Bloomberg Audio Studios, Podcasts, radio News.
This is a breaking news update from Bloomberg instant reaction and analysis from our three thousand journalists and analysts around the world.
The FED decision seconds away unchanged the expectation with.
The cold is my the cake.
Well pretty much as expected, no change in rates, and the FED leaves open the option of cutting rates in the future. Stephen Myron and Chris Waller descent in favor of a rake cut. Michelle Bowman does not. Waller's descent, of course, could be read as an effort to retain his place as a finalist to replace j. Powell later this year. The statement keeps the line about considering the extent and timing of additional adjustments to the target range,
suggesting more rake cuts are possible. There's no hint, however, of what that would lead them to do that or when. The economic assessment is very short and relative to recent stations, slightly positive available indicators suggests that economic activity has been expanding at a solid pace. It says job gains have remained low, and the unemployment rate has shown some signs
of stabilization. Inflation remains somewhat elevated. The officials say uncertainty about the economic outlook remains elevated, but they don't emphasize jobs as they have the last three statements or inflation as the major concern. The Committee is attentive to the risks to both sides of its dual mandate. The statement says, the open market desk at the New York Fan is again told to maintain an ample level of reserves by buying treasury bills or, if necessary, maturities of up to
three years or less. It's all about as plain vanilla as you can get, which shifts the focus, of course to Chairman Powell's news conference at the bottom of the hour. What does he say about the future of interest rates and what does he say about his future as a member of the Fed?
Stay tuned, Mi m.
Keeeth, we will stay tuned. The news conference about twenty eight minutes away. You run into that Mi McKee. Their world class. As always a FED decision unchanged the vote interesting ten to two to hold Ray steady the two Governor Myra and Governor Waller. It' tk is it unfair to describe the Governor Waller descent as an audition to take the top job at the Federal Reserve.
Nineteen ninety one is classic paper and game theory. I just think we saw a little Waller game theory going on to say the least. I don't have a strong opinion on it, but definitely that's a setup for the President to make a Waller decision.
This has been an individual, Torsten who has provided thought leadership on this committee, effective thought leadership now for a number of years. That descent will be described by many in this market as an audition for the top job at the Federal Reserve.
Is that unfair?
I think it is a bit unfair.
I mean, Chris is very very steady and stable and has had his whole career as a PSD economy is doing research that's going after the data, being data dependent. So I do view this mainly as a sign that he actually is worried, and his speeches have also given very clear indication of this. He is actually truly worried about that the label market might be signaling the things
about to get worse. So I think it's a little bit unfair to put him into that category because I do think that it's very important that he is telling us that he does believe that rates should have been cut today.
Is that worry about a jobs market justified by the data you looking at?
Well, that's the discussion.
I happen to have the view that this is all because of live supply being much lower. Immigration used to be three million a year now it's about four hundred thousand from the CBO. So with labor supply is lower, you should also expect job.
Growth to be lower.
Other people, including Chris put more Roller put more weight on labor demand.
So that's the debate at the moment.
Yes, there has been very little hiring, little bit very firing, suggesting that labor demand is indeed also weak. So this is the very important debate, and of course only the data over the next seven months would tell whether this dissent was actually a good idea or not.
Jan for the first conference of Vice Chairman Clarita fed amidst language on downside risks to employment having risen. Let's have a chat with some Amazon people this morning. Let's talk to ubs this morning. The mail I get the mail you get. People think fancy guys like Torst and Slack are nuts when they talk about a fully employed America.
I don't want to.
Whyever, do the data that comes from the conference board, because consume there's confidence all over the place. Right now is skewed by a whole bunch of things, including politics. But at a chute to the labor market. When people turn around to your tors and they say, right now is getting harder to get a job? Jobs are not plentiful, you have to take notice.
Done you absolutely it is absolutely the case that the labor market data has become slower in terms of job growth. But what is very critical here to remember is that if you have much fewer immigrants, going from three million to four hundred thousand a year, of course, that's also going to create the break even rate for unfound prayrolls that's a lot lower. That used to be two hundred thousand a year, and now the Fed says there's about thirty thousand.
So the closer you get to Sirum, of course, the mall.
