Surveillance: The Fed Decision

up the news conference with Sham and Powell. A balanced FED chair Jake Powell, I can tell you the market screaming one thing, and that's we've got a round view on this. Equities look like this on the SMP five hundred afternoon to you, this is the FED decides equity is off to the races. That one percent on SMP on the nastack up another two percent year today the NAST that one hundred is up almost thirteen percentage points.

In the bond market, big moves yields lower on a two year by eight basis points, four point one two percent on a two year on a ten year down ten basis points to three forty t K. The FED chair says we need to stay restrictive for some time. The job is not fully done. There's a lot of work to do. It's premature to think we've got this, he said. If the economy evolves in the way they anticipate, they don't see a twenty three rate cut, and yet

this market is leaning hard the other way. You know, we sort of guessed that it was a snooze statement, up we go, no big deal, and we said, maybe the pressor will be there, and a pressor for a number of minutes was as expected. And then maybe, like I've never seen, it's not that we're up, John, it's the way we're up. Out there right now is a massive shortcover into some form of dovish. Oh look, I

just got a message on the Bloomberg. I won't reveal who it is until they give me permission to do so, but I can share their words with you. This is what happens when you don't validate the December dots. That's the view out there on Wall Street at the moment. I'd go one step further. In essensely so, he was recognizing that the market was appropriately adjusting to incoming information.

And then at times, in fact, I would say repeatedly convincingly and unsuccessfully trying to lean against easy financial conditions simultaneously. Then at the end there and we talked about this before the decision, he basically said financial conditions hadn't he's too much compared to where they were at the last meeting, which is a shocking statement. And I want to just

point that out. Muhammadalarian putting out and saying, not sure which index he is using, the most widely cited ones show overall financial conditions is loose that they were a year ago. Indeed, the Bloomberg Financial Conditions Index shows the loosest financial conditions going back to February of two. So okay, that's number one, but number two, I would say, right

out of the gate, the market's got the memo. The first question, just as we said, J Powell, are you concerned about how the market has rallied about how loose financial conditions have become? Immediately he could have said yes, this is a huge concern and said it was I'm not sure that wasn't and then all of a sudden marketing nicely. That was basically that's the short version of the conference. He was asked about whether they discussed the pause now if you want, can you do that sound

effect again, because that would be appropriate. And it was kind of there in the mines, wait for the minutes, t K t K. What did you make of that? He's us directly about whether they discussed to pause at this meeting in the last couple of days. And you've got nothing back. You've got nothing back. The whole tenor of it was one of disinflation. I'll let somebody count how many times he said disinflation. John, I actually was thinking, and folks, I can't convey enough the velocities of the

market here speaking, price up, yield down. John, the two year yield to four digits at one brief second four point zero nine eight one. I was thinking to myself, is this guy going to drive the two year under four by the end of the conference? If the kid has three follow ups, we may have gotten earlier on this week. We asked, what are you more interested in the words of Chairman Pow or the economic data? Based on that performance. I'd rather hear from the economic data,

wouldn't you, Lisa. I mean, basically, what it screams is that he is looking at the disinflation and cautiously optimistic. The idea that he's still talking about a soft landing really highlights just this saying that, yeah, maybe the balance of risks ham ha, ham ha, you've got concerns about perhaps not going far enough, but things look pretty good again. This isn't the pushback that people are going to look for the mark. I like that question on the balance

of risk. It came from Colby over at the Financial Times, the whole Colby Smith Kelby remember, used to be the class of surveillance so many years ago. She asked about the balance of risk, and he kind of danced around it. Maybe four months ago he would have said, the risk of doing too little outweighs the risk of doing too much, and then he sort of underno, very difficult to manage the risk of doing too little, and obviously if we do too much we can do something. But it lacked

any real conviction, didn't it? Okay, So here's the real question. Does he mean what he says? Because if he does mean what he says, why didn't you go fifty and then just pause? Right? I mean, in other words, if he really is concerned about financial conditions at any level,

then why didn't he do that? And really that is the screaming conclusion after this press, I'm looking at two point zero five percent nastic lift, you know, the down not playing SPX I think is playing out the new It's forty one eighteen and I'm thinking of corporation is going okay, we need to buy back shares, and the CEOs on the phone right now screaming why did we do this last Wednesday? Again, it's it's the folks. You don't see this. It's the red and green of the

