WEBVTT - Bloomberg Surveillance TV: January 3, 2025 0:00:00.080 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.600 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.440 --> 0:00:18.400 with Lisa Bromwitz and A Marie Hordern. Join us each 0:00:18.480 --> 0:00:21.360 day for insight from the best in markets, economics, and 0:00:21.400 --> 0:00:24.720 geopolitics from our global headquarters in New York City. We 0:00:24.760 --> 0:00:27.400 are live on Bloomberg Television weekday mornings from six to 0:00:27.480 --> 0:00:31.000 nine am Eastern. Subscribe to the podcast on Apple, Spotify 0:00:31.200 --> 0:00:33.479 or anywhere else you listen, and as always on the 0:00:33.479 --> 0:00:37.160 Bloomberg Terminal and the Bloomberg Business app. Liz john Thomas 0:00:37.200 --> 0:00:39.760 a so far writing twenty twenty five can be positive 0:00:39.800 --> 0:00:42.160 for business or be it less room for runaway stock 0:00:42.200 --> 0:00:46.960 returns At these valuation levels and high earnings expectations reevaluate 0:00:47.000 --> 0:00:50.279 the opportunities for buying. There's plenty out there, not at 0:00:50.280 --> 0:00:52.599 all time highs. Liz joins us now for more. Liz, 0:00:52.760 --> 0:00:54.840 good morning and happy New year. Let's talk about those 0:00:54.840 --> 0:00:56.760 opportunities elsewhere where are they? 0:00:58.240 --> 0:00:58.680 Sure? Well? 0:00:58.720 --> 0:01:00.680 Then you excuse me when you look get their earnings 0:01:00.720 --> 0:01:03.560 picture for twenty twenty five. There are some pretty big 0:01:03.600 --> 0:01:06.680 reversals that are expected, and I think investors need to 0:01:06.680 --> 0:01:09.520 pay attention to that. We get so obsessed with this 0:01:09.640 --> 0:01:12.199 tech trade and focusing on whether or not we should 0:01:12.240 --> 0:01:14.240 be in a handful of tech names or all of tech, 0:01:14.319 --> 0:01:15.320 or certain. 0:01:15.040 --> 0:01:15.760 Parts of tech. 0:01:16.160 --> 0:01:19.160 But the second best sector in the SMP for earnings 0:01:19.160 --> 0:01:22.080 growth is actually expected to be healthcare this year. And 0:01:22.120 --> 0:01:24.959 then you look at things like materials industrials that are 0:01:25.000 --> 0:01:28.080 going to see these big reversals from what their results 0:01:28.080 --> 0:01:30.319 were last year. So I think there are opportunities out 0:01:30.360 --> 0:01:32.399 there that are not trading at all time highs. 0:01:32.520 --> 0:01:36.080 How much are these opportunities torpedo if yields don't necessarily 0:01:36.400 --> 0:01:38.160 come down? 0:01:38.720 --> 0:01:41.720 Well, so the question about yields, we know that this 0:01:41.800 --> 0:01:44.119 four and a half percent level on the tenure has 0:01:44.200 --> 0:01:46.080 been really critical to the. 0:01:46.040 --> 0:01:47.680 Equity markets at large. 0:01:47.720 --> 0:01:50.160 You'd start getting to that four and a half percent level, 0:01:50.440 --> 0:01:54.160 markets at large, indices at large start to struggle when 0:01:54.200 --> 0:01:57.360 you're looking at the growth trade. So just a straightforward 0:01:57.360 --> 0:02:00.760 growth trade, that's what's going to get hit first and hardest, 0:02:01.200 --> 0:02:03.960 largely because a lot of those multiples have expanded so 0:02:04.160 --> 0:02:07.160 much over the last two years, but also because when 0:02:07.200 --> 0:02:09.600 you just think about the discount rate, this is rational 0:02:09.639 --> 0:02:13.640 for markets as yields rise the discount rate rises, which 0:02:13.680 --> 0:02:16.040 means that what you're willing to pay for a stock 0:02:16.320 --> 0:02:18.360 today is lower. 0:02:17.960 --> 0:02:20.720 Than what it would be if that discount rate was lower. 0:02:20.800 --> 0:02:24.080 So yields should put pressure on some of those growth names. 