Speaker 1: Runt you by Bank of America Mary Lynch with virtual reality,
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Speaker 1: Pierced Fenner and Smith Incorporated. Ye. Welcome to the Bloomberg
Speaker 1: Surveillance Podcast. I'm Tom Keene with David Gura. Daily we
Speaker 1: bring you insight from the best of economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Joining
Speaker 1: us now is James Sweeney, Chief Economistic Credits with head
Speaker 1: of Global Fixed Income there as well. Great to see
Speaker 1: you here in our Bloomberg eleven three oh students in tips.
Speaker 1: Let me just start by by asking you a bit
Speaker 1: about the FED meeting yesterday. Agree with your expectations that
Speaker 1: were met. Let's talk about the balance sheet in a
Speaker 1: few moments. But first when it came to the to
Speaker 1: the outlook and what they had to say, how did
Speaker 1: it drive with what you were expecting? Yeah? Well, I
Speaker 1: I think the Fed was stoical in the sense that
Speaker 1: they were not uh, they were not moved by the
Speaker 1: recent weakness and inflation and the decline in some of
Speaker 1: the inflation expectation indicators. They did acknowledge it, but they
Speaker 1: went ahead and pulled the trigger on their hike, of course,
Speaker 1: and and laid out that balance sheet policy. Um. They
Speaker 1: still expect inflation to drift up towards their their targets
Speaker 1: over the medium term, but they did reduce the path
Speaker 1: of that increase somewhat, so it it looked it looked
Speaker 1: safe and reasonable. UM. But you know, I wrote a
Speaker 1: couple of weeks before the meeting, UM that the Fed
Speaker 1: was ignoring the recent weakness and inflation. And I think
Speaker 1: the market is really ignoring any any sorry, the recent
Speaker 1: decrease in inflation. I hope, I said decrease, UM, And
Speaker 1: the market seems to be ignoring any possibility of an
Speaker 1: increase in inflation, um, you know, a meaningful increase above
Speaker 1: that that recent average over over the next couple of years.
Speaker 1: It's it seems like the market and the Fed are
Speaker 1: jointly agreeing that inflation is a horizontal line UM right now.
Speaker 1: And and as a result, UM, the kind of expectations
Speaker 1: that that exists for where short term rates will be
Speaker 1: a couple of years out, are are you know, very
Speaker 1: low rates, very narrow um, very narrow path, and everyone
Speaker 1: sort of agreed that too. Or three years from now,
Speaker 1: we're going to have short term rates in the mid
Speaker 1: two's UM and not much risk of being a lot
Speaker 1: higher or a lot lower um. The options market actually
Speaker 1: confirms that narrow path, which is expected, and I think
Speaker 1: that's I think that's a little risky. How do we
Speaker 1: get to to this point? Whereas, as you point out,
Speaker 1: I think in a recent note progress toward full employment,
Speaker 1: Trump's inflation and the global industrial production growth at the
Speaker 1: FED is regarding that side of its mandate more than
Speaker 1: the other. Yeah. Well, um, as I said, I think
Speaker 1: the inflation news is being interpreted as a wobble against
Speaker 1: a kind of more or less horizontal trend um. And
Speaker 1: what's happening in the labor market is labor income has
Speaker 1: slowed a little bit recently, but it continues to grow.
Speaker 1: And the unemployment rate is not falling at eight five
Speaker 1: basis points a year anymore as it did from two
Speaker 1: thousand nine to two thousand fifteen, but it but it
Speaker 1: does appear to still be falling. So you know, we
Speaker 1: we could have a three handle on the unemployment rate
Speaker 1: with within a year. Uh. And in those conditions, UM,
Speaker 1: it's it's appropriate to uh to get short rates up
Speaker 1: to you know, positive in real terms. But before long,
Speaker 1: the fact that risky asset prices across a broad spectrum
Speaker 1: of them are are looking somewhat expensive from a historical perspective,
Speaker 1: UH is another reason that, UM, you know that that
Speaker 1: that policy should be tightening, and so now that the
Speaker 1: question really becomes the mode of that tightening. UH. The
Speaker 1: sequencing of balance sheet verse is versus rate et cetera.
Speaker 1: But you know they've they've now pulled the trigger and
Speaker 1: they've gotten They've gotten all the way up from zero
Speaker 1: to twenty five to one to one and a quarter.
Speaker 1: That's that's a pretty big move, especially given the other
Speaker 1: developed central banks are really not moving rates at all.
Speaker 1: James Sweet with us from Chris Swiss. Let me ask
Speaker 1: you about the balance sheet and the detail that we
Speaker 1: got yesterday, the way in which they intend to do
Speaker 1: this compositionally and in terms of of process itself. UH,
Speaker 1: was that in line with your expectations as well? And
Speaker 1: what is that? What does that tell you? What should
Speaker 1: that tell investor? Is about the path forward here? Um?
