Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business App. John Kirby, Admiral Kirby,
Speaker 2: fantastic to catch up with you, sir. Busy weekend, I'm
Speaker 2: sure for you and the administration, let's get straight into it.
Speaker 2: We've heard from Iran at least they've indicated the matter
Speaker 2: can be deemed concluded. I think we all want to know,
Speaker 2: Admiral Kirby, whether Israel Is indicated the same thing.
Speaker 3: I won't speak for the Israelis, I think you can
Speaker 3: understand that. I believe the war cabinet is still deliberating
Speaker 3: and making their decisions. The President had a very good
Speaker 3: conversation with the Prime Minister right after or towards the
Speaker 3: end of the attacks on Saturday night, and the President
Speaker 3: was very direct that this was a.
Speaker 4: Huge success, that Israel can be.
Speaker 3: Proud that it doesn't stand alone, and that it has
Speaker 3: superior military capability. Iran utterly failed and what they were
Speaker 3: trying to achieve, and that that success alone sends a
Speaker 3: strong message to Iran and to the region about Israel's
Speaker 3: place there.
Speaker 2: So could we just define success? How can we define
Speaker 2: the weekend's events as a success. To see the first
Speaker 2: direct strikes coming from Iranian soil on Israel, how is
Speaker 2: that a success in any way shape or for.
Speaker 4: Let's talk about what didn't happen.
Speaker 3: Hardly any damage and the only impacts were to an
Speaker 3: air base in central Israel, no real casualties except sadly,
Speaker 3: a young civilian girl was critically injured. In the vast majority,
Speaker 3: as the IDF have said, ninety nine percent of what
Speaker 3: Aroon threw up in the air, drones and missiles never
Speaker 3: landed either it failed or actually got shot down. So
Speaker 3: that's what didn't happen. And what did happen was Israel
Speaker 3: proved it has superior military capability and just as critically,
Speaker 3: they don't stand alone. That the United the United States
Speaker 3: stands with them. I think people are maybe not cognizant
Speaker 3: of the fact that the President put US forces in
Speaker 3: harm's way to help defend Israel for the first time,
Speaker 3: American fighter pilots in the air shooting things down that
Speaker 3: we're heading towards Israel, and they were extraordinarily successful in
Speaker 3: doing so.
Speaker 4: I think that's significant.
Speaker 2: You're talking about a successful defense. I think a lot
Speaker 2: of people also focused on the unsuccessful deterrents. The President said,
Speaker 2: don't and they did, and we're trying to work out,
Speaker 2: Admiral Kirby, in what way the US is able to
Speaker 2: influence Iranian behavior.
Speaker 4: Well.
Speaker 3: The President prepositioned military forces in the region, which allowed
Speaker 3: for that unprecedented successful defense. The President met with the
Speaker 3: G seven leaders yesterday to talk about a unified diplomatic
Speaker 3: response and to consider other options and alternatives to try
Speaker 3: to hold Iran accountable for what it did on Saturday night.
Speaker 3: Iran is increasingly isolated in the world, certainly in the region,
Speaker 3: and Israel has proven that it has friends.
Speaker 5: If Israel does not respond, is the new status quo
Speaker 5: that Iran can strike Israel from its own soil and
Speaker 5: there won't be a retaliation.
Speaker 4: Again, I can't speak to that, Amory.
Speaker 3: That's going to be up to the Prime Minister in
Speaker 3: the War Cabinet to make those decisions.
Speaker 4: We respect that it's a sovereign nation. They have to
Speaker 4: make those decisions.
Speaker 5: There's lots of reporting that the Biden administration that was
Speaker 5: verbalizing to these really that they do not support a
Speaker 5: counter strike. Isn't that in the sense taking one of
Speaker 5: those tools out of the toolbox and brandishing it to
Speaker 5: the world.
Speaker 3: The tools that we took out of the toolbox were
Speaker 3: pretty significant on Saturday night, Amory, ballistic missile destroyers in
Speaker 3: the instrument helping shoot down ballistic missiles, fighter aircraft in
Speaker 3: the air, other partners participating. There was a lot of
Speaker 3: tools in the toolbox, and there's no question that Iran
Speaker 3: recognizes the coalition that was put together to help Israel
Speaker 3: defend itself. Again, I can't speak for what either side
Speaker 3: will do going forward. All I can do is speak
Speaker 3: for President Biden as commander in chief. He has since
Speaker 3: October seventh, and he will continue going forward making sure
Speaker 3: that we are meeting our commitments to Israel, but just
Speaker 3: as critically that we're meeting our commitments to our own
Speaker 3: national security interests in the region, making sure we have
Speaker 3: the resources in place to protect our troops, our facilities,
Speaker 3: and the missions that we're conducting there in the Middle East.
