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The Fed Decision: Markets, Politics, and Housing 9/17/25
00:39:01
The Federal Reserve expected to cut rates by a quarter-point... we break down the market impact, Trump's feud with Lisa Cook, and whether lower interest rates can re-energize the housing market.
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- [00:00]
Mike Santoli
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- [00:03]
Kate Rogers
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Mike Santoli
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Leslie Picker
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Leslie Picker
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Brent Beard
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Leslie Picker
Trades and ETFs and retail fidelity accounts. Sell order assessment fee not included. Some account types and securities excluded. Details@fidelity.com commissions Fidelity Brokerage Services LLC Member NYSE SIPC.
- [00:31]
Prolon Ad/Announcer
Wanna look and feel your best this summer? Don't just think skin deep, think cell deep with Prolon. Prolon is a plant based nutrition program featuring soups, snacks and beverages that nourish the body while keeping it in a fasting state, triggering cellular rejuvenation and renewal. With proper diet and exercise, Prolon can help target fat loss, support lean muscle and reset your metabolism so you look and feel your best all summer long. Prolon is science backed nutrition that can help change your relationship with food in get 15% off plus a $40 bonus gift when you subscribe at prolonlife.com PandoraPromo these statements have not been evaluated by the FDA. These products are not intended to diagnose, treat, cure or prevent any disease. See site for details.
- [01:17]
Mike Santoli
You're listening to the Exchange. Here's today's show.
- [01:24]
Leslie Picker
Thank you Frank and welcome to the Exchange. I'm Mike Santole along with Leslie Picker and we are less than an hour away from the Fed's decision on interest rates. Stocks are mixed ahead of the decision decision with the Dow the only large cap index higher. You do have some strength in small caps as well. A quarter point rate cut all but certain today, but it's the outlook that investors will be paying close attention to.
- [01:45]
Mike Santoli
Tech lagging within Video the notable loser shares down 3% on a report that China is banning its top tech companies from buying Nvidia's AI chips. And we're watching yields their mix the 10 year continuing to hold below 4.1. The short end of the curve seeing a little bit of pressure today with the two year around 3.5%. Mike I guess the conventional notion is is kind of watching what happens after an hour from now for sure once you get the actual decision obviously forward.
- [02:18]
Leslie Picker
Outlook the history of Fed days are the market sometimes has a quick reflex reaction, then a little bit of a rethink and then it settles around even into the next morning. So you always have to sort of take with a grain of salt what the initial impulse is, but in general, this market is positioned and geared up for the doves to fly. Here you have yields pretty much at their year lows, dollar at lows, stock markets at the high. So, you know, maybe the bar is high to really dazzle and impress investors. But it does feel as if there's a fair amount of certainty here. People are confident also at the ability of the market to do well when the Fed's cutting for, quote, the right reasons. We'll see if that remains the case here. Let's bring in Steve Liesman who is at the Federal Reserve with more on where all those expectations have settled. Steve?
- [03:02]
Steve Liesman
Yeah, and how they got here, Mike, in the minutes before 8:30am on August 1 as well. To remember, not a single rate cut was priced in for this year. We're now under an hour away from the first rate cut expected since December. And the market has two more rate cuts priced in for 2025. Let's see how to find out if that promise for that hope for two more cuts happens. We'll focus on the level of concern the Fed expresses in in the statement and in the press conference with the conflict of weak jobs versus sticky inflation from tariffs. Watch the changes to the dot plot. We'll show the right outlook for the committee and the dispersion of that those outlooks and then look for dissents showing how much disagreement there is at the margin. At the Federal Reserve. Back in June, which is the latest Fed forecast, seven officials saw no cuts this year. Eight forecast to making the median just barely. Two that could go to three today after big downward divisions to those jobs. Reports affirming the market's view of multiple cuts in 2025. Another issue, possible dissent in favor of a 50 potentially from newly sworn in Fed Governor Stephen Miron, which would reflect President Trump's desire for drastic rate cuts. He could be joined by two other Trump appointees, two other Trump appointed governors, both said to be candidates for Powell's job as chair. Offsetting that, maybe a dissent from a Fed official or two who has spoken out before the meeting with more concern about inflation than jobs. The question is how does Fed chair find a consensus to forge on the committee and keep markets relatively happy about the outlook? Mike?
- [04:32]
Mike Santoli
Steve, I have a question just on the overall read through. You know, given that you've got 11 candidates essentially auditioning for that role of Fed chair to succeed Jay Powell, how should the markets be understanding what they see today vis a vis the political environment? In other words, how do we know that various decisions regarding The DOT plot, a lot or commentary about the broader economy are related to just the overall backdrop. Given all the politicization and all the uncertainty surrounding who is going to kind of make up the Fed in the future.
