Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. Let's talk about the
Speaker 2: future of this Federal Reserve, the White House casting a
Speaker 2: wide net to replace fed share, Japower, the US Treasury
Speaker 2: Secretary Scille Best and praising a quote very good meeting
Speaker 2: with the former Saint Lewis FED President Jim Bullard during
Speaker 2: his search. Jim joined us in a studio for more. Jim,
Speaker 2: good morning, Good morning, thanks for being here. Not many
Speaker 2: people get to experience what you've just experienced, sitting down
Speaker 2: for a conversation to potentially become the fed Share.
Speaker 3: Can you walk history what that was like, what's the
Speaker 3: process like?
Speaker 4: Well, as you say, they have a lot of a
Speaker 4: lot of people on the list, and they're following through.
Speaker 4: It's a transparent process. I think that's good. I think
Speaker 4: all the I know virtually all the people on the list,
Speaker 4: I think they're all good. So I think this was
Speaker 4: a meeting just to talk in broad terms, but I
Speaker 4: can't really report out, you know, details of what was said.
Speaker 2: The Treasury Secretary incredibly downed into the economy on financial markets.
Speaker 2: I'm sure you experienced that in your conversation with him.
Speaker 2: I think you can share with us the kind of
Speaker 2: questions I am matched that he's asking you when I
Speaker 2: ask them to you, which essentially is how do you
Speaker 2: view things right now? How do you think about the
Speaker 2: labor market?
Speaker 4: I thought the FEDS decision was a good one. Looks
Speaker 4: like a sequence of three moves in a row through
Speaker 4: the end of the year. Of course, you want to
Speaker 4: be data dependent, and the chair stress that in the
Speaker 4: press conference. But I think the committee was worried about
Speaker 4: the non farm payrolls report that you know, revised the
Speaker 4: previous months down considerably. You know, non farm payrolls is
Speaker 4: kind of the key number for the Fed, so I
Speaker 4: think that made them a little bit nervous. There are
Speaker 4: stories that you can tell about why that's happening. But
Speaker 4: on the other hand, you know, it could be weakness
Speaker 4: and labor markets. So I think that tilted things toward
Speaker 4: a little bit more dubbish policy. So they brought October
Speaker 4: into the picture, and now you've got markets pricing probably
Speaker 4: seventy five by the end of the year. That would
Speaker 4: be a significant move by the end of the year.
Speaker 4: And they have a little bit of optionality if the
Speaker 4: data goes the other way. So it's a pretty good
Speaker 4: decision from the point of view of how this works.
Speaker 5: You said, they have optionality if the data goes the
Speaker 5: other way. How high is the bar for strengthen the
Speaker 5: economy to really prevent the FED at this point, given
Speaker 5: everything from going three times this year.
Speaker 4: Yeah, I think the committee is also spooked a little
Speaker 4: bit by last year because last year the data looked
Speaker 4: weak but then turned around abruptly, and so they'll be
Speaker 4: nervous about that. It's hard to say exactly how high
Speaker 4: the bars acid judgment call will have to be made
Speaker 4: by members of the committee.
Speaker 5: There's this other disagreement on the FED. Clearly there are
Speaker 5: a lot of them, and understandably because in Wall Street
Speaker 5: there are a lot of disagreements as well as to what.
Speaker 6: The economic backdrop is.
Speaker 5: But you could see a spread in terms of where
Speaker 5: the neutral rate was from say three percent in terms
Speaker 5: of the long term job for some of the Fed numbers,
Speaker 5: or four percent for some of the others.
Speaker 3: Where do you sit.
Speaker 4: I think it's still fairly low, So you know, you
Speaker 4: could argue maybe three in a quarter or something like that.
Speaker 4: So if you're still above four percent with the policy rate,
Speaker 4: you're still one hundred basis points above if that's your
Speaker 4: If that's your number. So that's why I've been saying
Speaker 4: they have room to maneuver. They have room to come
Speaker 4: down some on the policy rate and still put downward
Speaker 4: pressure on inflation. Inflation is still above target, and you
Speaker 4: know it has been debated at length over the last
Speaker 4: six months or so, but I think they're in pretty
Speaker 4: good position right now.