Speaker 5: We've had sixty tons of arsenal fired upon Israel directly
Speaker 5: from Iran. We've had six months of Iranian backed who
Speaker 5: Thi's hitting as well, trying to hit even US vessels
Speaker 5: in the Red Seat and disrupting global trade. We also
Speaker 5: had an uptick of uranium enrichment by Iran. So to
Speaker 5: get to this deterrence, what is the US willing to do?
Speaker 5: We have sanctions in place, is the United States willing
Speaker 5: to enforce them?
Speaker 4: We have been enforcing sanctions, I mean, my goodness.
Speaker 3: In the three and a half years of this administration,
Speaker 3: we have implemented more than fifty sanctioned regimes, targeting more
Speaker 3: than five hundred entities and individuals. And again I won't
Speaker 3: preview coming sanctions or anything like that, but I can
Speaker 3: tell you that additional sanctions are certainly not off the
Speaker 3: table in terms of holding Iran accountable.
Speaker 4: And take a look at.
Speaker 3: The additional military resources that President Biden has added to
Speaker 3: the region even before October seventh. This is something that
Speaker 3: he's been keenly focused on, and as we saw from
Speaker 3: Saturday night, Iran is increasingly isolated on the world stage.
Speaker 3: They are increasingly making it harder for anybody in the
Speaker 3: international community to be sympathetic to any of their inimical interests.
Speaker 4: There Again, I think we've done a lot.
Speaker 3: We'll continue to look at our options going forward, and
Speaker 3: I suspect that we'll continue to hold Iran properly accountable.
Speaker 5: Analcarry how are they isolated? They had a call with
Speaker 5: the Saudis. They're sending all their oil to China, They're
Speaker 5: sending Shaha drones to Russia. In March, Iranian oil output
Speaker 5: hit a five year high.
Speaker 4: Where is the enforcement.
Speaker 3: There is enforcement of the sanctions. Memory again, this is
Speaker 3: one of the most heavily sanctioned countries in the world,
Speaker 3: and we're going to continue to look at our options
Speaker 3: going forward to hold them properly accountable. As sanctions are
Speaker 3: certainly not off the table, neither is going to making
Speaker 3: sure that we've got the capabilities in the region and
Speaker 3: we do to toward some of their destabilizing activity. You
Speaker 3: talked about the uranium enrichment when the previous administration pulled
Speaker 3: out of the Iran deal. It vastly accelerated the degree
Speaker 3: to which Iran could start to spin up their centrifuges
Speaker 3: and get closer to some.
Speaker 4: Sort of breakout capability.
Speaker 3: The President obviously tried, We tried, but Iran was not
Speaker 3: negotiating any good faith to get back into that Iran deal.
Speaker 4: But he also made clear that we will not allow
Speaker 4: Iran to achieve a nuclear weapons capability.
Speaker 3: We prefer to do that through diplomacy, but if not,
Speaker 3: we've got other options available.
Speaker 5: What's diplomacy, Bob Malley, the Iranian envoy is still under investigation.
Speaker 5: Who is leading these diplomatic efforts.
Speaker 3: As I said, the diplomatic efforts to get them back
Speaker 3: into the Iran deal are no longer being pursued because
Speaker 3: Iran wasn't negotiating in good faith, which is why we're
Speaker 3: going to make sure we have other options available to
Speaker 3: us to prevent them from achieving a nuclear weapons capability.
Speaker 6: Admiral one question, and Amory did touch on this, this
Speaker 6: question around what the response could be to Iran seizing
Speaker 6: a vessel in the Straits of Hormu. Is the idea
Speaker 6: of freedom of the seas. What's the US's response to that,
Speaker 6: given the fact that a lot of companies have already
Speaker 6: started to rejigger some of their trade routes and bacon
Speaker 6: extra costs as a result.
Speaker 3: Yeah, I had a little trouble hearing you over the
Speaker 3: lawnmower there, but I think I got the gist of
Speaker 3: the question. We certainly condemned this most recent maritime attack.
Speaker 3: This is a tack that the Iranians have used.
Speaker 4: In the past.
