Instant Reaction: Jay Powell on the Fed Decision
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These always go on, maybe one or two questions too long, don't they? That wraps up the first news conference with Chairman Powell for 2025. If you are just joining us, welcome to the program. A two-part story here. One part, the statement. The second part, the news conference. The statement pushed stocks down and bond yields a little bit higher. In the news conference, equities came off the lows and bond yields came off the highs. In the statement...

The Federal Reserve repeated that inflation remains somewhat elevated, but removed this reference to this line of it having made any progress towards their 2% goal. So that sounded somewhat hawkish, didn't it? So ultimately, inevitably, the Federal Reserve Chair was asked about this, and this is what he had to say in a presser just moments ago.

If you just look at the first paragraph, we did a little bit of language cleanup there. We took out a reference to since earlier in the year as it related to the labor market. And we just chose to shorten that sentence. Again, I mean, if you look at the sort of intermeeting data, it was good. And there was another inflation reading, I guess, just before the December meeting. So we've got two good readings in a row that are consistent with 2 percent inflation. Again, we're not going to overinterpret two good or two bad readings. But

This was not meant to send a signal other than this.

So, Lisa, we talked about it for the best part of 30 minutes. We thought it was a hawkish tilt in the statement. The chairman came out and said that line was not meant to send any signal. It was just language cleanup. If you look at the first sentence, when you take your Sharpie, you go like this and then you go like this. I mean, look, this was someone who talked in circles quite a bit. It was sort of saying something. But what are these? These are words. We don't know anything. I don't want to start speculating because you really don't know. The president? Who's that? And...

We can't really have any models. So he basically came out and did exactly what he wanted to do, which was say nothing. On the labor market, downside risks to the labor market appear to have abated. This is a change from where they were maybe back in September. There was this labor market scare, TK, in the summer, which the Fed responded to with 100 basis points of cuts to insulate the economy from seeing any further weakness, something that the chairman said at Jackson Hole he didn't want to see, TK. And it feels like they're a lot more comfortable

with the situation now. I totally agree. We heard that from our guests in the previous pre-press conference, pre-statement as well. And it does get to John, when do claims break out? The basic stuff we cover each and every day. And it goes to get to March, the idea of how many meetings do we have? How many inflation reports do we have? How many jobs reports? I think the most amazing thing about this is you and I could focus here. I mean, we're 20 minutes in with Man City, 23 minutes in with Man City, and they haven't got it done versus Club Bruges. It's a still no-no. This is just,

So you are actually watching it. I was joking about it. You're actually watching it. No, it's important. You know, I mean, there's what, 18, 19 champions games going on? That's more exciting than the press conference. Stephanie Roth of Wolf Research is not watching the European football right now. She is fixated on that news conference we all just heard in the last 60 minutes. Stephanie, it's good to see you. Good to see you. What did you make of that?

And then he did a little bit of reversal from the hawkish part of the statement. It was just January cleanup like you just mentioned. And then some of the key things was meaningfully above long-term neutral. And then he made some conflicting statements about, yes, rates are above neutral, but then financial conditions are a little bit easy. So he kind of said a little bit of a lot. That's exactly what I've been trying to wrap my head around. Meaningfully above neutral, but we can move slowly and we don't have to move at all. We can just observe.

We are looking at restrictive rates, but also accommodative conditions. Was this successful? Yeah, I think he wanted to get in and out without moving markets all that much. And yeah, it was a bit of a ride, but that's kind of what he accomplished.

I want to note Meta and Microsoft leg up here as we get to those earnings as well. Somewhere in there was some Stephanie Roth language where he talked about a central limit, you know, a Gaussian curve, a bell curve and that. My basic take is this is not a bell curve society. There's a log normal risk here. What's the risk for you, Stephanie Roth, in terms of the Fed parlor game forward? What's the thing they really need to focus on to stagger to March? The most important thing that we're going to be watching for is what happens from labor supply.

Because there's going to be 3.5 million people potentially losing their visa status over the next two years, and that could tighten the labor market. And it could happen kind of slowly and gradually, and maybe we won't really realize it until the second half of this year, and then you realize, wow, the unemployment rate is a little poor. Will the president focus on the labor mandate, or will the president focus on inflation, or is he just going to focus on, I'm a real estate transactional guy, and I need low rates?

Probably the latter. But the other things are going to be important too, right? So if we have the immigration thing slowly happening in the background, we don't really notice it until the labor market's kind of quite a bit tight. So we just changed our Fed call. We were calling for previously for two cuts. Now we're calling for one in May. And then I think after that, they're going to be done for a while. They're going to have to wait and see how things play out. Just out of interest, why May?

We're going to probably have some bad data for the next couple of months from an inflation perspective. We still have the Q1 seasonal problems from inflation, so we're going to have to get through that. And then in May, you can have some better data because you'll start to see a little bit of that inflation coming out. Do you feel like there's clarity on meaningful or restrictive? I want to go back to that for one second. I'm still trying to wrap my head around this. Not letting that go, are you? I'm with you for what it's worth.

I kind of feel like it's important here because that was one of the key questions. That was what Bob Michael was talking about. And that is the question, how much do you have to reduce it? And then he kind of was like, well, we're above it and maybe we'll reduce it.

Is it a problem, just going back to this Muhammad Al-Erian point, is it a problem that this is a Fed that doesn't seem to have a clear message or a clear direction at a time when people view this as one of the biggest potential upsets to the market and to some of the stability that we're seeing in terms of the soft landing?

I mean, so the challenge is they don't have a firm view on policy, and they don't even seem to agree to some extent, nor do they want to come out and say it from a policy in terms of how they're assessing fiscal, right? So it's going to very much depend on inflation expectations. Are they anchored? And Powell mentioned the Teal book from September 2018, and I think that's exactly how they're going to look at it.

If we see inflation expectations remain anchored, the Fed could wait for a while. And then next year, we're probably going to see slower growth as a result. And that's when they might have an opportunity to cut again. When you talk about inflation expectations in near term and long term, what are we talking about? Are we talking about the University of Michigan sentiment survey that is hugely politically affected? Are we talking about the Consumer Conference Board? Are we talking about five-year, five-year forward break-evens, right? What is the gauge that is important to this Federal Reserve? I would say progress.

Probably U.M.I.S.H. and probably inflation break-evens, the combination. Even though we all know U.M.I.S.H. isn't that great of a measure, but we all seem to watch it anyway. I don't know why. We watch it because they do. That's fair. Chairman Powell and this Federal Reserve responded to it. Do you remember that jumbo rate hike back in the day? U.M.I.S.H., apparently.

Yeah, and it notoriously comes out with a reading, and then the final reading ends up getting revised back down from an inflation perspective. Where are we in June? I mean, you mentioned March and May in the meetings, but within the conversation we've had with four or five worthies today, the question is what real GDP does out to June.

I mean, you know, the facts change. Are the facts going to change? Are we going to continue with this growth economy helping part of America, not all of America? We're probably going to be in this growth economy. The one thing from a sort of lower income perspective is animal spirits may support the broad-based consumer. We might actually start to see good spending pick up, which could help kind of the bulk of the economy because they're getting ahead of tariffs.

Yeah, and John, I mean, I got Microsoft legging up here now where it was before the meeting. I mean, we're going into earnings in one part of America, John. They don't give a damn what Jerome Powell says. They're just looking at free cash flow at Microsoft and the rest. I miss working with you on a daily basis for a whole host of reasons, but just then I had no idea if you were coming to me because Man City had scored, if they'd scored. No, I was going to keep this, you know. I wasn't sure what to brace for. Talia's in my ear saying, don't you dare.

I don't even know how to pronounce it. Zagreb 1, AC Milan 0? What is that about? Is that true? Has that just happened? Yeah, are you okay? Okay. Well, I'm not okay now. We'll continue. Let's continue by talking about financial markets and central bank decisions. Lisa mentioned the Bank of Canada a little bit earlier. Luke Howard writes in and said, thank you, by the way. Yeah, well, it's important. Luke, I got your back. Tiff Macklin and the Bank of Canada, they did decide to reduce interest rates. They did decide to say, you know what, we can't offer guidance because of tariffs.

Why is it any different for Chairman Powell and this Federal Reserve? We have an economy that's running well above trend. We're going to see a GDP print that's close to 3% this week. The economy's fine. There's no rush. And that's what he said. They're not in a hurry.

This is the single most important observation of the Fed Decides Today. America's totally different than what I witnessed in Toronto a number of months ago. We are separate in our exceptionalism, and it was in spades when I was up in Canada. Is it just because of the strength of the economy, Tom, or do you think it's because this is about the president of the United States and they're worried about what he's going to say? It's a little bit. I'll go with that overlay, but it's most about Clare and his colleague, Ned Phelps, and our dynamism.

is tangible, again with Microsoft kicking it off here with Meta in a bit. Lisa, you feel the same way? I guess the US has a much more robust economy. It also is a central bank to the world in many different ways. It also is not being subject to a president. It is part of a country with a president. It is very different for, say, Canada that is facing off with that.

