This is the FED decides. On Bloomberg Television, on Bloomberg Radio, Tom King, Jonathan Fair, Lisa A Bram West John Off Today and really I've got to just go straight to the markets. What the FED said is we don't have any decisions about any further rate hikes. What the market heard is you're done, and you could see a rally in bonds. You're here seeing irrally in stocks.
Tom.
That caught my attention at a time when the FED is trying to parse through nuance and the market only here's one thing.
The most are so correlated and so abrupt, including Oil West Texas Intermedia almost getting down to a seventy nine handle, which the chairman alluded to in the final question on the war in the Eastern Mediterranean. But in the bond market, Lisa, what's so important here is these moves are so large. I have to go to a standard deviation analysis. Conventional financial TV doesn't capture the magnitude of the vote. You're seeing. David Rosenberg, always brilliant out of Toronto, I know, making
clear this is a FED that is done. And yet the singular point was Leastman of CNBC and McKee of Bloomberg, where he stopped in the middle of his conversation to say, we stand ready to be hawkish against this entire arc of we're done.
Q whether or not they've lost some credibility because he could say, we're prepared to hike again. We've made no decisions. We're going to have a consensus on the Federal Reserve. The market again really is starting to price out further rate hikes more materially. I will just say this in terms of whether the market is doing the work for them. He speculated that it was really persistent changes in financial conditions,
and it's too soon to say everything was hedged. Everything was going back to the notes, Everything was very rode. He did as much as he could, as little as possible.
Yeah, I'll go with that. And I like the idea that everything was hedged in the sense of we didn't near data dependency much, which surprised me. I thought we'd say, Okay, the jobs report, maybe we finally see a crap in an economy coming off four point x percent real GDP. I think that this was taken by the markets, which is really what I would focus on. The diwop two hundred and fifty points one point six percent move Nasdaq at one hundred and seventeen basis points of soft landing
in the ten year yield. The market is speaking volumes.
They loved what they hurt, and this is going to of course be due to revision with time, and we've known that the knee jerk reaction is not always the
one that sticks. But tom to me the fact that the market is jumping on this and that earlier in the day you saw yields tick lower because their funding announcement, then even lower, particularly on the long end, after economic data that came in weaker than expected, and then Chair Powell coming in and pushing them that much further lower as people expect them to be done.
Yeah, it's going to be interesting to see this, say least, We'll continue to monitor markets, and we have a stellar group of people to drive the conversation forward. Let's drive the conversation forward right now. Almost quoting off Star Wars, he was very far, very far away. A question from Michael McKee. Let us listen to the chairman here on what is out there.
We're going meeting my meeting. We're asking ourselves whether we've achieved a stance of policy that is sufficiently restrictive to bring inflation down to two percent over time. That's the question we're asking. We're looking at the full range of economic data, including financial conditions and all of those things that we look at, and then we're you know, we've come very far with this rate hiking cycle, very far.
Who nailed this the very far of it was William Dudley out of Berkeley for years of course at Golden Sachs and the former New York Federal Reserve President, huge value at Bloomberg Economics and a senior advisor in economics for all of Bloomberg. Bill Dudley, you and I were in the lofty, cool climbs of Marrakesh a few weeks ago. Is the international community confronted a unique American experiment, a dynamic fiscal inducement, a fiscal stimulus?
To where we are now?
Your essay in the last two hours for Bloomberg makes clear you have immense concern that the Fed, given the cards dealt, could get this wrong. What did the chairman not address in this press conference.
I think that he's quite confident that policy is restrictive enough to slow the ecomedy down. And I think the fact that we just had a growth quarter about nearly five percent calls that a little bit into question. Also to the notion that financial conditions are truly tight to enough to slow the coming down, I think is also pretty questionable because if you look at most financial conditioning indexes, the CHIAP, the biggest impulse towards restraint really happened last year,
not right now. So I think that, you know, maybe they have done enough, maybe they haven't. But I think the reason why markets are hearing this so confidently is he he feels very confident that FED has done a lot. It feels policy is restrictive, and so I think, you know, the market is taking away the notion that he thinks he's done. And obviously, you know that depends on how the economy of allso has to inflation, what happens to
the labor market. And another thing that the market is taking a lot of a positive signal from is he talked about how all these pandemic effects are washing out now in a good way. So labor market is becoming much more in balance, labor force growth is picked up. It's a very benign story about how this stall played out.
It's basically a story where the FED really hasn't had to do that much to bring inflation down, and the FED basically is saying we don't think we're going to have to do much more from here.
Char Powell also didn't seem to think that there was any casualty in pausing, letting time go on, and then restarting rate hikes. He said that that wasn't problematic at all. Do you disagree.
