Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The Chairman of the Federal Reserve his words, this was
Speaker 2: one of the better meetings that I can recall.
Speaker 3: Maybe you had to be there.
Speaker 2: In the equity market, we look like this equity's shaping up,
Speaker 2: as follows, down by about two tens of one percent
Speaker 2: on the S and P five hundred on the Nasdaq,
Speaker 2: positive by zero point zero four.
Speaker 3: The game's fading.
Speaker 2: If you check out the bond market two year, ten year,
Speaker 2: thirty year, and locking this move right here yields up
Speaker 2: at the front end of the curve by six basis
Speaker 2: points the two year three ninety three, and when you
Speaker 2: push that through foreign exchange, you get some real dollar strength.
Speaker 3: Euro dollar down to.
Speaker 2: One fourteen this afternoon and down by one four percentage point. Now,
Speaker 2: perhaps these market moves to have you more about positioning
Speaker 2: than it does about the Fed meeting itself. But there
Speaker 2: is one point attention that I think is very much
Speaker 2: worth exploring, and it's on the labor market. Governor Wallaer
Speaker 2: is making the point that this labor market is on
Speaker 2: the edge. Chairman Powell has a different view of things.
Speaker 2: Take a listen.
Speaker 4: If you look at the labor market what you see is,
Speaker 4: by many, many statistics, the labor market is kind of
Speaker 4: still in balance. It's things like quit's, you know, job
Speaker 4: openings and let alone the unemployment rate. They're all very
Speaker 4: by many measures, very similar to where they were a
Speaker 4: year ago. So you do not see weakening in the
Speaker 4: labor market.
Speaker 2: Two headlines crossing in the last forty five minutes. I
Speaker 2: think articulating the Federal Reserve chairs bias a clear bias
Speaker 2: to wait. One, the totality of the data show you've
Speaker 2: got a solid labor market, and two, inflation is further
Speaker 2: from our goal than employment.
Speaker 3: That's a chairman. It wants to wait.
Speaker 5: And that's the reason maybe why on the margins you
Speaker 5: saw yields rise as he spoke, and you saw stocks
Speaker 5: roll over. A very confusing statement, I want to say,
Speaker 5: I was trying to purse through exactly what he was saying.
Speaker 5: You don't see weakening in the labor market, but you
Speaker 5: do have downside risks. What are the downside risks? When
Speaker 5: do you start to see the materializing and what is
Speaker 5: the difference between growing downside risk and a market that
Speaker 5: clearly isn't weakening. In his view, Jah and I.
Speaker 6: Agree on the labor front. There's two Americas out there.
Speaker 6: One's Donald Trump's America, and you know, there's Jerome Powell's America.
Speaker 6: While he was warbling gaily, I went into the Bloomberg
Speaker 6: and looked at weeks unemployed back to nineteen sixty seven,
Speaker 6: past COVID passed a great financial crisis. Weeks unemployed in
Speaker 6: this country are back to a level of two thousand
Speaker 6: and nine, and that kind of pre crisis agony. There's
Speaker 6: two Americas out there, and these two people are talking
Speaker 6: to one part here and one part there.
Speaker 3: You mentioned the President.
Speaker 2: I think that's the second part attention, one within the Fed,
Speaker 2: the other outside of the Fed. There was a note
Speaker 2: from the Chairman of the Federal Reserve on government boring
Speaker 2: costs and how the Federal Reserve doesn't take notes of
Speaker 2: what it costs the government given where interest rates aund
Speaker 2: right now, that's one of the core arguments coming out
Speaker 2: of the White House to cut of interest rights.
Speaker 5: Yeah, and it's one that is falling on deaf years
Speaker 5: as it doesn't necessarily want to be seen as monetizing
Speaker 5: the debt, right that would cause some sort of inflation surge. Theoretically,
Speaker 5: in economics, there is this idea, if you have a
Speaker 5: central bank that essentially is printing money by lowering rates
Speaker 5: or artificially suppressing the cost of borrowing in order to
Speaker 5: foster more spending by the government, that that can lead
Speaker 5: to longer term inflation. He's pushing back against that. Does
Speaker 5: that raise the ire of the president?
Speaker 2: My mckaye was in the room. McKay is going to
Speaker 2: be with us in about five minutes time, so stemp
Speaker 2: by for that. I want to bring in the former
Speaker 2: New York Fed President Bill Duntley to join the conversation.
Speaker 2: Bill welcome to the programs. Is this a federal reserve
Speaker 2: that has the luxury of waiting?
