WEBVTT - William Lee on Fed (Radio)

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<v Speaker 1>Let's get to our guest, William Lee, chief economist at

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<v Speaker 1>Milken Institute. Bill, thanks very much for joining us. I

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<v Speaker 1>wonder if you agree that we we may be entering

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<v Speaker 1>a period here where the market will focus more on

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<v Speaker 1>what the FED does than what the FED says. So

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<v Speaker 1>you had very hawkish commentary from j Pal today, but

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<v Speaker 1>investors haven't completely gotten on board yet with his new

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<v Speaker 1>guidance that calls for rates over five percent next year.

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<v Speaker 1>So do we need to let the data do the talking? Well, Brian,

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<v Speaker 1>it's really amazing that for the last several months since

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<v Speaker 1>Jackson Hole, the markets have insisted on wanting to hear

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<v Speaker 1>a message that the FED is not telling them. It's

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<v Speaker 1>almost like a ChEls and child, you know, tell me

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<v Speaker 1>what I want to hear and not what I don't

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<v Speaker 1>want to hear. And and and I think what we

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<v Speaker 1>we have to see is that this time the dog

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<v Speaker 1>plots show that the FED is really very clear and

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<v Speaker 1>almost unanimous and saying we're gonna be raising rates to

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<v Speaker 1>about five percent. In fact, seventeen out of nineteen and

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<v Speaker 1>form see members said we're going to push rates up

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<v Speaker 1>and we're gonna keep it there as long as it

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<v Speaker 1>takes to bring inflation back to two and we're willing

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<v Speaker 1>to take the cost of higher unemployment and slower growth.

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<v Speaker 1>Now that message is something that the markets are insisting

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<v Speaker 1>on not hearing. Yeah, yeah, yeah, Then how restrictive does

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<v Speaker 1>policy need to stay, you know where they are now built?

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<v Speaker 1>Or how much higher? Because you know Pols have talked

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<v Speaker 1>about it's not about whether rates he hit the peak,

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<v Speaker 1>but really the duration, how long and how high that

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<v Speaker 1>hold is going to be? How long do you think

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<v Speaker 1>it has to be? So leve on and and and

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<v Speaker 1>that's really the key to Paul's many messages. He's telling everyone, Look,

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<v Speaker 1>I'm gonna have to channel Volcer because you guys are

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<v Speaker 1>not believing me. Volker had the toughest time in the

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<v Speaker 1>world because he had unbelievable period of unanchored inflation spectations

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<v Speaker 1>where no one believed inflation would ever get back to

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<v Speaker 1>anywhere near single digits. Uh, And so he had to

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<v Speaker 1>raise rates up to very high levels and keep them there.

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<v Speaker 1>And and Paul saying, I'm gonna have to do that

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<v Speaker 1>if you guys don't believe me, so actually take into

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<v Speaker 1>account what I say and start to behave that way,

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<v Speaker 1>stop spending as much as you are doing um slow

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<v Speaker 1>down in in in your spending so that we can

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<v Speaker 1>bring supply and demand back into balance, especially in services.

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<v Speaker 1>Your ease up on your vacation. Right That overpriced airplane

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<v Speaker 1>ticket and the overcrowded airports are things that you don't

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<v Speaker 1>have to put up with. And if you don't put

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<v Speaker 1>up with it, the prices will come down. And that's

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<v Speaker 1>his message. And more importantly to the wage setting people.

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<v Speaker 1>You know, if you're setting wages at five and six percent,

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<v Speaker 1>you know that's not sustainable given a two percent inflation world,

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<v Speaker 1>given the productivity we've seen. So ease up on the

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<v Speaker 1>wage demands and and and and ease up on on

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<v Speaker 1>the labor market tightness that we've been seeing. They don't

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<v Speaker 1>see inflation getting back to around two percent until and

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<v Speaker 1>if it's if it's true that we have high rates

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<v Speaker 1>for the next three years, that must not be good

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<v Speaker 1>for equities, right, particularly given that they're also only expecting

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<v Speaker 1>growth at a half percent, And that that was one

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<v Speaker 1>of Paul's key messages today. He said Montrey policy transmission

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<v Speaker 1>works through financial conditions, and equity market is part of

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<v Speaker 1>financial conditions. He even said, if we find equity markets

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<v Speaker 1>uh easing up and rising in anticipation of our pivot,

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<v Speaker 1>We're going to have to raise rates even more to compensate.

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<v Speaker 1>So I don't think he could be any clearer to

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<v Speaker 1>equity market investors to say that we are not going

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<v Speaker 1>to be happy to see equity markets rally anytime soon

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<v Speaker 1>until inflation comes down again. But he also gave us

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<v Speaker 1>the one one character to say, if inflation does come

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<v Speaker 1>down more quickly, we will ease up on our tightning

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<v Speaker 1>more quickly. And that really is the key. It was

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<v Speaker 1>interesting when the questions were asked about whether the US

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<v Speaker 1>can actually avoid a recession. He seemed to think that,

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<v Speaker 1>you know, the strong jobs market can can really keep

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<v Speaker 1>the US out of a recession. If you take a

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<v Speaker 1>look at you know, the dots at five point one

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<v Speaker 1>percent for next year, the medium forecast four point six

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<v Speaker 1>percent unemployment rate is does that does that work out

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<v Speaker 1>the map for you? Can the US still avoid a recession? Well,

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<v Speaker 1>this forecast is a lot better than what we saw

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<v Speaker 1>in March, where we had this immaculate disinflation where no

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<v Speaker 1>movement in the unemployment rate brought the inflation rate down. Um,

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<v Speaker 1>this one is a lot more realistic and and again,

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<v Speaker 1>it depends on how spending behaves in the economy over time.

