1
00:00:00,080 --> 00:00:02,920
Speaker 1: Let's get to our guest, William Lee, chief economist at

2
00:00:03,080 --> 00:00:06,920
Speaker 1: Milken Institute. Bill, thanks very much for joining us. I

3
00:00:07,040 --> 00:00:10,160
Speaker 1: wonder if you agree that we we may be entering

4
00:00:10,200 --> 00:00:13,080
Speaker 1: a period here where the market will focus more on

5
00:00:13,119 --> 00:00:16,400
Speaker 1: what the FED does than what the FED says. So

6
00:00:16,400 --> 00:00:20,560
Speaker 1: you had very hawkish commentary from j Pal today, but

7
00:00:20,640 --> 00:00:23,720
Speaker 1: investors haven't completely gotten on board yet with his new

8
00:00:23,760 --> 00:00:27,360
Speaker 1: guidance that calls for rates over five percent next year.

9
00:00:27,720 --> 00:00:31,960
Speaker 1: So do we need to let the data do the talking? Well, Brian,

10
00:00:32,000 --> 00:00:36,160
Speaker 1: it's really amazing that for the last several months since

11
00:00:36,200 --> 00:00:38,840
Speaker 1: Jackson Hole, the markets have insisted on wanting to hear

12
00:00:38,880 --> 00:00:41,639
Speaker 1: a message that the FED is not telling them. It's

13
00:00:41,640 --> 00:00:43,720
Speaker 1: almost like a ChEls and child, you know, tell me

14
00:00:43,800 --> 00:00:45,120
Speaker 1: what I want to hear and not what I don't

15
00:00:45,120 --> 00:00:47,280
Speaker 1: want to hear. And and and I think what we

16
00:00:47,280 --> 00:00:50,240
Speaker 1: we have to see is that this time the dog

17
00:00:50,280 --> 00:00:53,559
Speaker 1: plots show that the FED is really very clear and

18
00:00:53,640 --> 00:00:56,480
Speaker 1: almost unanimous and saying we're gonna be raising rates to

19
00:00:56,560 --> 00:00:59,840
Speaker 1: about five percent. In fact, seventeen out of nineteen and

20
00:01:00,040 --> 00:01:03,360
Speaker 1: form see members said we're going to push rates up

21
00:01:03,520 --> 00:01:05,360
Speaker 1: and we're gonna keep it there as long as it

22
00:01:05,360 --> 00:01:07,960
Speaker 1: takes to bring inflation back to two and we're willing

23
00:01:07,959 --> 00:01:10,839
Speaker 1: to take the cost of higher unemployment and slower growth.

24
00:01:10,959 --> 00:01:13,800
Speaker 1: Now that message is something that the markets are insisting

25
00:01:14,080 --> 00:01:18,920
Speaker 1: on not hearing. Yeah, yeah, yeah, Then how restrictive does

26
00:01:19,120 --> 00:01:22,320
Speaker 1: policy need to stay, you know where they are now built?

27
00:01:22,400 --> 00:01:25,040
Speaker 1: Or how much higher? Because you know Pols have talked

28
00:01:25,040 --> 00:01:27,440
Speaker 1: about it's not about whether rates he hit the peak,

29
00:01:27,520 --> 00:01:30,840
Speaker 1: but really the duration, how long and how high that

30
00:01:30,880 --> 00:01:32,440
Speaker 1: hold is going to be? How long do you think

31
00:01:32,440 --> 00:01:34,760
Speaker 1: it has to be? So leve on and and and

32
00:01:34,800 --> 00:01:38,800
Speaker 1: that's really the key to Paul's many messages. He's telling everyone, Look,

33
00:01:38,880 --> 00:01:41,480
Speaker 1: I'm gonna have to channel Volcer because you guys are

34
00:01:41,520 --> 00:01:43,920
Speaker 1: not believing me. Volker had the toughest time in the

35
00:01:43,920 --> 00:01:48,760
Speaker 1: world because he had unbelievable period of unanchored inflation spectations

36
00:01:48,800 --> 00:01:50,760
Speaker 1: where no one believed inflation would ever get back to

37
00:01:50,800 --> 00:01:53,440
Speaker 1: anywhere near single digits. Uh, And so he had to

38
00:01:53,520 --> 00:01:56,080
Speaker 1: raise rates up to very high levels and keep them there.

