Let's head over to Bloomberg's Michael McKee with the headlines mic.
No surprises, no news, a few new words. In a unanimous decision, the Fed retains its five and a quarter to five and a half percent target range for its benchmark borrowing rate, and retains its language about determining the extent of additional policy firming that may be appropriate. The Policymaker's assessment of the economy contains some new adjectives, but no new information. Activity expanded at a strong pace in the third quarter, and instead of solid job gains have
moderated instead of slowed, Inflation remains elevated. The statement says tighter financial and credit conditions for households and businesses are likely to weigh on economic activity. That adds the words financial to this sentence, and it may be a nod to the idea expressed by many Fed officials that raising market rates are doing some of the Fed's work for
it a reason not to have raised rates today. This is the second meeting in a row that the Fed has held rates unchanged, and although the dot plot suggests one more move by the end of the year, the markets may interpret today's decision as confirming that rates have peaked. That's going to be a key question for Chairman J. Powell coming up.
You'll see, Mike McKee. We want to get to you quickly here. But we see the market moving lifting up. Equity's lifting up higher right now, with the Dow up eighty points two tenths of a percent, Nazek one hundred, do a tear up eight tenths of a percent as well? The tenure yield comes in ever lower bond prices up, yields down on the tenure yield four point seventy nine percent,
distant from the five percent yield. Mike, the statement is here, and maybe it's a preparation for December fifteenth, but it seems to be a preparation for a presumed slower American economy into this press conference. Do you assume we go from four point x percent Q three down to something dramatically weaker in this present quarter.
I don't think the Fed is going to put it that way. They took recession out of their forecast a meeting or two ago and basically have said that the economy can grow at a reasonable rate without without going into recession. Now J Powell has suggested we still need a period of below trend growth. We're nowhere near that now. If we do see it slow down, the question is
does it go too far too fast right now? All indications are it wouldn't that we could see slower growth without seeing recession, and we could see inflation continue to come down. But that's a question for them. There are they in damaged control right now making sure that they don't go too far because they think the economy is going to slow or do they think they've done enough at this point.
Michael McKeith, thank you so much. We'll be catching up with you throughout the afternoon, just taking a look at what's going on. The two year yields to me, Tom really stands out sharply down below five percent. As really to Mike's point, the market is taking this is the FED has done hiking rates for this ect already.
Headlines out now. Mike mckeel have much more on this as well as our guest. But low Brainerd showed up for the FED meet today. She's at the white outs now holding Quota's national Economic advisor. And let me read this headline. It's a brainer headline. FED repeats it will take a cumulative tightening and lags into account. Drogy would have just said, we're going out to twenty twenty five.
Well, and we're not going to hike anymore, because if you think about the cumulative rate hikes, have we seen enough from what already has been done? Or is this the long and variable lags that a lot of people are talking about.
Richard Clareda with us still he is with PIMCO and Columbia University. Richard Clareda, I look at cumulative and that just tells me we're going out there. Drogy would have put a date on it. Can Professor Clareda put a date on this longer FED at this.
Level, Well, I don't think so. I think you know that language curuity has been in there for several meetings, and it does recognize that the path forward depends upon how much they've done in the past. As I've said, these are always balancing acts. I think the Fed's baseline outlook makes a lot of sense. But if there is a risk, the risk is that inflation is too stubborn. If I were recommending or talking to J. Powell, I would recommend that he leaves the door open to doing more.
It doesn't have to commit to it. Every meeting's live, but I definitely don't think he wants to walk away today with the markets seeing the headline as FED is done.
That seems to be certainly, at least the initial read on this one line that Michael McKee pulled out was the tighter financial as well as credit conditions are set to weigh on the economy. They added financial into this. How much do you think the Federal Reserve and the members are concerned about some of the volatility we've seen on the long end of the curve, that maybe it's getting to something a little dysfunctional, a little bit less just restrictive.
Yeah, well, you know, the short answer is there's probably a range of opinions, but certainly Cha Powell recently and Lourie Logan, president of Dallas, have indicated that it reflects it is doing some of the Fed's job for it.
They haven't pushed back against it. I do think that the challenge, you know, having word Smith with others some of these things, the challenge of putting the financial conditions term in this statement is, you know, financial conditions can go up and down be vital for a lot of reasons. And then at some point they they may regret that they included it in the first place.
