This is Bloomberg Surveillance with Tom Keane, Jonathan Perrow, and Lisa Abramowitz on Bloomberg Radio.
This was operation Say Nothing, where you basically repeat data dependent over and over again but didn't say which data, and then you basically had a little bit for everybody basically saying they are concerned about inflation, but recognizing that inflation has come in somewhat. This was operation do no harm and say nothing and get out of there as quickly as possible, which she just did.
Highly repetitive, sometimes tedious in a bond market, be able to well hire going into this decision lower following get the two ye yield is down Tom by about three or four basis points in a bond market right now TK four eighty three natty one.
Some yield was as good as a Gini smile like the New York Times pulling the Barbie movie here to give us the spirit of the American economy. January thirty one, two thousand and twenty four. Is he going to have a leguard like press conference first of the year the Fed like tomorrow's laguard press conference if he gets a GDP slow down, as we heard Bob Michael and Andrew Hollenhorst talk about I'm fascinated about the luxury he has right now of a buoyant American economy and if that
drifts away, I'm not predicting that. But if that drifts away, John, is it laguard like in January?
He is predicting it won't drift away.
Yes, very much.
The Fed staff is saying no recession in their forecast. Germany is living one currently. On the balance of risk around the economy, take a listen to what the Fed chairman had to say.
It's really a question of how do you balance the two risks, the risk of doing too much or doing too little? And you know, I would say that, you know, we're coming to a place where where there really are risks on both sides. It's hard to say exactly whether whether they're in balance or not. But as our stances become more restrictive and inflation moderates, we do increasingly face that risk.
If you ask that question twelve months ago, the answer was obvious. What's the biggest risk right now? Doing too much? Doing too little? They would have told you straight off the bat, The biggest risk right now is doing too little. We need to hike, hike fifty, go even more than that TK. The further along you get into this journey of Chairman Powll and co. The less obvious the answer to that he comes. And we're at that point right now.
We're post pandemic without a theory. And if you're at Berkeley taking your PhD, maybe you can figure out a theory post pandemic. But I don't see it. William Dudley joins us now. He's a former New York Fed president, has the immense advantages of years with Ed McKelvey doing market economics at Golden Seachs. We're thrilled that doctor Dudley could join us this morning. Bill, we got to wake everybody up after a summer press conference. You ancient pass Bill,
This is twenty thirty days ago. The great US Treasury bound route is far from over. What I have not heard today is a discussion about higher interest rates. What is your belief that we could see higher interest rates?
Well, I think the chair Pole made a very clear in the press conference that he doesn't see the need to go that much further.
You know, the very fact that it's sort of meaning by meeting now tells you that he.
Thinks that, you know, maybe there's one more rate hike, maybe there's no more rate hikes as we go forward. But that's a very different story than what does that mean for the bond market. Because bonnios are low relative to short term interest rates, I think there's a number of reasons why bonios could move higher. Number one, inflation is probably not going to average two percent over the
next ten years. It's probably going to average a bit higher because the Fed has an asymmetric regime where when they miss inflation to the downside, they try to offset that with missions of the upside, but not the.
Other way around.
Also, if you look at the savings investment balance, it's not as favorable now as it was before because we have a lot more investment programs motivated by Biden administration policies, and the savings is also affected by the very large fiscal imbalances that the US is likely to run for many, many many years. So that implies that perhaps the neutral Fenel fund rate consistent with neutral montrepoles a little bit higher than in the past. And then lastly, the risks
are two sided now for the bomb mark. Before it's all about I could homeole Pole bonds and if we ended up in a recession and the fat got stuck at the zero lore bound, the bond marker would protect me. But now we're a long way from the lower bound. So the risk of getting stuck at the zero lower bound seemed very diminished at this point, and the rest of inflation being sticky, I think is you know, remains a very relevant to the botmb linker.
Bill.
We had an article at Bloomberg this week, folks, John Authors and Isabelle Lee reported on the Strategy World and how absolutely it's brutal has been for Wall Street strategist Bill Dudley lived this at gulb and six years ago. How clear is the Dudley crystal ball right now? Bill? How how what's the vision you've got? Are you making it up as you go?
Well, I'm a lot less clear now than I was, say a year or a year and a half ago. I mean, at that point, it is very clear that the said was way behind it in terms of the need to type monitary policy. They were going to have to go to restrictive and they're going to have to move fast to get there to keep inflation from getting
control totally out of control. Now they're at a restrictive setting, and so the question is, you know, how how high do they have to go to be sufficiently restrictive and how long do they.
