Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. Donald Trump and Carbala
Speaker 2: Harris planning dueling economic addresses. Trump speaking at Georgia tomorrow
Speaker 2: offering his plan to lower taxes for business owners, and
Speaker 2: Harris sanks you'll deliver a speech this week outlining her
Speaker 2: economic vision we get Lucky. This morning, we're joined by
Speaker 2: Jason Furman, the professor at the Harvard Kennedy School and
Speaker 2: former chair of the Council of Economic Advisors under President
Speaker 2: Barack Obama. Jason, welcome back to the program sir. It's
Speaker 2: been far too long before we get to the election race.
Speaker 2: Let's just talk about the states of the economy. So
Speaker 2: a lot of people are still talking about whether we
Speaker 2: can achieve a SELT lending. Do you think it has
Speaker 2: been achieved already?
Speaker 3: I think we're close. But the next core PCE reading
Speaker 3: on a twelve month basis is going to be probably
Speaker 3: two point seven percent, So inflation isn't all the way there,
Speaker 3: but labor markets are loose enough. I think inflation is
Speaker 3: coming down, but there's still narrow perils on either side
Speaker 3: of reinflation and reception, but a broad path to a
Speaker 3: self lending in between those.
Speaker 4: Paul takes one of the big risks, at least according
Speaker 4: to Ardie Ardenny, who is just on with us. You
Speaker 4: wrote this terrific, I bet in the Wall Street Journal,
Speaker 4: terrific writing. I want to start with just the lead sentence.
Speaker 4: The first modern presidential race between two candidates with undergraduate
Speaker 4: degrees and economics hasn't thrilled economists.
Speaker 5: Why not, Jason?
Speaker 3: You know, campaigns are never the place where you're going
Speaker 3: to completely thrill economists. But I think an awful lot
Speaker 3: is the odors want to hear incredibly simple solutions to things.
Speaker 3: Price gouging, stop Japanese investment in US steel mills, a
Speaker 3: whole new areas that are in tact like tips, and
Speaker 3: you know, none of these are ones that any economist
Speaker 3: would recommend, but you know, there's just quite a lot
Speaker 3: of pandering out there.
Speaker 4: Well, but at this point some people would say, we
Speaker 4: always get this to some degree, right, I mean, we
Speaker 4: get pandering, we get promises that don't get fulfilled. You've
Speaker 4: been in the political sphere before. How different is this time?
Speaker 5: You know?
Speaker 3: It feels a bit different. There's things I like in
Speaker 3: these campaigns too, especially an awful lot I like in
Speaker 3: the Harris campaign. So I don't want to say it's
Speaker 3: all negative. It feels like more because there's more things
Speaker 3: around limiting trade and controlling prices. A certain type of
Speaker 3: government intervention as opposed to the standard you promising lots
Speaker 3: of tax cuts or spending increases is more than normal thing.
Speaker 3: This feels to me, the more interventionists, more getting in
Speaker 3: the way of markets right after they've actually been really
Speaker 3: quite successful.
Speaker 6: And Jason, aren't they both doing this? I mean, Kamala
Speaker 6: Harris was talking about price gouging on the federal level,
Speaker 6: and then you have Donald Trump over the weekend talking
Speaker 6: about capping credit card interest rates. Aren't these both proposals
Speaker 6: price controls in the US economy.
Speaker 3: Yeah, I mean Donald Trump doesn't seem to be the
Speaker 3: type of person that respects free markets, competition, and all
Speaker 3: the things that go into it. He believes very much
Speaker 3: in a strong government. When he was president the first time,
Speaker 3: he tried to direct investment this way and that. So yeah,
Speaker 3: I don't think he's a particularly free market gun.
Speaker 6: Can you give us a sense of how you view
Speaker 6: if Donald Trump's not a free market guy, who is
Speaker 6: Kamala Harris?
Speaker 3: You know, I'm looking forward to that speech of this week.
Speaker 3: I think we'll hear more about how she defines herself economically.
Speaker 3: To a first approximation, you could expect a continuation of
Speaker 3: the types of policies we saw in the bidenministration, but
Speaker 3: remember a very very different context. I thought the initial
Speaker 3: stimulus was too large, but that's not going to repeat itself.
Speaker 3: We're not going to have, hopefully knock on wood, another
Speaker 3: massive global pandemic that will create the conditions for something
Speaker 3: like that. So, you know, there have been some some
Speaker 3: whispers about being more pro business. She spent more time
Speaker 3: with CEOs than President Biden. Did you know, pro business
Speaker 3: has his pros and cons, But on balance, I think
Speaker 3: wouldn't be a bad direction to move just a little
Speaker 3: bit in the way of right.
