1 00:00:02,520 --> 00:00:07,560 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:20,079 --> 00:00:23,279 Speaker 2: This is Wall Street Week. I'm David Weston, bringing you 3 00:00:23,640 --> 00:00:27,440 Speaker 2: stories of capitalism. This week, a Chinese startup triggers a 4 00:00:27,520 --> 00:00:31,560 Speaker 2: text selloff, raising questions about whether the Magnificent seven can 5 00:00:31,640 --> 00:00:36,000 Speaker 2: continue to drive the stock market. Plus the fates of 6 00:00:36,000 --> 00:00:39,320 Speaker 2: office buildings in New York City. Some are glitzier and 7 00:00:39,440 --> 00:00:42,760 Speaker 2: have more to offer their tenants than their Class B counterparts, 8 00:00:42,800 --> 00:00:45,879 Speaker 2: but they have more in common in the challenges they 9 00:00:45,920 --> 00:00:50,199 Speaker 2: face than meets the eye. But we begin with a 10 00:00:50,240 --> 00:00:53,960 Speaker 2: story about goals, how we set them, how we achieve them, 11 00:00:54,360 --> 00:00:56,720 Speaker 2: and how we change our behavior to make sure we 12 00:00:56,840 --> 00:01:00,920 Speaker 2: do goals like the Federal Reserve's goal of achieving two 13 00:01:00,920 --> 00:01:01,760 Speaker 2: percent inflation. 14 00:01:02,280 --> 00:01:07,240 Speaker 3: Over time, inflation has moved much closer to our two 15 00:01:07,240 --> 00:01:10,320 Speaker 3: percent longer run goal or two percent objective, moving down 16 00:01:10,360 --> 00:01:12,840 Speaker 3: to two percent, But get back to two percent inflation? 17 00:01:13,120 --> 00:01:17,000 Speaker 3: Are two percent objective sustainably down to two percent? Confidence 18 00:01:17,040 --> 00:01:19,720 Speaker 3: that inflation is moving sustainably toward two percent? 19 00:01:21,120 --> 00:01:24,600 Speaker 2: Given how often we hear about that two percent inflation goal, 20 00:01:25,000 --> 00:01:27,880 Speaker 2: you'd think it was just obvious, But it's not. 21 00:01:29,040 --> 00:01:32,920 Speaker 4: I do think to the public, there is this question, 22 00:01:33,120 --> 00:01:36,040 Speaker 4: why can't the price level, go back to what it 23 00:01:36,200 --> 00:01:41,280 Speaker 4: was before. Why even have a two percent inflation target? 24 00:01:41,840 --> 00:01:44,440 Speaker 5: I always get questions about it, even before the pandemic, 25 00:01:44,480 --> 00:01:47,400 Speaker 5: before the run up of inflation. Why isn't it zero? 26 00:01:47,840 --> 00:01:50,800 Speaker 5: Why aren't we aiming for zero instead of aiming for two? 27 00:01:51,200 --> 00:01:53,920 Speaker 6: The question I'm asked the most on this is did 28 00:01:53,960 --> 00:01:55,680 Speaker 6: you just pluck that number out of the air? 29 00:01:56,400 --> 00:01:59,400 Speaker 2: And over the years, the Fed's two percent target has 30 00:01:59,400 --> 00:02:03,200 Speaker 2: come under question from those that follow it closely. So 31 00:02:03,400 --> 00:02:07,320 Speaker 2: where did that two percent inflation target come from? For that, 32 00:02:07,720 --> 00:02:09,840 Speaker 2: we have to go all the way back to nineteen 33 00:02:09,960 --> 00:02:15,239 Speaker 2: ninety in New Zealand when Don Brash was the RBNZ governor. 34 00:02:16,160 --> 00:02:19,760 Speaker 7: New Zealand had had very high inflation by certain by 35 00:02:19,760 --> 00:02:24,480 Speaker 7: OECID standards anyway, double digit inflation figures through much of 36 00:02:24,480 --> 00:02:28,480 Speaker 7: the seventies and early eighties, and the then labor government 37 00:02:28,520 --> 00:02:31,200 Speaker 7: decided that they were going to get inflation right down. 38 00:02:32,000 --> 00:02:35,720 Speaker 7: In ninety eighty eight, the Minister Finance, asked about inflation 39 00:02:35,880 --> 00:02:38,520 Speaker 7: dropping below ten percent for the first time in some years, 40 00:02:38,960 --> 00:02:42,240 Speaker 7: said well, aren't you satisfied now? And the minister said no, 41 00:02:42,440 --> 00:02:45,480 Speaker 7: I'm looking for zero inflation or maybe zero to one percent. 42 00:02:46,240 --> 00:02:48,919 Speaker 7: Over the next couple of years that was modified gradually, 43 00:02:49,440 --> 00:02:53,280 Speaker 7: so the target became zero to two percent by nineteen 44 00:02:53,360 --> 00:02:56,160 Speaker 7: ninety two, and that was the target that I signed 45 00:02:56,240 --> 00:02:59,959 Speaker 7: up to. Subsequently, of course, the target was slightly amended 46 00:03:00,520 --> 00:03:03,079 Speaker 7: and we went to a target at midpoint of two percent. 47 00:03:04,000 --> 00:03:06,640 Speaker 7: We could explain to people what we were targeting. People 48 00:03:06,760 --> 00:03:10,840 Speaker 7: understood the game, and in the early years, particularly of 49 00:03:10,880 --> 00:03:13,600 Speaker 7: my time as governor, I spent a huge amount of 50 00:03:13,600 --> 00:03:17,200 Speaker 7: time talking to farmers groups, rotary clubs, church groups, any 51 00:03:17,240 --> 00:03:20,000 Speaker 7: groups that would listen, making it very clear that we 52 00:03:20,000 --> 00:03:22,880 Speaker 7: were deadly serious about achieving that target. 53 00:03:23,800 --> 00:03:27,000 Speaker 2: And from there it went worldwide. 54 00:03:26,560 --> 00:03:30,240 Speaker 8: Inflation returns to our two percent medium term target. 55 00:03:30,360 --> 00:03:33,440 Speaker 4: Inflation is now back to the two percent target. 56 00:03:33,600 --> 00:03:36,160 Speaker 8: Inflation has been close to our two percent target. 57 00:03:36,680 --> 00:03:40,840 Speaker 2: Canada followed suit, then the UK and others, and in 58 00:03:40,920 --> 00:03:44,920 Speaker 2: early twenty twelve the US adopted the two percent target. 59 00:03:45,480 --> 00:03:48,080 Speaker 9: The Committee judges at inflation at the rate of two percent, 60 00:03:48,600 --> 00:03:51,680 Speaker 9: it's most consistent over the longer run, with our statutory 61 00:03:51,720 --> 00:03:54,880 Speaker 9: mandate clearly communicating to the public this two percent goal 62 00:03:54,920 --> 00:03:58,680 Speaker 9: for inflation over the longer run should help foster price 63 00:03:58,680 --> 00:04:01,640 Speaker 9: stability and moderate long term interest rates, and will it 64 00:04:01,760 --> 00:04:05,160 Speaker 9: enhance the committee's ability to promote maximum employment in the 65 00:04:05,160 --> 00:04:07,360 Speaker 9: face of significant economic disturbances. 66 00:04:08,280 --> 00:04:11,640 Speaker 2: John Williams, now the New York FED President, was in 67 00:04:11,720 --> 00:04:15,040 Speaker 2: charge of the San Francisco FED when the policy was adopted. 68 00:04:15,560 --> 00:04:18,720 Speaker 2: He recalls that the motivation was transparency. 69 00:04:19,400 --> 00:04:22,239 Speaker 6: When cher Bernanke came to the FED, you know, clearly 70 00:04:22,279 --> 00:04:26,080 Speaker 6: he had strong desire for us to continue the worker 71 00:04:26,200 --> 00:04:29,360 Speaker 6: on transparency, be clear about our objectives, which actually had 72 00:04:29,360 --> 00:04:33,360 Speaker 6: started under Chairman Greenspan, and the love of movement toward transparency. Then, 73 00:04:34,000 --> 00:04:36,359 Speaker 6: So going back to January or twenty twelve and the 74 00:04:36,360 --> 00:04:38,640 Speaker 6: discussions that led to that, I had just joined the 75 00:04:38,680 --> 00:04:41,440 Speaker 6: FMC in the spring of twenty eleven, so I was 76 00:04:41,520 --> 00:04:44,040 Speaker 6: there for that, and it was really a focus on 77 00:04:44,120 --> 00:04:48,360 Speaker 6: greater transparency, greater clarity about what does good look like. 78 00:04:48,800 --> 00:04:51,000 Speaker 6: We don't want inflation that's too low, we don't want 79 00:04:51,000 --> 00:04:54,960 Speaker 6: inflation that's too high, and importantly, what's the inflation rate 80 00:04:55,000 --> 00:04:58,200 Speaker 6: that's consistent with a dual mandate that the FED has, 81 00:04:58,279 --> 00:04:59,920 Speaker 6: which is relatively unique to the FED. 82 00:05:00,320 --> 00:05:01,039 Speaker 3: Good afternoon. 