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Fed Decision with Mi McKay.
It's fifty and the promise of another fifty basis points and cuts by the end of the year, and another one hundred basis points in twenty twenty five, which would put the nation's benchmark rate at three point four percent. It's projected to fall another fifty basis points in twenty twenty six, which would put the rate at two point nine percent, which is now the Fed's median forecast for the neutral rate. That is up a tenth from June. The consensus is GDP will rise two percent this year,
down a tenth from the June forecast. Growth will be the same in twenty five and twenty six. Unemployment will hit four point four percent this year, that's an increase from the June figure. It will fall to four point three percent in twenty twenty six. PCEE inflation of two point three percent this year falls to two point one next year and hits the two percent target in twenty
twenty six. Though inflation remains quote somewhat elevated. The statement says they cut because they now have greater confidence inflation is moving sustainably toward their two percent target, and the risks to inflation and the labor market are roughly balanced.
While they do not explain why they decided on a half point reduction, the statement says the Committee is strongly committed to supporting maximum employment and remember in Jackson Hole, Chairman Poll said any deterioration in the labor market would be unwelcome. There was one descent from Governor Mickey Bowman. It's the first descent by a FED governor since two and five. It is the first ascent by any member
of the Committee since twenty twenty two. The statement adjusted to say the Committee will as always carefully assess incoming data. Quote in considering additional adjustments. There's no changes guys to the QT portion over Fed's pause.
My McKee stay closed, will come back to you. Here's the price sanction in response to it. Knee jerk reaction is the first move might not stick, but this is the move so far. By eight tens of one percent on the S and P five hundred, the overwhelming out performance on a russell the small caps now up by one point seven percent in the bond market, just bear in mind we've come a long long way and we've
priced in a lot to this yield curve. The two year just climbing just a little bit to one change the three point sixty at the moment at the front end of the yield curve and in the FX market, dolly and dropping back by about point seven percent. So that's a weaker dollar, a stronger japanesey and Lisa forty one on that currency pair.
Yeah, now over the Bank of Japan. And if they hike how much does that divergence continue. I also want to point out gold. You're seeing a bid into gold right now we start to look for some of the inflation proxies, So will this sort of feed into that idea? I thought it was interesting the long end of the yeld curve, just on the margins not significantly yields to slightly up on this idea that they're going to go bigger and potentially even more down the line.
So the media and dock can master some disagreement beneath the surface. So let's talk about the range and not just the median at the f WEBC the median dot for twenty twenty five in the projection materials that were just published is three point four percent. The range for twenty twenty five is anywhere from two point nine to four point one. Two point nine to four point one.
That's quite a range on this f WEBC. And I think for the first time at a long time, we have some descent playing gap publicly as well, the first descent from a sitting governor on the f WEBC since two thousand and five.
This was not a unanimous decision, and it.
Really highlights why this actually became such a knife edge kind of decision. Just to add to that, ten officials penciled in one hundred basis points or more of cuts for this year. Nine officials penciled in seventy five basis points or less for this year. It actually matters quite a bit for market expectations, especially given some of the policy uncertainty next year.
So TK we get fifty, we get fifty, and now we're waiting for the next act as a news conference in twenty six minutes time.
I think it's a surprise within the zeitgeist. This is to the edge of surprise. I think Powell maybe alluded to this with this enthusiasms at Jackson. Oh, you touched on something. Jason Furman touched on this morning, which is, don't forget the dollar, and Muhammad Larian, I'm going to be as direct as I can. It's the great unknown unknown here, a dollar weakness that anybody with our great hair doesn't know.
That we may not know. I think we've seen it before. I remember, I remember periods of dollar weakness. But it is dollar weakness. This is not just a fifty basis point cut. This is the Duvish fifty bass point cut. Well, I mean, if now I agree with you John that the Duvish pot comes from the median dots. But if you look at the range, it doesn't look at douvies. But that's not what the mark is going to hit.
The mark is going to look at the median dot, and we'll interpret this as a Douvish fifty basis points scut. And the first reaction was actually steepening of both two stands and twos thirties, which tells you something about what people are worried about.
To some extent, this median dot validates market pricing and cut again to this decision.
