WEBVTT - The Fed Won't Ride to the Rescue 0:00:13.960 --> 0:00:17.079 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.160 --> 0:00:20.119 My name is Mike Regan. I'm a senior editor at Bloomberg. 0:00:19.960 --> 0:00:22.680 And I'm Aldona hired across asset reporter with Bloomberg. 0:00:23.040 --> 0:00:25.840 And this week on the show, Well, the magic number 0:00:26.040 --> 0:00:29.120 is one point one percent. That's how much the US 0:00:29.160 --> 0:00:31.920 economy grew in the first quarter, according to the government's 0:00:31.960 --> 0:00:35.000 first estimate. That's down from growth of two point six 0:00:35.040 --> 0:00:37.040 percent at the end of last year, and quite a 0:00:37.080 --> 0:00:39.800 bit lower than the one point nine percent that economists 0:00:40.080 --> 0:00:44.519 had estimated in a Bloomberg survey. So is this it 0:00:44.560 --> 0:00:46.839 is that looming recession we've been hearing about more or 0:00:46.920 --> 0:00:49.479 less since the last recession. Is it finally upon us? 0:00:50.080 --> 0:00:52.800 And if so, how bad could it get? We're going 0:00:52.840 --> 0:00:55.279 to pick the brain of a senior economist at a 0:00:55.320 --> 0:00:58.480 major US bank, but Bildana. First, I have a very 0:00:58.600 --> 0:00:59.880 important question for you. 0:01:00.040 --> 0:01:01.280 Always have an important question. 0:01:01.640 --> 0:01:04.200 This is a divisive question this time of year. Okay, 0:01:04.680 --> 0:01:09.399 it's playoff time, but the question is hockey. 0:01:09.480 --> 0:01:13.479 Obviously, the sabers are out right, they're out. I don't 0:01:13.480 --> 0:01:16.960 actually watch that much of it, what my husband tells me. 0:01:17.319 --> 0:01:20.240 Okay, the wait, wait, wait, wait wait, you just do 0:01:20.319 --> 0:01:21.280 what your husband tells you. 0:01:21.360 --> 0:01:25.319 No, no, just when it comes. That's not. 0:01:27.240 --> 0:01:30.280 I mean, the only knowledge I have of the NHL 0:01:30.920 --> 0:01:33.959 is what he tells what what? What he relates back 0:01:33.959 --> 0:01:35.440 to me? You have me flustered. 0:01:35.480 --> 0:01:35.640 Now. 0:01:37.120 --> 0:01:39.319 I know that the Sabers are out, which is sad 0:01:39.400 --> 0:01:43.800 for our household. But the devils are are they still 0:01:43.880 --> 0:01:44.440 in the play? 0:01:44.760 --> 0:01:46.080 Devils indeed are still live. 0:01:46.200 --> 0:01:47.960 Oh my gosh. Then that's who I'm rooting for. 0:01:48.240 --> 0:01:53.680 Just beat the Ranges, the Ranges, but Florida Beat. You're 0:01:53.680 --> 0:01:58.200 exhausting my hockey knowledge. I'm an NBA guy. I uh, 0:01:59.280 --> 0:02:01.120 this is so you don't for me. 0:02:01.400 --> 0:02:03.080 I see, okay, but. 0:02:03.040 --> 0:02:04.720 I wish the hockey would just end earlier, like I 0:02:04.760 --> 0:02:07.040 could get into it if they weren't competing at the 0:02:07.080 --> 0:02:08.320 same time. Yeah, mba. 0:02:08.639 --> 0:02:10.920 Anyway, I don't know if there's a hockey team where 0:02:10.960 --> 0:02:12.680 our guests this week is based. 0:02:12.919 --> 0:02:14.799 She's in Charlotte. Is sarah hockey team? 0:02:14.919 --> 0:02:16.760 Oh yeah, yeah, I believe. 0:02:16.800 --> 0:02:18.480 So I don't know. Well, let me bring her, let 0:02:18.480 --> 0:02:21.200 me let me bring her in. 0:02:21.240 --> 0:02:24.760 It's Sarah House, senior economists at Wells Fargo. Welcome to 0:02:24.800 --> 0:02:25.120 the show. 0:02:25.400 --> 0:02:28.320 Thank you. So I'm a journey from Charlotte. So our 0:02:28.400 --> 0:02:32.519 closest NHL team is in Raleigh, and the Hurricanes, I'm 0:02:32.520 --> 0:02:34.720 happy to say, are still in the playoffs. 0:02:34.760 --> 0:02:36.240 Oh my gosh, she knows more than me and you. 0:02:36.480 --> 0:02:39.760 It's amazing that they play hockey in Carolina during basketball 0:02:39.800 --> 0:02:40.600 season at all. 0:02:40.919 --> 0:02:44.120 It's amazing that they play hockey in Florida at all. True, 0:02:44.560 --> 0:02:45.760 I'm always amazed by that. 0:02:45.840 --> 0:02:48.040 Well, Sarah, hockey or basketball the important question? 0:02:48.080 --> 0:02:49.799 First, hockey, for sure? 0:02:50.080 --> 0:02:51.040 Really, there you go. 0:02:51.080 --> 0:02:52.320 We beat we beat you out. 0:02:53.040 --> 0:02:56.000 Okay, But Sarah, maybe you can just start by telling 0:02:56.080 --> 0:02:57.680 us about your role at Wells Fargo. 0:02:58.600 --> 0:03:01.560 Sure. So, I'm one of our teams senior economists. So 0:03:01.600 --> 0:03:06.519 I focus on the US economy, specifically inflation and labor markets. 0:03:06.600 --> 0:03:09.079 Look a lot at FED policy just given the importance 0:03:09.120 --> 0:03:11.959 of those two sectors there, but really just that broader 0:03:12.000 --> 0:03:14.560 focus on the overall US outlook. 0:03:15.680 --> 0:03:19.119 So, Sarah, that print for the first quarter GDP surprising 0:03:19.200 --> 0:03:21.679 to you, more or less what you expected. How walk 0:03:21.760 --> 0:03:23.799 us through how you're thinking about what we know about 0:03:23.800 --> 0:03:25.040 the economy after that report? 0:03:25.720 --> 0:03:28.320 Yeah, so we're actually below consensus, in part because you 0:03:28.360 --> 0:03:32.280 did get some pretty significant revisions to consumer spending in 0:03:32.560 --> 0:03:35.520 the days before the release, so we had taken down 0:03:36.200 --> 0:03:40.120 our consumer spending numbers, but I think in some ways 0:03:40.320 --> 0:03:42.600 it was surprising and just the degree of the slowdown, 0:03:42.640 --> 0:03:46.280 so sort of bigger drag from from inventories. But you know, 0:03:46.360 --> 0:03:50.760 overall final demand from domestic purchasers was holding up, and 0:03:50.800 --> 0:03:53.280 so that's really kind of the better bell weather for 0:03:53.800 --> 0:03:58.280 underlying pace of economic activity. But we did see momentum 0:03:58.320 --> 0:04:01.920 slow over the quarter, and so we're a little less 0:04:01.960 --> 0:04:04.800 optimistic that we can maintain the pace that we saw 0:04:05.200 --> 0:04:07.520 in Key one as we look out further into the year. 0:04:08.200 --> 0:04:10.840 Okay, so let's look up into the year, because I 0:04:10.920 --> 0:04:14.160 believe you and your team are anticipating a modest recession 0:04:14.240 --> 0:04:16.920 for later this year, starting later this year, So can 0:04:16.960 --> 0:04:18.160 you tell us what's behind that. 0:04:19.320 --> 0:04:21.920 Yeah, so we are in the recession camp. We don't 0:04:21.920 --> 0:04:24.479 think it's going to be quite the douzy of the 0:04:24.520 --> 0:04:28.240 past few recessions. But when we look at just the 0:04:28.600 --> 0:04:31.440 degree of tightening that we've seen coming from the FED 0:04:31.720 --> 0:04:34.240 and really just the severity of inflation, we think that 0:04:34.279 --> 0:04:37.200 if the Fed's going to be really set on getting 0:04:37.279 --> 0:04:41.040 inflation anywhere close back to its two percent target, it's 0:04:41.279 --> 0:04:44.880 likely that we're going to see demand need to pull back, 0:04:44.920 --> 0:04:47.839 and so we are expecting a contraction later this year 0:04:47.920 --> 0:04:50.760 and spending. We're already starting to see some weakness coming 0:04:50.800 --> 0:04:53.680 out of the business investment side, and this is really 0:04:53.720 --> 0:04:57.960 a FED engineered recession aimed at curtailing demand to send 0:04:58.000 --> 0:05:02.239 that inflation pressure. Before the mess of March, we already 0:05:02.279 --> 0:05:07.080 see credit conditions tightened just as the outlook was deteriorating, 0:05:07.080 --> 0:05:08.840 So we think that's going to be important part of 0:05:09.240 --> 0:05:12.520 this slowdown, and not just the availability of credit, but 0:05:12.600 --> 0:05:15.760 just also the cost leading to businesses and households just 0:05:15.800 --> 0:05:17.240 getting a little bit more conservative. 0:05:17.920 --> 0:05:20.640 And you see it starting later this year and then 0:05:20.720 --> 0:05:24.560 continuing on into the first half of twenty twenty four. 0:05:24.640 --> 0:05:27.359 Or how long can we expect it to actually be 0:05:27.400 --> 0:05:27.840 playing out? 0:05:28.080 --> 0:05:31.880 That's a good question. Yeah, So in our baseline forecast, 0:05:31.960 --> 0:05:36.159 so we have the economy tipping into recession around the 0:05:36.200 --> 0:05:40.000 third quarter and really things getting worse around Q four. 0:05:40.120 --> 0:05:43.200 So Q four is kind of where we see the 0:05:43.240 --> 0:05:46.400 worst of it, but still spilling over a little bit 0:05:46.720 --> 0:05:49.520 into Q one. So we think it's likely to be 0:05:49.640 --> 0:05:52.320 kind of more of a slow drag in terms of 0:05:52.360 --> 0:05:55.479 economic activity, just given that, we also don't think the 0:05:55.480 --> 0:05:57.800 Fed's going to be writing to the rescue as soon 0:05:57.839 --> 0:06:01.359 as you do see that weakness, the nature of the 0:06:01.400 --> 0:06:03.359 inflation that we're seeing right now, I think that the 0:06:03.360 --> 0:06:06.440 FED is actually going to be pretty reluctant to ease 0:06:06.480 --> 0:06:09.599 policy even as the economy is entering a recession. So 0:06:09.920 --> 0:06:12.440 we do think it's likely to last a few. 0:06:12.279 --> 0:06:15.880 Quarters, you know, sir, there seems to be this sort 0:06:15.920 --> 0:06:20.039 of discrepancy right now between the manufacturing side of the 0:06:20.080 --> 0:06:24.719 economy and the services side of the economy. Manufacturing is 0:06:24.839 --> 0:06:27.720 very weak, you know, according to most of the purchasing 0:06:27.760 --> 0:06:32.000 manager indexes, they're all coming in below fifty, you know, 0:06:32.040 --> 0:06:36.640 that sort of dividing line between growth and contraction for manufacturing. 0:06:36.920 --> 0:06:40.000 Services have been better, but they're still holding above that fifty, 0:06:40.120 --> 0:06:44.080 signaling growth in the service industries. I mean, obviously the 0:06:44.120 --> 0:06:47.360 service side of the economy is way way bigger than 0:06:47.400 --> 0:06:50.640 the manufacturing side. But I'm wondering how you think about 0:06:50.640 --> 0:06:54.000 that discrepancy? Is there, you know, the possibility that that 0:06:54.080 --> 0:06:56.320 manufacturing side is sort of a canary in the coal 0:06:56.400 --> 0:06:59.720 mine for the entire economy, or how do you think 0:06:59.720 --> 0:07:03.200 about it? Sort of you know, one's growing, one's shrinking, 0:07:03.320 --> 0:07:04.719 and what it means going forward. 0:07:05.560 --> 0:07:09.080 Yeah, So I think one important aspect of that manufacturing 0:07:09.120 --> 0:07:13.800 services divide in this cycle, in particular, is the nature 0:07:13.920 --> 0:07:16.000 of the crisis that we just came out of, and 0:07:16.920 --> 0:07:20.440 really what areas of the economy have done fairly well 0:07:20.480 --> 0:07:23.440 over the past few years and which ones have struggled 0:07:23.440 --> 0:07:25.960 a little bit more to get back on their feet. So, 0:07:26.440 --> 0:07:29.680 you know, what's so interesting about the COVID recession is 0:07:29.720 --> 0:07:32.880 that it was a boon for manufacturing. So typically when 0:07:32.880 --> 0:07:34.920 you see a downturn, that tends to be some of 0:07:34.920 --> 0:07:38.680 the more cyclical items, you know, big ticket costs, and 0:07:38.760 --> 0:07:42.920 so consumers retrench more. But just given the nature of 0:07:43.760 --> 0:07:47.160 the shock that we saw and the demand that resulted 0:07:47.440 --> 0:07:52.280 in physical things over experiences, that was a huge benefit 0:07:52.400 --> 0:07:55.800 to the manufacturing sector. So we think some of this 0:07:55.880 --> 0:08:00.440 pullback is cyclical, so it's in response to the higher 0:08:00.480 --> 0:08:04.160 rate environment that we're seeing businesses cutting back on capital 0:08:04.240 --> 0:08:07.320 goods expenditures. But we also think it's a little bit 0:08:07.360 --> 0:08:10.560 of payback