WEBVTT - Surveillance: Hard Landing with Dudley 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.799 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.600 and of course on the Bloomberg terminal. This is a 0:00:29.720 --> 0:00:32.480 joy after I'm teen years at the Bank of America 0:00:32.600 --> 0:00:36.879 and really truly someone really glowed perfectly to the American 0:00:36.960 --> 0:00:42.360 housing market. Michelle Meyer has changed the shingle to MasterCard Economics. 0:00:42.440 --> 0:00:45.680 She is the US chief Economists at MasterCard Economics, and 0:00:45.800 --> 0:00:49.280 she is brave this morning to come on Surveillance. Michelle, boy, 0:00:49.320 --> 0:00:52.000 it's your language changed. You're moving from the big bank 0:00:52.080 --> 0:00:57.320 out the MasterCard. You are all wallet share and wallet shift. 0:00:57.960 --> 0:01:03.080 How much is my wallet shift after this weekend? Well, Tom, 0:01:03.120 --> 0:01:05.360 it's wonderful to be back on with you, and thank 0:01:05.360 --> 0:01:07.759 you team for for having me back and being able 0:01:07.800 --> 0:01:10.240 to now honor to be able to not represent and 0:01:10.319 --> 0:01:13.759 that's to part Economics Institute. As you noted, Tom, it's 0:01:13.800 --> 0:01:16.919 really is about the consumer. The consumer is the pulse 0:01:16.959 --> 0:01:19.679 on the economy and what we're paying really really careful 0:01:19.680 --> 0:01:22.480 attention to is whether or not you are seeing those 0:01:22.520 --> 0:01:25.399 wallet chair ships. Right, we're able to, you know, really 0:01:25.400 --> 0:01:29.080 get an understanding of of of the trends in consumer 0:01:29.200 --> 0:01:32.240 spending on a granular level, you know, in terms of 0:01:32.280 --> 0:01:35.520 the different categories. Spending on experience is spending on goods 0:01:36.040 --> 0:01:39.920 and clearly spending on you know, necessities. I mean, I 0:01:39.920 --> 0:01:42.600 think that's one of the key stories right now is 0:01:42.640 --> 0:01:47.520 with the inflation shock of really concentrate and necessities food, gasoline. 0:01:48.720 --> 0:01:52.280 You know, that's been a big, big, big increase in 0:01:52.280 --> 0:01:56.880 the parents out there. Tuition and summer break is under experiences. 0:01:57.000 --> 0:01:59.320 Just in case you didn't know that. What do you 0:01:59.400 --> 0:02:02.240 learn from charge cards? I mean, your granularity in the 0:02:02.320 --> 0:02:05.720 housing market was legendary. When you look at what we 0:02:05.800 --> 0:02:10.240 actually do with our various sundry charge cards, what does 0:02:10.280 --> 0:02:15.200 you tell you about our share and shift? Well, look, 0:02:15.240 --> 0:02:19.760 I mean clearly, the the data is robust and and 0:02:20.240 --> 0:02:21.959 uh you know, I mean the main data who we're 0:02:21.960 --> 0:02:24.200 looking at the master card spending pull Stata, which is 0:02:24.240 --> 0:02:26.520 going to be able to capture all types of emails 0:02:26.560 --> 0:02:29.520 to some extent um. So it's a really holistic view 0:02:29.720 --> 0:02:33.120 of the consumer um and right now, you are seeing 0:02:33.200 --> 0:02:37.280 the consumer generally still bugging along, spending very strongly. Out 0:02:37.280 --> 0:02:40.160 of course, we are looking at nominal spending trends, and 0:02:40.280 --> 0:02:43.000 part of that increase is reflecting what you all were 0:02:43.040 --> 0:02:47.040 just talking about with this this incredible inflation environment. UM. 0:02:47.120 --> 0:02:49.720 So once you adjust for that, real spending is you know, 0:02:49.919 --> 0:02:53.120 clearly more more modest given out price pressure. UM. But 0:02:53.200 --> 0:02:57.079 the consumer is still out spending on a variety of items, 0:02:57.120 --> 0:03:00.799 whether it is those necessities or still even durable goods. 0:03:00.840 --> 0:03:02.880 You know, we're looking at things like furniture spending, which 0:03:02.880 --> 0:03:05.320 is still looking very strong. Tom, you mentioned my love 0:03:05.360 --> 0:03:07.600 for the housing market which still exists, and we're looking 0:03:07.680 --> 0:03:12.360 at you know, really um detailed spend on housing related items, 0:03:12.360 --> 0:03:15.760 which at the moment are still looking quite strong. And 0:03:15.760 --> 0:03:19.400 Tom was talking earlier Michelle about Kent tiles of of income. 