Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
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Speaker 2: us now of Morgan Stantley, joining us around the table. Lisa,
Speaker 2: it's good see you, as always great to see you.
Speaker 2: Is anxiety about tariff distracting from fundamentals? It's a point
Speaker 2: you've made recently. Do you think it is.
Speaker 3: I think it absolutely is, And I think tariff's are
Speaker 3: probably the single biggest thing that are just that is
Speaker 3: distracting everybody. But I think the pace and the chaotic
Speaker 3: nature right of the announcements are distracting to everyone. And look,
Speaker 3: we know markets love certainty, they love predictability. We don't
Speaker 3: have that at the minute.
Speaker 2: Is it a justified distraction and other fundamental is good
Speaker 2: enough to stay commits it and stay the course and
Speaker 2: stay bullish US equities.
Speaker 4: I think.
Speaker 3: So, you know, our perspective has been to pick and
Speaker 3: choose your spots, and that expectations are key here, you know,
Speaker 3: our preferences to go where you know, we think companies
Speaker 3: can beat expectations, and one of the expectations haven't gotten
Speaker 3: to ahead of themselves.
Speaker 4: And to you know, Frawdy, you made a point that
Speaker 4: I thought was fascinating.
Speaker 5: We talked about the long and variable lags when it
Speaker 5: came to the FED hiking benchmark rates. We don't talk
Speaker 5: about the long and variable lags of them cutting by
Speaker 5: one hundred basis points starting in September of last year.
Speaker 5: Just how much is that driving some of the optimism
Speaker 5: and the deal making and the activity that everyone's expecting
Speaker 5: from corporate America this year.
Speaker 3: Well, you know, one of the things that's interesting is
Speaker 3: I think, you know, the rate cuts are certainly driving
Speaker 3: the animal spirits. Actually haven't seen a year to date
Speaker 3: the level of deal making that I think a lot
Speaker 3: of people were hoping for, and that's still a bit
Speaker 3: on the come. And so you know, I think that
Speaker 3: certainly the hundred basis points helps. It's getting you know,
Speaker 3: sentiment juiced. Right. So, we saw small business optimism right
Speaker 3: sore following the election, and I think part of that was, Hey,
Speaker 3: I'm going to get some rate cuts and I'm going
Speaker 3: to get you know, some pro growth policy out of Washington.
Speaker 3: But it remains to be seen, and I think, you know,
Speaker 3: to Jonathan's point, some of the chaos and the headlines
Speaker 3: is starting to cool.
Speaker 4: Some of those expectations.
Speaker 3: We saw, you know, that small business optimism come off
Speaker 3: the boil a little bit yesterday. We've seen some of
Speaker 3: the CEOs, including the Ford CEO, say, you know, whoa whoa, whoa.
Speaker 3: You know, let's let's let's you know, cool our debts, folks.
Speaker 5: There's a tension here between whether there needs to be
Speaker 5: some rate cuts, additional rate cuts for the broaden out
Speaker 5: story to really make sense, or whether the one hundred
Speaker 5: basis points that we got late last year actually was
Speaker 5: plenty to get this sector driving.
Speaker 4: Which is it?
Speaker 3: So I think it's I think it's interesting. You know,
Speaker 3: our thesis has been that we're in a bifurcated economy
Speaker 3: for the most part the large cap universe, the megacap
Speaker 3: universe hasn't needed any rate cuts, right because they've locked
Speaker 3: and loaded their cost to capital, you know, back in
Speaker 3: twenty twenty one. I fundamentally believe that the mid cap,
Speaker 3: smaller cap companies, the lower end the venture capital, some
Speaker 3: of the private equity portfolio companies do need more than
Speaker 3: one hundred basis points. So we're going to see, We're
Speaker 3: going to see where this goes.
Speaker 6: I know you're watching for a rotation of stock in disease,
Speaker 6: and you like the idea of cyclicals, energy, domestic manufacturers,
Speaker 6: But what about the fact that that uncertainty of tariff's
Speaker 6: just still lingers. Aren't those the ones that are going
Speaker 6: to be the most hurt.
Speaker 3: So it's interesting the megacap and large caps are so
Speaker 3: much more exposed to the tariff conversation. I mean, this
Speaker 3: is where you know, the mid caps and the small
Speaker 3: caps actually can get life if in fact the rate cuts,
Speaker 3: do you know, flow back to them, If in fact
Speaker 3: we get bank lending in more the regional banking system
Speaker 3: to accelerate to those pools of companies, I think that
Speaker 3: they can actually, you know, kind of have a better
Speaker 3: year relative to mega and large cap companies who are
Speaker 3: going to have to struggle with their China exposure, with
Speaker 3: their exposure to global trade, and to dealing with some
Speaker 3: of the constraints of tariffs and the costs of restructuring
Speaker 3: supply chains. If it comes to that, something else, you like,
Speaker 3: right now, a lot of people are hiding out even
Speaker 3: central bank's gold.
Speaker 6: Are you adding to that position?
Speaker 4: We are adding to gold, you know.
Speaker 3: Our Our perspective is that what's going on with gold
Speaker 3: very much has to do with folks around the world
Speaker 3: questioning the primacy of the United States dollar, right, and
Speaker 3: I think central banks around the world have begun to
Speaker 3: diversify their reserves. I think that's been one element. I
Speaker 3: think a lot of the enthusiasm, believe it or not,
Speaker 3: around cryptocurrencies is also, uh, you know, made people think about, well,
Speaker 3: you know, what is you know, if this is digital gold,
Speaker 3: what is you know, hard gold? And maybe I need
Speaker 3: some of that too. So, you know, our perspective is that,
Speaker 3: you know, given where we are with debts and deficits,
Speaker 3: given the extreme bifurcation of global FX markets, UH, that
Speaker 3: that gold will continue to outperform into.
Speaker 4: A third year.
Speaker 5: You're even wearing something to represent the strong filing goal,
Speaker 5: my goal, the gold blazer. I am curious about whether
Speaker 5: you see that sort of questioning of the primacy of
Speaker 5: the dollar shifting into some of the overweight that you
Speaker 5: might see we have seen over the beginning of this
Speaker 5: year anyway, in European equi ease as well as Chinese
Speaker 5: equities actually, which have really peaked up.
Speaker 4: Are you leaning into that or learning against it?
Speaker 3: We are one hundred percent leaning into this, you know,
Speaker 3: mean reversion trade.
Speaker 1: Uh.
Speaker 3: The massive underperformance of non US uh equities we believe
Speaker 3: has has reached extremes. Uh. Our best gas is that
Speaker 3: you know, the the current administration isn't helping, right, you know,
Speaker 3: in many ways. While it's great to pursue in America
Speaker 3: first policy, if you're in America, if you're not in America, Uh,
Speaker 3: there's all kinds of incentives to.
Speaker 4: Find ways to uh protect yourself.
Speaker 3: And that mean may mean uh, you know, creating you
Speaker 3: know trade arrangements with other countries and each other, uh,
Speaker 3: where America gets locked out. So you know, our perspective
Speaker 3: is that, you know, this is a time when not
Speaker 3: only the combination of valuation extraordinarily low expectations for or
Speaker 3: you know, regions like Europe potentially, like China, the potential
Speaker 3: to surprise on the upside, and the potential for some
Speaker 3: of these countries to actually stimulate, to have more proactive
Speaker 3: uh central banks. I mean you you know, Lisa, you
Speaker 3: talked about the fact that the Fed may only cut
Speaker 3: one or two times this year. It's highly likely that
Speaker 3: the ECB goes more frequently than that. It's possible that
Speaker 3: some of the central banks in you know, Latin America, uh,
Speaker 3: you know, where inflation had run hot, are going to
Speaker 3: go more more often than that. And those are the
Speaker 3: kinds of things that kind of create this relative catch
Speaker 3: up trade we.
Speaker 2: Told about this last week. It might push these countries
Speaker 2: to do things that might be good for them. Let's
Speaker 2: see if that happens. Lisa Shanon to Mokeen standy, Lisa,
Speaker 2: thank you. West tends to phone exchange foming New York
Speaker 2: Fed President Bill Duntley making the for king dollar in
Speaker 2: its latest Bloomberg opinion piece right in the following, America
Speaker 2: derives immense benefits from the dollars dominance, a position the
Speaker 2: countries such as China and Russia are seeking to contest
Speaker 2: by addressing the problem of cross border payments. The US
Speaker 2: could boost the global economy and cement its central role
Speaker 2: therein Bill joined US Now for more, but welcome to
Speaker 2: the program. Lots of topics to count. Let's kick off
Speaker 2: with this one right here. You start it with a premise,
Speaker 2: so let's talk about it. The immense benefits from the
Speaker 2: dollars dominance. Let's start there. But what are they?
Speaker 7: I think the dollar is a glunchpin of global financial markets,
Speaker 7: so we get what's called the exorbitant privilege of people
Speaker 7: wanting to hold dollar denominated assets. So that makes the
Speaker 7: cost of funding in the United States less than if
Speaker 7: the dollar was not viewed as the key currency in
Speaker 7: the global economy. But that's not necessarily for dain forever,
Speaker 7: and there are steps we can do to make that
Speaker 7: more more likely to be sustained in the future. And
Speaker 7: one thing is to make some progress on cross border payments.
Speaker 7: Across border are extremely expensive, especially for small retail payments
Speaker 7: like remittances. They cost maybe as much as six to
Speaker 7: seven percent. This could be called we could be brought
Speaker 7: down tremendously if we had if we developed instant payment
Speaker 7: systems nationally and then link them together. A number of
Speaker 7: countries have good instant payment systems Brazil, India, for example,
Speaker 7: The US is basically lower. We have two systems, but
Speaker 7: nobody uses them. Everybody uses cards and debit cards, benbo
Speaker 7: or PayPal. So we need to do something to revigorate
Speaker 7: the US instant payment systems, and then once we have that,
Speaker 7: we need to start to take steps to link it
Speaker 7: together with other instant payment systems around the world. If
Speaker 7: we do that, we can actually lower the cost of
Speaker 7: payments dramatically and cement the dollar as a key reserve currency.
Speaker 5: Do you see the FED actually getting on this in
Speaker 5: any capacity in the near term, considering that they have
Speaker 5: their hands full with their mandate and a lot of
Speaker 5: controversy around it.
Speaker 7: Well, I think you need some support from the administration
Speaker 7: in Congress. The countries that have been successfu well in this
Speaker 7: have basically had mandates. They basically said, you need to
Speaker 7: actually offer this service to your banking customers. In the
Speaker 7: United States, it's completely voluntary. And since it's completely voluntary,
Speaker 7: the two instant payment systems we have FED now and
Speaker 7: Artichs are basically not used by virtually anybody.
Speaker 8: So they exist. But if they're not used, then.
Speaker 7: How can you how can that be advantageous to link
Speaker 7: that into an international regime.
Speaker 5: Well, well, hopefully we can continue to catch up on
Speaker 5: this as it progresses, if it does progress this year.
Speaker 5: In the meantime, they focus very much on inflation and
Speaker 5: just how the Fed's going to be responding at a
Speaker 5: time where we're going to get CPI potentially at zero
Speaker 5: point three percent month over month, which would be the
Speaker 5: fifth out of the six latest readings at zero point.
Speaker 4: Three percent or above. How concerned are.
Speaker 5: You about this stickiness and does it surprise you that
Speaker 5: we're still not seeing the disinflation that so many people
Speaker 5: were expecting.
Speaker 7: I think it's very clear that the last mile is
Speaker 7: pretty sticky. And one reason is sticky is because we're
Speaker 7: operating at full employment. You know, there's gonna be a
Speaker 7: lot of downward pressure on inflation when economy is operating
Speaker 7: at a very high level of resource utilization, which is
Speaker 7: where we are today. I think the other thing is
Speaker 7: something that to Cheer Polty touched on yesterday. It looks
Speaker 7: like Maentre policy is a lot closer to neutral than
Speaker 7: what a lot of people.
Speaker 8: Thought a few months ago.
Speaker 7: You know, the fact that the economy continues to grow
Speaker 7: at a trend growth rate at a time where the
Speaker 7: federal funds rates you know, higher than four percent, tells
Speaker 7: you that maybe mandre policy doesn't really you know, isn't
Speaker 7: actually very restrictive at all. And so I think the
Speaker 7: prospect for further rate cuts has diminished considerably for the.
Speaker 6: Rest of the year, potentially, especially given the political uncertainty.
Speaker 8: Well potentially, I mean.
Speaker 7: The other issue we have, obviously is we have a
Speaker 7: lot of you know, uncertainty about policy. We have uncertainty
Speaker 7: about what's going to happen to terrorists, we have uncertainty
Speaker 7: about deportations, we have uncertainty about fiscal policy. And so
Speaker 7: the FED is also going to be reluctant to take
Speaker 7: big steps when they don't really know what the policy.
Speaker 7: See a mix is going going to be in the
Speaker 7: second half of the year and into twenty twenty six.
Speaker 6: But we might not know what the policy is going
Speaker 6: to be the entire year. It might be like this
Speaker 6: for four years. So what does the FED do just
Speaker 6: stay on pause forever?
Speaker 7: Well poll basically said that the that the FED would
Speaker 7: cut if either if the ecmomy slowed sharply or if
Speaker 7: inflation came down. I think I think it may not
Speaker 7: be quite that simple. It may be that you only
Speaker 7: cut if the economy slows down. You know, I could
Speaker 7: see inflation moderating further, the e commedy is staying strong.
Speaker 7: And in that situation, what's the what's the motivation for
Speaker 7: cutting rates at that point? So I think this, you know,
Speaker 7: one or the other might turn out to be that
Speaker 7: you actually need not just a following inflation, but you
Speaker 7: also need a substantial slowing of the economy.
Speaker 5: Well, I'm also curious about the X axis. At a
Speaker 5: time we're talking about inflation expectations over the next two
Speaker 5: and five years creeping higher, even though inflation expectations over
Speaker 5: the next ten years are actually going down. This idea
Speaker 5: that of the longer term it will suppress growth.
Speaker 4: How does the FED respond to.
Speaker 5: That, given that they have been patient with the idea
Speaker 5: of inflation taking a longer time to get to that
Speaker 5: two percent, But at a certain point, a long time
Speaker 5: becomes forever.
Speaker 8: Well, you're absolutely right.
Speaker 7: I mean, every year you spend above two percent, there's
Speaker 7: more risks that inflation expectations, which have been well behaved
Speaker 7: up to now, finally start to become an anchor. And
Speaker 7: I think when the FED looks at the effects on
Speaker 7: terrifts on the economy. They are going to be very
Speaker 7: focused on whether those higher prices caused by higher terroriffs
Speaker 7: are actually feeding into inflation expectations. If they do, they'll
Speaker 7: make the FED more cautious.
Speaker 8: If they don't, the FED will be focused on the.
Speaker 7: Growth impacts of higher terrifts slowing down the economy. So
Speaker 7: I think whether the FACT can look through the tariff
Speaker 7: increases in terms of their effect on prices will depend
Speaker 7: very importantly on what happens to inflation expectations over the
Speaker 7: next year.
Speaker 2: Hi, Bill, thanks for your time this morning. Looking forward
Speaker 2: to that second dance hastimately a little bit like to
Speaker 2: this morning as well. Be former New York FED President
Speaker 2: built up on the night, saystem with this surrounded table.
Speaker 2: Bebe Kelly at JP Morgan Asset Management. David, you've had
Speaker 2: five minutes. What jumps out for you.
Speaker 9: It's not as bad as it looks at first glance,
Speaker 9: because the things that the things that bumped higher are
Speaker 9: three of the flakiest numbers in the CPI. One of
Speaker 9: them was that shelter increased at four tenser percent. We
Speaker 9: saw a lodging of one point four percent. If you
Speaker 9: actually look at only's equivalent rent and rent they were
Speaker 9: up three tens, so it was a big increase in
Speaker 9: lodging one. That's not a big deal in April, but
Speaker 9: it just bounces a lot. If you look at airline affairs,
Speaker 9: they were up I think it was one point four percent.
Speaker 9: That's part of the core CPI issue. And then our
Speaker 9: old favorite auto insurance suddenly jumps two percent. And those
Speaker 9: three numbers are very bald. The government does not measure
Speaker 9: them very well. So I don't think that changes the
Speaker 9: overall thesis that inflation is basically under control. But I
Speaker 9: certainly agree with the analysis that this is no reason
Speaker 9: for the Fed to move an interest rate. It says
Speaker 9: nothing in this report which says we need to have
Speaker 9: lower interest rates.
Speaker 2: Just cham and have the luxury of making the same
Speaker 2: argument in about ninety minutes time on Capitol Hell, he should.
Speaker 9: You know, you should stand your ground for honest analysis.
Speaker 9: I know it's easy to come up with a bumper
Speaker 9: sicuret that inflation is high, but good economists, good central banking,
Speaker 9: requires you to analyze the numbers. And when he does
Speaker 9: look at this, he'll say, look, there are some special
Speaker 9: factors here, and I you know, don't throw things at me.
Speaker 9: There are some special factors which bumped up the number
Speaker 9: this month and a few months times, maybe even next month.
Speaker 9: You'll get a flip on the airlines and the hotels,
Speaker 9: and suddenly you get a better than expected number. They
Speaker 9: shouldn't overreact to this. But at the same time, you say,
Speaker 9: there's nothing here which says it inflation is cooling.
Speaker 5: I hepe thinking about Steve Rashudo and how he talks
Speaker 5: about how you can exclude this and exclude that.
Speaker 4: You guys tend to fight over this, but.
Speaker 5: At the end of the day, it really is a
Speaker 5: rate that has been very sticky. Are you saying it's
Speaker 5: okay for it to be a little bit sticky if
Speaker 5: it's at three percent not nine percent, and it's okay
Speaker 5: to just sort of accept a somewhat higher benchmark inflation rate.
Speaker 9: Yes, because if you look at it at the shelter
Speaker 9: issue really is very important. The owner's equivalent grant your
Speaker 9: shelter is still I'm not sure it's only this one.
Speaker 9: It's a four point four percent. Your review was four
Speaker 9: point six and so it's coming down, but it's coming
Speaker 9: down so slowly, but we know it's going to keep
Speaker 9: coming down. So always we know it's eventually, this is
Speaker 9: the core of the inflation rates eventually going to come
Speaker 9: down from three percent to two percent. We know that's
Speaker 9: going to happen. Didn't happen this month, and there's no
Speaker 9: reason for the Fed to to move quickly, particularly given
Speaker 9: all the policy uncertainty.
Speaker 2: David, appreciate your time as always. David Kenlly, the of
Speaker 2: JP Morgan Asset Management, joining us now to extend the conversation.
Speaker 2: Mohammed al Aaron of Queen's College, Cambridge on the latest
Speaker 2: inflation data with Equity's lower and bond yo hire Muhammed.
Speaker 2: First question to use, sir, just how high is the
Speaker 2: hurdle to hike interest rates at the federal serve? And
Speaker 2: does this conversation get started after a print like that?
Speaker 1: So I think it will get started in certain segments
Speaker 1: of the market, it will not get started within the Fed.
Speaker 1: And you know what, You've heard me say this over
Speaker 1: and over again, John, if their inflation target is truly
Speaker 1: two percent, then we would be talking about hikes. We
Speaker 1: wouldn't be talking about postponing cuts. No, there's three things
Speaker 1: that are very clear from these numbers. Taking that face value,
Speaker 1: I'm going to come back to the face value qualification.
Speaker 1: One day, are hotter than what the FED seems to
Speaker 1: expect giving it signals, and they're getting hotter second, and
Speaker 1: this is where I differ with David a little bit.
Speaker 1: They are consistent with the whole host of other data points.
Speaker 1: This is not some outlayer. They are consistent with what
Speaker 1: we've seen in other places. And also they are consistent
Speaker 1: with the hypothesis that companies and other segments of the
Speaker 1: population are much more sensitive now to actual and expect.
Speaker 8: The cost increases.
Speaker 1: This is not a repeat of twenty twenty one, where
Speaker 1: you have an unanticipated inflation and people don't adjust quickly.
Speaker 8: This is a different economy.
Speaker 2: So Mohammedan, you're suggesting that this economy is more inflation
Speaker 2: prone now than it was several years ago, more.
Speaker 8: Inflation sensitive now than it was before.
Speaker 1: But well, agree with David, And this is a conversation
Speaker 1: that the FED doesn't want to have, is that it's
Speaker 1: okay to have slightly higher inflation for now. You don't
Speaker 1: want to pull their work from under us exceptionalism. There's
Speaker 1: already a lot of uncertainty in the environment. Finally, John,
Speaker 1: the face value qualification was important because not only, as
Speaker 1: Mike pointed out, do we have the annual updates to
Speaker 1: all sorts of measuring things, but we also have the
Speaker 1: impact of the wildfire, and we simply don't know what
Speaker 1: the net net effect is. But at face value, this
Speaker 1: is certainly not good use for the Fed and the
Speaker 1: bond market, and.
Speaker 8: The equity market is reacting accordingly.
Speaker 4: Mohammed, there are two aspects to this.
Speaker 5: On one hand, you can say this truly is a
Speaker 5: more inflation prone market, and especially with companies more able
Speaker 5: and willing like Coca Cola to pass along price increases,
Speaker 5: you could see a spike upward, so you should respond
Speaker 5: as a federal reserve to.
Speaker 4: Tamp down that inflationary pressure.
Speaker 5: On the other hand, you're saying that the Fed should
Speaker 5: be patient because three percent inflation might be okay as
Speaker 5: long as it keeps going downward.
Speaker 4: Which is it? What is it appropriate to respond?
Speaker 1: So it goes back to two issues, one that Powell
Speaker 1: is finally willing to talk about and the second one
Speaker 1: that he doesn't want to talk about.
Speaker 8: The first one is what is the neutral rate? And
Speaker 8: he said yesterday that the neutral rate had meaningfully moved higher.
Speaker 1: The other one is what is the right inflation target,
Speaker 1: and that's the one he doesn't want to talk about.
Speaker 1: You know, my hope is that this FED will understand
Speaker 1: that if it could, and I understand why it couldn't,
Speaker 1: if we could talk about what is the right inflation
Speaker 1: target for an economy going to massive structural change, it
Speaker 1: would not be so obsessed with two percent.
Speaker 8: It would be flexible, It would target a range. Look, Lisa,
Speaker 8: it can be both.
Speaker 1: It can be that you should tolerate slightly hotter inflation prints,
Speaker 1: assuming that expectations remain relatively stable, and then you should
Speaker 1: promise us.
Speaker 8: Two percent down the road. But please don't target two
Speaker 8: percent for anytime soon.
Speaker 5: Mohamed, I'm struggling with the idea that the average inflation
Speaker 5: might be three percent, but Enory's eggs are fifteen percent higher.
Speaker 5: Or you know, you go to get to fly to
Speaker 5: a popular route and suddenly it's twenty percent higher. That
Speaker 5: there are select pockets of inflation where companies see they
Speaker 5: have the ability to kick up prices in a way
Speaker 5: that maybe they weren't at a time five years ago
Speaker 5: when this was a less inflation prone market. Does that
Speaker 5: raise concerns about longer term how much this could affect
Speaker 5: consumer confidence, especially at the lower end of the consumer scale.
Speaker 8: So I think there's two things.
Speaker 1: Eggs is, like David said, that is a supply shop,
Speaker 1: very different from higher prices for something where the demand
Speaker 1: is very high and the supply is an elastic So
Speaker 1: you know, these two things are happening, but they're economically
Speaker 1: very different in terms of attributes. And that's the reality
Speaker 1: of an average inflation rate is you have things going
Speaker 1: up very high and things going very low. The key
Speaker 1: thing to remember, at least what I look at, is
Speaker 1: the bet that the FED and others we're making is
Speaker 1: that service inflation would come down fast enough to upset
Speaker 1: goods inflation.
Speaker 8: That is no longer going down, no longer going negative.
Speaker 8: Now what we're seeing is goods.
Speaker 1: Inflation is starting to pick up, and service inflation hasn't
Speaker 1: come down fast enough. And I think that is a
Speaker 1: nature of the economy that we're functioning in right now.
Speaker 6: If that's the nature of where we are right now,
Speaker 6: was it an error, a policy error for the FED
Speaker 6: to cut one hundred basis points.
Speaker 8: And I believe that this FED has no strategic anchoring.
Speaker 1: It is a ridiculous sequence that we've had in July
Speaker 1: there's no need for a cut. In September there's need
Speaker 1: for a jumble cut of fifty basis points, and not
Speaker 1: much has changed in between. Then we come to the
Speaker 1: next two and we are recalibrating, meaning we're getting down
Speaker 1: to the twenty five regular twenty five. Now suddenly there's
Speaker 1: a huge discussion. Are we skipping? Are we pausing? There
Speaker 1: is no meaningful forward policy guidance coming from this FED,
Speaker 1: and that is the mistake, that is the big, big mistake,
Speaker 1: is that they are just incapable. It seems certainly unwilling,
Speaker 1: but but it seems incapable of taking a strategic view
Speaker 1: of where the economy is going. They have been so
Speaker 1: burned by their huge mistake in twenty twenty one, where
Speaker 1: they did take a strategic view, but they took the
Speaker 1: wrong strategy view, that they don't want to take any
Speaker 1: strategy view. So look for the FED policy not to
Speaker 1: act as an anchor for this economy, but to fuel
Speaker 1: volatility further. And I think that is the basic problem
Speaker 1: we have right now with this fetter reserve.
Speaker 6: Muhammad though, is this the Fed's fault in terms of
Speaker 6: what's going on right now? Or is it just because
Speaker 6: they're dealing with a tremendous amount of uncertainty extent of
Speaker 6: clarity on some big policy issues in Washington.
Speaker 1: Well, what I just said predated the great uncertainty in Washington.
Speaker 1: It predated it. So the FED has a problem. But
Speaker 1: you would hope that when you would look around and
Speaker 1: companies look around about in this uncertain world, that they
Speaker 1: at least think that there's one bit that provides the anchor.
Speaker 8: And the FED is not doing that.
Speaker 1: So whatever volatility is in the system right now, the
Speaker 1: FED will amplify it. And that's not what it should
Speaker 1: be doing, and that's not what forward politic cadence is
Speaker 1: all about. But if you are excessively data dependent, you
Speaker 1: will amplify it.
Speaker 2: Mohammed Adam Posen the Peterson Institute thinks the next move
Speaker 2: is a hike. Tilson Slock Apollo has made the argument
Speaker 2: on this program a number of times. Things potentially the
Speaker 2: next move is a hike. When you think about the
Speaker 2: next move and you know what the next question is
Speaker 2: going to be, is the next move still a cup
Speaker 2: or is it a hike?
Speaker 1: If they believe in that two percent inflation target, the
Speaker 1: next move would.
Speaker 8: Be a hike.
Speaker 1: I think they will tolerate high inflation without telling us
Speaker 1: they're doing so, they're just going to keep on promising
Speaker 1: us that everything's going to be fine. And I think
Speaker 1: that we are going to be pausing. The pause button
Speaker 1: is going to be on a lot longer than what
Speaker 1: the market has been expecting.
Speaker 2: Do you think that should be a feature of today's
Speaker 2: conversation of day two on Capitol Hill in front of
Speaker 2: the House Financial Services Committee? Is this committee tacitly accepting
Speaker 2: a higher inflation rate, an inflation rate that they shouldn't
Speaker 2: be targeting.
Speaker 1: This committee should be having a very detailed talk about
Speaker 1: monetary policy, and it should be talking about the different
Speaker 1: scenarios that are facing the economy right now and what
Speaker 1: is the role of monetary policy.
Speaker 8: That is what it should it should do. But you know,
Speaker 8: depending on your.
Speaker 1: Sports chair, pal is in the game of either sidelining
Speaker 1: difficult question or punting on difficult questions, or ducking and
Speaker 1: weaving on deficult questions. He doesn't want to make news.
Speaker 1: He already made some news yesterday that I don't think
Speaker 1: he was comfortable making. So even if you get the questions,
Speaker 1: you're not going to get the answers.
Speaker 4: Mohammed putting together what you're saying.
Speaker 5: If this FED does want to tolerate a higher inflation rate,
Speaker 5: is this neutral? Not necessarily any distance at all from neutral.
Speaker 1: So you've heard me say this again, and that's because
Speaker 1: I focus on the structural element of this economy.
Speaker 8: We are very near neutral. We may be at neutral already.
Speaker 1: The economy has fundamentally changed from what it was in
Speaker 1: the last decade, and that's because the supply side has
Speaker 1: fundamentally changed.
Speaker 8: So yes, I've been saying this for a while.
Speaker 1: Okay, we are very close, if not at neutral. And
Speaker 1: and I heard Chair Powi yesterday say that for the
Speaker 1: first time he said this, that the neutral rate has
Speaker 1: moved out meaningfully since.
Speaker 8: In the last few years.
Speaker 2: Somehowm it just to find a question then without of mind,
Speaker 2: And that has implications for the front end of the curve.
Speaker 2: What would this mean from your perspective for the bond
Speaker 2: market going forward from here? The shape of the curve,
Speaker 2: how things look compared to how they looked a decade ago.
Speaker 1: So the front end and up to about you know,
Speaker 1: four or five years is easier for me than the
Speaker 1: long end. And it's easier for me because I think
Speaker 1: the market is going to it's going to move to
Speaker 1: the expectation that we're not going to get a cut
Speaker 1: for quite a while.
Speaker 8: The long end, John, is really hard.
Speaker 1: You have a massive tug of war right now in
Speaker 1: the Big five the irregulation fiscal both both on the
Speaker 1: expenditure sign the revenue side, trade, immigration, and watch the
Speaker 1: fifth and I'm missing a fifth one I think of
Speaker 1: it in a minute. So those Big five drawn are
Speaker 1: not clear how they're going to net out yet, and
Speaker 1: that's going to impact the long end in a meaningful fashion.
Speaker 2: Muhammed, this was a clinic, it always is. We appreciate
Speaker 2: your time, sir. Thank you. Mohammed Al Aaron There of
Speaker 2: Queen's College, Cambridge on the latest inflation print. This is
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