>> it is the countdown to the fed rate decision, 25 basis points on the docket, just as the latest data suggest a slowdown. i'm kriti gupta. "bloomberg markets" starts now. ♪ kriti: let's get a quick check for the markets. a massive rates decision. is this this that down the markets are rented -- the stepped the markets aren't is bidding? nasdaq down but not by as much of a margin. tech is outperforming just a little bit. the bond market is catching a bit, unlike the stock market.

3.45 on the 10-year yield. put that in the context of volatility. it is nothing to write home about. let's see what happens 2:00 p.m. new york time. how much has the bond market been pricing in? that is going to have a ripple effect across the dollar. weakness in the greenback, we provide .2% weaker by .2% -- weaker by .2%. hold onto your hats, everything could change in just an hour. nymex accrued, 76 the handle. what is that tell us about the rally we have been so used to in the stock market the last couple weeks? is there a point of history that we can compare it to, or are we going in blind? morgan stanley's mike wilson said there might be a parallel. >> the movie had this month is very typical in the month of january, particularly coming off of a difficult year. we have been focused on january 2001 as a similar period.

we had a re-rating of the big tech stocks in the former leaders due to the tech bubble itself. kriti: joining us with more on what to expect is anna wong, chief u.s. economist for bloomberg economics and a former fed economist, as well as bloomberg's macro man on our traders blog. i want to start with you specifically because i want to ask about the financials condition index, the sensitivity to it at a time when the biggest move is coming from a forward-looking mechanism, the stock market. why does the fed so worried? >> well, the stock market does imply a wealth effect for households. i would push back a little bit. a lot of the easing of the financial conditions and, particularly the bloomberg iteration, is also a function of well-behaved credit spreads and a narrowing of credit spreads,

which obviously makes borrowing conditions for companies that much easier, leverage that much easier. broadly speaking, the purpose of interest-rate hikes is to tighten conditions across the economy, make it more difficult to access credit, make households field fewer animal spirits, less margin propensity to consume. all of those recently have been pushing the wrong way. in a sense frontloading the expectation that the fed is going to come to a halt relatively likely. kriti: speaking of that halt, anna, it brings me to your report this morning. it is not just financial conditions that i getting considered, it is the labor market at the core of it you highlight there are two job openings per unemployed person. we are almost back to the pandemic high.

what kind of timeline are we looking at as to when we will get the pivot? anna: i think it is a pretty close call between whether the -- march would be the last rate hike, or would it be may, which the fed is indicated in their december dot plot. all in all, inflation indicators we have seen our flagging that there is a strong near-term disinflation momentum, and that even the fed's own preferred wage measure, the eci, yesterday showed inflation is softening. as you said, the job openings data we saw today means the fed cannot take too much solace in all this disinflationary -- the disinflationary sign we have received so far. i think all in all, nothing has really pushed fed toward the direction of lowering the terminal rate from 5.25 to anywhere close to where the market expects right now. i think the fed is still on

track to get 5.25, raise rates to 5.25. kriti: the core of that is how quickly does inflation decelerate. anna, let's go broader here. you are seeing upticks in parts of the world. spain, their inflation coming back about touch wasn't brazil's margin deceleration slowing dramatically. what is the risk of the fed having to do a u-turn and having to go more hawkish when it comes to rate hikes? anna: currently markets, inflation swaps are pricing at cpi hitting low 2's by the middle of this year. that is conditioned on expectations that gasoline prices, oil price would remain flat. it looks like recent it is pointing to risk that gasoline prices, commodity prices might rise again, which means that i think the probability we attach inflation researching -- resur ging or lingering to four or 5%

is a pretty big risk. i would say that if that risk of inflation resurging materialized, the fed could easily hike beyond 5.25. kriti: cam, let's talk beyond trade. tomorrow we get the ble and ecb. to what extent -- i wonder to what extent the ecb is going to be driving the trade as the most hawkish central bank in the world by now. cameron: that is going to be the delta, obviously. they are universally expected to hike 50 basis points tomorrow, vis-à-vis 25 for the fed. they have been giving some mixed messaging in terms of the leaks to the press about what happens thereafter. the base case is another 50 in march. which obviously also would be

faster than the fed. i think there is a general desire out there to sell the dollar, even in the equity space, non-u.s. equities have got a lot more luster than those in the u.s., where there is some sense that what we are seeing is kind of a short covering balance. the value proposition of non-u.s. equities looks a lot more attractive than those in the u.s. right now it is kind of -- we are in a goldilocks environment for the deployment of capital outside the united states. if the rest as we accelerate and the fed has to pull a handbrake turn and -- on its rhetoric and hike more, that would throw that into doubt at least vis-à-vis the dollar. by the same token, if the u.s. falls off a cliff and goes into recession, that is going to

