Jay Powell, Munis, And ETFs (Podcast)

push those rates higher. And I think he also was trying to send the messages We're committed to do this for some time. Uh, So don't bet on us pulling back in the near term. That seems to be the message here and how the market's reacting. Let's get some professional thoughts here. Robert Teeter, head of Investment Policy and the Strategy Group at Silver Crest Asset Management, joins us. Robert, what's your takeaway? It was a short speech, but I

think he got his message across. I agree, short speech, very powerful, very strong communication that the job isn't done until the job is done. Until they get too I think some of this reaction that we're seeing here though, is perhaps healthy in that in my interpretation, it's ringing out some of the last hopes of a pivot. And I think pal made it very clear today there's no

pivot on the horizon. There might be a pause at some point, there might be a reduction in the scale of increases, but the main focus is on inflation here squarely, and I think he communicated that point very clearly and very concisely today, and that's how we're seeing the reactions unfold. What about on the bond market, I'm confused with the bond market is thinking here you're looking at a tenure yield that's virtually unchanged, even though being a little bit choppy.

As Herman Powell was speaking, what do you do with the bond market that just seems to hover, or say a bond yield that seems to hover around. Yeah, I thought that was interesting as well, and that's one of the reasons why I thought this reaction has been primarily centered on on equities and that hope for a pivot. It didn't seem to me that the bond market was

reflecting any kind of potential change in policy. It looks like the mix is still pretty evenly split between fifty and seventy five at the next meeting, maybe a slight move towards seventy five. Still pretty evenly balanced, and as he said, the tenure kind of hanging in right around three percent without any major reaction as well. So it sort of says to me that maybe the bond market has has interpreted the FED for what they've been saying

in terms of inflation. Maybe the equity market got a little bit carried away with that hope for a pivot a while back. But I think this is kind of a healthy one day adjustment in the equity side of things. Do you think the equity markets retest their late June lows? Robert Um, I don't think we'll get there. I think a lot of that depends on on the economic outlook, which today it has remained strong. There's been this battle between you know, which is going to change first, the

economy or inflation. It's been quite a long runway for for both. The economy is kind of hanging in their earnings estimates have been hanging in there, and I think that's really the critical point. So if we keep with this stability around rates, I think the evaluations will stay where they are, and if we keep earnings estimates where they are, equity should have an okay backdrop from now

through the remainder of the year. I think we'll be in a bit of a choppy and holding period, though certainly through the CPI report and probably through the next FED meeting as well. So in the laungic here of of the trade when it comes to trading the Fed's credibility. The idea here being that if they're going to tackle inflation and the market believes it, then they sell off.

But isn't that a good thing that they're tackling inflation are looking to do it because to some extended almost delays UH, this inevitable recession perhaps further into arguably into isn't that something risk asset should be celebrating. I think that's right. I agree with that interpretation, and I think that that that follows through in inequities or risk assets may take place in in coming weeks. I think today was sort of this recognition that there's there's absolutely no

chance for a pivot. I didn't think there was one. You probably didn't think there was one, but maybe there was a little bit of hope left for that inequities. But I think you're right, and I think the language PAL delivered and that that the regional fed shares that delivered in terms of front end loading and being really clear about this, this is the objective. Inflation is the objective. I think that's a strong and healthy message that inflation,

you know, hopefully will be coming under control. Here. They've talked about some glimmers of hope in the monthly reading, but Pal made it clear today that one month is not enough, and I think ultimately you're right, that's a that's a healthy message for risk assets over the long term. Alright, So given that backdrop, Robert, how are you guys positioning

your portfolios there? How much risk are you taking on in the near term or is it just kind of it's buy some real defensive kind of sectors here and just hunkered down for a little bit longer. Yeah. Well, we've been slightly above the midpoint of our range for risk exposure, mainly for equities, on the basis of we think over the medium term horizons, over the next few years, earnings we think will track higher, and we think PE's

have stabilized here. So while there might be some chop um, we think we returned to a slow growth economy, called it a two percent economy. We think earnings will maybe come in a little bit lower than consensus in the next few years, but still five six and so we're moderately modestly I should say, above midpoint of range for risk assets here. So I want to go back to something that Sherman Pal specifically said. He said this justification for remaining this hawk ish was going back to vulgar.

