WEBVTT - Is the Fed Done Raising Rates? Ellen Zentner Thinks So 0:00:13.800 --> 0:00:17.239 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.400 --> 0:00:19.560 My name is Mike Regan, I'm a senior editor. 0:00:19.360 --> 0:00:22.960 At Bloomberg, and I'm Aldana Hayrick, Across Acid reporter with Bloomberg. 0:00:23.280 --> 0:00:26.279 This week on the show, Well, the Federal Reserve did 0:00:26.320 --> 0:00:28.800 not raise interest rates at their meeting this week, but 0:00:28.920 --> 0:00:32.960 nonetheless the markets freaked out a little bit, probably because 0:00:33.080 --> 0:00:37.000 policymakers released projections showing that they don't expect to cut 0:00:37.080 --> 0:00:42.680 rates as aggressively as previously expected next year. Stock sold off, 0:00:42.720 --> 0:00:44.960 and so did the bond market, especially on the long 0:00:45.080 --> 0:00:47.800 end of the curve, with the ten year treasury yield 0:00:47.840 --> 0:00:50.960 reaching the highest level since two thousand and seven and 0:00:51.040 --> 0:00:54.120 the thirty year yield reaching the highest since two thousand 0:00:54.120 --> 0:00:57.400 and eleven. While the latest update from the Fed makes 0:00:57.440 --> 0:00:59.640 it look more and more like they're expecting a soft 0:00:59.720 --> 0:01:02.400 land for the economy, well, the markets are taking it 0:01:02.440 --> 0:01:05.240 pretty hard. We'll get into it with the chief US 0:01:05.240 --> 0:01:09.639 economist at a major Wall Street bank, but they'll dona first. 0:01:09.959 --> 0:01:11.720 I have to say it's been a while since we 0:01:11.880 --> 0:01:15.440 bugged our listeners to go and rate and review the 0:01:15.440 --> 0:01:17.880 show on Apple Podcasts. I think we need a new 0:01:17.920 --> 0:01:19.080 gimmick to entice them. 0:01:19.200 --> 0:01:20.280 Do you have one in mind? 0:01:21.680 --> 0:01:22.920 Funny you should ask I do? 0:01:23.040 --> 0:01:24.360 What is it? Bo? 0:01:24.360 --> 0:01:28.120 I'm thinking since you're a Buffalo Bills fan, you could 0:01:28.200 --> 0:01:31.440 do like the Bills fans do at the tailgates and 0:01:31.480 --> 0:01:33.679 like smash a card table. 0:01:34.040 --> 0:01:35.920 Yeah, you have to jump. You have to jump through 0:01:35.959 --> 0:01:36.840 the table. 0:01:37.160 --> 0:01:38.000 Jump through the table. 0:01:38.080 --> 0:01:38.319 Yeah. 0:01:38.440 --> 0:01:40.000 How about would you think you could say we get 0:01:40.000 --> 0:01:42.319 one hundred more reviews? You could how. 0:01:42.240 --> 0:01:46.240 About things one hundred more reviews and they make it 0:01:46.280 --> 0:01:47.080 to the super Bowl? 0:01:48.600 --> 0:01:49.120 Both of those? 0:01:49.280 --> 0:01:51.040 Yeah, to those I don't know to be too much. 0:01:51.160 --> 0:01:52.920 Then you'll you'll jump on a card tabe. 0:01:53.000 --> 0:01:55.160 Yeah all right, but the one hundred. 0:01:54.920 --> 0:01:58.640 Reviews being the first first order of business, it'll be 0:01:58.680 --> 0:02:02.400 a weird expense account item. Smashed the card tape? Okay, 0:02:02.840 --> 0:02:03.560 I think I. 0:02:03.480 --> 0:02:06.559 Can expense it to Bloomberg. I was just I would 0:02:06.560 --> 0:02:08.800 do it just for fun. I don't know if our 0:02:09.200 --> 0:02:12.480 guest is a football fan at all, but we have 0:02:12.600 --> 0:02:16.600 Ellen Zenner, chief US economist at Morgan Stanley, on this weekend. Ellen, 0:02:16.680 --> 0:02:18.639 I'm so happy to have you on the podcast. Thank 0:02:18.680 --> 0:02:19.720 you so much for joining us. 0:02:20.120 --> 0:02:22.000 Hi, guys, I love it. Thanks for asking me. 0:02:23.080 --> 0:02:25.840 Are you a Buffalo Bills fan. A secret Buffalo Bills 0:02:25.840 --> 0:02:26.960 fan by any chance. 0:02:27.160 --> 0:02:31.079 No, not even secret. I was quite into college ball 0:02:31.160 --> 0:02:34.000 growing up in Texas. That was really the Texas thing, 0:02:34.120 --> 0:02:38.040 high school and college ball, and never been a big 0:02:38.080 --> 0:02:41.480 fan of the NFL, although my dad was a big 0:02:42.600 --> 0:02:44.480 Saints fan, New Orleans fan. 0:02:44.840 --> 0:02:47.400 What if I remember correctly, you went to Colorado? You 0:02:47.400 --> 0:02:48.200 have coach Prime. 