SELLOFF THE DAY BEFORE, JOINING
US RIGHT NOW WALL STREET JOURNAL
ECONOMIC EDITOR JON HILSENRATH.
WHAT'S YOUR TAKE ON WHAT'S GOING
ON?
I HAPPENED TO SPEAK TO A COUPLE
OF FUND MANAGER THIS IS WEEK AND
THEY TOLD ME THAT THERE'S A
SHIFT FROM SOME LARGE FUNDS
MOVING OUT OF STOCKS GOING INTO
BONDS, WHEN YOU SEE THAT KIND OF
VOLUME AND BIG MONEY DOING THAT,
OBVIOUSLY IT WILL MOVE MARKETS?
>> YEAH, AND THAT MIGHT BE THE
CASE, MARIA, YOU KNOW, I WAS
PUZZLED BY YESTERDAY'S SELLOFF
IN PARTICULAR BECAUSE WE GOT
INFLATION NUMBERS THAT WERE
ACTUALLY PRETTY MODEST AND
LOOKED LIKE WHAT SPARKED THE
SELLOFF IN THE FIRST PLACE WAS
PEOPLE GETTING WORRIED ABOUT THE
FED, PEOPLE WORRIED ABOUT
INTEREST RATES RISING, WHEN YOU
HAVE MODEST INFLATION NUMBERS
THAT TAKES PRESSURE OFF THE FED
TO RAISE INTEREST RATES SO IT
WAS A LITTLE PUZZLING, IT LOOKED
LIKE THERE WAS MOMENTUM IN THE
SELLING AND KEPT GOING, BUT, YOU
KNOW, WE HAVE SAID THIS MANY
TIMES, THIS ECONOMY IS PRETTY
STRONG.
IT'S KIND OF HARD TO SEE A
SIGNAL FROM THIS MARKET RIGHT
NOW THAT THE ECONOMY IS -- IS
LOSING MOMENTUM, SO, YOU KNOW, I
THINK THE SELLOFF ITSELF DOESN'T
LOOK TO ME LIKE IT CONTINUES.
DAGEN: JON HILSENRATH, I'M GOING
TO ASK YOU A QUESTION POSED BY
ONE OF OUR VIEWERS ON TWITTER,
WHY IS THE FEDERAL RESERVE
REDUCING THE BALANCE SHEET AND
HIKING INTEREST RATES AT THE
SAME TIME BECAUSE THAT IS DOUBLE
WHAMMY OF TIGHTENING, WHY WOULD
THEY DO THAT, WHY ARE THEY DOING
THAT?
>> WELL, WE HAD A FINANCIAL
CRISIS, WE HAD A VERY DEEP
RECESSION, WE HAD A VERY SLOW
RECOVERY AND THE FED SET
MONETARY POLICY AT ABNORMAL
LEVELS, INFLATION WAS WAY BELOW
TARGET FOR MANY YEARS SO WE HAD
ZERO INTEREST RATES AND THEY
EXPANDED THEIR HOLDINGS OF
BONDS, WE ARE NOW HEADING BACK
FINALLY AFTER ALMOST 10 YEARS TO
AN ECONOMY THAT LOOKS MORE LIKE
NORMAL, INFLATION IS BACK AT 2%
TARGET, IT'S AT NORMAL, GROWTH
HAS PICKED UP, THE FED IS TRYING
TO GET MONETARY POLICY BACK TO
NORMAL, THAT MEANS RAISING
INTEREST RATES, THEY VERY
EXCEPTIONALLY LOW FOR A LONG
TIME AND TRYING TO NORMALIZE
BALANCE SHEETS.
MARIA: DO THEY HAVE TO?
DAGEN IS ASKING, WHY NOW, WHY DO
THEY HAVE TO DO BOTH THINGS,
THEY HAVE TO UNWIND THE BALANCE
SHEET, WHY NOT HOLD THAT, WAIT
FOR THAT GIVEN THAT THEY ARE
ENTERING A NEW PERIOD OF RAISING
RATES, YOU ARE PUTTING MORE
PRESSURE ON MARKETS IS THAT WHAT
YOU'RE SAYING?
