Bloomberg Audio Studios, podcasts, radio news.
Chairman pell fascinating news conference, the most interesting news conference we've seen with a FED share in quite a while. Let's start with the price action, a big portion of uncertainty with a sprinkle of transit tree equity markets rocketing.
We're up by one point five percent on the S and P five hundred on the NASDAG, up by one point nine on a Russell, up by close to two in the bond market, two year, ten year, thirty year yields down and down hard at the front end of the curve by five basis points to three ninety eight. Check out the commodity market, gold all time highs intra day up by about a third of one percent.
There's a couple of interpretations here. Here's one.
It's the bad news, so they've downgraded the outlook for growth but haven't responded by projecting additional cuts. Here's the good news, and this is what the market seems to be leaning on just a little bit more, and a FED chair spoke to it. Based on the forecast, the FED believes that any upward revision to inflation in twenty twenty five won't last beyond twenty twenty five into twenty six into twenty seven. On that and more, take a listen to what the FED share had to say.
It can be the case that it's appropriate sometimes to look through inflation if it's going to go away quickly without action by us, if it's transitory, And that can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly, and would depend critically as well on inflation expectations being well anchored longer term inflation expectations being well anchored.
A willingness to look through this perhaps reinforced by this take on you, Mitch Michigan. Inflation expectations reading is an outlier.
Okay, going back, there's a lot to unpack here. We can talk about you Michigan and how much that actually did or did not inform the back of twenty twenty two, and why it's less relevant now. The point of transitory
is a key one. This market is looking through the downward revision to growth, the stagflationary like circumstances that frankly defy logic for why that should be good for risk assets and points squarely to this belief that the Fed has resurrected transitory it is going to cut rates in the face of weakness.
What I find fascinating is John, you mentioned it correctly. Does see gold go out to a record high two thirds of the ways of the press conference, Folks, I've never said that in the technical destruction of the equity markets, to see the Dow and the S and P popped the way they are, by no means do they have some buoyancy of a bicygnal. I mean there's some damage out there from the politics folding into what he has to deal with.
The market reaction carries a lot of way, and right now, this equity market, it's rallying, going into the closing ball about forty minutes from now. Joining us on the program to react, the former New York Fed President Bill Duntley Bell three poun acts. We've wrapped it up, We've had the full cost that decision, and now the news conference. What's your reaction to all of the above.
The summary of economic projections is actually a bit hawkish in the sense that they that keep down graded growth and pushed up inflation, and the dot plots, you know that plot did shift up. They didn't shift up enough to change it from two to one rate cut this year, but they did did shift up.
Powell then came in, and I think he gave.
A pretty dubbish performance in the sense that you know, we got this, We're in a good place, we can afford to wait, we'll see how it goes, We're going to get the job done. So he I think was pretty reassuring to people that this was all, you know, quite manageable. I think the reality is, I mean, growth outlook is worse, the inflation outlook is worse, and certainty is a lot higher.
I'm not really sure how you parse that out as positive. But Paul put a pretty dubbish spin on it.
Bill that's where transitory comes in. It was resurrected, the word that was once left for dead. Thought to look through some of the tariff induced inflation, saying it probably would subside. What do you make of that, because it's giving a lot of confident to this market.
Well, one thing that he did talk about was inflation expectations, and he basically said, look, there's only one indicator that's really shown a significant increase in long term inflation expectations.
Everything else looks fine.
So he's basically telling people if you can ignore the University of Michigan long Term inflation Expectations measure, which has shot up very sharply the last month or so.
So that's reassuring.
So I think people think that's got this, you know, I think the reality is they're flying blind. They don't really know what's going to happen to growth, they don't know what it's going to happen to inflation, and you know, that increases the risk of making a policy mistake or just being late.
There's a book years ago, Bill Dudley, with a chapter by Bill Dudley and Ed McKelvey, and you set off of Patrick O'Brien. There's not a moment to lose, how x post is this fed? They're to me not, It is not a moment to lose.
They are weight.
