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Terminal and the Bloomberg Business app. This Thomas as so far, writing it would take a lot to not get account in September. The FED is more focused on labor in the near term, but over the next few meetings, I suspect the focus will shift to inflation.
Litz joins us.
Now for more, let's welcome, let's build on some of that, the shift back to inflation.
What's going to bring that about?
Well, when you think about where we are right now, First of all, the message that we receive from the FED on Friday was that the labor market had cooled. There's this average of thirty five thousand jobs added per month over the prior three months, which is a number that at least concerns them and they want to make sure that they don't.
Lose track of that.
But I think what will happen as time goes on is us knowing and the realization in markets that there's no room to hike rates. There's a little bit of room for the labor market to cool before the FED and before really the economy is going to look like it's in a lot of pain. We've got an unemployment rate still at four point two percent, and the expectation as of now is that it'll stay at four point two percent, So there's a little bit of room there for the labor market.
Still to cool off.
There's definitely not room to go back and have to hike rates if we lose control of inflation. But the other message that I think was very clear from the FED on Friday was that yes, we expect some effect from tariffs on inflation, but we're not going to see it immediately, and we're not sure if it's going to be just a one time or if it's going to
take a little bit longer. So that's why I say over the next few meetings, I think that the focus will shift back to inflation as some of that data comes through, and if they can get confirmation that tariffs were just a one time shock.
Liz, do you still see it though, in the same way the market is so on Friday that the chairman's current reaction function, the policy bias, is a pro risk one.
Well, on Friday, what happened I think that surprised markets was that he pretty much confirmed as long as things continue in this fashion, we're getting a cut in September. He didn't say that explicitly, but that was the interpretation. The other thing that happened on Friday that I think is a little bit lost in the huge rally is that before that speech occurred, markets had gotten down to
less than seventy percent chance of a cut. So a lot of that was just repricing back up to I believe it hit a high on Friday of maybe ninety one percent ninety three percent chance of a cut, So the repricing from sixty five ish percent back up to the low ninety percent was a lot of that rally. So just sort of a rejiggering of our expectations. Again, is this a sentiment shift to back to risk on?
It was risk on already. I think where we're at now, as we're back to having priced in this first cut and really wondering does that mean that there's another one to come? Is this the beginning of a cutting cycle, and how aggressive will this cutting cycle be. I still think that the job's data next Friday is going to decide for sure whether or not we're getting that first cut. If it comes in at expectations even slightly weak, that
cut will be all but baked in. We're actually below ninety percent chance right now, but that cut would get all but baked in, maybe even another sniff of fifty basis points, which I don't think is likely. But in the near term, yes, this is positive for risk assets. At some point, if this is the beginning of a cutting site, and if it starts to be in response to weak data, the market will have to digest the fact that, Okay, the economy is now cooling quite a bit.
We were cutting because we could, Now we're cutting because we're trying to prevent further weakness.
If this is the start of a cutting cycle, though, how could it be when the chairman himself said the tariff effects will be accumulating overcoming months with high uncertainty be about timing and amounts.
Well, that's what I think the market's going to have to figure out. Right now, we're acting as if it is the beginning of a cutting cycle, and this is going to be a slow message to keep going down further and further as the year goes on. We're pricing in a little bit more than two cuts right now before the end of the year. If you look at the time period when it might take tariffs to actually
work their way into the data. And when I say the data, we've already seen some effective tariffs in PPI data. We're looking for it in consumer price data, so CPI and PCE, and it'll take a little bit longer to get there because if the companies are not passing it through on the PPI side, on the wholesale side, it's going to take a little while to see that in
the consumer side to the end result. So usually, let's say it takes four to six months for that to actually work its way all the way through the system. The FED knows that, so they're buying themselves some time to say, okay, let's watch and see what happens over the next few months of inflation reports on the consumer side before we signal anything, promise anything to markets that this is going to be a slow cutting cycle that will continue.
Liz, what are you.
Looking for in terms of the data we have yet to see when it comes to the August payrolls and CPI report that could maybe make j Powell walk back this idea of a cut in September.
Well, one of the things that I had been saying even before Jackson Hole was we're getting really excited about a cut in September when we've got a lot of data still to come. So we know that the CPI and the PPI data was a little conflicting. CPI came in okay, if not slightly weak. PPI came in really hot, So there is already some conflicting message coming from the data. We've got another CPI report, We've got the jobs report obviously,
which everybody will be watching with baited breath. We've got a PCE report, so there's still a lot to come. If some of those come in hot, especially hot, then I think we're going to see a lot more uncertainty before that meeting. But I do believe that it would have to be a series of hot data, So it wouldn't just be a one time pop in CPI, a one time pop in PCEE, because they've already messaged to us that that might happen anyway.
