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 Amrie Hortern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App.
Speaker 3: I'm joined now by someone who intimately understands the FED
Speaker 3: was there for ten years and most recently was the
Speaker 3: FED Vice chair under J.
Speaker 1: Powell, who is still.
Speaker 3: Now the chair, and that's of course Lale Brainerd. Lale,
Speaker 3: thank you so much for joining us this morning. As
Speaker 3: we see this standoff between President Trump and Governor Cook,
Speaker 3: we have yet to hear from the FED itself.
Speaker 1: What kind of response do you think we can expect
Speaker 1: from the institution?
Speaker 4: Well, I think the Federal Reserve is an incredibly difficult
Speaker 4: position here. But you have to remember this is not
Speaker 4: about an individual governor. This is really an unprecedented attack
Speaker 4: on the independence of the Federal Reserve as an institution.
Speaker 4: There is nobody in the Federal Open Markets Committee, the
Speaker 4: Monetary Policy Setting Committee that can't be thinking well, what
Speaker 4: does this mean for me? And so any member of
Speaker 4: the board presumably is going to worry that they too
Speaker 4: could be subject to this kind of political pressure, and
Speaker 4: that fundamentally undermines the institutional independence of the Fed, which
Speaker 4: means higher inflation, potentially less credibility, even higher long term
Speaker 4: interest rates bad for the economy.
Speaker 3: Do you think this can actually impact how members are
Speaker 3: thinking about monetary policy?
Speaker 4: Well, I just think the implication if any member of
Speaker 4: that board could come under this kind of political pressure
Speaker 4: from the White House, and of course we saw that
Speaker 4: kind of pressure on the chair earlier this year. I
Speaker 4: think that does really put a higher premium on whether
Speaker 4: they're going to be willing to speak their minds to
Speaker 4: to sent on key votes if necessary. I think it
Speaker 4: really does create unprecedented risks.
Speaker 3: The President's letter talked about this mortgage allegation fraud in
Speaker 3: the mortgage world for Governor Cook, what if she was
Speaker 3: charged or convicted?
Speaker 4: Well, I think what is important here is due process
Speaker 4: and undertaking a real investigation and having the facts on
Speaker 4: the table, and the ability for her to defend herself legally.
Speaker 4: None of that has taken place here. The White House
Speaker 4: has preempted the process, and so that is why it's
Speaker 4: really unprecedented. It's very, very threatening to the very independence
Speaker 4: of the Federal Reserve, and it should cause concerns, I think,
Speaker 4: among investors and more broadly about that fundamental underpinning of
Speaker 4: our strong economy and our strong financial markets.
Speaker 3: Given this is just about one individual, does the Fed
Speaker 3: come out and say something or do they need to
Speaker 3: wait until that due process takes place.
Speaker 4: So the Federal Reserve as an institution is all about
Speaker 4: due process, and there have been individuals who have had
Speaker 4: investigations previously. There's a good process for doing that. That's
Speaker 4: not what's taking place here. This is really about trying
Speaker 4: to overturn the majority of the Board of Governors, long
Speaker 4: before any of these governor's terms are up, by threatening
Speaker 4: them with these kinds of investigations and firing without real
Speaker 4: due process and cause. And again, the Federal reserves independence
Speaker 4: really is at stake here, and that means that monetary
Speaker 4: policy will increasingly be overshadowed by concerns that there's political interference,
Speaker 4: whether or not that is actually the case if you
Speaker 4: think about it. J Powell opened the door for an
Speaker 4: interest rate cut in September very clearly. That's exactly what
Speaker 4: the president wants, so monetary policy is actually moving his way.
Speaker 4: And yet this is a very very aggressive attack on
Speaker 4: the Federal Reserve when monetary policy is doing exactly what
Speaker 4: he's been calling for.
Speaker 3: That speech the Fed Chair gave a Jackson holl just
Speaker 3: on Fridays, very different from how he sounded J Powell
Speaker 3: four weeks ago. Do you think the speech was political?