83 00:05:01,760 --> 00:05:04,960 Speaker 2: But the urge to have a clear, transparent inflation goal 84 00:05:05,120 --> 00:05:07,919 Speaker 2: didn't mean that the goal necessarily had to be the 85 00:05:07,960 --> 00:05:11,320 Speaker 2: two percent one that other countries had adopted. 86 00:05:11,200 --> 00:05:13,400 Speaker 6: With nineteen participants or however many were in the room 87 00:05:13,400 --> 00:05:15,640 Speaker 6: at the time. There's always a wide range of views. 88 00:05:16,160 --> 00:05:18,360 Speaker 6: So if you were to ask the question is one 89 00:05:18,360 --> 00:05:20,080 Speaker 6: and a half percent or two or two and a 90 00:05:20,120 --> 00:05:23,120 Speaker 6: half percent? Are those right or wrong answers? I think 91 00:05:23,160 --> 00:05:25,880 Speaker 6: any of those answers would work. I think two percent 92 00:05:25,960 --> 00:05:29,400 Speaker 6: is a good kind of Goldilock's. 93 00:05:28,839 --> 00:05:32,200 Speaker 2: Answer, given what other central banks had already done by 94 00:05:32,240 --> 00:05:36,960 Speaker 2: twenty twelve, chaer Bernanke's announcement was hardly a shock, but 95 00:05:37,080 --> 00:05:39,919 Speaker 2: it did spark plenty of debate, and one of the 96 00:05:39,960 --> 00:05:44,359 Speaker 2: voices initially against the target was the current Chicago FED President, 97 00:05:44,680 --> 00:05:46,719 Speaker 2: Austin Gouldsby. 98 00:05:46,800 --> 00:05:48,280 Speaker 10: I wasn't in a FED at that time. 99 00:05:48,360 --> 00:05:52,440 Speaker 4: I was actually kind of publicly critical that two point 100 00:05:52,600 --> 00:05:57,440 Speaker 4: zero percent conveys a false sense of precision, that the 101 00:05:57,520 --> 00:06:01,000 Speaker 4: inflation's a noisy series and just telling the difference. If 102 00:06:01,040 --> 00:06:05,400 Speaker 4: I told you how many months of inflation data would 103 00:06:05,400 --> 00:06:09,880 Speaker 4: it take, given the variability of the series, to tell 104 00:06:09,920 --> 00:06:14,680 Speaker 4: the difference between a two point zero percent inflation rate 105 00:06:14,720 --> 00:06:18,039 Speaker 4: and a two point two percent inflation rate, and the 106 00:06:18,120 --> 00:06:21,520 Speaker 4: answer is years of not decades of data before you 107 00:06:21,560 --> 00:06:23,440 Speaker 4: would be able to even tell the difference. So that's 108 00:06:23,440 --> 00:06:26,880 Speaker 4: why I was kind of critical at the time. But 109 00:06:27,040 --> 00:06:30,040 Speaker 4: that said, I've going to completely changed my view and 110 00:06:30,120 --> 00:06:31,839 Speaker 4: I'm now a strong advocate. 111 00:06:32,839 --> 00:06:35,640 Speaker 2: Whatever the pluses and minuses of the fed's two percent 112 00:06:35,680 --> 00:06:38,600 Speaker 2: target were when it was adopted over a decade ago, 113 00:06:38,880 --> 00:06:42,359 Speaker 2: it's now well established and the markets have come to 114 00:06:42,400 --> 00:06:45,920 Speaker 2: depend on it. The FED has a two percent inflation 115 00:06:45,960 --> 00:06:49,200 Speaker 2: target on average. How does that affect the markets? 116 00:06:49,600 --> 00:06:53,120 Speaker 11: It's extremely important. So I'll start with that because and 117 00:06:53,480 --> 00:06:56,039 Speaker 11: having that credibility that it is two percent over time, 118 00:06:56,440 --> 00:06:59,359 Speaker 11: because what we do is the market is essentially pricing 119 00:06:59,400 --> 00:07:03,240 Speaker 11: in and expect and a risk around the expectation over time. 120 00:07:03,720 --> 00:07:06,960 Speaker 2: Pria Misra is a portfolio manager at JP Morgan. 121 00:07:07,560 --> 00:07:11,040 Speaker 11: So, now if my inflation is somewhat understood, then I'm 122 00:07:11,080 --> 00:07:13,840 Speaker 11: pricing real rates over it, and so I'm talking about 123 00:07:13,840 --> 00:07:18,600 Speaker 11: the treasury curve. It contains that treasury curve the inflation pad. 124 00:07:18,680 --> 00:07:20,840 Speaker 11: Then we have to just price in where are real rates? 125 00:07:21,320 --> 00:07:25,160 Speaker 11: So I think it helps anchor expectation. It also tells 126 00:07:25,240 --> 00:07:29,920 Speaker 11: us how should the market price in the FED response 127 00:07:30,040 --> 00:07:33,840 Speaker 11: to either another policy shock, fiscal policy or a shock 128 00:07:33,920 --> 00:07:35,400 Speaker 11: to the economy. 129 00:07:35,440 --> 00:07:38,440 Speaker 2: For someone dealing daily in the markets, like Misra. The 130 00:07:38,480 --> 00:07:41,520 Speaker 2: fact of simply having a clear target is more important 131 00:07:41,520 --> 00:07:43,640 Speaker 2: than exactly what that target is. 132 00:07:44,720 --> 00:07:48,320 Speaker 11: Somewhere in the two to three percent range is fair. Now, 133 00:07:48,320 --> 00:07:52,080 Speaker 11: the Fed in twenty twelve pick two percent. It's somewhat arbitrary. 134 00:07:52,120 --> 00:07:53,520 Speaker 11: You could have picked two and a half, but they 135 00:07:53,600 --> 00:07:56,240 Speaker 11: picked two. I think it's a fair number. It allows 136 00:07:56,440 --> 00:07:57,880 Speaker 11: the fair if you think the Fed doesn't want to 137 00:07:57,880 --> 00:08:00,280 Speaker 11: go to negative rates, and look at Europe and it's 138 00:08:00,320 --> 00:08:02,760 Speaker 11: not clear the negative rates with that effective In fact, 139 00:08:02,760 --> 00:08:06,520 Speaker 11: they have all these negative externalities. It allows if inflation 140 00:08:06,640 --> 00:08:09,400 Speaker 11: is at two, it allows real rates to go negative 141 00:08:09,400 --> 00:08:11,960 Speaker 11: because effect funds gets to zero. That's a negative two 142 00:08:11,960 --> 00:08:15,160 Speaker 11: percent real rate, which is very stimulative for the economy. 143 00:08:15,200 --> 00:08:17,880 Speaker 11: So I think somewhen that two to three percent range 144 00:08:17,920 --> 00:08:18,480 Speaker 11: is important. 145 00:08:19,200 --> 00:08:21,760 Speaker 2: As much as the markets rely on that fixed two 146 00:08:21,840 --> 00:08:24,840 Speaker 2: percent target, does it matter that the Fed doesn't hit 147 00:08:24,880 --> 00:08:28,520 Speaker 2: it all that often? Since cher Bernanke announced the target 148 00:08:28,520 --> 00:08:32,160 Speaker 2: in twenty twelve, it's been within zero point two percent 149 00:08:32,280 --> 00:08:35,440 Speaker 2: of target in only twenty of one hundred and fifty 150 00:08:35,480 --> 00:08:39,640 Speaker 2: five monthly readings, and in more recent times, inflation has 151 00:08:39,679 --> 00:08:43,840 Speaker 2: been stubbornly stuck above the target after peaking in twenty 152 00:08:43,880 --> 00:08:48,320 Speaker 2: twenty two. The core PCEE that's the Fed's preferred inflation gauge, 153 00:08:48,760 --> 00:08:51,400 Speaker 2: showed signs of progress when it fell to three percent 154 00:08:51,520 --> 00:08:55,679 Speaker 2: in twenty twenty three, but since then it's largely flatlined, 155 00:08:56,480 --> 00:09:00,120 Speaker 2: leaving some to speculate about possible upward risks to infl 156 00:09:00,920 --> 00:09:04,280 Speaker 2: given an economy that appears to be running hotter than anticipated, 157 00:09:04,720 --> 00:09:09,400 Speaker 2: perhaps because of structural changes, but suggests changing the inflation 158 00:09:09,440 --> 00:09:12,160 Speaker 2: target at this point to those in the markets, and 159 00:09:12,240 --> 00:09:15,680 Speaker 2: you get a strong reaction. The Fed has said we're 160 00:09:15,679 --> 00:09:18,360 Speaker 2: not looking at a two percent target right now. Let's 161 00:09:18,400 --> 00:09:21,280 Speaker 2: assume what counterfactual. What if the Fed tomorrow came out 162 00:09:21,320 --> 00:09:22,960 Speaker 2: and said it's not two percent, it's two and a half, 163 00:09:22,960 --> 00:09:25,840 Speaker 2: maybe even three percent. How would the markets react? 