Balance of PowerBloomberg's Tom Keene, Jonathan Ferro and Lisa Abramowicz discuss remarks from Fed Chair Jay Powell following the Federal Reserve's latest policy decision on a special edition of Bloomberg Surveillance
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An absolutely fascinating news conference with Chairman Powell.
Where do we start? Where do we end?
A twenty five basis point reduction for the Federal Reserve as anticipated, but some drama over the last forty five minutes or so.
Let's start with the equity market.
On the S and P five hundred, we look a little something like this at all time highs up eight tenths of one percent. On the NASDAG we're up by one point six at the moment.
Looking at the.
Russell, we're up, down by about a tenth of one percent. Let's switch it up and get to the bond market and we'll go through these yields. Let's look at yields at the moment, down six basis points on twoes and down about eleven on tens. On a thirty year, we're down about eight basis points of the moment. On policy, this was really really subtle. Did they drop their easing bias? Not quite? Did they find a way to find some optionality without a doubt, effectively endorsing a view that we've had around this table over the last few hours. As times goes by, these decisions get a whole lot harder reluctance to endorse the September forecast, acknowledgment that downside risks have diminished. Awareness the White House policy could redefine the outlook as anticipated. A lot of questions on one thing, this week's election. Take a listen.
In the near term, the election will have no effects on our policy decisions. Here, we don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy would be, specifically, whether and to what extent those policies would matter for the achievement of our goal variables maximum employment and price stability. We don't guess, we don't speculate, and we don't assume.
That's the take awaund the election.
The obvious follow up to that question, are the September forecasts still valid?
Take a listen.
I think you take away a sense of some of the downside risks to economic activity having having been diminished with the Nipper revisions in particular, and so overall feeling good about economic activity. I think really the question is December, and you know by December we'll have we'll have more data. I guess one more employment report, two more inflation reports, and lots of other data. And you know we'll make a decision as we get to December.
So obviously that decision in December will be totally data dependent. But that sounds you heard just the door slowly opening to a pause if they need to. Now that's policy. Let's talk about leadership. You want some tension in this news conference. Take a listen to this exchange from about twenty minutes ago.
Some of the president's alex advisors have suggested that you should resign.
If he asked you to leave, would you go? No?
Can you follow up on do you think that legally you're not required to leave? No?
No, and then no again, and a follow up question a little bit later in the news conference. The answer to that follow up Lisa, not permitted under the law.
Even demotion is not necessarily permitted under law. The interesting aspect of this Number one, he was very definitive. Number two, he had a clear answer. It was clear that he had looked at that law ahead of this meeting and that it was fresh on his mind. It seems like this is going to be a very interesting transcript that we get in five years.
There's two press conferences today, genis smiled at Colby Smiths de Lisman and all asking adult questions about the economics. I went to Craig Trres after his question, our great historian and economics, and I said, Craig finally, and with Craig Trus launching off John, we got into the emotion of this election and fed independence into twenty twenty five.
We've got to separate these two issues, haven't we policy for December, which seems highly dependent on recent data and incoming data between now and then. Then the projections around policy which still feels some way off at the moment. There's nothing to model. I think it's basically what Sham and Pause said in that news conference. So let's park the politics just for a while. Just park the policy based on the data we've had since that September meeting and basically depending on the data we get when we.
Go into December. That sounds like a feder reserve.
That's t and us up for something that the former vice chair Richard Clara talked about in this program before that news conference started, that we could see Chair and Powell look to find some optionality going into December.
That is what the market was looking at, and what I was looking at was a FED fund's futures, which actually, after pricing in a ninety ninety five percent chance of a FED rate cut in December as recently as the end of October, was pricing in a sixty percent chance as recently as a.
Few minutes ago, as j. Powell was talking.
Key question is how much does this turn up the volume on CPI that we get next Wednesday, especially given that he pinpointed just some stickiness in the latest inflation.
This is something you said when the news conference is on. Lisa and I were talking about this, and you said, this is a Federal Reserve that prepared for this moment. The very fact that he responded in this fashion, that he responded to the questions in such direct way coming into next year, it sets up some real tension for twenty twenty five and perhaps even beyond.
Because this is not a FED that is just being passive and hoping people don't ask the questions. This is a FED that's very prepared. They were prepared in how they were going to answer it. They were prepared even for the yield move question, saying that we only take it into consideration when it has been that way for a prolonged period of time. Again, this is setting up tests for the market to take a consideration into consideration at a time when they are saying they're opening the door to responding by not necessarily cutting.
Intocember equity markets.
Right now, session highs, record highs on the S and P five hundred up by nine tens of one percent yesterday, a big sell off and fixed income TK this afternoon. We're seeing a bit of a rally Yield Stowa across the.
Camp, a bit of a rally. John, Do you have your six thousand banner ready? I mean you don't have an SBX six thousand bannerred.
Now TK seventeen points away. Yeah, we're far away.
We can't do Dow forty four thousand banner, but we can do SBX six thousand.
I'm sure they get that.
The present elect will be very interested in doing now. He wouldn't have one thousand.
He will be through next time year.
I said earlier on in the program this morning, it's funny you mentioned this. Stewart Kaiser City was sitting right there this morning and he said, you know, TK likes to down, and I said, I'm trying to change that, and going into next year, I'm trying to change President elect as well, to make sure that maybe he shifts away from that to the S and P five hundred.
I think that you have an equal chance at both.
Exactly.
Here's my response.
No, but what about him?
No, And I'm sure the President elect would say the same thing. Rick Reader joined us now from black Rot, one of the very best in global fixed income and cross asset in markets worldwide. Rick, welcome to the program. You followed that news conference. Let's just start with your first takeaway, Rick, what's your big one?
So, first of all, say, there's some drama there, and I thought that was interesting.
Listen.
I think I agree with that comments that they have to introduce some balance. I think in December, listen, I think the takeaway is they still think readers restrictive. I still think you got to get that fronds rate down four or ish. I think that you got it. You're going to go in December. I think you got to get the you know, you gotta be really careful about the mortgage rate in this country. We could talk about, but I think they're going to go in December. I think he's got that that that's part of the plan. But then as you get into next year, listen, I mean, you got it. You've got what could be a pretty significant policy change setup policy changes, and I think the dots when you go back to the September forecast, I think you gotta, you know, really think about that and evaluate. I think that's going to be one of the most fascinating things going forward is how do they adjust terminal rate from here? How do they adjust where they project growth to be when you're going to go through it could be some pretty significant evolution from here.
So, Rick, because I go through the cannon drove the FEDERASERF there's two dates with some asterisks over the next six months or so, and those little stars in the corner of those dates mean you get some projections at those meetings. So the next one is December eighteenth, and then as we work forward into the following year, we're going to get a decision from the federaserv in twenty twenty five in the spring a March nineteenth, a March nineth teenth, Rick, we'll have a new president who may be already coming forward with some policies and some big tariffs. Rick, do you think it's still too early on March nineteenth to expect this veneras f to bank in some policy from DJT the former president and President elect Donald Trump.
Can I can I also say that we'll wait and see.
Listen.
I think that. I think that.
Listen.
I think you're going to have to evaluate that policy. I mean, we're going to get more data on tariffs, We're going to get more data on how we deal with spending deficits. Listen. I think there are some extremes that gets said in a when you go through an election campaign like this, how aggressive will be on tariffs, how aggressive will be uncutting spending? And then I think you're going to start to see some clarity. You're going to see by the way, and you're going to see what a cabinet looks like. You're going to see who the people are. You're going to have a sense for those personalities and they you know what their disposition is with regard to policy. So yes, I think in March then you are going to have you're going to have to evaluate that and nine and have to evaluate what it means for the forward growth forecast that's Edrica.
One thing really stood out to me in the press conference, and yes, it was the no and the preparation for that question, but also this focus on inflation being a little bit stickier than in prior readings, and to me that was notable because it seemed like they had left inflation for dead.
That wasn't even part of the mandate.
It was, you know, sort of autopilot cutting until you sort of get to a certain place and then you wait and see how much does this turn the volume up on CPI that comes out on Wednesday?
It does.
I mean, it's gonna listen, I think one man's opinion or more our team's forecast. Listen, we think most of the descent and inflation has happened. You know, we think you've got tremendous goods deflation. Now you've got base effects that aren't a tailwind going forward. What does service inflation do from here? I mentioned it earlier. I think shelters a really big deal and part of why I think you got to get that rate down. You know, you have you see you know what you've seen over the last month. You look at housing affordability still a problem. Housing starts are low, building permits are low, existing home sales are low. You have a problem today, chilters. You're not getting enough home building. You look at all the home builder earnings, you know, pretty rough because they're subsidizing mortgages or subsidizing houses through through their bottom line. Listen, I think you're going to get the rate down. You got to get housing moving more efficiently, and that, by the way, that'll bring shelter inflation down. But that's been the thing that's sticky. But yeah, I think we're going to focus on what these in particularly I focus on service inflation. Where are we going to be over the next couple of months, And I think it's going to be pretty important. I think most of the benefit you've seen it play out already.
Rick, it's away from your rema. I was talking with Derek Belchunis are et face BlackRock's got an interesting bitcoin moments from printing seventy seven thousand, equities are moving, bonds are moving in the way we've discussed what does bitcoin at seventy seven thousand signal to fixed income into equities and for that matter, to the dollar.
These are good questions, hard questions.
Listen.
I will say one thing. I mean, obviously, what bitcoing is reflecting is a change, potential change in policy and a more favorable disposition towards crypto. I think that's point one and that's clearly the big driver. Second one that I'll throw out there that I think is robust. Listen, we got to deal with debt and deficits and what does it mean for currency going forward? And listen, I mean it's a scarce asset. It's becoming more scarce. And I think, and I will tell you from doing a lot of client meetings, people more and more thinking about real assets. People are thinking about, gosh in a different world. You know, what does it mean? You know, we got to get our spending down because our debt is too large. Do I own some scarce assets, some harp some real assets? And I think that's playing through obviously, alongside the bigger one being a more favorable disposition from policy in terms of where that is. But Gosh, I hear more and more about real assets. It's not just crypto, but in other places.
Rick, I've got to follow on that.
I really want to understand from your perspective, whether you see signs at the moment of people pushing back because of the deficits. So let's take yesterday's price action as just a snapshot of where things are out. So we saw a big self and fixed income. And typically if this was EMSA and we saw moves like that and I was worried about the fiscal position of that country, we'd see the currency weakness too.
But you didn't see that yesterday. You saw a lot of dollar strength.
So I'm wondering, from your perspective outside of that, whether you are already seeing signs of pushback and whether you'd expect to see it pop up in the US dollar anytime soon.
If it's all.
So, I think the first thing people react to is you got a change in policy, tariffs, stronger dollar generally, and I think that's a market tends to knee jerk market. You usually can only focus on one thing at a time, and I think it was focused on that. I don't do a client meeting today. We're not The first or second question is about the debt. It isn't about the debt of the country. The deficits were running. I think this administration is going to have to this Congress is going to have to address there's too much debt coming do. If you said to me next year, like Lisa said, We're going to be laser focused on inflation. We're also going to be laser focused on auctions because we're issuing so much debt every single week. Every client wants to know and I think gets to that question of why people are buying real assets. How the thing about, by the way, equities are an operating leverage machine on GDP and car fank you think about what does well in this environment. Equities still do well. But I gosh, every client meeting I go to, people want to talk about the debt. And I think it is definitely going to become much much more of the regular dialogue in everything we do. Investor, by the way, not just financial investors, corporate CEOs, CFOs, how they think about cap x, R and D. I think it's going to be a big deal going forward.
Can you just elaborate on that in terms of when we'll actually see it in a more dramatic fashion, because you can make a lot of arguments for why yilts have gone up, and frankly J.
Powell said, I'm not going to parse out.
What's what, but some of it could be deficits, some of it could be the political regime, some of it could be better than expected growth. I don't even know. I don't care it's going to stop anyway. At what point do you say this is real and this is actually a risk premium that's being put on for the first time.
In a long time.
Yeah, you know, we'd say a couple of things that, you know, Listen, it's hard to parse any individual movement that takes place in markets. But I think more and more, you know, by the way you look at what's happened to the credit markets. Spreads keep tightening, spreads keep tightening. You know, I've said this before. If you go through some of the companies today, high free cash flow, don't borrow on the front end of the curve, don't have any financing, don't have a maturity wall. I then think about the US government. We threaten a default every couple of years. We borrow at the front end. And the immense size of bill COUPONSI bill auctions we do every week, coupon auctions we do every week. Listen, I think it is you know, it's part of why every auction you got to watch, you know, is the particularly in the back end of the curve. Listen, I think there's going to continue to be a strong bid to you know. And by the way, part of why I like portfolios clip a lot of yield in the front end. Just keep clipping that yield, clipping that yield, you know, the back end. I think it's going to be a big focus going forward. Like you said, you know, we've never had I would argue in the US, it's not just the amount of debt, it's the debt service. We're talking about interest rates. We used to print treasury bills at zero percent, one percent, you know. Now we're printing huge size treasury bills every week at high level. So it's going to be it's going to be a big focus. And you know, is there one event listen, I think auctions are going to be are going to be worth watching, and I listen to the shape of the curve, you know what. I would say one last thing, and I think JPO was very clear and right. In this markets can be wrong a lot. You know, we had we priced two hard landings already this year. Markets can get crazy extreme one way or the other. But I think you've got to watch over time the premium we're paying in this country for the amount of debt that we're going to issue, what it means for the currency, and what it means, you know, for how much how much will people absorb, not justically but internationally.
Rick, I've had a couple of whispers, and I'd love your response to this. From a couple of banks, they're anticipated that maybe credit trades through treasuries, investment grade US corporate credit trading through treasuries. I'd love your view on that. Is that possible because for some companies, we're not that far away. Do you think we could see that in the next twelve months.
Sir Jonathan, I never thought if you go back a few years ago, I never thought. We've talked about it years ago. Remember we were funding companies a negative yield, Like I never thought that would happen. Do you remember that in Europe? Like we're lending company and I remember it explaining to my kids, like I'm lending money to the companies that negative I'm paying them to take my money. But then, you know, explaining why bons where they are starting to hard to explain anyway. So is it possible. It's definitely possible. You know, the supply demand dynamics are quite different, and it's definitely possible. I mean the spread tightening you're seeing across the board is pretty powerful. Listen, one thing, ultimately, taxing authority is a really big deal. And there's one thing that I think is usually important for the next couple of years. There's been a massive transfer of money from the public sector of the private Chector. The private sector has got I think the numbers two hundred and twenty trillion of net worth. The asset coverage in the United States is pretty darn good. How do you get at that asset coverage? How do you get at that net worth to send some of that money back to the government versus what they've transferred to the private sector. And that's going to be the evolution that I think this administration is going to have to navigate.
John, your insight there is critical. At least thirty five years ago, I had the privilege of hearing John Templeton say the same idea the credit would trade through full faith and credit. Then it was unbelievable. Now it's unbelievable, but it's a critical insight.
Yeah, but you heard what Rick said there, and it's really important. Through the pandemic, there was a massive transfer of money top and it was from the self righn to corporate America to individuals, the households, Which is why what we've seen ultimately because of policy coming out of the pandemic is the balance sheets the corporates are better. Balance sheets from households were rock solid. And what got weaker? Where is the leverage the sovereign? Now, Rick, you followed that up and said that ultimately that's going to have to be a source of revenue.
But that's not the policy proposal.
The policy proposal, as you know, is to drop corporate tax rates from twenty one to fifteen with conditions, which is domestic manufacturing. I get all of that, Rick, Are you basically saying that at some point we need to understand that that's what we need to do, even if it's not what we want to do. And Rick, for that to happen, you need guardrails, You need constraining forces, and I don't see any sign of that from many policy makers in Washington. And ultimately, it means it needs to come from the market. And the question is, Rick, it's the question we've asked for a decade plus. Will the market actually provide those forces? Will they constrain the hopes of fiscal policy? Makers the tax cut hopes from campaigning. Do you think the market will be a constraining factor or not?
The answer is yes. Listen, I think policy generally doesn't react. You know, hopefully I'm wrong in this case, but generally policy doesn't react to the sharks right next to the boat.
Yeah.
And I think you know, the markets will usually and to anticipate things, and by the way, I often anticipate them too early or wrong. But I think the markets are going to be a great barometer for what policy needs to adjust to. So you know, I'm hoping it's not egregious in terms of how that manifests itself. And I will say one thing and we get debate tax policy, marginal tax rates. Listen, I think the US economy, there's only one way that you bring the debt down. You got to outrun it and nominal GDP. We have to grow. Economy's got to grow. There's a series of initiatives you can have. You can have fiscal spend as long as it's got velocity to it and that the economy is growing. And then the cost of the debt has to come down, and the shear size of the debt has to come down. And then we slowly bring the debt problem down in this country. But I think it has to be a whole series of initiatives and quite frankly, policy needs to create confidence of investors of the general populace that they're moving the boat in that direction. And by the way, confidence is hugely powerful. You can do a tremendous amount. Your comment or it's comment about emerging markets the one thing US has, and you look at the faith in the fat and the faith in the in the confidence that will ultimately do the right thing. But I think you think that's going to be really critical going forward.
Rick, you're a money manager. Can we finish there on what you've been doing? Were selling bonds yesterday?
No? The uh no, not yesterday. But you listen to me, you know, I would just say, if you know, listen there without getting specific in terms of things we're doing. You know, I think there was regulatory change, or I think there's potential regulatory change. The financials are interesting. I think fixed income products like mortgages are interesting. When you change the regulatory dynamic around banks and their ability to buy different things, so you know, those assets have become more interesting. Listen, I think equities are rightly moving in the direction they should move with with a series of initiatives that could stimulate growth here going forward. So you know, I like, I like parts of the equity market, and that's so that's been And then you know the other side of it is that you know something that I'm just going to keep persisting on the front to the belly of the curve, yielding assets, credit, securitized assets Europe where you buy credit, et cetera. Like, if you just keep clipping this yield it is I mean, even if rates move up somewhat, you're still able to build portfolios. We have the CTF bink you're still able to create this portfolio six and a half percent yield. That's pretty spectacular. With inflation running at two you can be two point three percent. So that's my key is like, just let's keep buying this yield and hold this yield in the front of the belly and then let people take the risk further out the yield curve.
Rick, this was awesome.
It's going to catch have this appreciate it, Rick Rater with black Rock, when do you begin with that conversation?
So let's at chew over.
Yeah, Well, First of all, he was talking about inflation possibly being sticky even before what it transpired in Washington, DC. I love his response to you about were you selling bonds?
We like Morgatis well on banks.
We like banks, we like stocks.
But this to me is really the key to pay, which is how much can you buy the front end clip the coupon? Is this making cash great again essentially for people who want to sort of get some income on their margins but then go into asset classes that are going to be less vulnerable to a potential inflationary shops.
Just a guess, and I haven't hunt directly. I'm not sure if the Trump administration is looking to make cash great again, but we'll see.
I guess maybe that is a go.
Well, maybe it's make crypto gritty, And actually I think that it's make dollar less great so that it's weaker, although it seems like that's somewhat contradictor.
Let's get to Mima kay.
My mckaby was in that room in that news conference, and Mike McKay at some point there was some tension with Sham and Pow.
Were you surprised, No, I don't think anybody was surprised we got about as much out of him as we thought we would get. On the issue of Donald Trump and the elections, he just answered with one word and then one sentence. No, he's not going to resign if asked, and it's not permitted by law for the president to demote anybody on the FED. And there wasn't as many questions along those lines as maybe we thought there would be because he was so definitive on those two answers. I think what you got today was two different news conference messages. One was to the people inside the beltwigh here in Washington about his relationship with Donald Trump, and the other is to the markets. And that Rick picked up on this very well. The FED does not know what it's going to do. There are a lot of cross currents coming in twenty twenty five.
So if you think that the FED.
Is on some sort of path because of the last sep in the last dot plot, you're going to probably be wrong. The FED has a lot to keep an eye on, not just with the president, but with everything else going on in the world.
With respect to the message to the market, he was asked about the fact that the Federal moved the reference to gaining confidence on inflation, and he basically said, there's nothing to see here. It was just a semantic issue that we already said that and we're not going to repeat it.
Do you buy that?
I do?
