Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawnowitz Jailely, we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot Com and of course on the Bloomberg Terminal. And
Speaker 1: Benjamin bernanke would say, with his history, as with Milton
Speaker 1: Friedman and Anna Schwartz, it's always in every case about
Speaker 1: the banking and financial system which is under stress. That
Speaker 1: is a good introduction to Anastasia m Arosso for years
Speaker 1: covering Eastern Europe and all and now with I Capital
Speaker 1: Network with a much broader remit Anastasia. Let's go back
Speaker 1: a couple of years and speak of the Turmoil link
Speaker 1: in a higher oil price, real inflation worries that Mr
Speaker 1: a the Want has some would say self inflicted in
Speaker 1: the destabilization of Turkey. How idiosyncratic is it or can
Speaker 1: it be a contagion? Well, Tom, I do think at
Speaker 1: this moment it is idiosyncratic to Turkey and there's just
Speaker 1: too many issues in Turkey that have been building up
Speaker 1: for too long, you know, the current account deficit issues,
Speaker 1: you know, the rundown of the reserves, and when inflation
Speaker 1: is running, the last thing you do is cut interest rates.
Speaker 1: So this is a bit of a self inflicted damage here,
Speaker 1: and I don't think it's representative of other things that
Speaker 1: are happening in emerging markets, but perhaps identifying pockets of
Speaker 1: vulnerability is once against something that we need to do.
Speaker 1: Who has the twin deficits, who has low reserves and
Speaker 1: you know, who may not be able to withstand hips
Speaker 1: from the Federal Reserve and and higher dollar That might
Speaker 1: be one of the questions that we have for emerging
Speaker 1: markets in two but bradly speaking, a lot of them
Speaker 1: are much improved since point. Though. There's also a larger
Speaker 1: question here of air Duan fighting free markets and this
Speaker 1: idea of how much on a broader level of level
Speaker 1: policymakers are trying to fight free markets and trying to
Speaker 1: jaw bone down prices or job bone up valuations. How
Speaker 1: do you operate as an investor at a time when policymakers,
Speaker 1: and I'm thinking of the Federal Reserve in particular, is
Speaker 1: trying to keep a status quo. And we heard from
Speaker 1: your in timor earlier, the markets will win because they
Speaker 1: do not want to disrupt them. Well, I think the
Speaker 1: markets do ultimately prevail, and the supply demand balances prevail.
Speaker 1: And just to go back to the oil reserves and
Speaker 1: the release of the strategic patrolling reserve for a moment,
Speaker 1: it is a temporary move. I think it's kind of
Speaker 1: the only thing that's within a policy control at the moment.
Speaker 1: But it is going to be a small move. I
Speaker 1: will say, there was the release reserve that we're seeing
Speaker 1: is more than consensus was expecting. But even if we're
Speaker 1: released thirty million barrels, that was likely to translate into
Speaker 1: a downturn in price of two dollars a barrel or so,
Speaker 1: and so we probably going to see something more than that.
Speaker 1: Of course, a lot of it was fundloaded. But I
Speaker 1: do agree that this is just a temporary sense of
Speaker 1: control that I think policymakers are trying to exercise. But
Speaker 1: at the end of the day, it is what is
Speaker 1: supplied demand going to be? And for the broader economy,
Speaker 1: what is demand going to be? And was inflation going
Speaker 1: to do? So that's what the policymakers really need to
Speaker 1: respond to. Well, what strikes me about this reserve release.
Speaker 1: Anastasia is that we've seen it three times emergency releases
Speaker 1: in US history. It was during Desert Storm Katrina, and
Speaker 1: then when with the question of Libya in two thousand eleven.
Speaker 1: All of those were because you couldn't get the capacity,
Speaker 1: you didn't have access to that production. That's not the
Speaker 1: issue here. You could see a ramping up of output
Speaker 1: for OPEC Plus, or you could see shale players start
Speaker 1: to pump more oil. They're just not doing it. So
Speaker 1: how does that make this different? Yeah, so it does
Speaker 1: set up a bit of a fight here, I will say,
Speaker 1: because clearly that's not something OPEC Plus wanted to see happen,
Speaker 1: is to have this coordinated of strategic release. But and
Speaker 1: that's why they're starting to talk about potentially, um, you know,
Speaker 1: not ramping out their production. But the reality that OPEC
Speaker 1: has to grapple with is that we are likely to
Speaker 1: be in a surplus market next year versus the deficit
Speaker 1: that we've had. So I think they're going to calibrate
Speaker 1: their response carefully to that very quickly. In a stagia,
Speaker 1: do we need a strategic bitcoin reserve? Let's go here
Speaker 1: present wheelhouse. Well, I do think more and more companies
Speaker 1: and more and more individuals are building out their cryptocurrency reserves,
Speaker 1: and I would expand that beyond bitcoin, tim because Bitcoin
Speaker 1: has been a great trade this year because inflation was surging,
Speaker 1: and because the FIT was not doing anything about it.
Speaker 1: Now that the dollars moving higher and the FET is
Speaker 1: seemingly going to do something about inflation next year, bitcoin
Speaker 1: has lost a little bit of a shine. So there's
Speaker 1: two things I would say about that. First of all,
Speaker 1: you take a step back and look at the broader
Speaker 1: adoption trends of something like bitcoin, and I do think
Speaker 1: that's going to continue to grow in chursion notwithstanding, but
Speaker 1: near term there's other cryptocurrencies that I think do play
Speaker 1: a good role in the cryptocurrency reserve. Your sport, Annastasia
Speaker 1: and Rosso, thank you so much there with terrific perspective
Speaker 1: on the Lavan and over to Eastern Europe. This is
Speaker 1: a joy and an immense honor of Mark McCormick. By
Speaker 1: chance with us now as we see an emerging market
Speaker 1: currency unravel if you're just joining us, Turkish Lira is
Speaker 1: in full collapse. Mark McCormick with TD Securities has been
Speaker 1: resilient dollar all year. Marks thrilled to have you on
Speaker 1: at this historic moment for the people of Turkey. I
Speaker 1: was at at three point two standard deviations half an
Speaker 1: hour ago. We've now collapsed out to three point six
Speaker 1: standard deviations, getting very close to what the textbooks would
Speaker 1: say is a point of crisis four standard deviations out.
Speaker 1: How close is turn key to unraveling their financial system? Well,
Speaker 1: things are having me Yeah, I think to start there,
Speaker 1: we're already pretty much there in terms of the major
Speaker 1: pivot point. I think what we're seeing here is there's
Speaker 1: two factors. There's the local factor, the global factor, and
Speaker 1: there's a negative feedback loop. And the local factor is
Speaker 1: there's zero credibility and how the government is going to
Speaker 1: manage his finances, and there's zero credibility and how the
Speaker 1: central bank will operate within that framework. So the market
Speaker 1: is completely lost confidence. And again, when we get to
Speaker 1: these kind of inflection points, it becomes a nonlinear rather
Speaker 1: than a linear discussion. And this is where we kind
Speaker 1: of get to this four standard deviation momentum. At some
Speaker 1: point someone will step in in terms of whether or
Speaker 1: not it's the market. It's going to be offered a
Speaker 1: tremendous matter of risk premium and a carry. But we're
Speaker 1: in an environment now. If you think about what's driving
Speaker 1: markets on the global site, it's liquidity. The dollar is
Speaker 1: rallying largely because liquidity is coming out of the G
Speaker 1: ten bond markets. And so to think about these emerging markets,
Speaker 1: which again no one has a lot of confidence in
Speaker 1: the central bank. No, it's a lot a lot of
Speaker 1: confidence in government. No one's buying too your Turkey swaps,
Speaker 1: no one's buying CDs is no one's participating in Turkey,
Speaker 1: which exacerbates that. Mark McCormick, the heat of ben Espernanci
Speaker 1: of Princeton University is in crisis. Watch the banks TV
Speaker 1: Securities of Canada has a huge global reach across Europe.
Speaker 1: Out of your London desk, what is the financial solidity
Speaker 1: right now of the Turkish banks and their finance system? Well, yeah,
Speaker 1: that's that's something in terms of our general connection that
Speaker 1: we're gonna have access to. But I think again a
Speaker 1: big part of it is how the markets responding and
Speaker 1: how you know, conversations we're having with clients about these
Speaker 1: type of topics. It really kind of comes around to
Speaker 1: if you think about how these uh, you know, international
Speaker 1: investors are participating. Everyone wants to talk about it, no
Speaker 1: one wants to do anything about it. And I think
Speaker 1: that's the primary channel is there's a tremendous amount of uncertainty,
Speaker 1: and it's like when do you catch a falling knife?
Speaker 1: And you know, my kind of reading of the tea leaves,
Speaker 1: of the people that I speak with and the the
Speaker 1: interactions we have is no one wants to catch that
Speaker 1: falling knife just yet. Mark, Right now, we have been
Speaker 1: talking about how Turkey is an idiosyncratic story. However, there
Speaker 1: is a larger pressure that is similar to other developing markets,
Speaker 1: particularly as a dollar does strengthen as the FED is
Speaker 1: expected to raise rates. At what point do you start
Speaker 1: to see not necessarily to the same extent, but similar
Speaker 1: kinds of pressures and other developing market currencies. Yeah, that's
Speaker 1: a great question, and that's something that our E M
Speaker 1: T and went through on our Global effects Outlook are
Speaker 1: their global outlook as well, which is kind of like
Speaker 1: what you're doing is you're looking at funding pressures. You're
Speaker 1: thinking about backing up of of higher interest rates on
Speaker 1: the US and what impact does that have on capital flow?
Speaker 1: So essentially your primary focus is through Latin America. Um,
Speaker 1: you we have countries and again Turkeys another one. You've
Speaker 1: got a large current account deficit, someone needs to fund it.
Speaker 1: If you're not selling stuff to the rest of the
Speaker 1: world the way that parts of Asia do and running
Speaker 1: a trade surplus, well you now need international investors to
Speaker 1: participate in your fixed income or your equity market. So
Speaker 1: when you think about that in a world of rising rates,
Speaker 1: the you know, the biggest concern really kind of runs
Speaker 1: through Latin America, where you have large current account deficits
Speaker 1: and you're not offered the right carry cushion where you're
Speaker 1: not you're not offered the right environment in terms of
Speaker 1: growth and COVID reopening to feel comfortable buying those currencies
Speaker 1: just yet. And I think that's you know, participant are
Speaker 1: Our e M team is really focused on how Mexico
Speaker 1: looks vulnerable next year and where if you kind of
Speaker 1: look at that, Brazil could actually be an opportunity because
Speaker 1: there's so much rates coming through in terms of the
Speaker 1: Central Bank hiking that you're gonna get real rates higher
Speaker 1: in Brazil, which actually gives you that political uncertainty cushion
Speaker 1: that will probably pull some investors into Brazil next year.
Speaker 1: Evaluations in the f X channel already taken into account
Speaker 1: two or three rate hikes next year as the markets
Speaker 1: pricing in, right, I think that's a big, big driver
Speaker 1: if you think about what argues are for two. As
Speaker 1: an institution, we are actually very dubbish on the FED.
Speaker 1: We don't expect there the FED to move until three.
Speaker 1: We are looking for US two is intense steepener, which
Speaker 1: is generally kind of correlated with reflation. We're looking for
Speaker 1: firmer equity prices, and I guess, uh, you know a
Speaker 1: correlation offset that comes into this is really it could
Speaker 1: be firm or risk appetite, you know, not at the
Speaker 1: levels we saw one. So when I think, when you
Speaker 1: know what's priced in, what we have our real rates
Speaker 1: that are still gonna be really subdued, still potentially negative.
Speaker 1: We have the market who would have to reprice the
Speaker 1: fifty basis points worth of tightening that's priced in on
Speaker 1: the FED for next year, priced that out um and
Speaker 1: then also you're kind of reversing some of the expectations
Speaker 1: around US growth. We are looking for US growth next
Speaker 1: year to fall around to sit around three percent, which
Speaker 1: is again way below market expectations. So for me, Um,
Speaker 1: I think we're in a world again where we're trying
Speaker 1: to extrapolate the strength of the dollar in the hawk
Speaker 1: is fed into what is another you know, kind of
Speaker 1: annual outlook period. Uh. The outlook period now, I think
Speaker 1: for the first time is actually bullish the dollar. So
Speaker 1: our higher convictions is basically saying the world is going
Speaker 1: to be less correlated than when it was, and there's
Speaker 1: a lot of divergence on terms of trade, on central banks,
Speaker 1: on growth, and valuations. But this is not a clear
Speaker 1: runway to just think that the dollar is going to
Speaker 1: rally um as quickly, I think as everyone's assuming at
Speaker 1: this point so far. Mark And of course, uh, you're
Speaker 1: looking at euro dollar that is around one twelve dollar
Speaker 1: yen one fift team got a taste of that earlier.
Speaker 1: Is that so much yen or you're a weakness or
Speaker 1: is that primarily just a dollar strength story. Yeah, that's
Speaker 1: a good point too, because I think what people need
Speaker 1: to recognize is that the correlations around euro, especially to
Speaker 1: emerging markets, is broken down. If you look at euro
Speaker 1: dollar versus dollar China, we've basically seen these two currencies
Speaker 1: completely deviated levels that we've never seen before. So if dollar.
Speaker 1: China is right, we should be at one, and if
Speaker 1: euros right, we should be at you know, six eighty.
Speaker 1: So I think there's an element here that euro dollar
Speaker 1: is doing its own thing. Um, the biggest driver there
Speaker 1: is actually nominal rate spreads. It's not really a real
Speaker 1: rate story. If you look at the ada's the not
Speaker 1: the two year nominals are about three times more important
Speaker 1: than than the real rates. So I think the euro
Speaker 1: dollar is primarily a focus on the fed ECB right now. Um,
Speaker 1: I think people are worried about how COVID reopenings are
Speaker 1: impacting Germany and the Netherlands and some of these really
Speaker 1: big important countries. Because the Eurozone growth story is actually
Speaker 1: pretty solid relative to the US. So you need the valuation,
Speaker 1: you need the growth story. You also need equity inflows
Speaker 1: and all those things are influx. So I think there's
Speaker 1: an element here that dollar en is about higher rates globally,
Speaker 1: stagflation reflation, higher interest rates. We know that's coming, but
Speaker 1: euro dollar is a little bit trickier. Where I do
Speaker 1: think if the world starts to heal itself and we
Speaker 1: start to think about Eurozone growth, if we start to
Speaker 1: think about where the relative discounts are at and we
Speaker 1: start to think about, uh, the importance of equity flows.
Speaker 1: There could be a cushion that comes in there early
Speaker 1: next year. Mark McCormick, thank you so much, and really
Speaker 1: one of the great outlier calls a different view to
Speaker 1: two thousand two and two thousand It is time to
Speaker 1: stop in the political verbiage and actually get perspective. You
Speaker 1: can always in every case do that with Wendy Schiller.
Speaker 1: To say she's at Brown University barely describes her contribution
Speaker 1: to the discourse of American politics. Wendy, I want to
Speaker 1: go to David Morales, the youngest graduate in the history
Speaker 1: of Brown University's acclaimed Public Affairs Master's program. David Morales's
Speaker 1: mother picked vegetables out in California and he ended up
Speaker 1: with a prestigious degree. At your shop. He's a representative,
Speaker 1: a socialist representative from the seventh District of Rhode Island
Speaker 1: as well. He speaks Senator Warren speak, he speaks Senator
Speaker 1: Sanders speaks. What happens to the future of liberals in
Speaker 1: America in the next five or ten years in the
Speaker 1: Democratic Party. Well, I think there's an I wouldn't call
Speaker 1: it a lot war. But I think that there is
Speaker 1: a reckoning coming with the party because the party needs
Speaker 1: higher turnout among people who we used to say we're young,
Speaker 1: you know, eighteen eighty nine, but that generation is now
Speaker 1: thirty five years old, right, This is not just sort
Speaker 1: of young people, and they need that for people to vote,
Speaker 1: and that for people is highly dissatisfied with the establishment leadership,
Speaker 1: and they believe that government should do more to take
Speaker 1: care of basic human needs. That's what they believe, and
Speaker 1: that's why there's been this long drawn out fight over
Speaker 1: this what we call Reconciliation Package or whatever you wanna
Speaker 1: call it, build back Better. Um, you know that the
Speaker 1: government should provide more help to live a decent basic life.
Speaker 1: And you try to say how do you pay for that?
Speaker 1: And they don't really want to hear it. What is
Speaker 1: the percentage that is liberal in America? Do you have
Speaker 1: a working number in your head? You know, it's an
Speaker 1: interesting thing. People polling really asks about party affiliation much more.
Speaker 1: You know, do you consider yourself a liberal or conservative?
Speaker 1: And then which party do you belong to? That's the
Speaker 1: way they were the question. Uh, And I think that
Speaker 1: most people want to say they're moderate and you know,
Speaker 1: so then they say, well, I'm an independent, or I'm
Speaker 1: a Democrat or Republican, and so I think that, you know,
Speaker 1: pure liberalism. I think it's generational. What was a liberal
Speaker 1: in the sixties or seventies or eighties is not a
Speaker 1: liberal today. And that's the big disconnect. And the same
Speaker 1: thing happened, by the way, I hate to bring up
Speaker 1: that decade. The nineteen seventies, there was a big schism
Speaker 1: in the Democratic Party in Congress between people who were
Speaker 1: Democrats and people who were Liberal Democrats, and ultimately the
Speaker 1: liberal Democrats ended up winning up thirty years later, they
Speaker 1: lost the control of the Congress, though, Wendy. Nineteen seventies
Speaker 1: also a time of inflation, which is the first time
Speaker 1: now that we're seeing our surgeons and the political implications
Speaker 1: of higher price increases, a higher rate of price inflation.
Speaker 1: What's your expectation for how this plays out in terms
Speaker 1: of that schism, in terms of the mid terms. Well,
Speaker 1: I think the issue is combined with supply chain problems,
Speaker 1: right because people are willing to pay more now for things,
Speaker 1: but they go to the grocery store literally or the
Speaker 1: drug store, pharmacy wherever you're gonna go and it's you know,
Speaker 1: it's not there. You know you're seeing literally empty shelves,
Speaker 1: and that I think scare is a lot of people
Speaker 1: con You think, people of an older generation that thinks
Speaker 1: about regimes that never you know, supplied their people with
Speaker 1: enough goods. Even online, the wait time for things online
Speaker 1: is longer, it costs more. Soon, I'm still charge you
Speaker 1: for shipping now for things because they're just not available.
Speaker 1: These two things in tandem, I think scare people, and
Speaker 1: I think they see it as a sign of decline.
Speaker 1: And I think they'll blame the incumbent administration for that
Speaker 1: suppint well, and the administration is trying to take action
Speaker 1: as a result. Wendy announcing this fifty million barrel release
Speaker 1: of the Strategic Petroleum Reserve. Why would President Biden choose
Speaker 1: that option instead of encouraging US producers to pump more oil.
Speaker 1: It's an interesting choice. Other presidents have made it Kelly
Speaker 1: in the past. I think it's a it's a diplomatic choice, right,
Speaker 1: You're aligning with countries all over the world, so you
Speaker 1: have a little bit more cover. You're not just doing it.
Speaker 1: The US is not just doing it alone. But I
Speaker 1: think a lot of people on the street. If you
Speaker 1: talk to them at the guests pump, literally, they'll tell
Speaker 1: you they have no idea why guess costs what it does.
Speaker 1: They don't understand the supplied chain, they don't understand the
Speaker 1: reserve issue. They don't understand it. They just know they're
Speaker 1: paying ten fifteen fifty cents more gallon and they blame
Speaker 1: oil companies, gas companies, and they blame incumbent politicians. Well,
Speaker 1: and we've seen President Biden's approval rating taking a hit
Speaker 1: as a result of that particular issue of maybe the
Speaker 1: fact that it's taken so long to get any kind
Speaker 1: of economic agenda through Congress. Once billed back better in
Speaker 1: theory passes in the Senate as well, maybe that actually
Speaker 1: finally becomes legislation. The infrastructure bill has passed. He's taken
Speaker 1: this action on the spr Do you see his odds
Speaker 1: of getting approval higher as actually material higher or is
Speaker 1: he going to be stuck down here? I think his
Speaker 1: his approp ratings are also intertwined with the longevity of COVID,
Speaker 1: and I think people are really frustrated. Obviously, mass mandates,
Speaker 1: vaccine mandates, the facts of the vaccine does prevent serious
Speaker 1: illness in hospitals. They and most people, but not everybody.
Speaker 1: And I think people are just generally losing faith. And
Speaker 1: the problem is it's hard. That's that's snowball, right, So
Speaker 1: it's very hard to get that back, which is why
Speaker 1: the Democrats have to pay us something, even if it's
Speaker 1: a completely stripped down bill. They have to show they
Speaker 1: can still govern because if they can't, then they're gonna
Speaker 1: lose suburban voters, which we saw already in New Jersey
Speaker 1: and Virginia. And if they lose them now, it's very
Speaker 1: hard to win them back, even if things get better.
Speaker 1: Uh and when you thank you so much, Professor Schiller
Speaker 1: at Brown University, is just too short a visit today.
Speaker 1: We have to do this again as soon as it
Speaker 1: is a joy to get out front of the onslaught
Speaker 1: of economic data tomorrow with Michael Faroli, chief US economist
Speaker 1: at JP Morgan. Michael, I'm absolutely fascinated by the numbers
Speaker 1: that we have, how disjoint they are in our political debate.
Speaker 1: Let's start with the Atlanta GDP number, which is screaming
Speaker 1: eight percent. Or let take real g d P plus inflation,
Speaker 1: which is a nominal GDP that would make China happy.
Speaker 1: Or let's look at real GDP run rate of two
Speaker 1: two down near the famed Feroi potential g d P.
Speaker 1: How much of this nation is flat on their back
Speaker 1: in a week economy? Well, not much. I don't think
Speaker 1: the unemployment rate is you know, one of the statistics
Speaker 1: you didn't mention is the unemployment rate is now four
Speaker 1: point six p uh and that seems to be moving
Speaker 1: only lower. So the labor market, which is probably the
Speaker 1: most important market there is, looks pretty healthy. Inflation has
Speaker 1: been a problem the last two quarters, uh, and it
Speaker 1: will continue to be a problem, uh in in the
Speaker 1: fourth quarter. I don't expect that to persist in quite
Speaker 1: the same degree next year. I don't think many people do.
Speaker 1: Of course, uh So there is there are problems, but
Speaker 1: I think it would be quite extreme to say that, um,
Speaker 1: the economy is flat on his back. I mean, real
Speaker 1: gd is at peak levels and we're basically back to
Speaker 1: the trend we were on before the pandemic, which was
Speaker 1: pretty good trend. Michael. A lot of politicians are saying
Speaker 1: it is flat in the back, and the course they're
Speaker 1: centered on inflation. Right now, we all understand that debate,
Speaker 1: but so much of that is the demand for wage growth,
Speaker 1: and then inflation adjusted wage growth. Can JP Morgan model
Speaker 1: that we will see an actual real wage growth somewhere
Speaker 1: in the distance. So yeah, I think real wages will
Speaker 1: be growing next year um in part because again if
Speaker 1: headline inflation comes off, we know that nominal wage growth
Speaker 1: looks like it's on a pretty good trend right now.
Speaker 1: So all you need is some moderation and things like
Speaker 1: food and energy prices, particularly energy prices to start to
Speaker 1: see real wages pick up. And actually, you know, one
Speaker 1: of the things interesting things here that I think it's
Speaker 1: a little noted is that the labor share of national
Speaker 1: income actually continues to be on an up trend recently
Speaker 1: through the pandemic. So so I do think it's a
Speaker 1: good period for for workers. Certainly, vacancies are at an
Speaker 1: all time high, and workers are getting uh the wage
Speaker 1: races that you would think would would occurrent in a
Speaker 1: labor market like this. And this is perhaps, Michael, why
Speaker 1: we are seeing traders bring forward their expectations for the
Speaker 1: Fed to act and raise rates next year versus three
Speaker 1: you among them, Actually you had not expected any and
Speaker 1: last week you said you do expect a rate hike
Speaker 1: next year starting in September. Why did you see that
Speaker 1: changed your view on how the federal respond to this? So,
Speaker 1: I think the important, probably the most important development is
Speaker 1: over the past four months, the unemployment rate has come
Speaker 1: down one point three percentage points. Now we know that
Speaker 1: the Fed UH and beginning with with share Powell see
Speaker 1: inflation really persistent, inflation being driven by slack or the
Speaker 1: lack of slack, and that that's moving in a direction
Speaker 1: that suggests we're getting pretty close to full employment and
Speaker 1: that is the last remaining condition for liftoff. Having attained
Speaker 1: that condition, I think we could easily see that in
Speaker 1: the second quarter of next year. Um. Then I think
Speaker 1: it's only a matter of time before they left off
Speaker 1: and try and get back to something more more of
Speaker 1: a normal policy setting, because the labor market UH and
Speaker 1: inflation are certainly looking uh well, inflation is not looking normal.
Speaker 1: Labor market is getting back to normal. Michael, That's what
Speaker 1: I was going to ask, what's a normal policy rate
Speaker 1: right now? So I think, uh, well, I guess first
Speaker 1: you have to say what is the neutral real interest rate.
Speaker 1: I would think it's somewhere between zero and a half percent,
Speaker 1: So that would put nominal neutral interest rates at something
Speaker 1: like two to two and a half percent, which is
Speaker 1: about the peak we got in the last cycle. So
Speaker 1: I think until something really breaks in the economy, the
Speaker 1: FED would uh seek to get back to that, you know,
Speaker 1: in measured steps, of course, unless there's a real problem,
Speaker 1: but I think that's kind of the goal here in
Speaker 1: terms of normalization of policies, getting short term rates back
Speaker 1: into something like that range. When talking about the normalization
Speaker 1: of policy, you also have a number of policy makers
Speaker 1: now out saying we may need to taper more quickly
Speaker 1: than initially thought. Do you expect to accelerate a taper?
Speaker 1: And does not have any real bearing on liftoff, certainly
Speaker 1: can't rule it out given the pace of improvement in
Speaker 1: the labor market recently. Uh, And I do think it's
Speaker 1: kind of interesting that, you know, you had that remark
Speaker 1: from Vice Chair Clarada last week, and he's he knows
Speaker 1: he's out the door, so perhaps he feels like he
Speaker 1: can speak a little more freely or perhaps even speak
Speaker 1: on behalf of the institution and the staff. So I
Speaker 1: think the fact that he was out there raising that
Speaker 1: idea suggests it's something we again can't rule out. I
Speaker 1: don't expect to see that in December. I do think
Speaker 1: they probably pays them to wait a little bit to
Speaker 1: see if there is a seasonality or a winter wave
Speaker 1: here before making that decision. But if it looks okay
Speaker 1: in January March, I think that's certainly very live possibility.
Speaker 1: Larry Summers, the former US trugury secretary, says get the
Speaker 1: taper over with within three months? Is that too quick? Uh?
Speaker 1: I mean, right now, I think it's a little too quick,
Speaker 1: But I do think there's a case to be made
Speaker 1: for that. And I guess, following on your last point
Speaker 1: or last question, really the idea here is, uh, you
Speaker 1: don't want to be hiking at the same time you're
Speaker 1: you're tapering, right, so you want to get the taper done.
Speaker 1: So the sooner you get the taper done, as sooner
Speaker 1: you have the optionality to hike. Uh. If developments next
Speaker 1: year I really turned out to be quite a bit
Speaker 1: hotter than are currently anticipated, so um, you know, right now,
Speaker 1: particularly with the risks of a of a winter wave,
Speaker 1: I think it might be premature, but I think as
Speaker 1: we get into early next year, that bears a reconsideration.
Speaker 1: Michael two percent inflation is secrecent. I want to go
Speaker 1: to your acclaimed booth school seminar that you hold every year,
Speaker 1: and part of that debate will be around adam posing
Speaker 1: Peterson Institute in the idea of a new three percent
Speaker 1: level instead of two percent? Why can't we go decimals?
Speaker 1: And are we doing that right now? And that the
Speaker 1: new two percent is say two point two percent or
Speaker 1: two point three percent? Are we jaw bowing our way
Speaker 1: to that kind of level? So I don't think we
Speaker 1: can go to three percent for political reasons, right So
Speaker 1: the Fed, uh, the fact that they even interpret um
Speaker 1: price stability as two percent inflation back in the nineties
Speaker 1: was a bit of a sleight of hand on the
Speaker 1: congressional mandate. I think going to three would be really
Speaker 1: quite um risky for the institution. Some might say that
Speaker 1: flexible average inflation targeting was sort of a you know,
Speaker 1: backhanded way of reason the inflation target which you know,
Speaker 1: I think there has something to that on average it
Speaker 1: should be higher realized inflation. Uh now decimal points, given
Speaker 1: the imprecision of how we measure inflation, that might be
Speaker 1: a bit a bit much, but uh yeah, go into
Speaker 1: three percent. I don't think it's in the cards anytime soon. Michael,
Speaker 1: I want to finish up where we began this show
Speaker 1: with Tom asking a really good question. Are we just
Speaker 1: befalling hysteria with respect to inflation in these nineties seventies
Speaker 1: comparisons and this issue of framing inflation in a new
Speaker 1: one kind of way. What is the consequence of the
Speaker 1: inflation that we're seeing now? Is it potentially a longer lasting,
Speaker 1: higher inflationary environment that will have to fight, or is
Speaker 1: it we are going to see growth maturely slow and
Speaker 1: a bigger divergence between the haves and the have not. So,
Speaker 1: first of all, I think seventies comparisons, I agree, are
Speaker 1: kind of hysterical. Uh, the central banks around the world
Speaker 1: have learned the lessons of that period, um and that
Speaker 1: period didn't happen overnight. It didn't happen over the course
Speaker 1: of one year. It happened over the course of the
Speaker 1: late sixties into the seventies. I think the bigger risk
Speaker 1: here is that the FED does, you know, get caught
Speaker 1: with inflation that's not transitory, that is persistent, and then
Speaker 1: I do think they'll do the right thing, which is
Speaker 1: tightened policy until grows slows enough to ring out that
Speaker 1: inflationary pressure. I think the risk here is that, for
Speaker 1: whatever reason, it seems like any time you slow the
Speaker 1: economy to a certain point, or it's hard to slow
Speaker 1: the economy to you know, just the right level. In fact,
Speaker 1: when you slow it, it it tends to go tip into recession.
Speaker 1: So I think the worry more is that not that
Speaker 1: we have a seventies inflation, but that when the Fed
Speaker 1: realizes inflation is more persistent, have to catch up to
Speaker 1: the curb that they're arguably behind, and in doing that
Speaker 1: they could really tip tippy Comedy back into a downturn.
Speaker 1: Michael Ferli, thank you so much for joining today with
Speaker 1: JP Morgan as well. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
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Speaker 1: Keene and this is Bloomberg