The Federal Reserve appears to be on hold, waiting for clarity on inflation and fiscal policy. The March 19th Federal Open Market Committee meeting, with a new Summary of Economic Projections will illuminate members' revised thoughts on interest rates. Join us March 20 at 12:00 pm as Mike Goosay, Chief Investment Officer of Global Fixed Income at Principal Asset Management, breaks down the meeting, Chair Powell's press conference and the SEP.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Gary Siegel (00:11):
Hi, and welcome to another Bond Buyer Leaders event. I'm your host Bond Buyer Managing Editor Gary Siegel. Today we're going to discuss the Federal Open Market Committee meeting and monetary policy. My guest is Mike Goosay, chief Investment Officer of Global Fixed Income at Principal Asset Management. Mike, welcome and thank you for joining us.
Mike Goosay (00:39):
Thank you.
Gary Siegel (00:41):
So before we start, I'm going to tell the audience, feel free to ask questions in the q and a queue anytime there will be no specific question and answer period. So just let your questions fly as needed. Mike, was there anything in the post-meeting statement, the summary of economic projections or Chairman Powell's press conference that surprised you or grabbed your attention?
Mike Goosay (01:08):
Yeah, good morning and good afternoon I should say. And thanks for having me. Certainly there were some surprises in there as you kind of dug into the projections. Nothing really surprising. There are still two rate cuts expected for 2025, long-term average, maybe 75 to a hundred basis points lower in terms of Fed fund policy rate. Probably the most alarming to the markets and to us was the comments afterward largely dismissing the most recent University of Michigan sentiment data, which suggested that consumers and businesses were getting very concerned about both inflation picking back up and the economy rolling over in a much more significant fashion than maybe the Fed is viewing it as and to the point where the chairman actually used the word transitory in terms of some of the impacts of potential for tariffs and some of the concerns that were addressed in that Michigan survey. So transitory became a four letter word a couple of years ago and was really one that people didn't really like to use any longer, given that it was wrong as it related to inflation through that period. But nonetheless, that was probably the most surprising. Most of the forecasts were consistent with we had thought, which was slow down in growth, some moderation and inflation, but above the target level. So I would say that the dismissal of some of the more recent sentiment and survey related data was probably the most surprising.
Gary Siegel (02:42):
Well, wouldn't it be in Powell's best interest to try to calm markets from worrying about the University of Michigan survey and consumer sentiment because the consumer is what pushes GDP
Mike Goosay (02:58):
Look at in the neighborhood of 80% of the US economy is driven off the consumer. And so consumer confidence, consumer sentiment are very important. That plays out in a bunch of different ways, not only in expectations of growth going forward, but also as you think about business sentiment, which was one of the other pieces that had been some survey data was suggesting that CEO confidence was declining, that if persists does lead to job loss. Ultimately you do see that some lack of investment, you've heard that from a number of companies who have reported this year about this, some concerns about latter half of the year slow down in demand that could lead to reduction in force and that's when you start to get the consumer to get really concerned. When you start to have the risks of layoffs increase, then people's behavior shits and given, as I said about 80% of the economy is driven off that consumer that can quickly show up in hard data. Right now it's showing up in soft data, the survey data, but if you do see this persist, which is I think what Chairman Powell was trying to quell, it will start to show up in some of the harder data and it only takes a couple months for that to happen.
Gary Siegel (04:16):
So what was your view of the statement's acknowledgement that there's added uncertainty in the economy that seems obvious, but the fact that the Fed is now acknowledging it, how do you take, what's your take on that?
Mike Goosay (04:35):
So there's the elephant in the room which is tariffs, which they seem to be changing on a daily basis in terms of the percentage that's being charged, the countries that are being charged, what products are being charged. So you do have this that's just creating behavioral challenges you saw with front loading of some imports during December and January in advance of any kind of even talk about tariffs or what they would be charged with. And so the reality is that as we kind of sit here today, I think both investors as well as consumers and business leaders are uncertain about what the future's going to hold. There's no way to predict the next statement from the administration as it relates to tariffs. There's no way to predict whether that's going to be a positive or a negative. And so that's created the volatility we've seen in investments. Equity markets have been on a downward spiral for a few weeks now. You've seen a lot of volatility in interest rates probably as it relates to the conversation today. You've also seen a lot of volatility in the expectations of what the Fed is going to do throughout 2025 in terms of setting monetary policy rate.
