>> happy fed day. 25 basis points is the market consensus but part of wall street are warning about a pause. we will break it down. i am pretty grouped up. bloomberg markets starts now. kriti: let's dive into market action because green on the screen when you look at the equity market. the s&p 500 turned around. classic ahead of the federal reserve. all the action is in the bond market. at 414 on the two year yield. even if there is a pause at 470

five you still have dislocation in the front end of the curve. ripple effects in the currency market. right now dollar weakness is the story led by interest rate differentials across the atlantic. the euro-dollar at 107. brent crude, the question is inflation. if brent crude goes higher than 76, where it is now, what does that due to the inflation numbers the fed is watching? the banking crisis. major movers in today's session are all in the red. credit suisse, pac west, talking about the liquidity crisis. first republic waiting for a potential buyer. ubs not getting the bid they got yesterday, so, read on the screen looking at the financial sector adding a new wrinkle for the federal reserve this time. let's get to what our guests have told us about the bank dilemma. take a listen. >> we think the fed will go tomorrow if the equity market is down hard and financial concerns

are still building we have an issue. >> the real attention is inflation versus financial instability. the fed will say, let's not panic yet. inflation is still an issue. i think they will slow it down a little bit. a while ago they were flirting with 50 basis points. i think it will be 25. >> the lending facility will increase the size of their balance sheet making it more important the fed do its job on the interest rate side with its tools. i have seen a lot of speculation the fed may not raise interest rates, might pause, might cut rates. i do not see any way that happens where any narrative where that makes sense for the fed. >> fundamentals dictate slightly higher interest rates for the u.s. economy and some others. but the volatility, we see, can be a drag on growth. >> looking at the data by itself it would dictate need to continue to hike. they are looking at everything together and where they think it will go into the future. >> on top of that, today's

bloomberg chief u.s. economy and along rights that the fomc faces the most challenging odyssey decision in recent memory. the collapse of silicon valley bank and bank distress have markets on jet inflation remains at a four decade high, higher than any other u.s. banking crisis of the past 140 years. if that does not add pressure for jay powell and our guests today, i do not know what does. joining us now is mark zandi the chief economist at moody's. calling for a pause in today's fomc decision and the lovely and talented veronica clark economist at citigroup. veronica, citigroup was the contrary in until rick -- contrary in until recently calling for a 50 basis point hike. what will it take to get to 50 down the road? veronica: a couple weeks ago for a couple days we had a 50 basis

points call for this meeting. i think if the financial instability of the last couple weeks had not happened and we had a really strong february up women report, we -- appointment report, core cpi in february surprised higher than consensus we could be looking at 50 today. that seems very unlikely now. it will really depend on how things stabilize, if we do stabilize from here. we are watching the incoming economic data to see when we will start to see any real economy broader economy impacts from all this. the next couple months i think it still looks like inflation stays strong. i would not rule out a 50 basis point down the road. kriti: let's take the other side of the debate. mark, you are calling for a pause now. it does that mean down the road they have to hike by a bigger margin? mark: not necessarily. i think the banking crisis will have fallout on the economy. hopefully, we are past the worst of it and things are going to

calm down and we will not see any further bank deposit runs. even given what has happened so far i think banks, particularly, small and midsized banks will be much more cautious. they will restrain their lending and tighten their underwriting. they are a big part of the lending. banks with less than $250 -- $250 billion in assets count for about half of industrial loans, two thirds of residential mortgage loans 3 4th avenue commercial real estate loans. as they tighten standards and credit growth slows that will impact growth and inflation. you do a bit of connecting the dots here and given what we know so far i suspect the banking crisis is worth .25 points or .5 points of fed rate increases. so, no, not necessarily. kriti: perhaps the banking crisis have done to some extent what the federal reserve was trying to do, being restrictive. veronica, what, in your mind,

does a pause actually indicate? veronica: this is something i have talked to a lot of people in markets about. i think at this point a pause is may be telling us the fed know something we do not know. i don't think they have better insight then we would on how the broader economy will be impacted by this, but they probably have more timely and broader banking sector data. if they are seeing something in that day that gives them enough concern to pause, that's not necessarily a comforting measure. kriti: when we talk about whether or not that is comforting that is just the rate hike piece of the equation and then you have the quantitative tightening piece. we interviewed the fidelity international global macro economist earlier in the day. take a listen to what she had to say. >> there has been a lot of discussion on this in the markets. i think it is clear that the

expansion in the balance sheet we have seen so far is not equal to qe. because, it will not lead to credit creation. this is a different mechanism. so, it is unlikely to lead to relaxing of banking standards and more credit. kriti: mark, if you are not seeing it contain credit creation, net net is it having the same effect as a more intentional move from the federal reserve to tighten? mark: first to the point regarding that it is a pause, does that signal something untoward and people will get nervous about it and would that be counterproductive? that does not resonate with me. it is pretty clear that the system got very severely stretched. you are not fooling anybody by saying, ok, i am raising rates because i think i know something more than anyone else does. the system needed a very dramatic government support.