- [05:07]
Steve Liesman
So, Leslie, inside your question is a very important word. That is the answer, and that's the word auditioning. The extent to which they see their dot or their vote today as an audition for the job is really the question that you have. I talked to somebody about Chris Waller and he said to me, Waller doesn't have to dissent today in favor of 50. He's won. He dissented in July. A lot of times you see that, you see a descent to make a point and then they come back into the consensus. So he could dissent in favor of 50. But effectively, if the, if the market and the dot show where the Fed is going, you guys have been putting up the yields. Look at 405, look at 355, look at the pricing in the markets.
- [05:50]
Mike Santoli
The.
- [05:50]
Steve Liesman
That's all in there. It's already out in the market. What the Fed has to do is ratify over time these rate cuts that are priced in. Waller has no reason to dissent because it's all come his way. Unless, as you say or suggest. Leslie, there's some auditioning going on here.
- [06:05]
Leslie Picker
Steve, you know, you kind of gave us that valuable reminder that a lot can change in terms of the Fed outlook in six weeks. We didn't have any cuts priced in, you know, beginning of August. So that brings up just exactly how data dependent the Fed is going to suggest that it is looking out from here, you know, going to have the dot plot and that's going to be based on a certain set of assumptions. But how much contingency do you think they would want to convey? Maybe this is where Waller gets like, you know, that kind of dovish messaging out there. You do 25 and then you more or less say the rest is more or less baked.
- [06:39]
Steve Liesman
You know, Mike, I shouldn't answer that question because you're on the edge of the question that I want to ask Powell, which is, are we in the middle of. Is this. It's exactly right. Is it a sort of a autopilot type adjustment to take the edge off of the restrictive policy, or is this a data dependent type policy? Now, he may not even answer that question. But Mike, I think you're absolutely getting on what we want to know here. And there's two ways to think about it. One is the way you suggest, which is the Fed's going to go down and Maybe pause relative to the data that's coming in. The second way to think about it is it's an adjustment or a recalibration, which Paul McCully on this show has talked about quite a bit, which is get the rate down or towards neutral, regardless, almost regardless of the data or I guess irregardless of the data, to get tweets from grammarians out there and just, just make that adjustment down a couple of ticks or a couple of quarter points and then kind of wait and see and then become data dependent. So, Mike, that's the perfect question. I don't know exactly what it is because I'm waiting to see how the committee comes out in terms of these dissents. Is everybody on board or is there some dissent on either side or both?
- [07:47]
Mike Santoli
Yeah, it truly is among the most important Fed meetings we've seen in quite some time. Steve, we appreciate your coverage. We know you'll be all over it this afternoon as well. Well, of 25 basis point cut today is a foregone conclusion. Easing from here remains uncertain due to risks to both sides of the Fed's dual mandate. But our next guest says they're expecting a series of cuts which will have big implications for markets. Joining me now are Michael Gapen, chief US Economist at Morgan Stanley, and Anastasia Amoroso, chief investment strategist for private wealth at Partners Group. Thank you both very much for being here. Michael, let's start with you because we were just discussing with Steve that there's, you know, expected to be some dissent over the quarter point cut. Do you think that's more emblematic of the macro uncertainty that's out there or just the fireworks and the politicization and all the various headlines we've seen in recent weeks?
- [08:41]
Michael Gapen
Well, I don't think the economy justifies or warrants a 50 basis point cut. So I might argue that would be a little more maybe in the political realm. We've argued, I think what Steve was just debating there, which is if the Fed, the Fed, I think, is looking more to make a recalibration of their stance. They think risks to the outlook have shifted in the direction of a weaker labor market and so restrictive policy isn't justified. So I do think the point here is they want to recalibrate, get closer to neutral. And in our view that's, that's at least 75 basis points in cuts, probably 100. And the weak August employment data alongside August inflation data, which showed relatively limited tariff pass through, I think allows them to do consecutive moves here. So our argument is closer to. It's not fully baked and preordained, but it's closer to that. And I don't think the economy justifies a 50 basis point cut out of the gate.
- [09:40]
Mike Santoli
Anastasia, you agree with that, that kind of more balanced approach, but kind of tilting toward that potential macro backdrop weakening?
- [09:50]
Anastasia Amoroso
I do. I think the economy does justify a series of rate cuts into the end of the year. And I say that looking at the labor market, I mean, the Fed cannot really deny that the labor market weakness is everywhere and we don't want to risk for it to spread, whether you look at the number of jobs that are created or the downward revisions or the lack of job creation in any sector outside of health care. So I think the Fed will want to preempt that. And to Mike's point and Steve's point is the way to preempt that is to get back to neutral. So. So that's why I do expect to see 75 basis points of rate cuts into the end of the year. Obviously, if they do that, the time is of essence and the time is now because we are going through what I call the quarter of adjustment, which is companies are adjusting to higher tariff rates. How are they doing that? By absorbing some of the tariff expenses, but maybe not hiring as much. So that does weaken the labor market and the economy. And yet going into next year, we do expect this stimulus from tax cuts, but it's not here yet. So I think if the Fed is successful in delivering the cushioning the stimulus that's needed today, we can see this expansion, modest expansion, continue into 2026, but it is contingent on them acting now.
