WEBVTT - Surveillance: Rising Rates With Dudley & Lacker 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.520 and of course on the Bloomberg Terminent. We begin at 0:00:29.560 --> 0:00:31.960 this moment as we will for the coming days and 0:00:32.040 --> 0:00:35.120 maybe even stretching out to two weeks. The City Group 0:00:35.159 --> 0:00:39.080 just publishes they believe Mr paulib Be renominated our FED 0:00:39.159 --> 0:00:42.080 coverage with Michael McKee, and we look forward to advising 0:00:42.120 --> 0:00:44.640 you with the best guests we can find over the 0:00:44.680 --> 0:00:48.559 coming days and weeks. We start strong with William Dudley 0:00:48.720 --> 0:00:52.120 Bloomberg Opinion Columns, of course, the former president of the 0:00:52.120 --> 0:00:55.200 New York Federal Reserve and UH for years, with Goldman 0:00:55.280 --> 0:00:58.640 Sachs as well. Bill, you mentioned in your essay on 0:00:58.800 --> 0:01:03.600 a FED with some degrees of constraint. I would say 0:01:03.640 --> 0:01:08.119 a path forward is the Powell in the Brainer path 0:01:08.560 --> 0:01:12.920 all that much different forward into twenty two, twenty three, 0:01:13.080 --> 0:01:16.720 and twenty four. I don't think so. I think they're 0:01:16.760 --> 0:01:19.600 pretty much in the same page in terms of thinking Anthony. 0:01:19.680 --> 0:01:23.560 Inflation pressures that we're seen now are mostly transitory. Remember, 0:01:23.640 --> 0:01:27.319 the entire f O MC has supported the current policy path. 0:01:27.640 --> 0:01:30.400 There's been no dissents for for many many meetings, so 0:01:30.480 --> 0:01:33.360 everybody's on board. And also remember the chair can'tons do 0:01:33.400 --> 0:01:35.000 what the chair wants. They have to bring the rest 0:01:35.000 --> 0:01:36.600 of the committee along with you. So I think the 0:01:36.600 --> 0:01:39.040 difference between Paul and Brainer is pretty slight in terms 0:01:39.040 --> 0:01:41.240 of what Monterrey policy actually is going to turn out 0:01:41.240 --> 0:01:43.440 to be over the next couple of years. Some of 0:01:43.440 --> 0:01:47.080 this is the guestimates of previous inflations. Paul Krugman and 0:01:47.080 --> 0:01:49.720 Will Folks will talk about this with Jeffrey Lacker here 0:01:50.320 --> 0:01:53.160 in a bit Bill Dudley Krugman leans to the post 0:01:53.240 --> 0:01:57.400 World War two forty seven super inflation and then collapse 0:01:57.720 --> 0:02:02.880 to Eisenhower deflation, where Mr Lacker of Richmond suggests, maybe 0:02:02.880 --> 0:02:05.760 this is more pernicious like what we saw in the 0:02:05.840 --> 0:02:10.480 nineties sixties. Which kind of inflation is this? Well, I 0:02:10.480 --> 0:02:11.960 don't think we know the answer to that, because we 0:02:11.960 --> 0:02:14.680 haven't had this kind of recovery from a pandemic before. 0:02:15.040 --> 0:02:17.760 What we do know, though, is that the inflation pressures 0:02:17.760 --> 0:02:20.520 are turning out to be higher for longer. We know 0:02:20.600 --> 0:02:23.080 that that's starting to feed into wages, and we know 0:02:23.160 --> 0:02:26.760 that that's starting to feed into inflation expectations. So even 0:02:26.760 --> 0:02:29.480 if the initial impulse turned out to be transitory, you 0:02:29.520 --> 0:02:32.560 could still have long lasting consequences. We also know that 0:02:32.560 --> 0:02:34.480 the Federal Reserve is pretty late here in terms of 0:02:34.480 --> 0:02:36.639 responding to any of this. They're still adding stimulus, They're 0:02:36.639 --> 0:02:39.840 still buying treasuries and agency mortgage backed securities, which is 0:02:39.880 --> 0:02:41.880 pretty remarkable if you just step away from it for 0:02:41.919 --> 0:02:44.160 a moment and say, would you expect the Fed be 0:02:44.320 --> 0:02:47.000 adding monetary policy SteamOS at a time that inflation is 0:02:47.040 --> 0:02:49.919 running over six percent bell A market participant could be 0:02:49.960 --> 0:02:52.359 super nimble. I could be nimble with the incoming dates 0:02:52.360 --> 0:02:54.800 when change my mind. It seems to be a really 0:02:54.880 --> 0:02:58.480 high bar for federals of participant to change their mind. 0:02:58.600 --> 0:03:01.040 As you point out, this is way harder than expected 0:03:01.080 --> 0:03:04.160 it would be. It's stickier, it's broader. But I don't 0:03:04.200 --> 0:03:06.799 hear them changing their mind. But from your experience, what 0:03:06.840 --> 0:03:09.840 does it take to change your view? But I think 0:03:09.880 --> 0:03:13.440 they're in a type place because the fact is to 0:03:13.560 --> 0:03:16.280 change their mind, they have to accelerate the taper to 0:03:16.320 --> 0:03:18.360 get the taper done quicker, because they've made it very 0:03:18.360 --> 0:03:20.359 clear that they're not going to taper and you're not 0:03:20.440 --> 0:03:22.400 gonna be buying assets and at the same time being 0:03:22.520 --> 0:03:24.960 raised raised short term interest rates. So the taper has 0:03:25.000 --> 0:03:28.040 to be completed before they actually lift off. And to 0:03:28.080 --> 0:03:33.280 accelerate the taper would be problematic because you tried to 0:03:33.800 --> 0:03:36.840 put this out in a very controlled way to avoid 0:03:36.880 --> 0:03:39.280 a taper tantrum. If you not accelerate the taper, you're 0:03:39.280 --> 0:03:41.160 gonna get the taper tantrum that you're that you've been 0:03:41.160 --> 0:03:43.440 trying to avoid for the last six or twelve months. 0:03:44.120 --> 0:03:46.040 In your mind, Then do you conclude building this is 0:03:46.080 --> 0:03:49.320 no longer a date independent Federal Reserve given what you 0:03:49.400 --> 0:03:53.200 just said, well, I think that you know there's a 0:03:53.240 --> 0:03:55.000 case to be made for accelerating the taper. I mean, 0:03:55.040 --> 0:03:57.120 I think if you just look at the economic information 0:03:57.120 --> 0:04:00.000 that we're seeing flash and higher for longer fleash next 0:04:00.000 --> 0:04:03.400 dictations becoming unanchored, the labor market very tight. But I 0:04:03.400 --> 0:04:05.280 think it's very difficult for them to actually do that 0:04:05.320 --> 0:04:08.280 because that's an admission of a policy error, and it 0:04:08.320 --> 0:04:10.200 creates the risk of this taper TENDERM so I think 0:04:10.440 --> 0:04:12.880 end of the day, I think they'll probably wait. Should 0:04:12.880 --> 0:04:16.960 they wait, We'll see, Bill, you said basically that they 0:04:17.000 --> 0:04:19.640 have put themselves between a rock and a hard place. 0:04:19.880 --> 0:04:22.520 Are you saying that they've already committed a policy error 0:04:22.520 --> 0:04:25.640 by waiting as long as they have, particularly for ending 0:04:25.800 --> 0:04:29.080 their bond purchases. Well, I think they have made a 0:04:29.160 --> 0:04:33.440 mistake in the sense of being so slow to start 0:04:33.480 --> 0:04:35.480 the taper. They basically said, we're not going to start 0:04:35.520 --> 0:04:38.159 the taper until we made substantial progress towards these goals 0:04:38.160 --> 0:04:41.120 of employment and inflation. And now the taper isn't going 0:04:41.200 --> 0:04:44.160 to be completed by until June of next year. On 0:04:44.279 --> 0:04:48.360 the current trajectory, that's a very slow path of removal 0:04:48.360 --> 0:04:51.640 of accommodation given the economic information that we're seeing. So 0:04:51.680 --> 0:04:54.159 I think they've by locking themselves in this way. I 0:04:54.200 --> 0:04:57.480 think they've doubled down on being late. This is an 0:04:57.480 --> 0:04:59.719 important distinction when you say that this is the FEDS 0:04:59.800 --> 0:05:01.599 do wing that they are are between a rock and 0:05:01.640 --> 0:05:04.120 a hard place, when some people are arguing, even if 0:05:04.120 --> 0:05:06.160 they were to raise rates, that wouldn't have a material 0:05:06.200 --> 0:05:09.040 effect on the inflationary inputs, that won't solve supply chain 0:05:09.120 --> 0:05:12.880 disruptions that won't necessarily heal some of the labor shortages. 0:05:13.200 --> 0:05:16.240 Are you basically saying that at this point they are 0:05:16.480 --> 0:05:20.039 lacking the tools to really curtail inflation in a controlled way, 0:05:20.360 --> 0:05:23.680 and that they're hoping that it just remedies itself without 0:05:23.720 --> 0:05:27.680 them having to act. I mean, monitary policy obviously can't 0:05:27.760 --> 0:05:32.120 solve supply constraints. The only time can solve supply constraints. 0:05:32.360 --> 0:05:35.839 But what monterrey policy can do is keep temporary shocks 0:05:35.839 --> 0:05:39.600 to inflation from becoming more persistent and long lasting by 0:05:39.640 --> 0:05:42.840 preventing it from getting into inflation expectations and getting into wages. 0:05:43.040 --> 0:05:44.680 I think the biggest risk for the FED right now 0:05:44.720 --> 0:05:46.159 is that the labor market may turn out to be 0:05:46.160 --> 0:05:49.760 tighter sooner than what they anticipated. If that's the case, 0:05:50.160 --> 0:05:52.159 they're gonna have to make monterrey policy much tighter at 0:05:52.240 --> 0:05:55.280 some point. Bill, you've been in the trenches of market 0:05:55.360 --> 0:05:58.520 economics working with Ed mcclvy, and of course a younger 0:05:58.600 --> 0:06:02.920 Jan has a golden secs. Have you ever seen such 0:06:02.960 --> 0:06:09.320 an odd consensus so many not idiosyncratic but original Modeling 0:06:09.520 --> 0:06:14.920 forward twelve months of the guestimates of market economics, Well, 0:06:14.960 --> 0:06:17.480 I think that the FETE has been very clear about 0:06:17.520 --> 0:06:20.560 what their framework is and that been their applied trajectory 0:06:20.600 --> 0:06:23.360 for interestry. I think that's unusual to to commit yourself 0:06:23.400 --> 0:06:25.240 for so long into the future about what you're going 0:06:25.320 --> 0:06:28.080 to do when, as we see, the economic environment can 0:06:28.160 --> 0:06:31.359 change very quickly. It's also risking environment that's highly uncertain. 0:06:31.400 --> 0:06:32.760 It's not like we have a lot of experience in 0:06:32.839 --> 0:06:35.599 terms of recoveries from pandemics. So I think the FED 0:06:35.640 --> 0:06:38.160 probably made a mistake by locking themselves to to to 0:06:38.440 --> 0:06:41.680 into it a pre predicted path of how they were 0:06:41.680 --> 0:06:44.320 going to be. Bill. There was one conversation this year 0:06:44.400 --> 0:06:46.159 that's really stood out for me and I won't forget it. 0:06:46.160 --> 0:06:48.200 It was sitting down with you and Mohammed, just going 0:06:48.240 --> 0:06:50.280 into the summer, and you said something that really stunck 0:06:50.320 --> 0:06:52.839 with Mohammed, and and we talked about it subsequently that 0:06:52.880 --> 0:06:54.560 if the FETE started to move, they may have to 0:06:54.560 --> 0:06:56.960 move more quickly to get back to neutral, to do 0:06:57.000 --> 0:06:58.520 it more quickly. And that was an original thought at 0:06:58.520 --> 0:07:00.800 the time going into summer. But I wonder if we 0:07:00.800 --> 0:07:02.520 can add to that right now because we have this 0:07:02.560 --> 0:07:04.680 bizarre situation on Wall Street at the moment where we 0:07:04.680 --> 0:07:06.680 have this conversation about a FED being behind the curve, 0:07:07.080 --> 0:07:08.840 and then I'll ask someone, Okay, what does the FED do? 0:07:09.279 --> 0:07:12.120 And they'll say, one high CONQ three, one hiking Q four. 0:07:12.240 --> 0:07:13.880 Then they'll repeat the move in the year after and 0:07:13.880 --> 0:07:15.480 we'll have another two interest rate hikes. And it all 0:07:15.520 --> 0:07:18.480 sounds very calm, very smooth, and very orderly. Bill, you 0:07:18.520 --> 0:07:20.559 disagree with that to some extent, Can you just inform 0:07:20.600 --> 0:07:24.239 our audience, how well, what's very unusual about the market 0:07:24.320 --> 0:07:26.280 right now is the market expects the peak in short 0:07:26.360 --> 0:07:28.560 term interest rates for the federal fund rate to be 0:07:28.600 --> 0:07:31.480 around one in three quarters percent. One in three quarters 0:07:31.520 --> 0:07:33.520 percent peak in the federal fund rate in this business 0:07:33.520 --> 0:07:35.800 cycle will be the lowest peak ever going back all 0:07:35.840 --> 0:07:38.080 the way to the nineteen fifties. So this idea that 0:07:38.160 --> 0:07:40.600 somehow the peak in infestrates is going to be extremely 0:07:40.680 --> 0:07:44.760 low environment where inflation is extremely high just seems completely 0:07:44.760 --> 0:07:47.160 inconsistent to me. A lot of people will argue, though, Bill, 0:07:47.360 --> 0:07:48.960 that one of the reasons why is because of all 0:07:49.000 --> 0:07:51.200 the depth that's been issued, because of all of the 0:07:51.280 --> 0:07:55.880 high valuations and stocks that pensions rely on retirees. So basically, 0:07:56.120 --> 0:07:58.520 the FED will not allow the market to fall because 0:07:58.520 --> 0:08:00.680 it could torpedo the economy at a time when they 0:08:00.680 --> 0:08:02.920 have fewer tools to deal with it. Do you buy 0:08:02.960 --> 0:08:05.920 that argument, Well, of course the Fed doesn't want to 0:08:05.960 --> 0:08:08.720 cause a premature recession, but they're gonna the tightening of 0:08:08.800 --> 0:08:13.080 Mantrey policy has to tighten financial conditions. Tighter financial conditions 0:08:13.160 --> 0:08:16.280 is the mechanism that slows down at the economy, prevents 0:08:16.280 --> 0:08:19.680 the economy from continue to overheat. Now, obviously there's risks 0:08:19.720 --> 0:08:22.160 into doing that. You want to do enough to slow 0:08:22.200 --> 0:08:24.560 the economy down so you don't have higher and higher inflation, 0:08:24.920 --> 0:08:26.520 but not so much that you put push the e 0:08:26.520 --> 0:08:29.160 commy into recession. The risk, of course have gone up. 0:08:29.760 --> 0:08:32.120 The later you are to tighten Montrey policy, the higher 0:08:32.120 --> 0:08:34.719 the risk that the tightening ultimately leads to recession. This 0:08:34.840 --> 0:08:37.000 is crystal ball type stuff, Bill, But what kind of 0:08:37.040 --> 0:08:40.440 right path do you imagine? How shallow, how stape incrementally? 0:08:40.440 --> 0:08:43.400 What kind of moves would you expect. I think they're 0:08:43.400 --> 0:08:46.439 gonna go, you know, start probably after you know, June 0:08:46.480 --> 0:08:48.319 or a little bit later, and then they're gonna go 0:08:48.440 --> 0:08:50.800 faster than what people think and to a higher rate 0:08:50.840 --> 0:08:53.040 peak than what people think. Well, I think It's interesting 0:08:53.080 --> 0:08:55.440 is people have completely forgotten about what happened between two 0:08:55.480 --> 0:08:57.200 thousand and four and two thousand and six, where the 0:08:57.200 --> 0:09:00.679 FED tightened seventeen times in a row, each meeting quarter 0:09:00.720 --> 0:09:03.000 percentage point, taking the federal fund ray from one percent 0:09:03.040 --> 0:09:06.320 to five and a quarter percent. That seems extreme, but 0:09:06.440 --> 0:09:10.319 remember inflation wasn't a problem then, uh, and financial conditions 0:09:10.320 --> 0:09:13.240 weren't as a cognative as they are today. So you know, 0:09:13.400 --> 0:09:15.760 that's certainly an alternative type of pass that we could see. 0:09:15.760 --> 0:09:17.839 I certainly expect the peak to be well above the 0:09:17.880 --> 0:09:20.800 one and three quarters percent it's currently priced into financial markets. 0:09:20.840 --> 0:09:22.640 Just not have a three handle bill just to squeeze 0:09:22.640 --> 0:09:25.240 that question in what kind of thinking about Yeah, probably 0:09:25.280 --> 0:09:27.840 probably three or four. Yeah, that's what I would You know, 0:09:27.920 --> 0:09:30.360 obviously it's a crystal ball is cloudy? Was as you 0:09:30.360 --> 0:09:34.839 get further out of there we go Fed speak. You 0:09:34.960 --> 0:09:37.120 can't quite get away from the Fed too much. Tom, 0:09:37.200 --> 0:09:40.200 that was such a rude question the clinic, the former 0:09:40.240 --> 0:09:42.040 New York Fed President, thank you very much. Just to 0:09:42.080 --> 0:09:43.960 get in the mind, Tom, of a policy maker at 0:09:43.960 --> 0:09:46.079 the moment and a FLM a policy maker just to 0:09:46.120 --> 0:09:48.720 speak hopingly about what they think compared to where this 0:09:48.760 --> 0:09:57.559 market is. As we spoke with William Dudley earlier, we 0:09:57.640 --> 0:10:00.680 now speak with Jeffrey Lacker of Wisconsin, and of course 0:10:00.960 --> 0:10:03.600 of tenure at the Richmond Fed. And it is a 0:10:03.640 --> 0:10:07.520 wonderful sequence of conversation because of the history of the 0:10:07.640 --> 0:10:12.880 Richmond Fed. No one is is owned economic history like 0:10:13.000 --> 0:10:16.800 the Richmond Fed. Back the over thrilled to Jeffrey Lacker 0:10:16.840 --> 0:10:20.000 could join us, uh this morning, Jeff Lacker, we were 0:10:20.000 --> 0:10:23.960 talking in the comments there of Bill Dudley of Berkeley, 0:10:24.040 --> 0:10:27.360 and of course of the New York Fed shifting. Dare 0:10:27.400 --> 0:10:30.920 I say, Jeff to the edge of lacquer, does it 0:10:31.040 --> 0:10:35.439 surprise you to see moderates or even some doves approach 0:10:35.559 --> 0:10:40.959 a more cautious Richmond view. It's certainly striking that a 0:10:41.080 --> 0:10:43.240 number of people that you would historically think of as 0:10:43.400 --> 0:10:45.680 on the dovish wig have come around to this. But 0:10:45.760 --> 0:10:48.240 in a way it's not surprisingly. I think it's because 0:10:48.280 --> 0:10:53.199 of how far out of bounds of historical pattern the 0:10:53.320 --> 0:10:57.040 feds reaction for this inflation surge has been. People forget 0:10:57.120 --> 0:11:00.360 that the reason we got inflation under control, haimed it 0:11:00.360 --> 0:11:02.640 and then brought it down to two percent was by 0:11:02.679 --> 0:11:06.320 reacting with alacrity to inflation, scares little blips in the 0:11:06.360 --> 0:11:11.680 bond market that signaled the possibility of increased inflation expectations. Instead, 0:11:11.679 --> 0:11:14.319 this FED seems to be willing to let it run. 0:11:14.320 --> 0:11:18.640 And Jeffrey, and let's take at Jeffrey right now, to 0:11:18.679 --> 0:11:20.720 the immedia debate at hand. And I do this in 0:11:20.800 --> 0:11:23.440 honor of Thomas Humphrey, of course, and all the history 0:11:23.800 --> 0:11:26.400 you've done, Paul Krugman has gone back to the history 0:11:26.640 --> 0:11:30.280 of ninety seven, the post World War two spike down. 0:11:30.320 --> 0:11:36.040 We came with massive disinflation, Eisenhower deflation, and then there's 0:11:36.040 --> 0:11:39.000 a late sixties which was a little bit different. You 0:11:39.440 --> 0:11:43.600 basically suggests Mr Kruegman maybe off and Mr Lacker maybe on, 0:11:44.000 --> 0:11:49.960 with a more pernicious inflation of the late sixties discuss Well, 0:11:50.000 --> 0:11:53.880 I can see why the episode is attractive for those 0:11:53.920 --> 0:11:57.640 who are sanguine about this surge, But for me, it 0:11:57.720 --> 0:12:00.360 seems like the nineteen sixties and early set and vis 0:12:00.480 --> 0:12:04.880 is the more apt comparison. Inflation is ultimately about fiscal 0:12:04.920 --> 0:12:07.760 and monetary policy, and at that time period you had 0:12:08.120 --> 0:12:12.720 two very significant shifts shift in fiscal policy, with President 0:12:12.800 --> 0:12:16.959 Johnson running a Great Society program, but also running an 0:12:17.080 --> 0:12:20.480 escalation in the war in Vietnam that busted budgets. And 0:12:20.520 --> 0:12:24.360 then on the monetary policy side, you had the gradual 0:12:24.440 --> 0:12:28.240 and then sudden abandonment of the Breton Woods system, which 0:12:28.320 --> 0:12:31.719 tied the value of the dollar, however loosely, but in 0:12:31.800 --> 0:12:35.000 the long run to gold and tied down longer run 0:12:35.040 --> 0:12:40.440 inflation expectations. In addition, you had the subservience of FED 0:12:40.520 --> 0:12:45.240 Chairman William mc chesney, Martin and Arthur Burns to prevailing 0:12:45.760 --> 0:12:48.920 political wins, a subservience that tilted them in the direction 0:12:49.000 --> 0:12:56.199 of um reducing unemployment and setting inflation pressures aside. Today 0:12:56.600 --> 0:13:00.559 now we obviously have a very striking and la change 0:13:00.559 --> 0:13:02.840 in the fiscal outlook that's appeared over the last couple 0:13:02.880 --> 0:13:05.840 of years. And on the monetary policy side, the Fed 0:13:06.000 --> 0:13:09.760 rewrote its framework, it rewrote its philosophy last year, and 0:13:10.200 --> 0:13:14.520 again it tilted towards greater concern about employment and less 0:13:14.520 --> 0:13:17.559 of a concern about inflation, more of a willingness to 0:13:17.640 --> 0:13:21.520 let it run. Do you agree? Do you agree then 0:13:21.720 --> 0:13:24.160 that the remedy is going to be a very quick 0:13:24.400 --> 0:13:27.240 series of rate hikes or perhaps a jump again to 0:13:27.240 --> 0:13:29.400 what Bill Dudley was talking about where we could get 0:13:29.440 --> 0:13:32.600 three to four percent up and policy rates or peak 0:13:32.640 --> 0:13:36.360 policy rates in the cycle. Three to four percent wouldn't 0:13:36.400 --> 0:13:41.600 surprise me. Recycle, I think they're on track to a 0:13:41.880 --> 0:13:47.880 major policy blunder and recovering from that, realizing they've waited 0:13:47.920 --> 0:13:51.920 too long, it's going to cause them two of necessity, 0:13:52.040 --> 0:13:56.000 raise rates sharply and try and engineer a cooling of 0:13:56.040 --> 0:13:59.280 the labor market, and that very rarely turns out. Well, 0:13:59.400 --> 0:14:03.800 it's Bill Dudley's pointed this out publicly that UM and 0:14:03.840 --> 0:14:06.719 others as well, that the FED rarely is able to 0:14:06.720 --> 0:14:08.720 get the unemployment rate to like go back up a 0:14:08.760 --> 0:14:11.680 little bit without it going up fairly large amounts very 0:14:11.720 --> 0:14:14.840 hard to calibrate just how much UM to take out 0:14:14.840 --> 0:14:17.920 of the system, and UM, it seems to me plausible 0:14:17.960 --> 0:14:19.720 that we get to three and a half four percent, 0:14:20.240 --> 0:14:24.480 and in addition, that we pushed the economy into a recession. Yeah, well, 0:14:24.520 --> 0:14:25.880 that's exactly where I was going to go with this, 0:14:25.960 --> 0:14:28.240 Jeff Man. I'm looking right now at the average high 0:14:28.320 --> 0:14:30.640 yield bond held. The average junk bond HEIL to the 0:14:30.680 --> 0:14:33.840 United States is currently at four point to three percent. 0:14:34.000 --> 0:14:37.080 That is all inclusive, you get the overnight rate at 0:14:37.120 --> 0:14:39.240 three and a half to four percent, What does that 0:14:39.320 --> 0:14:41.600 do to the valuations of these securities? What kind of 0:14:41.640 --> 0:14:44.080 recession are we looking at? And won't the Fed be 0:14:44.160 --> 0:14:47.240 reluctant to move in that kind of manner because of 0:14:47.280 --> 0:14:50.680 the torpedoing effect on markets? Yeah, I think they're in 0:14:50.680 --> 0:14:53.840 a situation where they need to avoid an era. They 0:14:53.880 --> 0:14:59.680 need to pivot, recalibrate pretty rapidly, accelerate the taper get 0:14:59.680 --> 0:15:02.800 ready increases started earlier next year in the first half, 0:15:03.280 --> 0:15:07.240 and they're gonna need some good luck. And I think, um, 0:15:07.320 --> 0:15:10.600 a lot of markets seem to me priced for a 0:15:10.640 --> 0:15:12.560 lot of good luck. Jeff Flecker. I want to take 0:15:12.600 --> 0:15:15.720 the freshwater heritage here of the wonderful Marvin good Friend 0:15:15.760 --> 0:15:18.840 and of course his mentor Alan Meltzer at Carnegie mel 0:15:18.920 --> 0:15:21.840 And Alan Meltzer lectured me like you lectured me. We've 0:15:21.880 --> 0:15:24.920 got to look all in at the macro data in 0:15:24.960 --> 0:15:29.200 America as an entirety. Or are we so polarized now 0:15:29.480 --> 0:15:32.680 that the president's studying inflation has to look at it 0:15:32.680 --> 0:15:38.400 as two chords, the haves and they have nots. Good question, 0:15:38.440 --> 0:15:40.360 we typically haven't don't have a lot of data on 0:15:40.800 --> 0:15:45.400 UM inflation rates by cohorts UM. I think, more broadly, 0:15:46.080 --> 0:15:51.040 differential effects of inflation translated into UH, different political implications 0:15:51.080 --> 0:15:57.080 for the FED, different levels of political system dissatisfaction for 0:15:57.120 --> 0:16:01.320 the FED. On the employment side, I think UM, the 0:16:01.360 --> 0:16:07.960 FEDS redefined maximum employment as broad and inclusive. UM. That's 0:16:08.280 --> 0:16:10.400 all well and good, but it's really hard to measure, 0:16:10.440 --> 0:16:14.200 and by adding more, essentially more goals, you sort of 0:16:14.200 --> 0:16:16.880 weaken your attachment to any of them, and it raises 0:16:16.920 --> 0:16:22.360 serious questions. I think like the FED has been UM 0:16:22.880 --> 0:16:30.200 a slave to a deeply flawed and outmoded conception of 0:16:30.480 --> 0:16:34.160 maximum employment, and I think they missed an opportunity lest 0:16:34.200 --> 0:16:38.000 way to update that. Jeff one last question, because you're 0:16:38.000 --> 0:16:41.200 gonna throw me off air. Who was closer to the 0:16:41.240 --> 0:16:47.520 flawed concept? Governor Brainerd or Chairman Paul. I don't see 0:16:47.600 --> 0:16:50.200 much daylight to between them on this. I think that 0:16:50.280 --> 0:16:54.000 they're both strongly aligned with the House view that the 0:16:54.600 --> 0:16:59.920 board staff and others in the system promulgate UM views 0:17:00.480 --> 0:17:05.840 that views maximum employment as this timeless parameter that we 0:17:05.960 --> 0:17:08.880 get to at the very end of a long expansion 0:17:09.160 --> 0:17:11.399 if we're not if in the event that we're not 0:17:11.520 --> 0:17:14.879 hit by any shocks in the meantime, and you have 0:17:14.960 --> 0:17:18.639 to ask yourself the question, what was maximum employment in 0:17:18.720 --> 0:17:21.760 the third quarter of two thousand and twenty one, Well, 0:17:21.800 --> 0:17:24.880 whatever it was, we surely got there and went beyond. 0:17:25.240 --> 0:17:28.320 So the modern view that corresponds to the Monar view, 0:17:28.320 --> 0:17:32.160 which is that, uh, maximum employment in the natural rate, 0:17:32.240 --> 0:17:35.760 call it what you will, is something that fluctuates substantially 0:17:36.480 --> 0:17:39.159 over the business cycle, sub fluctuates with a lot of 0:17:39.200 --> 0:17:41.760 different economic conditions, and the FED needs to take that 0:17:41.880 --> 0:17:43.760 on board. This is why I love to speaking a 0:17:43.800 --> 0:17:46.440 former FED presidents because, Jeff, you'd never say this ten 0:17:46.520 --> 0:17:52.680 years ago. People speak them openly, I say, I said 0:17:52.720 --> 0:17:55.080 in the committee, and now it's only a changement. Jeff, 0:17:55.080 --> 0:17:58.520 thank you. Fund it there, Jeff Laca, former welcome FED president, 0:17:58.560 --> 0:18:07.120 Thank you very much. Joining us now. Lori Calvacina, head 0:18:07.119 --> 0:18:09.879 of US equity strategy at RBC Capital Markets. Laurie at 0:18:09.880 --> 0:18:14.600 the close on Friday forty two year end two, you're 0:18:14.640 --> 0:18:17.679 at fifty fifty. Walk us through the path to fifty 0:18:17.720 --> 0:18:21.680 fifty year and twenty two. So thanks John, It's great 0:18:21.680 --> 0:18:23.719 to be with you guys. As always, Um, look, we 0:18:23.760 --> 0:18:26.879 wanted to really refocus the conversation as opposed to just 0:18:26.960 --> 0:18:28.520 kind of thinking about where we're going to trade over 0:18:28.520 --> 0:18:30.080 the next six weeks, where we're going to trade over 0:18:30.119 --> 0:18:32.560 the next twelve months. And so we just went back 0:18:32.600 --> 0:18:35.120 to our models on basically all of the economic back 0:18:35.160 --> 0:18:37.720 tests and models point us to about fifty or higher. 0:18:37.920 --> 0:18:40.919 Our valuation models um several of which are looking at 0:18:40.920 --> 0:18:43.200 stocks versus bonds, reporting us to a number of about 0:18:43.240 --> 0:18:45.679 fifty fifty. And I think what we're really seeing in 0:18:45.720 --> 0:18:48.520 the data are two things. Is One, even though economic 0:18:48.560 --> 0:18:50.639 growth is expected to cool off next year and we 0:18:50.680 --> 0:18:53.240 do have some hurdles to get through frankly on supply 0:18:53.320 --> 0:18:56.000 chains and inflation, if we're if we're right about where 0:18:56.000 --> 0:18:57.600 the economy is going to end up next year, if 0:18:57.640 --> 0:18:59.560 it's about a four percent type number, which is what 0:18:59.640 --> 0:19:03.280 the economics community is anticipating right now, we should be 0:19:03.280 --> 0:19:06.840 getting to somewhere around SMP. That would be fair value. 0:19:07.080 --> 0:19:08.879 And all of our valuation work. If you look at 0:19:08.880 --> 0:19:12.359 stocks versus bonds in particular, stocks are still the only 0:19:12.359 --> 0:19:14.240 game in town, and I think that gets lost in 0:19:14.280 --> 0:19:16.760 this equity market discussion. At some point in time, Yes, 0:19:16.800 --> 0:19:19.719 we have extended valuations um. But stocks, at the end 0:19:19.720 --> 0:19:21.800 of the day are an inflation hedge. And when we 0:19:21.800 --> 0:19:24.560 look at our models that evaluate stocks versus bonds, we're 0:19:24.560 --> 0:19:28.680 still seeing a case for eight percent type returns next year. Laura, 0:19:28.800 --> 0:19:32.159 just a beautiful brief there. Um. I noticed Lory the 0:19:32.240 --> 0:19:35.040 string from General Electric to J and J and this 0:19:35.080 --> 0:19:38.160 morning the idea that Royal Dutch Shell will finally move 0:19:38.240 --> 0:19:40.960 from the Netherlands back over the United Kingdom. And these 0:19:40.960 --> 0:19:44.439 are corporations that adapt. They're gonna adapt based on what 0:19:44.520 --> 0:19:49.159 you just said to seven, eight, even nine nominal g 0:19:49.280 --> 0:19:52.240 d P if you, you know, forget about the mathiness 0:19:52.320 --> 0:19:55.239 of it. You extrapolate, the interpolate whatever a phrase from 0:19:55.280 --> 0:19:58.720 my childhood. How do you base your call? Is it 0:19:58.800 --> 0:20:02.120 based simply on non an old g d P. It's 0:20:02.160 --> 0:20:04.320 we we look at nominal GDP, we look at real 0:20:04.400 --> 0:20:07.119 GDP um again, we look at stocks relative to bonds. 0:20:07.160 --> 0:20:09.240 We look at a plain old fashioned pe multiple and 0:20:09.280 --> 0:20:12.280 make an assessment about next year's earnings. And I'll tell you, Tom, 0:20:12.400 --> 0:20:15.880 the earnings discussion is fascinating because there was so much 0:20:15.960 --> 0:20:18.800 eggs on this last reporting season. But whether or not 0:20:18.840 --> 0:20:20.840 companies were going to be able to manage through supply 0:20:20.920 --> 0:20:23.720 chain pressures and inflation pressures, and there was a lot 0:20:23.760 --> 0:20:26.600 of you know, complaining, and I'm not saying that it's unjustifiable, 0:20:27.240 --> 0:20:29.560 but if you look at the inflation discussion, it was 0:20:29.560 --> 0:20:32.160 pretty negative. We had a lot of companies talking about how, 0:20:32.520 --> 0:20:34.920 you know, their inflation outlooks had gone up next year, 0:20:34.920 --> 0:20:36.760 that they were caught off guard by the inflation that 0:20:36.800 --> 0:20:39.920 they saw perk up in three Q. Supply chain pressures 0:20:39.960 --> 0:20:42.280 have been real, they have been intense, but at the 0:20:42.320 --> 0:20:46.800 same time, companies have demonstrated a remarkable ability to structurally 0:20:46.880 --> 0:20:49.959 suck out costs from their systems. They have been applauding 0:20:49.960 --> 0:20:53.000 their supply chain teams, their logistic teams. They've been getting 0:20:53.000 --> 0:20:55.119 inventories on the shelves, they've been meeting the demand that 0:20:55.160 --> 0:20:57.800 they can, and they are managing through in a remarkable way. 0:20:57.840 --> 0:21:01.080 And I'm really hard pressed to understand why that won't 0:21:01.119 --> 0:21:04.080 continue next year on the strength that we've already seen glory. 0:21:04.200 --> 0:21:06.879 How much is a question mark here fiscal spending, the 0:21:06.880 --> 0:21:08.920 idea that we're gonna get a fiscal drag next year, 0:21:09.119 --> 0:21:12.040 and that could potentially affect how much consumers are willing 0:21:12.080 --> 0:21:13.879 to absorb these costs. I mean, I'm struck with the 0:21:13.920 --> 0:21:16.359 fact that nearly two out of three of the biggest 0:21:16.359 --> 0:21:20.399 two AS companies actually reported substantially fatter profit margins this 0:21:20.520 --> 0:21:24.159 year than back in two thousand nineteen. Well, look, I 0:21:24.160 --> 0:21:26.760