Fed Leaves Rates Unchanged, Dot Plot Signals Hold Until End-2020

Week on iTunes, SoundCloud, or Bloomberg dot Com. You can also listen to our radio show weekdays at two pm Eastern only on Bloomberg Radio. This is the Fed Decides on Bloomberg Television and Bloomberg Radio. I'm Scarlet Food. We are awaiting the final FED decision of the Central Banks. F o MC is expected to keep its interest rate

unchanged after three street cuts this year. We await the announcement at the top of the hour, followed by Fed Chief j Pal's news conference in just over thirty minutes. Here with me are my co host, Jason Kelly and Carol Masser. Do you think we're going to hear in a good place again? It feels like it feels like we're in a good place. We keep hearing that from everyone we talked to, right, Yeah, And I think what's really key is what's the bar for the FED to

actually start thinking about raising rates at this point? Because I don't think anybody expects any kind of movement today, but I think what happens down the road, and how far down the road, that bar is pretty high right now? All right? Joining us is Scott Minor, Guggenheim Global CEIO and Guggenheim Partner's co founder. His for manager is more than two sixty five billion dollars in assets, and Jeff Rosenberg, Black Rock Systematic Fix Income Senior portfolio manager. Jeff, what

will you be listening for? Well, you know, last time we were here, I think the big story was this notion of asymmetry. And what I mean by asymmetry is this is a FED that is very much willing to see inflation rise and will be very quick to act on any signs of inflation falling. And I think he's

going to reiterate that message. It's a really important message for investors because it really underlies the importance of bonds in a portfolio, because we don't need to worry about a repeat of two thousand and eighteen, your question a second ago. This is going to be a very different FED. Will be interesting to see whether they tipped the hat at all about the policy review and moving to average inflation targeting. That's a new regime, and that's a regime

where I FED is much more willing to see inflation. Ryan, And it's not December of twenty eight we've been talking about this. I should say, right where j Pale? You know you saw that he said some things that really disturbed the market. Scott, Right, Well, I think he's gotten a lot better since then, and uh, you know he's he's better at communicating. But the thing that I think is going to be very interesting is when he makes

his statement. I think he's going to focus a lot on the funding markets and I I think that the conversation day is going to be dominated about what's going on with REPO? Can the FED really fix this? And you know a lot of technical stuff that only people like us can really enjoy. Well, did the b I S Report change anyone's thinking on what happened and how the FED address of issues there? Well, it may have changed some people's thinking. A lot of us knew how

much there was in market in leverage. You know, I'm gonna let's make it interesting, Scott, because the meeting itself isn't going to be that interesting. I'm going to disagree with that. Wait, don't put it down, but I think I think Powell doesn't want to make this about the repo market. He wants to separate monetary policy from the technical aspects of liquidity and the repo markets. And the more he addresses the repo markets in a monetary policy

press conference, the more he conflates the two issues. I agree with you. People are gonna want to ask the issue because it's an important issue, But I think he's gonna want to try to clearly make that separation. Well, you may be right. I mean, he may just want to avoid it altogether. But you know, history shows us that that might not be the best approach. And so I'm not sure if the speech writers have maybe prepped him with something, because it's gonna come up for sure.

Either way, he'll probably make the point and stress the point that it's not Kuweie. Let's check in. When Mike McKee at the Federal Reserve, Mike as boring as forecast no change in rates today, and the plot shows the consensus is no need for a rate move next year either, as they stand hold through the election. Nobody is calling for a rate cut next year, and only four of seventeen see the need for any rate increase. Nobody dissented

today either. The first unanimous decision since may notoriously unreliable this far out, but the consensus dot suggests one basis point move in one at another in twenty two. The long run neutral rate, though, remains at two and a

half percent. As for today's decision to leave rates in the range of one and a half to one and three quarters percent, The statement says the Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the committee's symmetric two percent objective. The statement

drops the observation that uncertainties about the outlook remain. Instead, it says they will quote continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate. The economic outlook word for word the same as September, except that business fixed investment and exports, which had weekend last time,

remain weak. In this statement. The policymakers economic projections also changed very little, except for unemployment. They now see a three and a half percent job rust rate by the end of next year. That's two tenths lower than they saw in September, three point six percent in three point seven percent in two, both also down to tenths. The long run NEHRU rate now four point one percent, a

tenth lower than forecast three months ago. The growth and inflation forecasts unchanged two percent GDP in slowing to one point nine percent in one eight percent in two, while PC headline and core inflation one point nine percent next year two from then on. And I know you guys were talking about this. Finally, no change in balance sheet direction, T bill purchases into at least the second quarter of next year, and overnight repose and term repos at least

through January. Alright, Mike McKee at the federal reserve as boring as it as was expected, and you're kind of seeing that when you look at the market reaction, the thirty year yield staying down as you can see they're off by four basis points a ten year yield the two year yield not really straying that much either. They're both lower as well, indicating a rise in prices. US equity indexes are mixed. They were beforehand. The sp Marsley,

the doubt off Marsley, and dollar yen now basically unchanged. Jason, Wow, boring, but we're gonna make it exciting. You are listening and watching the FED decides here on Blueberg Television and Radio, and Jason Kelly, alongside Carol Master and Scarlett Food still with us to break it down. Googgenheim's, Scott Minor and Black Rocks. Jeff Rosenberg, Jeff, let me start with you. Boring. But boring's okay, Well, boring in the sense that it's

market expectations, right. There's a lot of information in there. There's tremendous amounts of information, but it's all pretty much as expected. I'll focus on the dot plot because that often moves the market. Not going to move the market here, pretty much as consensus expected. One hike in twenty one, another hike in twenty two, but nothing in and the longer run dot no change. There was some possibility there'd be a change there that might have moved the back end.

