so people were issuing debt at negative rates. it seems that's so far away now, my own sense is that we're not going back to that. but, you know, honestly, we're going to find out. but it feels, to me, that the neutral rate is probably significantly higher than it was back then. how high is it? i justdon't think we know. again, we only know it by its works. >> how do you respond to the criticism that will likely come that a deeper rate cut now before the election has some political motivations? >> yeah, so, you know, this is my fourth presidential election at the fed, and, you know, it's always the same, we're always going into this meeting in particular and asking what's the right thing to do for the people we serve. and we do that and we make a decision as a group, and then we announce it. that's always what it is. it's never about anything else.

nothing else is discussed. and i would also point out that the things that we do really affect economic conditions for the most part with a lag. so nonetheless, this is what we do. our job is to support the economy on behalf of the american people. and if we get it right, this will benefit the american people significantly. so this really concentrates the mind and it's something we all take very, very seriously. we don't put up any other filters. i think if you start doing that, i don't know where you stop. so we just don't do that. >> thank you, chair powell. my first question is, very simply, what message are you trying to send american consumers, the american people with this unusually large rate cut? >> i would just say that the u.s. economy is in a good place

and our decision today is designed to keep it there. more specifically, the economy is growing at a solid pace, inflation is coming down closer to our 2% objective over time. and the labor market is still in solid shape. so our intention is really to maintain the strength that we currently see in the u.s. economy. and we'll do that by returning rates from their high level, which has really been the purpose of which to get inflation under control. we're going to move those down over time to a more normal level over time. >> a follow-up to that. listening to you talk about inflation moving down to 2%, is the federal reserve effectively declaring a decisive victory over inflation and rising prices? >> no, we're not. so inflation, you know, what we say is we want inflation -- the goal is to inflation move down to 2% on a sustainable basis. and we're not really -- we're

close, but we're not really at 2%. and i think we're going to want to see it be around 2% and close to 2% for some time. but we're certainly not saying mission accomplished or anything like that. but i have to say, though, we're encouraged by the progress that we have made. >> i just would love to know kind of how the committee is thinking about the persistence we've seen in housing inflation. do you think you can return to 2% with housing inflation where it is? yeah. >> so housing inflation is the one piece that is kind of dragging a bit, if i can say. we know that market rents are doing what we would want them to do, which is to be moving up at relatively low levels, but

they're not rolling over -- the leases that are rolling over are not coming down as much, and oer is coming in high. so it's been slower than we expected. i think we now understand it's going to take some time for those lower market rents to get into this. but the direction of travel is clear, and as long as market rents remain relatively low inflation over time, that will show up, just the time it's taking now, several years rather than just one or two cycles of annual lease renewals. so i think we understand that now. i don't think the outcome is in doubt again, as long as market rents remain under control. the outcome is not in doubt. so i would say the rest of the elements that go into core pce inflation have behaved pretty well. they all have some volatility. we will get down to 2% inflation, i believe, and i believe that ultimately we'll

get what we need to get out of the housing services piece, too. >> some of your colleagues have expressed concern with starting to cut rates, you could reig nature demand in housing and see prices go up even more. what's the likelihood of that, and how would you react to that? >> the housing market, it's hard to gain that out. the housing market is in part frozen because of the lock-in with low rates, people don't want to sell their home because they have a very low mortgage. as rates come down, people will start to move more and that's probably beginning to happen already. but, remember, when that happens, you've got a seller, but you've also got a new buyer in many cases. so it's not obvious how much conditional demand that would make. the real issue with housing is that we have had and are on track to continue to have not enough housing. and so it's going to be

challenging. it's hard to find -- to zone lots that are in places where people want to live. all of the aspects of housing are more and more difficult, and where are we going to get the supply? this is not something that the fed can really fix. but i think as we normalize rates, you'll see the housing market normalize. and ultimately by getting inflation broadly down and getting those rates normalized and getting the housing cycle normalized, that's the best thing we can do for householders. and then the supply question will have to be dealt with by the market and also by government. >> just following up on some of the labor market talk earlier, you know, monetary policy operates with long and variable lags, and i'm wondering how much you see being able to keep the unemployment rate from raising too much comes from the fact that you're starting to act now,

and that's going to give people more run to run, versus just the labor market is strong. and then, also, if i could, following up on nick's question, do you see today's 50 basis point move as partially a response to the fact that you didn't cut in july and that sort of gets you to the same place? >> you're right about lags. but i would just point to the overall economy. you have an economy that is growing at a solid pace. if you look at forecasters or talk to companies, they'll say they think 2025 should be a good year, too. so there's no sense -- the u.s. economy is basically fine if you talk to market participants, bus businesspeople who are out there doing business. so i think our move is timely. i do. and as i said, you can see our 50 basis point move as a commitment to make sure that we don't fall behind. so you're really askingabout -- your second question, you're

