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As Federal Reserve policymakers meet this week in Washington, they're coming to terms with the fact that their fight against high inflation has gotten harder and more complicated. That's because of new economic data showing persistent inflation, sure, but it's also because of something FED shaired Jerome Powell did, or rather something he said to reporters at the end of a previous meeting back in December.

As Federal Reserve policymakers meet this week in Washington, they're coming to terms with the fact that their fight against high inflation has gotten harder and more complicated. That's because of new economic data showing persistent inflation, sure, but it's also because of something FED shaired Jerome Powell did, or rather something he said to reporters at the end of a previous meeting back in December.

The question of when will it become appropriate to begin dialing back the amount of policy restraint in place that begins to come into view and is clearly a discushed topic of discussion now in the world, and also a discussion for us at our meeting today.

The question of when will it become appropriate to begin dialing back the amount of policy restraint in place that begins to come into view and is clearly a discushed topic of discussion now in the world, and also a discussion for us at our meeting today.

We thought, wow, that's pretty explicit.

We thought, wow, that's pretty explicit.

That's Kate Davidson. She oversees Bloomberg's coverage of the FED.

That's Kate Davidson. She oversees Bloomberg's coverage of the FED.

The fact that he was sort of so clear that they were at this turning point. It did surprise all of us.

The fact that he was sort of so clear that they were at this turning point. It did surprise all of us.

That admission in December that Powell and his colleagues felt comfortable enough about what they'd achieved to talk about cutting interest rates also surprised Wall Street and investors welcomed that change in tone from the FED chair.

That admission in December that Powell and his colleagues felt comfortable enough about what they'd achieved to talk about cutting interest rates also surprised Wall Street and investors welcomed that change in tone from the FED chair.

There is plenty of fuel for optimism in the US market, with the Federal Reserve signaling this week that it is in fact ready to start thinking about cutting interest rates next year.

There is plenty of fuel for optimism in the US market, with the Federal Reserve signaling this week that it is in fact ready to start thinking about cutting interest rates next year.

At a time when many economists expected the US was headed for a recession, j Powell pivoted, and in a new analysis, Bloomberg Economics says the FED Chair did that at the perfect moment to stave off a recession, but that pivot in retrospect also had other consequences. That's because the boost to growth, which was good news, also gave a bump up to inflation, which is bad news. Powell is in a tough position trying to pivot again under difficult circumstances, and if he's not successful, forget the elusive economic software landing. Bloomberg Economics says the outcome of the Fed's fight is likely to be harder and bumpier than many in the markets expect. A two day meeting of the twelve person Federal Open Market Committee is underway, and after it ends on Wednesday, Jay Powell will take questions from reporters. Wall Street is going to scrutinize everything the FED chair says about what he and his colleagues are thinking about the economy and what's next. On today's show, I talked to editor Kate Davidson and Anna Wong of Bloomberg Economics about how that surprise pivot may lead to another one that challenges the FED chair faces and what to listen for when he speaks. This is the Big Take from Bloomberg News. I'm David Gera.

At a time when many economists expected the US was headed for a recession, j Powell pivoted, and in a new analysis, Bloomberg Economics says the FED Chair did that at the perfect moment to stave off a recession, but that pivot in retrospect also had other consequences. That's because the boost to growth, which was good news, also gave a bump up to inflation, which is bad news. Powell is in a tough position trying to pivot again under difficult circumstances, and if he's not successful, forget the elusive economic software landing. Bloomberg Economics says the outcome of the Fed's fight is likely to be harder and bumpier than many in the markets expect. A two day meeting of the twelve person Federal Open Market Committee is underway, and after it ends on Wednesday, Jay Powell will take questions from reporters. Wall Street is going to scrutinize everything the FED chair says about what he and his colleagues are thinking about the economy and what's next. On today's show, I talked to editor Kate Davidson and Anna Wong of Bloomberg Economics about how that surprise pivot may lead to another one that challenges the FED chair faces and what to listen for when he speaks. This is the Big Take from Bloomberg News. I'm David Gera.

In December. I think most people were quite surprised when he came out and gave a pretty clear indication that FED policymakers were starting to think about cutting rates.

In December. I think most people were quite surprised when he came out and gave a pretty clear indication that FED policymakers were starting to think about cutting rates.

Kate Davidson of Bloomberg News. A big pivot I've seen referred to as a Dovish pivot. And for those of us who don't cover the FED day in and day out, what is a Douvish pivot?

Kate Davidson of Bloomberg News. A big pivot I've seen referred to as a Dovish pivot. And for those of us who don't cover the FED day in and day out, what is a Douvish pivot?

Right? So, Hawks, when we're talking about the Fed, hawks tend to favor higher borrowing costs to make sure we're getting inflation down. Dubvish means that you might be thinking a little bit more about the labor market and wanting to make sure that borrowing costs interest rates are not so high that they're starting to lead to an undue rise in unemployment. So when we say that FED officials are become and charge your own pal is becoming more dubvish, that means that we are seeing the attention turning toward the possibility of lowering those borrowing costs to make sure that the economy doesn't tip over into a recession.

Right? So, Hawks, when we're talking about the Fed, hawks tend to favor higher borrowing costs to make sure we're getting inflation down. Dubvish means that you might be thinking a little bit more about the labor market and wanting to make sure that borrowing costs interest rates are not so high that they're starting to lead to an undue rise in unemployment. So when we say that FED officials are become and charge your own pal is becoming more dubvish, that means that we are seeing the attention turning toward the possibility of lowering those borrowing costs to make sure that the economy doesn't tip over into a recession.

Basically, how quickly did you recognize that the FED shair was speaking in a different way about the economy and the path forward for the FED.

Basically, how quickly did you recognize that the FED shair was speaking in a different way about the economy and the path forward for the FED.

It was during right as he kept going, we thought, Wow, that's pretty exc bluss that. I mean something that Jay Powell is known for as being pretty plain spoken, and he wants to make sure that people understand what he's saying. At the same time, usually they like to keep their options open. We assumed he would be a little more vague.

It was during right as he kept going, we thought, Wow, that's pretty exc bluss that. I mean something that Jay Powell is known for as being pretty plain spoken, and he wants to make sure that people understand what he's saying. At the same time, usually they like to keep their options open. We assumed he would be a little more vague.

FED communications is very nuanced, and you certainly can be an expert of the English language, but you could still not be able to decipher FED speak because the FED speak with a very specific in a very specific way.

FED communications is very nuanced, and you certainly can be an expert of the English language, but you could still not be able to decipher FED speak because the FED speak with a very specific in a very specific way.

Anna Wong is the chief US economist at Bloomberg Economics and one of the brains behind Bloomberg Economics is FED Sentiment Index. That's a natural language processing algorithm.

Anna Wong is the chief US economist at Bloomberg Economics and one of the brains behind Bloomberg Economics is FED Sentiment Index. That's a natural language processing algorithm.

You take all these headlines generated by Bloomberg editors and reporters that captured the ke essence of FED officials speeches, scrums or testimony or tweets, you know, the entire universe of fedspeak, and distill it into the core component that market traders need to know.

You take all these headlines generated by Bloomberg editors and reporters that captured the ke essence of FED officials speeches, scrums or testimony or tweets, you know, the entire universe of fedspeak, and distill it into the core component that market traders need to know.

I'd love for you to step back from the model itself, maybe put on your just your your economist had, and just give me a sense of how big a surprise it was that FED cher Jerome Powell changed his tone at that meeting.

I'd love for you to step back from the model itself, maybe put on your just your your economist had, and just give me a sense of how big a surprise it was that FED cher Jerome Powell changed his tone at that meeting.

Well, David, I always wear my economists pack. But however, the size of that Dolvish surprise was surprisingly large in the model. So our model allows us to distill like the relative magnitude of that surprise. And amazingly, that Doulvish surprise is even larger than the Duvish surprise right after the SVB collapse in March of twenty twenty three. So that tells you how big it is. It's one of the biggest Dolwish shock in this entire rike hike cycle.

Well, David, I always wear my economists pack. But however, the size of that Dolvish surprise was surprisingly large in the model. So our model allows us to distill like the relative magnitude of that surprise. And amazingly, that Doulvish surprise is even larger than the Duvish surprise right after the SVB collapse in March of twenty twenty three. So that tells you how big it is. It's one of the biggest Dolwish shock in this entire rike hike cycle.

And that shock came at a really critical moment.

And that shock came at a really critical moment.

At that time. There was a split and how market commentators were reading the economy. There's one camp ourselves including in this camp, that thinks that the economy is probably in the midst of a recession starting in October. And then there's the other camp that thinks, in fact, the economy is strong all along and the Fed did not have enough monetary restraint. We did think that if power were to Unleashduvish pivot, that would ease financial conditions and immediately support the economy.

At that time. There was a split and how market commentators were reading the economy. There's one camp ourselves including in this camp, that thinks that the economy is probably in the midst of a recession starting in October. And then there's the other camp that thinks, in fact, the economy is strong all along and the Fed did not have enough monetary restraint. We did think that if power were to Unleashduvish pivot, that would ease financial conditions and immediately support the economy.

The Dubbish pivot effectively had a huge stimulative effect. Here's Kate Davidson again.

The Dubbish pivot effectively had a huge stimulative effect. Here's Kate Davidson again.

I think it immediately gave people assurance or reassurance that a recession was not imminent. The Fed had kind of signaled they were willing to do what was necessary to protect the labor market at this moment where people were starting to worry geez rates are very high. There's also this idea that monetary policy it takes a while to work its way through the economy.

I think it immediately gave people assurance or reassurance that a recession was not imminent. The Fed had kind of signaled they were willing to do what was necessary to protect the labor market at this moment where people were starting to worry geez rates are very high. There's also this idea that monetary policy it takes a while to work its way through the economy.

Could you talk a bit about the way that this is kind of in hindsight, made the Fed's job trickier.

Could you talk a bit about the way that this is kind of in hindsight, made the Fed's job trickier.

Financial conditions loosened quite a bit, and that's always the risk because Fed officials what they think they want to do is they raise interest rates. They tighten financial conditions to get them to a point where they're constraining the economy. But once they had stopped doing that, they kind of want to keep them where they're at right. They don't want them to get too much tighter or too much looser, And so it's a careful it's a very careful balance.

Financial conditions loosened quite a bit, and that's always the risk because Fed officials what they think they want to do is they raise interest rates. They tighten financial conditions to get them to a point where they're constraining the economy. But once they had stopped doing that, they kind of want to keep them where they're at right. They don't want them to get too much tighter or too much looser, And so it's a careful it's a very careful balance.

So well, that pivot may well have pushed back a recession. That new analysis by Bloomberg Economics concludes it raised the rate of inflation by half a percentage point. That's after the break. We've been discussing the Federal Reserve's latest moves and what to expect from policymakers this week with Anna Wong of Bloomberg Economics and Kate Davidson of Bloomberg News. Kate, what were the first signs in twenty twenty four that maybe FED chair Powell had made a mistake, that he'd pivoted too early.

So well, that pivot may well have pushed back a recession. That new analysis by Bloomberg Economics concludes it raised the rate of inflation by half a percentage point. That's after the break. We've been discussing the Federal Reserve's latest moves and what to expect from policymakers this week with Anna Wong of Bloomberg Economics and Kate Davidson of Bloomberg News. Kate, what were the first signs in twenty twenty four that maybe FED chair Powell had made a mistake, that he'd pivoted too early.

Well, it's hard to say, because as economists often say, and as economics reporters we sort of subscribe to this that you can't take a lot from one data point. So we did see that, you know, inflation in January was a little firmer, firmer than people expected, saw that again in February, saw that again in March, and then I think it's like three, you know, three points it can be connected to make a trend. And late last year Chair Powell and some of his colleagues that had said things like, look, we don't have to see a better number every single month, month to month, but we have to continue to see more of what we've seen.

Well, it's hard to say, because as economists often say, and as economics reporters we sort of subscribe to this that you can't take a lot from one data point. So we did see that, you know, inflation in January was a little firmer, firmer than people expected, saw that again in February, saw that again in March, and then I think it's like three, you know, three points it can be connected to make a trend. And late last year Chair Powell and some of his colleagues that had said things like, look, we don't have to see a better number every single month, month to month, but we have to continue to see more of what we've seen.

And it looks like the FED chair has started to pivot again already. Two weeks ago, at an event on the sidelines of the International Monetary Fund Spring meetings in Washington, Powell said this.

And it looks like the FED chair has started to pivot again already. Two weeks ago, at an event on the sidelines of the International Monetary Fund Spring meetings in Washington, Powell said this.

The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence.

The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence.

