Risks to the economy are now balanced, Defense says, and they're no longer talking about raising rates, but do not expect cuts soon. No change in rates today, and the statement drops the reference to additional policy firming, now saying quote, in considering any adjustments to the target range, the Committee will carefully assess incoming data, the evolving outlook, and the
balance of risks. But before you buy March futures. The statement goes on to say the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent. Official say the economy is solid, job gains remain strong, and the Committee judges that risks to achieving its employment and inflation goals are moving into better balance. Inflation, however,
has eased over the past year, but remains abated. This statement says the economic outlook is uncertain and the Committee remains highly attentive to inflation risks. There is no change to balance sheet policy, nor does the statement suggest any changes are imminent. The Fed will keep the sixty billion dollar cap on treasury roll offs and the thirty five billion dollar cap on mortgage bonds. The decision today unanimous.
And one other bit of business, the Fed has extended its tight its tighter policies on investment in trading to senior staff and any staff with access to confidential information.
My McKeith, thank you, sir. Let's get to the price sanction immediately, look at equities. Equities on the s and P five hundred just to touch lower by almost one percent on the SMP. On the NASTAG we're down by one point four if you just turn to the bond market briefly, yield to a lower by about ten basis points at the front end now four twenty five sixty one. That may face just a little bit so least. So
let's go through what we got here. We've dropped the tightening bias, but on a full embrace of the right cut conversation taking place on Wall Street.
And then a little bit of appointment clearly that you can see on the front end with people maybe thinking they would lean into a march rate cut, saying not thinking ninety times soon, highly attentive to inflation risks. That focus may be casting a bit of cold water on some of the hopes and dreams.
C K down five basis points on the tenure just showed a four percent here at about three ninety eight.
Come in a little move here, John and I still say we're radically different from when we were earlier this morning, or even days and days ago. Yes, we've pulled back a little bit. It'll be interesting to see the press conference, to say the least, this is well timed. Joining us now is Richard Clarida. He is with Pimpco, our global economic advisor. He's the former vice chair of the FED and far more associated forever with his Columbia University Richard Clarida.
Ethan Harris, student of Columbia ex Bank of America wrote a brilliant piece off his hero at Columbia, Phil Kagan, the other day, and he said, we've blown it on our inflation studies. We've got to get on trend. And for him, the trend is the Dallas trim mean, the Cleveland media and the rest of it. What is a trend right now, Professor Clarita in inflation, Well.
Thank you for having me on.
Tom a good friend of Ethan, and Phil Kagan was a colleague and a friend for many years. I look at Dallas Fed trimmed mean too. It's running somewhere in the mid twos on an inflation that's down a lot from a couple of years ago, but it's still obviously somewhat above the Fed's long run goal of two percent.
But I think that's a good reading right now.
Rich when you look at the pushback, and it's such a pushback in this statement, why do you think this Federal Reserve is not quite prepared to fully embrace that ray cut conversation taking place on more straight.
Well on this one, John, I I actually agree with him. I myself, looking at the data they're looking at, would have thought March would be too soon. We don't get a lot more data in March than we have today. Moreover, as you've pointed out on airon I've been watching, you know, there is still some upside risk on the inflation picture. So I just think good policy of prudence would call for getting more information. And I applaud what they did in the statement today they did.
I don't have it in front of me.
I read Mike's account. Looks like there's a lot of red ink in it, and I think that made sense today.
Yeah, especially with that particular comment. The committee does not expect it will be appropriate to reduce the target rate until it has gained greater confidence that inflation is moving sustainably toward two percent. I'm wondering, which do you think that the New York Community Bank ORP issue changes the equation even on the margins for the FED? And if you are on the FED, for you.
Given what I know right now, Lisa, I would say not. But I do think that the reality is is that you know, we have a number of regional banks in the US, you know, above one hundred billion, but not in that mega category. And the FED FED did what it needed to do last spring, and I have no doubt that they will be there if further is needed. So I'd say right now, this doesn't appear to me
to be a stemic. But whenever banking is involved and you see an unexpected loss, it certainly is on their radar, and I'm sure.
