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The Federal Open Market Committee has raised interest rates twice, for a total of 75 basis points, in the current cycle with at least two more 50 basis point increases expected at the next meetings in June and July. The day after the next meeting, Marvin Loh, senior macro strategist at State Street Global Markets, will take a look at the dot plot, the post-meeting statement and offer his thoughts about future policy actions.
Gary Siegel: (00:10)
Hi, and welcome to another Bond Buyer Leaders event. I'm your host Bond Buyer Managing Editor, Gary Siegel. Today we're going to discuss yesterday's Federal Open Market Committee meeting with my guest, Marvin Loh, senior macro strategist at State Street, Global Markets, Marvin, welcome and thank you for joining us.
Marvin Loh: (00:34)
Yeah, thank you for having me. I'm very excited to be here with you.
Gary Siegel: (00:39)
So last month Fed Chair Jerome Powell said a 75 basis point hike was not on the table. All of a sudden we have some bad inflation numbers, some, inflation expectations jumping, and the Fed goes 75. What are your key takeaways from yesterday's statement and the SEP and Chair Powells press conference?
Marvin Loh: (01:07)
Yeah, certainly. I mean, it was a monumental move that they ultimately did, you know, 75 basis points is something that they haven't done since I believe 1994, just to put everything in historical precedent. They also directly contradicted, with the 75 something that they said that they weren't gonna do, that it wasn't on the table, they got a couple of bad data prints, agreed that there are troublesome concerns with inflation and inflation expectations and they pivoted quickly. So I guess we should, to a certain degree feel somewhat comfortable that they're willing to adjust as quickly as they are. You know, there are gonna be communication problems given that they were in blackout and they used a variety of opportunities to kind of signal that they were gonna go 75 using maybe some of your comrades in the press as a way to hint that they were thinking about it.
Marvin Loh: (02:00)
But yeah, I mean to me it highlights just how quickly things are changing and, to a certain degree, we should be comfortable that we've got a central bank that even though they have a blackout here, they were willing to do something that they felt that the data was telling them to do, but it also shows how offside they are. And I think that one of the things that I gathered in terms of how they readjusted the economic projection, the step as you mentioned, Gary, is that they really tried to get a little bit more realistic in the numbers. They lowered the GDP. So GDP is now expected to be below trend. They increased the inflation expectation because it's taking longer to get us to where they want price to be. And, at this point the headline inflation — and remember that the Fed looks at things from a PCE perspective — so there was a little bit more realization in the numbers, but overall, the Fed is still saying that they can construct a soft landing, even though Chair Powell said that it's gonna be hard to do it. And the risk is certainly around a recession. The numbers don't necessarily represent it. I think that they're in between a rock and a hard place, but they're getting closer to the market. They move things fairly significantly and their view on inflation is challenged where one of the bigger changes I think in the policy statement was that, they pretty much signaled that it's gonna take longer to get inflation where they wanted it to be, but they also, at the same time, said that they'll do what it takes. The challenge is when they started to go 75 and said that they weren't gonna go 75, it's really gonna leave the market offsides in terms of a bad data point is gonna make us think that maybe 75s are more likely than Chair Powell led us to believe where he thought that 75s were going to be an outlier kind of a move.
Gary Siegel: (04:21)
Well, I think in some ways, Chair Powell at his press conference decided that he wasn't going to try to give that 50 or 75 basis point view at any time in the future. You know, he said it could be 50, it could be 75 at the next meeting, but it sounds like he was trying to pull back and not make those kind of predictions.
Marvin Loh: (04:44)
Yeah. But he did, you know, and I think that he did himself a disservice quite frankly, I think he just sort of said we'll do what we think is necessary. I don't think that it was required to say that this next meeting was gonna be 50, 75, that in the future 75 is unlikely. When they're trying to send a message of yes, we're more worried about inflation now. and we're going to do what it takes, I think that one of the better takeaways is that we should get comfortable that the Fed understands the problem and they're willing to move things aggressively if theysee that they need to. But at the same time we're gonna be offsides because we don't hear from them every day. If we get data that once again makes us think that, okay, things are getting too hot again from a jobs market, from an inflation perspective, they might need to go harder again, they're kind of like, fighting themselves and giving us that outlook at a time when they say we really don't know how this is gonna evolve, but, trust us, we're gonna be on the switch and doing everything we can to bring inflation back to this 2% target.
