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We are about to get some words from the Federal Reserve as they embark on a pivot point of potential inflation, disinflation, and then potentially the end of a hiking cycle after raising rates by five hundred basis points.
Let's head over to Michael McKean. Now with the latest mic.
We have a super hawkish skip a unanimous Fed notice sense leaves the benchmark rate at five to five and a quarter percent. However, the new dot plot shows a new terminal rate of five point six percent, which would be two to twenty five basis point moves, or at least one point fifty Twelve of the eighteen members of the committee see rates at that level or above. One sees six and a quarter percent, four rates moving up only twenty five basis points, but only two see no
change between now and the end of the year. In their statement, the officials say holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy, but the very next sentence leads us into it with saying instead of saying in determining the extent to which additional firming may be appropriated, now reads in determining the extent of additional policy firming
that may be appropriate. There are also significant changes to the economic assumptions. Unemployment this year projected to reach only four point one percent, down from four point five four point five percent next year and in twenty twenty five, down from four point six. Growth revised up this year to one percent from four tenths and lowered by a tenth in the next two years. PCEE inflation forecast at three point two percent, down from three point three percent
this year. Core PCEE is revised up this year to three nine from three to six. There are almost no significant changes in inflation for the next two years. The federal funds rate will be cut, but not until next year. The summary shows it will be a big cut as well a full percentage point in twenty twenty four, going to four point six percent by the end of next year. They see rates falling to three point four percent in
twenty twenty five. The statement says the economy has continued to expand at a modest pace, but job gains have been robust and inflation remains elevated. While the banking system is sound and resilient, they do expect tighter credit conditions
will weigh on economic activity, hiring, and inflation. The extent of those effects remains uncertain, it says, And finally, there are no changes to QT the ninety five billion dollars a month roll off to repo or reverse repo rates or to counter party caps.
I think what's important here, folks. In the multiple decades that I've known Michael McKee, rarely if I heard that tone of the McKee voice. He has huge perspective on this. And to see the two year yield, Karen, if you can't bring up the two year yield right now, which only can be captured by a fourteen basis point move to high yields, the y axis on the two year yield right now, extraordinary equities give back fractionally. But the
yield move here, Lisa is, Mike, stay with us. The yield move here, Lisa's extraordinary.
They're getting the message loud and clear.
The FED wants to go again, and quite maybe quite significantly. But this from Drew Mattis of MetLife. He writes it and says, if they knew they were going to be able to go, they would have gone. If they were so convinced that they would need to raise rate significantly higher, why not today?
I mean, Michael McKee with then we're really an historic dot plot and projection study that you just said. Can you say that this is the first time, Michael McKee, where we begin to frame something in the vicinity of six percent for short paper.
Well, it's the first time you get anybody suggesting that we're now over six percent to six and a quarter for at least one member and two think we're going to go somewhere in between that. So it does look like we're putting it into the ballpark. But still the majority think we're going to end up at five point six, which is still a significant two moves.
Honestly, I just keep going back to this idea.
If they wanted to hike eventually and possibly twice more. Why not today the reassessment and potentially the concern out there, Michael McKee, stick with us, will be coming back to you as we do see markets on the move very much, readjusting to a reality where they possibly want to raise rates.
By two more times.
Just to put this in a perspective, this is the first pause in FED policy in fifteen months. That is where we are starting on March twenty twenty two and having raised five hundred basis points. They did not raise rates tom and you are seeing though their indications of further rate hikes being bled out into markets setting them lower.
And there's what we talked about this morning as well. This afternoon, the FED says the FOMC vote was unanimous. At this historic moment, it is good to speak with Diane Swanck, Chief Economists KPMG, with all sorts of experience here out of Michigan and Midwestern Chicago at economics, Dan, what in God's name is going on? Should they have just raised rates?
I actually think that they're really concerned. Its attention within the Fed that Julia referred to earlier in terms of the diversity of views. Chairman Powell is a much more skittish about what's going to happen in the financial markets and stresses in the financial sector, of the banking sector in particular, and not wanting to go too far. That said, this is a FED that is committed to additional rate hikes.
