Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Calsie Barrow of JP
Speaker 2: Morgan Asset Management, writing, the biggest risk for the bond
Speaker 2: market is a sustained reacceleration in inflation and wages. The
Speaker 2: results in rat heights being considered a fed onhold is
Speaker 2: still a positive backdro of that supports fixed income. Cassie
Speaker 2: joins us for more. CALSEI, good morning, good to see you.
Speaker 2: What did you take from the Treasury Secretary of comments
Speaker 2: on termin Out of the Dead?
Speaker 3: Yeah, so, I think the bond market was encouraged by
Speaker 3: the mage from Secretary Bessant, which was that it's not
Speaker 3: the time to be terming out the debt which I
Speaker 3: think really makes a lot of sense. Right If you
Speaker 3: look at the yield curve, it's positively sloped. If you
Speaker 3: look at thirty or real yields, they're at the highest
Speaker 3: level in twenty years.
Speaker 4: This is not the time to be terming out the debt, and.
Speaker 3: So the bond market is comforted by the fact that
Speaker 3: there's somebody at the HELM that understands the supply demand
Speaker 3: dynamics and is looking to manage term premium and at
Speaker 3: least not aggravate term premium even further.
Speaker 1: You're concerned about inflation, though, and potentially that means the
Speaker 1: FED is either on hold or might have to weigh
Speaker 1: a hike this year.
Speaker 4: No, so the biggest risk for the bond market is inflation.
Speaker 3: But we actually feel you're fairly comfortable with the inflation backdrop,
Speaker 3: and we do feel like with the FED they are
Speaker 3: still in an easing bias where there are essentially two
Speaker 3: decisions at every meeting, or two options at every meeting.
Speaker 3: One of them is to stay on hold, which is
Speaker 3: where they are right now now. The other is to
Speaker 3: cut rates. And I was hearing in the earlier segments
Speaker 3: a discussion about the labor market monitoring jobless claims. Looking
Speaker 3: at the impact that the layoffs are going to have
Speaker 3: on the broader economy, we still believe that the Fed
Speaker 3: is much more sensitive to labor market weakness than they
Speaker 3: are to labor market strength.
Speaker 4: You get a strong report, the Fed does nothing.
Speaker 3: You get a weak report, the Fed is stepping back
Speaker 3: in to support the economy.
Speaker 4: That's generally an environment.
Speaker 3: Where yields are range found with some risk of moving lower.
Speaker 5: Well to that point.
Speaker 6: Long end bonds they've fallen by about nine basis points
Speaker 6: so far this year. There's this discussion how much of
Speaker 6: it is supply what we heard from Scott Vessant yesterday
Speaker 6: and structural changes that may or may not happen to you.
Speaker 6: What is the bigger driver of that supply or is
Speaker 6: it growth concerns we're starting to see in the long end.
Speaker 3: I think it's primarily growth concerns. I think supply is
Speaker 3: a secondary factor. And the one thing that I would
Speaker 3: highlight is while the Treasury Secretary does have control over
Speaker 3: where we issue on the curve and they're in charge
Speaker 3: of determining what the weighted average maturity of the Treasury
Speaker 3: debt is, they are not the ones ultimately responsible for
Speaker 3: determining how much.
Speaker 4: Debt needs to be issued.
Speaker 3: That's still a function of how much the government takes in.
Speaker 4: So that's how much revenue they get from.
Speaker 3: Tariffs and taxes versus how much they spend.
Speaker 4: That's what the Congress.
Speaker 3: Is debating right now in terms of the reconciliation bills.
Speaker 3: That hole in the end of the day, it is
Speaker 3: not something that the Treasury control, but ultimately is a
Speaker 3: function of what the Congress decides, and so what the
Speaker 3: bond market is ultimately going to be trading off of
Speaker 3: in the long end, is what that growth impulse is
Speaker 3: or is not as it relates to the fiscal trajectory.
Speaker 3: Do we get the tax cuts, the extension of tax cuts,
Speaker 3: is there room for anything else, or is it really
Speaker 3: just status quo? In that case, not a lot of
Speaker 3: impulse coming from fiscal.
