This is Bloomberg Surveillance with Tom Keane, Jonathan Verrow, and Lisa Bramowitz on Bloomberg Radio.
That is it for the main new conference of the Federal Reserve with Chairman Jaypowe. They're following a twenty five basis point increase. Looking ahead on the economy, this is what he had to say. His forecast is for modest growth, not a recession. On policy, he was asked, is this a pause? We're getting closer? We maybe there, We discussed it, but here's the important But a decision on a pause was not taken today. Are we sufficiently restrictive? That's going
to be an ongoing assessment on cuts. Mike McKee pushing hard on that in the news conference the fmc's inflation out note Tom doesn't support raycuts.
The only one in the conference where there was really a stumble. Once again, always McKey, always.
If you are just tuning in on TV and radio. And this is a special edition of Bloomberg Surveillance covering the Federal Reserve's latest interest rate increase with Tom Keane, who wants to go home, alongside Lisa Bradbits'm Jonathan Ferroll, who is very happy to stay with you. If you are just tuning in, Welcome to the program. This is what the Chairman had to say.
With our monetary policy, we're trying. We're in to reach then and then stay at a for an extended period, a level of policy, a policy stance that's sufficiently restrictive to bring inflation out in two percent over time. We always have to balance the risk of not doing enough and not getting inflation under control, against the risk of
maybe slowing down economic activity too much. And we thought that this rate hike, along with the meaningful change in our policy statement, was the right way to balance that. This assessment will be an ongoing one.
The Chairman of the Federal Reserve said policy was tight. You put credit tightening on top of that, throwing QT. We may not be far off or possibly even at that level. When you get closer and closer to being sufficiently restrictive. I think Tom the Chairman is struggling to reflect there a consensus on the committee without drowning out that consensus of the committee with his own personal view. You can sense hows than he was addressing that question, And for those of you.
On radio, there's a time where he looks down and reads the prepared comments, and we saw that three, four or five times, it seemed throughout. What I would really emphasize, besides the decline we see down on two hundred SPX down eighteen, is how little the market moved during the press conference compared to the last four or five six press conferences. I don't think there was a gyrations the emotion within the conference.
Initially people Tom described it as dubvish. At least I have to say, listening to that news conference, that's not my personal assessment of what I heard over the last fifty minutes.
Inflation is a preeminent concern, and that's clear. That said, the market has not shifted in its view that this will be the last cut in this raid hiking cycle that has been the fastest going back to nine to eighty one. We just witnessed it according to market pricing, and that from here the next move will likely be a cut and it could come as soon as September. And perhaps he had no conviction about pretty much anything, but he did sort of reflect the seesaw underpinning the
debates at the to reserve at the FMC. That just gave confirmation to Marketshay.
Told you what that new focus was though, right, yeah, credit tigning Tom. It's going to be a big focus for this committee.
Is the overlay of all these other events that are happening banking, commercial, real estate, et cetera. What does that effect? I'm restrictive, and I've repeated this I think twice today. It goes back to constant at Missoulo in this phrase super restrictive. How restrictive are we now? And some would suggest more restrictive than we imagine just looking at the data.
I'm just going to put this out there. I suspect that the Senior Loan Officer Opinion survey is going to be really boring. And the reason why is because he made it sound that way. He had a written statement. When someone asked him what.
Does it say?
And he looks down, He's like, oh, I can't give you any preview, but just to think it's in line, and it's you know, probably we've seen this tightening since the second half of last year and it's been on going, et cetera.
So you enjoyed the last fifty minutes.
I mean I just was thinking to myself, all these people trying to get him to say something, and he's just like, look, we don't know, and we're doing the best that we can. I think the economy is a better shape than my colleagues. We all agree though in yeah Kumbaya.
Importent headline from the whole thing looking ahead, we would take a date dependent approach, predicted that we will be judge, we will be date to dependent.
Yeah, well, also do this right now. Let us jump to someone who's absolutely been out front on the trajectory of the FED, and that is William Dudley. He's, yes, a Bloomberg opinion columnist, Yes, a former president of the New York FED, but far more gentleman of Berkeley, steeped in our economic history, Bill Dudley, I've been dying to ask you this question. This word pause has come up and the arch question to me to get to June and on to the rest of what we observe in
twenty twenty three. If they pause, is it asymmetric or symmetric? Does a pause mean rate cuts to come? Or they can say we're going to pause and we can go either way. The historians John Taylor of Stanford across the pond from your Berkeley, Barry Ikengreen and others, would they say there's a precedent to analyzing asymmetric or symmetric pausing.
Well, I think they can pause and then continue to tighten again if the data turns out to support that. But obviously when they do pause, they're making a pretty strong statement that they've gotten enough information that they're confident that policy is sufficiently restrictive to use German policy terms to bring inflation down to two percent over time. So a pause is going to be a pretty significant event
from the FED. Now, obviously contact matters that we're in the middle of a debt limit ceiling fight at the time of the June FMC meeting. You might take a pause for other reasons, but I would say a pause will be pretty important event. What the FED was trying to do today was say, look, we don't know if we're going to pause or not at this point. The message, I think in the statement and in the prescotte is pretty clear. We think we're getting close to a level
that's sufficient restrictive. We're not absolutely certain the data is.
Going to do that.
We have to do a little bit more. We're clearly not going to cut yet. So I think the pushback that the FED is making relate to the markets pricing and rate cuts. The FED thinks that the process of getting inflation down to two percent.
Is going to take some time, a lot longer than what the market thinks.
I heard one word in the beginning of the comments, and it echoed from Lyle Brainerd. I believe she's at sixteen hundred Pennsylvania this week, and the former vice chair would suggest cumulative What is a cumulative effect of where we are right now, given how you nailed the need for higher rates to fight inflation.
Well, we're certainly in the vicinity of what's sufficient. I think in my mind whether they have to do another you know, increase or two it's hard to say.
At this point.
We've come a long way in the last year, as Pope Chair Paul said in his pres coms, you five hundred basis point five percent increase in short term rates.
That's a lot in a year.
And we're also starting to see some of the effects of that on the banking system, so that the FED has a whole nother source of restraint, which is credit conditions are going to tighten because some banks are going to pull up.
Now the hard part is, he said in his press conference it's very hard to access. How important that channel is going to be.
My own personal view is it's going to be fairly weak because the problems that these banks face were not that they went out and made bad loans. The problem that these banks faces they went out and took a lot of interest rate risks.
Bill, were you satisfied with the explanations or the answers to the questions about the supervisory of some of these banking institutions that have failed.
Well, I don't think the FED is you know, taking the full responsibility for being pretty slow on this process. I mean, if you go back and look at the November Financial Stability Report, which I did this morning, there's there's basically no mention of any kind of you know, interest rate risk mismatch, any prime kind of potential liquidity problem in the bank. So it wasn't just a question of the supervision not being more aggressive with Silicon Valley Bank.
I think the FED basically missed the risk here that deposits could flow out very very quickly because of the marked market losses on some of these banks balance sheets.
Do you think, then, Bill, they're still missing it that they don't appreciate the full extent of it, based on, for example, the preliminary look that they got to the Senior Loan Officer Opinion survey, which seemed to indicate just an ongoing trend of what they had seen. Are then underappreciating a new pressure in the market.
I think that his answer on the Senior Loan Officers survey was that it's moving in the same direction that it was upward in the tightening of credit conditions, but not in a way that would suggest that the problems of the banking system since mid March have led to a significant further tightening of credit conditions. So I think he's basically saying there's not really any new information in the Senior Loan Officers survey.
That was my sense of his response to that question.
Doctor Dudley, what you just said is extraordinary. You said, basically, the FED missed the ramifications of new digital technology the speed with which we can move deposits out a delicate question, if I may, Bill, and that is basically they want Mary Daily's head. There's no other way to put it nicely.
You've had experience being a president of a FED. Do you go after the president of any given regional FRED when there's a major blow up like this, or is it much more down the food chain looking at the process of supervision and regulation.
I think it's a much broader issue about supervisors finding problems with banks and then not forcing the banks to
remedy those problems in a timely way. The second issue here was I think the FED broadly missed the fact that this interest rate risk that they had created by being very late to tighten monitary policy, that they created by flooding the bank with deposits by doing quantitative easing, that they created part of the stress and the banking system that arose when they had to tighten monetary policy by five percent in a little.
Over a year.
So the Federal Reserve has some culpability here, both in terms of the monitary policy policies that they pursued over the last few years and also on the supervisory.
So it's certainly culpability.
They're not really looking to go out and acknowledge in a major way, that's for sure, based on some of the statements we've heard, they have to a degree.
