Central bankers do nothing. Markets respond

SPEAKER_1 (0:00)

One thing that we're hearing more about is a concept more around universal coverage and whether it's the Thrift Savings Plan for All, where there would be mandates to enroll everyone in some type of federal plan, or it's the state-by-state mandates of offering the IRA-type plan.

SPEAKER_2 (0:20)

To hear more about employer-based retirement plans and the current state of retirement readiness, subscribe to PGEM's The Outthinking Investor in your favorite podcast app.

Katie Martin (0:36)

Pushkin.

Those heady days when investors were convinced we were going to get rapid fire rate cuts from the Federal Reserve are well and truly over. This week, the Fed suggested that maybe we'll get one cut this year, maybe two. But today in the show, we ask, are we sure we're going to get even that? Like, is zero an option?

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the Financial Times here in London. And I'm delighted to welcome to the podcast today a full on central banking nerd, Chris Giles. Chris tell me, would you like to be a central banker? Is it an easy job?

Chris Giles (1:20)

No, you have to make these quite big decisions about what affects everyone's finances.

And you don't really know. And if you get it wrong, and it's obvious you've got it wrong after the fact, everyone has a go at you.

Katie Martin (1:30)

Yeah, people just sort of fling poo at you constantly and tell you you're wrong about stuff. Well, there's so many armchair generals, armchair Fed members, right?

Chris Giles (1:38)

I mean, I love to look at what the markets have expected the central banks to do. And so they say, well, their forecasts aren't working, but the market is literally a forecast of what rates are going to be. And they have changed their minds so many times over the last two years.

It's true, the central bank forecasts haven't worked at all well in the last few years, a bit better now than they were in 2022, but everyone's been in the same boat.

Katie Martin (2:02)

There's a whole lot of wrongness to go around. But so tell me, what did we learn from the Fed this week? They did this weird thing where they suggested that we're gonna get one and a half rate cuts this year. No, you don't really get half rate cuts in real life. So what are they saying?

Chris Giles (2:16)

You don't, and it's where the median, which is the median expectation of their committee, there's 19 people on it, was for one rate cut, but actually eight of them suggested two.

So it was pretty close, so they can't decide. So about half think two, about half think one, and a few think zero. So zero, as we started the show, is perfectly possible. We were thinking six at the start of the year. So that was where markets were. Markets were six at the start of the year. At the time, the Fed was about three.

The Fed sort of stayed sanguine, saying three, and now it's one or two.

Katie Martin (2:54)

Yeah, so the Fed's only moved by like one and a half cuts, right, in terms of signal of expectations. But the market really got the wrong end of the stick and ran really hard with it, right? So there's been this kind of big readjustment as markets have come into contact with reality.

Why has that process been so difficult to read? And what is it that now, that could actually force the Fed's hand to do something?

Chris Giles (3:19)

Well, it's all about data and the terrible term data dependence, which just means that you go along, you think something, the data comes in, proves you wrong, any change your mind.

Katie Martin (3:30)

So, haven't got a Scooby.

Chris Giles (3:32)

Haven't got a Scooby.

No idea what's going on. Start of the year, we just had three really good inflation numbers in the US. In all ways, it was better than expected. So, this is why the markets thought, okay, inflation's over, growth is back, hooray.

Katie Martin (3:48)

We have defeated inflation. Mission accomplished.

Chris Giles (3:51)

Exactly. They were on that aircraft carrier outside, with the banner, and then we had three really terrible inflation releases. And then we had the fourth one, we've had five in the year. The fourth one was okay, that was for April.

And the May figures we got on Wednesday were pretty good, actually really good. So, the key numbers there was that headline US CPI inflation, it's ridiculous that we have to go into these details. But the headline CPI inflation in the month of May was zero. There was no inflation towards the prices were the same as in April.