LIZ ANN SONDERS: I'm Liz Ann Sonders.
KATHY JONES: And I'm Kathy Jones.
LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Each week, we analyze what's happening in the markets and discuss how it might affect your investments.
Well, hi, Kathy. So clearly one of the biggest stories this week has been the Fed meeting and the press conference. Those are always interesting. Powell does it after every meeting concludes. Now, no rate cut this time. Nobody was expecting a rate cut this time, but the combination of the statement and the new release of the summary of economic projections, the dots plot, the press conference, what stood out to you most, Kathy?
KATHY: I think two words stand out for me. One is stagflation and the other is uncertainty. And I say "stagflation?" with a question mark because it's not clear that that's what the Fed is expecting. But, no change in rates. They're still holding the Fed funds rate at 4.25 to 4.5% where it's been for quite some time.
And I think what was most interesting in the economic projections was that the Fed is projecting inflation to be higher than they previously had projected and economic growth to be lower than they previously had projected. So, you know, it implies a whiff of stagflation. I think stagflation really is higher inflation than we're talking about and slower growth than we're talking about. But nonetheless, not a great signal in terms of what they're expecting for the economy. But I think the outstanding part of all this is what Powell talked about the most is uncertainty. So it looks like they left policy on hold just because they have no clue how things are going to turn out and they're waiting and watching. And he specifically cited the administration's, you know, myriad policies around immigration limits, around tariffs, of course, and around tax policy eventually. And I think that the committee just decided, you know, "We have to wait to see how all these forces play out," because you have some forces pulling growth and inflation higher, and you have some forces pulling growth and inflation lower, and you may get a bad combination where growth goes down and inflation goes up.
And I think they want to hold their powder and wait and see what happens on that. They didn't really change their expectations about unemployment very much. Obviously, that's going to be a swing factor. If the unemployment rate starts to tick up, that's a whole different ballgame. So it was very interesting. I can't remember a time when the dot plot was quite as interesting as this one, maybe a couple of years ago. But one of the things that stood out to me is for this year, rather than the vast majority looking for two rate cuts in 2025, now a smaller number are looking for two rate cuts in 2025 and eight are actually looking at one. So that biases the market towards saying, "Oh, maybe there's only one rate cut ahead because inflation is too stubborn." But the other thing about the dot plot that was fascinating to me is the dispersion around the longer run estimate is huge.
And it used to be really tightly held right around that 2.5% area. And now it's just all over the place. So it tells you just how uncertain they are. In fact, I think in the press conference, Powell said, "I didn't know anybody who's confident in their forecast." So there you go. So an interesting meeting, even though it was sort of nothing done.
What about you, Liz Ann? I know you and Kevin just published an article about uncertainty and potential recession indicators. So that really kind of dovetails with this press conference.
LIZ ANN: Yeah, and one word that stood out to me was his renewed use of the word transitory. I thought that that word had literally left the building a couple of years ago. I don't know whether it just slipped out of his mouth, and he might be thinking, "Oh gosh, I can't believe I brought that back into the Fed lingo here," but I thought that was interesting. But, I think it's also, important to note, and I think you and I may have even spoken about this on the past episode, but we focus on inflation in the weeds, the rate of change aspects of inflation, month-over-month changes, year-over-year changing. We get into the weeds of core versus headline and core services, ex-housing. So to say that, and I think this is what Powell meant by transitory, that we're not, likely looking at a long-lasting impact on a going forward basis where the rate of change is going to continue to be high. It's a one time, you know, jump up in the level of prices, which clearly is likely to be the case.
But that's how consumers think about inflation. So we can't discount that as if that doesn't matter because inflation gets into the psyche of constituents in the economy and it gets that way more based on how they view the level of prices relative to some past period of time. So I think that that's important. And I agree, looking at the distribution was really amazing. I think it's also important that of the 19 dots, 18 do see upside risks for core PCE inflation. And PCE as a reminder is Personal Consumption Expenditures Price Index, which is the Fed's preferred measure for inflation, even though the market and we look at every variety of it. But I want to turn back to you. I wanted your thoughts on the change to the Fed's quantitative tightening program, because although the decision on rates was unanimous, I think there was one dissenter on what the Fed announced they were doing with the quantitative tightening or QT program. So what were your thoughts on that piece of the news?
