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The Chairman of the Federal Reserve wrapping up the main news conference, depressed, doing their best to make that interesting. The Chairman doing his best to make it boring, and I think he was fairly successful. Your equity market this afternoon looks like this equity is positive by just a tenth of one percent on the S and P five hundred in the bond market on a two year, ten year, thirty year we look like this on a ten year maturity yield to lower by a single basis point four
twenty seven ninety one. The risks have risen, the risks have not materialized. The feted chair Jaypouse, says, we're well positioned to wait.
We don't think we need to be in a hurry. We think we can be patient. We're in a good position to wait and see is the thing. We don't have to be in a hurry. The economy has been resilient and is doing fairly well. Our policies wills the costs of waiting to see further are fairly low.
So they aren't going to wait, wait to see the outcome of trade talks between the United States and China, wait to see if this economy breaks one way or the other.
Why don't you just read moby Dick for an hour and a half. I mean, honestly, if you want to know if the how the Fed looks when they fil abuster, this was it. Ultimately, I thought that line was interesting that the cost of waiting didn't seem that great. Some people Neil data might disagree with that, but this right now is their stance. It is in a good place, and they did not give any sense of exactly what it would do to tip their hand away from that.
His speech at the Economic Club of Chicago, repeated in the news conference this time around. If current trade policy is sustained, it could mean high inflation. It could also mean lower growth. Our job. We have an obligation Tom to anchor inflation expectations.
The obligation is there, and of course the reach out is to when will they do something. There's a lot of heat to debate, and Neil Dudda sent me a note here from Renaissance Macro. He's scathing is the only word I could come up with scathing about their delay here, as you mentioned Andrew Hollenhorst, with a view and then you go all the way out. Dare I say in the next year the dispersion here is right. I just want to point out that if you had read the cliff notes of Moby.
Dick, I did a knowledge.
They could have pulled it off.
How much in the transitory this time around? Short lived or short lived? Yes, it's the new term for the chairman of the feder Reserve.
Yeah, in the sense that they will get clarity as time goes on, and right now they have none, but it will be made apparent to them as things settle into place. This idea, though, that right now the economy is still relatively healthy, is one aspect that I think maybe is going to become challenging in a month's time.
Let's get to the conversation joining us now they former New York Fed President Bill Duntley, Bill, thank you for joining us. They clearly face a range of risks, risks which, as the chairman says, have not yet materialized. Can you walk us through how you think they've responded to the risk they face and what you make of that news conference from Sham and Powell, I.
Don't think the news chre surprising at all. I mean, the FED is not really sure where Terrists are going to land, which is important, and when they land, they're not really sure what the consequences are going to be on growth versus inflation, on which side they're going to miss their mandate by a greater degree. So I think I was expecting him to say something pretty similar to this, and if I was in issues, I would have done exactly the same thing.
I thought the.
Most notable line was the cost of waiting to see further data seem fairly low.
Do you agree with that?
Do you think that the cost is fairly low of simply being parked on the sidelines at a time where a lot of people think that there are signs of a rapidly slowing economy.
Well, I think the costs are low relative to the risk of making a mistake. You know, Let's imagine that the FED cutting rates dramatically because they were worried about the labor market, and then it turned out that inflation expectations got unanchored and the labor market held up pretty well. That'd be a big mistake. And so the FED really wants to make sure that they don't go down that path. This is not just about the central scenario. It's also
about risk management. Try not to do the wrong thing so that you can respond effectively as things actually unfold. So I think the fact that the ter policy is not set is important, and the fact that we don't have any experience with the tariffs shock of this magnitude is also important. So in that environment, it's sort of like, you know, the hippocrat, Oh, do no harm to your patient.
Bill Dudley, part of your charm is you had a day job before the FED, job of actually trying to forecast out the economy. How would you frame that? Now you've got the luxury of not being at golden sacks. Can you look out one month? Can you look out two quarters? Can you model out a fancy McKelvey Dudley jewel out a year right now? I don't think you can.
No, no way.
I mean, I think the only thing we can say is that the economy, like Teerpaul said, is the economy right now it seems to still be in good shape. I think the most important thing I took away from the press conference that people should take on board is the fact that don't take the first quarter GDP at face value. The minus point three reading is all because
of mismeasurements. It's basically, they counted imports a lot better than they counted inventories, so there was a big drag from imports that was not upset by a big accumulation of inventories and domestic private final sales, which he brought up repeatedly in the press conference, is really a much more representative measure of how the economy is doing, and it's doing just fine, rising.
Three percent, So I think he can put the weight on the right things.
I'd point out you on Olssius with a two percent statistic for this present quarter published I believe last weekend, Bill Dudley. How does a FED communicate given this mess that has been wrought? What do they do in speeches coming up? John and I were talking here as we are looking at psg Arsenal about Jackson Hole. How do they get to Jackson Hole and communicate to the nation.
Well, you can only communicate to the extens that you actually know what's actually going on. So I think it's appropriate for the FED not to overpromise or imply that they have some crystal magic ball that allows them to see in the future when the future is actually ring cloudy. What I'm expecting at Jackson Hole, frankly, is the FED to talk about their Monitary Policy Framework review and wheel
that out. And I thought some of the questions at the press combs and that were interesting were Paul admitted that maybe Quey could have been wrapped up a bit sooner. So I think they understand that there are some things that they can improve in the monetary Policy framework, and so I think that's going to be the most interesting outcome of Jackson Hall.
Bill.
We've spent a lot of time speaking of FED watches on Wall Street, and they've also had a similar thing that this time, because of the constraints they might have to wag late, they won't be able to act preemptively. And I guess it's important to understand his definition of being late, because there was this really interesting moment in the news conference, and I'd love your thoughts on it.
He looked at the cutting that they did last year, one hundred basis points of rate reductions and said the FED was a little late to start cutting last year. Just what is the definition of late on the FMC.
I think late is when you realize that the risk on one side of the mandate have become you have become very predominant. So if the fact is you're only cutting at that moment means that you're probably late because the risk have really accumulated on the employment side of the ledger. And that's what happened last summer, and the uneplayer went up pretty quickly, and the risk of the layer markets are of unwinding.
In a bad way increased, and the Federal Reserve was pretty slow to get off the mark, and that's why they ultimately cut rates more quickly than they delayed, and then they cut more rates quickly than expected.
I think that that caught John has did attention, and a caught mine as well, because some people disagreed and said maybe it was proactive in a way that led to the increase in longer term benchmark yields this idea that maybe actually there was more strength and expected in the underlying economy. I just wonder what that means going
forward about that two percent inflation target. If we're still not back, if we did see something of affirming up of the labor market, and yet that still is the assessment from last year.
Well, I think there's two things there's are irrelevant going on.
Number One, the monitor policy may still not be as restrictive as the FED thinks. That is, I mean, the fact that the Commune's still doing okay with a resupposedly restrictive monitary policy in place, I think sort of.
Is meaningful to at least to me.
And the second thing I think is going on it's really important that people aren't putting up weight on is the labor force is going to grow much slower in twenty twenty five than it did in twenty twenty three and twenty twenty four. So the kind of payroll gains you need to keep the unemployed rates stable are much dramatically lower this year than last year.
There is this question going forward of what kind of pain tolerance would this FED be willing to accept before they start to have the clarity that they need to actually make a move. We were talking with Rich Clarita just before the press conference, and he said, maybe a half a percent increase in the unemployment rate, something material that they could point to, what's your assessment that would act actually provide clarity at a very unclear moment.
Well, I think I think Rich Clarida is broadly correct.
If the unemployer rate starts going up rapidly, like we go from four to two to say four to six, then the Federal Reserve is going to be thinking, boy, the.
Layer market really is weakening in a big way.