Bloomberg screen. And John's is different than mine, Lisa's is different than John's, etcetera. The pulsing here of the bet John is tangible. There is clearly still a massive spread between the projections and the top plot from the last summery of economic projections and what this market is priceful, And that's going to be resolved in the next couple of months, potentially to some extent by the incoming information

of the data, not by the Fed speak. Let's wait for the data the CPI prints in the labor market day when it starts with pay ross tomorrow. So here's my question. If you get an easing and financial conditions, does that matter in terms of pushing the economy further away from the goal, right, I mean, does it actually matter in a tangible way? Do you see animal spirits

or is this appropriate? It's really important theoretical questions. You know, there's a complex question with a complex answer, but the answer and he alluded to this, we're in new territories as we don't know well. And I will say, Subato, drop of Cecia are all writing in saying that he did not emphatically push back on financial conditions or market pricing of cuts. And that is the big takeaway from this. I didn't get the sense he cat about that spread.

That's so we didn't. Maybe it doesn't matter to them in the way that people think it does. The chairman of the Federal Reserve, how can interest rates twenty five basis points? This is what Chapel had to say. We think we've covered a lot of ground, and financial revisions have certainly tightened. I would say, uh, we still think there's work to do there. We haven't made a decision on exactly where that will be. I think, you know, we're going to be looking carefully at the incoming data

between now in the March meeting. The job is not fully done, except some people think it is equity by one somebody has and on the Mastack wrought by two percentage points. We are we have to see how it goes in the markets, still moving, still digesting a press conference again, the Nastack went under two point two percent. We need him and we got it from someone who's helped us so much over this pandemic. Jeffrey Rosenberg joined us the senior portfolio manager black Rock. Jeff I got

eight ways to go here. But the bet that we saw just played by the markets in the press conference and frankly after the press conference, is enormous. Is it a reset by the markets? Well, you know, I'm listening to the discussion and I think you're spot on here at LESA. I think you're your your spot on and the comments that you highlighted, I think everybody's picked up on it. It is the reflection, it's the answer to the question around financial conditions that the markets really sees on.

So there's a real disconnect between you know, what he said, what the statement said, maybe what he wanted to say, and what the markets heard. But what the markets heard was this issue of the conflict between financial conditions easing and whether or not that would impact the FEDS policy making. He dismissed it. Lisa, your second quest should answer it

absolutely matters. It matters, because it was the second thing that he said was it's important that financial conditions reflect the tightening, and so if they don't and it goes too far, it absolutely feeds back into This is how modern monetary policy transmits into the real economy, and so it will push against the attainment of their goals and that will eventually show up. But for today, the market reaction is really off of that that state, at least

of the Bloomberg television banner. I didn't write this one. This is a brilliant banner and it really says all here. Powell acknowledges disinflation. That's a terrific summary for non sophisticates about what they're watching here with titanic market moves, which is just a factual statement, right, because we are seeing disinflation in the data. And yet the way that it was emphasized, the lack of emphasis on the balance of risks of not going far enough is what has the

markets going. Jeff. To your point, if markets aren't listening to what j. Powell wants, which is tighter financial can isstions in order to get down to that two percent call sooner. Does this basically force the Fed's hand to

go further than might be feasible for this economy. Well, you know, it goes back to that very difficult concept of long and variable lags that right now they don't necessarily need to do that because right now, the disinflation commentary, the trajectory on inflation, the good news that he highlighted from the e c I, and the wage picture all makes it look like, hey, everything's going according to plan here.

But if along the way that easing and financial conditions undermines that that when you settle back down in terms of take out the disinflationary goods piece, I thought he did a nice job kind of uh, you know, answering the question of I think it was it was the question on you know, why isn't you I haven't you already gotten success on inflation? Is because you can't annualize the disinflation of of the goods portion of the economy. When all of that washes out, we may end up

at a higher level. And if that's the case, it's because the wage picture, which he cautioned many times we haven't seen success on that, but mostly the market is ignoring that. If that comes back to two rout at the same time as the easing and financial conditions, it's going to make the job harder. And Jonathan, what you said earlier about the disconnect between the FED statement of staying high at the terminal rate wherever that terminal rate

sets up is more? Is it fifty more? It's really about the markets are pricing not only that, but a full pivot and the easy and financial conditions may make that very hard to reconcile, but that may be a number of months and quarters away before we get to figuring that out. Jeff, if I'm a market participant, though, I'm listening to what he said about financial conditions and I'm just thinking that was bizarre. No. Dutor of Renmac

just published and they'll said this. Palace said that financial conditions of Titan considerably despite the fact that they have as considerably. The fact that he has said that is defish in its own right. The aults are increasing that the fetes declaring victory too soon. Jeff, what would you say back to that? Yeah, you know, that's I think

that's exactly. The interpretation there that if he's saying we're concerned, what he said was, we're concerned about the longer run financial conditions, We're not going to look at these short term measures. What he was doing is he was dismissing the thing that the market was most concerned about, that they would react to easing of financial conditions. And Niels

exactly right. It gave a green light for financial conditions in the near term to continue to ease, go ahead and and rally UH interest rates and and and risky assets. And so that was an opening. You know, they may look back on that and and and need to walk that back months. Jeff, you're in the script. Come on, John Ferrell Nott the calendar. Bramo is better at this and both to us, exactly when did they start walking back this press and a couple of days we'll say,

we'll say we've got payrolls coming up on Friday. I thought it was just really really strange, Tom, really strange. And I guess the simple question is this bullish for risk assets? Well, look in the in the short run, that's the market interpretation again, because it says, hey, risky assets, financial condition easing Fed's not going to react to that, so it relieves some of that concern that if you go too far then the Fed's got to do more.

Powell just said, not so worried about that. So in the near term, yes, but but you know, you've got to take the longer term view here that this is going to make the attainment of the inflation objective that much harder, and so the uncertainty is there. He had one great line, which I think is great and great to remember your certainty is not appropriate. And I think that's the other takeaway as we as we work through

this inflation. Truly original, and this Mr Farrell said, as the philosopher strange, the two year yield just breaks down to new Low's four point zero nine six. With immense respect, Jeff, how do you manage multi strategy in this milieu? How do you as a pro react to what we're witnessing this afternoon? Well, you know, it's it's it's a really good key word that you said, which is react, which is back to my common a second ago, certainty is

not appropriate. Forecasting here is very tough. It's very tough. It's Powell laid out, we haven't been through five episodes of global pandemics and know exactly how the story is

going to play out. So it is really about reacting, not overreacting to this day's financial conditions easing um, but it's also taking what the market is going to give you, and and right now with the curb and version and the opportunity of the highest yields being in the lowest risk areas of the fixed income market, sometimes that's what you got to take, and some of the other more uncertain parts you just have to wait until some of

that certainty and some of that uncertainty reveals itself. And that's critically this path that he talked about in terms of the labor markets in the and the wage picture. You know Tom joke that we get the two year yield below four percent, after j Powell spoke, we're getting closer to that four point oh eight o nine percent.

I am wondering, Jeff, whether you lean against this right At what point would you lean against this pretty significant move that we're seeing across the yield curve if you do think this FED has to walk this back, well, I think that the broader issue in terms of leaning against is really not so much the short term. But what is the market narrative and what is the market pricing in. It's pricing in a a very rapid return to two percent inflation with with a lot of certainty.

And I think that's the part that you can push back against in terms of if that inflationary trajectory turns out to be correct, that's already in the price, and if it's not. The surprise is to the upside and

the vulnerability. I think it is, particularly to those longer maturity yields, where they're reflecting not only the attainment of that two percent inflation in the lack of any kind of inflation term premium, but as well the pivot and the cut in interest rates, which would be, you know, exceptionally difficult to realize if that inflation trajectory doesn't doesn't

show up the way the consensus forecast has. I'm sitting here and I'm about to do an impression, my best impression of trying to be diplomatic, but we all saying he's that bad at his job, Jeff, that he's got to walk this back in the next couple of weeks. I mean, are you cruel? I'm ready to understanding Jeff. He would have had time to practice this last night and this morning. We all knew what questions would be asked. Are we seriously sitting here and saying he didn't mean

