This is the sixth meeting of the FOMC. It's done.
To him, it is done. And we just wrapped up listening to Fed Shair J. Powell talking about the decision and the economy and what's to come. Well, you know what, Carol, The Fed leaves rates unchanged, signals one more rate hike this year. Power says Central Bank to proceed carefully on a rate path, carefully how many?
It was like a drinking game every time he said careful or careful.
Hope you weren't drinking during that.
Wow, maybe some water you had.
Been you would be drinking a lot. And then to your treasury yields, they went flat after that initial surge.
Unbelievable. All right, So let's get to it.
I will say, the Fed chief saying that there's so much uncertainty around the timing of rate cuts, and that was something I felt like in the press conference that reporters were trying to pin him down to and he would not be pinned. Although it does feel like higher
for longer, all right, So let's get to it. Let's get some analysis, because we did get an upbeat, upbeat, I should say, an update on those economic projections from the Federal Reserve, and that was certainly something we were all focused on what we have with us or who we have this a former Bloomberg colleague, Eylanina Shalaeva, senior US economist at BNP, parried about on zoom in New York City and in Bloomberg Economics US economist Stuart Paul.
He's here in our Bloomberg Interactive Broker studio, Stuart, I do want to start with you. What are or were the key points of today's decision and what Jay Powell chose to stress in that press conference.
So Powell is definitely stressing that he's going to be maintaining a higher for longer posture. I think that some of the confusion that came from the press conferences that this is just a generally hawkish summary of economic projections. That's really the content of today's F ONEC decision is the summary of economic projections showing far fewer cuts in twenty twenty four, more optimistic GDP growth path. But for some reason, Powell, when he took to the podium, said
that a soft lending is not his base case. It's almost as I was very surprised.
What does that mean? That means things are better.
It's tim I mean, I took it as bad news. I took it as you know, think aren't as good as people think.
Well, we hear Bloomberg Economics think that there is some softness underneath the surface. I think that if we're trying to analyze the intent of the FED chairman here, we have to think that he's trying to invoke some sort of a memory of vulgar which is that he's willing to do what's necessary to break the back of inflation. Yes, he's optimistic about growth. That's why we or the median member of the FMC at least is optimistic about growth.
That's what helps to explain the median projection for the FED funds rate maintaining that higher for longer posture ending twenty twenty four at five point one percent five to five and a quarter range. And if the Fed is ever going to have to rain in inflation, maybe something might have to crack. That's what I think that he was alluding to when he says that a soft landing isn't necessarily his base case.
In Bloomberger Economic Sana Wong writing officials also completely scrapped a recession forecast for this year, so definitely taking that off the table.
Heyil Initialieteva, come on in here a senior US economist at BNPP, but also our former colleague here at Bloomberg, Leane, how did you read into that comment from Fed J Powell? He would not call this soft landing a baseline expectation. What's your interpretation of that?
I think I think, you know, the Chair is alluding to some event risk here, and I think there is a lot of things that could go wrong from now on. Yes, the you know, economic growth looks really strong if you look at the recent data, but we have a confluence of significant negative risks coming all at the same time in the in the fourth quarter of this year, you have student loan repayments restart, you have a possible shutdown,
excess savings are depleting. So there are significant risks to the soft lending scenario that is reflected in the summer of economic projections. They're really seeing stronger growth, lower unemployment rate at the same time, much lower inflation. I think the event risks that will make them be cautious at the following meeting.
If you could have asked a question to the FED chair, Ylena, what would it have been.
I think I wanted to hear a much clearer explanation of what he thinks about policy legs. He alluded to that a little bit in the opening remarks, but you know the extent of how much policy previous policy tightening impacted economic growth. I would like to get a better sense of that. It seems like Chair himself believes that policy LICs have not fully percolated through the economy and more impact is coming, you know.
And Stuart, I want to ask you, you know, process of getting inflation to two percent has a long way to go. So do I read that as yep, we're not at two percent yet, so we get that, Chair Powell? Or is it that that also means you guys still have work to do and so cooler jets everybody who's thinking of Fed cuts.
You know, the projected path for the Fed funds rate target range, at least for the median voter on the FMC, seems to be almost separate apart from the economic fundamentals that they're showing in their projections. We're not getting to the two percent core PC target until twenty twenty six. So yes, the core PC forecast was modestly revised down for twenty twenty three. But we also see growth being revised up, we see unemployment being revised down, labor markets
staying tighter for staying tighter for longer. That's not the higher for longer, the tighter for longer that the Fed had been looking for. Right, So to those fundamental economic projections, those forecasts scream one more rate hike to you. I mean, it's seams as though, it's to Lena's point that maybe these optimistic projections are just that, maybe they're just a little bit of a wish and something or crack in the background. Maybe it's something fundamental like Lena was talking
about that we've written about extensively. Maybe it's something like liquidity, and we haven't heard anything about QT in multiple press conference.
