00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts. 00:00:05 Speaker 3: Radio. 00:00:06 Speaker 4: News. 00:00:09 Speaker 2: This is a breaking news update from Bloomberg. 00:00:12 Speaker 5: Instant reaction and analysis from our 3,000 journalists and analysts around the world. 00:00:20 Speaker 3: The FOMC decided to maintain the target rate for the federal funds rate at 3.75% to 4% in support of the Federal Reserve's dual mandate. The committee believes that the accumulation of more information will help it determine the policy stance appropriate to ensure a timely return of inflation to the 2% goal. The committee will deliver price stability. 00:00:46 Speaker 4: I'm going to speak on behalf of a lot of people on trading desks around the world. I think at one point in that news conference, everybody started looking out the window to see what was happening elsewhere. Because there was a moment in that news conference where we stopped learning anything about anything. Equity markets this afternoon shaping up as follows. On the S & P 500, up a third of 1%. On the Nasdaq, up by 0.4%. In the bond market, twos, tens, and thirties. Yields shaping up as follows this afternoon. Twos down three basis points at 470. Tens up four. Thirties up five. There appears to be a disconnect between the rhetoric and the policy from the Fed chair, Kevin Walsh. 00:01:21 Speaker 3: Domestic spending has been resilient. Productivity growth is strong. In capital investment, robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little, but inflation remains elevated. 00:01:37 Speaker 2: Inflation is too high. The economy is strong. 00:01:40 Speaker 4: Yet the Fed decided to hold the opening statement more consistent with a Fed chair that just hiked interest rates, never mind keeping them unchanged. 00:01:47 Speaker 1: So what had changed? And the one thing that he did open the door to was the potential that market volatility started to give the sense that maybe something else was going on that they needed to monitor. He said that this interval of time is information rich information. He also said that, you know, you might be worried about the same old things, but this is actually a new regime. 00:02:07 Speaker 2: It may look like. 00:02:08 Speaker 1: It's just one rate hike that they've executed since he started there, but it's actually monetary medicine, a package that the Fed started five months ago. 00:02:15 Speaker 4: He came really, really close, stopped just short, but came really close to saying the market's doing some of the work for us. 00:02:21 Speaker 2: Disclose. 00:02:22 Speaker 1: That was the only explanation from what he said that actually gives any justification whatsoever for why with that rhetoric and that assessment of the economy, they did not hike. 00:02:32 Speaker 6: I am fascinated what we'll learn in the next year and 10 years about some of these really qualified people around the table at the Eccles building. what they think of this approach. I think that's what we haven't heard yet. It's only been five months, John. But I think conventional analysis fails, given what we heard there on protocol and on new monetary medicine. 00:02:55 Speaker 2: Tom, the issue and the risk this Fed chair always ran. 00:02:58 Speaker 4: If you're on board with ending forward guidance and the hyper-communication that we were getting from the institution over the last 10 years, that's one thing. Getting the rest of the committee to come with you is another. 00:03:08 Speaker 2: The outcome of this meeting this afternoon. 00:03:10 Speaker 4: is that they've reinforced the guidance we're going to get from select individuals over the next several weeks. In fact, the first thing I've done as this news conference wraps up is find out when Williams speaks next, November 6th, for anyone who's interested. It's going to be participating on a moderated discussion. All that's happened here is that we've just found out that when you hear from Williams and Jefferson... when that guidance about October or whatever the month might be comes in, even if it predates the data, that's what the policy is going to be. Because a lot of people on Wall Street concluded the data said go. The data said hike. The rhetoric from the Fed chair said the same thing. 00:03:42 Speaker 2: He's miles from that. 00:03:43 Speaker 4: And what you hear from Williams and Jefferson is that we can take a month to skip. And everything you heard in that news conference about having a time-rich conversation, Brammo, about the next month or so. Was everything Jefferson and Williams told you before the data even came out a few weeks ago? 00:03:57 Speaker 1: Yeah, the reaction function is even less clear right now, I think. If this is a data-dependent Fed, what data are they looking for? This is an informational-rich Fed. 00:04:06 Speaker 2: Era, interval. Is it the election? 00:04:08 Speaker 1: Is it oil prices? 00:04:10 Speaker 2: Is it CPI, which we just got? 00:04:11 Speaker 1: Is it GDP? Is it finger in the wind, let's look out the window? 