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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: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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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. Now with us around

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Speaker 2: the table to break this down. Missoo Steve rashutto JP

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Speaker 2: Morgan's David Kelly. Steve's been talking about the FED wanting

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Speaker 2: to cut, but the data is not cooperating. David Kelly,

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Speaker 2: is this data cooperating?

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Speaker 3: Nope.

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Speaker 4: No.

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Speaker 3: The sound that you heard there was the door of

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Speaker 3: slamming on the June Reid cut. That's gone.

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Speaker 5: I think the problem is the Federal Reserve and JP

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Speaker 5: Howell wants to achieve consensus. He's only had eight meetings

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Speaker 5: at fifty one meetings in which there's even being a descent,

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Speaker 5: and so he's going to try and convince the committee,

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Speaker 5: but he can't convince the committee of something that the

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Speaker 5: committee doesn't on average want to believe. And so so

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Speaker 5: he's not going to be able to get consensus around

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Speaker 5: at June rate cause I don't you know if he'd

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Speaker 5: even want to push one at this stage. So unless

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Speaker 5: there's something very weird in these data, I'd love to

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Speaker 5: see what exactly is pushing this, because there's some you know,

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Speaker 5: there may be things like tobacco price or something pushing this.

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Speaker 3: I don't know.

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Speaker 5: It sounds pretty high, but it's it's definitely more inflation

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Speaker 5: than FED once. I still think that they ought to

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Speaker 5: normalize rates over time. I'd be happy enough if they

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Speaker 5: start start to cut rates in June, but I think

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Speaker 5: this means that they won't.

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Speaker 2: The words of Chairman Powell, it's too soon to say

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Speaker 2: whether the recent ratings represent more than just a bump

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Speaker 2: chairman power in the last few weeks stave domined to

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Speaker 2: change that assessment of this stinks.

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Speaker 6: I think they they're you know, creating a problem for

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Speaker 6: themselves in terms of the promises of right cuts. The

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Speaker 6: inability to actually execute on him their fell would guidance

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Speaker 6: has lock them into something because they want to do

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Speaker 6: something that the data is not allowing them to do.

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Speaker 6: I think they ought to change it. Whether they will

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Speaker 6: or not becomes an interesting question. I think there's enough

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Speaker 6: doves on the committee that that will be a difficult

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Speaker 6: thing to sell. I think, as you know, Mike mentioned,

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Speaker 6: they're more likely to hold status quo and just you know,

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Speaker 6: allow the markets to do the effective adjustment for them

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Speaker 6: and wait till they get to the June meeting to

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Speaker 6: make any changes.

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Speaker 1: I'm struck by the fact that core inflation came in

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Speaker 1: harder than expected, as well as everything else, at a

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Speaker 1: time when we're seeing oil prices, when we're seeing more

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Speaker 1: broad commodities increase, craises question of how much more could

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Speaker 1: inflation rise. I'm wondering, from your per perspective, Steve, do

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Speaker 1: you think that this data raises the proposition of a

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Speaker 1: hard landing because it forces the FED to stay high

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Speaker 1: even if you see some weakening on the margins.

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Speaker 6: Well, I think the answer to your question is very simple.

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Speaker 6: I defined it as a hot landing, an environment in

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Speaker 6: which the economy slows back towards you know, two point

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Speaker 6: three two in a quarter type environment which is still

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Speaker 6: above the revised CBO trend.

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Speaker 3: They don't know if anybody knows that.

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Speaker 7: But CBO raised its.

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Speaker 6: Underlying trend growth really growth from the economy from one

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Speaker 6: than three quarters to two percent.

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Speaker 3: So my two and a.

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Speaker 6: Quarter two thirty lumber is still above trend. That gives

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Speaker 6: you a tight labor market environment. And it certainly suggests

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Speaker 6: it's going to be very hard to get inflation to

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Speaker 6: the two percent level. So could inflation wind up settling

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Speaker 6: somewhere around three as opposed to two, Yes, so that

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Speaker 6: to me would be a hot landing, not a hard landing,

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Speaker 6: But it still keeps the inflation percolating.

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Speaker 2: Check out this market move. Let's start with equity's equity futures,

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Speaker 2: the Russell getting absolutely slammed down by more than three percent,

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Speaker 2: or I gues s and P five hundred down by

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Speaker 2: more than one percent David Kelly just months ago, the

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Speaker 2: sound of the door slamming shut on a June rate cut.

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Speaker 2: If you're just joining us right now, zero point four

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Speaker 2: percent is the number. The estimate with zero point three

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Speaker 2: might be key down in Washington, d C. Might I

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Speaker 2: find a bit of time to chew over these numbers?

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Speaker 2: What it's underpinning this one?

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Speaker 3: This morning.

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Speaker 8: Well, the interesting thing is that there isn't any huge

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Speaker 8: jump in any category except motor vehicle insurance up two

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Speaker 8: point eight percent. It doesn't have a huge wig, but

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Speaker 8: it does figure into core services and that's pushed the

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Speaker 8: numbers up. What you're seeing is a lot of slight

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Speaker 8: increases in a lot of different areas. Rent up five

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Speaker 8: tenths after four tenths last month. They were the owners

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Speaker 8: you could rent the housing component unchanged at four tenths,

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Speaker 8: so that's still an upward weight on the overall numbers.

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Speaker 8: And we're seeing the same sorts of things throughout this

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Speaker 8: seven tenths gained for apparel, you know, things that go

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Speaker 8: over one percent, very little, but a lot of things

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Speaker 8: moved up a tenth or two during the month, and

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Speaker 8: that seems to be what's pushing this higher, and that

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Speaker 8: would make the Fed concern because it suggests a broader

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Speaker 8: base for inflation than just a few outliers like we've

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Speaker 8: seen in the past.

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Speaker 1: Mike, thank you so much. And I'm looking right now

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Speaker 1: at supercore. Someone noting that it's at four point eight

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Speaker 1: percent not exactly what this Federal Reserve wants to see.

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Speaker 1: David Kelly, I know that You've been really big on

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Speaker 1: the inflation, the immaculatus inflation, this idea that we were

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Speaker 1: going to get a landing and that it was just

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Speaker 1: sort of this natural base effects that would take hold.

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Speaker 1: Do you question some of that now?

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Speaker 5: Well, actually, what Michael was just saying makes me feel

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Speaker 5: a little bit better about the situation. That two point

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Speaker 5: eight percent in auto insurance, that's probably not.

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Speaker 3: A real number.

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Speaker 5: I mean, I mean the day last month they were

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Speaker 5: saying that auto insurance rates were up twenty point six

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Speaker 5: percent a year over year.

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Speaker 3: Now I know they're up.

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Speaker 5: I don't believe the negotiated auto insurance rates on a

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Speaker 5: month's month basis are actually that going up that much

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Speaker 5: at this stage. I also don't believe that a year

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Speaker 5: from now we'd be seeing also twenty point six percent

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Speaker 5: on auto insurance. We must have gone up some more.

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Speaker 5: And then also, if you know rents are up, then

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Speaker 5: the owner's equipment brand is up also, So that it

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Speaker 5: sounds like it's still the same problem of you know,

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Speaker 5: over eighty percent of the year over year inflation that

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Speaker 5: we're seeing is coming from auto insurance and the government's

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Speaker 5: measure of shelter costs, and both of those are very smooth,

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Speaker 5: badly measured issue in things which should come down over time.

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Speaker 5: I will admit that if has come you know, if

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Speaker 5: this is this is too much for the FED, and

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Speaker 5: they're good, they don't want to They won't want to

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Speaker 5: look into more details to find a reason to custom.

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Speaker 3: The long n place that's coming down.

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Speaker 6: Is a lot of these components aren't even seasonally adjusted

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Speaker 6: at the atyl micro level and the macro level. They're

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Speaker 6: aggregated so we can get proper seasonal adjustment behind it.

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Speaker 6: There's lots of components in the CPI, the fact that

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Speaker 6: some components go one way, some components go the other way.

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Speaker 6: That's why we have an index. So I don't really

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Speaker 6: look into the details. I'll look at the major aggregates

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Speaker 6: and the components, and what they're telling me it's inflation

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Speaker 6: is not doing what they wanted on average, and this

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Speaker 6: is a problem for them. You know, they've laid out

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Speaker 6: a scenario and they actually lowered the bar at the

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Speaker 6: March meeting to cutting rates, and the reality is the

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Speaker 6: economy isn't even meeting that lower bar for them. So

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Speaker 6: this becomes an ongoing quandary for them because they've created

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Speaker 6: a financial market environment that's much too accommodative for what

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Speaker 6: their macro scenario is and what their desire to cut

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Speaker 6: rates are. And therefore they've created a problem for themselves

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Speaker 6: because their forward guidance is keeping the labor market tighter

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Speaker 6: than it would normally have been if they didn't have

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Speaker 6: this degree of forward guidance. The dots are a bad concept.

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Speaker 6: They shouldn't be there. They lead the market in a

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Speaker 6: direction that they should not go. This has been a

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Speaker 6: mistake since it was created by Janney Yellen. Nobody at

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Speaker 6: the Fed is backed away from it the realities. I

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Speaker 6: hope when they sit down and review it next year

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Speaker 6: they realize this is a dumb thing and they walk

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Speaker 6: away from it.

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Speaker 9: David, do you agree, Do the dots just create this,

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Speaker 9: you know, problems within the financial markets?

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Speaker 5: No, I don't really. I don't have a problem with

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Speaker 5: with their transparency. I do have a problem with over

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Speaker 5: the active monetary policy. I think that we assume, you know,

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Speaker 5: I mean, Steve, you were talking about how their monetary

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Speaker 5: policy has kept the other forward guidance has kept unemployment tight.

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Speaker 5: I don't think that there's their forward guidance and rates

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Speaker 5: is having that much of an impact on actual macroeconomic

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Speaker 5: GDP growth, because if that were the case, the fact

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Speaker 5: that they've raised rates so much over the last two

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Speaker 5: years autosow GDP growth down, and it didn't. So I

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Speaker 5: don't think I think the FED has a big effect

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Speaker 5: on financial markets. You can see that today. I don't

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Speaker 5: think they're having a huge effect on the economy. I

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Speaker 5: do think that some of the ways that the Labor Department,

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Speaker 5: despite the fact that it's and index the way they

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Speaker 5: measure inflation, is adding some bumps to the bumpiness here.

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Speaker 5: These are manufactured bumps. It's kind of like you know,

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Speaker 5: roadworks in New York City. It's not just podles, it's

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Speaker 5: actually roadworks that's creating these bumps. So I think the

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Speaker 5: Bureau of Labor Statistics themselves are responsible for some of

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Speaker 5: the bumps here. I do, though, think this is a

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Speaker 5: fundamentally disinflationary economy. Inflation is coming down slowly, and I

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Speaker 5: just worry about an overactive monetary policy, which you've had

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Speaker 5: for many years, which basically distorts financial markets for no

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Speaker 5: good economic purpose.

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Speaker 9: And you talk about running a marathon, you have to

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Speaker 9: fuel yourself before you break down. So if June is

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Speaker 9: slamming the door. You think you slam the door against June.

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Speaker 9: When do you think the FED should.

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Speaker 3: Have to slip in?

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Speaker 5: Well, I mean I personally, I think i'd rather them

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Speaker 5: get going slowly and sort of send the message. So

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Speaker 5: please pay no attention to this. We're just bringing, We're

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Speaker 5: not easing, we're just normalizing.

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Speaker 3: I'd like them to get to sort of message that way.

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Speaker 5: But yes, I do think that they also tried to

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Speaker 5: get to normal before they need to, because someday we're

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Speaker 5: going to be sitting around this table and the FED

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Speaker 5: is going to be at a high level and suddenly

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Speaker 5: the floor has fallen out for some shock or something,

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Speaker 5: and so we're facing the possibility recession. Then the FED says, oh,

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Speaker 5: we've got lots of ammunition, we can get rates fast.

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Speaker 5: But I have never seen that one work out well.

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Speaker 5: If the FED has to cut rates a lot in

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Speaker 5: an inn aggressive responsive way, it always hurts the economies.

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Speaker 5: I'd rather they just gradually get back to a normal place.

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Speaker 5: But obviously this morning's data doesn't help them do that.

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Speaker 1: I keep watching the markets right now, and after we

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Speaker 1: got this out of an expected print across the board,

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Speaker 1: yields continuing to climb almost really pushing up toward that

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Speaker 1: five percent level, four point ninety three percent the highs

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Speaker 1: of twenty twenty four. I'm also watching the Rustle two

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Speaker 1: thousand and Steve, I love your idea of this. You say,

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Speaker 1: a hot landing, and this raises a question of what

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Speaker 1: this landing is going to look like if you do

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Speaker 1: see some of the smaller companies continuing to be pressured

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Speaker 1: given the fact that the FED really just lost their

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Speaker 1: excuse to cut in June. As we heard from David,

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Speaker 1: that was a sound of the door slamming shot on

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Speaker 1: a June rate cut.

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Speaker 6: Yeah, again, this is the problem the Fed's created. So

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Speaker 6: the reality is smaller companies get squeezed because they don't

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Speaker 6: have the pricing power, but they're getting cost in the

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Speaker 6: wage cost environment, and that's squeezing the profitability. And this

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Speaker 6: is something I think the FED really thinks they're attempting

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Speaker 6: to do. They're attempting to create an environment where, you know,

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Speaker 6: David kind of I'm in the camptend.

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Speaker 3: Longer term, there.

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Speaker 6: Are global deflationary stories. The problem is there are a

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Speaker 6: lot of domestic cyclical inflationary stories, and it's a battle

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Speaker 6: between the global deflation versus the domestic cyclical, and this

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Speaker 6: is a battle that's been going on, and the currency

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Speaker 6: has been somewhat of equilibrated between the two of them.

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Speaker 6: But the reality of the situation is the domestic cyclical

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Speaker 6: dominates more than the global deflationary over time. And the

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Speaker 6: other thing is the FED keeps on missing the importance

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Speaker 6: of fiscal policy in this equation. It's not only monetary

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Speaker 6: poles see that continues to stimulate the economy, it's fiscal

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Speaker 6: policy that continues to stimulate the economy. And therefore, the

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Speaker 6: federal reserves concept of what their neutral rate is the

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Speaker 6: natural rate that they're looking for are stored, I think

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Speaker 6: is incorrect. I think our start is substantially higher. I

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Speaker 6: think the level of rates that needs to be in

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Speaker 6: environment in order to bring inflation down is substantially higher

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Speaker 6: than the Fed is assuming. And I do believe the

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Speaker 6: market prices the dots, and that's a problem. The market

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Speaker 6: takes a look at the dots and says, the dots

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Speaker 6: are this, and this is what we price in as

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Speaker 6: soon as it happens. So the forward structure of rates

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Speaker 6: anticipates the dots, and that's a problem, which is why

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Speaker 6: they should be eliminated.

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Speaker 2: Let's talk about the price of fiscal policy right now.

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Speaker 2: Can we bring up the bond board. This move at

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Speaker 2: the front end of the yield curve. We're talking about

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Speaker 2: a twenty basis point move on a two year yield.

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Speaker 2: We took out four rights, we took out four ninety.

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Speaker 2: We're at four ninety three forty nine. We're up fourteen

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Speaker 2: on a ten year ares year round number four fifty

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Speaker 2: on a US tenure this morning, four fifty twenty nine

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Speaker 2: past that three to foreign exchange, the dollar is stronger

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Speaker 2: against absolutely everything. Dolly m took out one fifty two.

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Speaker 2: The europe broke lower to about one oh seven eighty five.

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Speaker 2: We're negative zero point seven percent there. And if you

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Speaker 2: are just joining guess we said earlier this morning, it's

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Speaker 2: quite now wait until late thirty. This one's allowed, David,

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Speaker 2: let's talk about it. This is an email I got

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Speaker 2: just moments ago. Of course, CPI month of a month

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Speaker 2: was point three five nine, which gets rounded up to

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Speaker 2: two point four. Yeah, you know, you come in a

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Speaker 2: little bit lower. You get rounded down to point three.

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Speaker 2: Does that make a difference to you? Does that change

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Speaker 2: the conversation in any way, shape or form.

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Speaker 5: No, no, But I think the other thing is in

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Speaker 5: any inflationary between two and three percent, I on the

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Speaker 5: consumption stage, I regard as basically okay. I mean that

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Speaker 5: I think the fad is a little too focused on

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Speaker 5: getting too precisely two percent, just as I think they

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Speaker 5: were in the last deck in trying to raise rate

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Speaker 5: it's up to two percent. I think, trying to you know,

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Speaker 5: manipulate monetary policy, get rate inflation right down to two percent.

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Speaker 5: I think they're a little too forceful in that. So no,

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Speaker 5: I don't I don't worry about it too much. What

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Speaker 5: I look at two things. One, yes, we've got a

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Speaker 5: lot of demand, but we've got tremendous labor supply.

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Speaker 3: I mean, we've seen increases.

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Speaker 5: We're a fifteen years high on the day before's participation

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Speaker 5: rate for the working age population. We've got massive immigration,

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Speaker 5: which is generating labor supply.

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Speaker 3: Year of year. Wage growth at the slowest level since

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Speaker 3: June twenty twenty.