Well, Jelena story rais is a really good point. I mean, how seriously can you take the dot plot out two years. It's one thing to you know, take the dot plot projections out for the remainder of the year, but it's an entirely different thing to look at it for the end of twenty twenty five. How do you look at different times there versus what they're saying.
I think I think you really have to take it with a grain of salt. Even going into the next year. You know, we did notice that the range of projections for twenty twenty four narrowed, but it's still a very wide range of totally different projections. And even this year, I think the fact that the fit downgraded inflation projections, but they still, I think in all of you are
very high relative to what will likely happen. So in this sense, you know, if inflation surprises to the downside closer to the end of the year, that will give them a way out of the lost projected hike of the cycle. We we think that they will they have reached the terminal rate.
Is there a word that you seize on in terms of what came out of J. Powell's mouth today, Elena?
In a sense.
You know, you know, sometimes he uses a word over and over. Sometimes there's a phrase and we all kind of you know, that's to be transitory, It used to be transitory data dependent.
Right.
How many times have we said that? Is there anything that came out of his mouth that you thought, Okay, this is kind of where.
Dake a dependency? But that has been their mantra for for quite some time. I think that they just want to be cautious with those, you know, steaky words.
How about for your Stewart, Was there something there?
No?
The thing that really stood out to me was that that J. Pewell didn't seem to strike, at least not to me, a single hawkish or dubbish tone. Usually, at least over the past few years, when the FOMC makes a decision, so in this case, the hold rate steady, he'll end up striking a more hawkish tone to compensate for the pause and raids, or if they were to hike, he ends up coming out a little bit dubvish during the press conference to sort of tone down any sort
of market reaction to the actual decision itself. That was not the case today during the press conference, at least not to my ear.
What did you hear? To my ear?
He sounded a little bit cautious. He used the word cautious multiple times, and they were just the same way that we see this sort of break between the fomc's medium forecast for the funds rate itself and it's forecast for the economic projections. It seems that there wasn't a cohesive narrative at least not to me when I was listening to the Price conference.
It's interesting, right, Okay, to Stewart's point, if I mean, there's a lot of risk management approach in what they're doing right now, not that they have achieved the goal, but they're very cautiously moving along.
It's risk management that is driving the decision at the point.
All right, So okay, where do we go from here? And I guess it's you know, Elena, what are the next kind of focal points for you? Is it just we're going to go from data point to data point? I mean, how do you think about November?
So we only get one with cpr CPI report and one more PEDROLS report before the November meetings. So I mean they're saying they're data dependent, but there's really not that much data they're going to get. I think what will keep them on hold at the next meeting is really the event risk. So again I mentioned a lot of things that are coming that could influence the decision to be even more cautious in the medium to in
the near term. But I think by the time they get to the end of the year to the December meeting, they will we will probably get a lot of data showing a significant slow down in economic roles in and even further slow down in the labor market, and eventually that would stop them from going another time as they are projecting in the Summary of Economic Projections.
Stuet I like the way that Yolena described event risk, these things that we talk about that the Fed absolutely has no control over.
Something that J.
Powell said, you know, higher oil prices, u AW strikes, student loan payments starting up. Once again, what's the biggest event risk on your radar right now?
Well, I'm not sure this is entirely an event itself. It is a catalyst at starting, but it's well signaled, right we know that it's in loan repay are going to be starting. In fact, student borrowers have started those repayments already, and flows into the Department of Education's coffers within the Treasury have already reached pre pandemic flows, so that typically shaved that should based on typical flows into the Department of Education shave off something like fifty basis
points from PC spending on a monthly basis. I think that that's probably I think that that's what's biggest to me other things like the UAW strike. Imagine that that's temporary shave something like one percentage point off of industrial production. That's the sort of thing that you get back though when they fire up the assembly lines again. Same thing
goes with the government shutdown. We would not even see that show up in the establishment survey if if any sort of federal agency still keeps workers on its payrolls, at least insofar as those workers will receive back pay when they are brought back to work at the end of a shutdown. Even a government shutdown wouldn't wouldn't hurt nonfarm payroll growth that much. But the extent to look the Board of Governors is sitting there on Constitution Avenue.
It's the sort of thing that they would see firsthand when economic activity within the district slows to a halt during a government shutdown. So it's the sort of thing they can feel very scary to policymakers, right.
