Between a hike and a hard place

0:00Today, markets expect the Fed to announce a rate hike the first in over three years. But then puts Fed check heaven wash on a collision course with the president who appointed him, and Treasury Secretary Scott Besson told Congress rising yields reflect deficit concerns but offered no plan to address them. This is Reuters Morning Bid bringing you unfiltered market news and analysis straight from the Reuters newsroom. I'm Anna Shamanski and London, and I'm Elena Cassas. It's Wednesday, September 16th. So Anna, the markets, who's a ruffling 90% chance at the Fed rates rates today, that's moved quite a bit just in the last few days. A week ago it was seen as almost 50-50. Now, the market's got used to having a lot of forward guidance. It's got used to knowing in advance what the Fed is going to do. We know that heaven wash doesn't like that, but he's going to have to give some kind of four guidance today, isn't he, when he's asked about where the Fed is going from here? Well, it's interesting to see. I mean, I think, yes, as you say, everyone expects we're going to get a rate height today, 25 basis points, but the real key is what happens moving forward.

1:01The Fed tends to not do one and done. If you look historically, that's very uncommon, which means we likely could get multiple rate hikes, which really does put worse in an interesting position. As we all know, he was appointed by President Trump, and President Trump has made his preference for rate cuts very clear. No one thinks, perhaps except for the President, that we should be cutting rates right now. Just if you look at how the economy is running hot, inflation has been above target for over five years, that being said, this is the political reality. In a way, this could actually give Washington opportunity, because one of the issues we've seen is that on the yields curve, yields at the longer end, particularly the tenure have been rising in the 30 years, obviously been rising quite a bit, but the tenure is really what we're zeroed in on. And part of that has been credibility concerns about Worsh, and this Fed's ability and willingness to do what it needs to find inflation. There is so much pointing to a rate hike. So Worsh can probably use that as cover, high-grades, and by doing that, gains some more credibility

2:03with markets. Well, most of his colleagues on the FOMC have essentially said in recent days that the data points to a hike and they would vote for one, can Worsh lead from behind in a sense here? Perhaps hope that President Trump's eye goes to colleagues on the FOMC. He did say the president recently, the Worsh was trying to do the right thing, but a hostile FOMC was holding him back. Yeah, exactly. I think in the way that's likely the type of signaling we could get, I don't necessarily think that will be the signaling we will get at the actual talk from Worsh, because he wouldn't want it in any way to come out and be appearing to suggest that he does not agree with the decision of the FOMC, obviously. There could be dissents, but they want to show that there is a unified messaging here that's very important for markets. Again, the interesting thing will be what does happen moving forward because historically, the tenure usually rises when you have a tightening cycle. Whether that happens this time, we'll be interesting to see. And that really, the ten years what's used for mortgages, it's really the benchmark rate. So while obviously the Fed controls the policy rate, it's that ten year that I think people

3:06will really continue to be looking at. Obviously, this week, when above 5% went back a little bit, but there are a lot of different forces pushing that up. Not just the credibility concerns, also the issues with the deficit, the trajectory, and then energy prices in terms of what's going to happen with that moving forward. Again, this remains a concern because, yes, we've seen crude prices increase quite a bit in the last week, but the real issue here continues to be refined products. In the reality, almost no matter what happens with crude, this is going to continue to be an issue probably through next year, frankly, because it's a refining capacity issue. And that's not going to get fixed any time soon, which means we could continue to have this inflationary force, as I've said, through next year. So worse may have some cover in this meeting, moving forward, that might get trickier. And as you say, Fed rate, forecast, and energy prices are only part of a huge amount of forces that are acting on the bond market at the moment, not least concerns about the US deficit. The Treasury Secretary Scott was sent a mitted Congress yesterday that the bond market is reflecting concerns about the size of that.

4:08He didn't offer any plan to try and reduce it. And he even said he would back President Trump's move to offer every American $5,000 after the next election. This is all going to keep piling into bond market concerns, isn't it? Yes, it's a lot of mixed messaging to be perfectly honest. Now, he did note, in which is true, that this is also a global issue. There are a lot of issues that so many countries are having, seeing rising barn yields, but it is certainly true that you also have some very specific US problems. And as you say, the deficit, the debt load and the deficit are chief among them. Now, also to be fair to best. This is a bipartisan issue. If you look at Republican administrations, if you look at Democratic administrations, no one's been great at reducing the deficit because what it means is dealing with entitlements because that represents the bulk of the budget. And no one wants to touch that. So I'm sure you probably, between now and the midterms or, and probably after the midterms, as well, might get some soundings from the White House about things they will do. Usually people talk about waste fraud and abuse, but I think experts, when it comes to

5:11physical policy, know that that's probably not going to move the needle. And as you say, if we were to get this $5,000 household down, where exactly that money is going to come from, that remains a big question mark, whether this needs congressional or approval, that remains a big question mark, whether it will even happen because we don't know what's going to happen in midterms. These are all a lot of question marks. But as you say, just really mixed messaging, which is not great for trying to have yields come down in the bond market. And those $5,000 each would add up to about 1.2 trillion extra onto the US deficit. When the federal government is essentially now having to borrow just to cover its debt interest, does that mean that the focus for the bond market is going to be on politics in the next seven weeks coming up to the midterms? Well, I mean, I'll be honest. At this point, I don't think bond markets are actually taking that $5,000 pledge that seriously, just to be perfectly honest. I think the bigger issue continues to be what's happening in the Middle East and also what's happening with Russian Ukraine. I really think a lot of this continues to be energy prices at least. If you look at when you really started to see the yield rise, it obviously has to do

6:12with the outbreak of the Iran War. So while I do think what happens in midterms is definitely going to be of major concern, I think focus will still be what's happening in the Middle East. Looking for more investing options? Meet SIBO, the exchange that pioneered options trading. With exclusive trading products like VIX and SPX options, SIBO can help you trade in any market environment. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. And for today's recommended read, check out Mike Donan's column on why the dime already be cast between Trump and his new Fed Chair. That link is in the show notes. And for more on any of today's stories, head to Reuters.com with Reuters app. Follow us on your favorite podcast player and if you're on a smart speaker, just ask for the latest market news from Reuters. And we'll be right back tomorrow.