What's Driving Fed Policy? w/ Jim Bianco

0:00If you've been considering futures trading, now might be the time to take a closer look. The futures market has seen increased activity recently, and Plus 500 Futures offers a straightforward entry point. The platform provides access to major instruments, including the S &P 500, NASDAQ, Bitcoin, natural gas, and other key markets across equity indices, energy, metals, forex, and crypto. Their interface is designed for accessibility. You can monitor and execute trades from your phone with a$100 minimum deposit. Once your account is open, potential trades can be executed in two clicks. For those who prefer to practice first, Plus500 offers an unlimited demo account with full charting and analytical tools.

0:45No risk involves while you familiarize yourself with the platform. The company has been operating in the trading space for over 20 years. Download the Plus500 app. Trading in futures involves the risk of loss. It is not suitable for everyone. Not all applicants will qualify. Hey, everyone. If you like this podcast, go behind the paywall to get privileged access to the smartest minds in finance. Visit realvision.com slash RVpod and use the promo code podcast10. That's podcast10 to get 10 % off our essential membership for the first year. Join the Real Vision community and learn how to become a better investor.

1:24And now to the top analysis of today's markets.

1:34What's driving Fed policy? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jim Bianco, founder of Bianco Research. Hi, Jim. It's great to see you. Thanks for having me back. Love having you on a Fed day. And boy, there's a sort of lot to unpack in this one. So we had the decision, Fed held rates steady for the first time. I think it is 15 months, but they certainly tried to sound as hawkish as possible. At first, we saw a stock sell-off The two-year yield shot higher. But then things sort of turned around after that as we made our way through the press conference. So just broadly, what's your reaction to what you heard and what you saw on the market?

2:15You know, the meeting itself not moving, the reaction is that's pretty much what was expected. There was an outlier chance they might do something like raise rates. But that was a very low probability, but higher than normal. I'd say that what they announced was super hawkish skip because what they did with the dot chart for 2023 is they raised it. And so they're saying that there's going to be two more rate hikes this calendar year, and there's only four meetings left. So that's 50 basis points spread over four meetings. all but two of the members of the Fed said that they would raise rates at least one more time.

2:58And the two that didn't said that they're just going to hold steady. In fact, one member thinks they're going to raise weights four more times, which would be 25 at every meeting here on out. And the probabilities for the July meeting are better than 50 percent. They're at 60. So this is looking like the communication that the Fed wanted us to believe was this was a real skip. And that July's meeting, you have to pencil in right now a hike for July. Now, maybe we pencil it out in the next couple of weeks, depending on the data or the Fed talk. But right now, you've got to say that they're not done.

3:31They're going to keep going with interest rates hikes as we move forward. Yeah, that was certainly the impression, especially in that initial statement. But as they were talking through the press conference, Powell was asked specifically about July, right? And his answer was a little bit murky and he said, well, it's a live meeting. And that's really the point where you saw the market start to turn around a little bit, thinking, okay, well, if there are two more, but they're not willing to say it's July, how hawkish are they really? And Oliver just put in the chat, do you think actions speak louder than words for the Fed?

4:09That little bit in the press conference seemed to introduce some doubt in their conviction. Yeah, I think so. And I I think my take on it is what came out in a press conference, I think this was a political move. Now, what I mean by a political move is I think Powell cut a deal with the rest of the FOMC. I think he had a couple of members on the FOMC, probably led by Austin Goolsbee from the Chicago Fed, who's brand new at the Fed right now, maybe Mary Daly in the St. Louis Fed, that were talking about dissenting if they were going to raise rates at this meeting. And so I think the deal was we're all going to agree that we're going to pause or skip this meeting for now, but that the rate hike cycle is not over.

4:58And that wishy-washy came through in the press conference. And I think the market interpreted that as they're not committed to continuing to raise rates. I'll push back on that and say, no, I think they are committed to raising rates. I think one of the things that came out sort of indirectly in the press conferences, you know, oh, you guys have raised rates 500 basis points, and that's a lot. Yeah, and there's very little evidence that that has hurt anything. Stock market's back at a 14-month high. You know, the economy, I like to joke that the problem with the economy is there is no problem with the economy.

5:36We're still churning out 300 ,000 jobs a month. This economy can handle 5 % if rates can handle probably 6 % rates. And I think that's really maybe even higher. And that's really what we've probably got in store for ourselves. So I think that the pause or the skip, whatever we're going to call it today, was really a political move. He just didn't want to raise rates with a bunch of dissents and then have to go through that agreement. Because that's the way the Fed, I disagree with it, but that's the way the Fed works, that they like to make sure that everything is a unanimous decision or as close to a unanimous decision as possible.

6:14Yeah, certainly. Certainly lately, Powell's been trying to do that and he's been very successful at it for the most part. So this is this is where I think it gets really interesting. And there's a lot of disagreement and there's a lot of disagreement, by the way, within the Fed, it looks like, which which I want to dive into into a minute. So do you think if that's the conversation and there are a couple that wanted to dissent, do you think that's right? Does it look like the economy is way more resilient than anyone thinks or or forecast a short time ago? It's sort of that that line that Larry Summers has been talking about and others.

6:51Is that the camp that you fall in, Jim? Yeah, I think that there's two there's two answers to this question. And the first answer is, as of June 14th, the day we're recording, the economy has been very resilient. It has beaten on the payroll report 14 consecutive months, which tells you when everybody's always wrong in the same direction every month, that they're missing something, that there's underlying strength in the labor market that they're not quite getting their head around, which is why we've got these consistent misses. and that the economy is showing very few signs of the recession that everybody thought we would have by mid-year back in January.

7:30Remember, back in January, the consensus was by the middle of the year, we'll see definite signs of recession. Well, we're at the middle of the year, and there are no signs of recession right now. So, of course, the recession forecast has been pushed off to Q4, Q1, and they'll just keep perpetually pushing it off. So, yes, the economy has been very strong. Will it stay that way as we move forward? This gets back to what I said before. We've raised rates 500 basis points. I think a lot of people are in the camp that that's going to hurt. And Jay Powell kind of intimated that in a conference, too.

8:05We've done a lot of work. We've got to wait and see what kind of effect it has. Monetary policy works on long and variable lags. And so that's really where the fault line is with debate. The only problem I have with it is we should have already seen some signs of real slowing in the economy because you could have argued they did 300 basis points of rate hikes as of eight months ago. And how come we're not seeing those effects on the economy just yet? So this is really where the debate is going to come in. As we go through the rest of the summer, if we don't see signs that the economy is really slowing down, we're going to start talking about 6 % or 7 % on the funds rate.

8:49And that gets me to the second point. It also matters as to what is important. Is it the inflation rate or is it the real economy? Now, a year ago, we were having a debate because we had the first and second quarters of the year negative GDP. Was that a recession? And a lot of people, I was in the camp that it was, and I still kind of think it was from a technical perspective, but I understand the argument that it wasn't because we never had any negative payroll or anything else along those lines, didn't slow the Fed down. They were hiking 75 basis points a clip during that period. What's that tell me?

9:27They only care about inflation. So maybe the economy goes into recession or maybe it doesn't. But if the inflation rate does not start to move towards 2 % And boy, did Jay make that clear. I'm sorry for going to recession. Just deal with it. We're hiking rates. And that was the mentality last year. And that could return as a mentality as we move forward. So the real question might be, the more important question might be, what's the next move for inflation? Exactly. And you answered the question we started the show with, which is, what's driving the Fed? And they made it pretty clear that it is inflation that is the main focus right now.

10:08So this is very interesting because if anyone's surfing around, I know Christopher, you caught Jeffrey Gunlock from Double Line was on talking after the Fed meeting and very much taking the opposite side of the argument saying, listen, the economy is weak. What are they talking about? And rattled off M2 deeply negative. Leading indicators are weak. ISM new orders are in recessionary territory. The yield curve is negative. And he thinks that the Fed is doing the same thing they did at the start of this with inflation, and they are looking at lagging backward indicators. They're looking in the rearview mirror, and they're not focused on sort of more real-time, high-frequency data, and they're going to go too far.

10:53Is that the level that's facing the Fed, or are we just not seeing more signs of recession that sort of gun lack is indicating? Well, Jeff's right on everything he said about the real economy. And I mean, I'm not that far away from his thinking. I'm saying that up until June 14th, it's been OK. But yes, there are some indicators that it may slow down. But it also comes down to priority. Let's just assume he's completely correct. If the inflation rate does not moderate to 2%, so what? They're going to hike rates. But if the inflation rate does moderate to moderate to 2%, then they aren't going to hike rates.

11:33And I think what gets lost is Jay Powell says the same words at every press conference for the last year. And it's all the boilerplate at the beginning that we ignore. And maybe we shouldn't. They're committed to getting inflation to the 2%. If we don't get inflation down, it is going to the economy won't work for everybody. We understand the hardships that inflation puts on everybody. Let me translate this, that half the country lives paycheck to paycheck. Half the country has no savings. If the inflation rate stays above wage growth, they lose. They buy less things every year at the store because their paycheck cannot keep up with rising prices.

12:21Jay Powell understands that. and he's saying, I've got to get the inflation rate down below wage growth. And all you rich people, and let me define rich people, you're watching me on Real Vision because you've got some kind of savings or interested in financial markets. Take one for the team. That was the argument last year. That argument may return as we move forward if the inflation rate doesn't come down. And so that's really, I agree with Jeff. It's just more about the priority. Is the priority of the Fed inflation or is real growth? And I think it's more about inflation. Hey, everyone, we're going to take a quick break right now to hear a word from our partners.

13:00We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

13:21to trade it in just two clicks feel ready you can move to real money with as little as a hundred dollars once your account is approved and the great thing is that in addition to crypto plus 500 gives you access to a wide range of instruments s p 500 nasdaq gas and much more explore equity indices energy metals forex and beyond with a simple and intuitive platform you could trade anytime anywhere experience the fast accessible futures trading you've been waiting for with plus 500. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone.

13:59Not all applicants will qualify. Plus 500, it's trading with a plus.

14:08And I think he said as much at one point when he was talking about underlying economic growth, And he was sort of saying because somebody asked him how you're upgrading your growth prospects. And yet we're talking about higher rates. He is talking about some of the other things that seemed inconsistent. And he said, stronger economic growth doesn't matter if you are seeing that eaten away by inflation. So that's why the concern about inflation. So you're absolutely right, Jim. I mean, it wasn't his exact words, but it was something to that effect that inflation is the concern, the worry that is going to hurt people, especially at the lower end of the income.

14:49Let's dig into why we keep seeing this persistent inflation, though. And does this have something to do with also this divide between people who are better off and those who are kind of living more paycheck to paycheck, or let's call it like most of the country? Right. Because it seems like if you're if you're Jeff and you're looking at the traditional ISM new orders, all of these indicators which would track or forecast where inflation is going, we haven't really seen that happen. It seems like inflation is what is it the services area that's keeping it elevated? Where's the stickiness? Is it wages?

15:28Is it the labor market? So there's a couple of things about the inflation rate. And I've argued this even on this platform here that, you know, the fancy word is we're in a post-pandemic economy. We tend to discount what an epic event it was to completely shut down the global economy and then restart it and then pump in massive amounts of stimulus to try and keep everything afloat. It is going to define that event in 2020 is going to define the economy for the next generation. And it is. And one of the things I think it's done is it's changed a lot of things about the way the economy works. The biggest one is, and this is my hobby horse I talk about all the time, work from home.

16:16I do not think you can discount how epic that is on changing the narrative of the economy. And I'm careful here. I'm using the word change. I'm not using the word worse. It's different. It's an apple. It's not an orange. That doesn't mean that one's worse than the other. And it really shows up in two places. One I've already mentioned, and that is, you know, most of the labor forecasts on Wall Street are always running the same direction, that there is a different type of labor market than we've seen probably in our lifetime, if not at least our career. And we still have to get our head around that.

16:52And it also showed up last year. And I'd like to remind everybody a year ago, we were in the beginning of 22. We were stuck with that second lockdown or second slowdown because of Omicron. Omicron faded. Then came the summer of 22. This is going to be the big reopening after Omicron. All of the retailers were really ramping up for everybody's going to rush back to the store because everything's going to open. What do we put on the shelf? Same thing we put on the shelf in 2019. What happened to the retailers? They simultaneously had gluts and shortages at the same time. Because what did they learn?

17:31People's tastes, people's basket of goods that they buy, not only changed, but probably permanently changed. Why? Because normally, before the pandemic, I was home, you were home two days a week, Saturday and Sunday. Now I'm home four days a week, Saturday, Sunday, home two days in the office three. That doubles the amount of time I'm at home. Guess what that does? That's changed my lifestyle. That's changed your lifestyle. That's changed everybody's lifestyle. There is a friction, a stickiness. The economy needs to be restructured. It needs to be brought up to date for the post-pandemic economy.

18:07Now, what's the problem? The problem, I'm going to lay the plane on a bunch of big banks in New York. Because if there is an industry that does not believe in work from remote work, hybrid work, It is big banks in Manhattan. They want everybody back in the office, you know, 11 hours a day, six days a week. That's what remote work is for them, you know, like it was in 2019. And they think that that's the way that the rest of the country is going to go. And so therefore, they're leading the charge to tell everybody, don't change anything. Just wait. It's all going to go back to the way it was. And the longer we take to understand this, the longer this friction, this out-of-balance economy.

18:51Now, out-of-balance doesn't mean it's going to be slower recession. But this mismatch is going to manifest itself in higher prices. I've used the analogy, and others have used the analogy, after World War II. The big difference was in 1946 and 1947, everybody knew, everybody understood, the economy just changed. We no longer are going to be making P-51s and Sherman tanks anymore. We have to restructure to a consumer economy. But in 2023, only some of us have said, you know what? Things have changed and we have to restructure the economy. But there's a significant voice saying, no, it hasn't. You just wait.

19:29Everybody's going back to the office. 2019 is just around the corner. And so it is showing up as sticky inflation. Core inflation, if you look at the last six months of core inflation, and J-PAL brought this up. It is averaging 5 % over the last six months this year. That is completely unacceptable for the Fed. The Fed likes to say that the neutral rate of inflation is half a percent above the inflation rate. Well, then that means 550 is neutral if that's where the core inflation rate is. And he said that's what they follow, core inflation. That means that all these rate hikes, we haven't yet get to neutral yet.

20:11We have not been restrictive yet on this economy. We're just afraid that we've raised rates so much and it weakened the banks a few months ago that if we keep going, it might be worse. So we have to really get our head around this idea that the economy has changed, inflation is a lot stickier than we think, and that when the Fed does resume raising rates and they're giving every indication they are, that they're going to keep going. And unless you tell me that the economy gets so bad that it brings down the inflation rate, that's not going to be enough to stop them. So that's such an interesting, and I love that you're willing to say things are different because I do think we're in this period where everyone's kind of trying to peer in and make a determination.

20:59I want to ask you a question, but I just realized I forgot to remind everybody that Wednesdays are now extended daily briefings, as you know, we've been telling you. And what a great day to have one on because I see your questions and we're going to get to them. If we go past the half hour, you need to be an RV member. So I'm giving you some time here to scan and jump on a trial so you can do that with us. Join our community. So Jim, if that is true and things are changed, I think this is a really, really important point and probably something the Fed is really trying to wrap their head around.

21:33Why is a structurally different economy, a work from home economy, more inflationary, at least right now? Why would that be? I mean, at the time we heard maybe, oh, people are going to work from home. They don't have to commute. They can work anywhere, including low cost states. Maybe employers will pay them less. I mean, there was an argument, maybe it would be disinflationary. Why is it inflationary? Are we not sure where it's going to settle. It's just inflationary now. I think it's a structural. What I mean by structural thing is that we go to work and we churn out product, whether it's a services product, a goods product.

22:08And we expect that the economy is going to consume the products that we churn out at the rate it always has. It's not. We're simultaneously getting gluts and we're getting shortages. A year ago, the shortage was in goods and the glut was in services. And now that is flipped. We've got a glut in goods and we've seemed to have a shortage in services, which is why we have such high services inflation. We're not in balance. Now, not being in balance doesn't mean that we're going to have a recession or a depression or anything. We're out of balance. And really what it's doing is it is skewing prices more to the upside than the downside.

22:49Once we've restructured the economy, got it back into balance, so we make stuff in proportion to the way that we consume it, then the inflation rate settles back down and goes back to something like it was pre-pandemic. But first, we have to restructure the economy. That's a lot of money, and that's a lot of time. That is a big change in the economy that's coming. And we've also got this prospect of AI and technology coming down the pike as well. That could very well lead some of that restructuring in the economy. That will be, like I said, simultaneously, it will be both a structural problem and then eventually a benefit.

23:31So what I'm trying to say is I think the inflation rate is going to stay higher for longer. Now, higher for longer is 3 or 4, 4.5. It's not 10 or 12 or 15. And that the Fed is going to look at this and they're going to say, you know what? But five might be neutral. Seven might be restrictive. And when the economy goes into recession, we're going to cut to four or three. There's no more zero left in this economy. There's no more 1 % or zero when we have a recession on the funds rate or 1 % when we have a recession on the funds rate. It's we're going to go back to four or three or maybe two and a half.

24:04And that we need to start to understand that that is the environment that we are in right now. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

24:22Yeah, move it back to equilibrium, which, by the way, some people would say a return to more historically norms. And even that sounds low if you really look back. I really appreciate the way that you explain that, Jim, because it almost sounds like a type of supply chain problem, but within our own economy where you're seeing things that are creating these choke points that are contributing to this, which I think we can all understand. And I certainly can think about different parts of my life where I've seen that. And then other parts where you see things loosening up. But it's kind of hard to get your head around because it doesn't seem to make sense.