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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keane. Always with Michael McKee. Daily we bring
Speaker 1: you insight from the best in economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg Well. The big bet is,
Speaker 1: of course on the central bank trade these days, and
Speaker 1: the bet has been that ever more stimulus will be
Speaker 1: coming our way. Now the Fed ready to meet next week,
Speaker 1: seems to be leaning the other direction. Ellen Zentner is
Speaker 1: the chief US econist at Morgan Stanley, and she's been
Speaker 1: nice enough coming at this early hour tell us that
Speaker 1: she predicted this all along. Yeah, it's not nice to gloat, Mike,
Speaker 1: but Tom's doing here. You can gloat. It's okay, good,
Speaker 1: good good, because he would tamp that down quickly. But
Speaker 1: I think you know, even we have to acknowledge, or
Speaker 1: have had to acknowledge over the past couple of weeks
Speaker 1: that the probability of a December rate hike has risen.
Speaker 1: I mean, the rhetoric was clearly moving in that direction.
Speaker 1: Policymakers feeling more comfortable with the progress they're making on
Speaker 1: their mandates. They're getting stir crazy. They don't like going
Speaker 1: a full year without hiking rates. Certainly that was not
Speaker 1: the definition of gradual they had in mind. Um Yet
Speaker 1: the data in just the past week, and Janet Allen
Speaker 1: said that to the extent that the data continue to
Speaker 1: confirm the outlook, another rate hike could be warranted. But
Speaker 1: the data looks pretty questionable going into this meeting, and
Speaker 1: unfortunate timing going into the September meeting. But I think
Speaker 1: markets are right to have lowered the probability that they
Speaker 1: hike in September. Your call has been no move until
Speaker 1: two thousand seventeen. Everybody focuses on that. The FED folks
Speaker 1: out in Jackson Hole, we're all saying that's the wrong
Speaker 1: way to look at it. It doesn't matter when we
Speaker 1: raise rates unless we wait forever. But it's the path,
Speaker 1: it's the it's the how fast we get to where
Speaker 1: we're going that really should matter to the economy and
Speaker 1: to bond mark well, and they're absolutely right. UM. And
Speaker 1: I've spent a good deal of time with our clients
Speaker 1: and emerging markets uh a few weeks ago. UM and
Speaker 1: emerging markets are are laser focused on what the FED does,
Speaker 1: and they're not necessarily uh nervous about an imminent hike
Speaker 1: if it comes with a promise that the FED is
Speaker 1: not tone deaf and the path will be lower, slower
Speaker 1: to a lower end game, if you will. And I
Speaker 1: think that the FED will start to set up for
Speaker 1: that UM at this September meeting. I think we not
Speaker 1: only get some mark to market of their growth forecast
Speaker 1: this year because the poor first half is going to
Speaker 1: pull those numbers down, but uh, several very important policy
Speaker 1: makers have you know, been laying the ground for work
Speaker 1: for Look, there are structural issues or persistent headwinds that
Speaker 1: are persisting longer than we thought UM, and potential growth
Speaker 1: is probably lower and therefore you need to lower your
Speaker 1: associated neutral rate uh that that would be associated with
Speaker 1: that lower potential growth, And so I think they do
Speaker 1: show us a lower slower path. This will also be
Speaker 1: interesting because the first time we can get twenty nineteen forecasts.
Speaker 1: Have you even thought about twenty nine? Does anyone have
Speaker 1: any clue what's going to happen in twenty and where
Speaker 1: are we going? I don't know. ECB actually gave some
Speaker 1: pretty discouraging forecast for eighteen because they had to lower
Speaker 1: inflation was I think one point seven, but they had
Speaker 1: to lower their growth forecasts overall. Ellen, do we just
Speaker 1: look at the markets and if the markets don't price
Speaker 1: in a FED hike that it means it won't happen? Well,
Speaker 1: I think there that's always the chicken and egg question.
Speaker 1: Uh So the FED is data dependent um and the
Speaker 1: market is looking at the same data the FED is,
Speaker 1: then the FED just has to be careful that they
Speaker 1: communicate around what the data mean to them. If the
Speaker 1: market sees the data the same way the FED does,
Speaker 1: then it should lead market probabilities higher or lower, depending
Speaker 1: on the EBB and flow of the data. And only
Speaker 1: in less the market has it wrong, than does the
Speaker 1: FED push back. And we have not seen pushback on
Speaker 1: the low probability the market is placed on September because
Speaker 1: the data has just not been definitive. Only half of
Speaker 1: the members we knew from the July minutes said that
Speaker 1: the conditions warranted another hike. The other half weren't yet convinced,
Speaker 1: and I'm not sure that we've gotten enough data since
Speaker 1: July to convince them to go at this meeting. Well,
Speaker 1: you mentioned that they're getting antsy because more and more
Speaker 1: of them are coming out and saying maybe there are
Speaker 1: some issues with financial market distortions, but if the markets
Speaker 1: don't let them move, they can't fix that, and it's
Speaker 1: the market's interest for them not to move. Yeah, but
Speaker 1: I don't think this is the markets not letting them move.
Speaker 1: I think it's the markets have read the data correctly.
Speaker 1: I mean, the probabilities have risen for a December hike,
Speaker 1: and I'm not sure that they'll get to froth on
Speaker 1: December until we get past election uncertainty. I think that
Speaker 1: that will hold back markets betting for a rate hike
Speaker 1: in December. But I think the markets have raised the
Speaker 1: probability and heard the Fed that you would like to
Speaker 1: go this year, and it's just does the data help
Speaker 1: the Fed get that open door or not. And we
Speaker 1: saw quite a big move in treasuries, especially the longer
Speaker 1: maturities yesterday on the back of ECB. Do you worry
Speaker 1: that bond traders are a little bit complacent of what
Speaker 1: happens to Fed from now until December. I'm not so
Speaker 1: worried about complacency for this year. I think like Dudley, UM,
Speaker 1: I would worry about complacency of the overall path. I
Speaker 1: mean the Fed. The Fed doesn't see eye to eye
Speaker 1: with markets on what the future path of rates is.
Speaker 1: The Fed has been coming down down down to the
Speaker 1: more pessimistic view of the market in terms of how
Speaker 1: much they can get done. But I think that's where
Speaker 1: when Dudley talked about the markets being complacent, I think
Speaker 1: it was more that he was talking about the path
Speaker 1: priced in through the end of seventeen, not necessarily about
Speaker 1: a rate hike this year. Uh. And so I think
Speaker 1: that's more of what worries the Fed, that the market
Speaker 1: is just never going to price in that they're going
Speaker 1: to be able to do anymore. Yeah, but do they
Speaker 1: have a credibility problem because they keep coming out and
Speaker 1: saying we're getting closer to raising rates and and then
Speaker 1: something always happens and they don't. Well, so that is
Speaker 1: the air drawbacks their benefits and drawbacks to being data dependent. Um.
Speaker 1: Being data dependent means that that you're naked, right, and
Speaker 1: if the data is overwhelmingly positive. Uh. Then it's it's
Speaker 1: obvious that that you must move in the bond market
Speaker 1: will give you that open door because probably abilities will rise.
Speaker 1: But it also means that anytime the data bobbles Uh,
Speaker 1: it also is going to make it very difficult for
Speaker 1: markets to get fraud about expecting another rate hike because
Speaker 1: the data isn't uniformly good. I think in the slow
Speaker 1: growth environment, data depends dependency can be very tough. Well,
Speaker 1: you don't take very quickly that maybe at one rate
Speaker 1: move would send a message to the markets that you
Speaker 1: can't take us for granted. That's just not how the
Speaker 1: FED operates, right, The Fed, uh will hike rates to
Speaker 1: tighten financial conditions. You don't want more tightening than you
Speaker 1: bargained for and surprising the markets in that case, well,
Speaker 1: I think that it would just be bizarre. It would
Speaker 1: be absolutely bizarre move that the that the Fed would
Speaker 1: surprise markets without preparing them for a rate hike. They
Speaker 1: would push back and basically say you're wrong, there's a
Speaker 1: better chance that we go, and then the markets would
Speaker 1: raise the probability ahead of the meeting. Still, she's the
Speaker 1: chief US economist at Morgan Stanley and she's been making
Speaker 1: the point that this is a dated dependent FED and
Speaker 1: the data have not been good of late. But does
Speaker 1: that mean the US economy is in trouble? Ellen, with
Speaker 1: a disappointing jobs report and the I S M numbers
Speaker 1: as you mentioned that didn't go so well, I wouldn't
Speaker 1: characterize as an economy and trouble. Um. I think that
Speaker 1: growth this year is tracking lower than expectations. It's more
Speaker 1: in line with the ours, but we tend to be
Speaker 1: lower than than consensus. Is certainly tracking lower than the
Speaker 1: Fed's expectations. Um. But I think what the what the
Speaker 1: more hawk is on the committee, let's say, could could
Speaker 1: hold on to is you know, okay, let's shut the
Speaker 1: door on first half growth. So it averaged around one
Speaker 1: percent growth. There were some transitory factors in their energy
Speaker 1: drag dollar drag that are probably coming off in the
Speaker 1: second half to some extent. So let's just look at
Speaker 1: third quarter tracking UH and beyond which is which is
Speaker 1: looking pretty strong for quarter. That could get some of
Speaker 1: the more hawkish members UH on the f O m
Speaker 1: C to use that argument to say, let's get another
Speaker 1: rate hike in UH this year. The data EBB and
Speaker 1: flow right and so all we know is that over
Speaker 1: the past week, with auto sales rolling over, is s
Speaker 1: M s declining? Uh jobs not so great report. Um,
Speaker 1: you know that it's just the EBB and flow. None
Speaker 1: of that looks too good. Maybe it just means that
Speaker 1: we started off uh spicy, to use Peter's term from
Speaker 1: earlier on on Bloomberg surveyan surveillance. Maybe we started off
Speaker 1: the quarter spicy and we fizzled a bit. Um. But
Speaker 1: I certainly wouldn't call it an economy in trouble. None
Speaker 1: of the leading indicators say that, you know, we're we're
Speaker 1: headed south per se. It's just the economy is sluggish
Speaker 1: and it doesn't look like it's overheating. In The inflation
Speaker 1: data continues to run below the Fed's goal with with
Speaker 1: very very lower, record low inflation expectations, and there's just
Speaker 1: nothing there that that would tell me that would make
Speaker 1: me prescribe another great hike to them. But Ellen, how
Speaker 1: do you look at the labor market, because actually that's
Speaker 1: pretty strong, um, you know, and and it's difficult to
Speaker 1: reconcile lower inflation with with a strong labor market. Yeah,
Speaker 1: so I think the labor market, um, you know, the
Speaker 1: FEDS Labor Market Conditions Index sort of takes all the
Speaker 1: pieces from the employment report, all the labor market data,
Speaker 1: and puts it into one nifty index so we can say, well,
Speaker 1: wasn't a good report or was it a bad report?
Speaker 1: Do we say it's good just because there's headline job
Speaker 1: growth and and the that labor Market Conditions Index has
Speaker 1: now declined in seven of the past eight months. So
Speaker 1: while we get strong headline job growth, the overall rate
Speaker 1: of hiring is still very sluggish compared to the prior cycles. Uh.
Speaker 1: You know, layoffs remain low, which are helping that net
Speaker 1: job gain that we get each month look good. Um,
Speaker 1: but I but I think there's still some room to
Speaker 1: go there. But that's not what what you know rubs
Speaker 1: policymakers the wrong way. Right. They're pretty confident on the
Speaker 1: labor market front. They think they've been making great progress
Speaker 1: on that front. It's the inflation front. When inflation expectations
Speaker 1: are falling and core inflation is low, it strikes terror
Speaker 1: in the hearts of policymakers. Every prescription they've learned, every
Speaker 1: theory they've learned, tells them you do not touch rates
Speaker 1: in that environment. Are the theories right. I mean seven
Speaker 1: years on, still extraordinary stimulus rates essentially still almost zero
Speaker 1: and there's no inflation. Why not try something different? Is
Speaker 1: a theory that if you raise rates that instills confidence
Speaker 1: in the economy and UH increases return on capital to businesses,
Speaker 1: which then might invest in then you might get something else. Yeah,
Speaker 1: but I think there's this perception that the FED just
Speaker 1: does not want to raise rates. They want to raise rates,
Speaker 1: but they want the conditions to warrant a rate hike um.
Speaker 1: And with growth so sluggish, it keeps them constantly back
Speaker 1: footed UM. And so I don't think they're going to
Speaker 1: buy into that UM theory that you know, you raise
Speaker 1: raise rates and and it will come. The sort of
Speaker 1: build it and they will come theory. Um. You know.
Speaker 1: I think what we do with policy makers oftentimes as
Speaker 1: we give them this halo effect and we think they
Speaker 1: just have the answers and know everything, and none of
Speaker 1: them have practiced in the post financial crisis world. All
Speaker 1: of them are trying to put monetary policy theory into practice,
Speaker 1: and they're feeling their way in the sand with their
Speaker 1: toes UH, and some of those decisions go well and
Speaker 1: some don't. But they're just doing the best that they
Speaker 1: can um and we've seen with Jackson Hole. You were there, Mike.
Speaker 1: The theme at Jackson Hole was let's rethink all of this.
Speaker 1: Maybe we need new policy frameworks. And so I think
Speaker 1: it does niggle them that maybe this is, you know,
Speaker 1: unprecedented times and we need unprecedented monetary policy. But policy
Speaker 1: makers move at a glacial pace. Well unfortunately fresh for
Speaker 1: out of time, but unfortunately having Ellen's at hern is
Speaker 1: not unprecedented, and she will be back. But thank you
Speaker 1: for coming in this morning. Ellen Setner is the chief
Speaker 1: US economist at Morgan Stanley and that she has not
Speaker 1: been someone who forecast safe FED rate move any time soon.
Speaker 1: Let me cattell is pimco's executive vice president, keeps track
Speaker 1: of all things politics. But let me you know where
Speaker 1: I'm going. I absolutely we are going. We are going
Speaker 1: to with Thursday Night Football, the opening of the football,
Speaker 1: did you stay up and watch? I did? I did?
Speaker 1: I was. I was debating when I was going to
Speaker 1: wear a thirteen jersey or twenty two jersey because C J.
Speaker 1: Anderson had a great night, but Travisan was was did
Speaker 1: a great job and definitely exceeded expectations. I had to
Speaker 1: I had to sleep, so I missed. I woke up
Speaker 1: to Muhammad al Arian uh is sending me message is
Speaker 1: going great comeback. It's like for which teams? So Denver, Broncos,
Speaker 1: Carolina Pathers twenty. Now we have covered that. Are you
Speaker 1: one more question? Are you satisfied with Trevor Simeon as
Speaker 1: the Broncos replacement for Peyton Manning? I I I am,
Speaker 1: I am. I think he again exceeded expectations. I think
Speaker 1: he looked really good. He can also run the ball too,
Speaker 1: So I um, I was impressed early days. But but
Speaker 1: but definitely a good a good opening early days. And
Speaker 1: there's a transition line for you. Um. In terms of
Speaker 1: exceeding expectations, the Republican nominee for president seems to be
Speaker 1: doing that right now. He has some no no discernible
Speaker 1: foreign policy or domestic policy plans. He seems to backtrack
Speaker 1: on all of his proposals on an almost daily basis now,
Speaker 1: and yet has closed the gap with Hillary Clinton. What's
Speaker 1: going on? Yeah? Seek In terms of the national pooling,
Speaker 1: it's not necessarily surprising that the the gap has narrowed.
Speaker 1: She had really almost a historically high post convention bounce,
Speaker 1: and it didn't look like it was necessarily going to, um,
Speaker 1: you know, be sustainable. I think that the question though,
Speaker 1: is it will continue to narrow or will it plateau
Speaker 1: around sort of a three to four percent lead, which
Speaker 1: she has, which she has right now. I think in
Speaker 1: addition to national polling, we're looking at state polling because
Speaker 1: as you know, this this presidency and this race is
Speaker 1: going to be dictated just by a number of swing states. UM.
Speaker 1: So I think that even become more pressing, probably from
Speaker 1: the Clinton perspective, are the recent numbers that are coming
Speaker 1: out of Ohio and Florida. She still has commanding leads
Speaker 1: and key swing states such as Pennsylvania and North Carolina
Speaker 1: and Michigan. UM. But she's she's definitely gonna be focusing
Speaker 1: on Ohio Florida because those are must wins for Trump. UM,
Speaker 1: and she's going to try to obviously take that away
Speaker 1: from from him. Well, somebody said, if this election is
Speaker 1: about Donald Trump, she wins, it's about Hillary Clinton. He
Speaker 1: could win. So what's it about right now? Yeah, And
Speaker 1: I think you know it's um. She obviously there was
Speaker 1: the reserve a flew of negative news around her UM.
Speaker 1: In August she was quite quiet because she was you know,
Speaker 1: fundraising and he and he's gotten to be, you know,
Speaker 1: much more disciplined. I think that the next inflection point
Speaker 1: from a market's perspective, from the public's perspective, is going
Speaker 1: to be the debates, and the first debate is septembery.
Speaker 1: Unlike this, you know, the recent UM forum that was
Speaker 1: on nb on NBC, this will be a ninety minute,
Speaker 1: uninterrupted debate where you know, the candidates will really have
Speaker 1: to dive into two policy details. I think to your
Speaker 1: earlier point, we haven't really seen a lot from Donald
Speaker 1: Trump and he won't be able to sort of rely
Speaker 1: on the commercial breaks UM or the sort of the
Speaker 1: headlines in order to evade, you know, really serve substance
Speaker 1: to policy questions. So I think that the next inflection
Speaker 1: point September twenty six, and so watch them, watch the
Speaker 1: pools after that UM and see through how they come out,
Speaker 1: because I think that that should be much more revealing.
Speaker 1: And then what we're seeing now Frenzy Lakwa in London
Speaker 1: and Michael McKee in New York, Tom Keane taking a
Speaker 1: couple of days off. Thank you for lending him your
Speaker 1: day's friend. Very nice. I hope he's rested when he
Speaker 1: comes back Tan, rested and ready. He's probably trying to
Speaker 1: save his strength for the political campaign. Had sixty days
Speaker 1: to go, and I'm sure most Americans think that's fifty
Speaker 1: nine and a half too many. Libby Cantrill is the
Speaker 1: executive vice president and political analyst for Pacific Investment Management Company,
Speaker 1: and she is with us today and before the break,
Speaker 1: Lebby we were talking about the importance of the debates,
Speaker 1: and I wonder to a certain extent how important they
Speaker 1: are in the sense that are there a lot of
Speaker 1: people who are yet to be convinced who could be
Speaker 1: maybe convinced to vote for Donald Trump? Or is his
Speaker 1: support you know, really hard among those people who will
Speaker 1: vote for him. And the real story is can Hillary
Speaker 1: get her supporters out to vote? Yeah? I think that
Speaker 1: that that's definitely a dynamic. But I also I mean
Speaker 1: it's it's quite surprising to us given how well we
Speaker 1: think we know these candidates, but the number of undecided
Speaker 1: voters this election cycle is actually quite high. Just if
Speaker 1: you look at you know, recent um compared to recent
Speaker 1: election cycles, so ten of voters are undecided, which means
Speaker 1: that the point could be more volatile, but that the
Speaker 1: things like the debates actually could make quite a big difference.
Speaker 1: So y as to me, is is this going to
Speaker 1: be Hillary's task to try to convince some of those
Speaker 1: maybe moderate Republicans who feel uneasy with Donald Trump to
Speaker 1: come over and vote for her. But I think more
Speaker 1: importantly it's going to be trying to convince those independents
Speaker 1: who really haven't made a decision yet. Um. Even if
Speaker 1: that that might be amazing to some of us, given
Speaker 1: how well we feel like we know these candidates. Well,
Speaker 1: how does it It's been a lot of talk about
Speaker 1: Hillary working on the ground game and Donald Trump not
Speaker 1: working on the ground game, but he had a ground game.
Speaker 1: He hadn't had to get out the vote effort at all.
Speaker 1: Does it really matter? Yeah, I mean that is he is.
Speaker 1: He's definitely calling sort of conventional wisdom into question and
Speaker 1: lots of different respects. I mean, from a ground game perspective,
Speaker 1: from sort of a state infrastructure field office, um, registering
Speaker 1: people to vote. I mean, he his members are really poultry.
Speaker 1: And I think it's the latest is he has eight
Speaker 1: eight field offices and swing states versus Hillary Clinton, who
Speaker 1: has almost three hundred. So Um, he hasn't really built
Speaker 1: out that state infrastructure. You know, he hadn't really done
Speaker 1: that for the primaries either, and and Ted Cruz of
Speaker 1: course had and that didn't really prove to be decisive.
Speaker 1: I mean that the general elections a little bit different
Speaker 1: because the primaries are already speaking to folks who are
Speaker 1: already galvanized to vote, whereas you know, the general election
Speaker 1: voters and especially some of the folks that Donald Trump
Speaker 1: is appealing to, they may not even be registered voters,
Speaker 1: so they this is the you know, getting them registered,
Speaker 1: getting them to be early voter is going to maybe
Speaker 1: even be more critical. Um, and we haven't seen him
Speaker 1: and make those make those investments. But I think that
Speaker 1: the lesson I have learned is you can't underestimate Donald Trump.
Speaker 1: And I think a lot of folks who follow Washington
Speaker 1: have you know, sort of constantly underestimated him and then
Speaker 1: you know, have been sort of surprised. That's probably the Yeah,
Speaker 1: that's absolutely spot on. My problem is that I'm fed
Speaker 1: up with knowing about the candidates. I want to listen
Speaker 1: to policy. I want to really make sure that I
Speaker 1: understand what they're standing for. When is that going to
Speaker 1: come through yeah, and this is really Hillary Clinton's strength,
Speaker 1: right If you go to her website, she has policy
Speaker 1: position papers and white papers, and she wants to talk
Speaker 1: about the policies. I think she was getting frustrated with
Speaker 1: Matt lower a few days ago because you know, she
Speaker 1: didn't feel like he was allowing her to do that. Um.
Speaker 1: Donald Trump doesn't really have a policy operation. I think
Speaker 1: that's sort of the other thing that is used to
Speaker 1: being conventional wisdom. UM. A lot of his folks in
Speaker 1: his policy shops have reportedly or not work with him anymore. So. UM,
Speaker 1: I think that the debates again will really shine a
Speaker 1: spotlight on on potentially that deficiency. But again, don't underestimate
Speaker 1: Donald Trump. But those are the debates are really going
Speaker 1: to allow for the candidates to get into the details
Speaker 1: of their policy positions. UM. And so you should hopefully
Speaker 1: be sort of fatiated come September after the first debate,
Speaker 1: which is on September twenty six. Libby. When I'm so,
Speaker 1: I'm sitting here in London, how do Americans vote? We
Speaker 1: have very strict rules in London about how much you
Speaker 1: can spend on the campaign. When you can start campaigning
Speaker 1: in a general election, do people in the US vote
Speaker 1: on personality, do they vote on policy or is twenty
Speaker 1: six team just different? Yeah, I mean it's a really
Speaker 1: difficult thing to say. Um, you know, I think that
Speaker 1: you know, don't underestimate Americans. Americans do care about the policies.
Speaker 1: They don't just you know, they don't just care about personality.
Speaker 1: But personality is important. I think one of the reasons
Speaker 1: why George W. Bush beat Al Gore, although very very
Speaker 1: marginally in two thousand, was because people have this perception
Speaker 1: that George W. Bush Bush could get a beer with um. So,
Speaker 1: you know, personality definitely matters, but people want to feel
Speaker 1: comfortable with their commander in chief that these folks have
Speaker 1: the nuclear codes, they're making incredibly important policy decisions through
Speaker 1: the statement of the obvious, and that they are you
Speaker 1: know that they know, um, they know that sort of
Speaker 1: the policy details. So I think it's sort of a combination,
Speaker 1: but definitely again is calling into conventional wisdom into question
Speaker 1: for sure. Even with the questions about who's leading the
Speaker 1: presidential race, there's seems to be a unanimity of at
Speaker 1: least newspaper headlines suggesting that Democrats are winning the race
Speaker 1: for the United States Senate. How do you read it
Speaker 1: at this point? Uh, if even if Donald Trump wins,
Speaker 1: the Democrats still have a very good chance to take
Speaker 1: the Senate, I don't you know, I don't think so necessarily.
Speaker 1: So the Republicans just going into this election cycles are,
Speaker 1: regardless of the Donald Trump phenomenon, we're facing a pretty
Speaker 1: challenging cycle of the thirty four seats up for re election,
Speaker 1: twenty four being defended by by Republicans. Of those seven
Speaker 1: and states that of the President Obama has won twice,
Speaker 1: So it was going to be a difficult election cycle regardless.
Speaker 1: But but the real vulnerable races are in swing states.
Speaker 1: So they're in the Ohios, the Florida's, the Pennsylvania's, and
Speaker 1: North Carolina's, the New Hampshire's, And if there is really
Speaker 1: big turnout safe for Donald Trump in those states, then
Speaker 1: Donald Trump will get to the White House, but likely
Speaker 1: the Republicans will be able to retain the Senate and
Speaker 1: vice versa. If Hillary Clinton has big turnout in those
Speaker 1: in those swing states, then likely the Senate goes back
Speaker 1: to being Democratic. So it's sort of you know, how
Speaker 1: goes the White House, so goes the Senate. Um meaning
Speaker 1: that if Donald Trump is you know, is able to
Speaker 1: get to the White House. Uh, then they will likely
Speaker 1: the Republicans will be able to retain the on it,
Speaker 1: albeit with a pretty slim majority. And as Mike, you know,
Speaker 1: the sixty vote filibuster proof majority is the most important
Speaker 1: in the Senate, and neither party would get that. Yeah,
Speaker 1: that's not gonna happen. What about the House. Nobody thinks
Speaker 1: that the Republicans will lose the House. But how many
Speaker 1: seats could they lose? Well, I think Nancy Pelosi thinks
Speaker 1: that the Republicans just hoping. But yeah, I mean it's
Speaker 1: it's as we've talked about, because of the congressional redistrict team,
Speaker 1: because of the historically high Republican majority that the Republicans
Speaker 1: enjoying the House right now, you know, very unlikely that
Speaker 1: they lose the thirty seats that they would have to
Speaker 1: lose in order to lose the majority. But probably you know,
Speaker 1: losing ten, fifteen, maybe even twenty again, depending on what
Speaker 1: the turnout is for Hillary Clinton UM is certainly feasible.
Speaker 1: So Speaker Ryan is very likely to stay Speaker UM.
Speaker 1: But with a smaller majority going into at this point,
Speaker 1: we're just after Labor Day when people are supposed to
Speaker 1: start paying at ten. Is it the debates that are
Speaker 1: going to determine this election? You said they're really important
Speaker 1: or could you know, could a terrorist event or something
Speaker 1: like that really changed perceptions or do people have a
Speaker 1: pretty good picture of who these candidates are? Yeah? Well,
Speaker 1: I think again, just given that historically high undecided margin,
Speaker 1: you debates are going to be important. I think other
Speaker 1: new information that you know might come out on the
Speaker 1: Clinton's side or the Donald Trump side for that matter, um,
Speaker 1: might also be might also be definitive. But there's also
Speaker 1: a chance, of course of what's you people referred to
Speaker 1: as an October surprise, So something like you know, a
Speaker 1: terrorist attack, or more details about the content of Sat
Speaker 1: Hillary Clinton's emails, or you know, more revelations about SAT
Speaker 1: Donald Trump's connection to you know, alleged connection to Russia
Speaker 1: or what have you. So, um, you know, things like that.
Speaker 1: I think, just again, given this unconventional nature of this election,
Speaker 1: that could actually you know, move move voters. Um, So
Speaker 1: pay attention to the polling right after Kember, after those
Speaker 1: that that crucial first debate October night, October nine, or
Speaker 1: the other dates of the debate so those are going
Speaker 1: to also be important. But then again, pay attention to
Speaker 1: the swing state pulling because that's going to be really
Speaker 1: ultimately definitive um of the outcome of the White House.
Speaker 1: And as Libby would tell you, pay attention to the
Speaker 1: Denver Broncos this year after last night's big comeback with
Speaker 1: let me cancel from Pipco, thank you very much, our
Speaker 1: political analysts and Denver Broncos football atatist. Fran doesn't know that,
Speaker 1: but she she has a side job. Fran. Who you
Speaker 1: put your trust in matters. Investors have put their trust
Speaker 1: in independent registered investment advisors to the tune of four
Speaker 1: trillion dollars. Why they see their role is to serve,
Speaker 1: not sell. That's why Charles Schwab is committed to the
Speaker 1: success of over seven thousand independent financial advisors who passionately
Speaker 1: dedicate themselves to helping people achieve their financial goals. Learn
Speaker 1: more and find your independent advisor dot com. We were
Speaker 1: sailing on with losses inequities, but not much movement in
Speaker 1: the bond market until Eric Rosenren, the president of the
Speaker 1: Boston FED, came up with his hawkish comments. This is
Speaker 1: a man who had been on the dovish side of
Speaker 1: the ledger for quite some time, but now suggests that
Speaker 1: the FED is in danger of falling behind the curve because,
Speaker 1: in his words, we may already be beyond full employment.
Speaker 1: Gary Stern is the former president of the Minneapolis Fed,
Speaker 1: and Gary, this seems like quite a turnaround for a
Speaker 1: FED Bank president. Did you ever find yourself in a
Speaker 1: situation where um, Although I'm told reliably he did not
Speaker 1: actually say it, but the famous quote from John Maynard
Speaker 1: Ken's of when the facts change, I changed my mind,
Speaker 1: where the the economic facts changed, and shortly before a
Speaker 1: meeting you suddenly found yourself rethinking your your beliefs. Um.
Speaker 1: Not not that I recall to the extent that apparently
Speaker 1: Eric Rosengren has reassessed the situation. Uh. And I'm a
Speaker 1: bit surprised, not because I think we have to try
Speaker 1: to classify President ro rosen Grin as a hawk or
Speaker 1: a dove, but because it seems to me the labor
Speaker 1: market has been reasonably strong for a sustained period of time,
Speaker 1: and so I don't understand why you would, you know,
Speaker 1: belatedly come to the conclusion that perhaps we're at or
Speaker 1: maybe even beyond full employment. Uh. We've we've had very
Speaker 1: substantial employment gains on average for several years now. Uh.
Speaker 1: If you look around the country, there are many labor markets,
Speaker 1: not at all, but many labor markets where anyone who
Speaker 1: wants a job can have one. May not be you know,
Speaker 1: their dream job, or they may not get paid as
Speaker 1: much as they think they ought to, but in many markets,
Speaker 1: if you want a job, you can have one. I
Speaker 1: think that's been the case for some time. Uh. So
Speaker 1: you know something in ways much of this is to
Speaker 1: me anyway, is is not news? Um? Now, of course,
Speaker 1: you you know, you can get surprised if you get
Speaker 1: a major departure. Uh. For example, you know, if consumer
Speaker 1: spending seems to be trending up and you get one
Speaker 1: or two months of consecutive months of weakness, that that
Speaker 1: could force you to change your views pretty quickly. But
Speaker 1: in this case, as I said, the labor market seems
Speaker 1: to have been consistently healthy for an extended period of time. So, Gary,
Speaker 1: does that mean if you had to vote on September
Speaker 1: twenty one, would you vote for a hike? Yes? I would, uh,
Speaker 1: because I for the reasons I basically expressed, Uh, I
Speaker 1: think the economy is fundamentally sound. I think we're certainly
Speaker 1: close to full cloiment, and the employment gains have been
Speaker 1: substantial over time. And you know the other part of
Speaker 1: the FED mandate is price stability, and that too has
Speaker 1: been achieved. So the question seems to me to be
Speaker 1: what what how do we conduct policy from here uh
Speaker 1: to sustain our accomplishments. But wage inflation is not as
Speaker 1: strong as people were expecting, and I guess the question
Speaker 1: should be, do you fear that the UK the US
Speaker 1: economy overheats if you don't hike in September? I don't think.
Speaker 1: I don't think overheating is imminent by any stretch of
Speaker 1: the imagination. And that's why the FED, you know, still
Speaker 1: does have some leeway with regard to timing UM. And
Speaker 1: I agree with with the observation that that perhaps wage
Speaker 1: inflation has not been as rapid as one might have
Speaker 1: expected given the state of the labor market. But I
Speaker 1: would be a little cautious about emphasizing that, because UH,
Speaker 1: the idea of cost push inflation was very popular in
Speaker 1: the nineties seventies, it was subsequently, I would say, fully discredited.
Speaker 1: I don't think I would put special emphasis on what's
Speaker 1: happening to wages or broader measures of compensation, and try
Speaker 1: to conclude how how inflation is likely to perform. I
Speaker 1: think ultimately what happens to inflation is up to central banks, UH,
Speaker 1: the Federal Reserve, the europe European Central Bank, the Bank
Speaker 1: of Japan, and so forth. And UH, compensation is obviously
Speaker 1: important because it's an ingredient in consumers ability to purchase
Speaker 1: goods and services. I don't think it's so important when
Speaker 1: it comes to inflation. UH. We are speaking with Gary's during,
Speaker 1: the former Minneapolis Fed Bank president, and we're talking about
Speaker 1: how the Fed seemed to be setting us up for
Speaker 1: a rate increase Jenny Yellen, Stanley Fisher out in Jackson Holme.
Speaker 1: Then along came the August payrolls report. And I wonder
Speaker 1: if you can have too much data dependence or you
Speaker 1: pay too much attention to the markets, Gary, because it
Speaker 1: seems like the minute you get a bad economic report,
Speaker 1: the markets say the Fed is not going to raise
Speaker 1: rates of futures, odds go way down, and then everybody
Speaker 1: writes off the feed and they back off. Well, there
Speaker 1: does seem to be some circularity to that along the
Speaker 1: lines you're described, but you know, the fet is. I
Speaker 1: think it goes beyond that. The fet is a fundamentally
Speaker 1: cautious organization. They don't they don't make an effort to,
Speaker 1: you know, try to get out in front of things
Speaker 1: or surprise people when unless they have to. So I
Speaker 1: think that, and I think that inherent caution has served
Speaker 1: the institution and has served the country well over time.
Speaker 1: So I'm not being critical of that, but I think
Speaker 1: they have out in themselves today to a point where
Speaker 1: data dependence has put them in a bit of a
Speaker 1: strait jacket. And it's because the data are in some
Speaker 1: sense inherently erratic. And I'm not talking about revisions on
Speaker 1: a month to month basis. I'm just talking about the
Speaker 1: nature of the incoming data. You know, in any given month,
Speaker 1: you might get a strong employment report, a good housing report,
Speaker 1: a mediocre report on consumer spending, and a week report
Speaker 1: on durable goods orders or something. Okay, what are you
Speaker 1: to do with all that? Gary Stern is with us
Speaker 1: from the Minneapolis Fed, And Gary, I will go back
Speaker 1: to what I was saying about the markets, and there's
Speaker 1: a perception that the FED is being sort of led
Speaker 1: around by the markets these days. Yeah, I think there
Speaker 1: is that perception. I think you're you're right about that.
Speaker 1: I and there may be there may be some truth
Speaker 1: to it, but I suspect that's exaggerated. I think what
Speaker 1: the FED is being led around by UH is it's
Speaker 1: so called data dependency, and they really are, as best
Speaker 1: I can judge, dedicated to that. And it seems to
Speaker 1: me that you know that inherently puts them in a
Speaker 1: bit of a strait jacket because of the nature of
Speaker 1: the data, which are always almost always mixed, by which
Speaker 1: I mean some series come in strongly in any given months,
Speaker 1: Some series come in UH give you a week reading,
Speaker 1: some come in kind of mediocre. I don't know what
Speaker 1: to what you make of that if you're a policymaker.
Speaker 1: UM Sometimes, as we saw the last few months in
Speaker 1: the labor market, very strong gains in June and July,
Speaker 1: and then a game that was satisfactory in my view,
Speaker 1: but below expectations for August, and that you know that
Speaker 1: seems to have affected market participants, but it also seems
Speaker 1: to have affected FED policymakers, and and I think the
Speaker 1: FED needs to find a way to get beyond the
Speaker 1: strait jacket that seems to be being in posed by
Speaker 1: data dependence. Uh. And I think I don't think it's
Speaker 1: impossible to do that, but I think it takes some
Speaker 1: thought and some effort to do that at some communication
Speaker 1: with market participants as well. Gary, So you made your
Speaker 1: point very clear. You want the FED to gradually tighten
Speaker 1: starting from September. Do you not worry about dollar strength? No?
Speaker 1: I mean it's obviously there could be that there could
Speaker 1: be further dollar strength coming from that, although you might
Speaker 1: argue that a lot of that is priced in one
Speaker 1: way or another, hard to hard to know in advance. Um,
Speaker 1: but let's suppose that the dollar does strength other things equal, Uh,
Speaker 1: that would uh slow the pace of economic activity in
Speaker 1: the US. But it wouldn't, my judgment be profound. After all,
Speaker 1: the US, of all the major economies, is probably the
Speaker 1: least dependent on foreign trade exports or imports. And and
Speaker 1: so I wouldn't exaggerate the consequences of further strengthening of
Speaker 1: the dollar. And as I said, some of that might
Speaker 1: be priced in. Gary Serton, former president of the New
Speaker 1: York the Minneapolis Federal Reserve, Sorry, but I'm thinking of
Speaker 1: Paul Volker, you know, went to Minneapolis, came back to
Speaker 1: New York and then it ended up down in Washington.
Speaker 1: Next week they fed meat September one and uh Scarlett food.
Speaker 1: Tom Keene and I will have full coverage for you
Speaker 1: of the FEDS decision and Janet Yellin's news conference beginning
Speaker 1: at one pm UM and then the decision at two
Speaker 1: and she will speak. The chair will speak at two thirty.
Speaker 1: World will be paying attention. Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane, Michael McKee is at Economy. Before the podcast,
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio. Mm hmmm.
Speaker 1: Who you put your trust in? Matters? Investors have put
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