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Good afternoon for our audience worldwide, Welcome to the program, a special edition of Bloomberg Surveillance on a Federal Reserve decision. The decision as follows, a fifty basis point cut with a sprinkle of descent. Your ecory market on the S and P five hundreds still just about firmer. But rolling over in that news conference, we're now firmer by just a quarter of one percent on a Russell, still elevated up by more than one full percentage point straight out
of the gate in that news conference. Framing policy recalibration something he said multiple times, a process that evolves over time. Take a listen to what the Chairman had to say on the path forward.
I do not think that anyone should look at this and say, oh, this is the new pace. You know, you have to have to think about it in terms of the base case. Of course, what happens will happen. In the base case. What you see is look at the SEP. You see cuts moving along. The sense of this is we're recalibrating policy down over time to a more neutral level, and we're moving at the pace that we think is.
Appropriate recalibration on repeat, Lisa looking forward to meeting by mating, this is not the new pace. That's something he puts some weights on, some emphasis in that news conference.
And if you were basically judging his news conference based on the stock reaction, there's a little wobble after that statement, and even more of a wabble after you really addressed the idea of a neutral race. He told it a sense of neutral, whatever that may be. And he said that my own sense is we're not going back to that nehru time or that negative rate, very low rate time.
Neutral rate is probably much higher. You saw a reaction there, but then people shook it off and said, hey, he's got our back.
I look, John, I strapped a fibonacci across this, and from where we were to the midpoint of the pandemic low is two and seven eighths. He is correct. It's just a nudge in the distance to travel just to get back to the midpoint.
Call it normal.
It's a lot longer than the job owning in the press conference that we just saw.
We're lucky to have Mohammad alongside us. He won't say mission accomplished. He refused to say in this news conference, But we've got to ask, isn't it implied?
Listen to this.
The labor market conditions are pretty close to maximum employment. Retail sales GDPs show the economy is growing at a solid pace. We're not seeing rising layoffs or hearing it from companies. It's time to support the labor market when it's strong. That's what we're trying to do. Is that mission accomplished? Isn't it implied?
Yeah?
I mean Jason Furman put it as well as anybody can when he said if you look at the projection, and now if you listen to his statement, it is and I'm quoting him, just about the closest thing to mission accomplished banner that you can imagine them unfiling. So I think it is the hard thing for Power is that we're not just recalibrating policy. We're recalibrating what we
mean by a fifty basis point cut. You don't start a fifty basis point cycle with a fifty basis point cut and say at the same time, the economy is in good place. And that's what he had to navigate all the time. If the economy is in a good place, why are starting with fifty basis points? And it was harder for him to reconcile it too, because he didn't want to acknowledge that keeping weights unchanged in July was a mistake. So that's the tension that played throughout the press conference.
He did mention that if they had that Job's report before that mating in July, that maybe they would have gone twenty five at that mate, take what did you make of that?
I made of that this idea that what does he mean about the totality of data? And he didn't talk about data dependency in quite the same way when he started. When he was asked by our own Michael McKee about what he was looking for and how much he seems to be reconciling something, he didn't have a real clear view on that. What is the data we're looking at now? Is it basically revisions to the jobs numbers that we're getting, as well as potentially the Beige Book.
You've said this a few times. Revisions seems to be more weight now in revisions, and I think over the last few news conferences now he's basically said, whatever payrolls is, he thinks he's overstating jobs growth in this country, which.
Has been just the truth over the past couple of months and frankly more than a year. Typically, when you get a weakening labor market, the data that you get initially is stronger than what you get on the revisions downward. But just to build the idea of mission accomplished, he kept saying that the only reason he could really make a commitment to fifty basis points is we are committed
to coming up with a good outcome. He came up with lots of He went to the thesaurus of outsoft landing, but that was really where he was heading.
Joining us now to discuss the continue the conversation built down to be the former New York Fed president and Bloomberg Economics senior advisor, billing your piece before this decision on Bloomberg opinion, you said the Fed should go big. Now I think it will it did. What did you think of what you heard this afternoon?
It's pretty much what I was expecting in the sense that one of the issues that Paul had is how do you two fifty without scaring people that you know something bad about the economy? And I think he did that very well. He basically said we're doing this because the news is good. We've made progress on inflation, as opposed we're doing this because the news is bad. So I thought it was a very uh, you know, providing reassurance to people that thinks that they've they've got it.
