Instant Reaction: Fed Chair Kevin Warsh's News Conference

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1:24Seize your opportunity at michiganbusiness.org. Bloomberg Audio Studios. Podcasts. Radio. News. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. I'm going to start with a quote from a late Fed chair. This one from Alan Greenspan. I know you think you understand what you thought I said, but I'm not sure you realize that what you heard is not what I meant. I don't think anyone really understood much the last 45 minutes in the market right now still trying to figure it out. The chairman talked about this market move we've seen in between meetings.

2:08This market is playing the ball and not the referee. Take a listen. Nominal and real yields are materially higher across the Treasury curve. In fact, some of the increases in market interest rates between FOMC meetings are among the most significant in the last two decades. In the intermeeting period, market attention centered on real data and real economic developments. Prices reacted in real time to incoming information. And the reduction in forward guidance may have been a factor. market participants are learning to play the ball not the referee and market prices will continue to respond in the direction and magnitude they see fit so is the fed chair outsourcing monetary policy to the market and if it is is this market starting to wonder whether this fed will actually follow through the most important part of this move today and this market cross asset is in the bond market Check this out.

3:11Look at the yield curve. Two-year yields questioning whether this Fed will actually follow through on an interest rate hike. Yields dropping at the front end by six basis points. And with that questioning, the conviction to actually do something about the inflation that the chairman is telling you they will do something about. Look at the longer end of the yield curve. 30s untethered. Yields up by seven basis points. 516 on 30s. Lisa, that's an interesting market reaction to a Fed share that for many was confusing over the past 45 minutes. Frankly, he came out, said that he was really happy to have the input of the market, but he wasn't outsourcing the Fed's decision to the market.

3:52He talked about these four goals, these deep questions that we talk about every single day, but gave no conclusion as to direction. He talked about a divided committee is not divided, but united in a determination to bring down inflation. And this market said, you know what, we're going to call BS on this and you're not going to hike rates and you're going to try to job on us. And you think that we're going to do the job for you. And so they're calling the bluff. I would like us to extend this show to 5 p.m., frankly, John. I know you got early hours tomorrow morning, but that was an historic press conference.

4:22There was all sorts of little tidbits and we've got wonderful guests to talk to about this. But every sense of that was radically different than anything we've seen in recent years. And let me to quote another central banker, and this is the Fed governor on the board right now, Chris Waller, going into the quiet period. He made this statement, sternly staring at inflation until it melts before our withering gaze is not an option. Brammo, is it an option? So what I love from Renaissance Macro from Neil Duddy came over and he said, Warsh, my judgment is this is a period of watchful thinking. So I guess a withering gaze is an option because ultimately, Kevin Warsh could not answer the question.

5:04If you still believe that inflation is a problem, why did you not hike today? He could not answer that question. What would make you hike? Reaction function. Reaction function is just guidance. It's just a prediction hidden in that. Is that true? No, it's an understanding of which data and what could potentially make you pull the trigger. What I also think was interesting, he kept saying that the market is a pure input into what the market believes, that the data is showing us. No, and Neil Dutta points this out too. It was a reaction to Fed speeches. They were indicating they were moving in a more hawkish direction.

5:35This is very difficult to say that this market is just playing the ball and not the referee. Three dissents at this Federal Reserve meeting. Rates kept unchanged. The confusing news conference for the past 45 minutes. Brammo, did you nail it? I missed by 20 seconds, I believe. No, no, no, by 17 seconds. We were taking bets on how long this news conference would last. Brammo came pretty close. 45, 32. It was a 45-18. Is play the ball from Caddyshack? I'm not sure where that quote is from. Play the ball, not the referee. Isn't that fairly well known, that quote? I think so. That's from the World Cup.

6:06Yeah, I think so. Oh, it's from the World Cup. OK. All right. Two-year yields down by seven basis points. Stopped it running the program. Torsten Slok of Apollo with us around the table. Torsten, good afternoon. Perfect guest. Hey, big challenge for you, buddy. First up, translate the last 45 minutes. What did you learn? Well, the first observation is that Powell actually also had three descents in April, and he also had three descents in December. So having dissents is not unusual. That's not a worse thing. We also had that under Powell. But that being said, there's very little to hang your hat on in the market.

6:34We didn't get any guidance in any direction. And it was also a little bit complicated to figure out what was the basis for the decision today in the sense of when Mike McKee asked, well, what are we waiting for? We didn't get a clear answer for what exactly are we waiting for, which was, of course, was a subtle way to try to get some forward guidance. but this is the part of the challenge. We're not delivering forward guidance that when Mike and others ask about what is it that you're watching, what exactly should we be watching, then the answer is that we're not really giving any guidance and the market can figure it out on their own.

