The Fed holds steady

0:00Katie Martin: From globalization to innovation, sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle to further inform your view. Listen to the Flipside on your favorite platform.

0:32Rob Armstrong: Pushkin. Central banking is a very buttoned-up, sober affair for very serious people, and if you're looking for drama, you really have to know where to find it. This week, we've had what seems to be a total snooze-fest from rate-setters in the US, UK and Europe. All of them kept interest rates on hold, so nothing to see here, you might think. But unhedged listeners know better than that. Beneath the surface, there's drama, there's bus stops, there's tension you could cut with a knife, and we're here for it. Today on the show, backseat drivers and the art of sounding clever when you have no idea what's going on.

1:12Rob Armstrong: If any central bankers out there want any tips on that, Rob and I are masters of the art. This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist at the FT in glorious, sunny London, where we're rolling into a nice long bank holiday weekend. And the forecast is, of course, rain. I'm joined through the miracle of technology by the athlete, the triathlete indeed, Mr. Robert Armstrong, all the way over there in New York City. Robert, are you going to turn into like one of those weirdos who tries to make themselves younger and live forever like that Brian Johnson fella?

1:51Katie Martin: No, no. And I just, I mean, I really object to being called an athlete. I am a large middle-aged man who's trying not to die prematurely. Maybe we could have an acronym for that.

2:05Rob Armstrong: Yes. Listeners, let us know on hedge.ft.com.

2:10Katie Martin: Well, you know, in your intro, Katie, you missed the most important thing that happened in central banking this week. I did? You did. You missed it. Jay Powell, chair of the Federal Reserve, made a joke and it was funny. He did? And this may be the first.

2:27Rob Armstrong: Because they're not known for their jokes, these guys, are they?

2:29Katie Martin: No, on the contrary. On the contrary. So Jay Powell, who announced yesterday that he would stay on as a Fed governor when his term as Fed chair expired, said he planned to keep a low profile as governor when he is no longer chair. And one of the questions from the audience was, Mr. Powell, could you say a little bit more about what keeping a low profile means? And while the question was being asked, Powell deeply bent his knees. So he appeared to be disappearing behind the podium. And it was actually very amusing because he kept a completely deadpan face on while he was doing it. And this will go down in history as the only funny joke a central banker has ever made.

3:19Rob Armstrong: I can't think of another one. So I think you're right. If any listeners can think of any other wacky little jokes from central bankers, let us know. But I can't think of any others. That's good stuff.

3:32Katie Martin: Yeah.

3:32Rob Armstrong: So that's probably the most interesting thing that's come out of central banks this week. No, I don't think that's true.

3:38Katie Martin: No, interesting stuff has happened.

3:39Rob Armstrong: No, not the joke, but J-PAL. So as you were saying, this is his swan song, right? He is over and out as chair of the Federal Reserve, but breaking 80 years of precedent. He is sticking around as a governor with a term that ends in 2028. I mean, I can't lie. Like, it is kind of funny. I mean, this is like it. So it clips the wings of like Trump's guy at the Fed. Right. Stephen Miran, for whom there is now no room.

4:15Katie Martin: Well, let's take a step back and provide some context. Jay Powell had been very explicit, very clear that he would stay at the Fed until this investigation initiated by the Trump administration. was over with total clarity and finality. So to listeners who have not been following this somewhat depressing story, the administration was like, there's cost overruns at the Fed's building. We're going to open a criminal investigation into the Fed chair run by the Department of Justice. I challenge you to find someone who believably makes the case that this was going on. So anyway, eventually, after getting beaten up in court, Pirro, the person in charge there, drops the case, which sounds like the case is over.

5:09Katie Martin: But she can't quite do it. You know, when she announces she's going to drop the case, she's like, but we could reopen it at any time. And we're passing it to the inspector general at the Fed. And, you know, it's the Trump thing of never conceding defeat.

5:23Rob Armstrong: Right.

5:24Katie Martin: So Powell's like, that doesn't sound like finality to me. here I am staying here. Just like I told you in very plain terms I would do in the first place. So in a certain sense, it's a non-story. He did the thing he said he would do.

5:37Rob Armstrong: Fun reactions to this include, number one, Treasury Secretary Scott Besson, who said this, and I quote, flies in the face of tradition, and it breaks the norms. It's like, oh, we like tradition and norms now. Cool. Like, OK, fine. And this prompted Erica McIntarfer, who, if you remember, used to run the Bureau of Labor Statistics. And she got the heave ho by effectively by the Trump administration because they didn't like some of the statistics she was pumping out. And she was like, oh, well, if we're doing norms, then I guess I'll rock back up for my job then. Yeah, exactly. There's some good trolling.

6:17Rob Armstrong: But also, Trump says that Powell is sticking around because he, and I quote, can't get a job anywhere else. Because, of course, it's famously difficult to find further gainful employment after you've been the chair of the Federal Reserve and no one will hire you, right?

6:32Katie Martin: Yeah, generally what you do when you leave the Fed is you bounce off a diving board into a swimming pool full of diamonds, I think, or$1 ,000 bills or something like that is the standard post-Fed employment plan. Right. I think this is good, what Jay Powell has done. And although it makes me hurt inside to say something nice about the Wall Street Journal, I can recommend Greg Ip's column about this. He's their big economics commentator, one of them at the Wall Street Journal, wrote about why this was a good idea. He made the case that, A, making it painful for Trump to attack Fed independents is a good idea because it shows him that there are costs involved.

7:34Katie Martin: And Trump is going to be around for another three years. He might have another bite at the apple. Making it sting is the right thing for him to do. And also, if he's going to come after Powell personally, that is harder for the president to do while Powell is still working for the Fed. That makes it an attack on the institution, not just the man. So I think and of course, by attacking Powell again, it's not even if Powell is not at the Fed, that's not a personal battle between Trump and the person. That is Trump showing that he can attack central bankers who don't do his bidding, that there's nowhere for them to hide even when they leave the job.

8:22Katie Martin: So this kind of behavior needs to be discouraged to the maximum possible degree.

8:27Rob Armstrong: Yeah. So so Powell is effectively giving up the opportunity to, as you say, bathe in money for the rest of his life by by by carrying on this job. And it does make it difficult for the administration to kind of stuff the sort of board of governors at the Fed with yes men or yes people.

8:49Katie Martin: So there is one what you would I think you can fairly describe as a yes person or in any case, someone whose views of monetary policy closely align with those of the president. That is Stephen Moran. He has a temporary appointment now. And when the new chair, presumptive, Kevin Warsh, comes along, and he's passed the hardest hurdles in the Senate to doing that, when he comes along in May, Powell stays. There is one less chair in the game of Fed musical chairs, and the person out is Moran. So the Fed now has probably a less dovish tilt than it would have had otherwise than if Trump had, say, just kept his mouth shut and not fiddled with the thing.

9:40Katie Martin: And this comes at a really tricky moment for the Fed because it is not totally obvious what the right policy is right now. And there are people on both sides who are making good cases. And indeed, this was sort of the theme of Jay Powell's swan song press conference that like we had a vigorous debate. There is disagreement on the committee, and that makes perfect sense because we are in an extremely tricky situation right now.

10:10Rob Armstrong: As you say, the Fed on balance is now less dovish, right? It's less inclined to cut interest rates. And as you also point out, right, that there was some disagreement within the rate-setting committee about not so much about what to do with rates, because I think I'm right in saying that it was only Moran who voted for a cut this time around. But there was a bit of disagreement about what to say about what they're going to do next. And some people on the committee were like, well, we should suggest that maybe we're going to cut at some point fairly soon. And other people were like, yeah, we just really don't know what's going on with the oil price.

10:50So there's disagreement.

10:52Katie Martin: This is very insider baseball-y, as we say.

10:57Rob Armstrong: You can get really deep on this.

10:59Katie Martin: But there is a line in the Fed's statement from this month that was in previous statements, too, that said something totally boring like, the committee will keep its eye on the incoming data as it considers further adjustments. And the point was that because the last adjustment was a cut, further adjustments implies we're looking at the data and thinking about cutting again, even though it doesn't say that out loud. And three members of the committee had strongly wanted to cut that sentence out to basically say we are totally neutral as to whether the next move is tighter rates or looser rates.

11:47Katie Martin: So they wanted any suggestion of a loosening bias to be removed from the statement. And the three of them went on the record as saying we thought they should have cut that sentence out.

11:57Rob Armstrong: So this is what I say when, like, you've got to get out a magnifying glass and really find the drama in Fed statements. But, like, it's very, very subtle. But just that tiny, very polite disagreement about one very, very boring sentence is the equivalent of, oh, they've had a row. This is cool.

12:15Katie Martin: It's exactly right. And as Jay Powell said explicitly in the press conference yesterday, the boredom is the point. In other words, he said you don't want to just go around changing the statement all the time. Like this month, it's like this. You want to the degree possible, you want all the communications to be as consistent and unchanging as possible. Right. So everybody knows what to expect. All expectations are coordinated. It's very clear what you're up to. And so even changing an implication in a sentence in the statement is a big deal because it says to the market, what we've been telling you to expect, you can no longer expect or can't expect it as much as you did before.

13:02Katie Martin: And that's a big deal. It's an expectations game and you have to manage those slowly and carefully.

13:08Rob Armstrong: Yeah, exactly. Exactly. Meanwhile, we've had some fresh U.S. economic data, GDP growth, so economic growth a tiny bit under forecast, but kind of OK. Two percent rate in the first quarter of this year. Right. And there was also some inflation data.

13:26Katie Martin: Yes, there was inflation data. So, I mean, and this goes straight to what makes the Fed's job difficult right now. So 2 % real GDP growth in the first quarter. That was a tiny bit lower than some account economists have been calling for. But I think 2 % real GDP growth is probably 30 basis points above trend growth rate for the United States. In other words, like just given –

13:53Rob Armstrong: 0.3 percentage points, right?

13:55Katie Martin: Yeah, yeah, yeah. So it's like a tiny – yeah. It's like basically given how much productivity there is in the United States, the growth of the population or non-growth of the population, all these other figures, like probably we're a 1.5 % or 1.7 % growth country. And we got a two. So things are still where, you know, it's still growing. And on the inflation side, we got personal consumption expenditures price index inflation report this morning. and no matter how you slice and dice that report, inflation on that measure, which is the measure the Fed likes to use, is 3 % or above. Take energy out, take food out, trim it, turn it upside down, shake it until it confesses.

14:43Katie Martin: It's 3 % inflation. You know what I mean? And so the Fed is saying, the Fed is saying, we got 3 % inflation, We got a war that hasn't even really showed up in the that's only starting to show up in in headline inflation and might show up more. And we have a job market where basically we're at full employment, but there's no dynamism in the market at all. Nobody's quitting. Nobody's hiring. And so what do you do in that situation? There's an argument for cutting. There's an argument for loosening. And, you know, we're caught in the middle.

15:23Rob Armstrong: yeah meanwhile where you can see the war in iran cropping up in the data we had some eurozone inflation data today not great um so we're looking at a rate of uh three percent in april which is up from 2.6 in march that's quite a big step higher but have a little guess what is what is driving the rise in inflation here.

15:49Katie Martin: I'm going to guess gasoline for one.

15:51Rob Armstrong: Energy inflation, highest annual rate in April, 10.9 % compared with 5.1 in March. So there's this massive pickup in energy price inflation and everything else is kind of meh, whatever. But this is really starting to like put the screws on in Europe and the UK. So thanks for that, America. So we had a couple of central banks over here today european central bank on hold at two percent and they've sort of given indications that they're not in a hurry to to to hike or to also do anything else near term bank of england it was quite quite a funny one so bank of england also on hold 3.75 but they have said they are ready to act which again if you have to get your magnifying glass out and and really see what they're trying to signal here.

16:45Rob Armstrong: This is a kind of, we're not going to sit on our hands and let this kind of get out of control. But it's difficult because I don't know, you don't know, Bank of England doesn't know what's going to happen with oil prices next. So rather than saying, okay, we think the oil price is going to be X and then working from there, what they've done is they've sketched out a few scenarios. And there's one scenario where like rainbows spring from the sky and everything is somehow fine pretty much immediately, which I would discount as not really possible.

17:16Katie Martin: We'll call that the Armstrong scenario.

17:22Rob Armstrong: Scenario B is the oil prices kind of, you know, we're already at or around the peak and then they start to drift down. The scenario C in which oil prices go up to about$130 a barrel and then we get some quite scary inflation numbers. I guess what I would just say is like we're not a million miles from$130 a barrel already. And I just wonder whether the adverse scenario that the Bank of England has sketched out, is it adverse enough? I don't know.

17:53Katie Martin: Yes, yeah.

17:54Rob Armstrong: So the minutes of the meeting from the Bank of England again suggested that rate setters are really quite divided on what to do next. There was one member of the nine-person committee, Hugh Pill, who voted for a quarter point rise in interest rates. And there are some rate setters who say they would like to act early and kind of get ahead of a potential kind of sticky inflation problem. Other people are saying, let's kind of wait and see how this pans out. So there's, again, the sort of disagreement there. And the sort of one piece of analysis on this I was reading from Sanjay Raja at Deutsche Bank was saying, look, you know, they're trying to play for time, but there's only so long you can kind of do this for.

18:37Rob Armstrong: And he was saying, given elevated geopolitical uncertainty, risks of multiple rate hikes can no longer be discounted. So this is going to be fun for my mortgage.

18:50Katie Martin: It's worth noting here what a tricky psychological game central bankers are playing. We've said this before, but it always bears repeating. Central bankers don't want and should not raise interest rates just because energy is more expensive. Because higher interest rates will not make energy less expensive except by really damaging the economy and reducing demand that way. What the central bankers are worried about is that energy prices go up. There's perceived inflation in the economy and people start to expect inflation everywhere and elsewhere. And so people like you walk into our boss's offices and we say, I'd like a raise, please.

19:36Katie Martin: Or I'm running a company and I say, you know what? I better raise prices on the whatever I make because I can see there's inflation everywhere and I want to get ahead of it. So what they're trying to do is not hurt the economy anymore by actually raising rates. But they want to convince the world at large that they are terribly serious people who will raise rates if this gets out of control. Right. So they're like, you know, don't make me do it. They're kind of saying wagging their finger at the world. And, you know, you just got to hope that works because, you know, we're very serious and very clever.

20:12Rob Armstrong: But ultimately, we're guessing just like everybody else is.

20:16Katie Martin: We're guessing and we don't and we actually don't want to do it. We only want to do it if you people out there start freaking out and expecting general inflation everywhere and asking for raises and putting up prices and doing all those nasty things.

20:31Rob Armstrong: So, listeners, the best thing you can do is chill out. We are going to be back in just one sec with Longshot.

21:09Katie Martin: Thank you. Today, stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.

21:21Rob Armstrong: Okie doke, it is time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what are you saying?

21:29Katie Martin: Katie, I'm Long Retirement, specifically my retirement from the Mexican food business. finally the taco acronym can be retired because there's a a proper successor which is nacho not a chance hormuz opens so witty mexican food plus politics acronyms are now someone else's problem and i'm hanging up my spurs what about you katie what are you long and short

22:00Rob Armstrong: Speaking of retirement, I am long extreme old age. My grandma is 103 tomorrow.

22:08Katie Martin: Hot diggity. I know.

22:12Rob Armstrong: And there's nothing wrong with her. And she's one of like maybe 1 ,500 people of that age in the UK. Like there's not that many of them kicking around. Almost all of them are women. So Rob, you might have to put up with me for a really long time.

22:26Katie Martin: is that i mean that's like 53 more years or something right of you it's crazy yeah like

22:35Rob Armstrong: yeah she's super old and she's fine and i'll give her a call tomorrow i hope you have the same jeans katie that's awesome yeah give her my love although we've never met i will i will she'll appreciate that not sure she's a listener but happy birthday grandma we are going to be back in your ears a little after that on tuesday so listen up then unhedged is produced by jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else.

23:15Rob Armstrong: Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

23:40Katie Martin: It's the tiny people who live a long time. That's why big people like me just die.