This is Bloomberg Surveillance with Tom Keane, Jonathan Ferrow, and Lisa Bramowitz on Bloomberg Radio. They raise rates.
That's about it. Federal funds now at a range of five and a quarter to five and a half percent, that is the highest in twenty two years. In their statement, FED officials drop the phrase about pausing to assess the state of the economy, replacing it with the Committee will continue to assess additional information and its implications for monetary policy. Future guidance was identical to June, leaving the door open
to another rate move in the future. In determining the extent of additional policy firming that may be appropriate to return inflation to two percent over time, the statement repeats the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Economic assessment
is little changed. Activity has been expanding at a moderate pace, perhaps a little faster than the modest pace seen in June. Job gains remain robust, unemployment remains low, and inflation remains elevated. Tighter credit conditions are likely to weigh on economic activity, hiring, and inflation, but the extent of these effects remains uncertain, the statement says, and the committee remains highly attentive to inflation risks no change to QT. The decision was unanimous conclusion.
See you in September.
Mi mckaye get on vacation. Seems to be the message from Chairman Pound and the team. Chairman Pound's got to speak in about twenty eight minutes time the news conference coming up. That statement a bit of a snooze. So let's check out the price action off the back of it. It's one, Are they done? That was your rate high from the Federal Reserve. Your equity market just a little bit soft, distilled, trying to recover. We're down by about two tenths of one percent on the S and P
five hundred on the Nasdaq. We're negative by zero point four percent. The fate of the nastak of course, the next week in the hands of earnings from Meta Apple Amazon over the next seven or eight days or so.
Outside of that, into the bond market, your two year yield coming in just a touch, just a little bit fading after that decision, now just about unchanged on the day with a two year at four eighty eight, and if you turn to the FX market off the back of that, with yields just about unchanged the dollar showing just to touch a witness against the euro in response to this decision, euro dollar at about one ten seventy four a tk A rate hike from the Federal Reserve.
It's about what's next. It always was twenty.
Two years out, you go back. I believe the math is to two thousand and one. Joining us Dan Swank, chief Economist, keep BMG BYB. Michael Continuing with us with JP Morgan, Dan, I'm going to just argue this, and I did this two days ago on a YouTube short showing the Nasdaq one hundred decline of March of two thousand and one. Things unraveled the last time we were at interest rates of this level? Do we have an analog here to the collapse of the market in March
of two thousand and one? Can a FED policy affect a present stock market collapse?
We certainly can if they go far enough, and so far it's been remarkably resilient. I would argue that we're also seeing this against the backdrop of what looks to be a bubble emerging in Jenai, which is a little reminiscent of two thousand and one but not quite there.
But I think that's important to remember as well. I think the larger issue for the FED at this point in time is that financial conditions are fighting them a bit, and even though they've got additional quantitative tightening, they've continued that.
That's why they're still going forward.
And I would argue one step further in that the good news we've gotten on inflation recently further emboldens the FED to actually.
Get to that two percent target.
There was sort of this sense among people around the FED and some within the FED that you know, they'll get close to two percent and then feel they've kind of done enough because of what they thought would be the pain needed and the trade off needed.
To get to two percent.
I think they're going to feel a little more emboldened now to actually get there, which means tighter policy for longer than many expect. And I think that's something that we've sort of not really come to terms with yet. Is sort of the unspoken side of what the FED had been saying, is that people were expecting the FED to kind of stop short of two percent.
It seems like this is operation don't make waves. It seems like this was not a FED looking to job on the markets into anything. This is a FED trying to back into the shrubs and disappear. Diane, would you agree with that characterization? Is that sort of the goal for FED?
Shair J.
Powell as he takes the helm of that press conference meeting in about twenty five minutes.
Well, certainly they didn't want to change their message, whether or not that's fading into the background. I mean, given the easing and financial conditions that we've seen, particularly in recent months and in recent weeks, that's something that FED that has to sort of be a bit concerning to the FED. What they're worried about is not what the
inflation data is going to be by September. They're worried about the end of the year seeing a potential acceleration and that it's a bumpy sort of ride down to two percent, and that we go and fits and starts and some of those mean an acceleration back up again, and.
That's what they're worried about.
And anything that we see that's too much of an easy in financial markets that's going to feed into that remember, bank credit is only about a third of all credit in the US economy, although there are a lot of spillover effects even in shadow banking industry for consumers from the tightening that we're seeing in the banking sector.
If you are just tuning in, welcome to the program. Fantastic lineup. Going into the news conference with Cham and Pound in about twenty five minutes time, we're talking to Dian Swamp and Bob Michael as well. Bob Michael of JP Morgan Asset Management with us around the table in a studio. Bob, just initially, your reaction to that decision five minutes ago.
I think it is exactly on expectations. They wanted to get the twenty five basis points done. They didn't want to convey accidentally anything dubvish. They reinforce that additional affirming may be necessary, that inflation's elevated. They're trying to do exactly what Diane talked about, not give financial conditions a chance to ease further.
But they are the Bloomberg Financial Conditions Index. I believe it's eleven ratios. Michael Rosenberg invented it with his team. It still shows an accommodation it screens. I'm thinking of Hollenhorst, it's City Group, and others go the other way, including Ellen. The idea, where's the AMMO for the next meeting to raise twenty five beeps? What's the data that we'll drive that.
I think they would need to see inflation start to tick up, not stay stable or continue to decline like it's doing. That's the only reason I would think they would hike at the next meeting. I think by the time we get to the September meeting, inflation will have improved to a degree, and I think you'll see more labor markets lack that they'll sit there and go We've.
Done plenty Dian, what's your concern for the press conference, given the fact that Jay Powell has a penchant for being a bit more revealing than he'd like, eliciting the reaction that perhaps they were avoiding in the statement.
Well, I do think that they want I think Ja Powell is going to go into this press conference being a little more defensive in terms of not wanting to ease financial conditions more and not wanting to have a confirmation bias on that. So I think he's going to be much more astute to that in this particular meeting. I do think it's hard for them to raise rates in September. However, we know that in October the medical component of the CPI at least reverses after twenty five percent.
Decline and insurance from a year ago in the June.
Number on CPI that reverses both month to month and on an underlying level year over year in October, and once you get to November you could see a bump up and inflation again. That does worry the FED more, along with some other issues that we've got coming in the pipeline with supply chain disruptions, everything from what's going to happen with grain prices to the fact that energy prices have come back up. All of those things coming
back in with persistent demand. Further complicating September are strikes. We've got UAW maybe on strike by September. We have avoided the Teamster strike, but the SAG strike has a lot of spillover effects, which has the potential of giving us a very strange August employment number that could even move to zero or into the red just because of the fallout effects.
On the industry.
And I think those things are going to make it very difficult for the FED to move in September. But September they lay out their forecast again and we'll get the view from there in terms of higher for longer and do they expect one more hike. I think they're going to want to keep that in their pocket to be able to do it if they need to later in the year.
Bob Dan just laid out basically sticky inflation or stickier inflation things that come back, whether it's the labor strikes or whether it's some of these year over year comps is, supply chain issues get rear their heads again, as well as a whole host of other issues, including gasoline. We mentioned that earlier surging. What's your pushback to that, to all of these base effects that start to.
Lose Not what I heard, or say what I heard, or say it's business as usual. Nothing's quite black and white. Everything's mixed. We look at a lot of things in here, and what you're betting on is if wages still remain elevated, that companies will be able to pass along those price increases to consumers. We're seeing that they're not able to do that to the degree they were able to consumers are pushing back their going down brand. We've also looked at wages quite a bit, and we looked at a
lot of them. We looked at unit labor costs, we look at the employment cost index, we looked at average hourly earnings. We took six of them, we weighted them, and we came up with the peak and wage gains was last year it was just about six percent. Today it's just under four percent. Three and a half percent wage gains is what the Fed and share pal have indicated to us is fairly neutral. They're not that far off.
It's going in that direction. Prices may go up for certain things, but what we're seeing from the consumer is they'll just cut back spending somewhere else.