Gary Siegel (05:54):
So what did you read into the change in wording about the balance of risks?
Mike Goosay (06:01):
So previously we had a lot of focus on inflation, not a surprise coming out of Covid, you had this spike up to seven 8% in terms of headlines EPI, and there's been a lot of progress down towards that fed's target of 2% over the last couple of years. And so a lot of those statements were about surprising upside to growth, the need to maintain tighter monetary policy in order to quell some of the inflation pressures that come from growth, the subsiding of some of the supply chain issues that had been creating even more risks of inflation remaining at an elevated level. More recent, we saw this last year where inflation had started to progress down towards that 2% target and the economic conditions were suggestive of maybe some softness. And so a lot of the commentary last year was about how do you balance these risks?
(07:01):
Keep in mind the Fed has a two-pronged model. It's stable prices and it's full employment. And so as the unemployment rates started to creep up during the summer and early fall last year, you had the Fed starting to refocus now on that employment side of the ledger rather than just the inflation side. And now that this seems to be a bit more balanced where we still have room to go in order to hit the inflation target, the unemployment rate is picking up but maybe more slowly than was anticipated and we can get into some of the details as to why that is. And so now it's how do we maintain this level of unemployment? How do we maintain our progress towards 2% inflation given the uncertainty of are there going to be tariffs? How significant are they going to be? How long lasting are they going to be and are they truly inflationary in terms of their permanent cost of goods that affects consumers or are they a one-off?
(07:59):
Is this back to that four letter word, are they transitory? And you actually heard Chairman Powell use that word yesterday, first time in a couple of years to answer the question about what is the impact of tariffs. And so I think the fed's statement was suggestive of exactly what markets are thinking, which is there's a bunch of uncertainty. The fed's job is to look through that. Our job as investors is to look through that to try to understand what the facts are as we understand them today, not to overreact to quotes or tweets that come out and create a long-term portfolio that's going to weather the storm so to speak. And I think you heard that from the Fed too, which is they're trying to figure out what's the appropriate level of monetary policy in order to weather the storm of uncertainty.
Gary Siegel (08:54):
What's your impression of the impact of the lessening of runoff in treasury securities?
Mike Goosay (09:02):
So right away it takes an effective seller out of the market. So the Fed had obviously been buying both mortgages and government bonds in order to stimulate economic growth during covid and even previous to that post the financial crisis in order to add liquidity to the system to be able to create a better environment, a more lower yield environment for the economy to come out of what had been significant doldrums. And once those were achieved and now you actually have that inflation pressures that we just talked about, the unwind of that liquidity, the removing of liquidity by pulling cash out of the system by selling securities, letting them mature off their balance sheet and reducing the size of the fed's balance sheet to something that is more consistent with what had been the long term. I think the acknowledgement that there's more uncertainty that they've done a lot already in terms of removing liquidity from the system, both in terms of keeping policy rates above neutral as well as extracting liquidity out of the system through reducing the amount of bonds that the Fed has on its balance sheet serve to push interest rates up even higher than they would have been otherwise.
(10:19):
And the result of the reduction in that is an acknowledgement that we're in a better spot. Now there's more two-way risk now than there had been a year or two years ago, and that by reducing the reduction in the balance sheet from what is crowned to about 40 billion a month down to about 20 billion a month, it would buy some flexibility from a monetary policy perspective. And so for longer term interest rates, what that really means is that you have a defacto buyer that had been in the market for three or four years, left for two or three years now they're no longer a seller, which has been what they have been for a couple years now where they've been actively reducing the balance sheet by selling bonds. That's net positive for interest rates in our mind it should put a floor under how high rates can go.
Gary Siegel (11:13):
So what is your outlook for rate cuts this year, Mike?
Mike Goosay (11:17):
So we're thinking the market is probably about right, somewhere between two and three rate cuts for this year. We're probably more in the three camp which would bring fed funds to a level that's closer to neutral policy rate or that are star that's consistent with not actually adding accommodation or restricting growth in the economy. And so we're in the mind that we'll probably get starting in the summer, we'll get our first cut depending on what we learn by the time we get into the fall about tariffs, what their impact is going to be on inflation, what the impact is going to be on consumer sentiment and consumer demand. We could see upwards of three cuts this year though.
