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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. Fantastic panel for you,

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Speaker 2: Steve Ashudo of Miszoo, David Kelly and JP Morgan Asset

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Speaker 2: Management alongside us. David first to you your view on

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Speaker 2: this inflation data of the last five minutes or so.

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Speaker 3: Yeah, I think it's okay. There are some bounty numbers here.

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Speaker 4: We've got a twenty point six percent increase in airline

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Speaker 4: faares that contribution to it. We've got a six tenths

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Speaker 4: increase in apparel, which was down seven tenths the prior month.

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Speaker 3: So it's bad.

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Speaker 4: But I think the big picture here is it's kind

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Speaker 4: of like when you take cookies out of the oven

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Speaker 4: they're cooling, but they seem to be cooling really slowly,

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Speaker 4: and you know, you want that inflatiary to come down faster,

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Speaker 4: and see it is coming down, but it's just it's

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Speaker 4: going to take some time.

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Speaker 3: And that's okay.

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Speaker 4: But I don't think there's anything here to alarm the

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Speaker 4: FED or anybody else. Some of the things that bounced

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Speaker 4: month to month bounced higher in February, and that's why

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Speaker 4: you got this number.

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Speaker 3: Daman.

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Speaker 2: Just to extend this one step further, is eating the

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Speaker 2: cookie kind of interest rights?

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Speaker 4: Is that what that is?

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Speaker 3: Yeah, but it's probably you know, too many cookies are

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Speaker 3: not good for you.

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Speaker 4: So I'm not looking for a very fast reduction interest rates,

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Speaker 4: and that's okay. I just want to see this expansion

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Speaker 4: stretch out, and if the inflatiaray can slowly cool, that's

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Speaker 4: really the best for the economy and for investors.

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Speaker 1: There's a question, just to continue the analogies, do for shootou,

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Speaker 1: if you leave the pan of cookies on the oven

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Speaker 1: and the oven is still on, do they cool at all?

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Speaker 1: And that is really a key question essentially, if we're

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Speaker 1: dealing with a lot of these different factors that still

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Speaker 1: are sticky and going in. But if you don't have

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Speaker 1: some sort of ongoing type policy, do they.

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Speaker 5: Cool it all?

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Speaker 6: Well, the reality, fundamentally, the look comes down to the

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Speaker 6: labor market at the end of the day. I hate

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Speaker 6: to bring it back to last week's Economics today statistics,

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Speaker 6: but it really does. The results is that most of

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Speaker 6: the components in inflation that are not going down are components.

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Speaker 5: That are service related.

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Speaker 6: Therefore their income based, and that's an important driver. And

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Speaker 6: as long as we have an economy that is running

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Speaker 6: with this title labor market and you know, three point

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Speaker 6: nine percent up from three point seven, Oh, that sounds

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Speaker 6: like a really big move, it's really not a big move.

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Speaker 5: We're still well below the.

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Speaker 6: Natural rate of unemployment, which means the frictional level of

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Speaker 6: an unemployment in the economy. This is a tight labor

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Speaker 6: market and it's not generating the easing of the labor

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Speaker 6: market conditions that could say to you, inflation is definitely

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Speaker 6: going to go back to two percent. And I think

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Speaker 6: at the end of the day, the reason why you

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Speaker 6: have a market that's looking through this number that came

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Speaker 6: in how they're expect it is because the Fed's telling

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Speaker 6: you they want to cut rates. So they're not telling you, well,

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Speaker 6: we're looking to see whether we have to raise rates

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Speaker 6: or we have.

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Speaker 5: To cut rates.

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Speaker 6: They're telling you we want to cut rates. The problem

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Speaker 6: is the data is not letting them. This has been

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Speaker 6: the driving force behind our call all year, and we

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Speaker 6: gan it le last year in November that they probably

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Speaker 6: weren't going to be given the opportunity in twenty twenty

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Speaker 6: four because the economy is not going to give them

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Speaker 6: the opportunity and that continues to be the underlying thought

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Speaker 6: process here and this data just kind of pans it out.