The mistake that they made in the seventies was pausing, and he doesn't want to make that mistake again. He made that very clear. But I'm curious about what happened after that in the eighties. And yes, Paul, I know I was not born in the eighties, but I have studied it, so it's okay I can ask this question. Didn't even let me get it, I know, because I know you too well. Um, but I have to ask, are we in for a repeat of the eighties here? And what do you trade if we are? Yeah? I

thought that was a really interesting point as well. One if I takeaways from it was that he mentioned both vulgar and green span, which, in a in a weird way, I thought was maybe a hint towards balancing out fifty and seventy five at the next at the next meeting. But I thought that was a really telling comment as well. He made it very clear, uh that you know they

won't finish until the job is done. And I think at your point earlier that that's a healthy message for equities over the longer term outlook, and so better to get the job done now, get it done effectively, uh, and hopefully set the stage for as we as we saw in the eighties, perhaps not quite so strong in terms of economic growth, but at least price stability and a bill city for valuations to remain flat or even increase a bit if we have a very stable inflation backdrop.

All right, Robert, really good stuff. You appreciate getting your perspective, your views here on the heels of some pretty important testimony coming out of Jackson Hole Wyoming from FIT chairman j Pal Robert Teter. He's head of Investment Policy and Strategy Group at Silver Crest Asset Management. Now on Bloomberg Markets, Muni's in focus with Joe Mesa. Alright, our focus on Munis today is Rottie, but I build America Mutual when

the market is unpredictable. Bad gives you certainty. BAM matured municipal bonds delivered to fall protection, value preservation and a durable rating. Asciar broker about BAM in short municipal bonds joining us today, Joe Meisa Bloomberg Briefs. He joins us on our Bloomberg Interactive Broker studio as he usually does. He's not one to phone it in like some others. So Joe's in our studio. Joe. When you hear the Federal Reserve talk about with conviction, we're right, we're raising

rates here? What does it mean? It's of a bond market typically see typically think about Oh man, you know what it's seen in the last couple of weeks. Is the yield curve inverted in Yes, very unusual occurrence. I can't remember the last time I saw it, but this is it's it's shocking because hey, Federal Reserves his interest rates and you know, the three and six months really responded and so now I think it's the three months is like a two thirty five, six months is about

two thirty. These are almost ten year yields right up front there. Do I want to ask you about another story that's near and dear to my heart, but perhaps not in a great way that I'd like to brag about. Um. I am a Texan and there's a lot going on between the East G space right now in Texas, especially when it comes to JP Morgan, black Rock, Ubs, can

you before? I don't want to step on your toes, So I'm gonna let you tell our audience the story because it kind of it gets complicated, you know, thank you pretty this if this is insane? The Republicans in Florida and in Texas. Uh, and several of the states are targeting banks and funds that they think are gonna put it woke, okay, and uh. This week the Texas Controller came out with a list of banks that he that he said, you know, you shouldn't do business with

these banks because they're oil boycotters. Uh. You know people. At the top of the list was black Rock. There's also Ubs. But I looked at this list and we got me was that. Uh. In the in the ten firms on the list, we have Donska Bank, and we have Nordea Bank, Schroders, Svenska Handelsbankan and Sweed Bank. And I thought, really, I just you know, to me, it seems that baby he's losing heart for this particular crusade.