Have to stay there?
And I think, you know, they've been the kind of news has been breaking in a favorable direction in the sense that they're getting quite a bit of disinflation without actually affecting the growth rate very much or without actually putting a lot of people out of work. I mean, the fact that inflation has come down and the uniplying rates still three point six percent is really good news from the face perspective.
But my own view is, you know, I'm still where I was before.
I think the Fed's going to have to be you know, tighter for longer, and I think they're going to probably emphasize the longer piece. If you look at their you know, their forecast, they don't see inflation getting back to two percent until twenty twenty five, so they think the process still has a long way to go.
And I agree with them.
Bill, How important do you think it is that essentially this is a FED no longer are giving forward guidance.
Well, I think that's sort of appropriate, you know, if you've gotten in the vicinity of where you think you need to be and you're uncertain about what's next because.
You don't know if you've done enough.
You don't know much about the long and variable lags of Audrey policy, you don't know how financial conditions are to react, are going to react.
To what you say and what you do.
I think at that point you don't really want to get for guys, because the Ford guidance is probably going to be misleading as opposed to illuminating. So I think it makes sense for them to talk about, you know, going meeting to meeting. One thing I was a little surprised today was that there wasn't much talk about the long and variable lags of Madre policy and the need to slow down the tightening the rate of the tightening process.
Paul very clearly puts the September meeting back on the table, and I was a little surprised by that because the last meeting was all about the need to slow down and go at a slower pace, and now I find out today that male September is a lot of meeting.
Well, and he was actually pretty blunt that someone asked him specifically, how does this job with what you said at the previous meeting, and he basically was like, that's all I'm going to say about that. I'm not going to continue. I'm wondering whether you think it's actually more confusing that there wasn't dissent at a time where there clearly is a range of opinions and we have a feed schair just reading the same thing over and over again in response to everyone's questions.
Well, the lack of dissent just means that people are pretty comfortable with the general trajectory of where Mantre policy is today, and they're happy about the fact that inflation's coming down, and they're happy about the fact that's coming down without actually having to really, you know, push up the unemployer rail a lot. At least at this point. I think what's the problem that Paul is great for themselves is what do you actually do in September?
So in September you're going to have a coup couple of things.
If you decide not to hike, what are you going to show in the summary of economic projection? Are you going to sh show further rate hikes? And if you do show fur the rate hikes it's going to raise the question why did you do it in September, just like what we saw at the last meeting, And if you do hike, then the question is, okay, well, why are you going so much quicker now? And do you show further rate hes in the economic productions after a
September rate egg. So I think he's made it very awkward for himself in terms of tying the projections of what's going to have in the future to what they actually decided to do in September or decide not to do in September. In terms of keeping rates unchange, I think they've created a bit of confusion. I think it would be better to stick to the story of Madre policy long and verable legs. At this point, we're close to where we think we need to be. Therefore we're
going to go most more slowly. But he definitely puts September back on the table. I mean, he basically talked about the fact that we have two more and Plomber reports by until September. We have two more CBI reports before September. So he put the September meeting back on the table more than I would have thought he would have done. Given that he talked about the need to go more slowly because of long and variable legs.
So I found that a little bit confused.
Some people frustrated about this September conversation. Bill I tried to jump in to end it, but we can carry on if you want. Barry that wrote it, and he said this. Questions about whether they high in September were in name. He went on to say, the press conference went poorly given no questions about fiscal policy working at cross purposes with monetary policy, nor any questions about the deep curve inversion of impact on small banks and the
supply of credit. Bill, can we pick up on the first piece just briefly, Where the fiscal policy right now is working at cross purposes with monetary policy?
Do you think it is?
Well?
I don't think fiscal policy is stimulative right now in the sense of the fiscal impulse. But we have very large chronic budget deviicits and those budget deviaits that are going to continue as far as the eye can see. So the way that plays out is it means that the demand and the pool savings is higher because the government's taking down so much of the supply of savings. Over the next year, we're going to see a lot more treasury supply.
Right now that the debt limit prices behind us.
The treasures can be ramping up their borrowing needs very substantially, and the Federal reserves is going to continue to sell. Can can continue at nine hundred billion a year of treasuries and Morgan securities throughout. So they've made tremendous amount supply, and I think that's weigh on the bond market.
