: going to be hearing over the next couple of weeks. 131 00:06:44,270 --> 00:06:46,589 Speaker 9: I think, you know, you look at the unanimous decision, 132 00:06:46,650 --> 00:06:48,570 Speaker 9: and maybe that to me is the headline here, is 133 00:06:48,589 --> 00:06:49,630 Speaker 9: they listen to Bramall. 134 00:06:49,690 --> 00:06:52,010 Speaker 5: It was bad form. They listen to you. Don't dissent. 135 00:06:52,070 --> 00:06:52,270 Speaker 2: Yeah. 136 00:06:53,080 --> 00:06:56,070 Speaker 5: Stay out of trouble. Don't dissent. That's the right phrase. 137 00:06:56,110 --> 00:06:57,650 Speaker 5: Stay out of trouble. Keep your head down. Get to 138 00:06:57,670 --> 00:06:59,950 Speaker 5: the next meeting and then keep your head down for 139 00:06:59,970 --> 00:07:00,570 Speaker 5: the elections. 140 00:07:00,790 --> 00:07:02,440 Speaker 6: Let's talk to a man who's been there, done that. 141 00:07:02,720 --> 00:07:05,060 Speaker 6: The former Fed vice chair, Rich Clarida, joins us now 142 00:07:05,080 --> 00:07:07,620 Speaker 6: for more. Rich, welcome. Not a surprise to see 25 143 00:07:07,620 --> 00:07:09,690 Speaker 6: basis points. What would you point to that is the 144 00:07:09,730 --> 00:07:11,290 Speaker 6: key development this afternoon? 145 00:07:13,000 --> 00:07:15,560 Speaker 3: Well, I think Mike McKee, as usual, did a great job. 146 00:07:16,200 --> 00:07:19,610 Speaker 4: You know, the timelier language is noteworthy, but again, the 147 00:07:20,070 --> 00:07:23,210 Speaker 4: mission accomplished is pushed out two years. I think it 148 00:07:23,270 --> 00:07:26,670 Speaker 4: is important that it was a unanimous decision. I think 149 00:07:27,270 --> 00:07:30,300 Speaker 4: it's also relevant that you had 16 people, and I 150 00:07:30,320 --> 00:07:33,120 Speaker 4: would also count 16 of the dots, and I would 151 00:07:33,160 --> 00:07:36,760 Speaker 4: count Chairman Warsh. You had 17 folks indicating, I think, 152 00:07:36,860 --> 00:07:40,580 Speaker 4: another rate hike later this year, which had been our 153 00:07:40,640 --> 00:07:42,520 Speaker 4: call that this would not be one and done. 154 00:07:42,560 --> 00:07:45,500 Speaker 3: And they give a very firm signal. They may not 155 00:07:45,560 --> 00:07:46,570 Speaker 3: need to do more. 156 00:07:46,670 --> 00:07:49,990 Speaker 4: I actually think the 3.4 percent on core PCE, which 157 00:07:50,050 --> 00:07:53,650 Speaker 4: is what I think I heard Mike say, I think 158 00:07:53,710 --> 00:07:55,510 Speaker 4: is a little lofty. I think we could come in 159 00:07:55,570 --> 00:08:00,710 Speaker 4: below that, especially given some of the methodology revisions. So, 160 00:08:00,990 --> 00:08:03,610 Speaker 4: but yeah, I think important that it was a unanimous 161 00:08:03,650 --> 00:08:07,920 Speaker 4: decision and a clear overwhelming majority of folks think they 162 00:08:07,940 --> 00:08:10,280 Speaker 4: need to move at least once more, which is in 163 00:08:10,320 --> 00:08:11,560 Speaker 4: line with what we think as well. 164 00:08:11,960 --> 00:08:14,040 Speaker 8: Rich, what do you think changed so much from the 165 00:08:14,080 --> 00:08:18,460 Speaker 8: July meeting to today that caused a unanimous decision by 166 00:08:18,680 --> 00:08:21,410 Speaker 8: all of the members, the voting members, to hike rates 167 00:08:21,450 --> 00:08:23,710 Speaker 8: and potentially engage in a cycle, not just one and done? 168 00:08:25,780 --> 00:08:28,800 Speaker 4: Well, the history is, Lisa, is that we typically don't 169 00:08:28,860 --> 00:08:30,620 Speaker 4: see one and done. 170 00:08:31,120 --> 00:08:33,970 Speaker 3: And so I think that's relevant. You think about it. 171 00:08:34,420 --> 00:08:37,630 Speaker 4: If we're targeting our target by more than 100 basis points, 172 00:08:37,990 --> 00:08:40,429 Speaker 4: what is 25 basis points on rates going to do 173 00:08:40,470 --> 00:08:40,809 Speaker 4: for that? 174 00:08:40,870 --> 00:08:45,830 Speaker 3: So I think there's a credibility to that. That's very 175 00:08:46,250 --> 00:08:48,010 Speaker 3: specific communication and guidance. 176 00:08:48,920 --> 00:08:51,400 Speaker 4: Williams and Waller and others saying, look, we want to 177 00:08:51,420 --> 00:08:54,420 Speaker 4: see progress. I think Williams put out their 0.2 per 178 00:08:54,460 --> 00:08:57,380 Speaker 4: month on core. And since then, we haven't got 0.2 179 00:08:57,380 --> 00:09:00,900 Speaker 4: per month on core, especially given where I think we're 180 00:09:00,940 --> 00:09:03,980 Speaker 4: going to end up with the core reading later this month. 181 00:09:04,080 --> 00:09:07,080 Speaker 3: And so I think they wanted to see that progress. 182 00:09:07,140 --> 00:09:09,990 Speaker 4: I think Chris Waller said, give disinflation a chance, and 183 00:09:10,020 --> 00:09:13,449 Speaker 4: they hadn't seen it. So I think especially after Jackson Hole. 184 00:09:13,470 --> 00:09:16,829 Speaker 4: It was important to ratify that reaction function. 185 00:09:16,990 --> 00:09:22,930 Speaker 9: Richard Clarity, your acclaimed research on dynamic stochastic general equilibrium theory. 186 00:09:23,309 --> 00:09:26,189 Speaker 9: The word stochastic is for shocks. I didn't hear any 187 00:09:26,250 --> 00:09:30,010 Speaker 9: statement on shocks coming from Michael McKee, and yet they 188 00:09:30,030 --> 00:09:32,929 Speaker 9: have to live with the shocks at present. Who's right, 189 00:09:33,240 --> 00:09:37,420 Speaker 9: Waller or Warsh on shocks and the importance of them forward? 190 00:09:40,790 --> 00:09:45,790 Speaker 4: Chris Waller and Chairman Warsh understand and are focused on 191 00:09:45,830 --> 00:09:47,530 Speaker 4: the shocks. In fact, I think that was one of 192 00:09:47,550 --> 00:09:49,780 Speaker 4: the big questions that the chairman is wanting to try 193 00:09:49,800 --> 00:09:53,400 Speaker 4: to answer. So I don't think the committee is disagreeing. 