Instant Reaction: Fed Chair Kevin Warsh's News Conference

Summary

Bloomberg Intelligence Podcast Summary

Episode: Instant Reaction: Fed Chair Kevin Warsh's News Conference
Date: July 29, 2026
Hosts: Paul Sweeney, Scarlet Fu
Special Guests: Torsten Slok (Apollo), Stephanie Roth (Wolfe Research), Michael McKee (Bloomberg), Tom, Lisa, John

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Episode Overview

This special episode features immediate market and expert reaction to Federal Reserve Chair Kevin Warsh’s latest press conference. The discussion hinges on Warsh’s ambiguous messaging, its impact on bond markets, questions of Fed credibility, and the implications for U.S. and global financing conditions.

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Key Discussion Points & Insights

1. Market Reaction to Warsh's Press Conference

Timestamps: [01:36]–[04:32]

• General Sentiment: Warsh’s press conference was widely regarded as confusing and lacking in clear guidance, with markets left to interpret the Fed's intentions.
• Uncertainty & Volatility: “There’s very little to hang your hat on in the market. We didn’t get any guidance in any direction.” – Torsten Slok [06:20]
• Yield Curve Movements: Two-year yields dropped (front-end), while 30-year yields rose notably, indicating market skepticism about the Fed following through with further rate hikes.
  • “Yields dropping at the front end by six basis points... questioning the conviction to actually do something about the inflation.” – John [03:04]

2. Fed Communication: Playing the Ball, Not the Referee

Timestamps: [02:12]–[03:43], [05:38]–[07:25]

• Reduction in Forward Guidance: Warsh stressed the market's role as a "pure input," but stopped short of saying the Fed was outsourcing policy to the market.
  • “He kept saying that the market is a pure input into what the market believes that the data is showing us.” – Lisa [04:49]
• Volatility as a Price: Hosts and guests highlighted that less guidance breeds more market volatility:
  • “The price for that is volatility. You could see that in the swing in the market over the last hour.” – John [07:04]

3. Credibility Challenge & Market Skepticism

Timestamps: [08:15]–[13:39]

• Market Calling the Fed's Bluff:
  • “What this market is saying right now is that he’s bluffing… Now it’s 50% chance of a September rate hike and dropping in real time.” – Lisa [08:15]
• Long-End Yield Response: The sharp rise in 30-year yields signals concern that the Fed may not act against inflation, forcing the market to do the tightening.
  • “If you keep on just talking tough… the long end will say, well, if you don’t deliver, we worry that you are implicitly allowing inflation to be higher…” – Torsten Slok [13:00]
• Fed's Dilemma: The committee may be compelled to hike in September to restore credibility.

4. Academic References & Model Critique

Timestamps: [09:47]–[11:30]

• Reference to the Lucas Critique: Warsh alluded to the idea that models using historical data become unreliable when policy regimes change, raising questions about how the Fed will forecast inflation without backward-looking models.
  • “He’s saying that you can’t just look at all the models that look back because when we are now changing policy, then forward-looking people are going to change behavior.” – Torsten Slok [10:43]

5. Implications for Capital Markets and Corporate Finance

Timestamps: [21:25]–[27:16]

• Historic Steepening:
  • “We have seen a very significant steepening of the curve that is quite dramatic… really unusual.” – Torsten Slok [21:50]
• Capital Cost Rising:
  • “How much pricier does the cost of capital get with this Federal Reserve?” – John [22:35]
• Corporate Bond Market Impact: Notable impact on recent issues by SpaceX and Amazon, with higher yields and wider spreads.
• Crowding Out: Increased sovereign and corporate supply is raising borrowing costs across the board.

6. Political Optics & Fed Independence

Timestamps: [16:26]–[18:01]

• White House Endorsement: President's supportive comment about Warsh adds to market concerns about the Fed’s independence during inflationary times.
  • “The optics of that absolutely stink... When you have a problem with inflation and you’re saying you’re committed to doing something about it, but don’t follow through…” – John [17:15]

7. Looking Ahead: Data Dependency and Communication Challenge

Timestamps: [27:37]–[30:43]

• Importance of Upcoming Data: Nonfarm payrolls and inflation prints will be critical.
• Communication Strategy:
  • “It must really inspire them to look themselves in the mirror… how do we think about this situation?” – Torsten Slok [28:54]
  • Upcoming "third act": Market will scrutinize further speeches from dissenters and key figures like Chris Waller for clues on forward policy.

