sonali: from new york city, for our viewers worldwide, i'm sonali basak, and bloomberg "real yield" starts now.

coming up, a downside surprise for u.s. payrolls, and a pulling forward the first rate cut to september. in a moment we will hear from former st. louis fed president jim bullard. we begin with the big issue. the job report delivers optimism for investors. >> it is a goldilocks report. >> good report across the board. >> that will please the fed and please the market. >> some of the leading indicators in the next three months or so are pointing to downside surprises in the jobs market. >> i don't think anybody can have any real confidence that rate cuts are eminent. >> powell basically dismissed any notion they will hide. -- wilhite.

>> the amount of uncertainties we are seeing, especially with inflation data. >> look at where we are on inflation. these are the ideas we use to write about as the goldilocks levels. >> we have been waiting to find this last mile of inflation, and here we are. >> he was a fed telling us, look at the longer term. look at where inflation was and look at where who -- where we have gotten into. i actually think that is the right message. sonali: with the fed and u.s. jobs report this week we saw the 2-year yield slide to the lowest level in nearly a month. we were flying past that 5% level, and then you had that fed meeting, perceived as dovish, and then jobs and ism data that showed a weakening of the economy. all in all that 2-year has swung by 30 basis points this week alone. traders are looking to price in a rate cut of 25 basis points by september, expecting rates to be lower by half a percent by the

january meeting next year. these expectations have been whipsawing. there is -- there are still certain members of the fed who are urging caution. governor michelle bowman, for example, saying today there are still a number of upside inflation risks. earlier this week i sat down with kkr's henry mcveigh. >> our businesses are saying, yes, there is inflation coming down, but probably hitting the 2% target is going to be quite hard. the fed has done a great job where they are, getting rates up quickly, moving aggressively, and starting to do the taper. one of the new nuggets we took away yesterday was, i think chairman powell did introduce the notion that under 3% inflation you get a little more emphasis on the dual mandate of employment and not just inflation. sonali: we now go outlive stanford university, where

michael mckee is standing by with former st. louis fed president jim bullard. mike? mike: thank you very much and welcome to the campus of stanford university, to all of our bloomberg viewers and listeners worldwide, and to jim bullard, the former st. louis fed bank president. now a dean at purdue university. when you look at where we are, if you were on the committee today, what would you think needs to be done? james: i think the amount of disinflation that occurred in the second half of 2023 was a lot. 200 basis points on the core pce 12 month inflation rate. so, that is big. that is the kind of thing we have not seen on that variable in many, many years. so, very successful, but, as you

know, the january, february, march reports stalled out a little bit. but you are still sitting at 2.8% on a 12-month basis. i think the challenge for the committee is to somehow take that disinflation on board, because it does mean you should have a lower policy rate without signaling that you are giving up on the last bit of inflation, 80 basis points you need to get back to 2%. that is the fundamental challenge. i think the wind has been blowing in the wrong direction during the first quarter and into april here. mike: we have a lot of bond investors who -- investors watching this program and listening to this show. why do you think we need lower rates? the argument from jay powell on wednesday was that the economy is fine right now, where it is. and we don't need to do anything. james: it is a good problem to

have. the committee has been very, very successful here. the economy is growing at a good pace. the labor market is very strong. today's report, a little softer than last time, it's still a very solid report. -- but still a very solid report. inflation above target, but not nearly as much as it was. and certainly most people think it is going to head back to target as we go forward. so, these are good problems to have. it is mostly about the tactics of how to play this going forward. now, one thing is that inflation by the metrics, i have been talking about there is only 80 points above target, but the policy rate is some 250 basis points above neutral. so, that is a lot, given that you are a relatively small distance from target. that adjustment has to be made at some point. they have to get going at some point, but they want to do that,

i think, and the wind is blowing in a better direction for them. mike: there is an argument that the things that are causing inflation these days are not things that are affected by monetary policy. whether you are set too high or not it is not going to bring down inflation from here. james: no, i don't really think so. i think inflation is a monetary phenomenon that is assigned to the central bank. the central bank can control inflation over the medium-term, and this episode is showing how powerful that can be. i think it really is up to the fed to get the inflation rate in the medium-term. there certainly is noise in the data, but that is not the main thing, i don't think. the noise can be positive or negative on a given day, but the trends are controlled by the central bank. mike: is there a risk if they leave policy too tight for too

long? james: there is. i think it is not a huge risk, but inflation could come down as we go through the rest of this year. i think many are thinking that is going to happen and the policy rate is way up in the 5% range, which would be too high for that kind of situation. i think if the right moment arises they can make a move and start to inch the policy rate down. another thing i think is, you can make a move without promising a whole sequence of moves, you know? just make a move because you want to take on board the good news we have had since last summer. mike: let me ask you from your long experience on the committee how you think about the markets and relationship to the fed. i did a chart yesterday, put it out on x, it shows since july 2023 the fed funds rate has not moved. the fed has not acted at all, and yet the markets have gone like this.