00:04:14 Speaker 2: Ultimately, we're not sure. 00:04:16 Speaker 1: This is part of the issue that I think a lot of people are having. And frankly, I think almost at this point, people would welcome the fact that we might get one or two fewer rate deciding decisions. Because if this is what it's going to be, it doesn't add clarity. 00:04:29 Speaker 6: John, I think conventional analysis here doesn't work. This guy is on another planet. From modern monetary theory. 00:04:36 Speaker 4: TK, don't wait two years. If we have to do this every single meeting, what's the point? Just bring it down to six now. To your point, Lisa, I think most people would be on board with that. 00:04:44 Speaker 2: Do it tomorrow. Wait two years. Make it happen tomorrow. 00:04:48 Speaker 1: The market reaction, I think, is notable. And you are seeing a steepening in the yield curve and the dollar getting weaker. And you start to wonder, OK, well, what's the market saying? Maybe, A, that regardless of how firm their 2 percent target is, this is a Fed that's going to wait a little bit longer. And a real question around the opportunities for them to actually make a move if they have fewer meetings to possibly move in. 00:05:08 Speaker 6: There's a critical distinction here. There's a lot of people that agree with him that, you know, John, I call it the parlor game. I hate it. He wants to get away from the parlor game. He wants to get away from the dots, fewer meetings. Who had ham and cheese sandwiches at the day one meeting? The usual thing. 00:05:23 Speaker 4: Sure. Fine. 00:05:24 Speaker 6: Okay, that's great. But he wants to walk away from modern culture. monetary analysis and the foundation of that. A guy like Michael Ferroli at JP Morgan, I don't know what he does with new monetary medicine and protocol from the 50s. 00:05:40 Speaker 4: I'm thinking about who might be happy with this decision. If I'm Dario at Anthropic, I'm probably pretty happy with this decision and that news conference. I'd be pretty thrilled with how that went. Essentially, an IPO coming up in a few weeks. Yeah. 00:05:51 Speaker 1: I mean, essentially, if you have someone who is concerned about any kind of market disruption in credit spreads. 00:05:56 Speaker 5: Tied to AI. 00:05:57 Speaker 2: Probably feeling pretty good. 00:05:58 Speaker 1: That probably is a positive. 00:06:00 Speaker 4: Got Priya Misra at J.P. Morgan with us around the table. Priya sat through that. Priya, well done. 00:06:03 Speaker 2: It's good to see you. That was fun. It was a difficult one, wasn't it? What did you learn? 00:06:07 Speaker 7: You know, I think Chair Warsh was trying to walk this fine line of saying that they're already committed to inflation and yet they didn't hike. I think he was trying to communicate this hawkish hold, but it's hard. But I would take a step back. There's the policy and then there's the communication. The policy, you saw the market reaction right after. I don't think the market was saying that the Fed's behind the curve on inflation. 00:06:29 Speaker 2: They've hiked. 00:06:30 Speaker 7: They're likely to hike some more. I think the market was okay with policy. What I was hoping to get from Chairwash, which we didn't really get, was explain the decision. He could have talked about inflation breadth. He could have said, we're not data point dependent. You know, the inflation trend is heading lower. He really didn't talk about the data. So we didn't get much on the decision. I was hoping to hear something more on, is this risk management, removal of the risk management cuts, or is this risk management hikes, or are we recalibrating the neutral rate? We didn't really get that. And then something on financial conditions. I think we got a little bit on that. I think the Fed did get a little spooked with the move in interest rates. I mean, we talk about Halloween costumes. My point a month ago was the tenure should be the Halloween costume. My kids refused to even walk with me. 00:07:15 Speaker 2: Now it's not the tenure. 00:07:17 Speaker 7: It's my latest as AI, Dr. Jekyll and Mr. 00:07:20 Speaker 6: Hyde. 00:07:21 Speaker 7: But, you know, it's not the Fed. So at least I think today is not like July. I think it wasn't a complete miscommunication. He did leave a lot more questions. We're going to have to listen to every other Fed official, wait for meetings. I personally like more meetings because I think the decision speaks more than what he's going to tell us at the press conference. But we'll have. 00:07:39 Speaker 2: Not to be too snarky, you want more of those meetings? So, you know... They're the meetings you get it. 00:07:44 Speaker 7: The policy decision was useful. The dots are useful. We might go, you know, the dots might go away. 00:07:49 Speaker 3: But the. 00:07:50 Speaker 7: Yes, his communication, I think, did not tell us much about the reaction function. 00:07:53 Speaker 1: If you want to dress like the 10-year, I'll walk with you, because I think that that's actually quite scary for a lot of different officials right now. What do you make of this commentary that he made about what happened in markets, that financial conditions seem to have tightened? And This sort of nod to that as the one thing that could have justified remaining on hold. 00:08:11 Speaker 6: Right. 