Fed Cuts Rates For First Time Since December, Chair Powell Press Conference

[00:00:00] Speaker 1: people about the state of the American economy. The dot plot will factor into this, too, with the [00:00:05] Speaker 2: market looking for a half a percentage point here this year. And then, of course, just the drama surrounding Lisa Cook and Stephen Myron. Michael McKee, we caught him on the way out of the newsroom. I'd be very curious to hear the questions that he's going to be posing to the Fed chair. You'll hear it and see it all right here on Bloomberg TV and radio starting in just a moment. We'll meet you back here at five. The late edition of Balance of Power starts 5 p.m. Eastern. Right now, a special edition of Bloomberg Surveillance. The Fed Decides. It starts right after this on Bloomberg TV and [00:00:35] Speaker 3: radio. In case you missed it, on Bloomberg Tech Asia. From labs in Shenzhen to workshops in Silicon Valley, humanoids are stepping out of science fiction and into our reality. This might seem like just a [00:00:48] Speaker 4: gimmick, but the humanoid companies in China, like Unitree, are blending tech and entertainment as seen as a serious part toward commercialization. Ultimately, the goal is to bring humanoid [00:00:59] Speaker 3: into households with varying estimates for how long that might take. Don't miss Bloomberg Tech Asia every [00:01:05] Speaker 5: month. Live from New York City for our audience worldwide. Bloomberg's The Fed Decides. Starts right now. [00:01:13] Speaker 6: This is a special edition of Bloomberg Surveillance with Jonathan Farrow, Lisa Abramowitz and Tom Keene. Bloomberg Surveillance. The Fed Decides. [00:01:24] Speaker 5: Live from New York City this afternoon. Good afternoon. Good afternoon. For our audience worldwide, that decision. We're going to be able to do a little bit more. We're going to be able to do a little bit more than what we have seen before. It's not about if they cut. It's how much they cut by. 25 or 50. [00:01:36] Speaker 7: And how do they signal the path ahead? Do they give a sense of a neutral rate that might look a little bit lower than what we have seen before? Given the composition, given some of the pressures and how do they understand the dueling mandate of inflation versus the labor market? [00:01:49] Speaker 8: You're way too technical for me. To me, it's just absolutely historic. I mean, John, you and I, the ECB emailed us one day with a love note saying snooze fest. It's not. There's never been a meeting like this. That's all there is to it. This goes back to McChesney Martin in 1951. [00:02:04] Speaker 5: There's nothing sleepy about this one. Three-part act statement forecast news conference. Can this Fed meet this market? [00:02:11] Speaker 7: This market has priced in a much greater degree of rate cutting, not just at this particular year, maybe not at this meeting, but throughout the year, maybe three rate cuts, but also this question of the terminal rate. [00:02:23] Speaker 5: Let's start with this market. Equities doing nicely since the Fed last met. Just off all time highs on the S&P 500, negative this afternoon by just a tenth of 1%. In the bond market, this is a very, very different bond market compared to where we were when the Fed last met. That two-year was closer to 4%. This afternoon, 353. That 10-year, closer to 450. This afternoon, closer to the threes. [00:02:47] Speaker 7: Yeah, and do we see a ratification, as you say? Do we get a sense that that is what a lot of the Fed officials are thinking? Coming up shortly, we'll get the views of PGM's Greg Peters, Kathy Chones of Charles Schwab and Sakjan Subhaja Rajapa. They'll be taking us up to that Fed rate decision at 2 p.m. Eastern. As John said, it is a two-part act, three-part act. Immediate reaction as we wait for the press conference with JPMorgan's Bob Michael, Diane Swank of KPMG, and Deutsche Bank's Matthew Lizetti. And finally, breaking it all down, Chair Powell's news conference has already happened, and we will be speaking with former New York Fed President Bill Dudley and BlackRock's Jeff Rosenberg. [00:03:26] Speaker 5: That is a stacked lineup right there through the next few hours. Joining us around the table, Greg Peters of PGM Fixed Income. Greg, good afternoon. It's good to see you. Great to be here. Can this Fed meet this market? [00:03:37] Greg Peters: Well, it's doubtful. You know, there's a lot of drama around this current meeting. It seems to me it's almost like a B-rated drama with interesting subplots. So I think 25 is obviously assured. There is a remote chance of 50, but it's all about kind of inside the inside. You know, what does the SEP look like? You know, how do we parse out kind of the new participants? How political is it? How much gamesmanship is going on? So that's the interesting twist of it. But the end result, I think, is uneventful, honestly. [00:04:11] Speaker 7: So the B-rated drama. I want to get into this. Mean Girls, is that essentially what you're going to be looking for? [00:04:16] Greg Peters: I was thinking more like Sunday night movie at midnight. [00:04:19] Speaker 7: Well, hold on a second. But this is important. How do you view the B-rated movie aspect of this, given that some of the personalities and projections might actually become the mainstream, the sort of core of the Fed's opinions come 2026? [00:04:35] Greg Peters: Yeah, no, you know, that's quite right, right? So I mean, I think we'll learn more over time. And so we'll see how, quite frankly, politicized the Fed is internally. And we'll see that through the SEP and the forecast. Increasingly, you'll see it through the speeches. But I guess the, you know, the point today is you might see it through the, you know, the dissent side, right? And so it feels like most people believe there's, you know, three dissents to ease more. But there's also a possibility of dissents on the other side. So that could actually really show some bedlam kind of within. I personally don't think it's a bad thing. I think just having consensus all the time isn't constructive. But how this is manifesting this time might be a little different because it's playing a different game, maybe a little more political than normal. [00:05:25] Speaker 8: Anna Wong's watching the Kansas City Fed chief, the president, I should say, to see what he does. I want to go where Lisa was. I was kidding her about the mandates. But we've got an inflation study, a job study. Seven years ago, pre-pandemic, Stephen Roach at Morgan Stanley wrote a blistering critique of the Fed on asset bubbles. It's your fault, because you at PGM of price bonds to perfection, price up, yield down. Does he have to address today the bond market asset bubble and the equity market asset bubble? We're seeing China stocks to the moon and the rest. [00:05:59] Greg Peters: I don't think that's part of the calculus. Honestly, I think the clear focus is on inflation and labor. The, you know, asset bubble is, you know, not, I think, part of, you know, the thinking at this current point. You know, you go back to Greenspan and took years for that irrational exuberance to play out. So, you know, I think there was a, you know, a lesson there, but I do think the mandate is more tilted towards growth than inflation and what that means for 2026. What I don't think enough people are talking about is what does 2026 look like? So if you have an environment where you have a fiscal thrust coming through, which is expected, you have a, you have a more accommodative central bank, you have kind of the pull forward of AI productivity, what does that do to inflation and what does that do to growth? And so if you run an economy really hot, then, you know, that could change how the Fed thinks about the rate path. [00:07:00] Speaker 5: I'm very, very pleased you've brought up this issue. This could well be the last time we get a forecast from Chairman Powell without knowing who the next Federal Reserve chair is actually going to be. By the time you get to December, we can have a pretty good idea of what the post-power world looks like. Mark Cabana of Bank of America asked a really provocative question. This morning, he's asked it a few times. Why would they stop at 3? Why would they just stop at 3%? How hard is this Fed with new leadership willing to run things? [00:07:28] Greg Peters: Well, you have to count on hope for the credibility factor, right? And so I think there's two different minds here. So there's a mind of, you know, getting into the role. But then I think ultimately your reputation is bonds, so to speak, right? So, you know, I don't think anyone wants to taint their own reputation or really taint the reputation of the Fed itself. So I do think they'll be contained by that. But it is an open question. We don't know. So there is a bias to be more easy, I think. But, you know, where neutral is or where, you know, being accommodative is, is always an open question. And I think we'll test that thesis in 2026 for sure. [00:08:09] Speaker 7: This is a compelling point, the idea that the discipline will be imposed by the bond market and ultimately the bond vigilantes will come back, particularly at the long end, and will impose a sense of restraint on the Fed and on the administration. Do they still exist if there, say, is yield curve control or, say, some sort of creative balance sheet use? [00:08:30] Greg Peters: Yeah, that's exactly the point. I actually don't think there's such a thing as a bond vigilante. I think that's an artifact from the past. But I think from a bond investing standpoint, it is really difficult to lean in continuously into the steepener view because of that risk, right? That risk of changing the issuance in the back end, doing buybacks, some form of financial repression. And so it's a very, you know, treacherous place to be given that. And that is why the U.S. has kind of outperformed other global markets because of that. They've done a better job on the debt management front, number one. And then number two, investors have a keen eye on changing that dynamic to, you know, keep back end yields down. [00:09:19] Speaker 8: The inflation adjusted rate is a residual. Sometimes it's hard to guess. We've had the 10 year real yield come down. I'm going to call it at the bottom of the range. You're the pro on this. What is the significance of with the chitchat today? We get a real yield that really breaks down. [00:09:34] Greg Peters: I mean, real yield is a interesting measure, right? You know, one measure high real yield means like that's a very good growth environment. That's one that you should should do well in from a risk standpoint. You know, post GFC was it was inverted and perverted in a way where negative and low meant it was good for risk taking. So I think we're in a much more kind of normalized zone, which is to say having real yields, you know, kind of the 1% type of zip code is where we're supposed to be. I think that's a truer measure of economic activity than, you know, the previous kind of regime. [00:10:12] Speaker 5: We've got about 60 seconds left in this segment at least that we can continue this conversation. How are you thinking about the relationship between the debate at the front end of the curve and the story further out along the curve? Are the two things connected right now? If they drop yields at the front end, what happens to the long end? [00:10:29] Greg Peters: Well, they're connected and they're not all at the same time. So the front end of the curve is a much cleaner place to invest, right, because it is clearly driven by central bank policy. So the closer you get to that central bank policy reaction function, the cleaner it is. As you go out the curve, yes, it's driven by central bank policy action, of course, but it's driven by so many other factors that are beyond your control, right? It has to do with inflation, of course, growth expectations and this pesky term called risk premium. [00:11:01] Speaker 8: Brilliant. John, does Dr. Myron know that? [00:11:03] Speaker 5: I think Governor Myron does. I've got some respect for Governor Myron. Going into this meeting, he doesn't strike me as the kind of guy. He takes big swings in the meeting. Would he take big swings when it comes to the dissent? I think that's a very, very different question today. I don't think he's going to go in and be rude to people and tell them they're all doing a horrendous job, but he could well be a little bit more aggressive with that dissent if we do indeed get one. [00:11:24] Speaker 7: In other words, 100 basis point rate cut. Is that what he thought it was deserved? Is that what we're going to come out and speak to later today? That, I think, is really going to be a mistake. [00:11:32] Speaker 5: I'm not sure how much credible a number closer to 100 would be. [00:11:35] Speaker 7: Does that rule them out for any kind of Fed contender? [00:11:37] Speaker 5: Greg Peters is going to stick with us. Greg, it's good to have you with us. Up next on the program, Kathy Jones and Sabatira Jappa. [00:11:43] Speaker 7: Making money isn't about drowning in emotions. It's about understanding what's actually happening. Markets are the best way to glean signal from noise, and that is what we try to do every morning. This is Bloomberg Surveillance. [00:12:06] Speaker 10: In case you missed it on Daybreak Europe, what does it mean if you're an entry-level coder? How much trouble do you think you're in? [00:12:14] Speaker 11: Everyone in the gauge of AR really have to relearn which tool to use when. And if you are technical, you know how the coding works, you're actually more productive with Lovable. Anyone can learn to be productive talking to the AI, but there's an advantage for technical people. Don't miss Daybreak Europe live every weekday. Okay, ready? [00:12:37] Speaker 12: David, what initially sparked your interest in this topic of longevity? [00:12:41] Speaker 13: 15 years ago, I turned 60, and I began to wonder how much longer I'm likely to live and what I could do to extend my life. On Longevity, I talk with the leading experts in science and medicine to educate people about how they might be able to change their conduct so that they can live a happier and healthier life. I'm David Rubenstein. Join me on a four-part journey as I explore the great quest for longevity. Only on Bloomberg. [00:13:05] Speaker 14: It's a countdown to the market open as we bring you the first trades across Europe. [00:13:14] Speaker 15: We'll debate the most important stories and what will drive the big investment decisions throughout the morning. I'm Guy Johnson. [00:13:20] Speaker 16: I'm Kriti Gupta. And I'm Anna Edwards. Join us every weekday morning for the opening trade, live at 7:00 a.m. here in London. [00:13:28] Speaker 15: Only on Bloomberg. Context changes everything. [00:13:32] Speaker 10: It does look like the Fed will cut. 25 basis points. 125 basis point cuts. If they do 25 bips or if they do even 50, the market should be able to take it. [00:13:51] Speaker 17: The Fed will still probably be looking for two cuts this year. Three cuts this year and more to come next year. [00:13:57] Speaker 18: Somewhere between five and six, 25 basis point cuts out to 20, 26. [00:14:02] Speaker 14: If you continue to see this kind of momentum on the labor market, you know, to get several more cuts in the back half of the year. There are all signs that you'll continue to see that weakness in the labor market data. [00:14:12] Speaker 19: If you look at the trend, it's weakening. In the balance, the Federal Reserve will look at the labor market for now, but they have to keep one eye on inflation. Chair Powell better sound relatively dovish. He's going to provide very limited guidance. [00:14:27] Speaker 5: The decision, 15 minutes away. The consensus view, a move of 25 basis points. Two outliers. Sogjen, Standard Chartered, looking for 50 in about 15 minutes' time. The scores into it look like this on the S&P 500. Not far off all-time highs. We're down a tenth of 1% this afternoon. In the bond market, 2's, 10's and 30's shaping up as follows. Your bond yield curve looks like this. Yields high by four basis points to the front end, 3.54. We have rallied a lot of both the front and the long end over the past six weeks. [00:14:57] Speaker 7: Yeah, and we've seen even a rally in credit. Just to give you a sense of just how much 10-year yields have rallied. They are down from 4.37% as of July 30th, the last Fed meeting. They are now at 4.03%. Just giving you a sense of that momentum. [00:15:13] Speaker 8: A couple days ago, we popped 3.99 in the 10-year. And this morning, we made a dash tour just for a couple of Sanka. But the answer is yield space is moving. Greg Peters is exhausted. Go further out. [00:15:23] Speaker 5: Go to 30's. Only a few weeks back, we're at about 5. Yeah. Come all the way back down towards 4.5%. And the way the curve has evolved through August into September. August, we had a bull steepener. Big rally at the front end. September, it's been completely the opposite. We've had a bull flattener led by the long end. [00:15:39] Speaker 7: And the reason for it has been different depending on the person you've spoken to. Some people say it's because of the threat of yield curve control or some sort of machinations in the balance sheet. Other people saying, look, if you have all these people in cash, you cut rates, well, they want to lock in that yield. So they're going to go out the curve. That's a new argument. And we're hearing it more. [00:15:55] Speaker 5: Joining us now to discuss Kathy Jones of Charles Swap. Greg Peters of PG and fixed income still with us. Kathy, let's start with expectations. What are you expecting in about 13 minutes time? [00:16:05] Speaker 20: Yeah, we're looking for 25, which is the consensus. You know, I guess there's an off chance it'll be 50. But given that inflation is still pretty high, I think it's going to be difficult to have a really aggressive rate cut at this stage of the game, even though the labor market's showing signs of deterioration. You know, an unemployment rate in the low fours is still not that far from what's considered full employment. And then you've got inflation at three-ish and edging higher. I think it's very difficult to make the case for 50 in this environment unless you have a really negative view of where the labor market's going. [00:16:42] Speaker 7: Given that backdrop, Kathy, why do you think there's been such a rally in the long end of the yield curve since the last Fed meeting? [00:16:48] Speaker 20: Well, you know, we've had the rally because, you know, the expectation we've had weak economic data and we have a greater expectation for rate cuts. And so, you know, the market has a lot of rate cuts built into it out to 2027. So the long end's been pulled down by that. But I would point out that the curve is still steep and steepening. We're still looking at a steeper curve as we go forward, even, you know, even if it's somewhat lower rates. I don't know that the long end can kind of get out of its way if we still have inflation pushing higher. And the dynamics behind inflation are still not great. [00:17:31] Speaker 8: Kathy, what's your action plan to put cash