WEBVTT - Surveillance: Hawkish Fed Policy With Bullard 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Brownwitz Jailey, we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.080 and of course on the Bloomberg terminal. As we spoke 0:00:30.120 --> 0:00:33.760 to William Dudley and Mr Lacker Jeffrey Lacker, the former 0:00:33.800 --> 0:00:37.600 President of Richmond yesterday. Today we speak with the genuine Beast. 0:00:37.640 --> 0:00:40.880 He's from St. Louis, James Bullard back to two thousand eight, 0:00:41.080 --> 0:00:43.840 who set the economic community on its ear a number 0:00:43.880 --> 0:00:48.120 of years ago, talking about regime change, the idea of 0:00:48.280 --> 0:00:51.720 how a central bank should act. The PhD from Indiana 0:00:51.800 --> 0:00:54.800 joins us this morning, and our questions, of course, always 0:00:54.840 --> 0:00:57.560 led at the beginning, unlike at the press conference by 0:00:57.560 --> 0:01:00.840 our Michael McKee. Michael, Well, good morning, Jim. I'm not 0:01:00.880 --> 0:01:03.920 sure what the real beast means, but we are happy 0:01:04.000 --> 0:01:06.480 to have you with us on Bloomberg Radio and television 0:01:06.520 --> 0:01:08.920 this morning. Uh, there's a lot going on. Happy to 0:01:08.920 --> 0:01:11.800 be here obviously to talk about, but there is an 0:01:11.800 --> 0:01:14.000 elephant in the room or at least it will be 0:01:14.120 --> 0:01:16.640 imminently in the room. So let me start with that. 0:01:17.360 --> 0:01:19.920 Sharon Brown, chair of the Senate Banking Committee, told us 0:01:20.040 --> 0:01:22.319 last night, as far as he knows, it is down 0:01:22.360 --> 0:01:26.440 to Lele Brainerd or j Pale for the next FED chair. 0:01:27.000 --> 0:01:30.360 You've worked with both. What would be the policy differences 0:01:30.760 --> 0:01:36.920 between the two? How would the FED change if at all? Uh? 0:01:37.200 --> 0:01:39.200 I think no matter how this comes out, there will 0:01:39.240 --> 0:01:43.399 be a lot of continuity in FED policy. Both of 0:01:43.440 --> 0:01:48.160 these players have uh, you know, long track records at 0:01:48.160 --> 0:01:52.720 the FED, so certainly it's a big committee. Also, I 0:01:52.720 --> 0:01:55.560 think people have to keep that in mind. Uh. And 0:01:55.840 --> 0:01:57.840 and there's a lot of experience on the committee, so 0:01:57.880 --> 0:02:02.640 I think we'd see uh conton nudity. Would you anticipate 0:02:02.680 --> 0:02:06.960 any change in the timeline for tightening policy? And I'm 0:02:06.960 --> 0:02:10.560 going to use that broadly to mean tapering and raising 0:02:10.680 --> 0:02:14.160 rates and forward guidance, anything that you might do between 0:02:14.280 --> 0:02:20.560 one or the other. You know, it's a committee decision, 0:02:20.760 --> 0:02:24.359 and and it's as I just mentioned, it's a it's 0:02:24.360 --> 0:02:27.800 a big committee and lots of opinions around the table, 0:02:28.000 --> 0:02:31.520 great staffs around the Federal Reserve and at the Board 0:02:31.560 --> 0:02:35.600 of Governors. So it's a collective process and we have 0:02:35.680 --> 0:02:38.919 to react to the data and and make decisions. So 0:02:40.120 --> 0:02:43.160 the chair's job is really to guide that process, I 0:02:43.160 --> 0:02:47.240 would say, uh, and and get to a good compromise 0:02:47.320 --> 0:02:49.919 in the center of the committee. Well, certainly you've got 0:02:49.919 --> 0:02:52.480 opinions that you've expressed them on what the Fed should 0:02:52.520 --> 0:02:57.760 be doing, the possibility of a faster move to tighten policy, 0:02:57.800 --> 0:03:00.200 but you've also, as you just said, what that on 0:03:00.280 --> 0:03:04.200 the data. The data are showing very strong inflation, and 0:03:04.280 --> 0:03:06.560 it shows up in the retail sales report this morning. 0:03:07.120 --> 0:03:10.120 Are you ready to say we should move more quickly? 