Speaker 2: You explained the FED asymmetric reaction function. I want to
Speaker 2: understand how the FED would respond to the following scenario.
Speaker 2: Let's say we've got some weaker economic data lay before
Speaker 2: Stata started to soften a little bit, but they still
Speaker 2: face the prospect of real policy change further down the road.
Speaker 2: I think what we're all trying to gauge in markets
Speaker 2: is whether that asymmetric reaction function would be compromised by
Speaker 2: the prospective policy change further down the road.
Speaker 4: I don't think so.
Speaker 3: I think that they are aware that there's a high
Speaker 3: level uncertainty, but they don't want to hamstring themselves with
Speaker 3: the what ifs, because there's always what ifs. We never
Speaker 3: know what's coming next, and in fact, perhaps we actually
Speaker 3: know a little bit more than we did before as
Speaker 3: it relates to what the Trump administration is trying to achieve.
Speaker 3: So I think they're going to stay very focused on
Speaker 3: the data. They're going to stay focused on the labor market,
Speaker 3: which for now stay is still fit healthy, and then
Speaker 3: on inflation, which you know, I think this year the
Speaker 3: Fed is much more prepared for the January inflation heat.
Speaker 3: The bond market has done a very good job fading
Speaker 3: the extremes.
Speaker 4: Right. So, you had a week retail sales report.
Speaker 3: The market brushed that aside because we know that the
Speaker 3: consumer is fully employed, they're going to keep spending. On
Speaker 3: the other side, we had the strong CPI report.
Speaker 4: They also brush that aside because.
Speaker 3: When we know that January continues to surprise to the
Speaker 3: upside no matter what the economists are trying to do
Speaker 3: to seasonally adjust, it doesn't seem to be working. And
Speaker 3: if you look at PCEE, which is the Fed's preferred measure,
Speaker 3: we're expecting that to fall to two point six percent
Speaker 3: on a year over year basis three and six month
Speaker 3: run rates around two and.
Speaker 4: A half percent. Yeah, it's not two percent, but it's
Speaker 4: pretty close.
Speaker 2: There's a lot of what ifs, that's for sure. Spending cuts,
Speaker 2: tax cuts, March fourth, twenty five percent, to have some Canada,
Speaker 2: Mexico middle of March twenty five percent steel aluminum eight
Speaker 2: Pril twenty five percent AU sized chips and drugs, maybe
Speaker 2: more than twenty.
Speaker 1: Five Fromber allegedly according to the President the other night.
Speaker 1: And also April first, before the April second deadline he set.
Speaker 1: April first is when the team is supposed to come
Speaker 1: together and say, this is where the issues are on
Speaker 1: these countries, on these sectors, and this is what we
Speaker 1: need to do. And at that point I'll have Jamis
Speaker 1: in greer employees.
Speaker 2: And towards the end of March, the Federal Reserve's got
Speaker 2: to put out some forecasts. So good luck to him.
Speaker 2: Calsei is going to see you as always, thanks for
Speaker 2: dropping by Caunsey Barrow there of JP Morgan Asset Management.
Speaker 2: You'll begin this hour stocks looking to close out a
Speaker 2: second straight week of gains. Nadia level of ups writing.
Speaker 2: We remain constructive on the medium term equity outlook, but
Speaker 2: near term the risk reward is less compelling. While we
Speaker 2: are staying invested, we advise hedging strategies and standing ready
Speaker 2: to buy potential dips. Naddia joints US for more Nadia
Speaker 2: go to see it. Good morning. What would lead to
Speaker 2: those potential dips?
Speaker 7: Well, you know, as you've been talking about doing certainty
Speaker 7: around towers, as those dates approved approaches US, we could
Speaker 7: see a pickup in volatility. It has implications for inflation.