So I think unless.
This job's report comes in really, really hot, I think we're getting that cut.
The jobs report is what I want to talk about, Liz. The prospect of an activity rebound. Can we just get into that a little bit more. I've seen that from Bank for America on Friday, heard Mazoo talk about it too. Jordan Rochester said, it's hard to get too duvish if US growth momentum from PMIS is real. How do you think about the prospect of a growth rebound as we work our way through September into year end.
Well, I think that's part of what the market is coning on with this broadening out trade that it started to do over the last couple of weeks. You're seeing some strength out of smaller cap names. You're seeing strength out of other sectors besides communications and tech, and even outside of industrials, which has been one of the top sectors this year. So the broadening out trade is enthusiasm
that we will have some sort of growth rebound. Activity rebound that's durable and can reach into other parts of the economy. I think it's possible, but it's too early to say, Okay, this is a growth rebound that's going to look like early parts of a cycle, because if we're just embarking on a cutting cycle again during this period, we have to really wait for confirmation of some of
that activity. And the reality is that the data had been moving in the opposite direction coming into this, hadn't been moving in a terrible direction, but things were cooling off.
He was cooling off.
A little bit.
The labor market has really been stagnant, a in a solid place, stagnant in a place of strength, but stagnant for a long time. So there would it would take some really exciting news or some shift in economic developments to I think broaden out the growth in a durable way.
Right now, stay with us, mul Bloomberg surveillance coming up after this.
Step.
A shooter of Missoula isn't convinced it's needed right in the following should the Feedi's policy, as the Markets Expect analysis suggests, the primary risk of the economy is a backup in long term interest rate. Steve joined us now for more, Steve, good morning, Good morning. Just tell us what do you think is brewing?
Care Well, I.
Think there's a bit of political pressure building. I think there's a bit of dovishness within this committee that has been brewing over years, and I think when you combine it with a misperception as to how restrictive monetary policy is, you wind up in a situation where you get a chairman making a statement like this, leaving a door open to a rate cut when he himself and his own balance of risks is completely balanced. The risk to the upside on inflation, The risk of inflation is to the upside.
The risk to employment is to the downside. Well, okay, what are you supposed to do?
Well?
The answer is, if I think it's restrictive, maybe I can cut rates. If I don't think it's restrictive, then I should be doing nothing. How do we define restrictive? That becomes the problem are they thinking at the moment?
Appears to be that, yes, we're facing upside risk to inflation and downside risk to employment. But the downside risk to employment are more important because the upside risk to inflation won't be as pervasive When we won't see the second round effects because of the downside risk to employment. How do you think about that, assue, you have to show.
Me that's the case historically.
Yes, there are important transitions that take place in terms of the labor market that happened more quickly than on the inflation side of the equation. Don't argue with that. Is this one of those conditions. The answer is no. You have an economy that is fundamentally healthy. You've got an economy that accelerated or rebounded right and I very very sharply after the second quarter GDP. You've got an
economy that's showing you have healthy consumer demand. You have an economy that is going to be above trend economic growth in the current quarter against the backdrop of a consensus forecast of zero point nine percent growth. And so therefore there's a disconnect between the reality and the perceptions, and I think that's part of the problem.
The other thing, I think when you're.
Looking at the coverage of this, everyone's focused in on the opening up the door to a rate cut.
The Chairman has said a couple of things.
One was that basically that he didn't think policy was that restrictive. Yet the market has five rate cuts price day.
That's number one.
Number two, if you look at the framework changes, everything they did in twenty twenty, which was adopting a style of monetary policy is gone, and they've readopted a tailor rule approach to monetary policy, which is a symmetric monetary policy guide frame. And when you look at the tailor rule type models, monetary policy is not restrictive.
So you mentioned though at the start, because one of them dimension happening here, you said it is a little political. Do you think his speech Friday was political?
Well, I think they may get into a situation where the Chairman said, Okay, I'm going to open the door to wait, let's see what the committee does. Because there seems to be this perception inside the White House, inside the Treasury that the Chairman can determine where monetary policy goes. So if the Chairman opens the door to a rate cut and the committee votes and doesn't vote for a rate cut, then guess what, it's not just one vote.
Bob Elliott was saying that he potentially was doing this to protect the FED as an institution, but it sounds like what you're saying, he's protecting himself.
Well, I again, protecting the FED as an institution.