It is rich as you know, As we know, a lot of thought goes into the language that gets put in this statement that line greater confidence. A lot of people are going to stress test that line greater confidence for the next one month or so. Neil datsra good friend over renaissance, Macro writes in what exactly does greater confidence mean? Can you talk to us about that? Rich? What do you think greater confidence means? And I'm going to ask this question just to wind up TK.
Is it one?
CPI print? Is it two?
Is it three?
Rich?
What is it?
Well?
I think you know, at the risk of exaggeration, you might have nineteen opinions on that on the committee.
I think the center of gravity though.
Look, the price inflation numbers have been moving in a very good direction six months now. Core inflation or Dallas FED measures are definitely close to to percent. But we do have an economy in which wage inflation is running about a point hotter than probably they think would be consistent with the long run goal. So I think implicitly they'll be looking at a number of indicators from the
labor market. We got some good news today on ECI, but even with that, ECI is still probably about a point hotter than they would ultimately like to see.
Rich Clarida measured, I'm going to associate it with Allan Greenspan.
You.
Yeah, I got to take it back further, but I'm sorry. We are slaves to measured in our great fear of becoming unanchored. We have regret. We're worried about the Bank of Japan. I believe it was back in the early two thousands. We need to be measured.
How do we be.
Measured after this pandemic and after this original economics?
Not surprisingly good question there, because a measured was used by the Maestro in four to talk about a measured pace of rate increases. But certainly now it may enter the conversation once they start to cut, and I think here you do see the tug of war.
Folks look at past history.
They see that when the FED starts to cut, it cuts very fast and in big chunks.
Oftentimes.
Typically if you go back and look Tom in soft landings and what turned out to be soft landings, it looks a lot different, more like two or three cuts seventy five bases points there. So so I think a lot of the measured in this cycle on the down direction is going to depend upon how soft the landing is.
You J.
Powell thinks the runway for a soft landings in sight, but right now that's a forecast, so it will be data dependent. Sorry that's a cop out, but I do think that it will be data dependent.
Can the FED afford to be measured well, I mean, can the FED afford to be measured and start later if we're also bumping up against a political silly season. As Tom would say, this has become something that more and more economists are looking at. Why not start earlier, go more slowly, and be less susceptible to becoming a political football.
Great, great point. It is an election year.
I noticed historically and you can confirm this on your Bloomberg terminal the FED. Historically, the FAT has moved in election years in both up and down. So I think the Paler FED will do what it needs to do this year in terms of adjusting rates, presumably downward.
But I do agree with you Lisa.
You know, if you think you're going to cut three times, say, which was what the December SEP was, certainly it would make sense to get that process going, you know, perhaps in the summer and not wait till November.
Shall we say to dovetable the academics of Richard Clara joining us now from the Midwest, Diane Swack of Michigan chief economist KPMG, really please to have you here with Diane, let me get away from the monetary mumbo jumbo. Diane, you are expert on the pulse of corporate America on this technology overlay we've witnessed look at the profits of Microsoft yesterday and also on this new change in productivity. Does this Federal Reserve have any understanding of the new productive America?
I think they do. I think they're watching it very carefully with the question is is it something that's sustainable? And you know, this is why I agree one hundred percent with rich the measured concept, because I think the markets really want to see much more aggressive rate cuts and the FED. I think they start in May, but I think what's important about it is they start before the second half of the year, before we really get into the summer. And I think that's going to be justifiable.
But I really think it's important to understand what's going on in terms of productivity. Growth picked up in part because people are not quitting jobs as much, they're learning the jobs they had. We're also finally leveraging all that technology that we took on as we pivoted online.
That's all good news.