Obviously, if it turns out that they need to do more, they're probably going to have to do more than just one quarter point move. You know, if you've taken a break for let's say six months, and the evidence accumulates that Madre policy is not as tight as you think it is, and inflation expectations are starting to become un anchored, labor markets not loosening, wages are stuck at four and a half percent, then it's unlikely that one quarter point move is going to be sufficient to do the job.
So I think it's either zero or multiple rate hikes.
Which is the reason why I probably some people are looking at this like yourself and saying they could be on the brink of an error. There was a question about how financial conditions really played into the Fed's decision whether higher yields were doing their work. He had some nuance around this, talking about a sustained move higher. Take a listen to Chair Powell speaking on the issue.
Persistent changes in broader financial conditions can have implications for the path of monetary policy. In this case, the title financial conditions we're seeing from higher long term rates, but also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions. With financial conditions, we're looking for persistent changes that are material.
Bill Dudley, from your vantage point, does this give any clarity as to how the Fed is counting yields in their picture of what restrictive really looks like?
Well, I think I agree with him that persistence is what matters. I mean, bonials go up for a week or two and then come right back down. That's not
going to presert much restraint on the economy. You know, one problem I think that Chairman has at this point is by talking to the markets in a sort of supportive way, stocks rally, bonial's fall, that's loosening financial conditions, and so that's removing some of the restraint that was creating some impetus for not tightening laundry policy further, the.
Harder the matter to me, Bill, and I don't want to turn this into Dale Jorgenson's through three ratio course, and Juliet Coronado has been brilliant on this as well. So let's listen to doctor Coronado and doctor Dudley, Folks, and Bill Dudley said, barring unexpectedly fast productivity growth, there seems to be almost a hope and prayer Bill Dudley, that this time is different and instantly we have a new elevated productivity. Do you see any signal of this in post pandemic America.
I think it's really too soon to make any decisions about protivty at all. Protivy growth took a real hit during the pandemic, and then it picked up as we reopened. What the trend is at this point is very, very uncertain. And you noticed that Chapaul did not talk about protin growth at that trend changing. What he talked about was a labor force growth had picked up a lot because labor ports, participation on you know, adult workers have climbed a lot, and immigration I picked up. He saw that
as a positive supply side surprise. But I don't think that the FED, or or Eye for that matter, think that there is a pro to vy growth miracle right around the corner.
Bill Dudley's Wednesday, We're going to a job's report on Friday. Let's go back to Dudley and mckelviy, Gold and Sex a few years ago. What's an appropriate non firm payroll statistic? Not on Friday, but say three month moving average out where you can say all clear. And finally, we have a labor economy settling down? Is it sub one hundred thousand?
Yeah, it's probably in that ballpark. I mean, as pure Paul said, we are getting a surgeon liver force this year, but I think he also expects that that will peter out over time, and then you're just stuck with the growth rate of the working age population, which is probably only growing in about a half a percent a year, and so that's consistent with payroll gains of maybe one hundred thousand a months or even a little bit less.
So I think that eventually the FED needs to bring payroll growth below one hundred thousand if they're going to generate enough slack in the labor market to bring wage inflation down to levels consistent with two percent inflation.
Given the volatility that we've seen in the bond market, Bill, how concerned are you about a real blowback on Friday should we get a job report that comes in materially hotter than expected and we continue to see those upsides surprises that you say may post the biggest risk.
Well, I personally would not put too much attention on any one given economic release at this point because the Fed is basically said we are patient now, and so one economic report is not going to change their thinking. It's only accumulation of evidence to suggests that policy is not sufficiently restricted to do the job, which will cause the FED to start to tighten Entrey Pauls again, So I think we need to maybe downplay any single report
at this point. It's going to take an accumulation of evidence for the FED to decide that they need to do more on Luntary Pauls.
Bill Dudley, thank you so much, greatly, greatly appreciated this morning, folks. I'll send out the essay across all my social heres op ed is really must read some really good writing just in the last twenty four hours from a number of people within the zeitgeist. I need to do a market check here because this is an historic move. They say, I'm going to be as quick as I can only says you go to Michael McKee. The Dow up two hundred and fifty eight points, heading towards a one percent lift.
I got a one percent lift, SMP five one hundred up solid forty seven points, Nasdaq one hundred on fire up one point seven percent. That into Apple earnings tomorrow at Lisa, I should point out tenure yield eighteen basis points modest move as well, and the real yield Lisa craters two point five oh percent after my first glass of tang this morning, and we are down sixteen basis points on the inflation of just a yield. The operative word, folks, is never. I don't think I've ever seen that.
It has been a pretty significant move and continues to be as the session grows older. Let's check back in with our own Michael McKee, who is in the room in Washington, DC. Mike, do you think the FED would be disappointed to see the market's reaction to Fed shair j Palace press conference?
