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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Claudia joins us
now from Mark. Claudia, Welcome to the program. Let's just start with that speech on Friday and the decision a month away. Just how finely balanced our things at the moment.
The FED is facing a really difficult decision. It's clear from the reason data pri jeally employment data, that we have a dual mandate that is in conflict and that that is the hardest situation for the FED to navigate. It's something that they talk about in their framework. Sure, he'll talk about that on Friday, but it's you know, this is this is tricky, and there's no that's why
they need the data. They need each individually as members to think about their outlooks, their forecasts, where does this land. So that's why I think it's appropriate for Power to outline how tricky the decision is, as opposed to like trying to in September it's October, like not get into timing, just lay out what it is that they're trying to deliberate on.
So Laudia, let's get into that. The idea of the framework. There's on one hand, the two percent inflation target, which they already have talked about average targeting, and they're going to have to illuminate on that and discuss whether they
want to actually increase that target slightly. And then there's a question of how they treat policy when there is a conflict between the dual mandate, So what are you expecting them to come out with and how much could that actually shift market expectations of how much they'll.
Cut right, So there's going to be a lot changing in the framework. I think if you're wanting to understand current policy, maybe you can send some of that to the side, because it really assumptions that the pandemic overturned and they're kind of catching up in their strategies and tools. The pieces of the framework that aren't changing on Friday
are some of the ones most important right now. So the two percent target, Powell has said repeatedly it was off the table for this framework review, Like, they will affirm the two percent target, and oh, let's all remember we've been above two percent for more than four years, right,
So that setting is important. And then the piece that will get a little tweak but probably remain intact is how they deal with when the when the mandate's intention They think about how far do we expect this to get off track and how long is it going to take us to get back to the goal for each
the employment and the inflation mandate. And I think again, if you look at the data we have in hand and we think hard about where inflation is and where it's been the last four years, inflation still comes up on top as the primary concern of the Fed and thus calls for the restrictive rate cuts. But it's a very dynamic situation. New data comes down on the labor market, the risks are, you know, things could move pretty fast.
But like those two pieces of the framework think are really really important for like thinking about how does the FED go forward as they're learning more about the economy.
For people who are listening to this and think that it's an academic exercise and coming up with different puzzles to put things together, it's actually incredibly important to understand whether this is just an inherently dubvish FED, Whether this is a FED that wants to prolong the economic cycle for as long as possible because it takes so long to get jobs back when there is some sort of
huge wave of layoffs. Do you expect them to sort of codify that type of approach which has been the assumption right now in markets for a long time, that they are more willing to allow inflation to be higher for longer in order to avoid that type of punitive and long lasting reaction in labor markets.
So I'm somewhat concerned that the new framework is going to be read as hawkish, like not, you know, going to bat for the labor market in the same sense, I don't think that's the right interpretation. I think when the change were made of the framework five years ago, we were in you know, the years after the global financial crisis, low inflation, low interest rates, unemployment rate was low, the FED was like trying to find tools to give some more oomph to the economy, to keep us away
from the zero lower bound. And so there were changes made tolerating unemployment that gets unusually low because you know, like that that could be good for the labor market going forward, and it didn't cause inflation in the past, and allowing for a period of time modestly above two percent inflation. Again, that was all about giving the economy some extra ooh. The last five years, the problem has not been the extra ooth in the economy, like we
had inflation risks that really came back. We had labor shorges for a period of time. So there's going to be changes that reflect some of the challenges the FED is seen in the last five years. But I would not see that as a fundamental Oh we need to, you know, put less emphasis on the labor market. It's
just it's realizing that we have some new challenges. I think we'll see some more about like the supply side of the labor market, structural changes that we're seeing that could get mentioned as well.
Well.
So it's a tricky document to read, but I don't think one should come at this and say, oh, the FED is going to leave the labor market behind. I think it's just really balancing the challenges they face with inflation with the challenges they face with the labor.
Market, Claudia, before spending a little bit more time in the labor market, can I just ask a perhaps obvious questions for people setting at home, what's the value of a framework review conducted by a lame duck FED? Share?