0:03:12.760 --> 0:03:15.720 I actually didn't see the report. Here is getting ready 0:03:15.760 --> 0:03:19.720 for the interview, but um uh, the inflation rate is 0:03:19.800 --> 0:03:23.680 quite high. The core pc inflation rate, the committee's favorite 0:03:23.680 --> 0:03:26.519 measures about three point six percent. That's the highest it 0:03:26.520 --> 0:03:30.960 has been in thirty years, well above our two percent target, 0:03:31.160 --> 0:03:36.200 and that number already throws out food and energy. So uh, 0:03:36.240 --> 0:03:38.840 you know, you're you're taming the data a little bit 0:03:38.840 --> 0:03:40.600 when you look at that kind of measure, but it's 0:03:40.680 --> 0:03:43.520 quite high. It does not have the reputation of moving 0:03:43.560 --> 0:03:48.560 down very easily. So I think it who's the committee 0:03:48.560 --> 0:03:53.320 to tack in a more hawk hawk's direction, uh, in 0:03:53.400 --> 0:03:56.720 the next couple of meetings, so that we're managing the 0:03:56.840 --> 0:04:00.720 risk of inflation appropriately. Uh. In inflation just happens to 0:04:00.760 --> 0:04:03.240 go away, We're in great shape for that. We're set 0:04:03.360 --> 0:04:07.080 up for that. But if inflation doesn't go away as 0:04:07.160 --> 0:04:10.840 quickly as many aren't currently anticipating, then it's going to 0:04:10.880 --> 0:04:14.040 be up to the Committee to keep inflation under control 0:04:14.080 --> 0:04:16.520 going forward. Well, when you say tack in a more 0:04:16.520 --> 0:04:19.719 hawkish direction, are you talking about speeding up the taper 0:04:20.040 --> 0:04:22.359 even with the risk of a taper tantrum? Are you 0:04:22.400 --> 0:04:28.919 talking about changing forward guidance? How would you tack? I 0:04:28.960 --> 0:04:32.000 think we've gotten past the taper tantrum issue because we 0:04:32.040 --> 0:04:35.560 went ahead and went ahead with the with the taper here, 0:04:35.600 --> 0:04:39.599 but we could move faster. We kept optionality on this 0:04:39.839 --> 0:04:43.760 that we could speed up the taper if it's appropriate. 0:04:43.880 --> 0:04:47.840 We have a hot CPI report here, as you know, 0:04:47.960 --> 0:04:53.799 I've advocated a faster pace pace that's twenty per month 0:04:54.240 --> 0:04:59.240 less on treasury purchases and ten less on mortgage backed 0:04:59.279 --> 0:05:03.760 security purchases. The reason I proposed that is that we 0:05:03.800 --> 0:05:06.640 would be done tapering at the end of the first 0:05:06.720 --> 0:05:10.640 quarter next year, and that would give us a little 0:05:10.640 --> 0:05:15.080 bit earlier moment that we could assess where the data 0:05:15.200 --> 0:05:19.200 is and decide what to do on on rate policy. 0:05:20.080 --> 0:05:23.920 UM so I think that's something to consider. I mean 0:05:24.320 --> 0:05:27.040 some might say, well, that's you know, that's faster than 0:05:27.080 --> 0:05:30.960 they like. I don't know, but we did retain the 0:05:31.000 --> 0:05:34.240 optionality on this. Jim Bullard, thank you so much for 0:05:34.520 --> 0:05:36.920 joining us this morning. It would be great to get 0:05:36.960 --> 0:05:40.840 your sense of Bill Dudley's comments about the end value, 0:05:40.880 --> 0:05:45.039 the end terminal rate that we are expecting for policy. 0:05:45.160 --> 0:05:47.679 Given how high inflation has gone, a lot of people 0:05:47.720 --> 0:05:50.400 think it's not going to get beyond two percent, he said, 0:05:50.480 --> 0:05:53.080 three to four percent. Do you think that that is 0:05:53.120 --> 0:05:58.599 a realistic end policy rate. Yeah, that's not my base 0:05:58.640 --> 0:06:02.880 case right now. I've got uh, you know, rates only 0:06:03.000 --> 0:06:06.719 rising to where they were pre pandemic. And I think 0:06:06.720 --> 0:06:08.640 it's good to keep in mind here that the pre 0:06:08.720 --> 0:06:12.440 pandemic economy was not a zero interest rate economy. So 0:06:12.920 --> 0:06:15.760 whenever you think we're back to the pre pandemic levels 0:06:15.760 --> 0:06:18.640 of output, which we already are, and the and the 0:06:18.640 --> 0:06:24.680 pre pandemic level of labor uh labor market performance, uh, 0:06:24.800 --> 