00:00We're calling it a hiking cycle but I don't think it's going to be a long cycle. Let's be clear.
00:03I think it's going to be this increase probably one in December. They'll probably take off in October because of
00:11the proximity to the elections. There may be one more next year. If you think about where we were we
00:19were when we look back probably slightly accommodative. Now we're moving to slightly restrictive. So we're not raising rates tremendously.
00:29And why.
00:30I mean because inflation has been running well above the Fed's target for a long time. So we're at five
00:37percent. Is there a scenario in which you see the 10 year gravitate towards five and a half six percent.
00:45I know those are just not nice round numbers but just help us understand maybe the risks to the bond
00:50markets giving way even further. Yeah I think rates could go somewhat higher from here. It'll of course depend on
00:58the data.
00:58But the kinds of things that are happening this is kind of good news higher rates because it's associated with
01:06a strongly performing economy. To the extent the Fed is able to get inflation to come down and turn around
01:13a little bit that might temper the increase in the policy rate.
01:17You've got fiscal deficits in there which is a big problem for the U.S. as well and there doesn't
01:23seem to be much of a plan about containing fiscal deficits and doesn't seem to even be an issue in
01:31the midterm elections on either side of the aisle.
01:34So I think markets are concerned about that and unfortunately doesn't look like the fiscal situation is going to get
01:41fixed anytime soon.
01:42So that would put upward pressure on rates all other things equal. Yeah it's not going to be a very
01:49I mean deep deep I could say or just long hiking cycle right.
01:53You're getting this sort of notion that it's going to be two and done. One one might be not enough
01:58but three might be taking it too far according to what Buller and what Patrick Harker said to us in
02:02the previous hour as well.
02:03And because you know rate hikes are not going to solve some of these economic forces at bay when it
02:07comes to the AI boom when it comes to oil prices above $100.
02:11So certainly that's still the key question here is really how much more does the Fed have. The market pricing
02:16seems to suggest maybe three by mid 2027.
02:19You are continue to see a bit of that flattening of the curve though. We're coming off some of the
02:23initial moves when it comes to the two year and we're still around that 5 percent level for U.S.
02:2810 year yields. But the rest of the markets you are seeing that Aussie 10 year moving a little bit
02:32lower to as we're down about four basis points.
02:35But yeah that two year yield had one as I was at the highest since we've seen about 20 23
02:40or 24. So so 471 for your U.S.
02:43two year yield. The rest of the markets as Dave mentioned here are taking it in stride in some ways
02:48you could say because it was largely priced in this rate hike.
02:51I think the market reaction is pretty expected. Yes. To an extent because I think the market is still a
03:00little bit puzzled and torn between what Kevin Walsh said
03:04which was quite hawkish and what the plots are telling you which is more dovish actually. And so we have
03:12seen this yesterday in the reaction.
03:15It was first in a way positive with the rates going down and equity markets being still up. But then
03:23during the press conference the markets start to reprice and to adjust.
03:28And I think Kevin Walsh has a tough job to do because I mean the U.S. economy cannot really
03:35afford much higher rates.
03:37Will higher rates really have an impact concretely on inflation is not sure. But he wanted to play this credibility.
03:45And that's why I mean even though there is no forward guidance. But I think the plots are telling a
03:52message which is quite important.
03:54That's right. So much for no forward guidance. When you take a look at the dot plot it is suggesting
03:58another hike.
04:00Yes. The question is how many more hikes because some suggest it could be one more this year. Some say
04:04two and then a pause.
04:07Yeah. I mean I was more in the camp to say no hikes was so appropriate because inflation data are
04:16volatile.
04:17There are inflationary pressure but also you know with higher long term rates the housing market is cooling down and
04:23housing is important for inflation.
04:26Services inflation is also cooling down in U.S.
04:29And so of course energy plays a role. But less and less in the economy. And at the end if
04:37you are at 2, 2.5 or 3 percent inflation is it a big deal.
04:41I'm not totally sure. And will 25 bips or 50 bips of higher short term rates have an impact really
04:49on the inflation it remains to be seen.
04:52If you have an impact on the cost for the treasury to borrow short term money.
04:59And as you may know today it is the most important channel to refinance the U.S. state. It's T
05:05-bills. It's not treasuries.
05:07And so here it will have a direct impact on the cost and on the deficit.
05:11So that's why I think that's why Trump is very nervous because he's a business fan.
05:17He knows to count. He knows that higher short term rates equal higher interest payment.
05:23At a moment where the deficit is super high. No sign of reduction of deficit.
05:28And so the bill will increase for the U.S. state.
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