Right?
So this is absolutely the right time for the framework review. The FED started this in twenty twelve. They started with a framework. It's about transparency. It's a communication tool. It is to clearly explain. It's a short document. It's pretty dense, but it's a short document to explain their principles, their strategies, big picture, high level, what are they doing. They started
doing the five year reviews in twenty twenty. Again, this is about transparency and accountability and having processes that they can be judged against. And it is true, this is in all likelihood Powell's last speech at Jackson Hole as FED Chair. Yet the framework is not the FED chair's framework,
it's the committee's framework. It is an agreement that they make together, and it isn't about one person and Also, this has been his tenure in the last five years, so in exercise and accountability in them saying, you know, some of the assumptions we made in twenty twenty, those didn't turn out to be the right assumptions. We've got to make some adjustments. So it's a great time. And above all, they told us five years ago they were going to do this review. There's a lot that's changed.
It's not a comfortable environment for the FED to be out in public. Sure they're doing the review, and that is so reassuring that we have a process that's working as planned.
We'd love to het your assumptions on a few things, and particularly the labor market, So let's start with that. You know the source of great division on Wall Street at the moment, and that's whether the step down in payrolls growth is a factor because of what we've seen in the economy, a cyclical turn or maybe a structural shift with what we've seen on the supply side of the labor market. Claudia, do you have a biases to which one it is right now?
It's almost certainly both. I think there's a lot of supply side in there right now. We can see this at utilization numbers, like the unemployment rate has been basically flat, right, so we're not seeing the unemployment rate climb as of yet. And also wage growth has not really you know, weakened, and those would be signs that it's demand. Now, there are absolutely risk the labor market and they're not hypothetical anymore. We can point to data that's slowing jobs growth is
it could be a real issue. And yet there are policies supply policies that are at play too. And when we think about the FED and the way the FED thinks about the labor market, it's important to remember the FED does not fight the trend. It can't fight the labor supply. It's trying to smooth out the sharp movements and demand that you know, can cause you know, a weakening in the labor market. So it's it's a tricky situation, but I think there really are signs that a good
bit of this is supply. And it is almost exactly the reverse of what we were trying to sift through last year, and we had the surgeon immigration cly.
This mights it really very difficult to communicate anything at the federals. And given the title, if this year has get together? Is a labor market in transition? Do you believe that the chairman has to make a call hit going into September as to the dominant factor he thinks is driving markets the labor market specifically at the moment, I doubt that.
He'll give us the full picture. I mean, it's one that's still developing again, you know, I think by widening and not just saying, oh, well, yes, labor market's weakening, that job growth is too low. Like, he's not going to make a definitive statement that things are really you know, you know, the risks are really rising rapidly. I think it'll lay out all the different pieces that they're grappling with.
And what better thing for them to spend a weekend grappling with the research and talking to scholars and people near it than structural changes in the labor market or like they need to be as on the cutting edge as they can be as they sift through the data and they decide the policy. But they're not there yet, and he's not going to front run the committee and make the decision for September. What possible good would that do?
He can be transparent about the process, be honest about what they see in the data, and you know, we'll see where this goes in terms of a decision. I do expect him to affirm that the next move will probably be a cut.
Right.
We're talking about timing here, yep, We're not you know, talking about you know, do they raise rates next? So I think, you know, we just keep it all in context. We're not going to get the answer that maybe investors are looking for. But that's because the FED is still deliberating.
Clodia Sam with the latest on the labor market and the Federal serve. Tadia, thank you, Toldia Sam of New Century Advisors, Investors bracing for FED chair Japus speech of the fed's annual symposium, and Jackson Hole Nail Dnswer of Renaissance Macro Research, writing, don't expect a strong signal and they will join us now for more. Neil, welcome to the program. Let's start with the labor market. Is this a labor market in transition?
Well?
I think so, you know, I think if you look at things like underemployment, you know, discourage workers out of the workforce, college unemployment, black unemployment, I mean, these are you know, there's clearly some weakening in the jobs market, leaving the slowdown impayial growth aside. And to me, what's important about it is that it really undercuts this argument that a lot of Hawks are making that the slowing in the jobs market is largely a supply driven phenomenon.
