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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business App. John Kirby, Admiral Kirby,

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Speaker 2: fantastic to catch up with you, sir. Busy weekend, I'm

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Speaker 2: sure for you and the administration, let's get straight into it.

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Speaker 2: We've heard from Iran at least they've indicated the matter

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Speaker 2: can be deemed concluded. I think we all want to know,

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Speaker 2: Admiral Kirby, whether Israel Is indicated the same thing.

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Speaker 3: I won't speak for the Israelis, I think you can

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Speaker 3: understand that. I believe the war cabinet is still deliberating

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Speaker 3: and making their decisions. The President had a very good

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Speaker 3: conversation with the Prime Minister right after or towards the

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Speaker 3: end of the attacks on Saturday night, and the President

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Speaker 3: was very direct that this was a.

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Speaker 4: Huge success, that Israel can be.

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Speaker 3: Proud that it doesn't stand alone, and that it has

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Speaker 3: superior military capability. Iran utterly failed and what they were

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Speaker 3: trying to achieve, and that that success alone sends a

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Speaker 3: strong message to Iran and to the region about Israel's

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Speaker 3: place there.

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Speaker 2: So could we just define success? How can we define

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Speaker 2: the weekend's events as a success. To see the first

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Speaker 2: direct strikes coming from Iranian soil on Israel, how is

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Speaker 2: that a success in any way shape or for.

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Speaker 4: Let's talk about what didn't happen.

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Speaker 3: Hardly any damage and the only impacts were to an

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Speaker 3: air base in central Israel, no real casualties except sadly,

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Speaker 3: a young civilian girl was critically injured. In the vast majority,

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Speaker 3: as the IDF have said, ninety nine percent of what

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Speaker 3: Aroon threw up in the air, drones and missiles never

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Speaker 3: landed either it failed or actually got shot down. So

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Speaker 3: that's what didn't happen. And what did happen was Israel

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Speaker 3: proved it has superior military capability and just as critically,

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Speaker 3: they don't stand alone. That the United the United States

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Speaker 3: stands with them. I think people are maybe not cognizant

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Speaker 3: of the fact that the President put US forces in

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Speaker 3: harm's way to help defend Israel for the first time,

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Speaker 3: American fighter pilots in the air shooting things down that

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Speaker 3: we're heading towards Israel, and they were extraordinarily successful in

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Speaker 3: doing so.

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Speaker 4: I think that's significant.

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Speaker 2: You're talking about a successful defense. I think a lot

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Speaker 2: of people also focused on the unsuccessful deterrents. The President said,

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Speaker 2: don't and they did, and we're trying to work out,

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Speaker 2: Admiral Kirby, in what way the US is able to

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Speaker 2: influence Iranian behavior.

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Speaker 4: Well.

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Speaker 3: The President prepositioned military forces in the region, which allowed

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Speaker 3: for that unprecedented successful defense. The President met with the

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Speaker 3: G seven leaders yesterday to talk about a unified diplomatic

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Speaker 3: response and to consider other options and alternatives to try

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Speaker 3: to hold Iran accountable for what it did on Saturday night.

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Speaker 3: Iran is increasingly isolated in the world, certainly in the region,

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Speaker 3: and Israel has proven that it has friends.

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Speaker 5: If Israel does not respond, is the new status quo

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Speaker 5: that Iran can strike Israel from its own soil and

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Speaker 5: there won't be a retaliation.

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Speaker 4: Again, I can't speak to that, Amory.

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Speaker 3: That's going to be up to the Prime Minister in

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Speaker 3: the War Cabinet to make those decisions.

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Speaker 4: We respect that it's a sovereign nation. They have to

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Speaker 4: make those decisions.

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Speaker 5: There's lots of reporting that the Biden administration that was

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Speaker 5: verbalizing to these really that they do not support a

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Speaker 5: counter strike. Isn't that in the sense taking one of

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Speaker 5: those tools out of the toolbox and brandishing it to

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Speaker 5: the world.

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Speaker 3: The tools that we took out of the toolbox were

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Speaker 3: pretty significant on Saturday night, Amory, ballistic missile destroyers in

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Speaker 3: the instrument helping shoot down ballistic missiles, fighter aircraft in

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Speaker 3: the air, other partners participating. There was a lot of

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Speaker 3: tools in the toolbox, and there's no question that Iran

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Speaker 3: recognizes the coalition that was put together to help Israel

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Speaker 3: defend itself. Again, I can't speak for what either side

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Speaker 3: will do going forward. All I can do is speak

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Speaker 3: for President Biden as commander in chief. He has since

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Speaker 3: October seventh, and he will continue going forward making sure

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Speaker 3: that we are meeting our commitments to Israel, but just

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Speaker 3: as critically that we're meeting our commitments to our own

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Speaker 3: national security interests in the region, making sure we have

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Speaker 3: the resources in place to protect our troops, our facilities,

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Speaker 3: and the missions that we're conducting there in the Middle East.

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Speaker 5: We've had sixty tons of arsenal fired upon Israel directly

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Speaker 5: from Iran. We've had six months of Iranian backed who

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Speaker 5: Thi's hitting as well, trying to hit even US vessels

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Speaker 5: in the Red Seat and disrupting global trade. We also

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Speaker 5: had an uptick of uranium enrichment by Iran. So to

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Speaker 5: get to this deterrence, what is the US willing to do?

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Speaker 5: We have sanctions in place, is the United States willing

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Speaker 5: to enforce them?

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Speaker 4: We have been enforcing sanctions, I mean, my goodness.

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Speaker 3: In the three and a half years of this administration,

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Speaker 3: we have implemented more than fifty sanctioned regimes, targeting more

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Speaker 3: than five hundred entities and individuals. And again I won't

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Speaker 3: preview coming sanctions or anything like that, but I can

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Speaker 3: tell you that additional sanctions are certainly not off the

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Speaker 3: table in terms of holding Iran accountable.

