Fed Holds Rates, Signals Higher Prices are Coming Due to Tariffs
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner, and we begin today with the geopolitics of the Mideast. We are being told that senior U.S. officials are preparing for the possibility of a strike on Iran in the coming days. Now, this situation, important to say, is still evolving, and it could change. Some of our sources pointed to the potential plans for a strike on the weekend.

Joining me now is Mark Cranfield. He is Bloomberg Markets Live strategist and he joins from Singapore. Mark, thank you so much for making time to chat with me. I think we can agree these are indeed delicate times. There's the geopolitical situation between Israel and Iran and the uncertainty of potential U.S. involvement. The story on tariffs, meantime, is very much still alive.

And then we've got the macro picture, which may be a little cloudy right now. But can we play off the Fed decision in the last session here in the States? And I'm curious to get your take on how you see it impacting market psychology right now in the Asia-Pacific. The Fed will be pretty happy with the result of what happened yesterday. They had an extremely difficult balancing act to do, as you say, in the context of all those things happening in the world. How do you create policy and guidance for?

for people in the United States and to some extent globally because everybody watches what the Fed has to say. And they managed to do it without disrupting markets at all. By the end of the day, equity markets, bond markets, currencies are pretty much where they started the day. So from that point of view, a pat on the back.

for the Fed, but it's certainly their task is extra difficult because they clearly hinted at the fact that the United States is going to have a stagflationary problem. They've lowered economic forecasts in their summary of economic projections. And at the same time, they've upsized the projections for inflation, particularly through the PCE window. So they're telling you that the stagflation, which is beginning to appear, is probably going to get worse in the United States. And yet,

they're working essentially with one arm tied behind their back because all investors can see that the difficulty for the Fed is that should inflation pick up and become sticky in the sense that it stays for a bit longer,

is the Fed going to really raise interest rates? Well, in the current environment and with Jerome Powers, the chairman, I think most investors would come to conclusion the Fed is not going to tighten policy. It's very much skewed the other way. Should the employment situation deteriorate and America risk going somewhere towards a recession, of course, they would act quickly and lower interest rates. The last thing they did was to lower interest rates. So they obviously have a slight bias towards doing that.

But the real problem for them is what happens if inflation starts to get higher. When you evaluate some of the risk that the markets are dealing with right now and you look at the potential for haven buying, particularly in U.S. treasuries or for that matter in the U.S. dollar, talk to me a little bit about the flow of funds that you have been seeing and how the dollar may be impacted right now.

We can take the dollar first, and I don't think there's much doubt that the US is losing its haven appeal. You can see that against major currencies, it's had a pretty rough year. This year, it's underperformed pretty badly. And then it's not just a one-sided thing, because obviously, there needs to be an appeal on the other side. If you have in currency trading, it's always one against something else.

It's all fine to say that the US dollar doesn't look as attractive as it did, but you need alternatives. And the alternatives are starting to look a bit better. So you take the euro, which is the second biggest currency on the planet. Europe's getting it exactly together, partly because it has to. It's under pressure to improve its defenses because

because of the situation in Russia and Ukraine and United States moving away from NATO. So they're having to spend more on defense. That's creating a bigger pool of funds for the euro. Investors can see that they're getting more comfortable that there's deep liquidity in the European market. So more money is starting to flow towards Europe. Then you've got China, which as just yesterday, we had the central bank governor giving extended details about what they're doing to improve the dynamics in China for foreign investors.

And that all revolves around stability and strength in the currency. They've made it very clear that China is right behind the yuan. They're not going to let it deteriorate. They're going to keep it strong and stable. And that supports all of the security aspects. It supports equities. It supports bonds. It supports all kinds of investment flows to China. And they're encouraging foreigners to send their money there. So you're beginning to have serious contenders to the US dollar. It doesn't mean to say that the US dollar loses its status overnight.

