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The beginning of a walk into the sunset for the Chairman of the Federal Reserve. J. Powell only has two more of these meetings on the calendar as the chairman of the world's most important central bank. For the equity market on the S and P five hundred is still close to all time highs on the SMP, on the NASDA one hundred up by zero point five. In the bond market on twos, tens, and thirties, we look like this. It's just about unchanged your ten year four to twenty five,
your two year three point fifty eight. Journalists did their best to make this one interesting. Chairman power was determined to make it boring. Take a listen to what the chairman had to say.
Some people didn't want to cut and dissented by committee pretty broadly for holding today that we still have some tension between employment and inflation, but it's less than it was. I think that the upside risks to inflation in the downside risk of I have probably both diminished a bit, so you know, we'll be looking at the other different views on the committee and you know we'll find our way forward as the data involve TK.
Just my takeaway, just my observation towards the end, it felt like a man who was looking forward to retiring and stepping down.
You know, there was a gold question. It's great he doesn't have Kruger ends in the drawer. He's got the Jerry Garciam commemorative gold coins in the drawer, so way looser, there's no question about that. But it was really interesting to see the nuances of the market away from the things we usually quote folks to look at what seriously what Sterling was doing, the way euro was vibrating that and I would suggest they could go back and say, you know, we got through that in one piece.
He's got some advice for the next fort share stat of politics Stephanie Ralph Wolf Research joins us now for more, Stephanie, the questions loaded with politics. He was not engaging, he was not playing. What was the takeaway for you?
I think it's a FED that is comfortable with the backdrop of data, which I think is the right call. The data seem to be improving from here. We actually think that it will continue to get better, in which case this will certainly be the last cut Underchair Powell. There's no more cut under Schair Powell. He's done, and he's I think that's right. He's fading into the sunset and just wants to avoid all of the questions that he didn't really want to answer.
Unfair question, but I can save it for your morning. Note it Wilf research. Maybe it'll help you think Mark Kearney at Davos talking about the new geometry of Middle countries. You look at the president neo mercantilism, the president week dollar. Did the Secretary Treasuries save this press conference by coming out hours before and sounding like James Baker from another time in place on strong dollar?
Yeah, I mean last night it was getting to be a little bit concerning when Trump made the comments regarding his comfort around the sharp drop in the.
Dollar that we've seen. That could also have.
Reverberations throughout the rest of the morning. So I think that is fair to some extent. Powell clearly don't want to comment on the dollar regardless, but there was the legitimate risk and there still is that there could become reverberations as the carry trade on wines. But it seems best and very well aware of the.
Aftermath of that.
Can I ask economic question please? Analog has been great on this, as you have, as well as Stephanie roth Or the idea of the vector and goods we take for granted is disinflation that's turned around. Now we've got goods moving up. We've got gold, command copper and all the other stuff John's talking about. Do you just assume out there somewhere after stimulus that goods roll over again into some form of disinflation, even if service sector stays with an inflationary tone.
Yeah, we're probably going to see a backdrop where we were likely to have some firm goods prices in the next couple of months, in the sense that one you tend to have there's some seasonal issues in some of the data.
You have consumer stimulus that's.
Going to hit goods prices for the next quarter or so, and then beyond that you're going to move to an environment where goods are running it roughly zero percent, and then it's back to an environment where it's all about the service sext.
Away from the politics of Washington. One of the takeaways from that particular news conference that I have is something I've heard repeatedly from a lot of Wall Street participants market participants, is that the data is going to be better. It will improve, the chairman saying overall, it's a stronger forecast than in December. The data since the last meetings show clear growth improvement, and a lot of people think that's going to continue because of the tax refunds. How
important these tax refunds going to be? Do you think people are overly optimistic about the impact this might have.
I think they will be positive for the consumer, but this is a consumer that is already doing fairly well.
Spending has been fairly solid in.
The fourth quarter, and everyone's rise up their GDP numbers in the fourth quarter Q one should be equally pretty solid. I think the main takeaway is that, yeah, maybe even you get a bit of a bump in consumer spending, people will spend the stimulus checks that come to them, and that is the American consumer. Well, then beyond that, this is an environment where you have positive momentum in the economy.
I think it will be important.
That's entirely fair, but it's also an economy that's performing a lot better than many expected towards the back part of the year last year when everyone was concerned about the health of the consumer.
Which was sin these conference asked the question, why wouldn't that lead to higher inflation, given how in some parts of this economy we are supply constraints.
What's the answer to that.
