WEBVTT - Surveillance: Supply Shocks with Singh 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Farrell and Lisa Brownwitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.799 Find Bloomberg Surveillance on Apple, podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.360 and of course, on the Bloomberg terminal. This next guest 0:00:30.560 --> 0:00:33.280 is one of the smartest minds on markets, but also 0:00:33.320 --> 0:00:36.360 the most experienced with both the private and public sector, 0:00:36.400 --> 0:00:39.839 having just come from the Council of Economic Advisors to 0:00:40.000 --> 0:00:43.120 President Biden. DLive Saying, who is now currently the Chief 0:00:43.120 --> 0:00:46.200 Global Economist at p JIM also former Deputy National Security 0:00:46.200 --> 0:00:50.120 Advisor for International Economics for the Biden administration. DELI, but 0:00:50.120 --> 0:00:54.240 I want to start with this question around increasing protectionism. 0:00:54.240 --> 0:00:57.400 I will get into some of your expectations for inflation, etcetera. 0:00:57.920 --> 0:01:00.840 But this idea of the Inflation Work Auction Act and 0:01:00.840 --> 0:01:03.760 what we're hearing out of Europe this morning of potentially 0:01:04.160 --> 0:01:08.000 trying to entice technology companies to come to their own shores, 0:01:08.360 --> 0:01:11.280 do you think that this could ignite some sort of 0:01:11.400 --> 0:01:15.720 increasing reglobalization or deglobalization that we already see in effect. 0:01:17.520 --> 0:01:20.560 Good morning, Lisa, Well, let's put step back and consider 0:01:20.640 --> 0:01:24.320 the global backdrop. We're in probably the most intense period 0:01:24.360 --> 0:01:27.600 of great power competition since World War Two, and it's 0:01:27.640 --> 0:01:31.119 in that context with repeated supply shocks COVID, but also 0:01:31.160 --> 0:01:34.120 the war in Ukraine that major economies are saying for 0:01:34.200 --> 0:01:38.959 critical goods like semiconductors, like pharma, for electric vehicle batteries 0:01:38.959 --> 0:01:42.280 as well, and some of the foundational technologies like AI 0:01:42.319 --> 0:01:45.840 and biotech and robotics, UH that that we want to 0:01:45.880 --> 0:01:49.360 have more prioritization on resilience that are, and more supply 0:01:49.480 --> 0:01:53.600 chains geared around geopolitical alliances rather than just global efficiency 0:01:54.120 --> 0:01:57.320 and rather than just prioritizing more inventories. So I think 0:01:57.320 --> 0:02:00.720 the re orientation of supply chains it's real for critical 0:02:00.760 --> 0:02:04.200 goods and foundational technologies, but there are ways for the 0:02:04.280 --> 0:02:08.680 US and its allies, particularly in Europe, block rate in 0:02:08.760 --> 0:02:11.880 terms of getting resilience against a shared set of shocks 0:02:11.919 --> 0:02:15.400 that worry US using a similar set of tools, and 0:02:15.440 --> 0:02:19.880 then ultimately, since this is a multiplayer, repeated game, taking 0:02:19.880 --> 0:02:22.760 actions that leave both the US, Europe and our allies 0:02:22.800 --> 0:02:25.519 better off. There's a political aspect of this leap, but 0:02:25.560 --> 0:02:29.880 there's also the economic ramifications of this in terms of 0:02:30.000 --> 0:02:33.480 higher costs. Can you dovetail your view on how the 0:02:33.520 --> 0:02:35.320 West will deal with this, how the East will deal 0:02:35.360 --> 0:02:40.120 with this, and how this really affects your inflation outlook. Yeah, 0:02:40.160 --> 0:02:42.880 so there's a there's a negative branch of the probability 0:02:42.919 --> 0:02:45.960 tree in which this kind of supply chain where your 0:02:45.919 --> 0:02:51.320 orientation leads to more frictions, lower economies of scale, lower productivity, 0:02:51.320 --> 0:02:54.200 and as you just suggested, higher costs. But there's a 0:02:54.240 --> 0:02:58.240 positive branch as well, which involves a race to the top. 0:02:58.400 --> 0:03:01.880 So that would mean more public investor spent, more indigenous innovation, 0:03:02.520 --> 0:03:07.120 more development of our respective labor forces, and higher growth potential, 0:03:07.320 --> 0:03:11.880 higher productivity, and diffusion of those games broadly. That's that 0:03:12.080 --> 0:03:14.359 is the that is the question that's now playing out 0:03:14.360 --> 0:03:17.240 before us. UM. The US, as you mentioned in the 0:03:17.280 --> 0:03:20.680 Inflation Reduction Act, is taking steps to boost bolster our 0:03:20.680 --> 0:03:24.560 own growth capacity. Europe is doing the same, Uh. And 0:03:24.600 --> 0:03:27.240 we have to manage this process very carefully and also 0:03:27.400 --> 0:03:30.880 consider how China and other countries that may not share 0:03:30.960 --> 0:03:34.720 our same objectives play their cards. UH. And this is 0:03:34.720 --> 0:03:36.720 going to take years to play out, and I think 0:03:36.720 --> 0:03:41.200 as economists, UM, I am I am putting my bet 0:03:41.280 --> 0:03:44.120 that this is ultimately going to lead to a net 0:03:44.200 --> 0:03:47.880 higher trend level of inflation and a lower trend level 0:03:47.880 --> 0:03:50.360 of growth. But I say that with relatively low confidence 0:03:50.400 --> 0:03:53.800 because these are early days. Well, which raises a question 0:03:53.840 --> 0:03:59.200 about your fundamental belief that central banks will exercise restraint, 0:03:59.320 --> 0:04:01.880 that they won't as rates as much as perhaps they 0:04:01.920 --> 0:04:04.560 say they will, simply because they don't want a hard landing? 0:04:04.640 --> 0:04:06.760 Can they do that in the face of some of 0:04:06.800 --> 0:04:11.520 these structural inflationary aspects that seem to be present, and 0:04:11.560 --> 0:04:14.680 a lot of people seem to be acknowledging that they 0:04:14.720 --> 0:04:17.159 have to I mean, they have to acknowledge that we're 0:04:17.160 --> 0:04:20.400 living in a world of repeated and profound supply shocks 0:04:20.960 --> 0:04:24.839 from the intensification of great power competition, which means more 0:04:24.960 --> 0:04:28.680 use of economic statecraft, from a very bumpy transition from 0:04:28.760 --> 0:04:32.360 fossil fuels to renewables, from this supply chain re orientation 0:04:32.400 --> 0:04:36.240 that we're talking about um and from less diffusion of technology. 0:04:36.440 --> 0:04:39.920 In that context, they are fighting the battle of their 0:04:39.960 --> 0:04:44.359 professional lives to maintain their credibility on fighting inflation, and 0:04:44.440 --> 0:04:46.440 so they have no choice but to execute on their 0:04:46.480 --> 0:04:49.200 on their mandate that's what we're seeing, and I think 0:04:49.200 --> 0:04:51.920 it will ultimately lead to an overtightening by central banks 0:04:52.600 --> 0:04:56.640 in a context of repeated supply shocks and thinning simple buffers. 0:04:57.120 --> 0:05:00.320 So I expect a bumpy road ahead. But there's the 0:05:00.400 --> 0:05:05.200 overtightening risk relative to the undertightening risk and allowing inflation 0:05:05.240 --> 0:05:08.039 to run too hot for too long and damaging the 0:05:08.080 --> 0:05:11.560 economy in that way. Is the recession necessary to get 0:05:11.560 --> 0:05:17.040 the job done? Well? Look, uh, central banks are doing 0:05:17.040 --> 0:05:20.240 what they can in this context, and we have a 0:05:20.320 --> 0:05:24.080 labor market and balance in this country. Unfortunately, labor supply 0:05:24.200 --> 0:05:25.880 is not coming back as fast as any of us 0:05:25.880 --> 0:05:28.679 would like. Labor force participation rates are about a percent 0:05:28.800 --> 0:05:31.919 or two below the pre pandemic level. We're seeing a 0:05:31.960 --> 0:05:34.520 fall and net immigration, and so the Fed feels as 0:05:34.560 --> 0:05:38.200 though all it can do to cool services prices x 0:05:38.279 --> 0:05:41.520 rents is to slow down labor demand and to get 0:05:41.600 --> 0:05:44.640 nominal wage growth back in the three and a half 0:05:44.680 --> 0:05:47.000 percent territory, which if you assume one and a half 0:05:47.040 --> 0:05:51.080 percent productivity, would be consistent with a two percent target. Now, 0:05:51.160 --> 0:05:53.240 if you're just the risk is this, if you're just 0:05:53.360 --> 0:05:57.080 relying on the spot inflation data to guide how much 0:05:57.120 --> 0:06:00.000 further tightening is necessary. You're likely to do too much 0:06:00.200 --> 0:06:03.440 because we're talking about more central banks tightening faster than 0:06:03.440 --> 0:06:06.640 we've ever seen in modern economic history, and because of 0:06:06.680 --> 0:06:09.080 the spillovers and because of the lags, this is not 0:06:09.160 --> 0:06:13.120 a process that's likely to end well. As you were 0:06:13.160 --> 0:06:15.960 just discussing kind of structural issues that are going to 0:06:16.040 --> 0:06:18.880 keep inflation more elevated. Should the Federal Reserve be thinking 0:06:18.880 --> 0:06:22.960 more seriously about not targeting two percent? Is that too 0:06:23.000 --> 0:06:25.920 low for the world we live in now? Well, the 0:06:26.640 --> 0:06:29.240 problem is you cannot change the goal post when you 0:06:29.279 --> 0:06:32.679 haven't won the game, and so changing the inflation target 0:06:32.720 --> 0:06:35.679 from two percent to three percent when you haven't achieved 0:06:35.680 --> 0:06:39.800 your objective would be a serious risk to the Fed's credibility. 0:06:39.880 --> 0:06:42.880 But I think the facto UH if we get to 0:06:43.320 --> 0:06:48.360 a core inflation level of let's say, below three UH 0:06:48.400 --> 0:06:51.119 and if that, if that decline in inflation is driven 0:06:51.160 --> 0:06:54.400 mostly by cecyclical factors, in other words, the FED is 0:06:54.440 --> 0:06:56.720 done when it can, then I think the fact could 0:06:56.720 --> 0:06:59.880 probably accept a higher level of inflation as a way 0:06:59.880 --> 0:07:03.040 of making up for decades of missing the inflation target. 0:07:03.080 --> 0:07:05.800 To the downside, I don't think they would announce this officially, 0:07:06.200 --> 0:07:08.640 but I think in a practical sense that's where we'll 0:07:08.640 --> 0:07:12.560 probably endout. Delia, pat Is, gasoline and crude prices. Factor 0:07:12.600 --> 0:07:14.680 into your expectations for next year and the fact that 0:07:14.680 --> 0:07:17.280 it's going to be a bumpy ride, given that we've 0:07:17.400 --> 0:07:19.960 seen an incredible rally, or at LISA at least if 0:07:19.960 --> 0:07:20.960 you look at it from the other side of you've 0:07:20.960 --> 0:07:24.600 seen incredible decline in oil prices, in gasoline prices. But 0:07:24.680 --> 0:07:27.240 next year, not only will China come back online, but 0:07:27.280 --> 0:07:31.119 the US is planning to start refilling their strategic petroleum reserve. 0:07:31.160 --> 0:07:33.280 How does that sort of factor in to what you 0:07:33.320 --> 0:07:38.240 see transpiring. Yeah, I think it's dangerous to extrapolate too 0:07:38.240 --> 0:07:40.440 far what we've seen over the past three months in 0:07:40.560 --> 0:07:44.720 terms of the decline of energy prices. Look, we don't 0:07:44.720 --> 0:07:47.120 know how the war in Ukraine is going to play out. 0:07:47.800 --> 0:07:50.080 We don't know what kind of supply shocks are still 0:07:50.120 --> 0:07:53.080 in store from Russia. We don't know how OPEC plus 0:07:53.440 --> 0:07:57.320 is going to handle its own production of energy. We 0:07:57.360 --> 0:07:59.880 don't know how the competition for a finite level of 0:08:00.120 --> 0:08:05.120 l m G globally will will also play out between Europe, Japan, 0:08:05.840 --> 0:08:08.520 UH Korea, and now you mentioned China, and so I 0:08:08.520 --> 0:08:10.680 think there are two studed risks in the energy market. 0:08:10.760 --> 0:08:13.960 And as a consequence this is he had another uh 0:08:14.200 --> 0:08:17.280 potential headache for the FED to have to contend with 0:08:17.400 --> 0:08:19.800 as it tries to get inflation back to target. I 0:08:19.840 --> 0:08:23.680 would not assume that the only component of inflation that 0:08:23.680 --> 0:08:26.800 we have to worry about is services prices experence. I 0:08:26.800 --> 0:08:30.240 think food and energy prices are still very much a 0:08:30.320 --> 0:08:33.400 prominent risk going in the next year, deliv saying of PGM, 0:08:33.440 --> 0:08:44.640 thank you so much. The market seems like it is 0:08:44.720 --> 0:08:46.840 testing the results. So I guess it's a question of 0:08:46.840 --> 0:08:50.680 whether Kuroda or whoever his successor is come midway through, 0:08:51.640 --> 0:08:54.320 is going to be forced to just abandon the policy entirely. 0:08:54.640 --> 0:08:57.280 Two things. Some people think that he's actually going to 0:08:57.320 --> 0:08:59.000 have to rip the band it off himself because he 0:08:59.040 --> 0:09:01.840 has the credibility and a successor will not. The second 0:09:01.840 --> 0:09:04.520 thing is, yes, they came in with an unannounced slew 0:09:04.600 --> 0:09:07.520 of bond purchases, but they didn't purchase twenty year bonds. Yes, 0:09:07.559 --> 0:09:10.320 it didn't purchase thirty year bonds, which raises questions about 0:09:10.320 --> 0:09:13.079 whether they're basically saying we can't control this one and 0:09:13.080 --> 0:09:14.679 we're gonna let it step and but let's start there. 0:09:14.840 --> 0:09:16.640 Mark Tendler is the perfect person to talk about that 0:09:16.679 --> 0:09:20.440 Chief Marget strategy to Bannckburn joining us. Happy holidays, Mark, 0:09:20.480 --> 0:09:22.760 Happy New Year. Let's just get your view Mark on 0:09:23.040 --> 0:09:27.319 why the dollar is weakening continually even today versus the end, 0:09:27.360 --> 0:09:30.000 despite what seems to be a reaffirmation if yield to 0:09:30.000 --> 0:09:33.319 cove control by the Bank of Japan. I don't really 0:09:33.360 --> 0:09:35.120 quite see it their way. I see that the Bank 0:09:35.160 --> 0:09:37.920 of Japan SU tried everybody, of course, but in the 0:09:38.080 --> 0:09:41.360 bay since then the dollar is at making higher highs, 0:09:41.840 --> 0:09:45.640 and even today it's holding above yesterday's low against the 0:09:45.720 --> 0:09:48.439 Japanese end. I think yesterday is low. It's just a 0:09:48.480 --> 0:09:50.920 little bit lower, about one thirty three forty. I think 0:09:50.920 --> 0:09:53.079 that matters, right A lot of people sort of. I 0:09:53.160 --> 0:09:54.920 think the attitude is don't want to be bitten by 0:09:54.920 --> 0:09:57.600 the same dog twice. The Bank of Japan SU pried 0:09:57.679 --> 0:09:59.800 us by the time of the move, and think a 0:09:59.800 --> 0:10:01.360 lot of people are on guard that they're gonna do 0:10:01.400 --> 0:10:03.520 so again. I don't think so. I think that the 0:10:03.559 --> 0:10:07.040 fiscal policy and the strengthening of again in the last 0:10:07.040 --> 0:10:09.160 month or so on a trade weighted basis is going 0:10:09.240 --> 0:10:12.040 a lower inflation in Japan and take pressure off the 0:10:12.040 --> 0:10:14.640 b o J to app again at least in the 0:10:14.679 --> 0:10:17.400 first quarter. And that first quarter is important because the 0:10:17.440 --> 0:10:21.640 swaps market shows the market expecting rates to go positive. 0:10:21.720 --> 0:10:25.240 Remember the overnight rated that minus ten basis points the market. 0:10:25.240 --> 0:10:27.600 The swaps market is showing a positive rate by the 0:10:27.640 --> 0:10:30.560 end of Q one. I think that's just exaggerated because 0:10:30.600 --> 0:10:32.240 again people don't want to be bit by the same 0:10:32.280 --> 0:10:35.160 dog twice. That was all excited for like an SNB 0:10:35.360 --> 0:10:38.920 moment from the Bank of Japan, and this was so 0:10:39.080 --> 0:10:42.560 much smaller. Even if it continues, do we ever get 0:10:42.600 --> 0:10:45.160 that mark? I don't know. I mean, I think that 0:10:45.280 --> 0:10:47.720 Japan is a tough situation. You know, it's not just 0:10:47.880 --> 0:10:51.920 that Corona is somehow idiosyncratic in its policies. But you 0:10:51.920 --> 0:10:54.760 look at what the bigger Japan's forecasting next year lower 0:10:54.760 --> 0:10:58.720 inflation below two percent, and the market expectations on far 0:10:58.960 --> 0:11:02.280 are on far from that. Japan had a stringle population, 0:11:02.679 --> 0:11:05.679 it has a it has like structural issues that are 0:11:05.720 --> 0:11:07.960 weighing on inflation. I think that's the challenge. And you know, 0:11:08.240 --> 0:11:12.120 earlier this week Japan recorded its third consecutive decline in 0:11:12.200 --> 0:11:15.199 industrial productions. And the last thing I quickly say about Japan. 0:11:15.480 --> 0:11:17.600 And I know we all focused on COVID and China, 0:11:18.080 --> 0:11:20.719 but I think it was Wednesday. There was Tuesday that 0:11:20.800 --> 0:11:24.800 Japan reported a record number of fatalities from COVID's not 0:11:24.960 --> 0:11:26.400 over yet, And I'm not, of course, I'm not a 0:11:26.400 --> 0:11:28.760 medical doctor. I don't know these things, but just seems 0:11:28.800 --> 0:11:30.719 to me that we're still getting a bit ahead of 0:11:30.760 --> 0:11:34.240 ourselves in the story. Uh. You know what's struck me 0:11:34.320 --> 0:11:37.080 yesterday or over the last couple of sessions. Is the 0:11:37.080 --> 0:11:39.720 strength of the pound? Or is it the weakness of 0:11:39.720 --> 0:11:42.240 the dollar? I mean, we were at thirteen fifty three 0:11:42.240 --> 0:11:44.880 on the Bloomberg Dollar Index in at the end of September, 0:11:44.880 --> 0:11:47.280 and we hung around there for six weeks. We've now 0:11:47.360 --> 0:11:50.360 come down. The pound, of course, broke down below parody 0:11:50.360 --> 0:11:52.360 at least I saw a pharaoh tweet that at one point, 0:11:52.400 --> 0:11:54.880 so I believe it's true. And now we were up 0:11:54.880 --> 0:11:59.880 to a dollar twenty five? Uh right now? Is the 0:12:00.440 --> 0:12:02.880 uh pound strength? Is a dollar weakness? Have we seen, 0:12:03.280 --> 0:12:07.320 um the the the peak for dollar? I think we've 0:12:07.320 --> 0:12:08.719 seen a piece of the dollar that you know what 0:12:08.760 --> 0:12:12.280 I think was happening was at the end of September. Uh. 0:12:12.320 --> 0:12:14.840 You know, people, I think they're just talking exaggerating what 0:12:14.920 --> 0:12:17.680 was happening. We actually the capital striking. Get the UK. 0:12:17.880 --> 0:12:20.920 It's about to enter a five quarter recession according to 0:12:20.920 --> 0:12:23.400 the Bank of England and the government to trust government 0:12:23.440 --> 0:12:25.520 the side, they have some fifth cloop stigulants. That seemed 0:12:25.520 --> 0:12:27.840 to be a good time for fifth book sigilist capital 0:12:27.960 --> 0:12:30.720 struck and you know the Encomige magazine was talking about 0:12:30.760 --> 0:12:33.840 brittlely and I was on tom Keane at the end 0:12:33.880 --> 0:12:37.160 of September and people were talking about the UK's an 0:12:37.160 --> 0:12:41.000 emerging market economy. And I think that kind of mentality, 0:12:41.000 --> 0:12:44.160 that kind of sentiment often corresponds to an extreme in 0:12:44.200 --> 0:12:46.319 the market. And I think that's what we've seen. I 0:12:46.360 --> 0:12:48.559 mean I had I had anticipated a move towards one 0:12:48.600 --> 0:12:53.079 twenty then one five. We've stopped about fifty on stirving. Uh. 0:12:53.080 --> 0:12:54.599 And this is where I am only the dollar in 0:12:54.640 --> 0:12:56.800 the big picture. I've seen the dollar and have a 0:12:56.920 --> 0:13:00.199 huge setback here and QUE four and oftentimes by that 0:13:00.360 --> 0:13:02.960 I mean nine out at nine out the g ted 0:13:02.960 --> 0:13:05.520 currency that's the only one that not in there is 0:13:05.520 --> 0:13:08.720 the Canadian dollar all appreciated by voy Thane five percent. 0:13:08.840 --> 0:13:11.760 It's the dollar Hear and Que four After such a 0:13:11.760 --> 0:13:15.319 big move, they technically indicator a bit over extended to 0:13:15.400 --> 0:13:18.040 the dollar on the downside. So I'm torn between thinking 0:13:18.080 --> 0:13:21.240 the dollar has turned lower and the short term technically 0:13:21.240 --> 0:13:24.600 indicated telling me the downside has been exaggerated. So I 0:13:24.600 --> 0:13:27.720 think there to happen Heared short of early and early 0:13:27.800 --> 0:13:30.640 next year is the market is going to reprice them 0:13:30.720 --> 0:13:33.640 the possibility of a fifty basic point height by the 0:13:33.720 --> 0:13:37.439 FED at the next meeting on February first, and I 0:13:37.480 --> 0:13:41.079 think that's going to get the dollar the technical correction well. 0:13:41.120 --> 0:13:43.000 And of course, something that the Fed may have to 0:13:43.080 --> 0:13:46.560 consider longer term into three is whether or not there's 0:13:46.559 --> 0:13:49.960 going to be a reinflationary impulse coming from a reopen 0:13:50.080 --> 0:13:52.960 China once they get past this current surge in cases 0:13:53.000 --> 0:13:54.839 what you mentioned a moment ago, Mark, how are you 0:13:54.920 --> 0:13:58.040 viewing that through the lens of the Wan, and so 0:13:58.200 --> 0:13:59.959 a couple of things. When I think that it's hard 0:14:00.120 --> 0:14:02.360 understand how the Chinese are able to do this, and 0:14:02.480 --> 0:14:04.160 I do this, I think be able to maintain a 0:14:04.240 --> 0:14:07.320 fairly stable currency, I sort of see them right now, 0:14:07.800 --> 0:14:11.679 given a turmoil in China itself. I see them why 0:14:11.800 --> 0:14:13.959 they have a very stable currency and they be able 0:14:13.960 --> 0:14:16.160 to engineer that. But I think that I think that 0:14:16.240 --> 0:14:19.560 the Chinese currency really trapped the Euro and the n 0:14:19.760 --> 0:14:22.800 right now broadly speaking, and I and those two currencies, 0:14:22.920 --> 0:14:25.080 I mean, I think the euro is clearly going sideway. 0:14:25.640 --> 0:14:27.800 We're holding just above the toy a moving average which 0:14:27.800 --> 0:14:30.360 you haven't really broken below for a couple of weeks now, 0:14:30.720 --> 0:14:32.400 and so I think that the I'm looking for the 0:14:32.480 --> 0:14:35.000 dollar to regain at seven level against the R and B. 0:14:35.480 --> 0:14:37.760 I think that this idea of you know, we heard 0:14:37.800 --> 0:14:41.360 this early last year where Chinese pp I, Chinese producer 0:14:41.480 --> 0:14:45.520 prices was the lead indicator for usd P I, I 0:14:45.600 --> 0:14:47.840 don't think so. I think things that really matter here, 0:14:47.880 --> 0:14:49.400 and I think you should see this very clearly, for 0:14:49.560 --> 0:14:53.040 Power of Talks were easily watching his service prices in 0:14:53.120 --> 0:14:56.440 the US, and these core service prices have very little 0:14:56.480 --> 0:14:58.640 to do with from Cown and Charina. I get think 0:14:58.720 --> 0:15:01.280 that the challenge for up in the US is that 0:15:01.440 --> 0:15:04.600 many people keep minding to blame other countries for our problems, 0:15:04.800 --> 0:15:08.200 whether it's China, whether it's mops off, whether it. I 0:15:08.320 --> 0:15:11.280 hope you mean in Vietnam, and I think most of 0:15:11.320 --> 0:15:14.600 our problems that really get home grown, well, that's probably 0:15:14.680 --> 0:15:19.320 not the most popular. He's just basically you can blame 0:15:19.360 --> 0:15:21.360 whoever you want. It's a smart handler and Fanning Brand 0:15:21.560 --> 0:15:27.720 have a wonderful new year. Joining us now as someone 0:15:27.880 --> 0:15:30.880 who has intensive knowledge understanding the labor market for the 0:15:30.960 --> 0:15:34.680 Federal Reserve, joining us now from the Brookings Institute, Stephanie Aaronson, 0:15:34.920 --> 0:15:38.160 Director of Economic Studies there, I do want to start there, 0:15:38.760 --> 0:15:41.360 do we have a true understanding of just how tight 0:15:41.440 --> 0:15:43.880 this labor market really is and how much wage pressure 0:15:44.360 --> 0:15:47.440 is driving things in a way that perhaps flies against 0:15:47.720 --> 0:15:49.760 this sort of moderation inflation that a lot of people 0:15:49.800 --> 0:15:54.720 are expecting. I think we've definitely seen a slowdown in 0:15:55.040 --> 0:15:58.120 the labor market. Um. I don't think we've seen a 0:15:58.200 --> 0:16:00.280 lot of increase in slack. But it's clear really the 0:16:00.360 --> 0:16:04.680 case that changes in payroll employment have come down. Firms 0:16:04.720 --> 0:16:08.320 are adding jobs more slowly. Vacancy rate has come down 0:16:08.440 --> 0:16:12.160 a tiny bit, although it remains very high. So I 0:16:12.240 --> 0:16:14.680 think we have some sign that things are moving in 0:16:14.760 --> 0:16:19.360 the right direction, but it's very small. Claims, for instance, 0:16:19.520 --> 0:16:23.520 have been largely moving sideways in recent weeks. So I 0:16:23.600 --> 0:16:26.840 think it's a bit too soon to tell exactly how 0:16:26.960 --> 0:16:28.720 much help the feed is going to be getting from 0:16:28.760 --> 0:16:31.280 the labor market. We're listen, fifteen minutes away from the 0:16:31.360 --> 0:16:35.920 last initial jobless claims reading of every time they come 0:16:35.920 --> 0:16:38.160 out you say they've been moving sideways. People kind of 0:16:38.160 --> 0:16:40.960 shrug their shoulders. They don't really care. They think that honestly, 0:16:41.040 --> 0:16:44.160 this is messy data that doesn't matter anymore. Do you disagree? 0:16:46.120 --> 0:16:48.760 I think it's not the clearest signal. The truth is 0:16:48.880 --> 0:16:51.360 that there are a lot of workers in this economy 0:16:51.360 --> 0:16:55.120 who are not eligible for unemployment insurance and that has 0:16:55.200 --> 0:16:57.720 decreased the signal that we get from the data. And 0:16:57.840 --> 0:17:01.120 it's also true that the data are noisy, but we've 0:17:01.200 --> 0:17:04.439 never had a recession without the claims data going up, 0:17:04.880 --> 0:17:07.440 and so while on a week to week basis it 0:17:07.560 --> 0:17:09.400 might not be that helpful to look at the data, 0:17:09.560 --> 0:17:13.320 I think that if we started to see large increases, 0:17:13.720 --> 0:17:16.119 that would clearly be a sign, and if we don't, 0:17:16.480 --> 0:17:18.600 then I think that that's also a sign that the 0:17:18.680 --> 0:17:22.480 labor market isn't deteriorating very much. Well, and in theory, Stephanie, 0:17:22.760 --> 0:17:24.480 it needs to do so. If the FED has any 0:17:24.520 --> 0:17:27.400 hope of getting inflation under control, unemployment is just going 0:17:27.480 --> 0:17:29.520 to have to go higher. The question is how high 0:17:30.400 --> 0:17:33.000 does it need to go and how high will be tolerated, 0:17:33.040 --> 0:17:35.400 not just by the Federal Reserve but politically as well. 0:17:35.520 --> 0:17:39.840 What do you think that level is. I mean, I 0:17:39.880 --> 0:17:43.080 would be surprised if we don't see the unemployment rate 0:17:43.240 --> 0:17:46.640 go up to at least around what the FED is expecting, 0:17:46.680 --> 0:17:50.680 maybe four and a half um percent, could be five 0:17:50.840 --> 0:17:54.640 per cent. But I do think that there are factors 0:17:54.720 --> 0:17:57.879 that are pushing down inflation, as we just heard, and 0:17:58.080 --> 0:18:01.239 so the FED is going to be getting some help. Uh. 0:18:01.560 --> 0:18:04.879 For instance, the housing markets already cooling a lot. We 0:18:05.000 --> 0:18:08.280 know that the rent data only show up in inflation 0:18:08.480 --> 0:18:10.960 with a long lad simply because of how the data 0:18:11.000 --> 0:18:14.320 are constructed, and so that means over the next six 0:18:14.400 --> 0:18:17.600 months inflation is going to be coming down. The goods 0:18:17.720 --> 0:18:22.040 prices are already uh starting to rise less quickly, and 0:18:22.240 --> 0:18:25.960 I'm hopeful that the change in policy in China is 0:18:26.160 --> 0:18:29.440 also going to reduce pressure on goods prices. Of course, 0:18:29.520 --> 0:18:32.000 it will also be trying to know what happens with 0:18:32.240 --> 0:18:34.680 energy prices, since that has a date factor two. So 0:18:35.040 --> 0:18:37.680 I don't think the labor market needs to do all 0:18:37.800 --> 0:18:41.080 of the work in this case, but certainly I do 0:18:41.240 --> 0:18:45.320 expect to see some deterioration, some increase in slack. I 0:18:45.400 --> 0:18:48.640 think we're all basically asking Stephanie Is for your guestimate 0:18:48.720 --> 0:18:53.080 of NEHRU, right, the non accelerating inflation rate of unemployment. 0:18:53.240 --> 0:18:57.000 I never exactly remember, but the idea is, and um, 0:18:57.080 --> 0:19:00.160 cath Rooney Vera yesterday told us her guest was four 0:19:00.200 --> 0:19:03.560 point nine. If you don't get to that level, um, 0:19:03.920 --> 0:19:08.480 we're still looking at inflationary consumer forces. So if it's 0:19:08.520 --> 0:19:11.719 four point nine percent and the FED only pushes unemployment 0:19:11.800 --> 0:19:13.640 up to four and a half or three point seven, 0:19:13.720 --> 0:19:16.720 now that just isn't good enough, right for an economy 0:19:16.800 --> 0:19:20.800 that has what se of of of of its inflation 0:19:20.880 --> 0:19:23.600 driven by services? Don't you need to get it higher 0:19:23.640 --> 0:19:25.480 than that? Shouldn't it be five and a half percent? 0:19:26.920 --> 0:19:29.920 I mean, I think if it's true that the neigh rut, 0:19:29.960 --> 0:19:33.919 as you said, is four point nine percent, then I mean, 0:19:34.600 --> 0:19:38.880 the higher the unemployment rate goes, you know, the less 0:19:38.920 --> 0:19:42.720 inflationary the environment is. Even if we don't really exceed 0:19:44.000 --> 0:19:46.280 the neigh rut but certainly you'll get the most bang 0:19:46.359 --> 0:19:48.840 for your buck once but unemployment rate is above that. 0:19:49.359 --> 0:19:52.720 My own estimate is probably that it hasn't written risen 0:19:52.880 --> 0:19:56.080 quite so much, uh maybe more in the neighborhood of 0:19:56.119 --> 0:19:58.040 four and a half or four and three quarters, So 0:19:58.320 --> 0:20:01.160 I'm not seeing the need for a unemployment to rise 0:20:01.280 --> 0:20:04.040 quite so quickly. But again, I think it depends a 0:20:04.119 --> 0:20:06.680 bit on how much the FED, how much help the 0:20:06.760 --> 0:20:09.480 FED gets from some of these external factors as well. 0:20:09.720 --> 0:20:12.040 I think you know, there also is some evidence that 0:20:12.760 --> 0:20:16.959 the vacancy rate is falling even without much of an 0:20:17.080 --> 0:20:21.320 increase in unemployment, and part of the reason that the 0:20:22.520 --> 0:20:24.960 NEHRU seems to be higher is that there's been a 0:20:25.080 --> 0:20:30.360 deterioration in matching of firms and workers, and a declining 0:20:30.480 --> 0:20:34.080 vacancy rate is a sign of an improvement in that 0:20:34.400 --> 0:20:37.240 process of matching of firms and workers, and if that 0:20:37.400 --> 0:20:41.480 comes down substantially, that will help ease the tension a lot, 0:20:41.960 --> 0:20:45.320 even without our seeing a big increase in the unemployment rate. 0:20:45.520 --> 0:20:51.000 So Lisa's son has a thesis that deglobalization um that 0:20:51.080 --> 0:20:53.040 we've seen as a result of the pandemic is driving 0:20:53.160 --> 0:20:56.520 up prices as well. That that's inflationary. It's just his theory, 0:20:56.680 --> 0:21:01.120 rightbody else's literally the consensus theory. Are you just talking 0:21:01.160 --> 0:21:05.240 about the carry on? I mean, I've been wondering about 0:21:05.280 --> 0:21:09.359 this to Stephanie. I was looking for pickleball paddles over Christmas, 0:21:09.560 --> 0:21:12.840 and the Chinese paddles on Amazon or ten dollars, But 0:21:12.920 --> 0:21:14.760 if you want to buy one that's made in America, 0:21:14.880 --> 0:21:17.720 it's like a hundred and fifty bucks. So that's a 0:21:17.840 --> 0:21:24.000 huge delta. How much is deglobalization really happening and how 0:21:24.080 --> 0:21:27.720 much of an effect it doesn't have on prices? I 0:21:27.800 --> 0:21:30.560 think for the long term, it's hard to say now 0:21:30.840 --> 0:21:35.600 whether we're going to really see a sustained deglobalization, whether 0:21:35.680 --> 0:21:38.200 the types of policies that the Biden administration is trying 0:21:38.280 --> 0:21:41.560 to implement are really going to shift a lot of 0:21:41.640 --> 0:21:44.320 production to the US, where indeed it will be more 0:21:45.480 --> 0:21:48.720 you know, more expensive. But it's clearly the case that 0:21:49.680 --> 0:21:55.119 the US benefited significantly from China's accession to the w 0:21:55.359 --> 0:21:57.440 t O and trying to really becoming sort of the 0:21:57.520 --> 0:22:01.320 factory of the world over the last into years. Goods 0:22:01.400 --> 0:22:05.520