in beverly hills, california, at the milken institute global conference. i'm romain bostic, and our coverage today will be bicoastal, including our team's surveillance. tom, john and lisa back in the new york studio. you want to start off, of course, with the consensus expectation, and it is twofold. first, a 25 basis point interest rate increase. and second, a signal to pause one of the most aggressive hiking campaigns that we've seen in the fed's 109 year history.

now, the latest case for the former, a hike. you talk about the adp private payroll figures that exceeded economic forecasts, rising the most in about nine months. and then you have the case for the latter, the case for a pause. the latest ism business activity index, downshifting to the slowest pace of growth going back to may of 2020. now, a fed hike today would bring the federal funds rate to a range of 5% to 5.25%. the highest going back to oh seven, a level that has forced investors and money managers to adjust those baselines and adjust those allocations. that includes a reassessment of equities, alternatives and a much bigger way fixed income. franklin templeton has more than $1.5 trillion in assets under management. that's across all those asset classes as well as a few others. founded back in the 1940s by rupert johnson. and for the last three years, it's been led to the person sitting to my left, jenny johnson. the president and ceo of franklin templeton. great to see you here on the milken stage. thanks for having me. let's start off here. there really isn't much debate about the actual policy rate. most people expect that to go up by 25 basis points. when we get that decision in an

hour. but people are looking for a little more clarity about whether this is actually the end or at least the pause in that rate hiking cycle. so i think my view is, is that it is a pause that they're going to do the 25 and then pause and just keep time for the markets to absorb, you know, the rate increases and, you know, we do know that the pace in which this this these rate hikes have happened has caused stress in the banking system. and so letting it pause for a while and sort of letting that filter through, i think is going to be really important. when you look at the severity of the rate hikes, you know, basically going from roughly 0% to 5% in a year's time here, has that been much more of a factor, do you think, in the volatility we've seen in markets or is it the actual absolute level of where rates are? okay. in my lifetime, yeah, this is these rates. this is nothing. what you saw. yeah. yeah, exactly. right. so it's not like that the banking system can't handle this rate. it's that the banking system is

having a hard time handling the pace of which the rate increases have happened. and so, you know, if you look at even back to sb, i mean, you know, this this was a duration issue which is directly related to how quickly the rates increased. and so i think that once we normalize in a pause, it's going to be a while before they they cut rates. but i do think that the business model can handle them at this level and when we talk about the economy and more importantly, business activity in light of the recent regional bank failures, but the broader concerns that you're going to see a retrenchment in lending and business activity coming out of the banks, both large and small, is that much more of a concern now, particularly when it comes to whatever recession probabilities we're looking for? i mean, honestly, i think we saw retention, retrenchment and lending by banks back to the global financial crisis when the rules changed around capital requirements. again, svb was investing in us treasuries. it wasn't a big loan portfolio. yeah. and so, yes, i think you're

going to see even more of a retrenchment. i think that's where private credit has stepped in and will continue to step in. so, you know, i think that's a direct consequence of the changing rules. you've expanded a lot of franklin templeton's products into that space as well, right. we have about $80 billion in private credit. and why i mean, was that driven by what your clients were asking for or were you just looking for just a better place to offer? so when we were looking at, you know, when this goes back to probably 2017 and looking at the secular train, secular trends in investments, it is clear that not only are institutions increasing their allocation to private markets, but

about the secondaries. when we talk about private credit, it is obviously much broader than it used to be here. a certain part of lending will go to the middle market. maybe certain aspects of it. there is a secondary space. usually higher-quality that they are usually chasing after.

>> over 6 trillion dollars deployed in private equity. today the number is north of 10,000 companies. the investment universe is now massive. you have pension funds and other asset allocators that have exposure on their balance sheet to the private market. there are public markets. both 2022 fixed income and equity portfolios came down probably 20%, fixed income 15%. you had to pay attention pulling it from your liquid assets. suddenly they are finding the denominator effect over allocated to private markets. so they will call a secondary lender and say, should i take some of this off the balance sheet. partners will come in to pick watch -- what partners and

managers i want. taking into consideration current of -- there are not enough managers in the secondary space it to absorb all the volume and demand. it's been a great time to get the pricing. romaine: a lot of demand came from big institutions. now we are seeing individual investors enter the space. a lot of companies opened products to a lower tier on the income spectrum. >> sellers tend to be institutions and historically buyers tend to be institutions. we have been very successful bringing it to the regional wealth channel. it's a great way to get exposure to the private equity market with a diversified portfolio. also you have what they call the j curve. where you first invest in private equity the fees make it so they $100 investment might be