Let's talk about this cumulative tightening and pull out a quote from the statement from the Federal Reserve, which, on the surface of things sounds pretty boring. It reads, life follows. In determining the extent of additional policy firming that may be appropriate to return inflation to two percent over time, the Committee will take into account the cumulative tightening of monetary policy. The lags the key word to want to fix in on the lags with which monetary policy affects
economic activity and inflation. Nil Dutta, one of my favorites out there over at Runmax, saying this, the FED is wedded to the long and veriable legs hypothesis. After eighteen months, we have seen home prices accelerate, stock prices accelerate, auto sales accelerate, and lay off sync. Long and veriable lags is the concept that might be outliving its usefulness. That swank, I know you've got a run, but i'd love your input on this debate. What are your thoughts on that?
You know, I think actually the legs are much longer than the FED actually thought. The FED really had gone into this tightening cycle thinking that there was almost a real time reaction function that the legs had shortened, and they were wrong. And in fact what we saw is this mortgage winter where people won't move out of selling their three percent mortgage home or listing it, or they've already paid off their mortgage and they can't afford to go into.
A higher rate.
That the transmission mechanism on monetary policy was blunted. That doesn't mean it doesn't eventually hit, but it has elongated the lags, and I think the FED is worried about that,
that the lags are still out there. And that's again why you don't move in September, because you could see more headwinds as we talked about earlier, in terms of you know, credit market tightening, what consumers face, rejection rates on everything from consumer credit cards, mortgage rates and mortgages and vehicle loans have all soared now they've soared over a period since twenty thirteen to on vehicle side to record high levels. But you know, we don't know historically
if that's really where we're at. But I do think it is important to note that there is some things the FED is going to be watching for to see how much does this slow down the economy going forward.
Don swamp O KPMG Dan, thank you as always wonderful to get you to weigh in on a FED decision which came out about swave or thirteen minutes ago twenty five faces point rate high. Bob, you were listening to that conversation. Can you make the argument just as easily as saying policy lacks of really long by also just saying they're also really.
Short, they're long and variable is what they are. They are, I'm going to quit the fact. And also when I hear the conversation about supplies and pricing, we're also looking at green SPAN's favorite indicator, vendor deliveries, and that's shown the greatest improvement going way back before the financial crisis. So the thought that there was pricing power because your goods were stuck on a container ship in the Pacific,
forget about it. They're here. They're actually piled up in warehouses and on shelves, and when you look at inventory to sales, they're off the charts high. The only way to clear them in an environment where the consumers clearly cutting back, going down brand and is stretched is to cut prices.
That's good. Can you say the same thing about services?
We'll see I think so.
Isn't that the big question?
Though?
Forget the goods argument.
I think so. I think just the cost to finance, travel, leisure, all of those things on your credit card, which is what is happening. That's why we're evolving. Credit usage has gone up so much it becomes punitive after a while. It's just not sustainable.
But Michael JP. Morgan asse to management alongside us, some FED decision day, the twenty five basis point hike behind us. No big changes to the statement. The news conference with Chairman Power begins in about sixteen minutes time. Joining us now is City Andrew Hollendholst alongside Jim Bianco of Bianco Research. Andrew, You've had the benefit of extra time to go through this. Your take on what we learned fifteen minutes ago.
You know, it's interesting. It's interesting because of what did not change. This seems to have been very carefully put together so as not to send a dubvish message like Diane was talking about. Really notable. I think that the BED could have taken the opportunity to say headline, inflation has come down. Core measures are still elevated, but they left that statement unchanged. It still just says inflation is elevated. On the growth side, what was oddest growth is now
characterized as moderate growth. So just the tiniest inkling of a little bit hawkishness that's creeping into this statement, at least relative to expectations.
Some of that little bit of hawkishness, and the street folks came from Jim Bianco, who joins us right now in Chicago. Jim Bianco you know, I look at where you are in the bombshell. You had a number of weeks ago saying maybe we're a little more sticky than we actually think we are. Where is Jerome Powells presumed our starred path at this press conference the Zeitgeisters, he's down to two percent. Things are normal, We're going to get back to normal. I'm going to suggest you disagree with that.
