Paul (2:21)

And I don't know that he sent a clear message 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 as a risk management rate cut. Flew in the face of the hopes and dreams of markets that were hoping.

Jeff Rosenberg (2:47)

Brilliant about Ford 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 like a B52 bomber's wingspan.

Tom Keene (2:59)

Massive spread.

Jeff Rosenberg (2:59)

Massive.

Tom Keene (3:00)

We can talk about it right now. TK @ the very bottom of that spread is a dot that's basically projecting a massive amount of rate cuts. It's a political debt, a sub 3% 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 promo, 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.

Paul (3:35)

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, 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, who will be doing the decision making here. 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.

Tom Keene (4:07)

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. A lot to process here. Many contradictions. Is that a fair way of describing this meeting?

Bill Dudley (4:21)

I think there is 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 risk 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 risk and the labor market, it seemed to be a little bit higher. You know, after that, you know, 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 parse the summary of economic projections a little bit more and realized that it was actually nine to nine plus million. So people wanted either or no more cuts or one more and nine wanted two more cuts. And then there was Steve Marin who, who I'm absolutely confident that that that's his dot.

Paul (5:21)

Well, Bill, I think a lot of people would agree with you. I just wonder going forward how much you are satisfied by Fed Chair Powell's response to why they are upgrading their expectation for inflation, why they always put the idea of 2% two years out and why they are still cutting even though they have not achieved that in more than five years.

Bill Dudley (5:42)

Well, if he didn't think policy was restrictive today, then he certainly they certainly wouldn't have cut. But he's starting 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 to 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, economic economy evolves. I mean, look at, look at the data just over the last couple of months now 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 3.4%. So there's a lot of uncertainty on the outlook. But you know, this is, this is an insurance rate cut. That that's all it is. And it doesn't really foreshadow what's going to happen going forward.

Jeff Rosenberg (6:40)

Bill Dudley, you're one of our best 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% in the last 24 months. Is this a Fed looking at a purchasing power crisis for too many Americans out to the Dec. 10 meeting and.

Bill Dudley (7:12)

Into next year well, there's definitely a squeeze on low income households. 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, 3% 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.

Jeff Rosenberg (7:47)

So who do they do it for, John? Global Wall Street? Is that the mandate?

Tom Keene (7:51)

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 will hit our inflation target. Mike McKee addressed this in the news conference and actually think it's a really important moment. How credible is this pursuit of 2%?

Bill Dudley (8:20)

Well, I think it's a fair point that, you know, every, 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 Paul made it very clear, he's trying, they're trying to balance the fact that the two goals are intentional. And so if they just focused on driving immediately to the 2% 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 2%. The risk is that inflation expectations finally become unanchored and the attacks on the Fed's independence obviously increase that risk.

Tom Keene (8:57)

Bill Dudley with the latest. Thank you, sir. Appreciate your reaction. Thanks for standing by. The former New York Fed President Michael McKee was in that news conference. It was an important moment, I think. And my Nikkei 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?

Mike McKee (9:15)

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 Steven 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 2% 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 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 target?

Paul (10:21)

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?

Mike McKee (10:40)

Well, 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, the, 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 dec to comment on Lisa Cook. He tried to keep it just to 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 that we've seen in a number of years.

Tom Keene (11:38)

Mike, just before you go, there was a moment there where I do think he addressed the governor mar in 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.that Governor Myron.sub 3% is a flavor of things to come, Mike, to what extent this committee will push back in the sense that.

Mike McKee (12:05)

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 to push rates lower whether or not the economy justifies it.

Tom Keene (12:38)

Mike McKay with the latest. Mike Clinic, as always, you're one of the very best. Appreciate your time. I think would be a massive mistake just to say that's all political. We had this conversation with Greg Peters of Peach and 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.

Paul (13:08)

And right now it seems like it was 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 1%, 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.

Jeff Rosenberg (13:28)

We're going to get to Jeff Rosenberg. But John, I was going to go to Mike on this. So let me just bring it up. April 29th, next year, June 17th, next year, July 29th. I think there's an election just after the October 28th meeting. When does House politics or even Senate politics come into this discussion with a vengeance? I don't know when it is.

Tom Keene (13:48)

I think we're right there right now.

Jeff Rosenberg (13:50)

Yeah.

Tom Keene (13:50)

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 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 what policy should be in 2026. And that's going to bring a very different flavor 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. Yeah.

Paul (14:42)

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.

Tom Keene (14:52)

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 over the last 90 minutes?

John (15:09)

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, it's the validation of the Waller Bowman critique from, 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. Kind of a big takeaway here is that the bond market and the 20 year end 25 outlook 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 mentioned it before. You know, going into the meeting, there was a lot of 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 risk shifting. And I think that's important in terms of validating that earlier point I just made that, you know, bond markets for the end of this year are kind of right online with where the Fed is. I think the disconnect into next year is interesting and that's going to have to be resolved, I guess.

Paul (16:57)

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.

John (17:16)

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 in corporate, 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.

Jeff Rosenberg (17:56)

Jeff Rosenberg, I assume you survived probability and statistics at Tepper at Carnegie Mellon. What's the standard error these fancy guys at the Fed are working with? How certain can we be the path forward? Are they really making it up, meeting to meeting as they go?

John (18:15)

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, 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, 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 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.

Jeff Rosenberg (19:50)

Absolutely brilliant. John, what this amounts to is, is it a new data dependency?

Tom Keene (19:54)

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 sank. 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 is 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 2% actually is. And as a bond investor, how your approach to a market should change given the information that you've had this afternoon.

John (20:36)

Well, and it was in your conversation with Mike McGee and his, his question, you know, the risk is they lose credibility on the 2% number. Now you can get stable prices at 3% 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 of to a 2% 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 2% 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, inflation protection. And the longer you go on above that 2% 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 is pretty contained because the inflation data isn't accelerating at the same time as the labor market is decelerating.

Paul (21:58)

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 just, it's come off and I just wonder if, let's say President Trump, 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.

John (22:37)

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, in, in, in policy alongside the changes in data.

Tom Keene (23:45)

If we get Chair Rick Rieder, I'm loading up on bonds okay, Jeff, I'm going to let you go. You don't have to respond to that. Don't get in trouble.

John (23:53)

Thank you very much.

Tom Keene (23:54)

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 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.

Paul (24:27)

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 is able to get some of the other members to come on board with him. And so it is just one person.

Jeff Rosenberg (24:46)

On a committee more than ages years. I'm looking meeting to meeting to meeting. It's a fed that's going to be overcome by events.

Tom Keene (24:53)

When you wake up a little bit earlier and join us tomorrow. Do you fancy that? I'm going to stand back.

Jeff Rosenberg (24:58)

Come in.

Tom Keene (24:59)

What do we have to pay TK to make you wake up earlier in the morning?

Jeff Rosenberg (25:02)

I got the Bentley. It's the. Getting the car down fifth Avenue is.

Tom Keene (25:06)

It's difficult. But if you want to talk about the haves and the haves now, talk to my people. This right here, just buy a Bentley.

Paul (25:18)

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