The tricky part of this pause or skip the waller skip as we call it, messaging it and this was a very effective way to message we're going to assess what tightening is out there and how much additional tightening
is needed. I want to add that much of financial markets have ignored that many central banks around the world that had paused have had to reassess and go back in Bank of Australia, the Reserve Bank of Australia, the Bank of Canada in the recent week ECB, all of these banks looking to think that they were close to a terminal rate now reassessing that. And I think the FED doesn't want to look like any pause that it takes is behind the curve and not continuing that products and the blur.
Of emotion there from Mike McKee and the data of the projections Diane Swank, was this a Fed of a single mandate? Have they basically said, we can't opine on labor because we're solidly under four percent.
There is clearly of you that labor markets are extremely tight. They acknowledge that I'm not at Also, heis by the upward revisions to the forecasting growth, the idea that they're still going to get to four and a half percent on the unemployment rate, although mild recession is still this sort of softish landing kind of scenario they're trying to
reach for. But when you start looking at the other issues on rate hikes, on how many great hikes are up are even an excess of a half percent in this year, that really gets to the core of the issue of how hawkish they think they're going to have to be to t rail what's become a more persistent global inflation underline inflation.
After the shock of these folks, equities deteriorate down negative three to four. It's okay, Dan, I cough like that all the time. SPX down a half a percent, and I really want to say that the two year yield my litmus paper this afternoon, continues to move to a higher yield. We've got a shocking sixteen almost seventeen basis point move. That's a ginormous move for those keeping score at.
Home, Lisa, and I'm watching real yields, basically inflation adjusted or the market's perception of inflation over two years, surging to the highest going back to two thousand and nine, nearly two point seven percent in terms of real yields, So it gives you a sense of the tightening as we move forward.
Diane, we were talking about how Chair.
Powell doesn't necessarily want to fractionalize his committee. He wants to keep people on the same page, and because of the varying views was why they didn't go. Is that uncertainty good or is it bad for a federal reserve setting policy at such an uncertain time.
I think I actually agree with Julia on this. I mean the idea of having First of all, he's been remarkably successful at corralling the cats. That's just something he.
Is very good at doing.
That said, the diversity of views when you're trying to calibrate policy very hard to do, and given the uncertainties we phase is healthy. And I think what Julia pointed out, if we had gotten a descent, what we did is he you served a descent by making this a very hawkish statement. Basically, give guarantee a July rate hike as well.
That was his way of buying time.
That was a compromise cut, so he did not get a ascent at this meeting. But I do think it is healthy to understand where the spectrum of views are given the uncertainty and the unprecedented nature. Are hete even using that word anymore, but we all know it. Julia did a very good job of saying how many things that were all integrating to try to understand this environment.
But having that spectrum of views on the bed and the diversity of views within the Federal Reserve is a strength of the FED, not a weakness.
Just to rehash if you're just joining us now. The Fed did not hike, but it was a super hawkish skip. According to Michael McKee, looking at a median rate forecast for the end of this year five point six percent, that is up from about five percent right now. It also sees the end of twenty twenty four rates being
at four point six percent. Definitely seeing a tilt upwards as they signal two more rate hikes by your end, Diane, I'm curious from your van point does that seem realistic based on the economic slowing and the disinflation that you're seeing, that that is what's required to truly bring inflation to the two percent target.
Well, it is our forecast, so we expect them to raise rates both in July and in September as to that half percent up. And I think that's important because the resilience that we've seen, even though inflation is cooled dramatically, which is wonderful, a lot of it has been concentrated in food and energy prices. Again very important for consumers.
But remember why did the Bank of Canada go back in because they saw bottoming in the housing market that could mean additional inflation down the road in shelter costs. We're experiencing something very similar in the United States at the same time that core services inflation has proven sticky, not just in the US but globally, even in Europe where they've had a technical recession.