0:06:27.440 then that should be the moment that you're back at 0:06:27.480 --> 0:06:30.359 the at the pre pandemic level of interest rates. We 0:06:30.360 --> 0:06:33.599 don't really have that kind of plan in place right now, 0:06:33.640 --> 0:06:36.920 but maybe that's something that to think about. I think, 0:06:37.560 --> 0:06:41.919 you know, these this rate policy and and tacking hawkishly 0:06:42.040 --> 0:06:45.680 now could pay great dividends for the committee in the 0:06:45.800 --> 0:06:48.800 year ahead or the eighteen months I had, because it 0:06:48.839 --> 0:06:51.040 means that we would have to do less later on, 0:06:51.760 --> 0:06:54.600 and you'd smooth this whole process out some. I think 0:06:54.640 --> 0:06:59.839 the scenario that U. Bill Dudley was describing was one 0:07:00.000 --> 0:07:03.440 where we get behind the data too far and then 0:07:03.440 --> 0:07:06.960 we have to move more aggressively later. And that was 0:07:07.000 --> 0:07:09.960 a stop go type policy that didn't work very well 0:07:10.080 --> 0:07:13.800 in the nineteen seventies. So I think it makes sense 0:07:13.840 --> 0:07:17.800 to try to move a little bit more hawkishly here 0:07:18.360 --> 0:07:21.720 and try to manage the inflation risk again. If it all, 0:07:21.880 --> 0:07:25.640 if it all dissipates next year, uh, we'll We'll be 0:07:25.680 --> 0:07:28.320 fine in that situation. Then we can push out rate 0:07:28.360 --> 0:07:31.400 increases out into the future. But how high can rates 0:07:31.400 --> 0:07:34.240 go given the where the economy is, and how quickly? Right, 0:07:34.240 --> 0:07:36.400 I mean, the idea of front loading rate hikes makes 0:07:36.400 --> 0:07:39.160 sense to avoid a sort of gloom and doom scenario 0:07:39.240 --> 0:07:42.400 that Bill Dudley was laying out four rates, perhaps setting 0:07:42.400 --> 0:07:45.560 the economy into recession. But how high could we currently 0:07:45.600 --> 0:07:51.520 handle given the trillions of dollars of debt that we've incurred. Well, 0:07:51.560 --> 0:07:53.880 I mean, I think the good news is you probably 0:07:53.920 --> 0:07:56.040 don't have to go to that high of a level 0:07:56.120 --> 0:08:00.560 to get a normal sense of interest rates. I mean, nineteen, 0:08:01.280 --> 0:08:04.320 you know, one and a half to two percent was 0:08:04.440 --> 0:08:07.040 kind of a common level, and that seemed to work 0:08:07.080 --> 0:08:11.560 pretty well for that pre pandemic economy. There were some adjustments, 0:08:11.600 --> 0:08:15.239 some trade issues going on then and and other other things, 0:08:15.240 --> 0:08:17.560 but I kind of take it as good news that 0:08:17.600 --> 0:08:19.360 we wouldn't have to go to that high of a 0:08:19.480 --> 0:08:23.680 level to remove the accommodation and remove the upward pressure 0:08:23.720 --> 0:08:28.280 that we're putting on inflation with our current policy. Jim Bowler, 0:08:28.400 --> 0:08:32.120 Tom Keen, Good morning to you, sir, Christopher Waller, who 0:08:32.120 --> 0:08:34.800 got an upgrade from your shop a few years ago, 0:08:34.840 --> 0:08:37.600 now governor of the FED in Washington. You and Chris 0:08:37.600 --> 0:08:41.680 Waller did a retrospective off your regime paper of two thousand. 0:08:41.880 --> 0:08:44.880 I believe it was sixteen, I can't quite remember. I 0:08:44.920 --> 0:08:48.839 want you to discuss now for the economic community if 0:08:48.880 --> 0:08:53.960 we're in a regime change where the theories aren't working. Here, 0:08:53.960 --> 0:08:56.800 we are coming out of a natural disaster, we have 0:08:56.840 --> 0:09:00.560 a China like boom economy of real and nomenal GDP, 0:09:01.360 --> 0:09:03.360 and then we've got the idea that we have to 0:09:03.480 --> 0:09:08.839 somehow unwind this to the terminal value scope out given 0:09:08.840 --> 0:09:13.000 a regime change, the win of a terminal value you're 0:09:13.080 --> 0:09:16.640 looking out to are you looking out six months? Are 0:09:16.679 --> 0:09:19.560 you looking out too a Cardinals World series? Or can 0:09:19.600 --> 0:09:26.560 you responsibly look out five or six years? I think 0:09:26.600 --> 0:09:29.960 this might be a moment where there, uh, there is 0:09:30.080 --> 0:09:35.800 potential for regime switching to a higher productivity growth regime. 0:09:36.200 --> 0:09:40.520 Not really ready to commit to that right now, but 0:09:41.120 --> 0:09:43.640 if you look at the data has become very volatile, 0:09:44.160 --> 0:09:47.160 it's not so clear that we're in the low productivity 0:09:47.200 --> 0:09:51.920 growth world that I was talking about in twix. Uh, 0:09:52.200 --> 0:09:55.480 we might push out of this. You know. The pandemic 0:09:55.600 --> 0:09:59.319 is the kind of event that really forces businesses to 0:09:59.480 --> 0:10:03.040 hustle and to think about how they can use technology 0:10:03.480 --> 0:10:06.440 to their advantage. They've got a very tight labor market 0:10:06.480 --> 0:10:09.960 that they're facing. Uh, they're probably dusting off plans that 0:10:10.000 --> 0:10:12.800 they had around for a long time to use technology 0:10:12.840 --> 0:10:16.640 in a better way. So, uh, that's very promising. I 0:10:16.679 --> 0:10:19.319 think that we could move to a period of higher 0:10:19.320 --> 0:10:23.120 productivity growth. That would be great for the economy. Uh, 0:10:23.160 --> 0:10:25.760 and it would put upward pressure on interest rates. So 0:10:26.080 --> 0:10:27.960 if we see that this is a critical theme for 0:10:28.000 --> 0:10:32.439 Bloomberg surveillance this year. Jibbola the idea of the technology 0:10:32.480 --> 0:10:35.520 overlay being underestimated as we come out of the war shock, 0:10:35.640 --> 0:10:39.520 the pandemic shock as well. If we get a technology 0:10:39.679 --> 0:10:44.280 overlay in an upgrade in our statistics, can we get 0:10:44.360 --> 0:10:48.040 to where instead of a two percent inflation target that 0:10:48.120 --> 0:10:51.480 we could migrate to something is at impose and suggests 0:10:51.840 --> 0:10:56.240 of a three percent inflation target simply because we have 0:10:56.360 --> 0:11:02.760 better productivity. No, I think you know, No, I don't 0:11:02.760 --> 0:11:05.480 think so you should. You should take the productivity on board. 0:11:05.480 --> 0:11:08.280 The economy would grow faster, and that would be a 0:11:08.400 --> 0:11:11.760 sensational thing. The last time we really had this was 0:11:11.880 --> 0:11:14.840 the late nineteen nineties, and at that point we were 0:11:14.880 --> 0:11:20.240 talking about paying off the entire national debt. It didn't happen, 0:11:20.320 --> 0:11:24.120 but we were talking about it at one point, And Uh, 0:11:24.240 --> 0:11:27.679 that just shows you what a big impact this kind 0:11:27.720 --> 0:11:32.559 of thing can have. On macroeconomic performance. So I would 0:11:32.559 --> 0:11:36.600 not mess around with the inflation target itself. That's become 0:11:36.640 --> 0:11:41.040 an international standard. And if the leading economy in the 0:11:41.080 --> 0:11:44.120 world decided to mess around with the inflation target, you'd 0:11:44.160 --> 0:11:46.320 get all this chain reaction all around the world. I 0:11:46.320 --> 0:11:49.960 think that would be chaotic and sounds like the seventies 0:11:50.000 --> 0:11:52.360 to me. So I would not try to go in 0:11:52.440 --> 0:11:57.640 that direction. But nevertheless, I think we may get the 0:11:58.360 --> 0:12:03.800 better the higher productivity growth that uh is kind of 0:12:03.800 --> 0:12:06.960 promising coming out of this pandemic, just because everyone has 0:12:07.320 --> 0:12:10.240 been experimenting with new technology. Mike, did you see how 0:12:10.280 --> 0:12:12.800 he treated me there like you get treated by Chairman 0:12:12.880 --> 0:12:15.280 Paul in the press conference. I mean, he just laughed 0:12:15.360 --> 0:12:18.840 right in my face over the face. Well, that was 0:12:19.080 --> 0:12:21.200 a long term look at what might happen. Let's talk 0:12:21.440 --> 0:12:23.440 what the traders all want to know, Jim, And that's 0:12:23.679 --> 0:12:26.680 the very short term. If you're thinking we should attack 0:12:26.720 --> 0:12:30.240 in a more hawkish direction, would that speed up the 0:12:30.320 --> 0:12:33.600 rate of rate increases? Uh, there's right now in the 0:12:33.640 --> 0:12:37.040 markets to rate increases for two and almost a third. 0:12:37.320 --> 0:12:42.120 Do you think that's realistic? You know, I'm agreeing with 0:12:42.240 --> 0:12:46.280 the markets right now because I've got two hikes penciled 0:12:46.320 --> 0:12:50.880 in for two uh that's dependent on the data. Could 0:12:50.960 --> 0:12:56.040 evolve going forward, depending on how the data come in. UH. 0:12:56.120 --> 0:12:59.600 So I think there are other ways we could uh 0:13:00.120 --> 0:13:04.520 tack in a Hawker's direction. I think we could uh 0:13:04.760 --> 0:13:06.840 play up the idea that maybe we don't have to 0:13:06.880 --> 0:13:09.000 wait all the way to the end of the taper 0:13:09.040 --> 0:13:13.240 in order to raise the policy rate. I mean, historically, 0:13:13.320 --> 0:13:15.720 when we've done this before, we have not wanted to 0:13:15.920 --> 0:13:18.600 be raising the policy rate while we're still tapering. But 0:13:19.200 --> 0:13:22.440 you could argue that the tapers all priced in, and 0:13:22.920 --> 0:13:24.960 what's going to happen over the next eight months is 0:13:25.000 --> 0:13:28.360 just follow through on something that's already priced in, and 0:13:28.400 --> 0:13:31.760 so that that would sort of relieve any constraint that 0:13:31.800 --> 0:13:35.720 the committee might feel about when the appropriate time was 0:13:35.840 --> 0:13:41.240 to commence with liftoff. Another consideration, I think that put 0:13:41.280 --> 0:13:43.160 on the table and have put on the tables, that 0:13:43.240 --> 0:13:47.319 we could allow runoff of the balance sheet at the 0:13:47.440 --> 0:13:50.760 end of the taper instead of waiting on that decision 0:13:50.920 --> 0:13:54.679 for uh for a while. So I think that that 0:13:54.720 --> 0:13:58.240 would be a way to um, uh you know, have 0:13:58.320 --> 0:14:02.320 a somewhat more Hawker's policy than otherwise, you know, We 0:14:02.360 --> 0:14:04.560 can debate how big an impact that would have, but 0:14:04.600 --> 0:14:07.880 you could allow the balance sheet to be running down, uh, 0:14:07.960 --> 0:14:11.880 sooner than is currently priced into the market. One last 0:14:11.960 --> 0:14:14.680 question is, and we'll keep it in the sailing category. 0:14:15.240 --> 0:14:17.520 When you tack, you run the risk of the wind 0:14:17.559 --> 0:14:20.200 coming on too hard and you've moved the sail too 0:14:20.240 --> 0:14:23.240 much and you can capsize. And I'm wondering what your 0:14:23.480 --> 0:14:26.720 view of the US economy is right now. Since policy 0:14:26.720 --> 0:14:30.040 works with a lag, do you risk cutting off the 0:14:30.080 --> 0:14:36.840 recovery by raising rates too soon if inflation is transitory? Yeah, 0:14:36.840 --> 0:14:38.880 well I love this. I meanyway, if you're gonna be 0:14:38.960 --> 0:14:41.280 in sailing, you've got to be good at what you do. 0:14:41.400 --> 0:14:43.960 And I think the same is true the committee. We 0:14:44.000 --> 0:14:46.680 have to react to data in the appropriate way and 0:14:46.680 --> 0:14:50.640 and manage the risk appropriately. I liked the chair's emphasis 0:14:50.720 --> 0:14:55.480 on risk management at the recent press conference. I think 0:14:55.520 --> 0:14:59.880 that's exactly what's going on here. Uh. You have two scenarios, 0:15:00.080 --> 0:15:04.960 one where inflation dissipates as the economy continues to reopen, 0:15:05.600 --> 0:15:07.920 and another one where it doesn't. And you've got to 0:15:07.960 --> 0:15:11.840 be ready for the second one. Um, if the first 0:15:11.880 --> 0:15:14.640 one comes, we're in great position for that already, so 0:15:14.840 --> 0:15:18.040 it's really the second one that we have to uh, 0:15:18.040 --> 0:15:19.760 we have to get ready for here, and I hope 0:15:19.760 --> 0:15:22.840 we've got the gusts of wind. We're playing that just 0:15:23.040 --> 0:15:25.960 right here. Jim Bullard, thank you so much. James Bullard is, 0:15:25.960 --> 0:15:28.080 of course the president of the St. Louis Fed, and 0:15:28.080 --> 0:15:30.920 of course I thanks to Michael McKee as well, not 0:15:31.040 --> 0:15:34.120 only on retail sales in his boom American economy, but 0:15:34.240 --> 0:15:38.640 on the delicacies I should say of the Fed forward. 0:15:45.200 --> 0:15:48.160 This is the conversation of the day, with great respect 0:15:48.240 --> 0:15:51.280 for James Bullard of the St. Louis Fed. For Global 0:15:51.400 --> 0:15:55.240 Wall Street, the TV Securities call is simply stunning. It's 0:15:55.280 --> 0:15:58.560 Mark McCormick and his resilient dollar with some nuances for 0:15:58.680 --> 0:16:01.600 next year, but lead in the charge. There's pria misra 0:16:01.680 --> 0:16:04.920 ahead of global rate strategy and a call that goes 0:16:05.040 --> 0:16:08.560 out into the far future. Prea. On the cover of 0:16:08.600 --> 0:16:12.600 your stunning report, you have the most important chart I've 0:16:12.600 --> 0:16:16.480 seen in fixed income in twenty years, Dominic constant, a 0:16:16.600 --> 0:16:21.040 credit suite showing the FED funds rate and the o 0:16:21.400 --> 0:16:24.800 I s view out the feathers coming off the rate 0:16:24.960 --> 0:16:30.400 of everyone's guest myths that we've gotten wrong, wrong, wrong. 0:16:30.920 --> 0:16:34.240 You say, once again, we've got it wrong. So you 0:16:34.280 --> 0:16:36.520 know this, this sort of tells you that great strategies 0:16:36.560 --> 0:16:40.280 all the market doesn't always call the Fed right. But 0:16:40.480 --> 0:16:42.360 you know, our thought right now is the market has 0:16:42.400 --> 0:16:46.000 been really torn with high inflation, you know we and 0:16:46.200 --> 0:16:48.360 and how long it will persist, and so the markets 0:16:48.400 --> 0:16:51.800 pricing in the first rate h literally right after wind 0:16:51.800 --> 0:16:54.640 wind t bring in. Now our view is that there 0:16:54.640 --> 0:16:57.520 are a huge COVID impacts on inflation that's going to 0:16:57.600 --> 0:17:00.760 start to decelerate. I also think the markets under estimating 0:17:00.800 --> 0:17:03.040 the extent of fiscal drag that's that we're going to 0:17:03.120 --> 0:17:06.320 face next year, and so growth is gonna slow, inflation 0:17:06.400 --> 0:17:09.040 has speak. It's not obvious to us that the FED 0:17:09.080 --> 0:17:11.480 has to turn around and start hiking aggressively. And so 0:17:11.760 --> 0:17:14.040 we actually have the first rate hype much later than 0:17:14.080 --> 0:17:17.320 that than when the markets pricing in steeper curve, you know, 0:17:17.400 --> 0:17:20.120 the front and sting a lot more anchored. But it's 0:17:20.200 --> 0:17:22.879 ultimately a view on the economy and the outlook of 0:17:22.920 --> 0:17:25.720 the economy as we recover into the post COVID world. 0:17:25.880 --> 0:17:27.919 It's also a view on the FED and believing prayer 0:17:28.240 --> 0:17:30.840 that they won't blink, they won't change their mind, that 0:17:30.840 --> 0:17:33.200 they won't get uncomfortable, they won't change their view, and 0:17:33.200 --> 0:17:35.719 then maybe that the FED chair won't change either. How 0:17:35.720 --> 0:17:37.280 do you get a read on that at this point? 0:17:37.320 --> 0:17:39.040 Prayer as you look out not to the end of 0:17:39.880 --> 0:17:43.119 three but just the next six months, right, And I 0:17:43.119 --> 0:17:45.240 think that's a big so that we always struggled with 0:17:45.359 --> 0:17:47.919 the economic outlook of the FED reaction function, and I 0:17:47.920 --> 0:17:51.159 think the committee is as split as the market is, 0:17:51.440 --> 0:17:54.080 you know. And I think that December dot plot will 0:17:54.119 --> 0:17:56.880 show again that there are those who believe inflation strangitory 0:17:57.200 --> 0:17:59.000 and those I think that we should be hiking. But 0:17:59.080 --> 0:18:01.440 I think the FED has taken a pretty big step there. 