asking about july. i guess if you ask -- you know, if we had gotten the july report before the meeting, would we have cut? we might well have. we didn't make that decision. but we might well have. i think that's not -- that doesn't really answer the question that we ask ourselves, which is at this meeting we're looking back to the july employment report, the august employment report, the two cpi reports, one of which came, of course, during blackout. we're looking at all of those things and asking ourselves, what is the policy stance we need to move to? clearly, literally, everyone on the committee agreed that it's time to move. it's just how fast do you go and what do you think about the path forward. so this decision we made today had broad support on the committee, and i've discussed the path ahead.

>> mortgage rates have already been dropping in anticipation of this announcement. how much more should borrowers expect those rates to drop over the next year? >> very hard for me to say. from our standpoint, i can't really speak to mortgage rates. i will say that will depend on how the economy evolves. our intention, though, is we think that our policy was appropriately restrictive, we think that it's time to begin the process of recalibrating it to a level that's more neutral, rather than restrictive. we expect that process to take some time, as you can see in the projections that we released today. and if things work out according to that forecast, the rates in the economy will come down as well. however, the rate at which those things happen will really depend on how the economy performs. we can't look a year ahead and

know what the economy is going to be doing. >> what's your message to households who are frustrated that home prices have still stayed so high as rates have been high? what do you say to those households? >> what i can say to the public is that we had the highest -- we had a burst of inflation, many other countries around the world had a similar burst of inflation. and when that happens, part of the answer is that we raise interest rates in order to cool the economy off, in order to reduce inflationary pressures. it's not something that people experience as pleasant. but at the end, what you get is low inflation restored, price stability restored. and a good definition of price stability is that people in their daily decisions, they're not thinking about inflation anymore. that's where everyone wants to be, is back to what's inflation. just keep it low, keep it

stable. we're restoring that. so what we're going through now really restores -- will benefit people over a long period of time. price stability benefits everybody over a long period of time, just by virtue of the fact that they don't have to deal with inflation. that's what's been going on. and i think we've made real progress. i completely -- we don't tell people how to think about the economy, of course, and of course people are experiencing high prices as opposed to high inflation, and we understand that's painful. >> i was wondering if you could go through -- you said at the beginning that coming into the blackout there was like an open thought of 25 or 50, the fed could move either 25 or 50. i would sort of argue that when

we had those two last speeches by governor waller and new york fed president john williams that they were sort of saying that maybe a gradual approach was going to win the day. i sort of want to ask a seven-part question about this. i mean, would you have cut rates by 50 basis points if the market had been pricing in low odds of a 50 point move like they were last wednesday, after the cpi number came out, a really small probability of a 50 point cut. does that play in your consideration at all? just talk a little bit about that. thank you. >> we're always going to try to do what we think is the right thing for the economy at that time. that's what we'll do. and that's what we did today. >> thank you, chair powell. you've mentioned how closely you're watching the labor market, but you also noted that payroll numbers have been less reliable lately because of the

downward revisions. does that put your focus on the unemployment rate, given the sep projection of 4.4 being the peak in the cycle. would going above that be the kind of thing that would trigger another 50 basis point cut? >> so we will continue to look at that broad array of labor market data, including the payroll numbers. we're not discarding those. we'll certainly look at those. but we will mentally adjust them based on the adjustment which you preferred to. this isn't a bright line. the unemployment rate is very important, but there isn't a single statistic or single bright line over which that might move that would dictate one thing or another. we'll look at each meeting, we'll look at all the data on inflation, economic activity and the labor market, and we'll make decisions about is our policy stance where it needs to be to foster over the medium term our

monda -- mandate goals. so i can't say we have a bright line in mind. >> thanks, chair powell. i know that you discussed earlier how the fed does whatever the right thing is and nothing else factors in. but in general, can you talk about whether or not you believe a sitting u.s. president should have a say in fed decisions on interest rates? because that's something that former president trump, who obviously appointed you, has previously suggested. and i know the fed is designed to be independent, but why? can you tell the public why you view that so important? >> sure. so countries that are -- democracies around the world, countries that are sort of like the united states all have what are called independent central banks. and the reason is that people have found over time that insulating the central bank from direct control by political

authorities avoids making monetary policy in a way that favors maybe people who are in office as opposed to people who are not in office. so that's the idea, is that -- i think the data are clear that countries that have independent central banks, they get lower inflation. and so we're not -- we do our work to serve all americans. we're not serving any politician, any political figure, any cause, any issue, nothing. it's just maximum employment and price stability on behalf of all americans. and that's how the other central banks are set up, too. it's a good institutional arrangement, which has been good for the public. and i strongly believe that it will continue. >> thanks for taking questions, chair powell. a couple of regulatory developments in the last week

that i want to ask you about. last week, michael barr outlined his views of the changes to the end game. i'm wondering if you are in alignment with him on what the changes should be, if those have support in a broadway that you're looking for, and if you think the other agencies are also onboard with that approach. and then yesterday other banking regulators -- >> hold the second question. [ laughter ] >> we'll give you a second question. the answer to your question is that, yes, those changes were negotiated between the agencies with my support and with my involvement, with the idea that we were going to re-propose the changes that vice chair barr talked about and then take comment on them. so, yes, that is -- that's happening with my support.

