WEBVTT - Surveillance: Fed Expectations with Hatzius 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.200 --> 0:00:12.720 with Jonathan Ferrell and Lisa A. Brawmowitz Jay Lee. We 0:00:12.840 --> 0:00:16.759 bring you insight from the best and economics, finance, investment, 0:00:17.079 --> 0:00:22.400 and international relations. Find Bloomberg Surveillance, an Apple podcast, Suncloud, 0:00:22.800 --> 0:00:26.240 Bloomberg dot Com, and of course on the Bloomberg terminal. 0:00:29.720 --> 0:00:32.800 Joining us. Now we get really Lucky Nan, chief economist 0:00:32.920 --> 0:00:36.120 at Government Sex. Yeah, let's talk about it. China GDP 0:00:36.240 --> 0:00:39.360 forecast over at Goldman now three for the year, you're 0:00:39.360 --> 0:00:42.800 at base case for pretty much everybody. They enter recession. Yeah. 0:00:42.880 --> 0:00:46.600 Where on Earth does that leave the US economy? I 0:00:46.600 --> 0:00:49.680 think the US doesn't have quite the same degree of 0:00:49.720 --> 0:00:53.800 headwinds as as both China and Europe. And China obviously 0:00:53.840 --> 0:00:57.080 you have zero COVID policy and the property market downtown 0:00:57.600 --> 0:01:01.240 which is a multi year development. In Europe, you've got 0:01:01.240 --> 0:01:04.480 the gas issue. There's nothing quite to the same degree 0:01:04.520 --> 0:01:06.920 that we have in the US. But it's going to 0:01:07.000 --> 0:01:10.839 be a slow growth environment below trend. The FED wants 0:01:10.880 --> 0:01:14.680 the lord trend. That's why financial conditions are where they are, 0:01:14.840 --> 0:01:18.440 because it it's tightening for the aggressively. And you've got 0:01:18.440 --> 0:01:21.720 the fiscal drags or plenty of headwinds for sure, but 0:01:21.959 --> 0:01:24.760 I don't think it's quite as bad as in as 0:01:24.760 --> 0:01:26.920 in China or the your area. How do you expect 0:01:26.959 --> 0:01:30.120 cham and Pound to navigate that on this Friday. I 0:01:30.160 --> 0:01:34.759 think he'll be balancing between two things. One, I think 0:01:34.760 --> 0:01:37.400 he will lay out a case, as he did at 0:01:37.400 --> 0:01:40.000 the last press conference, as they did in the minutes, 0:01:40.600 --> 0:01:44.360 for slowing the pace of increases. We have to seventy 0:01:44.360 --> 0:01:49.560 five basis point moves. Our expectation would be, barring significant 0:01:49.600 --> 0:01:54.160 data surprises, that the September move is fifty. I think 0:01:54.160 --> 0:01:56.760 he'll you know, I don't think he'll be specific about 0:01:56.800 --> 0:01:59.640 the number, but I do think he'll be saying, you know, 0:01:59.680 --> 0:02:05.360 there is a risk of overtightening, and therefore it makes 0:02:05.400 --> 0:02:08.040 sense to go a little bit more slowly than these 0:02:08.040 --> 0:02:11.200 really outsized increases. But at the same time, he'll he'll 0:02:11.240 --> 0:02:13.239 make make clear that the job is not yet done. 0:02:13.280 --> 0:02:16.920 Inflation is way too high. They're very committed to bringing 0:02:16.960 --> 0:02:20.480 inflation back down to two percent or or thereabouts. So 0:02:20.520 --> 0:02:22.560 I think it will be a balancing act. Yeah, and 0:02:23.000 --> 0:02:25.320 there's a mix here of themes and one of those 0:02:25.400 --> 0:02:27.760 what we just saw from Macy's where Bloomingdale's in the 0:02:27.840 --> 0:02:30.600 haves do well and Macy's in the have not really 0:02:30.639 --> 0:02:34.200 a struggling Or it could be John Taylor Stanford visiting 0:02:34.200 --> 0:02:37.720 with Bloomberg in the last twenty four hours saying sustain, sustain, 0:02:37.840 --> 0:02:41.640 sustain a higher yield environment. Are we getting our time, 0:02:41.760 --> 0:02:44.200 our extra excess wrong right now? Do we need to 0:02:44.200 --> 0:02:48.360 look out two years, three years, or five years of 0:02:48.440 --> 0:02:53.320 elevated inflation? I think a year from now, two years 0:02:53.360 --> 0:02:55.880 from now, inflation will be much lower because there are 0:02:56.000 --> 0:02:59.400 some you know, some some drivers. I mean, commodity prices 0:02:59.440 --> 0:03:02.480 are clear the good sector in general, I do think 0:03:02.480 --> 0:03:04.880 that's going to come off a lot. The risk is 0:03:04.919 --> 0:03:08.800 more on the services side, where we've seen less of 0:03:08.840 --> 0:03:12.840 an indication that things are slowing, especially rents are still 0:03:12.880 --> 0:03:15.680 growing very quickly. So I think that's still going to 0:03:15.720 --> 0:03:19.000 be well above normal, you know, into two thousand and 0:03:19.040 --> 0:03:23.000 twenty three, and maybe even maybe even beyond. So I 0:03:23.400 --> 0:03:26.320 do think that there there are going to be improvements, 0:03:26.440 --> 0:03:30.040 but not everywhere. Should we have a more nominal GDP 0:03:30.360 --> 0:03:34.840 nominal inflation analysis? Witness the haves and they have not, 0:03:35.360 --> 0:03:39.640 they have not are getting crushed minute by minute should 0:03:39.640 --> 0:03:43.040 we switch to a more nominal study. Well, I think 0:03:43.600 --> 0:03:47.120 what you're suggesting is that we look at the distribution 0:03:47.440 --> 0:03:50.839 of incomes and spending, and you clearly see some big, 0:03:50.880 --> 0:03:54.240 big differences there, and I think you know Macy's versus 0:03:54.280 --> 0:03:56.640 nord Strom's is a good example. You can look at 0:03:57.280 --> 0:03:59.880 in real income at the top end. At the bottom 0:04:00.120 --> 0:04:02.640 of the income distribution, there's been a much bigger pullback 0:04:02.960 --> 0:04:07.080 at the bottom end, in part because the fiscal support 0:04:07.200 --> 0:04:09.520 was so much more important there and that's come off, 0:04:09.720 --> 0:04:12.520 and in part because at the bottom end you see 0:04:12.600 --> 0:04:16.920 more of an impact from gas prices and inflation generally 0:04:17.320 --> 0:04:20.400 at the margin. The dropping gas prices obviously is helping 0:04:20.800 --> 0:04:23.479 somewhat more at the bottom end, but that's only a 0:04:23.560 --> 0:04:26.920 small part of the previous deterioration. There is, however, yah 0:04:27.160 --> 0:04:30.400 at least with physical goods, a bit of a disinflationary pressure, 0:04:30.200 --> 0:04:33.080 whether it comes to inventories or some of the commodity 0:04:33.120 --> 0:04:36.000 prices that have come off. Is it enough to achieve 0:04:36.000 --> 0:04:38.360 a soft landing if you actually improved some of your 0:04:38.360 --> 0:04:41.360 forecasts about what the FED has to do and the 0:04:41.400 --> 0:04:46.040 outcome in the US economy, I think it's certainly helpful 0:04:46.160 --> 0:04:48.839 and we've you know, continued to be in the softish 0:04:48.920 --> 0:04:52.719 landing camp um in part because of the expectation that 0:04:52.880 --> 0:04:57.000 some of the goods pressure pressures would abate. The most 0:04:57.040 --> 0:05:00.599 important factor, though, is adjustment in the labor market. That's 0:05:00.640 --> 0:05:04.120 something that they need to pull off, and I think 0:05:04.120 --> 0:05:08.040 we've seen some encouraging indicators, in particular the one point 0:05:08.080 --> 0:05:11.080 one million decline in job openings that we've seen in 0:05:11.120 --> 0:05:14.159 the Jolts data, which is probably still underway. We'll probably 0:05:14.160 --> 0:05:18.880 see some further significant declines there. That is starting to 0:05:19.440 --> 0:05:22.839 bring the labor market into better balance. Still early days, 0:05:23.120 --> 0:05:26.920 we still have a large gap between between jobs and workers, 0:05:27.000 --> 0:05:28.960 but at least we're moving in the right direction there 0:05:28.960 --> 0:05:30.880 and I think that's going to be key to sustain it. 0:05:31.160 --> 0:05:33.160 Do you think that the market right now is not 0:05:33.240 --> 0:05:35.919 reflecting what still has to be done though from the 0:05:35.960 --> 0:05:38.359 federal reserve in order to achieve that. And this is 0:05:38.360 --> 0:05:40.640 something that we've heard about throughout the morning. The theme 0:05:40.760 --> 0:05:42.560 of the day has been at stocks need to wake 0:05:42.640 --> 0:05:44.960 up to it. That is the bearish tilt. Do you 0:05:45.000 --> 0:05:47.839 agree with that that right now they are not accounting 0:05:47.920 --> 0:05:54.160 for the pain? I think the terminal rate pricing doesn't 0:05:54.240 --> 0:05:56.840 look too low. I mean it's sort of three, you know, 0:05:56.920 --> 0:05:59.280 three and a half or a little bit more. I 0:05:59.320 --> 0:06:04.039 think that that is sufficient relative to our forecast. Uh 0:06:04.400 --> 0:06:07.120 maybe even a little bit more than sufficient. Where I 0:06:07.120 --> 0:06:10.960 would disagree more with market pricing is the pricing for 0:06:11.120 --> 0:06:15.040 significant rate cuts. I think that you know, certainly could happen. 0:06:15.279 --> 0:06:17.279 It would happen if you went into a recession. But 0:06:17.320 --> 0:06:20.520 I think in a slow growth environment where the FED 0:06:20.640 --> 0:06:23.320 is trying to squeeze inflation lower, I think they'll be 0:06:23.440 --> 0:06:27.240 very resistant to to rate cuts. So I do think 0:06:27.279 --> 0:06:31.119 that those cuts are probably somewhat excessive from a market 0:06:31.120 --> 0:06:34.000 pricing perspective. It's a raisin hold strategy. In the words 0:06:34.040 --> 0:06:36.560 of San Francisco FED president Mary daily Young. If you've 0:06:36.600 --> 0:06:38.960 got any idea of how you think they will hold 0:06:39.040 --> 0:06:41.320 rates at that kind of level for how long? Is 0:06:41.320 --> 0:06:44.080 it too early? Too premature to add that conversation. Oh, 0:06:44.160 --> 0:06:46.120 I think it could be a couple of years. I mean, 0:06:46.360 --> 0:06:48.479 really get to the You get to them, you know, 0:06:48.680 --> 0:06:51.599 mid trees or or maybe even a little bit higher, 0:06:51.640 --> 0:06:55.039 and then then you stay there. Because I think while 0:06:55.080 --> 0:06:57.880 inflation will look a lot better a year from now, 0:06:58.200 --> 0:07:00.880 I think it will still be significantly above the target, 0:07:01.000 --> 0:07:04.000 and ultimately they do want to get back down to 0:07:04.080 --> 0:07:06.320 pretty close to two person. Yeah, and that is totally 0:07:06.680 --> 0:07:08.920 at a consensus. How much pushback do you get from 0:07:08.960 --> 0:07:12.080 clients when you bring that up. I think it's away 0:07:12.120 --> 0:07:15.200 from market pricing. I don't know if it's as out 0:07:15.200 --> 0:07:18.920 of consensus. In terms of what forecasters are saying. I 0:07:18.920 --> 0:07:22.000 think there are quite a lot of forecasters and FED officials. 0:07:22.040 --> 0:07:26.200 I mean you you just mentioned President Daily, FED officials 0:07:26.200 --> 0:07:29.400 who are saying that this is a reasonable baseline. John Screeze, 0:07:29.400 --> 0:07:31.400 one more question in here, because the bottom line here 0:07:31.480 --> 0:07:35.160 is simple. This is the theme of Jackson Hall. This 0:07:35.240 --> 0:07:39.320 is the difficulty. This is the theme. Yeah. Three, If 0:07:39.320 --> 0:07:40.920 you're gonna held rate to that kind of level, and 0:07:40.960 --> 0:07:43.040 it could be a stress you said could be a 0:07:43.080 --> 0:07:46.000 couple of years, what is the soft lending fit into 0:07:46.040 --> 0:07:49.360 that kind of profile, that kind of race profile. Well, 0:07:49.400 --> 0:07:52.880 I think that is a soft landing kind of kind 0:07:52.880 --> 0:07:55.000 of assumption. If it wasn't a soft landing, if you 0:07:55.040 --> 0:07:57.920 went into a recession, then I think you would get cuts. 0:07:58.000 --> 0:08:02.280 But if growths days at one percent one and a 0:08:02.360 --> 0:08:06.440 half percent, labor market continues to adjust, inflation gradually comes 0:08:06.480 --> 0:08:09.720 down and the FED in that environment keeps the funds 0:08:09.800 --> 0:08:12.800 rate relatively high. You know, I think that is a 0:08:12.840 --> 0:08:17.880 soft landing, Absolutely fascinating. It will continue this conversation, GOM, Yeah, 0:08:18.000 --> 0:08:33.520 great to catch up set exceptionally strong set of conversations today, 0:08:33.559 --> 0:08:36.520 Young Hots of Goldman Sex joining us and we continue 0:08:36.600 --> 0:08:39.920 strong now with Stephen Rashido to say he's chief US 0:08:39.960 --> 0:08:44.680 economist at Missouri Securities barely describes their desk with dominic constant. 0:08:44.720 --> 0:08:49.520 Stephen Rashida folds in a massive macro view, including a 0:08:49.640 --> 0:08:53.480 calculus of g d P in America. Stephen Shuto, when 0:08:53.520 --> 0:08:55.800 you talk to Dominique and the two of you get together, 0:08:56.200 --> 0:09:01.120 are we in recession? Uh? The NBA will not classified 0:09:01.120 --> 0:09:04.280 a recession to me. You know, two quarters of consecutive 0:09:04.640 --> 0:09:08.960 negative GDP reports, you know, implies your inner recession. The 0:09:09.040 --> 0:09:11.000 problem for people is going to be that this is 0:09:11.000 --> 0:09:14.600 gonna be a very shallow, very long recession. It's not 0:09:14.640 --> 0:09:18.319 going to be the typical recessionary environment that we've seen 0:09:18.640 --> 0:09:21.959 UM in since nineteen nine, which were credit cycles. Nor 0:09:22.040 --> 0:09:24.840 is it going to be the typical inflation cycle that 0:09:24.880 --> 0:09:27.560 we've experienced in the post war period up to the 0:09:27.640 --> 0:09:31.080 nineteen nineties. It's a very very different cycle. It's a long, 0:09:31.280 --> 0:09:34.120 shallow cyde well within that, and this has been the 0:09:34.120 --> 0:09:37.000 theme for the day. Stephen Shudo, if if you have 0:09:37.080 --> 0:09:39.400 a long show of cycle, does that mean the real 0:09:39.480 --> 0:09:43.320 message from Paula Jackson Hole will be a more sustained 0:09:43.800 --> 0:09:47.560 view of interest rate strategy and not the foolishness of 0:09:47.600 --> 0:09:51.440 the when the rates come down. That's exactly been our 0:09:51.480 --> 0:09:53.800 call all along in here, that we're basically looking at 0:09:53.800 --> 0:09:56.959 a dynamic of a pause, not a pivot. Uh. The 0:09:57.080 --> 0:09:59.599 question that we're still debating is it four percent er? 0:09:59.679 --> 0:10:02.160 Is it's something north of four percent? I think we 0:10:02.240 --> 0:10:04.240 have to get to at least four percent. And last 0:10:04.240 --> 0:10:05.960 time I was on we were talking about it, we 0:10:05.960 --> 0:10:08.760 were pricing three and a half. Now we're pricing something 0:10:08.800 --> 0:10:10.600 in between the three and a half and the four. 0:10:11.200 --> 0:10:13.080 I think we'll get to the four and you know, 0:10:13.120 --> 0:10:14.959 hopefully that will be the end, but it may not 0:10:15.040 --> 0:10:16.720 be the end of this scenario. This is the rice 0:10:16.800 --> 0:10:18.160 and hope to base state if we caught up with 0:10:18.160 --> 0:10:20.360 the unhanceus of Goldman, take a listen to what you 0:10:20.400 --> 0:10:24.200 have to say. Where I would disagree more with market 0:10:24.240 --> 0:10:27.920 pricing is the pricing for significant rate cuts. I think 0:10:27.960 --> 0:10:30.200 it could be a couple of years. I mean, really 0:10:30.240 --> 0:10:32.440 get to the you get to them, you know, mid 0:10:32.520 --> 0:10:35.240 trees or or maybe even a little bit higher, and 0:10:35.280 --> 0:10:39.080 then then you stay there because I think while inflation 0:10:39.080 --> 0:10:41.840 will look a lot better a year from now, I 0:10:41.840 --> 0:10:45.000 think it will still be significantly above the target. Right 0:10:45.080 --> 0:10:47.000 to what and hold for how long? Right to three 0:10:47.040 --> 0:10:48.400 or three and a half percent? And hold for a 0:10:48.440 --> 0:10:50.880 company is stafe? What do you think of that? Well, 0:10:51.040 --> 0:10:53.120 I think we're gonna keep on moving higher than that. 0:10:53.160 --> 0:10:54.840 I don't think three and a half is the top 0:10:55.320 --> 0:10:57.200 in order. I think necessarily we're gonna hold it for 0:10:57.240 --> 0:11:00.240 several years. I think there's clearly an argument to be 0:11:00.280 --> 0:11:02.640 made that we're gonna hold it through three. But where 0:11:02.679 --> 0:11:07.520 we go in is a very very different um animal altogether, 0:11:07.520 --> 0:11:09.680 because you have to look at what's happening in the currency, 0:11:09.960 --> 0:11:11.840 