Speaker 3: How credible do you think it pursue two percent actually is?
Speaker 4: I think the Committee is very dedicated to the two
Speaker 4: percent target. I think it would be foolish to abandon
Speaker 4: that target. It has set an international standard across all
Speaker 4: the countries of the world. And if the lead economy says, oh,
Speaker 4: you know, we're going to back off that then all
Speaker 4: the other countries would back off, you'd be back into
Speaker 4: the seventies and you'd have a lot of cash. So
Speaker 4: that is not a good idea, and the committee will
Speaker 4: try to get back to two percent. However, I think
Speaker 4: you want to get back in a nice, smooth, asymptotic
Speaker 4: path to two percent, and the forecasts always show that,
Speaker 4: and that's all is the way the Fed thinks about it.
Speaker 3: The two year rolling view.
Speaker 2: Now, some people might say that's aspirational, magical forecasting. It's
Speaker 2: just we're always forecasting this two years out but never
Speaker 2: actually hits it based on history, which raises the credibility question.
Speaker 2: The federal reserves cunning interest rates with inflation closer to
Speaker 2: three than it is to two, with unemployment closer to
Speaker 2: four than it is to five, and but that could
Speaker 2: ease it all time highs. Is this the right time
Speaker 2: to back away from that restrictive monetary policy that's going
Speaker 2: to lead to that glidepath back towards two percent.
Speaker 4: It's restrictive, but even when they come down, it'll still
Speaker 4: be somewhat restrictive. I think one of the pieces of
Speaker 4: risk management you have to think about here is suppose
Speaker 4: the economy is tipping into a March slowdown, then the
Speaker 4: Committee would want to be accommodative in that circumstance, and
Speaker 4: you'd want to be below your neutral rate, so you'd
Speaker 4: have a long way to go. You'd have to really
Speaker 4: scramble if that happened. I'm not saying that's the base case,
Speaker 4: but that's a possibility, and so you probably want to
Speaker 4: be a little bit closer to neutral, so you didn't
Speaker 4: have to work so hard if you got into that scenario.
Speaker 5: One of the tests for a lot of people is
Speaker 5: if inflation does go up, maybe say at the end
Speaker 5: of this year early next year, which a lot of
Speaker 5: people are expecting that it will, what's the Fed's response.
Speaker 5: Do they keep cutting or do they look past it
Speaker 5: is simply a one time price adjustment.
Speaker 4: I think they made pretty clear that they're going to
Speaker 4: look through temporary tariff effects and then they expect inflation
Speaker 4: to resume its downward trend and the effects have been muted.
Speaker 4: US Trade Representative does not have an inflation target, so
Speaker 4: I think that you know, it's up to the FED
Speaker 4: to determine what the inflation rate is going to be,
Speaker 4: not trade policy, but so lots of things affect inflation,
Speaker 4: and then you know, you have to get on your
Speaker 4: sort of medium term path, and I think that's what
Speaker 4: they're doing.
Speaker 5: You mentioned earlier that there is a degree of fear
Speaker 5: of repeating what we saw last year where they FED
Speaker 5: cut by a undred basis points and we saw the
Speaker 5: long end of the yield curve rise by one hundred
Speaker 5: basis points and economic data pickback up. And I just
Speaker 5: wonder how much you think the FED is open or
Speaker 5: you would be open if you are on the FED now,
Speaker 5: to adjust some of the balance sheet composition in response
Speaker 5: to any move in the long end of the yield curve.
Speaker 4: I think the balance sheet policy has been in the background.
Speaker 4: I think that's appropriate. The Committee has been shrinking the
Speaker 4: size of the balance sheet a little bit slower pace recently,
Speaker 4: but I think they're pretty happy with that policy for now.
Speaker 4: They want to get to this ample reserves level. There's
Speaker 4: a good speech by my former colleague Chris Waller and Dallas,
Speaker 4: so if you want some bedtime reading, you can read that.
Speaker 4: But that was actually a very good back of the
Speaker 4: envelope calculation about the balance sheet and all the pieces
Speaker 4: of the balance sheet. So I think that's a good
Speaker 4: place to start for those that want to understand current
Speaker 4: balance sheet policy. The mortgage backed securities are going to
Speaker 4: take a long time to go off. I do think
Speaker 4: the Fed made a mistake in March April of twenty twenty.