Speaker 1: I think they have to wait because they're not really
Speaker 1: sure what's going to happen to the economy, both on
Speaker 1: the inflation side and the liver market side. And I
Speaker 1: think they have a reason to wait because, as Paul said,
Speaker 1: the unemployment rate hasn't changed. So essentially what's happened over
Speaker 1: the last six months is labor demand has slowed, but
Speaker 1: labor supply is also slowed because of immigration policy. And
Speaker 1: he was very explicit about that. He really said, focus
Speaker 1: on the unemployment rate. It's basically in the same place
Speaker 1: as less summer. So I think, you know, the message
Speaker 1: from this, you know press conference was very clear, we're
Speaker 1: not in a rush. He also mentioned multiple times it's
Speaker 1: going to take time to figure out what the effects
Speaker 1: of the terrorists are going to be. And he also
Speaker 1: made it very clear that what he's focused on is
Speaker 1: making sure that any rise in inflation doesn't become persistent.
Speaker 1: He really wants to keep inflation expectations in check, and
Speaker 1: one of the ways you do that is by being patient.
Speaker 5: Bill, how did you understand you don't see a weakening
Speaker 5: in the labor market, but you do have downside risks
Speaker 5: and those downside risks are growing. Can you put that
Speaker 5: together and translate it well?
Speaker 1: The way I would think about it is the payroll
Speaker 1: employment growth rate has slowed, okay, and so the keep
Speaker 1: slowing that eventually is going to be a problem. But
Speaker 1: what it hasn't happened is that labor market hasn't actually
Speaker 1: loosened up because the unplaying rates exactly where it was.
Speaker 1: So two things that have been happening together. Labor supply
Speaker 1: growth is coming down, labor demand growth is coming down.
Speaker 1: I think they're worried about the downside risk because they
Speaker 1: do see this decline in labor demand. But it's not
Speaker 1: a problem right now because the unemployment rate hasn't moved
Speaker 1: at all.
Speaker 6: Bill Dudley, Bob Michael go was on with JP Morgan
Speaker 6: and he floored me with an eighteen percent even twenty
Speaker 6: percent modeled tariff rate. The people that aren't that sophisticated,
Speaker 6: they're listening, they're watching, and they're going back the nineteen
Speaker 6: thirties with those kind of rates. Are we leading to
Speaker 6: an economy that has the kind of tensions we knew
Speaker 6: and the nineteen thirties where the have nots struggle even
Speaker 6: more with they're all in nineteen percent terriff.
Speaker 1: Right, Well, there's a big difference. In nineteen thirties. You
Speaker 1: have a depression and then you have the tariff wars. Right,
Speaker 1: this is the tariff wars, and the economy is actually doing okay.
Speaker 1: So I think you have to think of the depression
Speaker 1: as quite different because the exwood Holiac was a reaction
Speaker 1: to what was happening in the economy. I think it's
Speaker 1: actually a little bit worse in terms of the magnitude
Speaker 1: of the terror shock compared to the nineteen thirties because
Speaker 1: the share of imports of GDP was much lower than
Speaker 1: than it is now, so this is actually a more
Speaker 1: sizable shock.
Speaker 6: I'm fascinating to Bill, with your study of history, how
Speaker 6: our central bank should adapt to a blended nineteen percent tariff?
Speaker 6: Is there any template for where we're heading in twenty six?
Speaker 6: In twenty seven.
Speaker 1: You're explaining exactly why the Fed's being quite patient. We
Speaker 1: don't have a template for this kind of shock. We
Speaker 1: don't know how quickly it's going to pass through into inflation.
Speaker 1: We don't know how that's going to affect inflation expectations.
Speaker 1: We don't know how the uncertainty about the trade policy
Speaker 1: is going to affect a business fixed investment. So we're
Speaker 1: in sort of uncharted territories. And when you're in uncharted territories,
Speaker 1: you want to be very cautious, and I think that's
Speaker 1: what the FED is being at this point.
Speaker 2: Governor Waller is making a different point Bill, as you know,
Speaker 2: in a recent speech, he said a large share of
Speaker 2: tariff increases won't be passed through to consumers. He went
Speaker 2: on to say the increase would fade over the next
Speaker 2: year or so. What is it about his argument that
Speaker 2: you don't find that convincing?
Speaker 1: Putting too much weight on what's happened so far as
Speaker 1: opposed to what will ultimately happen. Most of commons believe
Speaker 1: that most terrorists get passed through to the consumer in
Speaker 1: the end. That may not happen instantaneously, but that's what
Speaker 1: has happened historically, So I'm expecting a pass through. Every
Speaker 1: one percent increase in terrorists is a percent of imports
Speaker 1: is worth about a tenthuve a percent on the price level.
Speaker 1: So if we're going from two and a half percent
Speaker 1: tariffts of imports to seventeen eighteen percent, that's about one
Speaker 1: and a half percent on the level of prices.
