All Eyes on the Fed Heading Into Wednesday's Decision

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio, or watch us on YouTube search Bloomberg Global News. Tim's been talking about it. I've been talking about it. We've got the US Federal Reserve kicking off at two day meeting on monetary policy today. We're talking about the policy setting arm of the Fed.

Decision of course comes tomorrow at this time, twenty four hours fast forward, we will be hearing from j. Powell in that press conference we got with us and Matt Bosler, he's Federal Reserve reporter for Bloomberg News. He joins us on the phone from our New York City bureau. Matt, good to have you with us this afternoon. I know you're busy ahead of this well, I don't want to say ahead of the meeting because it's happening now, but

ahead of tomorrow's press conference. You have a great piece out today about the dual mandate that the FED has stable prices and maximum employment. But one of those things is getting a lot more attention right now, and that, of course is stable prices. So how is that employment

mandate taking a back seat thanks to Tim? Yeah? So, I mean, obviously the FED has made fighting inflation and bringing it down to their two percent target job number one this year, and so UM, you know, as of the last meeting in September, they actually came out for the first time with projection showing that, UM, they need to boost the unemployment rate, you know, almost a full percentage point through the end of next year to bring

inflation down to where they wanted to be. And this is really the first time since they started UM publishing these projections ten years ago that they've put out such a UM kind of dark forecast for what their policy

is going to do to the unemployment rate. And so it's a really interesting time right now, UM where they're dealing with uh, you know, increasingly calls from Democratic lawmakers, including UM Senator Liz Warren today, Um, for them to slow down and remember that they actually have two mandates and it's not just all about inflation. Yeah, it's rare though, right among global central banks. Matt, Yeah, it is, and so um, you know, the Fed has an employment mandate.

Most other central banks only have the one inflation mandate. And um, there's a really interesting history behind the FEDS employment mandate, right. It goes back to the civil rights movement in the United States back in the nineteen sixties and the nineteen seventies. This was really the work of civil rights activists who pushed for this and got it codified into law at the end of the nineteen seventies.

It was really kind of like the last, um dying breath of the civil rights movement, if you will, to get this on the books. But I mean, isn't the data that we continue to get showing us that the labor market is so resilient. I mean, take that Jolts number this morning, that it kind of can take a back seat to fighting inflation because as you right, back

in inflation was high and unemployment was high too. Yeah. No, that's right, And so the labor market has been so resilient all year and everybody's just kind of waiting for it to slow down, right, And we're not seeing that in the data yet, even though we've had these very

aggressive rate increases. So on one hand, you know, perhaps you might not expect it to show up in the data just yet because you know, the FED really only started um doing these rate increases about seven months ago, and as we know, it takes time for monetary policy to work through the economy. But you know, as the labor market data keep coming in so strong, it's also causing forecasters to you know, ratchet up their projections for where the FED is going to ultimately raise interest rates to.

And so it's kind of a double edged sword in that regard that this you know, continued strong labor market data makes it look like the Fed is going to have to be even more hawkish than previously planned to bring inflation down. And that's kind of where they are at the moment. Matt, I love you kind of give us a history less and when it comes to monetary policy, taking us back to Humphrey Hawkins, uh and remind you know, and reminding us once again of the Vulcar era maybe

what we've learned. But what's interesting too, though in your reporting and writing, is something that we talk a lot about in that some of the inflationary pressures are above and beyond Fed control. And so you do wonder with this dual mandate whether we need to be thinking that, Wait, guys, the FED can only do so much when it comes to inflation, and if they overdo it, it's at what

risk and what costs to the labor market. And so this is where you wonder whether policymakers have to come in and kind of give the FED an assist here, right, And you know that's pretty much been um completely acknowledged by the Fed, right for the most part. I mean, the one thing that they do say is that, look,

we do have a very strong labor market. Wage growth is very high, and even after some of these temporary supply side driven factors um you know, kind of resolve themselves and fall out of the inflation data, we're still going to be left with very high inflation. And so there is room for us to um camp down on the labor market with the man side policy. Now that's

a kind of a big hypothetical. You know, we don't really know where inflation is going to settle out, but that's the story that they're sticking with us at the moment. But it's hard to have a FED where the employment inflation mandates are in conflict, as you report. I mean, this is not an easy thing to navigate. Met Bosler a really smart read. And this story, by the way, is going to be in the upcoming new issue of

