Show Transcript
As the U.S. Federal Reserve prepares to meet, policy makers are widely expected to announce a cut in rates for the first time since its aggressive tightening cycle began. Gennadiy Goldberg, Head of U.S. Rates Strategy at TD Securities, explains why the Fed is likely to avoid any large moves as the economy shows signs of weakness.
Print Transcript
* It's probably one of the most highly anticipated meetings in recent memory. US Federal Reserve policymakers will be gathering next week, where they are widely expected to lower interest rates. The question is, by how much?
* The overnight rate has held at 5 and 1/2% for the past year, after an aggressive hiking cycle was brought in to tackle accelerating inflation. Gennadiy Goldberg, head of US Rate Strategy at TD Securities, joins us now from New York. And it's great to have you with us.
* Thanks for having me.
* Let's start with what you think is going to happen. I think we've gone beyond a "will they or won't they" conversation. It's more into, how much? So what are you expecting right now?
* Yeah, no, that's a great point. It really is a "how much" type of conversation. And right now, we're expecting a 25 basis point rate cut to start. There's still quite a bit of uncertainty. The market is still pricing in more than 25 basis points at the start.
* They've got kind of in the low-30s penciled in, which works out roughly to about a 30% chance of a 50 basis point rate cut. It's hard for them to start with a 50 right away if nothing is wrong, per se. I think they're going to take this very moderately, very carefully.
* They do see the labor market starting to slow. They see inflation, very importantly, coming back under control. So for them, this is sort of a mission accomplished moment. And for them, the big question is, how do we land this economy without also re-accelerating inflation, but also trying to deliver that soft landing that we've been promising for quite some time?
* I want to bring up the chart, if I could, Gennadiy, that you gave to us, where it shows what the market is pricing out all the way until September 2025. It's interesting because, again, this is one meeting that we're talking about coming up, but you can see almost 100 basis points being projected to be cut up until December and then another 100, almost, up until the following fall. Do you think those are all going to come to pass?
* It's not impossible. Certainly, we expect 25's for the next several meetings, all the way through October of next year, at which point we expect the rate to get down to 3%. It is possible, if the labor market continues to gradually slow down, the Fed could become a little bit more nervous. Remember, they've already gotten inflation under control. They refuse to admit it.
* They don't want to have a "mission accomplished" moment a la George Bush in the early-2000s. What they really want to do here is to bring the economy into kind of a more supportive environment. They want to make sure not to over-tighten policy here.
* I think some of these could come to pass. I think a very significant number could come to pass. And what I'll be really watching next week is how much the Fed is penciling in in terms of the actual rate cuts themselves. We're going to get their summary of economic projections. Last time around, they weren't penciling that many rate cuts this year, not that many next year-- I suspect you're going to have quite a bit of disagreement among the FOMC board over the course of the next week.
* It will be interesting to see that disagreement, because I think we're even seeing it with a lot of macro strategists, I know, out there right now who some of them are saying, look to what's happening with trade in the longer term. This is all inflationary in the longer term. So I guess that will be part of the debate, just understanding what the longer term outlook is for inflation and the impact if you cut too early, too soon.
* Absolutely. But it's really interesting-- over the last month and a half or so, the Fed's kind of focus has really shifted back towards the labor market. We were talking about nothing but inflation over the last 18 months. Really, in the last couple of months, it started to be more and more about the labor market.
* The reason for that is the labor market is starting to show some signs of gradually slowing down. And we just don't know where kind of that break-even pace of labor market growth is. Traditional wisdom told us it was only about 100k a month to keep that unemployment rate steady.
* Over the course of the last year, the unemployment rate's risen from 3.4% to as high as 4.3%, and now back to 4.2%. It's not moving in the right direction, and it's starting to get the Fed a little bit nervous at this point.
* Yeah. Let's bring in the chart that you passed on to us showing that point. We've got payroll growth rapidly cooling to-- you talk about break-even levels. I think you even talked about going from cooling to icing over.
* Yeah. And the bigger question is, what is that pace of break-evens? And we've had quite a bit of immigration in the US. It's really hard to tell exactly what that pace is. A lot of different agencies use a lot of different estimates.
* There's a paper done by Brookings about six or so months ago that put that break-even pace not at a 100k, like it was traditionally, but something between 160k to 230k per month. Now, what you see is, over the last three months, we've been moving well below that. Over the last six months, we've started to move below that as well.
* And the data over the last couple of months has contained pretty significant downward revisions to the prior month. So that pace has actually really started to decline. And that's something that I think has been worrying the Fed. We're sort of moving in the wrong direction.
* They've been using the word "stabilizing," that the labor market is stabilizing, it's normalizing. But it really isn't normalizing anymore. Now, it's just a function of possible just cooling. And that's something that they're pretty keen to avoid.
* I want to bring up the next chart that you brought in, also quite interesting, and this is the ratio of job openings to job-seekers. Tell me a bit about what we're looking at here.