from some of that demand being pulled forward 0:08:10.840 --> 0:08:15.320 and just really unsustainable levels of activity and demand for 0:08:15.880 --> 0:08:19.800 goods that again just benefited so much from the nature 0:08:19.800 --> 0:08:21.320 of the crisis. So I think there's a little bit 0:08:21.320 --> 0:08:23.520 of both in there that I think the downturn that 0:08:23.520 --> 0:08:25.680 we've seen, and not just the isms, but some of 0:08:25.720 --> 0:08:30.120 the hard data on manufacturing from the Industrial Production Report 0:08:30.640 --> 0:08:35.559 is indicative of the conditions are getting harder. It's harder 0:08:35.559 --> 0:08:39.360 for businesses to plan, they're cutting back on spending. But 0:08:39.400 --> 0:08:42.800 we think some of this is also just payback from 0:08:42.800 --> 0:08:45.599 what we saw in the pandemic years. 0:08:46.320 --> 0:08:48.720 And you mentioned the turmoil that we saw in the 0:08:48.720 --> 0:08:52.880 banking sector, and obviously that continues to play out. But 0:08:52.920 --> 0:08:55.800 I'm wondering how you're thinking about it, is the worst 0:08:56.000 --> 0:08:58.600 behind us? And then how can we start to see 0:08:58.800 --> 0:09:02.800 credit tightening or a crunch, whichever way you refer to it. 0:09:03.360 --> 0:09:06.520 How can we see it starting to manifest in the economy. 0:09:07.360 --> 0:09:10.760 Yeah, so our baseline assumption is the worst is over. 0:09:11.000 --> 0:09:13.320 You know, we saw obviously the Treasury, the FED, the 0:09:13.400 --> 0:09:16.959 FDIC come out pretty strongly and swiftly to try and 0:09:17.440 --> 0:09:21.640 stem the issues surrounding the banking sector. So, for example, 0:09:21.640 --> 0:09:26.080 we have a new facility aimed at helping helping banks 0:09:26.080 --> 0:09:29.760 with some of the securities that have lost value. And 0:09:29.840 --> 0:09:33.719 so our working assumption is that we're not in for 0:09:34.200 --> 0:09:37.240 an outright credit crisis, but we do think that on 0:09:37.440 --> 0:09:40.600 net credit is going to be tighter ahead. So we 0:09:40.679 --> 0:09:45.640 had already seen credit tight and pretty substantially leading into March. 0:09:45.679 --> 0:09:47.400 So if you look at the Senior Loan Office or 0:09:47.440 --> 0:09:49.640 survey for example that only went through the fourth quarter, 0:09:50.120 --> 0:09:54.880 we were seeing recessionary degrees of tightening across business loans, 0:09:54.920 --> 0:09:59.440 consumer loans, commercial real estate already. Now we don't have 0:09:59.520 --> 0:10:02.040 the next out quite yet, so we don't know exactly 0:10:02.040 --> 0:10:04.640 what the March events did to that. But you do 0:10:04.720 --> 0:10:07.000 have some data, for example, from the Dallas FED that 0:10:07.080 --> 0:10:10.240 does a by quarterly version of this, and it showed 0:10:10.280 --> 0:10:13.920 marginally more more tightening, and so we think that it's 0:10:14.040 --> 0:10:17.440 it's that additional restraint on credit flow. So we think 0:10:17.559 --> 0:10:21.240 maybe there's not a significant degree of additional tightening. I 0:10:21.280 --> 0:10:25.160 think that's consistent with what a number of Financial Conditions index, 0:10:25.240 --> 0:10:29.360 including the Bloomberg one, is showing. But I think overall 0:10:29.960 --> 0:10:33.600 we're looking at probably marginal more tightening. As banks are 0:10:33.640 --> 0:10:37.120 just a little bit more conservative, there's probably more anks 0:10:37.160 --> 0:10:39.800 around some of their funding costs and what's happening with 0:10:39.880 --> 0:10:43.000 the deposits, and so we think that that's going to 0:10:43.080 --> 0:10:46.000 lead to just slower credit growth across the economy, and 0:10:46.040 --> 0:10:47.959 that's going to weigh on activity. It's going to weigh 0:10:48.000 --> 0:10:52.760 on business's ability to expand, to hire, and so we 0:10:52.800 --> 0:10:55.400 think it's it's going to be a slow kind of 0:10:55.400 --> 0:10:57.520 a slow burn as we move through the rest of 0:10:57.559 --> 0:10:57.960 this year. 0:10:59.160 --> 0:11:01.400 And you do point out in a recent note that 0:11:01.520 --> 0:11:04.760 credit spreads haven't exactly blown out. They did widen quite 0:11:04.760 --> 0:11:09.880 a bit after the March bank turmoil, they've closed up 0:11:09.920 --> 0:11:12.600 a little bit, you know, and for listeners who are unaware, 0:11:12.640 --> 0:11:16.400 that's basically the interest rate on corporate bonds, the spread 0:11:16.400 --> 0:11:20.120 above the interest rate on treasuries is what we're talking about. 