You also, you know, when he's asked about, you know, the Sam rule and the risks that the unemployment rate could go up by quite a bit, more pretty reassuring
on that. You know, thinks that the labyer market can stabilize close to where we are today, and that's really hugely important because you know, if the layer of market doesn't stabilize, then we will have them out recession and then the FED will have to ease a lot more So, I thought the general tone of the of the press conference and the statement was we've got that, We've got it.
Bill. Congratulations your essay today. You think you were one of the Fed whispers everybody's talking about out there right now. Bill Dudley, I look at where we are and where we're heading, and it simply comes down to the strength of the American economy. Forgetting about the theater of recession. Where does GDP settle, whether real GDP or nominal GDP. How do you envision that in a year or even two years.
I think if you look at the Fed's forecast and look at how that growth affects the unemploying rate, the FED thinks that, you know, growth in the medium term is going to be two percent two percent plus at annual which rates. So and that's sort of what we're doing right now. So you know, the FED got a sort of soft landing in place. If the commy continues to growth at the same pace as it's doing right now,
the unemploying rate will stay relatively stable. You know, you saw in the Summary of Economic Projections, the FED shows a modest, very modest, further increase in the unemploying rate of from four point two today to four point four percent, but you know, nothing beyond that. So it's sort of a soft you know, if you look at their forecast, it's a soft landing kind of story, and you know, I hope they could pull it off.
Right now, the stock market and the bod market are trying to understand what the reaction function of the Federal Reserve actually is and to which data they're going to look at. It seemed like there was a renewed focus on both jobs revisions as well as the Beige Book, which was the input to potentially some of the heavier weight on fifty basis points. Do you view that now so as sort of these data points is taking on outsized importance.
I think they are more focused on the liver market because there has been deterioration in the labor market. I think there are much more confident than inflation is going to continue to come down because they've seen more slack in the economy and the labor market. They've seen inflation progress that we've already had, they've seen wage inflation moderating. So I think their concerns are very much on the labor market side.
So when I'm looking at the economic data right now, I'm focused on the liver market data, and that will determine whether, you know, we just get continued at a relatively modest pace after this the twenty five basis point reductions, which is essentially what was implied in the summary of economic projections, or whether they'll become more concerned about downside risk and then we'll have to get thrown a few fifties.
Bill.
Congratulations both on what you said they should do. And what you said they would do. And part of your argument was on the unemployment rate. So I want to go back to that. There revision up to four point four percent by the end of this year, stays at four point four percent at the end of twenty twenty five. Are you comfortable that we can stabilize here without the tipping points that you were so worried about.
That's well, we're going to find out over the next year. I mean, the somils are very simple, you know, tells us a very simple story. When the unemployment rises beyond a certain threshold, the next stop is a full long recession. The question is what's the right threshold. Historically, the Sambrell threshold has been a half a point rise in the unemploying rate on a three month moving average basis over the over twelve period. And we've already pierced that threshold.
So you have to believe that, you know, there is some risk here. You know, Paul was asked about the risk and you know, downside risk to the labor market, and you sort of, you know, mostly dismissed that. But I do think that I actually do think the risks are you know, maybe at best they're balanced, But I would actually be more concerned about the downside risk to the labor market now than thee risk to inflation.
Bill, You'll always find a politician that's unhappy. I found one, Senator Warren. This kind of interest rates has yet another acknowledgement that power waited too long to reduce interest rates. I do think the politics are relevant here. November seventh will be the next meeting. We might have a decision in hand by the American public as to who they'd like the next president of the United States to be.
We might know the makeup of Congress as well. We might have a better idea of what policy looks like in twenty twenty five.
Bill, you've lift this.
You were on the FMC back in twenty sixteen, I believe, can you walk me through your experience back then and whether the same applies this time around.
I would be very surprised that the election outcome affected what the FED does over the near term, because you know, an election outcome is one thing, but what that incoming president will be able to do with you know, as closely divided Congress, Congress remains very uncertain, and so I think the FED reacts to the world as it is as opposed to speculates about how the world could be. So I would be I would be very surprised if
the Fed doesn't cut rates at the November meeting. I mean, if they don't cut rates of the November meeting, it's because the economy is bounced back and very strong, or the inflation news is really bad between now and then, and that's not something I expect at this point. I don't think that Powell expects it. I think, you know, the odds of a twenty five basic point rate cut in November are very very high, and if the economy shows, you know, more weakness than maybe even fifty basis points.