The answer is that you'll see some sticky inflations of the first part of the year, in which case the next bet chair is going to be in an environment where inflation is running roughly three percent, the economy is fairly firm, and they're going to be trying to cut interest rates, and they're probably going to have trouble at first.
It's going to be later in the year.
When inflation starts to cool again you lose a little bit of that momentum where becomes a little bit easier of a conversation.
I haven't answered anyone this question. I think it's fair to ask now after this press conference we talked about and the President with great negativity would talk about the Bidens stimulus, what does the Trump stimulus actually look like into the mid term elections.
Well, you'll certainly you'll see that better or consumer for the first part of the year. It will fade into the election period of time, in which case then the focus is going to continue to be on affordability. So that's that's that's the opposite of stimulus from a sentiment perspective. And this is going to be the biggest challenge for the administration. They're gonna be dealing with all year and
they're gonna have a lot of trouble. They've been throwing a lot of different things at the wall to see what will stick, and there is not that much they can.
Change sticking right now.
But any given central bank, whether it's it's Chairman Waller, Chairman Mirror and whoever, Chairman Pharaoh, whatever, whatever we see with the Central Bank, they've got to figure out what will stick with half of America flat in their back. What's the wolf research plan for that? Besides a check in the mail.
There is not that much can be done.
The one positive is not about anything the administration can do. It is a just a cyclical pickup in the economy that will help at the margin for a lot of the bottom end of the k who has been left out.
They've been left out.
For a wholes and Postner's saying is you know, you get a pick up in the economy, you get productivity, and it pulls up people. I mean, that's the reigning theory here John, into labor Day and into the end of the year.
Just on the next FED share this from the Treasury Secretary in the last hour or so speaking to Yahoo, saying the pick may come in a week or so. It just feels like a rolling week. At the moment, we're waiting another week to get that FED chair pick. If you're just joining us, we're live on Bloomberg TV and on Bloomberg Radio. A FED rate decision behind us, a decision to keep rates unchanged after cunning at three
consecutive meetings. We did get some dissent from two FED governors, one being Governor Walla, the other being Governor Myron looking for a twenty five basis point reduction. Let's get to Michael McKee, who was in that news conference with Chairman Powell. Mike, welcome back. I give you an A for Tryank, a big A for trying. What would you take away from the chairman moments ago?
Well, I think we got the answer to whether Ja Powell would talk politics or policy He focused on policy, tried to stay away as much as possible from politics. When I asked him, and Nick tim Rose from the Wall Street Journal last him, and then he was asked about the all three of us got sort of the Seinfeld answer, No soup for you, He's not going to
talk about that issue right now. In terms of policy, however, he seemed to be a little stronger on the outlook for the economy than his feelings about what rates would be doing. He didn't give us any indication that rates would be going down, but he didn't give us any indication that they think they're at neutral. He suggested we're at the high end of it, which would leave you open to a rate cut if you were able to, in other words, if inflation's going down and unemployment calls
for it. But as Stephanie was saying, inflation's going to stay elevated for a while. So it's going to be hard in the remainder of Powell's term to have any rate cuts, and it'd be hard for somebody new coming in to get rate cuts right in the beginning, even if, as Powell says, they think that inflation x tariffs is running just about two percent or a little.
Above on the committee.
Might there is still a p U for an interest right reduction from both Governor Myron and a Governor Waller Mike for the paper of the Mischill counverage a little bit earlier immediately following the decision. What's the russal for that post from those two confidents on this FYMC.
Well, we know Myron has sort of been ordered to dissent. It's interesting that he only dissented for twenty five basis points this time instead of for fifty. Either he thinks they've gone far enough or he didn't need to do fifty to keep the president's favor. For Chris Waller, the initial reaction I've seen from just about everybody who has written about it is that he's trying to keep his place in line for a possible promotion to FED chair
replacing Powell. But I would imagine also that Waller, knowing him and knowing his reputation, will probably come out on Friday when the blackoutlifts, and give us some sort of statement on the economic reasons why he thinks a cut is important at this time. It's a little bit different situation now because the unemployment rate has go down. Inflation is according to the FEDS calculations which Paul talked about
going to for the core PCEE hit three percent. So it's harder to make the case for a cut at the moment. So it'll be interesting to see what Waller has to say.
My McKay, thank you, sir, stay close. Will come back to you a little bit later in the program. We talked about this. In the immediate aftermath of the decision that descend from Governor Waller for a twenty five basis point reduction, we heard from Vice Chair former Vice Chair Richard Clarder from Torson's Slock of Apollo, essentially calling it unfair to characterize this as a man purely voting for a reduction to keep his name in the running to become the Fed chair.