194 00:09:53,440 --> 00:09:56,530 Speaker 4: I think it's more how persistent will these shocks be? 195 00:09:56,830 --> 00:09:58,910 Speaker 4: Are we going to be talking about higher memory chip 196 00:09:58,950 --> 00:09:59,770 Speaker 4: prices a year? 197 00:10:00,130 --> 00:10:00,610 Speaker 5: From now? 198 00:10:01,730 --> 00:10:06,579 Speaker 4: Where will tariffs end up? You know, the oil futures 199 00:10:06,650 --> 00:10:15,260 Speaker 4: curve has been, you know, on oil prices. And so 200 00:10:15,300 --> 00:10:17,920 Speaker 4: I think it's not so much shocks or no shocks. 201 00:10:17,990 --> 00:10:21,530 Speaker 4: It's how persistent are they going to be? 202 00:10:22,590 --> 00:10:24,550 Speaker 6: How much further will they go? And Bram, are they 203 00:10:24,570 --> 00:10:26,869 Speaker 6: willing to go the final mile? Are they willing to 204 00:10:26,910 --> 00:10:29,189 Speaker 6: go through the pain to get inflation back down to target? 205 00:10:29,550 --> 00:10:31,730 Speaker 6: Had a message from a Bloomberg subscriber just moments ago. 206 00:10:31,890 --> 00:10:35,170 Speaker 6: And that's the question they're asking. Is this Fed willing 207 00:10:35,210 --> 00:10:37,410 Speaker 6: to go through the economic slump that might be required 208 00:10:37,429 --> 00:10:40,720 Speaker 6: to get inflation back to target? Because so far, right now, 209 00:10:41,380 --> 00:10:42,959 Speaker 6: inflation has been above target for quite a while. 210 00:10:43,450 --> 00:10:45,429 Speaker 8: Based on the fact that equities are up, I would 211 00:10:45,450 --> 00:10:48,109 Speaker 8: say the answer to that right now is perceived to 212 00:10:48,150 --> 00:10:51,430 Speaker 8: be no, that ultimately they will stop short of engineering 213 00:10:51,470 --> 00:10:54,530 Speaker 8: a full-blown recession because of the reluctance to do so. 214 00:10:54,950 --> 00:10:57,370 Speaker 8: And so that is why you're not seeing four, five, 215 00:10:57,410 --> 00:11:00,120 Speaker 8: or even six rate hikes getting penciled in by anybody. 216 00:11:00,530 --> 00:11:03,560 Speaker 8: That said, there is a lack of understanding of just 217 00:11:03,620 --> 00:11:05,820 Speaker 8: how much inflationary pressure and how much growth there is 218 00:11:05,860 --> 00:11:10,230 Speaker 8: in this economy. It has surprised analyst after analyst after economist. 219 00:11:10,270 --> 00:11:12,130 Speaker 8: And at what point do we end up seeing that 220 00:11:12,510 --> 00:11:14,430 Speaker 8: come through in the Fed having to go further than 221 00:11:14,450 --> 00:11:14,770 Speaker 8: they thought? 222 00:11:14,929 --> 00:11:17,270 Speaker 6: Dan Swank of KPMG standing by to jump into the 223 00:11:17,309 --> 00:11:19,830 Speaker 6: conversation as well. Dan, welcome to the program. We've got 224 00:11:19,850 --> 00:11:22,550 Speaker 6: a hike. They're looking for another one. There's a market 225 00:11:22,590 --> 00:11:24,770 Speaker 6: lean and a lean on the committee to go maybe 226 00:11:24,809 --> 00:11:26,830 Speaker 6: even further than that, Dan. What are you expecting beyond 227 00:11:26,870 --> 00:11:28,990 Speaker 6: just 25? 228 00:11:30,320 --> 00:11:32,210 Speaker 2: Well, one of the things that I think is really 229 00:11:32,250 --> 00:11:34,970 Speaker 2: important is this is the beginning of a rate hiking cycle. 230 00:11:35,030 --> 00:11:38,089 Speaker 1: They've signaled two already. That's important. 231 00:11:38,650 --> 00:11:40,940 Speaker 2: And they don't want to get ahead of themselves because 232 00:11:40,980 --> 00:11:44,760 Speaker 2: they're managing to the economic aggregates. We've got an economy 233 00:11:44,780 --> 00:11:47,520 Speaker 2: that's resilient but not resonating with too many issues. 234 00:11:47,960 --> 00:11:50,040 Speaker 1: And I think that's important as well. 235 00:11:50,460 --> 00:11:52,350 Speaker 2: At the end of the day, though, their job is 236 00:11:52,380 --> 00:11:56,329 Speaker 2: to derail inflation. And if we get into 2027 and 237 00:11:56,650 --> 00:12:00,550 Speaker 2: we're still seeing stickiness, particularly in the service sector and 238 00:12:00,570 --> 00:12:03,050 Speaker 2: the dispersion of prices, that's. 239 00:12:02,790 --> 00:12:05,150 Speaker 1: Going to be a real issue for the Fed. And 240 00:12:05,170 --> 00:12:06,189 Speaker 1: they'll have to go further. 241 00:12:06,410 --> 00:12:09,150 Speaker 2: And then we'll have to see just how much they're 242 00:12:09,190 --> 00:12:12,830 Speaker 2: willing to derail growth versus higher for longer and hope 243 00:12:13,370 --> 00:12:14,410 Speaker 2: for a softer landing. 244 00:12:14,890 --> 00:12:16,550 Speaker 8: One thing that I thought was notable, Diane, is that 245 00:12:16,670 --> 00:12:20,960 Speaker 8: in the statement, they do refer to geopolitical developments in passing. 246 00:12:21,620 --> 00:12:26,620 Speaker 8: They say, well, uncertainty due to geopolitical developments has been ongoing. 247 00:12:26,660 --> 00:12:29,480 Speaker 8: Domestic spending has been resilient, a nod almost to the 248 00:12:29,520 --> 00:12:32,520 Speaker 8: retail sales that we got earlier today. How much are 249 00:12:32,540 --> 00:12:36,079 Speaker 8: they not really going to address the oil price shock 250 00:12:36,240 --> 00:12:39,520 Speaker 8: because of the strong economic data elsewhere? In other words, 251 00:12:39,640 --> 00:12:42,240 Speaker 8: supply-side shocks are fair game as long as they come 252 00:12:42,520 --> 00:12:43,820 Speaker 8: with strength in other places. 253 00:12:46,790 --> 00:12:47,710 Speaker 1: Well, it really is. 254 00:12:47,890 --> 00:12:49,370 Speaker 2: At the end of the day, we had the retail 255 00:12:49,410 --> 00:12:54,290 Speaker 2: sales today, and they were stunningly strong and broad-based. Some 256 00:12:54,330 --> 00:12:58,590 Speaker 2: of those retail sales reflect actually buying ahead of feared 257 00:12:58,850 --> 00:13:02,380 Speaker 2: increases in tariffs in the vehicle sector, but they weren't 258 00:13:02,390 --> 00:13:04,980 Speaker 2: all that. And that is, of course, the very behavior 259 00:13:05,040 --> 00:13:07,740 Speaker 2: that the Fed is tasked to avert. So, I really 260 00:13:07,780 --> 00:13:11,520 Speaker 2: think it is a combination of demand and supply shocks 261 00:13:11,559 --> 00:13:14,920 Speaker 2: that they're dealing with now, and they're acknowledging that with 262 00:13:15,000 --> 00:13:17,260 Speaker 2: more than one rate hike in their forecast. 263 00:13:17,640 --> 00:13:20,850 Speaker 9: Diane Swank, your academics is Michigan, and Michigan has been 264 00:13:21,000 --> 00:13:24,370 Speaker 9: fabulous in the study of inflation. What I hear is 265 00:13:24,550 --> 00:13:28,430 Speaker 9: some guess that we can bring down inflation and not 266 00:13:28,510 --> 00:13:32,110 Speaker 9: bring down real GDP. Can we have that nirvana, or 267 00:13:32,170 --> 00:13:33,170 Speaker 9: is that just naive? 268 00:13:36,100 --> 00:13:39,100 Speaker 1: I think it's more naive than nirvana. And I am worried. 269 00:13:39,260 --> 00:13:41,640 Speaker 2: And I tell you, all the economists that I'm talking 270 00:13:41,679 --> 00:13:44,320 Speaker 2: to on the industry level, all the industry economists that 271 00:13:44,360 --> 00:13:47,300 Speaker 2: I talk to, they are worried about the cost pressures 272 00:13:47,340 --> 00:13:49,870 Speaker 2: they see in the pipeline and that it will be 273 00:13:49,970 --> 00:13:53,190 Speaker 2: much more sustained. And what will it take to really 274 00:13:53,230 --> 00:13:57,490 Speaker 2: derail this inflation? So right now, this is a step 275 00:13:57,630 --> 00:14:01,170 Speaker 2: in the right direction. But the debate within the economics 276 00:14:01,250 --> 00:14:03,970 Speaker 2: community is starting to be not whether or not they 277 00:14:04,010 --> 00:14:06,660 Speaker 2: have to raise again inflation. But how many rate hikes 278 00:14:06,720 --> 00:14:08,500 Speaker 2: do we need and how much do we need to 279 00:14:08,559 --> 00:14:10,460 Speaker 2: suffer between here. 280 00:14:10,740 --> 00:14:13,099 Speaker 1: And price stability to get to price stability? 281 00:14:13,120 --> 00:14:15,900 Speaker 5: Perfectly said. John Farrow, it's as simple as this. 282 00:14:16,000 --> 00:14:18,459 Speaker 9: Is that debate happening at the Fed or are they 283 00:14:18,480 --> 00:14:22,060 Speaker 9: walking on eggshells because of 1600 Pennsylvania Avenue? 284 00:14:22,160 --> 00:14:24,960 Speaker 6: Well, I think they're certainly having that debate. And the 285 00:14:24,980 --> 00:14:27,260 Speaker 6: White House is having no influence over this conversation because 286 00:14:27,280 --> 00:14:30,270 Speaker 6: they've just high-priced by 25 basis points and signaled they're 287 00:14:30,290 --> 00:14:32,230 Speaker 6: willing to go again. Dan, I just want to build 288 00:14:32,250 --> 00:14:34,070 Speaker 6: on this conversation you're having because I think it's so, 289 00:14:34,110 --> 00:14:37,750 Speaker 6: so important. Do you believe this labor market is tight 290 00:14:37,790 --> 00:14:39,770 Speaker 6: enough to put up the wage growth that would support 291 00:14:39,810 --> 00:14:42,370 Speaker 6: these higher prices? Do you believe the consumer price tolerance 292 00:14:42,430 --> 00:14:45,840 Speaker 6: exists to pass on these higher prices? Do you think 293 00:14:46,100 --> 00:14:47,320 Speaker 6: we're in that situation now? 294 00:14:52,970 --> 00:14:55,330 Speaker 2: In terms of the labor market right now, I'm seeing 295 00:14:55,430 --> 00:14:57,990 Speaker 2: two labor markets at the same time. There's pockets of 296 00:14:58,050 --> 00:15:01,170 Speaker 2: labor shortages where wages are starting to pick up. I 297 00:15:01,190 --> 00:15:03,610 Speaker 2: was just talking to a bank CEO yesterday who said 298 00:15:04,010 --> 00:15:06,750 Speaker 2: all his clients are can't find workers at the entry level. 299 00:15:06,790 --> 00:15:09,530 Speaker 1: These are not new college grads. These are entry. 300 00:15:09,290 --> 00:15:13,070 Speaker 2: Level positions that once might have been filled by foreign 301 00:15:13,090 --> 00:15:16,410 Speaker 2: born workers that are not being filled anymore. and that's 302 00:15:16,450 --> 00:15:20,010 Speaker 2: putting upward pressure on wages there. On the higher level, 303 00:15:20,050 --> 00:15:24,420 Speaker 2: we just saw some economic research that showed those professions 304 00:15:24,480 --> 00:15:28,220 Speaker 2: that are most exposed to AI are seeing a slowdown 305 00:15:28,620 --> 00:15:31,300 Speaker 2: in their wage gains. We're not seeing job losses per 306 00:15:31,340 --> 00:15:34,400 Speaker 2: se from AI, but we are seeing a slowdown in 307 00:15:34,480 --> 00:15:37,760 Speaker 2: wage gains in those sectors most exposed. And so you 308 00:15:37,800 --> 00:15:40,410 Speaker 2: have this dichotomy that the Fed is trying to deal 309 00:15:40,450 --> 00:15:43,690 Speaker 2: with And the bottom line is, again, they can only 310 00:15:43,730 --> 00:15:47,050 Speaker 2: deal with the economic aggregates. They can't deal with the 311 00:15:47,150 --> 00:15:51,730 Speaker 2: inequalities and the unevenness of this expansion, which has gotten 312 00:15:51,930 --> 00:15:55,600 Speaker 2: extremely concentrated in the AI build-out as well. 313 00:15:56,260 --> 00:15:59,360 Speaker 8: We just got a message from Steve Chivarona, Federated Hermes, 314 00:15:59,380 --> 00:16:02,100 Speaker 8: the chief investment officer there. And he had this comment 315 00:16:02,120 --> 00:16:04,740 Speaker 8: that I think is really important, Diane. If Warsh characterizes 316 00:16:04,760 --> 00:16:07,900 Speaker 8: this as a recalibration to higher neutral rate, reflecting higher 317 00:16:08,080 --> 00:16:11,120 Speaker 8: nominal growth, he can land the plane. Do you think 318 00:16:11,130 --> 00:16:12,540 Speaker 8: that we're going to get that much, Diane, or do 319 00:16:12,560 --> 00:16:14,940 Speaker 8: you think that ultimately we're going to have another exercise 320 00:16:15,460 --> 00:16:17,340 Speaker 8: in letting the actions speak for themselves? 321 00:16:20,220 --> 00:16:22,000 Speaker 2: Well, I think that we're probably going to have to 322 00:16:22,040 --> 00:16:25,830 Speaker 2: go through many iterations on markets on this, and I 323 00:16:25,870 --> 00:16:27,850 Speaker 2: think it's going to be hard for the Federal Reserve. 324 00:16:28,810 --> 00:16:32,430 Speaker 2: I think the move up in the neutral rate, I 325 00:16:32,470 --> 00:16:33,790 Speaker 2: expected that, but. 326 00:16:33,730 --> 00:16:34,430 Speaker 1: It's still too low. 327 00:16:34,910 --> 00:16:37,230 Speaker 2: I actually think this is neutral, what we're at right now. 328 00:16:37,640 --> 00:16:40,340 Speaker 2: And that means we're way too accommodative at the moment. 