I bill appreciate it as always built upley of Bloomberg opinion the Fed should go big now I think it will. It did it did about an hour and thirty minutes ago. Let's bring Gid Michael McKee. He was in the news conference. Mike McKee, I want your thoughts on that press conference where there was a little bit of tension for you. How did you walk out of this one?
Well, I don't think there was a huge amount of tension, except for the fact that as you were just talking about with Bill Dudley the idea that there is probably more risk to the labor department, to the labor market than the FED is letting on. And that's the concern. And to get to my question at Lisa mentioned the FED was data dependent until they were confident that inflation.
Was going to be down to target.
But how can they be data dependent on the unemployment rate? We don't know what it's going to be, and as Bill suggested, it could go up rapidly. Do we get a rapid response then, especially since policy works with a lag, it's a little unclear what their reaction function is going to be going forward.
Might looking forward to catching up with you tomorrow. Lots to talk about plenty more data just in the next week or so. Equities right now on the SMP Lisa firma by four tenths of one percent, the unperformance on the small camps that you might expect.
Yeah, and the Fed basically gave this market what it was looking for, and then some a question now of just how much this market has moved ahead of what the Fed has said. Mohammed, I would love your thoughts on what the new data dependency actually is given the fact that people are looking for a litmus test to understand what the reaction function is of a FED. That kind of is playing with what they get, which is the same lack of clarity that we have.
Yeah, I think the data dependence all comes down to the labor market, and he went through in detail a number of indicators he looks at and when he says the totality of the data, I think he really means it when it comes to the labor market. Lisa, I'm surprised you haven't picked up on the fixed income market and what has happened to treasuries that they're now higher on the day. There's been quite a move when this
statement was announced. The tenure went down to three sixty four is currently trading at three seventy.
It's up six spaces points space. What do you think that is?
I think they some and the curve has steepened. Two stands are now nine basis points. I think there is some concern as what does it mean longer term for inflation. That's the only thing I can think of. But the action has been really interesting, and once again you end up in a different place after the press conference than you wear after the statement.
Yes, no question about that I think of David Kelly is JP Morgan. You know John, He's been very good about a vector of nonfirm payrolls that gets you to a negative statistic three month moving average about one hundred and sixteen thousand. Nobody's modeling in here if this job economy USANA one talks about continues to deteriorate.
So what are we saying here, Muhammed, We're willing to accept three the high twos, or we're worried about going back to three point five push in four? What's the story here?
So we cannot answer that story without bringing in fiscal policy, without bringing in structural reforms. I mean, that's the trap we have all fallen into. That we still think of the FED is the only game in town. But does other things happening that that speak to? What is that weight? And that's why the wage is so wide?
You brought this up actually when j Powell said this over time and we're going to get down to two percent over time, it raises this question, especially as he talks about not mission accomplished but sort of you know, wishing to wash plist.
But this idea that we could I'm going to ask you to say that again.
Please, but this idea that you know, he's so excited about the idea of a soft landing that it will okay, it's okay for it to take a number of years to get back to that two percent target.
And that's in the projections. I'm going to have him in front of me, he said, co PC Right now, it's two point seven. They're projected at two point six at the end of this year, two point two at then of next year, and two by twenty twenty six. We basically pushed back the target.
I like what you said about mission accomplish, and it's this terror of getting this wrong, whether you're a governor or president. Chairman. Jason Furman out teaching AC ten up at Harvard and he was lectured by his daughter John. We got a tweet out from Jason Furman where his daughter walked in and said to Professor Furman, you were wrong. There's a lot of that going on right now.
A lot of people were wrong. I think we should pointing this out. The market was priced for something closer to fifty than twenty five. The overwhelming majority of economists in our survey, and we surveyed more than one hundred not even ten percent of them saw fifty. So shout out Mike Faroli over a JP Morgan, one of the very few together without a one guy belief over at Bloomberg Economics, who we're looking for that fifty today.
Yeah.
Deutsche Back actually did an informal survey also that they put out today, and something like sixty one percent roughly and plus remnus a half a percent came out saying that it was twenty five basis points. So this really was kind of on the back foot.