Now just joining US Steian Swan KPMG with us right now, Lisa Brawmwinson, Tom Keen on a meeting that is not a snooze fest. You heard it from our Michael McKee. An extraordinary and truly super hawkish statement. That is mister mckees's language. I'm going to take five point six percent on the terminal rate. Let's round it up collegiately to six percent. You can do that in biology. It's not biology, but we'll go there. Michael Gapin with US US economist
Bank of America, and of course Michael Collins Senior. We only booked Michael's today is how it works exactly well, Michael Collins with U A PGM fixed income as well, Michael Gabon. I got to go right to the terminal rate. It seems like we're flying blind. Does Bank of America have to adjust a money market fund a five five point one five point two percent? And are we migrating towards a five point six five point eight Dare I say six percent? Short term piece of paper?
It certainly looks that way, Tom. I think you could add to that story a whole bunch of Treasury bill issuans coming in a hurry, so T bill yields as well as other money market yields. Look, I think five point six is where the Fed is wanting to go.
I to answer your earlier question, if I may pose it to myself, Yeah, they should have hiked today, but I think they got stuck on timing at the end, and market pricing wasn't where they wanted, and maybe it would have been a little too disruptive to try and squeeze that in at the end. So we get I think what it will be a difficult message, which is for some reason, we saw enough to pause today, but we've also seen enough to tell you we think we need to do two more rate hikes.
Michael Collins, I flunk not one, not two, but three exams over the word disintermediation and what that means to me is not chaos but just uncertainty and discontinuities within the global fixed income space. Does the shock of this decision is super hawkish? Does it put a little bit of tension into the fixed income markets?
pGEM looks at yeah, absolutely, Tom. You know, we've been thinking the risk to the market pricing, which, as you know, have been pricing in a lot of rate cuts starting by the end of this year. We thought the risk was that those would be taken off the table, and sure enough, this really hawkish forward looking dot plot does that.
So the big kind of bear steepening or flattening, we're seeing in the yield curve is lined up with our positioning fortunately and is really to me what the FED should be doing is expected.
Michael Gapan, you were talking, first of all, happy birthday on this FED day to you. You were talking about how the FED didn't raise rates because the market wasn't aligned and they kind of ran out of time. Was that the right call given the fact that they want tightening financial conditions to help them get to their goal.
Look, I think I think in general, as a policymaker, you do not want to surprise markets with rate hikes. So I think that is the right base point of view. But I also think the data moved quickly against them. Just at the end of the intermeding period. We have upward revisions to construction spending and trade which puts Q one growth at two percent, very strong employment report. You know, I think you have to you're going to get a
significant market reaction today. Anyway, you know, I think they probably if they had another week, they would have they would have pushed us all into a hike in June.
Michael Collins, I'm looking right now at the projection of five point six percent rates by the end of this year. Two more rate hikes and four point six percent by the end of the following year. I keep asking, this, is this realistic based on the slowdowns that we're seeing in different areas. Do you think that they will actually achieve this? And if they don't, what kind of credibility are they sacrificing.
Yeah. I think what they really need to do, Lisa is try to convince the markets that they'll at least keep this funds rate where it is somewhere in the low to mid fives for longer than the markets are pricing in. Sending this more more hawkish message certainly does that right, and the markets are readjusting, as Tom said, to this higher yielding world. So I think that's the right message, the right move. But ultimately I don't think
they'll be able to get two more rate hikes off. Ultimately, I don't think they'll be able to have a FED funds rate, you know, in the mid to high fours or fives for more than the next year or so. So I think ultimately you will see more cuts. But for now, I mean rates are going to stay higher for a little longer than was priced in. I think that's the right message.
Dane Swank with us as well. I want to go to all three of you on this. I think it's so important. Swank. I want to look at the dot plot, and you know, I'm not a fan of it. I took Richard Berner one on one and I'm just not a fan of all this verbiage. I look at twenty three, I'm okay, there's sort of a cohesion, cohesion to it. I look at twenty five, it's a lesser cohesion. The dot plot right now in twenty twenty five, Diane Swank is a complete mess. There's no cohesion. It's basically a
linear point estimate from low to high. Dian Swank is a dot plot broken.