Speaker 3: We have, when able, been able to interdict, been able
Speaker 3: to try to afford other such maritime attacks, not all
Speaker 3: of them, of course, And we are also making a
Speaker 3: concerted effort over time, and we have been somewhat successful
Speaker 3: in intercepting goods that the Iranians have been trying to
Speaker 3: ship by sea to some of their proxies in Iraq
Speaker 3: and Syria and certainly the Huthis Iverner.
Speaker 6: One thing that a lot of companies are saying, a
Speaker 6: lot of executives is that they do have to make
Speaker 6: contingency plans because they aren't sure that there can be
Speaker 6: such safety and you've seen insurance costs go up. Is
Speaker 6: it appropriate for the US for Israel to more directly
Speaker 6: respond to Iran at some point, just not now.
Speaker 3: Again, I can't speculate about future operations one way or another,
Speaker 3: or future decisions that we might have to make. The
Speaker 3: President has been clear we're going to hold Iran accountable
Speaker 3: for their destabilizing activities. He's also been clear we don't
Speaker 3: want a war with Iran. We're not looking for another
Speaker 3: war in the Middle East or is to see the
Speaker 3: conflict that's currently underway in Gaza broadened or deepened across
Speaker 3: the region. Now we'll have to see how things unfold
Speaker 3: over the next coming days here, but we don't want
Speaker 3: to war with Iran, and everything the President has been
Speaker 3: doing since the seventh of October has been designed to
Speaker 3: try to bring the tensions down and to make sure
Speaker 3: that the United States is best posture to defend our
Speaker 3: interests there in the region.
Speaker 2: You and a fine now with a low mama, So
Speaker 2: we're gonna let you go. National Security accounts, SOL Communications
Speaker 2: advice that John Kirby, John, thank you, Sir Admiral Kirby.
Speaker 2: We appreciate your time with this amount of table together
Speaker 2: with Shanati KPWC. TELLMA show tell me you've had a
Speaker 2: few minutes to go over this one. What's your reaction
Speaker 2: to this?
Speaker 7: So Our feeling is it's two things. One is it's
Speaker 7: what's happening in the industry. So there is a rebound
Speaker 7: that's happening in investment banking. Investment banking was on a
Speaker 7: real downturn over the last prior twelve months, and what
Speaker 7: you see at Goldman is not even full power. I mean,
Speaker 7: we still think the industry, broadly speaking, is probably operating
Speaker 7: around seventy percent of what we would think is typical.
Speaker 7: So as we put the COVID period behind us, get
Speaker 7: to a more traditional moment, as IPOs pick up, m
Speaker 7: and A comes back, and especially if we get lower rates,
Speaker 7: we think the business has even further to go.
Speaker 4: So that's number one.
Speaker 7: Number two is I think it's a big moment in
Speaker 7: the Goldman reboot. They also sold green Sky in the quarter,
Speaker 7: which is putting some of their consumer efforts behind them
Speaker 7: and they're going to focus really on what's been the
Speaker 7: core of the company over the long term. We've been
Speaker 7: really positive on the shares. My senses will continue to
Speaker 7: recommend it even after today's move, and as the company
Speaker 7: earns around sixteen on tangible common equity in this quarter,
Speaker 7: it's a signal that they're starting from a very healthy
Speaker 7: point even this reboot.
Speaker 6: Something that Sheanali said that really stands out because it
Speaker 6: seems like of banks are implying the same thing in
Speaker 6: their numbers, use a balance sheet. We're hearing that again
Speaker 6: and again, using their balance sheets more aggressively. Is this
Speaker 6: the new model kind of going back to the old
Speaker 6: one as they try to compete with private credit and
Speaker 6: private asset managers, they got to use their balance sheets
Speaker 6: and they find ways to do it even with all.
Speaker 7: The regulatory Well, I think that that's going to be
Speaker 7: key because we've just gone through a moment where the
Speaker 7: banks in general of lost market shared to non banks,
Speaker 7: and I personally believe in a five percent yield world
Speaker 7: with a flat or inverted yield curve, it's going to
Speaker 7: be harder to get financing than when money was free
Speaker 7: during COVID. Okay, So having access to a balance sheet
Speaker 7: that's reliable is going to become more important to banks clients,
Speaker 7: and over time it could be part of the moment
Speaker 7: that helps these banks regain some share from that moment
Speaker 7: in time.
Speaker 6: Forgive me, there were years when a lot of these
Speaker 6: bank executives were saying that they can't do this, that
Speaker 6: they are hamstrung, their hands are tied because of financial regulations.
Speaker 4: What changed, well, I believe me.
