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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along

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Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jailey, we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. As we spoke

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Speaker 1: to William Dudley and Mr Lacker Jeffrey Lacker, the former

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Speaker 1: President of Richmond yesterday. Today we speak with the genuine Beast.

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Speaker 1: He's from St. Louis, James Bullard back to two thousand eight,

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Speaker 1: who set the economic community on its ear a number

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Speaker 1: of years ago, talking about regime change, the idea of

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Speaker 1: how a central bank should act. The PhD from Indiana

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Speaker 1: joins us this morning, and our questions, of course, always

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Speaker 1: led at the beginning, unlike at the press conference by

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Speaker 1: our Michael McKee. Michael, Well, good morning, Jim. I'm not

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Speaker 1: sure what the real beast means, but we are happy

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Speaker 1: to have you with us on Bloomberg Radio and television

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Speaker 1: this morning. Uh, there's a lot going on. Happy to

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Speaker 1: be here obviously to talk about, but there is an

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Speaker 1: elephant in the room or at least it will be

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Speaker 1: imminently in the room. So let me start with that.

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Speaker 1: Sharon Brown, chair of the Senate Banking Committee, told us

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Speaker 1: last night, as far as he knows, it is down

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Speaker 1: to Lele Brainerd or j Pale for the next FED chair.

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Speaker 1: You've worked with both. What would be the policy differences

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Speaker 1: between the two? How would the FED change if at all? Uh?

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Speaker 1: I think no matter how this comes out, there will

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Speaker 1: be a lot of continuity in FED policy. Both of

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Speaker 1: these players have uh, you know, long track records at

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Speaker 1: the FED, so certainly it's a big committee. Also, I

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Speaker 1: think people have to keep that in mind. Uh. And

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Speaker 1: and there's a lot of experience on the committee, so

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Speaker 1: I think we'd see uh conton nudity. Would you anticipate

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Speaker 1: any change in the timeline for tightening policy? And I'm

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Speaker 1: going to use that broadly to mean tapering and raising

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Speaker 1: rates and forward guidance, anything that you might do between

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Speaker 1: one or the other. You know, it's a committee decision,

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Speaker 1: and and it's as I just mentioned, it's a it's

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Speaker 1: a big committee and lots of opinions around the table,

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Speaker 1: great staffs around the Federal Reserve and at the Board

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Speaker 1: of Governors. So it's a collective process and we have

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Speaker 1: to react to the data and and make decisions. So

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Speaker 1: the chair's job is really to guide that process, I

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Speaker 1: would say, uh, and and get to a good compromise

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Speaker 1: in the center of the committee. Well, certainly you've got

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Speaker 1: opinions that you've expressed them on what the Fed should

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Speaker 1: be doing, the possibility of a faster move to tighten policy,

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Speaker 1: but you've also, as you just said, what that on

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Speaker 1: the data. The data are showing very strong inflation, and

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Speaker 1: it shows up in the retail sales report this morning.

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Speaker 1: Are you ready to say we should move more quickly?

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Speaker 1: I actually didn't see the report. Here is getting ready

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Speaker 1: for the interview, but um uh, the inflation rate is

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Speaker 1: quite high. The core pc inflation rate, the committee's favorite

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Speaker 1: measures about three point six percent. That's the highest it

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Speaker 1: has been in thirty years, well above our two percent target,

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Speaker 1: and that number already throws out food and energy. So uh,

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Speaker 1: you know, you're you're taming the data a little bit

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Speaker 1: when you look at that kind of measure, but it's

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Speaker 1: quite high. It does not have the reputation of moving

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Speaker 1: down very easily. So I think it who's the committee

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Speaker 1: to tack in a more hawk hawk's direction, uh, in

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Speaker 1: the next couple of meetings, so that we're managing the

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Speaker 1: risk of inflation appropriately. Uh. In inflation just happens to

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Speaker 1: go away, We're in great shape for that. We're set

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Speaker 1: up for that. But if inflation doesn't go away as

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Speaker 1: quickly as many aren't currently anticipating, then it's going to

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Speaker 1: be up to the Committee to keep inflation under control

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Speaker 1: going forward. Well, when you say tack in a more

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Speaker 1: hawkish direction, are you talking about speeding up the taper

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Speaker 1: even with the risk of a taper tantrum? Are you

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Speaker 1: talking about changing forward guidance? How would you tack? I

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Speaker 1: think we've gotten past the taper tantrum issue because we

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Speaker 1: went ahead and went ahead with the with the taper here,

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Speaker 1: but we could move faster. We kept optionality on this

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Speaker 1: that we could speed up the taper if it's appropriate.

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Speaker 1: We have a hot CPI report here, as you know,

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Speaker 1: I've advocated a faster pace pace that's twenty per month

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Speaker 1: less on treasury purchases and ten less on mortgage backed

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Speaker 1: security purchases. The reason I proposed that is that we

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Speaker 1: would be done tapering at the end of the first

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Speaker 1: quarter next year, and that would give us a little

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Speaker 1: bit earlier moment that we could assess where the data

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Speaker 1: is and decide what to do on on rate policy.

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Speaker 1: UM so I think that's something to consider. I mean

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Speaker 1: some might say, well, that's you know, that's faster than

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Speaker 1: they like. I don't know, but we did retain the

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Speaker 1: optionality on this. Jim Bullard, thank you so much for

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Speaker 1: joining us this morning. It would be great to get

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Speaker 1: your sense of Bill Dudley's comments about the end value,

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Speaker 1: the end terminal rate that we are expecting for policy.

