Power Lunch - Fed Decision Takeaways 3/19/25

Episode Date: March 19, 2025

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And welcome to Power Lunch, everybody. Alongside Kelly, I am Brian. And we are just about five minutes away to the Federal Reserve's decision on interest rates. They are not expected to move on rates. They still could not expect it to. And if you listen to our mock Federal Reserve and those who responded to our poll on X, you all agree. No change is expected, Kelly. But here's the thing. It's not even so much what they do, but maybe what they say not only in the statement, but also in the press conference. And the press conference often will move markets quite a bit. And a lot of times to the downside. I don't think a lot of people want to lay bullish bets before we hear from the chair. But that said, markets are moving higher right now. The Dow's up a quarter percent, 112. Well off session highs, we're up almost 300 earlier. The S&P is up half a percent.

The NASDAQ leading the way today is still up seven-tenths, mag-7 slightly higher. A couple of big names we want to point out on that front. Microsoft, while higher, is still down for the week. Could be its eighth straight down week, its longest streak since 2008. And meta's long winning streak, that's a distant memory. Since that streak ended on 5th, about a month ago, meta's down 20% and joins the rest of the MAG 7 in negative territory for the year. And we got our panel very quickly, though.

You look at a Microsoft and the narrative is that the markets have been falling because the tariffs, and maybe they are, but if you looked at a company and said, what company perhaps has absolutely zero impact from the tariffs, it's Microsoft, and yet, as you just said, it's down, what, eight weeks in a row? You hardly think they're the poster child for the environment. today. They're quietly having one of their worst losing streaks in almost 20 years. So you can call it company specific. You can say it's because of AI. Nevertheless, it's becoming quite substantial. Let's get right to our all-star panel. As Brian mentioned as we await the Fed top of the hour.

Joining us, David Kelly of JPMorgan Asset Management, Stephanie Roth of Wolf Research and Jim Caron of Morgan Stanley Investment Management. David, what do you expect? Well, I think no change in rates. I think though their forecast will be very important. I expect them to cut their forecast for economic growth for this year. It's right now at 2.1%. I think they'll take that down well below 2%. I think they're going to boost their estimate of inflation this year. It's now 2.5%. I think they'll say something higher.

The real question here is, do they anticipate a third rate cut this year? Right now they've got two rate cuts in there. If they leave it at that, I suppose that'll be regarded as slightly hawkish. If they give us three rate cuts this year or an expectation of three rate cuts, that'll be slightly dovish. So I think that's where the focus will be is just how many times they think they're going to cut rates this year, but it's not going to start today. Stephanie? Yeah, I agree on the growth and inflation. It's likely to be a sort of stagnationary type move, at least directionally, so lower growth, higher inflation.

I think the risk is now more, do they move to one cut instead of two? Base cases they stay two, and this is kind of an uneventful meeting. But I think the risk is hawkish that they're a little bit concerned about the inflation backdrop. They're still okay on the economy, and then there's the chance that they potentially, shift a little bit more hawkish year, although big cases that it's really just sticking with the two cuts that they have. Jim? So I think there's a third component to that, and that's the labor market. So essentially what I'm going to be looking at is, yes, for sure, they're going to downgrade their growth. Inflation may be a bit sticky. But what do they think about the labor

markets? Because after all, isn't it consumption that's really keeping the economy alive? It's 70% of GDP. If they really start to deteriorate their labor market views, if they have reasoning to do that, then I'm going to start to become a bit more concerned and a bit more aggressive in thinking that they could cut rates at least two times this year. Yeah, Jim, back to that. Okay, in the September statement, the Fed said that, quote, job gains have slowed. So they noted a slowing job market, but we haven't heard that in the last couple of meetings. So that's a little bit weird. And then what do you make of the bond markets move? Borrowing costs have actually gone up by over a half a percent since the Fed cut rates on September 18th.

Yeah, so I think the initial conditions matter a lot, right? When we started the year, we thought there were going to be three or four rate cuts this year, jobs market would get weaker, and we really hadn't seen that. So I think we had a really strong fourth quarter. That boosted interest rates higher. That kept the jobs market really strong. But the important point here, Brian, is all of that is starting to fade right now. And it's a question of, does that continue?