Speaker 7: I don't think any bank's going to stay outside of
Speaker 7: the financial regulations. I think it's just core blocking and tackling,
Speaker 7: which is having reliable acts. I think what's changed is
Speaker 7: the other markets aren't as easy. So zero interest rates
Speaker 7: meant that it was very easy for non banks to
Speaker 7: be able to raise financing to be able to enter
Speaker 7: the market. It's going to be harder for non banks
Speaker 7: to raise funding to serve bank customers. So I think
Speaker 7: that's what's changed, not the banks, but I think it's
Speaker 7: the other items and other conditions.
Speaker 4: You said you like Goldman's action.
Speaker 5: Olie was talking about how Ted Pick his whole business
Speaker 5: has been really the trading and potentially we'll read through
Speaker 5: Morgan Standing tomorrow.
Speaker 4: What other banks do you like?
Speaker 7: Well, we like Truest. It's one of our favorite ideas.
Speaker 7: It's one of the biggest banks in the nation. They
Speaker 7: sold their insurance broker for a whopping price recently they're
Speaker 7: going to trade in. What you don't see now is
Speaker 7: that they haven't put the gain into their financial statements yet,
Speaker 7: so the stock's really trading around one fifteen intangible book,
Speaker 7: which is a very low valuation for one of the
Speaker 7: best banks in the nation. It's got a five point
Speaker 7: seven percent yield. The next time that dividend changes, it's
Speaker 7: going up, not down. So our view is at a
Speaker 7: single digit pe ratio for a bank that's got one
Speaker 7: of the best franchises in the country. That is I
Speaker 7: would say our largest bank idea at the moment, and
Speaker 7: we're pretty bullish on that one. And then you know
Speaker 7: they're also doing a restructuring. They got a little bit
Speaker 7: off sides after their merger, and we think the new
Speaker 7: management team is very focused on fixing things.
Speaker 5: When you look at the loan market at the moment,
Speaker 5: what do you make from it? Because know your notes
Speaker 5: you talk about the seasonality is low.
Speaker 7: Slow, it's slow what we're seeing, and all the results
Speaker 7: that have come out loans have actually been a little
Speaker 7: bit lower than we expected. And when I watch, you know, look,
Speaker 7: we've had three now four banks report our firm files
Speaker 7: two hundred and twenty five. We got a long way
Speaker 7: to go. But what do I think. I think delay
Speaker 7: in the pivot. So our bull case on the stocks
Speaker 7: and we're market performed, So the bull case we're pretty balanced.
Speaker 7: But the bull case is that we're going to get
Speaker 7: a pivot and acceleration into earnings going into twenty twenty five.
Speaker 7: To the extent that we get less rate cuts, less growth,
Speaker 7: it probably pushes that back a little bit for when
Speaker 7: we see an acceleration in earnings.
Speaker 2: How aligned to you with the gloom of Jamie Diamond.
Speaker 2: I've a JP Milkan What did you make of the
Speaker 2: caution from him on Friday? Typically we're all used to
Speaker 2: sort of beating race, beating race from JP Milkan. Then
Speaker 2: on Friday things kind of changed. What do you make
Speaker 2: of that?
Speaker 7: There are still big macro risks in the marketplace. And
Speaker 7: I'll tell you when I talked to bank management teams,
Speaker 7: it's almost like I feel like I'm having a credit
Speaker 7: analyst discussion more than an in equity analysts discussion. They're
Speaker 7: very focused on their own balance sheet. I think strength
Speaker 7: and stability seems to be a bigger presence in the
Speaker 7: strategic boardroom of these banks. They are building these banks
Speaker 7: to make sure they can withstand any challenge.
Speaker 8: And Tom, if you look at the way Goldman and
Speaker 8: Morgan Stanley have been trading, they've been bears. Morgan Stanley's
Speaker 8: down more than seven point five percent over the last
Speaker 8: twelve months.
Speaker 4: Does it deserve that?
Speaker 8: Are these kinds of investment banking and trading businesses is
Speaker 8: just something people don't want to pick up on in
Speaker 8: this environment.
Speaker 7: I think for Morgan Stanley it's just a preference for
Speaker 7: Goldman Sachs. For us, we had been really bullish on
Speaker 7: Morgan Stanley.
Speaker 1: We pulled back.
Speaker 7: It's just the dynamics of what's happening in their own
Speaker 7: earnings at the moment. We just think there's more upside
Speaker 7: because there's more delta coming at Goldman. They can do
Speaker 7: a little bit more self improvement, and so we like
Speaker 7: it more. But so we're a market perform on Morgan Stanley,
Speaker 7: but think it's a fine company. We just think the
Speaker 7: dynamics don't have as much delta to them.