Speaker 7: It also has implications for overall economic growth, and so
Speaker 7: I think we're all watching those days. How much of
Speaker 7: that would stick. We do think probably that twenty five
Speaker 7: percent tariffs on aluminum and steel will stick. We saw
Speaker 7: that in the first Trump one point zero to protect
Speaker 7: American steel industry. They are twenty five percent tariff on
Speaker 7: Mexico and Canada. We think that that continues to get
Speaker 7: pushed up. That's likely going to be more.
Speaker 2: Negotiation this way transatlantical time highs, the S and P
Speaker 2: five hundred record high, the DAX in Germany record high.
Speaker 2: When you speak to clients, just shine a light on
Speaker 2: those conversations for us, do they believe any of this happens?
Speaker 5: You know?
Speaker 7: I think that we are a bit surprised that we
Speaker 7: haven't seen an increase in volatility this year. We were
Speaker 7: expecting that as the new administration takes office. But what
Speaker 7: you're seeing is damp volatility at the index LEFTL has
Speaker 7: been damped, and I think people.
Speaker 5: Are surprised by that.
Speaker 7: But when you look onto the hood, there's rotation happening,
Speaker 7: and there's dispersion, and that's what's stamping in volatilely. So
Speaker 7: I do think that we are trying to advise our
Speaker 7: clients to be pay pick up in volatility as we
Speaker 7: enter into March and April. But I also think that
Speaker 7: what clients appreciate is that rotation that's happening, that brought
Speaker 7: in and out.
Speaker 5: You have like nine of the eleven.
Speaker 7: SMP sectors are now performing over fifty percent of the
Speaker 7: index ILL performance. Compare that to the last couple of
Speaker 7: years was like twenty five to thirty percent.
Speaker 5: So I think.
Speaker 7: Clients are starting to appreciate that rotation finally happening.
Speaker 6: Well, part of what happens with that rotation is a
Speaker 6: mag seven that's underperformed. I think it's only up something
Speaker 6: like point zero five percent around there so far this year.
Speaker 2: But what has.
Speaker 6: Outperformed in tech really noticeably is what's happening in China.
Speaker 6: China Tech has been off to the races. It is
Speaker 6: on fire. Hong Kong Tech shares up another six and
Speaker 6: a half percent today after Ali Baba earnings.
Speaker 5: Are the two related?
Speaker 6: Is there some degree which America Tech lagging behind is
Speaker 6: because China is starting to pose a real threat.
Speaker 5: I don't know.
Speaker 7: We don't think that China posts a real threat, but
Speaker 7: we do think that there's an opportunity. We actually have
Speaker 7: had a call on China Internet's stock for some time,
Speaker 7: so it's nice to see you at they start to outperform.
Speaker 7: I think what Deep Seeks showed is that China still
Speaker 7: has an AI industry despite the fact that we've had
Speaker 7: chip restrictions, So we think that there's more upside to go.
Speaker 7: And then when you look at China Internet versus the
Speaker 7: American pairs, evaluation gap is quite wide. You know, you
Speaker 7: have those those stocks training out about fourteen times nearly
Speaker 7: you know, a half half as less as the American peers.
Speaker 7: And also we think that it feels like the government
Speaker 7: is going to be more supportive. We had that Priva
Speaker 7: symposium earlier this week as well, and then you had
Speaker 7: Baba bodydo all had great earnings and the fact that
Speaker 7: Boba is saying that you know, Capex over the next
Speaker 7: three years is going to be more than that of
Speaker 7: the last decade is quite encouraging. And so we think
Speaker 7: that there's a little bit more to go in that trade,
Speaker 7: and I don't think that over the longer term is
Speaker 7: at the expense of US tech. Will see what you
Speaker 7: know the Leader and Video reports next week, but the
Speaker 7: Kapech story that we've heard from those cloud players this
Speaker 7: past earnest season should be a positive for some of
Speaker 7: those semi semiconductions and compute companies.
Speaker 6: Just on that will we're talking about event risk dates
Speaker 6: away from the tariff dates February twenty six in video earnings.
Speaker 5: How big of an event risk is that.