Bill.
The hallmark of your work at Gulben secs Ages ago was an optimism about the American economics experiment. The most memorable moment today was Jennie Smilek of The New York Times folding in the Barbie movie into a discussion with the Chairman of the Federal Reserve about the resiliency of the American economy. The smart guys like you, everybody assembled in the room, everybody in the economics racket. Do we just get wrong the resiliency of America?
Well, I think that we have gotten wrong the resiliency of the US consernaert. I think what's driving it as the fact that during the pandemic there were large fiscal transfers from the federal government to the household sector, and household sector basically did three.
Things of it.
About a third of that was spent, about a third of it was used to paid on debt, and about.
A third of it was saved.
And so coming out of the pandemic, the household balance sheets were in much better shape than they typically are late in the cycle, and I think that's why the US consumer has been pre resilient. I think the point that Gino was making was just that, you know, going to Barbie uh in a in a theater is perfect example of discretionary mess of you know, discretionary consumption. People can decide to do that or not that decided to do It's not sort of core necessity.
And so the fact that the box office.
For Barbie and Openhearmer were so good was was was sort of evidence from from her perspective that the consumers still got some life life in them.
It's a surveillance movie. Ask did he go?
You gotta ask again, Bill Dentley and I'm bomping. So if you want to know, you can find out Bill, did you did you watch it over the weekend?
No?
I went to the mission possible. I haven't gone to Barbie or Openham. That's not the that's on my plans.
Though one're there that we're doings conference in the next week.
Kem Bill, Thank you, sir as always both incredibly insightful, lived it at the Federal Reserve as the New York Fed President. If you are just chuning in, welcome to the program this afternoon. Good afternoon to you all. The Federal Reserve. Hikin interest rates twenty five basis points the Federal Reserve chair saying that he believes monetary policy is restrictive.
There was a moment in this news conference when Mike McKee, our good friend and colleague down in Washington, DC, asked about that and pleased to say that Mike McKey joined just now, Mike, the evidence that policy is restrictive, can you point to it?
Well, he's point of the fact that inflation has come down, in that the Fed funds rate is now above the CPI in all cases, in both core and headline, and that real interest rates are starting to rise above zero. So they do see some restriction on the economy. But I think one of the key things he said was in his answer to me when he said policy has not been restrictive enough long enough. He doesn't want to put a time frame or a actual number on what
restrictive is, but clearly they could be there. They just have to leave it there longer. This was a man who wanted to basically keep his options open and not get tied down to anything at this point.
Mike, what does this twenty five basis point move due to our listeners and viewers I get and what this was alluded to by a number of our guests, big impact a year ago, two years ago. What's the impact today of this lift for housing, for food, for the day to day life that we have.
Well, it's probably not going to have much of an impact overall in a twenty five basis point, since it's the cumulative amount of tightening that's been done. That's what Jay Powell has been referring to over the last year and a half, where they've gone five hundred and fifty basis points.
Now, what you're.
Looking at is decisions made on interest rates for a period of time. You don't buy a house every day, you don't buy a car every day, you don't spend money investing in a new factory every day, So it does take time for that to work its way into the economy. They don't know how restrictive they have to be. Clearly, they haven't been restrictive enough in the housing sense because home prices have still been rising. But overall they're getting close to that area.
And I don't think that.
The average American is going to notice really anything different about this twenty five basis point move Mike.
Every time the FED has a meeting, you sit there, you listen to the tenor the potential staffoos, the way that people ask questions. Today you heard a very repetitive, very stick to the script J Powell. There was no forward guidance. When was the last time this Federal Reserve gave no forward guidance about what they were planning to do or how they even more thinking about the data that's coming in.
Well, it's been quite some time. The idea today, and I said this before the meeting, was that come in, do make as little news as possible. They were locked into raising rates because the market had decided that's what they were going to do, and so the Fed went ahead and did that, and beyond that, they tried basically to leave their options open. Jay Powell was very scripted as you heard he did sound more relaxed than he did at the last meeting or the last couple of meetings.
So from that sendpoint, Lisa, you could say maybe the vibe was they're getting close to the end, and I'm not sure at this point that they would raise rates again, but they don't want the markets to walk away from this thinking that they're going to do one thing or another, so they tried not to really give any guidance.
We're covering vibes of news conferences now with Mike McKay. Mike, Thank you, Sir Dan in Washington, d C. Appreciate it as always. Here's the runway the Canada for you. September twentieth, the next Federal Reserve decision Jackson Holl of course, in between this meeting and the next mating for the data August fourth for Payrowsugust tenth for CPI, September first for payrolls, September thirteenth for CPI. So TK two of each CPI and payrolls. It's fed meeting and you can take away
from this meeting, this news conference whatever you want. That conversation can change very quickly based on two prints of CPI and two prints from payroll.
At Lisa Naillen. She said, it's this completely data dependent. I'm going back to I don't think there's any theory involved here. I don't think there's any textbooks. That conversation we had before the press conference was just absolutely brilliant on the ambiguities of the moment right now with clarity. Because he has to manage money, Jeffrey Rosenberg joins this portfolio manager of black Rocks Systematic Multi Strategy Fund. Jeff, my deepest sympathies. You have to have a conviction, a
belief forward. What is your conviction now? Given the ambiguities we witness today, I think we have a little bit of silence here.
A tennis takes there. I don't you know, Jeff put it on me.
But the ambiguities here, you know, the the ambiguities here are important.
And John, I know that you're in the team meeting and Lisa starts throwing stuff at the screen. It's like Brown, You're I'm going away to.
I'm going away tomorrow, and you guys are running the show. I'm going I'm going deep to the Northeast. I'm just going it's just going to be I'm going away for months. It's going to be like a Sabbatan.
You're taking a month off.
Taking a month off, and and you guys have the former vice chairman of the FED and the arch question to Vice Chairman Claid I believe scheduled tomorrow in Bloomberg Savants in the morning. Check it out, folks, And I'm John, John, I'm sorry. The arch question here is Claire To saying we're not going back to We're not going back to two percent. Nobody Powell's not talking about. I don't think anybody else really is Claire To out front of.
I'm with you.
The standout call from former Vice chair Rich Clarider, together with Pimco, came out in the Secular Outlook a couple of months ago, and ultimately it's this underlying belief that they will tolerate higher above target inflation of two points something. You've got some indication of that, just a hint of it. When he talks about we're not going to hike until we get to two percent, that's ridiculous. And also, by the way, we don't think we're going to get to
two percent until twenty twenty five. And within that I think there is a message ramo that they are willing to tolerate two points something because they're willing to tolerate above target inflation from here all the way out to twenty twenty five.
If the Fed chairs correct.
You know, you pick up a really interesting point because it highlights the uncertainty around long and variable lags. He's saying that if we wait until inflation gets down to two percent, we will have necessarily gone too far. Okay, well, then how long do you have to wait before you understand what the ramifications of what you height? Is this a concession that you're willing to go to two and a half percent?
And that is.
Really what people are trying to purs you. Basically people are shrugging off, viewing this as a non meeting.
That's my view. We haven't talked about this enough though, and I think Jean Balvan of Blackrock congratulations by the way, for bringing this up repeatedly. What's the appropriate time horizon, the appropriate period to bring inflation back towards two percent?
What is it?
So one man's tolerance of above target inflation is another man saying, well, actually, we just need longer. And if he says twenty twenty five. Isn't that just him saying like, this is going to take a while, and I don't want to crush the economy to get there sooner.
Well, I think that that's a great point. I think the Fed said that that they're willing to be patient but persistent at that point at what the issue is. Will it become a self fulfilling prophecy at some point exact inflation.
Becomes Is there a window that's what you're getting out?
Yes, thank you, I appreciate that. That's helpful.
Well, it's a long day, I feel the way.
You know, you can film my sensitors, you can film my sentences as well. I need it sometimes too, Bramar, Is there a window where they need to address this before it becomes embedded? Right, You've seen what happened with ups and what almost happened with teamsters and the strikes. What are we talking about here? Five percent wage shikes? They're not going to be alone.
No, And we're already seeing that pretty much across the board. And people talk about the tight labor market. But that changes the scenario in this profound way. This is the issue that a lot of people are looking at, and yet you're seeing that divide, whether it's Bob Michael or whether it's Jimbianco.
You see the divide and the wage thing is critical because a lot of people they don't parse out unemployment, right, they don't parse out this, that and the other thing.
