Welcome to the Bloomberg Markets Podcast.
I'm Paul Sweeney. Alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven News. Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's bring in Liz McCormick. She is our chief correspondent for Global macro markets over at Bloomberg News and Joe Wisenthal host You know him as the host of the Odd Lots podcast. I know I'm as the host of
What You Miss. It's a show I deeply miss. That's what I miss is that show. In any case, I want to get the take of both of you. Liz, I'll ask you first because I couldn't sleep last night. I woke up, like in the middle of the night and I read your fantastic story on the increasing and increasingly scary government deficits and interest payments.
What do you think about Powell speech?
Well, I think pal, like you guys were saying, I think he did what he wanted. He wants to leave himself like Muhammad al Arian said full optionality. He's not boxing himself into a corner. He didn't give at all on you know, they're going to give up on the two percent target. The job isn't done. He noted a few good things, you know where inflations come down. But I think he just he doesn't want to give any signal,
you know, like markets pricing. He's not going to do anything in September, him and his folks, but that there could be more. And I think him saying, you know, if the if things remain resilient, we could do more. It just kind of goes in line with I just all these predictions. I think, you know, we will see what happens. And it's all about the data, right. If the data comes out stronger, inflation picks up, they could do more. Like Craig Torus always tells me, they'll do whatever they want.
You know, Well, I want to talk there was We had a story out from our Ruth Carson about the the r start, the theoretical level at which rate schnyder st emulate nor restrict and economy and j Pell did have something tiny to say about that. He said, we cannot identify the certainty, with certainty the neutral rate of interest And.
We've never been able to write never.
It's an abstract number.
It's theoretical, it's ephemeral.
I mean, all of a sudden, people are acting like our star is calculable.
Well, I didn't understand what this debate.
Where has this debate coming from? Well, Joe, that's why I want to bring you in.
Get what what is the what is the rate of the neutral?
Right here?
Are you ready for my big number?
I'm gonna reveal.
I'm going to reveal the news I heard it was two point five I think it may be two point five five percent.
Now, no, I have no idea.
But you know what's interesting to me is that it's prior to the speech. You know, everyone's like, well, what's the buzzers in checkson hole? What do people talk about? And people are like, oh, is he going to give a speech about like where our star is now and some thing theoretical and or is he going to maybe talk about productivity game? And it's like, you know, this
is an academic conference in theory. Last year he sort of pollow speech was like almost infamously short, like eight minutes, and he's just like we're not here to make friends.
We're just here to you know, get inflation down. And so this year was like basically the same thing, and it's once again he's sort of passed on the opportunity to deliver some like theoretical academic monetary policy speech and he basically said, this time in a few more words, but not, you know, we're still just our job is to get inflation down. And you know, there's some progress and there's some signs of encouragement, but it's still too
high and there's still more work to do. So I do think it's interesting that while people have these discussions about what is our star and can we know it in real time? And is this a useful guide, that he did not come here to address that question. And to the extent he did talk about stars, he's like, well, it's a cloudy sky, so we probably can't see the stars anyway.
But Joe, we know what we don't know, right, We know we can't know our star in real time. Everyone like, I've never thought of this as an number someone could pinpoint. Even he's not a theoretical academic j Powell, So especially he doesn't know what it is.
Well, you know, bond investors.
That's what they do.
They would say, Hey, we're trying to figure out our bond math, you know, you know, this is what we price off of, is our biz, you know, so we're going to make an estimate people are watching. I think Joe has talked about this before.
You know, the dots.
You know, we know the median has stayed at two and a half and that's the nominal neutral rate, but the average is moving up.
So that's what bond people do. Right, there's supposed to be ahead of the game.
But I think you're right.
I mean I come from a math background. Things like even term premium is a residual stuff. That's you know that you can't point put pinpoint estimate. But the bond people, that's what they're about, kind of speculating and doing their models and whatnot.
Yeah, was there any sign that like the long term dot plot has changed at all in this speech?
Well no, not in this speech, but I will say, you know, the quarterly the economic figures they put out with the dot plot, people have looked at you know, we always flash the median is two and a half, has stayed there for a bit now, but.
That the average if you take the average.
There's a few more policy makers that have bumped it up a little, like Joe saying two point five to five.
You know, so it's but you're taking what the median dot and then taking out inflation.
Well, yeah, so if you take the median dot, which is a nominal rate in two and a.
Half, which usually and you say the fits to your end.