A vice chairman, thank you so much. He's a former vice chairman of the Federal Reserve. Stress he's going to stay with us. Yes, okay, I did not know that. That is very good. Rich Claire to thank you for the generous time today giving your responsibilities at PIMCO. Joining us now. Diane Swank, chief economist KPMG, and Matthew Hornbach with his global head of macro strategy, Morgan Stanley Dan Swank.
We're talking rates, We're talking inflation. I believe there's an employment mandate as well, and part of that to all of your Midwestern heritage. Are auto workers better paid? How do we have wage disinflation if we have unions garnering the historic pay raises.
Well, first of all, I want to echo what Rich said is our concern is sort of around May and June. Where is the FED going to be? And I think the optionality to have rate hikes still on the table, and that every meeting's live is really important. So I
really agree one hundred percent with Rich on that. I think the issue on the UAW strikes and what they have seemed to have gotten is that, first of all, union contracts were lagging private sector contracts during much of the expansion and the frenzied hiring boom, and so some of this is catch up. I think also it's important that there will be spillover effects in the manufacturing setctor. More broadly, the key issue is how much will those
higher wages spill over into other manufacturers. That's yet to see, but I do think that's where their tension could show up, and it's yet to happen, and so they're going to ratify it. These were good contracts and a good win for the UAW, harder for the automakers. But I do think what's important to understand is that many of these contracted wages in the public sector as well are just now beginning to reset and catch up to where the private sector already was several years ago.
Matt hornback, what all that Lisa and I have done today? The single moment for me was your Seth Carpenter explaining the Zetner deceleration in this economy from four point x percent I know inventories in that down to something sub one percent in the Q four. What do our markets do with that deceleration presumed in real GDP.
Yeah, well, thanks for having me on the program, Tom. I do think that the deceleration will be important and factor into how the FED thinks about this higher for longer mantra.
I mean, it's.
True that the meeting today didn't really offer too many surprises, but we do have one more meeting before the end of the year, and even though we don't expect the Fed to be hiking rates at that meeting, there is an open question about what they do with their guidance that comes in the dot plot that I do think is going to be levered to the growth outlook, and if we do get this deceleration that Ellen and Seth are looking for, then we do I would suspect that
the Fed may have to take a slightly more dovish approach to their outlook for interest rates in twenty twenty four and beyond.
Very importantly, Lisa, the two year yield breaks down to a new lull on the two year yield, as you mentioned earlier in ten basis points, now in round it up on eleven basis points four point ninety percent.
This raises this question, how do you have a hawkish pause if a pause is a pause. Matt, Oh, what's your view? I mean, how much can really Fetcher J. Powell lean into this idea that they may not be done without the market saying yeah, you've been following us all year.
Yeah, Lisa.
I think that what will be key is Powell focusing on the data dependence of the Fed. We just got through a pretty strong round of data for the month of September. We've got two more months of data before the FED convenes in December, and then again that dot plot, I do think is going to be an important signaling mechanism. To the extent that they are done hiking rates, they can always double down on the higher for longer theme by taking all of the rate cuts out of twenty
twenty four. So that's going to be an important variable that investors will be paying attention to.
Diane, how much are you looking at the reliance on financial markets to do the work for them at a time things are volatile and to Rich Clarreta's point, financial conditions can change. How much is that not exactly comfortable place for the Federal Reserve to be in?
Well?
I agree one hundred percent with Rich on that, and so I guess Rich and I are just in one hundred percent agreement today, But I think that is going to be a danger for the FED because they're looking for this doing the heavy lifting forum. It is obviously already throwing a bucket of ice on the housing market that's going to come up in the fourth quarter. That said, the consumer is remarkably resilient. We've got double the savings we thought we had with the benchmark revisions, and it's
getting interest paid on it now. That is really important to take into account. And the strength of the economy. I think we're going to see a acceleration in the it's hard not to from almost five percent in a fourth quarter, but the consumer is still going to be pretty strong. We're set up to have pretty strong gains still with two and a half percent or so gains
and consumer spending. The strength of the economy justifies higher rates, and it also brings into question how much restriction we have, and if financial conditions were to unwind and the route and the bond market were to un that takes away the restriction that's out there, and all of a sudden, the FED has to get back in the game, and so that optionality of being every meeting live critical.