Speaker 7: You know, I think historically you've seen like mix mixed
Speaker 7: trading around in the video. Sometimes you have the stock
Speaker 7: trade up in turn is and then sort of a
Speaker 7: cell of the news and it has become a macro event.
Speaker 7: I don't know how much of a macro event at
Speaker 7: this time it is around because the stock is down
Speaker 7: going into earnest, so you know, there's sort of so
Speaker 7: expectations of volatility around that.
Speaker 5: I think people.
Speaker 7: Are likely going to be more focused on what the
Speaker 7: administration has to say in March and April. In the
Speaker 7: video is no longer so much of a macro event
Speaker 7: as it has been over the last that would say
Speaker 7: year and a half.
Speaker 1: So policies, though, can infect that stock when it comes
Speaker 1: to semi conductors coming out of Taiwan.
Speaker 4: Or export controls.
Speaker 1: How aggressive do you think the Trump administration is going
Speaker 1: to be?
Speaker 7: You know, the fact that he that he met with
Speaker 7: in the CEO of the company, I think is quite positive.
Speaker 7: I do think as President Trump continues to say that
Speaker 7: America needs to continue to innovate, so I think he's
Speaker 7: going to be mindful in terms of not doing anything
Speaker 7: that's so aggressive that it it's it dampens that innovation.
Speaker 7: But at the same time, uh, we wanna protect American
Speaker 7: technology and not have it get in the hands of China.
Speaker 7: We want to be ahead.
Speaker 5: Of of that.
Speaker 7: So we think that on the margin you could see
Speaker 7: some restrictions, but I don't think it's gonna be overly
Speaker 7: aggressive and it's not necessarily gonna be against like a Taiwan.
Speaker 1: We talked about all the risks that this market faces,
Speaker 1: and you're in the medium term, you're constructive.
Speaker 5: At what point do.
Speaker 1: You need to see the good stuff coming out of Washington,
Speaker 1: the tax cuts, the deregulation to get a little.
Speaker 4: Bit more bullish.
Speaker 7: I mean, reality is, we always thought that those tax
Speaker 7: cuts will probably be uh quite minimum and likely in
Speaker 7: the second half of the year. I think what you
Speaker 7: wanna see from the President is not tariffs that are
Speaker 7: overly aggressive. No blanketed tariffs. Right, don't wanna see tariffs
Speaker 7: of Mexico and Canada, cause.
Speaker 2: That would be disruptive.
Speaker 7: You are seeing progress, I think in terms of deregulation,
Speaker 7: we'll see who take the helm in terms of pri advice,
Speaker 7: share of supervision for like the the banks. Yes, this
Speaker 7: past week we see some volatility around financials, just given
Speaker 7: the headlines around the President Trump administration sticking with those
Speaker 7: stricter regulations around m and a of the Biden error.
Speaker 7: But again you know, those are guidelines and the interpretation
Speaker 7: might be totally different than the Biden error. So why
Speaker 7: that those a monkey wrench in the most pollished case
Speaker 7: for the banks. We don't think that is a deal breaker.
Speaker 2: You'd find the weakness and the banks this week.
Speaker 7: We would buy the weakness because there are other things
Speaker 7: at play that we think continue to support banks. Think
Speaker 7: about we have an economy that's still chugging a law,
Speaker 7: we have trading activity that's also doing well, asset and
Speaker 7: wealth management, and then there is that possibility for deregulation. Seacart.
Speaker 7: The the scenarios for this year less harsh than they
Speaker 7: were last year, so we could see capital returns in
Speaker 7: the back half of the year and then the basil
Speaker 7: three end game on pause, right you know, uh yeah.
Speaker 7: Bowman has said that, you know, there needs to be
Speaker 7: a review of those capital requirements, so we could see
Speaker 7: some easier regulation.
Speaker 2: Nadia always going to catch up, getting up down your theories.
