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Speaker 1: Okay, let's return to our questions of the day. How

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Speaker 1: are you feeling? What's going on? If you would to

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Speaker 1: talk about an overwriting emotion right now, is it fear

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Speaker 1: or is it greed? Let's sell off that question now

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Speaker 1: to Richard clarin And. Rich Clard a PIMCO Global Economic Advisor,

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Speaker 1: and of course Forma Photo is a vice chair. Rich

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Speaker 1: great to see. How are you feeling. What's the overwriting

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Speaker 1: emotion right now? Fear or greed?

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Speaker 2: Well, let me talk about the market.

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Speaker 3: I think there's certainly an element of of fear and

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Speaker 3: as always, uh, there's there's greed. I think it's important

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Speaker 3: as you're thinking about this sell off. I think there

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Speaker 3: are four potential factors. As always, there's the Fed, there's

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Speaker 3: the macro data, there is is fiscal potentially, and there

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Speaker 3: are technicals.

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Speaker 4: Uh.

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Speaker 3: Most of this sell off really since the Fed has

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Speaker 3: really not been on Fed news. I think it's been

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Speaker 3: a reflection of of of concerns about fiscal a higher

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Speaker 3: term premia, and of course fiscal dysfunction in Washington never

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Speaker 3: never ceases to disappoint.

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Speaker 2: So I think there's a lot going on here. Does

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Speaker 2: this mean a higher neutral rate?

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Speaker 4: Rich and sort of the echoes of that.

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Speaker 2: Well, it could, Alex.

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Speaker 3: I think at PIMCO we try to distinguish between like

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Speaker 3: a neutral bond yield on a ten year and the

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Speaker 3: neutral federal funds rate. We do think we're going to

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Speaker 3: be in a world eventually of steeper yield curves. But

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Speaker 3: there's no doubt that in a world where government debts

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Speaker 3: north of one hundred percent of GDP and we really

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Speaker 3: do not have a consistent fiscal policy in the US,

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Speaker 3: we're going to probably be in a world of steeper

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Speaker 3: curves for sure.

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Speaker 1: The neutral rate was interesting to try and see it

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Speaker 1: with hindsight. Yeah, Rich, what we can certainly observe right

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Speaker 1: now is a very fast move. Do you think the

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Speaker 1: Fed's going to be comfortable with the speed of the

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Speaker 1: move that we're seeing in the bow market?

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Speaker 3: Well, so far, you know, FED officials have had a

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Speaker 3: chance at various appearances, and they've not really taken that

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Speaker 3: opportunity to push back against this.

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Speaker 2: My own sense is that to the extent this move.

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Speaker 3: Does reflect higher bond yels because of so much treasury issuance,

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Speaker 3: it's not something that FED would necessarily want to lean against.

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Speaker 3: You know, it actually does some of the Fed's job

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Speaker 3: for it. But obviously if moves get extreme or persistent,

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Speaker 3: it could get the FED engaged, but we haven't seen

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Speaker 3: that yet.

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Speaker 4: Yeah, I think Alan Muskom Deutsche Bank was saying that

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Speaker 4: the reason seventy five BIPs in the ten year is

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Speaker 4: like one hundred and fifty BIPs worth of tightening for

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Speaker 4: the FED. So okay, not the worst thing in the world.

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Speaker 4: What looks unruly like? What would worry Rich if you

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Speaker 4: were still at the FED?

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Speaker 2: Good question.

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Speaker 3: You know what I'd be looking at, Alex and Guy

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Speaker 3: is I'd be looking at the extent to which this

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Speaker 3: selloff reflects a big move up in inflation expectations. You know,

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Speaker 3: the Paler FED wants to anchor inflation expectations. So far,

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Speaker 3: most of the move has been in real rates, not

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Speaker 3: in inflation. But if I were still back at the

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Speaker 3: at the Eccles or the Martin building, I'd be looking

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Speaker 3: to see that the Fed's credibility is still in place,

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Speaker 3: which currently it is.

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Speaker 1: Yeah, the FED would certainly like to maintain its credibility,

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Speaker 1: and if things get disorderly, maybe you would have the

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Speaker 1: opportunity to step in.

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Speaker 2: Rich.

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Speaker 1: Do you have any idea, Do you have any clarity

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Speaker 1: on what the current strike price of the FED put

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Speaker 1: is where things to get disorderly.