Not disappointed in that sense, clearly, If we continue to see this kind of drop in yields, it's going to take some of that market pressure off of the economy, and the FED sort of goes backwards a little bit. But I don't think they are counting on the markets being tight for a long time to completely do their job for them, because, as you mentioned just a moment ago, if you get a blowout number on Friday, then everybody's
going to reverse. I think the takeaway here is that the FED would like to be done, or at least at peak, and switch to the idea of how long, but they can't be sure yet. And I think the analogy I would use is the FED chairman is Potter Stewart at this point, the former Supreme Court justice who said that he could not define pornography, but he knew it when he sees it. At this point, the FED can't define what sufficiently tight.
Is, but meeting by meeting, they.
Will decide what they see.
So you kind of throw out the dot plot, which is what I was getting at with my question sem The markets can't predict anymore what the FED is going to do. They have to go into every meeting trying to assess what the FED will think about conditions at the time rather than some sort of objective data release.
Mike McKee and your tenure back to Arthur Burns, you were young buck there with Arthur Burns a few years ago. Have you ever seen a FED working away from theory, away from the orthodox They seem to be literally as you and Steve Lesman alluded to, making it up meeting to meeting.
Yeah, I mean orthodoxy changes obviously, and the time from Burns to green Span it changed quite a bit. And it's still a FED truism that the inflation is kind of the key to everything. But they don't know what's going on. The models don't work or haven't worked coming out of the pandemic. It's all something new. So they are doing their best to try to figure out what's going on without using some of the history based models and previous outcomes that they would have had to use
in the past. And this will in gender a lot of rewrites of monetary policy. Thinking, I'm sure.
Going down the road just to sum this all up, is strategically patient, the news sufficiently restrictive.
I saw that comment and I think it is. It sums it up pretty well. They are going to be patient they're going to have to have a good reason to do whatever, whether it's cutting rates, raising rates, they will not have to have a good reason to just leave rates where they are.
They could just go with the economy as they see it.
Michael McKee, thank you, and wonderful question. As always, strategically are you strategically patient?
Last night at nine pm?
I was not absolutely with the sugar highs, etc. But this to me really highlights what they're saying. And then you put the stock chart and you put the bond chart next to it, and you hear what the bond market is hearing. Just want to point this out to your yields four point ninety three percent, getting close to crossing that threshold into the four point ninety. No, it's a bouncing around, but just highlights what a massive move we've seen on the front end.
Massive is definement by the pros folks, and we welcome all of you not part of global Wall Street. People look at this strange phrase standard deviation, and all you need to know is you look back twenty days, forty days, whatever, twenty weeks and you try to figure out how much have we moved off the center trend. Jeffrey Rosenberg of Blackrock knows we've seen a standard deviation move. He is
with their systematic multi strategy fund. Oh, I can see you in the classroom as a freshman at Carnegie Melon Jeff Rosenberg going, what in God's name is standard deviation?
Did we get a jump condition today?
Jeff Rosenberg towards a less restrictive FED well.
As Lisa pointed out earlier, there's a lot of data coming out today, and so parsing out the reaction from the Fed versus the earlier you know, kind of main event behind the Treasury refunding is a little bit tricky, but I would highlight that the main differentiation is really the reaction in the front end of the curve, right from the refunding announcement.
That was really the back end.
As Lisa highlighted, a little bit of the weaker data on pmis also helping the back end rally, But the Fed market.
Reaction was really in the front end.
So I think, Powell, you want to look at the statement, and you want to look at the opening to the press conference. That's what they intended to say versus what the market interpreted from the Q and A.
What they intended to say was to try to be balanced.
Resiliency on economic growth implies we need to stay tight, maybe do one more against the tightening of financial conditions, which implies maybe.
We've done enough. That's what they were hoping to say.
Clearly, what the market saw was a preference for the worry of tightening financial conditions where at sufficiently restricted we can be done, and so you price out a little bit of probability for the next hike. That's the market reaction, as you went over in the earlier segment with Dudley. You know, it remains to be seen. The data will
dictate that. But certainly to your question, Tom big reaction, I think a lot more of that standard deviation move has to do with the refunding earlier a little bit coming out of this press comp How do.
You play this then, Jeff, if you think that the market is reading way too much into what Jay Powell said, which is trying to stick close to the script, although perhaps giving a different tone than people thought of, do you then sell to your notes and wait for them for yields to go back up, for them to cheapen and buy them back.
Well, you know, I think it's less a question about selling the two year note. Now, I think given the pricing and given the data that we have that Powell refer to two more inflation prints, two more labor prints, and what Dudley was just hinting at, You know, are we really seeing the degree of tightness. The degree is sufficiently restrictive given the trajectory of growth that we just came off of. Obviously no one expects that to persist.