329 00:16:40,620 --> 00:16:43,060 Speaker 2: That's a very different perspective than what they just put 330 00:16:43,160 --> 00:16:45,250 Speaker 2: out in the summary of economic projections. 331 00:16:45,570 --> 00:16:48,690 Speaker 9: Diane Swamp, a simple question. Will you miss the dots 332 00:16:48,990 --> 00:16:50,450 Speaker 9: if they do away with the dots? 333 00:16:55,740 --> 00:16:57,260 Speaker 1: Would I care if they do away with the dots? 334 00:16:57,300 --> 00:16:58,380 Speaker 5: Would you miss the dots? 335 00:16:59,100 --> 00:16:59,520 Speaker 2: I actually. 336 00:17:01,060 --> 00:17:04,369 Speaker 2: You know, the dots are... They're the dots. They give 337 00:17:04,410 --> 00:17:07,050 Speaker 2: us an inclination that they're in a rate hiking cycle. 338 00:17:07,190 --> 00:17:11,250 Speaker 2: I think the verbiage in the statement itself basically gave 339 00:17:11,290 --> 00:17:13,800 Speaker 2: us already that we're in a rate hiking cycle. 340 00:17:13,820 --> 00:17:15,260 Speaker 1: If it's one, it's more than one. 341 00:17:15,880 --> 00:17:18,180 Speaker 2: As I agree with Rich, we actually have two more 342 00:17:18,220 --> 00:17:21,320 Speaker 2: additional rate hikes and it could be more than that. 343 00:17:21,540 --> 00:17:23,550 Speaker 2: And I think that's the important thing that we should 344 00:17:23,570 --> 00:17:26,310 Speaker 2: be focusing on is they actually even changed the statement 345 00:17:26,390 --> 00:17:26,850 Speaker 2: on this one. 346 00:17:27,230 --> 00:17:30,619 Speaker 6: Dan Swank, KPMG. Dan, thank you. Appreciate it. If he 347 00:17:30,630 --> 00:17:32,199 Speaker 6: did not have the dots today, I think we'd have 348 00:17:32,240 --> 00:17:34,780 Speaker 6: a slightly different conversation because you wouldn't really know what 349 00:17:34,820 --> 00:17:36,379 Speaker 6: was implied in the forecast at all. There wouldn't be 350 00:17:36,420 --> 00:17:38,919 Speaker 6: any forecasts. We wouldn't be having that conversation about what 351 00:17:38,960 --> 00:17:40,980 Speaker 6: comes next. We'd be pretty blind at the moment. And 352 00:17:41,000 --> 00:17:43,040 Speaker 6: I'm not sure the Fed chair is going to give 353 00:17:43,080 --> 00:17:45,300 Speaker 6: you much in this news conference either, based on recent 354 00:17:45,320 --> 00:17:46,899 Speaker 6: performances at the presser. 355 00:17:47,060 --> 00:17:49,679 Speaker 8: Yeah, what we have is an imperfect measure of a cycle, 356 00:17:49,740 --> 00:17:52,120 Speaker 8: not necessarily a one and done, which is incredibly rare. 357 00:17:52,200 --> 00:17:54,360 Speaker 8: And that is ratifying market expectations. 358 00:17:54,619 --> 00:17:54,900 Speaker 6: You're right. 359 00:17:54,920 --> 00:17:57,300 Speaker 8: Without that, what would this Fed chair do, given the 360 00:17:57,340 --> 00:17:59,119 Speaker 8: fact that he doesn't want to really give it to 361 00:17:59,180 --> 00:18:01,669 Speaker 8: us verbally? At a certain point, though, you start to 362 00:18:01,730 --> 00:18:04,670 Speaker 8: wonder whether the jury has come back with respect to 363 00:18:05,090 --> 00:18:07,949 Speaker 8: a reaction function, not necessarily forward guidance. to say that 364 00:18:07,990 --> 00:18:10,550 Speaker 8: when you don't tell people, they price in an extra 365 00:18:10,630 --> 00:18:13,670 Speaker 8: premia to offset the chance of a Fed that moves 366 00:18:13,890 --> 00:18:15,460 Speaker 8: less predictably than some people were expecting. 367 00:18:15,480 --> 00:18:17,000 Speaker 9: I look at the set of things that come into 368 00:18:17,080 --> 00:18:19,600 Speaker 9: this mystery meeting we're having today, and I really didn't 369 00:18:19,680 --> 00:18:22,439 Speaker 9: expect a Fed looking for a nirvana of, yeah, we 370 00:18:22,480 --> 00:18:22,919 Speaker 9: can do this. 371 00:18:23,000 --> 00:18:25,470 Speaker 5: Inflation's going to come in, and there'll be almost a 372 00:18:25,530 --> 00:18:28,110 Speaker 5: painless growth side. is what I see. 373 00:18:28,369 --> 00:18:31,630 Speaker 9: And I did not hear from Diane Swank the idea 374 00:18:31,650 --> 00:18:33,169 Speaker 9: that would be a successful outcome. 375 00:18:33,310 --> 00:18:34,130 Speaker 6: I certainly hope they can. 376 00:18:34,430 --> 00:18:35,890 Speaker 5: We hope to. Absolutely. 377 00:18:35,930 --> 00:18:38,080 Speaker 6: I think we've all got a bias here. It's a 378 00:18:38,100 --> 00:18:40,300 Speaker 6: good economy. And I hope they can land that plane. 379 00:18:40,760 --> 00:18:42,720 Speaker 6: The evidence of the last five years, though, Tom, is 380 00:18:42,760 --> 00:18:45,680 Speaker 6: it's tremendously difficult to get inflation back to target with 381 00:18:45,740 --> 00:18:48,580 Speaker 6: nominal GDP this high and with the crude story in 382 00:18:48,600 --> 00:18:50,040 Speaker 6: the mix, too. And this is the problem that many 383 00:18:50,080 --> 00:18:52,680 Speaker 6: people will have with this hike this afternoon. This Federal 384 00:18:52,700 --> 00:18:55,520 Speaker 6: Reserve can't print molecules. It can't print barrels of crude. 385 00:18:55,800 --> 00:18:58,240 Speaker 6: It can't build refineries. It can't sign peace accords. There 386 00:18:58,290 --> 00:19:00,330 Speaker 6: is nothing they can do about the situation in the 387 00:19:00,350 --> 00:19:02,710 Speaker 6: Middle East. And I know we've been above target for 388 00:19:02,730 --> 00:19:05,750 Speaker 6: a long time before this war even started. But without 389 00:19:05,770 --> 00:19:08,050 Speaker 6: this war, without the shock in energy prices, we wouldn't 390 00:19:08,070 --> 00:19:10,409 Speaker 6: be having this conversation about hikes to the ECB. I 391 00:19:10,450 --> 00:19:12,430 Speaker 6: don't think we'd be having this conversation about additional hikes 392 00:19:12,450 --> 00:19:13,380 Speaker 6: to the Federal Reserve either. 393 00:19:13,470 --> 00:19:15,000 Speaker 9: I know you want to get to Matt Lazzetti here, 394 00:19:15,060 --> 00:19:17,500 Speaker 9: but I think this is important. Dominic Constant with a 395 00:19:17,600 --> 00:19:22,500 Speaker 9: brilliant research note from Mizzou. And he partitioned Waller and 396 00:19:22,540 --> 00:19:27,240 Speaker 9: Walsh and said there's not enough discussion about shocks and 397 00:19:27,280 --> 00:19:30,220 Speaker 9: what they mean for the economy. And, of course, from 398 00:19:30,260 --> 00:19:32,220 Speaker 9: an institution like this, we're not going to get a 399 00:19:32,280 --> 00:19:33,340 Speaker 9: shock discussion today. 400 00:19:33,400 --> 00:19:33,860 Speaker 5: I get that. 401 00:19:34,560 --> 00:19:39,000 Speaker 9: That's fair game. But the idea here of how these 402 00:19:39,100 --> 00:19:42,030 Speaker 9: shocks play out is far more important than the dialogue 403 00:19:42,050 --> 00:19:42,640 Speaker 9: I'm hearing today. 404 00:19:42,720 --> 00:19:44,590 Speaker 6: I wanted to give the former Fed Vice Chair of 405 00:19:44,609 --> 00:19:46,830 Speaker 6: the Federal Reserve just a final word on the conversation 406 00:19:46,869 --> 00:19:48,970 Speaker 6: we're having. Rich Cloward is still standing by. Rich, thanks 407 00:19:48,990 --> 00:19:50,879 Speaker 6: for your patience, sir. I know we had a technical 408 00:19:50,920 --> 00:19:54,090 Speaker 6: problem on our end just moments ago. Rich, in your opinion, 409 00:19:54,410 --> 00:19:56,830 Speaker 6: do you think we can get inflation back to target 410 00:19:56,890 --> 00:20:01,109 Speaker 6: at this Federal Reserve without causing demand destruction in this economy? 411 00:20:03,180 --> 00:20:03,600 Speaker 5: I do. 412 00:20:03,820 --> 00:20:08,439 Speaker 4: We saw an example of disinflation without a recession between 413 00:20:08,440 --> 00:20:12,419 Speaker 4: 2022 and 2024 and 5. I think it can happen. 414 00:20:12,500 --> 00:20:15,080 Speaker 4: I think, to be blunt, I think the PCE price 415 00:20:15,180 --> 00:20:19,379 Speaker 4: index is overstating underlying inflation in the economy. If you 416 00:20:19,400 --> 00:20:21,740 Speaker 4: look at the labor market, if you look at the CPI, 417 00:20:22,080 --> 00:20:25,220 Speaker 4: inflation's above target, but it's not as far above target 418 00:20:25,280 --> 00:20:27,080 Speaker 4: as the PCE is showing. 419 00:20:27,119 --> 00:20:28,800 Speaker 3: Some of that may get revised away in a. 420 00:20:32,570 --> 00:20:35,050 Speaker 4: We've seen it before, and I think it's certainly something 421 00:20:35,090 --> 00:20:36,040 Speaker 4: that can happen again. 422 00:20:36,180 --> 00:20:39,490 Speaker 6: Can the chair entertain that discussion without damaging its credibility? 423 00:20:42,530 --> 00:20:46,130 Speaker 4: Well, it'll be interesting to see how Chairman Warsh navigates today. 424 00:20:46,609 --> 00:20:48,570 Speaker 4: He may get that question. I'm eager to hear what 425 00:20:48,609 --> 00:20:50,890 Speaker 4: he says. But yes, I think there's an affirmative case 426 00:20:50,930 --> 00:20:53,250 Speaker 4: that one can make that, as I said, I think 427 00:20:53,290 --> 00:20:57,200 Speaker 4: the PCE index is overstating underlying inflation. I think they 428 00:20:57,240 --> 00:21:00,060 Speaker 4: have less ground to cover than maybe some of the 429 00:21:00,100 --> 00:21:03,639 Speaker 4: indicators suggest. So I'll be interested to see if he 430 00:21:03,700 --> 00:21:06,100 Speaker 4: makes that argument. He chose not to at Jackson Hole, 431 00:21:06,180 --> 00:21:09,110 Speaker 4: but we'll see if he does make that argument. 432 00:21:09,230 --> 00:21:11,430 Speaker 6: Watch this space. That news conference begins in 10 minutes time. 433 00:21:11,470 --> 00:21:14,130 Speaker 6: The former Fed Vice Chair Richard Clarida there weighing in 434 00:21:14,230 --> 00:21:16,990 Speaker 6: on a decision, a 25 basis point hike, the forecast 435 00:21:17,030 --> 00:21:19,410 Speaker 6: implying one more to go for this year. And a lean, 436 00:21:19,430 --> 00:21:22,090 Speaker 6: as many people have indicated this afternoon in their research notes, 437 00:21:22,150 --> 00:21:24,859 Speaker 6: that there might be more to come. in 2027. 438 00:21:24,859 --> 00:21:28,300 Speaker 8: It wasn't just core PCE. If you look at core CPI, 439 00:21:28,440 --> 00:21:32,360 Speaker 8: which is essentially that classic consumer price index stripped out 440 00:21:32,420 --> 00:21:35,010 Speaker 8: of energy and food, you can see that it was 0% 441 00:21:35,010 --> 00:21:38,470 Speaker 8: in June, month over month, 0.2% in July, and 0.3% 442 00:21:38,470 --> 00:21:41,170 Speaker 8: in August in terms of the increase. It is broad-based, 443 00:21:41,210 --> 00:21:43,490 Speaker 8: and that, I think, is the reason why people are saying. 444 00:21:43,490 --> 00:21:44,230 Speaker 1: They're taking action. 445 00:21:44,250 --> 00:21:46,710 Speaker 6: Matt Lozetti of Deutsche Bank standing by. Matt, welcome to 446 00:21:46,750 --> 00:21:49,760 Speaker 6: the program. Before this, you said this, It is not 447 00:21:49,800 --> 00:21:52,149 Speaker 6: clear the Fed is sufficiently restrictive. We now expect the 448 00:21:52,190 --> 00:21:56,750 Speaker 6: Fed to deliver 75 basis points of tightening in total. 449 00:21:56,830 --> 00:21:59,209 Speaker 6: We've had 25. Do you believe they validated the other 450 00:21:59,210 --> 00:22:00,650 Speaker 6: 50 with this this afternoon? 451 00:22:02,130 --> 00:22:03,790 Speaker 10: Yeah, I think the dot pod was a little bit 452 00:22:03,810 --> 00:22:06,300 Speaker 10: more hawkish than I was anticipating. I think you've got 453 00:22:06,320 --> 00:22:11,119 Speaker 10: a strong consensus for at least two rate. 16 out 454 00:22:11,140 --> 00:22:13,180 Speaker 10: of the 18 dots expect at least two rate hikes 455 00:22:13,240 --> 00:22:15,840 Speaker 10: this year. And actually, it's a committee that's pretty closely 456 00:22:15,900 --> 00:22:17,960 Speaker 10: split on whether or not you have two or three 457 00:22:18,090 --> 00:22:20,090 Speaker 10: rate hikes in total for next year. I think that 458 00:22:20,109 --> 00:22:23,130 Speaker 10: there's eight dots that show the Fed funds rate 75 459 00:22:23,130 --> 00:22:25,750 Speaker 10: basis points above yesterday's levels through the end of next year. 460 00:22:26,230 --> 00:22:27,810 Speaker 10: So I think it's very much in line with our 461 00:22:27,850 --> 00:22:29,510 Speaker 10: view at this point, which is that the Fed has 462 00:22:29,570 --> 00:22:33,180 Speaker 10: started a mild tightening cycle and that it's a pretty 463 00:22:33,200 --> 00:22:34,860 Speaker 10: strong base case that the Fed is likely to take 464 00:22:34,900 --> 00:22:37,520 Speaker 10: back the 75 basis points of reductions that they gave 465 00:22:37,560 --> 00:22:37,979 Speaker 10: us last year. 466 00:22:38,310 --> 00:22:39,810 Speaker 1: Matt, what do you think they're hoping to accomplish? 