0:11:20.840 --> 0:11:24.600 Should we expect some more widening if the economy is 0:11:24.679 --> 0:11:27.800 headed for a recession? And how bad would you expect 0:11:27.800 --> 0:11:30.760 that to get if so, And really, to complicate the 0:11:30.840 --> 0:11:34.840 question even further, how do you explain why credit spreads 0:11:34.840 --> 0:11:37.520 have remained fairly tame in this environment? 0:11:38.559 --> 0:11:42.079 Yeah, so I think it's possible that we'll see those 0:11:42.200 --> 0:11:45.120 credit spreads widen a little bit as you think you 0:11:45.160 --> 0:11:48.280 do see market participants get a little bit more concerned 0:11:48.320 --> 0:11:51.720 about the path for the economy. So, you know, we're 0:11:51.760 --> 0:11:54.800 a little bit more downbeat in our assessments of what 0:11:54.840 --> 0:11:57.840 we think is going to happen to the US economy. 0:11:58.360 --> 0:12:01.960 There still is this the softly camp floating around, so 0:12:02.000 --> 0:12:03.800 we think it's if we were to see that happen, 0:12:03.840 --> 0:12:06.720 I think you would see those credit spreads widen. But 0:12:06.760 --> 0:12:08.400 I think in some ways that the fact that they 0:12:08.440 --> 0:12:11.400 haven't widened all already it speaks to, you know, this 0:12:11.480 --> 0:12:14.280 is a pretty uncertain environment. So while we're in the 0:12:14.320 --> 0:12:17.640 recession camp, you know, there's a lot of unique factors 0:12:17.760 --> 0:12:20.280 about this cycle, which I think makes it very difficult 0:12:20.360 --> 0:12:23.880 to kind of pin down the timing of when activity 0:12:24.000 --> 0:12:26.520 is likely to just low more meaningfully and when you 0:12:26.600 --> 0:12:29.960 actually might get some of that more pressure on corporations 0:12:29.960 --> 0:12:33.920 and their profits and just pricing therefore being reflected in 0:12:33.960 --> 0:12:36.439 that worsening outlook for the business sector. 0:12:43.200 --> 0:12:45.120 And then how are you thinking about what's going on 0:12:45.400 --> 0:12:48.000 with the jobs market, Because we do have some more 0:12:48.080 --> 0:12:51.480 chatter of people saying the jobless claims have ticked up 0:12:51.760 --> 0:12:55.000 a little bit in recent weeks. The jolts number was 0:12:55.040 --> 0:12:57.360 a bit more surprising than people had thought. So how 0:12:57.360 --> 0:12:59.520 are you starting to think about what's going on in 0:12:59.559 --> 0:13:00.640 the jobs market. 0:13:01.280 --> 0:13:04.120 Yeah, So our view of the jobs market is that 0:13:04.320 --> 0:13:08.960 overall the market remains very strong, but the direction here 0:13:09.040 --> 0:13:11.880 is very important. So if you look across a whole 0:13:11.920 --> 0:13:16.840 host of labor market indicators, the direction is deteriorating. So 0:13:16.840 --> 0:13:19.120 you can see that certainly from the demand side, with 0:13:19.200 --> 0:13:22.800 those job openings down twenty percent from their peak. You 0:13:22.840 --> 0:13:25.360 can see it in terms of the jobless claim so 0:13:25.440 --> 0:13:29.480 still at exceptionally low levels, but we have seen them 0:13:29.920 --> 0:13:33.320 trend higher over the past few months after being more 0:13:33.440 --> 0:13:37.120 or less stable through twenty twenty two. Same thing with 0:13:37.200 --> 0:13:40.680 hiring plans, so we've seen weakening across the pmis whether 0:13:40.679 --> 0:13:42.960 you're looking at the ISM versions or some of the 0:13:43.000 --> 0:13:47.320 regional FED employment components in their surveys, but also just 0:13:47.360 --> 0:13:50.679 the small business hiring plans. So that's been an area 0:13:50.679 --> 0:13:53.880 where small businesses have been the ones that have had 0:13:53.920 --> 0:13:56.720 the hardest time getting labor in this economy over the 0:13:56.720 --> 0:13:59.720 past few years. But we're seeing those hiring plans dial 0:13:59.800 --> 0:14:03.480 back pretty markedly here, and in fact they're lower than 0:14:03.480 --> 0:14:06.280 at any point of barring just the throes of the 0:14:06.320 --> 0:14:10.400 pandemic since about twenty seventeens. You're seeing the demand indicators 0:14:10.440 --> 0:14:13.240 come down supplies coming back a little bit, and that's 0:14:13.280 --> 0:14:17.720 helping prop up the overall level of nonfarm employment in 0:14:18.000 --> 0:14:20.160 the pace of hiring. But even then, we've seen it 0:14:20.200 --> 0:14:23.440 decelerate over the past year, and we think we're going 0:14:23.520 --> 0:14:27.920 to see a further downturn here in the coming months. 0:14:28.400 --> 0:14:31.720 So I think when we hear the word recession, you know, dunk, 0:14:31.760 --> 0:14:34.320 dund dun, people tend to think of, you know, double 0:14:34.360 --> 0:14:38.000 digit unemployment, something really nasty. I don't get the impression 0:14:38.040 --> 0:14:40.240 that's what you're bracing for, though, how bad do you 0:14:40.240 --> 0:14:42.160 think that unemployment rate could get from here. 0:14:42.920 --> 0:14:46.880 We're not bracing for a huge spike in the unemployment rate, 0:14:46.920 --> 0:14:48.320 and part of that has to do with the fact 0:14:48.320 --> 0:14:50.840 that we're not thinking this is going to be a 0:14:50.920 --> 0:14:53.040 downturn like we saw in two thousand and eight, two 0:14:53.040 --> 0:14:56.440 thousand and nine, or the acute downturn that we saw 0:14:56.840 --> 0:15:01.720 in twenty twenty. So our GDP contraction we're looking for 0:15:01.760 --> 0:15:05.000 basically a peak to traff decline of roughly one percent. 0:15:05.640 --> 0:15:07.440 But even when we look at the increase in the 0:15:07.520 --> 0:15:09.720 unemployment rate, so we're only expecting that to go up 0:15:09.720 --> 0:15:12.400 to about five point one percent. So if realized, that 0:15:12.400 --> 0:15:16.600 would actually be the smallest increase in the unemployment rate 0:15:16.680 --> 0:15:19.960 over recession, and I think part of that reflects the 0:15:20.400 --> 0:15:24.120 fact that it's not a super severe downturn. But also 0:15:24.240 --> 0:15:27.360 there are still industries like leisure and hospitality that are 0:15:27.360 --> 0:15:30.520 catching up on hiring, and so that's going to have 0:15:30.560 --> 0:15:34.600 an impact in terms of perhaps the degree of output cuts. 0:15:34.680 --> 0:15:38.800 But those are less lower productivity jobs, and so that's 0:15:38.880 --> 0:15:41.160 going to help there. But then there's also a supply 0:15:41.360 --> 0:15:45.400 consideration here, So just the fact that one, employers are 0:15:45.400 --> 0:15:47.480 already pretty desperate to hire, they might be a little 0:15:47.520 --> 0:15:50.200 bit more conservative in terms of laying off workers, just 0:15:50.200 --> 0:15:52.520 given how hard it's been to get workers in the 0:15:52.520 --> 0:15:55.040 first place, not just over the past two years, but 0:15:55.080 --> 0:15:59.680 in the years preceding the COVID recession. And then also 0:15:59.760 --> 0:16:02.560 just the inflows into the labor force are much much 0:16:02.600 --> 0:16:06.240 slower than what we've had in prior decade, just given 0:16:06.320 --> 0:16:09.080 population trends. So I think just the normal inflows that 0:16:09.080 --> 0:16:11.720 we'd be seen into the labor market in the coming 0:16:11.800 --> 0:16:13.920 years that's going to limit how high you see that 0:16:14.000 --> 0:16:15.080 unemployment rate rise. 0:16:15.600 --> 0:16:18.920 So would that level of unemployment a little over five percent, 0:16:19.000 --> 0:16:21.880 would that change the calculus for the Federal Reserve. Do 0:16:21.880 --> 0:16:23.800 you think make them actually throw in the towel and 0:16:24.200 --> 0:16:25.120 start cutting rates. 0:16:25.840 --> 0:16:30.200 We're no, So we do think probably once the unemployment 0:16:30.280 --> 0:16:32.880 rate rises a percentage point or so, we think at 0:16:32.880 --> 0:16:35.480 that point, when it's very clear that the economy is 0:16:35.520 --> 0:16:37.960 in a recession, we do think that the FED will 0:16:38.080 --> 0:16:41.040 will start cutting. So this would still be a market 0:16:41.080 --> 0:16:45.080 departure from the reaction function of prior cycle. So for example, 0:16:45.080 --> 0:16:47.800 if you go look at the two thousand and seven 0:16:47.920 --> 0:16:50.800 cutting cycle, so they began to cut rates when the 0:16:50.880 --> 0:16:54.200 unemployment rate had only ticked up about a tenth or two. 0:16:54.360 --> 0:16:56.800 So the fact that the FED is likely to wait 0:16:56.880 --> 0:17:00.440 until unemployment has risen a full percentage point, which is 0:17:00.760 --> 0:17:03.880 pretty well known that it usually only takes about half 0:17:03.880 --> 0:17:07.040 a percentage point and you're definitely in a recession, I 0:17:07.040 --> 0:17:10.040 think that's a big change in the Fed's reaction. So 0:17:10.080 --> 0:17:12.440 we don't think that they'll, you know, completely look through 0:17:12.760 --> 0:17:15.000 the rise in unemployment, but we think that they will 0:17:15.400 --> 0:17:18.120 drag their feet because they want to make sure that 0:17:18.320 --> 0:17:20.960 you are seeing slack in the labor market come back, 0:17:20.960 --> 0:17:24.359 but also weakening demand. That's going to be enough to 0:17:24.359 --> 0:17:27.040 put down put enough downward pressure on inflation where you're 0:17:27.080 --> 0:17:29.800 going to get back somewhere at least close to two percent. 0:17:31.000 --> 0:17:33.960 What about before we see any potential cuts, Like, what 0:17:34.000 --> 0:17:37.359 are you expecting from the Fed for the remainder of 0:17:37.359 --> 0:17:39.600 the year, Because I was speaking with a bunch of 0:17:39.920 --> 0:17:43.080 money managers earlier this week, and a bunch of them 0:17:43.160 --> 0:17:46.280 are expecting the FED to also raise rates at their 0:17:46.359 --> 0:17:48.520 June meeting, even though it's not something that the market 0:17:48.560 --> 0:17:51.280 is exactly pricing in right now. What is your team 0:17:51.600 --> 0:17:53.520 projecting in terms of what we're getting from the Fed 0:17:53.800 --> 0:17:55.359 before any potential cuts. 0:17:55.800 --> 0:17:59.800 Yeah, So our or basicline expectation is that they hold 0:18:00.119 --> 0:18:03.840 in June and they remain on hold for the following 0:18:03.920 --> 0:18:08.080 few meetings, and that may is likely the end of 0:18:08.119 --> 0:18:12.240 the hiking cycle. And with that, I think that comes 0:18:12.280 --> 0:18:13.879 from the fact that you do see a number of 0:18:13.880 --> 0:18:17.040 FED officials, I think, getting increasingly nervous about how much 0:18:17.119 --> 0:18:21.119 they've done, lack of certainty over what the impact of 0:18:21.440 --> 0:18:24.240 the increases are on the banking sector, what it means 0:18:24.280 --> 0:18:28.359 for for credit growth and therefore the economy ahead. So 0:18:28.560 --> 0:18:31.880 I think just given the rapid degree of tightening that 0:18:31.920 --> 0:18:35.679 we've seen and the fact that FED officials they know 0:18:35.800 --> 0:18:37.880 that policy acts with the lag they want to see 0:18:37.920 --> 0:18:40.720 how that affects. So I think it's likely that we'll 0:18:40.760 --> 0:18:44.359 see the FED on hold for an extended period and 0:18:44.400 --> 0:18:47.199 then our baseline assumption is that then they cut. But 0:18:47.280 --> 0:18:50.680 I think if we continue to see the spending continue 0:18:50.720 --> 0:18:54.800 to grow, if we see the jobs market remain very strong, resilient, 0:18:54.840 --> 0:18:58.399 you don't really see that meaningful increase in unemployment and 0:18:58.440 --> 0:19:02.600 inflation remains sticky, you might hear a lot more conversations about, well, 0:19:02.720 --> 0:19:05.800 maybe the next move is actually another hike rather than 0:19:06.200 --> 0:19:08.160 the next move beating a cut. 0:19:08.480 --> 0:19:10.960 So the one thing that we really haven't touched on 0:19:11.200 --> 0:19:14.320 so far is your outlook on inflation. I think the 0:19:14.359 --> 0:19:16.600 one thing everybody can agree on is it's just not 0:19:16.720 --> 0:19:20.280 coming down fast enough. So what are you expecting in 0:19:20.359 --> 0:19:23.880 terms of the inflation rate coming down and to what level? 0:19:24.680 --> 0:19:27.520 Yeah, so our expectations are that we are going to 0:19:27.520 --> 0:19:31.159 see some meaningful improvement here over the coming month. So 0:19:31.200 --> 0:19:33.520 I think some of the increases we saw in the 0:19:33.520 --> 0:19:36.000 first quarter might have to do with a little bit 0:19:36.040 --> 0:19:38.760 of a residual seasonality, So you tend to see more 0:19:38.880 --> 0:19:41.480 price increases at the start of the year, and maybe 0:19:41.520 --> 0:19:44.480 just the seasonals not quite catching up with that. And 0:19:44.520 --> 0:19:46.840 I think also some of the momentum we've seen in inflation, 0:19:46.880 --> 0:19:49.080 you have to remember a lot of that came through 0:19:49.119 --> 0:19:53.240 revisions to those seasonal factors, so showing that Q four 0:19:54.040 --> 0:19:56.520 was actually a lot stronger than it was. So as 0:19:56.520 --> 0:19:59.440 we think ahead, I think there's some technical reasons why 0:19:59.480 --> 0:20:02.800 we might get a little bit more of a clear 0:20:02.840 --> 0:20:05.800 improvement on the inflation side over the next few months. 0:20:05.880 --> 0:20:10.240 Is those seasonals will actually lend a little bit more 0:20:10.240 --> 0:20:13.280 of a depressing effect to some of the readings coming up. 0:20:13.720 --> 0:20:16.840 But then I think also just where we are in 0:20:16.880 --> 0:20:20.800 the economy and the growth cycle, so our expectations are 0:20:20.800 --> 0:20:23.879 that you're starting to see the impact of the weaker 0:20:23.920 --> 0:20:27.520 housing market start to show up in these official inflation measures. 0:20:27.520 --> 0:20:28.960 I think we got a little bit of a taste 0:20:28.960 --> 0:20:32.520 of that in March. Maybe it overstated the pace of decline, 0:20:32.560 --> 0:20:36.280 but I think that's set to gather momentum. Thus far, 0:20:36.400 --> 0:20:38.960 the improvement in inflation has been pretty narrow. It's been 0:20:39.040 --> 0:20:43.280 largely energy and vehicles, but I think that there's certainly 0:20:43.280 --> 0:20:47.840 more room for that vehicle this inflation to pick up, 0:20:47.880 --> 0:20:51.200 but also broader goods as we have seen supply chains correct, 0:20:51.680 --> 0:20:54.400 and also just consumers are getting more choosy and their 0:20:54.960 --> 0:20:58.200 finances are squeezed, and so they just don't have that 0:20:59.240 --> 0:21:03.439 same degree of purchasing power. Just they're not able to 0:21:03.480 --> 0:21:07.760 just accept the same degree of higher prices that we've seen. 0:21:07.840 --> 0:21:09.560 So we think that that's going to be an important 0:21:09.560 --> 0:21:13.320 part in other goods, but also even some services, including 0:21:13.800 --> 0:21:17.320 some of the more discretionary services like travel that can 0:21:17.359 --> 0:21:21.639 also reprice pretty quickly as compared to other parts of 0:21:21.720 --> 0:21:25.520 the service sector like medical care for example. So we 0:21:25.640 --> 0:21:31.000 have core inflation coming down but still looking pretty high 0:21:31.040 --> 0:21:32.880 when we get to the end of the year. So 0:21:33.000 --> 0:21:35.280