Why the Federal Reserve Raised Interest Rates

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2:07absolutely pre-committing to it, making it pretty clear that he's prepared to go further. I'm David Gura and this is The Big Take from Bloomberg News. Today on the show, the Federal Reserve raises rates by 25 basis points unanimously in the face of elevated inflation and elevated uncertainty. Bloomberg opinions John Authors is with me, along with Maria Elowisa Capuro, who covers the Fed for Bloomberg News. And the three of us are going to dig into the Fed's latest rate hike, the market reaction, and the political fallout. The plane fact is that inflation is too high and has been for too long. John, you wrote earlier this week that Kevin Worsh kind of walked into a rates trap. Yes. Explain what you meant, but I can't think of a CPI report that has had as much perceived importance as the one that we got last week. This is one of the more plainly consequential ones.

3:08And the irony is that Kevin Worsh has set out his stall against giving forward guidance, against boxing himself into corners. But the way he presented himself at Jackson Hole a few weeks ago, when he complained that inflation was too high, he made the point that the level of inflation is unacceptable. He didn't talk about the direction of travel. He wasn't talking about our things steadily improving. He was saying, this is too high. And the problem he then had was that last week's last month's report, the level is still too high, if you're serious about the Fed's target, because of oil, thus he's more or less boxed himself into hiking because of the framework he gave us only a couple of weeks ago and because credibility is so important. Maria Eloise, I saw you in Jackson Hole after that speech. Was it immediately evident to you

4:08when he delivered it that this trap had been set and indeed he was wandering and doing it? It was definitely something we were asking people where they felt like caged in into September, but I think it's useful also to take a few steps before that, as you've seen back. And the reality is that there were members of the committee, this is not just Kevin Worsh, this is a committee for people voting. There were already members of the committee who felt back in July that there was enough reason to hike. So we had three descendants in favor of a quarter point hike. And at the same time, we've had more recently, even after Worsh's speech, other members of the committee also saying that they're very concerned about inflation, that if August came in hot, they would be willing to consider a hike. So it is pressure building. Also, I would say like around him. In the sense of Worsh, he also came to Jackson Hole very pressured to the liver or to explain his thinking a little bit more. Because he was so reluctant to do so. Exactly, and he's not,

5:12as John was saying, not just his reluctancy to give forward guidance in terms of where interest rates are going, but he also wasn't given much of his thinking around anything on the economy. July's pressure was very precise. He's answers to reporters were not very detailed into what is he thinking about inflation, where is he seeing signs that concern him, what does he think about and the employment. So I feel like he felt forced to be more direct. And he was. How direct was he in talking both about the rate hike and the rationale behind it? He was perhaps slightly more direct than he might have been. You could argue that he was arguing to constituency of one, I Donald Trump, in making it several times clear that this was from because of the economy being stronger than people thought it was. And the geopolitics had moved against.

6:16But that was an interesting way to frame it, which he came up with several times. If you listened very carefully, he was saying that he was embracing a discipline rather than a decision. Last month in Wyoming, I expressed my commitment to a monetary policy discipline, not to a decision. So I think your average psychological profiler, if this was a thriller, would say that he's giving the game away that he does indeed expect to hike further. And that's what his art blood said today, as well. The dot plots say that's and Bloomberg's beautiful work is now even clearer that we've got four, three more hikes after this one, four hikes total. This is going to be a true tightening cycle. And that is a quite remarkable shift in a very swift period of time, which has been a company I would argue by a really quite surprisingly mild reaction in the stock market. And we go to the

7:20warp function, the world interest rate probability function, the Fed funds future rate function on the terminal and see there was such conviction among investors that the Fed was going to raise rates today. 2 p.m headline flashes on the terminal. I get up and look at you John across the newsroom, your eyes, eagle eyes glued to your worksheet looking at the market reaction, walk us through what you saw what your takeaways were from the way that the market reacted to the decision today. And the chairman's comments at the press conference. I mean, the most obvious reaction, which is which held up was the dollar. The looks as though currency traders weren't expecting this hawkish a move. And I think the statement also similarly had more of an implication that they were going further than had initially been thought. And you did see higher rates, all other things equal attract funds to where the higher rates to be had strength in the dollar, all else equal. So the dollar was the one that most startled me

8:22and most interested me. The other thing that intrigued me, you know, the stock market, we are below the peak. We're about 3% isht below where the peak was. We're still up 10% for the year. If you're asking me this is this was more hawkish than expected. Should therefore very directly mean that stocks should go down a bit and they did, but they really didn't go down all that much. And that that was quite interesting. There were moments during the press conference when when the stock market seems to be getting more nervous, but you're still down 0.5% for the day. After a plainly more hawkish worse for stocks than expected, announcements suggest basically that we can handle this. That that that Kevin Walsh is right when he says he finds it hard to say that conditions are restrictive at the moment. He can he's just height rates and the stock market is still very close to a really impressive time high. John, let's talk about how we got here. Just give us