- [11:07]
Leslie Picker
Michael, you mentioned you don't really feel the economy right now warrants a half percentage point cut. So therefore, I assume that means you think it's kind of hanging in. Okay. I'm wondering about the interplay between the labor data and I guess, the rest of the economic indicators. If you go back several months, you know, Chair Powell was leaning on the low unemployment rate to say, look, we don't really have to act to get closer to full employment. We're fine right here. We're going to wait and see. And now we got this weak run of labor data, and I'm wondering if that's more representative of the underlying trend or if there's enough anomaly in there that we're getting the dovish move because the labor data is telling you to do it, but the rest of the economy is doing okay. How do we think about those things?
- [11:48]
Michael Gapen
Yeah, I think there's some truth to both of what you said, which is they are worried about the employment data and the fact that it may point a downside risk. But the unemployment rate's low, the labor market's still relatively healthy and tight.
- [12:01]
Brent Beard
Overall.
- [12:02]
Michael Gapen
The way that I would answer this is the Fed, at least to my ear, is not saying policy needs to be loose or easy. What they they just think it needs to be less restrictive. So what that does is allow a better balance. They're in a better position to resp. Respond to that labor weakness if it emerges or they can still stay around neutral if the unemployment rate stays low. So I think it's about getting to a position where they can react to how the economy evolves rather than sitting in a restrictive stance. So again, I think it is important to remember here the Fed's not saying it needs to be easy. It's just wanting to go from a restrictive stance to a neutral one. And I agree with Anastasia, there's a window here, I think, to do that in relatively short order. And I think they can take the opportunity to do it more of a.
- [12:49]
Mike Santoli
Preventative easing advance of something potentially worse. Anastasia, I'm curious because the Wall Street Journal had a piece today talking about the divide between high earners and older Americans who are faring better than ever and low income and younger workers who are struggling. And I'm curious if you think that divide is best fixed, fixed by monetary policy.
- [13:12]
Anastasia Amoroso
I think that's one of the solutions. I mean, if you think about the low income cohort, the chances of having a credit card balance or an auto loan are certainly higher. So if you think about some of those loans, they are tied to floating rates and those rates are quite high, whether it's on credit card balances or those auto loans. To the extent that we can see a reduction in interest expense, that could certainly be be a big positive for that income cohort. But I will say, just just broadly, I think the key thing for the Fed to do right now is to actually cushion the tariff adjustment. Because if you think about a company not having or having the ability to offset the tariff costs by all of a sudden increasing their cash flow because they don't have to pay quite as much of it in interest expense, what does that mean? That likely means they're going to maybe hire more than they're currently doing. You know, the thing that the Fed really has to fix now is not let the labor market deteriorate. Because if you are a consumer, you have a job, you have a greater confidence of having a job in the future. That's what really prevents this economy from tipping over.
- [14:21]
Leslie Picker
And I guess right now the bond market is not expressing much alarm about the inflation side. We'll see if that that continues here as we get this expected cut. Michael Gabin, Anastasia Omarosa, thank you very much.
- [14:34]
Anastasia Amoroso
Thank you.
- [14:35]
Leslie Picker
Coming up, Fed Governor Lisa Cook could hold the key to unlocking President Trump's deregulation agenda. We'll explain and look at the potential fallout for the financials.
- [14:44]
Mike Santoli
And speaking of banks, wa Fed CEO Brent Beardahl will join us with the C suite view on today's Fed decision, the impact that rates are having on his customers and regional lenders overall. Ahead less than 47 minutes left until the Fed decision on interest rates. The exchange is back after this.
- [15:05]
Leslie Picker
This is the exchange on cnbc. Sometimes an identity threat is a ring of professional hackers and sometimes it's an overworked accountant who forgot to encrypt their connection while sending bank details.
- [15:20]
Mike Santoli
I need a coffee and you need.
