Closing Bell - Closing Bell: Gundlach Breaks Down the Fed’s Hike 5/3/23

Episode Date: May 3, 2023

Bond king Jeffrey Gundlach of Double Line gives his first, exclusive take to the fed’s rate hike and Chair Powell’s news conference. Plus, Sofi’s Liz Young drills down on the big market headwinds that could be ahead for investors. And, Charles Schwab’s Liz Ann Sonders breaks down what is at stake … and if there could be more rate hikes ahead.

You're listening to Closing Bell in Progress. All right, that was Fed Chair Jake Powell, of course, after the decision to raise rates by another 25 basis points, the 10th such move in a little more than a year, and maybe most importantly of all, as you heard the Fed Chair noncommittal on whether in fact it was 10 and that's it. He said a decision on a pause was not made today. And I'm quoting, he did acknowledge the change in language, though, essentially substituting determining for anticipating when it comes to future rate hikes. Also said of the banking system, conditions have broadly improved. He called it sound and resilient. And that, of course, despite the fact that we've had three bank failures since March, he did note tightening in credit, underscored how tight the labor market remains.

As for stocks, there's your live picture there. We're at the lows of the day for stocks. It's taken a bit of a while, a bit of a moment for all of this to filter into the market. Stocks seem to be moving lower on the comment that the Fed chair made about 10 minutes or so ago, where in their own forecast, it is not for inflation to come down all of that quickly. Quote, in that world, said Fed Chair Jay Powell, he doesn't see rate cuts coming. The market, of course, is telling a bit of a different story. And we'll get into all of this with a great panel ahead. Liz Young is with us today. Jeffrey Gundlach, as he has been for

every Fed decision now, is joining in just a matter of moments. The DoubleLine is with us today. Jeffrey Gundlach, as he has been for every Fed decision now, is joining in just a matter of moments. The DoubleLine CEO with us exclusively, Lizanne Saunders, is here as well. I will turn to Liz Young. Steve Leisman called this a hawkish pause. How would you assess? Is the market still trying to make sense of it? Dow's down about 180. Well, the market obviously expected 25 basis points. That was not a surprise, I think, to anybody. What I heard today, I think it is very meaningful that they removed the language about expecting or anticipating further hikes. I think that it's probably more likely than not that we do get a pause from here

on out. And we've now entered the phase where we're high and we hold high. And that is a different phase than we've been in. It's going to be difficult and it's probably going to be long and protracted for stocks to digest that entirely. The other difference that I heard today, although Powell did still say that he saw the banking system as resilient and sound, he talked a lot about the stress that was presented in the last couple months. And I don't feel like there was that much attention paid to it in the last meeting. Is there offsides? There's something offsides there. The fact that he would declare the banking system, as I said, he did, quote, sound and

resilient. He said condition. This is another quote. Conditions have broadly improved in the banking system. We just had the third failure since March. Right. Well, the thing I would say about that failure, though, is that it wasn't a surprise, much like when SVB happened. That was very quick. It was sort of fast and furious. This one was maybe a little bit more easy to foresee. I don't know that it was necessarily off sides, but I think it's recognizing the fact that what they've done over the last year of raising rates by 500 basis points has both aspirational

consequences. So what they wanted to do was slow demand, maybe cool the employment market a bit, but then it has these collateral damage consequences that they did not anticipate. And they have affected financial conditions. And I think there was some acknowledgement of that today too, which I would welcome, frankly. There are things you have to add all of the math of it together. And if it's working, whether the way you wanted it to or not, if it's working to continue to tighten financial conditions and slow the economy, I'm glad that he acknowledged it. All right. I appreciate you being here right off the top. Let's bring in DoubleLine CEO Jeffrey Gundlach now. He joins us exclusively, as he does for every Fed Decision Day. Jeffrey, it's good to have you, as always.