Speaker 4: We went all in on mortgage back securities, thinking that
Speaker 4: the pandemic was going to harm the housing market, and
Speaker 4: we got ninety two, one hundred and twenty days in
Speaker 4: and boy it went the other way. Demand for housing
Speaker 4: was way up. So unfortunately we added a lot of
Speaker 4: mortgage backed securities over that two year period, but we're
Speaker 4: going to have to let that gradually go off.
Speaker 3: Would you AFFCD it for fifty this week?
Speaker 7: No?
Speaker 4: I don't think so. So I thought it was a
Speaker 4: good decision because the Hawks could say that, Okay, we
Speaker 4: only went twenty five, and we got optionality on the
Speaker 4: future moves. But the Doves got the twenty five and
Speaker 4: probably twenty five at October, and that's almost as good
Speaker 4: as getting fifty today. And you do get the optionality
Speaker 4: in their says.
Speaker 2: When people talk about the institution, you know, so wow,
Speaker 2: just based on what you've just said, do you think
Speaker 2: people underestimate just how persuasi if you need to be
Speaker 2: on the committee, the degree of negotiations that do take
Speaker 2: place about the kind of things you just described.
Speaker 4: It's a it's a you know, it's a big formal meeting,
Speaker 4: and people are, you know, very good at making their arguments,
Speaker 4: and they have the presidents have their own staffs. So
Speaker 4: I mean, I love it. I think it's a great
Speaker 4: it's it's a great place to make decisions. I think
Speaker 4: also people have to understand that you're not talking so
Speaker 4: much about what you're going to do on the day.
Speaker 4: You're talking about what should our future path be over
Speaker 4: the next six months and over the next two years,
Speaker 4: but especially over the next six months, because you know,
Speaker 4: you have to it's a big committee and you have
Speaker 4: to be basically on board with you know, what you
Speaker 4: to do. On that particular day.
Speaker 5: You were very vocal about how you felt about the
Speaker 5: dot plot back in the day.
Speaker 6: Didn't like it.
Speaker 3: Bring this up.
Speaker 5: So significant to see your dot always just there at zero?
Speaker 3: Are you going to get rid of it? Would you
Speaker 3: get rid of it? I mean, what use?
Speaker 4: I think we can do better than we have on
Speaker 4: the dot plot. And at one point I talked about,
Speaker 4: you know, dropping out completely. I did drop out of
Speaker 4: the long long run dot part. But I think we
Speaker 4: could do something like former chair Ben BERNANKEI outlined in
Speaker 4: the recent conference that the FED had about the framework review,
Speaker 4: and he mocked up a quarterly report that that could
Speaker 4: be put out, and that would put out a forecast.
Speaker 4: That's what other central banks do, and then members can
Speaker 4: talk relative to that forecast. They could say, well, no,
Speaker 4: I'm more optimistic about the economy, or i more pessimistic
Speaker 4: about inflaier whatever. I think that would be closer to
Speaker 4: an international standard. And that's probably the direction this should
Speaker 4: go because the dot plot has its problems.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: Marissa Adams, the Europe and America's regional head of Global
Speaker 2: Trade Solutions at HSBC, IT joins us now for more.
Speaker 3: Marissa, welcome back.
Speaker 2: We've got lots to talk about with you, including the
Speaker 2: latest developments in the UK. I just want to start
Speaker 2: with mitigation strategies. It's something you give us an update
Speaker 2: on every time we talk. What are the mitigation strategies
Speaker 2: now and how sustainable are they are? We reaching a
Speaker 2: point where corporations have got to make a decision either
Speaker 2: custom costs or pass this on.
Speaker 1: Thanks Jonathan, and good morning to you and Lisa. We
Speaker 1: are getting to a bit of an impasse now where
Speaker 1: there is only so long that companies can delay their investments,
Speaker 1: delay their decisions in terms of rejigging their supply chains,
Speaker 1: are looking for new demand markets and we've obviously seen
Speaker 1: a lot of first movers actually act quite quickly. But
Speaker 1: we are getting to a point now where the uncertainty,
Speaker 1: rather than the level of tariffs, is going to be
Speaker 1: a challenge.
