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The Chairman of the Federal Reserve, if there was a good meeting to scrap the forecast, then this one was probably it. The Chairman, de emphasizing the projections, re emphasizing the uncertainty, focused on the shock in the Middle East. We had one question, how would they respond to it? Would they look through it? The answer, it's not that simple. Equities in response negative. This session loads right now down one percent on the S and P five hundred. Likewise
on the NASDAK. In the bond market, twos, tens, and thirties, yields higher, particularly at the front end of the yield curve, up by seven basis points on a two year three seventy five. If you, like me, thought this would be boring, this was not a snooze. The Federal Reserve chair asked about succession. Take a listen to what he had.
If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed. I have no intention of leaving the board until the investigation is well and truly over, with transparency and finality. On the question of whether I will then continue to serve as a governor after my term ends and after the investigation is over, I have not made that decision yet.
Three points from the chairman of the Federal Reserve. Let's go through them individually. Point one, I will stay on his chair until a successor is confirmed. Point two, I have no intention of leaving the FED while the DOJ investigation is ongoing. And point three, even after that is complete, I haven't made a decision on how long I'll stay. On a big headline in that news conference.
He actually engaged with the question. We all were wondering whether he would give some sort of clarity, and we've got it. He is going to be the FED chair until Kevin worsh is in the seat. There's this question of what as well and truly over in terms of the investigation actually mean of people are going to be wondering that and the fact that he hasn't made a decision yet, what is going to tip the scales for him to understand when he can make the decision either way.
This wasn't a boring news conference in any way shape or.
For if we can bring up just an inter day chart the front end of the yield curve, So bring up the two year inter day and just have a look where things started to pick up. The Fed chat throughout this news conference was leaning into anchoring inflation expectations. That was notable, But we started to really bounce out to session highs when he started to lean into that
question about his future. And I just wonder, Bremo, we can have that conversation with guests over the next fifteen minutes or so whether those two things are connected to some extent on.
The margins, this market seems to be treating a Kevin WORSHFED as being more dubbish simply because we have President Trump tweeting or truth social lying every single day saying two late Powell needs to lower rates right now. You see, there is no full recut getting priced into the FED Fund's futures until June of next year. So that's how
far we've pushed it on. There was a one two punch fredschir J. Powell also said it's too so soon to know the full economic effects from Middle East, and then he said he would stay on, and we have known this is a pretty balanced fed. They're weighing the risks and clearly the specter of twenty twenty two hangs over.
He's fed.
Chair, Okay, you go, you'll go out to the specter of it. In the view Ford, I like what Lizayne Saunders. That's retreating Claudia Sam. Finally Powell throws the SEP under the bus skipet. Thank you doctor sum for that. My observation, John is it's ten twenty one pm and Doha, and I'm looking at the headlines while the chairman speaking, and I get the worst view forward in the crystal ball gazing six months. I think we got to gaze out
twenty four hours right now. That's the tension I see in the Iran the Iran headlines that we get out of Tel Aviv, and we're getting out of Dubai right now from Bloomberg.
And this is why it makes it so difficult to provide four casts in a moment like this one. I'm a chairman. Qui Roby talked about the need for humility the duration of this show. Yes, energy assets are in play in the minds of some people now after the strikes, we saw on Iranian energy assets just earlier this morning, crewed at the moment of one O nine on Brent
WTI around ninety eight. The Chairman is well aware that they've missed their inflation target for the previous five years, overwhelmed by a series of shocks, and this is another one.
Now.
You may still believe ultimately this Federal Reserve will look through this shock. But that wasn't a chairman that wanted to make that point in this specific news conference.
He didn't want to say the T word, even though essentially this forecast would suggest transitory. He tried to play the part of an oil expert. He tried to play the part of a generative AI expert. But nonetheless he said it is too soon to say so many times over again that we lost count. They are facing off with a series of shocks. With the backward view of what happened in the post pandemic era, you had inflation
that creeped up to nine percent. He will not want to continue that, especially with core PCE creeping higher in the wrong direction. Before even getting this out, well, the.
Headline to me, John, I know we got to get to doctor Slark, but the headline to me was a lack of descent. I mean, this was very green SPAN and everybody on the same page supporting this journ.
We stand out here TK and for our listeners and our audience worldwide. Just Chune again. The decision dropped about an hour and a half ago. The interest rate remained unchanged. The medium dot still implied one cut for this year. Lots of noise though beneath those headlines, the outlook for growth was better, the outlook for inflation was higher. But that single descent was Governor Myron and Governor Waller was
expected to descend. He sat around this table only a week two weeks ago and said it depends on the next job's report. An hour later, the job's report came in way weaker than expected, and we all thought, we know what the governor's going to do. He's going to vote for an interest rate reduction. And then he didn't. And that's off the back of the shock of the Middle East. And that's more than notable.