and you have to look at what's happening with supply 0:11:11.920 --> 0:11:14.200 chain related issues, and then you have to look at 0:11:14.200 --> 0:11:17.440 the demographics in the labor market environment. And it's this 0:11:17.480 --> 0:11:19.360 tug of war that we're going to see from a 0:11:19.400 --> 0:11:24.160 stronger currency, supply chains easing up versus the wage related 0:11:24.200 --> 0:11:27.840 pressures that are being dominated by the demographic issues, in 0:11:27.880 --> 0:11:31.040 particular the reduction in the number of workers from the 0:11:31.080 --> 0:11:34.240 millennials to the Generation Z which is now entering the 0:11:34.320 --> 0:11:36.640 labor force. So we might wind up in an environment 0:11:36.920 --> 0:11:39.680 where the Federal Reserve has to sustain higher rates on 0:11:39.679 --> 0:11:42.360 a longer basis than we've seen in here for quite 0:11:42.400 --> 0:11:45.440 some time. But again, what the starting point is is 0:11:45.440 --> 0:11:48.400 still an open book. What's the advantage of steven for 0:11:48.480 --> 0:11:51.240 the Fed raising rates beyond three and a half percent? 0:11:51.480 --> 0:11:54.559 What's the end target and why, especially if they planned 0:11:54.640 --> 0:11:59.320 then take them down to something lower over a longer term. Well, again, 0:11:59.360 --> 0:12:01.440 do they plan to take it down to something lower 0:12:01.520 --> 0:12:03.600 over the longer term? The real question is how does 0:12:03.600 --> 0:12:06.480 this labor market dynamic play out. You can make a 0:12:06.559 --> 0:12:09.720 very very strong demographic argument that the labor market stays 0:12:10.120 --> 0:12:13.760 tight throughout the entire period in here, and therefore you 0:12:13.800 --> 0:12:17.160 are as going a sustained higher level of interest rates 0:12:17.200 --> 0:12:19.679 going forward. The question always is going to be what 0:12:19.840 --> 0:12:22.520 level of rates will that be sustained at? But a 0:12:22.640 --> 0:12:26.000 quick return back to the near zero interest rate environment 0:12:26.480 --> 0:12:28.800 that we've been anticipating is going where that people have 0:12:28.880 --> 0:12:31.600 been someone anticipating is going to require some kind of 0:12:31.679 --> 0:12:34.400 credit event to unfold in the economy. And when you 0:12:34.480 --> 0:12:38.400 look at the underlying credit quality of the economy in general, 0:12:38.440 --> 0:12:41.800 there are some pockets where we are concerned, but an aggregate, 0:12:41.880 --> 0:12:44.240 the balance sheets are still very, very healthy. So what 0:12:44.360 --> 0:12:47.960 is your top federate that you're kind of penciling in here? 0:12:48.000 --> 0:12:51.200 How is that evolved over the past few months. Well, 0:12:51.240 --> 0:12:53.880 it's evolved a lot, I mean over the entire period 0:12:54.040 --> 0:12:57.839 of two but but I do think four percent is 0:12:57.880 --> 0:13:00.360 the near term target um and I think once we 0:13:00.360 --> 0:13:02.720 get to four percent, we will pause for a time, 0:13:03.040 --> 0:13:05.240 whether or not that's a pause to go higher or 0:13:05.280 --> 0:13:07.880 a pause to continue to hold that level on an 0:13:07.880 --> 0:13:11.599 ongoing basis. That's where my thought process is. Stevens side baseball. 0:13:12.080 --> 0:13:16.720 If we've got China with subpart China growth, the dynamic 0:13:16.800 --> 0:13:21.080 of exports minus imports, how does it change and what 0:13:21.160 --> 0:13:24.480 does that mean for Chairman Paul? Well, again, that comes 0:13:24.559 --> 0:13:26.840 right back to the currency story, because it's the supply 0:13:26.920 --> 0:13:30.439 chain dynamic. You have a slower global GDP environment. Clearly 0:13:30.520 --> 0:13:33.640 what's happening in Europe is creating a wider GDP output 0:13:33.679 --> 0:13:36.520 gap globally. You have a strong currency, which will allow 0:13:36.600 --> 0:13:39.200 us to import those products on a more on a 0:13:39.240 --> 0:13:43.560 more competitive basis, which will wind up dampening domestic inflationary pressures. 0:13:43.720 --> 0:13:45.720 And then you wind up with when as the services 0:13:45.800 --> 0:13:48.560 dominate over the goods portion of the equation. And I 0:13:48.600 --> 0:13:50.880 think this is the reason why inflation is going to 0:13:50.880 --> 0:13:53.560 come down. Whether it will get as quickly as the 0:13:53.640 --> 0:13:56.000 Fed would like to see back to their target or not, 0:13:56.360 --> 0:13:58.560 I think it will get there. I think it'll get there. Probably, 0:13:59.800 --> 0:14:02.760 I don't think it'll get there. In my first exercise 0:14:02.840 --> 0:14:05.600 this morning was to look at the Bloomberg Financial Conditions 0:14:05.640 --> 0:14:08.439 Index for the United States and for Europe, and the 0:14:08.600 --> 0:14:12.800 note back over thirty years that this is the first 0:14:12.840 --> 0:14:15.720 time they've diverged so sharply. Now, obviously there's a war 0:14:15.760 --> 0:14:20.040 in Ukraine, which is uh dealt to this. What does 0:14:20.160 --> 0:14:24.240 Bailey say to Powell or Powell say to Bailey on 0:14:24.320 --> 0:14:29.520 this immense transatlantic divide. Well, I mean, I think, you know, 0:14:29.720 --> 0:14:32.480 the situation is the reverse of what we experienced in 0:14:32.520 --> 0:14:35.960 the nineties seventies, where the you know, the Federal Reserve 0:14:36.080 --> 0:14:38.120 chairman at the time, Paul Ulcer, came back from an 0:14:38.120 --> 0:14:40.640 I M. F meeting UH and was forced to change 0:14:40.680 --> 0:14:43.680 monetary policy abruptly and cause, you know, one of the 0:14:43.680 --> 0:14:48.080 worst macro recessions, inflation recessions we've seen in our history. 0:14:48.440 --> 0:14:50.960 And I think all of the problems on the currency 0:14:51.000 --> 0:14:55.000 side of the equation are really European problems um and 0:14:55.120 --> 0:14:58.080 Europe has to address its issues. We can't fix its 0:14:58.120 --> 0:15:01.240 problem for them. And that's pretty much the same message 0:15:01.280 --> 0:15:04.640 that you know, Paul Volker got in reverse when he 0:15:04.680 --> 0:15:07.240 came back from the I m F meeting in ninety nine, 0:15:07.440 --> 0:15:09.880 which was basically, you have a problem with your currency. 0:15:09.920 --> 0:15:12.240 That's why your currency is going down. You have to 0:15:12.280 --> 0:15:14.600 fix your problem. And I think Powell has to push 0:15:14.600 --> 0:15:16.920 it right back on them. You've got a problem, you 0:15:17.000 --> 0:15:18.680 have to fix it. We can't fix it for you. 0:15:18.760 --> 0:15:21.120 And this is the different kind of FX wall, Lisa, 0:15:21.160 --> 0:15:23.560 we've been talking about through much of this year. This 0:15:23.640 --> 0:15:25.920 is a big problem for Europe. And it's kind of 0:15:25.920 --> 0:15:28.560 strange because ten years ago this is exactly what they 0:15:28.600 --> 0:15:30.800 were trying to engineer. A week of euro. They couldn't 0:15:30.840 --> 0:15:32.960 get one, they couldn't buy one, and now they've got one, 0:15:32.960 --> 0:15:35.840 a dramatically weaker euro at a time that they aren't. 0:15:35.880 --> 0:15:39.400 We don't want one absolutely important inflation how much though, 0:15:39.400 --> 0:15:41.200 is also a problem for the US, and we haven't 0:15:41.240 --> 0:15:43.000 really talked about that, John, but this was something that 0:15:43.080 --> 0:15:46.480 you had discussed earlier in terms of the Edyard Denny note, 0:15:46.560 --> 0:15:49.120 which is how much of oppression will this be on 0:15:49.160 --> 0:15:51.920 the balance sheets of companies that sell into Europe that 0:15:52.040 --> 0:15:54.840 have to deal with the headwinds from a stronger dollar. 0:15:54.960 --> 0:15:57.280 I don't think people have gained that out sufficiently. Well. 0:15:57.280 --> 0:15:59.440 The multinationals are going to have a problem, aren't they. 0:15:59.480 --> 0:16:01.560 But that's a cool a profit story. What it means 0:16:01.560 --> 0:16:03.440 for the broader economy. The other rest of that we've 0:16:03.480 --> 0:16:05.920 got here as well. Steve Thomas, an important question, what 0:16:05.960 --> 0:16:08.600 does Governor Bailey say to Chairman Powell. Governor Bailey is 0:16:08.640 --> 0:16:12.080 seeing economic weakness right now in a more pronounced way 0:16:12.200 --> 0:16:15.360 than Chairman Powell is. And Governor Bailey hasn't seen the 0:16:15.440 --> 0:16:18.400 year of a year peak in inflation. You've got him 0:16:18.480 --> 0:16:21.760 forecasting something close to percent. You've got City saying it 0:16:21.840 --> 0:16:25.320 might be eighteen percent. Steve, isn't that the bigger difference 0:16:25.400 --> 0:16:28.160 right now? The Transatlantic divide is that the US may 0:16:28.200 --> 0:16:30.400 be able to take some very very small amount of 0:16:30.440 --> 0:16:32.600 comfort from this idea. We might have seen peak year 0:16:32.640 --> 0:16:35.800 other year inflation for Europe and the UK. Is it 0:16:35.840 --> 0:16:39.320 still in their future? Well, again, this comes down to 0:16:39.400 --> 0:16:41.120 the fact that you remember the way we broke the 0:16:41.120 --> 0:16:45.320 back of inflation here was not just a monetary policy scenario. 0:16:45.720 --> 0:16:49.000 You know, the supply side revolution failed in terms of 0:16:49.040 --> 0:16:52.080 many things, but by breaking the back of labor through 0:16:52.120 --> 0:16:55.760 firing air traffic controllers, we did a lot in terms 0:16:55.760 --> 0:16:58.840 of changing the labor market dynamic, which was our problem 0:16:58.880 --> 0:17:01.560 back then. So again you have to push the blame 0:17:01.560 --> 0:17:04.520 back just not on central bankers. Central bankers have to 0:17:04.560 --> 0:17:07.639 push blame back on politicians and say you have to 0:17:07.720 --> 0:17:11.080 correct what you've done from a policy standpoint that has 0:17:11.119 --> 0:17:14.440 put us into this position, and it is your responsibility 0:17:14.480 --> 0:17:16.880 now to take the steps that are necessary. You can't 0:17:16.880 --> 0:17:20.080 expect central banks to solve all of the world's problems. 0:17:20.560 --> 0:17:29.520 Of missoua, Steve, thank you, sir. The character of surveillance 0:17:29.720 --> 0:17:32.040 is simply we want to talk to the best people 0:17:32.119 --> 0:17:35.080 we can find, and we're honored when they come on 0:17:35.080 --> 0:17:38.880 on short notice. He interrupts this morning with Standard Charter Bank, 0:17:38.920 --> 0:17:42.480 their global head of G ten FX research, Stephen Englander 0:17:42.640 --> 0:17:46.119 joins us on your foreign exchange space. Steve, let me 0:17:46.160 --> 0:17:49.280 cut to the chase. What is the character the nature 0:17:49.840 --> 0:17:55.400 of this historic bout of euro weakness. Well, I agree 0:17:55.520 --> 0:17:59.560 that it's largely the natural gas story. I mean, you've 0:17:59.560 --> 0:18:03.360 seemed in recent days and recent weeks move pretty much 0:18:03.400 --> 0:18:06.679 together with the euro. Uh, there's a broader global story 0:18:06.800 --> 0:18:09.960 that the market is panicking about. What that your power 0:18:10.000 --> 0:18:13.680 will say at Jackson Bull and so you know euro 0:18:13.800 --> 0:18:16.639 has two strikes against it and which is why it 0:18:16.680 --> 0:18:20.000 went through parody so quickly. Stave is d e CP 0:18:20.119 --> 0:18:24.720 got a roll supply head Um, you know, like in 0:18:24.760 --> 0:18:26.919 a Greek tragedy, there's just not that much that they 0:18:26.960 --> 0:18:30.119 can do. There's destin me that's approaching. Um. You know, 0:18:30.160 --> 0:18:32.800 the economy is weak. You know when we talk about 0:18:32.840 --> 0:18:36.920 supply chain disruptions, we're not getting our exercise bikes. When 0:18:36.920 --> 0:18:40.320 they talk about it, they're not able to heat their homes. Um, 0:18:40.480 --> 0:18:45.320 that's really weighing on sentiments in your own The ECB 0:18:45.440 --> 0:18:48.560 doesn't have a tool to address it. The UK inflation 0:18:48.640 --> 0:18:51.160 numbers last week kind of you know, I think lead 0:18:51.200 --> 0:18:53.240 people in the market to say, why is Europe different 0:18:53.280 --> 0:18:56.879 and what can ECB do about it and and the market. 0:18:56.960 --> 0:18:58.680 Then what you see the way Sterling is trading and 0:18:58.760 --> 0:19:02.639 Euro is trading, markets really punishing currencies that belong to 0:19:02.720 --> 0:19:06.280 central banks that have an inflation problem but are really 0:19:06.320 --> 0:19:09.280 ambivalent about how they're going to approach it. Steve, how 0:19:09.280 --> 0:19:11.359 do you think they should approach it? What's the optimal 0:19:11.400 --> 0:19:14.000 way to approach the situation the UK is in at 0:19:14.040 --> 0:19:18.240 the moment, the situation the CP is in, it's a 0:19:18.320 --> 0:19:21.840 it's a very tough situation. I think that when so 0:19:21.960 --> 0:19:24.720 much as supply shocks, you you know, if you're a 0:19:24.720 --> 0:19:27.399 central bank, you want to try and smoothe your response. 0:19:28.240 --> 0:19:30.080 Um the you know, when you don't know what the 0:19:30.160 --> 0:19:33.040 duration of the supply shock is going to be, you're 0:19:33.080 --> 0:19:36.160 really working in the dark. So I think they'll probably 0:19:36.240 --> 0:19:39.879 hype less than they should. Next year, if you know, 0:19:39.920 --> 0:19:42.440 they come out of the winter and the energy situation 0:19:42.560 --> 0:19:45.280 is more clear, they'll probably hype faster and that could 0:19:45.320 --> 0:19:49.840 actually give the Euros some some legs in three. But 0:19:49.960 --> 0:19:53.080 this year I think it's moving very cautiously. Step. When 0:19:53.119 --> 0:19:55.280 you were talking about how supply chain disruptions have caused 0:19:55.280 --> 0:19:57.280 the people in the U S to worry about when 0:19:57.280 --> 0:20:00.240 they get their exercise equipment, but in your up but 0:20:00.320 --> 0:20:03.359 worried about how to heat your homes. At what point 0:20:03.560 --> 0:20:07.119 does the US start to experience something more similar to 0:20:07.200 --> 0:20:10.720 the European angst? And this goes to this idea of divergence. 0:20:10.760 --> 0:20:16.480 How far the US economy can diverge from the European fate. Well, 0:20:16.560 --> 0:20:19.280 in so far as it's related to a particular commodity 0:20:19.359 --> 0:20:23.159 as cnatural gas, that divergence can extend for a long time. Um, 0:20:23.200 --> 0:20:26.440 we might have to pay more for our energy, but 0:20:26.480 --> 0:20:31.159 we're going to have it. Um. I think the European situation. 0:20:31.240 --> 0:20:36.240 If it's a very cold winter and if the accommodation 0:20:36.320 --> 0:20:40.760 to increase supply uh doesn't occur, it could happen. You know, 0:20:40.800 --> 0:20:43.520 it could be an extended divergence. It's not our baseline 0:20:43.560 --> 0:20:46.000 that it certainly is a risk. If there is an 0:20:46.000 --> 0:20:48.680 extet of divergence, what does that mean for how disruptive 0:20:48.680 --> 0:20:52.120 dollar strength could become if it could escalate beyond where 0:20:52.119 --> 0:20:57.280 people are currently expecting. Well, you know you're seeing different 0:20:57.680 --> 0:21:01.200 currencies react differently, like you know, ausy week last week. 0:21:01.320 --> 0:21:04.919 You know they've done worthy like everybody else, not so terribly. Um, 0:21:04.960 --> 0:21:07.240 they don't have that kind of exposure. You have the 0:21:07.480 --> 0:21:10.960 end that's done reasonably well. Again, you know, they're they're 0:21:11.000 --> 0:21:13.879 benefiting from oil prices going down, you know the natural 0:21:13.920 --> 0:21:18.160 gas situation. Isn't this dire for them? I think it's 0:21:18.160 --> 0:21:20.320 horses for courses. And then you have a set of 0:21:20.320 --> 0:21:23.200 currencies like you know, Mexico, Brazil, some of the em 0:21:23.240 --> 0:21:26.320 currencies where interest rates are high. So there's a buffer 0:21:26.359 --> 0:21:29.720 against Fed hawkishness. So I don't think, you know, I 0:21:30.000 --> 0:21:31.919 think if the Fed is hawkish, it's going to be 0:21:31.960 --> 0:21:36.359 a broad dollar move. We think it's gonna be limited. Um. 0:21:36.400 --> 0:21:39.560 But you know, I think they are different, Um. You know, 0:21:39.600 --> 0:21:42.800 circles of currencies that will respond differently depending on their 0:21:42.880 --> 0:21:46.679