Wait, wait, isn't their their best outcome?
Well, I don't fault them for waiting.
I mean, I think when uncertainty's really high and you're in the economy is in a pretty good place. I mean, on inflation's rates running two and a half three percent, the unemploying rates around four percent, you know, staying here, you know, and definitely would not be a really bad outcome. So I think that's what gives them the ability to wait,
because you're the starting point is actually pretty good. Another thing I thought it was interesting about Pauwell's remarks is he started to minimize the soft data that's showing a lot of weakness and said, we're really sort of focusing on the hard data. We haven't seen weakness in the hard data yet, So that was also reassuring.
This is what Marko Khlanovic formally, if JP Morgan has to say out on excess afternoon, not in a hurry means we will drag our feet when things get worse like in the fall of twenty eighteen. This is not bullish at all, but you've lived a lot of this in the past. Is there a risk of a repeat of twenty eighteen here?
Well, I just think there's a risk that the FED will be late, because if you have to have the information in hand before you act, and they're long and vera lags of monetary policy, you're not gonna uh to the necessary action in a timely way. I think that the same. But at the same time, I mean, which way does the FED lean? Do they willing against the
inflation or do you lean against the growth side. That was interesting in the summary of the economic projections also didn't get a lot of attention, but people's assessment of uncertainty about inflation and employment both went up. Their assessment
of risk to inflation and employment both went up. But I think that's really what tells you what's what's bad about the economic outlook now is that this dispersion of possible outcomes is pretty wide, and we just don't know which which way we're heading.
Bill, you said that this is a FED that's flying blind and essentially fed.
Char J.
Powell said it as much when he was asked why there was this ongoing to rate cuts priced into a market where you'd had some pretty sizable changes to growth and inflation, and he said, what would you write down? It's really hard to know how this is going to work out. Is there any time in history, Bill that you can think of where the FED was as flying blind as they are right now?
Well, I'm sure there's been other times.
For example, you know, when you had the two oil price shocks in the nineteen seventies, that wasn't very good. They had a great financial crisis in two thousand and seven, two thousand and eight, you know, the week Lennon Brothers failed over the weekend, and then the FED was meeting the next Tuesday and Wednesday. So that was probably a pretty flying blind moment. So I think there's been other
times like this. The good news is that you're economy, as Chair Paul made it clear, is starting from a pretty good police That's the important part.
John Pharaoh, David Rosenberg just out on Twitter right now. Really, this is the insight that I had with Boby Michael before. A four point four percent unemployment is a single stick one hundred basis points above the three point four percent low. You got to go back to nineteen forty eight to see that abruptness without a recession.
So we had some deterioration last Summer's Home. I'm with you, but it turned out to be a head fake, and the Federal Reserve was somewhat unerved by going into Jackson Hull and Sick noted some reaction to it, Lisa, and they followed up with a hundred basis points of interest
rate reductions. And here we are again, and we're trying to figure out if the soft data and the deterioration we've seen in the survey data is a head fake or not on whether it will translate into softer heart data down the road.
And it seemed like this was a FED more willing to say maybe it is a headfake with respect to soft data, and not necessarily emphasizing it as much as say, the hard data at the same time reducing their forecast. I wonder if we're making too much of the dots. I wonder if we're making too much of all of these utterances when essentially you have a FED chair himself saying we have no clue, we don't know, we don't know inertia, we kept it the same because what are
we supposed to do? And so there is this element where you have to look at this and say, on a fundamental level, is monetary policy still in the driver's seat at this point or is this a fiscally fiscal policy driven market and frankly an economically driven market that the FED cannot really engage with in a constructive way.
So, Lisa, for moments like this, I wouldn't put too much weight on the forecast because the chairman is telling you, we don't know. I'd put a lot of weight on the communicated reaction function, how they're communicating, how we'd respond
to certain information points. And Bill, I wonder what we've learned today If we did get a deterioration in the economic data over the next several months in the hard data, have we learned that this FED would respond to that, or would this FED weight because I think that's critical for a lot of investors. Are they constrained it's the easy bus now constrained by the inflation uncertainty of the next twelve months.