But the risk there is that you're not pricing enough of the possibility of another hike, and so maybe you hold off on adding twoes for me at these levels.
And jeffrom while you said at black Rock and I understand there's an index play here, but there's some active management and you're watching everybody else in the game.
What's the bet of.
The market right now? Is the bet that we're going to get this fed done in a more dubvish, less restrictive tone, or is a bet, hey, we're scared stiff and we may move higher.
Well, I mean, you have a number, you have a couple of different cross currents on there.
You know.
Obviously there's been a lot of talk about movement into the long end, movement of retail flows buying the long end. That's very much kind of we're we're at or close to the end, and we're going back to the old playbook that you know, once the FED is done tightening, then you get a big rally.
I think I think you.
Got to be a little bit cautious about we're just simply going back to the old playbook, but certainly, you know there's a degree of that in the market. And then the other really big kind of consensus story is around the steepness of the curve, that the curve is just way too inverted, that you need to see normalization of the curve, all the factors around that. You know,
the refunding was a little bit of that. That that kicked in post the August refunding announcement Japan and the news on the boj and yield curve coroll, you know, deficit financing.
There's a litany of list but there's a.
Very popular positioning around the steepening, and I think the reaction to the refunding earlier today really reflects that very crowded steepening position that exacerbates that standard deviation move that we saw earlier.
Je If I want to go full circle to where Lisa and I were early this morning. Folks, we've been livecence two am this morning. It's really, you know, you know, quite something, And Jeff, it's about the commercial banking system of America, which the chairman alluded to maybe a little
bit and maybe not enough for my taste. Can we get a bond market that heals to take those bond losses and drift them away into twenty twenty five where things can even get better if we don't get a massive bond move, but just enough of a bond move. Is there really the strategy here?
No, And you did hear that question. It was probably one of the few questions on that topic. I mean, this is a historic move in terms of interest rates. So you know, even if you get a modest kind of cut in interest rates that the bond market in the second half of twenty twenty four is anticipating, that's nowhere near enough to kind of unwind the unrealized losses that you're talking about from this historic move from zero to five.
So that's really about.
A long term story of repairing capital and dealing with those issues within the banking system that if you kind of repair the funding concerns and that was what the bank term funding question was referring to. Then maybe that doesn't become a crisis moment, but it still becomes kind of a longer term drag in terms of capital repair that even a small rally is is anticipated in the bond market pricing for twenty twenty four isn't going to be sufficient to repair.
Jeff, you talked about positioning, and I want to go there because a lot of people are saying short squeeze, This is a positioning squeeze, and we've been hearing that a lot. How much is levered funds that have come into the treasury market. How much is that what's underpinning some of the incredible volatility that we've seen over recent weeks.
Well, you know, that's a tough one to sort of pin it on leverage. You know, there's a lot of drivers to that volatility into that uncertainty. You know, positioning and crowded positioning exacerbates those moves, and that can be levered, it can be unlevered. It can be just asset managers who favor particular positions.
I don't mean to interrupt to Jeff, but there's a difference between real money investors who are making a long term vet on treasuries and people who are fast positioning trying to make a trade. Or is the market right now being determined by the trading types not by the real money.
I mean in short term reactions, absolutely, right, leverage is going to exacerbate reactions to price movements. So I think it's really about you know, decoupling, and you said it earlier. You know, the near term reaction isn't always to any data point where whether we're talking about the press conference or on Friday to payroll or CPI, that near term move yes, that's going to be dictated by algos, it's
going to be dictated soon by AI. It's going to be dictated by the levered positions and crowded positioning.
But let's separate that.
From kind of the longer run impact of the fundamental signaling. And as you mentioned earlier, you know, you can have the near term reaction and then a day later or two days later, you know, it's a very different trend as we parse the totality of the data. But certainly very short term price reactions are going to be driven by those levered factors.
Jeff Rosenberg, thank you so much. As always for your comment on this incredibly important day. It was supposed to be a snoozefest. It was not absolutely certainly a live induction into it wasn't either because the refunding announcement as well as some of the economic data. But really what we are seeing is a market coalescing around the idea for now that the Fed is done with rate hikes for this cycle.
And this is completely outside left field, but I guess it's stay tuned for Bloomberg in Asia and what Yvonne Man will lead with its six seven eight pm as well. If you get a market like this in the West, if you get this, joy to the world. Is this the moment where the Bank of Japan can slide in and do something constructively about their busted theory?
Little EDATORI light, well blinker, I'm sorry they had to go there, well blank If you miss it, subscribe the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. 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