Chairman Powell wrapping up twenty twenty three and unleashing a monster rally from New York City this afternoon, Good afternoon, Good afternoon, alongside Tom Keen and Lisa Brownbittz'm Jonathan Ferrow here with the scores in the equery market right now on the S and P five hundred up by more than one percent, on the NASDAK up by one point one percent. The words of Emily Rowland of John Hancock Investment, it's a pivot party and everybody's invited. Chairman Powell just
turned up the music. In the bond market two year, ten year, thirty year, look a little something like this. We're down twenty six basis points on a two year to four p forty seven on a ten year, we're down sixteen to four point zero four percent. We all had a big question coming into this news conference with Chairman Pow pushed back against these big moves in this bond market, these big moves in this stock market. He said, we still have a waste to go. Nobody is declaring victory.
That would be premature. Then just seconds later he said.
This question of when will it become appropriate to begin dialing back the amount of policy restraint in place that begins to come into view and is clearly a discush topic of discussion now in the world and also a discussion for us.
At our meeting today, we discussed the timing of raycouts at today's mate sink Lisa Ramitz, that was not the pushback some people be looking forward.
If this was pushback, he might as well have screamed, we did it at pop Champagne right if you're talking about a party. He basically endorsed the view that we have of the market. Where I'm looking at right now is the expectation of one hundred and forty basis points of rate cuts being priced into fed Fund's.
Futures for next year.
This is basically an endorsement of that bifed share Powell who had ample opportunities to push back and did not to me as be honest.
To the real economy. This is truly an historic meeting. I did not expect that. I went back to March of twenty twenty, let's call it the pandemic meeting, certainly with that impact. But I think you've got to go back twenty five years. What was on spoken there As everybody plays the fed parlor game, and this and that and the other is this is a resounding vote in the American real economy and in the productivity of the country. That's that's going to all be in the research over the next.
Forty eight hours.
Jus get and that self to me, it's immaculate productivity phrase reading to that in a big why yeah.
This is I can't I got goosebumps right now, folks. I can't emphasize how.
Unique this meeting is.
I don't have no idea how the Guard and Dudley respond to this. I have no idea what Christine Legard does tomorrow.
I like your phrasing.
Seduced by the idea that they could potentially get a soft landing, and the response to the question about the easing of financial conditions and whether that worked against their goal was not said. It was not particularly I don't want to say satisfactory, but didn't really give me a
sense of what the answer actually was. Right, because we're looking at a situation where people are just all in endorsing bonds, endorsing stocks, endorsing the soft landing, and it is very rare, it is a unicorn, and so how much does this start to push things in the opposite direction.
John, I'm gonna frame this.
I wrote to Mohammad al Aria and I think it was out on Twitter like twenty minutes before, and I said, two standard deviations is four point zero six percent.
That's right where we went.
I did not expect that we blew through that and almost hit the Bramo line, which is three point nine to nine x X.
We didn't get there. We did not get to the land of Bramo, but we were really quite close.
You have to remember, Tom, the end of October when people put together the year ahead outlooks for the end of twenty twenty four, targets like fifty two hundred was twenty percent upside from where we were. And now you want to take k is it pullish enough? And that's going to make people really, really uncomfortable as we start to bring forward a ton of gains into year Row'll.
Me quick here.
We got some two special guests for you right now on radio and television. But John, what I saw there is what I'm going to call non log convexity, which is a curve to the Russell two thousand, which is an acceleration of money in and I just wonder to year in how traditional money reacts and if you get what Greg Peters talked about, which is some legit convexity here.
What's the bet. I think the bet right now, Tom, is that growth doesn't get hit hot. This fed's going to count based on what we've just been told by Chairman Powder, rather what we weren't sold and what's implied already in market pricing. But Lisa, what would upset the bet. What would upset the bet right now is you've get a real down to it in economy that's not part of this story that's been priced in at the moment.
And there's dissonance when the FED statement is saying that there is a lagging effect, a lagging impact of FED rate hikes that hasn't yet been played out. If that's the case, where is that in the statement of economic projection?