Gary Siegel: (05:58)
So the Fed has been much more open. Is that a good thing or a bad thing? Because we see how it kind of backfired now.
Marvin Loh: (06:09)
Yeah. You know, so certainly the communication tool has evolved since the GFC. They've been much more transparent. Using communications is really one of the tools that they have now in addition to the fed funds, rate, in addition to the balance sheet. Trying to guide the market is one of the tools that they've used effectively since the GFC. It seems to work better when they're trying to hold rates down. so, it definitely is like, I guess you have to take the good with the bad because there are advantages to it. But in this kind of environment, when things are changing that quickly, it makes it harder for the market to really get comfortable that what the Fed is telling us in terms of what they think is actually how things are gonna evolve, because Chair Powell talked about needing to be humble around the data and ultimately understanding what the economic models are telling us and what they can tell us. Remember, we're coming out of a pandemic. Marvin Loh: ( 07:13) He was making those comments last year in terms of just how extreme things have gotten. One has to be humble in understanding what they don't with this economic data. And they're trying to portray that they know it via the communication tool. But in fact, we've again seen how quickly things change and what they think they know quickly turns and they have to pivot into another direction. Gary Siegel: ( 07:44) Well, that's an interesting point, Marvin. It seems like things are different this time. Inflation is different. The whole situation is different. Marvin Loh: ( 08:03) I certainly think that's one of the challenges and there's a challenge for all of us because we're all trying to get a sense of how bad inflation is gonna be, how it's gonna affect the market, how it's gonna affect volatility. We had a conversation about retirement and really our savings in terms of what we want to do and how we approach it. There are a lot of things that I think are unusual from an economic modeling perspective. The number of people that are working, that's one of the biggest challenges for the Fed ultimately in that the jobs market is incredibly tight. What we saw in their economic projections this time around was that they do think that the unemployment rate is going to increase, but it's gonna increase slowly from this kind of three and half percent Marvin Loh: ( 08:48) it's gonna end a little bit higher this year, according to their projections, it's gonna end a little bit higher next year. It's gonna get to a little bit over 4% in two years time. That's a wonderfully scripted linear, stable move that kind of reflects an employment market that's just going to evolve nicely. If we learned anything over the course of the last couple years, is that things are really, really fast. And I can't imagine, and that's probably one of the bigger, criticisms I have about what the Fed did yesterday was that they constructed an environment where they certainly felt the need to go more aggressively from a funds perspective. They certainly upgraded their inflation expectations because they ultimately had to, but they still think growth is gonna be positive. You know, maybe it's not in the mandate of the Fed to say that we're gonna push things into a recession, but certainly that's the way the market's going. Marvin Loh: ( 09:46) And they showed this kind of gentle increase in the unemployment rate, which still doesn't seem like it's based in that much reality, given how aggressively they feel they need to tighten things because inflation is so high. That's probably the biggest criticism I have, but, you know, one of the big challenges is the employment market. Where are the few million people that are still out of the workforce? That's really pressing this unemployment rate to remain lower and ultimately the amount of wealth that's still on the sidelines is so lopsided in terms of the income levels that we do know, based on retail sales, we do know based on some of the conversations from retailers that people are pulling back, people are substituting. Marvin Loh: ( 10:33) And in many ways there are parts of the income stream, parts of the income brackets within the country that are probably going into their savings fairly aggressively, but there's still a lot of wealth. So kind of this upside down wealth triangle remains, whereas, the high earners or the people that ultimately are in the top 10%, are probably going to the savings, but they got a lot more savings. And it just makes the job of the Fed that much more challenging as it tries to slow things down. And what winds up happening is that the lowest income brackets feel the most of that slowing initially, Gary Siegel: ( 11:12) There are other issues that have been raised because of COVID there are supply chain issues, so items aren't available, cars are difficult to find . Marvin Loh: ( 11:25) Yeah, yeah, yeah. Certainly we're still dealing with supply chains a lot longer than we thought we were going to be dealing with them. We did see in the last CPI report that new and used car sale prices are starting to rise again. So we had thought that there was a little bit of stability around it, that maybe those supply chains were starting to work their way out and sure enough, we get into the summer months and we don't have enough cars again. And it could be, and I had heard this, I'm not an expert on it, but, but there's apparently a certain type of metal that goes in chips that they can't get, and that's why they can't build cars. Marvin Loh: ( 12:08) So it's that type of stuff. That's certainly a challenge. China's zero COVID policy, the fact that that's still going on and our analyst here at State Street, that focus on Asia think that they will maintain that zero COVID policy until at least the fall. So those supply chains are likely to remain challenged. Now this time around they've approached it differently. They've required a lot of the workers to remain in the factory. So they're isolated in the factory with their coworkers, something that certainly we can't imagine, but the country is trying to make sure that the production floors don't shut down the way they did a couple years ago when COVID first started, but it's still going to be a challenge. And that to a certain degree is contributing to inflation also. Marvin Loh: ( 12:58) So as we were talking about before we went live, it seems to always be something that drives inflation on a monthly basis. We expect things to improve, how much higher can the shuttle price between Boston and New York go? Airfares have been a big driver over the last couple of months. People are paying $400 or $500 for the shuttle now, are they gonna pay $800? You know, there's gonna be a limit to that. So that will ultimately create a stable environment around a product, but then other products come in, people don't fly, so they drive. Car prices go up. We all know about what's going on with gas prices. These days that's sapping, ultimately consumption elsewhere because it's a tax and it's those types of challenges that are certainly different. It seems that all of them still keep coming together at the same time. Gary Siegel: ( 13:53) Monetary policy works with a lag. Now the Fed in the grand scheme of things has just started raising rates. Should they have not expected a change in inflation based on the limited amount of time that it's been since they made the first rate hike? Some people say they were behind when they started, and so I think pretty much the market welcomed a 75 basis point interest rate hike, but are we still not seeing the impact from the first hike and should the Fed maybe have done 50 and waited to do 75 for the next meeting? Marvin Loh: ( 14:43) Yeah. I mean, monetary policy certainly acts with a lag and that lag could be be fairly significant. The Fed only started to hike in March. It feels like a lifetime already, but yeah, that first 25 was in March. Then we had the 50 and the 75, but financial conditions had been tightening since last September. Once we started to build in more rate expectations and the Fed kind of stood on the sidelines, allowing those expectations to go higher, so to a certain degree, we've been, driving to these tighter financial conditions for six to nine months at this point. And we're starting to see the results of that, but one of the first asset classes to get affected was the housing market from an interest rate sensitive perspective, mortgage rates went up from about 3% to close to 5%, from September of last year into March of this year. Within the last couple of months, they're approaching 6%. Marvin Loh: ( 15:47) So, I don't know about you, but, I don't remember a 6% rate at least at least within the last 10 years in terms of buying a house. So, you know, we've seen that housing activity come off fairly significantly. I actually think some of the slow down in the consumer, it might not necessarily be just because of monetary policy. It might just be because of inflation and inflation is sapping that demand, but, you know, certainly we're hearing from the likes of some of the big box retailers, that they have too much inventory. So, that's working already. Te fed does expect things to get much tighter as we go into the fall. So it makes the argument to try to get more of these hikes in now because we're still below neutral, Marvin Loh: ( 16:38) so that by the fall we get a much better sense of just how much of a pullback we're gonna see on the consumption side of things. The real challenge in terms of, if you will, panicking, is that there still were some natural forces that I think the Fed expected to help on the inflation front of things. Some of the supply chains that we talked about, but also just base effects. Last April, May and June, we saw really big increases in prices. And the view was that when we kind of look at it