Rich Clarina, what's so important to me is again the analogue that we're conveniently using of taking Powell back to Vulcar and his Bill Dudley Rice an hour ago. For Bloomberg, he says, the arch fear was Arthur Burns, who allowed inflation to get out of control in the nineteen seventies. I believe we have a disinflation vector. But should we fear that inflation is out of control?
Well, the analogy I would use, which I think the FED would want to avoid at all costs, is nineteen sixty six LBJ had guns and butter. Inflation was moving up. The FED hiked and then they blinked and they cut in nineteen sixty seven and what we now call the Great Inflation I think stems back to a hiking episode that got cut short, and the FED did not re
engage when inflation went up. I don't think the power Fed would make the same mistake, But that's the part of the history book i'd be looking at and trying to avoid.
Matt.
When we take a look at how the market is handling this, we're not talking at all about the balance sheet. Should we be I mean, is that part of the discussion in a material way.
Well, Lisa, I do think that the balance sheet will be an important topic to discuss in twenty twenty four, but that's to us probably a bit more of a second half of next year issue as opposed to a first half issue. Nevertheless, you know, we will see the Fed's balance sheet continue to shrink in terms of its
securities holdings. The issue that we would be focused on here is what ends up happening with the BTFP, that term funding facility that the Fed introduced back in March, to see what kind of take up we end up getting through the first several months of twenty twenty four. I do think that will be an important factor that we should all continue to pay attention to.
Dian swank to pick up on what Matt Hornbook just talked about. And of course we see this in Japan with the Arch debate even into this evening. Pay attention folks Bloomberg Asia, a Don Mann and the rest over in Hong Kong following Japan in their odd economic experiment, Diane Swanker, are we going to successfully extricate ourselves from what did normal were being? You call it? Qi one, q E two, QE three, four five six, I mean Dian Swank where I mean McKees mcke's encyclopedic on this,
I don't get it. Are we going to get ourselves out of this qwy qt model successfully?
That's a big question. I'd love to hear Rich's response on that one. I think you know what's interesting is the FED wants to stop well short, is likely to stop short of their objective in terms of how much they drain their balance sheet. That said, the quantitative tightening, the reductions, and their bloated balance sheet, they're still going to stop at a level that's much higher than it was in the past. And what we've seen is any time there is a financial crisis, this is something that FED.
Once we get down to the zero boundary, we have to rely on now. The one thing that might be hopeful for the future is that it looks like the non inflationary rate is rising and that we're no longer coming out of a global financial crisis. And if we can avoid another major financial crisis where we literally have to go back down to the zero boundary, we've got a lot of room to stimulate now without going back
into the balance sheet. That's for now, and it looks like we'll have some cushion and the descent on rates is going to be significantly slower and end up at a much higher level than we entered the situation at in twenty twenty.
Matt, I want to pick up on what you were talking about with the funding program that the FED is set up for the banks. How much are you seeing signs that there would be serious financial distress if the FED were to wean the market from this backstop that they created after SVB.
Well, Lisa, I mean, banks, of course have the ability to raise funding in other ways. Is but it's clear from the weekly take up at this facility that there are certain institutions out there in the market that feel it's in their best interest to continue to tap this facility. We wouldn't expect the facility to go away in March,
but it is something that we carefully monitor. In addition, you know, when you look at the amount of reserves in the banking system, you know they've been resisting falling from their current levels, and so in some ways, I think what the system is telling us is that the FED may have already reached the minimum level of reserves that are required for these banks to continue to conduct their businesses. So we're kind of trying to monitor all of these various signs and what we see does concern us.
I have to say, Matt Harnbach, We're going to have to finish that conversation another time. Diane Song to both of you, thank you so much for taking the time on this FED day. And I've got to say, we have such an ace panel with us, Tom, the fact that we have such incredible names, Matt Hornback, Diane swank Rich Clarita who is sticking with us, and we are grateful for that joining us Now to the conversation. Greg Peters Cocio at PGM Fixed Income and Kathy Jones, chief
fixed income strategist at Charles Schwab. And to that point, Greg, do you see things starting to break in the financial sphere that the FED is kind of papering over with some of the programs that'll be key to watch.
Oh, I don't think so. I mean, I think those backstops are just that their backstops. I think there is this persistent worry around the proper function of the treasury market, so regulators are vigilant around that as is the FED. So no, I don't think anything's breaking at this point. And if you just take the data on balance, it's
actually reasonably good. So there's this whole sky is falling mentality out there, and you know, preparing for a rainy day is important, of course, but out of the right now it's pretty bright and side.
