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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Let's get back to the inflation prints out of the

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Speaker 2: US and what it tells us about thinking from the

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Speaker 2: Federal Reserve underlying US inflation then topping forecasts. As I

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Speaker 2: mentioned the course for a second month in February, the

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Speaker 2: advance likely to reinforce a Fed's cautious approach to cutting rates.

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Speaker 2: Very pleased to say join him now is Randy Crasn,

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Speaker 2: a former FED governor and professor of economics at University

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Speaker 2: of Chicago's Booth School of Business. Randy, great to have

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Speaker 2: you in the studio to digest his number that stood

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Speaker 2: out to you. Is this a sticky inflation print that

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Speaker 2: we're seeing in the US or is it a more

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Speaker 2: entrenched inflationory picture that causes potentially a challenge for this Federals.

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Speaker 1: And that's exactly what the FED is trying to pull apart.

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Speaker 1: And that's why J.

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Speaker 3: Powell said he wanted to see a little bit more

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Speaker 3: data before coming to a definitive conclusion of when they

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Speaker 3: can move now. They usually focus on the so called

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Speaker 3: personal consumption Expenditure Index, not the CPI. The PCE is

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Speaker 3: a little bit better balanced in terms of the role

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Speaker 3: of mortgages, or I should say the role of I

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Speaker 3: have different parts of of the consumer basket, and so

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Speaker 3: they prefer that one. But this still is suggestive, and

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Speaker 3: I think we'll give people pause. Certainly, no one's I think,

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Speaker 3: going to be moving in the next week, but.

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Speaker 1: They main lead the foundation for move in June.

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Speaker 2: Okay, before we get onto your views on where they

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Speaker 2: land and the sequencing, you say it's possibly June in

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Speaker 2: terms of unpacking the basket. Inflation that we got through

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Speaker 2: yesterday with all the context as you say that, the

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Speaker 2: focus is really good being on PCE for the FED.

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Speaker 2: We did see goods inflation ticking up a little bit.

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Speaker 2: That seemed to be something of a surprise. Do you

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Speaker 2: expect that to be short lived or is that indicative

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Speaker 2: of a more concerning trend.

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Speaker 3: So I think that the goods are going to be

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Speaker 3: more volatile because that's going to be more energy and

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Speaker 3: commodity prices that sort of move up more up and down,

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Speaker 3: and so that's why they tend to look good. Core

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Speaker 3: that strips that out. But we're still seeing fairly strong

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Speaker 3: growth in services, and in particular it's still strong wage growth,

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Speaker 3: and that's great for workers.

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Speaker 1: But more of a challenge for the FED.

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Speaker 2: And you mentioned Jay Pale and he said, of course

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Speaker 2: in testamental last week that we are getting close and

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Speaker 2: he wants more confidence him in the FMC. They want

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Speaker 2: more confidence in terms of the data that they're seeing

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Speaker 2: before they act, before they cut rates. But he says

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Speaker 2: we aren't getting close. I just wonder if there's a

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Speaker 2: concern that he may have to walk that back. It

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Speaker 2: seemed to be relatively doubvish from Jaypow. You concertainly he

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Speaker 2: may have to walk that back given what we're seeing

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Speaker 2: on the data front.

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Speaker 1: Well, he's so far.

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Speaker 3: I don't think there's enough data there to say that

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Speaker 3: he's going to have to walk that back. But he's

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Speaker 3: made it very clear he needs to see more data

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Speaker 3: before moving and so if the data don't move in

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Speaker 3: his direction, I think he doesn't have to walk anything

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Speaker 3: back and just say we haven't seen the data yet

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Speaker 3: to be able to make that move.

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Speaker 1: Okay.

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Speaker 2: Well, looking of course for the forecast, the updated forecasts

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Speaker 2: from the Federal Reserve or the dot plots, and the

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Speaker 2: potential revisions there. The markets of course have gone from

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Speaker 2: the start of this year pricing in about seven cuts

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Speaker 2: to a little over three right now, How do you

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Speaker 2: expect the revisions to the dot plots to evolve?

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Speaker 1: What are you expecting to see from that?

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Speaker 3: So I don't think we're going to see dramatic revision

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Speaker 3: to the dot plots. I think the markets have finally

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Speaker 3: gotten it. I thought it was just sort of crazy

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Speaker 3: that they were thinking that there are going to be

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Speaker 3: so many cuts at the beginning of the year. And

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Speaker 3: I think the Fed has been fairly consistent in their message,

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Speaker 3: and finally the markets are starting to move to be

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Speaker 3: roughly where they are. I don't see that the data

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Speaker 3: has changed so much that would dramatically change the dot plots.

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Speaker 3: I think three seems to be roughly right. The question

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Speaker 3: is will they start in June or maybe start a

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Speaker 3: little bit later.

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Speaker 2: Okay, so three seems relatively relatively reasonable. Where are you

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Speaker 2: in terms of your views on the US economy? Jamie

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Speaker 2: Diamond a big line crossing this week when he said, look,

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Speaker 2: we shouldn't write off the risks of a recession. It

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Speaker 2: is still potentially in the cards for the US. After

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Speaker 2: almost kind of consensus, few amongst the guests we speak

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Speaker 2: to that soft landing is there now for the US.

