This is the very definition of a unanimous hawkish pause. The Fed leaves rates today in the range of five and a quarter to five and a half percent, while saying growth is solid and inflation elevated, so higher for longer. Policymakers leave another rate move on the table for this year and take two reductions off the table for the
next two years. The statement once again discusses quote the extent of additional policy firming that may be appropriate, and the dot plot shows that twelve members of the Open Market Committee still believes they will raise rates by another twenty five basis points this year. The high dot at six and a quarter percent, comes out of the dot
plot with Saint Louis fed's Jim Bullard's retirement. For twenty twenty four, the committee now sees a median effective FED funds rate five point one percent of fifty basis points from their June projection, and for twenty twenty five three point nine percent, up from three point four percent in June.
The long run neutral rate is unchanged at two and a half percent, although the central tendency range moves up to three point three percent from two point eight, and the dots show seven members think that neutral is higher than two and a half. All this because the FED sis stronger growth, lower unemployment, and lower core inflation. Ahead, the economy should grow two point one percent this year.
They say.
That is up from one percent their June forecast, more than doubling. They say next year growth will be one and a half percent, up from one point one percent. Unemployment we'll finish this year at three point eight percent, down from their June forecast of four point one percent, and in the next two years end at four point
one down from four point five. Pce headline inflation will be three point three percent this year, up a tenth basically on energy concerns, but their core PCEE forecast falls to three point seven percent from three point nine percent. Next year it falls to two point six percent. One final note, no change in QT, no change in the ior or REBO rates.
Mike, stay closed. I'm just going to work through the price section. So off the back of this decision, we're negative by let's call it zero point two percent on the S and P five hundred. As you might expect, the NASDAG underperforming. If you turn to the bond market, yields to a lower almost across the curve at the front end as well. They're now hired by three basis points looking at staring in the face off the potential of closing out new cycle highs on the front end.
Fouve twelve eighty seven turns to five thirteen on a US two year, so yields up new cycle highs at the front end of the curve, and the dollar off the back of it a whole lot stronger. The euro against the dollar one oh six point eighty nine on the session positive, still by about zero zero point one percent, but certainly off the back of that decision, a stronger US dollar. Mi mckeir, I want to come to you
on that medium dot for twenty twenty four. Are you basically telling me the I took back half the cuts that were priced for twenty four in that previous projection.
That's basically what I'm telling you.
John.
They were looking at four point six percent and now they've gone up to five point one. Clearly they think the economy is strong enough that they may need to do more. At least that's the message they want to send to the markets.
Mike McKee I look at the growth forecast. You went through them quickly, maybe they don't make the headlines. I think they.
Should frame out again.
Their growth vision is Neil Dunna says they're wish casting for twenty twenty four.
Well, the biggest change is twenty twenty three. This year, obviously, the way things have been going, they need to mark up growth for this year. They call it solid. Two point one percent is their final growth. But growth next year is one and a half percent. That's up from one point one percent. That's a fairly strong change. So they do see perhaps the wish casting that Neil is talking about the idea that growth can be stronger into next year and certainly suggests the idea of a soft landing.
I look, Michael McKee at where we are in this and it gets to November and December. I know your first question to the chairman will be tell me about November, Mike McKee, tell us about what this translates in new for the next meeting.
Well, it's definitely going to put the markets on guard depending on what kind of data we see, especially in the inflation numbers. The Fed's acknowledging that we're going to see a little bit higher headline, a little bit lower on the core and If that's what we get, then the FED could decide to raise rates. It's hard to know exactly because of the energy components that are coming into this, but that's what to watch for when we
get the CPI and PCE numbers. The other, of course, joker in the pack is if the government does shut down and there is no data, the FED will have to use its own kind of methods to figure out where it thinks inflation.
Is my McKay, Thank you, sir. We know you've got to run and getst that news conference. M key is going to sprint to that. It begins in about twenty five minutes time. Just to go through the forecasts again, that is a monster Upwood revision to GDP, but their market to market at the Federal Reserve, so they go from one percent to two point one for twenty twenty three.
Tom.
The story for me is out in twenty twenty six. The story for me on unemployment. They've got it at four percent and PCE back down to two all the way out there.
Yeah, several years away.
And this is the aspirational, fanciful stuff that this is how it's going to happen. Unemployment for this year by the way. Three point eight percent is the forecast now and it only climbs to four point one percent next year. Bruce Casman talked about this a little bit early this morning at JP Morgan Tom, How how does unemployment need to go to get inflation lower? That's going to be a question we could explore in the next twenty five
minutes or so. But the Federal Reserve is telling you that they can get back to target two percent in several years time, and unemployment is going to be in and around four percent.
I'm going to go with Doddy here in combine it into what Mattlazetti said. I got lucky in that I picked out of Mattlazetti's note his first look at twenty twenty six. I don't even know if there's a first look to first quarter twenty twenty four, and certainty hear off the pandemic off the shift from a supply analysis to a demand analysis of the economy, and that's a pretty clumsy move. John looking out to twenty six. Now, maybe they're forced to do that, but boy, that's a
tough tough thing. Let's do this, and we're very lucky today to do this because we can fold in what you're all reading and feeling about the strike in America. Diane Swank is steep steeped, I should say in Midwest economics or tenure at Bank one, and of course are academics at ann Arbor.
Andrew hollandhorse with us as well.
Diane Swank, I guess the chairman has to mention the strike today. How do you fold strike analysis into the chemistry the FED has?
It's really tough.
I don't think. First of all, the strike is very targeted. We'll see over this weekend how far the strike gets. I think many people are worried about how long the strike will last, and that is important. It both suppresses economic activity, of course constrains inventories, but it's constraining inventories in a different way than the chip shortages did. So I'm not as worried about vehicle prices being the push
on inflation that they were. That some people are given that this is a more limited kind of production hit, and it actually gives market share to other producers out there. At the same time, demand has fallen quite dramatically for new vehicles because financiing rates have gone so high. I think what's really important in What the FEDGIS did was the whole concept of higher for longer, much higher for longer, and potentially a higher neutral rate on the other side
of this. This is what the theme was coming out of Jackson Hole Symposium was how synchronous the idea of higher for longer, longer montre is across the developed economies that even as we approach this peak in interest rates, that the central banks are emboldened because of the resilience that we've seen, even in those economies that have suffered recessions have not as been as bad as they expected, that they are emboldened to hold rates higher for longer.
And there is a concern on the other side of this that they're going to need a higher neutral rate. This is a different world than the world that we left in twenty.
Nineteen, far different, far different. Andrew, the start of this hiking cycle, we asked a pretty important question, can we get inflation down to target without doing too much damage to the labor market. Overwhelmingly people said we couldn't. We've made some progress without killing off the labor market. The Federal Reserve today Andrew is extrapolating that out. How hopeful Andrew is that forecast.
I think that's the big question that these forecasts raise. You have twenty twenty three growth revised materially high. You have that strong growth continuing into twenty twenty four now in their forecast. So you have an economy that's running head or above potential, you have an unemployment rate that's historically low, and yet we're meant to believe that wages and prices will cool in this economy. This just contradicts
basic macroeconomic theory. So this is a forecast that does not line up with traditional ways of forecasting the economy, with the relatively intuitive idea that when labor markets are very tight, that pushes up wages. When labor costs arising, that pushes up prices. So I think this is a difficult forecast to square with the reality of how economy us behave. That's to be addressed at a later point.
I think what the Fed did today makes sense in the sense that we're running strong growth, we're running inflation that's above target, so it makes sense to guide towards higher for longer. So they achieved the hawkish skip. If that was the intent that's achieved. I think in terms of the forecast, there are some real questions that need to be answered.
The hopes and dreams of these forecasts. Then let's sit on it. I remember a word that you used, maybe more than a year ago. You refer to the forecast from the feder Reserve as fanciful. Aspirational was a word
we heard again this morning, repeated through this afternoon. And when you look at these forecasts further out, do you think it's the right approach to extrapolate out current dynamics, which essentially is the following inflation can come down, can come in further without doing real damage to the labor market.
I think it's a great idea, and I hope they're right. I do think it is still fanciful. One of the things that I think that the FED is betting on is that we are seeing the high frequency data as the labor markets have cooled. This has been one of the most dramatic frenzied pace of a labor market and then cooling that we've ever seen, with unemployment still very low.
And what they're counting on is the high frequency data on job posting shows that wages are slowing even more rapidly as we go into fall so they're betting on those things helping them. At the same time, we've never seen we haven't seen in decades as many strike actions
as we're seeing right now. And that's where things like the current strike with the UAW, the strike that we're seeing in healthcare, the strikes that we're seeing ongoing with the actors and the Writers' Union, those things will have an impact. And how much we see the cost of living adjustments baked into contracts going forward is going to be very important. Remember, with the pop and energy prices,
we're going to see an increase to September. CPI is what sets the numbers for Social Security bump in January. That's one of the reasons its going to be higher bumped.
Now.