Speaker 5: Well you say that, and that a lot of people
Speaker 5: come on this show say peak uncertainty is behind us,
Speaker 5: and actually there is enough stability in the trade picture.
Speaker 3: I've lost you.
Speaker 1: I can actually hear you.
Speaker 5: Let's try to reestablish that, can you hear me? Now,
Speaker 5: let's try to reestablish that? Which on that line, that's
Speaker 5: the question to me, though, is you know she was
Speaker 5: saying that the uncertainty will still remain an issue while
Speaker 5: so many people have come on the show and talked
Speaker 5: about how there is a greater degree of certainty now
Speaker 5: which gives companies the ability to make the decisions you
Speaker 5: were talking.
Speaker 2: About, Francis Donald, what does she tell us RBC? She said,
Speaker 2: we're getting to the point Rissa Adams was alluding to it.
Speaker 2: We're getting to the point where corporation's got to think
Speaker 2: about what to do here. Cut costs, lay off labor,
Speaker 2: pass it on price hikes. It's exactly what my Gabe
Speaker 2: and Morcanstani's thinking about too. A lot of people might
Speaker 2: be surprised by this and say, you just market to market,
Speaker 2: you're pushing this off. Many people said at the very beginning,
Speaker 2: you're not going to see this overnight. It will take time.
Speaker 2: This is a process. First, you had to get through
Speaker 2: the pre tariff inventry. There have been other mitigation strategies
Speaker 2: that were implemented. Now we're going to get further and
Speaker 2: further through the year into the start of twenty six.
Speaker 2: You get close to decision time. It's a decision they're
Speaker 2: going to have to make.
Speaker 5: This is the reason why the Christmas shopping season and
Speaker 5: we keep talking about it and I realize it's still September.
Speaker 5: It's a reason why it's going to be so important.
Speaker 5: How much are consumers willing to accept some of the
Speaker 5: higher prices and how much will some of these companies
Speaker 5: have to continue with the cost mitigation plans. And that
Speaker 5: I think is what a lot of people were thinking
Speaker 5: about MRIs. I think we've re established you Sorry about
Speaker 5: the technical glitch. I'm wondering, can you get a sense
Speaker 5: of how much is hinging on the Christmas shopping season
Speaker 5: and the idea of how much consumers are really willing
Speaker 5: to adjust to higher pricing.
Speaker 1: You know, we've seen two sides of this too. I
Speaker 1: think firstly, we also saw the supply come forward for
Speaker 1: that shopping season, which is obviously critical, and we saw
Speaker 1: a lot of front loading coming through earlier in the year.
Speaker 1: But whether those costs of actually been passed on at
Speaker 1: this stage, I think is yet to be determined. I
Speaker 1: was in a large big box store yesterday and obviously
Speaker 1: all of the Christmas attire is in and all of
Speaker 1: those goods are there already, so I think that might
Speaker 1: be a little bit earlier than before. But whether they've
Speaker 1: actually passed on costs at this stage is yet to
Speaker 1: be seen. I think what's kind of interesting, and you
Speaker 1: know we've been talking about you alluded to at the
Speaker 1: beginning of the US and UK trade discussions. Obviously the
Speaker 1: trade state visit here from the President really interesting that
Speaker 1: whilst we obviously have this huge focus on goods trade
Speaker 1: and I've spoken about it before with both of you.
Speaker 1: Services trades really remains something credibly critical and actually very
Speaker 1: much an area where if you look at the economies
Speaker 1: of the future where we're trying to grow something that
Speaker 1: they're putting an extra emphasis on. The economic trade agreement
Speaker 1: that was reached in the particular the tech agreement that
Speaker 1: was announced about two hundred million in investment here into
Speaker 1: the UK really critical and we're seeing that clearly there
Speaker 1: are delays in some of the tariffs they're coming through
Speaker 1: on goods, but that isn't stopping business where services are
Speaker 1: a key component to actually growing and moving forward.
Speaker 5: So it means that the services businesses can have that
Speaker 5: greater degree of certainty to make decisions.
Speaker 6: I just wonder you talk.