radiate across the world and everything will go down and you typically see the dollar appreciate in that risk-averse environment. for now we are in a sweet spot in terms of relative interest-rate delta's favor in europe and more generally to macro backdrop of being a favorable one for the euro, non-us courtesies and non-us -- non-us currencies and non-us assets. kriti: the bond market, however, catching a bid. bloomberg's cameron crise and anna wong, we thank you as always. coming up, we are continuing the countdown. we go live to washington, d.c. michael mckee standing by from the federal reserve. this is bloomberg. ♪

kriti: this is "bloomberg markets." i am kriti gupta. 40 minutes away from the federal reserve decision, followed by a news conference from chair jay powell. all eyes on washington. michael mckee joins us from the federal reserve. mike, thank u.s. always for joining us. walk us through what we can expect. michael: not much doubt the fed will be raising interest rates and the bet on wall street is 25 basis points. they talked about a going into the quiet period, the idea that they want to scale back a little bit so they can make sure of what is going on in the economy and not push it into recession. they are getting close to what they said in a december would be there terminal rate. they have it at 5.1%. we are 4.5 right now. the question is how do they signal that they are getting close, or do they signal that they are getting close to the e

nd? each statement the last couple months said that ongoing increases in the target rate would be appropriate. do they drop the word "ongoing" and say "further rate increases"? that will be something to watch for today. jay powell, is he going to push back on the markets for pricing in the idea of rate cuts this year? kriti: certainly something we are keeping an eye on. the federal reserve keeping an eye on the labor market. we got adp data suggesting a little bit of softening. talk to us about the payrolls data we expect at the end of the week. michael: jolts data suggest we are not seeing loosening in the labor market because the number of job openings and of and the argument from the fed has been with that many job openings, employers are competing for workers and that pushes wages higher. we saw that today, tom brady switched jobs and he got a big raise. [laughter] fed's keeping an eye on that and it does not help them make the argument that things are getting a whole life better.

we will see what happens on friday and whether the average hourly earnings drop, the rate of increase slows down, as we saw in the eci. kriti: of course this rate decision kind of interesting because it is a step down from 25 basis points, if indeed that is what we get. couple new voting numbers as well, mike. michael: the annual rotation of the fed bank presidents, 4 leave, 4 take over. they are all in the meeting so they all offer their thoughts, but only 4, and the new york fed president, who votes all the time, will be joining the board of governors in voting. we have two new bank presidents, lori logan of dallas and austin goolsby of chicago. we don't know what their feelings are or the track records are. logan suggested the fed has to go higher than 5% last week. we will have to find out if they are on board. i don't think it will be dissent on today's moves, but we will

listen to what they have to say going forward. kriti: mike mckee, don't jinx it. we look forward to the press conference at the top of the hour, mike mckee in the front row. still ahead, we will get more insight on the highly anticipated for decision. 25 basis points priced into the market. we will talk to carl riccadonna, who joins me right onset, and michael foley, chief u.s. economist at jp morgan. he was the first to come out with a 25-basis-point call. this is bloomberg. ♪

kriti: this is "bloomberg markets." i'm kriti gupta. this is the countdown to the fed decision at the top of the hour. we are expecting 25 basis points priced into the markets. do we get that? joining us is carl riccadonna, chief economist at bnp paribas. always a pleasure to have you on set. let's start with 50 verses 25. i believe you reason he changed your call. what was the game changer for you? carl: in the intermediate period, pretty far back, not to reason. the game changer was the fed rhetoric in response to market conditions. we knew there would be moderation of inflation measures in the intervening period. a lot of the labor market data was very tight and this was a specific point that jerome powell was focused on in the

last several press conferences but especially back in december. we thought it was potentially room if they wanted to push back that the hawks could maybe have a little bit of leverage over waiting one more meeting until they downshifted. clearly the rhetoric moved in the other direction and i think that jerome powell, who's a very savvy politician on the committee and a consensus builder, was effective in delaying the fight to be over the terminal rate rather than any debate about pace. we responded to that. the other factor is financial conditions are extremely easy, and they have eased very impressively since about september of last year. this is something that powell pushed against in that december meeting, the press conference. i think the division between what the fed's saying in the market is hearing has only worsened in the interim.