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Speaker 1: Given how high inflation has gone, a lot of people

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Speaker 1: think it's not going to get beyond two percent, he said,

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Speaker 1: three to four percent. Do you think that that is

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Speaker 1: a realistic end policy rate. Yeah, that's not my base

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Speaker 1: case right now. I've got uh, you know, rates only

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Speaker 1: rising to where they were pre pandemic. And I think

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Speaker 1: it's good to keep in mind here that the pre

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Speaker 1: pandemic economy was not a zero interest rate economy. So

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Speaker 1: whenever you think we're back to the pre pandemic levels

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Speaker 1: of output, which we already are, and the and the

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Speaker 1: pre pandemic level of labor uh labor market performance, uh,

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Speaker 1: then that should be the moment that you're back at

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Speaker 1: the at the pre pandemic level of interest rates. We

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Speaker 1: don't really have that kind of plan in place right now,

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Speaker 1: but maybe that's something that to think about. I think,

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Speaker 1: you know, these this rate policy and and tacking hawkishly

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Speaker 1: now could pay great dividends for the committee in the

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Speaker 1: year ahead or the eighteen months I had, because it

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Speaker 1: means that we would have to do less later on,

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Speaker 1: and you'd smooth this whole process out some. I think

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Speaker 1: the scenario that U. Bill Dudley was describing was one

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Speaker 1: where we get behind the data too far and then

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Speaker 1: we have to move more aggressively later. And that was

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Speaker 1: a stop go type policy that didn't work very well

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Speaker 1: in the nineteen seventies. So I think it makes sense

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Speaker 1: to try to move a little bit more hawkishly here

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Speaker 1: and try to manage the inflation risk again. If it all,

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Speaker 1: if it all dissipates next year, uh, we'll We'll be

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Speaker 1: fine in that situation. Then we can push out rate

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Speaker 1: increases out into the future. But how high can rates

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Speaker 1: go given the where the economy is, and how quickly? Right,

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Speaker 1: I mean, the idea of front loading rate hikes makes

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Speaker 1: sense to avoid a sort of gloom and doom scenario

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Speaker 1: that Bill Dudley was laying out four rates, perhaps setting

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Speaker 1: the economy into recession. But how high could we currently

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Speaker 1: handle given the trillions of dollars of debt that we've incurred. Well,

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Speaker 1: I mean, I think the good news is you probably

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Speaker 1: don't have to go to that high of a level

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Speaker 1: to get a normal sense of interest rates. I mean, nineteen,

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Speaker 1: you know, one and a half to two percent was

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Speaker 1: kind of a common level, and that seemed to work

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Speaker 1: pretty well for that pre pandemic economy. There were some adjustments,

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Speaker 1: some trade issues going on then and and other other things,

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Speaker 1: but I kind of take it as good news that

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Speaker 1: we wouldn't have to go to that high of a

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Speaker 1: level to remove the accommodation and remove the upward pressure

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Speaker 1: that we're putting on inflation with our current policy. Jim Bowler,

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Speaker 1: Tom Keen, Good morning to you, sir, Christopher Waller, who

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Speaker 1: got an upgrade from your shop a few years ago,

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Speaker 1: now governor of the FED in Washington. You and Chris

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Speaker 1: Waller did a retrospective off your regime paper of two thousand.

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Speaker 1: I believe it was sixteen, I can't quite remember. I

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Speaker 1: want you to discuss now for the economic community if

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Speaker 1: we're in a regime change where the theories aren't working. Here,

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Speaker 1: we are coming out of a natural disaster, we have

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Speaker 1: a China like boom economy of real and nomenal GDP,

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Speaker 1: and then we've got the idea that we have to

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Speaker 1: somehow unwind this to the terminal value scope out given

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Speaker 1: a regime change, the win of a terminal value you're

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Speaker 1: looking out to are you looking out six months? Are

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Speaker 1: you looking out too a Cardinals World series? Or can

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Speaker 1: you responsibly look out five or six years? I think

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Speaker 1: this might be a moment where there, uh, there is

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Speaker 1: potential for regime switching to a higher productivity growth regime.

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Speaker 1: Not really ready to commit to that right now, but

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Speaker 1: if you look at the data has become very volatile,

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Speaker 1: it's not so clear that we're in the low productivity

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Speaker 1: growth world that I was talking about in twix. Uh,

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Speaker 1: we might push out of this. You know. The pandemic

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Speaker 1: is the kind of event that really forces businesses to

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Speaker 1: hustle and to think about how they can use technology

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Speaker 1: to their advantage. They've got a very tight labor market

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Speaker 1: that they're facing. Uh, they're probably dusting off plans that

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Speaker 1: they had around for a long time to use technology

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Speaker 1: in a better way. So, uh, that's very promising. I

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Speaker 1: think that we could move to a period of higher

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Speaker 1: productivity growth. That would be great for the economy. Uh,

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Speaker 1: and it would put upward pressure on interest rates. So

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Speaker 1: if we see that this is a critical theme for

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Speaker 1: Bloomberg surveillance this year. Jibbola the idea of the technology

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Speaker 1: overlay being underestimated as we come out of the war shock,

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Speaker 1: the pandemic shock as well. If we get a technology

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Speaker 1: overlay in an upgrade in our statistics, can we get

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Speaker 1: to where instead of a two percent inflation target that

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Speaker 1: we could migrate to something is at impose and suggests

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Speaker 1: of a three percent inflation target simply because we have

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Speaker 1: better productivity. No, I think you know, No, I don't

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Speaker 1: think so you should. You should take the productivity on board.

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Speaker 1: The economy would grow faster, and that would be a

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Speaker 1: sensational thing. The last time we really had this was

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Speaker 1: the late nineteen nineties, and at that point we were

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Speaker 1: talking about paying off the entire national debt. It didn't happen,

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Speaker 1: but we were talking about it at one point, And Uh,

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Speaker 1: that just shows you what a big impact this kind

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Speaker 1: of thing can have. On macroeconomic performance. So I would

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Speaker 1: not mess around with the inflation target itself. That's become

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Speaker 1: an international standard. And if the leading economy in the

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Speaker 1: world decided to mess around with the inflation target, you'd

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Speaker 1: get all this chain reaction all around the world. I

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Speaker 1: think that would be chaotic and sounds like the seventies

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Speaker 1: to me. So I would not try to go in

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Speaker 1: that direction. But nevertheless, I think we may get the

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Speaker 1: better the higher productivity growth that uh is kind of

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Speaker 1: promising coming out of this pandemic, just because everyone has

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Speaker 1: been experimenting with new technology. Mike, did you see how

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Speaker 1: he treated me there like you get treated by Chairman

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Speaker 1: Paul in the press conference. I mean, he just laughed

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Speaker 1: right in my face over the face. Well, that was

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Speaker 1: a long term look at what might happen. Let's talk

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Speaker 1: what the traders all want to know, Jim, And that's

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Speaker 1: the very short term. If you're thinking we should attack

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Speaker 1: in a more hawkish direction, would that speed up the

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Speaker 1: rate of rate increases? Uh, there's right now in the

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Speaker 1: markets to rate increases for two and almost a third.

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Speaker 1: Do you think that's realistic? You know, I'm agreeing with

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Speaker 1: the markets right now because I've got two hikes penciled

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Speaker 1: in for two uh that's dependent on the data. Could

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Speaker 1: evolve going forward, depending on how the data come in. UH.

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Speaker 1: So I think there are other ways we could uh

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Speaker 1: tack in a Hawker's direction. I think we could uh

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Speaker 1: play up the idea that maybe we don't have to

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Speaker 1: wait all the way to the end of the taper

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Speaker 1: in order to raise the policy rate. I mean, historically,

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Speaker 1: when we've done this before, we have not wanted to

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Speaker 1: be raising the policy rate while we're still tapering. But

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Speaker 1: you could argue that the tapers all priced in, and

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Speaker 1: what's going to happen over the next eight months is

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Speaker 1: just follow through on something that's already priced in, and

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Speaker 1: so that that would sort of relieve any constraint that

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Speaker 1: the committee might feel about when the appropriate time was

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Speaker 1: to commence with liftoff. Another consideration, I think that put

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Speaker 1: on the table and have put on the tables, that

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Speaker 1: we could allow runoff of the balance sheet at the

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Speaker 1: end of the taper instead of waiting on that decision

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Speaker 1: for uh for a while. So I think that that

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Speaker 1: would be a way to um, uh you know, have

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Speaker 1: a somewhat more Hawker's policy than otherwise, you know, We

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Speaker 1: can debate how big an impact that would have, but

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Speaker 1: you could allow the balance sheet to be running down, uh,

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Speaker 1: sooner than is currently priced into the market. One last

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Speaker 1: question is, and we'll keep it in the sailing category.

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Speaker 1: When you tack, you run the risk of the wind

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Speaker 1: coming on too hard and you've moved the sail too

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Speaker 1: much and you can capsize. And I'm wondering what your

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Speaker 1: view of the US economy is right now. Since policy

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Speaker 1: works with a lag, do you risk cutting off the

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Speaker 1: recovery by raising rates too soon if inflation is transitory? Yeah,

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Speaker 1: well I love this. I meanyway, if you're gonna be

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Speaker 1: in sailing, you've got to be good at what you do.

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Speaker 1: And I think the same is true the committee. We

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Speaker 1: have to react to data in the appropriate way and

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Speaker 1: and manage the risk appropriately. I liked the chair's emphasis

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Speaker 1: on risk management at the recent press conference. I think

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Speaker 1: that's exactly what's going on here. Uh. You have two scenarios,

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Speaker 1: one where inflation dissipates as the economy continues to reopen,

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Speaker 1: and another one where it doesn't. And you've got to

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Speaker 1: be ready for the second one. Um, if the first

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Speaker 1: one comes, we're in great position for that already, so

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Speaker 1: it's really the second one that we have to uh,

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Speaker 1: we have to get ready for here, and I hope

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Speaker 1: we've got the gusts of wind. We're playing that just

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Speaker 1: right here. Jim Bullard, thank you so much. James Bullard is,

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Speaker 1: of course the president of the St. Louis Fed, and

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Speaker 1: of course I thanks to Michael McKee as well, not

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Speaker 1: only on retail sales in his boom American economy, but

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Speaker 1: on the delicacies I should say of the Fed forward.

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Speaker 1: This is the conversation of the day, with great respect

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Speaker 1: for James Bullard of the St. Louis Fed. For Global

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Speaker 1: Wall Street, the TV Securities call is simply stunning. It's

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Speaker 1: Mark McCormick and his resilient dollar with some nuances for

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Speaker 1: next year, but lead in the charge. There's pria misra

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Speaker 1: ahead of global rate strategy and a call that goes

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Speaker 1: out into the far future. Prea. On the cover of

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Speaker 1: your stunning report, you have the most important chart I've

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Speaker 1: seen in fixed income in twenty years, Dominic constant, a

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Speaker 1: credit suite showing the FED funds rate and the o

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Speaker 1: I s view out the feathers coming off the rate

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Speaker 1: of everyone's guest myths that we've gotten wrong, wrong, wrong.

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Speaker 1: You say, once again, we've got it wrong. So you

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Speaker 1: know this, this sort of tells you that great strategies

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Speaker 1: all the market doesn't always call the Fed right. But

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Speaker 1: you know, our thought right now is the market has

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Speaker 1: been really torn with high inflation, you know we and

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Speaker 1: and how long it will persist, and so the markets

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Speaker 1: pricing in the first rate h literally right after wind

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Speaker 1: wind t bring in. Now our view is that there

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Speaker 1: are a huge COVID impacts on inflation that's going to

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Speaker 1: start to decelerate. I also think the markets under estimating

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Speaker 1: the extent of fiscal drag that's that we're going to

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Speaker 1: face next year, and so growth is gonna slow, inflation

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Speaker 1: has speak. It's not obvious to us that the FED

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Speaker 1: has to turn around and start hiking aggressively. And so

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Speaker 1: we actually have the first rate hype much later than

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Speaker 1: that than when the markets pricing in steeper curve, you know,

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Speaker 1: the front and sting a lot more anchored. But it's

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Speaker 1: ultimately a view on the economy and the outlook of

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Speaker 1: the economy as we recover into the post COVID world.

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Speaker 1: It's also a view on the FED and believing prayer

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Speaker 1: that they won't blink, they won't change their mind, that

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Speaker 1: they won't get uncomfortable, they won't change their view, and

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Speaker 1: then maybe that the FED chair won't change either. How

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Speaker 1: do you get a read on that at this point?

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Speaker 1: Prayer as you look out not to the end of

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Speaker 1: three but just the next six months, right, And I

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Speaker 1: think that's a big so that we always struggled with

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Speaker 1: the economic outlook of the FED reaction function, and I

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Speaker 1: think the committee is as split as the market is,

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Speaker 1: you know. And I think that December dot plot will

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Speaker 1: show again that there are those who believe inflation strangitory

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Speaker 1: and those I think that we should be hiking. But

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Speaker 1: I think the FED has taken a pretty big step there.

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Speaker 1: They've tapered sooner than what anyone was looking for. They're

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Speaker 1: taping much faster than the last time, or or than

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Speaker 1: analysts estimates. So they're responding to the risk. They're they're

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Speaker 1: in this risk management approach. They're already responding to the

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Speaker 1: risk of high inflation. By the middle of next year,

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Speaker 1: that's when it's going to get really tricky, because you know,

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Speaker 1: do they start to hide. That's when I think that

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Speaker 1: growth outlook is going to matter. I think the reaction

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Speaker 1: function doesn't need to change between now and then or

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Speaker 1: the talk around faster form of tapering, you know, using

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Speaker 1: the balance sheet to type financial conditions. We saw how

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Speaker 1: difficult that was in two thousand thirteen with the taper tantrum.

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Speaker 1: I don't think the Fed wants to risk it, so

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Speaker 1: we think the threshold for them to change that tapering

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Speaker 1: time frame is actually very large. So we left time

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Speaker 1: to figure out that reaction function based on how how

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Speaker 1: the data comes out over the next six months. Where

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Speaker 1: do you think that the labor market is weaker than

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Speaker 1: most analysts expect. Yes, we do things so particularly because

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Speaker 1: of the slack. I guess our big assumption is that

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Speaker 1: some people who have left labor force have done so

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Speaker 1: because of COVID, whether it's childcare, whether you're just concerned

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Speaker 1: about getting sick um, and they will come back. Now

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Speaker 1: the savings high savings has buffered some people. They've been

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Speaker 1: able to wait it out for the right kind of

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Speaker 1: job or the higher wages of higher wages, but ultimately

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Speaker 1: that brings them in and so there's a lot more

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Speaker 1: slack in the labor market. We also think the service

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Speaker 1: recovery will pick up and that will create demand for

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Speaker 1: those jobs. So it's not it's it's not a weak

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Speaker 1: labor market, it's just the slack. I think where people

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Speaker 1: are really divided is how much slack is there in

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Speaker 1: the labor market. We think, actually there's a lot of

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Speaker 1: hidden slack, and that will become more evident in the

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Speaker 1: first half of that There's an important distinction here. Some

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Speaker 1: people have been saying this is going to be a

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Speaker 1: shorter and harder cycle. Is your call that that's not true,

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Speaker 1: that this is going to be a long and arduous

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Speaker 1: cycle and that the feder will be patient. Or is

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Speaker 1: it that the Fed already missed its window to titan

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Speaker 1: and that at this point it cannot raise rates materially

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Speaker 1: higher than where they are now, given how much death

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Speaker 1: there is and given the economic momentum that will decelerate

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Speaker 1: meaningfully next year. Right, great questions. I think if we

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Speaker 1: compare it to the post financial crisis cycle, I think

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Speaker 1: it's going to be shorter than that. We had significant

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Speaker 1: fiscal tightening, we didn't have as much cheasing, So I

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Speaker 1: would say this cycle is shorter compared to the O

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Speaker 1: eight cycle because we just had a lot more policy

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Speaker 1: support um, both fiscal anotry. But will it be that short?

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Speaker 1: Are we overheating where the Fed will need to really

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Speaker 1: tighten financial versions there we do disagree. I think it's

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Speaker 1: going to be longer than the two year cycle, than

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Speaker 1: the markets pricing in. I mean, what shocking is for

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Speaker 1: those who believe that the labor market slack is gone,

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Speaker 1: and they believe the FED starts hiking mid next year.

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Speaker 1: Why is the endpoint of the hiking cycle only one

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Speaker 1: and a half. That's a really pessimistic outcret for the

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Speaker 1: productivity of the economy. So we think they'll start later,

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Speaker 1: but they'll be able to hide to two two and

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Speaker 1: a half or more. Normal Normal is neutral rate in

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Speaker 1: the combat battle. I'm not gonna I'll make it clear

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Speaker 1: as I can. Your call is a career maker or breaker.

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Speaker 1: There's no ender for butts about that. And when John

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Speaker 1: mentioned two thousand twenty three, I immediately thought of Mario

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Speaker 1: drag at the e c B. What does your call

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Speaker 1: and the failure of those guestimates, what does it mean

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Speaker 1: for the e c B and LA Guard? It hugely

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Speaker 1: advantages her if she gets a misera call. Well, I

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Speaker 1: think all central banks and we called it the year

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Speaker 1: of living dangerously because they're all trying to adjust policy

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Speaker 1: in an evolving economic outlook where you know, what are

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Speaker 1: the structural impacts of COVID. Is COVID transitory or is

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Speaker 1: it going to have significant impacts on the labor market

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Speaker 1: or a or an inflation dynamics that all center banks

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Speaker 1: need to adjust it. So it's a big question for

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Speaker 1: the e c B, it's a big question for the

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Speaker 1: r b A. But our thought is this is going

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Speaker 1: to be the year of divergence, so cross market trades

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Speaker 1: will make sense. You've got the e c B and

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Speaker 1: the FED on one side that have run below the

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Speaker 1: inflation target for so long that they can afford to

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Speaker 1: be patient. And then you've got the RB at the

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Speaker 1: Bank of England, the Bank of Canada smaller open economies

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Speaker 1: that we think we'll be forced in to start that

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Speaker 1: process of normalization. So you see more divergences, some fascinating

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Speaker 1: fex traits that could come off the back of that.

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Speaker 1: We love a comment from you on what built down

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Speaker 1: to the formerly York Fed person and said on this

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Speaker 1: program in the last twenty four hours he said the

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Speaker 1: FEN funds rate wouldn't hop out around one's seventy five,

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Speaker 1: where many people in this market think it will it

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Speaker 1: could top out somewhere three to four. Granted he believes

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Speaker 1: that this is crystal ball type stuff, and the merketar

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Speaker 1: crystal ball gets the further you go out, you've got

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Speaker 1: any thoughts on that at the moment, prayer as you

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Speaker 1: think about standing this journey later. Right, So I really

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Speaker 1: respect Bill, and I would say I hope so that's

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Speaker 1: not our care. We have the endpoint of the hiking

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Speaker 1: cycle closer to two and a half. I hope Bill

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Speaker 1: is right that the economy, maybe because of COVID or

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Speaker 1: all the technology that's been put in, that productivity does

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Speaker 1: move higher. And if that's what's happening, then I'm more

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Speaker 1: for higher rates. If it's you know, if economy can

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Speaker 1: handle higher interest rates because productivity is higher, or maybe

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Speaker 1: population labor force growth, those then then I think the

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Speaker 1: economy can handle it. Our fear is that the productivity

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Speaker 1: doesn't really materially move higher, and we've had a lot

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Speaker 1: more debt in the system, So I think if the

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Speaker 1: FED actually raises rates up to three, the economy won't

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Speaker 1: be able to handle it. Financial conditions or the intersensitive

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Speaker 1: sectors which is the entire economy is more leveled. So

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Speaker 1: I think it's the knock on effects that we struggle with.

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Speaker 1: But we'll be watching productivity and maybe you know there

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Speaker 1: has been that silver lining that we we can just

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Speaker 1: take labor force productivity that much higher. Super sharp love

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Speaker 1: the outlet we've had a rate of it in the

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Speaker 1: last thirty minutes. Is going to spend this afternoon reading

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Speaker 1: it to thank you very much for jo wanting to

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Speaker 1: us this morning. Pretty sure that TV security. Let's get

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Speaker 1: right to it. We continue this year ahead of view

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Speaker 1: with Andrew Sheets. He's chief Cross that strategist at Morgan Stanley. Andrew,

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Speaker 1: I've never seen it like it is right now, let's

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Speaker 1: start with the why is the reason there's such a

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Speaker 1: variants of opinion across global Wall Street simply because of

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Speaker 1: this natural disaster and the boom American economy. Right now,

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Speaker 1: we don't know how that's gonna unfold, do we. Well, Look,

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Speaker 1: I think there are a lot of uncertainties across different

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Speaker 1: acts of the market debate. We are dealing with two

431
00:24:20,960 --> 00:24:24,000
Speaker 1: where a lot of extraordinary policy is not going to

432
00:24:24,080 --> 00:24:26,119
Speaker 1: be there for for markets in the same way that

433
00:24:26,640 --> 00:24:29,119
Speaker 1: the training wheels are off so to speak. And I

434
00:24:29,119 --> 00:24:32,040
Speaker 1: think there's a lot of uncertainty around how much does

435
00:24:32,080 --> 00:24:36,400
Speaker 1: that affect market multiples and evaluations and performance. And then

436
00:24:36,400 --> 00:24:39,240
Speaker 1: I think we're also dealing with an inflationary dynamic that

437
00:24:39,280 --> 00:24:41,400
Speaker 1: we haven't seen in some time. If you look at

438
00:24:41,440 --> 00:24:45,359
Speaker 1: break even inflation expectations there near the highest and thirty years,

439
00:24:45,480 --> 00:24:48,399
Speaker 1: our economists think that inflation is going to moderate as

440
00:24:48,440 --> 00:24:51,879
Speaker 1: two goes on, but they're obviously different opinions around that.

441
00:24:51,920 --> 00:24:55,399
Speaker 1: So I think investors are uniquely facing some really big,

442
00:24:55,560 --> 00:24:58,040
Speaker 1: very interesting questions as we look at your head and

443
00:24:58,200 --> 00:25:00,199
Speaker 1: when I look at your year ahead, it's of the

444
00:25:00,200 --> 00:25:02,399
Speaker 1: research you put out of the weekend. I enjoyed reading it.

445
00:25:02,480 --> 00:25:04,119
Speaker 1: Oh what stead that for me? Though? Is you put

446
00:25:04,160 --> 00:25:06,280
Speaker 1: out an index coal of fully four hundred, But when

447
00:25:06,280 --> 00:25:09,480
Speaker 1: I read through the research itself, you almost the emphasized

448
00:25:09,520 --> 00:25:11,600
Speaker 1: the index code. It doesn't seem that relevance to what

449
00:25:11,640 --> 00:25:13,159
Speaker 1: you think in as whack? Can you just build on that?

450
00:25:13,200 --> 00:25:16,320
Speaker 1: For Sandrew? Sure? So, So like I think there's some

451
00:25:16,359 --> 00:25:19,359
Speaker 1: interesting factors about how we're how we're thinking about the

452
00:25:19,600 --> 00:25:21,760
Speaker 1: year ahead. I think, first as if we think about

453
00:25:22,160 --> 00:25:25,280
Speaker 1: you know, the equity market narrowly, especially the US equity market,

454
00:25:25,560 --> 00:25:29,240
Speaker 1: the world's largest equity market. We are cautious on the

455
00:25:29,320 --> 00:25:32,840
Speaker 1: year ahead. We do think the market ends two lower,

456
00:25:33,400 --> 00:25:35,200
Speaker 1: but we think that there could be a wide range

457
00:25:35,240 --> 00:25:37,600
Speaker 1: around that. We think the market could trade both higher

458
00:25:37,600 --> 00:25:41,160
Speaker 1: and lower over the course of next year before ending

459
00:25:41,160 --> 00:25:44,440
Speaker 1: a little bit lower. And we think single stock dispersion

460
00:25:44,480 --> 00:25:46,760
Speaker 1: is going to remain really high. And so I think

461
00:25:46,760 --> 00:25:49,720
Speaker 1: in these mid cycle environments like we're in today, you

462
00:25:49,840 --> 00:25:52,560
Speaker 1: get less of the action at the high level of

463
00:25:52,600 --> 00:25:55,280
Speaker 1: the market, more of the alpha, more of the importance

464
00:25:55,359 --> 00:25:58,200
Speaker 1: is that stock selection underneath the market. And we think

465
00:25:58,240 --> 00:26:00,639
Speaker 1: that's a really important theme for US East next year.

466
00:26:00,680 --> 00:26:02,240
Speaker 1: I know's just the other way in Europe and in

467
00:26:02,320 --> 00:26:04,320
Speaker 1: Japan versus the underwent in the US two does the

468
00:26:04,359 --> 00:26:07,879
Speaker 1: same story apply a little bit less. So actually, I

469
00:26:07,880 --> 00:26:10,399
Speaker 1: think Europe and Japan will be a little bit straightforward

470
00:26:10,520 --> 00:26:13,800
Speaker 1: data markets where look at Europe and Japan are are

471
00:26:14,000 --> 00:26:18,000
Speaker 1: very unique for satisfying two really important conditions. We think

472
00:26:18,040 --> 00:26:21,720
Speaker 1: they usually outperform these or assets that usually outperform at

473
00:26:21,760 --> 00:26:25,400
Speaker 1: this stage of the economic cycle. And they are cheaper

474
00:26:25,440 --> 00:26:27,639
Speaker 1: than they usually are at this stage of the economic cycle.