This will also begin to have more worries among people whether can I find a job? Cannot find a job, and those worries, of course, your sentiment are exactly showing up that in particular, the lower leg of the key continues to be on the significant distress.
The Federal Reserve keeping rates unchanged if you want, just tuneing in as expected, equities on the sm P five hundred just a little bit lower, just off all time highs on the SMP five hundred. Two descents looking for a twenty five basis point reduction, one from Governor Myron, another from Governor Waller. Joining us now a man who knows a little something about how this committee makes decisions, the former Fed Vice chair Richard Clarida. Rich Welcome to
the program, sir. What do you make of this decision and what are you looking for from the news conference in twenty five minutes time?
You know, it's as expected, pretty minimal changes to the statement if anything. As you mentioned though, changing and the wording about the labor market. I thought it was a close call going in whether or not we would see Governor Waller or vice Chair of Bowman descent, and in the end we did get the descent from Chris Waller. I agree with Torsten who was on earlier. You know,
Chris is a good economist. He's been consistent and had a good call on the labor market and inflation, and he's made the case in many speeches that there is a case to get rates down to neutral. So I take him at his word on that. In terms of the press conference, obviously no SEP projections or the like. And I think the reporters will be pressing the chair on what message they should take away from this in terms of the remainder of the year.
When you look at the politics here, I hesitant to say, Chairman, Clarita, but is this a moment where the president goes outside the chosen four candidates?
You know, there has been a speculation, there is the reporting this morning. You know, I know each of the candidates. I think any of them would be a good choice. They bring strengths to the job. But there are a lot of moving parts when you're FED chair, and so it'll be interesting to see who they finally select.
You And I.
Remember the day where Phil Graham went after Alan Green span on foreign exchange, Richard Claret, is it appropriate that a FED chairman speak of dollar dynamics, particularly the whip saw of President week dollars and Secretary of Treasury strong dollar?
Great question, as usual, Tom, You know, never say never, But both as a policy maker and as a student of policy making, the FED tries to stay out of any and all discussions about exchange rates, and I would expect J. Powell today, if he's asked that question the the to do the same.
So, Rich, when you think about yield curve dynamics, I mean, what is your view on what the yel.
Cub will do?
The consensus has to view that it will steepen.
Is that also your you?
Or do you think front end rates will stay stable and long rates.
Will also stay stable?
All?
How do you think about the curve at the moment?
Yeah?
Now, High Torston.
You know what's been remarkable is really since either going back to the last hike which is all the way back in twenty three or the first cut in twenty twenty four, the ten year treasury has been in a range from roughly four and three quarters to three and three quarters. A lot's happen in that intervening period. That importantly reflects much higher real rates than we had pre pandemic. So you have seen a shift up in the curve
relative to pre pandemic. And yes, would expect the curve to continue to steepen over time as ten years stay in that range and as front end rates come down under the new chair.
Rich, as you identify a range impressively stable so far for you and the team at Pinco Ridge. What's behind what's the biggest pillar of that stability that we're seeing over the past few months at the long end of the curve.
Well, I think it reflects the new dynamics, both because potentially a faster productivity growth and fiscal concerns. It's appropriate that longer dated real yields are higher than they were before. I think that's an important fact of life. I mean, the real debate and the real issue is, you know, within the FAED and in the market says, you know, where's the neutral rate?
Where do front end rates end up?
And we still think that neutral for the fund rate is somewhere down around three percent, But obviously that's going to depend on where we are in the cycle as well.
And this may be an unfair question.
Do you think an incoming FITCHA is going to make dramatic changes to the fit staff in terms of who's head of which departments? How do you think the incoming chair might think about things if he or she doesn't think that it's likely that interest rates are going to be coming down because of persuading the committee.
You know, I'm not sure about that.
It is important just for the public to know that the board staff does report to the chair. You know, during my time there, Chair Palell asked me to get very much involved with the staff, and I learned a lot from them. But it's I think there typically have been and always will be changes in staff. People get promoted, people moved on, and I should stay. During my time at the FED, the senior staff I worked with was incredibly capable, so I don't think there'll be any issues there.
Turst and Sucker, I think it's so important that we described the academics Richard Claire to all that he did with this fancy thing dynamics still cast a general equilibrium theory and monetary policy John mentioned earlier, do we know the reaction functions? Do you have an operative theory from the world of Richard Clara, Now that's operational well.
