>> welcome to bloomberg markets. it is another big day for the federal reserve with investors anticipating another 25 basis point rate hike. before we talk about the fed, let us get a look at the markets. s&p 500 down a little more than 2/10 of 1%, nasdaq 100 after a 41% surge down almost 8/10 of 1%.

even with the rises, the two year yield up a little bit, about three basis points. 10 year yield to standing about steady at 389. the u.s. central bank is poised to raise interest rates to the highest levels in 22 years. michael mckee is at the federal reserve with more. michael: it was 2001 when the fed funds rate is as high as it is likely to be at the end of today's meeting, 5.5%. the fed is 97% sure to do that, at least according to ois markets. you look at future fed meetings this year, and you see that there is generally -- markets are generally pricing in a skip in september and a slight chance of an increase in november. they start to price in a cut in december. what you are likely to see today is the fed raising rates, dropping one sentence about

holding to assess economic conditions from the statement, then it is up to jay powell pushing back on the idea the cpi -- one data point does not make a trend. he will say we are not going to cut rates this year, we are going to hold until we are certain the cpi is on its way down. there are headwinds and risks ahead and as he has said many times, another hike will depend on the incoming data. sonali: one data point does not make a trend and one voting member does not make a full committee. how divided is the fomc when it comes to rate hikes versus a level of and comfort with inflation writing above 2%? -- riding above 2%? michael: there are those who think they should go further and those who think they should hold. the ones who think they should go further do not think they should go a whole lot further.

the question is, do they have any kind of dissent at a meeting where they raise rates? if the committee is led by jay powell, who says we should raise rates this time, those who are more dovish will probably go along and we will not see any dissents. you will hear about it in their speeches after this meeting. sonali: we are looking forward to your coverage. we are bringing in simon freakley with alixpartners. they have advised many partners as well as high-profile restructuring. the reason for these rates are due to higher inflation, potentially sticky inflation. when you speak to ceos, how much is inflation pinching margins? simon: inflation is probably top of everybody's agenda. they are focused on how to thrive in an inflationary environment, it is tough. sonali: how much of is coming

from the wage picture, and you expect more upward pressure? simon: it is like a layer cake, every layer is a problem in itself. while wage inflation is an issue, material inflation is an issue. the talent market is still a very tight, the skills market is even tighter. to get critical skills to pivot business models, particularly in a digital era, is becoming a real challenge. sonali: this meeting comes before another jobs report soon after. when you talk to ceos across the globe, especially in the u.s., do you expect there would be more pressure on the job market in terms of layoffs and firings? simon: we have seen in the tech sector, maybe some over hiring. the labor market is still very tight, so is this combination of forces, these multiple disruptions that are making it

so challenges for business leaders around the world. sonali: do you think the fed will achieve the ability to make it to a soft landing, or at executives that you speak to preparing for a harder time? simon: the question is not will it be a recession with a small r or big r, but what can business leaders do now to pivot their businesses the best they can in these circumstances? the best business leaders around the world are leaning into things they can do now, not being a hostage of any strategy that is gone before, making sure costs are as variable as possible and they are focusing on core activities, making sure they are liberating liquidity because the best business leaders are staying agile. sonali: inflation is one part of the story, but the rising interest rates has had a large impact already, the highest level of bankruptcy we have seen

since the global financial crisis. alixpartners is one of the largest restructuring experts in the world. do you see this expanding meaningfully as we watch a delayed effect of interest rate hikes? simon: 2023 so far, there has been an uptick in chapter 11 filings, but that is the tip of the iceberg. all the business is not likely to file are still suffering the distress of higher interest costs. the bigger problem than the cost of debt is availability of debt. these are coming due in 24 and 25. if people afford to pay interest rates, will anyone lend them the money? sonali: it is not just higher interest rates. once the fed tightens further, how much might liquidity be drained from the system that perhaps the market is not accounting for? simon: can they lend as one question, will they is another. that is why you will see defaults go up. sonali: do you think the market