that is going to be another point today. it is a downshift, and a downshift is hawkish by nature. excuse me, dovish by nature. the rhetoric around the downshift has to give a hawkish tone. we will say a hawkish downshift. kriti: hawkish downshift seems to be a consensus call. the terminal rate you and your team is forecasting, 5.15%, meaning two more 25-basis-point hikes. what is the risk of switching back to 50? what are we looking at when it comes to rebound in inflation? are you worried about, say, rising oil prices? carl: i'm not worried about the risk of having to give it back to 50's. the risk is if inflation stopped looking as transitory as it has the last couple of months, if the fed would have to pick a higher terminal rate. it is not really the pace, it is the destination that matters. if they need to be more hawkish, they will do it by adding more hikes onto the tail end rather than ramping back up to a faster pace now, because we have moved

into restrictive territory. last year was a story of catching up. they had to have the outside 75- bit increases and now is more about fine-tuning the landing point. kriti: which brings me to the story of a financial conditions specifically. this is something we saw in the last press conference as we saw markets rallying on it. i think as the markets gal myself, it confuses me here. when you look at the stock market or credit spreads, at the end of the day forward-looking mechanisms, what is the federal reserve so worried about it? we are talking about being bullish on the economy 6, 9 months down the road. why is the fed worried now? carl: financial conditions are the linkage between what the fed is doing and how the economy response to that. if the fed is trying to tighten policy, financial conditions are easing, then the fed message is not getting across. we are in an environment where, yes, inflation has shown some improvement, but he needs to move a lot further to be consistent with their long-term objective. if they stop today and say this

is good enough and we will subside after the market view and start easing around midyear, then you are talking about an economy re-accelerating with inflation still well above the mark, whether we look at core inflation, and by inflation, wage pressures. that would create a reason for the fed to have to resume tightening later this year. they don't want to fall into that backdrop. they want to get the job done the first time.they proceeding with caution -- hence the downshift. financial conditions are a stone in the craw of jerome powell and others on the committee and they after approach reconciliation at some point really soon or risk a lot of the work they have done was not bearing fruit. just about some context around that last point, financial conditions based on the bloomberg financial conditions index are easier then when the fed tightening campaign started last march. this is not what jerome powell wants. kriti: surely something he will bring up in the press conference. michael feroli hopping in as

well, chief u.s. economist at jp morgan. one of the very first to call for 25 basis points. walk us through your call on that. what was the game changer for you? michael: well, i think various fed officials signaled that pretty clearly. you had a bunch of regional bank presidents, who are not necessarily dispositive interviews, but then when governor wilder said he favored a 25, i thought that was a pretty clear signal, and then various reports in the media by presumably well-informed reporters indicating that 25 is a block. it feels -- a lock. it feels like that should be the least -- maybe famous last words, but the least interesting developments. kriti: lots of jinks is on the ship -- jinxes on the show

today. i want to bring you the idea of a lag in what that means -- take a listen. >> all the analysis shows that the temp in the last fed rate hike -- if much proves to be the last fed rate hike, it takes about a year for the recession to hit. that is when the cumulative and lag impacts happen. in that year between the last rate hike and when the effect of the recession actually begins, there's going to be this debate. are we in a soft landing? will recession show up? did we managed to avoid it? kriti: bob is talking about a one-year lag between the last fed hikes and when the recession hits. his one-year affair time to look at? -- is one year a fair time to look at? carl: conventionally the long to variable lag was expected to be 12 to 18 months recent fed research suggests that the timeline has been compressed. the fed is more transparent than

it used to be. if alan greenspan or paul volcker was doing something, it took a lot longer for that to be reflected in financial conditions and eventually the real economy. i think that is shortened. if you look at some thing like the bloomberg financial conditions and, it is more of a two-quarter lag. one year is a reasonable estimate and it could prove to be shorted just we have more transparency and more efficient transmission mechanism that we used to. that being said, fed is doing one thing and financial conditions doing another. we have seen a version of this before because last summer at the jackson hole conference, jerome powell was kind of confronted with the same issue where he had to really straighten -- grab the market by the lapels and shake it a bit to get the message across. kriti: michael, last word to you. does this lag even matter when we are talking about a technical recession that has already been in the rearview mirror? michael: well, if you're talking

about the first half of last year, i don't think that qualifies as a technical recession, just given the strength in almost every indicator besides gdp. i do think the lags matter. job number one is inflation, but presumably that is without prejudice to its employment mandate. it wants to be sensitive to the lags. they do matter. to what your other guests were saying, there is a lot of uncertainty, that is what makes it far from an engineering science. kriti: certainly something we are keeping an eye on. michael feroli, chief u.s. economist at jp morgan, and carl riccadonna of bnp paribas, we thank you as always. you are still seeing the stock market under pressure. the s&p 500 down .5%, nasdaq still under pressure, down .2%. here is what is catching a bit, the bond market. 10-year yield 3.46. something we have to keep an eye on in terms of volatility going

into the fed decision. stick with us. coming up, special coverage of the much-anticipated federal reserve decision. 25 basis priced into the market. tom, john, and lisa leading the coverage. this is bloomberg. ♪