* Sure. So this is something that comes from the JOLTS report. So this is something I can tell you wasn't really paid much attention in the olden days before COVID. Now, we're paying a lot of attention to it just to show that the number of openings out there has really come down.
* Now, this is important-- what it tells us is there's not really a lot of firing that's happened. A lot of that normalization, as the Fed has been calling it, in policy has happened through a decrease in openings. So no one's really firing people, but there's a lot of decline in hiring that's going on.
* And everyone's kind of hanging on to workers and making sure that they don't actually over-fire but not really accelerating the hiring pace. And it's that question that you asked before-- is it a cooling off, or is it an icing over? That's what I think is starting to make the Fed a little bit nervous.
* The pace of that decline, the pace of the decline in job openings, has come from normalizing to maybe now something is starting to be a little bit wrong. And we're over-cooling where any subsequent declines there could actually suggest that maybe the labor market is a lot colder than anyone had expected before.
* That's fascinating. I know some people talk about cyclical employment when you're taking away the government and all kind of the more stable standards. And you're starting to see some real declines there, to your point. I wanted to ask, in that chart, you have a ratio there of 1.25-- what's the significance of that?
* So, really, what we do is we compare it to pre-COVID levels. What you can see is we had a huge jump in job openings, and that's really that post-COVID recovery, right? We had an icing over of the economy during COVID. We had a gradual thaw as employers were trying to hire back workers and hire back workers.
* Now, a couple of months ago, we were back to pre-COVID levels. And that's that dotted line. What we're seeing now is we're really plummeting through that. It really shows you that while companies are not firing workers, necessarily, we're not seeing tons of layoffs, the number of job openings out there, the number of listings, for example, is really plummeting. And that's a precursor to a less robust labor market.
* It means that wages could actually start to slow down. And what you could see is an impact on real consumer spending and growth going forward.
* I've only got about a minute left, but I know you and I were chatting before we started, and I think there's a lot of people who think that you're not going to see central banks move or the Fed move ahead of an election, and saying, historically, that's not really been the case. They are apolitical. They will do what they need to do for what they think the economy needs.
* Yeah, they're really policy wonks. And that's really the way I would think about them, is their goal is really to do what's best for the US economy. They're not trying to be political in any sort of way.
* They have been laying the groundwork for rate cuts for well over a year now. The market's been in a state of, Will they or won't they? for quite a while now. And this is finally coming to fruition.
* So it's really not that they're springing rate cuts on us out of nowhere. They've been talking about easing policy for quite some time. And, remember, they're not actually making policy easy. They're just making it slightly less tight, from upwards of 250 basis points above the neutral rate to 225 basis points above the neutral rate, if our 25 basis point rate cut forecast is correct.
[MUSIC PLAYING]
* The overnight rate has held at 5 and 1/2% for the past year, after an aggressive hiking cycle was brought in to tackle accelerating inflation. Gennadiy Goldberg, head of US Rate Strategy at TD Securities, joins us now from New York. And it's great to have you with us.
* Thanks for having me.
* Let's start with what you think is going to happen. I think we've gone beyond a "will they or won't they" conversation. It's more into, how much? So what are you expecting right now?
* Yeah, no, that's a great point. It really is a "how much" type of conversation. And right now, we're expecting a 25 basis point rate cut to start. There's still quite a bit of uncertainty. The market is still pricing in more than 25 basis points at the start.
* They've got kind of in the low-30s penciled in, which works out roughly to about a 30% chance of a 50 basis point rate cut. It's hard for them to start with a 50 right away if nothing is wrong, per se. I think they're going to take this very moderately, very carefully.
* They do see the labor market starting to slow. They see inflation, very importantly, coming back under control. So for them, this is sort of a mission accomplished moment. And for them, the big question is, how do we land this economy without also re-accelerating inflation, but also trying to deliver that soft landing that we've been promising for quite some time?
* I want to bring up the chart, if I could, Gennadiy, that you gave to us, where it shows what the market is pricing out all the way until September 2025. It's interesting because, again, this is one meeting that we're talking about coming up, but you can see almost 100 basis points being projected to be cut up until December and then another 100, almost, up until the following fall. Do you think those are all going to come to pass?
* It's not impossible. Certainly, we expect 25's for the next several meetings, all the way through October of next year, at which point we expect the rate to get down to 3%. It is possible, if the labor market continues to gradually slow down, the Fed could become a little bit more nervous. Remember, they've already gotten inflation under control. They refuse to admit it.
* They don't want to have a "mission accomplished" moment a la George Bush in the early-2000s. What they really want to do here is to bring the economy into kind of a more supportive environment. They want to make sure not to over-tighten policy here.
* I think some of these could come to pass. I think a very significant number could come to pass. And what I'll be really watching next week is how much the Fed is penciling in in terms of the actual rate cuts themselves. We're going to get their summary of economic projections. Last time around, they weren't penciling that many rate cuts this year, not that many next year-- I suspect you're going to have quite a bit of disagreement among the FOMC board over the course of the next week.
* It will be interesting to see that disagreement, because I think we're even seeing it with a lot of macro strategists, I know, out there right now who some of them are saying, look to what's happening with trade in the longer term. This is all inflationary in the longer term. So I guess that will be part of the debate, just understanding what the longer term outlook is for inflation and the impact if you cut too early, too soon.
* Absolutely. But it's really interesting-- over the last month and a half or so, the Fed's kind of focus has really shifted back towards the labor market. We were talking about nothing but inflation over the last 18 months. Really, in the last couple of months, it started to be more and more about the labor market.
* The reason for that is the labor market is starting to show some signs of gradually slowing down. And we just don't know where kind of that break-even pace of labor market growth is. Traditional wisdom told us it was only about 100k a month to keep that unemployment rate steady.
* Over the course of the last year, the unemployment rate's risen from 3.4% to as high as 4.3%, and now back to 4.2%. It's not moving in the right direction, and it's starting to get the Fed a little bit nervous at this point.
* Yeah. Let's bring in the chart that you passed on to us showing that point. We've got payroll growth rapidly cooling to-- you talk about break-even levels. I think you even talked about going from cooling to icing over.
* Yeah. And the bigger question is, what is that pace of break-evens? And we've had quite a bit of immigration in the US. It's really hard to tell exactly what that pace is. A lot of different agencies use a lot of different estimates.
* There's a paper done by Brookings about six or so months ago that put that break-even pace not at a 100k, like it was traditionally, but something between 160k to 230k per month. Now, what you see is, over the last three months, we've been moving well below that. Over the last six months, we've started to move below that as well.
* And the data over the last couple of months has contained pretty significant downward revisions to the prior month. So that pace has actually really started to decline. And that's something that I think has been worrying the Fed. We're sort of moving in the wrong direction.
* They've been using the word "stabilizing," that the labor market is stabilizing, it's normalizing. But it really isn't normalizing anymore. Now, it's just a function of possible just cooling. And that's something that they're pretty keen to avoid.
* I want to bring up the next chart that you brought in, also quite interesting, and this is the ratio of job openings to job-seekers. Tell me a bit about what we're looking at here.
* Sure. So this is something that comes from the JOLTS report. So this is something I can tell you wasn't really paid much attention in the olden days before COVID. Now, we're paying a lot of attention to it just to show that the number of openings out there has really come down.
* Now, this is important-- what it tells us is there's not really a lot of firing that's happened. A lot of that normalization, as the Fed has been calling it, in policy has happened through a decrease in openings. So no one's really firing people, but there's a lot of decline in hiring that's going on.
* And everyone's kind of hanging on to workers and making sure that they don't actually over-fire but not really accelerating the hiring pace. And it's that question that you asked before-- is it a cooling off, or is it an icing over? That's what I think is starting to make the Fed a little bit nervous.
* The pace of that decline, the pace of the decline in job openings, has come from normalizing to maybe now something is starting to be a little bit wrong. And we're over-cooling where any subsequent declines there could actually suggest that maybe the labor market is a lot colder than anyone had expected before.
* That's fascinating. I know some people talk about cyclical employment when you're taking away the government and all kind of the more stable standards. And you're starting to see some real declines there, to your point. I wanted to ask, in that chart, you have a ratio there of 1.25-- what's the significance of that?
* So, really, what we do is we compare it to pre-COVID levels. What you can see is we had a huge jump in job openings, and that's really that post-COVID recovery, right? We had an icing over of the economy during COVID. We had a gradual thaw as employers were trying to hire back workers and hire back workers.
* Now, a couple of months ago, we were back to pre-COVID levels. And that's that dotted line. What we're seeing now is we're really plummeting through that. It really shows you that while companies are not firing workers, necessarily, we're not seeing tons of layoffs, the number of job openings out there, the number of listings, for example, is really plummeting. And that's a precursor to a less robust labor market.
* It means that wages could actually start to slow down. And what you could see is an impact on real consumer spending and growth going forward.
* I've only got about a minute left, but I know you and I were chatting before we started, and I think there's a lot of people who think that you're not going to see central banks move or the Fed move ahead of an election, and saying, historically, that's not really been the case. They are apolitical. They will do what they need to do for what they think the economy needs.
* Yeah, they're really policy wonks. And that's really the way I would think about them, is their goal is really to do what's best for the US economy. They're not trying to be political in any sort of way.
* They have been laying the groundwork for rate cuts for well over a year now. The market's been in a state of, Will they or won't they? for quite a while now. And this is finally coming to fruition.
* So it's really not that they're springing rate cuts on us out of nowhere. They've been talking about easing policy for quite some time. And, remember, they're not actually making policy easy. They're just making it slightly less tight, from upwards of 250 basis points above the neutral rate to 225 basis points above the neutral rate, if our 25 basis point rate cut forecast is correct.
[MUSIC PLAYING]
