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Speaker 1: Previously having served as a president at the Dallas FED.

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Speaker 1: He says market's probably overreacted to Pal's comments. Joining us

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Speaker 1: from Dallas is Robert Kaplan. Robert, always great to have

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Speaker 1: you with us, particularly ahead of the holidays and into

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Speaker 1: this kind of curious period where we wonder what twenty

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Speaker 1: twenty four has in store for us in terms of

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Speaker 1: monetary policy. Do you think markets have overreacted to the narrative?

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Speaker 2: Well, maybe a little bit, But I think the Fed,

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Speaker 2: as you pointed out, has tried to put some cold

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Speaker 2: water on the thought that rate cuts will come as

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Speaker 2: early as people might be expecting, and in the size

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Speaker 2: they might be expecting. And I think the fact is

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Speaker 2: the FED is going to need to see at least

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Speaker 2: two or three months more of continued improvement. I think

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Speaker 2: tomorrow will probably be good news, but they're going to

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Speaker 2: need to see sustained improvement before they're going to be

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Speaker 2: willing to take more action. And so I think the

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Speaker 2: market should expect that it's going to take a while

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Speaker 2: and more sustained improvement before the FED does something.

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Speaker 1: As you say, they're not in the business of predicting business.

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Speaker 1: They're in the business of risk management, right, And the

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Speaker 1: sort of confluence of risks is pretty difficult to navigate

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Speaker 1: going into next year. There's still a lot of upside

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Speaker 1: risk in terms of stickiness if inflationary factors services, as

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Speaker 1: you point out, and quite a bit of confusion in

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Speaker 1: energy pricess right now too.

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Speaker 2: That's right there, And Brian moynihan, I see in your

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Speaker 2: previous clip he mentioned there's a tug of war between

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Speaker 2: the FED is very restrictive, but on the other hand,

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Speaker 2: fiscal policy and this project spending is very accommodative. It's

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Speaker 2: white hot, and so there's a bit of a conflict there.

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Speaker 2: And so they're going to be watching to see whether

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Speaker 2: the service sector inflation settles down somewhat. They're going to

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Speaker 2: be hoping that the price of oil continues to be muted.

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Speaker 2: But I would also, if I were there, to be

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Speaker 2: very aware that fiscal spending in this kind of strength

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Speaker 2: means I want to see more sustained improvement, because the

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Speaker 2: last thing you want to do is start taking action

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Speaker 2: to cut rates and then see inflation start to back up.

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Speaker 2: That's a scenario they've got to avoid. And that's why

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Speaker 2: I say they're in the risk management business. They don't

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Speaker 2: have to predict the future accurately, but they've got to

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Speaker 2: manage the risk, and that means being very deliberate in here,

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Speaker 2: and that's the reason you've seen the walk back.

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Speaker 3: How big of a risk is that we continue to

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Speaker 3: see financial conditions loosening, especially after the FMC.

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Speaker 2: I mean, I think that's a significant possibility in that

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Speaker 2: there's so much money in short dated paper in bills

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Speaker 2: that has to find a place to go and does

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Speaker 2: not want to be left on the sideline when rates

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Speaker 2: start to move down. So you're seeing this there's a

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Speaker 2: rush to either take duration or buy other financial assets,

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Speaker 2: and that's what we've seen over the last week or so.

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Speaker 2: I think the FED just has to be aware of that.

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Speaker 2: It can't do anything about that phenomenon. It's got to

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Speaker 2: do its job, which is managed the risk and take

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Speaker 2: its time and be deliberate. But I think you'll see

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Speaker 2: the story of twenty twenty four will be the Fed

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Speaker 2: will be more balanced in terms of two sided risk.

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Speaker 2: They'll be aware that they want to manage inflation, but

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Speaker 2: they're also going to be sensitive to the path of

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Speaker 2: the economy. I think the level of fiscal spending being

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Speaker 2: so significant will I think should be a big factor

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Speaker 2: and allow them to be a little bit more prioritizing

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Speaker 2: inflation over a slowing in the economy.

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Speaker 3: Expand on that, because there's really a lot of treasury

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Speaker 3: volume that needs to be digested in the next few years.

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Speaker 2: Right, Yes, and I think this is a big concern.

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Speaker 2: The good news is we saw treasury yields back up

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Speaker 2: over the last three to four months. We've now seen

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Speaker 2: them come back into the high three eighties. We've got

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Speaker 2: nine trillion of treasury securities to sell in twenty twenty four.

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Speaker 2: Seven of it is refinancing. Another two trillion is to

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Speaker 2: finance the deficit we just ran, and it's going to

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Speaker 2: get financed at about two hundred basis points higher than

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Speaker 2: the treasury yields of what's rolling off. And so what

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Speaker 2: the danger is we keep building interest expense into the

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Speaker 2: budget from six hundred and twenty five billion this year

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Speaker 2: to eight hundred billion on its way to a trillion

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Speaker 2: and it's starting. If that continued, it would squeeze out

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Speaker 2: not only discretionary spending, but some mandatory spending. And I

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Speaker 2: think that's an issue worth watching very carefully.

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Speaker 1: And I think, as Jerry alluded to, this kind of

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Speaker 1: recent loosening of financial conditions. Does the FEDS need or

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Speaker 1: desire to stick this alf landing potentially backfire and that

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Speaker 1: it makes it more difficult for them to be able

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Speaker 1: to do that, right, does it? You know these expectations

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Speaker 1: that are being created for the market to risk this

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Speaker 1: idea that this isn't just a pivot, that it is

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Speaker 1: a third put a third backstop at a time when

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Speaker 1: you know ourset prices are already high and there is

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Speaker 1: I'm looking at it and thinking, there's not that much

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Speaker 1: further upside without risking more inflation.

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Speaker 2: Yeah, Listen, the Fed is this is one of the

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Speaker 2: factors they're going to take into account because what they're

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Speaker 2: looking for, I think you'll see Tomor's PC number be

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Speaker 2: encouraging and show further improvement. What they're going to want

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Speaker 2: to see into January and February and maybe even March

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Speaker 2: is that we don't back up the other way, either

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Speaker 2: because of government spending or loosening financial conditions. And so

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Speaker 2: I think again, the FED is going to manage that risk,

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Speaker 2: and it needs to be balanced in doing that, and

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Speaker 2: I UH, and I think on the communications side, I

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Speaker 2: think they'd be well served uh to keep their powder

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Speaker 2: dry and and tell people that it's gonna. It's gonna,

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Speaker 2: they're gonna need to see more sustained improvement before they

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Speaker 2: take action.