Because how about JP Morgan, Right, JP Morgan. We have a story today by Amanda Albright and Danielle Moran about JP Morgan getting ready to go back and do municipal bond underwriting in the state of Texas. So all right, sall see you know you look at that look at that list, and then you say ha, because you know Texas has some financing needs and you would think they would want and many banks bidding as possible to get the lower their cost. Alright, key West International Airport, they're

coming to the inunicipal bob market. What's going on down there? Oh? Baby chickens running through the airport by the way, What yes, y are have a very fancy refurbishment plan that they're cooking up. And they sold about thirty thirty six million dollars in bonds this week and the total cost the project going to be about a d million. A lot of airports have been uh coming to market this year and actually the previous two years getting set for you know,

the expansion that are sure to come. And in the case of Key West, one was a record year for him. I saw that in your story, Joe, four percent of total capacity, you know, right, I mean, nobody wanted to literally shut down effectively. But last year people are like, we're going back to the Keys. Baby business was a bowman. And you know that's because, uh, they couldn't go anywhere else.

They were quarantines and or you know, shutdowns of of the international flight and and you know, you couldn't get you here, and even if you did, then you might not be able to get back in. So people looked at it and said like, great, let's go to the Keys, Let's go to see Gars, let's go to Maine, right And so last year booming at this airport, and of course I wanted to go see heming Wise house. Yeah that's yeah, we've got that down there. Yeah, it's a

good it's fun boy down there right now. That I actually don't mind the drive down the Keys. You flying Fort Lauderdale because it's easier to find into Miami, cross another half hour river the drive because it's a little bit north of Miami Airport, But then to drive down through the Keys is very cool, very picturesque, very picturesque, and in fact, you bring that up. Um, you know Moody is in their rating, uh of this airport brought that up. They said, you know, there are harder the

airports you could take. And it's a very picturesque drive. Yeah, and it's a tay. They stepped up out of Newark. They stepped up the number of flights down to key West. Good stuff there, unless you get stuck behind like a big truck because it's only a two two lane road most of the way. So yeah, so that can get a little top, all right, Joe Misa, guess what what? No, No, that's it. That's it. There you go, Boom, we can all have a drink. That's it. There you go. Joe Mysa.

He covers all things Muni's for Bloomberg Markets. Bloomberg briefs. The inverted yield curve in the MUNI market. I didn't know there was such a thing, but there is, and it takes Joe's reporting. The Muni yield curve remains inverted a rare occurrence in Muni's. So there you go, all right, smp F I found it off two percent here and looking at the corporate the treasury yield tenure treasury up just to smidge three point zero three percent the two

year up four basis points three point four. Oh, it's it's about a thirty seven point inversion in the US treasury yield curve. We'd like to welcome all of our viewers and listeners worldwide to Bloomberg as we digest Jpile's speech this morning, as guy mentioned a very very short speech eight minutes thirty eight seconds. Uh, it was six pages long. His previous speeches have been like fifteen sixteen pages long, and if very direct message, stay the course.

We do want to welcome now Cleveland fled President Loretta Mr. You were in the room. Uh, did he give from your perspective the way you look at the markets, and did he give the message that you felt needed to be given. I think that was a very strong message, and I'm certainly aligned with that. This is not a short campaign here. It's gonna take time and more fed work and more fed attention to get inflation on a trajectory down to our two percent goal when we're all

in and we're gonna be resolute about it. So I thought the message was strong and right resolute from your point of view, What does that mean? Resolute? Means that this is not a quick fix. This is we're going to have to bring rates up from their current levels and continue doing that until we see compelling evidence and inflation is moving back down towards two percent, and until it does, um, we're gonna have to just be very

very resolute in in that being our goal. You know, the July inflation import was welcome news, but we really can't let wishful thinking substitute for compelling evidence. So we need to see a lot more data. I personally need to see a lot more convincing evidence than inflation is moving back down. Do you have a feeling about September twenty one? You get more evidence and the jobs report in the CPI report before then. But are you leaning one way or another at this point? I mean, I

want to wait until the data comes in. I mean, as the markets assume it's going to be fifty or to seventy five, you know, that's what my head is, that's going to be one of those two. But I do think that we're going to have to move interest rates up from current levels, so I want to see that data. I'll sess it. Look at the decompositions of the inflation data um more carefully, and also the the inflation expectations data I think is very important as well.

