WEBVTT - Daybreak Holiday: Markets, Fed Policy, Travel Tips 0:00:01.760 --> 0:00:04.040 Thanks so much for joining us on the special edition 0:00:04.120 --> 0:00:07.880 of Bloomberg Daybreak. US markets are closed for the Memorial 0:00:07.960 --> 0:00:11.200 Day holiday. I'm Nathan Hager, and coming up this hour 0:00:11.520 --> 0:00:14.319 will the Fed cut rates this year? And if so, 0:00:14.680 --> 0:00:17.960 when and just how strong is the US economy? Will 0:00:17.960 --> 0:00:22.119 have a roundtable discussion with Michael McKee, our International Economics 0:00:22.120 --> 0:00:27.800 and Policy correspondent, and Bloomberg Economics Chief US economist Anna Wong. Plus, 0:00:27.840 --> 0:00:31.320 Memorial Day unofficially kicks off the summer. Are there any 0:00:31.400 --> 0:00:34.519 good travel deals to be had? We'll ask the founder 0:00:34.600 --> 0:00:38.239 of the Points Guy, Brian Kelly. But first let's take 0:00:38.240 --> 0:00:41.120 a look at the direction of travel for the stock market. 0:00:41.240 --> 0:00:44.320 Equities hit all time highs earlier this month. In fact, 0:00:44.320 --> 0:00:47.640 the Dow Jones Industrial Average crossed forty thousand for the 0:00:47.680 --> 0:00:51.120 first time. Plenty of analysts are racing to adjust price 0:00:51.159 --> 0:00:54.240 targets for the broader indexes. So what's in store for 0:00:54.280 --> 0:00:57.160 the rest of the year. Let's discuss with two expert 0:00:57.320 --> 0:01:00.640 voices on this market. Alisia Levine is this head of 0:01:00.680 --> 0:01:04.280 investment strategy at bny Melon, along with Brian Levitt, the 0:01:04.319 --> 0:01:07.680 global market strategist at Investco. Thanks to both of you 0:01:07.720 --> 0:01:10.640 for being with US. Of course, stocks have certainly defied 0:01:10.760 --> 0:01:13.240 expectations from the start of the year. So Alisha, I'll 0:01:13.240 --> 0:01:15.800 start with you, where do you see the momentum right now? 0:01:16.400 --> 0:01:19.200 So I think the momentum is really coming from the microside, 0:01:19.240 --> 0:01:21.920 which is earnings, and then of course the macro side, 0:01:21.959 --> 0:01:25.360 which is the data are holding in better than feared 0:01:25.600 --> 0:01:29.480 twelve months ago, six months ago, and the US economy 0:01:29.840 --> 0:01:32.880 is not overheated, and it's slowing down in a way 0:01:33.720 --> 0:01:37.480 that allows the FED not to have a hiking bias, 0:01:37.760 --> 0:01:40.160 and so therefore we just think it's a pretty good 0:01:40.240 --> 0:01:43.839 place to be. There is the possibility of volatility around 0:01:43.840 --> 0:01:46.959 the election, of course, and other hot data prints we 0:01:47.040 --> 0:01:48.720 might get on the inflation side, which really is the 0:01:48.760 --> 0:01:52.840 most important thing right now for where yields go. But 0:01:53.120 --> 0:01:57.160 other than that, we think the overall picture looks very good. 0:01:57.240 --> 0:02:00.360 So we'd say the negative side of sort of left tails, 0:02:00.440 --> 0:02:02.840 not that they're nothing, but they're not as big as 0:02:02.840 --> 0:02:05.680 they were. Let's say call it a year ago. And 0:02:05.760 --> 0:02:07.400 so we look at the world and we say, this 0:02:07.480 --> 0:02:09.320 kind of feels a little bit like the nineteen nineties, 0:02:09.600 --> 0:02:13.200 where good enough growth rates have normalized. We can grow 0:02:13.280 --> 0:02:15.480 from here and the economy is humming. 0:02:15.800 --> 0:02:19.480 Let's take that point, Brian. Looking like the nineteen nineties 0:02:20.080 --> 0:02:23.160 we saw a bubble back, then, is this a market 0:02:23.160 --> 0:02:25.920 that could see a bubble start to burst. 0:02:26.200 --> 0:02:29.080 Well, the late nineteen nineties we saw a bubble, so 0:02:29.160 --> 0:02:32.079 I think what was being referenced there is perhaps more 0:02:32.160 --> 0:02:36.359 the mid nineties we did see the green span fedback 0:02:36.440 --> 0:02:40.920 then raise interest rates in the mid nineties by a 0:02:40.919 --> 0:02:44.760 pretty significant amount. The market didn't love it, although I 0:02:44.760 --> 0:02:49.200 don't think an eight nine percent decline is anything terrible. 