Speaker 6: Now, how different would we see a Kamala Harris as
Speaker 6: a president if we get a sweep versus gridlock in Washington.
Speaker 3: You know, I'm not sure about the whole theory that
Speaker 3: gridlock is the most fiscally responsible outcome here. You know,
Speaker 3: with gridlock you're going to be able to extend an
Speaker 3: awful lot of the tax cuts. It's going to make
Speaker 3: it hard to enact deficit reduction. In the past, you've
Speaker 3: seen the parties make deals where one party gets extra
Speaker 3: defense spending in exchange for the other getting non defense spending.
Speaker 3: So the whole gridlock is good for the deficit thesis,
Speaker 3: I'm really not sure. I believe if you had a
Speaker 3: certain number of Democrats there the taxes you could raise
Speaker 3: that you couldn't raise in divided government, and that might
Speaker 3: result in a lower deficit than you'd otherwise have.
Speaker 4: Jason, I want to finish where we begin. You begin
Speaker 4: by saying that economists don't like the kind of tariffs
Speaker 4: that either side are proposing, the kind of limits to
Speaker 4: trade that we're seeing proposed, and yet we've seen increasing
Speaker 4: threats to the supply chain we've seen increasing questions about
Speaker 4: national security issues raised by certain fissures, the breakdowns that
Speaker 4: we've seen. If we do get some of these gates,
Speaker 4: some of these tariffs which both sides are proposing, does
Speaker 4: that increase the risk of inflation or reignition of inflation
Speaker 4: a really material way next year.
Speaker 5: Yeah.
Speaker 3: Look on tariffs is a massive difference between these candidates.
Speaker 3: Donald Trump is calling for ten to twenty percent tariffs
Speaker 3: on everything coming into the United States. That's stuff that
Speaker 3: we're just not going to be making here, like ballpoint pens,
Speaker 3: that stuff coming from countries that are close allies like Australia.
Speaker 3: There's just no coherent theory around that, and it's just
Speaker 3: at a scale that dwarfs anything that you've seen done
Speaker 3: in the Biden administration or I think plasantly we'd be
Speaker 3: done in the Harris administration. So absolutely, you follow through
Speaker 3: on the Trump tariffs, you were going to get a
Speaker 3: burst of inflation and a real quandary for the FED
Speaker 3: because it'll both lower economic growth and raise inflation at
Speaker 3: the same time.
Speaker 2: Jason, we've got to leave it there. We'll continue that
Speaker 2: conversation on the FED and the prospect maybe of rethinking
Speaker 2: Ray cuts with ray hikes in twenty twenty five. If
Speaker 2: that is the direction of travel, Jason Furman there at
Speaker 2: the Harvard Kennedy School, Let's turn back to the market. Secondly,
Speaker 2: futures right now up a quarter of one percent on
Speaker 2: then as that one hundred, looking ahead to a busy
Speaker 2: week of data and FED speak purchase ReRAM of Barclay
Speaker 2: saying the following, even the fifty basis point kind appears
Speaker 2: to have been a close call. The outcome bears the
Speaker 2: distinct footprints, imprints of a compromise with hawks, trading the
Speaker 2: fifty basis point cut in favor of hawkish messaging and
Speaker 2: a relatively high bar for the unemployment rate to warrant
Speaker 2: another aggressive cut. Pooja joins us now for more, Pooja,
Speaker 2: I just want to get to your growth outlook, and
Speaker 2: I just want to sit on your GDP outlook. Did
Speaker 2: you raise your GDP out look after getting that surprise
Speaker 2: move from the Fed last week?
Speaker 5: We did.
Speaker 7: We did good morning first of all, you know, and
Speaker 7: we did raise it by about ero point five percent
Speaker 7: ditch points for the end of Q four. So we're
Speaker 7: still penciling in two percent growth for the fourth quarter
Speaker 7: of this year, and then we've got a similar piece
Speaker 7: of growth in fact through the end of next year.
Speaker 7: Some of that was, of course, the easing and financial
Speaker 7: conditions that we've seen over the bar. You know, a
Speaker 7: couple of weeks we track the fed FCIG measure, which
Speaker 7: translates you know, financial conditions into the impulse for growth
Speaker 7: and it does suggest that growth could look better. So, yes,
Speaker 7: to your question, we have raised our GDP forecast modestly
Speaker 7: in the near horizon.
Speaker 2: Yeah, how does that line up with your view on
Speaker 2: the Fed's next move and the moves through twenty twenty five.
Speaker 5: Yeah, that's a good question.
Speaker 7: So look, our own baseline is for two twenty five
Speaker 7: basis points cuts this year, so that's you know, broadly
Speaker 7: in line with the medium projection for twenty twenty four.
Speaker 7: For twenty twenty five, we've got three twenty five basis
Speaker 7: points cuts, so that's a total of seventy five as
Speaker 7: opposed to one hundred basis points cut that the FOMC
Speaker 7: medium has And that's really predicated on the view that
Speaker 7: you know, the economy is going to look pretty decent.
Speaker 7: We don't have the unemployment rates staying you know, at
Speaker 7: four point four percent, which is what the FOI s
Speaker 7: has We in fact do see it taking lower. So
Speaker 7: we do think that, you know, they could afford to
Speaker 7: slow the pace of rate cuts going into twenty twenty five.
Speaker 4: Put you wrote something in your recent report that I
Speaker 4: thought was fascinating. Whatever was gained by the feds fifty
Speaker 4: basis point rate cut may have come at a significant cost.
Speaker 4: And you go on to say that it seems quite
Speaker 4: likely similar Wall Street Channel articles again to what we
Speaker 4: saw ahead of this latest fifty basis point rightcut during
Speaker 4: that blackout period coming up. Any blackout period will be
Speaker 4: interpreted as legitimate signals leading to unnecessary noise. This cost
Speaker 4: may well exceed whatever benefit the FED achieved by front
Speaker 4: loading one cut in our view, Can you just elaborate
Speaker 4: on how much this adds to potential uncertainty for you?
Speaker 5: Yeah, I think that's a great point.
Speaker 7: So, you know, just to take a step back and
Speaker 7: to recap what happened. You know, before the FED went
Speaker 7: into the blackout period, we had a bunch of data
Speaker 7: in hand.
Speaker 5: I think the last print we had.
Speaker 7: Was you know, the the non vampairo we heard from
Speaker 7: FMC officials, namely you know Waller FMC member Williams. And
Speaker 7: you know, the markets were essentially quite content to price
Speaker 7: in a twenty five basis points ratecut. That was our
Speaker 7: baseline as well. Everything looked good and then you know,
Speaker 7: as you mentioned, we've got a bunch of these articles
Speaker 7: and suddenly it raised the question and you know, put
Speaker 7: the possibility that the FED could perhaps you know, go
Speaker 7: a little more aggressive and go fifty basis points, and
Speaker 7: then you know, the pricing moved, and surprisingly, the FED
Speaker 7: actually ratified that movement market pricing. And we found that
Speaker 7: quite you know, quite surprising, to be honest, because it
Speaker 7: did not come on the back of data and in
Speaker 7: fact came on the back of a bunch of articles.
Speaker 7: And what this means is, if you know, something like
Speaker 7: if there's a precedent for this, now, it's quite possible
Speaker 7: that there's going to be a lot of noise and
Speaker 7: volatility around around the blackout period if we get more
Speaker 7: news information this way.
Speaker 5: And in terms of the fact.
Speaker 7: That the FED did not gain much is you know,
Speaker 7: the markets are still pricing in about the same amount
Speaker 7: of rate cuts as they work before the.
Speaker 5: News articles came out. So it's not very clear.
Speaker 7: To us what the FED achieved by by ratifying market
Speaker 7: expectations going this route.
Speaker 4: This might sound like a dumb question, but what is
Speaker 4: the actual economic cost of of a little bit more
Speaker 4: volatility around the blackout period?
Speaker 5: Well, I think it can.
Speaker 7: It can get you know, markets to run away with
Speaker 7: the with the expectations. It's you know, you would think
Speaker 7: that the data, hard data on economic activity.
Speaker 5: What you're officially hearing from.
Speaker 7: The f O and C guides market expectations. But if
Speaker 7: you have you know, something like this, it can lead.
Speaker 5: To a lot of volatility.
Speaker 7: Market pricing could go different ways, and then if the
Speaker 7: FED outcome looks very different to how the markets have moved,
Speaker 7: it can create financial market volletin.
Speaker 5: So I think that was the point that we were
Speaker 5: trying to make.
Speaker 7: That it creates unnecessary noise, especially after an error where
Speaker 7: FED communication has been really on point and they've really
Speaker 7: made an effort to do this so.
Speaker 6: Well, given this, do you think the FED now has
Speaker 6: a credibility problem?
Speaker 7: That doesn't seem like it. When we think of monetary
Speaker 7: policy credibility, we do tend to look at inflation expectations, right.
Speaker 7: The credibility comes from the fact that how committed are
Speaker 7: they towards their dual mandate and right now, there's no
Speaker 7: question that they're very committed. You know, it does seem
Speaker 7: like the focus is a little bit more on the
Speaker 7: labor markets than it is on inflation, as it should
Speaker 7: be given the inflation outcomes are pretty good.
