Closing Bell - Closing Bell: Stocks Sell Off & Fed Up 9/21/22

Episode Date: September 21, 2022

The market sinking after the Federal Reserve raised interest rates by 75 basis points and forecast more hikes in the future to fight inflation. Former National Economic Council Dirctor Gary Cohn weighs in on whether a recession is now more likely than a soft landing. Jefferies Chief Market Strategist David Zervos on how investors should be playing this volatility and whether the market is starting to price in a recession. And Mastercard Economics Institute's Chief Economist Michelle Meyer on why consumer spending remains strong despite inflation remaining very high.

You're listening to Closing Bell in Progress. Fed Chair Jay Powell, after raising interest rates another three quarters of one percent, signaling more work is to be done to fight inflation. More pain, he said, until we get to that two percent inflation level. Just want to show you what's happening with stocks all over the place. They initially dropped at 2 p.m. when we got the news and we got the dot plots, which is the projections that the Fed members make for future path of interest rates. They looked higher, certainly than June. And then

the market was expecting 4.4 percent rate by the end of this year, 4.6 percent for next year, higher than the market was expecting. Again, saw the market tank on that. And then we rallied during Fed Chair Powell's news conference. Perhaps one reason why he said the pace of increases depends on the incoming data, that data dependency, perhaps signaling a flexibility there, perhaps the reason for rallying. Then we lost all the gains just in the last moment or two when he started talking about pain again. Joining us on set as we do on these Fed days, Gary Cohn, former NEC director, former Goldman Sachs president. Mark has been all over the place. What's your takeaway?

Well, I think the speech was or the news conference was very much a follow on from Jackson Hole. We didn't have a Fed meeting last month in August, but we in essence did have a Fed meeting because the chairman laid out his very detailed, long speech in Jackson Hole, where he really laid down that they were going to try and be vigilant. They were really going to try and get ahead. They were going to try to get out in front of inflation. They were here to fight inflation. And I think today, the message was we are here to fight inflation. And you talked about the plots. We moved the plots up to 4.4 percent, but that's 100 basis points over where they were a quarter of a go.

So the governors are admitting the economy, the interest rates need to go 100 basis points and a quarter. So that's a pretty substantial move there. So we saw that, you know. But then the chairman himself comes into the speech and he starts taking off the successes. He starts talking about consumer spending going down. He talks about pressure in the housing market. He talks about decline in business fixed investment. So he does talk about the successes. So I think that's where the market sort of, you know, we saw it sell off. We saw it rally back. I think the market was

confused. Are we really into a hawkish Fed right here? Because their actions sound hawkish, and when the chairperson's talking, he's talking about the successes. Even Fed Chair Powell, when he tries to be super hawkish, the market questions his hawkish resolve, don't you think? Well, I think that is true. I mean, I think in one respect, he wants to be hawkish. On the other hand, he wants to remind people there has been some success here. Now, look, you and I both know that we've seen the Fed raise interest rates 3% over the course of the year. We've gone 3% in six months.

Fed activity, it hits the consumer very quickly. We've talked about how it hits the consumer very quickly. So, you know, adjustable rate loans to consumers go up. Mortgages go up instantly. So we see the reaction coming through the housing market very quickly. But the vast majority of Fed policy is very slow to evolve through the economy, very slow to evolve through the business cycle. That's the whole lag concept. The whole lag concept. We're just starting to see the effects of the very first rate increase right now. So we're six months into this, 300 basis points. I'm not sure any of us know the real impact of the 300 basis points so far.

And then the chair went out of his way to make sure we understood that there's another 100 to 125 basis points coming for the remainder of the year. He said there's some controversy in the room, whether it's another 100 or 125. Is it going to be 75 in November and 50 in December, or what, 50 and 50? 50-50, 75-50. 75-25. Look, we can get to those numbers a bunch of different ways, but I think the chair wanted us to know that the dot plot that they put out today, they're going to get very close to that number. They're going to get to that number in the next three months.