The question is how sustainable is it? And I think that's something the FED still hasn't figured out. And that's what we're going to see in the minutes. I mean, it's really interesting to me that the December meeting, when Powell came out and had a much more dubbish tone and was pretty excited, and markets got pretty excited off
of his comments. The actual minutes to the meeting were that, you know, hey, we're worried inflation rist search of the upside, and so it'll be really interesting to see the minutes off this meeting in terms of how they see the productivity growth continuing in twenty twenty four.
And you know, it's a cop o.
The FED gets to be able to react and be data dependent, and Rich is absolutely right about that.
But that's what they're going to do.
They're looking at a meetium ma Beetian basis, and I think, you know, we'll have enough information by May and June to begin those cuts. But I think that measured side of it is also really important, because the markets really want to take off and put a lot more cuts in than the FED is really.
Willing to do.
It was a really bizarre sequence to have the chairman engage in a conversation about interest rate cuts.
Then New York Fed President.
John Williams come out and say, not really talking about rate cuts, and then the minute seem to back up Williams and not power down. We'll let it go. Let's see if they repeat it again. I think today there's a feeling they are going to engage in a conversation a little bit more openly about the timing of interest rate reductions. Do you think they need to draw a clear distinction between adjusting rates and easing policy.
Yes, absolutely, and I'm sure Rich would agree with me. I mean, this is removing the restriction, but not trying to stimulate the economy, and I think that's very important. They're trying to normalize rates, They're not trying to stimulate a moribund economy, and that's a very different scenario as when you pointed out from a soft landing and what
may be at the moment and extremely soft landing. We also know that, you know, we're kind of coming in really strong in the first quarter on consumer spending, even with January and some weather disruptions. You don't mean much consumer spending for it to be very robust in the first quarter, and that's something that Fed's very attentive to right now as well.
So in the press conference, most certainly rich. There's going to be someone who comes up and asks fed Shaw J Powell, so how much did you guys talk about rate cuts?
Did you throw out dates?
Did you throw out what your criteria are? If you were on the FED, what would you hope he would say? How granular should they be? Given the fact that people know they're talking about it, they have to be talking about it. Everybody else is talking about it. How much do they really telegraph.
To the market. I'ms Lisa when the press conference is.
Moving beyond what was in the statement, sometimes because the chair wants to move in that direction, or because you've got a dividing committee. I think today, and of course we'll find out to thirty, I think today is a day when the chair on that question in particular, will hug the FOMC statement pretty closely, because it was a
big change from December. Some of it was expected, some of it was a little bit more hawkish, and so knowing J. Powell, I think today will be a day when he gets a question like that, he will hug the FMC statement language pretty tightly.
That's what you do with Bramo questions, just hold on to the statement, trying to cap All the question. I just wonder how many times they shared the love letter from Senate Banking Committee chairs share a brown and the letter from Senator Elizabeth Warren had a Democratic colleagues, Rich, you've got experience of this under the Trump administration. It's often and I'll say it for you. It was inappropriate, then it's inappropriate. Now how did you deal with it?
Then?
How do you suspect this FMC will deal with it now? As you see lines like this from senators down in Washington, d C. That I urged the Federal Reserve to ease monetary policy early this year.
How'd you deal with that? Rich?
Obviously we had to deal with it in a different contact. But it goes way way back, and I think FED institutionally and Jay Powell individually understands the stakes and I think he just thinks this is just part part.
Of the job, and the FED will, FED will look through it.
And of course the data is breaking in a direction where that completely reinforces it.
Richie Clarido, though, this is a good time to mention, of course, this is your public service to the nation is with John Snow and Treasury Paul O'Neil. Your work of course, is vice chair recently annoyed by the Museum of American Financial the Whitehead Award, and I'm going to go back there to Paul Voker and others. I'm sorry, Richard Claire. At the end of the day, you were teaching politics one on one at Columbia. This FED has to go into an election cycle.
No one watching or listening.
Has ever seen how political does the FED get, say, Labor Day.