We are moving meaningfully away from full employment, and the risk in that environment is that we're about to have a full blown recession. The SAM role didn't work well last year, right, the SAM role. We triggered the sum roll and there was no recession. But that happened because the labor force was growing very rapidly, and so the rise in the uniployer rate was driven by rapid labor force growth rather than by layoffs. This year, if the unemployer rate rises rapidly, will be driven by laos.
Bill Doublon, let me.
Throw in an audible then on that, given a trade war, given the ballet in Switzerland here in the coming days, are we at risk of damaging the productivity that seems so successful over the last twenty four months.
Absolutely, I mean this is putting investments, spending plans on hold.
We are almost certainly.
Going to have supply chain disruptions even if we were to resolve this tomorrow, because a lot of ships from China aren't landing here at coming to port here, and then that means there's going to be a lot less time to replenish stores for Christmas. So supply chain disruptions to some degree are almost inevitable. And that's assuming that you switch things back. You've turned the whole tariff thing off almost immediately.
Hey, Bill, I appreciate your thoughts. As always, built don't be the former New York Fed President. The Federal Reserve see it like this, the risks of risen to hire, unemployment, to hire, inflation, to lower growth. But the risks haven't materialized, and the risks are around trade talks as well. The President of the United States. In the last two hours or so, we've had a load of headlines from the Federal Reserve, but maybe the most important headline came from
the President. The President said, where I'm willing to lower tariffs to get China to the table. Now, the US is in negotiation mode at the moment, going into talks for the weekend, or already talks about talks between the United States and China and they can dial up and down the tariff by policy whenever they like. You can't set policy in a moment like this because you don't know what policy is going to be on the other side of Washington.
You don't understand necessarily what the supply chain disruptions are going to look like. Let's say they don't lower tariffs in anticipation of these types of talks. China has said that is the only way to start talks. So does that remove the idea of talks from the table entirely, even though they might be seeing each other in passing
in Switzerland. The key question here is how do they start to game out whether this is really a pandemic like supply side shock, or whether this is something entirely different that can get remediated in the near term. That is the difficulty that they are grappling.
It is different.
We've said it so many times on this program. I've heard all these comparisons to COVID. The difference this time around is you don't have to wait for the vaccine. The president has the vaccine. He can take the tariffs off, put the tariffs on whenever he likes. He's in control of the virus. If that's a good word to use. Probably not, but ultimately he is if you believe there are comparisons to COVID. The President is running policy here for some runaway virus that we don't have control over.
Chairman of the Fed right now, I.
Think he's in charge of what the feder Reserve's about to do without it out and this is the problem for the feeder reserve. Let's just say in a month, these talks are fantastic and the Federal Reserve cut interest rates by fifty basis points, seventy five basis points, one hundred basis points because they thought these were the new rules of the game. All of a sudden, policies offside and guess what, we're about to deliver a big tax
package down in Washington, DC as well. That's why this is so hard.
We vecho J.
Powell alluded to this, saying there are things that can be done. Some things, you know, we haven't seen them being done, but there are some things that could be done that could actually cause outcomes to be very different. Key question, and this is something that comes up in a lot of our discussions with analysts and economists. There is damage being done. It's not as if this genie can go back into the bottle so easily, and there are ships that are not going to get here, and
there are already supply chain disruptions. So at some point that is the reason why people are saying the pain is already being felt, the damage is being done, it's not just a matter of magnitude.
A number of weeks ago, we had a yeah, but where best, and maybe Lutnik had to go the president and say you're off side, fix this right now? And what in ten minutes they had it fixed.
And that initiatesd the night day pause we have and the negotiations are starting. But if you're the chairman of the Federal Reserve, look, it's an industry to go after the Federal Reserve.
We all partake.
I understand that we've been very critical, but I have some sympathy with the institution at the moment, I don't understand how you set policy for the medium term in a moment like this one.
I think that's the reason why the policy tool that is communication is now filibustering, because ultimately there is no communication that can be had at a time where there is no information, solid information that can be had and so maybe maybe we'll get more to the limits.