164 00:09:26,240 --> 00:09:29,079 Speaker 11: My blood pressure is increasing, just as you say it, 165 00:09:29,360 --> 00:09:32,520 Speaker 11: because it's a Pandora's box, right, you start with it's 166 00:09:32,559 --> 00:09:35,360 Speaker 11: just a fifty basis point increase, it's a slippery slope. 167 00:09:35,400 --> 00:09:38,920 Speaker 11: A year later, well maybe it's another fifty basis Once 168 00:09:39,000 --> 00:09:43,920 Speaker 11: you open the door to any increase in the inflation target, 169 00:09:44,200 --> 00:09:46,160 Speaker 11: I think the market has to price in the risk 170 00:09:46,240 --> 00:09:50,320 Speaker 11: that could continue to rise given bad inflation is right 171 00:09:50,360 --> 00:09:53,560 Speaker 11: now above target. I think it's disingenuous for the FED 172 00:09:53,600 --> 00:09:56,160 Speaker 11: to raise that target. It's like me trying to run 173 00:09:56,200 --> 00:09:58,680 Speaker 11: a marathon and then when I realize it's really hard 174 00:09:58,720 --> 00:10:00,840 Speaker 11: to run that much, I just look my target to 175 00:10:00,880 --> 00:10:03,240 Speaker 11: a ten k. Not that I can run a lot, 176 00:10:03,280 --> 00:10:05,840 Speaker 11: but you know, it just doesn't sound credible. 177 00:10:06,880 --> 00:10:11,240 Speaker 4: We said the target is two percent, and once you 178 00:10:11,440 --> 00:10:16,000 Speaker 4: set a target, that is a sacred promise that the 179 00:10:16,040 --> 00:10:19,600 Speaker 4: central Bank has made, and you can't debate coming up 180 00:10:19,640 --> 00:10:22,679 Speaker 4: with a new target just because you're not hitting the 181 00:10:22,720 --> 00:10:25,760 Speaker 4: old target. You got to finish your job before you 182 00:10:25,800 --> 00:10:27,040 Speaker 4: start looking for a new job. 183 00:10:27,840 --> 00:10:30,760 Speaker 11: I would say on inflation, it all comes down to expectations. 184 00:10:30,760 --> 00:10:33,040 Speaker 11: So why do I think we should take the inflation 185 00:10:33,080 --> 00:10:36,640 Speaker 11: target for granted, is because expectations. It would be great 186 00:10:36,679 --> 00:10:39,760 Speaker 11: if inflation expectations are well anchored, because then if I'm 187 00:10:39,800 --> 00:10:43,440 Speaker 11: a business, I can plan for pricing, I can plan 188 00:10:43,520 --> 00:10:46,559 Speaker 11: for my investments over time because I know this is 189 00:10:46,600 --> 00:10:50,319 Speaker 11: where inflation, roughly speaking, on average, will be over time. 190 00:10:51,200 --> 00:10:53,920 Speaker 11: If I'm a household, I can have that same expectation. 191 00:10:54,120 --> 00:10:56,880 Speaker 11: If I'm an employee and I'm going to ask my 192 00:10:57,120 --> 00:10:59,840 Speaker 11: employer for a raise, again I have a sense of 193 00:11:00,120 --> 00:11:00,400 Speaker 11: that is. 194 00:11:01,080 --> 00:11:04,360 Speaker 2: But for all the benefits of setting expectations for overall 195 00:11:04,400 --> 00:11:08,200 Speaker 2: inflation with a simple single goal of two percent, it 196 00:11:08,240 --> 00:11:11,400 Speaker 2: doesn't mean that everyone will experience the same level of 197 00:11:11,400 --> 00:11:17,560 Speaker 2: inflation across all socioeconomic groups, industries, or geographic areas. And 198 00:11:17,679 --> 00:11:21,439 Speaker 2: after a sharp ramping up of inflation, those expectations don't 199 00:11:21,440 --> 00:11:24,600 Speaker 2: return us to the prices we knew only three years ago. 200 00:11:25,440 --> 00:11:28,520 Speaker 2: So that is where we turn next. How people are 201 00:11:28,559 --> 00:11:31,760 Speaker 2: affected by inflation that hits us all differently. 202 00:11:32,480 --> 00:11:35,400 Speaker 5: People feel the higher prices. I feel the higher prices, 203 00:11:35,440 --> 00:11:37,880 Speaker 5: and when I go and explain, well, inflation is coming down, 204 00:11:37,920 --> 00:11:39,760 Speaker 5: of course they don't see that because they go to 205 00:11:39,840 --> 00:11:42,440 Speaker 5: the grocery store as I do, and prices are still high. 206 00:11:42,840 --> 00:11:45,640 Speaker 5: I do the grocery shopping for my family. I still 207 00:11:45,679 --> 00:11:49,679 Speaker 5: have sticker shock. I haven't adjusted in my expectations about 208 00:11:49,720 --> 00:11:51,640 Speaker 5: what normal is when I go to the grocery store. 209 00:11:53,480 --> 00:11:56,320 Speaker 2: When we come back, our colleague Michael McKee brings us 210 00:11:56,320 --> 00:11:59,360 Speaker 2: a story of how Americans in the Midwest react to 211 00:11:59,360 --> 00:12:02,400 Speaker 2: inflation and it hits them, and why they may not 212 00:12:02,600 --> 00:12:06,000 Speaker 2: always feel as reassured as the markets about that two 213 00:12:06,080 --> 00:12:10,319 Speaker 2: percent fed goal. That's next on Wall Street Week on Bloomberg. 214 00:12:18,000 --> 00:12:20,719 Speaker 2: This is Wall Street Week. I'm David Weston bringing you 215 00:12:20,920 --> 00:12:24,920 Speaker 2: stories of capitalism. Now, we continue our look at inflation, 216 00:12:25,480 --> 00:12:28,680 Speaker 2: the Federal Reserve's target rate, and how prices are felt 217 00:12:28,720 --> 00:12:32,200 Speaker 2: and viewed differently depending on where you live. To tell 218 00:12:32,240 --> 00:12:35,640 Speaker 2: that story, we bring in Bloomberg's International Economics and Policy 219 00:12:35,679 --> 00:12:37,720 Speaker 2: correspondent Michael McKee. 220 00:12:38,080 --> 00:12:41,319 Speaker 12: The Fed is steadfastly committed to bringing inflation back down 221 00:12:41,400 --> 00:12:44,640 Speaker 12: to two percent. That much is clear, but inflation is 222 00:12:44,679 --> 00:12:48,040 Speaker 12: felt and measured differently all across America. Those in the 223 00:12:48,080 --> 00:12:51,839 Speaker 12: Midwest may feel differently about the Fed's progress than those 224 00:12:51,880 --> 00:12:55,240 Speaker 12: in the markets. While inflation may be slowing for many, 225 00:12:55,440 --> 00:12:59,600 Speaker 12: prices remain high, posing a challenge for businesses across the country, 226 00:13:00,120 --> 00:13:06,520 Speaker 12: such as one restaurant on Chicago's South Side. 227 00:13:07,800 --> 00:13:11,040 Speaker 13: We're known for the best brisket in Chicago. We work 228 00:13:11,160 --> 00:13:15,760 Speaker 13: really hard to provide the area with true craft barbecue. 229 00:13:16,160 --> 00:13:21,079 Speaker 13: Our customers are regulars here because they love the atmosphere brisket. 230 00:13:21,320 --> 00:13:24,280 Speaker 12: Dominice Leitch is the owner and chef at Lexington Betty 231 00:13:24,320 --> 00:13:28,880 Speaker 12: Spokehouse on Chicago's South Side. She opened in twenty nineteen, 232 00:13:29,040 --> 00:13:32,679 Speaker 12: and like other restaurratories in Chicago and across America has 233 00:13:32,720 --> 00:13:35,880 Speaker 12: seen firsthand how the surgeon inflation over the past five 234 00:13:35,960 --> 00:13:37,959 Speaker 12: years has affected small businesses. 