Transcription:
Mike Scarchilli (00:05):
Hi everyone and welcome to the Bond Buyer podcast, your trusted source for insights on all things public finance. I'm Mike Scarchilli, editor-in-chief of the Bond Buyer, and in today's episode, bomb buyer managing editor Gary Siegel sits down with Blake Gwynn, head of US rate strategy for RBC capital markets for a deep dive into the current economic landscape and the Federal Reserve's policy outlook with inflation still above the fed's target a labor market facing uncertainty and growing concerns over policy shifts. Blake shares his perspective on what the data is signaling and how markets are responding. The conversation also explores the possibility of a recession, the risk of stagflation, the Fed's approach to interest rates and the potential economic impact of tariffs and policy on uncertainty under the Trump administration. With that, let's dive right in.
Gary Siegel (01:03):
Blake, welcome and thank you for joining us. So it appears the labor market is tightening inflation remains above the fed's target and there's much uncertainty about the economy. How do you view the economy right now?
Blake Gwinn (01:20):
Yeah, sure. And by the way, thanks for having me. The way I've been describing things to clients is that when we came into this year, we were much more in the optimistic camp. We had a very hawkish view of the Fed. That was true through most of 2024. That put us out of consensus quite often, particularly during some of that labor market. Those labor market concerns we saw in the summer of last year, and I think coming out of the election with the red sweep outcome, like many people, we were kind of focused on some of the tailwinds that were coming out of that outcome. That's for both growth and inflation on the inflation side, coming from immigration pullbacks on the growth side from deregulation, continued accommodative fiscal policy, i.e., tax cuts. But I think what's really changed since then is that the distribution of potential outcomes has gone from a very high probability of that modal positive case to now being much flatter.
(02:21):
I'm much less confident. I think this idea that the second half would see those tailwinds results in markets starting to price in a hiking bias around the Fed start to price in the possibility of some reacceleration, the path to that outcome is almost gone. If you think about the distribution, that probability of the right tail has gone significantly lower. And at the same time we've introduced these big downside tail risks that I don't think we're really part of my forecast about two months ago. So for now, I still think the fed's flat. I think the economy basically holds in, but very, very low in that and very close to tipping into more of those downside risk type of scenarios.
Gary Siegel (03:05):
So what I heard you say was you don't expect the next move to be a hike.
Blake Gwinn (03:11):
Not anymore. I think if you would've asked me that question about two months ago, I would've put a much higher probability on that. I would've said maybe 70% when we put out our year ahead for 2025, that shift to a hiking bias in second half, that was a big piece of our year ahead. And like I said, I think the path to that outcome has largely closed. And if anything, now we have these downside tail risks and with that comes a higher probability of the next move being a cut.
Gary Siegel (03:42):
So the past few weeks, the economic data have been a little softer for labor and this morning's release of CPI was also below expectations. Has the recent data changed your economic outlook? Any?
Blake Gwinn (04:02):
No, not particularly. And I would say the one thing that we're seeing a lot over the last month is this kind of divergence, I should say re divergence because the soft data, meaning a lot of these survey measures and things like that have really diverged from the hard data, meaning direct measurements of various forms of economic activity. Those had diverged over the last two years. They were starting to come back together again. But I think what we've seen in the last month or so is that those pieces of soft data, the surveys have really started to reflect a lot of the uncertainty around tariff policy, around a lot of these DOGE announcements and spending cuts. Those are reflecting that, but we haven't yet seen it crossover into the hard data, if you will, particularly the top tier if you're thinking NFP, CPI, things like that. That's something I wouldn't really expect to start showing up until maybe as early as March, but really kind of an April may story.
(05:01):
And I think the data that we've had since is actually, it's fine. It's very Goldilocks. We've had job prints, labor prints have basically been holding in. Obviously there's been some noise around some of these 2025 stories that we've already had. The LA fires, the bad weather that we've had in January, leaking into February. There's been some weird idiosyncrasies that had drove down Atlanta Fed's GDP Now that a lot of people were focused on. So there have been some pockets where we see weakness, but it's mostly been soft data or something kind of idiosyncratic around those factors that I just mentioned. But if you look at the real top-tier hard data, I think it's been holding in all right, that really hasn't changed our view so much. It's really the downside risks that I see now are much more forward looking and they're centered around this policy uncertainty that businesses and consumers are going to have around tariffs, around DOGE, etcetera.