Governor Chris Waller, I think is arguably the most interesting person on the FED right now in terms of what his decision actually was driven by. I'm curious if he comes out and says he is getting spooked by the direction of core PCEE. He's getting spooked by the component of what oil prices do. Do that, and we talk about wage inflation. Wage inflation is still above where it was in the pre pandemic period.
John, I was looking at F one in Japan here, and you said, do something serious. So I looked at the price of oil here. As you mentioned earlier, Brent crude up eighty one percent from whatever the bottom was, Saudi Light, Persian golf.
The physical mind hundred and.
Forty five percent, same number, this is eighty one and forty five.
It's the point that Jeff Carry of Carlisle was making a little bit earlier on this morning. There's a big gap right now between the physical market where Spot is trading, and the paper market, and he thinks it needs to close. He thinks the paper market needs to wake up to the real risk emerging in the Middle East. That's one opinion, one view. Other people aren't as concerned, but ultimately that's his opinion.
Every oil strategist that comes on says, why is everybody else too complacent? What we're seeing is really a different scenario than we've ever seen before, and a lot of people say yeah, yeah, yeah, you guys always get it wrong, and so ultimately this debate will continue to be it.
Was a few weeks ago. If you want to make a fall of someone on Wall Street, US recruit forecast. That's always been the way. Is the hardest thing to forecast. Torston slock is not a full He joined us from a pilot. Tolston, good afternoon, Good to see you. I've had some time to go through this one. A big reaction place.
Well, I think one interesting thing here is that if we begin to describe everything as another shock, there's another shock, there's another shock, and we're looking through that, it almost makes it sound like, well, I don't really have to react to anything because I've identified well, now there's just another shock coming along on all the prices. There was another shock from trade Wall, that was another shock from COVID. It makes it sound like that you should never do
anything as a central banker. So now we have a shock that is very serious, and it's very very clear that they decided to just basically completely ignore the Middle Eastern shock that we're facing here. So from that perspective, it is quite interesting. As Lisa is saying, why was it that Waller suddenly changed his mind, because it must be that he did put more weight on the Middle Eastern and the Iranian shock than what the average committee member did.
Here, do you think that you can infer anything from the price action? As John was laying out the idea that two year yields and ten year yields inflected upward as FED Shair J. Powell said that he planned to stay on should there not be another FED chair nominated and in the seat by the time his term expired.
Absolutely, let's just talk about it the way it is. At the last meeting there were ten people voting for interstration to stay unchanged. At this meeting, that are now eleven people voting for interstrations to stay unchanged. It's very clear Stevie ran at both meetings voted for race being lower. But at this instance what he certainly now says, I may be staying on until this is well and truly
investigated and complete. The risk is beginning to rise that well, maybe we'll have another hawkish member sitting for a longer period, and assuming therefore that Trump will appoint a more dubbish member that does of course lean more towards that we will have a more hawkish fit if he does stay on for longer period.
He's got hawkish.
Why is he considered hawkish?
Well, his hawkish relative to the alternative of a more dubbish member coming along.
You were weaned de Deutsche Bank under Focus land out with Adam Saminsky and Paul Senki. Their back of the report Excel spreadsheet was absolutely definitive about the supply and demand of hydrocarbons. Take that experience now, and how do you apply that apollo when you look at the American economy.
Well, it's very.
Clear when you think about demand and supply and on that the supply equation just changed quite dramatically. Now that we certainly have much less supply because of the strait of Homeost being closed, and because all the cascade of effects that are likely to come along. If this does continue for a longer period, so on the supply side, we will likely continue to have the very important question, namely, how long time is going to last before we get
supply up to the levels where demand is. And if that's going to take a longer time, then the risk is that energy prices and oil prices are going to stay more elevated it's also fuel prices of course that of course going to jet fuel. It's also of course fuel prices that are marine fuel. All these parts of energy complex are absolutely seeing some upward lift. And the longer the shot lasts, the more we will see energy prices stay more elevated.
When does this get real for you? At the start of this crisis, and we can call it that, people came on Bloomberg Surveillance on Bloomberg TV and made the point that if its days not weeks, it's okay. And here we are more than two weeks into this, and now we hear if it's weeks and not months, it's okay. When is it not okay?