235 00:13:38,200 --> 00:13:40,000 Speaker 13: I'll bring it over to you when it's ready. Okay, 236 00:13:40,040 --> 00:13:43,160 Speaker 13: thank you. Everyone's favorite our brisket that we're known for. 237 00:13:43,480 --> 00:13:45,800 Speaker 13: Two years ago, I spend three dollars and eighty cents 238 00:13:45,800 --> 00:13:48,280 Speaker 13: per pound. Today I bought brisket for four dollars and 239 00:13:48,360 --> 00:13:50,800 Speaker 13: sixty cents per pound, which means we have to sell 240 00:13:50,840 --> 00:13:54,240 Speaker 13: it at a higher price. Inflation is really affecting the 241 00:13:54,320 --> 00:13:57,199 Speaker 13: restaurant because we have to spend more money on product, 242 00:13:57,280 --> 00:14:01,560 Speaker 13: therefore increasing the prices for our customers. It makes it 243 00:14:01,559 --> 00:14:05,000 Speaker 13: really uncomfortable. You typically have to give people explanation why 244 00:14:05,080 --> 00:14:07,120 Speaker 13: is brisky by the pound more this week than it 245 00:14:07,240 --> 00:14:09,320 Speaker 13: was last week, and disappoints people. 246 00:14:10,760 --> 00:14:14,600 Speaker 12: The chilenges facing leech play out across America even as 247 00:14:14,640 --> 00:14:17,720 Speaker 12: inflation falls from the dramatic highs of twenty twenty two. 248 00:14:18,240 --> 00:14:20,760 Speaker 12: A recent survey found that twenty four percent of small 249 00:14:20,760 --> 00:14:24,480 Speaker 12: businesses identified inflation as the top problem they face. 250 00:14:24,880 --> 00:14:26,240 Speaker 5: I think one of the things that we've learned in 251 00:14:26,280 --> 00:14:29,480 Speaker 5: the last two or three years is people really really 252 00:14:29,520 --> 00:14:30,880 Speaker 5: hate high inflation. 253 00:14:31,240 --> 00:14:33,840 Speaker 12: But do people who aren't on Wall Street even care 254 00:14:33,960 --> 00:14:36,720 Speaker 12: that the Fed has a two percent target? The impact 255 00:14:36,720 --> 00:14:39,880 Speaker 12: of inflation is often felt more acutely in rural areas, 256 00:14:40,160 --> 00:14:43,360 Speaker 12: where household wealth tends to be lower, with far less 257 00:14:43,400 --> 00:14:46,880 Speaker 12: disposable income, those earning the least have to dedicate a 258 00:14:46,920 --> 00:14:51,920 Speaker 12: greater proportion of their income to everyday necessities. That divide 259 00:14:51,960 --> 00:14:55,320 Speaker 12: is compounded by the fact that wealthier Americans, often found 260 00:14:55,360 --> 00:14:58,560 Speaker 12: in urban areas, have relied on a booming stock market 261 00:14:58,600 --> 00:15:01,720 Speaker 12: to increase their wealth that offset some of the effects 262 00:15:01,760 --> 00:15:06,480 Speaker 12: of inflation. Is the experience of inflation different here in 263 00:15:06,520 --> 00:15:09,040 Speaker 12: your district in the Midwest and to the west than 264 00:15:09,080 --> 00:15:11,320 Speaker 12: it might be in New York on Wall Street? 265 00:15:11,720 --> 00:15:13,640 Speaker 5: I think so. I mean, I think especially when you 266 00:15:13,680 --> 00:15:15,200 Speaker 5: go out to rural communities, and we have a lot 267 00:15:15,240 --> 00:15:19,240 Speaker 5: of rural areas, the challenges that families are facing are different. 268 00:15:19,280 --> 00:15:22,320 Speaker 5: I mean, they're all facing the higher prices that virtually 269 00:15:22,360 --> 00:15:25,720 Speaker 5: all Americans have faced, but they also have acute challenges. 270 00:15:26,080 --> 00:15:29,120 Speaker 5: Hospitals are closing in many rural districts because there's not 271 00:15:29,240 --> 00:15:33,360 Speaker 5: enough population to support those hospitals. In some cases, colleges 272 00:15:33,400 --> 00:15:37,360 Speaker 5: and universities are closing it's hard to get home construction built, 273 00:15:37,400 --> 00:15:40,120 Speaker 5: even though there's a lot of land available getting new 274 00:15:40,160 --> 00:15:43,680 Speaker 5: construction and new development built. So the challenges in rural 275 00:15:43,680 --> 00:15:47,280 Speaker 5: communities are different, but a lot of times they're driven 276 00:15:47,320 --> 00:15:50,080 Speaker 5: by price as well. So there's some important similarities, but 277 00:15:50,160 --> 00:15:52,520 Speaker 5: there's some specific differences in rural communities. 278 00:15:52,720 --> 00:15:55,520 Speaker 12: For the likes of Neil Kashkari and Austin gouldsby a 279 00:15:55,600 --> 00:16:00,600 Speaker 12: large part of their districts cover vast rural areas. Focus 280 00:16:00,640 --> 00:16:04,040 Speaker 12: in John Williams's jurisdiction is naturally on Wall Street in 281 00:16:04,040 --> 00:16:08,200 Speaker 12: New York City, where analysts and traders immediately dissect any 282 00:16:08,240 --> 00:16:11,600 Speaker 12: inflation data, not just looking at the headline number, but 283 00:16:11,680 --> 00:16:15,240 Speaker 12: peeling back the layers to look at individual contributors, which 284 00:16:15,280 --> 00:16:16,320 Speaker 12: can vary widely. 285 00:16:16,720 --> 00:16:19,080 Speaker 11: You get the headline number, the core number. Literally the 286 00:16:19,120 --> 00:16:23,280 Speaker 11: next second, I look at services, so services versus goods. 287 00:16:23,480 --> 00:16:27,200 Speaker 11: Then I look at where's shelter and what has been high? 288 00:16:27,280 --> 00:16:30,720 Speaker 11: So what's keeping inflation high is not a broad based 289 00:16:31,320 --> 00:16:33,920 Speaker 11: higher inflation across then I would be a little nervous 290 00:16:33,920 --> 00:16:36,680 Speaker 11: that are we getting stuck somewhere above too. It's really 291 00:16:36,720 --> 00:16:41,120 Speaker 11: a couple of components. It's shelter it's lagging. Zilow. Rents 292 00:16:41,120 --> 00:16:44,360 Speaker 11: are coming down, it's just taking a while. People who 293 00:16:44,440 --> 00:16:46,680 Speaker 11: own their homes, it takes a while for that to 294 00:16:46,720 --> 00:16:48,880 Speaker 11: show up in the data, so there's a lag there. 295 00:16:49,000 --> 00:16:53,640 Speaker 11: Auto insurance, medical insurance. These are imputed numbers. That's why 296 00:16:53,680 --> 00:16:56,160 Speaker 11: I think it's actually good for them to have that flexibility, 297 00:16:56,480 --> 00:16:59,840 Speaker 11: because why should they keep policy high just because shelter 298 00:16:59,880 --> 00:17:03,760 Speaker 11: and inflation, which is owner's equivalent rent is running above target, 299 00:17:04,400 --> 00:17:06,960 Speaker 11: just because it's adjusting slowly for. 300 00:17:06,960 --> 00:17:10,200 Speaker 12: Those in the markets every day, like JP Morgan's priam Isra. 301 00:17:10,560 --> 00:17:13,639 Speaker 12: Communication is a critical part of a FED president's job, 302 00:17:14,000 --> 00:17:17,000 Speaker 12: and a clear target two percent makes that job a 303 00:17:17,040 --> 00:17:17,760 Speaker 12: lot easier. 304 00:17:18,040 --> 00:17:20,960 Speaker 6: Well, you know, inflation is different in different parts of 305 00:17:21,000 --> 00:17:23,320 Speaker 6: the country, and it can be different at different times. 306 00:17:23,640 --> 00:17:27,160 Speaker 6: I think that you know where this became easier, unfortunately, 307 00:17:27,440 --> 00:17:29,840 Speaker 6: was when inflation was high and everybody said inflation it 308 00:17:29,880 --> 00:17:33,880 Speaker 6: was high everywhere. Inflation was clearly damaging to the economy. 