Gary Siegel (05:59):
In your first answer, Blake, you basically said you expect the Fed to do nothing at its March meeting. Well, not nothing, but to hold rate steady at its March meeting,
Blake Gwinn (06:08):
They canceled it, it's done.
Gary Siegel (06:10):
What do you expect from the Fed for the rest of the year?
Blake Gwinn (06:14):
Yeah, so you're right. I think March there's really not going to be that much of a move. I think our view on the SEP dots is that for 2025, which is really the point of focus around these SEP meetings is the current year Fed dot. I think that stays the median for that stays at two cuts. I don't think, again, to this divergence between soft and hard data. I think the Fed, they're certainly watchful, I think of this decline in soft data and the uncertainty that's starting to show up in surveys and such, but I don't think they want to overreact to that. And I do think as long as in inflation remains a bit stickier than they'd like, that does kind of handcuff them in a way from really responding to that more forcefully or really trying to take some additional "insurance cuts" to stay ahead of that before it crosses over into the hard data.
(07:05):
So because of the inflation outlook still being a bit stickier than they'd like the inflation data being a bit stickier than they'd like, that's kind of the reason I think it keeps them on hold and keeps them really from reacting more strongly to this increased uncertainty we've had. Now looking at the rest of the year, this kind of goes back to what I said in my first answer around that modal expectation versus how the risks have shifted around it. We had the Fed on hold for the rest of the year. We thought we were already at the terminal rate, so our terminal call was 4.25%, basically where they're at now maintaining for the rest of the year. That hasn't changed. But whereas before we would've said they're on hold with a shift to a hiking bias by the end of this year. Now it's on hold and it's only going to take a few pieces of negative data or any signs that we are seeing that uncertainty cross over into lower activity. So businesses cutting back on CapEx, businesses cutting back on hiring, consumers cutting back on spending, etcetera, it's not going to take much on that front for us to really start to reincorporate cuts back into our forecast. So for right now, we still have the Fed on hold for the rest of this year, but those risks have shifted from upside and now to the downside, and I have to say we're very close to it wouldn't take much data to get us looking for cuts again.
Gary Siegel (08:30):
The new summary of economic projections that's released after this meeting, what changes, if any, do you expect in it?
Blake Gwinn (08:38):
I think kind of consistent with the data, the changes we should see relative to the December meeting are relatively small. I wouldn't expect major changes to the economic data. At the end of the year if you remember the December FOMC meeting Powell had said that their year end inflation outlook could, I can't remember the exact words he used, but they were very, very harsh kind of saying it had deteriorated the inflation data we've gotten to start the year. Now, obviously the Fed focuses more on PCE than CPI, but the CPI data we got for January was very strong, surprisingly strong. And even the year over year number, which Powell kind of tried to head that off by saying, Hey, we were really more focused on year over year at this point. Well, the year over year number moved against them too. Everybody expected it from, to go from 3.2 down to 3.1.
(09:34):
It actually ended up going up to 3.3 talking about core CPI here. Now I will say on the PCE side, which obviously the Fed focuses a bit more on that was a little bit more benign. So that strength we saw in CPI didn't really cross over as much to PCE. So there's a bit of wiggle room there where I do think they don't have to really remark. I don't think it's going to take a lot of remarking of those inflation forecasts because the PCE, like I said, was much more benign and that's the one that they're really focused on and that's the one that they're putting in that SEP. On the growth side, on the labor side, I think things are probably pretty close to their expectations. Again, if you're looking at that kind of tracking for GDP for Q1, obviously there was a lot of market attention on the fact that that GDP Now tracker went significantly lower a week or two ago.