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<v Speaker 1>If people ease up on their spending, inflation pressures will

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<v Speaker 1>ease off, wage demands will ease off, and we will

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<v Speaker 1>see a disinflation much more rapid than before, and we

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<v Speaker 1>may not even see the four four point unemployment they're

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<v Speaker 1>projecting for the next three years. But I think they

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<v Speaker 1>can go very easily the other way. We can go

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<v Speaker 1>to five percent or above five percent unemployment if we

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<v Speaker 1>see wages and prices recalcitrant and not behaving the way

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<v Speaker 1>the FIT is hoping it would. Bill, Let's talk a

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<v Speaker 1>little bit about China, because they are actually linked. It's

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<v Speaker 1>possible that if China opens fast and things go a

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<v Speaker 1>certain direction, that that adds to the inflation problem. But

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<v Speaker 1>I'd rather not focus on that so much at the moment.

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<v Speaker 1>One of our other headlines stories today is is the

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<v Speaker 1>comments from the CEO of a s m L about

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<v Speaker 1>how his company has already done enough in terms of

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<v Speaker 1>restricting exports to China. It seems like it's setting up

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<v Speaker 1>a little bit of a battle between the Netherlands government,

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<v Speaker 1>the company, and the US. How do you see this moving? Yeah,

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<v Speaker 1>this is this is one of the biggest problems facing

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<v Speaker 1>the Biden administration is to get our allies to be

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<v Speaker 1>on the side of putting pressure on China and be

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<v Speaker 1>more competitive with China and trying to preserve intellectual property

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<v Speaker 1>rights uh and and and because the Europeans are so

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<v Speaker 1>dependent on China trade, especially the Germans and and A

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<v Speaker 1>SML in particular, really needs to have very effective trade

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<v Speaker 1>relations with Taiwan, the main the main customer for their equipment,

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<v Speaker 1>and China right now is the main customer for a

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<v Speaker 1>lot of the advanced chips made by t SMC so,

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<v Speaker 1>so the bind administration is working very hard to get Netherlands,

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<v Speaker 1>Germany and all of the European allies to be on

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<v Speaker 1>our side. Unfortunately, their pocketbooks are pulling them towards China.

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<v Speaker 1>And that's attention when I can see resolve very quickly.

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<v Speaker 1>And you add that to what is looking to be

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<v Speaker 1>an increasingly bumpy sort of reopening story in China as well.

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<v Speaker 1>I mean we have, you know, government meetings that are

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<v Speaker 1>sometimes on sometimes I've given the COVID spikes and whatnot.

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<v Speaker 1>Should I just assume that supply chain log jams and

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<v Speaker 1>all that are going to continue for next year that's

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<v Speaker 1>my presumption. Actually, I I think the first thing we

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<v Speaker 1>will see in China is what we're already seeing is

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<v Speaker 1>a huge outbreak in cases of COVID and that will essentially,

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<v Speaker 1>you know, put workers out of out of work for

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<v Speaker 1>quite some time, and the supply chains will not be

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<v Speaker 1>restored as quickly as we are anticipating. What what also

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<v Speaker 1>we're not going to see is much help from China

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<v Speaker 1>in terms of helping the global economy as a locomotive

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<v Speaker 1>for growth the way was before. China is growth may

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<v Speaker 1>a register of five or six percent growth domestic demand,

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<v Speaker 1>but their demand for imports I think will be very limited.

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<v Speaker 1>Um and their ability to help on the inflation front

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<v Speaker 1>by fixing supply chains, as you say, because of these

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<v Speaker 1>often on kind of kind of events, but we would

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<v Speaker 1>also be limited. But Bill, let's finish on a positive note. Uh,

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<v Speaker 1>It seems to be a positive that we we have

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<v Speaker 1>some evidence now that the Chinese government is really listening

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<v Speaker 1>to the people and that they got the message that

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<v Speaker 1>people were not comfortable with these tight restrictions on COVID.

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<v Speaker 1>And this is really the most hopeful development I've seen

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<v Speaker 1>in almost a decade of the CP rule. I mean,

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<v Speaker 1>the fact that they are responding in a way that

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<v Speaker 1>is not similar to how they respond to the Hong

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<v Speaker 1>Kong is a huge, uh improvement. But what I'm suspicious

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<v Speaker 1>of is there the other back handed way of improving

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<v Speaker 1>relations with the Soviet With Putin Um, you know, it's

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<v Speaker 1>almost a one hand giveth and one hand to take

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<v Speaker 1>it away. A As long as he is trying to

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<v Speaker 1>supports Putin, the difficulties that eurofaces with the war and

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<v Speaker 1>the shortages caused by the war are going to persist,

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<v Speaker 1>and that will just keep the inflation problem even worse

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<v Speaker 1>for Europe and the rest of the world. Bill thanks

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<v Speaker 1>very much for joining us. Always a pleasure, William Lee,

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<v Speaker 1>chief economist at Milkin Institute,