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With your FEDERALZEV decision. The overwhelming consensus saying a twenty five basis point count is Mike mccaith.
It is a twenty five basis point cut, and the number of cuts forecast for next year has been cut in half to just two. Another two are seen in twenty twenty six and one in twenty twenty seven. And as the long run FED funds rate expectation rises to three percent, if that's basically seen as Fed officials view of the neutral rate, they won't get there under this dot pot until twenty twenty eight. We have one descent. New Cleveland Fed President Beth Hammick casts her first, preferring
to leave rates unchanged. Interestingly, three other members of the committee, presumably non voters, agreed with her. Ten members see two cuts next year five C three or more three forecast one, and there's one member who thinks optimal policy would be de levee rates unchanged. All of twenty twenty six and twenty five, there is only one change to this statement. They now promise to carefully assess incoming data quote in considering the extent and timing of additional adjustments to the
target range for the federal funds rate. There's no change to the committee's view of inflation, which has quote made progress toward the committee's two percent objective but remains somewhat elevated. The new economic forecasts, however, show both PCE headline and core inflation forecasts revised up significantly. Headline will be two and a half percent at the end of next year, up from two point one forecast in September. The core also two and a half percent, up from two point
two percent. They do see unemployment at four point three percent at the end of next year, which is down to tenth from September. The economy will end this year with GDP up two and a half percent, that's a half percentage point jump from their September outlook, and it is going to grow two point one percent in twenty
twenty six, a significant slowdown. In one technical note, the FED did lower the offering rate for overnight reverse repurchase agreements by thirty basis points to four point twenty five percent. That's the same as the Fed's target range.
Lower bound Guys, Mike McKee, thank you, sir. There's so much to one pack here, so let's just go with twenty twenty five and go to the forecasts, so we get a twenty five basis point cut, and then they do this for twenty twenty five. GDP revised higher, unemployment revised just a little bit lower. Then go to PCEE once again, revise just that little bit higher. So what you get for the top plot, the medium dot was
actually pointing towards four cuts for twenty twenty five. They've cut that in half to two, which basically marks the whole thing to market. This is where the market was looking for two cuts in twenty twenty five, and this is what the Fed is projecting. If you consider this in the medium dot, turn into the price section. Off the back of this, we unlock another dose of dollar strength.
You're a dollar breaking down to one oh four forty four off the back of that move in the bond market with the your tar at the front end of the curve on a two year up by three basis points to four twenty eight on a ten year up by single basis point to four forty one, and the equity market off the back of that, we come off session highs. On I guess and P five hundred, we are just about unchanged. So if you are just joining us,
welcome to the program. It's a twenty five basis point reduction from the federal serve with a sprinkle of descent and some big changes leased to the forecasts for twenty five and beyond.
And what you can see is basically the market readjusting, but not necessarily of freaking out. I think it's fascinating the idea that Beth Hammock, the new Cleveland FED President, is the loan dissenter three non voting members, as Michael McKee said, seem.
To have agreed with her.
To me, this is the definition of a hawkish cut. We now have one hundred basis points of rate cuts since that September meeting. Now they seem to be only bigging in two rate cuts, as you said, And it raises a question of what the parameters are, what the message you will be from FED Chair Jpowell.
Compare the September forecast to the forecast we just got. Where they thought FED funds would be at the end of next year, is now where they think FED funds will be at the end of twenty twenty six. They've pushed the whole thing out twelve months now, the debate we're going to have, and no doubt the debate they'll have in the news conference with Sham and Powell and
the journalists. How much of this is about realized data, the data we've had since the September meeting, and how much of this is about assuming, speculating, guessing what's about to happen with policy well.
And ultimately, how much can they divorce the two if they're looking for signals from the collective vetting agency, the collective wisdom of the crowds of markets.
At a certain point, they have been.
Following the market in certain aspects, and in this case, the market is inferring certain things about policies and the FED cannot ignore that. But I want to hear from Fedchair Powell this afternoon, in just about twenty five minutes time.
What is your scenario analysis?
How do you take in two stride the prospect of both tariffs as well as potential changes to immigration.