Yeah, I do.
I do think that we might be on a year over year basis looking at the lows of the year in inflation, you know, in June, and that we're going to see if there's going to be a big base effect for the rest of the summer, and it's going to start to drift towards four and we'll be lucky to be back even close to three by the end of the year. And that will bring up the big question is is the long run you know, rate of inflation is it two or is it two and a
half or three? And remember the Fed has already told us that neutral rate is fifty basis points above the long run inflation rate. So if it's two and a half, then neutral is three. And if the yield curve goes back to some normal level, which is around one hundred and fifty basis points. You're talking about a fair value for the ten year at four and a half and we're at three ninety right now, so we're a little
bit low. And so it all comes back to this whole argument about inflation and where's inflation going to go? And I've been arguing, you know, the big fancy word, that this is a post pandemic economy.
That means that.
All the models on how inflation are going to work have it worked since twenty twenty, and we have to write some new models on how it's going to work. Work from home being one big thing, about how major that the labor market has changed, and a lot of other things too, like with the supply chain, and I think we're gonna wind up with stick your inflation and LISTA.
This is critical because this is what our booking team. We've got the morning crew in the afternoon crew that do it twenty four to seven for us. And to see the setup here of Hollendhorst, Michael and Bianco in the collegial disagreements they have is the heart of the matter and how it rolls back over into whatever we're to make or lose in the stock.
Market, which is the reason why I'm kind of shocked that this was an eleven zero decision there was.
I agree with that strongly.
In fact, that there are such divergent.
This delusion, this delusion of unanimity is just it's I don't know the British to do this better than.
We do well.
I guess that That's what I would ask you, Andrew. Do you think that it undermines the FED to have unanimity at a time where they're clearly is not unanimity in markets or on the FED.
Look, I share with you the surprise that we would have no differences of opinion at this point. I think Powell has been somewhat masterful in terms of getting these decisions to be unanimous, but we saw that sometimes coming at the cost of Clay. I think that's what happened in June, where we had this strange decision not to raise raids, but to signal that it would be appropriate
to raise raids another fifty bait basis points. So as you try to keep that committee together and get unanimity, it's a little bit troubling in terms of getting clarity in terms of the communication.
Bob, your take on this in terms of whether it's helpful or harmful to have unanimity at a junction that is clearly so fraught with disagreement on the street and at the FED.
I don't think the unanimity is the accurate portrayal of what actually occurred in the meeting. And I'm dying for Bullard to go into public life, so that into private life, so that we can ask them these questions. I think what they did is they locked arms. As Diane's pointed out many times, they are concerned about financial conditions easing. This is another way to try to stop that from happening.
I look back with this, I can just see you with a speech with Buller down at Purdue. What a debate that would be right now as he moves from the Saint Louis Fed to Purdue, that goes to the dots in the dispersion.
This was a FED.
Let's speak for those that don't keep score on this, like I don't keep score on this. This is a dot free meeting. How important is the set up to the next dispersion? The next theater of dots? Are we beyond that?
We're living in an ai world. Now, what are we doing not doing dots and summary of economic projections at every meeting? Let's do it and indicate more about what the FED is thinking.
I think transparency.
If you're gonna no one, I think.
What is that?
Particularly? Not usually? But after the last meeting, we've all talked about what were they doing. They didn't hike in June, but they indicated another fifty. If I were Mike McKee, I would ask Chair Pale, what about the dots and the summary of economic projections from the last meeting? Do you still stand by those or would have anything changed?
Well, it's unclear which dot belongs to which policymaker Bostick might have been one of those that would dissent today. Bostic doesn't have a vote on the committee at the moment, but that doesn't have a vote on the committee either. The border governors. That would be where my issue is, because the border governors, even if they believe that they shouldn't be doing one thing, they all vote as a
committee as one. So I just wonder Andrew how much we should read into the lack of descent at today's meeting that maybe the September one is the one where it gets a little bit more fiery.
Yeah, I think it's definitely the case that there's a lot more going up behind the scenes here in terms of some disagreement. We saw some of that in the minutes to the June meeting, So there are real differences of opinion, and I think, like Diane, like the others were talking about earlier, this could really get interesting in September. In September, they'll have to make a decision first whether to hike rates. I think they probably won't because the
inflation did has been softer. But then what do you do with those dots? Are you still showing that you're going to hike again this year that would imply a hike in November. Are you then indicating that that's the last tyke of the cycle if we see inflation picking up further, And I think that the risks are that it will as we get towards the end of the year. So it gets really tricky as they get to that September meeting and then December dots again, Are you showing
no further hikes? Are you showing cuts? What do financial conditions do with that?
Jim come back in here, because you were talking about how models are broken and they're not really forecasting inflation in any kind of accurate way.
What is the compass for the FED?
Do we have a clear sense of what data dependency means in the post pandemic era where suddenly the data is not irreliable forward looking indicator.
To be frank, No, we don't. And that has been one of the bigger problems is that in a data dependent world, what the FED is trying to do is they're trying to divorce themselves from any theory that of how the economy and inflation is supposed to work, and they're supposed to react to the data, and then we get what we've had in the last two months. They paused in June, we got a big miss on in the inflation report, your over year one from four to three,
and then they hiked. And so I'm not exactly sure why they paused and why they hiked and what they're going to do next based on their recent action, which is why I would underscore what Bob said that you know, Mike McKee's got to ask what are you doing and what is driving these decisions?
Right?
Pause and then we get good inflation data and then you hike. So there's a big confusion going on out there right now, and it's all part of the modeling that we've seen in the market. It's been very difficult to figure it out.
I want to set up one question here and give it back to John to get to the press conference in six minutes. I want to go to Bianco, and then Holland Horst and then Michael here.
I want to know you.
Twelve months forward real GDP? Is you also violently disagree on inflation? Jim Biyonco twelve months forward real GDP? What's the statistic about one in a quarter or so?
Okay, Hollenhurst, I think we will have seen a decline. I think we'll have seen a recession by then, will be some one percent GDP for Rely.
Kasmin, what do they say folded in I think we'll have passed through minus one and a half to minus two percent real GDP.
This is not John in the American zeitgeist right now, the combination of those three opinions wrapped around their different inflation outlooks.
This is removed from Meta, removed from Google.
We can't let them go just yet to there's still seven minutes before they.
No I know but you're gonna know, I got to get back to Toddenham.
I'm trying to see what the future is made us say for seven minutes now, as you was talking about that was noticing Messides Benz rise that full yet got and the thinking hike again fifty basis points.
Messides still getting it done. Yeah, Jim, let's talk about that though, in oh seriousness, who's paying these high rates? Where are they bites in?
That's a good question. I think that they're biting at the business level that they're they're wanting up to pay higher rates. They're definitely biting at the residential real estate level. You've seen a wholesale change in the way that the residential real estate market existing homes to don't move, and we've been trying to fill the gap with new construction because we've got a multi year low and then the volume of existing homes. So they've been biting there as well.
Where they're not biting, by the way, it seems to be in the cost of capital in the stock market that doesn't seem to be bothered by it at all. So it's unclear as to where it is, and that might be leading to an idea that maybe all we've done with a five hundred basis point plus rise and rates is just pretty much trek neutral and we're not really that restrictive, which is why we're not seeing these high rates hurt the economy as much as we thought about.
Michael, what would you say banks to that.
I think it's biting in a lot of places. I think it is biting in the corporate world. You look at bank loans, defaults are arising pretty sharply. You look at the private credit markets. Talk to people and they're there are real tremors there about what's happening in terms of exchanges and extensions. You start looking at we didn't talk about central business district office space that's still out there unoccupied, that's owned in places. We saw that in Goldman's earnings
that has yet to be reconciled. So it's fighting hard. We talked a lot about the consumer. They are really struggling.
Would you like to talk more about Goldman annex? No, take a pass on that thought you might, and I've said Goman, No, Andrew, I think we need to spend a bit more time talking about this. Just how much of the disinflation that we've seen recently is a consequence of the tightening cycle of the last year. How do you know, how do you identify that kind of thing?
Well, I think that's partly why the Feds in a little bit of a different difficult position here, because they've taken some credit for some disinflation that they did not have a lot to do with, which is the decline and energy prices, which is the decline in food prices. And then we're seeing as we head into this meeting, we're having very large increases in gasoline prices. So it's certainly not going to feel to a lot of people like inflation really has been conquered.
Now.
Somewhere where they do have a direct effect is on the housing sector, shelter inflation. And again though I would raise a caution there that we're kind of in this that shelter prices are slowing, and they are, there's a lag that's introduced into the way that the data are put together, so those shelter prices will slow in official inflation statistics. But look at the reading from Case Shiller. Look at what we're seeing in the real time housing
price data. Those house prices are rising quickly now, so there's some real upside risks to inflation, which we kind of go back to Jim's point that maybe five percent five and a half percent policy rates are the amount of restraint on the housing sector at least that we thought it was going to be.
So I promise you this ready is to find a round of questions for three of you. With the news conference about three or four minutes to why we need to get your questions for chair and Power. We touched on it briefly. You don't get to repeat that twice. Jim, what would you ask the chairman today in about four minutes.
Basically what has been driving the decision making to pause into hike? I kind of said that earlier, but it does drive at the confusion as to what is really on top of mind for the Federal Reserve.
Andrew, what about you?
I would ask about the rebound in the housing sector, prices, growth upside rest to both well.
Michael, I'd ask what range of inflation and growth metrics are they using and what levels would they look at for them to one pause permanently and secondly cut rates.
What would they tolerate. I've heard that from Pimco that maybe two points something they'd be happy with that. They'd be okay with that. Does that resonate with you?
Two points something on headline for sure, as long as the trend is headed down.
Jim Bianco Andrew Hollenhorst, that are two of you. Thank you moments away from that news conference with Chairman Pow following a twenty five basis point hike from the FED Chairman Bramo. So it's almost questioned time and you can hear from the panel in the last twenty minutes bit of confusion over what they paused last time around, why they hike this time around, if they are truly data dependent.
What data they're looking at, what their model is there now to gauge out inflation going forward, what their threshold is, as Bob was saying, to hike or to cut. We don't have a sense of any of these things. The model is, come on, we're looking at it and they're supercore.
And yeah, everyone was high five in the FED a few weeks ago when we got that inflation data. It was like victory lap time, Bob, victory lamp. People talking about a victory lamp for the chairman at the Federal Reserve.
If you step back and look at growth and inflationary pressures. They are moderating. They should just put it in park and come back in January.
And do a victory lamp.
I don't know that.
I feel that feels too premature to me. That really does one print TK and start celebrating.
This has been a fascinating discussion. Thank you so much to our team for putting together. That's just brilliant conversation. Collegial disagreement. The common theme here from Marquette academics to UCLA academics to University of Pennsylvania academics is this is a press conference without theory. And I know I'm going to get pushedback on that from Mike McKee and others. But off the pandemic, they're flying blind, and Bob I would say, there is data dependent as we've ever seen.
Yeah, I think so Ever, well, look, I think that you are right that this is perhaps a theory free Federal Reserve that's still trying to hue some of the theories that underpinned their role in all of this. I would argue one of the biggest questions John is whether tightening has the same effect on an economy that is not showing signs of slowing down to your point, the lag the variable long, and variable.
Lives long but also variable.
So then how do we then talk about the efficacy of what they're doing.
They said they don't know, which is why they're in the risk management business, and they've got to work out what is the biggest risk cutting too soon or holding too long, And that's really really difficult to do. I think it's easier to say we need to cut because we've gone too far. It's harder to say, these disinflationory trends are on their way back towards taking us to a sustainable path to two percent. That's a much much bigger call.
I don't know the answer to what's the biggest fear inflation or recession.
We don't know.
And what you hear is from everyone on Wall Street a different answer.