Speaker 5: About a greater degree of coalescing around some sort of
Speaker 5: agreement between the US and UK. I want to talk
Speaker 5: about China and this phone call between Jijinping and President
Speaker 5: Trump later this morning, and I just wonder how much
Speaker 5: companies that you work with that you advise have completely
Speaker 5: written off China trade or have tried to completely immunize
Speaker 5: themselves from that supply chain just because there doesn't seem
Speaker 5: to be a definitive end to the uncertainty that you
Speaker 5: say is so paralyzing.
Speaker 1: So I think one of the key challenges with China
Speaker 1: and the US is that China supply chain is very
Speaker 1: very well built up. There's a huge amount of alliance
Speaker 1: between the China and the US on that. So the
Speaker 1: idea of shifting completely away just isn't really possible for
Speaker 1: a lot of companies, whether that's in consumer retail, automotive,
Speaker 1: some of the advanced manufacturing, even in the pharmaceutical sector.
Speaker 1: So there are obviously elements that they can rejig and
Speaker 1: look at other areas, but this is a critical goods
Speaker 1: supply chain for the United States, and any sort of
Speaker 1: certainty as that comes through on where those teriffs land
Speaker 1: will be welcomed by the corporates that we work with,
Speaker 1: stay with us.
Speaker 3: More Bloomberg Surveillance coming up after this.
Speaker 2: Joining us Now to extend the conversation, Jeanette lo A
Speaker 2: Shatigas Janette, welcome to the show.
Speaker 3: You just heard from Tanna.
Speaker 2: They're talking about Chinese and the lack of buying of
Speaker 2: soy beans here in America, important to core Republican districts
Speaker 2: and states in this country. Janette do you think we're
Speaker 2: any closer to nailing down those purchase agreements that really
Speaker 2: dominated the conversations back in the president's first term.
Speaker 8: Yeah, it's a great point, and thanks for having me on.
Speaker 8: So there's a lot of talk about whether or not
Speaker 8: there's going to be this grand deal between Shrump and she,
Speaker 8: and I think I'm a little skeptical about that happening.
Speaker 8: What we've seen is what Tayler kind of mentioned, it's
Speaker 8: this de escalationion. It's kind of meaning the status quo
Speaker 8: while there is this decoupling of the two countries.
Speaker 9: And you're seeing that with the fights over.
Speaker 8: Navidia ships and critical minerals coming to the US and
Speaker 8: then US sending ships over to China, and then also
Speaker 8: this piece about the agricultural the soybean purchases. So I
Speaker 8: think what they're trying to do is they're showing their
Speaker 8: pressure points on various sides to get a particular deal. This,
Speaker 8: I mean, may all be about TikTok, but then also
Speaker 8: trying to get some of these other pieces in place,
Speaker 8: trying to get companies in China to actually buy Navidiot
Speaker 8: ships after Trump said that he would allow that, getting
Speaker 8: them to actually buy these soybean purchases, which obviously, as
Speaker 8: you said, would be really important for critical constituencies in
Speaker 8: the US for political reasons. And so then that's kind
Speaker 8: of I think where we're going. So it's going to
Speaker 8: probably be a smaller deal, and trying to figure out
Speaker 8: how do we maintain some sort of status quote, how
Speaker 8: do we maintain some sort of good trade relations while
Speaker 8: at the same time we know both sides are kind
Speaker 8: of decoupling from one another.
Speaker 5: This is the reason why jedet I think a lot
Speaker 5: of people are trying to understand how transactional this relationship
Speaker 5: is and how rooted it is in ideology on this
Speaker 5: idea of national security and trying to immunize the respective economies.
Speaker 3: From one another.
Speaker 5: Is there any signal in what we might hear about
Speaker 5: from TikTok?
Speaker 8: Yeah, I mean, I think the one thing that would
Speaker 8: obviously be important is what does happen with the algorithm?
Speaker 8: I mean, the Trump has been less focused on the
Speaker 8: national security concerns that members of Congress have been with
Speaker 8: regard to the TikTok deal, and if that algorithm is
Speaker 8: still a licensed from byteedance, I think that's kind of
Speaker 8: a sign that this is a little bit more transactional
Speaker 8: and less about national security. But to the other point,
Speaker 8: Trump is really focused on other key sectors where that's
Speaker 8: really much more the focus for him for national security.