I mean, did we have a bunch of college graduates swarming across the border over the last three years? So I do think that, you know, demand is the principal reason why labor market conditions have slowed, and you know that's something that FED ultimately will need to respond to.
Is it problematic for you that stocks are at all time highs and that corporate bond spreads are at the lowest level since nineteen ninety eight at a time where you and others are making the argument that the economy is weakening to a significant A great.
If financial conditions are actually this easy, why is it that lending standards in the fed's own Senior Loan Officer Survey continue to tighten? Why is it that housing market conditions are weak? I mean, I think the argument is essentially conflating financial market conditions with financial conditions for the real economy, and the FED needs to respond to what's actually happening in the real economy.
Does it complicate though the Fed's messaging at a time where the economic data has been somewhat conflicted, There have been questions about the integrity of it just by virtue of how many people respond to these surveys. And you have a highly politicized environment with the President continuing to job bone the FED to cut rates significantly.
No, I mean, there's a lot of noise and uncertainty, but it's also the fed's responsibility to make decisions under these difficult circumstances. And you know, I think that's the tension that the chairman has to deal with. You know, I don't believe that the FED can cut, so it's kind of pointless to even talk about it. You know, you have to basically understand where the other people on
the other side of the argument are. I mean, basically, you have a FED at the moment that is split between people that think they should cut twice and not at all. So it's really hard to just move the overton window and be like, yeah, let's go fifty. That's not I don't think that's going to really persuade people. So you have to kind of you know, pick the battles wisely, and that's why I think going twenty five
makes sense as an insurance policy essentially. I mean, if the labor market deteriorate further, you know, then the FED can get more aggressive. But if you're calling for fifty right now, I mean, I think what you're basically saying, that's really a call option on another really bad jobs number. So you know, you kind of have to see it before you can kind of commit to it.
Yeah, that's what the Treasury secretary is calling for. Does he think the economy is worse than you think it is?
No, I think he thinks the FED is more behind than I think they might be.
When it comes to Treasury sector. Jim Bianco is putting out this argument that Besson is providing filler names basically, and that maybe his argument potential speculations that Trump's already cut a deal with Besant to take the job for next year. What do you think of that kind of argument as you track who is going to be the new FED chair?
I mean, the.
Treasury Secretary said repeatedly that he wants that he's in the job that he wants, and that he's been offered the job and said no, So I would take him at his word, you know, in terms of I mean what we are seeing is a flood the zone strategy. I mean, the presidents said very clearly that that you know, as well by three or four people that he's actively considering. And you know, I do think perhaps a lot of these other names are just kind of flooding the zone
to advocate for fifty. You know, folks like Laurie Logan you had up on your screen. You know, she's a voter next year. Maybe if you know, if she thinks she might have a chance at the job, maybe she'll start advocating for fifty. I mean, I don't know. I think, you know, most of these people that are up there, they're not going to fall for it, And I don't
think the market is either. But I do think it's you know, it's an interesting strategy of getting additional people to kind of come out and support a more aggressive rate cutting path.
Up front, No, just before you go, got about a minute left, just time for I think an important question. You've called this economy really quite well. You've talked about a slowdown that actually started at the end of last year and continued into this year. With regards to the labor market, the chairman has anchored his view around the headline unemployment rate. You've raised questions about that. How are you anchoring your view? What are you focused on?
Well, I'm focused on a number of factors. Might talk to them. I highlighted them, but you know, I mean, I think it's important to look at a wide body of indicators. And you know, the Conference for Labor Differential as an example. So what are consumers telling you about labor market conditions. They're telling you they're getting worse at the margin, that jobs are getting harder to get, jobs aren't plentiful. Historically, this has had a strong relationship to
what actually happens with the unemployment rate. That's not surprising because people tend to see things in their own local economies before the data actually picks up on it. Or small businesses. I mean, there was a lot of enthusiasm around small business sentiment rising, but look at what small businesses they're telling you about sales, that they're citing that as one of their single biggest problems, weak sales. And so historically, again, when that happens, you start to see
unemployment going up. And then looking at the employment data itself. I mean, look, we can talk about lower break even rates all you want, but I don't think a lot of people had like sub fifty on jobs on their bingo card in the second quarter. Okay, And that's kind of where we are right now, and you have to ask yours where are we going? And I do think it's probably weaker from here, particularly with respect to housing related industries.
