Power Lunch - Fed Meeting Recap 9/30/24

Episode Date: September 30, 2024

CNBC’s Tyler Mathisen and Kelly Evans take you through the heart of the business day bringing you the latest developments and instant analysis on the stocks and stories driving the day’s agenda. “Power Lunch” delves into the economy, markets, politics, real estate, media, technology and more. The show sits at the intersection of power and money. “Power Lunch” gives viewers a full plate of CNBC’s award-winning business news coverage, plus a healthy dose of personality from the show’s anchors and the network’s top-notch roster of reporters and digital journalists. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, a busy day to start the week. Welcome to Power Lunch alongside Kelly Evans. I'm Tyler Mathes. And glad you could join us new at 2 this hour, Fed Chairman Jerome Powell, to speak in just a couple of minutes to the National Association for Business Economics. It's in Nashville, expected to hit topics around the economy, inflation, and much, much more. And we've heard from some other Fed officials already today. In fact, on the dovish side, Gouldsby just in the last few minutes talking about how rates need to come down significantly. Before that, Bostick saying he'd be in favor of a half. point cut if the labor market continues to weaken, and we do get the big jobs report this Friday. The markets for their part are trading lower, but we're closing out a month that has bucked recent convention and been much stronger than expected this September. I mean, for the moment, though, the Dow's down 135, the S&P fractionally lower, same with the NASDAQ. Let's bring in our senior markets commentator Michael Santoli for more on this

Mike. And we look at what the markets are saying. They're saying, shaking off September, you know, kind of shaking off the hard landing concerns. And what do you make of it? Well, exactly, Kelly. And we front-loaded those hard landing concerns into the, I guess, initial eight trading days of September. And then since then, including when we got the Fed rate cut, you had mostly reassuring data. I wouldn't say universally across the board. But definitely the Fed's move was billed as being kind of proactive and we're doing this because

we don't want to be too restrictive, not because we think the economy's falling apart. And things like GDP revisions and jobless claims, even retail sales, suggest that that was plausible. I think that's why the markets have not seen fit to rethink the initial positive response to what the Fed did. In fact, the S&P, though, trading exactly where it was at the highs the day after the Fed decision that was on a week ago Thursday. So, I mean, really what you're saying there is that the data from the start of the month has been relatively benign. And the market, which typically can have some hiccups during the month of September, really hasn't. Right. We went down, you know, four and a half percent right at the start of September. and then bounced from it.

So you can argue that there has been the traditional seasonal chop and volatility. The other thing I guess to keep in mind is both in August and September, it was that first week of the month where the market started to get cold feet, sort of worry about ISMs, started worry about the monthly jobs report. That's the week we're in right now. Maybe it's too cute to expect it to be exactly the same path three months in a row, though. And we'll get obviously a jobs number on Friday, I guess. So we'll have a little one more data point.

and I think the Fed is obviously looking at two main areas. One is employment concerns and whether the employment market is slowing. And on the other hand, is inflation slowing. Mike, thanks very much. We're going to go, I guess Chairman Powell is starting his remarks. Are we going to go to Steve Leesman here? Let's go to Steve Leasman, who has an early look at the draft of the remarks. Steve.

Hey, Tyler, Fed Chair, Jerome Powell will tell the NAEP conference that if the economy involves as expected policy will move to a more neutral stance. He says we're not on a preset course. We're going to go meeting by meeting here. Risk are two-sided. The economy, he says, is in solid shape, and we intend to use our tools to keep it there. He also says the economy is strong overall, and we've made significant progress towards achieving the dual mandate. He goes on to say that the labor market is solid, but cooling and inflation has eased.

Further comments he makes, we do not need to see further cooling in the labor market to achieve the inflation target. Disinflation, he says, has been broad-based. Core service inflation is close to the pre-pandemic level, and he sees housing inflation coming down and continue to decline, however, sluggishly. Finally, he says risk to achieving the employment and inflation mandates are roughly in balance. A short speech he makes, Tyler, I guess they're interviewing him right about now so we could go to the Fed chairman for the actual remark. I do have some brief comments on the economy and monetary policy, and then I look forward to our discussion.

Our economy is strong overall and has made significant progress over the past two years toward achieving our dual mandate goals of maximum employment and stable prices. Labor market conditions are solid, having cooled from their previously overheated state. Inflation is eased and my FOMC colleagues and I have greater confidence that it is on a sustainable path back to 2 percent. At our meeting earlier this month, we reduced the level of policy restraint by lowering the target range for the federal funds rate by a half percentage point.

That decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective. Turning to the labor market briefly, many indicators show that the labor market is solid, to mention just a few, the unemployment rate is well within the range of estimates of its natural rate. Layoffs are low, the labor force participation rate of prime age workers is near its historic high and the prime age women's participation rate has continued to reach new all-time highs. Real wages are increasing at a solid pace, broadly in line with gains in productivity.

The ratio of job openings to unemployed workers has moved down steadily but remains just above one so that there are still more open positions than there are people seeking work. Prior to 2019, that was rarely the case. Still, labor markets have clearly cooled over the past year. Workers now view jobs as somewhat less available than they were in 2019. The moderation in job growth and the increase in labor supply have led the unemployment rate to increase to 4.2%, still low by historical standards. We do not believe that we need to see further cooling in labor market conditions to achieve 2% inflation. Turning then to inflation, over the most recent 12 months, headline and core inflation were 2.2% and 2.7% respectively. Disinflation has been broad-based,

and recent data indicate further progress toward a sustained return to 2%. Core goods prices have fallen a half percent over the past year, close to their pre-pendemic pace, as supply bottlenecks have eased. Outside of housing services, core services inflation is also close to its pre-pandemic pace. Housing services inflation continues to decline, but sluggishly. The growth rate in rents charged to new tenants remains low. As long as that remains the case, housing services inflation will continue to decline. broader economic conditions also set the table for further disinflation. The labor market is now roughly in balance.