I kept it quiet. Nobody cares what they think, but the fact is I was wrong.
Jeff Rosenberger black Rock joins us now for more. He wasn't wrong if you were waiting impatiently to give us his views on this. Jeff, let's talk about the bond market, and you can throw in your thoughts on this Federal Reserve. To say, the projections in the news conference as well, the botmarket's sunning golf. The thirty years up seven basis points, the ten year is up six. What do you think that signal was?
Jeff?
Yeah, I think the important point here is that there's the action and the fifty basis points, and then there's the expectation and what was priced in. And so while the bond market was leaning towards the fifty basis points, it was really more about that segment Jonathan of the press conference that you highlighted.
I had it written in my.
Notes as well, the interchange where Powell said, you know, don't take that fifty basis points as the new you know pace, and he pushed back against you know, this is going to be followed by he got several questions on more fifties the problem, and I think to I answer a bit of Muhammad's question, your question to Muhammad and that interchange is that the bond market was pricing in more subsequent fifties and into twenty twenty five still is pricing in bigger increases than what you're getting in
the sep and Powell and the press conference really pushed back against that.
So I think you have two things going on.
I'm very amenable to Mohammad and Lisa's comments that you know, maybe this is a little bit of a sign of inflation and some of those concerns what you're seeing in gold, but it's also I think in the immediacy this is a little bit disappointing relative to what's been built up in bond expectations, and that from a broader perspective is really an important point from an investment perspective that you can have.
Here's the headline.
Fed cuts interest rates by fifty basis points and the bond market returns are going to be negative today. So it's not just you know, the action I can anticipate, you know, the fence cutting rates.
It's time to back up the truck in terms of duration.
The problem is it's also a lot in the price, so they've got to over deliver, and they didn't do that relative to bond expectations. And that's why I think you're seeing a little bit of that disappointment out of fixed income markets and they're read on today's decision.
Jeff Muhammad scolded me because frankly, I wasn't paying enough attention to the bond market. The bond market is speaking, and the ten year note is speaking, and what it is saying is it at least has a higher yield. But we are speaking to the bond market right now. Jeff Rosenberg, what is your reaction function? Does this make you less interested on the margins in buying ten year or twenty year or thirty year treasuries.
Yeah, you know, I've said in lots of different context with you guys that you have to just be careful about where you want to own your fixed income, that the yield curve move can be more important, more determinant to your fixed income returns than just the direction of interest rates. A lot of times we just think about, you want to own bonds when rates are going down when the fed's cutting. You don't want to own bonds when they're hiking. But because the curve is so flat.
We're off the peak of inversions.
But it's still a historic lack of premium in that back end of the curve. That where you hold your duration is going to matter as much as how much duration you hold. So it's still that story for me. It's still the front end is a little bit better five years and in you want to be careful about that term premium. And the other thing that I'm highlighting here today is you just got to be careful about how much is.
Already priced in.
This is unique about the beginning of a FED cutting cycle. We're about twice the amount of expected cuts priced at the onset.
This was John Otter's article.
In Bloomberg, he highlighted this, it's a great chart, about twice the amount of historic FED pricing about over two and a half over two one hundred basis points, whereas historically you come in and there's only about one hundred basis points, so a lot is expected. It raises the
bar for subsequent fixed income performance. We've had a great run, but that tells you a lot of the performances in the rear view mirror, and so you got to be more thoughtful about where you own that duration around the curve when we look forward.
Does it give you more confidence though to go into risk?
Jeff, Well, you know, I think the FED did its best. And that was the interchange you just had with Dudley the press conference.
Channel lenge was.
Give fifty without spooking the market. I think they're successful today in there. That's the response in terms of small caps. You only buy small caps when the fence cutting rates, when you believe in the soft landing and the denominator effect, the discount rate is dominating, you know, any of your concerns in terms of growth.
So I think they navigated that pretty well.
I think when you go forward, you know it is a soft landing baseline. I think that's exactly what the SEP is saying. When you look at all of the other economic data outside of the labor market data, you know, it's all very good. It's all very supportive for risky assets and the fixed income side. That's a carry story. We're pretty comfortable with that. You got to be a little bit careful that it's a symmetric that a very tight spreads any sign of recession.
And I don't think we're really seeing.
The recessionary signs out of the labor markets, but you have to be cogniz of it that that is the one place where you're seeing some weakness.
