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With your Fed decision is Mike McCaig.
There is no change to interest rate. There are a number of small changes to the statement, but this is not a CU in September announcement, the FEDS forward guidance remains unchanged. Quote the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent. There's also no change in the overall assessment that economic activity has continued to expand at a solid pace. All
of the adjustments are basically to adjectives. Job gains have moderated, the statement says, instead of remains strong, Unemployment has moved up but remains low. Inflation has eased over the past year but remains somewhat element and in recent months there has been some further progress toward the two percent inflation goal. If there is a hint about the future, it's this.
Instead of saying risks to employment and inflation have moved into better balance, the statement now says the Committee is attentive to the risks on both sides of its dual mandate. The decision was unanimous, and that's basically it. If there is going to be a hint about a September move, it's going to be up to Chairman Power.
The two part story, Mike McKay, This was the first part.
The second part starts at about twenty nine minutes with that news conference in Chairman Powell. Let's get to the equity market. We stay positive on the S and P five hundred up by about one point five percent on then that's that one hundred up by two point five in the bond market yield to look a little something like this, we've done about two basis points on a ten year the move at the front end of the curve.
It's a small one, but notable, up by about two basis points on a two year at four thirty eight thirty two. I just want to get to those changes that might McKee identified. If you go back to the second paragraph of the June statement, line of that paragraph read as follows, the economic outlook is uncertain and the
Committee remains highly attentive to inflation risk. If you go to the second paragraph and the last line of the statement that just dropped, the economic outlook is uncertain and the Committee is attentive to the risk to both sides of its dual mandate, and Lisa, this is the story of the dual mandate and the risks around it coming
into balance. That looks like the way they formalized it this time around in the statement, and I just wonder how much the Shairman builds on that in the news conference in twenty eight minutes.
I want to pick up on your point that the bond market isn't moving that much. There's only an increase of about two basis points on the front end. And that is why exactly that they recognize the risk that the labor market is one that they.
Have to care about.
This sets up Jackson Hole for him to come out and change the framework, and then for September to be that first rate cut. No one's changing that view based on this particular statement.
The balance of risks has shifted, and you start to appear see it appear just a little bit incrementally in the statement. The decision rates unchanged. We're looking for a move still in September. To Leasa's point, we still have a news conference in front of us and Jackson holl the ann you'll get together at Jackson holl Well, I mean about a month away with us around a type
on place to say. The film of fed Vice Chair, which a clamorat is with us, still with us, is about Michael jpmulgan, Asset Management.
Rich.
It's good to see you, sir. Let's start with you. You listen to Mike. You saw the changes in the statement. What do you make of what we just heard?
Well, I'm a bit surprised, actually, I mean not with the adjectives. They needed to change some adjectives up, but I was a bit surprised about the reference to the the attuned and attentive to the balanced outlook.
I mean, that's certainly correct.
The chair has been making that that point, but I think it is relevant that they included it in the statement. He will certainly, I think, reinforce it in the press conference, and I think I do think it does tee up Jackson Hole.
There'll be some more information before then.
I look at it, and this show is the best one we've ever done. We've got Dudley with his important Bloomberg opinion piece a couple number of days ago, and I want to go to you on what you own, which is the high ground on the x anty x post debate. You've got the Economist magazine article you did a year whatever ago. You've got your January twenty twenty two context and consequence of speech. You want an ex anti aspirational FED.
I don't hear that here.
They're waiting.
They're waiting, They're waiting, they are waiting.
I think they are. They are getting greater confidence. But I think the key point not to toot my own horn is my view all on it's okay along and I think I've said so on this show, is that the pal FED really the goal is to get inflation to two points something and then they would start thinking about the next step, which would be easy, not running
an easy policy, but removing restriction. So I do think this is what we're seeing, and if we do get the cut in Septembers, I think we and markets expect it will be because they expect inflation x antes to continue to fall.
What are we anywhere near that? I'm sorry, this is an ex post FED. Going back to Arthur Burns, there is data dependent as I've ever seen.
