sonali: bloomberg real yield starts right now. coming up, powell's big pivot.

the fed chair hones in on the job market and sees inflation on a path sustainably downward. yields drop in anticipation of rate cuts and we begin with the big issue. the time has come for policy to adjust. >> the time has come for policy to adjust. the direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the outlook and the balance of risk. inflation is down closer to the objective with prices riveted 2.5 -- risen 2.5%. we have made a great deal of progress towards the outcome. my confidence has grown that inflation is on a sustainable path back to 2%. the labor market has pulled from its overheated state. the cooling is on escapable. with an appropriate dialing back there is good reason to think that the economy will get back

to 2% while maintaining a strong labor market. sonali: let us look at two-year yields over the past three days because on wednesday you have the payroll revisions and worries about the job market being weaker. in the week you saw stability and really yields rising just a bit because there was stability. the jobless claims coming in line with expectations. and then you have the big day. jackson hole driving yields lower. and expectation that we will finally get first rate cut after a historic cycle. we stand in the middle of friday with the two year at 392 and under 393, six basis points lower. we will talk about the implications. can -- joining us is brian and ken.

the idea that we are shifting the focus of inflation downward to the job market. what is the worry about the jobs market much further from here? brian: we are a little past a level that the federal -- that the fed will be comfortable with. if we see more deterioration that could be problematic. it has been the consumer in the job market holding things. the last monthly jobs report was not great. we are still in positive territory so it is not as if we are in really hurting. but if things deteriorate more rapidly the fed could be behind the curve. that is not our expectation that something to be on the lookout for. sonali: similarly, the idea that the time has come gives certainty about that first rate cut. what it does not say is how much or how soon. do you think 50 basis points is

achievable or do you think the fed should be standing at a 25 basis point rate cut? ken: can you hear me? sonali: we can. ken: we seem to be having a technical problem. sonali: let us go back to brian while we sort that out. you think 25 or 50 makes the most sense? brian: i think 25. the market is conditioned for 25 and the only way you get 50 is if we have a terrible job sprint for the august -- jobs print for the august job report. this is the last fed meeting before the general election. while the fed is taking great pains to say we will not be influenced by election calendar or politics, i think they would afford -- prefer to avoid meeting to do 50.

a very high bar for anything other than 25. sonali: the market is pricing in 100 basis points through the end of the year. why so much. if you have election uncertainty and both prudential -- potential candidates are putting forward policy that could be inflationary, how does the fed cut that much this year? brian: any policies being put forward that are inflationary are potentially down the road and would require one party control of both sides of congress and the presidency. we are a long way from needing to price in too much of one party or the other winning and putting policies into place. really what we are looking at is we will see a continued slow down into the fall. i think the market is just letting that the slowdown might be bigger in the fed might be behind the curve.

and either november or probably december the fed needs to come in with 50 to expedite the process. sonali: i believe we have you back. i think we might have lost him again. let us take with brian once more. if they do achieve the 50 basis point rate cut does that send a signal to the market that this economy is weakening faster than it meets the eye? brian: especially if it comes in september it is then what does the fed see that the market does not see. again, unless it is substantiated by really weak employment data, the bar is exceptionally high to be a 50 basis point rate cut in september. sonali: we have a lot of data, pce next week and jobs data. if you look at what is most important to investors what are you looking for the most? brian: jobs is at the top of the

list. we have seen inflation take a backseat. the other thing that is really important and this goes along with jobs is to continue to see the consumer willing to spend or at least spend some thing. it has really been a consumer led economy, always has been. and up until this point people felt good. they have their jobs and we are seeing risk assets and equity markets it very high level so the 401(k) feels good and the other investments feel good. you are willing to continue to spend at the upper income levels. if you start to see the job market deteriorate at a faster place -- pace, people will pull back where there is this moment where the fed is behind the curve. and that is detrimental to risk assets. sonali: brian and ken stick with

us but we will go over to jackson hole where lisa a prominent is live with the bank of england governor and the ecb governing council member. and we are watching this story. this is real yield on bloomberg. ♪

