Long Short Segment and Closing Remarks

The most iconic week in the bond markets continues. A couple of days ago we brought you some thoughts from the great and the good in bond markets on inflation, US credibility and all that jazz Since then, it's finally happened. We had an interest rate decision from the US under the new chair of the central bank, Kevin Warsh It's always kind of exciting for sad people like us when there's a changing of the guard at a big central bank But this switchover is kind of special for a bunch of reasons Today on the show, May the Warsh be with you. What do we learn about the man who, after Rob Armstrong, is now the most powerful person in Mcus This is Unhedged the Markets and Finance podcast from the Financial Times and Pushkins. I'm Katie Martin, a markets colonnist at the FT in London, back in the basement of FT towers after I was let out for good behaviour earlier this week I'm joined by the big fellow Rob Armstrong himself over in Brooklyn, New York Robert, and soon I'm gonna see you in real life. know? It's exciting. And I think it's important to note that this will be The rare occasion where we see each other in person and a massive hangover does not ensue I think this is we I think we can grow and change And this is I'm going to New York very briefly and you are not to take me to a bar and cause me to miss my flight home So the Fed decision earlier this week and the press conference from the new chair, Kevin Walsh I missed this whole thing because I was doing an FT event then I was watching the football so You were watching it all in real time, right? Give us the highlights. I mean, the statement, the written statement half of the usual length So Yes. didid that sort of brevity track through the press? And this was one of the big questions coming in Warsh has said in the past, he basically wants the Fed to communicate less. He wants to go back to the Federal Reserve tradition of Alan Greenspan where there's not a lot of talking Not a lot of sort of thinking out loud by either the chair or the other members of the open market committee And the markets are kind of left to figure things out. And you know one of the questions going in was like What is the statement going to look like? And then the statement lands at two o'clock yesterday afternoon and it's half the length Like you say Now, I don't think That is actually particularly substantive change in the sense of like, oh, we got all this information before we didn't get A lot of kind of empty verbiage was taken out And a lot of this kind of coded talk about the future, which they call forward guidance was taken out I'm actually fine with all that stuff going. You know, I've spent five years, you know, writing about this stuff several times a year and I'm not totally sure all that time wasn't wasted. Right. You know, like we can have a shorter statement, we can have less forward guidance, that is totally fine. But just reading that statement says, okay, new regime, the letter looks really different. That's the thing, isn't it? So like on the very sort of surface of it veryer boring fed decision, no change in rates, like no fireworks Yeah, I mean, I know it sounds like not a big deal, but like Harving the length of your statement is a bit of a statement in itself. It is, as you say, it's kind of, okay New rules And as you know, real finance devotees know. about every other meeting when the statement comes out Committee also releases a set of economic projections. where they say, here's what we think rates need to be. Here's where we think unemployment is going Here's how, you know, etera, et ccetera. And The most famous part of this statement is the so called dot plot, where each voting member of the monetary policy No, all members, I'm sorry, of the Monetary Policy Committee put these little dots on a kind of calendar of the next couple of years showing where they think appropriate monetary policy will be this year, next year, the year after that, and so on down the road. And it was speculated Is Warsch gonna put a dot? And indeed, he did not. We were one. We lost a dot And that's worse. kind of leading by example in his campaign of making everyone shut up. I'm not going to try to predict the future out loud. I don't think that does the world any good. And so that was the second shocker even before the press conference began You know, eighteen dots instead of nineteen. That's it. So the dots are always anonymous. So do we know that the missing dot belonged to Wars? No, he confessed. Right that he was the dot burglar in this case And when the press conference started This continued. He said, you know, we're not going to say much. And especially we're not going to say very much about the future. And so several times, He was asked in ways both veiled and explicit, What are you going to do if this happens? What are you going to do if that happens And he just said, All I can do is refer you back to the statement We didn't raise rates And suck it up So Rob, before we get into some of the nitty gritty about what Warsh said and didn't say, I'm interested What was his manner like Did he seem at ease with the press? Did he seem to like the questions? did he seem Nervous, did he seem overc conffident? you know, what were the vibes His tone was I would describe it as polite. Derm I wouldn't say over confonident But there was a new sheriff in town vibe there where you know from question number one and from his opening comments, he was setting down some lines And he was doing that in a friendly way But he was really representing firmness and projecting firmness. Interesting This is not a negotiation between me and the press. You know, I'm going to answer the questions politely, but there are for me, there are lines in place that shall not be crossed. And this actually crossed over into policy and effects on policy. He very, very firmly and plainly said several times Inflation is too high Inflation is a matter of monetary policy in his famous phrase, inflation is a choice. And we will put a stop to this And that last point was a change in tone from the way Howl discussed it where he said predecessor J Powell. ye. J Powell, the predecessor would always say things like, the committee remains firmly committed to satisfying our dual mandate or similarly