the funding facility from the fed, the deposit insurance for all depositors, all of the steps taken to resolve weakness in the system, these were very dramatic steps. the system is under a lot of pressure. everybody knows it. i don't think you will be scaring anyone when you say, hey, i will take a step back and take a look around and make sure the system is on solid ground given what i have done and if it is i can pick it back as quickly as i need to to address inflation, which is too high and probably will require more rate hikes. the number one priority at this point has to be getting the financial system on more stable footing. kriti: veronica, 30 seconds, your take on the quantitative tightening that seems to be in the balance sheet. veronica: we reverse about 50% of that balance sheet runoff we had from the usage of the new fed facilities and the discount window.

i would agree with the previous guest. this is not liquidity intended to boost lending in the economy. if anything, we are looking at the opposite. i do not think anyone is expecting lending is not tightening because of this. a fascinating lineup of a fascinating discussion. maricel goyena chief economist at moody's and veronica clark, economist at citigroup, a pleasure to have you on the show. camano, a live report from the federal reserve as we count down to the big decision. you don't want to miss this. you don't want to miss this. avalarahhh

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okay, great. j.p. morgan wealth management. kriti: this is bloomberg markets. today's interest rate decision is perhaps hoping traders chart a number of unknown variables. so many questions. who better to ask then michael mckee now joining us from the federal reserve in d.c.. i imagine you have a long list of questions to ask chairman powell. what do you think you will answer? mike: that's a tough question. the issue for the chairman is, how does he manage to make the case the fed is on top of the banking system? the banking system is not falling apart, yet, the fed still need to raise interest rates because inflation is still a problem. that will be his challenge. we will get the statement, the projections for the economy. then we have seen in many past meetings that by the time those

come out, the market trades one way and the chairman comes out and the market trades another. it's a balancing act kriti: kriti: for him today. k what do we expect to hear on the quantitative tightening front about the balance sheet, despite, the chart that has wall street anxious about whether this is the end of q2? michael: a lot of people are interested in that. it reflects ignorance of how q2 works. the banks sending securities to the fed particularly through the discount window, those are not to get cash to put to work in a credit instrument. that is to get cash to solve maturity mismatches or underwater securities on the balance sheet. so they want to hold onto the cash. plus, it is only temporary. 90 days through the discount window. at this point, that is not a version of qe. the fed will probably say, we are continuing to let qt run as it is happening and the decision to end that will be a separate

one made on the basis of when they think they have ample reserves and have not gone too far. kriti: mike, putting you on the spot. 30 seconds. it's not me, my producer tells me i have to. we have to ask about market pricing. a 75% chance of a 25 basis point hike and the other 25% is in the pause camp. will he have any indication of potentially 50 down the road? mike: no. they are at a point now where they are close enough to the end it will be 25 arnesen going forward. kriti: bloomberg's michael mckee live from d.c. ahead of the federal reserve meeting. thank you. ahead, we speak to ellen zentner at morgan stanley and andreas jobst of elias -- of allianz on whether the fed will hike or pause next. this is not a conversation you want to miss. this is bloomberg.

>> this is bloomberg markets. i am kriti gupta. we were just list. we are about 40 minutes away from the fomc decision. joining us now is ellen zentner chief u.s. economist at morgan stanley and andreas jobst head of macroeconomics at allianz. where they differ is the forecast in cuts.

andreas: critically important is the fed is currently very much driven by data. setting policy rates and guiding forward. data that is coming in is the best coincidental, or, also, when you look at the employment data, it comes with lag. so, we believe that there is a recession in the making. we see indications not only in terms of monetary, but also, the labor market is showing signs of significant weakness. when it comes to the starting of the pivot, q3, q4, a contraction of about one percentage point, that is largely driven by savings that have been completely spent and consumers

really cutting back on expenditure. this means the u.s. will then head for a negative quarter in q3 and q4. >> let's bring it back to the pause call that a good chunk of wall street is estimating. ellen, if we get apostate a on the concern of the banking system, will that pave the way for a volker repeat? a.k.a., chairman powell's worst nightmare? ellen: certainly, it could. if they were to choose divorce today i think chair powell would have to be very careful that he segregates the discussion around financials -- stability versus the very real problem that inflation still poses. it will depend on how they message through the summary of economic projections. do they pause today, yet, there dot plot still shows they intend to hike further? all of that, taken on the hall, the totality of the materials today, will be very important.

i want to go back to something and he said. the contraction in consumer spending is something we think we are already going through now. we have a decline in consumer spending and gdp in the second quarter because largely among the savings in the groups that would tend to spend it has already been depleted. when we think about how credit conditions might change going forward, how might these funding pressures continue to flow through the economy, we have to understand that credit conditions were already tightening a good deal starting back in the fourth quarter and that will be already impacting the economy this year. it is something the fed has desired. i hope we see a much more sharp slowdown in the labor market. i hope that helps the unemployment rate rise. then, the fed will realize it's job is not that is done. right? to a large extent we are already expecting what the market is thinking what warned rate cuts.

except, we think it warrants the end of the hiking cycle and the fed on extended hold. >> andy, respond to that. part of your teams call at allianz's was that economic growth would slow down dramatically the back half of this year. you expect that to slowdown -- to show up on the dot plots? andreas: the dot plot has always indicated up until now flexibility for the growth rate rising. that has been corrected by markets. you can see how the dot plots will evolve going forward. but, to lie on top of what we considered a consumer led recession towards the second half of this year, it is also that we see the housing market slowing down. in fact, 12 months of slowing in sales in addition to that. not only have we seen a cutback in consumer expenditure, but we have also seen a time of excess

supply. all of this growth has been declining. we have seen a -- businesses also building inventory as they work through backlogs of orders. overall, the picture is, both on production earned -- production, the manufacturing sector, it is really not creating new jobs. it is really the service sector. together with a very conservative and further contractions in consumer spending. that is what is motivating our call for recession. kriti: andy, when it comes to your cut call at allianz that is one of the contrary in calls. that brings me to the fomc decision. nomura is calling for it when he five basis point cut in addition to an end of tightening. the economist there are saying "we expect the fed to stop quantitative tightening and the

choice of deposit versus non-deposit investment vehicle matters for banks. ending qt should keep the amounts of reserves more apple than they would be otherwise. those quote -- ample then they would be otherwise." the team at morgan stanley is forecasting the second quarter of 20 to four for that moment. what would bring that forward? ellen: i think that the fed's guidance can bring that forward. already when we see results of the primary dealers surveyed, you will see that expectation has shifted forward among consensus because of the funding pressures and the question, really an unknown answer, as far as the fed is concerned, whether these funding pressures emerge because of balance sheet runoff or not, or, is it contributing to that? banking analysts would see -- say stop qt now. the fed would look at reserves in the system and to see -- and see it was very steady until march 8. that would suggest a policy

makers do not view qt as i contribute in factor. that said, it's always an unknown as to how much ample reserves you need to meet structural demand. chair powell would do well to remind folks that their stance already is they are willing and prepared to adjust any aspect of balance sheet runoff depending on economic and balance sheet developments and we think that is what he will stress today in the q&a. what does that mean for something like the housing market or labor market? what is the risk if the banking story is an isolated risk. ellen: the risk we have to watch for is the labor hoarding story. that is a narrative we started uncovering last year that remains very strong among companies. do we hang onto that? so, rather than laying off, compact -- companies continue to

control labor cost by reducing hiring. that's how you get a very gradual slowdown in job gains rather than an all-out fast turn into net negative job losses here. as long as the labor hoarding story remains strong, and we do not see a sustained rise in jobless claims, that will make it very difficult to get to the point of a recession that starts early enough for the fed to do multiple cuts this year. when we think about how the underlying data will play out here at a higher frequency, i think it continues to be the labor market that will have -- we will have to watch for. i think on the inflation side until you get a more material shut down in aggregate demand, which again, we are expected to go through in the second quarter here, i do not think you will have enough of a gravitational pull on inflation to change the outlook for this year. kriti: it will be a historic decision. they are both: for 25 basis points. a pleasure to have you on the

show. yields are down across the curve. equity markets are down as well. the s&p 500 is down about .2%, normal ahead of an fomc decision. coming up, special coverage by the surveillance team. the fed decides. this is bloomberg. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management.

it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management.