But you can see why money can now more happily move to other parts of the world because there are currencies which are standing up and being counted and saying, hey, we're a real alternative to the US dollar if you're uncertain about the outlook there. Treasuries is a much more complex picture, of course, because the Federal Reserve can twist the needle. They can lower interest rates quickly when they need to. But at the same time, you do have these spreads between treasury yields and other currencies

countries and that's where things will begin to show if people start to lose faith

in treasuries, you'll see with spreads will widen against Germany against Japan against other parts of the world. That's more likely than the absolute direction of what treasuries may be doing. But certainly their share of the market holdings are fixed income investments could well go down in relation to other countries. It's very interesting because we heard today from the US Treasury with respect to foreign holdings of US bonds and notes.

And we learned that foreign holdings were actually up in the month of April to the second highest level on record. I found that a little surprising. So foreigners right now are holding a little bit more than $9 trillion in U.S. government securities. Japan's still the largest. Britain, interestingly, has increased its holdings. China's holdings were down a little bit. But when you look at the risk...

Talking earlier about haven status, how much concern is there over the U.S. fiscal situation right now, particularly the budget deficit? And I'm wondering whether that outlook for budget deficits going forward has become an important driver of the buying that we have seen on the part of foreigners in U.S. treasuries.

Absolutely. Investors clearly are a bit concerned that should the tax and spending bill go through the United States as it's currently planned, it's going to worsen. It's already quite a bad fiscal deficit situation in the United States. It's not going to get any easier. And then if you look at the way the data you were just talking about, the holdings of UK, number of people from the UK entities which are holding Treasuries, when that is going up, that is a warning signal because that tends to be hedge funds. That is not

UK government or anybody, UK sovereign wealth fund, they don't even have one. But so it's not that kind of money. It's not secure money, which is going to, this is much more flaky, short-term money. So when the UK shows up as a bigger holder of

of treasuries. That's not a good sign. That just means that short-term holders who can quickly come in and out, and they're often doing it as spreads anyway against other things. So they're not really secure holders of treasuries. These are the people who can change on a dime. They'll be in and out in a matter of minutes. So that's actually a warning signal that the holders are less stable of US treasuries than they were earlier in the year. So all of these things. And of course, we're on watch for the potential that we've had one sovereign downgrade already

this year of the United States. These things tend to come in waves. And once the ball starts rolling in that direction, you could see more. Next stage will probably be to put the sovereign rating on another outlook for potential revision lower. Investors are watching that very closely. It could come before the end of the year. So all of these things are stacking up.

against the U.S. Treasury. It's not looking as secure as it was. I don't think it's a surprise at all that China reduced its holdings of U.S. government securities. Talk to me a little bit about what's happening right now insofar as you understand the progress that may be happening or may not be happening for that matter when it comes to the trade issue between Washington and Beijing.

It looks from our side, we're in Asia, we probably see a bit more slanted from the Chinese side, and it looks like they're playing the long game. It looks like the Chinese authorities are fairly happy with the way that they're stimulating their own economy. They're starting to rebuild things extremely well there. It's on a much better footing. Their markets are stable. Currency is strong.

They have some strong cards, as President Trump would say, particularly when it comes to some of the minerals they hold. So they look as though they're ready to take their time to get a trade deal that really works from their point of view. They don't look as though they're going to panic and sign anything quickly at all. They want to do thorough negotiation. And if it takes time, if it causes a bit of pain, they're willing to play the long game in that respect. That might be in contrast to how the US authorities see it. So don't expect...

China to suddenly say, oh, yeah, we're happy we've got a deal straight away until they're really sure that it's something that is fair and favors them as much as it favors the United States. I mentioned a moment ago the conflict between Israel and Iran. How is this being digested right now in the Asia-Pacific?