Is that sufficient?
I'm looking at equity market reaction right now, we're up by half of one percent. We've still got a news conference, a question we've asked for the last several weeks into this. Are we going to end up with disappointment on the other side of this news conference with Chairman Powell?
What would your question be now?
So, first of all, normally he's more dubvish than the statement, so that's going to be pretty hard to do this time.
But let's wait.
You know, my question will be what has changed since July when you decided not to cut weights and now there's this very aggressive cut and aggressive signaling.
What has changed The speech in CenTra Portugal at the start of summer very different to what we're hearing from the FMC just several months later. Joining us now to discuss is Bob Michael, a JP Morgan Asset Management. He joins us out of London this afternoon. Bob, we just won your first impression to the decision. What do you make of it?
It hit on pretty much everything we were looking for, probably a little less dubvish than we thought. In two instances, one there was a just so it was in a slam dunk and we would have liked to have seen the median dot for the end of next year somewhere around two and three quarters to three percent. But otherwise, as we had been guided over the last week, nothing to quibble about.
Bob, which bond series or individual bond provides the most information right now?
Is it a real yield?
Is it the nominal full faith and credit? What's the most valued, Abob Michael? Right now?
Credit spreads? Credit spreads will tell us whether investors believe the economy is in die or shape and this was an emergency fifty basis point cut, or whether this is just a fed a long way from neutral, perhaps as Muhammad hit it a meeting or two away from where they should have started the cycle, so they're starting to get towards neutral.
All is well, okay, all as well? And yet we saw earlier this morning was an increase in mortgage applications. What we've seen is already the bond market pricing in all of this and then some. And basically the statement
only encourages that even more. Do not see a risk of potentially reignited inflation Moob, that we could potentially see expressed in the long end, as Muhammad is mentioning, we are seeing that yield curve steepening in a way that hints that something else is amiss, especially impaired with gold.
WHOA, We're a long way away from that. We're looking at the three month annualized rate of core PCE running at one point seven percent, so that's not inflationary. There's signs of disinflation everywhere. When you look at the labor market. They talked about full employment, well the low and unemployment was three point four percent. A couple months ago was four point three percent. That's up nine tenths of a percent. You only see that when there's threat of recession. That's
characteristic of that. They've highlighted to us that the neutral Fed funds rate is somewhere around three percent. That's a debate we could have for a long time, but it's nowhere near five and a quarter five and a half percent, so they can start taking pressure off of businesses and households without reigniting inflation.
Bob, I know they call you Bob Michael, but you told me earlier was Bob Michelle's I'm going to stick to Bob Michelle. Bob Smith.
I came to London because I thought we were going to QPR Millwall on Saturday. Now you're in New York on me.
I am.
I'll be in London tomorrow, So Bob speak a little bit to the revisions and their projections and particularly unemployment. What do you make of that?
I didn't catch them.
What did they do? They pushed it up?
Yeah, I think they have to. I think they have to acknowledge that we're at a challenging time, that there are new entrants to the labor market, but those are still unemployed US workers, and they have to acknowledge that we're not below four percent anymore. We're heading a little bit higher. And that's why you need the policy response to start with fifty basis points. I'm okay with that.
Yeah, but Bob, but I think we've got to talk about this a little bit more. And I'm pleased we went to unemployment. Unemployment right now in America is at four point two percent. These are the FETs projections out in twenty twenty four year end out to twenty five and beyond, they've got projections of four point four percent. The medium projection for unemployment this year. Next year, they've
got it at four point four percent. Given the move we've seen over the last twelve months, Bob, how aspirational is that?
How realistic?
Is it that we just kind of pause around these levels for the next eighteen months.
Well, we very well could. I if we get two twenty five's over the next two meetings and we bring rates down one hundred basis points. What we know is there's still a shortage of housing. There are first time home buyers queued up to buy homes, so bringing rates down could bring those buyers into the market. We also know that a lot of businesses don't fund themselves in the public bond market. They fund themselves through bank loans,
through private credit. Those are floating rate loans. Those are anywhere starting with SOFA at five and three eighty percent. You take one hundred basis points off of that. That could help to stabilize things as well. Just because unemployment has headed up over the last year doesn't mean it has to keep going. It can certainly flatten out here if the Fed does its job.