it's not a final proposal. we're putting them out for comment, we're going to take comment and make appropriate changes. we don't have a calendar date for that. and as for the other agencies, the idea is that we're all moving together. we're not moving separately. so i don't know exactly where that is, but the idea is that we will move as a group to put this, again, out for comment. and then, you know, it will come -- the comments will come back 60 days later and we'll dive into them and try to thing this to a conclusion sometime in the first half of next year. >> and then yesterday there were merger reform finalizations from the other bank regulators. what does the fed have to do to align itself? >> i would bounce that question to vice chair barr. that's a good question, but i don't have that today. >> last question. >> thank you, chair powell.

you said earlier that the decision today reflects with appropriate recalibration, strength in the labor market that can be maintained in the context of moderate growth. even though the policy statement says you view the risks to inflation and job growth as roughly balanced. given what you've said, though, today, i'm curious, are you more worried about the job market and growth than inflation? are they not roughly balanced? >> no, i think, and we think they are now roughly balanced. if you go back for a long time, the risks on inflation, we had historically tight labor market. there was a severe labor shortage. so very hot labor market, and we had inflation way above target. that said to us concentrate on inflation, and we did for a while. and we kept at that. the stance that we put in place 14 months ago was a stance that was focused on bringing down inflation. part of bringing down inflation,

though, is cooling off the economy and a little bit cooling off the labor market. you now have a cooler labor market in part because of our activities. so what that tells you is, it's time to change our stance. so we did that. the sense of the change in the stance is that we're recalibrating our policy over time to a stance that will be more neutral. and today was, i think, we made a good, strong start on that. i think it was the right decision and i think it should send a signal that we're committed to coming up with a good outcome here. >> could there be a shock that could dip it into recession? >> i don't think so. as i look -- well, let me look at it this way. i don't see anything in the economy right now that suggests that the likelihood of a recession -- sorry, of a downturn is elevated. i don't see that. you see growth at a solid rate.

you see inflation coming down and you see a labor market that's still at very solid levels. so i don't really see that, no. thank you. >> okay, that was fed chair powell, following the decision to cut interest rates by 50 basis points. perhaps a bit of a surprise today. chair powell saying moments ago, you heard it in the news conference, that there is greater confidence that inflation is moving closer to their target, that the labor market has cooled, but that the economy remains strong overall. important to note, too, today that there was one dissent from governor bowman, the first from a position of that stature since 2005. stocks have been a bit volatile following the decision. we can take a look now. we are higher across the board. we'll track it, of course, over the final stretch. welcome to "closing bell." we're live in downtown los angeles and we're formed by

jeffrey gunlock. you said yesterday 50 was your call. now we have that. what's your reaction today? >> obviously, i'm not surprised. i thought it was interesting that later in the press conference jay powell admitted that they maybe could have gone in july. i remember when we met at the july 31st meeting, i said they should have cut. and what probably spurred my confidence that the cut was coming was since july 31st, the two-year treasury yield has dropped by more than 50 basis points. there's volatility, today, too, after this fed meeting. >> why are rates up today, do you think? >> the short end is down. well, it depends what minute you look at it. i guess it is up a little bit in yield. it did initially rally. >> i can look at it now as we have this conversation, 2s, 3s, p, 10, 30. all these yields are up. why? >> i think that the bond market

at the long end in particular is where the yields are up. the bondmarket doesn't want the fed to be easing aggressively, because they're worried about inflation. the rates have come down a lot this year on the short end, not very much on the long end. and the fed easing, the market is inflationary, and they're building in a premium against that. i think the word of the day was recalibration. he said it a lot of times, that they're recalibrating the rates. he seemed relaxed to me, even cracked a couple of jokes, which you don't see much from mr. powell. i think he felt good that he was now more in sync with the bond market. the bond market is very flat in yields from two years out to five years, even ten years. it's right about 350, which to me suggests that the base case is that the terminal rate for the fed funds rate is 360.