If they've effectively reset the clock on rate cuts because they want to see better inflation data, presumably they want to see a few months of data, what.

If they've effectively reset the clock on rate cuts because they want to see better inflation data, presumably they want to see a few months of data, what.

Economists and investors will be listening for on Wednesday is for the FED chair to pivot even more. It's a big opportunity for him to do that.

Economists and investors will be listening for on Wednesday is for the FED chair to pivot even more. It's a big opportunity for him to do that.

I think people will be listening closely for how much more data? How do you want to see before your comfortable cutting rates? But if he says something like three months. I mean May, June, and July. There's not a lot of time for them to make that decision. So the question is is that enough to give them enough confidence? But if they don't have that confidence by July, then you have Jackson Hole in August, where the FED chair typically makes a big speech. That'll be a moment for him to kind of potentially signal one way or another whether they're ready. And then September that's awfully close to the president dential election.

I think people will be listening closely for how much more data? How do you want to see before your comfortable cutting rates? But if he says something like three months. I mean May, June, and July. There's not a lot of time for them to make that decision. So the question is is that enough to give them enough confidence? But if they don't have that confidence by July, then you have Jackson Hole in August, where the FED chair typically makes a big speech. That'll be a moment for him to kind of potentially signal one way or another whether they're ready. And then September that's awfully close to the president dential election.

Okay, how good is the insulation the FED has from the politics? What's your sense of how much pressure this institution is under and how much more that pressure is likely to build as we get closer to November.

Okay, how good is the insulation the FED has from the politics? What's your sense of how much pressure this institution is under and how much more that pressure is likely to build as we get closer to November.

I do think the pressure is going to build, and I think it's important to note that it's not just coming from the right. I mean, there are Democratic lawmakers who have complained that the FED should be cutting interest rates. So I think that that will definitely pick up from both sides as we get closer to November. But I think that Cher Powell has shown that he is pretty good at navigating all of that. Something. Let's say that he has put a lot of time and effort into is building relationships with lawmakers on Capitol Hill, and that was hugely to his benefit during the Trump administration because even while he was taking a lot of incoming from the White House, Republicans on Capitol Hill defended him. Essentially, they had his back, and I think that that was a big help because ultimately the FED was created by CONGRESSNG Griss oversees the institution and that's who Powell has to answer to. The FED Chair is nominated by the President, and Chair Powell was nominated by President Trump, but he's confirmed by the Senate.

I do think the pressure is going to build, and I think it's important to note that it's not just coming from the right. I mean, there are Democratic lawmakers who have complained that the FED should be cutting interest rates. So I think that that will definitely pick up from both sides as we get closer to November. But I think that Cher Powell has shown that he is pretty good at navigating all of that. Something. Let's say that he has put a lot of time and effort into is building relationships with lawmakers on Capitol Hill, and that was hugely to his benefit during the Trump administration because even while he was taking a lot of incoming from the White House, Republicans on Capitol Hill defended him. Essentially, they had his back, and I think that that was a big help because ultimately the FED was created by CONGRESSNG Griss oversees the institution and that's who Powell has to answer to. The FED Chair is nominated by the President, and Chair Powell was nominated by President Trump, but he's confirmed by the Senate.

Kate Davidson and her team of reporters are covering this week's meeting, and they're also keeping an eye on how Wall Street reacts at this moment. With this FED meeting underway, what are markets expecting now about what the FED is going to do in the remainder of twenty twenty four.

Kate Davidson and her team of reporters are covering this week's meeting, and they're also keeping an eye on how Wall Street reacts at this moment. With this FED meeting underway, what are markets expecting now about what the FED is going to do in the remainder of twenty twenty four.

So this is actually really interesting. Markets have dialed back expectations a lot. They were almost more hawkish than the FED itself was, at least when officials met in March. So markets now see between one and two cuts in twenty twenty four, and they don't expect the first cut to come until much later in the year. And that is I think in large part because of this sort of surprising, surprisingly strong, surprisingly hot inflation data that we've gotten at the beginning of the year.

So this is actually really interesting. Markets have dialed back expectations a lot. They were almost more hawkish than the FED itself was, at least when officials met in March. So markets now see between one and two cuts in twenty twenty four, and they don't expect the first cut to come until much later in the year. And that is I think in large part because of this sort of surprising, surprisingly strong, surprisingly hot inflation data that we've gotten at the beginning of the year.