Hey, Bob, appreciate catching up as always, Bob Michael There of JP Morganes and management, there's a couple of moves in this market that I think are very very interesting. We've just gone fifty and in some ways the dot plot is validating what we were pricing in this market ahead of time as well. And what you're saying at the long end is the long bond sell off and yields climb by two basis points. It's not a big move, but it's notable by two on tens, on thirties, we're
up by three. And at the same time we've got gold at all time highs. What is this market sniffing out, Well.
It's sniffing out on the margins a greater inflationary risks than otherwise priced in. Look, I can make an argument about how it might mean that we're going to suddenly get run away into somebody style inflation. That's not what it's saying. But what it is saying is that on the margins, the idea of a bigger and frankly a Dubvish fifty basis point rate cut really highlights how inflation is still back on the table, at least on the margins.
They're talking about a dual mandate imbalance. Mohammed, your impression is that it's a single man date central bank now, and you don't think we should take our eyes off the other side of the mandate in the market. Speaking to that, just on the margin, this afternoon.
I think at the margin, yes, but I do think that this is the reaction of a single mandate FED right now, especially if you believe two percent is your inflation target.
Let's cross Ouf it's a Diian swamp and bring her in a KPMG. Dan, we'd love your thoughts on the decision and that we can get into the nuances. What do you make of the fifty instead of the twenty five.
This was a huge victory for j Powell, who really laid out at his Jackson Hall speech that he was worried about employment and that is what this is about. And Mickey Bowman doing a discent. Powell willing to take a descent among the board members as opposed to among a president. That is how much he wanted this half percent rate cut. And I think that's very important. I think you're going to see it. Couch and explained within the context of several participants at the July meeting thought
they were ready to go ahead and cut. So this is a bit of a catch up to that, and so that should help temper a little bit this Duvish read on it. I was surprised that they kept the risk balanced, although clearly the focus is now unemployment and not allowing the situation and employment to become much worse. Remember, we're at one hundred and sixteen thousand payroll gains three month moving average as of August. That's not statistically different
from zero. Combined with the downward revisions we saw on August twenty first, the day before Powell gave his remarks at Jackson Hole, those downward revisions record downward revisions. Even if they're not as as large as they appeared because of some immigration that we're not capturing, they're still large.
And it means the birth and death rate, the death rate of firms has picked up and their small businesses aren't hiring as much as well, which could mean actually the payroll data for this year also gets revised down. And that's what they're worried about.
Dan, your workout on LinkedIn has been just hugely beneficial, a really holistic view of the US economy. I have a Dow Jones industrial leavage, bottom of the pandemic up one hundred and twenty eight percent twenty one percent per year. I've got debt and deficit that hal Bronner and Bernstein never dreamed of. Diane Swank Is this a FED just dealing with our stimuli? Is this a FED just dealing with debt and deficit to the sky.
You know, we've had everything you could possibly imagine pushed up inflation, and now we're seeing it come down despite the fact that we still have a lot of debt. So you know that on the margin, yes, we do have high debts, and I do believe we need to deal with that at some point in time, and I don't think we have anyone who's willing to talk about it on either side of the aisle, which is another issue.
We can talk about that at a later date. But right now we've got a federal reserve that's no longer buying that debt, and you've got a federal reserve that is seeing inflation come down despite the fact that we have high debt. And that's because on the margin, after we get past the sort of six months that we put a whole year budget into from March into October, first, you get a continuing resolution at best through your end,
and you're going to get more constraints on spending. I think as we get into twenty twenty five, Diane.
One reason why this comes as a surprise this decision. One reason why is because they could have telegraphed this more carefully. There was no data that really moved the needle between the time when the quiet period began and now that would chip us toward fifty Why do you think there wasn't more clue communication that this was a Federal Reserve ready to cut rates by fifty basis points.