To me, the character of the descent's interesting. I don't have time to study it, but the uniqueness of you know, she's quantitative economics out of Stanford. She certainly knows her where around the block. But that's something your first meeting, and you descent. I mean, what would Allen Greenspan say to that? That's like Lawrence Meyer one oh one. But the answer here is the markets are moving. I'm looking at yen out to a one point fifty four level.
Damien would look at it eight different ways. But the answer is this is not a snoozefest, and there's a lot going on here in a more than expected hawkish cut.
This is what they call a hawkish cut. I could not agree more. And that's judged by what's happening at the front end of the curve. Even if they reduce interest rates by twenty five basis points, the two years higher by seven basis points, we're back through four thirty. Bob Michael JP. Morgan's had some time to go over the statement, to go over the projections and the market reaction. What do you make of this one?
Well, I think they have an incredible sense of self awareness that the economy looks great. The fourth quarter is going to come in around four percent. You've got unemployment at four point two percent. They'll take the side of it that says that's a pretty good level to be at. Inflations a little bit above their target. What's the rush to keep cutting rates. Let's just back up a little bit. I think also they do have to listen to what's being talked about at Mara a Lago, and there is
a lot being talked about. Not any of it is going to be disinflationary or a headwind to growth, and they have to begin to model that in. I actually think they did the right thing. I'm pleasantly surprised they went to two cuts next year instead of three. We'll see what happens.
And do they model in does the Trump administration model in his behavior, his statements on strong dollar that we saw eight years ago, whatever the math is, or is there going to be a different discussion about the efficacy of a strong dollar For President Trump, he's going to demand a week dollar. We got to have exports up ers or new behavior.
I think that's something we're just going to have to wish see. I think there's still a view that the exceptionalism of the dollar is another one of these things that's potentially over invested in. And suddenly if you see policies coming out of the administration on Tara said aren't as severe as expected, then you're going to see a lot of the foreign economies, a lot of the currencies and bond markets start to appreciate a bit.
Do you think that it was a mistake?
And essentially this is the FED walking back what fedshir Powell said about we will not welcome any further weakening in the labor market.
I think there's some of that, and I think they looked at the totality of the data. I started by saying, when they look at everything, it's the perfect soft landing. They're looking for a resting spot. They don't think it's three or four rate cuts away. They think it's somewhere around two more rate cuts away.
Do you think that.
It's good that there's more descent now at a time when there is so much dissent and disagreement just about understanding where we are currently.
I love it. I think it's ideal. You heard the conversation with Ellen. She's sitting there looking at things are about as perfect as you can get them. I try to point out housing and she smacks it away. And I think that's what you're getting at the FAD, which is, you know what, inflation's a little higher than we want. Growth is a little bit firmer than we thought. The labor market looks pretty healthy. And by the way, has anyone talked about holiday sales? The consumers looked pretty good.
What are we doing cutting rates further?
Yeah, look at this John and all the things moving across the Bloomberg launch pad. Canadian dollars extraordinary. We're not nearer one forty four, but it's a jump condition. Unlike others, which you're just pushing up as well.
They've got their own true day shape problems TUMP, and Europe's got their own problems too. You're at dollar right now breaking down, So one O four twenty just about holding on now it's a one A four handle. There's one question I've got for you. By it's a forecast. We haven't talked about the longer run DOUP. It is inched up by like that much from two point nine to three. Is there not a bigger realization going on in the committee that that needs to come up a
whole lot more? Why is this taken so long to draw that conclusion?
Yeah?
I think the realization is setting in, and I think having a dissenter on board is going to help drive that conversation. But if you step back and think where three percent is relative to a few years ago. That does seem pretty high. We had negative real FET funds rates for a long period of time. The very first stop back in twenty twelve was four and a quarter percent. Now we're right about that four and a quarter percent. Why not just sit there and say we can get
to around two percent inflation? About one percent of a real Fed funds rate is about the right level of pressure. I still think it's going higher.
The chairman talked about a recalibration. We've had three meetings on basis points of cuts across three meetings. Was that the recalibration? Have we had it now?
I think that's some of it. I think that's only part of it. Yeah, I think that's only part of it. It just takes a week labor print over the next month or so. It takes a surprise to the downside in core PCE. One of those things to remind the Fed that this level of rates with a four handle in this economy that's come from zero interest rates is still somewhat restrictive and there's more work to do.
If you are just joining us, welcome to the program. Ten minutes ago, a twenty five basis point reduction from the Federal Reserve a sprinkle of descent. But that's not where the headlines are. The headlines are in the Summary of Economic Projections released alongside the statement from the Federal Reserve, where they improved increase their forecast for GDP for twenty five,
They took down their unemployment rate forecast. They pushed up their forecast for PCE, and they did this with interest rates, projecting rates would drop only to three ninety when previously they were looking for three forty. So the Federal Reserve, essentially for the median dot has gone from projecting four
cuts in twenty twenty five to just two. Off the back of that, in the bond market yields a higher the dollars stronger, and equity is a rolling Going from the S and P five hundred, we are down by zero point six percent. So weigh in on this. Dane Swamp of KPMG joined us. Now, Dan, you've had some time to pour over all of this. Let's start with those projections. Was that in line with what you were looking for?
Actually it is, and I'm glad to see it. I thought that the Fed was going to if they were going to do a quarter point, which was already priced into the market that they had to scale back dramatically, at least by half. They're a forecast for rate cuts next year, which is what they did, and the disagreement
within the committee is exactly what you would expect. There's a lot of debate right now about how close are we actually to neutral, and in fact, the new Cleveland Fed President was one of the ones that said we may be closer than you think. So it's not so surprising that she casted as set. Even though it's her first meeting, it's also her last meeting to vote before we see Austin Goilsby roll back onto the committee in
January as a voting member. I think it's not surprising at all that there were three participants at the meeting that also agreed that they don't want so many rate cuts next year. The economy they can do it without front running any policies. Right now, the economy has come in much stronger than they expected. There's been upward revisions to both employment and inflation has come in hotter, and the consumer is atlas to the US economy and the
world at this point in time, and that's important. I think It's also going to be really important to see in the discussion and in the minutes to this, how much they talked about that consumer sentiment number that showed people buying ahead of price hikes and that hoarding activity, which suggests that perhaps inflation expectations are not as well anchored as they thought, and to become a bit more unmurned moored in the post pandemic economy.
Diane, Illinois. You're Illinois is the fifth largest state economy. It would be the eighteenth largest economy if it was a country in the world. And yet we perceive Illinois not flat on its back, but a much more diversified, struggling state. What do you see out there about the two Americas that you would tell Chairman Powell.
Well, you know, I don't need to tell Chairman Pouel anything, because he spends a lot of time looking at both Americas. I think people don't realize how much time he spends talking to people who are trying to upscale themselves and get out of being paid by the government and get training, especially single women with children. I know how much he spends time. He doesn't want to spend time just talking to executives when he goes out to all of his
regional visits at the FED. He actually asked to see the underbelly, to see where people are struggling, what's really going on. I think what's important. I mean, I think about this in my own situation. My son, when I asked him what he wanted for Christmas, he asked me to donate to the homeless and the working homeless are a real problem, and I think that is one of the issues that we're struggling with. And interest rates alone coming down are not going to change the supply of
housing that once was a single lever. We know that affordability has been bid up by a whole host of factors, including scarcity of labor and these recent disasters that we've seen which are pushing up the costs of actually construction.
Because of this fragility, and Bob, I'm curious your thoughts. Some people are saying that essentially this is a hawkish tone, but this still is a FED with a pretty low bar to cut again, that is the comment from Neil Dudda as he looks underneath the hood of some of the employment markets that Diane was talking about.
Do you agree, I think the bar was low. It got a lot higher because they're telling us they're rethinking how many cuts they have to do. And certainly by the time they meet again at the end of January, they're going to hear a lot more from the administration, and it's going to be the administration, not the incoming administration, and they're clearly going to have to model that in wigh that. So I don't think there's a pretty low bar here. I think it's gotten higher.
I'm really pleased you brought up Nil Datta's no if you go to the bottom of this noe Nil from Renmack. Of course, there's an interesting line here on the incoming administration. There is plenty of speculation of what the Trump administration will do, but they have to actually walk through the door. The FED ought to focus on the here and now. The risk is now that the economy slows and the FED is passively tightening by doing nothing. And here's the kicker.
I think the punchline curious that the FED was about to cut a hundred basis points and then all of a sudden stops as Trump walks through the door. Diane, how much of these moves, the change to the forecast that we're seeing are about the incoming data since September, and how much of it is about expected changes to policy that will shape that data in the years to come.
Well, we do know that with the continuing resolution that they're talking about a fairly large increase in bailout funds for the affected states from the two hurricanes. That will boost growth at the beginning of the year, and it is inflationary at the same time, So that is sort of already baked into the cake. Are they doing scenarios,
Of course they are, but they can couch certainly. I think you're going to see Powell couch very much and be very cautious to say they're not front running any policy. They did cut at this meeting. If they were front running policy, they wouldn't have cut at this meeting. And I think that's what Powell wanted to say, even with the descent, with this hawkish tone, this is sort of the perfect way for him to say, we're doing our job. We're looking at the data. It's coming in stronger, the
economy is solid, and it justifies higher rates. Now, you always worry about what's going to break going forward. The administration coming in, they will have more information on it, but even tariffs take quite a while to kick in. They don't kick in overnight, and I think people forget about that and we don't know what Not only will the tariffs completely look like we have ideas and we can model out scenarios, but retaliation will be designed to
disrupt supply chains. That's very important because when you're thinking about it that way, that is inflationary and we're in a much more fragile supply chain environment, which we've already seen. Vehicle prices have already gone up again just in response to the damages and the buying ahead of additional price hikes due to two monster hurricanes. So we're in a situation where we have much more fragile supply chains with
the embers of inflation still smoldering. That's just not a situation you want to add fuel to the fire on you want to keep the lid on inflation. And I think the FED is still hoping to hit that soft landing. But a soft landing, really they will not declare victory. And this will not be Chairman Powell that we saw a year ago, who was pretty jubulant a year ago
when we were sitting in this exact spot. I think you're going to see a Chairman Powell that is cautious optimistic about the economy, talking about the strength of the economy. That's why they're doing what they're doing. That's why the outlook looks like it is not front running policy.
Michael, I got a ten year yield move and the real yield, the real yield was a two five two, all of a sudden popping four basis points rounded up about the two point one to three percent. What does that signal to your bond market? What does that signal the business? Just to see the real yield Butcher's up write against recent husbec six months.
It tells me that investors might have been tilted the wrong way coming into the FOMC decision, and they're unwinding some of that. We'll see where it closes. I'm pretty optimistic things will settle down. I think Diane said it correctly that this is still a FED that cut rates in front of incoming policies. So they must see something in the improvement in inflation that they like, and they must see something in the labor market that they want to make sure it doesn't metastasize.
We'll find out more in about eleven minutes time. In this news conference, stants a special thanks to Dan Swamp of KPMG. Want to draw your attention to what's developing in the FX market and elsewear. So we're starting the bond market just a flavor of that yields up on a front end by seven basis points the two year back through four p thirty. If you take that move, just push it through foreign exchange. What do you expect bit of moves in G ten the dollars stronger against
absolutely everything, against the majors in G ten. Beyond that, in em tom two percent move against Brazil two again negative, that's another two each of them.
Yeah, but each of them are radiosyncredits on.
The top of the twenty so far this ye, yeah, she.
Got Turkish lera popping through thirty five today finally. But they're each a different story. But as Damian Sasomer says his expert on this, it is a flat out six percent depreciation an them currencies, and John, I'm looking at the drawer and the standard of course five hundred. I'm not using the dow here in the SPX is we have a drawdown a negative one point five percent.
Sessions carnage of the session line with down about point seven percent on the session. On the SMP, Mattless seti off Deutsche Bank joined US now and we tased this one U Matt a little bit earlier in the program, we said, Mattless, Eddi is looking for one more Cup said it was a close call for December, and then ultimately you think they're done for twenty twenty five. Matt, Are they getting close into your world?
Well?
