Instant Reaction: Jay Powell on Fed Policy

This is a Bloomberg Savannah special. The FED decides, I think we all need to lie down after the last one hour or so. There is three steps to this. Step one except you're finished, Chairman Pale saying the policy rate is likely at its peak. Step two acknowledge the next step it's appropriate to dial back at some point this year. And step three attempt to explain the threshold to do so. Take a listen.

What do we want to see? We want to see more good data. It's not that we're looking for better data. We're looking at continuation of the good data that we've been seeing, and a good example is inflation. So we have six months of good inflation data. The question really is that six months of good inflation data is it's sending us a true signal that we are in fact on a path, sustainable path down to two percent inflation.

That's not good enough for this market. It wants to know about March March rate cuts. This is what the Chairman had to say.

Based on the meeting today, I would tell you that I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting. To identifying March as the time to do that. But that's that's to be seen.

And this is what you get in this market off the back of it all and equity market this sous off on the S and P five hundred session lows down one point two percent on the Nastak down one point five In the bond market, we had a big rally, still got a decent rally, but yields are off the loads at a session we're down seven or eight basis points on a two year, four to twenty six on a ten year down five Lisa three ninety seven eighty five.

We were supposed to hear him hug the statement, and he did. He gave this ambiguous answer to pidful necessarily anything at all. We didn't learn anything, and that was exactly what he was hoping for. And then he said the m word March, and he actually answered the question, and the market responded to that. You know, whether it's six, we shall see. But that's clearly was a signal that was not necessarily in the.

Statement a TK.

They just did not sound comfortable, or at least chairman does not sound comfortable suggesting we're cutting at a time.

See yeah, Bazarre.

I mean the clarity there was the March idea, Claudia Sawmo on Twitter saying that was the bombshell is clearly they've moved March out of the way. What an odd press conference they got one word, John Timid. The timidity here, the carefulness is extraordinary. I felt like I was looking at a Bank of Japan meeting from twenty five years ago.

There was something that didn't come up in this needs conference. I was surprised there weren't more questions about what happened in a banking system today, what happened with one particular bank, New York Community Bank, because LISTA, that's what we were talking about in anticipation of the decision for much of today.

It was such an easy question, but I guess it didn't sound very sophisticated. How much do you account that is that worried about? After in when does that become an issue that actually ends up causing you to coverrate more quickly.

The thing to be here, John, is the behavioral aspect of this meeting. These are smart people. They put it on their pants, one leg at a time, et cetera. And the answer is the timidity I heard today was just I've never heard that timidity question.

QT. Let's get the folder out, get to the right page. So far it's gone very well. We had some discussion of the balance sheet. We're planning to have an in depth discussion in March. At the beginning of that process. We see rates and a balance sheet as independent tools. They're not there yet, and I think that's the frustration with Marcus today. Chairman Power is deeply pragmatic. He's trying to go through this step by step, have a clear sequence of things. The market wants it right now, wants

Wants to know even what the criteria are. The criteria is when we decide what the criteria will be, and depending on which member I mean, the idea of the data just needs to continue to be good and then how long does it need to be good six seven.

Eight months.

I don't know. Well, she'll see And that seemed to be sort of this feeling, maybe because each member has a slightly different view as they try to gauge a really uncertain economy.

Thank you for joining us on television radio. And what we're going to do is talk to people with historical perspective about this moment as we all stagger into twenty twenty four. William Dudley out of Berkeley. I'm tenured at Goldin Sachs for years, and of course a former New York Federal Reserve President, Bloomberg Economic senior advisor. You know, Bill, I feel like I want to go and talk to Eiken Green or Brad DeLong right now out in the

I think they're so careful because things are actually going very well. If n Kyle wasn't as strong as it was, they would be much more inclined to cut rates. But since we've seen very strong growth in the fourth quarter, the Fed's aware of the fact that if they started a little bit later, it's probably not.

Going to have much consequence for the economic outlook.

The fact that financial conditions have eased over the last few months also allows the FED to be a little bit more cautious.

So I think it's really the strength of the economy. The easing of financial conditions means the Federal reserves of the view that they can be a little bit more patient.

I thought that with very interesting press conference, because up until the points that cheer Paul talked about the March meeting specifically, the market was actually taking it as March was in play, and then he explicitly took it off the table, and the Federal Fund futures contracts went from pricing in more than fifty percent probability of a rate cut in March two significantly less. So I think that

They talked about it today. They're going to have an in depth staff in March, so I think we.

Could expect quantity of tightening deeper and to happen sometimes, you know, probably around the first half of this year.

Bill lets unpack some of that. I gets to QT in a moment. I just want to talk about these strategic ambiguity. So in the statement, this is what they said. The Committee does not expect it will be appropriate to reduce the target range until it has grained greater confidence that inflation is moving sustainably towards two percent. So obviously, our former colleague, good friend Jidis Smilek of the New York Times, first question out of the gate wants to

I think what he wants to see is more of the same. I think that's basically what he said. I think they're a little bit of concern that maybe the really good inflation news that we're seeing is a little bit about goods price weakness and that that may ultimately fade away, so that there might be a little bit

Bill, do you think that it was a mistake for freed Shair Powell to say that March was not on the table.

I don't think it's off completely off the table.

All he said was, we don't think I don't think at the current point that will be confident enough in March.

But you know, we economic data better inflation is than.

He made evident by the time we get to March, and March meeting is still a ways off, so you know, his degree of confidence could change between.

Now and then.

Bill Dudley, I look at some of the criticisms here that they're on trend of disinflation. Jason Firman up at Harvard has a wonderful blending of annualized vectors and such. Which vector do you use if they're on the vector, when do they start? What's the Dudley vector where you measure our disinflation?

Well, I think that I think we're still in a very tricky period because we had lots of good inslation during the pandemic, then we opened up the economy that goods of inflation went away. In fact, we're actually getting goods deflation now. And the cual question is how long will that good goods deflation last? Because if it ends, then inflation pressures could actually start to be more evident.

Again, I was saying that as the fact.

That services inflation should also come down as wage games become less more modest, and I think the Employment Cost Index report today was a positive reading that wage trends are becoming more consistent with two percent underlying inflation.

Bill you mentioned QT, can we just finish that with you. Did you get the sense from the chairman that he wants to end QT before he starts to reduce interest rights, or that we can see those two things play out independently.

I think they're completely independent. Ending QT is not about, you know, loosening monetary policy.

It's about basically getting the level of reserves and banking system down to a level that's low as low as possible without the reserve level actually affecting interest rates. So this is totally independent of the decision about whether you want to make Montet policy more accommodative.

This is based on the bank's demand.

For reserves, and the Fed's trying to estimate what that demand is, and they want to make sure that there's enough reserves in the banking system, but not too much. So they want to have a cushion over the banks underlying demand for reserves, and they're going to try to make you know, they're going to do the taper to make sure that they approach approach that place very very carefully.

Bill, are you surprised that nobody asked about New York Community Bank? And how would you have responded to a question about how that factors into the FED decision making process in the next few months.

I think the FED is not that worried about some of the banking issues.

Because I think that they're really banked by bank now, and I think this is all happening.

In plain sight. This is not like the Great Financial crisis.

Where you really couldn't evaluate the situation for individual banks.

Right now you can sort of see what's happening to banks and that interest margin.

You can see what's happening to the losses on their securities portfolio. You can see what kind of earns pressure they're under. So I don't think the FED views the banking system issue as very important right now. Now that could that change, could something great. And I think the other thing that makes them a little bit more confident about this is long term interest rates.

Have come down.

We peaked ten year treasure you'll peaked around five percent, now around four percent, and so that pressure on banks that took a lot of interest rate risks, they're still under pressure, but that pressure is less than it was a year.

Ago going forward. I am curious about J. Powell and the March discussion. He didn't hug the statement precisely the way that Rich Clarida suggested that maybe he ought to.

Do.

You think that this is actually a sign of how there is J. Powell the man and J Powell the herder of cats that is the FED Committee. I mean, is how much is that basically what we're seeing.

I don't think he really parted from the statement in any meaningful way. I think he just gave a little bit more nuanced to what the Fed, how the FED thinking is evolving. Obviously, the statement is pretty short and pretty concise, and the Fed is very careful about the changes that they make in the statement, and obviously in the press conference you can't be quite the precise.

So I thought he tracked the statement quite well.

But what you're thinking, June Coup, what's you feel now?

I've been thinking May and I don't see any reason to James that.

May Bill Dubby, thank you, sir, forming New York Fed President.

Take care.

We've got an answer. He's thinking, Mike, you got to the answer.

You on the answer for mister poul in March too.

The market move on March.

Let's get to that market, Maye right now? Could he's put him back by one point four percent on the S and P five hundred. The Nastack is lower as well. Tech earnings were let's say, under yesterday after the close. More tech earnings to come tomorrow, Amazon, Meta, Apple still to come Thursday after the close. The Nasdaq is down by one point seven percent. I've missed you small CAFs

Basically, what you're seeing is the market is now pricing in a thirty eight percent chance of a March rate cut, down from almost a sixty percent chance of a rate cut come just before this press conference. The market adjusted will at last we shall see tomorrow shall be a whole news story. It seems like the feathers being somewhat consistent toward that may kind of timeline, which is the reason why I've got ninety one percent chance currently price.