Greg Peters, where's an appropriate inflation adjusted rate? If I look at the ten year real yield two point five zero earli early this morning. I know you came in late today, Greg, right now two point three nine percent. We've seen a reduction there, but still way elevated over two years ago. Where's the appropriate real yield? Yeah?
So, I mean I think we've been so stuck in this central bank dominant world where everything was topsy turvy upside down, where actually negative real yields was an inducement, right, and that was a far cry. And how we thought about real yields in the past, right, really yield our function of you know, pretty strong growth, stable growth, and you know, a little inflation. So I think we're in
a much more normal environment today. And quite frankly, Tom, I think we're so jaded by this recency bias when the FED just dominated the game and pushed real yields to really kind of unpactors flee life levels.
Kathy Jones with us of Charles Schwab and her recency bias is clients going, should I buy a money market funder an eight year CD? Kathy Jones, You know, I look at the moment that Greg Peters was just describing just simply, all it comes down to me is what do I do with five percent cash? What are you seeing at Schwab? What are people doing off of the FED action with a money market fund? And I'm going to call it five and a half percent?
Well, we're saying again clients do lots of different things that have lots of different clients, but we are seeing a lot of interest in say CD ladders, treasury bill ladders, treasury bond ladders. As people look at where the yields are and the real yields, which we've been pointing out have been pretty attractive, they're starting to sort of tiptoe
out the curve. We don't have a lot of interest in going very long on the curve, but I think the idea of capturing four or five six percent, depending on what instruments you're in yields going over the next five to seven years is looking more attractive. So we're starting to see a little bit of that action. A lot of louder securities though, is a way to kind
of average into the market. But I do think we the longer we can hold in some sort of a range and stabilize, and the more we can get a signal from the FAT that maybe there's not a lot more common in the way of tightening, you know, the more people will get up the courage to extend out a little bit in duration.
Kathy, I know that you're very interested in the balance sheet and hearing about what the FED has to say, and we did just here from Matt Hornback that he thinks that the FED has hit the minimum amount required of reserves, that basically we're bumping up against the size maybe the balance sheet needs to be.
Do you agree with that? Yeah, you know, I have only done a small amount of work on it, which is why I want to hear what the FED has to say about it, because I like to know what their thoughts are, and we really haven't gotten them to talk about what's the optimal size. We've had some estimates of twenty to twenty five percent of g If you do that, you're going back. You know, we're going down
quite a bit more. Put that against where you know reserve requirements should be, and you know you're you're kind of at odds. Which is why I find this question of the FED continuing QT even when they eventually shift to easier policy. I find that to be a big question mark in my mind as to how back can those two policies can kind of coexist smoothly. So I don't know that we're at the minimum level yet. I think there's some room to go from here, but I
am concerned. I would like to know what they're a deeper thought process than the little information should we've been given.
You know, Rich Clarina, what's so important here? And I'm thinking of your conversations and your council, to the portfolio managers at PIMCO, and in the moment we're in there are select people out there saying bonds out immaturity are a screaming buy. How do you frame that at PIMCO? Given what the FED is doing post pandemic. Can you say price up, yield down and go out in maturities to get total return.
Well, that's what exactly, in the sense that investors can earn returns that they would have been drooling over three years ago by not moving all that far out on the on the curve, certainly if you look at investment grade corporate or or or mortgage backed security. So what we're saying is that there is a menu of opportunities
available to investors. But when you can get returns real rates where they are now, and because we're in the camp that thinks the FED will succeed in ultimately bringing down inflation, but this is at a great entry level and you don't have to take a lot of duration risks. Some of vextors because of their business model, do have more duration risk, but there are opportunities even if you don't want to add.
That this is great.
The Dean of Columbia Economics is bond manager. I think I think Rich claar To just got out of bond ticket and said let's go along.
Which is there reason why va I do want to just get a sense from you, Rich about the balance seat question about whether the Fed's balance needs to be a lot bigger than people have previously had imagined, and if we're kind of bumping up against that level.
I don't think we're bumping up against that level, Lisa. Remember, the FED has something another acronym, the reverse Repo Facility program, that's got a trillion dollars in it. That money, once it leaves that facility will then flow back into reserves.
So I think if you if you.