309 00:17:33,960 --> 00:17:36,920 Speaker 6: It was harmful to families and businesses. Everybody wanted to 310 00:17:36,960 --> 00:17:39,840 Speaker 6: see inflation lower. I think the communication of the two 311 00:17:39,880 --> 00:17:43,600 Speaker 6: percent goal was incredibly powerful during this period because we 312 00:17:43,600 --> 00:17:46,080 Speaker 6: weren't questioning what should we should get inflation to what 313 00:17:46,200 --> 00:17:48,240 Speaker 6: is good look like, we said, absolutely, we need to 314 00:17:48,240 --> 00:17:50,440 Speaker 6: get to two percent. We're consistent on that. I think 315 00:17:50,440 --> 00:17:53,760 Speaker 6: people understood that the importance of price stability, the importance 316 00:17:53,760 --> 00:17:57,399 Speaker 6: of getting inflation back down. I think that was, you know, 317 00:17:57,600 --> 00:17:59,840 Speaker 6: regardless of all the debates of exactly how did you 318 00:17:59,840 --> 00:18:02,959 Speaker 6: come to two percent, it was a very clear, strong message. 319 00:18:02,960 --> 00:18:05,400 Speaker 6: It's a message that Chair Powell repeated over and over 320 00:18:05,480 --> 00:18:08,880 Speaker 6: that you know, we're not compromising on achieving that. 321 00:18:08,880 --> 00:18:11,800 Speaker 12: That's not the kind of analysis Americans elsewhere are making. 322 00:18:12,359 --> 00:18:15,760 Speaker 12: They see inflation in the supermarket, at the pump, and 323 00:18:16,080 --> 00:18:18,879 Speaker 12: in their rent. They're still coming to terms with so 324 00:18:18,960 --> 00:18:23,000 Speaker 12: called sticker shock, something goules By and Kashkari say requires 325 00:18:23,040 --> 00:18:24,920 Speaker 12: a different kind of communication. 326 00:18:25,440 --> 00:18:28,240 Speaker 5: We do a lot of conversation with labor unions and 327 00:18:28,320 --> 00:18:32,680 Speaker 5: one of the sources for me of information about people's expectations. 328 00:18:32,720 --> 00:18:36,200 Speaker 5: You know, in economics we talk about expectations matter, inflation 329 00:18:36,359 --> 00:18:40,520 Speaker 5: expectations matter. We talk to labor groups about what wage 330 00:18:40,600 --> 00:18:44,240 Speaker 5: rates they're negotiating in their multi year contracts, to look 331 00:18:44,280 --> 00:18:47,959 Speaker 5: at what is the inflation embedded in their own thinking 332 00:18:48,160 --> 00:18:50,920 Speaker 5: looking ahead two to three years now, as they're having 333 00:18:50,960 --> 00:18:54,160 Speaker 5: their negotiations. They might not be thinking, well, my inflation 334 00:18:54,240 --> 00:18:56,800 Speaker 5: expectations are x and I need this kind of wage growth, 335 00:18:57,080 --> 00:19:00,920 Speaker 5: but it's clear that inflation is woven into the fabric 336 00:19:01,320 --> 00:19:03,840 Speaker 5: of their thinking about the economy and the future, so 337 00:19:04,119 --> 00:19:07,959 Speaker 5: it does register. They may not be as technical as 338 00:19:08,040 --> 00:19:10,239 Speaker 5: a Wall Street analyst and how they talk about it, 339 00:19:10,560 --> 00:19:12,119 Speaker 5: but it's present in their thinking. 340 00:19:12,280 --> 00:19:15,040 Speaker 14: Inflation is eating away at the funds available. 341 00:19:15,200 --> 00:19:18,800 Speaker 12: Go back to the inflation of the nineteen seventies eighties, 342 00:19:19,200 --> 00:19:22,800 Speaker 12: Paul Volker's time in office, and people would do things 343 00:19:22,840 --> 00:19:25,359 Speaker 12: like bring two by fours and throw them in front 344 00:19:25,400 --> 00:19:27,240 Speaker 12: of the Fed book because they were mad at the 345 00:19:27,320 --> 00:19:31,200 Speaker 12: level of interest rates. You're in a kind of ironic situation. 346 00:19:32,000 --> 00:19:34,720 Speaker 12: People hate inflation, but they get mad at the people 347 00:19:34,760 --> 00:19:36,399 Speaker 12: whose job it is to fix it. 348 00:19:37,560 --> 00:19:38,399 Speaker 10: Look, that's true. 349 00:19:38,560 --> 00:19:43,040 Speaker 4: Nobody's nobody's ever like ah, my greatest central banker. They're 350 00:19:43,119 --> 00:19:45,960 Speaker 4: just mad if you don't do the job to keep 351 00:19:45,960 --> 00:19:46,680 Speaker 4: inflation law. 352 00:19:47,000 --> 00:19:49,879 Speaker 10: I was close personal friend of Paul Volgar. 353 00:19:49,960 --> 00:19:54,040 Speaker 4: He's a personal hero of mine and mentor his widow 354 00:19:54,200 --> 00:19:59,040 Speaker 4: uncle gave me that original two by four that they 355 00:19:59,119 --> 00:20:02,320 Speaker 4: sent to him, scribbled on the top of it. Please 356 00:20:02,880 --> 00:20:06,639 Speaker 4: reduce these insane interest rates, and I keep that in 357 00:20:06,760 --> 00:20:09,080 Speaker 4: my office on the shelf right next to my desk 358 00:20:09,119 --> 00:20:13,080 Speaker 4: here at Chicago FED as a reminder of two things. One, 359 00:20:13,920 --> 00:20:20,280 Speaker 4: the decisions that the central Bank makes effect regular people, 360 00:20:20,880 --> 00:20:27,800 Speaker 4: regular businesses, regular consumers, quite directly. And two, sometimes if 361 00:20:27,840 --> 00:20:30,800 Speaker 4: it starts going wrong, you got to make tough decisions. 362 00:20:31,000 --> 00:20:34,560 Speaker 4: What we want to once we're in this experience is 363 00:20:35,400 --> 00:20:38,800 Speaker 4: have wages growing faster than prices. And the good news 364 00:20:38,920 --> 00:20:43,720 Speaker 4: is lately that's what's been happening, and as productivity grows, 365 00:20:43,880 --> 00:20:46,199 Speaker 4: we can do that even more so. But if you 366 00:20:46,280 --> 00:20:49,359 Speaker 4: talk to regular people, I kind of think the world 367 00:20:49,359 --> 00:20:51,800 Speaker 4: of inflation targets is not in their space. 368 00:20:52,359 --> 00:20:55,120 Speaker 12: Why is it so expensive the dynamics you just described 369 00:20:55,119 --> 00:20:59,119 Speaker 12: about wages and prices. I imagine that most of the 370 00:20:59,119 --> 00:21:01,639 Speaker 12: people you talk to when you go around in the 371 00:21:01,680 --> 00:21:05,600 Speaker 12: district and speak, they don't understand that. They don't think 372 00:21:05,600 --> 00:21:06,440 Speaker 12: of it that way. 373 00:21:06,920 --> 00:21:09,560 Speaker 4: I think it's true that most people do not think 374 00:21:09,560 --> 00:21:10,120 Speaker 4: of it that way. 375 00:21:10,160 --> 00:21:10,920 Speaker 10: And if you look in. 376 00:21:10,880 --> 00:21:15,240 Speaker 4: The surveys, they're extremely upset about inflation. And then if 377 00:21:15,280 --> 00:21:19,280 Speaker 4: you say, but look at your wages, they tend to say, 378 00:21:20,240 --> 00:21:22,040 Speaker 4: I earned the wage increase. 379 00:21:22,119 --> 00:21:24,280 Speaker 10: I got out of my hard work. 380 00:21:25,560 --> 00:21:28,600 Speaker 4: The inflation I had nothing to do with, and so 381 00:21:28,760 --> 00:21:30,800 Speaker 4: that's the part that makes me upset. 382 00:21:31,520 --> 00:21:33,439 Speaker 10: They are in reality. 383 00:21:32,960 --> 00:21:36,000 Speaker 4: Tied together wage growth and price growth. 384 00:21:36,400 --> 00:21:40,119 Speaker 12: On the surface, wages are growing faster than inflation. The 385 00:21:40,200 --> 00:21:43,080 Speaker 12: latest reading had wage growth at four point two percent 386 00:21:43,320 --> 00:21:46,159 Speaker 12: compared to an inflation print of two point nine percent. 387 00:21:47,040 --> 00:21:49,920 Speaker 12: Wages are going up, but are they going up enough 388 00:21:49,960 --> 00:21:52,960 Speaker 12: to offset the significant period of time where high inflation 389 00:21:53,119 --> 00:21:57,280 Speaker 12: comfortably outpaced any growth in wages. It turns out that 390 00:21:57,440 --> 00:22:01,679 Speaker 12: since the end of twenty eighteen, inflation still outpaces wage 391 00:22:01,680 --> 00:22:05,880 Speaker 12: growth overall. And who's benefiting from that wage growth anyway? 392 00:22:06,480 --> 00:22:08,920 Speaker 12: While all income groups have seen wage growth of the 393 00:22:09,000 --> 00:22:13,280 Speaker 12: last year, historically, America's wealthy have seen their average earnings 394 00:22:13,320 --> 00:22:16,840 Speaker 12: grow forty six point two percent since nineteen seventy nine, 395 00:22:17,240 --> 00:22:20,320 Speaker 12: compared to just seventeen percent for its lowest turners. 