to work? I understand we're before the meeting. Let's go after the meeting, but let's take it out to into next year as well. What's the Kathy Jones action plan given Fed chaos? [00:17:45] Speaker 20: Well, we're hoping people aren't too heavily in cash at this stage of the game because we've been encouraging them to be intermediate term on the curve and up in credit quality. And I think that that is still our plan. You know, we'll see how that policy evolves. We'll see how the economy evolves. But we're really looking for a fair amount of volatility going forward. There's a lot of things on the horizon policy wise that can shake up the market. So we don't want to go super long, but we don't want to sit in cash because I think the bias is still to cut rates. [00:18:21] Speaker 5: Greg Peters, let's get to you on some of this. Why are so many people so comfortable just sitting and waiting in the belly of the curve? [00:18:29] Greg Peters: Because there's positive carry, right? Positive carry and roll. It's the bond investors dream. And so you look at just the level yields, the steepness of the curve. It's, you know, it's a very good, you know, environment for just just being in bonds. And I would say that's a global story, just not a U.S. story. So I don't think the bond quote unquote bull market goes away. I think it's a very robust environment for bonds. One point I want to just make, though, just on volatility. Sure. What's really important to watch is the trend in volatility. Typically, what you see as the Fed enters the easing cycle, volatility broadly comes down. It pulls volatility down. So if you actually see vol actually move higher in this rate easing cycle, that could be a sign that there's concerns around, you know, Fed independence, you know, risk around the economy, all these other types of things. So it's something to watch for. It sounds like an arcane part of the market, but it's a really important one to get a view into. Great. [00:19:32] Speaker 7: How crowded is the long bond right now? The shorts were pretty crowded and they got stopped out. And that was probably a significant part of it. At this point, how balanced is positioning? [00:19:43] Greg Peters: Yeah, so positioning is much more balanced. So you're quite right. The move was around positioning, right? I think at the end of the day, we're fitting a narrative to the positioning trade more than anything else. But the positioning side is much cleaner. As a consequence, I think there's room again for the curve to kind of gently re-steepen here. But, you know, positioning has played a part. It will continue to play a part. And so this is, you know, how we invest these days. [00:20:14] Speaker 8: Kathy Jones, are you writing a strategy as a Fed cut, as a one-off, or as a series of rate cuts on the edge of Greenspan? What strategy are you writing right now? [00:20:26] Speaker 20: Yeah, we do think there will be a series of rate cuts. But we're not expecting the cycle, so much as we can tell at this moment in time, to be as deep as the market has priced in. And that's because our view on inflation is that it's going to remain stubborn because of tariffs, because of immigration policy. You know, you name it, there are a number of reasons. And so we're looking at a series of rate cuts, but not as deep as what the market has priced in. Another reason we're being kind of cautious and anticipating volatility is because we think the market's gotten pretty far ahead of where the Fed is likely to go. And then you add in all the uncertainty about who's running policy at the Fed and the future, and, you know, it becomes a stew pot of factors that could cause vol to pick up. [00:21:21] Speaker 5: This is something Brian Moynihan was essentially alluding to earlier on this morning, that in 2026, you could have a sticky inflation story that may constrain that easing by the Federal Reserve. [00:21:31] Speaker 7: Yeah, speaking not only to Brian Moynihan, but all of the people under him and the acceleration you're seeing in consumer spending. And then speaking to Scott Kirby over at United and hearing the same thing, this reacceleration in consumer spending, it doesn't scream some sort of slowdown or recessionary condition. [00:21:46] Speaker 5: They're talking about resilience. We're talking about an equity market near all-time highs, investment-grade credit spreads near multi-decade tides. And yet we're having a conversation about whether this Fed, in seven minutes' time, will cut interest rates by 25 basis points or 50. So, Badra Rajapur of Sogjen is with us now for more. So, Badra, I want to get to you on that, the 50 basis point view. Is that what you and the team are looking for and, ultimately, why? [00:22:10] Speaker 17: So, I think the spirit of the call from our economists is the fact that given the information we have on the job market and the revisions, quite dramatic, the Fed has some catching up to do. So, the idea is that the Fed is going to have to front load some of these cuts between now and the end of the year. So, whether it's a 50 basis point cut at the September meeting and then another 25 basis point cut or a series of 25 basis point cuts, these cuts coming earlier and sooner makes a lot more sense given the fact that we now know that there's a decent amount of weakness in the labor market. You know, that said, I mean, you know, I am sympathetic to the market pricing of cuts, which is calling for, you know, three cuts, but kind of more spread out as opposed to 50 basis points at the September meeting. The data, especially recent data, the retail sales data has been very strong. And outside of the labor market, you know, most of the other data points that we've gotten, ISMs, et cetera, have also been somewhat surprising to the upside. So, given the fact that, you know, the economy is in a relatively good spot, the Fed does have a little bit of luxury in spreading out those cuts. [00:23:22] Speaker 7: Subadra, you're talking about the evening special on Sunday on C-SPAN. We're going to talk about the B-movie, at least as Greg Peters was talking about earlier, the sort of drama in the background. In other words, to put it bluntly, how much does it really matter to you as a bond strategist, what Stephen Myron says, given that he is a new governor and he has the full backing of the president? [00:23:43] Speaker 17: It does matter. I think words do matter. I think the fact that if you, you know, at least optically, when you have maybe three governors dissenting for the first time since the late 80s, I think that that's really going to stand out. And what would be interesting is if you actually have dissents on the hawkish side. And that will really make the meeting very colorful. I mean, if I could, I'd love to be a fly on the wall in these discussions over the last couple of days. But again, I think that these these statements and sentiments do carry value. I think broadly speaking, I think that's what the market's trying to suss out as well, because if you look into the end of next year, you're looking at, you know, pretty decent amount of cuts being priced in. So the market is assigning a higher probability for a much more dovish, you know, Fed committee, FOMC committee next year. [00:24:33] Speaker 8: So, Bhadra, Societe Generale is a Paris bank in a nation in a complete total uproar. We all know the French story, the politics in all. This Fed meeting is invaded by politics. Does Jerome Powell have to speak to the non-financial America out there? [00:24:50] Speaker 17: Yeah, he always does. I think that the messaging has always been very clear and simple. They do look at policy for all Americans, all sectors of the economy. They are going to take into account that there are certain sectors of the economy that are particularly coming under, you know, pressure, especially if you look at, you know, the employment side of the picture. We still have haves and have-nots economy. So Powell, I think, is going to be very, very focused on trying to keep basically all constituents of the economy in mind while changing policy. And that's part of the reason why I think it makes sense for them to front-load cuts, you know, this year. [00:25:29] Speaker 7: Kathy, four minutes, less than four minutes until we get that decision. If you were in the press conference, what would your one question be to Fed Chair Jay Powell if you had one? [00:25:40] Speaker 20: Well, I'm going to assume that whoever went before me asked about squaring up the, you know, the dual mandate with the rate cut. And I would go on to ask a bit more about the concept of maturity matching on the balance sheet. This is something Governor Waller has talked about. And I think Stephen Myron might embrace as well. And I think that that has some implications longer term for how the Fed proceeds and how the market develops. [00:26:12] Speaker 5: So I would definitely ask that question if I had the chance. Balance sheet management, Bremo, keeps coming up, doesn't it? Yield curve control. Right. [00:26:21] Speaker 7: All of these things, these questions keep coming up. Yield curve control under another name. I mean, if people start tuning out and they hear, you know, tweaking the balance sheet and maturity matching, that is another way of factor yield curve control that a lot of people are trying to understand. [00:26:35] Speaker 5: Kathy Jones of Charles Schwab, Sybantra Japper of SocGen, to the both of you, thank you. That decision is about two minutes and 30 seconds away. We've talked about this three-part act. We've got a statement, the forecast, the news conference. Let's just sit on the forecast. The Federal Reserve has to project and forecast, not payrolls, but unemployment. And going into this, I wonder if we're going to be surprised more by how much the SEP changes or by how much the SEP actually remains the same. How much can these forecasts around things like unemployment for inflation actually change? And that's what's interesting about the moment. Typically, when the Fed is projecting more interest rate cuts, you'd expect a big downgrade to growth. You'd also expect an upgrade to unemployment. [00:27:14] Speaker 7: We might not get that in two minutes' time. Especially given the fact that we're at a pretty neutral pace, just taking a look at where we were. The projection was for 4.5% at the end of this year in terms of an unemployment rate and a 3.1% core PCE. It wasn't expected to shift that much on either front over the following couple of years. [00:27:33] Speaker 8: John, I think what you bring up is a really, really important point. What confidence do we have in our guesses out to June of next year, December? And Lizanne Saunders had the map of the day. It was household insurance across America. Let me tell you, half of America is flat on their back with fixed costs surging. [00:27:54] Speaker 5: This is the question, I think, for the committee today and for the news conference, too, for Chairman Powell. And there was a key difference between how he addressed this question in July and how he's thinking about it over at Jackson Hole in August. What is anchoring your view on the labor market right now? Is it the unemployment rate? Is it measures of slack? Or is it payrolls growth? Because the Chairman Powell of July was very different to the Chairman Powell of August. [00:28:15] Speaker 7: Who said that it was really important back in July to look at the unemployment rate and then the payrolls headline figure. The problem is, right now, people really dispute the idea that we have the same kind of labor market that requires the 150, 200,000 jobs created per month. And that this is more of a 50,000 a month kind of break even rate that we should be looking at. [00:28:35] Speaker 5: Do you get lulled into a bigger conversation, a bigger decision than you otherwise would have made? And that's something that this Federal Reserve has to confront today and for the next several months. That decision is 20 seconds away. The question is not if they'll cut interest rates. The question is, by how much? 25 or 50? And how much can you project in the guidance, the forecast? The equities going into it just about unchanged on the S&P 500. In the bond market, twos, tens, thirties look like this. Your two-year bond yield up by three basis points with your Fed decision. Here is Mike McKee. [00:29:08] Speaker 21: The answer to your question, John, is a quarter percentage point cut as expected. But Fed officials also see two more cuts this year in October and December, according to the new dot plot. There was one dissent, and that is from Stephen Myron, the Trump representative on the board, who wanted no cuts this time. He wanted rather two cuts this time, 50 basis points. Next year, the committee sees only one cut so far, but the dispersion is very wide. And the very bottom dot for next year is at 2.75 percent, suggesting once again that is Stephen Myron. The committee sees that they are attentive to the risks of both sides of their mandate, but they say the risks to the downside for unemployment have increased. And that's the reason that they are cutting rates today. They also adjust the forward guidance in the statement to drop the word extent and just say in considering additional changes to the target range in the future, they will consider all kinds of options. There is no real change to their economic forecasts, but we don't know exactly why that is, whether it's because Myron contributed different numbers than others or Anna Paulson, the new Philadelphia Fed president contributed different numbers than others. But the growth rate is marked up for this year to 1.6 percent from 1.4 percent. And the unemployment rate is unchanged at 4.5 percent. PCE inflation at 3 percent is unchanged from their July forecast and core PCE inflation unchanged at 3.1 percent. There's no change overall to the balance sheet. And once again, there was one dissent, Stephen Myron, the new member of the board from the Trump administration. The rest of the board, including Mickey Bowman and Chris Waller, satisfied with moving the rate down to the range of 4 to 4.25 percent. [00:31:06] Speaker 5: Mike McKee, thank you, sir. Stay close. We'll take some time to internalize what we've just heard from the Federal Reserve. A lot of information. Equities off the back of it, still just about positive by a tenth of 1 percent. In the bond market, yields just a little bit lower at the front end of the curve, down by two basis points on twos to 3.48. In foreign exchange, some euro strength, some dollar weakness. We approach 1.19 on euro dollar, which is its own story, which we'll get to later, 1.18.84. I want to do a couple of things. Let's take the forecast and just focus on 2025 and 2026. And I just want to focus on where the projections were in June and where they are now and just go through this piece by piece. For GDP compared to June, that's an upgrade for this year and for next year. For the median dot, we've gone from 3.9 in June down to 3.6 for now. So we're looking for another two cuts. For next year, we've come down from 3.6 to 3.4. And PCE has remained pretty stable, I've got to say, for this year. For next year, they're looking at around 2.6 percent, up from 2.4. So just get into this a little bit more. What an odd decision we've got here, Brammo. That this Federal Reserve, and you don't usually see this, has cut interest rates by 25 basis points, has increased by just one interest rate cut relative to where we were in June for this year. At the same time, they've upgraded growth, kept unemployment basically unchanged, and basically projecting CPI to be sticky and close to 3 percent. [00:32:28] Speaker 7: And saying in their statement that inflation has moved up and remains somewhat elevated, as their SEP, their Statement of Economic Projection suggests. So then why is the bond market rallying? Why are yields down even at the long end, if this is basically the projection that inflation will remain high and they will cut into that inflation? And what this hints at, and this I think is really going to be interesting, is this clear desire by the Federal Reserve to overweight the economy, even allowing inflation to run hot. And they will keep cutting despite that inflation. That is what is getting translated into this market. [00:33:05] Speaker 5: I want to cross back over to Mike McKee if he's still with us and hasn't run off to the news conference just yet. Is Mike there good? Mike, I want to come back to you. How original is to see this, to see a rate cut, to see the projection of more to come, at the same time all these other things are happening with the forecast? How can you explain that? [00:33:21] Speaker 21: Well, I think there's two possibilities, and they both center around the new members on the board, Anna Paulson from the Philadelphia Fed, and most probably Stephen Myron. When you look at the range of the forecasts for GDP, they moved up the bottom range and the top range. And the same is true with the unemployment rate. It didn't move at all, but inflation didn't move. And it seems that Myron probably put in stronger growth, lower unemployment, and at least unchanged or lower inflation going forward. And that probably accounts for the changes in the forecast. What's really interesting is the wide dispersion in 2026 dots. There's clearly no consensus yet on how many rate cuts they're going to want to see, except Mr. Myron thinks rates will go down to the 2.5% to 2% range. [00:34:11] Speaker 5: Mike, I know you've got to run, but when you go into that news conference, you start to think about questions already. What do you want to know from Chairman Powell? [00:34:18] Speaker 21: Well, I think you guys were phrasing it well there in your reaction. If inflation isn't going down, then why are you cutting rates is sort of a basic fundamental question here. [00:34:30] Speaker 5: Mike McKee, with the latest, you get ahead to that news conference. It starts in about 25 minutes time. So we got 25. The Federal Reserve ultimately met the market for 2025. 