Powell's Testifies and Impeachment Hearings (Podcast)

j Pal speaking in front of Congress today. We already got his comments released earlier this morning, saying essentially that the FED policy is in a good place right now, but there are risks out there. To get a preview what we might hear from FED Chairman Power, we welcome Diane swamp Grant Thornton, Chief Economist. Diane, thanks so much for joining us here. You've got to look at some of the comments from FED Chairman Poal. What do you

think we might hear from him? Well, the key issue is one they're on the sidelines until they see a major change in the outlook for growth, and that could be anything from an escalation of the trade war with China to some kind of escalation in geopolitical tensions like what's going on in Hong Kong. Depending on that plays out, that could have an economic impact as well, and that's

something that they're watching closely. Was interesting that he talked so much about fiscal policy in his prepared remarks, warning that you know, we're gonna need that fiscal space down the road because the said doesn't have a lot of tools to counter a recession should we get there. And this is something that other FED chairman have constantly sort

of gone on. He's joined the band legon of other FED chairman on this talking about fiscal policy, the need for um sustainable fiscal policy, and also the need to provide help when the economy does falter. This is something we only saw in the early stages in the post crisis period. In fact, then fiscal policy became a hurdle for the economy as all the burden was shifted on to the shoulders of the subtle reserve. And they know

the dangers of that. They've already experienced the dangers of that, and they're worried also about the unintended consequences of too low rates for too long, and that's something he mentioned as well in his prepared remarks. And that's corporate at He's concerned about the lofty levels of debt were now taking on and that that may be a threat to the economy when we have a downturn, making any downturn worse than it otherwise. Would be the headline though, is J.

Powell makes no news? He's successful, right? I mean that's going to be the headline today. Artful dodger, Yes, the artful dodger. Okay, that's that's in Washington. Would you want to make news today if you're the Fed chairman? I don't think. And you know what, he has competition. He has competition. So it's so he's in a good spot right now. I am wondering, though about the CPI data that we got today showing that without energy and food

it actually is decelerating. How concerning is that to you? Well, I think it's really hard as the unevenness of inflation for the Federal Reserve. What we're seeing is, you know, you've got a lot of inflation and medical care costs and medical services that's a over five percent from a year ago now where you've got a deceleration and many other categories. There's a big drop in apparel prices. That's

been something that's ongoing. We also saw the reversal and new and used car prices, and this is something that you know, the FED for the moment has sort of sidelined a bit and said, hey, you know, we were worried about inflation being too low. We're gonna wait on the legs on these three rate cuts we saw and see if that pushes inflation up gets a little more heat in the economy. They're certainly willing to take that in terms of wages, and if that translates into more inflation,

that would be welcome news for the Federal Reserve. That said, this ongoing stickiness in the low inflation environment, although it's high for some people, those people who are on fixed incomes and have to pay for medical costs more as a larger show of their budget, they're really screaming right now. On the other side of it, we're not seeing the wage games you really want for workers, and that's what

the FED is really striving for. So, Diane, we've seen really over the last year developed a scenario where the consumer increasingly is carrying this economy as we see weakness

and manufacturing sector business investment. How long do you think that trend can continue, well, you know something's got to of either business sector has to come back a bit and show up the foundation of growth going forward, so we get some productivity gains, we get some movement up in that or consumers are going to take it on the chain if businesses pull back more and have the second shooting drop, and that is actual cuts in hiring.

And that's something we're really watching closely because there really was a very important shift that went on this summer and in this year, and that was a slowdown in payroll growth, but also the overall job openings are down four months in a row from a year ago, still at lofty levels. That's great. Firms are reporting it's easier to higher than it was um earlier in the cycle. All of a sudden, that loosening of the labor markets to the exact opposite that we want this late at

a game, at the stage in the business cycle. We want to see a little more heat and less fragility in the business cycle in terms of the labor market. And that's what so far has been really holding consumers up is the fact the labor market is still there, not as many wage gains and in raises as they like, but frankly, low prices at the pump compared to a year ago are helping them out. Huge sentiment shift in the market right now from bearished bullish, with a feeling

that the disinflation, the deflationary trade is overdone. Do you think that there is data to support that. I think the disinflationary trade, it's not clear that that's overdone yet. We've got to see the effects of tar of sound consumer products. That's still in the pipeline. But I think more importantly though, is we've got a global situation that's still weak, and the market seems to trade on you know, yes or no answers. Is the global economy slowing further

at the moment? No, um, but it could. It looks like it's plateau ing at the bottom or bottoming out in some areas, But we don't know if there's another step down or if it's going to step up. My own concerns is that we're very limited in how much stimulus we can provide, and that China remains a real wild card, not only with the trade agreement but just growth itself. In China. It continues to weaken and surprise on the downside, and that's something it seems to be

discounted in financial markets. This isn't like the japan trade war in the China is the second largest economy in the world with tentacles and almost every other economy in the world. So the ripple effects may not be through what we worry about in financial markets directly, but indirectly through growth. Dian Swank, thank you so much for being with us. Diane Swonk as Grant Thornton Chief Economist. Well, there's a really cool article on the terminal today that