475
00:26:27,680 --> 00:26:30,840
Speaker 1: And and very few assets take both of those boxes.

476
00:26:31,000 --> 00:26:34,280
Speaker 1: At the moment, the Europe and Japan do. So we

477
00:26:34,280 --> 00:26:36,879
Speaker 1: think those are both markets that can deliver about a

478
00:26:36,960 --> 00:26:39,960
Speaker 1: ten percent return next year, and they'll be some of

479
00:26:39,960 --> 00:26:42,560
Speaker 1: the better places we think investors can hide out, and

480
00:26:42,600 --> 00:26:45,240
Speaker 1: we think that performance would be relatively broad based. How

481
00:26:45,320 --> 00:26:47,600
Speaker 1: much do you think that the Fed holding off on

482
00:26:47,720 --> 00:26:50,399
Speaker 1: raising rates as quickly as people expect will lead to

483
00:26:50,480 --> 00:26:54,040
Speaker 1: a steepening in a yield curve and overweight in financial

484
00:26:54,119 --> 00:26:58,800
Speaker 1: sort of sort of tailwind to some of these cyclical trades. Yeah,

485
00:26:59,160 --> 00:27:00,880
Speaker 1: I'm really glad you asked about that, because I think

486
00:27:00,880 --> 00:27:03,800
Speaker 1: there are two really kind of interesting factors about how

487
00:27:03,840 --> 00:27:06,879
Speaker 1: we see this playing out. The first is the market

488
00:27:07,119 --> 00:27:10,600
Speaker 1: might not believe our view immediately. There's there's no reason

489
00:27:10,640 --> 00:27:13,119
Speaker 1: for it too write. There's I think very little incentive

490
00:27:13,160 --> 00:27:15,320
Speaker 1: for the Federal Reserve to come out in January or

491
00:27:15,320 --> 00:27:17,800
Speaker 1: February and say we're not going to hike rates in

492
00:27:17,840 --> 00:27:20,560
Speaker 1: the second half of the year. Why why would they?

493
00:27:20,720 --> 00:27:23,159
Speaker 1: So that is a reason why we actually think the

494
00:27:23,240 --> 00:27:26,400
Speaker 1: dollar can start off the year stronger, why we can

495
00:27:26,440 --> 00:27:29,000
Speaker 1: get really yields rising the first part of the year.

496
00:27:29,040 --> 00:27:31,479
Speaker 1: I think the market could act with a little bit

497
00:27:31,520 --> 00:27:33,600
Speaker 1: more of a hawkish attint to it, and that's the

498
00:27:33,600 --> 00:27:36,720
Speaker 1: way our interest rate strategists are thinking about things now.

499
00:27:36,840 --> 00:27:39,200
Speaker 1: I also think that as you move into as you

500
00:27:39,280 --> 00:27:42,000
Speaker 1: move throughout the year, our view is that the hikes

501
00:27:42,040 --> 00:27:44,440
Speaker 1: that the Fed is not going to do in two

502
00:27:44,520 --> 00:27:48,840
Speaker 1: simply get shifted back into four. That the market starts

503
00:27:48,880 --> 00:27:52,360
Speaker 1: to think, look, starting a little bit later is going

504
00:27:52,400 --> 00:27:54,560
Speaker 1: to mean that the Fed is ultimately going to be

505
00:27:54,680 --> 00:27:57,760
Speaker 1: able to hike more, and so the curve will steep in.

506
00:27:57,840 --> 00:27:59,720
Speaker 1: There will curvel steep in between the two year point,

507
00:28:00,000 --> 00:28:02,520
Speaker 1: if your point, and again that's that's a really key

508
00:28:02,560 --> 00:28:05,200
Speaker 1: part of how our interest rate strategy is is thinking

509
00:28:05,240 --> 00:28:07,920
Speaker 1: about your head. So if the dollar is going to strengthen,

510
00:28:08,240 --> 00:28:10,600
Speaker 1: does that mean that going into the beating of the

511
00:28:10,680 --> 00:28:13,280
Speaker 1: year you want to be overweight stocks? In other words,

512
00:28:13,280 --> 00:28:16,800
Speaker 1: that this nuanced call calls for a frontloading of all

513
00:28:16,840 --> 00:28:19,719
Speaker 1: gains and then perhaps a pretty steep sell off mid

514
00:28:20,040 --> 00:28:23,600
Speaker 1: two later in the year. Well, you know, the stronger

515
00:28:23,680 --> 00:28:26,359
Speaker 1: dollar will tighten financial conditions. I think that's a reason

516
00:28:26,400 --> 00:28:30,000
Speaker 1: why we are we are waiting to turn bullish on

517
00:28:30,000 --> 00:28:33,240
Speaker 1: on emerging market assets. E m sts have have really

518
00:28:33,320 --> 00:28:36,720
Speaker 1: underperformed in one They are in many cases cheap but

519
00:28:37,240 --> 00:28:39,480
Speaker 1: we would like to get that dollar strength out of

520
00:28:39,480 --> 00:28:42,600
Speaker 1: the way first. And if I think about the other markets, look,

521
00:28:42,720 --> 00:28:45,560
Speaker 1: the weaker euro the weaker again we think can connect

522
00:28:45,600 --> 00:28:48,440
Speaker 1: as near term tail winds to to Europe and in Japan.

523
00:28:48,640 --> 00:28:51,160
Speaker 1: While you know for the U S it's it's going

524
00:28:51,240 --> 00:28:54,040
Speaker 1: to increasingly become I think a question around how much

525
00:28:54,120 --> 00:28:56,680
Speaker 1: is this dollar strength starting to impact earning? So we

526
00:28:56,960 --> 00:28:59,040
Speaker 1: do think the earning story is pretty good in the

527
00:28:59,120 --> 00:29:01,840
Speaker 1: US equity market, or our caution is almost entirely around

528
00:29:01,840 --> 00:29:05,560
Speaker 1: the multiple, not around the earning side. But it's another factor.