what he said about financial conditions? Well, I think that was It was one question. It was in the beginning. Everything else went to script, right. Everything else was cautionary, explaining the different components in terms of inflation, the lack of certainty around the wage piece, the importance of why we need to keep the pace going slowing but going because of their perception of what is the appropriate stand So all of that was there. It was this one

piece on financial conditions. Perhaps there's going to be a clarification. We've seen this before in other meetings where there were statements made where it wasn't clearly where he was talking about short term inflation when talking about real rates or long term They came back out to clarify that. So you know, perhaps they do. But most of what was here and that was the market reaction at the beginning. This was sort of relatively hawkish, kind of delivered on

on expectations. Rates were a little bit higher. But yeah, the question on financial conditions certainly has triggered this round answering, Jeff, thank you, Thank you, Jeff. Your equity market. Then at one point supercent on the natstack, we're up by more than two percent the rally in the bond market. Let's look at the move Fel's allowed at the front end by eleven basis points on a two year tom four point zero eight percent on a two year yield. I don't want to talk once year because we got two

great guests coming up. But John talked about in the two year yield from above a four his move seventeen basis points. I can honestly say I've never observed that. And Mike McKay, running out of that news conference, joins

us right now, Mike, good afternoon. Your thoughts on that one, Well, you know, I called up a graph of the Financial Conditions Index, and if you look at it six months, three months back, Uh, yes, they've eased, But go back a year and j Pal's right, they are significantly tighter. And so the Fed seems to be saying, we are seeing the impact of our cumulative effort of raising interest rates. We're not sure how much more we have to do.

We're leaving the door open to do it if necessary, but for the first time, we're starting to acknowledge that maybe we don't have to go as high as we said at the last meeting in December. And so it's kind of the FED trying to have more optionality, I think because they are sure of where they are this UH. The economy is sort of like Schrodinger's cat at this point, and they're trying to direct it. So where do they

go from here? They keep an eye on all of these indicators and his Paul said, we we've got all these UH inflation, jobs, and growth indicators coming up before our next meeting that we can take a look at the markets. However, I want to trade today, And as Paul said, they have a different job than we do. Mike, do you think that the FED underestimates where financial markets are,

that they're looking at something else? When he talks about tightening and financial conditions amid some of the loosest financial conditions according to at least Bloomberg Financial Index Condition and UH Conditions Index going back to February of UH. You know, you can look at a lot of different indexes for financial conditions. They're looking at the overall tightening. I think in the bond markets is what really matters to them

is certainly liquidity and equity markets. But what that does is simply makes it easier for companies to spend and for people who have a lot of money to have more money. But the spending decisions are going to be based much more on the cost of borrowing money. And they have had some success, they're they're coming down today. But what would happen if we got a three point five percent unemployment rate on Friday? Bond market might completely

reverse itself. So the Fed can't be as reactive to every change in the way the markets go as the markets can be. And I think Paul wanted to make that point today. Michael McKie, thank you so much, and we'll make further wisdom. I think John here in the coming days, we need to frame John who this guest is. This guy was out front on a crucial distinction. Yeah, gloom recession, but out there everyone else was in short and Deutsche Bank said, no, we're up. Make the cold

recessions on back. This is big a call. Remember the conversation when it happened to Misrael. Let's go to Matthew Lozetti right now with Deutsche Bank Matthew, do you reaffirm a recession call after the bizarness we're seeing today? I need I need a nast deck up three and points to confirm the bizarness. But do you reaffirm an n B E R recession call out there? Yeah, you know, that is still our base case. We still have expectations that it begins around the middle of the year, but

you are seeing some changes in risks around that. I think we've seen some slaving in the data that's more material in the recent data points than we were anticipating. In consumer spending capac Certainly, the housing market has kind of been in dire straits. We got anism report this morning that shows very clear weakness, and so I do think that there's you know, conditional on recession happening. There is some risk that happens a little bit earlier than

what we have built in the forecast. At the same time, you know, I do agree with Chair palle Bit that the price and disinflation that we're seeing wages coming down at the same time with financial conditions easing. If price inflation continues to come down as it has, it does open up a greater path to US soft landing so still have a base case for recession timing is unchanged. Where there has been a shifting in risks around that.

