Fed Could Cut Rates Sooner, Rather Than Later: Porcelli

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Bloomberg Aug 3, 2023 15:23 · 16.9k Views

Tom Porcelli, the new chief US economist at PGIM Fixed Income, talks about when the Federal Reserve may start cutting interest rates on "Bloomberg Surveillance."

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Transcript

  • 00:00 People are talking about maybe they haven't hiked enough and that there is momentum underpinning some of the inflation and the market
  • 00:07 that previously had been under appreciated.
  • 00:10 What's your view.
  • 00:11 Yeah look I so first of all thank you good to be here
  • 00:15 good to be sitting at P gym.
  • 00:16 It's it's been it's been great so far
  • 00:18 in my grand total of three weeks.
  • 00:20 But it's been it's been awesome great team.
  • 00:23 Yeah.
  • 00:23 Look, I think that,
  • 00:25 you know my, my, my view in that regard hasn't really changed much.
  • 00:28 I mean I I think that in so many ways I, I, I think that the Fed was fighting yesterday's war on inflation.
  • 00:33 I
  • 00:34 mean inflation is softening.
  • 00:36 You know, I I think what we need to make a distinction here between though is
  • 00:40 you know
  • 00:41 and I think Powell laid this out so perfectly,
  • 00:43 which I haven't said many times, but I I think he nailed it.
  • 00:47 I think you know what you want to see is
  • 00:49 inflation slow credibly and sustainably.
  • 00:53 Those are his words and and I think that's I think that's where we're going.
  • 00:56 So
  • 00:57 I I think that the sort of the the construct around that though is does that mean you have to get to 2%
  • 01:03 And I think the answer to that is I don't think we do, I don't
  • 01:06 I think that's the ultimate objective.
  • 01:07 But I don't think that that is a roadblock to the Fed cutting rates at some point
  • 01:12 and we can still see a scenario where the Fed actually is cutting rates
  • 01:16 you know sort of sooner than later.
  • 01:17 I mean not it's not necessarily this year idea,
  • 01:20 but I can see a scenario where the labor backdrop is, is is slowly deteriorating which it is right now, I mean jobless claims notwithstanding and we're in sort of a funky seasonal window for those.
  • 01:30 But I think if you get toward the end of the year and if the Feds forecast for the unemployment rate materializes
  • 01:36 and if their inflation forecast materializes, I think that might be enough for the Fed to say, hey, you know what, maybe we're going to take back some of this aggressive accommodation.
  • 01:43 And if they did, that
  • 01:46 could could be fuel to the fire from an economic perspective and you can actually have wind up having a really good 24.
  • 01:52 So it's just a sort of an interesting thing that we've been kicking around.
  • 01:55 There's something you said that builds on what Adam Posen was talking about that's really important to highlight
  • 02:00 that inflation
  • 02:02 may be OK at 3%
  • 02:05 and the Fed may even
  • 02:07 verbally acknowledge this, that they're OK with this and they're not willing to compromise the labor market in order to get inflation down to the prior target.
  • 02:15 Are you expecting that to be explicit by the Federal Reserve?
  • 02:19 I I don't think that they can say that explicitly
  • 02:21 because I think all of a sudden it throws into sort of question the the credibility around inflation and and the and the inflation target,
  • 02:28 which let's just be clear, the inflation target is literally a finger in the air, right?
  • 02:31 I mean there there's no real literature that says 2% is the number.
  • 02:35 I I think
  • 02:37 the the narrative is I can see a narrative evolving this way.
  • 02:41 It's really easy to say that you're going to beat the heck out of inflation
  • 02:46 when the unemployment rate sitting at the lows.
  • 02:49 I think it's a completely different dynamic when it the unemployment rate is actually starting to drift higher
  • 02:54 and that's a scenario that we could easily see play out over the course of the
  • 02:58 coming year or so.
  • 02:59 So I think that's how the Fed is going to be able to justify, hey look the credibly and sustainably idea.
  • 03:04 It's happening.
  • 03:05 We're we're seeing it actually drift lower.
  • 03:08 But now we have to start to worry about the other side of the mandate, the
  • 03:11 the labor mandate and we can easily start to take back some of this accommodation,
  • 03:15 some of this tightening.
  • 03:15 I think that's how the narrative can.
  • 03:17 So I don't think it has to be like this big weepy, hey, we have to cut.
  • 03:21 I think it could be, hey, we're going to cut because we want to extend the cycle.
  • 03:25 There's a larger question here about what that means about interest rate sensitivity of this economy