467 00:22:40,010 --> 00:22:42,190 Speaker 8: Is it just taking the froth out of equity markets? 468 00:22:42,390 --> 00:22:45,490 Speaker 8: Is it on the margins, just crimping the extra consumer 469 00:22:45,530 --> 00:22:48,940 Speaker 8: spending power that there was, even with consumer discretionary we're 470 00:22:48,980 --> 00:22:51,760 Speaker 8: seeing in terms of the stock performance, not doing very well? 471 00:22:53,359 --> 00:22:56,560 Speaker 10: Yeah, I think the motivations are similar to monetary policy 472 00:22:56,580 --> 00:22:58,180 Speaker 10: tightening that you would typically have. 473 00:22:58,300 --> 00:22:58,920 Speaker 5: I understand. 474 00:22:59,460 --> 00:23:02,320 Speaker 10: that there are supply shocks ongoing. But I think it 475 00:23:02,400 --> 00:23:05,090 Speaker 10: is not just about supply shocks. You have a very 476 00:23:05,130 --> 00:23:07,869 Speaker 10: strong growth backdrop as well. As we saw with retail 477 00:23:07,910 --> 00:23:12,850 Speaker 10: sales this morning, the Atlanta Fed GDP tracker is 5.1% annualized. 478 00:23:13,290 --> 00:23:16,270 Speaker 10: Consumer spending is expected to grow above 4%. You have 479 00:23:16,290 --> 00:23:18,450 Speaker 10: a big CapEx boom that is taking place. Wealth effects 480 00:23:18,490 --> 00:23:21,050 Speaker 10: are meaningful. So what the Fed should do is to 481 00:23:21,090 --> 00:23:24,369 Speaker 10: try to tighten financial conditions in order to likely slow 482 00:23:24,609 --> 00:23:28,709 Speaker 10: demand growth and help to guide inflation back to target. Now, 483 00:23:28,750 --> 00:23:30,490 Speaker 10: will they get all the way back to target without 484 00:23:30,570 --> 00:23:33,950 Speaker 10: significantly reducing demand? I guess I have some skepticism about that, 485 00:23:33,990 --> 00:23:36,149 Speaker 10: but can they at least get closer? Can they get 486 00:23:36,190 --> 00:23:39,810 Speaker 10: something closer to 2.5%, something closer to 2%, whereas it 487 00:23:39,850 --> 00:23:41,750 Speaker 10: looks like we are stuck closer to 3% at this point? 488 00:23:42,190 --> 00:23:44,070 Speaker 10: I think that's the objective. I think the other objective 489 00:23:44,130 --> 00:23:47,169 Speaker 10: is to take the steam out of upside risks, to 490 00:23:47,830 --> 00:23:51,390 Speaker 10: buy back into Fed credibility. to ensure that inflation expectations 491 00:23:51,450 --> 00:23:54,810 Speaker 10: don't pick up as well. And so it's about risk distribution, 492 00:23:55,190 --> 00:23:57,869 Speaker 10: risk management, but also helping your modal forecast get it 493 00:23:57,910 --> 00:23:58,609 Speaker 10: closer to 2%. 494 00:23:58,609 --> 00:24:01,860 Speaker 8: Matt, how important is the word timelier in this Fed statement? 495 00:24:02,180 --> 00:24:04,000 Speaker 8: It's doing a lot of heavy lifting at a time 496 00:24:04,080 --> 00:24:08,540 Speaker 8: when the SEP does not seem to indicate a sooner 497 00:24:08,600 --> 00:24:09,260 Speaker 8: return to 2%. 498 00:24:09,260 --> 00:24:13,240 Speaker 10: Yeah, I think we have to view that as versus 499 00:24:13,270 --> 00:24:16,070 Speaker 10: the counterfactual. So if they did not have 50 or 500 00:24:16,070 --> 00:24:19,030 Speaker 10: 75 basis points of rate hikes, in their forecast for 501 00:24:19,290 --> 00:24:22,470 Speaker 10: this SEP, we would have expected that their inflation forecast 502 00:24:22,490 --> 00:24:24,830 Speaker 10: for next year, perhaps the year after that, would have 503 00:24:24,890 --> 00:24:25,850 Speaker 10: also risen. 504 00:24:26,320 --> 00:24:26,620 Speaker 4: You're right. 505 00:24:26,630 --> 00:24:29,800 Speaker 10: I think time of the year is doing a lot 506 00:24:29,840 --> 00:24:32,060 Speaker 10: of work. But I think what we see is that 507 00:24:32,280 --> 00:24:34,840 Speaker 10: inflation is not moving down fast enough for the Fed. 508 00:24:35,619 --> 00:24:38,179 Speaker 10: They've lost some patience, I think, with that progress that 509 00:24:38,220 --> 00:24:40,659 Speaker 10: they were seeing or lack of progress. And therefore, it 510 00:24:40,960 --> 00:24:42,899 Speaker 10: is very clear that they feel they need to act. 511 00:24:43,100 --> 00:24:45,790 Speaker 10: And there's a pretty strong consensus enacting again with at 512 00:24:45,830 --> 00:24:47,570 Speaker 10: least another 25 basis point hike this year. 513 00:24:47,750 --> 00:24:49,859 Speaker 6: Matt, when we spoke to Vice Chair Clarida and we 514 00:24:49,960 --> 00:24:52,380 Speaker 6: asked him whether you could get inflation back to target 515 00:24:52,480 --> 00:24:55,639 Speaker 6: without causing real demand destruction, he said yes. And he 516 00:24:55,700 --> 00:24:58,280 Speaker 6: pointed to a period after the pandemic. We didn't have 517 00:24:58,320 --> 00:25:00,359 Speaker 6: time to get into it, but I think that period 518 00:25:00,420 --> 00:25:03,770 Speaker 6: is worth discussing. We also had through that time A 519 00:25:03,930 --> 00:25:07,469 Speaker 6: massive positive supply shock for Labour. And we're not going 520 00:25:07,490 --> 00:25:09,300 Speaker 6: to litigate this right now. You're certainly not in the 521 00:25:09,340 --> 00:25:11,860 Speaker 6: right seat to do that. But ultimately, there was a very, 522 00:25:12,359 --> 00:25:14,520 Speaker 6: very odd approach to immigration in this country at the 523 00:25:14,560 --> 00:25:16,740 Speaker 6: southern border, which allowed a lot of people to come 524 00:25:16,780 --> 00:25:19,500 Speaker 6: across and wait on wages in this country. Matt, we 525 00:25:19,520 --> 00:25:22,310 Speaker 6: don't