00:08:12 Speaker 7: I think so monetary policy works into the economy through financial conditions. So the fact that he said the financial conditions have tightened and that's kind of what they expected. I think it's telling you that that's how monetary policy works. So all this idea that the AI trade is not interest sensitive, I think he's pushing back against it. That's the area he was a little explicit in. And so when we talk about he's buying time for what, it's not just the labor market and inflation. It's going to be financial conditions. If the air is coming out of the AI trade, well, interest rates might come down, but financial conditions might tighten. And then the market's doing the work for the Fed. I don't think he wanted to say it because when he said it in July, that was a problem. It looked like the market might bully the Fed. But I do think that this Fed chair looks, and it's not just chairwash. 00:08:58 Speaker 2: I think the rest of. 00:08:59 Speaker 7: The Fed, I mean, we heard from Williams and Jefferson. I think they looked at the market and said, this is doing the work. So we can actually then, the urgency goes down for us to hike. 00:09:08 Speaker 6: He talked about protocol. And he's written before about McChesney Martin, 1951 and the accord. To me, he's almost wistful to go back to another time. I felt like I was watching Tobey Maguire and Reese Witherspoon in Pleasantville. We're back to the 50s, like back before Burns, back before the 60s, back to a simpler time. He's yearning to go back there. How does that dovetail with a cacophony of responsibilities we have in monetary policy linked into fiscal policy? 00:09:39 Speaker 7: It's very hard. Now, I see the point about going back, because if you look at big productivity increases, we might. 00:09:44 Speaker 6: Be— But we're not the same economy we were in the 50s. Our news flow alone— I mean, John has personally moved British pound at least six times on this show. I mean, the speed of news flow today, he's not allowed to go back to that. wistful thinking. 00:10:01 Speaker 7: I think which is where I wish we could get a better sense of the reaction function because then the market will react to data points. And it doesn't just have to be inflation and the labor market. It could be the earnings of some large hyperscale or it could be to the issue equity or debt. But let the market react to all this information if we have a sense of the reaction function. We are getting a better sense today than we were, I'd say, in July. 00:10:25 Speaker 2: I'll give you that. 00:10:27 Speaker 6: I'll give you it better than July. 00:10:28 Speaker 7: We're just piecing it together and we're realizing there's not just the chair wash reaction function. There's every other of the 19 members reaction function that we need to. So maybe AI can help us get some. 00:10:39 Speaker 6: I got a question to fit into John Farrow here. John, you've stood on the lawn of the ECB. I talk about this stuff. You've actually done it. How does the Bank of England, the ECB, how do they react to what I just witnessed? 00:10:53 Speaker 2: The lack of guidance? The lack of analysis? 00:10:56 Speaker 6: Some people would say the MBA happy talk speak I just heard. 00:10:59 Speaker 4: Tom, without criticizing too many people, I think people have had experience of that at the ECB for the last several years. 00:11:05 Speaker 6: Okay. 00:11:06 Speaker 2: Same situation. 00:11:07 Speaker 4: There are some people in this market who don't believe the person leading that institution was cut out for that job to begin with and haven't received the kind of guidance they want from that institution either. So I think the ECB might have a little bit in common with what we've seen from the Federal Reserve under this leadership. The problem with this leadership right now is that he wants to make a change at the top of this institution into how they communicate, but he's trapped in the post-GFC communication architecture. So he has to deliver a news conference. Clearly he doesn't want to. Clearly he doesn't have much to say. And I think he's trying to be collegial. It's difficult to be that way when others aren't on board with what you're trying to do. And the speeches over the last few weeks from Williams and Jefferson, I think, are probably the most important development of the. 00:11:49 Speaker 2: Last month, aside from what happened with financial markets. 00:11:52 Speaker 4: It doesn't matter what the Fed chair says about anything in this news conference. It doesn't matter that he doesn't provide guidance. Because the only guidance you need is from the core of the committee. And the core of the committee told you precisely what would happen at this meeting. 00:12:05 Speaker 2: They kept rates unchanged. 00:12:07 Speaker 4: The core of this committee told you precisely what the chair ended up saying, which is we have time. We want to take more time to find out and get more information about what's happening here. So for a Fed chair that's trying to move away from the old Fed, my conclusion watching this play out this afternoon is that this new Fed sounds a whole lot like the old Fed. 00:12:25 Speaker 2: They're talking a good game about inflation. 