I think the pal FED will not be political, but it's inevitable monetary policy will be pulled into the political presidential discussion. I think they're prepared for it, and I think they have decided or they're deciding what they think they need to do based on the economics, and when they're ready to go, they'll communicate it. I'm confident they'll succeed, but I don't disagree that there is going to be an enhanced emphasis and focus and a political element to the focus on this.
In the meantime, there's a real question, Diane about what exactly greater confidence means. As John was talking about earlier, what metrics are you looking at? I was struck by doom spending, which of course caught my eye, but some of these areas that might be distorted because of changes post pandemic. What gives you the clearest read.
Oh, I think you're just going to have to continue on the labor market and inflation. Those are the two most important things. Those are the two most important data points to the Federal Reserve, and that's what they're going to be watching. I want to just echo something that you know, Rich said. You know, we've seen Powell go through some pretty hard political times already, and he's proven himself to be an institutionalist with the FED on that
and I think that's a positive thing. The FED doesn't have a horse in this race. That said, they will be blamed for no matter what they do, no matter what, and they know that. And I think that's what Rich is telling you, and that's you know, that doesn't mean their decisions are going to be influenced by it. It just means that they know how to go through the
hailstorm that's about to hit them. That said, they're looking for continued improvement in inflation and continued improvement in services inflation. I think they're going to get it, and I think they will be moving by May. But the bottom line is they want to see that continued. And they're also watching the consumer out there pretty closely, because this has been a remarkable not only resilient consumer, a defiant consumer, showing just how strong they really are.
Diane my McKee is still listening before he goes into that news conference. Questions for Chairman Powell, what are they now?
The biggest questions are, you know, how do you talk about? What is that exact issue is? What does this mean when you guys feel confident enough to cut rates? What is going to be the criteria? That's what all the focus is going to be on. And my guess is he's going to talk about it vaguely. And that's the problem for financial markets because they want something corincrete. And this is when you get as rich about it, but you get to the hard part between monetary policy as a science or an art.
This is the art at the moment, Dane. Thank you Van swamp there on the latest Let's reset here if you are just joining us live on TV and radio. It is a special edition of Bloomberg Surveillance. The FED decides, the news conference is in about thirteen minutes time. We had the decision about seventeen minutes ago. No change on interest rates. They drop this bias towards further tightening. There's
this new line we need to talk about. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards two percent. So listen to the market response to all of this. The rectory market this afternoon looks like this. On the S and P five hundred, down by zero point nine percent. We're down one point three on the net stack LISA in the bond market by eight or nine basis points, not session lows on
bond yields. I have to say this move faded just to touch. So the market is looking at the Federal Reserve hoping the inch towards interest rate cards. They're kind of taking a baby step today, but not fully embracing the idea just yet.
The fact that they sort of said there's still a prolonged period of time before we reach our inflation targets to cast some cold water. There's store people out there. We thought maybe we'd get a cut at this meeting. Right that it was a live meeting. We heard some people saying that's what they should do right. This casts some serious cold water on it. I love the idea of what we're going to hear from j Power. Absolutely nothing. You will hug that statement. He will say as little
as possible. He will be as ambiguous as possible. Just wait for it.
We could get a.
Surprise at last time. And I think Dan Swark was absolutely right about the science and the art. John. We're coming out of a pandemic. The great miss call last year was economic growth. Where were we twelve months ago?
Doom?
Gloom totally now total, just total bloom.
Everybody was wrong playing I was wrong, everybody else was?
He just taking this personally right now, down right in the new studio.
The brim up him looks beautiful. But the point here, John, is it is in art.
They're making it up as they go after this massive pandemic and massive stimulus. So I think today is less predictable because I was humbled, less.
Present, Tom.
It's important to pause here, and I'm pleased you've brought it up. It's important to pause and go over where we were, where we thought we'd be, and where we actually are. Where we are right now, it's unemployment, sat the four percent, inflation's doing better core PC. Last week we were talking about a two hand or not a three, which is a massive change as well. And GDP Tom gross how up in the face of interest rights climbate aggressively. Now,
this is not a judgment about where we going. This is just an observation about where we are, and where we are is so much better than where we thought we'd be twelve months.