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a reverse mortgage loan eliminates your monthly mortgage payments and puts tax-free cash in your pocket. why don't you call and find out what a reverse mortgage can mean for you? call finance of america and get your free, info kit. call this number lisa: welcome back. this is lisa abramowicz in jocks and whole -- jackson hole. the air is clearing as time goes on. we have someone from the other side of the atlantic who i am sure is watching the euro gain value.

the governor of the bank of england, the former e.u. and a member of the ecb governing committee. this to me was a seminal moment kicking off a rate cutting cycle. you did it and got ahead of it. does anything that you have heard here change your view about how quickly the ecb can go? olli: i think it has enforced confidence to the disinflationary process globally. of course the united states and its economy is central in the world economy and as jay was very clear that this is now the turning point in monetary policy and he is going to tame it. that is very clear for us europeans. even though we are not the third or -- the 13th federal district of the u.s. reserve. lisa: they say we want to but we

are independent. we had the portuguese central bank and he said september is an easy call, you agree. brian: it is never an easy -- olli: it is never an easy call. as you look at data for the moment inflation is stabilizing and the long term trend. there has to be some weaker data some time ago. but now we see more convincing data concerning rates growth and we have to see the forest from the trees, the long trend in disinflation. at the same time, the outlook in europe especially manufacturing is rather subdued and weak. in my eyes, this reinforces the case for a rate cut in september, provided that we see data that is inflationary and it

will be on track. lisa: there was a believe earlier that the ecb rates would cut more significantly than the federal reserve. it seems like that could be shifting in the fed could cut rates more significantly than the ecb. do you think that that is right? given the fact that europe and central bankers are more concerned about weakness in the biggest economy in the region than in the u.s., does it make sense to you that the ecb should cut less than the fed? olli: two points. we have seen inflation in this cycle has been a global phenomenon. it rose globally and it has been contained globally. and now it is therefore no surprise that it is -- you are seeing a synchronized reaction from the fed and ecb, and from the other major central banks.

the second point is that we have certain differences in the economic context between the u.s. and europe. in europe, growth outlook is looking somewhat weaker than the u.s.. that, nevertheless there is plenty of similarities because of this process now going on and they are both taking this on the basis of the mandate and the basis of the economic data concerning our jurisdiction. lisa: so we will see how it goes, essentially? olli: we have already have had a lot of data to prepare for our interpretation. lisa: there is this expectation baked into markets that the terminal rate in europe will be 2.5%. one of the big questions is what is the ultimate destination for the cycle that we are embarking

on maybe globally? do you think that is appropriate? 2.5%? olli: there has been some fluctuation concerning the terminal rate this rate cutting cycle. that is understandable because there is so much uncertainty, not the least because of geopolitics in the middle east and russia's illegal war in ukraine and then also because we are still seeing a relatively strong service inflation, for example in europe. i think the conclusion of this is that we need to have to have a big picture in mind. for me, seeing the forest from the trees means that the inflationary process has been going on since fall 2022 and it is still going on, and now it is a question of which kind of

speed do we cut rates so that it takes into account that we have to preserve price stability, that is our main mandate. at the same time we take other e to preserve price stability, that is our main mandate. at the same time we take other considerations into consideration. lisa: would you consider a 50 basis point rate cut? olli: pardon? lisa: would you consider a 50 basis point rate cut? olli: we always have to be open to what kind of rate cut or rate decision that we make. but i do not want to commit myself at this stage. what we do is we take this on the basis of data dependence which does not mean data points dependence, but the longer term trend. and we focus particularly on

three. one is the inflation outlook. the second is underlying inflation neutralized from the enterprises. and third, strength of monetary policy. lisa: right now we are seeing the euro strengthened. earlier it went to the strongest versus the dollar back to july of last year. is that a gutter bat thing from your point of view? olli: it is not a policy target. yes it has indirect consequences and impacts on inflation in the medium-term, but we do not particularly target the interest rate. so, our mandate is to fill price stability in the eurozone zone and euro area, and that is what we are focused on. lisa: thank you for being with us. the governing council member and bank of england governor and a

former e.u. commissioner. thank you for being here from us -- with us from a beautiful jackson hole, wyoming. this is bloomberg. ♪ how am i going to find a doctor when i'm hallucinating? what about zocdoc? so many options. yeah, and dr. xichun even takes your sketchy insurance. xi-chun, xi-chun, xi-chun! you've got more options than you know. book now.

