Instant Reaction: Jay Powell on the Fed Decision

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1:28Bloomberg 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. In the next 20 minutes on this program, we need to discuss two things. The future of Chairman Powell, one, the easing bias of the Federal Reserve, two. On the future of Chairman Powell staying gone as a governor of the Federal Reserve, he was asked why. This is what he had to say. My concern is really about the series of legal attacks on the Fed. These attacks are battering the institution and putting at risk the thing that really matters to the public, which is the ability to conduct monetary policy without taking into consideration political factors.

2:16The Federal Reserve Chairman, Jay Powell, on independence. I think Fed independence is at risk. So what about the easing bias? Let's talk about monetary policy. A question coming into this decision is whether this Federal Reserve would move to a more symmetrical reaction function. That's the jargon. This is the plain speak. Is it just as likely they'll hike as they'll cut? They didn't do it this time around, but there was some dissent. This vote was 8-4. Four dissents. Haven't seen that since the 1990s. Of those four, three wanted to get rid of that easing bias. This is what the chairman had to say on that issue.

2:46The number of people on the committee who either could support that language change, changing to a more neutral stance so that a hike is as likely as a cut, that number has increased over the intermeeting period. And it's easy to see why. We had the discussion. A majority are still on the page of not feeling the need to move to that level. And that's where I am. I get it, though. You know, at a certain point, you would move. and that conceivably could come as soon as the next meeting. They're getting closer, but they're not there yet. So much to learn, apparently, over the next 30 to 60 days. I thought that was the most market-moving aspect of the news conference, the idea that it wasn't just the three dissenters who wanted to shift to a more neutral kind of positioning, a symmetric kind of positioning, but that it was a bigger group that just didn't feel like there was a need to move right now because ultimately, why move now when so much can change?

3:37Nonetheless, this goes on for as long as people might be thinking, based on the oil prices in the future, this is something that clearly will come back on the table. I like the way on the Bloomberg professional service we have a way to see the president's tweets quickly. I am waiting to see a presidential tweet. I think we all like. Do we get it by the time the clock turns around here or do we get it by Meta's earnings here in X number of minutes? Things have softened somewhat around this institution, just a little bit. We heard from the Treasury Secretary, Scott Besson, who said it's understandable if this Fed remains on hold for some time.

4:09But the last thing we heard from the president was something like this. If the chairman doesn't leave on time, I'll fire him. Now, what does on time actually mean? Because he can stay on as the board of governors. He can stay on that board until 2028. Is that on time or is the president looking for something else? Are we entering a new standoff? We're dealing with a standoff in the Middle East. We were dealing with a staring contest between Tom Tillis and Donald Trump. And now we might be dealing with President Trump versus Jay Powell, the governor, to see who blinks first, who's going to drop the legal cases, who's going to step away.

4:39And this could potentially get pretty tense, especially if the bar is that much higher right now for Fed Chair Jay Powell. Mike McKee was in that news conference. He'll join us in just a moment. I want to start with Jim Bianco of Bianco Research. Jim, welcome to the program, buddy. I think Fed independence is at risk. The chairman's words. I'll continue to serve as a governor for a period of time. Recent events have left me no choice but to stay. Your reaction, please. I think it's one of the most disappointing things that he's done during his chairmanship. That is a political decision. The decision was made to push the investigation of the building to the inspector general.

5:17The inspector general finds some malfeasance or wrongdoing with the building. They'll have a criminal referral. That is appropriate. He seems to be saying that the Fed has billions of dollars in building construction and no one's allowed to ask any questions about it. And he's going to stand in the doorway and disrupt the Fed as long as they're going to look into this building. I think that that is a big, big disappointment. I would have expected more from him, to be very honest. And I'm a guy that liked him. I'm a guy that would have reappointed him. And I think this is a big disappointment that I've seen from him.

5:49Jim, do you think that it has longer term ramifications for the institution based on the fact that he is saying he does think that this is an independent institution, a committee, but does want to avoid some of the attacks that he says are battering the institution. Mariner Eccles is the only other Fed chairman that stayed on in the late 1940s. And his memoirs say that he stayed on because he saw with Bretton Woods and with the World Bank and the IMF in the post-World War II period, change was coming and he wanted to marshal the world through those changes. It seems like what Chairman Powell is saying is we're 80 years later and change is coming and I want to stand in the doorway and prevent those changes.

6:28He said that he wants to see a more traditional move back to the Fed. He wants to see the Fed institution remain the way it is and not evolve. Now, as far as independence goes, I think we've solved the independence problem with the vote today, 8-4. We have 12 independent voters. The chairman is one of those voters. That is how you're going to get a truly independent Fed. The chairman cannot dictate the policy like he has for the last 40 years. He needs six other people to agree with him in order to get that policy across. What's going to happen if we continue to have these dissents? I'll remind you last year, the Bank of England had a 4-4-1 vote.

7:09If we get to a 6-6 vote with this Fed, we're already at 8-4. That gives Chairman Powell all the power to decide what the policy is going to be, even though he said he's not going to give any speeches and he's going to remain in the background. Or is he saying that he will just do whatever Chairman Walsh tells him to do, and that's the way he's going to vote, and he's not going to vote independently? So there's a big problem that he needs to define and try to explain, and he didn't at this press conference. Jim, I look at this simplistically. I got oil at 1-19-61, and this announcement that I saw on the Bloomberg that we're leaving an aircraft carrier from the Middle East, the Gerald Ford with 5 ,400 sailors, I believe it is, is coming home exhausted.

7:51Is Jerome Powell simplistically in the same way just staying to block a Trump appointee, period? it. I hope he's not, you know, and I hope that, you know, he's he's trying to be fair minded in his decision. And I disagree with the decision and we can have disagreements in it. And that that isn't being as political as that, that he doesn't want Trump to have another appointee. And by the way, we'll get the Lisa Cook decision by June when the court adjourns. And if they do allow him to fire Lisa Cook for cause, I would assume probably the same day he'll fire Jay Paul and we'll have to and then he'll get two votes or he'll get two open seats to be able to replace.

8:37Now, of course, the court could rule otherwise, but that's coming as well, too. But I hope it's not that. I hope that it is more that he has a view about the institution not changing in a world where I think we're changing and it needs to evolve and he's preventing that. Jim, stay close. I've got Mike McKee standing by. He just hopped out of the news conference. I want his reaction to all of this as well. Mike, you're in the room. Have you got a different perspective on things? Yes, I think I do. I was listening to what Jim said. I don't think Jay Powell is staying because he's trying to stand in the way of progress at the Fed.

9:10I think Jay Powell is staying because he doesn't trust the Department of Justice. He noted at the top that the Justice Department had said that they were dropping the probe. But he referenced back to Jeanine Pirro's comment about we could file another criminal complaint. And he doesn't know what the Justice Department will do, whether or not there would be validity in what the Justice Department might do. So he wants to make sure that that is the case. And he will at least probably stay through the inspector general's report. It is also possible he would stay on beyond that in order, as you did mention, in order to deny the president the possibility of another seat if he thinks what the president wants to do is take political control of the Fed.

9:55So, Jim, I want to give you a chance to respond to that. If anything, the chairman's been consistent. He set a bar. He said this needs to be wrapped up with transparency and finality. And based on the comments we've heard, according to the chairman, he thinks they've fallen short of that bar, Jim. Yeah, I think he thinks that. Senator Tillis does not think that. That's why he voted today to advance his nomination. And I agree with Mike that he does not trust the Justice Department, but it's not his call. It's the Justice Department that the American public elected through the election of Donald Trump.

10:28And if he doesn't like it, he's going to then stay as a disruptive force to the Fed to prevent them from making any kind of changes or referrals or even looking in. Remember, this is all about the building cost and why it's been taken several years and has run so expensive. And it seems like he's saying we're not allowed to ask. I've got another disruptive force to talk about, Jim. I'm allowing it to jump in. 120 on Brent. Just breached that level moments ago. Higher on the session by 8%. Let's just take a step back. The chairman's future is one part of the discussion. These market moves are something else at the moment.

11:02Brent at 120. Just sit on that. Yields higher at the front end of the curve, retesting the highs of the last two months or so. And equities. Bring up the equity screen at the moment. Equities this afternoon, in the face of these moves in fixed income, these moves in commodities, doing almost nothing, Brammo. hardly moved, not even phased ahead of these earnings later this afternoon. And this was what the Fed was talking about, right? We have the Nasdaq actually up four tenths of a percent ahead of those earnings. As we look to the strength that Fed Chair Jay Powell was talking about at his last press conference, but this is where it becomes tricky.

11:36At what point do those higher oil prices that might be leaving big tech unfazed become an inflationary pressure that can be withstand, could be withstood simply because there is enough momentum in this economy. Jim, let's get to the price action. Not so interested in should, shouldn't. Interested in market consequences. Here's a Federal Reserve debating dropping its easing bias, pressure building the commodity market, rates repricing yields higher. What are the consequences, Jim? I think the consequences are huge, because if you look at the way that oil is trading, you're right that the June contract went over 120 a few minutes ago, and that's the highest it's been since June of 22.

12:13What about the long term? OK, let's look at the December contract. The December contract is making new all-time highs, too. And it's saying to us, at least if you want to take it at face value, that the price of oil is going to stay elevated at least through the end of the year. As Chairman Powell said, we already have, he said, 3.5 % on PCE inflation. That's their measure. And if it's all driven by energy, it's going to stay there right now. And it's going to be problematic for the Fed to even talk about an easing with that level of inflation. It's not going to disappear and go away unless there's some resolution in the war.

12:52And the problem is the market doesn't see the resolution in the war. That's why both the June all the way to the December contract continues to move higher. Hey, Jim, good to see you. Appreciate your opinion. Jim Bianco there of Bianco Research. Mike, always good to see you, buddy. Great work in the news conference. Mike McKee down in Washington, D.C. If you're just joining us, welcome to the programme. We are set up for quite an afternoon now. In the next 60 minutes or so, we should hear from four of the biggest companies on the planet. Microsoft, Meta, Alphabet, Amazon. Before we get there, some big market moves to talk about.

13:21Eight consecutive days of higher crude prices. Brent crude through 120. Just briefly, we've taken out the highs of the year on a closing basis if we close at these levels. 119.95, look at that. WTI comfortably into triple digits. This move in the bond market off the back of it yields higher at the front end of the curve, up by 10 basis points. not just about oil, also about this Federal Reserve. If you missed it, here's a summary. An eight to four vote. Haven't seen that level of dissent since 1992. Of that four, three hawkish dissents, a conversation about dropping the easing bias. They haven't got enough people on site just to do that just yet.

13:54But we're losing support for that easing bias at this Federal Reserve. And potentially, if this conflict in the Middle East doesn't get resolved, then all of a sudden you will have a consensus to move to a symmetric risk. We have now priced out a rate cut for 2026 in the Fed funds futures. At what point do we start repricing in hikes? Because ultimately, this is an economy that can withstand oil prices at this level, rates at this level. And that was the word that we heard from the Federal Reserve. Repricing here is hard because it's a war. Somebody mentioned there it's a war. We forget we're in a war.

14:24And within that, I don't know what the unknown is tomorrow or out to June 17th. Nobody knows. We're just going to take in the data and take in the war news. And what I'm for John is to take in the next marginal President Trump tweet. The S &P 500 down by a tenth of one percent. If you looked at that, it's a snoozy afternoon and nothing happened at this Federal Reserve meeting. That's just not the case. Jeffrey Rosenberg of BlackRock joins us now for more. Jeff, what's the bull case in the face of what's brewing elsewhere? Well, you know, you highlighted it well between trying to disconnect what's going on between oil prices and the committee meeting today and what we heard.

15:02And, you know, I want to highlight, you know, the thing that I found most interesting about Powell's comments were explaining the, I think, the second main point and takeaway of the meeting, which is this theme of a divided committee that comes out of the 8-4 vote. And he framed it as a natural consequence of the conflict in the Fed's objectives between growth and inflation, which the$120 oil, you know, is that, is that, you know, point. And he got asked the question about pass-through. And this is, I think, what the markets are really struggling with is he basically made the point, it's all about the time of which the Straits of Hormuz remains closed.

15:43And no one knows what that will look like. So Jim just talked about the forward curve, you know, December contract making its new highs, but it's, It's significantly lower than the front end of the curve. So there's an expectation here that at some point that's opening up. We don't know what that is. And I think divided committee is likely to be the continuation because of this point that Powell highlighted, that when you're faced with the conflict of the dual objectives, that people are going to see that in different ways. Some are going to be arguing for the growth impact. Some are going to be arguing for the inflation impact.

16:17And that might be the more expected outcome as opposed to what we've seen and the historical comparisons of this being, you know, very unusual. Maybe get used to that being a little bit more usual. Jeff, it seems like the conflict of the Middle East isn't necessarily that close to wrapping up. Maybe it is. And we just all are getting mixed signals. Do you think this market needs to price in a greater chance of a rate hike as the next move by the Federal Reserve? Well, it's already done that. And to this discussion about the easing bias and the language, you know, the market already took the easing bias out.

16:52It did that at the onset of the oil price impact from the Iran war. So I don't think that is a catalyst for sort of the next move. That's mostly, you know, the Fed is a deliberative body, getting the right number of people willing. You heard Powell talk about that. They're slow to move that bias. The market is not, and it's moved the bias to easing out of the market pricing. So I don't think that's really the market event. The market event is really the uncertain, unknown question that he was asked. What's the pass-through from headline inflation to core inflation? You heard Warsh talk about it in terms of trimmed mean and not looking at core PCE as a measure.

17:34That's a very particular way of looking at the potential for pass-through. Will he get and move the rest of the committee onto that view? If so, that's a very dovish implication, and you bring the bias back in. But as Powell highlighted, we really just don't know, so you're going to have to see whether or not those pass-through of headline and decor shows up, whether Warsh's more dovish interpretation shows up, and whether he can push the committee towards his direction. And that will bring the bias back into market pricing, but right now we're pricing it out. Jeff, I got eight questions in time for one, and it's just simple.

18:11For our listeners and our viewers across this nation and worldwide, what is the best tool to use in the bond market to study the potential dynamics? Don't, you know, the benchmark tenure or that, or is there a unique Rosenberg spread that makes sense? What is the efficacious way to study the pulse as seen in fixed income? Yeah, you know, Tom, the kind of historical rule of thumb is, if you want to keep it simple, it's about the five-year maturity point on the Treasury curve. That kind of impacts the best estimations of where you're looking for current and forward-looking Fed expectations. And that kind of is your benchmark for looking at it.

18:55You can look a little bit shorter, two-year is going to be the more near-term expectations. I think that's a really good metric. And then on the inflation side, remember inflation, you know, headline inflation is going to impact shorter maturities. You want to look a little bit further out. You can look at the slope of the curve, five-year, five-year forward measures on break-even inflation is better when looking at longer-term market expectations of the impact on inflation. And so far, you know, that's been relatively benign. And so that's kind of supporting, you know, Powell's comments in terms of market longer term expectations not being unduly impacted.

19:33If you started to see that change, that's going to be a major signal for Fed policy pivoting more towards the inflation concern if you start to see that show up in that metric. Jeff, last question from us. Last time we had yields at these levels, close to them, was the end of March. And every person we spoke to in fixed income on Wall Street had a very favorable interpretation of these moves. They said we were creating value and they wanted to buy it. Jeff, do you think we're creating value this afternoon and do you want to buy? Well, I think the move in the front end is creating some value. You know, you're seeing a big curve flattening.

20:12Again, a lot of it is conditional on that pass-through of inflation. But stepping out of the curve into the front end, we're having Warsh come in. He's already signaled that he wants to look through that and take a more dovish interpretation. You know, will he be able to bring the committee along with him? You know, when you start pricing hikes in, it depends on the oil move and it's persistent. But I think there's a little bit of value there. Completely different answer really to the opposite side when you look in the long end of the curve. The long end needs to build term premium. We got a savings glut that's turning into a savings deficit, particularly as we need to reshore, rebuild, reallocate in global savings around the implications of this Iran war.

20:55all at the same time as fiscal deficits are increasing the demand for that borrowing. I think there you see a different story, and that's less of a buying opportunity and more of something we're going to need to see increase in terms of the term premium to bring investors back into the long end of the curve. Hey, Jeff, good to see you. Great answer. Jeffrey Rosenberg there of BlackRock, breaking down his views, not because I think it's the right answer, just it's an important answer to a very difficult question right now. Two-year yields higher by 10 basis points, 10s at 441. If you think that right now there's a great opportunity to buy in the 10-year, give us a call.

21:28Because right now, everyone who we ask seems to go right to the front end and saying, that's where I'm going to get some yield. But right now on the long end, things might be changing. And ultimately, we just can't get ahead of it. And that seems to be a theme again and again. Bob just emails in. He's on his way to F1 in Miami here. And Bob's looking at it and he's going, the price of gas went up 10 cents yesterday, 22 cents this week. People aren't eating out at restaurants. That's got a lot more to do with this than any of the fancy talk. That flight got more expensive. This afternoon is not over.

21:57Big Tech coming up after the close. Coming up tomorrow on Bloomberg TV, on Bloomberg Surveillance, we'll kick things off with Julian Emanuel of Evercore. We'll catch up with Mike Wilson of Morgan Stanley and a whole lot more from New York City this afternoon. Good afternoon.

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