What was interesting, and we haven't talked about it yet, it's just how comfortable he would be with decent growth, strong growth. I think it's a change. You go back to the Jackson Hole Symposium of what was it twenty twenty two in August, pain pain, pain, pain, and now we say basically, strength is okay, we something we have to work against.

This is basically the FED not necessarily saying victory, but saying we could get victory and we're not going to get in the way of it.

Right.

I mean, how much is this a sort of acceptance of this concept that disinflation is good, regardless of whether the strength might suggest that, you know, it could be a problem.

I'll be quicker. I know you want to get to Mike McHugh was in the press conference to me, the huge overlay here is got fear by monitorist monetary economics people about getting this wrong. Were Willie Pessick and Forbes used to righte now Denberg nailed it. Willie Pessick wrote it on the Bankageapan and I'm sorry. They are scared stiff of getting this wrong.

They want to see more day at home. I'm totally with you. You can see they're uncomfortable. Chairman, how ultimately is still concerned that inflation stabilizes above tar Kit for him, that still seems to be a risk.

It's a risk for all the people who we speak to as well, especially with that strength. What's the bigger fear, though, and this I think is different. Is it that inflation reaccelerates or is it that they do serious damage to a labor market that seems to be in a good place, And that to me seems definitely more balanced.

Mike McKay with us now he was in the news conference, Mike McKay, fantastic work as always, sir. What was your big takeaway Mike from that presser?

Well, basically, the Fed has gone to where the market wanted it to be, but they didn't go farther. As you were talking about, they're not giving us a timetable yet but leaving enough ambiguity that you can try to figure it out on your own. Basically, may comes into the equation then, because by that time they'll have three more PCE inflation data releases and they'll have a pretty good idea of whether or not we're going to be able to maintain this in the two percent range inflation level.

Mike, he were in the room, so you've got a better sense of this than us. I found guarded at times very scripted. At least it talked about that form of FED Vice chair Richard Kntra talked about that as well in anticipation of the news conference. But did you get the sense that March comment was unscripted, that was off the cuff, that was from the chairman directly.

No.

I think that basically he went in ready to say that, probably didn't want to unless he had to, because they never like to put a time frame on anything. But you'll get just one more PCE report before that time, and that's probably not going to be enough for them. So it was It wasn't that he couldn't say it. It's I think he didn't want to, but was asked directly about it.

So did Mike with leguard in the ECB, we parse the hawks, We know who the hawks are. Who are the hawks pushing against Powell's dubbishness? Who are who are the people out there Bush Caffidy? Who are those guys out there that are hawks right now?

Well, we know that Mickey Bowman has been a hawk and Lorettamester have been a hawk. But they both have said that they don't necessarily think we're going to need interest rates to rise anymore. So they've at least come to the neutral zone. The question is will they accept the idea of rake cuts, And I suspect that's going to.

Depend on the data between.

Now and the March meeting, now and the and the May meeting. At some point you have to go with what the data are telling you, even if you were afraid that you were going to have to raise rates earlier.

Are you surprised, Mike that no one asked about the New York Community Bank issue and how much they do have confidence the regional banks truly are in a good spot.

Well, I think the fact that they took the strength of the banking system part out of the statement was a mere coincidence because the statement would have been drafted yesterday and circulated among them, and of course they didn't know anything about your community Bank at that point. But I think the reason that didn't really come up is because think about what happened to New York Community Bank. They lost money in a quarter, and stock investors jumped

I might thanks for the update. Great work Mi McKay out there down in Washington, d C. Just coming down down these conference with Sham and Powell. E could he say K in this session? I was down about one point five percent on S and.

P got greater confidence that Microsoft hit a yearly high yesterday. You know, the market's off and I really don't know what to think about it. The real yield came back nicely, gyrating off the nominal ten year yields three point nine nine percent. To me and Lista, this goes to your concern over the banking system and other properties in New York City. They're really coming under you know, individual properties coming under pressure. The fact is that ten year yields

Although to me it seems like he wasn't that concerned about that much. To be completely honest, it's just that he didn't want to get it wrong, and he didn't want to get it wrong on either side, but certainly with the strength also, as you pointed out, the fact that he did indicate that March was off the table despite some of the signs that people were using to justify it was significant for the market and is the reason why we're seeing.

The market move on that we talk he manages money joining us now. Jeffrey Rosenberg from Blackrack really really interesting here on whither and forward? How does your view adjust. Jeff, I was thunderstruck by the timidity, the massive almost comedy on the word data. You got to go out and run a portfolio. How do you do that given what we observe today?

So, Tom, you're talking about the timidity, and it's in the context where the last two meetings was the opposite from the chairman.

There was a lot of confidence.

Yeah, I characterize it as a little bit of a victory lap. He leaned into the positivity, he leaned into the good news. And here I think it began with the statement. The inclusion of the of the new language around needing to have greater confidence was the sign that they're going to push back a bit against market expectations, and it carried over into the press conference.

Wasn't clear whether that would happen.

It clearly did happen, and it's capped off with his headline that is absolutely the headline takeaway, which is the pushback,

Going to be necessary to get that inflation down.

So it's the risk of losing financial conditions and markets are just primed for the big green light to go out and back up the truck, and obviously they're disappointed on that today.

I think that's a little bit purposeful and.

Jeff Rozenberg Jason Furman up at Harvard Teaching X ten with my tweet of the day. I love his single sentence observation. I feel like I could be confident enough after two more jobs CPI prints, may I suggest that Friday at eight thirty we and the chairman will readjust.

Yeah.

I mean, look, he wants to delay here, and there was something that he said that I think hasn't been picked up on, which is the decision to begin cutting is of great consequence. And then he also said earlier because of that or because of that concern, there's no need to rush. So waiting for more data and kind of the pushback on what more data do you need isn't really the story here. I don't think they need more data He kind of said that we have confidence.

We just want even more confidence.

I really think it's they don't want to rush into it. Jonathan Vero, you asked me after the last payrolls, you know what is my expectation? I said, you know, June, mainly because I don't see the rush here. And I think that's the stories. It may is a June, it's not March. It's pushing back. Is they don't want to rush into a cutting cycle.

You said something really interesting there, Jeff, This idea of financial conditions being a concern that they see the sort of golden pathway and they want to get there so bad that they don't want to disrupt it by giving any more fuel to this market. Do you get that sense just in general that if things sort of say subdued for a bit longer, that'll actually make it easier for the FED to cut sooner.

Well, the thing that will make it easier for the Fed to cut sooner, and I think Bill Dudley highlighted this is is that the problem is that there's a little bit too much good news on the on the economic growth side and the labor market side. If they had some weakening that would make it much easier to say now we need to cut. It's hard to say you need to cut, and we'll talk about this on

A greater focus.

Which is which is on the growth side? Like where is the restrictiveness of this policy that you're so confident every time you say policies is restrictive.

Is it really is as restrictive as we think?

Steve Leison Olways has some smart questions. John Ferrell, let's go to the statistics for Friday. I got one hundred and eighty five thousand on survey non firm payrolls. I got an unemployment rate of three point eight percent. That may have a little bit to do with there, Timid.

Yeah, that's ink. That speaks to their nervousness. So Jeff, let's finish on this data. Still looks okay. Payrolls might change that on Friday for you right now in this market, putting money to work. What are you about for counting for.

You know, I think there's a lot of hemming and haweing today tomorrow around the timing of when do they go. But I think if you take a step back from this inside baseball story, the broader story is the FED has won the battle on inflation. Not totally certain you know where we settle in there, but certainly they can begin a cutting cycle. And the growth side is much more positive than what we had thought, particularly when we thought that interest rate sensitivity was going to be greater

Something I think we have to keep an eye on.

But you look at the corporate side, you look at the consumer side, it's very strong, and the credit markets here I think are strong. There's not a huge price appreciation opportunity, but I think the yield opportunity that you can capture there without the risk of the downside of inflation.

Sorry of recession is still the story here.

Hey Jeff, thank you sir. I know we're going to do this again late this week, so we see a Friday after payrolls Jeff Roisenberg there at black Rock, thank you, buddy. Equity's in a session. Loves were down one point five percent on ESMP, with Dan Hart on the NATSNAK as well t can the bond market. The move fights just a little bit yield to lower my eight basis points. At the front end of the caf.

Use for the tech juggernaut, you mentioned that John got Amazon, I believe in Apple tomorrow, maybe Facebook, And the answer is, uh, you know, we're gonna We're gonna get some tech earning, some tech joy. But Lisa, I'm sorry to Jason Furman's comment here, the jobs report on Friday has a new importance.

So maybe if it gets strong enough, then everybody will go back to maybe you know, going to June. And if.

I confuse him with Jason Furman as well, yeah, I did see Jeff rosenback.

No, I'm talking about Jason jobs matter.

I confused.

They look the same, look the same.

I'm going to suggest John support it is now really important.

Not all economists like the same, John, we should do this again.

How much you have to wake up earlier, talk to people