DAGEN: THEY DON'T KNOW THE
IMPACT OF UNWINDING THE BALANCE
SHEET --
>> IF I CAN INJECT THERE.
TO JON'S POINT EVERYONE
APPLAUDED QUE1, THERE WAS MIXED
VIEWS OF QUE2 AND MOST PEOPLE
DID NOT THINK WE NEEDED TO DO
QUE3, NORTH OF 4 TRILLION ADD
TODAY BALANCE SHEET, NO ONE SAW
PLUS ZERO RATES, YOU COULD SAY
WE WERE EASILY NEGATIVE RATES
WITH THE QUANTITATIVE REASONING.
MARIA: DO I THAT VI TO DO IT
NOW?
JON: MARIA, ON THE QUESTION AT
WHY NOW, THEY'VE BEEN DOING IT
FOR YEARS, THEY STARTED RAISING
INTEREST RATES IN DECEMBER 2015.
GRADUALLY AND THE BALANCE SHEET,
THEY ANNOUNCED THAT LAST YEAR,
THEY ARE MOVING VERY SLOWLY AND
IT'S NOT GOING TO BE FULLY
UNWOUND FOR A COUPLE OF YEARS AT
LEAST SO IT'S A VERY SLOW AND
GRADUAL OH PROCESS, YOU KNOW,
THE MARKET MIGHT BE RESPONDING
TO IT NOW AND THE PRESIDENT
MIGHT BE RESPONDING TO IT NOW
BUT THEY'VE BEEN AT THIS FOR A
LONG TIME.
MARIA: OH, HE'S RESPONDING IN A
BIG WAY, JON.
THE PRESIDENT LASHED OUT AT
FEDERAL RESERVE AGAIN YESTERDAY
BLAMING THE CENTRAL BANK FOR
THIS WEEK'S MARKET SELLOFF,
WATCH.
>> I THINK THE FED IS OUT OF
CONTROL.
I THINK WHAT THEY ARE DOING IS
WRONG.
I THINK THE FED IS FAR TOO
STRINGENT AND THEY ARE MAKING A
MISTAKE AND IT'S NOT RIGHT AND
DESPITE THAT WE ARE DOING VERY
WELL BUT IT'S NOT NECESSARY IN
MY OPINION AND I THINK I KNOW
ABOUT IT BETTER THAN THEY DO.
MARIA: JUST TO BE CLEAR, THE
PRESIDENT SAID HE'S NOT GOING TO
FIRE FEDERAL RESERVE JAY POWELL,
JON.
JON: THERE'S SOME QUESTION ABOUT
HOW FAR THE PRESIDENT COULD GO
TO FIRE JAY POWELL, THE LAW
STATES THAT IT WOULD HAVE TO BE
FOR CAUSE AND THAT'S BEEN
CHALLENGED IN COURTS OF WHAT
EXACTLY CAUSE WOULD BE, DECISION
--
MARIA: COME ON.
JON: NO, THIS IS SOMETHING
THAT'S BEEN CHALLENGED IN COURT,
SO, YOU KNOW, IT WOULDN'T BE --
IT WOULDN'T BE AN EASY THING FOR
HIM TO DO IN THE MARKETS DON'T
THINK WOULD RESPOND WELL WITH A
FIGHT --
MARIA: YOU'RE RIGHT.
>> I WANT TO GO BACK TO YOUR
CONVERSATION ABOUT THE IDEA WITH
THE MARKETS AND TO DAGEN'S
POINT.
WE NOW HAVE WHERE YOU CAN BUY
MUNICIPALS AT 4%, WE HAVE NOT
SEEN THAT IN OVER A DECADE AND
SO WE ARE AT A POINT WHERE YOU
COULD EASILY NOT SEE JUST WITH
FIXED INCOMES BUT YOU CAN GET
TAX EQUIVALENCE OF 6% NOW, WITH
THE VOLATILITY WE HAVE SEEN OVER
THE LAST FEW MONTHS, IF YOU LOOK
OVER THE LAST YEAR WE ARE FLAT
YEAR ON YEAR WITH RESPECT TO THE
DOW AND THE S&P, SO I WOULD JUST
TELL YOU THAT I THINK NOT ONLY
WITH TREASURIES BUT I ALSO THINK
THAT THEY LOOK REALLY ATTRACTIVE
NOW.
