Rich Clarendo, Global Economic Advisor of HIMCO. Of course, former feder Reserve Vice chair joins us now from Zerich. Rich, great to see you, perfect person to talk to. What did you make of yesterday in aggregate.
Well, it was an interesting meeting. Obviously, no great decision. I think the DOTS came in on the hawkish side, with only one cut penciled in this year versus three in March.
That's what I thought going.
Into the meeting was more likely.
I thought it would be a cross close calls. It was.
Obviously in some ways the Fed got trumped yesterday by the data. The CPI numbers were very FED friendly. The core number was soft, headline was around zero, and so it's interesting that even though you could argue the Fed on net was hawkish, it was on Netta Davis day in markets given the CPI report.
So is are the dots old news given the fact that we've got updated CPI which is maybe a little bit more benign and positive.
Great question. You know, they could be they could be stale. Now.
The Chair did acknowledge, as certainly was the case when I was there, that members of the committee do have a chance on the day of the meeting, and yesterday after the CPI number came out to revise their dots.
If they choose to.
He didn't want to go into whether or not folks actually had to the extent they didn't. And certainly if we get more numbers like this than they could be a stale. But I more or less think that right now they are in data dependent mode. I know it sounds tripe, but I think they need to see a lot more good inflation data to have the confidence to cut.
How far through that journey do you think we all, though, rich We've talked about and Chris Wallace talks about this, the need to see a series of data prints that are pointing in the right direction to take us in the right direction.
How big a tick in the.
Bulx kind of down that road are we given the CPI data that we got yesterday.
Well, I certainly think we're going to need a guy. We're going to need They are going to need more data than just the one more set of print will get before the July meeting, which I believe is July thirty first, And since there's no meeting in August, I think the soonest practical time to even think about a possible rate cut would be the September meeting, and then my own judgment is a lot would have to go
right between. Then we'll get numbers for June and July and CPI for August, and so if you had three more numbers like what we got yesterday, then September could be could be possible. But I think barring that, we're probably looking at either November or December, and that's more or less I think where market pricing is.
Right now, I'm assuming December is probably more likely given the politics that's going to be happening in November. Yeah, that'd be correct.
Yeah, Indeed, the November meeting if I look at the calendar correctly, Guy, the November meeting this year is the day after the election, which obviously could make sense if it's a close call to do that in December.
Yeah.
In terms of how we think of this in aggregate reach, the sort of the totality of the cuts while the cuts come later, seems to be largely intact. We're going to get to the same place, We're just going to take longer to get there. Is that the right way of thinking about this?
Yeah, that was exactly And indeed the Chair more or less made that point yesterday in the press conference. It's fewer cuts this year than they thought in March, but they added an additional cut to twenty twenty five and an additional cut to twenty twenty six, so they actually end up now Again, the further out you go in the projections really the less informative they are. And so and you saw the chair yesterday and the press conference
sort of remind folks of that of that point. But yes, if you just take the dots literally, they literally get to the same place they did in March, but just with more of it back loaded, and again assuming that the inflation data does break their way Ageah. The other interesting thing about yesterday, when I think he was pressed by a reporter about cutting with inflation running at two point six or two point seven percent, I think what they had was inflation running at two point eight by
the end of the year. You know, the Chair made some reference to that on the exact quote. You know, that would be a pretty good place to be. Now, obviously the Fed is targeting two percent inflation, but it
does reinforce this message. We've had a PIMCO for some time, not only for the Fed but the ECB and the Bank of England and others that they're really operating in a two point something range on inflation, and once it gets there and they think it's falling, they can begin to cut and cut in tandem with declining inflation.
Is the focus on inflation the Fed obviously, and you reference a couple of other central banks that the FED has a dual mandate. Is the focus on inflation? Is the balance kind of sixty forty inflation versus what's happening with the labor market? How do you think the kind of the mix of of inputs there thinking about works right now?
That's a great question, because I actually think it's quite important in this cycle. I think it was clear back in twenty twenty two and three that when inflation was too darn high, they were, in essence a single mandate central bank. Charr Pell even acknowledged that Jackson hole in twenty two that raising rates could cause us some pain.
We haven't seen that.
It's been a very, very rapid and so far painless disinflation. And you got a question yesterday about whether or not they would cut rates preemptively because they were forecasting a softening economy. And arise in the unemployment rate, and he didn't commit to doing that. He said they want to try to avoid that. On the other hand, they also want to avoid a situation where they declare a mission accomplished and then have to be hiking rates next year
because inflation rebounds. And so my guess is that on net, they're going to really need to see some tangible evidence of economic slowing before they actually cut, absent some better news on inflation.
It's the trade that everybody seems to have on. Is the steepener everybody's anticipation we get right cuts the fiscal position probably means the back end remains reasonably elevated, and that's the trade that everybody seems to want to have on. Yet we've seen very little movements in the spread two tens for really quite some time. Whilst it is the beginning of the year, Really when does that kick off?
When does that if that trade is the right trade, when do you think it starts to really materialize and work.
Really good point, because we obviously we have an inverted curve and we have now for nearly two years, so I think that's close to a record at PIMCO. We don't believe inverted curves are the new normal. The curve will resteeping, So in that sense, it is the good trade to have on over the next several years. As in anything in financial markets, markets will try to get
ahead of the inflection point. So sometimes you know, it's better to look at those opportunities not so much in spot space, but in forward space, so essentially the way when our market's pricing them, the curve will steepen, and
to try to look for opportunities there. But you know, there's a lot of money on the sidelines right now, for example, in money market mutual funds, and my sense is that once we do get that first cut, or once it more or less gets priced in one hundred percent, you will see you will see start to see a lot of moving in the direction of the steepening bias.
Rich You're in Europe, you're in Zurich. We're watching quite a lot of political consternation here in Europe, and I'm just wondering how you're thinking about how investors, how portfolio managers should be thinking about political risk right now. It suddenly seems to have inserted itself into the debate in a way that it hasn't for a while. We're sitting it in France right now. We've seen in some emerging markets. We're all looking so carefully at what is going to
happen in November in the United States. How are you, guys at PIMCO, how are you thinking about kind of trying to navigate that and what is the best advice you've got? How are you thinking about what that process is going to look like?
Well?
It certainly it was a focus of our recent secular form. You know, we are certainly now moving into a multipolar world. More than sixty percent of the world GDP is in countries that are having or have had elections.
This year.
We've seen surprises on both side. You know, a surprise in India where Modi did not get the support expected. On the other hand in Mexico where Shinbaum got more support than expected. Obviously an early election in the UK Macron now indicating elections for the parliament in France, the European Parliament.
We could go on and on for several segments.
The way we look at it at PIMCO guys that there's always some element of geopolitical risk. But I think you'd have to argue now, given that we have a hot war in Europe and in the Middle East and the geopolitical risk, it just emphasizes that this is a volatile, uncertain world and what we're doing is trying to put together for our clob gcience robust portfolios that that are that are that do well in all circumstances. It's a challenge, but I think there are opportunities there which.
I couldn't have thought of a more perfect person to talk to, to digest and analyze. Thank you yesterday, CPI the Fed genuine pleasure, sir, Thank you very much. Indeed we always appreciate your time. Richard Clarida, global Economic Advisor at PIMCO and of course former Federal Reserve Vice Chair