WEBVTT - Surveillance: Smart Fed Policy with Garvey 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.280 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.040 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.600 --> 0:00:30.720 the Bloomberg Terminal and the Bloomberg Business app. Pork Garvey 0:00:30.920 --> 0:00:33.080 is with I n G and he brings to them 0:00:33.479 --> 0:00:37.080 prodigious econometrics as well. I want to go to the 0:00:37.120 --> 0:00:40.839 econometrics of the moment and really within that and the 0:00:41.080 --> 0:00:44.040 shock of all the fancy mathematic you deal with on 0:00:44.159 --> 0:00:47.919 dead and central banks every day. What's the overcome by 0:00:47.960 --> 0:00:52.080 events thing you worry about out there? What's the obe 0:00:52.159 --> 0:00:56.360 out there that we need to pay attention to. I 0:00:56.360 --> 0:00:57.640 think you've got to look at the shape of the 0:00:57.680 --> 0:01:00.680 curved tom to on the sound that they is a 0:01:00.880 --> 0:01:05.160 really unusual set of circumstances. We haven't seen the degree 0:01:05.480 --> 0:01:08.759 of inversion that we're seeing now in the past four 0:01:09.000 --> 0:01:11.160 or five decades, and that tells me that that the 0:01:11.160 --> 0:01:14.840 back end of the curve is pricing in a huge 0:01:14.880 --> 0:01:19.400 degree of uncertainty. I'm not convinced it's entirely the rate 0:01:19.480 --> 0:01:22.240 cut narrative. I think there's a bit of geopolitics out there. 0:01:22.760 --> 0:01:26.160 I think there's the reality that the central Bank is 0:01:26.200 --> 0:01:30.039 holding lots of bonds out there, and I think there's anchoring. 0:01:31.080 --> 0:01:35.280 I have this conversation with traders all the time. They say, oh, 0:01:35.360 --> 0:01:36.600 we think the tens they're going to go back to 0:01:36.640 --> 0:01:38.520 two percent, and I would say why, and they say, well, 0:01:38.560 --> 0:01:41.280 that's because that's where it was. We're not going back 0:01:41.280 --> 0:01:44.240 to where we were. I meant, this is brilliant and 0:01:44.280 --> 0:01:45.880 there's a lot to unpack there, and we don't have 0:01:45.920 --> 0:01:47.880 a time to do the unpacking today. We'll do our 0:01:47.920 --> 0:01:50.280 for Bosi later. The bottom line is we are at 0:01:50.280 --> 0:01:53.360 a fourth standard deviation move off the Great Moderation going 0:01:53.400 --> 0:01:56.080 back to nineteen eighty five, and that's part of that 0:01:56.200 --> 0:01:59.040 yield curve spread. And whether if I look at two 0:01:59.120 --> 0:02:02.360 years compared to three years, as you say, truly we're 0:02:02.400 --> 0:02:07.800 in new territory, does it signal depressed growth or a 0:02:07.920 --> 0:02:13.280 duration of subpart economic growth. I doubt that very much. 0:02:13.520 --> 0:02:19.120 And here's why. If you look at where neutrality is, 0:02:19.480 --> 0:02:22.640 I would suggest neutralities around three percent. Why three percent? 0:02:22.680 --> 0:02:25.519 Three percent is two two and a half percent off lation? 0:02:26.000 --> 0:02:29.079 A half one percent really yield And if I look 0:02:29.120 --> 0:02:31.760 at the back end of the curve, it's not discounting 0:02:31.880 --> 0:02:34.920 a break below three that's usually important for me. So 0:02:35.240 --> 0:02:41.080 I think we've had this unprecedented degree of monetary tightening. 0:02:41.200 --> 0:02:44.680 It's still in absolute terms, leaves us at approaching five 0:02:44.720 --> 0:02:47.320 and a half percent. Big picture, that's not huge. We've 0:02:47.320 --> 0:02:49.200 come from zero to five and a half were not huge. 0:02:49.440 --> 0:02:52.359 If we get there and we're done, and the next 0:02:52.400 --> 0:02:54.560 move is down, and let's suppose a FED gets down 0:02:54.600 --> 0:02:57.920 to three percent, that's a very tolerable outcome, And it 0:02:58.000 --> 0:03:01.160 doesn't suggest anything like what you've just scribed. Work with 0:03:01.200 --> 0:03:04.040 the balance of risks, which do you think is more 0:03:04.080 --> 0:03:08.320 concerning the risk of inflation persisting at a higher level 0:03:08.800 --> 0:03:13.200 or the risk that rate hikes could really kill the economy? 