Instant Reaction: Fed Holds Rates, Three Officials Dissent

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2:20Lori Logan, Beth Hammack, Neil Kashkari agreed rates should stay on hold, but they did not support including an easing bias in the statement at this time. Stephen Myron wanted a quarter point cut. The last time there were four dissents, October 6th of 1992. As for that easing bias, the statement still contains the phrase, in considering the extent and timing of additional adjustments to the target range, a line meant to suggest that the easing cycle has not necessarily ended. The Iran war figures prominently in the economic overview. Inflation is elevated, in part reflecting the recent increase in global energy prices, the statement says.

3:00Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The committee remains attentive to the risks on both sides of its dual mandate, it says, even though recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low on average, the statement says, and the unemployment rate has been little changed in recent months. The dissents open up a whole new line of questioning for Chair Powell. Four dissents would ordinarily be a sign of discontent with the chair. Since this is likely Powell's last meeting as the chair, it may not be anything more than expressions of concern about the toll of the war.

3:44At each meeting this year, the number of Open Market Committee members who have worried they might have to raise rates has increased. We shall see when we get a chance to talk to the chairman. Mike McKee, stay close. I just want to run through the price action. I've got a big question to come back at you with in just a moment. Equities have stayed slightly lower, no drama here, down by 0.2%. Into this decision, yields were already elevated, particularly at the front end of the curve. They stay somewhat elevated, up seven basis points at 390. This isn't the kind of decision that moves around crude.

4:14Crude is still higher by 67%, 118 on Brent. Mike McKee, I just wonder, coming into this decision, we were talking about the possibility, the potential, this Federal Reserve introduced some symmetrical reaction function. But looking at that kind of dissent, I wonder if the dissent alone has achieved the same thing, just by introducing some two-way risk, given the level of dissent you can see in this afternoon's decision. That's a very good point, because, of course, if Powell leaves the Fed, that's one less vote that we know would be on the easing side at this point. We're going to have to wait for the minutes unless the chairman wants to give us a number, which I doubt he will, of people who think that they should be at least suggesting the idea of raising rates in the future.

4:57But it's obviously grown since the last time and feelings have grown more certain, at least among those who think that two-way warning should be included in the statement. It's very, very unusual. Obviously, it has been almost 30 years since we've seen anything like this. And it is definitely a sign that the Fed is split over this question. And one would think that if these people were willing to dissent because they wanted a two-way warning, because they did not want an easing bias in the statement, that they probably would have voted for a rate increase had that been on the table. Mike McKay, appreciate your time.

5:36You get in the news conference. Looking forward to your line of questioning a little bit later. That news conference, 27 minutes away. We have an eight to four vote at the Federal Reserve. That's some level of dissent. Yeah. And didn't Mike just say that that was the first time we've seen that since October 6, 1992. This is unusual. To me, this really highlights the committee aspect of this and the fact that Fed Chair Jay Powell, for all of the job voting from the president, sits on the more dovish end of this. And I think that that's very notable. So how does he message this given that, A, he probably doesn't matter as much, but B, how does he signal that this isn't necessarily a sign of dysfunction ahead of a new Fed chair coming in, but rather how difficult this moment really is?

6:14The expert on this is John Farrell, the gentleman from the United Kingdom where dissent is far more evident. There were two moments of four dissents in the 89-92 period, and the distinction here, John, is those dissents were to ease, to let up as Greenspan was stricter, and this is radically and historically different. So I remember a level of dissent, a degree of dissent back at the Bank of England coming out of the financial crisis. They basically told Mervyn King what to do, right? They wanted more QE. And I remember the governor being voted down on countless occasions. On this occasion, I'm looking at this level of dissent and I just wonder if the chairman would welcome it.

6:47I think it's probably a good thing right now that there is no group think, that we're in a situation at the moment that deserves some kind of debate about where policy should be and where is it going and what kind of risks we face in the economy right now. I actually also think that that's the kind of committee that Kevin Walsh should want to inherit. Groupthink has been a problem at this institution for the last five years. I wouldn't look at that as a committee that's voted down the chairman in quite the same way that the committee voted down the governor at the Bank of England a number of years ago.

7:15This feels somewhat different. And if you want to move to some kind of symmetrical reaction function at the Federal Reserve based on that vote, I don't think you need it in the statement. I think the dissent already speaks to it. Which I think is why I'm noting the increase in the dollar more than anything in bond yields. You're seeing a strengthening in the dollar versus the euro. And that, I think, gives you a sense, maybe at least of the Fed independence question and the fact that this truly is a committee. But to get up front of the pundits, is this the committee in dissent that President Trump wants?

7:44That's a different question. Yeah. This president clearly wants lower interest rates, TK. And the kind of thing that we've just seen voted for right now is not for lower interest rates. you've got a committee that's worried about the prospect of a market thinking they always get interest rate cuts that they don't have to worry about inflation first and foremost the first rule for any central banker any real central banker anchor inflation expectations this is part of that exercise yeah as neil dada put it he messaged it's clear that wars has his work cut out for him good luck convincing some of these folks that it's time to cut rates and potentially overhaul the whole system different question entirely bob michael with us around the table from J.P.

8:21Morgan Asset Management. Bob, do you have any reflections on this decision? Yeah, clearly it's in the dissents. Clearly they're moving more towards a symmetrical policy. It's confirmed in the first paragraph where they characterise inflation previously as remained somewhat elevated. They remove the somewhat and it's just elevated. So they're telling us they are increasingly concerned about the level of prices, the level of oil and the potential pass-through to the system. I think you're right. I think this is less a message about J-PAL and more a message to the incoming Fed chair that, hey, we could be dissenting.

8:58Get prepared for that. I think he may welcome that. TK asked the question about the president, what the president would like. This is another exercise. It's quite important. Everyone's been worried about the future of the Federal Reserve, central bank independence. Will the chairman stay on? That degree of dissent makes the life of, I think, Chairman Powell easier to walk away from this institution. There's no capture of this institution. This institution is still independent. Inflation expectations are still anchored. And that is not dependent on Fed Chair Jay Powell staying gone as a governor on this board for the next two years.

9:30I see what you did there. So maybe they agreed for people to send, although one of them is perhaps in a different direction. I'm not suggesting this was choreographed to Jerome Powell coming out and saying, I'm gone. Good luck for you. Go ahead. I'm not suggesting there was any choreography here, just that there are some some benefits to that level of dissent. Stephanie Roth of Wolf Research has been going through the statement and reacting to all of this and looking at the price action. Stephanie, your only take, please. Yeah, I mean, I think one, it tells us that the committee is certainly divided and they're not going to be a committee that's willing to just cut rates because Warsh wants them to do so.

10:02And it's also interesting because in the in the hearing last week, Warsh noted that he wants debate in the room, but he wants a more unified statement. And that's certainly not what we got today. So the odds of cots later this year certainly should go down on the back of what we're seeing today. It's just a committee that certainly doesn't even want to have an easing bias, let alone easing in the near term. Stephanie, does it surprise you that more members of the Federal Reserve didn't get on board with moving to a more symmetrical type of approach? A little bit. I mean, certainly it sounds like it was a fairly divided group.

10:35And perhaps there were others that were even more on the fence that didn't officially dissent. And this was a big question for the meeting today. There was actually two big questions. One was, were they going to maintain the easing bias in the statement? And many thought that they would actually remove it. So that was, you know, perhaps a bit of a surprise to some extent. And then, of course, the other question is, how is Powell going to answer the questions about what his plans are once worse is actually confirmed? Bob Michael, what is our overall stimulus right now? I know we had timing for tax season where everybody got a check in the mail and all that.

11:08But what's is all of this discussion about an historic post-COVID stimulus that is starting to make the wheels come off the wagon? Yeah. Well, when I was listening to Matt and Subhadra earlier going into this, I was thinking the Fed would be nuts not to move to a symmetrical posture because we know we have higher prices. And what I heard from them is the economy is doing just fine. They're right. You've got the stimulus from the one big, beautiful bill act. That's not finish, we know there's a tremendous amount of capex. When I talk to our clients, they're just getting started on the AI journey.

11:44There's a lot more spending to come. And we also know there's a lot of money sloshing around the system. You look at any measure of money, M2, deposits, money market funds, they're still going vertical. Can I do an audible? Yeah, you're about to do an audible here to get to 4 p.m. and 4.15 p.m. You're the bond pro. What's a so what of$30 billion from one of these MAG 7s? They're going to put the money out. They're going to call Bob Michael. It's all going to go to J.P. Morgan. And when they do that, what does it mean for the dynamics of their balance sheet? What does it mean for the dynamics of the American fixed income market?

12:23Well, the guys reporting today, if they were to issue$30 billion, you'd hardly notice it. That's how big they are. That's how little leverage they've carried. And in our conversations with a lot of big borrowers, we want to know, do they see the demand? These guys have the demand. They'll show you the demand. And they can't monetize it until they put in place the capacity. So there is a big bill to go. And I think these guys are right to borrow and get that bill going. Can I sell you some twos at 393, up 10 basis points off the back of this? You know, you ask me, what if the Fed did this? And we never really thought they were going to do this.

13:04It's a very artistic way to do it. Nope, I wouldn't touch it here. To that point, to that framing, that's really important. Haven't they achieved the same thing? You don't need it in the statement. Haven't the dissents achieved the same thing? Well, it's kind of in the statement. It's the last line of the statement. And you talked about, was this choreographed or not? I absolutely think it was. Every single word in the statement is choreographed. They sit there and they debate it. I think this very nicely opens the door for Jay to peacefully depart from the Fed. So this is their sort of offering to him, their farewell gift to him, is here you go and that ultimately we're going to give Kevin Warsh a hard time?

13:41I don't, well, okay, I didn't say that. I think what they're indicating is like we recognize inflation's a problem. We're not going to sit there and keep advocating for more monetary ease. We're going to be more balanced. Don't worry about the independence of the Fed, Jay. Go off into retirement. You said you wouldn't buy it. Why wouldn't you buy it? Because I think the Fed has flipped the tables on the markets right now. What does that mean? I think they've now shifted to something. It's not outright hawkish, but it's more hawkish than where they've been. And then you step back and go, there is still stimulus out there.

14:22and we're in the middle of the Middle East conflict. Those things have yet to be settled. Let's just get out of the way of this and see where the market's settled. OK, so let's build on that. Let's extend the conversation a little bit more. TENS are at 441 right now. What kind of numbers are you thinking about? Well, we're breaking through to new highs. I don't think you get to 5%, but do you get to something like 4 and 5 eighths? Probably. Then I'd get interested. then you're starting to, you're putting a percent on the Fed funds rate. And I think it's one thing to switch to a symmetrical bias.

14:59It's another thing to actually come in and start hiking rates. And I did say I don't expect any changes in rates this year. That's cuts or hikes. John, five-eighths is how we used to quote paper. We'll do 30 seconds in the next hour. I'm aware. Ten's right now at 441. With this move at the front end of the curve, as I mentioned, up 10 basis points. It's 394, let's call it, 393. Equity's starting to break down just a little bit. Don't make too much of this. We're down by 0.3 % on the S &P 500. You will notice, Bram, the underperformance in a Russell down by 1 % plus. These are the companies that are most vulnerable to rates going higher.

15:36I really am struck by what Bob's talking about because this is a market shift. And really, it does highlight how much this war has changed the dynamic fundamentally for people who believed that rates would just gradually go lower. And if they don't, how much does that change some of the expectations about the equal weight market, which we've seen being baked in, and frankly, about the broadening out trade and adding to that, how much steam can there be behind some of the tech trades that are somewhat dependent on some of the consumer aspects? I'm thinking, for example, meta advertising or Amazon, your cleaning supplies, your children's costumes, whatever.

16:11Children's costumes? I end up buying a lot of those. Okay, what, ahead of Halloween? Just getting the discount in? Also senior parties. Okay, all right. Important stuff. Hey, Stephanie, good to hear from you this afternoon. Thanks for your time. Stephanie Roth there of Wolf Research to talk about the equity market. Kate Moore of City joins us now for more. Kate, you're just starting to move higher, getting a squeeze over in crude, Brent out to close to 120 equities, somewhat softer, but not really looking at this as a dramatic event. How would you frame things? Yeah, I don't think today's event with the Fed is the big event for equities right now.

16:43This is also like a massive Lollapalooza when it comes to earnings this week, which you know, Jonathan, quite well. And I think the equity market attention is much more there. And so far, everything that we got yesterday, expectations for after the close today and tomorrow, are for actually quite strong numbers, reiterating not just the AI tech story, but also actually a very solid U.S. consumer. So I think that is really where kind of equity risk is focused right now, less so on this, what I would argue is also a very interesting set of descents in the FOMC. Kate, that said, is there a level or is there some sort of rate of change that gets you concerned as an equity investor about what's going on in the bond market?

17:23Should this Fed suddenly move to put rate hikes squarely on the table? It seems unlikely in our view that the Fed is going to put rate hikes on the table, Lisa. I would say that is not in our kind of any of our distribution for the back half of this year. Stability, even as inflation is warm and even as the Fed is going to wait and see and more dissent happens across the FOMC. But we, of course, will watch what happens because the relationship between equities and bonds has broken down a number of times over the last couple of years. The correlations are not exactly what they had been historically.

17:56And bonds have not been the safe haven asset that some people had become used to in their early days of asset allocation. So across our multi-asset portfolios, we've been more tactical. We've continued to be short duration. I heard Bob a moment ago say he wouldn't be buying two years at this point. I tend to agree with that. And we tend to like to take most of our risk on the equity side and think about other diversifiers outside of the fixed income space. Kate, I look at where we are in the market. And John, I brought this up today because, frankly, I have misplaced this. The Dow up 20 percent one year trailing.

18:31SPX up 28 percent one year trailing. All in NASDAQ up 41 percent one year trailing. Kate, it's completely separated from the nation's angst. What do you see as an indication that that keeps going? And how can the Fed assist with that? Yeah, Tom, one of the things we've been focusing on and something our investment committee was talking about earlier today is the massive dispersion in terms of sectoral earnings, not just this quarter, but through the balance of 2026. And this is also kind of what we're seeing in the overall economy. We've gotten tired, I think, of talking about the K-shaped consumer because even the bottom part of the K seems to be holding up relatively well with decent real wages.

19:12But there is a huge amount of dispersion below the surface in the equity market fundamentals and in the macro fundamentals. And that can make people uncomfortable. But unfortunately, what's really driving the market higher has been extremely strong earnings and expected free cash flow from the large parts of the market cap. and we continue to stay kind of anchored to the equity risk and loving U.S. large caps, even as we recognize it is going to be a very uneven experience and perhaps a better opportunity for somewhat more active management as we go through this year. Unfortunately, part of the dance right now, monitoring equity markets, bond markets and commodity markets, more importantly, is following these headlines regarding the Middle East.

19:53And we've got more from the president, this time some comments on the Russian leader, Vladimir Putin. They've had a conversation. The Russian leader said he'd like to help with the Iranian in Richmond. There has been some suspicion for a while that maybe that enriched uranium would be moved to a third party, and perhaps that would be Russia. And some headlines, I have to say, looking at this, that alludes to that, Lisa, at least this afternoon. Now, as we've said on countless occasions over the last two months, one headline that speaks to one story will last about five minutes and things can quickly change.

20:23All I can do with you is share with you the current headlines, and they're the headlines that dropped just moments ago. Yeah, and they include the idea of potentially having a ceasefire with Ukraine and Russia, and then uranium moving from Iran over to Russia. I mean, a lot of things that are a lot of questions. What you do with this, I think people have shrugged it off and moved on because they don't know what to do with it because it's just a headline. So they look at things like, oh, the placating idea of rates going down. You start removing some of these pillars. That's when suddenly some of the angst starts to percolate up a little bit more.

20:52Initially, I think this market took comfort from the intent. the commit to de-escalation, the commitment to de-escalation and not returning to hostilities. But the fact of the matter is that over this entire period, crude's not been moving, energy's not been flowing sufficiently. And every day over the last eight sessions, crude keeps grinding higher. What's intriguing about this, every time we get a bit of hopium, some headlines, some reports here, there and everywhere, crude has really stopped responding to it in the same way. Brent is still elevated here, TK, at 118 and up on the session by 6%.

21:20I really agree with that. And you see the angst in Southeast East Asia and other selected geographies, and it's way more tangible than anything we have. The sum of this is real GDP and the inflation piled on top of it. Kate Moore, if you're still with us, I'm absolutely fascinated how you feel nominal GDP will affect our listeners and viewers. It's still going to be buoyant, I guess, but it's a different nominal GDP, isn't it? Yeah, it is. And look, I think some of this, Tom, is getting reflected in the consumer confidence data and the surveys that have come out where consumers are talking about their discomfort.

21:58It's not just high gasoline prices. Maybe it's they don't like the direction of the country. They don't feel as confident as they have in the past. Yet the thing that I keep anchoring on is actually what's happening in their behavior. And we've been looking at all this high frequency consumer data, whether it's around dining outside the home or traveling and spending. And we got some good reports from a couple of early consumer companies this quarter. And all of it is showing that despite all these negative surveys, people feeling uncomfortable with the path of the economy, that they're continuing to operate more BAU.

22:29So, Tom, this is a little bit of a friction I think we have, which is maybe we don't get a massive acceleration that benefits all parts of the economy. But as long as both the consumer and the AI tech space continue to fire, you know, we feel like you can't be on the sidelines for risk assets. OK, it's good to see you. It's great to catch up, as always. Kate Moore there of Citi, breaking down this equity market and reflecting on this decision from the Federal Reserve about 20 minutes ago. If you're just tuning in, welcome to the programme. In about 10 minutes' time, we'll hear from the chairman of the Federal Reserve, Chairman Jay Powell, in what could be, should be, his final meeting at the Federal Reserve.

23:01Just moments ago, 20 minutes ago, we had a decision from the Federal Reserve to leave interest rates unchanged. What stood out was the degree of dissent, 8-4. 8-4. And that 8-4 vote, marking the first time since October 1992, that four officials have dissented against an FOMC decision. So something we haven't seen in a number of decades. All of this in anticipation of earnings after the closing bell from some of the biggest companies on the planet, including Microsoft, Amazon, Meta, Alphabet, all of that still to come, which has supported the Nasdaq. The Nasdaq is still positive by a quarter of 1%.

23:35But if you want to look at the small caps right now, the Russell down by 1 percent. Allow me to give you the why. This move at the front end of the yield curve on a two year of nine basis points to three ninety three off the back of this move in the commodity market. Lisa, Brent crude one eighteen and up six percent. Fed funds futures have now priced out completely any rate cuts this year. We are now pricing out interest rate cuts by the Federal Reserve for 2026. Whether we shift to people starting to price in rate hikes like we did a couple of weeks ago, that remains to be seen. It also is unclear exactly how much the press conference can really do to that.