The advantage is Peter Hooper and others were we've been talking here in the last twenty minutes about the assumption they will adjust to this FED press press conference, which is massively market moving. I'll let you into the data check. I can't look at those big numbers like he can look at them. But the bottom line here Matt was Eddy, I don't know, come on with NAS deck out two point seven percent up three points on the NAVS deck. This is a massive market move. Do you expect them

to walk back this press conference? Matt? Look, you know I think that there were three dubs things at the mark was latching onto you. Guys have certainly been talking about the f CI point. I think the other two points would be He did not reaffirm the December sep although he did indicate a couple more rate hikes as an expectation, and he also hinted at that there were

clearly discussions about pausing. The way that I would read the FED from now now on is you know they are clearly guiding towards another hike in in March of twenty basis points, but they are highly data dependent at this point. If we get inflation accelerating in the near term, which is our base case, and it sounds like it's the Fed's base case as well, I think they likely

do deliver on that. That may rate hike as well, but it'll be highly dependent on what happens with the inflation data in terms of whether they should push back on this or not. I do think they downweight equities in terms of thinking about financial conditions. When you look at broader based measures of financial conditions, what's happening with bank lending channels, what's happening with cn I lending conditions,

There's been a much more substantial tightening there. So I do think you have had a broader tightening of financial conditions. You know. All that said, do they want equities to be ripped thing right now and using pinecial conditions substantially more than where they were? I would say, you know, sequel, that was probably not the expectation from from the press count Did you get there from Biggie Charger? That was

like ripping? I actually wish someone in the news conference has said the natstack is up two point six percent. What do you think. I think for a lot of people in this market, they done with the inflation story we send the peak of that. They're done with the FED hike and cycle. They believe the terminal rate is just around a corner. The big debate now is what do we come down to. Where do we settle down

on CPI is at four pc? Can we get that nice claim trajectory back to two without doing too much damage? And how long is the Fed going to stay at peak? And Matt, I just wonder is the date on a calendar where you think that difference that spread between this market and this Feller reserve starts to get reconciled, resolved in one way or the other. Yeah. I think there's there's two elements to this. There's the terminal rate pricing, the gap that's there and can that possibly close? And

then there's the rate cut part to it. Um. I do think if we get you know, stronger inflation prints over the next few months, which is offline expectation as I mentioned, I think it's the Feds as well that you will likely see the market price greater probability of a hike into May, and so that will help to I think, narrow the gap between the Fed and the

market on terminal rate pricing. There's the other side of this, which is then the rate cut part, and I think that will just take you know, evidence on are we get over accession or not. Are we seeing inflation come down in a way in which the unemployment rate is not moving higher? Um? But really I think, you know, wrote a piece last week. Under most of the conditions that we expect that the consensus expects, or even the FED expects, they likely should begin to cut rates this year.

And that's because they are coming from such a restrictive stance for monetary policy that that even as inflation comes down, they can keep real rates positive while still cutting the nominal Fed funds rate. And so I do see a high probability of them cutting rates by the end of the year. We have a fifty basis point cut in December as our baseline expectation. So how high is the hurdle for that? Can you just put some more numbers

on that particular code. Yeah, I think, you know, if you do not see progress in the labor market loosening, and if you were to get an inflation forecast that is close to the FEDS. So by that, I mean, you know, CORPC at the end of this year at three and a half percent, the unemployment rate at or below four percent. In that world, the FED would most likely not be cutting rates. But we think inflation is

gonna fall a bit faster than the FED. We think that the labor market is going to loosen a lot more aggressively, um than you know where it is today. And I think if you're anywhere you know, call it four and a half to five percent on on the unemployment rate, and that inflation CORPC has fallen into the three percent range, you're likely to begin to at least see a modest adjustment and monetary policy lower by the

end of the year. When does the loosening in financial conditions that we see today with the two point six percent gain on the NASDAC, when does that lucien ing start to push us further away from the FEDS goal, further away from a soft landing. Yeah. I think would certainly agree with Chapal today that you don't want to over emphasize any short term movements, especially want to over emphasized movements around a key event risk, as as what

we've had with with today's FMC. So we'll have to see what happens with the market over the next few days. We have key data points, key earnings reports. UM. But you have seen these high frequency estimates of fcies clearly easing. Uh. And if that's occurring in a world where we have some acceleration and inflation data over the coming months, UH, then I think, you know, the FED would have likely have to push back on that. It could very well come simply by pricing in what the FED already expects

for the terminal rate about five percent. Do you think the Fed did a good job today? You know, I think was quite honest. I think they want to be backing away from for guidance. At this point in time. There is a lot of uncertainty. You know, there's questions about risk management. We are coming to a world where there's much more two side of risk because we're seeing procession risks at the same time where inflation is moderating.

It's a difficult one always, I think to produce a neutral outcome for the market, the market will kind of anticipate and see and latch onto what it wants to latch onto. I guess I would counter with there were a few hawkers point in his um. In the press conference, he noted a couple more rate hikes, which I would kind of read as reaffirming that the May FMC, or sorry, the December FMC, meaning he said that they need substantially

more evidence on the inflation front. All that, in my read, actually suggests that the baseline remains that they hiked through may you know, putting aside with the market has latched onto m from from these other data points, I Matt wonderful to catch up with the set as always Matt LAZETI there of Deutsche Bank following the latest move from the Federal Reserve. I want to pick up on that phrase. It's an important one, Tom, more two sided risk. There is a much more two sided than they were just

several months ago. And I think that maybe if you send some hesitation in that news conference, it's a reflection of that. Really really a good point. And what's important

here is the two sided risk is not symmetrical. The history of central banking, going not back to biblical but easily back to the nineteenth century, is it's always in every case a symmetric and they're battling that reality of asymmetry within the certainty that he mentioned there, it's an uncertainty that all of us are living day to day.

Probably good fortune fortunate that they don't have to put on any projections today, any forecast, because I think it's tremendously difficult to forecast this economy one year round, given what's happening with China. And China wasn't a big feature of that news conference, and I imagined in a couple of months time, I think, just sitting care guessing, I can imagine a news conference that's got way way more

questions about China than it's us right now. He flicked at it, though, when he started talking about whether his statement of economic projections was changing, he talked about international affairs were affecting some of the potential projections, so flicking at this idea that perhaps the reopening of China could help the situation. Pair that, though, with the fact that now we're pricing it evidently the FED swaps pricing in fifty basis points of rate cuts by year end. I mean,

that's both a gloomy picture and an optimistic picture. I can't figure out which. My head's kind of just in a nut. Another beating up on a feed as a sport, and a lot of people enjoy playing that sport. But if you were to sit here and say, is that the outcome the FED chair wanted from this particular meeting, Tom, I think it's fair to say it probably isn't. Yes, I agree, it was in a way, it was almost

like he was in the metaverse. I mean, you know, we don't have the metaverse within monetary policy, but I'm looking at a market reactions that screams metaverse. Well, here's the thing. And to be fair to J. Powell, he's trying to speak the truth, and the truth is nuanced to a market that doesn't want nuance and doesn't want that, that wants a hard statement. This is what we're going to do. This is where we lean. And he's saying,

you know, okay, we've got this, We've got that. That nuance isn't playing well in a market that is looking for something definitive. I just want him to reflect the consensus on the committee. And when he's asked straight questions like did you discuss a pause? Just answer the question did you discuss the pause? And what are you really worried about? If you say I discussed the pause. Then

now's that going up four? So what you've told us you're not really bothered about financial conditions, What does that matter? They're the kind of weird hesitant moments that I think the market matches onto and investors just sit here and say, Okay, let's buy, let's go. They're done here, they're hesitating, Let's move on. And when we talk about moving on, we're not.

We're moving on to right, We're moving on to this big conversation about the economic data, the incoming information, and at this point, I don't think anything else matters, right,

and which economic data. They are talking about jobs, but they're also talking about tom as you mentioned, disinflation, and that says a lot, the fact that as focused and emphasizing that as much as the jobs and the fully employed America, it's disinflation within the Murta verse, speaking of murder, get some earnings a little bit later, t K. That does it for us. Absolutely. I think we're here again in a few hours, exactly like tas Away exactly's just

going to say about beds. Were all that a crazy, crazy time with a crazy time. We'll pick up the pieces tomorrow morning, looking forward to that coverage with you from New York City. For our audience worldwide, this was the FET decides. This is Bloomberg. Good afternoon. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday, started at seven am Eastern on Bloomberg dot Com, the I Heart

Radio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg.