Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailely, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminals. About joins US
Speaker 1: now head of US Right Strategy at Selk and Sabauta.
Speaker 1: For a while now, a number of weeks you've been
Speaker 1: talking about high yields led by the United States. It's
Speaker 1: not still your care view going into next year. Absolutely.
Speaker 1: I mean, I think if you look at all the
Speaker 1: data we've been getting, whether it be on the employment
Speaker 1: front or retail sales, it's been gangbusters, right. So in
Speaker 1: that context, you should see as the US economy starts
Speaker 1: to reopen from business. Yes, people aren't getting into their
Speaker 1: business clothes and going into work, but it will happen
Speaker 1: if eventually when infection rates start to come down. So
Speaker 1: there's a lot there's a decent amount of savings still
Speaker 1: left in the US to be spent. So I think
Speaker 1: that that should that sort of trajectory supports you know,
Speaker 1: pretty decent growth, not just into but also and beyond.
Speaker 1: So you're looking at a very strong trajectory for growth
Speaker 1: over the next several years. Yes, there are some rests
Speaker 1: on the inflation front, as well as on things like
Speaker 1: oil prices, which might eat into consumer spending. But broadly speaking,
Speaker 1: I think the fundamentals are strong and that should lead
Speaker 1: to modestly higher years from here on the spar in
Speaker 1: another time and place, we were measured in our path
Speaker 1: to a restrictive monetary policy. How far away are we
Speaker 1: measured or unmeasured from being restrictive. Well, Montrey policy is
Speaker 1: not restrictive at all right now right, I mean defense
Speaker 1: to purchasing assets, So to me, that's providing more accommodation,
Speaker 1: not taking away accommodation, even though they're going to start
Speaker 1: keepering asset purchases um and they have suggested that they're
Speaker 1: not going to be hiking rates you know, soon, at
Speaker 1: least not as of yet, even though the markets pricing
Speaker 1: in hike as early as as as the June meeting,
Speaker 1: so the you know, for them to really move towards
Speaker 1: more tighter Montree policy, you're looking at sort of a
Speaker 1: pivot away from tapering at the pace that they are,
Speaker 1: as well as starting to move towards uh, you know,
Speaker 1: suggesting rate tax, both of which hasn't happened yet. But
Speaker 1: to build on what Tom was asking for, a key
Speaker 1: debate has been whether the market is underestimating how restrictive
Speaker 1: FED policy could get. What's your view on this at
Speaker 1: a time when right now the market is is projecting
Speaker 1: a sub two target top rate, whereas some people are
Speaker 1: saying it should be three to four. Well, I think
Speaker 1: it's really hard to know what the terminal FED trans
Speaker 1: rate is going to be. I think the markets pricing
Speaker 1: in a very very aggressive start timing for rate tax
Speaker 1: as well as a piece of rate tax after the
Speaker 1: first rate hype, maybe starting as early as June of
Speaker 1: next year. So I think it's really really hard to
Speaker 1: know what what the picture is going to be, like,
Speaker 1: you know, three or four years from now, and then say, oh,
Speaker 1: the termot fat funds rate has to be you know,
Speaker 1: four percent. I think we just don't have enough information.
Speaker 1: In fact, we don't even have enough information on what's
Speaker 1: going to happen in the next six months. I mean,
Speaker 1: most people think that inflation might persist well in the
Speaker 1: middle of next year now, but the fat doesn't is
Speaker 1: not on board with that view. So I think that's
Speaker 1: just a lot of uncertainty. Sort of extrapolating into the
Speaker 1: terminal fat funds right now is just premature. How lonely
Speaker 1: will the federal Reserve be early next year? SAVANTRAA will
Speaker 1: others join in? Do you think with this pivot? Well,
Speaker 1: first of all, we don't know if they are going
Speaker 1: to pivot, because I would say key takeaway from the
Speaker 1: f MC meeting minutes was that they do think that
Speaker 1: inflation is going to be transient and that it's going
Speaker 1: to come down by the second or third quarter of
Speaker 1: next year. They still believe that going to the December
Speaker 1: meeting or beyond, they're not really going to pivot period.
Speaker 1: So it really depends on, you know what they think.
Speaker 1: The you know, the information is by the December meeting.
Speaker 1: We get one more CPI print before the December meeting,
Speaker 1: and that's that's why I think the December meetings will
Speaker 1: be very, very crucial, because you're going to get information
Speaker 1: on employment, which we already have a pretty strong dejectory for.
Speaker 1: We're also going to get like a third data point,
Speaker 1: if you will, before the December meeting, which should give
Speaker 1: them enough information if they want to to pivot. Will
Speaker 1: other global central banks follow the US? Perhaps not. I
Speaker 1: think that global monetary policy is very asynchronous, and it's
Speaker 1: probably going to remain remain asynchronous whilst your next year
Speaker 1: and the year after. So every day over the past
Speaker 1: week or so, Sibat, we've gotten about a hundred different
Speaker 1: Fed officials I'm exaggerating speaking at different forums. What's your
Speaker 1: sense about anything, if anything we've learned that's new or
Speaker 1: moves the ball forward about how they're thinking about their
Speaker 1: rate policy. You know, it was kind of disappointing that
Speaker 1: we heard quite a few fat speakers, but not really
Speaker 1: and in substantive or new from any of the speakers.
Speaker 1: I think some of the hawks has sort of doubled down.
Speaker 1: You're hearing from the likes of Bullet, who are saying
Speaker 1: that we should be thinking about balance sheet normalization right
Speaker 1: after tapering as of purchases. He has always been calling
Speaker 1: for a sooner taper and to taper as well as
Speaker 1: you know, faster begin of beginning of rate heights. So
Speaker 1: it's all the same story from from the hawks, um
Speaker 1: and you're what you're hearing now more is the ex
Speaker 1: FED officials like the likes of Dudley and Lockhart, who
Speaker 1: are saying that the Fed should be thinking about normalizing
Speaker 1: policies sooner so that they don't sort of made so
Speaker 1: there's not a policy mistake, you know, by not raising
Speaker 1: greats soon. Do you listen to the former guys or
Speaker 1: the current wants Savantra from more accurate where you think
Speaker 1: it's going the current ones. I think the former guys
Speaker 1: are more honest and open with their opinion. But that's
Speaker 1: just my few Sabantra. The former guys have have a
Speaker 1: lot of wisdom, right, so we can we can take
Speaker 1: away information from that, Savantra Jampa of Sock. What we
Speaker 1: do with your folks is we try to get lucky,
Speaker 1: and you get lucky in all different ways when you
Speaker 1: book quality people, which our team recently has been on fire.
Speaker 1: And they said, let's get Megan Green, senior fellow at
Speaker 1: Harvard Kennedy School. But what you don't vote, no, folks
Speaker 1: is out of Princeton in Oxford. She was definitive on
Speaker 1: Europe and Turkey a good number of years ago, and
Speaker 1: we're thrilled Megan Green could join us at this moment.
Speaker 1: Is Turkey simply unravels on Lera. You know, Meg and
Speaker 1: I went back into the Great Internet and there it
Speaker 1: was EU Turkey. Something is rotten. You're an authority on this.
Speaker 1: How rotten is Air Tuan and Turkey right now? Yeah?
Speaker 1: I mean, I think the markets are really speaking for themselves.
Speaker 1: It's not just Air to Wan, it's also the independence
Speaker 1: of the central banks, some or unorthodox policies. Um, you know,
Speaker 1: euro dollar bonds in Turkey. I think that the Turkey
Speaker 1: is at the front of the line for emerging market
Speaker 1: countries that have borrowed a ton to pay for this
Speaker 1: pandemic response. Uh, and that may not be able to
Speaker 1: service that debt as interest rates start rising. Accommodation is
Speaker 1: withdrawn globally. So Turkey is a real car canary in
Speaker 1: the coal mine. Brazil is another one. But I think
Speaker 1: Turkey has been a real basket case for a long
Speaker 1: time and it's it's playing out in the markets. Now.
Speaker 1: Do you presume that Mr Arata Juan and the various
Speaker 1: Ara Tajuans from two thousand two under crisis of finance,
Speaker 1: will he turned to America or Europe? That's the big question.
Speaker 1: I think probably the US is actually more important Turkey
Speaker 1: makes no qualms about not really having any interest in
Speaker 1: joining the EU. Now. Uh, there was a spat between
Speaker 1: Turkey and EU with a migrant crisis of course a
Speaker 1: number of years ago. Um, but the US is really
Speaker 1: what matters in terms of big financial flows, and so
Speaker 1: I think one will probably turn more towards the US
Speaker 1: than it will towards Turkey. I think it will have
Speaker 1: to turn towards the i m F as well, though
Speaker 1: Megan a Turkey is a very specific story with a
Speaker 1: very novel perhaps approach to economic theory. When it comes
Speaker 1: to President are to Wan, there is a larger take
Speaker 1: here though, especially with the South African rand, which we're
Speaker 1: seeing also lose favor today as it raises rates, but
Speaker 1: perhaps not as much as people were hoping. Why is
Speaker 1: it that there is this feeling in emerging markets that
Speaker 1: they have to tighten rates, but they don't want to
Speaker 1: tighten rates quite as much as a lot of the
Speaker 1: traders are expecting them and want them to. Look, a
Speaker 1: lot of emerging markets, both middle and low income countries,
Speaker 1: already had a debt problem before the pandemics started. Then
Speaker 1: they had to issue a lot of debt, of course,
Speaker 1: to pay for the pandemic response. So they don't really
Speaker 1: want to high rate so that much because they know
Speaker 1: that that will increase their borrowing costs. And it's all
Speaker 1: fine as long as liquidity is ample and borrowing costs
Speaker 1: are low. But they learn from the LA STM debt crisis,
Speaker 1: and so a lot of that debt has been issued
Speaker 1: in local currency debt, and so central banks are a
Speaker 1: little bit reticent to high grades. It's also worth pointing
Speaker 1: out that in general, while fistful accommodation was really relaxed
Speaker 1: in most emerging markets are actually going ahead and engaging
Speaker 1: in a degree of austerity for three. And so if
Speaker 1: you have the fiscal engine pulling back and the monetary
Speaker 1: engine pulling back, it's going to make it much harder
Speaker 1: for these countries to service their debt. And also that
Speaker 1: has couragesy implications that makes it harder for them to
Speaker 1: pay for imports. And so I think we're going to
Speaker 1: run into a lot of trouble in terms of a
Speaker 1: sovereign debt crisis and emerging markets. Maybe not this year,
Speaker 1: but I think from next year onwards. And and the
Speaker 1: I m F has beefed up their firepower to deal
Speaker 1: with this, but they don't necessarily have good programs for
Speaker 1: countries that kind of fall in the middle and and
Speaker 1: need medium term help. And this goes really to Damien
Speaker 1: Sassaur's point, how the FED is banker to the world
Speaker 1: and they are looking not only at domestically what the
Speaker 1: policies need to be. But if they high rates twice,
Speaker 1: which is the consensus right now among traders at least
Speaker 1: that's what's priced it to the market, what would that
Speaker 1: do with that trigger the sovereign debt crisis that you're
Speaker 1: talking about in the developing world. Yeah, we've seen in
Speaker 1: the past that has the FED high grades, borrowing costs
Speaker 1: everywhere else go up, and that's that's the case for
Speaker 1: the Eurozone, that's certainly case for emerging markets. And while
Speaker 1: uh IM sovereigns have been better about issuing in local currencies,
Speaker 1: the private sector hasn't necessarily. Of course, it depends on
Speaker 1: which country we're speaking about, but a lot of that
Speaker 1: debt is issued in US dollars, and so as borrowing
Speaker 1: costs go up for the US, they rise everywhere else.
Speaker 1: But also their currency implications that make it harder for
Speaker 1: a lot of em countries to service that debt. Megan
Speaker 1: one of the things we're seeing in this season of
Speaker 1: outlooks of two thousand twenty two in market economics, which
Speaker 1: you did at Manual Life, is almost a lack of consensus.
Speaker 1: We use the C word consensus, But the bottom line
Speaker 1: is everybody's all over the map right now. Is that unusual?
Speaker 1: So it's not unusual in a pandemic. None of us
Speaker 1: really know where the economy is going unless we can
Speaker 1: work out what's happening with the virus. So that's one
Speaker 1: massive piece of uncertainty. But remember we've never been through
Speaker 1: any of this before, and so while other economists and
Speaker 1: I can come out and say with a lot of
Speaker 1: confidence what we think will happen to something simple like inflation,
Speaker 1: we actually just don't really know. There's a ton of
Speaker 1: uncertainty around the labor market. What does the labor force
Speaker 1: participation rate look like? That has big implications for whether
Speaker 1: the labor market is tight or actually has quite a
Speaker 1: lot of slack right now. That feeds on into what
Speaker 1: the Fed should do. Um, there's huge uncertainty around all
Speaker 1: of this, and these are the basic building blocks for
Speaker 1: any kind of macro forecast. So it's unsurprising that economists
Speaker 1: are sort of all over the map meanwhile, so that'th
Speaker 1: The carpenter of More Can Stanley, on the show earlier
Speaker 1: said that if you start to see inflation peek out
Speaker 1: in the first quarter, as the FED is currently expecting,
Speaker 1: and then start to decelerate, that will be enough for
Speaker 1: the FED to remain on hold for the remainder for
Speaker 1: the duration of two and wait until the first quarter
Speaker 1: of high rates. Do you agree that it's not necessarily
Speaker 1: the absolute level of inflation but the direction of travel. Yeah,
Speaker 1: I think that's probably right. Um. I also think that
Speaker 1: the FED has sort of promoted their mandate on full
Speaker 1: and inclusive employment and and that's a real priority for
Speaker 1: them in a way it hasn't always been. And so
Speaker 1: if we do see inflations start to decelerate next year,
Speaker 1: then I think that the FED will feel a lot
Speaker 1: less pressure to withdraw accommodation. That being said, I don't
Speaker 1: actually think we're going to see inflation decelerate at the
Speaker 1: beginning of next year, and I'm I'm firmly in team
Speaker 1: Transitory on the inflation question, but I think the supplier
Speaker 1: disruptions that we're facing now will probably persist for at
Speaker 1: least another year. And it requires not only an abatement
Speaker 1: in demand, but also it requires us to go back
Speaker 1: to buying services instead of goods, and and that will
Speaker 1: depend very much on the virus, so that can take
Speaker 1: a while. And then of course it also requires us
Speaker 1: addressing some of these supply chain disruptions. I think that
Speaker 1: could take quite a lot longer. But I do agree
Speaker 1: with Seth. If we were to see weaker inflation, the
Speaker 1: FED would be under much less pressure to hike rates,
Speaker 1: and I think we could well end up waiting until
Speaker 1: to see rate hikes, and I think that would be
Speaker 1: the right call actually, even if we don't see an
Speaker 1: abatement and inflation early next year. Interesting in line with
Speaker 1: Morgan Stanley and t D for that, Madam Megan, thank you,
Speaker 1: Mcan Grayen if they crawl institute and how the Kennedy
Speaker 1: School out of London this morning. Another one of the
Speaker 1: great dual degrees in America, as you take French at
Speaker 1: William and Mary and attach it to something else. Seth
Speaker 1: Carpenter did that. Were there French and Francophone studies program
Speaker 1: which is worldwide acclaimed And we're thrilled that the gentleman
Speaker 1: from Paris could join us today and John Faroll. I think,
Speaker 1: you know, if if down at the Fed, John help me,
Speaker 1: but they speak Greek, maybe Seth can pick up on that.
Speaker 1: Maybe the French would help on the resume along with
Speaker 1: working at the FED, working at the Treasury. Set Some
Speaker 1: people are saying it, and I asked this very delicately.
Speaker 1: Mr Gorman is watching. Would you be interested, Seth in
Speaker 1: the role that people are talking about connecting you with
Speaker 1: down at the Federal Reserve? Uh? You know, I always
Speaker 1: blush a little bit when I hear those stories. I
Speaker 1: don't personally have any information about that. If you do,
Speaker 1: you know, Seth, maybe they like the idea of the
Speaker 1: call you've got for next year on the Federal Reserve,
Speaker 1: no hike. In fact, you're going for Q one three.
Speaker 1: Let's start there, hy Q one, Seth? Why not next year?
Speaker 1: I think that's a great question. And you know, when
Speaker 1: I think about Ellen Zentner, who's a great economist in
Speaker 1: her US team, the call on the FED really is
Speaker 1: the derivative of the call on the US economy. So
Speaker 1: the forecast for inflation, which is obviously top of mind
Speaker 1: for everyone, is that inflation is going to peak somewhere
Speaker 1: around the beginning of the and then start to come
Speaker 1: down over the course of two And I'm looking at
Speaker 1: a few things. You were talking at the at the
Speaker 1: top of the segment about oil prices and if there's
Speaker 1: going to be a reserve release there. I don't have
Speaker 1: a strong call, but looking at futures where somewhere at
Speaker 1: or close to the peak, if you don't have oil
Speaker 1: prices going up anymore, that inflationary pressure starts to fade away. Similarly,
Speaker 1: supply chains. Our equity analysts from Asia have talked about
Speaker 1: the semiconductor shortage coming to an end. So as things
Speaker 1: start to normalize, probably over the course of the entire year,
Speaker 1: but as things start to to normalize with supply uh
Speaker 1: an oil prices stopped rising, then we we we have
Speaker 1: a forecast for inflation coming down. Listen to what your
Speaker 1: Powell said at the last press conference. He said he
Speaker 1: expects inflation to fall, but not until Q two or
Speaker 1: Q three. So if we're right and inflation does fall
Speaker 1: and maybe even starts in the first quarter of the year,
Speaker 1: that's going to give them a bit more breathing room
Speaker 1: relative to what I think a lot of the markets
Speaker 1: looking at. And then other part of their mandate employment.
Speaker 1: We've got a forecast for the labor fourth participation rate,
Speaker 1: especially for prime age workers, to do what it does
Speaker 1: in every expansion, which is to rise. It's already's been
Speaker 1: doing that over the past several months on net and
Speaker 1: if that continues, then they get to reconsider those two
Speaker 1: conditions for a rate lift off. What's going on with
Speaker 1: inflation and what's going on with pect So seth normalizing,
Speaker 1: though is not normal. As you pointed out, the idea
Speaker 1: of the inflation rate peeking and then coming down still
Speaker 1: does not leave us with a comfortable inflation rate for
Speaker 1: the Fed to just completely do nothing other than follow
Speaker 1: it's relatively slow taper. What gives you confidence that they
Speaker 1: will be able to push back against the Bill Dudley's
Speaker 1: of the world, who are saying, guys, you're so far
Speaker 1: behind the curve and you are risking a huge policy error.
Speaker 1: I mean, I think it's got to be very strong
Speaker 1: and very lively debate, and so you know, it's being
Speaker 1: at this desk and trying to think about what's likely
Speaker 1: to happen. I have to go back to Powell's words.
Speaker 1: He said he doesn't expect inflation to materially fall until
Speaker 1: Q two or Q three. That to me sounds like
Speaker 1: let's let the taper run its course and then after
Speaker 1: that start to think about when, when when to talk
Speaker 1: about rate hikes south I look at all this in
Speaker 1: the debate that we framed on Bloomberg surveillance over the
Speaker 1: last couple of days. Our listeners are viewers, their seats
Speaker 1: are spinning over fancy guys like you, over what's the
Speaker 1: key determinant in the fear of inflation and that this
Speaker 1: is the Bloomberg business we cover talks about. And I'm
Speaker 1: gonna ask you this as clearly as I can Kelli
Speaker 1: Look coefficient critique, what is the what is the Kelly
Speaker 1: Look coefficient critique? See I who play Kelly Look efficient
Speaker 1: critique very very well, then, tom Um, I think there
Speaker 1: is a massive disconnect between the way that macro economists
Speaker 1: talk about inflation and the way that everyday real people
Speaker 1: talk about inflation. People who are in the course of
Speaker 1: their everyday life are not running regret sans. They're not
Speaker 1: sort of scanning the data to see what's going on.
Speaker 1: They're paying attention to how much money they're paying to
Speaker 1: fill up their gas tank. They're paying attention to how
Speaker 1: much money they're paying at the grocery store when they
Speaker 1: buy food. It seems entirely reasonable for the average person
Speaker 1: to be to be feeling the high prices that are
Speaker 1: going on here, and I think they're in lies a
Speaker 1: real big communication challenge. I think, uh, that communication challenge
Speaker 1: might actually get compounded over time because the Fed very
Speaker 1: intentionally has set a target for pc inflation. Markets in
Speaker 1: general look at CPI inflation. They're measured differently. There are
Speaker 1: conceptual differences between them. The gap between those two can
Speaker 1: actually get much larger over the course of the year,
Speaker 1: and so there's a real challenge there translating inflation as
Speaker 1: macroeconomists who are studying central banks think about it, versus
Speaker 1: inflation and what it costs for it every for everyday
Speaker 1: activities for regular people. Seth, do you promise to come back? Promise?