Yeah, they are data dependent, but I think that they attenuated and focused on the statement today emphasize there's both sides of the mandate. So I do think they're looking at just the labor market as well as the inflation data.
Bob, what's your take on this.
It seems like it's less dubbish, a little bit more balanced than you initially thought. Do you think this just is trying to move as incrementally as possible.
I think they preserve full optionality heading into Jackson Hole. I also think that central bankers are mindful of what happened to the ECB earlier this year, where you could have made the same argument, if you're going to go next month, why not go this month? And then of course you saw what happened. So I don't see too much different than what we expected, other than they just decided to maintain the full optionality. We'll see what happens
as we roll into September. We're still very much expecting twenty five basis points in September.
No, doctor, if Runmack just writes in publishes with language like this, it means the Fed will have to make a more pronounced shift in language in September. I'm surprised stocks are holding up well on this statement. Perhaps equities of looking ahead to the news conference, the news conference starts in about twenty four minutes to because I to say, the FETTI is waiting for additional data. Can they even articulate why inflation might reaccelerate from here? Can we pick
up on that question, Bob? Can you articulate the risk surround inflation? Why might it reaccelerate from here?
Corporate profitability still looks great. We talked about S and P five hundred earnings. They're coming in ahead of expectations. You look at the guidance companies are giving you. They're up twelve percent next quarter. So we're not in a recession. We're slowing down in some parts of it.
We'll see.
You know, I can't find really the argument what's going to cause inflation to reaccelerate, To be.
Honest, Rich, we were talking about how this was definitely going to be unanimous, and I wonder how much of wrangling of cats there is in the room and whether this is basically a representation of that that there's some members who believe that inflation has been killed, it is nowhere in sight that labor is important. And then you have others who say, well, you know, wait for the year over year, cops. Is that kind of what we're seeing here.
I think it could be an element.
You know, we've had some members of the committee, and I know most of these folks, but it's a different committee than the one I was on, and many of them do emphasize both sides of the duel mandate. So I'm sure that reflects a number of folks views. I do think though, this is a committee that certainly got burned earlier in this year because the inflation data went the wrong way, and to their credit, they became very data dependent, as Tom indicated. I think that they put
it this way. I think they think they're going to go in September. There is a range of data where they wouldn't, but I think it's a pretty small range, and I think that's really the balance of trying to strike. And I think we'll hear that in the press conference.
We were speaking earlier with James Bullard formally Saint Louis fed and he was talking about how he always raised the question at meetings that if you wanted to cut rates, most certainly at the next meeting, why not cut him now. Bob was sort of discussing that earlier, and it sets up the sort of difficult period of time where every data point could potentially upset the apple cart if it doesn't comply. Do you think that they're in that zone right now?
I don't really.
I mean I've certainly during my time on the committee we found ourselves there a couple of times, so it can happen. I think the data we have gotten, you know, the chair did a lot of communication before blackout, and the data since then has reinforced that view. So I think there's a pretty wide range of data where they'll feel comfortable going in September.
So I don't think they're in that danger zone.
Can you confind that Jim actually set those things to the fmcs?
Well, of course I would never reveal what was said in an fm C me except what I say, all the brilliant things I said.
So Don Swage joins us now from KPMG, alongside form of FET vice chair Rich Cloud above Michael F JP Morgan done. I want to get into this statement that came out about eight minutes ago. What do you make of it? The incremental changes and when you're looking for something bigger, I wasn't.
Looking for anything bigger, and I think one of the key issues here is we saw Powell talk about in his congressional testimony when pushed on the Jewel mandate. He said, listen, this is the thing that keeps me up awake at night. The number one thing that keeps me awake at night is that overshooting, the overtightening. So that is in there, and that is what opens the door a crack, not
wide open, which is what we expected for September. And I do think they do think they're going to move in September, and I agree wholeheartedly with rich on this.