Longer run inflation expectations remain well anchored. Turning to monetary policy. Over the past year, we have continued to see solid growth and healthy gains in the labor force and in productivity. Our goal all along has been to restore price stability without a kind of painful rise in unemployment. that has frequently accompanied efforts to bring down high inflation. That would be a highly desirable result for the communities, families, and businesses we serve. While that task is not complete, we have made a good deal of progress toward that outcome. For much of the past three years, inflation ran well above our goal, and the labor market was extremely tight.

Appropriately, our focus was on bringing down inflation. By keeping monetary policy restrictive, we helped restore the balance between overall supply and demand in the economy. That patient approach has paid dividends. Inflation is now much closer to our 2% objective. Today we see the risks to achieving our employment and inflation goals as roughly in balance. Our policy rate had been at a two-decade high since the July 2023 meeting. At the time of that meeting, core inflation was 4.2 percent, well above our target, and unemployment

was 3.5 percent near a 50-year low. In the 14 months since the July 2023 meeting, inflation has moved down and unemployment has moved up in both cases significantly. It was time for a recalibration of our policy stance to reflect progress toward our goals, as well as the changed balance of risks. As I mentioned, our decision to reduce our policy rate by 50 basis points reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving

down sustainably to 2 percent. Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided and we will continue to make our decisions meeting by meeting. As we consider additional policy adjustments, we will carefully assess incoming data, the evolving outlook and the balance of risks. Overall, the economy is in solid shape.

We intend to use our tools to keep it there. We remain resolute in our commitment to our maximum employment and price stability mandates, and everything we do is in service to our public mission. Thank you very much and I look forward to our conversation. Thank you. Thank you so much. Short and sweet. So here we are in Tennessee we've had a major hurricane move through. It's top of mind. You know when we, so I thought to bring it up right at the beginning. Does the Fed have a role to play when natural disaster strikes? So let me just say, like everyone, we see the tragic loss of life and the terrible disruption of millions, literally millions of people, including here in Tennessee.

We have a couple of things that we do in these situations. One is that we're encouraging bankers to work with their affected customers in affected areas. And the second thing is that sometimes in these situations when power is out, there's a need for cash. And so we find that is a very important thing in these disaster situations. And so we we have the ability through the reserve banks to make sure that the banks have available cash so that if power is out for a significant amount of time, there's enough cash to do transactions. But, you know, obviously we're mainly on the sidelines and, you know, sympathizing with this very difficult situation people are in.

Great. You, in your prepared remarks, you walked us through the decision to begin cutting rates. What has happened, though, since the September meeting? What's new since the September meeting? Since the September meeting. So most of the data that we'll see before our next meeting hasn't come yet, of course. And we can talk about that. But I would say, you know, one thing worth pointing to is the...

annual NIPA revisions, which I thought were quite interesting. And I'd point out a couple things. First, as this audience will know well, there are two ways of measuring output in the economy. There are many ways, but two principal ways are gross domestic income versus gross domestic product. So GDI versus GDP. There's lore and there's research that says that actually GDI, gross domestic income, gives a better real-time reading.

And for the last year and a half or so, GDI has been quite low relative to GDP, raising, for those of us who forecast the economy, the risks that the GDP will turn out to have been overstated and it'll get revised down to meet GDI. So that's been a downside risk that we've been monitoring. As this audience were well known, quite the opposite happened, and there were very large adjustments to revisions to GDI. And there's now no gap between it to. In theory, there should be no gap.

It's no statistical error in measurement. So that's that kind of, I would say, removes a downside risk to the economy. Secondly, it has looked as though consumers were spending more than their income. We see disposable personal income now being estimated up. And so that's no longer the case, again, removing what we've been thinking of as a possible downside risk that the level of consumer spending might be unsustainable. So we look at that and again it looks these were very large healthy upward revisions to income. So we had income was revised upward, spending was

revised upward but income was revised upward so much more so than spending that the savings rate came up. That's right. Even with greater spending. Yeah the savings rate too. So we think savings are now, there are more savings on people's balance sheet and the savings rate is higher. So that that speaks of more kind of background that suggests that spending can continue at a healthy level. I'll just mention quickly two other things that I thought were interesting. One was just another modest increase in estimated productivity. We can talk more about that, but of course we're watching the situation with productivity. Productivity is very important to

potential output and the question is are we seeing rising productivity which will be sustained over a period of time and of course I think it's way too early to say that. Nonetheless you do see some increase of productivity because we've increased income but not hours worked. The last thing and maybe the most significant though is there's been a, there's a bit of a tension between the labor market data, which speaks of a cooling labor market and the spending data, the GDP data, which has been quite solid. And I would say that has not been, that tension has not been resolved unlike a couple of

the others. Nonetheless, I would say though that if you take away from this as I do, that you can be somewhat more comfortable with the spending data, that may also help with the employment data. So if the economy, so GDI, it was pretty significant upward revisions, GDP also was revised upward somewhat. And so if, when there's strength in the economy like that, does that give you some sort of sense or more of a sense of security when you're seeing a cooling labor market that maybe the worst outcomes won't happen if GDP is still that strong? So the answer is ultimately yes, but I would add though that I think there's a lot of

thinking that the labor market may give a better real-time picture in some cases than does GDP data. So if you look back over prior downturns, you'll often see that they weren't well predicted by GDP data, but they were by one or more aspects of the labor market. Now, we don't see that happening. There's really nothing that I can point to in the economy that suggests that a downturn is more likely than it is at any time. So we don't see that, but I would say seeing that there's more support

for thinking that the GDP readings we get are solid, I think that does have, it helps at the margin. That's not going to stop us from looking very carefully at the labor market data, though. So I have a few questions here on unemployment. The first is related to the summary of economic projections, and then the second is related to state versus national rates of unemployment. So in the summary of economic projections, the median participant has the unemployment rate moving from 4.2% today to 4.4% by the end of the year.

