00:00That said, how will the Fed be speaking about this decline in oil prices and its impact on
00:05inflation going forward? Will we see numbers come in slightly?
00:09So I think that that's actually the most relevant conversation piece within the Fed at the moment.
00:15We've spent the last three months with energy prices running ever higher, gasoline contributing
00:21a significant amount to headline CPI. What happens if there is a continued flow through of lower oil
00:28prices to lower gasoline prices? What had been a pillar of inflation will become a drag over the
00:33course of the next three or four months. And that, if anything, that just reinforces the prudence of
00:40the Fed's decision to wait and see how it plays out. There has only been a small amount of pass
00:45-through
00:45to core inflation. Core goods last month was negative in outright terms. That buys the Fed
00:50plenty of time. So I do think that the energy shock remains extremely topical for monetary policymakers
00:56and will probably ultimately drive the tone of what we hear from Washington.
01:00If he does decide to thread the needle and not give away too much about whether the next
01:05interest rate move might be a hike or a cut, does this market reprice, particularly the front end?
01:11I think that the reason that two-year yields are at 4% or effectively hovering around 4% is
01:18because
01:18we've priced in the probability, very low probability, but of a rate hike sometime over the course of the
01:25next six or eight months. So the market is comfortable with the idea of symmetry around the current
01:30policy rate. So I wouldn't be surprised if we shrugged off a slightly hawkish tone. I think the bigger risk
01:37is that we're all poised for a hawkish, ready-to-fight inflation wash. What happens if he comes out and
01:45he's a lot more dovish or erring on the dovish side of balance? I think that we haven't had that
01:51price
01:51fixed, and that gets two-year yields to 385 pretty quickly.
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