WEBVTT - Bloomberg Surveillance: Bruce Kasman on Fed Expectations

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<v Speaker 1>Bruce Knsman, chief economist and head of Global economic Research

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<v Speaker 1>at JP Morgan joins us Now for more. Bryce, let's

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<v Speaker 1>talk about this the FED decision today, with expectations high,

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<v Speaker 1>we get some kind of guidance about maybe a March

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<v Speaker 1>rateca At the same time, on Friday, we're looking for

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<v Speaker 1>payrolls growth still close to two hundred k. How do

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<v Speaker 1>you reconcile those two things, Bruce.

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<v Speaker 2>Well, I think what the Fed is going to do

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<v Speaker 2>today is open a door, but basically tell us it

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<v Speaker 2>hasn't decided when it's going to walk through it. And

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<v Speaker 2>I think there's a story here about inflation coming down

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<v Speaker 2>that's encouraging them. But there's also a story about the

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<v Speaker 2>economy looking pretty strong here, which is raising questions about

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<v Speaker 2>how restrictive actually the five and a half percent policy

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<v Speaker 2>stances they're going to grapple with that. I think for

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<v Speaker 2>a while, I think the data is going to tell

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<v Speaker 2>the tale. We've got this two CPI reports before the

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<v Speaker 2>March meeting, we got two payroll reports.

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<v Speaker 3>We're looking for a strong payroll report on Friday.

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<v Speaker 2>I think most likely the strength of growth and I

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<v Speaker 2>think some firming in goods price inflation. We're expecting is

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<v Speaker 2>going to slow the FED down and have them wait

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<v Speaker 2>in March.

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<v Speaker 1>Bruce, We've got plenty of questions around the table about

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<v Speaker 1>the labor markets, so let's talk about it a little

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<v Speaker 1>bit more. You're looking for north of two hundred can

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<v Speaker 1>I think on Friday the meet and estimate in our survey.

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<v Speaker 1>At the moment it's one eighty five unemployments below four percent.

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<v Speaker 1>I think you've raised the right question. What evidence is

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<v Speaker 1>there that we ask quote sufficiently restrictive given what we're

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<v Speaker 1>seeing in the labor market.

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<v Speaker 3>Well, I think an interesting question.

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<v Speaker 2>I think they will use that language and the statement

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<v Speaker 2>today sufficiently restrictive. Many FMC members have been basically emphasizing

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<v Speaker 2>that policy is at a restrictive stance and should.

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<v Speaker 3>Start to come down.

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<v Speaker 2>But the economy did very well at the end of

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<v Speaker 2>last year. It's carrying continued strength into the start of

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<v Speaker 2>the year. I think the labor market is showing some

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<v Speaker 2>reduction in churning, some reduction in labor demand, but there

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<v Speaker 2>is demand starting to pick up in some sectors of

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<v Speaker 2>the economy, and I think job growth is going to

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<v Speaker 2>stay strong here. I think the unemployer rate's going to

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<v Speaker 2>stay below four percent. So I think they've got a

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<v Speaker 2>tough balancing act here. How they talk to us about

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<v Speaker 2>that balancing act between inflation progress, strength of growth, and importantly,

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<v Speaker 2>how they interpret financial conditions becomes really the color we're

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<v Speaker 2>going to get today in terms of thinking about where

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<v Speaker 2>they stand.

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<v Speaker 4>I find this labor market incredibly confusing right now, and

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<v Speaker 4>I'd love your help to try to understand it, because

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<v Speaker 4>you see it as stronger than the average person on

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<v Speaker 4>Wall Street. We've heard about those slew of layoffs ups PayPal, Google,

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<v Speaker 4>Amazon City, Macy's, you can go on and on. Yesterday

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<v Speaker 4>we got the jolt state of the job openings data,

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<v Speaker 4>and when you look beneath the hood, you can see

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<v Speaker 4>the level of quits. People actually quitting fell to the

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<v Speaker 4>lowest the rate going back to twenty twenty. At what

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<v Speaker 4>point are we seeing real time weakening that just isn't

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<v Speaker 4>making its way into the overall headline data.