Yes, the institutions.
Seems to be under attacked, but it's always historically been under attacked. We went through a very very calm period where we did not attack the FED. From basically Paul Volker on, We're now back in the more political environment of these things, and we've historically faced these dilemmas. I think the real real issue for the FED in here is not just maintaining its independence, but maintaining its credibility.
Okay, what is your framework?
Is your framework a symmetrical monetary policy?
Okay?
If it's a symmetrical monetary policy, then live up to the symmetrical monetary policy. If it is still a policy skew towards the labor market issues, i e. It is the more equal of too equal framework our guidelines, then be clear about that. And this I think opens up the of the dilemma for what we're dealing with today.
And do you think we could see a repay of last year they dropp rights to the front end.
I mean, it's not saying problems for the long end.
I think that's really the underlying risk that they face now. Again, could that be that a message to people on Capitol Hill that believe, well, mint, if you lower short term interest rates, long term interistrates to automatically come down. The answer is yes that maybe you know what has to happen to get it done.
Is twenty five basis points going to matter one way or the other?
No?
Well, one hundred and twenty five basis points matter, yes, And.
That's really really the difference here.
I don't really care if they cut rags twenty five basis points in September.
I care about what they do with the dots.
Do they now look at their different framework and say, okay, we've back to the pre twenty twenty framework, Well, what should the dots then be going forward? Should the dots still be for the number of rate cuts we envision against an environment where we have an economy that's going to continue to grow, and we have inflation in our forecast that's one hundred basis points above.
Our target state. This is really important.
What I hear from your analysis as a clear distinction between whatever they do on September and then the rest, and the rest is far more important. Do you see scope then for Holkers on a seventeenth Well.
The problem is the dots because the dots aren't set as part of policy. They go into the meeting having delivered their dots and their sep and therefore it's just a calculation. And unfortunately the market only pays attention to the dots. It is the intellectual gravity. Well, okay, once you put that dot out there, all thought process in the market goes to explaining that dot and forecasting what's
going to get that dot to happen. Nobody thinks of anything else outside of how does that dot get validated?
And that's where the market is.
So as long as those dots run the risk of being there, I think you might wind up with a more graded divergence in the dots in September, and that may be the thing that matters.
Stay with us.
Mulblemberg Savannah's coming up off to this. So here's the latest this morning. Bon yields plunging on Friday after fed cha jypouse sick nor day, possible rate count in September, ending an eight month pause. Robert Tip of PGM writing the attention to the growth side of the fed's equation is also a welcome development, suggesting the FED is a tune to downside economic risk. Robert joins us now for more, Robert, welcome to the program, sir. Let's just reflect on what
we heard from Chair and Powell. What is he setting us up for going into year end.
I think he set us up for doing whatever the data told him to do. You know, he opened up to rate cuts with one sentence. You know, before that sentence he was talking about inflation and the concerns on the inflation side, which are very real, frankly, and you know, he got it wrong on the data, and he really pounded the table at his last press conference about how decent the labor market was and they weren't cutting.
And then he got, you.
Know, three months worth of bad data in one go on that Friday.
So he opened the door to the rate cuts.
If they got another ratification of the weak data, he's opened the door. They can cut rates. He can work with his committee. But he bought time, and he bought the ability to act independently, because this bet is not independent and they have to be very careful, Robert.
He also redefined what weak data actually was. We'll get to central bank independence in a moment. I want to sit on the labor market last time around in the news conference, he talked about the labor market being solid and ank at that view around the unemployment rate almost that data point alone, and now he's looking at a simultaneous step down in the supply side of the labor market and the demand side and putting more weight on
one versus the other. And I'm just wondering, Robert, why you think that's come from.
Yeah, you know, I think that that data is incredibly light in terms of sampling. I'm not a statistician, I'm not an economist, but it's not that many households, it's not that many businesses, and so you need a couple of years before that data begins to settle down with all the revisions. And so if you add subtract and god forbid, start dividing those numbers and getting unemployment rates, you have a tremendous amount of risk in interpreting those. So you know, you know, I think the economy is
doing reasonably well. But to his point, when you get downward revisions, they tend to have positive serial correlation.
You tend to keep seeing them.
Some research says, you know, that doesn't correlate with recessions.
Some shows that it does.
And I think you, and I know that often with recessions, you look back, they say, oh, yes, six months ago.
We were actually in the recession. We didn't know it.
He's feeling that risk, so he's adjusting. Nobody knows what to look at in terms of the data. But I think that's why he's struggling and everybody's grappling with that information.