worth $95 for a time. that smoothed out in the secondary. romaine: when the strategies really became popular it was because of a low rate environment. the idea that the yield and return you can get particularly in the fixed income space is not there. so you need a better diversifier with a better return. does that increase in interest rates over the last or change the appetite? jenny: it has the potential to change it in private equities. secondaries are replacing it at the time they purchase the portfolio so they can take into consideration interest rates. i think you will see some of the models that were just about leverage will be harder. those that were more about restructuring and figuring about -- out the best way to manage the business will still be successful even with higher rates. romaine: what about straight fixed income? the idea of so much cash moved into short-term treasuries,

basically, cash increments. jenny: finally you are getting paid to own fixed income which is terrific. a money market fund can get 4.75% high-yield. you can get 9%. you can get liquid assets impacting our private credit. if they have not had the kind of deals to invest in since the global financial crisis. the challenge is that the traditional fixed income market on the liquid side is actually paying great returns. so, the var is a little higher to decide whether you want to tie up that capital or stay short and invested in traditional markets. romaine: it raises the question about how clients are located now. there was concern about the last bull market cycle. everybody was in stocks and people would joke about being 99% overweight in u.s. equities. obviously a lot has changed. i am curious, the mix we are seeing now in allocations, does that hearken back to the mix we saw hot -- prior to the global

financial crisis and.com boom. j.: a pension fund usually tries to target 6.5 percent 7% return. they have one third of their portfolio now invested in fixed income and they can absolutely achieve that return taking risk off the table. one of the issues under appreciated at a time when interest rates were zero was to get return you had to move up the risk curve. now they can bring that back a bit. romaine: the risk we talk about, is that transparent enough? i am talking specifically about private markets. jenny: the risk for the private market, i am not sure. the risk is liquidity, right? because, you are making, you know, a private loan, in many ways. because of the banks are not lending at the same level. they are getting even greater returns for the same risk level. the question is, does the investor understand it? tim: where -- romaine: where is

the quiddity? right now it seems all the liquidity is coming from asset managers in the private space looking to push the instruments. we don't have a fed liquidity anymore and what we have seen in public markets changed as well. jenny: there is a risk banks will not keep lending in the same way they were lending. from a lending standpoint that will be covered by private markets. the question is, if you are a midsized company can you get access to markets and what is the cost of the access is the banks are not continuing to lend in the same way. syndicated loans. we now require a bank to keep a portion of that equity on their balance sheets. it's very expensive and private credit managers do not have the same requirements. romaine: i am curious about what clients are asking you about their worries about the economic environment. jenny: clients are asking, obviously, big marker things.

u.s./china relations. what does that mean? will they'll be restrictions on certain investors from investing in china? what does that ultimately mean? i don't think anybody sees an end in sight for the war between russia and ukraine. what does that mean for energy and food security? there is honestly a little bit of a divide you are starting to see between friends of the u.s., friends of china, and the parties that are kind of in the middle. clients are trying to understand what it means from an investment standpoint. romaine: jenny johnson is the president and ceo of franklin templeton hoping to kick off today's -- helping to kick off today's special coverage of the fed decision. after the right, a live report from d.c. from michael mccabe. stick around -- michael mckee. stick around. this is bloomberg.

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( ♪♪ ) ( ♪♪ ) ( ♪♪ ) constant contact delivers the marketing tools your small business needs to keep up, excel, and grow. constant contact. helping the small stand tall. >> welcome back. i am scarlet fu in new york. shares from meta raised their gain now down about 2.5 percent after the federal trade commission proposed limits on facebook monetizing use data for products like facial recognition technology. we are 45 minutes away from the federal reserve interest rate decision and our economic and policy correspondent mike mckee is at the fed now. what are you watching for?

michael: four things wall street wants to know today. first is about interest rates. are they one and done? will they raise 25 it and suggest a pause? that will likely come out in the statement when they change the language to suggest instead of likely further rate increases maybe there will be further rate increases. the rest is likely to come when jay powell gives his news conference. the second thing everybody will want to know with the economic outlook. i'll close to recession? -- are we close to recession? what is the status of inflation? then they will look at the banking system. do we expect more bank failures? how does the fed see it impacting the economy? will we see much more significant credit tightening going forward. finally, the debt ceiling. the chairman is likely to try to avoid answering much on that. but as it gets closer, and now

we are up to june 1 as a possible date, the fed does commit. treasury is their boss in the situation. they are the fiscal agent for the treasury so they are planning for what they may be asked to do. we will ask about it. it's coming up in about 45 minutes. the market reaction at 2:00 wall street time is often different from what happens when jay powell starts to speak at 2:30. scarlet: there is more nuanced to the decision. it comes out in about 42 minutes. 30 minutes after that jay powell begins speaking. next, we head back to milken in beverly hills where romaine sits down with guggenheim partners executive chair out of shorts. -- alan schwartz.