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Speaker 4: And take a look at.

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Speaker 3: The additional military resources that President Biden has added to

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Speaker 3: the region even before October seventh. This is something that

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Speaker 3: he's been keenly focused on, and as we saw from

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Speaker 3: Saturday night, Iran is increasingly isolated on the world stage.

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Speaker 3: They are increasingly making it harder for anybody in the

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Speaker 3: international community to be sympathetic to any of their inimical interests.

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Speaker 4: There Again, I think we've done a lot.

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Speaker 3: We'll continue to look at our options going forward, and

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Speaker 3: I suspect that we'll continue to hold Iran properly accountable.

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Speaker 5: Analcarry how are they isolated? They had a call with

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Speaker 5: the Saudis. They're sending all their oil to China, They're

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Speaker 5: sending Shaha drones to Russia. In March, Iranian oil output

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Speaker 5: hit a five year high.

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Speaker 4: Where is the enforcement.

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Speaker 3: There is enforcement of the sanctions. Memory again, this is

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Speaker 3: one of the most heavily sanctioned countries in the world,

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Speaker 3: and we're going to continue to look at our options

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Speaker 3: going forward to hold them properly accountable. As sanctions are

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Speaker 3: certainly not off the table, neither is going to making

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Speaker 3: sure that we've got the capabilities in the region and

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Speaker 3: we do to toward some of their destabilizing activity. You

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Speaker 3: talked about the uranium enrichment when the previous administration pulled

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Speaker 3: out of the Iran deal. It vastly accelerated the degree

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Speaker 3: to which Iran could start to spin up their centrifuges

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Speaker 3: and get closer to some.

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Speaker 4: Sort of breakout capability.

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Speaker 3: The President obviously tried, We tried, but Iran was not

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Speaker 3: negotiating any good faith to get back into that Iran deal.

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Speaker 4: But he also made clear that we will not allow

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Speaker 4: Iran to achieve a nuclear weapons capability.

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Speaker 3: We prefer to do that through diplomacy, but if not,

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Speaker 3: we've got other options available.

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Speaker 5: What's diplomacy, Bob Malley, the Iranian envoy is still under investigation.

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Speaker 5: Who is leading these diplomatic efforts.

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Speaker 3: As I said, the diplomatic efforts to get them back

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Speaker 3: into the Iran deal are no longer being pursued because

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Speaker 3: Iran wasn't negotiating in good faith, which is why we're

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Speaker 3: going to make sure we have other options available to

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Speaker 3: us to prevent them from achieving a nuclear weapons capability.

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Speaker 6: Admiral one question, and Amory did touch on this, this

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Speaker 6: question around what the response could be to Iran seizing

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Speaker 6: a vessel in the Straits of Hormu. Is the idea

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Speaker 6: of freedom of the seas. What's the US's response to that,

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Speaker 6: given the fact that a lot of companies have already

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Speaker 6: started to rejigger some of their trade routes and bacon

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Speaker 6: extra costs as a result.

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Speaker 3: Yeah, I had a little trouble hearing you over the

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Speaker 3: lawnmower there, but I think I got the gist of

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Speaker 3: the question. We certainly condemned this most recent maritime attack.

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Speaker 3: This is a tack that the Iranians have used.

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Speaker 4: In the past.

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Speaker 3: We have, when able, been able to interdict, been able

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Speaker 3: to try to afford other such maritime attacks, not all

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Speaker 3: of them, of course, And we are also making a

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Speaker 3: concerted effort over time, and we have been somewhat successful

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Speaker 3: in intercepting goods that the Iranians have been trying to

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Speaker 3: ship by sea to some of their proxies in Iraq

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Speaker 3: and Syria and certainly the Huthis Iverner.

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Speaker 6: One thing that a lot of companies are saying, a

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Speaker 6: lot of executives is that they do have to make

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Speaker 6: contingency plans because they aren't sure that there can be

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Speaker 6: such safety and you've seen insurance costs go up. Is

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Speaker 6: it appropriate for the US for Israel to more directly

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Speaker 6: respond to Iran at some point, just not now.

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Speaker 3: Again, I can't speculate about future operations one way or another,

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Speaker 3: or future decisions that we might have to make. The

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Speaker 3: President has been clear we're going to hold Iran accountable

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Speaker 3: for their destabilizing activities. He's also been clear we don't

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Speaker 3: want a war with Iran. We're not looking for another

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Speaker 3: war in the Middle East or is to see the

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Speaker 3: conflict that's currently underway in Gaza broadened or deepened across

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Speaker 3: the region. Now we'll have to see how things unfold

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Speaker 3: over the next coming days here, but we don't want

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Speaker 3: to war with Iran, and everything the President has been

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Speaker 3: doing since the seventh of October has been designed to

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Speaker 3: try to bring the tensions down and to make sure

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Speaker 3: that the United States is best posture to defend our

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Speaker 3: interests there in the region.

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Speaker 2: You and a fine now with a low mama, So

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Speaker 2: we're gonna let you go. National Security accounts, SOL Communications

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Speaker 2: advice that John Kirby, John, thank you, Sir Admiral Kirby.

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Speaker 2: We appreciate your time with this amount of table together

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Speaker 2: with Shanati KPWC. TELLMA show tell me you've had a

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Speaker 2: few minutes to go over this one. What's your reaction

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Speaker 2: to this?

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Speaker 7: So Our feeling is it's two things. One is it's

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Speaker 7: what's happening in the industry. So there is a rebound

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Speaker 7: that's happening in investment banking. Investment banking was on a

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Speaker 7: real downturn over the last prior twelve months, and what

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Speaker 7: you see at Goldman is not even full power. I mean,

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Speaker 7: we still think the industry, broadly speaking, is probably operating

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Speaker 7: around seventy percent of what we would think is typical.