I think the dot poll has been broken for a long time. I don't think it's the most effective thing, and I think the Fed now it's really more short term than long term, but it really underscores the uncertainty that we face out there. And I will add one more reason of why the Fed paused at this particular meeting, that Treasury issuance issue. That is something they wanted to
get over the hump on. And remember, we start to get corporate tax revenues in tomorrow, which may be able depending on how you know a day before the Fed makes this decision on how fast treasury issuans have to go. This is another thing that the chair Powell himself, I think, was working to get some space around. But I also think it's really important to understand that so far around the world, central banks have underestimated the ability of the
transmission effect of higher rates and their economies. Their economies have proven much more resistant to rate hikes than they thought they were. They thought they'd happen on a real time basis. There were estimates out there that this would be almost real time in the legs would disappear. Two things are happening. One is governments intervene to dampen the effect. Particular have to Russia invaded Ukraine of higher inflation, which extended out the period of inflation and dampen the effect
of higher rates. But it also has put us in this situation where central banks are now having to go back in and the concern is that we could get a reacceleration or more entrenched inflation. And that's why this is so hawkish.
Michael Gaban when you're right about this, and again I'm going to go out eighteen months to the craziness of beginning twenty twenty five with a dot pot that's absolutely original and from I'm going to call it buller to high to whoever low goules, be low whatever. I'm just guessing their folks. But Michael gaban as you right for the Bank of America, what's the single biggest mystery to you in the GDP equation. What's the mystery that's going to come out of this press.
Conference in the short run. I would say that what surprised me and I think others has been how much labor supply has grown and responded in twenty twenty three, the massive surgeon immigration, the pickup and late in the labor force. The shortfall between labor supply and labor demand has narrowed quickly. As Diana said, it's meant the labor market is held up, spending is held up, and there's
a lot more resilience in the economy. And as Lisa mentioned, maybe it's even adding to that excess saving argument just because of higher income. The further we go to we go out, it's we don't know how quickly inflation is going to come down. And I think that twenty twenty five distribution tells you the median of that means absolutely nothing. There's no weight to that middle. The committee simply doesn't know.
We're on radio and television. We welcome all of you across this nation and worldwide. Michael McKee has gone into the hermetically sealed press conference and i'll see that in about eleven maybe twelve minutes. Here, Lisa, we've not talked about something. Lisia, you and thank you so much hitsf for bringing this up out on Twitter. The steepening of a prea misra like twos tens spread here out to ninety three basis points. Let's remind ourselves of how this
is a Michael mc gapein taught me this word. It's a ginormous curve in version that we see redone today, redone.
Today, ninety two basis points of inversion that we're looking at right now. Not quite the record high or record low, i should say, for the cycle of one hundred and seven, nonetheless highlighting how higher near term rates are really not coherent with the long term rates that are going down. I'm also looking at the rate expectations going out by September five point three percent by January now the implied FED funds rate is five point two percent.
Michael Collins, how do you play this?
Do you lean into the long term yield story with this idea that the Fed will necessarily bring inflation down at whatever cost to growth?
Absolutely, a really hawkish Fed, Lisa, this late in the cycle, when you're already seeing evidence of growth and demand and inflation lowing is definitely bullish for the long end. It means that they will by hooker by crook control inflation, right. They are adamant about that. I think they're very convincing to the market. So this big kind of flattening we're seeing in the market is definitely evidence of that. And I think, you know, long term rates are pretty much capped here.
Do you think, Michael Collins, that there is going to be an issue with riskier credit as the Fed does double down and as you start to see pretty significant refinancing costs as time goes on.
Yeah, no doubt right. I mean this does take a little bit of time, right. The long these high rates for longer will eventually bite is more and more companies, more and more commercial you know, real estate mortgages, more and more individuals, more and more governments, have to refinance their debt at these higher rates. You will see tremendous dispersion in the markets. You'll see weaker credits, more levered companies, companies exposed to floating rate dat really start to suffer here.