And that's what we're going to try to find out. Well, we're going to find out here in about 10 seconds, because that's when the Fed decision is coming out again. No change expected, but it's what they say. and we'll give you the rundown. Kelly gave it to you just the top of the show. We are seeing markets that are higher, at least for now, maybe not Microsoft, but the Dow is up about one quarter of 1 percent. The NASDAQ, the big winner, seven-tenths of one percent and a 10-year bond yield at 4.3 percent. Let's go right now to Steve Leasman in D.C. The Federal Reserve keeping interest rates unchanged at four and a quarter to four and a half percent,

but it makes a point of saying that uncertainty around the economic outlook has increased, and the Fed says it is attentive to risks on both sides of its mandate in a move that we will be debating. It removed the statement saying that risks to its dual mandate are roughly in balance. That came out of the statement this time. On the Fed's projections, it boosted core inflation to 2.8% for 2025 from 2.5%. So 3 tenths up, by the way, exactly mirroring the CNBC Fed survey. It kept 2026 at 2-2, and same for 2020.

27 at 2%, suggesting the Fed either thinks it will control inflation through its policy or any tariff issues will pass through. It did reduce its growth forecast all the way down to 1.7 for this year from 2.1% and by 0.2% in 2026. So the Fed does see a weakening impulse coming to economic growth. However, in answer to the discussion you were just having, it really kept the unemployment outlook very much unchanged, only a tenth increase in the unemployment forecast.

So now you're wondering what they do with rates. They kept the two rate cuts in place for 2025, but the dot plot is a touch more hawkish, and I will go over that in just a second. I want to tell you the news on the balance sheet, for which there is some. They reduced the runoff of treasuries down to $5 billion a monthly from $25 billion.

They kept the mortgage-backed security runoff at $35 billion. Governor Waller, dissented, very technical dissent, actually. He agreed with the idea of not to change rates, but he did not want to change or reduce the balance sheet runoff on the economy. They say it's expanding at a solid pace. They say unemployment has stabilized, but inflation remains somewhat elevated. Now, let me give you the hawkish tilt or tilt inside this dot plot here.

Four of the 19 officials wanted no rate cuts compared to only one in the December forecast. four C only one cuts and nine C2 cuts. What's gone is the kind of, I don't know what you'd call it, the dovish wing of the committee here, where there were five people who were looking for 75 basis points of cuts this year. Now there are only two. So a kind of compression here, leaving the top where it was and some of the bottom coming up, a little bit more hawk this year,

but the median still maintaining a forecast or an outlook, not a promise, but an outlook for two rate cuts this year. Guys, back to you. So, Steve, you know, I can't say, look, the market is interpreting this in a somewhat dovish manner. And for me, I'm going right to the balance sheet on this. This is super interesting. And I want to make sure that I kind of explain this clearly and that I understand it clearly.

So in essence, the Federal Reserve just decided it's going to sell fewer treasury bonds, right, from its balance sheet. As it's deciding. Can I grammatically correct you, Kelly? Well, yes. I'm over simplifying. Only for technical reasons. I don't want to be rude here. Yeah, yeah.

But I do want to say the technical thing is the Fed will allow. fewer treasuries to run off of its balance sheet. That is to run off mature and not be replaced. They're not selling. If they were selling, the market would be freaking. But they're letting it run off so the market's not freaking. Sorry for an interruption. Well, I guess point being, and maybe one of our guests can step.

David Kelly, I'd be curious for your reaction on this. But if the Fed is slowing the runoff, on the margin, that's what I'm looking at bond yields falling right now. Is this welcome news for a treasury market where every little bit that helps in terms of people keeping the treasuries that they have and not reducing their balance sheet more as the Fed's doing here, does that really help on the margin with interest rates as we watch the tenure moving to the downside? Well, very marginally, this actually wasn't unexpected. The problem, you know, they've got some multiple areas of uncertainty here, and one of them has to do with the debt ceiling. So they think there's going to be a debt ceiling agreement at some stage over the summer. When that happens, the Treasury is going to bounce up or increase its holdings of the Federal Reserve, which will cut reserves.

It brings the idea of a problem in the Treasury market or in short-term interest rates more likely. And that's what they've been trying to avoid. They want to be sure that they don't have a repeat of what they had back in 2018, where they let reserves get down too low. Now they see a risk of that in the next few months, and that's why they're just backing off here. They just don't want to reduce that balance sheet too much and end up with a problem. So just trying to keep out of the way of trouble here in a very uncertain environment. And David, I only want to harp on this because Steve just said there were some hawkish elements.

So if people are wondering, well, why would that not translate to bond yields going up and so on and so forth? I mean, do you think that these moves on the balance sheet offset or mitigate that to some extent? Maybe a little bit. But I think the truth is the economy, traders, consumers, businesses. We're all in wait and see mode here on what administration. policies tend to turn out to be in the end on tariffs, on government cutbacks, on immigration, and on fiscal policy of 2026. And, you know, I think the one thing I would sort of take issue with here is I actually think

economic growth could be slower than 1.7% this year, fourth quarter over fourth quarter. We're seeing a good deal of weakness in the first quarter numbers, which isn't really reflected in their statement. So that's the one place I'd be a little bit different from the Fed on here. But I don't blame them for trying to be cautious here because they really have to wait to see what the other side of Washington does. Yeah, and Steph, let's go back to this idea of the grammatical technical correction, right? The runoff, not the sell.