I think the other issue is there's sort of this tale of two economies we're seeing and merge out there, the one that's in the household survey that's close to but not yet triggered the PSALM rule, which is what got Bill Dudley up in arms, and how weak employment has been in the household survey and the establishment survey, the GDP data, other jobs data that suggests the economy
is still on solid footing. And right now the Fed has been opting into more of that establishment survey, where payrolls have held up, although that they're not quite as strong as they've been. We're going to get probably some good public sector hiring in the jobs numbers on Friday again, which will help boy those overall numbers adding to some weakness in the private sector. But I think that's important is that the FED is looking at this and their wane which is the right stuff.
And you really getting.
To Rich's point too. There isn't just one piece of data that the market keeps looking for that could tip the apple cart. The FED is looking at the totality of the data, and that last line really gets to that point. The totality of the data will allow them to go in September, and they don't want to make the same mistake the ECB made move and then have to freeze and be in a purgatory. Their credibility is at stake. They want to make sure inflation is coming down.
But I agree with Rich.
They'll still cut before inflation reaches it's two percent target, anticipating that the economy by lifting off that restriction, the economy will get there.
We have swank and clarity with us. Bob Michael, maybe a question for you on the economics of the moment. Are we slaves to measure we have measured for decades. We're being very measured, where maybe other central banks aren't. Are we just just so afraid to move and we're over careful, over cautious, because once we move, we've got to move in a measured vector.
I feel like we're back to the green span FED, where every word is so carefully thought out it makes you want to overanalyze it and no one can give an inch. If the wrong word is in there, then the FOMA gets concerned about the market pricing and hundreds of basis points of rate cuts and risk assets being up tentskers. Okay, please, but we're talking about and rich touched on it. We're in I think, very restrictive range twenty five basis points. You're not in a loose monetary
world with money flooding all over the place. You're still restrictive. You've got to start that journey somehore.
This is too important, Lawrence Meyer, Washington University. Is some monograph a term at the FED to our green span apart that it was a dictatorship? Are we getting to the point now no one can dissent and everyone's measured because we're measured and appropriate.
No, I think no one has descended because two years ago inflation was too damn high and they all agree they wanted to get it lower. It'll get more interesting as we get close. But what I want to say to invoke the Olympics, now, this is a FED that really wants to stick the landing. You know, they won't say this word, but their projection and what we're seeing in Bloomberg Consensus and elsewhere is a soft landing and
they want to stick it. And you know, the data is now solid, is moving in the right direction, and so you know, getting back to the Green Span FED, there was a soft landing or so in those years, Alan Blinder is written. They're not common, but we do see them. I think towards in twenty nineteen. I think the Palfed got a soft landing. We don't see it in the data because we got the pandemic. The Ecomomie looked pretty good in January.
Of twenty twenty. So they're trying to stick the soft landing.
Forget about sticking the landing, Let's just throw them in the seine the waters.
Thought there's another there's another analogy. Matt Hornback puts this out earlier, and I'd love your thoughts on this, Diane. Basically, the Olympic motto to carry on with this reads faster, higher, stronger together could have been used to talk about central banks globally altogether. Now it might be at more opper, boat, slower, lower, weaker together. Diane, how much is that looming over this
FED meeting? The idea not of synchronized swimming or synchronized rate cuts, but this idea of trying to sort of take an edge off for the rest of the world. That really does seem to be dealing a little bit more with some negative growth.
I don't think that's the fed's main concern, and I'm sure rich will backed me up on that. I remember seeing Ben Bernaki actually go after another central banker said you guys need to change your policy to help us out, and he said that's not our problem, basically at a Jackson Hole meetings. So that is not the fed's primary concern. That said, a strong galer helps us out down the road and keeping goods prices lower, so that helps the
FED out. I think what's more important here in terms of the Olympic analogies, is that the road to gold is often paved with tears and obstacles, and I think people forget that. I'm thinking of Simone Biles here.
I'm sorry.
She's my hero and heroin at this point in time. But I'm thinking about, you know, soft landings. People forget the nineteen ninety four ninety five situation. It looks great on paper. I lived it.
I remember it rich. You lived it too.
It was ugly at the time. Chairman Greenspan's reappointment as his third term as FED chair was held up for four months in nineteen ninety six because he nearly crashed the economy in nineteen ninety five and people were so
angry at him for not easying sooner. And it was his own colleagues, including Jennet Yellentt on the FED that got him to experiment with pro activity, growth and intense form competition that bringing down inflation and allowing the unemployment rate to fall instead of using monetary policy.