Rich is well famous for their credit multiply and they work with Binenke. And of course what credit markets have been doing and what credit markets are doing is often very critical, of course for the economy, because if credit conditions begin to tighten, the economy has a problem. If credit conditions begin to losen, of course, the economy could also have a problem, namely that it just becomes too easy money, including in creditib.
Gen conversation after conversation, the assumption is credit markets are going to loosen because we have maybe it's Biden like stimulus. I believe the next six months we're full bore ahead.
The credit spriends are very tight, and now the dollars weakening. And when you think about the dollars influence on final conditions more broadly tossed and what is the contribution that comes for the fects channel, Well, what.
I think is very important to remember is that foreigners come to the US for two reasons. They come to cut coupons in fixed income because levels are higher here, and they come to get exposure to AI. So for any discussion, for talks about well with it, all of ag intergo down, you need to come with a view that either AI is going to roll lower, all interest
rates are going to be a lot lower. So as long as you can cut coupons and get much higher returns in US assets, you will still have foreigners abroad in Europe, Japan, Canada, Australia who come to the US to buy US financial assets because they simply do offer higher returns than what you get in most other countries.
Foreign holdings of treasuries at the end of last year, close to the end of last year record heighs. People hardly talk about that today.
Well, and if you go back and look at the TICK data for netfoink purchases of US assets, you saw that in April of last year, during Liberation Day, things were absolutely chaotic. It was indeed the case that the rest of the world was sell America. But since April, for the data we now have from May up onto November, it was very very strong inflow of data and to rates in particular credit and also of course in two equities.
If you are just chaining again, welcome to the program. About ten minutes ago the Federal Reserve leaving it to strains unchanged two votes straight twenty five bases point reduction from Governor Waller and from Governor Myra, and the news come with Chairman Pale.
In about twenty minutes time.
We've got the form of FED Vice chair of Richard Clouder standing by just one more question, rich I want to come to you on this an important topic because the Chairman will be asked about this in the news conference. I have no doubt that a more confrontational approach, a more assertive approach from the chairman a few weekends ago towards the White House, Rich, what do you think prompted that?
How much internal debate was there about it?
You know, I'm not sure. I guess we'll have to wait for J. Powell's memoir to find out. I just infer that the Chair made the decision he'd been you know, he had been quiet and had really not weighed in in the past, and I think he just made a decision that he wanted it to be known that he felt that the FED needed to focus on independence and focus on making the judgments on monetary policy. Any color beyond that, we'll have to wait for the memoir.
Rich, Do you think it's made it harder to focus on monetary policy?
Though?
I really don't think.
I don't think so, in light of all the things that are that are going on. I think it was a very clear, very clear indication that for the remainder of his term as chair, you know, that will be will be the focus.
Richid Cloud, Thank you, sir, as always, thanks for FED Vice Chair, Rich CLOUDA. We have no doubt the Chaman will be asked about that issue in about twenty minutes time. Joining us now to extend the conversation, Bob Michael of JP Mulgan Asset Management. Bobby, You've always got your own questions, buddy. What do you want to hear from the chairman in the next hour.
Well, the question he's not going to answer is does he intend to stay on if after his chair expires? But I think the one to ask is what does he see in the labor market that's particularly wearing to him? And is the FED undergoing studies about what the broader impact of AI will be across the economy.
Bob Michael, you look at the key question that you mentioned is labor. We mentioned this earlier off Orzag and Posen. Does your team at JP Morgan see any form of wage dynamic that indicates inflation?
Not so much right now. I think this low, higher low fire has really dampened wage gains quite a bit. We'll see what happens in the first half of the year. Certainly expectations are pretty good for the economy and corporate spending. Maybe that will lead to higher wages, but right now you're not seeing evidence of that.
I really can't emphasize on the folks that Fraser it'll see into the middle of the year than Bob Michael with that with an interest rate strategy. And given all the upset at the FED, how far out is the Bob Michael vision at JP Morgan? Can you get out to Q three or dare I say, model out of fixed income portfolio to twenty twenty seven?