they said at the end of 2025, they think they'll be at about 350. he's very much in sync with the bond market and i think he was uncomfortably out of sync with what was going on with the two-year treasury. they had to do 350 to get more in line in pricing. >> you made the argument yesterday that the fed is behind the curve. the chair himself was emphatic that he says, we're not. your reaction? >> well, now they're not so far behind the curve. i think they're a little bit, because they're still up at 4.78 in the middle of the fed funds rate, but it seems to me that they're very open to keeping this process going. it's interesting that the next fed meeting is after the election. usually it would be before the election. i think they punted it a week. so they'll have a lot more potential to cut 50 in november than they would have if it was right before the election. then it starts to -- i don't

really put much credence in this idea that the fed is thinking about elections. jay has said that repeatedly. i actually take him at his word. but i still think it would be rough if you do it two days before the election. >> the fed -- i think it's fair to say, has never really been in what you might call the insurance business. they're data dependent, they react when the data suggests that they should react. was today a bit of an insurance policy by doing that? >> yes. >> because he noted multiple times the economy is basically fine, the economy is solid. he went on and on about that, and multiple times. >> he used the words risk management more than once. and that strongly suggests an insurance policy type of mentality, at least partially. because he knows that the employment rate, the jobs that are reported the first friday of the month, he admitted they're artificial. he said that today, there's something artificial about them because they keep revising them lower. there's the monstrous 818,000 --

800,000 jobs on the revision, and it seems to be happening consistently. he said we'll make a mental correction now on the first friday of the month, which would mean about -- just think of it as being 75,000 jobs overstated. so i think if we get to an employment report that's at 100,000 jobs, that's going to be a real dangerous signal. because if you clip 75,000 off of that, you're starting to fly the plane near the tops of the trees. and also i want to point out that the household survey, which is also an important survey and tends to be more accurate at turning points of the economy, that has had negative full-time job growth this year, all through january, now we're eight months negative job growth. and the part-time jobs are almost zero. so the surveys do not really jive with one another, but they're clearly weakening and he

acknowledged that today. >> do you think the economy is weaker than the fed chair himself just said? >> i think the present data supports -- and it's backward looking, but the present data supports his statement that the economy isn't showing signs of significant stress. and gdp now, the most recent quarters of gdp, they're showing up at about 2% real, which is pretty solid growth. it's the growth that the cbo uses to make their predictions. but i do think that the interest rate problem with credit card and the economy is significant. i think the level of debt on the consumer is very high, and so i expect to see weaker economic data in the coming reports. i still think there's a good shot that the history books will say september of '24 was the start of a recession. >> steve liesman has come out of the room. i want to bring in our senior economics reporter. steve, how close of a call was this really?

the fed chair used the words broad support for a move today, and of course we did have the one dissent, notably, by a fed governor, which we haven't gotten since 2005, somebody of that stature. >> yeah, my good friend mark olsen, who dissented in favor of easing of policy, we haven't had one dissent in favor of tighter policy in a while here. scott, i want to bring your attention to the word "recalibration" and maybe a discussion about what that means here. the chair used the phrase about six or six times in the press conference. it was part of his opening marks. and i asked him the question, how can we know, given that the data has been reasonably strong, actually running near 3% on the gdp tracking forecast for this quarter, retail sales were strong, industrial production was strong. so i asked him, how can we know what you're going to do. and listen to what he said and i'll give you my thoughts on the back end of it.

>> you'll see that it's a process of recalibrating our policy stance away from where we had it a year ago when inflation was high and unemployment low, to a place that's more appropriate given where we are now and where we expect to be. and that process will take place over time. >> so what you're doing here, scott, if you're recalibrating policy, you're almost in a way disconnected from what the current data is telling you. and it means you're going to go down and you might go down, and what jeff was talking about, 50 basis point increments, if the inflation is a little higher, if the jobs are higher, you're recalibrating to get to a place where you can respond to the data. but if you're way high, which is what the chair is suggesting, you can't respond to the data adequately if you're way off the mark. you've got to recalibrate and i think that's where the fed is going. i agree with what jeff is saying. i think he took a little more -- i don't know what you would say,

took signal from the job revision that perhaps was warranted in part, because goldman suggests there may be an immigration issue with that data. that being said, we're recalibrating and that means we're not really following the data quite as closely as we might to figure out what the fed is going to do. >> jeffrey is nodding his head as you're talking, the way that you viewed this today with that word, because it's the first word that jeffrey mentioned. >> i didn't hear that. >> just like steve liesman. stay with us. i want jeffrey to answer. >> that's the word of the day, for sure. i got the feeling that jay powell was getting quite confident about the inflation trend. our inflation model, which uses shelter and the price of energy pretty heavily, suggests that the inflation rate on the headline cpi, within about five months from now will go down below 2%. and it will depend on what

happens with the commodity complex, but it could stay below 2% for quite some time. and the commodity complex is strongly supportive of that. the bloomberg commodity index is below 50, 100 two-day moving average. with the dollar having lost about 4% in value since the last fed meeting, the commodity complex is showing no signs of life and the price of crude oil is hovering around $70 a barrel with signs that it might break to the downside. so it could be interesting to see how low the inflation rate goes. i feel that one should not be worried about near-term inflation but should be worried about longer-term inflation. that's what's got the loan and bond markets a little bit concerned. because when the economy rolls over, we're starting from a deficit of nearly 5% gdp, and it's going to go up a lot. and that means a lot of bonds.