Yeah, but if you say the fits two percent inflation, that's like a neutral real rate of about fifty basis points right, that's kind of the going rate. So bond people are saying, maybe it's gonna tick up a little higher with the long run dot to show us maybe they think neutral is higher. Who knows, but I think you know, I said, we have to talk about this because nothing against stock people, but everybody and their brother stock people, you name it, are talking about our star.
Like you said it something like no one gave a hoot about it. I always try and guess on the Bloomber terminal. We have a great tailor rule function and you have to put in your neutral real rate guestimate there, which is part of the fun of it and also mos most the most infuriating part of it. I think the nehru too, Like it's another one of those numbers that we just don't really know, right Joe.
But yeah, I mean, look, you will not get any real disagreement anyone's like, oh, like, no one. You'd be hard pressed to find someone who could like really say, oh, this is the number and we know it in real time, etc. But in the defense, if I were gonna like mount some sort of defense of the concept, it's like, well, the economy feels different today in twenty twenty three than
it did in twenty thirteen, and what are some reasons. Well, we did get this like really different fiscal response to the crisis that we saw, you know, of COVID versus the fiscal response that we got to the Great Financial Crisis and so forth. So there are some structural differences. It would seem the labor market was really tons of
slack over the twenty tens. Now about labor marketing tightness, maybe some demographic changes, maybe some changes in the nature of world trade and whether you know, you know, whether
there's this sort of ongoing disinflationary trend. So I don't think it's many people are going to say, Okay, we know this number in real time but is an exercise to think, well, could we have structurally higher rates because of some fundamental difference in macro, particularly around globalization, particularly around fiscal I don't think that's like a crazy conversation
to have that. And also, furthermore, this idea that maybe, like you know, we sort of got anchored to this zerup era in our minds where everyone's like, well that was the normal and rates are going to come down. And of course, you know, like we know the twenty tens were sort of a historical aberration. Maybe it could be more like the eighties, Maybe it could be more like the nineties.
We don't know.
So I think maybe there is some value in discussing did something structural change about the macron landscape globally or in the United States that would say, you know what, we are going to have higher rates for longer than we would have expected. What are those conditions? And maybe that is a fruitful conversation I have.
Of course that's fair.
And I think I can't remember the name exactly of the Jackson Hole Symposium, but it's like, I think the name out, I think structural change, structural And you know, we heard Jim Bullard talking to Mike McKee yesterday, and he did say he thinks we're in a new and a new inflation regime, a new interest rate regime.
But I think we all agree on that already.
I thought, you know, yes, our star thing Cloudy Assam told Tom Keen a couple of days ago she of the psalm rule. I can't remember where she went to grad school, but she went to Denise University, which makes me pretty proud.
But she said that was to her.
The most interesting debate at jacksonvill was where is our start? And that's when I started to think things are getting a little weird.
Well, I mean, you talk about a paradigm shift. Though I was looking at the thirty year yield and we're back close to where we were in twenty eleven. I mean, are we just going back like a decade plus but not to the nineties or to the eighties, if that's where we're talking about where long term yields are. And maybe put this in the context.
Mortgage rates are where they were when was more the mortgage rate lasted seven and a half.
I think that was early two thousands. I forget which year, but I mean, is there a prospect that we as with as with home buyers, simply a just slowly over time to like slightly higher rates. And what does that mean? What do you think that means?
Liz, Yeah, I think I think I was gonna bring that up that I think that's the broader picture besides this our star gazing is that there's a lot of people, like Bill Dudley has written about that feel like overall the system is going to have structurally higher rates for longer, meaning you know, we're not going to go like so we're saying, oh, we're at the highest rates since two thousand and seven, and certain tenors and treasuries and whatnot,
but you know that maybe we're we're supposed to be there, that things have changed part of a little bit what Joe was saying, that we're you know, maybe inflation is.
Going to stay sticky. Even in the Fed's.
Forecast, they don't get to their two percent goal for several years, right, So if rates have to stay higher, that may be that we all have to get used to saying, oh, my home equity line is now at seven and three quarters.
You know it's not seventeen twenty percent were in the well that's eighty.
Right, that's what I mean, you're just going to just and say maybe I'll do these three things in my house, but not that one. But you know, some people are you know, it depends on where you are. Some people are having trouble keeping up with things, of course, you know, Joe.
What I think is most interesting is a debate about what the.
Inflation target should be.
And I'm not saying I think it should change because or or that it's really a special number at two percent. I just think it's interesting when people talk about it. I think, uh, you know, I don't like inflation. I think it's a regressive tax. But that's just my opinion. It could be any any target.
What do you think.