Yeah, I mean you have to to say that the dots move closer to that world today, I think really importantly within the SVP. You know, obviously a lot of focus on the dot plot, but what drove that was this big upwardess assessment in inflation. They moved up their core PC inflation forecast to two and a half percent next year. That's closer to our own view. They moved up their core PC inflation forecast for two point two
percent in twenty twenty six. Really takes till twenty twenty seven really to get back to their inflation target of two percent. And then there was a big reassessment of the risk assessment around both the labor marketing and inflation risks to the upside of inflation, everybody kind of anticipates and move back to in that direction, and they're much
more balanced risks to the labor market. So it's kind of an sep from a forecast perspective and from a risk assessment perspective that looks a lot more like it did in June than September.
Matt, how much do you think this really is stemming from the data that we've gotten of late versus just a promise change in policies next year? In other words, is this as Neil Dutta says that they cut by one hundred basis points and then Trump walked in the door.
I think a lot of this is just the incoming data that we've seen. You know, they marked up their growth forecast as everybody else has, by about fifty basis points since the September meeting. They marked up their inflation forecast just given the incoming data by twenty basis points since the September meeting, marked down their labor market forecast by twenty basis since the September meeting. I think the
data since the September meeting confirmed a few things. One, growth is robust to the downside, risks to the labor market and consumer are less than they were three months ago, and three there are risks that inflation is just year than many anticipated. Just put into some context, core PC ended last year at three percent, it's likely an end of this year at two point eight or two point nine percent. That's very little progress over the course of this year, and they basis points despite that.
Matt Jason Furman just publishes up at Harvard Teaching at ten his first sentence mad as simple. I don't know why the FED cut. Matt Lazzetti, Why did the FED cut?
I think it's a great question, and I you know, as you know, it was kind of discussed. We thought that there was a lot of good reasons not to cut. I think when Chair Palace asked this question is going
to be difficult one for him. But the way that I think he'll frame it is they still believe that they were restrictive, and we still believe that they are as well, and that even with a twenty five basis point cut, they maintained that level of restriction and that they're still kind of being able to balance the risks assessment from a labor market inflation perspective. At this point in time, So I think that'll be the argument at
this At this point. That said, I think the signal from them is that they're not just on this regular cadence of ray cuts. They're not just kind of on a path a smooth passed down to a neutral rate
that is kind of uncertain. That it does look like they are going to be pausing for a bit longer here, given their baseline forecast for the data, and that's in line with their own expectations that the data flow, we think over the coming months and then coming quarters will just not be consistent with dialing back more restraint.
Tom.
I thought that was a great question, and I'd like Bob's answer because honestly, I think that that really is a key question, and it's going to be very difficult for this FED chair to really answer. If you actually are upgrading your expectation for core PCEE, why did you cut at all this meeting?
Yeah, and so Matt may eventually be right that this was the last one. As he was talking, I was thinking, bohy, this is really reminiscent of nineteen ninety five when they had pike rates from three to six percent. Everyone thought they'd have to cut rates to four. They did seventy five basis points. That was it five and a quarter, and then they came back shortly there after starting the hike rates. You do look around and do see that
actually the economy's doing pretty well. Now there are things below the surface in the labor market they have to be concerned about. There is a nine tenths of a percent increase in the unemployment rate. You've never had that without a recession. We look at job gains and look at the six month moving average one hundred and eight thousand, haven't seen that since twenty ten. So why not continue to take a little pressure off of businesses in house?
Given everything we've learned in the last twenty four minutes, does it make you more or less comfortable in pricing risk this afternoon?
It makes me more comfortable. I think the Fed sees what we see, which is, hey, this is a pretty good economy. We'll see what policies look like. Let's find a place to rest for a bit. We're not going to break anything. And it could be with a couple more rate cuts, and that's it. Matt could be right, It could be here. We'll find that out by March.
Now, Zodie, what's the elasticity here? The Atlanta GDP statistic is three points one percent. Can this suddenly saved your own power? Can we get a suddenly so slower economy or do you really have to glide out to the same middle of next year?
Look, the slower economy is something that you know, we in consensitive have been expecting for the past several years. It just has not come at all. You see the past several quarters two point eight percent growth in Q three, as you mentioned Q four, tracking at you know, about three percent at this point in time. Our own growth forecast is for two and a half percent growth next year.
But that's a deceleration relative to where we are. Financial conditions are easy, credit conditions have the sentiment has improved. So I do think that this economy has a substantial momentum behind it, and I think can give you strong growth outcomes. One thing I'm a little bit surprised about is actually their potential growth estimate remained at one point eight percent. They've been talking so much about productivity growth,
the supply side of the economy. I thought that that would begin to manifest in a higher potential growth rate in their forecasts. Didn't happen today, but maybe that's an coming quarters.
Matt, what would you want to ask j Powell at a time when everyone's going to try to get him to comment on Trump policies and everyone's going to try to understand just how high the bar is to cut again.
Yeah, so I think you know, I was going to ask about kind of the level of restriction if they had three cuts baked in, But I think it's more about understanding how they how they think about a few things in the labor market. Bob mentioned, you know, some weakness in the labor market. I'd be interested in whether or not the rise of the unemployment today they would
view similarly to the rise through the summer. I think there's many reasons for them not to payrel games are stronger, the quits rate has moved higher, the hiring rate has stabilized a little bit, job openings have picked up. But are they as concerned about this rise in the unemployment rate as they were during the summer. Second question I
think is on shelter inflation. We did have this big downdraft in the latest print that went against chair palacing that it's going to be a very slow progress on this front. How are they just thinking about over the next several months. I think it's an important question for them as well.
Matt.
There's one problem, one big problem I've got with this decision, and it's the words the chairman used in the last news conference. I guess we don't assume, we don't speculate that inflation forecast, Matt. Are we're sitting here and really saying that that much has changed in two months. The warrants the upgrade to that inflation forecast of the FMC without guessing, speculating or assuming on what policy is going to do.
So our own inflation forecast is two point six percent. That builds in about twenty basis points from tariff, So you know, they'd be a little bit more hawkers on the inflation front then then we would be, you know, just going back to twenty nineteen. I don't think they're really building in tariff effects explicitly into the forecast as of yet. I do think that that is factoring into the risk assessments that we see in the back of the SEP where everybody kind of moves shifted back towards
upside risks to the inflation front. But that should also make you worry to a certain extent. You know, if their baseline is two and a half percent without tariffs, it'd be even higher than that with tariffs which are likely coming, and therefore they'd probably be taking out even a little bit more of those rate custom that they were anticipating, which was already leaning in a hawker's direction.
No doubt you'll hear lots of questions about that. About three minutes time when this news conference starts, Matt will let you Runt of Deutsche Bank No dot sev Renmack writes in talked about him a few times already this afternoon. The Fed is pre judging policy, that's one view. That's Neil's view.
Yeah, and he's talking about the fact that there has been such a huge shift without some sort of massive change in the tone of the data that I think people will disagree with. We have some people who say the data has come in a lot hotter. Nonetheless, they have a lot of things to explain in this press conference.
Well, Michael, if they speculatink, are they assuming? Are they guessing at the FMC?
Do you know what their inflation forecast? Just struck me as frustration, frustration with well with the stickiness of inflation. It should be one point nine to two percent by now. Look at how the labor market has loosened up, look at how growth has slowed down, and here we are still around two and a quarter to two point six percent. I don't read anything into it more than that.
So basically, do you think that at this point this is a federal reserve that basically really is just throwing darts at the dark board.
I think they have to be because they don't They don't what he's saying, because they don't know what. By the way, back in two thousand and nine, they would have forecast two and a quarter to two and a half because remember they had the flexible average inflation targeting. They wanted higher inflation for a period of time, and that's what existed in ninety five during the last soft landing. They don't guess speculate, but they model, and they've modeled something.
Yeah. I brought this, Colin Hurst, Let me bring it up with you. It's real simple. Are they going to stay on an ext post method that they use for four hundred years or are they actually getting out front and predicting. I don't buy it. They got to be exposed. They gotta wait for GDPD crack for unemployment to five percent.
Right now, they have the cover of both, don't they.
Yeah, exactly. I mean they're just an ex post machine. That's all there is to it.
But Michael, this was fun. It's going to see you, sir, almost that almost of the holidays after this. This is like kind of it for many of you, I know, going into YEARN for us included
You want to tack to eas