So we will have seen a 4% raise in Fed fund rates over the final nine months of the calendar year. Then, of course, the first question is right out of the box. And Steve Leisemann asked the second question, was on this topic as well, is, okay, we've seen 3%. We'll see another percent this year. Like, how do you know when to slow down? How do you know when to take a pause? Because we know there's a lag effect. Did we get an answer on that?

I don't think we did. Well, I'm sure Steve will tell us if he thinks he got an answer or not. Yeah, we're going to talk to Steve here in a minute. Look, Gary, actually, we've got him. Senior economics reporter Steve Leisman, I was just mentioned in the room there. Ask that question, Steve, what did you take away? You know, Gary's got it exactly right to focus on that, I think. We did get something of an answer. It was a bit like I'll kind of know. Well, let's just look what he said. This was in response to is it possible you might get to a place where you feel like you have to pause and see what impact Fed rate increases have on the economy?

Here's what he said. There is a possibility, certainly, that we would go to go to a certain level that we were confident in and stay there for a time. But we're not at that level. Clearly, today, we're you level. Clearly today, we've just moved, I think, probably into the very lowest level of what might be restrictive. And certainly in my view and the view of the committee, there's a ways to go. Now, it's very important, Sarah, I think to understand that one of the very last things

that Chair Powell said was that the committee has this 4.6% funds rate in for next year. And he said something along the lines of, and I think it's pretty likely we're going to get there. So that's what I was saying that Gary is spot on in looking at the totality of rate hikes that are coming. I think it's 300 basis points in a year. And I think they've done in terms of what's happened to the two year and 100 basis points in just the last month or so, which I don't know how the treasurers at places like where Gary used to work are dealing with that. It's got to be something inside the financial system right now. But but this idea that they indeed will get

and the chair seems to support going to that high level, which, as I said earlier, he's out hawked the hawks here relative to where the market was going into this. The Fed is above where the market is for next year and the year after that. Absolutely. And you see that in the two year note yield. Just want to point that out for everyone. And initially it spiked on that forecast for rates to four one one was the high that we got. It is just around that 4% level, Gary. So Steve raises a good point. It's a big rate shock in a short amount of time. What kind of damage does that do? It is. Like I said, it's 300 basis points so far, another 100 basis points this year. This is a big shock. And as I said, it's a lag effect. So look, we're seeing some of the effects. We're seeing the dollar at record highs.

Let's show the dollar. The dollar spiked on this news. The dollar is spiking. Twenty-year high at least. And so we will see the effects of this. We don't see the effects of the dollar today. We're going to see them in the economy day by day. We're going to surely see them when we see this quarter's earnings.

Anyone that's trying to sell U.S. goods overseas, they're going to feel it. Anyone that's repatriating earnings from offshore back to the United States, it's going to hurt companies that are repatriating earnings from overseas back to the United States. So the dollar effect is going to have a real impact. This is what I'm talking about, the lag effect. We don't see it day to day, but we will see it over time. Exporters are having a very difficult time selling products overseas. Our products are expensive when you're buying it in foreign currency. But we do import a lot and it helps. We do.

It also puts pressure on inflation, which we're trying to do. I think the other problem is it wreaks havoc around the world. It does. And it makes you wonder at what point it seems like everyone's kind of cool with it right now. But but there is a question of whether are we are we going to see some sort of intervention are we going to see some sort of plaza accord when you get to these levels you have to wonder well it surely would be helpful if we saw other major central banks around the world get the same religion that the fed has right

now and start raising their interest rates we've got major central banks around the world right now with still very low to zero interest rate policies. The U.S. has become a carry trade. You can buy the U.S. dollar. You can earn 4 percent in short duration treasuries, two year treasuries. You can earn in six month treasuries and you can be long the dollar versus what you can in your own country. You know, people are going to buy the dollar, you know, so we're going to continue to see stronger and stronger dollars as currency migrates to the carry trade here in this country. Gary, hang on. We're going to come back on the other side of the break. Gary Cohn, of course, former NEC director. I just want to show you a live look at the S&P 500 sector heat map. Just a moment ago, every sector was stronger and we've given up some of the gains, as you can see.

