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The Federal Reserve leaving interest rates unchanged for a third meeting in a row. That move defying President Trump's calls for the central bank to loosen monetary policy. Vishal Khanduja, Morgan Stanley Senior fixed income portfolio manager joining us now to discuss. Vishal, so we got this hold as expected. We got an uptick and concern about stagflation sort of expressed in the statement here. At the same time markets are moving on the Fed. They also appear to be moving on some commentary from from President Trump that he's not going to preemptively lower tariffs to get Chinese negotiators to the table. When you put all that together, what does it mean for fixed income markets?

Sure, thanks and good afternoon. I think this statement did exactly what the Fed wanted them, wanted it to do is to stay the course, repeat their concern for more growth downsides, concern about their dual mandate at risk and uncertainty increasing on that part, but then no action. So I think that extra word, as you pointed out the further that was added in one statement and then the extra layer of uncertainty to their dual mandate that did the trick. Now, I'm hoping that chairman Powell repeats that performance of the statement in his Q&A as well. What does this do for the fixed income markets? I think, um, some of the things that I think we've been looking for is the monetary policies reaction function to all of this. Are they still focused on growth downsides versus inflation upsides? Uh, I think Q&A will be focused a lot more on that. I think the market could get a little disappointed if they're trying to eke out uh, a statement or two or reaction function, if they're going to see through some of the high inflation print starting next week. So I think, uh, front end of the market should be pretty well bid. The zero to five year anchors down, the back end of the market, I know it's putting up a great performance today, but uh, is still vulnerable to what's happening in DC for uh, from the deficit reduction plan or lack thereof, if you will.

So that benchmark tenure of Vishal, lots of puts and takes there, but so we're sitting here at four to six. When your clients ask you, Vishal, where do you think that's headed near intermediate term, you tell them what?

I think initially in around October, November, we were looking at the economy, looking at the strength of consumer and corporate balance sheets, even though uncertainty was high and volatility was going to be high, but our range was four to five percent. Very difficult to breach the four percent as we thought that nominal growth will keep up and then very difficult to breach the five, as that's where we think that that stalls the economy down. We've seen that in Q1 of 2023 as well with the regional bank crisis here. Now, I think our range is more 350 to 450 on that end. So that's wow, because the nominal growth picture has changed. We do think that there's going to be a clear demand destruction in the back half of this year. And the next 18 months, I think the Fed will be dovish and will use some of that uh, tools in the toolkit to to to uh, keep up with their dual mandate.

Vishal, as we mentioned, um, you know, President Trump has continued to discuss the Fed and has continued to discuss Jay Powell from a market participants perspective. What does that mean in terms of I guess the predictability for what the Fed's going to be doing?

I think the makeup of the Fed today with chairman Powell at the head of it, um, is pretty strong. We do think that they have quite a bit of independence and they're going to assert their independence throughout this process as well. They did it last year, uh, amidst, during the election time timeframe. I know there was quite a bit of chatter about, um, the Fed's independence at that point. They got us through that. The the weak unemployment reports that we had started to see, 100 basis points in three meetings, and they are going to, we strongly believe, get us through this part of the uncertainty as well. But yes, I think that, I think the the tweet or or the post that we had seen on Truth Social, I think in our mind starts the interview process, which hopefully in our minds as a base case ends up in May 2026 when the current chairman's um, uh, term is done. So independence is definitely at risk, but we do think our base case is that they'll be able to assert themselves through the economic cycle here.

And Vishal, those very smart economists you work with over there at Morgan Stanley, how many cuts, Vishal, are they estimating and expecting in 2025?

I think less so in the summer, it will be more in the back half. I think that's why if you look at our conviction level on exactly when they start to cut here is lower. That's why we don't have very uh, big magnitude of bets in the zero to one year part of the curve. But then as you gradually move away and move into that sort of 12 to 18 month timeframe, we think our our our conviction level is pretty high that they will be dovish about four to five cuts in the next 12 to 18 months. And that's that that's why our sort of overweight to the Treasury curve or interest rate curve is more than that five year mark. Uh, to be uh, to be clear on the on the on the positioning.

So you think that's the that's the the part of the curve that is going to benefit the most if they are cutting more.

Exactly. I think that terminal rate sensitivity to that five-year point of the curve, as well as I, if I take a step back, what are we trying to achieve with the fixed income allocation? That's a dual mandate. You're trying to get income and total return and we are trying to get your negative correlation to risky assets. And we think that that five-year point, three to five year point to be very clear, is that sort of opportune or a point to express that opinion with. And then the more you move on to sort of like expand it out, the same analysis to the back end of the yield curve, and a few more sort of variables are start affecting it. I think lack of a credible, sustainable deficit reduction plan, you start getting into the demand and supply, you start getting into some of the uh, reserve currency issue, etc. That 20 and 30 year part of the curve in our opinion is very vulnerable to that. And that's what is going to be uh, very reflective of the term premium is going to be very reflective of that opinion from the market.