8. Mortgage and Housing Market Implications

Timestamps: [31:30]–[31:54]

• Discussion on rising mortgage rates:
  • “The bank rate 30-year mortgage is 6.70%. Are we going to enjoy an 8% mortgage soon after this is going up?” – Tom [31:30]
  • “I don’t know about eight, but it’s gone up after this. If this continues, without a doubt.” – John [31:35]

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Notable Quotes & Memorable Moments

• John quoting Greenspan:
  • “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.” [01:40]
• Lisa on the Fed’s messaging:
  • “He came out, said he was really happy to have the input of the market, but he wasn’t outsourcing the Fed’s decision to the market... the market said, you know what, we’re going to call BS on this.” [03:43]
• Torsten Slok on volatility:
  • “If you do not have forward guidance, you do have more volatility. But in fairness to Kevin Walsh's point, he did say... markets are reacting to the data as we go along.” [09:12]
• Stephanie Roth on market disbelief:
  • “Markets just don’t believe them... Rather than doing watchful thinking, he’s really doing wishful thinking.” [20:14]
• Tom on historic market moves:
  • “This is basically what’s called a reverse operation twist in real time. We’ve never seen it.” [18:20]

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Important Segment Timestamps

• Fed chair’s unclear guidance & market response: [03:04]–[07:25]
• Academic model references (Lucas critique): [09:47]–[11:30]
• Credibility and long-end yield surge: [12:10]–[14:31], [16:49]–[18:01]
• Corporate/capital market implications: [21:25]–[27:16]
• Looking ahead to more Fed communication: [27:37]–[30:43]
• Mortgage market/personal finance impact: [31:30]–[31:54]

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Conclusion

This episode encapsulates a moment of high uncertainty, with a new Fed chair opting for less explicit guidance, causing sharp volatility and skepticism in financial markets. The panel underscores risks to the Fed’s credibility, a potential break from past communication strategies, and the repercussions for everything from treasury yields to mortgages to corporate financing. The episode ends with a call for close attention to upcoming data and Fed commentary, as the landscape remains unusually fluid and unpredictable.

Transcript

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[Lisa]

Bloomberg Audio Studios Podcasts Radio News

[Torsten Slok]

this is a breaking news update from Bloomberg.

[John]

Instant reaction and analysis from our 3,000 journalists and analysts around the world. I'm going to start with a quote from a lay Fed chair, this one from Alan Greenspan. I know you think you understand what you thought I said, but I'm not sure you realize that what you heard is not what I meant. I don't think anyone really understood much the last 45 minutes, and the market right now still trying to figure it out. The chairman talked about this market move we've seen in between meetings. This market is playing the ball and not the referee. Take a listen.

[Michael McKee]

Nominal and real yields are materially higher

[John]

across the treasury curve. In fact, some of the increases in

[Michael McKee]

market interest rates between FOMC meetings are

[John]

among the most significant in the last two decades.

[Michael McKee]

In the intermediate period, market attention centered on real data and real economic developments.

[John]

Prices reacted in real time to incoming

[Michael McKee]

information, and the reduction in forward guidance

[John]

may have been a factor. Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit. So is the Fed chair outsourcing monetary policy to the market? And if it is, is this Market starting to wonder whether this Fed will actually follow through. The most important part of this move today in this market cross asset is in the bond market. Check this out. Look at the yield curve, two year yields. Questioning whether this Fed will actually follow through on an interest rate hike. Yields dropping at the front end by six basis points. And with that, questioning the conviction to actually do something about the inflation that the chairman is telling you they will do something about. Look at the longer end of the yield curve. 30s untethered yields up by 7 basis points, 516 on 30s. Lisa that's an interesting market reaction to a Fed chair that for many was confusing over the past 45 minutes.

[Lisa]

Frankly, he came out, said that he was really happy to have the input of the market, but he wasn't outsourcing the Fed's decision to the market. He talked about these four goals, these deep questions that we talk about every single day, but gave no conclusion as to direction. He talked about a divided committee is not divided, but united in a determination to bring down inflation. This market said, you know what, we're going to call BS on this and you're not going to hike rates and you're going to try to jawbone us and you think that we're going to do the job for you. And so they're calling the bluff.