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Speaker 7: So as we put the COVID period behind us, get

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Speaker 7: to a more traditional moment, as IPOs pick up, m

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Speaker 7: and A comes back, and especially if we get lower rates,

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Speaker 7: we think the business has even further to go.

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Speaker 4: So that's number one.

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Speaker 7: Number two is I think it's a big moment in

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Speaker 7: the Goldman reboot. They also sold green Sky in the quarter,

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Speaker 7: which is putting some of their consumer efforts behind them

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Speaker 7: and they're going to focus really on what's been the

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Speaker 7: core of the company over the long term. We've been

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Speaker 7: really positive on the shares. My senses will continue to

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Speaker 7: recommend it even after today's move, and as the company

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Speaker 7: earns around sixteen on tangible common equity in this quarter,

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Speaker 7: it's a signal that they're starting from a very healthy

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Speaker 7: point even this reboot.

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Speaker 6: Something that Sheanali said that really stands out because it

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Speaker 6: seems like of banks are implying the same thing in

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Speaker 6: their numbers, use a balance sheet. We're hearing that again

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Speaker 6: and again, using their balance sheets more aggressively. Is this

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Speaker 6: the new model kind of going back to the old

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Speaker 6: one as they try to compete with private credit and

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Speaker 6: private asset managers, they got to use their balance sheets

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Speaker 6: and they find ways to do it even with all.

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Speaker 7: The regulatory Well, I think that that's going to be

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Speaker 7: key because we've just gone through a moment where the

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Speaker 7: banks in general of lost market shared to non banks,

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Speaker 7: and I personally believe in a five percent yield world

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Speaker 7: with a flat or inverted yield curve, it's going to

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Speaker 7: be harder to get financing than when money was free

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Speaker 7: during COVID. Okay, So having access to a balance sheet

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Speaker 7: that's reliable is going to become more important to banks clients,

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Speaker 7: and over time it could be part of the moment

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Speaker 7: that helps these banks regain some share from that moment

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Speaker 7: in time.

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Speaker 6: Forgive me, there were years when a lot of these

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Speaker 6: bank executives were saying that they can't do this, that

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Speaker 6: they are hamstrung, their hands are tied because of financial regulations.

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Speaker 4: What changed, well, I believe me.

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Speaker 7: I don't think any bank's going to stay outside of

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Speaker 7: the financial regulations. I think it's just core blocking and tackling,

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Speaker 7: which is having reliable acts. I think what's changed is

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Speaker 7: the other markets aren't as easy. So zero interest rates

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Speaker 7: meant that it was very easy for non banks to

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Speaker 7: be able to raise financing to be able to enter

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Speaker 7: the market. It's going to be harder for non banks

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Speaker 7: to raise funding to serve bank customers. So I think

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Speaker 7: that's what's changed, not the banks, but I think it's

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Speaker 7: the other items and other conditions.

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Speaker 4: You said you like Goldman's action.

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Speaker 5: Olie was talking about how Ted Pick his whole business

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Speaker 5: has been really the trading and potentially we'll read through

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Speaker 5: Morgan Standing tomorrow.

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Speaker 4: What other banks do you like?

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Speaker 7: Well, we like Truest. It's one of our favorite ideas.

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Speaker 7: It's one of the biggest banks in the nation. They

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Speaker 7: sold their insurance broker for a whopping price recently they're

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Speaker 7: going to trade in. What you don't see now is

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Speaker 7: that they haven't put the gain into their financial statements yet,

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Speaker 7: so the stock's really trading around one fifteen intangible book,

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Speaker 7: which is a very low valuation for one of the

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Speaker 7: best banks in the nation. It's got a five point

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Speaker 7: seven percent yield. The next time that dividend changes, it's

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Speaker 7: going up, not down. So our view is at a

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Speaker 7: single digit pe ratio for a bank that's got one

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Speaker 7: of the best franchises in the country. That is I

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Speaker 7: would say our largest bank idea at the moment, and

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Speaker 7: we're pretty bullish on that one. And then you know

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Speaker 7: they're also doing a restructuring. They got a little bit

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Speaker 7: off sides after their merger, and we think the new

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Speaker 7: management team is very focused on fixing things.

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Speaker 5: When you look at the loan market at the moment,

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Speaker 5: what do you make from it? Because know your notes

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Speaker 5: you talk about the seasonality is low.

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Speaker 7: Slow, it's slow what we're seeing, and all the results

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Speaker 7: that have come out loans have actually been a little

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Speaker 7: bit lower than we expected. And when I watch, you know, look,

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Speaker 7: we've had three now four banks report our firm files

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Speaker 7: two hundred and twenty five. We got a long way

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Speaker 7: to go. But what do I think. I think delay

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Speaker 7: in the pivot. So our bull case on the stocks

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Speaker 7: and we're market performed, So the bull case we're pretty balanced.

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Speaker 7: But the bull case is that we're going to get

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Speaker 7: a pivot and acceleration into earnings going into twenty twenty five.

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Speaker 7: To the extent that we get less rate cuts, less growth,

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Speaker 7: it probably pushes that back a little bit for when

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Speaker 7: we see an acceleration in earnings.

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Speaker 2: How aligned to you with the gloom of Jamie Diamond.

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Speaker 2: I've a JP Milkan What did you make of the

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Speaker 2: caution from him on Friday? Typically we're all used to

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Speaker 2: sort of beating race, beating race from JP Milkan. Then

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Speaker 2: on Friday things kind of changed. What do you make

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Speaker 2: of that?

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Speaker 7: There are still big macro risks in the marketplace. And

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Speaker 7: I'll tell you when I talked to bank management teams,

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Speaker 7: it's almost like I feel like I'm having a credit

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Speaker 7: analyst discussion more than an in equity analysts discussion. They're

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Speaker 7: very focused on their own balance sheet. I think strength

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Speaker 7: and stability seems to be a bigger presence in the

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Speaker 7: strategic boardroom of these banks. They are building these banks

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Speaker 7: to make sure they can withstand any challenge.

