WEBVTT - Surveillance: Fed Should Take Back Rate Hike, Kudlow Says 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:30.080 Bloomberg dot Com, and of course on the Bloomberg We 0:00:30.200 --> 0:00:33.920 now look at monetary ramifications off this job report. In 0:00:33.960 --> 0:00:38.240 twenty nine minutes, Julia Cornado, Macro Policy Advisers joins us. Julia, 0:00:38.400 --> 0:00:43.720 I look at the reaction functions available or predictable to 0:00:43.800 --> 0:00:47.279 the FED. Do we understand them or we flying as 0:00:47.320 --> 0:00:51.280 blind as maybe something. I mean, I think it's pretty 0:00:51.280 --> 0:00:53.760 clear what the objective is for the FED, and that 0:00:53.920 --> 0:00:56.360 is to keep the recovery going as long as it 0:00:56.400 --> 0:01:00.360 possibly can. And so I think that's why we're talking about, 0:01:01.040 --> 0:01:05.759 you know, interest rate cuts. Now. The prescription when you're 0:01:05.800 --> 0:01:08.800 close to zero on interest rates is to move ahead 0:01:08.840 --> 0:01:10.720 of risks and not wait for the for them to 0:01:10.760 --> 0:01:14.240 fully materialize in the data. So we expect to see 0:01:14.240 --> 0:01:17.479 some jobs slowing today. We expect to see a slowing trend. 0:01:17.600 --> 0:01:21.480 We've we've seen the global economy slow ah and it 0:01:21.520 --> 0:01:23.800 looks like it's going to be taking out some insurance 0:01:24.200 --> 0:01:26.240 but John, I'm asking you this question too, because you've 0:01:26.240 --> 0:01:28.119 got to ask us a card because he's gonna want 0:01:28.400 --> 0:01:32.800 a rate cut. What does a rate cut accomplish, John Farrell, 0:01:33.520 --> 0:01:37.360 very very unlikely that it will accomplish much, given how 0:01:37.400 --> 0:01:40.760 loose financial conditions already are. And Julie, and We've asked 0:01:40.920 --> 0:01:43.440 the Federal Reserve chair this question. In the news conference. 0:01:43.720 --> 0:01:47.320 Tom Kane asked the vice chairman this question, What will 0:01:47.360 --> 0:01:49.000 it do if they cut rights at the end of 0:01:49.000 --> 0:01:52.840 this month. Well, let's keep in mind that the expectation 0:01:53.360 --> 0:01:56.880 of rap cuts is one of the reason financial conditions 0:01:56.920 --> 0:02:00.120 are so very true. So in the face of all 0:02:00.120 --> 0:02:03.200 of the risks that markets have to look out at, 0:02:04.120 --> 0:02:07.280 they have this insurance from the Fed to cut rates. 0:02:07.320 --> 0:02:11.120 They've built that in and that's kept financial conditions from 0:02:11.160 --> 0:02:14.760 going into a tightening cycle. And so that's that's exactly 0:02:14.800 --> 0:02:19.440 how policy works. That's the transmission mechanism. So it's not 0:02:19.480 --> 0:02:22.840 like it's going to ease them more, but markets have 0:02:22.880 --> 0:02:24.960 already heard the Fed loud and clear that they're going 0:02:25.000 --> 0:02:28.160 to move and that's one of the things that offset 0:02:28.240 --> 0:02:30.800 some of the risks out there. So Junior, essentially we 0:02:30.880 --> 0:02:33.560 just need to validate market expectations. But beyond that, I 0:02:33.639 --> 0:02:35.000 failed to see how it helps. I mean, it's the 0:02:35.040 --> 0:02:37.440 price of credit the problem in the United States right now, 0:02:37.480 --> 0:02:39.320 most people would say no, it's the price of credit 0:02:39.480 --> 0:02:41.760 the problem. In Europe right now, most people would say no. 0:02:41.919 --> 0:02:44.600 Likewise in Japan, where is the price of credit actually 0:02:44.639 --> 0:02:47.880 a problem? No, it's not really the price of credit, 0:02:47.960 --> 0:02:52.360 but it's short circuiting the transmission of these risks through 0:02:52.360 --> 0:02:56.760 the confidence channel, and so it's not necessarily and that 0:02:56.840 --> 0:02:59.880 we see that in financial conditions. Okay, this is really 0:03:00.000 --> 0:03:03.400 really important, and we're talking with Julia Cornado with really 0:03:03.520 --> 0:03:08.720 significant experience in thinking through the mathiness of all this 0:03:08.960 --> 0:03:13.960 over to the behavioral nous of all this the confidence channel. 