But I think this is still supportive to risky assets.
It just quickly Jeff November seventh, how different is that committee meeting going to be compared to this one?
Well, you know, as you pointed out, you know you're coming on the back side of the election. But you know, as Powell answered, they're going to try to avoid any kind of discussion on that. It's really going to be about the evolution of the data. You know, the interesting data point in terms of revisions. You know, we talk about data dependence The problem is that data we're dependent on is not very dependable.
Try that out slowly.
But that's the payroll data, right, and so the revisions are going to be important.
We're going to have another one that's going.
To dictate a lot of the discussion without a deceleration. I don't think you're going to be talking about fifties, but they've clearly laid the groundwork here for a twenty five in November, twenty five in December. That's what I think is will price back into the bond market. That's why you're seeing a little bit higher rates. If they deliver on that, then there won't be as much surprise or anticipation as we had in this meeting.
So Jeff, let me ask the question that I suspect you hate being asked. And let's assume that you're being asked for a retail investor sixty forty simple portfolio. What should they do now given everything you've.
Just said, Yeah, I mean, the part of this discussion around the forty, around the fixed income piece, Mohammed is is that it's not the old sixty forty. It's not this era where bond volatility is three percent. Bond volatility is six to eight percent in the post COVID environment. So the forty side is really where we've got to do some rethinking, and that's where we talk about.
Diversifying your diversifiers.
Thinking about different ways of finding ballast in your portfolio because of the uncertainty of how duration and risk free rates are going to perform in a more inflation uncertain environment. That's the points about the yield curve and what's already priced in. So I think in that sixty forty it's really about, you know, using different ways to find diversification and diversifying that forty bucket away from kind of just piling into traditional duration.
Did I hear you say a more inflation uncertain environment?
That is what I said.
Yes, I don't think that's what Pole thinks.
There's greater confidence that inflation is on a path to returning to two percent, but we're not at two percent and that path, as we saw in the interchange, the shelter inflation, the uncertainty around how far we're going, and the wage inflation picture. Right, there's a lot of confidence that we're moving towards there, but we're not quite there yet.
That's the point about a more uncertain inflationary environment, and with respect to kind of negative stockbond correlation, which is really the.
Driver of the sixty forty part.
The challenge is that was really working well in your portfolio when inflation was missing from below. Inflation is still missing from above, and until you get back to the period where we have too little inflation, you're not really back to that halcyon days of fixed income in sixty forty.
Jeff, this was perfect. Thank you, sir, Jeff Rosenberg. There of black rock on the Federal Reserve decision. If you are just joining us, welcome to the program. It's a fifty basis point CUD from the Federal Reserve with some descent, the first descent we've seen from a sitting governor on the FMC going all the way back to two thousand and five Governor Mickey Bowman. Not a surprise for many of you who's followed some of those speeches over the
last month or so. If you're looking at the equity market, just about just about attempting to hold on to an eighth day of gains on a S and P five hundred, and it's a struggle. We turned slightly negative on the SMP on the NASNAK one hundred, we're negative by zero
point zero five percent. Mohammed, just a final thought what I heard from you, then, if you have any confidence the inflation story is done, that we're on a one way trip now back to neutral, which might be around three percent, are you suggesting that confidence might be misplaced?
I think it's too early to declare mission accomplished. We've come a long way, but their inherent contradiction that still have to be sorted. John, this was historic. I mean, we're going to look back on this day not only as the beginning of the cutting cycle, but as having we calibrated what we mean by fifty basis point start
to a cutting cycle. And we're going to look back and either this will be the absolutely white bet, which is be preemptive on the labor market after you were reactive to inflation this is a fundamental change in their reaction function. Or alternatively, we will look at this as being too aggressive. I'm hoping that it will be the first, because we all want the labor market to do well.
Of course, Michael B. Key asked for about being preemptive, and he said data dependency or the totality of data My big issue coming out of this is do we understand the fed's reaction function more or do we understand it less than we did before.
I think we've got a lot of questions that still demand answers, and hopefully we'll get them over the next few weeks, but I doubt it once that data starts to come in. I'm looking forward to hearing from the rest of the committee, aren't you. Oh yeah, over the next few days.
It's quiet a sense.
Yeah, let's just see how close some of them were to actually gun twenty five, not the fifty Mohammed Thank you,