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Speaker 2: This is what makes you a call really really compelling.

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Speaker 2: As you say you are fighting the Federal Reserve.

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Speaker 5: Well, I'm not.

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Speaker 6: The Federal Reserve's fighting the economy. That's the difference. I'm

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Speaker 6: not fighting the Fed. I'm not fighting the economy. They're

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Speaker 6: fighting the economy. And I hate to tell you, fighting

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Speaker 6: the American consumer is a losing battle.

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Speaker 5: And that's what we're running into. This American consumer.

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Speaker 6: They have a tight labor market, they have income gains,

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Speaker 6: and they're going to spend it. There's liquidity, people are

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Speaker 6: willing to lend the money. They're going to spend money,

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Speaker 6: and that's the energizer bunny of the US economy is

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Speaker 6: the US consumer.

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Speaker 1: David, I heard your voice as you tried to interject,

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Speaker 1: so go for it.

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Speaker 3: Well, yeah, with old you respect.

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Speaker 4: I do slightly disagree with this whole idea that we're

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Speaker 4: getting inflation coming or significant inflation coming out of.

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Speaker 3: The labor market.

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Speaker 4: It is still a tight labor market, yes, but even

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Speaker 4: in this report today, one of the key variables I

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Speaker 4: look at is food away from home, what a restaurant

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Speaker 4: meals doing, because that is very sensitive to wages, and

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Speaker 4: they were only up one tenth of a percent. Also,

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Speaker 4: if you look at last Friday, I look at the

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Speaker 4: labor market data in general, the quits rate is now

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Speaker 4: down to twenty nineteen levels, so people.

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Speaker 3: Are not quitting in huge numbers.

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Speaker 4: If you look at the National Federation of Independent Business

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Speaker 4: survey of owners, the number of people who are a

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Speaker 4: number of small businesses that say they're going to raise

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Speaker 4: wages is now at it the lowest level since March

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Speaker 4: of twenty twenty one, so we're not seeing those wage increases. Yes,

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Speaker 4: it's a tight labor market, but we've got a lot

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Speaker 4: of low, low wage immigrants coming into the labor markets,

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Speaker 4: which I think are holding that wage growth down, and

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Speaker 4: I don't see a spread of wages in this report.

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Speaker 4: What I see is auto insurance up twenty point six percent. Still,

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Speaker 4: that's pushing up the measured CPI inflation range. We've got

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Speaker 4: shelter costs up six percent EU ofver year. Still, that's

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Speaker 4: pushing up the measured CPI inflation rate. But both of

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Speaker 4: those numbers are lacking reality. And so what I think

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Speaker 4: is going to happen over the course this year is, yes,

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Speaker 4: inflation is going to come down slowly, and I think

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Speaker 4: that's fast, you know, I think that will be fast

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Speaker 4: enough for the FAD to start cutting in June, because

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Speaker 4: we still do have a demonstrably tight monetary policy given

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Speaker 4: the direction of inflation, and we also try to move

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Speaker 4: back to neutral.

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Speaker 6: Steve, Yeah, well, I think when we go in and

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Speaker 6: start looking at individual components of an index, we're making

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Speaker 6: huge mistakes. This is the point I think Lisa was

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Speaker 6: talking about earlier.

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Speaker 5: This is an index.

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Speaker 6: It has components that are going to move up, and

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Speaker 6: currently they are going to move down. That's why we

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Speaker 6: use an index. That's why we just don't look at

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Speaker 6: individual components. We look at the broad index. And the

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Speaker 6: broad index is telling you a message inflation sticky. We

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Speaker 6: can argue say, oh, this month this did this, this

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Speaker 6: month is did this. But the reality of the situation

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Speaker 6: is the index is not doing what they wanted to do,

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Speaker 6: So general price movements aren't doing what they want to do,

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Speaker 6: and they're doing it because of the labor market and

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Speaker 6: this concept about the quit rates and everything else. We

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Speaker 6: don't have enough historical data of the Joltz data to

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Speaker 6: make any real, really valid statistical commentary off the Joke's data.

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Speaker 5: It doesn't exist far enough back.

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Speaker 6: And we're jumping on these neuvel statistics, just like we

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Speaker 6: did during COVID when we were looking at all these

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Speaker 6: things about you know, how many people were booking restaurants,

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Speaker 6: how many people were going to you know, taking out

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Speaker 6: a door dash and things like that, and they all

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Speaker 6: let us absolutely nowhere. The reality is the index is

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Speaker 6: not going down anymore, it's stalling out. The core numbers

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Speaker 6: seem to be leveling out as well. That's telling us

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Speaker 6: that we still have a tight labor market, and on average,

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Speaker 6: that labor market is generating enough consumer activity to keep

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Speaker 6: this economy going and to keep inflation from coming back

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Speaker 6: to the FEDS target as quickly as they would like

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Speaker 6: it to be because they're promising to cut rates, and

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Speaker 6: the reality is the economy's not giving them the opportunity.

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Speaker 5: And that's the real driving point.

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Speaker 2: David Keny, I'm sure you want to jump back in.

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Speaker 3: Well, yeah, I.

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Speaker 4: Do think even with the Jill's data, I mean, we

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Speaker 4: go to a lot of data, you do have to

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Speaker 4: put together a mosaic of all the data. I do

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Speaker 4: think it's a mistake to use sort of rules of

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Speaker 4: thumb or have the economy of ev operated twenty or

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Speaker 4: thirty or forty years ago. The truth is this is

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Speaker 4: not your grandfather's economy. It is not inflation prone. Inflation

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Speaker 4: went up a lot, it's coming down, and even on

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Speaker 4: you know, looking beneath the surface and the index. I

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Speaker 4: agree if these were small categories, but that auto insurance

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Speaker 4: issue is adding six tenths of a percent to the

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Speaker 4: overall CPI inflation rate, which you know we would be

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Speaker 4: at a two point six instead of a three point

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Speaker 4: two it wasn't for the auto insurance issue. And again

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Speaker 4: the shelter issue is also actually more than fifty percent

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Speaker 4: of the year of year inflation rate. So these two things,

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Speaker 4: the way the government is mismeasuring shelter and the way

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Speaker 4: it's mismeasuring auto insurance.

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Speaker 3: If those two things.

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Speaker 4: Fall out gradually of the CPI numbers over the course

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Speaker 4: of this year, that CPI inflation rate will move down

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Speaker 4: towards two percent unless we have an energy shock. So

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Speaker 4: I think we're still is you know, I still think

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Speaker 4: it's cooling. I think somebody shut the oup and off

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Speaker 4: these cookies are cooling. They're just cooling slowly.

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Speaker 6: Let me just deal with the auto insurance issue, because

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Speaker 6: one of the reasons why auto insurance rates are going

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Speaker 6: up is because when you get a fender bender today,

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Speaker 6: it's awfully expensive.

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Speaker 5: To repair the car.

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Speaker 6: Okay, there's a lot more in fenders these days, and

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Speaker 6: there used to be in fenders. So the reality is

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Speaker 6: the costs you're measuring what's in reality happening.

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Speaker 5: It's not a spurious uptick. That's number one. Number two.

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Speaker 6: When people get into arguing about, oh, the rent to

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Speaker 6: shelter doesn't do this or it doesn't do that, the

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Speaker 6: reality is this is the index we have. Let's not

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Speaker 6: talking about OGE. We can get a perfect index. This

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Speaker 6: is the index we have. This is the index we're

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Speaker 6: setting policy on. This is the message that's coming across

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Speaker 6: the BLS does a very good job at trying to

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Speaker 6: measure these things and measuring them as accurately as possible.

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Speaker 6: And I think all of this second guessing is to

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Speaker 6: what the data is doing, undermines the real reality of

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Speaker 6: the situation and keeps people hoping for something that's not happening.

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Speaker 6: This is exactly what the Federal Reserve wants to have happened.

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Speaker 6: They want everybody to keep on hoping that it's going

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Speaker 6: to happen. So it keeps markets in, it keeps the

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Speaker 6: labor more it tight, and they hope they get an

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Speaker 6: increase in social welfare. And that's what I think is

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Speaker 6: the driving motivation behind this, and that's the reason why

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Speaker 6: the equity market is up. Let's be honest, you have

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Speaker 6: an economy here with the Federal Reserve is saying we're

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Speaker 6: not going to upset the apple cart. We're going to

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Speaker 6: keep this economy moving. We're going to keeping it going

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Speaker 6: in a forward direction, and that's good for stocks. So

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Speaker 6: it's no surprise to me that the equity market's doing

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Speaker 6: what it's doing. The corollary is the bond market, on

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Speaker 6: the other hand, is taking the assumption that we're going

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Speaker 6: to get back to two percent inflation.

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Speaker 5: And when people say, oh, this isn't.

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Speaker 6: Your grandfather's economy or whatever, and we're not getting back

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Speaker 6: to double digit inflation, the reality is, if we're talking

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Speaker 6: a big difference between two percent three percent inflation, we're

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Speaker 6: talking one hundred basis points on.

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Speaker 5: The tenure note.

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Speaker 6: That's huge, and therefore we can't discount the fact that

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Speaker 6: we're getting stuck around three, not around two.

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Speaker 2: David Kenny, let's talk about a federal reserve. Governor Walla,

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Speaker 2: what's the rush? President Kascari, why do anything? You've got

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Speaker 2: an answer to that, David, what is the answert?

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Speaker 3: Well?

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Speaker 4: I think the answer is, to be honest, the Federal

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Speaker 4: Reserve should not be trying to micro manage aggregate demand

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Speaker 4: in the economy. If we've got a ten year if

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Speaker 4: we've got a federal funds rate between five and a

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Speaker 4: quarter five and a half percent, that is a tight policy.

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Speaker 4: It is designed to slow the economy down. It can cause,

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Speaker 4: it's given us an inverted yeal curve. It's causing problems

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Speaker 4: in the pricing of assets and in regional banks. I

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Speaker 4: don't want the Fed to cut aggressively, but I think

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Speaker 4: they should gradually move back to neutral if the inflation

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Speaker 4: rate is heading towards two percent, and so I think

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Speaker 4: they'd be right to start in June, cut again in September,

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Speaker 4: cut again in December, take it easy, but bring rates

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Speaker 4: back down to a neutral level, which I regard as

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Speaker 4: being somewhere in the three and a half to four

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Speaker 4: percent range for the federal funds rate. But they ought

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Speaker 4: to do that because there's no reason for them to

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Speaker 4: be interfering with the economy, which is actually going in

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Speaker 4: the right direction, with inflation in fact heading towards where

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Speaker 4: they wanted to go. And on the issue of auto insurance,

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Speaker 4: I realize that auto insurance prices have gone up by

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Speaker 4: I have to pay higher auto insurance too. My real

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Speaker 4: issue is it's up twenty point six percent a year

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Speaker 4: of a year now, and whether the government is measuring

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Speaker 4: that wrong or correctly or incorrectly, I'd be willing to

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Speaker 4: put money on the table that won't be up twenty

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Speaker 4: point six percent a year from now. In fact, I

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Speaker 4: wouldn't think it'd be up as half as much as that.

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Speaker 4: So if it comes down over the course of this year,

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Speaker 4: it's going to pull the CPI.

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Speaker 3: Inflation rate down.

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Speaker 4: So I do think that inflation's coming down, and if

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Speaker 4: the economy is moving in the right direction, the Federal

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Speaker 4: Reserve shouldn't have its hand on the tailer either way.