0:02:48.240 --> 0:02:52.720 Now, I did go to Colorado, but you know, I'm 0:02:52.720 --> 0:02:56.200 a walking paradigm. I started at University of Texas and 0:02:56.360 --> 0:02:58.360 never stopped being a Longhorns fan. 0:02:59.200 --> 0:03:01.960 Like I am loyal to the Bills. But Ellen, we 0:03:02.000 --> 0:03:04.280 had this big week, which is why I'm so thankful 0:03:04.320 --> 0:03:07.799 you were able to join us this week because, as 0:03:07.840 --> 0:03:11.399 Mike mentioned, markets sort of had a little freak out 0:03:11.480 --> 0:03:13.720 post the FED meeting. So just to start, can you 0:03:13.760 --> 0:03:16.760 give us your big takeaways from the FED meeting. 0:03:17.880 --> 0:03:21.640 Yeah. Look, I think it's undeniable that the statement was 0:03:21.680 --> 0:03:26.240 more hawkish than we expected. I think for me, you know, 0:03:26.520 --> 0:03:29.560 in the current conditions paragraph, which is how the FED 0:03:29.680 --> 0:03:32.679 describes sort of what's going on or what's happened since 0:03:32.680 --> 0:03:35.880 their last meeting, they you know, it is a fact 0:03:36.280 --> 0:03:39.240 that jobs have slowed, but remained strong, and they noted 0:03:39.280 --> 0:03:42.280 that it is also a fact that inflation has come 0:03:42.320 --> 0:03:45.640 down quite a bit but remains robust, and they did 0:03:45.680 --> 0:03:49.360 not note that. And sometimes what they leave out can 0:03:49.360 --> 0:03:51.960 be just as important as what they put in. I mean, 0:03:52.040 --> 0:03:56.760 Chairpal did note it in the press conference several times 0:03:56.840 --> 0:04:00.960 that core inflation has come down significantly. Well, why didn't 0:04:00.960 --> 0:04:03.720 they just note that fact in the statement. It's because 0:04:03.920 --> 0:04:07.680 you're far from declaring victory. God forbid that the market 0:04:07.720 --> 0:04:12.480 thinks that you're declaring victory over inflation and you get 0:04:12.560 --> 0:04:16.800 some easing and financial conditions you hadn't planned on when 0:04:17.160 --> 0:04:20.120 type financial conditions is really what they need to sustain 0:04:20.360 --> 0:04:22.960 to be sure that the economy is going to continue 0:04:23.000 --> 0:04:26.280 to slow. It's been growing much too quickly this year. 0:04:26.880 --> 0:04:29.600 For I'd like to sort of just step back and 0:04:29.760 --> 0:04:33.920 talk about say the last three or four years, you know, 0:04:34.000 --> 0:04:39.560 I feel like for the art or science of economics, 0:04:39.640 --> 0:04:43.680 however you view it, it's been a really weird few years. 0:04:43.720 --> 0:04:43.880 You know. 0:04:43.920 --> 0:04:47.559 We've had this massive shutdown of the economy like nothing 0:04:47.600 --> 0:04:51.320 we've ever seen, then this massive stimulus to bring it 0:04:51.360 --> 0:04:55.840 back to life, followed on by you know, a major 0:04:55.920 --> 0:04:59.120 war in Europe, what's it been like to be a 0:04:59.120 --> 0:05:03.000 really high level, very closely watched economists during all this? 0:05:03.320 --> 0:05:06.520 You know, are there lessons to be learned? Because I 0:05:06.520 --> 0:05:09.600 feel like it was so hard to predict and forecast 0:05:09.720 --> 0:05:13.360 anything throughout all of this. What's it been like during 0:05:13.400 --> 0:05:15.200 this whole last few years. 0:05:15.560 --> 0:05:19.120 Gosh, well, it's it's been exciting, to say the least. 0:05:19.279 --> 0:05:22.440 I think, you know, the word humble comes to mind. 0:05:23.720 --> 0:05:29.120 You know, it's been a humbling experience, and it's taught 0:05:29.200 --> 0:05:32.240 me and my team to be very creative in our 0:05:32.279 --> 0:05:37.440 approach to thinking about the outlook. And frankly, I've been 0:05:37.480 --> 0:05:40.279 looking forward to, you know, sort of the period that 0:05:40.320 --> 0:05:43.560 we're going through now and next year, where you know, 0:05:43.600 --> 0:05:47.599 it's a period of normalization as we get COVID further 0:05:47.680 --> 0:05:51.000 into the rear view mirror. I think, you know, what 0:05:51.040 --> 0:05:53.440 I'm starting to realize was some of the incoming data 0:05:53.520 --> 0:05:56.080 is that it seems like we go through these big 0:05:56.160 --> 0:05:59.440 crises and there's a lot of never will we ever 0:05:59.640 --> 0:06:02.160 and this after two thousand and eight as well, never 0:06:02.240 --> 0:06:04.960 will we ever take on debt again, never will we 0:06:05.040 --> 0:06:10.560 ever buy homes again? And guess what we do? We 0:06:10.600 --> 0:06:14.400 do all those things again? But you just have to 0:06:14.440 --> 0:06:17.640 get the crisis further into the rearview mirror. Folks were saying, 0:06:17.640 --> 0:06:20.000 we'll never go see a movie again, We're never going 0:06:20.040 --> 0:06:24.920 to the theater ever again. And you know, I'm pretty sure 0:06:24.960 --> 0:06:28.120 that Barben Hibern brought in a billion dollars through the 0:06:28.160 --> 0:06:32.000 box office. So I'm looking forward to more of the 0:06:32.080 --> 0:06:35.680 datas that folds to just see a normalization of the economy. 0:06:35.760 --> 0:06:39.359 I don't think a whole lot has changed in the 0:06:39.400 --> 0:06:41.920 way we go about our business. I think we just 0:06:42.000 --> 0:06:45.400 have to get a lot of these big distortions that 0:06:45.480 --> 0:06:47.440 are now unwinding out of the way. 0:06:48.520 --> 0:06:51.800 So you say you've been very creative in your approach, 0:06:52.320 --> 0:06:54.719 what does that entail? Because I remember during the pandemic 0:06:54.760 --> 0:06:56.360 a lot of people were looking at these sort of 0:06:56.440 --> 0:07:02.880 alternative data, looking at off occupancy rates, as you mentioned, 0:07:02.920 --> 0:07:06.880 movie theater going, you know, foot different foot traffic. All 0:07:06.960 --> 0:07:10.640 kinds of different measures had come about during the pandemic. 0:07:10.960 --> 0:07:13.880 They've sort of fallen off to the wayside more recently. 0:07:13.920 --> 0:07:16.760 But so what types of things does your team look 0:07:16.800 --> 0:07:17.200 at now? 0:07:17.960 --> 0:07:20.720 Yeah, Well, I think to me, what was really lucky 0:07:20.800 --> 0:07:25.160 is that even before the pandemic hit, you know, technology 0:07:25.240 --> 0:07:27.400 was advancing in a way that we were getting more 0:07:27.440 --> 0:07:31.720 and more private data sources and high frequency data forge sources, 0:07:31.840 --> 0:07:37.560 daily data that was becoming more prevalent, so that we 0:07:37.560 --> 0:07:40.680 were starting to find new ways to track the economy. 0:07:41.160 --> 0:07:46.480 The need for that during COVID really escalated and so 0:07:46.840 --> 0:07:48.960 you know, this is where we were using Google Earth 0:07:49.120 --> 0:07:52.160 to look at ships that were parked offshore that were 0:07:52.160 --> 0:07:55.560 not able to be unloaded, and more robust use of 0:07:55.640 --> 0:07:59.480 things like Google Maps and Open table to figure out 0:07:59.640 --> 0:08:02.400 a people were starting to move and shake again and 0:08:02.440 --> 0:08:06.680 going out to dine and that sort of thing, and 0:08:06.840 --> 0:08:11.160 that kind of data. Those data sets proliferated, and hey, 0:08:11.200 --> 0:08:15.080 for a time they were free. Now those data sets 0:08:15.600 --> 0:08:20.960 have become more and more expensive. But using those data 0:08:21.000 --> 0:08:24.040 sets instead of just you know, the traditional or in 0:08:24.080 --> 0:08:28.160 addition to the traditional government and other private sources that 0:08:28.200 --> 0:08:32.400 were already prevailing before COVID really helped us stay more 0:08:32.400 --> 0:08:36.520 abreast of exactly what was going on on the ground. 