Surveillance: Focus On Fed's Forward Guidance, Stanley Says

to have you with us on the program. Good morning, big question for a lot of our audience whether this is an insurance rate cut that is about to come down from Chairman Poll or the beginning of a rate cunning cycle. Stephen, what are your talent clients right now? Well, I mean, obviously that depends on how the economy progresses, but I would say, you know, in my view, it's

more of an insurance cut. I think the economy has proven um to be in considerably better shape today than than we saw it at the uh previous meeting in June, when the Fed essentially decided that they were gonna need to um to invoke cut in in July. So UM, you know, I I think it's premature to talk about whether there's going to be you know, maybe one or two more, But I certainly don't envision this being a long series of cuts, as you would expect if the

economy we're falling into recession. Saying, what is the GDP growth right now and what is a tip point where Chairman Powell would continue to cut rates. Where where's the Steve Stanley statistic on the run rate of the economy right now? Well, the first half of the year we average two point six. I think that's a pretty good um metric of where we are now. I expect growth in the second half of the year to be pretty similar,

with the consumer continuing to lead the way. Um. You know, in terms of where the tipping point is for Charman Pale, it's hard to say because from what I can tell that they're not really paying a lot of attention to growth there. Looking Steve, this is the art of the matter. I want to make clear, folks, Steve Stanley's when every award there is in g d P four casting you're the two six. Let's say you massively are wrong, so it's only two point three. At what level would Steve

Standling cut interest rates? Well, you know, everybody thinks the trend is around two percent. I'm not sure why if it should be cutting rates when growth is above trend at this point. So, Stephen, how does he manage that message in the news conference today? What's the strategy for communication? I imagine they spent the last couple of days thinking about how to deliver what they need to say in this news conference. Given that it's pretty limited the material

they have. They just have the statement and the news conference. How do they manage the message today? Yeah, I think it's gonna be really tricky. Um. I think explaining the rate cut is maybe the easier part, and Powell did that in July. He cited three things. He cited downside risks around trade uncertainty, decided weakness in the global economy, and he cited the fact that inflation is below modestly

below target. I think for me, the trickier thing is going to be the forward guidance, and that's really what people are focused on. Um. The problem the FED has is that it it professed to be data dependent in June, and it really wasn't. We learned after the fact when we got the minutes, it defended more or less decided that they were going to cut in July as of the June meeting, And so how does the FED communicate if they want to truly be data dependent going forward,

how do they communicate that now? You know, no, no, we really mean at this time. Um, they certainly can't use the same language they used in June. So, Stephen, typically we'd have the summary of economic projections at a meeting with a news conference. Now we have a news conference at every meeting, and in some meetings we don't have a summary of economic projections. So no new forecasts, no new dot plot. Is that an advantage or a disadvantage for the chairman today? Um? I mean, I guess

it's a mild disadvantage. But I think that you know, it looks like a very wise move to invoke press conferences at the end of every meeting, which um, Charon Powell did for the beginning of this year. I mean, it gives them more flexibility. Remember there was all the talk in the prior regime that they could only cut or hike at meeting is where there was a press conference. Well, you know, it turns out July is the in the

feeds of mind, the proper time to be easing. And and if if we were still in the old mode, there wouldn't even be a press conference today. So, um, you know, and think it turns out to be a good thing that that the FED is having press conferences after every meeting, and you know that should give him plenty of of room to explain what the FED is doing. I just think it's going to be a tricky message to deliver. Well, Stephen, let's talk about what the FETE

is doing. You signed the three reasons to ease monetary policy. I imagine he might repeat them in the news conference today. Something he totally failed at was responding to a question from our very own colleague, Michael McKee as to how easy a monetary policy will have given the challenges we

have currently. How do lower rates help in this environment? Stephen, Well, I think that's a good question, and if I were chair and power, I'd be doing everything I could to avoid that question, because, um, the reality is the main

thing that's holding the economy back right now. And again, we are growing above trends, so it's not like the economy's week, But the main thing that's holding it back is uncertainty around trade policy, and there's literally nothing the FED can do to resolve that we're talking about this early this morning, Steve Stanley, If the if consumption is a plug, like it's pretty immovable. Consumer just delivers what they deliver. What are we asking of investment in this

country to jump start what? I guess President Trump and others want. What? What? What are we are we asking for a doubling of investment in the company at the margin? Well, I don't think you need a huge amount in terms of investment. I mean, look, we're at a point in the cycle. The unemployment rate is near fifty year lows. It's not like we need the economy to be growing

tremendously above trend. Now, if you're the president and you're less than eighteen months from reelection, of course you want the economy to be growing as fast as it can and and that's you know, that's that's I think that the sentiment behind his rhetoric. But if you're the Fed, you're just looking for growth that kind of keeps things going.