Yeah.
That has been a man who's delivered.
Effective leadership, thought leadership at the Federal Reserve and call every single turn of the economy over the last several years.
Yeah. I think Tourston summed it up nicely. This is a legit academic folks with major crowd out at Washington State. He wrote a very important, small, tiny, perfect paper in nineteen ninety one I believe it was. It made his reputation and it's on game theory, but accessible game theory, you know. Besides, he's like you, he's cutting chisels, he's lifting weights every day.
I wish I lifted like he did. Have you seen him deadlift?
Oh yeah, have you seen this? It's ridiculous. It's ridiculous how much weight he lifts. But yes, please can take a legitimate guy.
I mean, Ken Rogo is a huge fan of what this academic has done. And he's delivered it. And here's the key thing, and I think attractive to the president. He's done it in a plain spoken way, and that may be to the benefit of President.
I want to avoid the politics of this, Tom, but we've complained so much about group think of the Federal Reserve. We can't complain when someone sticks their necc count and says we need to do something different. And this is why I think we need to do this differently. Risk cut both ways. And we've seen that coming out in the pandemic. How wrong the consensus has been. Oh yeah, risk cuts both ways.
It's the humility is in order, and I frankly I heard that from Chairman.
Poulton Jeffrey Rosenberg of Black Rock joins us now to weigh in on all of this. Jeff, Welcome to the show, sir. The big takeaway for you, unchanged and a chairman who's not looking to change things for the next several months, would you agree, Yeah.
I think the big takeaway on the policy side was the removal of the balance of risks from the labor
market assessment. He got asked that question. I think the most interesting interchange was in the very first question, where he very clearly laid out he wasn't going to address the politics side, and then and got into the substance on the change and the balance of risks, and I think from the economic perspective, that was the most interesting thing in acknowledging that they moved away from both sides of the inflation and the labor market tension that was
there previously, and that's an upgrade to the assessment. I think the near term implication is the bond market has the pricing right that you know, and then in the next six months there's really no real movement towards a cut now. Obviously it depends on the data and everything in terms of the expectations for the FMC is going to be in the back half of the year, Jeff Rozenberg.
Maybe more important than the press conference is the American exceptional is at four oh two, Microsoft four oh three, Tesla four oh five, Meta four oh eight. IBM, honey, thank you so much for those times. I mean, what's keeping this fed going? Is this exceptional America? How do they keep that experiment going with their policy given politics.
Yeah, that's a really important point, Tom, and it came up a little bit in the press conference. You just had to like listen for it. It's a point I made often, you know in these discussions that you know, where is the surprise coming from. It's coming from the consumption side. It's being supported by the wealth effect, and the wealth effect is being supported by all of those
earnings and that AI story. So you know, we talk a lot about the macro economic perspective here, but it's really about the micro and the micro is the AI and the technology story, the concentration, and it's flowing through from the micro to the macro through the wealth effect. And that was why most economists are underclubbing GWth in twenty twenty five. It may be again the story in
twenty twenty six. It's a little bit of the CA shaped economy story as well, because it's only a small portion that are benefiting, but that small portion overwhelmingly is influencing that consumption sething wrong.
I look at that. I love how mister Rosenberg goes to the wealth effect as well. I want to frame out what we talked to Turston Slock about real GDP, which is being buoyant by the wealth effect, maybe with a little bit of add out inflation. Where do you see nominal GDP for the next chairman, John, We go out two meetings, then there's like one or two or three meetings. October twenty nine is a dead meeting because of the election. Where's nominal labor dayish in America?
Yeah, you're going to be sitting five percent a little bit higher.
Wealth effect, John, that's what we call this.
Rosenberg's right, Yeah, I mean.
And the wealth effect has been really important for the past couple years, partially just because it has broadened out beyond just the very wealthy. This is a consumer where younger people are involved in equities. More people, even though they don't have the lion's share of the equities, they are still more invested than many years past. So it's helping a big part of America, of course, not that bottom of the k which just continues.
And yet by some measures, by some measures, Conference Board consumer confidence hasn't been lower in the last decade.
Explained, Yeah, conference Board was weaker, you mish was stronger. I think the net of the two is a consumer that feels bad about the price level in the economy, which is something that cannot be changed easily by any means. But they're largely employed and they don't like the policy uncertainty, so they continue to spend because most of them are employed and continue to make decent wage gains. They also
have they benefit from that wealth effect. But when you ask them, how do you feel about the economy, it's perhaps not great or.
Maybe four five percent. Nominal GDP is not what it used to be, That is not as labor intensive. That this growth is coming from tech capex spent, that don't change in the lives of everyday Americans, at least not now. Isn't that a good explanation as to what's going on?
Yeah, I think that's part of it.
And also concerned about the future prospects because we all know AI is going to have important impacts on the labor market. You continue to see headlines about job cuts. The thing is that this part of the year there is often headlines about job cuts, and everybody gets scared in January about the labor market because they see all these headlines, and then it proved to be not such a big problem.
Jeff Rosenberger, I'm sure you're aware of posen and ors eggs mapping out of a higher inflation, a more resilient inflation. What does your bond world do if we get inflation resilience.
So a big part of that, Tom is in the term premium. Right, the FED, and what we saw in twenty twenty five was that the short end of the yield curve, shorter maturities, were very responsive to policy rates. It came up in the press conference today and the question about long term interest rates, and Powell basically admitted that longer term interest rates are going to be a function. He focused on the fiscal policy uncertainty, but there's more
than that. There's real interest rates. The whole other picture to AI is an incredible shift in investment demand that raises real interest rates and the inflation piece to her question, Tom is about inflation risk premia, and as you move further out in time, there's more time for that uncertainty for all those reasons to affect inflation and the bond market impact is a steeper yield curve, reflective innominal space of greater inflation risk pre I.
Look at this, Jeff. The question of where we are, and this goes back to dollar analysis of the last couple of days, is it's very nonlinear at some point. If I look, you know, to look at the benchmark ten year yield, how close are we to a point where you get accelerated tendencies if we unwind, that would be lower bond prices, higher yield. Is it ten beeps away? Is it thirty beeps away? Is it a fiction? It's just out there somewhere. Yeah.
Again, it kind of came up in the context of the recent volatility in jgbs.
You know, is there a.
Nonlinear event for the US bond market. You know, it's a different market, It's much bigger, it's much deeper. There's a lot more impact in terms of price and substitution effects that can happen. He talked about it in terms of the fiscal side. It you know, the debt level is sustainable, but the path is unsustainable at some point. You know, no one really knows where that point is.
We used to talk about it in the context of small, open market economies around one hundred percent eighty percent debt to GDP. That's a very different setup than for the US economy, and.
We don't really know.
I would I think it's a much longer term process in terms of building a risk premia slowly and less of this kind of tipping point argument. But we don't really know for the US bond market what that will uh, what that will look like.
Last your direct question.
I asked this to Toss and Slock for Apollo in the last hour, and he said, no, do you have a decent understanding now this FEDS reaction function.
I mean, I don't know if it's as clear as no. I mean, I think that they shifted in the summer, and Waller was ahead of it with regards to the payroll side, the labor market side. They were validated in that shift by the slowdown in the labor market, and they told us today that slow down market in the labor market is kind of stabilized. So if you look at the response function, at least for consistency, they paused the cutting, and they appears to be justified by the
reduction in the downside risk to the labor market. So to me, that kind of validates a little bit of what we understand about their response function of this current fed that they are more keyed in on the labor market risks then they are on the growth side, and the growth side is being upgraded at the same time he talked a little bit about that, So I think we're still getting, you know, some view into that response.
Well, let me put it another way.
Let's say growth picks up in the way that Stephanie and Tolson are looking for, and let's say inflation picks up alongside that.
Do you have an understanding of what they will or won't do like this year?
Well he kind of answered that one as well, at least from Powell's perspective, is that no one has trying to find my notes on this one, no one has rate hikes in the expectation the economics of an uptick in growth and an uptick in inflation, you know, might otherwise say that, but yes, in terms of the response function, it's still asymmetric here where they're looking, you know, to be stable, or maybe looking for economic reasons to cut,
but not looking for an economic scenario where they're raising interest in firlks.
I really want to say, if Jeffrey Rosenberg here with Stephanie Roth is important because they both carry their day to day work with a lot of humility. Where in your head is the unemployment rate where everyone involved goes, oops, it's not four point sixty four point seven or that is there a stuff you were off unemployment rate where the dialogue radically changes If.
We get that, Yeah, if you start to shift towards five percent, then.
The dyna round number five percent.
Good round number, five percent, five percent.
Now the same as it was a five percent ten or thirty years ago. I don't think it.
No, I don't think so.
In what ways described our audiences here worldwide? Why five percent all American unemployment right now was you know, seven percent unemployment right back when?
Yeah, it structurally shifted down over time, in which case, because the labor market dynamics have have have have changed materially, what keeps us in full employment today is not the same.
As what we were.