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Speaker 3: That's why they should move back to.

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Speaker 1: Neutral, which raises this question, David, before we go to Steve.

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Speaker 1: I am curious though about the oven and the cookies,

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Speaker 1: just because there is a sense that if you have

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Speaker 1: easier financial conditions, as we see today in the market

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Speaker 1: on the heels of an hotter than expected CPI print,

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Speaker 1: that this will actually keep these multifaceted areas continue to

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Speaker 1: make them hot. Basically, the wall of money isn't going

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Speaker 1: away because real wages are actually increasing.

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Speaker 5: How do you fight against that idea?

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Speaker 4: Because we've had for years, we've had an economy which,

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Speaker 4: before the pandemic, before we had all this fiscal policy,

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Speaker 4: we had an economy which was quite capable of producing

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Speaker 4: low inflation. You know, yes, it's a tight labor market,

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Speaker 4: But how many major strikes we have occurring right now

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Speaker 4: in the United States today? I think the answer is zero.

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Speaker 4: I mean, we're not seeing a very vigorous labor force

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Speaker 4: demanding high wag increases to or they'll quit. And so

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Speaker 4: I think you can actually run this economy relatively strong

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Speaker 4: at at high levels of capacity without generating higher inflation,

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Speaker 4: and what's wrong with that? So you know, I do

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Speaker 4: think this is not an inflationary economy at its core.

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Speaker 4: We got inflation because of the pandemic, the policy response

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Speaker 4: in Ukraine that's fading and has really faded, and because

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Speaker 4: of that, I think inflation comes back down to two percent.

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Speaker 1: Anyway, this is fascinating, Steve, because ultimately this is one

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Speaker 1: of the big disagreements. Are we entering a new normal

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Speaker 1: or is this going back to the old? I mean,

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Speaker 1: is that essentially the breach between yourself and David Kelly.

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Speaker 6: Well, there's this concept because we were there before COVID, we're.

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Speaker 5: Going to go back to there. Okay, it's a simple argument.

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Speaker 6: The reality of the situation is the world we had

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Speaker 6: before COVID had two very big differences. One Larry Summers

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Speaker 6: or say yeah, Larry Summers was talking about secular stagnation.

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Speaker 5: Which clearly was not correct.

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Speaker 6: Alan Blanchard, on the other hand, I think was one

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Speaker 6: hundred percent correct talking about the fact that we the

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Speaker 6: dead overhang.

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Speaker 5: Well, COVID corrected that dead overhang.

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Speaker 6: Okay, the federal government bailed out all the state and

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Speaker 6: local governments. The lower interest rates allowed everybody to refund

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Speaker 6: a refy all of their mortgages and all their corporate

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Speaker 6: debt at much lower levels of interest rates. Interest expenses

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Speaker 6: are actually no problem for corporate America. That's a big

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Speaker 6: difference there as well. The other fundamental difference that's taking

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Speaker 6: place is before COVID, people.

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Speaker 5: Were uncertain in their jobs.

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Speaker 6: Okay, there was a high degree of uncertainty and employment.

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Speaker 6: People will always convince this whole concept of double digit

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Speaker 6: earnings corporations making sure they managed towards earnings was going

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Speaker 6: to bring down their employment. They could get fired at any moment.

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Speaker 6: Now there's a lot more security in your job. And

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Speaker 6: when there's a lot more security in your job, it

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Speaker 6: doesn't mean we're going to get accelerating inflation. The question

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Speaker 6: is does inflation come back from three to two. There's

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Speaker 6: a big difference between the two of them. And the

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Speaker 6: big difference is not necessarily an equity con consideration. It's

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Speaker 6: a bond market consideration because fundamentally, where should the ten

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Speaker 6: year note be? The ten year note should take the

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Speaker 6: inflation target or the long term outlook for inflation and

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Speaker 6: add the underlying trend rate of growth to the economy.