And Steve, you jump in. But, Steph, this seems to be maybe a bigger deal than the headlines might suggest. And I'm saying that because our friend Jeff Kilberg notes, this is kind of a mini QE, quantitative easing injection. At least it appears that to him. Most of our viewers and listeners probably don't care that much about what the Federal Reserve does. They simply want their own borrowing costs, mortgage rates. auto rates, credit card rates, whatever it may be, to come down as well. How do you read this running off, not selling of treasuries?

Yeah, and that's been the case throughout, you know, most of this QT period. Now they're just slowing down the pace of that, which makes sense, right? As David highlighted, there's concern around the debt ceiling that can create a lot of volatility within reserves. They're just trying to get ahead of it. This was a fairly modest move, and it was hinted in the minutes. So while this is slightly, you know, a slight surprise, it was not overly surprising for the market, but this is the one difference versus what forecaster had effectively priced in,

which was the change in growth, change in inflation, and expectation that they could stay pat on rates at this point because we don't really know the full effect of policy. April 2nd is going to be a really telling deadline in terms of what Trump's going to do on from a tariff perspective. Sorry, Jim. Let me go very quickly through just kind of the people are just joining us here. Oh, my gosh, the Federal Reserve, they jump in. Here's, I think, how we're reading this. And again, Steve Leesman, please jump in if any of this is not correct.

By the way, markets there are not moving or moving slightly higher. Maybe on this news we shall see. The Fed sees the economy expanding. Maybe two rate cuts seen this year. No real change in the job market the rest of the year. Maybe a slight. I think Steve Leesman said one-tenth percent drop in the jobless rate so far this year. Inflation, maybe mildly higher as well.

So Jim, how do you read what the Federal Reserve just did? I think this is very non-committal. The Fed is kicking the tires on the economy. Look, we have a couple of things in front of us, and I think it's very important to respect the timeline. We've got reciprocal tariffs coming up on April 2nd. We don't really know how that's going to go, but it's in front of us. Then you have first quarter earnings results that are going to come out.

CEOs are not going to sing a positive tune about the first quarter, right? You're likely to see some, you're likely to see some, basically some bad news from some of the CEOs, or at least talking that way. The next Fed meeting is May 7th, and I think that tees us up for a rate cut at the June 18th Fed meeting. So essentially, this is the first time the Fed is trying to make a decision as financial conditions are tightening, meaning that credit spreads are widening, and the equity market has just gone through a 10% drawdown.

So effectively, this is the first time the Fed is trying to decide as markets are now starting to soften and weaken what they ought to do. And in the past, you had a stronger equity market, tight credit spreads, and the Fed was trying to convince you that cutting interest rates was the right thing to do. Now the markets are kind of siding that way, but they're not 100% sure how this is all going to play out. April data, the events of April, I can't underscore this enough, are going to be extremely important. And I think the tone is going to be changed by May 7th at the next meeting. Steve, we know that the market's first interpretation is often not its final one. Going back as we digest this, what kind of explain to us the hawkish element you see

a little bit here in the statement and in the dots. Okay, I'll go back to my notes here. It's a very technical thing. I wish I had a graphic I could put up. Maybe they have it up right there. Okay, so here's what happened. There's four now with no cuts for this year. That had been only, I want to double check what I'm saying here, had been only two, okay? And then you see there there's two with three cuts, there had been five with three cuts. So a compression towards the middle. Guys, I want to think, explain how maybe I look at this whole statement. I don't see the balance sheet as that big a deal. The bond market may get some help from that. To me, this is a bit like the Fed sending up a flare or an SOS and saying, we don't know what's going to

happen. They reduced the growth rate pretty sharply. They raised the inflation rate pretty sharply and kept the outlook for rates pretty much unchanged. But more importantly to me is it removed that statement from the last statement that said, we think risks are roughly imbalanced. That's gone. I don't think they know where risks are going to go. And I think what they're doing, I think it was Jim who said it earlier. Playing for time is where they're at right now because of the uncertainty. Look, they took this statement that said uncertainty has increased and put it up in like the second paragraph of the statement here. So this is a almost waving a white flag on the outlook saying we surrender. Well, I guess and this is great stuff. And I threw both this statement, Kelly,

and the last statement into chat GPT, because I want to see what it filtered out. And basically Steve Leesman is chat GPT because the two came to the exact same conclusion. Sorry. And Steve doesn't require nearly as much energy. David Kelly, what's interesting about- You don't know how much energy I require, Brian. Well, today I know you might need a few extra caffeinated coffees. David, but here's the reality. And I think to waving the white flagpoint, April 2nd are when these new tariffs are supposed to kick in. They may not. They could kick in before. They could kick in never. They could kick in later. We don't know how much. I'm not saying this statement doesn't matter, but how much do you think the Federal Reserve is like everybody else, just kind of waiting and seeing

what this administration does because how do they make any real policy moves when we don't actually know what's going to happen? Exactly. Two days after the election, Jay Powell said, you know, we don't guess, we don't speculate and we don't assume, but you can't make monetary policy unless you do one of those things. And so eventually it's going to have to make a monetary policy move one way or the other. But I think it's not just the tariffs, the other part of it that's really important

is how does this fiscal, how does the tax bill for 2026, evolve over the next month or two. If we get one big bill which involves a lot of fiscal stimulus in 2026, then the Fed's going to look at that and say, why should we deliver monetary ease if on the other side they're stimulating the economy also? And so they want to see that too. So I think it's a bit about tariffs, but it's also a lot to do with how Congress shapes this tax bill for 2026

and what that means for the outlook for 2026. And the Federal Reserve is signaling greater uncertainty, uncertainty, but they like everybody else just has to wait and see. All right. Panel, thank you. We'll leave it there for the time being. We appreciate it. As the market moves back towards session highs, Dow's up 235 points. On that note, let's get down to Mike Santoli at the New York Stock Exchange. Mike, and what's your take? Yeah, Kelly, I think the reason the market, I think, initially is able to have some measure of comfort with this outlook, to me is in the raising of the inflation projection, PCE inflation to 2.8, and not reducing the median number of cuts.

That, to me, suggests some level of tolerance for inflation being sticky. They still think policy is somewhat restrictive. They still think that disinflation is the reason that they would be normalizing rates lower from here, and they don't see a reason collectively at this point to change anything. Now, none of those positions is held with high conviction. And I think, as everybody's been saying, they're essentially just going to defer to the next several weeks worth of facts and developments before we decide on that. I think it leaves the market in a position of probably rooting for the economy to stay in there. You know, you realize that the Fed ultimately would kick in if we got weakness,

but good news on the economy should be good news for the markets because, you know, you're not really wishing for things to erode quickly from here. I don't think if you want earnings estimates to hold up. Let's go now out of Chicago. And a man I just saw in person, by the way, which is great. Rick Santelli, okay, I need your help, Rick, because I'm very confused. We're starting to see headlines crossing from other news organizations, financial times saying Federal Reserve sharply cuts U.S. growth forecast. Okay, maybe, but the first line of their statement is recent indicators suggest the economic activity has continued to expand at a solid pace. I'm trying to figure out where some of these headlines are coming from. What do you, are you seeing something different? Yeah, most of the people I talk to that are traders with large institutions, hedge funds,

they don't really pay as much attention to these flashes as you're pointing out. As a matter of fact, would all this talk about uncertainty? Here's what many people I talk to jokingly say. When we were pre-uncertain times, was the track record of the crystal ball of the Fed and their dot plots very accurate? No, it wasn't accurate. Pre-uncertainty, I don't suspect it's going to be anything. any more accurate during uncertainty. Here's what many traders are talking about

even before any of this happened. We're talking about any changes more or less, and that really is it, more, less. Okay, and I'll tell you what I mean. Downshift, less growth, but not recessionary. Less labor strength, but not recessionary. Less inflation progress, paying more attention now than they did, and less easing based on just general notions

that they're gonna remain pretty aloof, because they really don't know what to do and less QT. And all of those things I discussed with many of my sources long before the statement or the Fed meaning. These were from yesterday or the day before. And the reason I bring them up is, is that I think when we talk about balance sheet, first of all, that was completely built in.

Actually, many expected that we wouldn't just get less QT, that we would actually end QT or do more quantitative easing. So I don't see much movement actually. actually from that headline. But I think that when you look at it all together, what you see is exactly as our panel said, a Fed that doesn't want their fingerprints on this yet because they don't know what the future is,

but they've never known what the future is. We just don't know how the globe is going to readjust to all the things that may come down the pipe. Maybe Liberation Day on April 2nd, we get no tariffs. But at the end of the day, keep two things in mind, okay? That is, if the Fed doesn't do as much, short end is going to get sticky, and it has. Right now, twos are hovering right around unchanged. Matter of fact, most of the curves

around unchanged. And the long end is going to be very disturbed that we're not going to get anywhere closer to the 2% target. And most likely, this administration isn't going to make huge progress on deficits. So if you had to summarize, once again, I think you're going to look for some curve steepening driven by long rates going higher. Rick, when you say curve steepening, I remember those debates that we had about flattening being a bad thing. So is this moving in a more constructive direction here? Well, I think it's a more constructive adjustment, in my opinion, because I think long rates divorcing themselves from some of the manipulative forces and being more susceptible

to market forces is truly a good thing. And once again, I think that the equity markets now are showing you the true direction. Maybe there's not going to be any Fed put, so to speak, but don't kid yourself. The Fed pays very close attention. to equities and the more volatility they get in equities, the more uncertainty they're going to showcase in their statements. Yep, that you word. Rick, thank you very much, Rick Santelli. Let's welcome in Richard Clareda, the former Fed Vice Chair, Global Economic Advisor at Pimco. All right, Rich, what's your take? Welcome. Well, you know, I think there was a lot of focus on would the dots remain unchanged. And so

they still show the two cuts, albeit with a little bit more disagreement. I would point out the downshift on the growth projection is basically to the pace of growth. The Fed thinks is consistent with trend or potential growth. But yes, they are emphasizing the uncertainty, and I'd expect the chair to say that in a couple of minutes at the press conference. And then finally, I think there was some speculation based on the January minutes that they might end QT entirely today. So essentially, they're saying they're going to cut back the pace of the runoff, but still do some runoff. So all in, think a pretty constructive meeting compared to some of the concerns going in. Market seems to be most happy that despite the upward revision to their core inflation forecast,

they upped it by three-tenths because of tariffs, but they didn't change the fact that they still could do two cuts, right? So you're kind of getting that best possible. They're looking past the tariff impact there. I think you're 100% right. You know, there's been an ongoing debate in the press online, and I'm sure probably at the Fed about the best way. to think about the, you know, the Trump tariffs. And consistently, you know, what Chris Waller and Chair Powell and others have said, the first instance is to look through that as not inflationary. And I think today's signal from the dots is an indication that that's their baseline. They're going to be attuned and attentive to inflation. And if you look, they indicate that

there is upside risk to inflation from this forecast. So I think that also explains some of the change in the language wording. There's a firm out by a big, mall called Fashion Island in Newport Beach, California. They manage trillions of dollars. They're called Pimco. You might have heard about them, Richard. And Pimco's job is not to react to the Fed as much as it is to anticipate what the Fed or what more importantly the bond markets may do. The bond market, as I pointed out at the top of the show, may be saying something different than our friends at the Federal Reserve are because borrowing costs have actually gone up, not down, even as they're talking about cutting interest rates.

Where do you? Where does PIMCO see borrowing costs six months and one year from now? We had a big move up in Treasury yields, you know, in the anticipation of the election and then after the election, you know, the so-called Trump trade. So some of the moving yields really has not been so much about monetary policy as about, you know, the fiscal outlook. You know, we've consistently said we think we're going to be a world of a steeper yield curve. I noted that on your conversation a moment ago. You know, the 10-year Treasury yield has really been in a range of between 375 and 475. And that makes sense to us right now. You know, the big question is, you know, when and how rapidly will the Fed cut?

And that's going to be very data dependent. So I hate to disappoint you without. But which my point was, does it matter? Listen, I'm not discounting the Fed. They run the show. I get it. Okay. They're kind of like the referees.

You want to compare them to March Madness. But they're talking about cuts and the bond market is going in the opposite direction. We have viewers and listeners that are thinking about buying a home and they're waiting for rates to come down and they hear, ooh, the Fed's going to cut, honey. Don't worry, we'll wait a couple of months and mortgage rates will come down. Guess what? They've waited and mortgage rates have gone up, not down, since the September 18th Fed rate cut where they sort of bizarrely sliced by a half a percent and talked about, inflation being somewhat elevated. That was in September, not now. How much do you trust this Fed,

Richard? Well, I trust the Fed. What I acknowledge, though, is that a lot of things drive treasury and mortgage yields and mortgage rates. You know, if you look at the pricing and interest rate futures towards the front end of the curve, they do price in those two rate cuts, you know, but a lot of factors. Secretary Besson himself says, you know, I want 10-year yields to be lower, and that's going to depend on fiscal policy as well. So I think that's the way that I think about it. Richard Claretta, former Fed Vice Chairman and also Global Economic Advisor at the aforementioned PIMCO, Richard, always value and appreciate your time.

Thank you very much. Thank you.