We had good news on that front today that Michigan numbers come down obviously gasoline, but they're still elevated. Do you still have any concerns at this point that we have seen any kind of expectations get built in? Well, I do think we're at the for the range of you know, being longer term inflation expectations being consistent with

two inflation. I don't think they're they're over that range yet, but I think we have to take it very seriously when we see those those levels being elevated and sustained elevated, because if inflation expectations were to move above levels consistent with two percent or long run two percent inflation goal, then getting inflation back down will be that much harder

and that much more painful. And so that's why I'm very focused on that as well as well as the other data on inflation to be able to assess, you know, how much demand moderation is happening, how much supply change is happening, because we really have an imbalance in demand and supply. Of course, the FED tools work on the demand side. Um, so that's the one thing you can't control here, and that is obviously a danger going forward.

You don't know what's going to happen. Well, but they're ups I'd risks they're right because we know that the European situation with Ukraine and the Russian supply of oil that's going to be you know, those numbers are coming out or that environment means that probably gasoline prices may not be sustained at lower levels. So again, I don't think this is a time to declare victory over inflation. There's a lot going on in the economy that will affect inflation going forward, and we just have to be

very resolute. If you look at services inflation, rents are still very elevated, and rents flow through into those underlying inflation numbers with a lag. And so again I think there's reasons to be cautious on declaring that inflation is peaked, and cautious in thinking that it's on a trajectory moving down. And that's the approach I'm taking. I really need to see convincing evidence of that before I would say that we can ease off of our need to raise interest rates.

Chairman said that the goal is to get rates to a slightly restrictive stance, which he said, you look at that summary of academic projections from June and it was around three four. Buddy caveated debt by saying September twenty one, you have a new set of projections. Have you changed your view on where you think the terminal rate needs to be? So there's a lot of confusion out there about what that three point for UM. That's a long run You know, there's a long run neutral and a

short run neutral. And if you think about where inflation expectations are, and you think about what's a real rate, a neutral real rate UM, that's like about a half a percent. We're still in negative real rates. So we haven't even gotten to a neutral in that sense um inflate fed funds rates. So we're gonna have to move rates up. I mean, I think we're going to have to move them up, and this is based on just my current rate of the data above four and probably

need to hold them there next year. So in other words, move them up to slightly above four percent UM sometime early next year, and it just keep them there in order to get this inflation under control went back down to two. The markets looked at what the VET has been saying about that and say we don't think they can do that, that we're going to see recession going forward. Are you willing to go into recession to maintain rates

at that level? Well, I think we're going to have to assess demand versus supply right the imbalanced there, But I do think we'd have to see inflation coming back down because even if UM growth and I do think growth will be slow. Um, I'm not projecting over recession, but I do think we're gonna have below trend trend growth UM this year and into next year. But I think that's necessary in order to get inflation under control.

And we'll see increasing in the unemployed rate unfortunately. UM. But I don't think excessively deep in terms of either a pullback and growth or UM labor markets, you know, being totally disruptive because the labor market is so strong right now. It's still extreme, you know, very tight. We have labor demand really outpacing labor supply. So again there's a reason to think that, yes, we're going to see a slowing in fact, our policy is intended to work

on that demand side. But there's also reason to think that it may not be um a prolonged or deep um slow down. It could very well be that we have to have some slow down, but it won't be one that's really a painful one in terms of the longevity or deepness in it. That said, we're going to have to have that, I mean, and if we don't have that, I don't think we're gonna get inflation moving back down, and that will create more problems. It'll be

very painful. We won't be able to get the strong labor market conditions we had in the last expansion unless we get this inflation down. We're speaking with Lareta Master, the president of the Cleveland Federal Reserve Bank, who was