- [15:22]
Leslie Picker
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- [15:42]
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- [16:27]
Leslie Picker
Smarter by CNBC make it career and income boosting online courses to help you be smarter and more successful. Get the newest course how to start a business. Go to CNBC. Make it.com/courses Special offer ends September 30th welcome back to the Exchange. We are less than an hour away from the Fed decision. Our next guest says markets are focusing too much on the number of rate cuts and not enough on the makeup of the Fed, especially President Trump's attempt to reshape it by firing Fed Governor Lisa Cook. Joining us now is Dan Clifton, head of policy research at Strategic Research Partners, a Baird company. Dan, it's great to, great to talk to you here. I mean, it's interesting because for as much as there's been kind of the pressure and the friction and the back and forth and the debates about, you know, what the Fed would do and what the administration might prefer, the data have come in in such a way that you now have this consensus built by one way or another about roughly the path of cuts. So what do you think the main implications are of this interesting dynamic we're going to have of the composition of the Fed governors and regional presidents as we, as we see it.
- [17:34]
Dan Clifton
That's right. Well, first, good afternoon. Thank you for having me on. You know, I think it's important directionally Powell and Trump now think rates got to go lower. Rates are going to go lower and we're going to have a debate about how many of those rate cuts as we get deeper into the fourth quarter. We're going to have a debate about what the balance sheet should be doing because bank reserves are getting low and whether Kuti should end and what the Fed should do with its mortgage backed security roll off. Should they put that money in housing or T bills? So that's a second story that's building. And then you have the compensation of the Fed exactly what you're asking about. And you know, we're watching these court cases very closely. Lisa Cook has won in both of the lower courts. There's been a pattern in immigration and trade where Trump loses in the lower court and then wins at the larger court. So I wouldn't call that case over. But if Cook is removed or allows Trump to remove her from the Supreme Court and from the Federal Reserve, it would really start to open up the wheels for financial deregulation. And I think the market has kind of looked at this Lisa Cook as Trump just trying to get lower rates, get 300 bips down lower on the fed funds rate, when in fact it will start creating the votes to do very significant financial deregulation. And something we notice, Mike, is that the bank stocks have been very sensitive to these personnel changes. I mean, the banks started to outperform the s and P500 when Coogler seat unexpectedly came up in early August and then really accelerated on this Cook news. So I do think that it will be very important for thinking about financial deregulation on a timing basis. If Cook stays on the Fed, then eventually some point in 2026, Trump will be able to do it, but it would allow him to do it sooner. And then second is that if Cook leaves, then you actually have the votes to start not reappointing regional Fed presidents in February when they come up. And that's very significant. You have five regional Fed presidents voting on the FOMC next week, next year, and that's where you could see some changes. So you have all these interesting subplots building on the Fed in addition to your traditional monetary policy stories. I think they're very important and they're underappreciated by investors at this point.
- [19:43]
Leslie Picker
What particular financial deregulation measures are one vote on the board of Governors away from getting through that matter? Yes.
- [19:51]
Dan Clifton
So if you look at the Bowman speeches, and Governor Bowman will be putting forward a plan that she hasn't put it forward yet, but she's outlined it. And it's deeper than just the supplemental leverage ratio, which would allow banks to buy Treasuries without impacting their capital requirements. But she's talking about changing the global systematically important bank surcharges. How do you unlock the hundreds of billions of dollars that's sitting on the JP Morgan balance sheet, put that into more productive uses? Very consistent with what Treasury Secretary Bessense trying to do in using financial deregulation to be able to get rates lower and, and really kind of ease financial conditions to get growth, economic growth higher in the US and that means that you're changing the Dodd Frank regulations that were developed after the, after the global financial crisis. And I do think that there are some FOMC members, such as Michael Barr, who have been opposed to making those changes. And so as Trump gets more and more members on the board, that becomes a much more plausible scenario to do in a more aggressive financial deregulation, one that could really impact what those capital requirements are going to be for the banks.
- [21:02]
Mike Santoli
Yeah, I think that's an important point there, and one that often gets lost in the narrative surrounding the Lisa Cook situation is just what they're trying to accomplish on the drag side. When I sat down with Michelle Bowman in July, I asked her, essentially, you know, how much consensus do you have behind these deregulatory proposals? And, you know, if you were to think of someone who would be on that board that would be in line with that deregulatory side of things, who would it be that you think might kind of change things dramatically on the deregulatory side?
- [21:39]
Dan Clifton
Yeah, awesome question. So I'm assuming from implying, from your comments that she probably wasn't enthusiastic of saying that she had the whole board behind her. We know, because members give speeches that kind of argue against going this aggressive and that it would create another crisis. Right, but you now have Moran there. So he's, he just got on the Fed. Waller's very sympathetic to this and potentially could be the Fed Chairman. You know, I think Powell's been responsive but wants a more middle ground. So as you get that fourth seat amongst the seven boards of governors, you know, who is Trump going to pick for that extra seat? We see treasury secretary Bessant doing 11 interviews for the Fed chair. There's only one Fed chair. So that means that he's really doing interviews for who's going to be replacing in the Board of governors or some of these regional Fed presidents. And I would look to that list. And if it's anybody on the short list of the Trump folks, like Kevin Hassett or Kevin Warsh, you know, they're all going to be very responsive to more deregulation. I think that's going to be a key issue that the Treasury Secretary is going to raise in these interviews in understanding where they are not just on monetary policy, but where they are in deregulation as well.
- [22:47]
Mike Santoli
Yeah. And important to note that when we talk about Fed independence, we usually talk about Fed independence as it pertains to monetary policy, not necessarily as it pertains to bank deregulation and bank supervision. Dan Clifton with strategic. Thank you very much. Appreciate your time today. Coming up, Stubhub making its long awaited public debut today. The IPO pricing at 2350 a share opened last hour 2535, currently trading about 2.7% below its IPO price. The details behind the offering ahead.
- [23:30]
Leslie Picker
Sometimes an identity threat is a ring of professional hackers. And sometimes it's an overworked accountant who forgot to encrypt their connection while sending bank details. I need a coffee and you need Lifelock. Because your info is in endless places. It only takes one mistake to expose you to identity theft. Lifelock monitors hundreds of millions of data points a second. If your identity is stolen, we'll fix it, guaranteed or your money back. Save up to 40% your first year@lifelock.com specialoffer terms apply.
- [24:00]
Prolon Ad/Announcer
Wanna look and feel your best this summer? Don't just think skin deep, think cell deep with Prolon. Prolon is a plant based nutrition program featuring soups, snacks and beverages that nourish the body while keeping it in a fasting state, triggering cellular rejuvenation and renewal. With Proper diet and exercise. Prolon can help target fat loss, support lean muscle and reset your metabolism so you look and feel your best all summer long. Prolon is science backed nutrition that can help change your relationship with food in just 5 days. Get 15% off plus a $40 bonus gift when you subscribe@prolonlife.com PandoraPromo these statements have not been evaluated by the FDA. These products are not intended to diagnose, treat, cure or prevent any disease. See site for details.
- [24:47]
Mike Santoli
Welcome back to the exchange, Mike. You're taking a look at stock valuation is an important concept.
- [24:52]
Leslie Picker
Exactly. In particular, the indexes have been on a great run. Obviously you have some optimism built into markets about how the economy and earnings are going to shake out. And what we've done here is we've gone to basically what I would refer to as the ceiling of the valuation range since this bull market started this current phase three years ago. And so the NASDAQ 100, you know, coincident or not 28 times has basically been the max we've gotten to and we're essentially back up there. It's more like 22 and a half to 23 times for the S&P 500. Now no magic to these lines. Obviously we can breach into the upside, obviously if earnings in the coming year are underestimated. This is actually less expensive than we think. But it's worth noting that we've already repriced to a pretty aggressive level. Take a look here at investment grade corporate debt spreads. It tells a very similar story. Were priced for some pretty benign outcomes. Lower the spread, the more optimism, the less compensation you get for owning slightly riskier corporates. And this is a 20 year chart so it doesn't get much lower than this. Obviously these spikes are around recessions pandemically. We don't expect much of anything in the way of macro stress. So just know that's our backdrop.
- [26:02]
Mike Santoli
Now the chart you had earlier with the valuations I noticed that was from 22 exact and that that 20. So is that just kind of given the current rate cycle as much? So if rates were to go lower, would P E valuations essentially support higher levels? Just hypothetically?
- [26:19]
Leslie Picker
Yeah, hypothetically, yes. I'm not that. I'm not that sold on the idea that there's this really tight linear relationship between those things. If you went back actually five or six years during the pandemic, we got more expensive. Right. That's because partially earnings were really depressed, rates were zero and risk appetites were very high. And the most expensive and most Fast growing stocks were leading the way. So yeah, arguably there's upside to this. We obviously were higher in the 90s. We also were lower on corporate debt spreads in the late 90s. So it's not to say that we are an absolute maximum. But you know, you got to recognize exactly what you're paying for when you buy at today's price.
- [26:56]
Mike Santoli
It is pretty remarkable though, with investment grade spreads being as tight as they are throughout the entirety of the cycle and that the gapping really only took place in recessionary periods. You look at the length of that chart.
- [27:08]
Leslie Picker
I mean, look, people say investment grade debt, there's data. People don't default on investment grade debt because you know why? It gets downgraded to junk before they default. And so there is a great deal of comfort in that, in idea of owning that paper.
- [27:19]
Mike Santoli
Yeah, absolutely.
- [27:19]
Leslie Picker
All right, let's take it to Kate Rogers for a CNBC news update. Hi, Kate.
- [27:24]
Kate Rogers
Hi, Mike. Rudy Giuliani must pay his former defense lawyers nearly 1.4 million million for defending him in connection with his work as President Trump's personal lawyer. A New York judge ruling today in favor of the law firm Davidoff, Hutcher and citron in their 2023 lawsuit to collect unpaid fees from him. No comment yet from Giuliani or the law firm. DHL is hiring more than 200 customs agents to help with the import process and to make sure importers are complying with the Trump administration's trade rules and tariffs. The CEO of DHL Global Forwarding telling CNBC today that's a 40% increase in the division's capacity and noting that with the daily changes in tariff and duty rates, the company needs experienced operators of which there is a shortage. And Open Air is diving deep into how people are using chat GPT every day. In a study released today, OpenAI's economic research team found non work related Messages surged to 73% in June this year from 53% just a year ago. Researchers found that most of the conversations were about getting practical guidance such as how to advice and tutoring. Back over to you guys.
- [28:33]
Mike Santoli
Yeah, my favorite new hack is like taking pictures of our house and being like how would you design this interior design? Very unrelated.
- [28:40]
Leslie Picker
It's new. YouTube essentially. Yeah.
- [28:42]
Mike Santoli
Only work related if you're working from home, I guess. Kate, thank you. Thank you. Coming up, a check on the health of the regional banks with the CEO of Wafeds, Brent Beard. All his take on rates and the state of lending with shares basically flat since January. 30 minutes left until that big Fed Decision on interest rates. The Exchange is back after this.
- [29:08]
Leslie Picker
Welcome back to the Exchange. Take a look at markets right now largely idling in front of that Fed decision. You have the Dow up half a percent. Tech is down, small caps are up. So. So trying to execute that playbook after a Fed rate cut sometimes of buying cyclicals and, and selling secular growth stocks. We'll see if that holds.
- [29:25]
Mike Santoli
Yeah, I got about 27 minutes left. Big gains for the big banks though ahead of Today's Fed decision. J.P. morgan, Goldman Sachs and Morgan Stanley all hitting record highs this week. City shares touching their highest level since 2008 today while bank of America is back at highs not seen since 2007. Regionals also climbing. The KRE banking ETF up nearly 3% over the past two months and 9% so far this quarter. Will a Fed rate cut keep the bank rally going? Joining us now to discuss is Watford CEO and President Brent Beard. All Brent, thank you for being here. I guess the main question surrounding today's rate decision as it pertains to smaller banks in particular is whether or not you feel like financial conditions are particularly restrictive right now and if so, what a 25 basis point cut would mean vis a vis 75 basis this point cut.
- [30:17]
Brent Beard
Yeah. Leslie, great to be with you and really good questions. And it's interesting that you let off with what's happening with the big banks and they are, you know, trading at all time highs and rightly so, they're absolutely killing it. And I do believe 25 basis point decrease in rates, if that happens, which is obviously the consensus, would be good for all banks and good for regional banks, but most importantly, good for our clients. The real question I struggle with is why? Why are we doing a 25 basis point cut right now when stocks are at all time highs, real estate values are all time highs, inflation has come down, but it's still higher than the Fed's target rate. And employment is certainly trending negatively, but still unemployment is near historical lows. So I kind of scratched my head as to why the timing on this.
- [31:06]
Mike Santoli
So when, as you scratch your head, do you feel like the environment would be better off if rates were to stay where they are? Obviously just, you know, the bank business is such that you want to be able to lend at a decently high rate and capture a spread there. Now you have to have the loan demand to back that up. But I'm just curious kind of where that inflection point is for you right now?
- [31:27]
Brent Beard
Yeah, no, there's no question over the last couple of Months as people are settling into what tariffs are and what this new economy really looks like. I think we're starting to get a pickup in inquiries in terms of loan demand. So I think loan demand will increase regardless of the move by the Fed. But if the fed does move 25 basis points, I think there'll be an uptick in terms of economic demand because very simply it's easier for borrowers to cover their debt service coverage ratio. The other real impact that not a lot of people are talking about. We've spent so much time talking about commercial real estate in the, the doom and gloom of commercial real estate with banks, especially mid sized banks, and that just has not materialized. And this is a great example of if you can just stay with it. Now all of a sudden rates are coming down. As you know, the long term rates which are largely a function of what the market anticipates happening with the Fed, they've come down 75 basis points from the first part of the year. So now commercial real estate borrowers can get a significantly better rate than they could have just nine months ago.
- [32:32]
Leslie Picker
And Brad, I mean, right related to that is the housing market. I mean one of the answers to the question of hey, why do we need to be taking pressure off of the economy when financial conditions look loose is housing markets seem stuck yet and pretty poor housing start numbers today. People have really felt as if mortgage rates have to come down a lot. Naturally that's about market interest rates like you're suggesting. But what about that sort of spread between mortgage rates and the 10 year yield? Is there anything that can be done either by the banks or by policymakers to try and encourage those mortgage borrowing rates to ease a little bit?
- [33:08]
Brent Beard
Now you've hit the nail on the head. What happens with the spread and in anticipation of what's going to happen. We've already seen mortgage rates come down. I think what was published this morning is the current rate is down to about 6.4% on mortgage rates rates which is down from about 7% just a few months ago. But what can we do to get spreads down even further? We have to de risk in one way, shape or form. And the reality is we need more supply in terms of housing. It's a supply driven problem in terms of our cost of housing. If we had more supply out there, I think you'd see the cost of housing come down and frankly it's been my biggest surprise with this increase in rates.
- [33:47]
Mike Santoli
Rates.
- [33:48]
Brent Beard
Normally when you get a massive increase in mortgage rates, you see the value of residential real estate come down. We just didn't see that in this cycle.
- [33:55]
Mike Santoli
And you mentioned the potential unlock for loan demand being related to tariff uncertainty abating and so forth. Do you get the sense that the labor market is also deteriorating against this backdrop? How should we think about the Fed's balance of risks right now?
- [34:12]
Brent Beard
Yeah, you know, I feel for the Fed right now because they're in kind of a precarious situation and clearly they've signaled to the market that a rate cut is coming today. I think if it doesn't happen today, everyone would be surprised and we'd be, we'd see a big sell off. But I don't see that happening. And I think in all likelihood it's going to be that 25 basis points. I think the most important thing is the messaging. What comes after today? Are there going to be further cuts? Are they going to be data dependent? To your point, in terms of labor, I think everybody's really nervous right now when it comes to layer labor as it relates to generative AI and what is AI going to do to the job market? So I actually think you're going to see those that have been waiting out for better jobs hop back in on whatever job they can get, not knowing what the future holds.
- [35:03]
Leslie Picker
Yeah. All big questions, Brent. We'll see if we get some resolution. Thank you very much, Brent Beard. All right, coming up, a big divergence in the performance of recent IPOs. This week, shares of Gemini Space Station down about 24% below its IPO price. All shares of Figure are up more than 16%. A check on today's big debut and what its move lower is telling us. The exchange will be right back.
- [35:35]
Mike Santoli
Welcome back. Let's check on shares of StubHub. That stock down about 1.9% after pricing at 2350. StubHub opened at $25.35 a share. This is a IPO. Pricing came in exactly at the middle of the range. The overall valuation that they had been marketing was already about a 44% discount to its private valuation from 2021. So I think they thought that the buy side would appreciate that discount to the private level. But clearly it needed a little bit more of a takedown from there.
- [36:07]
Leslie Picker
Didn't generate a ton of new excitement. I mean, Obviously it's a 25 year old business. It's a pretty mature industry. It's not as if they're kind of creating, you know, the whole playing field that they are operating in. So, you know, not the fastest grower. I mean, obviously it's A it's an interesting business, one that's going to have a place for a long time, but it doesn't have the profile of, of one of those moonshots, I guess.
- [36:27]
Mike Santoli
Yeah.
- [36:28]
Leslie Picker
All right. Coming up, homebuilding hit a near two and a half year low in August while building permits sank to May 2020 levels. But not even disappointing data can keep the homebuilders down today. Will a rate cut change the real estate narrative? That is next.
- [36:50]
Mike Santoli
Welcome back to the Exchange. Mortgage rates holding near three year lows ahead of the Fed decision. Diana Olig joins us now to dig into those numbers. Diana?
- [37:00]
Kate Rogers
Well, Leslie, mortgage rates dropped yesterday to their lowest level in three years at 6.13%. And today pre Fed announcement, they're just slightly higher at 6.15% according to mortgage News Daily. Now if the Fed does do the expected quarter point cut, some experts predict longer term bonds might sell off, increasing interest rates. It depends more on the commentary from the Fed meeting. But that's what happened last year after that first cut. Now an initial drop in rates last week caused a massive run on refis with those applications jumping 58% compared with the previous week, refinance demand was 70% higher than the same week one year ago. All that according to the Mortgage Bankers Association. Now the refinance share of mortgage activity increased to nearly 60% of total applications and the average loan size on refis reached its highest level in the 35 year history of the survey as those borrowers would see bigger savings. Now refis for arms, that's adjustable rate loans were very strong, increasing to nearly 13% of all applications and that is the highest level since 2008. ARMs of course, can offer rates up to 75 basis points lower than the 30 year fixed.
- [38:09]
Leslie Picker
Back to you, Diana. Thank you. Our next guest says lower rates will help widen the pool of prospective buyers, but most importantly improve the market's biggest headwinds, consumer confidence. For more we're joined by John Lavallo, U.S. homebuilders analyst at UBS. John, good to see you.
- [38:24]
John Lavallo
Thanks for having me.
- [38:25]
Leslie Picker
I mean a lot of moving parts in terms of what drives housing demand and supply, I guess quarter point, you think that's enough to excite consumers or just part of the process of rebuilding it?
- [38:36]
John Lavallo
I actually think the most important thing is rate stabilization. So we're at 6.15. As Diana said, that's most important. Now to the extent that we get a cut today and the long end of the curve follows, that's very good news. Lower rates are good for Housing, it opens up the pool of potential buyers, it allows the builders to cut back on the incentives that have been hurting mortgages and hopefully it can unfreeze this existing home market that's been at GFC trough levels for three years.
- [39:03]
Leslie Picker
I mean the data this morning were pretty bleak as far as I could tell. Right? On permits, on, on starts, you have more completion. So it feels as if there's this locked up situation in the markets. Why are the, the new homebuilders you think decently positioned to actually have some improvement from here into next year?
- [39:21]
John Lavallo
Counterintuitively, the lower starts number is actually a good thing because there's a little concern of inventory in certain markets. So the fact that the builders are showing discipline is very, is very well taken by the market. Now look, our view is 2026 is going to be a better year for housing than 2025. Volume is going to be better. We have a very counter consensus view that gross margins can actually be higher next year even in a stable environment. So flat out slightly higher. That's very out of consensus. And there's green shoots that are happening out in the market that we can happy to talk about. I mean Toll Brothers talked about foot traffic improving. A top five builder said that the south has been very strong and there's been a resurgence in Florida where there's been the inventory concerns. A top, top 15 builders told us that, that, that over the past five weeks demand has actually been up mid single digits year over year. So things are moving in the right direction. It's not an all clear sign but it's not getting worse.
- [40:16]
Mike Santoli
Now you mentioned that stabilization is critical in terms of kind of mortgage predictability and so forth. You know the Fed funds rate has essentially been paused up until what's likely to be, you know, the next 10 minutes. But the market rate volatility has been present. Do you expect that market rate volatility to stabilize in a way that gets more people kind of to take out mortgages, refinance mortgages and so forth?
- [40:40]
John Lavallo
Very hard to say because there are other factors including inflation that play into that. Interestingly, there's been news about a third mandate for the Fed. Price stability, full employment and potentially moderated long term rates. Look, I don't know what the outcome would be longer term for the economy, but that would be good for housing. In our view, lower rates again stimulate demand.
- [41:02]
Leslie Picker
Yeah, that's a third leg to the mandate that people have more or less said well it's kind of redundant, you know, or it's just going to take care of itself. But who knows what that means down the road for balance sheet usage and stuff by the Fed? I guess the other question is affordability, which is obviously, you know, pretty stretched at this point. Is there any hope there if rates.
- [41:21]
John Lavallo
Come down, that certainly helps.
- [41:22]
Leslie Picker
Yeah.
- [41:23]
John Lavallo
And what's been really interesting is the builders have been very effective in buying down mortgage rates. So if you went to a public builder, you weren't paying the 6%. Today you're paying, you know, five, you're paying maybe just under five. To the extent that we can get lower rates, the key here will be the builders will not need to buy down and that's very accretive to margin or they won't have to buy down as much. And that's where the real kind of juice is in our opinion.
- [41:47]
Mike Santoli
So you don't see home prices, prices falling then when we get that unlock, when people do start to move, when it becomes more affordable from a mortgage standpoint, you don't think that's going to bring down home prices necessarily?
- [41:58]
John Lavallo
It's a very interesting question. I think the turnover is very important. Think about it. We're running at 4 million units of existing home sales, GFC trough levels. When an existing home is sold, generally there's a home that's purchased that could be a new home. So just freeing up that, that kind of, of inventory is very, very important.
- [42:17]
Leslie Picker
And just quickly before we go, what are your favorite names here in terms of the stock?
- [42:21]
John Lavallo
Sure. Topic is Meritage Homes which is an entry level, first time buyer. We also like Dr. Horton on the low end and then we kind of take a barbell approach. Toll at the high, high end in Pulte Group as well.
- [42:33]
Leslie Picker
All right John, the Vallo. Appreciate it. Thanks very much for having me. See how the entire treasury curve and mortgage rates do in the last little while. Of course we are expecting that quarter point rate cut. We'll see if the consensus is surprised today, it's going to do it for us here on the Exchange. Power Lunch is going to pick up coverage of the Fed decision right after this quick break.
- [42:58]
Mike Santoli
You've been listening to the Exchange. Make sure you're subscribed to get each episode every day, same time, same place.
- [43:06]
Leslie Picker
A CNBC exclusive. Scott Wapner with Jeffrey Gundlach live from Double Line hq. First reaction to the Fed decision plus market response and economic outlook. Closing bell today, three eastern and streaming on CNBC Plus.