After this speech, is he's setting up the market to pay more attention though to the labor market report that comes out.
I think the market always thought the labor market was more important. And in fact, if you just look at the COVID experience, as long as they were concerned about the labor market, they weren't hiking interest rates until they're absolutely sure. Yet labor market's probably okay. And wow, inflation is way, way, way too high. So this is a FED that has been trained. This is the third FED
of the United States. And you know, the most public strongest opposition to FED independence was probably right in the fifties before their independence with Truman, you know, Humphrey Hawkins, after a very brief reception in sixty nine. In the seventies they wrote this, you know, dual mandate, which actually has more parts to it. It's a very employment heavy mandate.
So I think that the markets already realized the FED would lean on that because the Fed's independents can be shaken by Congress, and the board itself can be attacked as well.
You said earlier the FED is not independent, do you mean? Because their mandate is back to someplace, and that's Congress, that's the lawmakers.
Not only is it made by the lawmakers, they set the targets. But this is a president that can legislate effectively. I mean we saw this with the budget where he pushed something through that touched entitlements in fast, you know, lightning speed and vent the budget rules right. And maybe I'm not saying whether this is right or wrong. I'm just trying to adjust to reality here. What's possible in this environment. These people that are voting on the rates
are under tremendous pressure. They can come under attack from the Justice Department. But at its very fundamental basis, the Fed's mandate is set by Congress that will reserve Act Humphrey Hawk and it can be changed at any time. So I thought he was very artful. It wasn't like twenty eighteen or a little bit earlier in this cycle where he fought on the interest rates, laid out the situation, you know, said things that are falling out on the size of the side of the ease here.
And that's the best way to remain maintain the.
Ability to act independently is to not fight it, go with the data, do the right thing in the eyes of the CURRENTSIE.
Guyst Well, Robert, let's talk about what the White House ultimately wants. And it's not just about lower interest rates to the feder Reserve. It's lower boring costs and lower mortgage rates. Robert, If they drop rates of the FMC, are they going to get lower borrowing costs and lower mortgage rates.
Well, they had a lot of tools I left that actually the shadow tournament of the Fed running the treasury. You know, they're pulling in the issuance towards bills, their buying back bonds, right, so they can they signal they're said in issuing more long term securities.
They're interested in issuing more team bills.
So if they can get a lower short term interest rate rightly or wrongly and issue more bills, you're not going to have a runaway cost of issuance.
You know over the next three and a half years.
Are you, as an investor less concerned than about what happens at the longer end of a curve.
I think that if yes.
I think that if they in fact, you know, run policy that's reasonable, which I think they will. As you pointed out, there's there's a wide range of people that are going to be appointed, have to be confirmed for a point.
In all of that, you're.
Going to get a reasonable outcome in the back end of the curve. I don't think you're going to get a drop in long term rates, but you know what, you haven't gotten a drop in long term rates. We got to foreign a quarter basically three years ago and we're still at foreign a quarter.
We've been plus minus.
You're going to get a lot of variability in the data, but you will get lower short term rates. This is very positive for markets. You know, in terms of corporations, they can deal with a little bit higher inflation with the tariffs, We're going to get a little bit higher inflation. But the Fed and the market overall is not going to demand higher real rates across the curve because private sector conomy.
Can't pay it. And that's that's what you're seeing.
I think that's why you had, you know, excess reserves piling up, is because nobody wants that money at that rate, and that will kind of cap.
Private sector yields.
Treasure yields will push up against that a bit, but overall that's an environment where higher yielding fixed income product continues to outperforms.
Are going to get away from us.
Yeah, stay with US molblindex savannas coming up off to this, Let's stick with inflation and the poss forward for the Federal Reserve for Onica clock of City righting, the worst case scenario for tariff related inflation has been avoided. The biggest test of tariff passed through dynamics will likely be data from August through October for on Anica joint just
now for more for Ononica Cood morning, good morning. You notice the same line of inflation is transitory back at the Federal Reserve, that.
Word specifically probably not. But yeah, this is a FED that's setting up to look through maybe multiple months of some stronger inflation data. Obviously, it's going to depend on the details. Do we see services inflation slowing, our inflation expectations anchored, But yeah, that was a pretty dubvish comment from Tripong.
If they're saying look through it, then basically the market is only going to be focused on what the labor market.
I think that's the most important, and there definitely, you know, can be some stronger inflation scenarios. We don't know exactly how this will all play out, but I do think it's probably the case that demand is soft enough so you're not really getting these big price increases all at once. This could be somewhat drawn out, and that comes down to the demand backdrop, which is the labor market. If the labor market is slow, and that's what they're going to be much more focused on.
Based off all of this. In pal speech on Friday, is the FED basically accepting that they'll never hit a two percent inflation target. Again, I don't leave in the foreseable future, yeah, I don't think so.
I mean, I think at some point, you know, if we really are sticky at something like three percent, that they won't be comfortable with that. But we will have this multiple month period of some stronger data, but it won't necessarily be the true persistent kind of inflation that would get them concerned. And then maybe a year or so from now we're back towards two percent.
I find the analysis of the labor market slightly more controversial. This was an individual the sound of the news conference a number of weeks ago pre day CENTFP. Sure, but think about what he said of the news conference. Labor markets solid anchored the view around the unemployment rate. A few days later, what did unemployment do? Not a lot compared to the massive negative revisions we saw in payrolls. Now, I'll span out basically what he told us on Friday
and you can give me your analysis of things. Essentially, the chairman is saying that, yes, we've had a step down and supply and a step down in demand, which has kept the unemployment rate pretty stable given everything that's been going on. But I'm going to put more weight on the step down in demand. Yeah, now that's your camp I understand that. But surely for the feeder reserve,
shouldn't they be focused on measures of slack. Shouldn't they be able to sit there and say, yes, demound's seen a step down, but measures of slack have remained stable, so we can remain on count for inflation.
Yeah, I think if we don't see the unemployment rate moving higher yet will be hard maybe to get certainly bigger, you know, cuts all at once. We're not expecting fifties. But I think the issue, and Powell did still talk about, you know, the labor market this way in July, is why is demand weakening?
What's going to stop that?
If rates are restrictive, rates are probably not where they should be, then.
That's a fair comment. Just how restrictive are we?
Then?
I think rates are restrictive. You know, obviously we look at the long run dot you know, like markets, we're pricing you that five five more cuts or so. But I think if you look at something like housing, that's a really good example of you don't even necessarily need rates to go higher. You just leave them at restrictive levels and you've gotten that contraction. Again.
John's been bring up the point though, when the Fed cut last year, it actually didn't help the housing market because mortgage rates actually went up. Yeah, how concerned you this is going to happen this time?
Right?
Yeah?
I don't think we're really concerned that, you know, ten year yields are going to go too much higher if the Fed is really cutting. We saw that on Friday, A Duvish chair means means tenure rates lower to.
You also said we don't expect fifties, meaning do you expect a cycle of cuts?
Yeah, we do. I think it is harder to get those big cuts at this stage, at least starting with that. You know, obviously rates were at a higher level last year. You weren't as concerned on the inflation side of things. But I think this is a FED that's going to proceed with a series of cuts.
What do you expect in full twenty twenty six? And it's sort a dividing line between what happens before May and what happens to Mate.
Yeah, we are still expecting that this is going to be a FED that is data dependent. Obviously they have to you know, majority vote to you know, have a policy reached. We still think it's it's a consecutive five.
A consecutive five. So you don't think a whole lot changes when we get that new fetch.
I don't think necessarily, Yeah.
We'll obviously it can come from.
I mean, there is obviously a lot of a lot of pressure on them, but I think it depends obviously on who the chair will be. If it is someone like Governor Waller, you know Market's very familiar with him. We know exactly how he thinks.
The Governor Waller would be a super comfortable choice for wall Street.
I think at this point.
Absolutely he's someone that wall Street really admires and backs at this moment, even if they don't agree with his view, they think he's credible and he thinks they think he can represent an independent FED and not something that's just doing White House bidding, like maybe the President's on any c director.
Can we just finish on the Banach shape? What do you think the approach of the new FED chair will be to the balance shape?
Yeah, it's really not gotten a lot of attention it is. It could be interesting if it's someone like Governor Waller, he's been a bit more hawkish on the balance sheet, allowing it to run off for longer. But I imagine for now it's just as is.
I've picked up on the same dynamic. I've been very surprised sat here that there hasn't been more attention on the bannaed sheet. If you listen to what the White House wants, it's not just lower rates, it's lower borrowing costs, it's lower mortgage rates, which begs the question if you're not going to get it through ad justin short term rates, you have to get it through.
Other meats, right right.
There's really not a lot to talk about that right now, but they are very focused on on cuts, especially because they are issuing so much in the short end. So that really does depend on what the Fed rate itself is doing. Obviously, for consumers, you know, ten year mortgage rates, all that matters more, but for now, if it's federal borrowing costs, that depends on what the Fed's doing.
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