Speaker 4: Well, I think that the Chair was very careful in
Speaker 4: laying out that the balance of risks had shifted. He
Speaker 4: pointed specific to the possibility that the labor market is
Speaker 4: weakening faster than the members of the FLMC had believed
Speaker 4: in their last meeting because of the revisions to three
Speaker 4: months worth of hiring data, and so he laid out
Speaker 4: a very I think strong case based on data and
Speaker 4: the facts, why they were now potentially going to be
Speaker 4: more attentive to that labor market weakening, while acknowledging that
Speaker 4: inflation is still likely to go up because of the
Speaker 4: very high tariffs that have been put in place.
Speaker 3: Knowing the data and knowing all the personnel that are
Speaker 3: going to get together at the next FED meeting September seventeenth,
Speaker 3: do you expect them all to walk through that door
Speaker 3: that the FED chair opened up for a cut.
Speaker 4: Well, I don't know if all members of the FMC
Speaker 4: will be in the same place, and of course what
Speaker 4: we should hope for is a really good debate and
Speaker 4: an airing of differing views. But I do think that
Speaker 4: barring something really surprising in the upcoming employment print and
Speaker 4: CPI print, it's more likely than not that they will
Speaker 4: vote for a twenty five basis point reduction in the
Speaker 4: federal funds rate.
Speaker 3: Do you think there's a bias to the labor market
Speaker 3: in this federal reserve?
Speaker 4: So up until this point, I think what we've heard
Speaker 4: is a lot of discussion about the potential risks to inflation.
Speaker 4: Inflation is still high. It is between two and a
Speaker 4: half and three percent, and while this time last year
Speaker 4: it was going in the right direction moving down to
Speaker 4: the two percent target, this year is actually moving up.
Speaker 4: So we have heard a lot of attention to inflation,
Speaker 4: appropriately so, but the Chair acknowledged that they are balancing risks,
Speaker 4: risks of higher inflation risks of lower employment, and that
Speaker 4: is exactly what you expect from tariffs, a stagflationary shock.
Speaker 3: When he was talking about tariff's he said that it's
Speaker 3: not going to come all at once. The impact is
Speaker 3: the fedcher basically signaling to the market and to us
Speaker 3: to just look through any potential hot CPI prints that
Speaker 3: come out between now in the next twelve months.
Speaker 4: So my interpretation of that discussion is simply to acknowledge
Speaker 4: that when the labor market starts to turn down, unemployment
Speaker 4: often doesn't gently move up, and the Federal Reserve doesn't
Speaker 4: have a lot of time to react. Unemployment often jumps higher.
Speaker 4: Whereas because the tariffs have changed a number of times
Speaker 4: and still do not seem to be settled, because businesses
Speaker 4: were so good at getting inventories in ahead of time,
Speaker 4: because consumers did a lot of advanced purchases, those tariffs
Speaker 4: are working their way into prices more slowly. So I
Speaker 4: think it was just an acknowledgement of different potential timing
Speaker 4: on the two legs of the dual mandate.
Speaker 3: It felt like Chair Powell was coming around to how
Speaker 3: Governor Waller thinks, or maybe how Governor Bowman thinks. And
Speaker 3: I want to end on those two individuals their names
Speaker 3: potentially to be the next FED chair.
Speaker 1: Their scenario. People are talking about that.
Speaker 3: All the presidents' terms need to be renewed in February.
Speaker 3: Would you see a situation or risk at the FED
Speaker 3: Board when next multiple presidents at the bidding of the
Speaker 3: President of the United States.
Speaker 4: Well, I think that is exactly the risk that we
Speaker 4: are seeing play out right now. So by moving preemptively
Speaker 4: to remove a governor from the Federal Reserve without going
Speaker 4: through the process, without there being any clear evidence, the
Speaker 4: President essentially is moving to shift the majority of the
Speaker 4: Board of Governors well before what was contemplated in terms
Speaker 4: of the institutional structure in their terms. And that opens
Speaker 4: the door when renewals of all of the Reserve Bank
Speaker 4: presents come up in February, to again take very unprecedented
Speaker 4: actions and potentially not renew some of them in order
Speaker 4: to shift the overall voting majority on the FMC. That
Speaker 4: is an unprecedented attack on the independence of the Federal
Speaker 4: Reserve and it should really concern us about their ability
Speaker 4: to continue to be credible in fighting inflation and keeping
Speaker 4: our economy on a strong course.
Speaker 1: Which is quickly.