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Speaker 8: And Tom, if you look at the way Goldman and

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Speaker 8: Morgan Stanley have been trading, they've been bears. Morgan Stanley's

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Speaker 8: down more than seven point five percent over the last

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Speaker 8: twelve months.

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Speaker 4: Does it deserve that?

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Speaker 8: Are these kinds of investment banking and trading businesses is

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Speaker 8: just something people don't want to pick up on in

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Speaker 8: this environment.

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Speaker 7: I think for Morgan Stanley it's just a preference for

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Speaker 7: Goldman Sachs. For us, we had been really bullish on

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Speaker 7: Morgan Stanley.

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Speaker 1: We pulled back.

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Speaker 7: It's just the dynamics of what's happening in their own

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Speaker 7: earnings at the moment. We just think there's more upside

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Speaker 7: because there's more delta coming at Goldman. They can do

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Speaker 7: a little bit more self improvement, and so we like

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Speaker 7: it more. But so we're a market perform on Morgan Stanley,

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Speaker 7: but think it's a fine company. We just think the

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Speaker 7: dynamics don't have as much delta to them.

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Speaker 2: Chanie pass like that alongside tell mi shall I kyped up?

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Speaker 2: You just like to read the Number's just the ren

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Speaker 2: things sumptionalty quickly, bait bait bait. How would you frame

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Speaker 2: it any other way? The gold sacks this smalling.

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Speaker 4: There's no other way to frame it.

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Speaker 8: Remember they've only been training at one point two times

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Speaker 8: book value. Heading in today Morgan Stanley's at one point five.

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Speaker 8: It sets the bar super high for tomorrow. And remember

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Speaker 8: there's a big cloud over Morgan Stanley with a lot

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Speaker 8: of questions about the investigations that they're facing. They haven't

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Speaker 8: said anything yet, and so the earnings are one thing,

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Speaker 8: but then the story is also going to be equally

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Speaker 8: important heading into our.

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Speaker 2: Let's got to score U up on the board again

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Speaker 2: and just look at MOK and Standley and gets winning Sat.

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Speaker 2: Tomorrow morning in the pre market, it is positive off

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Speaker 2: the back of what you're saying on Goldman sacks. Goldman

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Speaker 2: up by three point four percent, just beats across the board,

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Speaker 2: and we totally so briefly about the night, sure of

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Speaker 2: the upside surprise, let's just sit on fixed sounds and

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Speaker 2: trading revenue just for a bait longer. Full point three

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Speaker 2: to two billion the estimate three point sixty four. That

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Speaker 2: is a solid.

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Speaker 6: Beat, and it really raises a question, Okay, they're using

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Speaker 6: their balance sheet more so that means they're making directional

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Speaker 6: bets or taking things down in a market that might

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Speaker 6: look like it's liquid but may not be as liquid.

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Speaker 6: And then it also raises this question about just how

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Speaker 6: much they're taking share from some of these other companies

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Speaker 6: just in terms of private asset managers, which is something

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Speaker 6: a lot of people have talked about.

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Speaker 7: But also to remember, we don't have Credit Sweee anymore.

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Speaker 7: So a year ago, Credit Suite disappeared overnight in the ubs.

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Speaker 7: So when you look at the statistics, I believe that

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Speaker 7: market share was pretty much captured by many of the

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Speaker 7: biggest other banks. So I think that's also on a

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Speaker 7: year over year basis been somewhat of a.

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Speaker 2: So when Aschinali, is the pinketting bigger or did they

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Speaker 2: just take someone else's slice? So you said that slice

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Speaker 2: belong to Credit Suite.

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Speaker 7: I would say amongst probably others, I would say they're

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Speaker 7: getting a bigger piece of the slice. Because while I

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Speaker 7: do think and I think Morgan Stanley will benefit tomorrow

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Speaker 7: from the market just being better. And believe me, is

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Speaker 7: someone who operates an investment bank, I pay attention to

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Speaker 7: league tables and market share, believe me. So the biggest

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Speaker 7: firms have probably picked up the most share, and it's

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Speaker 7: a few firms who have done that, and Morgan Stanley

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Speaker 7: and Goldman would be in that bucket.

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Speaker 6: What's good for Goldman Sachs isn't necessarily good for Science

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Speaker 6: Bank for some of the others that are smaller regional banks.

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Speaker 6: How much is the gain of big banks the loss

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Speaker 6: of regionals.

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Speaker 7: Well, well, they tend to do different things, so the

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Speaker 7: net interesting income world that they all live in is

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Speaker 7: somewhat similar. It's the investment banking piece that really is

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Speaker 7: the big delta that we've been talking about. So as

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Speaker 7: we get away from banks that report that don't have that,

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Speaker 7: they're going to be war attuned to what's happening in

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Speaker 7: the interest rate environment. The good news there though, Li

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Speaker 7: says that six months ago we would have been talking

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Speaker 7: about the quantity of deposits. It's all about deposits, the

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Speaker 7: quantity of deposits. The nice thing is that pressure has eased,

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Speaker 7: and you're already seeing it in the numbers.

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Speaker 1: Now.

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Speaker 7: It's the cost of those deposits. And we're waiting for

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Speaker 7: the Fed to cut rates a little bit to take

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Speaker 7: some of the heat off, because you know what, US

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Speaker 7: treasuries are really competitive for bank deposits. We need the

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Speaker 7: US treasury rate to back off a little bit for

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Speaker 7: the banking industry to do a little better. And it

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Speaker 7: is actually all about deposits more so than loans.

