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  • Fed to Respond to Financial Conditions: Morgan Stanley’s Wolfe

Fed to Respond to Financial Conditions: Morgan Stanley’s Wolfe

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Bloomberg Mercury Apr 9 08:48 · 47.9k Views

Sarah Wolfe, senior economist at Morgan Stanley, says it will take the deterioration of financial conditions to get the Federal Reserve to step in and deliver interest rate cuts.

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Transcript

  • 00:00 Sarah Wolf of Morgan Stanley writes, we revise our outlook for the US economy in the direction of even slower growth and a sharp firming
  • 00:06 of inflation.
  • 00:07 Sarah joins us now for more.
  • 00:09 Sarah, good morning,
  • 00:09 good morning.
  • 00:10 Does that constrain the Federal Reserve?
  • 00:12 Puts the Fed in a very tricky position.
  • 00:14 They're going to be on this wait and see hold.
  • 00:15 We're getting the FOMC minutes later today.
  • 00:18 Likely going to be a non event.
  • 00:19 Chair Powell made it pretty clear on Friday
  • 00:22 that he's highly attentive to the outlook.
  • 00:23 But they're not going to move until they get some deterioration in the hard data.
  • 00:26 The soft data is not enough.
  • 00:29 So what gets the Fed to move by more markets and out pricing in over 4 cuts for this year?
  • 00:33 It's financial conditions.
  • 00:35 We're talking about the the deleveraging that we saw yesterday.
  • 00:38 Credit spreads are widening a bit.
  • 00:39 There's a little bit of concern about what's happening in the private credit market as well.
  • 00:43 And so I think the feds going to be very highly attuned to how the the financial plumbing plays out.
  • 00:48 And that could be what gets the Fed to move.
  • 00:50 We've mentioned it a few times that.
  • 00:52 Back in 2018, in December 2018, when high yield credit really started to breakdown, spreads started to widen aggressive,
  • 00:59 and issuance completely froze, the Fed did step in.
  • 01:03 Are you saying parallels to this moment or are they constrained by the inflation story in a way now that they weren't back then?
  • 01:08 They're definitely more constrained today, right?
  • 01:10 I mean, we were dealing with 1 1/2% inflation in 2018, so it was much easier for the Fed to be delivering cuts
  • 01:16 they already had.
  • 01:17 We're ready to be a bit more on an easing bias.
  • 01:19 Right now.
  • 01:19 the Fed
  • 01:20 is treading a very fine line where they're worried that long run inflation expectations are going to be drifting higher with growth slowing down.
  • 01:26 It's a very tricky position for the Fed.
  • 01:29 But at the same time, if you have some type of liquidity
  • 01:31 issue, that's what could really start to cause the economy to tumble very fast.
  • 01:36 And so you see that
  • 01:37 the Fed will be very focused on the hard data when they can be,
  • 01:41 but then be very focused on financial conditions when they need to be.
  • 01:44 So we could start to see a little bit of a shift in Fed communication of financial conditions
  • 01:48 continue to deteriorate.