KATHY: Yeah, I wasn't too surprised. They made an adjustment to it. So it gets a little bit technical. And for the Fed, it really is technical. There's a lot of theories around that suggest that the Fed is using this as a backdoor strategy to do ease policy or not ease policy or whatever. But actually, at this stage of the game, for quantitative tightening that is allowing the balance sheet to shrink, the Fed cut in half the amount that they're allowing to roll off the balance sheet. And the reason is really because they want to make sure there are quote unquote "abundant reserves" in the system. And what happens is the Treasury has drawn down its general account because we're under the debt ceiling limit. And when we finally get that lifted, they're going to have to replenish that account. And that means they're going to issue a lot of T-bills and that temporarily lifts reserves, and it gets into the plumbing of the financial sector. But the point of the matter is they want to make sure there are ample reserves. That's just part of their goal right now.
And if they're draining too much out of the system at a time when the Treasury needs to replenish the general account, you could encounter a pinch point like we did a couple of years ago where there's just not enough money in the system. So, that's really what it's all about. And Powell was asked about it during the press conference and I think he tried to really downplay the change. They're going from, you know, a cap of 25 to 20 or whatever it is. But it's not that big a deal, but it is a step towards ending the quantitative tightening program because they're, you know, the balance sheet is getting danced down over two trillion from the peak and it's around 22% of GDP which some have suggested is a pretty good level for the economy. So I think that this is just a gradual adjustment, but there always will be people who claim whatever the Fed does has ulterior motives, but I really think they're very just focused on not allowing reserves to get too tight and causing some sort of problem in the system because that is a big problem when they encounter that and then they have to go the other direction and it gets to be a big mess for everybody.
LIZ ANN: You know, I know you teed up when you pushed it over to me, the report that Kevin and I wrote on Monday. So we can put a link to that in the show notes. Of course, that was written before the Fed meeting. So we didn't do any kind of perspective deep dive on that, but wanted to address the pretty grave amount of uncertainty. So there's lots of interesting visuals in there. One in particular is the Trade Policy Uncertainty Index. Maybe it's the ultimate "duh" that it has gone parabolic. And Powell did address this somewhat based on questions he was asked, that where we're seeing the most acute amount of weakness at this stage is in the softer economic data, so the survey-based data, the confidence measures. But we are starting to see it work its way into some of the hard-data measures. So that's, I think, what's important to watch. In an ideal world like we saw a couple of years ago, when we saw weakness show up in the soft measures, the confidence measures, never corroborated by the harder measures. And ultimately the soft data caught up to the hard data. Given what we know now, all else equal, those are huge all-cap caveats these days. It looks more likely, at least near term, that the hard data could catch down to the soft data. It's hard to see a scenario where, given this ongoing uncertainty that all of a sudden, the survey-based data says, "Oh things look fine now until we get a little bit more certainty."
KATHY: Yeah, I think one of the key points there, too, is we're not just talking about one consumer sentiment survey, right? You're talking about surveys of businesses done by the Federal Reserve, done by various forecasting or survey-based entities. So, what you see when you look at those comments is just this feeling among a lot of businesses that "We can't plan. We just don't know what to plan for and therefore we can't…" They're not necessarily downbeat on the economy, they're just so unsure how to move forward and I think the risk is that the longer you sit still, the worse the economy can get because you don't hire and you don't place orders and things don't happen and the economy is dynamic, it has to keep moving and if it stops moving for a long enough period of time because of this overhang of uncertainty, then you can get into this downward movement in economic growth. So it's not just University of Michigan consumer sentiment, it's a lot of different surveys that are showing this level of uncertainty, a word that's getting very much overused.
LIZ ANN: You know, and that makes me think about an interesting comment that our colleague Mike Townsend—plug for his own podcast, WashingtonWise—but we were all at a conference last week doing a panel. And I think Mike had been in attendance at the Business Roundtable event that was in Washington, D.C. And he said, one of the overarching themes by businesses, not that any of them were saying, "Yeah, tariffs are great idea," but they were saying, "If this is the path we're going down, give us some certainty. What will it be? Is there a date certain? Are they going to be pulled off?" So they just said, "Give us the numbers with some kind of certainty and then we can plan accordingly." So that's another way to think about the level of uncertainty here.
KATHY: Yeah, I think rules of the road would be helpful for everybody. And once those are out there, if they're going to stay for any length of time, then people can plan around it and make their decisions. But if you don't have the rules of the road, it's very hard to move forward.
LIZ ANN: All right, so now we're going to do at this point of the show what we often do, which is look ahead a bit and we are approaching the end of the first quarter next week. So Kathy, what do you think people should be watching as we close the book on another quarter and looking ahead?
KATHY: Yeah, I think for me, it's always the big ones. It's always the employment data and the range of numbers around the employment data, such as JOLTS, and that stands for job opening and labor turnover survey. We won't get those right away. But I think we're going to be keeping a really close eye on those jobless claims as a very current indicator of how the labor market is doing because that's going to give us a lot of indication about where we go next. And then we'll get some of the more hard data as we like to call it. We'll be getting another revision of GDP. I think for fourth quarter that's a little old. But we'll be getting some of the durable goods orders. It'll be interesting to see how businesses are feeling right now in terms of placing orders for capital goods. And then at the end of next week, we get the personal income and spending numbers, the PCE, et cetera. It's a bit down the road, but I think that as always, those are really important numbers. How about you, Liz Ann?
LIZ ANN: Yeah, well, I think PCE in particular is important, not just because it'll be the latest inflation reading, and we know it's the Fed's preferred, but the latest consumer price index and producer price index were seen as somewhat benign. The only rub being that the components within those two indexes that map over to PCE version were on the slightly hotter side. So actually, it didn't mean, we can breathe a sigh of relief. PCE is set to undershoot expectations, which in the world of inflation, that's a good thing. And I think it'll be interesting, particularly in the context of what the summary of economic projections said about expectations for where the PCE is likely to land both near term and down the road.
We also get S&P Global's version of the PMIs, the purchasing managers indexes. And they're starting to get watched alongside the Institute for Supply Management version, which has always been the more popular ones, but there are often some nuggets that you find in S&P Global's version. I think these days, you mentioned it, Kathy, the comments, the verbatim comments from companies that are involved in these surveys, I think are the real tell in this environment. We also get the Conference Board's version of consumer confidence. We had the University of Michigan version of consumer sentiment. Interestingly, consumer sentiment tends to key a little bit more off of inflation based on how the questions are asked. Consumer confidence tends to key a little bit more off the labor market and perceptions thereof. So it's important to put that in context because some people really wonder at times where if you have a big divergence between those two readings, what can be the explanation for that since on the surface it looks like they're asking the same types of questions.
And then you mentioned jobless claims, always important, but increasingly so. And I think we've talked about it before, most federal workers file under a different system than the traditional initial unemployment claims, which is why increasingly economists, and I did this last Thursday when the data came out, also show a chart for those federal filings to get a, you know, obviously a fuller capture of what's happening with some of these DOGE spending cuts. And by the way, in case you've been living under a rock for quite some time, DOGE is short for the Department of Government Efficiency under the leadership of Elon Musk.
You can also look at claims, traditional claims by region. So you can look at D.C., you can look at Virginia and Maryland. And I think we're also going to start to deep dive into some of the ripple effects of the layoffs that we know are happening at the federal level, but also know are likely to trickle down into state and local, into the world of education and healthcare just because of some of those broader DOGE spending cuts and specifically grants. So that's certainly going to be on my radar.
KATHY: Well, Liz Ann, I do want to mention and congratulate you on once again being named as one of the 100 most influential women in finance by Barron's.
LIZ ANN: Thank you.
KATHY: Kudos to you.
LIZ ANN: It's missing a name by the way.
KATHY: Oh?
LIZ ANN: You.
KATHY: Oh, ha ha, no.
LIZ ANN: I'm not kidding.
KATHY: No, no, no, no, I, no, no, I don't I don't have the I don't have the reach that you do. But, you know, for a fixed income person, I'm happy to just, you know, keep working. And it's fun to do this podcast with you. But no, it's a great honor. I think you've been on it many years in a row now, haven't you?
LIZ ANN: I think since the inception.
KATHY: OK.
LIZ ANN: They'll probably find somebody more interesting at some point, I'll take a while it lasts, but thank you. Thank you.
KATHY: It's great, yeah.
LIZ ANN: So that's it for us on yet another eventful week. Thanks as always for listening and you can keep up with us in real time on social media. I'm @LizAnnSonders on X and LinkedIn. My standard public service announcement, make sure you're following the real me. Impostors continue to be rampant. You can also read all of our written reports and those include lots of charts and graphs at schwab.com slash learn.
KATHY: And I'm @KathyJones, that's Kathy with a K on X and LinkedIn. If you've enjoyed the show, we'd be really grateful if you'd leave us a review on Apple Podcasts or reading on Spotify, feedback wherever you listen. You can also find all of our episodes on YouTube. Just search for "On Investing podcast." We'll be back next week with a new episode.
LIZ ANN: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.