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Speaker 1: Where do you land on this debate where do I land?

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Speaker 1: So you know there's soft landing, hard landing, softish landing.

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Speaker 1: I'm kind of hardish landing.

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Speaker 3: But I do think there'll be a substantial slowdown in

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Speaker 3: the second half the year.

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Speaker 1: Now.

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Speaker 3: Why is that because real interest rates have finally gotten

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Speaker 3: positive for the first time in twenty years.

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Speaker 1: They've only been positive for about six months.

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Speaker 3: That is, the interest rate, the five percent or so

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Speaker 3: interest rate has been above the inflation rate only for

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Speaker 3: about six months. Real wages are finally starting to be

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Speaker 3: to grow in a positive way. Now, remember when prices

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Speaker 3: were going up at like eight percent, you could sell

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Speaker 3: stuff at eight percent. Your main input cost was growing up.

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Speaker 3: But going up at three or four percent, that's a

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Speaker 3: great trade. You're going to buy a lot of that input.

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Speaker 3: When real wages start to grow up a little bit

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Speaker 3: more and you're not being able to sell at quite

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Speaker 3: the same pace or same pace of price increases, you

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Speaker 3: may start to see a little bit of weakness in

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Speaker 3: the labor market.

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Speaker 1: I don't think.

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Speaker 3: I'm not calling for recession, but I think a slowdown

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Speaker 3: from where we are. We've been just having screaming growth

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Speaker 3: in the US. I don't see how that's going to

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Speaker 3: quite well not in a second.

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Speaker 2: That pricing power then ties into the story around equencies,

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Speaker 2: and we're on what we was saying in terms of stocks.

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Speaker 2: Does that suggest that stocks are getting a better ahead

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Speaker 2: of themselves? Then if you see a more challenging picture

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Speaker 2: in the second half, does this rally in US stocks

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Speaker 2: look a little unsustainable to you?

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Speaker 3: Well, I'm usually under the business of predicting the exact

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Speaker 3: level of the stock market, but I do think that

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Speaker 3: markets seem to be kind of price to perfection. They

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Speaker 3: seem to be thinking that, oh, soft landing or no

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Speaker 3: landing at all, we're going to continue to have really

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Speaker 3: strong earnings growth. I'm a little bit more concerned that

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Speaker 3: there could be some challenges to that.

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Speaker 2: You've been also thinking, I know, in great detail about

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Speaker 2: the proposals around additional capital reserves for the US banking system,

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Speaker 2: and this also caused some surprise and certainly generated headlines

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Speaker 2: when Jaypower suggested that the proposals would be either radically revised, rewritten,

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Speaker 2: or potentially scrapped altogether. You've been thinking about the potential

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Speaker 2: the potential risks of this proposal. Give us the detail

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Speaker 2: and why you think actually the proposals, if they were

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Speaker 2: to come into force, they could actually cause more risk

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Speaker 2: for this financial system versus reducing the.

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Speaker 3: Risk, because I don't think there's been a really careful

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Speaker 3: cost benefit analysis that's done. Certainly, you want to make

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Speaker 3: the banking system safe, but you also want to make

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Speaker 3: the entire financial system safe. So if you keep raising

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Speaker 3: capital requirements, what happens more and more activity goes outside

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Speaker 3: of the banking system, and we've been seeing that, whether

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Speaker 3: it's private equity coming in and doing private debt, so

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Speaker 3: many other areas that you're seeing a lot of stuff

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Speaker 3: going off into the so called shadows.

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Speaker 1: There's potentially more risk there because.

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Speaker 3: The regulators as well as market participants don't have this

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Speaker 3: much line of sight, and that's where you could potentially

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Speaker 3: get these unintended consequences of sure, you're trying to make

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Speaker 3: the bank safe safer, but you could maybe make the

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Speaker 3: entire system a little bit more risky.

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Speaker 2: Is that where the regulatory lens needs to be then

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Speaker 2: on the off off balance sheet banking sector, the shadow banking,

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Speaker 2: and how concerned are you that potentially there's a black

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Speaker 2: swan event there?

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Speaker 3: So I think that's where we really need to have

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Speaker 3: a stronger line of sight. We need to do more

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Speaker 3: data gathering there. We need to have better understanding of

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Speaker 3: the risks of linked interlinkages amongst those non banks as

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Speaker 3: well as between the non bank sector and the banking sector.

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Speaker 1: I think that's really where we need to have.

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Speaker 2: A lot more fun Randy I was speaking to a

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Speaker 2: former BOJ official yesterday and he said the likelihood for

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Speaker 2: him of the BOJ going next week with a right

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Speaker 2: height the first one since two thousand and seven, He

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Speaker 2: put that at seventy percent, and he also suggested they

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Speaker 2: could also drop yield curve control. Where do you think

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Speaker 2: the BOJ goes next week? Do you think they've seen

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Speaker 2: enough to give them the confidence to make this move? So?

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Speaker 3: I think Away De Sun wants to go very, very gradually,

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Speaker 3: and I think that's the kind of mantra that he's

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Speaker 3: had so far.

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Speaker 1: They're facing a lot of challenges.

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Speaker 3: Because obviously, as you said, there's very strong wage growth,

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Speaker 3: not only a TODA but a number of the other

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Speaker 3: wage settlements have been very very strong.

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Speaker 1: But they're also in a period of very low GDP growth, and.

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Speaker 3: Also inflation expectations haven't quite moved up to the two

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Speaker 3: percent area where they want them to be, so I

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Speaker 3: think they'll move cautiously.

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Speaker 1: There may be some slight moves in the direction of.

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Speaker 3: Move up next week, but I think it's more that

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Speaker 3: they're going to provide the foundation for moving down the line.

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Speaker 1: But I think they need to see a little.

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Speaker 3: Bit more to make sure that consumption is still going

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Speaker 3: to be strong and inflation expectations move up.

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Speaker 2: And when you say down line, you think April or

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Speaker 2: do you think they could even push it further back.

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Speaker 1: I think they'll depend.

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Speaker 3: I mean, I think you know, we're seeing some weak

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Speaker 3: economic numbers overall. If those turn around, then I think

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Speaker 3: they'll move more rapidly. If those are still quite weak

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Speaker 3: and we still don't see in fleation expectations moving up,

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Speaker 3: it could be a little bit later. But I think

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Speaker 3: there'll be gradual moves in each of these each of

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Speaker 3: these steps in that direction, Okay.

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Speaker 2: Cautious, gradual. The timing still TBD. Are global markets ready

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Speaker 2: for this shift from the Bank of Japan? What do

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Speaker 2: you expect to see in terms of the market the

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Speaker 2: global market ramifications of this move.

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Speaker 1: This is something that's very important.

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Speaker 3: Japan is a very big place, and Japan has a

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Speaker 3: lot of debt outstanding, and so obviously as interest rates

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Speaker 3: go up there, there's going to be more flow back

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Speaker 3: to Japan. Most major countries of the world are issuing

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Speaker 3: a lot of debt and so there is going to

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Speaker 3: be a lot of competition for who's going to buy

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Speaker 3: which debt.

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Speaker 1: So far, the bond vigilantes have then come back out.

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Speaker 3: They seem to be happy to say, oh, lots of debt,

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Speaker 3: no problem.

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Speaker 1: At some point they will rise up.

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Speaker 3: I hope it doesn't come to suddenly, but at some

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Speaker 3: point they'll come back, and that's going to be a problems.

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Speaker 2: Has that surprised you that the bond vagilancies are so

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Speaker 2: far stood on the sidelines, And what do you think

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Speaker 2: would be the trigger then for that intervention?

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Speaker 1: That's always the key. We never know exactly what triggers it.

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Speaker 3: Something changes people's confidence, and it look at countries like Argentina,

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Speaker 3: they kind of go along very well for a while

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Speaker 3: and then boom, suddenly something happens and people get very worried.

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Speaker 3: Is the rest of the world like Argentina, No, but

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Speaker 3: you worry that there could be some sort of triggering

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Speaker 3: event that make people say, gosh, I'm not so sure

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Speaker 3: they're going to be repaying or I'm not so sure

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Speaker 3: they're going to have the economic growth to be able

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Speaker 3: to make those payments.

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Speaker 2: On the ECP A couple of dubbish comments today suggesting

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Speaker 2: maybe from the Bank of governor over in France and

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Speaker 2: another central bank governor who sits, of course on the

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Speaker 2: ECB Government Council, suggesting that possibly April, possibly June. There's

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Speaker 2: a debate as to whether the ECB has to has

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Speaker 2: to wait for the FED to go first. Is the

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Speaker 2: ECB they'll give them the dyna in terms of soft

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Speaker 2: inflation versus the US, and amongst which much weaker economy

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Speaker 2: than the US is the ECB at risk of a

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Speaker 2: policy mistake.

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Speaker 3: So I think they have much more pressure to move

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Speaker 3: more rapidly because exactly as you said, much weaker economy

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Speaker 3: and the US economy is still quite strong, and so

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Speaker 3: I think they're going to get pressure to move more rapidly.

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Speaker 3: But I think they are looking very much at what

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Speaker 3: the FED is going to do, and so I think

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Speaker 3: how the FED characterizes what their next move is going

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Speaker 3: to be, because my guess is the FED statement next week,

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Speaker 3: they're not going to say they're going to move, but

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Speaker 3: they're probably going to say they'll move soon, leaving the

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Speaker 3: foundation from moving in June or next move in the

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Speaker 3: summer time.

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Speaker 2: Okay, think the gravitational pool of the FED always, Randy,

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Speaker 2: because the thank you very much indeed for the analysis

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Speaker 2: of coming on of course into the studios to walk

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Speaker 2: through that CPI, printing the implications for the FED, and

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Speaker 2: of course where the BOJ and the ECB could go

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Speaker 2: as well as they weigh up their own challenges. Randy

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Speaker 2: Crossing a former FED governor, of course and professor of

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Speaker 2: economics and the University of Chicago