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00:00The impact and implications of what has come out from the Fed yesterday.
00:05Robert Sorkin, Senior Global Economist at Citi Research with us this morning.
00:09We're also speaking with Kenneth Polkari, Chief Market Strategist at SlateStone.
00:13Welcome to both of you and absolutely delighted to have you on this very important day.
00:19Robert, let me start with your take.
00:22Were you pleasantly surprised with the 50 basis points?
00:25And does it matter that the Fed chief says don't expect this to be the new normal
00:30or the rate of cuts that we will see going further?
00:35Great questions and thanks so much for having me.
00:38Yeah, this was a very close decision for me going into the meeting.
00:44I was torn between whether they would do 25 or 50.
00:49And I think what we heard from Powell is really this was kind of what sounded like a risk management move,
00:58that they feel that they made enough progress on inflation and they feel the economy is in a solid place
01:05and they want to do something to ensure that the economy stays in a solid place
01:10and that they will continue to get what they feel is a soft landing.
01:15So, you know, that was, I think, the messaging that we heard from Powell,
01:19which I think was very good messaging because my fear was that if they went 50,
01:25it could signal that they know something that economists and markets don't,
01:30that they're more concerned about the economy than maybe justified by the recent data.
01:36But instead, they took the path saying that they still think they're soft landing.
01:39You see that in their forecast.
01:42And this is really to kind of get the ball rolling in a significant way, but may not be needed beyond this meeting.
01:49It will depend on how the data evolve.
01:51So they start off with a 50.
01:53But right now, even with a little bit more rise in the employment rate, they're saying that they'll go 25 after these meetings.
01:59So I think Chair Powell did a very good job of explaining the logic
02:03and overall was pleasantly surprised by the move in the meeting.
02:07OK. Kenneth, I don't think agrees with that, maybe because from what I heard or saw his response.
02:14Kenneth, you think that this was a 50 basis points or too much?
02:21I think it's a crisis move. Look, I was under the impression we were going to get 325 basis point cuts in September,
02:27November and December, which I thought was perfectly OK.
02:30Going in two weeks ago, going into the meeting, I think that was really the sense on the street.
02:35That was going to be 25. And then you could start to see it.
02:38They started getting pressure from elected officials.
02:40I think they got pressure from the White House.
02:42And then they started to they were in a quiet period.
02:45So you couldn't hear from anybody at the Fed. So how do they do it?
02:48They kind of leaked the story to test the market at The Wall Street Journal.
02:52You know, Nick, Nick Timrose wrote an article on Thursday questioning 25 over 50.
02:57And was it really going to make a difference?
02:59And then on Monday, you had the big banks coming out and saying it didn't make a difference.
03:02It was irrelevant whether the move was 25 or 50.
03:05And then on Tuesday morning, you had The Wall Street Journal come out with another article basically demanding a 50 basis point rate cut.
03:12And what did the market do? The market didn't get nervous. The market didn't sell off.
03:16And so I think that Jay Powell came out today.
03:19He told us the economy is strong. Inflation is coming down. The labor market is strong.
03:23But we need to make a crisis type of rate cut. It doesn't make sense.
03:27There's a disconnect there. And so it is what it is.
03:30They did it. It's fine. We saw how the market reacted at first at rally.
03:34Then it sold off. I know futures are looking higher right now.
03:37But I think there's going to be a little bit more digestion of his conversation, of his speech.
03:42And then I think, you know, we'll see we'll see stocks back off a little bit going into what is now a chaotic and confusing election that is just six weeks away.
03:52Which is the other thing the Fed for the Fed to make such a dramatic move six weeks ahead of the election really brings into question.
04:01Are they pandering to to the Democratic Party? Right. Because that's clearly what it looks like.
04:07I'm just going to take on from Kenneth's point. It's Amina joining in the last.
04:12Robert, that question is for you. In the last few decades, the Fed has done a 50 bps rate cut during crisis, during the COVID pandemic and during the financial crisis.
04:24Do you feel like this is just simply good politics?
04:27Because I think politics at this stage is going to be far more important in terms of the economy than the Fed action.
04:36Yeah, and it's a great point looking at history.
04:39And as you said, jumbo moves are typically thought of in extreme scenarios, in crises, as you noted, when they cut by jumbo amounts.
04:52Or if you look early in the cycle where they felt they were behind the curve and were worried about inflation risk and started hiking by jumbo amounts.
05:00Clearly, this is an atypical move to start off a cutting cycle by this size in a period where the economy is holding up relatively well.
05:12You know, we have a low jobless claim, so we're not seeing layoff activity.
05:16The level of the unemployment rate is still fairly low and the consumer is still spending and not really showing signs of rolling over.
05:24So I do think that the fundamentals would suggest that this type of move would typically in the past not have been explored.
05:35But I think it is not politics that is driving this decision.
05:39I really think from looking at Powell's communication today that they felt that they should have cut in July is my read of their of the tone of their comments.
05:51And now that they've seen so much progress on inflation and the economy holding up well, that they decided to play a bit of catch up.
05:58And that's why they have the large move today.
06:00So I don't think at all it's politics driving it.
