WEBVTT - Surveillance: ECB Adds to Fed Gloom 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 Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.799 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.680 and of course on the Bloomberg terminal. The single headline, John, 0:00:29.720 --> 0:00:31.160 I see and this will be good to get into, 0:00:31.200 --> 0:00:34.199 Jeremy stretch out of g t FX at C I 0:00:34.320 --> 0:00:36.919 b C is what they do which we don't do, 0:00:37.040 --> 0:00:39.800 is they go out three years to two thousand twenty 0:00:39.880 --> 0:00:44.920 five and there's a miraculous conception of inflation plunging. There's 0:00:44.960 --> 0:00:47.560 no other way to put it. From an eight level 0:00:48.200 --> 0:00:51.199 down to a stunning two point four percent. That is 0:00:51.280 --> 0:00:55.560 optimism of a certain level. Jeremy, stretching all your years 0:00:55.600 --> 0:00:59.840 of central bank watching, Can they get out near three 0:01:00.080 --> 0:01:04.920 years and look for an inflation and disinflationary trend? Is 0:01:04.959 --> 0:01:10.360 the ECB publishers today or is that wish for thinking? Well? 0:01:10.360 --> 0:01:13.319 I think it's interesting that the CB are still anticipating 0:01:13.360 --> 0:01:16.400 the inflation will still be above their target threshold by 0:01:16.400 --> 0:01:18.880 the end of twenty twenty five. I wouldn't have been 0:01:18.920 --> 0:01:21.240 surprised that the ECB felt it would appropriate, or at 0:01:21.280 --> 0:01:24.800 least the ECB staff had attempted to try and find 0:01:25.080 --> 0:01:27.679 a narrative that allowed the inflation profile to get back 0:01:27.720 --> 0:01:30.520 to target. But clearly because of the upward revisions that 0:01:30.520 --> 0:01:32.360 we've seen in the profile that both this year and 0:01:32.440 --> 0:01:34.959 next year, it is going to be very very difficult 0:01:34.959 --> 0:01:36.720 to see or it's going to be a very tough 0:01:36.800 --> 0:01:39.920 ask for the ECB to be able to force or 0:01:40.040 --> 0:01:43.959 drive inflation with pressure down without probably a greater degree 0:01:43.959 --> 0:01:46.960 of economic dislocation that they're currently pricing into their forecast. 0:01:46.959 --> 0:01:49.000 So I think, but perhaps a little bit too too 0:01:49.000 --> 0:01:52.560 ambitious to optimistic contems to the growth trajectory, and if 0:01:52.600 --> 0:01:55.040 if we are going to see inflation falling back, it 0:01:55.120 --> 0:01:56.560 is going to be a very much a challenge that 0:01:57.000 --> 0:01:58.560 is going to have to be met by probably a 0:01:58.600 --> 0:02:02.160 more aggressive policy reaction than the market has been or 0:02:02.200 --> 0:02:04.960 certainly we have been considering well. Yeld declimbing in response 0:02:05.000 --> 0:02:06.840 to that, particularly the front end of the BUN market. 0:02:06.880 --> 0:02:09.359 Your German two years up by eleven basis points to two, 0:02:10.440 --> 0:02:12.640 the ten years up by eight or nine basis points 0:02:12.639 --> 0:02:14.960 on a ten year right now to a round about 0:02:15.040 --> 0:02:17.600 two percent two point zero two percent. For give me 0:02:17.639 --> 0:02:19.359 for throwing so many numbers at the war, but I 0:02:19.400 --> 0:02:21.480 do want to go through the inflation projections again from 0:02:21.480 --> 0:02:24.560 the u c B. We now see average inflation reaching 0:02:24.600 --> 0:02:27.280 eight point four percent in twenty two before decreasing a 0:02:27.400 --> 0:02:30.680 six point three percent in twenty three, with inflation expected 0:02:30.720 --> 0:02:33.799 to decline markedly over the course of the year. These 0:02:33.800 --> 0:02:36.239 are still really high, Prince Jeremy. Just to go through 0:02:36.320 --> 0:02:40.320 core and their projections there projected to average three point 0:02:40.320 --> 0:02:42.880 four percent in twenty two point three percent in twenty five. 0:02:42.919 --> 0:02:45.720 That's headline. When you strip out food and energy, that's 0:02:45.720 --> 0:02:48.000 projected to be three point nine percent on average in 0:02:48.000 --> 0:02:51.240 twenty two and then rise to four point two percent 0:02:51.320 --> 0:02:53.760 in twenty three. Can we just talk about that clip, 0:02:53.800 --> 0:02:56.799 High Jeremy, that they're looking for in core inflation through 0:02:56.880 --> 0:02:59.000 next year. Your thoughts on that and just how far 0:02:59.080 --> 0:03:02.360 they can push the terminal rate given what you expect 0:03:02.360 --> 0:03:06.400 to happen with GDP on what they're looking for as well. Yes, 0:03:06.440 --> 0:03:08.080 that's right, I think that, I mean, I think you know, 0:03:08.120 --> 0:03:10.359 when we've you've obviously been talking a lot about the 0:03:10.400 --> 0:03:12.400 FED projections over the course of the last twelve hours 0:03:12.480 --> 0:03:15.440 or so, and there is a real dichotomy in terms 0:03:15.440 --> 0:03:18.560 of the inflation profiles that we're seeing from those requisite 0:03:18.560 --> 0:03:21.560 central banks, and the pace of the moderation in terms 0:03:21.600 --> 0:03:24.320 of the Eurozone is very very glacial in effect. And 0:03:24.360 --> 0:03:26.919 of course, as you quite rightly say, those core inflationary 0:03:26.960 --> 0:03:30.040 pressures are going to be pronounced over the medium run, 0:03:30.080 --> 0:03:31.840 and that is going to be a real difficulty for 0:03:31.919 --> 0:03:34.000 the for the European central banks. So I think in 0:03:34.040 --> 0:03:36.480 the context of some of the discussions you're having after 0:03:36.480 --> 0:03:38.240 the FED last night, is that who has the greatest 0:03:38.840 --> 0:03:41.640 potential policy problem with policy dilemma than I think in 0:03:41.680 --> 0:03:44.440 the ECB definitely falls into that remit because of course, 0:03:44.960 --> 0:03:47.440 as we know, there are those fragmentation risks as well. 0:03:47.480 --> 0:03:49.680 So it's going to be very difficult to see how 0:03:49.720 --> 0:03:51.480 the ECB is going to be able to square the 0:03:51.520 --> 0:03:56.640 circle by trying to tighten policy but without creating significant 0:03:56.640 --> 0:03:59.080 degrees of uncircaity against what is still a backdrop of 0:03:59.600 --> 0:04:03.160 very lated and amplified core inflation repressures. And they do 0:04:03.200 --> 0:04:05.960 can see that the Euro Area economy may contract in 0:04:05.960 --> 0:04:08.640 the current quarter and next, So there is a hint 0:04:09.040 --> 0:04:11.600 at that recession, although not necessarily coming out with the 0:04:11.640 --> 0:04:15.200 same kinds of prognostications as the Bank of England also 0:04:15.240 --> 0:04:18.560 talking about food and underlying inflation, Jeremy is the e 0:04:18.680 --> 0:04:20.400 c B, which I think it was a lot more 0:04:20.440 --> 0:04:23.240 interesting in terms of the statement than the Federal Reserve. 0:04:23.880 --> 0:04:26.839 Is the ECB just sort of getting ahead of what 0:04:26.880 --> 0:04:29.839 the federal have to deal with and recognizing a stickier 0:04:29.880 --> 0:04:33.279 inflation for a longer period that goes beyond what the 0:04:33.320 --> 0:04:37.480 markets are currently allowing for. Yes, I think that's true. 0:04:37.480 --> 0:04:39.800 I think we are going to see core inflation proven 0:04:39.839 --> 0:04:42.159 to be remarkably sticky. So yes, we can see headline 0:04:42.200 --> 0:04:46.360 inflation repressures gradually easy if we are correct in assuming 0:04:46.400 --> 0:04:50.719 that those energy forward curves are correct. But core core inflation, 0:04:50.760 --> 0:04:52.960 in terms of service driven inflation, I think is going 0:04:53.000 --> 0:04:55.800 to be much more challenging to drive out of the system. 0:04:55.839 --> 0:04:58.080 And it may well be the case that we see 0:04:58.120 --> 0:05:01.680 many central banks facing difficulty to really squeeze core inflation 0:05:01.720 --> 0:05:05.360 back towards target thresholds over a two year four past arizons. 