have that anymore. In fact, we've had a negative 526 00:25:22,330 --> 00:25:25,600 Speaker 6: supply shock on labor, a negative supply shock on goods, 527 00:25:26,080 --> 00:25:28,580 Speaker 6: a negative supply shock in the energy market as well, Matt. 528 00:25:28,960 --> 00:25:32,380 Speaker 6: How do you achieve that story of getting inflation back 529 00:25:32,420 --> 00:25:37,129 Speaker 6: to target without demand destruction? Because right now, barring a 530 00:25:37,170 --> 00:25:38,869 Speaker 6: peace accord in the Middle East, I don't see where 531 00:25:38,890 --> 00:25:40,450 Speaker 6: the positive supply response comes from. 532 00:25:42,210 --> 00:25:45,310 Speaker 10: Yeah, look, the early stages of this coming out of COVID, 533 00:25:45,490 --> 00:25:48,070 Speaker 10: we did see this immaculate disinflation taking place where we 534 00:25:48,090 --> 00:25:50,670 Speaker 10: were able to get inflation from very high levels down 535 00:25:50,710 --> 00:25:53,869 Speaker 10: on the core PC index closer to 3%. That had 536 00:25:53,950 --> 00:25:57,510 Speaker 10: the Fed tightening policy very aggressively, helping to bring inflation 537 00:25:57,530 --> 00:25:59,910 Speaker 10: expectations into check. But as you mentioned, we had very 538 00:25:59,970 --> 00:26:03,369 Speaker 10: positive supply side forces at that point in time. It's 539 00:26:03,430 --> 00:26:07,610 Speaker 10: very different right now. You have all the negative supply-side 540 00:26:07,630 --> 00:26:10,780 Speaker 10: forces that you mentioned. The Fed cannot do anything about those. 541 00:26:11,210 --> 00:26:14,540 Speaker 10: But there's also a very robust demand force here. AI-related 542 00:26:14,580 --> 00:26:18,020 Speaker 10: investment is strong. Consumer spending growth is strong as well. 543 00:26:18,560 --> 00:26:22,459 Speaker 10: And so I do think that inflation is likely stuck, 544 00:26:22,480 --> 00:26:25,640 Speaker 10: core PC, between 2.5% and 3%, unless the Fed acts. 545 00:26:26,180 --> 00:26:28,840 Speaker 10: And the ultimate question was, were they happy enough or 546 00:26:28,880 --> 00:26:31,840 Speaker 10: content enough with an environment where their forecast would be 547 00:26:31,859 --> 00:26:34,189 Speaker 10: to 2.5% into the future. And I think we just 548 00:26:34,210 --> 00:26:35,889 Speaker 10: now see that the Fed's patience has run out and 549 00:26:35,910 --> 00:26:37,530 Speaker 10: they think they need to act. I think that's the 550 00:26:37,570 --> 00:26:37,910 Speaker 10: right move. 551 00:26:38,230 --> 00:26:40,450 Speaker 6: Matt, the issue you've described, though, when you've identified the 552 00:26:40,510 --> 00:26:42,880 Speaker 6: parts of the economy that are supporting the economy right now, 553 00:26:43,280 --> 00:26:46,520 Speaker 6: they're the most rate-insensitive parts of the economy. The rate-sensitive 554 00:26:46,560 --> 00:26:49,900 Speaker 6: parts of the economy already on its knees. And they're 555 00:26:49,920 --> 00:26:52,600 Speaker 6: just kind of hammered even more. So, Matt, ultimately, what 556 00:26:52,640 --> 00:26:55,139 Speaker 6: we've identified here are the things that are supporting prices 557 00:26:55,160 --> 00:26:56,920 Speaker 6: at the moment are the things that this rate hike 558 00:26:56,940 --> 00:26:59,179 Speaker 6: does nothing about. So, Matt, before we go into this 559 00:26:59,220 --> 00:27:01,460 Speaker 6: news conference, can you point to exactly what this hike 560 00:27:01,520 --> 00:27:02,859 Speaker 6: achieves this afternoon? 561 00:27:04,060 --> 00:27:04,230 Speaker 2: Sure. 562 00:27:04,280 --> 00:27:07,120 Speaker 10: So I think you're absolutely right that there are sectors 563 00:27:07,160 --> 00:27:09,780 Speaker 10: for which financial conditions are tight. The housing market is 564 00:27:09,820 --> 00:27:13,040 Speaker 10: the clear example. I think it's also right that AI-related 565 00:27:13,060 --> 00:27:15,760 Speaker 10: investment is not going to come down simply because the 566 00:27:15,780 --> 00:27:17,960 Speaker 10: Fed hiked rates by 25 basis points today. That's clearly 567 00:27:18,020 --> 00:27:21,440 Speaker 10: not going to derail incentives around AI. But what it 568 00:27:21,460 --> 00:27:23,920 Speaker 10: can do is help to tighten broader financial conditions. It 569 00:27:24,160 --> 00:27:26,040 Speaker 10: can help to lift the dollar. It can help bring 570 00:27:26,060 --> 00:27:28,700 Speaker 10: the equity markets down a bit. It can help to 571 00:27:29,440 --> 00:27:32,669 Speaker 10: lead to wider credit spends. Those things through various channels 572 00:27:32,810 --> 00:27:35,690 Speaker 10: will reduce demand side pressures. That is what the Fed 573 00:27:35,890 --> 00:27:38,070 Speaker 10: can do. That's what monetary policy is intended to do. 574 00:27:38,090 --> 00:27:40,790 Speaker 10: You know, I think that there's just very strong signals 575 00:27:41,150 --> 00:27:45,310 Speaker 10: that monetary policy is not restrictive, is not sufficiently restrictive. 576 00:27:45,810 --> 00:27:48,889 Speaker 10: The Fed's goals and what they have to do is 577 00:27:48,910 --> 00:27:51,880 Speaker 10: essentially set monetary policy so that it is sufficiently restrictive 578 00:27:52,210 --> 00:27:54,220 Speaker 10: to get inflation down to target over a time period 579 00:27:54,240 --> 00:27:56,780 Speaker 10: that they are happy with. And that's what today is 580 00:27:56,820 --> 00:27:58,179 Speaker 10: intended to do. I think it's the right move to 581 00:27:58,200 --> 00:27:58,439 Speaker 10: do that. 582 00:27:58,619 --> 00:28:00,859 Speaker 6: Matt, thank you, sir. As predicted by you. Matt Lozelli there. 583 00:28:01,210 --> 00:28:03,490 Speaker 6: of Deutsche Bank and others too. A 25 basis point 584 00:28:03,530 --> 00:28:05,530 Speaker 6: hike from this Federal Reserve, a signal they'll go again 585 00:28:05,869 --> 00:28:07,429 Speaker 6: before the end of the year. Most people who come 586 00:28:07,470 --> 00:28:09,610 Speaker 6: on this programme will suggest that won't happen in October, 587 00:28:09,990 --> 00:28:11,330 Speaker 6: right before the election. We'll see. 588 00:28:11,810 --> 00:28:12,250 Speaker 5: We'll see. 589 00:28:12,550 --> 00:28:15,000 Speaker 6: And then again in 27, maybe they'll go again. Neil 590 00:28:15,020 --> 00:28:16,879 Speaker 6: Dutter was one of the first to react over at Renmac. 