06:02I think it's the fundamentals.
06:04And they feel that they probably should have moved in July.
06:07Powell even hinted at that a little bit when asked if he would have cut in July had they seen the labor market data at that point.
06:15So I do think this is somewhat of a catch up move and somewhat of a risk management move and rather than a political move, which I don't think it is.
06:25All right, Robert, I just want to come to a bit of detail of some of the commentary from the Fed and the implications thereof,
06:34where the focus now seems to be moving to the labor market data versus inflation.
06:40Is that a fair assessment to make?
06:43The unemployment forecast not looking as good as the inflation forecast.
06:47That question for Robert.
06:49What does that mean in terms of the kind of action and focus we will see from the Fed?
06:56Yeah, absolutely. And as you said, it's really about the labor market now.
07:01I don't want to say they don't care about inflation at all.
07:04But, you know, you had heard from Powell's Jackson Hole speech.
07:07It's really not as much about inflation and it's more about downside risk to the labor market.
07:12And Powell even cited himself today talking, referencing his Jackson Hole speech and really talked about how the labor market is squarely in focus.
07:21So I do think the balance of the mandate has shifted away from focusing on those inflation risks to really being concerned about downside risk to the labor market.
07:31And I think there it's very helpful to look at their forecast in the SEP, the summary of economic projections.
07:38They're projecting a 4.4 percent unemployment rate by the end of this year.
07:42That's about 20 basis points higher than it is now.
07:46And with that, they're projecting two more 25 basis point cuts.
07:49So that gives a sense of how they're thinking about labor market conditions.
07:53If the unemployment rate were to move higher than that, you're likely to get more jumbo moves in coming meetings.
07:59So I think they gave a very good sense of how they're thinking about the labor market and emphasize that that's really their focus at the moment in terms of guiding policy, at least over the next few meetings.
08:10Kenneth, a quick question for you.
08:13We've got that 50 basis point rate cut.
08:15I mean, I think the debate is bad economy or good politics.
08:18But that aside, historically, such an aggressive rate cut usually leads to an asset bubble.
08:26I know this is good for risk on trade.
08:28But do you fear that too much too soon could actually spoil the party?
08:32And we saw that when we saw the dollar carry trade unwind.
08:36It didn't go down too well, if you remember.
08:38How do you feel this is going to play out?
08:41So I'm a little.
08:43Listen, I understand and I agree with most of what you just said.
08:47But I just think that this move went on a crisis situation.
08:51The last time they made those jumbo moves was in crisis situations.
08:55Jay Powell made it very clear himself today.
08:57We're not in a crisis situation.
08:59So it's confusing to me that they cut rates as if we were.
09:03Now, that being said, they did what they did.
09:05It's fine.
09:06Now it is what it is.
09:07We have to live with it.
09:08And the next couple of rate cuts should probably be absolutely no bigger than 25 if we get even two.
09:14Maybe there's only one more this year and maybe not.
09:17We'll see.
09:18But one way or the other, I do think that initially people are going to digest this.
09:22They're going to listen to what he said.
09:23They're going to pull apart his speech tomorrow.
09:25Everyone's going to be looking at it.
09:27I actually think that the market probably has a little bit more downside as it kind of readjusts.
09:32There's going to be some concern over is he really sure that the economy is OK?
09:38Or is he cutting aggressively because he's a little bit worried?
09:42Because it could go both ways.
09:43He had a fine line to walk.
09:45I think he did a great job today trying to manage that.
09:48But I also think that there's that underlying worry that maybe the economy is weaker than he's letting on.
09:56And we're going to start to see that.
09:58And then that's what's going to turn into a bigger negative situation.
10:02But look, here's the other thing.
10:04If it doesn't and the economy stays fine, this aggressive rate cut has the ability now to stir up demand and reignite inflation,
10:12which is exactly not what we want to happen, what he wants to happen.
10:16Because if that happens, then they're going to quickly turn it to raising rates again.
10:21And that will be very ill-received by the market.
10:24Wow. Raising rates.
10:26That move could be debatable, but be that as it may, let's work with that assumption that maybe that could happen,
10:32because these days we don't quite know what will happen.
10:34Robert, my question to you is, from an emerging market perspective,
10:38now that we know that the 50 basis points is done, another 50, whether 25, 25 or 50 or what have you,
10:44is on the anvil in the next two or three meetings.
10:47What happens to flows for emerging markets?
10:51Because that's what the Indian viewer would want to hear right now.
10:54Are there flows coming the emerging market way because of this move done by the Fed?
11:00Yeah, it's another great question.
11:04And I think what we've seen in this cycle is emerging markets in many cases have found less scope to cut rates
11:14because the Fed has been higher for longer.
11:17And there have been fears about what that would do to to flows in the economy's exchange rate.
11:24You know, if you go back to earlier this year, it looked like the Fed was going to cut five or six times.
11:30And instead, those rate cuts got delayed and we only just got the first cut in September.
11:36And over that period, many emerging markets that started cutting early had to or ended up cutting less than expected
11:45or in some cases pausing their rate cutting cycles.
11:50And I think now that the Fed has cut rates, it's going to ease some of those fears and some of those pressures.
11:56And what you're going to see is emerging market rate cutting cycles broadening and picking up steam again.
12:04And so we're looking for many of these EMS to see scope to start cutting rates again without having to worry about those
12:11those factors with the exchange rate and flows.
12:13And that includes EMS in Asia where rate cuts have not really gotten started.
12:19But I think now that the Fed has started to move, that will open up scope for those economies to ease as well.
12:26So I think the Fed's move for EM means that some of those rate cutting cycles can start up again
12:33and new rate cutting cycles can start as well.
12:38Just a quick taking a cue from Robert and talking about what this means for India and simplifying this,
12:45because we've talked about, I mean, the whole world is talking about the Fed rate cut.
12:49And I guess the man of the hour, the man of the last few weeks has been the Fed chief.
12:54Very simply put, a Fed rate cut, what does it mean for India?
12:58First up, the school knowledge or theory suggests that this increases foreign inflow into emerging markets.
13:05The reason being investors that are seeking relatively higher dollar returns would look at markets outside their home country.
13:12So countries like India stand to gain.
13:15Apart from that, it does impact the dollar-rupee pair.
13:18Now, why do we say this, right? An influx of foreign inflow into India will affect the rupee.
13:23This is because if a foreigner needs to come into India and invest in our equity and debt markets,
13:28what they need to do is sell the dollar and buy the local currency.
13:32This, of course, in a broader business sense means imports for Indian companies or Indians gets cheaper,
13:39but exports gets less competitive, which also means that IT sector, case in point,
13:45could stand to get impacted because buying from Indian IT companies may not be as cheap as it was when you had a stronger dollar.
13:53In terms of bond market, lower interest rates typically lead to a rally in bond markets.
13:59Indian bonds also may become more attractive as yields appear far more favorable.
14:04Apart from that, the big question is will or will not the RBI move?
14:09Again, historically we've seen that months after the Federal Reserve has moved with their rate decision, the RBI usually follows suit.
14:17The reason that's done is to maintain the rate differential between the dollar and the rupee.
14:22But let's also remember that the current RBI governor has time and again indicated that they will not move on the rate cycle
14:30unless there's a need locally, and they would not be doing it just because the Fed has done this.
14:36Kenneth, so this question comes to you next.
14:39There's a whole debate about whether or not in the near term money will start flowing into countries like India.
14:47The only argument I have here is that while we've been anticipating this,
14:53there have been some markets that have seen aggressive foreign inflows coming into the equity and the debt market.
14:59We saw that on the Emerging Market Index too.
15:01But I think the argument for India has been that it's an expensive market.
15:05Do you feel like valuations, will play spoiled sport, and foreign investment may not very quickly find its way into India?
15:13You know what? I do think that it may not find its way immediately, right?
15:19There's going to be a recalibration based on what the Fed has just done, what the Fed's going to do,
15:24how that's going to impact the dollar, and how it's going to impact the EM markets, right?
15:29The emerging markets, whether it's India, whether it's the other EM countries, and what they do with their rates.
15:34And so I think we're going to have to watch and see how that happens.
15:37I don't think it's going to happen quickly or immediately.
15:39And to your point, a weaker dollar is going to make your products more expensive.
15:44And so therefore, if they don't bring that in line, then that differential is going to stick way out,
15:50is going to be probably a hindrance or a headwind to new money coming in.
15:55But if India and the other EM nations come down, they start to keep the differential the same.
16:01And so therefore, there doesn't end up being a big difference.
16:05Then I think, yes, there's more of a possibility that opportunity and money will come into places like India,
16:12which are very, very hot and actually very exciting at the moment in terms of opportunity
16:17and what's going on there in your markets, in your sectors.
16:23Ravi, short of time, but very quickly, Robert, quick question.
16:28What does this mean for gold, base metals and crude, up or down, positive, negative in the near to medium term?
16:36Yeah, absolutely. On the gold and metal side,
16:43we saw gold rallying and the potential for a larger move heading into this.
16:50And then it really depends, I think, on why the Fed is cutting rates so rapidly in this environment.
17:00Is it the soft landing scenario, as the Fed has been saying and I still think is likely?
17:07Or is the Fed cutting because we're in a recessionary environment and they're going to have to cut rates very rapidly?
17:15And that can lead to more flows into into something like gold.
17:19So I think, again, for that, it really depends on what the driving factors are for energy.
17:26You know, we're looking our commodities team is bearish oil and thinks that oil is going to continue to fall.
17:34And Brent's going to fall to something like sixty dollars a barrel over the next several quarters.
17:39And that's really in part based on slowing global growth, particularly in developed markets.
17:46So you can't group all commodities into one bucket based on this move.
17:50It depends on what happens after this, why the Fed is doing the move and what happens with with the rest of the world.
17:57But I think base case on the energy side is oil is likely to fall from here.
18:03And gold, again, other metals depends on the U.S. outlook.
18:09Gentlemen, out of time completely, but thank you so much for being with us on the show today and giving us your thoughts.
18:15Really, really appreciate your time.
18:18That's the global view on what the Fed could do and the resultant impact thereof.
18:22Now.