9:27the 30,000 foot view of how this economy is doing now with the data or telling us and policy maker is about jobs and inflation as well. We've got to bear in mind that this is with looking at the economy and the aggregate, but at the aggregate level, particularly thanks to the unexpected positive shock coming from all the money being spent on AI, there's no great positive shock from productivity helped by it yet. But their plainly is a very big positive shock from the sheer amount of money being spent on building it out. The economy is fine. Nominal GDP is rising at levels that outside of the really big distortions around the pandemic we haven't seen in 20 odd years, since before the global financial crisis and didn't really very often see growing fast than this for the 10 years before that, which given that the economy is that much bigger these days starting from a higher base, that's a good place to be. If you look at financial conditions, Bloomberg has lots of very cunning ways of smoothing together, lots of different

10:31measures of exactly how tight money is. Financial conditions are pretty much as easy as they have ever been since we've been measuring them, which again goes back some decades. So there is no way on earth that you cannot survive one pathetic little 25 basis point rise in the Fed funds rate. Companies are raising money with no problem at all, and where there is at least some reason to think that inflation is higher than ideal and that it's worth taking some steps to reduce it, particularly given that there is a very serious problem within equality, which is very directly worsened when inflation is high. Ergo from 30,000 feet there's an argument for rates to be somewhat higher than they are now. After the break, more of my conversation with John authors and Maria Eloisa Capuro.

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14:40discovered the world's game, which we already know. We want it for time. Brittle, brutal. We digress. We digress into subjects which may or may not interest. Even more than more people. I think the trap is we are in this very difficult situation. There are two important points. One is Donald Trump has been prepared to take much more direct action against J. Powell than any president had done in previous history against a Fed's chairman. J. Powell is still a governor. He is still a governor. There are limits to what he could do, but plainly he can make your personal life very difficult. And Lisa Cook could tell you this as well. The other thing is at this point, and this could actually surprisingly point to how important the midterms turn out to be, Worsh's term lasts longer than Trumps unless you can find a way to actually fire him, which we

15:41discovered with J. Powell is pretty difficult. He can just outlast this guy now. And a lot could depend on the midterms. If this is a really major blue wave rebuke to Trumpism, which is possible, then Trump can huff and puff a lot more and we have a more truly independent Fed's chair. If it turns out, and again, I regard this as about equally likely to to the big blue wave that he barely loses the house holds on to the Senate quite comfortably, quite a number of big Trumpy politicians actually get back in and you still have a fairly empowered president with the Senate behind him for another two years, even if he's a layman duck than he was, that could make quite a big difference to the politics of exactly how Kevin Worsh is able to do his business, exactly how independent he can be. And to add, even the Fed remains independent from economic cycles, and I do film all of the Fed officials to think about the economy independently from economic cycles.

16:48The reality is that if the situation gets worse in inflation and they didn't hike now, why could have happened in October? Like, are they actually free to hike in October? Is the next rate hike most likely coming in December? Because of the election. Because of the election cycle. There are studies that do actually show that central bankers pressed into political cycles to at least intend to weigh them out and not make drastic calls before elections. There's certainly a very widespread belief, which I can tell you just from my inbox, there was the jumbo cut that Jay Powell made at 50 basis points the September before the 2024 election. And if you could remove the election from it and I could completely explain it, it was a contentious decision, but I could completely explain it, they very nearly had cut the meeting before and they'd had some surprisingly bad data

17:51two days after they had met and realized they should have cut then and they were catching up. There were good explanations for why they suddenly cut by 50 bips with an election coming up. That looked bad. It's not stupid. It is not mad conspiracy theorism to think that was out of order. That is definitely heightened tensions. You do not, if you're Kevin Walsh, want to be on the receiving end of people angrily thinking you are playing politics. So we got the market reactions we've been talking about and then the anticipated reaction from the president as well. He posted on Truth Social after the meeting and the press conference. Interest rates in the United States should be 1% or less because we are the best credit in the world by far. He goes on to say at the end of that post, lower the interest rates for the United States of America and fast all caps with an exclamation mark at the end. What does this mean for Kevin Walsh? Is he still navigating this new job? To some extent, as I've been saying earlier,

18:53unless he's prepared to go to the lengths of actually trying to fire Kevin Walsh for calls or get the justice department to come up with some reason to prosecute him as an individual, both of which unfortunately are conceivable but are unlikely. I don't think famous last words. I'm not sure what Donald Trump says about this. For now matters all that much. He made his call. He gave Walsh the job. He stuck with him and he can huff and puff but I don't think that would move the market terribly unless he did something as extreme as I just said, unless he actually makes a coherent attempt to fire the guy. That would be huge and it would be very misguided. I think there's always in which maybe we get a more tame reaction that we feared from the warehouse. But if they can sell it as

19:57it is appearing to be a decision to initiate a rates hike cycle that may be a short one because really there's two more rates implied in the dot plot that sort of corrects and removes the dose of accommodation that the German Walsh was saying today and helps drive strength in the economy as he also said. We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives. But for everyone, as he also said, that inflation it is a tax on those who have on those lower income households. If he can sell it that way, I think we may have a more mild reaction and he survives. One other point I'd add to that, I think Kevin Walsh was quite a good politician. He did sell this

21:01the economy is stronger than I thought it was when I arrived 120 days ago. The phenomenal Trump economy is just so good that we just have to tighten rates just a little bit and it isn't going to hurt it because we're just so strong. If you liked this episode, make sure to follow and review the big take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow. If you listen to financial news, you know a lot of time has spent thinking about what's next. The next opportunity, the next investment, the next move. But sometimes what matters most is being ready for what you never saw coming. For more than 75 years, Cincinnati Insurance has

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