We have a terrific lineup for you, and we start strong here after this historic press conference with William Dudley, he's a former New York FED president and a student at California Berkeley years ago of our monetary history and of course Bloomberg economic senior. As I said, Bill, I got goosebumps. It just seems to be a massive statement that even if we have nominal GDP of four percent, we have immaculate productivity and will somehow get through this.
Do we sustain this market reaction, this belief in America, or do we are we inset for some titanic disappointment.
Well, I think that Peals Prescott has made clear that he's really pleased by how the economies performed, the fact that you could get inflation down, about the unemployer.
Rate going up, had some moderation and wages. He thinks everything is going really, really well, and I think that's true.
The question is whether it's going to continue or not, and there are definitely things that can go wrong. One thing that can could go wrong is the fact keeps madret policy too tight for too long and we have weaker economy. Another thing that can go wrong is if that can ease policy prematurely, or the market itself can ease financial conditions prematurely, which will stimulate THEO and make it so that the Fed can't cut rates that's at
all as quickly as the market expects. I think the market's getting a little to have itself here in the sense of taking the fit's optimism and translating that into very large reductions and short term rates in twenty twenty four.
But what do you think happened to the Chanman pound of only two weeks ago.
I just think that they're very happy with how the economy is performed.
I mean, basically, they've had decent growth, unemploying rates stable, and inslation's come down a lot, and.
That's basically, you know, as good as it can get.
And that's really what's just summarizing the summary of economic production now summary of economic projection shows a very modest increase in the unipllyer rate from here and essentially a soft landing kind of forecast. Now, soft landings are really difficult to pull off, and they're particularly difficult to pull off when you've been very late to type monitoring policy. And what's allowed this to happen is that there were
supply disruptions. There was a reduction and labor supply, both of those things every verse, and that made the fifth job a lot easier.
Build the prospect of getting sticky in flag shit into next year, getting stuck at three. So it makes it because six months ago, Bill, we were told that the last mile. It was difficult. It was hard. Then Secondary and starts sounding like the fat chair again, saying it's not that hard. You hear it from chairm and Power didn't get any indication it would be particularly difficult into next year. Do you think that is the prudent approach to what twenty twenty four could look like.
I think he's telling you what he really thinks.
I think he's very happy with how things are performed, and he didn't say it would necessarily continue, but he also said that he was hopeful that.
These trends would continue into twenty twenty four.
My own view is that the Fed is going to be cutting rates in twenty twenty four.
We're clearly done in terms of rate hikes.
The possibility of another radhike is really low at this point. The question is really just timing of rate cuts and magnitude, and that's going to basically be driven by the strength of the economy, pressure on resources, and what actually happens to services inflation at this point.
Bill, do you think that j.
Powell did a good job.
Do you think that it was right for him to say what he thinks and not push back at all against the market Party.
I always think it's good to say what you really think, but I think the problem with doing so is it's basically added fuel to the fire.
Paul talks about the long legs of.
Entre policy, but financial conditions are much much more commonative than there were just a few months ago. And if you look at the Fed's own assessment of financial conditions back at the end of October, of the impulse from financial conditions the economy, based on the fedsal model.
Was pretty neutral.
So financial conditions now are actually adding impulse towards the economic growth going forward.
I look Bill at where we are, and it's clearly beyond the pandemic. We've had a number of conversations off across a long surveillance day about how goods are goods, and we've got some deflation and service sector inflation's coming down.
Is this economy beyond the pandemic? If you were to.
Talk to Mary Daily in San Francisco, to John will at the New York Fed, can we say our economy is beyond the pandemic?
I think mostly in this sense that the conditions today are very similar to where we were in February twenty twenty, when we had a very tight labor market. The difference is wages are a bit higher, inflation's a bit higher, and mandre policy.
Is considerably tighter.
But it does feel more like February twenty twenty than it does between any period.
After that bill sit tight. I want to bring in Mia Kay down in Washington day. Say, Michael McKay, you were in that news conference. Were you surprised by the approach from Chaman Powell?
Well, I wasn't surprised by the approach once we'd heard from the Fed and in their statement and what we saw in the dot plot. But it is a rather dramatic change from what he said just twelve days ago about it not being time to talk about ray cuts.