Yeah, I think it's a really interesting question. I mean, Powell is sort of adamant today that he's like, we're not changing the inflation target, probably because of buzz of people in the media. You know, there's adjacent Ferman columni. It's like, maybe we should go to three percent. It feels kind of academic, and I think they're in terms of like, look, the way I think about it is
this three years ago at Jackson Hall. It was virtual that year in twenty twenty, but three years ago at Jackson Hall, the FED laid out it's a new framework, flexible average inflation targeting, which essentially said that we're willing to accept some trade off. We're willing to accept some higher inflation in exchange for a more rapid pace of
labor market healing. That's basically what it was. And so I think when you see these conversations about a higher inflation target and whether the FED should tolerate three percent or two and a half percent, etcetera, it's essentially asking the same question, which is, we have a good labor market right now. We have it's great three and a half percent unemployment, that's really encouraging. The spread between black
and white employment. Unemployment has narrowed quite a bit. Wages at the low end of the income scale are growing faster than high high end. These are all things that I think people generally wanted to see for a while. So when I when the conversation happens about should we tolerate higher inflation, to me, the real question is like how much are we willing to sacrifice on the inflation side in order to keep the good news on the employment side. And so I think that is sort of
what this question is about. It's like two percent isn't fixed in stone, it's ex sense of like what low and stable inflation looks like. But given where we are unemployment, should we tolerate how stressed should we be about some periods where we're a little bit above that or three percent three and a half percent? Do we want to preserve what we have in the labor market? And this,
I think is the sort of real question. How much do we how much are we willing to sacrifice of what we've achieved on the labor market side to get back to two percent? Is like, to me, the question that really we're trying, we're really that we're really discussing when we talk talk about raising the inflation target.
Joe, great talking to you, Thanks so much for joining us. Joe Wisenthal, who co hosts odd Lots of Course with Tracy Alloy Liz McCormick. Always a pleasure to have you in the studio.
You're listening to the team. Ken's a live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcast.
Let's bring in someone who does this for a living. RJ. Gallo, senior portfolio manager at Federated Hermes, joins us am I being too glib, Rj. Because it doesn't seem like Powell moved markets much. And he, I mean, my opinion of what the Fed is going to do, my guess, my forecast is just the same today as it was yesterday.
I think that the anticipation for the speech was that it wouldn't necessarily be a seminal message like it was a year ago, which was a really aggressive and powerful message to the markets that we're tightening, and we're tightening a lot that was a year ago intended to rebuild their credibility as an inflation fighter, and I think that has worked. Here we are in August of twenty twenty three. I think we expected sort of an agnostic, cautious speech.
I think that's what we got has a little teeny bit of a hawkish tilt to it, and as a result, two year yields or a little cheaper treasurey occurs a little flatter because of that sort of hawkas message. That will tighten again if we need to. But it's a cautious message because He also emphasizes the risk of doing too much versus the risk of doing too little, repeating
some other messages that he's said before. As you noted, I think that there's some information in the speech, maybe most notably the line where he basically says the two percent inflation target is the two percent inflation target he's trying to push back I think on media speculation and market speculation that the FED will want to increase its inflation target over time. That was probably a subtle but important point that was added here for specific purposes.
I believe one thing.
That did change the FED swaps beginning to price out the first twenty five basis point rate cut, wopping next June, moving to next July. And does that change your positioning in treasuries at all? Does that make you any less eager to purchase I think medium to long term duration or is this sort of just all noise here for you?
I think were living in a challenging time. Many on Wall Street, many investors, have been expecting that the cumulative impact of the aggressive FED tightening would have produced a sharp growth slowdown, perhaps a recession. By now, that had
been our internal call within Federate Hermey's fixed income. We leave positioned to lean a little bit long duration and up in quality, reducing weightings in high yield and investment grade, for example, to underweight positions in anticipation of that economic outcome. And it has not happened. The economy has not just been resilient, it's been strong, supported by the consumer, supported
by government spending. Inflation fortunately has come down. Otherwise yields would be a heck of a lot higher than they are today. Imagine what yields would look like if inflation was still six, seven or eight percent and the economy was plugging along at high rates, relatively high rates of growth. So the inflation story has worked, but the recession outcome has not. Our vue is ultimately we are going to see some diminished growth path. We keep pushing that back.
Today's news doesn't change our positioning per se, but I think it does emphasize the agree to which the Fed is very committed to seeing inflation return back close to its sup percent target. And that means they're not in a hurry to ease. They anticipate there'll be some easing and growth. Powell explicitly talked about jolts weakening. In his comments today, he also talked about the lower rated non farm payroll job creation that we've been seeing recently. Positive, yes,
but at lower lower pace. And I think on net you know this is the news today. Was not hugely marketing movement, but it doesn't change our view. We still lean a little long. We're still up in quality. We think that growth slowdown will come.