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Speaker 5: One, so we don't really have a problem there. And

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Speaker 5: then in the longer term, in the quality competition, just

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Speaker 5: the and the lack of you know who've had virtually

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Speaker 5: no strike so far this year, the lack of any

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Speaker 5: union pressure to push up wages. All that suggests to

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Speaker 5: me this is fundamentally disinflationary economy. I tend to agree

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Speaker 5: with Steve that there are cyclical forces which are making

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Speaker 5: it just a little sower coming down. But I know

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Speaker 5: I'm fine with the idea that inflation is going to

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Speaker 5: be drifting down and there's going to be a time

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Speaker 5: when we're all sitting around this table wondering what the

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Speaker 5: Fed's going to do to push it up.

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Speaker 2: You've said a few times that this disinflationary trend, which

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Speaker 2: has hit some bumps in a route over the last

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Speaker 2: few months, had nothing to do with the Federal reserve.

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Speaker 2: When you just talked about the labor market, you talked

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Speaker 2: about forces that had nothing to do with the federal reserve.

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Speaker 2: Why doesn't that play into what Governor Water is saying,

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Speaker 2: which is based I mean, why do any think it's

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Speaker 2: all what Kashgari is saying it white cup rights this year?

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Speaker 2: Why doesn't that just plan to that idea.

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Speaker 3: Because you're starting the wrong place.

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Speaker 5: If the federal reserve was at a neutral level, I

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Speaker 5: think the neutral level of federal fund rate is a

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Speaker 5: lot higher than two point six percent, But if they

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Speaker 5: were at say four, then yeah, they should just focus

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Speaker 5: on their golfkin. They do not have as much impact

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Speaker 5: on the economy.

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Speaker 3: Day to day as they think.

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Speaker 5: They spent a decade try to speed the economy up, failed,

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Speaker 5: then they now they've been trying to sew the economy

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Speaker 5: down failed. It's clear that they're in a very rough

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Speaker 5: stream with a very tiny paddle, and they are really

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Speaker 5: not moving the boat at all. And so what they

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Speaker 5: can do though, with a lot of this active monetary

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Speaker 5: policy is just rough. Financial markets miss priced assets last decade.

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Speaker 5: We miss priced housing terribly, and now a large chunk

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Speaker 5: of younger Americans can never buy a house because home

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Speaker 5: prices are just too high.

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Speaker 3: But we've got normal mortgage rates.

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Speaker 5: We've mispriced a lot of speculative assets, you know, meme

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Speaker 5: stocks and megacap stocks of some kinds, and you know,

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Speaker 5: and cryptocurrencies all were you know, these things were funded

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Speaker 5: because the carrying cost of crazy it was zero. So

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Speaker 5: I wish the Federal Reserve would pay more attention to

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Speaker 5: what they do to financial markets with their manipulation of

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Speaker 5: interest rates, and let's worry too much about what they're

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Speaker 5: doing to the economy.

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Speaker 2: That effect, we played the ship game. Can we play

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Speaker 2: the will gang? What do you think they will do?

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Speaker 2: I think they'll I think they'll skip. I think they'll

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Speaker 2: skip in June.

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Speaker 5: I think they will set that up and then probably

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Speaker 5: at the moment, I think they probably set up for

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Speaker 5: September and December two rate cuts this year.

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Speaker 6: Can I just jump in there because I think I

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Speaker 6: totally disagree with David just said a minute ago in

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Speaker 6: terms of what's driving this thing and about monetary policy

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Speaker 6: returning to some natural rate or neutral rate, and what

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Speaker 6: that neutral rate should be. The reality is the Federal

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Speaker 6: Reserve was trying to stimulate the economy when there was

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Speaker 6: a dead overhang. The dead overhang was weighing heavily on

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Speaker 6: the economy, and Federal Reserve is doing what it was

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Speaker 6: supposed to do off setting that dead overhang with very

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Speaker 6: very low subsidy levels of interest rates. COVID cleaned out

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Speaker 6: that dead overhang. Now there is no dead overhang. Balance

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Speaker 6: sheets are exceptionally healthy. The economy has back its animals,

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Speaker 6: and therefore the Federal Reserve needs to be taming back

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Speaker 6: on those animal spirits by keeping the level of short

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Speaker 6: term interest rates high enough not to allow the economy

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Speaker 6: to get too excessive in its growth rate to create

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Speaker 6: a substantially higher rate of inflation that then gets embedded

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Speaker 6: in the system. This is the mistake the Federal Reserve

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Speaker 6: made in the sixties that created the seventies. And I

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Speaker 6: think they've learned from that, and hopefully they've learned from

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Speaker 6: that and realized not to succumb to the idea that

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Speaker 6: there is some natural rate or some neutral rate that

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Speaker 6: we have to get back to, where if monetary policy

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Speaker 6: just gets back to some lower level, we're all fine.

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Speaker 6: The reality is they have to fight against the animal

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Speaker 6: spirits that are created from an economy that has very

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Speaker 6: healthy balance sheets, low corporate debt servicing burdens, low household

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Speaker 6: debt servicing burdens, and a tight labor market that's feeding

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Speaker 6: the engine of the consumer economy.

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Speaker 5: David, I think you're talking about Wall Street animals and

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Speaker 5: mainStreet animals.

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Speaker 6: I mean, I think that think it is main Street.

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Speaker 6: I hate to tell you a lot of it has

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Speaker 6: the same effect. The companies drive their share prices, they

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Speaker 6: keep their employees. All those things matter. What happens in

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Speaker 6: terms of the start hat matters. What happens in terms

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Speaker 6: of Main Street.

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Speaker 3: We just disagree.

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Speaker 5: I don't think the monetary policy is as effective on

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Speaker 5: the economy as I But.

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Speaker 1: Let's talk about where Wall Street meets Main Street, right

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Speaker 1: they we're going to have a real Wall Street response

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Speaker 1: to this. We already are seeing it right now, and

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Speaker 1: there's going to be a one two punch because we

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Speaker 1: see the price action right now, and then at one

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Speaker 1: pm we're going to get an auction of ten year notes.

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Speaker 1: It's really going to test the appetite of a market

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Speaker 1: that's looking very skittish. Steve, how vulnerable is this market

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Speaker 1: to a real upset that will actually disrupt some of

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Speaker 1: this easy money conditions and this sort of happy talk

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Speaker 1: that we've been hearing all year.

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Speaker 6: Well, the reality is these moves tend to be somewhat

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Speaker 6: partially reversed out by the end of the day. I

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Speaker 6: understand the ten year auction is coming and it will

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Speaker 6: probably be a sloppy auction as a result of it.

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Speaker 6: But I think the more important point to understand is

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Speaker 6: what this says to the average CEO in this country

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Speaker 6: is inflation is hot. Why am I not raising my prices? Okay,

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Speaker 6: I maybe getting squeezed on my margins. I've got to

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Speaker 6: get double digit earnings I've got a tight labor market,

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Speaker 6: inflation is up, other people are raising theirs.

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Speaker 7: Why don't I just raise my prices?

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Speaker 3: You know?

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Speaker 6: And that becomes the self fulfilling prophecy of creating the

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Speaker 6: inflation environment. And this is where the rubber actually meets

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Speaker 6: the road, because if I'm sitting there in that executive

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Speaker 6: office and I'm looking at my stock getting hit, I

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Speaker 6: want to drive up my stock price. How do I

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Speaker 6: drive up my stock price? Do I go out and

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Speaker 6: suddenly start firing workers?

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Speaker 3: What do I say?

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Speaker 6: Everybody else is raising prices?

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Speaker 2: Why or I?

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Speaker 1: And this really feeds to this question, David, that a

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Speaker 1: lot of people are expecting margin expansion this year and

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Speaker 1: where is it going to come from. It's going to

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Speaker 1: come from some of these price increases. So is that

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Speaker 1: one of the theses kind of underpinning some of the

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Speaker 1: rally that we've seen inequities?

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Speaker 5: Well, I hope not, because it would lead to higher inflation.

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Speaker 5: If CEOs do that and they say, Okay, now's the

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Speaker 5: time to raise prices, or if workers ay, now's the

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Speaker 5: time to demodo age increase, the thing is, we wouldn't

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Speaker 5: have come down from nine percent to three percent on

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Speaker 5: three point four percent three point five percent at CPI.

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Speaker 5: That wouldn't have occurred if businesses were actually able to

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Speaker 5: do this and workers were actually able to do that.

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Speaker 5: What was seeing if you look at the infliction when

441
00:19:01,280 --> 00:19:03,920
Speaker 5: we get the data and we look carefully here, or

442
00:19:03,920 --> 00:19:05,840
Speaker 5: we're still going to be in a situation we're eighty

443
00:19:05,840 --> 00:19:07,720
Speaker 5: percent of that inflation that we're looking at right now

444
00:19:07,880 --> 00:19:11,200
Speaker 5: is simply the government's measure of shelter costs and auto insurance.

445
00:19:11,359 --> 00:19:15,359
Speaker 5: You look at energy, food goods, everything else. It's not

446
00:19:15,560 --> 00:19:18,720
Speaker 5: particularly inflationary. And that has to say that we've got

447
00:19:18,760 --> 00:19:21,240
Speaker 5: a competitive economy in which, yes, everybody wants to raise

448
00:19:21,240 --> 00:19:22,480
Speaker 5: the priceis that are scared to.

449
00:19:23,640 --> 00:19:26,040
Speaker 2: It's fantastic conversation, Steve. I'm afraid I've got to wrap

450
00:19:26,080 --> 00:19:30,240
Speaker 2: it up for getting the Stavis plan, David Kelly to

451
00:19:30,359 --> 00:19:37,800
Speaker 2: the both of you, Thank you. Prime Minister Kashida arriving

452
00:19:37,840 --> 00:19:40,119
Speaker 2: in Washington for the country's first state visit to the

453
00:19:40,200 --> 00:19:43,400
Speaker 2: US in nine years. Hanging over the visit, Nippon Steel's

454
00:19:43,440 --> 00:19:46,840
Speaker 2: plan taker over of US steel Tomy Marcus of Wolf

455
00:19:46,880 --> 00:19:50,000
Speaker 2: Research Rights. In this, Japanese officials suggests they believe their

456
00:19:50,000 --> 00:19:52,240
Speaker 2: best play is the state quiet and work with the

457
00:19:52,240 --> 00:19:55,880
Speaker 2: Committee on Foreign Investment to try to secure a positive recommendation,

458
00:19:56,160 --> 00:19:58,520
Speaker 2: avoid putting Biden on the defensive, and see if the

459
00:19:58,600 --> 00:20:02,080
Speaker 2: situation improves after the election. Tobin joins us now for

460
00:20:02,200 --> 00:20:04,760
Speaker 2: more that's hope, and as we know, a big element

461
00:20:04,800 --> 00:20:06,320
Speaker 2: of this is to try and secure the vote in

462
00:20:06,359 --> 00:20:09,280
Speaker 2: places like Pennsylvania. Is that working.

463
00:20:10,960 --> 00:20:13,359
Speaker 7: At the moment, I would say it's not working yet.

464
00:20:13,600 --> 00:20:15,960
Speaker 4: Biden's still behind in the polls across the blue Wall

465
00:20:16,000 --> 00:20:18,680
Speaker 4: states that he needs to win, pulling very tight in

466
00:20:18,720 --> 00:20:22,360
Speaker 4: Pennsylvania and Wisconsin, a little bit more pro Trump in Michigan.

467
00:20:22,400 --> 00:20:25,879
Speaker 4: But I think all well within kind of competition distance

468
00:20:25,920 --> 00:20:26,760
Speaker 4: for both candidates.

469
00:20:26,880 --> 00:20:29,919
Speaker 7: So you know, it has not worked yet, but it

470
00:20:30,040 --> 00:20:33,080
Speaker 7: is understandable. I think that the Biden and the Biden.

471
00:20:32,840 --> 00:20:36,359
Speaker 4: Campaign are looking at that swath of political territory with

472
00:20:36,400 --> 00:20:37,480
Speaker 4: a very keen.

473
00:20:37,320 --> 00:20:38,040
Speaker 3: Eye to hope.

474
00:20:38,160 --> 00:20:40,280
Speaker 2: Do you sense these Japanese understand or are we at

475
00:20:40,359 --> 00:20:42,360
Speaker 2: risk of isolating some of our allies?

476
00:20:43,880 --> 00:20:44,679
Speaker 7: I think they get it.

477
00:20:44,720 --> 00:20:46,840
Speaker 4: I mean, I think that we've seen in the response

478
00:20:47,119 --> 00:20:52,640
Speaker 4: to this situation from Prime Minister Kashia and officials around him,

479
00:20:52,800 --> 00:20:55,520
Speaker 4: in the wake of Biden coming out sort of surprisingly

480
00:20:55,560 --> 00:20:58,960
Speaker 4: strongly against the deal a few weeks ago that they

481
00:20:59,000 --> 00:21:01,600
Speaker 4: understand there's no real percentage in pressing him on it.

482
00:21:01,680 --> 00:21:04,240
Speaker 4: At this point, the company is still very gung ho

483
00:21:04,480 --> 00:21:06,920
Speaker 4: on the deal. I mean, you know, you're still seeing

484
00:21:07,000 --> 00:21:10,159
Speaker 4: lots and lots of you know, advertising lobbying focused on

485
00:21:10,720 --> 00:21:13,080
Speaker 4: on DC types kind of touting the economic benefits of

486
00:21:13,119 --> 00:21:16,280
Speaker 4: the deal. They're continuing to try and engage with the union,

487
00:21:16,320 --> 00:21:19,359
Speaker 4: even though the USW seems very dead set against the deal.

488
00:21:19,600 --> 00:21:21,600
Speaker 4: So it's not as if the Japanese side in general

489
00:21:21,640 --> 00:21:23,119
Speaker 4: has given up, but I think you are seeing at

490
00:21:23,119 --> 00:21:25,920
Speaker 4: the governmental level they're not making it their number one priority.

491
00:21:25,960 --> 00:21:28,760
Speaker 4: The summit this week is much more focused on security

492
00:21:28,760 --> 00:21:31,399
Speaker 4: issues and defense cooperation, where I think the mutual interests

493
00:21:31,400 --> 00:21:35,320
Speaker 4: are more aligned, and you know they will try to

494
00:21:35,320 --> 00:21:36,600
Speaker 4: get a good outcome here, but know.

495
00:21:36,560 --> 00:21:37,880
Speaker 7: That it's not a foregone conclusion.

496
00:21:38,000 --> 00:21:40,440
Speaker 9: When it comes to the SAFIUS review, what the ministration

497
00:21:40,600 --> 00:21:43,000
Speaker 9: is looking at is whether or not there is this

498
00:21:43,080 --> 00:21:46,360
Speaker 9: connection to China. Do you think that's warranted?

499
00:21:48,560 --> 00:21:51,640
Speaker 7: I think this is all downstream of politics.

500
00:21:51,760 --> 00:21:53,840
Speaker 4: I think if you were doing a purely neutral, staff

501
00:21:53,920 --> 00:21:58,000
Speaker 4: driven Safeists review with no concerns about politics whatsoever, if

502
00:21:58,000 --> 00:22:00,320
Speaker 4: this were a company that did not have United States

503
00:22:00,320 --> 00:22:03,880
Speaker 4: in the name, that had a kind of iconic legacy

504
00:22:03,920 --> 00:22:07,080
Speaker 4: to it. I don't think authentically that there would be problems.

505
00:22:07,119 --> 00:22:09,360
Speaker 4: I mean, as we're seeing in the summit. More broadly,

506
00:22:09,640 --> 00:22:13,320
Speaker 4: Japan is probably our most important ally in the Indo Pacific,

507
00:22:13,560 --> 00:22:17,280
Speaker 4: one of our most important allies globally. I think Japanese

508
00:22:17,320 --> 00:22:19,640
Speaker 4: control of US companies in general is not a big

509
00:22:19,680 --> 00:22:20,439
Speaker 4: security concern.

510
00:22:20,920 --> 00:22:23,800
Speaker 7: Steal a little bit of a special case, but I do.

511
00:22:24,000 --> 00:22:27,960
Speaker 4: Mostly think that we are seeing an exercise in mitigating

512
00:22:28,000 --> 00:22:31,680
Speaker 4: the kind of potential political liability of allowing this again.

513
00:22:31,520 --> 00:22:33,400
Speaker 7: Quote unquote iconic US company.

514
00:22:33,160 --> 00:22:37,480
Speaker 4: To be acquired by foreign entity, regardless of where that's domicile.

515
00:22:37,680 --> 00:22:39,919
Speaker 9: And when you talk to Japanese officials, they say, actually

516
00:22:40,000 --> 00:22:42,720
Speaker 9: uniting these two companies would be a force against China.

517
00:22:42,800 --> 00:22:46,160
Speaker 9: So we're at risk in Washington to create this boy

518
00:22:46,200 --> 00:22:49,600
Speaker 9: that cried wolf situation when it comes to national security concerns.

519
00:22:50,840 --> 00:22:52,679
Speaker 4: Yeah, I mean, you heard rom talking about this a

520
00:22:52,720 --> 00:22:54,840
Speaker 4: moment ago, and the clip that you played like, it's

521
00:22:54,880 --> 00:22:56,640
Speaker 4: not unique to the US.

522
00:22:56,720 --> 00:22:58,919
Speaker 7: It's not unique to this situation. For there to be

523
00:22:59,440 --> 00:23:00,280
Speaker 7: a political.

524
00:23:00,080 --> 00:23:04,199
Speaker 4: Considerations or you know, even economic considerations around protecting kind

525
00:23:04,240 --> 00:23:06,240
Speaker 4: of domestic champions and various sifting industries.

526
00:23:06,640 --> 00:23:10,320
Speaker 7: So you know, again it's not I think the ideal situation.

527
00:23:10,400 --> 00:23:12,359
Speaker 4: It's not what you'd want as you're trying to deepen

528
00:23:12,400 --> 00:23:15,159
Speaker 4: both economic and security cooperation with Japan.

529
00:23:15,240 --> 00:23:17,240
Speaker 7: But I do think that they that they get it.

530
00:23:17,240 --> 00:23:22,840
Speaker 4: It's not derailing the other efforts to knit a tighter relationship. Again,

531
00:23:22,920 --> 00:23:25,280
Speaker 4: the sort of suite of deliverables that are being rolled

532
00:23:25,320 --> 00:23:27,920
Speaker 4: out around the summit, I think both sides feel quite

533
00:23:27,920 --> 00:23:30,000
Speaker 4: good about in terms of Japan's you know, sort of

534
00:23:30,040 --> 00:23:32,560
Speaker 4: continued shift towards being a full spector and geopolitical actor

535
00:23:32,960 --> 00:23:35,320
Speaker 4: in the Ino Pacific, you know, sort of undergoing their

536
00:23:35,320 --> 00:23:38,880
Speaker 4: own military modernization and preparing to cooperate a lot more

537
00:23:38,880 --> 00:23:40,280
Speaker 4: with the US and to touring China.

538
00:23:40,480 --> 00:23:42,719
Speaker 1: Tovid it's getting a lot harder to distinguish politics from

539
00:23:42,720 --> 00:23:44,520
Speaker 1: policy at this point, and I do want to get

540
00:23:44,560 --> 00:23:46,400
Speaker 1: your thoughts ahead of an interview that we have later

541
00:23:46,480 --> 00:23:49,560
Speaker 1: on with an analyst for strtigis where he came out

542
00:23:49,600 --> 00:23:52,439
Speaker 1: and John mentioned this quote. It's fascinating to me Washington

543
00:23:52,480 --> 00:23:54,560
Speaker 1: has committed to run the economy at full employment at

544
00:23:54,560 --> 00:23:56,960
Speaker 1: all costs until the election and the FED is looking

545
00:23:57,000 --> 00:24:00,000
Speaker 1: for every excuse possible to cut to aid this cast.

546
00:24:00,520 --> 00:24:02,720
Speaker 1: Would you agree with that assessment? Is that kind of

547
00:24:02,720 --> 00:24:05,240
Speaker 1: the feeling that you hear from the clients that you

548
00:24:05,280 --> 00:24:05,639
Speaker 1: speak to.

549
00:24:06,680 --> 00:24:09,600
Speaker 4: So I will say it's a very active debate among

550
00:24:10,119 --> 00:24:13,280
Speaker 4: my clients and other folks in the DC space, the

551
00:24:13,280 --> 00:24:15,680
Speaker 4: extent to which FED decision making this year is politicized.

552
00:24:16,000 --> 00:24:18,440
Speaker 4: I don't really agree with the notion that the FED

553
00:24:18,520 --> 00:24:20,480
Speaker 4: is putting its finger on the scale for the sake

554
00:24:20,560 --> 00:24:21,840
Speaker 4: of an electoral outcome.

555
00:24:24,119 --> 00:24:26,000
Speaker 7: I've sort of heard that talking point a lot. I

556
00:24:26,000 --> 00:24:26,920
Speaker 7: don't really think it's right.

557
00:24:27,000 --> 00:24:29,399
Speaker 4: But I think Powell's very clear political incentive is to

558
00:24:30,119 --> 00:24:32,320
Speaker 4: ride off into the sunset as a person who defeated

559
00:24:32,320 --> 00:24:34,880
Speaker 4: this outburst of inflation. I think he cares a lot

560
00:24:34,920 --> 00:24:38,879
Speaker 4: more about his legacy, about you know, not being the

561
00:24:38,920 --> 00:24:41,960
Speaker 4: next Burns and he does about getting reappointed, or the

562
00:24:42,000 --> 00:24:44,240
Speaker 4: sort of inevitable political attacks that will face from both

563
00:24:44,280 --> 00:24:47,119
Speaker 4: sides depending on when they cut. You know, if they

564
00:24:47,119 --> 00:24:49,119
Speaker 4: cut in June or July, they'll be criticized for cutting

565
00:24:49,119 --> 00:24:51,040
Speaker 4: too early and too much. If they cut in September,

566
00:24:51,040 --> 00:24:52,920
Speaker 4: it will be criticized for cutting too close to the election.

567
00:24:53,200 --> 00:24:55,480
Speaker 4: If they wait until November December, it will be criticized

568
00:24:55,480 --> 00:24:57,520
Speaker 4: for holding rates high, you know, sort of longer than

569
00:24:57,520 --> 00:25:00,600
Speaker 4: necessary in a way that hurts Trump. So if he doesn't,

570
00:25:00,640 --> 00:25:02,479
Speaker 4: damned if he doesn't. I think in terms of the

571
00:25:02,520 --> 00:25:05,640
Speaker 4: political incoming he's going to face, you know, I think

572
00:25:05,640 --> 00:25:09,199
Speaker 4: that their incentive is to try and actually navigate the

573
00:25:09,600 --> 00:25:12,960
Speaker 4: you know, genuinely challenging set of empirical questions that they're

574
00:25:12,960 --> 00:25:16,560
Speaker 4: facing around the appropriate path for rates. Not that they'll

575
00:25:16,600 --> 00:25:18,760
Speaker 4: do it correctly necessarily, but I do think that we

576
00:25:18,800 --> 00:25:21,080
Speaker 4: are seeing their sort of authentic best effort to try

577
00:25:21,080 --> 00:25:22,639
Speaker 4: and manage both sides of the dual mandate.

578
00:25:23,000 --> 00:25:24,760
Speaker 1: There is this question though, of course, of whether the

579
00:25:24,760 --> 00:25:28,800
Speaker 1: FED comes under attack in terms of it's legitimacy in

580
00:25:28,880 --> 00:25:32,280
Speaker 1: another administration, whether it has sort of an incentive to

581
00:25:32,320 --> 00:25:33,960
Speaker 1: preserve more of a status quo.

582
00:25:34,520 --> 00:25:35,119
Speaker 7: Do you believe that?

583
00:25:35,160 --> 00:25:36,520
Speaker 1: I mean, this is sort of one of the theses,

584
00:25:36,560 --> 00:25:39,720
Speaker 1: one of the sort of conspiracy theories underpinning this, which

585
00:25:39,720 --> 00:25:41,320
Speaker 1: is the reason why we hear this so much.

586
00:25:41,960 --> 00:25:45,199
Speaker 4: Right, I mean, you know, if you gave Powell trucierum,

587
00:25:45,200 --> 00:25:46,560
Speaker 4: would he prefer Biden to Trump?

588
00:25:47,000 --> 00:25:47,520
Speaker 7: Probably?

589
00:25:47,600 --> 00:25:50,040
Speaker 4: But I again, I don't he is a registered Republican.

590
00:25:50,080 --> 00:25:54,480
Speaker 4: It's not as if he's sort of somebody whose track

591
00:25:54,520 --> 00:25:56,440
Speaker 4: record would suggest that he's going to sort of move

592
00:25:56,480 --> 00:25:59,119
Speaker 4: heaven and earth to get Biden reelected. Generally, when we

593
00:25:59,160 --> 00:26:02,560
Speaker 4: look backwards at the record of what FED policy has

594
00:26:02,600 --> 00:26:05,920
Speaker 4: actually been in election years in the period since Nixon

595
00:26:05,960 --> 00:26:08,520
Speaker 4: and Burns, we don't see any good evidence that there's

596
00:26:09,119 --> 00:26:12,439
Speaker 4: any sort of historical pattern around election interference. They're no

597
00:26:12,480 --> 00:26:15,040
Speaker 4: more likely to get cuts and hikes in election years,

598
00:26:15,359 --> 00:26:18,880
Speaker 4: you see. You know, the deviation between the tailor rule

599
00:26:18,920 --> 00:26:22,879
Speaker 4: and actual FED fund rates in election years is, you know,

600
00:26:23,280 --> 00:26:26,240
Speaker 4: if anything, more hawkish than than it is in non

601
00:26:26,240 --> 00:26:28,560
Speaker 4: election years. So, you know, I think there's not a

602
00:26:28,560 --> 00:26:30,520
Speaker 4: lot of empirical track record to point you on this,

603
00:26:30,600 --> 00:26:32,719
Speaker 4: and I don't really think it makes sense for Powell.

604
00:26:33,800 --> 00:26:35,720
Speaker 4: You know, again, he's towards the end of his career.

605
00:26:35,920 --> 00:26:37,760
Speaker 4: I'm sure he would like to get reappointed, but I

606
00:26:37,800 --> 00:26:40,840
Speaker 4: do think he cares much more about not sort of

607
00:26:40,840 --> 00:26:43,199
Speaker 4: mismanaging the situation and going down in history as the

608
00:26:43,200 --> 00:26:47,280
Speaker 4: person who allowed like a big reacceleration of inflation totally

609
00:26:47,280 --> 00:26:50,480
Speaker 4: failed at these sort of you know, historically important job

610
00:26:50,480 --> 00:26:52,760
Speaker 4: that he's facing at this kind of inflection point, so

611
00:26:53,640 --> 00:26:55,280
Speaker 4: you know, and again in terms of the legitimacy of

612
00:26:55,280 --> 00:26:58,000
Speaker 4: the FED, they will face quite st our political attacks

613
00:26:58,119 --> 00:27:00,000
Speaker 4: no matter what they do, and so I don't think

614
00:27:00,080 --> 00:27:01,000
Speaker 4: they're trying to solve through that.

615
00:27:01,359 --> 00:27:03,480
Speaker 7: Yew makes a ton of sense, well said, I don't

616
00:27:03,520 --> 00:27:03,800
Speaker 7: buy this.

617
00:27:03,880 --> 00:27:05,320
Speaker 4: I hear it a lot like the theory is definitely

618
00:27:05,320 --> 00:27:06,639
Speaker 4: out there, but I'm not on board.

619
00:27:06,760 --> 00:27:09,679
Speaker 2: Lose lose time of Marcus of Wolf Research, super diplomatic

620
00:27:09,680 --> 00:27:14,000
Speaker 2: and active debate. This is the Bloomberg Surveillance podcast, bringing

621
00:27:14,080 --> 00:27:17,679
Speaker 2: you the best in markets, economics, and geopolitics. You can

622
00:27:17,720 --> 00:27:20,480
Speaker 2: watch the show live on Bloomberg TV weekday mornings from

623
00:27:20,520 --> 00:27:23,800
Speaker 2: six am to nine am Eastern. Subscribe to the podcast

624
00:27:23,840 --> 00:27:27,000
Speaker 2: on Apple, Spotify or anywhere else you listen, and as

625
00:27:27,040 --> 00:27:29,960
Speaker 2: always on the Bloomberg Terminal and the Bloomberg Business app.