and will we have a change in the pattern? and i'm quite open to this idea, though not utterly convinced, that at some point in the recession the fiscal and monetary responses will lead to the long end of the bond market perhaps going up in yield. and that could be sort of being signalled, even for just the last couple of hours, by the action today. >> steve, lastly, to you, and you made thispoint, i thought it's interesting, some of the criticism leading into today has been that the fed has been too data dependent. your suggestion with the move today of 50 basis points is, in fact, a break from that. jeff and i talked about the idea of an insurance policy, that the fed really isn't, generally speaking, in the insurance business. but maybe that's what today really was. >> so, scott, that's a great observation, except for when the fed essentially is in neutral and trying to balance and feel the way as to where the right

neutral rate is. then it ends up being an insurance business in terms of essentially getting policy to the place where acting on the biggest risk. remember what greenspan used to say, guarding against the low probability, high-risk event. i think that's where powell is right now. and by the way, we may end up -- i hope jeffrey is wrong here, it's a bad bet to bet against jeffrey, i'll knowledge that. we may end up calling this if he's wrong, the immaculate 50 basis point cut. he said what this means, the u.s. economy is in a good place, our decision is designed to keep it there, the economy is growing at a solid pace, inflation is coming down closer to a 2% objective, the labor market is still in a solid place. if we end up being okay here, this could be the only and the first ever immaculate 50 basis point rate cut, scott. >> steve, thanks so much. our senior economics reporter.

it goes to what claudia said in the hour preceding the decision, that the somm rule says we're in a recession she says we're not. >> i guess she's violating her own rule. i use something that's similar, it's simply the unemployment rate relative to its 36-month moving average. and we're observably, convincingly above the 36-month moving average, and there has not been any experiences where we've made that crossover without a recession. and so watch out for that. on this insurance policy thing, you see ads on tv where somebody says, oh, our friend is only 47, they say, do you have life insurance? the guy says no. you better get on it. i think jay seemed relaxed today because he's somebody that didn't have an insurance policy yesterday and now he has the insurance policy. and he feels comfortable about

that. and the recalibration is absolutely appropriate. because he's right, i thought one of the best points he's made ever as fed chairman was comparing where they were with the inflation rate up well above their target and the unemployment rate in the mid 3 1/2s, a restrictive policy is a no-brainer under that set of circumstances. but that's not where you are anymore. i think it was a very wise way for him to make that point. it set the stage and really offered a very good rationale for why 50. >> the projections suggest 100 basis points this year, projections. you said you think 125. where will we be, do you think, by the end of the year on that? >> i think we'll probably get another 75. so it will be down 75 from here. about 4 1/8th. >> there are dangers on both

sides. the fed chair acknowledged this as well. you move too fast, you risk reigniting inflation. you move too slow, you risk tanking an economy that he says looks pretty good. how do you see the balance of those risks? >> i think that the interesting question about what this fed policy is going to do is what's going to happen to the housing market. is it really going to stay firm? is it going to go up because of potentially lower interest rates? or is it going to unlock supply if you get interest rates into the high 5s on mortgage rates, will that unlock supply if people who have been wanting to move, will it help the economy? because some of these people that took out mortgages a year or two ago might be able to do some rate reduction and monthly payment. i think that's the real wild card for the inflation rate and the economy, is what happens to the housing market. and i don't think any of us

really know. and the reason is that we've always experienced lower rates during recessions and we have not had hiking cycles, strong housing prices. will they go down if they cut rates? i don't really know the answer to that. and i'm very anxious to see the data as it develops. for now, i just think the inflation risk is lower than the unemployment rate and the employment risk and the economic risk generally with the consumer. >> what do i do as a credit investor? let's switch to how to put this into action today. a lot of people are thinking about that now. >> last meeting i said that you should go from floating to fixed, which is the first time i've said that in a long time because the fed is going to start cutting rates. and certainly that's been a good call.