I mean, I thought the FED report from Michael Barr that came out last week was did acknowledge that there was a lot of improvement on the supervisory side that
that needed to be made. But I don't think the FED has acknowledged the fact that the monetary policy regime that they followed, which was to be purposely late and tightening minetary policy, meant you were encouraging banks to take on more interest rate risk, and then those banks got caught and the Fed a reserve raised by five hundred basis points.
Well, that's an assessment your successor at the New York FED certainlytors in chair based on his most recent comments Mike McKay's run out of the news conference to catch up with us. My wonderful questioning to the chairman as always in the news conference, thank you for that on behalf of the whole audience really pressing him on those rate cuts. Mike, what was the assessment of what you heard in the last sixty minutes?
Well, I think basically what we heard was the FED saying we don't know exactly what we going to do, so we're going to play it carefully and we will punt on a decision or on forward guidance for now until we get a better read on the economy. Powell as it pains to say his own personal opinion is we're not going to receive a recession. But he also ruled out rate cuts in case somebody is thinking that they might do that soon. So a very cautious FED here. If I could, I'd like to ask Bill Dudley a
question to be still with us about that. Because the data don't change a whole lot in six weeks. What would be the bar for the FED, since you've been in as meetings for the FED to race rates to change its mind to say we need to do more, what would they need to see?
I think they have to see evidence that the economy isn't slowing, that the labor markets not loose thing, that wages aren't coming down, that core inflation's not falling, you know. I mean, at the end of the day, what they're trying to do is assess what is sufficiently restrictive in order to get inflation back down to two percent. Before the banking system problems, they thought sufficiently restricted was higher.
Than what we are today.
In fact, Paul was talking about potentially even doing a fifty basis point Radhi cut not too long ago, and then.
The banking problems hit, and so that's caused.
The BED to lower their estimate of what sufficiently restrictive is. So the data will inform them about what's sufficiently restrictive is. If the data is really strong, they'll revives up their notion of what's sufficiently restrictively.
Well, Bill, are they going to put more weight on financial sector data or are they going to put more weight on the data coming from traditional indicators.
I think they're going to put a lot of weight on what they're seeing in terms of the labor market, wages and inflation.
You know, that's really where they haven't made much progress yet.
They're also going to probably take some signal by what's happening in the housing sector, because if you look at the single family housing sector, it looks like it's actually stabilizing. So the policy restraint that's already been put in place looks like it's the effects of that on housing are starting to fade.
A butot just a fine question from a soul. This is something the case brought up over the last week in my car conversations with him. Whether this would be a nod to June two thousand and six. You obviously have a deep understanding of the history of the Federal Reserve back in June O six. They wrote in the statement, the extent and timing of any additional firming that maybe needed to address these risks will depend on the evolution of the outlook and et cetera, et cetera, inflation and
economic growth implied by incoming information. Now, Bill, do you think it's a deliberate nod to Juneo six when essentially that decision ended up being a pause.
No. I don't think they know yet, And I think Power is being true, very honest when he said that we haven't made any decision about whether we're going to pause yet. I think they think that the probability is higher that they're going to pause, but they haven't actually got there yet.
Bill, Thanks for that. Wonderful to get your perspective.
Bill Dundley there on the latest from Bloomberg Opinion and of course the former New York Fed President on this Federal Reserve decision. If you are just tuning in, welcome to the program on TV and radio. Special coverage here Bloomberg Surveillance After Hours, late, very late, Tom Keane, Lisa Brammitts, Jonathan Farrow after aur at like three pm, which is bed time.
What you may all being. We got a pop turnel.
React marketing negative zero point six percent on the smp TK and upon market that's seven basis points now but two year right now, three eighty eight.
Not what he's giveaway. There's no question about it. I've been looking at Apple. We'll get to that tomorrow. But John, what doctor Dudley said there is extraordinary. He did not mince any words about this institution missing the effect, the slew that the Newtonian rates of change of the interest rate movement hasn't been enough talk about this. You can do it on the Bloomberg terminal. It's in your face. And to hear that from Bill Dudley, I don't care
that he's an ex official. That was a scathing rebuke of his institution.
Feut On regultary I have signed to some extent. It's been an acknowledgment of that in the most recent one.
But two.
To your point, they increased interest rates aggressively from zero to five. They went fromt loading. They were catching up, and because they had to catch up, you've had this rate shock, and that's what Bill Dupley is talking about.