2026 is a little bit more interesting because this market, Brammo, as you know, is much more aggressive on rate cuts for next year than this Federal Reserve based on the median dot in the Federal Reserve's projection. Because as Mike McKee just indicated, the dispersion, which is something you talked about, the spread of the dots for next year is incredibly wide. [00:34:59] Speaker 7: And it makes one wonder if a certain dot has a greater weight than other dots, given the fact that the market is moving on the idea of more cuts, even though some of the other dots suggested only two cuts this year and relatively few next year. And the Statement of Economic Projections talks about a Fed funds rate that ends next year well above 3 percent. We are now below that in the futures markets. [00:35:22] Speaker 8: Something you're interesting, you've got a median, you've got a central tendency, you've got a home on the range and all that. Guess what? There's not a median statistic here above 2 percent. Is sub 2 percent economic growth politically acceptable coming up on an election in 2026? I don't think so. [00:35:39] Speaker 5: The answer to that is no. No, this is edge of Europe is what I'm looking at here. So your point, TK, which is why this administration would like this Federal Reserve to be a lot more aggressive than these dots would imply. [00:35:50] Speaker 7: Which is the reason why the market is hearing exactly what you're pointing out, that that is not an acceptable kind of reality. And that's why I think it'll be very interesting to see how Fed Chair Powell really gets behind this. [00:36:01] Speaker 5: Greg Peters, you're following the story as it evolves. What's your initial takeaway? [00:36:05] Greg Peters: Yeah, so the initial takeaway is definitely prioritizing growth. I'm not surprised that, you know, Myron was, you know, far afield. I am surprised by only one descent, though. I think most people thought, myself included, you'd have three. But I think the question that we're not asking is inflation itself. So it's embedded in that forecast. Is it still a, I'm sorry to say, transitory inflation component driven by tariffs that roll off over time? And so if indeed that is factoring in to the Fed, you know, forward thinking, then that does mean there's more room for cuts because they're not as worried about that inflation component. So I would just be hesitant to look at the inflation number in abstract. I think what's driving it underneath is the key. [00:36:56] Speaker 5: To your point, there is a very clean, dare I say, convenient glide path back down to 2% in the forecast from 3-1 to this year, 2-6 for next, 2-1 after that, down to 2 for core PCE. [00:37:07] Speaker 7: Yeah, there's a big rebuttal on that, and that is in the dollar. And you mentioned this earlier, and the idea that long-term bonds yields are falling. You're seeing a rally across the board in everything but the dollar, which just hit the lowest levels going back for the entirety of this year. That is speaking volumes about exactly what you just pointed to. [00:37:25] Speaker 5: We just took out 119 on euro dollar. Let's head over to Europe and catch up with Bob Michael at JP Morgan in the heart of foreign exchange in the city of London. Bob, great to get your thoughts. You've had about eight minutes to go over this one. What jumps out to you, sir? [00:37:38] Speaker 22: A couple things jump out. Greg's right. One descent was surprising. We certainly thought there would be three pushing for 50 basis point rate cuts and possibly two suggesting nothing. And then also the fact that two rate cuts were pulled forward into this year. We thought there would just be one more for this year, so more or less where we were last time. It tells me that this is a Fed that locked arms, felt this was time to reduce policy from what was surprisingly restrictive to them. They were probably shaken by the labor market revisions and thought, wow, we've kept policy a lot more restrictive than we thought. Let's start getting to neutral and let's do it in unified fashion. I think this is good for the markets. [00:38:26] Speaker 7: Bob, good for the markets. Let's talk about which ones. It might be good for risk assets. How much can this keep being supportive for long term bonds given that theoretically higher inflation would come on the heels of a prioritization of growth? And typically higher inflation is bad for long term bonds. [00:38:45] Speaker 22: Well, I wonder if the indication of higher inflation is just a suggestion to us not to expect 50 basis point rate cuts in here, but 25 perhaps every meeting for the next few meetings. Maybe they don't get down to 3% right away. They pause somewhere around three and a half either side of that. I get that. I'm sort of with the Fed. We don't really know the shape of inflation until we see the final shape of tariffs. Right now, the evidence is pretty good. Businesses have absorbed some of it and the consumer hasn't really pushed back all that much. And there's been signs of disinflation. So I'm not that concerned about inflation. [00:39:26] Speaker 8: Bob, your colleague Michael Ferroli made global headlines a long time ago talking about a sub 2% potential GDP. Without COVID, try stimulus and all the rest in the legislation. These median growth estimates today. Do we have to get used to this sub 2% real GDP? [00:39:46] Speaker 22: It doesn't feel like we're going to have to get used to it. It feels like we live in a world where policy will be generous on the accommodative side, both fiscal and monetary. We're looking at dots now, but we also haven't weighed in. Forget about tariffs. The One Big Beautiful Bill Act, that starts to hit in earnest in the first quarter. So I wouldn't be surprised to see GDP estimates go up next year. [00:40:12] Speaker 5: For those of you just tuning in about 10 minutes ago, 11 minutes ago, the Federal Reserve made the decision to cut interest rates by 25 basis points. There was one dissent, an individual looking for a 50 basis point cut. That was the newly minted Governor Myron sent over from the White House. Does he have a business card yet? I want to get to something, TK. Check this out. Go to the dot plot and the projections. And if you go to the dot plot and you look at 2025, there is a very lonely dot at the very bottom of the screen. And it's sub 3%, not for next year, but for this year. There is a dot there just below 3% for 2025. Now, we're all asking. And of course, when you follow those things, there are no names on the dots. You don't know who they belong to. But I think we've got a pretty good idea who this might have come from. We've been asking how aggressive Governor Myron might be. The dissent is one story. The push for a whole lot more for the year ahead. [00:41:02] Speaker 7: You mean 125 basis points of rate cuts by the end of this year seems a little bit aggressive. Look, to me, that is notable. And it might be exceptional for people to hear that and absurd if you think about the growth in the economy. And yet, how much is the market trading off this? And I wonder, how much does this have disproportionate weight in the market? Because this is someone who really is coming with the backing of the president and could be some sort of signification of who he might pick next year. [00:41:28] Speaker 5: I can see this picture at the corner of my eyes. So let's take this picture. And for our audience at home, I'm just going to articulate what we see on the screen right now. So you've got this lonely dot for 2025. And then in 2026, you've got this additional story to think about. This massive spread in expectations from individual policymakers of the Federal Reserve. Lisa, they have got absolutely no idea what 26 brings, what 27 brings. This is a low conviction Federal Reserve. And you've got to bear that in mind when you go into this news conference. These guys are not gods. They haven't got crystal balls. They are clueless going into next year. We're all clueless. [00:42:04] Speaker 7: And when we were speaking today to some of the heads of retail banking, what we have seen is retailers themselves don't know how much they can pass along inflation, how much there will be this elasticity in terms of demand. [00:42:16] Speaker 8: Greg Peters is not clueless. I'm looking at the Bloomberg Total Return Corporate Index, and it is a miracle price up and yield down. Do you predict that we will see these acclaimed indices, Lehman, Barclays, et cetera, now the Bloomberg Total Return Index, they're going to break through and go through the highs of pre-COVID. I mean, we can have a new low yield regime that we just didn't think would occur. I don't think so. [00:42:42] Greg Peters: I think that's heroic. I think the world has changed post-COVID. I think the environment of zero interest rates, negative interest rates will continue to be looked back on as a bad idea. That drove those rates to those levels. So I don't think so. [00:42:59] Speaker 8: But can we go on the edge of Myron? I guess that's the question. Can we find that dot? [00:43:02] Greg Peters: I don't think you can get there without a recession, honestly. And I think it's important to remember, the starting place is above neutral, right? So we're not even at the top of neutral yet. Yeah. So, you know, the Fed still has room. They still can get to 4% and, you know, they're neutral, right? And so we have a long way to go. As you get much lower, though, that's where things become really quite accommodative. And I think that's a different question. So I think we're all kind of hot and bothered by this move. But the truth of the matter is, we're not in neutral territory yet. [00:43:39] Speaker 5: In some ways, this was the easy decision. And every decision after this gets a little bit harder. In equities right now this afternoon, equities rolling over on the S&P 500. So negative now by about a quarter of 1%. Check out the Russell by 1.24%. The rally for small caps continues. Bond yield is still a little bit lower at the front end, lower at the long end. Thirties are down by three basis points. Twos are down by almost two basis points. We've got Bob Michael and JP Morgan still with us. But I want to come back to you. You've just heard from the Federal Reserve. And I don't know what we get in the news conference, but let's just go with what they've told us so far. They're telling us we can upgrade growth, not bring down the projections for inflation, and ultimately offer you more rate cuts. How bullish does that make you as a bond investor? [00:44:21] Speaker 22: Aren't they magical? It's all dependent on their policy. If they bring rates down to where they say they're going, they think they are going to cause greater growth and maintain stable inflation. Look, I think there are so many policies in flux on the fiscal side that we don't know yet. I think what we do know is that the labor market was starting to struggle by a greater degree than we all had thought. And we saw that revision and went, ah, and it's time to start relieving some of the pressure on corporate America now. [00:44:56] Speaker 8: John, it's 216. We've yet to mention tariffs. I find that extraordinary. [00:45:01] Speaker 5: So I'm pleased you brought this up, TK, because I think still a lot of people are talking about the tariffs of April as an event and not a process. And I think it's far more important to be open minded about the process and the potential of pass through still to come. We know based on the data so far that we aren't seeing the exporters drop prices aggressively. You can see that in import prices. We know based on the data so far that a lot of companies domestically are absorbing this on margin. Right. What we don't know is whether they pass on those costs in the next several months and change this inflation picture entirely. [00:45:33] Speaker 8: Exactly. We know the Excel spreadsheet from the Fed here and the sub two percent growth. My question is, are we seeing a decline in purchasing power? And that's why you see, you know, the curve coming down and yields coming down right now. [00:45:45] Speaker 5: I think what we've seen, Tom, without a doubt, is that we've seen a massive step down in payrolls growth. Yeah. That has clearly spooked some members of this Federal Reserve. But Lisa, I think it's key to point out, not all members of this Federal Reserve. There's some members of this Fed will still be anchoring their labor market view around what's happening with unemployment, which has been pretty stable through all of this, through the whole of this summer. And look at the forecast from the Fed. They're still forecasting pretty stable unemployment around four and a half percent. [00:46:10] Speaker 7: Yeah, which is the dispersion going back to that is the reason why I'm struggling to interpret the move in markets right now. Because is the market taking their guidance on Myron or on the idea that there are Fed officials who are pushing back and saying, actually, we need to be tighter? Right now, is this a trial balloon for what it would be if there was a Fed that was being more aggressive? Or are we not there yet? I mean, that, I think, is going to be a tell in terms of, does the bond market behave if it believes that a Fed is willing to really prioritize growth in a significant way over inflation? [00:46:41] Speaker 5: Hey, Bob, going to catch up, as always. Bob Michael there of JPMorgan. Lisa, let's turn to Diane Swonk of KPMG. She's standing by. Diane, welcome to the program. So much the process here going into this news conference in about 12 minutes' time. What's your number one issue going into the presser? [00:46:55] Speaker 23: Well, first of all, it's really clear that Powell corralled the cats. And I assume that Waller and Bowman did not dissent in part because of the strong retail sales data, which also revealed inequality and something else that's going on out there. And that is that spending on restaurants went up after adjusting for inflation. The spending at grocery stores actually fell after adjusting for inflation and the retail sales numbers. And so you've got this sort of, you know, the K-shaped economy we keep talking about, the bifurcation, but that masking the underlying weakness in lower- and middle-income households. So this was clearly an acknowledgment that, yes, the labor market has weakened and they want to shore up the labor market. What surprised me as well was that we had heard the Fed talk about a reduction in what they thought the neutral rate was. Powell had referred to that, that there had been some discussion about that in previous meetings. That did not show up in the forecast. And I think that's important as well because they're removing restriction now. It's not just calibrating down because the neutral rate has moved down. They're trying to say, listen, we're removing some restriction, acknowledging the weakness in the labor market, want to shore up the labor market. But if you really do read this sort of through to next year with a major change in leadership at the Fed, you could have a situation where you overstimulate and get in more pernicious and self-fulfilling prophecy on the fact that consumers and firms now expect inflation to be higher. And I think what the Fed is struggling with is that consumers are also telling them in their own surveys that the job market is the worst it's been on record since 2013. That's something that has got to have startled the Fed as well. [00:48:44] Speaker 7: Diane, this is without a doubt a very confusing economic time. It's also a very confusing time when it comes to the Fed's reaction function. Do you have a clear sense of how the Fed is going to prioritize incoming data, whether it's retail sales or jobless claims or whether it's the payrolls report, and decide how much to ease? [00:49:05] Speaker 23: It's really hard. This is, you know, it's one thing for the Fed to forecast the stagflationary mild bout of stagflation that they did since March. That's gotten more stagflationary over time. That was hard to forecast. It's another thing to live it in real time. And that's what we're doing. And, unfortunately, it is very hard to not -- you have to shore up the labor market a bit. That said, you don't want to remove so much accommodation that you allow these waves, as we heard earlier, I mean, the idea that these are an uneven rollout of tariffs. So it's not just one and done. And Powell was careful in his Jackson Hole remarks on that, too. It's not all at once. It's coming in waves. That reinforces the idea that we're going to normalize inflation, which becomes its own self-fulfilling prophecy. And the Fed really has to be quite cognizant of that. [00:49:59] Speaker 8: And, Diane, you own the study of Michigan, Chicago, and down south on the Mississippi River. The mail I get is people are flat on their back in this K-shaped economy. How does Jerome Powell address the have-nots of America? They don't have AI. They didn't buy NVIDIA like John three years ago. What do we do with the people that aren't participating in the system? [00:50:21] Speaker 23: Well, it's actually -- it's really -- the inequality is getting worse. We know that. Actually, Moody's just came out with an updated estimate on some of the inequality. And, you know, the top 3.3% of households are really doing really, really well. The top 20%, a little bit better in terms of gaining spending since '21 relative to inflation. The rest of the economy, the bottom 80%, pretty much flatlining it since after adjusting for inflation on their spending patterns. That's a really tough position to be in. And it gets to the heart of what we're still dealing with is the embers of the pandemic inflation. We're still smoldering when you added on the tariff-induced increases in prices. And that's what's really tough for the Fed to deal with and for the average American. Because remember, even when the labor market was much more robust, when inflation flared, the majority of Americans believed we were in a recession because their purchasing power was eroding and they were losing ground. And I think that's very important because it really gets to the corrosive nature of inflation. And at the end of the day, you cannot get full employment sustained unless you really derail inflation. What we don't know is if this will just be a couple steps up and then just come off or if it will be more persistent. And that's what he's going to have to emphasize at the press conference today is that they're going to be mindful to watch what's coming on in terms of how persistent the inflation becomes and how much inflation expectations to get jargony get unmoored. NVIDIA. [00:52:06] Speaker 5: That's my biggest position, TK, at Hindsight Capital. [00:52:09] Speaker 23: You killed it. [00:52:10] Speaker 5: I wish. You just killed it. Diane Swank of KPMG. Diane, thank you. Appreciate it. Matt Lozelli of Deutsche Bank standing by. Matt, welcome to the program. What an interesting forecast mix. More rate cuts in our future. Growth apparently OK. Unemployment not a problem. Explain that one, Matt. [00:52:26] Speaker 24: Yes, I think for the near term, it's pretty clear. They talked about increased downside risk to the labor market. And so this is all about risk management. It's not about modal forecasts at all. As you noted, growth is stronger. The unemployment rate unchanged for this year. Inflation unchanged for this year. You can see at the back of the FCP, their forecast, there was a little bit of a shift in the distribution of risks. There's officials that are more worried about downside risk to the labor market. Less officials that are more worried about upside risk to inflation. It's basically in line with what we were anticipating. The Fed shifting in a little bit more dovish direction today. Close call on the two versus three dots. I think the key question for Chair Powell is how much does he lean into the near-term signal of cutting out each meeting this year? [00:53:08] Speaker 7: Do you get a sense, Matt, of how much the reaction function has shifted? John's done a really great job of talking about how from July to August, there seemed to be a shift from the unemployment rate to the headlines, payrolls report. Do you have a sense of just how tolerant this Fed is going to be of inflation well above 2% for years on end and keep cutting? [00:53:30] Speaker 24: Look, I