0:03:14.919 --> 0:03:18.240 Why don't they just cut rates this afternoon after an 0:03:18.240 --> 0:03:21.480 average or a shorter rate. That would be an immediate 0:03:21.600 --> 0:03:25.880 confidence boost, isn't it? Well, if it if they cut 0:03:26.040 --> 0:03:29.800 rates in between meetings that looks like an emergency, that 0:03:29.880 --> 0:03:34.360 looks like panic, that wouldn't never fairly boost confidence. But 0:03:34.400 --> 0:03:38.600 if they move methodically and say, look, we're sking some slowing, 0:03:38.640 --> 0:03:41.920 We're going to address it. Don't worry, keep doing what 0:03:41.960 --> 0:03:45.520 you're doing, And that's how you keep confidence on track. 0:03:45.560 --> 0:03:48.960 It's a very tricky game, and we're in an uncertain 0:03:49.000 --> 0:03:53.240 period like this, but I think moving unexpectedly can actually 0:03:53.920 --> 0:03:59.120 hurt confidence. They try to set up expectations for easy policy, John, 0:03:59.200 --> 0:04:02.320 I can't. And they how important this discussion is the 0:04:02.560 --> 0:04:07.320 history of this of successes in too many failures of 0:04:07.480 --> 0:04:11.360 guessing the future. There's confidence issues critical Or here's the 0:04:11.400 --> 0:04:14.440 line from the chairman, announce of protection is worth a 0:04:14.480 --> 0:04:17.440 pound of cure at the moment, though, Julia, there seems 0:04:17.480 --> 0:04:20.120 to be seems to be a disagreement. I think that's 0:04:20.160 --> 0:04:22.440 a different song, Julia. I think there seems to be 0:04:22.520 --> 0:04:26.840 a disagreement between what announce of protection actually is between 0:04:26.880 --> 0:04:29.200 the Federal Reserve and where the market is currently. The 0:04:29.240 --> 0:04:32.000 market seeing announce of protection as a hundred basis points 0:04:32.000 --> 0:04:34.760 of cuts over the next twelve months. Does that sound 0:04:34.839 --> 0:04:38.120 like ann ounce of protection to you? That sounds like 0:04:38.160 --> 0:04:40.840 a lot. Uh. And I think that the said can 0:04:40.920 --> 0:04:44.560 afford to be more data dependent that they may have 0:04:44.640 --> 0:04:47.360 to deliver that much. It sort of depends on how 0:04:47.440 --> 0:04:50.400 much transmission we actually see to the real economy. So 0:04:50.800 --> 0:04:52.800 it's a little bit chicken and egg. You're you're right, 0:04:52.839 --> 0:04:56.479 about that UM, and I think that the FED can 0:04:56.520 --> 0:04:59.680 just stay on course. Cut in July, see how the 0:04:59.760 --> 0:05:02.480 data flow in. If another cut is needed, then they'll 0:05:02.520 --> 0:05:06.160 do another cut and on they go. What data matters? 0:05:06.240 --> 0:05:10.120 If the data flows in after this ginormous jobs report 0:05:10.160 --> 0:05:15.680 in fourteen minutes, fifteen minutes, what data matters, Well, the 0:05:15.800 --> 0:05:21.800 jobs data are very important, comprehensive data that they see. UM. 0:05:21.880 --> 0:05:26.760 The trade development, business investment is one one thing that 0:05:26.800 --> 0:05:31.320 they have identified right now, Well, business investment has been 0:05:31.360 --> 0:05:35.839 sort of sluggish, it's not contracting, it's sort of flattened 0:05:35.839 --> 0:05:39.839 out after a very strong couple of years. So they're 0:05:39.839 --> 0:05:46.320 watching that other intrasensitive sectors, cyclical sectors, housing, UM. And 0:05:46.360 --> 0:05:50.240 then again right now the job's report really is front 0:05:50.240 --> 0:05:54.240 and center because it's the resiliency of the domestic service 0:05:54.279 --> 0:05:57.960 sector that's key here, that makes the difference between sort 0:05:57.960 --> 0:06:01.000 of a bumpy soft landing to tend in a recession. 0:06:01.520 --> 0:06:03.760 This is critical service sector. You bring up probably the 0:06:03.800 --> 0:06:05.920 most important question for a lot of people at the moment. 0:06:06.000 --> 0:06:09.360 Looking at the labor market, manufacturing is really weak worldwide, 0:06:09.360 --> 0:06:12.240 and we started to see that weakness materialized in the 0:06:12.279 --> 0:06:15.039 United States as well. Whether it feeds into the service 0:06:15.080 --> 0:06:19.119 sector in a way that would produce a really big 0:06:19.200 --> 0:06:22.279 down turn beyond just returning to trent growth. Are you 0:06:22.320 --> 0:06:26.559 seeing any sign of that already, Julia, We haven't seen 0:06:26.839 --> 0:06:31.400 signs of, uh, something that's terribly worrisome. We have seen 0:06:31.560 --> 0:06:34.800 some slowing in the service sector indicators with everything else. 0:06:34.880 --> 0:06:38.200 The I s M non manufacturing indexes come down off 0:06:38.200 --> 0:06:40.839 the highest, so has the hiring component of that index. 0:06:41.320 --> 0:06:45.479 It's not yet moving towards contractionary territory though, so it 0:06:45.560 --> 0:06:50.440 looks okay. I think the resilience story still holds up. Um. 0:06:50.480 --> 0:06:53.600 But again, if that's not going to take chances by 0:06:53.640 --> 0:06:58.120 waiting around, hopefully they're going to stabilize that. And so 0:06:58.240 --> 0:07:00.640 that's what we're looking for in today's report and India 0:07:01.400 --> 0:07:03.720 July report. Then we'll get at the beginning of August 0:07:04.160 --> 0:07:07.800 to see how that domestic service sector holds up. For 0:07:07.839 --> 0:07:12.280 your statistical care folks, let's get a non farm number 0:07:12.320 --> 0:07:15.640 from Dr Coronado. Do you have a payrolls number off 0:07:15.640 --> 0:07:20.360 one sixties survey? Yeah, I'm I'm right around to survey 0:07:20.400 --> 0:07:25.560 m at one sixty five, So, uh, it's down. It's 0:07:25.600 --> 0:07:30.520 a bounce back from May, but a slower trend. Okay, 0:07:30.600 --> 0:07:33.800 it's still plenty. Remember our sort of break even is 0:07:33.840 --> 0:07:35.600 a hundred k. That's what we need to hold the 0:07:35.680 --> 0:07:40.239 unemployment rate steady. Uh So anything above that is not bad, 0:07:41.040 --> 0:07:43.200 and so that would be a decent number, but it 0:07:43.200 --> 0:07:45.600 would be down from where we have been nicely frame 0:07:45.960 --> 0:07:51.080 Rica don at one uh Dr Coronado at one six 0:07:51.520 --> 0:07:56.000 and also after careful surveillance research, Dr Coronado likes mint chocolate. 0:07:56.160 --> 0:07:59.760 Show choice. What is it about I scream with you today? 0:07:59.800 --> 0:08:03.320 Tell it's the time of year. It's that time of year, 0:08:17.320 --> 0:08:20.520 and returned to Jason Furman, a Harvard University a former 0:08:20.640 --> 0:08:23.000 chairman of the President's Council of Economic Advices and of 0:08:23.080 --> 0:08:26.120 course at the Peterson Institute as well. Dr Furman, what 0:08:26.280 --> 0:08:29.640 is the policy prescription right now for the two Americas 0:08:29.680 --> 0:08:32.559 we have? We have some kind of run rate of 0:08:32.679 --> 0:08:37.360 decent employment bouncing seventy two up to two, but a 0:08:37.520 --> 0:08:42.640 huge part of America seems disassociated from this fully employed America. 0:08:42.800 --> 0:08:47.400 What is your labor prescription? Yeah, I think you see 0:08:47.440 --> 0:08:51.040 it in the numbers. UM this month, year over year 0:08:51.120 --> 0:08:57.040 average hourly earnings up three point one. That's actually lower 0:08:57.160 --> 0:09:00.839 wage growth than what we had about months ago, when 0:09:00.880 --> 0:09:04.000 it was running at nearly three and a half percent 0:09:04.120 --> 0:09:07.319 a year. I the good news is that, you know, 0:09:07.640 --> 0:09:10.360 means the Fed just doesn't need to be very worried 0:09:10.360 --> 0:09:14.679 about inflation. Yet another reason they don't need to be um. 0:09:15.200 --> 0:09:20.400 The prescription for that is heart economy and continued um 0:09:20.679 --> 0:09:24.000 low unemployment rate. That hasn't been working as well as 0:09:24.080 --> 0:09:26.959 we'd liked, so I think we'd need to try a 0:09:27.040 --> 0:09:29.840 bit more of it. Adjacent, one theme for this program 0:09:29.880 --> 0:09:31.720 over the last couple of hours is whether we're returning 0:09:31.760 --> 0:09:35.520 to trend growth in and around two GDP and maybe 0:09:35.559 --> 0:09:38.200 returning to more mature payrolls growth. Something a little bit 0:09:38.240 --> 0:09:41.079 more conservative away from two hundred thousand towards say a 0:09:41.200 --> 0:09:44.360 hundred k. Today's number makes that call a little bit 0:09:44.440 --> 0:09:48.160 more complicated, Jason, what's your base case for that return 0:09:48.240 --> 0:09:50.520 to trend growth? Is that something you see slowly happening 0:09:50.559 --> 0:09:55.079 over time this year? Yeah, I see that happening slowly 0:09:55.120 --> 0:09:57.720 over time this year. I think that's exactly the right word. 0:09:57.800 --> 0:10:01.040 And you know, I think historically evidence this trend is 0:10:01.120 --> 0:10:04.320 more like one point seven five percent. I don't think 0:10:04.360 --> 0:10:07.280 we'll fall that far this year, but I think that's 0:10:07.280 --> 0:10:09.599 where we're heading. And you know, just look at the 0:10:09.679 --> 0:10:15.599 unemployment rate it has you know, basically you know, is 0:10:15.679 --> 0:10:18.880 falling at a lower rate than it was before. Um, 0:10:19.040 --> 0:10:22.559 so we're closing the gap more slowly than we were before. 0:10:22.720 --> 0:10:25.240 Jason Furman and John Ferrell will speak with Lawrence Cudlow 0:10:25.240 --> 0:10:27.440 of the White House here in a bit. He's going 0:10:27.480 --> 0:10:30.120 to spin a supply side message that things are good, 0:10:30.200 --> 0:10:32.840 debt is good, we can grow ourselves out of debt. 0:10:33.160 --> 0:10:37.920 What is the thing that Larry Cudlo gets most wrong? No, 0:10:38.360 --> 0:10:40.679 I think it's that the underlying trend growth of the 0:10:40.720 --> 0:10:43.440 economy is more like one seven five to per cent, 0:10:44.080 --> 0:10:47.120 and that you know, it's like a super tanker. It's 0:10:47.200 --> 0:10:49.959 not something that turns on a dime. It's not a 0:10:50.080 --> 0:10:53.320 new president elected and all of a sudden everyone changes 0:10:53.400 --> 0:10:58.480 their estimates um of trend growth. And just you know, 0:10:58.520 --> 0:11:00.439 look at job growth last year it was two hundred 0:11:01.520 --> 0:11:04.120 a month. This year it's about a hundred and seventy 0:11:04.200 --> 0:11:07.959 thousand a month. It's probably going to come down from 0:11:08.080 --> 0:11:13.520 there an absent master productivity growth. UM, we can't you know, 0:11:13.640 --> 0:11:15.880 we're not going to be able to generate the three 0:11:16.320 --> 0:11:19.040 growth at the White House. This is really important. It 0:11:19.160 --> 0:11:22.160 speaks to the tensions evidence certainly over the last forty 0:11:22.200 --> 0:11:26.280 eight hours in America, a polarized America. David blanche Flower 0:11:26.800 --> 0:11:29.880 may very clear that the one way to jump start 0:11:29.960 --> 0:11:32.600 all this is immigration, and then that there's all these 0:11:32.679 --> 0:11:36.040 jobs that are skilled jobs that are unwanted and a 0:11:36.120 --> 0:11:40.000 growing population would help that. How do you study right 0:11:40.080 --> 0:11:44.839 now productivity in the body count of America? Can we 0:11:44.960 --> 0:11:49.840 get to a better labor America with a present population growth? 0:11:52.360 --> 0:11:59.040 We definitely have very unfavorable demography right now. And you know, 0:11:59.200 --> 0:12:01.320 you can either have more babies in wait twenty years 0:12:01.960 --> 0:12:06.800 or have more immigrants and they can work right away. Um. Probably, Uh, 0:12:07.000 --> 0:12:09.160 you know, the ladder is a little bit more feasible. 0:12:09.640 --> 0:12:11.400 I mean, the latter is a little more feasible. And 0:12:11.520 --> 0:12:15.079 that comes from policy as well. You're an expert in 0:12:15.160 --> 0:12:18.280 policy prescription. I think you've been very fair, uh and 0:12:18.440 --> 0:12:21.880 indeed balanced and looking at those that are conservative and 0:12:22.000 --> 0:12:27.240 those are liberal as well. Into the election, how are 0:12:27.280 --> 0:12:30.360 we going to address the debate on productivity? I mean, 0:12:30.559 --> 0:12:34.400 this is hugely emotional in America. What is the best 0:12:34.520 --> 0:12:38.240 prescription besides the trope of you know, everybody needs to 0:12:38.280 --> 0:12:41.560 be more educated. I get that. What's the immediate prescription? 0:12:42.800 --> 0:12:45.559 The problem is is not one answer. There's a lot 0:12:45.640 --> 0:12:48.839 of different ingredients. Immigration actually doesn't just help with the 0:12:48.920 --> 0:12:52.440 labor force. It helps with productivity because you bring people 0:12:52.640 --> 0:12:54.839 in with a lot of skills and a lot to 0:12:54.920 --> 0:12:59.520 contribute to our economy. Um. I actually think we could 0:12:59.559 --> 0:13:02.679 do another round a business tactor form um And what 0:13:02.840 --> 0:13:06.920 way didn't didn't they get enough last time? Well? I 0:13:06.960 --> 0:13:09.200 don't think we need to lower business taxes, but if 0:13:09.240 --> 0:13:14.600 you take steps like shifting to expensing more favorable tax 0:13:14.640 --> 0:13:16.760 treatment of R and D. And if you do that, 0:13:16.880 --> 0:13:19.240 by the way, you can probably raise rates a bit 0:13:19.520 --> 0:13:21.880 and and bring in some more revenues. You sound like 0:13:21.960 --> 0:13:25.560 you're positively Johnsonian on this. Are you talking about true? 0:13:25.720 --> 0:13:27.480 I mean, I mean I'm gonna use the phrase generally, 0:13:27.559 --> 0:13:33.040 but an investment tax credit to really spur domestic incentives 0:13:33.160 --> 0:13:37.640 to create jobs. Well, we have expensing in the law, 0:13:37.760 --> 0:13:40.960 but then it phases out over a five year period. Um, 0:13:41.120 --> 0:13:43.559 i'd actually make that permanent. But then you need to 0:13:43.600 --> 0:13:46.600 do some other things to make that work, like bigger 0:13:46.720 --> 0:13:53.839 limits on interest deductibility and more. Uh, you know, and 0:13:54.000 --> 0:13:56.520 and and and potentially higher tax rate. But I think 0:13:56.559 --> 0:13:58.959 focusing on innovation. I mean, you know, the R and 0:13:59.080 --> 0:14:02.760 D tax credit is sometime with the United States pioneered, 0:14:03.320 --> 0:14:06.240 we're now way behind most of the world on it um. 0:14:06.320 --> 0:14:10.000 We could expand that, right I any day, folks, I 0:14:10.040 --> 0:14:12.800 expect Dr Ferman to start talking with the Texas accent 0:14:13.200 --> 0:14:15.920 as he goes all the sixties at LB Jan's. Jason 0:14:16.000 --> 0:14:19.040 Furman has always thank you for the view on policy 0:14:19.120 --> 0:14:23.160 here off really quite good jobs for Dr Ferman, of 0:14:23.200 --> 0:14:42.400 course with the Peterson Institute at Harvard University. Right now, 0:14:43.040 --> 0:14:46.120 perfect guest Michael Darter with us with them CAM Advisers, 0:14:46.160 --> 0:14:48.320 and we see this as Karen was mentioning with real 0:14:48.800 --> 0:14:51.320 seismic change in the market and shift. Michael, what I 0:14:51.440 --> 0:14:54.000 would point out, and this is looking, folks at four 0:14:54.120 --> 0:14:57.880 or five fancy charts which don't work on radio. We're 0:14:57.960 --> 0:15:02.840 about sixty or seventy sent back to where we were 0:15:03.080 --> 0:15:07.840 before rate cut certitude. With this good jobs report, do 0:15:08.000 --> 0:15:15.040 we eliminate or ameliorate or lesson rate cut certitude? Hi, Tom, 0:15:15.120 --> 0:15:17.840 thanks for having me on. I certainly hope not, because 0:15:18.040 --> 0:15:22.320 what you're dealing with here with payrolls is a coincident indicator, 0:15:22.520 --> 0:15:26.240 and the long leading indicators have been pointing down. Even 0:15:26.320 --> 0:15:28.800 with the backup in the tenure yield. Today you still 0:15:28.960 --> 0:15:32.080 have an inverted treasury yield curve. That's been the case 0:15:32.240 --> 0:15:35.160 for over a month now. And so if we're going 0:15:35.200 --> 0:15:38.800 to take one piece of coincident data and have a 0:15:38.920 --> 0:15:42.840 parade about the FED not easing policy, that yield curb 0:15:42.920 --> 0:15:45.880 in version is more likely to persist in the business 0:15:45.920 --> 0:15:49.000 cycle is more likely to end in about a year's time. 0:15:49.520 --> 0:15:54.960 What is the leading indicators that matter to Michael darda Well. 0:15:55.200 --> 0:15:58.120 I like to look at the yield curve. Um it's 0:15:58.160 --> 0:16:01.560 frequently dismissed because it is such a long leading indicator 0:16:01.680 --> 0:16:04.800 with variation from cycle to cycle. So it's not uncommon 0:16:04.920 --> 0:16:07.840 to see other data that still looks fine for quite 0:16:07.920 --> 0:16:11.440 some time. I look at monetary growth, so we've had 0:16:11.520 --> 0:16:15.480 some intermittent negative readings in the inflation adjusted and one 0:16:15.600 --> 0:16:18.400 money stock year over year. That tends to happen when 0:16:18.440 --> 0:16:22.280 the curved handcake. And then we can also look at 0:16:22.360 --> 0:16:25.480 credit markets and then some shorter term leading indicators like 0:16:25.640 --> 0:16:30.600 jobless claims, and in those indicators still look okay. And 0:16:31.000 --> 0:16:33.680 so you know this is an economy that's not falling 0:16:33.720 --> 0:16:37.000 off a cliff. It is slowing. But I think if 0:16:37.040 --> 0:16:39.480 the FET is going to try to quote unquote get 0:16:39.640 --> 0:16:44.000 tough and defy those July rate cut expectations, then we 0:16:44.040 --> 0:16:47.160 could be headed into troubled waters. This is so important 0:16:47.200 --> 0:16:49.320 in folks. I'm looking at the Bloomberg screen future is 0:16:49.400 --> 0:16:52.600 negative twelve. They are negative five earlier? Is Mr Darta 0:16:52.640 --> 0:16:56.080 mentions the yield two point zero one? Michael, I'm looking 0:16:56.160 --> 0:16:58.440 at the vanilla spread the twos in the tens you're 0:16:58.520 --> 0:17:02.120 expert at using the Bloomberg was spreads. I mean, all 0:17:02.200 --> 0:17:05.560 of a sudden, that vanilla curve was twenty four and 0:17:05.640 --> 0:17:09.480 twenty five and twenty six basis points point to five 0:17:09.720 --> 0:17:13.119 percentage points difference in yield between the ten year and 0:17:13.200 --> 0:17:17.720 the two year, and it flattens down to seventeen basis points. 0:17:18.359 --> 0:17:19.960 Is that the kind of thing that would be the 0:17:20.040 --> 0:17:23.639 final straw for the FED to see a point a 0:17:23.800 --> 0:17:30.440 negative point zero one basis points on two s tends? Unfortunately, 0:17:30.800 --> 0:17:33.879 I don't think the FED is actually paying that close 0:17:33.960 --> 0:17:36.760 of attention to the to the curve, whether it tends 0:17:36.840 --> 0:17:39.000 to twose. I'd like to look at the ten year 0:17:39.480 --> 0:17:42.720 relative to the bill rate or the policy rate. Most 0:17:42.760 --> 0:17:46.960 of the academic literature, Yes, I agree, business cycles, you 0:17:47.119 --> 0:17:50.000 looked at a rate that's more harnessed to the FEDS 0:17:50.040 --> 0:17:53.440 policy rates. So the two year note yield has expectations 0:17:53.520 --> 0:17:56.520 of rate cuts in a multiple rate cuts, which is 0:17:56.600 --> 0:18:00.280 why that spread is still positive. But for the FEDS part, 0:18:00.320 --> 0:18:03.720 I think they're looking, you know, mostly at the macroeconomic data. 0:18:03.720 --> 0:18:06.880 They're looking at payrolls, are looking at joldless claims, they're 0:18:06.920 --> 0:18:10.040 looking at the unemployment rate, and that's all well and good, 0:18:10.200 --> 0:18:13.000 But aside from claims, you're really looking at a set 0:18:13.080 --> 0:18:16.760 of coincidence or even lagging indicators. And you've got the 0:18:16.840 --> 0:18:19.159 stock market up strongly. So you have some members of 0:18:19.200 --> 0:18:23.160 the Fed getting increasingly uncomfortable with the amount of rate 0:18:23.240 --> 0:18:26.359 cut expectations that that we have in the market. So 0:18:26.480 --> 0:18:30.000 you could have a showdown here going into the July 0:18:30.240 --> 0:18:32.880 meeting where the Fed quote unquote tries to stand tough. 0:18:33.040 --> 0:18:37.080 I think that would be a serious and potentially catastrophic 0:18:37.240 --> 0:18:41.000 mistake for the business cycle. But we get more data 0:18:41.160 --> 0:18:45.000 between now in that meeting. I want to revisit again 0:18:45.080 --> 0:18:47.840 the kind of data that Vice Chairman Clarato will be 0:18:47.960 --> 0:18:50.760 looking at with this set of PhD s. I mean, 0:18:50.880 --> 0:18:54.359 is it just retail sales and that kind of consumption 0:18:54.480 --> 0:18:57.280 data seventy of the economy or is it more on 0:18:57.359 --> 0:19:01.480 the business side. You know, Tom, I think it's both. 0:19:01.600 --> 0:19:04.240 But one problem we have is you don't want to 0:19:04.280 --> 0:19:08.680 focus too much on one data point. And so let's 0:19:08.720 --> 0:19:12.440 take today, for example, two thousand, quite a strong number, 0:19:12.960 --> 0:19:15.000 but if you look at a three month average, we're 0:19:15.080 --> 0:19:17.359 running at about a hundred and seventy one thousand for 0:19:17.520 --> 0:19:23.600 overall payrolls for private sector people. Dr right, So go 0:19:23.760 --> 0:19:26.120 back to the January of this year, those three month 0:19:26.200 --> 0:19:30.159 averages were two forty five and two forty respectively. So 0:19:30.920 --> 0:19:35.320 so if we're looking at trends, there's a clear slowing trend. 0:19:35.400 --> 0:19:37.879 Now that doesn't necessarily mean that you're headed off of 0:19:37.960 --> 0:19:43.359 a cliff, but slowdowns by definition must pre recessions. So 0:19:43.440 --> 0:19:46.480 the FED should be a bit more alert here. Um, 0:19:46.640 --> 0:19:51.120 you've mentioned Vice Chair Clarita. He watches inflation expectations very carefully, 0:19:51.200 --> 0:19:55.800 and we've had a pretty significant pullback and bond market 0:19:55.840 --> 0:20:01.440 inflation expectations that alone in my books with Justice well, 0:20:01.800 --> 0:20:04.840 but this is important, Michael we've got service sector inflation. 0:20:05.000 --> 0:20:08.359 Three issue, we've got goods inflation near deflation. Do you 0:20:08.480 --> 0:20:12.120 see evidence yet, given all of the trade and manufacturing 0:20:12.240 --> 0:20:15.080 and slow down in that, do you see evidence yet 0:20:15.840 --> 0:20:21.240 that we are importing disinflation and deflation from abroad or 0:20:21.359 --> 0:20:25.240 from the US goods sector over to that core service 0:20:25.320 --> 0:20:29.960 sector inflation. Well, keep in mind that the core service 0:20:30.000 --> 0:20:33.520 sector inflation is sticky price inflation. It will tend to 0:20:33.640 --> 0:20:36.680 lag the business cycle. So I'm afraid what's happening here 0:20:36.800 --> 0:20:40.960 is forward looking bond markets are anticipating a slowdown in 0:20:41.080 --> 0:20:45.399 aggregate demand. So nominal GDP growth, which ran up to 0:20:45.480 --> 0:20:47.800 the high end of the recovery range last year, is 0:20:47.960 --> 0:20:51.359 already slowing and is likely to continue to slow. So really, 0:20:51.880 --> 0:20:55.200 if we're going to be importing disinflation, I think we're 0:20:55.240 --> 0:20:58.000 importing it from simply a slowdown in aggregate demand. Just 0:20:58.160 --> 0:21:00.639 the A S A D model, Tom, Yeah, Well, the 0:21:00.960 --> 0:21:03.080 S A D models one model to use. But can 0:21:03.160 --> 0:21:06.200 these models be efficacious for a FED? I mean, have 0:21:06.280 --> 0:21:11.080 they gone beyond beyond any kind of traditional econ one 0:21:11.119 --> 0:21:14.199 on one analysis to where they literally have to make 0:21:14.280 --> 0:21:18.040 it up as they go based on leading data? I 0:21:18.200 --> 0:21:20.360 think that the Fed's in a position now where they're 0:21:20.520 --> 0:21:22.480 they're going to be forced to take a bit of 0:21:22.520 --> 0:21:26.120 a leap of faith um in the forward looking indicators 0:21:26.760 --> 0:21:29.399 in order to avoid the risk of a downturn and 0:21:29.440 --> 0:21:32.360 a repeat of the zero lower bound scenario. If they're 0:21:32.400 --> 0:21:34.680 not willing to do that, then you know, it's more 0:21:34.760 --> 0:21:37.080 likely this business cycle comes to an end, and when 0:21:37.119 --> 0:21:39.040 the FED does get around it easing, they're going to 0:21:39.119 --> 0:21:41.240 have to do a lot more of it. And so 0:21:41.680 --> 0:21:44.399 let's try to avoid that eventuality if we can. But 0:21:44.560 --> 0:21:46.919 that means that you don't play this in a totally 0:21:47.040 --> 0:21:52.000 conventional way, fixated on coincident and lagging information. That's a 0:21:52.080 --> 0:21:55.200 good way to be continently behind the curve. Michael, thank 0:21:55.200 --> 0:21:58.200 you so much. Michael, daughter will clinic their folks, MKM partners. 0:22:12.680 --> 0:22:15.280 The Trump Administration's views on the jobs report. I'm pleased 0:22:15.320 --> 0:22:17.240 to say we join now on Bloomberg Television and on 0:22:17.280 --> 0:22:21.520 Bloomberg Radio by Larry Cuttlow, National Economic Council Director. Great 0:22:21.560 --> 0:22:24.560 to see you as always, Larry, Thank you, Jaathan appreciate it. 0:22:24.760 --> 0:22:27.280 Really really strong job number's a really nice bounce back 0:22:27.320 --> 0:22:29.640 from the month of May. Do you think we're overestimating 0:22:30.040 --> 0:22:31.760 some of the weakness that some people think will come 0:22:31.800 --> 0:22:36.119 through nineteen into well. I don't know why, you know, 0:22:36.280 --> 0:22:39.000 there's always this course of people who want to be pessimistic. 0:22:39.520 --> 0:22:44.479 I would simply say that the big numbers today two thousand, uh, 0:22:44.600 --> 0:22:48.320 you know, good wage increases, still about three low unemployment rate. 0:22:49.040 --> 0:22:53.920 We are still in a very strong prosperity cycle. It's 0:22:53.960 --> 0:22:58.080 a growth cycle. It's a prosperity cycle. Here July four 0:22:58.440 --> 0:23:01.040 life liberty and the pursuit have happened as things are 0:23:01.119 --> 0:23:06.320 looking pretty good. I can't explain the chronic pessimism. All 0:23:06.520 --> 0:23:11.840 say is we have very good pro growth policies, low taxes, deregulation, opening, 0:23:12.000 --> 0:23:15.879 energy trade reform. I think the incentives of our supply 0:23:16.000 --> 0:23:19.000 side policies are working, and I don't know why people 0:23:19.080 --> 0:23:21.480 don't want to see that. I'm very optimistic because you 0:23:21.560 --> 0:23:23.760 might guess, Larry, you haven't been afraid to wait. In 0:23:24.080 --> 0:23:26.280 to the debate around the Federal Reserve, a lot of 0:23:26.320 --> 0:23:28.440 people asking the question, what does July five the dates 0:23:28.440 --> 0:23:31.000 of today? I mean, for July thirty one, the Federal 0:23:31.040 --> 0:23:33.240 Reserve meeting, what is the case for a rate cut? 0:23:33.520 --> 0:23:36.880 After this labor market report Larry. Well, look, I don't 0:23:36.920 --> 0:23:39.480 think you know, here we go again. Um, I don't 0:23:39.520 --> 0:23:43.160 think there's a Phillips curve trade off between strong jobs, 0:23:43.240 --> 0:23:47.160 for example, and higher inflation and interest rates. I don't 0:23:47.200 --> 0:23:50.760 believe that. I think more people working and succeeding as fabulous, 0:23:51.280 --> 0:23:54.720 and I think the evidence shows that the inflation rate 0:23:54.800 --> 0:23:56.720 is rock bottom. You know, I was just looking at 0:23:56.800 --> 0:23:59.920 some of the market figures on the way over here again, 0:24:00.040 --> 0:24:02.720 and not only do you have an inverted you curve, 0:24:02.920 --> 0:24:06.000 which I think is somewhat troublesome for the longer term, 0:24:06.560 --> 0:24:09.879 but the break evens on the inflation, you know, the 0:24:09.960 --> 0:24:13.879 tips break evens the five year Jonathan is one and 0:24:13.960 --> 0:24:17.520 a half percent, and that's the CPI number. So the 0:24:17.640 --> 0:24:21.040 pc deflated that the FED users would be about thirty 0:24:21.080 --> 0:24:23.800 basis points less than that. So you're one a quarter 0:24:23.920 --> 0:24:27.280 percent inflation, which is way below the Fed's target and 0:24:27.359 --> 0:24:30.360 what most people want. And that's the reason I think 0:24:30.400 --> 0:24:34.360 they should take back the interest rate hike. Now I'm 0:24:34.359 --> 0:24:37.639 not encroaching on FED independence. I'm actually just reading the 0:24:37.800 --> 0:24:41.280 market tea leaves if you ask me, the Federal Act 0:24:41.359 --> 0:24:43.720 in its own time. But I'm just saying I think 0:24:43.840 --> 0:24:46.600