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with us still is crying and -- brian and ken. you think about the week ahead and you get new jobs data. what are you watching as the more critical moments now that you know a fed rate cut is around the corner. how much? how much will the data guide that? ken: unless we get something really unusual or see a lot more large-scale layoffs than the 20 -- 25 basis points is all we should expect. for it to go to 50 it would need a fairly substantial case in the direction when we get that nonfarm payroll number in september. sonali: the one thing i have been wondering is has the market been doing a lot of work for the fed. i want to pull up this tweet from a harvard economist. "powell aggressively used open mouth operations but that is

exactly in the right place." if you have real yields perennially moving lower, does the fed even need to cut 25 basis points after september or 50 basis points as you suspect -- suggest? brian: the fed has always use their words to influence the markets and get the reaction they are looking for. they knew -- they do need to follow through on their promises. do they need to end up doing nine or 10 rate cuts as fed fund futures might suggest? i think we are way ahead of the horse. to expect that many. it will depend on the data. we have to get two or three rate cuts at least unless the data comes out and is really strong, or else the fed loses some credibility. they have taken great pains to build up credibility.

sonali: let us talk about market implications. we have seen significant moves over the last couple of weeks in the short and long end of the curve. where are the buying points right now given the rallies that we have seen, even when they are short-lived? ken: the last time that you and i spoke was on the 21st of june. and i recall that one of the other panelists was suggesting that a rate hike was still in the cards, which we discounted pretty hard. i think at this point, you have to say to yourself that if you have already waited to put money to work for the duration perspective you have missed out on a bunch of a. i think the market is anticipatory and we saw that weaker jobs data. in the market reacted quickly. the fed will still need to move

and we do not think that that 25 basis points is the most likely one, not 50. it will have to continue over the course of the year. having said that, i agree that the market got ahead of itself thinking that we will see a substantial number of moves as the market might suggest. sonali: what does that mean if both of you believe the market is getting ahead of yourself -- itself? do you short parts of the curve? brian: we took the opportunity when the 10 year fell down to 360 to take some profits there. we have been again for longer, clients for the longer-term timeframe been suggesting thinkh short-term maturities. even if the fed cuts four or six times they yield the return and that will start to evaporate. there might be better options elsewhere.

within the fixed income maturities, we are targeting intermediate-term fixed income today. i do not get too excited at these yield levels. i think to see yields fall substantially from here outside the short end of the curve you are going to have to have a bigger slow down or harder landing, something break. it would not be the base case. you know, right now it is kind of playing defense. and perhaps looking for opportunities when they present themselves. sonali: what about the curve steepen or? -- steepener? that has been a popular trade and a very long version. the 210 is at 12 of 13 basis points when you look at the inversion. at what point does this curve disinvert. ken: good question.

i think there is a bit more room to move, but whether we are looking at the curve or valuations in general, i think we need to recognize that valuations are compressed and you are looking at credit markets or credit spreads. spreads are tight. there is relatively little differentiation between sectors in categories in terms of ratings. all of that is out there and you do not want to be picking up pennies in front of a steamroller. i think there is an opportunity. the steamroller is not insight. sonali: we have to leave it there. that is brian and ken, and a big day at jackson hole. and the fed pivot and play. a quick check of the markets before we let you go from real yield. we have the markets on a tear after powell's speech. the s&p up .5% nearly the same for the nasdaq 100. yields lower on the day. the two year at green -- 3.93.

seven basis points lower. that doesn't from new york. the same time and -- the same time and place next week. this was bloomberg real yield and this is bloomberg. ♪

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