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You're listening to Strictly Business
Podcast with Lindsay Williams.

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The US Federal Reserve is always in
investors' spotlights, but it seems to me

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more so at the moment.

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And to that point, I received a piece of
work from the desks of Alex Holroyd-Jones

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and Rebecca Phillips,

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portfolio manager and analyst,
respectively, at 91 in London.

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Let me just read you a snatch from that
piece.

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It says here, the Fed has flipped into
risk management mode.

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a subtle shift in language that carries
major consequences for markets.

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What looks like a technical recalibration
is, in practice, a tailwind for equities,

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said Alex Holroyd-Jones.

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And he's on the line with me now.

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Alex, as if equities need a tailwind, but
you contend that that's what they're

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getting.

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I think that's right.

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Yeah.

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Thank you for having me.

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Yeah, I mean, I think one of the big
mysteries this year is why markets have

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gone up so much when...

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The risks seem so elevated and we're in
what people expect to be a stagflationary

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environment,

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yet we can see equities going to the
races.

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And I think there are some important
drivers under the surface which have

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facilitated that.

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And the Fed being one of them.

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I think the Fed at the moment, after the
recent release of the FOMC minutes,

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the market's factoring in two more 25
basis point cuts this year.

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Would you agree with that?

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Yeah, I think that's right.

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And I mean, When you think about that and
you look at where inflation is, inflation

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is above target.

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You have people saying, well, why are they
doing this?

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But I think as we outlined in that piece,
you know, there have been some changes

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which are subtle,

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but have meaningful implications that I
think we're seeing playing out, which is

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really, really important for markets on a
forward looking basis.

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What are the subtle changes of which you
speak?

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So I think we go back to earlier this
year.

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When you think about the environment we
had, we had the tariff shock.

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And that led to materially higher risks of
stagflation.

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I think the markets triced that in.

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We saw the trapdoor open under markets in
April.

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And then since then, I guess markets have
recovered.

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But the Fed were at that point worried
about inflation, which is right, because

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as we know,

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when tariffs go on on your imports and
prices are going to rise.

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And I think the Fed were, to some extent,
worried about prices.

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and weren't able to adjust their policy
for the growth shock that was coming

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because the tariff hit.

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And as a result, that was arguably not a
good environment for markets because the

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Fed weren't able to ease,

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constrained by higher prices, and the
growth data looked pretty bad.

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But we fast forward to where we are today,

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and I think one of the key changes was
that we saw actually weakness in the labor

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market.

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Conversely, that turns out to be pretty
good because the Fed at that point would

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say,

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OK, well, actually, maybe we have to take
our policy looser to try and guard against

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the risks that

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actually the labor market starts turning
over more materially.

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And that's a big change because we find
ourselves in this environment where, yes,

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prices are high,

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but the Fed are looking at these labor
market risks.

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And at the same time, there are signs of
the growth picture.

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beginning to bottom out.

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So you went from a situation where the Fed
weren't helping markets to now they are,

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and that's a big change.

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You're sort of subtly saying, there's that
word again, subtle,

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you're subtly saying that the Fed is
prioritizing the employment situation over

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inflation,

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because in them, again, referencing that
FOMC minutes statement, which was recently

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released.

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They said they want inflation back at 2%
and they want the employment market

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buoyant.

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It seems to me, again as a layman, that
there is a case of wanting their cake and

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eat it.

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I think that's very fair from an outside
perspective,

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but I think you have to understand exactly
how the Fed potentially set their policy.

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And I think this is, it's not necessarily
right, but it's how they work.

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And I think the key point there is that
they look for evidence that their policy

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is either loose.

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or tight.

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If they can see evidence that policy is
loose, then they would seek to potentially

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tighten.

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And if they see evidence that policy is
tight, they would seek to loosen.

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And one of the key, if not the key element
of that is the labour market.

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So the current inflation rates may look
high, but the way the Fed will work is

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they say if the labour market is
deteriorating,

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then in the future, inflation will be
lower.

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And early this year, there was no sign of
the labour market deteriorating.

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If you remember, we had all these NFP
prints which are still coming out and the

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labour market prints are still coming out
very, very strong.

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And then fast forward to where we are
today, those labour market prints are now

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at stall speeds,

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so coming out close to zero, which
reflects all of that uncertainty that

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we've seen.

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But in the Fed's mind, they will be
saying, well, now we can see evidence that

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our policy is tight,

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and therefore we have to loosen.

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And that's a big shift.

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And if that's happening whilst the growth
environment is looking like it might be

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basing out as the tariff uncertainty
falls,

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as financial conditions loosen, as lower
interest rates start to impact the

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economy, then that's

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essentially becomes the best environment
for risk assets because you have a

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proactive central bank and a growth

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picture that's actually looking a little
bit better.

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Okay, so let's say we get two cuts this
year, 25 basis points, 25 basis points,

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and there's a sort of a melt-up in
equities if they haven't already factored

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those two cuts in, of course,

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because that is also something that could
happen.

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But what about next year?

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A lot of people say, Alex, that the tariff
situation...

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It's all very well now.

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It doesn't seem to be impacting inflation
that much.

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But that's because the importers and the
people that are affected by the tariffs

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are absorbing the tariff

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increases at the moment because they can.

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But later on, maybe in the first, second
quarters of next year, they won't be able

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to absorb that and they will pass it on to
the consumer.

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And therefore inflation goes up.

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And then the Fed have got a problem
because people will moan ahead of the

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November elections, 2026.

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Yeah, I think that's a really, really
interesting point.

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I think first and foremost, it's important
to note that the market and expectations,

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and I include the Fed in this,

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had already moved to think about there
being a stagflationary hit.

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So to some extent, it was somewhat
discounted.

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And as you said, ultimately, we've been
through a period where actually those

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outcomes have been less bad as initially
feared.

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So prices have actually been less acute.

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And to some extent, that is allowing
the...

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the Fed to ease.

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And that's one of the reasons why
ultimately, if prices are less bad,

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then they can provide liquidity and not be
too fearful about it leading to further

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price rises.

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But I think, as you say, the big issue
potentially comes next year, because

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ultimately, this is a price shock.

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It might be less truncated than feared, as
a result, more protracted.

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So it takes time for this to filter into
prices.

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And the market still expects it to be
temporary.

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So I guess the big risk next year.

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which is most certainly at the forefront
of our minds,

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is that actually prices remain stickier
than us and

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the Fed fear.

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And that means that maybe the Fed are
forced to be less accommodative next year.

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But what I would say, I keep coming back
to is in the short term, we're talking in

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the next three to six months, you have a
Fed which is

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trying to guard against those labor market
risks and is trying to provide liquidity.

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And you already mentioned it, we have, to
some extent, the ingredients for a melt up

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in stocks,

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because you have a life changing
technology in AI, you have a growth

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backdrop,

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which looks like it's basing out and
picking up and you have liquidity entering

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the market.

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And so in the short term, the next three
to six months, you have this very, very

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positive environment for equities.

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And next year, I think that's where
potentially it becomes more challenging if

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those price pressures remain stickier,

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which has to be a real risk.

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OK, let's take the actual data, the hard
data out of the equation now.

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And you very neatly avoided politics in
your piece, you and Rebecca, Alex.

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I don't know if that was because of
politics are even more erratic than data

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is.

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But there is there is an element of truth
to the fact that the Fed without power

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will.

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feel compelled to cut rates because of you
know who absolutely i think that's a it's

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a really important point and it's most

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certainly something we think about so i
mean as as the listeners will be aware i

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mean next year we see powell is likely

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to step away from the fed entirely
obviously we're going to get a new chair

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and

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there'll be a number of appointees who are
going to be appointed by trump i think you

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know ultimately there is clearly a
willingness and

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a desire from the administration to see
interest rates fall.

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to potentially support growth next year.

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For now, these demands for lower rates are
not necessarily an issue for markets.

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And the reason being is because of those
points I raised earlier,

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which is that policy is deemed to be tight
because we can see that the labour market

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looks soft.

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The issues for markets will become next
year if you have a new chair and new

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members

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of the board who are calling for cuts.

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If growth was looking very strong and
prices were rising and they were still

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calling for cuts, that would become an
issue.

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But for now, it's less of an issue because
the economy

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is looking like it needs stimulus because
of that labour market weakness.

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So it's a risk next year that potentially
you see independence come under question

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from the Fed.

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But at the moment, there doesn't seem to
be much in the way of an issue with what

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some of those more dovish members are
saying.

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Yeah, I wonder what will happen if the
government continues to be locked down in

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the United States, because we can't get
the non-farm payrolls numbers out.

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I'm sure that the Fed gets them under the
table.

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But anyway, we've still got the ADP
numbers.

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That's the private sector.

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employment numbers every week.

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So we'll get a better picture with a
couple of sets of data, I think.

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Now, on that point, what about your view,
Alex?

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Is it going to be a melt up or at worst,

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a steady momentum of the bull market that
has become so familiar to us since the dip

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in

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April of this year?

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It's something that we continue to think
about how far markets can potentially run.

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And I keep coming back.

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to and you mentioned the labour market, I
keep coming back to the labour market and

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I think it is ultimately the most

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important indicator to watch for a number
of factors.

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One is that we know to some extent it's
lagging in that firms

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don't make decisions immediately,

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it takes time and what we are seeing at
the moment is an echo of all of that

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uncertainty that was around

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earlier this year.

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And so the labour market that looks soft,
we saw the ADP numbers were very weak in

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particular, the private sector job numbers
looked very weak.

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But ultimately, it reflects where we have
been.

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And as a result, those numbers are likely
to look soft for a while.

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But what that means is the Fed are going
to remain accommodative as long as their

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numbers remain soft.

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And as I mentioned, that gives a window of
three to six months where Potentially,

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we still see the uncertainty from early
this year continuing to weigh on those

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employment decisions.

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And that allows liquidity to remain
abundant.

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And whilst liquidity is abundant and you
have a growth picture which holds up,

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then the markets can have the potential to
run quite hard.

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And I keep coming back to the fact that
we're in an environment where fiscal

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policy looks quite loose, particularly in
the US,

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but globally.

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And you've got interest rate cuts.

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and that Combination is pretty rare
outside of recessions.

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And so you can see why we have the
ingredients to see the market continue to

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move higher.

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But what I would say, and what I'm not
downplaying, is the fact that the labor

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market does clearly look weak.

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And while it looks that weak, there are
the risks that it deteriorates further.

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And that's a risk that we continue to be
acutely aware of.

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But for now, you're in this
Goldilocks-type environment where growth

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is strong.

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and the Fed are supporting it.

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And that's a pretty bullish environment
for markets.

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The trend is your friend, as someone
wisely said many, many years ago.

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What a complicated situation.

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But it will be less complicated once the
Fed and the markets themselves do their

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own thing.

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Alex, thank you very much for your
analysis.

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That was Alex Holroyd-Jones, Portfolio
Manager at 91 in London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors.

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and do not reflect the policy, position,
or opinion of any other agency,

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organization, employer,

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or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision,

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and rethinking at any time.

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