really caught my eye. The title in particular, the FED is losing its grip on US interest rates once again. I thought the Fed was doing a great job. Alex Harris covers all things effects and rates for Bloomberg News. What's going on here? I was about to give the big pat on the back to the Fed for getting

is nice offt Landing. Well, I mean, here's the thing, you know, so there's like policy tool kit that the works with to sort of keep the FED funds rate within that band, which is right now one and a half percent to one in three quarters per cent um. But you know, part of the unintended consequence with you know, these liquidity injections, these repo operations, treasury bill purchases, is that it's helped push the FED funds rate a bit

lower than it might otherwise be. And so now, like you know, with the previous adjustments, you know, when FED funds was too close to the top of the range, Well, now we're at a point where it's a little too

close to the bottom of the range. Now people are wondering, while if they were making adjustments to interest on excess reserves rate, which is one of their tools and the toolkit, you know, when we're getting so close to the top, can we expect something similar in the bottom to ensure that Fed funds, you know, doesn't risk breaching that bottom, that bottom boundary, and instead, you know stage okay, hold

on a second. So for people who don't necessarily count themselves as interest rate wonks, the larger takeaway here as I listened to you, maybe again going back to the repot issues and going back to this question, is the Fed's balance sheet too small considering how big the market

for US treasuries has gotten. It's a really good question, and it's whether or not there's enough liquidity and you know, some people would say, no, there's no risk of that breach on the lower boundary because there's not enough liquidity back in the system. And I think Powell also brought this up at the very end of his written testimony that will hear shortly UM is that no, we're fine, We're working on getting our reserves back into the system. Um.

But you know there's still liquidity. Too much. Liquidity is not the issue yet. There is a question heading into year end, are we going to see another repo market disruption akin to what we saw in September. Given the fact that we haven't come up with a permanent solution yet, I think we'll see some sort of disruption. I think

that's being anticipated. Part of the reason is you have these regulatory factors at the end of the year of search arges for the big banks know where repo, which can be punitive for these scoring forces them to pull back. So we are going to get a pull back. Do I see repo at ten percent? Again, probably not, but definitely elevated. I think already year end is trading somewhere above three percent, which you're relative to where repo is now on a daily basis. Somewhere around one sixty. Yeah,

that's quite a move. Um. You know, I don't know what permanent facility they can put in place right now that would alleviate, you know, some of these issues. I think there's little things that they can do to address it, mainly how you know, they treat the repo operations, because part of the issue is going to be is, Okay, you have the repo operations and they stay with the dealers, and that cash does not get out to the rest of the market, and it's the rest of the market

that needs that funding. So I mean, that's one of the reasons why we're going to have issues. And I think the FED just philosophically doesn't know what they should be doing if they put a standing repo or a permanent repo facility in place. Quite yet. Have we seen this repo problem BEF, I don't recall it at being

this long and duration. No. I mean the thing is that, you know, post finance, you know, the financial crisis was a completely different animal, and so post crisis, you know, all these regulations went into place that sort of kept a lid on on funding rates essentially so to avoid scenarios like this. But now, I think you have an interesting intersection between you know, regulatory changes in the last decade plus, you know, shifting monetary policy, and you know

QUEI which we never had had before. And I think that's creating some of these pressures. And that's why I think everyone's a little confused as to how to confront this and what tools we have at our disposal, because I don't necessarily think it's just monetary tools. I think, you know, we have to look at this from a fiscal standpoint, a market structure standpoint. So there's a lot

of interesting issues with this. The incredible irony of banks having so much cash on their books that they can't put the cash back into the system, but they're forced to have that cash in the books in order to meet their sort of risk requirements. And Alex you said this that banks are going to be de risking into year end. How close are they to doing that, because we're hearing they're de risking, and that is part of the reason why you've seen volatility in some risky debt.

Right now, I think you're getting close. I mean, you know, the other thing is someone had said it's not just going to be de leveraging you know, across repo it's going to also be deleveraging some of their derivatives positions and onminding those as well. So there is a risk you're gonna see this. I think we're getting close to figure. You know, once we get nearer to Thanksgiving, you should

start seeing some of this happened. Definitely, December could be a little bit bumpier than people expect because this isn't just going to be a last week of December kind of thing. They're going to start closing up shop, you know, and pulling back sooner rather than later. So there is no per se permit solution for the FED that we've seen at the short end of the curve and that repot market is it. So it is the kind of the fact those just to kind of let the balance

she grow a little bit. I think that's what they're intending to do. You know, Lorie Logan, who's um de facto how to the markets group right now at the New York FED, she spoke I believe it was last week she addressed the Primary Dealer annual meeting, and you know, they seem to acknowledge that, Look, we understand when there are pressures we're going to be coming in, so and they know that there are gonna be times where reserves are gonna shrink and they're gonna need to combat that

by by doing something more. Either it's more REPO operations, more treasury bill buying, um, you know, so they know they know that they needed, like there's gonna be times where it's offset and they're going to have to keep doing more. You know, there's a lot of outstanding questions to this though, and one of the things is how long is this really going to go on? Because people are thinking this is going to go beyond the second quarter?

And how do you contend with the treasury that has seasonal issues with treasury bills where you actually get negative issuance and treasury bills so you have to think about a scarcity risk now in me as well. So you know, there's a lot of competing forces, and and you know, it seems like the more the Fed steps in, the more complicated things get for them. So it's going to be interesting to keep watching. And I should just note that fields on treasuries right now heading lower after the

disappointing CPI data. Alex just real quickly here thirty seconds what may we hear from fed CHURJ. Powell today in about five minutes about this issue in particular. You know, I don't think you know, he has a paragraph at the end, you know, offer a word on it. We're trying to get back to ample reserves. We see it as a level somewhere where we were in early September. You'll be interesting to see what kind of questioning we

get about this from the Joint Economic Committee. I think a lot of questions probably are going to center around regulation and what do you do from that standpoint to fix it, because you know, you have Elizabeth Lawrence letter to Steve Manutian, you know, last month, who was saying, hey, we you know, don't use this as an excuse to roll back rags here, you know. So I think this is going to be one of the big issues for and then we'll see what else they come up with.

We'll see what else they come up with. I have a feeling it probably will be less repo, more political in nature. Alex Harris, thank you so much for being with us. Alex is of course covering all things interest rates, UH and bonds related for us at Bloomberg News. We're going to hear from J Powell testifying in front of Congress, but currently Uh there are other testimonies going on, in particular the first public impeachment hearings in front of the

House of Representatives. Ari Natter has been following them. He's a Bloomberg News reporter covering all things regulatory and Washington, d c Ari joining us from the nation's capital. Ari, what are you looking for from these hearings that you think will be the most notable takeaway? Right? Well, today it's historic and peace hearings give the American people their first chance to see west been playing out until now behind closed doors and decide for themselves whether Donald Trump

committed to impeachable offenses and his actions towards Ukraine. House Democrats are hoping to use the hearings to bring to life thousands of pages of closed door testimony and make the case that Trump abuse his office and should be impeached for pressuring Ukraine to investigate Biden, his political rival, and withholding AID until that happened. So, Ari, what is the fundamental Republican strategy here as he's hearing to begin?

Is it simply to say it was no big deal? Right? So, these hearings did give Republicans their first high profile chance to defend the president. I think their defense is is multi pronged. In one hand, there arguing that Trump has done nothing wrong in calling for the investigations and that his objective was not was the root out corruption in Ukraine rather than to bolster his own political fortunes. They're also saying, um, you know, if he did anything, it's

it's not an impeachable offense. Uh So, I think I think we'll hear that. And um, already we've heard Republicans called this a smear campaign orchestrated by Democrats and the quote unquote corrupt media. Uh so there's a kind of a window into the Republican defense. Markets don't care. That seems to be the takeaway when there are developments in the impeachment hearings. Who are these four? Is anyone paying

attention outside of the Beltway? That's a good question. Um, I believe this hearing is going to be televised across the nation. I mean, it's really is historic event. Is only the third time in history that impeachment hearings have been conducted. But to your point, Um, you know, even if the House does vote to impeach Trump, that begins a Senate trial. H and Republicans control the Senate, they're not expected, uh to you know, convict him, So you know,

this could be a political theater. But again, you know, if the House impeaches Trump and the Senate really system, that will make it election issue. And I think that's that's part of the strategy here. All Right, what do you think is a a win here for the Democrats or those you know moving towards impeachment. Is it simply too just air all publicly everything that's kind of already

been testified about, right. I think what they're trying to do is move public opinion, and support for impeachment has grown but stabilized. We've seen an NBC Wall Street Journal poll recently that found four nine uh favorits Trump impeachment removed from office. A win for them would be to really move the needle to the point where you know, standard Republicans don't have a choice or you know, actually, um, you know, vote to impeach Trump. What's the timeline here?

Uh So Democrats in the House want to wrap this up by Christmas, which if they vote to impeach Trump, then um, that immediately kicks off a Senate trial, which would happen election year, which presents, you know, it's own complications considering that many of the dun senators are running for president and presumably you need to stop campaigning and come back to Washington, Uh, you know, for impeachment. So in a Senate hearing, what's the time frame for that?

I can't remember the last time we've had one of those. We haven't gotten to the Senate hearing, right, Um, So what I know is that if the House does vote to impeach Trump, then the Senate immediately begins a trial with the Chief Justice presiding, and Mr McConnell is that he doubts so that Trump will not be convicted. Thank you so much for being with us. Ari and Nat are covering all things at regulatory in Washington, d C. For us coming to us from our Bloomberg n No

One studios are Thank you. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa bram Woyds. I'm on Twitter. At Lisa A. Bram Woyds One before the podcast. You can always catch us worldwide on Bloomberg Radio