one of the best performing asset classes since the last meeting is long-term treasury bonds. so i think that credit spreads are very, very tight. it depends what index you look at. there's one from bank of america, there's others. and the high yield bond market got on one of those indices to a level of 280 basis points of excess yield over the ten-year. it's kind of quietly gone to 320. so they're already starting to widen, which is another reason why i think that underneath the surface of the economy you have to be careful. because when credit spreads start to widen, that's a sign that things aren't all that copacetic. also, i'll point out that the yield curve is no longer inverted, and when you get near the front end of a recession, it's not so much that it's inverted at the front edge, it's when it has been inverted, particularly for a long time, and then it de-inverts. that's happened.

and we were inverted for a couple of years on parts of the yield curve. also, remember, t-bill and chill, everybody likes the six-month t-bill at 5.5%? i said don't do that because you're going to wake up one day and it's not going to be at 5.5%, and pretty soon i think it's going to be at 4%. so the intermediate part of the credit market is still good. the middle tier of the capital structure, not the junkiest stuff. i prefer fixed over floating. and now with the dollar weakening, it might be time to start upping emerging markets. and if you're really intrepid, in local currencies. i'm not convinced the dollar is going to accelerate to the downside, but i will believe that if we get too closes below 100 on the dixie and at 100.5. we're not that far away. the currency play might start to get interesting. >> you told me yesterday you

went from a maximum long on long-term treasurys, you cut that back a little bit in recent weeks. >> yes. >> what do you do from here then? >> well, rates are kind of stabilizing, they're not at an attractive level anymore, when you could get 5% and you thought the inflation rate was going down to 3%, they were attractive. now they're at 3.5% in parts of the market. we've been favoring not so much trying to be long, at the long end of the market, which had been good for part of the yeerks but rather the relationship between short rates and long rates, which has changed by 115 plus basis points since we were at the maximum inversion. i think that's going to continue. i think we're going to get the two-year treasury to go to 150 basis points less than the long bond. so there's still a long way to go. so that sort of a trade, what we're doing is it's odd, you're actually taking a more positive

position on two years, perhaps five-year treasurys and a less optimistic view of the long end. so you can shorten your duration and actually benefit from rallies. that's kind of weird, and it's because it's the short intermediate end that's rallying, and i don't think the long end is going to rally much anymore. i think the easy money has been made. >> you've talked repeatedly about the deficit, this idea that you would think because we're embarking on this cutting cycle that yields all across the curve would continue to come down. you suggest that could happen, but then on the longer end, certainly, you could have interest rates actually go up as the cost of funding the deficit increases. >> yes, well, long-term interest rates, they're barely changed year to date. there's been volatility, but they haven't gone down, while the two-year treasury rate has come down a fair amount. so this steepening theme and the rejection of recession being a

positive for the long bond has been in play all year on a point-to-point basis. so i think that the problem that i worry about is that our response to say recessions have been incrementally more money printing. yes, covid is very unusual, we hope we don't have a repeat of something like that. but the amount of money they were willing to give away is a cautionary tale. so what might happen when the next recession comes, that's my thesis as to why long rates might actually, after the initial presponse of already coming down, that may get rejected and rates may start to go up. and that would be a real trap. you could even have a failed auction or something. remember when that happened in the uk and the long bonds went up 100 odd basis points in a day. i think we have a chance of that happening if the policy isn't handled correctly. it's going to be fascinating to

navigate through this. because none of us know what it's like to have a big bear market in bonds, start from a level and then will they drop during the recession. maybe they won't. where will credit spreads go during recession if, say, junkier borrowers don't have the ability to refinance, which they've had historically, because rates go down. even though spreads widen during recessions, the base rate, the treasury rate has always come down quite substantially. i'm of the mind that might not happen this time. so there could be a lot of companies that are trapped into fixed rate debt. thankfully the cfos are smart. they locked in very tight spreads and very low rates back in 2021 and extended maturities. so thankfully it's not an immediate problem. but it's kind of like the rent data or the shelter data in the cpi, it's sort of like we see the new rent rolls are not that robust. there's actually parts of the

country where the new tenant rates are declining. but it takes a while for the old rents to get to their level and roll over. so i think we have potentially coming our way in 2025 sort of a tailwind on the shelter component coming down. i think jay powell kind of alluded to that, too. he seemed quite aware of the differentiation between new tenant rents and rolling of old tenant rents. and it's happening at a rate that is shorter, the timeline is more extended than most people, i think, are used to assuming when they look at the rent levels. that's another reason why i think that the fed is comfortable. he says he's balanced, he used that word over and over. what i heard was we're more worried about the employment picture than the inflation picture and i agree he's right on that. >> you've made the argument that if people assume that it's going to be -- as some have suggested, that this is going to be a