396 00:22:20,720 --> 00:22:23,199 Speaker 5: The overwhelming message that we've received them, that I have 397 00:22:23,280 --> 00:22:26,480 Speaker 5: received is hey, high inflation is really bad. It was 398 00:22:26,640 --> 00:22:29,320 Speaker 5: very painful for my family, It was very painful for 399 00:22:29,400 --> 00:22:31,800 Speaker 5: my business. Get it all the way back down. 400 00:22:32,280 --> 00:22:32,439 Speaker 8: You know. 401 00:22:32,480 --> 00:22:35,240 Speaker 5: They might debate whether two percent should be the right target, 402 00:22:35,359 --> 00:22:37,680 Speaker 5: or one percent or zero, but get it all the 403 00:22:37,720 --> 00:22:39,840 Speaker 5: way back down to what we were used to before 404 00:22:39,880 --> 00:22:40,960 Speaker 5: the pandemic. 405 00:22:40,680 --> 00:22:43,320 Speaker 12: And they probably couldn't necessarily put an exact figure on 406 00:22:43,560 --> 00:22:45,639 Speaker 12: what they were used to before the pandemic. So I 407 00:22:45,680 --> 00:22:48,240 Speaker 12: wonder is the two percent target necessary? 408 00:22:48,640 --> 00:22:52,000 Speaker 5: It is necessary. It's necessary because those Wall Street analysts 409 00:22:52,040 --> 00:22:55,280 Speaker 5: that you talk about, they are very active in financial markets. 410 00:22:55,640 --> 00:22:59,359 Speaker 5: We know that most financial products ultimately get priced off of, 411 00:22:59,400 --> 00:23:01,800 Speaker 5: for example, the ten year treasury market. So it is 412 00:23:01,840 --> 00:23:05,159 Speaker 5: important that the people who are professionals in investing and 413 00:23:05,240 --> 00:23:07,919 Speaker 5: in forecasting understand what we're trying to do and have 414 00:23:07,960 --> 00:23:09,760 Speaker 5: confidence that we're going to achieve it. So I do 415 00:23:09,840 --> 00:23:14,480 Speaker 5: think having a specific numeric target is very helpful. It 416 00:23:14,560 --> 00:23:17,480 Speaker 5: becomes self reinforcing the more we demonstrate our ability to 417 00:23:17,560 --> 00:23:20,200 Speaker 5: hit it. But it needs to be a low enough 418 00:23:20,280 --> 00:23:23,399 Speaker 5: number that people on main Street don't need to spend 419 00:23:23,400 --> 00:23:25,240 Speaker 5: their time thinking about it. They have better things to 420 00:23:25,240 --> 00:23:28,000 Speaker 5: do with their time than thinking about inflation. That's our 421 00:23:28,080 --> 00:23:29,280 Speaker 5: job to get it back there. 422 00:23:29,920 --> 00:23:32,960 Speaker 12: From Wall Street to main street. Inflation is felt by 423 00:23:33,040 --> 00:23:36,639 Speaker 12: all and target or no. Ultimately, the real goal is 424 00:23:36,760 --> 00:23:41,120 Speaker 12: former chair Alan Greenspan's definition of price stability. When people 425 00:23:41,160 --> 00:23:45,960 Speaker 12: don't think about inflation at all. 426 00:23:44,480 --> 00:23:48,080 Speaker 2: Our thanks to Michael McKee, our international economics and policy 427 00:23:48,080 --> 00:23:51,680 Speaker 2: correspondent here at Bloomberg. Coming up next on Wall Street Week, 428 00:23:51,960 --> 00:23:55,359 Speaker 2: how office buildings in New York City are not created equal, 429 00:23:55,760 --> 00:23:59,760 Speaker 2: but finding capital and tenants might be the great equalizer. 430 00:24:00,320 --> 00:24:12,720 Speaker 2: I'm David Weston, and this is Bloomberg. This is a 431 00:24:12,800 --> 00:24:17,119 Speaker 2: story about sibling rivalry. Two members of the same families, 432 00:24:17,160 --> 00:24:20,280 Speaker 2: sharing many of the same traits and sometimes competing with 433 00:24:20,359 --> 00:24:25,320 Speaker 2: each other, but who lead very different lives. Office buildings 434 00:24:25,359 --> 00:24:27,639 Speaker 2: are part of the life's blood of New York City. 435 00:24:28,040 --> 00:24:33,119 Speaker 2: They come in a range of shapes and sizes. 436 00:24:34,560 --> 00:24:39,159 Speaker 8: Typically, the marketplace is stratified between the A product and 437 00:24:39,520 --> 00:24:45,000 Speaker 8: B and C products, and A covers a wide definition 438 00:24:45,119 --> 00:24:49,359 Speaker 8: of quality buildings generally buildings of a newer vintage, but 439 00:24:49,520 --> 00:24:51,480 Speaker 8: in New York City, where the average age of buildings 440 00:24:51,520 --> 00:24:54,240 Speaker 8: are sixty five years old. Newer in New York City 441 00:24:54,320 --> 00:24:56,200 Speaker 8: could mean a building that's thirty or forty years old, 442 00:24:56,560 --> 00:25:00,320 Speaker 8: but it's generally buildings that are well located, have either 443 00:25:00,640 --> 00:25:05,159 Speaker 8: new vintage or have undergone heavy redevelopment. Big capital spends 444 00:25:05,160 --> 00:25:09,160 Speaker 8: over the past several years have modernized infrastructure, have efficient 445 00:25:09,200 --> 00:25:12,240 Speaker 8: floor plates, higher ceiling heights, and things that people find 446 00:25:12,320 --> 00:25:16,040 Speaker 8: im portan in today's work environments. But within the A product, 447 00:25:16,760 --> 00:25:19,480 Speaker 8: then you have the marquee product. You have the best 448 00:25:19,560 --> 00:25:20,200 Speaker 8: of the best. 449 00:25:21,359 --> 00:25:24,800 Speaker 2: Stephen Durrell's is director of Leasing and Real Property at 450 00:25:24,920 --> 00:25:28,680 Speaker 2: sl Green and is responsible for one Vanderbilt, the new 451 00:25:28,760 --> 00:25:35,000 Speaker 2: office tower looming over a Grand Central station. The way 452 00:25:35,080 --> 00:25:39,080 Speaker 2: the New York City Controller keeps score, About sixty percent 453 00:25:39,160 --> 00:25:43,200 Speaker 2: of all Manhattan office space has some form of A grade, 454 00:25:43,600 --> 00:25:46,600 Speaker 2: but the top five star rating is reserved for only 455 00:25:46,680 --> 00:25:50,600 Speaker 2: thirteen percent, leaving about forty percent with the grade of 456 00:25:50,720 --> 00:25:55,360 Speaker 2: B or below. Ruth coulp Haber has spent her career 457 00:25:55,480 --> 00:25:58,359 Speaker 2: putting tenants into those millions of square feet of New 458 00:25:58,440 --> 00:26:01,800 Speaker 2: York office buildings. For her, the category of the building 459 00:26:01,920 --> 00:26:04,600 Speaker 2: makes an enormous difference in getting them leased. 460 00:26:05,040 --> 00:26:07,720 Speaker 1: To say this is a tale of two cities is 461 00:26:07,840 --> 00:26:12,119 Speaker 1: an oft used, somewhat tired metaphor at this point, but 462 00:26:12,359 --> 00:26:17,240 Speaker 1: absolutely true. So let me paint a picture. You have 463 00:26:17,600 --> 00:26:22,520 Speaker 1: the A buildings such as one Vanderbilt, Hudson Yards, One Vanderbilt, 464 00:26:22,880 --> 00:26:26,919 Speaker 1: one block from Grand Central. The building's fall it just 465 00:26:27,040 --> 00:26:30,679 Speaker 1: opened during the pandemic. Two hundred dollars a foot in 466 00:26:30,760 --> 00:26:35,640 Speaker 1: rent is the last deal they did there. You go 467 00:26:36,680 --> 00:26:42,000 Speaker 1: two blocks from there and you have the Chrysler Building 468 00:26:42,680 --> 00:26:45,639 Speaker 1: and you have two thirty Park Avenue at the Helmsley Building. 469 00:26:46,240 --> 00:26:49,679 Speaker 1: These are icons of New York City real estate. These 470 00:26:49,720 --> 00:26:53,280 Speaker 1: are the grand domes of New York City office buildings. 471 00:26:53,760 --> 00:26:57,159 Speaker 1: Both of these buildings are in default on their mortgages 472 00:26:57,960 --> 00:27:02,439 Speaker 1: and are a good percentage empty. So that is what 473 00:27:02,480 --> 00:27:04,439 Speaker 1: I would call a tale of two cities. 