Power Lunch - Federal Reserve cuts interest rates by a quarter point 11/07/24

Episode Date: November 7, 2024

The Fed approved its second consecutive interest rate cut today, moving at a less aggressive pace than before but continuing its efforts to rightsize monetary policy.We’ll break down what it all 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.

The Federal Reserve cutting interest rates by one quarter percent to a new range of four and a half to four and three quarters percent or the mid range of four point six two five. The decision this time was unanimous. There was no dissent by Michelle Bowman, the Fed governor. The committee will continue, it says, to consider adjusting the funds rate, looking at the data, looking at the risks and the outlook as well. It sees risks on both sides of its mandate, that is the possibility of higher inflation or higher unemployment. But it sees those risks as roughly balance. it says the economy is expanding at a solid pace same language as last time labor market conditions have generally eased before in the prior statement it said that labor market conditions have slowed I think it's a little bit better number or characterization than it had been inflation it says has made progress towards the 2% target but it remains elevated it removed the line that the committee has gained greater confidence inflation is moving towards 2% I don't know what that means or how to do that it says instead it's cutting in light

of support of its goals of reaching the 2% target and its dual mandate. Finally, it says the economic outlook is uncertain, but it will continue reducing its balance sheet. Kelly, that is, and I would say a waveless or splashless quarter point post-election cut. Well, it's a bit early, but you're probably right. Steve, stick around. Let's turn to our panel for some more reaction. And of course, to look ahead to the press conference that is coming at half past. And Jim, that's often when we've seen some bigger moves.

So it is. Look, I mean, ultimately, I think what the Fed is going to try to key off of is what's happening in the labor market. I think inflation they're comfortable with. Inflation has been coming down. It's starting to settle down. They're making progress to their 2% target. I think that's yesterday's news. tomorrow's news is what happens to payrolls. Now, look, ultimately, we've had some storms, we've got a lot of noise within the data. This is stuff that they have to sift through. But I think their biggest concern is if there is a slowdown in the economy, and if the unemployment rate starts to rise very, very quickly, then they will have wished that they've continued on with their pace to cut interest rates.

And I think that's what they're going to do, 25 today, 25 in December, and I think they're on a mission to 4 percent, and then they're going to reevaluate. The statement admitted the reference to having gained greater confidence in inflation moving sustainably to the 2% target, David. What does that mean? I don't think it means that much. They're always trying to use as few words as possible, so if they can get rid of a sentence, they're happy to do so. I think they needed to use that language while justifying a first move, but I don't really think it means very much. I do, you know, I feel pretty good about payrolls, though.

I think that's, you know, after the election, you're just not seeing commercials who make people feel better, but I think you will see a bounce in small business confidence. There's a lot of uncertainty going into the election. I think people will probably be more positive about making business decisions. So I don't see any reason to expect a slowdown. We might actually see slightly higher inflation in the months ahead. So I don't expect the Fed to accelerate the pace of rate cuts. Stephanie, your thoughts?

Yes, our base case is that they're going to be doing that every other meeting cutting cycle from here. The one thing we didn't talk yet about is the ECI. The Employment Cost Index showed wage and wage and inflation just continuing to slow down. So this is largely explained by perhaps productivity picking up, which is a great backdrop for the Fed to be able to continue easing, even though the economy is holding up fairly well. We're sitting here in a kind of a non-inflationary type of growth environment with productivity actually picking up. So despite the expectation that growth is going to, you know, remain fairly solid here. The Fed is still able to continue its path on easing.

Steve, we turn to you for some more color from the statement. Were there any dissenters? No, not this time. There was some speculation, at least I guess it was from me. I was thinking that maybe Michelle Bowman, who was unhappy with 50, would be unhappy going a further 25, which would be 75. She wanted to do 25, but I guess she's on board now. Sometimes, Kelly, when a person descents, the dissent the one time, they let their objections be known, and then they go along with the committee in the future.

I've seen that quite a bit, the idea that, hey, you raise your hand, you let it be known. I like the characterization that was said earlier, and I think it's worth thinking about. The Fed says in its statement that the risks are roughly balanced, but what's it doing? It's cutting rates. So it is indeed acting, regardless of what it's saying about the risk being balanced, it's acting as if it's bigger concern is indeed what's happening in the employment market. And it's going to be interesting to see, well, first of all, about revisions, but maybe how the Fed Chair or other Fed officials characterized that recent October report we got,

which was indeed messed up by the hurricanes and by the strikes. But still, when you look through it, and I talk to a lot of economists about this, generally they saw it as weaker. Because if you add back $100,000 from those two factors, you still have a pretty weak employment board. So I think the Fed is saying risks or balance, and that's part of this whole recalibration idea. Maybe one of the questions we might ask Fed Chair Powell,

hey, are you recalibrating or you're done recalibrating? Because the recalibration is kind of like we need to get down to another place, And then we can start thinking about acting more along the lines of the data. David Kelly, does a new administration mean anything to the Fed or to the Fed chairman? Obviously, Mr. Trump is known for being outspoken, for saying exactly what's on his mind. So talk to me about that a little bit. Yeah, and not yet, I think. I think that the Fed will continue to cut gradually the first, you know, in December.

I think they'll cut again. And then we'll go into early next year. And we'll see what policies are actually likely to make through Congress. And whether there's any early action in tariffs, that could have a big implication, because if you have a big increase in tariffs right off the bat, that's going to increase inflation. That might make the Fed more nervous. But I think the Fed is going to try and keep its head low for a while and see if it can avoid getting any incoming from the new administration. Eventually, though, if something goes wrong with the economy, I expect that the administration will get very mad with the Fed and blame the Fed for that. But that's kind of comes at the job if you're on the Federal Reserve.

Jim, do you think, I believe the Fed Chair's term continues into 2026. Do you see any possibility that he might not fill out that term, either because he decides to step away or because he's basically pushed? Well, there's always a possibility, right? I don't see it, though. I don't place this as a very, very high component of potentially what, you know, President Trump's policies would be, would be to remove the Fed Chair. I don't think that's his first stake in the ground that, you know, that he's going to make. I mean, like I said, it's clearly a possibility, but so far the Fed is doing pretty much what he wants the Fed to do. He wants them to cut interest rates. The Fed is in the process of doing that.

That should hopefully stabilize and help the economy. Ultimately, you know, the Fed has a dual mandate of price stability and full employment. I think the number one thing, whether it's President Trump or its or its Chair Powell, is they need to make sure that the jobs market stays stable. Because if it doesn't, there's this thing called reflexivity. And what that means is that you can get a rise in the unemployment rate that comes very quickly, and that could have very negative effects on the economy. So I think what the Fed is really focused on right now is making sure that the labor market stays as stable and as healthy as possible, and doing rate cuts is doing their part to ensure that that happens.

Stephanie, what do you expect to be the impact of kind of what's been mentioned on the tariff front, at least on just the general inflationary stance under this Trump administration? because again, the previous one for all the tariffs that were implemented, they were cutting rates by year three of his term. Yeah, so one, we do think it's fairly stagnationary. When we modeled it, we look at, we look for about a 1% hit to GDP and a 1 percentage point boost to inflation. So this is very stagnationary. The thing is, it's not proper policy for them to be hiking rates as a result of the inflationary impact, because that would likely cause a real serious downturn in economic growth.

So the proper policy would be more likely to just hold and watch and see how things shake out rather than to act more hawkishly as a result. So in base case, it is a negative impact. 1% hit to GDP is probably a conservative number. It could be much more significant depending on how this shakes out. Although, David, the entire agenda seems to be one where they're trying to grow our way out of these myriad problems. Well, yes, but I mean, there are a lot of promises made. And the really interesting question we're all going to be grappling with here is once there is no, campaign, there's there will be a pressure on President Trump? How does President Trump and a Republican

Congress decide to move things forward in terms of policy? Because I don't think they're going to implement everything they promised. Well, there's, the pressure could come from the bond market, though, and that's why it's interesting to watch those levels taking a breather today. Yep. Yeah. Go ahead, Steve. I was just going to say, guys, I have a question for the panel, which I've never done before, okay? The question to ask Powell today is, what does he think of? about the recent rise of interest rates and what that should say about Fed policy. The answer Powell will typically give is, well, who cares? These things go up, they go down.

We watch them. It's an input, but we usually look past market movement. How do you ask the question in a way that doesn't get you the stock Powell answer? Good. It's a jump ball. Who wants to take it? I guess I'll start on this one. I guess the way that I would start that question is is really asking about the deficit, right? You know, the way I would ask that question is, is how does Powell think about, how does the chairman actually think about the rising deficit, the potential to fund that,

and what impact that might have on treasury yields, and then how might they actually react to that? Now, clearly, higher rates will slow the economy, could actually slow inflation, so sometimes there's an adverse effect or an effect that's not necessarily accounted for. All right. Thank you, Jim. Thank you, Jim.

Thank you, Jim. We take fiscal policy as given. That's what Powell is going to say in response to that one. Well, how about you ask him, does he think the increase in rates is due to higher inflation expectations, higher deficit expectations, or higher growth expectations? You won't want to answer, but. What did you say, Steve? I didn't hear you. I can work with that.

I can work with that, David. All right. That's not a bad one. All right. Stephanie, any final thoughts? Yeah, I think you can ask him how he's thinking about if rates stay above 4.5%? Is the market doing some of the work? in the opposite direction of what they're trying to do,

and how do they feel about that? Because right now, the market is actually counteracting what the Fed is attempting to do here today by cutting rates. Analyst, been great being with you. Thanks a lot. As always, appreciate your time. Let's get to Bob Pisani now at the New York Stock Exchange. Bob.

And, Tyler, not much reaction in the stock market, the S&P 500 is essentially unchanged from where it was just about 10 minutes ago. And probably for good reason. Here you look at these numbers here and these comments. The growth is decent here. economic activity continue to expand at a solid pace. Labor market conditions generally ease. Unemployment rate moved up but remains low.

Inflation has made progress toward the committee's 2% objective. Not far off from where it was at the last meeting here. I think the problem is that for this press conference, nobody down here thinks that this is going to be about inflation or the trajectory of growth. Everyone down here at least believes that this is going to be about tariffs, tax cuts, and whether Powell will stay on if President Trump wants him. to leave at this point. And of course, the tension is, Palos always refused to deal with these kinds of questions. He's always said, I'm happy my job. I plan to stay on it until the end. And he's always very much stuck to the trajectory of economic data and avoided having discussions, theoretical discussions about things like tariffs. The problem from everybody's

point of view at this point is the Fed's mandate, partially, is to address inflation concerns, and to the extent that something like tariffs might be inflationary, that could very much affect the Fed's trajectory, a growth trajectory for next year. So it's a legitimate question. I anticipate he'll be avoiding it, but I anticipate that there'll be a little tension here because the press will be constantly rephrasing that kind of question exactly because these actually do fall within the Fed's mandate. So it's going to be a very, very interesting press conference. But right now we are essentially unchanged on the S&P 500, guys. Thank you, Bob.

Let's go to Chicago for some reaction in the bond market, which is, similar kind of taking it in stride right now, Rick? Yeah, taking it in stride. There's from interesting subtle moves below the hood that we should pay attention to. If you look at an intraday of two-year, it's been the most responsive. It was hovering at 419 prior to the rate lowering,

and now it's around 423. Maybe what's most important, though, is that if you look at auction yields, the auction yield for the three-year, for example, was 4.152 for the 10-year. It was 4.347. They're both underwater. The only one that isn't underwater is the 30-year bond because that was lucky enough to be auctioned later in the process

after yields started to already make their move. Why am I mentioning the auctions? Because much of yesterday's selling, in my opinion, was due to the auctions being underwater. You own something that's underwater. What do you do? You sell it. That was part of that.

The other issue, I think, is that many are going to be talking, of course, about the neutral rate, R-Star, this magical yield that the Fed thinks that they're going to know about when it happens, it sounds a little bit like fiscal and monetary voodoo to me. Other than the fact, if you look at the actual data points that we've had recently, the last jobs report had almost a 30% revision to August and September, calls into question accuracy. If you look at the personal consumption expenditure core year over year, 2.7,

sticky, sticky, sticky. In terms of what the Fed's doing, it makes complete sense. They've telegraphed it. They've been in sync with the markets. But ultimately, how it moves from here, I love the way the panel's all bringing up fiscal policy and what the Fed may do. Because in the rearview mirror, this Fed kept interest rates so low,

they definitely were part of the problem with respect to allowing the government to overspend because, heck, zero interest rates is not really costing us anything. That has changed. To find a sudden interest in fiscal policy now, I would scratch my head. We have no idea with the next president, Trump, number 47, is going to do much of the talk to get him elected, was, as many candidates are, kind of presenting a bunch of issues and how he may move. One thing for certain, look for tax cuts.

Another thing for certain, look for many in Congress to continue to not use dynamic hedging and get it all wrong in terms of what the problem is. It's not a revenue problem. It's a spending problem. And maybe that should be one of the first questions. Back to you. Rick, thanks. We appreciate it.

Rick Santelli, keeping an eye on things. We're minutes away from Chair Powell's press conference, starts at half past. We'll take you there live as soon as it happens. His comments can often be much more market moving. First, we'll get some more reaction to this 25 basis point cut from former Fed Vice Chair Roger Ferguson. We'll be right back on Power Lunch. Welcome back to Power Lunch. The Fed just cut interest rates by a quarter point. It was largely expected. Markets are somewhat unmoved.

But what do investors now want to hear from Fed Chair Jerome Powell? He'll begin speaking and taking questions in about 12 minutes. Roger Ferguson joins us now, former Fed Vice Chair and a member of our mock Fed panel. Roger, it's great to have you here. And maybe you can address that kind of that triple issue of rising long-term rates. Is it the deficit? Is it inflation? Is it real growth? How do you think the Fed's thinking about this backup, a significant backup and yield since they cut rates last time around. Well, first, thanks for having me on. Look, I think it's a combination of expectation of increased deficits, perhaps growth staying strong, but also the risk of inflation probably has gone up.

You have the Fed cutting rates as the fiscal policies are becoming more stimulative. And so I think the market is suggesting that the borrowing costs that the U.S. government is going to face are more likely to go up as opposed to going down as we go into a bout of what looks like pretty serious deficit spending. So what is the Fed's role when that is the case? No one's saying that they need to react to fiscal policy, but in some ways they can't ignore it either. Well, no, they can't ignore it. So what they'll do is obviously running through their models, they'll think about it.

And they want to see if there's an inflationary impetus that comes from that. And all of that depends very much on whether or not productivity increases and the economy grows. Uncertain for sure. And so let's wait and see. But I think they will be a little more attuned to pick up an inflationary risk as we find, you know, bigger and bigger deficits and an increase of the debt. But not yet decided, and they'll wait and see. Yeah, and I wonder if you're pointing to the idea that there might be fiscally stimulative things like tax cuts and spending programs that are in the pipeline here, the effects of those would not show up for quite some time. So I guess then my question would be, how soon would you expect the Fed to react to that?

Would they wait and see it until they can see the effects, or would they move preemptively? Well, that's a very interesting question. They certainly have to wait and see what the actual policy is. It takes some time to propose tax cuts, to get them through Congress. So this is not an immediate thing. And so I think it's first, what is the policy? then once they get the size and the magnitude, they'll run it through their models of the U.S. economy, which are the best out there.

And so I'm not in any sense suggesting that, you know, the next move is going to be up. I think they'll wait to see what the policy is, assess it in an analytical sense, and then be prepared to move if it looks as though inflationary pressures are going to pick up. Yeah, or it could. And so we shouldn't be on our... Go ahead, finish. I'm sorry, sir. Yes, go ahead, please.

No, I was going to say, I guess... No, we shouldn't be... No, please, finish. I'm sorry. We shouldn't be, you know, attuned to a sudden change in policy from either the administration or the Fed. So we're talking about something that's going to play out

over quarters, if not years. And so we should just be very mindful of a time frame here. That's not the next few meetings. Yeah, that was kind of what I was driving at was the idea that this is going to play out over time, the reaction to whatever the fiscal policy is. And it could be that interesting. interest rate cuts are slowed or if there's a strong feeling that the policy is going to be inflationary,

well, maybe the interest rates go up a tick. But that's down the road under any of the scenarios you can envision. Yes, it is. I think they're on the path. Inflation seems to be coming down right now. They focused on the labor markets, which are probably okay, but potentially weakening. So I expect them to have at least one more cut this year in December. And then perhaps, you know, slow the pace of cutting as they wait and see how things are playing out. What will you be listening for in the press conference? I think this is going to be a press conference that is going to try to make as little news as possible, frankly. And so, you know, and so I think effectively, is he just going to reinforce, is Chair Powell going to reinforce the messages that they've been giving over the last couple of press conferences?

That's my expectation. So I think this is going to be, I think he's going to try to keep this as even keel as possible. I'm pretty sure they're pleased that the markets did not overact either fixed income or equity markets. And I think the goal here is to simply stay as close to the statement as possible, stay as close to previous statements as possible, and not make brand new news here. All right. Well, we will see.

They're usually pretty artful at not making news. Mr. Ferguson, thank you very much. We appreciate your time. Roger Ferguson. Thank you. And we are just moments away from Jerome Powell's press conference. We'll get more reaction to the Fed decision when Power Lunch returns. There is the podium. And we will see him come out in about seven minutes. Welcome back to Power Lunch, everybody. Just minutes away now from Fed Chair Powell's press conference at half past the hour. For a little more analysis, let's bring in Mike Santoli for some perspective.

Mike, what do you make here? I mean, Kelly and I were just joking a little bit. We've gone from maybe the most consequential presidential election to the most inconsequential Fed meeting we've seen in years. For sure, Tyler, and in fact, I'm sure that's the way Chair Powell probably likes it. Kind of a low drama, decision, the statement barely tweaked. And really it reflects, I think, the fact that the Fed and policy are in a pretty comfortable spot for now. There's going to be a moment when maybe the stakes go up a little bit from here. But they're following, you know, the path that they've mapped out before in terms of normalizing rates. I get a lot of the back and forth about what to make of the yield move on the long end of the curve.

And do you think that it means a policy mistake? Do you think that it means there's a deficit tantrum going on? I don't really see there being that much to explain. July 31st, we were right at this level at four and a quarter on the 10-year. We had a massive growth scare that collapsed yields. The growth scare went away. We got to create a rate cut that's in part supposed to be helping to normalize the level of Fed funds as well as the yield curve. That seems to be what's going on.

Maybe if we fly from here in yield, that's going to tell us a different story besides just, you know, hey, we're still in an economically resilient time, and the Fed can deliberately adjust policy on the short end. Yeah, Mike, where will you be listening? I mean, how do they make this go into a much, you know, a market with a much bigger reaction, even if that's not what they're hoping? Yeah, I mean, I think, you know, if somehow Powell gets very explicit about, you know, a December pause, or maybe we're closer to neutral than we thought we were. I doubt that's going to be the case.

He loves to be very agnostic vocally about, you know, where neutral is, just knowing that we're not there yet. So I'm not sure that there's going to be anything that he really makes waves about. I know that the responses to all of the fiscal policy and Fed governance questions, I mean, there are going to be nowhere that we do want to hear, you know, what that's going to be about. You had a big dollar rally. you know, what he makes of really the path of inflation probably matters most of all. That was, as you guys have been talking about, the tweak in the statement, kind of removing that confidence, that stated confidence that inflation was heading toward target.

But what they know right now is with PCE, 2.5% annual rate or core at 2.7, you know, Fed funds at four and three quarters is the wrong spot. So therefore, we've lowered them, and we probably have room to do more of that. Yeah, I think it's kind of interesting and significant that they, take out, you know, that further progress is being made because inflation's such a big deal for them and for his legacy. Yeah. And that's exactly. They're still on that campaign. As much as they say balance of risks is relatively equal right now, they recognize that they're still not yet at that end point of the fight against inflation that they've been, you know, going at for two and a half

years. Yeah. Did you expect the market to just sort of chill a little bit today? I mean, the most part. Yeah, I mean, look, they could have used this as an excuse for some reason to back off after the, Russell 2000 went up 6% yesterday. Bank stocks, so banks are down 2%. So you're seeing a little bit of a breather taken in the majority of stocks, but really nothing dramatically in the way of a give back. Yeah. All right. Mike Santoli, thanks very much. We appreciate your time. Why don't we go to a quick market check to a sort of level set where we stand right now as we go to the Fed chair?

The Dow is basically flat off 11 points at 43-718. The other market barometers, the NASDAQ, has been higher. And Chairman Powell is entering the room, I take it.