Speaker 2: Thank you, Nannia. Level there. Jason Furman, the former chair
Speaker 2: of the Council of Economic Advisors, with some sharp words
Speaker 2: for the previous administration writing in Foreign Affairs, Biden never
Speaker 2: did the hard work of explaining to the public that
Speaker 2: enforcing further limits on trade with China imposed real costs
Speaker 2: on Americans, but the national security gain was worth the
Speaker 2: economic pain. Jason joined us now for more. Jason, imagine
Speaker 2: you didn't write the headline the post neoliberal delusion and
Speaker 2: the tragedy of Bidenomics, but certainly the content got a
Speaker 2: lot of attention as well. What kind of feedback did
Speaker 2: you get from your own party after publishing that?
Speaker 8: You know, I've been pleased by the reaction I've gotten.
Speaker 9: There's certainly some people that have been very negative and
Speaker 9: very critical. I've heard from a lot of Democrats who
Speaker 9: were happy that I wrote it and think we need
Speaker 9: to figure out, you know, a different way for policy
Speaker 9: going forward. And you know, I've also heard from people
Speaker 9: as generate ideas.
Speaker 8: But the one feedback I haven't liked.
Speaker 9: Is there's been people from the Trump administration who have
Speaker 9: leaked all over it without realizing it. It is also
Speaker 9: a description of many of the problems, in some cases
Speaker 9: more severe of their own policies.
Speaker 1: What do you think is the most severe problem in
Speaker 1: your mind of what the Trump administration is offering right now.
Speaker 9: In terms of the economy, Tariffs, especially if we actually
Speaker 9: go ahead with anything on Canada and Mexico, which are
Speaker 9: just so inextricably linked with the way in which America
Speaker 9: makes things. I thought it was refreshing that the Shrogury
Speaker 9: Secretary was effectively admitting that it will actually raise prices.
Speaker 9: I would warn him against using the word transitory for inflation.
Speaker 9: You don't know what gets built into expectations. I don't
Speaker 9: think the Fed could afford to have the inflation rate
Speaker 9: go to three percent for a year or two and say,
Speaker 9: but don't worry, it's just because of the tariffs. We're
Speaker 9: going to keep cutting raids even though inflation is three
Speaker 9: percent now.
Speaker 1: Jason isn't going to be hard for the Democratic Party though,
Speaker 1: to throw stones at this administration when it comes to tariffs.
Speaker 1: When we had such high inflation and the Biden administration
Speaker 1: refused to remove tariffs on places like China.
Speaker 9: Yeah, I wish the Biden administration had removed a lot
Speaker 9: of those tariffs. I wish the Biden's US trade representative
Speaker 9: hadn't said. The idea that tariffs raised prices has been debunked.
Speaker 9: But you know, I don't think what about itism helps
Speaker 9: your economy, And I don't think that you know, if
Speaker 9: tariffs raise inflation by half a point and we end
Speaker 9: up with two point nine percent inflation, and.
Speaker 8: Maybe the Americans aren't really.
Speaker 9: Noticing it quite as much as they did a couple
Speaker 9: of years ago, but the Fed will certainly be noticing it.
Speaker 9: The Fed's not cutting rates in a world with inflation
Speaker 9: like that, and in fact, it might even be raising them.
Speaker 6: Jason, to that point, what happens if a similar mistake
Speaker 6: is made this time around, and by similar mistake, I
Speaker 6: mean this idea that you point out that John started
Speaker 6: us with, that tariffs are being put on and they're
Speaker 6: not necessarily described as something that you need to grit
Speaker 6: through for national security and what's more, something that raises
Speaker 6: revenue and brings down taxes when the reality might end
Speaker 6: up being different on the ground.
Speaker 9: Yeah, I mean, it's a terrible way to raise tax revenue.
Speaker 9: It's highly distortionary. In some cases, it is a national
Speaker 9: security tool. And for example, sanctions on Russia. No one
Speaker 9: ever said America is going to get rich by putting
Speaker 9: sanctions on Russia. We understood that we were paying a
Speaker 9: small economic cost by not doing business in Russia, but
Speaker 9: they're going to pay a disproportionate cost, and I think
Speaker 9: it is if the president uses his leverage well and
Speaker 9: not clear that he is something that would help bring
Speaker 9: them to the table.