So continued drift upward. And yet the median expects that the pace of rate cuts will move down as the unemployment rate continues to move up. How do you square that picture? How do you explain that? Well, remember that the summary of economic projections is really just a tabulation of the individual 19 participants. So it doesn't come from one sort of consistent thing. But I can tell you why I think people will have written up a couple more tens of unemployment. It would just be that,

as we've seen, the level of job creation is maybe not quite at the level it needs to be to hold unemployment constant given assumptions about supply. That would make sense to me. I don't think, I think everyone at this point is looking at their forecasts and understanding that their great uncertainty bans around it, but the SEP asks you to write down your most likely case whether you want to or not. And so that's what it is. So it's sort of a love-hate relationship with the summary of economic projections? That's not unfair.

Not for you personally, but yeah. I would say it's sometimes it, sometimes of the out it people can pay too much attention to it I will say though one one thing is we do it as you this audience well knows we do it once a quarter and over the course of a full quarter the old SEP can get pretty rusty you know but for a few weeks after the meeting after after after we write down the SCP it's actually a pretty good read on what the thinking of the committee is and I'll point to one thing I will point to is that if you look at the path that

people wrote down we had ten people at four cuts or more or two remaining cuts. We had 19 people at three or more. But the sense of the committee, this is not a committee that feels like it's in a hurry to cut rates quickly. It's a committee that wants to be guided. Ultimately, we will be guided by the incoming data. And if the economy slows more than we expect,

then we can cut faster. If it slows less than we expect, we can cut slower. And that's really what's going to decide it. But I think from a base case standpoint, we're looking at it as a low. as a process that will play out over some time, not something that we need to go fast on. It's more, it'll depend on the data,

the speed at which we actually go. So before I get to that second question on the unemployment rate, I'm going to ask you a point blank question here. How are you thinking about the November meeting? So a couple things. One, we have two employment reports and an inflation report coming in.

So the main thing will be to look when we get to that meeting at the totality of the data, and we'll be looking at the activity data, the unemployment data, and the inflation data, and asking ourselves, is our policy stance in the place where it needs to be for us to best foster achievement of our goals? And I think we'll take everything into account, and we don't have that data yet. So that's the main thing. But the other thing is just I wanted to point out, and I kind of just did, that, you know, It's a committee that we will do what it takes in terms of the speed with which we move.

But if you look at where we were two weeks ago, coming up on three weeks ago, I guess, when we wrote down our SEPs and made our decision, it's, you know, it was a situation where people were thinking, you know, the bulk of the committee was at 75 or 100 basis points, and there were, the votes were on 50, and that would mean two more cuts. It wouldn't mean more 50s. Now, of course, that'll depend on the data. But ultimately, that's what the baseline is. If the economy performs as expected,

that would mean two more cuts this year, a total of 50 more. Question from the audience now. The regional bank presidents know their districts very well. And they come into the FOMC meeting. And even before that, the beige book provides that snapshot of what's going on around the country. And so we focus on the national.

unemployment rate, but there are state unemployment rates as well. Are there certain states that are primarily responsible for driving up the unemployment rate nationally? Is it something that's more broad-based? And how would you weigh sort of national versus state level? I mean, at the end of the day, we're looking at the national aggregate levels, but the real value, one of the great values of the Reserve Bank system is we get detailed reports of what's happening in the districts, which really start with the directors of the branches and the main banks who come in and talk to their, and they talk to the staff and also to the president of the reserve bank.

And I think the banks just do a great job of gathering data and anecdotal information too about what's going on in the district. This is enormously useful to us who are sitting in the center and don't have that range of contacts or that. So I think it's quite useful. But at the end of the day, we have to go on national data Although, of course, they're great, there are different things. It's a big, big country, a big economy.

They're parts of the country that are, you know, doing better than others. In your prepared remarks, you mentioned about job finding prospects. We have Dana Peterson here, Chief Economist, from the Conference Board. The Conference Board had data recently showing that folks feel like it's getting harder to find a job. How do you, does that one concern you and two, how do you weigh sort of survey data versus hard data like a job openings and labor turnover survey for instance? You know, we look at everything, of course, in particular the job finding rate has come down very significantly. And so if you're out of work now, it's going to be harder to find a job than it was two years ago when the labor market was extremely tight, where you would have had multiple employers, for you outside the building to give you offers.

Now it's much more at a normal level or even perhaps a little bit soft. So the job finding rate is much lower. So by so many measures, the labor market is still solid, but it really has cooled. I mentioned vacancies relative to actual unemployed people who are looking for jobs, so they're counted as unemployed. That is right around 1.1 ratio. That was a tight labor market before the pandemic. But it's less tightened out with that number was at 2.0 and it's worked its way down.

Like so many measures, quits all of those wages, all the, they point to the same thing, which is a labor market that's still strong, where conditions have cooled considerably. And as I mentioned, we don't think that labor market conditions need to cool further from where they are just to take the unemployment rate. I mean, it's substantially higher. 4.2% is substantially higher than where unemployment was in 2000. 2019 and inflation was below and it was below 2% 2019. Take a broad set of conditions. Look at 2019. That was not a high inflation environment. So this is not a problem with excessively

tight labor markets causing inflation. I'm so glad that someone submitted a question on housing inflation. I'm sure you're so glad as well. And so I'm going to ask it because we haven't really talked about inflation yet. You made a great point in your prepared remarks that it's running right. around three month annualized pace is running right around 2%. So housing inflation has been a large contributor to the overall inflation and continues to be an issue throughout the country eroding wage gains and although housing costs are not a dual mandate, how is the housing market factored into decision-making by the Fed?

