Instant Reaction: The Fed Decides

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1:27Learn more at thehartford.com slash risk mitigation. Policies provided by Hartford Fire Insurance Company and its property and casualty affiliates, Hartford, Connecticut. 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. The news is sparse. No change in rates. Nine in favor. Three dissents. Logan, Hammock, and Kashkari. Other than that, there is not a word of difference between the June statement and this one. Economic activity is expanding at a solid pace, it says.

2:13Uncertainty is elevated, in part because of the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce and unemployment has changed little. Inflation remains elevated relative to the 2 % goal, in part reflecting supply shocks that have driven price shocks. The statement again concludes by saying the committee will deliver price stability. I think this is the shortest summary I have ever given you. and I've padded it out a little bit just to make it a little longer and feel like I've done something. There's no real surprise in here. You could point to the dissenters, but they've all said something about inflation and the fact that we might have to raise interest rates in the future.

2:55So it doesn't really give you a clue about what's going on. And there's no hint in the statement about what might happen in the future. So if Kevin Warsh wants the spotlight, definitely on him today. Hey, Michael, come back to you in just a second. Let's whip through the price action. So as expected, widely expected, no change on this decision. Some dissent, not one, not two, but three dissenting voices from regional Fed presidents from the obvious places. The move in the market is interesting, though. Equities off the lows on the S &P 500, just erasing some of the losses so far this afternoon on the S &P 500.

3:27Still negative, but not as low as we once were, with the S &P negative just 0.3%. And we're getting some confidence in the tech trade, the Nasdaq down by 0.2. In the bond market, let's just sit at the front end of the yield curve. Two-year yields were higher by basis point or two, now down four to 4.25. So we often talk about this, Brammo, the difference between economists' expectations and the risk that the market was pricing in. And clearly, just a little bit of a gap there. Even with that descent, some relief at the front end of the curve, a rally on twos. There truly was about a 30 % chance of a Fed rate hike at this meeting, and that chance was not necessarily fulfilled.

4:01It is notable, though, that there were three descents. And that, I think, is the news from this particular statement, given the fact that Neil Kashkari also joined Laurie Logan and Beth Hammock. I was on a panel with him and he was talking about this with a bunch of CEOs and saying this is a problem and it is more pernicious for the average consumer in this country right now that inflation is so high than potentially the labor market is softening because it's not. And I think that is something that you are hearing in the minority on the Fed. The good news here for the leadership of Kevin Walsh, early days, quick reaction.

4:32The dissent came from the regional Fed presidents and not from the board because if it came from one of the board members this afternoon, I think we'd be having a very different conversation, TK, to the one we're about to have. Is the market voting Apple,$5.053 trillion, just out to a new record high,$3.44? Is the market voting here on their new Fed chairman? I think Apple's voting on a lack of capex, and I think that's been a story on Apple. Oh, yeah, I know that. I mean, I get that run. But, I mean, right here within the minutes after this announcement with the SPX popping up is well. I mean, they certainly like what they saw.

5:04Well, let's take a step back and think about what's been happening in asset classes. We've had this massive move higher in energy and lots of volatility in between over the previous five months. You've seen that ripple through interest rates. We've priced out cuts and in many places priced in hikes and in some places actually engineered rate hikes. What we haven't seen is a growth scare. The backdrop for growth is still pretty good. Consensus for GDP is still around too. Unemployment has been falling closer to four and away from five. That's good news. Now you've got a Federal Reserve that doesn't still see a reason, even with that as your backdrop.

5:36They don't see a reason to hike interest rates right now today. Some do, but not the committee as a whole. If you're looking at that from a risk asset standpoint, Tom, that's risk positive without a doubt. It is. I mean, they're moving forward. And to me, the key thing after Jackson Hole is to get to that next meeting. All of a sudden, Jackson Hole may be interesting. Oh, I definitely think it's going to be interesting. We need to hear about insights from task forces. That said, right now, I do think that's going to be important. I think that they're going to be important. To me, this is actually a fascinating statement.

6:07Does he set up a September rate hike with the idea that there are three dissents and potentially there is another CPI and PPI print that will be potentially hotter than expected? Neil Dutta-Renmack, always early to publish. He says the following, I think the dissents tell you the direction of travel. It will be very tough for Walsh to hold the line into September. I hope Mike McKee's holding the line. just before he goes into that news conference in about 25 minutes time. Mike, given the lack of new information here beyond just the dissent, what's your approach to the news conference at 2.30 Eastern time?

6:38Well, I think we have to ask very direct questions of the chair. We can't ask him broad questions like what is your reaction function or something like that, because then he's going to just elide those questions and we won't get good answers. So we'll have to pick out some things like where we are with rates. Are those sufficient at this point? Something to try to get him to give us some specifics on how he's thinking. But I think what you guys have just gone through is what he's looking for. He'd rather have you speculating, markets speculating, than give you a hint. And nature abhors a vacuum, so the markets are going to fill it with what they think might happen.

7:16But it's going to be hard for anybody to really know unless Warsh wants to start tipping his hand, which it'll be a battle between us and him, I guess. Looking forward to it, Mike. Thank you, buddy. Get inside that news conference. Mike McKee will go into that news conference for us. It will begin at about 25 minutes time. If you just joined the programme, welcome to the programme. So unchanged to the Federal Reserve, but the vote is different. It's nine to three. And the dissenting voices are as follows. Bottom of the statement, Beth Hammock, Neil Kashkari, Laurie Logan. Dissent coming from the obvious places.

7:44All three of those voting for an interest rate hike. At the bottom of the statement, that line sticks. The committee will deliver price stability. We've got Bob Michael of J.P. Morgan Asset Management alongside us. Bob, is that line in the statement enough for us not to question their commitment to price stability with inflation running above target for as long as it has been running above target? I think the three dissents are more important than that last statement. I think that it shows that they're starting to migrate towards tightening policy. You know, there's still 75 % of the voting members that were in favour of no change.

8:23So you're only at 25%. But I think it's important. If I were at the press conference, I'd ask about quantitative tightening. Are they talking about that? Is that something they could start up again and help snug the liquidity that's in the system? Best guess for September. Limited additional information, but best guess for September. What would you call now? They do nothing, but maybe there are four dissents. Well, Michael is going to stick with us. Going into that news conference 25 minutes away, joining us now is Jim Bianco of Bianco Research. Jim, welcome to the program. It's a whole new world, a new era for this central bank.

8:57You've been writing about it extensively. Just first of all, your reaction to this decision this afternoon. Not surprised by the decision that the Fed did not raise rates. I still would defer with Bob and think that they are going to raise rates in September. I think the dissents are the most important thing because one of the things I've been emphasizing is after Trump attacking this Fed for two years, they want to be independent. And they've decided that independence is 12 independent voters. So what we're going to get at the press conference is one twelfth of the opinion of the Fed is we're going to get Warsh or maybe we won't get it at all if he doesn't express it.

9:37Now, he's got a lot of power. or he could probably, you know, twist some arms to get them over the line, whichever way he wants to go. I suspect that if they were all voting their true conscience, we might have had a few more dissents, maybe not enough to raise rates, but a few deferred because he didn't want to do it would be my guess. Jim, do you think it's significant that none of the governors joined with the dissenters, even though there were some reports of some pretty interesting family fights over dinner last month? Mildly. I was expecting that maybe Chris Waller was going to be a dissenter.

10:11He still might be a voter for a rate hike in September, maybe a couple of others. But I do want to emphasize again, we're going to parse every word that Warsh wants to say. I think that the Fed is more of a vote tailing exercise right now. You know, you got to look at all 12 people and say, which columns are they in? Hikeholder cut and seven is a majority and which column has seven. And that's what the Fed's going to do. That's how they work now. Bob Michael, the young rippersnapper, Jim Bianco, a couple of years ago had an arch call calling for higher interest rates when no one was looking for it.

10:43The other day, Ed Yardini said, these are normal rates. We have to get used to rates being here again. Is Dr. Yardini and Jim Bianco correct? We just got to get used to these higher rates. Yeah, I think what we're seeing more broadly across the economy is a need for capex. There's demand for capital. There's a productive use of it. There's going to be competition and a cost of it. That's pre-GFC kind of macro environment. You're not going back to zero to 2 % rates. Do I think there's enough cause for them to hike in September as opposed to next year? I don't think inflation is going to change that much.

11:19I can't remember, John, if you're on or off here, but you said this 20 minutes ago. What percentage of people in the street actually remember pre-GFC? We were very live, and I remember what I said. I talked about the average age on the trading floor, which is probably mid-30s right now. So the world that they're used to is not the world that Kevin Walsh wants to take us back to. It's also not the world that we've experienced in financial markets either. To your point, we had these anchors across fixed income for the last 10, 15 years. Lisa and I have talked about them daily, how they're disappearing.

11:49Germany had fiscal prudence for decades. It's disappearing. Japan had disinflation, deflation for decades. It's changed. And in America, the biggest companies on the planet were buying themselves, not issuing stock, not issuing debt. That's changed as well. The price of that, Bob, what is the price of that? And what part of this market is most vulnerable to that competition for capital? It feels like it's the sovereign market. I don't know a sovereign which isn't interested in investing in energy security, in investing in the defense of its borders, in investing in AI and technology more broadly.

12:25They don't have the budgets to do it. They're going to have to go out and borrow. That's going to create more competition for the capital. That's OK. That's a normal capitalist environment. We're OK with that. But it doesn't mean 0 to 2 percent central bank rates and treasury government bond yields is the right level, it means probably neutral rates for the Fed are around 3 % to 5%, and you're looking at a 10-year Treasury that, who knows, could be 4 % to 6%. In this world where suddenly you have to battle for capital, and Jim, I'd love your take on this, is it a policy error if Fed Chair Kevin Warsh allows the move to stick that we're seeing right now in markets?

13:07Now there is not a full rate hike being baked into September, and frankly, the initial move has given back at least at the long end of the yield curve. Do you think that it is important for this Fed, whether it intends to hike or not, to keep the message that they are prepared to do so to tame inflation? I think so. If you want to back up, go back to September of 24. That's when the Fed first started cutting rates. The 30-year yield was 4 percent, was exactly 4 percent. Right now it's 5-10. It's gone up 110 basis points while the Fed has been cutting rates. By my measures, I can't find another example of a rate-cutting cycle that produced that big a rate, a yield increase in the long end since the 1980s.

13:49But then again, we also had 14 % interest rates then. And without that, never in anything back to the 1950s. So really, the market is trying to tell you that I think the direction of travel is going to be higher. It's more worried about inflation. And if the, you know, go back to that last sentence, if the Fed wants to deliver price stability, I'll throw one other into you. Kevin Warsh said that inflation is a choice. They might have to choose to do something about it fairly soon and maybe as early as the September meeting. Jim, if they do something about it, do we continue with this robust nominal GDP we've seen?

14:24I think we can. And I also think if the Fed were to raise rates, that that might put the high in yields for the year. I think part of the problem has been that now that we don't have forward guidance, the market is pricing what it thinks. And I think it thinks it's there's an inflation, let's say issue or worry. I don't want to go full blown problem or crisis. It's not that bad yet. And that's why yields keep going up. And I think it would like to see the old line, the old adage on Wall Street I've been using is that bond traders can relax or stop panicking when the Fed starts panicking and maybe a little bit of panic from the Fed might go a long way to helping the bond market stop with this yield rise on the long end.

15:06It's a valid point, Jim. Appreciate your time, buddy. As always, Jim Bianco there of Bianco Research. If you're just joining the programme, welcome. A news conference with Chair Walsh in about 17 minutes' time. The decision 13 minutes ago, leaving rates unchanged, a vote of 9 to 3. Three dissenting voices, three regional Fed presidents, Hammock of Cleveland, Kashkari of Minneapolis and Logan of Dallas. Three voices who have given us a decent steer that this might be the outcome of this meeting, at least for them. Next two weeks might be interesting. I think we're all going to look for that schedule, aren't we?

15:38Those speeches, what everyone thinks. And this was always the problem for this Fed chair. Looking to put communication back in a box, back in a bottle and throw it away and bury it. Everybody else still wants to talk. And if you speak less, we just put more weight on the people that do speak. And that's what we'll be doing in the coming weeks. It's going to be a vote-telling exercise over the next two weeks with people watching every single press conference, every single speech and wondering who is going to be the additional voice to vote for a rate hike and how close are they. And that is ultimately the calculus that we're going to see.

16:08Kevin Warsh could potentially put that back in the bottle if he gives us some sort of quantification or characterization of what the reaction function is. But barring that, we're going to be doing vote tallying and we're going to have a bingo card and it's going to be a lot of fun. Can we go from three to four to five to six, et cetera, to seven? Diane Swank of KPMG joins us now for more. Diane, welcome to the program. Do you believe this is the direction of travel? This is the first of many votes that will look for higher interest rates. Absolutely. I think the three dissents from the presidents is what exactly we should expect right now.

16:39And those dissents were not done in a vacuum. They also are representing presidents who could not vote at this meeting. That is often what is done. And I also think many people on the board are leaning towards a rate hike as well. We've already gotten a lot of indication of that. And so I do think we do get rate hikes in September. I actually think today would have been better, but I expected them to skip today, even though there was a 30 percent chance out there that they would do it today, because we're starting to get weak. This is something that Kevin Warsh has said himself. We've had five years of inflation.

17:12It's not all the Fed's fault. But at the end of the day, it is the Fed's choice, as Jim pointed out, to do something about it. And we need to do something about this inflation. It has been around for too long and created a muscle memory. It's becoming the norm instead of the anomaly. And tomorrow we're going to get that PCE data, which the reason why Beth Hammock sort of threw down the gauntlet and wrote the LinkedIn post hours before the Fed's blackout period, letting us know exactly how she felt about rates was because they were tracking the inputs on that number. And it will be 3.3 percent on the core.

17:45And on the super core, I think 3.7 percent super core services that is sticky and hot and hotter than it was at the beginning of the year. Bob Michael had a really good point earlier. He said it kind of depends why they hike. Is it going to be that the data shows a reacceleration or is it just that they're running out of patience? And if they're running out of patience and tolerance of high inflation after more than five years, that typically isn't a great place for a central banker to be. And would you agree with that? I do agree with that to some extent, although I think we still got a little more inflation out there as well.

18:16But the problem is that it's just been too persistent. This is too much for too long, and it's compounded. Much like I've argued, compounding stock returns have raised the level of wealth. Compounding inflation has risen the level of prices to be too high for too many. And that being front and center is not the definition of price stability. And that is what the Federal Reserve is charged to do. And with the labor market in a stronger position, there's no reason not to do it now. Bob Michael, I'm not going to go to the one with Sterling Academics at Michigan and Economics. I'm going to go to the Classics major from Pennsylvania.

18:52Is it a small matter that the three dissenters are an aerospace engineer, educated, a public policy, Lori Logan, educated, and Beth Hammock at 21 was on the desk at Goldman Sachs. Is this almost a dissent rebellion against traditional monetary economics? It may be more common sense than anything else. I think, as Diane pointed out, you've been a long way away from the 2 % target for a long period of time. There could be a little bit of disinflation in the system. I wonder what happens if the next couple prints on core PCE, you go from 3.4 to 3.3 to 3.1. And you see you're still above 2%. But what about on core CPI?

19:38You go from 2.6 to 2.5 to 2.3. You're still above 2%. I think dissents reflect that, hey, we're not at our target. If this swings around the other way, we're poised to move. But you don't move yet if you're starting to see some disinflation. Can you talk about Goldman, the Death Star in front of J.P. Morgan? Can we do that? No, but that's where Beth was. She was 21 years old on the desk. And I just nobody, nobody dissenting, John, did the usual economic path. Let's go to that. I find that remarkable. Let's go to the quote of hers in the LinkedIn statement going into the quiet period. The lead up to this dissent.

20:17There is no conflict in our mandate. Inflation is too high. The labor market is right around my level of maximum employment for the first time in my tenure. I'm hearing from businesses who say they think we need to take action to curb inflation. And that's pretty punchy stuff. And when you said that dissent might be on the behalf of others on the committee who don't get a vote, how many regional Fed presidents are hearing the same thing from their districts across this country? I think they all are. And I think that's the important, you know, sort of what we're seeing out there. We are seeing many people across the country showing up in the beige book as well.

20:54It's showing up out there that firms still have some pipeline even on last year's tariffs. So the new tariffs, they're reinstating old tariffs that will add a lot of extra tariffs out there. But we also have Russia sanctions, which allow up to 100 percent tariffs on some of our trading partners at the discretion of the president. So those are coming going through Congress right now. All of that is more choke points, more shocks at the same time that we still have this persistent underlying inflation that's just not going away. And to think that it's going to go away on its own when we're seeing things like in the wages in the leisure and hospitality sector, which shed jobs last month, wages actually accelerated.

21:36That's something to watch. That's the service sector. That is where we're seeing that booing sort of effect of wages. Also, the cost holding up that inflation. That is something the Federal Reserve is very concerned about. You want low wage workers to get more pay, but only if they get more pay that's above and beyond the level of inflation. Bob, I'm struck by the neutral rate. We haven't talked about it once. But given the sort of competition for capital that seems to be going on globally, is it possible just that the real rate has to be a whole lot higher than people previously expected? And frankly, we're seeing that in the lack of any kind of erosion from demand?

22:13Remember when the Fed first started doing the dots in 2012 because they didn't think we in the markets were smart enough to know what normal looked like again. So they were going to help us out. And you go to that long-term median dot, which was perfect textbook. It was 4.25%. How did they get there? Over the 100-odd year history of the Fed, the real Fed funds rate had been 2.25%. What were they targeting? 2%. You put the two together. There's your fancy algorithm, 4.25%. Wouldn't it be funny if that proves to be correct over the next decade? I look, John, where we are with this. And just again, we've got to get to the next meeting.

22:57This press conference to me, I mean, to Bob, it's gone out on Twitter what Bob said about what are we going to see. We have no clue what we're going to see here. Zero. Zero. It's totally up to him. Will he be on time? I mentioned to Mike, I hope he will be. I mentioned to Mike earlier on this morning when we were on Bloomberg surveillance. And I said to Mike, as a journalist, you have to change your questions. because no one wants to be the journalist in the news conference that gets a two-word response and it involves task force. No one wants to be that guy. So what are the kind of questions you need to ask Kevin Walsh that maybe you wouldn't have thought of asking Chairman Powell?

23:29Yeah, well, and what Mike said was you've got to be very specific. And I liked his question about specifically how are you thinking about oil? Because right now you could say a lot of the inputs to inflation are supply shocks. How do you consider supply shocks when they are repeated supply shocks again and again and aren't likely to stop being shocks considering the fact that this conflict isn't going away anytime soon. Diane, you're great at this. Final question. What's your question for the Fed chair? You've talked about a new chair, an old guard. What's your question for this guy? I guess my question is really on that neutral rate, exactly as Bob outlined.