Speaker 8: That's basically what tariffs are.
Speaker 9: Like, and where you especially don't want to do them
Speaker 9: is where they're on intermediate in pots that are needed
Speaker 9: for American manufacturing, When they're on things that consumers want,
Speaker 9: when then there are things that are made by our allies,
Speaker 9: when they are things where you could cause trade diversion
Speaker 9: from another country, just lots and lots of the ones
Speaker 9: that they've talked about are just very poorly designed.
Speaker 6: In this scenario though, Jason, we saw last time around
Speaker 6: terrors were something that specifically hurt growth, which is the
Speaker 6: bigger concern this time around. Is it some sort of
Speaker 6: inflationary impulse or is it weakened growth and we can demand.
Speaker 8: In the medium and the long run. It's definitely growth.
Speaker 9: When I teach tariffs in class, we don't focus on
Speaker 9: the inflation aspect of them. We focus on what it
Speaker 9: means for both consumers having you know, worse options to
Speaker 9: buy things and producers who it's effectively putting attacks on
Speaker 9: as well having a harder time I'm selling things in
Speaker 9: the current conjunction. Though we have underlying inflation and around
Speaker 9: and a half percent. If it falls by a few tents,
Speaker 9: we're in great shape. The Fed can resume rate cuts
Speaker 9: if it rises by a few tents. The Fed has
Speaker 9: to call off any rate cuts. And it rises by
Speaker 9: a few tenths more than that, and they're increasing rates again.
Speaker 9: So given where we're poised right now, tariffs are just
Speaker 9: that inflation aspect, and the interaction with the Fed, I
Speaker 9: think really is quite important.
Speaker 2: Jason got forty seconds left. I wanted to squeeze this in.
Speaker 2: Do we have any experience of threats this large, lingering
Speaker 2: for this long with regards to tariffs? Do we start
Speaker 2: to behave as if tariffs aren't just going up?
Speaker 9: Yeah, our record amounts of uncertainty that businesses are facing
Speaker 9: right now, just even threatening tariffs and unthreatening them has
Speaker 9: been studied by economists and it has an effect, and
Speaker 9: that effect is a minus. So it's not something we
Speaker 9: should be playing five dimensional chests with. We should be clear, transparent,
Speaker 9: and ideally limited.
Speaker 2: Jason, I appreciate your time and a publication enjoyed the piece.
Speaker 2: Thank you, sir, Jason. And at the Harvard Kennedy School
Speaker 2: has sent back to the economy Fed official signal the
Speaker 2: rates will remain high for longer with government policies bringing
Speaker 2: inflationary risks. Tiffany Wilding of PIMCO writing, all of these
Speaker 2: policies and negotiations are likely to coincide with some economic
Speaker 2: disruption and market volatility in the near term. How much
Speaker 2: volatility is tolerable is still the key question. Tiffany joined
Speaker 2: us now for more. Tiffany, welcome to the show. And
Speaker 2: in many ways I'll ask him where's the volatility? Because
Speaker 2: equities are close to all time highs on both sides
Speaker 2: of the Atlantic, and some people believe that maybe that
Speaker 2: just leaves the door open for the president to be
Speaker 2: even more aggressive with tariff threats. Of the things on
Speaker 2: the table, what are you and the team actually expecting.
Speaker 5: Yeah, so, you.
Speaker 10: Know, I think there's a lot, clearly a lot of
Speaker 10: uncertainty here because I definitely think inflation, as you mentioned
Speaker 10: in market volatility, will be a constraint to what the
Speaker 10: you know, what the administration honest uh eventually does you know.
Speaker 10: But nevertheless, what they are saying they're trying to do
Speaker 10: is they want to rectify decades of you know, trade
Speaker 10: and balances you know that have you know, treated the
Speaker 10: United States, in particular, the manufacturing sector in the United
Speaker 10: States unfairly.
Speaker 5: You know. In order to rectify those.