What's your reaction to the decision today? Well, it was very noncommittal. And I think the market really anticipated that, that, you know, the idea that they're not going to make a decision or a prediction or any inclination about what's going to happen at the next meeting is completely consistent with the way the market and the treasury market has been priced. I did think, like Steve Leisman, it was a little bit of a hawkish kind of background tone to it. He sounds very resolute. He's certain that not stepping away at all from the 2% inflation commitment. He's right to say that inflation has come down a lot and it's not going to come down as quickly anymore. In fact, we believe at DoubleLine that the low inflation print is probably going to be this year around 4% on a year-over-year basis for

the CPI. So that would imply that the Fed is going to keep rates around the level that they're at now unless something goes wrong with the economy, which is certainly not a low probability outcome. We've had these bank failures. This is what I talked about in the aftermath of SVB, Scott, when we talked about how rising interest rates are something that people aren't used to. Not used to rising interest rates and then going up and then staying there for a protracted period of time. And it's going to have different ramifications than what most people's professional experience has taught them. And that's certainly the case with these bank failures. I mean, these people are pulling money out because there's absolutely no reason to keep their money in. You can get higher interest

rates by a lot, thanks to the Fed's 500 basis point interest rate increases. You can get bills at 5.2 percent for a couple of months. And the two-year Treasury has fallen over 100 basis points in the aftermath of these bank failures. But it just seems to me that the deposits are going to keep drifting out. And I don't think that this is the last chapter in this regional banking problem. It harkens back to the S&L crisis way back when, when we had high interest rates and these S&Ls were losing their deposits. This is kind of the same phenomenon. And I don't really see what's going to make it stop unless the Fed is going to cut interest rates, which there's no inclination of cutting

interest rates in the next meeting. And the bond market says that there's not going to be any more rate hikes and that there's going to be cuts almost assuredly by the end of this year. And that's consistent with my view that we've talked about in past appearances, that recessionary odds are pretty darn high right now. The chairman was smart, saying we've got 500 basis points of interest rate increases. We've got credit contraction with the banking problem. We've got quantitative tightening. All these things have led me to having been relatively neutral to somewhat optimistic or tinged towards optimism on risk assets ever since really last September or so. I'm really turning more bearish at this point in time. I think the markets for risk assets are too complacent, given this cocktail of higher interest rates, quantitative tightening and credit contraction. Certainly, we should expect higher default rates and lower quality fixed income securities as we

move into the end of this year. And I'm strongly of the opinion that investors should be going up in quality and bond portfolios. And we might finally crack down below 337 on the 10-year, which has been this amazing barrier that we can't get through. We tried to get through it today. We couldn't get through it. If there's a recession, we'll probably get through it. And I'm toying with the idea that this might be the last flight to quality rally that really creates profits for Treasury bonds, because I'm really worried about the deficit situation in the United States. We're not even in a recession yet, although the economy is only growing at 1.1 in the first quarter.

But we have a 7 percent deficit as a percentage of GDP, and we're not even in a recession yet. So we're going to have really big problems with debt. Was today a mistake? Should they have done nothing? I think they should have done nothing today. But I've heard a lot of commentators say these words that I agree with. Twenty five basis points is going to make a huge difference. You know, it's certainly there's always the straw that breaks the camel's back. But four hundred seventy five or five hundred basis points over the course of a little over a year, it's kind of the same thing.

So I just harken back to what we talked about when the Fed started raising interest rates. They started too slowly. They should have raised interest rates a lot more in the middle of last year, and they waited until really those multiple 75 basis points. And that was because the bond market was throwing a fit. And we probably would have had this regional banking problem to this magnitude if the Fed had started raising rates more dramatically early on. Like I talked about, a 200 basis point move should have been their first move. We probably wouldn't have gotten the long bond to a 50%

drawdown that hurt, obviously, SVB and other banks. And certainly, there's lots of underwater securities that remain in the banking portfolios. So I think today was on the margin, I guess I'd call it a mistake. But I think the market was completely prepared for this exact press conference, this exact statement from the Fed. It's extremely noncommittal. But I would bet pretty strongly that the Fed's not going to raise interest rates again. Yeah. I mean, there was a thought going in, even though the market was prepared for 25, Jeffrey, that they may, in fact, do nothing.

Hold with me just a second. I want to bring in Steve Leisman, just got out of the news conference. And, Steve, it was a thought that you put forth earlier today um you mentioned the idea of there's a crisis in the regional banking system in this country and i said to you after three o'clock you may be saying but the fed raised again anyway and in fact that's that's what they did. They did. And it was interesting. Powell said the situation is improved in the banking system. And while he was talking, I went back and looked. The KBW is down 30 percent over the past month. Four hundred billion dollars has left the banking system in deposits in the past month. And you've had three bank failures. Now, maybe Powell is

right, as he said, that these were the three that were troubled at the beginning and now we're maybe past that phase and out of the woods of bank failures. But to Jeffrey's comment earlier, I do want to remark, the statement itself was more hawkish than I thought. But Powell ended up kind of putting a more dovish spin on it. The statement's trying to suggest, hey, we're not anticipating doing it, we're not sure we're going to do it, but we're kind of looking to hike more. Powell gave this impression that we may be done here. That was kind of the impression.

In fact, if you don't mind, Scott, let's listen to what Powell actually said. People did talk about pausing, but not so much at this meeting. You know, there's a sense that we're much closer to the end of this than to the beginning that you know as i mentioned if you add up all the tightening that's going on through various channels it's we we feel like we you know we're getting closer or maybe even there yeah so he suggested scott that that maybe the the funds rate is all is where they need it to be right now given the situation of potential tightening down the road. You know, I listened to him when he said, you know, he used the words near or at sufficiently restrictive policy.

Right when he said that, I looked over my left shoulder at the market and it didn't really do much, but it did move. Let me bring Jeffrey back in, too. Jeffrey, it did move when the Fed chair said that their own forecast doesn't call for inflation to come down all that quickly. And in the Fed chair's words, quote, in that world, I don't see rate cuts. Now, we're at the lows of the day. Now the Dow's down some 225. Maybe the market doesn't like your commentary either, Jeffrey, that it's a bad time now for risk assets. And you're concerned about where we're going from here. Well, right. I mean, I think that the storm clouds are much, much denser than they were back in September.

And I think that we look at the leading economic indicators. They're down 8 percent year over year. And the momentum continues strong in recent months to the downside. There's a very high correlation between the leading economic indicators and high-yield bond spreads. And they've disconnected for now. The leading indicators say high-yield bond spreads should be much higher than they are right now. And also lending conditions, which lead default rates on high-yield bonds, they've been getting much tighter. And obviously with these bank failures, it's much accelerating in terms of tightness. We should expect significant lower quality bond defaults

starting in the fourth quarter of this year. And when you have bonds defaulting or you have spreads widening on the lower tiers of credit, it's very difficult to make a case for equities because obviously equities are junior in the capital structure to these bonds. And if the bonds are suffering, the equities are going to have significant headwinds. And we've been bumping up. Last time we talked, Scott, I talked about I thought the stock market was OK. It could go to 4,200, 4,300 or so on the S&P. We can't seem to bust above that. We keep selling off about 4,200. I think we've been sort of at this trading range for a sufficient length of time that my suspicion is we're going to break to the downside because of this trifecta that you just played, basically, that Jay Powell was

alluding to. So I think risk needs to be very carefully managed at this point in time. You know, Jeffrey, after SVB failed and we had you on when we were worried about who's next or what might happen next, what might not just break but shatter, you said of the idea that the Fed thought it had enough tools in its toolbox to fight inflation and then deal with these flare-ups wherever they may be in the financial system. You said that the Fed can't have its cake and eat it too. You get the idea from listening to the Fed chair that they still think that they can, that they can deal with whatever issues come up, that they think

the bulk of the flames, if you will, have now subsided. I kind of think that Jay Powell was a lot more confident two press conferences ago than he was today. He seemed very tentative to me in terms of his conviction of where things were going. I thought it was, just to repeat, I thought it was interesting that he said inflation isn't going to come down maybe as quickly as they thought before. Remember, the dot plots have the inflation rate going down to 3% or so by the end of this year. I don't think that's going to happen.

