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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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. So here's the latest.
All eyes on fetched J. Powell, as he said to speak Friday from Jackson Hole, the focus turning from when to how big and how many rate cuts the Fed actually delivers. Cassiberrow of JP Morgan assea management rights in the following simple policy rules would suggest the Fed could have already started easing by now. This was true even before the last jobs report, but further confirmed by the most recent CPI report risk reward favors owning some duration
in portfolios. As we approach the star of the Fed's easing cycle, Cassie joined us now for more. A Cassi language is really important you say easing, some people might say removing restriction. Are you talking about a shift towards accommodation of the feder reserve?
Well, I think you are rightfully so picking up on a little bit of a differentiation. So when I say easing, I think the FED in their mind, views that as reducing policy restrictiveness. But I think when I look at the environment more holistically, putting aside the conflicting noise that we're hearing in terms of the labor market and the consumer, is it really weak or is it really strong? I think the inflation backdrop alone at this point probably justifies
at least one hundred basis points of rate cuts. Not immediately, but I think a policy rate closer to three and a half to four percent is probably where we should be trending, just based on the inflation data alone. And that's because inflation is coming down. It's more broad based, just concentrated in two categories at this point, shelter.
And auto insurance.
Let's get into that a little bit more, sort of set the stage for the economic bankdrop, and then we'll get into the market call the breadth of the decline in inflation. How encouraging has that been for you? Where is shelter? Is that still a sticking point?
It has been very encouraging.
I mean so if you think about the inflation or disinflation that we saw last year, it was primarily a goods story and that was the low hanging fruit. What we've seen more recently is that the inflation or disinflation has broadened out and it's now included the services category, now the shelter category. I know there's a lot of hemming and hawing over is it coming down?
Is it coming down fast enough? But you know, I look at it. I look at the year over your rate.
It's down three hundred or three hundred basis points three percent over the last year.
It's coming down, and I.
Think it will probably continue to normalize over time. Two levels more consistent with pre COVID, which is where the majority of the CPI basket is already trading.
You've been talking to about this for many months. Basically the rest of the markets come on board with you, and it seems like this is now consensus and the market is pricing this an already and some would argue has already moved for the Federal Reserve, which hasn't moved, and yet effective rates have essentially dropped that much. How disruptive would it be if FED chair Jpewell doesn't lean into the rate cuts that are being priced into the.
Market in his speech on Friday.
Yeah, that's a really good question, because you know, I look at the moves and yields this year, right, and they've all been driven by data.
Not one has been driven by FED speak.
It's you know, it's the data that's driving the market's reassessment of how many rate cuts need.
To be done this year.
And earlier in the year, when there was concern about reacceleration risk and there were a couple hot inflation prints, the market priced out rate cuts.
They didn't need FED speak to do that.
So I guess where I'm circling back to is when I think about Jackson Hole and what share Palel's responsibility is. You know, I think what we're going to hear from him is that he is comfortable with the inflation backdrop. This is an environment where the FED can start removing policy restrictiveness.
But I don't think he is going to.
Be particularly explicit about how many rate cuts that will be or how far they need to go. I think that they're going to kind of continue to let the market do that work for.
Them, So, in other words, he's not going to lean into it one way or another, Which raises this question about the theme of the actual conference, which is reassessing the effectiveness and transmission of monetary policy. How effective and how much control do they have over the transmission of this monetary policy If all of the moves this year have not been driven by their rhetoric, have been driven by data.
Right, well, I mean, I think that's because we've moved out of an era of true reliance on forward guidance. If you think about what forward guidance was and why it was created, it was created for an environment of the zero lower bound, right It was when we cut to zero and we still needed to be even more accommodative, and we had no tools left, and we've tried quantitative using one, two three, What else can we do?
Well, we can try to just jobble in the markets.
And continue to promise them low rates for longer. The environment we're in right now is not really an environment of extraordinary policy where the forward guidance that we need is that type of forward guidance, And so I think that the environment that we're in is one rightfully sell where you know, the forward guidance is not what's most relevant. What's most relevant is where we are in the business cycle.
And to be frank, you know, we're all learning that together, including the Federal Reserve members as they watch the data.
Kelsey, when you were talking about the data and the market moving data dependent, that's because the FED told them they were so data dependent. So it comes from the FED basically saying we're so data dependent, the market should be data dependent. Does j Pell need to almost take a step back on that when he talks and said this week at Jackson Hall before the potential cut or keeping policy in line us back on the market, you shouldn't be so data dependent.
So I do think there's probably an opportunity.
For him to use words such as gradual to describe the easing cycle. So he is likely aware that commentators in the media and financial market participants have been talking about the need for intra meeting cuts after the July jobs report, the need for potentially fifty basis point rate cuts. I think the data he's seeing on a mosaic basis is probably not suggesting a need to be that quick to move. And so while I think he wants to communicate that they have the capacity to be quick if necessary.
The current environment is one where.
They can adjust slowly and recognize that in the event that something goes wrong, we're in a great position to respond because we're not near the zero lour a bound. We have five hundred basis points of policy space. And that's also you know, I think what the bond market is picking up and while while yields are coming down, spreads are also stacking very well.
Continued, I just want to say this upfront present company excluded. The last year has been dominated on this program by a bunch of people trying to sell some bond funds and to get out of cash. And I hear it again now, sort of scaring people out of cash, to say the rate cuts are coming, extend duration, get out of money market funds. Why is now the right time
to do that? Because I've seen headfake after head fake over the last twelve months, when people have given up, say five point five percent, and rushed out to buy duration when they maybe didn't need to. Why is now the right time? Why is now different?
Well, I mean I was just looking at the numbers myself, and you know, I said, you know, normally the conventional wisdom is once the FED is start is done hiking, which was back in July last year, it's time to start extending duration. If you were to have moved just a little bit of that cash into one to five year high high quality corporate credit, so one to five year investment great credit, you would beat two hundred basis points ahead of cash at this point thirteen months later.
So I think it proves the and is actually already there. And that's before the fat has even started cutting.
Cassy Barrow of JP Morgan Accent Management defending the sales pitch of the last eighteen months. So here's the latest the US dollar extending losses as traders away. Comments from fenchair J Powe from Jackson Hole on Friday, Expectations for a September FED rate cut happen to push the Bloomberg Dollar Index to its lowest level since March of this year. Steve England are a standard chartered right in the following. We now expect three twenty five basis point cuts from
the FMC for the rest of twenty four. We also expect steeper rate cuts in the first half of twenty five, totaling seventy five basis points in Q one and fifty basis points in Q two. Steve joined us. Now for more. Steve, welcome to the program, and let's start right there with your calls for three cuts this year and one hundred and twenty five basis points in the first half of
twenty twenty five. Can you help pass and our audience understand whether that's an adjustment based on falling inflation or whether that's a shift to accommodation to confront weak growth.
More the first if we really see weak growth, you know, which is not our baseline.
But you know, fifties learned the picture.
The fifty story is very you know, a typical recession fall off, a cliff story.
We don't expect that, so we have twenty five.
So I think as we get into twenty twenty five, with the unemployment rate drifting up and inflation getting closer to target, all the considerations of you know, how tight should real interest rates be matter, So that's why we think that they'll be able to cut more aggressively and bring the FED funds closer to neutral in the first half.
I think the Fed would prefer not to do it in twenty twenty four because they want to be sure we're still on track for you know, getting target inflation, and they want to be sure if they do a fifty, that the economy is in dire straits. But by twenty twenty five they will be more confident that they can do in isolated fifty.
We don't think it's going to be too many of them.
See if there are two very different conversations, though, there is a key distinction, and you've drawn it, the conversation about removing restrictiveness and a conversation about shifting towards accommodation. What does the dollar look like? How does it trade in one back drop versus the other?
Yes, the dollar is kind of interesting. You know. We thought that the dollar because.
We're we're at saying twenty five basis points, the market was somewhere between twenty five and fifty and q four, So as the market pulled back from those rate kind of expectations, we thought the dollar would strengthen.
What we've seen so far is.
That the asset markets and the currency markets are paying attention to the abrilliance that you're seeing in equities, and you know, that's kind of been driving the dollar weaker, even though the interest rates move. Interest rate moves have been more in favor of the dollar than against it. We have to see if that persists. There's still a long way to go before we entirely get rid of the you know, one hundred basis points, you know, get
back to seventy five that we expect. So we as a baseline, we still think the dollar could much stronger.
But twenty twenty five we think will be a week.
Dollar year, because that will be you know, all systems go to basically get back to neutral.
The Fed will converge with everybody else in rates terms.
Does it bother you Steve's that the bond market disagrees with itself. That essentially, you have FED fund's futures talking about your view of things, two hundred basis points of rate cuts by the end of next year, but then you've got a two year trading at four percent. I mean, you start talking about the dollar before you even get there. The market can't agree with itself.