Speaker 2: Chanie pass like that alongside tell mi shall I kyped up?
Speaker 2: You just like to read the Number's just the ren
Speaker 2: things sumptionalty quickly, bait bait bait. How would you frame
Speaker 2: it any other way? The gold sacks this smalling.
Speaker 4: There's no other way to frame it.
Speaker 8: Remember they've only been training at one point two times
Speaker 8: book value. Heading in today Morgan Stanley's at one point five.
Speaker 8: It sets the bar super high for tomorrow. And remember
Speaker 8: there's a big cloud over Morgan Stanley with a lot
Speaker 8: of questions about the investigations that they're facing. They haven't
Speaker 8: said anything yet, and so the earnings are one thing,
Speaker 8: but then the story is also going to be equally
Speaker 8: important heading into our.
Speaker 2: Let's got to score U up on the board again
Speaker 2: and just look at MOK and Standley and gets winning Sat.
Speaker 2: Tomorrow morning in the pre market, it is positive off
Speaker 2: the back of what you're saying on Goldman sacks. Goldman
Speaker 2: up by three point four percent, just beats across the board,
Speaker 2: and we totally so briefly about the night, sure of
Speaker 2: the upside surprise, let's just sit on fixed sounds and
Speaker 2: trading revenue just for a bait longer. Full point three
Speaker 2: to two billion the estimate three point sixty four. That
Speaker 2: is a solid.
Speaker 6: Beat, and it really raises a question, Okay, they're using
Speaker 6: their balance sheet more so that means they're making directional
Speaker 6: bets or taking things down in a market that might
Speaker 6: look like it's liquid but may not be as liquid.
Speaker 6: And then it also raises this question about just how
Speaker 6: much they're taking share from some of these other companies
Speaker 6: just in terms of private asset managers, which is something
Speaker 6: a lot of people have talked about.
Speaker 7: But also to remember, we don't have Credit Sweee anymore.
Speaker 7: So a year ago, Credit Suite disappeared overnight in the ubs.
Speaker 7: So when you look at the statistics, I believe that
Speaker 7: market share was pretty much captured by many of the
Speaker 7: biggest other banks. So I think that's also on a
Speaker 7: year over year basis been somewhat of a.
Speaker 2: So when Aschinali, is the pinketting bigger or did they
Speaker 2: just take someone else's slice? So you said that slice
Speaker 2: belong to Credit Suite.
Speaker 7: I would say amongst probably others, I would say they're
Speaker 7: getting a bigger piece of the slice. Because while I
Speaker 7: do think and I think Morgan Stanley will benefit tomorrow
Speaker 7: from the market just being better. And believe me, is
Speaker 7: someone who operates an investment bank, I pay attention to
Speaker 7: league tables and market share, believe me. So the biggest
Speaker 7: firms have probably picked up the most share, and it's
Speaker 7: a few firms who have done that, and Morgan Stanley
Speaker 7: and Goldman would be in that bucket.
Speaker 6: What's good for Goldman Sachs isn't necessarily good for Science
Speaker 6: Bank for some of the others that are smaller regional banks.
Speaker 6: How much is the gain of big banks the loss
Speaker 6: of regionals.
Speaker 7: Well, well, they tend to do different things, so the
Speaker 7: net interesting income world that they all live in is
Speaker 7: somewhat similar. It's the investment banking piece that really is
Speaker 7: the big delta that we've been talking about. So as
Speaker 7: we get away from banks that report that don't have that,
Speaker 7: they're going to be war attuned to what's happening in
Speaker 7: the interest rate environment. The good news there though, Li
Speaker 7: says that six months ago we would have been talking
Speaker 7: about the quantity of deposits. It's all about deposits, the
Speaker 7: quantity of deposits. The nice thing is that pressure has eased,
Speaker 7: and you're already seeing it in the numbers.
Speaker 1: Now.
Speaker 7: It's the cost of those deposits. And we're waiting for
Speaker 7: the Fed to cut rates a little bit to take
Speaker 7: some of the heat off, because you know what, US
Speaker 7: treasuries are really competitive for bank deposits. We need the
Speaker 7: US treasury rate to back off a little bit for
Speaker 7: the banking industry to do a little better. And it
Speaker 7: is actually all about deposits more so than loans.
Speaker 2: When you say we're white saying you made the banks,
Speaker 2: because for the rest of us with money on deposit,
Speaker 2: we're not.
Speaker 4: We're to poss on hid by bills. Final time.
Speaker 2: You know, I make it.
Speaker 4: Happen on wine. It's easy to do.
Speaker 9: Tema shot, Thank you.
Speaker 10: So consumer spending has been strong. I think it is
Speaker 10: driven by strong fundamentals. Job growth has been solid, We've
Speaker 10: seen real wage gains. We're in a pretty strong economy
Speaker 10: with good growth, So yes.
Speaker 1: It's part of that story.
Speaker 10: But you know, I think what we're realizing is we're
Speaker 10: getting a nice tailwind from the supply side of the economy,
Speaker 10: good labor force growth, strong productivity, good real wage gains.
Speaker 1: So with that, I think, you know, consumers are spending.
Speaker 11: What's the thinking in your office and among your colleagues
Speaker 11: about does this last or is this a surprise that
Speaker 11: you think could go wait at any minute.
Speaker 10: Well, one thing that makes it really hard to forecast
Speaker 10: is we're still feeling the effects of the after effects
Speaker 10: of the pandemic and Russia's war in Ukraine and all
Speaker 10: the things that have happened in between. So we're definitely still
Speaker 10: seeing an adjustment process by the consumer in the economy overall.
Speaker 1: But you know, overall, I think that.
Speaker 10: The economy will continue to grow at a solid rate
Speaker 10: this year, probably not as high as the three point
Speaker 10: one percent we saw la year, but something like two
Speaker 10: percent or around that. So I feel like we're still
Speaker 10: in a good place, probably not as rapid growth as
Speaker 10: we saw last year.
Speaker 11: Speaking of international events, I have to ask you the
Speaker 11: Middle East going on right now, how do you think
Speaker 11: about the economic and policy.
Speaker 9: Implications of these events?
Speaker 10: Right so, obviously we're watching this very carefully. I think
Speaker 10: the primary way you see it through is first of all,
Speaker 10: through commodity prices, but second is what we think of
Speaker 10: as a flight to safety, where investors, when they see
Speaker 10: risks in the global economy, they tend to bring money
Speaker 10: to the US dollar, and that tends to push yields
Speaker 10: down somewhat. Right now, I think, you know, markets are
Speaker 10: pretty pretty stable. We're not seeing big movements in that way,
Speaker 10: but generally that's the way I would what I would
Speaker 10: expect to see when you see heightened geopolitical tensions.
Speaker 11: When you think about what the markets are reacting to
Speaker 11: and what could come out of this, is this more
Speaker 11: of an inflation worry or a growth concern.
Speaker 1: Well, it's really hard to say.
Speaker 10: It really depends on how the situation evolves right now.
Speaker 10: I don't think of this as maybe in the near
Speaker 10: term it could be effect of financial conditions and commodity prices.
Speaker 10: As I mentioned, I don't see this as a major
Speaker 10: driver the overall forecast or outlook for economic growth or
Speaker 10: for inflation.
Speaker 11: Speaking of inflation, CPI came in much hotter than expected
Speaker 11: and sort of freaked everybody out on Wall Street and
Speaker 11: market sort of took that as a turning point in
Speaker 11: Fed policy.
Speaker 1: Do you see it that way?
Speaker 10: I don't see it as a turning point. I think
Speaker 10: that you know, we've saw inflation come down.
Speaker 1: Maybe quicker than we expected. Last year.
Speaker 10: We definitely saw really lower readings and inflation in the
Speaker 10: final six months that I never thought that that was
Speaker 10: going to stay that low.
Speaker 1: That was unusually low.
Speaker 10: We're now seeing some a little bit unusually high readings. Overall,
Speaker 10: I think the picture is one of the economy is
Speaker 10: getting in better balance, we still have a strong labor market,
Speaker 10: and we're seeing inflation gradually come down.
Speaker 6: Now.
Speaker 10: I do think that, you know, for me, what do
Speaker 10: I see in the data, well the economy, and then
Speaker 10: you pointed out the retail sales today, but more broadly,
Speaker 10: the economy continues to be strong again. I think we're
Speaker 10: being helped by strong demand and supply, and those are
Speaker 10: helping growth, and we're seeing you know, inflation come down
Speaker 10: a little bit slower than expected, and so you know,
Speaker 10: I think markets are taking all that information into account
Speaker 10: and how they how they expect policy to be. For me,
Speaker 10: I'm you know, data dependent as always, really take the
Speaker 10: totality of the data and think about what it means
Speaker 10: for achieving our maximum employment and price stability goals. So
Speaker 10: I don't see this as a game change or anythink.