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Speaker 2: When you say we're white saying you made the banks,

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Speaker 2: because for the rest of us with money on deposit,

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Speaker 2: we're not.

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Speaker 4: We're to poss on hid by bills. Final time.

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Speaker 2: You know, I make it.

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Speaker 4: Happen on wine. It's easy to do.

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Speaker 9: Tema shot, Thank you.

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Speaker 10: So consumer spending has been strong. I think it is

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Speaker 10: driven by strong fundamentals. Job growth has been solid, We've

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Speaker 10: seen real wage gains. We're in a pretty strong economy

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Speaker 10: with good growth, So yes.

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Speaker 1: It's part of that story.

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Speaker 10: But you know, I think what we're realizing is we're

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Speaker 10: getting a nice tailwind from the supply side of the economy,

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Speaker 10: good labor force growth, strong productivity, good real wage gains.

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Speaker 1: So with that, I think, you know, consumers are spending.

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Speaker 11: What's the thinking in your office and among your colleagues

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Speaker 11: about does this last or is this a surprise that

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Speaker 11: you think could go wait at any minute.

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Speaker 10: Well, one thing that makes it really hard to forecast

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Speaker 10: is we're still feeling the effects of the after effects

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Speaker 10: of the pandemic and Russia's war in Ukraine and all

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Speaker 10: the things that have happened in between. So we're definitely still

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Speaker 10: seeing an adjustment process by the consumer in the economy overall.

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Speaker 1: But you know, overall, I think that.

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Speaker 10: The economy will continue to grow at a solid rate

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Speaker 10: this year, probably not as high as the three point

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Speaker 10: one percent we saw la year, but something like two

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Speaker 10: percent or around that. So I feel like we're still

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Speaker 10: in a good place, probably not as rapid growth as

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Speaker 10: we saw last year.

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Speaker 11: Speaking of international events, I have to ask you the

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Speaker 11: Middle East going on right now, how do you think

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Speaker 11: about the economic and policy.

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Speaker 9: Implications of these events?

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Speaker 10: Right so, obviously we're watching this very carefully. I think

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Speaker 10: the primary way you see it through is first of all,

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Speaker 10: through commodity prices, but second is what we think of

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Speaker 10: as a flight to safety, where investors, when they see

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Speaker 10: risks in the global economy, they tend to bring money

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Speaker 10: to the US dollar, and that tends to push yields

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Speaker 10: down somewhat. Right now, I think, you know, markets are

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Speaker 10: pretty pretty stable. We're not seeing big movements in that way,

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Speaker 10: but generally that's the way I would what I would

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Speaker 10: expect to see when you see heightened geopolitical tensions.

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Speaker 11: When you think about what the markets are reacting to

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Speaker 11: and what could come out of this, is this more

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Speaker 11: of an inflation worry or a growth concern.

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Speaker 1: Well, it's really hard to say.

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Speaker 10: It really depends on how the situation evolves right now.

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Speaker 10: I don't think of this as maybe in the near

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Speaker 10: term it could be effect of financial conditions and commodity prices.

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Speaker 10: As I mentioned, I don't see this as a major

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Speaker 10: driver the overall forecast or outlook for economic growth or

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Speaker 10: for inflation.

443
00:21:24,080 --> 00:21:27,399
Speaker 11: Speaking of inflation, CPI came in much hotter than expected

444
00:21:27,600 --> 00:21:30,119
Speaker 11: and sort of freaked everybody out on Wall Street and

445
00:21:30,200 --> 00:21:33,040
Speaker 11: market sort of took that as a turning point in

446
00:21:33,160 --> 00:21:34,040
Speaker 11: Fed policy.

447
00:21:34,080 --> 00:21:34,960
Speaker 1: Do you see it that way?

448
00:21:35,200 --> 00:21:37,040
Speaker 10: I don't see it as a turning point. I think

449
00:21:37,080 --> 00:21:39,640
Speaker 10: that you know, we've saw inflation come down.

450
00:21:39,480 --> 00:21:41,840
Speaker 1: Maybe quicker than we expected. Last year.

451
00:21:41,840 --> 00:21:45,879
Speaker 10: We definitely saw really lower readings and inflation in the

452
00:21:45,920 --> 00:21:48,840
Speaker 10: final six months that I never thought that that was

453
00:21:48,880 --> 00:21:49,960
Speaker 10: going to stay that low.

454
00:21:50,400 --> 00:21:51,720
Speaker 1: That was unusually low.

455
00:21:51,880 --> 00:21:56,720
Speaker 10: We're now seeing some a little bit unusually high readings. Overall,

456
00:21:56,800 --> 00:22:00,520
Speaker 10: I think the picture is one of the economy is

457
00:22:00,520 --> 00:22:03,760
Speaker 10: getting in better balance, we still have a strong labor market,

458
00:22:03,840 --> 00:22:06,040
Speaker 10: and we're seeing inflation gradually come down.

459
00:22:06,280 --> 00:22:06,440
Speaker 6: Now.

460
00:22:06,440 --> 00:22:09,119
Speaker 10: I do think that, you know, for me, what do

461
00:22:09,200 --> 00:22:11,120
Speaker 10: I see in the data, well the economy, and then

462
00:22:11,119 --> 00:22:14,320
Speaker 10: you pointed out the retail sales today, but more broadly,

463
00:22:14,359 --> 00:22:16,880
Speaker 10: the economy continues to be strong again. I think we're

464
00:22:16,920 --> 00:22:19,720
Speaker 10: being helped by strong demand and supply, and those are

465
00:22:20,600 --> 00:22:23,879
Speaker 10: helping growth, and we're seeing you know, inflation come down

466
00:22:23,920 --> 00:22:26,760
Speaker 10: a little bit slower than expected, and so you know,

467
00:22:26,800 --> 00:22:30,040
Speaker 10: I think markets are taking all that information into account

468
00:22:30,040 --> 00:22:32,960
Speaker 10: and how they how they expect policy to be. For me,

469
00:22:33,160 --> 00:22:35,840
Speaker 10: I'm you know, data dependent as always, really take the

470
00:22:35,880 --> 00:22:38,520
Speaker 10: totality of the data and think about what it means

471
00:22:38,520 --> 00:22:42,159
Speaker 10: for achieving our maximum employment and price stability goals. So

472
00:22:42,200 --> 00:22:44,480
Speaker 10: I don't see this as a game change or anythink.

473
00:22:44,520 --> 00:22:47,879
Speaker 10: I do think it's important information that will clearly, you know,

474
00:22:47,920 --> 00:22:50,920
Speaker 10: affect my thinking and my forecast.

475
00:22:51,240 --> 00:22:53,920
Speaker 11: Even those who've thought about what PCEE might be after

476
00:22:53,960 --> 00:22:56,400
Speaker 11: the p p I and cp I say inflation isn't

477
00:22:56,400 --> 00:22:59,880
Speaker 11: coming down rapidly anymore, but you do have the strong growth,

478
00:23:00,040 --> 00:23:04,159
Speaker 11: you have very low unemployment. Why cut rates if the

479
00:23:04,200 --> 00:23:06,439
Speaker 11: economy is doing fine at this level.

480
00:23:06,680 --> 00:23:08,919
Speaker 10: Well, first of all, I think Monte policy is working

481
00:23:09,000 --> 00:23:11,320
Speaker 10: at the rates that we have now, So I think

482
00:23:12,119 --> 00:23:14,680
Speaker 10: I think Monte policy is in a good place over

483
00:23:14,720 --> 00:23:18,080
Speaker 10: the past six twelve to eighteen months, we've seen all

484
00:23:18,119 --> 00:23:21,400
Speaker 10: pretty much all the measures of imbalances in the labor market,

485
00:23:21,440 --> 00:23:24,879
Speaker 10: and our economy received many of them back to levels

486
00:23:24,880 --> 00:23:27,120
Speaker 10: we saw in twenty eighteen or twenty nineteen. So we're

487
00:23:27,119 --> 00:23:30,280
Speaker 10: seeing the you know, restoring balance in the economy. We

488
00:23:30,320 --> 00:23:33,840
Speaker 10: are seeing a slow decline in inflation. So I do

489
00:23:33,880 --> 00:23:36,840
Speaker 10: think Monterey policy right now is in a good place.

490
00:23:36,880 --> 00:23:39,640
Speaker 10: I'm not fixated on where the rates need to go,

491
00:23:40,280 --> 00:23:42,440
Speaker 10: you know, over the next year. What I'm focused on

492
00:23:42,760 --> 00:23:45,680
Speaker 10: is how do we best achieve our maximum employment and

493
00:23:45,760 --> 00:23:48,359
Speaker 10: price stability goals. The data we're seeing show that the

494
00:23:48,359 --> 00:23:50,800
Speaker 10: economy is strong and that's really good news, and labor

495
00:23:50,800 --> 00:23:54,200
Speaker 10: markets strong. At the same time, we are getting better balance,

496
00:23:54,280 --> 00:23:57,320
Speaker 10: and we're seeing some decline overall and inflation. So for me,

497
00:23:57,520 --> 00:24:00,199
Speaker 10: it's really about getting that right and then whatever we

498
00:24:00,240 --> 00:24:03,240
Speaker 10: need to do to adjust monetary policy we can do

499
00:24:03,680 --> 00:24:05,520
Speaker 10: to bet you know, best continue.

500
00:24:05,400 --> 00:24:06,760
Speaker 1: The progress towards our goals.

501
00:24:07,320 --> 00:24:09,960
Speaker 10: So that's how I'm thinking about it, and we'll just

502
00:24:09,960 --> 00:24:12,320
Speaker 10: have to keep watching the data and make the decisions

503
00:24:12,359 --> 00:24:13,560
Speaker 10: based on those goals.

504
00:24:13,800 --> 00:24:15,920
Speaker 9: Well, is your base case that you will cut rates

505
00:24:15,920 --> 00:24:16,359
Speaker 9: this year?

506
00:24:16,880 --> 00:24:20,119
Speaker 10: My own view is I think that with inflation continuing

507
00:24:20,119 --> 00:24:22,400
Speaker 10: to gradually come down, and I guess I would say

508
00:24:22,440 --> 00:24:25,880
Speaker 10: gradually is the operative word here, and with the economy

509
00:24:25,960 --> 00:24:28,639
Speaker 10: remaining strong, I do think that given where the level

510
00:24:28,680 --> 00:24:32,840
Speaker 10: of rates are, real interest rates now are considerably higher

511
00:24:32,880 --> 00:24:34,760
Speaker 10: than they were before because inflation has.

512
00:24:34,640 --> 00:24:35,560
Speaker 1: Come down quite a bit.

513
00:24:36,080 --> 00:24:39,119
Speaker 10: So we will need start a process at some point

514
00:24:39,320 --> 00:24:41,840
Speaker 10: to bring interest rates back to more normal levels. And

515
00:24:41,960 --> 00:24:44,919
Speaker 10: my own view is that, well, you know that process

516
00:24:45,080 --> 00:24:48,200
Speaker 10: will likely start this year, but again it's going to

517
00:24:48,200 --> 00:24:51,679
Speaker 10: be driven driven by the data and achieving our goals.

518
00:24:51,760 --> 00:24:53,680
Speaker 9: So it's possible you don't do anything this year.

519
00:24:53,800 --> 00:24:56,080
Speaker 10: Well, again you're asking me to speculate and what they

520
00:24:56,119 --> 00:24:59,520
Speaker 10: will happen more And you know, right now, I think

521
00:24:59,600 --> 00:25:03,280
Speaker 10: Monte policies in a good place. We're seeing the progress.