Yeah. A couple of days ago, I was talking to Michael Dardo over at MKM and he said we were talking about high yield. He said he thinks junk is his words, insanely expensive. And when I look at delinquencies any chart, or or or you know, credit card usage, it just goes up into the right recently. Are you expecting to see more default? Shouldn't investors get more risk, sorry, more reward for that kind of risk.
That's part of the reason why we are in fact up in quality. We think on the on the macro front, the consumer has been spending at a breakneck pace, and they're pulling down on the COVID era access savings I think we call it these days. Eventually that's going to run pretty thin for mid and lower income households. We're bringing back the student loan payments. That's going to have some impact. So we think the consumer is going to fade with respect to high yield. We think the evaluations
are too tight. We were underweight during the rally. We've missed some of that, ad Midley, but we're not going to chase it now. We think that because the fundamentals should weaken and we think there will be some uptick in defaults that we want to see wider spreads before we start getting back more constructive on high yield.
You know, we were talking with our chief economics correspondent or I think that's her title, Liz McCormick, just a few minutes ago, and she had a great piece out about how US budget deficits exploding no end in sight, and there are economists very worried about the potential for that to drive up treasure yields in the long term. But there's sort of this interplay right around what the
Fed wants to do versus the US fiscal health. I mean, do you see that having any impact when you think about the kinds of risk you're taking in the long term?
Yeah, I know.
We when we develop our duration Callum, the head of our Duration Committee, and our duration call expressed as a percentage of index long or short, is predicated clearly on our monetary policy outlook. But fiscal policy is another key ingredient in the discussions about how we're going to manage duration. And on the fiscal front, you know, bottom line is the US government is spending quite a bit more money than it takes in. That's been the case now for
quite a while. That was true before the pandemic, it remains true after the pandemic. Neither party seems to really believe in fiscal discipline when they actually have the control of Washington. We saw that when the Republicans had complete control during the Trump early Trump years, they just spent
more in tax less episode went up. Eventually, this is going to have to turn, But for now, I think there is a difficult challenge where the FED is trying to restrain the economy and bring down inflation with a policy. Aggressive policy stands for shrinking the balance sheet raising rates. Meanwhile, fiscal policy, on the other hand, is net stimulative through the tax credits linked to the green energy spend that was part of the Inflation Reduction Act, as well as
the Infrastructure Bill, which was very bipartisan. So the federal government is doing some things that arguably they probably need to do. If we're going to do some transition to how we become a more green economy, that's going to cost money. If we're going to have rebuild and expanded infrastructure in a country that needs some of that, that's going to cost money. But of course it's coming at a time and the economy is already running pretty hot, and so it is working across purposes with the FED
to some degree. And that's why our duration long. You know, we're not max long, We're not even a quartermax long. We're leaning long because we think that fixed income is repriced to the point now where it creates you to investors, as income is real in a real sense net of inflation expectations. And we think ultimately some some slow down in the economy will occur, but the fiscal stance is going to support the economy while the monetary stance is trying to restrain it.
How slow, how bad do you think it'll be?
R Jy.
We had previously thought that, you know, there were some in our you know, we we we were a team, and there's some members of the team who felt that we were going to have a potentially deeper session. Especially last springing when SVB was blowing up, it felt like the early, the early signs of a true crisis brewing. Maybe not as bad as a Lehman Brothers global financial crisis, but something that was going to be very stressful and lead to a deeper downturn. I think when you look
at it now, consumers are strong, jobs are plentiful. We think it's going to be a modest recession. I wouldn't be surprised if we get, you know, the traditional two periods two quarters of GDP contraction, but the NV er to see jobs, jobs and retail sales, all the components that they look at to officially call a recession sufficiently tip over to the point where we have a mild recession that's not long lasting. In a world like that, we're not expecting the Fed to go back to the
zero lower bound. We're not expecting the tenure Treasury to have a two handle. Again, I wouldn't mind it if it by a three handle. But it's a cyclical downturn, not a big seminal event like a financial crisis.
RJ great having in the program. Thanks so much, we really appreciate your insight.
RJ.
Gallo there from Federated Hermes.
You're listening to the tape. Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Let's ask a professional investor. Caterita Seminetti joins us right now. She is a senior vice president private wealth advisor over at Morgan Stanley and Kat, I mean, the one thing that I look to that's a little confusing is the dot plot. And I know it's not supposed to be a forecast, but these are you know, essentially the FED participants on individual forecasts, and they call for fore cuts
next year if we get another hike. On the other hand, Powell has said rates are going to stay this high for years, and everybody seems to know that unless something breaks, they're not going to cut.