00:12:27 Speaker 4: They obviously want to anchor inflation expectations, but they're willing to tolerate above target and messy prints like the one we just got because they're not willing to act. 00:12:35 Speaker 2: That's the only conclusion you can have. 00:12:37 Speaker 4: Colby tried. We used to work with Colby. She's fantastic. It's the first question out of the gate. Why aren't you hiking today? The economy's strong. Why aren't you doing anything? That question was asked 50 different ways. He didn't answer it once. And if they're not going to make a move after the data we just got, And I'm not advocating for a move from the institution, by the way. That's not what I'm doing here. I'm basing this on their own rhetoric. There is a massive spread between how the Fed chair is speaking and what they're doing. And this just sounded like a typical Fed chair trying to wanker inflation expectations with above target inflation and not willing to do anything about it. 00:13:09 Speaker 6: But Priya, within the mix, at least to jump in here because you're reading different stuff than I am. Within the mix, is there any talk about where these presidents and these governors will revolt against this chairman? Is that discussed or analyzed in any way? 00:13:25 Speaker 7: So not revolt, but I would say we're paying attention to every dot and every voter, non-voter, because that's important. Now, this is coming down to counting votes, a little bit like the Supreme Court, where, you know, it's not a concern. And I will say the Fed came into the new chairworshes regime divided. So there was already this question of is this a supply shock? Is it leaking into demand? Is it just AI or is it broadening out? I think there are big questions there. So we're going to be listening to really every Fed official getting a sense of what do they think about how much the market's doing the work for them, even if they're not explicitly saying it. How much of that was behind what Williams and Jefferson said? But I'll go back to we think this is still a supply shock. There were questions on whether they should have hiked in September. If this is a supply shock, normal conventional economic theory would say, Look through it. I think this was risk management. They're worried that it'll spread through. It's just not clear from Chair Walsh that the committee broadly is there. I think that's where Jefferson and Williams and I would say Waller are there. So just watching, not just what they say about the next meeting, and, you know, it's the totality of whether they hiked this meeting or not actually doesn't matter unless if you're trading October Fed Fund futures, but it's the totality of hikes. We're still pricing in three hikes, which is more than... the most hawkish Fed official has been till now. 00:14:45 Speaker 2: Do you know why I'm so upset? Mike McKee didn't get to speak at the news conference. What was that about? 00:14:49 Speaker 4: Mike McKee joins us now for more. Mike, what happened in there? What happened in the press, sir? 00:14:55 Speaker 8: Well, I didn't get called on. That's one thing that happened, and I don't have any explanation for that other than they put us in the very back row. 00:15:02 Speaker 2: I think, John, that you said it best. 00:15:03 Speaker 8: You've said it very, very well about what's going on with Chairman Warsh and this Fed. He wants to change the communication style. But he doesn't know how and he's leaving people with a vague impression of what the Fed is thinking and it's not helping anybody on Wall Street figure out what to do. When you listen to what he said today, they want more time to look out the window. 00:15:26 Speaker 2: What are they going to see out the window? 00:15:28 Speaker 8: There is one more CPI between this meeting and the December meeting. They get PCE tomorrow. They know what that number is already. But that's the only inflation measure, that one CPI. So if you're worried about inflation and you get one more number and you know oil prices are going up and you know that the war is still going on, I don't think you're going to learn a whole lot by looking out the window. And so it leaves open the question of Where does the Fed think it needs to intervene and why? 00:15:55 Speaker 3: And that's a question that he did not answer. 00:15:58 Speaker 8: Good question on whether we've migrated from supply shock to demand shock. If it's a demand shock, and certainly he was at pains to say the economy is really picking up. then obviously the Fed has more work to do in a different way. And we didn't get anything on that right now. One thing I would add is I've gotten several messages from people on Wall Street about this change in the meeting frequency. If it starts next fall, what meeting are they going to skip? It would seem logical to skip the October meeting because you've got SEPs if they still have those in September and December. But how does the market know? How do they know how to price futures at this point if they don't know when one of those meetings won't produce anything? So a lot of questions come out of this that he didn't even come close to answering. 