Speaker 5: Right now, the market's expecting that next year you're going
Speaker 5: to see a pretty big rate cutting cycle, regardless of
Speaker 5: the economic data, almost just simply because of there being
Speaker 5: a new FED chair who has a particular mandate. You
Speaker 5: can put aside the idea of whether or not you
Speaker 5: think that that's good or bad. Do you think that
Speaker 5: that will lead to higher inflation? Given the fact that
Speaker 5: right now, even if the FED remains on hold, we're
Speaker 5: talking about fifty basis points and then pushing it into
Speaker 5: next year, I.
Speaker 1: Think we should be careful not to overste date the
Speaker 1: fact that the chairman is going to change because there's
Speaker 1: twelve people on the Federal Open Market Committee, and those
Speaker 1: people aren't going to do what they think is inappropriate,
Speaker 1: so the chairman has to sort of bring along the
Speaker 1: rest of the committee. The second thing I would say is,
Speaker 1: you know, the disagreement among them in the committee isn't
Speaker 1: quite as large as people are making it to be.
Speaker 1: Pretty much everybody expects rates are going to fall over
Speaker 1: the next couple of years. It's just a question of
Speaker 1: timing and magnitude.
Speaker 5: You've been in the committee, You've been in the room
Speaker 5: for some of these FED meetings. We heard that this
Speaker 5: was one of the better meetings. That was what FED
Speaker 5: chair J Powell said, And then he thought that it
Speaker 5: was a really robust discussion. Can you translate what that means?
Speaker 1: I think what he's saying is that we're all still friends,
Speaker 1: and we're all still getting on and we respect each
Speaker 1: other's points of view, you know. So he started he
Speaker 1: started downplaying the importance of what the descents mean, and
Speaker 1: I think that's right. I don't think the des sense
Speaker 1: our big schism in terms of the monetary policy outlook.
Speaker 1: The fact is if you look at the summary of
Speaker 1: economic projections, every single respondent expects interest rates to be
Speaker 1: lower at the end of next year.
Speaker 6: You know, we've gotten through the last hour and a
Speaker 6: half here, Bill, I have to say we haven't mentioned
Speaker 6: the dots. That's a good and beautiful thing. What are
Speaker 6: the dots do forward? Given this exceptional terriff uncertainty? I
Speaker 6: don't know how, John, how do you create a dot.
Speaker 3: Got away into September? Getting around?
Speaker 6: Well?
Speaker 1: I know, but that's that's one of the problems with
Speaker 1: the summer of econmic economic projection. It's a modal forecast,
Speaker 1: but it doesn't really tell you that much about uncertainty
Speaker 1: around that forecus and the round that forecast. It's quite large.
Speaker 6: Right now, I want to interrupt the show. John, you
Speaker 6: mentioned to me megdand Decie has died in London, the
Speaker 6: giant of London School of Economics. Bill Dudley Megnum. Decide's
Speaker 6: strength was humility. What's the humility we need right now?
Speaker 6: In two Americas a boom economy and a lot of
Speaker 6: people really struggling. What's the humility our Central Bank needs?
Speaker 1: Well? I think I think Chairman Paul does have humility.
Speaker 1: I mean that precisely why he's not cutting rates today
Speaker 1: is because he's un sure and about what the economic
Speaker 1: outlook is. So he's not pre judging what's going to
Speaker 1: happen because he doesn't want to make a mistake. So
Speaker 1: I think he's showing appropriate humility as the chair of
Speaker 1: the Fed Reserve at this point.
Speaker 2: Oh, I appreciate your time. Bill Dudley, the former New
Speaker 2: York Fed president. You mentioned DESI remember that word Hubris, Yeah,
Speaker 2: And that was the name of the book, right.
Speaker 6: A fabrious book, a short, thin monograph, and what he
Speaker 6: did with general equilibrium theory does we don't need to
Speaker 6: do it now, we're too tired from the warning shows.
Speaker 6: But the answer here is humilities in order the Alarian's
Speaker 6: unknown unknowns. That's where we are right now.
Speaker 3: We've all been humboard coming out of the pandemic.
Speaker 2: A lot of consensus calls turned out to be very,
Speaker 2: very wrong, including the Federal Reserves when it came to transitory.
Speaker 2: Have they been scarred by the transitory tory? Do you
Speaker 2: think that's why they're waiting that a little bit longer
Speaker 2: this time around to move again.
Speaker 5: If you believe that they should be cutting you could
Speaker 5: make the argument that they're not. They're waiting to see
Speaker 5: more data because they got it wrong, and that is
Speaker 5: very much what we're hearing from people like Neil Data,
Speaker 5: et cetera. At the same time, the argument that inflation
Speaker 5: has remained above two percent for so many years at
Speaker 5: this point and you haven't seen it fall. If anything,
Speaker 5: it's actually firmed up, points out why this is still
Speaker 5: such a risk for the FED chair and why this
Speaker 5: is such a compelling artist.
Speaker 6: Just quickly here, you know, we've got to get to Mike.
Speaker 6: I can't say enough how I disagree with Oh, if
Speaker 6: we cut rates, it's a path to wherever. Just cut
Speaker 6: the rates once and see what happens. They can break
Speaker 6: the green spin.