Speaker 1: The some of the numbers they gave here a little
Speaker 1: more aggressive than we thought, and I think the amount
Speaker 1: of detail was sooner than we thought. And and actually
Speaker 1: we did slightly tweak our view in response to the
Speaker 1: news where we now expect the balance sheet normalization to
Speaker 1: commence in September and the next rate hike and not
Speaker 1: to happen until December UM in two thousand and eighteen,
Speaker 1: we expect two more hikes, so so we're only expecting
Speaker 1: three hikes over the next eighteen months, but the balance
Speaker 1: sheet normalization to occur at the same time. So specifically,
Speaker 1: you know, they said that they would start out I
Speaker 1: think it was six billion and four billion on on
Speaker 1: treasury and mortgages where they would have a cap on
Speaker 1: how much runof they're going to allow, you know, runoff,
Speaker 1: meaning they're not reinvesting coupons in principle for maturing um securities,
Speaker 1: and as a result, their balance she's gonna start shrinking,
Speaker 1: and then they're gonna up it um basically doubling that
Speaker 1: those numbers after three months, and then they're gonna do
Speaker 1: it again three months after that. And so if you
Speaker 1: go a year out and if they're if they do
Speaker 1: manage to kind of be on a glide path of
Speaker 1: of of of balance sheet change. You know, within kind
Speaker 1: of a year, year and a half, they're gonna be
Speaker 1: at que two levels of reverse quee um and and
Speaker 1: the market will have to cope with that. James Sweeney
Speaker 1: with this was Curt Sweets. Good morning everyone, Bloomberg Surveillance,
Speaker 1: David Gurr and I David. We gotta thank all of
Speaker 1: our teammates today for a marathon day. Have to say
Speaker 1: the listen, good day. Have you hear James this morning?
Speaker 1: On too many themes? One of the themes that we
Speaker 1: have is what the financial markets, in the bond market
Speaker 1: is telling James Sweeney, I believe I'm seeing a flattening
Speaker 1: yield curve. Do you link that to slower g d
Speaker 1: P or is it just a separate thing you're not
Speaker 1: worried about. Well, you know, I think I think yields
Speaker 1: are pretty sensitive to to what's happening in global growth,
Speaker 1: the news flow, the surprises, the p M I is
Speaker 1: all that. Um. We had an unusual period last year
Speaker 1: where global growth was very weak at the beginning of
Speaker 1: the year. It recovered throughout the year. Yields didn't go
Speaker 1: up until the election. It was as if you know,
Speaker 1: seven months of move was concentrated into three or four
Speaker 1: weeks after the election, and we actually think global growth
Speaker 1: hit a local peak early this year January February and
Speaker 1: has been coming off. So you know, given some downside
Speaker 1: surprises in the US inflation and falling global growth, it's
Speaker 1: not so surprising that yields came back down again. Um,
Speaker 1: but I think actually, you know, we've got a two
Speaker 1: eight target on the ten year at the end of
Speaker 1: the year. My colleague Privine Core Party are our rate strategist.
Speaker 1: So I think global growth is gonna is gonna pick up.
Speaker 1: I think the Fed is going to continue to implement
Speaker 1: its tightening um, and I think we may be around
Speaker 1: a temporary low in the tenure. Was it an ultra
Speaker 1: accommodative press conference yesterday? Are we beyond ultra accommodative? As
Speaker 1: you mentioned, they've done a set of rate increases in
Speaker 1: the world. I believe the world has not come to
Speaker 1: an end. The the stance of policy is a combinative.
Speaker 1: The incremental news from yesterday was somewhat more hawkish than
Speaker 1: the market expected, but not sufficiently hawkish to to necessarily
Speaker 1: interrupt the party. I may see the futures are down
Speaker 1: a little bit this morning on on stocks. UH. The
Speaker 1: market will take a little while to digest, but basically
Speaker 1: stocks and bonds across the board have been seeing price
Speaker 1: gains together for months and months as this low UH,
Speaker 1: this easy monetary policy and low real rates have have
Speaker 1: met with the growing US economy and no wobbly but
Speaker 1: fine in global economy. UM. The question now is could
Speaker 1: tighter monetary policy, you know, could that trigger higher yields
Speaker 1: UM and could it even trigger some some weakness in
Speaker 1: equity markets and risky assets. This has been a very
Speaker 1: technical market. There's there's a lot of frustrated traders out there,
Speaker 1: equity traders in particular. It's been a tough market to
Speaker 1: trade with with really these tech stocks leading aggressively and
Speaker 1: and the rest of the equity market behaving in some
Speaker 1: odd ways. Just got about thirty seconds here. We'll come
Speaker 1: back with you, But let me ask you how indelible
Speaker 1: this plan for the balance sheet is? In other words,
Speaker 1: so with the potential for so much changeover at the Fed,
Speaker 1: how much gredience do you give what we heard yesterday? Yeah,
Speaker 1: I think there's a good chance that if we get
Speaker 1: a candidate, you know, outside of Gary Cone outside of
Speaker 1: Janet Yelling. Um that you know, I would expect a
Speaker 1: FED chair to to obviously UM influence the implementation of
Speaker 1: the policy. There's there's nothing to say that that this
Speaker 1: this path um can't be paused, can't be stopped. Um.
Speaker 1: You know, I think there are other candidates from Yelling
Speaker 1: and Cone. UM. I think Kevin Wars for example, is
Speaker 1: leading candidate. And UM, yeah, we will we will see, UM,
Speaker 1: we will see. It should be it should be interesting. UM.
Speaker 1: I think the market is gonna end up being very
Speaker 1: focused on on this search for new leadership. And if
Speaker 1: it's yelling, um, then then we expect this path to continue.
Speaker 1: Of course, let's come back with James Sweeney of Credit
Speaker 1: Sweet James, I got about eight ways to go here,
Speaker 1: and I think you're gonna go Why quill C plus
Speaker 1: cyplus G plus n X And something I didn't talk
Speaker 1: about it yesterday, which is investment and the dearth of
Speaker 1: investment here there and everywhere. Do you care the commercial
Speaker 1: and industrial loans have rolled over or any other investment
Speaker 1: parameter that shows a tepidness or weakness. We care, In fact,
Speaker 1: we did a thorough piece on that recently. And why
Speaker 1: do you know, I thank you, Tom. But what we
Speaker 1: found is that is it C and I loan really
Speaker 1: do very consistently lag what happened to investment last year,
Speaker 1: and so they're really not telling us about anything new.
