RATES FROM THE FED. LET'S LOOK

AT THE YIELDS THIS MORNING.

5.101. I'M STARTING TO LOOK AT

A 30 YEAR AGAIN. BUT THERE'S A

TEN YEAR AT 462. JOINING US NOW

MARK CABANA CO-HEAD OF GLOBAL

RATES RESEARCH AT BANK OF

AMERICA SECURITIES. ARE YOU

SURPRISED. THANKS FOR COMING IN

MARK. ARE YOU SURPRISED THAT

35% POSSIBILITY OF A RATE HIKE?

I WOULD NOT HAVE THOUGHT THAT,

ESPECIALLY AFTER THE INFLATION

READINGS.

>> WELL, THANKS FOR HAVING ME.

IT'S VERY UNUSUAL TO BE GOING

INTO A FED MEETING WITH THIS

LEVEL OF UNCERTAINTY. THE

MARKET HAS GOTTEN USED TO A FED

THAT GUIDED FOR ITS INTENTIONS

COMING OUT OF A MEETING. BUT TO

GO IN WITH ROUGHLY A 1 IN 3

POSSIBILITY THAT THE FED WILL

BE HIKING VERSUS HOLDING IS

UNUSUAL. NOW, IF THE FED WERE

TO HIKE AT THIS MEETING, IT

WOULD BE. AND THIS IS NOT

HYPERBOLIC, UNPRECEDENTED,

ACCORDING TO OUR ANALYSIS.

LOOKING BACK TO THE EARLY 90S

FOR MARKET PRICING GOING INTO

FED HIKES, WE'VE NEVER SEEN THE

MARKET PRICE LESS THAN A 60%

PROBABILITY OF A FED MOVING IN

THAT DIRECTION. SO IF THE FED

WERE TO HIKE TODAY, IT WOULD BE

A BIG SURPRISE. AND IT WOULD

SEND A SIGNAL ABOUT WHAT THIS

FED'S REACTION FUNCTION IS TO

VERY ELEVATED INFLATION. NOW,

JODI, YOUR QUESTION, IS IT

SURPRISING THAT THE MARKET IS

STILL HANGING ON TO THIS TO

SOME EXTENT, BECAUSE THE DATA

THAT WE HAVE GOTTEN SINCE THE

FED LAST MET IN JUNE HAS

INDICATED A BETTER THAN

EXPECTED OUTLOOK FOR INFLATION,

AT LEAST A SOFTER THAN EXPECTED

JUNE INFLATION PRINT AND A

LABOR REPORT THAT WAS NOT AS

STRONG AS MANY HAD ANTICIPATED.

HOWEVER, THE MARKET IS STILL

BELIEVING IN THIS POSSIBILITY

BECAUSE WE'VE HEARD HAWKISH

DISCUSSION FROM SOME FED

MEMBERS, AND WE'VE HEARD CHAIR

WARSH INDICATE THAT HE REALLY

HAS, TO SOME EXTENT, AN

IMPATIENCE ON ELEVATED

INFLATION. AND SO THOSE

DYNAMICS, WE THINK, ARE WHAT IS

GIVING THE MARKET THIS

RELATIVELY ELEVATED RISK THAT

THE FED COULD SURPRISE WITH A

HIKE TODAY.

>> WE HAVE NO HISTORY OF WAR.

IT'S AND THERE'S A NEW SHERIFF

IN TOWN. WOULD HE WANT TO PROVE.

I JUST CAN'T SEE IT. WOULD HE

WANT TO PROVE THERE'S A NEW

SHERIFF IN TOWN AND I'M HERE

AND DO THAT BECAUSE.

>> WELL.

>> THEY WANT TO PROVE YOU'VE

GOT A BAZOOKA IN YOUR POCKET

AND YOU DON'T WANT TO HAVE TO.

>> YOU TALK WITH A BAZOOKA IN

YOUR POCKET.

>> MAYBE YOU SHOOT OFF ONE

QUICK SHOT SO EVERYBODY KNOWS

YOU GOT IT.

>> SO SO THE.

>> ARGUMENT, I THINK THAT WOULD

BE A BIG MISTAKE.

>> THE ARGUMENT FOR.

>> IT.

>> THE ARGUMENT FOR IT IS THAT

HE HAS SOUNDED SO IMPATIENT ON

GETTING INFLATION DOWN. AND IN

HIS CONGRESSIONAL TESTIMONY HE

SAID THERE'S BEEN IT'S BEEN 62

MONTHS, FIVE YEARS SINCE THE

FED LAST HIT ITS INFLATION

TARGET. SO THEY'VE BEEN FAILING

FOR A LONG TIME. AND THE LONGER

THAT HE WOULD WAIT TO

POTENTIALLY ACT, THE MORE HE

OWNS IT. RIGHT NOW HE CAN

SOMEWHAT INFLATION BLAME THE

LAST FED CHAIR POWELL FOR THIS

ISSUE.

>> YEAH HE DOESN'T HE DOESN'T

HOLD ANY RESPONSIBILITY FOR

WHERE THINGS STAND FOR THE LAST

FIVE YEARS. THAT'S RIGHT. I DID

HEAR SOMEBODY ON MORGAN SHOW

THIS MORNING DESCRIBE IT PRETTY

INTERESTINGLY THAT TO YOUR

POINT, JOE, WE'RE STILL TRYING

TO FIGURE OUT WHO KEVIN WARSH

WILL BE AS CHAIRMAN. AND ONE OF

HER GUESTS SAID, WE DON'T KNOW

IF HE HAS A HAWK AND DOVES

CLOTHING OR A DOVE IN HAWK'S

CLOTHING. AND I THOUGHT THAT

WAS A PRETTY GOOD DESCRIPTION.

>> LOOK, THE LAST TIME I WAS IN

THIS SEAT WHERE YOU HAD ME ON

JUST AHEAD OF THE JUNE FOMC, I

THINK I MADE A COMMENT SAYING

THAT KEVIN WARSH IS A RELATIVE

STRANGER TO FINANCIAL MARKETS.

I STILL THINK THAT'S TRUE. WE

DON'T KNOW WHAT HIS REACTION

FUNCTION IS YET. HE HAS TALKED

TOUGH ON INFLATION, BUT WE

DON'T KNOW IF HE'S GOING TO

BACK THAT UP YET. NOW JOE, WHEN

YOU WERE DOING THE RUNDOWN OF

CURRENT INTEREST RATES, I

NOTICED YOU PAUSED A LITTLE

WHEN YOU TALKED ABOUT THE 30

YEAR. IT'S BACK ABOVE 5%. IT

HAS BEEN FOR A LITTLE WHILE NOW,

AND A LOT OF THE QUESTIONS THAT

WE GET ARE, HOW DOES THE LONG

END OF THE RATES CURVE RESPOND?

IF THE FED HIKES, DO LONG END

RATES GO UP OR DO THEY GO DOWN?

AND WE THINK THAT THE ANSWER TO

THAT IS REALLY A FUNCTION OF

HOW THE MARKET INTERPRETS A FED

HIKE IN RELATION TO THE OUTLOOK

FOR GROWTH AND HOW RISK ASSETS

RESPOND. MY OWN PERSONAL VIEW

IS THAT IF THE FED HIKES TODAY,

IT'LL BE A SURPRISE. THE MARKET

WILL LIKELY DIAL BACK ITS

GROWTH EXPECTATIONS EVER SO

MODESTLY, AND RISK ASSETS

PROBABLY WON'T LIKE IT. THE

COMBINATION OF MODESTLY LOWER

GROWTH AND RISK OFF, I WOULD

THINK, HELPS BRING LONG END

RATES DOWN TO SOME EXTENT, AS

OPPOSED TO PUSH THEM

MEANINGFULLY HIGHER. WE'LL HAVE

TO SEE IF THAT'S EXACTLY WHAT

HAPPENS. BUT IF YOUR FED CHAIR

WARSH, AND YOU'RE ASKING

YOURSELF, HOW DO I SURPRISE

TODAY? OR WHY WOULD I SURPRISE

TODAY TO ESTABLISH THAT

CREDIBILITY ON INFLATION IS ONE

REASON, BUT ALSO MAYBE TO HELP

LONG END RATES COME DOWN IS

ANOTHER. AND WE KNOW THAT THAT

IS AN OBJECTIVE FOR THIS.

>> HE KNOWS THAT HE'S SPOILED

BRATS. THEY'RE ALREADY POUTING

THAT THEY'RE NOT GOING TO GET

CUTS BECAUSE THEY HAD THAT. I

MEAN, OKAY, SO WE'RE NOT GOING

TO GET ANY CUTS. AND YOU CAN

WATCH THE WAY BITCOIN ACTS OR

WHATEVER OR, YOU KNOW, WAIT A

MINUTE. NO NO NO NO CUTS. SO

THEN WE GO TO, YOU KNOW, NO

NEUTRAL OR NO ACTION AT ALL.

THE IDEA THAT YOU'D GO ALL THE

WAY, TAKE TWO STEPS. THAT'S

LIKE AN ANALYST GOING FROM A

STRONG BUY TO A STRONG SELL

THAT THAT NEVER HAPPENS.

>> IT WOULD BE A SURPRISE. AND

THERE'S MANY IN AT LEAST THE

EQUITY SPACE THAT I SPEAK WITH

THAT ALMOST THINK IT'S

IMPOSSIBLE.

>> THAT THIS COULD HAPPEN.

RIGHT. AND YOU THINK TWO

DISSENTS. YOU THINK TWO PEOPLE

WILL WANT TO HIKE?

>> WE DO.

>> AND THE TWO.

>> AND WHEN WE THINK ABOUT THE

COMPOSITION, WE DO THINK YOU'LL

GET TWO DISSENTS IF THEY HOLD.

BUT NOTABLY, IF THEY HIKE, WE

ACTUALLY THINK YOU'LL GET ZERO

DISSENTS.

>> HOW MANY TOTAL 12. IT IS 12.

10 TO 2 THEN IS WHAT YOU SAID.

>> SO SO IT'S NOTABLE THAT THE

PATH OF LEAST RESISTANCE, JUST

FROM A DISSENT PERSPECTIVE

WOULD INDICATE A HIKE AT THIS

MEETING, NOT A HOLD. NOW THAT'S

NOT NECESSARILY HOW WARSH IS