It's definitely constrained to a degree. I think the thing to focus on is the unemployment rate. If the unemployer rate stays where it is, then the fact can wait. The underplanner rate goes up to say four and a half percent, then the FED has to worry about the whole thing giving way. So I think the the tightness of the layer market, how the layer market's performing, is
really important. That itself has a lot of uncertainty because remember, the growth rate of the labor force this year is to be much much slower.
Than it was in twenty twenty three or twenty.
Twenty four because very little in migration keyportations so speak, slow down in the layer force growth.
So what that means is you can have growth and not have much change in the unemployer rate.
So I think the unemploy rate is the summary statistic that I'd be focusing on.
I agree with that, doctor Dudley. And my question is, is a four point four to four point five percent YOU three unemployment rate? Is that the same as a YOU three unemployment rate of ten or twenty or thirty years ago.
Oh, I mean, I think the unemployed rate consistent with full employment has come down over time.
Part of that's due to the aging of the population.
You know, older workers are employed at a higher percentage of the time.
So I think, you.
Know, the fed's view is that we're basically at full employment right now four percent or so. But if we go it to four and a half, the Fed's going to be starting to worry that this whole thing is unwinding in a bad way, and then they'll be really assessing is if inflation bad news bad news transitory or is it getting into into into inflation expectations.
It's difficult to say. With that, you might build that this FED is a is in a good place. Do you think it's in a good place.
Well, they're in a good place in the sense that the the starting point for the commie is in a good place. They're not in a good place in the sense that they're being hit with shocks that are bad for growth and bad for inflation, and they don't really know what the policy is going to be yet.
So I think they're not in.
Good shape in the sense that, let's put it this way, they like where their car is sitting today, but they now have to drive down the road a very big foggy environment.
Hi.
Bill, thanks for having to make sense of it. Appreciate it. Built down be that the former New York FED president lates, after a conversation like that, you wouldn't have guessed the equity market is up by one point percent.
On a SMP.
I don't go understand in any way why a stagflationary environment would be positive for risk assets. I think that that was sort of what Bill Dudley had to say as well.
You raised a point though, if this is a FED that.
Still is going back to the transitory idea and believes as their base case that these tariffs are going to have a one time inflation ramification, but that will die down, then why wouldn't they be more inclined to cut rates in the face of weakness, And that goes to this dubvish aspect that's being reflected in markets.
Mi McKay joins us. Now he's run out of the news conference to catch out with us. Michael McKay, the T word makes a comeback in the news conference.
What was your reaction, Well, it did cause my eyebrows to go up a little bit, and I wondered if he had been warned against that. But seriously, you guys had the smart people out ahead of me, Bill Sadley and Lisa brahm Witz. I agree with both of the things that they said. That Bill Dudley said, this FED is lost, and I think that is the case. They don't have any idea what's going on in the economy.
And as Lisa said, you really can't believe or take seriously anything that they projected today because they don't know. This stuff has a half life of the next tweet. So at this point, the FED is just trying to reassure the country, which probably explains what we're seeing in the markets today. Is that J. Powell sounded like he was reassuring, But I wouldn't take any message out of this. Everything after that, he said, after good afternoon, I would sort of put to the side.
What did you make, Mike of his complete dismissal at the University of Michigan sentiment survey.
Well, that's this kind of standard thing for Fed officials, the old uh. We watch what they do, not what they say, and people have The inflation numbers in these surveys have been distorted a lot in the past because people don't really have a good handle on what the inflation rate is. They just know their grocery prices are going up. So I can understand why he said that, And it was just a one month move in the
longer run. The shorter run has moved up for a couple of months, So I think this is maybe a little whistling past the graveyard in terms of not trying to give the impression that the Fed is worried and going to have to take some action.
Mat McKay appreciated the updates, looking forward to your conference frant today and into the weekend as well. Lost the process here, equity is up nice by one point two percent on the S and P five hundred. That bounce continues with us around the table to close things out. Amandalina of black croc Amanda.
Where to begin? So lots of process here.
One thing we haven't talked about enough, and Lisa mentioned it coming into the decision, a reduction in QT.
How important is that to this market?
Well, good afternoon, thank you for having me. Two things jump out to me. One is going back to the growth inflation mix being more challenging. A lot of this was baked in heading into this expectation, and so I think that's part of why we're seeing the market reaction. We've had just such a bruising few weeks in the equity market. Most forecasters have reflected a lower growth and higher inflation, and I think that's part of what's driving
this here. And I would just underscore something that Bill Dudley said, which is I think this just makes the growth backdrop all the more critical because the FED is telling you that inflation will not allow them to be responsive. And so really that one point seven percent growth in the s SEP slightly below trend that really has to hold up for risk assets to validate this move, because the Fed's telling you that they can't respond as it
really to QT. I think maybe that's why you're seeing some modest relief in longer and yields and in the bond market. I think on the margin that could be somewhat helpful versus the counterfactual, but I don't think it's the main driver.
I think the main driver here is that.
A lot of this bad news was baked in heading into this expectation. A more challenging growth inflation mix is the base case, and I think it warrants some widening in credit spreads.
Do you think it's positive that he resurrected the transitory word.
I mean, I think it was accompanied with a healthy dose of we're not quite sure what's going on, I think so, I don't. I think the market is kind
of looking through that. But from my perspective, his kind of reinforcing that the labor market is still in a solid place is to me the key thing, because if you think what's driving the resilient growth that we've seen over the past few quarters in the US, it's the consumer in aggregate, if we have a higher layoff rate, so if corporates start to be concerned about margins, they flex that layoff tool more aggressively, which is still quite low that's a situation where that weakness that's so far
confined to the low end consumer could extend more broadly. So what to watch micro level commentary, high frequency data on a labor market, capital markets functioning right, like the idea that corporates can issue just at a higher cost. That's fine for market functioning. I think where the FED starts to get concerned as if the markets are frozen.
There's also this question of the long end of the yield curve and why it should go down. If this FED is biased to looking through any inflationary shock as simply near term, if that is their base case and we will not know for a longer period of time, does that raise concerns about longer term entrenched inflation, especially at a time of global fiscal releveraging.
Absolutely, And I think our base case is that longer end yields are structurally higher.
Right.
So that's the view across a variety of platforms at black Rock, and I think right now what we're seeing is that treasuries are not a reliable hedge in risk asset underperformance. And so what you've seen, you've seen to a certain extent, treasuries can rally when there are growth can but it kind of peters out at a certain point. And really for rates to rally significantly, you actually need to have more valid recessionary like concerns.
You can't just have a growth slow down. So what we're.
Seeing is that it's almost like a quasi hedge, but it's not a firm hedge. As for the inflation expectations, I do think it is concerning that they're not expecting inflation to get back to target until twenty twenty seven. Similar message from the ECB Frankly, where President Leaguard said.
It's going to be a further path.
When you think about the spillovers of German fiscal spending right, higher bund yields. These markets don't operate in a vacuum, right, So equity is verse credit or you're versus us, and so I think we are bracing for structurally higher rates and structuring higher inflation.
If we have one point seven percent, and if we get the X axis were on and it extends, that tells me Republicans get tossed out of Congress just as one talking point, and it'll be huge pressure. Does it just evolve down to price up, yield down? And we go through four percent. As Bob Michael told us the conference.
I think, I mean, I think you asked earlier the unemployment rate that's really problematic for consumer credit. Five percent is the metric that we're hearing that things really become problematic. But I think on the way to that journey, so when you start to get to four and a half percent, I think you start to get concerning. It's the velocity of that move and then and often these are nonlinear, right, so the deteriation happens quickly, as we've seen in prior cycles.
I think that is very concerning.
But to me, it really just hinges on Sharpal mentioned a low hiring, low firing environment. If that firing picks up, that's really problematic.
That's exactly where I wanted to go. Tomorrow morning, I got thirty Eastern time jobless claims drop. Help me understand the scenario. If we start to see some weakness that, how will markets respond to that? How will we think about the federal reserves response to it?
I think markets have front loaded it a bit. You've seen some widening in credit spreads. European credit is still holding in well, So I think that points to the US concern. From my perspective, the FED, though, is somewhat constrained in how they can respond to.
That given the inflation backdrop.
So I think that's why the deterioration in the growth backdrop is so important to monitor. And it's also probably more critical than it was even a few months ago, because a few months ago the expectation was inflation will
continue to cooperate. If further progress on inflation is delayed, then you somewhat have one hand tied behind your back in terms of what you how I guess the question is how much of a growth deterioration needs to occur before the FED can react, and it seems to be that the bar is pretty high for that.
That's another way saying bad news is bad news if it is bad news over the next few weeks.
Especially when accompanied with even your term inflation. I'm just struggling to understand what kind of offset they can provide by cutting rates at a time or inflation is a concerned I just keep going back to that and this question about how supportive that will actually be. I guess that if the news is bad enough and they cut rates, it'll still be bad. But you also might get a little cheaper borrowing.
Cause this goes to the wait and see. Confidence was a word that came up in that news conference. How long before you have any confidence. I'm not sure anyone can have any confidence right now. How long do they have to wait before they see?
Well, that's that's what I think makes the high frequency data so valuable. And as we saw during the pandemic, it was the company commentary that actually shined the light on how pervasive the supply chain disruptions are.
I think that's just.
Underscores the point you have to be invested for a wide range of growth, inflation and policy outcomes. All right, So it's not even just the growth inflation mix, it's the policy mix. So incorporating floating rate exposures, real assets, inflation hedges, those are all things that are really valuable because I think there are just so many paths on this probability tree that we really have to position for all scenarios.
When we were coming into twenty twenty five, there was this belief that we have on one hand a FED put and on the other hand a Trump put. Trump put still out there is sort of a question mark. The FED put people are saying, well, maybe they're going to be willing to step in. Can we really frame the issue in that kind of way? I guess that that's sort of the fundamental question of today, where the market's treating a duvish response from the FED as being
positive for risk assets. Is that is that the new paradigm?
Is it the old paradigm?
The one thing that jumped out to me from chair Pouse comments. Previously he had talked about that they would respond to an unexpected weakening the labor market. If the now base case is four point four percent unemployment, then it seems to me like you'd actually have to have something beyond four point four percent unemployment to step in
and respond to that. So I guess it's saying that the bar is actually high, because right now they're telling you that they're expecting some weakness in the labor market beyond that.
Unlike the three of us you went to class on Friday at Villanova years ago. I mean remember this, well, when you study stagflation or hints of stagflation, there's a point where every central bank has to choose price change finance or jobs, jobs, jobs. I see no indication of anything, but they're going to capitulate to a higher unemployment rate down the road and ignore the rate markets. Is that the way you read it?
I mean, I think that's what their forecasts are telling you, is that they're baking in some deterioration. And so what does that mean for risk assets? Stag A stagflationary environment is unquestionably negative for risk assets because in that scenario you have a bit of a double whammy of wider spreads and higher rates.
We don't do logs as late we've all been since five am or four am, But the answer is as nonlinear, is it?
That's really what that's right?
And I think I think that's right, And I think when you take a step back, yes we've had some widening and credit spreads, but all things considered, we're still really tight, and so we're baking in an expectation for an ongoing rebuild of versus premius.
So I think the market.
Is rallying today because this was not as hawkish as it could have been. I think the risk coming into this was maybe we just saw one cut in twenty twenty five, we kept the two. But going forward, I think we should be baking in some widening in credit spreads, and we would do that as an opportunity. And I heard your conversation with Bob earlier. There is a lot of demand on the sideline, So I think being opportunistic is really the key to take it.