And that's that's part of the Fed's intention, really right, to weaken demand and weaken the economy. And you'll see it in the lower end consumers, lower end corporations, and you're going to see that disparsion really accelerate late in cycle.
Here, zidegeist check on a Wednesday afternoon, if you're just joining us nine minutes away from the McKee press conference, and this I just think is great. I guess I brought it up in a question to someone. I can't I can't remember what I did five minutes before. Folks, Drew Mattis, you said, was listening over at met Life, and here's Andrew Hollendhorst. Of course, has been historic and calling for a higher rate regime memo. Hollendhorst looks like
a genius this afternoon. May I quote the gentleman from UCLA seconding mister Mattis, why not just hike exclamation point? Thank you Andrew for watching a.
Big question, Diane Swank, do you want to take that What is the indication here? Is it that they just didn't have the consensus or is this something more? And does this basically mean, especially they do raise rates, that a soft landing looks a little less likely today than it did yesterday.
I think all of the above. I think the reason that they took a pause is because the chairman himself is getting more skittish about this, and we saw that come out in the May press conference. I think he got a lot of pushback within his committee, and that's what we're seeing is that pushback. I do think the time ran out on them in terms of shaping market expectations.
Their last part of their open period where they could comment, they basically said we're going to skip that shape market expectation. So it would have been a surprise to rates here that said it does not preclude a half percent hike in July instead of a quarter percent hike in July. And I think that's something we're going to see come out in the press conference today as well. The biggest question out there will be why didn't you do it today.
I do think that the Federal also chairman Powell will talk about the Treasury issuances and that extraordinary going on, those extraordinaraytions is against the back of quantitative tightening. People forget that the FED did not stop quantitative tightening, and this is something that we really don't know the interaction of.
We've never done this experiment, and that is also something that's in the back of his mind, and I would expect that he'll emphasize that we're still being restrictive by also continuing quantitative tightening at the same time that Treasury has to do this massive debt issuance.
We're looking at equities off pretty considerably after this release. We're looking at a NASTAC down seven tenths of a percent. Michael Gapan, Do you think the FED is happy to see risk acids selling off today?
Yes?
In general, I mean, I think financial conditions, they've struggled to get them across the board as restrictive as they would like, and so I think obviously, if you're if you're going to move the dot fifty basis points higher, I think the intent is to tighten financial conditions. So yes, I think that this is what they would want to see.
Michael, let me go to this lineup's great today, Michael Collins, Michael Gape, and Diane Swank. And of course we'll have much more here in six minutes with the press conference and Michael Gabe and I'm just going to pick on you because of the large platform of Bank of America. I'm supposed, you know. I'm with Elizabeth Warren on this. I think having a low unemployment rate is generally good for society. And are we in a panic about a super hawkish FED because just possibly real gd P in
an overlay of inflation is a buoyant nominal GDP. Are they bad things?
No, maybe it's too much of a good thing, might be one of the arguments. I mean, certainly the inflation we got tom as you know, wasn't all because of a tight labor market. There are other sources that drove it. And I would say, in our projection and most people's projections, of a so called mild recession or downturn in the economy brings the unemployment rate up to the mid floors. Very few people are thinking it goes above five. The
thirty year average unemployment rate is over six. Think we're just saying a little less, say buoyancy if you probably the right mix for the long run performance. So nobody can doubt that a low unemployment rate is good for Americans and job seekers. But I think on the balance, or I should say, a different balance is probably preferred.
John from Capri emails and John, thank you for listening this afternoon. He says, go to Michael Collins and ask a financial question. Michael Collins, you're at PGIM. How will chief financial officers react to a super hawkish FED where Holland, Horris and Madis are just saying they should have raised rates to begin with? Does that goose issuance here through the summer?
You know, no, it's it's actually just the opposite. What we're seeing is really encouraging. Right When markets change and conditions change, people and companies change their behavior time, and we're actually seeing a lot of corporations put off debt issuance. In fact, we're seeing a lot of them use their free cash flow to pay down debt so they don't enough to reissue their debt at a much higher coupon.
