Speaker 1: And the savannahs this morning struggling to find consensus.
Speaker 2: It's not just that we don't know what the destination is,
Speaker 2: we don't know what the journey is. Also there's disagreement
Speaker 2: as how quickly will FED official go from backward looking
Speaker 2: data dependents to forward leaning. So we have these disagreement
Speaker 2: both within the FMC and also between the market and
Speaker 2: what seems to be the consensus if there is one
Speaker 2: under FED. So this is for me, it's a fascinating time,
Speaker 2: but it is also a very confusing time.
Speaker 1: I think most of us are confused. So here's the
Speaker 1: latest investors bracing for the Fed's first interest rate count
Speaker 1: in more than four years and looking for answers to
Speaker 1: a lot of big questions. Tolson's lack of apollo, saying,
Speaker 1: despite surveys showing that the consensus expecting a soft landing rates,
Speaker 1: markets are pricing in a full blown recession the Feds.
Speaker 1: Our style model says that neutral monetary policy would mean
Speaker 1: a FED funds rate at three percent, but maybe this
Speaker 1: estimate is wrong. Tilston joins us now for more toasting.
Speaker 1: Good morning to you, sir. We've got a lot to
Speaker 1: work through. When they sit around on the Committee, and
Speaker 1: they continue the conversation today if it doesn't need to continue,
Speaker 1: and they ask themselves what's the biggest risk care upside
Speaker 1: risk to inflation or downside risk to growth? What else
Speaker 1: do you think they come up with.
Speaker 3: I think that they would look at the dual mandate
Speaker 3: and it is absolutely correct that inflation was nine point
Speaker 3: one and the summer of twenty twenty two and now
Speaker 3: it's two point five. So we've come a long long
Speaker 3: way when it comes to inflation. But the other side
Speaker 3: of the dual mandate eavenly full employment. Yes, the unemployer
Speaker 3: rate has gone up a bit, but literally all other
Speaker 3: economic activity indicators, really indicators for everything across GDP, as
Speaker 3: you saw yesterday, industrial production, retail sales remain quite strong.
Speaker 3: So now you begin to sit and look at the
Speaker 3: real side of the economy and say, should I put
Speaker 3: a lot of weight on the unemployer rate going up
Speaker 3: a bit because of largely because of labels apply or
Speaker 3: should I put more weight on all the other real
Speaker 3: economy indicators are actually still in relatively good shape. So
Speaker 3: I think that they would do it from the perspective
Speaker 3: of saying, what's the dual mandate, saying and where are
Speaker 3: we on the various indicators on the side of the door.
Speaker 1: So do you take issue today with the decision of
Speaker 1: reducing interest rates or take issue with the conversation about
Speaker 1: them returning back to three percent quickly?
Speaker 3: So I do think that it is the returning back
Speaker 3: to three percent that's problematic because the three percent number
Speaker 3: there are star number or the terminal estimate that they
Speaker 3: have put out in the dot plot that they now
Speaker 3: literally have on the New York Fed homepage that our
Speaker 3: style where we're going is three percent. That turns out
Speaker 3: to be wrong because if this were the case, Markesterry
Speaker 3: policy would be much more restrictive. And the incoming data,
Speaker 3: when you look at it Atlanta FEDGDP now at three
Speaker 3: percent yesterday, that's not restrictive. If you look at what
Speaker 3: happens to industrial production yesterday, that's not restrictive either. If
Speaker 3: you look across the board on a wide range of indicators,
Speaker 3: it doesn't look like Marnins Terry policy is particularly restrictive.
Speaker 3: Most importantly in credit and in private credit. You're seeing
Speaker 3: that loan default rates are going down. If we had
Speaker 3: a recession, defall rates would not be going down.
Speaker 1: There would be going up.
Speaker 3: Even if we had a slow down, it would be
Speaker 3: the same show. Given this vast majority of indicators, when
Speaker 3: you look out of the windows still telling you that
Speaker 3: things are actually still okay, then it is problematic to
Speaker 3: sit there with high conviction and saying that Marnsterry Poles
Speaker 3: is very restrictive.
Speaker 4: We're in a Kumbayah kind of mood. We're trying to
Speaker 4: find consensus. And one thing that strikes me about what
Speaker 4: you said is it doesn't sort of really reduce the
Speaker 4: need for a fifty basis point rate cut today. You're
Speaker 4: just saying longer term, maybe they should push back against
Speaker 4: some of the expectations for two hundred basis points of
Speaker 4: reduction quickly like that, to get down to that level
Speaker 4: that is closer to what may be neutral.
Speaker 1: Is that correct?
Speaker 3: Well, if a style where we're going the term will
Speaker 3: fitfunds rate, if we think that's three but it actually
Speaker 3: is more like four four and a half, then you're
Speaker 3: not in a rush to cut fifty. Then you could
Speaker 3: just take twenty five and say, if we need to
Speaker 3: get to four and a half, that's just seventy five
Speaker 3: hundred basis points lower than where we are, So there's
Speaker 3: no need to hurry to lower interest rates. If you
Speaker 3: have that, we don't need to get quickly down to three,
Speaker 3: but we just need to get to four and a half.
Speaker 3: So it does become quite important whether it's twenty five
Speaker 3: or fifty, because it signals whether we are in a
Speaker 3: hurry to do something or whether we still have time
Speaker 3: to look at the incoming data that still continues to
Speaker 3: be strong.
