>> it's fed day, 75 basis points on the table and stocks are in the red area "bloomberg markets" starts now. ♪ some red on the screen as we look at the stock market. losses have accelerated in the s&p 500, down .6%. the real pain is stuck in russell 2000. we see losses of over 1% ahead of the fomc decision. is that rate sensitivity or simply a momentum train that has lost a little steam as we wait to hear from jerome powell in

just a few minutes. we will also talk about the 10 year yield because it is catching a bit ahead of the fed decision, that never happens, especially when you see a jumbo rate hike priced into the market. interesting to see volatility still in the market, 403 on the 10-year. as you see volatility in the bond market, the curb -- currency market falls. the dollar taking its cue from the treasury market. looks like it is flat on the day but even at session lows you saw weakness driving the volatility in the stock market and not just the stock market, the commodity market as well, the commodity index has been higher for most of the week. thus far, brent crude inching closer and closer to the 100 level, trading around a 96 handle up on the day. we had an interesting conversation earlier with goldman sachs chief global strategist eat oppenheimer who spoke about how far the bond market came as central banks fight inflation. >> this an overwhelming shift

that happened. we have to take into account it was only the beginning of last year the markets were only sing one or two rate prices this year in the u.s., nothing in europe until next year. we see now a whole range of significant rate increases with more to come. and just over a year ago, a quarter of all government debt around the world had negative yield. people were paying to the privilege of lending to governments. now you are getting around 4% for the u.s. 10 year treasuries. this is a big shift and requires valuations of financial assets to moderate. kriti: let's turn and dive a little more to the federal reserve as we await their next move to fight inflation. i want to bring in anna wong, chief u.s. economist at bloomberg news's international economics and policy correspondent michael mckee. i want to start with you, because you gave a beautiful set up this morning about simply what we are waiting for from the federal reserve but i'm curious what could move the markets here. what is the game changer for the

equity and bond market? michael: i'm not sure there is a game changer in the decision today. it is pretty well priced in. if anything would move the markets it would probably be if jerome powell was perceived as dovish today. if he opened the door at 50 basis points and mark is felt there was a better chance of that than 75 then you probably would see a positive market reaction but i do not think he wants to do that. he will try to use strategic ambiguity to try to keep markets guessing and say it is all data-dependent. kriti: anna, hop on in here. i want to make it clear to our audience that anna was way ahead of what is now priced into the market as the base case, the 5% terminal rate of get marginal 2023. anna wong predicted months ago, was a contrarian on that front. we will get into the nerdy wonky on the market dynamics in a bit but i want to ask you about credibility. i asked michael mckee about when the last time we sci-fi decision and jobs are poor in the same

week hand, anna, he said it was not that rare actually. i'm wondering if we start to see perhaps questions about the credibility of the fed in two days when we get the payrolls report. anna: i think, if you look at inflation expectation, measures show traders and market participants believe the fed can bring inflation under control eventually, so that is an acknowledgment of confidence over the fed. so i would say that by-and-by, everybody still believes the fed will eventually do what is needed to bring inflation down. kriti: mike, i will bring you back in and ask you the same question, fed credibility, is it on the line as we get more data after today's meeting? michael: over a longer period, yes. next week we get the cpi which will be very interesting to many in the markets and probably eigh on the markets -- weigh on the

markets more than the payrolls report. the problem for the fed's monetary policy works with long lags and it will take a while for policy to be felt. we have seen signs of slowing in the economy, certainly in the real estate market. so does the fed acknowledge that today in their statement and tie it to what they have been doing? and how firm does our get about how much more they have to do? that will go a much longer way toward answering questions about credibility. kriti: let's dive into the real estate question. how worried should we be about the housing market here? first, it is ashes the first real tangible effects from the federal reserve we see in terms of hiking the rates as through mortgage rates, but should we really be worried about some sort of pop of a housing bubble or is that a sign of success? anna: i think embedded in the fed forecast is a housing price correction. our baseline is housing price,

according to the intensity index, should correct by 15% in the next two to three years in order to get back to equilibrium level, consistent with where wage and income is. we have a hard time finding the trigger of how this housing price correction could lead to a moment. in 2008, mortgage underwriting quality was fairly low. that led to financial institutions having all of these had in bombshells and this time around, the mortgage underwriting quality has been good, household balance sheet is stronger than many years now, and households have higher equity in their houses then before. all in all, we do not see the kind of negative spillovers from a housing sector correction as the one we had seen in 2008.

kriti: certainly something we will keep an eye on. there is so much to keep an eye on when it comes to consumer spending, the housing market, jobs market. which we had more time, anna wong and michael mckee, thank you both for your time. up next on this program, exciting interview, cathie wood joins us to talk about the fed's impact on markets and her fund, especially what we could learn from the market crash. i conversation is next. this is bloomberg. ♪

