Instant Reaction: Jay Powell on the Fed Decision

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1:25Do that, do that, do that with Acrobat. Learn more at adobe.com slash do that with Acrobat. 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 chairman of the Federal Reserve. If there was a good meeting to scrap the forecast, then this one was probably it. The chairman de-emphasizing the projections, re-emphasizing the uncertainty, focused on the shock in the Middle East. We had one question. How would they respond to it? Would they look through it? The answer, it's not that simple.

2:10Equities in response, negative. Netsession lows right now, down 1 % on the S &P 500. Likewise, on the Nasdaq in the bond market, 2s, 10s and 30s. yields higher, particularly at the front end of the yield curve, up by seven basis points on a two-year 375. If you, like me, thought this would be boring, this was not a snooze. The Federal Reserve chair asked about succession. Take a listen to what he had to say. If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed. I have no intention of leaving the board until the investigation is well and truly over with transparency and finality.

2:48On the question of whether I will then continue to serve as a governor after my term ends and after the investigation is over, I have not made that decision yet. Three points from the chairman of the Federal Reserve. Let's go through them individually. Point one, I will stay on as chair until a successor is confirmed. Point two, I have no intention of leaving the Fed while the DOJ investigation is ongoing. And point three, even after that is complete, I haven't made a decision on how long I'll stay on. A big headline in that news conference. He actually engaged with the question. We all were wondering whether he would give some sort of clarity and we've got it.

3:23He is going to be the Fed chair until Kevin Warsh is in the seat. There's this question of what is well and truly over in terms of the investigation actually mean. A lot of people are going to be wondering that. And the fact that he hasn't made a decision yet, what is going to tip the scales for him to understand when he can make the decision. Either way, this wasn't a boring news conference in any way, shape or form. If we can bring up just an intraday chart, the front end of the yield curve. So bring up the two year intraday and just have a look where things started to pick up. The Fed share throughout this news conference was leaning into anchoring inflation expectations.

3:56That was notable. But we started to really bounce out to session highs when he started to lean into that question about his future. And I just wonder, Bremo, we can have that conversation with guests over the next 15 minutes or so, whether those two things are connected to some extent. On the margins, this market seems to be treating a Kevin Warsh Fed as being more dovish simply because we have President Trump tweeting or truth socialing every single day saying too late, Powell needs to lower rates. Right now you see there is no full rate cut getting priced into the Fed funds futures until June of next year.

4:29So that's how far we've pushed it on. There was a one-two punch. Fed chair Jay Powell also said it's too soon to know the full economic effects from the Middle East. And then he said he would stay on. And we have known this is a pretty balanced Fed. They're weighing the risks. And clearly the specter of 2022 hangs over his Fed chair. You'll go out to the specter of it and they view forward. I like what Lizanne Saunders does retreating. Claudia Somm. Finally, Powell throws the SCP under the bus. Skip it. Thank you, Dr. some for that. My observation, John, is it's 1021 p.m. in Doha. And I'm looking at the headlines while the chairman's speaking.

5:07And I get the worse view forward in the crystal ball gazing six months. I think we got to gaze out 24 hours right now. That's the tension I see in the Iran, the Iran headlines that we get out of Tel Aviv and we're getting out of Dubai right now from Bloomberg. This is why it makes it so difficult to provide forecasts in a moment like this one. and the chairman quite rightly talked about the need for humility, the duration of this shock. Energy assets are in play in the minds of some people now after the strikes we saw on Iranian energy assets just earlier this morning. Crude at the moment at 109 on Brent WTI around 98.

5:41The chairman is well aware that they've missed their inflation target for the previous five years, overwhelmed by a series of shocks, and this is another one. Now, you may still believe ultimately this Federal Reserve will look through this shock, but that wasn't a chairman that wanted to make that point. in this specific news conference. He didn't want to say the T word, even though essentially this forecast would suggest transitory. He tried to play the part of an oil expert. He tried to play the part of a generative AI expert. But nonetheless, he said it is too soon to say so many times over again that we lost count.

6:11They are facing off with a series of shocks with the backward view of what happened in the post-pandemic era where you had inflation that creeped up to 9 percent. He will not want to continue that, especially with core PCE creeping higher in the wrong direction before even getting this out. The headline to me, John, I know we've got to get to Dr. Sluck, but the headline to me was a lack of dissent. I mean, this was very Greenspanian, everybody on the same page supporting this chairman. They stand out here, TK, and for our listeners and our audience worldwide, just tune again. The decision dropped about an hour and a half ago.

6:43The interest rate remained unchanged. The median dot still implied one cut for this year. Lots of noise, though, beneath those headlines. The outlook for growth was better. The outlook for inflation was higher. But that single dissent was Governor Myron. And Governor Waller was expected to dissent. He sat around this table only a week, two weeks ago and said it depends on the next jobs report. An hour later, the jobs report came in way weaker than expected. And we all thought we know what the governor is going to do. He's going to vote for an interest rate reduction. And then he didn't. And that's off the back of the shock of the Middle East.

7:13And that's more than notable. Governor Chris Waller, I think, is arguably the most interesting person on the Fed right now in terms of what his decision actually was driven by. I'm curious if he comes out and says he is getting spooked by the direction of core PCE. He's getting spooked by the component of what oil prices do to that. And we talk about wage inflation. Wage inflation is still running above where it was in the pre-pandemic period. John, I was looking at F1 in Japan here and you said do something serious. So I looked at the price of oil here, as you mentioned earlier. Brent crude up 81 percent from whatever the bottom was.

7:48Saudi light, Persian Gulf. the physical market and forty five percent. Same number. This is 80 percent, 145. It's the point that Jeff Curry of Carlyle was making a little bit earlier on this morning. There's a big gap right now between the physical market where spot is trading and the paper market. And he thinks it needs to close. He thinks the paper market needs to wake up to the real risk emerging in the Middle East. That's one opinion, one view. Other people aren't as concerned. But ultimately, that's his opinion. Every oil strategist that comes on says, why is everybody else so complacent?

8:18And what we're seeing is really a different scenario than we've ever seen before. And a lot of people say, yeah, yeah, yeah, you guys always get it wrong. And so ultimately, this debate will continue to play out. What did we say a few weeks ago? If you want to make a fool of someone on Wall Street, ask for a crude forecast. That's always been the way. It's the hardest thing to forecast. Torsten Slock is not a fool. He joins us from Apollo. Torsten, good afternoon. Good to see you. You've had some time to go through this one. Your big reaction, please. Well, I think one interesting thing here is that if we begin to describe everything as another shock, there's another shock, there's another shock.

8:48and we're looking through that, it almost makes it sound like, well, I don't really have to react to anything because I've identified, well, now there's just another shock coming along on all the prices. There was another shock from trade war. There was another shock from COVID. It makes it sound like that you should never do anything as a central banker. So now we have a shock that is very serious. And it's very, very clear that they decided to just basically completely ignore the Middle Eastern shock that we're facing here. So from that perspective, it is quite interesting, as Lisa is saying, why was it that Waller suddenly changed his mind?

9:15Because it must be that he did put more weight on the Middle East and on the Iranian shock than what the average committee member did here. Do you think that you can infer anything from the price action, as John was laying out, the idea that two-year yields and 10-year yields inflected upward, as Fed Chair Jay Powell said, that he planned to stay on should there not be another Fed Chair nominated and in the seat by the time his term expired? Absolutely. Let's just talk about it the way it is. At the last meeting, there were 10 people voting for interest rates to stay unchanged. At this meeting, there are now 11 people voting for interest rates to stay unchanged.

9:48It's very clear Steve Iran at both meetings voted for rates being lower. But at this instance, when he suddenly now says I may be staying on until this is well and truly investigated and complete, the risk is beginning to rise that, well, maybe we'll have another hawkish member sitting for a longer period. And assuming, therefore, that Trump will appoint a more dovish member, that does, of course, lean more towards that we will have a more hawkish fit if he does stay on for a longer period. But he's not hawkish. Why is he considered hawkish? Well, he's hawkish relative to the alternative of a more dovish member coming along.