think they're showing us that they're pretty tolerant of above target inflation. In fact, if you look at their forecast for next year, they actually raised their inflation forecast by two-tenths. They raised their growth forecast. They lowered their unemployment rate forecast. And yet we see a lower Fed funds rate. I think the reality is we are now projecting at five-plus years of inflation being at least 50 basis points above their target. And yet they are cutting rates into that environment. So I think it's a Fed where, you know, as long as there are no worries about the labor market, they can be hyper-focused on inflation. But once some of those concerns about the labor market really manifest, you see a pretty dovish shift. And I think that's what we saw from Chair Powell at Jackson Hole, and we're seeing it manifested now through the dot plot. [00:54:10] Speaker 8: Matt Lazotti, Diane Swank brought it up and many others have as well. We're all focused on tariffs and substitution. Are we seeing a decline in purchasing power here? Is there an income effect from tariffs that the Fed has to fold in? And what is this, John, 50 more beeps they're going to do by the end of the year? Potentially, yeah. Widespread of estimates, though, TK. [00:54:28] Speaker 5: By the next time the Tots win one of them, I don't know. 125. TK, Spurs are doing all right? [00:54:32] Speaker 8: Yeah, they are. They're doing all right. Matt, purchasing power here. This is a huge issue for Americans, isn't it? [00:54:38] Speaker 24: It is, no doubt. But I think the main area where you would first see that is through consumer spending data. And I take Diane's point and the points earlier that there's great dispersion around that data, with that being driven by higher income households. At the same time, GDP growth is tracking above 3% in Q3. It was above 3% in Q2. Retail sales are robust. CapEx growth was strong. So I think it's a Fed where even if you are seeing it eat into disposable income growth, consumer spending growth in the aggregate is strong. And monetary policy has one blunt tool, which is the Fed funds rate. So really, they're not apt or really able to get at a lot of those distributional issues. I think Chair Powell and the Fed would probably tell you that that is more up to fiscal policy, tax and spending policies that we would see from the administration. So I don't think that this is really about trying to alleviate some of those distributional concerns. I think it's concerns about the aggregate labor market, which is not being manifested in strong growth at this point in time. And then just trying to get ahead of it and taking out some insurance against that. [00:55:45] Speaker 5: Matt Lazzelli, appreciate it. One of the best, Matt. Thank you, sir. Matt Lazzelli there of Deutsche Bank. The news conference a few minutes away. We often hear people come on the program and say, I expect it to be dovish. And really, the response to that should always be dovish to what? Relevant to what? Relative to who and what and where? Relative to the market, this isn't dovish. Of course, we were looking for really bullish expectation for rate cuts in the next 12 months or so. But it's their own forecasts that make this dovish. The fact that the Federal Reserve is coming out and telling you, you know what, Lisa, next year, I expect a better picture for growth. I expect a slightly higher inflation print than we did a few months ago. But you know what? I give you some rate cuts to the mix as well. That's basically what the Federal Reserve has communicated in these forecasts today. Yeah. [00:56:26] Speaker 7: The currency markets are hearing that loud and clear. And I think that that is the biggest tell. And I keep going back to that with the Bloomberg dollar spot index now at a new post 2022 low. We have seen it completely weakened fall versus some of its counterparts. Why? Because of this prioritization of growth over inflation by the FOMC and a reiteration of that in this SEP. [00:56:48] Speaker 8: Greg, I've got to ask you a basic question. You've been doing this for a few years. When you read sell side literature right now, economic think tank literature, can you trust the forecasts? [00:56:59] Greg Peters: Well, yes. I mean, I think forecasts are always fraught. The dot plot is no different than a sell stock forecast. It's not like they come with any additional information. But I think in this particular period when there's so much going on, and I hate the word uncertainty, but it is the right word. I mean, you know, we've been talking about tariffs as an example. We have a Supreme Court decision coming. We don't know what the shape of tariffs is going to look like after that, just as one example. So it's a really difficult environment. So you should expect to see more dispersion. What the markets are trying to suss out, what I'm trying to suss out is what's real and what's political. And I think that's an open question, and time will tell on that front. Is the political real? Well, the political is driving the real. [00:57:45] Speaker 5: They're going to be the same thing next year, aren't they? [00:57:47] Greg Peters: Yeah. No, no, absolutely. And I think this is the world or this is the investment realm that we have to deal with. And so it's not going to change anytime soon. But this was an incredibly dovish set and dot plot. [00:58:02] Speaker 5: And, you know, the markets are responding in kind. We don't know for sure who's that dot, who that dot actually belongs to at the Federal Reserve. You can have a decent guess. [00:58:10] Speaker 25: Come on. [00:58:11] Speaker 5: Sure. They're not going to tell us. But here's my point. I bet you $10. It would be a mistake, I think, to say that's Governor Myron. It does not matter. Isn't that a hint, a flavor of what could be coming further down the line? In 2026, isn't that ultimately what the Fed share dot could look like in the next 12 months? [00:58:31] Speaker 7: This is the reason why I do believe, based on the market activity, people are putting a disproportional amount of weight on that dot and on the view, on the descent, because it is a flavor of who that new Fed chair could be. [00:58:43] Speaker 8: We're close to Powell coming out as quick as I can. The markets will police the politicians in Washington. [00:58:49] Speaker 5: TK, you say that. Look at what this Fed's just done. It's revised higher its inflation forecast and just cut rates. [00:58:56] Speaker 8: But we are, as he correctly said, Greg said, we're above the neutral rates substantially. They got wiggle room here. [00:59:01] Speaker 5: I agree with that. This decision is the easier decision. Without a doubt, we're on the same page on that front. But if anything, you can talk about this Federal Reserve falling into the hands of political actors. This Federal Reserve hasn't hit its inflation mark for years. That's led by the chairman of the Federal Reserve, Jay Powell, who stepped into the room. Let's take a listen to the chairman of the Federal Reserve. [00:59:22] Speaker ?: Good afternoon. [00:59:23] Speaker 26: My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. While the unemployment rate remains low, it has edged up. Job gains have slowed, and downside risks to employment have risen. At the same time, inflation has risen recently and remains somewhat elevated. In support of our goals and in light of the shift in the balance of risks, today the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point. We also decided to continue to reduce our securities holdings. I'll have more to say about monetary policy after briefly reviewing economic developments. Recent indicators suggest that growth of economic activity has moderated. GDP growth – GDP rose at a pace of around 1.5 percent in the first half of the year, down from 2.5 percent last year. The moderation in growth largely reflects a slowdown in consumer spending. In contrast, business investment in equipment and intangibles has picked up from last year's pace. Activity in the housing sector remains weak. In our summary of economic projections, the median participant projects GDP to rise 1.6 percent this year and 1.8 percent next year, a touch stronger than projected in June. In the labor market, the unemployment rate edged up to 4.3 percent in August, the unemployment rate has increased. As a result, the unemployment rate has decreased in August, but remains little changed over the past year at a relatively low level. Payroll job gains have slowed significantly to a pace of just 29,000 per month over the past three months. A good part of the slowing likely reflects a decline in the growth of the labor force due to lower immigration and lower labor force participation. Even so, labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant. In addition, wage growth has continued to moderate while still outpacing inflation. Overall, the marked slowing in both the supply of and demand for workers is unusual. In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have arisen. In our SEP, the median projection for the unemployment rate is 4.5 percent at the end of this year and edges down thereafter. Inflation has eased significantly from its highs in mid-2022, but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the Consumer Price Index and other data indicate that total PCE prices rose 2.7 percent over the 12 months ending in August, and that, excluding the volatile food and energy categories, core PCE prices rose 2.9 percent. These readings are higher than earlier in the year, as inflation for goods has picked up. In contrast, disinflation appears to be continuing for services. Near-term measures of inflation expectations have moved up on balance over the course of this year on news about tariffs, as reflected in both market- and survey-based measures. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with the interest of inflation. The median projection in the SEP for total PCE inflation is 3.0 percent this year and falls to 2.6 percent in 2026 and to 2.1 percent in 2027. Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. At today's meeting, the committee decided to lower the target range for the federal funds rate by a quarter percentage point to 4 to 4.25 percent, and to continue reducing the size of our balance sheet. Changes to government policies continue to evolve, and their effects on the economy remain uncertain. Higher tariffs have begun to push up prices in some categories of goods, but their overall effects on economic activity and inflation remain to be seen. A reasonable base case is that the effects on inflation will be relatively short-lived, a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed. Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem. In the near term, risks to inflation are tilted to the upside and risks to employment to the downside, a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. With downside risks to employment having increased, the balance of risks has shifted. Accordingly, we judge it appropriate at this meeting to take another step toward a more neutral policy stance. With today's decision, we remain well-positioned to respond in a timely way to potential economic developments. We will continue to determine the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks. In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate, based on what each participant judges to be the most likely scenario for the economy. The median participant projects that the appropriate level of the federal funds rate will be 3.6 percent at the end of this year, 3.4 percent at the end of 2026, and 3.1 percent at the end of 2027. This path is one-quarter percentage point lower than projected in June. As is always the case, these individual forecasts are subject to uncertainty, and they're not a committee plan or decision. Policy is not on a preset course. The Fed has been assigned two goals for monetary policy: maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission, and we at the Fed will do everything we can to achieve our maximum employment and price stability goals. Thank you. I look forward to our discussion. Chris. [01:06:22] Speaker 18: Great. Thank you. Chris Frugeber at Associated Press. As you know, Fed Governor Stephen Myron has continued, kept his position at the White House, even as he's joined the Fed board. This is the first time, I believe, the Fed's board has had someone with executive branch ties in decades. Does this compromise the Fed's independence from day-to-day politics, and relatedly, how can you maintain the public's perception the Fed is politically independent with this dynamic? Thank you. [01:06:54] Speaker 26: So, we did welcome a new committee member today, as we always do, and the committee remains united in pursuing our dual mandate goals. We're strongly committed to maintaining our independence, and beyond that, I really don't have anything to share. [01:07:10] Speaker 18: Okay. And then, just as a quick follow-up, I'm sorry. You and other Fed officials have spoken extensively about the impact of tariffs on inflation. Although, perhaps, with many companies appearing to eat the tariffs, tariffs may be impacting the labor market and other parts of the economy instead. Do you see that as a possible outcome here, that tariffs are the reason we're seeing some slowing, particularly in the labor market, rather than in inflation? Thank you. [01:07:36] Speaker 26: You know, it's certainly possible. You know, we're-we're beginning to see-we have begun to see goods prices showing through into higher inflation, and actually, the increase in goods prices accounts for most of the increase in inflation, or perhaps all of the increase in inflation, over the course of this year. Those are not very large effects at this point, and we do expect them to-to continue to build over the course of the rest of the year and into next year. And, you know, it's also possible that there may be effects on unemployment, but I would say if you're looking at why employment is doing what it's doing, that's much more about the change in immigration. So the supply of workers has obviously come way down. There's very little growth, if any, in the supply of workers. And at the same time, demand for workers has also come down quite sharply, and to the point where we see what I've called a curious balance. You know, typically when we say things are in balance, that sounds good, but in this case, the balance is because both supply and demand have come down quite sharply. Now demand coming down a little more sharply because we see-we now see the unemployment rate edging up. [01:08:47] Speaker ?: Thank you. [01:08:48] Speaker 23: Thank you. Nick. [01:08:52] Speaker 27: Nick Timorosso, The Wall Street Journal. Chair Powell, do economic conditions and the balance of risks no longer warrant a restrictive policy setting? [01:09:02] Speaker 26: So I don't think we can say-we can say that. What we can say is this: that over the course of this year, we've kept our policy at a restrictive level, and people have different views, but a clearly restrictive level, I would say. So-and we were able to do that over the course of this year because the labor market was in very solid condition with strong job creation and all those things. I think if you start-go back to April and now look at the revised job creation numbers for-for May, June, July, and August, you can kind of-I can no longer say that. So what that means is that the risks which-the risks were clearly tilted toward inflation. I would say they're moving toward-toward equality. Maybe they're not quite out of equality. We don't need to know that. But we got-we do know that they've moved meaningfully toward greater equality, the risks between the two goals. And that suggests that we should be moving in the direction of neutral. And that's what we did today. [01:09:56] Speaker 27: Under what circumstances would a larger than 25 basis points rate cut be warranted? And how seriously was that option entertained at your meeting this week? [01:10:07] Speaker 26: There wasn't widespread support at all for a 50 basis point cut today. You know, I think we've done-we've done very large rate hikes and very large rate cuts in the last five years, and you tend to do those at a time when-when you feel that policy is out of place and needs to move quickly to a new place. That's not at all what-what I feel certainly now. I feel like our policy has been doing the right thing so far this year. I think we were right to wait and see how tariffs and inflation and the labor market evolved. I think we're now reacting to, you know, to the much lower level of job creation and other evidence of softening in the labor market and saying, well, those risks are maybe-maybe not fully balanced, but moving in the direction of balance now. And so that-that warrants a change in policy. [01:10:53] Speaker ?: Colby. [01:10:55] Speaker 25: Colby Smith of the New York Times. Should we be viewing today's cut as the committee taking out some insurance against the possibility that the labor market is at risk of weakening? Or is it the committee's view that the dynamics of a downturn are already in place? I guess I'm just, you know, trying to square the shift in the rate forecast in the SEP towards more cuts than just three months ago with the fact that the forecast for unemployment didn't change. [01:11:20] Speaker 26: Yeah, I think you could think of this in a way as a risk management cut, because if you look at the SEP, actually the projections for growth this year and next actually ticked up just a little bit. And inflation and unemployment didn't really move once. So what's different now? What's different now is that you see a very different picture of the risks to the labor market. You've seen-you know, we were looking at 150,000 jobs a month at the time of the last meeting. And now we see the revisions and we see the new numbers. And I don't want to put too much emphasis on payroll job creation, but it's just one of the things that suggests that the labor market is really cooling off. And that tells you that it's time to take that into account in our policy. [01:12:03] Speaker 25: So just looking at the SEP once again, the median participant has inflation higher than previously expected by the end of next year and the Fed not getting back to the 2 percent target until 2028. So I guess I'm just wondering how you characterize the risk to price pressures of kicking off a series of cuts at this point. [01:12:21] Speaker 26: Yeah, so I would look at it this way: we fully understand and appreciate that we need to remain fully committed to restoring 2 percent inflation on a sustained basis. And we will do that. At the same time, we've got to weigh the risks to the two goals. And I would say since-really since April, to me, the risks of higher and more persistent inflation have probably become a little less. And that's partly because the labor market has softened, GDP growth has slowed, and so I would just say that the risks there have been less than one might think. And in terms of the labor market, what we're seeing is unemployment is still low, it's still a relatively low rate, but we're seeing downside risks. [01:13:17] Speaker 21: Michael McKee from Bloomberg Radio and Television. I'm a little confused by your explanation of the Fed cutting rates because of unemployment if you think that most of what's happening in the employment area is related to immigration, which your rate cuts wouldn't address. How do you see that as more important than inflation, which has remained almost a full percentage point above your target? [01:13:44] Speaker 26: Well, I was saying that what's happening in the labor market has more to do with immigration than it has to do with tariffs. That was the question I was answering. So I wouldn't say that all of what's happening in the labor market is due to tariffs. I mean, you clearly have a slowing in due to immigration. You clearly have a slowing in demand, which is now perhaps more than that in supply. And we know that because the unemployment rate has ticked up. So that's what I meant by that. [01:14:12] Speaker 21: I think a follow-up. Every year since 2015, the SEP has forecast that you would hit your target two years later. And this year, this SEP says you're going to hit your target two years later. Two percent does not seem to be in sight. Does that suggest that the two percent target is not really achievable? And does this present any credibility problems for you in telling people that that's what you're going to do if you can never reach it? [01:14:42] Speaker 26: Well, I mean, you're right. It does say we're going to get to two percent inflation in 2028 at the end of '28. But that's literally how you put the projections together. You're writing down a rate path which is designed to create, over the course of the SEP timeframe, two percent inflation and maximum employment, too. That's all that is. You know, we don't—no one really knows where the economy will be in three years. But the nature of the exercise is to write down policy that you believe would return to the two percent goal over the—at least by the end of the exercise. [01:15:17] Speaker 14: Thanks so much, Elizabeth Schulze with ABC News. The latest inflation report shows that prices are still going up across key categories for many households, including groceries. What will the Fed do if prices pick up more? [01:15:34] Speaker 26: So our expectation—and you can see this consistently through the year—has been that inflation will move up this year, but that the—basically because of the effects on goods prices from tariffs. But that—those will turn out to be a one-time price increase as opposed to creating an inflationary process. That's been our forecast. Pretty much every forecast—all the individual forecasts say that. We can't just assume that, though, right? We have to—our job is literally to make sure that that is what happens. And we will do that job. Right now, the situation we're in is that we see—we see inflation—we continue to expect it to move up. Maybe not as high as we would have expected it to move up a few months ago. The pass-through into—of the tariffs into inflation has been slower and smaller. The labor market has softened. So the case for there being a persistent inflation outbreak is less. And so that's why we think it's time for us, really, to acknowledge that the risks to the other mandate have grown and that we should move in the direction of neutral. So what will we do? We'll do what we need to do. But we have two mandates, and we try to balance them. For a long time, our framework says that when our two goals are in tension—this is quite an unusual situation—how do we decide what to do? Because our tools can't do two things at once. What we do is we ask which is farther from—how far is each from the goal and how long is it expected to get to the goal? So—and then that's—we think about those things and we see, as I mentioned, we have been—our policy had been really skewed toward inflation for a long time, really. Now we see that there's downside risk clearly in the labor market, and so we're moving in the direction of more neutral policy. [01:17:22] Speaker 14: How concerned are you about the slowdown in the jobs market for households at home, especially younger Americans struggling to land a job? [01:17:29] Speaker 26: So it's—it's an interesting labor market, and obviously we think it's appropriate that we reduce our rates so that we become more neutral, which will be—which presumably will be better for the labor market. So it's—you—you see people who are sort of more at the margins. So kids coming out of college and—and younger people, minorities, are—are having a hard time finding jobs. The overall job finding rate is very, very low. However, the—the—the layoff rate is also very low. So you've got a low—a low firing, low hiring environment. And the concern is that if you start to see layoffs, the people who are laid off won't—there won't be a lot of hiring going on. So that could very quickly flow into—into higher unemployment. In a—in a healthier economy, healthier labor market, there would be jobs for those people. But now the hiring rate is very, very low. So that's been a growing concern over the last—the last few months. And it's one of the reasons why we think it's appropriate that we begin to—we begin to shift our policy focus toward a more balanced one. [01:18:35] Speaker 4: Steve. [01:18:39] Speaker 28: Steve Leisman, CNBC. Mr. Chair, in the past during rate, could you use the word recalibration? And I wonder if you pointedly did not use it this time. And in fact, when you said policy is not on a preset course, did you mean to—that is sort of the opposite of pre—of recalibration? Are we meeting to meeting data point by data point? Are we in the process here of getting back to neutral? Thank you. [01:19:04] Speaker 26: So I think we are—we're in a meeting by meeting situation. We're going to be looking at the data. You know what? Let me—let me say a word about the SEP, really, here. So we often point this out. The—what the SEP is, it's an accumulation—a accumulation of the individual projections of 19 people, showing what they believe at a particular moment in time to be the most likely path for the economy and, thus, the appropriate path for monetary policy as well. And, as you know, we don't—we don't debate or try to agree on what that is. We just write them down and accumulate them. We do sometimes discuss them. And so we always say we're not on a preset path, and we really mean that. The actual decisions we make are going to be based on the incoming data, the evolving outlook, and the balance of risks at the time the decisions are actually made. So you will have seen that we have 10 participants out of 19 who wrote down two or more cuts for the remainder of the year, and nine who wrote down fewer than—in fact, in a good number of cases—no more cuts. So rather than looking at—so rather than looking at this as certainty, I would encourage people, as always, to look at the SEP as—through the lens of probability. And so there are different possible outcomes and likelihoods rather than this one is certain and this one isn't happening. So that's what I would say. Thank you. [01:20:27] Speaker 28: Thank you for getting to my follow-up question. What was—is the dispersion in the outlook a sign of uncertainty of policy in the meetings to come? Thank you. [01:20:37] Speaker 26: You know, it's—it is such an unusual situation. Ordinarily, when the labor market is weak, inflation is low. And when the labor market is really strong, that's when you've got to be careful about inflation. So we have a situation where we have two-sided risk, and that means there's no risk-free path. And so it's quite a difficult situation for policymakers. And it's—it's not at all surprising to me that you have a range of views. It's not so much about having different views for the path of the economy, but it's partly that. But it's also partly about what's the right thing to do in light of this—of the tension between the two goals. How do you weight them? How worried are you about one versus the other? And so it's—it's—it's natural. I think it would actually be surprising if you didn't have a pretty wide range of views based on, you know, in this kind of highly unusual situation. And we do. So—but, you know, we—we get together. We discuss. We have a great discussion. And then we decide what to do, and we act. But you're right there—that it is—it's a wide dispersion of views. And I think that's understandable and natural in the current situation. [01:21:51] Speaker 29: Hi. Victoria Guida with Politico. You've talked a lot about Fed independence and the importance of it over the years. But as—as markets have questions about what exactly President Trump's intentions are with the Fed, what would you point to as the things they should be watching to determine that the Fed is still making decisions based on, you know, the economic outlook rather than political considerations? [01:22:17] Speaker 26: Look, it's deeply in our culture to do—to do our work based on the incoming data and—and—and never consider anything else. That's just—everybody who was at the Fed really feels strongly about that way. So, you know, you'll know it by the way we talk about what we're doing, by the speeches that people give, by the decisions that we make. You'll know that we're just still going to do that. That's all we do. And we don't—we don't frame these questions at all or see them in—in terms of political outcomes. I think when you get to another part of Washington, everything is seen through the lens of, does it help or hurt this political party, this politician, you know, that's—that's the framework. And I think people find it hard to believe that that's just—that is not at all the way we think about things at the Fed. We're taking a longer perspective. We're trying to, you know, serve the American people as best we can. So I—I think—I think you'll—you would be able to tell. I don't—I don't believe we'll ever get to that place. You know, I would say we're—we're doing our work exactly as we always have now. And people are—they're making their—their arguments. And—and we're having a—really a great discussion around these challenging issues. So— [01:23:24] Speaker 29: Do you see the court case around Lisa Cook as being related to questions of Fed independence? [01:23:30] Speaker 26: You know, I see it as a—a court case that it would be inappropriate for me to—to comment on. [01:23:38] Speaker 30: Thanks, Mr. Chairman. Edward Lawrence from Fox Business. So we saw the preliminary benchmark revisions down 911,000. The revisions for June were the first negative revisions we've seen since December of 2020. You know, how can the Fed base important decisions on rate and what to do with the interest rates on data that seems to be, as you've called it in the past, noisy? [01:24:04] Speaker 26: So on—on the QCEW, the revision that we saw was almost exactly what we expected. It was—it was amazing how close the expectation was. So—and the reason for that is, for the last bunch of quarters, there's been a—almost a predictable overcount. And I think the—you know, the Bureau of Labor Statistics really does understand this, and they're working hard to fix it. It's got to do—of course, it has something to do with low response rates, but it's also got to do with what's called the birth-death model, because a good amount of job creation happens around new—new companies and how many go out of business, how many are founded. And it's just really hard—you can't survey for that. You've got to have a model that predicts that. And it's quite difficult to do, especially when the economy is undergoing big changes. So—and they've—they've been working on that and are making progress on it. But I—you know, the data we get is—is still well good enough for us to do our work. To the extent we have issues around data right now, it's about low response rates. That's happened all over—all over, really. Response rates are just lower to surveys now, both in and out of the government. And it's no great secret, you know, we want higher response rates, and we need those to have, you know, less volatile data. And the way to get that is to make sure that the—that the agencies that collect the data have sufficient resources to drive higher response rates. It's not a complicated problem, but that's what it takes. It's not a mystery. That's what it takes. The other thing I'll say, Edward, is in the case of the jobs—job creation, the first—the response rate is quite low for the first month, or lower for the first month. By the time you get to the second or third month, you're still collecting responses for that last month—for that prior month. And you get to the place where the data are much more reliable by the second and certainly the third month. So it's not that we don't get the data. It's just that we get it a little later. [01:25:56] Speaker 30: But if—well, for the benchmarks, if that holds, it's 51 percent of the jobs that we thought were there weren't really there. It shows a weaker market—job market coming into this year. If you had had that information, would it have changed your mind related to where the interest rates should be, should there have been a cut earlier? [01:26:13] Speaker 26: You know, we have to live life looking through the windshield rather than the rearview mirror, as you know. And all I can tell you is we see where we are now, and we take appropriate action, and we took that appropriate action today. Howard. [01:26:26] Speaker ?: Thanks. Howard. [01:26:28] Speaker 31: Thanks. Howard Schneider with Reuters. So, as you mentioned a minute ago, some margins of the job market would suggest that the slide's already happening. Black unemployment rate in August was above 7 percent, declining work week, difficulty among college graduates finding work, high-rising youth unemployment. Why do you think a quarter percentage point now is going to arrest that? [01:26:52] Speaker 26: Well, I didn't say that I thought a quarter point would make a huge difference to the economy. But you've got to look at the whole path of rates, right? And the market has already been baking in expectations. I mean, our market works through expectations, right? So, I think our policy path really does matter. And I think it's important that we use our tools to support the labor market when we do see signs like that. I did mention that. You know, you see minorities, unemployment going up. You see younger people, people who are more vulnerable economically, more susceptible to economic cycles. That's one of the reasons, in addition to just overall lower payroll job creation that shows you that, at the margin, the labor market is weakening. I would also point to labor force participation. Some part of the significant decline in labor force participation over the last year has probably been cyclical in nature, rather than just the usual aging process. So we put all those together, and we see that the labor market is softening, and we don't need it to soften anymore, don't want it to. So we use our tools. And, you know, it starts with a 25 basis point rate cut. But, you know, the market's also pricing in a rate path. I'm not blessing what the market is doing at all. I'm just saying it's not just one action. [01:28:09] Speaker 31: As a follow-up to that, the growth mix right now seems very concentrated in an investment and on the consumer spending side in the higher income groups. Do you feel that that's an unsustainable mix for the economy moving forward? I wouldn't say that. [01:28:27] Speaker 26: I mean, you're right. Those are two- we're getting unusually large amounts of economic activity through the AI build-out and corporate investment. I don't know how long that will go on. No one does. In terms of spending, you saw that the consumer spending numbers were well above expectations, and that may well be skewed toward higher-earning consumers. There's a lot of anecdotal evidence to suggest that. Nonetheless, it's spending. So, I mean, I think the economy is-you know, it's moving along. Economic growth is going to be 1.5 percent or better this year, maybe a little better. Forecasts have been coming up, as you can see. So, labor market is-unemployment is low, but-you know, downside risks, but it's still-it's still a low unemployment rate. So, that's how we see it. [01:29:24] Speaker ?: Stephanie. [01:29:26] Speaker 32: Hi, Stephanie Ruhle, MSNBC. Treasury Secretary Scott Fesson has said that the Federal Reserve suffers from mission creep and institutional bloat. He's now calling for an independent review. Would you support an independent review, or are you open to any sort of reform in any areas of the Fed? [01:29:47] Speaker 26: I-of course, I'm not going to comment on anything the Secretary says or really any other officer says. So, in terms of reform at the Fed, you know, we just-we just went through a lengthy and, I think, very successful process of updating our monetary policy framework. I would say there's a lot of work going on behind the scenes around the assets we have in the Federal Reserve Bank-Federal Reserve System and at the board. Are they the right size? Are they the right size? We're actually going through a 10 percent head-head-10 percent headcount reduction through the whole Fed, including the board and all the reserve banks. The employment-employment at the Fed at the end of that will be basically at the same level it was more than 10 years ago. So, we will have had zero job growth for more than a decade when we're finished with that, and I think we'll probably-we'll probably do more than that. So, I think we're-we're certainly open to constructive criticism and-and ways to do our jobs better. [01:30:50] Speaker 32: But not an independent review? [01:30:52] Speaker 26: We're certainly open to, you know, to always trying to do better. Neil. [01:30:58] Speaker 33: Mr. Chairman, Neil Irwin with Axios. There's been some debate lately on whether AI is already starting to affect the labor market in terms of lower labor demand, higher productivity by contrast. Do you-do you buy that? And if that is true, does that have implications for the monetary policy setting? [01:31:17] Speaker 26: So, there's-there's great uncertainty around that. I think my view, which is also a bit of a guess, but widely shared, I think, is that you are seeing some effects, but it's not the main-not the main thing driving it. And so, particular focus on young people coming out of college. And yeah, there may be something there. It may be that-that companies or other institutions that have been hiring younger people right out of college are-are able to use AI more than they had in the past. I think that may be part of the story. It's also part of the story, though, that, you know, job creation more broadly has slowed down. The economy has slowed down. And so, it's probably a number of things. But yeah, it's-it's probably a factor. Hard to say how big it is. [01:32:02] Speaker ?: Andrew. [01:32:04] Speaker 34: Thanks, Mr. Chairman. What evidence-what evidence do you see of tariffs showing up in inflation? [01:32:13] Speaker 26: Well, if you-you can take goods-just sort of the broad goods category. And last year, goods inflation was negative. If you go back 25 years, that was the typical thing, was-was that goods inflation was-goods prices generally went down, even adjusting for quality. So, that was not the case during the pandemic. Of course, goods inflation went very high. But we had essentially returned to zero or slightly negative inflation. Now, I think goods inflation over the course of the past year is 1.2 percent, which doesn't sound like a lot, but it's a big change. So, we think-I mean, analysts have different views, but we think it's contributing, you know, 0.3 or 0.4 or something like that to the current core PCE inflation reading, which is 2.9 percent. So, it's-it's contributing. Um, what's-what seems to be happening is that, you know, the-the tariffs are-are not-mostly not being paid by exporters, mostly being paid by, really, the companies that-that sit between the exporter and the consumer. So, if you-if you buy something and you sell-you sell it through retail or you use it to make a product, you're probably taking those-a lot of those costs on and not able to pass it fully along to the consumer yet. That's a lot-that appears to be what we're seeing. Um, all of the-all of those companies and entities in the middle, they'll tell you that they have every intention of passing that through in time. But they're not doing that now. Consum-to the consumer, the pass-through has been-and been pretty small. It's been slower and later-slower and smaller than-than we thought. But the evidence is-it's very clear that there's some pass-through. [01:33:55] Speaker 34: Okay. Um, I-I also wanted to ask if you could share with us the conditions under which you might consider leaving the Fed in-in-in May. [01:34:05] Speaker 26: I have nothing new on that for you today. [01:34:09] Speaker ?: Thanks. Katarina. [01:34:11] Speaker 35: Hi, Katarina Sarajevo with Bloomberg News. Um, I just wanted to follow up, um, on, you know, one of your answers, um, just a couple minutes ago. Um, you know, we've often heard you talk about how you and your colleagues, um, you know, do not think about politics. This does not enter the room. Um, but one of your new colleagues, um, does come from this world, right? Where everything is seen through this framework of, um, of politics and, uh, of what party is being helped. And, um, and that person is still employed by the White House. Um, how, how can markets and the public, um, interpret, um, you know, some of his speeches, for example, and then some of, you know, the forecast that we see today. I mean, the median for this year was moved, um, because of the introduction of his forecast. I'm talking about the number of, uh, ray cuts seen this year. Um, what do you, you know, what do you say to, to markets and the public that are trying to interpret, um, you know, what you guys are saying? [01:35:16] Speaker 26: So there, there's 12, 12 vote, 19 participants of, of whom 12 vote, as you know, on a rotating basis. So no one voter, you know, can really, the only way for any voter to really move things around is to be incredibly persuasive. And the only way to do that in the context in which we work is to make really strong arguments based on the data and your, one's understanding of the economy. That's really all that matters. And, uh, that, that's how it's gonna work. And, um, I, I think that's, that is the way the, the institution, if that's in the DNA of the institution, that's not gonna change. [01:35:54] Speaker 35: And then I wanted to ask about a Gallup poll that showed that, um, Americans now have more confidence in the president than the Federal Reserve when it comes to doing what's right for the economy. Why do you think that is? And, and what's your response? What's your message to the public? [01:36:10] Speaker 26: Our response is we're gonna do everything we can to use our tools to achieve the goals that Congress has given us. And we're not gonna get distracted by, by anything. So I think that's, that's what we're gonna do. We're just gonna keep doing our jobs. Claire. [01:36:24] Speaker ?: Claire Jones, Financial Times. [01:36:26] Speaker 36: Um, given the range of views expressed prior to the meeting, I think there was a lot less dissent today than a lot of people expected. It'd be good to know just what you think the drivers were of coming to that very strong consensus in the meeting. And also on the flip side to just explain why the dot pots, plots are really so scattered between, you know, someone even expecting rates to end up higher by the end of the year to, to five cuts. I mean, what were the kind of range of views you had about on one side, why there was so much support for a cut today and on the flip side, why there's so much divergence about what comes next? [01:37:09] Speaker 26: So I think there's quite a wide react, a wide assessment that, um, the situation has changed with respect to the labor market. Whereas we could still say, and did say in July, at the time of the July meeting, that the labor market was in solid condition and we could point to 150,000 jobs per month and many other things. Um, I think that the new data that we've had, and it's not just payrolls, it's, it's, uh, other things as well, suggests that there really is meaningful downside risk. I said there was a mountain downside risk then, but I think that that downside risk is now a reality and, and there's clearly more downside risk. So I think that was, I think that's broadly accepted. And so that meant different things for different people. Some, uh, you know, some wrote down, almost everyone wrote down, supported this cut and, um, some supported more cuts and some didn't, as you will see from the dot plot. So it's just the way, that's just the way it is. I mean, people have, it's, it's, uh, you have people who take this work very seriously, think about it all the time, do their work, uh, discuss it with our colleagues. You know, we endlessly discuss this in, uh, between ourselves. And then we have a meeting where we put it all out on the table and this is what you get. And you're right. There is a, there's a range of views in the dots. And, and I think that's, like I said, uh, very unsurprising given the quite unusual, historically unusual nature of the challenges that we face. But let's, let's remember though, the unemployment rate is 4.3 percent. The economy is growing at one and a half percent. So, um, it's not a bad economy or anything like that. We've seen much more challenging economic times. But from a policy standpoint, the standpoint of what we're trying to accomplish, it's challenging to know what, what to do. There are, as I mentioned earlier, there are no risk-free paths now. Uh, it's not incredibly obvious what to do. So we have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on, on maximum employment, which is, those are our two equal goals. And you will see that there are just, there are a range of views on, on, on what to do. Nonetheless, we, we came together today at the meeting and, and, and, uh, acted with a high degree of unity. Archie. Thank you. [01:39:31] Speaker ?: Archie Hall from The Economist. [01:39:32] Speaker 37: You, you mentioned earlier that job creation is running below your guess at its breakeven rate. I'd be curious to hear a bit more about that and where you think the breakeven rate is. [01:39:45] Speaker 26: You know, so there, there are many different ways to, to calculate it. And, um, none of them is perfect. But, you know, it's, it's clearly come way down. There, there, you, you could, you could say it's somewhere between zero and 50,000. And you'd be right or wrong. I mean, you, there are just many way, different ways to do it. Um, so whatever, wherever it was, 150,000, 200,000, a few months ago, it's come down quite significantly. And that's because very, a very lower amount of people are joining the labor force. The labor force really not growing much at this point. And that's, that's a lot of where the, uh, the supply of labor was coming from over the last three, uh, two or three years. So we're not getting that now. We're also, we've got much lower demand. You know, it's interesting, uh, that supply and demand have really come down together so far. except now we do have unemployment ticking up outside, just one tick outside of the range where it's been for a year. 4.3% is still a low level, but I think this speedy decline in both supply and demand has certainly gotten everyone's attention. I'll follow up if I may. You mentioned [01:40:59] Speaker 37: the downside risk to employment a fair amount, but it's striking that measures of activity and output for the third quarter. Those that we have seem pretty strong. The Atlanta Fed's GDP now is very strong. You mentioned strong PCE numbers as well. How do you square those things? Is there a chance actually it could be upside risk to the labor market if those activity measures are right? [01:41:16] Speaker 26: Well, that would be great. We'd love that to happen. So I don't know that you see a big tension there, but it's gratifying to see that economic activity is holding in. So it's a good bit from consumption. It looks like consumption was stronger than expected, what we got earlier this week, I guess. And also, we're getting a fairly narrow sector is producing a lot of economic activity, which is the AI build-out and economic activity, which is coming up. So, you know, we watch all of it. And I would say we-we-we did move up-the median for growth for this year actually moved up in the SEP between the June and September SEPs. So-and really the inflation and labor market didn't change much. It's really the risks that we're seeing to the labor market that-that were the focus of today's decision. Nicole? Nicole. Hi, Nicole Goodkind with Barron. Thank you for taking my question. Given the cumulative impact of high interest rates on the housing sector, I'm wondering how concerned you are that current rate levels are exacerbating housing affordability issues and potentially hindering household formation? [01:42:22] Speaker 38: And wealth accumulation for a segment of the population? You know, housing is an interest-sensitive activity. So it's at the very center of monetary policy. When-when the pandemic hit and we cut rates to zero, [01:42:44] Speaker 26: uh, the housing-housing companies were incredibly grateful and-and it was really-they said that was the only thing that kept them going, was that we-we cut so aggressively and provided credit and things like that. And they were able to finance because-because we did that. The other side of that is when inflation gets high and we raise rates-and it-it-you're right, it does burden the housing industry. And, uh, so rates- have come down a bit. And as that happens, we don't set the-we don't set mortgage rates, but our policy rate changes do tend to affect mortgage rates. And that has been happening. And that'll-that'll, of course, raise demand. Um, lower borrowing rates for-uh, for builders will help, you know, get-builders will supply. Uh, and so some of that should happen. I-I think most analysts think that-that it would have to be pretty big changes for it to matter a lot-for the-big changes in rates for the-for the-to matter a lot for the housing sector. And, you know, the other thing is by-you know, by achieving maximum employment and price stability, that's a strong economy, that's a good economy for-for housing. And then the last thing I'll say is, uh, you know, there's a deeper problem here. There's not a cyclical problem that the Fed can address, and that just is a-a pretty much nationwide housing shortage. Or-a lot of places in the country just don't have enough-enough housing for people. Uh, and-and, you know, all of the areas around metropolitan areas like Washington, for example, are very built up, and so you're having to build farther and farther out, and that-that, uh, so that's where it is. [01:44:21] Speaker 38: And just a quick follow-up. During the last SEP-or the press conference, following the last SEP, you seem to indicate that policymakers lacked conviction about their projections, and I'm wondering if you still feel that way. [01:44:34] Speaker 26: You know, forecasts-uh, forecasting is very difficult, even in placid times. And-and, as-as I've mentioned before, forecasters are a humble lot with much to be humble about. So, uh, I-I think right now is a particularly challenging time, even more uncertain than usual. And so, I don't know any forecaster anywhere, really. Ask-ask any of the forecasters whether they have great confidence in their forecast right now. I think they'll honestly say no. Jennifer. [01:45:08] Speaker 39: Thank you, Chair Powell. Jennifer Schoenberger with Yahoo Finance. If you're cutting rates, why continue to reduce the size of your balance sheet, then pause the unwinding? [01:45:18] Speaker 26: Well, I think we're-you know, we're-we're cutting the size of our balance sheet quite marginally now. As you know, with the balance sheet, um, we're-we're still in-in abundant reserves condition. We've said that we would stop somewhat above, uh, a, um, somewhat above an ample reserves level. That's where-that's where we are. And we're-you know, we're getting closer to that. We're monitoring it very carefully. And I don't think that that has at all significant, uh, macroeconomic effects. These are pretty small numbers moving around inside a giant economy. You know, the number-the-the level of runoff is not-not very large. So I wouldn't attribute macroeconomic consequences to that at this point. [01:46:01] Speaker 39: And at his recent confirmation hearing, Stephen Myron brought up that the Fed actually has three mandates from Congress-not just jobs in stable crisis, but also moderate long-term interest rates. So what does Congress mean by moderate long-term interest rates? How should we understand that when we see the 10-year Treasury moving? And how do you think about this part of the mandate when policy choices like rate cuts or balance sheet reductions affect the long end of the yield curve? [01:46:29] Speaker 26: So, um, we always think of it as the dual mandate: maximum employment and price stability for a long time because we think moderate long-term interest rates are something that will result from stable inflation low and stable inflation and maximum employment. So we don't-we don't-we haven't-we haven't thought about that for a very long time as a third mandate that requires independent action. So that's where that is. And there's-there's no-there's no thought of-as far as I'm concerned, there's no thought of considering that-you know, considering that we somehow incorporate that in as something in a different way. [01:47:09] Speaker 40: Matt Egan: Thanks, Chair Powell. Matt Egan from CNN. We-we recently learned that average FICO credit scores are down this year by two points, the most since 2009 during the Great Recession, and delinquencies are high for car loans, personal loans, credit cards. How concerned, if at all, are you about the health of consumer finances, and do you expect today's cut will help? So, you know, we're aware of that. [01:47:41] Speaker 26: I think default rates have been kind of ticking up, and we do watch that. They're not at a level -- I don't believe they're at a level where overall they're, you know, terribly concerning, but it is something that we watch. You know, lower rates should support economic activity. I don't know that one rate cut will have, you know, a visible effect on that. But over time, you know, a strong economy with a strong labor market is what we're aiming for, and stable prices, so that should help. [01:48:10] Speaker 40: Just to follow up, this rate cut is coming at a time when the stock market is at or near all-time highs, and some valuation metrics are elevated historically. Is there a risk that cutting rates could overheat financial markets, potentially fueling a bubble? [01:48:27] Speaker 26: You know, we're tightly focused on our goals, right? And our goals are maximum employment and price stability. And so we take the actions that we take with an eye on those goals. Separately -- and that's why we did what we did today -- separately, we monitor financial stability very, very carefully. And, you know, I would say it's a mixed picture, but households are in good shape, banks are in good shape. Overall, households are still in good shape in the aggregate, and I know that people at the lower end of the income spectrum are under pressure. But from a financial stability perspective, we monitor that picture. We don't have a view that there's a right or wrong level of asset prices for any particular financial asset. But we monitor the whole picture, really looking for structural vulnerabilities. And I would say those are not elevated right now. Thank you. [01:49:22] Speaker 7: Jean, we'll go to you for the last question. [01:49:28] Speaker 41: Hi, Chair Powell. Jean Young with M&I Market News. I wanted to ask about inflation expectations. You've said the Fed can't take the stability of inflation expectations for granted. You mentioned at the short run they've gone up a little bit. I wonder if you can talk a bit about that. And then also at the long run, I'm wondering, do you see evidence that the debate over Fed independence and the growing deficit is putting pressure on inflation expectations? [01:49:58] Speaker 26: As you said, shorter-term inflation expectations have tended to respond to near-term inflation. So if inflation goes up, inflation expectations will predict that it takes just a little while to get back down. Fortunately, throughout this period, longer-term inflation expectations, both break-even in the markets and almost all of the longer-term surveys, Michigan being a bit of an outlier lately, have been just rock solid in terms of, you know, running at levels that are consistent with 2 percent inflation over time. So we don't take that for granted. We actually assume that our actions have a real effect on that and that, you know, we need to, you know, continually show and also mention, discuss our commitment to 2 percent inflation. And so you'll hear us doing that. But, you know, we're, as I mentioned, it's a difficult situation because we have risks that are both affecting the labor market and inflation. Those are our two goals. And so we have to balance those two. When they're both at risk, we have to balance them, and that's really what we're trying to do. I don't, your latter part of your question was about independence. You know, I don't see market participants. I don't see that that's something they're factoring in right now in terms of setting interest rates. Thanks very much. [01:51:21] Speaker 5: That wraps up the news conference with Chairman Powell down in Washington, D.C. here in New York City. We're reacting to a 25 basis point rate cut from the Federal Reserve, a dissent pushing for 50 basis points and a huge, huge debate about the future. Anna Wong of Bloomberg Economics with this to say: I have not seen a meeting with so many contradictions. This is a low conviction Federal Reserve with limited visibility and a very wide range of views on the future. And this is why this market is so confused, captured by this move in the equity market on the S&P 500. Move lower, move higher all over the place. This market is somewhat shaken. This Federal Reserve has no idea what 2026 is going to bring, and this chairman did his best to articulate that. And I don't know that he sent a clear message [01:52:13] Speaker 7: because it's not possible to send a clear message. That sound you hear? That's the idea of forward guidance dying. Because ultimately, how can a Federal Reserve with this level of dispersion in views really give any sense of their reaction function? And to me, the idea that he said there wasn't widespread support at all for a 50 basis point rate cut, and talking about this, the risk management rate cut flew in the face of the hopes and dreams of markets that we're hoping. And that's brilliant [01:52:37] Speaker 8: about forward guidance just evaporating. And John, it goes back to when you looked into the other room here, the south wing of our studios, and you looked at the dot plot, and the dispersion looked [01:52:46] Speaker 5: like a B-52 bomber's wingspan. Massive spread. Massive. We can talk about it right now, TK. At the very bottom of that spread is a dot that's basically projecting a massive amount of rate cuts for the year ahead. It's a political dot. A sub-3 percent dot. Tom, look above it. You've also got a dot there that's looking for a Federal Reserve that could be hiking interest rates over the next several meetings. These dots are all over the place, and, Brammo, you nailed it. A risk management rate cut, two-sided risk, no risk-free path in a meeting-by-meeting situation. I think the chairman did his best here to form a consensus that probably didn't exist on the committee when they got together for the first day just yesterday. [01:53:25] Speaker 7: Yeah, I think that that's well said. He even talked about the labor market that clearly you can no longer say it's very solid. But then he went on to say that any kind of headline disappointment was due to the immigration picture probably in a significant part. This is the reason why it is a Federal Reserve that is unable to really present forward guidance because ultimately we don't even know who will be doing the guiding and who will be doing the decision-making coming next year. And that is the reason why there's so many questions about that outlier. Tom called it a political dot. That political dot potentially has quite a bit of weight. [01:53:57] Speaker 5: Might be a flavor of things to come in 26 and beyond. Joining us now to discuss the former New York Fed president, Bill Dudley. Bill, welcome to the program, sir. Lots of process here, many contradictions. Is that a fair way of describing this meeting? [01:54:10] Speaker 42: I mean, I think there's a lot of tension between the inflation outlook and the labor market outlook, but I think Paul said it pretty well. I mean, he said basically we think that the risks on the unemployment side have risen more than the risks on the inflation side. And so given that, we should be less restrictive. And so we're taking out essentially a risk management cut to reflect the fact that the risks on the labor market seem to be a little bit higher. After that, there's a lot of uncertainty about, you know, how that's going to evolve in 2026 and 2027. And the committee, you know, is split about what to do going forward. You know, I think it's interesting. The market reaction initially was like, oh, gee, two more rate cuts this year. And then I think people parsed the summary of economic projections a little bit more and realized that it was actually nine to nine plus Murren. So nine people wanted either no more cuts or one more cut. And nine wanted two more cuts. And then there was Steve Murren, who I'm absolutely confident that that's his dot. Well, Bill, I think a lot of people would agree [01:55:13] Speaker 7: with you. I just wonder going forward how much you are satisfied by Fed Chair Powell's response to why they're upgrading their expectation for inflation, why they always put the idea of two percent two years out and why they are still cutting, even though they have not achieved that in more than five years. [01:55:32] Speaker 42: Well, if you didn't think policy was restrictive today, then he certainly they certainly wouldn't have cut. But if you start with the premise that policy is restrictive, it's exerting downward restraint on the economy. And we and basically given that the balance of the risk have shifted towards greater risk, the downside on the labor market side, he wants policy to be somewhat less restrictive. So this is a very modest adjustment. And I don't think there's a lot of, you know, I don't think there's four guidance at this point, really, that's meaningful, because it really is going to depend on how the market, you know, the economic economy evolves. I mean, look at look at the data just over the last couple months. You know, we have weakness in the labor market, and then we seem to have strength in terms of GDP and spending. So, you know, the Atlanta Fed GDP now forecast for now cast for the third quarter is at three point four percent. So there's a lot of uncertainty on the outlook. But, you know, this is an insurance rate cut. That's all it is. And it doesn't really foreshadow what's going to happen going forward. Bill Dudley, you're one of our best [01:56:31] Speaker 8: at dovetailing the dynamics of market economics into our academics. I think of Robert Hall, who was at Berkeley, and he went over to a school across the Bay. I can't remember the name of it right now. Bill, I look at the inflation. Let's take East Hampton, Massachusetts, where when you were a kid, you were in school there. Sewage rates are up 33 percent in the last 24 months. Is this a Fed looking at a purchasing power crisis for too many Americans out to the December 10th meeting and into [01:57:03] Speaker 42: next year? Well, there's definitely a squeeze on low income households. They don't benefit by the rise in the stock market. They don't benefit by the fact that they're locked, you know, they hold, you know, three percent mortgage mortgages. They're hurt by the higher tariffs. They're hurt by the weaker labor market. And so it's really a tale of two economies in terms of the outlook. Monetary policy is a very blunt instrument. And unfortunately, the Fed can't calibrate monetary policy to sort of equally help everybody in the current environment. So who do they do it for, John? Global Wall Street? Is that the mandate? [01:57:41] Speaker 5: You know, I was thinking back to TK, my days back at school when I was a kid. If I kept telling my mom in two years, I'll do better. In two years, I'll do better. I'm sure my mom at some point would lose patience. Bill, should we lose patience with this Federal Reserve? What is this? In two years time, we'll hit our inflation target. In two years time, we'll hit our inflation target. Mike McKee addressed this in the news conference. And I actually think it's a really important moment. How credible is [01:58:05] Speaker 42: this pursuit of two percent? Well, I think it's a fair point that, you know, every it's always two years later, we're going to finally achieve our inflation objective. You know, the Fed's basically trying to, as Chair Powell made it very clear, they're trying to balance the fact that the two goals are in tension. And so if they just focused on driving immediately to the two percent inflation goal, that would lead to much higher unemployment. And so they want to balance those two risks. But, you know, the risk to the Fed is that every year you continue to go with inflation above two percent. The risk is that inflation expectations finally become unanchored. And the attacks on the Fed's independence obviously increase that risk. [01:58:47] Speaker 5: Bill Dudley with the latest. Thank you, sir. Appreciate your reaction. Thanks for standing by the former New York Fed president. Mike McKee was in that news conference. It was an important moment, I think. And Mike McKee joins us now for more. Mike, first of all, your assessment of the last 60 minutes or so. And what did you make of that exchange you had with the Fed Chair? [01:59:05] Speaker 21: Well, the last 60 minutes or so, I think Jay Powell was trying to walk a very fine line because he's got a very divided committee. Nobody is sure what's going to happen going forward except for Stephen Myron, who thinks that things are going to be absolutely rosy and we need to cut rates a lot. Everyone else is uncertain. And the dot plot median shows two rate cuts this year. But when you look at the dot plot itself, it's so narrowly divided that you really can't take any signal from it, as Bill Dudley was saying. So Powell is trying to tell people that we really don't know without saying we really don't know. And as Bill said, trying to make this an insurance cut. The two percent thing, I think, is a real question for them. And he didn't really give a good answer to my question. It's not just that inflation expectations become unanchored, but that higher expectations can become embedded. And people don't think you're going to get it down farther. And so then how do you fight that going forward if you can't make any progress or can't be seen to be making any progress towards your [02:00:10] Speaker 7: target? Mike, while you're down there, since you are in the room, it sounded like Fed press conference language. We did get a statement. We did get a rate decision. But can you tell us and just describe to us how different this Fed meeting felt, what it looked like, what kind of changes were made? [02:00:30] Speaker 21: Well, I'll tell you, there's a lot more press here than usual. That's one thing that it looked like. The changes are the kind of things that you would see in the statement when they're changing policy, which they did. The dot plot may be a little bit more confusing, less guidance in it than we had seen before. And there was obviously some tension between what the rate cut medians were with what the economic projection medians were. But overall, it went off pretty much as they usually do. The Fed's statement wasn't that unusual. There obviously was the big elephant in the room of Stephen Myron that the chairman declined to comment on. He also declined to comment on Lisa Cook. He tried to keep it just to the the Fed. So it's it really wasn't a hugely different dynamic, except that there were a lot more moving parts than we often see, or at least than we've seen in a number of years. Mike, just before you go, [02:01:29] Speaker 5: there was a moment there where I do think he addressed the Governor Myron question, the importance of one individual on the committee and how much sway they have on the FOMC, how they've got to persuade the other individuals in the room. And Mike, I think it begs the question, if that Stephen Myron dot, that Governor Myron dot sub 3% is a flavor of things to come. Mike, to what extent this committee will [02:01:52] Speaker 21: push back? Well, clearly, the committee pushed back today and we didn't see a dissent from Mickey Bowman or Chris Waller. So they seem to be satisfied with where they are at the moment. And that suggests that Stephen Myron is not going to have a lot of influence. Nobody really expected him to. It does raise the question, though, John, as you sort of imply there, that if the president gets more people on the board, where do we go from here? And the Myron dot is a sign that the president's people would definitely try [02:02:24] Speaker 5: to push rates lower, whether or not the economy justifies it. Mike McKee with the latest Mike, a clinic as always. You're one of the very best. Appreciate your time. I think it would be a massive mistake just to say that's all political. We had this conversation with Greg Peters of Pigeon right before the news conference. He said, what's political and what's real? Whatever you think is political right now might be real next year. That might be a flavor of what's still to come from the incoming chairman for 2026. And it's not just about being able to persuade the rest of the committee. It's a question about how credible it will be with fixed income and broader markets. And right now, it seems like it was [02:03:00] Speaker 7: credible to the extent that it's not causing some sort of massive sell off in long term yields. I do think it's notable that there was only one dissent about a 50 basis point rate cut. And I think we have to keep going back to that. But Stephen Myron was alone. He didn't get a sort of concurrent opinion from Mickey Bowman or Chris Waller. We're going to get to Jeff Rosenberg. But John, [02:03:20] Speaker 8: I was going to go to Mike on this. So let me just bring it up. April 29 next year, June 17 next year, July 29. I think there's an election just after the October 28 meeting. When does House politics or even Senate politics come into this discussion with a vengeance? I don't know when it is. [02:03:38] Speaker 5: I think we're right there right now. You know, before this decision, Tom, we sat around the table and I said, this is the last set of forecasts you'll get from Chairman Powell without knowing who the incoming Fed chair is going to be. And I think we can say that by the time we get to December, we'll know who the Fed chair is. We expect to know who the Fed chair is. And you're also going to know what they think about where policy should be in 2026. And that's going to bring a very different flavour to the meeting at the end of this year. Chairman Powell did the best job he could possibly do in that news conference, given all the contradictions of this moment, not just about the contradictions within the committee, the contradictions almost all over the place. The fact we've had the step down in payrolls growth that we've had and unemployment has been super, super stable over that period. The fact we're looking for a better growth profile for 26, yet at the same time, we're talking about more rate cuts, not less. It's a very unusual environment. And I think the chairman did the best he could do given the circumstances to communicate that. [02:04:32] Speaker 7: Yeah. And I think that if you did sound a little bit like word salad occasionally, it probably was to be forgiven just based on the fact that there aren't good answers to any of these things, especially given the dissent that you're getting on the committee. [02:04:42] Speaker 5: Jeff Rosenberg of BlackRock joins us now for more. Jeff, welcome to the program. We often say, you and I, the first move isn't always the right move. And we'll see if it sticks in financial markets. But what do you make of this move in response to some of the contradictions we've heard [02:04:57] Speaker 43: over the last 90 minutes? Yeah, you guys have covered a lot of it. I'd say, you know, the three big takeaways for me, you know, number one, it's the validation of the Waller-Bowman critique from the summer. It's not unexpected, but it's important to recognize, you know, that was the first thing that the markets reacted to, the change in language in the statement. And it clearly was echoed by Powell in the press conference that the impact of the revisions on the data, he kind of like focused on it and then said, well, it's not just that, but then he went back to it again and again. And so that was the first takeaway is this labor market slowdown has clearly resonated. It's shifted the, the, the balance of risks. And that was the initial market reaction. Rates went lower and they were, they were a bit positive on that. But when we got into the press conference, it became a little bit less focus on that and more about the forward 2026, 2027 outlook. And that's where my second point is, is kind of a big takeaway here is that the bond market and the 20 year end, 25 outlook are, are basically aligned. It's when you look further out into those projections relative to where the bond market is pricing, where there's a lot of disagreement. And it gets to this notion of the spread that you were talking about before in the dots as you, as you, as you look at the dispersion there. And finally here, I think you've mentioned it before, you know, going into the meeting, there was a lot of, you know, uncertainty about whether you'd get more than one dissent, whether Waller and Bowman would advocate for a faster move. They didn't, they were kind of on board with this adoption of the balance of risks shifting. And I think that's important in terms of validating that earlier point I just made that, you know, the bond markets for the end of this year are kind of right on line with where the Fed is. I think the disconnect into next year is interesting, and that's going to have to be resolved. [02:06:46] Speaker 7: I guess, Jeff, how much does this increase the weight of just how many seats the president has to fill, given the fact that, as John and Tom were talking about, we did see pushback from the other members, from going 50 basis points. We didn't see that coalescing around that view. [02:07:06] Speaker 43: Yeah, that's going to be a big issue. And I think that's part of what you're seeing in terms of the disconnect between the dots today and the bond market expectations for the path of policy rates in 2026, because the path of actual policy rates is what the bond market is pricing. And the path that's written down today is based on the current makeup, right? And so that's where you see, like, effectively a disconnect in the bond market incorporating the possibility of a different makeup of the FOMC underlying the expectations of the distribution of outcomes for where policy rates evolve beyond the near term, where you see really clear alignment. [02:07:45] Speaker 8: Jeff Rosenberg, I assume you survived probability and statistics at Tepper and Carnegie Mellon. What's the standard error these fancy guys at the Fed are working with? How certain can we be of the path forward? Are they really making it up meeting to meeting as they go? [02:08:05] Speaker 43: Yeah, it gets to this dispersion within the dots, and it gets to something Powell talked, he mentioned a couple of times, which I think is a really important way of thinking about and framing this moment in time for the bond market and for how the bond market follows what the Fed does. And he said there is no risk-free path. And that's a really important concept. And what he means by no risk-free path is that there's risks to erring on the dual mandate. A little question about the third mandate in there later, but there's a risk to the dual mandate if you pursue the maximum employment and you put the inflation at risk and vice versa. If you focus on inflation, you put the employment at risk. And that's a very uncomfortable and unfamiliar spot. We called it, before we got into the post-COVID environment of too much inflation, we called it divine coincidence of monetary policy. The policy mandates were aligned. They never faced that conflict. And so bond markets never faced the uncertainty that the dispersion in the dots is reflecting. And there's really no resolution of that. It's going to be the data and what is the marginal change in data that the market's focused on, that the Fed's focused on. And the marginal change is that employment has been the big downward revision. Inflation has kind of been persistently above target, as we talked about going on five years in the projections, but it's not accelerating. And that's the key. It's what's the rate of change between the dual mandate. Right now it's all on the labor markets and that's going to keep its focus. That may change. And as that changes. Absolutely brilliant. John, what this amounts to is, [02:09:42] Speaker 5: is it a new data dependency? They've made a choice. And I think we should respect that fact. Jeff, you can always fall into the trap of suggesting what the Fed should do, what it shouldn't do. Jeff, the chairman's saying there's no risk-free path. But the committee's made a choice to cut interest rates, to signal more to come. If there is a consensus, it's to cut again, cut again, and cut again. Now, Jeff, as a market participant, you've got to respect that the Federal Reserve has made a choice to take that risk. And I want to understand from your perspective, how credible you think the pursuit of two percent actually is. And as a bond investor, how your approach to a market should change, given the information that you've had this afternoon. Well, and it was in your conversation [02:10:28] Speaker 43: with Mike McGee and his question, you know, the risk is they lose credibility on the two percent number. Now, you can get stable prices at three percent as long as it's not accelerating, but you're not reaching your target. So it's shifting the target and you lose the credibility and the anchoring to a two percent level. What does that mean? It means a higher level of long-term interest rates. It means a higher level of term premium. And to the extent that you get more variability as a result of not only hitting two percent, but being persistently above it, you get a higher inflation risk premium. And all those things factor into how we price in term premium, the value of the long end of the curve, the value of inflation and inflation protection. And the longer you go on above that two percent target, the more and more we start to price those things in. But my earlier comments is right now everybody's focused on the labor markets. And the key here, the key presumption that we're going to test is, is that inflation that's still coming down the pipe in terms of the tariff pass-through, is that one off? Everyone's pricing it in to be one off. Hopefully that's correct. But the data and the evolution of the data and the relative change between the inflation and the labor market data is going to shift that focus. Right now, the back end's pretty contained because the inflation data isn't accelerating at the same time as the labor market is decelerating. [02:11:48] Speaker 7: Yeah, but Jeff, to build on what John's talking about, if this is essentially a central bank that has chosen and they chose the labor market over inflation, then you would expect there to be a much bigger risk premia on some of the long-term bond yields. It's come off. And I just wonder if, let's say, President Trump selects Chris Waller to be the next Fed chair, how much does that risk premium come back because it takes off the prospect of more aggressive yield curve control? In other words, how much is this sort of subdued reaction in long-term bonds sort of predicated on this idea that this will be a very creative Federal Reserve and a very creative Treasury Department? [02:12:27] Speaker 43: I mean, I think on the prospects of innovation and a change in policy, I think a lot of it will have to be the actual actions as opposed to the potential for those actions. Very hard for the bond market to price in those changes in policy until the likelihood of those other scenarios in terms of policy innovation are more clearly identifiable in terms of the probabilities. Right now, they remain kind of in the realm of possibility. But as long as they're in the realm and not in the likelihood, it's hard to price those things in. I think the second piece around it is really going to be how the data evolves to inform both those policy choices and the relative trade-off between this lack of risk-free path. If inflation is accelerating and the labor markets are not decelerating, then the shift in the focus can flip to inflation. How do policymakers react to that? And is that reaction consistent with how the bond market is pricing? I think that's how we'll evolve as we see these changes in policy alongside the changes in data. If we get Chair Rick Reader, I'm loading up on [02:13:37] Speaker 5: bonds. Okay, Jeff? I'm going to let you go. You don't have to respond to that. Don't get in trouble. Thank you very much. You run. Jeff Rosenberg of BlackRock. Thank you, sir. Governor Myron, what are the odds he becomes Chairman Myron? What are the odds that someone like him joins the committee? And what would that do to the perception of this Federal Reserve? And how would it change financial markets? That dot there is really, really important for 2026 and how we should be thinking about this institution and what their approach will be, how it will change, how persuasive, how credible it might be. We've got to ask some big, big questions about next year for monetary policy and financial markets. [02:14:17] Speaker 7: Yeah. And the difficulty in understanding whether the market is actually responding to that dot, right? Are we getting a sense of what the market's reaction would be to that type of approach to monetary policy? Or are people dismissing it? This is not somebody who was able to get some of the other members to come on board with him. And so it is just one person on a committee. [02:14:37] Speaker 8: More than ages, years, I'm looking meeting to meeting to meeting. It's a Fed that's going to be [02:14:42] Speaker 5: overcome by events. Will you wake up a little bit earlier and join us tomorrow? Do you fancy that? I can do it. Are you going to stay in bed? I'll come in. No, you know. What do we have to pay TK to make you wake up earlier in the morning? I got the Bentley. It's the [02:14:54] Speaker 8: getting the car down Fifth Avenue. It's difficult. You know they talk about the haves and the haves [02:14:59] Speaker 5: nuts. Talk to my people. This right here. Just buy a Bentley. [02:15:24] Speaker ?: We'll be right back. [02:15:54] Speaker 10: In case you missed it on Daybreak Europe. What does it mean if you're an entry-level coder? [02:16:17] Speaker 11: How much trouble do you think you're in? Everyone in the Gage of AR really have to relearn which tool to use when and if you are technical and you know how the coding works, you're actually more productive with Lovable. Anyone can learn to be productive talking to the AI, but there's an advantage for technical people. Don't miss Daybreak Europe live every weekday. [02:16:44] Speaker 1: Governments make the commitment for net zero. Companies have begun to do the work of looking down their supply chain. I'm not sure. I think that while there isn't the intense activity around accelerating ESG, it is not a stop. In fact, I wouldn't even say that it's a pause. I think it is a how do we do it in this current environment? I mean, it's only three short years that Thailand hosted APEC. And the thematic from that APEC to subsequent ASEANs to, you know, to so many of the bilateral engagements that we've had is really how are we going to do this just transition? How are we going to transition our economies from energy systems to, you know, to data systems in a way that's going to get us to a net neutral world, right? I mean, a net zero world. I don't think that that's going to change. I think that there are adjustments to this. All the companies that I've been talking to, they have not stopped the work of looking through their supply chains with ESG in mind, because that is just where the puck is going. And if you look at policies, like in Europe, they've got CBAM, right? I mean, the carbon border adjustment. Different governments have put forward commitments to getting to net zero. And I'm not seeing any giant signal around the world that is saying, let's stop doing this, right? I mean, so if that signal is still there, that is actually, I think, one area of predictability for businesses and investors that that is still directionally where we're going. [02:18:11] Speaker 13: Okay, ready? [02:18:12] Speaker 12: David, what initially sparked your interest in this topic of longevity? [02:18:16] Speaker 13: Fifteen years ago, I turned 60, and I began to wonder how much longer I'm likely to live and what I could do to extend my life. On longevity, I talk with the leading experts in science and medicine to educate people about how they might be able to change their conduct so that they can live a happier and healthier life. I'm David Rubenstein. Join me on a four-part journey as I explore the great quest for longevity. Only on Bloomberg. [02:18:41] Speaker 44: Middle East and Africa, vibrant resources and high-yield investment opportunities. Join me on Horizons Middle East and Africa for the stories, newsmakers, and insights from this exciting region. Now, weekdays, only on Bloomberg. Bringing you up-to-the-minute energy news whenever and wherever it happens. I'm Joanna Bersechi in Vienna, and this is Bloomberg. [02:19:07] Speaker 6: The countdown is on. Everything you need to get the edge at the end of the market day. This is The Close. [02:19:18] Speaker 45: Live from Studio 2 at Bloomberg headquarters in New York. Romain Bostic here with The Close. Kicking you off to the closing bells here in New York. Just 10 minutes away and just a little more than an hour removed from the U.S. Federal Open Market Committee, voting 11 to 1 to cut the target rate for the federal funds rate by a quarter of a percentage point. This is what I'm going to say. This is the 1 to 4.25 percent, the 4.25 percent, the 4.25 percent, the 4.25 percent, the 4.25 percent after holding rates steady for five straight meetings this year. The initial market reaction to the 2 p.m. Fed statement was a bit of a risk on rally. A risk on rally that briefly pushed the Russell 2000 above an all-time high that it hasn't broken since 2021. Great sensitive assets like banks, like home builders, like gold, all pushed higher as well, though they did reverse some of those gains, yields, crypto, and the dollar dipping. But once Jay Powell got to the press conference and outlined the potential risk ahead and the tension between its two mandates and bolstering the labor market while tamping down inflation, the price action flipped a bit. Jay Powell trying to explain? Well, I'll just let him explain it himself. [02:20:18] Speaker 26: In support of our goals and in light of the shift in the balance of risks, today the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point. The labor market was in very solid condition with strong job creation and all those things. I think if you go back to April and now look at the revised job creation numbers for May, June, July, and August, I can no longer say that. We did welcome a new committee member today, as we always do, and the committee remains united in pursuing our dual mandate goals. I think you can think of this in a way as a risk management cut. Inflation, we continue to expect it to move up, maybe not as high as we would have expected it to move up a few months ago. The pass-through of the tariffs into inflation has been slower and smaller. [02:21:06] Speaker 45: Jay Powell was the man of the hour as we kick you off to the close. Ken Shinoda joins us here in Studio 2, Portfolio Manager at Double Line Capital. And, Ken, I want to focus first on the use of the word risk management, the phrase risk management, as a way to characterize what happened today. What do you think he meant by that? [02:21:23] Speaker 46: Yes, I was really keen on that word because the bulls were hoping for a more dovish language out of him. Some of the bears, maybe those who wanted to short bonds, were hoping for some hawkish rhetoric. And I think he picked that risk management word because it was, this is a cut, but we don't know what's going to come as far as the data, and we need to go meeting by meeting and be data dependent. So he's keeping that data dependent way that the Fed has been acting. Are you surprised by that? I think that he does not want to make the mistakes that other Fed chairmen have made in the past by cutting too soon. And so he's really keen on keeping rates where they are, staying restrictive until he's really sure that the inflation is contained. But he's definitely concerned about the labor market. We've had some weaker non-farm payrolls, and that's what he was focusing on at the end there. [02:22:13] Speaker 45: Well, in your role and the money you manage and more particularly the types of assets you manage, what's more of a concern for you right now, the labor market or inflation? [02:22:22] Speaker 46: For credit-sensitive assets, then we're really focused on the labor market if we're heading into a recession. But company earnings are strong. Retail sales came in decent. And so the credit markets aren't really worried about it now. You know, I think I'm more concerned about the long end of the yield curve. It's had a decent rally here, but, you know, if we go back to concerns around too much fiscal stimulus, you know, excess spending by the government, I think that long end could steepen more. So I'm more convinced that if things weaken, the two-year will fall on yield than I'm convinced that the long bond will have a huge rally. [02:22:55] Speaker 45: What is that balance right now? Because, I mean, he didn't talk a whole lot about that and really wasn't asked about it, to be fair. But there has been this positioning in the market that has pretty much been short duration or at least medium-term duration and not a whole lot going on on the long end of the curve other than for those institutions that basically have a mandate to buy out there. [02:23:13] Speaker 46: Well, it's been a good place to be. You know, T-bill rates have been really high. The two-year was, a few weeks ago, closer to 4%. You could buy some credit assets on the front end of the curve. So, look, I still like that front end of the curve. We've had a little bit of a rally here that maybe we could see a pullback. I hate to read too much into price action on Fed Day because there's so many people that are changing the positioning. But I think, you know, if you get a little bit of a pullback across the curve, it's, you know, a good time to add. You don't need to add the long bond, but I feel like a broken record. I've been on here for the last couple of years saying that kind of two- to five-year portion of the curve, it's a good place to be. [02:23:50] Speaker 45: I am curious what the net effect, let's assume for a second this is the start of an actual rate-cutting cycle and not just a one-off. I mean, they've promised, or at least the dot plot promises, two more cuts this year, maybe one in 2026. With regards to the housing market, we saw housing stocks today get a little bit of a boost. Some bank stocks also getting a bit of a boost for mortgage traders, mortgage bond traders here. Is that going to be a net positive or is this something now that you have to kind of hedge? [02:24:14] Speaker 46: Cutting rates is definitely net positive for investors that buy agency mortgage-backed securities. The spread that you get paid is highly correlated with interest rate volatility. So when bond prices are going down, rate volatility is going up, that's a really bad market for agency MBS. And we saw that through kind of like 2021 on through the middle of 2023. But as they cut rates and rate volatility comes down, that's a really good market for government-guaranteed agency mortgage-backed securities. You mentioned the housing market. The challenge the housing market has is, let's just say the neutral rate is three and the Fed cuts all the way to that through the end of next year. You know, will the 10-year, the mortgage rates that you as a borrower get out there in America, it's really tied off the 10-year portion of the curve. Are we really going to see lower 10-year Treasury yields than 4%? I think you might need to see a recession or a big slowdown in growth to really break down and get down towards that kind of mid-threes. [02:25:05] Speaker 45: Are you anticipating that we will see, I guess, if not in a recession, more economic pain in the short run or median run? [02:25:12] Speaker 46: It's hard to say. We're all watching the data. One of the things that we're noodling on, and Jerome mentioned, he's looking at the payroll numbers because they used to come in. [02:25:22] Speaker 45: You're on a first-name basis with him? I hope so. [02:25:24] Speaker 46: I feel like he's a nice guy. You know, payroll numbers have been coming in, you know, 100,000 to 150,000. And now they're coming in, and I think Powell referenced kind of that 0 to 50,000 range, and so people are concerned. Now, things have changed. We've seen a big demographic shift. Baby boomers leaving the workforce. Immigration's down a lot. So maybe a lower non-farm payrolls number, maybe that's the new normal, right? And so really, we should be more keen on the unemployment number as opposed to just focusing on job creation. [02:25:54] Speaker 45: Is 3% inflation the new normal as well? Because we've basically been camped out there, at least on the PCE. [02:25:59] Speaker 46: Yeah, we're there right now. You know, goods inflation came up a little bit, and he even mentioned that he's watching that. But it seems like so far companies have been eating a lot of that inflation and not passing it through. And I don't think if we see it in the next couple of months, I think that tariff inflation isn't going to be as bad as people thought. [02:26:21] Speaker 45: Yeah, that seemed to be a big takeaway, and he even addressed that during the press conference, the idea that a lot of that is sort of getting sucked out by the middleman. And at least for right now, that's good for the economy. Ken, I have to leave it there. Always a pleasure. All right. Thank you. Ken Shinoda, Portfolio Manager over at Double Line Capital. As we continue to count you down to the closing bells a little bit earlier, we had a pretty strong rally on our hand where it looked like most of the major indices were going to set new record highs. As it stands right now, it looks like we are going to miss that. The Dow Jones Industrial Average up about a half a percentage point on the day, and that is pretty much your outperformer. Everything else, either flat or in the red, yields slightly down a mixed bag for the dollar and the VIX. The full breakdown of all of today's market action and a push ahead to what to expect next with our global simulcast that starts right now. [02:27:07] Speaker 6: The closing bell, Bloomberg's comprehensive cross-platform coverage of the U.S. market close starts right now. [02:27:16] Speaker 45: And right now we are two minutes away from the end of the trading day. Romain Bostic here to take you through to the closing bell with the global simulcast. It starts right now. Carol Master and Tim Senevic in the radio booth. Welcome to our audiences across all of our Bloomberg platforms here on a Fed day. A Fed day, Carol and Tim, where we got pretty much exactly what we did.