Gary Siegel (12:03):
What is your estimate of the neutral rate and how does it compare to the Fed's estimate?
Mike Goosay (12:09):
So I think it's pretty consistent. We think the neutral rate is somewhere about a hundred basis points lower than where we are. And again, those three cuts aren't with the goal of stimulating the economy in our mind. The three cuts are with the goal of reducing the restrictiveness, that monetary policy currently having an economy. And so if you get a hundred basis points over the next year or so, which is what's largely the Fed's expectations are, we think that brings you to neutral, doesn't bring you to any kind of level which would stimulate economic growth.
Gary Siegel (12:46):
So what is the problem with the deficits, the US debt and the debt ceiling discussions? How is this going to affect the markets
Mike Goosay (12:56):
Short term, probably limited other than anytime you get noise or nervousness as it relates to increasing the deficits, markets are get concerned longer term. It's a problem obviously it's a question of how do you control the deficit is really around cutting spending or increasing revenue. So that's the only two ways you can do it. And at this point with this current administration, there seems to be a goal to extend the 2017 tax cuts that were put in place that are set to expire at the end of this year that will immediately erode the fiscal position even further because a lot of those were factored to wear off in 2026 and ultimately will create more deficit unless you cut costs and cut some of the expenditures and that you're seeing some of those offsets being done through the Doge program of searching through on how do we cut back on some of the spending programs that the government's been put in place. So longer term it erodes the confidence of investors to lend the US government money longer term that will create higher levels of interest rates for the economy. And so deficits are bad long term. It's just like your credit quality deteriorates just like if you and I were to over borrow and not pay back as rapidly as our lenders would expect.
Gary Siegel (14:24):
So now we get to tariffs and I know there are no easy answers because the tariff situation changes on a fairly regular basis. What is your position? What do you see? Are they going to ever go fully into effect? Will they be permanent? Are they just negotiating stances and it'll never come to fruition in the proportions that have been proposed?
Mike Goosay (14:58):
Yeah, it's a tough question, Gary, as you well know, there's really no great answer that I can give right now other than they appear to be negotiating tactics as they stand today. Trump has really put a lot of emphasis on tariffs of being the solution to a lot of the fiscal problems that the US government is dealing with. And so I do think there will be some tariffs that are put in place whether they're just reciprocal, same rate, you charge us, we charge you, or whether they're even broader and deeper than that is still an open question. I think that the administration kind of used what happened in Europe over the last couple weeks of increased defense spending some fiscal stimulus being done by the German government as a suggestion that maybe some of these tariff threats are working and that they're creating a better long-term partnership between these countries that are going to start to either meet their share of NATO defense spending or going to be more balanced and fair as it relates to some of the current tariffs on US exports.
(16:09):
But I do think that there will be some tariffs put in place. The depth and the extent and the term of those are really hard to answer right now. There is a goal that this administration has of rebuilding to some degree some manufacturing capability within the US and to be able to create some sort of structure that allows that industries, those industries, those manufacturing roles to be able to create it in the US and ultimately in my mind, whether that's a good decision or a bad decision is something that Trump really ran on and is going to be put in place to some degree.
Gary Siegel (16:51):
Yeah. Sorry, I got lost for a second because that's computer froze up. So at some point you think the Fed becomes proactive anticipating potential implications of tariffs on monetary policy.
Mike Goosay (17:07):
Tariffs by their nature are inflationary. There's some question of whether it's a one-off cost adjustment or whether or not they perpetuate a higher level of inflation in the economy. So if they are creating an environment where inflation remains elevated and is going to not allow the Fed to come close to hitting their 2% target, then I do believe that the Fed will start to take those factors into account when setting monetary policy and as a result probably means that monetary policy will remain at a higher level than would otherwise be the case if those tariffs were not in effect,
Gary Siegel (17:49):
How serious is the Fed about hitting 2% inflation? Would they be satisfied at two and a 5% or two and a quarter?