one year ahead, we're not gonna get as big of a jump in a lot of those prices. Last April, May and June it was used car prices as the rental car companies were trying to buy cars. So they were going to the used car market cause the new car market couldn't accommodate. The expectation was that that was not gonna happen this year Marvin Loh: ( 17:33) and we were going to see this natural kind of more stable and ultimately disinflationary environment emerge this spring into early summer. That didn't happen. So I think that that's when they started worrying, and they didn't say transitory because it's not necessarily in vogue, but there was a view ultimately in their projections that there was a transitory aspect that was gonna help them out to a certain degree. It did help out on some things. But what we've seen over the last couple of months is that other things started getting more expensive and ultimately, the war was something that they couldn't predict. The war's impact on not only energy prices, but on food prices and fertilizer, is something that's making its way into the discussion, and ultimately the housing, values still, even though we're not seeing any activity, they remain high. House prices are unaffordable for large swaths of the country. And we haven't seen those prices come down, even though we've seen activity around housing effectively, dry up. Gary Siegel: ( 18:37) And mortgages are going up too. So that adds to the problem of affordability in housing. Marvin Loh: ( 18:45) Yeah. I mean, it is a challenge particularly for younger folks that might be looking for their first house. A colleague of mine has been aggressively looking, and I hear the terrible stories that some of these younger families are trying, that they have to go through. Older folks like us, I guess we benefited from a much more normal market, if you will. But, that takes a while because ultimately, unlike other asset classes, you're not forced to sell if the price is not there, you're gonna wait, you're gonna go from the spring selling season. You'll wait until the fall selling season. If that doesn't work, you'll take it off. Marvin Loh: ( 19:28) Maybe you'll wait until next year. And then if it's not selling, then maybe you start to cut prices. So, you know, we should kind of expect that the shelter component in CPI is going to remain a problem. And, I think the Fed obviously is acutely aware of that, but the lag associated with that, that's monetary policy with a real lag, you know it takes somewhere between 12 and 18 months before these kind of higher interest rates make their way into the decision making process to the point where the broader housing market starts to see prices come down. Gary Siegel: ( 20:07) Well, as of yesterday, before the meeting, the fed funds futures markets were pricing in about 280 basis points of further policy tightening this year. So now they're still expecting 205. Whereas the Fed is expecting to raise rates about 175 basis points. That's still quite a bit of tightening to go. Marvin Loh: ( 20:31) Yeah, yeah. You know, it certainly is. I tried to get a note out to the folks that we work with about the results of the FOMC and the way I kind of phrased that was at least we're playing in the same ballpark now, however, they were so far off earlier that it was almost comical and, the market certainly didn't believe what the Fed was saying in terms of the dots, at least. I mean, you know, the market still thinks that the Fed needs to tighten more than what they're saying. It is in an environment of incredible uncertainty where we are seeing kind of slow downs occur already. So the Fed might be right, Marvin Loh: ( 21:14) the market might be right. One of the challenges is that in terms of communications and the way they approach the 75 versus 50 basis points, it's going to give the market a lot more comfort and flexibility in saying the Fed needs to go higher, regardless of what they're saying, because they're just gonna, if they need todo 75 or a hundred, and they say that they're never gonna do 75 or a hundred, again, they could change their mind. So that's where the communication challenge is out there. But in terms of where fed funds has the end of the year versus where the Fed has the end of the year, it's one hike in an environment where we're hiking so aggressively. I'd say that things are pretty close. Marvin Loh: ( 22:01) It could go either way, but unlike what we saw after the March meeting, when the Fed gave its last set of projections, at least the market is close. The market was so far ahead of the Fed and the market has been so far ahead of the Fed at this point for the last nine months that again, you know, it was almost comical how aggressively the market pushed expectations and the Fed just stood by, I believe. So, we'll see if they push back. I don't think they're gonna be in the situation to push back yet because they just don't know. Everything is so fluid, and ultimately prices are still way too