Edmund Shing:

Hello there, once again from BNP Paribas Wealth Management. In this podcast this week, we want to talk about the latest FOMC meeting led by the new Fed president Kevin Warsh post Jerome Powell era. What did they say that is potentially different? What implications are there for interest rates and for the bond market?

I am Edmund Shing, Chief Investment Officer, and I am joined today by Guy Ertz, deputy CIO from Luxembourg. Hello, Guy.

Guy Ertz:

Hello, hi.

Edmund Shing:

Well, kicking off with the first of our three questions. What, first of all, are the key takeaways in your view from the first Fed meeting with Kevin Warsh?

Guy Ertz:

Well, there is a shift here towards a more hawkish stance. Not long ago, there was still a reflection here of sort of a median opinion looking for a rate cut, but that has definitely changed now. We have a number of participants now that are pencilling in at least one rate hike or more. So that is signalling here a kind of a first shift to notice.

Then we have some interesting comments that are also in line with what Kevin Warsh was saying before he was nominated. One is about communication. Warsh wants to change a bit the way the Fed communicates, in particular, not using the forward guidance anymore in a way that was done before. Then also some task forces on the impact of AI on productivity, and also the plan here of the Fed to reduce the balance sheet. So, these are the sort of the main task forces that are now that will be put in place. Also, interesting that forward guidance that will be taken away could be bringing a bit more noise and a bit more difficult exercise for the market, and could in some sense also increase some premium on the long end of the curve.

Edmund Shing:

Okay. So, in light of this FOMC meeting and the changes brought by Kevin Warsh, do you Guy, in turn, consider changing your view on the Fed funds policy rate outlook now?

Guy Ertz:

Yeah, that is a good question of course. I mean we have a current stance that is to look for a no move kind of outlook. So, we were expecting the Fed to be on hold, but of course, given what was said in that meeting and after the meeting, we have to see how things evolve. Now, we will probably wait to have a bit more data on the next job report, the next core PCE, but then we could be eventually reviewing and including one rate hike. If we do, it would be rather for December, because of course we have the elections in November. So, it is a bit surprising that the market is now pricing even a high probability for September, because when you think about it, the Fed could be under pressure from the political side if they do hike just before the elections. So for us, that is quite unlikely. So, with the data we expect for the next two weeks, if we consider then including one rate hike, it would be rather for December.

Edmund Shing:

Okay, and what implications, therefore, are there for bond markets? I mean, are we at the risk of seeing, for instance, higher bond yields at the longer end of the Treasury yield curve?

Guy Ertz:

Yeah, that is a very good point. And also, the market has been repricing a bit in recent hours. The repricing was somewhat more on the shorter end, reflecting, of course, a higher probability of rate hike. So the two year yield was moving more to the upside than the ten year, and especially compared to the thirty year, which was relatively flat even after the Fed comments. Now, going forward, I think the long end is really influenced not so much by short term political decisions by the Fed, but more by the credibility of the Fed, i.e. the Uncertainty about long-term inflation, in particular. So, if we look at what has been said now in the committee, I think one point is particularly interesting, and that is the idea of getting away from the forward guidance, because that could be bringing in some more risk premium, because the market has less visibility regarding long-term inflation if the Fed is not giving any guidance anymore. So, that is something we have to monitor. That could be the reason why in the coming weeks we could eventually also review our target for the ten-year yield U.S. to the upside. Again, it would be more linked to higher inflation uncertainty or lower visibility about long-term inflation than related to the comments and the probability about short-term sort of Fed fund rates decisions. So, that is, I think, something we have to keep in mind. To what extent what was said during the committee is influencing the risk premium on the long end.

Edmund Shing:

Excellent. So, maybe not necessarily an obvious buy on the ten-year U.S. bond yield at this point. Excellent. Well, thank you very much, Guy, and thank you to our audience for listening to this podcast from BNP Paribas Wealth Management. Please like, share, subscribe to our series of podcasts, and until the next time, thank you very much for listening and goodbye.

Guy Ertz:

Byebye.