Daybreak Weekend: Fed Decision, Sweden Election, BOJ Meeting

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Nathan Hager (0:10)

This is Bloomberg Daybreak Weekend, our global look at the top stories in the coming week from our Daybreak anchors all around the world. Straight ahead on the program, we look ahead to the next monetary policy decision from the Fed. I'm Nathan Hager in Washington.

Caroline Hepker (0:23)

I'm Caroline Hepke here in London, where we are asking if Sweden will become the latest example of Europe's right-wing rise.

Doug Krizner (0:30)

I'm Doug Krizner looking at the reasons why the Bank of Japan is expected to raise its policy rate in the coming week.

SPEAKER_1 (0:38)

That's all straight ahead on Bloomberg Daybreak Weekend. On Bloomberg 1130 New York, Bloomberg 99.1 Washington DC, Bloomberg 929 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on bloombergradio.com and the Bloomberg Business App.

Nathan Hager (1:02)

Good day to you. I'm Nathan Hager and we begin today's program with a highly anticipated decision from the Federal Reserve. Kevin Warsh and company are set to begin their two-day meeting on Tuesday ahead of a September monetary policy decision on Wednesday. Ahead of it, we are joined by Anna Wong, Chief US. Economist for Bloomberg Economics. Anna, there has been so much anticipation heading into this decision. Bets in the rates market are steadily building that we will see an interest rate hike coming up this week. What's your expectation over at Bloomberg Economics?

Anna Wong (1:37)

Right now, the markets have almost fully priced in a 25 basis point hike already. So regardless of what any one thing or what any doves on the FOMC, which are on the fence, nobody could be on the fence just because markets have spoken. They want and they expect a hike. Kevin Warsh himself would be in a difficult position because he faces a boss, a president who has explicitly called for him to cut, and instead he is delivering a hike two months before the midterm election.

But he has himself to really blame for this difficult situation because, and Jackson Hole and in the two FOMC briefs before now, he has said he wanted to rely on unfiltered market signals to guide economic reality. And here the markets has shaped that reality. But the problem is that reality and that market signal might not be the most appropriate economic policy. In the CPI report, we have seen a hotter than expected CPI, and that was what led to this huge jump in market pricing of a rate hike. However, the hotness in the CPI report is really because of a couple strange things. One is the wireless cell phone service plan, and in other hotels, and it just so happened that Airbnb has been shifting and changing its pricing policy in the last couple of months. So should the Fed policy be because of a couple things like this? Well, I think that regardless, that is the reality. They are forging ahead. We are expecting that in the SEP, the summary of economic projections which the Fed will be updating, it will likely show one hike just in 2026, which is the hike that they are going to do.

And that reflect the fact that there, in fact, is still a lot of people on the fence. I think the fully priced and market futures overstates the certainty in this situation. In fact, it's more of a close call on the FOMC.

And then we are expecting to see in the SEP cuts in 2027 and 2028 As in the end, I think there are a lot of disinflation signals such as the fact that many food items are coming down and medical drugs are also coming down, entering into deflationary trends. And also, Warsh's own preferred metric, which is a metric that measures how many categories and PCE are growing at more than 3% inflation rate, that actually has come down. So all of this suggests that I think there is still just one hike in 2026

Nathan Hager (4:45)

Okay, well, given those disinflationary signals that you're mentioning there, does that make a case potentially that we could see a pause later on this week?

Anna Wong (4:56)

This is this difficult situation that I said that Kevin Warsh created himself for him. He has given a very hawkish Jackson Hole speech.

And while he said he does not want to give forward guidance, the guidance in his speech is that if these things does not happen, he will have to hike. And all these things in the CPI report do not provide a sufficient case to check the box on what the doves and the people in the camp of holding rates want to see. And so even though the economics of it is it's embedded in the details, but the obvious things, the things that that's causing the market to price in almost full certainty of a hike, are these top line things. So there's just no room for nuances or maneuverability around these details. It is the top line. It is what the markets has, the markets have spoken. And Kevin Warsh has said we should listen to the market. So the Fed will listen to the market.