Well, I never asked the market to be entirely consistent because there are different segments in the market.
But you know, the two years is.
Kind of you know, pricing in that FED fund saved by the end of twenty twenty five, beginning of twenty twenty six will be around three percent.
We're now at five and change.
So the two years sort of averaging you know, where we are going to be versus where we are now.
You know. But I would say this, and I think this is really important.
If it does turn out that we're in a typical recession, that you know, all the saw rules charts that on unemployment that everybody was pulling out, that this economy follows the contours of a typical recession, the market is way off base because FED will take real rates to zero, may be negative, so that would mean like a two
percent FED funds rate or even below. I think right now the market is pricing in a very comfortable sluggishness in the US economy that you know, mostly twenty five basis point cuts can deal with.
If it turns out that's not the case, you know.
We're mispriced, and we could go back to the early August world where you know, equities are mispriced because the economy is a lot weaker, and fixed income is mispriced because the cuts are going to have to be a lot deeper than you know, what's.
Priced in now.
This is a question going forward, and John was alluding to it, the idea of dollar weakness or dollar strength depending on what kind of rate cuts there are. I'm wondering how much some of the dislocations, or some of the overweights on the dollar versus the yen or things like that, how much those carry trades are really flushed out of the system last week, giving more of a clean slate that will lead to more controlled moves, the same kind of violence that we saw.
You know, from the indications, we have certainly.
What you call fast money hedge funds, you know, high frequency traders. They got out of their long dollar positions very very quickly, so the market is pretty clean. There could be a few segments of the market where they're catching up, but I think that the you know, positioning is much much lower than it was two weeks ago or even a week ago, and it's certainly not in terms of dollar longs, those have kind of disappeared.
Steve, just quickly, are you satisfied on the morning bight this morning that we have broken the correlation between the Japanese yen and what happens with risk given the equities holding up okay this morning, even with a much stronger Japanese yen.
I'll say this, I never thought that the end trade was driving global risk.
It did drive Asian FX.
I mean that's why you know all Asian currencies are strong, and it did drive the unlined. But I think that the big equity market moves that we saw and the big fixed income moves that we saw were driven by recession fears.
And those could come back.
It's not our baseline, but those could come back if it turns out that the unemployment rate keeps throwing up by two tens of a percent of the months, and so we're not out of the woods yet.
We'll be playing this game again on September six. Looking forward to it, Steve, Thank you, sir, Steve England have standard shouted Secretary of State Anthony Blinkett arriving at Tel Aviv as Israel and Hamas truce talk stall yet again. Senior Advisor to the President for Energy and Investment Amas Hogstein, playing a key role in these intensions in the Mid East for the Band and administration. He joins us now as great to see you. Widely regarded as one of
the President's most trusted security advisors. You were in Beirut, I believe in the last week as well. Can you set the States Rusk just help explain to us where talks aren't currently both between Lebanon and Israel, and what's happening currently in the Gaza strip as well.
Well.
First, good to be here. Thank you for having me. Yeah, I was in Beirut last week. We had obviously rising tensions and escalation of different reprisals and different threats across the region. The President had ordered large parts of military US military to the region, and of course diplomacy to
commence as well to be able to reduce tensions. The most important thing that President's focused on now that we want to achieve is a ceasefire agreement that brings the hostages home finally to their families, brings relief to civilians in Gaza, and sets the stage to end this war. That's the most important thing. So the talks in Doha last week, talks continue right now. As you said, Secretary blink In is in the region in Israel today and
I take issue with stall. I think that the press wants to have some you know, there's movement every single day, But these are very serious discussions that will continue over the next several days.
We'll educate us where has there been movement.
Well, I can't, obviously for obvious reasons, can't.
Go into the details of where the of the details of the talks. But they are progressing things. That's why Secretary blink In is there and the work will continue. This never happens overnight, but I'm confident that will continue to push as hard as we all can. And when it comes to Lebanon, look, we had a ratching up of escalation. We're trying to bring some of that down. I was there really to talk to folks about how do we think about the day after and and talk
about bringing some normal sense of normalcy for Lebanon. Look, Lebanon is at at at a war that I think it's people don't want that they didn't that neither side really started. Hasbela decided to join the conflict on October eighth.
And we've been in a tit for tat ever since.
So it's really important that is a critical piece not to allow to escalate, as it has ramifications for the rest of the region.