(10:25):
Again, due to some idiosyncratic things, it's very early in the quarter as more data comes in that should level out. And I think from the Fed's perspective, they're not just automatically using these kind of forward-looking trackers, these realtime GDP Now type trackers, they know that the data's going to level out. They know this kind of issue around gold, this classification issue around gold that was driving a lot of that frontloading imports, etcetera. So I don't think they're going to significantly mark down growth or mark up their unemployment forecast either. And that's why I say when we're thinking about the SEP median 2025 dot for cuts that stays, that stays at two. If you're not really moving the econ forecast, there really shouldn't be that much need to move around the rate forecast either.
Gary Siegel (11:10):
Chair Powell always has a press conference after the meeting. What do you expect him to say and what do you think the market would like to hear him say?
Blake Gwinn (11:20):
Well, Powell has gotten very good at avoiding very market moving things. I think earlier in his tenure, he had a tendency sometimes to use some phrasing or take the bait on some questions from some kind of gotcha questions from reporters that would get him into a little bit of trouble. But I think he's gotten very good at avoiding big market moving things during the press conference. So with that being said, the message into the blackout period that we got from Powell, we heard from him on the Hill, and I would also just say other Fed speakers into the blackout period, which when Powell speaks at the FOMC meeting, he is speaking technically on behalf of the rest of the FOMC, not just his own views. So if we look at that Fed speak that we got from all the speakers into the blackout period, I think there's just this general sense that they're kind of in wait-and-see mode that the data has held in alright, they can have patience. You keep hearing them say things like, we have the ability to kind of sit and wait and see how things develop. So I don't think they're in a rush really to go anywhere. Now I think what we're going to be very attuned to and what markets are probably going to be more attuned to is if we see any signs or to what degree are they starting to onboard some of this uncertainty that's showing up obviously in risk assets. But again, like these survey survey type measures that have been declining and have been referencing tariff uncertainty, DOGE uncertainty, they generally try to avoid Powell's done his best to really avoid talking about not just fiscal policies, but Trump type of policies. He's done his best to kind of avoid that and say, well, we're only going to really incorporate that once it starts to be apparent in the data, once law actually gets passed and then we see the effects of it, that's when we'll react.
(13:15):
But I think it's going to be hard for him to not really mention how this uncertainty, this isn't just about policy being enacted, this is about the uncertainty around policies that couldn't be impacting things. So I think seeing how he characterizes that, seeing how much concern about those factors there is within the committee, that's what I'm really going to be looking for is how they're viewing this increase uncertainty and the decline in risk assets, the decline in the soft data and what they're looking for to really shift their stance to a more dovish position for the rest of the year.
Gary Siegel (13:55):
The beginning when you were talking about how Powell avoids answering questions reminds me of former Dallas Fed President Richard Fisher, who at the end of his prepared remarks would say, I will now take the opportunity to avoid answering your questions.
Blake Gwinn (14:14):
Well, I used to work at the Fed, and I think when we would do a market outreach and talk to market participants on the phone, I think it was kind of the same story. We'd always offer the opportunity to ask questions, but usually kind of cheekily give the guidance that we wouldn't really be able to answer any of them. So it's an old Fed tradition.
Gary Siegel (14:33):
Well, we have to take a short break and we'll be right back and we're back. So Blake, is the U.S. economy at risk for recession and why or why not?
Blake Gwinn (14:48):
Yeah, look, recession is still not our call. That's not a part of our call right now. But I will say that the probability of that has certainly grown. If you had asked me two months ago, I would've put that very, very low, sub 10% type of probability for recession in 2025. Now that's probably ticked up into the 20% type of range. And every day that we continue to see this back-and-forth and the uncertainty and this kind of mad flurry of headlines coming out of the administration and how that's impacting sentiment both consumers but also C-suites, that recession risk starts to gradually tick up still 20%. I'm using completely subjective numbers here, but if I see that as 20%, it's still not a likely outcome, but it has come up from sub 10%, so it's moving it, it's on its way higher. It's definitely starting to move higher, so not a base case anymore.