What do you think, Well, Matt, thank you for having me on the show. You know, it's a challenging time and you're right, he hasn't really said anything new. You know, we see inflation coming down, and you know that means that the FED is nearing the rate hike cycle, but does it actually mean that. It justifies the valuations that we have seen and the growth that we have seen earlier this year, and whether they're going to continue really
depends on the data. But investors seems to be a little bit distrustful of the messaging because it took FED such a long time to react to inflation and that transitory message that you know, we all heard so much about, you know, But eventually they're going to be done. The question is are they going to pause first or you know, actually continue to raise rates for a little while longer.
You know, But when we look at the yield curve and we see higher rates and the longer side of the yield curve, that does point out that the rates might be staying longer for you know, for higher for longer.
You know.
That plus the treasury over issuance that that we're seeing so far, so we have to incorporate that into our reality and translated into market expectations.
Well, we've got a couple of weeks before our next FED meeting there is you know, when you look at swaps market, it is personally going a twenty one percent chance that we could see a second hike here November is a little bit higher.
What's your take, What would we.
Need to see to actually change those expectations make that a real thing.
Well, the earnings are slowing and you know that's good thing, and inflation is coming down, so FED is seeing a lot of the data that they're hoping to see, you know, but at three percent, they're really not close to the target number, you know, so there is a possibility that they might continue, you know, to high grades, but you know, whether they do or not, you know, if we take the larger picture into consideration, they're nearing the end sooner
rather than later, they're going to be done, you know, and eventually they're going to pause.
You know.
What I like personally is that we kind of stopped talking on some level about the rate cuts because we need to concentrate on here and now we still have to get through the end of the year. You know, in market, you know, to us, it's going to look slightly different in the second half that it did in the first half, you know, because again you know, don't do are the evaluations that we have seen, the growth that we have seen only in select areas and in
these very select names. Was it actually justified or perhaps it was overly optimistic, which is the way it seems to us.
You know, we heard some interesting statements yesterday from Nikki Haley, former governor of South Carolina, she's running for president, concerning the retirement age, and I wonder what you take from those statements. I mean, it's going to be a drastic change, though not necessarily unexpected or difficult to understand, if we raise the retirement age here in the US. What does that mean for some of your clients.
Well, our clients are concerned because you know, on one side, you know, of course, nobody likes that notion of kicking the can down the road and taking the responsibility of funding the retirement benefits for our retirees, you know, to the next generation. But at the same time, we have to be responsible and we have to take a close look, you know, at the numbers. You know, because on our side we see investors, you know, on one side, really
hoping for the short lending, for the soft lending. I apologize, but you know, but also being very cautious of the market because so much of the retirement income has to come from personal savings. Now good news, of course that we are in the high interest rate environment, and then investors right now can get higher yields, you know, in anything from money market to any area of fixed income. You know, but retirement age is a big subject and it should be addressed sooner rather than later.
What do you think is appropriate for a retirement age? I ask this because I see you listened as the corporate Retirement director at Morgan Stanley.
Well, of course, I mean, you know, if the calculation is based on the actual areial assumptions, you know, in the way that the Social Security is funded. So it's not an easy question to answer, you know. But on my side, as financial plan and letter, we will plan for any age. We just need to and to understand what retirees you know, should be preparing for. But it's a really larger conversation in the big complicated calculation.
I'm planning to retire when I'm about Let's see, I'm having a kid in November. I'll be fifty, so she'll be down to college when she's twenty. So I think I'll retire around seventy two. That makes sense to me.
He's the best significant hike from from where the expectation is.
I think he's seventy five.
I may have to work a little bit longer.
Actually, now they think about it college costs, you know.
Yeah, it's tough.
I mean, so give us the quickly.
I think we only have about thirty seconds here. Where are you putting your marginal dollar for your clients at the moment.
Simon, We tell investors to be defensive, to stay with quality, you know, with large gap in the areas like you know, industrials and financial, healthcare materials, to look at dividend income, and you know, to flight to safety. It's not a bad thing when interest rates are this high, you know. So we are cautioning our clients to be defensive until you know, things normalize a little bit, until at least through the end of the year.
All right, Katherine, great to get your take. Thanks so much for joining us on this the all important Jackson Hoole speech day. Katerina Seminetti there. She is senior vice president and a senior portfolio member as well as Corporate Vironment Director over at Morgan Stanley. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer.
I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Faull Sweeney. I'm on Twitter at pt Sweeney.
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