You can, and you have to. You can't invest a lot of assets without having some view on the short term, the medium term, and the longer term. Right now, things look pretty good. On Monday, I said that the Yell curve looked about as perfectly priced as you could have it. So does the bond market. It seems to incorporate reasonably
good economic activity this year. It seems to incorporate what we think could be disinflationary forces coming from both the headwinds of tariffs on spending and also the impact of AI. It's sort of an ideal market for bonds, including credit.
Well under the issue about AI, given AI is so prominent in the equity market, and now AI is also becoming a bigger weight in the public IG index. And by the way, AI is also hugely in venture capitil two thirds of venture capitul is AI. How do you think about the construction of portfolios at the moment when you certainly have when you look holistically at asset occasion one fact on named the AI that is everywhere.
Well, we've seen a lot of sectors in the past access the markets for a lot of funding, and the lesson from that is to wait until the supply starts to weigh on prices and that's your opportunity to go in. I think what we do understand is there's an enormous need of capital because there's an enormous productive use for it to build the infrastructure that's going to power everything. What we do see at JP Morgan Chase is every line of business is using AI and how it operates,
and it is creating a lot of efficiencies. It allows us to scale very very efficiently. So it's not going away. It only seems to be accelerating.
Yeah, Papa, I want to build on this. I think is really important.
And I say this a little tongue in cheek, but ultimately a big factor behind the GDP growth for the last twelve months is the capex spend of a handful of companies. Is that becoming the more important macro indicator, never mind payrolls. Is what happens after the close today from METSA, Microsoft and what we hear from the big tech players over the next week.
I think so, because they're not only telling us how their businesses look, they're telling us how every other business looks, and how every other business is thinking about AI and are they willing to invest more there. I think we're going to find the answer is yes, that everyone's over the hump. They see this as real. They've lagged a little bit. Why shouldn't they. They were unsure about the impact of Taris. They were unsure how AI would play out. Now that seems to be in the rear view mirror.
I think you are going to see pretty good earnings and pretty good downrage forecasts Alston.
This is one of the great dilemmas I think for manegy policymakers officials worldwide right now the divide between GDP and payrolls growth. GDP's fantastic payroll growth super subdued. And you can point to supply side factors like immigration. That's a factor, sure, but the character of GDP is becoming less and less labor intensive based on what we've seen over the last twelve months.
Absolutely, and a very important point when we talk about the FIT is that that also is because we simply have that the forces that are driving GDP are actually not very interest rate sensitive.
Because most of the false insessive.
Driving the boom in AI and the energy built out had been coming because of equity valuations.
Being so high.
Now there's mall in the change in the capitalist structure to watch also motet issuance. But for the last several years, no matter what their fitfund straight did, we had a really strong boom in AI and that was driving the economy forward and continues to drive the economy forward because this strength is coming from sources that are much less interest rate sensitive than traditional components of GDP.
Let's get a source on this. Turston slock this morning. It was good to see up before nine am. Turston. This is his daily note, the daily Spark. Bob Michael, quantifying the productivity gains from AI, I would say, it's JP Morgan with what is it? It's like Walmart two million employees in the US. You people have more knowledge, Bob Michael about the new use of AI help doctor slock out. How are our productivity gains from AI.
Well, the aspiration is that you're growing and you can do a lot more with the same amount of resource. So that's the ambition and the aspiration. We're still early into it. We'll see what the payback is down the road.
I mean, look at this tour, so please expand on and there's productivity, and I guess it comes down to solo and this strange thing total factor productivity, which is basically a made up pixie dust of that John you mentioned earlier that American spirit. What does our total factor American spirit look like right now?
Absolutely GDP.
Growth can come from three sources capital, labor, and productivity. And the key issue is if productivity is strong, that can more than dominate the other forces of growth, especially when labor is now contributing less because immigration is being restricted. So that means that the requirements coming from total facts of productivity or productivity really significant because that needs to deliver a lot of growth now that we have less growth coming from the labor side.
This is why it's hard to sell America.
So many of these reasons are just a long list of things as to why it's hard to sell America, Bob, the headlines of the last week or so, not just the last week, but the last twelve months. Do you push back against them as well, Bob.