Nala appreciate your time, as always. No answer of Renmac the slow down he sees in the economy. Bernardi Goldberg of TV Security, saying, assuming the next round of inflation and payroll data largely behaves, we believe the path phase September rate cut by the fat has been cleared. Gannadi joins us snaw for more good monitor. Thanks very welcome to the program. How high is the bar to deround that rate cut expectation for September?
I mean, all he has to do is really not say a ton. I think if he just kind of clears the way and says, look, we're you know, we're definitely looking at the data. But if all goes well, you know, the market pricing is the market pricing. I think that blessing alone would be fine. I think the big risk for market if he is If he sounds very noncommittal, that's when in the October and the December pricing there's about thirty five basis POINTSPLI between those two.
That's when that starts to move around. If he sounds like a noncommittal.
Tritter, what's the incentive to Sam commits it to anything on Friday?
Tie. I think that's the the you mean. I'd say the bar is pretty high at this point. The data has been all over the place. You've seen the bigger vision to payrolls. I think they've seen enough to start to move. I think that's the key here. You know we're looking for a cut in September, October, December. I think they've seen enough to start moving. But you're right, in order to commit to October December, they need to really know that things are slowing down. I don't think
that's the case. So I don't think these calls for fifty bases point rate cuts in September are justified, at least not yet. But they're going to keep that or open everything. I think the bigger problem is if he comes in and pushes back on this market pricing and he says, you know, why do we need to cut it all? That's really when markets will start to get upset, because right now markets are trading as though that cut is secured.
Do you think that it's awkward that they're talking about cutting rates in twenty five basis points sequential moves for the rest of this year, at a time when investment grade credits for RIZ or the Titus is nineteen ninety eight.
I think that the issue is things are okay on the surface level. If you dig down into certain parts of the economy, if you look at housing, for example, if you look at certain portions of the US consumer, there are some stresses, but overall, if you do kind of a top down analysis, there's really two problems. One is that inflation is a little bit uncomfortably high, and we don't quite know the pass through yet. We know it's kind of getting through there, but it's not as
terrible as predicted. And the other one is that, yes, consumers are moderating, they're purchasing, so do they need a little bit of help? Does housing need a little bit of help? I think twenty five basis when increments makes sense, you kind of start the process and you know, to John's point, you don't commit to anything. You just make sure that you kind of react to the data as it comes in, you know.
I'm just I keep thinking about a conversation that we were having last week about can you have your cake and eat it too? Can you essentially have a really good economy and a labor market that continues to be robust at a time where inflation continues to go down, even though right now you still have it at a relatively sticky pace, can you? Or is that a fantasy?
I think it's you know, that would be a fantastic end to chair Powace career, where you know you've got inflation basically back at two percent, the labor market at full employment, and you could just sail out into the sunset. That would be fantastic. Reality is often different, But of course reality is often a little bit different. I think if it can make sure to keep inflation under control, I think that's really what's keeping them from cutting rates here.
And if you look at the labor market, the labor market's starting to soften up a little bit. You are starting to see a little bit of a drift higher in the unemployment rate. We expect more of that in the second half of the year, a little bit less in consumption, a little bit less in hiring. It's not a very dynamic labor market. It's low higher low fire.
Right.
The problem with that is when you fly that close to the ground, it doesn't take much to upset the apple cart.
When you said, data is all over the place, do you trust the data?
I trust the data in as much as I've always trusted in, right, And there's a hierarchy of data right. First and foremost, you get the anecdotal data you dismiss I would say ninety five percent of that or more because that doesn't tend to drive things. Then you get survey data, then hard data, and then really you get you know, I would say, kind of stretches of data.
