FED, Fra Francis, Jay Powell discussed on Bloomberg Businessweek
To Bloomberg BusinessWeek here on a very exciting fed day. I'm Jason Kelly alongside Carol Massar. And this is Bloomberg radio. That was the big Jason about how dovish Jay Powell fed chief would come as a result or be as a result of this. Latest fed decision are the fed, of course out with its latest decision last decision. In fact, on interest rates in twenty eighteen as expected raising rates trimming its forecast for hikes in twenty nine thousand nine from three now down to two as we await the press conference with fed chief Jay pal that will happen at the bottom of the hour suggest about fifteen minutes from now, let's get some analysis on what we heard from the fed Francis. Donald in the house senior economist at Manulife asset management in our Bloomberg interactive brokers studio along with Jeffrey Cleveland, his chief economist at paid and in regal joins us on the phone from Los Angeles. For instance, let's kick it off with you. So the fed okay dove. How much of a dove did Jay Powell Cobb off or not even much this barely fits addition of adultish hike from my perspective. We could have gotten so much more pessimism. Baked into the statement. This is not going to be enough for markets to feel satisfied. That they've made a real turn in their view of what's happening in two thousand nine hundred and twenty there weren't significant changes to the language. They could've changed further gradual increases to adjustments. For example, all it did was out of the word some new changes in any material way too long run growth expectations and those dots that could have done so much more to them to signal. So the the big issue here is that there's still a substantial disconnect between what markets are expecting. And what the fed is suggesting is going to happen next. And so Geoffrey, what do you make of that disconnect? You agree with what France has just laid out read it. Yeah. You're the huge disconnect right now between the the market and the fed defended thing still additional rate hikes to three at still more to the market has priced in the market. Right out the curve is flattening us. That's what you're seeing reflected here in the aftermath. And I was actually the statement. It was marginally hawkish can use. The in the sense. They did you know, it was easy to throw in some risks just pay pay respects to the global risk. But you know, that that's pretty cheap and easy to do. They didn't really do anything fundamental to ship their view. They still see the economy's on track. And they're going to be hiking further the market doesn't by who's. Right. So FRA Francis. Coming on that first are the markets writer the financial markets, right? In terms of what they're seeing in the economy. It's not like we have CEOs coming out and telling us everything's falling apart of that. We did have the FedEx EEO or the FedEx company coming out with their latest results last night, and they were kind of talking about slowdowns in terms of the global economy. But whose right is it what the feds looking at and what they're seeing for the economic outlook our financial markets. Right. Well, historically, financial markets have been right. So that's an important consideration. But the way that I look at this as someone who actually asked to make investment decisions is the risk is asymmetric here. The market is already pricing in less than one rate hike for twenty nine thousand nine. The fed still at to which direction is it more likely to go into I'd say in the near term or more likely to have to get closer to the idea that Xs possible, especially because q one and q two twenty nineteen actually look like they could provide some upside surprise where I think the fed is wrong. Here is on that twenty twenty rate hike. They still have baked into their dots twenty twentieth. Shaping up to be a really difficult years. Anybody really have visibility on twenty twenty. Let's be fair here. How much how much do you really feel like we can look Francis. At the outlook and say, okay, I feel pretty confident about the hard truth is that economists really don't have great visibility more than twelve months out. But there are some things that we know impact an economy without with about an eighteen month lag. And those things are monetary policy. We already know that we have substantial rate hikes in the pipeline. The bulk hidden in twenty twenty we know that there's a substantial fiscal drag that's going to happen in two thousand twenty we know these things unless there's a material change them. We know that these are going to create a could drag on growth in two thousand twenty now if they're hiking in March of this year, they're hiking into that soft patch of growth in two thousand twenty. Exactly to me. The big disappointment today, or what will really weigh on the market sentiment is not twenty nine thousand nine persistent twenty twenty dot and that failure to revise twenty twenty expectations lower for growth. So Jeffrey just come on in just a second. But just reminding people the markets are continuing to bounce around a a little bit. We have the Dow up about four tenths of one percent SNP up about three tenths of one percent. Nasdaq still trading lower about two tenths of one percents of Jeffrey turn to you in about eleven minutes or so give or take we're going to hear from chair Jay Powell, what do you need to hear from him to what do investors need to hear to make them feel better about this decision about this statement? You know, I think the markets are are getting this wrong. You know, getting the outlook wrong. Liquidity issues balance constraint were going into the year and people are meeting making a working at the market