Speaker 2: This is.
Speaker 6: Just to have a rate cut. Oh my god, I
Speaker 6: just in this uncertain time, just change your rules because
Speaker 6: half of America is flat on her back.
Speaker 2: I'm happy to give the Chamman some credit on one
Speaker 2: particular point. I think he navigates the descend pretty well
Speaker 2: in that news conference over the last sixty minutes.
Speaker 5: So so I love the interpretation. We're still friends and
Speaker 5: so you know, we can discuss and disagree, but everyone
Speaker 5: had well argued points of view. Look, he did navigate
Speaker 5: that well well by saying this is a time of
Speaker 5: uncertainty and certainty calls for robust debate, and that is
Speaker 5: what we had on this.
Speaker 6: Well we see that at Jackson Hole. I think we will.
Speaker 5: I think it will.
Speaker 6: It's going to be maybe one of the most interesting
Speaker 6: Jackson Holes.
Speaker 5: Out there, with a focus on the labor market, how
Speaker 5: much is changing and how you measure it in a
Speaker 5: very new world, not only with the immigration but also.
Speaker 6: With your it's going to be amazing.
Speaker 2: Woman you go around singing around Jackson Hole on a
Speaker 2: late night fish yeah, canoe save those stories for another day.
Speaker 2: It's that what's your canoeing impression?
Speaker 3: What was that? That nice?
Speaker 5: But that's he has never done.
Speaker 3: Oh you did like the water? Impret nice? I like
Speaker 3: that too.
Speaker 2: This comes from wilst Fargo just moments ago. Optionality maintained.
Speaker 2: I think that's the conclusion of a lot of people
Speaker 2: optionality maintaining going into the September meeting. Mike McKee was
Speaker 2: just in the room. It joins us right now for more. Mike,
Speaker 2: Welcome back to the show, sir. What was your big
Speaker 2: takeaway from the news conference?
Speaker 7: Optionality maintained. I mean, it's basically j Powell's goal. He
Speaker 7: maybe has disappointed the markets those who were leaning into
Speaker 7: a September cut just because we had the two descents
Speaker 7: for July and because it's going to provide more data
Speaker 7: between now and then. But Pole tried to make it
Speaker 7: clear that the data could go either way, and that's
Speaker 7: I think something that maybe people in the markets had
Speaker 7: sort of forgotten. The biggest issue for the FED is
Speaker 7: that the.
Speaker 3: Tariffs have not.
Speaker 7: Taken effect yet in large measure. We just got copper
Speaker 7: tariffs during this news conference. More are coming, so it's
Speaker 7: going to be very hard for the FED to know
Speaker 7: by September necessarily whether we're going to have a large
Speaker 7: inflation increase or not. Poll seems to think not, and
Speaker 7: he's still in the camp of those who are looking
Speaker 7: at it as a one time move. But he does
Speaker 7: seem to accept a little bit of the Waller and
Speaker 7: Bowman argument that we could see inflation rise more if
Speaker 7: people lose if they lose control of inflation expectations, and
Speaker 7: certainly the anecdotals or as we get it that companies
Speaker 7: are raising prices and consumers are noticing it and they're
Speaker 7: not happy about it.
Speaker 5: Maybe this was a meeting and operation optionality maintained, and
Speaker 5: it was a successful one. It really through the emphasis
Speaker 5: on Friday's data on the jobs report, not just necessarily
Speaker 5: the headline number, but the unemployment rate. Suddenly that becomes
Speaker 5: the most important number of the week, potentially, Mike, how
Speaker 5: much did you see a spotlight thrown on exactly that composition.
Speaker 3: Well, it's the.
Speaker 7: Unemployment rate the FED has been looking at for some
Speaker 7: time because if companies are letting people go, then you
Speaker 7: have a problem because you lose their salaries their wages,
Speaker 7: and people stop spending, and then people get afraid that
Speaker 7: they might lose their jobs too and pull back. But
Speaker 7: the thing that the FED is looking at is not
Speaker 7: so much the unemployment rate level, it's how fast it moves.
Speaker 7: A number of them have said that if we got
Speaker 7: to four and a half percent fairly quickly, which in
Speaker 7: theory could happen by September or maybe the October meeting,
Speaker 7: then they would be really concerned because that would again
Speaker 7: that a lot of companies are moving at the same time.
Speaker 7: If it inches up to four point two percent on
Speaker 7: Friday as forecast, not going to be a big concern.
Speaker 7: We'll look at the size of the labor market of
Speaker 7: the workforce, and if it inches up to four point
Speaker 7: three percent and then by September, they're not going to
Speaker 7: be overly concerned. So watch the rate of change much
Speaker 7: more than the change itself.
Speaker 2: My great work has always Thanks for dropping back again.
Speaker 2: Michael McKee there of Bloomberg with the Latest. Just got
Speaker 2: this note from a Bloomberg subscriber. I read it to you.
Speaker 2: We want to remain open to different points of views.
Speaker 2: Here the Fed likely has it wrong. High rates of
Speaker 2: feeding inflation expectations, high rates of feeding inflation expectations. People
Speaker 2: look at the cost of housing, rents and mortgages. If
Speaker 2: rates come down, so will inflation expectations, because it will
Speaker 2: unlock housing, and the housing market is most important.
Speaker 5: Well, this seems to be in tantem with what President
Speaker 5: Trump is arguing that if people feel like they could
Speaker 5: borrow more cheaply, could unlock the housing market. I'm not
Speaker 5: sure I'm totally following that aspect of it. I do
Speaker 5: think though, there is this belief that because of where
Speaker 5: bond yields are, people in particular savers, which make up
Speaker 5: an increasing proportion of the population, are getting a lot
Speaker 5: of income, and that income can go directly back into
Speaker 5: the economy. So there could be an argument there unique arguments.
Speaker 2: This is the hope potentially that maybe would unlock some supply,
Speaker 2: some supply for certain people around this table sitting on
Speaker 2: mortgages and paying two to three percent interest rates, and
Speaker 2: that certain person might be choking as week about house.
Speaker 3: I'm something of my wife. I couldn't quite keep it together.
Speaker 2: I want to talk about this equity market. Equities decline
Speaker 2: in by four tens of one percent on the SMP
Speaker 2: following the news conference. Bond yields started to shift higher.
Speaker 2: You push that through foreign exchange, and you started to
Speaker 2: get some dollar strength on the market. Jeff Rosenberg of
Speaker 2: Blackrock joins us now for more. Jeff, Welcome to the show, sir.
Speaker 2: I just want it from your perspective whether these moves
Speaker 2: tell you more about positioning than it does anything that
Speaker 2: was said in the news conference.
Speaker 8: Yeah, Jonathan, you say it often. You know, the first
Speaker 8: move is not necessarily the last move on the data.
Speaker 8: I mean, I think they're pretty consistent with the headline
Speaker 8: you talked about just a minute ago in terms of
Speaker 8: optionality preserved. I think when you look at what Powell
Speaker 8: came back to many many times was this balance of
Speaker 8: risk focus and how unique the challenges are that you
Speaker 8: have an inflation challenge and you have a labor market's
Speaker 8: challenge and the focus and we'll be back on Friday
Speaker 8: to talk about it. The focus on the unemployment rate. Remember,
Speaker 8: he also said that there's a risk inside of that
Speaker 8: that the balance that you're getting is because you're getting
Speaker 8: the offset on the supply side, but that the demand
Speaker 8: side decline was indicative of downside risk, and that to
Speaker 8: me was a little bit of a tell of if
Speaker 8: you see that scenario where the labor market balance of
Speaker 8: risk starts to move more in favor of cutting, that
Speaker 8: they'll be responsive to that. Otherwise it is this overshoot
Speaker 8: in terms of inflation. He said, at many times they're
Speaker 8: at target on the unemployment rate perspective, So the labor
Speaker 8: market's at target and you're off targeted terms of inflation,
Speaker 8: and that's what justifies the slightly modestly restrictive. But if
Speaker 8: the inflation piece moves in their favor, meaning it is transitory,
Speaker 8: the tariff impact moves through, they'll move to cut rates
Speaker 8: off of restrictiveness.
Speaker 2: Well, Jeff Pus, how long are they going to have
Speaker 2: to wait before they can make that cool because what
Speaker 2: you just said doesn't sound like September.
Speaker 8: Yeah, you know, that is the interesting part when we
Speaker 8: talk about this, you know, inflation passed through and transitory.
Speaker 8: You know, we're just starting to see in the chairman,
Speaker 8: you know, address this in the in the press conference
Speaker 8: that we're just starting to see some of the incidents
Speaker 8: in terms of tariff impacts. Now that's not broad based inflation,
Speaker 8: that's in goods inflation, and so they're going to care
Speaker 8: about the impact and the balance between services and goods,
Speaker 8: and he talked about a little bit of that of
Speaker 8: that trade off. But to your question, it is going
Speaker 8: to be a tricky environment. If if the unemployment rate
Speaker 8: stays stable here and the labor markets don't decelerate, which
Speaker 8: is Waller's concern, and inflation starts to accelerate, it's going
Speaker 8: to be hard for them to be cutting rates into
Speaker 8: that environment. Remember what he said was, you know, we
Speaker 8: believe we're modestly restrictive, but we don't know where we're at,
Speaker 8: and the data tells us, and the data is consistent
Speaker 8: with less than modestly restricted because the economy is doing
Speaker 8: well enough despite the setting of a policy rate otherwise
Speaker 8: being somewhat above their idea of where neutral is.
Speaker 5: Jeff, it seems like the feed is talking about how
Speaker 5: they engage with monetary policy in a very traditional way.
Speaker 5: It seems like the market is exploring ideas of whether
Speaker 5: the rate setting policy has served a different purpose recently.
Speaker 5: And John was having me explain something that someone sent him,
Speaker 5: and I lost my breath because I was trying so hard.
Speaker 5: But there is this idea that actually keeping rates high
Speaker 5: is inflationary in and of itself, and that because the
Speaker 5: growth and the inflation trajectory seemed to be roughly imbalanced,
Speaker 5: it is appropriate and actually the right course of action
Speaker 5: to lower rates. That's what President has been arguing. Do
Speaker 5: you see anything to suggest that monetary policy is just
Speaker 5: in a profoundly different place in this cycle and serves as
Speaker 5: a completely different function in the economy.
Speaker 8: Well, I think we have to remember that a lot
Speaker 8: of the pass through of monetary policy flows through financial conditions.
Speaker 8: You know, It's interestingly it was hardly mentioned. I think
Speaker 8: Powell mentioned it very briefly about financial conditions remain accommodative,
Speaker 8: but that a lot of the impact of monetary policy
Speaker 8: is not the direct impact into the economy in terms
Speaker 8: of credit credit rates. A lot more of that is
Speaker 8: on credit spreads. That's financial conditions and credit spreads are
Speaker 8: exceptionally tight. They're more indicative of mid expansion level than
Speaker 8: any kind of slow down concern, and that the pass
Speaker 8: through to the housing market, which was I think the
Speaker 8: question you choked on a bit was, is much more
Speaker 8: about what Powell said. It's more about term premium and
Speaker 8: things that the FED doesn't directly control. I think the
Speaker 8: bigger issue in terms of monetary policy is the financial
Speaker 8: conditions impact. And financial conditions are both about monetary policy
Speaker 8: what they directly say, but other aspects. A lot of
Speaker 8: the financial condition easing that we've seen is more about
Speaker 8: the other fiscal policy. The passage of the bill, the passage,
Speaker 8: the extension, the elimination of the risk of a big
Speaker 8: increase in taxes, and the tariff uncertainty is also a
Speaker 8: big part of the financial conditions easing. So it's not
Speaker 8: just about monetary policy directly in terms of its contribution,
Speaker 8: but the overall picture in financial conditions that creates the
Speaker 8: either easing feature that we're having right now or a
Speaker 8: tightening feature when financial conditions tightened.
Speaker 5: So to put that into a market call. Does the
Speaker 5: fact that the FED is remaining on hold give you
Speaker 5: more confidence to invest in long term treasuries with the
Speaker 5: belief that this FED is going to try to get
Speaker 5: inflation under control.
Speaker 8: I think that the longer term treasury impact has more
Speaker 8: factors associated relative to near term FED policy. I think
Speaker 8: the short term FED policy and the inflation piece is
Speaker 8: additive to the long term perspective, but it's challenged by
Speaker 8: a couple of other things. One, as you're coming into
Speaker 8: this environment after a long period of a collapse in
Speaker 8: term premium, you're having a change with respect to inflation
Speaker 8: and inflation uncertainty. That is a reflection of the post
Speaker 8: COVID environment where the pricing of an inflation term premium
Speaker 8: is resetting higher, and you have a change in the
Speaker 8: global environment in terms of the level of trade, the
Speaker 8: amount of recycling, the holding of reserves, and and finally
Speaker 8: the attractiveness of long term treasuries as a portfolio hedge.
Speaker 8: We've had a significant structural change in stockbond correlation. It's
Speaker 8: a reflection of all those factors. In particular the movement
Speaker 8: from an environment of too little inflation. We're going on
Speaker 8: six years of too much inflation relative to target, and
Speaker 8: that challenges the effectiveness of long duration as a portfolio hedge,
Speaker 8: which reduces its tractiveness. That encourages an increase in term
Speaker 8: premium changes. You know how much we want to hold
Speaker 8: long term treasuries in a portfolio as a result of
Speaker 8: all those structural changes.
Speaker 6: Jeff, forget two Americas. We got in America float once back.
Speaker 6: I think Powell talked about that today. The President talks
Speaker 6: about it each and every day. Look at the housing market.
Speaker 6: Just as one example, your Carnegie Mellon is going to
Speaker 6: take in billions and billions of dollars into western Pennsylvania
Speaker 6: to do AI. How does a central bank prosecute monetary
Speaker 6: policy given the polarization of America.
Speaker 8: Yeah, Tom, it's a frequent theme We've talked about on
Speaker 8: the shows We're together, and it's something we look at
Speaker 8: a lot. The distribution of economic outcomes matters as much
Speaker 8: as the central tendency. Unfortunately, what we heard a lot
Speaker 8: from Powell today, and it's the kind of simplification of
Speaker 8: economic statistics, is it looks at that central tendency and
Speaker 8: not the distribution, but the distribution matters. The question was
Speaker 8: raised about you know delinquency rates at the high end,
Speaker 8: which was a bit surprising. He said, I don't know
Speaker 8: what to make of that. I read that too. I
Speaker 8: read that too. I think we all did. And so
Speaker 8: those distributions matter, and I think the problem for the
Speaker 8: FED is setting the interest rate policy in the middle
Speaker 8: isn't necessarily going to solve the problems at the bottom.
Speaker 8: Powell talks a little bit about this in terms of
Speaker 8: what policy, what monetary policy is equipped to deal with,
Speaker 8: and what other policies like fiscal policy, are going to
Speaker 8: be better attuned to address some of the inconsistencies or
Speaker 8: inequities across the distribution. And that's something that FED policy
Speaker 8: is just not designed to address.
Speaker 6: Bottle it, John, That's the clearest explanation of a distributional
Speaker 6: policy I've heard so far. There's two Americas. Maybe it's
Speaker 6: like England, maybe it's like France. I don't know, but
Speaker 6: we're living it and Powell's living it in real t HF.
Speaker 2: Let's sit on the market for a couple of baits.
Speaker 2: You mentioned correlations, messy correlations. Back in April, we had
Speaker 2: risk breakdown alongside the risk free asset. The dollar didn't
Speaker 2: strengthen off the back of it, even though we had
Speaker 2: high up bond you it's how much comfort can you
Speaker 2: take in some of the developments we've seen cross asset
Speaker 2: over the last few weeks, the last month or.
Speaker 8: So, Yeah, I would say the last few weeks or so,
Speaker 8: you've seen a little bit of a return to NORMALITI
Speaker 8: stock bond correlations kind of coming back in line. It
Speaker 8: was during that period that you just referenced, that was
Speaker 8: the Liberation Day, terriff uncertainty. Around April, we saw some
Speaker 8: dramatic breakdowns in historic correlations of what you expect from
Speaker 8: traditional hedging assets, whether it be the dollar or gold
Speaker 8: or fixed income. And I think that lesson of that
Speaker 8: shock period has to be learned that a lot of
Speaker 8: these breakdowns are due to some structural changes. The biggest
Speaker 8: one of which I talked about a minute ago, and
Speaker 8: it affects fixed income dramatically, and that is this shift
Speaker 8: in environment from too little inflation to too much inflation.
Speaker 8: Where did we hear it today? We heard it today
Speaker 8: when Powell talked about the balance of risk, and that today,
Speaker 8: unlike in any prior period, the FED is challenged on
Speaker 8: both sides of its dual mandate. There's an inflation challenge
Speaker 8: and a growth or maximum employment challenge, and that tells
Speaker 8: you that the FED is more constrained. You can see
Speaker 8: the constraint. It's in the debate. You've got two dissenters
Speaker 8: differing in viewpoints of which side of the dual mandate
Speaker 8: should we focus on. But what that means for the
Speaker 8: stockbond correlation in the bond hedge is that the FED
Speaker 8: can't be as aggressively accommodative as they were in an
Speaker 8: environment where there was not this challenge on the inflation.
Speaker 8: When you had too little inflation, you could cut interest rates.
Speaker 8: It was called the divine coincidence of monetary policy. You
Speaker 8: could achieve both goals, raise inflation and support growth at
Speaker 8: the same time by cutting rates. That was the era
Speaker 8: of massive heading efficacy of fixed income. We're out of
Speaker 8: that era. Where is the hedging efficacy. It's going to
Speaker 8: be more in the short end, it's going to challenge investors.
Speaker 8: We've got to think about alternative forms of diversification, think
Speaker 8: differently about portfolio construction. But that's a structural change, and
Speaker 8: we saw it a little bit in April, kind of
Speaker 8: more recently kind of coming back when overlearn the more
Speaker 8: recent data, and it's more about recognizing the structural change
Speaker 8: that I think is going to be persistent.
Speaker 5: To be more specific and build on what John was
Speaker 5: talking about. One correlation that broke down was the idea
Speaker 5: of higher rates in the US, meaning that there would
Speaker 5: be a stronger dollar. It seems like as we do
Speaker 5: see rates go up on the heels of this press conference,
Speaker 5: we are seeing that ongoing dollar strength and as John
Speaker 5: nodded to this, partly could be a positioning thing how
Speaker 5: underweight people had gotten the dollar versus the euro. But
Speaker 5: do you think that this is a marketing point in
Speaker 5: terms of the solid, straight lined downward weaker in the
Speaker 5: dollar that we saw in the first half of the
Speaker 5: year is over.
Speaker 8: I think there is a shift, and you can look
Speaker 8: into the equity markets and into the cross section of
Speaker 8: equity markets to really see how dramatic that shift is.