Speaker 1: I would like to come back every time I'm invited. Yeah,
Speaker 1: but he can't come back within the window. He can't
Speaker 1: come back within the window. And that's on the black
Speaker 1: camp period. Want to hear from the run thank you
Speaker 1: for promising to come back, Seth. Convient to that from
Speaker 1: Marcin Stanley, Let's pick it up. We've got some wonderful
Speaker 1: guest today on economics, and we go to someone incredibly
Speaker 1: skilled here on market economics. Stephen Stanley is with the
Speaker 1: amorous peer part in their chief economist and is really
Speaker 1: good at the granularity. Steve Stanley, I want you to
Speaker 1: extrapolate the reality of John Deer and as Greg Velier
Speaker 1: reports this morning, ten percent inflate a wage lift, and
Speaker 1: then the next year of five percent in wage lift,
Speaker 1: and the year after that of five percent wage lift.
Speaker 1: That smells like inflation to me. Can the union inflation
Speaker 1: fall over to non union America? Well? Absolutely, I mean
Speaker 1: the labor market is incredibly tight right now, and I
Speaker 1: think workers realize that they have the leverage. And so
Speaker 1: you're not only saying it with some of these strike actions,
Speaker 1: but also UM people sitting out waiting until they get
Speaker 1: an offer that they that they liked. So yeah, I
Speaker 1: mean I think workers right now have the um you know,
Speaker 1: have the leverage, and they're gonna push it. You know.
Speaker 1: I look at Target in Amazon together bordering up on
Speaker 1: two million employees, and I would suggest that the margin
Speaker 1: those are almost union like employers just because of their mass,
Speaker 1: almost general motors of nineteen thirty five or nineteen fifty
Speaker 1: five as well. Are we more organized than we think
Speaker 1: we are in our labor markets? That's an interesting question.
Speaker 1: I mean, I think in some aspects that's probably true. Um,
Speaker 1: these big companies are big employers, I should say, have definitely,
Speaker 1: you know, responded with kind of big moves in terms
Speaker 1: of wages, raising the minimum ways that they pay or
Speaker 1: the average wage that they pay, in a manner that
Speaker 1: is somewhat akin to a collective bargaining type situation. Um.
Speaker 1: You know, maybe on some other parameters, whether it's you know,
Speaker 1: working conditions or other collective bargaining type issues, you know,
Speaker 1: maybe not so much so. It's maybe it's a bit
Speaker 1: of a hybrid. Stephen. Does the FED have time to
Speaker 1: wait for this labor market to hail, to get back
Speaker 1: to where we were before this pandemic. The FED is
Speaker 1: way behind the curve right now. I mean, the fact
Speaker 1: that we're still buying assets is you know, it's just
Speaker 1: it's a problem. And so they're gonna, I think they're
Speaker 1: gonna end up moving quite a bit faster than they
Speaker 1: think they're gonna. At some point they're gonna have to
Speaker 1: accelerate the pace of tapering. UM. And I think we
Speaker 1: are going to get rate hikes next year, um, but
Speaker 1: it's gonna take a while for the FED to catch up.
Speaker 1: I mean they are definitely and they look they wanted
Speaker 1: to be behind the curve to some degree. I mean,
Speaker 1: this is what the new framework stipulates. So we're getting
Speaker 1: kind of a great experiment. Um. But the world looks
Speaker 1: very different than the way we thought at looked in
Speaker 1: two thousand two nineteen when the FED developed this new framework.
Speaker 1: Let's talk about how much its changed as things stand.
Speaker 1: That que program is set to run down by the
Speaker 1: middle of next year. Run me through when you think
Speaker 1: that set to end, and when the next right high
Speaker 1: cactually comes after that? Sure, so I think by early
Speaker 1: next year, assuming that the inflation numbers continue to uh
Speaker 1: to be very firm, which I expect, um that they
Speaker 1: will have to accelerate the pace of tapering. So as
Speaker 1: you said, if they just maintain the current pace, they
Speaker 1: would be done by June. I think they'll probably finish
Speaker 1: March or April something like that, and then I have
Speaker 1: the first rate hike pencylvan for June. Um, you know,
Speaker 1: with a couple more before the end of the year. Stephen,
Speaker 1: what's the trigger for them to move to a more
Speaker 1: hawkish framework as you're talking about, well, I think you
Speaker 1: know clearly the inflation numbers are going to be propelling
Speaker 1: them forward. And I think on top of that, we
Speaker 1: are seeing UM good progress in the labor market. And
Speaker 1: I think the shoe that is left to drop in
Speaker 1: terms of the labor market is labor force participation. And
Speaker 1: people have been kind of waiting. You know, there was
Speaker 1: the end of the unemployment benefits UM, the beginning of school,
Speaker 1: the UM, you know, calming down a bit of the pandemic.
