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Final Fed Decision of the Year 12/10/25
00:42:41
The Federal Reserve is expected to deliver its third straight interest rate cut in its last meeting of 2025. We break down the impact on markets, the economy and tech financing ahead of Oracle's earnings.
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B
Thank you very much, Scott, and welcome to the Exchange. I'm Kelly Evans and we're less than an hour away from a rate cut decision. Will it be one and done or more to come? Our guests have some very different opinions about that. But with us this hour, fund Strat's Tom Lee, who says it's one and done, but it won't rail the rally. Ironside's Barry Knapp is much more dovish, but with a major caveat. Former CEO chair Jason Furman doesn't think the Fed should cut at all today. VC low Tony says a cut is needed, but it could also add fuel to the debt boom. And we'll hear in a CNBC exclusive from Blackstone's Jonathan Gray. Plus, the creator of the SAHM rule, economist Claudia Sahm says we do need an insurance cut today and she'll be here to explain why. With stocks in a holding pattern until this decision, you can see literally almost unchanged 10 year looking a little better too at 416. Let's get straight to Washington and Steve Liesman with the final walk up. Steve?
- [01:42]
A
Hey, Kelly. The Fed at its final meeting of the year expected to cut rates for a third straight time but signal a higher bar for future cuts. And while the Fed meets, the president expected to hold interviews to narrow down his choice to replace Fed chair Jay Powell next year. Futures market fully pricing in at 90% for a cut today, but that falls off sharply in January. You can see there. And there isn't really another cut confidently priced in until June. What happens then? Well, Powell successor will take office in June. Fed watchers expect the Fed to adopt language in its statement from a year ago when it said, quote, in considering the extent and timing of additional adjustments to the target range for the federal funds rate. Well, what was that? That was a signal the Fed was going to pause rate cuts. Further signal could come in the Fed's forecast and the dot pot, maybe some dissents. With disagreements continuing on the committee over how many rate cuts will be forecast for next year. CNBC able to report that the president will hold a series of interviews with prospective Fed candidates or Fed chair nominees, beginning with former Fed Governor Kevin Warsh. Today we can also confirm an interview with betting market favorite Kevin Hassett and Fed Governor Chris Waller. Further down in the probabilities. All of this taking place in a very curious environment, Kelly, of rising bond market yields, unusual for a time when the Fed is cutting and the Fed making policy forecasts in the absence of official data that come out next week. So the the outlook could change sharply not just with the statement and with the Powell press conference, but in seven days when we get all that data.
- [03:08]
B
Kelly, that's exactly right. I know you've said they should wait. Did anyone ever entertain that concept there, Steve, that you floated to them?
- [03:15]
A
Maybe for a nanosecond, but I think they decided that they would not look good if they were waiting on one piece of data. To which my argument was it's not one piece of data. Two months of jobs data and it's a bunch of inflation data. So we'll see. Maybe it's the right call. I do think, Kelly, it's worth pointing out, you know, their thinking, I believe, is on a risk management basis that whatever happens next week, they'll feel better if if they had cut in the face of a weak, a weakening job market, then they would have not cutting if inflation is a bit elevated.
- [03:47]
B
Yeah, exactly. You know, it's hard to do it and then get so much more information about the economy. I understand that. See. For now, thanks. We'll let you go and we'll see you soon for the big decision. Steve Liesman down at the Fed. And let's bring in our first panel now, which is Barry Knapp, the director of research at Ironsides Macro, and Tom Lee, Fundstrat Global Advisors managing part. Welcome to you both. Tom, you're more I don't want to make it sound like you have a point of view other than that you're expecting a more hawkish Fed and Barry, you're expecting one that's a little bit more dovish. So Tom, you're more in line with consensus right now. What would that look like and why are you still bullish on stock prices?
- [04:20]
A
Well, I think precisely because Our clients are expecting a hawkish cut. So exactly as Steve laid out. You know, Fed does a cut, but future cuts are uncertain, not even maybe until June now, because that's the base case then if that's what happens. Of course, markets have already been bracing for that, you know, and they've been bracing over it since October. And of course there's a chance that it's a dovish cut, which would be bullish as well. And then I think would what to.
- [04:49]
B
You would be a dovish cut. Are there projections, Are there dots? Yes, there is. So we'll know right away if they come out and those projections show that they're expecting more rate cuts next year than you're saying. We might only get one more in the mid, in the summer.
- [05:01]
A
That's right. And it could also be interpreted dovishly if they start acknowledging the balance of risks are shifting so that they then markets can realize the Fed is now acknowledging there's some underlying fragility of the economy. And of course now QE is because Q2 is ending. It's essentially not QT, which is QE. And there's, you know, of course the chance that there's something positive. The Fed has to say. So I think it is a hawkish cut, but actually I think market reaction is positive.