Speaker 5: So I think it's too early.
Speaker 7: To start questioning any of that, but it does create
Speaker 7: a bit of a kink in the communication policy PJ.
Speaker 2: We've got to leave it there a free share to
Speaker 2: catch up.
Speaker 5: With.
Speaker 2: It's around of time. But to continue the conversation. Bob
Speaker 2: At of Unlimited bub good morning, and welcome to the program.
Speaker 1: Good morning.
Speaker 2: What did we achieve with the fifty paces point right
Speaker 2: cut last week at the Federal Reserve?
Speaker 1: Well, I think the biggest thing that the Fed highlighted
Speaker 1: was that they were trying to paint the picture of
Speaker 1: a strong economy and sufficient disinflation that they can deliver
Speaker 1: big cuts relatively quickly into that scenario. Now you can
Speaker 1: argue whether you actually believe that that's true, but I
Speaker 1: think the path that they're laying out they're committed to,
Speaker 1: and they believe it's data driven because they believe that
Speaker 1: the inflation numbers are going to get back to their
Speaker 1: two percent mandate, and that's very interesting for markets. It
Speaker 1: might be too easy into a hot economy which got
Speaker 1: a lot of effects, second and third order effects that
Speaker 1: they might not expect. You believe in disinflation, No, probably not.
Speaker 1: I think the thing that's interesting you inflation is still
Speaker 1: running above the FEDS band aid. We have to remember
Speaker 1: that no matter how you slice it, and easy into
Speaker 1: that environment when you have a hot economy means that
Speaker 1: we're probably more likely to get acceleration rather than deceleration
Speaker 1: head The thing that's interesting about that is that the
Speaker 1: FED probably won't see that data come out until they've
Speaker 1: cut a few hundred basis points, and only then will
Speaker 1: they be held accountable for the fact that the disinflation
Speaker 1: might have reversed. And so I think it's a tricky
Speaker 1: period over the course of the next fifteen eighteen months
Speaker 1: when the FED isn't going to get the feedback loop
Speaker 1: that their policy is too easy.
Speaker 4: Just to put a bow on that, are you saying
Speaker 4: that right now the risk of a reinflationary kind of
Speaker 4: moment is greater or less priced into a market and
Speaker 4: more real than say a downdraft and gross Well, certainly.
Speaker 1: It's less priced into markets. When you look at long
Speaker 1: term inflation expectations, the expectation is for you for inflation
Speaker 1: to be at two percent or below two percent essentially forever.
Speaker 1: And given the geopolitical dynamics, given the FEDS easing into
Speaker 1: a relatively strong economy, given the fact that you start
Speaker 1: you still see a lot of sticky dynamics and inflation,
Speaker 1: particularly related to wages, which are showing some signs of reaccelerating.
Speaker 1: That whole picture doesn't really align with the probabilities of
Speaker 1: a certainty around two percent inflation and much more likely
Speaker 1: that we have higher inflation ahead rather than lower inflation.
Speaker 4: Normally, somebody with that kind of view would be bullish,
Speaker 4: because if you believe in this sort of strong economy
Speaker 4: that could foster some reignition of inflation that would be
Speaker 4: probably positive for equity valuations. But you wrote the stock
Speaker 4: market is priced perfection, and so far this quarter is
Speaker 4: providing plenty of data points that the perfection is unlikely
Speaker 4: to be achieved in reality.
Speaker 1: Why well, I think when you're trading markets, you got
Speaker 1: to trade against what the price and expectations are, and
Speaker 1: we're at pees that are almost as high as they
Speaker 1: were during the tech boom. We have forward earnings growth
Speaker 1: expectations in the mid teens. That's a pretty strong scenario
Speaker 1: already priced into the markets.
Speaker 5: Now.
Speaker 1: The FED is helping that along, and that's probably a positive.
Speaker 1: But I think the story is much more around being
Speaker 1: long stocks relative to bonds, because that's the scenario, you know,
Speaker 1: of the growth reacceleration that probably isn't fully priced into
Speaker 1: the market.
Speaker 2: Let's introduce China into the conversation. They're now exploiting disinflation,
Speaker 2: perhaps even deflation. How do the factor into your world
Speaker 2: view right now?
Speaker 1: Well, China's experiencing debt de leveraging, you know, akin to
Speaker 1: what happened in Japan, and akin to classic balance sheet recession,
Speaker 1: a classic balance sheet recession, and the policymakers there are
Speaker 1: maybe driven by motivations that are not related to macroeconomic policy,
Speaker 1: more like political motivations. And so for whatever reason, they're
Speaker 1: choosing not to respond to the situation. And so China's
Speaker 1: probably in this malaise for the foreseeable future. I think
Speaker 1: the effects on the West are actually relatively limited. And
Speaker 1: the reason why that is is, you know, China's deflationary
Speaker 1: impulse has been basically the same for the last couple
Speaker 1: of years. Probably China is not going to accelerate in
Speaker 1: terms of getting a deeper and deeper or a worse
Speaker 1: rate of deflation going on in the economy. And if anything,
Speaker 1: you've seen it tick up. And so the big picture
Speaker 1: is it's not it's probably not the main story that's
Speaker 1: going on. When you're looking at US inflation, Western inflation
Speaker 1: in general. What really matters. It's the labor markets. It's
Speaker 1: all about the labor markets. It's all about that wage data.
Speaker 1: If you look at the Atlanta Fed wage tracker data,
Speaker 1: we're one to two points above where we were pre COVID,
Speaker 1: And unless you believe productivity has matched that increase, that's
Speaker 1: an underlying inflationary pressure that remains in the economy.
Speaker 6: But Bob, isn't the deflationary pressure coming from China has
Speaker 6: everything to do with the commodities market. Isn't that helping
Speaker 6: Western economies?
Speaker 1: Yeah, it certainly is an effect on the commodities markets.
Speaker 1: And if you're trading you know, copper or other direct
Speaker 1: commodities that China has a meaningful share of, that's going
Speaker 1: to be an influence, a meaningful influence on that supply demand.
Speaker 1: But the flow through of that to the to the
Speaker 1: US inflation picture, it's pretty tiny compared to rents, labor,
Speaker 1: the other sort of imported you know, the other sort
Speaker 1: of important goods costs that you know, cars, new cars,
Speaker 1: used cars, all of those things represent a much bigger
Speaker 1: impact on US inflation and US policy.
Speaker 6: Liz Young Thomas or guess at the top of the
Speaker 6: hours talking about one risk would be reacceleration of commodity prices.
Speaker 6: Do you see that where China is right now?
Speaker 1: Commodity prices have basically been trading, you know, and particularly
Speaker 1: oil prices, which is really the thing that matters, have
Speaker 1: been trading in a tight range over the last couple
Speaker 1: of years. After the move down eighteen months ago. You know,
Speaker 1: I don't see meaningful pressures on the upside or the downside.
Speaker 1: On the downside, on the downside, you've got a natural
Speaker 1: cap in terms of you know, suppliers taking barrels off
Speaker 1: the market if oil prices start to fall a little
Speaker 1: too much. And on the upside, there's still a lot
Speaker 1: of incremental production. You know, US production is near all
Speaker 1: time highs. A lot of production that can come into
Speaker 1: the market to put a cap on it. So that's
Speaker 1: probably not the big story here. It's much more about
Speaker 1: the sticky inflationary pressures in the economy. On the forward
Speaker 1: looking basis.
Speaker 4: How much would longer term yields have to rise to
Speaker 4: make you a buyer.
Speaker 1: Well, I think at this point you know you've got
Speaker 1: to see inflation expectations move up considerably here, So I
Speaker 1: think you know easily into the into the mid forest
Speaker 1: before you start to have a real conversation that that's
Speaker 1: a that's an attractive bid, particularly relative to stocks in
Speaker 1: a stronger growth environment.
Speaker 2: When you say inflation expectations, you're talking about markets based pricing.
Speaker 2: Are you talking about consumer surveys the likes we see
Speaker 2: from you, Mitch every other Friday.
Speaker 1: But what you're looking for, mostly mostly in terms of
Speaker 1: trading the bond market, it's all about price and break
Speaker 1: even inflation. And so that that's the thing that if
Speaker 1: you look at the market's basically priced to be, you know,
Speaker 1: at two percent or below essentially forever or inflation swaps,
Speaker 1: that's what you're trading. And those are the those are
Speaker 1: the areas of the market that look particularly under price.
Speaker 1: And the reality is if you're going to trade, if
Speaker 1: you're gonna get exposure to duration right now, buy the
Speaker 1: tips all right. You're you're seeing real yields that are
Speaker 1: still pretty good on any long term perspective. You know,
Speaker 1: around one and a half to two percent. That's a
Speaker 1: pretty good real yield if you can lock it in
Speaker 1: for twenty or thirty years without any rest.
Speaker 2: Bob, it's good to see you. Let's do it again soon.
Speaker 2: Thank you, sir, Bob Elliot. There are unlimited on this
Speaker 2: fun market. This is the Bloomberg Surveillance Podcast, bringing you
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