0:02:24.360 --> 0:02:27.519 That being said, I think investors are going to start 0:02:27.560 --> 0:02:32.360 looking for opportunities, growth of opportunities in different places, and 0:02:32.440 --> 0:02:35.760 some of those places might be pharma and biotech. Healthcare 0:02:36.120 --> 0:02:39.200 really legged the index last year. There's a lot of 0:02:39.639 --> 0:02:43.240 bad news priced in, bad expectations priced into healthcare right now. 0:02:43.320 --> 0:02:46.359 I think they're priced for a good opportunity in twenty 0:02:46.360 --> 0:02:48.920 five if investors need other growth options. 0:02:49.080 --> 0:02:52.160 Liz, when you talk to investors, how receptive are they 0:02:52.240 --> 0:02:55.160 to this message? Or basically you've either had big techs 0:02:55.160 --> 0:02:57.280 that have continued to outperform or people are getting a 0:02:57.320 --> 0:02:59.839 little bit nervous and everything has just gotten a little 0:02:59.840 --> 0:03:01.960 bit elevated and want to hide out in T bills. 0:03:02.000 --> 0:03:04.120 I mean, how much are people willing to sort of 0:03:04.120 --> 0:03:07.359 look into the nuance at a time where some people 0:03:07.400 --> 0:03:09.200 are worried about peak sentiment. 0:03:10.880 --> 0:03:14.120 Well, I think peak sentiment probably happened post election, and 0:03:14.160 --> 0:03:17.320 we baked in a lot of this optimism, but without 0:03:17.400 --> 0:03:20.280 policy clarity. So now we've gotten to a more rational level, 0:03:20.280 --> 0:03:22.880 we've had this little pullback. We've ended the year on 0:03:22.919 --> 0:03:24.679 a bumpy note. We sort of started the year on 0:03:24.720 --> 0:03:27.520 a bumpy note because we know that we need more clarity, 0:03:27.520 --> 0:03:31.360 we need more answers in order to actually trade those 0:03:31.400 --> 0:03:34.080 stocks for the long term. So how much are people 0:03:34.120 --> 0:03:36.880 looking into the nuance? I don't think so much yet, 0:03:37.000 --> 0:03:40.240 because we're in this waiting game between now an inauguration, 0:03:40.840 --> 0:03:43.440 now and when the cabinet goes in place now and 0:03:43.480 --> 0:03:45.480 when we have actual clarity on some of. 0:03:45.440 --> 0:03:46.480 These big policies. 0:03:47.160 --> 0:03:49.440 Also, when you look at a market that is so 0:03:49.760 --> 0:03:53.360 driven by momentum, people aren't looking at the nuances. We're 0:03:53.400 --> 0:03:56.440 looking at the momentum trade. We're looking at where sentiment 0:03:56.520 --> 0:03:58.840 is driving things. And a lot of times in those 0:03:59.000 --> 0:04:03.320 environments you have this fomo attitude and that does. 0:04:03.160 --> 0:04:04.720 Ignore a lot of the nuances. 0:04:04.760 --> 0:04:07.000 So I think as time goes on, and if tech 0:04:07.280 --> 0:04:09.560 continues to come under some pressure, and if there is, 0:04:09.960 --> 0:04:12.120 you know, perhaps a slow down in earning's growth, a 0:04:12.160 --> 0:04:14.800 slow down in the optimism, which doesn't necessarily mean a 0:04:14.840 --> 0:04:17.400 pull back, but just a slow down in the optimism, 0:04:17.680 --> 0:04:20.120 investors will start to look outside and have to be 0:04:20.160 --> 0:04:23.240 more nuanced about it. I think profit margins and earnings 0:04:23.279 --> 0:04:26.960 are going to be a really critical factor in investing 0:04:27.000 --> 0:04:28.960 this year, Liss. 0:04:28.360 --> 0:04:31.119 When you talk about policy clarity, have you gotten any 0:04:31.160 --> 0:04:34.120 clarity over the past forty eight hours from Washington and 0:04:34.200 --> 0:04:36.480 mar Lago when it comes to the one big, beautiful 0:04:36.480 --> 0:04:39.480 bill and hopefully getting it done by May. 0:04:40.279 --> 0:04:41.240 We've gotten a little. 0:04:41.320 --> 0:04:43.400 But as you guys mentioned earlier in the show, the 0:04:43.440 --> 0:04:46.800 market doesn't seem all that upset by it at this point. 