Power Lunch - CNBC Special: The Fed Decision 6/14/23

Episode Date: June 14, 2023

“Power Lunch” is back in Washington, as we count down to the Federal Reserve’s latest interest rate decision.We’ll bring you the decision live, and ask our all-star panel to react to all the angles right up to Fed Chair Jerome Powell’s press conference. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, welcome back to a special Fed decision power lunch. I'm Tyler Matheson, along with Kelly Evans, here in Washington, D.C. Glad you could join us. We're just a few minutes away, of course, from the release of the Fed's decision on interest rates. Most expect a pause, i.e. no change in rates. We'll see what our panel is predicting. But first, let's check on the markets. The Dow is lagging today, as it has almost all day, down about 100 points. United Health, the main contributor there. S&P 500, hitting its highest level since April of 2020. the NASDAQ with another gain, now up 30% so far this year. So let's bring in our panel. Julie Beal, portfolio manager at Kane Anderson Rudnick, Michael Kushma,

CIO of Global Fixed Income at Morgan Stanley Investment Management. Greg, I'm chief economics commentator at the Wall Street Journal. Welcome to all of you. Greg, let me start with you, since you're sitting right on my right hand here. You think that the Fed could actually raise rates even more without damaging the economy. Is that what you favor them do? Well, if you look at the current configuration of rates and what the economy is doing, it's hard to make the case that they've managed to accomplish a lot.

Inflation, core inflation, seems very sort of sticky around the 4 to 5 percent area. The economy seems to be doing just fine, very strong job growth. And look, stock market is up 22 percent. Like in my book, that is not the sign of a market that's worried about like a really vice-like grip coming from the Fed. And you look at the regular CPI, including energy, and you look at energy, and it was one of the main reasons that number came down as much as it did. Right. So I think people might be getting a bit of a head fake.

It's great that the overall inflation rates down from 9 to 4%. But we know from years of covering this that the underlying trend is better arrived at by getting rid of the food and energy components. That gives you 5%. Now take out some of the other stuff that's a little funky, like shelter, cars and so forth. You end up with something that's we're calling supercore, and that's like running a 4% or 5%. And none of those numbers are anywhere remotely close to what the Fed wants, 2%. So that's why I think that there's a lot.

a bit of a reality check in order. Michael Cushma, give us your setup here with two minutes to go quickly. Sure. I think there's a good case, I think, 60, 40 that they pause, or actually, they skip, skipping me. I think skipping is different than pausing. Pausing may mean they're stopping. Skipping means we're still in the process of raising rates, but we've done enough. Let's take a pause and see how things are playing out. Inflation has come down a lot, as Greg said. But on the other hand, major components of it are not decelerating very fast. And if you compare today's data with what they were projecting back in March, the last time they put together their projections.

Inflation's higher than expected. Unemployment's lower than expected. Growth is stronger than expected. So from those perspectives, you would say their job is not done, but we're getting close. Julie, let me ask you as, you know, if this is a castle built on sand, as we emphasize the strength of the market, we're also approaching, you know, the 15% post-inversion rally. everyone said we should expect. So do we have this run its course and then revert to the bare market as the economy slows? You know, I think it's going to actually be sector specific. I think there are

already pockets of the S&P that are in a clear earnings decline where margins have been super pressured by not just overall commodity price increases, but wages as well. And so it hasn't really rippled throughout the economy, but I think there's going to continue to be these uneven sections. So unlike most recessions where we kind of all move together in concert, I actually think there are going to be these puts and takes and delays. And that makes it really hard to kind of know where the direction and the leadership should be in the market. Greg, we have about 40 seconds before we go to Steve. What kind of language should be we be looking for in the statement and then in the press conference? Will they talk about additional policy firm instill to be needed? If so, I think that's,

first of all, at least a broad hint that there probably are more rate hikes to come. I want to see if they revise up the terminal rate forecast in the projections that they give us. There's a good chance that even if they pause here, the signal from the statement and from those projections are that they think they have one or two more to go. In other words, from five to five and a quarter up to five and a quarter, five and a half, maybe even more. Maybe even more. Can they get rid of the range at some point?