(15:51):
And the other thing I would say is I do think coming into this year, the economy's still on pretty solid footing. Consumer and business balance sheets we're in pretty good shape. Obviously there's been some concerns about credit at lower income, the lower income side of things, but when you really look at the middle upper incomes that drive a lot of the consumption in the U.S., when you look on the corporate side, those kind of clean balance sheets certainly give us some buffer against the downturn. And that I think coming into this without that over-leverage or a lot of signs that people are out over their skis or have gotten too far onto the risk side, that does put us in a pretty good position to kind of weather some headwinds. So I think there's a stage before recession where it's kind of not great growth, some continued loosening of the labor markets, just kind of a general slowdown, but where we don't really roll over into a self-accelerating type of recession. So I think there's still that case before we get to the full on full-blown kind of recession.
Gary Siegel (17:13):
Any concern about stagflation?
Blake Gwinn (17:16):
But the term stagflation, and I always kind of cringe a little bit just because when we talk about stagflation historically, the conditions there were so much more extreme. And I think what we're talking about here is really a very light version of stagflation and the way I kind of characterize it as a period where the Fed's dual mandate is kind of working at odds against each other and the Fed has to essentially choose one to focus on more than the other and let the other slide. So I would almost describe what our base case is at this point, again, with the Fed on hold for the rest of this year. I think that is at this point looking more like a stagflation light type of outcome where growth at best is probably somewhat flat, slightly down from last year labor markets, again continuing to soften a bit, so you get the kind of stag portion on that side, but then the Fed can't really react to that, or at least isn't going to react to that because the inflation pressure is still remaining a bit problematic throughout the year.
(18:20):
So it's a very light version of stagflation. And I think when you think about our base case with the Fed on hold, I think that's more what that looks like now, again, relative to where we came into the year thinking that there would be this re-acceleration, it wouldn't be stagflation, it would really be inflation, but also tailwinds to growth by second half that has really given way to more of this stagflation light type of idea. So it is something, I wouldn't say I'm worried about it. I mean that's kind of our base case at this point, but it's a very, very light form of stagflation. I think if growth gets bad enough, you tip over into that scenario where the Fed does actually cut and they almost kind of turn away from the inflation side of their mandate because if growth really starts to take a tumble, if labor markets are really taking a hit and really soften, their assumption would be that inflation would take care of itself in a quarter or two because you get growth low enough, you get negative growth, you get negative payroll prints, that's going to take care of the inflation problem in a couple quarters time.
(19:20):
So I think at that point they kind of move away from the inflation side of the mandate and just say, let's focus on making sure growth and labor don't fall more than they already look to be. That's where you get them focusing on that and delivering more forceful cuts, those stagflation lights where you just get flat or maybe a corrective cut or two,
Gary Siegel (19:42):
It's time to talk about tariffs. Blake, no one knows what's going to happen, but what is your view? How long will they be in place? What impact will they have on the economy or any other version of that question you want to answer.
Blake Gwinn (20:00):
Just make my own question. Look, I think you are absolutely right to caveat this whole conversation by saying uncertainty. I mean, I have no idea. I don't know that anybody has an idea. And if anything, one thing that's been striking over the last few weeks is I don't even know if cabinet members have any idea. I think if you kind of watch these TV appearances from Lutnick and others, sometimes it appears that they may be at odds with what Trump wants to do at any given time, and we've gotten some kind of mixed messages and very quick walk backs of various announcements. So for somebody on the outside who's not sitting in the Oval Office, it's even harder. So I don't claim to have any great view on that. I do think coming into the year, again, in line with this more positive outlook, like many people, I think we kind of looked at tariffs as unlikely.
(20:54):
The kind of tariffs that they were talking about on the campaign trail, these really large blanket tariffs across all trading partners, all products, we just didn't really see that as a risk. I think the barriers to that were both political, meaning that it's fine to talk about on the campaign trail, but when you actually sit down to start pulling the trigger on these things, the number of businesses, large donors, congressmen in your own party that have some type of connection in their district to imports or exports that could be hit with counter tariffs, etcetera, etcetera, the pushback against these things would basically result in them getting very watered down or pulled back, etcetera, etcetera. So that was kind of our view that there'd be that political pushback. And then on the other side of it, you also have legal constraints. The president does not have unlimited right to impose tariffs.
