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Speaker 1: The perfect individual, a good friend of mine. This program

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Speaker 1: to wrap up this week, Mohammed al Aaron of Queen's College, Cambridge,

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Speaker 1: amongst other things, of course, Mohammed, I want to put

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Speaker 1: the catch up with you. Better earnings, better data, bonds

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Speaker 1: running this week, Equality is running this week. Let's start

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Speaker 1: with the number one question of the week. It's inflation

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Speaker 1: on a sustainable path back towards two percent or is

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Speaker 1: there reason to believe it reaccelerates later this year.

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Speaker 2: We don't know, John, It's going to depend on what

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Speaker 2: happens to service inflation. We need service inflation to come

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Speaker 2: down before goods inflation goes back up, and good inflation

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Speaker 2: will go back up at some point, so we need

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Speaker 2: a lot of help on the service side. But John,

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Speaker 2: you cannot get in the way right now of the

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Speaker 2: soft landing narrative. That narrative is building momentum. It is

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Speaker 2: stronger than it was last October when it handed off

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Speaker 2: to something else. But everything we've seen so far this

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Speaker 2: week CPI, BPI, the banks, it's all been about a

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Speaker 2: soft landing narrative. And that narrative is on the goal

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Speaker 2: and I wouldn't get it in the way of it

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Speaker 2: right now.

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Speaker 1: And in Hondhal, the city has changed his view on

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Speaker 1: policy over at the Federal Reserve, says Hike in July

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Speaker 1: was looking for a high. In September, he's push that out.

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Speaker 1: In a Vanbrries said this on inflation, the soft inflation

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Speaker 1: story may last for several months and possibly the remainder

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Speaker 1: of the year, but still tight labor markets and a

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Speaker 1: rebounding housing market, risk of reacceleration and inflation late this year,

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Speaker 1: already next year.

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Speaker 2: Madam.

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Speaker 1: It tells me about that window, that soft landing, soft

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Speaker 1: inflation story. You sound a little bit more constructive, not

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Speaker 1: just on the economy, but dare I say this market too.

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Speaker 2: So we are definitely in a good window for inflation data.

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Speaker 2: It will last into September. It's partly it's base effects.

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Speaker 2: Partly it's what's happening around us. Partly it's the feed

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Speaker 2: into production from the PPI. It is what happens thereafter, John,

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Speaker 2: And when you look at the components of inflation, it

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Speaker 2: is critical, and you just it is critical that we

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Speaker 2: don't get certain components moving back up before service disinflation

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Speaker 2: has established traction. That is the bet. There's two big

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Speaker 2: bets out there right now. One is that the inflation

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Speaker 2: decline will be linear. Too early to bet on that,

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Speaker 2: And the other one is that the FED will stop

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Speaker 2: after the first after the next weight hike, which is

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Speaker 2: in July. That if that data dependent, they stop, if

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Speaker 2: they are worried about their credibility, and then, remember the

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Speaker 2: bad experience they had in twenty twenty one, they may

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Speaker 2: want another weight hike as insurance. I would stop if

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Speaker 2: I were them. But this FED has surprised me so

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Speaker 2: many times, John that I don't know what they're going

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Speaker 2: to do.

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Speaker 1: Well, never mind the bad experience of twenty twenty one,

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Speaker 1: Let's talk about the experience of early twenty twenty three

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Speaker 1: when the chairman started to embrace the disinflation reprocess.

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Speaker 2: Maha much.

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Speaker 1: When we get to the news conference at the end

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Speaker 1: of this month, Jackson Holle in August, at the end

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Speaker 1: of the next month, do you expect to hear the

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Speaker 1: same kind of thing again or do you expect to

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Speaker 1: hear what we heard from Chris Waller the governor overnight?

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Speaker 1: I see two more twenty five basis boys hikes and

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Speaker 1: a refusal to embrace the inflation data of the last month.

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Speaker 2: Yeah, I mean, we've had three speakers so far, and

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Speaker 2: all of them have pushed back against the dual hypothesis

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Speaker 2: of linear disinflation and one hike and that's it. They're

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Speaker 2: not ready to give up. Give that up now. It's

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Speaker 2: a lot going to happen in the next few weeks. John,

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Speaker 2: the big story of the year is what did not happen,

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Speaker 2: rather than what did happen. We did not get a recession.

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Speaker 2: The hikes, which have been significant, did not weaken the

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Speaker 2: label market. Credit contraction has not happened. The banks haven't

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Speaker 2: suffered yet from inverted yel curves, concerns about depositive depositors

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Speaker 2: looking for higher deposit rate. It is all about what

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Speaker 2: has not happened. This is the big and this is

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Speaker 2: why so many people have been surprised with their recession calls,

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Speaker 2: with the market calls, because a lot of things simply

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Speaker 2: have not happened.

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Speaker 1: Let's explore that a little bit more Mohammed. There are

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Speaker 1: some people who believe that the tiny cycle of the

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Speaker 1: last twelve months still hasn't been What evidence is there

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Speaker 1: that the improving inflation data is a consequence of the

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Speaker 1: rate hiking cycle that started in March of last year.

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Speaker 2: I think the evidence comes from the good sector. Is

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Speaker 2: that you've had significant impact on weight sensitive goods and

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Speaker 2: that is what has driven inflation down along with the

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Speaker 2: reversal of the surge in energy and for the US

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Speaker 2: in food prices. So that is why we're getting these

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Speaker 2: good inflation numbers and they are to be welcomed. The

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Speaker 2: problem and you know that that was the concern I've

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Speaker 2: always had about the FED being late, is that inflation

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Speaker 2: migrated to the service sector and to wages. And the

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Speaker 2: problem when that happens, as we all know, is that

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Speaker 2: that is less sensitive to weight hikes. So that is

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Speaker 2: where the service versus goods element comes in, and it's

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Speaker 2: critical that we see the disinflation on the service site.