Yeah, they're total hogwash. We invest money for loads of different plans around the world. This time last year, into March April of last year, maybe through the summer. There was some concern there were plans that we're looking at diversifying. We saw very little of it. We're not seeing any of that now. I think there's a realization that the breath, the depth, the size of the markets in the US make it the best place to exercise your fiduciary duty.
And that's what they're seeing. Yeah, is there some currency hedging going on on the side, a little bit, But is there a wholesale sell America assets? Absolutely not. If it's happening, we're not seeing it. We pretty much see everything.
You know, Bob, I'm thinking of University of Pennsylvania, and you know you're in Latin class at Pennsylvania where you got straight a's, and you know you look at hogwash as newgay or fritilla or in epsha and butcher in the pronunciation here. But stay with me on this Bob, is there a hotwash among the administration. Bob Michael, you're a bond guy. I want you to help me with foreign exchange. In Bruce Casman's world, I got one day it's a week dollar policy. I got the next day
a strong dollar policy. It sounds like it's time for Secretary Diamond.
I think he's doing a great areas and I hope.
He stays there.
By the way to end an interview, Bob, thank you, sir, Bob Michael of JP Morgan Asset Management, stand out of trouble.
Hugwash, hugwash. That's what he thinks that I said.
That's brilliant, and you hear it in your wonderful Morning note as well. People are so frustrated by this spin that they're getting, given the cacophony of our American politics and all in.
A long time ago.
Tell me the president's first term marked out right of great pace on divorcing your political boss from your market analysis. And I think there are reasons to be worried about diversifying away from the dollar. And I'm not going to color everyone who has that opinion with the same brush, but I will say this, I think some of this has been driven by people who just don't like the policy out of the White House. Torsten and dare I
say they have a bit of TDS. I do think some of that is coloring some of the analysis that's coming from not just Wall Street, but from research desks around the world.
Absolutely, And you go around Europe and you talk to a lot of people who are of course saying, oh my god, what's going on? This is confusing, this is chaotic?
Is its?
All these discussions, and then you ask at the end of the beer, well, how are you even investing your money? Or we're still buying dollar assets because dollar asses still offer great returns again higher levels of vials. Also, in AI exposure, you don't get much AI exposure if you invest only in European stocks, don't get much AI exposure in Japan, Cana, in Australia. So the US offers things that are simply not being offered by the rest of the world.
I mean, quickly, John, you spent twelve hours on the SAT in London the day of Brexit. Here we're popping one thirty eight on sterling. Does your life change with the one forty three sterling?
You're still convinced that I get paid in sterling, but I hope so.
I mean, I'm looking at the chart here and we're right up against the Rangers.
Gives an recent price section.
I wish I was funded and stealing, but given this is my tantier over here, I'm still.
Funded at Dallas. Your reviews over Okay.
Thank you sir, Thank you boss. Let's get to dine swamk of KPMG, she joins us. Now this news conference stance in about seven or eight minutes time time. Welcome to the program. What are your questions for Sham and pal when this news conference stants.
I think one of the questions that hasn't been asked of the FED is we've heard the FED talk about curbs and immigration and its effect on the break evens, on unemployment and the labor market. More broadly, we have not heard anything about the pockets of labor shortages that are beginning to creep up. The quick rate in leisure and hospitality absolutely soared in November and over the summer,
and that is because of curbs and immigration. We know that forum born and native born workers in some professions, most notably in the service sector, are compliments, not substitutes for each other, and that's something that we're watching closely as well. And even with the productivity growth we've seen, the AI boom that's going on, is currently with that productivity growth not derailed inflation, and in fact it is adding to inflation on the margin for in salient prices
for many consumers, notably electricity costs. And then you have this cold spell on top of it that added to natural gas costs. But all of that is still pushing up prices rather than down when we're going to get a lot of fiscal stimulus in the beginning of the year as well.
Dan, your work recently has been absolutely brilliant about the fabric of employed America. What is the one thing Wall Street Consensus, the three zip codes in Manhattan, what's the one thing they get wrong about labor America.
Well, first of all, the overall and employment rate is not really a good summary statistic.
Right now.