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Speaker 3: Well, I think that's a tricky concept in general of

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Speaker 3: the FED put. What I do think we do know

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Speaker 3: Guy and Alex is you know, the FED understands that

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Speaker 3: the liquidity of the treasury market is essential to achieving

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Speaker 3: its mission. And certainly in my time at the FED

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Speaker 3: we had disruptions and for example in the rebail markets

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Speaker 3: in twenty nineteen. So there can be sufficient or significant

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Speaker 3: disruptions where the FED sets in. We saw from the

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Speaker 3: Bank of England exactly a year ago.

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Speaker 2: But I don't know.

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Speaker 3: I don't have a particular level that I would mention

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Speaker 3: right now.

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Speaker 4: Do you think that the bond market is functioning well?

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Speaker 4: I mean we talk about equity risks, the hedge fund

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Speaker 4: basis trade like all that stuff. Is the bum market

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Speaker 4: giving us a real read? Or are there just a

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Speaker 4: lot of distortions and.

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Speaker 2: What do we do with that?

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Speaker 3: Alex a good point, because I alluded to that a

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Speaker 3: moment ago. I do think there are market technicals at

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Speaker 3: play here.

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Speaker 2: Essentially.

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Speaker 3: What I mean by market technicals tendencies for prices to

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Speaker 3: move or overshoot in response to fundamental news, you know.

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Speaker 3: For example, I'll give you a good example just entry day.

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Speaker 3: If you look at your Bloomberg screen, you'll see that

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Speaker 3: yield on the ten year treasury moved up about fifteen

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Speaker 3: basis points and then moved down roughly that amount on

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Speaker 3: the ADP data. So those are very big, big moves

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Speaker 3: and in response to one report. So that's telling me

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Speaker 3: that there is a technical element here.

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Speaker 1: Yeah, you've also alluded to the fact that the Fat's

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Speaker 1: already comfortable with what it's seeing to a certain extent.

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Speaker 1: This is doing the job that the FED may need

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Speaker 1: to do further down the road. Rich, do you still

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Speaker 1: believe that the FED has further to go? I'm wondering

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Speaker 1: what the right question to ask you is right now?

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Speaker 1: Is it still how high do they go? Or is

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Speaker 1: it still or is it now how long do they

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Speaker 1: stay there? And I'm just it's that kind of Ah,

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Speaker 1: we the oa at the top of the mass, and

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Speaker 1: hold we at the tupe of table mounting. Where if

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Speaker 1: you were to pick a mountain, where are we?

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Speaker 3: Yeah, Well, if you had asked me this a month ago,

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Speaker 3: and I think I was on Bloomberg around that time,

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Speaker 3: I was in the camp going into the September meeting

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Speaker 3: that we would would we would likely get one more

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Speaker 3: hike in this cycle, if really just for precautionary reasons,

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Speaker 3: and certainly the dots at the September meeting had twelve

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Speaker 3: of the nineteen participants indicating.

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Speaker 2: One more hike. I'm less of that view now.

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Speaker 3: I think given that, as I said, the bomb market

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Speaker 3: can do some of the Fed's job for it. You know,

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Speaker 3: if even some of this recent increase were to stick,

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Speaker 3: I think the Fed could well could well be done if.

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Speaker 2: The set is done. First of all, thank you for

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Speaker 2: breaking news with us. We appreciate it.

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Speaker 4: If the bet is done, what about twenty twenty four,

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Speaker 4: It looked like the dots were looking at two cuts.

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Speaker 4: Do you see that being real?

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Speaker 2: Alex and the interesting and guy.

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Speaker 3: The thing about about market pricing is that it's reflecting,

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Speaker 3: you know, a weighted probability, weighted average of a lot

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Speaker 3: of scenarios. You know, two cuts looks about right to me.

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Speaker 3: But I mean, I think there's a certainly a chance

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Speaker 3: that we don't get any cuts next year, or conversely,

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Speaker 3: if inflation falls more rapidly than I and the FED expect,

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Speaker 3: they could be cutting more. So, I think the way

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Speaker 3: to look at those numbers is that they're averaging across

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Speaker 3: a range of outcomes. But that doesn't look unrealistic to me.

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Speaker 3: What I will say is back in May, when the

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Speaker 3: markets were pricing in six cuts, including starting this year,

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Speaker 3: I thought that that was out of line with FED reality.

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Speaker 2: But no, right now, where.

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Speaker 1: Do you rich when we get into a rate cutting cycle,

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Speaker 1: what does that cycle look like? Do you think how

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Speaker 1: low do we go? Catherine Mann was talking the other day.

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Speaker 1: She was talking about rates being permanently higher. Do you

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Speaker 1: agree with her?

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Speaker 3: Well, I think in the case of the UK and

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Speaker 3: good my good friend Catherine managed doing a great job there.

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Speaker 3: I think that is right because remember they barely got

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Speaker 3: rates above zero before the pandemic. During my time at

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Speaker 3: the FED, we got the fund rate all the way

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Speaker 3: up to two point five percent. What I do think, however,

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Speaker 3: is you know, central banks do have some room to

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Speaker 3: cut now, and so they're further away from the zero bound.

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Speaker 3: But I do not to sound boring, but I think

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Speaker 3: that's going to I think central banks are going to

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Speaker 3: be data dependent. I think an important difference in this cycle,

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Speaker 3: leaning into Catherine's.

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Speaker 2: Direction, is this is the first rayhike cycle.

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Speaker 3: At least in the US in forty years in which

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Speaker 3: the goal of policy has been to reduce inflation, not

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Speaker 3: just to keep inflation from going up. So I think

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Speaker 3: there probably will be something of a bias in this

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Speaker 3: in this cycle as well.

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Speaker 4: Oh that's interesting. And it also goes back to the

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Speaker 4: neutral rate right in the head. Oh yeah, still definitely

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Speaker 4: unclear that on that sense. So Rich, I'm just wondering, then,

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Speaker 4: what you think about the labor market? Do we like,

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Speaker 4: what happens if we get a super hot number on Friday?

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Speaker 4: What happens if we get a nice cool number? Like? What?

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Speaker 2: How are you thinking about it?

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Speaker 3: Well, there's no doubt that the FED wants the labor

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Speaker 3: market to slow. It's hoping it can engineer that soft landing.

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Speaker 3: But one hundred and eighty two hundred thousand jobs a

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Speaker 3: month is probably about one hundred thousand more than the

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Speaker 3: economy can can sustain without upward pressure on wages. So

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Speaker 3: I think that that our analysis indicates that we're going

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Speaker 3: to continue to see a slow down in gains and

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Speaker 3: payroll growth. You know, if we would be interesting tomorrow,

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Speaker 3: if if we're a change The ADP report is indicating something.

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Speaker 3: If we got an eighty k print tomorrow, you know,

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Speaker 3: that would certainly be you know, down shifting into the

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Speaker 3: range the FED thinks is consistent. But I do think

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Speaker 3: that the FED is looking not just at the price

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Speaker 3: inflation data, but also age and compensation costs. They're still

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Speaker 3: running hot relative to the fed's long run inflation target.

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Speaker 1: Yeah, them services data seting pointing us in that direction.

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Speaker 1: We got that the the top of last now, so

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Speaker 1: rich put it all together for me, Jamie Diamond's warning

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Speaker 1: of the risk of potentially going to seven percent on

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Speaker 1: the ten year. We've got others making similar noises, someone

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Speaker 1: even saying higher, What do you think? What kind of

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Speaker 1: trajectory are we currently on? Do I want to be

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Speaker 1: buying the tenure at this point? Do you think there's

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Speaker 1: going to be a better entry point further down the road?

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Speaker 3: Well, what I'd say about that is we think that

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Speaker 3: we're in a world and we've said this in our

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Speaker 3: publications that we do think the FED has credibility it

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Speaker 3: will get inflation to too, and starting yields for patient

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Speaker 3: investors are attractive. There are a lot of opportunities in

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Speaker 3: the bond market and spread and mortgages and globally, So

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Speaker 3: you know, I wouldn't necessarily highlight just an interest rate

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Speaker 3: level at this point, but yes, the bomb market is

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Speaker 3: adjusting as I said, to technicals, to macro data, to

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Speaker 3: fiscal dysfunction, and prices will find a level you know,

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Speaker 3: consistent without data.

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Speaker 4: Rich always going to get your perspective next time with

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Speaker 4: me in studio, We'm okay. Person Ridge Clarative, PIMCO Global

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Speaker 4: Economic Advisor and former Better Reserve Advice Chair. Great to

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Speaker 4: get your perspective. I always learn a lot