Can we just go back to one single number? Let's get to Steve Leasman with the Fed decision, Steve. The Federal Reserve pausing, but raising the median forecast of the funds rate, to 5.6 percent indicating a very hawkish committee outlook and strong support for at least two more rate hikes this year. I think this comes under the definition of a hawkish pause, maybe a very hawkish pause. FOMC statement saying it's holding the target rate steady, allowing it to assess additional information, including the cumulative effects of tightening and lags of monetary policy. I want to go through in detail here the summary of economic projections and the funds rate.

Only two members of the committee are forecasting the rate at the current rate of 5.13%. Four support one more hike. Nine or half of the committee is forecasting two more hikes, but there's more because two are supporting three hikes, and one supports a full percentage point higher or four quarter point hikes in the funds rate. The committee sees more inflation this year than it previously did, forecasting a 3.9% core rate versus 3.6. the prior economic projections in March, and less unemployment, 4.1 versus 4.5. And moving on, they did see better economic growth this year, not tremendous, but 1% versus 0.4%. The statement said the economy continues to expand at a modest pace. Job gains have been

robust. Unemployment has been low and inflation elevated. They continue to say tighter credit conditions are seen weighing on the economy hiring and inflation, but they don't act as if they will. decision was unanimous, guys. I just say in terms of a hawkish pause, this is for sure that with at least two more rate hikes forecast by the majority of the committee, and some want three, and some want four. And also one other thing you want to look at is if you look at the real rate forecast, the one that was the nominal funds rate minus the core PCE they forecast. They're actually even tighter still. They have been forecasting 1.7. Now they're forecasting a real rate year end of 2%. So that's even tighter than they had previously thought they'd be.

Guys? Wow. Steve, we don't even know where to begin. But stay there as we look through this. The market reaction obviously is initially sharply lower. Usually the market's a little slower to react to and saves this for later in the session. But right now we see the Dow tipping lower by about 200 points and the 10-year yield jumping to 384. Let's bring in Bob Vasani, Rick Santelli, along with the rest of our panel. Rick, what are your thoughts? You know, my thoughts are considering how Steve presented.

what the Federal Reserve is not only doing now, but what they intend to do. Of course, A, it makes the data dependent part of me explode. But how could the markets not see interest rates rise in the Dow fall? What Steve said sounded hawkish times 10. But to me, if you listened to the Fed and you looked at the last CPI number,

you're basically looking at old news, in my opinion. Let's just start with number one, seasonal adjustments. Okay? One of the big issues that pushed CPI into hotter territory were used car prices. First of all, Mannheim used car prices are seasonally adjusted. All of our jobs numbers, for the most part, are seasonally adjusted. And I continue to say seasonal adjustments aren't what they are cracked up to be. A. B, I think a lot of the used car prices are stale.

Everything I'm seeing starting to come through looks a lot different. And I think when you go to July 12th and you see the June CPI report, you're going to see a significant ding from used car prices, exactly the opposite of the last report. That's not all. Let's think about the trim mean, the 16% trim mean put out by the Cleveland Fed. If you look at that, and of course that's X, food, energy, and used car prices, what you see is on the quarter over quarter annualized, it's now under 3%. So I think there are a lot of reasons to be nervous if you look at more stale data. you assume that these numbers are going to perpetuate themselves. But I think the reason

equities were so strong yesterday is some of the traders have looked through the numbers and are trying to look towards the next several reports. And I think the future they see is different than the past. Well, let's go to Bob Pisani for a quick update on where the stock market stands right now. It looked like it started to nosedive immediately. Yes, but only about 25 points in the S&P, that is not a huge move. So remember last time we had a dovish hike and this time we got a hawkish pause. I'm not sure this necessarily changes a lot. Certainly, you've got half the committee supporting two more rate hikes. I think that's a lot more hawkish than equity traders anticipated. But I'm not sure it dramatically changes the situation. What we've

seen here is the S&P right now is trading it nearly 19 times forward earnings. That is not only not a recessionary multiple, that is an expansionary multiple, and 25 or 30 points on the S&P isn't going to appreciably change that. The problem right now, and maybe this is a good pause right now, is the S&P and the markets are really pushing the limits of the soft landing story. We've moved up 5% just this month because the jobs report is so strong, the numbers are so strong, and the belief is the Fed is near done. I'm not sure one or two more points or 50 more basis points really makes a difference. So here's the hope for people wanting the market to move forward at this point.

The volumes have been terrible recently. A lot of people still don't believe this soft landing story. And all of those people who bought treasuries, one-year treasuries three months ago at four and a half percent, the S&P is up 13 percent since that happened in the middle of March. And the question is, regardless of whether we get a 25-point drop in the S&P right now, which we just got, whether or not those people are going to get any kind of FOMO and believe that the economy is going to remain relatively strong. There's your hope for the market to move up right now.

