>> less than one hour from the federal rate decision on the market is bracing for another 75 basis points. bloomberg markets starts right now. ♪ kriti: the stock market is up about half a percent but you have a cell the rumor by the market setting up or buying what is expected to be a 75 basis point rate hike from the federal reserve in just under one hour.

let's look at the two year yield. we are at a little over 4%. it's up only five basis point so how much higher do we go? at the end of the day, is about unemployment and about the forecast and 75 basis points. the bloomberg dollar is where you will see a lot of the reaction and the ripple effect is bringing on record highs. it shows up in the commodities space. vladimir putin says he is going to ramp up the war effort on his end. action? it's all about the federal reserve. take a listen. >> we expect 75. >> they will take 75 basis

points. >> another 75 basis point hike. >> chairman powell has one mission to stamp out inflation. >> the real question is >> the terminal rate on the fed funds. >> the number is going up but the fed has come out more hawkish. >> powell is extremely hawkish and they will not be a pivot anytime soon. >>. just chairman powell put the kibosh on that at jackson hole. >> they are seeing their way to. >> the ship. kriti: let's jump right into the conversation. you are making a contrary and call back in july, moving the terminal rate up to 5% from four.

tell us what you made that change. >> we saw back then that some of the sticky components of the cpi is moving up. we thought the electricity prices would be pushing up i think that's what we are seeing and wages, pass-through from wages to final prices is happening. i think the fed is becoming more concerned about that and you see that coming out of research from the fed staff. going forward, the fed would be much more mindful about keeping rates high at a longer duration. kriti: at the core of that thesis is the labor market story. at the same time, there is a conversation in the equity market that the federal reserve, even though it has been driving the trade, may not be the driver into the end of the year. in the past couple of moments, we got a headline from meta

saying is looking to trim its cost by 10% in the coming month. walmart is pulling back on holiday hiring. how does that matter for the equity markets now? >> it doesn't matter as far as what we pay for earnings. the federal reserve is consequential to set the discount rate that impacts valuations for the equity market. that said, the equity market is a bit nervous that while we are seeing evidence of slowing earnings growth, we are seeing earnings come in slower the next few months. the equity market is nervous that the fed will take the policy rate so high it will squeeze off economic growth. if the technical recession continues or will it deepen? the fed effectively squeezed off credit, resulting in a much

bigger crunch on the economy and what does that mean for the earnings stream going forward? there are several avenues where the fed is still having an impact with respect to this. kriti: in your call for a 5% terminal rate, you said it would result in 2 million job losses. will that be enough to loosen the labor market? >> i think 2 million job losses is our conservative number. if you look at post-world war ii on average and how much on appointed rises during a recession, its 2.6%. at the lows, we saw three point 5% couple of months ago. you could easily get 5.1% if you add 2.6% in a normal recession. the fed said they are not going to ease off on rate hikes even

if there is an economic downturn. you could easily get over 5.1% unemployment in that case. kriti: let's talk about the trade. sell the rumor, by the news and that's something you hear in the fed meetings. there was us -- there was a massive selloff monday in the s&p 500 is in the s&p 500 is in the greens what happens at 2:00 p.m. today? >> that's the million-dollar question. i think the equity market is well prepared for 75 basis wins. they are relatively prepared for them to continue to be hawkish. there is a lot of uncertainty about the outlook. i would not argue that that is embedded in asset prices right now. if the fed guides to a much higher terminal rate, and

consistent hikes of higher levels, the equity market is not particularly prepared for that. the whispers in the equity market are around the fed going 75 basis points today but starting to go down going forward, reflecting the deterioration in the economic outlook that everyone is anticipating. that creates a lot of opportunities in the medication and messaging. the market is expecting 75 but the messaging is what matters. kriti: if we had a 5% terminal rate by mid next year, what happens to equities? >> we have to reprice valuations. it depends what that means for the economy. if we are getting to 5% by next year and seeing an acceleration in growth, that's a different outlook for the equity market.

we could have inflation still very high and jeannie struggling. i think it will matter because there is more to the equity market than just the fed. i think 5% is difficult and the 5% terminal rate means closer to 12 in terms of the pe multiples on the s&p 500 so that's an owners decline in the multiples. you have to have much stronger earnings growth for the equity market to survive intact in an environment where rates are that high. kriti: a fascinating conversation and we will see if that happens. thank you both so much for your time and insight. coming up, we are waiting to hear about the fomc rate decision at the top of the hour and we will go down to washington with michael mckee on the scene next. this is bloomberg. ♪.

kriti: this is bloomberg markets. we continue to count down to the fo's -- fomc decision at 2:00 p.m. michael mckee joins us from washington. walk us through whether there are any surprises here. 75 basis points, is there any reason to worry? michael: i don't and so, there were no indications that the fed does not want to surprise markets. they didn't say 75 going into it but that's because jake will set up the choice last time as 50 or 75 -- that's because jay powell set up the choice last time. if they were going to go 100, the probably would have sent a signal so the market functioning

is not disrupt the. then it's a question of the. plot in the economic productions and where they take rates from your after today and how long do they keep them there. kriti: speaking of economic projections, where is the surprise, unemployment or ged be? -- gdp? michael: it will probably be unemployment because fed officials right down what they think the optimal monetary aussie level is and then what they think the economic conditions are that would produce. whatever they say for unemployment will be a measure of what they think is tolerable in terms of and unemployment increase. they would like to see, something they would not be surprised that. they will also tell us how slowly they think inflation will come down and it will probably be slower than the last time.

not even until 2025 do we get close to 2%. kriti: there is a forecast of a 5% terminal rate and you would see a 2 million job loss figure. is that enough to loosen the labor market? michael: it's hard to say, in theory it should be. one thing the fed has been doing is relying on the jolt survey which shows 11 million open jobs. many economists don't think that's accurately say those jobs are either -- are either duplicates or were posted at one time and never taken down or companies don't intend to fill them. it's hard to know how tight the labor market is. if you start losing one million or two workers, you will see some loosening and you will see people willing to take jobs for less money which is the bottom line. this is a tight labor market and the higher wages it has produced

starts to fall back. kriti: bloomberg's michael mckee , thanks for joining us. still ahead, two numbers, 75 or 100, we discuss how high the federal reserve will go. that conversation is next. this is bloomberg. ♪

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kriti: this is bloomberg markets. we are closer to the fed decision at the top of the hour. will they move 75 basis points or 100? joining us at the senior u.s. economist who is calling for 100 basis points. you are in the minority when it comes the call for 100, why do you think that is? >> looking back at the dead, it has avoided pricing the market for most of their policy decisions but over that time, we don't think the inflation situation has gotten better. there is a reasonable argument to be made that the inflation situation has gotten worse. howell was clear that if they need to do 100, they won't

hesitate and we think the data supports that move so deals like a good time for the fed to surprise the market and maybe -- and may be changed strategy a little bit. 100 basis points is not bad. many market participants might welcome that. they are trying to get ahead of the inflation problem. kriti: why do you say the 100 basis point argument at a time when the cpi number came out much higher than expected? why not go 100? >> it's to remind us to never say never and there is always a possibility of an outcome that doesn't seem likely. i think the read for the guidance from the fed is clear. either 50 basis points or 75

basis went rate hike. the inflation report came out during a communications blackout so it would give that opportunity to change that. there will be guidance in thedots and the plans to hike further. there is no argument from any economist that inflation is far too high and that requires policy rates that move higher. you could put a low probability on 100 basis whines. it's hard for me to see a strong incentive for the fed to go 100. kriti: it kind of feels like one of the major criticisms on this 100 basis point call is that it would create some sort of panic in the market or signal some sort of that the federal reserve doesn't know how far to go.

why is that the wrong take? >> that was a take we heard a lot about early this year when we heard about 50 basis went hikes in january. that it would effectively be a panic moved by the fed. here we are, the fed has delivered a 50 basis point hike and delivered two 75's and they say they will be data point and we think the data warrants a 100 basis point hike. i think it might be reassuring that the fed is stepping up and doing what might be required to get ahead of inflation and they are following through on the credibility. i think there is a fundamental problem the policymakers might think that the right moves 100 basis points with the fed is not willing to do there, what did that mean about bank credibility. maybe we should be more aggressive.

i think it will happen today and if not today, then sometime in the future. kriti: there was a time when the market is almost rewarded the unreserved for surprising the market. do they still need to establish their credibility? >> that's another reason why they probably won't hike 100 basis points today. if you said rhetoric between the june fomc meeting and the jackson hole some rosy and, -- symposium, conditions were easing and that's an important context for jackson hole. chairman powell said he is narrowing his sides and talked about the need to bring down inflation even if that means running down the economy and kind -- and financial conditions have reacted. not all financial conditions

tightening stop they are understanding the financial reaction better. the data came out and was stronger than expected and they priced in a 75 basis point rate hike in interest rates went higher and equity prices moved lower. that's exactly the kind of reaction that leads to higher inflation and would indicate that markets are internalizing expectations. the expectations are coming down. i think 75 basis points is a better route for the fed to make . kriti: you are both on the opposite side of 75 or 100 to have the same call for november, 50 basis points but talking about the deceleration.

100 basis points down to 50, why is that your base case? >> the basic premise is what you buy with 100 basis went's sake sharper tightening of financial conditions. since jackson hole, financial conditions have tightened since june by our own measures, the things are looser than they were three months ago. they have not retested the lows from june and corporate credit spreads are not at levels that would be stunned with negative key growth so there is still a lot of work for the fed to do on financial conditions. you can achieve tighter financial conditions by releasing updated economic projections and hawkish rhetoric from jay powell which can be interpreted by investors under different circumstances and might not buy you much in terms of concrete forward guidance. it would get 100 basis points today, the inflation data over the next few months will move

from the three-month moving level and that will allow them to down step 250 basis points in november and december. it's important to note against that context that we assume the economy will enter a recession and that's why we think we will a -- be able to slow down sooner than expected as inflation starts to lower and the unemployment rate picks up. kriti: at the core of it, it comes down to the market moves you are seeing today. the two year yield crossing 4%. what is going through the mind of the federal reserve or jay powell's mind on this bond market? >> i think they are looking at the two-year nominal yield which is a little bit technical. it's also the two-year real yield and the 10 year real

yield. if you look at nominal treasury yield and subtract inflation or expected in elation, you have a 10 year real rate of interest above 1% stop that's essentially the highest level real rate and that would indicate to fed officials that in terms of policy rate expectations, they are getting to levels that may be somewhat restrictive. that's baking in the expectations that they will move toward 4.5% which is what the market is requesting and expectations are shifting. it's inflation expectations which are staying relatively low as nominal interest rates are moving higher. kriti: a fascinating conversation, i could talk to you guys for the next hour. coming up next, the fed decides.

that does it for me, stay with us as we count down to the all-important federal reserve decision, tom and lisa will take it from here. this is bloomberg. ♪