Speaker 10: Balances, they have to really get at some structural issues
Speaker 10: within the global economy, within these economies that you know
Speaker 10: run surpluses, you know, like China, Japan, South Korea, in Germany,
Speaker 10: you know, And so these are not going to be
Speaker 10: things that are easily negotiated, you know, and if if
Speaker 10: they are changed, if the trumpetministration is trying to force changes,
Speaker 10: you know, certainly could result in some disruptions. So, you know,
Speaker 10: I think how much disruption is tolerable, you know, is
Speaker 10: kind of the key question here, you know.
Speaker 5: And when we look at market pricing.
Speaker 10: You know, it does look like, you know, a lot
Speaker 10: of you know, a lot of there's a lot of
Speaker 10: sanguine kind of pricing when we look around, you know,
Speaker 10: the markets don't seem to be you know, really reacting.
Speaker 5: You know, to the potential for this type of disruption.
Speaker 2: It's diffinity. Do you think the FED will react when
Speaker 2: they meet in March. They've got to put out some
Speaker 2: new forecasts, and we know that we've got certain tariff
Speaker 2: proposals on the table for March, including twenty five percent
Speaker 2: on Canada and Mexico, twenty five percent on steel and aluminum,
Speaker 2: and then in the following month that we go into April,
Speaker 2: there's the reciprocal tariffs that people are looking for as well.
Speaker 2: How do you expect the forecast the change of at
Speaker 2: all at the Federal Reserve?
Speaker 10: Yeah, I mean, I think this puts the FED in
Speaker 10: a really tricky position, you know, because these types of policies,
Speaker 10: they will result in a or likely will result in
Speaker 10: a delay of the Fed meeting its two percent inflation goal.
Speaker 10: That will result in one time kind of price level
Speaker 10: adjustments as these tariffs are passed on to consumers. But
Speaker 10: at the same time they could also result in some
Speaker 10: economic disruption.
Speaker 5: Growth can can have a bit of a drag from this.
Speaker 10: You know, other policies that the Trump administration are implementing,
Speaker 10: you know, like more aggressive immigration policy, these, you know,
Speaker 10: some of the government's potential government spending cuts that are
Speaker 10: being discussed within these reconciliation bills. All of that will
Speaker 10: put downward pressure on growth, and so that's not you know,
Speaker 10: that kind of goes against the dual mandate.
Speaker 5: You have conflicting issues.
Speaker 10: I think in terms of the FED, basically what they've
Speaker 10: signaled is that the economy is coming into this period
Speaker 10: relatively strong position. You know, inflation has been stickier than expected,
Speaker 10: that last mile has been more difficult, and with all
Speaker 10: of this uncertainty, they're kind of happy to sit and
Speaker 10: watch for now at least, and to kind of see
Speaker 10: how this plays out.
Speaker 6: Tiffany, could that lead to something that looks like a
Speaker 6: policy mistake if history has told us that one of
Speaker 6: the impacts of tariffs is weaker growth.
Speaker 5: And you have a FED that's still squarely.
Speaker 6: Focused on inflation, perhaps with recency bias, that they might
Speaker 6: not move or might not cut as much as they
Speaker 6: should when we know what some of the impacts of
Speaker 6: tariffs are and as you say, it's not great for
Speaker 6: the economy.
Speaker 5: Yeah, I mean I certainly think that's possible.
Speaker 10: You know, I still think that the FED or Reserve
Speaker 10: is is squarely focused on the labor market. You know,
Speaker 10: as we saw in the you know, the latter half
Speaker 10: of last year, with you know, an unexpected weakness in
Speaker 10: the labor market, you know, really kicking off about one
Speaker 10: hundred basis points of cuts and adjustment lower in the
Speaker 10: FED funds rate. You know, we really do think they
Speaker 10: are focused on that. You know, so ultimately maybe they're
Speaker 10: a little bit more delayed. But if the labor markets
Speaker 10: really deteriorate, you know, we would we would expect the
Speaker 10: Fed to react in a in a strong way.
