WEBVTT - Surveillance: Fed Game Plan with Dudley 0:00:05.120 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.480 --> 0:00:12.320 with Jonathan Farrell and Lisa Abramowitz joined us each day 0:00:12.360 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.479 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.600 --> 0:00:30.480 the Bloomberg Terminal, and the Bloomberg Business app. Joining us. 0:00:30.480 --> 0:00:33.800 So let's get right to it right now with William Dudley. 0:00:33.840 --> 0:00:37.600 He is a former New York Fed President, preceding John Williams. 0:00:38.000 --> 0:00:40.800 He writes for Bloomberg Opinion. We are honored by that, 0:00:41.000 --> 0:00:45.600 and most importantly, he has led an incredibly consistent and 0:00:45.760 --> 0:00:48.600 cogent debate of how we need to get used to 0:00:48.680 --> 0:00:51.479 higher interest rates, We need to get use to a 0:00:51.560 --> 0:00:56.480 more sustained inflation and do something about it. Bill, what 0:00:56.560 --> 0:01:00.760 do you make of the cacophony of the last and days? 0:01:00.840 --> 0:01:04.440 Just as in an open question to a former art official, 0:01:05.040 --> 0:01:08.880 your your followers speaking, you're in the next hour, what 0:01:09.000 --> 0:01:12.560 do you make of the last ten days? Well, I 0:01:12.600 --> 0:01:15.000 would say it's really much ado about nothing, because at 0:01:15.000 --> 0:01:16.880 the end of the day, how the economy performs is 0:01:16.880 --> 0:01:19.480 going to determine how much the FEED does, and any 0:01:19.480 --> 0:01:21.880 disagreement between the market and the Feds we resolved by 0:01:21.920 --> 0:01:24.160 the economic data. Uh. You know, what we saw on 0:01:24.319 --> 0:01:26.240 Friday is a good example that we had a very 0:01:26.240 --> 0:01:29.600 strong employment report, and the market is now repriced to 0:01:30.120 --> 0:01:32.720 basically mimic what the FET is written down in their 0:01:32.760 --> 0:01:36.480 December Summary of Economic projections. Market is now pricing in 0:01:36.520 --> 0:01:38.320 a twenty five basic point rate hike in March, in 0:01:38.400 --> 0:01:41.240 the twenty five basic point great hike and make that's 0:01:41.240 --> 0:01:44.399 what FEED officials have been promising. So we're pretty much 0:01:44.400 --> 0:01:48.840 in alignment. Now, what is the character of our disinflation? 0:01:48.960 --> 0:01:52.000 The textbooks you studied at Berkeley would be something like, 0:01:52.480 --> 0:01:57.640 there's a sixties seventies Prevoker inflation, there is a Korean 0:01:57.680 --> 0:02:01.120 War sharp disinflation, which the Laurea Krugman wrote about just 0:02:01.200 --> 0:02:04.120 in the recent days, and then there's all discussion about 0:02:04.120 --> 0:02:07.600 the Biden stimulus, and almost back to Freedman and a 0:02:07.720 --> 0:02:13.679 monitorist dynamic. What does Dudley disinflation look like? Well, I 0:02:13.680 --> 0:02:15.519 think part of the problem is that debased and muddeled 0:02:15.600 --> 0:02:18.200 is because people have either put themselves in the transitory 0:02:18.280 --> 0:02:20.520 camp or the non transitory camp. And the reality is 0:02:20.560 --> 0:02:23.160 we have some of both. In the transitory side, we 0:02:23.160 --> 0:02:25.919 had a lot of goods pressure inflation in the goods 0:02:25.919 --> 0:02:27.880 marketing sector of the of the economy because of the 0:02:27.880 --> 0:02:31.320 shifting composition of demand towards goods during the pandemic. That's 0:02:31.320 --> 0:02:33.359 all I'm winding now. But we still have quite a 0:02:33.400 --> 0:02:36.120 bit of pressure in services inflation. And that's one thing 0:02:36.160 --> 0:02:38.720 that policy highlighted. We need to get services inflation x 0:02:38.800 --> 0:02:41.240 housing down. We're not gonna do that until we have 0:02:41.320 --> 0:02:43.840 more slack in the labor market, the layer markets basically 0:02:43.880 --> 0:02:46.880 the tightest layer market in memory, uh, and that that 0:02:47.040 --> 0:02:50.000 is not consistent with a tu percent inflation outturn. So 0:02:50.040 --> 0:02:52.120 the Fendries aerve needs to push the unemployer rate of 0:02:52.240 --> 0:02:54.880 generate more slack of the layer market get wage inflation down. 0:02:55.360 --> 0:02:57.840 Only once they have done that can they be confident 0:02:57.880 --> 0:02:59.840 and they're gonna get inflation back down to two percent 0:03:00.000 --> 0:03:03.040 on a sustainable basis. What's the role of financial conditions 0:03:03.200 --> 0:03:07.400 on that process of disinflation. Well, the financial conditions are 0:03:07.440 --> 0:03:09.760 sort of the way that monetary paulic the impulse gets 0:03:09.800 --> 0:03:12.000 translated to the real economy. Right, So if the FED 0:03:12.080 --> 0:03:14.399 raises short term interest rates but nothing happens in terms 0:03:14.400 --> 0:03:16.080 of the bond market the stock market, it's not going 0:03:16.120 --> 0:03:18.320 to have much of a restraining impact. So it's really 0:03:18.400 --> 0:03:21.240 important that the rise in short term rates affects bond 0:03:21.320 --> 0:03:24.639 prices and stock prices. That's how the FED gets grabs 0:03:25.240 --> 0:03:27.080 the real economy. We see that in the housing sector. 0:03:27.120 --> 0:03:29.079 It's it's the rise in long term interest rates, the 0:03:29.200 --> 0:03:31.680 rise and morang rates. That's really cool to off housing. 0:03:31.919 --> 0:03:34.840 That's how the FED gets gets attraction on monetary policy. 0:03:35.240 --> 0:03:37.640 You know, I think Paul basically it's not that disturbed 0:03:37.680 --> 0:03:40.920 by the marginal easy in financial conditions to head or 0:03:40.920 --> 0:03:43.120 the last few months, because he knows that if the 0:03:43.160 --> 0:03:46.680 FED keeps going, financial conditions probably won't ease much further 0:03:47.160 --> 0:03:49.080 and the Fed words are, will actually be able to 0:03:49.120 --> 0:03:51.520 get control of things. Well, this isn't really important. Pill. 0:03:51.600 --> 0:03:54.680 Basically you're saying it doesn't really concern FED Chair J. 0:03:54.800 --> 0:03:57.760 Powell because he thinks that when they actually enact tighter 0:03:57.800 --> 0:04:01.160 financial policy, the markets will adapt and adjust. Another word, 0:04:01.200 --> 0:04:02.960 stocks will fall and you won't get the same kind 0:04:03.000 --> 0:04:05.760 of rally that you saw in January. That's a different 0:04:05.800 --> 0:04:08.120 message than the markets taking away, which is that he 0:04:08.160 --> 0:04:11.480 doesn't care. Can you explain why you have conviction around 0:04:11.520 --> 0:04:13.760 the view that he just knows that eventually they're going 0:04:13.800 --> 0:04:16.479 to realize and they're going to see the light. I 0:04:16.480 --> 0:04:18.040 think part of the issue here is that there's a 0:04:18.040 --> 0:04:20.760 lot of concerning about the economic album. So you know, 0:04:20.760 --> 0:04:23.080 Paul isn't really sure how much further he has to go, 0:04:23.440 --> 0:04:26.159 So he's not really sure if financial conditions are off 0:04:26.279 --> 0:04:28.240 where they're relative to where he needs them to be. 0:04:28.480 --> 0:04:30.880 What he does know, though, that is that he controls 0:04:30.920 --> 0:04:33.800 the policy rate, and so if he needs, if he 0:04:33.839 --> 0:04:36.440 needs to slowly coming down more, you can just raise 0:04:36.560 --> 0:04:40.400 policy rates higher, or you can keep them higher higher, longer, 0:04:40.680 --> 0:04:42.960 and that will tighten financial conditions and do the job. 0:04:43.200 --> 0:04:45.719 So the fedcing control here, I mean, financial markets can 0:04:45.800 --> 0:04:47.560 think whatever they want. At the end of the day, 0:04:47.600 --> 0:04:49.719 the Fed Reserve is going to write the script based 0:04:49.760 --> 0:04:52.240 on where they take the Federal fundry build. There's a 0:04:52.279 --> 0:04:55.320 guy out in San Francisco a number of years ago 0:04:55.440 --> 0:04:59.200 who its stars in his eyes and develop our and 0:04:59.240 --> 0:05:02.839 then our ard and now we're talking about our start start. 0:05:03.920 --> 0:05:06.760 You watched the Ascent of John Williams and is great 0:05:06.800 --> 0:05:09.960 respect within monetary economics. And now he sits in the 0:05:10.040 --> 0:05:14.520 chair you had in New York explain our start and 0:05:14.600 --> 0:05:18.600 its importance in this cacophony that we're living in right now. 0:05:19.880 --> 0:05:22.560 What we're trying to do is figure out what level 0:05:22.600 --> 0:05:26.039 of short term rates makes monterary policy restrictive. So to 0:05:26.080 --> 0:05:28.080 do that, you have to have some notion of what's neutral. 0:05:28.560 --> 0:05:30.960 You know that words, how high should not a federal 0:05:31.000 --> 0:05:33.760 fundrais be to have a neutral Montrey policy? And that's 0:05:33.760 --> 0:05:36.039 where our start star comes in. Our star is an 0:05:36.160 --> 0:05:39.240 estimate of what the neutral interest rate is after adjusting 0:05:39.279 --> 0:05:42.279 for inflation. And our star came down in the in 0:05:42.360 --> 0:05:44.640 the last ten or fifteen years. It was running two 0:05:44.720 --> 0:05:48.320 percent prior to the Great Financial Crisis. Now it's around, 0:05:48.400 --> 0:05:50.960 you know, probably somewhere in this one percent range. But 0:05:50.960 --> 0:05:52.520 you have to have a no show where neutral is 0:05:52.520 --> 0:05:55.200 before we can think about what's tight. Right. Well, if 0:05:55.200 --> 0:05:58.760 that's the case, do we have a confidence in our 0:05:58.960 --> 0:06:06.320 meeting demeaning monetary theory? Given the effective technology, the effective demographics, 0:06:06.600 --> 0:06:10.760 the effect of larger factors that Olivier Blanchard's writing about. Now, 0:06:10.960 --> 0:06:14.880 do we have a confidence the formulas work well? I 0:06:14.920 --> 0:06:17.000 think your pointing out the fact that there's a lot 0:06:17.000 --> 0:06:20.479 of uncertainty exactly what neutral where neutral is uh, And 0:06:20.520 --> 0:06:23.120 so the Fed Reserve is essentially trying to push Monterrey 0:06:23.200 --> 0:06:25.520 policy to us, saying that they're confident that they're at 0:06:25.600 --> 0:06:28.880 in restrictive territory. They probably don't know how restrictive, but 0:06:28.880 --> 0:06:31.640 they're confidence that are there in restrictive territory. As long 0:06:31.640 --> 0:06:33.800 as that they're in restrictive territory, that will slow the 0:06:33.839 --> 0:06:36.800 economy and bring inflation down. Now, if it turns out 0:06:36.880 --> 0:06:39.320 that our star was much higher and a five percent 0:06:39.440 --> 0:06:42.279 fed nomenal Federal FUNDRAI wasn't enough to push Monterrey Paul 0:06:42.760 --> 0:06:45.160 into restrictive territory, the Connie Win Slow and the Federal 0:06:45.160 --> 0:06:47.520 Reserve and ultimately have to do more. So the uncertainy 0:06:47.520 --> 0:06:50.880 about our star is translates to uncertainty about how tight 0:06:50.920 --> 0:06:53.120 does Monterrey policy have to be, how high does the 0:06:53.160 --> 0:06:55.359 federal fundraiate have to go, and how long does the 0:06:55.360 --> 0:06:58.240 Federal Reserve have to keep it there. That details perfectly 0:06:58.240 --> 0:07:00.920 into Friday's labor market report. That really shifted the narrative 0:07:00.960 --> 0:07:06.159 for at least the bottom. But but but this really 0:07:06.240 --> 0:07:09.600 raises a question of whether it was material enough to 0:07:09.720 --> 0:07:13.360 shift your view of how high our star has to be, 0:07:13.520 --> 0:07:17.800 how high the terminal rate needs to go. Well. I 0:07:17.800 --> 0:07:19.720 think at this point the FEDS game plan is to 0:07:19.800 --> 0:07:22.360 go to what they think is restrictive and then keep 0:07:22.360 --> 0:07:24.520 it there as long as it takes. I think, you know, 0:07:24.520 --> 0:07:27.120 if they are faced was stronger data, I think it's 0:07:27.160 --> 0:07:29.960 more likely that they extend the timing of how long 0:07:30.040 --> 0:07:33.040 monetary policy is restrictive as opposed to keep raising the 0:07:33.160 --> 0:07:36.000 rate higher and higher. Now, obviously, if the commy stays 0:07:36.080 --> 0:07:38.840 really strong, then they're gonna revise up their forecast of 0:07:38.920 --> 0:07:41.960 what interest rate peak is necessary to slowly commy. I 0:07:42.000 --> 0:07:43.520 don't think we're there yet, but do you think that 0:07:43.680 --> 0:07:46.400 five five quarters still where they're headed, and then they're 0:07:46.400 --> 0:07:47.960 going to hang out there for a while. If the 0:07:47.960 --> 0:07:50.240 econmy stays strong after you get to five to five 0:07:50.240 --> 0:07:52.840 and a quarter, then you could see them move even further. 0:07:53.120 --> 0:07:56.040 Remember we used to talk about the improbability of a 0:07:56.080 --> 0:07:59.880 soft landing, the improbability of getting this to land in 0:08:00.040 --> 0:08:02.360 some sort of nice way, and now that's the base case. 0:08:02.720 --> 0:08:04.400 Do you push back or do you think that it 0:08:04.440 --> 0:08:06.280 looks more and more likely that we could get some 0:08:06.320 --> 0:08:10.440 sort of immaculate disinflation or a soft landing. I think 0:08:10.440 --> 0:08:12.640 it's still unlikely. I mean, I think that it's true 0:08:12.680 --> 0:08:14.680 that we're not going to go into recession anytime soon. 0:08:14.720 --> 0:08:17.000 The economy just says too much for momentum. If you 0:08:17.000 --> 0:08:19.840 look at the Lanta Fed now a GDP now forecast, 0:08:19.840 --> 0:08:21.720 they revised it up by over a percentage point just 0:08:21.760 --> 0:08:23.880 in the last week, so they're looking for two point 0:08:23.920 --> 0:08:26.880 one percent growth first quarter. Before it was less than 0:08:26.920 --> 0:08:29.120 one percent just on the back of last week's data, 0:08:29.440 --> 0:08:31.320 So I think the commy has quite a bit momentum. 0:08:31.480 --> 0:08:34.319 I do think the recession is likely in the medium 0:08:34.559 --> 0:08:37.320 term because the Fed has to push up an employer 0:08:37.400 --> 0:08:39.680 rate by a meaningful amount to generate that slap in 0:08:39.679 --> 0:08:41.959 the layer market. And every time the Fans pushed the 0:08:42.000 --> 0:08:44.200 unemployer rate up by more than half a percentage point, 0:08:44.360 --> 0:08:46.920 we've always ended up in recession. I just don't see 0:08:46.960 --> 0:08:48.760 that this time is gonna be any different. Do you 0:08:48.760 --> 0:08:51.719 think that we, when we look back from historical perspective, 0:08:52.040 --> 0:08:55.000 can write the book on zero rate policies as having 0:08:55.120 --> 0:08:59.640 ended without any sort of financial accident that was material. Well, 0:08:59.679 --> 0:09:01.640 I think all the things that we did during to 0:09:02.000 --> 0:09:04.640 fix the financial system fund the Great Financial Crisis have 0:09:04.720 --> 0:09:06.679 helped a lot. I mean, the banking systems in much 0:09:06.720 --> 0:09:11.160 better shape, much more capital, much more liquidity, stress test mismanagement. 0:09:11.480 --> 0:09:14.320 So I think the financial system system is stronger now. 0:09:14.679 --> 0:09:17.040 And that's why the Fender Reserves in some way in 0:09:17.080 --> 0:09:20.320 control of the process. Once the FED that cheese is objective, 0:09:20.400 --> 0:09:22.280 they can cut rates. And so if the e commy 0:09:22.320 --> 0:09:24.440 turns out to be weaker than the FED wants at 0:09:24.520 --> 0:09:26.920 some point, you know, six months, twelve months down the road, 0:09:27.160 --> 0:09:29.400 the Federal Reserve can cure that pretty quickly because they're 0:09:29.440 --> 0:09:31.319 gonna be a you know, they're gonna be five in 0:09:31.400 --> 0:09:33.760 terms of rates. There canna be plenty of room for 0:09:33.800 --> 0:09:36.800 the Fed to stimulate the economy. That's why Paul, you know, 0:09:36.840 --> 0:09:39.880 said that, you know the risk of staying too tight 0:09:39.960 --> 0:09:42.560 too long is less than the risk of not doing enough, 0:09:42.840 --> 0:09:46.040 because the FAN has the ability to support the time 0:09:46.080 --> 0:09:49.800 comes hugely valuable. Dr Dudley, thank you so much. Quem Dudley, 0:09:49.880 --> 0:10:03.880 the former president of the New York Fed. Next guest home, 0:10:03.920 --> 0:10:06.040 was looking at three hundred thousand, and that was like 0:10:06.080 --> 0:10:10.080 the app he was like, and then we go five 0:10:10.080 --> 0:10:13.760 seven set that Outliers. Andrew Hollenhorst, his chief US economists 0:10:13.760 --> 0:10:16.680 at City Group. He's really provided intellectual leadership over the 0:10:16.720 --> 0:10:19.560 last year. We had a wonderful conversation a number of 0:10:19.600 --> 0:10:22.640 weeks ago here on the terminal rate on where this 0:10:22.760 --> 0:10:26.560 fed will go. Andrew, John and Lisa want to dive 0:10:26.600 --> 0:10:28.800 into that. But what I'd like to talk to you 0:10:28.800 --> 0:10:31.720 about in the days you see, l A, you had 0:10:31.760 --> 0:10:34.400 the great joy of all the heritage U c l 0:10:34.480 --> 0:10:37.480 A of Axcel Leonovot, who is one of the bravest 0:10:37.520 --> 0:10:40.920 economists I've ever read. He was way out front in 0:10:40.920 --> 0:10:43.640 the sixties and seventies. Some people have said he was 0:10:43.679 --> 0:10:46.800 the marine coming out of the trenches on inflation for 0:10:46.920 --> 0:10:50.320 Volker Axel Lanovo would look at the M two right 0:10:50.360 --> 0:10:53.360 now and he would just simply say, what do we 0:10:53.480 --> 0:10:56.400 have going on? What do we have with the money 0:10:56.440 --> 0:10:59.000 supply coming down? You were weaned on this at u 0:10:59.080 --> 0:11:03.160 c l A. Should we pay attention to Leonovid's M two? 0:11:04.559 --> 0:11:06.680 Thanks very much, Tom, And you're right. I mean U 0:11:06.679 --> 0:11:08.680 c l A was a great place to go to school, 0:11:08.840 --> 0:11:12.640 and I think the message was to always take the 0:11:12.640 --> 0:11:16.480 theory seriously, but then confront the theory with reality. And 0:11:16.840 --> 0:11:19.960 I think that's what Axel would ask us to do today. UM. 0:11:20.000 --> 0:11:22.960 In terms of M two, You're right, it's coming down, 0:11:23.000 --> 0:11:26.280 but it's coming down after being up very substantially. And 0:11:26.520 --> 0:11:30.079 I think that's what is difficult in annual analyzing this economy, 0:11:30.080 --> 0:11:33.120 that we had such big movements during the pandemic period, 0:11:33.120 --> 0:11:36.920 big increases in savings built up UM, and we're trying 0:11:36.920 --> 0:11:39.240 to figure out now as those things are moving in 0:11:39.280 --> 0:11:43.000 the opposite direction. Savings, for instance, are coming down, how 0:11:43.280 --> 0:11:46.040 much of a tailwind that's going to be for demand 0:11:46.480 --> 0:11:50.240 and for spending and for price pressure. And going back 0:11:50.280 --> 0:11:52.520 to that Job's report, it looks like we may have 0:11:52.600 --> 0:11:54.280 more of a tail wind than we might have thought. 0:11:54.400 --> 0:11:58.120 What is your disinflation confidence look like we've got this 0:11:58.480 --> 0:12:02.080 February fourteens at report. Do you have confidence to five 0:12:02.200 --> 0:12:06.000 to four to three or Kenya? Was John mentioned in 0:12:06.000 --> 0:12:10.160 your note get somewhere in the vicinity of Chairman Paul's 0:12:10.200 --> 0:12:13.560 two percent. I think we're still the ways away from 0:12:13.640 --> 0:12:16.520 two percent. And we have some good news on inflation, 0:12:16.520 --> 0:12:19.720 which is that goods inflation has cooled, But that's really 0:12:19.760 --> 0:12:22.840 what we're seeing in these monthly inflation prints and share 0:12:22.880 --> 0:12:24.800 Powell was trying to emphasize that, and let me just 0:12:24.880 --> 0:12:27.280 re emphasize that that a big part of what we've 0:12:27.280 --> 0:12:30.200 seen is used car prices that are coming down. Goods 0:12:30.240 --> 0:12:33.679 inflation in general that is slowed. So that's good news 0:12:33.800 --> 0:12:37.560 on the inflation front. But if you look at those 0:12:37.679 --> 0:12:42.480 non shelter services, you look at services away from housing, 0:12:42.880 --> 0:12:45.520 those are still inflating at a rate of about four 0:12:45.559 --> 0:12:48.600 percent annualized. So it does look like maybe some of 0:12:48.640 --> 0:12:53.480 the biggest, most aggressive inflation on the good side has 0:12:53.520 --> 0:12:56.680 come off, but we still have the services inflation, and 0:12:56.679 --> 0:12:59.080 that's what's gonna be sensitive to the labor market. That's 0:12:59.080 --> 0:13:01.640 what's gonna be sensitive to a number like five thousand 0:13:01.640 --> 0:13:03.920 plus jobs. So then why er do you think that 0:13:04.000 --> 0:13:06.760 Chair Powell isn't more aggressive, isn't taken the same kind 0:13:06.800 --> 0:13:10.360 of wyoming tone with respect to his press conference on Wednesday, 0:13:10.440 --> 0:13:13.640 With respect to that interview yesterday, I was a little 0:13:13.640 --> 0:13:16.280 bit surprised, to be honest. I think that David Rubinstein 0:13:16.400 --> 0:13:19.160 kind of set him up to make some change, make 0:13:19.280 --> 0:13:22.640 some differences from what he said last week before the 0:13:22.720 --> 0:13:25.640 job's number versus after the job's number. I think you 0:13:25.679 --> 0:13:30.040 could tell from the body language and from reading between 0:13:30.080 --> 0:13:32.400 the lines of it that that there there is a change. 0:13:32.440 --> 0:13:36.199 Probably it's uncomfortable for a FED official to make too 0:13:36.320 --> 0:13:38.720 much out of any one monthly number, but it's not 0:13:38.760 --> 0:13:40.719 just the one monthly number. Lease If you look at 0:13:41.080 --> 0:13:44.440 the pace of job growth prior to the January reading, 0:13:44.800 --> 0:13:47.440 we're running at something close to three hundred thousand jobs 0:13:47.480 --> 0:13:49.439 per months. So I don't think we're going to continue 0:13:49.480 --> 0:13:52.040 to print five hundred thousand jobs a month, but even 0:13:52.040 --> 0:13:54.760 three thousand would be enough to keep that unemployment rate 0:13:54.800 --> 0:13:58.000 moving down. It's already at a fifty year low. I'll 0:13:58.040 --> 0:13:59.280 go back to those days at u c l A. 0:13:59.280 --> 0:14:02.000 If you do the base macroeconomics, it's a very very 0:14:02.000 --> 0:14:04.679 tight labor market. It's hard to think that that wouldn't 0:14:04.720 --> 0:14:07.960 create wage pressure, but we are seeing wage pressure actually declined, 0:14:08.040 --> 0:14:10.840 So what do you make of that? So that's been 0:14:10.880 --> 0:14:12.520 one of the most interesting things in the data that 0:14:12.520 --> 0:14:14.520 we have, this this really tight labor market, it's actually 0:14:14.559 --> 0:14:18.000 tightening further. And then you're right across a range of measures, 0:14:18.040 --> 0:14:21.200 we saw some softening in wages, but remember it kind 0:14:21.200 --> 0:14:23.360 of goes back to what we were talking about earlier. 0:14:23.720 --> 0:14:28.600 This is a softening from historically rapid wage increases. We 0:14:28.600 --> 0:14:31.440 were reopening the economy all at once, every restaurant was 0:14:31.440 --> 0:14:34.280 trying to hire workers at the same time bring these 0:14:34.280 --> 0:14:37.240 workers back into the labor force. That of course is 0:14:37.280 --> 0:14:40.040 going to create a surge of wage pressure. So maybe 0:14:40.080 --> 0:14:42.440 we've come off of that surge of wage pressure against 0:14:42.920 --> 0:14:44.640 a bit and we'd come down from you know, call 0:14:44.720 --> 0:14:47.520 it five percent wage inflation to four percent wage inflation. 0:14:47.760 --> 0:14:50.240 But with a really tight labor market, I wouldn't expect 0:14:50.240 --> 0:14:51.960 that to slow further, and if anything, the risk is 0:14:52.000 --> 0:14:55.920 that it accelerates. And after the March meeting May three 0:14:56.080 --> 0:15:01.040 June fourteen July, the school starts against Septe number twenty. 0:15:01.200 --> 0:15:04.960 Which of those meetings is the real crucible for this 0:15:05.080 --> 0:15:08.320 FED where they've really got to decide if their demand 0:15:08.440 --> 0:15:12.200 structured Phillips curve driven or not. So I think you 0:15:12.200 --> 0:15:14.680 have a few signposts along the way. The March meeting 0:15:14.720 --> 0:15:17.640 is going to be really important because that's where Chaire 0:15:17.720 --> 0:15:19.360 Powell isn't going to be able to do what he 0:15:19.400 --> 0:15:21.600 did in the interview yesterday and kind of say, well, 0:15:21.640 --> 0:15:25.080 let's let the data take US where it does, the 0:15:25.200 --> 0:15:26.880 f O m C will have to come out and 0:15:26.920 --> 0:15:28.960 Fed officials broably will have to come out with their 0:15:28.960 --> 0:15:33.480 projections for the economy, inflation, and importantly for that terminal 0:15:33.560 --> 0:15:36.200 policy rate. Right now they have a five to five 0:15:36.480 --> 0:15:39.000 when you looking at that jobs report, maybe if anything, 0:15:39.040 --> 0:15:40.920 it should be revised up. So we'll see where the 0:15:40.960 --> 0:15:42.640 core inflation data comes in. We think it will be 0:15:42.640 --> 0:15:45.760 a little bit stronger. UM. Where does that median dot 0:15:45.760 --> 0:15:48.520 go at the March meeting will be really important. It 0:15:48.520 --> 0:15:52.240 looks like a basis point rate hike is quite likely 0:15:52.320 --> 0:15:55.400 in March. The question is going to become May. In June, 0:15:56.040 --> 0:15:59.480 they've talked about ongoing rate hikes, probably another hike in May. 0:15:59.520 --> 0:16:01.480 We think are gonna be hiking again in June. But 0:16:01.720 --> 0:16:03.760 this is when it might get a little bit more 0:16:04.040 --> 0:16:07.360 difficult because they're gonna have to actually navigate between a 0:16:07.480 --> 0:16:10.680 labor market that, if financial conditions tighten further, should be 0:16:10.720 --> 0:16:13.680 slowing UM an inflation that is still too high. So 0:16:13.880 --> 0:16:16.280 how are they going to navigate that tension and the 0:16:16.320 --> 0:16:19.280 reaction function. They haven't really had to do that yet. Andrew, 0:16:19.280 --> 0:16:21.040 I love reading your notes every time they come out. 0:16:21.080 --> 0:16:23.360 I'm excited to read them, especially when everybody was convinced 0:16:23.360 --> 0:16:24.640 that we're going to go back down to two percent 0:16:24.680 --> 0:16:26.040 inflation by the end of the year and the fiend 0:16:26.120 --> 0:16:28.400 is going to be cutting rates by fifty basis points. 0:16:28.600 --> 0:16:32.280 There was frustration in your voice that I sensed of, Hey, guys, 0:16:32.320 --> 0:16:34.720 the data hasn't changed. It hasn't so often they're still 0:16:34.760 --> 0:16:37.200 going to have to hike that much more. What has 0:16:37.240 --> 0:16:40.320 the response been, like two clients, the mood swings among 0:16:40.360 --> 0:16:44.040 investors that pushed back as this sort of a view 0:16:44.080 --> 0:16:47.120 in the market has shifted from rapid disinflation to well, 0:16:47.240 --> 0:16:50.800 maybe not. It's interesting listen because we have this kind 0:16:50.800 --> 0:16:53.720 of stability that we're talking about from share Powell trying 0:16:53.760 --> 0:16:56.480 not to try and change too rapidly as the data 0:16:56.560 --> 0:16:58.360 come in um in any of the market, which of 0:16:58.400 --> 0:17:00.720 course is going to change very rapidly, to try to 0:17:00.840 --> 0:17:03.080 figure out where that next data print is coming in. 0:17:03.320 --> 0:17:07.000 And we had a series of three cooler core inflation prints, 0:17:07.000 --> 0:17:09.560 we had softer wage data. So I think it makes 0:17:09.600 --> 0:17:11.800 sense that the market got a little bit more excited 0:17:11.800 --> 0:17:14.400 about these outcomes where inflation just comes down of its 0:17:14.400 --> 0:17:18.359 own accord. And I think our job here as economists 0:17:18.440 --> 0:17:21.480 is to look at all of the data and really 0:17:21.480 --> 0:17:24.800 figure out what's most likely in terms of an outcome. 0:17:25.000 --> 0:17:30.159 And despite the slower price inflation, despite the softer wage inflation, 0:17:30.920 --> 0:17:33.600 looking through to the tight labor market, looking through to 0:17:33.760 --> 0:17:37.040 services inflation, we just weren't convinced that really anything that's 0:17:37.040 --> 0:17:39.680 slowed down in terms of an underlying pace. And well, 0:17:39.760 --> 0:17:41.920 you know, you see how it just takes one data 0:17:41.960 --> 0:17:43.959 print and all of a sudden the market is well 0:17:44.000 --> 0:17:46.720 along those same lines. Makes you wonder what happened to Jackson? Hope? 0:17:46.720 --> 0:17:49.280 Pal doesn't it? What happened to Jackson? Hope? The data 0:17:49.320 --> 0:17:53.320 caught up with these guys are data is changed changing? 0:17:53.400 --> 0:18:00.680 Sign Andrew, Thank you? Andrew homean host that of City Joy. 0:18:00.920 --> 0:18:04.919 She is chief investment Officer Morgan Stanley Wealth Management, Lisa 0:18:05.000 --> 0:18:08.439 Shellett here knowing that things have changed. There is a 0:18:08.560 --> 0:18:12.760 yield and that means cash has Vailue. Lisa, we're talking 0:18:12.800 --> 0:18:16.840 before the show about your outside of perspectus, where you've 0:18:16.880 --> 0:18:20.080 got maybe ten percent cash whatever that movable feast is 0:18:20.119 --> 0:18:25.919 to portfolio to portfolio. But the Morgan Stanley audience wants 0:18:25.960 --> 0:18:31.280 to hold more cash than that. Why well, look I 0:18:31.720 --> 0:18:34.280 think that there's a huge amount of uncertainty out there. 0:18:34.359 --> 0:18:39.040 I think you know that we've been cautioning against the 0:18:39.320 --> 0:18:41.440 fact that we think that this is yet another bear 0:18:41.520 --> 0:18:45.240 market rally. Uh, that if we were going to really 0:18:45.359 --> 0:18:49.159 materialize the soft landing, we would not be seeing negative 0:18:49.520 --> 0:18:53.760 earnings and year over year compares and not negative earnings 0:18:53.760 --> 0:18:57.400 guidance and negative earnings revisions. Uh. So you know, I'm 0:18:57.440 --> 0:19:01.280 hardened that maybe our clients are are taking our cautionary 0:19:01.320 --> 0:19:05.520 view to heart. Uh, they're also embracing for the first 0:19:05.560 --> 0:19:09.320 time and you know literally uh you know, six seven 0:19:09.359 --> 0:19:15.920 eight years a livable uh fixed income yield meaning net 0:19:16.080 --> 0:19:18.320 of the expected inflation by the end of the year, 0:19:18.359 --> 0:19:22.400 which may be sub four percent, gives them a positive 0:19:22.440 --> 0:19:25.720 really yield um and they don't need to take any 0:19:25.800 --> 0:19:29.600 duration risks. So you know, we've got folks piling into 0:19:30.520 --> 0:19:35.320 things like certificates of deposit, like money market funds, which 0:19:35.400 --> 0:19:38.280 you know, I know in many eras were not considered 0:19:38.280 --> 0:19:42.600 sexy products but are satisfactory for a lot of investors 0:19:42.680 --> 0:19:45.160 right now, Lisa, do you think that's wise to take 0:19:45.240 --> 0:19:47.520 on a product that maybe you have to think about 0:19:47.520 --> 0:19:49.880 where to deploy capital in a year or two where 0:19:49.920 --> 0:19:52.199 yields just done at this level. Lisa, how do you 0:19:52.560 --> 0:19:54.840 how do you advocate for taking maybe a little bit 0:19:54.880 --> 0:19:57.200 more risk, maybe taking on a little bit more duration, 0:19:57.240 --> 0:20:01.560 but looking in these interest rates for a whole lot longer. Yeah. 0:20:01.720 --> 0:20:05.600 So look, I mean I think that there's an argument there. Uh. 0:20:05.640 --> 0:20:09.560 The problem is right now we've got an inverted yield curve, 0:20:09.720 --> 0:20:14.080 and so you're not really getting paid any extra yield 0:20:14.160 --> 0:20:17.800 for taking on some of that duration risk. Uh. And 0:20:17.840 --> 0:20:20.720 so what we've said to folks is, look, let's be 0:20:20.880 --> 0:20:25.160 patient this year. Ultimately, if we get this this mythical 0:20:25.600 --> 0:20:28.719 soft landing that everyone seems to be betting on, Uh, 0:20:28.760 --> 0:20:32.520 then that yield curve is going to invert. I mean, 0:20:32.640 --> 0:20:35.480 it's going to re steep, and I should say I'm sorry, Uh, 0:20:35.480 --> 0:20:38.680 And that means you're longer. The longer unto the curve 0:20:38.760 --> 0:20:40.920 is going to give you some higher yields. And so 0:20:41.320 --> 0:20:44.720 let's stay ultrashort duration right now. Let's see how the 0:20:44.800 --> 0:20:47.640