Consumer staples hanging on. General Mills had a really good quarter. We'll talk about that stock at a record high. Technology stays green. So does industrials. Everything else turns red, though, on the day. Nothing extreme. But as I said, it's been a really volatile and choppy trade post-Fed. We're going to have much more reaction to what we heard from Fed Chair Jay Powell with Gary Cohn and others right after the break. Welcome back on this Fed Day. Huge indecision here on the part of investors post Fed news conference from Fed Chair Jay Powell. He just wrapped it up moments ago.

The S&P and the Dow have now turned negative. Again, we were higher for most of the news conference, lost the gains, moved up again, and now we are giving some back. The Dow is down about 110 points right now. The Nasdaq is flat. It's sort of outperforming, thanks to some stronger moves in NVIDIA, Qualcomm, Microsoft, although Amazon and Apple are under pressure. So split tech trade there. The 10-year note yield has turned lower. Again, it spiked earlier on the news that the Fed was raising its interest rate hike projections for this year and next year. That was the big takeaway from the from the initial headline. The two year yield is still higher. The dollar is still stronger, but they are off the highs of the session. Let's bring in CNBC senior markets commentator to help us make sense, Mike, of all of this.

Yes. How do you read it? I think there are huge hazards in attempting to make perfect sense of each little faint and juke after the press conference or during the press conference. You and I know it's often unresolved, perhaps more so this time than most in terms of the takeaway from what happened in terms of the committee's projections and what the chair had to say. However, I think it's significant that the S&P 500, as we look right here, was down more than 10 percent in five weeks leading up to this. So the market was already in a little bit of a defensive crouch, not really expecting direct overt relief from what Chair Powell had to say. It did not get it. So while we did have, I guess, a little bit of a ratcheting higher of the ultimate target rate for the end of this year and into next year, it didn't really move the timeline out very much. My read on investor psychology right now is we just want to be done with it. The ongoingness of the Fed chasing inflation has been the main kind of headwind to

risk appetites. And that's something that maybe within a few months of lifting, I would also say thirty eight hundred and change has been the floor so far. We've gotten tentative traction there four sessions in a row, just above 3,800. Is that relevant? Could we completely rethink this in the morning? Absolutely. You and I both know that's how it goes. Take a look, though, at financial stocks and how they're set up. It tells an economic and market story here.

This is regional banks right here, the KRE. They've been outperforming. They've been holding up pretty well. Now, you have the capital markets ETF that's had a little bit more of a struggle. The markets have done a little bit worse than perhaps Main Street has. And then you have private equity ETF, publicly traded private equity funds. They're struggling. They're dependent on very wide open and generous capital markets.

We saw the difficulty of getting the Citric LBO debt priced over the weekend and some banks taking losses. So this, to me, is the ultimate setup. It's not saying that the real economy is in direct, immediate peril, even if, in fact, the Fed is implicitly saying we more likely have a recession than a soft landing. Absolutely. Mike Santoli. Mike, thank you. Stay close. Gary Cohn still with us. Gary, what is the forecast for the economy? Because the Fed is finally acknowledging that growth is going to come down, unemployment is going to rise, and they're not talking as much about a soft landing. No, they're not. You know, Sarah, when I listen to this and I think about it, the piece of the equation

that troubles me or I have the most difficult getting my head around is the employment picture. You know, I think we have to take a step back and we're all sort of obsessed on employment and we should be because I think the employment inflation, the wage inflation is driving a lot of the inflation in the United States. So wages filter through everything we buy. They filter through services. They filter through the goods because you still have to manufacture the goods. You have to deliver them. You have to drive them. There's store employees. There's people involved. So wages, to me, is the key to this. So take ourselves back pre-pandemic. Pre-pandemic, we were starting to have the conversation about the aging of the American labor force.

What we were going to do with the aging American workforce. We were going to lose people out of the workforce. We then go through a horrible, horrible pandemic. And unfortunately, we lose a couple million participants in the workforce because of the pandemic. Either they drop out of the workforce, they have long-haul COVID, or they perish. Horrible, horrible, horrible things. Then you had a bunch of people that saw that and they early retired. So we see that our labor pool has gone down. We know that our labor force has gotten older.

And we see that businesses, as they want to grow, are having trouble attracting people back to the workforce. I think the chairman pointed to one piece of data that I've always said is the most important piece of data, which is the JOLTS report. Job openings. Yeah, job openings, jobs lost. There's still plenty of them. He talked about people quits. He talked about quits, which is in the report. He talked about jobs opening. He talked about, you know, people quits. He talked about quits, which is in the report. He talked about jobs opening.

He talked about jobs loss. He says he looks at that more than he looks at the unemployment numbers. If you look at the JOLTS data, there's two openings for every unemployed person in America. I don't know how we stop having job openings. We're really going to have to dramatically, dramatically slow down the economy. We're going to have to really crush demand. This is what Larry Summers has been saying. I know what Larry's been saying. I don't know if we can crush demand that much. If we crush demand that much, we're going to have a really severe recession. Is that what you think is happening?

I do not think that's happening. I just don't think we're going to crush demand that much. I think this employment force, because it has naturally contracted, we are going to have a relatively vibrant workforce that's going to be able to demand wages to bring them back into the labor force. And I think it's going to be hard, hard to get rid of wage inflation. Well, that is a predicament for the Fed. Gary, stay with us. We're going to talk more about this. I also want to get your reaction to this tweet that just came from Senator Elizabeth Warren about the Fed decision after this quick break. Of course, she's going after him for what she calls another extreme interest rate hike. Also still to come, Jeffrey's chief market strategist gives us his first reaction

to the Fed decision and Chair Powell's comments. And do not forget, Delivering Alpha returns in person next week. I'm going to be moderating a great panel there with three of Wall Street's biggest names discussing key issues in the market. Of course, we'll talk about the Fed and we'll get some of their best investment opportunities. Scan the QR code right there on the screen. You can still register. We'll be right back. Stocks are heading south again. We just hit session lows during the break. We're swinging like 100 points every few minutes here. The low of the day was down a little more than 300, and we're down about 243 right now.

The biggest drags, UnitedHealthcare, Caterpillar, American Express, Visa, and McDonald's. Just a few pockets of green in the safety stocks, like a Walmart, which is working today, and a Home Depot. Goldman Sachs barely higher. Gary Cohn still with us. So what is the takeaway, Gary, for investors? Last time you were on in June, you said buy. That worked really, really well until Jackson Hole. Now what? So last time I was on, we were about at these levels and we had a big rally. We've had a big sell-off. Look, I sort of feel the same way. There's a lot of bad news out. I think we've talked about earnings getting affected.

We've talked about what's going on. We've seen 100 basis point move in dot plots. We know where the Fed is sort of heading. We know where they're going to be. I think there's some relatively decent value in the stock market right now. But look, it's going to be a volatile ride. Where is their value? I think you've got to look around for companies that are really well-run, good companies that are just beat up.

I also want to talk about the political ramifications because already it's starting to come in. Senator Elizabeth Warren, who's been critical of Fed Chair Powell before, tweeting, he just announced another extreme interest rate hike while forecasting higher unemployment. I've been warning that Chair Powell's Fed would throw millions of Americans out of work, and I fear he's already on the path of doing so. This is something the Fed is actively trying to do, which is boost unemployment. Will that cause some political problems for him? Well, he is trying to slow down the economy, but he's trying to do it because the other side of the equation is hurting the same Americans. The same Americans are being hurt by inflation.

You know, when you talk about 8.3 percent inflation and it's not going down, that means prices are going up by 8 percent a year compounded. You have to think about 8.3 percent a year compounded. People can't afford that. Wages are not going up at 8.3 percent a year compounded. So we've got to attack one of these problems. And so you really have to decide. So you think he's doing the right thing? Well, you have to attack a problem. You literally have to attack a problem. And ultimately, we have better tools to attack the inflation problem. All right. Gary Cohn, thank you very much. Thank you. Always good to have you here on a Fed Day. We'll see you at the next meeting.

Booked. Don't miss more reaction to the Fed on Closing Bell Overtime. Scott's going to talk to DoubleLine CEO Jeff Gundlach. That is coming up at the top of the hour. But first, right here, much more on this wild market action when we take you straight into the Market Zone next. We are now in the Closing Bell Market Zone. CNBC Senior Markets Commentator Mike Santoli here to break down these crucial moments of the trading day. Plus, thank goodness, we've got MasterCard Economics Institute's Michelle Meyer and Jeffries David Zervos here to talk about the Fed.

And this crazy reaction, Mike, all over the place. We're now looking at new lows down 341 or so on the Dow. It looked like the market hated the initial decision. Of course, the expectations, that dot plot going higher. Then they liked what they heard, I guess, on the data dependency. I mean, it's hard to parse too many words here. And then we've given all up and then some. I know you never trust the post-Fed reactions, but this one appears to be particularly indecisive.

It is. And a lot of it has to do, in addition to all those things you mentioned, the kind of looking at the shadows of the different shadings of the commentary is the positioning ahead of time. So market is attempting to essentially gather itself up right around the same level that it's tried to bottom the last few days.

I'm not sure there's a whole lot of significance to those levels. For the S&P, it's a bit over 3,800. We're there now. It goes all the way back to you know some lows even in May. But the bigger picture is that we're not there yet. And the message from chair Powell is we're not there yet. And also that Powell seems to want to keep the market back on its heels. That's been part of the project all along. So as Steve Leisman said know, they've kind of out hawked even the hawkish observers and investors here just by a little bit, though. I still think it's relevant that the long term bond yields are going lower. The market thinks the work against inflation is going to be effective and therefore it's not really a long term panic. It's a sort of what we have to

go through along the way. And that's where you're seeing the short-term yields capture a little more in the way of rate hiking in the next few months. And then maybe we can stop and pause. 401 on the two-year yield. Ten-year goes the other way, as you said, 3.15 or so. The dollar also is higher by almost 1 percent. And that is going to be increasingly a focus. It has been. And it's getting even more severe. Let's show you how the consumer is doing and how the latest Fed interest rate hike could impact consumer spending and the economy. Joining us now is Michelle Meyer, chief economist at MasterCard Economics Institute. Michelle, what was your takeaway from Fed Chair Powell as it relates to the economy?

Well, I think Fed Chair Powell was very clear. He is completely committed to cooling down inflation and achieving price stability, which means you've got to cool down the economy. And right now, what we're seeing in the economy, and clearly what federal officials are seeing as well, is a lot of resilience, resilience in the labor market, resilience in the consumer. The consumer that's out there, yes, facing higher inflation, facing high interest rates, trying to navigate that, but being able to given the amount of purchasing power that they still have out there. So given monetary policy and these big interest rate increases hit with a lag, how long can the consumer hang on? Well, I think a lot of that

rests on what happens to the labor market. To me, that is the critical data point out there, is the pace of job growth, the path forward for the unemployment rate, looking at high frequency indicators like initial jobless claims or job openings or the quit rate. These things that tell us about the amount of churn there is in the labor market. So far, there's been only really moderate cooling. Still see a lot of job creation, still see a lot of income growth. And as long as the consumers are seeing income growth, they're able to be out there spending, especially given the health of their household balance sheet with savings and credit card growth. So I think it's going to be a function of when the Fed feels like they've pushed enough, where they're starting to see those cracks,

those proper cracks in the labor market. That will be the real turning point for the Fed to say, OK, monetary policy works with long and variable lags. We've done what we need to do for now. Let's slow it down. Not there yet. Yeah, Gary Cohn saying the wages, that's going to be the key going forward for the markets and for the economy. That wage growth filters into everything.

So, Michelle, the resilience of the consumer, how are you processing how the consumer is dealing with inflation? Is the resilience simply the fact that they are paying higher prices for everything? Or are they actually, is traffic up? Is spending up? Can you just get more granular on what you're seeing? Sure. I'm always happy to get granular, Sarah.

So what we're seeing in this spending poll stat is a consumer that is still spending on aggregate and running at about 11 percent growth on a year over year basis. But you are seeing these shifts right so in the categories where you've had the biggest price increases particularly in categories like durable goods- things

related to the housing market which is clearly been suffering. There has been a pullback especially once you control for inflation look at the quantity measures. In other categories like experience based spending travel

recreation restaurants. There's an acceleration of spending especially in the last few data points so. I think the consumer is is certainly making choices they've changed their behavior to some extent they've obviously acknowledged higher

prices they're not pleased with some of these high prices- but the fact is is that when you look at the numbers on aggregate nominal spending has remained strong. Michelle prices. They're not pleased with some of these high prices. But the fact is, is that when you look at the numbers on aggregate, nominal spending has remained strong. Michelle Meyer, thank you very much for the pulse check on the consumer. We appreciate it. Another company warning on earnings to tell you about. This time it's Chemours, cutting its full year guidance on weakness in its titanium business, declining demand in Europe and Asia tied to lowered estimates.

Comoros joining FedEx, Ford, Nucor among those lately warning of macro headwinds and a softer economic outlook. Mike, we pay attention to these because these are the ones that are sensitive to the economy. And we're wondering how slow the global and U.S. economy is slowing. Right. And the materials sector is where you're going to feel a lot of that first. It's very still, very boom bust. A lot of the chemical companies where natural gas is essentially the leading ingredient and the cost of that has gone up so much. And then, you know, yeah, things like metals, external demand.

We're dealing with a situation here where we're trying to slow a U.S. economy at a time when the rest of the world is slowing because it doesn't really want to. And so sometimes that can be complimentary and it can help in the U.S. to offset some of the inflationary pressures. But so far, we're not really seeing that in the numbers. So it's all about, you know, kind of each incremental warning and sector that has to be stress tested for what's already priced in. New lows, Mike, down 438 right now on the Dow, 1.4 percent on the S&P 500, one and a half percent on the Nasdaq. Every sector has turned negative, including consumer staples, which we're holding up. One thing I'm watching very carefully, as you know, is the U.S. dollar, 111.26. So we're

up another full percent on the dollar. It's just roaring. And there's got to be a correlation there because we've seen the impact on earnings. We've seen it on our exports, it's just roaring. And there's got to be a correlation there because we've seen the impact on earnings. We've seen it on our exports, as Gary said. What else are you following as far as what the equity market is taking its cue from at this point? I mean, it's much more about, look, we're in a downtrend that's been in place since January. We know the Fed is tightening into a slowdown with the objective of reducing demand, demand for labor and perhaps demand for goods down to the level of supply that can be delivered and to take, you know, wage growth and consumer spending growth a little bit off the boil. Those are kind of tough cross currents to navigate. And I think that's where the stock market is.

To me, it's about we go a little bit lower from here. You're going to start to look a little more oversold the way you did in June. You know, actually, we're at these levels are a little below. In a few weeks, the market will have gone nowhere in two years. And that's just a kind of general rule of thumb to say it's, you know, that's sometimes in 2018 and 2011, early 2016, where the market finally felt like things were priced in pretty well once it had basically gone sideways for a couple of years. So those are some things I'm keeping in mind, in addition to the fact that very tough seasonal period now and through October,

but then it gets a whole lot better, supposedly, after midterm elections. We've just dropped below that key 3,800 level on the S&P, Mike, that you were watching, I know. Let's hit some movers. General Mills holding on to some strong gains today. It's up about 5%, 6%. The maker of brands like Cheerios and Pillsbury posting very strong first quarter numbers while also raising its full year outlook. That is despite costs that are rising by as much as 15 percent, which was higher than the forecast from June, according to the company. Those costs

are for things like raw materials, labor, freight, fuel. The strong quarter was driven by consumers eating more meals at home, they're cooking more at home as inflation continues to bite, according to the CEO, Jeff Harmoning. Lower volume of sales, though, was partially offset by, of course, higher prices. Food prices rose, we know, 13.5 percent in August year over year. The company now expects adjusted earnings to grow 2 to to 5%, up from a prior flat to 3%. And organic net sales estimated to grow by 6% to 7%. Mike, it is a signal that people are having to pay more for food.

And food is one of the biggest problems and one of the most stubborn parts of this inflation data. Fetcher, Powell, Menton, Shelter, but it's also food. It's such a big share of what we spend in our wallet, and it doesn't appear to be coming down very quickly, may even be rising. I looked through the commentary on the conference call. General Mills said they're happy with where prices are right now, but they've raised them a lot. And they will continue to do so in places like flour if those costs continue to rise.

Right. So packaged foods, that's obviously where the price increases are coming through. So it's not as simple as just looking at the commodity futures of agricultural products and saying this is a cooling of food inflation. The only slight silver lining here, and it doesn't make anybody comfortable, but the percentage of disposable income spent on food as a part of the total family budget has been going nothing but down forever. And so you're rebuilding some of that. It's pinching people's spending, certainly if you're kind of paycheck to paycheck.

But I don't see it as something that can be an upward spiral. And it's coming off of a relatively low base. Also, restaurant stops have acted better because the eating out versus eating at home cost equation has actually moved slightly more in their favor. We are now firmly in sell-off mode, down 1.2 percent or so on the S&P 500. It has been volatile post-Fed, post-news conference with Fed Chair Powell. There's the intraday chart. That's what you have to look at, down 389. We were as high as more than 200 at one point after the Fed. Let's bring in David Zervos from Jefferies. He's the chief market strategist there. Always talk to him on a Fed Day.

For your reaction, David, and your takeaway. Hi, Sarah. It's good to be back on Fed Day. And I think it's, you know, I don't think there was a lot that we learned that was new. The market is reacting. But for a Fed Day, it is volatile, but it's not that volatile. We've seen some pretty big days on Fed days this year. I think his message was the Jackson Hole message, maybe a little bit more negative, a little bit more using that word pain and trying to get people ready for this idea that there is short-term pain that we're going to have to go through. And it's all for the greater good of maintaining the anchoring of long-run inflation expectations, which I think all economists, policymakers, and I think folks in the investment community see as a key ingredient to long-run growth. And the equity market is really trading that off now.

It's trading off the idea that the anchor is in place. The anchor is well taken care of. We're going to be all right in the end. And that's what the Fed is telling us. And that's what they're here to do. But to get there is a very difficult and treacherous hike up the hill and probably fraught with a few slips and falls everywhere. So the question is, what do you do with bonds? And what will that determine about stocks?

Because a lot of what you just said is already priced in. I think that's part of the indecision is the positioning here, right? We already, we knew that the Fed chair wants pain. We knew that they're just going to keep hiking rates until they see more compelling evidence. Inflation is coming down and unemployment is rising. So with the 10-year now at 3.5, it's been a big move. until they see more compelling evidence inflation is coming down and unemployment is rising? So with the 10-year now at 3.5, it's been a big move. The two-year at 4.1, what do you do?

Is that the peak, or you think there's room to go higher there on those rates? I think they could certainly go higher. And he told you it's all about the fight, and we don't know. The answer is, Sarah, nobody knows where this peaks out. Nobody knows how long the supply disruptions last, how long the negative supply shocks are. What we do know, and I think Jay's been very adamant about telling you this, is that they're going to fight it. So I think June was a very interesting time. We were lower than this and we were talking on that day and the Fed did 75 and they sounded very tough. And the market kind of liked it. The market liked the idea that the anchoring was going to be taken care of. Because that's great news for equities over the long run. And equities are a very long duration asset.

And I think we felt pretty good about that. We didn't know how much short term pain we have to take. And now what we're doing, and that's, I think, why we rallied up for three months. And now we have to kind of contend with this other force that's driving equities lower, which is higher and higher risk-free real rates that are going to push us negative for a time so that we can get that anchoring in place and get inflation back to two. And so it's a tussle. It's a tussle between the good news at the end of the rainbow and the path by which we get to the end of the rainbow. And again, it's very unclear. And

I think Jay was pretty good about telling you that you hope for the best, prepare for the worst. It's not the greatest line. But at the end of the day, we know they're going to take care of the anchor and equity should like that. And that should keep a bottom that's not too severe in place. And the market should like it. In the meantime, we just don't know how high real rates have to go and they may have to go a lot higher. And that's going to hurt. That's going to be the thing. It's going to hurt. But I think the fear, David, is that he overdoes it, is that they overdo it in their zealousness to fight inflation. And we know that it hits with the lag and there's already

we're already starting to see some of the damage in the housing market, consumer, jobs. I mean, it's starting to show up. And we know that the Fed has made a lot of those mistakes in the past. And really what he's telling you, Sarah, is that if they're going to make a mistake, it's not going to be a mistake of declaring victory too early. So you almost know they're going to go too far. And I think the market has to price that. And look, maybe down at 3650 on the S&P or a little bit lower back to the lows. The market's kind of priced for a mistake. The market's priced for that overzealous, higher real rate that really knocks things down. And then the Fed kind of does what it did in 2019, which is reverse a mistake. And I think it's a tricky time for valuation. but if I have to

think about it between 3600 and 4200 I kind of think a soft landing is pretty much in price in price below those old lows we start to price in a mistake in a harder landing and then we have to think about how quickly the Fed pivots from that and above 4200 I think they told you at Jackson Hole you guys are pricing in no landing and I'm gonna you to smack you over the head, which he did. Which is what they did, and they just did it again. So let's talk about the dollar, because there was a question there about international coordination, cooperation. He said we don't coordinate on policy, but we certainly talk about it, and we share a lot of information, which we know.

So now that the forecast from the Fed itself is to go another 125 this year and potentially more next year, and the dollar is already sitting at more than 20 year highs, how are they going to deal with that situation? Isn't that going to be problematic? I actually think they want a stronger dollar. It's a very unique time with oil prices high and the dollar strong. I think the administration and the Fed are quite happy with a strong dollar. It suits them. The stronger we go, the lower energy prices come, the faster energy prices come down, the less money we send over to Vladimir Putin, and the faster the Fed solves the inflation problem. So it's a very unique time in dollar policy history. I know

something you've studied a lot over your career, Sarah, that we have such a strong dollar. And actually, I think both folks who set dollar policy, the Fed and the Treasury, are quite content to see it go, which is not good news for our trading partners necessarily. Right. Everybody else is not content. The strong dollars that they borrow. Yeah. Right. I mean, emerging markets and this dollar-denominated debt, euro, not going to be happy if the euro, it's good for their exports, but not if their currency is crumbling. Thank you very much, David Zervos.

We've got to leave it there. We appreciate it. From Jeffries, there's the two-minute mark, two minutes to go in the trading day. The VIX, the volatility index, Mike, goes to 28. Tell us what that means and what else you're seeing in the internals. Yeah, I mean, obviously, the sort of upper end of this recent range for the VIX, to be honest, I don't see it as being something that says this was a big shock today.

It was incrementally, you know, a little bit something extra to worry about in terms of how far we have for what the Fed has to do. The market breadth is definitely negative, 4 to 1 to the downside on the New York Stock Exchange. Also not a big surprise. I guess it's more like 6 to 1 at this point. Take a look at the spread between the three-month Treasury yield and the two-year. This is the kind of super secret pre-inflation indicator when it goes negative. Not yet negative, but if you're going to get another 50 to 75 basis points in six weeks in November on the Fed funds rate,

that could kick it higher, and therefore we're on watch for that indicator to flash. So here's the chart of a one year of the VIX. And you'll see it's kind of in this mid to upper 20s range. It's on another little climb higher. Certainly cautionary, but to me, not the speaking panic just yet, Sarah. As we head into the close, take a look at the market. We are, again, just right near the lows of the day right now. Every Dow stock is lower except for Walmart just hanging in there. We're down almost 500 points. UnitedHealthcare, Caterpillar are the biggest

drags. S&P 500 is down 1.65 percent, and that is just going to go out at the lows of the day as well. Every sector down. The Nasdaq comps down one and three quarters percent. So it looks like we might get a rally there during Fed Chair Powell's conference. Gave it all up and then some. That's it for me on Closing Bell. See you tomorrow. Into overtime now with Scott Wapner.