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This market got the dubvishness it wanted to hear. The equity market's positive by close to two percent on the S and P five hundred on the NAS NAK one hundred up by three point three. We're moving closer to cunning interest rates. September could well be on the table. Push that through the bond market. A fifth consecutive day of gains for the ten year tracery yield to lower. We're down by four basis points on a ten year. It's a break of four point one percent. So we've
all got the same question. Just how low is the bar for a rate cut in September. This is what the chairman had to say.
The question will be whether the totality of the data, the evolving outlook in the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market. If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.
So let's talk about the calendar.
The next meeting September eighteenth, the data in between August second, This come in Friday payrolls August fourteenth, CPI report, September sixth, the jobs report on the eleventh, another CPI report, going into a Federal Reserve decision week, and most people are seeming after that, Lisa, we're like this far away from that interest rate cup, especially at.
A time where there was a different type of language in this communication. We are not data dependent. They are or they are data dependent, They're not data point dependent. They want to draw distinction that one data point isn't going to throw them off materially. They repeated the totality of the data as well as how they just need to see the same kind of good data that they've already been seeing.
Turn continuum to me was critical that Steve Leisman's question was great about measured alluded to this their slaves to measure. John, that's other is to it. I just don't know what else to say. You know, I'll talk to Dudley about it here. This to have Clarena and Dudley with.
Us today is fantastic last lights out and I really for you a global Wall Street.
What's coming up here with doctor Dudley is required listening.
There was a fantastic line that came from evercause Krishnakua, I want to share this quote with you. He thinks they've laid the foundations for a rake Caunt September. I think a lot of people observing that news conference would agree. But this quote's interesting. We think in practice it's not very data point dependent and view the cautious evolution of the statement as intended to carry hawks along and avoid descents, as was indeed the case today. Expect a clearer signal
a month from now at Jackson Hole. I'm thinking about the minutes as well. I just wonder how well set the stage is for the doves to dance and sing very loudly in these minutes that come out in a number of weeks time.
I was very happy that the reporter asked him to elaborate on the fact that at this particular meeting they did discuss the possibility of cutting reeds, that there were a few members but not the vast majority. Here is the question, how loud was that voice and what did they have to give to those people to get on board with them in terms of this decision?
Did you bring the dark to Dudley? Moments ago the ten yure yield broke down to a four oh eight ninety two. It's a new low yield. Could you imagine, John, what our shows are going to be like with a three ninety nine ten year I can't get.
There where we're going to be in September. Where's the unemployment rate going to be in September? That's the big question. I have gone into the payrolls report this Friday. Bill Dudley got a shout out in this news conference. Bill dut Lee joins us now the former New York Fed president and Bloomberg opinion columnist as well. Bill, I want to go to your column that you wrote in the last week or so. It was quoted in this news conference.
I'm sure you heard it. What did you think of the chairman's response to it?
I thought it was a fair response. I mean, this is my opinion and is reaching a slightly different opinion. I mean, we're at a point where the risks are pretty closely balanced, and so the question is do you go a little earlier or do you go a little later? I think you know the reason why I thought it makes more sense to go is that if the market's already pricing in September with a high degree of certainty.
What are you really waiting for at this point? Why take the additional risk of you know, the community deteriorating further, so you know, end of the day, it's probably not going to make a big bit a lot of difference. But I think you know, given the fact that the market expects the Fed to cut once that decision is mostly made, and I think you heard today it was mostly made, then why are you waiting?
Bill Dudley, your essay heard around the world, the single sentence the Fed doesn't want to be fooled again. You've held court at Princeton, where the late wonderful Daniel Kahneman held court. Here's common with Taversky. Decision makers know they are prone to regret, and the anticipation of that painful emotion plays a part in many decisions. How is regret aversion playing in to this massive data dependency x post ballet.
What maybe happening here is the fact that they got fooled on inflation, you know, earlier this year where the data came in bad makes them overly cautious that they're going to make this and that they they can make the same mistake again by going early. I think it's you know, kind of has talked about recency bias, you
put too much weight on the most recent experience. So this may be a case where they're not putting enough weight on the on the fact that, you know, things are slowing and the inflation's coming down, and maybe now it's the time to act. I think it was interesting you got a question about the sombrule. You know that the fact when the unemployery climbs above zero point five percent on a three month moving average basis you always
have recession. He said he's aware of it, but clearly the FED doesn't put a lot of weight on that risk.
Do you feel like we're getting closer to the moment where we will see real dissent on a committee that's being cobbled together and you can kind of feel the strains in some of the community case.
Now, I think what happened, you know today was basically the Doves got a pretty dubbish statement and a pretty dubblish press conference, and so you know, they're sort of set on board, and the Hawks got more patience. And so when you arrive at the center Tamber meeting, assuming the outlook doesn't change in the material way and That's basically what pub was saying. It's not about a single data point. The outlook has a change in a fundamental way for the FED not to go to in September.
At that point, you have something to basically you give to both the doves and the hawks. The doves, you thank you for being patient. The Hawks, we waited, So let's go together unanimously at the September meeting. So I think, you know, I think it's a good, good possibility that you'll see an unanimous vote at September for a twenty five base point recud.
But you brought up the Psalm rule. The chairman also brought up the yield curve in this news conference as well and highlights it the false positives we're getting from traditional indicators. Just to reflect back on that piece that you wrote for Bloomberg Opinion, can you walk us through why you do think actually the Psalm rule does matter, that maybe we should have a little bit more of a focus on these traditional indicators still and not completely ignore them.
Well, if I can start with the yelkur the reason why I don't think the ill curve is necessarily a good predictor is the US curves is inverted because people think monetary policy is tight. So it's not that you'll cruise shape that causes the economy to week it weaken. It's the prison sumption that monitary policy is restricted because
of the economy weaken. Most of the time when the occurs inverted, monitary policy is tight, and so the he occurs a good predictor The soumrule, I think is a little bit different and basically saying once the libor market deterioration goes beyond a certain point, it becomes self reinforcing. Essentially, why I think happens is business households here about the liver market weakening, they pull back on their consumer spending.
That causes businesses to pull back in terms of investment and hiring, and that leads to further weakness and consumption. And then for the rises in the unemployer rate, it's a pretty amazing statistical regularity that either rises less than a half a percent or next stop is a full blown recession. There's nothing in between. The smallest increase in the unemployer rate trough to peak is either between zero
point five and one point nine percentage points. There's nothing in the middle, which I think is pretty interesting statistically, Now he did recognize that as a statistical just a statistical result. There's nothing sort of there's no economic law behind it. But the track record is thirteen and oh.
So you know, think about the odds of flipping a coin thirteen times and coming up heads there every time after a Why you're starting to believe that the next flip is going to generate the same result?
Bill take us back to first principles. Why can't they just cut and say one and done and will observe versus our addiction to measured?
Well, I think what will happen is once they start start to cut, they'll probably keep going. You know, once they start to do the first rate cut, they basically decide that mantre Paul's that we've accomplished our mission in terms of inflation and unemployment. Policies restrict us, so we know now have to go back to neutral. Neutral's not
twenty five bases points away. So if you have a rate cut in September, it's probably gonna be followed by raycuts at least one or two more raycuts later this year.
Well, it seems like this was a setup for Jackson Hall. We've been talking about that. It seems like there will be some sort of policy regime shift that we will observe in August. What do you think it will be.
I think that Paul really needs to save much more than what he said today, frankly, and I think the changes in the statement and the press conference the day basically tell you that September is going to happen unless the economic outlook changes materially. Now that's possible, you could get a whole string of bad inflation numbers, or the economy could come in hot, but I think, you know, in the next six weeks or seven weeks, is the
outlook going to change materially? I doubt it. So I think regardless of what happens in Jackson Hole, I think the Fed's going to cut in September. I think, you know this, Paul will sort of check in at the Jackson Hole and basically, you know, probably confirm that we're still on track for this this result for Ray cut in September. But I don't I don't think it's you know, I don't think he has to use.
It for that well, although it's not just about September, it's not just about whether they're going to move again one more time this year. It's about what the destination is, it's about the pace, it's about what the goal is. In terms of just the view of where the economy is, Bill, do you expect there to be any discussion about the terminal rate, about what it means to be neutral at a time or this is a very different economy than pre pandemic.
Well, I would assume that once you get inflation, you know, highly common the inflation is going back to two percent, and you think the labor markets and balance, then you presume you want to go back to a neutral manitrate policy. And the question is what's neutral? And that comes down to that whole question of what is the level of our star the neutral federal fund rate. I think that neutral is clearly lower than where we are today, But is it one hundred basis points lower or two hundred
basis points lower. That remains to be seen. So the Feds can be sort of feeling its way now. Obviously, if we fall into recession, then the whole story changes because in a recession environment, the Fed doesn't want to go to a neutral manitrate policy. They want to go to a stimulative mantarate policy. So if we actually, if it turns out, with the benefit of hindsight, that the FED is late and we have a mild recession, then the Fed's going to cut rates much more dramatically.
Bill, I've never said this. I've got Dudley, Krugman and Blinder on the same page. Never did I think i'd say that the money paragraph from your good friend Alan Blinder, any such early cut should be accompanied by a warning not to expect a steady stream of rap cuts. He alludes to the ECB. Do we need some MECB religion at the Eccles building?
Now? I think that the FED will probably cut more than one, because once you start to cut, you're basically saying, I think it's time to remove montary restraint. And Monterey restraint is not going to be removed with just one twenty five base point raycut.
Bell great to get your thoughts, appreciate it, go down be there. The former New York Thanking President Wengan on this Federal Reserve decision. As you got a lot of people talking over the last week about the need to move in July and the mat thing this just passed, I want to bring you a headline comes from the New York Times and it reads as follows around Supreme leader ordering a retaliatory attack on Israel. The New York Times, citing three Iranian officials, brief on the order. This is
what I can tell you about crude. Crud's been rallying all day, and the price of crude looks like this at a moment, Brent crude by four percentage points TK. You would off to say, overtaken by events. The last thing that FED needs other next month or so is an energy price shock.
I'm so glad you brought this up. Jan We let off the show this morning with Ethan Bronner, our Tel Aviv Nears news bureau chief encyclopedic in the region, and he says the position here now is unprecedented, and he made clear there's going to be immediate news following both from the north to Lebanon. In the news that you just have from Tate Ryan.
As we get those updates, we'll bring them to you. I just want to reset if you are joining us. We've just had a federal reserve decision in the last couple of hours. Interest rates unchanged, incremental changes to the statement. There was a sense that in September the Federal Reserve chair would set us up for a rake cut. In September, he took a baby step towards doing so, and the market picked up on things accordingly, big rally across equities on the NASTAC on the s and P on a rustle,
it looks like this right now. It fades just to touch, but we're still higher by one point four percent on the SMP. Bear in mind, the Nasdaq was poised for the worst month of the year, and at one point in the last couple of hours was on course for its best day of twenty twenty four. That fades, We're back down to about two point seven percent higher on the session on the Nasdaq. We reference this stat a
little bit earlier on today a few times. We are now on course for the seventh consecutive Fed decision day rally on a two year bond at least, so that yield is lower by six basis points.
How much is this just that Jerome Powell tends to skew dubvish And how much is this that the market still has a probability or a possibility baked into what the yield is that the Fed could maybe surprised in a hawkish manner. Either way, this is a market that likes to hear FED shero Powell to speak, and today was no different.
Mike McKee was in the room with a Federal Reserve chair down in Washington, d C.
He joined us from the nation's capital.
Now, might you've just got outside walk us through your biggest takeaway from that news conference this afternoon.
Well, I think what you walk away with is what Bill Dudley was talking about. If the economy doesn't do something weird, change positions, change directions, then the Fed is going to be cutting in September.
But there are a lot of.
Potential twists and turns between now and then. Friday is e at risk with the jobs report, and of course you just mentioned the situation with Iran. I don't think the Fed was taking those things into consideration today as reasons not to move today, but they do have to worry about.
Them and what might happen.
So they will at this point be on a cutting course unless something significantly changes. And I think that was the message that Paul wanted to deliver, and I think Bill put it well when he talked about how the statement was skewed to the doves a little bit, and the news conference maybe to the hawks, and both sides get something out of it.
Mike, you've been doing this for a few years. Back to mcchestney Martin, we almost printed a four h six ten year moment. Go Can the bond market tell the Fed what to do?
Probably not. And one of the things that you have to keep in mind is that we have all this international news going on, and the US bond market is the haven market. So a certain amount of what's going on today is probably in reaction to Israel and Iran, and a certain amount of it is the politics going on in this country. And then on top of that, what the FED is considering and what the economic data are showing. But I suspect today's less about the Fed
and the data than it is about other things. Because the market had pretty much priced for a September breake cut, they didn't get any surprises out of the Fed today.
Mike, you're referring, of course, to the news that John broke about Uranian Supreme leader ordering an attack on Israel for the two assassinations that Israel carried out. Right now,
we're seeing crude markedly higher, particularly Brent crud Mike. I wonder how this relates to Fedchair Powell has been talking about that this is actually better inflation data today than it was, say late last year or earlier this year, simply because it is not being driven by goods, It is being driven by the employment market, is being driven
by services. How much do you believe based in those comments, this is a FED that is willing to look through good side inflation and focus much more on something else.
Well, I think they are, especially if oil prices go up only temporarily. The problem is if oil prices go up for quite some time, then that feeds through into the real economy, particularly on the services side. See surch charges by delivery companies. Airline affairs might go up, that sort of thing. So they're going to have to keep.
An eye on that.
But their general instinct would be to look past any kind of energy price change that comes about that they think might be temporary. And at this point we have been waiting for a major shift in energy prices since October seventh, when the first attack on Israel game.
So we haven't seen it yet.
Let's see whether this holds or not, and then the FED would have to take it into account.
If it's still going up.
Five percent rally in crew today might make great work. As always, sir, appreciate it. We'll catch up with you a little bit later. This week's not over. Still got some work to do. The FED decision behind us. Tomorrow we'll get jobless claims. On Friday, we'll get a payrolls report and we'll be catching up with Jeff Rosenberg of black Rock. We can do that now, Jeff at eight thirty one on Friday, Will this decision today to do nothing?
Will that look like the right one?
Well, you know, it might look like the right one.
But I think the point you're also getting to is that Friday, and we'll see on Friday as well, is going to be.
Much more consequential.
But I think the important point about how it's going to be more consequential is what we've heard from everybody so far. We've heard from the chairman and in the statement is this is very much setting the table for September, and the bond market had already priced that outcome. And so what you look at into and the payroll is you're setting up the bond market, perhaps broader markets for a very asymmetric outcome. If the data is much much stronger,
then you're going to have some disappointment. If the data comes in along lines of what Chairman Powell was talking about in terms of gradual normalization, or even a little bit weaker than that, the market will continue to price in this path of a cut in September, a cut
in December, and even more into twenty twenty five. So I think Friday, the risk is really on the upside that you get a surprisingly strong payroll report, and that has to call into question whether or not policy is really as tight as it is, and that's really the issue. Everyone's kind of saying, hey, this is right. The Fed's got it right. The Fed saying we've got the soft landing. We want to secure the benefits of soft landing. But he kept report repeating PDFP at two point six percent.
You look at the GDP number that just came out, You look at Atlanta Fed GDP now forecast for third quarter. We are well above in growth terms anything associated with long term sustainable growth. And so yes, we've seen some signs of restrictiveness, but how much of that restricted because that's where the asymmeturity.
Against the grain totally against the grain. And I think you know you well, most of the people coming on this show right now, if they're going against the Federal Reserve, they're saying it's because they think this FED is too tight, not restrictive enough. You're making the point, hey, Jeff, that might be they're not as tight as they think they are. Now that really goes against the grain, Jeff. Is that the point you're trying to make?
That is the point exactly that I just made. No one's really talking about it because the Fed's not talking about it, But the data is what your question was about what happens on Friday and how does that make this moment?
Look?
Well, if the data comes in continually stronger, then we're going.
To have to start to talk about that.
Now.
I'm not saying that that's where we're going. Where we have been, and what we tend to do is to extrapolate where we just have been. So we're extrapolating out the benefits of the gradual slow down in labor markets. The normalization ecis another great data point.
There's nothing in the crystal ball that says that that won't happen.
But your question was, what if it does then you start to think about these things. And my point is everyone is so one sided on this point that the asymmetry to the market reaction is much greater to the upside surprise and strength on Friday than it is to coming in in line or even being weaker.
So let's put a call around that, Jeff, are you basically selling to your notes right now, trying to lock in because you think that this could be the highs given that they are not recognizing the risk of an upside surprise to the job's report.
No, I wouldn't say I'd go that far, But what I would say is it tempers some of the enthusiasm for adding to two years at this point when it's all in the price and even more so, releive to what the Fed is saying that you're going to get.
So the bar is a little bit higher to what do I do with this information in my portfolio when you look at well, you know, the bond market's really quite a priced a lot of that in so it makes it a little bit more tricky than just saying, Oh, the Fed's going to cut rates and I should back up the truck and buy a whole bunch of duration well, a lot of that trade has happened in the last month.
So if you're just talking about maintenance cuts and the degree of maintenance cuts that are required is what you were talking about with Bill Dudley a minute ago. We don't really know where that neutral is. So how do we know where neutral is? You know it when you see it, meaning you know it when you see it
in the data. So if the economy doesn't slow and that unemployment rate doesn't continue to rise, and it says you're not so restrictive as you think you are, and I think, you know, we just kind of have a pile up on one side of the debate here when the data is still saying two point six percent PDFP.
He said it twice during the press conference.
He also said the other thing that has been supportive of restrictedness interest rates, sensitive sectors and the slowdown in the labor market. But it's a more balanced view around this debate around how restrictive we are than where the market is kind of lining up, and that sets up in asymmetry to the outcome.
And Jeffrey a great student of history, and if we have the headlines that John Farrell was talking about, there of Tehran and Israel, and for that matter, up to Lebanon as well. How far out the full faith and credit curve does politics does war do our fears play in? Is it short term, is it out to the two year pinch, or is it out even further to the ten year note.
So I'm going to frame that in that question or my answer to that question, in terms of how does the kind of flight quality response in the bond market place out in this environment. I've said this on the show maybe a couple of times. We've written about it, that flight to quality during the q zero interest rate policy environment was.
A curve flattener.
If you're very close to zero rates in the front end and you're looking for portfolio protection, you buy it in the long end. Today we're in a very different environment. Five and a quarter to five and a half. There's plenty of room for the front end to go down, and so it's more of that pre GFC kind of bond market reaction, where flight to quality is a steepener and it's in the front end of the curve.
So I think you see the most powerful reaction.
It's hard to disentangle the high frequency between the news that Jonathan Broke and.
The result of the press conference.
But you do see a little bit of a steepener move into the market. Again, hard to disentangle the two, but I think when you take a step back, flight to quality now is the steepener trade, and your better yield response is going to be more in the front end in this kind of environment.
What's interesting to me today, Jeff, is what's not rallying on the heels of some of those headlines, especially in light of the fed's dubbish tilt. Yes, but they did not cut rates, is that the dollar is not catch it a bit. It's weakening pretty dramatically. You're seeing the Bank of Japan very happy today. They're getting what they wanted in terms of a little bit more yen strength.
How much is this sort of the new narrative that in a flight to safety type of moment, if the FED is going to cut rates and not recognize that upside risk, you will see persistent dollar weakness heading into next year.
It's a tricky one, Lisa, because you know, on the one hand, you've got kind of interest rate differentials driving some of those dollar moves. Clearly with the yen a balanced against the other side of flight to quality, which is which is the pure risk off trade, is usually
dollar strength. You go for the strongest institutional protection in terms of wealth, and so I think I think initially the move is much more about interest rate differentials, and that's why you're not seeing so much of the move on the dollar. I think it's too soon to say whether or not you're going to see a bid to the dollar from political risk.
But I think if it was a.
Larger issue that spreads, you're going to think more Traditionally that's going to be dollar strength.
You got to jump down and gold up forty one dollars.
Got a big running in the bond market too, and equities as well. Jeff, just find a question before I go. There's people watching listening to this program right now. They just want to know, can I buy the S and P five hundred and take a vacation? Is there anything to worry about between now and September.
Well, you know, you never want to say take a vacation.
You know, buying equities you've got some risk, but you take the totality of what the chairman went over, and this is a lot of good news. I mean, this is a chairman, basically saying without saying it, we've achieved the soft landing. That's a great outcome for the equity market, it's a great outcome for the economy.
It's a great outcome.
More more broadly, So I think that's the takeaway and generally that's going to be pretty supportive. I think the other thing, just to mention, obviously, you know you're not really buying the S and P five hundred.
It's not the economy.
It's a collection of stocks that has a very high weight to a secular technology theme. And that secular technology theme is playing out again today following Microsoft's earnings and
you're seeing a bid back to Semis. So you've got like the micro story there a lot as well as the policy story, and we've got to keep that in mind when we're looking at this high frequency data, and if you're buying the S and P five hundred with a very high historical share to tech, it's really also buying into that tech story as much as it is about the macro economy.
Just trying to take a vacation.
Jeff, appreciate it, Jeff Rosenberg, the frank Row Jeff, thank you, deeply thoughtful stuff go into payrolls on Friday. We should share with you the numbers that we're looking for on Friday. Just another peak snap peak of the payrolls survey here at Bloomberg. The meeting estimate, it's one seventy five on Friday, the previous number two of six. Unemployment coming into focus
much more for many of you, I know. So here's the estimate for unemployment four point one percent, in line with the previous number previous month of four point one percent.
Lisa.
And the reason why it matters that unemployment read possibly more than anything else, is because of a guest to four point two percent.
It triggers a S rule.
Bill Dudley talking about why that's important at that point, Historically it becomes a self reinforcing mechanism of weakness.
The difference is you and I are taking vacation like eighteen hours. Pharaoh's taken eighteen days. That's the difference here.
Actually, I'm missing Fridays. I'm going to be on vacation. Thank you you're missing it's on American It had to do a kid's schedule.
That's a manager here.
As a manager, here are I track everyone's vacation. You absolutely correct, you've both taken much more than I have. Okay, just for the bar chart of it I do at home. It's a spreadsheet I let up with the Boomberg terminal and a monochy vacation at the same time.
That's productivity.
Miss this, haven't we appreciate?
It's going to see its TK Please, thank you, sir, Lisa, thank you, thank you. You're going to bless us with some of your criticism of the Federal Reserve tomorrow.
That's the line of the press conference.
That really is
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