Factor that in, I think there is more road for the FED to travel to shrink its its balance sheet. I do. I agree with your prior previous guests. It is interesting that the FED has talked about continuing QT even after they potentially adjust rates. You know, when I was there in twenty nineteen, we stopped QT before we cut rates, so that would be an interesting difference.
Professor Claire to thank you for your generous time today here at this FED meeting. We're gonna let rich Claire to go here six minutes away from this important press conference with is Kathy Jones of Schwab and Greg Peters of Pigium. Greg, I'm just going to ask you a simple question here, and I'm starting to hear it. A lot are bonds of screaming buy.
I think there's a tremendous amount of value in the bond market today. But I want to go back to you know, do you really want to extend duration. I think you do, but you want to do it very carefully. So I think the shape of the curve matters a lot. You know, Tom, you keep talking about cash and the shape of the curb tells you to be defensive, tells
you to be in cash. So if you subscribe to this higher for longer front end rate environment where the FED can no longer kind of cut down to zero and has that flexibility, then you need to see the curve normalize before you really step in and moss out the curve. So to me, it's really quite simple. The shape of the curve dictates where you want to be on the curve. And while there is value, absolutely we're excited about it, I don't really see the need to rush out and lock in duration here.
Greg.
It seems like a year ago, but we got the refunding agreement for a funding announcement excuse me from the Treasury Department earlier today and it seemed to move the market quite a bit. Do you think that we learned today that supply right now is trumping any kind of fundamental economic read that it really does come down to simply, there are not enough buyers to pick up the US debt with yields as low as they had been traditionally.
No, absolutely not, Lisa, what I know you like to push that narrative. I don't think that's true. I think on the margin, yes, it does put more pressure on the back end, but it goes back to the shape of the curve. Why is the curb inverted when we're printing five percent GDP and inflations around kind of three percent, So you know, I think that is really the fundamental dictate here, not so much to supply. At some point it will map, but I don't think that is the
driver today. I think that's more of a kind of a politically driven red herring than anything else.
Keathy Jhones would be interesting to see how the chairman addresses commercial banking. We've been talking all day about the Keith Britt Index BKX really having some challenges technically, and of course finding a bid has been a challenge, even with the Dow up one hundred points, NASDA, GOP eight tens of percent, VIC seventeen point four to three. Kathy, the heart of the matter is a movement of money from deposits to money market funds, and that's the theory
here of instability that could come. Do you see those potential instabilities out there in the trust market between deposits and money market funds.
Well, I think if there's any issue that the FAT is now very much focused on and has its arms around, it's this one. After what happened in March, I've got to believe that the regulators and everyone else that the FAT, indeed in the regulatory environment for banking in general, is scrutinizing this pretty tightly. So I don't know that this is going to be some sort of a trigger for crisis so much as something that is going to have
to be worked out over time. And I think that that probably means a lot more mergers among financial institutions and recapitalization, et cetera. But it's usually not the things that everyone's focused on, that is, you know, bring up the crises. It's something that no one's left.
I can't say enough about this, Lisa, Well, what we've done today in with the terrible construction of the Keith Breanda Woods chart, it's simply got to come down to combinations and transactions. I just see no other way to do it.
Yeah, although we do see a lot of positivity in the underlying economy, and we see that with the Ajult report wrote earlier today and a whole host of other components. Greg Peters really was talking about that. So, Kathy, from your vantage point, how much when do we know that we are underestimating the strength of the economy and the sort of momentum behind this inflation?
Well, I think west're getting at, Lisa is this question of you know, what's the growth rate, what's the underlying growth rate going forward? What's our and our star and all those questions. I think that that obviously a lot of debate around that. There is a strong belief that we've moved to a higher level of economic activity for a lot of reasons going forward then we've had over the past decade or two. And that means that we're at higher rates for longer, that the resting place is
higher than it was before. So, you know, how will we know? I think in the labor market is probably the key indicator. Right if we start to see at acceleration in jobs and you know, real decline in the unemployment rate, that would be certainly a big surprise. I think expectations are it's going to go the other way since we've had so much tightening in this system, so it'd be a pretty big shock if we saw that
component of the economic environment shift upward. I don't anticipate that that will happen, but I think that that would be the big surprise.
Kathy Jones and Greg Peters, both of you, thank you so much for being with us on the playoffs game equivalent in the economics sphere. Subscribe the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening.
I'm Lisa Abramowitz, and this is Bloomberg