0:03:14.160 --> 0:03:17.400 The former is the biggest risk. But I think I 0:03:17.400 --> 0:03:20.359 think the way the FED is pursuing policy here is 0:03:20.840 --> 0:03:23.480 it's kind of smart. I know the FED gets a 0:03:23.560 --> 0:03:28.000 hard rap because of missing the early rate hikes, but 0:03:28.200 --> 0:03:30.519 twenty fives from here is quite smart. They've got to 0:03:30.600 --> 0:03:34.320 keep on twenty fives and level off, and at a 0:03:34.400 --> 0:03:37.680 certain point in time, this degree of tightening has got 0:03:37.680 --> 0:03:40.640 to hurt. You look at lending standards out there, they 0:03:40.800 --> 0:03:45.280 are as tough as they've been since the Great Financial Crisis, 0:03:46.120 --> 0:03:47.960 but we're not seeing that in the data. And this 0:03:48.040 --> 0:03:49.920 is really the concern that's causing a lot of people 0:03:49.960 --> 0:03:52.600 to rethink the balance of risks once again, the sort 0:03:52.600 --> 0:03:56.880 of you know, schizophrenic nature of disinflation or not. How 0:03:57.000 --> 0:03:58.480 much do you look at the recent data and the 0:03:58.520 --> 0:04:02.320 stickiness of inflation and start to question your thesis and 0:04:02.360 --> 0:04:05.680 start to question if perhaps it's not really restrictive if 0:04:05.720 --> 0:04:08.000 you look at policy rates right now, yeah, you're right 0:04:08.120 --> 0:04:10.880 least we're not seeing it in the data for January, 0:04:11.440 --> 0:04:14.040 potentially for February. There's a weather impact there, there's a 0:04:14.040 --> 0:04:17.200 seasonal adjustment factor there. If you stand back and look 0:04:17.240 --> 0:04:20.840 at the direction of travel for the data over the 0:04:20.880 --> 0:04:24.440 past year, we are seeing the impact with the exception 0:04:24.480 --> 0:04:26.240 of the labor market. The labor market is where we 0:04:26.320 --> 0:04:31.240 have this remarkable anomally where we still can't get people 0:04:31.640 --> 0:04:35.320 to work, which is incredible to be in that situation 0:04:35.400 --> 0:04:38.160 right now. That is going to creek. Though we've got 0:04:38.160 --> 0:04:43.120 to remember that the replacement number in payrolls is one fifty. 0:04:43.400 --> 0:04:46.320 Once we get to blow one fifty, we're in growth 0:04:46.400 --> 0:04:50.680 recession territory. If we go mildly negative, we're in recessionary territory. 0:04:50.839 --> 0:04:53.440 We don't have to go to a deep recession territory, 0:04:53.760 --> 0:04:56.480 but the indicators we're heading in that direction, and it'll 0:04:56.520 --> 0:04:58.560 be over the next couple of quarters that we see 0:04:58.560 --> 0:05:00.920 that come to bear. If you want to peaka payrolls 0:05:01.080 --> 0:05:03.640 for next Friday, not this Friday, but next Friday. The 0:05:03.800 --> 0:05:07.120 estimates so far to twenty the previous number five seventeen. 0:05:07.279 --> 0:05:09.000 I'm not sure what the estimate is worth at this point, 0:05:09.000 --> 0:05:10.840 and I'm not sure what the previous number is worth either, 0:05:10.880 --> 0:05:12.440 because we can have some months to revision in one 0:05:12.480 --> 0:05:14.760 way one way or the other. So I won't put 0:05:14.760 --> 0:05:16.560 too much weight on that. Probably, I think there's something 0:05:16.560 --> 0:05:18.680 I'm going to walk away from this conversation with from you. 0:05:19.240 --> 0:05:22.440 We're not going back there. There's still a lot of 0:05:22.480 --> 0:05:24.720 people who think we're going back there. And if you 0:05:24.760 --> 0:05:28.000 look about the arc of like the last twelve eighteen months, 0:05:28.040 --> 0:05:30.160 it was we can't live with two percent, we can't 0:05:30.200 --> 0:05:32.680 live with three, we can't live with four, we're about 0:05:32.720 --> 0:05:35.040 to live with five. What is it that's changed? Do 0:05:35.160 --> 0:05:38.400 you think in this economy that maybe people haven't grasped 0:05:38.680 --> 0:05:40.560 the people that are sitting there saying we are going 0:05:40.640 --> 0:05:44.800 back there, what don't they get we also count live 0:05:44.839 --> 0:05:47.640 with five. By the way of five percent is ns 0:05:47.760 --> 0:05:52.880 an equilibrium and the equibinate is down to three. This 0:05:53.120 --> 0:05:55.560 is a really unusual set of circumstances, John, I mean 0:05:55.640 --> 0:05:58.479 that there are so many anomalies here relative to previous cycles. 0:05:58.880 --> 0:06:01.080 I think people are not getting a lot of stuff 0:06:01.080 --> 0:06:03.560 because it's it's tough, it's it's it's all over the place. 0:06:03.839 --> 0:06:06.359 And it goes back to the inversion of the curve 0:06:06.480 --> 0:06:08.840 and how unusual that is. And I would say the 0:06:08.920 --> 0:06:12.560 other big anomaly out there is how calm. But I 0:06:12.600 --> 0:06:14.919 would say it's anomally it's a positive thing. How calm 0:06:15.000 --> 0:06:18.200 the system is. You look at where banks PRINTCP very tight, 0:06:18.760 --> 0:06:22.440 you look at where credit spreads are very contained. There's 0:06:22.560 --> 0:06:25.440 very little concerned about anything breaking. So when I say 0:06:25.920 --> 0:06:28.520 we're not going to go back there, show me a 0:06:28.680 --> 0:06:31.360 reason to go back there. Something's got to break, and 0:06:31.600 --> 0:06:34.440 so far something hasn't broken. And until we get that, 0:06:35.520 --> 0:06:37.680 you know, I think up to five percent down to 0:06:37.720 --> 0:06:40.760 three percent, it's a pretty tolerable outcome. It includes a 0:06:40.800 --> 0:06:45.760 bit of a growth recession, but not Tom's description of 0:06:46.120 --> 0:06:49.280 Tom's gloom and armaged. It's been a surprise to me, 0:06:49.360 --> 0:06:51.960 so to be honest with you, particularly in Europe, not 0:06:52.000 --> 0:06:53.840 just the United States least. So we've talked about this. 0:06:54.279 --> 0:06:56.840 Just the idea that we're now talking for in Europe 0:06:56.880 --> 0:06:59.359 and the Italian bond market spreads there is still pretty 0:06:59.360 --> 0:07:02.000 contained right to the whites we saw last year, which 0:07:02.080 --> 0:07:04.880 suggests we can live with higher than two percent in 0:07:05.000 --> 0:07:06.719 terms of what that terminal yield can be, as Park 0:07:06.839 --> 0:07:09.960 was saying, and we're not going back to zero a 0:07:10.080 --> 0:07:12.960 big time soon. People say that, but have they really 0:07:13.080 --> 0:07:16.200 believed that. In that believe we can go back to 0:07:16.280 --> 0:07:21.040 pre pandemic trends, love inflation, low growth, interest rates, get 0:07:21.040 --> 0:07:24.120 a long big tech. A lot of people still think 0:07:24.160 --> 0:07:26.680 that this was great, just awesome. Come by more often. 0:07:26.720 --> 0:07:41.120 Para of ig financial markets on this debt market. Joining 0:07:41.440 --> 0:07:44.600 Michael McKee is of course Carl Ricadana with BMP Perry 0:07:44.640 --> 0:07:47.520 by the Chief US Economents again out eight beeps on 0:07:47.600 --> 0:07:49.800 the ten year or four point zero eight percent to 0:07:49.880 --> 0:07:53.040 thirty year bond is a stunning four point zero three percent. 0:07:53.600 --> 0:07:56.600 I want to allude here to the complexities of productivity. 0:07:56.640 --> 0:07:59.280 I'm going to call its three ratios lots of partial 0:07:59.360 --> 0:08:03.480 differentials there. And the bottom line is people like you 0:08:03.680 --> 0:08:07.520 are hoping and praying that our post pandemic productivity, that 0:08:07.640 --> 0:08:12.320 our post pandemic efficiency is good. That data tells me 0:08:13.200 --> 0:08:19.120 maybe not fold productivity into this volatile market debate. Well, 0:08:19.200 --> 0:08:21.440 the productivity numbers, if we look at them in year 0:08:21.480 --> 0:08:24.040 on year terms, are actually deep into negative territory, almost 0:08:24.080 --> 0:08:27.280 down two percent. So we have very strong job gains 0:08:27.400 --> 0:08:30.920 and an economy that is slowing. So that's not really sustainable, 0:08:31.000 --> 0:08:33.800 but it can kind of run that way and inconsistent. 0:08:33.960 --> 0:08:37.320 The inconsistency can last for you know, at least multiple 0:08:37.400 --> 0:08:40.920 quarters unit labor costs of a three handle. Does it 0:08:41.080 --> 0:08:43.640 lead to the gloom of a wage price spiral? Does 0:08:43.679 --> 0:08:45.959 it lead to a gloom that we're not going to 0:08:46.000 --> 0:08:48.679 get quiescent wage growth. So let's look at that unit 0:08:48.760 --> 0:08:51.160 labor cost number and year on year terms, and it's 0:08:51.200 --> 0:08:54.000 even more disturbing. It's six point three percent, as I 0:08:54.080 --> 0:08:57.640 see in the bloom table here. So what six percent 0:08:57.800 --> 0:08:59.880 plus on a unit labor costs if we look at 0:08:59.920 --> 0:09:04.040 the employment cost index running at five percent, These are 0:09:04.080 --> 0:09:06.640 the elements of wage price spiral. And I know Cher 0:09:06.760 --> 0:09:08.679 Powell has said that he doesn't think we're in a 0:09:08.720 --> 0:09:10.800 wage price spiral at the moment, but once you're there, 0:09:10.840 --> 0:09:13.439 it's too late and it's a very expensive problem. Historic 0:09:14.080 --> 0:09:16.079 this factors into how the FET is thinking about that 0:09:16.360 --> 0:09:20.200 annual average productivity decreased one point seven percent from twenty 0:09:20.440 --> 0:09:22.920 twenty one to twenty twenty two. The BLS says, the 0:09:23.120 --> 0:09:26.920 largest annual decline in the measure since nineteen seventy four. Wow, 0:09:27.120 --> 0:09:29.600 that's it, and that that precisely gets back to four 0:09:29.640 --> 0:09:32.079 to five years before vulgar and shows the scope and 0:09:32.160 --> 0:09:34.640 scale of this historic moment. I just want to point 0:09:34.679 --> 0:09:37.280 out Lisa Rickadona can come back because he uses the 0:09:37.320 --> 0:09:41.559 Bloomberg terminal. It's good how that works well. But Carl, 0:09:41.600 --> 0:09:43.720 aside from your usage off the Bloomberg terminal, I am 0:09:43.800 --> 0:09:46.480 curious as you pass through this. We were just talking 0:09:46.600 --> 0:09:48.679 before these numbers came out, that you were looking for 0:09:48.800 --> 0:09:53.040 more evidence that there was something stickier in nature about 0:09:53.120 --> 0:09:55.679 these numbers that we got out in January. Is this 0:09:56.000 --> 0:09:58.520 leaning you a little bit closer to that moment. We 0:09:58.679 --> 0:10:02.080 are seeing persist inflation everywhere. That's been a longstanding call 0:10:02.160 --> 0:10:05.840 of my team at BMP. We're seeing persistent inflation everywhere, 0:10:05.920 --> 0:10:08.120 including in wages. And there was a little bit of 0:10:08.160 --> 0:10:11.040 a rollover in Q four and so team Transitory was 0:10:11.480 --> 0:10:13.839 put on their sneakers to run a victory lap. And 0:10:13.920 --> 0:10:17.080 it's pretty clear that that has kind of washed out 0:10:17.160 --> 0:10:18.520 now in the most recent data, So we have to 0:10:18.559 --> 0:10:20.679 see how far this is running. But certainly, you know, 0:10:21.280 --> 0:10:24.880 I see evidence of labor markets softening everywhere I look, 0:10:24.920 --> 0:10:27.400 except for in the economic data. Right if you open 0:10:27.440 --> 0:10:30.560 the newspaper, you see layoffs here, and hiring intentions down 0:10:30.679 --> 0:10:34.640 and all those signals. But in the actual macroeconomic data, 0:10:34.720 --> 0:10:36.480 you're not seeing the cooling of conditions. And we have 0:10:36.600 --> 0:10:38.680 seen this. There was a Wall Street shortle article about 0:10:38.720 --> 0:10:40.280 this as well. I am looking right now at ten 0:10:40.320 --> 0:10:43.000 year yields getting close to that four point one percent, 0:10:43.160 --> 0:10:46.760 four point zero eight percent rounded up to the nearest tenth. 0:10:46.880 --> 0:10:50.360 I'm a hundred. I'm curious from your perspective, whether we're 0:10:50.440 --> 0:10:54.040 getting to a perspective where it is a new regime 0:10:54.280 --> 0:10:57.200 where productivity is going to be lower, Labor costs are 0:10:57.240 --> 0:10:59.520 going to be higher. You have a different kind of 0:10:59.600 --> 0:11:04.359 labor market and workforce that's going to require more investment. 0:11:04.760 --> 0:11:07.280 Are you seeing enough signs that we are there? When 0:11:07.320 --> 0:11:09.920 you have that kind of heat in the labor cost 0:11:10.000 --> 0:11:14.959 pressure series? On an extended basis, businesses have no alternative 0:11:15.080 --> 0:11:18.400 aside from making the capital investments, from the technological technological 0:11:18.520 --> 0:11:22.000 investments to drive a productivity rebound. Just real quick, the 0:11:22.080 --> 0:11:25.000 broader story here, We surged in productivity coming out of 0:11:25.080 --> 0:11:27.800 the pandemic, right, so now this is the correction period, 0:11:27.840 --> 0:11:30.920 so we shouldn't get too depressed about the low productivity number. Also, 0:11:30.960 --> 0:11:35.439 the BLS notes that they applied the historical revisions that 0:11:35.480 --> 0:11:38.600 they put into the Jobs report and into the CPI 0:11:38.720 --> 0:11:42.079 reports to this release, which is probably why it is 0:11:42.120 --> 0:11:44.280 such a huge show to the two of you here, 0:11:44.320 --> 0:11:46.160 and you got a minute and a half to warble gaily. 0:11:46.240 --> 0:11:49.400 As Lisa mentioned earlier today, blah blah blah. And the 0:11:49.520 --> 0:11:52.600 answer here is does this shift the fifty beeps? At 0:11:52.800 --> 0:11:56.160 next meeting debate, Michael oh I would say no, this doesn't. 0:11:56.200 --> 0:11:58.200 I mean, we have too much data coming out ahead 0:11:58.240 --> 0:12:01.319 of us that's far more important than this, Jobs and 0:12:01.520 --> 0:12:04.120 CPI will have a much bigger influence on the FED 0:12:04.160 --> 0:12:08.720 than Carl believe. They will warble gaily in uniform harmony 0:12:08.840 --> 0:12:13.000 with my you're not supposed to agree with that. The 0:12:13.080 --> 0:12:15.000 inflation report that's going to be much more critical. This 0:12:15.120 --> 0:12:18.880 is kind of stuff we already knew from the look 0:12:18.960 --> 0:12:22.000 like the inflation report. If we look into the details, 0:12:24.440 --> 0:12:27.079 look at the US service sector inflation, which is what 0:12:27.360 --> 0:12:30.280 is really driving the FED reaction function is showing very 0:12:30.360 --> 0:12:33.559 little evidence of any kind of disinflationary trend, and you 0:12:33.640 --> 0:12:36.520 won't see that with wage pressure. It's continuing to accelerate higher. 0:12:36.559 --> 0:12:38.600 And tomorrow we do get at ten AM the ISM 0:12:38.679 --> 0:12:40.679 services index, and that is going to be key, not 0:12:40.880 --> 0:12:43.400 just the index, but price is paid for that given 0:12:43.440 --> 0:12:46.280 the fact that we saw manufacturing prices paid increase to 0:12:46.320 --> 0:12:48.080 the degree that they did. If you see that kind 0:12:48.120 --> 0:12:50.920 of moving services, could that really move the prices matter? 0:12:51.000 --> 0:12:53.280 But it's an activity gauge. So the new orders, the 0:12:53.360 --> 0:12:55.959 production numbers, that really will tell us more about this 0:12:56.080 --> 0:12:59.280 potential reacceleration thing about the European numbers too, as they 0:12:59.320 --> 0:13:02.199 were largely even buy food prices, which has not been 0:13:02.440 --> 0:13:05.080 a big issue here. I mean, we've had elevated food prices, 0:13:05.200 --> 0:13:08.680 but we've seen being driven by the UH service prices 0:13:09.240 --> 0:13:14.640 much more. What's been happening. Had you were talking yesterday 0:13:15.040 --> 0:13:17.280 about with or without shelter? I got the three of 0:13:17.360 --> 0:13:20.160 your pilot on me together. Mike, please, you were talking 0:13:20.240 --> 0:13:23.280 yesterday about the differences between the way the US and 0:13:23.679 --> 0:13:28.560 Europe dealt with unemployment during the pandemic. Europe kept workers 0:13:28.760 --> 0:13:33.199 on the job by subsidizing employers, and so the employers 0:13:33.240 --> 0:13:35.199 didn't have to go out and raise wages as much 0:13:35.240 --> 0:13:37.080 as they've had to do in the US. Well, let's 0:13:37.080 --> 0:13:39.440 continue this discussion. We're go into a data check now. Lisa, 0:13:39.520 --> 0:13:41.439 help me here, because I don't see much spread movement. 0:13:41.520 --> 0:13:44.120 I do see a ten year real yield come out 0:13:44.160 --> 0:13:47.000 to a one point five percent, but in the actual 0:13:47.120 --> 0:13:50.840 yield space nastack down one percent here on the nastack 0:13:51.160 --> 0:13:56.160 one hundred. But Lisa, four point zero seven percent on 0:13:56.240 --> 0:13:58.800 the ten year yield is just stunning. The nominal yield 0:13:58.920 --> 0:14:00.679 is really what I'm looking at. Not just after the 0:14:00.760 --> 0:14:03.280 thirty year it crossed four percent for the first time, 0:14:03.320 --> 0:14:05.040 it went straight to four point h two percent, And 0:14:05.080 --> 0:14:08.560 we're looking at just this real trajectory of higher inflation 0:14:08.679 --> 0:14:11.000 for longer being gamed out in some of the yield structure, 0:14:11.080 --> 0:14:13.320 and that I think is a game changer on radio 0:14:13.360 --> 0:14:16.120 and television. Thank you for continuing with this pre AMISERA 0:14:16.160 --> 0:14:18.480 will join us here in a moment. We thank Carl 0:14:18.640 --> 0:14:23.840 Ricadya of BMP Pariba and always Michael McKee for driving 0:14:23.960 --> 0:14:31.480 this stunning debate to put things into perspective. I'm going 0:14:31.560 --> 0:14:34.800 to do that right now. Priamisra and Lisa Bramwits are 0:14:35.560 --> 0:14:39.359 far too young to remember when Bob Redford stood outside 0:14:39.440 --> 0:14:44.720 the Plaza Hotel in the way we were and with 0:14:44.880 --> 0:14:48.880 Barbara Streis, and they said, memories data, DA, DA, guess 0:14:48.960 --> 0:14:53.920 what productivity dynamics are back to nineteen seventy four. Someone 0:14:54.000 --> 0:14:57.560 who has been expert at measuring this over to our 0:14:57.600 --> 0:15:01.640 financial bond market is Priamisra TV Securities, and she joins 0:15:01.720 --> 0:15:05.040 us this morning. We're looking at the history of this 0:15:05.240 --> 0:15:08.000 pre up and we're also looking at your brilliant call 0:15:08.080 --> 0:15:11.920 an inversion. Although some have been brave recently and said 0:15:11.960 --> 0:15:15.320 look higher yields, I get a coupon along the way, 0:15:15.800 --> 0:15:18.880 I want to be brave here. In February and March 0:15:19.080 --> 0:15:22.720 of twenty twenty three, did the bravery the courage? Did 0:15:22.760 --> 0:15:27.080 it slip away this morning? Thanks for having me on. 0:15:27.280 --> 0:15:30.160 So no, I think you have to be patient. It's 0:15:30.200 --> 0:15:32.920 hard to pick the absolute topping yield. You know you're 0:15:32.960 --> 0:15:36.120 talking about having confidence. I don't have a ton of 0:15:36.200 --> 0:15:38.720 confidence in the front end because you know, we know 0:15:38.840 --> 0:15:42.320 inflation is sticky. We know it's post services X shelter 0:15:42.520 --> 0:15:45.400 is driven by wages. It's a very tight labor market 0:15:45.480 --> 0:15:48.960 and companies are holding label. So it's possible that inflation 0:15:49.280 --> 0:15:53.120 remains persistently high through the year, and the Fed we 0:15:53.240 --> 0:15:55.640 think in twenty five basespin instruments may have to keep 0:15:55.760 --> 0:15:59.360 hiking maybe five seventy five, maybe six percent. So you 0:15:59.440 --> 0:16:01.200 know that very front end of the yield cuve I 0:16:01.240 --> 0:16:03.200 think is very driven by data in the near term, 0:16:03.440 --> 0:16:06.520 the long end. That's your view, that's your neutral rate view. 0:16:07.040 --> 0:16:10.040 And I think the data is strong on the consumer, 0:16:10.080 --> 0:16:13.320 on the labor market. Not because policy contrastrictive. We are 0:16:13.360 --> 0:16:16.560 in restrictive freditory. It's because the lags have not worked through. 0:16:16.600 --> 0:16:19.680 I mean, the fat fund rate crossed four percent only 0:16:19.760 --> 0:16:22.320 in December. You have to give the economy more than 0:16:22.400 --> 0:16:24.440 two months for it to keel over. And I think, 0:16:24.880 --> 0:16:26.680 you know, that's why the long end is selling off. 0:16:26.760 --> 0:16:29.640 People expect that interest rates don't matter. I think interest 0:16:29.680 --> 0:16:31.920 rates matter. They just take a while to show up 0:16:32.000 --> 0:16:35.600 in terms of business investment decisions or spending decisions free 0:16:35.600 --> 0:16:37.960 I want to go to the It takes a while. 0:16:38.240 --> 0:16:41.880 If I've got a seven standard deviation, move from very 0:16:41.960 --> 0:16:45.040 low thirty year yields out of very high thirty year 0:16:45.120 --> 0:16:49.560 yields stunningly out above the great moderation, and I go 0:16:49.720 --> 0:16:53.920 back to whatever the new center tendency is. How long 0:16:54.000 --> 0:16:57.080 does that take? Is this a matter of six months 0:16:57.240 --> 0:16:59.640 or is it a matter of six years to get 0:16:59.720 --> 0:17:04.560 back to normal? So economic theories suggests twelve to eighteen 0:17:04.600 --> 0:17:07.960 months from monetary policy to work through. I mean you 0:17:08.000 --> 0:17:10.520 could argue maybe it's a little bit shorter, maybe it's 0:17:10.560 --> 0:17:14.040 twelve months nine months. I will say something that maybe 0:17:14.160 --> 0:17:17.200 making the lags longer this time is that the consumer 0:17:17.800 --> 0:17:21.320 entered the hiking cycle with a large amount of accumulated savings. 0:17:21.680 --> 0:17:24.639 Now those savings are running off. We're tracking, you know, 0:17:24.720 --> 0:17:26.879 by the end of this year. We're thinking in the 0:17:26.920 --> 0:17:30.080 third quarter those savings are largely gone that's when the 0:17:30.160 --> 0:17:33.640 consumer has to start to reckon with higher interest rates, 0:17:33.800 --> 0:17:37.560 tighter financial conditions, maybe a job market that's not as strong. 0:17:37.720 --> 0:17:39.439 I mean, there may not be a lot of firing, 0:17:39.560 --> 0:17:42.080 but job openings start to come off. So I think 0:17:42.119 --> 0:17:45.000 it's more or later this year that we think consumer 0:17:45.040 --> 0:17:48.159 spending slows down the job market starts to weaken. So 0:17:48.200 --> 0:17:51.119 I don't think you're waiting six years. But we're watching 0:17:51.160 --> 0:17:54.240 those savings numbers and the savings continue to come off. 0:17:54.359 --> 0:17:56.600 But you know, today, if I have a job and 0:17:56.720 --> 0:18:00.600 I'm making five percent wage growth, wage gains, and I've 0:18:00.640 --> 0:18:03.480 got savings I'm spending. I think we're just saying be 0:18:03.640 --> 0:18:06.680 careful in extrapolating that, because those savings will run out 0:18:06.840 --> 0:18:08.600 by the end of the year. How much conviction do 0:18:08.680 --> 0:18:11.000 you have to load the boat on ten year to 0:18:11.119 --> 0:18:15.200 load the boat on thirty year treasuries? So I have 0:18:15.359 --> 0:18:17.280 much more conviction on the ten year and the thirtie 0:18:17.359 --> 0:18:19.280 than I do on the front end. I don't know 0:18:19.280 --> 0:18:22.120 about loading the boat. I use the word I used. 0:18:22.119 --> 0:18:24.560 I guess some few weeks ago when I started to 0:18:24.680 --> 0:18:27.399 leg in, I would leg in some more because you know, 0:18:27.480 --> 0:18:30.680 I think you're at we entered some around three eighty, 0:18:30.800 --> 0:18:33.640 we lenter some more longs at four percent. I think 0:18:33.640 --> 0:18:36.359 the Fed's telling you that they have to engineer hard landing. 0:18:36.560 --> 0:18:38.280 They're not going to say it because it's very hard 0:18:38.320 --> 0:18:40.600 politically to get that through. But how do you get 0:18:40.640 --> 0:18:43.280 inflation down without a rise in the unemployment rate? So 0:18:43.400 --> 0:18:45.720 the FED will have to engineer a rise in the 0:18:45.800 --> 0:18:49.480 unemployment rate. Then these four percent tens will look really cheap. 0:18:49.600 --> 0:18:52.480 But it's for the peak of four ten. Now maybe 0:18:52.480 --> 0:18:53.920 it goes to four twenty five, So I think you 0:18:53.960 --> 0:18:56.200 want to have some dry powder to keep adding to it. 0:18:56.800 --> 0:18:59.080 But I think you know these levels in a long 0:18:59.280 --> 0:19:02.240 term sense. I don't think our star is higher or 0:19:02.280 --> 0:19:04.159 the neutral rate should be much high. I think the 0:19:04.200 --> 0:19:08.040 FED is committed to two percent inflation, and we've seen productivity. 0:19:08.200 --> 0:19:10.640 I don't think the economy can handle very high real 0:19:10.760 --> 0:19:13.800 rates in the long run. This is such an important point, 0:19:13.840 --> 0:19:15.800 and it goes guess what poor Carvey was saying, or 0:19:15.880 --> 0:19:18.240 he said, Listen, people think we're going back to the 0:19:18.280 --> 0:19:20.840 same kind of regime we were in prior. You're saying 0:19:21.119 --> 0:19:23.520 we are going to go back to that regime. What 0:19:23.840 --> 0:19:27.000 gives you confidence other than just the FET is committed 0:19:27.000 --> 0:19:30.120 to a two percent inflation regime, especially if a two 0:19:30.160 --> 0:19:33.160 percent inflation regime is different from the prior ten years, 0:19:33.280 --> 0:19:35.680 which it wasn't a two percent inflation regime. As Time mentioned, 0:19:35.680 --> 0:19:38.800 it was a sub two percent inflation rate, right, So 0:19:38.920 --> 0:19:41.000 I think there are some structural factors that might be 0:19:41.119 --> 0:19:43.240 moving inflation a little higher. So if we were sub 0:19:43.320 --> 0:19:45.639 two percent, maybe the next ten years will be a 0:19:45.680 --> 0:19:48.560 two percent number. But I think inflation does. If the 0:19:48.640 --> 0:19:50.760 FIT thinks they want to get to two, they're going 0:19:50.800 --> 0:19:53.080 to keep policy restrictive for a while. They're going to 0:19:53.160 --> 0:19:56.120 keep that front in, you know, not cut rates anytime soon. 0:19:56.920 --> 0:20:00.600 Really our star or really equilibrium rate, those are driven 0:20:00.680 --> 0:20:04.680 by productivity, demographics, saving the cloud. I don't know if 0:20:04.720 --> 0:20:07.840 any of this is right, you know, after COVID, so 0:20:08.200 --> 0:20:10.600 maybe it's not zero. It's fifty basins points, all right, 0:20:10.680 --> 0:20:13.520 but we're well north of that in terms of market 0:20:13.560 --> 0:20:16.359 pricing of real rate Priya with respect of the giant. 0:20:16.520 --> 0:20:21.920 Stanley Fisher, who I would suggest codified ultra accommodative as 0:20:21.960 --> 0:20:24.879 his work as a vice chairman and Ben Amma's at 0:20:24.960 --> 0:20:27.440 New Ones just writes this up. I've never used this phrase. 0:20:27.520 --> 0:20:31.600 Before Priya and Ben doesn't predict this, but he suggests, 0:20:32.320 --> 0:20:37.280 does this data drive us out to ultra restrictive? Is 0:20:37.320 --> 0:20:44.399 the larger pendulum here from ultra accommodative out to ultra restrictive. No, 0:20:44.680 --> 0:20:46.800 I think it's fair. I mean the move in rail rates, 0:20:46.880 --> 0:20:49.040 it's not just a front endrail rates. Look at where 0:20:49.080 --> 0:20:51.359 ten year rail rates are and the speed of the 0:20:51.480 --> 0:20:54.560 move over the last year. The extent of tightening, I 0:20:54.640 --> 0:20:58.080 think in move us from ultra accommodative to ultra restrictive. 0:20:58.640 --> 0:21:01.159 But we're not seeing it in the ITA yet, and 0:21:01.320 --> 0:21:03.840 so I think this is where we want to be patient. 0:21:03.960 --> 0:21:06.040 I don't know if the FED can be patient. Can 0:21:06.480 --> 0:21:08.000 you know, are they going to feel the pressure to 0:21:08.080 --> 0:21:10.680 go faster, go higher. We actually think they're going to 0:21:10.720 --> 0:21:13.160 be patient and go at twenty five, try and feel 0:21:13.200 --> 0:21:15.320 their way around that end point and then keep it 0:21:15.400 --> 0:21:18.000 there for a while until inflation comes down. But yeah, 0:21:18.000 --> 0:21:20.119