And you look at averages. So you look at the three month of sixtemlooming averages, something like a payroll report that those recent revisions really push those averages a lot lower. That's what the Fed's looking at for direction. It's not
necessarily the next is m print. It's really the trend in you know, the labor market, the trend in inflation, and from what they're seeing right now, I think there's enough to start the process of cuts, but not necessarily enough to commit to, you know, one hundred and fifty base points of rate cuts, let's say.
But going forward with a highly polarizing what someone say, bias economists leading the BLS, would you continue to trust the data or the gold standard out the window.
I think we'll have to see if you know exactly who gets confirmed. First of all, I think there's a confirmation process where I do suspect there's going to be some pushback, especially if the views are seen as over the bias. The BLS is also has several thousand people employed. There are rule books and manuals. If we start to see that being broken down, then of course I think the data will be so pet But there are private sector serviys, you know ADP. Then suddenly becomes much more
important for the for the labor market. The issue is really not a comprehensive data set for inflation. That's the big problem, because everything feeds into the PCE report, which then the FED uses, So it's not just you know, it's not that simple.
I would say, let's talk about the top of the Federal Reserve. We spoke to a FED chair candidate Mark Summerlin. You heard a piece of that sound that interview coming into this conversation. Lisa asked him a fantastic question about what he would do if long end rates started to rise as type cutting interest rates, and he was very blunt. He just said, you stop, you stop, because that's not what you want to see happening. That is what happened
last year from September onwards. Do you see a risk of that repaytink all over again.
I think if you view the inflation as not being under controlled, then absolutely. And I think the issue right now is the Fed's cut is very delicate balancing act. They want to start to ease, They want to start to help the economy because they are worried about the labor market. But if that inflationary pressure continues to build, I think the problem becomes they actually have to stop or you know, I've seen, I've heard floated, you know,
yield curve control as a possible alternative. I don't think we're there yet. I think the Treasury is already starting to worry about it by shifting some of the issuance to the front end and buying back more longer day to debt right, So the worries are already there. It's just a function of does the FED keep moving. If that continues to happen, we expect the curve to keep stepening.
By the way, just quickly, what's your highest conviction trade given all of this, that seems very very certain.
Here, I want to I think it makes sense to start legging insideration. You know, we are whether it's September or October, we are seeing the FED looking to restart the cutting cycle. You know, all kind of signs point in that direction. I think the seven to ten year parts of the curve look especially attractive. The five year and under is where everyone's kind of hiding out and parked.
So if you can extend out to sevens and tens as rates start to drift lower, I think that makes a lot of sense here.
Knati appreciate you son, Thank you, sir. Cannot help back t dy securities. Kelly great coach of the Stimpson sense of writing. The following Today's meeting will test Zelenski's ability to hold the line and to keep Ukraine's fate from being decided without him. Kelly joins us nap and more. Kelly, welcome to the program. How do we avoid a late February scenario? How do we avoid a repeat of that?
Yes, I mean this has to be one of Zelenski and the Europe's main concerns is that we'll see a repeat of this what happened in February. You know, I think we're in a different place than we were in February. I think Zelenski is much smarter to not fall into sort of the traps that he did in February. And course the Europeans are going to be there to act as a buffer.
Kelly, what do you know about this security guarantee? They're discussing the NATO Article five like guarantee, but not NATO.
Yeah, you know, this is very vague. That's one of the things I would say about this summit. It was ended in sort of a cloud of uncertainty. And I see two possibilities for these Article five guarantees. One is that Putin has actually accepted that Europe and the United States can provide some kind of Article five guarantee that if Russia were to attack again, that they would be
obliged to respond, including militarily, to an invasion. I think that's unlikely, but The second possibility would be that it's actually something more like there were negotiations in Eastanbul shortly after the war started, and there was an Article five type guarantee as part of those negotiations that Russia had accepted, and essentially all of the parties in the United States, the Europeans, in Russia itself would guarantee Ukraine's security. If
one of them attacked, the others would respond. And I think that maybe that we're returning to the East of Bulfo formula. Of course we don't really.