There, he's been one on one.
I mean, forget about measured.
We have a stock market which is voting every day, every tick, and I believe since October has been on a tear.
They have to fold that.
Into the just putting back from old time highs. Robert Tip is with US of PGM sixth income alongside the former Fed Vice chair Richard Klouda. Robert Tip, You've had about twenty minutes to go over this one. Your reaction to it?
Sure, Yeah, you know where we are versus where we expected. I mean, we did not have a backdrop for a recession. Interest rates were raised for a reason. The system had a clean backdrop. It was not one of these backdrops that was going to crumble when interest rates were raised. It continued right through SVD. The economy has plowed through and the Fed is fine tuning the policy at this point. Now.
They started off with the first notion of cutting rates, I mean arguably back in July, Palell talked about how they would not wait for two percent inflation. They'll be cutting way ahead of that.
Now.
September saw a huge U turn, so they were fine tuning with maybe like a chainsaw at that point. December, you know, they came in and we had a U turn and a U turn frankly before that in October they called an audible as rates went up to five percent and they started to talk down their own higher for longer. At this point, they're really balanced. The market wants to get two hundred basis points ahead of them,
which is actually kind of understandable. The five point three percent Fed funds rate they're running right now is a long way from the two and a half percent that they're putting forward as neutral. And inflation is hundreds of basis points off its highs and pretty sustainably, you know, is down in the threes, if not down at target
right now for about six months. So their comments, you know, suggest they want to see a few more months or maybe be a big team of them want to see another six months before they go.
Robert from the parlor game.
Let's go to what you and Greg Peters do every day, which you've got to.
Be in the market.
Are you being in the market clipping the coupon or can you actually still pop a good total return this year?
Yeah?
I think big picture, the market is going to clip a good return. I think that your spread products, you know, as we've said, starting off, put out a piece at the end of twenty twenty two yield his destiny. You are going to clip that coupon. But we've seen the market seventy five one hundred basis points on either side of four percent roughly, and I think we're going to continue to see these big swings. Right now, the market
wants to go in the dutish direction. But this powle fed is aware that the second big woop move higher in inflation in the seventies came with hostility in the Mideast, with volatility in the Middle East and a big increase in oil prices. And we have full employment around the world. We've seen very high inflation that brought about higher wages. All of that is in retrograde right now. They're going to want to make sure they have that really under control before they turn aggressively here.
It's a good point, Robert, and I expect that we will hear from Fetcher J. Powell. They are watching the issues and the conflict in the Middle East carefully, Rich Clarita, one thing that was really notable about the December press conference was that Fetcher J. Powell had an opportunity to push back against that rosy outlook, the sort of flooding into risk assets that Robert Tip was talking about and that so many people have embraced.
He didn't push back.
Do you think it's going to be the same at this press conference that he will just say ultimately, the markets will do what we want, what they want to do, we're watching something else and we're on a good glide path.
Again.
I think this is going to be a press conference where it will make sense for the chair to to really hug that FMC statement.
There was a lot of red ink.
It was therefore a reason it gave the message that you know, basically trying to dissuade folks from pricing in that March adjustment and talk about they want to see the considerable and additional evidence and so I think that's a pretty good place for him to spend most of the day, at least on those sorts of questions.
I have to say, Rich, you're not hyping up this news conference until it sounds like I can't repeat. I appreciate the honesty, though, Robert Tip. Just finally, I'm getting a load of people right in to say, what's the trade? What's your favorite trade right now? Robert, after what you've just heard.
Yeah, I think that it's not the whether the cuts price in are correct or not. I think it's the timing and the shape of the curve, the ends.
Of the curve.