Bloomberg Business Week, which is out later this week. It's already on the Bloomberg terminal at Bloomberg dot com, but be sure to pick up that magazine. Matt, by the way, is Federal Reserve reporter at Bloomberg News on the phone in our New York City bureau. You didn't give Matt the question that you wanted to ask her. Howell tomorrow. I'm still working on still working on it. I'm still thinking about what's a pivot? Is a pivot like not so aggressive? Is it cutting rates? Is it? What? What

pivot are we talking about? You're listening to Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Blake Masters is betting that more money from Peter Teel, Donald Trump, and conservative activists plus some rallies with Carry Lake can help put the GOP in control. We're talking about Arizona with that story, our own Bloomberg business Week calumnist Max Chafkins. He's with us right now

in the Bloomberg Interactive Broker's Studio. Max. The story is featured in the upcoming issue of Business Week magazine, but it's available now on the Bloomberg terminal at Bloomberg dot com slash business Week. Okay, let's link back to the election, Max and Arizona pivotal state, but it ended up going

for President Biden. Josh Green wrote a really prescient story um in basically predicting or or speculating in the possibility that Arizona would turn purple and that the thing that would drive at purple would be the Maricoba County suburbs. And um, you know, Arizona is kind of an interesting state because it's sort of was the pioneer of this kind of right wing populism. Sure if JR. Pio in a lot of ways was a proto Trump, and in that stuff looked like it was in the rear view mirror.

Joe Biden won the state. Our pile has lost like the last three elections he's he's contested. So so the state is trending um blew er and and and away from the kind of you know, sort of hardline right. But what we're seeing in two with you know, a relatively unpopular president, high inflation and so on, that that sort of right wing that has been there in Arizona

is is surging right now. And um it is what Blake Masters and Carry Lake and some of these other candidates that are running in the state are betting on and and and you know, if they're successful, obviously it could um have have serious implications both for the Senate and for what is interesting kind of understanding like who's funding who in that state and what's going on behind

the scenes. Right. So Masters is interesting because he's a political outsider and he was basically a protege to Peter Tiald, the Siliconali investor. Yeah exactly, uh famous uh because he uh was co founder of PayPal. He was one of the early backers of Facebook. Yeah. I wrote a whole

book about him. Um, And he basically plucked a couple of Senate candidates, um out of relative ob Security J. D Vance in Ohio and and Masters, who really had no profile whatsoever besides basically being known as Peter Teal's right hand man, gave him a ten million dollar seed investment and basically carried him through the Republican primary. And then when we got to the general election, Masters has

had a much harder time. Teal had not been funding him for for a couple of months, and partly because Teal has sort of pushed Masters, I think to the right, you saw a hesitancy from sort of more mainstream Republicans

like Mitch McConnell to fund the campaign. So there's been this kind of dance right where you have on one side the sort of mainstream Republicans, um Mitch McConnell, and then on the other side these kind of activists with Peter Teal and Donald Trump being kind of unity right, like as you point out when it comes to the

Republicans in this state. Yeah, what's so interesting is, especially Arizona, is you have an entire ticket statewide of basically trumpets of candidates who say that the election was in some sense stolen. Carry Lake at the top of that ticket. Blake Masters has made kind of similar comments, and you also have candidates for attorney general and Secretary of State

kind of saying the same thing. So it's a real test, um, I think for sort of that message, the stop the steel conspiracy is it can connect actually like win you an election in a in a swing state. Um. But it's also of course a test for the popularity of Donald Trump and and you know the popularity of of Democrats. Frankly, Okay, so what do the data tell us right now? What did the polls tell us? It's it's very close. Uh, you bring up polls, just kidding. So lake has is

running a little bit ahead of Masters. I think she's even or slightly ahead of her Democratic opponent, which is interesting. That's one of the people in the Republican Party now are are talking about her as a rising star. I went to this event in Arizona. They kept referring to her as r Rhonda Santis, which that was kind of funny. Um. But in any case, uh yeah, and there's speculation, Oh, she could be a potential you know, vice presidential candidate

if if if Trump runs in Masters. Um has you know, not proven a successful candidate. He also has a um, you know, probably a better opponent Mark Kelly, who's incumbent, has raised a ton of money UM, and so he's running a bit behind Lake, although he is very close as well. And you know, at this point it could probably go either way. So how do you like you

do this story? And we're looking at some really kind of key pivotal as we always are states in the upcoming midterms and certainly it will ultimately in the next presidential run. I mean, how do we kind of square what's going on in Arizona versus kind of more broadly across the country. How do you think about it? I think that the same kind of forces are a play.