0:04:47.000 --> 0:04:48.719 I don't think, first of all, it's a surprise to 0:04:48.720 --> 0:04:50.520 say that we're going to see more tariffs this year. 0:04:50.560 --> 0:04:52.960 I think we know that, but we still don't know 0:04:53.080 --> 0:04:56.479 exactly when that's going to happen, how much it's going 0:04:56.520 --> 0:04:59.520 to happen, and all the different places where it might 0:04:59.560 --> 0:05:03.240 actually impact market. So again, it's sort of just reinforces 0:05:03.240 --> 0:05:06.679 we're still in this waiting game. Things are proposals right now, 0:05:07.000 --> 0:05:10.880 they're not signed in, they're not affecting stocks at this point. 0:05:11.160 --> 0:05:11.320 Now. 0:05:11.360 --> 0:05:14.240 Of course, as they become more and more realistic, the 0:05:14.279 --> 0:05:15.400 stock market will price that. 0:05:15.440 --> 0:05:16.560 In ahead of time. 0:05:16.839 --> 0:05:19.440 But I think the message of today is that, Okay, 0:05:19.720 --> 0:05:21.640 we know there's going to be more tariffs coming. Maybe 0:05:21.680 --> 0:05:23.440 the message is a little bit different than what we 0:05:23.520 --> 0:05:26.479 thought two weeks ago, but it's still tariffs and we're 0:05:26.520 --> 0:05:29.039 still not sure, so we have to wait a little 0:05:29.040 --> 0:05:29.520 bit longer. 0:05:29.600 --> 0:05:32.360 Well, if it's still terrorsts regardless, even if they're more narrow, 0:05:32.560 --> 0:05:34.920 is it now time for companies essentially raise prices. 0:05:37.160 --> 0:05:38.840 I don't think that companies are going to get away 0:05:38.839 --> 0:05:40.960 with raising prices as much as they have over the 0:05:41.080 --> 0:05:44.920 last few years, because consumers now realize that inflation has 0:05:45.000 --> 0:05:48.080 come down. It was easier to pass through those costs 0:05:48.080 --> 0:05:51.760 and those price increases when inflation was rising wage growth 0:05:51.839 --> 0:05:52.400 was rising. 0:05:52.760 --> 0:05:54.400 Now we've got cooling wage growth. 0:05:54.440 --> 0:05:58.320 We've got CPI and PCE numbers that most people understand, 0:05:58.520 --> 0:06:00.320 or at least at a lower level than they were. 0:06:00.360 --> 0:06:03.560 Certainly not deflationary, but at a lower level than they were. 0:06:03.640 --> 0:06:07.039 So it's more difficult to justify a pricing pass through 0:06:07.080 --> 0:06:09.080 even with a tariff change. 0:06:09.200 --> 0:06:11.240 Liz, can you help us with the week ahead? We 0:06:11.320 --> 0:06:13.920 have one hundred and nineteen billion dollars of dead auctions. 0:06:13.960 --> 0:06:16.600 We have the key labor report that comes out on Friday, 0:06:16.839 --> 0:06:19.760 with the expectation of one hundred and sixty thousand jobs 0:06:19.800 --> 0:06:22.719 printed in December, and then we have the potential for 0:06:22.880 --> 0:06:27.560 truth postings or any other utterances around the Trump camp. 0:06:27.800 --> 0:06:30.560 Of those three which were most important for. 0:06:30.560 --> 0:06:34.359 You, I'm focused on the jobs report. We also have 0:06:34.480 --> 0:06:37.040 jolts this week. So when you look at just what 0:06:37.080 --> 0:06:39.200 the market had been focused on through most of twenty 0:06:39.240 --> 0:06:42.120 twenty four, it was jobs. We had turned our focus 0:06:42.160 --> 0:06:45.640 to the jobs market because it seemed as if inflation 0:06:45.800 --> 0:06:49.320 had been largely defeated. Now we've got this environment where 0:06:49.400 --> 0:06:53.720 jobs are still very important. Inflation has again become very important. 0:06:53.839 --> 0:06:56.520 So this week the story is going to be about jobs. 0:06:56.800 --> 0:06:59.680 I don't expect there to be any big surprises yet. 0:07:00.000 --> 0:07:02.360 I think what everybody is watching for is to make 0:07:02.360 --> 0:07:03.520 sure that we're still. 0:07:03.440 --> 0:07:05.000 Expanding the labor market. 0:07:05.160 --> 0:07:07.520 But one of the tenets of our twenty twenty five 0:07:07.600 --> 0:07:10.760 outlook is that we have low churn. 0:07:10.680 --> 0:07:12.320 In the labor market right now. And what I mean 0:07:12.360 --> 0:07:12.760 by that. 0:07:12.760 --> 0:07:15.960 Is low hiring, low quits, which means people just aren't 0:07:16.000 --> 0:07:19.920 moving around quite as much. So this idea of adding 0:07:19.920 --> 0:07:22.320 a ton of jobs every month, I don't think is 0:07:22.360 --> 0:07:25.360 something that investors are really looking for. What we're looking 0:07:25.400 --> 0:07:29.200 for is just no real deterioration in the labor market, 0:07:29.200 --> 0:07:31.520 because right now, as the Fed has mentioned, the labor 0:07:31.520 --> 0:07:34.880 market is still resilient and it's pretty well balanced. So 0:07:34.920 --> 0:07:36.880 what we need is for the labor market to stay 0:07:36.920 --> 0:07:39.440 stable while the rest of some of these bumps in 0:07:39.440 --> 0:07:40.680 the road figure themselves out. 0:07:40.760 --> 0:07:42.640 We will get a lot of labor markets data this week, 0:07:42.640 --> 0:07:45.600 including child's data tomorrow. Let's appreciate your time. It's going 0:07:45.640 --> 0:07:58.880 to say, let's young tell us that of sofi. David Malpass, 0:07:58.920 --> 0:08:01.920 writing in a wool streatch op ed, President Electrum was 0:08:02.040 --> 0:08:04.480 right last week when he raised the red flag over 0:08:04.520 --> 0:08:07.240 the debt limit. The outgoing government is leaving a Taylor 0:08:07.280 --> 0:08:10.800 made debt crisis for mister Trump that complicates his work 0:08:10.840 --> 0:08:15.320 to implement his mandate, cut taxes quickly and rebuild US strength. 0:08:15.560 --> 0:08:17.560 David joins us now for more. David, welcome to the show. 0:08:17.560 --> 0:08:19.000 So it's always good to catch out with you. I 0:08:19.000 --> 0:08:20.520 just want to address that one line of the op 0:08:20.640 --> 0:08:23.960 ed a Taylor made debt crisis. Can you just explain 0:08:24.000 --> 0:08:24.880 that a little bit more. 0:08:25.960 --> 0:08:29.200 That's right, this has been coming on for a year, 0:08:29.280 --> 0:08:30.080 for two years. 0:08:30.240 --> 0:08:33.760 That kind of planned it so that the new president, 0:08:33.840 --> 0:08:37.240 the next president would have the problem. So Congress spent 0:08:37.400 --> 0:08:39.760 all the money, and so it's Taylor made for a 0:08:39.800 --> 0:08:43.520 crisis because if you don't raise the debt ceiling, you 0:08:43.640 --> 0:08:47.840 have a default on the national debt. What I've wanted 0:08:47.880 --> 0:08:51.200 them to consider is rewriting the debt limit so that 0:08:51.280 --> 0:08:54.319 it actually works. You've got to stop the spending before 0:08:54.400 --> 0:08:57.839 it happens, rather than after you've already spent it. 0:08:58.280 --> 0:09:00.800 David, we heard over the weekend from my Johnson House 0:09:00.840 --> 0:09:03.880 Speaker that there is going to be one big, beautiful 0:09:03.880 --> 0:09:06.320 bill and it's going to probably come in April, and 0:09:06.360 --> 0:09:10.440 it will be put through by reconciliation to get all 0:09:10.559 --> 0:09:13.680 of Donald Trump's agendas in place. Where're speaking with Henrietta Trace, 0:09:13.760 --> 0:09:16.400 she said this could expand the deficit by some five 0:09:16.520 --> 0:09:19.560 trillion dollars. Do you think there is the will to 0:09:19.600 --> 0:09:22.280 start to revise the debt ceiling debate and some of 0:09:22.320 --> 0:09:25.240 these other issues to structurally reduce the deficit under the 0:09:25.240 --> 0:09:26.199 Trump administration. 