I was a little lost in thought there. And the reason why is because-- You're watching a football team? I'm watching a football team. No. I'm trying to wrap my head around whether it's appropriate for this Fed to be sort of directionless right now, or whether it's inappropriate. I don't know whether it is appropriate because it is an uncertain time. And I don't know if it's inappropriate because they have to give some sort of sense of what the reaction function is and the scenario analysis.

and they could have a more clear view. I don't have an answer on that. Stephanie Roth, how ex-post are they? That's all there is to it. To me, they're massively ex-post waiting for data. Yeah, I think that's been the case over the past couple of years is they've been very much data point dependent, which they say they don't want to be, but they have been. But they are. They are and they have been. And that's going to be the case for much of this year. They're going to react to see how fiscal policy ends up playing out.

And they're in a wait and see mode, which is confusing for investors. But at least at this point, the economy is doing just fine. Inflation has settled down, so it's not really that big of a problem. This felt like a clean up for December. That's what it felt like to me. A clean up for December. This isn't about policy changes.

This isn't about expected policy changes. This is about our view on the labor market and inflation. And that's why we've not cut interest rates today. Back in December, Chairman Powell made a hash of that. And I think he made a hash of it. And I do have some sympathy that it was because of what happened with the forecast and how some officials incorporated some policy uncertainty, TK, and ultimately they changed their inflation forecast on that. Well, you're better at this than me because I don't look...

I don't read the minutes. This was a clean up for December. Lisa reads the minutes. But when Colby, I think it was her follow-on question, and you played it there, when Colby Smith at the Times, he said some mumbo-jumbo about we cleaned up the language.

What in God's name does that mean? Help me. - It's hard not to read that. It's hard not to read that. It's hard to read that and just walk away with this idea that yeah, that doesn't mean anything. I mean, I take signal from that, whether he says there's no signal in it or not. I take signal from that change. - Which is the reason why the market hasn't given back the entirety of the move.

You're right, though. Again, how do we interpret the fact that don't see what your eyes see, don't read what your eyes read? There is no meaning in words that are very deliberately crafted to give meaning and to really give some indication to the markets, which is the reason why I'm grappling with the idea of a rudderless market, a rudderless Fed, I should say, and whether that is overruled

okay and appropriate or whether it is potentially inappropriate at a time when a lot of people are worried about a potential Fed policy error. Stephanie, it's good to see you, as always. Thanks for dropping by. Stephanie Roth there of Wolf Research. The NASDAQ just moments ago turning positive, slightly negative now on the S&P 500, erasing the losses of this afternoon. Mike McKee was in the news conference. He's back out now. He can share some of his thoughts with us. Mike, share with us how that went from your side, from your perspective in the room.

Well, I would disagree with you a little bit, John, and say that this wasn't probably an effort to send some sort of signal or even necessarily a cleanup as such. I think the Fed is sort of at sea. They don't know what is going to happen. And since the economy is performing well, unemployment is low, inflation is not going back up. It has stalled out a little bit. They feel they can

wait, they don't need to do anything else at this point. I asked him specifically whether they had a forecast they could rely on, and he said no. He was also asked, is March a live meeting? And he said, it's a live meeting, but we don't have any idea. We're going to look to the data, et cetera. So I think right now what you've got is a Fed that's just trying to stay out of the way as long as they can.

And they can, as long as the data continue to show the economy's doing OK. Mike, do you expect that in March it's going to be a more complicated staying out of the way at a time where you have to reflect a number of views that might not be in the same vein as Jay Powell? That seemed to be what the problem was in December, reflecting that some members did think about what policies could be going forward.

Well, I think it will probably be more confusing. But how confusing will depend on the president and what is happening if he has imposed tariffs, if those tariffs invite retaliation, how long the tariffs will last, how high the tariffs will be, will probably present different economic models to the various voters on the Open Market Committee.

and there may be some disagreement i suppose they'll come together on whether they need to cut rates or not to overcome some of the issues that that would raise but and they're gonna have to wait and see exactly what this does now by march you probably won't have much of an economic effect so they will have to game out what they think will happen from whatever tariff announcements come out as the defender of chief

of that great institution behind you. Mike, I have no doubt you disagree with me. Michael McKee there, everybody on the Federal Reserve. Mike, thank you. If they're trying to stay out of the way this time, it's because they got in the way back in December. And I think a lot of people would take that perspective as well. This was, I'm trying to walk back the idea of talking about speculation around policies.

It seems as there is a divide. And there is a curious question around whether this is something Bill Dudley raised. They're going to start to go toward the staff assumption and really reflect the staff economic forecasts and not necessarily disparate Fed members. It might clear the air a little bit in terms of having some of these awkward

moments. I go back to just what Stephanie Roth, I think, nailed it on the mandate. It's a job market. You know, guess what? Thursday claims matter. You can eat a forward moving average Thursday claims. It hasn't broken yet. And until the job market breaks, and I feel bad about this because again, off Craig Torres reporting, a good portion of America, the job market's already broken. I checked. I can't believe it's actually 1-0. And now you've got me all wound up about the

football. Jeff Rosenberg of BlackRock joins us now to talk about the markets and not the European football. Jeff, welcome to the program, sir. Lots of debate about what was intended and what wasn't intended in that statement throughout that news conference. What was your big takeaway this afternoon? So a couple of takeaways, but I think the big takeaway is clearly a reiteration of the end of the December FOMC signaling that this is a Fed that's

not in a hurry to take any further actions. And so you kind of bookmark where we are. This is the pause. This is the articulation of the pause. And he outlined those reasons. And I think that's kind of overriding the main story. It's not a huge story because that was...

pretty much well in the market. You're not seeing a big market reaction. Second thing I would take away, Lisa, you highlighted it. You know, there's some contradictions here and they were kind of highlighted in the press conference. We've had those contradictions for a while. You know, meaningfully restrictive, yet financial conditions are easy. Meaningfully restrictive, yet we're not in a hurry.

And I agree with you, Lisa, and have said for a while, this failure to kind of take into account the role of financial conditions in the setting of policy, kind of like moving that more to the background, is a real issue here for the conduct of monetary policy. And it remains in that, and that kind of came up. And then the third point I'd kind of highlight, and John, this is where you just left off, is just thinking

how is the Fed going to manage through this environment of heightened policy uncertainty? And he kind of addressed it and then didn't want to address it because there's no real good answers for that because the policy is being made and

the outcomes are not known. So they're going to have to be reactive to that. There's no forecast ability. There's a range of outcomes that he talked about. It's not elevated relative to COVID or GFC. So we got that question to kind of tamp down some of the concerns around it being elevated. But it's an elevated degree of uncertainty centered around policy uncertainty.

Jeff, I was musing over whether it was appropriate for a Federal Reserve to basically not have a clear message at a time where there are very clear economic conditions and potential policies down the pike.

I'm going to ask you this in a slightly different way. As a market participant, does it introduce a greater degree of liability tied to Fed decisions not having a good understanding of exactly how they are going to proceed given certain potential developments?

Yeah, it's what we call the reaction function. And we're very much focused on thinking a couple of steps ahead of how is the Fed going to react to data? How is the Fed going to react to uncertainty? Because that's how we're going to price in the bond markets. You know, we moved a long way away from forecast dependency and a forecast dependent Fed towards a data dependent Fed and now a policy dependent Fed. And so that makes it a

a bit challenging, but again, kind of in the context of putting it in a historical context, not more challenging than it has been in the past. The Fed gives us some guidance. I think he reiterated that guidance here. You see it in the pricing. The disconnect between market expectations and the Fed rhetoric is actually the lowest it's been

And that kind of narrows the range of outcomes here. So there's a little bit, in some sense, less uncertainty around the disconnect between bond market pricing and what the Fed is signaling. Jeff, the technology of America, you're hardwired with it, with your heritage to Carnegie Mellon. We saw the technology bro line up at the inauguration front and center as well. How do you overlay this technology boom that we're in right now? I'm looking at the NASDAQ back 30 years. It's unreal.

And the answer, Jeff, is how do you overlay this technology boom into your rate space and into what the Fed will do? It's a bolt-on which I just can't get a handle on.

Yeah, it's a great question. It came up a little bit in the press conference today as well. And so, you know, one way, and it's not the only way because what we're talking about here and what we talk about the megaforces of AI, you know, are so profound through so many parts of our economy. But a very simple way of thinking about it in the macro lens

is the wealth creation that we've seen in terms of the equity market, equity market performance, the way in which that translates into financial conditions, into wealth effects, into confidence effects, and ultimately into consumption. I think it's a big reason for why the disconnect between looking at the degree of policy restrictiveness, meaningfully restrictive,

takes the lens of what is the interest rate relative to inflation? How does that look historically? But it ignores the impact of the wealth effect that we're seeing in consumer confidence effects from that, which have a large element of the AI megatrends, the AI boom, the incredible expectation in profits and revenues that we're seeing flow through into people's

of wealth, and we know that consumers and consumption is very much driven by that aspect. And so I think that's been kind of an underappreciated element to why, despite the meaningfully restrictive policy, we haven't seen it in the data, in the economics.

This is critical. We had Greenspan who read chapter 22 and said, you know what, the stock market matters. I believe we have a president who says the stock market matters. Do you see evidence that this Fed and Chairman Powell care about that wealth effect?

They most certainly care about the wealth effect, understand it. He answered that question when he got the question about the earlier moves in the stock market on Monday. And he talked about the persistency of the impact on financial conditions. So there is the answer, right? They're not going to worry about one, two days worth of sell-offs. They're going to look at financial conditions and the wealth conditions.

component the stock market component of that it's not the only thing that goes into financial conditions he was clear to highlight that the increase in interest rates in the long and it's been tightening financial conditions the impact on housing but they're well aware of the impact of wealth effect but it it's not a small move it's not an isolated move in one part of the equity market has to be broad-based it has to be persistent and that's what we've seen in the past

of when you can flip the script on is the economy driving markets or is the market driving the economy? When the market has a big enough decline and it impacts the wealth and confidence, then it's markets that then lead the economy and the Fed will be,

having to take that into account in their setting of policy. - All right, Fed Chair Rosenberg, I wanna talk to you about getting several steps ahead then of the Federal Reserve as you figure out how to position, what are you looking at? What is your scenario analysis when the policies come down the pike to understand whether they're gonna be potentially inflationary, whether they're gonna be disinflationary, whether they could boost growth or slow it?

Yeah, it's about this kind of reaction function. And it's a little bit about the assessment of the asymmetry to the reaction function. Will they tolerate a little bit of missing on the 2% inflation trajectory relative to an outturn in labor market tightening? And so far, I think that we've seen the Fed, given the willingness to cut interest rates, he got the

question around, do you have to wait till you hit 2%? No, we already know the answer to that. They started cutting before they got to 2%. So we know that the Fed, at least in the recent experience, has been more concerned about labor market tightening, the concern about over tightening. The classical Fed did it in terms of the

create causing the the recession that creates a little bit of a symmetry of willingness to accept not getting to two percent so that your reaction the feds reaction my expectation around the feds reaction to weakening in labor markets might be more to cut

the opposite of, let's say, the inflation figures, they start to, instead of sticky, it's sticky and a little bit upward. Is the Fed going to raise interest rates into that? I think it's a much higher bar. That asymmetry is kind of helpful to positioning fixed income in the Fed-centric kind of

I THINK THAT'S THE PLACE WHERE YOU HAVE A LITTLE BIT BETTER ASSESSMENT BECAUSE OF THIS ASYMMETRY BETWEEN GROWTH AND INFLATION.

Always great to get your views. Appreciate them this afternoon. Thank you, sir. Jeff Rosenberg there of BlackRock on the latest Fed decision. Of course, it wasn't just about the Fed today, and Tom brought up the tech players. So we'll hear from Meta, Microsoft and Tesla over the next few hours. And I want to bring you a number from Deutsche Bank. Amazon, Microsoft, Alphabet, Meta, expected to surpass $200 billion in AI capex

over the course of the past year. That is real money. We've talked a lot about the Federal Reserve's role in this economy. Those tech players have a huge role in this economy. On every level. And arguably, some people could say that chat GPT single-handedly saved the U.S. from a technical recession, if not an outright recession, based on some of the investments that have been made.

You're right to focus on big tech earnings, because what this Fed news conference just showed us is that you're not going to learn anything there, but you will learn from what you hear from some of these executives in terms of how much more they're going to keep investing and where they see the gravitational pull. Just quickly here, there's a parallel to 1995. I remember the first time I heard the word Google. I was like, really? And I didn't.

Pony it up, but the bottom line is John is you're right this capex overwhelms everything and we're gonna see that here as we begin the tech Derby with Microsoft We'll see if they can justify it given what we found out on Monday if that is indeed the real deal coming up on the close They'll follow through with the Federal Reserve decision and go into the close and pick up on a tech story No doubt we're gonna catch up with Betsy Duke the former Federal Reserve Governor in just a moment live from New York City this afternoon Good afternoon to you all. Thank you for choosing Bloomberg TV and radio and

This was The Fed Decides.

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