You know, you know another stage, which is that you have this small but very engaged UM subset of the electorate that the sort of Trump portional electorate, which is UM. You know, it's it's not a majority, but but they're

they're extremely enthused. And the question is, you know, are they going to turn out, especially in a mid term year UM when Donald up is not on the ballot UM And and the extent to which you know, these these Trump aligne candidates have you know, won their primaries and kind of become the main forces in their states and and this, this cuts across other states as well. You know, it really just shows how Donald Trump is still, you know, very much the most important person in the

Republican Party. UM on the donor side. You know, there's a very interesting kind of drama between Teal and and as I said, the kind of more moderates, because Teal kind of foisted these harder line candidates on the Republican Party, carried them through their primary campaigns. And you know, if they lose, that's gonna be a huge blow for him. It's it's gonna look like he wasted, you know, over

thirty million dollars, uh, you know, promoting unelectable candidates. If they win, though, it's gonna be a huge Uh, it's gonna be a huge win for Teal. We'll push the Republican Party, they're right, you know. And and I would expect he would then play a probably a pretty important role in what about economic messaging, Max, because if we think about you know, for example, here in New York and the reason why he's olden is pulling closer and closer to Kathy Hokel, the incumbent is about crime and

the economy, um, mostly crime. But I'm wondering about the economic message, because we see that resonating across the country in different states. Is that happening in Arizona? Yeah, I mean Masters and Lake are talking about inflation, just like

everybody else is talking about inflation. Although I think they're they're less offering a plan and more sort of offering a critique, which is that you know, the Democrats have have have led us down and so on, and and it's very much, um, a message about sort of culture

type stuff, as you said, crime in immigration. Um. Sorry, in Arizona, of course, immigration is a big thing, right, So so they're so Masters is hitting his Democratic opponent primarily on inflation and and immigration, saying the border is out of control and things like that. It really is um uh similar to Trump is um and similar to

the Trump messaging that we've seen in past elections. Well, and key two will be how it plays out for the Secretary of State races, right too, because if again there's a contested race or ever like election outcome, I mean, these are the guys that can decide it. Just got about twenty second. Yeah, Arizona is interesting because the Secretary of State candidate Mark Fincham, who is allied, allied with Lake and Masters is a very hard line you know,

big borderline conspiracist um. And so if he's able to win, you know, that will be a huge vindication for the Trump folks and uh and and could have implications. Oh my gosh, unbelievable. Well, the midterms what just a week away? Yes, one week, Carol, one week from today exactly. I voted early here in New York and I did not Mark, Max. Thank you so much. Max Chafkin, of course, columnist of

Bloomberg Business Week. Check out his story in the upcoming new issue of Business Week, out on news stands later this week. Already on the Bloomberg and at Bloomberg dot com. It's a great story. Check it out online and of course on the terminal as well. And then later this week has Carol mentioned and the magazine. You're listening to Bloomberg Business Week, and this is Bloomberg Radio. This is Bloomberg Business Week with Carol Master and Bloomberg Quick Takes.

Tim Stinovic on Bloomberg Radio. You've got a very very special guest with us right now. Yeah, Firmer, beloved Bloomberg colleague him. Yeah, for Bloomberg. Well, he's still be loved, but he's a form of Bloomberg goalie. It's that kind of a day. Carver Kodanna is now the chief you as economist at BnB party and he's here in our Bloomberg Interactor Broker studio. How are you. I'm doing fine. It's great to hear you. I heard you on a radio TV this morning. Yes, on surveillance earlier this morning.

It was really good. Um did you well? Thanks? All right, now we're talking about the important stuff. So let's talk about this meeting tomorrow. Yeah, fed meeting. What's top of mind for you? Top of mind is going to be the signaling in the press conference. The you know, as we kind of look at the meeting statement that from the prior meeting and think of what needs to change at this meeting. It could be as little as the

date stamped on the meeting statement. So it's all about the press conference and the kind of signaling towards what they'll do in December. Uh. And knowing j Powell and how he operates, I don't see any reason for him to get out in front of this. The pivot. The market is close to split between fifty and seventy five at the December meeting. And I think he's going to let the data do the talking. So he'll say, there's two more jobs reports, to more inflation reports, two more

rounds of inflation expectations data. And so you know, we will look at, using his word from the last meeting, the totality of the data. Uh and uh, you know, determined. He'll say that at some point, right, we can't do seventy five forever. There will be a point where it is appropriate to downshift. Uh it maybe it maybe December, but we're not sure yet. And we'll base our decision on the upcoming data. Right. The FETIS made it very clear this year they are acting on realized data, not forecasts.