[Tom]

I would like us to extend the show to 5:00pm Frankly, John, I know you got early hours tomorrow morning, but that was an historic press conference. There was all sorts of little tidbits and we've got wonderful guests to talk to about this. But every sense of that was radically different than anything we've seen in recent years.

[John]

Allow me to quote another central banker, and this is the Fed governor on the board right now, Chris Waller. Going into the quiet period, he made this statement sternly. Staring at inflation until it melts before our withering gaze is not an option. Promo Is it an option?

[Lisa]

So what I love from Renaissance Macro from Neil Duddy came over and he said, Wash, my one judgment is this is a period of watchful thinking. So I guess a withering gaze is an option because ultimately Kevin Wash could not answer the question, if you still believe that inflation is a problem, why did you not hike today? He could not answer that question. What would make you hike? Reaction function. Reaction function is just guidance, is just a prediction hidden in that. Is that true? No. It's an understanding of which data and what could potentially make you pull the trigger. What I also think was interesting, he kept saying that the market is a pure input into what the market believes that the data is showing us no and yielded points this out too. It was a reaction to Fed speeches that were indicating they were moving in a more hawkish direction. This is very difficult to say that this market is just playing the ball and not the referee.

[John]

Three dissents at this Federal Reserve meeting. Rates kept unchanged. The confusing news conference for the past 45 minutes promo. Did you nail it?

[Lisa]

I closed. I missed by 20 seconds, I believe. No, no, by. By 17 second bets on how long

[John]

this news conference would last. Pretty close.

[Lisa]

4532. It was a 45 play the ball from Caddyshack.

[John]

I'm not sure where that quote is from.

[Lisa]

Play the ball, not the referee.

[John]

Isn't that fairly well like well known

[Lisa]

that right from the world?

[John]

Yeah, I think so.

[Tom]

It was from the World Cup.

[John]

Okay. All right. Two year yields down by seven basis points stocked it ran in the program tossed in slok of Apollo with us around a table to us and good afternoon. A big challenge for you, buddy. First up, Translate the last 45 minutes. What did you learn?

[Torsten Slok]

Well, the first observation is that Powell actually also had three dissents in April and he also had three dissents in December. So having dissents is not unusual. That's not a worse thing. We also had that under Powell. But that being said, there's very little to hang your hat on in the market. We didn't get any guidance in any direction. And it was also a little bit complicated to figure out what was the basis for the decision today in the sense of when Mike McKee asked, well, what are we waiting for? We didn't get a clear answer for what exactly are we waiting for? Which was of course was a subtle way to try to get some forward guidance. But this is the part of the challenge we're not delivering forward guidance. That when Mike and others ask about what is it that you're watching? What exactly should we be watching? Then the answer is that we are not really giving any guidance and the market can figure it out on their own.

[John]

The price for that is volatility. And you could see that in the swing in the market over the last hour or so. Equities were positive. They turn negative again. Bring up the bond board if we can and just look at twos, tens and thirties, this move in the yield curve toss. And I'd love to get your reaction to this because you were watching this closely throughout the news conference. This move at the front end and how it informs this move at the long end of the curve.

[Torsten Slok]

Well, what was interesting was that 10 year rates really went up and down like a yo yo for a better part of the conference. That's a little bit unusual. Normally 10 year rates take a step either up or down as we move forward in the press conference. But the fact that there was such a swing, it is also telling you that markets are trying to figure out are they hiking at the next meeting. So yes, Fed fund futures are saying now there's a 70% chance that they will hike at the next meeting. But what was also the interesting question is when he was asked about, well, if markets then are predicting say 80%, 90% chance of a hike going into a meeting, are you going to deliver on that? And the answer was no, we're not going to deliver on that. It will all be contingent on the debate that we're having. And markets may be pricing what they're pricing, but we're still going to go with just what the committee is thinking. So in that sense, the market pricing in some sense is helpful. But at the same time, we in markets can't really even rely on that. If expectations are saying we're getting a hike at this meeting, the that we are actually getting a hike.

[Lisa]

What this market is saying right now is that he's bluffing. Because if you take a look at it, it was 70% chance of a September rate hike. Now it's 50% chance of a September rate hike and dropping in real time. How much do you view the 30 year as the real tell in terms of what the market is taking from this Fed, which is potentially you're not going to hike rates and you're going to hope that job owning is just going to do the job.

