Power Lunch - Fed Holds Rates Steady, Notes “Progress” On Inflation 7/31/24

Episode Date: July 31, 2024

 Federal Reserve officials held short-term interest rates steady, but indicated that inflation is getting closer to its 2% target. Central bankers made no obvious indications that a rate cut was imminent. Instead, they maintained that more progress is needed before cuts can happen.We’ll break down what that means for both markets and your money, right up until 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.

Good afternoon, everybody, and welcome to Power Lunch alongside Kelly Evans. I am Tyler Matheson, and we are just a couple of minutes away from the Fed's decision on interest rates. Most Fed watchers not expecting a change in rates today, but this could be the meeting before the meeting. So in about 30 minutes from now, we'll be listening closely to Fed Chair Powell for any clues about September. Let's get a check on the markets ahead of that decision. We've got the Dow up 283, so it's really broken out back towards session highs in the last hour or so. The SMP is up 1.5% 5522. The NASDAQ is up 2.4% a monster move to retrace some of the sell-off we've seen in recent weeks. Speaking of which, check out Microsoft slightly lower, as the markets were hoping for even more from the company's results.

But well off those after-hour lows last night, they're only down 1% and they're continuing to spend on AI, and that's helping AMD at NVIDIA. NVIDIA up almost 11% today. All right, let's get right to our All-Star panel. As we are just a couple of minutes away from the Fed decision, a little less than 3%. three minutes. Joining us, David Kelly, Chief Global Strategist at JPMorgan Asset Management, Stephanie Roth, Chief Economist at Wolf Research and Jim Karen, CIO of Cross Asset Solutions at Morgan Stanley Investment Management. Welcome to all of you. Stephanie, let me begin with you. You say that the Fed has effectively delivered a rate cut by coming out with such a consistent

message over the past couple of weeks. Explain what you mean there and what are you hearing that tells you that the rate cut is basically already baked in? Yeah, you've heard a chorus of speakers cutting out all delivering the same message. They've been saying the labor market has softened. They said the risks are now more in balance between the inflation side and the employment side of the mandate. And they're basically talking about a rate cut in September. And by doing this and having this consistent message, that has eased financial conditions, which is doing the job of a rate cut just in advance.

So they're effectively delivering this rate cut now because markets are doing the work for the Fed. Now they're still going to, of course, have to deliver on that, but it's very, very likely that's going to be the case. David Kelly, you agree with what Stephanie just said? Yeah, I think so, but again, it is important that they deliver. So I think what we'll see in the statement today and in the press conference are sort of a few gentle chimes just reminding investors that the rate cutting act is about to begin here. Nothing to get alarmed about right now, but we will see rate cuts, I think, begin. in September. I think it's very important for the Federal Reserve to lay it out and be pretty consistent and steady in cutting rates because it's actually, this is a dangerous time. You don't

want to be cutting rates too quickly here and alarm people. So I think they'll give a clear message that September we're going to get that first rate cut. In September, we get that first rate cut. Jim, I guess the question is, what else do they signal or hinted, do they try to maintain something kind of hawkish in order to push back against these relatively strong markets we've experienced? Well, I think what the Fed is trying to figure out right now is, is the economy weakening or is it just normalizing? Are we coming off of, you know, strong jobs that we've had in the past post-COVID and inflation's coming down? And is all of this just a normalization or is this truly a weakening that really deserves a significant dovish statement today that leads us into thinking that September is the first cut. Look, I'll be the first one to say. I think it's 50-50 in September. I think it's still a close call. But I think it's really a question. And this is one, this is what I'm going to be listening to with Powell is how they phrase this. I don't think they do anything today. I'd be worried if they did because I think the economy's cooling, not collapsing, but I think it's more of a normalization of conditions as opposed to weakening, so I still think

it's a close call. We will come back to you on that 50-50 proposition, but now let's go to Steve Leasman for the Fed's decision on interest rates. Steve Leesman. The Federal Reserve left rates unchanged, but changed its statement in a way that may lay the groundwork for future, right? So it doesn't necessarily guarantee it. I'll start off with the most important changes where the Fed said the risk to its employment and inflation goals, quote, continue to move into better balance rather than just have moved into better balance. And the committee says it's attentive to risks on both sides of the mandate, not just highly attentive to the inflation risk, which it had been saying for quite some time.