591 00:28:16,900 --> 00:28:19,280 Speaker 6: He made the point that they're underestimating how much they'll 592 00:28:19,320 --> 00:28:22,780 Speaker 6: need to do to get inflation back to target. Now, 593 00:28:22,840 --> 00:28:25,360 Speaker 6: Matt talked about financial conditions and maybe doing it through 594 00:28:25,380 --> 00:28:27,860 Speaker 6: that channel. Lisa, we've had yields up at the front 595 00:28:27,900 --> 00:28:30,609 Speaker 6: end by 100 basis points year to date. Equities are higher. 596 00:28:30,750 --> 00:28:33,010 Speaker 6: Credit spreads have done nothing, even with a mountain of 597 00:28:33,030 --> 00:28:35,830 Speaker 6: supply going into YG. Where are the type of financial 598 00:28:35,850 --> 00:28:36,630 Speaker 6: conditions coming from? 599 00:28:36,990 --> 00:28:39,530 Speaker 8: We've been asking this for quite a while, and it's 600 00:28:39,570 --> 00:28:41,300 Speaker 8: a good point to bring up. I'm glad you really 601 00:28:41,660 --> 00:28:45,300 Speaker 8: went hard on that because ultimately a question here is 602 00:28:45,540 --> 00:28:48,200 Speaker 8: what exactly is 25 basis points going to do, given 603 00:28:48,220 --> 00:28:49,840 Speaker 8: the fact that we already have had that baked in? 604 00:28:49,860 --> 00:28:52,650 Speaker 8: What will 75 basis points do? What will 100 basis 605 00:28:52,690 --> 00:28:56,560 Speaker 8: points do? Ultimately, how much is it just a signaling 606 00:28:56,580 --> 00:28:59,980 Speaker 8: to financial conditions? Is that really the transmission mechanism to 607 00:29:00,060 --> 00:29:03,210 Speaker 8: slow down some of the deals activity to potentially bring 608 00:29:03,230 --> 00:29:03,650 Speaker 8: inflation to check? 609 00:29:03,670 --> 00:29:05,000 Speaker 5: That's the heart of the matter. You nailed it. 610 00:29:05,030 --> 00:29:06,770 Speaker 9: Like some people would say, they should be on 50 611 00:29:06,770 --> 00:29:09,790 Speaker 9: basis points today. The fact is, 25 basis points is 612 00:29:09,870 --> 00:29:13,690 Speaker 9: nothing except for the guy at 1600 Pennsylvania Avenue. And 613 00:29:13,710 --> 00:29:15,530 Speaker 9: we have to see the response from the White House 614 00:29:15,950 --> 00:29:18,580 Speaker 9: to this. I thought Lozetti was just absolutely brilliant there 615 00:29:19,200 --> 00:29:20,760 Speaker 9: on this nirvana that they're in. 616 00:29:20,780 --> 00:29:21,340 Speaker 5: You know what? 617 00:29:21,740 --> 00:29:24,560 Speaker 9: How do you get inflation down? And you keep saying 618 00:29:24,580 --> 00:29:28,800 Speaker 9: demand destruction. It's fancy talk, OK? It's just slower economy. 619 00:29:29,600 --> 00:29:31,690 Speaker 9: Who wants a slower economy into an election? 620 00:29:32,030 --> 00:29:34,510 Speaker 6: This is the pain that the former Fed chair talked 621 00:29:34,570 --> 00:29:36,760 Speaker 6: about in Jackson Hole when we were all together. A 622 00:29:36,800 --> 00:29:39,250 Speaker 6: few years ago, a few summers ago, he talked about 623 00:29:39,290 --> 00:29:42,560 Speaker 6: the pain required to get inflation back to target. Unemployment 624 00:29:42,580 --> 00:29:44,860 Speaker 6: is still around four. There are people in pain in 625 00:29:44,900 --> 00:29:46,880 Speaker 6: this economy. I certainly don't want to understate that. 626 00:29:47,120 --> 00:29:47,540 Speaker 3: There are. 627 00:29:47,980 --> 00:29:50,200 Speaker 6: But at the aggregate level, the headline number, you don't 628 00:29:50,280 --> 00:29:52,910 Speaker 6: see it in unemployment. right now. You certainly don't see 629 00:29:52,930 --> 00:29:55,950 Speaker 6: it in GDP. And that's why people are wondering whether 630 00:29:55,970 --> 00:29:58,140 Speaker 6: they're willing to go that extra mile. Are they actually 631 00:29:58,200 --> 00:30:00,740 Speaker 6: really willing to cause that kind of problem, that demand 632 00:30:00,760 --> 00:30:02,840 Speaker 6: destruction to get inflation back to target? 633 00:30:03,060 --> 00:30:05,550 Speaker 8: Kevin Gordon of Charles Schwab said the struggle of this 634 00:30:05,590 --> 00:30:08,230 Speaker 8: supply shock environment, the inflation data might at times be 635 00:30:08,250 --> 00:30:11,430 Speaker 8: driven by idiosyncrasies, but the Fed deals in aggregates. They 636 00:30:11,450 --> 00:30:13,590 Speaker 8: have a blunt tool. It's their only tool. It is 637 00:30:13,650 --> 00:30:16,680 Speaker 8: not clean. It potentially will take some casualties. But it's 638 00:30:16,700 --> 00:30:18,850 Speaker 8: the only tool they've got. And that was the conversation 639 00:30:18,870 --> 00:30:21,630 Speaker 8: that we had with Beth Hammock in Jackson Hole. And clearly, 640 00:30:21,750 --> 00:30:23,430 Speaker 8: a lot of Fed officials are on board with that. 641 00:30:23,590 --> 00:30:25,710 Speaker 6: That door's going to open any second now. The Fed chair, 642 00:30:25,750 --> 00:30:28,170 Speaker 6: Kevin Walsh, will step in. Some inside baseball for you 643 00:30:28,230 --> 00:30:30,270 Speaker 6: on the journalism front. Mike McKee telling us that they've 644 00:30:30,330 --> 00:30:33,710 Speaker 6: reordered the press room in alphabetical order. So now Mike 645 00:30:33,730 --> 00:30:35,780 Speaker 6: McKee is on the second row and a Wall Street 646 00:30:35,800 --> 00:30:37,840 Speaker 6: journalist at the back. I've got no idea what that 647 00:30:37,880 --> 00:30:39,480 Speaker 6: means for how the questions are asked and what order 648 00:30:39,500 --> 00:30:41,180 Speaker 6: they're asked in. But that's what I heard. 649 00:30:41,340 --> 00:30:41,720 Speaker 5: We heard. 650 00:30:42,220 --> 00:30:43,390 Speaker 6: About 45 minutes ago. 651 00:30:43,450 --> 00:30:45,350 Speaker 8: Yeah, I gather that's one of a number of changes 652 00:30:45,430 --> 00:30:47,720 Speaker 8: that may come down the pike for this meeting. I 653 00:30:48,120 --> 00:30:49,620 Speaker 8: am curious how long it's going to end up being 654 00:30:49,710 --> 00:30:49,990 Speaker 8: as well.