0:09:27.480 --> 0:09:31.280 I think there's a strong will to reduce spending. One 0:09:31.320 --> 0:09:33.920 of the things going on is Biden is leaving the 0:09:34.040 --> 0:09:37.880 copboard bear as he leaves office. That means they've spent 0:09:38.080 --> 0:09:41.240 up as much as they can on the current fiscal year. 0:09:41.920 --> 0:09:43.400 They've also they're in the. 0:09:43.320 --> 0:09:48.040 Process of obligating every day that goes by. They're obligating 0:09:48.120 --> 0:09:51.720 huge amounts of money that can't be gotten back through 0:09:51.760 --> 0:09:55.360 the recision process. So if you make a grant and 0:09:55.400 --> 0:09:57.920 you obligate the funds, you can't get them back. 0:09:58.559 --> 0:10:00.840 And then another way that they've. 0:10:01.240 --> 0:10:03.360 The cupboard is bare, and then showing up in the 0:10:03.360 --> 0:10:08.720 bond market is they've kept the issuance of debt short term. 0:10:09.160 --> 0:10:12.880 So one of the biggest decisions facing the new administration 0:10:13.320 --> 0:10:17.280 will be what maturity to issue at and does the 0:10:16.559 --> 0:10:19.920 Federal Reserve buy back all of the long term debt? 0:10:20.240 --> 0:10:23.280 You know, the Fed is this giant hedge fund. 0:10:23.360 --> 0:10:26.880 It's owning all of the long maturity are a big 0:10:26.960 --> 0:10:29.880 chunk of the long maturity bonds. So I think over 0:10:29.920 --> 0:10:33.319 the last three months they've lost maybe six hundred and 0:10:33.360 --> 0:10:34.719 fifty billion. 0:10:34.520 --> 0:10:38.280 Dollars just on having a bad bond trade. 0:10:38.320 --> 0:10:40.960 You know, yields have gone up, so they're the big 0:10:41.080 --> 0:10:45.160 holder of long term yields. So the consumer feels okay, 0:10:45.640 --> 0:10:49.560 but the government itself is losing massive amounts of money 0:10:49.760 --> 0:10:53.839 until they find a way to slow down the spending machine. 0:10:54.120 --> 0:10:54.679 Do you think. 0:10:54.800 --> 0:10:56.480 Just to sort of build on that, David, that the 0:10:56.520 --> 0:10:58.920 reason why we've seen that rise in longer term yields 0:10:59.160 --> 0:11:00.960 is because of the death said, is this truly the 0:11:00.960 --> 0:11:02.920 bond vigilantes coming back to the table. 0:11:04.360 --> 0:11:05.320 There's some of that. 0:11:05.400 --> 0:11:07.839 The market looks ahead and says is do you have 0:11:07.880 --> 0:11:11.040 a mechanism to actually control yourself? 0:11:11.640 --> 0:11:14.440 And so that you know, the bond yields are having 0:11:14.559 --> 0:11:18.680 multiple problems. One is the Fed's models are really broken. 0:11:19.040 --> 0:11:21.160 So the Fed is basically saying, if. 0:11:21.040 --> 0:11:24.040 You have more growth in the economy, we assume it 0:11:24.120 --> 0:11:29.000 will be inflationary, and so we will have higher interest rates. 0:11:29.200 --> 0:11:31.599 So it's a broken models problem. 0:11:31.960 --> 0:11:35.200 But then second, as I mentioned, the duration of the 0:11:35.240 --> 0:11:40.440 government was held down. The FED was buying the treasury 0:11:40.520 --> 0:11:43.840 issued some long term treasuries, but then the Fed bottom 0:11:44.000 --> 0:11:47.600 back and so this is a major problem because you 0:11:47.679 --> 0:11:50.160 have to get over the hump. You can do that 0:11:50.400 --> 0:11:55.440 through confidence, and that means are you able to repeatably, 0:11:55.760 --> 0:11:58.440 you know, over and over again. Cut spending. Do you 0:11:58.480 --> 0:12:02.560 have a mechanism to act actually control what Washington spends. 0:12:02.840 --> 0:12:04.959 That's yet to be seen, but I think they can 0:12:05.000 --> 0:12:05.319 do it. 0:12:06.000 --> 0:12:08.200 David, I don't really see any restraint right now with 0:12:08.240 --> 0:12:12.320 the incoming Trump administration. President Trump talked about yesterday one 0:12:12.440 --> 0:12:16.400 powerful bill, border security, energy policies, renewing Trump airor tax 0:12:16.480 --> 0:12:20.040 cuts except making them better to include no tax on tips. 0:12:20.040 --> 0:12:23.439 And we're talking about a president who spent eight trillion 0:12:23.559 --> 0:12:25.880 dollars or edit eight trillion dollars to deficit during Trump 0:12:25.920 --> 0:12:30.400 one point zero. So where do you see the appetite 0:12:30.520 --> 0:12:32.040 of Trump to want to cut spending. 