They did continue to say that there won't be cuts or they don't believe that there should be cuts until they have greater confidence of inflation moving towards a 2% goal, but they did talk about jobs and inflation. Let me go through that. They said job gains have moderated. That's a downgrade from Remain Strong in the prior statement. They noted the rise in the unemployment rate, but added that it remains low. They previously just said that the unemployment rate remains low.

The statement notes an improved outlook on inflation saying it has eased and remains somewhat elevated, adding the word somewhat. So they're less concerned, as you can see, with the inflation level. said there's been some progress towards the 2% target, not just modest further progress. Guys, I'll leave it there with, really, it's a change in the balance of risks, I would say, from one where they clearly indicated they had their keen eye and highly attentive to inflation. Now they're watching both sides of the mandate. But I wouldn't say they guarantee a rate cut in the next meeting. They maybe just laid the groundwork for one if they feel as necessary

and the day to cooperate between now and the September meeting. Tyler. All right, Steve, thank you very much. Stick around as we get back to our panel for some reaction there. I think Stephanie, Steve has characterized it well. It feels to me like the language indicates that the Fed is putting the ball on the T and is going to whack it real soon. I think that's totally fair. And that's exactly, they have to talk about cutting before they actually do the cut. So this is the meeting where they're setting that up. And that's exactly what the statement has detailed for us. They're telling us the risks have changed. Now it's about both sides, the mandate, they don't want to see the unemployment side of their mandate really start to suffer.

And given that the unemployment rate has legitimately started to rise, arguably our opinion is it's more supply driven than demand driven. But it has started to rise. We're seeing the softening in the labor market. And the Fed has to be cognizant of that. They're trying to land the plane. And in order to do so, it makes sense to be cutting at this point. With inflation now coming back down very much below their 2.5% target on, or at least the two and a half level that they've outlined on most measures when you look back on one and 12 months.

David, what do you make in the markets? Reactions, largely treading water, or not treading water, but unchanged from going into the decision. Well, you know, I think it's probably more or less as expected. I do think there are quite a few comments, changes in the statement, all of which are in their doveish direction. So it's more than one or two gentle chimes indicating that rate cut is coming. They're banging away and they're going quite a lot to let people know this rate cut. is coming here. I am a little concerned. I don't want them to talk about this in terms of a

weakening economy. I think they're on the right track if they say, look, we're going to normalize rates because inflation is normalizing. If they can stick on that theme, I think it'll be much less alarming than if they say, well, the unemployment is going up a bit and more worried about the other side of the mandate. Because as soon as the Federal Reserve expresses real worry about the state of the economy, that doesn't speed the economy up. That slows the economy down. So they need to be careful not to do that and just stick to the point that, look, inflation's coming down, that justifies us normalizing rates. Jim, were there any surprises in what you hear in the language that Steve so ably surmai or summarized for us? And then I want to come back to your

idea that a September rate cut is no better than a 50-50 chance. Do you still feel that way based on what the Fed has just said? Yes, I do. So let me start there. Look, I mean, the two things I heard in the statement and what I'm queuing off of is moving into better balance. and focusing on both sides of the mandate. So what that really means is that we're not so worried about inflation anymore. We think it's moving in the right direction. Right now, the key is employment, it's jobs growth. We're going to get more data on Friday.

We're going to get another payroll number before they move again. So look, you know, we have this thing that we call a fear framework, which is the Fed, employment, asset prices, and interest rates. And essentially, what the interplay is between all of these is the employment situation is the absolute key. If employment slows, doesn't collapse, but just cool. enough such that wage inflation is coming down, that's the key ingredient that gives the Fed confidence to start to cut interest rates. We got an ECI data print today. Everything seems to be moving in the

right direction, but still, we have a few more data points ahead, so I wouldn't want to get too excited. Look, you know, I mean, September to me is still 50-50. Even if they go, I still think it's a close call. Stephanie, what do you say to those who argue that those who want rate cuts are doing it out of self-interest for the markets or the banking system and so forth and not out of concern for the slowing labor market or that it would be similarly damaging to Americans to have a slowing labor market alongside what they already know is difficult inflation? Yeah, I think it's the right thing to do from a policy perspective to be lowering rates. We're now seeing inflation back down close to 2%.