Know, Kellyen.
Didn't they already make this agreement in nineteen ninety four. What's so different from this than the Budapest memorandum.
Yes, so it is different from nineteen ninety four or when that was a security assurance. The States assured Ukraine the parties to it, including Russia, that they would not attack.
Of course, Russia is not.
Abided by those terms, but there was no obligation in any of the language to say that if Ukraine was in fact attack, others needed to provide assistance to support their defense, and a security guarantee does that. It actually says that there will be assistance provided in the event of an attack.
The perception after the meeting in Alaska between Vladimir Putin and President Trump was that this was a PR victory for Vladimir Putin. Do you think that there is anything that could happen today in this meeting with European leaders in Vladimir's Lensky that could reverse that, that could change that perception and put a new spin on exactly how this carries out over the remaining weeks and months ahead.
Yes, I mean, it's certainly true that for Putin this was a PR victory before the talks even started, just being able to arrive on you a soil, no longer being you know, this isolated pariah, but sort of returning to being a statesman. I will say, though, today I think the stakes for Zelenski and Europe are much higher than even you know, propaganda victories and PR victories. You know, if I'm Zelenski, I'm arriving in DC not for this photo op, but because I want to be able to
shake the actual peace process. I think we're now in the stage where this is really shuttle diplomacy, and so he's really up to Zelenski to really walk that needle up being able to assert and protect Ukrainian interests, but also making sure that he's able to keep Trump aligned with him, to be able to represent Ukrainian interest with Russia.
How much of a sense do you have about Europeans willingness to really commit, whether it's money, whether it's troops, whether it's their own guarantees behind any kind of peace agreement between Ukraine and Russia, because that's been something that's been sort of contentious and contended between the US and Europe.
Yes, and so glad you brought that up, because I think this is something that is often overlooked, which is that Europe talks a lot about wanting to provide some kind of security guarantee, but they're sparse on the details of what they're actually willing to provide in very concrete terms and how they're going to make that credible.
And they face two challenges in this regard.
One is that the decades of low defense spending mean that their military capabilities are more limited, particularly to be able to provide for their own security as well as potentially for Ukraine's.
And then the.
Second is that this war's gone on for three and a half years and the Europeans have not been willing to intervene directly because they don't believe that they have sufficient interests to justify that level of commitment. So how do you make a commitment to potentially enter a new war should Russia attack credible when you've already demonstrated that you weren't willing to fight a war over Ukraine. Those are both really big challenges for Europe.
Kelly state Wikoff said that important discussion will need to be had regarding Don Yesk. What can Zelenski ex today?
Yes, So this is you know, this is the area where it's going to be the hardest for Ukraine. I think these Article five guarantees are meant to be a sweetener, and the reality is that there's going to be have to be some level of territorial concessions if we're going to get to a piece stale. And it's clear that Putin is focused on Donesque in particular, you know, to try to capture the rest of donbos Lahansk in Dunesque
makeup Donbass. He has Lahonsk under Russian control at the moment or occupation, and he has about eighty seven percent of a Dunboss is under Russian occupation.
And he wants the rest of it.
And so I think, you know, part of for for Zelensky is he has to decide, you know, is it better to do this at a negotiating table or to continue to fight. And it looks like if they continue to fight, the Russians will slowly and painfully be able to capture the rest of Dunesque, And so is it better to have options at the negotiating table so you can get some other kinds of concessions, whether it's other Ukrainian territory or also these kinds of security guarantees.
Kelly, just quickly, it might sound like a silly question, but why are we okay with Article five style guarantees but not NATO membership?
Yes, I mean it's clear that NATO membership is a redline for the Russians.
They do not want NEEDO membership.
But this is also why I'm skeptical that the Russians are going to be acceptable with some idea of American or European forces, even in limited numbers on Ukrainian soil, to try to make that kind of Article five guarantee credible.
Kelly, I appreciate your reaction to things. Thank you, Kelly greco of The Stimpsons Scent. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, a geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and, as always, on the Bloomberg Terminal and the Bloomberg Business Amp