in the room as Jaremen J. Powell spoke today. Uh, some of your colleagues argue for a go go slower approach in terms of raising rates to that restricted because they're considered about long run legs, and some of the others we've talked to say, Uh, that's not really an issue because policy lags are much shorter these days, and so we don't have to worry that a year from now we're going to be choking the economy. Where do

you follow on that spectrum? Well, I do think that the because of the forward guidance that the FED gave when it pivoted, you saw the financial markets react probably sooner um and more sharply than typically. But that doesn't necessarily mean that the real economy is going to the effect of the policy changes on the real economy are going to happen faster. So I think I'm agnostic on that. And even when we say long and variable, it's a long and variable part. So six months, eighteen months is

still a long time. So that isn't really a frame that I'm I'm using to sort of determine where I think appropriate policy is. Rather, I'm going to be looking at the data and what it's informing me about the outlawk So I know a lot of people say, well, why are you looking at data that's past, you know, talking about the past and not looking forward. I I'm looking forward. But the data helps inform my outlook for

the economy and assess the risk to that outlook. And so I'm looking forward, and I think we have to with policy. So, for example, I don't believe we're going to be raised it would be appropriate to continue raising rates until inflation is down to two We're gonna at some point have to pause, keep rates probably at an elevated level for some time, and then make sure that

inflation is on the downward trajectory. What do you see or what are people telling you in your district, both businesses and consumers about how they feel about the economy, because there's a potential uh self creating problem there. I think there's a lot of concern about the future. If you talk to businesses now, a lot of them say,

you know, things are so really good. I still have orders, you know, I have a backlog of orders, and manufacturer will say so, I think that activity will stay, you know, relatively strong this year. It's about the future. It's about what's going to happen next year and and going forward. And the same on the consumer side. When you talk to the the households, you know they're struggling with this inflation.

I mean, the inflation is very painful, and that's why it's some imparative that the Fed do this action um to get that inflation under control. But again, most of it's not about necessarily the current situation. It's really what is the future going to bring and that's why it's very important for the FED to be doing actions now so that the future can be a better future. Well, thank you very much for joining us today. The right semester is the president of the Federal Reserve Bank of Cleveland.

A busy day, J Pile telling the markets to stay the course. There, Atemester telling us she's with J Pop. All right, let's stay on this. We want to just get some more color here because it is clearly moving the markets where the equity market is bringing. Steve Matthews, US economy reporter for Bloomberg News. Steve again, you know, we were kind of parsing through what we heard from FED Chairman J. Pal but in terms a messaging, well

you gotta give him two thumbs up. Pretty clear, pretty concise, uh, and really didn't leave much wiggle him there. Yeah, that's exactly right. I mean I saw one Wall Street report that referred to the speeches short and sweet, although it was really more short and not very sweet. I mean it was like, we're gonna do whatever it takes, and that's gonna mean pain for the economy, pain for households,

and we're okay with that. I mean, there were all these references to Paul Vulker, who was the FED chair in the early nineteen eighties and caused unemployment to hit ten percent and serious recession, actually two recessions, and that was kind of the praiseworthy FED chair that that he cited.

So it was pretty clear that the big message was UH, in July after the FED meeting when they rates by seventy five basis points, and he said at the press conference, We're gonna see some slowing of rate increases in the future, and you know, it would be extraordinary to continue to have seventy five basis points every meeting. Uh and and there would be no forward guidance. Wall Street took that. I mean, the FED is about the pivot. We're on the verge of a pivot. And today's message was no, no, no,

there's no pivot. We're our resolute We're going to continue to push higher rates and we're going to keep them there for a long time because that's what we think is necessary to get inflation down. Paul, I have to say, I love the Have you ever kind of pay attention with Steve or Mike McKee talk about Wall Street and it's kind of like Oh those guys again. Um, see, if I gotta ask you, I mean, right now, the the bets here, it seems like it's a coin toss

between fifty and seventy five. What would the extra basis point difference really make in the September hike, well, in the in the greater scheme of things, As you correctly point out or suggest with your question, it doesn't mean a lot of difference. I mean, it's the the ending point is probably more important than whether it's fifty or