[Torsten Slok]

Yeah, because 30 year rates are basically saying if you're not hiking rates, then we are hiking rates. And that's why 30 year rates have just made it much more expensive to borrow to buy a house. And as a result of that, financial conditions are tightening. And he didn't tighten financial conditions, but the market decided to say, well then we think it's time to tighten financial.

[Tom]

John, I know you've got a question. The key thing to me, John, is 30 year rates. 520 is a key print. We're at 517. 520 is an OMG print.

[John]

The price of volatility. Is that what we're learning? The price of reducing guidance, reducing communication being very, very unclear about what on earth they're going to do with policy. We paying the price this morning and this afternoon.

[Torsten Slok]

But that's why the task forces will be Very, very interesting because they will certainly also on the communication task force they will have to discuss what is the best approach. Is it the best approach to have no forward guidance? Is it a better approach to have forward guidance? If you do not have forward guidance, you do have more volatility. But in fairness to Kevin Walsh's point, he did say that, well, when we don't say anything, markets are reacting to the data as we go along. But the risk of course is that if the market is overreacting to some data, that then also needs to be resolved in the task force on communication. Namely is that the right way to do it because it runs the risk as you're saying John, that you will have more volatility.

[Tom]

Torsten, thrilled to have you here with this really odd press conference. There was a bombshell in there where he went back to 2014 in a paper he did on the Lucas critique. It's just slipped in there for a second. But to academic economists that is a bombshell. What he said and what he's basically saying is the distrust that Robert Lucas, the laureate had of models. Are we, you know I think of Claudia Saad, you mentioned this earlier. The idea of reaction functions. Is this a new almost model free Federal Reserve away to to Lucas and even away from the giant Olivia Blanchard.

[Torsten Slok]

It does lean into the Chicago Stanford school of thinking, namely that when you have a policy that you are changing, you should not run regressions and look historically at the data up to where we are now because the change in the policy is going to change how people behave.

[Tom]

New model then is there a new fresh wash model we need to discover?

[Torsten Slok]

Yeah, because I think he's saying that you can't just look at all the models that look back because when we are now changing policy then forward looking people are going to change behavior.

[Tom]

How do you determine an inflation rate across that? If you take DSG Richard Claire to Gertler Brown, if you take the mathematics of that, throw it out the window for this show. But the bottom line is inflation is the measurement we use. How will we measure inflation? With a new Warsh Lucas model?

[Torsten Slok]

But that's exactly right, Tom. That's why if you don't have the models that look at the latest data, then what are you then looking at? What are you then relying on for forecasting what inflation will do going forward? So in other words, if I'm not allowed to look backwards and say this is where the data is coming from and the trend is whatever this or that, well then what am I then using as the guidepost for thinking about what inflation will do going forward.

[John]

Basis point, move on 30s. There it is, almost higher by 11 basis points and closing in on 519. I'm thinking of all the people that would be unhappy with this news conference in the last 60 minutes. Forget market participants. Imagine being at the treasury right now and you're Scott Besson and you're seeing yields go higher on tens, materially higher on 30s. And then I'm thinking about the others on the committee. I'm not an establishment guy. I'm very, very happy to blow things up and have a new era. I, I've got no problem with that. I'm open to new ideas. But I just wonder how offended some of the sitting officials might be by how patronizing much of that news conference was over the last 60 minutes.

[Torsten Slok]

Well, it's clear that the sitting committee that he came into had already thought about basically all areas of the task forces before. So it's clear that the market here is saying, well, if we now are getting a day with a no hike, well, then the long end of course is moving, basically telling you that, well, this is all about credibility. Are you really going to follow through on inflation? And that's of course the thing that the FOMC needs to go home and think about. Now the market reaction speaks very clearly that now we need to talk about what is the credibility of the committee. Because it cannot only be talk, you will eventually have to follow through. And that's why the probability given this market reaction now has gone up quite significant that they will have to move at the next meeting.

[Lisa]

But this is really important. In other words, you're saying that the reaction, the long end of the yield curve, is a challenge to the credibility of this Federal Reserve and will force their hand that if they do not hike rates in September, the you will see some sort of a mooring of long term yields.