And that was the conclusion that not only I came to when I read this statement in the lock up, but all the other reporters basically came to as well, We've seen this before. When they start changing policy, they give a rationale for that, we're moving in the direction or we're getting close to where we need to be, and then after that they're already there, so they don't need to keep repeating that. They just took it out, as he said, for clarity.
Mike McKay, I'm the latest in that news conference. Might we'll have a longer conversation tomorrow when you get back to New York City. What a news conference with chem and Pound, Tom Constant with us now of Miszoo.
Tom, welcome to the program.
We'll just give you the opportunity to share your initial takes from that news conference and then we'll get into it.
What's that for you?
It was pretty much as expected in the sense that he's still committing to the easing cycle. I think this sort of new news might be, where might they pause in the context of the new policy regime that we'll be getting with a change in the administration.
But the idea is, I think.
There are you know, are subjects of the data really shocking. They're kind of on an auto pilot to get rates down to around four percent and the early part of that next year, and then we take it from there. If they have to respond to policies that adjust the balance of risks, for example, then you know they'll.
They'll they'll figure that out then.
But the election itself isn't really affecting what we thought any way they were going to do.
Donickive's the theme of a Trump administration has growth at any cost, pushing against all this is going to be a nominal GDP left When you sum things together with Steve Rashudo, do you just assume a run rate five percent nominal GDP or can I even look for an animal spirit towards six percent?
Well, I definitely think there's a there's an animal spirit sing out there. That's pretty interesting. I Mean, the the only caveat is when we went through tarifs before, you know, when they started to sort of hit it wasn't clear in twenty nineteen that the animal spirits were exactly kicking in, and the fact had to get into extra easing mode by then. So I think there is certainly some definitely uncertainty around the whole thing right now. Though you know the issue is a lad market. You know it's not great. I mean, employment growth is sort of stagnating. I would say the economy has been bifurcated. You've had some very strong sectors, some weak sectors, and you know, if it wasn't for the latest, you know that the election, we'd still be in the mode whereby the FED would be preemptively trying to cut rates quite quickly to stop unemployment going up. So we can't forget that, and we're going to have a few more months whereby, if animal spirits don't kick up, you might still well see unemployment rising above where the FED expects it to be. And therefore, you know, some disappointment. I mean, growth itself is a bit of a lagging indicator, and it really reflects the average of the economy, doesn't reflect the underlying weaknesses and some of the sectors.
If we expect the unexpected is a year go through parody or dare I say one on three maybe and you answer one sixty will signal a new resilient and stronger dollar.
Well, I mean it really should do.
I mean, you know, if, especially if you're going to start pricing for the tariff. So again, what we don't know is whether the tariff threat it's just a threat, whether it's going to be enacted. If you are going to enact taris, then you know there is obviously the risk the dollar is going to basically go up, and that's a big part of that. And then you get into the you know, the instance of the tariff is obviously falling onto the exporters. The consumer is going to be somewhat protected. You know, that's where we might end up getting. But you know, Trump is Trump, and so you know it could well be just a big bargaining chip and we might not get the full force of the tariffs. I would say one thing about tarast so is we do actually need them if he's genuine about his tax cuts and the modification to the tax law, and next year, you do need the tariffs to actually pay for that. So you know, I'm guessing we're going to get the tariffs in the.
End, I'm just putting the policy aside. And there have been other changes that have happened in the past three four weeks that also were addressed here. Yields have gone up because of economic surprises to the upside, Inflation on the margins has been slightly stickier. There have been questions about why long term yals are so high, and frankly, my risk assets don't care because there are basically treating it like it's for the right reason. At what point do these yields force the FED to take notice in a way that they don't have to now they can just dismiss it as a blit.
Potentially, well, I.
Do think a lot of the moving yields is obviously being driven by term premium, what we call term premium, and they're good reasons for why term premium is rising. One of them is taris, but another one is obviously the fiscal supply, So that means you kind of get this sort of steepening pressure through the yield market, and it's obviously consistent with the deficit concerns that are being coming out of the new policy regime forthcoming. In terms of how that affects risk ass is really a balancing act. If you have term premium going up normally, all else equal, risk ass would suffer. However, if on the other side of that, you're getting a sort of higher level of growth, let's say because of the fiscal stimulus coming through, then that really does kind of easily overwhelm the impact of term premium. So premium has been very low, so to expect it to sort of go up is not unreasonable. It's almost if you like normalizing by some models we look at, and if you can take a quid pro quo and say, well, look, we're going to have higher growth coming out of all of this, then there's no reason for risk asses to perform badly. And I think that's kind of where we are. So we're in the sort of, you know, best of all possible worlds in the sense where risk acids are okay.
And yes, long term yields are.
Rising, but they're not rising so much that they're going to unravel the story for riskases. And bear in mind the FED is in restrictive mode, so by the fact that they can reduce their short term rates, it will help anchor the curve lower. So you may well have higher term premium, but if short rates are still falling at the other end, then the whole curve is somewhat getting anchored, which is actually quite good news, and it does avoid one.
Of the problems we had last year.
If you recall, I used to I call it the Liz Trust moment, where when if the FED threatens higher yields at the front end and you have a term premium a rising in terms of hurting the long end, that's really bad news for risk assets because that kind of unravels, you know, both sides of the equation, so to speak.
You said a number of things there, or one aspect as you said that the FED is clearly in restrictive territory at this point and it will be easing J.
Tup.
Powell actually maybe casts a little bit of question around just how restrictive they were, saying that they're trying to get down to a place and then adjust that they can figure out what that neutral rate is. Do you think that he was opening the door to pausing in December to not necessarily cutting more for the rest of this year.
I for a feel that they're pretty much an auto pilot for a December cut. I definitely think he's opening the door to a pause, let's say within the next six months. So they're not going to sort of run all the way down to three percent, which is where they have that neutral rate, but they could definitely pause around four percent. Pausing around four and a half is a little premature, particularly since they haven't even seen wouldn't have seen the new administration come in, So you know, to my mind, you know, not yes is the pause, and therefore they can sort of plow through, you know, into a Q one easing and then pause, pause. Then in terms of neutral and where it is, obviously no one really knows where it is, but you know, we've done some interesting work to suggest that if interest rates don't come down, employment in certain sectors will continue to slow and go negative. And that's this kind of preemptive aspect of why they want to bring down rates, and that's kind of where, you know, why I feel that neutral is not here. It's probably not a four percent and it's probably close to three percent, but we'll see in the end.
So what a.
Constant and Rashido say about a run rate of non firm payrolls? I mean, can you get non firm payrolls permanent under one hundred thousand, or can you even go to a negative statistic?
Well, I think, I mean clearly you can, and I think that's that's the problem. I mean, Powell himself said, the lad market has eased enough, you can't. You don't really want to have payrolls running one hundred thousand or so. And the reason or less the reason is because layoffs are still very low. The layoff rate is still running below one point two percent of the employed workforce, the idea. Before COVID, the layoff rate was in a range of one point two to one point four percent. So adjusting layoffs higher, which will be reflected, for example, in the claims data going higher and normalizing if you like, with employment growth down in around one hundred thousand or so, you will see unemployment rate rising well above the FED forecast. So you have to have basically pay rolls accelerating or somehow cross your fingers and hope layoffs never actually go up.
And we're in a new world where companies just won't fire people.
And in a way, that comes back to the animal spirits, animal spirits to either not lay off or animal spirits to hire more people and get pay rolls accelerating. Just keep the unemployment rates where it is in line with where the FED would like to see it in the medium term.
Heydan, this was great. It's going to hear from you, sir. It's been too long. Don constant there of miszoo on a federal reserve. We'll do this all over again in December. But the key one, I think circle it on the calendar for twenty twenty five March nineteenth March nineteenth, Spring of twenty twenty five when they have to produce some new forecasts with some new policies in mind.
Maybe especially as the third finishes out the first one hundred DS. It raises this real question how many of the policy implementations have really affected the trajectory of the economy. And they can't use this as a punt. We'll see what we see, they'll have seen, and they'll have to react.
The Fed is reactionary, The market is anticipatory. The Fed is reacting to the data. This market is anticipating changes to policy, and a lot of that right now hinges on what happens with the House and whether we get this GOP suite from New York City that does it for us. Thank you very much, reducing Bloomberg TV and radio