And that's really a silver lining here, right. As a credit investor, someone investing in corporate debt, you really want them to see them pay down debt, and we're actually seeing more and more examples of that, So that actually might be the thing that saves us here and really helps us avoid an existential credit crisis, which which looks
looks better and better. You know, you won't see a big despite spike in de faults because companies are being proactive and they see the writing on the wall there and they're starting to pay down debt. So this is a really good story from a credit perspective.
Michael Collins, This now becomes a guessing game. What's the Fed going to do in July? I oh, yeah, what are they going to do in September? And it becomes a credibility issue. What will you have to look for and what will you have to see to call their bluff and say no, you're not You're not going to go twice more before year end?
Yeah, I mean, right now, they're telling us they're going to change their policy from hiking at every meeting to basically hiking at every other meeting. Right, so they're going to hike, you know, twice in the rest of the year on a quarter basically slow the pace of hiking
is what they're telling us. Again, I think it The longer they wait, the more evidence will become apparent in the markets, in the economy, and in the inflation data that will cause them to step to the sidelines and probably pull off one more like if that for the rest of the year.
Michael Gabin, what will the real tenure do here? I'm absolutely fascinated by the super hawkish nature of the printed word and the projections that we saw. Does the tenure real yield finally break out from one point six chis back to my pre COVID level of say two point oh two to two point oh five. Do we get finally the real yield to move.
I mean I certainly in the front end, meaning kind of out to five years, I think that real rate has to go higher. I'm not you know, I'm not yet fully convinced it would have to move in that direction for the tenure. Right, If you've become more convinced today that the FED, as you mentioned earlier, is just really reacting to inflation, not so much economic activity, then the message here is they want to bring inflation down,
so you get kind of the inversion at place. So certainly though they're telling you real rates need to be higher over the next two to three years.
Diane, how political do you think the decision will be to raise race even further from here, given that the focus really is on wages and employment.
It's a great question, and I think the political backlash is already out there. First of all, the reason we're not as euphoric about the low unemployment we have is because we've lost living standards and actually lost spending power to inflation, and so that's the challenge the Fed's already
had to face. What's been amazing is, you know, even Vulgar blinked back in nineteen eighty and reduced rates that mosted them by ten percent to get a second recession in nineteen eighty one eight two after the first recession in nineteen eighty which was an election year. So I do think there is going to be some political backlash
to this idea of raising unemployment, which is understandable. But I think at the end of the day, the FED is really concerned about the persistence of inflation, and at the Fed's at the right conference, it's not.
Just why did you not go to day?
Is the optionality on the table to move a half percent again and an upcoming emitting They do not want to bake into the cake. This idea that they'll only move every other meeting. That messaging is where I'm really going to be watching for, because I think the FED wants all options on the table.
The three have been generous with your time. Back to your clients at KPMG, at the Bank of America, and of course at PGM as well, Diane Swack, Michael Gaban and Michael Collins. And all of a sudden the snooze fest became and you heard it McKee's voice, you know, McKee, maate, you could just hear the shock of the language and what we heard from mister Madison, doctor Hollenhorst as well.
This was surprisingly hawkish, if you want to say so, because people were perhaps anticipating a twenty five basis point rate hike implied at the July meeting, but not fifty basis points of hikes before your end. You're seeing that with respect to yields markedly higher to the highest level since early March.
And now the FED decides derby, Well, McKee, have the last question of the second to last question.
I'll have the third from last question. We're gonna definitely, We're definitely going to mix things up here. I hear that's the whisper.
From the room. We're also seeing the dollar so off, although less than before.
One oh eight twelve, just to reset, we are about to hear from Fedshair J. Powell after they did not raise rates for the first time in fifteen months, after ten consecutive meetings of rate hikes. Now they are not hiking, but they are indicating they are going to hike at least twice more before the end of this year.
Their work is not done.
That was very clear in their statement, and now the question will be why did they not hike today If they were so convinced of that momentum, what was the hold up as they tried to get consensus