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Speaker 1: It's going to be interesting to see how the next

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Speaker 1: twelve months materializes evolves with that in mind, Muhammad, and

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Speaker 1: the long available as of policy, how it starts to

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Speaker 1: come through the pipeline, it starts to buy in this economy.

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Speaker 1: Torson Slock has really been on top of this over

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Speaker 1: at Apollo A Man. I'm sure you know, wow, Muhammad,

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Speaker 1: he said, the flawed logic in the current market narrative.

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Speaker 1: This is what you and I discussed him right now.

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Speaker 1: The narrative at the moment, embracing the soft landing hopes

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Speaker 1: and dreams. He pushes back. He says this, the lank

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Speaker 1: defects of FED hikes will continue to drag the economy

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Speaker 1: down over the coming twelfth to eighteen months. That is

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Speaker 1: why the recession is a more likely outcome than of

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Speaker 1: soft landing. Never mind the narrative, Muhammad, never mind what

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Speaker 1: this market's going to embrace through summer is. It's still

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Speaker 1: your base case potentially that we get a recession more

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Speaker 1: than perhaps we get a soft landing.

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Speaker 2: So I haven't been in the recession camp, John, I've

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Speaker 2: been pushing back over and over again. There's nothing automatic

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Speaker 2: about a recession. We get there. If there's another part

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Speaker 2: is a mistake. But the economy itself is strong and robust.

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Speaker 2: You've heard me say this over and over again. This

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Speaker 2: is an economy that surprises on the upside. But we

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Speaker 2: can still get a recession if the FED over titans,

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Speaker 2: which is a possibility. Then that takes you to the

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Speaker 2: question of what is the effect of all the cumulative

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Speaker 2: langs that are coming in. Look the hard thing. You

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Speaker 2: can make a recession call, but be careful of the

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Speaker 2: market technicals. I mean, the one thing that has frustrated

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Speaker 2: those in another is the market technicals have been very strong,

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Speaker 2: and you've got to respect the technicals those who don't

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Speaker 2: get trampled on. And these technicals have embraced soft landing.

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Speaker 2: They have been a consistent inclination to go higher, and

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Speaker 2: now there's reason to go higher. The PPR and the

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Speaker 2: CPI numbers, we're very encouraging. So those people, I still

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Speaker 2: think that our outstanding questions. One of them, you're right,

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Speaker 2: the cumulative effects of the hikes. Two is the inflation dynamic?

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Speaker 2: Are they going to be as accommodating as we want them?

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Speaker 2: And then three is the FED? And I think these

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Speaker 2: are open questions right now.

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Speaker 1: Could you define policy mistake for us? They are communicating

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Speaker 1: projecting two more hikes? Is that a policy mistake that

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Speaker 1: leads to an unnecessary outcome for economic growth?

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Speaker 2: So it gets us into the question of how quickly

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Speaker 2: do you want to get to an inflation target? And

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Speaker 2: what is the right inflation target? That is where your

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Speaker 2: question goes. If you want to get to a two

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Speaker 2: percent inflation target quickly, you will make a policy mistake.

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Speaker 2: You will make a policy mistakes for two reasons. One

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Speaker 2: is my own belief that that is not the right

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Speaker 2: thing to do. You don't want to get to two

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Speaker 2: percent quickly. The supply side is disrupted, is disrupted by

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Speaker 2: Jerio politics, It's disrupted by the rewiring US supply chains

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Speaker 2: that the corporate sector is doing, gets disrupted by the

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Speaker 2: labor market is disrupted by many things. So if you

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Speaker 2: force two percent, you will contract demand much more than

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Speaker 2: should so, John, we get into this very complex question. Now.

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Speaker 2: Is chef Power going to discuss this in August? I

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Speaker 2: doubt it. The Fed understandably, the Bank of England, the

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Speaker 2: ECB do not want to go anywhere near the discussion

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Speaker 2: of the inflation target, and that's because they're worried about

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Speaker 2: their credibility. They don't want to open that discussion until

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Speaker 2: that we establish a credibility.

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Speaker 1: Slightly unfair of me to ask, but not on what

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Speaker 1: they should do, and what do you expect them to do?

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Speaker 1: Are they one and done?

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Speaker 2: That's what I would do if I were there, one

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Speaker 2: and done, because I don't believe that we should be

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Speaker 2: getting to two percent inflation quickly, because we will risk

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Speaker 2: breaking something. I want to say breaking something. There's two

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Speaker 2: aspects to it. The economy with the vulnerable segments of

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Speaker 2: society being most vulnerable, and two the financial sector. There's

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Speaker 2: still a lot of things to happen, particularly in the

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Speaker 2: non banks. John, We've talked about commercial real estate. It

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Speaker 2: happens slowly. All this refinancing don't happen. Instant energy that

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Speaker 2: happened slowly, So we've got to be careful not to

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Speaker 2: shoot ourselves in the foot. Yet again, it's the policy.

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Speaker 1: Try and let me. You've talked about all year that

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Speaker 1: exchanged between growth, inflation and financial stability. Muhammed wonder for

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Speaker 1: to catch up with you and wrap up the week.

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Speaker 1: Muhammed There. Muhammad Ahalian of Queen's College, Cambridge,