does that affect how you think about the transmission of policy or criticisms that you are behind or ahead of the curve? do those affect the way you think? james: it is critically important, and i think economists even today are still struggling to understand exactly how this complicated dance works. because it is not just the policy rate today, but the expected policy rate in the near term. one way to look at that is the two year treasury yields. if you look at that over the last year or year and a half, i have called dot chart mr. toad's wild ride. [laughter] because at different junctures it looked like the fed would go higher, it looked like the fed michael lower, and while the policy rate itself is a fairly smooth chart, the 2-year has been going up and down because of expectations about fed policy. i think that is critically

important as to how policy works. i think it helped the fed when we were raising rates. the 10 year went up much faster than the policy rate. that was helpful. and last december when chair powell said that the rate cuts were coming into view, the markets ran with that and 2-year declined maybe 100 basis points, and now it has come all the way back. it is a lot of volatility. i know the move index is high. mike: you talked about the expected future path of monetary policy. now that you are not on the committee and don't have to worry about it, what is your expected path? do you think they will cut this year? james: i do think they will get to a moment where it makes sense, and you will get a little bit further disinflation that will allow them to come down out of the 5% range. but it is going to be data-dependent, and, you know, it is a fickle world.

when you are looking at the data you never quite know what is around the corner in macroeconomics. but i do think they will find their moment to get the policy rate down. that stay restrictive. that is the key thing. even if they came into the high fours somewhere, that would still be a relatively high policy rate. it would still be putting downward pressure on inflation. the goal is to get inflation to asymptote down to 2%. you want this gentle landing. ideally this gentle landing into 2%. hopefully they can get that. mike: colleges have been in the news lately, for all the wrong reasons. what was easier, being on the fed board or being a dean at a college? james: both very challenging jobs, and i like that. i like to be actively involved and doing a lot of things all the time. but we have a lot of growth at the school of business, and a lot of support from our alums,

and many outside the university as well. it is not easy, but it is a great project and we are having a lot of fun. mike: jim bullard, now dean of the school of business at purdue university, thank you for joining us. we will send it back to you. sonali: our thanks to michael mckee for a slate of great interviews today and former st. louis fed president jim bullard. up next is the auction block. levels sit near record highs. stick with us. we will talk about that next. this is "real yield" on bloomberg. ♪

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this is bloomberg "real yield." it is time for the auction block. starting with the u.s. treasury department. announcing it will sell one how to 25 billion dollars of longer-term securities next week during its quarterly refunding. auction sizes remain near record levels and it was also revealed that on may 29 they will start its first debt buyback program in more than two decades. boeing was the main driver for u.s. high-grade this week with a $10 billion sale that drew a massive order book of $77 billion. the sale represented more than half of the weekly total investment grade. in high-yield they close the books on the busiest april since 2021. borrowers sold more than $26 billion of debt. the busiest start in three years. we are now going to bring in our roundtable on credit rates in the fed. joining us now is meghan swiber, bryan whalen, and rob waldner.

meghan, because you do see market pricing start to come down, that first fed rate cut expected as early as september, at least according to the market, at the same time you have that officials questioning that inflation is not out of the woods yet. why is the market getting ahead of the fed here? meghan: we heard two very important messages from both powell and the data this week. on powell, he is guiding the market toward the fact that is not looking at delivering hikes as long as inflation expectations are still well anchored. which is what we see across the way the market prices this. this morning what we did see was a moderating labor market. very important for the fed, also moderating average hourly earnings. it is the story of the fed taking rates from a place that is overly-restrict of to a level that sits more neutral now that we have seen this inflection point in the data. ed: with all of the whipsawing

it is hard to be convinced by one week's moves. rob, if you had to explain concerns around inflation, what would they be at this point? rob: i think you are right that one piece of data is not enough to draw a conclusion. we had a fair amount of disinflation at the tail end of last year. then we had prices running a little bit higher than we would have expected for much of this year so far. i think three data points in a row really draw -- make us have to double-think what is going on with the inflation picture. there certainly are places in the economy that have proven to be a bit sticky. that would be the fear, i think, that the fed was concerned about that is holding them back from cutting rates. we heard from powell, they did not want to raise rates, but they are going to be happy

keeping rates high for an extended period of time to watch for this data coming in. the inflation data to come in lower. ed: bryan, do you share the same conviction that september can be the first cut this year? bryan: sure, it could definitely be. and of the points we have tried to emphasize is that whether picking the right month where the fed actually goes is not the most important part of the analysis. it is, what is going to be the state of the world? what is going to be going on with growth when they do start to cut? and are we going to get this, some might say, pollyanna, some might say fictional tale where the fed is going to have the opportunity to cut it is very slow pace for the next 18 to 24 months? history would suggest that is not the case. history would suggest that by the time the fed is cutting, the economy has downward momentum as fischer says, it is a dimmer, not a light switch.

more than likely in our estimation the fed is going to have to go more aggressively once they start to go. sonali: i'm going to put each of you on the spot and where you think the two-year and 10 year ends this year? meghan: we are looking at still an inverted yield curve. we are calling for the first fed cut of the cycle to be in december. but, really don't have a tremendous amount of conviction on that time. it does come down to one thing. it comes down to the inflation data. that is key in anchoring the fed's confidence on timing of cuts. but what we do have more confidence in is the trough of this cycle. we have the market pricing this trough at 4%. we are expecting the market to price that lower, 3.5% or so. we think owning duration in the belly of the curve. sonali: where would you start to buy into the two-year and

ten-year part of the curve? rob: meghan makes a good point, which is the curve is inverted. which is going to keep us from having a large treasury rally. even if we rallied to four point 5%, that is a small rally overall. we would probably see some volatility in that process. the inverted yield curve will keep us from rallying strongly until and unless the fed really gets the all clear to be able to cut rates. ed: bryan, i have a different question for you. some of your colleagues have sounded the alarm on this idea of a no landing or soft landing. kind of warning that things could get choppy or. when you look at the data starting to soften in the jobs market, what is the rate of change that would take us from a place that is a comfortable softening of the job market to an uncomfortable one? bryan: i mean, i think we would agree with the bullish view.

we agree with not just the right call, but the place on the curve you want to be, which is the front and. inverted yield curves cannot last indefinitely. we are seeing slowing all over the economy. the one thing that continues to hold up has been consumer spending. look at what is keeping consumer spending afloat. it has been lower savings rates, higher credit card usage. we look at the wealth effect. it looks like the balance sheet impact of high equity prices is keeping consumers' optimism high and keeping their spending high. the back in turn on a dime. this conversation so far has been about the right market. i think, you know, directly correlated to that is what is going on in the equity markets, what is going on with the corporate bond market. we think the pricing is totally inconsistent with the potential risks out there and we think at some point this calendar year

you were going to get a reckoning in the credit markets once it realizes not everything in the economy is as rosy as they would like to believe. sonali: very interested in how that plays out. what is the risk of this -- of things starting to soften much more materially? meghan: hard to say at this point, but what we are seeing in terms of the composition of the data is not this hard landing. it is more so this sign of slowing. powell was asked this question very directly. is this a stagflation environment? we very much disagree with that. it is more the signs of moderation, which makes it such that this cutting cycle is going to look and feel different than cutting cycles with the fed actually has to get to an accommodative policy rate. we are looking at 10 year at 4.25. this is a modest rally. a 50 basis point move rather than a 100 basis point move. in the case you are worried about these hard landing

scenarios, still owning duration, owning treasuries is the place you would want to be. ed: to speak to what bryan was speaking about, -- rob: the spread is very tight. that is the genesis of your question. but if you look at them and there is a lot of demand for credit, and that is because the all-in yields still look compelling. we like some of the opportunities from credit, and the worry about a recession, a sharp downturn, we don't see the imbalances that would drive that sharp downturn. sonali: we thank you guys so much for your time. certainly diverging view -- viewpoints makes a market. meghan swiber, bryan whalen, and rob waldner. the earnings season is still in swing. we are going to talk about that next. this is "real yield" on bloomberg. ♪

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sonali: i'm sonali basak, and this is bloomberg "real yield." it is time now for the final spread. we are keeping an eye on jean jinping as he visits europe. make sure to catch our coverage at milliken all week. we have the boe decision on thursday. friday we are watching the university of michigan sentiment data and ecb minutes. he was a look at some of the big earnings set for next week. ebs, disney, uber are some of the highlights. with that michigan sentiment data we will be looking for clues on what is happening at disney, robert hurt, and reddit. if the exuberance is still there. for uber we will have a glimpse at what you are getting from the tech row. and we still see some banking across the world, although ubs

does have presence in the united states. that does it from us. same time, same place next week. this is bloomberg "real yield." what a week it has been. this is bloomberg. ♪

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>> welcome to bloomberg markets. i'm sonali basak. traders are moving on bets the fed will cut september after the u.s. labor market posted smallest game in -- gain in six months the markets are at least. the s&p 500 is up more than 5100 on the day up more than 1.1 percent. still down on the week. a little exuberance, more in tech stocks. the nasdaq 100 is up