Lara Ram, chief US economist at FF Investment, saying this, it is incredible how long it has taken the market to let go of hopes for a March rate cut. My expectation is that we get two to three rate cuts in the second half of this year. Lara's calling them surgical rate cuts. Lara and pleased to say, joined us now for more. Let's get into what's happening in
this bond market, Lara. We've had a big reassessment of what is happening with the Federal Reserve, and yields have climbed on a ten year over the last two sessions by double digits. Are you surprised by how little we've moved? Do you expect us to move even more based on the data we've had so far.
Yeah, you know, I think it's been a reassessment. But given that we were at five percent as recently as October, I think there is.
Room to have even more of a reassessment.
I think this idea that we're sort of, you know, just pushing rate cuts out month by month by month. To me, Ben's the question of how we're really stepping back and reevaluating as investors the impact of a higher yield world, and you know, you add up the you know, the sheer supply of treasury coming online, we're gonna be able to get those auctions done.
But all else people, well, that's higher yield.
The inflation genie is not fitting back in the bottle. That's a higher yield story.
And then the growth. At the end of the day, I'm actually surprised yields aren't higher than they are.
Lara, With that in mind, why do you think is better to express the stronger data through the bond market the longer ended a curve and not necessarily at the front end.
Well, I think the inversion and the fact that short term mualds are so much higher than long term yields is really still a signal that the bond market is nervous about some coming slow down, or it's also muscle memory from the fact that when we do have problems, the FED slams rates down to zero. I think the FED is in a place, maybe a good place it hasn't been in for a long time. If the economy
slows more more than sort of a Goldilocks landing. And I agree with Lisa that phrase is feeling overused at this point, the Fed has room to cut rates maybe a little bit more, but these six rate cut forecasts, to me, it need to come with some more significant economic slowdown, which wouldn't be great for equities.
Laurie, you were talking about higher yields ahead, particularly in the long end. How much higher could you foresee at a time where a lot of people think we're kind of range bound for the foreseeable future.
You know, you look at long tracks of a history when nominal GDP aligned.
Pretty closely with long term yields.
I don't want to make some insane forecasts of yields going up above six percent, but you look at where we're growing today and say we settle around five percent nominal GDP growth, I don't think it's out of the question that we would hit five percent on the tenure at some point this year, and I just don't think markets are prepared to that for that. The complacen see
that we're seeing is coming from two places. It's coming from expectations that growth is just going to be very optimistic and that inflation's going to come down.
But it's also coming from complacency that yields are going to stay low.
You know, long term meals are going to stay low, and I just think we need to prepare ourselves for a lot of yield volatility.
We saw that last year. I think that carries forward.
One of the big things that people have been struggling with is what is the neutral rate?
Right?
Because if it is much higher, rates could stay at that level for longer and you could see things kind of chug along. Do you have a sense of whether five percent ten yure yields would be incredibly restrictive? Are four percent yields restrictive?
When do we know? You know?
This is something that I have debated heavily because to a large degree, we don't We can't measure the neutral rate, and if you look back at history, we've never actually that at a neutral rate for any length of time. The Feds always in very restrictive territory. We're always in accommodative territory. We don't tend to just hang out around two and a half to three and a half percent
FED funds rate. So I think, you know, every FED cycle starts because we've had a shock, either you know, a very strong growth shock or a very weak shock. And today we're sitting still carrying the momentum from a very strong shock. So I think it could be another six quarters before we really get a sense of where we are. And in the meantime, wow, wage pressure, inflation pressure, it's all creeping higher again.
So, Lara, last year, I remember our conversation. You said inflation may not make the last mile. That's what you said last year. Here we are you still seem to believe that's the case. We could sense with Chairmen Powell in the news conference last week, he wasn't quite comfortable to say on behalf of the whole committee that they had greater confidence that we were indeed heading back towards two percent, and they want to see more data, more of the same, perhaps not better, just more good data.
He was concerned that perhaps the that movement we've seen over the last six months might have been down to one off factors, not as base case, but the concern exists clear to me that you may think it is actually down to one off factors. What is it about the last six months that you see not repeatable in the next six months.
Getting from you know, six percent to three percent I think has been a lot easier. I've been sort of using that analogy of like a long road trip with a bunch of kids in the back of the car. If a couple of them start acting up, it makes the whole trip really difficult. And I think we're starting to see am act up again. And we've just I think had a nice period where a short period where we were seeing you know, the energy, the goods prices
and progress on services moving together. But services is starting to creep higher.
I think goods.
Deflation may have run its course, and I think energy is very open to geopolitical risks. There are growing I think, you know, influences that are going to cause a couple of the kids to throw tantrums in the next six months.
Journey. Who are the kids in the back of the car? Name them fed officials, a handful of them or is this market participants?
No, I think the kids are what's driving inflation higher. It's you know, the shipping costs creeping higher. It's services wages creeping higher.
It's coming from.
The fact that food prices are still I think too high for consumer comfort.
It's coming from a lot of places now.
Lara Ryan, thank you Lara of FS Investments. That was prittiant