Well, Frankly, I don't think that Jay Powell, by the time the blackout period hit had the votes in his pocket to be able to do that, and I think we saw that in some of the mixed messages. Even the day of the blackout period, Chris Waller, governor on the Federal Reserve, had said, you know, you'd be open to a more aggressive rate cut, but he didn't seem
to be really ready to do it. In September, we saw John Williams come out that same day and sort of talking about more cautious rate cuts, more of a quarter point kind of rate cuts. So they didn't telegraph it because he hadn't crowded the cats. But this really does speak to the fact that he does have an extraordinary ability to actually do just that.
Let's get to this quote from no data of Runmack just down at the moment.
Here's the issue.
The balance of risks have changed and June most saret balanced risk to un employment. Right now this is completely flipped mostly risk to one employed skews to the upside. This will not be the last time we see a fifty in our opinion, Lacy, your thoughts.
This is basically being priced into this year. I mean, how else do they get to more than one hundred basis points potentially by the end of this year. And if you think about it, it raises a lot of questions about what they are seeing that suddenly makes that such a consensus. Given that we've gotten a lot of mixed messaging.
Let's head back to London and catch up with Bob Michael at JPMorgan Asset Management. Bob, I'm sitting there in cash. I've been sat here for a long time. You've been wanting me for a long time that I face real reinvestment risk. The fence just cut fifty and I'm freaking out.
I give you a call.
I'm now worried about another fifty and maybe another fifty after that. What are you buying on my behalf?
We're telling clients just get into the bond market. Just get into a general bond fund. It could be an aggregate investment grade bond fund, could be a core plus bond fund. If you're in a high tax bracket, get into a general municipal bond fund. Yields are coming down. Yields are at this level with six point three trillion dollars in cash building up and most people not liking
the bond market. Some buying has brought it down here, and this money will come in because they're going to watch the return on cash go down like power windows.
I got to say, Muhammad, this goes to the point that you were making. I love your comments on this, this idea that the Fed was seeing something that ndeim shifts his view, and what we're seeing right now is
that maybe he just didn't have the votes. I'm just trying to wrap my head around what that means going forward, that maybe they're going to be even more aggressive than the market previously thought, and that maybe it is appropriate to price in even more spread compression, even more yields going lower.
So it would not surprise me if that is the market reaction. It would not surprise me at all, because the market has been conditioned to ask for more and more and gets more and more. So when't surprise me if that, If that is what happens, I will go back to the significant dispersion in people in FMC members view as to what the destination looks like, and that discussion has got to be reconciled over time. So I don't think it is as clear cut as the market will make it seem.
Diane Swarck, I got eight ways to go here. Let's try this. You've got a wonderful reading of America away from three zip codes in Manhattan, the quadrants of Washington, DC. This rate cut, how does it affect America that are not the elites, not the people enjoying Nvidia to the moon.
Well, this is really important because the rate cuts, the short term rate cuts, are what comes through on loans that consumers take out. This is beyond the mortgage rate situation. This also helps the mortgage rate situation obviously, but the real issue for consumers are short term interest rates and how they are priced on their debt. Now, on the credit cards, the average credit card rate is about twenty five percent. This is a rounding era on that. It's
not going to help a lot on that. That's just incredible how high those rates are. But when you get into auto loans, when you get into other kinds of loans that consumers take in businesses, middle market through small businesses, it affects all those loans. And right now you can imagine a lot of people are going to get some relief in terms of that. Now, the good news is there's not a lot of overhang of debt for consumers
and they can service the debt they've got. But for those lower income households that have already exhausted all of their savings and then some this is good news. They rely on lower rates to buy used vehicles. They can't even afford to buy new vehicles anymore. That goes right up into middle income households. So that's where we'll see some movement, but it's not immediate. You're not going to
see that. Also understands there's legs and I think Muhammad Muhammad is right about the issue of the market front running. When the real message here is that this was not signaling that we're ready to cut cut, cut, cut, This is a window of opportunity to cut now catch up on July, that's important, But this isn't a signal that they're ready to go half percent, half percent, half percent
sort of continuously. And the election is an uncertainty that is not factoring into the decision today, but it is an uncertainty in terms of policy for twenty twenty five and twenty twenty six, and that could change the trajectory for the Federal Reserve once that cloud of uncertainty regarding the election outcome in you as is lifted.