moves declined equity than changing their macro story. And the way they do that and say, oh, there's these these things globally. Just think we've gone too far in that direction. And so anything he can say to just convey reiterate, the strength that Betty see these the underlying strength, the US economy, strong, labor market conditions guest are risks. But everything's still seems to be on the right track that could maybe bring the the market around. But I don't know there's a wide Gulf as we head into this press conference from what I'm seeing on the screen, so Jeffrey, let's talk a little bit about that press conference. What do you want to hear from Jay Powell who is just not talk about this all the time magazines covered? Some really great perspectives on him in terms of his background. Right. He's not the academic that we've seen from Janet Yellen or Ben Bernanke. This is a real practitioner at understands Washington understands the investment world. So we'll maybe. Yeah. Maybe he'll go back to the analogy that he rolled out a couple of weeks ago. You know, just reiterating that as long as the data justifies it the fed thinks it's moving back toward the neutral setting. They don't know exactly where that neutral setting. Analogy he used of course, is that light switch in a darkened room. They still think it's higher than than where we all right now in terms of the fed funds rate setting, but they're not wedded to that. It's not a preset course, I think that's the that'll be underlying mantra that he tries to leave. Again, the market has a very different scenario in mind. The market is thinking that this is you know, we we've had a rate hike here. But that's it. What was done for the cycle? That's what I see priced into futures market. And the and the economy is about to rollover tardy, really distinct different views here. Interesting environment for veterans, if you wanna bet one way or the other though, so Francis is forward guidance sort of useless. At this point. Should we just sort of back off of that? And just let the dated do its work and not get so caught up in, you know, kind of what had what and how many and when and interpreting all of this language well in twenty nine thousand nine hundred a little bit of a predicament, which is that it's clear Powell wants to remove the last vestiges of forward guidance from his statement, although he didn't remove the some further gradual increase today, which suggests you still okay with it at the margin, but in twenty nine hundred, and we know they're going to be pulling back as near the end of their hiking cycle focusing a lot more on the data. But at the same time, we have press conferences from howl at every single meeting. So all of a sudden, we're going to be hearing more from Powell, but yet he'll be saying less. I don't know how markets still with us. I think actually it's a high volatility regime, and there's going to be a lot more focus on all those. I hear secondary economic data points that come in. It's not a fun market to play around and give it I wonder to Jeffrey if we when we start to hear from companies, I'm kind of looking forward to the next round of earnings can be a bit of a. Behind as we go through all the numbers. But I do feel like we need to hear from corporate America about what they're seeing in terms of their businesses in the outlooks. Yeah. I think will ultimately what happens with the fed funds rate. Carol depends on what happens with growth with earnings out over the next twelve months. So that's really the key in the heart of it. Right now, the bond market has a as a slow down, and perhaps even a cut priced in. To the to the out years. So if the data defies that we will have a different outcome. That's my that's where I'm betting I think growth will hold up over the next twelve months. Corporate earnings will hold up for not perhaps not at the rate that we've seen in twenty eighteen but we'll still be these in in two thousand nineteen and the unemployment rate, I guess perhaps most importantly by the end of next year. It could be three point two percent, Carol. And if that happens, then that's below what the fed is expecting right now based on their projections. And I think that would justify further additional rate increases in the market will end up being wrong over that period, the bond market and so Francis what what would make the market feel better setting the fed aside because I think it's safe to say that the fed has been one thing that's obviously been weighing on this market. But there's also trades. Also sort of general economic concerns this geopolitical concerns what what would make us feel better. Well, clearly, a more optimistic fed isn't. We're seeing in the market pricing right now this bear flat near almost markets are almost like stubborn children. And you say everything's gonna be okay. And they say, I don't believe you at all. Sasha invert? I think what would really help here is. Just a nice upside surprise, the data good old fashioned could until the data data in particular. The labor market the global labor market is pretty tight labor market. Now, the problem, we're good with jobs. That's not the issue here. The big issue is inflationary expectations. They are very weak on the back of oil and concerns about global activities, so China, we did get a targeted rate cut today from China, and let's not forget that as folks today on the fed European upside surprises, I think that would be fantastic for the US curve right now, if we had just a little more hawkish us from the but at the end of the day, this really comes down to what twenty twenty is talking about business investment, a strong consumer exports. It's a simple GDP equals c plus I plus g plus affects you know..