Well, almost you spent a lot of time with Lebanon Speaker of the Parliament, who's very close to Hesbelah, What did he tell you about Hesbela's intentions when it comes to Israel.
Well, A, as you know, Hisabella and Israel have gone on rounds of conflict over the last several decades on every several years.
We've had relative quiet.
Since the two thousand and six conflict ended and through the Security Council Resolution seventeen oh one, it has never really been implemented by either side. So we need to get to another point. I think the Speaker as well as most Lebanese people, they just want this to end. They don't understand why they're at war.
Well, what tools does the US actually have to pressure Lebanon.
Well, again, we can talk about what does the what does it look like to end not only this round, but to put things in place that will create stability for the long term and bring economic growth and stability and prosperity in Lebanon. It's one of the most used to be one of the most successful countries.
Today. They went into the.
Total blackout the other day because they lost the last fuel in their power plants. I mean, this is a country that should be prosperous. So that's the kind of things that the United States and our allies can do, and I think the people of Lebanon want that we have to get past this. One of the things that will make it a lot easier to do that, of course, is the ceasefire in Gaza.
Okay, so let's talk about the ceasefire in Gaza. The President said potentially this could be a way to halt Oran from retaliating. Iran has come out overnight and said that's not true. We're going to retaliate. Do you view these talks which Secretary Blinkn is talking about last ditch, final effort basically this week, as halting an Iranian retaliation or does the administration still expect Iran to retaliate?
Well, I think the President has made clear his expectations when he gave orders for the US military to do take several actions to be able to defend both Israel and the region from a potential retaliation from Iran. We don't believe Iran retaliate period, but we want to de escalate, and that's why the US military is there. But at the same time, we are focusing on the diplomatic effort diplomatic push. And that's why Bill Burns Brett McGirk were
in Cairo and Doha last week. Why Secretary Blincoln is in the region today and in meeting.
With prime minis. And it's in now just today.
The United States put down a draft on Friday, So we're working with the parties to be able to get to an agreement.
Who's that faultier in terms of the gaps? Is it Hamas or is it Benjamin Ye.
I'm not going to go into faults.
I think this is there's no time to waste now, and neither party has an excuse to delay. If you want it, if you want to bring some relief to the people in Gaza, if you want to bring the hostages home, this is the time.
To reach an agreement.
Why is this the time?
I think it's been a long time this conflict has gone.
Out, but we keep hearing that we have the time. Why is next? What happens if Secretary Blinking comes back without an agreement?
Well, I don't think he's going there to come back with an agreement. It's just to move the process along or to get to the point of an agreement, and I think he will do everything that he can.
This is the most important moment.
Uh, there's talks have been intensifying, We've seen what the chances and odds are for escalation.
That's not only anybody wants.
I guess another way to put this is Tony Blinken said that this may be the last chance to reach some sort of seas fire agreement.
What happens after that?
Look, I want to focus today on being able to get there and so that we're going to put That's why the president's saying that he's going to put as much of his efforts that he can in order to get to that outcome.
That's what we're focused on.
How difficult is the president to put all these efforts in when he's viewed internationally as a lame duck.
I think, first of all, there's one present. He is the president of the United States. The full I can tell you. I've been traveling the world. I don't think that that is the view. Everybody knows we have an election coming up. He's the president for the next six months, and this is a crisis that cannot wait six months.
I think everybody knows that if you're talking about things that will happen over the next several years, and people will focus on talking to president, to the next president Kamala Harris, but I think that for now, these are not crises. When you talk about the US economy, you talk about the global economy, you talk about the crisis in the Middle East, these are not things that everybody's going to say, well, let's just take.
A break and wait till January. That can't happen.
So that's why we're that's why you're covering the economy the way you are. And President gets brief. The last couple of weeks have seen volatility in the markets. We don't pretend that there's that We're just going to wait ti January.
How often do you speak with the president.
As needed some weeks more on the last time just a few.
Days ago, just a few days ago. How engaged is he in these ongoing talks?
Extremely engaged We've had He has convened his team on a daily basis.
He talks to folks on to get regular updates. He is very, very engaged.
He's talked, he has calls with world leaders and regional leaders also weekly.
In order to be able to push this forward.
Your future does it end with Biden? Will continue with Harris.
I serve President Biden ask me that again in six months when President Harris takes office.
We have to say. If you can say when we're talking again in six months before that, NOE doubt it's going to see us. Thank you. White House Senior Energy Advisor i mus Hogstein.
There.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and 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 app