10:18You were weaned at Deutsche Bank under Fulker's land out with Adam Siminski and Paul Sankey. Their back of the report Excel spreadsheet was absolutely definitive about the supply and demand of hydrocarbons. Take that experience now. And how do you apply that Apollo when you look at the American economy? Well, it's very clear when you think about demand and supply and oil that the supply equation just changed quite dramatically. now that we suddenly have much less supply because of the Strait of Hormuz being closed and because all the cascade of effects that are likely to come along if this does continue for a longer period.

10:51So on the supply side, we will likely continue to have the very important question, namely how long time is it going to last before we get supply up to the levels where demand is. And if that's going to take a longer time, then the risk is that energy prices and oil prices are going to stay more elevated. It's also fuel prices, of course, that are, of course, going to Jet fuel is also, of course, fuel prices that are marine fuel. All these parts of energy complex are absolutely seeing some upward lift. And the longer the shock lasts, the more we will see energy prices stay more elevated. When does this get real for you?

11:20At the start of this crisis, and we can call it that, people came on Bloomberg Surveillance, on Bloomberg TV, and made the point that if it's days, not weeks, it's OK. And here we are more than two weeks into this. And now we hear if it's weeks and not months, it's OK. When is it not OK? Mike. Well, the next one will probably people saying if it's months, it's not quarters, then we will also have a change. So you're absolutely right. The fear is, of course, that it does continue at the Fed level. If you put this into purpose, the Fed's model of the U.S. economy, it has to last at least one quarter because that's the only way you can get a real serious shock to begin to feed through.

11:51If it begins to last, of course, several quarters, then it's a much more serious effect. But it is ultimately about that duration question. And that's what the market is trying to figure out. And the Fed very clearly told you today that they do not think that this is going to last a long time. Mike McKee in the news conference. He's run back out for us. Mike, welcome back to the program. Some key headlines in that news conference. What jumped out for you? Well, I think two things, John. One, there was a sort of more humble aspect to what Jay Powell was saying when it came to tariff price inflation.

12:19He was conceding that it wasn't doing what they thought it would do, lasting longer than they had anticipated. And now, layer on top of that, inflation that will come into the energy markets and perhaps others because of oil. And so he was less saying the idea that, well, we're prepared to go either way, depending on what happens with the economy, as he was saying, we've been fooled and we're not going to put ourselves in that position. We're going to sit back and wait so that we don't react wrong because we've been wrong. The other thing, of course, was what Powell said about whether he's staying on or not because he's refused to talk about that so far.

12:58He did acknowledge what his lawyers told the Department of Justice in their deposition. But the most interesting thing was he said he's staying as chairman pro tem and that's the law. Well, there's a presidential counsel's office memorandum that says, no, it's the president who can appoint somebody as the chair pro tem. So we could be looking at another big legal fight down the road if they don't get Kevin Warsh in there by May 15th. Yeah, Mike, this is where the problems arise with the chairman really engaging in this topic this afternoon. Does it provide consistency or just introduce even more controversy?

13:37Well, he's trying to provide consistency, I suppose, by saying not much is going to change until my successor gets here. But whether or not that's a shot at the president or some sort of way to push back on the pressure he's been getting, we don't really know. But at this point, you have to think the White House is going to disagree with that interpretation of who's chairman pro tem. Now, it's important to realize, too, that the chairman pro tem of the Board of Governors is largely irrelevant for a short period of time until they get Kevin Warsh confirmed. term it's staying as chair of the open market committee that would really bother the president because towards as torsten was just saying leave somebody who's more hawkish more likely to vote for a hold on the board mike mckee with the latest thank you sir appreciate it great job as always mike there at the federal reserve down in washington dc torsten can you answer that question we've touched on it briefly with you just expand on it does it provide consistency or introduce controversy well it would definitely be a lot cleaner if you have a fit chair and then And that Fed chair walks out and a new Fed chair sits down.

14:41And then we continue with a new Fed chair. That's how it usually works. That's how it normally is. That's how we want a Greenspan, a Yellen, a Ben Anke. But now that you suddenly have this issue that the existing Fed chair, either he may stay on the committee, which is also a huge issue, or we may not have Kevin Walsh in the seat. And as Mike was just saying, that will raise all these other legal issues around, well, is this something that you can do or not do? And that, of course, begins to just raise a lot more uncertainty about Fed independence and what is the institution making of decisions.

15:09Do you think that it's leading market participants to not take into account some of the forward guidance or some of the discussions on the Fed, that there is less credibility as a result of some of the increasing political rhetoric around this institution? Well, I think that we are moving towards a Fed where the focus will be at the extreme on dissents. Today, we had 11 versus one. That was very clear. But going forward, we are likely going to have, especially over the next several quarters, as other FOMC members might be leaving, we will have much more scrutiny of what are the existing members saying, what's the difference in speeches, what's the difference in footnotes between someone who was dovish, someone who was hawkish.

15:45We are entering an era of Fed watching where things are getting much more complicated because it has this political dimension of why is this person saying this? Is this person staying on the committee for political reasons? It just opens up a whole different dimension to Fed watching than what we've been used to for a long time. That's a Fed banker to the world to borrow from Bill Rhodes. Jerome Powell has to look at the varying energy intensities with Brent crude at nearly 110 a gallon. We've gone 106 to 109 here right now off headlines on the Bloomberg. When you look at the way EM is crushed by these prices, food, energy, and the rest that you're expert at, Torsten, does the dialogue just shift from the conventional parlor game.

16:32Well, there's been discussion about the swap lines. There's been discussion about, in the broader context of things, what is the Fed's mandate? And is the Fed's mandate to take care of the U.S. economy and the people who live within the U.S., 50 states? Or is this someone who is supposed to take care of the global economy? And it's very clear that the trend of travel here certainly seems to be that we're moving towards that the Fed should really be caring mainly about the U.S. economic outlook. Is it expressive currency? Is that what we're not seeing in the Q2? Well, given that foreigners own roughly around 20 percent of treasuries, 20 percent of credit and roughly a third, of course, also of equities, we still have a situation where foreigners do play a very important role in U.S.

17:11financial markets. So that key issue of what is the goal of the Fed becomes very, very important. I'm just struck by how historic this is. The last person to stay on at the Federal Reserve as Fed chair after his term was Mariner Eccles. This was in 1948 when his term was up. And he stayed on because he was concerned about the post-Bretton Woods order and an economy that was torn from the war that we had just seen. And he wanted that consistency. That was the last time this happened. And I just am struck by the historical parallel. At a time when we were questioning geopolitical alliances, when we're questioning how exactly some of these monetary policies are going to work in an inflationary world at a time of increased government debt, it is interesting that we're dealing with the same discussions.

17:54And I think it can't be forgotten, these sort of echoes that we feel from 1948. I think it's easy to introduce one's opinion into this situation. So I'll just allow the market to guide us. Clearly, the chairman is concerned about a threat to independence. Is he right to be? Look at inflation expectations right now. Market based inflation expectations have remained really well anchored throughout all of this. So whether you're concerned about the chairman's attack on the institution or not, let's just focus on the markets. Markets have decided it's not a credible threat. So does the chairman actually have a role here that he needs to play?

18:28Is this a card he needs to hand to hold? I don't really understand that. I'm struggling with that. That's something I'm wrestling with. My opinion doesn't really matter. The market's telling me there isn't a concern with central bank independence. The market is telling me there isn't a concern with inflation expectations. And the data is telling me that the rest of the world's not worried either. because when I look at foreign ownership of U.S. assets, they are rock solid. And for treasuries, I think they're at all-time highs at the last data point I saw, Torsten. So is there a problem here that the chairman even needs to address?

19:00Well, that's why the key question becomes, what does confidence mean? Is it confidence by Jay Powell? Is it confidence by foreigners? Is it confidence by markets? It does become a very important debate. That's why this discussion around who will be the next fair chair, now we know it's Kevin Walsh that was around that time. Also a lot of discussion around, It could have been someone else who might not have been perceived as credible as Kevin is. So for that reason, I completely agree. Who is the judge ultimately of what Fed credibility is? And where do we look and where does the market look for evidence whether Fed credibility is being threatened?

19:30And look how many establishment figures came out when Kevin Walsh was nominated by the president. How many establishment figures? And forgive me if you're insulted by being establishment. Gila Gopinath, formerly of the IMF, I don't think it gets more establishment than that. endorsing Kevin Walsh and saying he'd make a great Fed chair. Mark Carney of Canada, the former governor of the Bank of England and now prime minister, endorsing Kevin Walsh as a future Fed chair. What exactly is the chairman defending here when it is standard protocol to leave once your term is up? Well, I think that that's a fair question.

20:04And ultimately, my personal opinion doesn't matter. Frankly, I don't know what my personal opinion is. I just think that there is a sense right now in markets to the point that Fed Chair Jay Powell made that even on Congress's level, they have confidence and they would like to see Fed independence continue. And that's you see in Tom Tillis's move. So what would make him stay on? I guess that that's one of the questions. What would change his mind to actually remain on as governor, past his term as Fed chair, if Kevin Warsh were in the seat that would make him feel like he needed to uphold this Fed independence?

20:35Jeff Rosenberg of BlackRock joins us now for more. Jeff, I imagine you want to avoid this topic altogether. So I'll ask you about the substance of the news conference, the shock from the Middle East, and whether it threatens to upend the outlook for this economy. Yeah, I mean, look, the conclusion here on the substance really pivoted on that moment. I would argue, though, that the pivot was less about the conversation about whether he was staying on and that part of the conversation, and really his answer to the question that occurred right before that. That was the question about, hey, aren't you more worried about the employment outlook?

21:09And he definitively said no to that and then pivoted to the challenge on inflation. And from my reckoning in the meeting, that was the point at which the meeting turned hawkish, because the majority of the discussion around the meeting is around inflation, whether it was the tariff inflation not coming down as much as expected, the unknown impact of energy prices on future inflation. So, you have this kind of backdrop of forces that are pushing up inflation and disappointing the expectations for inflation to decline in the backdrop of stable unemployment rates. And so that really, I think, pivoted the market reaction to, uh-oh, this Fed is much more hawkish, the front end flattening, the equity markets responding.

21:57And that was the moment in the meeting where this moved from what had started out as a kind of dovish statement interpretation, holding the Waller descent to the side for a second, into a definitively hawkish press conference. Jeff, I'm looking right now, and we've completely priced out a rate cut for 2026. The first rate cut now isn't priced in until July of 2027. Does that matter for risk assets? Does that matter in any way, shape, or form? Or has the Fed been totally sidelined by other events? Well, I think it does matter because that's what you're seeing in the markets, right? Risk assets are going down, and I think they're going down because of a pricing in of a more hawkish Fed.

22:39This is a risk asset market that has benefited for a very long time from a highly accommodative Fed, both in terms of price and quantity, when you think about the impact of the balance sheet. So, as we debate what the future Fed looks like, there's both a price and quantity uncertainty there, but both of those in the past have been highly supportive. When you challenge that, that immediately reprices, you know, the Fed's near-term expectations, which you're talking about, but also the degree to which that liquidity in price and quantity is supported and will have the outlook continuing to support risky assets.

23:15Jeff, John and I were going back and forth during a press conference about what the flight to Monza is going to be the first week of September. It's already up 60 percent. It's moved 60 percent to Milan. You want an F1 one? Already up as well. Of course he does. Where are we going to be to both of you? Let me start with Jeff Rosenberg here. Demand destruction to me is tangible when you see a given fancy plane ticket go up 60 percent or a gallon of gas. What does BlackRock say about demand destruction? Well, it's interesting because the last question in the press conference, the premise was, if you remember it, how high do energy prices have to go before you'll consider hiking rates?