So you know we think of core inflation as three buckets, goods inflation, non-housing, which is by far the biggest bucket and then housing services and that's rents and also owners equivalent rent the first two have looked like they broadly speaking move back to their pre-pandemic level housing services inflation has not yet and what's happened is that what should happen is when market rents drop as leases turn over when sorry when the increase in market rents drops to a low level as it has as As leases turn over year upon year, you should see housing services inflation flatten out. And you are seeing that, but you're seeing it just at a sluggish pace.

As sluggish as it usually. So I think we went from thinking, I went from thinking at the beginning that this would happen fairly quickly to now thinking that that process will play out over a period of some years, two, three, four years. Nonetheless, as long as market rents, actual new leases are, as long as inflation, inflation in those rents, those leases is relatively low, it's going to come, it's going to show up in housing services and inflation as well. It's just going to take, my guess is it's just going to take longer than we've been expecting and longer than we've wanted. But I think, you

know, the direction of travel is clear as long as market rents remain, market rate inflation remains relatively low, which it still does. So the good side of that equation, goods prices, are less, you know, less under the control of the Fed, but we have been sort of moving back to our previous regime of deflation and goods prices. Some of that is probably sluggish growth from China. But how much do you rely on goods prices being in deflation in order to help that overall aggregate inflation? So if you go back before the pandemic, you had, as you pointed out, you had mild deflation

in goods for globalization reasons and other reasons. And, you know, so you take those three buckets I talked about, together they produced inflation between 1.7 and 2%. So we're trying to get back to a world where inflation is 2%. And the combination of those three buckets is less important than the fact that you get the aggregate back. So I just pointed out that goods inflation is kind of back to where it was and so is non-housing services.

And that's most of the inflation bucket. but the third one is not there. Any combination of those things will do, but I think it really looks like the third, over time, is going back down to where we would like it to be, which is at a level, which won't be 2%, it'll be a little higher than 2%, but that will make the aggregate 2%,

right in the range of 2%. So you're going to be embarking on a review of the framework. And inflation, the behavior of inflation, since the framework change in 2020, is that, do you think that will inform, or how well will that inform the discussions when you do start the process of going through that five-year review again?

So we're starting our second five-year review late this year. So we haven't started it yet. We're just now in the process of kind of laying out all the questions we're gonna ask and assigning the memos and doing that kind of thing. We're not really ready to roll that out yet. But of course, you know, we're going

to be asking how should we change our framework which is embodied in the statement on longer-run goals and monetary policy how should we adapt that to what we now understand to be the way the economy works what have we learned from the last five years and that that's what we'll be doing so we'll be asking all all of those questions and you know giving our answer five years is flown by I can't believe we're already up on another review of the framework can't believe It feels like yesterday. I know.

So let me ask you, because you talked a few times about the data that you're going to receive before the November meeting. And one of those data points, most notable being an employment report that comes out during blackout. Now, some time ago, the blackout period around Fed meetings was extended. And I can tell you that as a long time Fed Watcher, I loved it when the blackout period was extended because it was almost like a sleep while the baby sleeps. so I could like relax longer leading up to the meeting because we could all sort of take a break.

And so, and I also used to have a saying that, and this was my personal saying, the Fed does not react well to late breaking news. And it was my way of saying, once you went into blackout, that was it, the data in hand determined that meeting. But it feels like more so over the last year or two, data and maybe it's the volatility around the data data is being considered during the blackout period maybe it always was it just wasn't that volatile even policymakers have talked about

and yourself you know data that was released during blackout leading up to the meeting so what does that mean for an employment report that's released during blackout just ahead of the November meeting i mean it depends on the broader situation but if it's a really important employment report you should you should assume we haven't made a decision until we see it and And we will, we're absolutely going to take into account data, important data that comes in during the blackout period. It gets harder when it's like this, you know, the morning of the second day of the meeting. It's harder to do that.

But, you know, because, you know, everything is just, you know, it's a big machine. But if it comes out during the blackout period, you know, you should just, going into that, you should just assume that what happens there could really matter for the decision. If that makes sense, there might be a situation where that wouldn't make sense. But I think in the world we're in right now, then we're going to be looking carefully at the data, even though it's in blackout. Absolutely. And if this is right, then even during the deliberations during the FOMC meeting, policymakers do have the ability to change their thinking or their forecasts or their views during that meeting. Yes.

I mean, we do a lot of work, you know, during blackout. We spend a lot of time. I talk to every participant on the Thursday and Friday before the meeting in detail about the economy and what they're hearing. And so there's a lot of discussion that goes on. And ideally, what we discuss in the meeting is kind of a synthesis of all of the views and information that we're all sharing with each other. So, but you should just assume, though, that decisions don't get made until the meeting. They're not going to be made. I mean, sometimes there isn't really a decision to make, right?

It's pretty obvious what we're going to do. Other times, when there is a serious decision to make, you should just assume that it gets made with as much information as possible. If you make the information, the decision before you get all the information, you're throwing away, you know, some information there. You wouldn't do that. Yeah. So on the, when you began hiking the federal funds rate in 2022, the focus has been on the policy lags, sort of long and variable, but who knows how long or how variable. And so, you know, it seemed like the lags were longer than we thought they would be on the way up. Does that mean that the lags may be longer on the way down?

And how do you gauge whether those lags are changing? You know, this is a very hard part of it. You can't really know, even now, we can't really know why what's happening is happening. People will be debating in 25 years whether what's happening now with the cooling labor market is due to policy lags or due to something. else. So we can't know. What we can know is that what we believe is that policy works with

long and variable lags, and we have to take that into account in our thinking, and we do. You know, it's challenging. On the other hand, just take the current situation. What you see is solid growth in the economy. So, and what you see is a solid labor market. So in a way, the measures we're taking now are really due to the fact that our stance is due to be recalibrated, but at a time when the economy is in solid condition. That's what we're doing. We're recalibrating policy to maintain the strength in the economy, not because of weakness in the economy.