[Torsten Slok]

Yeah, because the risk is if you keep on just talking tough, tough, tough, and therefore markets end up saying, well, this is just a lot of talk. And you don't deliver on that tough talk. The risk is of course, that the long end will say, well, if you don't deliver, we worry that you are implicitly allowing inflation to be higher despite the talk about not allowing inflation to be higher. And that is indeed a question about the ultimate credibility. Is the committee ready to vote next time? This was not only Kevin Walsh, this was nine members who voted to keep interest rates constant at this meeting. So at the next meeting, many of them must look at the reaction today and come to the conclusion if we want to keep our credibility, we do have to move to make sure that inflation comes down and therefore ultimately long rates also begin to go down.

[John]

Michael McKay was in the room. Our colleague joins us now for more from Washington, D.C. michael McKee, we'd love your review of the last 60 minutes. What's the big takeaway?

[Michael McKee]

Well, I think it's very similar to yours. A lot of words, not much information. And the Fed chair leaves with markets probably going the wrong way from what he would like to see at this point. The thing he wouldn't answer is what they actually did today. He talked a lot about talking, but when are they actually going to do something? Whether it is acknowledging that the 3 and a half to 375 rate range is adequate for the job they want or it's not and they need to raise interest rates. There was no acknowledgement of what the case was really on either side. It was a lot of talk about while we're talking and that doesn't get the markets anywhere and people aren't going to be very happy with what they heard.

[John]

I think, Mike, there was an interesting exchange and you were part of it too. When he was asked why didn't you raise interest rates? And he basically said, well, I think rates did rise. And he talked about the move in the last 42 days. And Mike, rates rose because for many people, they thought this Fed might follow through on the data that we've been seeing over the subsequent few weeks, follow through on some of the Fed speak that we'd seen from the likes of Wall of the likes of Hammock and others, too. And Mike, and then it got to this moment where I just thought, okay, is the Fed chair outsourcing monetary policy to the market? And if he is, but then I don't think he's going to hike interest rates. We'll take all that back. And then we see this move in the bond market. I don't want to make too much of a big deal of this move. We can take it back tomorrow and in the next week or so, but it's material. You're up 11 basis points to the long end of the curve on 30s. And Mike, the conversation we're having around the table, do you believe that is a market beginning to question the credibility of this institution?

[Michael McKee]

I don't know if that's necessarily true because it's still so early in his chairmanship, but it is an indication that the market disagrees with what the Fed is doing. The market thinks at this point that interest rates should be higher and whether or not you believe it's because they're only looking at the data, it is, it is telling the market something, that data. I suspect that the markets are still looking at the data and putting it in context of, well, what's the Fed going to do about it? Because the Fed controls the benchmark lending rate for the country. The markets don't. The markets react, the markets move around. But the benchmark rate is going to be set by the Fed and the Fed is going to be reacting to the conditions in the economy. And we got nothing on what he thought the conditions in the economy are or would be. And we got nothing basically on why the market markets might be right or wrong and whether that's an adequate response, an adequate measure to keep inflation under control.

[John]

My thank you, buddy. These comments from the President certainly won't help. So we've got the White House review of things they've just published. This is from the President. Kevin Walsh is fantastic. Walsh has a board. It's a political one. Walsh would love to see lower interest rates given the move we're seeing on the screen right now. 30 yields up by 11 basis points. Those comments from the President this afternoon will not help.

[Lisa]

30 year yields have just broken through the highest levels going back to 2007. Just to give you a sense right now of the bond vigilante ism that you're seeing in bond markets because they are seeing a more potentially politically motivated Fed. Not necessarily that being the case, but given the lack of clarity, the a lot of circular talk, the lack of any kind of straight answers about reaction function or exactly why they remained on hold, and then the President's comments are

[John]

not a good brew for this particular point. I think we're both on the same page about this. I don't believe that Kevin Walsh is doing the President's bidding right now. He's widely backed by several establishment figures when he got the nomination for this job. I'm thinking of one. I can't think of anyone more establishment than Mark Carney, the Canadian Prime Minister who gave him a pretty fantastic endorsement when he got selected for the position. I don't think he's doing the President's bidding, but the optics of it absolutely stink. When you have a problem with inflation and you're saying you're committed to doing something about it, but don't follow through and then highlight the market that's doing the work for you. And now the market's beginning to push back and at the same time The President's putting out words, saying that this is actually what Kevin Walsh wants. The optics of that, the backdrop for it, not a good one, and conflating

[Lisa]

the idea of a fed funds rate with the market rate and saying that there was something that happened and that we have done something because that moved. The market's saying we're not that silly, we're not that ignorant. We know how this is done. It was an anticipatory. It was an anticipatory market. And if you're not going to make good on that, we're going to call your bluff.

[Tom]

John, this is an historic moment. The charts I'm seeing on the screen right now, John, I've never seen this is basically what's called a reverse operation twist in real time. We've never seen it. And what's key here, which Torsten, I know you've got Stephanie Roth on deck. The first and second derivatives of this move have to be digested by a huge body of the American economy. Let's just start with the housing market as just one example.

[John]

Well, let's just start with what we thought this was all about. There was a belief that we were reducing forward guidance so that we could introduce some volatility into the front end of the curve which would help cap longer end yields. That you'd start to be more uncertain about what this Fed might do, but in a different way. That maybe the outcome would be more hawkish than it would have been otherwise. And what we saw more recently, Lisa, was that dynamic people were talking about it. This would contribute to longer yields over time at the longer end of the curve, lower yields over time. That's not what you see this afternoon when you drop by 5 basis points at a front end and you are seeing a move of 11 at the long end, 3, 520 on 30s. That's not good. That is not the outcome people were looking for.

[Lisa]

No volatility. If you truly are potentially on the fence and are going to move is one thing. But if you've got a parent who's saying if you do that again, I'm going to turn the car right around and go home and the kids keeps doing that and the parent keeps driving straight to go to the amusement park, well guess what, the kids going to keep goofing around in the backseat and that's what's going to keep happening. Because ultimately if you don't believe that they're actually going to do anything, why should you start to prepare and price

[John]

it in that right there? That's experience TK that's experience. That's my real world experience.

[Tom]

When you're driving and you lean over,

[John]

no, Lisa is more than one, you turn 100%. Stephanie Roth of Wolf Research joins us now for more. Stephanie, welcome. It's a confusing one sometimes. This is straightforward. The last hour is anything but. What's your takeaway?

[Stephanie Roth]

Yeah, I mean, I think markets just don't believe them. The thing is, I do think that the Fed will alter that. The data will ultimately bail out the Fed to some extent because the market's saying we don't believe that the Fed is necessarily going to be hiking in September. You know, that raises inflation expectations. That does exactly the opposite of exactly what was set out to do today. If we do end up seeing inflation data come in a little bit softer, that might bail him out. He's basically, rather than doing watchful thinking, he's really doing wishful thinking. If the data ends up coming in line with his side, this may all work out. But if not, this could end pretty poorly.

[Lisa]

You said his side and this is important, Stephanie, it seems like the takeaway is that Kevin Warsh is much more dovish than people previously thought. Do you think that that's the correct interpretation?

[Stephanie Roth]

Yeah, I think he, he didn't want to say anything because he didn't want to make it clear that he is in favor of staying on hold. He wants to make to have markets do the work for him. The problem is like you all were talking about earlier, that might have worked up until now being, you know, following what we've heard today, the markets are going to do the exact opposite and then what is he going to say in September? So I think this is the market realizing that the first FOMC was him trying to establish credibility, trying to come across as hawkish and now markets are just not buying it.

[Tom]

Torsted slack. I've got the 30 year to 5.20 rounded up to 5.21. We can do that this late in the day. If I have this move in the 30 year yield, I'm up two standard deviations. How will finance? Obviously you're good people at Apollo, but how will finance adapt to what they heard? Adapt to this reverse twist? I've never seen it. How do you adapt tomorrow morning?

[Torsten Slok]

Well, this is a very historic day in the sense that we have seen a very significant steepening of the curve that is quite dramatic. I'm trying to think back when we ever seen like 20 basis points move in the curve, in the steepness like this. It is really unusual and the answer to your question is that these sensitive components of GDP that are interest sensitive, of course housing and autos will probably continue to struggle. They have struggled for quite some time when interest rates have been high. But the tailwinds to growth coming from air spending, coming from the one big of a bill, coming from the home shoring, those things will still continue to see tailwind. That's why we might get in the next half hour when the news come from both the hyperscalers today and tomorrow. This could also create some more volatility because that will also begin to become a macro event. If that does begin to send signals around what is the outlook for the broader economy, especially around the data center

[John]

build out to us, then can we talk about the price of the data center built out and the capital raising that we're seeing worldwide right now 38 yields up 11 basis points. That's before we even find out the capex intentions of some major companies in the next 24 hours or so. How much pricier does the cost of capital get with this Federal Reserve?

[Torsten Slok]

Well that's exactly the discussion because not only of course have spreads on hyperscalers widened out and CDS has also widened out now the base rate has also moved up and in this case actually much more than spreads have widened out. So the all in yield for financings of course in the public market for hyperscalers have definitely increased quite significantly. The issue now becomes well if your returns in AI, I expect it to be like 10, 15% or higher, well then these things are relatively small peanuts relative to the big picture of the returns that are going to come along. But ultimately that discussion is all about the economics one on one, namely what is the marginal revenue you expect to generate and what is the marginal cost of producing that piece of revenue. So for compute the debate is around well now the rates have gone up and all in yields have gone up. Is it the case that we're reaching a level of all in yields or all in cost of capital? That's beginning to become more problematic for the hyperscaler. So far that has not been the case. But the question is of course over the next 24 hours whether we get any either confirmation that that's happening or whether we are contrary beginning to see still more upside risk to more data center bailout just continuing and this is a reason why.

[Lisa]

And Stephanie, I'd love your thought and what Torsten said earlier, that all of this is not a virtuous cycle and it's not something the Fed wants to see and so torson was saying that he thinks that the probability of a September rate hike is even greater now to try to control the long end of the yield curve and prevent this sort of higher borrowing costs for some of these hyperscalers in the build out. Do you agree with that?

[Stephanie Roth]

I mean I do if the data don't improve. So if we're, if we're sitting here in September and the data just continues to remain firm, especially on the inflation side, but also on the growth in the CapEx data, in terms of CapEx related CapEx just continuing to move higher, then yeah, absolutely. That increases the odds that they're going to ultimately be hiking. I do think that we'll see seasonality in the inflation data and a bit of a cooling such that this may all work out. Such as that doesn't actually have to cut September and in that environment it will do so in an environment that's a little bit more market friendly. But if that forecast is wrong, then absolutely they're going to. This makes them even more likely to have to be cutting in September because it tells you that they're making a policy mistake.

[Tom]

Look at this moment, John, of course I got to go to the quality full faith and credit documents. Space X's 30 year bond 6.65% we're enjoying it at 7.8% right now, not quite through a new low. But again the mystery to me is the permeation of this through Wall Street. It's not just about FOM's Lucas critique and all that. What does this do to Wall street starting in Asia here in X number

[John]

of hours you mentioned Space X. So they came out with that debt issue in the last month or so and the demand was softer, below average. And then we had Amazon follow up TK and concessions were larger. And then you sort start to see spreads widen out in the secondary market to across a number of tech names as well. Tom and we've been talking about this dynamic for a while, the crowding out of the market, that there is a race to raise capital and that we've been worrying about the additional supply coming from the treasury for the best part of 15, 20 years. The deficit, it was okay at the time because not everybody else was doing the same thing. Now we talked about this already earlier in the program. Germany has gone away from fiscal prudence to borrowing and spending. Germany has moved on to something else. Japan has as well. They've had decades of deflation. They now have inflation anchors away there for that bond market yields up. We've now got the Hyperscalers moving away from buying their own equity to negative free cash flow and now issuing equity and issuing debt, that's additional supply here, there and everywhere. And everywhere you look right now, there are increased capital demands. So to have the Fed chair perform in the way has in the last 60 minutes to see the market reaction to that, that's led to high yields at the long end of the curve. To have that in this moment, Lisa things get tighter, things get harder and yields go up and the price for capital gets more expensive and the value

[Lisa]

of the dollar on the global stage goes down. And we're seeing that in a pretty big way. It is notable to see the long end of the yield curve in particular perform this way. And as Torson made a good point about the hyperscalers they have been issuing disproportionately at the long end of the yield curve, they have issued more on the long end than the U.S. government. And you have to wonder how much this is going to constrain some of the productivity and the virtuous aspects of what a lot of people are expecting and prolong the uncomfortable mismatch period that he was talking about.

[Torsten Slok]

There's also the additional challenge that if you take your textbook out and interest rates go up in the long end, the dollar should be going up. So that's why you're now beginning to ask, well, is the dollar now beginning to react to front end rates? Normally it is the long end that moves the dollar most. So there's a lot of considerations also around why is the dollar going down so much at the same time, while short rates are moving down and long rates are moving up?

[John]

STEPHANIE in the next two weeks we'll all be very focused on the Fed speak. We were calling this a three part act all day. The statements, one act, the news conference is another. It was quite an act. The third act is going to be the speeches of all the officials that haven't had their say yet. What are you looking for from the Fed speak in the coming weeks?

[Stephanie Roth]

Yes, we're certainly going to hear from those that dissented. Why did they dissent? Because war certainly didn't really answer that question. So we'll hear, we'll certainly hear that argument. And then I'm going to be looking for, you know, eventually the next speech by Waller because that's going to give us a sense of what did the core of the committee actually, what is he thinking? He's been amongst the most transparent and represents more of the middle folks on the committee and that's going to Give us a much better sense of what are they thinking, what are they leaning and what does he think about what Price Action is doing? Because he is somebody who's very willing to give his reaction function and his thoughts on what markets and the data are going to do.

[Tom]

That's right where I wanted to go. Stephanie, Torsten Slok, how does Chairman Walsh react to what we're seeing on the screen, the data? And the fact is he's going to have to amend the way he speaks the concepts, he speaks the McKinsey MBA of it and talk to academic economists.

[Torsten Slok]

I think that it's not only him, it is the nine versus three on the committee here that there were nine members who voted to keep rates constant today. So the consideration for the whole committee must be to go home and think hard about how do we communicate this? Do we do this before the meeting? What do we say at the press conference? How do we communicate in this statement? Because it is clear that this is a somewhat worrying development, especially in the long end. We do have next week nonfarm payrolls. Let's not forget that. So to Stephanie's good point, the data could begin to move in the opposite direction. So who knows? We all have all kinds of views on what might be happening on the labour market at the moment. So far it's been relatively strong. But you're right, Tom, at this point, it must really inspire them to look themselves in the mirror here and begin to think about how do we think about this situation and given what just

[John]

happened today, loss of Fed chairs make communication errors, particularly at the start of that term. We've seen that repeatedly in Federal Reserve history. This, in that way might be no different. We do have to go through this process and start to understand how this new Fed Chair communicates what it means to markets. And I mentioned this earlier, this move in the bond market, don't know where it goes. We could take it back tomorrow. That's not really the point. The point is whether this is by design or not, is this the intention? Is this actually what Kevin was, the new Fed chair wants to see? Is this the outcome to that news conference that he was looking for?

[Lisa]

Well, if the data is speaking, the market is speaking and the market is saying, right now, we don't believe you. So does he have to come out and hike rates? Who is his audience? Who is he speaking to? I ask that because typically Fed chairs have an odd job of trying to toggle between the broader public and the markets. He wasn't speaking to the markets or if he Was then he's not getting the reaction that necessarily he wants. Given the fact that they've talked about wanting to bring down mortgage rates in particular and this is going to move it in the opposite direction.

[John]

Stephanie, it's good to see you. It's always great to catch up. Stephanie Roth there of Wolf Tossen, Slok of Apollo. We again on this decision from the Fed chair, Kevin Walsh and a decision by the committee to keep interest rates unchanged with 3% from three regional Fed presidents. And then a very confusing news conference that has come with the price and that price this afternoon is high yield to the long end of the curve.

[Lisa]

Yeah, the highest levels that we've seen since 2007. At one point in the final moments of the trading session, you have to wonder to your point whether he is satisfied as well as whether he is going to rethink how much information he would like to disclose. It seems like he thinks the less information he gives is a virtue. However, I think a lot of people would say that maybe this is not the controlled kind of response that leads to any kind of predictability.

[Tom]

Quickly, the bank rate 30 year mortgage is 6.70%. Are we going to enjoy an 8%

[John]

mortgage soon after this is going up? I don't know about eight, but it's gone up after this. If this continues, without a doubt. The Fed chair Kevin was wrapping up his news conference. The good news, maybe it's bad news for you, I don't know. But we'll be here at every meeting because there will be a news conference for the rest of this year after every meeting, a commitment to that from the Fed chair.

[Lisa]

Again, why then would you introduce the idea of not potentially having one? There's so many questions here. The lack of clarity is one thing. If it's instrumental, detrimental in creating volatility, or if it's lack of clarity for lack of clarity's sake because ultimately you don't want to invoke political ire. I don't know.

[John]

And let's see if these moves stick.

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[John]

Meow.