00:00Colin Martin of Schwab writing inflation remains sticky. Our base case is that the Fed remains on an extended pause.
00:07Colin joins us now for more. Colin good morning. Morning. How high is that bar for rate hikes of this
00:12Federal Reserve. It's getting lower. You know we've been saying it's a pretty high bar for the past handful of
00:16months now with last Friday's labor market report. The bar keeps coming down. But we're acknowledging that things are moving
00:23very fast. There's a lot of uncertainty right now. If we look at it strictly in a vacuum the case
00:28can be made for a hike right now. We have inflation
00:29that's been high for five years and counting and moving in the wrong direction. And a labor market that at
00:35least for the time being has shifted maybe from stabilizing to strengthening. That's the good news. But the outlook is
00:40very uncertain. I mean you were just talking about the potential de-escalation in the Middle East. That's a major
00:44wild card. We have Warsh coming in. How open to rate hikes will he be. So rather than bouncing around
00:51too much we're focusing on an extended pause right now. We're acknowledging that the probability or likelihood of a hike
00:57has risen. But we want to see how the next few months
00:59play out. Well before you get a hike you need a hawkish bias. And we don't have one of those.
01:02We have an easing bias. And next Wednesday at his first meeting we're expecting him to slip into neutral. Not
01:08a hawkish bias but neutral. Some people might be pushing back against that. Do you think there will be some
01:12on the committee next Wednesday that will push for a so-called hawkish bias?
01:17Maybe. But there's been a lot of comments we've heard from officials over the past few weeks. And Beth Hammock
01:22last week I think had had some neutral comments where she said right now things are OK. But maybe we'll
01:29have to shift. I'm probably butchering her actual quote. But the idea that the direction is moving to hikes but
01:35we don't need to do anything right now. She's been one of the more vocal hawks. She was the one
01:39who dissented the last meeting. So I think that's a nice reasonable approach.
01:43But if we continue to see the conflict go on. Which is inflationary. And if we see this labor market
01:48strength continue. I think that shift to neutral could become a shift to hawkish. But I wouldn't expect that next
01:57week.
01:57Well do you think anyone next week is going to say we should have a hike at that meeting?
02:02I don't think so. But I think there will be some that are clearly moving in that direction. But given
02:08the idea that if we shift the easing bias knowing that that was what a bunch of the dissenters were
02:13focusing on last time and they at least shift to neutral acknowledge that there's two sided risks including those hawkish
02:19risks. I don't know if we'll necessarily see a dissent.
02:22I'm not trying to be cute. Does Kevin Warsh decide not to put a dot on the plot?
02:26He might. I mean he's been pretty clear about his views about the dot plot. I mean even Powell himself.
02:33I was about to say Fed Chair Powell. Former Fed Chair Powell.
02:35Now Governor Powell.
02:36I've seen a few people make that mistake in notes by accident.
02:40So Governor Powell you know at his at his last press conference acknowledged that this is a discussion that committee
02:45members have had. So I think there are some including Warsh that maybe aren't too happy with how that goes.
02:51They acknowledge the uncertainty.
02:52And he said they just haven't come with come up with with a better resolution. So it's possible he doesn't
02:57throw that out there because he knows or he's been pretty clear about the downsides to that dot plot.
03:02We now have a two year yield. That's 40 basis points above the Fed funds rate. We always think of
03:08George Soros saying the bond market never lies. What would have to happen with the economic data to make that
03:14two year yield not lie?
03:15Sure. Not lie. Well let's see. We need I think a de-escalation in the Middle East. I think we
03:22need to see a you know the hit to oil prices start to show up in the data. Right now
03:30it's not happening. We talk about the savings rate coming down.
03:33We talk about the potential hit to higher gas prices. We're not seeing it right now. I think for a
03:39hike to happen we need to see inflation to continue the recent trend.
03:43We used to if you asked me two months ago I'd say re-accelerate right now probably discontinue the trend
03:48and the labor markets continue to strengthen. We're getting a little bit closer to that right now.
03:53But I don't think we're at a full fledged hiking cycle. I think we're looking at one or two and
03:58we're seeing what that two year treasury yield is right now. I think it is getting a little ahead of
04:02itself.
04:02But I do think a lot of it plays out with the Middle East. It sounds like it's a cop
04:06out but I think that does matter in terms of how high do oil prices stay and for how long
04:10and is there a hit to consumer spending.
04:13So far not so much because AI and CapEx have been a key driver. But I think we're going to
04:19have to see how that plays out especially into the summer season.
04:21Let's just build on Cam's line of questioning. So we're talking about the difference between the policy rate and twos.
04:26Twos have come up. That's steepened.
04:27The interesting piece of this you look further out twos out to tens. That piece of the curve, flat neck.
04:32What do you think that speaks to?
04:33I actually am a little bit confused about that because we don't expect a full hiking cycle coming up anytime
04:39soon.
04:40So I think short-term yields have probably gotten a little bit ahead of themselves.
04:43We do see more upside risks with long-term yields. So I wouldn't be surprised for a steeper curve right
04:49now given inflation, given uncertainty.
04:52The term premium is something that we're looking at a lot right now. Inflation is not just high. It's uncertain.
04:57With Worshin as the Fed chair, use of the balance sheet is probably behind us.
05:02So I'm actually surprised that the 10-year has actually been somewhat well-behaved.
05:07And I would expect a steeper yield.
05:08So you don't want tens here? You don't like them at 455?
05:11Not yet. We're not saying now is the time to be adding duration.
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