high. Gary Siegel: ( 22:42) Marvin, I have to ask you, is this a credibility issue for the Fed? Is the fact that they ruled out 75 and now they're ruling out a hundred and saying 75, isn't going to be a normal occurrence, if they go 75 or have to go 75 at the next meeting, does the market stop believing them? Marvin Loh: ( 23:09) Trade credibility is one of these concepts which certainly they wanna be taken seriously by the market. And, I think what's more important from a credibility perspective at this point in the cycle is the view that they're gonna do what it takes. So I think from that perspective, the 75 gave them a little bit more gravitas, right. You know, they showed the ability to pivot, but if they're trying to control the curve because maybe volatility is getting a little bit too intense, you know, that Fed put, if you will I don't think that they're as concerned with the Fed put right now. Certainly they've stood by the sidelines as the S&P is down 20%. And the NASDAQ is down over 30% as you know, any of us that have 401ks know, Marvin Loh: ( 23:59) but if they wanna pull that back, and the market is getting a little bit too far ahead of itself, that's where the credibility issues are going to come into play. So I do think later on in the cycle, it might cause them a bit of a problem? I don't think it's gonna cause them that much of a problem now, just because there's so much uncertainty, anyway, that if we get a data point or we get a couple of data points that make it seem as if things are either slowing down very significantly, including prices or the other way, the markets have been quite fluid, in its comfort level to kind of move things around. And, I think that that's going to continue until we get a better idea of just what we're looking at. Gary Siegel: ( 24:50) Powell has said that they wanna see a series of data points. One data point is not going to be sufficient. Where do you see inflation going? When is it gonna cool down? When is it going to be, I mean, last month, everyone thought that it started to show flattening and then this month's numbers were up again. Marvin Loh: ( 25:14) Yeah, yeah. Certainly all of us have been trying to call peak inflation now for what feels like the last year. I think it's important to break down the inflation components, at least from a monetary policy perspective, it's not necessarily important from a consumer perspective because they're looking at the headline, they have to buy food, they have to put gas in, and they're looking at 8% and it's ultimately terrible. But in terms of what monetary policy can influence it really is around consumption baskets. And, that's why we have the core and we have the headline reading because it's energy because the war is still going on, because food prices remain high and ultimately because shelter costs are starting to, you know, it's part of the process in terms of monetary policy working with the light, but we still got an upswing associated with that. Marvin Loh: ( 26:12) That's going to remain a challenge, I think until the fall. You know, whether or not we've seen a peak, you know, I don't know. I'm not necessarily that good to say that 8.6 was the highest, and now we're gonna be at 8.2, that's still too high. That's not the type of improvement that Chair Powell was talking about. We did not get the base effect improvements that we expected this April, May, June relative to what we saw the prior year. That trend seems to be something that may continue. We might get a little bit of relief, but it's not the type of sustainable relief that Chair Powell is talking about. Again, base effects and kind of how inflation is calculated while we had really high prices in the spring, early summer, last year, we had more normal, lower prices in the summer. Marvin Loh: ( 27:05) So July, August, September, we actually had fairly low prices. And we all probably wanna forget some of the flareups with COVID, but I think it was because we did have some flareups in COVID and that kind of pulled demand back. But then those prices, again, accelerated in the fall/winter of last year. So, I guess I'm going through that because it's gonna make big improvements from a year-over-year perspective, much harder to obtain over the summer over the next few summer months. June is still a hot month. We still might see the headline inflation number come down in June, just because, 2021's June number was so high, but then that just natural cadence part of thing, given how monetary policy acts with a lag is gonna be harder in the July, August, September months. Marvin Loh: ( 27:57) Once we come to higher prices in the fall of this year relative to the fall of last year, where prices were hot again, we're gonna then, we should see hopefully sustainable gains. But I don't think the Fed's gonna be able to say they're comfortable until then, just because of kind of the cadence associated with how these numbers are going to move around now, what's important is again, looking at the core part of things. So, core is made up of a lot of the consumption baskets. So, people traveling, airline fares, that's in that number, car prices are in that number and ultimately shelter prices are in that number. It did not increase as much as the headline because we stripped out the more volatile energy component from it, but it's still too high. If we do see maybe some stability, particularly as we go through the summer, because consumer demand, at least, on the fringe looks like it's coming back, maybe the Fed gets a little bit more comfortable earlier. But I would, I would think that we're gonna still be talking about prices being too high and from a Fed's concern perspective, the view that the consumer thinks that these higher prices are going to continue. That's kinda that inflation expectation discussion until at least the fall. Gary Siegel: ( 29:21) Well, of course the big picture Marvin is whether we hit recession and whether theres stagflation. What are your opinions about stagflation and recession? What are the chances we hit that in the next year or two? Marvin Loh: ( 29:39) Yeah. So, I've been of a view that it's gonna be hard for the Fed to avoid a recession. To me it's shades of recession. We very well could get a technical recession quite frankly, which, which I don't think anyone's gonna view that as the type of recession that we're worried about, because we did have a negative print in the first quarter and some of the tools that are out there in terms of forecasting, the second quarter are at about zero. So, you know, it's a big economy. If it's showing zero, it very well could be negative. You know, technical recession, two negative quarters in a row, it might be there, but, the Fed's gonna keep tightening. You know, the market expects the Fed to keep tightening, prices require that the Fed keeps tightening, Marvin Loh: ( 30:23) and so long as those prices, which are unusual, based on a lot of the other things that we talked about, if they remain high, they're gonna need to tighten not only as we get into the end of this year, but into next year. So I think a recession is something that the market is starting to take more seriously. The Fed's projections prior to what they gave us yesterday showed it was really Goldilocks or almost likean ostrich with the head in the sand. You know they were gonna tighten aggressively, but we were still gonna have zero unemployment for the most part at three and a half percent and growth that was gonna be two to 3%. They changed that. Growth is now only gonna be in their mind 1.7%. Marvin Loh: ( 31:09) The unemployment rate is gonna increase, but that's still to a certain degree a soft landing associated with that. Chair Powell said that it's gonna be hard. There, there is a path to a soft landing, but avoiding a recession is getting increasingly harder is kind of one of the takeaways I got from his press conference yesterday. So I do think that a recession, to a certain degree is somewhat unavoidable. It's just a matter of how bad it is, now. Stagflation is already something that we're probably in. It's an environment where you have high inflation, slow growth. We're now predicting below-trend growth and we're predicting inflation. I'm kind looking at a little cheat sheet I have here from the Fed's perspective of 5.2% this year and 2.6% next year. So that's still above trend. Marvin Loh: ( 31:59) So we've got kind of the, the components of stagflation. The challenge that I have with the concept of stagflation is that when you talk about the biggest concerns with stagflation it's around it being permanent, where you get high prices and you get low growth the way we saw in the seventies and eighties. That I don't see. I think that we're gonna deal with kind of this more stubborn inflation environment longer than we had expected, longer than we had hoped, and growth is gonna need to slow around that, but eventually it's gonna come back and balance. I do think that over the intermediate term, kind of the monetary policy transmission process of slowing growth to the point where prices are gonna come down is still intact. Gary Siegel: ( 32:49) It's kind of strange how the Fed spent a decade trying to get inflation up to 2%, and now it's just surpassed that and now they're trying to get it down. And I think that's gonna be just as difficult as trying to deal with that as it was trying to get it up to 2%, Marvin Loh: ( 33:09) You know what, it's really funny how a lot of the economic theory over the last 10 years it's been turned upside down, if you will. I remember, and I probably had a conversation with you in the past where, deflation was the bigger concern, like getting prices higher had become an obsession with the central banks. It certainly has driven policy with the Bank of Japan for the last several decades. And it still is, to a certain degree driving how the Bank of Japan is approaching things, you know? Case studies out of Europe, case studies out of Japan showed how hard it was to get prices higher. And, it was okay to let inflation run hot because we can control it. I don't think they came up with these circumstances, and again, there's a series of events that are unusual here, supply chains, missing workers, if you will, immigration policy somewhat being turned upside down, all of that is new over the last couple of years versus the 10 to 15 years before. But, I do think that a lot of the central bankers got too comfortable with their thought around being able to control inflation, and it's much more persistent and persnickety than they had thought it was gonna be for sure. Gary Siegel: ( 34:34) A lot has come up in the past three years that no one would've expected. I mean, no one could've predicted COVID, then there's the war and there are other problems. Is there anything you see that will add to this in the coming months or is it going to be something unpredictable? Marvin Loh: ( 34:56) You know what, I do worry about the employment market and whether or not structurally it's different and it's not gonna normalize. Again, when we kind of think about the arc that we've gone through over the last couple of years, first, it was people were on the sidelines because the employment benefits kind of made iteasy for people to remain on the sidelines, but once those employment benefits ended, they would come back into the jobs force. That didn't happen. We are seeing some normalization now, that's why we're able to add three to 400,000, new jobs every month, but not have the unemployment rate go significantly lower because more people are coming in. So you see a little normalization associated with that. But there's still clearly much less workers now in the market than what we had before the pandemic. Marvin Loh: ( 35:49) Whether it's retirees, whether it's immigration policy, or whether not, it's just a change in lifestyle, that's a risk. So it's certainly something to keep in mind, because we do need to see, in my mind that unemployment rate go higher. I think higher than what the Fed is saying, which is 4.1% in 2024, to really get the inflation rate to a point where we've got more priceability because remember, we are a services driven economy. So, the wage component to that is fairly significant. Another risk, I do think is this kind of zero COVID policy that we see in, in China. You know, they are our production plants, if you will. And, if that continues much longer, both from what China contributes to GDP globally, as well as what it does to goods that a lot of the developed markets rely on. Marvin Loh: ( 36:52) That's a wildcard. So certainly,watch that. And I guess more broadly, I don't recall a period where we've had everyone tightening financial conditions dealing with inflation the way we're seeing now. So the Fed and the conversation we're having here in the U.S. is by no means unique. We saw the Swiss National Bank, which hadn't raised rates since 2015 go 50 basis points today. We see the Bank of England going. We see the ECB, which, you know, at one point I had thought I was never gonna see a positive depo rate coming out of Europe, because the ECB would never increase rates. They're gonna increase rates and given what the SNB just did, we're likely to see 50 from the ECB at some point soon. So you know, all of that happening at the same time and hoping that the economy and the machine associated with it doesn't break down, I think is a risk. So yeah, I'm watching those, but certainly inflation is front and center in terms of what everyone's worried about. Gary Siegel: ( 37:55) I'm going to take a question from the audience. If you look at current Fed expectations, the market is pricing in significant rate hikes, followed by rate cuts pretty soon thereafter. What do you make of this? Do you think the market has it right? That the Fed only needs to reach about 4% for a short while and then can start cutting rates. What if inflation persists and they need to be in restrictive territory longer? Marvin Loh: ( 38:23) Yeah, that's the hard landing scenario at this point. I mean, there's still a certain degree of economic belief from a transmission perspective, if you will, the Fed's going to tighten to the point where we get a recession, prices are gonna ultimately start to stabilize around that recession. And then the Fed, by its own admission is going into restrictive territory so it's going to allow them to cut. That wouldn't be a terrible outcome and it would be one where if we got a better sense that that is actually the way it's going to evolve, we might not need to, we could start getting to the point where we could redevelop our portfolios and not be as concerned with the volatility. Marvin Loh: ( 39:15) The flip side of that, is whatyour audience member said is that if growth slows, but inflation remains hot and they can't take their foot off of the accelerator because inflation remains hot, that's the hard landing perspective. And I think that, from a volatility perspective, what we're doing is really, on certain days believing that it's going to be more of a mild recession, nd other days thinking that, okay, they're gonna have to tighten so much that it's gonna drive a much bigger, recession. So that is probably one of the bigger challenges in terms of how to approach, the investment clarity Gary Siegel: ( 40:07) Question, This person says he thinks the Fed is late to the party raising interest rate, will they need to continue three quarter point rate hikes? Marvin Loh: ( 40:22) You know what, I do pencil in another 75 basis points for the July meeting. At this point, I think that, inflation, you know, kind of based on some of the tools that we have, which show us a little bit more of a real time reading of inflation, continues to be hot going into the current month. So there's gonna be no relief yet at a time when we should expect some relief again, because of the base effects that we saw in June of last year. So I do think 75 is in the cards probably from the Fed's perspective, they would like to slow down after that, because again, policy with the lag putting in 150 over the summer, having put in 75 earlier when that gets us to, two, two and a quarter percent or so, come to fall and seeing the impact that it has on a consumer, which is already starting to pull back on paper, they probably wanna get back to a 25 basis point cadence as we go near the end, get to the end of the year, but until we get to neutral and until we start to see, again, some of that more sustainable inflation gain in terms of prices going down and ultimately being a bit more stable, Marvin Loh: ( 41:41) I don't think that they are, I don't think they have the luxury of not considering 75 for at least the July meeting. And I would think that potentially 50 is in the cards for the September meeting. So we're still gonna have kind an environment where you're gonna get some of outsized moves as they try to get closer to neutral, because the inflation situation doesn't allow them to really take a breather yet. Gary Siegel: ( 42:10) We know that neutral is an estimate. When you say neutral, what number are you talking about? Marvin Loh: ( 42:18) Yeah. You know what I mean, I'm still using somewhere between probably two and a half and 3%. The Fed defines neutral at this point from a median perspective at two and a half percent. Most of the estimates around it have been between two and 3%. So, you know, I'll take the two and a half to three as, as kind of a guess in there. So kind of based on that, you know, we're restrictive by the end of this year, three and three eights. We get more restrictive next year, you know, potentially a hundred basis points over with a 3.8% expectation, and then we'll see if things have changed significantly enough that that neutral rate is inaccurate. At this point, there's, nothing that I see that makes me think that, the way the economy looked like before the pandemic isn't ultimately where we get to if the jobs market continues to improve a bit in terms of the number of people in the workforce, if wages continue to trend the way they have been, which is much more stable. Marvin Loh: ( 43:27) Over the last couple of months, even though we've added a lot of jobs, and kind of the aging of the population and, the technology aspects of prices is probably gonna reassert themselves. It's probably something that's taking longer than anyone expected. So this might very well be a 24 number, but kind that neutral rate is over a longer term anyway, Gary Siegel: ( 43:50) We're just about out of time. So the last question is gonna be, where do you see the terminal rate? Marvin Loh: ( 43:58) That was fast. Marvin Loh: ( 44:00) So for me, I've got about, I think I got, I have about a three and a half to three and three quarters as theterminal rate. So I'm hoping that as we get into the fall and the beginning of next year, that kind of natural cadence around prices and growth is going to at least provide a little bit more clarity. It's a hundred basis points more than neutral, so you're going to slow the economy fairly significantly. I still believe that ultimately you get a level where activity slows enough that pricing can come down, and once prices start to come down in the U.S because of a recession, potentially, it's going to influence other economies. Also, that's just the place that the U.S. has kind of in terms of its economic power, if you will. And then the way we see demand outstripping supply around the world, we're gonna see that turn once it starts to turn here globally. So, you know, I think again, it works in a way where there's a multiplier effect because you know, when the U.S. catches a cold, the rest of the world catches the flu, if you will. Gary Siegel: ( 45:17) Well, I want to thank you. Again, My guest was Marvin Loh, senior macro strategist at State Street Global Markets. And I'd like to thank the audience for tuning in this morning. Have a good day, everyone. Marvin Loh: ( 45:30) Thank you.