  • 03:30 and whether we're in a new paradigm
  • 03:33 where there isn't necessarily the same kind of sensitivity
  • 03:36 and rates can be higher for a longer period of time.
  • 03:40 Is that kind of what you're seeing?
  • 03:41 Yeah.
  • 03:42 So it's
  • 03:43 you
  • 03:43 know one of my one of my prior bosses
  • 03:46 love to tell the story about how they how they knew that the Fed cut rates, right.
  • 03:50 It wasn't as simple as looking at your your your Bloomberg screen.
  • 03:53 I mean you literally had to go to the Fed.
  • 03:54 You had to get one of the H reports.
  • 03:56 You had to do all this analysis and this all happened over the course of multiple days.
  • 04:00 What why do I highlight that because in a in in an age where Fed officials relentlessly have a microphone in front of them
  • 04:07 this notion of forward guidance I think is very real.
  • 04:10 So I think the the Fed can impact the term structure much further out.
  • 04:15 And so I think in that context, yes, I think you know the Dudley piece that a lot of people were talking about, I think that that's fair.
  • 04:22 I think that
  • 04:23 you know the the economy feels the effects of this much quicker.
  • 04:27 I would add one other thing though that's really important
  • 04:31 and and maybe this is blunting the blow of this,
  • 04:35 you think about corporations, corporations are sitting on a mountain of cash
  • 04:39 and they've turned out a lot of their debt,
  • 04:42 right.
  • 04:42 So you don't have that impact right now.
  • 04:44 And I think that's really an important idea.
  • 04:46 And I think and I'm sorry, I'll be really quick on this at the end, it's an important idea because when I think about labor and the possible deterioration,
  • 04:53 thank goodness we got that productivity number because productivity has been poor.
  • 04:57 And when you think about the hoarding idea and and and Mike mentioned.
  • 05:00 And I think this is such an important idea.
  • 05:02 I think the hoarding idea could actually come back to haunt
  • 05:04 the labor backdrop.
  • 05:06 Because if you have hoarding that's taken place as productivity is actually not performing that well,
  • 05:11 all in the context of company's ability to pass on prices, which is now diminishing,
  • 05:16 all in the context of consumption, which is, you know, sort of pretty soft.
  • 05:20 What do companies do to defend profit margins?
  • 05:23 They will tend to go after labor.
  • 05:25 So I think it's a really interesting idea
  • 05:28 that is not being talked about enough.
  • 05:30 And yeah sure I think that the these companies probably have
  • 05:34 deflected some of that because they've been able to turn out debt and they're sitting on a mountain of cash.
  • 05:38 It's a it's a it's AI think it's an interesting idea that that is fascinating going forward as we take a look at when that recession does come to pass
  • 05:46 everyone seems to be pushing out their expectation of that have you as well.
  • 05:50 Yeah.
  • 05:50 So our our call at at PGM is that we we do not suffer through a recession that it's really more of a sort of we're calling it weak Flation.
  • 05:58 It's you know it's a dynamic where
  • 06:01 inflation remains north of target but growth remains pretty sluggish
  • 06:05 and that's what we expect over the coming year.
  • 06:08 The risk to that is what I've just highlighted if if companies actually
  • 06:11 decide OK margins have compressed enough,
  • 06:14 you know we're going to have to take it out of somewhere
  • 06:16 that's a risk to the labor backdrop
  • 06:19 to be sure.
  • 06:19 But but I I I like our view that
  • 06:22 that that things are probably going to hold
  • 06:24 hold in there and not go through the recession online.
  • 06:27 I I would say one quick thing if I can,
  • 06:29 you know it's interesting this idea of of recession
  • 06:32 and it not materializing,
  • 06:34 it's been interesting.
  • 06:35 One of the things that we've talked about and again this is
  • 06:38 a view that we have now at PGM is this sort of you know it's almost like a mid cycle slowdown sort of dynamic right like 9495
  • 06:44 and that's something we've been talking about at at my in my prior job
  • 06:48 and I I think I think about that today
  • 06:51 and and for some of the recession calls out there, think about the things that were in recession,
  • 06:55 right, consumer spending on goods was in recession,
  • 06:59 housing was in recession, CapEx right was down what in two of the last four quarters.
  • 07:04 So there's there were a lot of segments of the economy that actually were performing really poorly.
  • 07:08 It just didn't all sort of conspire at the same time.
  • 07:10 So it's just, again, another interesting sort of angle on that idea.