We're going to at the Jeff Rosenberg. But basically, folks, this is Bramo and Farrell all wound up and me and McKee are more institutionally friendly. I'm sorry some of the people that.
Let me clean up what you just said? What you mean by that, and I'll leave my count of it is that you have the establishment view.
Yeah, and that's way questioning.
You know, it's like twenty twenty they like everybody else. But the bottom line is, here's a guy with immense experience. Bill was in my book blah blah blah, great, he was scathing about his institution.
Debt crises always happened in the instruments that are thought of as safe. That is always what has happened. Back in two thousand and seven, two thousand and eight, it was the triple A rated or debt that was tied to mortgage mortgages that were basically bundled together. So here's the question. Has this Federal Reserve and frankly regulators generally just let me finish.
Have they basically.
Assumed a complete lack of risk in some of the benchmark treasuries that they're using as like the safety pools, as the buffers, and this really if it's not appreciated. How much further does it potentially got light?
You know, I'm slowly losing it with ut campecific.
West specific West easing into the clothes. I'm sorry, Pacific West has given me a seven down to six point five to two. And when you see people like this with this language, it's enough to make you know, Jeff Rosenberg's gonna get his first gray hair.
Jeff's waiting for us. That's why it's agent.
Jeff Blackcock joined us right now. Jeff, you've got all of that, not this, all of that made in the news conference with him and power. Jeff, you take away please?
Yeah, I've got three key takeaways here.
You know.
First thing is when you just look at the totality of this, this is pretty much on uh spot on for market expectations. The statement all but basically admits to this is a pause. In the press conference, he tried really hard to not say that, but to say that, and I think it's pretty clear that that's that's where we're at.
Second thing that I took away.
I'll call it the new Powell arithmetic as to how he gets to the pause in that policy is sufficiently restrictive, and so what is that new arithmetic, it's the nominal rate minus three percent inflation gets you to a two percent real rate. Add to that credit tightening and add to that QT, and that's how.
He gets to sufficiently restrictive.
And so I think when we look forward, it's really going to be the assessment on this arithmetic towards sufficiently restrictive. First of all, is three percent the right inflation rate to subtract from that nominal rate? If inflation stays high, that real rate isn't as tight as he's implying. Second piece is and he admitted this, we don't really know the magnitude of this credit tightening.
We only know the directionality.
And the third piece is how much is QT really generating sufficient tightening in the real economy remains kind of very unclear. And the third key takeaway here and he talked about this and McKee great question because you got
this out of him. You know what about rate cuts in the market, and he highlighted that's the difference between the market inflation forecast, which is a very aggressive decline back down to two percent, versus the Fed's forecast, which is for a much more gradual inflation for decline and that's what separates market expectations for FED cuts from the fed's reiteration again here that they will hold rates at this level for a long period of time in contrast
to market expectations. So it gets us back to a focus on the inflation data.
Is your sense, Jeff, that we just witnessed the last rate hike in this cycle?
Well, I think we've seen the last rate hike in the consecutive rate hikes.
I think there's a pause, and now it's a pause.
For validation to what I was just describing. Is this really sufficiently restrictive? There was some acknowledgment by the Chairman in the data that suggests some uncertainty that we're not seeing the degree of tightening in the labor market commensurate with a five percent increase in interest rates. We're not yet seeing critical measures of inflation in that services X housing inflation coming down at a pace consistent with the attainment of a two percent goal. So these are kind
of the cautionary tales around. And even the statement in the language says, you know, we're not moving towards cuts next, we're just pausing. But that doesn't mean that the full cycle is ended and we can claim success.
That is going to be about the evolution and the data.
Jeff, do you have confidence that the FED truly does have a handle on what's going on in the regional banks given what they acknowledge was some pretty significant oversights and based on what you see in the granular data that you study every single day in order to make trades.
Well, I think, you know, the anatomy of a banking crisis is very hard to assess, you know, whether it's done. He got the question. He was very careful about answering it.
You know.
I think it's clear that this first phase, when he identified the three problematic banks now being under resolution, that putting sort of a line under the first phase, you know, And I think that's the case. We can see that in the data. You can see you can see that in the deposit flows.
I think he's very.
Reticent to make too big and too large of a blanket statement on that, given the uncertainties that we associate with banking crises. I think the second thing is really the critical one, and that is not the direction of credit tightening.
Yes, this is tighten credit.
It's important to note, and he highlighted this in the upcoming sluice as well as in the Beijes book data. We had seen tightening in credit conditions already in place before.
The March banking crisis.
What's unclear here and very hard to measure, is what on the margin has this done to accelerate that relative to trends that were already in place for a five hundred basis point tightening. And, as he admitted, with honesty and humility, very hard to make that assessment.
And I think that's the right assessment in terms of.
The magnitude of the quantity of the credit tightening.
And Jefferson, the banks roll over here as well, Keith briet and Woods index moves down to new lows, back to twenty twenty. And I also point PacWest moving over just as one of the banks having a tough afternoon of it. Jeff Rosenberg, The fact is what I'm looking at is a three month ten year spread the short short t bill versus the benchmarkets. In truly in the cliches uncharted territory, it is out five point four fitted standard deviations with a velocity to an ever greater inversion,
which part of that Barbell matters. Looking at the three months dynamic or look looking at the ten year dynamic.
You're gonna hate this answer, Tom, but you know, both matter, and they're they're telling you different stories. Right The front end is telling you about the extent of where we are in terms of policy and the tightening that has happened. The long end is telling you about the confidence in the market forecast for inflation to turn right back down to two percent. You can also argue, and I think there's merit to these arguments, that there's some risk premium
in there. There's some tail risk scenarios that are reflected in the ten year there is the expectation for the Fed to react to those kind of growth shock, tail risk shock by easing monetary policy. And there's a forecast here that inflation goes right back down to two percent pretty pretty aggressively. So I think that's what's the message
of that deep inversion. You know, you can also say that that's telling you that you're not going to get that inflation decline without a deeper recession than safe Howell is forecasting. So all those things are implicit in that amount of curve.
What's important release is we're going to standard deviation analysis. It seems like not every chart, but half the charts I'm looking at. I'm now looking at the size of the move given the trend, which is what you do with standard deviations, and frankly, that's what you do on the edge in crisis coming out of crisis. I mean, that's sort of the tonier you get again with USPXO off twenty.
Three points and PacWest down four percent, a similar kind of move in Western Alliance shares as we degreed heading into the close. I do wonder, Jeff, your comment and Drew Matis's point. Drew Metis have met life, he wrote in saying, what a missed opportunity to provide relief to the banks. An unexpected pause could have flushed out shorts
in the sector and created more breathing room. What is your view, Jeff, Do you think that this was a missed opportunity to throw a lifeline to some of these spiraling prices that we've seen in the regional banking sector.
You know, he's sort of got that question a little bit, you know, when he got the.
Question, why didn't you pause?
And he gave an answer that was about getting to sufficiently restrictive. But I think the subtext which he didn't discuss, but I think it is something that is important, is the potential for creating an.
Overreaction by financial markets.
Right.
So he was very much taking pains to not use the word pause, leading you basically up to it without saying it. And I think that was prescripted again to avoid what we had seen in other FMC press conferences, an overreaction too large of.
An easing in financial conditions. Right.
So, remember the Fed's perspective here is we haven't won the battle on inflation.
Inflation is still well way too high.
Four point six percent of core pcees. So they don't want to give the market any reason to ease the
financial conditions tightening. And I think the pause in the early pause, and yeah, there is a the banking system perspective on that, but there's the broader system perspective and that the tightening and credit conditions is actually aligned with their inflation objectives, and so they don't want to push too far back against that and create an unintended easing and financial conditions at this point in the inflation fighting, which is not yet.
One you need a PhD in psychology. Jeff Rosenberger Packrock Jeff, Thank you, sir, Thank you very much.
Doug bet you talking about game theory.
Your recordy market breaking down a little bit here. I've got to say Packwest is down about three point eight percent or so. Western Alliance is negative as well. We're down to there by four percent. The equity market breaking down on the S and P by zero point six percent. Here's a final line from Thomas Thorndon of Hedge fun Telementary. No rate cuts for you seems to be the takeaway right now, got into the close.
Here's some coverage for you.
Simasha, chief Global strateg just a principal Asset Management alongside Scarlett fo and Remain Bussy. Looking forward to their conversation tomorrow morning. On Bloomberg Surveillance, Ben Ladler, Jane Fowley, Way Lee, we go from the Federal Reserve to the ECB tomorrow, Apple after the close on Thursday, then onto payrolls from New York City. Thank you for choosing Bloomberg TV and Radio. This was Bloomberg Surveillance. This is Bloomberg