Obviously they did.
Today they're feeling much better about the overall state of the economy. As one analyst put it, today, if good inflation report is j PL's idea of a good time, then his party has turned into a rager because inflation is coming down very quickly. And then the next question becomes, as I asked him, when do you cut? And that's the part they're not ready to get into yet or describe.
And so we're probably still.
In for a few months of the markets watching the data and trying to guess when the Fed is going to respond.
Michael, within all the blur of the data and all the guestimates forward, did they frame out a subpar GDP, either real or nominal? Did they frame out subpar growth?
Well, basically that's what Paul said, we're going to get because the direction of the economy is slower and the lagged effects of their rate increases have not yet completely been felt, but that the economy will start picking up again and growing to potential. And he also admitted the possibility of surprise there the economy grows faster than expected
is also very real. So I think they're at this point working on the models that they have, but admitting that they have been wrong before and we could see faster growth. But the interesting thing was, other than a sort of perfunctory caution, he wasn't suggesting that we are now that they would go back necessarily to rate increases.
Mike McKay, thank you so great job today. As always, the reaction pouring in this afternoon, This line from Steve chevon over it federates it initial takes. He wants to come. He always saw inflation as transitory Bramo your favorite. It's come down on the supply side. He smells a self landing and wants to cut to stick the landing. He had no interest in pushing back against market expectations, right or wrong. It's bullish for now. As a takeaway from Chevon this afternoon.
That's exactly where I wanted to go, and I wanted to get Bill Dudley's opinion about whether we did get basically confirmation of transitory. Do you think when we look back, the Fed won't have been wrong when it came to transitory inflation. They just were premature.
I think that most of the inflation pressure had which was transitory, but not all of it. I mean, I think some of the services inflation is due to the tightness of the layer market. I think what's really interesting about Paul's press conference today is he talked to us about the risk of being too late to cut.
So he actually admitted the possibility that if we.
Stay tight for too long, we could actually have a whip comomy that's too weak relative to what we desire.
And that's something new from your pom.
That's a very important point, the ex postedness of it. If you will doctor Dudley. They've got a weight weight weight after the fact. So let's say something coarse like the unemployment rate. How many months do they have to wait until they get real confidence that the labor economy is caught up with our immaculate disinflation.
I think they're gonna be looking at what happens to the unemployed rate, the tightness of the labor market, and what the consequences that are for wages. Paul did admit that wage inflation still will bit too high to be consistent with two percent inflation. But boy, the FED is pretty close to where they want to be in their outlook at this point.
Bill, you've been on the committee before. You can look at this from the outside. Now. It's a tricky game, this one to get into someone's head, and I think maybe what we shouldn't play, but I think on this occasion we should. Two weeks ago, I heard from a very different FED chairman, and I'm trying to work out
what happened today. Whether that was just a man who was representing his own views and this was a man who was representing the committee's view, or whether, like we've indicated, he's being seduced by this idea of netting a soft landing, and the guy who was trying to act like Vulka was never really Vulka. What is it? What do you make of who Chairman Powell is and what he ultimately thinks about things?
Well, the fact that he's worried about keeping MADRI policy too tight for too long tells you that he's not thinking like Paul Bulkery.
So there is and there's a risk cutting rates prematurely, But I.
Think it's coming from us to the fact that he's just really really happy with how things have evolved and that, you know, optimism is showing through as it has shown.
Through from time to time and has pressed conferences.
Bill.
It's maybe not your remit, but it's certainly the New York Fed's remit. They're going to keep track of flows off of declining interest rates. What is a stability or instability that you observe in six trillion dollars of cash, let's say most of it loaded money market funds? Is that yield comes down? Is our system going to be able to handle it?
Yeah? I don't think there's gonna be any problem.
I mean, you know, the Fed Reserve says the short term interest rates and then money market rates trade off that if if money market rates, you know, firm up a little bit, then money will flow back into the money market fature just ones.
I'm not worried about that at all at this point.
Bill, Just to wrap it all together, do you think that the chance of a hard landing has gone down materially over the past month or do you think that it's about the same or even has gone up.