0:02:49.840 --> 0:02:54.600 But when it became clear that the Federal Reserve could 0:02:54.639 --> 0:02:57.560 back off, that the economy was still strong, the proverbial 0:02:57.680 --> 0:03:03.519 soft landing of that, it ended up being a very 0:03:03.639 --> 0:03:07.400 nice number of years for markets beyond it. So I 0:03:07.400 --> 0:03:10.160 don't think Alicia was mentioning it to suggest that this 0:03:10.280 --> 0:03:13.480 is a market that's in a bubble. More that there's 0:03:13.520 --> 0:03:17.120 a nice setup for markets to continue to climb higher. 0:03:17.160 --> 0:03:20.520 And if it is nineteen ninety four nineteen ninety five, 0:03:21.600 --> 0:03:24.440 you know investors would would then be quite happy over 0:03:24.480 --> 0:03:25.760 the next few years. 0:03:26.160 --> 0:03:28.919 Of course, Alicia, you set up a pretty strong bullish 0:03:28.960 --> 0:03:32.919 outlook there with the setup just now, how much further 0:03:33.040 --> 0:03:35.720 upside do you see for this market, what's going to 0:03:35.760 --> 0:03:39.040 be the catalyst for where things go for the second half. 0:03:39.520 --> 0:03:41.560 So I think the catalyst clearly has to come from 0:03:41.560 --> 0:03:45.640 the earning side. I think the excitement over AI and 0:03:45.680 --> 0:03:51.120 sort of fellow travelers, so the hyperscalers of Magnificent seven 0:03:51.200 --> 0:03:56.400 plus the chip beneficiaries, plus the power of the utility beneficiaries. 0:03:57.120 --> 0:04:00.960 That feels like it's well locked into place, and it's 0:04:01.000 --> 0:04:03.560 not an unknown, right, It's not an unknown. So I 0:04:03.560 --> 0:04:05.520 think you have to have earnings come in from the 0:04:05.520 --> 0:04:09.840 rest of the market. I think it's clear that another 0:04:10.080 --> 0:04:14.800 hot inflation print could cause volatility here. We would expect 0:04:14.800 --> 0:04:19.560 something like that. I think the models for predicting inflation 0:04:19.720 --> 0:04:23.640 are clearly not working and that's okay, But it does 0:04:23.680 --> 0:04:26.760 look like we're sort of in this disinflationary period with 0:04:26.839 --> 0:04:29.159 some hiccups here or there, so that could cause some 0:04:29.279 --> 0:04:32.520 volatility in the bond market. Overall. What we've been saying 0:04:32.600 --> 0:04:37.840 is the FED pivoted in December. We don't think the 0:04:37.880 --> 0:04:41.520 FED pivots from the pivot. So in terms of rate 0:04:41.640 --> 0:04:44.360 cuts this year, we've always said less and later. We're 0:04:44.400 --> 0:04:47.560 really at one cut for the year that would be 0:04:47.920 --> 0:04:52.440 sufficient to keep the market moving higher into the end 0:04:52.440 --> 0:04:54.600 of the year. And let's just point out, Nathan, you know, 0:04:54.800 --> 0:04:57.760 we're in a re election year and administrations tend to 0:04:57.760 --> 0:05:00.640 do everything they can to get reelected, and I think 0:05:00.680 --> 0:05:03.160 we see that with some fiscal support. So I think 0:05:03.200 --> 0:05:05.359 it's just very hard if you just put a timeline 0:05:05.400 --> 0:05:08.560 on this, even though we're as strategist Brian knows well, 0:05:08.600 --> 0:05:10.320 you don't put a number and a date in the 0:05:10.320 --> 0:05:14.040 same sentence. I just think, yeah, I just think that 0:05:14.120 --> 0:05:18.160 it's just hard to get that deep sell off from 0:05:18.279 --> 0:05:20.360 here into the end of the year in a re 0:05:20.440 --> 0:05:24.080 election year with the setup that we have of two 0:05:24.080 --> 0:05:30.440 to three percent growth and inflation that possibly sticky but 0:05:30.560 --> 0:05:31.640 still on the downward trend. 0:05:31.720 --> 0:05:35.200 I want to pick up to something that Alicia talked 0:05:35.200 --> 0:05:39.120 about at the beginning in terms of companies meeting their 0:05:39.320 --> 0:05:43.800 expectations for earnings. We've gotten through most of the earning season, Brian, 0:05:43.839 --> 0:05:46.640 and you've seen a lot of these companies put out 0:05:46.760 --> 0:05:51.120 pretty strong forecasts, some pretty positive outlooks in terms of 0:05:51.120 --> 0:05:53.920 where they see things going. Do you think companies are 0:05:53.920 --> 0:05:56.600 going to be able to meet or exceed their earnings 0:05:56.640 --> 0:05:59.560 expectations heading into the second half. What's it going to 0:05:59.560 --> 0:05:59.920 take for. 0:05:59.839 --> 0:06:00.560 Them to do it? 0:06:01.000 --> 0:06:03.599 It's so far they've been able to. And this was, again, 0:06:03.680 --> 0:06:06.440 to your point, another good earning season in a time 0:06:06.480 --> 0:06:08.920 when you know, many investors a year or two ago, 0:06:08.960 --> 0:06:12.280 we're thinking a recession was coming and we're contemplating what 0:06:12.640 --> 0:06:15.960 a decline in earnings could look like. So it's an 0:06:16.040 --> 0:06:19.320 economic backdrop, both in the US and globally that continues 0:06:19.360 --> 0:06:23.000 to be supportive for corporate earnings. The irony in all 0:06:23.040 --> 0:06:26.240 of it, Nathan, is that for all the focus on 0:06:26.320 --> 0:06:29.400 the FED, and for all the focus on will they 0:06:29.520 --> 0:06:32.320 or won't they and by how much and when the 0:06:32.400 --> 0:06:37.800 reality is that good nominal growth and no rate cuts 0:06:38.080 --> 0:06:41.919 is just buying for markets, and in fact perhaps maybe 0:06:43.000 --> 0:06:47.440 preferable to weaker growth and lower rates, which is what 0:06:47.520 --> 0:06:49.360 a lot of investors had been expected. 0:06:49.520 --> 0:06:54.960 Speaking with Brian Levitt, Invesco's global market strategist and Alicia Levine, 0:06:54.960 --> 0:06:59.720 the head of investment strategy at bny mellon interesting point 0:07:00.160 --> 0:07:04.160 and had just their Alisha about the setup still being 0:07:04.279 --> 0:07:07.680 positive for companies even if we don't see a FED 0:07:07.800 --> 0:07:10.520 rate cut this year. Do you share that view? Is 0:07:10.600 --> 0:07:15.120 there really that much of an expectation from companies that 0:07:15.160 --> 0:07:18.760 they FED needs to deliver in order for the momentum 0:07:18.840 --> 0:07:19.920 to continue for stocks. 0:07:20.360 --> 0:07:22.800 So for thirty percent of the SMP, which is about 0:07:22.800 --> 0:07:25.520 the top ten stocks, they don't need to borrow. So 0:07:25.600 --> 0:07:28.160 what the FED does in some ways is not relevant 0:07:28.200 --> 0:07:31.200 to their business models. Where you feel it whether the 0:07:31.240 --> 0:07:34.440 FED cuts or not, is as you do go down 0:07:34.520 --> 0:07:36.800 cap into small cap. You know a lot of the 0:07:36.800 --> 0:07:40.960 small cap index over half has floating rate debt that's 0:07:41.040 --> 0:07:43.640 due much sooner than the fixed rate debt that the 0:07:43.720 --> 0:07:46.640 larger cap companies took out in twenty twenty and twenty 0:07:46.640 --> 0:07:49.400 twenty one when rates were near zero. So that's why 0:07:49.520 --> 0:07:53.120 the rustle, for instance, is still fifteen percent below it's 0:07:53.160 --> 0:07:55.720 all time high in twenty twenty one, because you do 0:07:55.800 --> 0:08:00.840 have some business models that could be threatened here. Overall, 0:08:01.280 --> 0:08:06.360 the SMP is more resilient to what the FED decides 0:08:06.400 --> 0:08:09.600 to do with rate cuts if the FED stays here, 0:08:09.600 --> 0:08:13.280 which is very possible. A lot of the debt in 0:08:13.320 --> 0:08:17.240 the SMP is fixed rate and that maturing until twenty 0:08:17.320 --> 0:08:20.680 thirty or later. That's just a structural change. And so 0:08:21.200 --> 0:08:23.760 I think this kind of obsession with the FED is nice, 0:08:23.800 --> 0:08:26.800 but to Brian's point, you know, when the FED cuts 0:08:27.080 --> 0:08:30.320 many times, it means that the economy is weak, we 0:08:30.360 --> 0:08:34.080 have higher unemployment, and we're headed into a recession or 