(21:52):
There are exemptions that these have to fit under. And our view is that if you try to do these kind of broad tariffs, that there would be court challenges that would essentially curb their ability to put in these broad tariffs. So I don't think that for all the noise we've had over the last few weeks, I don't think either of those things has necessarily been disproven. I don't think maybe there's a slightly bigger risk now after seeing how aggressively they've gone after it after trade in the early days, maybe that increases the odds of a bad outcome a little bit more. But if anything, I can look at the pullback that we've seen and with the Canada where we've seen the rolling out of deadlines, we've seen the pullback in USMCA compliant categories, et cetera. It does seem like the pushback, and whether it's from markets or whether it's from people that have the president's ear, that that pushback has kind of avoided some of the worst outcomes.
(22:46):
So I'm still relatively sanguine, again with very, very low conviction, with very low conviction that there's going to be a lasting large, broad type of tariff that we were expecting, I shouldn't say they were expecting, but that he was kind of talking about on the campaign trail. I don't think that has necessarily changed. I will say the one thing that has changed or the one thing we didn't see coming was the kind of chaotic nature of the entire discussion. And I think that's what's really got markets on its toes that's increasing uncertainty. It's not that there's going to be tariffs. I think markets and business leaders, C-suite types, if we kind of know where tariffs are going, if these are kind of very transparent, well telegraphed rolled out in a very clean way, businesses can plan around that. The businesses that are impacted can take that on board and move on with thinking about what the landscape looks like for the next few years, the next five years, the next 10 years. I think the chaotic nature of how this has gone down makes that very difficult. And that's really what I'm more concerned about is not even what tariffs go into place or how long they last, but that the uncertainty around it and the rollout of it and the point, the framework that the White House is using around them is so ambiguous to markets and business leaders that they just can't really plan and that that's going to drag on CapEx on hiring on investment, etcetera.
Gary Siegel (24:20):
That was a better answer than my question was. Thank you. So the Fed, when it started cutting rates, was worried about inflation and then at some point it was more worried about jobs than inflation. Now what do you think they're more worried about the jobs market or inflation and why?
Blake Gwinn (24:41):
Yeah, and I think you're referring to last year we had that, there was certainly a little bit of scare around the labor side in summer into late summer of last year given what was happening in the labor market data. So there was a brief period where I think they got a little bit worried about that, the so-called Sahm trigger that you might've seen a lot of coverage about in the news, etcetera, that is this kind of early warning sign, if you will, for recession that triggered. And there was a lot of focus on that downside, the downside risk to the labor side of the mandate. But as that came back, and to be fair, we were on the other side of that. I mean, we were looking at the things that were driving the shifts in the labor data back then and saying, look, these are not really kind of your classic early recession type of decline in the labor markets.
(25:35):
These were really shifts in labor supply and some cooling off of a very, very, ahistoric 2022 and 2023. There were still some very weird things happening in labor markets. So it was always our kind of view that these things are going to work themselves out. Labor market's actually still on solid ground. And that's actually what ended up happening. I mean, we saw the unemployment rate come down. The unemployment rate came back down to where it was. I mean the last two months we've been at 4.1 the month before that we were 4.0 and almost rounded down to 3.9. So very kind of benign type of labor risks right now. So I think the Fed has shifted a bit back to the inflation cut side because at the same time as those unemployment risks or the labor market risks have been coming down at the same time that's been happening, their confidence that inflation is headed back to 2% has also been deteriorating.