Speaker 3: You know, Governor Bowman and Waller, do you think they
Speaker 3: would be up for that kind of level of revamping.
Speaker 4: So this is really not about individual members of the
Speaker 4: board or the FMC. This is really about whether political
Speaker 4: pressure will continue to be exerted on all members of
Speaker 4: the FLMC in a way that puts them in jeopardy
Speaker 4: and potentially makes them less willing to share their views
Speaker 4: about the economy and appropriate monetary policy with the public
Speaker 4: and also to vote their mind on monetary policy decisions.
Speaker 4: That is what is at stake here, and I think
Speaker 4: it's very concerning.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Joining us now to extend the conversation, the former New
Speaker 2: York Fed President Bill Dudley. Bill, welcome to the program.
Speaker 2: Extensive experience the Federal Reserve inside that institution. How do
Speaker 2: you think they'll be responding to this this morning?
Speaker 5: They're going to be very unhappy because this is a
Speaker 5: real assault on the Federal reserves independence. And as we know,
Speaker 5: central banks independence is really important for good economic outcomes.
Speaker 5: There's been a reason why we've been moving in the
Speaker 5: direction of greater central bank independence over the least four decades.
Speaker 5: Across the world because central banks that have independence in
Speaker 5: terms of how they conduct monetary policy to achieve the
Speaker 5: objectives set for them by Congress and the administration do
Speaker 5: a better job in controlling inflation and keeping the economy
Speaker 5: on a stable path.
Speaker 1: So this is assault on that.
Speaker 5: And I'm sorry of surprised that the markets are so
Speaker 5: relaxed about this.
Speaker 1: Now.
Speaker 5: Maybe that's because we don't know where this is going
Speaker 5: to go. We don't know whether Lisa Cook is going
Speaker 5: to be able to stay in office. It certainly looks
Speaker 5: like the barf to getting her out is quite high,
Speaker 5: because it doesn't seem that the for cause would extend
Speaker 5: to the allegations against her. But she certainly a very
Speaker 5: minimum deserves her day in court.
Speaker 6: Well, Bill, it seems like that is the system that
Speaker 6: is emerging, that we're understanding the contours of FED independence
Speaker 6: from the courts. Be it the most recent ruling that
Speaker 6: said other independent agencies could have their heads fired by Trump,
Speaker 6: but not necessarily the FED without cause. This maybe defining
Speaker 6: having the courts define what causes. If you have a
Speaker 6: system where it's not encoded in law but instead is
Speaker 6: being interpreted by the courts, what does that say about
Speaker 6: the fragility or the stability of FED independence.
Speaker 5: Well, it sort of has to be interpreted by the
Speaker 5: course because this is there's no precedence for this. We
Speaker 5: don't really know what the law is until the courts
Speaker 5: actually rule on it. So the courts have to decide
Speaker 5: what's the law intended to do. I think most people
Speaker 5: think that, you know, what Lisa Cook did does not
Speaker 5: represent four clause dismissal from her governorship. But it's up
Speaker 5: for the courts to adjudicate that.
Speaker 6: So, Bill, if we're in a scenario where it seems
Speaker 6: like we might be that this is a FED that
Speaker 6: wants to start to ease policy that it wants to cut,
Speaker 6: but because of all these proceedings in the background, you
Speaker 6: get some real tension on the long end of the curve.
Speaker 6: What would the FED do in that case that it
Speaker 6: wants to cut, it wants to ease, but the markets
Speaker 6: do something different.
Speaker 5: Well, I think the Federal do what it thinks is
Speaker 5: appropriate to achieve its subjectives on employment and inflation and
Speaker 5: policy certainly signals that his jackson will remarks that he's
Speaker 5: worried about the downside risk to the labor market more
Speaker 5: than he's worried about the upside risk to inflation, and
Speaker 5: so his view that Manterrey policy is currently restrictive. He
Speaker 5: basically set a signal that is highly likely the Fed
Speaker 5: is going to cut rais and September. And I don't
Speaker 5: think this changes any of that. What it does change
Speaker 5: is down the road when the Federal Reserve acts. When
Speaker 5: the Federal Reserve, if they cut rates at subsequent times,
Speaker 5: is that because they think that's the appropriate thing to
Speaker 5: do for the economy, or because it's because they're under
Speaker 5: pressure from the Trump administration. Putting a lot of pressure
Speaker 5: on a central bank is in my mind, somewhat counterproductive
Speaker 5: because it basically causes people to start to wander is
Speaker 5: a central bank doing what is appropriate to achieve its
Speaker 5: objectives or is it caving into pressure from the administration.