Well, the next one will probably people saying this is months, it's not quarters. Then we will also have a change. So you're absolutely right. The fear is, of course, that it does continue at the FED level. If you put this into Fergus the Feed's model of ER's economy, it has to last at least.
One quarter, because that's the only.
Way you can get a real serious shock to begin to feed through. If it begins to last, of course several quarters, then it's a much more serious effect. But it is ultimately about that duration question, and that's what the market is trying to figure out. And the fit very clearly told you today that they do not think that this is going to last a long time.
Mi McKay in the news conference is run back half for us might welcome back to the program. Some key headlines in that news conference. What jumped out for you?
I think two things, John. One, there was a sort of more humble aspect to what Jay Powell was saying
when it came to tariff price inflation. Ne was a conceding that it wasn't doing what they thought it would do, lasting longer than they had anticipated, and now layer on top of that inflation that will come into the energy markets and perhaps others because of oil, and so he he was less saying the idea that, well, we're prepared to go either way depending on what happens with the economy, as he was saying, we've been fooled and we're not
going to put ourselves in that position. We're going to sit back and wait so that we don't react wrong because we've been wrong. The other thing, of course, was what Paul said about whether he's staying on or not because he's refused to talk about that so far. He did acknowledge what his lawyers told the Department of Justice in their deposition. But the most interesting thing was he
said he's staying as chairman pro tem and that's the law. Well, there's a Presidential Council's Office memorandum that says no, it's the president who can appoint somebody as the chair pro tem. So we could be looking at another big legal fight down the road if they don't get Kevin warsh in there by May fifteenth.
Yeah, Mike, this is why the problems arise. With the chairman really engaging in this topic this afternoon. Does it provide consistency or just introduce even more controversy.
Well, he's trying to provide consistency, I suppose by saying not much is going to change until my successor gets here. But whether or not that's a shot at the President or some sort of way to push back on the pressure he's been getting, we don't really know. But at this point you have to think the White House is going to disagree with that interpretation of whose chairman pro tem.
Now it's important to realize too that the chairman pro tem of the Board of governors is largely irrelevant for a short period of time until they get Kevin Worshk confirmed. It's staying as chair of the Open Market Committee. That would really bother the president because as Torston was just saying, leaves somebody who's more hawkish more likely to vote for a hold on the board.
Ma McKay with the lightst thank you, sir, appreciate it. Great job as always might there are the Federal Reserve down in Washington, D C. Tolson, can you answer that question. We've touched on it briefly with you just expand on it. Does it provide consistent and see or introduce controversy?
Well, it would.
Definitely be a lot cleaner if you have a fit chair and then that fitchair walks out and a new fittchure sits down and then we continue with a new fit chair.
But now it usually works.
That's how normally is that's how we want a green span Yellen on the Penanke.
But now that you shuttaenly have this.
Issue that the existing fit chair either he may stay on the committee, which is also a huge issue, or we may not have Kevin wash in the seat.
And as Mike was just saying.
That will raise all these other legal issues around will is this something that you can do or not do? And that of course begins to just raise a lot more certainly about FED independence and what is the institution making of decisions.
Do you think that it's leading market participants to not take into account some of the forward guidance or some of the discussions on the FED that there is less credibility as a result of some of the increasing political rhetoric around this institution.
Well, I think that we're moving towards a FED where the focus will be at.
The extreme on dissence.
Today we had eleven versus one that was very clear, but going forward we are likely going to especially over the next level quotas as although IFMC members might be leaving, we will have much more scrutiny of what are the existing members saying. What's the difference is the speeches, what's the difference is in footnotes between someone.
Who was dubbished someone was hawkish.
We are entering an era of fit watching where things are getting much more complicated because it has this political dimension of why is this person saying this? Is this person staying on the committee for political reasons? It just opens up a whole different dimension to fit watching than what we've been used to for a long time.
Parlor game. But in your expert at this on a global basis, this central banker to the world to borrow from Bill Rhodes, Jerome Powell has to look at the varying energy intensities. With Brent crude at nearly one hundred and ten a gallon, we've gone one oh six to one oh nine here right now off headlines of the Bloomberg. When you look at the way em is crushed by these prices food, energy and the rest that you're expert at, touristen, does the dialogue just shift from the conventional parlor game.
Has been discussionate about the swap lines. There's been discussion about in the broader context of things, what is the feeds mandate, And is the feeds mandate to take care of the US economy and the people who live within the US fifty states, or is this someone who is supposed to take care of the global economy. And it's very clear that the trend of travel here is certain received to be that we're moving towards that the FEDS should really be caring mainly about.