To do it.
That is really important to remember is that soft landings are not easy. They look good on paper, but getting there can be a hard path.
Dan, Where does the confidence come? Where does it come from? The unemployment stabilizes at these levels and doesn't carry on shifting higher into year end?
What underpends that?
Well? I think I don't know if unemployment is going to stay there or not. It often moves up slowly and then moves up rapidly. Alls I know is that even Claudia sam who wants to FED to cut right now, has argue to her own rule might not be applicable in the post pandemic economy because of all the changes we've seen. We've seen much of the rise in unemployment has come from more people seeking jobs, an increase in
the participation rately among primate workers. We've seen an influx of foreign workers, foreign born workers accounting for over seventy percent of the growth and civilian labor force since Februar of twenty twenty. That's helped to buoy the unemployment rate as opposed to a surge in layoffs. That doesn't mean there aren't stresses in the labor market. That doesn't mean there aren't still problems. But at the end of the day,
what is it that people complain most about. They can complain most about the high level of prices still, and that's something that the FED also has to keep in front of its mind. And I think that's where we're at at the end of the day. We don't want to lose this and not hit that soft landing, but
it's a rocky road to get there. I think we're still going to make it, given the fact that we saw the positive of consumers pushed back in the second quarter on price hikes, and retailers and producers capitulated.
They rolled back.
Prices on goods, and we saw a rebound in growth, doubling the pace of the first quarter, driven in large part by a rebound in consumer spending. That's the Goldilock scenario towards a soft landing.
There's this issue, Bob. We're looking at market pricing, and right now it seems like this is consensus that they are going to land the soft landing, even though it is sort of a rarity or a white elephant. Do you think that the market has overpriced that soft landing or even underpriced it because the internal skepticism just keeps.
On roaring Now, I think the markets are right on track with the soft landing, and if it in fact happens, the FED can bring down rates a fair amount and the markets will continue to appreciate. I think what's different this time is the FED and investors have a lot more real time information. I was around in ninety four ninety five. I was around in eighty one and you didn't have that information, and now you have it. It's real time, it's live. You can see what's going on.
Businesses have it, households have it. And maybe it gives policymakers a false sense of comfort, but they have that sense of comfort, which.
Really kind of leaves the market kind of in the way, sort of in the same boat that the FED is in. And I wonder, rich you know, if you were still on the Fed, how much the FED looks at the market to kind of gauge progress sort of follows them, if you will, because they are gauging real time data.
And if anything, this is the collective will. And I love the war stories from the mid nineteen fifties for everybody, but I wonder if you know, if that's something that they could really kind of sink their teeth into.
Oh sure, well, I mean, I'll just speak for myself. But you're looking at the market hopefully to try to extract signal.
There's always noise.
You have to be honest with yourself, but it's particularly irrelevant for things like the growth outlook and the inflation outlook.
You need to know what is being expected.
That's a key input to monetary policy, our expectations. I gave one of my speeches at the FED was on this point avoiding the hall of mirror problems by looking at market prices. So I'm not saying it it's easy, but I don't think there's an alternative.
I want to cross back over Todayne Dan, I know you've got to go in a second. Just a quick final word a question for Chairman Powell in this news conference, Dan, what will it be?
Well, this is on communication, so I think it's going to be very hard for the FED to communicate. We're already seen financial markets are trying to front run the FED on a larger cut in September. How do they calibrate their communications to deal with what may be more measured cuts?
Interesting?
Dan, Thank you as always, Dan Swamklair of KPMG. If you are just joining us, welcome to the program. The FED decision came out about twenty minutes ago, unchanged on interest rates and the statement largely unchanged as well, just some incremental changes. So the focus on the news conference now, which starts at about ten minutes time with us joining us now, and please to say as Mike Capen of Bank for America, Michael, going into this news conference, very
incremental changes in that statement. Were you expecting more than what they delivered?
No, I wasn't. I think with the strong growth numbers we receive, the right place for them to make adjustments is exactly where they did. Reflect it a little bit in cooling labor market conditions, reflect a little bit more progress on inflation, kind of pin down and nail down that balance of risks argument, because that's what the share had said in front of Congress. So I think this
was the right incremental move. I think the Fed feels that it's in a sweet spot right now that the data is moving in its direction, so it's getting closer. It just needs a little bit more and then that confidence, that nebulous confidence may be there. So this is what we were expecting. We weren't expecting a big lean in either direction from the statement.
The market, as you know, Mike, has been looking for September at a baby step towards that you and a team have been looking for December. What separates you at the moment, Michael, the data that backs up your view. What separates you from the rest of the street at the moment.
Well, I'd say we have less concern about downside risk to the economy. We certainly are watching for it and looking out for that. We may be wrong on this view, but the economy grew at a pretty solid pace in the second quarter, and yes, things are moderating and cooling, but I still think that there's a lot of resilience to both the economy and labor markets. And we'll see. Maybe there's a little unevenness in this inflation story, but certainly September, a September cut has moved a lot closer
to our baseline. So, yeah, we're still in December, but we've got two employment reports and two inflation reports between now and now, and then you know, further progress in those two variables, a little bit weaker employment, kind of repeats of what we just saw in June inflation that could easily put a cut on the table in September. So September can happen, but it may not. So I think that's how i'd frame it right now, Michael.
Let's just put a bow on this. What does further progress look like to you? In the two labor market reports, the toy flation reads that we get until the next meeting.
Well, I think the labor market report is maybe a little more asymmetric. You know, a strong report's probably not going to prevent them from cutting, but obviously a week one could. So if they feel the labor market is softening more than they expect, they could go in that regard. Otherwise, I think to your earlier question of what's going to cause inflation to rise, I can't see it, I agree, But I don't think what they can rule out right now is that inflation settles in at a level that
feels a little uncomfortable for them. So I think, on the margin, a little more evidence that no, we're not going to get stuck with say core PCE in the high twos. It does look like it's moving lower. So one or two more reports that give them confidence about that, then I think is probably enough.
Speaking of discomfort, we know a topic they're uncomfortable with, and that's politics, and it comes up in this news conference.
We know what Chairman Power is going to do. He's going to ignore it.
But there was a less sent to him by Senator Warren Company and TK there's a quote in this let's say the immediate press release read as follows, the failure to cut rates would indicate that the FED is giving into bullying and it's putting political considerations ahead of its jull mandate to promote maximum employment and stable prices. So you've got the Republicans saying, if you cut rights, it's political, and you've got the Democrats saying, if you don't cut rights,
it's political. Sort of stuck in a rock and hard place between the boat.
And what's important here, John, it's so so important is that Richard Claret is one of the people that bought history back to economics with his work at Columbia. I sat at the FED with you in that magnificent library of first editions, and Elizabeth Warren reached down and said, take the book off the shelf. And I took Torsten Veblin The Theory of the Leisure Class off the shelf, and you and I were talking about it. This is a few years back. That's what Senator Warren's talking about
is the Gilded Age. Are we in a gilded age where the elites are talking only to the fancy people and indirectly doing monetary policy only for the fans see people?
Well, no, And in one word, I think you know the FED has the dual mandate, inflation was too high.
They're focused on both sides.
I think the economies in a place where it can certainly adjust and wait another two months until the cuts command.
So I would push back on that.
Mike Cap, you push back, just how relevant is the US selection and US politics?
Well, the way I would frame this, and I think Rich would agree. I was formerly on staff at the board, and I learned quickly that no matter what you do or don't do, somebody is going to be upset, and one side will complain or the other will complain. So I think you learned quickly the best thing to do is to do what you think is right. So I would put it at that. So they have competing opinions here, the right thing to do is to do what they feels right.
Michael finished with the same question I finished with Diane Swamp questions for the chairman. If Michael McKay's listening going into this news conference, what's the number one question for you?
Well, the chair is said that they could ease if there's unexpected weakness in the labor market, which is actual data that comes in below their expectation. But what about preemptive using on the risk of labor market weakening. I think that might get the gap between market pricing and what the Fed thinks that will deliver.