You know, whether you're looking at the next six months or whether you're looking at the tenure or the third year point, those look more reasonably priced than some of your two year out interest rates that are really banking on two hundred basis points of interest rate cuts in
the next eighteen months. And I think if you can stay in the market and clip that coupon, avoid rolling up the yield curved, and also make some money on the tactics of trading this wide range on rates, I think it's gonna be a very good year for bonds.
Robert Hip, thank you. Sir, from Pajim on the latest from the Fed for reserve for more his Bank for America's Mike Gape and the chief economist, Mike, you've got the Fed going in March. Do you like what you hear today? We make in that closest step, another baby step towards you'll cool.
We are.
I think you can interpret the statement as saying risk to the outlook our balance, therefore, our guidance should be balanced. And then did we debate a rate cut today? Yes, we did, just not for very long. What we need is more confidence before we cut rates. And I do think that involves seeing more progress on services inflation and more progress on wages, because as you know, a lot of the disinflation has come from goods price. Those declines may not persist. So the Fed we'll see more of
that data. I think they can get there by March. So I'd say the statement was broadly in line with our thinking.
Michael Gape And how aggregated are we or disaggregated are there? To America's out there in America flat on its back? And then the prosperous America is witnessed by Microsoft's profit yesterday.
Yeah, there is you know, the economy is bifurgate, bifurcated. I think more broadly you could just say, you know, industrials and goods versus services. The industrial side of the economy has been suffering. Regional banks, obviously with news headlines this morning, still continue to struggle, but the consumers in good shape. The services side of the economy is doing well.
Tech earnings are doing well. It has been kind of a rolling recessionary story where certain segments of the economy have had problems at different points in time, but the economy overalls has powered through. So thinking about it in that way, Tom, I think makes a lot of sense.
Michael, I love hearing the bustle and the hustle behind you, and I imagine everybody's saying, the balance of risks, how do we get the greater confidence in equation is coming down? What does that mean? So what do you think that means in terms of how much you've got to get in terms of data underbelt?
So I think they can get there by March in the following way, and that they'll get February PCE and they'll get the CPI and the PPI for that next pc I'm sorry the January PCE. But then they'll get CPI and PPI for that February PCE print during the blackout period, so they'll have two more inflation reports. They'll get more information on where is services inflation, where is sheltered, They'll get more wage data in the next two employment reports.
I really think it's about that side of the ledger. For some on the committee for Governor Waller, he says the components don't matter. I just look at inflation, so his bar may may be lower, but others are really kind of concerned about that good services trade off and worry that services are too sticky.
And it would optionality written this way because it can mean whatever they want it to mean, Lisa at any time over the next few months, which.
Is the reason why he's going to hug that statement so close and everyone's going to be happy. And then you.
Really, so I'm going to read a statement or read the minutes, and it's going to say in there it is written, it's gonna it's going to actually say it.
Richard Clarity, let's come to you and just wind things up and put a bow on it if we can. This has been a single mandate Central Bank for the last couple of years where they focus on inflation and getting it back down towards two percent. Can we talk about the other side of the Jewel mandate? Is there anything to worry about in the labor market?
From your perspective, the labor market is in a very good place. If anything, it's it's running a little hot. Uh, But I do think there's a path for that to adjust under the under the outlook. So yeah, the labor market is, you know, that's what we want maximum employment. We're at perhaps a little bit more than maximum employment. But but wage inflation is decelerating. We saw on the e CI, and I think that that's what they're factoring in for this year.
Continuing there, Michael Gape, And do you agree?
I do.
I would say if concerns would be about the dispersion of employment growth, which is pretty narrow focused in leisure and hospitality and education and health, and then remaining growth in the private sector is basically flat. But I agree with Rich the labor market's in a good place and it's helping to drive the outlook.
Mike can I You've got to run.
It's great to get you cool. Michael Gape In there of Banks for America looking for a March interest rate reduction. Richard Clarida, Thank you, sir, and congratulations on that Whitehead Award. Truly prestigious, Sir. We appreciate your time.