Speaker 2: Well, you've got great contacts. Do you sense that shift
Speaker 2: is already underway?
Speaker 5: No, I don't think so. I think there is a
Speaker 5: case to cut rates in September. I'm not sure I
Speaker 5: would be in that camp. I'm not as convinced that
Speaker 5: monetary policy actually is restrictive today, and I am more
Speaker 5: worried that the rise in inflation caused by the path
Speaker 5: through of the tariffs. Will you could be end up
Speaker 5: being more persistent than Paul does. But that's a reasonable
Speaker 5: point of disagreement. I think that if the Fed cuts
Speaker 5: rates in September is not a big event. The market
Speaker 5: certainly anticipates rate cuts over the next year. They expect
Speaker 5: the Fed eventually to cut race back down to what
Speaker 5: they view as sort of a neutral a federal fund
Speaker 5: rate of around three to three and a half percent.
Speaker 2: Go out of interest. Why are you more concerned about inflation?
Speaker 2: In very simple terms, the Fed share has basically come
Speaker 2: out and said he's not worried about upside risk to
Speaker 2: inflation because of the downside risk to employment.
Speaker 1: What makes you more concerned, Well.
Speaker 5: Four years of being above your inflation to objective, and
Speaker 5: every year you're above your inflation objective, that increases the
Speaker 5: risk that people start to view this is the steady state,
Speaker 5: and then that starts to flow into wage settlements, and
Speaker 5: then it becomes very difficult to get rid of the
Speaker 5: inflation that's been embedded in the system at that point.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after.
Speaker 1: This significant escalation.
Speaker 3: When it comes to the President and this standoff with
Speaker 3: Governor Lisa Cook. This really stems from FHAFA director Bill
Speaker 3: Poulti talking about the fact that they think she committed
Speaker 3: mortgage fraud.
Speaker 1: These are allegations.
Speaker 3: The President down has letter last night Jonathan saying the
Speaker 3: American people must be able to have full confidence in
Speaker 3: the honesty of the members entrusted in setting policy and
Speaker 3: overseeing the Federal Reserve.
Speaker 1: We're now joined by.
Speaker 3: Scott Linscombe of the Cato Institute. He works on general
Speaker 3: economics and trade. Scott, thank you so much for joining
Speaker 3: us this morning. Just your reaction to this headline overnight.
Speaker 7: I'm can't say I'm surprised given the run up and
Speaker 7: some of the statements from the Trump administration already. But look,
Speaker 7: that doesn't mean that this isn't a significant move. You know,
Speaker 7: the independence of the FED is extremely important for US
Speaker 7: monetary policy in the US economy. We you, Cato and elsewhere,
Speaker 7: have always been concerned about isization of the FED. But
Speaker 7: this is now going in the wrong direction, right. It
Speaker 7: is pushing us more towards politicized monetary policy, and quite frankly,
Speaker 7: you know, it's not something that appears justified by the
Speaker 7: numbers in terms of absolutely necessitating some.
Speaker 1: Sort of rape cup.
Speaker 7: When you look at core CPI still above three flash
Speaker 7: pm I last week showing significant price pressures. The idea
Speaker 7: that you know, this is just a Racalca Trent FED
Speaker 7: fighting the president's whims our needs is not really held
Speaker 7: up in the data.
Speaker 1: Does the market actually believe it yet?
Speaker 3: How do you see this playing out, this fight between
Speaker 3: Governor Cook and the President of the United States.
Speaker 7: Yeah, I mean, I think some of the calmness in
Speaker 7: the market probably stems from the fact that it's not
Speaker 7: one hundred percent clear that they can do this Cook
Speaker 7: and her legal team saying they're going to fight it.
Speaker 7: In that, you know, it appears to be I think
Speaker 7: giving some people some thoughts that, you know, maybe the
Speaker 7: independence of the FED still intact. But that being said, look,
Speaker 7: this Trump is a persistent guy. We know this, and
Speaker 7: I don't think we should be too confident that this
Speaker 7: is this is going away anytime soon. Regardless of how
Speaker 7: this particular spat turns out.
Speaker 1: Whether it's the FED, whether it's trade.
Speaker 3: We like to see the President United States put his
Speaker 3: thumb on the scale.
Speaker 1: He takes an interventionist approach. You wrote about that this.
Speaker 3: Week in the Washington Post when it comes to Intel.
Speaker 3: What kind of president do you see Trumps setting for
Speaker 3: future administrations.
Speaker 7: It's a lot of troubling precedent. I mean, beyond the
Speaker 7: pressuring the Fed. Now, you know, you have the state
Speaker 7: taking big stakes in private companies like Intel, not during
Speaker 7: a great recession or wartime, but in peacetime and doing
Speaker 7: it clear under a pretty clear pressure and coercion from
Speaker 7: the overall office. Of course, you have all the import
Speaker 7: substitution in tariffs and uncertainty and trade deals, which is
Speaker 7: also all executive power as well. You know, it makes
Speaker 7: you wonder where the heck Congress is all in this,
Speaker 7: But it also makes you think what the next president's
Speaker 7: going to.
Speaker 1: Be able to do.
Speaker 7: You know, Bernie Sanders was cheering Trump's Intel move, and
Speaker 7: you could very well have a Democratic president that picks
Speaker 7: up these very same precedents and pushes even further into
Speaker 7: an interventionist executive branch acting unilaterally, and that's of course
Speaker 7: going to raise serious issues, serious problems for the health
Speaker 7: of the US economy.
Speaker 3: Well, the President also said he would be interested in
Speaker 3: maybe striking more deals like this. Are there companies that
Speaker 3: you're looking at that potentially we can see a similar
Speaker 3: approach from this White House.
Speaker 7: Yeah, you know, as I wrote in the post, if
Speaker 7: any company that's taken subsidies from the US government and
Speaker 7: happens to be located in a strategic industry by the
Speaker 7: executive branches, definition should be a little bit concerned. The
Speaker 7: fact is that we now have national security investigations in
Speaker 7: the trade space on a whole lot of products, not
Speaker 7: just chips and steel and aluminum.
Speaker 1: In others.
Speaker 7: We've already seen a golden share for US steel. We've
Speaker 7: already seen investments in MP materials, which is in the
Speaker 7: rare earth space. So I think there's no question that
Speaker 7: companies that have some sort of dealings with the US
Speaker 7: government in these strategic industries may be the nets to
Speaker 7: get a call from the Oval Office.
Speaker 3: Trump has talked about building the US Sovereign Wealth Fund.
Speaker 3: Is that what all of this is leading towards?
Speaker 1: Well?
Speaker 7: Any C Director Kevin Hassett basically said as much yesterday
Speaker 7: that they're using a lot of the industrial policy that
Speaker 7: was implemented during the Biden years through the Inflation Reduction Act,
Speaker 7: the Chips Act, the Infrastructure Bill, and some other exiscuative
Speaker 7: authorities to basically reverse engineer a Sovereign Wealth Fund, which
Speaker 7: Trump is long wanted. And this, again, I think is
Speaker 7: a concern for companies that have taken some of these,
Speaker 7: you know, ups of trillions of dollars in government subsidies.
Speaker 7: But it's also I think, you know, a cautionary tale
Speaker 7: about US industrial policy generally. Now, this stuff maybe starts targeted,
Speaker 7: but tends to have a way to spiral out of control.
Speaker 3: Scott, I just want to end on another truth last
Speaker 3: night from the President, not getting as much attention what's
Speaker 3: going on at the Federal Reserve, he said he's going
Speaker 3: to stand up to countries that attack US tech because
Speaker 3: of things like digital services.
Speaker 1: What does this mean for the European Union.
Speaker 3: Given the fact that the President has already struck a
Speaker 3: trade deal.
Speaker 7: With them, Well, I think it should tell the European Union,
Speaker 7: Japan and anybody else that these trade deals that they
Speaker 7: signed over the last couple of months are never really finished.
Speaker 7: You know, digital services taxes were supposed to be an
Speaker 7: issue you in the EU negotiations. The Europeans resisted any changes.
Speaker 7: They signed this big deal, which most people saw as
Speaker 7: a pretty huge cave by the Europeans. And here we
Speaker 7: are just a couple of weeks later and Trump's asking
Speaker 7: for more. So, you know, for those who think, especially
Speaker 7: in the market, who think these trade deals have settled
Speaker 7: down the tariff space, well think again.
Speaker 2: Stay with us multil impax surveillance coming up after this,
Speaker 2: John Guess around a table, Tolston smock of Apollo Toaston,
Speaker 2: good monic, Morning morning. Your reaction to this one.
Speaker 8: Well, obviously the market reaction here is a little bit
Speaker 8: surprising in the sense that the stock market is basically
Speaker 8: now want changed, at least before we opened. By what
Speaker 8: you're seeing in the long end is certainly somewhat worries
Speaker 8: on the Yulcovist evening telling you that the market is
Speaker 8: expecting that ray cuts are coming, because this seems to
Speaker 8: be at least more likely given recent discussions including j.
Speaker 8: Powell on Friday, but also that the long end has
Speaker 8: moved higher. It's obviously equivalent to beginning to think about
Speaker 8: that maybe there is a risk that inflation is going
Speaker 8: to be a problem for a longer period than what
Speaker 8: people thought just a few days ago. The conclusion from
Speaker 8: a broader perspective is obviously a discussion around well, maybe
Speaker 8: we should just begin to think about when we say
Speaker 8: rates are higher for longer, then maybe it's long rates
Speaker 8: that will be higher for longer, not only for fiscal reasons,
Speaker 8: but also now because of this emerging debate, not only
Speaker 8: because of what Powell said last Friday in Jackson Hole
Speaker 8: about the framework, but also about this issue now about well,
Speaker 8: what would the composition of THEBC look like? Are they
Speaker 8: going to allow essentially the inflation target to be higher
Speaker 8: than what it has been just for the last several years.
Speaker 6: Trsten really zeroing in on the shape of the yield
Speaker 6: curve though, and talking about duration getting hit.
Speaker 1: It is the thirty year yield.
Speaker 6: It's a ten year yield which hasn't moved as much,
Speaker 6: and you'd expect if the issue is is more persistent inflation,
Speaker 6: the ten year yield also would be moving on higher
Speaker 6: tens thirties curve is the steepest since twenty twenty one.
Speaker 6: Why is the thirty yearield specifically acting as the release valve.
Speaker 8: Well, there's just more sensitivity in the form of duration
Speaker 8: and the very long end. So ten year rates of
Speaker 8: course are not down as much as two year rates are.
Speaker 8: So really it is the whole yeel curve that is
Speaker 8: just steeper, And you're right the tenure rate basically being
Speaker 8: only down a little bit here as we speak, is
Speaker 8: certainly also telling us that it really is the very
Speaker 8: long duration exposure. Those with very long duration exposure relative
Speaker 8: to matching their long duration liabilities, they are the ones
Speaker 8: that are reacting to this, mainly worrying about that thirty
Speaker 8: year is where most of the action has been. But
Speaker 8: you're right, it is a little bit peculiar. We look
Speaker 8: at it here and say, well, why thirty is moving
Speaker 8: so much more than tens But I think it is
Speaker 8: just the reflection of the whole yell curve s deepening
Speaker 8: here that is going to take some time now to digest.
Speaker 8: And as Mike also was just saying, well, what exactly
Speaker 8: will be this scenario we have now ahead of us.
Speaker 8: Is this going to change the composition of their FIRMC
Speaker 8: or what will their FIRMCEE then look like, especially when
Speaker 8: we come to the other side of.
Speaker 1: February next year.
Speaker 6: So is it your assumption, if we get more doves
Speaker 6: appointed to the FOMC, more people who are maybe willing
Speaker 6: to listen to the arguments of the White House, that
Speaker 6: it's the inflation target that changes that.
Speaker 8: That's the main mechanism I absolutely think that we should
Speaker 8: all think of this as essentially a change in the
Speaker 8: inflation target. We have now for thirty forty years, been
Speaker 8: used to the inflation target is two percent. If I
Speaker 8: own treasuries, my fixed income PORTFOLI will be eroded by
Speaker 8: two percent every year, and inflation now is allowed to
Speaker 8: be higher for longer, and if Jpower now last Friday
Speaker 8: is said that the change and framework away from flexible
Speaker 8: average inflation targeting also will allow inflation to be higher
Speaker 8: for longer. That means that bond investors should begin to
Speaker 8: think about that. It is simply the same as saying
Speaker 8: that the inflation target will also be higher, not necessarily
Speaker 8: significantly higher than two, but even if we grow up
Speaker 8: to two and a half and three over time, that's
Speaker 8: a fairly significant erosion for fixed income investors, especially in
Speaker 8: public markets.
Speaker 2: Houston, They's some really important, critical, serious points. But this
Speaker 2: has happened independent of the pressure on central bank independence.
Speaker 2: The whole points of central bank independence is to make
Speaker 2: the tough decisions divorced from political cycle, to make sure
Speaker 2: that you hit your two percent target. So what is
Speaker 2: the excuse for Shair and Pound and the Federal Reserve
Speaker 2: to miss this target for so many years.
Speaker 8: Well, the issue, of course at the moment is that
Speaker 8: normally the dual mandate, meaning inflation and unemployment, normally points
Speaker 8: in the same direction. If you have a strong economy,
Speaker 8: an employment rate goes down, inflation goes up, and you
Speaker 8: should hike rates. If you have a weak economy, the
Speaker 8: opposite happens. Of course, inflation goes down and growth goes down.
Speaker 8: Of course you should be cutting rates. Now there is
Speaker 8: this tension in the dual mandate, and that is what
Speaker 8: brings this discussion to the table. Maybe that now the
Speaker 8: dual mandate is pulling in different directions. Inflation is saying
Speaker 8: the feed should be hiking. And if we have upward momentum,
Speaker 8: if I look at ECFC go on my Bloomberg screen,
Speaker 8: the CONTENTSUS expecs inflation for the next twelve months to
Speaker 8: be three percent for the next four quarters. That's a
Speaker 8: very high level of inflation when the target is two.
Speaker 8: That says that the Fed should even consider hiking rates.
Speaker 8: But at the same time, Pial very clearly last Friday
Speaker 8: said no, no, we're not going to put much more
Speaker 8: weight on the slowdown on the label market, and with
Speaker 8: the anchoring in the long term inflation expectations. That could
Speaker 8: be the use and the reason the small door out
Speaker 8: of saying well, maybe we don't need to worry so
Speaker 8: much about inflation, maybe we can focus more on the
Speaker 8: label market. So the answer to your question is it's
Speaker 8: because of the tension in the dual mandate that one
Speaker 8: part of the dual mandate it says that should be
Speaker 8: hiking and the other part says it should be cutting.
Speaker 8: And that's what brings this discussion to the table at
Speaker 8: the moment about what exactly is the best decision.
Speaker 1: As you know the weather.
Speaker 2: Addressing that at the moment is to say, essentially, and
Speaker 2: this is coming from the FED share governor want of shares,
Speaker 2: this view, the labor market's not sufficiently tight enough to
Speaker 2: worry about second round effects that this inflation story will
Speaker 2: ultimately be. They won't say it, but they're basically spanning
Speaker 2: it out transit tree, which you push back against that.
Speaker 8: Well, the risk is that we don't know if that's
Speaker 8: the case. But Hammock at the Cleveland Fed has been
Speaker 8: pointing out that companies and her district are beginning to
Speaker 8: raise prices, even those that are not impacted by teriffs.
Speaker 8: So the risk is also in services inflation. Services makes
Speaker 8: up two thirds of GDP, and the ism prices paid
Speaker 8: in services has really started going up, and that suggests
Speaker 8: that even and Austin Goldby was also pointing to this,
Speaker 8: that even the service part of the CPI index could
Speaker 8: begin to show some up pressure. So we just don't
Speaker 8: quite know if we're out of the woods on the
Speaker 8: inflation front. So that's also why inflation swaps in twelve
Speaker 8: month's time uprising that inflation will be in one year's
Speaker 8: time three point four percent. That is dramatically higher than
Speaker 8: the fifth two percent target. And that is the fear,
Speaker 8: of course that some people in the market have, nameing
Speaker 8: that maybe inflation is going to be not only translitorially higher,
Speaker 8: but maybe there is a risk that it could be
Speaker 8: more permanently higher, in the sense that we will have
Speaker 8: inflation higher for longer. And that's of course the risk
Speaker 8: that we could have a policy mistake here by focusing
Speaker 8: too much on the leave of market.
Speaker 2: Well, let's talk about how policy might evolve. There's three
Speaker 2: time frames that think about here. Danny told about two
Speaker 2: of them a little bit earlier, the September than everything else.
Speaker 2: But the September everything else, and then there's life after
Speaker 2: power from May onwards. And I just wonder whether you
Speaker 2: think perhaps we're getting ahead of ourselves here that beyond
Speaker 2: September there's still a lot to apply for.
Speaker 8: I do think that it's a good idea to take
Speaker 8: a deep breath and go for a long walk in
Speaker 8: a green park and say, you know what, touch grass.
Speaker 1: There's a lot of.
Speaker 8: Things going on at the moment, which of course are
Speaker 8: somewhat unusual, including of course the topic of the But
Speaker 8: let's see what the data is telling us. We have
Speaker 8: a lot of data points before we get even to
Speaker 8: the December meeting, so the market is currently only prising
Speaker 8: a content in September and December, but getting into next year,
Speaker 8: the economy could be in a very different place. We
Speaker 8: could either have a scenario where infleation is a lot
Speaker 8: higher and we have a whole different discussion, But it
Speaker 8: could also be a scenario where we have growth slow down,
Speaker 8: that's a lot weaker and therefore the fit we'll be
Speaker 8: cutting a lot more. So let's take the data as
Speaker 8: it comes in and watch exactly how it plays our relative.
Speaker 2: To the dual main day for the fed who don't
Speaker 2: be talked about the same thing. If you're in the
Speaker 2: threes gone into twenty twenty six, this guits harder and
Speaker 2: harder to count.
Speaker 6: It does get a lot harder, But I think it's
Speaker 6: going to be really instructive.
Speaker 1: On Thursday, Governor Waller is.
Speaker 6: Going to be giving a full fledged monetary policy and
Speaker 6: economy speech. Considering Powell's come around to his camp and
Speaker 6: he's up for the FED chair. I think that's really
Speaker 6: also going to determine maybe that medium term plus longer
Speaker 6: term trajectory of the.
Speaker 2: FAT and empower can take notes and basically use the
Speaker 2: same notes in the news conference. This is basically what
Speaker 2: the speech was on Friday. Anyway, less of my snark,
Speaker 2: I want to finish on with you where you think
Speaker 2: this is ultimately heading. Care you believe we do end
Speaker 2: up in this situation where we are facing stagflation and
Speaker 2: this federal reserve is ultimately paralyzed and that dubbish bias
Speaker 2: is constrained, because at the moment what we hear is
Speaker 2: the dubbish bias isn't constrained. Do you think that's the
Speaker 2: ultimate destination though.
Speaker 8: I absolutely thank the ultimate destination exactly because the issue
Speaker 8: is normally fit policy is very straightforward because both parts
Speaker 8: of the dual made it are actually designed to point
Speaker 8: in the same direction, with the business siding. When the
Speaker 8: economy is good, you should be hiking. When the economy
Speaker 8: is bad, you should be cutting. But now because of
Speaker 8: this tacflationary impulse coming not only from tariffs but also
Speaker 8: coming from immigration restrictions and deportations, lowering labor supply and
Speaker 8: putting up by pressure on wages in the sectors where
Speaker 8: unauthorized immigrants are working, namely agricultural construction, hotels, and restaurants.
Speaker 8: That's taclationary impulse is creating this very complex situation for
Speaker 8: the FED where it becomes a matter of do you
Speaker 8: like atmosphere like oranges as the fit chair or as
Speaker 8: the FMC, do it like inflation or do it like
Speaker 8: the slow down and growth?
Speaker 1: And where do you put your weight?
Speaker 8: And that does indeed depend a lot on what is
Speaker 8: the composition of the committee.
Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best
Speaker 2: in markets, economics, and geopolitics. You can watch the show
Speaker 2: live on Bloomberg TV weekday mornings from six am to
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen, and as always, on the
Speaker 2: Bloomberg terminal and the Bloomberg Business app.