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<v Speaker 2>So I think we have to distinguish between a normalization

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<v Speaker 2>and weakening.

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<v Speaker 3>And remember the labor market was.

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<v Speaker 2>Unusual over twenty twenty one through early twenty twenty three,

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<v Speaker 2>as we were really normalizing back after a COVID shock

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<v Speaker 2>that was quite perfect. So what I think we're seeing

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<v Speaker 2>now is pace of job growth slow. I think we're

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<v Speaker 2>seeing less people leave jobs. I think we're seeing wage

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<v Speaker 2>inflation come off at.

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<v Speaker 3>Very high levels.

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<v Speaker 2>But I think we're also seeing in the high frequency

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<v Speaker 2>data a sense that things are starting to stabilize, and

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<v Speaker 2>stabilize at a reasonably strong pace, consistent with the fact

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<v Speaker 2>that the unemployment rates below four percent, consistent with the

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<v Speaker 2>fact that the economy is growing at a three percent

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<v Speaker 2>pace here. So I think we have to be a

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<v Speaker 2>little careful not to get carried away by momentum that's

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<v Speaker 2>reflecting the normalization after outsized strength in the labor market

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<v Speaker 2>over the last two years.

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<v Speaker 4>How do we know that we've really killed the potential

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<v Speaker 4>for a wage price viral if we do see this

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<v Speaker 4>ongoing strength underpinning Yes, i'lbe at some kind of peripheral layoffs,

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<v Speaker 4>but otherwise, as you say, a very strong labor market.

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<v Speaker 2>I think the term wage price file is too extreme

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<v Speaker 2>in terms of what the debate is right now. I

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<v Speaker 2>think we've seen that the shocks that pushed wage inflation up,

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<v Speaker 2>that pushed inflation up, many of them have gone from

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<v Speaker 2>the scene, and we're not with a threat that inflation

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<v Speaker 2>is going to be four or five percent. I think

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<v Speaker 2>we're debating within a range of is inflation settling back

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<v Speaker 2>towards the fed's targeted two or are we getting stuck

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<v Speaker 2>somewhere around three? And there's a story there which we're

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<v Speaker 2>seeing with wage inflation, which looks like it's still running

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<v Speaker 2>above four percent, and you're asking, well, how well is

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<v Speaker 2>productivity doing, how much pricing power do companies have, Whether

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<v Speaker 2>the big drops and goods pricing we've seen in the

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<v Speaker 2>last few months is a bit of a temporary phenomenon,

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<v Speaker 2>and how much further progress are we going to see

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<v Speaker 2>on shelter cost service price inflation. And these are all

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<v Speaker 2>questions which we haven't answered yet, but we're debating with

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<v Speaker 2>the point about is inflation coming all the way back

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<v Speaker 2>to the low twos or is it getting stuck somewhere

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<v Speaker 2>around three? And neither of those is a wage price spiral.

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<v Speaker 2>That's not really the dynamic of this economy right now.

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<v Speaker 2>But three percent inflation is too high for the FED,

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<v Speaker 2>and we'll certainly slow them down, if not stop them,

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<v Speaker 2>if that's what the data starts to show.

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<v Speaker 1>Bryce. I just wanted to hand relevant the FEDER reserve

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<v Speaker 1>actually is to this conversaying, we've talked about them so

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<v Speaker 1>much over the last two years. It's interesting, isn't it

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<v Speaker 1>just how race sensitive is this economy? If high rates

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<v Speaker 1>then slow it down, will lower rates speed it up? Bruce,

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<v Speaker 1>I don't know the answer to that. How relevant is

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<v Speaker 1>the FED?

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<v Speaker 2>I think that's a really important question, and I would

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<v Speaker 2>just say two things here. First of all, I think

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<v Speaker 2>last year we had a very significant drag coming from

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<v Speaker 2>higher interest rates on housing other durable spending. Monetary policy

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<v Speaker 2>did do damage, but it was offset by fiscal stimulus,

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<v Speaker 2>It was offset by sharp falls and energy prices, and

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<v Speaker 2>it was offset by still benefits of COVID normalization. I

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<v Speaker 2>think now we're in a really interesting position because monetary

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<v Speaker 2>conditions are still tight, borrowing rates are still high, bank

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<v Speaker 2>lending standards have tightened, but financial conditions have eased a lot.

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<v Speaker 2>And that juxtaposition of tight monetary conditions and easing financial

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<v Speaker 2>conditions is really unprecedented, and how it plays out in

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<v Speaker 2>economic performance is uncertain. So I think in that regard,

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<v Speaker 2>your question is really spot on. This is a really

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<v Speaker 2>tough tough economy to get your hands around in terms

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<v Speaker 2>of what the fed's transmission is doing.

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<v Speaker 3>As we look to twenty twenty four.

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<v Speaker 1>I'm so pleased you brought that out because I'd introduced

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<v Speaker 1>another dynamic as well. This conversation today about higher real

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<v Speaker 1>interest rates, the FED sort of allowing passive tightniggas inflation

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<v Speaker 1>comes down and keeps nominal rates steady. Bruce, is that

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<v Speaker 1>offset my bets a real incomes in America?

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<v Speaker 2>Well, first of all, I think it's wrong to say

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<v Speaker 2>that there's a mechanical link between inflation and real interest rates.

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<v Speaker 2>That depends on how people think about the forward path

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<v Speaker 2>of inflation. It depends on how interest rate markets, as

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<v Speaker 2>we discussed a minute ago, of feeding through the financial conditions.

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<v Speaker 2>But I do think the point you're making is important.

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<v Speaker 3>One.

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<v Speaker 2>The rise the fallen inflation is a reduction of a

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<v Speaker 2>set of supply shocks that hit us. As that's happening,

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<v Speaker 2>that's a boost to household purchasing power, and we can

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<v Speaker 2>see the consumer respond to that. The good news is

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<v Speaker 2>that income is also being generated by the corporate sector

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<v Speaker 2>right now. It's not a move away from corporate profits.

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<v Speaker 2>As we're generating strong demand overall, and as we're generating

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<v Speaker 2>what has been pretty good productivity outcomes, we're looking for

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<v Speaker 2>a three percent quarterly gain in the fourth quarter productivity

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<v Speaker 2>print tomorrow, which would be pretty impressive.

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<v Speaker 4>Just quickly, Bruce, to wrap this up, economics tries to

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<v Speaker 4>be agnostic when it comes to politics, and it tries

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<v Speaker 4>to look at these very specific issues and calibrations of

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<v Speaker 4>inflation and labor markets, but it's hard to avoid the politics.

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<v Speaker 4>This year, a lot of people saying the FED is

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<v Speaker 4>going to try to get an earlier start to avoid

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<v Speaker 4>cutting rates more aggressively right into the election. We're also, though,

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<v Speaker 4>hearing from congress members sure at Brown the latest in

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<v Speaker 4>the Senate saying, I urge the Federal Reserve to cut rates.

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<v Speaker 4>How difficult does that make the situation for the FED?

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<v Speaker 4>How does that factor into your considerations?

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<v Speaker 2>So I think we should not consider the FED as

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<v Speaker 2>having an explicit political lens in terms of their policy setting,

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<v Speaker 2>But the FED is operating in a political environment, and

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<v Speaker 2>I think there is a sensitivity there that if the

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<v Speaker 2>FED was slow in lowering rates and the economy did

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<v Speaker 2>fall as we moved into the election campaign season, that

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<v Speaker 2>they'd be politically vulnerable. So I do think there's a

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<v Speaker 2>bit of a bias here that if they think they're

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<v Speaker 2>going to ease that they probably started a little earlier.

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<v Speaker 2>That does weigh on our thinking. It hasn't pushed us

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<v Speaker 2>to think they'll go all the way in March, but

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<v Speaker 2>I do think that's a consideration we should have in

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<v Speaker 2>our minds.

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<v Speaker 1>Hy Bruce is trying to catch up to get your thoughts,

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<v Speaker 1>Bruce Kaslan, the of JP. Morgan