I always think about with these kind of things, it's either kind of a one off if it ends quickly. Right. The longer these things lag on, I assume the economic impact is so much greater. Elan It was kind of fun, I guess to kind of watch J Powell deal with, you know, trying to be pressured into like when do we cut rates? Like when does it come? He says, going into twenty twenty four. The time will come at some point, and I'm not saying when to cut interest rates,
So he's very careful about that. How do you think about when we will start to cut rates?
So in all of you, you know, we will sleep into a recession, and that will be a modest recession in our view, but still that should push the FED to start cutting rates. Another consideration is something that came up during the press conference is the level of real rates. So if inflation continues to slow down and it falls rapidly, that would push real rates much higher from where they are right now. They're already in a restrictive territory, and the FED will just not want to keep pushing real
rates even higher into the restrictive policy stands. So at some point the FED will have to cut nominal rates just to keep real rates from rising further. So and we think that that time will come sometime in the middle of next year.
I think that that's generally right. I think it's in the middle of next year. I wouldn't be surprised to see something like twenty five basis points of meetings starting from June July. And it's exactly that. It's to maintain that constant spread between printed inflation and nominal policy rates, so that monetary policy stays sufficiently restricted but not excessively restrictive. I think that just tim to your question earlier, thinking about any sort of catalyst that could be shocking, that
could materially change policy decisions. It seems as though people have entirely stopped discussing liquidity, and they entirely stopped discussing the consequences of QT. But the bank term funding program has maintained essentially a constant balance. Banks are still continuing to borrow from the federal home loan banks, and we're still seeing we're still seeing deposits leaving the banking system because rates are materially higher.
If you're talking about the out, the fallout from the regional bank crisis.
Well even preceding the regional bank crisis is a consequence of quantitative tightening. The other aspect of monitor Harry policy that's operating just sort of in the background. There is an attempt to soak up liquidity at the FED. And though we always focus on the Fed's dual mandate price stability in full employment or maximum employment, the sort of thing that could pop up in the background is a liquidity event, and those sort of events tend to be
pretty convex. We don't really have the foresight of saying, you know, student loan payments are starting in October.
Again.
They happen when they happen, and I'm surprised that it's the sort of thing that doesn't come up in press conferences anymore.
I mean, COVID happened when it happened. March twenty twenty happened when it happened. These are things that you know, if you go back to twenty nineteen and the summary of economic projections, then right, nobody was foreseeing something like this, an event risk like this causing the FED to drop rates to zero.
No, exactly exactly, I mean, I don't know.
I mean, you think about this year, y Lane, and I feel like we've been all over the map right when it comes to we thought kind of the world was coming to an end MIDI end, you know, with the regional bank crisis.
But you know, we've dealt with.
Crypto over the last year. I mean, there's been a lot of things that have certainly come at this market. But you know, here we have an environment where you see certainly equity strategises continuing just to kind of ratchet their estimates higher. But at the same time, you know, I'm looking at in stocks right now or down to their lows of the session, but I'm looking at you know, the rate moves today, your two year at five point one, four, ten year at four point three, I mean, five years
at four point what five three? I mean, are these the rates that we should anticipate will continue to see certainly going into twenty twenty four.
Well, at some point the fact we'll have to cut rates and we will see some movement on that front.
Right.
I think one thing I would like to highlight though, is all these things that we mentioned in our discussion, like such as student loans and strikes and you know, the depletion of excess savings. We should not forget about that, even though we've been talking about it for a long time. Those things make the economy more vulnerable to exogenous shocks.
So some type of liquidity events and other things that Stuart mentioned, so like I think that the slow down in the economy to the point at which it approaches somewhat some stall speed, that makes the economy really vulnerable to something that could happen that we cannot anticipate. And that's an important point, and this is something that we should be watching.
Yeah, I mean there's a lot on the place.
It's certainly a lot covered by j Powell today, but a lot for us to kind of continue to moll over and we'll see how the financial markets continue to read it. Guys, Thank you so much, really appreciate it. I know you guys have had a busy afternoon watching all of this. So great to get you.
Was here late last night. I saw you on TV late last night. What you were getting?
Are you doing a.
Previa Australia Daybreak?
Oh yeah, somebody's got to do it.
A lot of central banks right now, right.
Somebody needs to talk about starts and permit, somebody needs to talk about what to anticipate from the face. It's been a busy day for us. Lena, we miss you here at Bloomberg. Eliza says, hello over there, you guys too, well, you know what, we love it when you get to join us.
Lena and on FED Day at any time. So it's awesome to have you back with us.
Totally, totally all right, be well, Kilena Shilett.
You have a senior US economist at BNP Pariba as you know, a former Bloomberg colleague and Stuart Paul, us economist at Bloomberg Economics.
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