We know at the end of the year those having to accept part time instead of full time hidden all time high. We're now at the place where in the new millennium, for the last twenty five years, we've seen instead of multiple job holders falling as an expansion goes longer, they're now rising. This is part of that labor share of income being eroded. The inequalities we're seeing out there, and the frozen state of the labor market where those who have a job are cleaning on and those who
do not have a job are left wanting. I think is very important to understand when you think about things like the U six measure of unemployment, which gets into that sort of under the hood that's running around eight point four percent, two point two percent above where it was in twenty nineteen, and I think those are important issues.
Sank quickly here. The model is that the tech bro are taking over America. We've talked about American exceptionalism, but so many people just want to turn around that ugly labor share vector.
How would you do that? Well, what's a difficult thing to do.
And certainly with the way that the C suite and the gap between employees and the C suite c AI and how it's affecting productivity growth is another issue. We could literally see a payroll recession as the economy booms in twenty twenty six, and that is something that I never expected to see out there. I think it's really important to remember though, that we still have not ameliorated inflation. We still have inflation, and it's much like compounding stock
returns that has driven that wedge of wealth higher. Compounding inflation over the last five years has left prices out of reach for too many. At the same time, the labor market is frozen, and that is why you're seeing the consumer attitude surveys.
We are and what are.
The consequences of the K shaped situation for the consumer? From a broad macro perspective, the weekly, the monthly retail sales data is still recentably okay, does this.
Matter later this year?
How do you think about the case shaped situation? Is it something that the fits are they take into account? Why does this matter from a macro perspective.
It's really important from a macro perspective because I think it's providing an underlying floor under inflation, and that's what I worry about. Could happen that with fiscal stimulus on top of it, to temporarily disperse economic gains at the beginning of the year as we see those tax refunds
come in. That is important because you sort of the sugar high could be very short lived if it only makes inflation stick and as I said, inflation is already compounded to the place where most Americans feel that things are out of reach, and that underscores and undercuts the Fed's inflation fighting credibility.
Don I think we have to sign and I'm sure you share this sentiment. If any of us gets a tax refund, it's pan the energy bill over the last month. Thank you, Dan swamk wank in on the federal Reserve and a banks for the economy, I think we just take a beat with the two and a half minutes we have left. Well, Dan Swamp just sat there that we could have an economic boom yep, and the payrolls recession.
Now I know this sounds a little bit philosophical, but what on earth is a boom if we have a payrolls recession?
I'm going to go to I think your question, John is brilliant. What she said was remarkable. I don't think I've ever heard that ever.
Ever.
The bottom line is, we have a president who's prosecuting a neo MRK until his strategy. You were weaned on this ages and ages great Grandpa Slock a million years ago as well. How do we extract ourselves from a neo MRK until his strategy to get growth back in for the rest of the public not benefiting from this tech boom.
Well, the challenge, of course is that the AI boom has to main been demain driver for so long. But if you implement policies, of course that ultimately says that we want fewer goods and fewer peoples to come into the country. The risk is that of course does come deglobalization with a risk of high inflation, risk of high inflation in prices, risk of high.
Inflation in wages. So that's why if we are and this is not only in the US, this is.
Also Europe, this is also across the wisidy area. You're seeing more and more segmentation of the global economy. Of course results in now everything needs to be produced domestically, homeshing, unshoring, reshoring. All that, of course results for FIC income investors in more upside Regstoin.
Feace, you just described the nineteen thirties in the United Kingdom.
It's on the biggest rest of the GDP growth we've discussed over the last twelve months. The populist remedies the White House might introduce to try and correct the key One of those issues we've talked.
About for the last few months.
The last month or so has been the introduction of a cap on interest rates on credit cards that could have the complete opposite intended effect of chilling financial conditions, of tightening credit availability. And they're the kind of things at the moment this administration TK that are the kind of things they're thinking about.
I think the phrase is grasping it straw us. I don't hear much policy or science find it. Maybe we'll hear that in these comments.
To this, just in from Peugh van steinas of Oliver Wyman. Sure you know him. He wants us to start a podcast. I want to know of Mark Rowan. We'll give up torst them once a week so we can do a little podcast together. He liked the last hour so much.
First Gust could be human.
Do you think Mark and Jim will get on board with that? Can we have you once a week? Can you write the check if we've got a budget in this avalance, we'll try and make that happen. Twlston, this was a pleasure. Thank you, sir Towson. Slock There of Apollo