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romaine: that the milken institute global conference. the severity of the banking conference is nowhere close to the stress in 2008 but some are looking for parallels when we talk about the bear stearns collapse in 2000 eight and the subsequent and more systemic failures of lehman brothers later that year. alan shorts was the last ceo of bear stearns and after the collapse he went on to build guggenheim's advisory is this into a juggernaut.

alan shorts is the cochair of guggenheim securities and managing partner at guggenheim partners. alan: nice to see you. romaine: guggenheim has been an advisor to the fbi see on some issues going on with the regional banking crisis, particularly the government orchestrated bailout of first republic this past weekend. alan: my partner jim milstein who is very skilled in restructuring and all this has been in government and in the obama administration. he is the one on our team that has been advising the fdic. the fbi ceded an extraordinary job. to end the weekend being able to take first republic, which had to go into receivership, to be able to have it sold so by the time it went into receivership it was then owned by jp morgan. it was a very good thing they accomplished and i am proud of the team. romaine: it was a fairly orderly

takeover but we had three big regional banking failures in the past three months. are you concerned about contagion risk? alan: you have to be concerned but i believe those three were idiosyncratic. they had an exceptional rise over the last several years. uninsured deposits. they put them into long mature assets. they took extraordinary duration risk. then that duration caught them to where basically they went through all the capital on the market basis. i do not think any other banks were anywhere near as aggressive as that. i would be surprised if near-term we had any other banks hit hard by duration risk. they have been making sure they get liquidity. i think that wave of was has -- what has happened has probably stabilized in my opinion. romaine: do you see any parallels with what is happening

now relative to what happened in 2008 and 2009? alan: i read about what happened in 2008 and 2009. i think it's very different in a major way. what happened in 2008 and 2009 was really a credit crisis. there was a bunch of overinvestment in what turned out to be bad credit. then the lack of visibility into those assets, etc., caused a freeze in the banking system and it things happened with bear stearns limen and the rest of the global economy. but, a couple things i would worry about that could be similar to that. you do not do the same things, but you can be different. when bear stearns happened and before lehman happened, you basically had a brewing crisis that at the same time as the fed was easing over in europe they were tightening credit and so while there was a crisis brewing

you are actually getting tightening in credit. that was part of the severity of the crisis. i think now what i would worry about a little, it's not an exact parallel, but, how much pressure there will be in bake lending. how much banks will have to pull back because of the duration risk they took. and at the same time, may be monetary policy is still tightening while bank credit is tightening. that is what i worry about. romaine: that is a big question. coming out of gf cu cell regulations on systemically important banks that curtailed some activity. jp morgan and jamie dimon effectively going to the rescue of first republic. there are a lot of questions asked to what type of appetite they are their peers will have to continue lending at least at the rate they were. alan: yes and it is broader than that. it is really that duration risk

was taken by a lot of people within the system. so, on the lending side, the lenders that took duration risk are having to pull back. and, they have less capital, really. as their rates go up, with what they are borrowing, they will have to tighten lending standards. at the same time, what i do not think is on the others, there are a lot of creditors out there building their business on floating-rate debt. as their debt cost goes up, their ability to pay could go down. we don't know how much tightening there will be both from banks pulling back and with things like commercial mortgages and others that there is a problem with the credit side, not just the duration side, if i am making sense. romaine: to loop back to the fed decision today, with the expectation that whatever the terminal right is, whatever it ends up being, the fed seems committed to maybe holding it

there for significant time. alan: yes. i worry less about what the quote rate is. it is really when you have to think about easing. rate is not the only measure of impact on the economy. it is really lending standards and credit availability. i think that the fed, i hope they will get it right but they have to pay really close attention to what is happening as the output of the rising of the rights as much as what the way has to get to. romaine: alan schwartz is the executive chairman at guggenheim partners helping us set up coverage into bloomberg surveillance standing by with the big fed special. after the break diane swonk and bill dudley will be featured. we have full market coverage of the big fed decision at the top of the hour. the press conference is after that and the market reaction subsequently. live in beverly hills california this is bloomberg.