Speaker 8: Certainly you see it in terms of the index performance
Speaker 8: and the recovery and new highs, but you see it
Speaker 8: underneath that the performance of cyclicals versus defensives, you know,
Speaker 8: fully recovering, but you also see it in the kind
Speaker 8: of recovery and animal spirits. The reach for risk that
Speaker 8: we see in say the outperformance of unprofitable companies in
Speaker 8: the performance that we see in quality versus high quality
Speaker 8: versus low quality companies. And so I think the shift
Speaker 8: in the macro narrative around tariffs is really reinforced around
Speaker 8: We've removed the tariff uncertainty. We're no longer trading off
Speaker 8: of tariff headlines. Yes, we have the tariff implications still
Speaker 8: in front of us, but the kind of bigger tail
Speaker 8: risk has been removed and associated with that. To get
Speaker 8: to your question, you know, you kind of return to
Speaker 8: a bit more of US exceptionalism. A lot alongside the
Speaker 8: AI trade has come back. It's recovered from the deep
Speaker 8: seek kind of draw down back in February. So a
Speaker 8: lot of these under the surface themes have come back,
Speaker 8: and one of those that is associated with it is
Speaker 8: this kind of US exceptionalism, and that's been pretty favorable
Speaker 8: for the dollar. Away from kind of the macro story
Speaker 8: around the FED, it's really some of these underlying macro themes,
Speaker 8: secular themes around AI US exceptionalism.
Speaker 2: Hey, Jeff, well framed as always, We'll see a Friday
Speaker 2: for payrolls. Appreciate your time, sir, Thank you, Thank you
Speaker 2: very much. Jeff Rosenberg there of black Rock. I think
Speaker 2: Jeff articulated things pretty well, just that he sits at
Speaker 2: a flow monster, and a lot of those flows have
Speaker 2: come back home to the United States. That's where a
Speaker 2: lot of the money's been going over the past few months.
Speaker 5: And it's not because of parsing exactly who's going to
Speaker 5: dissent on the FED and exactly what metrics they're looking at.
Speaker 5: It's because of what we're going to get in about
Speaker 5: sixteen minutes time with Amazon well Emmeta and Microsoft today
Speaker 5: and Amazon and Apple tomorrow. That has been the driver,
Speaker 5: and that's what we see. Aren't going base.
Speaker 2: Eleven trillion dollars worth of names, four names, one fifth
Speaker 2: of the market. Company s and P five hundred Big
Speaker 2: tech is a major piece of the puzzle.
Speaker 6: I'm still getting over Google's numbers. I thought they were
Speaker 6: absolutely extraordinary, and just see what you know. We'll see
Speaker 6: what we see here, John. If we stay on another hour,
Speaker 6: I think we should we'll get d x Y two
Speaker 6: one hundred. That'd be a good idea.
Speaker 3: You want to stay for another sixty.
Speaker 6: Minutes, think for another sixty minutes, explain.
Speaker 2: To the audience why like d x Y a little
Speaker 2: higher and you wrote dollar a little lower, whereas you'd
Speaker 2: like to go.
Speaker 6: Well, we're stening. Sweeney's going to Rome. I think that
Speaker 6: works out.
Speaker 2: Let's just say one fourteen is better than pushing one twenty, right, Lisa, help.
Speaker 6: Me here, because the land from England is on holiday.
Speaker 6: You and I go on vacation, which is seventy two
Speaker 6: hours if we're lucky.
Speaker 2: August and Caprias, I gave up my thirty days and
Speaker 2: I did.
Speaker 3: I'm fully American. I've been here ten years and I'm
Speaker 3: going to European. I fully embrace. I fully embrace the
Speaker 3: culture vacations. I'm off an xt y. I'm exactly summarize it.
Speaker 6: They don't have a life. Watch the x y god
Speaker 6: one hundred.
Speaker 3: The dollar is a whole lot stronger.
Speaker 2: Equity's pulling back just a touch, But this is a
Speaker 2: federal reserve that still has a bias to cut interest rates.
Speaker 2: This is a chairman, though with a bias to wait,
Speaker 2: and that's a key difference.
Speaker 5: The idea that there hasn't been a weakening in the
Speaker 5: labor market is really notable and puts him in stark
Speaker 5: contrast to Chris.
Speaker 3: Waller coming up tomorrow. Stick with Bloomberg Surveillance.
Speaker 2: We'll catch up with Chris Farona strateigas they're appan died
Speaker 2: at JP Morgan Asset Management, the former Kansas City Fed
Speaker 2: President Esther George and Ghagi Chowdhry of Black.
Speaker 3: Rock from New York City.
Speaker 2: For our audience worldwide, thank you for choosing Bloomberg TV.
Speaker 2: This was a Bloomberg Surveillance special.