It's all eyes on the oil prices, as you can expect. Everybody's watching that minute by minute to see what it means for changes in oil. So far, we haven't got close to the $100 threshold. That's probably where people really start to get excited about the oil market. If it goes above $100, that starts to impact other asset classes a lot more. For now...

we've reached about 80 roughly on on brent which is not this high by recent standards but it's not really out of the realms of what we've been seeing in the movements over the past year or so so not extraordinary it certainly was a quick move in oil but not yet one that really destabilizes financial markets on a bigger basis so that's probably why you've seen contained moves in currencies and bonds and equities as well get above a hundred dollars to

Things start to change quite rapidly. You were talking a moment ago about the potential for hedge funds to become involved in trading of U.S. bonds, particularly in the U.K. Talk to me a little bit about what hedge funds do when they're trading oil and how that may be manifesting it right now, particularly given the environment that we're in right now.

We can already see in the options market, in some very substantial changes in the demand in the options market. In fact, by some measures, what's going on in the current state of the option market is actually more extreme than when Russia invaded Ukraine a few years ago. So that just shows you how suddenly people are positioning very quickly into that space. They will be trading spreads between contracts. So oil futures trading is very deep liquid market.

people trade the curve whether it steepens or flattens they'll also be trading on the outright volatility in the market which they do through the options market so that turnover in that market has exploded in the past couple of weeks and that's all geared towards the expectation that oil could spike higher again from here so at the same time the flip side of that of course is if things calm down quickly you can see oil retrace very quickly so we could go easily go back

towards the mid 60s in terms of price if that premium some people Goldman Sachs today saying that the premium is around $10 for the the world premium priced into oil at the moment I think Bloomberg economists say between five and ten so something around that figure needs to be shaved off the oil price if you get the situation calming down quickly so you could see quite a fast retracement but for the moment of course

People are not going to do that just yet because there's still a lot more to play out in that area. But that just shows you how quickly oil can reverse should Iran and Israel no longer be a major focus for the oil market. Mark, we'll leave it there. It's always a pleasure. Thank you so much for making time to chat with me. Mark Granfield is a Bloomberg Markets Live strategist joining from Singapore here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So Fed officials left their key policy rate unchanged in the last session in a move that was pretty much widely expected. They continued at the same time to pencil in two rate cuts in 2025. The Fed also lowered its estimate for economic growth this year while raising its forecast for both unemployment and inflation. So this combination of weaker growth and stickier inflation suggests

a more difficult economic backdrop. We got reaction from University of Michigan professor Betsy Stevenson. She spoke earlier with Bloomberg's Heidi Stroud-Watson, Averell Hong. First question, just how difficult is the Fed's position? You can see what they're thinking exactly by looking at their projections. So, you know, it is true that their forecasts for the U.S. economy are getting worse over time. You know, in December,

They thought that the US economy would grow 2.1% this year. They revised that down to 1.7% in March, and they revised that down again here in June to 1.4. So it's like every day it gets a little bit, there's a little bit more of a sense that, okay, we're not gonna have a strong year this year. And I thought it was kind of ironic to listen to him say, there's less uncertainty about

That doesn't mean things are good. We actually feel more certainty that we're going to have tariffs that stick that are higher than any kind of tariffs the United States has had in 50 or 60 years. So we're probably going to end up with some kind of effective tariff that is probably

five to ten times higher than what we had before Trump came into office. So I think our uncertainty is coming down, but it's because we're resigned to the fact that we're going to have higher tariffs and we're gonna have lower growth. So if you look at that range of forecasts, you did see their uncertainty come down, but it was actually because the people who were most optimistic have now sort of joined the rest of the pack and thinking that it's gonna be slower growth.

So you might say then, why shouldn't they be cutting rates right now? Well, that's because that certainty about we're going to end up with higher tariffs and they're going to stick means that we do have inflation in front of us. And he's got to make sure that we don't let that inflation take off.

another thing to consider, which is as inflation expectations have risen, effectively they are cutting the real rate because keeping rates the same when people are expecting higher inflation is a rise in nominal rates and a cut in that real rate. So the market's cutting rates for them.

Yeah, that's a really key point, Betsy. I have to sort of, you know, not chuckle, obviously, there's a lot of negativity out there. But, you know, you make the point of is certainty when it comes to a more negative outlook really a good thing? But we've obviously seen the worries for the markets over energy markets and energy costs. Is it too early at this point to be able to look at the inflationary upside pressure from a potential change in those energy market dynamics?

I thought on this, Powell was quite reassuring and reminded us that if you go back to the 1970s, a big oil price shock was terrible for the United States. But the United States doesn't rely on foreign oil as much. In fact, the U.S. had achieved energy independence. Now, of course, the market means that prices should go up because we can sell anywhere in the world.

We're not forced to sell to ourselves. So, you know, in the whole you obviously care about more than the United States. The whole the whole world is going to suffer, you know, with this geopolitical tension. So I think there are real global worries about that. But I think what Powell said is those are not huge inflationary worries for the Fed right now.

What about domestically, Betsy, when it comes to what you're seeing among the American public, worries about consumer confidence, job security?

Well, I mean, we do see that consumer confidence is down, CEO confidence is down. People do have concerns about job security, and they're not just about tariffs. We have Amazon coming out today and saying, you know, we're going to need fewer people because we're going to outsource our jobs to AI. And so it's no longer going to be about, you

competing with workers in foreign countries, it's gonna be competing with artificial intelligence. So I think there is a lot of anxiety. And in fact, I would say this anxiety has been brewing for quite a long time and is one of the explanations for the tariffs that we have today. Is that Americans have real anxiety about

where the economy is going. I don't think the choices President Trump is making has reassured them. In fact, I think that it's made it worse. But I do think it would be a mistake to think that that's the only thing weighing on American consumers and on American businesses.

What else is weighing on consumer confidence and businesses then? And to what extent are you seeing, perhaps for American industries as well, the cost pass through, given how the dollar has also been depreciating? Right, so I mean, this big set up.

of question. So and I think consumers and businesses are in different places. So from consumers, I think that they think there's just a lot of uncertainty around what is going to happen in the workplace, right? Are they gonna have jobs? What we're seeing is a very weird labor market right now where unemployment is low, but it's not a good time to be unemployed. It's not a good time to try to change jobs. And that creates a little bit of anxiety in consumers. If you start to fear

that you could lose your job or that you could see your wages stagnate. You might start to pull back on your spending and as you pull back on your spending that makes that a self fulfilling prophecy. On the business side, how to make decisions in a world that is highly uncertain and that's about tariffs, it's about the geopolitical risk.

political risk, right? We have a government right now that is very, very interventionist. I think a lot of American companies thought that the great thing about President Trump was he was gonna let them just do their thing and that they were going to not have to deal with a really heavy regulatory environment. But what they've learned is that it is still a pretty heavy environment. It's just

on a different set of issues and preferences coming out of government. So I think that uncertainty means everybody's moving a little bit slower. And when you slow the pace of movement, you slow economic growth. Let's see, I think when-

You spoke with Bloomberg back in April. There was still this sort of discussion over whether it was a bigger growth risk or a bigger inflation risk and whether we could kind of see through the inflation risk. Do you think now that there's a real risk of stagflation for the U.S. economy? I mean, certainly every forecast has moved in the stagflationary direction.

And I think if you think about what can cause stagflation, like we had stagflation in the 70s. Stagflation really needs to come from some kind of supply shock

that causes economic growth to shrink in a way that's sort of mismatched with where consumers are at. So consumers want to keep buying stuff, so prices are going up, but we're producing less. And that mismatch in the 70s that was caused by all the oil price shocks. What's happening right now in the globe, and it's the same thing

caused the inflation in 2021, 2022 coming out of the pandemic is supply chain problems. So we're not able to move goods around the world. We're not able to count on trade. And that's shrinking what we can possibly produce, but that's not shrinking our desires. And so that is where we get that stagflationary pressure.

And I think we just got to wait and see sort of how that ends up playing out. What's gonna happen geopolitically in all the domains, tariffs, war, etc. That disconnect there. Great to get your insights, Betsy. Thank you so much. Betsy Stevenson, professor of public policy and economics at the University of Michigan.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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