is discounting how much defaults might take higher, given your seen potential liquidity constraints and maturities do not come due until next year or the year after? simon: there is some discounting, but it is not fully reflected. if maturity does not come due until 2025, it better know in 2024 what the available strategies are. i think this is going to become very real. sonali: do you think some of the effect margins are under pressure, but not all that much? given the distress you are expecting the next two years, the call today does not really give a full picture of the issues we might see tomorrow? simon: i think there will be winners and losers. i think the best capitalized businesses will still thrive, i do not think it is a generalized view. the businesses that are may be struggling to meet interest payments today will find they cannot make interest payments

tomorrow, the management teams that have not taken cost out of business to keep flexibility have not make sure they have liquidity to pivot on the back of opportunities they have for growth will find there will be enterprises. there will be winners and losers, but i am optimistic. sonali: when you think of the overlay of generative ai, do you think this will have a significant impact on the economy and jobs moving forward in a way that investors might not be accounting for in the next year or two? simon: generative ai is going to disrupt every job in every industry in every geography. it may redistribute labor to different jobs. i am optimistic about the impact, there is more opportunity and generative ai than there is challenge and every major technological disruption in history shows it does not decimate the job market , it just redistributes jobs to be done. sonali: when you speak to

executives, was the single biggest inflationary pressure they are facing? simon: which cost a materials cost, but those are compounded by supply chain disruptions. they are making sure they are looking for the opportunities, tactical opportunities, to drive growth and margin. netflix by stopping subscription sharing, very smart. additional subscriptions are outweighing the retraction. people are looking for the eddies in this dream to drive performance of their business. sonali: the single biggest thing that is misunderstood as it stands today, before another set of rate hikes and potentially another on top of that? simon: the single biggest mistake is thinking the past as a predictor of the future. people should not look back to see what they should plan going forward. they need multiple strategies, multiple options and they need to move quickly. doing it is at a premium.

sonali: that is ceo of alixpartners. coming up, u.s. home sales fall for the first time since february. we will discuss this with kevin thrope of cushman & wakefield, up next. ♪

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markets. u.s. new home sales declined in june for the first time in four months, suggesting interest rates and high property prices are starting to strain the market. home prices have climbed for a fourth month due to demand and tight inventory. the fed is watching housing prices closely with the dallas fed president warning that a rebound in housing prices would pose an upside risk to inflation down the road. here to discuss is kevin thrope with cushman & wakefield. thank you for joining us. if you take a look at the risks to inflation and the path the fed is on, do you think they will need a hike above and beyond what we might see today? kevin: i do not think so. i think this is pretty baked in, the fomc will follow through as expected. i think that might be the last hike. the fed has more than doubled

the long run equilibrium rate, i think sufficient enough to slow the economy and bring inflation in. we are seeing good progress in inflation. stickier components, core cpi turning in the right direction. keep your eye on the employment cost index coming out on friday, it will be interesting on wage growth. commercial real estate specifically, we are looking for signals. for your viewers, it is worth noting that historically as you near the point where the fed is going to make this first move down, which we think will be early next year, that is the best time to buy property. you go back prior to covid, the last time the fed was cutting rates was september 2007. they went out and bought a building that day, your property depreciated by 200% cumulative

return over the next 10 years. this is a critical point in the cycle, i think we are nearing the end of the tightening cycle. if history is any guide, they are going to garner large returns. sonali: one about this idea of any future price shock risks, the idea that housing prices or wages could move inflation higher and start to impact this idea of a cut next year? kevin: i do think there is softening happening in the housing market, that should help. home sales have come down, which is not that surprising. we had a major run up in home values going up into this year. we have seen mortgage costs, going from 4% to 7%. there is a lock ineffective or if you bought the last couple of years,, you are locked into that

rate and you are not in a rush to sell your property and take on a mortgage rate of 7% or 8%. i think what we are going to see with inflation is a feedthrough impact. housing lags in the way cpi is calculated, that will start to filter through in the second half. i am not so sure we are at the point -- home prices have started to drift higher again, i think there is another shoe to drop in home values. you have to come down for affordability reasons. i think maybe the last couple months of home price growth are more of a lift in the longer term trend. sonali: also the distress, there is worry about how much the commercial real estate industry could start to follow for cliff, particularly with offices. how much do you expect higher rates to keep impact in the distress you have started to see? kevin: it is a challenge. we went from 10 year 1%, up to