0:08:34.120 --> 0:08:37.959 we're already there. So I think most of us as 0:08:38.000 --> 0:08:40.839 strategists would take you know, five to five and a 0:08:40.880 --> 0:08:44.680 half percent nominal growth with you know, a FED funds 0:08:44.760 --> 0:08:48.959 rate meeting that more or less. And don't forget earnings 0:08:49.000 --> 0:08:53.720 are nominal and the SMP reflects nominal growth, and so 0:08:53.880 --> 0:08:58.800 you are in a sense already participating in all those 0:08:59.040 --> 0:09:01.000 parts of the market that you may be a little 0:09:01.000 --> 0:09:03.840 worried about with higher rates, as long as your companies 0:09:04.200 --> 0:09:06.240 don't have to go out and tap the debt markets. 0:09:06.600 --> 0:09:08.360 Bran, I want to pick up on another point you 0:09:08.400 --> 0:09:12.360 had earlier about looking beyond the US market. We've been 0:09:12.360 --> 0:09:15.400 talking about the resiliency of the US economy, but the 0:09:15.400 --> 0:09:19.360 potential as well for some other opportunities outside the US. 0:09:19.440 --> 0:09:22.920 Where are you looking? Where are you advising clients to 0:09:22.960 --> 0:09:27.079 put their attention when it comes to x US investments? 0:09:27.840 --> 0:09:31.160 Yeah, and investors clearly have preferred the United States for 0:09:31.200 --> 0:09:35.160 a variety of reasons. The catalysts that tend to unlock 0:09:35.280 --> 0:09:40.439 the value in other parts of the world will either 0:09:40.520 --> 0:09:45.200 come from economic surprises or will come from policy changes. 0:09:45.320 --> 0:09:49.400 So if you look at places like China, or in 0:09:49.480 --> 0:09:55.000 Europe or in the UK, where valuations are more reasonable, 0:09:55.080 --> 0:10:00.480 are their catalysts, and you're seeing policy that likely moves 0:10:00.600 --> 0:10:03.240 ahead of where we are in the US in terms 0:10:03.240 --> 0:10:06.400 of supporting the economy. You've seen trying to take some 0:10:06.440 --> 0:10:10.959 steps now to support their property sector. The European and 0:10:11.559 --> 0:10:14.120 UK central banks may be lowering rates ahead of time. 0:10:14.120 --> 0:10:18.040 But what you're also seeing is those parts of the 0:10:18.080 --> 0:10:22.679 world that were hit harder over the last year or 0:10:22.720 --> 0:10:25.600 so are now starting surprise to the upside a bit, 0:10:25.640 --> 0:10:29.720 while the US surprise in disease in terms of whether 0:10:29.760 --> 0:10:33.319 we're outpacing economic expectations are coming down a little bit. 0:10:33.400 --> 0:10:37.320 So it's a sea change. It's not necessarily one where 0:10:37.320 --> 0:10:40.679 we say go out and you know, swing wildly to 0:10:41.200 --> 0:10:44.600 move from the US to international. But if you believe 0:10:44.760 --> 0:10:48.040 we're in the recovery phase of the cycle in those 0:10:48.080 --> 0:10:51.559 parts of the world, then you would want to increase exposure, 0:10:52.360 --> 0:10:55.880 will help the evaluation of the portfolio, diversify some of 0:10:55.920 --> 0:10:59.520 your dollar exposure. And if we're right that those economies 0:10:59.520 --> 0:11:02.560 are recover intends to be a good backdrop for their markets. 0:11:02.960 --> 0:11:06.320 Now, Alisha, I'm curious where you're looking for surprises. I mean, 0:11:06.360 --> 0:11:09.520 we've got wars still happening around the world, We've got 0:11:09.520 --> 0:11:12.520 a US presidential election coming up in the fall, We've 0:11:12.520 --> 0:11:15.600 got a UK election coming up in the summer. What's 0:11:15.640 --> 0:11:16.360 got your attention? 0:11:16.760 --> 0:11:19.000 So is this the question about what makes me worry 0:11:19.000 --> 0:11:19.360 at night? 0:11:19.600 --> 0:11:20.720 What makes you worry at night? 0:11:20.760 --> 0:11:26.000 Alicia n So, Look, I think the geopolitical risks are 0:11:26.160 --> 0:11:29.240 very real and heightened in a way that you know, 0:11:29.320 --> 0:11:33.360 typically markets don't really factor in geopolitical risk for more 0:11:33.400 --> 0:11:35.800 than a few weeks at a time, I think, you know, 0:11:35.920 --> 0:11:39.960 and typically it's through the commodity cycle. So you know, Ukraine, 0:11:39.960 --> 0:11:44.440 Middle East clearly oil and in the Ukraine case a 0:11:44.480 --> 0:11:47.840 fertilizer and for food that could be still at risk there, 0:11:49.080 --> 0:11:51.920 but the market knows that. And in fact, you know, 0:11:52.080 --> 0:11:55.320 WTI oil prices have actually come down from the peak 0:11:55.360 --> 0:11:57.439 when there was probably a ten dollars premium in oil 0:11:57.480 --> 0:12:01.320 prices for a hot war in the Middle East. I think, 0:12:01.800 --> 0:12:05.200 you know, maybe there's some volatility around the election, and 0:12:05.280 --> 0:12:07.360 I would say this, I think the best thing that 0:12:07.400 --> 0:12:09.440 can happen for all of us, is that we wake 0:12:09.559 --> 0:12:12.200 up or we go to sleep with a fifty three 0:12:12.360 --> 0:12:15.679 forty seven win for whatever party it is, and it's 0:12:15.679 --> 0:12:17.439 a clear winner, and I think that would be the 0:12:17.480 --> 0:12:20.400 best case for the market regardless. I think if we 0:12:20.440 --> 0:12:23.320 have one of those where it's really too close to 0:12:23.440 --> 0:12:26.360 call and may take weeks to find out, that's not great, 0:12:26.400 --> 0:12:29.120 and that won't be great for the market either. And 0:12:29.120 --> 0:12:31.080 so that's just I think probably the risk out there. 0:12:31.120 --> 0:12:33.080 The other thing is the deficit. Of course, neither party 0:12:33.400 --> 0:12:35.680 is really serious about addressing this, and in fact, both 0:12:35.720 --> 0:12:41.280 platforms have enormous fiscal spend attached to their political promises. 0:12:41.360 --> 0:12:42.960 So I'd say that's something we have to keep an 0:12:42.960 --> 0:12:43.320 eye on. 0:12:43.640 --> 0:12:46.800 Our Thanks to Alisha Levine, head of investment strategy at 0:12:46.800 --> 0:12:50.960 bn Y Melon and Invesco Global market strategist Brian Levitt. 0:12:51.080 --> 0:12:53.280 And coming up next, we'll take an even closer look 0:12:53.320 --> 0:12:55.880 at the economy and whether the Fed will cut interest 0:12:55.960 --> 0:12:59.280 rates before this year is out. I'm Nathan Hager, and 0:12:59.400 --> 0:13:06.640 this is Bloomberg. Welcome back to this special edition of 0:13:06.679 --> 0:13:10.600 Bloomberg Daybreak. US markets are closed for Memorial Day. I'm 0:13:10.679 --> 0:13:13.079 Nathan Hager. Thanks for joining us. Now we want to 0:13:13.120 --> 0:13:16.360 turn from the stock market to the economy. Twenty twenty 0:13:16.360 --> 0:13:20.800 four began with high expectations for interest rate cuts. So 0:13:20.920 --> 0:13:24.160 far we haven't had a one. So what will it 0:13:24.200 --> 0:13:26.520 take for the Fed to finally pull the trigger and 0:13:27.200 --> 0:13:29.520 will they even do it? To dive into those questions, 0:13:29.559 --> 0:13:33.520 we have convened a special economic roundtable. Anna Wong is 0:13:33.559 --> 0:13:36.920 with US, chief US economist at Bloomberg Economics, along with 0:13:37.040 --> 0:13:41.720 Michael McKee, International Economics and Policy correspondent for Bloomberg Radio 0:13:41.800 --> 0:13:44.280 and Television. Thanks to both of you for being with us. 0:13:44.280 --> 0:13:46.560 And I'll start with you, Mike, because you talk with 0:13:46.600 --> 0:13:49.040 these FOMC voters like all the time. So what are 0:13:49.040 --> 0:13:50.440 they telling you in terms of policy? 0:13:51.040 --> 0:13:54.320 Basically, their story hasn't changed. They're waiting for inflation to 0:13:54.400 --> 0:13:57.240 show signs that it is going to continue on down 0:13:57.280 --> 0:14:00.320 to two percent. Now, one important thing to remember is 0:14:00.600 --> 0:14:04.000 they're going to start cutting interest rates before they get 0:14:04.000 --> 0:14:07.440 to two percent. They've made that clear. But right now 0:14:07.480 --> 0:14:11.080 they're not seeing any progress at all since basically inflation 0:14:11.160 --> 0:14:13.839 has stalled out. So it's going to take a little while, 0:14:14.120 --> 0:14:18.240 several more months, and then we'll see whether they get 0:14:18.280 --> 0:14:19.880 anything this year or not, a lot of them moving 0:14:19.920 --> 0:14:23.040 out sort of on the curve, and more and more 0:14:23.080 --> 0:14:25.560 of them talking about end of the year as a 0:14:25.640 --> 0:14:29.120 possible first timing for a rate cut. 0:14:28.920 --> 0:14:31.360 Several more months. And of course you worked as an 0:14:31.360 --> 0:14:34.720 economist in the Federal Reserve, and it's so funny because 0:14:34.760 --> 0:14:36.520 at the beginning of the year there was all this 0:14:36.560 --> 0:14:39.560 talk about maybe six or seven interrast rate cuts. Now 0:14:40.080 --> 0:14:41.960 there's no way we can get that the way the 0:14:42.040 --> 0:14:45.040 calendar is going. So what do policymakers need to see 0:14:45.360 --> 0:14:48.640 to get that assurance that they can start the interest 0:14:48.720 --> 0:14:49.520 rate cutting cycle. 0:14:49.800 --> 0:14:52.000 Yeah, So, you know, in the beginning of the year, 0:14:53.000 --> 0:14:55.600 when the market was pricing in one hundred and seventy 0:14:55.680 --> 0:14:57.880 base point of right cuts, that was a little bit 0:14:57.920 --> 0:15:02.239 overdoing it. But even then time, given the inflation trajectory, 0:15:02.600 --> 0:15:06.240 a fair assessment, given the you know, inertial tailor rule, 0:15:06.440 --> 0:15:09.480 which the Fed has followed quite closely over the past 0:15:09.520 --> 0:15:12.600 two years, is that one hundred to one hundred and 0:15:12.640 --> 0:15:16.440 twenty five bases cut was reasonable. And now we are 0:15:16.520 --> 0:15:21.160 down to the model, the tailor rule saying that a 0:15:21.200 --> 0:15:25.480 fair assessment would be forty basis point of cuts, and 0:15:25.560 --> 0:15:28.240 that would be the result from a reasonable range of 0:15:28.280 --> 0:15:32.000 inflation numbers. And the reason why that rule has come 0:15:32.080 --> 0:15:35.160 down from one hundred and twenty five to now forty 0:15:35.280 --> 0:15:39.160 is because mostly because of the inflation data as you suggested. 0:15:39.520 --> 0:15:42.440 So I think the expectation that the Fed will cut 0:15:42.600 --> 0:15:46.560 once or twice this year is still fair. And whether 0:15:46.720 --> 0:15:48.920 it would be more like one cut or two cut, 0:15:49.000 --> 0:15:53.160 it depends on whether inflation is going to be closer 0:15:53.200 --> 0:15:56.280 to ending the year closer to two point six percent 0:15:56.560 --> 0:15:59.240 or is it three percent. So in our forecast, we 0:15:59.360 --> 0:16:04.600 do expect inflation to be drifting back up from a 0:16:04.600 --> 0:16:08.480 low of two point seven percent mid year to closer 0:16:08.520 --> 0:16:10.520 to three percent by the end of the year. But 0:16:10.560 --> 0:16:13.760 we still do think the Fed would cut because unemployment 0:16:14.040 --> 0:16:17.800 is we think it's going to rise about four percent 0:16:17.920 --> 0:16:18.920 by the end of this year. 0:16:19.120 --> 0:16:22.360 Mike, from what you're hearing from Fed officials, are they 0:16:22.440 --> 0:16:26.440 feeling that pressure to deliver the first cut before the 0:16:26.560 --> 0:16:29.960 year is out? I mean, it does get harder to 0:16:30.560 --> 0:16:33.320 make that move once we get closer to an election, 0:16:33.560 --> 0:16:34.000 doesn't it. 0:16:34.040 --> 0:16:37.680 They would argued no, and past history supports that idea 0:16:37.720 --> 0:16:40.560 that the election doesn't make any difference to them. They'll 0:16:40.560 --> 0:16:44.360 do what they think they should do when the time comes, 0:16:44.920 --> 0:16:47.240 But at this point they don't seem to be feeling 0:16:47.320 --> 0:16:50.440 any pressure because the economy is not demanding it. They 0:16:50.480 --> 0:16:53.320 look around and they see where unemployment is well below 0:16:53.360 --> 0:16:58.520 four percent, and they see the economy growing basically at potential, 0:16:58.720 --> 0:17:02.040 and they don't think they need to cut rates at 0:17:02.040 --> 0:17:04.840 the moment. The biggest concern they have going forward is 0:17:04.880 --> 0:17:08.439 that if inflation does start to fall again, then you 0:17:08.520 --> 0:17:12.520 get a rise in real rates and that would tighten 0:17:12.640 --> 0:17:16.600 conditions even more. So maybe they don't want that. The 0:17:16.640 --> 0:17:19.960 other side of that coin is do they need to 0:17:20.080 --> 0:17:24.119 cut rates because the economy slows so much and that's 0:17:24.160 --> 0:17:26.840 not in anybody's forecast there at the moment. 0:17:27.359 --> 0:17:30.040 Well, so what is the forecast and when it comes 0:17:30.160 --> 0:17:34.160 to the path for disinflation. Obviously we did see that 0:17:34.400 --> 0:17:37.840 little bit of a bump the first quarter of this year, things, 0:17:37.880 --> 0:17:40.960 as you said, have been stalling out. Where do you 0:17:41.080 --> 0:17:45.320 see the disinflationary path going, if at all, into the 0:17:45.359 --> 0:17:45.960 second half. 0:17:46.240 --> 0:17:48.959 Typically in the beginning of the year you do have 0:17:49.080 --> 0:17:55.160 these unfavorable seasonal factors, and for this year, the unfavorable 0:17:55.200 --> 0:18:00.600 seasonal factors for inflation lasted beyond February, which is a 0:18:00.600 --> 0:18:04.160 little bit unusual. But then if the past is a guide, 0:18:04.200 --> 0:18:07.719 from here on out to the end of summer should 0:18:07.760 --> 0:18:11.480 be a favorable period for disinflation. So our forecast, and 0:18:11.560 --> 0:18:14.960 I think the Fed's forecast, is for the year over 0:18:15.080 --> 0:18:19.280 year core PC deflator to continue to edge down from 0:18:19.320 --> 0:18:24.240 now to mid year. Possibly by August we will see 0:18:24.280 --> 0:18:27.040 a core pc E twelve months change of two point 0:18:27.080 --> 0:18:30.080 seven or two point six percent. But our forecast for 0:18:30.119 --> 0:18:34.280 the second half is more pessimistic because then all these 0:18:34.320 --> 0:18:37.200 favorable factors we see from here to end of summer 0:18:37.280 --> 0:18:41.480 will reverse and then it gets harder. And that's when 0:18:41.800 --> 0:18:45.800 we also think that the base effects of inflation would 0:18:46.000 --> 0:18:49.600 turn against all these measures, because that's because last year 0:18:49.640 --> 0:18:51.720 we called last year, the second half of last year 0:18:51.840 --> 0:18:55.720 was very favorable for inflation. So you have this low 0:18:55.800 --> 0:18:58.480 base effect which tends to push up the year over 0:18:58.600 --> 0:19:01.119 year in the second half, and this is why we 0:19:01.160 --> 0:19:03.040 think that at the end of the year core PCE 0:19:03.680 --> 0:19:08.360 deflator would be closer to three than mid twos. 0:19:08.680 --> 0:19:12.720 Speaking with Anna Wong, the chief US economist at Bloomberg Economics, 0:19:12.800 --> 0:19:18.600 and our Bloomberg International Economics and Policy correspondent, Michael McKee. Mike, 0:19:19.000 --> 0:19:21.880 you've been talking, of course to FED officials. We've heard 0:19:21.920 --> 0:19:24.760 from Raphael Bostik of the Atlanta FED talking about how 0:19:24.760 --> 0:19:28.679 there are active discussions about where the neutral rate is, 0:19:29.280 --> 0:19:35.639 the rate at which policy neither slows nor grows the economy. 0:19:36.280 --> 0:19:39.800 What's the thinking about where that stands right now? 0:19:39.880 --> 0:19:42.639 Well, it's becoming more important because now we're getting into 0:19:42.680 --> 0:19:46.320 the possibility of rate cuts, and so the question for 0:19:46.359 --> 0:19:49.600 everybody is once they do start, how far do they cut? 0:19:50.200 --> 0:19:54.160 And I think most FED officials would tell you they 0:19:54.160 --> 0:19:56.560 don't really know. They don't think they will be going 0:19:56.600 --> 0:19:59.920 back anywhere near the zero rates that we had for 0:20:00.080 --> 0:20:03.080 a while. But how fast can the economy grow right now? 0:20:03.160 --> 0:20:07.920 That's not clear. And unfortunately, the neutral rate is something 0:20:07.960 --> 0:20:12.640 that's not observable as an individual number. It's something better 0:20:12.680 --> 0:20:16.239 seen in hindsight. But they're looking at the inflation rate 0:20:16.320 --> 0:20:18.800 and they're looking at the growth rate, and they're thinking, 0:20:18.840 --> 0:20:23.880 maybe we have seen the economy move up its neutral rate, 0:20:24.520 --> 0:20:27.800 but would that last. As Anna said, forecasts are we're 0:20:27.800 --> 0:20:30.880 going to see a cooling as we go along. So 0:20:31.320 --> 0:20:35.640 they don't really have a good number yet. They're thinking 0:20:35.760 --> 0:20:40.160 in terms of somewhere around four percent, maybe a little higher, 0:20:40.160 --> 0:20:43.679 a little lower, but it's going to depend on the 0:20:43.680 --> 0:20:47.639 conditions in the economy at the time, and that's going 0:20:47.720 --> 0:20:49.919 to be several rate cuts down the road, So we 0:20:50.000 --> 0:20:54.280 probably won't get a neutral rate view until sometime next year. 0:20:54.640 --> 0:20:57.720 And when it comes to conditions in the economy, And 0:20:58.200 --> 0:21:02.720 is there some thinking within the FED or among economists 0:21:02.760 --> 0:21:06.920 like yourself that there may need to be some further 0:21:07.040 --> 0:21:11.200 damage to the economy to get inflation to the fed's 0:21:11.240 --> 0:21:15.440 target in terms of the labor market, in terms of 0:21:15.760 --> 0:21:16.879 goods and services. 0:21:17.400 --> 0:21:22.119 I think from reading the community public communications of the FED, 0:21:23.480 --> 0:21:25.840 it's pretty clear to me that the FED has moved 0:21:25.880 --> 0:21:30.040 away from that view that you do need damages to 0:21:30.119 --> 0:21:33.920 the labor market to bring down inflation. In fact, the 0:21:34.000 --> 0:21:38.160 confidence within the committee has been building that you don't 0:21:38.200 --> 0:21:43.159 need that They are banking on productivity growth and also 0:21:43.520 --> 0:21:51.080 immigration to provide support to the economy without introducing inflationary forces. 0:21:51.280 --> 0:21:54.080 And there's a lot of discussion as well about whether 0:21:54.640 --> 0:21:57.680 the two percent inflation target even makes sense. I mean, 0:21:57.680 --> 0:22:00.800 we hear from the likes of muhammedel Air saying that 0:22:00.800 --> 0:22:05.240 that level is arbitrary. Mike, why is it so important 0:22:05.400 --> 0:22:08.960 for this FED to get to that two percent target? 0:22:09.560 --> 0:22:12.520 It's basically a credibility issue for them. One of the 0:22:12.520 --> 0:22:15.160 things that was pointed out at the Atlanta FED conference 0:22:16.119 --> 0:22:20.160 last week was that during the great inflation of the 0:22:20.480 --> 0:22:25.280 nineteen seventies and eighties, inflation expectations soared along with the 0:22:25.480 --> 0:22:29.239 inflation rate, and that didn't happen this time, and so 0:22:30.480 --> 0:22:34.640 they fed credibility. People believe the FED will do what 0:22:34.680 --> 0:22:37.159 it takes to bring inflation doubt, and they have the 0:22:37.200 --> 0:22:41.239 two percent target, so they need to stick to that. 0:22:41.280 --> 0:22:44.680 They need to make sure people understand that they're going 0:22:44.720 --> 0:22:47.760 to fight inflation, they're going to bring it down. We 0:22:47.840 --> 0:22:51.600 may never actually get there because they will start cutting 0:22:51.600 --> 0:22:54.480 before they get to two percent, and if inflation gets 0:22:54.520 --> 0:22:57.840 sticky at two point three percent, I don't think they're 0:22:57.840 --> 0:23:01.680 going to risk damaging the economy by trying to push 0:23:01.680 --> 0:23:05.440 even harder. But they want people to know they're going 0:23:05.480 --> 0:23:09.320 to follow up. Now. They start later this year, a 0:23:09.560 --> 0:23:13.600 review of their policy framework probably taken another year, and 0:23:13.640 --> 0:23:17.240