What to Expect From Fed Decision on Wednesday

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00:00Well, let's stick with the Fed's head of tomorrow's rate decision, Jonathan Pinkle of UBS,

00:04writing, we expect a large majority of FOMC members to support a 25 basis point rate cut.

00:11Expect few changes to the dot plot and no change to median assumption of appropriate policy.

00:16Jonathan joins us now. Good morning, Jonathan. Thanks for being here.

00:19Thanks for having me.

00:20So let's just start with a question of what you expect to learn tomorrow if you don't

00:24think we're going to get any adjustments.

00:26Well, I think we are going to get a certain amount of communications out of Chair Powell

00:29assessment of the risks, how he's viewing the outlook, what kind of bar he might have in mind

00:36for future cuts. The market's been pretty anchored to sort of having the year-end target range kind

00:45of around 3% at the end of next year. I think a lot of that is the discussion you were just having

00:49on the next Fed chair. But I think for the remainder of Chair Powell's tenure, he still is

00:54balancing these mixed signals. I mean, you just heard the Home Depot news. He's got kind of weak

00:59residential, weak non-residential, kind of weak, soggy labor market. How does he balance that

01:04against the inflation? I think those are going to be important questions to assess as we go

01:08through the press conference tomorrow.

01:09How different is it that we might see four dissents for the first time going back 30 years

01:14on the FOMC committee?

01:16Well, it's not that unusual historically. I mean, you know, if you look back and you think about

01:21sort of the Greenspan era where Chairman Greenspan really, with a lot of manipulative skill, I would

01:29add, having watched him, you know, really controlled the committee. And then you had, you know, sort of

01:35the GFC, the Bernanke era where, you know, you know, Ben was just the extraordinarily correct scholarly

01:42choice for the moment. And then you had, you know, the pandemic and the inflation. So it was sort of an

01:46era where, you know, there were sort of a lot of all hands on deck moments. So I'm not surprised we

01:52haven't seen a lot of dissents lately. But if you look historically, dissents are really the norm.

01:57It's unanimity is kind of the exception. I also think Chair Powell's, I'd bet he gets fewer than

02:04four dissents. And I mean, you were talking about the clout earlier. What kind of clout does he have

02:10at this point? I think it's more earned respect. I mean, he's the one who's been pounding the pavement

02:15up on Capitol Hill. He's the one who is being, you know, tweeted about. He's too late. Do you know

02:20what I mean? Like, I think he's really done a lot to incorporate the views of his committee.

02:27I think at the end of his tenure, he's just kind of earned some deference at this point.

02:32As an institution, though, actually, don't dissents show the credibility that this is a

02:36deliberative body and it's not we're just going to all line up where the chair is, at least for the

02:40future if you are concerned about potentially someone that is very close to the president

02:46of the United States. Sure. I mean, sure. I mean, dissents are super healthy, but you also don't

02:50even need the dissents, right? And we can hear Beth Hammock, even though she's not a voter,

02:54she's not going to dissent, but she clearly she disagrees with this policy. So you certainly do have

02:59that kind of open debate. And that's something that's certainly, I think, going to play out and

03:03remain a feature for the next FOMC as well next year.

03:07So when you look into next year and the next FOMC, how many cuts do you have baked in for

03:12next year? And does it matter who the Fed chair is?

03:15I have two.

03:16Who are the cuts?

03:17And yes, it does. Yes, it does, I think, matter who the Fed chair is. I mean,

03:21you know, we're all talking about Kevin Hassett. I mean, I've known Kevin for a long time. And Kevin

03:25actually has, you know, in terms of his ability to build credibility, he's got, I think, kind of three

03:33key features that would make him sort of an effective Fed chair. One is his academic publication

03:38record's pretty impressive. If you think about the peer-reviewed journals he's published in,

03:43he has incredibly well-cited papers. Second, he was on the board staff and is an incredibly astute

03:48data expert of himself with knowledge of a lot of that staff and how they use the data. And third,

03:54he's really, I mean, Kevin's nice. I mean, he's really collegial, right? I mean, I think that will go

03:59over well in terms of trying to work with his colleagues. But I also think that that combination

04:04is going to help him win debates at the table. So we talk often about Fed policy as being rate

04:10cuts. But when we talk to equity strategists for 2026, they talk about the use of a balance sheet.

04:15They talk about quantitative easing in another name. And we hear that from Morgan Stanley. We hear

04:20that from Bank of America. We hear that from BlackRock, the sort of monetization of the debt that

04:24already is transpiring with respect to a focus on T-bills and the potential purchases disproportionately

04:28on the balance sheet. How much are you looking for that type of activity in the background,

04:33regardless of potentially a tempered view of how many rate cuts this Fed can make?

04:38Yeah, I know. I mean, I'm expecting them to start outright expanding their securities holdings in

04:43January. And a lot of that is, though, I think, you know, if you look at the level of reserve balances

04:49and what's happening in repo, it does look like it's starting to get a little tight. So I do think that

04:54they are going to have what they would call a reserve management purchase program.

04:59Regular purchases of T-bills, I think they probably start around $40 billion a month. But I think

05:04that's probably going to have to get up to 60 by the end of the year. Really, just because they've

05:09got other liabilities that are rising over time. You clearly seem to be sort of in this ample reserve

05:16regime where you're putting upward pressure on the effective funds rate. I mean, the spread to IORBs

05:21has narrowed steadily over the last month and a half. So I do think they're at a point they need

05:26to actually start adding liquidity instead of draining. Which is what a lot of people are

05:30mentioning. And they say that the sell-off that we saw in big tech was largely driven by the

05:34withdrawal of Fed liquidity, reaching that tipping point of reserves. I'm just wondering how much is

05:39this a technical issue in the markets? And how much is this outright asset buying and monetization

05:43of the debt? So there is an element of monetization of the debt. I'm skeptical at how much that's

05:53driving high-frequency equity market moves. I mean, it is the case that if you got more volatility in

05:59repo markets and higher repo rates, you're going to have higher costs for funding leveraged positions

06:05in equity markets. But I think what's happening in the background of the Fed balance sheet is they've

06:11kind of gone too far. They need to reverse it. But I don't really think this is going to be some sort

06:15of flood of additional liquidity. I think they are going to try to temper how much they are actually

06:21adding. And I think the risk is they probably err on adding too little. Okay. So if that's the case,

06:26I guess, how do you game out the idea that we might see Fed rate cuts in addition to fiscal stimulus,

06:32in addition to a re-accelerating U.S. consumer at a time where inflation has still been relatively

06:36sticky? Do you see this as creating a problem for the 10-year and a Federal Reserve that might be

06:41motivated to try to cap some of those yields? I don't think it's going to be that much of a

06:44problem for the 10-year, mainly just because we are getting some good news on the forward

06:47inflation indicators, right? I mean, if we look at the composition of inflation right now, we're

06:51seeing sort of core goods, ex-used cars sort of turn up. You can see the tariffs slowly passing

06:56through. But the forward indicators that we're getting on things like the slowing in rents have

07:01actually really gone the Fed's way. You know, we've got among the higher estimates of inflation on the

07:10street. But by the second half of next year, we're still back to 2.5% or below on annualized

07:15run rates. So, you know, the Fed's sort of got some tailwinds here on inflation. You know,

07:21the Fed credibility, you know, we'll see how much they try to push rates lower. But I do think that

07:26you'll start to hear a much more credible case about the supply side and in a way that I think

07:32it'll alleviate at least some investors' concerns over whether this is really going to be sort of a

07:38FOMC that runs amok. So you don't agree with the Hawks about the concerns about inflation. But how

07:44do you view the labor market next year? Well, I'm sympathetic to the Hawks' argument. I mean,

07:48like, they haven't hit their target in five years, right? It's going to be going on six.

07:51Three is a new two. Right. Yeah. At some point, it's going to look bad if inflation does stay sticky.

07:56But, you know, I do think they face a problem with the labor market. I mean, you've had residential

08:00investment contracting, structures investment, government spending and investment even without the

08:04shutdown's been unusually weak for the U.S. And consumer spending's been mixed, right? I mean,

08:10upper income's doing well, but we're seeing other parts that aren't. So the labor market is weak for

08:15a reason. And if the labor market turns into more obvious contraction, you really could have

08:19households pull back in earnest. So, you know, thinking about sort of Chair Powell's risk management

08:24framework, you know, the potential cost to the economy of, you know, an unemployment rate that

08:29doesn't stop going up. You know, I can see why he wanted to kind of address, you know,

08:35there wasn't a whole lot of reason to slow the labor market when it's already weakening too much.

08:40And there's not a lot the funds rate is going to do to stop the cost push inflation of tariffs. So

08:44I do think his calculus makes a little bit of sense.

08:47So

08:52you

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