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Speaker 6: So if you have two percent inflation, you should have

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Speaker 6: a ten year trading range of three and three quarters

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Speaker 6: to four and a quarter. We're basically in the middle

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Speaker 6: of that range right now. If it's three percent inflation,

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Speaker 6: then it's four and three quarters and five and a quarter.

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Speaker 6: We're nowhere near that range. And this is the fundamental difference.

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Speaker 6: And this is the problem for the Federal Reserve. They

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Speaker 6: have a two percent target. Kids, they don't have a

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Speaker 6: three percent target. They have a two percent target.

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Speaker 5: Now.

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Speaker 6: Markets right now are allowing them, allowing them to continue

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Speaker 6: to be patient. At some point the markets may say

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Speaker 6: we're not going to allow you to be patient, and

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Speaker 6: that becomes the concern when the bond market begins to

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Speaker 6: turn around on them and say, you know what, we're

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Speaker 6: not dealing with this, that you're going to get back

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Speaker 6: to two percent inflation. That's the risk if they move.

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Speaker 6: If they move and you want to seeing the dollar

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Speaker 6: go down dramatically, you could reverse a lot of the

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Speaker 6: goods inflation disinflation that has been taking place. And if

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Speaker 6: that happens, they didn't have an inflation problem on their hands,

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Speaker 6: and this is why they have to be patient, and

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Speaker 6: they're probably going to have to be patient throughout the

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Speaker 6: balance of this year. But it's not a negative equity story,

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Speaker 6: because this Fed does not want to set this economy back.

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Speaker 6: It's a positive equity story, and that's what's happening in equities.

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Speaker 6: My consideration is the yield curve could stay inverted a

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Speaker 6: lot longer. And just because the yield curves inverted doesn't

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Speaker 6: mean it's a problem for the economy because nobody borrows

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Speaker 6: at the front end of the curve anymore like they

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Speaker 6: used to, and that's a critical differentiation.

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Speaker 2: You're asking a balance of risk question around the Federal Reserve,

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Speaker 2: and I think it's an important question, David, help us

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Speaker 2: answer it. The biggest risk right now is it coming

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Speaker 2: too soon or holding too long? And why do you

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Speaker 2: still believe it's holding too long.

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Speaker 4: I don't think the biggest risk of the economy is

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Speaker 4: behavior of the Federal Reserve.

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Speaker 3: I think they.

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Speaker 4: Should, you know, as a matter of long term strategic policy,

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Speaker 4: move back to a neutral rate because the economy doesn't

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Speaker 4: need them to be tight at this point. But the

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Speaker 4: bigger risks the economy are really really from outside of

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Speaker 4: the behavior of the Federal Reserve anyway, geopolitical risks, environmental risks.

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Speaker 4: You know, if something happens to oil, then then you know,

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Speaker 4: our entire view of the of the world sort of

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Speaker 4: changes a bit here. So you know, I think the

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Speaker 4: Fed ought to begin to cut. I think they will

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Speaker 4: begin to cut. But my main point is that as

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Speaker 4: we look at the date of month by month, category

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Speaker 4: by category. Now we do build up to the pieces

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Speaker 4: of the index, because that's how we forecast. We have

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Speaker 4: to look at the individual pieces. And what I see

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Speaker 4: is a global economy which is relatively sluggish.

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Speaker 3: Chinae sluggish, Europe is sluggish.

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Speaker 4: It's not generating enough demand to push up core goods

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Speaker 4: or even food energy in any way. So with add

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Speaker 4: some supply shop there, the whole goods part of the

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Speaker 4: of the global econo's not going to give you inflation.

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Speaker 4: I don't see a labor market that's give is particularly

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Speaker 4: inflation area either, and so that allows you come down

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Speaker 4: to two percent.

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Speaker 2: Let's agree on one thing. We do this again next month.

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Speaker 2: David Kelly, Steve Ashudo to the two of you. Thank you.

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Speaker 2: This is the Bloomberg surveillance podcast, bringing you the best

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