I think they are somewhat concerned about the fact that inflation has been running a little below target this year, but that feels like it's um even if it's not um transitory, as Pal said in May. But then bernig Don in June. It does feel very structural, and I'm not sure that there's a whole lot that I can do about that either. Um, But you know, I don't know that we need to be goosing the economy right now. I think the economy is fine. Stanley, thank you so much.

The great unspoken of so much of our politics and almost the FED is trade. Like, what will Chairman Policy say today? Is the head of the FED supposed to address a trade wark? Yeah? I think he has to address he has to talk about the risks are around the outlook. I thought what I found really striking the debates, not just the ones last night and the ones we are set together again the previous round two barely any mention of what is happening with China. I mean, you're

in Detroit should be the story. Court Democrats will vote Democrat. I get that, But if you want to win the election, start talking about the economy. And if you have one person that says you're losing your jobs and you're losing your jobs because of China, and then another set of individuals not even referencing what's happening, only one person is winning that debate. Because I mean one person is having it, Meredith,

something with us with your Asia group on this topic. Meredith, it's so important that the easy answers it's about agriculture, and I guess it will be addressed in the president front and center with farmers. But it's more than just agriculture, isn't it. It certainly is what this is. This is

really not about tariffs. It's really not about trade. At the heart of this, Tom is this is really the economic competition between two markedly different models and which are for years were now at more of a tipping point because the China state backed capitalist model is, in the views of Washington policymakers, on the verge of being able to overtake the United States in some of the key

technology growth sectors of the future. And that's really what is driving not just a trade confrontation, but the broader US China technology war that we see playing out, most notably with Huawei. A series of governments just believe that China was going to look increasingly like the United States and the rest of the Western world as years progressed. A lot of people fell head over heels for that president. She speech over in Davos, a couple of years ago

rather foolishly. I think now we face what you say as a tipping point, and I just wonder how this rolls over. Is it something that just continues now the way it is at the moment, this tension year after year after year for a couple of decades, or do something break? How do you frame that for clients at the moment, Meredith, My sense this is going to be more of a a long term struggle than something that

is necessarily going to break it. And look, we we need to go back to how Washington and Beijing work together in prior decades. There's this raging debate within Washington right now that the engagement policy of prior administrations, both Republican and democratic, failed, and I think that's ultimately wrong. It was useful at that time, and as a former U. S. Diplomat, I was at the table when we were pressing Beijing that they needed to make economic reforms that a couple

of years later they would eventually make. They would get there, They were listening, but it was always in their own time frame, and it was always the kind of reforms that would still allow state China state capitalist model to be uniquely Chinese and not Western and that's really where we are right now moving forward all the singles that we're watching as that engagement debate seems to be changing

in Washington. That is confirmed for Beijing that Washington can't live with China under Shijin Ping being China, and that as such, Hiju and Ping is not no longer looking to reform China's models, so that is more amenable to President Trump's America, but looking to do what he can to preserve the economic structures that he's put in place that he thinks is uniquely positioned to see China's economy

transition um and while retaining its unique characteristics. So perhaps fortunately for President g the conversation at the moment is will you sell product to Huawei and will you buy some agricultural products from our farmers in the United States. It seems to me that we've drifted away from some of the core issues at the moment. Meredith, can we get back to the core issues again? I think that we would. We need to get back to those core issues.

But right now Washington Beijing are they're having more surface level conversations, and even today the talks in Shanghai they wrapped early. That tells you that they are not getting to those core issues, and in fact that the levels of if not trust, then at least sort of mutual understanding of where the both sides are that's really sort of broken down. We need to get back to that in order to make substantial progress. You say, terrorists don't

matter a lot of people. You know, they'll go okay, great, except it does if they are if they are a tax on imports and attacks on Americans. Who's winning the tariff war? Right now? What's what's the partial score? Well, it is tariffs do matter, Tom, But in eur Asia groups of view, it's not necessarily the tariffs that are

going to have the ultimate lasting impact. It's the export controls, it's the investment restrictions, it's the attacks on each other's economic models that is going to cause the long term destabilization. Just for a minute here, I know Dr Bremer doesn't want you to do this, but let's go short term. Is it China one US zero right now? On tariffs? Who's winning? Well, Americans are certainly paying those tariffs, but