I think it's gone down materially over the last six months. I mean over the last month.
I don't things have changed very much, but definitely the prospects.
Of the soft landing are the best they've been in last year or two.
Something changed in the last two weeks for Chairman Powell, that's for sure. Bill Good to catch up Bill Dudley there of Bloomberg Opinion, former New York Fed President. Let's recap the price action some well moves across the board in the equity market and in bonds since the start of November the end of October this afternoon at one percent on the SMP. The gains fade a touch, but big gains nonetheless on the NaSTA Cup by zero point nine percent. How about the Russell the small caps up
by two point seven percent. We are talking about gains of more than ten percent since early November on the sm P five hundred a year in a month. In the bond market two year, ten year, thirty year, two year, four forty seven when the FED met in November, the morning at that meeting, on the second day of that meeting, four ninety two on a two year right now four forty seven, twenty five. What a turnaround? TK close to five percent and all the way back down again.
There's't anybory's looking at.
I mean, it's something as idiosyncratic as a Turkish liras on a bid today for the first time since the time began. But yeah, you can look across all of the equities, bonds, currencies, commodities and see the effect of this.
John, I want to go on one week. I want to go on two weeks.
Every strategist out there has to republish and readjust and let me tell you got your outlook to bed December five.
Yeah, let's go in this weekend. We're rewriting it. I mean, is this is that dramatic?
I have to create what I said, I was quoting the tenure. The tenure was a fornaty two. The two year back in early November was three five percent. These are massive changes back down to four forty seven on a two year on a tenure just above four percent in the effects market. I think we've got to talk about this, the Tucker war that we're going to see play out now off the back of what we've just heard and into tomorrow with the ECB. The euro at the moment looks like this one to wait sixty eight,
that currency pair positive by zero point seven percent. Given the moves we've seen in the bobs market, that dollar is a whole lot weaker. Where does this leave present leguard in to morrow's mathic hold my beer?
I mean, essentially, is this what she's going to say is okay, I'll take that, and I'll raise you by saying I think we should raise we should cut reads. In March, this is going to be a bigger question. Did the whole world experience pandemic era inflation that has largely subsided and that was ultimately transfittory or is there something else at play? Jpell did not want to embrace the question about financial conditions loosening and what that means.
Are we going to hear the same thing from Christine Lagard.
There was a moment in that news conference, just a moment where he reflected on how wrong so many people have been in twenty twenty three, and I think before we go home for Christmas, the holidays and look ahead to twenty twenty four, tom we need to reflect with some humidity about what went wrong in twenty twenty three. Last year, twelve months ago, looking out twelve months, we were talking about the prospect of recession, of much higher unemployment.
We called the Fed's forecast aspirational ck. We had bank failure, some of the biggest bank failures we've seen in decades, not just in this country but around the world. And yet a couple of quarters later, we had GDP north of fifth point. So when we talk about NED and ASoft landing getting all these rate cuts the FED is talking about without the economic weakness, I think we've got to remember this has been a very very difficult economy to forecast, and the next twelve months might best tricky.
We're repiecing the show together for tomorrow, folks. This is so profound. Our team's going to work all evening to give you the best tomorrow morning that we can. And Amy said to me, who do we talk to? And you know the usual names you mentioned, Bob Michael, JP Morgan. I think to see a bank like JP Morgan recast.
Their view forward.
But I looked to Uri and timmor at Fideli with decades of experience of real economy analysis.
And this is the regard distinction. If we do four percent nomenal, what's the character of that.
American four percent growth versus whatever number you have in Europe? They don't have the technological pop that we have.
Can we introduce some politics into this?
Did you speak with Chirbiden?
This gets really really difficult going into next year. Okay, let's say we get seventy five basis points of cuts. Where are they landing and does the political calendar shape where you think that comes later? Given that we're going to have campaign in full flow, full flow going through next year, are you telling me they're going to wait
until June. We had Matt Lazelli, a Deutsche Bank on the program a little bit earlier, Lisa, and he said, they start in June and they go one hundred and seventy five basis points they start in June and go on seventy five into the election.
Right now, there is a seventy four percent chance of a rate cut at the March meeting for the Federal Reserve. That is what I'm looking at in terms of what people are expecting. If the FED is currently talking about cutting rates, why would they wait until June? From politics? For politics, they could be accused of political interference either way deciding on when they meet.
TK that's the question.
Why wait, Well, there's a y.
Weight, but there's also a look the further data, and again I'm skewed towards a study of the real economy.
We finished stronger.
Jeffrey Rosenberg with his portfolio manager, Blackrock Systematic Multi Strategy Fund, he will be systematically reviewing everything after this historic meeting. Jeff, you know we're at gunpoint at Carnegie. Mellen you were required to read both volumes of Alan Meltzer and get out the sixties and seventies and FED meeting. And what doctor Meltzer would say is it is at the end of the day about the real economy. What did Jerome
Powell today say about the American economy? With the stunning statement the dots in the Q and A.
Yeah, it was overall a validation of the transitory view. And you know, what was a little bit feared going into the press conference was whether he would push back. He got the softball from Nick Timmeros on financial.
Conditions now being nice and clearly, you know, chose not to hit it out out of the park in terms of pushing back on on financial conditions, and that was a green light to continue the initial reaction from what we got in the statement of economic projections and the dots and the seventy five basis points and the dots is clearly the surprise.
So you know, this is a green light for investors.
I think nixt question and this question of financial conditions, and Bill Dudley mentioned in a minute ago this is the problem is that this can go on for a while and it can get overdone in terms of how much easing the market does before the FED. But the message today is the Fed is very happy with what they've seen.
What changed. You know, clearly it's.
The validation on the inflation story, and they're very pleased that after getting it wrong for so long, they're really getting the validation in getting it right.
So, Jeff, what do you do. Stay on the bill, hold on to it tightly, don't let go what you do.
I mean the short term is, you can't really fight this until there's some kind of fundamental data from the economy side that pushes back, and there hasn't been.
It's all been coming up.
Soft landing, inflation declines yesterday. You can squint at Core Corp. Nobody seems to look at Corecorp anymore. He mentioned it very briefly. It actually popped up. So there are some, you know, vulnerabilities, but the message and the concern, no one's looking at the vulnerabilities. They're looking at the validation. And so with that validation, this bullish sentiment can go on for a while until we get a new.
Round of economic data.
And until then, I think, I think the message is pretty clear that the FED is more than willing to see an easy in financial conditions, won't step in the way of that.
Kathy Jones of Schwab Josh Schwab put this out on x or Twitter. With that, I have to revise my twenty twenty four outlook.
Happy to do it.
Are you revising your twenty twenty four outlook after this meeting?
You know, I've done this for so long that I don't do the whole you know, Christmas in July outlooks in October kind of thing, because you end up with this problem. So no, I don't have to revise it because I just I just haven't put it out yet.
So that's that's a good plan.
B Look, Jeff, at where we are, and I just looked up one of the black Rock money market funds five point two four nine one percent. Where's all that money going? I mean, this is right up your wheelhouse.
Where's all that money going when that yield comes down?
Yeah?
You know you ask this question in the pre segment to one of the guests, and I was listening in, and you know, this is the change.
This is the.
Turning point because last year it was all about you're rewarded for staying in cash when the cash rates are going up. When the cash rates start going down, now your rate of return starts going down in cash. So it is the signal to start moving out of cash into into more term rates in fixed income, to lock in rates at their highest yields. If you're going into
a cutting cycle, to move back into risk. As we talked about earlier, the lack of the hard landing, the over forecasting of recession fears, the legacy of the damage of twenty twenty two that's kept people happily in cash.
All of that dissipates, and I think that's what I was referring to before.
You got to be careful as to how big that easing and financial conditions can become and how that can undo some of what the FED thinks is the right stance. But that being said, this is a turning point, and I think you do start to see that money move out of money markets into risk of your assets, into more term rates to lock.
In higher rates.
As the cash rates start to come down. You're penalized now in twenty twenty four for holding cash because the rates and the prospect of the rates is to go lower.
Jeff, what would you advocate for You're sitting in cash, You've missed the rally of the last month, You see yield drop and you get nervous. Reinvestment risk is not just going to worry about.