You say the same thing, how much appeatize is that's a.
Fix thing case we are And I think I would say save for the lowest quality pockets of the market where for example, triple C interest coverage is still below one times, and so that's a very tenuous place. But foreign demand, yield based demand, long duration spread product, high quality spread product. The US is the largest broadest market for that, and so there is a significant amount of demand.
But but I do think there needs to be a rebuild of risk premium, given this is unquestionably a more challenging growth inflation mix.
Where is that money coming from.
Does it come at the expense of risk assets like stocks? And I speak at a time where Howard Marks of Oak Tree came out and said he prefers credit right now over at equity risk because you are getting income and you have a greater degree of certainty.
And you're higher in the capital structure.
And I think maybe one of the understated themes of the past few quarters or maybe past few years, is that corporate bonds, because of the higher interest rate, are throwing off more cash just on an ongoing basis, and so just reinvesting that cash is something that's important.
Foreign demand has been a big talent. I will say, on.
The margin, we are bracing for some of the foreign demand for US dollar credit to overtime perhaps be repatriated back to European markets now that European yields are quite attractive, and so on the margin, that's something to watch for. But again, these risk assets don't happen in a vacuum. But I do think there's a significant amount of demand, whether it's coming from equities, it's coming maybe from different parts of.
Foreign markets.
One thing we haven't talked about here. We got black rock on the desk here. I mean, John is just simple bit dog moonshot out to eighty five thousand. I mean, you know, these are the indicators, and technically it's not telling me anything, but I'm sorry, you're going seventy eight thousand to eighty five thousand.
Galla six know something too?
What are we seeing that from crypto from gout I think that's diversification.
I think that's the market saying that p'erhapping, that's fear. I think that the gold.
Is perhaps central bank buying, some other dynamics going on there. But I think a big part of it is portfolio diversification, real assets, inflation, hedges, uncorrelated exposures, real roads, the stagflationary backdrop that we suggested that the sixty forty portfolio wouldn't fare that well in that sort of passive.
She's a machine, he's been false.
Need to buy rucks.
Look, I'm looking at this. I don't have any technical veracity on baitcoin that well.
As I got pause.
Is that your haven trade?
My haven trade is tuition.
Okay, find out what's happened with a triple leverage cash down to rugs.
Oh my god, I just upset Blackrock. I was in syndication, but then they wouldn't go for triple everstoll cash.
Amanda appreciate the time. Fantastic, What a moment, Amanda lanam there of black Rock. Perhaps we're being fast and loose with the s words stagflation. We're looking for growth close to two percent and inflation anywhere between two two and a half three percent. But it's the mix, and this is what Amanda was talking about. The mix here, This is the challenge the feder reserve is facing. It's the central banker's dilemma. Typically the tind of dilemma you see
in emerging markets are not in developed markets. Downside risk to growth, upside risk to inflation, and a feeder reserve uncertain, low on confidence and not sure what to do.
And that's the reason why gold is really telling us something, and that is this real question about whether the United States, with the policy mix and the monetary policy backdrop and inflation where it's coming from, can avoid a stagflationary like spiral, not necessarily stagflation of the nineteen seventies, but an environment that makes it more difficult to repay a debt load that's causing a lot of concerns for a lot of people.
Peter Fisher taught me is get your hands out. This is on radio. It doesn't work. We're going to go with this. The answer is here on a nominal GDP basis, today the lower growth was balanced up by stagflation to a pretty much level nominal GDP. What happens to amandoline loans call if we get nominal GDP to begin to compress. That's what's not in the discussion.
I'll tell you what this market is doing for the benefit of our TV audience. Like this up into the right, just sort of up into the right. That's the story today. We'll see if this holds. We're positive by one point five percent on the S and P five hundred going into the closing bow. Coming up on the close, the team's going to take it over. They'll be catching up with the former Fed Governor Betsy ju from New York City this afternoon. Good afternoon, tea, Well, thank you for
choosing Bloomberg. This was Bloomberg surveillance