China's own growth is markedly slowing. Six You know, what are we John in the us splitting here between Steve Stanley's two point six and shriek Camars comparison when start looking at growth that way between China and the United States. Yeah,

you're right, even slowing growth is not bad growth in China. Correct. Yeah, I would agree with that, but I would look at what's happening in China at the moment, and I think it's I think it would be a mistake to sit here and say that the United States is under more pressure, the president is under more pressure because there's an election next year. We always seem to make that mistake and

boil it down to electoral politics. Meredith, and I'd like you to give us a little bit more clarity as just to how much pressure President she is under right now. Not to get this wrong, because there are some people that think perhaps he's overstepped in the last couple of years, Perhaps he's take had been a little bit too bold with made in China, and this is the blowback from that previously. What are your thoughts on that, Absolutely he

is under increased pressure. And I say this as the Chinese Communist Party leadership are preparing to go to their annual summer retreat, where I'm sure that she's in Ping will be in listening mode, not just on the US China trade confrontation, but on the blowback with b R I. We've seen him scale back that program slightly and look to tweak it to address the criticisms there. Also what's

happening in Hong Kong. We have an upcoming presidential election in Taiwan that could move that island further away from from Beijing's grasp. So he's got a lot of pressure coming at him. But what's key here is that there is no one that could possibly replace shijin Ping. Now he has neutralized any potential successors, and so all the power is still rest with him. His position is still relatively strong. Regardless what do you see in the Mandarin press?

What do you see when your great gifts is to be able to read all this in real time? What are they actually writing? I love when you ask me this question Every time, Tom I would say that there is a market shift away from what kind of reforms might be necessary to reach a deal, and more so to what can we do to shore up our own unique state capitalist system to wave off onward pressure coming from Washington. So they are managing the tension coming from Washington.

They're not looking to of any problems. Is it a vacuum for Europe right now? I mean, can they slip right in here and become more dominant to those important Chinese view questions? I certain I think China will be looking to replace some of its relationships with Washington with Europe,

Latin America, other key key economies. But those same concerns about Chinese industrial policies, investment practices, they're in European capitals to to a somewhat of a lesser extent, they would prefer a different approach than that taken by President Trump, but they do share those concerns. One final question, Should John and I do a road trip to Hong Kong and in November, you know, just get out in front of the big changes. I'd love to see you guys

in Hong Kong and November. That's good. Should come back you plan in the next couple of months. I'm working on it. Yeah, you know, there's a lot going on there pretty ahead of right strategy for t DC securities. Do you want to us now as we count you down to that fat decision prayer, just begin with what you're looking for? In several last time, I uh, John,

thanks thanks for having me on tom UM. So we are looking for the twenty five based point of cut that is pretty much baked in the cake, I would argue, I think all the focus is going to be on forward guidance and really what the what the thresholders for the next yeas you know, does does data need to get worse for the FAT two ease again or are they still going to continue to add insurance cuts? So I think that's really going to be the focus. There's

also some talk around this fifty based point cut. I think it's very hard to message that because if they go fifty and talk about going more than the market might say, you know, what does the FED know that we don't know? If they don't go fifty, they can go twenty five, and I think keep that optionality out there. The other thing that the treasury market and I think overall markets will look at, will be on the balance sheet. So remember the balance sheet is supposed to or or

rather balance sheet run off. Balance sheet runoff is slated to end in st member. But you know, it's hard for the Fed too, I think, communicate that they're actually easing on the rate front, but they continue to tighten on the balance sheet front, so they might end that. I think that's pretty bullish for treasuries because now it implies that the FED is going to be buying as much as you know, twenty billion off treasuries in the

open market. So it's not QUEI, but it will look like a little bit uh, you know, like a small que So just to jump in just quickly on this issue because you're not aliged Banks America. JP Morgan also thinks that we could get an end to balance sheet roll off early, but it's only a couple of months early. Why is that material? So it's not so material in terms of of the total amount of reserve drainage, but where it is material is that the FED will be

potentially buying as much as twenty billions. I think what the market doesn't quite appreciate is that because rates have fallen, mortgage runoff is running fairly high, so it's about fifteen to twenty billion a month now. The FED is probably going to continue to let mortgages run off, but they're going to replace mortgages with treasuries. So for the first time, keew We ended the FED will mean the open market buying treasuries, and you know it's it's not a couple

of billion. They'll be buying twenty billion a month, So that's going to add you know, download pressure on r Is any of this in fabosi? I mean you and I we rounded through six seven, eight hundred pages of fabosi. People like you, Preya, you just sort of glibally say, you know, twenty billion, this twenty billion that what is the outcome of this original policy? Yeah? I think the outcome of the original QUEI was to take duration discouvers.

This is about just keeping policy unchanged and allowing the FED to ultimately return to a all treasury portfolio. But it is a new martial buyer in town. So you know, I think with all this talk about deficits, you know, arging to rise, when you've got another buyer, John, is there any positive Swiss yield? The answer is no. I mean, Prea, the price of this is disincentivizing normal processes in finance. How do we get to how do we get back

to normal processes? Well, I think we're redefining normal right. If if our star, which I think the FED was hoping was close to fifty base points to one percent. What if it's actually zero in the US, and so what if we were actually tighter monetary policy. You know, as much as we'd like to blame this on the trade boar, maybe the FED should not have raised rates as much as it did. So now as they're taking it out, I know they're going to pictures as insurance cuts,

but I think it's possible that policy was restrictive. So now if they take that back and Our Star actually goes down, is that going to be stimulative. I'm actually very skeptical that insurance cuts work. I think we're in the starting phase of a slowdown. I'm not sure twenty five or even fifty base points do a whole lot because financially conditions are pretty easy. So I think the FACT will pitch this as insurance and then they'll have to continue to do more because I just don't know

any of the global uncertainties going away. You know, the in Portland organ every time someone mentions Our Star, they have a drinking game where you have a shot of blend coffee. You have drunk you can't. You have coffee. They don't, they don't, you know, they don't just a caffeinated blend cost sounds like a really weird drinking every time it came out of San Francisco. That's a city sellth Is it Starbucks coffee? No, no one drinks star

Wars coffee. They're everywhere but blend coffee. Okay, what's the relevance of this? It's our start? I mean, where's where's our start? Now? Yeah? Yeah, yeah, where's our start? Nobody knows? Thank you, very easy. You'll only know in hindsight. You know that, oh, maybe we were above our star. Such a nebulous concept. Well, pray have they found out that they were above it? You know? I don't know. I think we just won't know. Um. I think the FED

so far doesn't. I mean, it's clearly the President things that we were much above our start. I think the Fed is attributing this, not so much too than having tightened too much, but more than you know, new uncertainties have come in and there's inflation. We don't know if the philipsco exists, how flat is it? Maybe it's a

straight line, the horizontal line. So there's so many unknowns that I'm almost hoping that they don't rely too much on our star and instead communicates a different reaction function. We have a very different which is why I think, you know Bill Dudley's comments, that's the old guard. We're in a new fair interest knew different reaction function where they want to be more aggressive is Gairman Paul and the old guard, No, I would argue he Clarada Williams.

I think that's the new guard that they just don't want to go back to the zero low a bound. So rather than waiting for data to suggest that they need to ease, let's go early. What's the cost of going early, Well, inflation, But actually inflation is running so low that that's not a problem. I'm a little nervous around financial stability. I think that's been swept away a little bit. So you'll get a couple of descents with people who think that or maybe we shouldn't be that.

You know that preventions better than cure, but there is some unintended consequences of easing when you don't need to ease. So you'll get the few descents, But I think the core of the committee is in the camp said let's ease. The cost of of that prevention is not that high. We've had a range of people warning about easy monetary policy.

Morgan's down eas Russia's Shama in the New York Times, Scott Minor of Guggenheim talking about the same thing, your reference, the New York Fed President, the former New York Fed President, Bill Dudley running for Bloomberg Opinion, all warning about easy monetary policy and what it could mean for financial stability and markets down the road. Well, let's talk about markets. Priyer, Germany came out with a ten year bund auction this morning, a yield a negative zero point for one percent below

the depot rate in Europe. Morgan Stanley have this argument, and it goes as follows. And Andrew Sheets, Mike Wilson and others have really been driving it forward. If you believe the easing would work, the commodity complex would be rallying. If you believe the easy in would work, you would expect inflation expectations to pick up materially. If you believe the easing would work worldwide, you'd expect ten year thirty year yields to start to drift higher. So let me

ask you this prayer. If we get a rate cut, if we get several right cuts, if we get a c B easing, do you just see the whole curve being pulled down or can we get some statements, can we get the long end to start to pick up a bit? I think if it's just the monetary policy side that's easying, I don't think you get that stepening. And particularly if the fact keeps calling this insurance cuts. If we're going back to zero, we're doing que you know,

forget about any asset bubble risk around here. I think then you can get that stepening. If you get any fiscal easing, you can get that steepening. But you know, monetary policy can only go that far. So if we're just talking about a few rate cuts, I think you don't get that steepening eel curve. And I completely hear you.

I think the market saying these insurance cuts don't work, and the first is going to have a tough time if the data doesn't pick up to say that this is just a few cuts that we're putting into it. Thank you so much, Thanks pressure to the securities. Right now, we're gonna dash to uh Detroit. Kevin Surreali is in Detroit at the Fox Theater where they're having a Democratic debate. Kevin an open question what's the difference between these debates

versus the previous debates. I think it's getting more serious, and I think you're starting to see that in terms of the candidates last night, uh and, and really the contrast that was drawn. You know, I just spoke with Tom Chairman of the Democratic National Committee, Tom Perez, uh and, and he made that case as well. You know, in the spin room, you know, the issues of whether or not at the nomineque can be for Medicare for all or not and unite the party was the talk of

the spin room. But Chairman Perez made the point that look, ultimately, they're going to have to have differences of opinion in the party regardless of who the nominee is. But I said this earlier on Bloomberg TV with you Tom, but I think it it's worth repeating in the sense that Senator Elizabeth Warren, Senator Bernie Sanders, in terms of the policy arguments, they are setting the parameters of the debate, and every other candidate is reacting to what their plans are.

Uh and, and they're on the other candidates are on defense. Kevin, I've got to watch you about the format. A lot of people are frustrated with this format. Why can't they just put the tear one candidates on one night and the Tier two, three, and four on another night. We want to see all of the main all of the front runners together on one night. What are they doing? Biden and Warren? Yeah, you know, look, it's such a fair question, John I asked it to to Chairman Perez.

They're thinking was when the Republicans had this issue in the twenty sixteen cycle, they had the main stage debate and then the Kittie table debate, and they were criticized for not giving you know, the lower tier candidates enough of a shot, enough of a chance, so they tried to take the opposite approach. Become the fall, the requirements to qualifying for a debate become more difficult of a threshold to reach, and you're gonna start to see pressure

and the field dwindled down. Kevin, what's the money game right now? I mean I saw a poll that Mr Biden is very nicely ahead of the others, etcetera, etcetera. But within the pros that you spend all your time with, what's the dynamic right now? They're commenting on, Well, I mean that's why some of these lower to your candidates. To Jonathan's point it's so important is because we always talk about a viral campaign and having that viral moment.

All that viral campaign leads to is an opportunity to fundraise and to raise big bucks. And so if you're better Overorke, you know, you might have had a big start and gotten some a couple of million bucks in the bank when you launched on Vanity Fair. But you know, you know that those those campaigns and the burn rate of those campaigns that someone put it to me yesterday, that's that becomes very difficult to say what happens tonight. Biden, Kamala,

Biden Booker, Is Biden formidable? Is Biden a formidable front runner? Uh, there's pressure approached Biden's approach to step out and be a gross He's actually prepared to have a fun time. Because I found it unbelievable, Kevin that he turned around down to the debate and affected me. The reporting was that he wasn't prepared for people to go after him exactly, and he said, I mean you've seen this in terms of like last last cycle or last debate in Miami.

He didn't even go into the spin room. He hadn't even even criticized for not even going and giving interviews. And now you've started to see that the campaign is putting him out more. Look for that, Look for how he clashes and with Harris. But also look, and I say this that bears repeating, Look to see how he draws an ideological contrast with the candidates not on the stage, Elizabeth Warren and Bernie Sanders. How cool is the Fox Theater. It's the one jewel that wasn't torn down. It's awesome.

Elvis Presley performed there. You know Motown Rita Franklin. I'm actually standing outside of the Parks and Wreck Diner at Grand River Avenue. It's like this famous diner. Some have more coffee and full day ahead. It's really coughing up for the Fox Theater. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at

Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio