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 Ameri Hordern. 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. Has turned to the
Speaker 2: Federal Reserve policymakers remaining divided ahead of the December meeting.
Speaker 2: The San Francisco FED President Mary Daily, writing in a
Speaker 2: blog this morning, we must ask ourselves, are we in
Speaker 2: the nineteen seventies or the nineteen nineties. We can't ignore
Speaker 2: the seventies or the post pandemic inflation run up, but
Speaker 2: we can't ignore the rest of history either. The Fed
Speaker 2: President Mary Daily joined us now for more. President Daily,
Speaker 2: welcome back to the program. Always good to see you.
Speaker 2: Let's just start with that question that you ask yourself,
Speaker 2: what's guiding your assessment of where we are?
Speaker 3: So I'm looking at both inflation and productivity. And if
Speaker 3: you look at inflation you're seeing that it's been pretty
Speaker 3: contained so far in the goods prices which have been
Speaker 3: directly tariff and then you look at the other parts
Speaker 3: of inflation, you just don't see much of a run up.
Speaker 3: So that's good news, and inflation expectations what people expect
Speaker 3: remain very well anchored. Look at productivity and you see
Speaker 3: that productivity is rising GDP growth is rising while the
Speaker 3: labor market is slowing. So that tells me there's a
Speaker 3: little bit of that boost coming from firms looking to
Speaker 3: do more with less, but that's also causing a slow
Speaker 3: down in the labor market. So the fifty basis point
Speaker 3: adjustment we've made has helped support the labor market, but
Speaker 3: still keeps policy restrictive so that we can put downward
Speaker 3: pressure on inflation.
Speaker 4: President Daily, what are you looking at to determine whether
Speaker 4: it's the nineteen seventies the nineteen nineties.
Speaker 3: Well, I'm going to really look at things that improve
Speaker 3: productivity to think about the nineties, and it's more than
Speaker 3: just the stock market valuations for AI companies. It really
Speaker 3: is about the companies out there who might be using
Speaker 3: AI and then asking them, going directly to them and
Speaker 3: asking them what's it doing.
Speaker 5: For your bottom line? And how are you using it?
Speaker 3: And what we're hearing are pretty encouraging, but very early signs.
Speaker 3: They see how it can help their bottom line, how
Speaker 3: can improve their productivity, even how they can be supportive
Speaker 3: of their workers, give them more interesting work, take the
Speaker 3: less interesting work away. But they all tell us it's
Speaker 3: early days, so more to come on that. And then
Speaker 3: on the inflation part, are we in the nineteen seventies
Speaker 3: really asking employers and firms what are you doing with prices?
Speaker 3: Are you thinking about raising your prices? How are you
Speaker 3: going to think about losing volumes if you do so
Speaker 3: in a slowing economy, especially for consumers from the fiftieth
Speaker 3: percentile down. And putting those two things together, I think
Speaker 3: we'll get a lot of clarity about which direction we're heading.
Speaker 3: And with policy you know, been slightly adjusted, we are
Speaker 3: in a good place to continue to evaluate the information
Speaker 3: before we make any decisions. We can't know Xante before
Speaker 3: the day to come out, and before we get that
Speaker 3: information really what we're facing. We just have to have
Speaker 3: an open mind about which one it could be.
Speaker 5: And maybe other periods of history. I didn't even mention.
Speaker 4: President Daily how different would the neutral rate be if
Speaker 4: it were, say, more like the nineteen seventies or more
Speaker 4: like the nineteen nineties. Just how different would FED policy
Speaker 4: be in response to one or the other paradigm.
Speaker 3: Well, you know, there's many nuanced ways it could affect
Speaker 3: the neutral rate. But I can back up from that
Speaker 3: and just ask what were the policy remedies.
Speaker 5: If you think we're about to have.
Speaker 3: An inflation run up, then we obviously would have to
Speaker 3: hold policy tighter for longer because we wouldn't want that
Speaker 3: to occur. You know, honestly, Americans have endured already too
Speaker 3: much inflation, and we really need to get that back
Speaker 3: down to two percent to restore price stability, as we've
Speaker 3: committed to. On the other side, if it's productivity, you
Speaker 3: would start seeing the economy run a little bit longer.
Speaker 3: Maybe if you go back to the debates of the nineties,
Speaker 3: you know, we saw the labor market slow. Workers were insecure,
Speaker 3: but the labor market had unemployment that was fairly low,
Speaker 3: and many at the time were worried that could spur inflation.
Speaker 3: But Greenspan Chairman green Span held on with his colleagues.
Speaker 3: They didn't raise rates, and what you saw was, you know,
Speaker 3: the nineties, which was a booming time, and we ended
Speaker 3: around target inflation and we had a productivity boom. So
Speaker 3: you're trying to balance those two things together, and it
Speaker 3: means not looking just at headlined information, but getting below
Speaker 3: that information, talking to firms, talking to consumers, talking to workers,
Speaker 3: really on the ground work like we do at the
Speaker 3: reserve banks and other places. You know, the FED is
Speaker 3: built to do this on the ground work as well
Speaker 3: as look at the published data.
Speaker 4: President Daily, reading the blog post this morning, it seems
Speaker 4: like you're leaning more towards the nineteen ninety side of
Speaker 4: things than in nineteen seventies.
Speaker 6: Is that right?
Speaker 3: Well, you know right now, you know, I'm in the
Speaker 3: West in I have the nine states in the Western
Speaker 3: United States, and it's not just Silicon Valley that seems
Speaker 3: interested in AI. No matter who we talk to, whether
Speaker 3: they're you know, small businesses, medium or large businesses, manufacturing, tourism, etc.
Speaker 3: They're using AI in a way that they say is
Speaker 3: going to improve their productivity and they're already seeing parts
Speaker 3: of it. So when I see that, I'm like, Okay,
Speaker 3: we need to think about that. What really will spur
Speaker 3: this is an ongoing thing, is if they start to
Speaker 3: change their business processes.
Speaker 5: So that's what I'm looking at now.
Speaker 3: That means, but I guess a different way to say
Speaker 3: that is we cannot take our eyes off inflation again.
Speaker 3: Americans have endured high inflation too long. That's our mandate.
Speaker 3: So while I'm looking for productivity gains and seeing if
Speaker 3: they're going to continue, I'm also keeping my eye completely
Speaker 3: focused on inflation to make sure that it doesn't pick
Speaker 3: up in a way that would suggest we need to
Speaker 3: do more or we need to hold longer.
Speaker 2: President Teddy, how would you respond to the criticism that
Speaker 2: the Federal Reserve as an institution has taken its side
Speaker 2: off inflation, that inflation is close to the three than
Speaker 2: it is the two, and the Fed's been kind of
Speaker 2: interest rates.
Speaker 3: You know, I don't think that if you unpack the
Speaker 3: inflation data you really see signs of that. It's true
Speaker 3: that headline inflation is printing at that level, but you
Speaker 3: have to take a part that inflation and ask how
Speaker 3: much of it is the effective tarots passing through the
Speaker 3: goods prices that we expect to be a one time,
Speaker 3: price level adjustment, and not a consistent run up in inflation.
Speaker 3: And if you unpack the data, what you see is
Speaker 3: you don't see inflation running up in services or housing,
Speaker 3: and importantly, you don't see it spreading into inflation expectations
Speaker 3: that would be the thing that would continue to run
Speaker 3: up inflation coming forward. We also see a labor market
Speaker 3: that's softening and wage growth that is moderating, so you're
Speaker 3: really not going to see a lot of pressure coming
Speaker 3: on the cost side of labor. So I put those
Speaker 3: things together, and we don't want to make the mistake
Speaker 3: of holding on too long for rates only to find
Speaker 3: out we injure the economy.
Speaker 2: Presidents, any can we just pick up on the cost
Speaker 2: of labor. I think this is really important right now, clearly,
Speaker 2: and it's hard to dispute this.
Speaker 7: It's in the data.
Speaker 2: We've had a massive step down and pay rolls growths.
Speaker 2: That is a little bit more confusing. Is it demand?
Speaker 2: Is it cyclical? Is it structural? Is it something else?
Speaker 2: Like immigration? What's your town right now? What can you
Speaker 2: point to that helps tell you it's one thing over
Speaker 2: the other.
Speaker 3: Yes, you look at prices. In this case, the price
Speaker 3: of labor as wages. If it was simply a supply
Speaker 3: and firms were still scrambling to find workers to fill
Speaker 3: what was jobs that were supported by the previous immigrants,
Speaker 3: you would find wages going up as they bid for
Speaker 3: workers to try to fill those jobs.
Speaker 5: But that's actually not what you see.
Speaker 3: You see wage growth slowing, even in sectors where immigration
Speaker 3: played a larger role, and so that to me says
Speaker 3: it's a demand shock, a negative demand shock along with
Speaker 3: just a coincidental negative supply shock. So you lost workers,
Speaker 3: but you lost jobs at the same time, or you
Speaker 3: had job growth slowing. And what we're seeing now does
Speaker 3: that continue to net out?
Speaker 1: Right?
Speaker 3: What if the supply of workers doesn't keep going down
Speaker 3: but the demand for workers does well, then we'd end
Speaker 3: up with a rise in unemployment. So have to keep
Speaker 3: squarely focused on those types of things. We're definitely in
Speaker 3: a low firing, low hiring period and interrogating that labor market,
Speaker 3: continuing to watch the information, see what firms do next.
Speaker 5: That's going to be the important part.
Speaker 4: And it's something that a lot of people have said,
Speaker 4: really is the case shape the idea that, particularly on
Speaker 4: the lower end, you have not seen wages keep pace
Speaker 4: with the rest of the income spheres. I just wonder, though,
Speaker 4: how much we are seeing a massive amount of inflation
Speaker 4: and acid prices and how that feeds into what you're
Speaker 4: looking at, especially at a time that may rhyme with
Speaker 4: the nineteen nineties, and we know what happened after the
Speaker 4: nineteen nineties.
Speaker 6: How much do you weigh that? How much do you
Speaker 6: have to pay attention? Well, you know one of.
Speaker 5: The things that you do.
Speaker 3: So financial market conditions are one input into our decision making.
Speaker 3: That one of the many inputs. You know, we have
Speaker 3: two goals, price stability, full employment. We're trying to think
Speaker 3: about what inputs affect those two variables, those two goals.
Speaker 3: But what I look at is if you look under
Speaker 3: the valuations, you know, people are really talking about one
Speaker 3: of two things. This is going to be a transformative technology.
Speaker 3: AI is going to change the world to be like
Speaker 3: electricity or the steam engine.
Speaker 5: And then the people who are a little more skeptical.
Speaker 3: Are saying it's going to be a business as usual technology.
Speaker 3: Think of computers in the Internet. The thing that's true
Speaker 3: about both of those is they're both productive. You get
Speaker 3: productivity from both of those. They both help with growth.
Speaker 3: They both help the pie and the US expand. And
Speaker 3: so we're not talking about a bunch of ideas with
Speaker 3: no backing. We're talking about, you know, equity investors, not
Speaker 3: highly leveraged going in and making banking bets really on
Speaker 3: whether it's going to be transformative or business as usual.
Speaker 3: But everybody agrees on one thing. It will change productivity.
Speaker 4: At the same time, President Daily some people would suggest
Speaker 4: that yes, you will see stocks continue to go up
Speaker 4: in the face of another rate cut, But at the
Speaker 4: same time, the transmission mechanism of the additional cuts are
Speaker 4: slower to take. It's less efficient in terms of the
Speaker 4: pass through just based on how much lending there is,
Speaker 4: whether it's in the private lending sphere or beyond.
Speaker 5: How do you measure.
Speaker 4: These things at a confusing moment, Well, you.
Speaker 3: Know, I guess this argument that we've somehow lost our
Speaker 3: power monetary policy doesn't transmit. I simply don't see it
Speaker 3: in the information. If you go out and you look
Speaker 3: at what happened when inflation was running really, really high,
Speaker 3: we raised rates pretty aggressively, and mortgage interest rates rose rapidly,
Speaker 3: car loan rates rose rapidly, and the economy slowed. Inflation
Speaker 3: came down. Right now, what I'm seeing is we adjust rates.
Speaker 3: Mortgage interest rates come down, not one for one, that's
Speaker 3: not how it works. Usually is less than one for one,
Speaker 3: but they come down. You see a little more activity
Speaker 3: in the housing market, you see a little more activity
Speaker 3: in the borrowing market more generally, and you see that
Speaker 3: dynamic work. So I guess the most important thing is
Speaker 3: just to remember that Monterey policy acts with a lag
Speaker 3: and right now we're making decisions not just for what's
Speaker 3: going to happen next week, but what's going to happen
Speaker 3: in the next six month to a year. So that's
Speaker 3: how we have to think about it, with our forecasts
Speaker 3: and then how we adjust policy as those forecasts evolve.
Speaker 4: How frustrating has it been not to get government data?
Speaker 3: You know, I really want the information, the fullest amount
Speaker 3: of information we can possibly get. But one of the
Speaker 3: things that I think maybe underestimated in public about what
Speaker 3: the FED does is we're regularly relying on government provided
Speaker 3: data that's the gold standard of data in the world.
Speaker 3: We're also relying on private sector surveys which have been
Speaker 3: collected for many, many years, and we can correlate them
Speaker 3: with the government collected data over time and know exactly
Speaker 3: how they relate to one another. And then, of course
Speaker 3: there's really no replacement, especially at inflection points in the economy,
Speaker 3: for talking to businesses, workers, communities, and consumers, asking people
Speaker 3: what they're really doing.
Speaker 5: And then you know, I like to do this, Go to.
Speaker 3: The parking lots of your favorite retail stores and look
Speaker 3: at how many cars are in the parking lot and
Speaker 3: what people are buying.
Speaker 5: That tells you a lot.
Speaker 3: You know, airports are are full, people are out there.
Speaker 3: You can go to you know, go to a sporting
Speaker 3: event or a concert, see how many people are there.
Speaker 3: What you see as an economy that is slower than
Speaker 3: it was. Consumers that are not they're more picky about
Speaker 3: what they spend on, but they're still out there participating
Speaker 3: in the economy.
Speaker 5: And that's how we get the.
Speaker 3: Information we need to make the right decisions that are
Speaker 3: according to our mandates, but mostly for the American people.
Speaker 6: Presidentially.
Speaker 4: You've been working with the FED or on the FED
Speaker 4: Committee for a long long time on these in these debates,
Speaker 4: have you ever seen it more divided than it is
Speaker 4: right now?
Speaker 6: On the FMC.
Speaker 5: He knows, of course.
Speaker 3: I mean, look at the if you look at the
Speaker 3: transcripts and the meeting minutes, and you know it's helpful.
Speaker 3: Go back and look at the nineteen nineties debates, and
Speaker 3: go back and look at the commentary around the nineteen seventies.
Speaker 3: You know it is a misnomer to think people always
Speaker 3: agree the right way to think about it. In my judgment,
Speaker 3: this has been my experience, is that the debate we
Speaker 3: have I wouldn't even call a division. I would call
Speaker 3: it differences of opinion that are really healthy in about
Speaker 3: trying to make policy in an uncertain time.
Speaker 5: With no truth. We don't have truth.
Speaker 3: We have forecasts, we have our best estimates. We have
Speaker 3: taking the evidence and then taking it again and looking
Speaker 3: through it with different lenses. I see that as a
Speaker 3: strength of the committee, a strength of the Federal Reserve,
Speaker 3: and importantly is it is delivering the best possible decisions
Speaker 3: we can make. So I have seen this many times before,
Speaker 3: and I think it's always at inflection points that you
Speaker 3: see the broadest amount of disagreement, and it's exactly what
Speaker 3: I hope people would want from a committee making decisions
Speaker 3: on inflation and full employment. It really does help us
Speaker 3: make sure that we're doing the best we possibly can.
Speaker 2: So you're happy to confirm on the record you have
Speaker 2: not seen Governor Maron and President Smith in a fight
Speaker 2: in the C day meeting. Can we confirm that President
Speaker 2: Daty today that hasn't happened.
Speaker 5: You always try, and yet I'm not a rookie.
Speaker 7: Marry Daty, thank you. That's always good to see you.
Speaker 7: Stay with us.
Speaker 2: Multile Imberg surveillance coming up after this, stop scanning some ground.
Speaker 2: Sarah Hunt Vampindt Saxton words, writing, investors are seeking refuge
Speaker 2: in companies that demonstrate financial resilience, prioritizing steady dividend growers
Speaker 2: and firms with a strong free cash flow needed to
Speaker 2: weather a downturn.
Speaker 7: Sarah joins us now for more. Sarah Good Mornick Heaoy morning.
Speaker 2: There's some tech companies determined to eat into that cash flow,
Speaker 2: aren't they.
Speaker 8: They are definitely determined to eat into it. And I
Speaker 8: think that between that and the fact that they're raising
Speaker 8: some debt is what's given some people.
Speaker 6: Some pause on the story right now.
Speaker 8: So I think you mentioned earlier today sticker shock that
Speaker 8: people are getting from some of these investments, So I
Speaker 8: think that there is an issue there.
Speaker 2: So it's AI the consumer slowed down. I mentioned that
Speaker 2: note from Stuart Kaisher City. There's been a range of
Speaker 2: reasons for the pullback. What do you think is the
Speaker 2: dominant one in the last week.
Speaker 6: It's interesting. I think it's really the end of all
Speaker 6: of it.
Speaker 8: And I think the government shutdown didn't matter until it
Speaker 8: started to matter. And when you start to see those
Speaker 8: pain points, people start thinking about when do we get
Speaker 8: this resolved, how do we get this resolved? And how
Speaker 8: bad does it make things going forward? And I think
Speaker 8: all of a sudden that started to matter again. You
Speaker 8: start to layer in enough things and it's the totality
Speaker 8: of them, I think, more than an individual one.
Speaker 6: Is it noise or.
Speaker 4: Signal the sell off that we saw last week. Is
Speaker 4: it something that is viable and just a blip that
Speaker 4: offers opportunities, or is it signaling that there is some
Speaker 4: weakness under the surface that needs to be paid attention to.
Speaker 8: I think the magnitude of some of the declines on
Speaker 8: the MISSUS gives you a little bit more pause than
Speaker 8: you would have normally.
Speaker 6: I think there's nothing wrong.
Speaker 8: With having the market stabilize and or have some sort
Speaker 8: of a down draft for a while after hitting record high.
Speaker 6: After record high after record high.
Speaker 8: So this is not like there's some massive change underneath,
Speaker 8: but I do think that there is some willingness now
Speaker 8: to look out and say these better grow, these earnings
Speaker 8: better grow into some of these valuations, and or these
Speaker 8: valuations are on a high level. Markets don't generally correct
Speaker 8: because of valuation, but it certainly could give things pause.
Speaker 8: And I don't think you've seen a major downdraft here,
Speaker 8: but you definitely have seen some under the surface. You've
Speaker 8: seen a lot more percolating and big drawdowns than you
Speaker 8: normally would in individual names.
Speaker 4: One thing that's raised some concerns, at least in conversations
Speaker 4: that I've had, is that one of the biggest players
Speaker 4: in this space is open Ai. And open Ai is
Speaker 4: a private company that's expanding very rapidly and has circular
Speaker 4: deals with all of the big tech players, and you
Speaker 4: don't have visibility into what they're doing, who they're hiring,
Speaker 4: how they're spending, or what their plans to growth grow
Speaker 4: in terms of specific new programming. How much does that
Speaker 4: give you true pause and actually make you lighten up
Speaker 4: some of your exposure to the AI players.
Speaker 8: I think the real question is the functionality and how
Speaker 8: we are going to use everything. I don't disagree on
Speaker 8: the open AI, and I think that part of the
Speaker 8: issue was the serve of discussion around whether or not
Speaker 8: there needed to be guarantees or needed to be this,
Speaker 8: or needed.
Speaker 6: To be that. In the end, we're going to need
Speaker 6: a lot more power. Are we going to need as
Speaker 6: much as we think we are. I'm not sure.
Speaker 8: I think that there will be efficiencies in there, but
Speaker 8: I think that the overall build is going to continue.
Speaker 8: The emphasis on CHAT GPT of all of the different
Speaker 8: large language models is one, but there are other ones
Speaker 8: out there. But I do think that the circular financing
Speaker 8: started to cause people to question it. And every time
Speaker 8: the questions come is when you start to see that
Speaker 8: NASA wobble.
Speaker 6: One reason why.
Speaker 4: This has been such a difficult economy and market to
Speaker 4: call is because you have this sort of secular tech trade.
Speaker 4: John's talked a lot about this overlaid on what could
Speaker 4: be a cyclical shift in the underlying economy. How much
Speaker 4: are you seeing a cyclical shift to the downside. It's
Speaker 4: some of the recent earnings reports, whether it's fast retailers,
Speaker 4: fast casual restaurants, or whether it's some of the other
Speaker 4: margin compression we've seen in other stores versus a sort
Speaker 4: of bottoming out in some ways, like the Mike Wilson's
Speaker 4: of the world seem.
Speaker 8: To think, well, this is going to come down to
Speaker 8: and this is where the tricky the data being not
Speaker 8: available is tricky. It's going to come down a lot
Speaker 8: to the labor market in the near term because what
Speaker 8: has happening there is going to i think, inform both
Speaker 8: the FED and some other areas of what's going to
Speaker 8: happen next. And I think it's hard to figure out
Speaker 8: right now if people are if that's an AI problem,
Speaker 8: if it's an inflation problem, if it's a cost problem.
Speaker 8: All those different pieces are swelling together, and without data,
Speaker 8: it's kind of hard to get a gut check on that.
Speaker 8: But I don't know that you're having a major major
Speaker 8: change until we really start to understand how to use
Speaker 8: the tools. So I'm not sure that it's a secular
Speaker 8: shift in the labor market as so much as we
Speaker 8: have some cyclical issues going on in some higher costs.
Speaker 2: There are some things going on though. Earnings growths fantastic,
Speaker 2: so that corporations seemingly are making money.
Speaker 7: Employment growth is terrible.
Speaker 2: GDP is tracking really well at the moment, could change
Speaker 2: given the government shut down, but at the moment tracking
Speaker 2: quite well. And yet employment growth is pretty terrible based
Speaker 2: on Vario syndicators.
Speaker 7: What gives? What explains that?
Speaker 8: I think it's a combination of there's still some scar
Speaker 8: tissue of letting too many people go and people not
Speaker 8: wanting to let people go if they think there's going
Speaker 8: to be some growth.
Speaker 6: But I think that the movement in jobs is part
Speaker 6: of the problem.
Speaker 8: It's sort of like the movement in houses is part
Speaker 8: of the problem because unless you can get you know,
Speaker 8: it's interesting they were talking about making mortgages assumable again,
Speaker 8: which they weren't for a while. Unless you can get
Speaker 8: you can keep somebody these old mortgage There's a lot
Speaker 8: of stuckness in the housing market. There's some stuckness in
Speaker 8: the labor market because people don't necess early want to
Speaker 8: let people go and see what happens next. And I
Speaker 8: don't know how that resolves itself in the near term.
Speaker 8: It's harder to get a job now than I think
Speaker 8: it probably was a few months ago. It's certainly from
Speaker 8: a younger person standpoint, very difficult to get a job,
Speaker 8: because when I talk to my younger people, they are
Speaker 8: quite worried about that.
Speaker 7: Fifty mL coas that's the proposal over the weekend? Do
Speaker 7: you buy it? Does that make sense to you?
Speaker 8: I think that your previous guests made a great point
Speaker 8: about the fact that that or you made a great
Speaker 8: point about the fact that that's a demand.
Speaker 6: A response and not a supply response.
Speaker 8: We need to be able to build more houses, so
Speaker 8: there's either a regulatory push that needs to change.
Speaker 6: Something needs to happen where you.
Speaker 8: Actually get more affordable housing built. And that is the
Speaker 8: problem right now. Making mortgages go out to fifty years. Sure,
Speaker 8: it's like car loans to ten. It makes it cheaper,
Speaker 8: but does it make sense? And is that what you
Speaker 8: want to do to yourself from a financial.
Speaker 2: Stand makes it cheaper on a monthly basis, but over
Speaker 2: the term of the loan makes it a whole lot
Speaker 2: more expensive.
Speaker 4: And you're paying all the interest upfront, so at a
Speaker 4: certain point, you're just paying the interest upfront to pay
Speaker 4: the actual mortgage back when you're three hundred and four
Speaker 4: years old.
Speaker 2: Congresswoman Mantre Tanda Green, pushing back, heinst this proposal as well,
Speaker 2: where is she on the political spectrum right now?
Speaker 7: It's really pushing back the.
Speaker 4: Circle, as we've been saying, right units on the other end,
Speaker 4: after it gets to a certain place. There is a
Speaker 4: populace tilt right now, and we have to keep pointing
Speaker 4: to what it is responding to, and it is the
Speaker 4: cost of living. It is some structural issues and the
Speaker 4: real debate needs to be exactly what the best way.
Speaker 6: Is to fix those.
Speaker 2: So, Sarah, I just want to finish on tech. You
Speaker 2: can do single names, So I want to bring up
Speaker 2: a single name. Metsro and Microsoft have had a really
Speaker 2: lousy thirty days and sitting out all this spending is
Speaker 2: Apple and Apple has had a really really good thirty days.
Speaker 7: Is there a story there?
Speaker 8: I think that the difference between Microsoft and Meta on
Speaker 8: the spending is that Metas had more of a checkered
Speaker 8: history on money spent versus Microsoft, where I don't think
Speaker 8: you can make that argument. I think that they're stuck
Speaker 8: in a problematic we need more capacity than we have,
Speaker 8: and I think for Apple there's been another story too,
Speaker 8: because it's whether or not this is going to.
Speaker 6: Be a refresh year.
Speaker 8: Finally, after all the years of hoping that it was
Speaker 8: going to be, so I think that there's some differentiation there,
Speaker 8: but to the extent that it's not putting any strain
Speaker 8: on Apple's balance sheet. This goes back to the argument
Speaker 8: about balance sheets and.
Speaker 6: Cash flow, right.
Speaker 8: You want to make sure in an uncertain environment that
Speaker 8: those companies are running through the proper amount of cash
Speaker 8: and everything else. I don't think that's a problem for
Speaker 8: Microsoft or Meta, but I do think that on the
Speaker 8: edges that's starting to make people more wary, which is
Speaker 8: why we like.
Speaker 6: To look for lots of cash.
Speaker 2: A month ago, though the bus was so different. Everything
Speaker 2: with AI related was up and up into the right aggressively.
Speaker 2: And a month later we're talking about Apple as if
Speaker 2: it's spending discipline. And a month ago we had people
Speaker 2: coming on the program saying they're missing a moment, they're
Speaker 2: not spending enough. Is it a feature or a bug
Speaker 2: the discipline of Apple.
Speaker 8: It's both, depending on exactly what the psychology is. And
Speaker 8: I will say that this year has not been rewarding
Speaker 8: the people who are more cautious with their dollars as
Speaker 8: much as it's been rewarding the people who are spending
Speaker 8: like crazy. But when people start to worry that spending
Speaker 8: like crazy can't go on. They go right back to
Speaker 8: the folks where they think that there's some discipline there.
Speaker 8: So I could be a little bit of a back
Speaker 8: and forth.
Speaker 6: I think it's an and a non in the.
Speaker 2: War stay with US Multlomberg surveillance coming up after this.
Speaker 7: The shutdown.
Speaker 2: Adding to economic uncertainty is the White House estimates losses
Speaker 2: of fifteen billion dollars per week. Lindsay pix Or of
Speaker 2: Stifhel writing, investors will be listening closely to any indications
Speaker 2: of a growing divide among policy opinions, the threshold for
Speaker 2: additional rate cuts and broader expectations for policy going forward.
Speaker 2: Lindsay joint us Now for more, Lindsay, welcome back. What
Speaker 2: is the strongest argument right now for this Fed to
Speaker 2: sit out the December ratecount decision?
Speaker 9: Well, I think right now, when we look at the
Speaker 9: broader pace of economic activity trending near three percent, coupled
Speaker 9: with inflation still elevated well above the Fed's two percent target,
Speaker 9: I think it's going to be difficult to justify any
Speaker 9: further policy easing and really solidify the need for the
Speaker 9: FED to take a pause sit on the sideline allow
Speaker 9: further data to evolve and give the FED a better
Speaker 9: sense of where we're headed go going forward. But right now,
Speaker 9: not only is that justification not there, but the sense
Speaker 9: of urgency is far from there as well.
Speaker 4: Lindsay, when we've been looking at other data points to
Speaker 4: try to backfill what we haven't been getting from the government,
Speaker 4: everyone seems to focus on the labor market. What metrics
Speaker 4: are you watching for inflation? On the other side of things,
Speaker 4: I think.
Speaker 9: One of the key metrics that we're focused on right
Speaker 9: now is inflation expectations. Despite the fact that the FED
Speaker 9: continues to vocalize a desire to get back to two percent,
Speaker 9: as we've seen over the past several years, they failed
Speaker 9: to take the needed steps to ensure a return to
Speaker 9: price stability, and the market is seeing that when we
Speaker 9: look at the latest inflation expectation calculations near terms still
Speaker 9: up near five percent, but longer term, so we're talking
Speaker 9: five years and out, still up near four percent. So
Speaker 9: there is a lot of concern that despite where the
Speaker 9: FED is right now, further inflationary pressures may be coming
Speaker 9: down the pipeline A.
Speaker 4: So you're talking about I believe the University of Michigan
Speaker 4: Sentiment Survey, because when I look at say break even rates,
Speaker 4: it's still around the two point two percent over the
Speaker 4: next five to ten years. So when you take a
Speaker 4: look at the market based inflation expectations, they haven't risen.
Speaker 4: How do you explain that that sort of discrepancy.
Speaker 9: Well, I think right now it goes back to the
Speaker 9: telltale story that we're feeling more inflation from a consumer
Speaker 9: standpoint than maybe the market calculations are presenting that two
Speaker 9: and a half is to three percent range. Consumers are
Speaker 9: feeling twenty percent increases, thirty percent increases at least over
Speaker 9: the past five years across a number of key categories,
Speaker 9: from transportation, household energy, to your morning coffee. This has
Speaker 9: been compounding pressure on the consumer. And of course, as
Speaker 9: we know, inflation expectations feed directly back in to the
Speaker 9: realized inflation calculation, and this is something that the FED
Speaker 9: has historically kept a very zion in order to not
Speaker 9: allow inflation expectations big on further underlying inflationary data is
Speaker 9: one key data point to suggest the FED needs to
Speaker 9: take a further more direct focus on teaming price pressures
Speaker 9: in the marketplace.
Speaker 2: Lindsay the last time we had a big moment with
Speaker 2: inflation was of course coming out of the pandemic, but
Speaker 2: it was easier for the Federal Reserve that time. Even
Speaker 2: though they took that time, it was certainly easier because
Speaker 2: the labor market was so tight. What's interesting about this moment, lindsay,
Speaker 2: is that they feel not great about inflation, but they
Speaker 2: also feel pretty lousy about the labor market as well.
Speaker 2: And you see that across sentiment surface and lindsay, I'm
Speaker 2: curious why you believe we're tracking so well with GDP
Speaker 2: and your attitudes about the labor market are so lousy.
Speaker 9: Well, I think when we look at some of the
Speaker 9: labor market conditions, we have to be careful not to
Speaker 9: put too much stock in one data set, or one
Speaker 9: data point for that matter. First off, a top line
Speaker 9: job creation has slowed markedly over the past couple of years,
Speaker 9: but this is somewhat expected in an aged recovery, not
Speaker 9: to mention an ongoing structural shift with businesses increasingly relying
Speaker 9: on technology the adoption of AI, so we no longer
Speaker 9: need two hundred three hundred thousand jobs to reach that
Speaker 9: full employment level. Second, just because we see that one
Speaker 9: data point again, top line, job creation is slowing. Other
Speaker 9: metrics suggest we're on more solid footing. When we look
Speaker 9: at the unemployment rates still near ish four percent, when
Speaker 9: we look at wage growth, still up at four percent,
Speaker 9: when we look at jobless claims, still very range bound
Speaker 9: as they have been for the past couple of years.
Speaker 9: So just as there's some indications of cooling, there's vast
Speaker 9: other indications that the labor market is far more solid
Speaker 9: than some of these more dire predictions.
Speaker 2: So lindsay, just to follow up, because we've gone over
Speaker 2: this ground a few times throughout summer chair and Powell
Speaker 2: appears to have shifted his view on the labor market
Speaker 2: and the way he anchors his view around the labor market.
Speaker 2: He took your view of things at the start of summer,
Speaker 2: he anchored his view with the labor market around the
Speaker 2: unemployment rate, and then things changed through the summer and
Speaker 2: he appeared to anchor his view around the deceleration we've
Speaker 2: seen in overall pay roads. Where do you think will
Speaker 2: be by the time we get to December.
Speaker 5: Well, I think it was pretty clear.
Speaker 6: We saw in this statement.
Speaker 9: That the Fed downgraded their assessment of the risks on
Speaker 9: the employment side, but not necessarily in terms of forward
Speaker 9: looking thinking, but as justification for the September and October
Speaker 9: rate cut. But cheer Paul clarified during the press conference,
Speaker 9: saying that he does not expect any further deterioration in
Speaker 9: labor market conditions, suggesting that we may have reached this
Speaker 9: point of stability, further justifying than a position of policy
Speaker 9: on the sideline.
Speaker 7: Stay with us.
Speaker 2: More Bloomberg surveillance coming up after this. Magot swipert Bank
Speaker 2: for American Writing. Our houseview is still that the FED
Speaker 2: holds off on a cup at the December meeting and
Speaker 2: indeed doesn't cut again until the middle of twenty twenty six.
Speaker 2: Maket joined this now for more Meccan Good morning morning.
Speaker 2: You're essentially saying that Chairman POW's a last cup as
Speaker 2: FED chair was last month.
Speaker 7: He's done.
Speaker 6: That's indeed true.
Speaker 7: John.
Speaker 1: You know, ultimately the FED reaction function that we see
Speaker 1: right now, and we're hearing this from a number of voters,
Speaker 1: is this caution around inflation. And you know, I think
Speaker 1: to help answer this question of is it demand is
Speaker 1: it supply related? Look at some of the claims data
Speaker 1: claims is still quite low, which is a pretty decent
Speaker 1: sign to me that people are not being fired at large,
Speaker 1: at least in the private sector right now. And what
Speaker 1: we see in our B of a card data is
Speaker 1: still this resilience of the US consumer and the importance
Speaker 1: of the consumer we see generally speaking in terms of
Speaker 1: that leading what we look at from a labor market perspective,
Speaker 1: we usually see consumption lead labor, not the other way around.
Speaker 2: So the last time they put out forecasts, which was September,
Speaker 2: they conceded the outlook hadn't really changed, but the risk
Speaker 2: around the outlook had let's cut risk management. When they
Speaker 2: get together in December, the middle of December and they
Speaker 2: have to put out new forecasts, are they going to
Speaker 2: say the same thing again, the outlook hasn't really changed.
Speaker 1: Well, I think John, it's really about this balance of
Speaker 1: risk assessment and what changed in September and why they
Speaker 1: penciled in this additional cut at the December meeting is
Speaker 1: because they were viewing this risk more to the downside
Speaker 1: on the labor market, and we're thinking that that would
Speaker 1: drive more of a downside shift in inflation. But if
Speaker 1: we look at some of the inflation data right now,
Speaker 1: we're still seeing a lot of strength in services inflation
Speaker 1: that tends to be more of the cyclical component of
Speaker 1: the inflation basket. And then again we are also in
Speaker 1: importantly this absence of data from the Fed. Probably one
Speaker 1: of the first data points that we're going to get
Speaker 1: out once the government reopens is the September Labor report,
Speaker 1: and an our view, that's going to be above consensus expectations.
Speaker 4: Why aren't wages increasing more than if this is the
Speaker 4: demand picture that you're talking about.
Speaker 1: Well, while we are certainly seeing this cooling in hiring,
Speaker 1: we are not seeing companies turned to be outright firing folks.
Speaker 1: And so the reason why we're not seeing this uptick
Speaker 1: in wages is largely because we're seeing the shift from
Speaker 1: a supply perspective. AI maybe one fact that's slowing the
Speaker 1: growth of employment overall, but we're not seeing this turn
Speaker 1: the other way around in terms of net firing.
Speaker 4: Right now, if the Fed does cut race, does that
Speaker 4: make you less likely to go into duration? I mean,
Speaker 4: how much does that affect the longer term inflation backdrop?
Speaker 7: Yes?
Speaker 1: And this is exactly the question that we're asking ourselves
Speaker 1: right now, Lisa, is how to think about December and
Speaker 1: the path for the FED in near term versus what
Speaker 1: some of these risks are for a FED more medium,
Speaker 1: longer term. We understand Powell's reaction function pretty clearly. We
Speaker 1: have a nice indicator from a lot of the FED
Speaker 1: speakers right now in terms of how they're thinking about
Speaker 1: this balance. But we worry about a new FED chair
Speaker 1: that's going to be thinking about the balance of risks differently,
Speaker 1: namely not considering three percent inflation to be meaningfully above target.
Speaker 1: We're hearing some of those comments from Myron and Bowman
Speaker 1: right now at three percent is okay. We're discounting that
Speaker 1: three percent inflation rate, and a new FED chair may
Speaker 1: be more concerned about the slow down that we're seeing
Speaker 1: and hiring, which we think is more is more supplied.
Speaker 1: They may be overweighting from a demand person.
Speaker 4: Why isn't the current FED also tacitly saying that three
Speaker 4: percent inflation is fine, because essentially that's where it's been
Speaker 4: for quite a while, and it's been above that two
Speaker 4: percent level for more than five years. So at a
Speaker 4: certain point, maybe they're saying they're still going to get
Speaker 4: down to the two percent target, But at what point
Speaker 4: are they going to say it will get down maybe
Speaker 4: in twenty seventy three.
Speaker 1: And this is a big issue for the fixed income
Speaker 1: market because if you look at what the market's pricing
Speaker 1: for inflation in the medium longer term, they're giving the
Speaker 1: FED full credibility on this. You look at where a
Speaker 1: tenure breaks are priced, considering that thirty forty basis point
Speaker 1: but differential between CPI and PCE. The market's giving the
Speaker 1: FED full credibility on this two percent target. And if
Speaker 1: you do have a FED that's getting more comfortable with
Speaker 1: three percent inflation cutting alongside that, we see more of
Speaker 1: upside to being long inflation. We like that at the
Speaker 1: tenure part of the curve.
Speaker 2: It's kind of strange how well anchored market based inflation
Speaker 2: and expectations have been, how credible this pursuit of two
Speaker 2: percent seems to be when it's anything but based on reality.
Speaker 2: How the DTAs come in, and how Effet's behaved over
Speaker 2: the last few years.
Speaker 6: It's something that I check almost every single day.
Speaker 4: Honestly, the five year, five year break even raids and
Speaker 4: the ten yure break even raids, and I've just been
Speaker 4: looking at where is the breakout going to come? It
Speaker 4: just has not come, And I wonder how much people
Speaker 4: are looking at disinflationary forces, whether it's from AI and
Speaker 4: accounting for that before accounting for some of the inflationary
Speaker 4: aspects or other things.
Speaker 6: I don't really have an answer.
Speaker 2: I've said this week would be super snoozy with a caveat.
Speaker 2: I did say this in the last hour as well,
Speaker 2: that we might get some economic data. So let's talk
Speaker 2: about the data you set above consensus expectations on payrolls
Speaker 2: once it's released. What's above consensus right now? What's good
Speaker 2: for them?
Speaker 1: Good number is just still steady job creation that's modestly
Speaker 1: above break even and break even right now the market
Speaker 1: thinks is probably much much lower than what we had
Speaker 1: been seeing previously, called around fifty k or so. And
Speaker 1: a lot of that comes back to what Lisa's point was,
Speaker 1: related to the supply balance that we have in the
Speaker 1: labor market right now, this slow.
Speaker 6: Down and hiring.
Speaker 1: So any number that doesn't indicate an uptick in the
Speaker 1: unemployment rate, I think is is pretty decent.
Speaker 2: So sixty seventies is enough to keep the Fed on
Speaker 2: the sideline, I think so.
Speaker 1: I think so, John, And again it's going to be
Speaker 1: this decision in the absence of us likely getting any
Speaker 1: more inflation data through the December meeting. We very likely
Speaker 1: had the last CPI print that we're going to get
Speaker 1: until the December the December Fed meeting. CPI was slated
Speaker 1: to come out the second day of the December Fed Meeting,
Speaker 1: but inflation is not something that they can actually calculate retroactively.
Speaker 1: They do this survey throughout the month, and you know,
Speaker 1: we're still now part of the way through November going
Speaker 1: to be okay.
Speaker 2: This is really important because I'm not sure how many
Speaker 2: people are quite aware of this. So you suggest that
Speaker 2: even if the government reopens like tomorrow, we move along,
Speaker 2: that they might not have CPI December meeting.
Speaker 1: They may not because oftentimes when the government's closed for
Speaker 1: a while, it takes them a while to actually get
Speaker 1: back to a normal production schedule in terms of publishing
Speaker 1: the data. So it's very likely that we won't get
Speaker 1: any more inflation data through the December meeting.
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