Of course, you know.
That is co dependent on the president. The president's driving the dialogue right now. It's standard psychiatric work. They're codependent at the White House.
The White House is in the drive and seat couldn't be more TK. Mi McKay was in the room. He's out of the room now. Mi McKay, welcome back to the You said it multiple times, Mike can the lead up to this. I don't have anything to add on that. Chaman Powell and Mike on a number of issues. He didn't have much to add.
No, he didn't. You've been talking about it. The FED doesn't know what's going to happen. Nobody knows what's going to happen, so you can't make policy. But one thing I would add is that you've been talking about this as a supply shock, which it very well could be, but the FED was also setting the message today that it could be a demand shock. And if there's a demand shock, it could be reflected in things beyond just
the unemployment rate and the inflation rate. We could see people start to pull back on spending significantly because either the shelves are empty or because they think things are going to be bad. Maybe they listened to Jay Powell today talking about the elevated risks. So there's a lot going on, a lot of cross currents going on, and it really comes down to how does all this affect the consumer? And by that I also mean businesses, because
as you reported, every day people are pulling guidance. They don't know what's going to happen. So at this point the economy could go either way. The Fed's stuck in the middle. And really there isn't much to say about the FED for right now except that they're watching like we are.
Mike.
You're a student of FED history, and I wonder how much this has a parallel in recent history at a time when the FED is just going to say uncertainty in fifteen different ways and then sometimes the same way over and over again.
Well, I think there isn't an exact comparison, but what you might look at is obviously the pandemic, where nobody knew what was going to happen, because we hadn't had this happen before, and so the FED was stuck in a situation where it knew things were bad, it knew it had to do something but how long did that have to go on and how far did they need to go? That was the question that was never really decided and we kept talking about for months and months.
But the idea of we've got stagflation out there, but we don't know if it's going to happen, and if it does happen, we don't know how bad it's going to be or when it's going to happen. That I don't see any precedent for Michael.
McKee for International Audience briefest right now and you and I know the shadow FOMC iconic at Carnegie Mellon and the rest tell us about the Trumpian shadow FOMC right now? Is there coalescing a beast that's going to send signals, send messages? Critique Jerown Powell.
Well, there are a couple of different groups going on. You could say the Shadow Open Market Committee doesn't really have a lot of critiques at this point other than what we were talking about earlier, the Fed's mission creep. The question I asked him, there are people who are contenders for the FED chairmanship when the President finally makes a decision, who could be having things to say. Kevin
Warsh talked last week a week before about that. But really the opposition or the people who are going to the questions are in the administration right now. Because the President wants to influence the FED. He can't really do it, but he wants to. So there are going to be other people who are going to pick up on this stuff and talk about it. Scott Besson's been asked about it.
He was asked about it today. They want the FED to lower rates, but I think mister Bessett knows even if mister Trump doesn't, the FED can't move right now because they don't know what mister Trump's going to do.
My McKay appreciate the reaction we're here from Mike throughout today on Blombag TV and on Bloomberg Radio. So we've had plenty of sympathy for the institution. It ends right now. Here's the criticism. It goes like this. I've heard it now from the previous Minneapolis FED president, Saint Louis FED President rather Jim Ballad. I've heard it directly from muhammadan Aeron as well, that this FEDER reserve is only really
entertaining one scenario. They hear a lot of people talking about a wide range of outcomes, but emphasis matters at a news conference, and the emphasis which Sham and Powell keeps landing on stackflation without saying stackflation, and Jibilla said this Muhamma set it as well. What they don't entertain is the prospect of a good outcome, the prospect that the Chinese turn around over the next few weeks and say,
you know what will give you what you want. The Europeans do the same thing, and you end up in a situation where you have lower teriffs, and maybe you end up in a situation where you have a reduced tax rate as well, and perhaps by the end of this year you're in a better position for both the risk assets and growth too. And you don't hear any of that when you listen to Chairman powt and I didn't hear much of that at all in the last ninety minutes.
There is a key question here. Is there a scenario in which they would have to high rates. Is there a scenario in which they don't have to move at all, because this is a soft landing in the same kind of way that they used to with no tariffs. There is a positive economic outcome that he kind of alluded to in passing, but it wasn't necessarily the main story.
Yeah, kinda but not really very Joining us now to discuss Jeff Rosenberg of Black Croc geff I make it simple, is this a moment to own bonds and if so, wear on the curve.
It's certainly a moment to be adding diversification to your portfolio because the whole theme everybody's been talking about, and Powell answered in multiple ways, is we don't know and he doesn't know, and it's heightened uncertainty. So you need more balance in your portfolio. And now the subsequent question is the bonds give it to you? And there I'd say you got to be more anchored to the front end of the curve. The back end has a lot of uncertainty. You got to look for alternative ways of
finding diversification in your portfolio. And beta exposures are just directional. Is the market going up? Is it going down? Is it a good outcome? Is it a bad outcome? Is as LISTA was just outlining, you know, it's incredibly uncertain and so it's a time for diversification.
Jeff, This feels like in high school when someone really likes someone else, and they keep talking about them at nauseum, and you feel like there's nothing else to talk about, and you're kind of sick of the conversation, but you feel like you have to keep entertaining it. It feels like everyone's trying to get into the head of one person again and again and again and is sort of exhausted by the end of the day.
How do you rise above.
That and understand what's actually happening in the economy in some kind of way, to understand what way things are turning.
Yeah, it's a good it's a it's a good metaphor, it's fun metaphor, and uh, and it's and a tough question. And I think one one way is to really think about it from a portfolio construction point of view of what am I exposed.
To in my portfolio?
Right, So, if it's about one person and one outcome, that's kind of the antithesis to what we've all learned over the years of how to build a good portfolio. Don't put all your eggs in one basket. In this context, it is, don't have all of your outcomes determined by that uncertain and unforecastable outcome. Uh, and so that's really about diversifying my sources of return. I've talked about it on this program before. Often all we talk about is
the beta outcome, the directional outcome. And there's another good news story here for investors, which is all this uncertainty actually increases opportunities. But if you're investing not in directional space, but in the cross section, and so you're creating bigger winners and losers in the micro space, there's greater divergences and dispersion in the macro space.
And so if you have strategies that.
Are more about betting on the differences and not the direction, you can balance out your exposure to not just one person that's a really tough outcome, but to hundreds of different outcomes that's a better chance for success. And that's a way to pivot away from this kind of unipolar focus.
On that you know, popular person in high school.
Is there anything else you'd like to a pod?
Good idea, just sort of it's just sort of exhausting.
There's something more to say or talk about. Everyone's exhausting.
I'll take that from you. There's no question about that.
Jeff Off.
Your remit what I'm seeing is a multi standard deviation move in selected currencies. Where's your unexpected out there across equities, bonds, commodities, and particularly the depth of the currency markets.
Yeah, I mean the FX move is really important here, right, and so like let's just kind of look at what's happened in markets since April second.
Is you've had this remarkable rebound in.
Risky assets, equities, subequity indices, factor exposures, and we've kind of are above in many of those measures. The April second tariff Day Liberation Day announcement. The one exception, you know, all a lot of these boxes are the same. Which one's different is the dollar and the FX piece of that, and that's really talking about kind of the global impact here and that that hasn't been resolved because you know, are we going to be talking about deficit equalization or
tariff equalization. The latter is a pretty good outcome to the earlier conversation. You could get lower tariffs, This could be really positive. But the former, which is what was the initial thrust of the policy announcement, is deficit equalization. That's very problematic and it's problematic to the flip side of deficit equalization is a big collapse in the US capital account surplus, and that's what you see on the currency piece.
That's the big surprise move.
We got to keep an eye on that, and I think that's a really key development. You know, especially as we go through each one of these announcements on bilateral trade negotiations, you're going to look at the voting evaluation of those pronouncements in the currency markets.
I think you'll get a good read.
This goes to the heart of your whole discussion around diversification and balance. How much is that diversification and balance increasingly international as a result of that uncertainty around the dollar and the space going forward.
Yeah, I mean that's a huge theme. You see it in the flows, you see it in the.
Relative equity returns.
It's partly what's reflective in the currency that you are seeing from a global investor perspective, kind of a questioning of the overweighting that has existed in say equity portfolios because of the dominance of US capital markets.
Right.
You look at GDP VERSUS market cap differentials and you have a very big gap. The largest gap is in the US, and so that's one way of sort of thinking about where would the rebalancing occur, and the trigger for that is again this assessment. Are we going to push further on this policy towards deficit equalization?
Then I think you're going to be looking.
More at equalization between market cap and say GDP contributions in the global cross section.
John and John. The fiscal debate may get overwhelmed by the actual data of employment and interest rates, back to the FED and all that, But I would go back to what you and I first talked about decades ago, which is Euroswissy and the fact that you have strong Swiss right now, and as Jeff alluded to, anybody in equity who's including all our listeners and viewers in the stock market, don't forget a monitor foreign exchange each and every day. The Swiss Frank is talking right now.
And these central banks will have a decision to make how to respond to some of these shocks, and I think it's clear the kind of decision they're making so far, Lisa, We've talked about it, the ECB reducing interest rates, the Chinese coming out reducing interest rates, the Federal Reserve doesn't really understand the nature of the shock yet. The rest of the world has decided it's disinflationary. Maybe they have the capacity to reduce interest rates in a way that
the Federal Reserve does not. But we've talked about this a million times trade talks. Things can change from hour to hour, never mind day to day. It's only a few hours ago we read a headline from the President of the United States that said he wasn't willing to reduce terarists to engage in negotiations with the Chinese. And then we have reporting moments ago that says the President is ready to rescind global chip curbs. Now, this is sort of one versus the other. Every single headline moves
this market one way versus the next. The Federal Reserve can't behave that way. It can't reduce rates twenty five minutes ago and then hikem the next That's the problem they've got at the moment.
In fairness, a lot of people feel like they can't live like this right now. A lot of traders out there are saying, what's the point. I mean, you see that whip saw in the Nasdaq in particular, this is something that Nvidia has wanted. There is this tension between the fast moving headlines of a tweet or a truth or a statement with the real economy and companies that
have to make longer term decisions. And as an investor, especially where speed was your friend, how do you deal with that in a very different.
Backdrop, Jeffy, you toda this yet?
How you fading?
Look, we're feeling great.
This is creating a lot of opportunities if you know where to look and rewait your sources of returns away from the stuff that's impossible to forecast, right and so like in this last conversation, this is sort of in our kind of systematic framing. It's like momentum signals versus reversal. Momentum is a really tough strategy right now. Reversal much better, exactly the description that you're just talking about. One day, it's one headline, even within a headline. Within a day,
the headlines are reversing around. So that creates opportunities if you're way your sources returns to the right environment. And it's just kind of like recognizing, Look, the easy momentum macro trade of the post COVID environment is not the trade right now. It's much more in the cross section, much more reversal. That's where you can find some opportunities.
And if you're trying to predict, you know what the next you know trade headline is going to be, that's going to be a very frustrating place.
Yeah, good luck to you.
Never mind within a day, within the hour, Jeff, Thank you, sir, Jeff Rosenberg of Flackrock. The latest reporting from the team here at Bloomberg the Trump administration planning to rescind Binden Era AI chip curbs. According to people familiar with the METSA.
You look at in video shares, there are more than two percent on this news, and it makes sense given how vociferously against this they've been. This goes to the question of what is the ultimate goal of some of the tit for tat in the trade war that is between the China and the US. Is it just completely coupling when it comes to tech? Is this trying to tweak the rules confusing