0:08:36.920 --> 0:08:39.280 And I tell you what, the fact that all of 0:08:39.320 --> 0:08:43.320 that's been introduced and used more robustly now means that 0:08:43.640 --> 0:08:48.480 also we have an even more and even larger portfolio 0:08:48.520 --> 0:08:51.439 of data to rely on during government shutdowns when the 0:08:51.480 --> 0:08:55.400 government data is not available. We used to fly blind 0:08:55.720 --> 0:08:58.400 during government shutdowns. And I say this because we're facing 0:08:58.480 --> 0:09:04.920 a possible government shutdown on September thirtieth, and depending on 0:09:05.240 --> 0:09:08.240 the breadth and the length of that, we might start 0:09:08.240 --> 0:09:12.960 to miss data points. And luckily we've got private sources 0:09:12.960 --> 0:09:16.160 and other high frequency data where we can have some 0:09:16.240 --> 0:09:19.200 sort of idea of what the economy is doing even 0:09:19.280 --> 0:09:22.760 if we're not getting the official government data. And so 0:09:23.360 --> 0:09:26.080 I think even in the field of economics, we've seen 0:09:26.120 --> 0:09:29.680 a good deal of transformation of technology and how we 0:09:29.800 --> 0:09:30.160 use it. 0:09:31.080 --> 0:09:33.000 You read my mind, Allan, because I wanted to ask 0:09:33.040 --> 0:09:38.040 you about that looming government shutdown potential government shutdown, and 0:09:38.200 --> 0:09:41.480 reading one of your recent notes, you seem to think 0:09:41.559 --> 0:09:45.960 that it could be a sort of catalyst for the 0:09:46.000 --> 0:09:49.880 FED to pause again in November. But walk us through 0:09:49.880 --> 0:09:52.160 exactly how you're thinking about it. Is it the lack 0:09:52.400 --> 0:09:55.560 of available data for the FED that would cause that, 0:09:55.720 --> 0:09:58.800 or is it the potential damage to the economy that 0:09:58.840 --> 0:10:01.120 could be done from a shutdown? Little of both. What's 0:10:01.160 --> 0:10:04.040 sort of the implications for us for this one more 0:10:04.160 --> 0:10:06.840 curveball to be thrown at the economy at this point 0:10:06.840 --> 0:10:07.360 in the cycle. 0:10:08.080 --> 0:10:10.559 A good economist always says it's a little bit of both, 0:10:12.200 --> 0:10:16.000 and economists right to added economists, but it really is. 0:10:16.120 --> 0:10:22.840 So in monetary policy making, uncertainty tends to lead to 0:10:22.960 --> 0:10:28.160 policy paralysis. And so certainly when you have a government 0:10:28.200 --> 0:10:33.080 shut down, and the breadth of it matters, right, if 0:10:33.120 --> 0:10:36.040 it's a partial shutdown, there are some agencies that will 0:10:36.080 --> 0:10:38.600 continue to operate, and we can continue to get things 0:10:38.679 --> 0:10:41.520 like hey, roll data, even if we don't get Census 0:10:41.520 --> 0:10:45.720 Bureau data and the like. If it's a full government 0:10:45.760 --> 0:10:50.120 shut down, then you really don't get any of the 0:10:50.160 --> 0:10:56.880 government data. And so if we're lacking data that the 0:10:56.920 --> 0:11:02.079 FED can officially think its teeth into, right, then that's 0:11:02.120 --> 0:11:05.679 going to lead to an inability to make a decision 0:11:06.280 --> 0:11:09.640 about the path for rates, And so that's sort of 0:11:09.679 --> 0:11:14.120 through the lens of the FED becomes foggy. The damage 0:11:14.160 --> 0:11:17.360 to the economy comes from, say a full government shutdown 0:11:17.440 --> 0:11:22.800 where all non essential workers are furloughed. And our estimate 0:11:22.880 --> 0:11:25.839 is that for every week of shutdown, it shaves off 0:11:25.840 --> 0:11:29.440 abouto point two percentage points from GDP growth, And so 0:11:29.480 --> 0:11:31.560 that's where you're actually getting to the meat of it 0:11:31.920 --> 0:11:36.920 that you have an impact on the outlook. Now, we 0:11:36.960 --> 0:11:39.120 can go back and look at past government shutdowns and 0:11:39.120 --> 0:11:42.480 see that, Okay, in hindsight, they were sort of a 0:11:42.480 --> 0:11:46.880 blip in the economic outlook. Because the government opens back up, 0:11:47.200 --> 0:11:50.600 you do have some permanent loss of activity. Workers that 0:11:50.679 --> 0:11:56.719 weren't buying lunch around the agencies, you know, those restaurants, 0:11:56.720 --> 0:11:58.920 coffee vendors, others are not going to make up for that. 0:11:59.520 --> 0:12:02.360 But you know, workers go back to work. Congress has 0:12:02.480 --> 0:12:05.560 always approved back pay for those furled workers, and so 0:12:05.679 --> 0:12:10.840 especially for income, it ends up being a blip for 0:12:10.920 --> 0:12:14.160 the time being. It's something that stays the Fed's hand. 0:12:14.240 --> 0:12:17.400 Now in this case, right, they've got a lot of 0:12:17.440 --> 0:12:19.440 time on their hands. They've got until the end of 0:12:19.440 --> 0:12:21.480 the year to decide if they're going to hike further, 0:12:21.679 --> 0:12:24.440 and they've left the door open tike further if needed. 0:12:24.920 --> 0:12:27.280 I have a strong view that they're done here, but 0:12:27.360 --> 0:12:31.240 they have left the door open. And so this is 0:12:31.320 --> 0:12:35.280 just something that you know, the incoming data that we've 0:12:35.320 --> 0:12:38.959 got over the next several weeks, say a month, tells 0:12:39.000 --> 0:12:42.400 me that it is highly unlikely they hike in November, 0:12:42.400 --> 0:12:45.839 but they still have the December meeting to consider after that. 0:12:52.600 --> 0:12:56.360 What potentially might make them hike in November or December. 0:12:56.360 --> 0:12:59.360 And if they are done here, can you lay out 0:12:59.440 --> 0:13:02.320 your views for what you expect in twenty twenty four, 0:13:02.320 --> 0:13:06.200 because I think you are projecting cuts starting in March. 0:13:06.880 --> 0:13:09.560 Yeah, yeah, that's right. So I think for them to 0:13:09.679 --> 0:13:13.240 hike in November and December, you know, two things have 0:13:13.320 --> 0:13:17.679 to happen. One, they're pleased. Let these seem with increased 0:13:17.679 --> 0:13:20.240 slack in the labor market and the slowdown in job gains. 0:13:20.280 --> 0:13:23.199 They noted that in the statement three month moving averages 0:13:23.240 --> 0:13:27.600 around one hundred and fifty thousand for payrolls. Now, let's 0:13:27.640 --> 0:13:32.160 say that that starts to re accelerate again, and so 0:13:32.200 --> 0:13:35.000 it doesn't look like that slow down in job gains 0:13:35.080 --> 0:13:39.840 is durable. And then you pair that with, say, core services, 0:13:40.240 --> 0:13:43.040 I'm going to strip out durable goods prices because they've 0:13:43.080 --> 0:13:46.840 been in deflation, and that's only twenty five percent of 0:13:46.880 --> 0:13:50.000 the core inflation bucket. And so it's services that really 0:13:50.040 --> 0:13:54.960 matter here. And let's say that core services also reaccelerate, 0:13:55.080 --> 0:13:58.560 and for that to happen, you really need core services 0:13:59.320 --> 0:14:02.960 to pop upward to a round point six percent month 0:14:02.960 --> 0:14:05.800 over month, which would be quite a deviation from the 0:14:05.880 --> 0:14:10.480 current trend. But those things together you could see putting 0:14:10.480 --> 0:14:13.960 a November hike back on the table, putting a hike 0:14:14.000 --> 0:14:18.120 in December solidly on the table. And so you know, 0:14:18.200 --> 0:14:21.080 I've got a strong conviction from the forecast that we 0:14:21.160 --> 0:14:24.240 have for the incoming data that it's not going to 0:14:24.320 --> 0:14:27.960 meet that criteria. But there's there's always a bar, and 0:14:28.720 --> 0:14:31.600 we just think that the bar is higher for them 0:14:31.640 --> 0:14:36.240 to do something further this year in twenty twenty four. 0:14:36.320 --> 0:14:39.080 The cuts that we have there, you know, you mentioned 0:14:39.120 --> 0:14:41.280 that we're expecting them to start in March. We have 0:14:41.320 --> 0:14:44.880 a quarterly paced twenty five basis points a quarter. You know, 0:14:44.960 --> 0:14:49.000 the FED is now expecting two cuts next year, and 0:14:49.920 --> 0:14:52.040 it may be a little tongue in cheek to say, 0:14:52.080 --> 0:14:54.640 but the difference between the Fed's expectation and our own 0:14:54.760 --> 0:14:58.000 is a difference of opinion around the outlook. So we 0:14:58.040 --> 0:15:02.480 have a forecast that this deceller and inflation continues. That 0:15:02.640 --> 0:15:06.600 means that even as the FED holds rates steady at 0:15:06.600 --> 0:15:08.680 between five and a quarter and five and a half percent, 0:15:08.720 --> 0:15:13.760 if inflation is falling, then real rates continue to remain 0:15:14.000 --> 0:15:17.360 very restrictive around that two percent level. In our forecast, 0:15:17.360 --> 0:15:22.080 which is historically quite high. The fed's forecast has real 0:15:22.160 --> 0:15:25.760 rates rising further from around one point nine percent at 0:15:25.760 --> 0:15:27.040 the end of this year to two and a half 0:15:27.040 --> 0:15:30.360 percent next year. You plug that into any macro model, 0:15:30.680 --> 0:15:32.840 and that doesn't look like a FED that's really wanting 0:15:32.840 --> 0:15:36.120 to achieve a soft landing. And I think therein lies 0:15:36.320 --> 0:15:43.000 that the issues that can come about with internal consistency 0:15:43.040 --> 0:15:48.520 when you're forecasting by committee. It's not quite consistent that 0:15:49.480 --> 0:15:52.240 the median forecasts of the FED suggests that real rates 0:15:52.240 --> 0:15:56.040 are going to need to rise six tenths further next year, 0:15:56.920 --> 0:16:01.200 yet they're wanting to achieve a soft lane. There's something 0:16:01.240 --> 0:16:01.680 off there. 0:16:02.200 --> 0:16:04.600 Can you talk about real rates a bit more? Why 0:16:04.880 --> 0:16:07.520 do real rates matter? And can you talk about the 0:16:07.600 --> 0:16:10.240 sort of through line to the real economy. 0:16:10.440 --> 0:16:14.400 Yeah, so real rates matter both from a company perspective 0:16:14.400 --> 0:16:19.000 in terms of profitability, from how restrictive credit is in 0:16:19.040 --> 0:16:24.560 the economy, banking's ability and willingness to lend. And you know, 0:16:24.600 --> 0:16:27.040 if you think about the where the FED thinks the 0:16:27.640 --> 0:16:30.960 neutral rate of interest should be, they think the neutral 0:16:31.040 --> 0:16:34.280 rate of interest is half a percent for the real rate. 0:16:35.000 --> 0:16:39.560 So two percent real rate is really restrictive, really far 0:16:39.640 --> 0:16:43.680 into restrictive territory, and you know, feeding that through into 0:16:43.720 --> 0:16:46.920 macro models would tell you that that's going to have 0:16:47.520 --> 0:16:52.520 a pretty big downward impact on the economy, and I 0:16:52.520 --> 0:16:57.080 think much larger than what the FED thinks is necessary 0:16:57.120 --> 0:17:02.640 in order to flow inflation. I don't think individual policy 0:17:02.680 --> 0:17:05.040 makers are really thinking that we need to have two 0:17:05.080 --> 0:17:07.679 and a half percent real interest rates next year, that 0:17:07.720 --> 0:17:11.360 they need to be two percentage points higher than neutral. 0:17:11.680 --> 0:17:13.119 But that's what it looks like if you were to 0:17:13.200 --> 0:17:18.439 just take their forecasts at face value. The impact to 0:17:18.520 --> 0:17:23.520 the real economy is essentially what we've been seeing, right. 0:17:23.600 --> 0:17:26.280 It's not that the Fed's interest rates have not had 0:17:26.280 --> 0:17:30.160 an impact. You know, we've already gone through a recession 0:17:30.200 --> 0:17:33.760 in housing. We saw the impact on housing first and foremost. 0:17:34.400 --> 0:17:37.440 It's the very interst rate sensitive area of the economy. 0:17:38.200 --> 0:17:42.840 We've seen higher interest rates have the effect of flowing 0:17:42.840 --> 0:17:46.960 demand for credit and credit availability, making credit more expensive. 0:17:48.119 --> 0:17:51.639 We are of the camp that monetary policy works with 0:17:51.840 --> 0:17:56.000 long lags, and that is the biggest disagreement, the outstanding 0:17:56.000 --> 0:18:02.440 disagreement on the FMC. Those that believe monetary policy works 0:18:02.440 --> 0:18:04.959 pretty quickly through the economy and those that believe it 0:18:05.000 --> 0:18:08.719 works with a lag. So while it may look like 0:18:08.800 --> 0:18:13.280 we've escaped unscathed after such a rapid pace of tightening 0:18:13.320 --> 0:18:17.520 and monetary policy, we think that all of the impacts 0:18:17.560 --> 0:18:21.840 have not yet been felt, and that uncertainty alone means 0:18:21.920 --> 0:18:26.879 that there's a good deal of downside risk to the 0:18:26.920 --> 0:18:29.359 economy that we think is out there. 0:18:29.760 --> 0:18:33.120 Obviously, the other big elephant in the room these days 0:18:33.320 --> 0:18:37.600 is the price of oil. West Texas Intermediate is back 0:18:37.640 --> 0:18:41.560 in the ninety dollars a barrel range, mostly a supply 0:18:41.800 --> 0:18:45.199 issue with Russia and some of the OPAC nation in 0:18:45.200 --> 0:18:49.040 Saudi Arabia really limiting production. You do seem out an 0:18:49.040 --> 0:18:52.400 interesting note out on this about a week ago, and 0:18:53.080 --> 0:18:54.840 you know, to summarize and correct me if I'm getting 0:18:54.840 --> 0:18:58.240 this wrong, But basically it seems like you think a 0:18:58.240 --> 0:19:00.879 lot of people are worried about the inflation are aspects 0:19:01.080 --> 0:19:04.919 of oil rising like this, But you point out it 0:19:04.920 --> 0:19:07.720 should take a while for it to feed into the 0:19:07.720 --> 0:19:12.720 core measures of inflation that exclude energy and food, but 0:19:12.760 --> 0:19:16.600 that perhaps that sort of tax on the consumer element 0:19:17.040 --> 0:19:21.320 of oil is a bigger story here. So how big 0:19:21.359 --> 0:19:24.920 of a risk is this oil price shock to both 0:19:24.960 --> 0:19:29.199 sides of the equation, growth and inflation, because I think 0:19:29.280 --> 0:19:30.920 one thing I would point out I think is different 0:19:30.960 --> 0:19:32.760 about this than a lot of oil price shocks. A 0:19:32.800 --> 0:19:34.840 lot of times you get this spike in oil prices 0:19:34.920 --> 0:19:37.600 because of say a hurricane in the Gulf for some 0:19:37.840 --> 0:19:43.119 geopolitical tension that really ratches up the speculation in the market, 0:19:43.160 --> 0:19:45.679 that boosts the price, and all that turns out to 0:19:45.680 --> 0:19:49.639 be ephemeral and short lived. Personally, I'm not sure if 0:19:49.640 --> 0:19:53.119 that's the case this time, with the OPEC producers really 0:19:54.720 --> 0:19:58.240 seeming very happy to keep the price higher for the 0:19:58.280 --> 0:20:00.760 near future. But I'm wondering, how you thinking about it. 0:20:00.800 --> 0:20:03.920 How long do we need to see prices elevated for 0:20:04.080 --> 0:20:07.600 the risk to really become acute, both from an inflationary 0:20:08.280 --> 0:20:10.119 and economic perspective. 0:20:10.680 --> 0:20:13.760 Yeah, so it's great points we like to point to 0:20:13.800 --> 0:20:17.120 weather forecasters and commodity strategist to make us feel better 0:20:17.160 --> 0:20:19.760 as economists when we're trying to get things right in 0:20:19.800 --> 0:20:24.000 the economy. It's a really tough job because there are 0:20:24.000 --> 0:20:26.600 a lot of people that will tell you only geopolitics 0:20:26.640 --> 0:20:30.840 matters for oil prices, and so I have no idea 0:20:30.840 --> 0:20:32.879 where oil prices will go, But I will tell you 0:20:32.880 --> 0:20:35.919 that our commodity stratus do believe, as you noted, that 0:20:36.000 --> 0:20:39.920 this may be more durable, but it is a mixed 0:20:39.960 --> 0:20:43.320 bag for the US economy. When it is a supply 0:20:43.480 --> 0:20:47.000 shock and not a demand shock. Demand shock would be 0:20:47.119 --> 0:20:50.919 that just the strength of the US economy and global 0:20:50.960 --> 0:20:54.360 economy is so great that demand is outstripping supply. That 0:20:54.400 --> 0:20:57.520 tends to have a more muted impact on the economy 0:20:57.800 --> 0:21:00.960 than if it's a supply stock where the amount of 0:21:00.960 --> 0:21:06.080 barrels that were producing globally just drops, And so in 0:21:06.119 --> 0:21:11.000 that case you do get an impact on demand on 0:21:11.040 --> 0:21:15.320 top of the impact on inflation. So we've modeled these changes, 0:21:15.400 --> 0:21:19.040 and a ten percent increase in oil prices does raise 0:21:19.080 --> 0:21:23.439 headline inflation in the US by about thirty five basis 0:21:23.480 --> 0:21:27.119 points on headline over a three month period if you 0:21:27.240 --> 0:21:31.879 just modeled as a one offstock. But the transfer to 0:21:32.160 --> 0:21:35.880 core prices in the US, because really you're only immediately 0:21:36.040 --> 0:21:42.200 impacting transportation prices in core inflation, it's only about two 0:21:42.240 --> 0:21:45.760 to three BIPs, right, two to three basis points on 0:21:45.880 --> 0:21:51.680 core inflation, So a really really small effect. What outweighs that? 0:21:51.840 --> 0:21:54.439 And I think you were getting at this and what 0:21:54.480 --> 0:21:57.879 we addressed in the note is that it acts as 0:21:57.880 --> 0:22:01.320 a tax on households. If you are paying more to 0:22:01.400 --> 0:22:03.760 gas up at the pump, then you are having to 0:22:03.880 --> 0:22:09.320 pull spending from elsewhere, and so it tends to reduce 0:22:09.359 --> 0:22:14.520 consumer buying power and weighs on not just real income growth, 0:22:14.520 --> 0:22:18.920 but real consumer spending, and that is the predominant concern 0:22:19.600 --> 0:22:22.960 of the FED today. So it's really a blessing in disguise. 0:22:23.480 --> 0:22:27.320 If you're the FED and you have been trying to 0:22:27.440 --> 0:22:31.520 slow the economy and the consumer has just been frustratingly resilient. 0:22:31.840 --> 0:22:36.159 If you can get some additional help from higher gas prices, 0:22:36.760 --> 0:22:41.560 then you might welcome that. It becomes problematic only if 0:22:41.560 --> 0:22:45.000 it is sustained over longer periods of time, and then, 0:22:45.040 --> 0:22:51.120 as chair Pal noted at the FED meeting, it then 0:22:51.240 --> 0:22:54.480 becomes something that could pose a risk to inflation expectations, 0:22:54.560 --> 0:22:57.560 raising inflation expectations, but it does have to be sustained 0:22:57.600 --> 0:22:58.200 for some time. 0:22:59.160 --> 0:23:03.080 So, Mike, rising oil prices were another elephant in the room. 0:23:03.119 --> 0:23:06.320 But I can actually name like a bunch more, including 0:23:06.359 --> 0:23:10.919 that consumer loan repayments are restarting. We also had a 0:23:10.960 --> 0:23:14.880 survey that we had done at Bloomberg, where the majority 0:23:14.920 --> 0:23:18.199 of respondents we had asked about consumer spending said that 0:23:18.280 --> 0:23:21.280 personal consumption. They see personal consumption going down in the 0:23:21.280 --> 0:23:23.679 first quarter of twenty twenty four. So how do you 0:23:23.920 --> 0:23:26.960 see all of these factors impacting the consumer? 0:23:27.400 --> 0:23:30.159 Yeah, so I think the student loan, the resumption of 0:23:30.160 --> 0:23:34.520 the student loan debt payments is a great point to note. 0:23:34.560 --> 0:23:37.199 We have tried to use surveys to get at the 0:23:37.280 --> 0:23:41.520 percentage of student loan borrowers that say they are going 0:23:41.560 --> 0:23:43.560 to start paying that back right away because there is 0:23:43.600 --> 0:23:45.520 an option to be able to delay that into the 0:23:45.520 --> 0:23:48.879 second court, sorry, the first quarter of twenty twenty four, 0:23:50.080 --> 0:23:54.800 and I like to think that, you know, as good 0:23:54.880 --> 0:23:58.280