0:03:19.680 --> 0:03:23.040 How much is what you're capturing really the upper echelons 0:03:23.080 --> 0:03:26.440 of earners and not necessarily a holistic picture of the 0:03:26.600 --> 0:03:30.919 entire consumer market. Well, I think whenever you're looking at 0:03:30.960 --> 0:03:33.919 some you know, high frequency data that's not the official 0:03:33.960 --> 0:03:36.040 stats coming out the government, you have to consider what 0:03:36.120 --> 0:03:38.840 your panel looks like and what you're capturing. For the 0:03:39.080 --> 0:03:41.880 for the broad economy. I mean, my senses is that 0:03:41.960 --> 0:03:45.760 it is a really good representation. Um, you know, I 0:03:45.800 --> 0:03:49.480 think the general risk is that the very tears are 0:03:49.520 --> 0:03:53.120 probably a little bit underrepresented. In the middle of the population. 0:03:53.400 --> 0:03:57.080 Is really what we're grasping there, um, you know, for 0:03:57.080 --> 0:04:00.920 for the really low low income folks that aren't using 0:04:01.000 --> 0:04:03.880 other types of payments, that are mostly using cash, that's 0:04:03.920 --> 0:04:05.760 gonna be a really hard thing to capture in any 0:04:05.800 --> 0:04:08.880 of these types of high frequency data points. Um. But 0:04:08.960 --> 0:04:11.200 to be able to get that pulse of that you know, 0:04:11.400 --> 0:04:13.720 middle income consumer, I think it's really the key. The 0:04:13.760 --> 0:04:15.920 reason why I asked Michelle is because for a long time, 0:04:15.960 --> 0:04:18.000 people didn't even have to dig into their savings. They 0:04:18.000 --> 0:04:20.560 had so much cash they could just keep deploying it. 0:04:20.839 --> 0:04:22.760 I want to get a sense of whether the ongoing 0:04:22.839 --> 0:04:26.279 spending momentum that we're seeing is really coming from people 0:04:26.320 --> 0:04:28.960 continuing to dig into their savings, or whether they're starting 0:04:28.960 --> 0:04:31.159 to borrow more, whether they're starting to leverage up, and 0:04:31.160 --> 0:04:36.640 whether that could actually get crimped by higher yields. Yeah. So, 0:04:36.680 --> 0:04:38.880 I mean, if you look at the past year, it 0:04:39.000 --> 0:04:42.760 was extraordinary and that we had very, very low debt 0:04:43.000 --> 0:04:46.200 right the debt debt service ratio, the financial applications ratio 0:04:46.320 --> 0:04:49.839 hit wreckor lows across a variety of income cohorts. And meanwhile, 0:04:49.880 --> 0:04:52.920 we had extraordinary amount of savings given the environment we 0:04:52.920 --> 0:04:56.039 were in, which was this you know, spectacular physical stimulus 0:04:56.080 --> 0:04:59.360 and montary stimulus. That's reversing right, the fatas hiking interest 0:04:59.440 --> 0:05:02.320 rates not saying the same degree in fiscal stimulus. So 0:05:02.400 --> 0:05:05.120 naturally we're gonna say reversal there. We're saving starts to 0:05:05.160 --> 0:05:07.880 come down, um, and leverage starts to come up. That's 0:05:07.880 --> 0:05:11.400 where we are in the cycle. UM. So it's quite reasonable. 0:05:11.480 --> 0:05:14.080 And I think that the silver lining is that at 0:05:14.120 --> 0:05:17.679 least we have those buffers UM. And that's really important 0:05:17.680 --> 0:05:20.040 to keep in mind when we're thinking about these headwinds 0:05:20.040 --> 0:05:22.839 that are hitting the economy is what's the starting point? 0:05:22.920 --> 0:05:25.280 And the starting point for the consumer is a more 0:05:25.320 --> 0:05:29.279 solid one than we've seen during prior cycles. Brian emails 0:05:29.320 --> 0:05:33.720 in from over by Hill's Kitchen, and Brian Michelle is 0:05:33.880 --> 0:05:36.240 asking you what the when you look at all the 0:05:36.320 --> 0:05:38.880 charge card data and that what does it change to 0:05:38.960 --> 0:05:42.680 the duration the X axis of your inflation? Guests, Brian 0:05:42.720 --> 0:05:50.480 wants to know that before eight thirty this morning. Help sure. So, look, 0:05:50.520 --> 0:05:54.119 I mean the inflation story I think is very very clear, 0:05:54.160 --> 0:05:56.520 which is that we are an environment where inflation has 0:05:56.600 --> 0:06:00.560 risen meaningfula particularly well, come on, come on to the chase. 0:06:00.640 --> 0:06:03.800 I'm not talking to Alexander. I'm talking to Michelle Myer Willing. 0:06:03.839 --> 0:06:07.160 Inflation sustained or do you buy the story inflation is 0:06:07.200 --> 0:06:09.320 going to ease up? Brian hold on, Brian, he's on 0:06:09.360 --> 0:06:14.000 the phone here, Brian hold On, Okay, go told Brian, 0:06:14.120 --> 0:06:17.160 doesn't give you one minute. Um, Look, I think inflation 0:06:17.320 --> 0:06:20.520 is going to come off these extraordinary highs, but not 0:06:20.600 --> 0:06:23.839 to play, not quickly. Um, there's a running of price pressure. 0:06:23.880 --> 0:06:27.599 Inflation expectations have increased, and companies have pricing power, and 0:06:27.640 --> 0:06:30.559 consumers have the ability to spend more as well, given 0:06:30.600 --> 0:06:33.400 that they're also seeing wage increases. So you have both 0:06:33.800 --> 0:06:37.880 a wage push and a cost push, and that is meaningful. 0:06:37.920 --> 0:06:39.840 So it's gonna take a while for that to come 0:06:39.839 --> 0:06:43.000 off entirely. That a clear answer. That was great, That 0:06:43.080 --> 0:06:45.520 was classic. That was like, it feels like this v 0:06:45.640 --> 0:06:50.800 body course would be Bran report. Accompliments to Michelle. Thank you. 0:06:50.960 --> 0:06:52.840 It's gonna catch up. It's always right to see a 0:06:52.960 --> 0:07:03.640 master Card. You know that Michell of master Card, Dan Skelly, 0:07:03.800 --> 0:07:05.680 they head of market research and strategy of Mark and 0:07:05.760 --> 0:07:07.880 Standing Weft Management. And then let's stop there. You've been 0:07:08.000 --> 0:07:10.200 right this defensive shift. The question I think for a 0:07:10.240 --> 0:07:11.840 lot of people and equities at the moment is whether 0:07:11.880 --> 0:07:14.920 there is a tanctical opportunity to lean the other way? 0:07:15.240 --> 0:07:18.760 What would you say to those people? Not yet? Jonathan 0:07:19.120 --> 0:07:22.320 and so in good morning, Jonathan and Tom and Lisa. 0:07:22.440 --> 0:07:25.880 So look we're not there yet. UM. The bond market, 0:07:25.960 --> 0:07:29.400 the interest rate expectations have come a long way, as 0:07:29.480 --> 0:07:32.440 we all know from last fall, UM. And so look 0:07:32.480 --> 0:07:34.800 the markets are now called it nine ten percent off 0:07:34.840 --> 0:07:37.920 their January all time highs UM. But we don't think 0:07:38.000 --> 0:07:40.440 there's two things that are priced in at these levels, right. 0:07:40.560 --> 0:07:44.040 So if we're expecting these rate heights and the markets 0:07:44.080 --> 0:07:47.080 digested that with just a ten percent move, what can 0:07:47.160 --> 0:07:50.400 we expect for QT and for balance sheet reduction? And 0:07:50.520 --> 0:07:52.800 we can talk more about that, but also what can 0:07:52.880 --> 0:07:54.560 we think about in terms of the hits of the 0:07:54.640 --> 0:07:58.160 consumer and owns that our economists, as you know, recently 0:07:58.240 --> 0:08:00.920 marked down her GDP forecast for this year by about 0:08:00.920 --> 0:08:04.000 a percentage point due to higher oil and gas prices. 0:08:04.440 --> 0:08:06.840 So we're not there quite yet, Jonathan. We're also, we 0:08:06.880 --> 0:08:10.120 would add, we're entering a seasonal weak period. We're gonna 0:08:10.160 --> 0:08:12.920 have some tax bills come do. Maybe Tom just finished 0:08:13.000 --> 0:08:15.800 his as you as you noted, but the summer months 0:08:15.840 --> 0:08:18.440 are seasonally weak for the markets. Dan. When you take 0:08:18.480 --> 0:08:20.880 a look at tenure yield it's almost at three percent. 0:08:21.400 --> 0:08:23.560 At what level do they start to matter? I mean, 0:08:23.600 --> 0:08:25.360 we talked about this and I go back to something 0:08:25.440 --> 0:08:27.520 we talked about two years ago, and it's become almost 0:08:27.560 --> 0:08:30.360 obsolete at a time when yields have gone far faster 0:08:30.600 --> 0:08:32.680 and far higher than a lot of people could thought. 0:08:33.040 --> 0:08:36.280 What are you looking for here? So at least it's 0:08:36.360 --> 0:08:39.280 your point. You gotta consider two factors. One is the 0:08:39.440 --> 0:08:43.000 level and the speed and the pace of the increases. 0:08:43.080 --> 0:08:46.520 And look, I think to date we've seen equity markets 0:08:46.600 --> 0:08:50.560 discount incredibly fast paced. Right, so we've seen that last 0:08:50.600 --> 0:08:52.640 call it three or four months. We're just talking about 0:08:52.960 --> 0:08:56.480 how fast the pendulum swung in terms of great expectations 0:08:57.120 --> 0:08:59.240 um and so look, I think you've seen most of 0:08:59.320 --> 0:09:02.439 that discount in the equity market. On the other note, 0:09:02.520 --> 0:09:05.319 when you think about level. Look, we've been arguing Mike 0:09:05.360 --> 0:09:09.199 Wilson via his valuation math, has been arguing that higher 0:09:09.280 --> 0:09:12.960 rates ultimately get translated into lower multiples. Okay, and we've 0:09:13.000 --> 0:09:15.920 seen multiples come down quite a bit for the index, 0:09:16.559 --> 0:09:18.679 but we think there could be further d rating to go. 0:09:18.880 --> 0:09:21.480 And so you know when you talk about like um 0:09:21.679 --> 0:09:24.240 an absolute level that really matters. If you get that 0:09:24.440 --> 0:09:27.840 much above three percent, call it three and a quarter, now, 0:09:27.960 --> 0:09:30.600 that's going to take another couple of multipoints, multiple points 0:09:30.640 --> 0:09:33.640 out of the event. Then I look at the index 0:09:33.760 --> 0:09:36.560 now and I look at sectors, and I just simply 0:09:36.720 --> 0:09:39.160 put do I want to be passive or do I 0:09:39.240 --> 0:09:44.000 want to be active? Here? Definitely a time to be active, 0:09:44.160 --> 0:09:48.080 tom And truly an excellent question question. So the last 0:09:48.160 --> 0:09:52.360 several years really going into COVID and coming out of 0:09:52.400 --> 0:09:56.280 COVID was marked by a really tremendous wave for passive. 0:09:56.440 --> 0:09:58.959 Right you could be in the index and do incredibly well, 0:09:59.440 --> 0:10:02.559 a period of high returns at absolute low volatility, and 0:10:02.840 --> 0:10:06.360 and frankly that repeated the previous cycle that was the 0:10:06.480 --> 0:10:10.280 case from O eight oh nine until UH and things 0:10:10.320 --> 0:10:13.120 have really changed. We've seen a true regime shift tom 0:10:13.559 --> 0:10:16.240 at all levels of the economy in the market, and 0:10:16.320 --> 0:10:20.599 we're seeing volatility obviously increased. We've had tremendous volatility this 0:10:20.760 --> 0:10:24.280 year given the Fed interest rate cycle, but also geopolitics 0:10:24.360 --> 0:10:27.720 obviously everything going on tragically in Ukraine as well. Uh 0:10:27.800 --> 0:10:31.800 And so given higher volatility, given a late a cycle 0:10:31.880 --> 0:10:35.480 that's a pre approaching late innings, we're seeing the greater 0:10:35.559 --> 0:10:39.160 dispersion between stocks and sectors. And to the point earlier, 0:10:39.400 --> 0:10:42.280 you want to be very cognizant of which sectors you overweight, 0:10:42.840 --> 0:10:45.720 and so the defensive sectors have started to emerge as 0:10:45.760 --> 0:10:50.160 a leadership group. They don't happen to be uh tremendously overweighted, 0:10:50.200 --> 0:10:52.360 and some of the market cap weighted index, as you know, 0:10:53.120 --> 0:10:55.160 just to round things out, we can squeeze this in. 0:10:55.240 --> 0:10:58.160 I think, is it strange to see this with it's 0:10:58.240 --> 0:11:00.840 up fifty visis points of the last couple of weeks 0:11:00.880 --> 0:11:03.040 on a tenure, to see the defensives do so well, 0:11:03.320 --> 0:11:07.040 the utilities erupt, they outperform, healthcare up, the likes of 0:11:07.080 --> 0:11:09.000 the banks down and down hard. What does that speak 0:11:09.040 --> 0:11:10.920 to you? What does it tell you about where beyond 0:11:10.960 --> 0:11:14.839 the cycle? Yeah, it's an excellent point, John, So you're 0:11:14.880 --> 0:11:17.839 seeing mixed messages from the bond market and stock market, 0:11:17.920 --> 0:11:21.040 and typically what we've observed over time, and Mike's written 0:11:21.080 --> 0:11:23.559 about this, is that when you see that divergence in 0:11:23.679 --> 0:11:26.520 message from fixed income, from the bond market and from 0:11:26.520 --> 0:11:30.560 the stock market, typically stocks are telling you very interesting signals. 0:11:30.840 --> 0:11:34.520 And so to your point, that defensive leadership is telling 0:11:34.559 --> 0:11:37.600 you definitely that stocks are more worried about growth, right, 0:11:37.679 --> 0:11:40.199 and so that's the tricky tradeoff that the bet is 0:11:40.600 --> 0:11:43.440 certainly going to consider them the next several months. They've 0:11:43.480 --> 0:11:47.480 talked very aggressively about doing everything it takes to tame 0:11:47.559 --> 0:11:49.839 the inflation tiger and put it back in its cage, 0:11:50.200 --> 0:11:52.920 but we don't know if that's possible. Dan Scalia, Morchus Stanley, 0:11:52.960 --> 0:12:02.360 Thank you, sir. This is the must read of the morning, 0:12:02.440 --> 0:12:05.360 because not only does Bill Dudley's an academic, but also 0:12:05.440 --> 0:12:08.800 as someone stealed and market economics as he was for 0:12:08.920 --> 0:12:13.120 years at Goldman, Sachs really gets out the timeline and 0:12:13.280 --> 0:12:16.319 says when and what is so important here in speaking 0:12:16.360 --> 0:12:18.920 to the former president of the New York Fed is 0:12:19.000 --> 0:12:22.359 he addresses with courage, not the easy guests of the seventies, 0:12:22.800 --> 0:12:26.160 but things to learn from the nineteen sixties. William Dudley 0:12:26.240 --> 0:12:30.040 senior advisor to Bloomberg Economics and writes uh for US 0:12:30.400 --> 0:12:34.000 at Bloomberg Opinion. Bill Dudley, Robert J. Samuelson of The 0:12:34.040 --> 0:12:38.920 Washington Post and his magisterial The Great Inflation and It's Aftermath. 0:12:39.480 --> 0:12:44.960 Why is now like Walter Heller and Vietnam. Well, one, 0:12:45.040 --> 0:12:47.720 we have lots of fiscal stimulus like we did then, 0:12:47.960 --> 0:12:50.360 and then we had the Great Society Programs in Vietnam 0:12:50.440 --> 0:12:52.760 war spending. And the second thing is the labor market 0:12:52.880 --> 0:12:55.800 is extraordinarily tight. You know, everyone's focused on what's having 0:12:55.840 --> 0:12:58.439 a headline inflation and has it peaked? And I think 0:12:58.480 --> 0:13:00.640 they're missing the force from the tree is here, because 0:13:00.880 --> 0:13:02.880 what's really going on is the layer market has not 0:13:03.040 --> 0:13:06.000 been this type in many, many, many days. And that's 0:13:06.040 --> 0:13:07.960 the problem because if the layer market is too tight, 0:13:08.320 --> 0:13:11.120 wages are going to continue to strengthen. And if wages 0:13:11.160 --> 0:13:13.360 continue to strengthen, we're not going to go back to 0:13:13.400 --> 0:13:16.840 two percent inflation. Bill Dudley, that intern at Goldman Sexyn 0:13:16.960 --> 0:13:19.679 Hats said that on the show here a couple of 0:13:19.800 --> 0:13:24.640 days ago that the labor market is shockingly tight. Does 0:13:24.720 --> 0:13:27.800 that lead to the wage spiral? Michaelle Meyer just spoke 0:13:27.840 --> 0:13:30.640 about it, and frankly, that is the collective memory of 0:13:30.679 --> 0:13:34.280 the sixties, isn't it. Well. I'm not sure how fast 0:13:34.400 --> 0:13:36.160 what inflation will go up because we have a lot 0:13:36.200 --> 0:13:38.520 of other factors pushing inflation down. But I think the 0:13:38.640 --> 0:13:40.760 key thing to focus on is if the labor markets 0:13:40.840 --> 0:13:43.640 this type, what's going to happen to wage inflation? Wage 0:13:43.640 --> 0:13:46.240 inflation currently running around five and a half percent, depending 0:13:46.240 --> 0:13:49.960 on which measure you you use, five alcent wage inflation 0:13:50.120 --> 0:13:52.720 is not consistent with the sense to percent inflation objective. 0:13:53.040 --> 0:13:54.920 So how do you get inflation down? You need to 0:13:55.000 --> 0:13:58.280 push the unemployer rate up, and that's the problem. Every 0:13:58.360 --> 0:14:01.280 time the federies are added type Terrey policy enough to 0:14:01.360 --> 0:14:04.000 push the unemployment rate up, they've ended up in a 0:14:04.040 --> 0:14:06.559 full scale recession. The key question just when is this 0:14:06.600 --> 0:14:08.320 gonna occur? And it's not gonna occur in the near 0:14:08.440 --> 0:14:10.840 term because the Fed hasn't yet made Terrey policy type 0:14:11.600 --> 0:14:13.959 might not even happen in twenty three because we don't 0:14:14.000 --> 0:14:16.240 really know how aggressive the fenter reserve is going to 0:14:16.280 --> 0:14:19.000 be in terms of tightening Terrey policy but if the 0:14:19.080 --> 0:14:22.920 FED delays, all that means is inflation will get more entrenched, 0:14:23.240 --> 0:14:25.000 and then they'll have to do more later. So a 0:14:25.360 --> 0:14:28.040 hard winning is inevitable. Whether it happens in twenty three 0:14:28.120 --> 0:14:29.880 or twenty four, that depends on the Fed. Do you 0:14:29.920 --> 0:14:33.120 anticipate they will delight by somewhat you've heard Bill? How 0:14:33.160 --> 0:14:35.840 do you think they will respond to a mechanical peak 0:14:35.880 --> 0:14:39.040 in inflation this year? Well, I think they're gonna take 0:14:39.120 --> 0:14:41.320 some signal from the fact that inflation is coming down 0:14:41.360 --> 0:14:43.720 because it's going to support their story about the transitory 0:14:43.840 --> 0:14:46.560 factors being a primary driver of y. Inflation moved up. 0:14:47.240 --> 0:14:49.120 But you know, if inflation is eight percent for a 0:14:49.200 --> 0:14:51.000 year and then two percent for a year because all 0:14:51.000 --> 0:14:53.880 the transitory factors are washing out, the average is still five. 0:14:54.400 --> 0:14:56.400 And you know, if the labor market continues to tighten, 0:14:56.440 --> 0:14:58.520 which I think is likely. You know, the automployer rate 0:14:58.640 --> 0:15:00.880 is already it's a three points expercent. It couldn't fall 0:15:00.920 --> 0:15:03.480 even further. Uh, it doesn't really matter what happens the 0:15:03.520 --> 0:15:06.400 transitory inflation what It doesn't really matter what happens in 0:15:06.440 --> 0:15:08.400 the headline inflation. You have to look beneath the service. 0:15:08.480 --> 0:15:10.440 What's actually going on in terms of the tightness of 0:15:10.440 --> 0:15:13.440 the liver market and its consequences for wage inflation. Bill, 0:15:13.480 --> 0:15:16.440 what you're saying is pretty radical. You're suggesting that perhaps 0:15:16.520 --> 0:15:20.840 the FED should cause the hard landing sooner and closer 0:15:20.920 --> 0:15:23.880 to now than wait, because the consequences will be that 0:15:24.040 --> 0:15:27.240 much worse. Is that accurate? Well, I don't know that 0:15:27.280 --> 0:15:29.640 they should cause try to cause the recession. I mean, 0:15:29.680 --> 0:15:32.840 I think they should always go for the soft landing. 0:15:33.440 --> 0:15:34.720 But what they need to do it they need to 0:15:34.760 --> 0:15:37.760 make Monterrey policy tighter sooner. And I think the big 0:15:38.280 --> 0:15:40.600 discussion here about what what whether the fifth one a 0:15:40.640 --> 0:15:43.200 good job or a bad job? Is the timing. We're 0:15:43.200 --> 0:15:45.520 still at a quarter to a half percent federal funds 0:15:45.600 --> 0:15:47.320 rate at the time that the unemployer rates three point 0:15:48.360 --> 0:15:50.760 and you're over your CPI inflation is eight and a percent. 0:15:50.800 --> 0:15:53.880 It's remarkable the Fed's late. They know they're late. That's 0:15:53.920 --> 0:15:56.240 why we're talking about fifty basis point right high. Each 0:15:56.240 --> 0:15:58.240 of the next couple of meetings. The FED wants to 0:15:58.280 --> 0:16:01.080 get to neutral very quickly, if they haven't really signaled 0:16:01.160 --> 0:16:03.640 much appetite for going very far beyond that. If you 0:16:03.680 --> 0:16:06.880 look at the last summary of economic projections. The Madre 0:16:07.000 --> 0:16:09.760 policy setting anticipated in at the end of twenty three 0:16:09.840 --> 0:16:12.960 was just a very tight, very very very modestly tight 0:16:13.080 --> 0:16:15.400 Monterrey policy setting. Well, but right now I'm looking at 0:16:15.440 --> 0:16:18.280 work that page that forecasts where interest rates will be, 0:16:18.800 --> 0:16:22.840 and in February three it's currently above two point three percent. 0:16:23.000 --> 0:16:25.240 When we talk to strategists, they say this is priced in. 0:16:25.760 --> 0:16:29.000 What should people be pricing in if your world were 0:16:29.040 --> 0:16:32.760 the one in which the FED moved at an appropriate rate? Well, 0:16:32.800 --> 0:16:34.440 I think, I mean, I think the Fed needs to 0:16:34.440 --> 0:16:36.440 make Montreal policy tight, and I think that I've been 0:16:36.480 --> 0:16:38.480 saying this for quite some time that that requires short 0:16:38.560 --> 0:16:41.400 term rates and at least three or four percent. Obviously, 0:16:41.480 --> 0:16:44.480 it depends on where inflation ends up. The inflation is 0:16:44.520 --> 0:16:46.640 running three percent, then neutrals, not two and a half. 0:16:47.080 --> 0:16:49.120 Of inflation is running three percent, then neutral is more 0:16:49.200 --> 0:16:51.000 like three and a half to four. So it really 0:16:51.080 --> 0:16:53.400 depends on where inflations. I mean. But when people talk 0:16:53.440 --> 0:16:55.840 about the neutral federal fundrate, they act as if that 0:16:56.160 --> 0:16:59.160 neutral federal fundrate doesn't matter on what underlying inflation is 0:16:59.520 --> 0:17:02.800 higher their line inflation higher neutral feedle fundrate more for 0:17:02.880 --> 0:17:05.280 the federal reserved to do in terms of tightening moder policy, 0:17:05.480 --> 0:17:07.200 but just to clean that up just quickly, just on 0:17:07.240 --> 0:17:09.800 the timeline, do you anticipate the longer they wait, the 0:17:09.920 --> 0:17:11.960 higher the peak and the Fed funds right will have 0:17:12.040 --> 0:17:16.200 to be yes, yes, Because the longer we sit with 0:17:16.280 --> 0:17:18.600 a very very tight labor market, the more upward pressure 0:17:18.600 --> 0:17:20.600 they'll be on wages. The more that upward pressure on 0:17:20.760 --> 0:17:23.679 wages will feed into prices, and so the underlying inflation 0:17:23.800 --> 0:17:25.640 rate will accept tend to drift higher. That that's really 0:17:25.680 --> 0:17:28.520 the lesson of the nineteen sixties and the early nineteen seventies. 0:17:29.040 --> 0:17:32.439 Each cycle inflation radgeted higher because the Federal Reserve did 0:17:32.520 --> 0:17:37.080 not address that the issue forceful fully soon enough. So 0:17:37.359 --> 0:17:39.920 if they delay, they'll have to ultimately do more. But 0:17:40.119 --> 0:17:43.119 a fascinating raiding. We appreciate your time this morning, as always, 0:17:43.359 --> 0:17:46.000 fantastic build down ply. The Blimberg opinion columnists and former 0:17:46.040 --> 0:17:49.480 New York Fed President and Provocative rights to a conclusion 0:17:49.520 --> 0:17:51.520 that reads as follows. The FEDS choice is clear. If 0:17:51.560 --> 0:17:54.280 it acts sooner with inflation expectations still well anchored, the 0:17:54.320 --> 0:17:56.920 cost in terms of folk on output and higher unemployment 0:17:56.920 --> 0:17:59.400 should be relatively modest the final line of the whole 0:17:59.440 --> 0:18:03.000 pace tom. If it waits and allows inflation expectations to 0:18:03.040 --> 0:18:05.200 get out of hand, the bill will be much high. 0:18:11.160 --> 0:18:13.960 Elena Poula Covid joins US now the Center for European 0:18:14.040 --> 0:18:17.960 Policy Analysis. Elena's is the last time we have seen you. 0:18:18.600 --> 0:18:23.320 Things have changed. A flagship of the Russian navy has sunk. 0:18:23.840 --> 0:18:28.600 How does that change Mr Putin's body language? Well, the 0:18:28.680 --> 0:18:31.040 sinking of the Muskvab that's the name of the ship, 0:18:31.400 --> 0:18:34.800 was definitely a big hit to Russia. We even saw 0:18:35.160 --> 0:18:39.119 Putin supporters, the talking heads in the Russian state control 0:18:39.200 --> 0:18:44.119 media being really critical of the sinking of this flagship 0:18:44.240 --> 0:18:46.960 vessel of the Russian fleet. It's not just the flagship 0:18:47.040 --> 0:18:50.200 vessel of Russia. This was the largest ship operating in 0:18:50.240 --> 0:18:52.960 the Black Seat. And what we've seen since then is 0:18:53.080 --> 0:18:57.000 Russia and Mr Putin doubled down on their tax on Ukraine. 0:18:57.080 --> 0:19:00.399 Just today we saw Russia hit with missile the western 0:19:00.520 --> 0:19:04.800 city of viev Does Ukraine double down with this success? 0:19:05.480 --> 0:19:08.920 And where the material they're getting from the west? Is 0:19:09.080 --> 0:19:12.080 Ukraine more able to maybe not the drama of sinking 0:19:12.160 --> 0:19:15.679 a ship, but do you perceive that they are engaged 0:19:15.880 --> 0:19:20.640 and ready on this Monday. They've certainly been getting ready. 0:19:20.720 --> 0:19:23.520 In your president Zelanski has been making his rounds with 0:19:23.680 --> 0:19:27.040 all the western capitals and beyond that, fleeting from more weapons. 0:19:27.080 --> 0:19:29.680 I think the situation we're seeing now is that the 0:19:29.800 --> 0:19:32.960 window is really narrowing. Russia is starting to target those 0:19:32.960 --> 0:19:35.600 supply lines. Now. We can't take it for granted that 0:19:35.760 --> 0:19:37.639 we've been able to meet in the United States and 0:19:37.720 --> 0:19:41.160 allies have been able to get those weapons into Ukraine. 0:19:41.640 --> 0:19:46.119 Not Russia is targeting those UH military routes. So it's 0:19:46.160 --> 0:19:49.800 going to become increasingly difficult. The Ukrainians are certainly tired. 0:19:50.240 --> 0:19:53.440 They understand what's coming, a huge new offensive. Um. I 0:19:53.560 --> 0:19:57.240 do think they gave themselves ready, but um there's still outnumbered. 0:19:57.280 --> 0:19:59.960 Are now gone by the Russian side. Elena can give 0:20:00.119 --> 0:20:03.679 the sense of what happens when or if Mariupa falls. 0:20:03.800 --> 0:20:06.240 We understand that it is surrounded and it is an 0:20:06.240 --> 0:20:09.119 a crucial piece of land for Russia because it provides 0:20:09.200 --> 0:20:12.000 a land bridge to Crimea and connects to the don 0:20:12.040 --> 0:20:15.840 Bass region of eastern Ukraine. How much will that be 0:20:16.040 --> 0:20:20.600 a game changer when that occurs? So the Manupa, you know, 0:20:20.680 --> 0:20:22.480 it's a it's a town that not many people have 0:20:22.600 --> 0:20:24.720 ever heard of. Even a lot of Ukrainians hadn't hadn't 0:20:24.720 --> 0:20:28.359 heard of it until it became this big strategic battle 0:20:28.880 --> 0:20:31.760 uh for for the war. And even back in ten 0:20:31.760 --> 0:20:34.639 we saw Russia try to surround Marupa and they failed, 0:20:34.960 --> 0:20:37.760 and now they're you know, wrapping up the unfinished business. 0:20:37.800 --> 0:20:40.120 In some ways, it will be a game changer from 0:20:40.119 --> 0:20:43.959 a military perspective. The main reason for that because right now, 0:20:44.040 --> 0:20:47.520 the only thing that stands between Russia's Eastern front and 0:20:47.720 --> 0:20:50.359 sort of southern front where they have access from the 0:20:50.440 --> 0:20:54.240 sea from Crimea where they can do an amphibious attack 0:20:54.320 --> 0:20:57.000 and landing, for example, the only thing that's standing and 0:20:57.040 --> 0:21:00.520 then being able to combine and join their forces Marupa 0:21:01.000 --> 0:21:03.680 as soon as that happens, and unfortunately it is looking 0:21:03.800 --> 0:21:07.560 like it's just a matter of days until Marupa falls. 0:21:07.920 --> 0:21:10.800 Russia will be able to then put you know, let's 0:21:10.800 --> 0:21:14.800 say marines in navy in from Crimea, take them to 0:21:14.920 --> 0:21:17.320 the east. They'll be able to combine basically the southern 0:21:17.400 --> 0:21:21.399 and the Eastern front and cut off any Ukrainian troops 0:21:21.440 --> 0:21:22.760 they are it will have been able to get in 0:21:22.920 --> 0:21:24.920 so far, But you know, what does this mean in 0:21:25.080 --> 0:21:27.720 terms of the longer term? Also, because we've heard from 0:21:27.840 --> 0:21:30.320