Speaker 1: So there are a number of events that people were
Speaker 1: waiting for in the fall that they thought might change
Speaker 1: the equation for labor force participation. And then the next
Speaker 1: few months are going to be really key on that.
Speaker 1: I think either we're gonna get a big influx of
Speaker 1: people back into the job market, and those people are
Speaker 1: mostly going to find work very quickly given the number
Speaker 1: of job openings and how desperate firms are to staff up.
Speaker 1: Or we're gonna find that people are hanging back UM
Speaker 1: for longer than than expected, in which case the labor
Speaker 1: market just remains tight. I think in either case, UM,
Speaker 1: the FETT is going to have to conclude that the
Speaker 1: you know, the work is mostly done on the labor market.
Speaker 1: I think we're gonna be at something approximating full employment
Speaker 1: UM by next spring, which becomes really the main debate
Speaker 1: that I see into next year, which is what is
Speaker 1: the terminal policy rate, that is approp rate for the
Speaker 1: new economy, the post pandemic reality that we're looking at.
Speaker 1: And we heard from Bill Dudley of the New York
Speaker 1: formerly of the New York Fed, who said he thinks
Speaker 1: it could be three to four percent, that this is
Speaker 1: something more persistent when it comes to inflation and longer lasting.
Speaker 1: Do you agree that the Fed is not only going
Speaker 1: to hike more aggressively, but has a much higher target
Speaker 1: to hit to normalize this economy. Yeah, funny you should
Speaker 1: bring that up. That's something I'm actually writing about right now.
Speaker 1: I've got something in the works on that. I think
Speaker 1: if you look at the adjustment that has been made
Speaker 1: in the markets over the last several months, there's been
Speaker 1: a big adjustment in terms of the data liftoff and
Speaker 1: what happens at the beginning of the rate cycle. But
Speaker 1: if you look further out um at various money market futures,
Speaker 1: what you see is that the markets still expect the
Speaker 1: FED to end this cycle below two percent, and so
Speaker 1: I think that is potentially the next shoe to drop.
Speaker 1: If we start to see rate heights UH next year,
Speaker 1: in the second half of next year, and inflation is
Speaker 1: still running well above the FEDS target, people are going
Speaker 1: to start to think a little bit more seriously about
Speaker 1: that scenario that that Bill Dudley and others have laid out.
Speaker 1: Um And I think, you know, if the FED says
Speaker 1: that neutral is two and a half and inflation is
Speaker 1: already running well above target and it doesn't come all
Speaker 1: the way back the way that a lot of FED
Speaker 1: officials think, then you know, I think that's the point
Speaker 1: at which people are going to start to wonder, well, hey,
Speaker 1: maybe we are going to have to move into restrictive territory. Steve,
Speaker 1: The equation is why will CE plus I plus G
Speaker 1: as in government plus something to do with there on
Speaker 1: net exports? On the back end, the people pushing against
Speaker 1: your view say government will slow down, that the fiscal
Speaker 1: drag will be tangible as well. Discuss that. Do you
Speaker 1: buy it? Um? I think it depends on how you
Speaker 1: define fiscal policy. So if you define a fiscal policy
Speaker 1: by what passes then that would be true. Um, but
Speaker 1: I'm not sure that's the right way to look at it.
Speaker 1: The way I would look at it is all of
Speaker 1: the fiscal our jests that we've seen over the past
Speaker 1: eighteen or so months, um for the most part, is
Speaker 1: sitting on household balance sheets. Still. Uh, it was all saved.
Speaker 1: You know. Household balance sheets show excess savings relative to
Speaker 1: pre pandemic levels in the neighborhood of three trillions. So
Speaker 1: most of those rebate checks and unemployment benefits and all
Speaker 1: the rest are still waiting to be spent. Now, it
Speaker 1: won't all be spent at once, but I do think
Speaker 1: that fiscal policy in that sense is going to be
Speaker 1: continuing um to provide a table into growth in Statemen.
Speaker 1: This was really interesting. Thank you, sir Stamens Downey. That about.
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