- [05:32]
B
And we're, there's so much more you're queuing up here. We're going to get into. But on a top level, why, why isn't it a bigger roadblock for markets, Tom? You know, you could look at this and just say, well, we're already basically at all time highs, look at the Russell's and so forth, you know, and Powell's been known to not have a very favorable reaction to his commentary and he's only got a few meetings left, so maybe he's even more hawkish than usual.
- [05:53]
A
I don't know.
- [05:54]
B
Why don't you think that's a bigger risk? Whether it's, I'm not just myopically even talking about this afternoon, but, you know, kind of setting the tone into year end and then into next year.
- [06:02]
A
Yeah, I mean, I think part of it is just the market's now adjusted to the idea that the Fed is institutionally slightly hawkish. Now, part of it may be because.
- [06:14]
That there could be undue pressure coming from outside the Fed and the institution wants to protect its integrity and that comes across as hawkish. But that dynamic is something the markets have been bracing for and they've reacted negatively to it. Like in October they did. And so I Think because of that, that's what people are building into this December meeting, which is why it could be a surprise.
- [06:37]
B
It's like when Apple always gives cautious guidance. You just cut the stock, always sells off after earnings and then it does fine again. And they also of course have the post Covid period to react to where you know that someone like Powell who's about to leave is going to want to say I didn't reopen the door to inflation.
- [06:52]
A
Right, that's right.
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B
For that legacy. Exactly. So Barry, all of that said and done, there are still lots of people starting to talk about this quantitative easing issue. So it's a little bit confusing when you have is, are we to view that even as economic policymaking or is that something completely different that just has to do with the plumbing of the financial system.
- [07:11]
A
So for three years you and I have been talking about the Fed eased primarily using their balance sheet, but tightened using only one of three channels that they have, which is they've just been draining reserves from the system. And so that's the plumbing issue which is getting tight. But the much more important and impactful part of QE is when they're buying treasury notes and mortgage backed securities that lowers long term rates which is what really influences equity prices and other risky assets. And they suppress volatility by buying mortgage backed securities because of prepayment.
- [07:49]
B
When do you expect them to come back into the market?
- [07:51]
A
The treasury market, they. The. It is not lost on me. It shouldn't be lost on any investor that the 10 year treasury yield has moved from 399 on December 1st to 420 since the Fed began what I'm calling DT duration tightening.
- [08:06]
B
Oh no, now I'm confused. Right.
- [08:08]
A
Well now they're reinvesting their mortgage backed securities pay downs into treasury bills, not into treasury notes.
- [08:15]
B
Right.
- [08:15]
A
So that means they're buying 17 fewer billion per month of five, we'll call them five year treasuries for simplicity's sake. And they're buying bills instead. And so that's putting upward pressure on longer term rates. This is when Kevin Wash talks about shrinking the Fed's balance sheet to encourage private sector lending. He's, he's skipped a step in there. The step is deregulating the banking sector, lowering the G sib surcharge, widening the supplementary leverage ratio, doing all these things that could potentially expand bank balance sheets as much as $6 trillion from the 22 or 3 or so billion that they currently are. They should be the buyer. They own the debt. This is crucial in the long run that a price sensitive buyer owns the government debt, not a price insensitive buyer. So when the government starts spending like drunken sailors, as they did in 2020 and 21, spending 30% of GDP. Right. They're not able to just keep going, finance it and keep going. And so this is a crucial transition that needs to happen this year. But the reason. Yes, I'm, I'm dovish on the Fed cutting the policy rate to try and steepen the yield curve so small banks can participate in this process.
- [09:32]
B
A lot of people are saying they should cut because they want to renormalize the yield curve.
- [09:37]
A
That's right. So their policy rate has been overly restrictive for floating rate borrowers, small businesses, Russell 2000 companies. You know, Tom and I have tried to get bullish on the Russell 2000 for the last couple of years.
- [09:48]
B
Right.
- [09:48]
A
This is part of the reason why it hasn't worked. But policy has been accommodative for long term fixed rate borrowers, investment grade companies relative to how you companies, for example. So for me it's crucial that they allow that duration to return to the wild, go back into the market, reinvest in bills, but lower that short term rate.
- [10:08]
B
And just to put a point on that so I can follow you when you say look, the rate is too high, it can come down a little bit. Fine. But then they also need to restart qe. Ok, I guess they do.
- [10:18]
A
They're not going to restart qe. If I'm right about deregulating the banking sector, they're going to be totally unnecessary.
- [10:24]
B
They're going to restart qe. They're already saying they're already. Basically it'll be total.
- [10:28]
A
Well, he, Powell is not going to be chairman anymore and integral into what Bassett is asking the next Fed chair to do is deregulate the banking sector. The banking sector doesn't need to hold 3 trillion of reserves because the requirements don't.
- [10:42]
B
Then they don't force them worry about the balance.
- [10:45]
A
We're not going to have tight repo rates.
- [10:46]
B
Yeah, yeah.