They didn't do it here. So boring in the sense that that's pretty much as expected. But what is it telling you. It's telling you this is a FED that is on pause for a long time. It's a different regime for FED policy making. And even if they do start raising rates, they're barely raising rates. This is a far cry from normalization from years ago. For those on radio, and of course on TV, we're showing dots go on

the Bloomberg terminals. So taking a look at the dot plot, and I should point out that thirteen of seventeen officials expect no change in borrowing costs for so it seems like all in in terms of what we get. Scott, though, I do want to ask, coming off of that, you feel like we have enough visibility at this point, especially it's an election year and there are still some major issues out there now, Carol, I don't think we have

good visibility at all. And you know, it's it's interesting because when you look at what history has sold us that about nine months after the last rate cut, the FED is back in the mode of raising rates. When we're in one of these mid cycles slowdowns. So if it truly is a mid cycle slowdown, I mean I would anticipate we should probably see an acceleration of growth in the second half of next year, and that the Fed would try to respond to it. Another thing, though,

that was really subtle. That was interesting here is they left they state the neutral rate is at two and a quarter, but they said that the short term rate was appropriate, which means in their mind policy must be stimulative. Um, it's not neutral. So you know, stimulative policy should spill

over into the real economy. And uh, you know when I when I made these kinds of observations during the financial crisis, people never believe that we would get to turn around by the third quarter of two thousand nine, And so you know, I think by the time we get to the third quarter of next year, things could look a lot for eleven years in right, Yeah, exactly. Well, things have changed a lot, of course INCEO and twelve months ago, especially Mike McKee still have the federal reserve there.

How much did the November jobs report, the blockbuster jobs report really help, how in avoiding having to take any action to come around and having to tilt wish or hawkish in the near term. It'll be an interesting question to ask the members of the committee because obviously it

validated the stance of policy right now. We also know if you look at the graph of non farm payrolls that months where we have a really outsized gain unexpected gain, the next month is kind of a makeup and you have a lower than expected increase, so that could happen. They don't look at one month, however, they kind of

look farther out. I did want to pick up on something that Scott said, and uh, do a little advertisement for the Bloomberg here, and this will drive the people on radio crazy, but they can go home and uh sign into the Bloomberg and look at dots go because they've changed it a little bit now and there's a bar across the top where it says custom and you

can put in a day. You go back to two thousand twelve, and you can see what the forecasts were on the dot plot compared to where they are now, and it just shows you how completely unreliable they are. They don't have visibility and everything is going to change. But if you're trading right now, you've got to trade on what they're telling you. At the moment, which raises a question, and I'll pose this to Jeff, but Scott

can jump in as well. The long run neutral rate doesn't change, as we pointed out, two and a half percent, but in twenty twenty two they're still at two point one percent. Does that suggest that maybe their neutral rate is a little high. Yeah, it's it's certainly may and it's come down in terms of you also saw it in terms of the NEHRU coming down as well in

the forecasts. And so this is a FED that is tilting towards accommodation because of both the risks of the outlook, but also at the point I made at the beginning, the asymmetry with respect to the outlook for inflation, and and that'll be interesting for me. I think in the press conference, does heat up this change in the policy reaction function that says we're willing to be late, we're willing to be operating different. This is no longer a preemptive FED, is a FED that is trying to UH

generate inflationary UH pressures. And that's partly what you see I think in those in that path of those dots, right, But I also think it reflects that the FED is groping in the dark here, right, nehru Why we're not getting wage acceleration really? Or were inflation here? So you know, why why is nehru above four percent um? You know, I'm old enough to remember when people thought Nahru was

three percent um? You know. The the other thing that's interesting is, you know this whole thing with the neutral rate. I mean some of the members of the committee actually believed the real neutral rate is negative. So you know, maybe the neutral rate isn't two and a half or two and a quarter, maybe it's closer to one and a half and so and and that's the kind of debate I think they're having internally, and they're they're just groping in the dark to figure out what to do

at this point because they're in unexplored territory. Well, Scott, speaking to that debate, I'm just looking at our Steve Matthews. We're looking at the FED blog, the live blog that's going on as well. Most of the committees do expect higher rates in one there's a large dispersion of where committee participants expect rates to go. All in all, this is a devish message. I mean, there is a lot

of still questions out there. I do wonder among the big macro stories that are out there, whether it's trade, whether it's the elections, some other issues, what are the ones that you're watching, um Jeff, that you think could maybe changed and really impact the FED come. Well, this is this is a world in which everything is upside down. The FED and markets don't focus on the outcome for

what it means for financial markets. But the other way around, the FED focuses on financial markets for what it means for their activities, meaning financial conditions is in the driver's seat, and so what will move the FED and the dot plot and FED policy is what happens to financial conditions. And so the number one consideration today is trade policy and the trade fight that we're having, the trade war

that we're having, and how that resolves. Markets have jumped to a conclusion no tariffs imposed on December, smooth sailing, everything's gonna be fine. So you're vulnerable if it isn't. And the vulnerability and financial markets means there's a spike in volatility, and that's what drove the FED back into the markets to move from hiking to cutting. That's what would move the FED. I think most likely in this environment.

Mike McKee down in Washington, I want to ask you what you make of the FED stands on the repo market, especially given that is a story that has dominated Bloomberg headlines over the past couple of months. We spent a lot of time talking about it on our show. I know Scarlett has as well, and I know you have Where are we on that question? Yeah, well, the statement doesn't move us anywhere on that question, but I think

Jeff had the point earlier that it was corrected. They want to keep that separate from monetary policy at this point. They don't want it to be seen as any form of policy making, any form of QUEI. So if there is to be any kind of announcement or any kind of change, it may come from j Pole in the in the press conference, But I would put it to Jeff and uh to Scott. You're looking at right now reports from the b I s that it wasn't a one time confluence of random events in September, that there

are structural and regulatory problems out there. And then you have that that note that went around yesterday from Zoltime Posar of Credit Suites suggesting we could have big problems at the turn of the year. What would you like to hear, j P. I will say, what what's needed for the markets at this point? Well, look, Mike, I think that the problem here is beyond the control of the FED. UH. I think they understand that macroprudential policy

that was set up UH. You know in the wake of the financial crisis has created a matrix of regulation which we're now starting to find the limitations on UM and so, you know, regulations like the g SIB which basically sets leverage ratios for the banks. UH. That gets set at the end of every year, and the banks traditionally sort of go above the ratio until December thirty one and then they shrink their balance sheets suddenly at

the end of the year. That's going to cause a lot of issues coming into the end of the year and its issues I think that are beyond the control of the FED. UM. The repo market is dominated by four banks. UM, they can't you know, the transmission mechanism of these banks aren't willing to expand their balance sheet. I'm not sure how the liquidity flows from the FED to the markets. And UH, I think they have a bigger structural issue here which is outside of their control.

So we're talking with Jeff earlier about financial conditions and how that will drive the FED in twenty If you bring in the repal market and the funding pressures we've seen and the fact that it will kind of continue to be an irritant, could the repal market squeeze end up infiltrating financial markets and affecting financial conditions to the point where the FED then has to respond to that. I know we're getting circular here. Sure, I don't think

we're gonna the repo market. It will self. I think I can get really sloppy going into the end of the year. I think we could have a lot of dislocation because if you can't finance this collateral, the only other option is to sell it. So we could see, you know, some some significant sell offs going to the end of the year in fixed income in particular. But you know, the thing that I've you know, Jeff is talking about the uncertainty, and the thing that I find

interesting is this skew in options pricing. Uh. You know, all the put buying that's going on around next year. Uh, and the election looks a lot like what was going on back in two thousand and sixteen before the election. And so you know, history shows us that when you have this much sort of hedging occurring in the market, that once you know, you get past the risk event, if you haven't had some major bad piece of news, it's we're likely to get a lift in stock prices

and risk assets across the board. All right, So we could see some big moves later on. Mike McKie, I know you're about to head into the news conference that J. Paulb be hosting in about fifteen minutes time. What kind of I mean? I know that you're not going to give us the exact question, but gives a sense of where you're really gonna russ him? Well, I think we want to know if there is any kind of concrete or or clear explanation of what the Fed's reaction function

is now. Is it inflation that they're watching that would cause them to maybe change their their forecast, their outlook for rate moves. And obviously there are questions about the repole market. We were laughing today. We could ask about Steven Strasburg and Garrick Cole's new baseball contractor they're gonna be pushing wage inflation higher. Uh, at this point we could ask him anything like that. Well, Mike, I gotta say, I don't think it will be at the Dodgers. Yeah, alright,

looking forward to those questions. All right, our thanks to Bloomberg's Michael McKee. He'll rejoin us after FED here j Powell's news conference, and we'll get back to Mike shortly. I do want to continue, We do want to continue with our roundtable here. So, Jeff, I do wonder about kind of though this subpar growth, I mean, do we start to see um growth at all pick up in

your view and term of the U. S economy? Well, you know, I think we've got to unpack what you mean by subpar growth because this growth is actually above potential, and it's you know, while potential one in three quarters is subpar relative to history, forget the history. The world has moved on, demographics has changed, productivity has changed. We're

outperforming our potential. So this is actually quite good growth. Uh. And as as Scott said, there's a case to be made that it could get that much better because we're providing accommodation. Housing is turning, the labor markets are are quite strong. So I think the growth picture, at least in the US is good. Now globally there's a subpar story, and that's certainly been a big part of uh this year's recession, fears that the US would import the world

subpar growth. But next year we could flip that around and the US could export it's above par growth to the rest of the world. UH So, I think the FED is a little bit less concerned about the growth picture and a bit more concerned about the inflation picture

thereof exactly, but from too little. And that gets you again to this asymmetry on the inflation and that's really their problem, and it's a problem that they think they have the tools because inflation is a monetary uh component, and they're going to be focused on how do we get inflation back up and how do we avoid deflation and really did the deflation in inflation expectations, because that's the concern. Well, Scott, we could talk a little bit

more about baseball. I would love to do that, But related to that, let's let's talk a little bit about the consumer and maybe the CEO, the typical CEO who you're talking to, how is he or she feeling as they're reading this from the FED and looking forward to j Powe, Well, I think, look, I think that your typical CEO is trying is basically putting everything on hold. Um, we have all these questions around charade, the supply chain, and you see it in expectations for investment next year.

So I think most of them are just focused on, you know, how do I milk as much productivity out of this as I can? When you know, as Jeff was talking about, you know, you aren't you know, we're not seeing runaway wage pressure, but you know, we are seeing wages grow between three and three and a half percent, and you know, when you have margin pressure, I think they're going to be focusing on that more than anything.

But they're not building a new factory that there. We're not talking about huge expansion for a lot of C E s now. And I think that you know, this is one of the unintended consequences of the trade policy, is that the advantages that were offered in the Tax Act, of immediate expensings, of capital expenditure, all these things that you think we'd be out there just going to town on the uncertainty around uh, you know, the the the

supply chain. Uh, you know where where in the world you invest is got people, you know, basically biding their time, waiting for a better opportunity. Three rate cuts don't make the CEOs feel any better about wanting to to put their money to work. You know, it's interesting when I talk to people about the economy, I get a fair amount of pessimism. Um, you know people are you talking to well Carol, okay, Well here's the deal. You talked to a lot of people and it doesn't feel so good.

And you do have folks who running companies that are hesitant. And I think about three months ago August, we were talking constantly about recession. There were there was a lot of nervousness. And here we are today, like things swing back. So where are we fundamentally well, fundamentally, I think we're in a good place. I mean, you know, again it's a little defensive, Jeff. Jeff commented, I mean, you know, we we have solid job growth, we have wage growth.

You know, the consumer is really pulling this thing along. If you want to get near term. You know, the correlation between stock prices and Christmas sales is very strong. You've got year over year sales. Maybe in the neighborhood of five percent or more, which is a big piece of consumption. So you know, uh, you know, things look pretty good, and I think that uh uh, you know, as we go into the next year, we now have the e c B back in the mode of expanding.

It's a balance sheet. We've got the Fed expanding its balance sheet. I know it's not quantitative easy, but I do think it's large scale asset purchases. Um and um, I know, uh and uh. You know. The other thing is that the Germans are finally coming around and who you know, everybody's complained in Europe that they haven't taken lead with physical stimulus. Now Merkel is being forced into that mode and you know, we'll see you know, some

stimulus out of you know, Europe. So you know why there are so many people putting on more put positions. Why are you know, there's more stories about planning for risk in so why are we getting that. Let's not conflate financial markets and economies those two can be just so.

The financial markets have it wrong, not that they have it wrong, but when financial market valuations are at as high as they are, when people's folios are exposed, and then you have an uncertainty that is unmeasurable, like trade uncertainty. It implores you to add some protection even if it has nothing to do with your fundamental macroeconomic outlook can be great, and the fundamental macroeconomic outlook can be lagged to the financial markets rather than the other way around

its financial market outcomes. That was my point Earli, about financial conditions that lead economies rather than the other way around. And so our focus on the economy can be wrong if we're trying to manage portfolios there we have to focus on risk positions, exogenous factors to the economy like trade, trade uncertainty or other factors. And that's I think where

you can get the put option by. This is the FED Decides on Bloomberg Television and Radio and Scarlet Food, joined by my co host Accow Master and Jason Kelley and with of with us, of course, as always Jeff rosen Berg of Black Rock and Scott Myer Minor of Even Time. I want to bring up a chart on recession because Carol brought up how in August we're talking about recession. The fears were all around us, and for those of you on radio, what we've seen is that

the odds of a recession have come down. In August, they reached almost according to the New York Fed and Bloomberg Economics this model, but it's come down to about from the New York FEDS model and thirty three percent for Bloomberg Economics. Jeff, When you think about the prospect of a recession, what do you look at to get a read on that likelihood? Is it the yield curve? I mean the New York Clereds models based on the yeld curve? Is it that? Or is it something else? Well,

that's what I was gonna say. It's like, these recession probability models are the levels that you get out of them are highly dependent on one, do you do you put in the yield curve? In two? What's the coefficients

that you use on the yield curve? And and answer your question, you don't want to use the yield curve or you can't use the quantity of the yield curve in the same way, the yield curve direction is telling you the right message, but the size of it is not applicable because we changed the nature of the yield curve with global QUEI and negative interest rates and so that's distorted that measure, and it's probably led to an

overstatement in the degree of recession probability. The direction is correct, I mean, best recession probability indicator is overheating from a job market that's overheating, and that's the unemployment rate. But the lags from the trough and the unemployment rate to the subsequent recession can be quite long, and it's not necessarily the case that you get that recession probability in the next three or six months the way that these

models are saying. All right, so Scott, final thought before we hear from j Palell in just a few minutes, what are you expecting to hear from this very well behaved fed chair. Well, exactly. It's always exciting moments here and speak. Um, you know, I think you know, I think Mike is right. I it will be interesting to see whether he gives us some clues about the asymmetry question. That is a rearly from the last meeting. They made it clear that if they needed to cut rates again

they were going to do that. Um, I'm not sure they're gonna They don't want to take the punch bowl away, but I'm not so sure they wanted to emphasize that as much as the past. And uh, you know, also I think will be interesting to see whether he addresses the job report and the signs that things seem to be stabilizing and improving. Jeff, what do you think? What do you want to hear from him? Yeah? I mean,

I think this a symmetry question. I think you know, whether he answers it more specifically around moving towards average inflation targeting, what their concerns are around falling inflation expectations as a driver of that shift. Um, I think those will be some of the the key some of the key issues, and whether or not how much they address some of these near term drivers to their decisions, whether it's trade or the jobs market, that would be interesting.

It would be interesting as well. Uh, you know, there's this gap with you know, with the tail of to Phillips curves, got wage inflation that is accelerating, but it is not showing up in broad based inflation. It's part of the inflation narrative that says we're worried about this lack of inflation, yet we see inflation and jobs markets. Will that tip over what are we looking at? What are we concerned about there all right. Jeff Rosenberg of Black Rock and Googen Hime's Scott Minor. They will be

rejoining us after j Pale's news conference. We have about five and a half minutes to go before j Pale begins speaking. This is the FED decides on Bloomberg Television and Radio. If you thought someone was missing from our coverage this afternoon, you are correct. It is Tom Keene and he's actually in London because we decided to move

him to where the excitement is. Tom and it's not in New York and Washington, because the Fed will pretty much do as is expected, but it is in London where we don't know what's going to happen with the election tomorrow. The polls show some tightening here between Labor and Conservative, don't they. It's really really interesting. I watched very carefully the newscast at six pm here in London and there's a couple of messages Scarlett. Really some of

it goes to the slow economic growth. To Scott, Jeff and Michael have been talking about. What's fascinating here is one how everyone is worn out by the Brexit debate and they are absolutely frustrated by the divisions in the country. Within a parliamentary system. We have to remember Scarlett tomorrow, there will not be a vote for one prime minister

one election, even five elections. There's really six hundred plus different elections that will call us around Prime Minister Johnson or Mr Corbin or maybe one of the so called variations of hung parliament. We can get. What's interesting to bring it over to the FED meeting today is all of this comes from subpar growth and from the subpar employment and the underemployment that we see both in the

United Kingdom and in the United States. Carol is doing a little cheer here as you mentioned the words some part. I believe Tom said that both of you talked about subpar growth. Well, I I think we have to distinguish between the growth coming in subpar as a function of low potential growth and what we're actually seeing in terms of growing When you say subprime, when Tom is talking about subprime, it's that our growth levels are lower, and

that's a function of what Tom's talking about. Elections, fiscal policy, political systems and choices on how we construct the economy, incentives, the role of government. All of those things change potential growth and potential growth is lower. And that's what that vote is about in Brexit is what our vote is going to be about next year as well, in terms of the elections, Tommy want to come back in Yeah,

I do. With Jeffrey Rosenberg. Jeffreyes some years, losses this week, the death of Paul Walker and of course the huge death of Marvin good Friend in a way too young age. You studied at Carnegie Mellon under the Meltzer School, the Freshwater School, and so much of their theme is that we would run out of ammunition if we were too accommodative. Does this fed into the dot plot that we showed earlier and I say good afternoon to Bloomberg Radio worldwide?

Does this FED risk running out of the ammunition to assist the country? I think the good news is that the FED has more ammunition. I think Tom you're over in the UK. It's closer to Europe where that's a much more pressing story, and they are closer to if not already ran out of ammunition, Our FED is not.

It has that potential, but there's enough steepness in the curve, there's enough forward guidance, there's enough potential l SAP expansion, quey expansion where there's more ammunition for the FED, but the longer you use it and the longer your policies and the lack of fiscal policy to help your monetary policy, which has very much been the case in Europe. UH, as long as that exists, it pushes the pressure for monetary policy to do more, longer and longer, and that

exhausts the ammunition. And that's what you've seen in Europe. Scott, what do you think, um Tom is in London? I want to fold the ball back in here because there's talk, of course that if something does happen, if there is a shock, the b oh you will need to act doesn't matter at this point. Well, I think, look, it does matter that they do respond, they don't just sit

on their hands. But you know, to come back to what Jeff was saying, and the question from Tom is central banks are there to help smooth out business cycles, right, They're not there to solve structural problems. And the issues they're facing in Europe, the issues we're facing in Japan, and the issues we're facing the United States are all structural. We're running out of workers. You know, you can talk

about regulation. You can talk about productivity, but the reality is that if we don't have the factor inputs to grow the economy, the economy just slows down. And I think that that that turns into a political issue. But there's no magic wander, easy fix. We're going to have to face the real problems. Alright, final thought from you, Mr Keane, were in London. You've got a lot on your plates still this week. Well, I think it will be very eventful, certainly for the Fed into two thousand twenty.

There's no question, Jason, it will be eventful for the United Kingdom. What am I watching for tomorrow? Of course we can't talk about it tomorrow. They have very strict polling rules. But in our special coverage tomorrow night at five pm New York time and ten pm London time, all of that will be wrapped around this tactical voting, the idea of choosing even if I don't want to vote for candidate B, I'll vote for candidates C because it will do something with candidate A completely different than

what we see in the United States. Tom King joining us from London, thank you for making a special guest appearance there. Tom of course is in London to cover the UK elections. It will be interesting to hear what he discusses tomorrow on Bloomberg Surveillance. Is they can't talk about the AK elections. I think they're gonna talk about the FED, and they're gonna talk about j Powell. And this is the FED decides on Bloomberg Television and radio.

I'm Scarlet Fool alongside Jason Kelly and Carol Masser the highlights from the Federal Reserve Chairman's news conference. He was a fairly dubbish tone here. He made clear that the FED will not raise rates until inflation is at two percent or higher. In fact, he said some participants penciled in inflation overshoots in their outlooks as well, and in response to Michael mckie's question, he indicated that there is flexibility on plans to widen expand the balance sheet, including

perhaps coupon purchases. He mentioned as well that in hindsight, the FED rate hikes UH that were taken, including last December's, were not a mistake. He said, in terms of an update on the FEDS Monetary Policy Framework review, it will take until mid and h the idea that nothing is going to change is not correct in terms of market impact. Investors seemed to like what they heard from J. J. Powell.

Bonds extending the rally, the ten year yield, and then two year old falling stocks turning decisively higher, the US dollar sinking. You can see their weakening versus the yen at one O fifty two, crude oil extending or should say pairing its decline. It had full and as much as one point nine percent on an inventory build, and gold extending its game. All right, so let's get little bit more analysis. Let's bring in Diane Swank. She's grand

Thorn and chief Economists. She's joining us from Chicago. Still with us is Scott Minord, Guggenheim Global CIO and Guggenheim Partner's co founder. His firm, by the way, manages over two hundred sixty billion in assets, And also still with us Jeff Rozenberg, black Rock Systematic Fixed Income Senior portfolio Manager. But I do want to start with you, Diane, because the scarlet just mentioned overwhelmingly, we're seeing kind of feedback

um this FED day as being a dovish one. But your note to say that the statement of forecasts are slightly more hawkish than one would expect. What stood out for you, well, I think there's a real disconnect between Powell as the dove and much more dovish than many of his regional counterparts at the Federal Reserve banks, and what what the statement is and what the forecasts are. So what we see is a forecast where inflation stays below target, yet they don't have rates being cut in

That doesn't make sense. It should be actually having rates being cut. I was surprised that he said all of the rate hikes in were not a mistake. I think you could maybe argue the first three rate hikes were justified given the data we had at the time, but

the fourth rate hike in December was a mistake. So you know, there was a little bit of a pushback there from the Fed in terms of what we've seen before, more of the humble pie that they were eating and sort of eating crow a bit much of this year. That was sort of being backed off a bit at this um with this statement and the forecast that we saw. All right, So Scott, little humble pie, little crow being eaten there by j bel do you agree with that? What was the tone that you took away well, I

took away a couple of things. I think the piece of information that we got that was important that we didn't know, because most of it is a rehashing of things that we didn't know, was this small, little off comment that he made about what you didn't see in the forecast that were written down around inflation, and he said something like a number wrote down overshoots on inflation

as appropriate. And that's important because overshooting on inflation is the new framework review about average inflation targeting, and I

think they're setting up some of that. There's a lot of discussion on inflation, a lot of questions about the lack of inflation, and I think he's setting us up for next year and trying to build that sense of credibility and talking about how the FED builds credibility, not just in terms of saying we want to target inflation, but you need to back it up with with policy actions. Mike McKee now joining us. Of course, he stepped out

of the news conference after it concluded. Mike, you asked some questions, very good questions on the b I S Report and the REPO market, and the FED chair gave indication that there's some flexibility here when it comes to expanding the balance sheet, it's a start contrast to what we heard last year when he made the comment about the balance sheet expansion being on winding down, being on autopia.