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kriti: this is "bloomberg markets." as we get closer to the fo mdc -- fomc decision, a 75 basis point change priced in and the downshift of hiking rights. -- rates. here to join us is chief u.s.

economist at -- 75 basis point's consensus but what is interesting about your call is you might see 75 basis points in december as well where is the market is largely expecting 50. why the difference? >> first, thanks for having me. i think it is clear the fed is debating about whether and when to step down from 75 basis point rate increases to 50. from our perspective, there are two good reasons to think they should go by 75 again in december. if you look back to the september. lot, officials were uniformly agreed they should get to 4.5% on the fed funds rate. that would be i think consistent with another fate -- another 75 basis points december. if you think the terminal right needs to be higher as many anticipate, we think it needs to be at least 5%, getting to the terminal rate at a faster pace makes sense. i think the data we have seen since the september meeting on oh -- almost uniformly push the fed in a more hawkish direction.

the cpi reports, jobs info, the eci growth remaining resilient, and 80 -- adp drugs growth, all pointing to a labor market that remains resilient and wage inflation pressure that remains elevated. kriti: part of that call is you see a downshift but it is not happening until 2023. why does the typing matter there? what difference could to months make? >> if we take a step back, i'm not sure the timing matters that much. from what happens to the overwrought can i mix in area and recovery. where i think it matters is tactically. how does the fed get from here to a downshift? when is it appropriate to possibly allow for easing of financial conditions that could take place? what i'm worried about, when we looked at the july fomc meeting, a messaging beginning to talk about downshifting at some point, to ease financial conditions substantially, it ultimately led to the message at

jackson hole and the hawkish messaging we have gotten. at this point, with none of the data consistent with inflation pressures moderating the labor market coming into better balance, i think from the fed's perspective it makes sense to skew in hawkish direction and ensure financial conditions do not use prematurely and out hopefully into early next year -- and hopefully into early next hear we see evidence inflation is going down and the fed can set down at that point. kriti: let's talk about the physical response, you have a federal reserve that made it clear the path they are on. i want to ask you about the issues that may come from washington specifically. let me list out some things, and spr release, windfall tax i could keep oil prices or oil production suppressed, pushing oil prices higher, student loan forgiveness, senator elizabeth warren asking the federal reserve to actively talk about how the job losses are implied in the market. are you concerned about the fiscal response and how that

squares with the monetary response? >> yeah, and i would add to your list what is happening with salo governments. we wrote a piece where at least 20 states have legislated at least through $30 billion of fiscal stimulus to households. really if you think the issue today is the labor market is too tight and consumers are strong, we think they accumulated excess savings of $2 trillion era that is fueling demand-driven inflation which is what we think. then really any additional stimulus makes the fed job more difficult. it means they have to raise rates to a higher level, more aggressively, and i think raises the recession risk into next year. no doubt all of those things we are thinking about where you can see more money into the pockets of households or businesses. at this point time, it worsens our inflation problem, makes the labor market tighter and the fed have to raise rates more aggressively. kriti: you mentioned the labor market, exactly where i wanted to go. i curious about the plethora of issues that face the market now.

i will hand you another list, bear with you. we are talking about the housing market, the jobs market, inflation stemming from not just wages but from commodities as well. what is the biggest issue now? matthew: i think for things like the housing market it is an area where the fed tightening is working. we have seen them signal a more aggressive and hawkish stance that got embedded in the 10-year treasury yield and mortgage rates and the knock on effects of that into mortgage procedures applications, housing activity, is almost exactly how you would anticipate given the housing affordability shock. where i think we are not seeing the impact as of yet and where it is most important is in the labor market. when you look at recent data, there is not much evidence of an allen says correcting job openings relative to unemployed individuals. this is a measure chair powell highlighted on a number of indications. there is 5 million more job openings than unemployed people today. the ecr wage growth i mentioned his remaining elevated.

so i think the real issues we are seeing, even if you believe goods deflation is coming back, is the labor market, what that means for services-driven inflation and how persistent it will be. i think that is the area we need to see some evidence of listening taking place. ultimately into next year, we expect that will happen but a number of factors we mentioned just now suggested is at least in the near term more resilient than previously anticipated. kriti: the consensus on the terminal rate is now 5% peak going into march 2023. that was not the case couple months ago. what are the odds here that the entire market call changes again in a couple months? we were supposed to be done or having this pivot or step down from december and that was supposed to happen in september. what happened? matthew: i think if we have learned anything it is to have humility about where the terminal rate is. every time we think we have got into a significant -- a sufficient level to bring inflation down, labor market

down, then financial conditions will tighten enough. we have learned it has not been enough. financial conditions have not continued to tighten, the labor market shows no signs of loosening and inflation has not come off it i would be cautious in thinking 5% is sufficient at this point time area we view the rest as skewed to the upside. in terms of what the fed many to deliver. really it is about does inflation evolve in a way that allows the fed to step down next year? we think the answer is yes early on, but i think there is clearly risk skew to wear them and having to do a more 50 basis point rate -- rate increases or 50 into next year. kriti: we just showed a chart from the bloomberg terminal that showed the stock market was responding to the stalled outright. if the market consensus is it does stall at 5%, it kind of creates a little base case or bull case i should say for the s&p 500 that has been in complete carnage for most of

this year. i know you are not an equity man necessarily but i want to ask you about the wealth of hike here and consumer because that is something that a lot of americans are watching when they are looking to judge whether or not the federal reserve is making the right decision. does the wealth affect matter at this point? >> i guess first i would say it is really an important signal for what the fed needs to do or has to do. they want to maintain tight financial conditions so i believe -- i think as we going to the press conference a difficult thing for chair powell is to maintain market pricing around 50-50 for december, maintain market pricing at 5%, but signal they will downshift at some point over the coming meetings. i think risks are either he skews more hawkish, which is what we anticipate, or if he does allow for a greater view of the downshift taking place that uses financial condition as we saw last july. in terms of the wealth affects we have seen from the equity market, i do not think they have

been as impactful as you may have anticipated. in many ways i think that is due to the liquidity buffers we have seen from households. both with the nearly $2 trillion of accumulated excess savings and from the additional fiscal measures from state and local governments. it has met consumer spending has not stepped down as much as anticipated and has remained resilient over recent months. kriti: that addresses the consumer side, the spending side, which admittedly is a good chunk of the driver of the american economy. let's talk about manufacturing. those numbers, even if you look at the pmi's, are expanding and quite strong. any concerns on the manufacturing front? when does that turnaround? matthew: there you have seen mixed evidence the eyes of manufacturing index earlier this week was stronger than expected, still expansionary territory. when you look across the regional fed surveys, i think the more do men there, especially looking at the forward indicators. what are their expectations the next six months?

all of them are looking pretty downbeat and that activity should decline. i think if we take a step back and you look at the overall course of what the economy has gone through over this pandemic, as the economy shut down and shifted activity from services to goods, good spending went well above the covid trend and it should be part of everyone's base case that that has to come below -- that has to come back closer to trend meaning a goods recession or manufacturing recession needs to take these. consumer spending has a mention has been resilient on goods as well. everything we have been looking at that we anticipate to happen that would allow the fed to step down, at least so far it has not showed up in the data. kriti: matthew luzzetti of deutsche bank, sticking with us on deep interpretation of the economy. thank you for joining us. next, we dive into the market impact. this is bloomberg. ♪

kriti: this is "bloomberg markets". the fomc decision expected at the top of the hour, 75 basis points priced in. let's talk about the market impact, especially how they are impact ahead of the decision. cameron crise joins us, a macro strategist for the markets like team. cam, thank you for joining us. i want to ask about the vision within the committee. does that matter to markets? if you start to see perhaps some people vote for a 50 and some

boat 75? >> maybe on the margin. i believe we had to sent a couple meetings ago, was it esther george i think dissented and preferred 50. so i wouldn't exact -- it would not exactly be a new phenomenon. we know that the fomc is going to be slowing down eventually. jerome powell is 99.99% certain to talk about slowing down at some point in his press conference today. he made that point and has prepared remarks in the last two fomc press conferences so he will talk about it today. we might see the equity market in particular get excited about that. they haven't slowed yet and really i think what ultimately will matter is the destination, not necessarily the path or

journey. right now we are sort of at the peak in terms of whether markets expecting more of a terminal right. alessi pushes back on that, and i do not think you will, any sort of relief we get from his discussion of a potential slowdown in the quantum of tightening moving forward i think will be very feminine. kriti: speaking of the terminal rate, i have a great rate that shows the fed pricing of 5% but the two year yield, 10 year yield, still far below that. when can we expect the yields to catch up? >> we can't. you would not expect bond yields to necessarily reflect the absolute dingdong peak rate because there is a -- an explicit expectation that once rates hit ap, the fed has talked about they will remain at peak for some time and then eventually they will come lower.

the market is pricing rate cuts marginal rate cuts by the end of next year and deeper easing into 2024. the fed itself for better or worse rightly or wrongly is projecting its long-term rate at 2.5%, so, if the fed says in the long run we will think to -- rates will be 2.5%, it does not make any sense for longer-term yields to reflect a peak interest rate, if you happen to believe the fed is correct in its assertion that the long run rate is 2.5%. i think one can make a credible argument that the long run rate should be rising with the estimate of the rate rising so the global economy restructures itself and there is this pressure moving forward for

companies to maybe locate manufacturing closer to home. kriti: certainly something we will keep in on. cameron crise thank you as always. a quick market check, s&p 500 down, read on the screen. the fed's special is next with tom, john, and lisa. this is bloomberg. ♪