We're starting to see signs that labor market is cooling a little bit. And it doesn't make sense that rates of 5.5%. So doing a couple of cuts in the near term makes absolute sense. I would say certainly it doesn't appear to be political. The Fed's in a tough spot. No matter what they do, they're going to be called political to some extent. So they have to do and follow their data framework. And that's exactly what we're seeing. The data are very consistent with the Fed outlining that they should be cutting in September. And that's the steps that we've seen. And if inflation proved not to be seasonal in Q1, then we wouldn't be talking about a rate cut right now. Steve David says that this statement is a sort of chaka block heavily peppered with rate cut rhetoric.

Do you see it that way as well? I don't. I agree with David that it's full of things that move towards the dove-ish side, but there's something missing from the statement, and I think the conversation, but Stephanie just got at that. What I think happened here is the Fed moved to neutral. Now, the question, in terms of the balance of risks, the question is, where do you put, where does the committee put the funds rate? Is the funds rate highly restrictive such that with a neutral balance of risk,

they have to dial it back? that's the case, I think that's what Stephanie got at, then you can firmly read rate cuts into this, but you can't have the conversation about what this statement says without an understanding, and hopefully we might get that from Fed Chair Powell during the press conference about how restrictive the Fed feels it is right here. If the funds rate is seen as neutral, which I don't think it is, and the balance of risk is neutral, no need to change rates. But if it's highly restrictive and you can bring it down with a neutral balance of risk, then there's cuts that are planned in here. Anything you'd add to that, David?

No, I agree with that. But I think the Fed has said, and Jay Powell has said a few times, that he doesn't need the economy to be weakening in order to cut rates. He just needs to see inflation head towards 2%. And the ECI numbers today, other indicators, all of them suggest the trend rate of inflation is heading towards 2%. And the Fed, you see, the thing is the Fed needs to cut because inflation is getting better. If they wait until they have an economic excuse because the economy is getting weaker, they're not going to help the economy by doing that. They're just going to look like they panic.

So I'd much rather than steadily normalize rates because inflation is getting better than do it in an emergency action later. And that's why I do think they ought to go ahead and probably will go ahead and cut rates in September. Jim, you get the last word here. Look, I mean, I still think, I'm going to stick with my 50-50. I think that what Steve is saying is correct is that if they're moving towards a neutral stance right now, What they need to be confident about is that wage inflation is coming down. They need to see further softening in the labor market. Their biggest fear is if inflation becomes unanchored, meaning that it comes down,

but then it starts to go back up because a jobs market is still relatively strong, wage inflation is still there, and they're cutting into an economy that's normalizing, not necessarily slowing or collapsing to a bad level, in which case starting in the fourth quarter, you're going to see the year-over-year comparable start to push inflation higher, potentially. So they don't want to be in a position where they start to cut rates now, then all of a sudden in the fourth quarter, you see inflation start to just stall and start to maybe even tick up a little bit higher. I think that's what they're worried about and they

need a little bit more data. So that's why I'm still at 50-50 on September. Interesting. All right, folks, we're going to have to leave it there. David Kelly of JP Morgan, Stephanie Roth, Chief Economist at Wolf and Jim Karen. We appreciate your time today. And stocks are holding steady following the decision, but will markets hear what they want to hear from Chair Powell, that's always the big question. Bob Bassani has more over at the New York Stock Exchange. Bob. And the market seemed very happy with what they hear because unchange is a little bit unusual

for an FOMC meeting. So look at the markets here. The Dow was 268 going into the meeting. Now about 275. That's unchanged. That's statistically insignificant move. The S&P was at 83. Points on the upside.

Now 85. Again, insignificant statistically. The Russell 2000 is essentially unchanged from prior to the meeting. And of course, that's been the big mover this month. up 10% outperforming the S&P and the S&P Tech Index, which has been down this month, an underperformer, that two is up maybe one or two points. Again, not statistically significant. The reason I think the market's happy with this is, remember, there's a three-step process here

that the market has come to believe will happen. First is the Fed sets the stage today for a potential rate cut. And they did that today. Look what they did. They lowered the jobs outlook a little bit. Job gains have moderated rather than remain strong. And they had a somewhat lower inflation outlook where they said, said inflation was somewhat elevated, adding that word somewhat. So lower inflation outlook and

somewhat lower job outlook. That's, again, setting the stage for potential rate cuts. That may be perhaps at Jackson Hole. They make some additional statements. We'll have some more data. And finally, you get the rate cut in September. That's the plan that the market believes will happen. That appears to be what is being delivered right now. Remember, the two to three months going into the first rate cuts, usually, historically, are pretty good for the market. So while this is setting up very well, I think the big question is, what's the pain trade here? What would cost have the most people, most off-sides here? Maybe we could get another series of aberrant inflation reports, but that seems kind of unlikely.

These numbers are starting to slowly come down and coalesce around very steady declines in inflation. Maybe we could get a sudden economic deterioration, but that would only lead to more, rates, or more rate cuts, not an increase in rates. The only thing that I can think of, Kelly, besides some kind of aberrant inflation report that would rattle the market at this point is a little bit more of what we've got in July. Nobody anticipated that CPI report would cause a sudden deterioration in interest rates. Suddenly value stocks go up, small caps go up, a re-rating of technology stocks. That process is still going on.

I don't think it's necessarily completed. We get this kind of easy data. coming in the next couple of months, that's very likely to continue. Kelly. It's an excellent point. It's hard to believe that NASDAQ 100 and the Russell 2000s are neck and neck year to date now up around 11%. Bob Banks. Gold's also hitting a session high after the Fed decision. Let's go to Chicago for more reaction in the bond pits. Rick? Yes. If you look at all maturities, we've seen more volatility in the short end like a two-year versus the 30-year. But let's look at the intradays. If you look at a two-year right now, it was around 436, unchanged on the session at top of 2 o'clock Eastern. It popped up a few basis points up to 439.

It's resting a little higher than where it started. A lot of volatility, though. If you look at a 10, start it out at 4.10%, makes it up to just shy of 14, hovering one basis point hotter. The longest maturity, the 30 year started at 435. It's hovering one basis point higher. dollar index has improved, but it's still lightly down on the session. You know, if you look at this in a clinical fashion and you cut through all the words and the verbiage and the wordsmithing, what you have is you have an inflation rate most likely

going to settle around 2.5 to 3% in the big picture. Okay? The feds targets 2%. That might not matter much. Yes, prices are stable, but look at all the noise they made when we were slightly under 2% pre-COVID, made a big deal, cut rates too low. And that really is the issue here. Take a step back. Look at the size of these refundings.

$125 billion for threes, tens, and thirties. That is so much larger than it was just several years ago. And why were they allowed to create such huge deficits? Because the Fed kept rates too low, too long. They can't make the mistake again of being an enabler. We still have an administration that loves to overspend. They need to keep these rates higher for longer. One rate cut won't be a big deal.

But they're going to trap themselves. The market says, Sep, they're right in tune with the market. I hear people say 50-50. It certainly doesn't look 50-50 to me. But what is going to be a problem is how they set the stage after the first rate cut because give an inch, give up to the elbow, they're going to want the whole thing. They're going to want more rate cuts. And the Fed really needs to be cognizant of the fact that we are now potentially looking at a Minsky

moment when it comes to supply. and they're at the epicenter of how we frame the equation for how much we can spend, how much we can borrow, and how much we can afford the service to debt. Tyler, back to you. All right, Rick Santelli, thank you very much. More and more experts joining in calls for a September rate cut, including a number of our mock Fed panel, economist Claudia Somm, creator of the SOM rule, recession indicator, and the markets are pricing it in two. So what should we expect to hear from FedEx?

Chair Powell, we'll ask her, we'll ask Claudia, when Power Lunch return. Welcome back to Power Lunch. There's a look at the markets, which broke out to fresh session highs, but just by ever so slight amount as we await Chair Powell's news conference, which does tend to move markets. All this after the Fed's decision at top of the hour to hold steady. For right now, stocks are holding onto their gains. Nessdaq still up two and a half percent, and NVIDIA is leading the way on pace for its biggest gain since February, up 11.5 percent. Still, it's down about 7 percent in July, and a number of three. Factors are leading to today's big gain, a rebound after yesterday's decline, plus positive comments from Morgan Stanley, also AMD, reporting its results and slightly beating estimates for earnings and revenue and showing continued growth in sales for AI chips. Those shares are up 3%. And that is where Microsoft comes in, even though the stock is trading lower after its results, the street loving the $19 billion of spending almost all of it on AI.

Malius analyst Ben Wrights is calling it the KAPX that saved the world. He says that all that Microsoft money will benefit Nvidia and AMD, but also Broadcom, Arista, and even Intel. And oil prices meantime are higher 4% today after concerns about fighting in the Middle East escalating could lead to a regional war. Hamas's top political leader was assassinated in Iran. Iran is accusing Israel and Iran's leader is threatening Israel with, quote, severe punishment. has not commented on the assassination, but did say it killed a Hezbollah official in Beirut, whom Israel blames for the attack over the weekend that killed those 12 children. With all of that going on, Pippa Stevens joins us with more on,

finally, a big move in oil, and that you wonder if markets are starting to get more concerned about what could happen next now. Yeah, we are seeing a big move in oil prices today, Kelly, and that's because these two back-to-back assassinations are raising concerns that we could see broader fighting in the Middle East, including a direct Iran-Israel conflict. As RBC's Halima Kroft put it, quote, The assassination of the Hamas political leader, Ismail Haniyah, overnight in Tehran,

moves this conflict appreciably up the escalatory ladder and edges the region closer to a wider war, adding the fact it took place on Iranian soil could trigger a response from Iranian leadership. Hania was a lead Hamas negotiator in ceasefire talks. For oil specifically, the next move will largely be determined by how Iran responds. Richard Bronze from energy aspects told me that while Iran,

Iran and Hezbollah will feel the need to respond, the firm believes they still want to avoid a full-scale war. If their response is well telegraphed, like we saw back in April, when Iran responded to the killing of a senior IRGC commander, then the geopolitical risk premium in oil could start to fade within a week or two. Now, since the October 7th attack on Israel, oil prices have largely traded sideways due to the market's view of contained escalation and no actual disruption to oil supply. But as CIBBC Private Wells Rebecca Babin said, even if the general view is that Iran and Israel don't want a wider conflict, the odds of a calculation mistake are rising here. They may not want a wider conflict,

but one of the reports I heard earlier today was that the assassination of the Hamas leader in Tehran may have come as a result of a drone-fired missile that originated inside of Iran. So you've got the potential of an infiltration of Iran, sovereign territory, and it would seem that they would have to respond to that kind of provocation. Yeah, there are a lot of moving parts here, and I think that that's part of what analysts are saying, is that even if at the high level, both sides don't want this wide-scale war, that would be

very costly, both in terms of economics as well as the human toll, the more you have this escalation, the more you have all these different parties in different countries involved, the more, you know, you could have a mistake or something that's unintended, and then it just raises the stakes for everyone involved. And so we really do have to see what Iran does. And the oil market is now pricing a little bit more geopolitical risk premium. But again, it's the fact that no supply has yet to be impacted. That's what's driving oil right here. This also sort of says to me, I mean, Israel's war has two main objectives. One is to end Hamas, destroy it. And two is to retrieve and repatriate hostages. This tells me that the former objective, Israel,

really the governing one right now. Decapitate Amas. And you've seen the rhetoric from both sides rise as well. You had Iran's supreme leader saying, you know, quote, our duty is to take revenge. And so I mean, who's to say what's going to happen next? But I think, you know, from the oil market, you know, side of things, unless Iranian oil infrastructure is targeted, again, they're exporting about two million barrels per day, even though they remain under U.S. sanctions, but we've largely turned a blind eye. And so unless that actually happens, probably little impact on the oil market, but again, the human toll elsewhere, much more severe. All right, Pippa, thanks very much. We are just moments away from Fed Chair J. Powell's press conference. What will he signal to the markets about the September meeting that he hasn't signaled already?