3.5%, drifting toward 4%. that is putting pressure on property, no question about it. i would emphasize the headlines, what you see in the stress is not really happening across the broader commercial real estate sector. even looking at delinquency rates in the u.s., owners 30 days past due on their loan payment. it is around 3% nationally. hotels were closer to 20%. i am not seeing evidence of a widespread distress, even in office. delinquency rate around 5%. for every five buildings you see in the headlines as distressed, there are 95 others you do not see. cash flow positive, no current

issues. i do not disagree with your point we are going to see more distress, that is the easiest prediction to make. the move up will create value destruction. i believe the bulk of it will be concentrated in the office sector, we have a wave of loans maturing the next couple years and it will make refinancing very difficult. there are certain lower quality office products rendered obsolete for remote work. there are problems here. commercial real estate is very nuanced. it depends on quality angiography, that is probably not what you want to hear. your producers probably in your ear saying get this economist off the air. [laughter] but it is. sonali: nothing like that, everyone knows exactly when to buy a house next year. that is kevin thrope, we thank you for your time. still ahead, bloomberg's

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sonali: this is bloomberg markets. after considering a range of scenarios, bloomberg economics has good reason for betting on an end to the interest rate hiking cycle in july. rate cuts seem to be offing not too far down the line. anna wong wrote the report on that forecast in me from d.c., thank you for joining us. when we think about the direction of travel, how much risk is baked into the prediction this may be the end?

what would cause that to change? anna: i think one of the things we are looking for is to see today at powell's press conference, how much has he taken into account the softening and labor market? we have seen payroll data surprised for the first time in over a year to the downside, the fed staff has a way of parsing the adp number to extract the real signal underlying the labor market. in the minutes, we saw that fed officials are considering the possibility that the labor market is softer than the nonfarm payroll looks. fed officials will have the survey in hand as they consider policy this week, and i think that may show credit conditions are indeed tightening more as we head into the second half of this year.

both reasons let us to think that by the time september rolls around in the fed can write down a new projection, that might cause them to indicate today's hike is the last one. sonali: how much concern is there that inflation will be writing above 2%, into the 3% range? anna: that is a real possibility, it depends on a lot of things he could not observe yet. it depends on what is the trend productivity growth? if trend productivity growth is only 1%, it means nominal wage growth has to flow all the way to 3% before being consistent with 2% target. it is likely nominal wage growth as for percent, productivity is 1%. in that case, the trend underlying inflation is stuck at 3%. even in that situation, our note indicated the fed will be

cutting in the next year because real interest rate will be rising as inflation falls to 3%. even with inflation stuck at 3%, the fed will be set to cut in the next two years. sonali: how do you categorize the dispute inside the federal reserve? it is going to be into next year that the market is looking into, the idea of how many more hikes and when they could cut, yet inflation is still a big concern to many committee members. anna: there are probably three camps, one camp represented by bostick, for example, is rates are sufficiently restrict, you do not into do more, just wait for lags and monetary policy to go through. delinquency rate on consumer loan sticking up. those people think we are one and done. on the other hand, there are those who think there will not

be a recession, legs are short, no more monetary restraint going forward. that would be in favor of going back, hiking one more time or even more. there is a third camp that things may be rates are sufficiently restrict now, but you do not know what supply shocks await us down the line. commodity prices could continue to rise the next couple of months, so they would want to hike more just to buy the fed some insurance in case that stock should materialize in the next couple of months. sonali: that is anna wong. next, we have an all-star lineup of experts, including j.p. morgan's bob michele joining the surveillance team for the fed decides, half an hour until that decision. this is bloomberg. ♪

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