So therefore, if we're sitting at five percent that's a that's a much riskier environment than than what it would have been done.
You live this in Coventry with the auto business in the United Kingdom. I just watched of the destruction of Eastman Kodak yesterday, a great YouTube video. It was like walking through my childhood. But that world is gone when it was a seven percent unemployment and now we're walking around happy with a five percent numbers.
Well, the thing to build on that, Tim, I think we have to confront a new risk. You bring up the old manufacturing hubs the basis of say the United Kingdom and for that matter of Detroit he in the United States. That's what globalization did to manufacturing. And the risk now that we have to confront in the West at least is whether AI is going to do that
to services what globalization did to manufacturing. You said it was a brief acknowledgement there from the chairman in that news conference, just to give a little nod to the prospect of a reduction in jobs at least in a short term because of this new technology.
Yeah.
I think that's fair and I guess that is the risk in the future that we end up with a structural shift higher because before it was, you know, a backdrop where.
Globalization and manufacturing.
Helped to sort of bring the economy into today. We're a much more developed economy than we were.
You know. Of course, that's the risk.
That we see into the future, that we end up with a structurally slightly higher unemployment rate. But I'm not convinced that it will end up being quite that. I think there's an environment where you end up with job gains as a result.
I think that's the problem being a policy maker right now. I'm not convinced of anything, and I'm not sure they are either. Things have changed. We asked Bob Michael a JP Morgan, your former colleague, the question a little bit earlier. What's more important for the outlook for the economy now the spending numbers from these big names that report in about twenty minutes time in the next hour, or the payrolls report that we get every first Friday of the month.
And he's pointing to tech capex from the major tech players in the United States. That has completely changed the conversation. How do you set policy with traditional macro indicators when what's driving the economy right now is something else.
So I think what's driving market is of course AI, and that kind of is required to continue moving ahead in order for the US economy to be okay. If tech catpacs started to slow down materially as a result of AID, there was a whatever reason they decided to return on that investment wasn't quite as high. Usse econdy would still be okay. We're not at a place where AI is so ingrained and important into the economy that if it were to if those dynamics were to change,
the economy would be in big trouble. We estimate that the domestic share of capex AI related capex is that one a half percent of GDP housing is a little over three, so it's not that ingrained yet. In a couple of years, if this continues at the pace, then the conversation is different.
Jeff Rosenberg, let me ask you, Stephanie Roth question. I think it fits in your fine and that is if you look at the labor upset that's out there. John and I are overwhelmed every day with emails talking about fancy people at black Rock and Wolf Research talking about AI AI that when does the Central Bank just have to address with these two Americas? When do they address to Americas.
It's a great conversation and came up again in the press conference, and I think Powell did a really nice job in addressing what we don't really know and we don't know what that impact is going to be. But he also critically added this comment on this is not something that FED policy is well suited to, right, So if we want to address labor market frictions and disruptions, that's much better suited to other government policies than the
broad cudgel of monetary policy. I want to just come back to your earlier conversation and just make one other point that the wealth effect that we were discussing, it's a double edged sword. So while the cap X impact that Stephanie was talking about point well taken, the wealth effect, if you were to have you know, a challenge to the valuations or concerns or repricing the benefits that we've
seen can also you know, turn into headwinds. And so we should just be kind of aware of that fact of the AI micro impact to the macro economy.
And Jeff, I just want to avoid the rent. But we have got a few more minutes. I get frustraatesed when we say things like the FED can't do things about certain situations when they've contributed to them themselves. And I'm talking specifically about site inequality and the k shaped economy. Jeff haven't made contributed to that problem.
Uh yeah, It's one of my favorite discussions. And you know, it goes back, you know, Jonathan, even the comment that I just made. You know, how does the FED address
these things in their policy framework. It's financial conditions, and the FED does affect financial conditions, and they are affected by financial conditions, and so you know, when the FED made a policy choice back in the GFC through the portfolio channel to try to address the challenges of the collapse in the housing market, they kind of pushed up into their transmission mechanism toolkit transmission through financial conditions. And so that's really the problem that we've been inheriting for
the last two decades. And so, yes, it is something that they're part of. It's it's part of Besson's you know, criticism in the gain of function, and it's part of the kind of you know, future potential for FED policy review of you know, how do we how do we extract or how does the institution extract itself from those things? At a at a simple level, it's it's what should the portfolio look like, what should the holdings look like?
Should we still have mortgages? And that's one example of how you could, you know, change some of those functions in a new policy.
Is getting rent. That's the challenge for the next guy. Jeff is going to see Jeffrey Rosenbuck there of black crook,