The transcripts are released every five years. And so I believe it's January of 2025 that we'll first get a look at the 2019 transcripts. And five years ago, you may recall that you were cutting rates. So give us a peek, if you will, into what the transcripts might show around the deliberations you were having at that time as to what were you seeing in the national and the international economy that would drive you to make that rate adjustment. And what did you see that made you feel like you had done enough? It's a very different situation than the current one.

I guess I'd start by saying. But so if you remember, we had raised rates very much. slowly, I think a total of nine times to maybe two and a quarter and two and a half percent. And what my colleagues and I were feeling in 2019 was significant global economic weakness and also some weakness in the United States economy. And also just a lot of, this was a time of a lot of trade issues and it was, markets were really uncomfortable and businesses were business sentiment was very concerned. So we cut three times, and I felt like at the end of the year, I felt like that.

I really felt like it had worked well to settle things down. And so we were still at 175 basis points or something like that. That was that situation. Current situation is one where we raised really quickly to the highest level in 20 years, policy being at about 5.3%, 5.5 and a quarter to 5.5.5 to help with inflation in a world where we had the highest inflation in a long time. And then I think if you take a snapshot of our policy stance, which we put in place in July of 23,

and look at, and you did this in my remarks, unemployment was 3.5% really tight, and inflation was 4.2 or 3%. So now look where we are. We're at 4.2% unemployment and 2.5% isish in inflation. So the stance that we put in place 14 months ago, is not the stance that we need now. It's time to recalibrate. And I think we held on for a long time. And I think we did the right thing. I mean, history will tell. But I think we wanted to get

confident about inflation. So we wouldn't be in a situation where inflation could just come right back. And so we held on long enough that I think we're more confident that. So this is, this is quite a different situation than 19. But that's how I remember 19. Do you think the 50 basis points that you delivered in September, that cut, you described as a strong start, did that cut give you more confidence in the soft landing? I would put it this way. It's a reflection of our confidence that inflation is moving sustainably down, or growing confidence, that it's moving sustainably down to 2%.

You know, as I mentioned, our design overall is to, is to, to achieve disinflation down to 2% without the kind of painful increase in unemployment that has often come with this inflation processes. So that's been our goal all along. We've made progress toward it. We haven't completed that task. I think you'll see us using our tool in a way

that shows our commitment to achieving that. In terms of, I don't want to make a judgment about its likelihood. I just want you to know that we're committed to using our tools. to do everything we can to achieve that outcome. Well, you know, economists every day were asked to put a probability on the soft landing.

I try very artfully to avoid it. And I'll just put it as I have high hopes. So the unemployment rate, though, has risen. And so should folks be focused more on the delta, the change in the unemployment rate from that very low 3435 to now 4.2, or the fact that 4-2 is only 2, two-tenths above where the committee believes full employment to be, if we can have any confidence of where we think full employment is. And how would parsing demand versus supply

in that rise in the unemployment rate factor in? I mean, the change that we've experienced in the unemployment rate is information. And we shouldn't reject that for what it's worth. It's information. We should know it and consider it. And it may, is it telling us something about future movements in that direction. We can't know that, but that's the question. So we're not going to ignore that. I think also the level of, and the reason why unemployment has moved up too is also important.

But the level is still a level that is, I mean, I remember when I joined the Fed in 2012, I remember unemployment going down below six and then down below five, and people were really thinking, wow, we're in the fours, this is really low. You know, 4.9% was considered to be perhaps below the natural rate. Now we're talking about 4.2. So I think you need to keep that in context. In terms of supply and demand, you know, it's really down to your, the level of payroll job creation has come down pretty significantly

from where it was earlier this year and certainly in prior years. It's 116,000 a month for the last three months, and that's without the QCEW adjustment. which would tend to suggest that that will be revised down significantly in time if the QCEW adjustment is sending an accurate signal about what's happening now. Those are the preliminary annual benchmark revisions. Yes, through March. Right. That's right.

So, you know, I think you look at all of it. You've got a solid labor market and, you know, we are recalibrating our policy stance and will continue to do so going forward in order to maintain that. position. And when you talk about following the totality of the data, obviously in the U.S. we enjoy really a good deal amount more of government sources than I think other countries. We have a lot of private sources for data. And so this is a shameless plug for NAB, really, because I wouldn't be president without it, but Svenia Goudel, who is the chief economist of Indeed, is a member, a valuable member. And indeed, LinkedIn, ADP, they all put great monthly reports out on the dynamics of the labor market

from millions of data points really that they track. How do you take into account, sort of say, a jolts, which is an official government source for the flows in and out of the labor market versus what some of the private sources show? How closely do your economists follow that? Oh, really closely. Yeah. Of course, we look at jolts, we look at Indeed. You know, You know, you can pick out any of these and critique it, but I think the bigger picture is that the business of collecting data about the U.S. economy and analyzing it is really one of the great achievements of our country, frankly. We're committed to doing everything science allows us to do to understand what's going

on in the economy. Understanding it perfectly is impossible, but we do everything. We do some of this at the Fed, mostly this is not done at the Fed. said, but the collection of data and the information that we get are as good as it can possibly be. And basically, it's been a, it's a great success story about our country and about our economy, I think, overall. Yeah. Maybe another shameless plug is just that NAEP is a very strong supporter of funding data agencies

at the government level to ensure healthy, reliable, and sound data sets. Just saying. So given that you're talking to a room full of economists, I'd love to get a sense of how you all at the Fed use your economists. You have a few, just a few at the Fed. Think of 150 or so, I'm not sure, but it's a lot. And maybe when you're in the committee meeting itself, how do you use the economy?

the economists to give you updates, to give you the data that you need to help you make decisions. We have a lot more than 150 economists. I knew it was a big number. It's a big number, but it, I mean, we're hiring? For the NABE scholars. We're always hiring. Always. You know, we're an interesting organization and, you know, we're right, we have very

large number of PhD economists, but we also have, you know, policy-making responsibilities in monetary policy, in payments, and financial regulation. And so we're kind of on the line between academics and policymaking, very important policymaking. The economists that we have, I would say this about the other professionals that we have, they're incredibly important to the work that we do. The way I experience it is I meet regularly with different groups of economists, but if I have a question about something often about the labor market or inflation or anything, I'll get an answer, but usually I get a group of people.