They are only in singularly looking at wage inflation. Through all this debate of if folks say, what's this meeting like versus the other ten meetings we had, and I'm going to go to the great observation of Neil Datta that we finally have a legitimate real wage in this country, and that changes the emotion the behavior of people, like the bombshell from Drew Matis earlier this week, really pushing against the gloom we heard from our guests where he says,
you got a legitimate real GDP forward. Part of that, John is a legitimate wage growth, which I don't think is within the debate right now. Inflation worry.
We're worried inflation worry.
Read, I'm not worried of I'm getting a payridet.
No, we worry about that.
I think you know, I've always find it weird when the economists say, you know, this is uncomfortable, wages are too high, and like everyone else is just like, there's nothing uncomfortable about this.
You know, that's what I want to happen a year end. I want to pay rice.
And we heard JJ Powell really speak to that. He basically said, you know, we want this. It's a good thing that wages are going up faster than inflation. And yet is it if that's the goal to get down to two percent? This is the conundrum. And he tried to parse it through by actually saying nothing.
At least you and I will try and say something tomorrow, Monic, we'll be here alone with our TK. I think tomorrow there's going to be a conversation about something. Might the key talked about in the news conference. What's restrictive and what evidence is there that we are restrictive right now? This is what the chairman said. The FMC believes monetary policy is restrictive. He did acknowledge that it's not restrictive enough for long enough, so they need to hold it
here for some time. But ultimately, if you look at the real Fed funds rate, it's at a meaningfully positive level. Okay, well, let's look around what evidence is there off that right now? And I would go one step further. What evidence is there that disinflation we have seen so far is a consequence of the tightening they've delivered if they believe there
are these exceptionally long and veriable lags. And I would go to what Neil Data said at Renmac during this news conference, and I'll redoubt what he sent to me private Lybert He's happy for me to share it with you all. He said, the FED remains wedded to the long and verlable lags hypothesis. After eighteen months, we've seen home prices accelerate, stock prices accelerate, auto sales accelerate, and
lay off sync. Long and vailable lags is a concept that might be outliving its usefulness now for the same people looking at the same evidence. You can have one individual brander that turns around to you and says, I think the long and vailable lags are a whole lot longer. And someone else can make the same a different case with the same data and say, you know what, I think they're a whole lot shorter. They just haven't had any effects yet.
And anyone who's looking to the FED for guidance forget about it, because they're not going to give you any and you know, basically what I heard was a chair moving the goalpost saying, Okay, it might be restrictive, but it hasn't been restricted for long enough. So is this a new criteria that it has to be long enough that you put that X axis long enough and then that will take place. They don't know, So how do they communicate?
We don't know.
We're experiment. I think out of this conversation and this is Ed Haim and Evercore is SI and I thought Michael Dart of Roth MKM was just brilliant today on this. There's an entire monetary or money side to this, including something no one talks about it anymore, which is M two. I mean, if I was down there with Paull asked me a question, I'd say to Chairman, your PhDs tell you at the FED that M two doesn't matter anymore. Velocity doesn't matter. Europe just announced a crater in loan
demand with a slowdown. There is well, what's the viscosity right now of the American system? Bob Michael's here. I saw him. He's on his phone doing commercial real estate workouts for Jamie Diamond while he's sitting on setting commercial good boardy Bob.
Thanks for be it was fantastic.
By the way, You've taed up Europe quite nice because I'm trying we shift away.
Trip to cover the ECSS sabbatical, but Madame Leguard would like me to be here.
The European Central Bank decision is tomorrow, and it's worth repeating that Germany is in recession. The data is absolutely dreadful, and inflation Lisa is still sticky.
And this is the fear. What happens if this ends up being a similar story in the US, if inflation reaccelerates and growth slows down. We didn't hear that from Fred jo J. Powell. His base cases we avoid a recession and we end up bringing down inflation to two percent the goldilocks. He's leaning into that, and yet.
Yes, I don't think he's I don't think he's leading in the goldie locks. I think he's worried about Bill Dudley's outlook, right, you know, he's just just they don't want to make a mistake on the upside. They do not want to cut before they're certain. That's the emotion of the discussion.
I asked the question Tom earlier whether the biggest risk right now is cutting too soon or holding too long?
And I think I'm with you at the biggest risk.
If I missed the damn golf stream at titoborough never month.
I thank you for the news comfort.
I was checking the trade schedule at the same time.
You want it out to sell.
This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. 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 Bloomberg