522
00:25:03,320 --> 00:25:07,359
Speaker 10: We're seeing progress. It's a bumpy road on the inflation front,

523
00:25:07,520 --> 00:25:09,640
Speaker 10: and we'll just have to figure out how to best

524
00:25:09,680 --> 00:25:13,159
Speaker 10: adjust policy as needed to achieve our goals.

525
00:25:13,280 --> 00:25:16,600
Speaker 9: Now, you mentioned the real rate is policy tight?

526
00:25:16,960 --> 00:25:20,280
Speaker 10: Now, I do think we have restrictive monetary policy.

527
00:25:20,320 --> 00:25:21,520
Speaker 1: I do think policy is tight.

528
00:25:21,680 --> 00:25:24,800
Speaker 10: So what do I look for Because the economy is growing,

529
00:25:24,840 --> 00:25:27,680
Speaker 10: it grow over three percent? You know, we're adding about

530
00:25:27,960 --> 00:25:30,160
Speaker 10: two hundred and seventy five thousand jobs over the first

531
00:25:30,160 --> 00:25:32,480
Speaker 10: three months, So that seems like an economy that's really

532
00:25:32,480 --> 00:25:35,800
Speaker 10: strong and not being held back by monetary policy. But

533
00:25:35,840 --> 00:25:39,080
Speaker 10: if you take a step back, all these measures of

534
00:25:39,160 --> 00:25:43,159
Speaker 10: imbalances in the labor market, whether job openings or wage rates,

535
00:25:43,280 --> 00:25:46,120
Speaker 10: or quits rates, or all the other indicators we look at,

536
00:25:46,280 --> 00:25:49,199
Speaker 10: all of them are moving from being very tight to

537
00:25:49,359 --> 00:25:51,919
Speaker 10: less tight, and most of them back to more strong.

538
00:25:52,000 --> 00:25:55,200
Speaker 10: Labor market are getting closer there. I mean, job openings

539
00:25:55,200 --> 00:25:57,440
Speaker 10: are still high, wage growth is still a bit high,

540
00:25:57,600 --> 00:25:58,080
Speaker 10: but these.

541
00:25:57,920 --> 00:25:59,359
Speaker 1: Are all moving in the right direction.

542
00:26:00,119 --> 00:26:03,359
Speaker 10: Stance in MANTE policy has really been an important driver

543
00:26:03,160 --> 00:26:06,440
Speaker 10: of restoring balance to the economy and helping bring inflation

544
00:26:06,920 --> 00:26:08,320
Speaker 10: towards two percent.

545
00:26:08,480 --> 00:26:09,640
Speaker 9: What's left with inflation?

546
00:26:09,880 --> 00:26:12,880
Speaker 11: Is it something that you can affect or are these

547
00:26:13,040 --> 00:26:15,480
Speaker 11: non interest rate responsive sectors?

548
00:26:16,000 --> 00:26:19,560
Speaker 10: You know, MANTE policy can affect inflation in the economy.

549
00:26:20,280 --> 00:26:22,960
Speaker 10: It works through multiple channels, so there are some sectors

550
00:26:23,000 --> 00:26:26,240
Speaker 10: that maybe are not as intrasensitive, but the economy is

551
00:26:26,320 --> 00:26:29,200
Speaker 10: interest rates sensitive. We've seen that over the past couple

552
00:26:29,200 --> 00:26:32,760
Speaker 10: of years as we've moved from an accommodated.

553
00:26:31,840 --> 00:26:33,440
Speaker 1: Policy to a restrictive policy.

554
00:26:33,600 --> 00:26:36,160
Speaker 10: So Monte policy is working. To expect it to continue

555
00:26:36,200 --> 00:26:37,840
Speaker 10: to work to bring inflation down.

556
00:26:38,119 --> 00:26:40,520
Speaker 1: You're going to see it, you know, show up.

557
00:26:40,440 --> 00:26:42,919
Speaker 10: In different parts of the inflation rates, you know, goods

558
00:26:43,040 --> 00:26:44,320
Speaker 10: versus services and things.

559
00:26:44,480 --> 00:26:46,880
Speaker 1: But over the past year year and a half we have.

560
00:26:46,960 --> 00:26:50,400
Speaker 10: Seen a broad based declining inflation in all these categories.

561
00:26:50,480 --> 00:26:51,960
Speaker 10: It's just that we haven't gotten all the way to

562
00:26:51,960 --> 00:26:55,159
Speaker 10: two percent, and we just need to keep policy in

563
00:26:55,200 --> 00:26:57,760
Speaker 10: the right place to achieve that two percent goal.

564
00:26:58,000 --> 00:27:01,280
Speaker 11: The question I always ask is what companies telling you

565
00:27:01,359 --> 00:27:04,480
Speaker 11: these days about their hiring plans, about what they're having

566
00:27:04,520 --> 00:27:08,119
Speaker 11: to pay, and about inflation, whether they're raising prices or

567
00:27:08,160 --> 00:27:09,480
Speaker 11: having to pay higher prices.

568
00:27:09,640 --> 00:27:12,160
Speaker 10: Well, clearly, if you asked me this question a year

569
00:27:12,240 --> 00:27:14,320
Speaker 10: or two ago, that's all they would be talking about.

570
00:27:14,440 --> 00:27:20,080
Speaker 10: Price increases, compensation increases, the challenges of hiring employees. Today,

571
00:27:20,160 --> 00:27:23,240
Speaker 10: I think those you know, those comments are still out

572
00:27:23,240 --> 00:27:25,600
Speaker 10: there a little bit, but far less than before.

573
00:27:25,720 --> 00:27:27,280
Speaker 1: We're hearing from our context.