The US economic outlook.
Is an expressive currency or is that what we're not seeing in the Q two.
Well, given that foreigners own roughly around twenty percent of treasuries and twenty percent of credit and roughly a third, of course also of equities, we still have in a situation where foreigners do play a very important role in US financial markets, So that key issue of what is the goal of the FED becomes very very important.
I'm just struck by how historic this is. The last person to stay on at the at the Federal Reserve as FED chair after his term was Mariner Accles. This was in nineteen forty eight when his term was up, and he stayed on because he was concerned about the post Bretton Wood's order and an economy that was torn from the war that we had just seen, and he wanted that consistency. That was the last time this happened.
And I'm obstruct by the historical parallel at a time when we are questioning geopolitical alliances, when we're questioning how exactly is some of these monetary policies are going to work in an inflationary world at a time of increased government debt, it is interesting that we're dealing with the same discussions, and I think it can't be forgotten these sort of echoes that we feel from nineteen forty eight.
I think it's easy to introduce one's opinion into this situation, So I'll just allow the market to guide us. Clearly, the chairman is concerned about a threat to independence, is he right to be? Look at inflation expectations right now. Market based inflation expectations have remained really well anchored throughout all of this. So whether you're concerned about the chairman's attack on the institution or not, let's just focus on the markets. Markets have decided it's not a credible threat.
So does the chairman actually have a role here that he needs to play? Is this a card he needs to hand to hold? I don't really understand that. I'm struggling with that. That's something I'm wrestling with. My opinion doesn't really matter. The market's telling me there isn't a concern with central bank independence. The market is telling me there isn't a concern with inflation expectations, and the data is telling me that the rest of the world's not
worried either. Because when I look at foreign ownership of US assets, they are rock solid. And for treasuries, I think there are all time heights at the last data point I saw tourced And so is there a problem here that the chairman even needs to address?
Well, that's why the key question becomes what does confidence mean? Is a confidence by J Paul? Is it confidence by foreigners? Is it confidence by markets? It does become a very important debate. That's why this discussion around who will be the next fairture now we know it's Kevin Wash that wasn't around that time also got a lot of discussion around it could have been someone else who might not have been perceived as credible as Kevin is. So for
that reason I completely agree. Who is the judge ultimately of what fake credibility is? And where do we look and where does the market look for evidence whether the fair credibility.
Is being threatened?
And look how many establishment figures came out when Kevin Walsh was nominated by the president. How many establishment figures. And forgive me, if you're insulted by being establishment, get a Gopinath formerly at the IMF. I don't think it gets more establishment than that. Endorsing Kevin Walsh and saying you to make a great FED chair. Mark Carney of Canada, the former governor of the Bank of England and now Prime Minister, endorsing Kevin Walsh as a future FED chair.
What exactly is the chairman defending care when it is standard protocol to leave once your term is up.
Well, I think that that's a fair question, and ultimately my personal opinion doesn't matter. Frankly, I don't know what my personal opinion is. I just think that there is a sense right now in markets to the point that fedher j Powell made that even on Congress' is level, they have confidence and they would like to see FED independence continue. And that's you see in Tom Tillis's move. So what would make him stay on? I guess that
that's one of the questions. What would change his mind to actually remain on as governor passed his term as FED chair? If Kevin Walsh were in the seat, that would can feel like he needed to uphold this spred independence.
Jeff Frosenberg of black Rock John just now for more. Jeff, I imagine you want to we'll let this topic go together, so I'll ask you about the substance of the news conference, the chunk from the Middle East and whether it threatens to upend the outlook for this economy.
Yeah, I mean, look, the conclusion here on the substance really pivoted on that moment. I would argue, though, that the pivot was less about the conversation about whether he was staying on and that part of the conversation, and really his answer to the.
Question that occurred right before that.
That was the question.
About, Hey, aren't you more worried about the employment outlook, and he definitively said no to that, and then pivoted to the challenge on inflation. And from my reckoning and the meeting, that was the point at which the meeting turned hawkish, because the majority of the discussion around the meeting is around inflation, whether it was the tariff, inflation not coming down as much as expected, the unknown impact
of energy rice on future inflation. So you have this kind of backdrop of forces that are pushing up inflation and disappointing the expectations for inflation to decline in the backdrop of stable unemployment rates, and so that really I think pivoted the market reaction to this FED is much
more hawkish. The front end flattening the equity markets responding, And that was the moment in the meeting where this moved from what had started off as a kind of dovish statement interpretation holding the waller to sent to the side for a second, into a definitively hawkish press conference.
Jeff, I'm looking right now, and we've completely priced out a rate cut for twenty twenty six. The first rate cut now isn't priced in until July of twenty twenty seven. Does that matter for risk assets? Does that matter in any way, shape or form er. Is the FED been totally sidelined by other events?
Well, I think it does matter, because that's what you're seeing in the markets right Risk acid are going down, and I think they're going down because of a pricing in of a more hawkish FED. This is a risk asset market that has benefited for a very long time from a highly accommodative FED, both in terms of price
and quantity. When you think about the impact of the balance sheets, so as we debate what the future FED looks like, there's both a price and quantity uncertainty there, but both of those in the past have been highly supportive When you challenge that that immediately reprices. You know, the fed's near term expectations what you're talking about, but also the degree to which that liquidity and price and quantity is supported and will have the outlook continuing to support risky assets.
Jeff, John and I are going back and forth during a press conference about what the flight demands is going to be the first week of September. It's already up sixty percent. It's most sixty percent to the Milan.
N F one already as well as well.
Jeff, where are we going to be to both of you? Let me start with Jeff Rosenberg here. Destruction to me is tangible when you see a given fancy plane ticket go up sixty percent or a gallon of guess what does Blackrock say about demand destruction?
Well, it's interesting because the last question in the press conference the premise was, if you remember it, how high does do energy prices have to go before you'll consider hiking rates? And that just misses this whole point about demand destruction because the scenario where this goes on longer and is more disruptive to oil prices is a scenario where you shift the focus from inflation, which is today's and maybe the last couple of weeks story to a
growth story. And it's not how high the oil prices go before you hike, but how high and for how long the oil prices get before you cut. And I think that's the swing there.
The term on that that's exactly where I am is that this is a GDP story of constructing GDP under massive price stress.
Absolutely, because now we'll begin to watch on the weekly data, on the monthly data, and we have data for how many miles are driven in the US, we have data for how much money is spent on gas at the pump. We also have data for our airfares and how much people are spending on buying airline tickets. So for that reason, if those things begin to come out, especially even with the anydotal limits of this slowing down, this should begin to be more worrying.
John, close a loop with you utility prices in the United coh it's the same thing we're not. I mean, I think your own pile's aware of this, frankly, but the zeitgeist is not talking about the GDP demand.
They're going to get me in shine much trouble with regards to the UK. They've got a problem over there, and his name is Ed miliband I believe it there and you could sell that out yourselnds, because I don't live there anymore. I'm going to talk about the shark with COVID and the inverse, the mirror image of what we see now, which is something Jeff Curry of Karla was talking about earlier on this morning on Bloomberg TV. In COVID, we had a massive demand shock and it
took negative prices to rebalance the market. The Homer's crisis is the complete inverse of that. So you've got a massive supply shock that requires much much higher prices to rebalance the market. So to your point, the question is whether one hundred dollars in the paper market in futures right now, the futures curve going at to December, the price is something in the high seventies is sufficient enough to do that at the moment.
Well, that's why what's interesting about also what Tom is saying. If you look at the is SUP they've revised inflation up.
Lists degree that makes total sense.
But they also revised GDP up telling you that they're not assuming any demands whatsoever. So well, the TEXTOK, would certainly tell you that at oil price shock is tafletion, you get higher prices and lower GDP, and there was no evidence of that in the SUP today.
Jeff, that's a big question. I think it's an important one. Where's the hit to growth from the higher inflation from the higher outlook for energy prices.
Well, it's certainly not in their forecasts. And that's that's the clear kind of takeaway is that the forecasts are basically talking about a temporary transitory to use that word impact, So that's not in the forecast. I don't think we want to take too much away from that, because if you look at page sixteen of the SEP, it talks
about the uncertainty in the forecast. The uncertainty in these forecasts is greater than the mean, and so that really tells you there's not a huge amount of forecast accuracy here. So let's kind of put aside that these are actual forecasts.
Of where we're going to go.
For what is really important here is it kind of tells us about the tone and the consideration of the committee, and that is basically, and Powell talked about this a little bit of upgrading the longer term upgrade to growth,
I think is the message. The little bit of the longer term upgrade to the Fed Fund's terminal rate going up, and it's a little bit of a productivity story, but that is ignoring any kind of short term impact becoming bigger issues for twenty twenty six in the economic outlook from the oil price shock.
Jeff, it's going to say sprite to catch out Jeff Risen fat black crow,