We'll get some reaction and analysis from economist Claudia Somm when we return in two minutes. Welcome back to Power Lunch. We're just moments away from Fed Chair Powell's press conference. We often see the bigger moves based on what investors. hear or don't hear from him versus just the decision itself, which we already have. Let's bring in Claudia Somm, New Century Advisors, Chief Economist. Oh, we have the same kind of wardrobe vibes, too. Creator of the SOM rule, the recession indicator. She was among the three members of our mock Fed panel who voted for a cut this month.

I was just reading your latest missive Ms. Somm. And it's quite clear. You say cut, cut, cut, cut, cut, cut, cut, cut. So what do you want to hear from the chair? An explanation of why they didn't cut. Right. Like the case is there, the case is there on the inflation data, both the data in hand, some of the forward-looking inflation data, right? What we're at two and a half percent PC inflation year over year, and to be calling this some further progress? Right? Like, what is it they're looking for? I think the bar is getting set pretty high and that doesn't, that really doesn't make a lot of sense. The Fed needs to start that process back. gradually to normal, which means gradually reducing interest rates. There are whenever, as we've been debating this past hour or so,

there are viewers and Americans who are concerned and think this is all about appeasing Wall Street and they're liquidity junkies and they just want lower rates and it's self-interested and it's not in the interest of the average person. What would you say to that? The feds mandate, the one they're given by law from Congress, is low inflation and low unemployment. And that is their focus, and that's, you know, the tools they have, interest rates aren't necessarily the perfect tool for that, but that's what they're aimed at. And that is what they have to focus on.

And exactly how this affects markets is important, but it is not the Fed's duty. And for Americans having jobs and having stable prices, right, that's not appeasing Wall Street. That's like having, you know, putting us on a good growth path. And then the Fed should be out of the way. They should not be big in the discussions about what's long-term growth. What's, you know, the productivity. They're just trying to get us out of what has been a very rough four years. And then step aside and let the real economy get going.

If you were to ask Chair Powell, the very sort of pungent question that I sense is on, what the hell are you waiting for? What do you think his answer would be? More data. I understand they have a very tough, very tough decision to make. And the tools, the rules of thumb that we often use in thinking about monetary policy, thinking about the economy, they don't make a lot of sense, right? You think back just two years ago in the summer, that was Powell's Jackson Hole speech,

the there will be pain, right? To get inflation down, it is likely there will be job losses and less growth. Fast forward two years. I mean, this has been hard at times. There has been no recession. There has been no widespread pay and inflation came down a lot. So then what does that tell you in terms of what does it take to get that last mile? How important is it to pull back, start easing the interest rates? I mean, I get it. It's tough, but they've got to make a decision. In the minute we have before he's likely to come out, though, what if the economy isn't as weak as we think it is? You know, having been bearish for the last two years, you know, at some level. you have to acknowledge this immigration surge means that potentially that's the reason the unemployment rate's been going up. You've seen this whole debate going back and forth about it. GDP just came in better than expected last quarter. Jobless claims still look fine. Job openings rebounded last month. I don't know. Maybe it's maybe we can handle rates higher

than we think. We didn't need a weak economy to get inflation down. We don't need a weak economy to get that last little bit out of inflation. So that's where it's, we've got a lot of this growth the productivity, the labor supply, like all those places are in place. We do not have to be afraid of a good economy, right? If the inflation job is done or we're on that glide path, it's okay. Like the Fed can start stepping aside. It's not about them. So did you hear, as many of the other commentators you've had on,

did you hear the Fed really setting up a rate cut in September? Yeah, I mean, this is about as good as the doves could want for a statement. There was a lot of red ink, and I can only. imagine how many hours and hours of painstaking negotiation. We're over every word. We're going to have to break in there, Claudia. Thank you.