474 00:27:05,880 --> 00:27:06,080 Speaker 8: One. 475 00:27:06,160 --> 00:27:10,679 Speaker 2: Vanderbilt falls squarely in the premium marquee category based on 476 00:27:10,760 --> 00:27:12,760 Speaker 2: location and amenities. 477 00:27:13,960 --> 00:27:18,960 Speaker 8: Infrastructure, healthy work environments, a big amenity package, and things 478 00:27:18,960 --> 00:27:22,000 Speaker 8: that really address people's you know, how they want to 479 00:27:22,040 --> 00:27:24,399 Speaker 8: operate their business and what allows them to operate the 480 00:27:24,440 --> 00:27:27,239 Speaker 8: business their business from an infrastructure point of view. So 481 00:27:27,280 --> 00:27:30,080 Speaker 8: that is a unique part of the marketplace, and that 482 00:27:30,200 --> 00:27:34,280 Speaker 8: part of the market commands a distinct rental premium over 483 00:27:34,720 --> 00:27:37,600 Speaker 8: everything else. This in the Manhattan marketplace. 484 00:27:39,600 --> 00:27:42,480 Speaker 2: Jeffrey Garral operates in a very different part of the 485 00:27:42,520 --> 00:27:46,520 Speaker 2: Manhattan office business, owning and operating what are called B buildings. 486 00:27:46,920 --> 00:27:49,840 Speaker 2: He comes from a family of real estate developers and 487 00:27:49,880 --> 00:27:52,760 Speaker 2: has been in the business since the seventies. He's now 488 00:27:52,880 --> 00:27:57,560 Speaker 2: chairman of GFP Real Estate formerly known as Newmark Holdings. 489 00:27:58,080 --> 00:28:00,640 Speaker 2: We talked to him at one of his buildings located 490 00:28:00,680 --> 00:28:03,040 Speaker 2: at the corner of eighth Avenue and twenty sixth Street 491 00:28:03,400 --> 00:28:05,280 Speaker 2: in the Chelsea area of Manhattan. 492 00:28:05,600 --> 00:28:09,479 Speaker 14: You'll find a number at which point people will rent it. 493 00:28:09,600 --> 00:28:13,439 Speaker 14: It sometimes takes a while to figure it out. But 494 00:28:13,640 --> 00:28:15,919 Speaker 14: when I was much younger, we bought a building on 495 00:28:16,000 --> 00:28:19,520 Speaker 14: eighth Avenue five or five days and I was trying 496 00:28:19,520 --> 00:28:22,679 Speaker 14: to rent the space for sixteen dollars a foot. And 497 00:28:22,920 --> 00:28:26,359 Speaker 14: when somebody's I was young, said lower the rent to 498 00:28:26,440 --> 00:28:29,320 Speaker 14: thirteen dollars, you'll fill it. And exactly, I lower the 499 00:28:29,359 --> 00:28:32,960 Speaker 14: rent and I filled it, you know, because it's supplying 500 00:28:33,040 --> 00:28:37,640 Speaker 14: them in The guy wants to pay forty dollars. He's 501 00:28:37,680 --> 00:28:41,040 Speaker 14: looking at all the product that's out there at forty dollars. 502 00:28:42,280 --> 00:28:45,280 Speaker 2: As much difference as there may be between the Marquee 503 00:28:45,320 --> 00:28:49,600 Speaker 2: one Vanderbilt and gfp's three twenty two Eighth Avenue, they 504 00:28:49,640 --> 00:28:53,200 Speaker 2: both face some of the same challenges, like the pandemic 505 00:28:53,600 --> 00:28:56,200 Speaker 2: and the effect it had on people just not going 506 00:28:56,200 --> 00:28:58,320 Speaker 2: into the office. Whatever class it was. 507 00:28:59,520 --> 00:29:03,040 Speaker 1: What's really killing the office space industry now is a 508 00:29:03,080 --> 00:29:08,000 Speaker 1: trend that began before the pandemic, but then was accelerated 509 00:29:08,080 --> 00:29:13,200 Speaker 1: dramatically during the pandemic, which is working from home. Before 510 00:29:13,480 --> 00:29:17,280 Speaker 1: the pandemic twenty nineteen, the statistics are there were about 511 00:29:17,320 --> 00:29:23,120 Speaker 1: seven percent of the workforce working from home, but once 512 00:29:23,160 --> 00:29:27,280 Speaker 1: the pandemic started and then now we're at about twenty 513 00:29:27,320 --> 00:29:30,480 Speaker 1: eight percent, so it's a four times increase and it's 514 00:29:30,520 --> 00:29:34,760 Speaker 1: had a huge impact on the office space market. 515 00:29:35,440 --> 00:29:40,200 Speaker 14: The pandemic was brutal because people just stayed home. You know, 516 00:29:40,240 --> 00:29:46,400 Speaker 14: everybody stayed home. I stayed home. Luckily, the government did 517 00:29:46,440 --> 00:29:52,080 Speaker 14: this program where they allowed companies to apply for a 518 00:29:52,160 --> 00:29:57,760 Speaker 14: loan and they could only use it for rent, insurance 519 00:29:57,800 --> 00:30:02,640 Speaker 14: and to pay their employees, and then eventually the loan 520 00:30:02,680 --> 00:30:07,120 Speaker 14: would be forgiven for the most part, so that helped 521 00:30:07,200 --> 00:30:11,280 Speaker 14: us enormously because the guy legally they couldn't put the 522 00:30:11,320 --> 00:30:13,120 Speaker 14: money in the pocket. They had to use it to 523 00:30:13,160 --> 00:30:16,400 Speaker 14: pay rent. So that kept us in business. And then 524 00:30:16,520 --> 00:30:20,440 Speaker 14: gradually when the COVID, you know, people started to come 525 00:30:20,440 --> 00:30:23,920 Speaker 14: back to work. Initially two or three days a week. 526 00:30:24,080 --> 00:30:27,080 Speaker 14: Now it's like our company is four days a week. 527 00:30:27,280 --> 00:30:30,480 Speaker 2: But the seismic shock of the pandemic still didn't keep 528 00:30:30,600 --> 00:30:33,680 Speaker 2: sl Green from opening. It's One Vanderbilt in the middle 529 00:30:33,840 --> 00:30:37,280 Speaker 2: of the shutdown. You opened actually during the pandemic at 530 00:30:37,280 --> 00:30:39,720 Speaker 2: twenty twenty. Did that changed your plan at all? 531 00:30:40,360 --> 00:30:43,160 Speaker 8: It didn't certainly give us a few moments of pause 532 00:30:43,160 --> 00:30:44,800 Speaker 8: as to what it meant for the real estate market, 533 00:30:44,840 --> 00:30:48,400 Speaker 8: would have meant for Manhattan overall. The grand opening of 534 00:30:48,480 --> 00:30:54,840 Speaker 8: One Vanderbilt, it's the recovery. But we were actually designated 535 00:30:55,040 --> 00:30:57,520 Speaker 8: a critical building to Manhattan because a lot of our 536 00:30:57,560 --> 00:31:01,320 Speaker 8: tenants were financial service tenniss tennis were signed up during 537 00:31:01,320 --> 00:31:04,400 Speaker 8: the construction period. So when we opened up, we were 538 00:31:05,080 --> 00:31:08,200 Speaker 8: sixty percent leased at that point in time, and we 539 00:31:08,280 --> 00:31:11,960 Speaker 8: literally cut the tape and opened the doors for businesses 540 00:31:12,000 --> 00:31:14,480 Speaker 8: in September of twenty twenty, So just as the world 541 00:31:14,480 --> 00:31:17,920 Speaker 8: started to awaken coming out of pandemic, and I think 542 00:31:18,000 --> 00:31:22,240 Speaker 8: you know lesson learned, there was even a new appreciation 543 00:31:22,400 --> 00:31:26,160 Speaker 8: for this location, in this building coming out of the pandemic, 544 00:31:26,760 --> 00:31:30,640 Speaker 8: largely because of its convenience to transportation, where if you 545 00:31:30,720 --> 00:31:33,880 Speaker 8: think back, how people they don't want the there used 546 00:31:33,920 --> 00:31:36,120 Speaker 8: to be the commute, the inconvenience of commute, and then 547 00:31:36,120 --> 00:31:37,800 Speaker 8: all of a sudden it was I really don't want 548 00:31:37,840 --> 00:31:40,120 Speaker 8: to do a two leg commute, get on the subway 549 00:31:40,160 --> 00:31:43,680 Speaker 8: after I've come off a train from my suburban home. 550 00:31:44,200 --> 00:31:47,080 Speaker 8: So the proximity to Grand Central made it even that 551 00:31:47,160 --> 00:31:50,560 Speaker 8: much more desire. But also to focus on a healthy 552 00:31:50,680 --> 00:31:54,920 Speaker 8: workplace environment. Clearly all of our tenants went through some 553 00:31:55,080 --> 00:31:57,160 Speaker 8: period of reflection as to whether or not they were 554 00:31:57,200 --> 00:31:59,920 Speaker 8: going to have some element of a hybrid work environ 555 00:32:00,040 --> 00:32:03,520 Speaker 8: ronments or some portion of their employees. Would you permanently 556 00:32:03,560 --> 00:32:04,160 Speaker 8: work from home? 557 00:32:04,520 --> 00:32:08,360 Speaker 2: Another challenge shared by Marquee and be Office buildings alike 558 00:32:08,880 --> 00:32:12,680 Speaker 2: is the need to get financing, which means real sensitivity 559 00:32:12,840 --> 00:32:13,720 Speaker 2: to interest rates. 560 00:32:13,960 --> 00:32:17,880 Speaker 8: There's no doubt it is tremendously difficult to capitalize new 561 00:32:17,880 --> 00:32:21,040 Speaker 8: construction in today's world. There's only a handful of players 562 00:32:21,040 --> 00:32:23,280 Speaker 8: in New York City that have the financial resources to 563 00:32:23,360 --> 00:32:27,200 Speaker 8: really have access to capital, have a balance sheet where 564 00:32:27,200 --> 00:32:31,920 Speaker 8: they can bring their own resources to bear. It is 565 00:32:32,240 --> 00:32:38,320 Speaker 8: rarefied air to find developers who have that capacity to 566 00:32:39,360 --> 00:32:44,760 Speaker 8: skill set to build, ability to assemble sites, access to capital, 567 00:32:45,360 --> 00:32:48,080 Speaker 8: and really have the vision in order to come up 568 00:32:48,080 --> 00:32:50,240 Speaker 8: with a design that meets the market and anticipates the 569 00:32:50,320 --> 00:32:52,160 Speaker 8: changing market as the years go by. 570 00:32:52,480 --> 00:32:55,520 Speaker 2: And that sensitivity to rates gives a big advantage to 571 00:32:55,600 --> 00:32:59,320 Speaker 2: those able to borrow less, people like Jeff Garam, who 572 00:32:59,400 --> 00:33:02,320 Speaker 2: was able to buy his b buildings at affordable prices 573 00:33:02,440 --> 00:33:06,160 Speaker 2: years ago and resisted the temptation to leverage up when 574 00:33:06,240 --> 00:33:07,280 Speaker 2: rates went so low. 575 00:33:07,840 --> 00:33:10,200 Speaker 14: I think we bought for five and a half million dollars. 576 00:33:10,720 --> 00:33:15,480 Speaker 14: And the reality is that the tech guys would rather 577 00:33:15,640 --> 00:33:21,200 Speaker 14: be in Soho Chelsea, Tribeca, the village. So loads are 578 00:33:21,200 --> 00:33:24,160 Speaker 14: the buildings we own because we weren't rich enough to 579 00:33:24,200 --> 00:33:27,440 Speaker 14: buy the glass buildings. So we're in pretty good shape. 580 00:33:27,440 --> 00:33:30,120 Speaker 14: It's just you know, you've gotta have the money, and 581 00:33:30,120 --> 00:33:33,080 Speaker 14: you're gotter not be over leverage. It's a simple business. 582 00:33:33,240 --> 00:33:35,040 Speaker 14: If you have too much debt, it's screwed. 583 00:33:35,520 --> 00:33:38,000 Speaker 2: So what sort of leverage you typically see in an 584 00:33:38,000 --> 00:33:38,680 Speaker 2: office building? 585 00:33:39,360 --> 00:33:43,080 Speaker 14: I think typically I've been through so many ups and 586 00:33:43,120 --> 00:33:47,520 Speaker 14: downs you learn don't get greedy. It's very tempting to 587 00:33:47,600 --> 00:33:50,760 Speaker 14: borrow too much right now. The buildings are my favorite 588 00:33:50,800 --> 00:33:53,760 Speaker 14: buildings are the ones that have no debt. I don't 589 00:33:53,920 --> 00:33:59,600 Speaker 14: have to think about it. Fortunately, I was smart enough 590 00:33:59,640 --> 00:34:03,280 Speaker 14: to see the handwriting on the wall, and I took 591 00:34:03,360 --> 00:34:06,760 Speaker 14: all the buildings that were low leveraged and refinanced at 592 00:34:06,760 --> 00:34:09,839 Speaker 14: the beginning of twenty twenty, so I have a lot 593 00:34:09,880 --> 00:34:12,880 Speaker 14: of ten year loans at three and a half percent, 594 00:34:13,000 --> 00:34:14,080 Speaker 14: three and three quarters. 595 00:34:14,239 --> 00:34:17,040 Speaker 2: In the end, though, it's not about how well financed 596 00:34:17,080 --> 00:34:19,920 Speaker 2: the building is. It's about providing a space that makes 597 00:34:19,960 --> 00:34:23,719 Speaker 2: people want to work there, something one Vanderbilt was designed 598 00:34:23,880 --> 00:34:25,200 Speaker 2: specifically to do. 599 00:34:25,880 --> 00:34:30,760 Speaker 8: What really distinguishes the building are things like super high 600 00:34:30,800 --> 00:34:35,680 Speaker 8: ceiling heights, column free floors, infrastructure that can support any 601 00:34:35,800 --> 00:34:38,360 Speaker 8: kind of business meeting, lots of air conditioning, lots of 602 00:34:38,360 --> 00:34:42,640 Speaker 8: electric capacity, and amenities. Amenities that come in the form 603 00:34:42,719 --> 00:34:47,920 Speaker 8: of shared meeting spaces. I'll shared auditorium, boardroom that make 604 00:34:47,960 --> 00:34:51,200 Speaker 8: available to the tenants a food and beverage program where 605 00:34:51,200 --> 00:34:55,240 Speaker 8: we have two one Michelin Star restaurants operated by world 606 00:34:55,239 --> 00:34:59,840 Speaker 8: class chef Daniel Blude. And a building that's oriented towards 607 00:34:59,840 --> 00:35:04,040 Speaker 8: a healthy work environments, which in a post COVID world 608 00:35:04,120 --> 00:35:06,359 Speaker 8: took on an importance that you know, none of us 609 00:35:06,360 --> 00:35:10,520 Speaker 8: really appreciated before COVID, the amenity offering specific to each. 610 00:35:10,440 --> 00:35:13,680 Speaker 2: It just isn't realistic to expect a good solid bee 611 00:35:13,760 --> 00:35:16,520 Speaker 2: building like three twenty two eighth Avenue to compete with 612 00:35:16,560 --> 00:35:19,719 Speaker 2: the likes of a one Vanderbilt, and Durrell says there 613 00:35:19,760 --> 00:35:22,600 Speaker 2: probably isn't an appetite to build a lot of new 614 00:35:22,760 --> 00:35:26,640 Speaker 2: Bee buildings in Manhattan anytime soon, but that doesn't mean 615 00:35:26,719 --> 00:35:27,760 Speaker 2: they don't have a future. 616 00:35:28,880 --> 00:35:31,279 Speaker 8: I mean, you know, it's there is a bit of 617 00:35:31,320 --> 00:35:36,600 Speaker 8: a misnomer to believe that there is no reawakening in 618 00:35:36,640 --> 00:35:40,320 Speaker 8: the beer market. We're starting to see that mid price 619 00:35:40,520 --> 00:35:44,239 Speaker 8: point product come back to life. Now, as I said earlier, 620 00:35:44,280 --> 00:35:48,319 Speaker 8: we're overs supplied with that product. But you know, there 621 00:35:48,360 --> 00:35:52,000 Speaker 8: is a place for certain businesses that can't afford two 622 00:35:52,120 --> 00:35:55,040 Speaker 8: hundred dollars foot rents, that you know, want to pay 623 00:35:55,120 --> 00:35:57,840 Speaker 8: sixty or seven or eighty dollars a square foot, and 624 00:35:58,840 --> 00:36:04,759 Speaker 8: there's an opportunity to reposition some portion of that marketplace 625 00:36:05,200 --> 00:36:08,600 Speaker 8: with new capital investment, to bring in new infrastructure and 626 00:36:08,680 --> 00:36:14,319 Speaker 8: menditize those buildings, particularly those that have proximity to public transportation. 627 00:36:15,840 --> 00:36:17,959 Speaker 2: That does it. For this episode of Wall Street Week, 628 00:36:18,120 --> 00:36:21,880 Speaker 2: I'm David Weston. This is Bloomberg. Join us next week 629 00:36:22,080 --> 00:36:39,239 Speaker 2: for more stories of capitalism.