What do you listening for? What do you expect the FED chair to say when he addresses reporters on Wednesday?

What do you listening for? What do you expect the FED chair to say when he addresses reporters on Wednesday?

Well, I think the thing about this meeting in May is that FED officials don't have to put down on paper where they see rates heading. They don't think that he's going to commit one way or the other. He's going to lean heavily into the idea that they just have to see what the data show, which is something It feels like it's kind of like a broken record. He has said it over and over and over and over again. This time he doesn't have to say anything else. I think he's going to not commit to a plan one way or the other.

Well, I think the thing about this meeting in May is that FED officials don't have to put down on paper where they see rates heading. They don't think that he's going to commit one way or the other. He's going to lean heavily into the idea that they just have to see what the data show, which is something It feels like it's kind of like a broken record. He has said it over and over and over and over again. This time he doesn't have to say anything else. I think he's going to not commit to a plan one way or the other.

And you mentioned that your model is predictive. What is it telling you now?

And you mentioned that your model is predictive. What is it telling you now?

The model is saying that if the if Powell does not do a hawkish pivot to reverse his December pivot, then unemployment rate would be declining and inflation will be a point five percentage point higher. However, if he does decide to do at hawkish prices that in the next two months then unemployment rate would be back on track to rise towards four point five percent at the end of the year.

The model is saying that if the if Powell does not do a hawkish pivot to reverse his December pivot, then unemployment rate would be declining and inflation will be a point five percentage point higher. However, if he does decide to do at hawkish prices that in the next two months then unemployment rate would be back on track to rise towards four point five percent at the end of the year.

Is it accurate to say that the change in tone in December made the Fed's job more difficult, made this fight against time inflation more difficult.

Is it accurate to say that the change in tone in December made the Fed's job more difficult, made this fight against time inflation more difficult.

Yes, As a policymakers, you really don't want to turn the economy into like a yo yo ball, where like it's never good when the asset market is like running up by a crazy amount, and then you have to do something to burst this bubble because bursting the bubble create volatilities, create uncertainty, and it's it's a path where things are moving gradually is always profitable to things going up and down and up and down. Right, So I think from the Fed's perspective, this is this is not a good sign. And inflation also has an inertial of its own. And so if if the longer that inflation is away from the FEDS two percent, the more entrenched inflation will be in p people's mind and later on, oh, it will be harder for the FED to bring inflation back down to two percent. So there is actually a clock ticking in terms of bringing inflation back to two percent.

Yes, As a policymakers, you really don't want to turn the economy into like a yo yo ball, where like it's never good when the asset market is like running up by a crazy amount, and then you have to do something to burst this bubble because bursting the bubble create volatilities, create uncertainty, and it's it's a path where things are moving gradually is always profitable to things going up and down and up and down. Right, So I think from the Fed's perspective, this is this is not a good sign. And inflation also has an inertial of its own. And so if if the longer that inflation is away from the FEDS two percent, the more entrenched inflation will be in p people's mind and later on, oh, it will be harder for the FED to bring inflation back down to two percent. So there is actually a clock ticking in terms of bringing inflation back to two percent.

Thanks for listening to The Big Take podcast from Bloomberg News. I'm David Gura. This episode was produced by Jessica Beck and Thomas lou It was edited by Naomi Shavin, Tom Orlick, and Chris Antsy. It was mixed by Blake Maples and fact check by Alex Sagura. Our senior editor is Elizabeth Ponso. Nicole Beamster Boor is our executive producer. Sage Bauman is Bloomberg's head of Podcasts. Please subscribe and review The Big Take wherever you listen to podcasts. It helps new listeners find the show. Thanks for listening. We'll be back tomorrow

Thanks for listening to The Big Take podcast from Bloomberg News. I'm David Gura. This episode was produced by Jessica Beck and Thomas lou It was edited by Naomi Shavin, Tom Orlick, and Chris Antsy. It was mixed by Blake Maples and fact check by Alex Sagura. Our senior editor is Elizabeth Ponso. Nicole Beamster Boor is our executive producer. Sage Bauman is Bloomberg's head of Podcasts. Please subscribe and review The Big Take wherever you listen to podcasts. It helps new listeners find the show. Thanks for listening. We'll be back tomorrow