- [10:47]
A
So that's how we avoid the Fed expanding their balance sheet and interfering with the price of the most important security in global markets. The ten year trip.
- [10:55]
B
Absolutely. But Tom, the reason why we fixate on this, which sounds wonky but it's not. Especially if you're in the crypto world, for instance, where you hear people saying QE is coming, the liquidity is coming, buy Bitcoin or buy whatever crypto asset or buy stocks because this is coming. So it's important to Know whether it's.
- [11:10]
A
Coming or not comes from the banks. Yeah, fair. But yeah, in the crypto world, Q T was draining liquidity. So the ending of QT is essentially qe because if they're just holding the balance sheet flat, they are still going to be essentially adding liquidity to the.
- [11:27]
B
System to maintain the size.
- [11:28]
A
Yes. And so that is why I think crypto prices have risen in anticipation of this meeting.
- [11:35]
B
So do crypto prices keep going? Do you have a bullish view still on small caps? If we're finally going to get that rate coming down a little bit, where should people look for alpha or outperformance?
- [11:47]
A
Yeah, I mean like 2026 is a year like there's a new Fed. Right. And, but a dovish tilt and at a time when the ISM has been below 50 for a record more than three years. So that's really good for small caps and as Barry says, if they deregulate banking and we were talking about this offline, that's really good for small caps, but that's also really good for the business cycle. And we're, we've talked about this in some of our past research. Crypto prices are really sensitive to the ISM. So the ISM moving back above 50 has historically been associated with actually super cycle moves in Bitcoin and ethereum ISM.
- [12:29]
B
Going into expansion territory is positive for bitcoin and overall. Interesting.
- [12:33]
A
Yeah. And so if you look at ISM and bitcoin and you detrend Bitcoin essentially look at its distance from the 200 day, it's almost perfectly correlated to the ISM.
- [12:43]
B
Surprising.
- [12:44]
A
And same thing with copper to gold prices. So copper's an industrial metal versus gold is.
- [12:49]
B
Right. But all of that tells you that it's basically just risk on that they're all behaving like an economy. And is that, am I over?
- [12:55]
A
Yeah, I think that's, I think that's right. I think bitcoin is a bit of a chameleon because there, there will probably be a time when it acts like gold, but right now it acts a lot more like it's sensitive to monetary policy and the business cycle and both are about to turn up. So that would mean anybody who thinks the bitcoin for your cycle means crypto prices are down next year, we're betting against that, thinking that new highs come early January.
- [13:22]
B
As a final word, you know, we're about to talk to Jason Furman Barry, who says the Fed should not be cutting because of inflation. And I'm just curious what your response would be to that that the rate.
- [13:31]
A
Did not trigger the 20, 21, 22 inflation. We cut the Fed cut the policy rate from one and a half to zero. But then they bought in 21. They bought a trillion and a half of securities which injected that amount of reserves into the system at the same time that Janet Yellen drew down the Treasury General Account, didn't issue and injected another 1.6 trillion in reserves. That government spending and Fed purchases of assets which facilitated the government spending is what drove house prices up 46% in 18 months and drove goods prices from negative one to 12 and a half. So I would much prefer the Fed controlling inflation by expanding the term premium for longer term debt. Trying to cool off this excessive speculation that people like Beth Hammack are worried about. Steep. Right. And steepening the yield curve so that small banks can start lending to small real estate developers and small businesses and we can stabilize the part of the economy that's really weak.
- [14:34]
B
So again you think they can lower rates and still lean against the AI bubble? For sure.
- [14:38]
A
Because the, the thing that determines stock prices over time we create an equity risk premium. We use the 10 year tips yield, the real yield from the 10 year part of the curve, not the policy rate. Right. So this liquidity versus longer term rates is crucial distinction. And I would argue to Jason if they really want to control inflation the thing is making this process privatizing the Fed's balance sheet so that price sensitive buyers own the debt and the government can't go wild.
- [15:08]
B
Barry wants long term rates to go higher. You're never going to get a.
- [15:11]
A
They're not, they're not going. I want to be clear. They're not going far higher because Basin does have some tools underway. The deregulation of the banking sector. He could eliminate the 20 year. There's other things he's going to do.
- [15:22]
B
Yeah.
- [15:22]
A
But I do think, you know, a 440 to 450 move or so in tens early in the year and a much steeper yield curve.
- [15:29]
B
Interesting.
- [15:29]
A
Is probable.
- [15:31]
B
And that would be the right formula. You know there'll be a quiz after the break if everyone's been following up but I like the nuance here because it's. There's much more to it than simply.
- [15:38]
A
What they do is the balance sheet is just so crucial and it was so crucial to what happened in 21. Yeah. And it's so crucial to the outlook going forward. The Fed owns six and a quarter trillion of securities. The committee at the last meeting in the minute said they think that portfolio should have this roughly the same duration as Treasuries. Outstanding.
- [15:56]
B
Yeah.