golden aged for fixed income because of the trajectory of rates, that it's more nuanced than that, that you need to be more selective and careful than just thinking that way. how? >> yeah, i mean, the golden age for fixed income was a year ago when spreads on high-yield bonds were 500 over and the base rate was at 5%. you could get 10% if you underwrote your credit risk prudently without really trying all that hard. but now fixed income rates are down around 3.5% on treasurys, for most of the curve, and we've got the spreads that have widened, but still only at 320 basis points a junk bonds. so you've gone from 10 plus to 6 3/4 and the spreads have started to widen. i think credit is still fine in single a, bbb, strong bbs, maybe some strong single bs. but you've got to be careful on where you are on the curve and you want to make sure that you have companies that don't have rollover risk in the very near

term. >> you've raised a lot of eyebrows yesterday when you suggested that private credit is a bubble. do you want to expand on why you think that's the case? it's trillions of dollars, the asset class. >> private credit is a ver cyclical asset class and it usually gets to a high valuation and a lot of over-investment, when you can look at public markets and find they're not attractive. for example, starting 2022 in my just markets webcast, i pointed out -- this was at the top of the s&p 500, i pointed out that using conventional decades-long data series of valuation on the s&p 500, so the ratio of pe, price to sales, price to book, there's about 25 of these things that you can look at, and versus its own history -- forget about other asset classes, just before these valuations were versus decades of the s&p's history,

the stock market was really overvalued versus its own history. it was top percentile of pe, top 3% percentile of all of the 25 data analyses. but weirdly, relative to the internals of the s&p 500, i said on my just markets webcast they're undervalued versus the ten-year. we've got this way overvalued value market but it's cheap to the ten-year because you can compare that to the inverse of the pe, and it was below average versus the ten year treasury. so i said this is a bad setup because you've got an overvalued stock market and interest rates almost sure to rise with what we knew was going to be rising inflation from negligible interest rates. what allocators do, i don't like the s&p versus itself, i hate the bond markets, it's cheap versus the overvalued stock

market, but rates are going to go up. that means that stocks will not have a tailwind, they'll have a headwind of the discount rate of the forward earnings going up and bonds are going to take the worse losses in the history of the bond market, which is what happened. what allocators say, i don't want to buy the s&p, i don't want to buy the ten-year, so what am i going to do? they turn to things that are mo more opaque, things that aren't rich in valuation history, and they say come to me with a blind pool, a spac going on, a lockup fund. i'll tell you what, i don't like public markets, i don't like stocks, i don't like bonds, so i'll give you money to allocate to your spac under one condition, don't tell me what you're doing. because if you tell me what you're doing, i'm going to be over to map over the over-valuation analysis of stocks and bonds and not going to like it. so they kind of hold their nose,

close their eyes, cover theiratheirary ears and hope it's going to work out. unfortunately, the promise is a little bit of a false promise, based upon a volatility argument, which means you get about the same return and hopefully a little bit better than the public market, but you have lower volatility. that's a false promise, because they're not market-to-market. they're private. it's like saying you never lose money on a cd. well, you have a penalty if you want to get rid of it. so i think that's false promises that go into these non market-to-market strategies, and every speech i've given in the past two years, one of the very first questions is what about private credit. i said, i guess you must own a lot of private credit. yeah, a lot of private credit. i noticed at harvard when they had problems with their donors backing away, we've got a $50 or $60 endowment and had to attack

the bond market for operating money because they didn't have enough liquidity in their portfolio of endowment to raise $1 billion or $2 billion for salaries and maintenance and so forth. that's telling you a lot, that there's a lot of luiquidity. when they get tapped, they have to liquidate some of the stuff and it's not at par. it's going to be at a haircut. so i would be very cautious, because as the economy transitions -- if i'm wrong and it takes a yeato get into recession, it doesn't matter. once you get to these types of conditions, you have to asct. you can't say everything is okay. valuations are high, particularly on the magnificent stuff. this is a fun area for active management. it's great when rates are moving, it's great when the

yield curve is changing. you can start to make some clear decisions on what to do. but i would not be allocating significant money at these yield levels to long-term treasury bonds. >> i want to ask you about a couple of other investment ideas, but i want to take a quick break. we're back here at double line and we're going to get mike santoli's first reaction to the decision in the market zone, which is next.