DAGEN: JON, CAN I ASK YOU ONE
THING TO ROBERT'S POINT, THE
FEDERAL RESERVE THIS QUARTER IS
RAMPING UP HOW MUCH IT'S
BASICALLY UNWINDING THAT BALANCE
SHEET, RIGHT, HAVE THEY CAPPED
THE BRAKES ON THAT OR ARE THEY
GOING TO MOVE AHEAD IN THE NEXT
3 MONTHS WITH THAT LEVEL OF
BALANCE SHEET REDUCTION?
JON: YEAH, THEY'VE BEEN
GRADUALLY INCREASING HOW MUCH
THEY ALLOW TO UNWIND AND THEY
ARE KIND OF REACHING THE LIMITS
OF HOW MUCH THEY'LL DO IT, BUT
AS I SAID BEFORE, IT'S A REALLY
GRADUAL PROCESS, IT'S NOT GOING
TO BE DONE FOR ANOTHER TWO YEARS
PERHAPS, SO --
MARIA: IF YOU'RE GETTING SAFETY
AT 3 AND 4%, MIKE, ARE YOU GOING
TO TAKE RISK OF PUTTING MONEY IN
STOCK MARKET WHEN THERE COULD BE
AN ATTRACTIVE ALTERNATIVE TO
JUST SLEEP AT NIGHT?
MIKE: IS IT ATTRACTIVE IN
HIGH-GROWTH ENVIRONMENT?
IS IT ATTRACTIVE -- IS 3 OR 4%
SOMETHING YOU WANT IF YOU CAN
TALK ABOUT AN ECONOMY THAT'S
GROWING WHERE YOU CAN INVEST IN
EQUITIES WHERE YOU COULD EXPECT
EARNINGS TO INCREASE AND HAVE
WITH THE FAVORABLE TAX PLAN THAT
WE HAVE THAT MORE BETTER
CORPORATE EARNINGS I WOULD ARGUE
THAT 3 TO 4% IN THIS ENVIRONMENT
IS NOT SOMETHING I'D LOOK FOR.
MARIA: PLUS YOU'RE GETTING A
DIVIDEND ON THE STOCK SIDE TOO.
MIKE: IN SOME CASES YOU'RE
GETTING DIVIDEND.
I THINK WHAT SPOOKED THE MARKET
IN THE SELLOFF IS THE FACT THAT
FED GAVE A PLAN OUT INTO NEXT
YEAR AND I THINK THE MARKET WAS
LOOKING FOR MORE DATA DEPENDENCY
SO IF THE DATA WARRANTS MORE
HIKES DO IT BUT I THINK THE PLAN
THAT THEY WERE GOING RAISE RATES
REGARDLESS KIND OF SPOOKED THE
MARKET A LITTLE BIT, WOULD YOU
AGREE?
>> WELL, I DON'T THINK THEY SAID
THEY WERE GOING TO RAISE RATES
REGARDLESS.
I THINK POWELL, THE FED CHAIRMAN
HAS SUGGESTED THAT THEY STILL
HAVE A WAYS TO GO BUT INVESTORS
SHOULD HAVE KNOWN THAT, LIKE IF
YOU LOOK AT THEIR FORECAST, THE
FED HAS BEEN SAYING FOR A WHILE
NOW THAT THEY EXPECT TO DO ONE
MORE RATE INCREASE THIS YEAR AND
THEN 3 MORE NEXT YEAR, THAT'S
JUST -- IT'S JUST NOT NEW.
MARIA: THAT'S WHAT DAGEN WAS
SAYING.
JON: WHAT I FIND INTERESTING
THAT THE INFLATION NUMBERS HAVE
COME IN SOFT AND THE FED HAS
LESS REASON TO GO MORE
AGGRESSIVELY AND THE BOND MARKET
OR STOCK MARKET DIDN'T REACT OH
TO THOSE INFLATION NUMBERS.
MARIA: INITIALLY THEY DID.