WEBVTT - Apollo Chief Economist Torsten Slok Talks Fed Day & Outlook

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<v Speaker 1>And the savannahs this morning struggling to find consensus.

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<v Speaker 2>It's not just that we don't know what the destination is,

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<v Speaker 2>we don't know what the journey is. Also there's disagreement

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<v Speaker 2>as how quickly will FED official go from backward looking

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<v Speaker 2>data dependents to forward leaning. So we have these disagreement

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<v Speaker 2>both within the FMC and also between the market and

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<v Speaker 2>what seems to be the consensus if there is one

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<v Speaker 2>under FED. So this is for me, it's a fascinating time,

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<v Speaker 2>but it is also a very confusing time.

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<v Speaker 1>I think most of us are confused. So here's the

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<v Speaker 1>latest investors bracing for the Fed's first interest rate count

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<v Speaker 1>in more than four years and looking for answers to

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<v Speaker 1>a lot of big questions. Tolson's lack of apollo, saying,

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<v Speaker 1>despite surveys showing that the consensus expecting a soft landing rates,

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<v Speaker 1>markets are pricing in a full blown recession the Feds.

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<v Speaker 1>Our style model says that neutral monetary policy would mean

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<v Speaker 1>a FED funds rate at three percent, but maybe this

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<v Speaker 1>estimate is wrong. Tilston joins us now for more toasting.

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<v Speaker 1>Good morning to you, sir. We've got a lot to

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<v Speaker 1>work through. When they sit around on the Committee, and

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<v Speaker 1>they continue the conversation today if it doesn't need to continue,

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<v Speaker 1>and they ask themselves what's the biggest risk care upside

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<v Speaker 1>risk to inflation or downside risk to growth? What else

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<v Speaker 1>do you think they come up with.

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<v Speaker 3>I think that they would look at the dual mandate

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<v Speaker 3>and it is absolutely correct that inflation was nine point

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<v Speaker 3>one and the summer of twenty twenty two and now

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<v Speaker 3>it's two point five. So we've come a long long

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<v Speaker 3>way when it comes to inflation. But the other side

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<v Speaker 3>of the dual mandate eavenly full employment. Yes, the unemployer

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<v Speaker 3>rate has gone up a bit, but literally all other

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<v Speaker 3>economic activity indicators, really indicators for everything across GDP, as

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<v Speaker 3>you saw yesterday, industrial production, retail sales remain quite strong.

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<v Speaker 3>So now you begin to sit and look at the

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<v Speaker 3>real side of the economy and say, should I put

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<v Speaker 3>a lot of weight on the unemployer rate going up

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<v Speaker 3>a bit because of largely because of labels apply or

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<v Speaker 3>should I put more weight on all the other real

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<v Speaker 3>economy indicators are actually still in relatively good shape. So

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<v Speaker 3>I think that they would do it from the perspective

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<v Speaker 3>of saying, what's the dual mandate, saying and where are

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<v Speaker 3>we on the various indicators on the side of the door.

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<v Speaker 1>So do you take issue today with the decision of

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<v Speaker 1>reducing interest rates or take issue with the conversation about

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<v Speaker 1>them returning back to three percent quickly?

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<v Speaker 3>So I do think that it is the returning back

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<v Speaker 3>to three percent that's problematic because the three percent number

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<v Speaker 3>there are star number or the terminal estimate that they

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<v Speaker 3>have put out in the dot plot that they now

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<v Speaker 3>literally have on the New York Fed homepage that our

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<v Speaker 3>style where we're going is three percent. That turns out

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<v Speaker 3>to be wrong because if this were the case, Markesterry

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<v Speaker 3>policy would be much more restrictive. And the incoming data,

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<v Speaker 3>when you look at it Atlanta FEDGDP now at three

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<v Speaker 3>percent yesterday, that's not restrictive. If you look at what

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<v Speaker 3>happens to industrial production yesterday, that's not restrictive either. If

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<v Speaker 3>you look across the board on a wide range of indicators,

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<v Speaker 3>it doesn't look like Marnins Terry policy is particularly restrictive.