(26:29):
And again, I mentioned earlier that that comment that we got from Powell at the end of December and the whole of that hawkish December FOMC meeting came about because of what we were seeing in some of the labor data and the fact that it just wasn't coming down in the way that the Fed wanted. So things are relatively balanced, but I do think right now they are tipped still a bit more to the inflation side that they're just not quite confident that we are consistently coming, consistently coming back down to that 2% level. And I think particularly when you start looking at some of the base effects that we're going to get the rest of this year further, progress seems a little bit more difficult. So for now, I think they're more focused on that. The last thing I would say is on the tariff side specifically, just because we were just talking about tariffs a second ago, but Powell has kind of admitted that some of the FOMC participants are working in expectations for policies into their outlooks.
(27:33):
Now, I presume that those are more inflationary at this point because that mentioned first kind of started in the December FOMC where it was a hawkish delivery. And the implication was that yes, some of them are thinking about cutbacks and immigration that could create wage pressure or tariffs that could create upward price pressure. So I do think some people have been incorporating those into some FOMC participants have been incorporating that into their outlooks. And so again, just suggests that things are still a little bit more focused on those upside risk to inflation than downside risk to labor, which aren't really that problematic now, but we'll see how that shifts with if this uncertainty starts shifting into the hard data. That's what we're really looking for. Does that shift happen where it starts to pull things back to the downside on growth, downside on labor?
Gary Siegel (28:22):
How serious is the Fed about hitting 2% inflation? Do you think 2.5% would be enough to satisfy them?
Blake Gwinn (28:30):
That's a great question, and honestly, I think a lot of Fed wonks and people who follow the Fed a lot do ask that question and have discussions around that. Comments from the Fed have, I think at least suggested there is a bit of a comfort level around that. I think it's hard for them to outright say, Hey, we're fine with 2.5% because then that really it can kind of reset and create this kind of moving goalpost that if 2.5, if you say, okay, well they're fine with 2.5, well then they worry that 2.5 becomes the floor and we trade above that floor. So then 3% is okay. And then it's just kind of this slippery slope where if they are seen accepting 2.5, that inflation expectations will then move to something like 3%, and that can very easily slide. So they're not likely to admit that openly.
(29:28):
But the way I've kind of characterized it is that it's not binary. It's not like you hit some level and you go from easy to tight or vice versa, that it's really a sliding scale. I mean, it's like being in a car and you're not hitting the brakes, you're not hitting the brakes as hard in different points of that slow into a stop. And so the way I think about it is the closer you get to that 2% target, the less they're pressing on those brakes. So when you're at 5% inflation, you want to be as tight on monetary policy as you possibly can be. When you get to 3%, you're less tight. When you get to 2.5, you're leaning just a hair to the tight side, and then finally a 2%, you're more neutral. So I really see it more as a kind of a U-shape around that 2% than as far as their reaction function, where they're going to set rates in terms of restrictiveness and tightness. It's really more kind of a sliding U-shape as they get to that 2%. It's not really as binary as saying, we hit this level, we're fine.
Gary Siegel (30:35):
President Trump has said he wants a greater say in monetary policy. Do you see any pathway that President Trump erodes the Fed's independence in any way?
Blake Gwinn (30:50):
Look, it's impossible to say that there's no way, certainly with Trump, he's nothing if unpredictable and kind of has broken a lot of norms and things that you wouldn't have thought you thought were kind of immutable. And so I would never say never, but I think just looking at the way I understand things and the way I look at things, I see very little impacts from Trump on Fed decision making. For one, if we don't have any unexpected resignations or departures from the Fed, he won't have that many opportunities to name people to the board. So we have Kugler's seat coming up. Now, obviously everybody's talking about Powell's chair term ending, but remember that his board term actually extends well beyond that. So there is a scenario where he may no longer be the chair, but he actually stays on the board, meaning Trump in the next few years may only have that one seat, the Kugler seat, to allow him to put somebody onto the board.
(31:57):
So he may only be able to place one person on the Board of Governors. And remember that all of the regional presidents, the president doesn't really have a hand in that. Those are selected by the boards of the individual banks and selection committees at the individual banks. So he doesn't really have a hand outside of selecting board members. So if he can only really put on one board member, now maybe he can make somebody chair, that's fine. But I also would say that if there is a sense that he has put somebody in that is purely there to do his bidding, I do wonder if there's a possibility where we could see votes FOMC votes becoming more operative than symbolic. And what I by that is I think we've grown very accustomed just because by the nature of the Fed chairs we've had over the last four or five decades going back Bernanke, Yellen, Powell, back to Greenspan.
(32:52):
I mean, these were very respected people and I think they could lead by consensus. And so we've kind of become accustomed to the way the Fed operates, where they generally are a consensus driven outfit, and maybe you get a dissent here and there, that's fine. But overall, they operate by consensus. And that has been possible because I think there is respect for those Fed shares. Now, if Trump were to put somebody in that Fed chair spot that is seen as really just a pass through for doing what Trump wants, they don't have to go along with that. And we have seen Fed chairs lose votes. Like I said, we're just used to that because it's the way things have operated for most of recent history. But even Volcker, Volcker lost a vote. He was on the wrong side of an FOMC vote. So it's not impossible to think that maybe we get into a scenario where, yes, he puts somebody in to try to influence what those decisions are going to be, but the rest of the committee just basically revolts and says, well, we're going to vote.
(33:52):
We're going to vote where the data is. We're going to keep doing what we were doing. So even there, I don't think he has a ton of influence. The one thing I'll say, and I think this has been very interesting, I think it hasn't really gotten enough attention, particularly in terms of the rally in Treasuries we've had over the last month or so, Bessant focusing on the tenure and saying he and Trump are really focused on the tenure. I think this is a really smart strategic move because in the prior term when Trump was upset and wanted rates lower, what did he do? He took to Twitter and tried to bully Powell into cutting rates that didn't really work. Now, some people have a different view of that, but overall, I would say Powell was not moved by Trump tweeting at him. He didn't really care.
(34:40):
So that was pretty ineffective. I think this focus on the 10 year point, what Bessant probably smartly realized is that a 10 year yields probably have a much bigger transmission to the real economy. That's what influences more corporate borrowing rates, mortgage borrowing, etcetera, right? Much more so than the Fed funds rate. So I think it's a decision to basically cede the front end of the curve to the Fed and say, fine, if you don't want to cut, don't cut. We're going to control the 10 year yield. And the interesting thing about the 10 year yield, and again, why I say this is a smart strategic move by Bessant, is that they actually have a direct lever to pull. They control issuance. And if they wanted 10 year yields, lower Bessant could come out tomorrow and say, well, I'm cutting issuance in 10s and 30 year bonds, and we're going to put that issuance into the front end. We're going to put it into bills, we're going to put it into twos and threes basically forcing a flattening of the curve and forcing the 10 year yield rate lower. Now, that's not something I'm expecting, but that is a possibility that I had not even considered before Bessant started talking about and focusing on the tenure yield a month or so ago. So I think that's a way to sidestep the Fed and say, you know what, fine Fed, you control the Fed funds rate. We're going to grab control of ten-year yields.
Gary Siegel (35:57):
Well, we're out of time, but I want to thank you, Blake for joining us and for all your insight. Sure thing. And
Blake Gwinn (36:03):
Thanks for having me.
Mike Scarchilli (36:05):
We hope you enjoyed today's episode of the Bond Buyer Podcast. A big thank you to Blake Gwynn for sharing his insights into the evolving economic landscape, and to our own Gary Siegel for leading an in depth discussion. Here are three key takeaways from today's conversation. One, the Federal Reserve is likely to stay on hold for now, but downside risks to growth and increase policy uncertainty could tilt the balance toward rate cuts later in the year. Two concerns about inflation remain. The Fed appears focused on maintaining stability even as uncertainties around tariffs and fiscal policy create headwinds for business confidence and investment. And three, while the risk of recession is rising, the US economy still has some buffers. However, prolonged policy, uncertainty, and potential market disruptions could shift the outlook quickly. Thanks for listening to the Bond Buyer Podcast. This episode was produced by the Bond Buyer. If you enjoyed the discussion, please subscribe on your favorite podcast platform. Leave us a review and check out our latest coverage at www.bondbuyer.com. Until next time, I'm Mike Scarchilli, signing off.