- [15:57]
A
That would imply they should own 2 trillion of bills, not 200 billion.
- [16:01]
B
We don't even need stablecoins. We see we're solving all these problems at once. Gentlemen, thanks. Really appreciate it. Of course, we'll find out in 45 minutes what they decide. Barry Knapp and Tom Lee, thanks for coming on set today. Former CEA chair Jason Furman does say the Fed shouldn't cut today. He'll make his case and tell us what he wants in the next Fed Chair right after this quick break. Plus, Blackstone President and CEO Jonathan Gray will be here. The firm has over $1 trillion in AUM and huge exposure to real estate, finance, infrastructure and credit. And that's also coming up on the Exchange.
- [16:34]
A
This is the Exchange on cnbc.
- [16:39]
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- [18:17]
Welcome back. We're awaiting the Fed decision on rates. Top of next hour. Markets are widely expecting a third quarter point cut in the last Fed meeting of the year. The refinitive odds are at 91% today, but our next guest says the market has it wrong and easing is a mistake because inflation is well above target. Joining us now is Jason Furman, former chair of the Council of Economic Advisors under President Obama, now with Harvard's Kennedy School. Jason, it's great to have you here. I did ask our previous more dovish guest, I don't know if you caught that, why he thinks that you're wrong about this. And it's his explanation is basically because the government is not pumping liquidity into the system the same way that we were in 2021. So inflation's less of a problem now. I don't know if you want to pick up that thread.
- [18:59]
A
So first of all, I think they are going to cut rates today. So I don't think the market's wrong in its prediction. I think the Fed is wrong in its decision inflation. And I partly agree with your guest. I think the inflation was largely fiscal in 2021 and 2022. But right now the continuation of inflation is also partly fiscal. We're continuing to run a large budget deficit. It's actually going to go up a little bit over the next year. And so that means the Fed needs to do now what it basically was way too slow to do in 2021, which is offset all of that expansionary demand policy. And yes, we should have lower, higher long rates, but the only way to get there is if people aren't expecting so many cuts to the short rate as they are right now.
- [19:43]
B
So you would get a higher 10 year yield to lean against the bubble and everything else and to lean against inflation. But you know, you'd get there by basically saying, well, it's because the Fed's not going to keep cutting interest rates. What about, what about the little guy? What about the small banks? What about smaller companies? You know, what about the public who thinks, you know, I need a break here, I could use lower rates.
- [20:04]
A
Look, if you want to have lower rates, the government's going to have to lower its budget deficit as long as we're doing expansionary fiscal policy at the same time that we have enormously expansionary financial conditions coming from the huge run up in asset prices. That just means the system is awash in demand. Inflation's a percentage point above target. The unemployment rate is only a tenth or two above its target. And so the Fed needs to keep its focus on inflation. And ultimately that's the right thing for everyone. But yeah, it does require more rate increases than it would if we weren't increasing the budget deficit in the way that we've been doing.
- [20:43]
B
I do think it's a bit of a confusing time. You have terrible consumer sentiment even while gas is below $3 a barrel. You know, you have the President talking about an affordability crisis while at the same time the Fed's talking about lowering rates. Let me play. Actually, the President speaking last night about the economy and inflation and he promises they're combating it. Here's what he said.
- [21:02]
A
You're getting lower prices, bigger paychecks. We're getting inflation, we're crushing it. And you're getting much higher wages. I mean, the only thing that you. It's really going up big. It's called the stock market and your 401k is going up.
- [21:22]
B
Jason, how would you respond?
- [21:24]
A
Yeah, I mean, he has a tool that could make things more affordable and it would be to drop his tariffs. The wonderful thing there is he doesn't even need congressional legislation. He can do it with a stroke of the pen. He could do it before the Supreme Court comes and rules on some of the tariffs that he's done. There's no doubt that part of why goods prices are up, this year's tariffs. In fact, he himself said it. He talked about how people wouldn't be able to afford as many dolls. The Vice President talked about how we can afford to pay more for toasters made in America. I don't, I don't think that was the right attitude on trade. I'd love to see them, you know, undo that self inflicted wound.
- [22:00]
B
In other words, the Fed is the only game in town to keep inflation from staying, you know, at the relatively elevated, elevated levels. I think we're around 2.8% on the core PCE. And that would be your preferred way of dealing with this is keeping rates kind of where they are in what you view as, I guess, restrictive, maybe needs to be more restrictive territory.
- [22:20]
A
Look, my preferred thing would be the President and Congress. The President can do the tariffs all on his own. The President could work with Congress to bring the budget deficit down. If you took both of those steps, then the Fed could cut interest rates while being on a path to have lower inflation and lower inflation expectations. The Fed is the only game in town once again, because no one else is doing their job and playing their part to deal with our economic situation.