Speaker 1: But Tiffany, what about the inflation side. We're going to
Speaker 1: get University of Michigan. We've already seen these surveys come out,
Speaker 1: and people are concerned about potentially higher prices, even if
Speaker 1: it's a one hit because of teriffs. How is the
Speaker 1: FED going to react to that?
Speaker 5: Yeah?
Speaker 10: Yeah, I mean ultimately, I we we agree it's a
Speaker 10: tricky position for the Fed. I think ultimately, for now,
Speaker 10: you know, the Fed is is going to stay on
Speaker 10: hold and is going to watch how this plays out.
Speaker 5: You know, inflation movement, higher in inflation.
Speaker 10: Expectations would be something that the Fed would would be
Speaker 10: you know, very much focused on and ultimately, could you know,
Speaker 10: delay or or mute the extent to which you know,
Speaker 10: they they cut the policy rate even amid you know,
Speaker 10: a growth scare or some deceleration you know on the
Speaker 10: activity side. You know, so I think this is something
Speaker 10: again that they're they're going to continue to watch and
Speaker 10: it sets up for a very tricky position for them.
Speaker 2: It's definitely, what is our experience of taro threats lingering
Speaker 2: for this long? If this just persists through the year,
Speaker 2: do you have an experience of that, What happens? How
Speaker 2: does the consumer behave, how the companies behave?
Speaker 10: Yeah, well, you know here again, you know, I think
Speaker 10: it's a there's a little bit of you know, I
Speaker 10: hate to be a two handed economist, but you know,
Speaker 10: you do have expectations that impact behavior and that can
Speaker 10: go in in both ways in terms of growth and inflation.
Speaker 5: You know.
Speaker 10: So you certainly have evidence from the first you know,
Speaker 10: the first Trump administration that increases in just policy uncertain
Speaker 10: see economic or trade policy uncertainty, you know, does hold
Speaker 10: back hiring, does hold back investment, you know, as as
Speaker 10: as businesses or more unsure.
Speaker 5: Of what the rules of the game.
Speaker 3: Are.
Speaker 10: At the same time, though, you also see some you
Speaker 10: know call it front loading behavior, and we think we
Speaker 10: are absolutely seeing consumers do that now. So we've seen
Speaker 10: an increase in goods purchases that drove the acceleration and
Speaker 10: consumption in the second half of last year. You know,
Speaker 10: we calculate it contribute about two percentage points to the
Speaker 10: roughly four percentage point growth that we had in real consumption.
Speaker 10: And that's consumers, we think, just hurrying up their purchases
Speaker 10: of various goods expecting some of these tariffs, you know,
Speaker 10: So that is kind of a near term boost to growth. Obviously,
Speaker 10: that won't last forever, you know, and eventually, you know,
Speaker 10: we think the broader trade policy uncertainty, if it continues,
Speaker 10: will really start to hurt growth, and ultimately, you know,
Speaker 10: I think the risk here, you know, relative to where
Speaker 10: we see you know, consensus in terms of forecasts two
Speaker 10: percent growth for twenty twenty five, I think the risk
Speaker 10: here is probably where the growth comes in lower than that.
Speaker 10: You know, as you look across these policies you know
Speaker 10: that are being discussed and even implemented, you know, many
Speaker 10: of them, you know, outside of maybe tax cuts, you know,
Speaker 10: are aren't great for the growth outlook, at least in
Speaker 10: the near term. And of course, when, when and if
Speaker 10: we do get tax cuts, that's more of a second
Speaker 10: half story in a twenty twenty sixth story. So the
Speaker 10: near term risk I think is more of a loss
Speaker 10: of momentum in the US economy.
Speaker 2: Here Tiffany, Can I just finish by saying, God, bless
Speaker 2: you to the you and the team at PIMCO for
Speaker 2: waking up so early on the West coast. It's amazing
Speaker 2: what you and the team do. Tiffany Wanting of Pimco.
Speaker 2: Five thirty Eastern Time, Western Time, rather on a West
Speaker 2: coast in Newport Beach, California. This is the Bloomberg Surveillance Podcast,
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