like aspirational lines. And the message from Wars was, we will achieve price stability, period. Not we're trying where we're doing, it's going to happen, right? Okay. Good luck, Kevin. This is the contradiction that is at the heart of all this, isn't it? So the assumption and it's a reasonable one is that he has been put into this seat effectively by Donald Trump to cut interest rates. and Trump has made a lot of noise about what a numbs skull and a moron Jay Powell was for not cutting rates u, you know, before now and he's been just like lashing out at the Fed at every opportunity to say, it needs to cut rates, it needs to cut rates Warsash comes along on his first meeting, he does not cut rates, which seems to be the sensible thing to do. and all of a sudden Trump is saying, Well, you know, whatever. I'm sure he's made the right decision. But ironically The message that came from Worsh was surprisingly right? It was pointing in the direction of taking a tough line on inflation, which all things equal implies highigher interest rates, which is the opposite of what Trump has been talking about forever. Maybe you've been right all along, Rob, and you know, Warsh has said, you know, yes, sir, no, sir, absolutely, I will cut interest rates to get the job or implied something of that flavour. But once you're in the seat, you just do the job properly. I hope that's true I don't think we got conclusive evidence that that is true It's not like Warsh ripped his applying for the job Mask off, laughed maniacally and announced that rates were heading up Right, But he did make that firm statement Inflation is too high. That's our fault. Things are going to change around here and we're going to get it under control And he was backed up, by the way, by a committee. Everybody else did submit one of those dots that we talked about. So that was the kind of double whammy hawkishness of this meeting Wh sending the it's our fault and we're going to fix it message and the committee going fifty percent in on a prediction of a rate increase this year. Okay. Yeah. I don't think that's quite conclusive. Certainly the market read this as very hawkish. The two year Treasury yield, which responds to expectations, market expectations for Fed policy significant and dramatic leap after the meeting, but donon't think this performance as a Hawk was Totally convincing I'll give you the most important example of why which is his answer to an excellent question by our colleague, Claire Jones, who is at the press conference representing the FT. And she asked the following extremely straightforward question. If Inflation is too high And inflation is always a matter of bad monetary policy. Why are you not at this meeting raising rates This is a tremendously straightforward question. and not about the future, by the way. And Warsh pretretend it was a question about the future. I can't answer that. We'll meet again in six weeks. No more four guns, but no. So now he's not answering questions about the present and and the past. too, right? But it's not point. Buts she's not asking about the future. She's She'sking about the past Yeah Why didn't you do it? Why did you do this thing in the past and So Warsh's refusal speak to the future actually extends to the present and the recent past, as it turns out. And I think we deserve an answer to that question Right? Given his other statements Why doesn't the committee think we should be raising rates? Why doesn't he think? I thought that was a legitimate question. We did not get an answer, which means there may be a dove back there somewhere. Yeah. What is the future? Time is a flat circle So I gather he was talking about No fewer than five task forces So look at Fed Like how the Fed communicates, how the Fed does its job. Why not just Here's an efficiency gain, why not just have one task force and get it to do five things? But anyway, what's going on with these task forces? He really did back up the task force truck and dump it on the audience. And it, you know, became a bit of a joke by the end of the conference everyvery question he would answer. Well we have a task force for that. Amazing. And look I think institutions need reform whether you're a company or a newspaper or a central bank. But not a podcast. We can't change anything. We will never change. We will never be reformed. But every once in a while, other things besides this podcast, you know, you need to sort of take all the sheets out of the cupboard and shake them around basash out the rugs And so I think that's all fine. too my eye, by far most important of this phalanx of committees is the one that will be devoted to deciding what is to become of the Fed's multirillion dollar balance sheet. So this is the big pot of money that the Fed has accumulated Part of its efforts over the years to save the financial system from disaster has basically been to buy loads of bonds And now it's sat there with a huge pile of bonds and it's thinking, hh, what do we do with this stuff? And different central banks are dealing with this issue differently. But as you've pointed out on this show before, like Wars is like that guy who's been like, you know throwing little bits from the peanut gallery for years saying you've got to cut your balance sheet. you've got to cut your balance sheet. and now he's in the hot seat and it's like, okay, then Kevin Let's see how this is going to work. What you got to do. Yeah exactly. And of course, the reason the balance sheet is important is because the bonds on the Fed's balance sheet. The other side of that coin is cash inside of the financial system So when that when the number of bonds the Fed holds goes up and down, you're basically shoving liquidity into the financial system are taking liquidity ye which is a sensitive business When there's not enough cash floating around the system, Acidents happen, peopleeople worry about it. The money markets freeze up. You have sell offffs, etcetera. So it's not just like laa laa. We're going to just sell all these bonds into the market and it'll be fine. So everybody knows it's a tricky business. And but he's been hating on this for fifteen solid years. He's been complaining. Big balance sheet is bad. It causes inflation You know, we can have an argument about whether he is right or