00:16:44 Speaker 4: Very few answers. Mike McKee, wonderful job as always down in Washington. Mike, appreciate it, sir. Jeff Rosenberg of BlackRock joins us now for more. Jeff, you sat through that too. For someone in this market, what was material to you? 00:16:57 Speaker 5: Yeah, Jonathan, listening to the conversation, I'll highlight three things in kind of reverse order. 00:17:02 Speaker 2: I think we've talked about a lot of them. 00:17:04 Speaker 5: You know, the answer for why they didn't do anything this meeting, he got the question a couple of times and he kind of answered it. They're waiting for more data. 00:17:12 Speaker 4: Fine. 00:17:13 Speaker 5: A lot less discussion on oil than I would have thought of for the second point. But he did say oil's up and we need to take note of that. And I think that's also, to Mike McKee's comments a minute ago, that's also what they're going to be looking for. They talked a lot about it in prior meetings, again, less this time. But the third point I'd highlight is I think the most important thing that we took out of this discussion and the Q & A was a lot more discussion on financial conditions. He kind of opened with the financial conditions, unwilling and unable. to call them tight, but noticing the tightening and linking it back to AI with this really important marker that AI, interest rates matter to AI. He talked about the rollover and the correlation between oil and interest rates. He never sort of finished the conversation because he said he's not a Wall Street newsletter. But if he were to finish it, what happened was that the rates stopped looking at oil and they started looking at the AI trade, and he paid attention to that. So we're going to pay more attention to that, and I think that's probably the most important takeaway. And a little bit of the steepening of the curve that you see there in the market, I think that's a little bit of a dovish hint because they're going to be really focused on whether they're overly tightening financial conditions if there is indeed this much of a reaction to an increase in interest rates to the AI pricing in financial markets. 00:18:34 Speaker 1: So, Jeff, is the Fed put alive and well right now for risk assets? 00:18:39 Speaker 5: Oh, our favorite topic. You know, I don't know if I could say it's alive and well. I mean, I think what we got a hint of and what I was just answering and a little bit what you see in the steepening is he's sensitive to it. 00:18:53 Speaker 2: He's sensitive to looking at AI. 00:18:56 Speaker 5: You know, we also got another piece of information that we hadn't maybe heard before when he answered the Korean reporter. with, I'm really more focused on your markets than you may imagine me to be. That's really important because he understands just how important the AI driver is to growth. Even though he's talking about it broadening out, this is really an important piece. So if you see some wobbles there, I think maybe not the Fed put in that it can work, but certainly what we saw this month was the market sort of sniffing out that AI is a macro event as much as it is a micro event. And if there is a undermining of it, it's going to be a macro event that is primarily disinflationary. It's supporting growth on the consumption side. It's supporting it on the investment side. He made that point. So he well aware of it. So that's where you get the interest rate sensitivity. And it's really a validation we saw in the last couple of weeks. 00:19:57 Speaker 6: Jeff Rosenberg, for all of us in the game, you were at Carnegie Mellon. You had the privilege of Alan Meltzer. his 1,400-page history of the Federal Reserve. What would Alan Meltzer think of what we observed this afternoon? 00:20:13 Speaker 5: Well, you know, someone said it earlier, I think it was Mike McKee, about how he wants to change the Fed, but he's locked into the old communication. I would say he's locked in, but he's also trying to change the communications as much as he can. We're seeing the changes in the press conference. You only get one question. He picks which one, if you ask to, shortening it from about an hour to about 30 minutes, the statement being revised. Meltzer would see that in the context of the history of the Fed as, yes, trying to go back to the earlier interaction you had with Priya about, you know, can you go back to those halcyon days? The thing I would add to that conversation is, The big change is the role of financial conditions and consumption because consumption is so powered by the wealth effect. That linkage you didn't have in the halcyon days. It was much more manufacturing, much higher savings rate, much less consumption out of debt financed means, so much less interest rate sensitivity and financial condition sensitivity. So that aspect, and that's what we heard, the transmission mechanism is through financial conditions. That's the primary way in which the Fed's policy setting affects the economy. So I think we learned a lot about that, even though not much was changing to Jonathan's comments earlier. Inside some of this conversation, I think we did hear some interesting data points. 00:21:34 Speaker 2: Jeff, diplomatic. Appreciate it. Thank you, sir. Jeffrey Rosenberg there of BlackRock.