Bond traders take a turn in the spotlight

SPEAKER_1 (0:00)

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Kevin Warsh (0:26)

This won't surprise you, I'm not in the forward guidance business.

Kai Risdahl (0:29)

No Chairman Warsh, no surprise at all. From American Public Media, this is Marketplace.

In Los Angeles, I'm Kyle Rizdahl. Wednesday, today, 16 September. Good as always to have you along, everybody. Kevin Warsh, the global economy is discovering, is a man of few words. So few, in fact, that in just a single one of his answers at his press conference today, can be found his working theory of this economy.

Kevin Warsh (1:05)

As you might know, I'm not a data point dependent guy.

So I won't react one way or another to data that shows up on our doorstep. But on your first question, I think the more important one, what transpired in the seven weeks since we last met?

Kai Risdahl (1:21)

What indeed?

Kevin Warsh (1:23)

I'll highlight three things that have happened in that intermeeting period.

Kai Risdahl (1:26)

Please do.

Kevin Warsh (1:27)

One is, I may have had a judgment seven weeks ago about the strength of the economy. There's been a pretty wide-ranging set of data, including the labor markets that the economy has strengthened. You might have heard me say that in Jackson Hole a few weeks ago.

It's a judgment that I have and the committee has.

Kai Risdahl (1:45)

I heard you back then indeed. Please go on.

Kevin Warsh (1:48)

Second, inflation trends. I said in Jackson Hole, trends matter. I said in Jackson Hole, we need to look outside the window and interrogate reality.

My judgment some weeks ago was the inflation summer trends weren't passing the test. I've seen very little information since that would make me reverse that decision, so I've stuck with it.

Kai Risdahl (2:10)

Inflation trends not passing the test, that is important. Thing number three, then.

Kevin Warsh (2:16)

And the third thing that's changed in seven weeks are geopolitics. There's no hiding from hot spots around the world, and our judgment about what is the most likely or least likely of the geopolitical situation has changed.

Kai Risdahl (2:31)

Changed as in not gotten better.

Kevin Warsh (2:33)

All three of those things led themselves to a firm unanimous decision today.

Kai Risdahl (2:39)

And that, ladies and gentlemen, is how the Federal Reserve's target for its main interest rate finds itself this afternoon a quarter of a percentage point higher than it was when the day began. Wall Street today, I'll tell you what, when the Fed Chairman starts talking about inflation trends not passing the test, traders do not much care for that. We will have the details when we do the numbers.

The thing about Chairman Warsh not doing the forward guidance thing is that markets are kind of left on their own to figure out what's going on, and that can get bumpy sometimes. Exhibit A for us of late is the bond market caught between elevated inflation and a tight-lipped Fed. What's that like, do you suppose? Marketplace's Sabri Benishaw made some calls.

Sabri Benishaw (3:47)

You know, usually it's the stock market people who get all the glory and the headlines and the views. Now it's the bond people's time to shine.

Marvin Lowe (3:55)

Certainly it's nice to be one of the first calls rather than in the second round.

Sabri Benishaw (4:00)

Marvin Lowe is Senior Global Macro Strategist at State Street Markets. There's $161 trillion worth of bonds in the world more than the value of all stocks.

Marvin Lowe (4:10)

This is a bond market that drives everything.

Sabri Benishaw (4:12)

They touch everything from mortgages to stocks. One of the many things that drives the bond market is the Federal Reserve, though, and under Kevin Warsh, the Fed has stopped telling the bond market what it's thinking as much. Vinnie Blue does fixed income research for Raymond James, which is a Marketplace underwriter. He says a terse Fed is cool with him.

Vinnie Blue (4:29)

Clients are going to come to us and want to know what we think. It really opens up an opportunity for us to fill that void that the Fed may not be filling as much as they used to.

Sabri Benishaw (4:40)

Still, the spotlight is not always kind. Andrew Clinton is CEO of Clinton Investment Management. They do a lot with municipal bonds.

Andrew Clinton (4:48)

Up until I would say six weeks ago, everything was going quite swimmingly. It was a good year for fixed income in general and municipal bonds in particular.