39
00:01:56,320 --> 00:01:58,640
Speaker 1: And and Paul saying, I'm gonna have to do that

40
00:01:58,680 --> 00:02:01,920
Speaker 1: if you guys don't believe me, so actually take into

41
00:02:01,920 --> 00:02:04,960
Speaker 1: account what I say and start to behave that way,

42
00:02:05,520 --> 00:02:08,760
Speaker 1: stop spending as much as you are doing um slow

43
00:02:08,800 --> 00:02:11,239
Speaker 1: down in in in your spending so that we can

44
00:02:11,280 --> 00:02:14,720
Speaker 1: bring supply and demand back into balance, especially in services.

45
00:02:15,320 --> 00:02:18,600
Speaker 1: Your ease up on your vacation. Right That overpriced airplane

46
00:02:18,639 --> 00:02:21,359
Speaker 1: ticket and the overcrowded airports are things that you don't

47
00:02:21,360 --> 00:02:22,720
Speaker 1: have to put up with. And if you don't put

48
00:02:22,800 --> 00:02:24,959
Speaker 1: up with it, the prices will come down. And that's

49
00:02:25,040 --> 00:02:28,320
Speaker 1: his message. And more importantly to the wage setting people.

50
00:02:28,560 --> 00:02:31,200
Speaker 1: You know, if you're setting wages at five and six percent,

51
00:02:31,880 --> 00:02:35,480
Speaker 1: you know that's not sustainable given a two percent inflation world,

52
00:02:35,639 --> 00:02:38,160
Speaker 1: given the productivity we've seen. So ease up on the

53
00:02:38,160 --> 00:02:41,120
Speaker 1: wage demands and and and and ease up on on

54
00:02:41,280 --> 00:02:45,320
Speaker 1: the labor market tightness that we've been seeing. They don't

55
00:02:45,320 --> 00:02:50,239
Speaker 1: see inflation getting back to around two percent until and

56
00:02:50,360 --> 00:02:53,320
Speaker 1: if it's if it's true that we have high rates

57
00:02:53,639 --> 00:02:56,919
Speaker 1: for the next three years, that must not be good

58
00:02:56,919 --> 00:03:01,240
Speaker 1: for equities, right, particularly given that they're also only expecting

59
00:03:01,280 --> 00:03:05,240
Speaker 1: growth at a half percent, And that that was one

60
00:03:05,280 --> 00:03:09,239
Speaker 1: of Paul's key messages today. He said Montrey policy transmission

61
00:03:09,280 --> 00:03:12,520
Speaker 1: works through financial conditions, and equity market is part of

62
00:03:12,520 --> 00:03:16,760
Speaker 1: financial conditions. He even said, if we find equity markets

63
00:03:16,840 --> 00:03:20,480
Speaker 1: uh easing up and rising in anticipation of our pivot,

64
00:03:20,840 --> 00:03:23,280
Speaker 1: We're going to have to raise rates even more to compensate.

65
00:03:23,560 --> 00:03:25,400
Speaker 1: So I don't think he could be any clearer to

66
00:03:25,680 --> 00:03:29,680
Speaker 1: equity market investors to say that we are not going

67
00:03:29,720 --> 00:03:32,920
Speaker 1: to be happy to see equity markets rally anytime soon

68
00:03:33,240 --> 00:03:35,960
Speaker 1: until inflation comes down again. But he also gave us

69
00:03:35,960 --> 00:03:39,480
Speaker 1: the one one character to say, if inflation does come

70
00:03:39,520 --> 00:03:42,520
Speaker 1: down more quickly, we will ease up on our tightning

71
00:03:42,600 --> 00:03:45,800
Speaker 1: more quickly. And that really is the key. It was

72
00:03:45,840 --> 00:03:49,680
Speaker 1: interesting when the questions were asked about whether the US

73
00:03:49,760 --> 00:03:52,120
Speaker 1: can actually avoid a recession. He seemed to think that,

74
00:03:52,160 --> 00:03:54,520
Speaker 1: you know, the strong jobs market can can really keep

75
00:03:54,520 --> 00:03:56,520
Speaker 1: the US out of a recession. If you take a

76
00:03:56,560 --> 00:03:58,320
Speaker 1: look at you know, the dots at five point one

77
00:03:58,320 --> 00:04:01,640
Speaker 1: percent for next year, the medium forecast four point six

78
00:04:01,680 --> 00:04:05,600
Speaker 1: percent unemployment rate is does that does that work out

79
00:04:05,640 --> 00:04:09,440
Speaker 1: the map for you? Can the US still avoid a recession? Well,

80
00:04:09,480 --> 00:04:11,280
Speaker 1: this forecast is a lot better than what we saw

81
00:04:11,320 --> 00:04:13,960
Speaker 1: in March, where we had this immaculate disinflation where no

82
00:04:14,120 --> 00:04:17,159
Speaker 1: movement in the unemployment rate brought the inflation rate down. Um,

83
00:04:17,320 --> 00:04:19,799
Speaker 1: this one is a lot more realistic and and again,

84
00:04:19,960 --> 00:04:24,159
Speaker 1: it depends on how spending behaves in the economy over time.

85
00:04:24,520 --> 00:04:27,600
Speaker 1: If people ease up on their spending, inflation pressures will

86
00:04:27,600 --> 00:04:30,479
Speaker 1: ease off, wage demands will ease off, and we will

87
00:04:30,520 --> 00:04:33,520
Speaker 1: see a disinflation much more rapid than before, and we

88
00:04:33,560 --> 00:04:37,080
Speaker 1: may not even see the four four point unemployment they're

89
00:04:37,080 --> 00:04:39,400
Speaker 1: projecting for the next three years. But I think they

90
00:04:39,440 --> 00:04:41,159
Speaker 1: can go very easily the other way. We can go

91
00:04:41,200 --> 00:04:44,080
Speaker 1: to five percent or above five percent unemployment if we

92
00:04:44,240 --> 00:04:49,120
Speaker 1: see wages and prices recalcitrant and not behaving the way

93
00:04:49,160 --> 00:04:51,920
Speaker 1: the FIT is hoping it would. Bill, Let's talk a

94
00:04:51,960 --> 00:04:56,159
Speaker 1: little bit about China, because they are actually linked. It's

95
00:04:56,240 --> 00:04:58,880
Speaker 1: possible that if China opens fast and things go a

96
00:04:58,960 --> 00:05:02,159
Speaker 1: certain direction, that that adds to the inflation problem. But

97
00:05:02,440 --> 00:05:04,440
Speaker 1: I'd rather not focus on that so much at the moment.

98
00:05:04,440 --> 00:05:07,159
Speaker 1: One of our other headlines stories today is is the

99
00:05:07,200 --> 00:05:10,200
Speaker 1: comments from the CEO of a s m L about

100
00:05:10,320 --> 00:05:13,800
Speaker 1: how his company has already done enough in terms of

101
00:05:13,800 --> 00:05:17,800
Speaker 1: restricting exports to China. It seems like it's setting up

102
00:05:17,839 --> 00:05:20,880
Speaker 1: a little bit of a battle between the Netherlands government,

103
00:05:21,000 --> 00:05:25,279
Speaker 1: the company, and the US. How do you see this moving? Yeah,

104
00:05:25,320 --> 00:05:27,360
Speaker 1: this is this is one of the biggest problems facing

105
00:05:27,400 --> 00:05:30,039
Speaker 1: the Biden administration is to get our allies to be

106
00:05:30,240 --> 00:05:33,960
Speaker 1: on the side of putting pressure on China and be

107
00:05:34,040 --> 00:05:37,359
Speaker 1: more competitive with China and trying to preserve intellectual property

108
00:05:37,480 --> 00:05:40,440
Speaker 1: rights uh and and and because the Europeans are so

109
00:05:40,560 --> 00:05:43,440
Speaker 1: dependent on China trade, especially the Germans and and A

110
00:05:43,560 --> 00:05:48,279
Speaker 1: SML in particular, really needs to have very effective trade

111
00:05:48,320 --> 00:05:52,360
Speaker 1: relations with Taiwan, the main the main customer for their equipment,

112
00:05:52,640 --> 00:05:55,640
Speaker 1: and China right now is the main customer for a

113
00:05:55,680 --> 00:05:58,880
Speaker 1: lot of the advanced chips made by t SMC so,

114
00:05:58,880 --> 00:06:04,040
Speaker 1: so the bind administration is working very hard to get Netherlands,

115
00:06:04,279 --> 00:06:07,039
Speaker 1: Germany and all of the European allies to be on

116
00:06:07,080 --> 00:06:11,400
Speaker 1: our side. Unfortunately, their pocketbooks are pulling them towards China.

117
00:06:11,640 --> 00:06:14,440
Speaker 1: And that's attention when I can see resolve very quickly.

118
00:06:15,240 --> 00:06:17,880
Speaker 1: And you add that to what is looking to be

119
00:06:17,960 --> 00:06:22,000
Speaker 1: an increasingly bumpy sort of reopening story in China as well.

120
00:06:22,040 --> 00:06:24,920
Speaker 1: I mean we have, you know, government meetings that are

121
00:06:25,279 --> 00:06:28,640
Speaker 1: sometimes on sometimes I've given the COVID spikes and whatnot.

122
00:06:29,120 --> 00:06:31,960
Speaker 1: Should I just assume that supply chain log jams and

123
00:06:31,960 --> 00:06:34,920
Speaker 1: all that are going to continue for next year that's

124
00:06:34,960 --> 00:06:38,240
Speaker 1: my presumption. Actually, I I think the first thing we

125
00:06:38,279 --> 00:06:40,719
Speaker 1: will see in China is what we're already seeing is

126
00:06:41,120 --> 00:06:44,560
Speaker 1: a huge outbreak in cases of COVID and that will essentially,

127
00:06:44,600 --> 00:06:46,640
Speaker 1: you know, put workers out of out of work for

128
00:06:46,720 --> 00:06:49,400
Speaker 1: quite some time, and the supply chains will not be

129
00:06:49,480 --> 00:06:52,760
Speaker 1: restored as quickly as we are anticipating. What what also

130
00:06:52,800 --> 00:06:55,159
Speaker 1: we're not going to see is much help from China

131
00:06:55,200 --> 00:06:57,880
Speaker 1: in terms of helping the global economy as a locomotive

132
00:06:57,920 --> 00:07:01,000
Speaker 1: for growth the way was before. China is growth may

133
00:07:01,040 --> 00:07:04,640
Speaker 1: a register of five or six percent growth domestic demand,

134
00:07:04,960 --> 00:07:08,640
Speaker 1: but their demand for imports I think will be very limited.

135
00:07:08,960 --> 00:07:11,800
Speaker 1: Um and their ability to help on the inflation front

136
00:07:11,800 --> 00:07:14,480
Speaker 1: by fixing supply chains, as you say, because of these

137
00:07:14,480 --> 00:07:16,760
Speaker 1: often on kind of kind of events, but we would

138
00:07:16,760 --> 00:07:20,320
Speaker 1: also be limited. But Bill, let's finish on a positive note. Uh,

139
00:07:20,840 --> 00:07:24,040
Speaker 1: It seems to be a positive that we we have

140
00:07:24,120 --> 00:07:27,560
Speaker 1: some evidence now that the Chinese government is really listening

141
00:07:27,600 --> 00:07:30,480
Speaker 1: to the people and that they got the message that

142
00:07:30,880 --> 00:07:34,000
Speaker 1: people were not comfortable with these tight restrictions on COVID.

143
00:07:34,960 --> 00:07:37,480
Speaker 1: And this is really the most hopeful development I've seen

144
00:07:37,560 --> 00:07:41,680
Speaker 1: in almost a decade of the CP rule. I mean,

145
00:07:41,720 --> 00:07:43,760
Speaker 1: the fact that they are responding in a way that

146
00:07:43,920 --> 00:07:45,720
Speaker 1: is not similar to how they respond to the Hong

147
00:07:45,760 --> 00:07:49,960
Speaker 1: Kong is a huge, uh improvement. But what I'm suspicious

148
00:07:49,960 --> 00:07:54,600
Speaker 1: of is there the other back handed way of improving

149
00:07:54,640 --> 00:07:58,080
Speaker 1: relations with the Soviet With Putin Um, you know, it's

150
00:07:58,120 --> 00:07:59,680
Speaker 1: almost a one hand giveth and one hand to take

151
00:07:59,720 --> 00:08:01,960
Speaker 1: it away. A As long as he is trying to

152
00:08:02,000 --> 00:08:06,440
Speaker 1: supports Putin, the difficulties that eurofaces with the war and

153
00:08:06,520 --> 00:08:09,000
Speaker 1: the shortages caused by the war are going to persist,

154
00:08:09,040 --> 00:08:11,400
Speaker 1: and that will just keep the inflation problem even worse

155
00:08:11,680 --> 00:08:14,800
Speaker 1: for Europe and the rest of the world. Bill thanks

156
00:08:14,880 --> 00:08:17,200
Speaker 1: very much for joining us. Always a pleasure, William Lee,

157
00:08:17,320 --> 00:08:19,360
Speaker 1: chief economist at Milkin Institute,