In a couple of different ways, he acknowledged it has been quite a year for the FED because, of course, at this time last year, the FED was also raising interest rates and suggesting they were prepared to continue doing it. And uh, he had a little humble pie there suggesting

maybe they have learned something about visibility and forecasting. But in terms of the repo rate, Uh, they think what they have in place at the moment, the term repo and the overnight repot facility and the sizes of the auctions that they're presenting are going to be enough to get through a year end. But he said, we are looking at regulatory changes. We are looking at the possibility of buying coupons instead of te bills, and if we

see that it's necessary, will do that. Now. Some of the things he talked about obviously deep in the weeds of the plumbing, like different banks having a different characteristics on their balance sheets, that sort of thing, But it does show that the FED is paying attention to what's going on, even if they are not in the same

place as some analysts who think trouble is coming. I gotta say, Scott, I was watching you as Mike us that question, and as J. Powell said, these are very important operational matters but unlikely to have any macro economic implications. You had a little bit of a did find it interesting that, you know, he he left the door open subtly that maybe things at the end of the year

could get a little bit rough, right. The other thing which was interesting was sort of like, you know, nothing to see here, you can just drive by, right, we got it, Yeah, we got it. You know, nothing to worry about. But you know, look, we're we'll find out. But again I think, uh be good to have some cash on hand at the end of the year. Do

you buy that idea that there's no macroeconomic implications. Well, I think that that the FED will work with the regulators to fix the problem before it turns into a macro One thing about the difference today and two thousand and eight. Policymakers were slow to react, and now they're on a hair trigger, and and they just don't want to let this get out of control. He also said that it's not the Fed's job to eliminate all volatility, So you could have some volatility around the your end.

It won't necessarily be macroeconomic changing, game changing volatility, but you might have some volatility. Well, and Diane Swan coming back in here from Chicago, it's also interesting to sort of see maybe a moment where the FED steps a little bit out of this very harsh spotlight. It feels like it's been in for this entire year, and certainly what a difference from a year ago, as you alluded to, what does that mean for investors maybe in the short and mid term if the FED is not as big

of a concern. Well, I think they really do want to be on the sidelines. They don't want to be part of election year politics. That said, I think some of the points that Jeff made earlier about the FED wanting to overshoot on inflation, they're really setting the stage, even though it's not in their dot plots that you know, Sharon Paulle is pretty clear to say, don't look too

much at those because they're out of context. But the idea is that he is more devish than what we were seeing out there, and I think the idea that there's more slack in the labor market and you'd really need to see wage is with a little heat in them to really feel like the labor market was hot. Those are suggesting that the FED actually has a much lower threshold to cut rates and raise rates. And I think we still will see an additional rate cut at

least one next year, if not more than that. And that's something that the FED doesn't want to say up front, but I think the Fed, I think chair and Poell is more than ready to do and he's been able to get the votes even when it was tight. That's exactly what I was going to ask you about. So you expect potentially one more rate cut in is recession at all on your radar, Diane? What's still on my radar? Because we still don't know exactly what's going to happen

and how long. Um we'll hit the pause button on trade. If we can hit the pause button on trade and roll back some of these tariffs, we can certainly do well and continue through without a recession. If we were to see some kind of reaction function in a few months where all of a sudden, the delay in tariffs were taken back and we were seeing an escalation and trade again with China that would change the equation up the antien risks and trade on interests of a recession again.

I think that is where we're at. The good news is we seem to be de escalating at the moment and that gets us a little wiggle room. But his chairman Paul was very careful to point out even with the U s m c A getting passed, it doesn't raise lift avail of uncertainty with China. And even then, you know, we still have uncertainty if we keep the tariffs in place that we have in place. There still is uncertainly about with trade policy will be post election year.

We're all highly attuned to the facial reactions that you

guys have. Scott, you raise your eyebrows when Diane talked about a possible rate cut in Well, you know, I really appreciate it when people disagree with me, because I mean, seriously, you know, Diane's a great economist, and uh, you know, I like people that can can give me something to think about because you know, look, you know, I actually invest money, right and unfortunately, my clients pay me to have an opinion and so I have to have an opinion, and uh, you know, and so the one thing I

always find about having an opinion is the only thing that can happen if it could go wrong. Right, So you want to hear somebody else give you a really strong argument, and uh, you know, while I don't agree with Diane, I think that I have a lot of confidence that President Trump wants to get reelected and he will probably tone things down. Uh. And you know, look, I wouldn't be surprised if you know, on Sunday, you know, we see a tweet about you know, he's really good

friends with she and President She and the president. She's making lots of headway and you know, we're buddies and we're gonna get together happen in election years. Right. Oh yeah, that is that is the assumption, by the way. But I agree with you on that assumption. That said, there's a lot that can go wrong with China in um in the next twelve months. Well, I think Diana, that that the the issue with you know, China going bad in the next twelve months. We you know, that's about

how long it is till the election. And I think that he doesn't want to risk that in the face of the election. I do agree with you, there's a lot here they can go bad. But you know, I, as I say, I'm I've got to have an opinion. So I'm gonna go with Donald Trump wants to be president again. So all right, Mike, we Ki jump in here. I know you have a question. Well, it kind of

follows from all of that. I guess I'll pose it to to Scotter dug given the events of the past year, given the fact that a year ago J. Powell kind of stepped in it at this press conference by suggesting that we were going to face the status quo? Can you really come up with a long term horizon trade based on the FED given how they've shown they don't

seem to have a lot of visibility either. Well, you know, one thing, Mike that I always like to reinforce with people is I think we all need to have more confidence in the willingness and ability of our government to print money. And so the thing that I know I can fall back on is the comment I made earlier, uh to Scarlet, which is the feed is on a hair trigger, and we we see that, you know, the first sign of turbulence in December, they were willing to

go on hold and reconsider everything. And if you look at the stock market, the minute they went on hold and Williams went out and did the mop up exercise. After that meeting, stocks came roaring back. So, you know, it's not clear that we had to have all this, but at the end of the day, things weren't doing so bad before we stopped and we started cutting rates. But clearly they want an insurance policy that this thing is going to stay on track. Jeff, what are your

thoughts on all this? Yeah, Look, I think Diane and Scott are laying out these these kind of two sides of the argument, but the core of that argument rests on you know, can you get in the mind of the president and his decision anyone? Do you do you feel lucky about there's a lot of shots. I'm not sure how many bullets are left in that round. Uh So that's that's the part. It's not risk, it's it's it's uncertainty and you can't measure it. And you know,

you can take both sides. I think I think what's clear is that this is the issue, and Sunday may give us a little bit of a of a kick that can uh down the road. Um, But you know you got to have an opinion. It's just what do you base the opinion on. And I find it hard to want to put a lot of my investor's money writing on an assessment of somebody. I have no idea how to how to judge. But you know it's like the old rush song. You know you can choose not

to decide, you still have made a choice. So if you if you don't quotes Rushman, come on back in on this, Diane. What are your thoughts here in terms of the election and the impact above my pay grade? You know, I mean, you know talking about I can't imagine a scenario where this election year adds certainty rather than uncertainty. Um, even if we hit the pause button on trade, So that still is out there, and I think that's something that we have to deal with. That

doesn't mean the economy falls apart. What does matter is if there is as much as the FED is on a hair trigger, they don't have a lot of triggers left to pull. And on the flip side of it, we also know that in the speed of a tweet, policy can change on trade and that's a hair trigger as well. And that's something, as I said above, my pay grade to forecast. I know Scott has to have an opinion, Jeff has to have an opinion. I appreciate that this is such a amazingly uh kind disagreement. I

have thought that's how we do it here. Well now seems as much as time. Well, I appreciate it, and it's worth it to challenge all of us. We all want to be challeng absolutely well. It's worth bringing in as well the idea of political pressure from the top and someone who has handled it well in the past. Of course, this week we saw the passing with giant in the finance world and in the world of central banking, Paul Volker, of course, passing away the age of ninety two.

There's a recent Bloomberg opinion piece written by the former Boe governor Mervin King. He says Vulgar established his reputation at the FED as an inflation flight fighter between seventy nine and eighty three, when short term rates rose to more than double digit inflation was conquered a long time ago. That episode did more than anything to convince people of the need for the fed's independence. And it proved how vital it is for central bankheads in particular to resist

political pressure, often from the very top. Now, clearly we don't know what the President is going to do, but we know that he will likely say something. But I do want to get everyone's thoughts on the legacy of Paul Volcker and whether um, as one reporter asked j Powell, he cast a long shadow over the FED in terms of how they think about fighting inflation and the scourge

of inflation. Well, you know, I think he did, um and and the reason I say that is for thirty years we were we were concerned about pre emptive tightening to stop inflation. And I think what we just lived through last year was the sort of you know, ingrained legacy of we got to get ahead of inflation before it takes off. I think what policymakers have discovered is

that deflation can just be as threatening us inflation. And maybe, you know, the Vulkers leaning against inflation was appropriate for the time, but we've we've moved beyond that. Jeff. It's got a few minutes ago mentioned printing money, and of course we live in an era. We were just speaking earlier this week with Stephanie Kelton about modern monetary theory. I mean, Paul Looker had some thoughts on that, to to say the least, But this feels like a different

era in a lot of ways. Well, it absolutely is a different era because that was an era of inflation, the anchored inflation expectations, and where the policy challenge of the day was to rain those inflation and inflation expectations. In today, it's different, and that's why we're talking about printing money and modern monetary theory, because we're challenged on too little inflation, and so it is a very a

different era. Uh. And folks of an inflation fighting earraw might look at what we're talking about today with shock, but some of them, including Volker, could recognize that the challenges were different and so the prescriptions uh for solving them are different. So, Diane, in terms of the prescriptions that we need inflation versus deflation, it sounds like you'd

be a litt bit more concerned about deflation at this point. Well, I think you know, the fat is still I mean, you know, Paul went on at length of what he would inquire to see a hot labor market, you know, wages really heat. We need some heat out there. We still don't have the heat. And you know what's interesting too about the labor market is as good as things are, the labor market for new college grads and college grads in general is still worse than it was in late

That's another little caveat that we keep missing. We've got more under employment than we once did, so even though wages are accelerating at the entry level, we're still not seeing that move up into the higher level, the management levels. We've talked about that a lot in the past. I also would add one little caveat on a legacy of

Paul Woker. He pushed hard against the deregulations that we saw in the nineteen eighties, and that's one of the reasons he had to resign from his position because he got out overruled on regulation by his other FED governors um in seven. I think it's important to think he also was one that was warning about the concerns of what his legacy is, his long expansions, which also come with complacency, and he's worried about how far we could get stoke financial bubbles today. Well, that's a great way

to end the conversation. Our thanks to Diane's Wanka, Grant Thornton, Googen Himes At, Scott my nerd Black Rocks, Jeff Rosenberg, and of course Bloomberg's Michael McKee down there in Washington. Well, you're listening and watching the FED decides on Bloomberg Television and Radio. I'm Jason Kelly, alongside Carol Master and Scarlet Food. Let's listen to some of the highlights from FED Chairman

j Powell's news conference. With our decisions through the course of the past year, we believe that monetary policy is well positioned to serve the American people by supporting continue to economic growth, a strong job market, and inflation near

our symmetric two gold. While low and stable inflation is certainly a good thing, inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer term inflation expectations drift down, pulling actual inflation even lower. In order to move rates up, I would want to see inflation that's persistent, uh, and that's significant, A significant move up in inflation that's also persistent before raising rates

to address inflation concerns. That's my view. Looking ahead, we will be monitoring the effects of our recent policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the federal funds rate. Of course, if developments emerged that caused a material reassessment of our outlook, we would respond accordingly.

Policy is not on a preset course. All right, Well here with this in New York City to wrap up today's decision, Carl Ricka, Donna Bloomberg, I Canot's chief US connois and our Jersey Bloomberg Intelligence chief US interest rate strategist. Alright, gentlemen, you've had some time to just synthesize it, analyze it all. Carl, take it off with you. What do you hear from J Pow? This is a FED that's increasingly confident that three cuts was the magic number, or they're going to

sit back. The hurdles are high for additional action, even though the dot plot shows that the next move will be a rate hike. In fact that the current time, the hurdle for a hike is actually higher than additional easing. So the Fed today told us we'll see you on inauguration day. Does it change anyway? Thinking about what happens in terms of rate moves or the economy, the economic outlook.

This is a FED that's on hold, and I think that probably not not so much today changed my thinking, but the resilience we've seen in the labor market over the last couple of months tells me that we will be able to execute a soft landing here. Consumers do have the spending power to carry us through until conditions hopefully improve in twenty twenty. But if the trade talks go poorly over the next couple of days and all

bets are off, I wrote, what about you. I know you're listening carefully to all the comments about the repo mark, you know, the repo stuff. I thought it was really interesting, in particular that j Pali said that they might tweak regulations and rules for banks in order to uh quell some of the things like interday liquidity and maybe make repo a little bit less balance sheet intensive. And I

think that is something that is probably needed. It's probably not the only issue that the repo market has been having, but it's certainly a big one. And I think the fact that they acknowledge that and also moved away from the idea that they're going to use a standing repo facility, and that's gonna come out anytime soon. So I think those are the two things that came out of here

that we're really new. One of the things that we discussed is when j Powell said, in response to Mike McKee's question that they're very important operation matter, but unlikely but unlikely to have any kind of macro economic implications as a result. Is he right, Yeah, so you agree

with So I do agree. I think that the only real macroeconomic implication for for any change to these regulations and to the repo market is if repo rates were persistently very high, because that would make funding treasuries even higher, and that would actually have the effects of probably steepening the yield curve a little bit and making yields higher

than they should be. And that's one of the reasons why the FED needs to focus on this and needs to make sure that treasuries are well funded and the kind of the grease around the wheel bearings and really really lubricated. Otherwise you can wind up with, you know, a very squeaky wheel and if you don't want it to fall off and create volatility in all the markets. Alright,

So Carl Roydonna. A year ago, J Bell stood up in front and sort of unwittingly, I think, unleashed a whole series of events that made for a very interesting back half of December. Very well behaved reading his script, J Pell today, is he reflecting, well, what's going on

in the broader economy? I think he is, and I think he learned from that experience last year, where not that they were not aware of what was happening in the economy, but the market was already down something like twelve going into that meeting, and then they tried to be economic cheerleaders and that just came across as tone deaf, and things got worse as the A quarter war on, and then Christmas Eve was kind of the crescendo of it. All. Um this time around that they're being very cautious, very

well choreographed, well telegraphed. Everyone was clearly singing from the same hymnal following the October meetings. So what today was really not a surprise in any any shape or form. Go ahead, you know how much of a factor is the FED then for the next couple of weeks, because they've made clear what their stances they're in wait and see,

and they don't really see an impetus to do very much. Yeah, I think that the you know, with the FED on hold, and like you know, Carl, Carl and his team think that the Fed's probably gonna be on hold at least until we get you know, very significant changes in the in the data momentum. So I think that over the next couple of weeks for the FED, they're really going to focus on this year end. I mean j Pal

even said it. So tomorrow, the FED at around three o'clock is going to come out with a new schedule for repurchase agreement operations and I think they're gonna add one, maybe two more term operations that are going to go over year end and increase the sizes. So they've been doing these two week operations they roll off, two of

them roll off next week. They've been about thirty five billion and undersubscribed, so I think they're gonna raise that to maybe forty five or fifty billion, and that way they're going to inject as enough liquidity to kind of quell these fears that I think a lot of people are talking about. I thought it was interesting what Diane Swank had to say about maybe another interest rate cut come.

Is that even likelihood in terms of what we're seeing in the market, Well, the market, the market is still pricing for the better than even odds of a cup by the end of next year, but it's kind of linear. So I feel like it's the market kind of discounting volatility in the economy and maybe a bad case in both trade and something going on with the election, But you know, the markets, the market certainly thinks that an ease is much more likely than a hike at this point.

The the election poses a big hurdle for the FED to actually tighten policy next year, as does the fact that the FED has undershot on inflation something like at the time of the time since two thousand and nine, so they're willing to let it run a little bit hot. I can't see a hike next year, but certainly if we lose momentum, if growth momentum looks like it's going to dip a little bit further, how the FED could be a force back into action, even though that's not

what the dot plots reflecting. And the final point I'll make is that pick your favorite spring holiday. Whatever the FED is doing in the spring of an election year. They tend to keep doing that through the elections. So if they're in slow hiking mode, they'll continue in slow hiking mode. If they're on hold, they'll stay on hold through the election. Carl, quick question for you, last question trade geo politics. What's the biggest worry inflation? Employment? What's

the biggest worry for J. Polle at this point? For J. Pale, at this point, I think it's trade. He acknowledged that that was the big unknown variable forward this year as he reflected on, you know how the Fed could have maybe orchestrated policy differently. Uh, And certainly if things seem to unravel in the current trade negotiations, which earlier today the Wall Street Journal noted that the senior negotiators in China hadn't spoken in ten days with the scene your

negotiators in the US. So if trade falls apart, that could certainly up end the feds well intended plans. Cal RICKA. Donna of Bloomberg Economics and Ira Jersey of Bloomberg Intelligence, thank you both so much. We have a stock market that is in the green right now. The SMP up a quarter of one percent, bon yields are lower, the dollar is sinking as well or falling, you should say, and uh, President Trump has not tweeted on the FED. That does it for our spread special on Bloomberg Television

and radio. Thanks for listening to Bloomberg Business Week. You can subscribe to the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show every weekday at two pm Eastern only on Bloomberg Radio