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<v Speaker 3>Most importantly in credit and in private credit. You're seeing

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<v Speaker 3>that loan default rates are going down. If we had

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<v Speaker 3>a recession, defall rates would not be going down.

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<v Speaker 1>There would be going up.

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<v Speaker 3>Even if we had a slow down, it would be

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<v Speaker 3>the same show. Given this vast majority of indicators, when

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<v Speaker 3>you look out of the windows still telling you that

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<v Speaker 3>things are actually still okay, then it is problematic to

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<v Speaker 3>sit there with high conviction and saying that Marnsterry Poles

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<v Speaker 3>is very restrictive.

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<v Speaker 4>We're in a Kumbayah kind of mood. We're trying to

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<v Speaker 4>find consensus. And one thing that strikes me about what

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<v Speaker 4>you said is it doesn't sort of really reduce the

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<v Speaker 4>need for a fifty basis point rate cut today. You're

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<v Speaker 4>just saying longer term, maybe they should push back against

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<v Speaker 4>some of the expectations for two hundred basis points of

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<v Speaker 4>reduction quickly like that, to get down to that level

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<v Speaker 4>that is closer to what may be neutral.

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<v Speaker 1>Is that correct?

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<v Speaker 3>Well, if a style where we're going the term will

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<v Speaker 3>fitfunds rate, if we think that's three but it actually

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<v Speaker 3>is more like four four and a half, then you're

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<v Speaker 3>not in a rush to cut fifty. Then you could

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<v Speaker 3>just take twenty five and say, if we need to

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<v Speaker 3>get to four and a half, that's just seventy five

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<v Speaker 3>hundred basis points lower than where we are, So there's

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<v Speaker 3>no need to hurry to lower interest rates. If you

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<v Speaker 3>have that, we don't need to get quickly down to three,

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<v Speaker 3>but we just need to get to four and a half.

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<v Speaker 3>So it does become quite important whether it's twenty five

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<v Speaker 3>or fifty, because it signals whether we are in a

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<v Speaker 3>hurry to do something or whether we still have time

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<v Speaker 3>to look at the incoming data that still continues to

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<v Speaker 3>be strong.

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<v Speaker 1>What in the en.

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<v Speaker 4>Humming data makes you concerned about a reacceleration of inflation,

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<v Speaker 4>which would be the other side of the mandate that

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<v Speaker 4>could potentially be negative if the federal to cut overlay aggressive.

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<v Speaker 3>Well, one obvious area is of course housing. Given housing

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<v Speaker 3>has a weight of thirty five percent in the CPI basket,

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<v Speaker 3>now you see the NHB has begun to increase. Of course,

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<v Speaker 3>if you lower Morgus raised dramatically, as we've seen here

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<v Speaker 3>over the last three four weeks, that will also give

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<v Speaker 3>a boost to housing. We're seeing some of the housing

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<v Speaker 3>indicators show signs of turning around, and with an already

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<v Speaker 3>low supply of houses and therefore inventory being very very

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<v Speaker 3>low by historical standards, you could have that housing inflation

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<v Speaker 3>at least if you take the chart of case Shiller

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<v Speaker 3>and that with Oeer, it does look like we could

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<v Speaker 3>get a rebound over the next several months in the

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<v Speaker 3>housing components of the.

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<v Speaker 5>CPI if the Fed comes out and cuts twenty five

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<v Speaker 5>basis points, but Powell has very dubvish language. Will that

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<v Speaker 5>be to the markets almost equal to a fifty bas

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<v Speaker 5>point cut?

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<v Speaker 3>Well, I do think that exactly the communication around what

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<v Speaker 3>they do today, So I think that they will go

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<v Speaker 3>twenty five, But if they do go fifty, how they

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<v Speaker 3>talk about this will be extremely important. So that's why

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<v Speaker 3>the dot plot coming along today with the statement is

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<v Speaker 3>very very critical for rates expectations. Markets are obviously pricing

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<v Speaker 3>ten cuts through this cycle, which is basically based on

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<v Speaker 3>the idea that we got to get down to neutral.

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<v Speaker 3>We got to get down to neutral and three percent

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<v Speaker 3>as quickly as possible. But if the dot plot certainly

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<v Speaker 3>now tells you will maybe you're not getting ten cuts,

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<v Speaker 3>maybe we're getting only six seven cuts. Then of course

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<v Speaker 3>that will also mean that Marcus will look at that

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<v Speaker 3>and say, well, maybe we are overpricing this and maybe

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<v Speaker 3>we are to hooked on. Excuse me, the model in

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<v Speaker 3>the FEDS basement, name me our star. Rather than going

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<v Speaker 3>up into the living room and looking at the incoming data.

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<v Speaker 5>I want to ask you a quick question on fiscal viewers.

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<v Speaker 5>Government every day pays out billions. When we pay out

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<v Speaker 5>our interest three billion. With the FED cutting, how much

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<v Speaker 5>less money is the government actually need to pay on

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<v Speaker 5>our interest.

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<v Speaker 3>Yes, so we calculated that if the Fed cuts one

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<v Speaker 3>percent is point the interest payments on a daily basis

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<v Speaker 3>with decline from three billion to two and a half billion.

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<v Speaker 3>But that's still a very very significant number of reads

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<v Speaker 3>it to where we've been historically. So you're absolutely right.

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<v Speaker 3>Knowing interest rates helps in terms of dead servicing costs.

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<v Speaker 3>But in the background, we of course still have dead

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<v Speaker 3>levels continuing to rise and that's of course creating challenges

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<v Speaker 3>for the fiscal situation. Maybe in the near term it

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<v Speaker 3>will be a little bit of relief, but down the

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<v Speaker 3>road this problem is of course not going away.

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<v Speaker 1>And we suggesting John Williams is in the basement, Well, I'm.

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<v Speaker 3>Just saying that the focus here on what it is

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<v Speaker 3>that is the narrative. Also, if you think carefully about

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<v Speaker 3>what is the easy be saying, what is the Bank

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<v Speaker 3>of England saying they're not framing their decisions for marninterry policy.

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<v Speaker 3>According to some excuse me, academic healmen Field for what's

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<v Speaker 3>happening with our Star, They're framing their debate as what

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<v Speaker 3>is the incoming data doing? So in that sense, I

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<v Speaker 3>love us Star, and I think everything that goes into it,

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<v Speaker 3>and trust me, I have I spent a lot of

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<v Speaker 3>time thinking about and I have a psd in economics.

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<v Speaker 3>It is a very interesting thing to spend time on.

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<v Speaker 3>But I'm just telling you that if you think about

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<v Speaker 3>the incoming data then putting it up on the scale,

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<v Speaker 3>maybe the incoming data should get a bit more weight.

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<v Speaker 1>Get out of the basement and get in the living

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<v Speaker 1>room and looking at the window.

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<v Speaker 4>Nobody quins Chard Williams in the basement.

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<v Speaker 1>Is you know, there is this.

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<v Speaker 4>Feeling that maybe we are making a little bit too

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<v Speaker 4>much or placing too much emphasis and certain measures that

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<v Speaker 4>are you know, fuzzy or dusty.

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<v Speaker 1>Jim Bianco of Bianca Research made this point. There's a

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<v Speaker 1>great divide right now, you know, going into this decision

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<v Speaker 1>between market pricing and economists. In our survey, more than

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<v Speaker 1>one hundred economists surveyed in our survey, not even ten

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<v Speaker 1>percent of them think a fifty basis point cup happens today.

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<v Speaker 1>That's how big the spread is between professional economists at

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<v Speaker 1>the moment and market participants.

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<v Speaker 4>How do you make a move that is outsized at

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<v Speaker 4>a time where you're only able to see lagging indicators

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<v Speaker 4>and the data itself is kind of contradictory. We're seeing

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<v Speaker 4>different signals from say, the mortgage market versus say, Autoloe delinquencies.

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<v Speaker 1>Turston, this was wonderful, be one of the best thing.

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<v Speaker 1>We appreciate it. Thank you, sir,