Mike Gapin, Thank you, sir, Michael Gapin there Bank for America. The news conference about five minutes away.
But there is a.
Question here about what kind of interest rate it would be when we get one, if we get one in September. Is it a risk management decision? Is it a mid cycle adjustment the beginning of something much bigger than that? Do you think they have to frame it at this point? Do they think they have to characterize what it might be?
I think they do, and I think they'd like it to be part of the normalization process. That they've achieved their targets on both sides of their dual mandate, and they could start to bring down what is a restrictive policy.
Michael Gabin echoed your speech of January two twenty two. It's about ex ante aspiration. I don't want you to voice for the chairman. I know that's inappropriate, but how does he voice the aspiration of getting out front here in six seven minutes?
Well, I think he'll stick to the mandate and he'll stick to documenting the progress, and again he won't use the word soft landing, although that's I think what they're trying to, what they're trying to achieve, and I think Governor Waller's done a very effective job as many speeches in making the point that they have time because the data is holding up quite well. You know, it was a very bold call a couple of years ago for Waller to say we can disinflate without this huge pain
in the labor market. I think they were prepared to take it if it was required. It hasn't happened, So now I think they're even more focused on the soft landing, and I do think they do want to avoid a premature declaration of mission accomplished, because even if underlying inflations are going to target, there's always noise in the data, and two or three months of noise in the wrong side is a bit uncomfortable.
Rich there's this feeling baked into markets that Vecho J. Powell is much more dubvish than the statement might suggest. Are you expecting that tone to kind of come out in the news conference?
Interesting?
You know, we heard a lot from Chair Powell at CenTra on Capitol Hill, sitting down at the Economic.
Club of DC. I've gone through and looked at that.
I would actually expect him to stick pretty close to that which which was very balanced, not declaring victory but acknowledging progress, emphasizing, as the statement does today, that they are really attuned and attentive to both sides of.
The duel mandate. You know.
So there are some times where I think the press conference is really the chair using a lot of this is what I think. I think we'll hear a lot of this is what we think today. The Committee's pretty tight tightly aligned on where they are.
Bob, what are you listening for today?
I actually think he will come out a bit more dubbish. I think that's the way he's rolled the last several meetings. He's surprised us by deviating from the script and indicating that, yeah, you know, he could see rate cuts on the horizon. I can't take my eyes off of the last sentence in the second paragraph, where the committee is attentive to the risk of both sides of its dual mandate. I got what I wanted at least, which is acknowledgement of
risks in the labor market. The more I look at that, the more it's clear to me that they're going in September. If I were Mike McKee, a lot of people try to press the Fed on what their neutral long term rate is, I would ask him, at what level is the FED funds rate no longer restrictive?
Do you think they can answer that?
Rich Well, I think they won't answer that.
I think they have, and this is one of their probably nineteen different opinions on the committee. One thing I'll say a little bit is right now, as I look at my Bloomberg screen or I did twenty five minutes ago, September was more than one hundred percent priced. And even I wouldn't say it's one hundred percent. There are there's data we could get between now and then that where they might not go. So that's why I skeel a little bit to being a little bit more balanced than maybe Dubvish.
But you know, we'll find out.
I'm pleasing you brought up Central Portugal because I think it's really important to reflect on the comments from chem and Power back in Central Portugal at the ECPs, and you'll get together. Chem and Power was talking about the strength of the labor market and the strength of the labor market being a reason for them to wait, that they have time, they can wait and see a few more months of data.
Maybe.
And it's his characterization again in this news conference of the labor market that I think is matters. Off the back of that incremental change in the statement that you're all picking up on around the table, that last line of the second paragraph. You've seen this incrementally in the FED speeches over the last few weeks, lease of the last month. They've placing greater emphasis on the other side of the mandate in a way that it wasn't even part of the conversation a year or so ago. Think
about where we've come from two years ago. Jackson Hole, August twenty twenty two, Pain pain to get inflation down. The focus was getting inflation down. You can start to hear the focus shifting to the labor market.