wrong parenthesis, he's wrong, but So that was probably the biggest question on my mind or one of the two biggest questions coming in my mind was, what's he going to say about the balance sheet? And that question was largely answered in the statement itself. The second sentence of the committees statement reaffirmed the committee's commitment to an ample reserves regimes. That is a reference to the reserves of that cash that the Fed pushes into the financial system when it buys bonds. And it was saying, we're not going to mess with the balance sheet right now So we will be saved, reformed, sanctified, free of sin at some later date. A What is it like? Which I think Lord, make me virtuous but not yet, kind of thing. But not yet. And we are not virtuous yet. And I think, by the way, that is exactly the right decision evenven if you hate the big balance sheet do not want to sneak up on the market at this point. You want to make sure everybody sees any changes to this coming a mile away and has plenty of time to prepare for whatever you're going to do. Yeah. I mean, the Bank of England knows this very well, right? So unlike other central banks which just let these bonds sort of mature and die and then doesn't buy anymore So the Bank of England is doing what's called active quantitative tightening, which means that it's actively selling bonds that are sitting on its balance sheet On the margins that does weaken the bond market and pushes up government borrowing costs and everybody else's borrowing costs with it. but it is marginal, but that's because As you say, everything is so well flagged. There are zero surprises here. The process is incredibly transparent. It's as boring as possible. They like to just make sure this whole thing happens without ruffling the market. But again, you know, if Washh were to ruffle US government bond market, then we've all got a problem on our hands. It's not in his interest to do that I think this is going to be pererhaps even more than increasing or decreasing interest rates, this might be grand narrative of the beginning of his chairmanship. because we have a delicate financial situation in the United States where the government is running a huge deficit All those treasuries have to be that they country issues in order to pay for its deficit spending have to be bought by somebody And if at the same time as that is happening, you're giving lots and lots of government paper the market to buy. If the Federal Reserve starts pushing government paper into the market at the same time, investors might start to choke on all this stuff And you know, we've had moments that looked like that was happening before. And you know, can we have a small balance sheet and a big government deficit at the same time and a stable market the same time People have described that as the Fed's triilemma. You can have nice cal markets. You can have a small balance sheet And you can have big deficits, but you can't have all three at once You know, And so how he juggles how how Wars as it where keeps those three balls flying in the air is going to be one of the great narratives of this chairmanship. Yeah. So the big narratives so far are Make me virtuous but not yet. but also like cart becomes sayess. There may be some arcane rule in the Fed that describes this I don't think the Fed chair can make the like the regional heads of the Federal Reserve banks who are the people who are always making speeches about this or that and what they think about rates Can he tell them to be quiet and sit in the corner? I don't think so. So it's a test of his leadership. if I mean, he can shut himself up He sort of did that in the meeting yesterday. He did it by erasing his dot But can he make other members of the monetary committee shut up? I don't really know. Can he make Jay Pow?re Is everybody gonna to play nice? Yeah I don't know. H. Speaking of shutting up, let's do exactly that and come back in just one second with L short Okeie doke, it is time for long short that part of the show where we go long a thing we love or short a thing we hate. Rob, what are you saying? I am Short, AI model revenues. At least in the near term, it seems to me we're getting a lot of stories about how companies are like, whoa, this stuff is expensive And so we got the big one was from Uber, who was like, you know, we blew through our AI budget in the first couple of months the year. We're going to use cheap AI models and only use the really fancy ones, the frontier models once in a while. And I think in general, so there's this little trickle, this little drum beat of like, man, this stuff is expensive I wonder if know we had this wild growth in revenues at the model builders like Oen and Anthropic. I wonder if we're hitting a little bump in that road. And I'm guessing that we are. Thrillingly, yet another pronunciation by Rob of Anthropic. It's just every day know I have an infinite number Ethropic. Thropic is it now? I wish to reiterate my short of these confounded smart glasses that are just everywhere. Everyone is launching a new type of smart glasses The reason I'm reiterating my opposition to these Ugly awful glasses is there's a new set of ugly awful glasses that's come out of the Snapchat people Evansan Spiegel. They're ugly as hell these glasses. they make you look like a thunderbird and And I just I just what are we doing here? Like this is madness. We're just down with this sort of thing. We're just developing a surveillance state out of nowhere for no good reason whatsoever, It's a golden age perverts and weirdos and I don't like it and I wish these things to be banned I've made this lecture before and I will make it again. I hate these things I'm in the golden age of perverts and weirdness. These are my people Looking forward to seeing you Rob in New York in a couple of days. Listeners. Listeners wish me luck. We will be back in your ears on Tuesday, so listen up then Unhedged is produced by Jake Harper and edited by Brian Erstatt. Our executive producer is Jacob Goldstein. We had additional help from Topa Forehead. Special thanks to Laura Clark, Greta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free and a thirty day free trial is available to everyone else. Just go to ft. com slash unhedged offer. I'm Katie Martin. thanks for listening