And these will turn out to be people who have spent, you know, 30 years or 20 years, you know, thinking about that very question. And there might be two or three different opinions or way to approach that problem in the room. So people, they feel free to disagree with each other. And they also feel free to disagree with us with the policymakers. And we feel free to disagree with them. I mean, it's a very healthy dynamic. But, you know, you know so many of these people. They're wonderful people.

They're incredibly committed public servants. I'm deeply honored to get to work with these people. And I think the Fed is a great place to work for an economist. One of them said to me, one of the most senior ones, said, you know, if all we can do around here was just sit around and analyze and talk about the economy, we'd have the best jobs in the world. All the policy making kind of takes is hard, but ultimately it's really fun and enjoyable to analyze and discuss the economy.

We could all spend our whole lives doing that. whole lives doing that, but we have other responsibilities too. Just a few. You can probably relate to that. Yeah. Well I think even you and I have a conversation where you said I like nerding out with the economists and we appreciate that yeah. I'm glad that you do. I speak economies. You speak economists, yeah, it's a whole different language. So in our in our last minutes here, you know, sandwiched between you and Alon Colette, at the lunch table. Lots of talk around, I hear guitars, I hear blues music, I hear

comparing every band that's your favorite and albums and I feel like that's been the conversation of this whole conference. As Alon said, we were at the Johnny Cash Museum last night. It's just Nashville is just a phenomenal place. And so if you were to be able to stay over, what would you do this evening in Nashville? I would certainly visit the Patsy Klein Museum and the Johnny Cash Museum. Big Petsy Kline fan. So many, I like this kind of music. I like music way too much. The other thing is there's a band that it turns out Alon's going to see tonight called the Time Jumpers and it's basically the best studio musicians in Nashville and hence in the world really in the kind of music they play. And they play at a place called Third and something or other. Third and Lindsley. But it's an excellent band. Vince Gill sits in as the lead singer but he's not always there. Anyway, that's what I would do. And I've got to come back because I've know. I've been a fan of that band for 10 or 15 years, and I've never seen him live.

Well, in about 15 minutes, it's going to be sold out. So. I've got some tickets. Yeah. Well, yeah. Already is sold out. Oh, gosh. OK, should have known.

All right, well, next time then. And for now, thank you so much for giving us your time today, Chair Powell. We really appreciate it. Thank you. Thanks, Ellen. And that was Federal Reserve Chairman Jay Powell being interviewed by Morgan Stanley's Ellen Zentner at the NAB conference. That's National Association for Business Economics.

They're making plenty of jokes and references to that along with their taste in music. But we're sitting here next to Steve Leesman, who's got the key headlines, Steve, as we heard from him, both in those prepared remarks. And then as they moved throughout the-the-Powell has never heard your band. Right. I mean, this was a major oversight. Well, you know, he just has a good taste in music. And I don't know the time jumpers, but I am going to look them up. But you know that Nashville is the home of the greatest songwriters in the country right now,

where some of the great stuff is being produced. There's a lot of musical GDP coming out of Nashville. I will say that I think Powell's most important comment here is Fed projections, the SEP, the summary of economic projections show that if the economy performs as expected, that would mean two more 50 basis point, two more 25 base point cuts for a total of 50. So he's giving us his base case. and his base case is relying upon the SEC. There's a little problem there, which is the market sees 75 coming,

so they have to come to terms a little bit. I'm not too concerned about 25 being offered. The data, I think, will show that. He says, look, we're going to watch the data. We've got a couple more employment reports coming out. A couple quick headlines, Tyler. He says, I don't think I've ever heard a Fed Chief speak as clearly as you just quoted him. And he said, we're looking for two more cuts total of 50 basis plan.

And that's why the market is. It's down. I mean, the Dow's, the headline is so far as Dow falls 200 points as Powell signals he won't be as aggressive cutting rate. I think that's right. And I do see, by the way, the probabilities of the 25. It's interesting. The probability of a 25% is 65% right now, more or less where it's been all day. But the market still has this basically 100% probability just about by January, by the January meeting that there'll be 125 lower, about 100% probability. there'll be 100 lower by the end of, by the December meeting. So there's some differential out there with what the market expects. Absolutely. I think the other thing the market might be digesting right now is this notion that maybe, just maybe not clear, though, I would say, that Powell is laying out a 25 basis point increment

in terms of how fast he's going to go. There was one other comment I liked where he said, we're looking at this process that will play out over some time, not something we need to go fast on. not go fast is 25. It'll be data dependent. And, of course, there was one other thing worth talking about. This is maybe more for the innards, the wonking of Kelly's show. We're watching the situation with productivity. It's an important potential output. It's possible with all the revisions that there's an upward shift in productivity that would be over time important for Fed policy. And again, we don't have a major reaction to the downside. This is a market that, yes,

It's tilted lower, but there's some Middle East headlines as well. It is not a massive reaction to the idea that the economy can withstand that nature of cuts. Right. So I look at, Kelly, for what it's worth, I'm not saying this is the right way to look at it, if there are big differences between the market and the Fed. Which there are. When we look out. When we look out, but right now, I look at the near term, we can talk about looking out, which is important.

But right now, 75 and 100, we can come to terms with that in a single jobs report. It's the two-year time frame. So let's talk about that. You give you the two-year quote, and I'll give you the... 380, I think it was, and we're at 512? Over time, the market is saying, one way to think about it, that the overnight rate for the two-year will average out to 380 over two years. So one year from now, the market already has the Fed Funds rate at 3%.

Wow. So there's a difference. A year from now, they have us cutting by two. Let me double check that. I want to make sure I'm absolutely right. the Fed Funds contract for September 2025 is currently trading at 3.025. Wow. So that means that there's some coming to terms that's going to happen over time.

So what would you say? If the one year, I don't know what the differential there is, 380 over a two-year average. It's not crazy, but there's still some, like, for example, look at the one year is 390 right now. But that's why it's so interesting that it's not the long term. The shortest term, the two years, not shortest, but two-year, two-year, higher now than it was before they cut by 50. That's an extraordinary. That difference has to be...

I think it's important, but I also think, look, you can put up a chart, and I'm saying this with a wink in a nod, because I think I'll do this in the back, was I say this, put up a chart of since the Fed meeting, and that shows adrift higher in yields. But put up a chart in the month or two before the Fed meeting, and we have come a long way down. There is a lot of additional stimulus. And, of course, look at the yields in the Treasury. important. But then look also at the rates that businesses are paying. Look at what deals are being done because the market has an ability, for example. If yields come down, they could take it back and

spread. That hasn't happened. So business lending or business borrowing, and we'll see if that goes over to the consumer as well. It gets down to the consumer. So there's a tenure. You can see that over what is that since September. That's the drift higher. Now go back, guys, a little bit further. That's since the Fed meeting. Right. That's since the Fed meeting. And now show me, I don't know, three or four months of what's happened here. And the two-year yield for what it's worth was it 5% in late April. Late April. There you go.

So there's, okay, so that's the two different ways to look at it. Some guys make their living on the far right of the chart, and a lot of people make their investment nest eggs over the long term of the chart. Fair enough. On that note, let's bring in a couple more voices to talk this over. Bob Dahl is CEO and CIO of Crossmark Global Investments. and Andrew Holland Horse is chief U.S. economist at City. Great to have you both here.

Bob, before I just want to mention some of these headlines on the newswires. Lebanese troops have pulled back north of the border. We are all aware that the situation in the Mideast may get more intense and may also be putting pressure on the market. So with that in mind, how significant are these remarks from Powell and which way do you think this sort of gap in the bond markets and Fed funds is going to go? Yeah, I think you're right to bring up those headlines. lines, they're going to come and go and it's going to create some volatility in both directions

in the market. But in terms of Powell's comments, hard to disagree with anything he said. I guess one of my concerns is we're going to get the 2% inflation, quote, unquote. I don't see how we get to 2.7 trailing 12 per PCE, their favorite. Two to 2.7 down to 2 is Herculian. and I don't see how we get there without a recession. The other point I would make is I'm really glad he brought up the revisions. In revisions, that's the past. So normally we don't care about those things. But those revisions were so significant.

It's hard to ignore them. And I think anybody that's been on the cautious side of the economy has to be pushing their numbers up as a result of the extra income, the extra cash, et cetera, et cetera. So, Andrew, why don't you jump in? and react to what Bob said there. I mean, in other words, he's skeptical that the Fed is going to get to 2%. Yeah, I think what we heard from Powell is that there's a lot of belief now amongst Fed officials

that we have CorePCE running at 2% on a three-month annualized basis. Now, I agree with Bob. There are some real long-term issues here. We have a structural shortage of housing. Housing can reemerge as an upside risk to inflation. But I guess agreeing with Bob that if, If the labor market is weakening, then you're not going to have that research and demand for housing, even as interest rates come down. If the labor market is weakening, you're not going to have as much upward pressure on wages.

So cyclically, I at least see this story where they do get back to a lower rate of inflation. I think they're feeling enthusiastic about that. But to Bob's point, I mean, I'm not sure that that's happening in a world where we have no concerns about downside risk. The point that I would disagree with Chair Powell is that we don't see any. that makes us concerned about recession, we've triggered the song rule. We have a movement up in the unemployment rate that we typically only see during a recession. So I think we should at least be concerned about it. Not everyone has that as their base case, but it's at least a concern here. Andrew, is the same, Steve, just real quickly before we move out, Andrew, is that, though,

a reflection of more labor supply because of immigration or anything? I mean, are there dynamics that, again, as some herself has said, not, you know, rules are made to be broken? Is that an important dynamic or, you know, are there reasons to dismiss it? Yeah. I think Powell was kind of trying to correct the record on this or kind of mark to market where things are now. That was an argument six months ago, maybe three months ago. What we've seen for the last three months and Chair Powell said this is the pace of payroll job growth has slowed. It's slowed to something that we usually only see at the beginning of a recession. So this really is weak labor demand that's driving the unemployment rate higher now. Andrew, I don't know what you want from the Fed Chair. He cut rates by 50 basis points,

further rate cuts. So whatever he's saying about the possibility of recession, he's certainly situating himself to get more in a better place to respond to recession. Bob, I want to ask you, Kelly, to her credit, said there's a lot of headlines out there. But let's say the market was simply reacting to Powell, who I personally read as saying, guys, get used to a 25. How much of a disappointment would that be for the market that you can see when you look at the probabilities has at least another 50 built in. Is the stock market reliant upon more aggressive rate cuts, or can it live with a more modest 25 basis point approach from the Fed?

It will learn to live with a 25, but I think there's some adjustment as you're insinuating with your question if in fact that's what the pace is going to be. Look, you went through where the market's expecting rates a year from now, and 25s are just not going to get us there. Right. I agree with your skepticism. I don't see more than 25 a meeting. Therefore, I don't think we get as low as the market thinks, unless the economy is a lot worse, as we just talked about, the economy could be weaker. You know, the sort of the economy's balanced and everything's, quote, okay, insinuated. That's, I think, reaching a bit. The employment situation is clearly weakening, and we just don't know how fast we'll find out over the next couple of months. months. All right, gentlemen, thank you very much. Steve Leesman. Good to see you, as always. Bob

Dahl, Andrew Holland-Horse, thank you as well. Now, the key story we're following this hour, a divisive bill aiming to regulate AI in California, getting vetoed by the state's governor Gavin Newsom. Kate Rooney has more on the failed law, which could have served as a blueprint for national regulation. Kate. Hey, Tyler, so this was a big deal in Silicon Valley. It was the AI bill to watch. And while it was going on at the state level, it would have been a de facto. Acto national law because the bulk of tech companies, AI companies are based here in the state. It would have also applied to any AI companies even operating here on top of that SB 1047. That's the name of the bill.

It was really a potential blueprint, rather, for Congress to draft any sort of legislation. It was designed to hold companies liable for any harm caused by AI models. It would also require what some describe as a kill switch if these models suddenly went rogue and we had some sort of doomsday scenario. Newsom said on Sunday in that veto, this law would have only applied to the largest model, so anything that would have cost over $100 million to build. He described it as a, quote, false sense of security pointing out that smaller models could actually be just as influential and designed for sort of more niche targeted use cases, like in government, for example.

The bill has caused a schism here in the Valley. You got open AI, meta, Google, all opposing that law, arguing that it was legally vague and that it would have potentially hindered innovation. The research community, meanwhile, was overwhelmingly for it. You had folks like Jeffrey Hinton, the man who is often credited with building modern generative AI. He was a vocal backer and then Open AI's rival, Anthropic. After some amendments did eventually come around to it, even Elon Musk backed the bill on X, said on balance it was the right vote. Newsom saying that he's not abandoning regulation.

He's now convening a board of experts to help draft some other options. But for now, the industry will continue to self-police. guys back to you that was sort of going to be my next question so what's next is this uh drive a stake through this vampire or uh will there be other efforts to create a new regulatory regime or could the could the governor's veto be overridden well so the in the veto it was a long sort of next step layout by newsome saying essentially we've got this board we're going to keep working on it and he's saying this this industry really does need to be regulated but i would point out the speed at which these companies are growing, adding to some of the urgency to start regulating these companies.

If you look at the growth, even the numbers that Open AI is putting out there, they're in the midst of closing this funding round. Their models are moving quickly. The companies are moving quickly. They're raising boatloads of money at this point. So the urgency from the industry is also that by the time you figure out one of these new laws, you could have an entirely new model. You could have an entirely new set of LLMs.

So I would say the speed at which this industry is moving, really adds to some of the urgency. But I would say California is taking this quite seriously. And as I said, you know, we talk about national and federal regulation. California is really ground zero of some of this innovation and really is seen as an important area of jurisdiction at this point. So Newsom's a key player here on top of, you know, needing some action to come out of Congress. All right. Kate, thank you. Appreciate it very much. Still to come, some of today's key movers in three-stock lunch. Oh, yes, we'll be right back. Welcome back. Let's not leave you with.

without a three-stock lunch. Today, we're trading some of the big headlines and Hightower's chief market strategist and CNBC contributor, Michael Farr, is here with us on how to position. Michael, welcome. We're going to start with some semis, which are taking a hit after China has reportedly urged

local companies to stay away from Nvidia's chips. Invidia shares are now down about a percent. They were down 3 percent pre-market. Not a big reaction, Michael, but what would you do with those Nvidia shares here? Yeah, we don't care about really what China's doing right now. And I think that the report by Kate was probably as important as anything on the regulation of the AI. Invitya is a great company. And for now, they're growing earnings at 40%

per year and there are 40 times earnings. You get a chance to buy Nvidia on pullbacks because the market is doing the same stupid thing with Nvidia than the market does with the Fed. They make it, they want it to be bigger than it is. They want these great earnings reports to even be better than they are. And when they come in only great and not greater and greater, the market that stock trades off. So every time there's been an earnings on NVIDIA, you've had an opportunity to buy it at about down 15%. I would wait, but I think it's one you probably want to own for a while. I've got it as a buy. Same thing with the Fed. When they actually do what they say they're going to do, markets get disappointed. I wish markets would listen better. All right. Let's move on to Carnival,

Michael, down nearly 3 percent despite a beat. Shares are under pressure thanks to week Q4 guidance. What are you doing with Carnival, if anything? You know, the numbers were okay here in the earnings, but this is a really volatile stock. And here's the thing that really bothers me about this. This is a $23 billion in market cap stock with $28 billion in debt at Carnival. Okay? They've got good EBITDA. They're trading at, you know, single digits in terms of multiples.

But it's very, very volatile. It's a ton of debt. They have very small room for error. I think if you're going to own something, I like Disney better, they're going to add four more cruise ships. year. It's much safer, much better balance sheet, not that kind of debt. I'm out. I'd sell it on this strength. That's been a tough sort of wait to get out from under when Carnival's case. I hear your point. Speaking of which, what about CVS? I mean, they're saying that major shareholder Glenview is planning with the company, an activist push, and it's got the shares up two and a half

percent. They're down 20 percent this year. What would you do here? Uncle. Say uncle and sell it. say uncle and cell. CBS hadn't been able to get out of its own way, and I owned it for years and years and years, and so many things about CVS are attractive. So there's 70% of the country of Americans live within three miles of a CVS. I mean, there's a whole lot as medicine changes, as health care changes, to recommend it.

But right now, they just can't seem to execute. They've got problems with Aetna and the PBMs. When you look at these activist shareholder things over history, When they get involved, you get a temporary pop. It usually only lasts a couple of weeks. And it benefits the activist investor group much more than the average shareholder. So you get some strength in here. This would be one I'd sell and I'd move on.

Michael, I know you have a home down in South Florida. How'd you get through the hurricane? Ah, you're nice, Taylor. This time, because we're in Naples, we did okay. We really feel so bad for the folks up towards the panhandle and the big bend area. Tallahassee it was really tough but this time knock wood we're okay yeah unlike the in which did so much damage down there michael far thanks very much uh and thank you for watching power lunch closing bell starts right now