Speaker 8: So he's much more focused on doing more domestic manufacturing
Speaker 8: of semiconductors, pharmaceuticals, defense components, things of that nature in
Speaker 8: the United States. Tech obviously is a big piece of that.
Speaker 8: The AI race is a very big piece of that.
Speaker 8: I think that's also what his broader picture is. So
Speaker 8: being able to help in Navidia, I think would be
Speaker 8: more in stative, almost more than TikTok.
Speaker 5: FedEx came out last night and said that it was
Speaker 5: going to take a billion dollar hit partly because of
Speaker 5: Chinese deliveries that are going to be taken off the
Speaker 5: table for them or limited as a result of some
Speaker 5: of the changes in roles. A lot of companies have
Speaker 5: just moved on, and so have investors from this story.
Speaker 5: Is there anything that can come out of today or
Speaker 5: the next couple of weeks with the negotiations that you
Speaker 5: think a lot of companies, corporate executives, investors should be
Speaker 5: paying attention to that could reintroduce a level of uncertainty
Speaker 5: that really will make a difference.
Speaker 8: Yeah, I mean, I think the bigger story is actually
Speaker 8: I mean, so the call will be important in figuring
Speaker 8: out what deliverables there may be and whether there is
Speaker 8: something broader than when I outlined a few minutes ago.
Speaker 8: But I think also obviously what happens with the court
Speaker 8: case before the Supreme Court as to whether or not
Speaker 8: not the tears that Trump imposed under the AIPA Trade Authority,
Speaker 8: whether those can remain in place, that could be quite disruptive,
Speaker 8: because we do think that the President will has a
Speaker 8: backup plan that even if they're overturned by the Supreme Court,
Speaker 8: they will be reimposed under other means. And I think
Speaker 8: also we want to kind of watch to see if
Speaker 8: there is the opportunity for more other tree deals in
Speaker 8: this environment where we get more uncertain, and then also
Speaker 8: kind of looking at these exemptions that keep popping up.
Speaker 8: You know, we have the Japan tree deal on the
Speaker 8: talk about doing some exemptions for.
Speaker 9: Goods that the US doesn't produce.
Speaker 8: We don't mind here things that are important for aircraft
Speaker 8: and generic pharmaceuticals. And is there an increasing ability to
Speaker 8: get a hold of those exemptions. I think that could
Speaker 8: be important for the story larger going into the fourth
Speaker 8: quarter as well.
Speaker 2: Jeanette, this exemption story, I think coffee and that conversation
Speaker 2: that was sparked by the report coming from the Washington Post,
Speaker 2: I think is really important. A Republican from Nebraska, a
Speaker 2: Democrat from California reportably introducing your bill to exclude coffee
Speaker 2: from tariffs, and Jeanette, that bill may not go anywhere.
Speaker 3: I've got no idea.
Speaker 2: Perhaps it doesn't, but that's the first real sign I've
Speaker 2: seen of Congress starting to impose itself a little bit here.
Speaker 2: And I would love to get your perspective on this,
Speaker 2: whether you believe that might be the first step of
Speaker 2: many still to come further down the road. Yeah.
Speaker 8: I mean there was another story as well this week
Speaker 8: about how members of the House we're saying that they
Speaker 8: want a trade task course and they want to put
Speaker 8: a smaller limit on how long they can avoid trying
Speaker 8: to repeal the national emergency that Trump imposed for these terroiffts.
Speaker 8: And I think one of these issues is the consumer
Speaker 8: piece coffee, you know, bananas, things like that.
Speaker 9: Tuna is a one of those exemptions.
Speaker 8: So I think there's also a focus on where are
Speaker 8: costs actually hitting consumers, and then what is the trade
Speaker 8: piece and the trade authority. So it does seem like, yes,
Speaker 8: Congress is trying to maybe reassert itself. I don't necessarily
Speaker 8: know how much it'll authority you'll be able to claw back.
Speaker 8: I don't think the movement is that strong yet. But
Speaker 8: I think if there were to be, you know, a
Speaker 8: worsening economic situation, that is like kind of the emphasis
Speaker 8: that you would need to actually see that happen, and
Speaker 8: we don't see that happening in the near term.
Speaker 3: Stay with us. Multilemberg Savanna's coming.
Speaker 5: Up after this, Let's say, on this conversation, Claudia Som
Speaker 5: of New Centry Advisors writing this, it's dual mandate of
Speaker 5: maximum employment and price stability is intention cutting rates to
Speaker 5: reduce the downside risks to employment increases the upside risks
Speaker 5: to inflation. Claudia joins us. Now, Claudia, so great to
Speaker 5: see you. And this is really the point that we
Speaker 5: were trying to wrap our heads around. How much does
Speaker 5: an emphasis on growth, a prioritization of the employment market
Speaker 5: increase the risks of inflation in a way that isn't
Speaker 5: fully appreciated.
Speaker 6: Well, I think Powell is telling you is the feed
Speaker 6: appreciates this. There is a tension. Inflation is elevated, It's
Speaker 6: been elevated for more than four years, and it's probably
Speaker 6: going to go a little bit higher before it starts
Speaker 6: moving lower. Cutting rates is not going to help on
Speaker 6: the inflation side. So, but I think to your point,
Speaker 6: it's about which one is the more acute problem. We
Speaker 6: go into a recession, which is not the Fed's baseline,
Speaker 6: that is not my baseline, then we have a big problem.
Speaker 6: And so that's what the FED is reacting to. If
Speaker 6: inflation gets stuck, yes, that is a problem, and they
Speaker 6: will have to come back to that, and it may
Speaker 6: like cutting now may make that problem be real in
Speaker 6: the future, but it's not as acute. So it's this
Speaker 6: balance of risks that they're trying to sort you know,
Speaker 6: to sort out right now.
Speaker 5: And it's a balance of risks that seems to have
Speaker 5: allowed inflation to be above their two percent mandate for
Speaker 5: more than four years and potentially for six years based
Speaker 5: on their forecast going forward. Is this a FED that
Speaker 5: might say verbally two percent but might mean three percent.
Speaker 6: It's certainly a FED that has shown its willingness to
Speaker 6: give it time, right so the target is two percent,
Speaker 6: but the target doesn't say two percent next month, next year, right,
Speaker 6: They give themselves some runway to get there, and the
Speaker 6: tradeoff has been, you know, allowing the labor market to
Speaker 6: be more resilient. I mean, coming out of the surge
Speaker 6: of inflation in twenty twenty one and twenty twenty two.
Speaker 6: The FED could have gotten that down to two percent
Speaker 6: really fast, but we would have had to have a recession,
Speaker 6: a severe one to do that, and they chose not to. Right,
Speaker 6: So you know, there's there's no free lunch here, right
Speaker 6: Like these these the goals are intention and they still
Speaker 6: continue to navigate this. And I think if you really
Speaker 6: focus on and they say it in their framework, they
Speaker 6: look at like how far like employment or inflation is
Speaker 6: away from the goal and for how long it's going
Speaker 6: to be away from the goal? And so I think
Speaker 6: they made the right decision at this moment thinking about
Speaker 6: the employment data has been pretty soft and disconcerting, but
Speaker 6: keeping an eye on inflation at the same time.
Speaker 7: You know, Chloie, I think the point you made there
Speaker 7: about they could have brought inflation back to target more quickly,
Speaker 7: but chose not to. As investors, I think your performances
Speaker 7: was directly related to how quickly you realize that that
Speaker 7: reality that they simply were not willing to do what
Speaker 7: was necessary to get inflation back to target. But I
Speaker 7: do want to ask you just to pivot a little
Speaker 7: bit off of what you were saying and what we're
Speaker 7: discussing here with inflation as point blankly as I can
Speaker 7: or tariff's inflation.
Speaker 6: Tariffs are going to increase prices, right, so there is
Speaker 6: a period inflation is an increase in prisis, so there
Speaker 6: is a period where it appears likely that they are
Speaker 6: putting upward pressure and it's not just relative price changes.
Speaker 6: But I agree with the sentiment that it is a
Speaker 6: one time price level adjustment, right, so it's not inflationary
Speaker 6: in the sense of creating inflation forever. But I do
Speaker 6: get very concerned, and I frankly think the FED maybe
Speaker 6: downplaying this risk somewhat at this point that as you've
Speaker 6: had inflation hired closer to three percent for some time,
Speaker 6: people are just going to build that in Like not
Speaker 6: everybody's running a model of tariff effects and this and that,
Speaker 6: and the FED independent, you know, like they just see
Speaker 6: inflation and then when they have to plan for the
Speaker 6: future a business or a family. They just kind of
Speaker 6: use what they've seen recently. So I do worry there's
Speaker 6: this creep of we just start building in the higher
Speaker 6: inflation and then that that's where we get starck.
Speaker 7: I agree with you conceptually. Obviously we view things through
Speaker 7: the prism of inflation expectations, and you don't want consumers
Speaker 7: to start adjusting behavior in that way. But what you
Speaker 7: just articulated there was a worry that consumers would start
Speaker 7: thinking about it this way. But isn't it fair to
Speaker 7: say that the worry about future inflation expectations should be
Speaker 7: treated subordinate to the reality of the slowdown in the
Speaker 7: private sector job market?
Speaker 6: But I think, I mean, you need to think of
Speaker 6: the price setting process and the way people the way
Speaker 6: businesses make decisions, the way they forecast their decisions is
Speaker 6: an important one to make. So I don't want to
Speaker 6: downplay the expectations. I will say there's another piece thinking
Speaker 6: about inflation dynamics going forward, which is really the question,
Speaker 6: like what is this doing to inflation two years from now,
Speaker 6: three years from now? Is to think about this. These
Speaker 6: tariffs are part of a major reshuffling of global trade,
Speaker 6: and we have benefited. One of the pull down on
Speaker 6: inflation that we've seen for many years in the United
Speaker 6: States is through good imported goods. We have trade, we
Speaker 6: have innovation, like that's actually been something that helps hold
Speaker 6: inflation down. And even if it's not like a big effect,
Speaker 6: losing that actually could give some lift to inflation over time.
Speaker 6: So it's not just about what's in people's heads, like,
Speaker 6: we really are reshuffling the deck in terms of the
Speaker 6: way trade is done and the way the goods come
Speaker 6: into the country.
Speaker 5: And this is one reason why some people are saying
Speaker 5: it's so hard to get a handle on exactly what
Speaker 5: the new neutral rate is and how much higher inflation
Speaker 5: just naturally will be in the economy. Claudia, You've researched
Speaker 5: the labor market for a very long time, and I
Speaker 5: wonder whether it makes sense to run the economy hot,
Speaker 5: to run the labor market hot at a time of
Speaker 5: dramatic transition in terms of the AI shifts, how quickly
Speaker 5: that's changing some of the job roles, the necessity for
Speaker 5: companies to actually invest in reskilling a lot of people.
Speaker 3: Do you think that this is there of a new.
Speaker 5: Priority that necessitates a faster pace of growth.
Speaker 6: It's a difficult dynamic to make. I mean, running the
Speaker 6: economy hot when we already have inflation that is elevated.
Speaker 6: I mean, that's really a risky scenario. And I will say,
Speaker 6: you know, just seeing like the Michigan Survey household survey
Speaker 6: is coming out again, people are very clear, like when
Speaker 6: they talk about what's wrong, like they're pretty pessimistic. Higher
Speaker 6: prices is still a big issue. So inflation has come
Speaker 6: down a lot, but it accumulates over time. So there
Speaker 6: there's not an easy answer to that question. And a
Speaker 6: lot of it is gauging as to exactly how hot
Speaker 6: we're running it. Like I think you can make an
Speaker 6: argument on the margin for maybe you know, going on
Speaker 6: the side of let's let employment run, let's let investment run,
Speaker 6: but you have to be careful because some of the
Speaker 6: discussions about let's have a federal funds rate of say
Speaker 6: one percent, that's not an on the margin discussion. That's
Speaker 6: like a big overturning of like how hot we're willing
Speaker 6: to go. And I think there we need to be
Speaker 6: very careful because inflation is not something that people handle well.
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