0:18:01.480 --> 0:18:04.480 They've tapered sooner than what anyone was looking for. They're 0:18:04.520 --> 0:18:07.160 taping much faster than the last time, or or than 0:18:07.560 --> 0:18:11.240 analysts estimates. So they're responding to the risk. They're they're 0:18:11.280 --> 0:18:14.119 in this risk management approach. They're already responding to the 0:18:14.200 --> 0:18:16.760 risk of high inflation. By the middle of next year, 0:18:16.800 --> 0:18:19.199 that's when it's going to get really tricky, because you know, 0:18:19.280 --> 0:18:21.600 do they start to hide. That's when I think that 0:18:21.640 --> 0:18:24.639 growth outlook is going to matter. I think the reaction 0:18:24.680 --> 0:18:27.399 function doesn't need to change between now and then or 0:18:27.440 --> 0:18:30.800 the talk around faster form of tapering, you know, using 0:18:30.800 --> 0:18:33.440 the balance sheet to type financial conditions. We saw how 0:18:33.480 --> 0:18:36.160 difficult that was in two thousand thirteen with the taper tantrum. 0:18:36.400 --> 0:18:38.320 I don't think the Fed wants to risk it, so 0:18:38.359 --> 0:18:40.520 we think the threshold for them to change that tapering 0:18:41.040 --> 0:18:43.320 time frame is actually very large. So we left time 0:18:43.359 --> 0:18:46.560 to figure out that reaction function based on how how 0:18:46.600 --> 0:18:48.720 the data comes out over the next six months. Where 0:18:48.720 --> 0:18:50.840 do you think that the labor market is weaker than 0:18:50.880 --> 0:18:56.000 most analysts expect. Yes, we do things so particularly because 0:18:56.000 --> 0:18:58.560 of the slack. I guess our big assumption is that 0:18:58.880 --> 0:19:01.399 some people who have left labor force have done so 0:19:01.480 --> 0:19:04.240 because of COVID, whether it's childcare, whether you're just concerned 0:19:04.280 --> 0:19:07.240 about getting sick um, and they will come back. Now 0:19:07.280 --> 0:19:10.359 the savings high savings has buffered some people. They've been 0:19:10.400 --> 0:19:12.159 able to wait it out for the right kind of 0:19:12.240 --> 0:19:16.199 job or the higher wages of higher wages, but ultimately 0:19:16.320 --> 0:19:18.359 that brings them in and so there's a lot more 0:19:18.400 --> 0:19:20.679 slack in the labor market. We also think the service 0:19:20.720 --> 0:19:22.840 recovery will pick up and that will create demand for 0:19:22.880 --> 0:19:25.440 those jobs. So it's not it's it's not a weak 0:19:25.520 --> 0:19:28.399 labor market, it's just the slack. I think where people 0:19:28.440 --> 0:19:30.520 are really divided is how much slack is there in 0:19:30.520 --> 0:19:32.520 the labor market. We think, actually there's a lot of 0:19:32.600 --> 0:19:35.560 hidden slack, and that will become more evident in the 0:19:35.600 --> 0:19:38.439 first half of that There's an important distinction here. Some 0:19:38.480 --> 0:19:40.119 people have been saying this is going to be a 0:19:40.160 --> 0:19:43.600 shorter and harder cycle. Is your call that that's not true, 0:19:43.800 --> 0:19:45.960 that this is going to be a long and arduous 0:19:46.000 --> 0:19:48.080 cycle and that the feder will be patient. Or is 0:19:48.119 --> 0:19:50.439 it that the Fed already missed its window to titan 0:19:50.760 --> 0:19:53.160 and that at this point it cannot raise rates materially 0:19:53.240 --> 0:19:55.640 higher than where they are now, given how much death 0:19:55.640 --> 0:19:58.439 there is and given the economic momentum that will decelerate 0:19:58.600 --> 0:20:02.159 meaningfully next year. Right, great questions. I think if we 0:20:02.240 --> 0:20:04.960 compare it to the post financial crisis cycle, I think 0:20:04.960 --> 0:20:07.359 it's going to be shorter than that. We had significant 0:20:07.359 --> 0:20:10.680 fiscal tightening, we didn't have as much cheasing, So I 0:20:10.720 --> 0:20:13.639 would say this cycle is shorter compared to the O 0:20:13.800 --> 0:20:16.560 eight cycle because we just had a lot more policy 0:20:16.600 --> 0:20:21.200 support um, both fiscal anotry. But will it be that short? 0:20:21.359 --> 0:20:24.040 Are we overheating where the Fed will need to really 0:20:24.040 --> 0:20:26.959 tighten financial versions there we do disagree. I think it's 0:20:27.000 --> 0:20:28.879 going to be longer than the two year cycle, than 0:20:28.880 --> 0:20:31.679 the markets pricing in. I mean, what shocking is for 0:20:31.680 --> 0:20:34.240 those who believe that the labor market slack is gone, 0:20:34.320 --> 0:20:36.600 and they believe the FED starts hiking mid next year. 0:20:36.880 --> 0:20:38.959 Why is the endpoint of the hiking cycle only one 0:20:39.000 --> 0:20:42.240 and a half. That's a really pessimistic outcret for the 0:20:42.280 --> 0:20:44.760 productivity of the economy. So we think they'll start later, 0:20:44.800 --> 0:20:46.920 but they'll be able to hide to two two and 0:20:47.000 --> 0:20:50.840 a half or more. Normal Normal is neutral rate in 0:20:50.880 --> 0:20:53.400 the combat battle. I'm not gonna I'll make it clear 0:20:53.440 --> 0:20:57.640 as I can. Your call is a career maker or breaker. 0:20:57.720 --> 0:21:00.960 There's no ender for butts about that. And when John 0:21:00.960 --> 0:21:04.399 mentioned two thousand twenty three, I immediately thought of Mario 0:21:04.520 --> 0:21:08.639 drag at the e c B. What does your call 0:21:09.040 --> 0:21:12.480 and the failure of those guestimates, what does it mean 0:21:12.520 --> 0:21:15.760 for the e c B and LA Guard? It hugely 0:21:15.880 --> 0:21:21.639 advantages her if she gets a misera call. Well, I 0:21:21.680 --> 0:21:24.360 think all central banks and we called it the year 0:21:24.359 --> 0:21:29.000 of living dangerously because they're all trying to adjust policy 0:21:29.160 --> 0:21:31.840 in an evolving economic outlook where you know, what are 0:21:31.840 --> 0:21:35.240 the structural impacts of COVID. Is COVID transitory or is 0:21:35.280 --> 0:21:37.560 it going to have significant impacts on the labor market 0:21:37.640 --> 0:21:40.960 or a or an inflation dynamics that all center banks 0:21:40.960 --> 0:21:42.800 need to adjust it. So it's a big question for 0:21:42.840 --> 0:21:44.159 the e c B, it's a big question for the 0:21:44.280 --> 0:21:46.080 r b A. But our thought is this is going 0:21:46.160 --> 0:21:48.800 to be the year of divergence, so cross market trades 0:21:48.800 --> 0:21:50.359 will make sense. You've got the e c B and 0:21:50.400 --> 0:21:53.040 the FED on one side that have run below the 0:21:53.040 --> 0:21:55.800 inflation target for so long that they can afford to 0:21:55.800 --> 0:21:57.960 be patient. And then you've got the RB at the 0:21:58.000 --> 0:22:00.760 Bank of England, the Bank of Canada smaller open economies 0:22:00.800 --> 0:22:03.720 that we think we'll be forced in to start that 0:22:03.840 --> 0:22:07.280 process of normalization. So you see more divergences, some fascinating 0:22:07.359 --> 0:22:08.960 fex traits that could come off the back of that. 0:22:09.600 --> 0:22:11.440 We love a comment from you on what built down 0:22:11.440 --> 0:22:13.159 to the formerly York Fed person and said on this 0:22:13.200 --> 0:22:15.560 program in the last twenty four hours he said the 0:22:15.560 --> 0:22:18.600 FEN funds rate wouldn't hop out around one's seventy five, 0:22:18.640 --> 0:22:20.639 where many people in this market think it will it 0:22:20.680 --> 0:22:23.959 could top out somewhere three to four. Granted he believes 0:22:24.000 --> 0:22:26.320 that this is crystal ball type stuff, and the merketar 0:22:26.320 --> 0:22:28.480 crystal ball gets the further you go out, you've got 0:22:28.520 --> 0:22:30.720 any thoughts on that at the moment, prayer as you 0:22:30.760 --> 0:22:34.200 think about standing this journey later. Right, So I really 0:22:34.240 --> 0:22:37.400 respect Bill, and I would say I hope so that's 0:22:37.440 --> 0:22:39.359 not our care. We have the endpoint of the hiking 0:22:39.400 --> 0:22:41.360