Speaker 1: Last year, we had a couple of things going on.
Speaker 1: We had a mining and energy investment slump, which was
Speaker 1: global um that was definitely weighing in the US. We
Speaker 1: also had dollar strength weighing on manufacturing investment. So I'm
Speaker 1: not so worried about C n I loans, but I
Speaker 1: think on the investment side, there was a brief overshooting
Speaker 1: expectations about what Capex was gonna do after the after
Speaker 1: the election and when the when the p m I spiked.
Speaker 1: Now that the p m I s have come off,
Speaker 1: I think people are calming down. Um. So we have
Speaker 1: kind of mid single digit expectations for business investment in
Speaker 1: the US going forward, which is okay, it's not great.
Speaker 1: It's not a boom. If you get an infrastructure stimulus,
Speaker 1: if you get tax reform, you know, maybe those numbers
Speaker 1: go higher. But um, but I think the you know,
Speaker 1: the reality of this whole recovery, which is the absence
Speaker 1: of an investment boom despite very low interest rates. I
Speaker 1: think that's likely to persist for a while until we
Speaker 1: find some kind of trigger. I think it's possible, but
Speaker 1: we haven't had it yet. Investments okay, it's not a disaster,
Speaker 1: um and the specific shocks from the dollar and from
Speaker 1: energy are really falling out of the data. Now. I'm
Speaker 1: watching the reaction here to the b O E rate
Speaker 1: decision on on Top Live on the Bloombergose life block
Speaker 1: of what's happening, and so they're keeping the interest rate
Speaker 1: A quarter percent vote was five to three. How big
Speaker 1: a deal is that divide among policymakers at the at
Speaker 1: the b O And what does it tell you about
Speaker 1: the Bank of England's engagement with the UK economy, with
Speaker 1: economic policy and with this still ongoing Brexit process in
Speaker 1: the UK. Well, you're you're always gonna have You're always
Speaker 1: gonna have some central bankers who are outside the consensus view. So,
Speaker 1: um you know. I actually I recently read Sebastian Malaby's
Speaker 1: new book on on Alan Greenspan and it was very
Speaker 1: interesting on the committee dynamics. I think during the Greenspan era,
Speaker 1: a um, you know, it became thought pretty widely that
Speaker 1: the leaders of central banks just make the decisions and
Speaker 1: the committees go along. And what Malaby detailed was how
Speaker 1: much effort Greenspan used to put into bringing his whole
Speaker 1: committee along. It takes a lot of work to to
Speaker 1: herd these cats and and you know, maybe carneys and
Speaker 1: work to do if he's got three dissenters at the moment.
Speaker 1: But most of the time, um, the governors, the chairs
Speaker 1: get get their way, so um, I mean definitely in
Speaker 1: the UK the outlook is a little confusing right now.
Speaker 1: High inflation growth rolling over, but unemployment actually pretty low
Speaker 1: um and a lot of currency moves. So you know,
Speaker 1: you would forgive a group of central bankers or economists
Speaker 1: for having different views on where monetary policy ought to be. Well,
Speaker 1: let's come full circle. Then we were talking about Kevin
Speaker 1: warsh and uh Garry Conan, and who might be leading
Speaker 1: this FED going forward given what you're just saying, given
Speaker 1: the what we we've read in this Smashion Maloby's book,
Speaker 1: how much determinism does the new FED chair have? In
Speaker 1: other ways, we're talking about the potential for a personnel
Speaker 1: turn over and all that might bring. Are we are
Speaker 1: we overplaying that? Given what the committee is able to
Speaker 1: do No, I don't think so. I think, UM, I
Speaker 1: think it's very important who gets the leadership job, and
Speaker 1: I think whoever accepts the leadership job has to recognize that, UM,
Speaker 1: the president is going to be filling the seats around them.
Speaker 1: So some people are surprised that Janet Yellen is emerging
Speaker 1: as a as a pretty strong candidate. UM. But even
Speaker 1: if it's yelling, it's gonna be yelling with a very
Speaker 1: different group of governors UM around her. UM. Some people
Speaker 1: would say that why would Yellen take such a job,
Speaker 1: But people close to Yellen say that, well, because she's
Speaker 1: very civic minded and if she thinks that, uh, if
Speaker 1: she thinks that she's the best person for the job
Speaker 1: and it's good for the country, she may go ahead
Speaker 1: and do it. But I think we should definitely respect
Speaker 1: a wider range of possible outcomes, given not just the
Speaker 1: potential change in the chair, but the potential change in
Speaker 1: those around FED. FED governors have been outvoted before that
Speaker 1: that happened to vulcer, it can happen, and in the
Speaker 1: Trump era, it's definitely something that should be on the
Speaker 1: list of possibility. Interesting that's worth having you back on
Speaker 1: along James Sweeney, Thank you so much. Here's with credit
Speaker 1: sweet story on the Bloomberg right now that Bob Mueller
Speaker 1: is examining whether President Trump sat to slow the probe
Speaker 1: into net form. National Security Advisor Michael Flynn. Good to
Speaker 1: talk about this here with one Richard Painter, former Associate
Speaker 1: Council to the President, Chief ethics lawyer to George W. Bush,
Speaker 1: who joins us now the Richard Professor of Corporate Law
Speaker 1: at the University of Minnesota Law School. Mr Painter, great
Speaker 1: to have you with us here. Help me understand what's
Speaker 1: changed as a result of this turn this next chapter
Speaker 1: in this investigation. It appears the investigation widens. What's changed. Well,
Speaker 1: I think it was inevitable that the Special Council would
Speaker 1: investigate strikes out justice by the President. Huh the President
Speaker 1: in his statements to the Russian ambassador news media, Uh,
Speaker 1: you know, adding it all out it it's very uh
Speaker 1: clear that he um certainly was very very concerned about
Speaker 1: the Russian investigation when he fired James Comy. And uh
Speaker 1: it appears to me that he did fire James Commy
Speaker 1: because of the Russia investigation, that because of the pretense
Speaker 1: set forth in the Department of Justice memorandum, And you know,
Speaker 1: so that is a strong case for obstruction of justice.
Speaker 1: Whether it's the case that the special that the special
Speaker 1: comfort want to prosecute or not remains to be seen.
Speaker 1: But I think it's inevitable that there certainly would be
Speaker 1: an investigation of whether or not the President uh committed
Speaker 1: obstruction of justice of the sort that could be prosecuted.
Speaker 1: How important do you think it's going to be the
Speaker 1: the interview that you mentioned, the interview during which the
Speaker 1: President Trump sat down with Sterhold of NBC News, the
Speaker 1: tweets that he's made about the circumstances surrounding this this investigation.
Speaker 1: What role is all of that going to play here
Speaker 1: going forward. Well, that's the information that we know of.
Speaker 1: That's what's public, uh, And I think that when it's public,
Speaker 1: what again, I think const is a quite strong case
Speaker 1: of starting of justice. But what the special prosecutor will
Speaker 1: do is talk to others in the administration and kind
Speaker 1: of what the President said privately. Did he talk to
Speaker 1: other people other than James comy Um about trying to
Speaker 1: stop the Russian investigation? Did he talk to other people
Speaker 1: about what he said to James comey Um? And those
Speaker 1: are the questions that it didn't need to be answered.
Speaker 1: I think if people start to claim the executive privilege
Speaker 1: of the there's starts to that the special prosecutor is
Speaker 1: going to ask a court. And I think it's quite clear.
Speaker 1: Out of the United States, there is the nexting case
Speaker 1: that when involves a criminal investigation, uh, they claim executive
Speaker 1: privileges is really quite weak. Professor, Let me ask a
Speaker 1: dumb question. Is there a chief White House ethics lawyer
Speaker 1: in the White House right now? I believe so. But they, uh,
Speaker 1: they they have a very different approach to the ethnics
Speaker 1: issues that we did the push administration is this lawyer
Speaker 1: administration is Mr cass It was just because of time, Professor,
Speaker 1: Is Mr cassu Wits competent to advise the president in Washington? Um? Well,
Speaker 1: first of all, Mr Cassawits is not the chief White
Speaker 1: House ethics lawyer. He is not a government employer, he's
Speaker 1: not on the White House capital's death So his job
Speaker 1: is only to advise the President in his personal capacity
Speaker 1: with the respective investigation and defending himself against potential criminal charges. Um.
Speaker 1: The White House people are hiring their own criminal defense attorneys,
Speaker 1: and uh, you know, there's a very very important role
Speaker 1: for criminal defense lawyers in this situation, but it certainly
Speaker 1: isn't to try to advise people going forward as to
Speaker 1: what to do with their offessional capacity. This was too short,
Speaker 1: Richard Painter, thank you so much. With Minnesota and the
Speaker 1: University of Minnesota, uh Law, we'll hope to get him
Speaker 1: back on soon. That was great with David. That was
Speaker 1: really quite good. Runch you by Bank of America Mary Lynch.
Speaker 1: With virtual reality, virtually everything will change. Discover opportunities in
Speaker 1: a transforming world VI of a mL dot Com slash VR,
Speaker 1: Mary Lynch, Pierced Fenner and Smith Incorporated. This is gonna
Speaker 1: be fun, and I don't mean working with data. It's
Speaker 1: always fun. Which is the Journal of Economic Literature. I
Speaker 1: was reading it last night, David, because the Yankees were
Speaker 1: un late Volume x x x v I I December.
Speaker 1: The Science of Monetary Policy, a new Keynsian perspective Clarta
Speaker 1: Gali Girdler. If you read it, you gotta read this paper, folks.
Speaker 1: In fact, you probably reread it. They lead with a
Speaker 1: quote from Alan Blinder, having looked at monetary policy from
Speaker 1: both sides now quoting Jody Mitchell, I can testify that
Speaker 1: central banking and practice is as much an art as science.
Speaker 1: I would suggest Richard Clata that art was on display yesterday.
Speaker 1: It is amazing how complex the rationalization has got. Yeah, well,
Speaker 1: I think what you're referring to is the fact that
Speaker 1: we got a rate hike from the FED even though
Speaker 1: the data has been soft. There's a FED that says
Speaker 1: that their data dependent and I've said on this show,
Speaker 1: but four data dependence itself is not a monetary policy.
Speaker 1: So we saw that in full display. So the data
Speaker 1: would have suggested pausing, but they hiked. Why did they hike?
Speaker 1: I think two big reasons. The first, uh is they
Speaker 1: clearly want to get the balance sheet reduction underway, and
Speaker 1: they set a standard for themselves, which is we can't
Speaker 1: really think about the balance sheet normalization until hikes are
Speaker 1: well underway. So yesterday was the fourth So I think
Speaker 1: that I think that was definitely a factor. I think
Speaker 1: the other factor as well is the fact of the
Speaker 1: matter is is that their models are telling them policy
Speaker 1: still accommodative. There are raising rates, but they don't think
Speaker 1: they're tightening policy. Um financial conditions are very easy, so
Speaker 1: they saw an open door. They took advantage of it,
Speaker 1: but I must admit it created sort of an interesting
Speaker 1: press conference. Well, I'll say the least on page four
Speaker 1: or five of CLARAA Gallant Gurtler, you walked through the
Speaker 1: mathematics of the economy, the I S curve knocked up
Speaker 1: against what Chare Yellin talked about yesterday, the strength thing
Speaker 1: called the Phillips curve. Does the math in that paper
Speaker 1: still work well? The Phillips curve obviously is a very
Speaker 1: important part of that analysis, and Cherry yelling herself as
Speaker 1: an expert on it and made mention of it several times.
Speaker 1: So far, we're not seeing the traditional Phillips relationship between
Speaker 1: unemployment and inflation. Interestingly enough, we are seeing some evidence
Speaker 1: of the Phillips curve effect in wages once you adjust
Speaker 1: for the fact that productivity is low. But I think
Speaker 1: the big thing that the Fed's probably noticing, although they
Speaker 1: didn't dwell on it yesterday, is in January, year over
Speaker 1: year core inflation was at one eight, very close to
Speaker 1: two percent, and now it's about one five. So it's
Speaker 1: going in the wrong direction. I think that's probably more
Speaker 1: of a concern. It's moving in the wrong direction. They
Speaker 1: hope it's temporary, but so far can't tell David if
Speaker 1: the kids can't sleep tonight. You can just read in
Speaker 1: the footnotes from Clara to Gilly and Girdler. You know,
Speaker 1: footnote that's my favorite right there, fot you much loved
Speaker 1: copy of clari. Let me ask you about what we
Speaker 1: learned about the balance sheet yesterday and how that changes
Speaker 1: your perspective on what things are going to be like
Speaker 1: going forward. Here we we've got some numbers, have a
Speaker 1: better sense perhaps of the timetable for it from an
Speaker 1: investor's perspective, What does that mean? You know? I think
Speaker 1: I think David, it's a good question because I think
Speaker 1: underreported fact of the Fed's plan is with these caps,
Speaker 1: they announced their FED is still going to be buying
Speaker 1: treasuries and mortgage backed securities. So you tell your listeners
Speaker 1: they want to shrink the balance sheet. Oh and by
Speaker 1: the way, every month they're still buying. You think, well,
Speaker 1: what you know, that's sort of like I'm going on
Speaker 1: a diet, but I'm gonna I'm gonna have a double
Speaker 1: two desserts um and and interestingly enough, one reason why
Speaker 1: the bond markets, I think David have taken this so well,
Speaker 1: is that essentially, as a treasury matures, they're going to
Speaker 1: replace it with a five or a tenure treasury. If
Speaker 1: you adjust their perform folio for the duration that is
Speaker 1: the maturity, it may not be shrinking at all. So
Speaker 1: one reason the BAB market has been pretty relaxed is,
Speaker 1: you know, this is not a very austere or dramatic
Speaker 1: UH reduction in the balance sheet. Once you adjust for UH,
Speaker 1: they're going to continue to buy. What was Cherry Yellen's
Speaker 1: message to those who are skeptical about where inflation is
Speaker 1: right now visa v the willingness or eagerness to to
Speaker 1: keep hiking. The word transitory came up. I I know,
Speaker 1: But how forcefully is she defended that? Well? She basically
Speaker 1: yesterday David I'd summarized the one hour press conference in
Speaker 1: two words. She was saying, trust me. You know it's
Speaker 1: that clar ger trusting. You know, implicitly, I'm an expert.
Speaker 1: I've been doing this for thirty years. You know, inflation
Speaker 1: goes up, it goes down. Trust me. She gave the
Speaker 1: little analogy about, you know, the arithmetic of the CPI
Speaker 1: with cell phone prices. Uh so I think that, but
Speaker 1: I do think that. I don't think that third rate
Speaker 1: hike that the blue dots indicated yesterday is a slam dunk.
Speaker 1: I think they will commence the bounty process in the fall,
Speaker 1: But if the fall is under underwhelming, as so far
Speaker 1: the first half of the year has been, they may
Speaker 1: not get that third rate hike in. Uh. Do we
Speaker 1: get any better sense of what full employ him in is?
Speaker 1: Two policy makers on the FEN. Well, you know, they
Speaker 1: keep revising down the unemployment rate, which is consistent with
Speaker 1: full employment. So three years ago it was five point three,
Speaker 1: now it's at four point six. I think the actual
Speaker 1: unemployment rate is lower. And I think, David, the pattern
Speaker 1: has been as unemployment continues to fall and inflation doesn't
Speaker 1: pick up, they keep revising down. Uh. And that's not
Speaker 1: I'm not critical for that. You know, as the data evolves,
Speaker 1: they do need to factor that in within trust me
Speaker 1: and within the wonderful work that you are acclaimed for.
Speaker 1: I did a word search. Joe Stiglett's name is not
Speaker 1: in there. He has acclaimed was Sandy Grossman. About what's
Speaker 1: the information we have in the market? What's the information
Speaker 1: Chair Yelling or vice chairman Fisher or Lyle Brainard what's
Speaker 1: the the information the signals that they're getting right now
Speaker 1: or all a Grossman stiglets? Are they flying blind? Well?
Speaker 1: That is a classic paper. It's called the Impossibility of
Speaker 1: informationally Efficient Markets. You you can tell I've read it,
Speaker 1: but I think there isn't enough. I think there is
Speaker 1: an analogy time and it's the end. It's the following
Speaker 1: are the FED? The FED is trying to to actually
Speaker 1: navigate and work through a pretty complicated signal extraction problem,
Speaker 1: and in particular there's mixed messages. So for example, bond
Speaker 1: yields have fallen. Now bond yields can fall for a
Speaker 1: couple of reasons, uh, And they're trying to distinguish whether
Speaker 1: or not that's a signal the economy's weakening, or if
Speaker 1: it's just telling you something that their negative rates and
Speaker 1: in the rest of the world. The other signal extraction
Speaker 1: problem that they have, of course, is this inflation problem.
Speaker 1: Is that transitory or permanent? And then financial conditions. Financial
Speaker 1: conditions are easier, stocks are higher, credit spreads are lower.
Speaker 1: Does that tell them they should hight more aggressively or
Speaker 1: does that tell them basically just to take it easy.
Speaker 1: So it is a pretty complicated problem, right, can we've
Speaker 1: gone graduate school PhD on everybody out there, and this
Speaker 1: is really special with Richard clairet Columbia University and of
Speaker 1: course with PIMCO. So with what you just said, head,
Speaker 1: I'm gonna go to the Greek letter theta, which is
Speaker 1: belief in the time function. Trust me on the time function?
Speaker 1: Do you have a belief in transitory out to a
Speaker 1: permanent effect on in this case inflation? I mean, do
Speaker 1: you do you have a knowledge of how to parse
Speaker 1: between transitory or permanent? Where we just flying blind? Again? Well,
Speaker 1: the reality and I've actually done empirical work in this
Speaker 1: and I know the literature. The reality is that the econometrics,
Speaker 1: the econometrics of signal extraction in the real world are
Speaker 1: actually quite complicated. So even though the FAT has two
Speaker 1: PhD economists and does brilliant econometric work, there's a pretty
Speaker 1: big element of judgment involved as as as well. And
Speaker 1: so the sense that's a combination of statistical models and
Speaker 1: and sort of gut gut in the time that we've
Speaker 1: got left, then should we go to a more rules
Speaker 1: based fed away from that gut field that you just
Speaker 1: spoke If we get Marvin good Friend as chairman, because Claire,
Speaker 1: it is too much discretion based. Do we need a
Speaker 1: more rules based fed Well, of course on my mind,
Speaker 1: busts chuck that paper. Clara Galli Girler actually proposed what
Speaker 1: we called a forward looking Taylor rules. So I'm very
Speaker 1: much in the camp that a rules based approach makes sense.
Speaker 1: I wouldn't be handcuffed to it, but it's an essential
Speaker 1: input to doing sound policy, can I, David? I I
Speaker 1: gotta say this, folks. We invented Bloomberg on the Economy
Speaker 1: and Bloomberg Surveillance. Al Mayer said to me, you can't
Speaker 1: do that every show, but every every everyone in a while,
Speaker 1: Everyone in a while, John Tucker, we go off the rails,
Speaker 1: Professor Claire, this will be out for your re listening pleasure. John,
Speaker 1: This will be this will be on iTunes podcast in
Speaker 1: the Global Wall Street where you just heard there from
Speaker 1: Richard Clarida was just special. I can't say day to
Speaker 1: thurstund like that. Very good. We'll go with that, Richard, Claire,
Speaker 1: appreciate you being Richard Claid and Bloomberg eleven three studios
Speaker 1: of course of pimp in Columbia University as well we'll
Speaker 1: be talking more about the FED coming up here with
Speaker 1: the Craig, Bishop of URBC as well. I promise I
Speaker 1: will tweet out some of what Professor Clarida and I
Speaker 1: were talking about, because it is really important work and
Speaker 1: the foundations for what is being debated. As in the
Speaker 1: press conference yesterday that was special Richard Clarida at PIMCO
Speaker 1: is a really interesting what I'm gonna call political scientist
Speaker 1: and economists. Diana Fritz goot Roth joins us now with
Speaker 1: the Manhattan Institute UM for years in support of UM
Speaker 1: a certain kind of political science, and that's something that
Speaker 1: many Republicans are are very comfortable with, and maybe the
Speaker 1: President as a Republican is comfortable with. And you will
Speaker 1: join us. Now, how is the president doing, Diana, Just
Speaker 1: to begin with the idea of Trump fiscal economics is
Speaker 1: a cogent The President wants to lower spending and reduce taxes,
Speaker 1: which is a very cogent policy, absolutely, and it's worked
Speaker 1: in other countries, it's worked in the United States. And
Speaker 1: almost everybody agrees that our deficit is too large, our
Speaker 1: debt is too large. We're passing this on to our
Speaker 1: grandchildren who have not agree. I agree. Everyone agrees with this,
Speaker 1: but did he? And I mean this was great respect
Speaker 1: for the debate folks, and we get tons of mail
Speaker 1: and Dr Fricht ros On with us when when he
Speaker 1: affected his first budget proposal? Was that a political document
Speaker 1: or was that a Diana Frisch goot Rough document with
Speaker 1: with some real meat to it? This was President Trump's
Speaker 1: view of what the budget should look like, of what
Speaker 1: the draw government, but it should look like. And it
Speaker 1: had cuts in many places, and it had increases in
Speaker 1: national defense, and that goes along with what President Trump
Speaker 1: proposed during his campaign. So it was it was a
Speaker 1: document aligned with his policy promises during the campaign. And
Speaker 1: I should just say, I am not doctor. I'm just
Speaker 1: Diana virtual. I have an m fill in economics from
Speaker 1: ox Very good. Excuse me. That's what you get from
Speaker 1: someone like Oxford. Everybody else is walking around all day.
Speaker 1: I'm a doctor. I'm a doctor. We try to make
Speaker 1: note of that. I do agree with with Diana's attention. Well,
Speaker 1: it's just I don't want to be on your show
Speaker 1: on the false pretender. Very good, Diana, excuse me. I'm
Speaker 1: on this show on David saved me. I let me
Speaker 1: ask you just about the degree are There are those
Speaker 1: who complained that the President drafted this document in a vacuum.
Speaker 1: He wasn't thinking about what what Congress would think of it,
Speaker 1: what Republicans and Congress in particular would think about it.
Speaker 1: I look at the reception that it got on Capitol
Speaker 1: Hill and a good quantity of Republicans fellow publicans who
Speaker 1: weren't happy with it. How problematic is that? In other words,
Speaker 1: he's laying out the strictures for what he wants. Should
Speaker 1: have had more political awareness about what was more possible
Speaker 1: or all presidents lay out their wish list for a budget. Uh,
Speaker 1: and then it's up to Congress and the president to
Speaker 1: negotiate over what finally comes out. I don't think you
Speaker 1: could think of any congressional budget over the past half
Speaker 1: century that's come out exactly the way the president asked for.
Speaker 1: So President Trump's budget is not at all unusual. It's
Speaker 1: his wish list, it's his vision as to where the
Speaker 1: economy should go and where the budget should go. Does
Speaker 1: he does he have enough awareness of the funding deadline
Speaker 1: that's coming up. We haven't heard a lot of clarity
Speaker 1: from this White House about the dead ceilings, say it's
Speaker 1: approached to the to the dead ceiling, or indeed it's
Speaker 1: approached to this September deadline. Does he do his colleagues
Speaker 1: need to come out more forcefully here to say what
Speaker 1: the White House's position on all of that is. President
Speaker 1: Trump has an excellent set of economic advisors. Gary Cone,
Speaker 1: head of the National Economic Council. My friend Kevin Hassett
Speaker 1: will be the starting off as Chairman of the Council
Speaker 1: of Economic Advisors. I'm sure they have fully made him
Speaker 1: aware of all the deadlines. Does he need to be
Speaker 1: more incremental? I mean, so much of the liberal critique
Speaker 1: of the of the Trump budgets and discussion so far.
Speaker 1: Is it just too much, too hard, too soon, too abrupt?
Speaker 1: Is there something to be said for gradation? I think
Speaker 1: that this this proposed budget has This budget has been maligned.
Speaker 1: First of all, people say it cuts spending. It doesn't.
Speaker 1: It raises federal spending by about one point seven trillion
Speaker 1: over the next uh ten years. It says it cuts medicaid,
Speaker 1: and uh no, it raises the amount of money spent
Speaker 1: on medicaid over the next ten years. Uh. Some functions
Speaker 1: of government that were personally it's perfectly reasonable thirty or
Speaker 1: forty or fifty years ago, such as the Corporation for
Speaker 1: Public Broadcasting are no longer reasonable in light of all
Speaker 1: the multitude of radio and TV stations that we have
Speaker 1: right now, Why should it be the government's role to
Speaker 1: fund television and radio when there's shows like yours that
Speaker 1: do find without government money. So I think that a
Speaker 1: budget should always be a time of looking over what
Speaker 1: the government roles should be in light of changes in
Speaker 1: the economy, and have people jump up and down and
Speaker 1: say we need a government radio and TV station. Yes,
Speaker 1: well we might have needed one fifty years ago. We
Speaker 1: certainly do not need one now. That's not something that
Speaker 1: tax pays should have to fund. Dana, I am going
Speaker 1: to ruin your morning and come back and talk about care.
Speaker 1: And Diana first got rots with us with the Manhattan Institute. Dana,
Speaker 1: let me give you an open question to get the
Speaker 1: conversation going. David Guray is poised to pounce, how close
Speaker 1: are we to socialized medicine? Oh, we're not. We're not
Speaker 1: close to socialized medicine, I would say, I would say it.
Speaker 1: We can see that the Obamacay exchanges are crumbling. We
Speaker 1: have United Healthcare pulling out Etna and some pulling out.
Speaker 1: But I don't think that single payer is going to
Speaker 1: be replacing uh, the Obamacare exchanges. We're probably going to
Speaker 1: have more competition, more choice for consumers. That's what people want.
Speaker 1: That's what the Senate is working on right now. That
Speaker 1: was in the House bill. Where is your your optimism
Speaker 1: for that happening? We look at the congressional calendar, how
Speaker 1: compressed it is, how full it is, uh, and we
Speaker 1: see the Senate's on willingness to take up the House
Speaker 1: bill as the starting point for for what it's going
Speaker 1: to to ultimately draft. Where does your optimism when it
Speaker 1: comes to healthcare come from? Well, Senator Mitch McConnell is
Speaker 1: crafting his own bill, which is going to be ready
Speaker 1: around July the fourth, he says, or perhaps later. Senator
Speaker 1: McConnell is an extraordinarily smart man who knows parliamentary procedure.
Speaker 1: And I'm sure that between Health Speaker Ryan and Majority
Speaker 1: Leader McConnell, uh, they can get it done. Because this
Speaker 1: is what voters elected them to do. They were elected
Speaker 1: on a platform of repealing Obamacare. Premiums arising twenty five
Speaker 1: to every year. It's unsustainable. Insurance companies are dropping out
Speaker 1: United Healthcare and some ethnic Okay, so give me the
Speaker 1: I want to. I'm really fascinating by this, folks. If
Speaker 1: it's sixteen or sevent of g d P and every
Speaker 1: single guest from Reinhard to Diana Frisco Roth says, we
Speaker 1: gotta fix it. What's your prescription given the realities of
Speaker 1: two thousand eighteen society. Well, the the prescription is that
Speaker 1: insurance companies should be allowed to offer the plans that
Speaker 1: people want to buy, which is not the case right now.
Speaker 1: Right now, each insurance company has to offer the same
Speaker 1: plan with the same offerings, so there isn't any company
Speaker 1: tisie between them. If I want to buy a plan
Speaker 1: that just covers major expenses such as falling off my
Speaker 1: bike in traffic when I bike to work, or getting
Speaker 1: cancer or a heart attack, I'm not allowed to do that.
Speaker 1: I have to buy a plan with maternity care, mental
Speaker 1: health coverage, drug abuse coverage, all these bells and whistles
Speaker 1: that I don't necessarily want. Well, of course, this is
Speaker 1: raising the price of health insurance and we need a
Speaker 1: different system. Just like with auto insurance. We can do
Speaker 1: auto insurance because people think about auto insurance. No one
Speaker 1: ever says I'm losing my job, I'm going to lose
Speaker 1: my auto insurance. No, because you buy outside the system.
Speaker 1: You have a choice of plans, you have a choice
Speaker 1: of deductibles, you can have collision UH. You know you
Speaker 1: do you and we can do the same kind of
Speaker 1: To be fair, though, I have to buy it in
Speaker 1: order to get a license, I have to prove that
Speaker 1: I have auto insurance. Yes, but you don't have to
Speaker 1: buy a very expensive plan that UH that has UM
Speaker 1: changes your oil that the pays, but changing your oil
Speaker 1: pays for routine maintenance. That's what you have to buy
Speaker 1: for healthcare. And I do agree that in the new
Speaker 1: health care bills there should be a penalty for not
Speaker 1: having coverage. Otherwise you're going to have people gain the
Speaker 1: system and just pick up the insurance when they have
Speaker 1: UH when they have a problem. And there are protections
Speaker 1: against that in other markets, like you can't just buy
Speaker 1: home insurance when your house is on fire, you can't
Speaker 1: just buy car insurance when you engage when when you
Speaker 1: have a major crash. Should be the same with health insurance.
Speaker 1: We have been talking about monetary policy all morning and
Speaker 1: light of the Fed meeting yesterday. Let me ask you
Speaker 1: about a fiscal policy. Last week the White House christ
Speaker 1: and last week as infrastructure a week. How optimistic are
Speaker 1: you that we're going to see some sort of fiscal
Speaker 1: package you within within the year. Do you think that
Speaker 1: the White House is prioritizing that enough you mean you
Speaker 1: mean an infrastructure Indeed, indeed, the trillion dollar Plan that
Speaker 1: the President discussed in that speech before a joint session
Speaker 1: of well, the trillion dollar plan also means reducing barriers
Speaker 1: to private sector companies building infrastructure. That's a large part
Speaker 1: of the plan. The President is very serious about reducing
Speaker 1: all the duplication that there is in the permitting. He
Speaker 1: came out with a huge pile of environmental impact statements
Speaker 1: that were used for a connected road between and to
Speaker 1: seventy and said it was too big. He's absolutely right.
Speaker 1: That raised the price of doing that road, of building
Speaker 1: that road, So now the tolls on that road have
Speaker 1: to be higher than they would be otherwise, reducing the ridership.
Speaker 1: These regulations are really getting in the way of private
Speaker 1: companies building infrastructure, and a large part of the President's plan,
Speaker 1: as he said, is going to be encouraging public private partnerships,
Speaker 1: reducing regulations, encouraging the private sector to build its own infrastructure,
Speaker 1: getting out of the way. When you look at public
Speaker 1: private partnerships, what's the role of them in improving or
Speaker 1: building on our infrastructure here in the in the US?
Speaker 1: Is that the the end goal to move to that
Speaker 1: realm entirely? What role should should public private partnerships play
Speaker 1: when it comes to infrastructure, Well, the end goal should
Speaker 1: be moving towards a situation where they are much more
Speaker 1: private and much less public. But in situations where the
Speaker 1: federal government actually owns the assets, such as the bridge,
Speaker 1: or the highway or the airport. Uh, then the federal
Speaker 1: government has to do some kind of permission, some kind
Speaker 1: of agreement to allow the private sector to invest. But
Speaker 1: there should be the maximum private sector investment possible. I
Speaker 1: look at what is going on here now in the
Speaker 1: cacophony in the White House. Have you spoken to the president? Uh? Recently? Diana,
Speaker 1: I have never spoken to the president. I was part
Speaker 1: of his team, but not everyone on his team spoke
Speaker 1: to the president. Okay, well that's fair as well. What
Speaker 1: would be your prescription for the White House to get
Speaker 1: a more cogent budget plans? For school plan linked with
Speaker 1: all the other distractions out there. I think that the
Speaker 1: White House is UH producing these budget plans, and I
Speaker 1: would suggest that the next step is for Congress to
Speaker 1: actually take them up and implement them. It's Congress that's
Speaker 1: the bottleneck. It's people who are saying Congress, and you
Speaker 1: said it earlier in the program, how is Congress going
Speaker 1: to pass tax reform? How's it going to pass healthcare reform?
Speaker 1: With a few legislative days left, when I suggest that
Speaker 1: Congress take part of the August recess and stay in
Speaker 1: Washington to work on these items and also move the
Speaker 1: process through faster. Yesterday, UH the due to the extremely
Speaker 1: tragic shooting of Steve Scalise, there was very little done,
Speaker 1: which is understandable. But Congress needs to make up that
Speaker 1: time and move these bills through. There's also debt, feeling problems. Budget,
Speaker 1: There's many things to do infrastructure. I'll sleep that there, Diana,
Speaker 1: Thank you so much. Danna, first to go through off
Speaker 1: is with a man Hair Institute. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
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