There's a difference though, between down shifting and pausing red hikes. So just help us understand the environment that we're ENTERINGE do we go to one where we continue to see rate hikes of twenty five basis points or fifty basis points at meeting after meeting, or do we just get to a point where the FED reaches the terminal rate? And I would love to hear what you think the terminal rate is going to be? And leaves it there for for what how long. Well, the level of rates

matters relative to the growth rate in the economy. So if we look at GDP right now, we're growing at about a nine percent pace. The Fed Funds rate is far below that, right, so it's it's not as restrictive as it might seem. But we see that growth is decelerating sharply, the housing sector obviously heading into a pretty significant contraction maybe annualized decline in the back half of

this year. We see the factory sector starting to respond to the strength and the dollar, which has crimped export demand and whatnot. So we see more parts of the economy starting to creak as FED tightening weighs in on the economy. Our baseline view is that we will get another seventy five basis point hike at the December meeting, another fifty basis points in the first quarter of next year,

probably at the February meeting. That gives us to a terminal FED funds rate of five and a quarter meeting December, and then fifty and Q one, probably fifty at the February meeting. Right, it could be between February March, but we don't want we don't want to forecast around two corners, So so the downshift is coming, maybe not in time four December, but with the FED funds right north of five cent unfortunately, I have to use that our word on your program, Carol, and uh, we think that this

means recession in the first half. We're not there already because we still have positive income growth in the economy. We're creating positive monthly gains and employment, which is a very important barometer of recession. So we're not quite there yet, but things are slowing, and I think this will become more evident when we see payrolls on Friday. Uh and over the course of this quarter, and especially as we get into Q one of next year. What would be

recessionary about payrolls on Friday? I mean, we're guessing, right, So so if we're close to know what's recessionary out that is the direction of travel. So I'm at about two D fifteen thousand on that forecast. But we're cooling from a pace of four hundred five hundred thousand per month earlier this year. So if we extend that trend, it doesn't become processionary necessarily in Q four, but by the first part of next year, then we're getting into

the realm of a negative payroll print coming in. Where there's one, they're like cockroaches, there will there will be multiple uh. And that probably means that that we've we've slid into contraction. And just the last point I would add to that, um, consumers have been uh surfing on a wave of excess savings. Right. This has propped up consumers even while inflation is high. Uh two levels of

performance and consumption that wouldn't otherwise be possible. But those savings are you know, poised to run dry, so to speak, in the first half of next year. Right, we're burning through about a trillion dollars of excess savings per quarter. We started at about you know, just north of two trillion, uh. And so you know, just use that math and that shows you that the tank runs on the fumes in

in Q one of NEXTEL. One of the discussions we've been having, like on the other side of this, as we get our way through this fed cycle, should we just as a civilization just say, hey, inflation is going to run a little bit hotter than it has traditionally because of things that are going on were broadly strategically and fundamentally, I think we're in a regime shift on inflation where a lot of factors, whether it's de globalization or moving away from you know, petroleum and and whatnot,

carbon emitting fuel, energy sources, uh, demographics, all of these things could mean higher inflation. But if the FED is focused on getting it to two percent, that just means there will be a more restrictive FED response. So we said recession next year. Typically in recession, the FED is the white Night riding to the rescue, cutting quickly and aggressively. I don't think we can count on that to happen

this time around. They're going to keep a foot on the brake pedal to make sure they ring the inflation pressures out of the system. Inflation is real. Absolutely, they are not abandoning that target anytime soon, or they will risk the sagrin of the U. S. Congress if they do. That would be a pivot. Car Kada's so great to see you. Here is the economist at BNP Pariba joining us here in studio. I'm roam Marco journal. Yeah but you let me drive? No no, no no, no home all

right please, I'll do the riding gravels. I want to drive. It's a good question. Drive. This is the Drive to the clothes down on Bluebird Radio. All right, just under ten minutes until we ring the closing bell on this Tuesday's session of trade, first trading day in November, and we are seeing stocks off their worst levels of the session, but pretty much down across the board. So let's get to it. Our drive to the close, guest is with us. We got Amanda Gotti with US, chief investment officer at

P and C Asset Management Groups. She joins us on the phone from Philadelphia. I always think of the what is it the twelve Rings of Christmas, Amanda Gotti, because it's not That's what I was gonna say. Now that we're in November, we're gonna get closer and I don't want to know what inflationary things look like this year. Uh So stay tuned for, you know, around Christmas time when Amanda comes back. But before we get there, Amanda, we have got a long way to go, because we

got a FED meeting that has kicked off today. We hear from FED share J Powell tomorrow. Um markets were very optimistic in October. What's top of mind for you right now? Well, thanks, so much for having me. We're definitely excited to share the insights from the Christmas Price index. So I'm looking forward to that conversation. But the thing that certainly top of mind right now is ultimately what the FED does in terms of action items here and

also in terms of forward guidance. And so I think from our perspective seventy five basis points, it's pretty much a foregone conclusion in terms of the action item coming out of the meeting. But what is an entire really clear is the guidances they're going to provide or ultimately you know, where the end state for monetary policy ends.