Incredible reactions here. Dows down 334 points. Greg, do you think this is them putting the knife in the soft landing story? Not really. I was just actually looking over the numbers here. And actually, if you take the numbers at face value, they almost sort of strengthen the soft landing story. They've got GDP growth up more this year,

like I think 1% versus 0.4%. Tiny little trims to it next year and the year after that. Unemployment rate lower over the forecast horizon. So, actually, if I look at the unemployment and the GDP forecast, the Fed seems more comfortable with the soft landing story. The weird thing is, but they have that against a world of higher inflation. So in some sense, they're saying, we think we can still get the soft landing, but given that inflation is a higher problem at the start of this process, we need to get the short rate higher to make

sure that happens. I got to say, there aren't a lot of precedents for pulling this one off. I mean, I hope so. The market clearly hopes so. This is a balancing act they got ahead of them. Julie, how do you react? I think that the rate increases, as was mentioned before, are more about messaging than they are about their real financial impact. I think what's actually more meaningful going forward is what happens with the Fed balance sheet and quantitative tightening,

because that is actually going to have the most impact on what's happening in bank reserves, and that in turn is going to impact their willingness to lend to consumers and business. So I think that's really important. And what this is about, these rate increases are really about messaging about future rate cuts. It's saying, no, we're not going to be cutting rates this year. You need to push that back. We're pushing back recession risk, too, but you need to push back your expectations for any kind of rate cuts. Michael, how about you? I mean, Steve pointed out that the decision itself was unanimous, but the plotting of future rate increases was anything but unanimous. Yeah, it's clear it seems to be a schism between those who don't think the economy

needs many more rate hikes to get to the inflation target, kind of what Rick was talking about inflation. There are measures of inflation which are falling quite significantly over the last couple of months and should continue to fall. Headline inflation is going to have a three-handle next month after the next inflation report. However, the Fed is to make sure that the market doesn't, or the economy and market participants don't get complacent. That all all is well and done. It's just going to be this super soft landing and that inflation is going to come down to their target without much trouble. And it is a soft landing. The things are better than expected. As I mentioned before, the release, that they're revising up all the positive things about

the economy except for inflation. But they're dealing with that saying, look, if inflation does not come down, we're not hiking rates today, but inflation does not start coming down as we project, we will hike rates some more. And that also means that we're not going to be. cutting rates as much next year. Steve, I'm just going to bring you back in here. If you can give us some more context, I just want to make the observation that this is a bit odd that everything in the report that Greg's describing, GDP goes up, the unemployment rate goes down, inflation goes up, and they're pausing. And yet at the same time, they're telling us they're going to a 5.6 percent terminal rate. That seems like totally bizarre messaging to me.

Once again, like I said about Tyler in the last hour, you're confused, Kelly, because you're paying attention. That's exactly what's going on. And what I wanted to do now is I want to do a visual demonstration of the precise way that Rick just described how Fed is making policy. They are driving looking like this. They're looking in the back, but they're driving forward. That's exactly what Rick is describing. I was hopeful that the Fed was going to take a flyer on making policy on the forecast of inflation coming down. And instead, I very much agree with Rick that it's ignoring certain indicators that suggest inflation is about to fall. And I have to come to a bad conclusion here, which is that it gives me the sense the Fed is not going to stop until they break

something. And I thought they had a chance today. Well, I don't think it's broke. Didn't SBB count for something? Well, no, no, I don't think that. How many three of the four biggest bank failures in history have happened since March, and they consider this not to be breaking anything. Agreed. We can debate the degree of breakage out there, but I would just say that that when I say break something, I mean the economy. I mean, really to plunge it into recession. And it seems to me that there's a decent contingent, a hefty contingent of the committee right here that does not want to stop until they really break the back of economic growth here. And I think that's their outlook here. And that's why they're putting 50 more basis points on in an economy that seems like it may not need it at this point.

Rick, go ahead and jump in. I saw you shaking your head vigorously. You know, I completely agree with Steve's assessment there. They are driving forward, looking in the rearview mirror. Not only that, the brakes disconnected. the pedals to the metal on rate increases. I think this move and the hawkishness is purely for messaging. They pause.

The pause is the issue we should not ignore. Why would they pause? Kelly's right. Considering everything, why would they pause? Because they want to be done. They just can't share that with the rest of us yet. That's my opinion. Greg, you'd like to jump in.

Yeah, Kelly, I think Kelly raised exactly the right question. Given all the data says they should go further, why pause? Let me just read from the statement. Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy. In other words, we want to see more information. We want to see if that five percentage points of cumulative tightening has the effects that we expect to see. I think that, being honest, they haven't seen those effects.

I think if you want to be as generous as possible of the case, the thing they worry about most is that the trouble that they had with the banking system a few months ago is not over. We reported this week that they've got their eyes on 30 potentially problem banks. We do, you know, and, you know, all three of us have been through these crises before, right? You think it's over, it's not over. And I think there's a large feeling among every member of the committee that they really don't want to, like, tighten into an incipient financial crisis, give themselves a little bit more time to make sure that's not what they're doing. But Greg, Greg, I have, I'm sorry to interrupt, but the effect of this is to tighten financial conditions, right?

So it's not like they get away with just forecasting two rate hikes got free, right? They have an effect when they forecast these two rate hikes, and they do that for a reason. So I just don't think it's what do you want to call it, a sterile forecast. It's one that has meaning and effect on the economy. Yes, one last thing, though. But the difference between promising two rate hikes and delivering two rate hikes is that with the first, you get a little bit of optionality, so that at the crisis that you don't think is going to happen, but you're afraid is going to happen. does happen, you can pull back.

Julia, Rick, agreed with you there that this is a lot about messaging more than about monetary policy. Yeah, I have to agree. I think it's important to keep in mind that, you know, a lot of this is how you are thinking about inflation, right? You can say we've cut inflation in half, but you can also say historically, getting from 5 to 2 percent is incredibly difficult. And I think that's what they have in mind.

They're terrified to say mission accomplished. see all the mistakes that were made in the 1970s. I think that's their primary concern, right? Because credibility has been an issue for these guys. So I think I'm willing to say, trust them when they say they're going to be higher for longer. This is like the credibility that we've assigned to them is like 1999 high school, Julie. Like, don't believe her, but do believe them. They're going to stay up here for a while.

Or Michael Kushman. I'll paraphrase our Mike Santoli, who's saying, kind of to Greg's point, is the whole, the most important thing here. Yes, they're hawkish and all the messaging, but was that just the cost? of getting a unanimous decision on the pause that they ultimately or the hold that they've ultimately delivered. I think that's true. They want to square the circle and get everyone on board to a policy policy projection going forward and this satisfies everyone. People who didn't want to hike rates right now, they didn't get a rate hike. But for the Hawks, they didn't promise, but they forecast that they will deliver rate hikes if needed down down the road. And what's important is that the

economy has not, it's difficult for the Fed to, to force, to use their forecasts for inflation run policy because they tried that for 15 years or so after the global financial crisis forecasting higher inflation forecasting higher inflation and never showed up so i think they gave up on forecasting and this has been a theme for a while now that they're not going to stop until see the white of the eyes of disinflation they're going to when inflation is down where it's supposed to be then we stop Bobazzani final word to you well just look here what the market is doing okay of the s mp 500 is down a little more than 30 points since they made the announcement.

That's not nothing, but statistically it's not much given. We've moved 500 points since the middle of March and the banking crisis. They made a point. The economy's strong job gains robust in recent months. They repeated that strong language they had before. They raised their GDP forecast. The question is, can the markets, can the stock market withstand another 50 basis points, which admittedly is a surprise for everybody down here?

The market is saying yes right now. I don't consider a 30-point drop in the S&B to be terribly significant. At least for the moment, let's see what happens in the press conference. All right, Bob, thank you very much. And to our panelists, thank you as well. Let me see if I can see them all over there. I see Santelli. Yes, I do.

I see I see I'm. I see Michael Kushma. I see Julie Beale. I see Steve. Thank you guys very much. And we'll be back in touch soon on this as we await comments from the Fed Chair, Jay Powell. It's going to be a lively. press conference, I think. We're going to get some more reaction to the decision after a quick

break. Welcome back to Power Lunch. The Fed leaving rates unchanged, but signaling that more rate heights could be ahead. Let's get some reaction from David Wessel's senior fellow in Economic Studies at the Brookings Institution. Greg Ip is also with us still. And I feel like the only one who's never worked at the Wall Street Journal here. David, let me begin with you. It is unusual, it would seem to me, to have unanimity on the the overall decision, but the kind of scatter in terms of the predictions of where the terminal rate may be and how many more interest rate hikes there are likely. Have you seen a Fed like this in your recollection? Well, first, Tyler, was that your job application for the Wall Street

term? I'm happy where I am. That's pretty unusual. I think that often it said that the argument at an FMC meeting is not about what happens at the current meeting where the signal has been sent, but what's going to happen at the next meeting? So it must have been that enough people were comfortable with the chair and the vice chair designates call for us to skip a meeting. Everybody agreed to that, but they don't all agree on where we go from here. I agree with what Greg said is that this does give them some options. If the economy is a lot worse, inflation is down, more banking problems, then they're not committed to a rate increase. This is just a signal that a lot of them think more is going to be needed. David, do you think this is the stock

market's fault? Is this the net, is this chat cheap ETs fall? Is this Nvidia's fault? I don't know. Greg made a good point in a piece he did for the Wall Street Journal that in the extent that the market is happy, that tends to give the economy more oomph and makes it harder for the Fed to slow things down. So that I don't think it's the stock market's fault, but financial conditions are a problem here. I haven't looked at what the bond market did. Look, I think that the signal that they're going to, a lot of them want to raise rates by 50 more basis points is going to have a depressing effect on the markets and the economy over time, even if it didn't right away. Greg, you want to react there? Yeah, I mean, it's just kind of interesting. Like, if you actually go into the internals of the market,

and people have pointed this out to me, is that the median. stock actually is really well-behaved. Like, I think the equal-weighted S&P is actually kind of flat for the year, right? It's 10 stocks that are 90% of the return. It's like Nvidia and then a bunch of other stuff, right? So, I mean, if you're a stock, and a strategy, you say, this market's not carried away,

it's just like eight stocks. Which the Fed's response is, well, yeah, well, Nvidia's worth a trillion dollars, okay? And, like, Intel's only worth, like, a tenth of that. So I care about the fact that there's a trillion dollars of stock market wealth out there that's having an effect on people's propensities to spend, you know? they can't wish away the fact that almost all the contraction in equity values that happened

when they first started tightening is gone, right? The financial conditions tightening hasn't been what they expected. And the multiple for the market undeniably high. Go ahead, David. I think, look, the real thing they're looking at is that the pace of the economy remains surprisingly strong. The job market is strong. Vacancies have come down, but not a lot.

And inflation is coming down, but painfully slowly. So that's a recipe for we need to do more. And I think that's what the message they sent today. Do they land the plane smoothly, David? In other words, avoid a recession. It is a tough one to do. You know, it's kind of funny. All these recession forecasts keep getting pushed out versus going to be the first quarter of the

I still think we're going to have a recession because I think they will do what it takes to get the unemployment rate up to the forecast level. But I agree that there's a better chance. than I used to think of a soft landing. I think the thing to watch for in the press conference is if we can tell where Jay Powell is in this spectrum. Is he in the raised rates twice, or is he not? I don't know if he'll tell us,

but people will be trying to dissect his adverbs and his eyebrow raises to see how he is relative to that. I was wondering the same thing. How do we find out where the chair sits on this? Well, I was going to say that one thing that some folks have noticed is that Powell often has a habit of like whichever direction the statement goes. he tends to dial it back in the presser.

So, like, my sort of, you know, you know, non-specific prediction would be that it's probably a little less hawkish. He's going to sound a little more dovish than... Than the statement did, you know. Why does he do that? You're so right, by the way, Greg. It feels like we have one sense of things at 205 and another one at 245 every time.

It's probably just that when you talk for an hour, you're going to give it more nuanced and multidimensional message, right? And therefore, like, you know, people will be able to pluck what they want from that one hour of dialogue to sort of make what... whatever the case they want. And look, these decisions never are simple. There's always conflicting information, and the chair can choose to emphasize or not emphasize those conflicting factors. All right. Thanks, Greg. Thanks, David. Appreciate it. You're welcome. Just a couple minutes away from that press conference. We'll hear from Fed Chair Jay Powell himself,

usually speaks for about an hour taking us inside the decision, the Fed's forecast. He'll explain the projections and maybe how they're looking at the stock market. We'll take you there live as soon as it begins, and there's more of this CNBC special, the Fed decision, after this break.