574
00:27:27,920 --> 00:27:30,159
Speaker 10: You know that it's easier to fill positions than it

575
00:27:30,280 --> 00:27:33,920
Speaker 10: used to be. Wage compensation pressures are less, and price

576
00:27:33,960 --> 00:27:36,639
Speaker 10: pressures are are less. I think that's consistent with what

577
00:27:36,680 --> 00:27:38,840
Speaker 10: we're seeing overall in the data.

578
00:27:38,960 --> 00:27:42,480
Speaker 9: You're the potential growth guy. Has potential growth moved up?

579
00:27:42,880 --> 00:27:45,760
Speaker 10: You know, I am being getting more optimistic about potential

580
00:27:46,119 --> 00:27:47,160
Speaker 10: growth in the economy.

581
00:27:47,200 --> 00:27:48,560
Speaker 1: I think for a couple of reasons.

582
00:27:48,720 --> 00:27:51,520
Speaker 10: One is, you know, through the pandemic and everything that

583
00:27:51,600 --> 00:27:54,760
Speaker 10: happened after that, I, like most people, had concerns that

584
00:27:54,840 --> 00:27:57,639
Speaker 10: the supply side of the economy had suffered, you know,

585
00:27:57,760 --> 00:28:00,560
Speaker 10: damage the labor force and in terms of labor force

586
00:28:00,560 --> 00:28:05,000
Speaker 10: and participation. And you know, as we've watched the data

587
00:28:05,240 --> 00:28:07,760
Speaker 10: over the past two years, we've seen an increase in

588
00:28:07,800 --> 00:28:11,520
Speaker 10: labor force participation, increase in labor force growth, and we've

589
00:28:11,520 --> 00:28:13,919
Speaker 10: seen a rebound of productivity. Now I'm not saying that

590
00:28:13,920 --> 00:28:18,000
Speaker 10: we're in some you know, new high growth kind of world,

591
00:28:18,160 --> 00:28:21,000
Speaker 10: but I do think a potential growth is probably closer

592
00:28:21,040 --> 00:28:23,320
Speaker 10: to two percent or a little higher, which is well

593
00:28:23,359 --> 00:28:25,880
Speaker 10: above a lot of estimates of the past few years.

594
00:28:25,920 --> 00:28:29,280
Speaker 10: And that's a very positive sign for us real incomes

595
00:28:29,320 --> 00:28:32,760
Speaker 10: and for the economy and honestly for helping get inflation down.

596
00:28:33,240 --> 00:28:35,520
Speaker 11: A question for all of our friends around us on

597
00:28:35,560 --> 00:28:38,920
Speaker 11: trading desks. You had a briefing on QT at the

598
00:28:39,000 --> 00:28:42,000
Speaker 11: last meeting from the FED staff and members, according to

599
00:28:42,040 --> 00:28:44,800
Speaker 11: the minutes, generally agreed that it should start soon.

600
00:28:45,040 --> 00:28:47,360
Speaker 9: Does that mean May or does.

601
00:28:47,240 --> 00:28:48,120
Speaker 1: That mean June.

602
00:28:48,280 --> 00:28:51,680
Speaker 10: Well, I think we said fairly soon, and the you know,

603
00:28:51,760 --> 00:28:55,400
Speaker 10: I think that the reasoning for slowing the pace of

604
00:28:55,440 --> 00:28:57,920
Speaker 10: reduction or balance sheet makes a lot of sense.

605
00:28:57,920 --> 00:28:59,640
Speaker 1: It's a prudent course of action.

606
00:29:00,280 --> 00:29:03,480
Speaker 10: We are decreasing the balance sheet quite rapidly, and by

607
00:29:03,600 --> 00:29:06,760
Speaker 10: slowing that we'll have more ability to monitor, assess, and

608
00:29:06,840 --> 00:29:10,960
Speaker 10: analyze as we get eventually to an ample reserves kind

609
00:29:11,000 --> 00:29:13,840
Speaker 10: of world that we're aiming for. Everything is going with

610
00:29:13,880 --> 00:29:16,800
Speaker 10: the balance sheet. Everything is going exactly as planned. Things

611
00:29:16,840 --> 00:29:20,880
Speaker 10: are going well. When we decide to slow the pace

612
00:29:21,200 --> 00:29:23,240
Speaker 10: of the balance sheet, that's a decision for the committee.

613
00:29:23,240 --> 00:29:24,480
Speaker 1: No decision was made at the.

614
00:29:24,480 --> 00:29:27,960
Speaker 10: Last meeting, but obviously we'll get together relatively soon and

615
00:29:28,000 --> 00:29:30,360
Speaker 10: discuss this further. But to me, this is a sign

616
00:29:30,360 --> 00:29:32,880
Speaker 10: of success of the plans we laid out almost two

617
00:29:32,960 --> 00:29:35,719
Speaker 10: years ago to reduce the balance sheet. We've had very

618
00:29:35,760 --> 00:29:40,160
Speaker 10: little disruption in markets. It's worked exactly as planned and

619
00:29:40,200 --> 00:29:43,160
Speaker 10: we're just executing on that plan and that's going very smoothly.

620
00:29:43,320 --> 00:29:46,160
Speaker 9: So QT could come before great boots.

621
00:29:46,440 --> 00:29:47,800
Speaker 1: These are really separate issues.

622
00:29:47,840 --> 00:29:50,800
Speaker 10: I mean our shrinking the balance, we're focused on getting

623
00:29:50,840 --> 00:29:53,840
Speaker 10: to ample reserves. On monetary policy, we're very focused in

624
00:29:53,960 --> 00:29:57,840
Speaker 10: achieving our maximum employment and priceability goals. Those are different objectives,

625
00:29:57,960 --> 00:30:01,800
Speaker 10: those instruments can, obviously in different times, in different ways.

626
00:30:02,360 --> 00:30:05,920
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627
00:30:05,920 --> 00:30:09,000
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628
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630
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