seventy five. Those who favor seventy five, the folks like Jim Bullard, the head of the St. Louis FED, who has been, you know, the most hawkish FED official for some time, argued that frontloading will help, you know, push the economy down. I mean, basically, the whole point of the FED tightening is you want to match supply and demand. There's too much demand, there's not enough supply. Supply is not really coming up, so you have to do something to depress demand to have it below trend, and that

really hasn't happened so far. You're still getting huge jobs, get job gains and UH and income gains, so they want to move at rates higher faster so that you can get that downward pressure on the economy and the rates would be theoretically restrictive as opposed to we're about neutral right now. And Steve, another takeaway, at least for me, is that recession is clearly on the table here. Um, how do you think the FED thinks about it? How

do you think the White House thinks about it? I mean, is it something that the Fed is saying, you know, shallow recession is not the worst thing in the world, because if that gets us to lower inflation, so be it is that kind of how we should be thinking about it. Powell is talking about below trend growth today,

which is not exactly recession. If you if you consider that the trend growth for the economy is maybe one and a half to two percent, you could get below trend growth of I mean, if you had the theoretical soft landing, you could get blow trend growth of one percent, a half percent, you know, something close to zero and still not push the economy into recession. And I think that's their big hope, that there's still some kind of avenue to get below trend growth but without there being

a serious recession, and if there is recession. They would certainly be happier with a shallow as opposed to a deep recession. But you know, the message again today was whatever it takes, so that if it, if it becomes necessary to have a significant recession to bring inflation down. They view inflation as job one, and that you know, really having stable prices is a prerequisite for having a good economy. So it's like it's not an either or situation.

It's really almost a sole focus right now on inflation. Can we talk about them for a moment about the quantity of tightening piece of equation. They are undertaking something that has never really been done to this extent before and only been done successfully once, and even then it wasn't done completely. Correct me if I'm wrong, Steve. But but I'm curious about what this means for the Fed's playbook when it comes to future recessions. Let's get past

this shallow recession that seems to be this inevitability. But in the future, this is a tool that is now in their toolbox, and I'm curious about the success right here. Does this mean that every time we hit a recession similar to the Global Financial Crisis or COVID for that matter, that quwie is going to be a tool that the FED uses. I think the answer to that is yes.

I mean that they have been relatively clear, not necessarily every recession, because it's like with with this recession, if we have a recession, and while you may think it's inevitable, the FED is still holding out hope that it's not inevitable. But when you hit a recession and you want to stimula like growth, then you know you have a lack of options. You have forward guidance, you have cut you

don't really don't have cutting rights. You can cut rates to zero, but that that's it, and so you know you're left with QUEI. And and I think that's it's gonna be a permanent tool. And I think they are resolved that, you know, with with rates at zero, they have no choice but to use it as a tool in the future. I'm glad you said that, because it feels like when you have QUI as part of the playbook,

with that also comes asset price inflation. So I'm wondering that in the process of quantity of TWITE tightening, why is the asset price inflation as a function of QUEI such a surprise. Well that it really shouldn't be. I mean, the problem with what the Fed has is they have a lack of tools. I mean it's like interest rates are a blunt instrument. You can raise them, you can lower them, and then you have QUI, which is also

kind of a blunt instrument. I mean, it's essentially another facet of of of interest rates, and you know it's going to affect asset prices, and they you know, obviously in retrospect, they should have judged this a little bit sooner. They should have seen what was happening with housing prices and with stock prices and maybe moved a little bit faster,

which they now kind of recognize. But they let things get out of uh, get get a little bit ahead of them, right, all right, Steve, great stuff is always Steve Matthews, US economy reporter for Bloomberg News. Steve has been in our Atlantic bureau since I'm gonna do the math for everybody. That's twenty five years and good for Steve. Awesome reporting coming out of Atlanta, Georgia. Thanks for listening

to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio