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The Chairman of the Federal Reserve System, I'm truly in historic day. As or Michael McKee said with some emotion at two pm, made super hawkish. Fred I saw a couple of research notes saying hawkish hawkish. I don't know what hawkish means. I certainly don't know what hawkish squared means as well, but there you have some piercing questions there, and we've got some of the video to playback. That did move the market, Lisa, what I would suggest here
with markets sort of a sigh of relief. We went down off the statement, we came back with a nice Nasdaq one hundred turn, Apple breaking out to new highs. We may have time to get to that, but it was in the two year yield a twenty eight basis point swing to a much higher two year yield, resetting to the new hawkish hawkish, and then we came in, is he calm the markets?
My takeaway is j Powell wants to sound hawkish. He wanted to double down on super hawkishness, and he failed because basically the real key moment was that when you couldn't commit to any July rate hike. To me, this stood out in response to a question about what the change in the statement of economic projections to shift upward fifty basis points of further rate hikes, what that meant about July.
Take a listen.
We didn't make a decision about July. I mean, of course it came up in the meeting from time to time, but really the focus was on what to do today. I would say about about July two things. One decision hasn't been made to I do expect that it will be a live meeting.
The live meeting was not the same as we have an indication that we are going to raise rates, and at that point you start to see the shift in markets, with equity starting to lift and getting it at one point up as much as a half a percent on the Nasdaq, and you can see a real retracement of those bond yields. Basically, if you're not going to commit to a July rate hike, why should we believe the average of a statement of economic projections by committee members?
We chat Aaron a moment. We've got some very important stuff from some of the great academics across the nation. I'm going to feature Jason Furman here in a bit. If you're just joining us, we welcome you on radio, on television at Worldwide. Tom Keen and Lisa Bramwis. Jonathan Ferrell on assignment on one of three islands in Italy. I'm not sure which one is, Like you know, I think Capri.
How do you call vacation assignment? I don't understand.
Because I'm American. We don't go on vacation. Little faraoh goes in holiday, which is a good and beautiful thing. We're gonna have some great conversation coming up here and in moments, Talia, do we have the Furman tweet here? I think this is too important. It's in a good SAGIWI and the Jeffrey Rosenberg here in a moment, did we get that this is Jason Furman of Harvard. Of course, with his public service to the nation and teaching, I should say x ten at Harvard, which gives him great
credit as well. The FOMC is signaling a baby step away from a belief in low equilibrium interest rates. The median long run FFR was unchanged, two and a half of the central tenantcy shifted up, and then all three of the lowest long run dots shifted up. Expect more of this shift over time, Professor Furman of Harvard University. Joining us on Jeffrey Rosenberg, portfolio manager of Systemic Multi Strategy Fund at Blackrock.
Oh, he's not good yet.
Okay, we'll get to Jeffrey Rosenberg in a moment. Joining us now our academic Michael McKee here, which I thought what was great, Mic is for the first time in age if someone had a ruder question than you, which I think was very good. Michael McKee, Jason Furman, I think, with summary here of the history that Mike I heard in your voice at two o'clock, this is an extraordinary moment, Mike. Is this where the FED begins to shift, where we're
heading up to our former vice chair? Clarity says so the Jason Furman alludes to that finally we're beginning to find a new level above two percent.
Well, it may be the issue there is going to be how long it takes inflation to come down, which is sort of the genesis of the question that I asked in terms of whether it's time or data that's going to make a difference. I think a lot of what went into today's decision was the Reserve Bank of Australia and the Bank of Canada took rate moves off the table, and the markets were then shocked when they
had to come back and raise rates again. So they don't know if they're going to need to raise rates again. They think if nothing changes that they may need to. They're giving themselves that flexibility. They don't want markets to price in the end of tightening or any of rate reductions in the near term. But Pole seemed to indicate that while they have these two rate moves priced into their dot plot, it doesn't mean they're necessarily going to
do them. They will see what happens with inflation with the economy going forward. So July may be live, as he said, but if we don't see a lot of change, I think you're going to see a lot of people leaning towards the idea of the Fed holding again.
That I thought was really interesting, and you asked a great question which he did not answer. He really just kept saying, look at the statement of economic projections, Look at the dot plot. How much we witnessing attention between j Powell as an individual representative on the FMC versus the committee which is significantly more hawkish than he is.
I think it's going to be very interesting, Lisa, to listen to what the Fed officials have to say over the coming weeks, Because if you had asked where we would get dissents at this meeting, we would have said, and I think everybody on Wall Street would have said, from the hawkish members. But now it appears that the hawks led the way, Powell going in, Jefferson going in, and William's going in, essentially leaning towards the pause and
leaning perhaps more Dubvish than others. So what was it that drew them into this idea of an additional two rate moves? If they indeed joined in, it's hard to imagine Powell not doing it. But there were some dots below the new median, but it does seem that the group as a whole group more hawkish. So what brought that on? And is their division? Was their division or did we all kind of misread it. It's it be interesting to listen to their speeches in the next couple of weeks.
Agreed, and he even indicated that listen to their speeches and they'll tell you what they think. Michael VICKI thank you so much as always for your terrific world and just sort of saying right now we are seeing that lift reignite inequities NASDAC up three times on the percent as you really reassess the commitment that this FMC truly has trans rates next.
Month critically, and this is perfect to go to Jeffrey Rosenberg on the VICS, which is in the equity space. This is the volatility measurement around the standard of course five hundred bursts down to a constructive thirteen point nine. A boy, we taken volatility out of the equity markets here, and of course Jeff Rosenberg that's part of his view as the systemic multi strategy fund manager for black Rock. He's been so wonderful to be with surveillance here for
a good amount of time. Jeff, I'm going to go to the history right now. We'll get to the vix in a moment and what it means for the yield space. Professor Furman at Harvard says, today's a sea change. And finally we're getting the verbiage from our central bank to get away from what you know. I'm going to associate this with John Taylor, where we had a run rate under two percent one point eight one point seven percent.
We use two percent as a language, and finally we're going to start admitting we're going to come down to something above two percent. Is that what hawkish hawkish meant today?
You know, it could be part of that Tom That's a.
That's a that's a huge deal long run, because it implies that lot or space for the FED to reach its terminal rate because the real neutral rate is higher than anticipated. I'm not sure that's so clear. I think that's an interesting read. I think what's really clear here in the market reaction is the FED, you know, mark to market and upgrade.
It's upgraded its assessment.
Of the economy, and you know that's good news in some sense. This is about you know, really pushing back hard against the recession. Consensus, the recession expectations from consensus in terms of economics, and consistent refrain all year long that it's just around the corner. It's just around the corner, not around the corner. And yes, you've got the FED
who's got to push back against that. But for the kind of back in and forth in financial markets is a little bit about, hey, this economy is a little bit more resilient, and Powell admitted it, it's been much more resilient to the five hundred basis points than they expect, than anyone expected, both in terms of the economy.
Jeff, to me, this is a foundational moment, and your colleague Waylee nailed this a couple of days ago, and that there just seems to be a resilience here that deserves a higher interest rate structure. Did we get wrong the recession idea in the sense that for whatever reason, technology, demographics, the other factors. Blenchard talks about that this is just simply a much more resilient American economy that we have to deal with in finance.
Yeah, and resilient to what resilient to interest rate sensitivity?
Right?
I got done talking about housing interest rate sensitive sectors they're the most, they're the fastest to respond.
Yes, we've seen that. What we haven't seen is the rest of the economy. And so what that might.
Imply is a lot less interest rate sensitivity to tightening, and higher interest rate than is expected. And so either you need a lot more and what's really missing here is the admission that you need to do a lot more damage to the labor markets to really reign in that inflation.
Otherwise you're going.
To be living with a lot longer, more persistent inflation than a lot of the forecasts, including the FED, and these updated SAP are implying.
Jeff, do you believe Fed Chair J Powell that this FED is going to go twice more?
I think twice more is not too high of a bar. I think the market had one more. A little bit of the surprise in the sep here is that you've got two more. I don't really think that's the surprise. I think the surprise is what I was just sort of implying that, if indeed you don't see inflation.
Respond more aggressively.
And to Tom's first question, if indeed the real neutral rate is much higher than what Williams was just highlighting in a recent speech. Yes, and what people think is, you know, no change from the pre COVID environment, then that terminal rate is much higher. Not fifty basis points, but hundreds of basis points, and that would end up being a big surprise. I'm not saying that's where we're going.
But the longer that you don't see the response in labor markets in inflation, the more the data is telling you that you're not tight in terms of policy, and to get tight you got to go a much higher.
If that's the case, then why are equity markets up right now? Why is the Nasdaq actually gaining stability and then some even on the heels of projected further tightening.
So I think, you know, there's a big story around the Nasdaq and some concentration issues around spots.
Tech is back as sort of the safe haven and the safe.
Place to go, so you have a little bit of that issue. It's not a high breadth market move.
You well, one a second, but Jeff, I'm sorry to interrupt, and I realized this is difficult, but this is important because it's not just what it has been doing. It is in response to what we saw today that as j Powell started to talk, and as he was basically saying they have no committed to a July rate hike, you saw a real enthusiasm kind of percolate up. Doesn't that tell you something more than just simply AI hype.
Well, it is more than that.
And what I was going to extend that is it's back to what is the safe haven for equity investors. The safe haven is large cap tech and so you've added a few new semiconductor companies in that list. We got new funny acronyms to describe that new equity market concentration. But it's about where do I go when I'm uncertain. I go into these large cap companies because that's what's say. If you want to see the broader economic impact, then
you got to look at Russell two thousand. You got to look at small caps and you see a big gap in that performance today. I think that's where you search more about the economic sensitivity and where the vulnerabilities.
Thank you very much for pulling that up.
And that's where you see the disconnected and that's where I think you can square somewhat of the Oh that's got to do more, that's not so good for the economy.
Okay, so that's not so.
Good for the movement into economic sensitive stuff. If you if you run this back a little bit further from the beginning of the month, from the end of May payrolls, you see Russell was actually leading the stock markets.
And so this kind of rotation is.
About uh oh, all right, I go back to my safe haven. It's just my safe haven in this new world is large cap tech. It's not the two The Fed's raising rates, and so this is where you see market dynamics going.
I think it's all very consistent.
Jeff Rosenberg, thank you so much today with black Rock on a busy, busy afternoon. You want to get Michael McKeon here for one more question before we get to doctor Carpenter as well. Mike, I'm going to assume the dots of twenty twenty three, I was twenty five sprawl from Bullard to Goulesby. What are we going to hear in the next FED speak Derby? How do all these speakers deal with a hawkish hawkish statement?
Well, I think first of all, you throw out the twenty twenty five dots because those are just sort of darts on a board.
They don't have Yes, you may.
They don't have any idea where we're going to be in twenty twenty five. They don't know about twenty twenty four. As Powell admitted today, the economy has surprised with its strength this year, and we got these surprising move in the dot plot this time. So I wouldn't look that far out. But I think what you do want to say is that we're going to see who can define what it would take for them to move again. Obviously
Austin Golesby probably doesn't want to do very much. But if the Fed is going to move, if Jim Bullard is going to move, is it going to be that time question, the fact that inflation doesn't come down, or is it going to be the fact that inflation goes back up again.
That's what they need to find out.
Based on this question that Tom is rightly asking. Are you seeing this shift as evidenced by some of these projections and even what we heard from j Powell? Are they moving the terminal rate higher than what we've I'm accustomed to.
Well, yes, I think they are.
They do think that we could go to as much as five and three quarters percent.
Or six percent.
The issue is if they start to get that high, what second round effects are there, and so they're going to be reluctant to move, but they want to leave that possibility open because the economy has been so strong and they don't think that it is going to react as it has in the past. And one interesting thing today is by moving up to one percent for a GDP growth figure this year, they're.
Implicitly pricing out a recession.
So while pal says the risks are still onto the upside for inflation, they're not to the downside anymore, at least as far as the Fed is concerned, it seems, with going too far, tightening too much and sending the economy into contraction.
Michael McKeith, thank you so much, really really exceptional. They're reporting us out at two o'clock and how original this statement was today, mister McKee in charge of all of our economic coverage, we finished strong. Lisa with the or ghost.
With someone who has extensive experience at the Federal Reserve and beyond in government making some of these decisions and seeing the mechanics of it. Someone who currently heads the economics team as global chief Economist at Morgan Stanley, Seth Carpenter joining us now, and I am curious your reaction. Why are markets up if the FED is shifting upward its expectation of terminal rates.
Yeah, I think there was a lot to impact there. I think Lisa was listening to the show earlier and you pointed out that Powell was unwilling to commit to July, called it a live meeting, which I think makes sense, but he didn't want to lock himself in. And I think the equity market might be saying, gosh, maybe we got off easy. There could have been an even more hawkish outcome. Look what happened with the dots, and now Powell is saying, Okay, that's not baked in the cake.
So I think your analysis earlier was pretty.
Spot on at this point.
Was that a failure at a time when inflation has been sticky or is it FED seeing something that perhaps others are overlooking in terms of how quickly this economy is seeing justinflation.
I wouldn't call it a failure, and I don't know that they're seeing something that other people are. And I think one way you can interpret the rates market reaction, which is say, not solely pricing in what dot plot says, is the market understands that the FED decisions will be dependent on the incoming data, and I don't think the market shares the view that inflation is going to be nearly as high as what the Fed's written down.
Their forecast for core.
PCE inflation at the end of this year went up by a sizeable amount. Looking at my colleague Ellen Zenner and her team's forecast for CPI inflation, just the next print that we get next month, it's going to be really, really hard to get anywhere close to the Fed's core inflation forecast for this year. And so if we're right, and if the market's right on where inflation is going to go for the next print, boyd, the committee probably will be seeing a different tune.
I think that's part of what's going on.
That will actually, I think did a reasonably good job keeping that hawkish option there while not having a hike at this meeting.
It's original territory to say the least focus is not a cliche. This is not something Seth. Carpenter was taught at Princeton by a guy named Bernanki and Alan Blinder and other greats of a Princeidon. Doctor Carpenter, I look at where we are, and if I can state it is original territory, it's in some form original economics. Do we just simply have to really start thinking of a higher our start is Jeff Rosenberg said, maybe away from what John Williams codified a few weeks ago.
I'm not convinced that we have enough information yet to get there. And in fact, any estimation that gets done of our star just takes so many years of data to get any sort of precision on it.
And the committee really.
Has to make decisions at a meeting by meeting basis. So they're going to do in practice what all of those fancy statistical techniques do, which is look at the data and ask the question, given where the industrate is now, is inflation rising or falling? Is the economy slowing or speeding up? And if the answer is inflation's coming down a bit and the economy is slowing down a bit,
then you just conclude we're above are star. It's literally as simple as that, and in real time, it is the best that they can do.
I first met ellen Zettner in a true expertise of measuring the American consumer. I believe it saw a FED today walk greatly away from a recession call. Maybe we'll see contractions slow down in some form of stag nation. Who knows, but doctor Carpenter. If I look at Alan Zettner's study of the American consumer, the great miscall of the last six months is this is a good economy. We are buoyant, we are spending money. Do you see
any amendment of that today? I mean, can we believe in that forward that it's a better than good econom.
So good is in the eye of the beholder a bit. I mean, the unemployment rate is quite low. We've had spending hold up. But I would just stress we have had here at Morgan Stanley since the beginning of this rate hiking cycle, a call that we would get as soft landing. We think inflation is coming down, we think inflation will continue to come down. But we have never had as a baseline forecast of the US economy we
would go into recession. And I feel really comfortable that we had that view before that we're sticking to that view now.
Jeff Rosenberg had an interesting comment when he was looking at the performance of the Nasdaq as per usual these days, seeing gaines on both the S and P and the Nasdaq and then looking at nearly a percent loss on the Russell two thousand and basically this goes into the haven stocks. The haven assets are the big companies and the smaller ones are being increasingly left behind. Even if we do get a soft landing, how is that dynamic going to rejigger the haves emma have nots in corporate America.
I think there's just a whole set of cross currents going on here. And as we often like to say, the economy is not the market. In the market is not the economy. We do think there's still more slowing to happen. There's probably going to be a little bit more slowing going on in some of the good sectors than in the services sector, and so that's going to change a bit who the winners and the losers are.
We do think Europe is going to be slow as well, and so those companies that are exposed to the rest of the world through exports are probably going to fare a bit differently than those that are just domestically focused. So I think it is a very very tricky time now for investors to try to parse out just from the headline macro numbers, what is going to.
Mean for the individual components of the equity market.
Are you seeing signs set of material disinflation on the wage front at a time when Jay Powell did talk about the fact that there was some sort of right sizing or in the balance between supply and demand for labor, are you seeing signs that there is going to be a significant drop bar resistant area that remains.
Sticky even as you see disinflation in goods.
So two critical points that I would make here. One is we have been just pounding the table for quite some time that the labor market is tight, but it's tight in the sense that they're actually there's a bit of a shortage of workers relative to the amount of economic activity. So we can get the economy to slow down without there having to be a whole wave of layoffs. And that's part of our thesis for a soft landing.
And I think Powell sort of nodded in that direction by pointing out that vacancies are coming down, hirings are coming down, but firings are not really going.
Up a lot.
So I think that's the first point. The second point that I think is very much worth emphasizing. However, and Jay Powell was asked about this.
A little bit.
He referred to the Bernanki and Blanchard paper. But we have been saying now from several quarters in a row. People overestimate how critical wage inflation is for the resulting consumer price inflation. They are clearly correlated. But most of the direct action of caudality is from consumer prices to wages. I am not worried about the current setting of wage inflation being the thing that drives inflation higher.
So the carpenter, I've got two and a half minutes left. Let's look at the heritage of Morgan Stanley economics. Steve Roach invented it. You followed on with great international economics.
You come down the.
Ramp at the Hong Kong Airport and there are the two billboards. It's Morgan Stanley, Greet you to China, Greet you to Hong Kong. And certainly it changed Hong Kong. Now our Secretary of State will visit China. That is in the news today. And the great mystery is the strength of the Chinese economy and what it means for America. What is the reporting of Morgan Stanley on the strength of the Chinese economy.
Well, we remain reasonably upbeat about the outlook for Chinese economic growth this year, and it has been such a roller coaster over time. We were bullish on China a bit before the market was, and then the market got way over at SKI when the first quarter data came out and the opening.
Up process started happening.
Now I see lots of people getting super bullish on China, and our view is and has been, it will be domestic spending leading the way. It will be domestic spending on services, that's the biggest part of it. And if and when the rest of the economy starts to weaken as we have started to see for some Q two data, there's going to be some policy support coming out to keep the housing market from collapsing again, to keep infrastructure
from being a drag on the economy. But no two ways about it, we think China's going to have far exceed its official five percent growth rate target this year.
Seth Carpenter, thank you so much for taking the time as always, and we look forward to catching up with you throughout the weeks ahead as we continue to contemplate the pace of disinflation and the nexcess of China, which is actually really interesting, this idea that any stimulus could then reignite some of the growth that people have been looking for.
And it goes right over to the ramifications of thees ESB easier, good afternoon, folks here for fifteen hours. And what it goes over to, Lisa, here is the ECB and how they react to a hawkish hawkish fed.
Right, the idea of a hawkish skip, a super hawkish skip over to you, Christine Legard. Tomorrow we will hear from our here's the score in markets, an ASTAC still maintaining a gain app and tens of percent on the S and P down about a tenth of a percent. But I keep going back to what Jeff Rosenberg had to say about the Russell two thousand. There you're seeing a material decline, regardless of any potential optimism about perhaps fewer rate hikes or a temperate fed. That is where
you're seeing it sell off almost a percent. As people take a look at smaller companies and how much they're going to struggle.
Or they take a look at big companies, as we showed Apple earlier, buttressed ride up against those recent highs, a little bit away from being a three trillion dollar company, and to me, it's again I go back to my arch theme to Americas that have and they have nots and of course Chairman Paul trying to speak to both parts of our economy. Let's be honest, there's a huge part of America flat in.
Their back, which really is perhaps the reason why he started with saying our dual mandates, they want to support employment, they want to bring inflation down. That was a nod perhaps to some of the political pressures.
We're looking at the Marcus now the down negative two sixty six. If the vix is really cinteresting with a thirteen handle here fourteen point zero one on the Vicks and market close here will be very very interesting A good minutes away, fifteen minutes away from that, what we're going to give you a course is more reaction to the FED decision what it means for the American economy.
Torsten Slock has been absolutely on fire at Apollo. He will join Jay Barry, co Head of US Rates Strategies at JP Morgan and we're thrilled to close out with our team here on a FED Decide's Day with Ethan Harris, Bank of America, Head of Global Economic Research. When you'd say thank you to all of you, and particularly John Ferrell on assignment. We'll see in July the Fed decize. Good morning.
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You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg