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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Here, Powell keep saying that rates are restrictive enough, yet

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Speaker 2: data comes in hot, continues to be hot, and core

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Speaker 2: CPI is likely to remain very sticky. So how many

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Speaker 2: cuts we've gone from seven to three?

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Speaker 1: Are we likely to go to two?

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Speaker 3: I think at this point you should probably take the

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Speaker 3: Committee and the Chair at face value. I think their

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Speaker 3: best guess right now is still three cuts this year,

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Speaker 3: And of course the data can go one way or another,

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Speaker 3: but that's the base case. I think it's been a

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Speaker 3: very successful policy. The policy rate was increased a lot

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Speaker 3: during twenty twenty two, and inflation fell quite a bit

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Speaker 3: in the second half of twenty twenty three. Last year,

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Speaker 3: at this time, core pc inflation would have been two

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Speaker 3: hundred basis points higher than it is right now. That's

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Speaker 3: the Committee's favorite measure. So you're looking at a very

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Speaker 3: successful policy with a pretty strong economy. So a lot

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Speaker 3: of things going right for the Fed right now.

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Speaker 1: So Powell has been right so far.

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Speaker 3: Yeah, I think he's been right so far, and the

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Speaker 3: Committee's been right so far to pursue an aggressive strategy

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Speaker 3: to bring inflation back to target. Most of that was

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Speaker 3: in twenty twenty two, and then you bore the fruit

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Speaker 3: in twenty twenty three and into twenty twenty four. Here

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Speaker 3: we talked about.

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Speaker 1: How the FED is data dependent. Powell himself says he

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Speaker 1: is data dependent. What exactly does that mean and which.

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Speaker 2: Data in particular is he looking at should be looking

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Speaker 2: at it?

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Speaker 3: I think right now, I think it's mostly the inflation data,

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Speaker 3: because on the real side of the economy, things are

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Speaker 3: going very well, and you can argue about why, but

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Speaker 3: they're going very well. The Committee doesn't really have to

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Speaker 3: worry about that side of the mandate right now. All

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Speaker 3: they've got to worry about is getting inflation back to

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Speaker 3: the two percent target, and they've come a long ways back.

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Speaker 3: Already was four point eight percent now two point eight

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Speaker 3: percent core PC inflation on a twelve month basis. That

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Speaker 3: means you've only got eight tenths of one percent to go,

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Speaker 3: And some people are saying that the next report will

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Speaker 3: lead to core PC being only two point six percent

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Speaker 3: on a twelve month basis, So you're starting to get

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Speaker 3: close enough. I think you have enough data in hand

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Speaker 3: right now to justify the first rate cut, maybe not

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Speaker 3: a whole string of rate cuts, but you could certainly

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Speaker 3: justify the first rate cut now based on the data

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Speaker 3: that they have.

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Speaker 2: We talk about how the US economy is very strong,

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Speaker 2: So would you say that the risk in the US

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Speaker 2: economy right now is inflation and not growth?

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Speaker 1: Fair to say that that's I think that's right. Yeah,

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Speaker 1: Why is the US economy so resilient? I mean, not

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Speaker 1: too long ago we were.

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Speaker 2: Expecting a recession one hundred percent or you know, priced

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Speaker 2: in of a recession.

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Speaker 1: Yet here we are with a very resilient economy.

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Speaker 3: Yeah. Last year, at this time, you had the bank

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Speaker 3: failure of Silicon Valley Bank and other banks, smaller banks

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Speaker 3: around the country. That was overinterpreted to mean that the

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Speaker 3: US was going into recession. I don't think it was

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Speaker 3: ever a good story to tell because yes, their banks failed,

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Speaker 3: but they're only a small fragment of the total banking

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Speaker 3: and the total intermediation sector in the US economy. So

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Speaker 3: I think that card was overplayed. And not only did

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Speaker 3: the US not go into recession in the second half

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Speaker 3: of twenty twenty three, but the economy actually boomed in

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Speaker 3: the second half of twenty twenty three, So you really

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Speaker 3: got a very strong outcome and that has continued into

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Speaker 3: the first part of twenty twenty four here, although I

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Speaker 3: would say we're going to be closer to the trend

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Speaker 3: growth rate now, not way above trend the way we

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Speaker 3: were during the last six months of twenty twenty three.

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Speaker 2: Some people talk about the US economy being a two

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Speaker 2: track economy.

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Speaker 1: What's the risk in that?

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Speaker 3: What do you mean by two tracks?

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Speaker 1: There's some parts of the economy that's actually very weak.

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Speaker 3: Yeah, I think that's always the case, probably in any

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Speaker 3: any really big economy. There are always some things that

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Speaker 3: aren't going so well, or some markets where there are problems.

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Speaker 3: But I think that it's very encouraging that the overall

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Speaker 3: picture is very strong for the US new to.

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Speaker 1: Rate, of course, that is the big question.

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Speaker 2: Some say, well, the fat says it's two point six percent,

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Speaker 2: but we have the likes of I Coon re called

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Speaker 2: his name now, but you know, indicating that it is

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Speaker 2: six percent all above.

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Speaker 1: Larry Summers, for instance, says.

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Speaker 3: That, okay, yeah, the committee's number is two point six.

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Speaker 3: I think that's going to be ratcheted up here, but

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Speaker 3: it wouldn't go above three or three and a half.

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Speaker 3: So the policy right right now is the top end

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Speaker 3: of the policy range is five and a half, So

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Speaker 3: that would take quite a bit to get it down

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Speaker 3: to three and a half. And you think that's eight

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Speaker 3: a rate cuts at twenty five basis points a meeting,

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Speaker 3: that would take quite a while. This takes a whole year.

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Speaker 3: One of the things I'm concerned about is that if

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Speaker 3: they don't get started soon enough, then everything else will

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Speaker 3: have converged and you'll be at the soft landing, but

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Speaker 3: the policy rate will still be too high. And I

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Speaker 3: don't think they want to be in that situation because

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Speaker 3: that would risk overshooting on the inflation target and having

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Speaker 3: inflation go below target, or risking more recession than you

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Speaker 3: want to take on. So I think it is an

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Speaker 3: art form to get this to the right level at

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Speaker 3: the right time Europe is looking. I think it's very instructive.

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Speaker 3: Europe right now is already projecting that they'll overshoot the

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Speaker 3: inflation target and have inflation below target in twenty twenty five.

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Speaker 2: You talk about the risk of the FAT possibly being

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Speaker 2: behind target, behind the cavs so to speak, How do

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Speaker 2: you assess that risk that it may be behind the covs.

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Speaker 3: Yeah, I don't think that this has really come into

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Speaker 3: view yet because things are going so well. So it's

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Speaker 3: a good problem to have. The economy is doing well,

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Speaker 3: inflation's coming down. But if you don't pay attention to

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Speaker 3: everything that could happen, you might weigh the probabilities a

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Speaker 3: little bit off. So it's maybe a minor problem to have,

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Speaker 3: but it's something you keep an eye on in the

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Speaker 3: months ahead.

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Speaker 1: Shot the fat tipper off, it's balance sheet run off. Yeah.

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Speaker 3: I think the Committee has had a quantitative tightening policy

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Speaker 3: since twenty spring of twenty twenty two, implemented in the

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Speaker 3: fall of twenty twenty two. I think they're going to

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Speaker 3: slow that down based on comments at the last meeting,

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Speaker 3: but it will still be a quantitative tightening policy, just

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Speaker 3: not quite as fast as it was, and I think

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Speaker 3: that's perfectly fine. I think it makes sense to shrink

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Speaker 3: the balance sheet.

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Speaker 1: It doesn't make sense. If it does, it does make sense.

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Speaker 1: It does make sense. How much further than.

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Speaker 3: Well, I think they want to get the level of

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Speaker 3: reserves to be the right level for the current economy,

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Speaker 3: and they think they're too high right now. But I

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Speaker 3: think they're moving in the right direction. This doesn't seem

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Speaker 3: to be impacting other parts of the policy, so I

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Speaker 3: think they've got the right plan here.

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Speaker 2: Of course, we have the US election at the end

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Speaker 2: of the year. How might that factor into fat thinking

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Speaker 2: and shape what it does?

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Speaker 3: So I don't think it really factors into monetary policy,

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Speaker 3: at least not ordinary monetary policy. And I don't think

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Speaker 3: you can win an election based on what the central

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Speaker 3: Bank does in September or August or so. I don't

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Speaker 3: think so. I don't think the typical voter, the median voter,

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Speaker 3: doesn't look at that and doesn't really know anything about that.

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Speaker 3: So for US politics, it's a lot about cultural issues.

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Speaker 1: Just one little question.

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Speaker 2: Jim Trump two point zero, what might that mean for

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Speaker 2: the year's economy.

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Speaker 3: It sounds like he'll be ever aggressive on trade as

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Speaker 3: he has been in the past, although I would say

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Speaker 3: the Biden administration picked up a lot of the Trump

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Speaker 3: type policies, and so from a trade perspective, it may

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Speaker 3: not be all that different than it was under Biden.

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Speaker 1: James Blotti, thank you so much for your insights.