Mike Goosay (17:58):
I think as long as inflation is moving in the right direction, the Fed can plant the flag of success. And so ideally 2% is just a number. It's really hard to hit that number. It's a moving target and it's going to be, is it 1.9? Okay, or do you want to stimulate? Is 2.2 bad and yeah, you need to restrict. So I think as long as inflation is moving to that range of their comfort and I think that is probably two to two point a half percent, then I think the Fed would believe that they've accomplished their objective. And that's why we as an organization think the more important thing to pay attention to going forward is the labor market because inflation has been moving in the wrong direction for the last couple months. But we do think that there's some technical factors there that will play out over the course of this year that will allow the Fed to acknowledge that inflation may be a bit higher than 2%, but not moving in the wrong direction.
(18:56):
But the bigger concern we'll be revolving around is the labor market deteriorating. Most recently we've seen that despite there hasn't been a lot of job losses, there hasn't been a lot of firings, the hiring rate has come down dramatically. And if you go into an environment where you start to get those layoffs, you do see the firings increase by a more dramatic rate than what we have seen to date. When you have that coinciding with a low hiring rate, that's when you can have a problem. And I think that's what you heard from the Fed. You heard from the fed statement, was the economy slowing a bit and the employment picture is showing some signs of weakness and as long as that's the case, we need to be vigilant about making sure that monetary policy is consistent with reducing the risk that you do see an elevated unemployment rate.
Gary Siegel (19:57):
Given the fact that tariffs may be inflationary. Is there any chance that the next Fed move is an increase?
Mike Goosay (20:06):
That one's easier to answer. No. I should caveat that by saying certainly if the tariff story becomes so much worse than we any of us could have expected and you wind up with an inflation rate that's 4% or something more meaningfully higher, I think the Fed would potentially have to hike policy rates, then that's not a 2025 problem. That's 26, 27. And I think between now and then the prospects of an ease is much greater than any risk that there's a hike.
Gary Siegel (20:45):
Mike, you expect recession at any point?
Mike Goosay (20:50):
Always expect recession is possible. I think your textbook would tell you that it's between 15 and 20% all the time risk of recession. Our view today is that that's unlikely in 2025 or 2026 that the growth rate will certainly be weaker in the first half of this year, but that the risk of recession is at or below what the traditional assumed recession risk is and any other given year. So the risk we see near term is that this uncertainty that we started the webinar talking about is going to create concerns around the consumer. It's going to pull back behavior, whether that's related to just discretionary spending, companies hiring plans or the way that the government's conducting its review of some of these different agencies. All of that is going to create this uncertainty that's going to undermine growth in the first half of the year. Our expectations are there'll be some resolution around tariffs at some point during 2025 we'll have some answers. We don't have any answers right now. We'll have some certainty about really did the labor market deteriorate rapidly or did it just stop expanding at the pace that it had for the last three or four years? And that in our mind we'll be much more optimistic during the second half of the year than what we're experiencing right now.
Gary Siegel (22:26):
Any concern about stagflation?
Mike Goosay (22:29):
I mean what data right now would suggest that that's what we're moving towards? Tariffs created more inflation. We already have some above 2% inflation rates. And if this is a rolling increase in inflation that coincides with the sentiment decreases that we just talked about, that reduce the consumer's demands ultimately that you can create the risk of snag inflation low now, but it's not, not out of the realm of possibility.
Gary Siegel (23:01):
For two years the yield curve was flashing red saying that was going to be a recession, but we haven't had one yet. Is it still worth watching the yield curve for signals about recession?
Mike Goosay (23:15):
We do think it is. As you suggest, the inverted curve is usually a precursor of a recession and that's what we had for a couple of years and now we have a normally sloped curve and 99 out of a hundred times when that happens, you get a recession and that doesn't appear to be the case at this point. And you can chalk that up to the Fed did a really good job at pivoting quickly and creating liquidity in the system to offset those risks. There was still lots of cash sloshing around the system that was a hangover from Covid that created demand that wouldn't have normally been there given the levels of interest rates that we saw on the front end of the curve and the government continued to be expansionary. Government deficits grew through that period and a lot of the US exceptionalism through those last couple of years can be potentially explained away by government overspending. So all those led to the recession call, which with what the inverted yield curve suggested being incorrect going forward, it still is a pretty good indicator of risks to the economy. The market is pretty good at saying when the Fed is tightening and keeping rates too high for too long, the market will invert the yield curve and that's usually a good sign of a recession.
Gary Siegel (24:45):
So I'm going to take some questions from the audience now because we have several in our queue. Don't the protective tariffs prospective tariffs result in detrimental impact to innovation? So I guess they're asking if the tariffs will hurt innovation
Mike Goosay (25:10):
Potentially. I guess it depends on goods and services are being taxed or tariffed and what the ability is of those companies to pass those through to consumers or do they have to absorb them themselves? The more of those tariffs that have to be absorbed by the innovators, by the manufacturers, the less they have for r and d and the less potential we have for further innovation. So you can certainly make that case if you believe that those tariffs get passed through almost fully and directly to the consumer, then probably limited. So
Gary Siegel (25:48):
And the follow-up to that is will this risk American competitiveness as Ronald Reagan said in the 1980s?
Mike Goosay (25:57):
Yeah, I rewatched that speech from 1980, I think it was 84, 85, about the perils of tariffs that Reagan went through. And certainly it's a risk despite the fact that I've been a fixed income manager for 30 years. I'm more of an optimist than a pessimist. Traditionally fixed income people always are pessimist. And so I'd like to think that there's a plan of attack here that the administration is pursuing to my earlier comment about using this as a negotiating tool rather than a true creating a trade war that would undermine us. I don't know if exceptionalism or competitiveness or maybe placed in the world is the right way to say it, but it certainly would. If they were to persist at the degrees that are being rumored, then that would certainly have an effect if you believe Ronald Reagan was correct.
Gary Siegel (26:56):
Next question from our audience is what would happen to the economy if Powell gets fired by Trump? And we know that that is not possible. Really
Mike Goosay (27:07):
It's not possible. Now Powell can be removed from the chairman's seat, but he cannot be removed from the Federal Reserve Board. So that would be the one thing that could happen that could certainly create consternation in the markets if it were so it seems pretty limited that Powell would be terminated from his role at all. But the worst thing that could be done would be to just remove him from being chairman of the Fed, putting somebody else in and then he becomes just like a member, just like any other reserve board. Governor,
Gary Siegel (27:42):
I'll follow up on that. If Powell is not renominated, do you think there's any chance that he stays on the board?
Mike Goosay (27:53):
No short answer. No. I think his term is up and I think he's open for another term, but chairman, when they're done with their chairmanship, they're usually done. So it seems unlikely that he would stick around in a non chairman capacity.
Gary Siegel (28:15):
I agree with that, but I've had some people tell me they thought that there might be a chance that Powell stays on the board and I didn't believe that, but figured I'd ask.
Mike Goosay (28:27):
Yeah, stranger things have happened, Gary, but it seems unlikely.
Gary Siegel (28:31):
Agreed. So our next question from the audience is I've noticed that corporate spending has declined any thought around that.
Mike Goosay (28:44):
Everything's going to revolve around the uncertainty comment that we just started the call with, which is when businesses are uncertain of what the rules of the road are going forward, they're going to pull back spending behavior, whether that's m and a, capital expansion, hiring plans, all of those things get put on hold until the rules of the road are more clear. I think the US one of the recipes for success over time is you give CEOs, you give corporate boards, you give individuals the rules what to operate within. They figure out how to make it work. When you don't have the rules or the rules are going to change or the guardrails are going to widen or tighten, they're less apt to make those investment decisions that are required to continue the innovation to the earlier question or continue the expansion from a corporate. So it's no surprise that corporate spending is declining. We expect that to continue until there's more clarity about ISTs tax policy. We were waiting for deregulation. That was one of the cornerstones of the Trump plan. And so I think a lot of companies are waiting for what does that mean? How does it affect individual industries? So until there's clarity around that, I think you're going to continue to see spending behavior be a little bit more muted.
Gary Siegel (30:13):
Another question from the audience, Mike. Do you see the value of the dollar weakening globally due to current policies?
Mike Goosay (30:22):
So based on current policies, risks of what we just went through before, which is the fed cutting rate, it's apt to be the dollar could weaken from here in terms of the dollars leadership of the world reserve currency, unlikely there's not another currency that can really compete at this point. And as a result, you should expect that when interest rate differentials narrow, which is what's been happening and what the expectations that continue that the dollar should weaken in that environment. If growth expectations decline more meaningfully for the US economy versus the rest of the world, which is what you saw on the heels of some of those European spending programs that were announced, then you should expect a dollar to weaken. And that's what we've have happening. So near term, absolutely yes. Longer term global investors want US assets, global investors and global exporters price things in US dollars, world trade is done in US dollars. So the likelihood of the US dollar losing its world reserve currency status is very limited in my opinion.
Gary Siegel (31:32):
What do you think the near term possibility of removing Fannie and Freddie from conservatorship is?
Mike Goosay (31:41):
That was always the plan. It's hard to kind of imagine that there isn't as part of deregulation, privatizing government, whether that's the post office or Amtrak or all these other pieces, that they wouldn't want to do the same thing with Freddie and Fannie. It's hard to do and I think it's going to take a lot more time than just snapping the fingers and saying, we're going to do this tomorrow. So prospects for it are high. In my opinion, this administration wants to reduce the private business reliant on federal government interceding in the day-to-day operation. And so I would imagine that'll be a long-term goal. I
Gary Siegel (32:28):
Do you see crypto growing as an alternative currency option?
Mike Goosay (32:36):
Okay, so I always have to be careful with this one because I'm a crypto skeptic, although certainly Bitcoin pushing a hundred thousand for a while made me look silly. I don't really understand the value behind it. So I just don't think it's a replacement currency for other things that you can actually transact in day to day, go out, get my coffee in the morning, I can't pay with Bitcoin. Now, certainly I think there was some blockchain benefits of having these cryptocurrencies for secure, safe, secure payment processing systems. That was one of the real reasons why the original advent is some of these currencies, these cryptocurrencies. And so I can certainly see that growing in the future as a technology, but as a replacement for traditional currencies, I find that unlikely at this point.
Gary Siegel (33:28):
How do you see the existing economic climate affecting the power utility industry relative to data center growth?
Mike Goosay (33:39):
So I think obviously the demand for energy that is going to result from the increased needs or storage and data center needs, as we think about the maybe some of the current administration's deemphasis on alternative sources of energy is going to put pressure on traditional fossil fuel like industries to create power necessary to fuel the insatiable appetite for data center power use. And so that certainly will create more pressure on utilities, and I find it hard to believe that longer term we shouldn't have alternative sources of power for maximizing the efficiency of the demands on the power grid. And so near term, I think it's going to require utility companies, private enterprise to continue to invest in those technologies in order to meet this growing demand for energy to run these data centers. You're giving me all the hard ones, Gary?
Gary Siegel (34:53):
Yeah, these are from the audience. I'm sorry, I'm not screening them. Maybe I should. So a follow up to the energy question, do you think the US will finally seriously look at nuclear as a growth option?
Mike Goosay (35:10):
I think we probably should look at all sources of energy as a way to meet the growing needs of power in the country. And there's fear around nuclear every time you hear about something in Japan with the meltdown of a reactor. I grew up in Pennsylvania, I still remember Three Mile Island vividly. So I think people are going to have that consistently in their back of their minds. But safe, secure nuclear power seems to be an area that we're supposed to explore as an alternative source to fossil fuels or in addition to all these other sources. We probably shouldn't just close the door on something or anything at this point as a way to get power into the system.
Gary Siegel (35:56):
Do you see European markets decreasing trade with the US? If these tariffs continue to be pushed,
Mike Goosay (36:07):
It certainly makes it more expensive to export goods into the US if those costs of tariffs cannot be passed through to the consumer. That being said, the US economy is the largest economy in the world. It is a consumer driven economy and businesses are going to want to be focused on areas where they can sell product. And as a result of that, I think it makes it more challenging, but these companies are not going to step away from doing business with the US consumer.
Gary Siegel (36:42):
Mike, what is the general direction of the commercial real estate market this year? As more companies are demanding their employees come back to the office.
Mike Goosay (36:53):
I mean, we still have a glut of property that is going to keep some real ceiling on the valuations of those commercial real estate properties, but the fear of the entire commercial real estate market exploding seems to be something that's behind us at this point. There certainly have been increased demands on property. We see that in our own business at Principal, where we have more and more people coming back to the office in New York, in Des Moines, in Seattle and Portland. And we need to make sure that we have space for those employees as we want to have more of that culture of in-office for our staff. And so that is happening across the market. I live in New York every day. We see another company announcing four or five days a week back in the office. So that should support that commercial real estate market in the near term. Probably more importantly, the fears of it imploding imminently, which was the case over the last couple of years seems to be behind us.
Gary Siegel (38:02):
So Donald Trump has said that he told the World Economic Forum that he will demand lower interest rates, and he is also said that he wants more say in the federal reserve's monetary policy. Do you see any path to that?
Mike Goosay (38:22):
So I think the way that Trump or any government could impact the level of interest rates is to get the fiscal house in order. So if we were to run a balance budget or we were to be reducing our deficit, which is something that we need to focus on, a lot of countries need to focus on that will reduce long-term interest rates. I mean, do you reward better credits just like a higher credit score for a mortgage borrower gets a better rate than the lower score. And so that's one way that any government can influence interest rates. The influence of the current president on monetary policy is limited. I mean, you could talk about it all he wants, but the reality is that that is an independent entity that sets policy based on the governor's expectations of growth and inflation and the labor market on a go forward basis. And it's clear settled law that there isn't and the influence that can be had by the current administration.
Gary Siegel (39:38):
What are the biggest risks to the economy?
Mike Goosay (39:43):
So we talked about a lot of 'em. The global economy is certainly on a somewhat slowing path and the risk going forward is around the labor market. If we see a significant deterioration in employment, then you can certainly imagine that that could be probably the biggest risk given the nature of the US economy and those issues or those things that can impact that employment picture are continued uncertainty. We don't get resolution around what is the plan of attack for tariffs? What is the tax plan going forward? What ultimately is the regulatory environment going to look like? Those are going to create enough uncertainty that employment picture could deteriorate and that would be our biggest risk to the near term, to the economy.
Gary Siegel (40:45):
How do all these things that we've discussed today, Fed policy and tariffs and the economy, how do they all impact the bond market at this point? What do you see going ahead in the bond market?
Mike Goosay (40:58):
Well, I think what you're seeing is a couple of different things. You had the resteepening of the yield curve with the interest rate cuts being priced into the market longer end after having outperformed for a while has been underperforming more recently. Just reflective of this uncertainty, this uncertainty about how does this affect the deficit, how much issuance is going to be required. We didn't really get into it, but the tax cut extension, which is we think a high degree of probability will happen in 2025 where we'll get those extended is all negative, the deficit without substantial increase in revenues or cutting the expenditures. And so the market is reacting to all of these things, uncertainty about growth, uncertainty about inflation, uncertainty about deficits. And so we're seeing the volatility in the market increased meaningfully. And that's probably the way the bond market is being most impacted by all this uncertainty is not necessarily that we've seen a big change in interest rates. We haven't, rates have gone up, they've gone back down and we're somewhere in between right now. But the reality is that it's a pretty bumpy ride with all this noise.
Gary Siegel (42:14):
So what questions are you getting from clients? What are they worried about?
Mike Goosay (42:18):
So all the things we talked about are the things they're worried about, but I think what they're really focused on is yield. How do I get income for so long post GFC then post covid, There was no yield in the bond market. You put money in a cash account or a money market account, you got no income levels of long-term interest rates were really low. You had to take a lot of duration risk to really get any kind of income. And now you have a positively slope yield curve. You have higher all in yields, whether that's government guaranteed assets or corporate credit. And I think a lot of investors and institutional and retail are both focused on getting yields into their portfolio. And so that's what a lot of our conversations are about is how do I feel comfortable that the economy is in a place where I'm not going to have defaults rising meaningfully and I'm going to potentially have risk of capital while maximizing the amount of income or the amount of yield that you can get into the portfolios. And so I think that's what investors are really focused on today is all this uncertainty is creating some consternations about equity risk taking a lot of private asset risk. And so the focus on public fixed income B is how can I maximize my yield while minimizing my risk to my capital?
Gary Siegel (43:42):
Well, that concludes our leader event. I would like to thank our audience for tuning in and I would like to thank my guest, Mike Goosay, chief Investment Officer of Global Fixed Income at Principal Asset Management. Have a good afternoon everyone.
Mike Goosay (43:58):
Bye.