It's real.
You see the moves in a single day of more than twenty basis points. What are you antificating for?
Well, I think there's lots of different ways to step out of cash into It depends on the risk perspective, but in fixed income, you know that movement into the front end of the curve, you can step out a little bit more into the belly. It's going to lock in not only some yield levels, but you'll pick up a bit more price appreciation in a total return context.
In a falling rate environment, I think you can go further.
The soft landing the lack of economic recession. It bolsters yield and you'll pick up in terms of income and credit risk.
That credit risk it's priced in, but it's not going to collapse.
And so if you avoid the recession, investors can can step out on the risk spectrum and fixed income increase yield levels relative to cash, lock those in and as long as that recession outlook is avoided. And that's not a guarantee, but that seems again with what the data is showing to be the more likely scenario. You know you'll lock in those yields and achieve a higher return than what you're going to get out of sitting cap.
I want to just point out that we're down now about a percentage point in less than a month on ten year benchmark yields. This is full faith and credit, the most liquid market in the world, and we're seeing fluctuations that we have never seen before. Does that raise any concerns for you that we are seeing such incredible volatility in just the market's psychology on not that much different in terms of news, as you pointed out earlier.
Yeah, it's a really good point when thinking about what the fixed income market looks like from a portfolio context. We just have to get more used to this higher level of volatility. You know, the AG index, the benchmark for fixed income, used to be a three to four percent volatility instrument. Today it's about double that. So when you're balancing out portfolios, there's just a higher level of risk. You can mitigate that by being shorter in terms of duration.
Some of the more attractiveness in the front end of the curve is you've got still the highest yields and with the lower duration, less volatility, but a bit less price appreciation too, So there's a little bit of a trade off there, But it is to Lisa's point, you gotta expect this isn't the old fixed income market.
It's a newer fixed income market.
It means higher volatility better yields still in the front end until we normally.
Jet One final question.
Torston, Slack and Apollo head out a stunning chart today of a spike in bankruptcies within all this, and I mean from a political economic standpoint, the history of this meeting, the shock of this meeting. Is this a meeting that just benefits the halves of America? Half does countries flat on their back and the others are living large. The dows up four hundred and sixty points. Is this just about almost the financialization and advantage of the elite in America?
So I love Torreston, love his work.
You know what he's highlighting now, and he's done this for a while. Is there there's a distributional aspect of our economy that gets lost in these aggregate statistics. And so there is an impact of rising interest rates, There is an impact of the significant tightening and interest rate policy, but you don't see it as much in the aggregate. You see it when you disaggregate, and that distributional side.
So the bottom end of consumers, the bottom end of credit is more vulnerable, and you're starting to see that, but it's still a distributional story. It's what you would expect to see in the tails, and it is showing the effect of that. But that doesn't necessarily mean that story is exacerbated strapolated into the aggregate view.
It's part of the story, it's an important part.
Credit cycles begin from the bottom, and so you got to watch that. But the counterpoint is that the rest of the distribution has created a lot of immunity, if you will, not permanent immunity, but a lot of reservoirs to buffer the increases in interest rates. On the consumer side, that's from savings. On the corporate side, that's from fixing
maturities and turming out interest rates. And the reason is we had such a prolonged period of zero interest rates so that the shock of interest rates isn't as much of a shock as it appears it can be. And we have to watch it, and you're certainly seeing it. It's tors and highlighting, you know, in some of the tales, but it's not really the aggregate story yet.
Jeff, I've got a few seconds. Pick a month for the first rate cut, and you're not gonna give us an outlook, but just pick a month.
Jeff, I'm gonna give I'm gonna give you. I'm gonna give you June. You know, sometime in the summer, I think the March, and I know Neil maybe a little bit early.
What's the rush.
They still want to make sure they've nailed the inflations.
We've got to leave it that. Jeff got to catch out, Buddy, always says Jeff Rosenberg there of black Rock, the Federal Reserve chair, does not want a claim victory. Let me tell you this market already has.
This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple, Podcastsoundcloud, Bloomberg dot com.
And of course on the terminal. I'm Tom Keen, and this is Bloomer