Speaker 10: I do think it's important information that will clearly, you know,
Speaker 10: affect my thinking and my forecast.
Speaker 11: Even those who've thought about what PCEE might be after
Speaker 11: the p p I and cp I say inflation isn't
Speaker 11: coming down rapidly anymore, but you do have the strong growth,
Speaker 11: you have very low unemployment. Why cut rates if the
Speaker 11: economy is doing fine at this level.
Speaker 10: Well, first of all, I think Monte policy is working
Speaker 10: at the rates that we have now, So I think
Speaker 10: I think Monte policy is in a good place over
Speaker 10: the past six twelve to eighteen months, we've seen all
Speaker 10: pretty much all the measures of imbalances in the labor market,
Speaker 10: and our economy received many of them back to levels
Speaker 10: we saw in twenty eighteen or twenty nineteen. So we're
Speaker 10: seeing the you know, restoring balance in the economy. We
Speaker 10: are seeing a slow decline in inflation. So I do
Speaker 10: think Monterey policy right now is in a good place.
Speaker 10: I'm not fixated on where the rates need to go,
Speaker 10: you know, over the next year. What I'm focused on
Speaker 10: is how do we best achieve our maximum employment and
Speaker 10: price stability goals. The data we're seeing show that the
Speaker 10: economy is strong and that's really good news, and labor
Speaker 10: markets strong. At the same time, we are getting better balance,
Speaker 10: and we're seeing some decline overall and inflation. So for me,
Speaker 10: it's really about getting that right and then whatever we
Speaker 10: need to do to adjust monetary policy we can do
Speaker 10: to bet you know, best continue.
Speaker 1: The progress towards our goals.
Speaker 10: So that's how I'm thinking about it, and we'll just
Speaker 10: have to keep watching the data and make the decisions
Speaker 10: based on those goals.
Speaker 9: Well, is your base case that you will cut rates
Speaker 9: this year?
Speaker 10: My own view is I think that with inflation continuing
Speaker 10: to gradually come down, and I guess I would say
Speaker 10: gradually is the operative word here, and with the economy
Speaker 10: remaining strong, I do think that given where the level
Speaker 10: of rates are, real interest rates now are considerably higher
Speaker 10: than they were before because inflation has.
Speaker 1: Come down quite a bit.
Speaker 10: So we will need start a process at some point
Speaker 10: to bring interest rates back to more normal levels. And
Speaker 10: my own view is that, well, you know that process
Speaker 10: will likely start this year, but again it's going to
Speaker 10: be driven driven by the data and achieving our goals.
Speaker 9: So it's possible you don't do anything this year.
Speaker 10: Well, again you're asking me to speculate and what they
Speaker 10: will happen more And you know, right now, I think
Speaker 10: Monte policies in a good place. We're seeing the progress.
Speaker 10: We're seeing progress. It's a bumpy road on the inflation front,
Speaker 10: and we'll just have to figure out how to best
Speaker 10: adjust policy as needed to achieve our goals.
Speaker 9: Now, you mentioned the real rate is policy tight?
Speaker 10: Now, I do think we have restrictive monetary policy.
Speaker 1: I do think policy is tight.
Speaker 10: So what do I look for Because the economy is growing,
Speaker 10: it grow over three percent? You know, we're adding about
Speaker 10: two hundred and seventy five thousand jobs over the first
Speaker 10: three months, So that seems like an economy that's really
Speaker 10: strong and not being held back by monetary policy. But
Speaker 10: if you take a step back, all these measures of
Speaker 10: imbalances in the labor market, whether job openings or wage rates,
Speaker 10: or quits rates, or all the other indicators we look at,
Speaker 10: all of them are moving from being very tight to
Speaker 10: less tight, and most of them back to more strong.
Speaker 10: Labor market are getting closer there. I mean, job openings
Speaker 10: are still high, wage growth is still a bit high,
Speaker 10: but these.
Speaker 1: Are all moving in the right direction.
Speaker 10: Stance in MANTE policy has really been an important driver
Speaker 10: of restoring balance to the economy and helping bring inflation
Speaker 10: towards two percent.
Speaker 9: What's left with inflation?
Speaker 11: Is it something that you can affect or are these
Speaker 11: non interest rate responsive sectors?
Speaker 10: You know, MANTE policy can affect inflation in the economy.
Speaker 10: It works through multiple channels, so there are some sectors
Speaker 10: that maybe are not as intrasensitive, but the economy is
Speaker 10: interest rates sensitive. We've seen that over the past couple
Speaker 10: of years as we've moved from an accommodated.
Speaker 1: Policy to a restrictive policy.
Speaker 10: So Monte policy is working. To expect it to continue
Speaker 10: to work to bring inflation down.
Speaker 1: You're going to see it, you know, show up.
Speaker 10: In different parts of the inflation rates, you know, goods
Speaker 10: versus services and things.
Speaker 1: But over the past year year and a half we have.
Speaker 10: Seen a broad based declining inflation in all these categories.
Speaker 10: It's just that we haven't gotten all the way to
Speaker 10: two percent, and we just need to keep policy in
Speaker 10: the right place to achieve that two percent goal.
Speaker 11: The question I always ask is what companies telling you
Speaker 11: these days about their hiring plans, about what they're having
Speaker 11: to pay, and about inflation, whether they're raising prices or
Speaker 11: having to pay higher prices.
Speaker 10: Well, clearly, if you asked me this question a year
Speaker 10: or two ago, that's all they would be talking about.
Speaker 10: Price increases, compensation increases, the challenges of hiring employees. Today,
Speaker 10: I think those you know, those comments are still out
Speaker 10: there a little bit, but far less than before.
Speaker 1: We're hearing from our context.
Speaker 10: You know that it's easier to fill positions than it
Speaker 10: used to be. Wage compensation pressures are less, and price
Speaker 10: pressures are are less. I think that's consistent with what
Speaker 10: we're seeing overall in the data.
Speaker 9: You're the potential growth guy. Has potential growth moved up?
Speaker 10: You know, I am being getting more optimistic about potential
Speaker 10: growth in the economy.
Speaker 1: I think for a couple of reasons.
Speaker 10: One is, you know, through the pandemic and everything that
Speaker 10: happened after that, I, like most people, had concerns that
Speaker 10: the supply side of the economy had suffered, you know,
Speaker 10: damage the labor force and in terms of labor force
Speaker 10: and participation. And you know, as we've watched the data
Speaker 10: over the past two years, we've seen an increase in
Speaker 10: labor force participation, increase in labor force growth, and we've
Speaker 10: seen a rebound of productivity. Now I'm not saying that
Speaker 10: we're in some you know, new high growth kind of world,
Speaker 10: but I do think a potential growth is probably closer
Speaker 10: to two percent or a little higher, which is well
Speaker 10: above a lot of estimates of the past few years.
Speaker 10: And that's a very positive sign for us real incomes
Speaker 10: and for the economy and honestly for helping get inflation down.
Speaker 11: A question for all of our friends around us on
Speaker 11: trading desks. You had a briefing on QT at the
Speaker 11: last meeting from the FED staff and members, according to
Speaker 11: the minutes, generally agreed that it should start soon.
Speaker 9: Does that mean May or does.
Speaker 1: That mean June.
Speaker 10: Well, I think we said fairly soon, and the you know,
Speaker 10: I think that the reasoning for slowing the pace of
Speaker 10: reduction or balance sheet makes a lot of sense.
Speaker 1: It's a prudent course of action.
Speaker 10: We are decreasing the balance sheet quite rapidly, and by
Speaker 10: slowing that we'll have more ability to monitor, assess, and
Speaker 10: analyze as we get eventually to an ample reserves kind
Speaker 10: of world that we're aiming for. Everything is going with
Speaker 10: the balance sheet. Everything is going exactly as planned. Things
Speaker 10: are going well. When we decide to slow the pace
Speaker 10: of the balance sheet, that's a decision for the committee.
Speaker 1: No decision was made at the.
Speaker 10: Last meeting, but obviously we'll get together relatively soon and
Speaker 10: discuss this further. But to me, this is a sign
Speaker 10: of success of the plans we laid out almost two
Speaker 10: years ago to reduce the balance sheet. We've had very
Speaker 10: little disruption in markets. It's worked exactly as planned and
Speaker 10: we're just executing on that plan and that's going very smoothly.
Speaker 9: So QT could come before great boots.
Speaker 1: These are really separate issues.
Speaker 10: I mean our shrinking the balance, we're focused on getting
Speaker 10: to ample reserves. On monetary policy, we're very focused in
Speaker 10: achieving our maximum employment and priceability goals. Those are different objectives,
Speaker 10: those instruments can, obviously in different times, in different ways.
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