That's one of the reasons we had stickier inflation at the start of this year, and so that could be a sticking point and be harder for the Federal Reserve and.
Hall and hors. You need a victory lap right now.
I've got a five point one to three percent two year yield.
I've got a ten year real yield.
Any moment to pop through two percent one point nine to nine percent right now, how does our economy, how does our business society. How does it adapt to a two percent real yield? Is that a signal of buoyancy and resilience or is that a signal of trouble to come.
You know, we've seen the economy a lot more resilient to higher interest rates than I think many people expected at the beginning of this rate height cycle. And part of that is that a lot of the debt that's out there is fixed rate debt that doesn't mature for many years. You think about thirty year fixed rate mortgages, many of those are still at lower rates. You think about some of the corporate borrowing that's taking place, and
that also hasn't all been refinanced yet. So as that debt is refinanced, you start to have people, individuals and firms experiencing higher rates that should slow the economy. You see credit that's tied up, so there is a sense that this is slowing the economy, but it has to be sustained. I think that's the message in the dot plot for.
Bloomer Radio Worldwide.
Bring up the chart again on television here that we just put up with a two year yield back to before the pandemic, and this is an arch call by Holland Ors.
So Swank was very good at this as well.
Andrew Holland Orse, we're back to yields that I remember, and Diane Swank doesn't remember. The consensus belief out there is OMG, We're all going to die with his yield structure. We're going to a six percent two year hollan Orse yield.
Are we all going to die?
Well?
Remember the two thousand and five to two thousand and seven period. This was an extended period of time when the economy performed relatively well and we sustained higher yield levels. And it wasn't that long ago, but it just feels like a long time ago, and many people haven't experienced that yield environment. So I think this is kind of rediscovering that economies can continue to grow, continue to produce
inflation at higher yield levels. Eventually, these levels may be restrictive enough, sufficiently restrictive in the words of the Fed, to cool the economy, but that's a process that can take time.
Van you want of the best of this, give Mike McKay a little bit more help. What's the question for Mike for this chairman in this news conference? The starts in about fifteen minutes time.
I really want to know about how they're so optimistic about growth for next year given some of the headwinds that we face going into next year, everything from higher oil prices to student loan repayments and the additional tightening that they expect in the pipeline, not only in the banking sector but more broadly. So you know that one and a half percent is really pretty stunning. With a half percent higher on short term interest rates, that's remarkable
resilience with a cooling of inflation. And I'm just trying to square all that all comes together.
Yeah, oh, Diane, we all are. We're trying to figure this out. Dana Swank there and Andrew Hollenholst, two of the very best on a federal reserve. That news conference starts in fifteen minutes. If you're just joining us, welcome special coverage of the September Federal Reserve decision life on TV and radio at Bloomberg Surveillant Special alongside Tom Kean,
I'm Jonathan Ferrow. The decision unchanged, no change on rates of the Federal Reserve, the focus on the projections of this FED, a monster upgrade to GDP for this year in many ways marking to market.
No news there.
We understood that growth was better than expected through much of this year. They understand that now the new projection is two point one percent. The old projection was just one percent. An upgrade to the GDP forecast as well for next year two for twenty twenty four that goes from one point one percent to one point five Some of the projections elsewhere pretty fascinating. Twelve of the nineteen officials on the f webc still forecasting, plotting an extra hike this year in twenty twenty three.
In twenty twenty four, the medium.
Dot we priced out half the cuts they had projected in the previous set of forecasts. But ultimately it's the self landing hope and dream. The decision tom today is to extrapolate out current conditions, the idea that we can get back to target all the way back to two percent without seeing gunemployment climb much higher than four percent.
We had a banner up moments ago on television here and I did the quick nominal GDP math and this is basically out twenty four months, our thirty six months you know, out to when we turned into a pumpkin Giant's simple. They're looking at four percent nominal GDP or lower. And there's a lot of people looking at the spirit of this economy saying that with this inflation, that that maybe strengthens the economy. And it's a you know, to bust Bramo's chops, it's a toxic brew.
It is a toxic bru I mean, but for them right now, there's nothing toxic about those projections.
I can't get out to Max.
Katona, We said Max Catton at HSBC. He started talking and we said that sounds like Goldie looks forever. Yes, on those projections, Goldie looks for the next twelve months.
Yeah, I would, I would the rest of the cycle.
And what's interesting here, folks we're coming here from London, is you know those of you in TV Counto, the sunset is spectacular tonight. I went out on the sidewalk in the rain here, the lovely afternoon rain. Out of that workoff for London, practicing for Bank of England tomorrow in this jumble that we're seeing right now in America, Yeah, is the same exact theoretical jumble we're going to see tomorrow with the Bank of England.
These people are making it up as they go.
Let's turn to the price section and see how much Chairman Powell has to sign the news conference it starts in about thirteen minutes. Your equity market totally unchanged on
the S and P, slightly negative on the Nasdaq. But this move in the bond market, Tom, let's sit on that the two year cycle highst yeah, four through five point one percent, just like that, up by three basis points on the session Tom yield only ten year, not much price section there, four thirty, four, thirty year, let's call it four forty TK on the long bond.
Let's bring it in right now. This is very important.
P James Greg Peters with US on yield and Jim Bianco with US with Bianco Research. Jim, let me go to you right away. I just think this is so so important. There's a sense of longer. I see a nominal GDP call out twenty four months, which is not longer.
It's it finally rates come in. Do you buy it?
Well?
I buy the idea that you want to be looking at GDP nominal GDP as being a benchmark for long term interest rates. But I'm not buying this idea that nominal GDP is going to fall to the levels that
they think. If I was to describe, you know, this this confusion that we seem to have about this FED policy, it's they're almost arguing that nothing of significance happened in twenty twenty and that we're going to return back to normalization in the word we like to use, that's replaced transitory, and go back to something between twenty ten and twenty nineteen where we can have you know, two and a half percent real growth, one percent to two percent inflation,
four percent nominal growth, and that would bring everything down and you'd have Goldie locks forever. But I'm not so sure that that's the case. I think that the economy has changed since the shutdown restart in twenty twenty, and the Federal Reserve is still struggling to come to and they're still thinking we're still in the last cycle.
Greg, you've got to work with real money here. The decision to extend duration, to find a belly of the curve, all the other professional stuff you.
Do with PGM.
Does the language and the nuance of the forecast and the dots, does.
That change your conviction and what you're doing with your portfolios.
Well, I would say that we're finally getting what we've been thinking for quite some time, and that is higher for longer. Right, the markets have been raging against this notion that rates will remain high. All the forward curves are pointing down, the dot plot pointing down. So I think this really throws cold water on that. And so for us at PGIM, you know, we really think it's a higher for longer. We never felt the need to jump into duration. You know, maybe it's closer to that now,
but more in the back end the curve. So look, I mean, I think the Fed delivered exactly what they wanted to by it a hawkish SAP that allows them to speak more dubbishly and perhaps not move rates higher.
Here, Greg, it's not just the high for longer message that jumps off the page of the SCP. It's the growth inflation mix looking out a year two years, so they believe you can give back to target two percent, an unemployment is going to drift higher, maybe to four percent and basically stop there.
Greg.
That has big implications for how you invest elsewhere beyond rates, bonds and to credit. Is that your outlook that basically we can achieve back to target inflation barely shaking up the labor market in any way, shape or form.
Well, it is very aspirational, There's no doubt about it. I mean, that is a Goldie Loocks type of outlook. If you have an environment where rates remain higher but growth is quite robust and inflation's coming down, I think that is a fantastic investing backdrop. I do think we're pretty close to it. The challenge, of course, on the table is all these different uncertainties and cross currents, and that has not gone away by any stretch of the imagination.
So you know, we need to take these these forecasts with the grain and salt. There's no different than our own forecasts, right, They're rife with uncertainties. But you know, I do think there's a distinct possibility here, at least directionally. And you know, I feel pretty good about the outlook.
And Jim Bianco, do you feel pretty good about the outlook?
You know, if we're talking about the outlook about the FED, you know, I have my issues with it.
Like everybody else.
But to eat on something that Greg just said, let's be real. We all have forecasts and most likely they're all wrong. But that's okay because we're not getting expected to predict the future.
The key is whether or not we can adjust.
We can see that, okay, the data is coming in not as we expected, and we need to adjust these forecasts. And I fed a reserve in the last couple of years not had a good track record on that. We can all remember transitory. And what I'm afraid of with this Goldilock's forecast is when the situation comes in that it's not panning out, they're going to dig in their heels and continue to say it will and they might wind up making another transitory type of mistake in twenty
twenty four. I'd like to see Chairman Polly, you know, show some flexibility with these forecasts, to say, look this one you think now, but if the circumstances and data comes in soon, that's out the window and we're going to adjust. And that, like I said, that is okay. That is what you should do with a forecast, not just keep at it because you're afraid of some embarrassment of having to change it.
And Jimmy uncle the Lauriate Paul Kruman with a wonderful essay on disinflation, and he really emphasized what the FED doesn't look at, which is plain vanilla inflation. Are they just miss in the fog of London, in the fag of Washington, the fag of cross America? Are they missing a disinflationary tendency in place?
I don't necessarily think they are missing a disinflationary tendency. I happen to be in the camp that inflation on a year over your basis, I'm talking about headline CPI has bottom for the year, it's going to drift towards four percent, not much higher than that. Energy prices are going to be a big factor in that drift higher, and that will be enough maybe to give us that one more rate hike that they're looking for and to at least justify going from two from four to two
cuts next year. And I think that if that continues that the December update of this plot will probably take those two cuts away as well. So I'm in that inflation is sticky camp, and that the FED is going to have to come to the realization that they're not going to get close to three percent, so the disinflation that they're hoping for, that inflation comes down, the unemployment
rate can stay at four. It's been described here as fanciful, and I would also be in that camp too, That is fanciful, and we'll have to see whether or not that situation on faults.
John moments ago rounded up the ten year real yield to two percent. This is what the most the dominic constant at Mizuo's idea of we are restrictive.
Forgive me for thinking out loud, gents, there's a very very simplistic approach to markets. You get economic information data, you think about what it means for the FED, and you trade accordingly. Now, Greg, I wonder if that's just changed off the back of these forecasts from the Federal Reserve.
And let me go one step further and explain why the first Friday of the month we'll get a payrolls report, and if that payrolls report is hot, typically we sit there and say, well, labor market pressure higher inflation.
FED has to do more work.
But Greg, hasn't the FED just told us ho, don't they just de emphasized the importance of the labor market to the inflation conversation?
Johan, I think I'm putting way too much emphasis on the step and the forecast. I mean, at the end of the day, we're in this data driven world. The FED is trying to bounce that out. And I think the markets, given the fact that we're in this data driven world and we're not getting we're wanting in terms of clarity out of the FED, we're relying a little too much on this data release. So I don't think anything changes. I think it's the data change. I think
that FED policy changes. And you know, it's also important remember two things. One is that you know they don't have inflation going down to you know, two percent until twenty twenty six, which is you know, quite some time from now. And then two, we just had a massive revision of GDP in this year, so you know, let's use that as kind of a reminder that forecast era is really quite high here.
And Jim, what do you throw us on the same question.
Yeah, if I could give you a cynical thought, that is that let's see if we even get a payroll report in October six, because if we have a government shutdown, the BLS is closed and Mike McKee's sitting in front of an empty building on that morning. So leaving that aside, I do think though that if you're talking about the payroll report, the consistency about it, it's been it's been much stronger than we've been looking at for the last fourteen eighteen months or so, all but something like two
or three of the reports have been above consensus. And that seems to be the trend that I would think would stay in place. And if we see those kind of numbers come in, it's going to push everybody firmly into that away from that goldielax and into that higher for Lunger camp as well.
We got to make some money to get home here, John Farrell, Ian Lingen, the screaming buy of the ten year yield just says, this is a FED doubling.
Down on soft landing.
Mister Lincoln, of course, of bemo, thanks Greg, Greg Peters. If they're doubling down on soft landing for you at PGIM, is the ten year yield a screaming buy?
No, I don't quite understand that logic, could be honest with you. I mean, what that would presuppose is that you'd have a healthy dose of cuts.
In response to that soft landing.
I think yields are relatively range bound here. I don't really see a big move either way. Yeah, it does look a little over sold. There's some technical dynamics, but ultimately on a medium term basis, it looks pretty fair value to us. So I don't think the bond mark. Investing in the bond market is not about capital appreciation. That is a pre pandemic trade. It is about roll and carry, and so no, I don't expect it as a screaming buy.
With that in mind, Greg, if there's a pool of money people sitting at home right now, they're sitting on the front end. They've been told by a couple of people that they should worry about reinvestment risk in the next six months and allocate accordingly further down the curve. Are you saying, relax, patients, you find where you are.
Yeah, so I've been saying that the whole time. No one wants to listen to it, right. I think there's been this tendency that jump back into the pool because these higher rates are going to evaporate. What the Fed isld you today with the markets are finally starting to respond to is that no, these rates are actually around here for a while. So yeah, so I don't think there's anything reading the rush and so we like duration, but we wouldn't go Hell's belts.
Sorry, let's fold this into Jim Bianco. I mean, John, it's just simple. Bianco was way out front with this idea of defining what longer looks like with a ten year yield, and he's in the camp with Greg Peters.
Hi, Jim, this was great. Jim Bianca, together with Craig paid us. Thank you, guys.
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