7:04The price for that is volatility and you could see that in the swing in the market over the last hour or so. Equities were positive, they turned negative again. Bring up the bond board if we can and just look at twos, tens and thirties. This move in the yield curve, Torsen, I'd love to get your reaction to this because you were watching this closely throughout the news conference. this move at the front end and how it informs this move at the long end of the curve? Well, what was interesting was that 10-year rates really went up and down like a yo-yo for a better part of the conference. That's a little bit unusual.

7:32Normally, 10-year rates take a step either up or down as we move forward in the press conference. But the fact that there was such a swing, it is also telling you that markets are trying to figure out, are they hiking at the next meeting? So, yes, FedFundFutures are saying, no, there's a 70 % chance that they will hike at the next meeting. But what was also the interesting question is when he was asked about, well, if markets then are predicting, say, 80 percent, 90 percent chance of a hike going into a meeting, are you going to deliver on that? And the answer was, no, we're not going to deliver on that.

7:59It will all be contingent on the debate that we're having. And markets may be pricing what they're pricing, but we're still going to go with just what the committee is thinking. So in that sense, the market pricing in some sense is helpful. But at the same time, we in markets can't really even rely on that if expectations are saying we're getting a hike at the next meeting, that we are actually getting a hike. What this market is saying right now is that he's bluffing. Because if you take a look at it, it was 70 % chance of a September rate hike. Now it's 50 % chance of a September rate hike and dropping in real time.

8:26How much do you view the 30-year as the real tell in terms of what the market is taking from this Fed, which is potentially you're not going to hike rates and you're going to hope that job owning is just going to do the job? Yeah, because 30-year rates are basically saying if you're not hiking rates, then we are hiking rates. And that's why 30-year rates have just made it much more expensive to borrow, to buy a house. And as a result of that, financial conditions are tightening. And he didn't tighten financial conditions, but the market decided to say, well, then we think it's time to tighten financial conditions.

8:51And John, I know you've got a question. The key thing to me, John, is 30-year rates, 520 is a key print. We're at 517. 520 is an OMG print. The price of volatility, is that what we're learning? The price of reducing guidance, reducing communication, being very, very unclear about what on earth they're going to do with policy. Are we paying the price this morning and this afternoon? But that's why the task forces will be very, very interesting, because they will certainly also on the communication task force, they will have to discuss what is the best approach. Is it the best approach to have no forward guidance?

9:23Is it a better approach to have forward guidance? If you do not have forward guidance, you do have more volatility. But in fairness, to Kevin Walsh's point, he did say that, well, when we don't say anything, markets are reacting to the data as we go along. But the risk, of course, is that if the market is overreacting to some data, that then also needs to be resolved in the task force on communication. Namely, is that the right way to do it? Because it runs the risk, as you're saying, John, that you will have more volatility. Terce, I'm thrilled to have you here with this really odd press conference.

9:52There was a bombshell in there where he went back to 2014 in a paper he did on the Lucas critique. It's just slipped in there for a second. But to academic economists, that is a bombshell, what he said. And what he's basically saying is the distrust that Robert Lucas, the laureate, had of models. I think of Claudia Sahn. Lisa, you mentioned this earlier, the idea of reaction functions. Is this a new, almost model-free Federal Reserve away to Lucas and even away from the giant Olivia Blanchard? It does lean into the Chicago Stanford School of Thinking, namely that when you have a policy that you are changing, you should not run regressions and look historically at the data up to where we are now, because the change in the policy is going to change how people behave.

10:40Is there a new model then? Is there a new fresh, worse model we need to discover? Yeah, because I think he's saying that you can't just look at all the models that look back, because when we are now changing policy, then forward looking, people are going to change behavior. How do you determine an inflation rate across that? If you take DSGE, Richard Clare, or Gertler, or Brown, if you take the mathematics of that, throw it out the window for this show. But the bottom line is inflation is the measurement we use. How will we measure inflation with a new Warsh-Lucas model? But that's exactly right, Tom.

11:10That's why if you don't have the models that look at the latest data, then what are you then looking at? What are you then relying on for forecasting what inflation will do going forward? So in other words, if I'm not allowed to look backwards and say this is where the data is coming from and the trend is whatever this or that. Well, then what am I then using as the guidepost for thinking about what inflation will do going forward? Was that nerdy enough for you? 10 basis point move on 30s. There it is. Wow. Almost higher by 11 basis points and closing in on 519. I'm thinking of all the people that would be unhappy with this news conference in the last 60 minutes.

11:42Forget market participants. Imagine being at the Treasury right now and you're Scott Besson and you're seeing yields go higher on 10s, materially higher on 30s. And then I'm thinking about the others on the committee. I'm not an establishment guy. I'm very, very happy to blow things up and have a new era. I've got no problem with that. I'm open to new ideas. But I just wonder how offended some of the sitting officials might be by how patronising much of that news conference was over the last 60 minutes. Well, it's clear that the sitting committee that he came into had already thought about basically all areas of the task forces before.