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so this is pickleball? it's basically tennis for babies, but for adults. it should be called wiffle tennis. pickle! yeah, aw! whoo! ♪♪ these guys are intense. we got nothing to worry about. with e*trade from morgan stanley, we're ready for whatever gets served up. dude, you gotta work on your trash talk. i'd rather work on saving for retirement. or college, since you like to get schooled. that's a pretty good burn, right? got him. good game. thanks for coming to our clinic, first one's free. we're back in los angeles for the closing bell market zone. cnbc market commentator, mike

santoli is here with us. michael, you're looking at the markets. we're at the lows i guess for the dow and s&p. it's really dangerous, though, to judge what's going to happen in the markets by a knee-jerk reaction an hour after a decision. >> yes, usually a hazard to ex d in regional banks and an attempt to push up the small caps. consumer cyclicles doing well. but it's getting swamped by just a general response. also, the first rate cut in a cycle often is greeted with a little bit of indifference by the market. what i would say, too, is the fed decides to go bigger rather than smaller on the first cut, but powell actively tried to withhold any promise that therefore it's going to be an accelerated easing cycle. there was a higher implied neutral rate. then you guys were talking about

treasury yields response on the long end, especially going up, and i think that's kind of made the message a little staticy here in the markets. big picture, we had a market that seemed priced pretty well for a soft landing type scenario, bumping up against levels that have capped the market for a couple of months. let's see tomorrow if there's a cleaner message in this market than we're getting so far. >> jeffrey, you see at the bottom of our screen here, gold hits an all-time high. you've been talking a lot about it. what do you think of it here? >> i continue to hold gold and i would dollar cost average into it at these prices. we're close to the highs of all time, but the setbacks are very small. it's symptomatic of a market that is in accumulation mode, and i think that the path of least resistance for gold continues to be up. and i think, also, that -- one

thing that's interesting about gold, i pioneered this thing, the copper/gold ratio and it used to be a good starting point, the price of copper, the price of gold. and it worked very, very well for many years, and now it doesn't work at all. it says the ten-year treasury should be somewhere like 2% or something, not up at 4%. and basically i think it's because the purposes, the reasons that people own gold have gotten to be less speculation and more kind of permanent holding or insurance policy, once again, because there's growing mistrust of the political system and the global economic order and the global geopolitical risks. and these lead to a bull market trend for gold that i believe is firmly in place. >> interesting. michael, i guess one of the hot debates is going to be going forward what the small caps are

going to do. not a great lifted the, although obviously the russell is in positive territory. you've heard the arguments like i have that it's not really safe to buy small caps until you actually get the rate cuts. but we have a delicate balancing act there, too. yes, we got the rate cuts, but it's not like the economy is in the all clear for the foreseeable future, either. >> that's right. i mean, they did run into the meeting, too, and once we started having the chatter, russell was outperforming going into today's decision. they're digesting some of that. i think it's more interesting to see financials, how they're going to respond, especially large cap financials. that would be a message about whether in fact the soft landing scenario is going to be preserved. big picture, historically you want an easing cycle to be deliberate, not rushed, not urgent. powell did everything he could today to say this is about being

preemptive, it's about trying to maintain a strong labor market, not to save one that's already eroding. whether everybody sees it that way or not, that's definitely the operating assumption that they're going with. we can hope that that's true. even with that, they're saying they're going to be cutting rates significantly through next year, even without inflation getting to 2%. so there is obviously 4.2% unemployment, 2.5% inflation. all of that should be good as an input. it's a matter of a market that's already trading a little bit rich, possibly, based on today's earnings. >> jeffrey, if i'm an equity investor and i've heard since 2009 don't fight the fed, is there any reason to change that strategy today? >> i don't think so. i do think it's important to think about how you're approaching the equity market. the s&p 500, excluding financials, has very little

floating rate debt. it's mostly all fixed rate debt. so they don't really benefit that much from the fed cutting rates. you go to the russell 2000, you've got about 45% at the floating rate. and they will have a tremendous benefit. so i think that while the trend of the s&p versus the russell 2000 has been relentless, it has rolled over from a double top and i'm pretty sure that this heightened cycle will create much bigger tailwind for the russell 2000 than the s&p. i remember last meeting i said the fed starts cutting, it's going to be good for financial assets. things have done pretty well since the last meeting. i think it's going to be a little bit trickier because of the interplay between why they're cutting rates, there's concern about the labor market and the economy. it's going to be an interesting time period. >> jeffrey, thank you so much.

>> thank you. >> we will see you for the next fed meeting and see what happens. certainly a big day today. 50 basis points. maybe a bit of a surprise. markets are going to close in the red, albeit slightly. we will see what the next days bring. i'll send it to "overtime" now. >> that's the end of regulation. avery dennison ringing the closing bell. the u.s. department of bureau and state and consulate affairs doing the honors at the nasdaq. stocks giving up initial gains after a 50 basis point cut from the fed. this is the first rate cut since the start of the covid pandemic back in 2020. the dow had been up 375 points at the highs, touching a new record. we saw a new record for the s&p 500, too. the nasdaq giving up a 1% gain. that's the scorecard on wall street. the action is just getting started. i'm morgan brennan with jon fortt. >> we've got a great lineup of expert