I could not agree more.
Dan, just one of the best, as always a clinic Dane swamp there of KPMG November seventh could be a very very different meeting if you are just joining us, Welcome to the program. Twenty five or fifty. We got
fifty from this Federal Reserve. The outlook unclear. Ten out of nineteen officials favoring learning interest rates by at least an additional half point over the remaining two meetings of twenty twenty four, and the next meeting in twenty twenty four could be very interesting if we do indeed have in hand the outcome of the presidential election. Mattas eerdiodoutsche Bank joins us now for more. Matt, your first reaction to this one place, sir, we get fifty.
Yeah, I think it's all about the messaging that we hear from Chair Powell about the reaction function as we look ahead, you know, as we were thinking through. If they go by fifty basis points, what does the communications challenge for them? I think it's two things. One, they have to project confidence in the economy, positivity in the economy, so they avoid a negative confidence signal. And then two, I think that they want to send a signal that this is not the new norm, that they're going to
be ratcheting down at twenty five basis point increments. And as I look at that dot plot and the skew for this year, it does seem that there's a pretty strong kind of consensus around going twenty five basis points from here. I think eighteen out of nineteen dots showed only an expectation of two more twenty five basis point rate cuts are less, and so I think Powell can
paint this as a one off. It was meant to right size monetary policy to a lower inflation environment, ensure that the real rate deprize too much, and to really show that kind of actions speak louder than words in providing confidence on the soft lanning, Matt.
Lozzetti, The ten year real yield just printed below one point five zero to mean, that's a huge signal coming out of the pandemic. What does a diminished real yield do for American business, American finance and investment.
Look, I think we should expect that the goal of this is to keep financial conditions easy, to ensure that financial conditions don't overtighten and put a soft landing in jeopardy. That is ultimately the legacy of chair Pal and I think that he took out some insurance against that. Today. I think that's a good outcome for the economy. Hopefully he can message it in that way, which is they have a positive outlook. This is not the starting of
a fifty basis point cutting cycle. And I think if you get that soft lanning, prospects improve financial conditions ease, and we have a very good outcome for the economy.
Matt.
One of the stickiest areas of inflation has been a housing market, and what we've seen there has been recently an uptick in mortgage applications as well as just in general some of the Homelander stocks. How quickly could you see a transition from a market that is completely flat on its back, not shifting around moving at all, to one that is robustly priced, discovering to the upside with people given renewed confidence by lower rates.
Yeah, you know, we got mortgage purchase applications this morning and they did show a tick up, more driven by refinancing activity than purchase activity. It does seem to be lagging a little bit to move in the mortgage rates
so far. My own view is, I think that's driven by when you look at the University of Michigan or Conference Board, so many consumers expect rates to come down over the next year, and so that has to happen, and maybe as rate cuts happen, and as mortgage rates fall further, that really does unleash activity in the housing market that would present upside risks for the economy. You know, I think the reality is Q two growth was three percent.
Q three growth is tracking near three percent. According to the Lanta Fed GDP, we look at consumer spending on a three month anualized rate. It's the highest that we've had since twenty eleven. We got a robust retail sales report this week, so you know, I think Chapell should present a picture where the underlying economy and fundamentals are resilient and strong here, but they were taking decisive action today to ensure that those outcomes continue.
Hey, Matt, final round before you go. Question for the chairman in this news conference? What's your number one question?
I think it's all about reaction function. So the fact that they went by fifty basis points today before seeing very weak outcomes for the economy will naturally raise questions in the market about what if you get a weaker job support, do they go by seventy five basis points or not? So I think it's all about the reaction function from here, and how does he respond to that? Does he kind of set a high bar either for another fifty basis point or even higher rate cuts?
Manas Ddie at Deutsche Bank, Bob Michael JP Morgan assad Management still with us. Bob, you love asking this one too, so I'll ask it for you. What's your question for Mike mccainn this news conference? A little bit likester on this soufternoon.
As the concept of an equal labrim long term neutral FED funds rate expire, do we need that any more? Shouldn't they be talking more in terms of a real Fed funds rate maybe minus one percent to plus three percent. I mean, for goodness sakes, in my career, I've seen the Fed funds rate at zero and twenty percent, So trying to target something like that is nonsensical to me.
Hi, Bob got to catch up as always, Bob Michael at JP Morgan Asset Management, we get fifty from the Federal Reserve. The price action looks like this, up a half of one percent on the s and P five hundred in the last hour, Lisa printing a new old time high on the SMP.
Which really is in line with what some people were expecting, although disappointment they did not get. If you want to take a look at whether this is a Fed that can outdove market expectations, it seems like they did. And the projections going forward really highlight how this market likes to run ahead of even where Fed pricing is. Just
look at this. If you take a look at Fed fund future pricing, we're actually pricing in a four point one percent Fed funds rate to end this year, so we're talking about an additional almost one hundred basis of additional cuts from here one hundred and fifty basis points of cuts, which just again points to why a Dubvish fifty basis point cut has made a difference in this market.
Mohammad, you alluded to this. If they go fifty, the pressure will build to go fifty again. Is that what's happening.
That is what's happening. And the market loves this, and it's been the repeated conditioning of the market. Give it something it will want more.
I look at this late in the press conference John, when we get to the political questions, like if I was to parachute John into the Alarian Institute of Behavioral Economics and.
Policy, would you behave?
The first I would behave? And the answer is there's two United Kingdoms out there, and there's two Americas out there, and he has to address within his neutrality and the political debate those two Americas. It's not just about Bob Michael and the portfolio and Park Avenue trying to figure out what to do next.
How does he navigate some of those issues? Muhammad?
How difficult is it to set policy for two very different experiences in this economy?
It's very difficult. It's even more difficult when politicians are shouting, go seventy five or seventy five, Now it is really difficult. What's not clear to me is if he is actually buying insurance, what is the cost of that insurance? What is the downside of buying insurance? You know, insurance is hardly ever costless. So what is the downside of having brought insurance for the economy? And that's something we'll only find out over time.
What's the cost of buying insurance for the economy but also for the FED and for its political independence and this reputation therein I just wonder if it's more difficult to make the decision now in November seventh, now that you've had this initial faithacy basis point rate cut and you have a market that's now saying, yeah, you could do another one in November.
Yeah.
And that was the argument all along, start in July. Don't get yourself in this situation, but it is what it is. And then now going to have to navigate this. I think power is going to be very clear. He'll say we are not impacted by political issues, just like he will say that he is blessed, to use his word, by loss of opinions from outside, but ultimately it's what they're deciding that.
Room, and they will get lots of opinions after this one. In just a moment two minutes away, Chem and Pal, we'll walk into that room and give us a news conference for the next sixty minutes or so. We'll take that in its entirety on Bloomberg TV and on Bloomberg Radio. Lisa, things could be very different. On November seventh, we said that repeatedly. I don't think you can overstate it. Things
could be very different. The outlook for twenty twenty five could shape up in a rather different way, dependent on what the complexion of Congress looks like, how divided things are in the nation's capital, and.
Whether or not we even know at that point, as Amory likes to say, whether we have a decision just will be interesting. How much this is the three part act. We get the third part of the act coming up moments away. How he characterizes what this insurance policy is really for. Is this because they are seeing true weakening in a labor market that otherwise is kind of hanging in there, And that I think is one of the key questions.
How do you expect him to frame it Is this a one off mid cycle adjustment, a wait and see, we'll regroup in November. Or is this the beginning a one way trip back towards what they think is neutral?
Can it be both? I mean, right, is there basically? Can everyone have their cake and then eat it too? Because essentially you have inflation coming down and you have an economy that is in a trajectory that typically does lead to further weakening. Is it history that can actually make sense at a time that has defied a lot of historical precedence. It's going to be a really difficult one for him to really, it's.
Going to be difficult because they're coming out of a pandemic and they're making it up every meeting and every day and every speech, gen as they go. They're making this up as they go. Today they catch up, maybe is the right way to put it. But the then, what of November and in the twenty twenty five is real?
We sent the Oula Gray on that We've said this a few times. We've all been humbled for this pandemic and coming down the other side