And it sounded to me that Jay Powell isn't so sure anymore either. So in spite of the fact that we have commodities that are super weak, commodities have been very poor for several months and they're negative year to date, you would think that you might have more confidence that inflation was coming down, but it just isn't happening because the services inflation is so high. If you look at goods inflation, it's right back down to pre-pandemic levels. There is no goods inflation on a year-over-year basis versus where we were three years ago. But the services inflation is way up there. And so maybe that's why the commodity price declines aren't

really showing up in the inflation data, because they're showing up in the good side of things, but not on the service side of things. Steve Leisman, I mean, you alluded to this in your question to the chair as well, this idea that they've got enough to deal with both and it's one of the reasons why going in as you noted this morning rosengren and kaplan the former presidents respectively of boston and dallas suggested don't do anything you got to really wait and see what what the outcome of all this is. And the Fed chair remains sort of resolute in this idea that they've got it, that they can deal with it. First, I want to compliment Jeffrey's television viewing skills because I was the banking crisis and the banking turmoil, at least, of uncertain magnitude. I don't know how many times he said the word uncertain, but he kept talking about how there's going to be some tightening effects from this.

But we don't know how much. So he has to kind of balance these two things. So I guess I would be more uncertain, too, and less resolute or confident in that scenario. But the answer to your question is yes, Scott. He still thinks he can run this what's called a separation principle. We could do monetary policy over here, and we can do supervisory and regulatory policy on the other hand, and we don't have to mix one up with the other. I think that's what Rosengren and Kaplan think is a problem here, that you're going to potentially keep raising rates or keep them high while the banking system has these problems

we've been talking about. And certainly today, an extra quarter point on the funds rate did not help the banking system, right? It really made some of the marks there more underwater or more negative than they had been. So it didn't help. And so what happened is ostensibly the credit tightening problem the Fed will have just got worse. So I think that's an issue that they're going to have to deal with. But they think you're right. They can keep them separately. Some people don't agree that's the right way to go. Steve Leisman, thank you very much.

We'll get back to Jeffrey Gundlach now. So, Jeffrey, I want to, you know, let's look at this in total here, okay? The Fed chair himself, you know, said it over and over. We've done 500 basis points in a little more than a year. And I remember the many conversations we had at the very beginning of all of this, where you suggested that the Fed chair either paint or get off the ladder. Well, he put his paintbrush down and they got a spray painter, okay? And they spray painted the whole thing. And he was asked today if he had any regrets about what they've done and the speed in which they've done it, also in the context of the former Treasury Secretary Steve Mnuchin out in L.A.

saying that they started too late and raised too quickly. Of that concept, the Fed chair, he cleared his throat a couple of times, a few regrets. Who wouldn't have done things a little bit differently, he said. How would you assess what they've done here? Well, just to repeat, I think that they raised rates too slowly. And the fact that they have to leave them high now for a long time, as Steve Leisman just pointed out, is not good for the banking system. I mean, it's this problem that the short rates are so high above the bank rates that and everyone's waking up to the fact that they can get five and a quarter percent on short dated T-bills and you're getting like 37 basis points on bank accounts. And I just thought there's just it's one of these things where before the global financial crisis,

I was telling people, don't buy commercial paper money funds. And everyone thought I was nuts. And I said, there's no reason to own them. I'm not predicting a total collapse, but there's no reward. You have incremental credit risk and no reward. People leaving money in banking accounts that are earning half the interest rate or less than half the interest rate they get on T-bills is nonsensical. So leaving rates this high is going to continue this stress. And so I believe that with a very high probability, there's going to be further regional bank failures. And, you know, we saw some incredible bad action this week already on, you know, Western Alliance and Pacific West.

And so I think this is an issue that's going to continue to haunt the Fed. And if they'd only raised rates quicker a year ago and then we could have done a pause then and see what happens. I just think this meat grinder of an approach that they used in raising rates sequentially and then finally getting up to this level that is no longer being ratified by the bond market at all. The two-year Treasury is below 4%. That strongly suggests to me that something is going to be a catalyst that at least the Fed is going to cut rates by the end of this year. And I think they might cut them by as much as 75 basis points. That's why the 25, some would say, matters more than it would otherwise appear on a day like today. You say, oh, it's just another 25. It doesn't matter either way.

But when you talk about money market funds, which are already offering competitive rates to what you think you might get in other asset classes, another 25 basis points just underscores to people there is competition for your money elsewhere. Right. That's the fundamental problem with risk assets. You can get yields that are sort of double the dividend rate on the S&P 500 with zero risk. And there's zero reason to have half that interest rate in anything that has any semblance of risk to it. You know, people talk about this raising the insurance for deposits above $250,000. I think I saw Elizabeth Warren on your station, and I think she's right when she said it's already basically unlimited. We're just playing games here. It's just like the debt ceiling. We play this debt ceiling game all the time. We've had the debt ceiling for 106 years, and they've raised it 98 times. I mean, what good is a debt ceiling that isn't a ceiling? What good is a cap on insurance that isn't really a cap when push comes to shove? And that seems to be where we are right now. So things are changing. I'm sensing a

lot of change in the way rhetoric is happening. Let's look at the southern border. You know, we talk about we're not going to do anything, and now we're putting troops down there. That's pretty radical, but people are agreeing on stuff. So when people can start actually agreeing on solutions, or at least steps towards solutions, it's sort of a positive thing. And the next one that's going to be coming is there's going to be a serious debate about these entitlement programs because we have to address them.

It's absolutely critical that we address these entitlement programs by restructuring them. And I know that's the third rail of politics, and, you know, nobody wants to touch it, but it must happen. And it must happen in the next few years. And we're going to get there. This is that fourth turning I've talked about. We're here now. Neil Howe, the great demographer, I think he's got a book coming up called The Fourth Turning is Here. And he's the one that spoke in those terms predicting the global financial crisis basically about 15 years ago.

So it's it's about to get interesting. So strap in and risk manage very carefully. So in light of all of that, if you have to risk manage and you don't like risk assets, what would you buy today if things are, in your words, turning the way that you see them? I think you need to have that long-term bond exposure in treasuries because we could have one more significant flight to quality rally. And that allows you to own, this has been my theme for several quarters now, and I haven't changed it, that allows you to own some of the areas of the market that have very high yields, but observable risks that make those yields so high, that makes investors demand high yields. So I like things that are in

like the messy areas, but the higher part of the capital structure. So commercial mortgage-backed securities. You mentioned commercial mortgage-backed securities to people, and they break out in hives because everybody knows of all the problems in the office buildings and the major markets. But these things are somewhat priced in. And so if you go not to the lowest depths of the capital structure, but you can get yields that are pretty compelling and can be hedged with the Treasury market. So I like that. I still believe the dollar is going down. It's been falling for some time now. I think it's going lower as the Fed is going to be cutting interest rates. And so I still think you're supposed to own non-U.S. risk assets to the extent that you own them at all.

And I've owned Europe for quite some time. It's doing very well. It's beating the U.S. by a fair amount now over the past several quarters. And I'm starting to warm up on emerging market equities in Asia, ex-China, and in parts of South America. So these are areas, this is non-traditional investing, but we're in a non-traditional sort of a we're in a non-traditional sort of a place right here. And the thing that's going to scare people is going to be the coming defaults in high yield bonds. I would stay out of anything below a double B or single B anyway. I'd stay single B and higher in junk bonds almost exclusively. And we've been rotating higher for

quite some time and spreads haven't widened yet, but I think they're going to as we move into the later part of this year. Are you buying gold? I've owned gold, yes. I bought it at $1,800. It looks kind of like a triple top to me for the near term. It keeps banging into the low $2,000s and then reverses. But I think gold is going to ultimately break out to the upside as the dollar takes its next leg down. So I have a core holding in gold at this time. Interesting. Jeffrey, I so much appreciate it, as always. A Fed day is not a Fed day

unless we hear from you immediately after all this goes down. And we look forward to doing it again. We'll do it again. Yes, sir. Thanks, Scott. I look forward to that. That's Jeffrey Gundlach exclusively with us on Closing Bell here on CNBC. Let's bring in Lizanne Saunders now, chief investment strategist at Charles Schwab. Get her reaction to all this. Lizanne, it's nice to see you, of course, as always. You heard Jeffrey say this is not good for risk assets, wouldn't buy U.S. stocks. You agree? Well, I think avoiding the entire U.S. market may not make a lot of sense, but I think you have to be way up in quality. You know,

we've had some fits and starts this year, particularly in January, where you saw kind of speculative juices kick back in and provide fill up to areas like the meme stocks and early cyclicals. I think this is an environment where you want to stay factor focused and really high quality factors. So high interest coverage and strong balance sheet and strong free cash flow, low volatility. I think that's the way to navigate within a still uncertain equity market versus the get in, get out, which I don't think either of those are investing strategies. I hear you. But like you're at a cocktail party. Someone's like, you know, get in, get out, which I don't think either of those are investing strategies. I hear you. But like you're at a cocktail party. Someone's like, Lizanne, why should I own stocks at all when I can own longer dated treasuries? I can reduce my risk or I can own money market

funds. Fed just raised interest rates. Right. So I'm getting even more bang for my buck there. And I just can sleep. I can sleep at night. How do you counter that? Well, you it depends on what the goals are of the investor. If, you know, four percent or so with the sleep at night factor is enough in terms of the generation of income along the way and they don't need to grow principal to a significant degree, then, yeah. But I don't think that there's a cookie cutter blanket answer to a question like that. It depends on what the goals are of the investor and a long term investor that's looking to to to grow the principle and not just generate some income probably is going to want to have equity exposure. I just think this is an environment now within the equity exposure that you want to be really quality focused and then also apply the disciplines around diversification and periodic rebalancing.

Do you think the Fed was hawkish today? Was Powell hawkish? Was it more so than you expected? How would you characterize what he said and what they did? Well, I think probably the most important thing was what Powell did not say, which, by the way, I think is appropriate, which is he did not reinforce what the market has expected, which is rate cuts starting in short order. I have felt that that's quite an odd disconnect that's still embedded in market expectations with inflation still above the Fed's target, a still tight labor market without serious deterioration being witnessed either in the economy or specifically employment. How that is supportive of a pivot just doesn't make any sense. All of

that may be supportive of a pause as the Fed assesses the effects of what they've already done. But this notion of all else equal with inflation still well above the target, that there's some justification for a pivot, I think the Fed is dealing with a bit of a credibility issue. I think you would really, really test that credibility if they said, now we're kind of throwing everything away. I think the only way the Fed pivots to rate cuts, not just pauses, is either we get more significant deterioration in the economy, specifically the labor market or the banking system travails turn into much more of a systemic crisis absent those two or some combination take the fed at their word which is their inclination is even if they're now at the terminal rate they're going to stay there for a while

do you worry about more more banking issues i mean the fed chair i thought it was you know interesting today where he used those words, sound and resilient, that conditions have broadly improved. To many people, it would be, I don't know, the opposite. Well, I guess it depends on whether those comments were tied to what Powell and others on the FOMC saw in their advanced look of the sluice report, which comes out next week. And he did reference that. But we have to remember that credit conditions, even in advance of the start of this banking system problem with the fall of SVB, credit conditions based on the prior quarterly sluice report showed tightened conditions in recession territory already.

And it does raise the risk of not just a credit contraction, but a credit crunch. That doesn't tend to happen sort of moment in time. But I think that's the way to think about the economy on a looking forward basis is how severe is the tightening in credit. So even if this is not, doesn't continue to be sort of the whack-a-mole of individual banks under pressure, I think the broader force of a potential credit crunch and the impact that that has on the economy is definitely still ahead of us.

I just wonder also is, you know, when you suggest, well, you know, these sort of things are not a moment in time deal, that maybe it's different this time. And that the way we used to think about, well, the way we used to think about all of this would lead one to say, well, this doesn't just sort of happen in a moment of time, where in fact SVB happened in a really quick moment in time. And then First Republic, and it's the third since March. And if you look

at the KRE and look at the regional banks, yes, they're OK for this moment today. Yesterday, it was anything but. I just wonder if we're and the Fed chair is enough in touch, so to speak, with exactly what's happening and how quickly it may. Well, that's the risk. And there's certainly ample history of even Fed chairs like Bernanke back in 07, essentially saying, you know, nothing to see here, paraphrasing, but not warning in advance of what turned into the global financial crisis. There are a lot of differences, though, relative to them. We know we have a more highly capitalized financial system that's less indebted. This is not akin to what happened in 08 with housing imploding and literally and figuratively being a house of cards that took the entire financial system down with it. But just because it's not a mirror of what happened in 2008 doesn't mean the economic

implications are still ahead of us. Quite frankly, this not happening in a moment in time has really been a descriptor for this entire cycle related to the pandemic, the way we've seen weakness roll through the economy, why we've been calling it a rolling recession on the good side first, housing, housing related with then the offsetting strength on the services side. The disinflation and inflation has rolled through the various inflation metrics as well. And it is just a very, very unique cycle. And I think the Fed is grappling with that because it is not the sort of clarity of signals that you often get through things like leading indicators in the economy. We're dealing with really, in many ways, an apple compared to history's oranges.

Put you on the spot on my last question. Was this it? 10 and they're done? Was this the last hike? Probably. But I also think they're going to stay in pause mode for a fairly extended period of time absent something. The wheel's really falling off here. So so pause, but not pivot. And no cuts this year. Well, again, there could be cuts this year, but not all else equal, not under the conditions that exist today. There could be cuts, but it would be because of more serious economic pain or more serious stress in the banking system. Absent those, pause. Great having you, as always. We'll see you soon. That's Lizanne Saunders, of course, of Schwab, joining us.

We're now in the closing bell market zone, by the way. CNBC senior markets commentator Mike Santoli is with us to break down the crucial moments of the trading day. SoFi's Liz Young is back with us as well. Mr. Santoli, I'd love your take on what happened today. First of all, relatively muted response shows you that it was more or less in the lane of what was expected. But I do think it also reflects a bit of frustration by investors that Powell did not, because he could not, let us off the treadmill of still wondering exactly which one is going to be the more dominant force going ahead, whether it's inflation, whether it's risk to growth. I think the baseline assumption is now they're on pause, but they didn't commit to it and they didn't set the bar, the sort of threshold for what would lead them to the next move being a hike.

So I think that's understandable that we get this kind of kind of diffident, ambiguous type response in the market didn't permit itself a little bit of a Fed is done rally, not now, but if not tomorrow morning, the next couple of days, because it feels like that's what we're geared up for at this point. There's another piece of it, which is it gets to the point on the banks, which is I don't think that the market in aggregate appreciated Powell saying the banks are fine and that we don't think that we need to really worry about that as a big source of stress right now. Which is why I've been highlighting it, whether it's this great disconnect, if not, you know, some might suggest tone deaf and saying, how can you declare something sound and resilient two days or three days removed from Jamie Dimon picking up

the pieces of First Republic? I don't think it's tone deaf, but it does. It sort of doesn't show that he's bending over backward to soothe the market in this regard. He wants it to be so. Look, when the toddler falls in the playground, the parent immediately says, you're OK, you're OK, you're OK. The toddler's probably OK, but he's got a skin knee and he doesn't feel so good. He's embarrassed. And that's where the market is right now. The toddler fell down. He wants to be soothed, not be told you're OK. Liz, the idea of what Jeffrey Gundlach said, he doesn't think it's good now for risk assets.

You heard what he likes. You've liked the shorter dated treasuries. He likes longer dated treasuries. He likes a lot of other things that are outside the U.S., other parts of credit. What's your take? I still do like shorter-dated treasuries. I think longer-dated treasuries probably have a little bit of room to rally if we get really spooked about a recession. But, look, I think what we're looking at now is this argument between the Fed and the market. The market still expects three cuts before the end of the year. The Fed can't really say that they're going to cut because they'd have to then admit that they're modeling in some kind of recession. They're not going to admit that. He almost all but did. You know, what Jay Powell said, you know, maybe it's a recession. And if it is, hopefully it's a mild

one. Right. Well, if you look at their indication of a recession, the near term forward spread, it's showing like a 90 percent chance of recession in the next 12 months. He said that maybe staff expects a recession. He doesn't necessarily. So they're in the next 12 months. He said that maybe staff expects a recession. He doesn't necessarily. So they're still not fully admitting it. He does not like surprises. So he didn't surprise us today. And he values flexibility.

And he maintained his flexibility. I think they're done. I think the market wants them to be done. But I don't think it's a good thing from here on out. Because usually the market doesn't actually see the stress. Even if we get a rally to Mike's, tomorrow or in the next couple days, the market doesn't usually see the real stress until after the Fed is done and then right after they cut. So if there is a rally, as Mike suggested, who knows? You wouldn't be a believer in it.

Would you urge people to fade it? I would urge people to fade it. I feel like I've been saying that about every rally this year, but I would continue to urge people to fade it. And you have to watch the timing of this. Although earnings season has been better than expected, the economic data continued to weaken. We've got still inflation as an issue. I don't think that a rally here is warranted in the long term. I certainly don't think at this point in the cycle it's an indication of some sort of sustainable bull market. Maybe, you know, J-PAL is not going to be a huge market mover over the next 24 hours or what have you. But Tim Cook, maybe. Yeah. Don't forget with Apple, the big kahuna in overtime tomorrow. I mean, it is the biggest stock in the market. It is so

representative of that mega cap trade. It's the last of the big mega cap stocks to report. The others did pretty good. You're not going back to the lows with those stocks performing well. No. I mean, Apple market cap wise is equivalent to the Russell 2000 in market cap. So we're worried about the Russell 2000. It's lost a percent and a half off its high of the day, and it's kind of wallowing near those multi-month lows.

On the other hand, it kind of doesn't matter in the grand scheme based on the aggregate amount of money invested. I've often said that I don't think Apple's really an economic bellwether. It's much more of a measure of people's willingness to say, fine, let me go with the safe kind of predictable trade. And a market that's overly dependent on Apple specifically, when Apple outperforms a lot, to me, it's not the one you're going to wish for. So I don't know. I'm not going to say tomorrow's a make or break when it comes to Apple's report.

I do think that we're still going to be in this zone of conflicting staticky signals for a while. Because, you know, Liz is right. You know, Powell said my prediction is not for a recession, but the staff, maybe they had a higher GDP, you know, number for the first quarter and therefore or a lower one. It doesn't matter. Let's be clear. The staff is not three people sitting in a back office. That's right. We're talking about hundreds of economists that are on the staff of the Federal Reserve. The point is, we don't know. And actually, the way things are tracking, we could be looking at June, where the dot plot has revised higher economic outlook because of

what's happened since then. So we really are in a zone of, look, we're not going to get it all clear. We know we're not going to get it all clear. What's been priced in in terms of flattening out of earnings? That, to me, matters more. And the market is not forecasting, so to speak, rate cuts because of anything that Powell said or didn't say or anybody on the Fed said or didn't say. It's just saying the blend of risks and probabilities say if there's a deviation from expectations, it's likely to be in the direction of weaker growth or a banking accident. And therefore, cuts are going to come. And they usually come five to six months after the last hike anyway on average. All right, what an interesting day we've had. Fed raises by another 25 basis points.

The question remains, is that the last hike? Market trying to make sense of all of it. Dow's going to go out with a near 270-point loss.