Speaker 1: What in the en.
Speaker 4: Humming data makes you concerned about a reacceleration of inflation,
Speaker 4: which would be the other side of the mandate that
Speaker 4: could potentially be negative if the federal to cut overlay aggressive.
Speaker 3: Well, one obvious area is of course housing. Given housing
Speaker 3: has a weight of thirty five percent in the CPI basket,
Speaker 3: now you see the NHB has begun to increase. Of course,
Speaker 3: if you lower Morgus raised dramatically, as we've seen here
Speaker 3: over the last three four weeks, that will also give
Speaker 3: a boost to housing. We're seeing some of the housing
Speaker 3: indicators show signs of turning around, and with an already
Speaker 3: low supply of houses and therefore inventory being very very
Speaker 3: low by historical standards, you could have that housing inflation
Speaker 3: at least if you take the chart of case Shiller
Speaker 3: and that with Oeer, it does look like we could
Speaker 3: get a rebound over the next several months in the
Speaker 3: housing components of the.
Speaker 5: CPI if the Fed comes out and cuts twenty five
Speaker 5: basis points, but Powell has very dubvish language. Will that
Speaker 5: be to the markets almost equal to a fifty bas
Speaker 5: point cut?
Speaker 3: Well, I do think that exactly the communication around what
Speaker 3: they do today, So I think that they will go
Speaker 3: twenty five, But if they do go fifty, how they
Speaker 3: talk about this will be extremely important. So that's why
Speaker 3: the dot plot coming along today with the statement is
Speaker 3: very very critical for rates expectations. Markets are obviously pricing
Speaker 3: ten cuts through this cycle, which is basically based on
Speaker 3: the idea that we got to get down to neutral.
Speaker 3: We got to get down to neutral and three percent
Speaker 3: as quickly as possible. But if the dot plot certainly
Speaker 3: now tells you will maybe you're not getting ten cuts,
Speaker 3: maybe we're getting only six seven cuts. Then of course
Speaker 3: that will also mean that Marcus will look at that
Speaker 3: and say, well, maybe we are overpricing this and maybe
Speaker 3: we are to hooked on. Excuse me, the model in
Speaker 3: the FEDS basement, name me our star. Rather than going
Speaker 3: up into the living room and looking at the incoming data.
Speaker 5: I want to ask you a quick question on fiscal viewers.
Speaker 5: Government every day pays out billions. When we pay out
Speaker 5: our interest three billion. With the FED cutting, how much
Speaker 5: less money is the government actually need to pay on
Speaker 5: our interest.
Speaker 3: Yes, so we calculated that if the Fed cuts one
Speaker 3: percent is point the interest payments on a daily basis
Speaker 3: with decline from three billion to two and a half billion.
Speaker 3: But that's still a very very significant number of reads
Speaker 3: it to where we've been historically. So you're absolutely right.
Speaker 3: Knowing interest rates helps in terms of dead servicing costs.
Speaker 3: But in the background, we of course still have dead
Speaker 3: levels continuing to rise and that's of course creating challenges
Speaker 3: for the fiscal situation. Maybe in the near term it
Speaker 3: will be a little bit of relief, but down the
Speaker 3: road this problem is of course not going away.
Speaker 1: And we suggesting John Williams is in the basement, Well, I'm.
Speaker 3: Just saying that the focus here on what it is
Speaker 3: that is the narrative. Also, if you think carefully about
Speaker 3: what is the easy be saying, what is the Bank
Speaker 3: of England saying they're not framing their decisions for marninterry policy.
Speaker 3: According to some excuse me, academic healmen Field for what's
Speaker 3: happening with our Star, They're framing their debate as what
Speaker 3: is the incoming data doing? So in that sense, I
Speaker 3: love us Star, and I think everything that goes into it,
Speaker 3: and trust me, I have I spent a lot of
Speaker 3: time thinking about and I have a psd in economics.
Speaker 3: It is a very interesting thing to spend time on.
Speaker 3: But I'm just telling you that if you think about
Speaker 3: the incoming data then putting it up on the scale,
Speaker 3: maybe the incoming data should get a bit more weight.
Speaker 1: Get out of the basement and get in the living
Speaker 1: room and looking at the window.
Speaker 4: Nobody quins Chard Williams in the basement.
Speaker 1: Is you know, there is this.
Speaker 4: Feeling that maybe we are making a little bit too
Speaker 4: much or placing too much emphasis and certain measures that
Speaker 4: are you know, fuzzy or dusty.
Speaker 1: Jim Bianco of Bianca Research made this point. There's a
Speaker 1: great divide right now, you know, going into this decision
Speaker 1: between market pricing and economists. In our survey, more than
Speaker 1: one hundred economists surveyed in our survey, not even ten
Speaker 1: percent of them think a fifty basis point cup happens today.
Speaker 1: That's how big the spread is between professional economists at
Speaker 1: the moment and market participants.
Speaker 4: How do you make a move that is outsized at
Speaker 4: a time where you're only able to see lagging indicators
Speaker 4: and the data itself is kind of contradictory. We're seeing
Speaker 4: different signals from say, the mortgage market versus say, Autoloe delinquencies.
Speaker 1: Turston, this was wonderful, be one of the best thing.
Speaker 1: We appreciate it. Thank you, sir,