0:12:33.280 --> 0:12:36.560 It's going to be a combination of increasing growth and 0:12:36.720 --> 0:12:41.679 production within the economy and making the existing spending more efficient. 0:12:41.960 --> 0:12:44.439 So if you get more from it and you have 0:12:44.920 --> 0:12:46.880 fewer people but fewer. 0:12:47.080 --> 0:12:50.200 Obligated funds, that's going to be the trick. 0:12:50.760 --> 0:12:54.360 But I want to really put emphasis on this idea 0:12:54.360 --> 0:12:57.319 of markets being forward looking and looking at the output 0:12:57.480 --> 0:13:00.920 of the economy. If you can change the inner system 0:13:01.280 --> 0:13:05.360 that means both the production but also the transmission of energy, 0:13:05.880 --> 0:13:09.160 that's going to have a big downward effect on inflation. 0:13:09.559 --> 0:13:12.640 The FED doesn't have that in its models that you know, 0:13:12.760 --> 0:13:15.440 each of the Fed's models are broken. One is on 0:13:15.559 --> 0:13:18.600 how you set interest rates. One is how you use 0:13:18.720 --> 0:13:22.319 the balance sheet. You know they've used it very harmfully 0:13:22.600 --> 0:13:24.360 in terms of the lost money. 0:13:24.880 --> 0:13:28.079 And then third is their regulatory policy. The FED has 0:13:28.120 --> 0:13:30.319 this massive control over. 0:13:30.320 --> 0:13:34.160 Lending to small businesses and that hasn't been going well. 0:13:34.280 --> 0:13:38.000 But that can be repaired and fixed. You get more output, 0:13:38.320 --> 0:13:42.160 less inflation, and you can bring interest rates and bond. 0:13:42.000 --> 0:13:44.800 Yields down, something you've talked about a few times, David. 0:13:44.840 --> 0:13:46.960 We'll have this conversation again in the near future, I'm sure. 0:13:47.040 --> 0:14:00.560 David Malpasta, the former World Bank President, the former New 0:14:00.600 --> 0:14:03.120 York Fed President, built downly calling for the Central Bank 0:14:03.200 --> 0:14:06.079 to improve its communication, writing The better the quality of 0:14:06.080 --> 0:14:09.800 the Fed's communication, the more accurately market participants can assess 0:14:09.840 --> 0:14:12.840 how policy is likely to change. This tightens the linkage 0:14:12.880 --> 0:14:17.360 between monetary policy actions and financial conditions, which increases the 0:14:17.400 --> 0:14:21.600 speed and precision of monetary policy transmission. Bill John Justice 0:14:21.640 --> 0:14:23.560 now for more. Bill, Welcome to the show, sir, and 0:14:23.600 --> 0:14:25.400 a very happy new year to you. Where do you 0:14:25.400 --> 0:14:27.960 think the FED is struggling to communicate right now? On 0:14:27.960 --> 0:14:29.359 what issue specifically? 0:14:30.400 --> 0:14:34.320 I think the smary economic projections last month was confusing 0:14:34.320 --> 0:14:37.400 the people because there was a pretty big up for 0:14:37.600 --> 0:14:41.480 revision to the inflation estimates for twenty twenty five, Yet 0:14:41.880 --> 0:14:44.760 it was hard for pol to explain the sources of that. 0:14:45.080 --> 0:14:48.880 He noted that the participants don't operate from a common 0:14:48.920 --> 0:14:53.080 set of assumptions. Some were assuming effects of Trump tieroff 0:14:53.080 --> 0:14:55.840 and deportation policies, some weren't, and some didn't say whether 0:14:55.880 --> 0:14:58.520 they were or weren't. So each of the projections has 0:14:58.560 --> 0:15:01.320 a different set of assumptions embedded in it, which makes 0:15:01.360 --> 0:15:05.200 it very hard to anticipate what the FED thinks is 0:15:05.240 --> 0:15:06.880 going to happen and how they're going to react to it. 0:15:07.320 --> 0:15:09.480 Bill is the issue for the FED right now communication 0:15:09.800 --> 0:15:13.880 or just not necessarily understanding which direction this economy is 0:15:13.880 --> 0:15:14.360 going to go in. 0:15:15.880 --> 0:15:16.160 Both. 0:15:17.000 --> 0:15:20.360 I think the problem is they're having trouble communicating how 0:15:20.400 --> 0:15:22.920 they're likely to react to the Trump policies. 0:15:23.200 --> 0:15:25.640 Obviously, if terists are broad based, that is one effect. 0:15:25.680 --> 0:15:29.440 If they're much more targeted, as the Watching Post report suggests, 0:15:29.880 --> 0:15:31.600 that has a different implication. So there's a lot of 0:15:31.600 --> 0:15:33.440 the I'm certainly about what Trump policies are going to be, 0:15:33.640 --> 0:15:36.040 and of course the FED is uncertain about how the 0:15:36.080 --> 0:15:39.240 economy itself is going to perform. You know, a key 0:15:39.400 --> 0:15:41.120 issue for the FED in terms of the economy is 0:15:41.360 --> 0:15:43.280 the labor market going to continue to weaken or not. 0:15:44.360 --> 0:15:46.360 Has been very clear that he thinks the labor market 0:15:46.400 --> 0:15:48.920 is still weakening and he doesn't want to weaken any further. 0:15:49.320 --> 0:15:52.560 So that's why Friday's payroll and ployer report is so important. 0:15:52.160 --> 0:15:54.040 When you talk about a reaction function. This has been 0:15:54.080 --> 0:15:56.120 one of the big quag buyers for people. What is 0:15:56.160 --> 0:15:59.360 sort of the scenario analysis that the FED is doing 0:15:59.400 --> 0:16:01.240 and how they're going to respond to it. Do you 0:16:01.240 --> 0:16:03.960 think that they have that scenario analysis or do you 0:16:03.960 --> 0:16:07.480 think that increasingly, by default, it is becoming an increasingly 0:16:07.560 --> 0:16:09.160 data point dependent federal reserve. 0:16:10.480 --> 0:16:13.160 Well, there's definitely a scenario analysis that takes place before 0:16:13.200 --> 0:16:16.720 each meeting. The staff prepares what's so called tealbook, and 0:16:16.760 --> 0:16:19.200 in the Tealbook there's a baseline forecast, but there's also 0:16:19.320 --> 0:16:23.480 these alternative simulations which suggests how the economy might evolve 0:16:23.560 --> 0:16:24.880 if things happen differently. 0:16:24.960 --> 0:16:27.360 I think that's another problem with the Summary of Economic Projections. 0:16:28.160 --> 0:16:30.960 It's a modal forecast and it doesn't talk about at 0:16:31.000 --> 0:16:33.320 all about what could happen if things turn out differently 0:16:33.360 --> 0:16:36.800 than what FED officials expect. So I think one thing 0:16:36.840 --> 0:16:39.480 the FED could do is actually do what a lot 0:16:39.520 --> 0:16:43.120 of foreign central banks. Do is actually have a consensus forecast? 0:16:43.520 --> 0:16:46.120 Difficult to do with a committee of nineteen people spread 0:16:46.160 --> 0:16:48.520 all over the country, but you could actually start to 0:16:48.520 --> 0:16:49.840 publish the staff forecast. 0:16:50.080 --> 0:16:52.560 There is a staff forecast available before. 0:16:52.280 --> 0:16:53.880 Every meeting, and if you put that out there, you 0:16:53.960 --> 0:16:57.200 have a better sense of what the baseline assumptions of 0:16:57.240 --> 0:16:57.800 the FED are. 0:16:58.120 --> 0:16:58.760 But Bill isn't. 0:16:58.760 --> 0:17:02.240 One of the issues that's problems is because they don't 0:17:02.280 --> 0:17:04.800 want to or can't be seen talking about policy. Do 0:17:04.840 --> 0:17:07.200 you just think the FED should be more open about 0:17:07.480 --> 0:17:09.200 policy all of the members. 0:17:10.920 --> 0:17:14.119 Well, clearly what happens on tarists and deportation is going 0:17:14.160 --> 0:17:17.160 to have a big effect on the commy in twenty 0:17:17.160 --> 0:17:20.800 twenty five, so I don't think you can avoid thinking 0:17:20.800 --> 0:17:23.399 about that in terms of making your economic forecast. I 0:17:23.400 --> 0:17:25.640 think the FED is reluctant to talk about it because 0:17:25.640 --> 0:17:28.919 he doesn't want to get self engaged into this political discussion, 0:17:29.440 --> 0:17:31.720 and I think they're worried that that will politicize the FED, 0:17:32.040 --> 0:17:34.639 so they're trying to think about it with how talking 0:17:34.640 --> 0:17:35.840 about it at the same time. 0:17:36.080 --> 0:17:38.639 Is your main concern right now with the FED communications 0:17:38.720 --> 0:17:41.399 or would you do anything differently on policy? 0:17:42.680 --> 0:17:44.840 I think they are in a pretty good place right now. 0:17:44.880 --> 0:17:48.000 I think that they understand that the commy is doing okay, 0:17:48.960 --> 0:17:53.240 Inflation is a little bit sticky, so it makes sense 0:17:53.280 --> 0:17:55.520 to wait. They also understand that there's a lot of 0:17:55.560 --> 0:17:58.480 uncertainty about what policy is going to be forthcoming. And 0:17:58.520 --> 0:18:00.680 then Paul said when things are uncertain, to slow down. 0:18:00.840 --> 0:18:02.240 So I think that all makes a lot of sense. 0:18:02.280 --> 0:18:05.399 I think the big disconnect I think between markets and 0:18:05.440 --> 0:18:07.359 the FED is where is the FED heading over the 0:18:07.440 --> 0:18:10.040 medium to longer term. The Fed says we're heading to 0:18:10.080 --> 0:18:12.760 three percent federal funds rate. The market says we're heading 0:18:12.760 --> 0:18:14.919 to something more like a four percent federal fund rate. 0:18:15.000 --> 0:18:17.880 So there's a pretty big gap about what is a 0:18:17.920 --> 0:18:21.080 neutral monitary policy. FED thanks the neutral manitary policy is 0:18:21.160 --> 0:18:23.359 quite a bit easier than we are today. The market 0:18:23.440 --> 0:18:26.159 thinks that the neutral manitary policy is slightly easier than 0:18:26.200 --> 0:18:26.960 where we are today. 0:18:27.280 --> 0:18:29.920 But what did you do with your own forecast when 0:18:29.920 --> 0:18:32.239 you had Trump come aga? In Volume one? How did 0:18:32.280 --> 0:18:34.680 you change things? Did you anticipate the changes to policy 0:18:34.840 --> 0:18:37.439 beforehand or react once it was introduced. 0:18:39.040 --> 0:18:40.240 I think I thought. 0:18:40.000 --> 0:18:41.920 That there was more risk in the forecast, So I 0:18:41.960 --> 0:18:44.080 think the biggest change for me was to talk about 0:18:44.119 --> 0:18:46.680 risk and uncertainty going up. And I think that's what's 0:18:46.720 --> 0:18:49.320 happened today. I mean, I think the big transition from 0:18:49.400 --> 0:18:51.800 Biden to Trump is under Biden, we sort of knew 0:18:51.840 --> 0:18:53.960 exactly what the policies were, and in fact, over the 0:18:54.040 --> 0:18:56.040 last two years, there hasn't really been much in terms 0:18:56.040 --> 0:18:58.880 of new policy initiatives. Now we're going into the Trump era, 0:18:59.119 --> 0:19:00.520 you know there's going to be a lot changes in 0:19:00.600 --> 0:19:03.040 policy and yet and we don't know yet they're what 0:19:03.080 --> 0:19:04.960 they're going to be. So I think we're going from 0:19:05.000 --> 0:19:07.399 a period of low uncertainty too much higher and certain in. 0:19:08.080 --> 0:19:09.679 That's what's got to get priced into markets. 0:19:09.720 --> 0:19:11.600 That's one reason why I think the bond market has 0:19:11.680 --> 0:19:13.760 done poorly over the last few months. 0:19:13.920 --> 0:19:16.320 Bill appreciate your time. As always built down to there, 0:19:16.320 --> 0:19:18.840 the former New York Fed President, looking out to twenty 0:19:18.880 --> 0:19:23.160 twenty five and beyond. This is the Bloomberg Surveillance podcast, 0:19:23.280 --> 0:19:27.360 bringing you the best in markets, economics, angiopolitics. You can 0:19:27.400 --> 0:19:30.160 watch the show live on Bloomberg TV weekday mornings from 0:19:30.160 --> 0:19:33.440 six am to nine am Eastern. Subscribe to the podcast 0:19:33.480 --> 0:19:36.680 on Apple, Spotify, or anywhere else you listen and as 0:19:36.720 --> 0:19:39.640 always on the Bloomberg terminal and the Bloomberg Business App.