529
00:29:05,600 --> 00:29:07,560
Speaker 1: It's another tightening and financial conditions that we have to

530
00:29:07,560 --> 00:29:09,560
Speaker 1: be mindful of. And to just final question when you

531
00:29:09,600 --> 00:29:11,480
Speaker 1: sit down with the team and you do this work

532
00:29:11,600 --> 00:29:14,680
Speaker 1: with n Inzana, with Mike Wilson, with everybody else, Matt

533
00:29:14,680 --> 00:29:18,320
Speaker 1: wholemac over and Morgan Stanny too. This FED coal, how

534
00:29:18,440 --> 00:29:24,040
Speaker 1: FED chair dependent? Is this cool? Well? You know, I

535
00:29:24,440 --> 00:29:27,600
Speaker 1: as we think about it, we we were not sure

536
00:29:27,720 --> 00:29:30,880
Speaker 1: that it is as dependent as it might otherwise be.

537
00:29:31,120 --> 00:29:33,080
Speaker 1: We think that the FED is going to be facing

538
00:29:34,120 --> 00:29:40,280
Speaker 1: moderating core cp core PCE throughout next year. Core PC

539
00:29:40,520 --> 00:29:42,560
Speaker 1: rate that's gonna be well below the cp I rate

540
00:29:42,640 --> 00:29:45,640
Speaker 1: well below the headline inflation rate that others might be

541
00:29:45,720 --> 00:29:48,200
Speaker 1: focused on, and so that there's going to be I

542
00:29:48,280 --> 00:29:52,280
Speaker 1: think a strong argument for some patients, whether it is

543
00:29:52,800 --> 00:29:56,680
Speaker 1: Share Powell or whether it is somebody else. So that's

544
00:29:56,760 --> 00:29:59,840
Speaker 1: not the main determinant of our call for patients. UM

545
00:30:00,000 --> 00:30:03,200
Speaker 1: are are determinators around the inflation path and how we

546
00:30:03,280 --> 00:30:06,440
Speaker 1: think the FED responds to that. And we love catching

547
00:30:06,480 --> 00:30:08,440
Speaker 1: up with your great work. Send out by stem while

548
00:30:08,440 --> 00:30:10,960
Speaker 1: you Andrew shakes that of Morgan Stanley on the outlook

549
00:30:11,160 --> 00:30:20,760
Speaker 1: for two. Right now, Dana Curtis Peterson is going to

550
00:30:20,880 --> 00:30:24,000
Speaker 1: join excuse me, Dana Peterson uh to join us right

551
00:30:24,080 --> 00:30:27,600
Speaker 1: now chief Economists at the conference where Dana, the heritage

552
00:30:27,640 --> 00:30:30,040
Speaker 1: of the conference board is so much about a reading

553
00:30:30,440 --> 00:30:34,000
Speaker 1: of the American consumer. What is the distinction you see

554
00:30:34,080 --> 00:30:39,720
Speaker 1: now in your research? Well, our last reading consumer confidence

555
00:30:39,800 --> 00:30:41,760
Speaker 1: was in October, so I know there have been other

556
00:30:41,840 --> 00:30:44,720
Speaker 1: readings out there for November, but that last reading showed

557
00:30:44,720 --> 00:30:47,200
Speaker 1: that people were still pretty optimistic. They were still looking

558
00:30:47,280 --> 00:30:51,720
Speaker 1: forward to buying things, uh, cars, appliances, big ticket items,

559
00:30:51,760 --> 00:30:54,960
Speaker 1: and even going on vacation. And also our Holiday Outlook

560
00:30:55,360 --> 00:30:58,520
Speaker 1: survey indicated that even though people anticipated that things would

561
00:30:58,760 --> 00:31:01,520
Speaker 1: cost more. They were still looking to buy and spend

562
00:31:01,560 --> 00:31:03,320
Speaker 1: about the same amount of money this year that they

563
00:31:03,400 --> 00:31:06,440
Speaker 1: spent last year, Dana, How much is this potentially people

564
00:31:06,680 --> 00:31:09,720
Speaker 1: bringing forward their purchases ahead of the holidays to get

565
00:31:09,720 --> 00:31:12,920
Speaker 1: ahead of the crunch with supply chains, like, for example,

566
00:31:13,040 --> 00:31:16,400
Speaker 1: people buying Christmas trees in November the middle of November

567
00:31:16,480 --> 00:31:20,520
Speaker 1: from home depot. I think there's definitely that's definitely happening.

568
00:31:20,520 --> 00:31:22,880
Speaker 1: When we look at sporting goods, toys and the hobby

569
00:31:23,120 --> 00:31:27,280
Speaker 1: UH sales for October, they were pretty strong. And even

570
00:31:27,400 --> 00:31:30,200
Speaker 1: I went out and on all my Christmas toys ahead

571
00:31:30,240 --> 00:31:32,400
Speaker 1: of time in October, So we do think that some

572
00:31:32,560 --> 00:31:35,560
Speaker 1: people are probably buying in advance of expectation of store

573
00:31:35,600 --> 00:31:40,760
Speaker 1: shelves being understocked. And certainly inventories are big issues. Are

574
00:31:40,840 --> 00:31:42,720
Speaker 1: we going to see an increase in inventories in the

575
00:31:42,760 --> 00:31:45,240
Speaker 1: fourth quarter to help us see a real bounce back

576
00:31:45,280 --> 00:31:48,400
Speaker 1: in GDP growth after the soft reading in the third quarter. Well,

577
00:31:48,440 --> 00:31:50,720
Speaker 1: it also is a question of whether the strength in

578
00:31:50,800 --> 00:31:54,280
Speaker 1: the retail sales can continue into December or whether we've

579
00:31:54,360 --> 00:31:59,440
Speaker 1: kind of frontloaded the data. That's a great question that's

580
00:31:59,480 --> 00:32:02,200
Speaker 1: really not going be born out until we see November

581
00:32:02,280 --> 00:32:06,400
Speaker 1: and December data UM. But again very strong intentions among people,

582
00:32:06,960 --> 00:32:10,680
Speaker 1: especially folks looking to buy clothing UM and also high

583
00:32:10,760 --> 00:32:15,440
Speaker 1: tech goods. And I'm very optimistic and certainly encouraged to

584
00:32:15,480 --> 00:32:17,680
Speaker 1: see the auto sales pop up because indeed we know

585
00:32:17,800 --> 00:32:21,600
Speaker 1: that there's been this semiconductor crunch and certainly there's more

586
00:32:21,680 --> 00:32:24,520
Speaker 1: demand for cars out there and probably will help bolster

587
00:32:24,640 --> 00:32:27,840
Speaker 1: sales for the balance of this year. And how uncomfortable

588
00:32:27,880 --> 00:32:30,040
Speaker 1: do you think the FET is right now with this

589
00:32:30,160 --> 00:32:33,760
Speaker 1: incoming dates rather the past countle of weeks. Well, I

590
00:32:33,880 --> 00:32:36,520
Speaker 1: think what the data telling us is that after the

591
00:32:36,600 --> 00:32:40,479
Speaker 1: delta variants setback, the economy getting back on track UM.

592
00:32:40,680 --> 00:32:45,320
Speaker 1: Even though the UH the restaurant and bar sales were

593
00:32:45,400 --> 00:32:48,120
Speaker 1: flat UM and probably in real terms they might have

594
00:32:48,200 --> 00:32:51,160
Speaker 1: been a little bit negative. It's we're seeing mobility data

595
00:32:51,240 --> 00:32:53,360
Speaker 1: pick up. People are getting back out there, and certainly

596
00:32:54,000 --> 00:32:57,280
Speaker 1: UH growth is strong. Inflation is really powerful at this

597
00:32:57,440 --> 00:33:00,640
Speaker 1: point UM. Inflation expectations at least in the short term.

598
00:33:00,680 --> 00:33:04,120
Speaker 1: The delta is pretty steep UM. And also labor markets

599
00:33:04,160 --> 00:33:06,080
Speaker 1: are healing, so I would imagine that we're getting to

600
00:33:06,120 --> 00:33:08,480
Speaker 1: the point where the FED can feel, hey, you know

601
00:33:08,600 --> 00:33:12,160
Speaker 1: what we have reached full employment. We're well beyond our

602
00:33:12,720 --> 00:33:16,240
Speaker 1: our expectations for inflation. Uh, let's go ahead and start

603
00:33:16,320 --> 00:33:19,360
Speaker 1: thinking about normalizing policy next year. And when you say

604
00:33:19,400 --> 00:33:21,560
Speaker 1: we're getting to the point of full employment, what are

605
00:33:21,560 --> 00:33:23,520
Speaker 1: you looking at to guide you and how close are we?

606
00:33:23,560 --> 00:33:26,880
Speaker 1: Actually just put some numbers on that. Sure, well, we

607
00:33:26,960 --> 00:33:29,000
Speaker 1: know that there are four point two million persons that

608
00:33:29,040 --> 00:33:31,880
Speaker 1: are still absent from the payrolls report. However, we also

609
00:33:31,960 --> 00:33:36,360
Speaker 1: know that tons of people retired, about three million potentially,

610
00:33:36,400 --> 00:33:38,320
Speaker 1: and not all of them are necessarily going to come back.

611
00:33:38,960 --> 00:33:41,760
Speaker 1: So when you look at the participation rate, it's probably

612
00:33:41,800 --> 00:33:44,560
Speaker 1: telling a story that is, um, you know, a little

613
00:33:44,680 --> 00:33:47,920
Speaker 1: underrepresentative of what's going on the labor market. If we

614
00:33:48,000 --> 00:33:50,600
Speaker 1: continue to see a roughly half million jobs at it

615
00:33:51,120 --> 00:33:54,320
Speaker 1: over the next few months, and also anticipating that folks

616
00:33:54,360 --> 00:33:57,080
Speaker 1: aren't coming back from retirement, we're probably pretty close to

617
00:33:57,160 --> 00:33:59,800
Speaker 1: full employment. And certainly once we reach that, I think

618
00:33:59,840 --> 00:34:02,800
Speaker 1: the FED will feel comfortable with starting to normalize. What

619
00:34:04,320 --> 00:34:09,040
Speaker 1: what inflation rate is the inflation rate that makes wage

620
00:34:09,080 --> 00:34:13,080
Speaker 1: growth impossible? In your head, is it three inflation or

621
00:34:13,200 --> 00:34:18,480
Speaker 1: is there some statistic higher? Um, I'm not sure what

622
00:34:18,640 --> 00:34:21,120
Speaker 1: that rate is, but I would imagine even though uh,

623
00:34:22,000 --> 00:34:25,400
Speaker 1: the FED signal or indicated that they're not seeing a

624
00:34:25,480 --> 00:34:27,840
Speaker 1: wage price spiral right now, it's hard to imagine that

625
00:34:27,960 --> 00:34:31,080
Speaker 1: some of these increases and wages aren't filtering down to consumers.

626
00:34:31,120 --> 00:34:33,720
Speaker 1: I mean, certainly that's what we're hearing at the conference

627
00:34:33,800 --> 00:34:36,920
Speaker 1: port from our members. So um, I would imagine that

628
00:34:37,200 --> 00:34:42,280
Speaker 1: as we see wages increase in the BLS reports EMPLOYT reports,

629
00:34:42,320 --> 00:34:45,360
Speaker 1: that the FED will become less comfortable and potentially become

630
00:34:45,440 --> 00:34:48,279
Speaker 1: more concerned that there will be this spiral and that

631
00:34:48,360 --> 00:34:51,040
Speaker 1: they need to do something to address it. Danna, thank

632
00:34:51,080 --> 00:34:52,839
Speaker 1: you for beam with us this morning to write this down.

633
00:34:52,920 --> 00:34:55,600
Speaker 1: Danna pities in that of the conference board. This is

634
00:34:55,640 --> 00:34:59,600
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live

635
00:34:59,760 --> 00:35:03,160
Speaker 1: we days from seven to ten am Eastern on Bloomberg

636
00:35:03,239 --> 00:35:07,040
Speaker 1: Radio and on Bloomberg Television each day from six to

637
00:35:07,200 --> 00:35:11,840
Speaker 1: nine am for insight from the best in economics, finance, investment,

638
00:35:12,000 --> 00:35:17,000
Speaker 1: and international relations. And subscribe to the Surveillance podcast on

639
00:35:17,120 --> 00:35:20,920
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on

640
00:35:21,040 --> 00:35:25,160
Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg