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It's a special coverage of the Federal Reserve meeting. Let's start with the scores, all time highs on the S and P five hundred positive by zero zero point eight percent on the Nasdaq, at one percent on the Russell, at one point six in the bond market, a rally for most of that news conference on a two year yield to lower by six basis points to four sixty one ninety three.
So let's talk about the why.
The why is in the outlook the projections from the Federal Reserve. Growth revised higher, unemployment revised down, inflation revised up, all my maintaining the same medium dot implying three cuts in twenty twenty four. So there was a clear and obvious contradiction in the outlook and a clear and obvious question to ask in this press conference.
What gives this? Is what the chairman had to say, It doesn't mean.
What it means is that you know, we we've seen incoming. As I pointed out in my opening remarks, we did mark up our growth forecast, and so have many other forecasters. So the economy is performing well, and the inflation data came in a little bit higher as a separate matter, and I think that caused people to write up their inflation. But nonetheless we continue to make good progress on bringing inflation down.
There's two ways to interpret this, the unkind way and the kind way. The unkind way, if you're a FED Basha, you would say he wasn't prepared for that question. The kind way would be to assume that he was, and there was a message, a signal in that non onset Bramo, I have to say, I'm in the natsakamp and not the full mat.
I would agree.
I actually think that there was a message in this, because honestly, he didn't really push back on financial conditions either, and didn't really have any concrete answer. I heard a lot of words. I didn't hear some sort of answer to our financial conditions moving the economy in the wrong direction, which makes me think he's comfortable with it. He's not going to push back. This is a FED that wants
to cut rates. They still want cut rates. And when he talked about inflation coming down over time, I'll stress the overtime. This is higher inflation for a longer period of time that will be tolerated by.
This Federal reserve.
Strong growth isn't a problem. Equity markets at all time highs not a problem the feed chair. I think this is important how they've set up the perceived asymmetric policy stance of the federal reserve in the minds of so many in this market. Right now, the FET chair is signaling repeatedly he is more willing to respond to weaker growth than he is stronger growth. So even if you
project stronger growth, Bramo, it doesn't matter. He doesn't mean he's going to raise interest rates anytime off the back of that.
But week of growth, they're ready to go.
And you pointed this out. He distinguished the idea of growth that was horder from inflation as though those stories
were independent of one another. And it raises this question, are they still looking at this as a supply side driven kind of issue that caused the inflation kind of the pandemic effects and the ripple throughs that will naturally subside, which raises the question have they really done anything to inflation or is this just some sort of other type of influence that they're kind of riding and trying to give out.
You know what stood out to me as well, the story hasn't changed. When he says the story hasn't changed, yet the data has, I think the meaning of what he's saying has changed.
The meaning is different.
If you say the story hasn't changed even though inflation comes in hotter than expected, you're changing. You're sending a very different signal to the one that you were sending even a month two months ago.
And you can see that just frankly in the data that they should put out there. Their forecasts exactly are not the same. When they talk about core PCEE coming to two point six percent at the end of this year versus the expected two point four percent previously. When you talk about the growth projection increasing materially, this is a shifted kind of landscape with higher inflation and a
higher rate for longer. But they're saying the story hasn't changed, which again talks about a green light to stocks, which is exactly what we're seeing.
Let's bring in the guests with equities at old time highs. We can catch up with Bill Downley, the former New York Fed President and Bloomberg Economic senior advisor. Bill the feed Chess said, we're committed to getting inflation back to two percent. How committed did he sound in that news conference.
I think he's changed the story at all.
I think what people are a little bit flummoxed by is the fact that fedsi's stronger growth, a little bit higher inflation, yet the same number of indust rate cuts penciled in for twenty twenty four. I think the reality is it almost flipped. I mean, one more person had moved their interest rate forecast up, it would have been two rate cuts since the media and rather than three, and people probably would be interpreting this in a much
more different manner. I think, you know, Paul's confident about a couple of things. Number one, that inflation is coming down. Number two that there that the liver supply is increasing and that's creating slacking the labor market. And three ben mantary policies tight, and that's why he's confident that eventually he is going to cut rates.
Just a question of.
Timing, Bill, do you think that there's something incompatible about shifting upward a growth target, shifting upward targeted PCE for the end of the year, and even shifting up just slightly where rates are going to be, and saying the story hasn't changed. That the inflation target is still the same, it just might take a lot longer.
I think what people I think misinterpret is the Summer of Economic Projections is not a Federal Reserve forecast. It's not Powell's forecast. It's a collection of individual forecasts. And the Fed doesn't coordinate the s B. They're not trying to go out and ask people to write down certain numbers to tell a certain story.
It's just a collection of individual forecasts.
And as we see in this case, you know, one dot moves, you have a slightly different story. So I think that Powell's basic message is that the underlying story hasn't changed. We didn't completely buy into how good the inflation numbers were in the second half of the next year. We're not completely put off by the bad inflation readings in January and February.
We still think minetary policy is tight. We still think we're going.
To get more confident about getting inflation down to two percent, and so we still think we're going to cut rates this year time. He's uncertain, and you know he said over and over again it depends on the data, but.
Not all dots are created equally.
Where do you think Chairman Powell is on this story right now, because it just seems to me there is a bias to cut interest rate. Steve Raschudov and Zuhi came on this program in the last week or so and he said, this Federal Reserve wants to cut interest rates. Shaman Pale wants to cut interest rates. Is the bias to cut regardless of what the data looks like.
I wouldn't go as far as to say the bias is cut no matter what the data looks like. I mean, the Fed's still committed to trying to get inflation down to two percent. But I think what's driving Pal is the fact that he thinks that monetary policy is restricted. So if you stay at the current setting, the connie will gradually slow, and that will set the stage for less strength in the labor market, which will then motivate
cutting interest rates. That's what he's highly confident about. When he got the question to day about financial conditions, he showed no concern at all about easing and making the economy too strong. I thought that was noteworthy because in the past he's talked about financial conditions a lot. It's an important way that monetary policy gets transmitted to the real economy.
But this time he did not take the bit on financial conditions easing. And of course when he doesn't take debate on financial conditions easy, what does it do. Because financial conditions to ease more.
It's a green light to buy stocks. That's exactly what's happened in the S and P five hundred at all time highs and up another zero point eight percent. But we often hear that we're restrictive, and there are some people to come on the program and push back against that. Exactly because stocks at all time highs, credit spreads are
very tight, and unemployment is still below four percent. What do you point to if you were back on the FMC, just to demonstrate more clearly to people as to why this FMC believes we are sufficiently restrictive.
Well, first of all, the economy does seem like it's slowing.
I mean, we grew four percent in the third quarter, three something set in the fourth quarter.
It looks like we're gonna get something like two percent in the first quarter, and there are signs of weakness.
And if you look at industrial production over the last year, it's actually been down.
If you look at ours work they've been soft. So I think the economy.
I think the FED is getting enough evidence that the economy is slowing that gives them confidence that monetary policy is actually restrictive. And of course, you know, as loans mature, they get repriced at higher interest rates, and so you know, as.
Time passes, you stay at the current level of interst.
Rates, that's going to exert more restraint because it's going to drive up financing costs for a lot of smaller businesses and for consumers.
I guess I want to just sit on the whole idea, that of financial conditions and the idea that he didn't push back and that's why it's a green light to buy stocks. Is that correct in your view that this isn't something that's going to move against them in terms of allowing capital markets to really foster a lot faster growth and potentially even more inflation, like we hear from lenders themselves, even to middle market companies day after day.
I don't think it's a green light to buy stocks because it could be the wrong decision. Maybe financial conditions are making the economy too strong, and maybe they will keep inflation too high, and in that case, then the Federaliser won't cut rates, and.
Then financial conditions will will tighten.
I mean, one reason why financial conditions are as easy as they are is because the market is highly confident that the Fed's going to cut rates, not just in twenty twenty four, but also in twenty twenty five. You look at the so for a few market they have rates coming down to about three and a half percent over the next.
Couple of years. So it's that prospect of.
Rate cuts that's really providing support to the stock market and to credit spreads. You know, the market basically sees the Fed is having their back. If the e commedy weakens, the Federal cut rates. I mean, that's the other thing that came through in his remarks today. If the labor market were to weaken, the Federal Reserve would take that into account in terms of the timing of interest rate cuts.
So we don't really have to worry about the economy collapsing because of it starts to weaken significantly, the Federal Reserve will ride to the rescue with rate cuts.
I'm looking right now at FED Fund's futures and it points to yesterday a fifty seven percent chance of a June rate cut and right now it's something around sixty eight sixty nine percent chance, so increasing the expectation for a rate cut in June despite the fact that the data didn't give j. Powell any extra confidence. Some people would look at this and say, Okay, maybe they see signs of restrictiveness, although what he pointed to was the quits rate, which is the common sort of the thing
that people point to as signs of weakness. Other people would say, why the urgency is as politically motivated to get going before the election takes off, because then they could potentially be influenced even more. There is there something else weighing on the decision making process that's pushing the FED to air on the side of being a bit more dubvish and allowing this economy to run hot.
Well, I think, as he said, as inflation comes down, then the FED can focus on both sides of their dual man and not just the inflation side, but also the growth side. And so I think he Fed more and more is conscious of the fact that they they want to do enough to bring inflation down to two percent, but they don't want to overdo it inadvertently cause or recession.
So in some ways, the Fed is trying to have their taken hit it too right.
They want to ease, but not so soon that they that they run the risk of easing prematurely.
Just to go through these full costs. It's a big up with revision to GDP. December projection was one point four percent. New projection is two point one col pc eight. It goes up from two point four to two point six And I just want to get into the details of that with you.
Bill.
Constant Hunter just wrote in said why is the equity market up so much with a basically unchanged dot plot? Because productivity is expected to continue, which will allow stronger growth with little additional inflationary pressure. This scenario is good for risk. Can you talk to us about that, Bill, the relationship between stronger growth and maybe muted inflation. Inflation that doesn't climb that much off the back of a
whole economy. How important is that missing ingredient that has been missing over the previous ten years, Say that productivity that maybe we're starting to see come back through in a stronger way, I mean.
Protin It could be part of that.
We don't really know what the pro to A trend has been it was very weak during the pandemic, and that it's been very strong over the last year. I think the big thing where the FEDS taking some comfort from is the fact that the liver force growth has picked up dramatically, both because of participation rates among working age population has increased quite a bit and also immigration. So you know, the real question is how long is
that strong labor force growth going to last. If it lasts all the way through twenty twenty four, that allows the economy to grow, you know, more quickly without it generating a tighter labor market. So the growth rate of the layer force is can be a very very important factor determining exactly when the Fed can cut rates in at what growth rate.
And Bill he did mention immigration, and I really that was notable to me because we heard from Morgan Stanley's Ellen Sentner, and we also heard from Jon Hatsias at Goldman Sachs in his reports where he's talking about immigration is one of the big wild cards for why you have seen some of the wage pressure come off and participation go up, and even some of the unemployment data take a little bit higher just because some of the new members, new new migrants to this country are filing
for claims. How much is that changing the dynamic in ways that is unappreciated.
Well, I think you know what's happened is we had a very sharp restraint on labor supply during the pandemic because we weren't letting letting anybody into this country except people who are.
Coming over illegally.
And then all of a sudden, you have a ketchup for all those people that wanted to get come into the country, you know, in twenty twenty and twenty twenty one, twenty twenty two, now coming in twenty twenty three. So the real question is that just a temporary period of ketchup or do we have a sustained growth of faster labor force growth. So I think that's that's that's a wildcard for the outlook.
Frankly, hey, Bill enjoyed this fantastic catch out with this Bill Anty there, the former New York Fed President, reacting to that news conference with Chairman Powell. This afternoon, old time highs on the S and P five hundred zero point nine percent, up more than one four percentage point on the NASNAK Right now, the small CAPSNA performing positive by two point two percent on the Russell two thousand. In that news conference, Mike McKee asking a couple of questions.
He's back out of that news conference for us now, Mike, your reaction to that one, please.
Well, basically, I think Bill Dudley has it right. The chairman was trying to tell people that the situation hasn't changed, even if the FED is being more realistic, shall we say about growth and inflation?
Now?
The thing he left out is that a significant number of members of the committee did raise their inflation forecasts, and that has some implications down the road in that with only one dot needing to switch, we aren't guaranteed three this year. We could see if we get another bad inflation report. This easily flipped two dots instead of three dots. But for right now, he's saying there isn't really a change.
Bill Dudley pointed to the fact that there was no pushback to the financial conditions point, and this was notable because this is a second press conference in a row that people asked about financial conditions easing and he didn't take the bait. How much signal is there in this that essentially he is not bothered by the fact that we're seeing stocks at all time highs.
Well, the FED doesn't really worry about stock hitting all time highs, except for if there's some sort of bubble bursts that they have to deal with. They view it as just another way that people are collecting income. Now, it could be a bubble, but they're looking at the cost of doing this business. And right now what we're seeing is the prime rate is unchanged. Mortgage rates have come down, but only a little bit. Credit card rates
have actually gone up on average. Companies are still borrowing, and credit spreads have come down, but they're not borrowing as much as they were. So at this point, is it restrictive? Is it not restrictive? Financial conditions reflect what's happening in the stock market and to a lesser extent, the bond market, but not necessarily what's happening in the real economy.
Do you get the sense, Mike, that there's a bit of hurting cats here? I mean, as Bill was talking about Bill dud Layton and former New York FED president, that there is a sense it's not a collective view of what's going to happen. It's each FED member coming out with their projections and him having to cobble together a narrative about that. Is that essentially what we saw, in particular with the first answer to this question of trying to pull together all of these new pieces.
Yeah, I think the first question was one that any one of us would have asked because it was so obvious the Fed is raising its inflation forecast, it's growth forecast, and not changing. The fact that it wants to cut three times makes sense of that. I'm not sure he completely made sense of it, except for the fact, as Bill Dudley put it out, that not everybody switched their vote. We needed one more dot to move, and we could
have seen that. But they do have a problem with the dot plot in that Wall Street tends to see it as a collective forecast rather than as a collection of nineteen individual forecasts. And if you break that down, you do see what I was talking about earlier, that a significant number raised their inflation forecast, and so it probably wouldn't take much to tip us into two if
we continue to see this kind of inflation data. It was interesting though, that he gave us the Fed's core PCE reading basically thirty basis points for the month of February. We haven't got that yet, but that would suggest that inflation on a PCE basis is not excelting the same way we saw CPI and PPI.
Did and Mi niquay, thank you, sir. I appreciate it. Trying to explain what's going on that news conference. Let's just put it this way. The optic's not great when you look at the medians and the shift we've seen now relative to December.
I do like this explanation that basically it's not the sort of cabal coming up with some thesis that he can then put out there. It's him trying to pull together the different narratives. It is an interesting point that they basically leaked the core PCEE. They leaked this course sort of key metric as reason to not be more hawkish and push back against the market.
So Pittchit had this to say, the medium didn't change for twenty four but the average change by eleven basis points, and at four point eight one percent, it's closer to two cuts than it is to three. That's a kind of way of shaping things up if he wanted to frame things at a federal reserve. In fact, that it might have been a better response for the fetcham and in the news conference to explain what's going on.
Yeah, on the margins, This does shift people to have slightly less confidence, which is the reason why we're looking to potentially cut rates fewer times. We'll have more time to sift through everything and under stand whether we actually are making progress. And then everybody would have said, Okay, we've heard absolutely nothing.
The fact of the matter is he didn't go with that option, though, did heme with a different option? Excuse it away? Focused on other things, and the fact of matter is lead. So we go back to something we've talked about a million times on this program. Will the FED have the ability to respond to adverse shocks? The answer is yes, based on the communication we've had. Do they see strong growth as a problem per se? The answer is no, based on the communication we've had. So
what do you do today this afternoon? New by Stocks and you buy the front end of the curve because in the minds of Catholic economics this afternoon, based on their note, still on track for a rake cut in.
June, which is really the market's view too. You're seeing that probability increase, constance Hunter's point is well taken that what they're looking at is the hope of productivity and the hope of supply side demand for the labor market to offset some of the growth that would have come with inflation, in sort of disinflationary nirvana. We'll see if we get it.
Let's continue this conversation, Jeff Rosenberger, Black Rock is joining us now. Jeff, I just want to know what you've been in the last how you're running around the trading floor at Black Ross scream and buy stocks.
How did you respond to this one?
No, I think the main reaction is what you've been talking about in terms of the two cuts versus the three cuts. I mean, I think that's the headline for the bond market and why you're seeing such a big steepening.
And as you point out, you know, it was really much closer to a two cut scenario, but they didn't go with that at all, and neither did the neither did the market narrative, and most of what you got from Chair Powell was kind of dismissive in terms of the uptick in the inflation forecast for twenty twenty four.
He didn't even mention it in the opening statement when he got the question on it, it was just a mark to market issue, so really trying to kind of handwave around the dissonance between stronger growth, higher inflation, and no changes to cuts. But I think that issue is going to be in front of us as we watched the data, you know, play out. They gave the forecast for the inflation. They don't see any changes, but he also said we don't really know, and so I think
that'll be a little bit of longer term issue. But why you're having such a big reaction on the equity side is because the bond market is quite happy with it, and that interchange about the FED put is back will cut rates if there's any weakness in the employment picture, and risky assets love that story.
But isn't that valid? I mean, at a point where we're talking about the potential to answer some of these questions about why there's been this shift on the margins, could this mean inflation is going to stay around for a bit longer. Maybe it's okay because we want to make sure we have to stick this soft landing. I mean, those would have been clear answers. Isn't the sort of non answer signal as John and I have been talking about to basically look to that FED put as a likelihood.
Well it is, but there's a real problem with that, and the risk is that the FED has just got the read on their degree of restrictiveness fundamentally wrong. Look at the answer to the question that he gave on you know, how do you know that you're restricted? It's all looking at the labor market. How do you know that financial conditions don't matter and you cannot look at them? He pointed to the labor market. Well, most of the repair in the labor market has nothing to do with
the fed's policy. It's all supply side. And so when you look at the implications of the fed's policy and financial conditions, and Mike McKee you talked about this a little bit, I just want to amplify that it does affect the real economy because the transmission mechanism from financial conditions is through confidence, and confidence translates into demand, and so it's absolutely acting in opposite to what the FED
is intending here. And that's a tension that the FED is ignoring right now, but they ignore it at their own peril. The market is following the FED narrative, So everybody's happy with it, but the risk is that they're off and so that inflation doesn't fall as far as everyone's expecting to, and you end up having to do the opposite of what we got today, which is, uh oh, actually things are stronger. We can't cut as much as everybody expects at the opposite reaction. That's a risk for
the future time. But that's why some of this matters.
So, Jeff, this is refreshing. Let's put it that way.
Once you've identified an inconsistency like that, as a market participant, how do you position accordingly?
What do you do? What are you doing differently?
So the thing that it highlights is just the asymmetry in terms of market performance. Now, you're not going to see it releve realized until it shows up in the data, but it highlights that the fed's actions and its narrative kind of conspire to push people into the same types of trades, and so when you get the surprise on the other side that might be brewing here, I'm not saying that it is, but it creates a much larger
opposite reaction. I don't think you can position for that today, because you've got a position with the momentum, which is, hey, they're gonna cut three times, they're pretty sanguine and as it as you've seen in the equity market today, it's everybody back in the pool.
It seems as though there aren't that many people worried about inflation getting unmoored. Everyone seems to say that doesn't
seem to be the risk that we're currently facing. The Fed doesn't seem particularly worried about inflation expectations really getting out of their control, all things being equal, does that give you enough confidence to buy longer term treasuries ten year treasuries, thirty year treasuries with the conviction that the Fed will truly get inflation back down to two percent.
So, just a clarification, we're not talking about inflation going back up. We're talking about the failure of inflation to go down to two percent as fast as the FED expects it to, and therefore they can cut interest rates as fast as they need to because they are more worried about being too restrictive. So it's more about not getting as much as what the market expects than some kind of big change in terms of the inflation trajectory.
On the second part of your question, Lisa, super interesting development here, kind of more minor in terms of the headlines here, but that change to the longer run dot and what you saw on curve reaction is an attempt to try to steepen the curve. Most of the reaction is just in the front end, but you look at the back end and it was flirting with higher rates,
positive yield movements to the back end. And it is this longer run story that perhaps the landing point isn't as low as what we think it is today, isn't as low as what it was pre COVID, that the neutral rate ends up being much higher, and that the
path of aggregate cuts as much lower. And then you add on top of that a lot of the fiscal considerations in terms of the amount of debt that's being pushed into the private side and the QT that he talked about the balance sheet slowing, less support for absorbing that that challenges the back end of the curve. So I think it's still a much more challenging environment for longer dated maturity interest rates coming out of this meeting.
You put this all together, Jeff, do you feel as though this federal reserve is tacitly acknowledging that they will tolerate a higher inflation rate for a longer period of time if it's going down even very gradually to that two percent level.
Yeah, you know, I think he got he got that question explicitly, and he said it explicitly as explicit as the FED is going to be within the ambiguity of language. He said over time. He's stressed over time, And I think the interpretation of that is they're not going to be so worried about hitting two percent immediately. Now, there's a lot of gap and room for interpretation about what is the difference in calendar dates and time between immediate
and overtime. But I think it's pretty clear that the FED is not going to press on economic growth and recession for the benefit of going from three to two percent. And I think that's pretty clear where this bet is leaning.
Chef, this was awesome, ready thoughtful stuff. Thank you, sir, Jeff Rosenberg there over at black Rock. You want two moves in this equity market right now? Stocks, old time highs take another. Guess what hit a record high just months ago? A fresh old time high goat not just stocks, but gold as well. Bramo breaking out and getting back up there.
So there's one way to interpret this, which is potentially fear of inflation and then you go into gold. And then there's another version of this, which is if interest rates go down, intersparing assets are not as attractive and you can go into a hard asset. So these are two of the potential explanations people might have for gold either way, both of them taking effect exactly.
So how about both the fact of the matter is they're still entertaining interest rate cauns and maybe even inflation isn't going to reaccelerate in a profound way. That's not what Jeff Rosenberger is sent over at black Rock. Perhaps it hangs around above target Sticky.
Tomorrow special from Jonathan Farrow and being a Goldbug, the new, the one and only.
I think it's some gold bugs out there are quite happy with that news conference.
Let's put it out there, and it's been an incredible rally, and so maybe they've got it just turbocharged.
We'll continue this conversation tomorrow morning. Thank you very much for tuning into Bloomberg TV and Bloomberg Radio for our audience worldwide. What a fed news conference a green like for so many of you to carry on buying equities, your stock market at all time highs from New York.
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