And you know, I could talk all day about you know, the still somewhat solid underlying fundamentals, the health of the consumer, what's going on in credit markets, even some of the economic days today looked okay ish, But I think the only thing that really matters in terms of the pass forward is what the FED does. Well, no, it's a

really good point. Well, how would you assess what you're seeing in terms of the economic backdrop and market backdrop and what that means and what that pretends for corporate earnings going forward? We're still of course going through earnings, but what it means perhaps going into next year. Yeah. So, I mean in terms of the economic data that came out today, there's clearly some flowing and some settling, you know,

crisis levels coming down. Uh, And it's really a reflection of the said doing what they're trying to do right there, tightening financial conditions. There's lowing down the backdrop. But the frustrating part about this is for as aggressive and hawkishness hawkish as they have been in terms of you know, these consistent outside rate hikes, hasn't really made that much of a difference in terms of the inflationary backdrop. We

haven't made that much progress. And it comes back to this idea that there's a perfect storm of headwinds swirling here that the FEDS policy tools in the tool kit really aren't effective at combating, and talk well, can you talk about some of those Amanda, sorry to jump in, I just want you to talk about some of those specific headwinds here that that have you concerned, because it does seem it does seem pretty puzzling that, you know, despite not puzzling, because we know this stuff takes time,

but I think frustrating to a lot of people that where we see softness now is housing, but kind of nowhere else. Right, So, so some of the challenges that we're seeing are certainly, you know, as it relates to the pandemic itself and the grip that it continues to have. Even though it may feel like we're kind of getting back to normal business as usual pre pandemic, there's still a grip there in terms of the pandemic itself, and it's showing up in the flickering on and off and lockdowns.

As it relates to China and other parts of Asia, there's still some pretty significant supply chain disruptions. We certainly have Russia and Ukraine applying a ton of pressure on commodity prices and energy prices in particular. Just because the FED raises raised, we're tapers are balance sheet and a more accelerating rate, does that have any impact on those

key variables? You know? So I keep coming back to this idea that there's a perfect storm here that's driving inflation here, and so you know, the FED continues to raise rates, but I think we're getting to a point where we're not an overly restrictive territory, but we can easily tip into that place and we ultimately end up with still elevated inflation in the backdrop. All right, so what do we do? We've got money to put to work or we're just trying to protect our assets. What

do we do in this environment? Nanda, Well, there's no question evaluation multiples have responded accordingly to the challenges that we've been facing this year. So from evaluation perspective, it definitely look more attractive on a relative basis today than where we started the year, But we're still playing quite

a bit of defense. The contrarian and me wants to start getting excited about new investment opportunities that major inflection points in the cycle, that's really where opportunities are born. But we're still playing quite a bit of defense here in the short run, until we can get a better handle on how far and how fast the FED is

going to continue to move from here. So from our perspective, you gotta go US over international in terms of positioning larger caps over smaller and then we've effectively neutralized our growth versus value um bet inequities. That one, that one has been really challenging, kind of the pendulum swinging back and force between growth and value all years, so that one hasn't really paid to kind of pick um size

in terms of positioning in the past. Forward, Amanda, when are we going to start to see some good news here? I gotta tell you, I'm feeling a little pessimistic after after hearing from you. It's which is fine. I mean, it's your take on the markets, um, But when you know, if you help us look forward to is there any optimism that you have? So I don't want to be

overly bearished sounding. I think it's just important to be a little cautious here at this point that I'm already getting my Christmas wish tied up for for Sanza here, and it's sort of the impossible thing, but I'm hoping for a December FED pause. I don't think that I'm actually going to get it. I think my gifts will get lost in supply chain disruptions. But I think, honestly, I keep coming back to this idea that the single most important variable for the path forward is where FED

policy ends. It's not so much one individual meeting or another, it's where that end state or terminal rate UH for monetary policy lands. And I think if we stopped short of where the dot plot suggests the FET is headed. Um, we still have the potential to avoid recession. It's not a foregone conclusion at all. It just comes back to what the FET ultimately chooses to do well. It's an interesting time, that's for sure, Amanda. Thank you so much,

Amita Gotti. She's chief investment strategist over at P ANDC Asset Management Group, joining us on the phone in Philadelphia. Thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com, and you can also listen to our radio show at two pm Eastern on Bloomberg Radio, or watch us on YouTube search Bloomberg Global News