The Trading Floor: Why the Fed Won't Be Cutting Interest Rates Anytime Soon
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Welcome to the Market Maker podcast, hosted by me, Anthony Chung, where every Friday I talk to a member of the team about what happened in markets this week. From macro themes and single stock news to cryptocurrencies and careers in finance, our aim is simple, to make finance interesting and easy to understand for everyone. So let's get to it.

Hello and welcome back to the trading floor. And we're coming hot off the tails of the latest FOMC announcement. That's the US Central Bank, where their rate setting panel voted unanimously to keep the benchmark federal funds rate in a range of four and a quarter to four and a half percent, where it's been since December. That part very much as expected. However, there has been some very subtle, nuanced word changes within their statement.

And of course, I've got the master on hand, Piers Curran, to break that down for us. So Piers, how are you? Not bad. Yeah, the master. I like that. I could get used to that title. Well, look, in this episode, then, I think it's probably appropriate that we kind of

break this down, not just go over the news because I think you've said on many episodes before but for any kind of newbies that monitoring monetary policy events is a particularly challenging exercise. In fact, many of the economists if you're thinking about operating in this field in the future, working in research, let's say a sell-side institution, it would not be uncommon to have a PhD in these types of subject matters but

We're going to park that and look at this much more from a markets perspective. So how the markets reacted last night, decoding the statement and looking at some of the context and some takeaway points from it. So yeah, let's talk about maybe the context first then. So why was this meeting potentially important? Yeah, and actually maybe just before that, I mean, it's probably worth just stating that

you know, I've been trading and monitoring markets for, you know, over 20 years now. And I would say that, you know, if you're coming to markets new or you're getting interested in it for the first time, then, you know, where do you start in terms of, right, how do you start figuring out are these markets going up? Are they going down? Obviously, there's lots of different types of assets and

You know, it can be quite daunting, maybe a bit overwhelming to try and start figuring out, well, okay, all this information flow that we get 24-7 these days, you know, how do you start to break it down into some kind of, how do you categorize it? How do you put it in some kind of list of importance and stuff? And I would say a general rule would be that monetary policy should be at the top of the list.

You know, generally speaking, stuff knocks it off the top every now and then temporarily. Trump tariffs, for example. But what's the mainstay in my 20 years in markets? I would say it's monetary policy. So

And so, right, monetary policies, that's countries' central banks. And generally speaking, they're in charge of interest rates. They're also in charge of this thing called the money supply. And really, they're trying to use these two levers, interest rates and the money supply. They're two levers they use to try and ultimately control the economy.

and to put it in a position where it is growing sustainably and they one of the keys to that is inflation and having stable inflation at or around their target and like the fed and the bank of england and the ecb and so on their their target is two percent all right so they're trying to get inflation at two percent because ultimately that's the optimum for sustained growth okay now

why do markets, you know, I'd say in terms of levers for the economy, they're the most powerful, right? So if you think that financial markets really are a reflection of how the economy is performing, obviously you can delve into individual assets. You can look at a company's shares and all right, fine. Obviously,

that share price is going to be heavily influenced by how well that company's performing. That's the stuff a company itself can control. But then how well a company performs partially is out of that company's control because it depends on how the wider economy is performing. And that's the environment in which the company is operating, right? So when we're thinking about markets, or at least how I think about markets, which is a bit more top-down macro, well then...

you know, I need to be on top of the biggest influences on the economy and that is central banks and its monetary policy. So whenever there's a central bank meeting, and I guess, well, then the next step is, well, there's loads of central banks. I mean, every country by and large has a central bank, right? Well, okay. So which are the most important? And obviously you're starting to think about the biggest economies on the planet. And obviously the US is the biggest economy. Okay.

It also is more than that, though, because the US dollar is, of course, the global reserve currency and lots and lots and lots of smaller, you know, less mature emerging markets are hugely dependent on the dollar. They use the dollar.

A lot of these countries carry, you know, US dollar denominated assets. And so, you know, you start to think about the US and the Fed and having tentacles right across the planet from a sort of financial system perspective. And so when the central bank of the US start to use their levers,

or just talk about what they're going to do with these levers, well, then markets are really super sensitive to it. And in the end, that means it's one of the most important things if you're operating in those markets. Yeah, and maybe then, can you just define, as you were saying there, it's not just pulling the lever, but they might pull the lever. So this is forward guidance, right? Yeah, so, you know, given what I've just said,

you know, you've got to be pretty careful with how you use these levers, right? I mean, you literally, the Fed, if they make a mistake,

could dump their economy into recession and the rest of the world with it. So to give it a visualisation then, there's a wall with a series of levers, but I've got my hands in the pocket as the head of the Fed chair. Just one hand coming out of the pocket would be actually enough to trigger a trading move. My hand actually being placed on the lever is the next escalation of getting closer towards taking action. And then me pulling the lever is the final action.

That's right. And look, markets, and think about it from a trader's point of view, if you think a market's going to go up or down, let's just say you think the market's going to go up, well then, if that's your decision and that's your strategy, well, you want to buy that asset as soon as possible at the lowest price. The longer you wait.

the less of the rally you're going to profit from if your strategy turns out to be right. Okay. So that means markets are very much like thinking about the future. I always say the line that asset prices today are a reflection of our future economic predictions. So we're starting to think about what the Fed might do in the future and position for that today.

And so, as you say, you know, as Jerome Powell, as his hand just inches partially out of his pocket, right, we're starting to think, okay, he's going to pull the lever. So let's actually place the trade now, you know, betting essentially on what we think he's going to do with that lever in X months time. So bringing this to the current day then, because there's been this, well,

The tariffs is the main thing, but there's been two major kind of economic data points. There was the recession coming in the US because we had that negative print of 0.3%, which we discussed in last episode, probably not the case. That was commented on by Powell. But then also we had NFP, the main labor report, and the two were almost, on a superficial level at least, conflicting. So how did that play into...

this particular meeting and what Powell was talking about in his language. Yeah, right. So this particular meeting, you're like going into it. It's difficult for the Fed at the moment. On the one hand, you could say that. And that's because you've got Trump, you know, in the Fed's ear permanently trying to get them to cut rates, right? Trump has been heavily critical of Powell for not cutting. Trump calls Powell Mr. Too Late.

Uh, that is basically saying he always leaves it too late. He's always buying the curve. Get on and cut rates, pal. Get on a cut rate. Right. So he's got that in one ear. Okay. But the Fed are supposed to be impartial, right? So pal's trying to be professional about this and just essentially ignore it. Although some of the, some of the things, the nuances in the statement, I think are a little bit of a sort of, uh, retaliation, uh,

in some ways, to Trump. But look, from an economic point of view, it's a tricky one because we discussed this last week, so I won't go into too much detail, but you've got soft data on the economy. So that's soft, that's people getting surveyed. Individuals thinking about consumer confidence, businesses through the ISM reports and so on. So surveys have been quite weak, although the services have

PMI on Monday was actually pretty strong. But anyway, survey reports have been quite weak, showing people aren't particularly confident. They're worried. And look, this makes sense because that's a reflection of the uncertainty that Trump has generated through his tariff strategy, right? So people are worried and concerned. They're uncertain. They're not sure what's going to happen. That's the mood.

But that has not fed through to the economy because the hard data, that's the actual evidence of economic output, even that GDP figure, we discussed it last week, yes, was negative on the headline, but actually was solid underneath, pretty strong. Non-farm payrolls backed it up on Friday. So you've got this weird situation where people are worried and uncertain and the surveys are weak, which is

which is bad news for the future. But in the meantime, the present is solid and strong. And so the Fed are like, well, look, given that, I personally, I think if Trump wasn't, if Trump had lost the election, right? If this whole tariff debacle didn't exist, remove it entirely from the equation. Would the Fed be changing rates here if it wasn't for Trump and tariffs? I think no.

I think, forget Trump, I think the data warrants the Fed to stay on hold because the economy's solid and look, inflation's still above target. And yeah, you know, people are worried about the future, but ultimately the Fed are correct here.

Powell is correct to keep his hands in his pockets. Okay, so let me give you some of the language here. And I guess a fairly, the balance of risks is how I'd probably summarise the first part of what he said, which was, although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.

Again, last week we talked about the GDP equation and why that's likely to bounce back. The next shot came just one paragraph down. He said, though, uncertainty around the economic outlook has increased further. So it's kind of like, no, actually it's good, but the uncertainties are increasing. So this is that kind of pendulum effect. The other thing was the word, quote, further,

was an addition to March's language. So the way that this kind of sounds as well and further communication he made was the committee is attentive to the risks to both sides of the dual mandate. Just explain to me quickly, dual mandate, what is this? Their job, their reason for existence is price stability. So that's keep inflation stable at 2% and full employment.

So that's their dual mandate, price stability and full employment. If they nail both, you've got a solid, sustainably growing economy. Okay. Okay. So the committee is attentive to the risks to both sides of the dual mandate. The addition this time is they said and judges that the risks of higher unemployment and higher inflation have risen.

So is this tipping the hat then to some of the stagflation talk that's been doing the rounds in recent weeks? Absolutely. This is Powell and the Fed saying we're worried stagflation risk has gone up.

And, you know, the addition of that word further, so uncertainty around economic outlook has increased further. I think that's a real retaliation to Trump. Because remember, their last meeting was start of, well, end of March, right? So pre-liberation day, which was the 2nd of April. So that's Powell just saying, look,

Your tariff strategy, Trump, has unquestionably increased uncertainty.

about how this is all going to play out in the future and what's the shape of the economy once all this tariff shenanigans gets kind of sorted out where are we and what does the economy look like it's literally impossible to predict so Powell's saying look in the meantime the economy's solid and risks to the up so he stagflation risk remember that is where

The economy slows, right? Economic momentum slows and inflation goes up at the same time. It's like the worst nightmare. So he's saying tariffs will lead inflation higher and will put the brakes on the economy. And then we're really snookered because, yeah, our dual mandate, basically both are going in the wrong direction simultaneously.

It's so interesting. The summary here seems to be that Powell's saying that the Fed are not going to be rushed and the outlook depends on the White House. It sounds like the type of intellectual shots fired that's really going to wind Donald up really badly in the next 24 hours. Because it sounds like this is a really polite way of Powell giving him a real shot across the bowels, isn't it?

Yeah, this is Powell's platform, right? These Fed media, I mean, all right, he talks in the media, whatever, every now and then, but this is his moment. Every six weeks, he has a platform, him and his committee have a platform to be in charge. And this is it. This is his chance, right? So it's definitely messages here to the administration.

um oh look we'll see in six weeks time that's when their next meeting is who knows how further down the path will be on this tariff thing i don't know maybe not much further you know have china and the u.s come to the table to start negotiating yet no i mean there's noises that maybe that might happen but you know these things take a long time so yeah the uncertainty is

remains maybe just to conclude then so how did the market react to all of this information last night and what or if any has market expectations shifted given what we've heard yesterday yeah i mean not much reaction would be the overriding thing i mean stocks have gone up though and particularly overnight i mean it was it was a bit messy so this stuff happens if i talk london time

Then when the Fed have this episode every six weeks at 7 p.m. London time is when they release the statement.

So that's that kind of two sides of A4 just laying out what they're doing with rates and why. Okay, so you get reaction there. And the S&P actually kind of sold off off the back of the statement. And then Powell steps up and there's a press conference at 7.30 p.m. London time. And so then there's more reaction. But here we are. Ultimately, the S&P is just breaking. I'm looking at the futures. They're just breaking like 5,700 here. And so...

you know, the S&P is solid. It's, if anything, gone up marginally since last night. And so, and look, this market is, look, it recovered the liberation day sell-off. So the S&P is back to where we were at the end of March. And here we're now in like a bit of a pause. It's paused for the last couple of days. And we're like, all right, we've recovered that

That big start of April sell-off. But where do we go from here? And I think that there's nothing really in this Fed meeting that really gives me at least any guidance, further guidance as to where these markets go from here. I think, I don't know, we're going to need more on the tariff front.

You know, do China come to the table to negotiate? Yes or no. Do tariff deals get done with some of the other big players? Yes or no. I think that's probably the next sort of chapter here in where markets go. So stocks are very stable and happy. You know, bond markets didn't really react. Particularly, I'd say the dollar has...

I mean, again, it's hardly moved, but it's kind of strengthened marginally. The dollar's come off some of the weaker levels that we saw last week. So like a euro dollar hit 115 last week, which is kind of crazy. And here we are back down below 113. So yeah, I'd say market reaction has been generally pretty subdued to this. Yeah, the euro dollar one, you're right, that is crazy. Because I remember we were recording an episode only months ago

Very much clearly talking about parity. And here we are. The dollar hasn't been at 115 since for over three years. Yeah. Yeah, it's kind of, yeah. So one thing I was going to say is, to me, it feels like the market is acting too binary to this tariff situation. It felt like there was, you know, real aggressive escalation.

And we were in like heightened uncertainty panic mode. And now we've shifted like, oh, it's fine. We're all just deal making now. It was all part of the strategy to escalate to negotiate. I feel like with any negotiation, particularly the history of Donald Trump, he could quite easily as he goes through negotiation. It's not here's my starting point. Here's mine. And then we have a bit of a tussle and then deal.

There's multiple movements within that to get to the centralized point of agreement. So I feel like we're not out of the woods yet and that the China situation is looking very positive as of now, but they're just having the initial dialogues. And I do feel like perhaps the market's looking too binary as in it's all clear or it's really bad. And actually, it's a lot more nuanced than that.

There's one layer, right, on top of what you've just said, which is, is there, I mean, what proportion of the market participants believe that Trump ultimately will do what the markets tell him? So just meaning that after Liberation Day, where he went a bit crazy with tariffs and then markets dumped and Trump went, oh, all right, fine, I'll pull back from that. So did he react to the market's reaction?

Or was it not that? Was that Trump's strategy in his play anyway? And I think a lot of market participants believe ultimately Trump will back down if markets sell off, meaning just buy the dip, because if there is a dip, he's going to back down and it'll rebound. So-

Right. So playing to that thinking, then if I was second guessing him, I would say, well, now he knows the red line, as we were saying at the time, unless the fixed income, the rates market starts showing some odd signals. Well, then why would you be brokering deals right now? It's time to get into dialogue and then go aggressive again to get a better deal. Like surely that's what his game is.

yeah i mean that's right we'll see so we're in a bit of a holding pattern at the moment okay and to conclude then in terms of the futures markets so in the short end of the fixed income markets so typically then this is where we look at short-term interest rate futures or stirs this would be something that you very much would trade it back in the day peers this opposed to more longer duration bonds like 10 30 year bonds

The short end's very ultra sensitive to interest rate expectations. Now, what that's showing us is that the market's still positioning itself for about three interest rate cuts this year of the remaining five meetings, not a cut in June. The market is pricing for the July at about 85%. So that's perfectly fine information for now, right? But it's pretty meaningless given what we've just been talking about.

I think it's entirely meaningless. I think that what will happen with tariffs is the one single factor that will shape everything. And we don't know what will happen with tariffs, but we're going to find out in the next few months. And then I think in the meantime, markets, it's almost like there's so much uncertainty. Markets are pretending it's not there.

That they're kind of seeing through. It's transitory, right? They're seeing through it and they're just assuming tariffs will sort itself out. And so what, what, what, what does, what do things look like on the other side? And they look like an extension of what

was happening at the end of last year which was inflation's coming back down to target and the fed will lower rates from what's been a really high level of interest rates you know for the last couple of years and so they'll cut rates back to below whatever four percent down to three and a half percent as inflation gets back to target that that's what we thought at the end of last year

I think people are positioning for that idea to get back on track in the second half of this year. But just first half of this year, there's just been this weird sort of episode of Trump and tariffs. Let's just put everything on hold because no one's quite sure what's happening.

All right. Well, look, we'll end the conversation there. So thank you, as always, Piers, for your insights. So thanks, everyone, for listening. If you have not already rated the show, please do drop us a rating. It really helps get the podcast out there on the platform's algorithm to as many people as possible. And it would be very much appreciated. But until the next episode, take care. Thanks a lot.

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