- [22:49]
B
You know, what I think is tricky and interesting is that both yourself, who would argue for fewer rate cuts, and someone like Barry Knapp who's arguing for more rate cuts, you both think the longer term bond yields are going to or probably should go higher. You know, for some of these reasons we've discussed, so maybe it's 4.2, 4 and a half percent that's going to keep mortgage rates elevated. Like that's the most important, you know, benchmark really for the whole US Economy, including for smaller borrowers. So no one's talking about a path where that rate comes down substantially.
- [23:21]
A
Yeah, I think that's right. And look, I don't like that. I wish mortgage rates were lower. I wish the 10 year was lower. I'd personally be happier if that was the case. But if the central bank is the only one dealing with the inflation problem, it just has this blunt tool. And this tool largely operates through things like the real estate sector of the economy. And in some sense it needs to do even more there to make up for the fact that its tool just isn't evenly spread in its application throughout the economy. I think the good news here is part of why there's this pressure on the Fed is also another good thing happening in the economy, which is we are having an AI boom right now. It's on the demand side. My hope is it starts to show up on the supply side in terms of higher productivity. And if that happens, it will make some of these choices less painful and really will help, you know, increase people's paychecks.
- [24:16]
B
We have to go. Claudia Sahm later this hour is going to argue that we need an insurance cut because of what she sees going on with the labor market. So are you not worried? You think the labor market's fine?
- [24:25]
A
Oh, I'm worried about the labor market, but I'm more worried about inflation. And the growth numbers are so strong that it looks like what's happening on the real side of the economy, it's more about labor supply, which is not something the Fed can fix, not labor demand.
- [24:39]
B
All right, Jason, appreciate your time this hour. Good to get your point of view. Jason Furman with Harvard's Kennedy School. Coming up, Blackstone President and CEO Jonathan Gray. Exclusively from Goldman's Financial Services Conference, we'll get his thoughts on markets and the economy. With the shares of Blackstone riding a four month losing streak, which is actually its worst since 2020, don't go anywhere. Wear.
- [25:05]
A
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- [26:43]
A holding pattern for stocks as we await the Fed decision, but the Dow's up 185 now while the Nasdaq is going exactly in the other direction, down about 100% points. Russell's are fractionally higher. Quick check on bond yields as well. Remember, we came into the month below 4%. Briefly hit 420 earlier on, but you're seeing a bit of buying throughout the Yield Complex for 159. Let's get to Kate Rogers now for the CNBC news update. Hi Kate. Hi Kelly. Federal tax prosecutions have fallen to their lowest level in decades. That's according to a Reuters analysis which found prosecutions down 27% from last year as the Trump administration continued conducts a sweeping overhaul of the justice system to focus more on immigration, an overhaul that included deep cuts at the IRS's Criminal Investigative Unit. Defense Secretary Pete Hegseth is meeting with his British and Australian counterparts aimed at moving forward on nuclear sub building and technology sharing pact. It was originally signed in 2021 and includes the sale of three US built nuclear subs to Australia starting in 2030. And Real Housewives of Salt Lake City star Jen Shah was released from federal prison today more than four years early on six and a half year sentence. Shah pleaded guilty in 2022 to wire fraud for her role in a nationwide telemarketing fraud scheme. She was also ordered to forfeit six and a half million dollars and dozens of luxury items as restitution. According to the Bureau of Prisons, she is now either in home confinement or or a halfway house. Kelly, back over to you. All right, Kate, thank you very much. Kate Rogers about 30 minutes away from the Fed move and the stakes couldn't be higher for tech companies as they spend eye watering amounts on the AI buildout. The big five hyperscalers, Amazon, Alphabet, Metta, Microsoft and Oracle, they've issued $108 billion in debt this year. That is a 500% increase from just last year. And with the Fed ending quantitative tightening last week, my next guest says signals around what comes next are just as important as the policy rate. Sounds like our earlier discussion, love. Tony is founding managing partner at Plexo Capital and a CNBC contributor. It's good to have you here.
- [28:48]
A
Thanks for having me.
- [28:49]
B
So the Fed, some say, needs to make sure that it doesn't further stoke an AI bubble here. Do you share those concerns?
- [28:57]
A
Well, what's interesting is if we look at the anticipation, it's already been priced in to see a drop of 25 basis points. And as your former guest alluded to, really I think the story here is not only the drop in the rate itself, but also the balance sheet. And so we're going to have to listen very closely to hear what Chairman Powell said to let us know now that quantitative tightening has ended, what we're going to do in this maintenance mode for the balance.
- [29:23]
B
She why are you as a VC so obsessed with that? Right? Like why does it matter? Why does it, why is it so impactful?
- [29:28]
A
Yeah, it's so impactful because what we've seen now is that the private companies are really driving a lot of what happens in the public markets. And so for an investor, we need to understand all the dynamics that happen within the entire macro because we have moved from thinking about these typical software company investments as being just huge cash flow machines. They're starting to look in the public markets more like utilities. The having to build out this infrastructure. You know, when you look at a lot of these companies, even Alphabet issuing about 25 billion in debt now we'll have to see how much of that is used for refinancing. But even in the notes they said this is going to be partially for air infrastructure. And it's because as Morgan Stanley has estimated, we likely need about 3 trillion in infrastructure to be built over the next five years. And about half of that is going to need to come from the debt markets.
- [30:18]
B
Right. But so some say the, you know, they don't want the Fed to lower rates and kind of then really open the floodgates to. These companies are already able to borrow at pretty good terms. Right. If. And maybe it's not up to the Fed, maybe it's the marketplace telling you what the appropriate borrowing rate should be. Do you think this is all building up towards an AI bubble?
- [30:38]
A
Well, let's think about this in two ways. I like we're an investor in Anthropic and I like how Dario approached this at DealBook with your colleague hosting.
- [30:46]
B
Right.
- [30:47]
A
He said that when you look at it, we're not in an AI bubble when it comes to the actual technology itself and the use cases. That's real. Yes. But what we do need to get our arms around is this new, new dynamic that we've entered where we're requiring massive amounts of infrastructure to be built out. And when you look at a lot of the companies, I look at an Alphabet, which I've written about a lot, being able to really fund a large portion of that through their cash flows. But then we look at some of the other companies like Oracle, like Meta, you know, Oracle just hovering right above junk. They are making a massive bet. But what you look at are how the market is reacting. And you can really see it with the credit default swap spreads that look at Oracle and how much those are going up. Oracle announces at the end of the day. So it'll be interesting to see is that a canary in the coal mine moment about infrastructure buildout or is Oracle going to signal that they actually have.
- [31:39]
B
The revenues that I know we got to go. But it's interesting to me to say, well, if there's too much froth, or maybe you're not seeing it in the IPO market. Right. A lot of these recent IPOs again. Ho hum.
- [31:48]
A
Yeah.
- [31:48]
B
Right.
- [31:49]
A
Yeah. Been pretty disappointing. Yeah. People are waiting for the anthropics, the open eyes, even the data bricks.
- [31:54]
B
Because bring this all together, then you get the narrative in the IPO wall as well. As you can see here, a lot of these names are down 18, 28, 35%.
- [32:02]
A
That's right. They've been pretty disappointing. Some good news on the extremes. If you look at Reddit, where we were an investor.
- [32:07]
B
True.
- [32:08]
A
That went public last year. That kind of provides some of the data sources for AI. Or if you look at a core weave, which provides a lot of the data infrastructure, those companies are doing well. So I think it's a tale of two cities as a whole. Always is the case.
- [32:20]
B
Yeah.
- [32:20]
A
Low.
- [32:21]
B
Thank you so much. Appreciate talking to you. Thanks for having this decision low. Tony. With PLEXO still ahead, forget the hawks and doves. Economist Claudia Sahm says today's expected rate decision is an insurance cut and she'll tell us why right after this.
- [32:38]
A busy day over at Goldman's 36th annual financial services Conference underway in New York City. Seen a great content from there over the past day or so. Leslie Picker is there now, joined exclusively by Blackstone President and CEO Jonathan Gray. Perfect timing as we're about to hear from the Fed. Leslie, over to you.
- [32:56]
Perfect timing indeed, Kelly. John, thank you so much for joining us. As Kelly mentioned, it's a great day to have you and get your perspective really on the macro. I'm just curious what you're seeing across the portfolio in terms of distress versus risk appetite and what does that indicate to you about the need for for additional rate cuts in 2026?
- [33:15]
A
Well, Leslie, it's great to be with you. I would say we're seeing a pretty good macro environment when we look at our companies. In the third quarter, their revenue growth in private equity was up 9%. This AI capex boom has really fueled a lot of business activity, particularly in the United States, where we see a little bit of weakness is on the consumer side, sort of the middle to lower. If you look at water parks and theme parks, hotels, you do see some weakness there. The labor market has softened a bit. So when we talk to our CEOs, they say it's much easier to hire today than it was three years ago. And wage rates have gone from sort of low fours to call it 3% on an hourly basis in the US and I think that softening, softening of the labor market, given the Fed's dual mandate, will help them cut rates. I'd also say on the rental housing front, which is a big component of cpi, the data lags and what we see in our portfolio is much lower inflation there as well. So I think the overall picture is pretty good resilience, some softening on the consumer side, a bit of weakness on the labor side, some slower inflation numbers that should be allow the Fed to cut rates. That's good for the economy ultimately. It's certainly good for our business.
- [34:35]
B
So it will allow the Fed to cut rates. It's the market is expecting a 25 basis point cut here in just a few minutes. What about 2026? Do you think 25 basis points is enough given what you're seeing? Or do you think the portfolio could use potentially even more easing in order to prevent some of those concerns from Getting out of control.
- [34:52]
A
Yeah, I would say it's really about the US economy. Economy in the labor market. And I think they're likely to cut rates because there are parts of the economy that are more tied to capital intensity. Housing in particular, commercial real estate, construction. Some of those areas that, you know, lower rates would help. Certainly they would help consumers, they'd help companies. Again, I think the good news is the inflation data with a lag here will be supportive of those cuts. And so as investors in an environment with a pretty resilient economy, lowering cost of capital and then this big potential productivity boom coming from AI, that's not a bad combination. And that's why you see us investing so much capital.
- [35:35]
B
Yeah. This is important insight because you obviously run $1.2 trillion in a diversified array of assets. Lower rates, of course bode really well for private equity dealmaking, but it can also also be a headwind for some other businesses, namely in credit and insurance. How are you thinking about the impact on spreads going into next year and the yield you'll be able to offer investors?
- [35:57]
A
Well, I think the key thing for what we do in private credit is can we deliver a premium return relative to liquid markets. When we started our non traded btc, it was actually five years ago when rates were much lower than they are today. And the premium you deliver over low base rates is even more important. So for our individual investor clients, our institutional clients, our insurance clients, for them, can we deliver more than they get in say the leverage loan and high yield markets for a number of those clients, for the insurance clients versus what they can get in investment grade credit? And that I feel very good about because what you're basically doing is bringing those investors right up to borrowers. That's what private credit is all about. It's a little bit like what Amazon does with you getting your goods to you directly as opposed to going through bricks and mortar retail. And that innovation is what's working for borrowers, it's working for investors. It ultimately is also very helpful for the financial system because it tends to be less leverage and better match funding in terms of duration.
- [37:01]
B
And yet the space has seen so much noise in the last few months or so with those high profile bankruptcies. In October there was a filing out from B CRED today, which is your semi liquid product in that space that redemptions tick up a little bit. What do you attribute that to? Was it some of the negative headlines we've been seeing or.
- [37:19]
A
It's. It's all about the noise. The facts on the Ground remained incredibly good. The business produced strong performance again in October. You know, we've seen this before in 22 when there was worries about credit. In 23 after Silicon Valley bank, we saw an uptick in redemptions after Liberation Day. Ultimately, those are moments in time. There's been a lot of tough press out there. The question is what happens on the ground, what happens with performance? And when you're investing in non investment grade credit, there can be some losses along the way. The question is, is do you overall have a really solid credit portfolio? In the case of that vehicle, we're Talking about just 40% loan to value loans that have been made historically. We're talking about companies that have had 9% EBITDA growth this year. And the lowering of rates is helpful. So we feel great about what we're doing in that space. We can't control the narrative out there. In fact, you referenced a couple of those high profile bankruptcies. Bankruptcies, they weren't even private credit situations. And yet there are obviously market participants who don't love this innovation that's happening in this space. And so there's a lot of noise. For us, the key is long term focus, deliver for the individual investors, the financial advisors, if we do that, all those flows, that'll take care of itself.
- [38:41]
B
In terms of concerns and noise out there. Another bucket of that is AI. And we whether it's in a bubble, whether there is an overbuilt, you have a lot of exposure to this AI megatrend, as you've called it, with regard to infrastructure and real estate and equity and debt. So you see things from all angles. Do you buy that narrative of a bubble or the risk of overbuild? And are there specific areas that actually are a concern of yours?
- [39:05]
A
You know what I'd buy is whenever you have this kind of sea change, it could be railroads back in the 19th century or electricity or the Internet, you'll see excess enthusiasm, you'll see misallocations of capital. But I think it's a huge mistake to underestimate what's coming. We're bringing super intelligence at scale, at super low cost to consumers and businesses. And that's going to lead to this productivity revolution. And so there's $60 trillion spent annually on labor. If you make that 15% more efficient, that's $9 trillion a year. So investing a lot in chips and data centers and power, that makes a ton of sense. So from my standpoint, I would say how do we invest against this megatrend? But do it in A way where we don't take too much risk. So we have leaned into being the biggest investors in data centers around the world, doing it in the U.S. europe, in Asia, but doing it in a safe way where you put a shovel on the ground when you have a long term lease with a big company. Same thing with energy and power. You're not betting on who the winners are. You're betting that autonomous vehicles, robots, data centers, all of this is going to demand more electricity. So you invest in generation, in electrical equipment, in utilities, the whole thing, you're focused on how I can capture this megatrend. And then yes, you do some investing in large language models, application software, promising companies like Norm, AI or Open Evidence. But you recognize that there's greater risk, but you're playing for greater upside. So I think as investors, you can get scared off easily by saying this is all a giant bubble. I think more importantly is to recognize there's a fundamental shift here. How can I do it safely? And the last thing, thing I'd say is I think investors are overlooking the risk of the disruption in their sort of back book, which is what happens to all sorts of businesses if autonomous vehicles come. What does that mean for auto insurance? What does some of this mean for lower value added IT services? There's a whole range of businesses, accounting, legal that are going to be transformed, advertising, media. So I think the key, key is to recognize this change is coming. And as investors think about the various risks to your portfolio, not just is this one company overvalued, this is going to be profound. And as a firm, we're very focused on protecting our downside but capturing the upside for our clients.
- [41:35]
B
Yeah, we've heard a lot of those themes today and yesterday at this Goldman Sachs conference. John Gray, president of Blackstone, really appreciate your time today on this very important macro day as well.
- [41:46]
A
Great to be with you, Leslie.
- [41:47]
B
Thank you, Kelly. I'll send it back to you. And noteworthy to hear him talk about some weakness in those parts of the consumer there. Leslie, thanks very much there. Thanks to Jonathan as well. Coming up, we'll hear from economist Claudia Sahm, who's also calling today's expected Fed decision an insurance cut. She'll explain why. And our coverage of the Fed decision continues next hour on Power Lunch with our panel of experts here to explain their reactions to the decision and to look ahead to Chair Powell's past press conference, which is always a big market mover. We're back with much more after this.
- [42:20]
Welcome back. We're just moments away from the Fed move. Our next guest says today's cut is an insurance cut against a weakening labor market. Let's bring in Claudia Sahm, chief economist at New Century Advisors, creator of the SAHM Rule. Claudia, it's great to see you. Let me just set this up a little bit because we had Jason Furman earlier saying we shouldn't cut because of inflation and because of the deficit. Those pressures are still too high. Obviously others are more dovish. They think that we can and should explain where you come down on this. Right. So I think it's appropriate for the Fed to be cutting again today. I was on board with the two cuts they've done this year. Frankly, the, the risk of a deterioration in the labor market, we're not there now.
- [43:00]
A
We don't see signs of it right now, but we've seen a lot of.
- [43:02]
B
Slowing in job creation. The unemployment rate has moved up for three, three consecutive months through September. That is exactly the kind of dynamic we do not want to see keep going and building. And so what the Fed is doing is they're taking out some insurance and trying to really buffer the labor market so that we don't end up in a recession. There is no reason inflation is elevated, but there is no reason to, to stand by and let a recession take hold. So you think the labor market signals are becoming more worrisome?
- [43:33]
I think when you look at the risk, the downside risk to employment are more substantial than the upside risk to inflation. They're both there. This is a tough call. You can make a case on either side of it. But I think when you bring all the information that the Fed has right now about the economy, it's on the employment side where things are more worrisome and they have the ability to take another cut, take some restriction out. It might not solve the problems, but it certainly means that the Fed isn't contributing to even more slowing in the labor market. What about the argument that the, the job cutting is either in response to over hiring during COVID perhaps some out migration happening, perhaps also some AI disruption, in other words, not issues that the Fed should react to.
- [44:16]
A
Right.
- [44:16]
B
So back in the summer when Chair.
- [44:18]
A
Powell talked about the curious balance of.
- [44:20]
B
The labor market and you know, the demand and supply, they could both be the reason the job creation is slowing.
- [44:25]
A
I think, you know, that is happening.
- [44:27]
B
That is absolutely there. But as we have gone further into this year, it is more and more clear that a weakening demand for labor is what's taking over. And we got more information today on wage growth that it has continued to slow. That's what happens when there's less demand for workers. And so I think we're just, and again, the unemployment rate rising is another sign that demand is winning in terms of that demand supply. And you want the Fed to be reacting to that. Do you have an opinion on the balance sheet? We're debating all hour long really, whether they should, you know, saying they should restart quantitative easing. But are we going in that direction? In that direction? Well, they're going in a direction that the Fed will, will restart asset purchase price sometime early next year. They won't frame it as quantitative easing. It's more just like keeping enough liquidity in the system kind of, you know, the economy is always growing and that, that kind of framing. So I don't have a firm view on, you know, exactly when they should restart that, but absolutely paying attention to market functioning. That's also something that the Fed does not want to lose control of. Do you have a level of rates that would be appropriate? You know, we've talked about your rule, which is more about when recessions are on set. But how would you know where level of rates is? Right. So there's, I mean, the economy is always evolving. There is no one magical number. I will say that for each rate cut that the Fed goes through, it does raise the bar for the next cut. Right. We are in an environment where inflation is elevated. Right. And so as the Fed is cutting, it's removing restriction. And it is, you have to, to keep going down that path, you have to be comfortable with the idea that, well, whatever extra inflation we have right now is going to kind of take care of itself. Understood. So whereas I'm in favor of cutting, that doesn't mean just like let it rip and just keep cutting. Right.
- [46:10]
A
You're going to have to keep evaluating that.
- [46:12]
B
Claudia Sahm, thanks for making the time exactly the person to check in with on Decision Cut Eve. CLAUDIA Sahm, New Century Advisors. Our Fed coverage continues on Power Lunch. I'll join Brian Sullen for that right after this quick break.
- [46:29]
A
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