12:17So it's clear that the market here is saying, well, if we now are getting a day with no hike, well, then the long end, of course, is moving, basically telling you that, well, this is all about credibility. Are you really going to follow through on inflation? And that's, of course, the thing that the FOMC needs to go home and think about now. The market reaction speaks very clearly that now we need to talk about what is the credibility of the committee, because it cannot only be talk. you will eventually have to follow through. And that's why the probability, given this market reaction now, has gone up quite significantly that they will have to move at the next meeting.

12:48But this is really important. In other words, you're saying that the reaction, the long end of the yield curve is a challenge to the credibility of this Federal Reserve and will force their hand, that if they do not hike rates in September, you will see some sort of unmooring of long-term yields. Yeah, because the risk is if you keep on just talking tough, tough, tough, and therefore markets end up saying, well, this is just a lot of talk, and you don't deliver on that tough talk, The risk is, of course, that the long end will say, well, if you don't deliver, we worry that you are implicitly allowing inflation to be higher, despite the talk about not allowing inflation to be higher.

13:18And that is indeed a question about the ultimate credibility. Is the committee ready to vote next time? This was not only Kevin Walsh. This was nine members who voted to keep interest rates constant at this meeting. So at the next meeting, many of them must look at the reaction today and come to the conclusion. if we want to keep our credibility, we do have to move to make sure that inflation comes down and therefore ultimately long rates also begin to go down. Michael McKee was in the room. Our colleague joins us now for more from Washington, D.C. Michael McKee, we'd love your review of the last 60 minutes.

13:47What's the big takeaway? I think it's very similar to yours. A lot of words, not much information. And the Fed chair leaves with markets probably going the wrong way from what he would like to see at this point. The thing he wouldn't answer is what they actually did today. He talked a lot about talking, but when are they actually going to do something, whether it is acknowledging that the three and a half to three, seven, five rate range is adequate for the job they want, or it's not, and they need to raise interest rates. And there was no acknowledgement of what the case was really on either side.

14:24It was a lot of talk about, well, we're talking. And that doesn't get the markets anywhere. And people aren't going to be very happy with what they heard, I think. Mike, there was an interesting exchange, and you were part of it too, when he was asked, why didn't you raise interest rates? And he basically said, well, I think rates did rise. And he talked about the move in the last 42 days. And Mike, rates rose because for many people, they thought this Fed might follow through on the data that we've been seeing over the subsequent few weeks, follow through on some of the Fed speak that we'd seen from the likes of Waller, the likes of Hammack and others too.

14:58And Mike, and then it got to this moment where I just thought, OK, is the Fed share outsourcing monetary policy to the market? And if he is, well, then I don't think he's going to hike interest rates. We'll take all that back. And Mike, then we see this move in the bond market. I don't want to make too much of a big deal of this move. We can take it back tomorrow and in the next week or so. But it's material. You're up 11 basis points at the long end of the curve on 30s. And Mike, the conversation we're having around the table, do you believe that is a market beginning to question the credibility of this institution?

15:27I don't know if that's necessarily true because it's still so early in his chairmanship, but it is an indication that the market disagrees with what the Fed is doing. The market thinks at this point that interest rates should be higher. And whether or not you believe it's because they're only looking at the data, it is telling the market something, that data. I suspect that the markets are still looking at the data and putting it in context of, well, what's the Fed going to do about it? Because the Fed controls the benchmark lending rate for the country. The markets don't. The markets react. The markets move around.

16:04But the benchmark rate is going to be set by the Fed. And the Fed is going to be reacting to the conditions in the economy. And we got nothing on what he thought the conditions in the economy are or would be. And we got nothing basically on why the markets might be right or wrong and whether that's an adequate response, an adequate measure to keep inflation under control. Mike, thank you, buddy. These comments from the president certainly won't help. So we've got the White House review of things they've just published. This is from the president. Kevin Walsh is fantastic. Walsh has a board. It's a political one.

16:38Walsh would love to see lower interest rates. Given the move we're seeing on the screen right now, 30 yields up by 11 basis points. Those comments from the president this afternoon will not help. 30-year yields have just broken through the highest levels going back to 2007, just to give you a sense right now of the bond vigilantism that you're seeing in bond markets, because they are seeing a more potentially politically motivated Fed, not necessarily that being the case, but given the lack of clarity, a lot of circular talk, the lack of any kind of straight answers about reaction function or exactly why they remained on hold, and then the president's comments are not a good brew for this particular market.

17:18And Brammo, to your point, I think we're both on the same page about this. I don't believe that Kevin Walsh is doing the president's bidding right now. He's widely backed by several establishment figures when he got the nomination for this job. I'm thinking of one. I can't think of anyone more establishment than Mark Carmney, the Canadian prime minister, who gave him a pretty fantastic endorsement when he got selected for the position. I don't think he's doing the president's bidding, but the optics of it absolutely stink. When you have a problem with inflation and you're saying you're committed to doing something about it, but don't follow through and then highlight the market that's doing the work for you.

17:51And now the market's beginning to push back. And at the same time, the president's putting out words saying, well, this is actually what Kevin Walsh wants. The optics of that, the backdrop for it, not a good one. And conflating the idea of a Fed funds rate with the market rate and saying that there was something that happened and that we have done something because that moved. The market's saying, we're not that silly. We're not that ignorant. We know how this is done. It was an anticipatory market. And if you're not going to make good on that, we're going to call your bluff. John, this is an historic moment.

18:23The charts I'm seeing on the screen right now, John, I've never seen. This is basically what's called a reverse operation twist in real time. We've never seen it. And what's key here, which Torsten and I know you've got Stephanie Roth on deck, the first and second derivatives of this move have to be digested by a huge body of the American economy. Let's just start with the housing market as just one example. Well, let's just start with what we thought this was all about. There was a belief that we were reducing forward guidance so that we could introduce some volatility into the front end of the curve, which would help cap longer end yields.

18:59That you'd start to be more uncertain about what this Fed might do, but in a different way, that maybe the outcome would be more hawkish than it would have been otherwise. And what we saw more recently, Lisa, was that dynamic. People were talking about it. this would contribute to longer yields over time at the longer end of the curve, lower yields over time. That's not what you see this afternoon when you drop by five basis points at the front end and you are seeing a move of 11 at the long end through 520 on 30s. That's not good. That is not the outcome people were looking for. No, volatility, if you truly are potentially on the fence and are going to move is one thing.

19:34But if you've got a parent who's saying, if you do that again, I'm going to turn the car right around and go home and the kid keeps doing that and the parent keeps driving straight to go to the amusement park well guess what the kid's going to keep goofing around in the back seat and that's what's going to keep happening because ultimately if you don't believe that they're actually going to do anything why should you start to prepare and price that in that right there that's experience tk that's experience that's right real world experience when you're driving and you lean over at the same time Exactly.

20:01No. Lisa has pulled more than one U-turn in her life. 100 percent. Stephanie Roth of Wolf Research joins us now for more. Stephanie, welcome. It's a confusing one. Sometimes this is straightforward. The last hour is anything but. What's your takeaway? Yeah, I mean, I think markets just don't believe them. The thing is, I do think that the Fed will – that the data will ultimately bail out the Fed to some extent. Because the market's saying, we don't believe that the Fed is necessarily going to be hiking in September. you know, that raises inflation expectations that does exactly the opposite of exactly what Warsh had set out to do today.

20:33If we do end up seeing inflation data come in a little bit softer, that might bail him out. He's basically, rather than doing watchful thinking, he's really doing wishful thinking. If the data ends up coming in line with his side, this may all work out. But if not, this could end pretty poorly. You said his side, and this is important, Stephanie. It seems like the takeaway is that Kevin Warsh is much more dovish than people previously thought. Do you think that's the correct interpretation? Yeah, I think he didn't want to say anything because he didn't want to make it clear that he is in favor of staying on hold.

21:02He wants to make, to have markets do the work for him. The problem is, like you all were talking about earlier, that might have worked up until now. Being, following what we've heard today, the markets are going to do the exact opposite. And then what is he going to say in September? So I think this is the market realizing that the first FOMC was him trying to establish credibility, trying to come across as hawkish, and now markets are just not buying it. Torsten Sluck, I've got the 30-year at a 5.20, rounded up to 5.21. We can do that this late in the day. If I have this move into 30-year yield, I'm on two standard deviations.

21:37How will finance, obviously you're good people at Apollo, but how will finance adapt to what they heard, adapt to this reverse twist? I've never seen it. How do you adapt tomorrow morning? Well, this is a very historic day in the sense that we have seen a very significant steepening of the curve. That is quite dramatic. I'm trying to think back when we ever seen like 20 basis points move in the curve in the steepness like this. It is really unusual. And the answer to your question is that the sensitive components of GDP that are interest sensitive, of course, housing and autos will probably continue to struggle.

22:11They have struggled for quite some time when interest rates have been high. But the tailwinds to growth coming from AI spending, coming from the one big bit of a bill, coming from the homeshoring, those things will still continue to see tailwind. That's why we might get in the next half hour when the news come from both the hyperscalers today and tomorrow, this could also create some more volatility because that will also begin to become a macro event if that does begin to send signals around what is the outlook for the broader economy, especially around the data center build-out. Torsten, can we talk about the price of the data center built-out and the capital raising that we're seeing worldwide right now?