0:05:05.400 --> 0:05:07.479 So in a sense, that's why it's still interesting that 0:05:07.520 --> 0:05:09.640 the CB are still struggling to get back to their 0:05:09.680 --> 0:05:12.800 target threshold even in year three. And that just underlines 0:05:12.839 --> 0:05:15.480 that inflationary pressures I think are going to be much 0:05:15.480 --> 0:05:18.200 more pronounced and stickier, particularly if we're going to see 0:05:18.600 --> 0:05:22.680 wage growth remaining relatively elevated because of still relatively tight 0:05:22.760 --> 0:05:25.839 lego markets, even if we're seeing a moderation in macro activity. 0:05:25.960 --> 0:05:28.760 What a challenge. Jeremy Stretcher C I p C. Thank you. 0:05:33.200 --> 0:05:35.680 I'm already leaning too. January twelve. Well, you know we've 0:05:35.680 --> 0:05:38.960 got a job jobs report January six. I believe it is, 0:05:39.000 --> 0:05:41.560 but but I'm sorry, I'm already going to January talk 0:05:41.600 --> 0:05:44.080 to get another look at inflation. Someone doing that as 0:05:44.080 --> 0:05:46.280 well as Jonathan Pingle, chief you US Economics that you 0:05:46.360 --> 0:05:49.359 be as security Jonathan, I gotta study for you in 0:05:49.400 --> 0:05:53.120 your academics from years ago, and that is simply, is 0:05:53.120 --> 0:05:57.200 there any history of any central bank modeling and getting 0:05:57.320 --> 0:06:01.920 right a major three year disan flationary trend the FEDS 0:06:02.000 --> 0:06:04.960 trying to do it, and in technical this morning the 0:06:05.120 --> 0:06:08.520 e c B has elevated up inflation for this year 0:06:08.960 --> 0:06:11.360 and they go out to a nirvana in two thousand 0:06:11.480 --> 0:06:17.960 twenty five. Is there any predictability to that exercise? Well? Thanks, Tom, 0:06:18.360 --> 0:06:21.520 thanks for having me. First of all, Yeah, forecasting inflation 0:06:21.600 --> 0:06:25.760 is hard. Um. I I think that has been proven, um, 0:06:25.800 --> 0:06:30.040 in spades in when we look back at history. You know, 0:06:30.120 --> 0:06:33.160 getting this exactly right on the way down is probably 0:06:33.160 --> 0:06:35.320 going to be as hard as getting it right on 0:06:35.360 --> 0:06:37.720 the way up. Um. When I think about the central 0:06:37.720 --> 0:06:41.919 bank experience, UM, you know, you've had some immaculate disinflations 0:06:42.360 --> 0:06:45.560 following World War Two. Is is one example. UM. It 0:06:45.600 --> 0:06:48.000 was certainly the case the Chairman Green's band seemed to be, 0:06:48.520 --> 0:06:49.800 you know, kind of ahead of the curve and the 0:06:49.839 --> 0:06:54.080 productivity gains in the mid nineties and the disinflation that 0:06:54.080 --> 0:06:57.440 that led to. UM. But you know, let's face it, 0:06:57.480 --> 0:07:00.440 a three year, two year, even one year head inflation 0:07:00.520 --> 0:07:05.080 forecast at the moment um, it is pretty difficult. UM. 0:07:05.160 --> 0:07:07.680 And in some respects UM. You know, I think the 0:07:07.720 --> 0:07:09.760 FED has been dealt a better hand than the e 0:07:09.920 --> 0:07:13.080 C BUM because they are getting some data in hand 0:07:13.120 --> 0:07:16.200 that starts to look like there is some real disinflation coming. 0:07:16.960 --> 0:07:18.840 What do you make though of how much of this 0:07:18.920 --> 0:07:22.640 disinflation really stems from some of the more variable areas, 0:07:22.880 --> 0:07:28.760 which include gas, natural gas, gasoline, crewe products. Well, you know, 0:07:28.800 --> 0:07:31.560 in the US. You know, certainly the energy um, you know, 0:07:31.560 --> 0:07:35.160 the energy prices moving up and down, UM, you know 0:07:35.200 --> 0:07:38.280 has played a role. But you've also got um a 0:07:38.400 --> 0:07:41.640 number of components of inflation, like you know, use car 0:07:41.720 --> 0:07:46.480 prices that you know, you know exploded higher in new 0:07:46.480 --> 0:07:50.080 car prices up UM, and we're already seeing use car 0:07:50.120 --> 0:07:52.880 prices fall two percent a month the last few cp 0:07:53.000 --> 0:07:55.280 I s. So UM. It is a lot of our 0:07:55.280 --> 0:07:58.760 little components. And you know, what goes up, you know, 0:07:58.800 --> 0:08:00.880 could come down quite quickly in the US. I mean, 0:08:01.240 --> 0:08:03.640 you know, in Europe and the Eurozone, you know, the 0:08:03.680 --> 0:08:05.760 reasons to think inflation might be a little stickier than 0:08:05.760 --> 0:08:09.480 the USUM, particularly if the Fed does engineer and increase 0:08:10.160 --> 0:08:13.640 UM in unemployment UM. You know, in the US that 0:08:13.680 --> 0:08:17.400 does typically prove somewhat disinflationary, even if you think there's 0:08:17.400 --> 0:08:19.920 a flat Phillips curve. You know, in the Eurozone, they 0:08:19.960 --> 0:08:23.760 don't have quite the same flexibility in their labor markets UM, 0:08:23.840 --> 0:08:26.160 which you know, could also lead to sort of more 0:08:26.160 --> 0:08:30.160 persistence UM in the Eurozone relative to the US for inflation. 0:08:30.320 --> 0:08:32.560 Although the e c B did come out with perhaps 0:08:32.679 --> 0:08:35.760 an even more hawkish statement than the Federal Reserve in 0:08:35.880 --> 0:08:39.679 terms of how much higher they revised upward their inflation 0:08:39.960 --> 0:08:43.079 expectations for this year, for next year, for the year after. 0:08:43.559 --> 0:08:46.880 From your vantage point or the balance of risks, have 0:08:47.040 --> 0:08:49.480 they changed when it comes to both the FED and 0:08:49.559 --> 0:08:52.880 the ECB in terms of either going too far or 0:08:52.920 --> 0:08:55.320 not going enough. Before it was not going enough. Do 0:08:55.360 --> 0:08:59.240 you think now it's more evenly balanced? Oh? Yeah, No, 0:08:59.320 --> 0:09:01.599 I definitely, I think it's more evenly balanced. Li Sa, No, 0:09:01.679 --> 0:09:04.559 it's a great point, um. I mean, you know, we 0:09:04.600 --> 0:09:07.240 actually are expecting a pretty weak U S economy in 0:09:07.280 --> 0:09:10.920 the latter part of three. You know, that's both because 0:09:10.960 --> 0:09:14.640 households are exhausting their excess savings, which we think is 0:09:14.640 --> 0:09:16.920 going to you know, start to bind for more household 0:09:17.000 --> 0:09:19.679 and restrain consumption. And and on top of that, we're 0:09:19.679 --> 0:09:23.000 just gonna still pile the mounting effects of you know, 0:09:23.040 --> 0:09:25.920 what's been a very rapid tightening cycle. The e CV 0:09:26.040 --> 0:09:28.000 is a little bit further behind the FED. There they 0:09:28.040 --> 0:09:30.800 are playing some catch up, um, but there as well, 0:09:30.840 --> 0:09:33.880 you know, they are facing a tough economic outlook as well. 0:09:34.000 --> 0:09:36.560 So I do think these risks are becoming more balanced. 0:09:36.960 --> 0:09:42.520 Are we in neutrality? For rates? Yeah? In the US 0:09:43.080 --> 0:09:46.280 are we in neutrality in terms of the central bank ballet, 0:09:48.240 --> 0:09:50.319 So I would actually I mean, I you know, chure 0:09:50.360 --> 0:09:53.800 Pal yesterday said he thought policey rates were in restrictive territory. 0:09:53.880 --> 0:09:55.920 I would agree with that. I mean, there's a pretty 0:09:55.960 --> 0:09:59.040 big margin of error for whether or not, um, you're 0:09:59.080 --> 0:10:03.280 really at neutral. Um. I don't mean to interrupt, but 0:10:03.360 --> 0:10:06.160 just because Jonathan, just because of time, this is really important. 0:10:06.600 --> 0:10:10.640 What is the single variable of our mystery about that 0:10:10.760 --> 0:10:15.199 collar around neutrality? Is it inflation? Is it jobs? Is 0:10:15.240 --> 0:10:19.440 a g d P? Is it just we don't know? Well, 0:10:19.520 --> 0:10:21.040 I mean we just don't know. I mean it's also 0:10:21.320 --> 0:10:25.360 a longer run concept. I mean, you know there's a 0:10:25.360 --> 0:10:28.160 lot that goes into the neutral rate. It's our demographics 0:10:28.160 --> 0:10:32.760 are productivity growth, thank you, um, but it's you know, 0:10:32.840 --> 0:10:35.160 pinning it down in real time. It's your Powell's explained. 0:10:35.440 --> 0:10:37.839 Can he come on again? And I disgust that was great? 0:10:38.080 --> 0:10:41.720 Are you suggesting that the Yeah? I mean, Jonathan, thank you, 0:10:41.760 --> 0:10:45.320 that was brilliant. What he absolutely nailed there, which drives 0:10:45.360 --> 0:10:47.839 me nuts, is all it's like the dots, all this 0:10:48.040 --> 0:10:52.920 gazing and Pringle nails, the demographics nails the technology we're 0:10:52.920 --> 0:11:07.760 living in we don't understand, etcetera, etcetera. Jonathan panofs. But 0:11:07.840 --> 0:11:09.200 we can sit on the bank aving it for longer, 0:11:09.240 --> 0:11:10.520 Bioll meats. We're going to do that now with that 0:11:10.600 --> 0:11:13.960 shop Bettia, Deputy c i Owe the fixed income at 0:11:14.000 --> 0:11:16.880 Newberger Berman a show first to you, just your reflection, 0:11:17.280 --> 0:11:19.880 your thoughts on what we've learned from two central banks 0:11:19.880 --> 0:11:22.760 in the last twenty four hours. Yeah. I think the 0:11:22.920 --> 0:11:26.720 the overruning message is that the time of central banks 0:11:26.720 --> 0:11:29.720 being able to hike rates without an impact on the 0:11:29.760 --> 0:11:31.880 real economy and real growth, which was a lot of 0:11:31.880 --> 0:11:34.760 the story of two thousand and twenty two, that's over 0:11:35.000 --> 0:11:39.040 and we're now transitioning to this environment where central banks 0:11:39.040 --> 0:11:42.319 are divided over how do you wrestle with inflation rates 0:11:42.360 --> 0:11:44.920 which are very high but likely to come down and 0:11:45.000 --> 0:11:47.800 the future trade offs to growth And you know this, 0:11:48.000 --> 0:11:52.120 This dissension and the collared descents on the BOE really 0:11:52.160 --> 0:11:54.679 just put an exclamation point on it, which is there 0:11:54.720 --> 0:11:57.720 are some individuals that you know, think and want to 0:11:57.760 --> 0:12:00.400 conduct policy more on a forward looking basis us where 0:12:00.480 --> 0:12:04.319 others are still view the risk management attributes of policy 0:12:04.360 --> 0:12:07.920 making is we've still got to be very dependent upon inflation, 0:12:08.280 --> 0:12:09.960 and this is the debate that's going to be at 0:12:09.960 --> 0:12:12.560 all the central banks for for next year. How do 0:12:12.600 --> 0:12:14.920 you invest around that? How do you take the messaging 0:12:15.360 --> 0:12:18.520 and use it to to really create some sort of 0:12:18.640 --> 0:12:20.559 thesis based on the fact that a lot of other 0:12:20.600 --> 0:12:23.079 people are discounting at wholesale and say the data will 0:12:23.080 --> 0:12:24.760 be what the data will be, and we don't buy 0:12:24.760 --> 0:12:28.400 what they're selling. So I think the biggest investment implication 0:12:28.520 --> 0:12:31.439 is is fixed and convolatility is going to go down. Um. 0:12:31.480 --> 0:12:33.600 You know, you look at this year from low to high, 0:12:33.679 --> 0:12:36.400 the US tenure moved in about a three hundred basis 0:12:36.400 --> 0:12:39.200 point just under a three hundred basis point range. We're 0:12:39.240 --> 0:12:42.440 probably heading back to something next year where you know, 0:12:42.520 --> 0:12:45.520 we're going into this environment of slower hikes, fewer hikes. 0:12:45.640 --> 0:12:48.280 You know, I think consensus is broadly correct on that. 0:12:48.679 --> 0:12:51.079 But what that means is expect ten uere interest rates 0:12:51.120 --> 0:12:53.280 in the US to move maybe in a hundred hundred 0:12:53.280 --> 0:12:55.079 and fifty basis point range. It's going to be a 0:12:55.160 --> 0:12:58.400 dramatic reduction next year. And what that means is that 0:12:58.520 --> 0:13:01.240 income high quality income um it's going to be more 0:13:01.320 --> 0:13:04.480 volatile still on a day to day basis, But ultimately 0:13:04.800 --> 0:13:07.960 you invest on the idea that with less volatility you 0:13:07.960 --> 0:13:10.680 can earn income and high quality income, and you know, 0:13:10.720 --> 0:13:14.000 in a lot of fixed income markets, and you stay position. 0:13:14.040 --> 0:13:16.679 You have some positions on that, some of the more 0:13:16.840 --> 0:13:21.280 devish um uh, you know, central bank views that inflation 0:13:21.320 --> 0:13:24.000 can fall in the growth impact um that that that 0:13:24.080 --> 0:13:26.719 could play out and lead to some higher returns and 0:13:26.800 --> 0:13:30.760 fixed income next year. A shark is we approach neutrality 0:13:31.160 --> 0:13:36.200 or approach restriction? Is it easier to have confidence in 0:13:36.240 --> 0:13:40.400 a portfolio of fixed income? I mean, now that we're here, 0:13:41.000 --> 0:13:46.160 is it easier to prosecute a portfolio and hold a portfolio? Yeah? 0:13:46.200 --> 0:13:49.000 And I think the biggest driver of this, and Powell's 0:13:49.040 --> 0:13:51.840 actually I think been quite articulate on this, which is 0:13:52.200 --> 0:13:56.319 three big drivers of inflation. You've had goods inflation, housing inflation, 0:13:56.720 --> 0:14:00.600 and then services x housing. If you go back three months, 0:14:00.760 --> 0:14:03.640 all three of those were rising and who knew, who 0:14:03.720 --> 0:14:06.440 knew when they were going to stop. Um Now we're 0:14:06.440 --> 0:14:09.040 looking at goods prices in you know, mid to high 0:14:09.080 --> 0:14:14.319 single digit deflation. We're seeing some you know, higher conviction 0:14:14.360 --> 0:14:16.920 that over the next six months housing prices are going 0:14:16.960 --> 0:14:19.440 to come off but it still leaves this issue of 0:14:19.480 --> 0:14:23.440 the third which is the services ex housing inflation. But 0:14:23.520 --> 0:14:26.200 we've transitioned to this environment where call it two out 0:14:26.200 --> 0:14:28.640 of three of the big CPI categories, we have a 0:14:28.640 --> 0:14:31.359 little bit more confidence of we know what the trajectory 0:14:31.400 --> 0:14:33.720 will be there, and that's the key thing that gives 0:14:33.720 --> 0:14:35.680 you a little bit more confidence that some of the 0:14:35.800 --> 0:14:40.360 left tail of significantly higher rate possibilities are being reduced 0:14:40.360 --> 0:14:42.760 pretty quickly. So thanks for being with us today. We 0:14:42.760 --> 0:14:44.280 always appreciate it. We'll catch the with you a little 0:14:44.280 --> 0:14:45.880 bit later in the year. I'm sure I check battier 0:14:45.960 --> 0:14:52.720 the of new Berger Berman. We have the advantage and 0:14:52.760 --> 0:14:55.880 particularly after the Bank of England decision today, which I'm 0:14:55.880 --> 0:14:59.000 gonna call collar descent, those looking for a more aggressive 0:14:59.240 --> 0:15:02.200 rate move in the was looking for more dubbish rate 0:15:02.280 --> 0:15:05.680 moves have someone I could only think of. Adam Posen 0:15:05.800 --> 0:15:08.760 is the equivalent. John Riding is Chief Economic Advisor to 0:15:08.800 --> 0:15:11.560 bring capital with Service to the Bank of England, his 0:15:11.720 --> 0:15:14.640 Bank of England and also to the Federal Reserve System 0:15:14.640 --> 0:15:17.160 as well, and he joins us now with decades of 0:15:17.200 --> 0:15:20.760 experience here. What will you listen for from Governor Bailey 0:15:20.920 --> 0:15:25.520 is he has colored descent, something totally unfamiliar to Americans. 0:15:26.120 --> 0:15:30.080 Well occasionally have thought there's a bifurcation in these dissenting views. 0:15:30.160 --> 0:15:33.520 Two members of the committee didn't want any change in rates, 0:15:33.560 --> 0:15:38.120 which I find somewhat remarkable and speaks to the devishness 0:15:38.160 --> 0:15:40.960 of some people on the committee, and on one person 0:15:41.240 --> 0:15:44.560 wanting a larger than fifty basis point rate high um 0:15:44.800 --> 0:15:47.520 and then you then you had six going along. So 0:15:47.520 --> 0:15:51.840 so that what what were the two who were not expecting, 0:15:52.120 --> 0:15:55.320 not not unexpecting, but not wanting a rate high when 0:15:55.320 --> 0:15:59.920 the inflation rates running at almost ten percent? Now, what's interesting? 0:16:00.000 --> 0:16:02.880 Compare that to the Fed? And you asked what, I 0:16:02.920 --> 0:16:08.520 hope Governor Bailey sounds like j Pal did yesterday because he, 0:16:08.920 --> 0:16:12.440 for once, he put in a terrific performance and he 0:16:12.560 --> 0:16:16.520 kept pounding away at the markets. The terminal rate five 0:16:16.520 --> 0:16:18.840 point one percent, it's going to stay there for a while. 0:16:19.080 --> 0:16:21.920 Don't look for cuts until there's clear evidence that inflation 0:16:22.040 --> 0:16:24.240 is headed back to two percent. And as you make 0:16:24.320 --> 0:16:26.360 the point, the markets are saying, well, we're still not 0:16:26.400 --> 0:16:29.880 even going to price in a terminal funds rate above five. 0:16:30.920 --> 0:16:36.880 All comes down to inflation. And I think that markets 0:16:36.920 --> 0:16:40.760 to some degree, are looking for central banks to react 0:16:40.880 --> 0:16:43.480 as they reacted when economies are going into recession over 0:16:43.520 --> 0:16:47.720 the last two decades, when inflation wasn't a problem. Inflation 0:16:48.280 --> 0:16:51.200 is a real problem, and a much bigger problem in Europe. 0:16:51.360 --> 0:16:53.600 You made reference to the banking in the UK is 0:16:53.640 --> 0:16:56.920 a small, open economy. Um, the exchange rate has a 0:16:57.000 --> 0:17:00.680 really big impact on inflation, much more so than than 0:17:00.760 --> 0:17:04.480 in the US UM and of course the bank also 0:17:04.520 --> 0:17:06.920 has to navigate A nice get little update on those 0:17:07.480 --> 0:17:11.040 troubles in the guilt market back in September forced the 0:17:11.040 --> 0:17:15.399 Bank of England to begin easing again with temporary quantitative easing. 0:17:15.600 --> 0:17:18.560 The day after, they confirmed that they were going to 0:17:18.680 --> 0:17:21.520 start quantitative tightening the following week, and they had to 0:17:21.520 --> 0:17:23.520 abandon those plans, which John, let's unpack some of this, 0:17:23.520 --> 0:17:25.159 and let's start with the nature of the descent on 0:17:25.200 --> 0:17:26.800 the b O way. The individuals that didn't think we 0:17:26.800 --> 0:17:29.920 should hike interest rates today, they believe in long and 0:17:30.000 --> 0:17:33.280 variable lags. They think the cumulatively over the last twelve months, 0:17:33.320 --> 0:17:34.800 we've done enough already and that's going to hit the 0:17:34.840 --> 0:17:37.399 economy next year, We're going to go into recession. They 0:17:37.480 --> 0:17:39.359 ultimately must believe that inflation is going to be on 0:17:39.359 --> 0:17:42.040 a downtrend. What would you say back to that, Well, 0:17:42.359 --> 0:17:45.720 let's use the language that the FED has adopted. Policy 0:17:45.800 --> 0:17:50.520 needs to be not just restrictive, but sufficiently restrictive to 0:17:50.600 --> 0:17:53.760 get inflation down. And ask, is a three and a 0:17:53.800 --> 0:17:57.960 half percent interest rate when inflation is at around nine 0:17:58.000 --> 0:18:01.960 and a half percent restrict if at all? Real interest 0:18:02.040 --> 0:18:05.920 rates interest rates adjusted for inflation are at negative six 0:18:06.000 --> 0:18:10.720 percent on the policy rate. And I don't know any 0:18:11.000 --> 0:18:14.679 economic theory that would say a negative six percent interest 0:18:14.800 --> 0:18:18.840 rate is a restrictive policy setting. So the message and 0:18:18.880 --> 0:18:22.120 the message to Fed has shifted to now they were late, 0:18:22.840 --> 0:18:26.960 but they continued easing through the inflation problem last year. 0:18:27.040 --> 0:18:29.600 But at least now they're they're getting that message out 0:18:29.640 --> 0:18:32.240 and and have they done their messaging. They said, it's 0:18:32.280 --> 0:18:34.760 not a question just how fast we raise rates, That's 0:18:34.760 --> 0:18:37.680 that's a lesser important question. Now it's how high and 0:18:37.760 --> 0:18:41.160 how long are we going to keep it there? And 0:18:41.880 --> 0:18:46.159 I think that they Europe and then the Bank of 0:18:46.200 --> 0:18:49.840 England is struggling with the how high. I think the 0:18:49.880 --> 0:18:53.560 Fed's largely got the message right, But then the next 0:18:53.640 --> 0:18:55.200 part of the message is going to be how long. 0:18:55.240 --> 0:18:57.720 And that's where the market simply just don't believe. They 0:18:57.760 --> 0:19:00.920 believe that the recession is going to lead to lower 0:19:00.920 --> 0:19:03.880 inflation and that's going to do the FEDS and Bank 0:19:03.920 --> 0:19:06.840 of England's and the ECB's job for them. And I 0:19:07.280 --> 0:19:11.000 think with these particularly these supply shocks on energy prices 0:19:11.040 --> 0:19:15.720 and still horrible developments in the Ukraine, these policy rates. 0:19:16.080 --> 0:19:18.440 To imagine that a three percent policy rate would be 0:19:18.560 --> 0:19:22.360 high enough to bring inflation down, um, I just don't 0:19:22.359 --> 0:19:24.720 get it. There's also a disbelief, though, just to push 0:19:24.720 --> 0:19:27.000 back a little bit, that we could go from eighteen 0:19:27.000 --> 0:19:29.040 trillion dollars of negative yielding debt in the world to 0:19:29.119 --> 0:19:31.960 one trillion dollars of negative yielding debt in just a 0:19:31.960 --> 0:19:34.080 couple of months and that nothing will break and then 0:19:34.119 --> 0:19:36.600 suddenly we'd have this complete regime change that everyone would 0:19:36.640 --> 0:19:39.040 say that was going to be catastrophic, and then suddenly 0:19:39.080 --> 0:19:40.720 it would all be okay, and it wouldn't be enough, 0:19:40.760 --> 0:19:43.400 and suddenly rates had to go much higher. People don't 0:19:43.480 --> 0:19:47.200 believe that things can change this quickly without some consequences 0:19:47.200 --> 0:19:48.960 that we have not yet seen. How do you push 0:19:48.960 --> 0:19:52.840 back against that, Well, you're actually right I mean something 0:19:52.880 --> 0:19:56.560 did break back in September, which which was the guilt market, 0:19:57.000 --> 0:20:01.480 and then you were in an uncontrolled um rise in 0:20:01.600 --> 0:20:06.240 guilt yields because of the leverage decisions that UK pension 0:20:06.280 --> 0:20:10.240 funds had taken number of funds in terms of buying 0:20:10.800 --> 0:20:13.800 UK government bonds on borrowed money so they could also 0:20:13.880 --> 0:20:18.800 invest in equities to try and catch up with their underfunding. 0:20:19.240 --> 0:20:23.200 And what happened was those that that important and why 0:20:23.200 --> 0:20:25.800 did they do that? Because central banks have kept interesting 0:20:25.880 --> 0:20:28.359 it's too low for too long and they've been buying 0:20:28.440 --> 0:20:34.240 the assets and so banks got pension funds got over leverage. 0:20:34.240 --> 0:20:37.000 So something did brick and other things may break. The 0:20:37.040 --> 0:20:40.040 break in the crypto market I think is largely unrelated 0:20:40.080 --> 0:20:44.840 to um. These these policy issues, but things things will break. 0:20:45.320 --> 0:20:50.359 But but if you abandon targeting inflation, which of course 0:20:51.240 --> 0:20:53.439 in a sense the New York Fed has actually touched 0:20:53.480 --> 0:20:55.560 on that with this our star star concept, there might 0:20:55.600 --> 0:20:59.840 be interest rate that might need to be hind for 0:21:00.000 --> 0:21:02.760 and inflation might break the financial system. Yeah, I gotta 0:21:02.760 --> 0:21:04.520 ask you a question before we run out of time. 0:21:04.840 --> 0:21:07.480 I've heard this story before. The only reason you got 0:21:07.480 --> 0:21:09.639 into came, which is your mother beat math into you. 0:21:09.720 --> 0:21:12.560 It's well, well, well understands you said at the kitchen 0:21:12.560 --> 0:21:15.840 table and said, Johnny, do your your math. Can the 0:21:15.920 --> 0:21:20.080 time continuum that you mentioned there be a substitute for level? 0:21:20.480 --> 0:21:24.879 Can the Feds substitute a certain level of interest rates 0:21:24.920 --> 0:21:28.960 for getting up to a Bullard like excess terminal rate? Yes? 0:21:29.080 --> 0:21:32.359 I think they can. But the difference between the Fed 0:21:33.200 --> 0:21:37.120 is that they have policy rates getting clear at least 0:21:37.119 --> 0:21:39.359 close to if not in restrictive territory, and when the 0:21:39.480 --> 0:21:41.720 end and planning to get an ongoing process is going 0:21:41.800 --> 0:21:43.720 to get rates higher, and then they can let those 0:21:43.800 --> 0:21:47.080 rates sit. And I think that's where the conversation shifts. 0:21:47.359 --> 0:21:49.840