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Speaker 1: This market is getting ahead of itself. Let's have that

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Speaker 1: conversation right now with Mohammed al Aaron of Queen's College, Cambridge,

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Speaker 1: with us in the studio here in New York City.

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Speaker 1: Mohammed Gratz to catch up with you as well, Sir,

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Speaker 1: Let's start with this. We're stuck on Wednesday. Never mind

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Speaker 1: the fact that it's Tuesday. We're still talking about Wednesday.

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Speaker 1: What happened in that news conference with jam and Powell

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Speaker 1: last week?

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Speaker 2: Total confusion and the fact that you start a show

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Speaker 2: on Tuesday talking about confusion from last Wednesday is an

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Speaker 2: indication of how absurd this whole situation is. John, The

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Speaker 2: whole point of FED communication is to do two things.

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Speaker 2: One is to be transparent and two is to enhance

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Speaker 2: the power of forward policy guidance. Instead, FED communication confuses people.

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Speaker 2: Fed communication fuels moll has it, how often did you

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Speaker 2: hear the FED put is back and it ewards the credibility.

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Speaker 2: I think we have a real problem with fedmmunication, and

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Speaker 2: the market is absolutely correct in trying to do two things.

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Speaker 2: First in trying to bully the FED, because this FED

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Speaker 2: seems to be willing to be bullied, and secondly, to

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Speaker 2: get carried away with this notion that we the FED

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Speaker 2: put us back.

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Speaker 1: Let's go back to the comments from shareman Powell in

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Speaker 1: the news conference Mhammon and work through them together.

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Speaker 3: Here's the quote.

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Speaker 1: The question of when it will become appropriate to begin

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Speaker 1: dialing back the amount of policy restraint in place is

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Speaker 1: clearly of dyslopic of discussion now for the world and

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Speaker 1: also a discussion for us at our meeting today. Did

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Speaker 1: you find that confusing or the comments we've had since

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Speaker 1: then confusing?

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Speaker 3: Which one?

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Speaker 2: So, like everybody else, I think you put more emphasis

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Speaker 2: on share Pal's comments, and that's what the market has done.

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Speaker 3: If someone was with him.

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Speaker 2: That understood how the market would react, they would say

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Speaker 2: to him, WHOA, be really careful because the way you're

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Speaker 2: going to be heard may be different from how you

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Speaker 2: want to be heard. You're going to be heard as

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Speaker 2: opening the door wide open to a major rally in

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Speaker 2: both fixed income and inequities.

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Speaker 3: You know, in the old days you.

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Speaker 2: Had people like Kevin Walsh who would be in touch

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Speaker 2: with the markets, who understood how the FED would be heard,

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Speaker 2: and who was a moderating voice in terms of let's

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Speaker 2: ask the question, not what we want to say but

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Speaker 2: how will we be heard. We don't have that and

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Speaker 2: join this other confusion. You have now two qrong communication reaction.

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Speaker 2: One is to walk back what he said, and the

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Speaker 2: other one is to explain what he said. Right, you

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Speaker 2: can't do both at the same time. You've got to

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Speaker 2: decide are we walking it back? Are we explaining it now?

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Speaker 2: We're getting both.

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Speaker 1: So we've had funy of pushback, not just from FED

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Speaker 1: officials but from paper writing columns, including yourself.

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Speaker 3: Muhammed.

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Speaker 1: Bill Dudley, formerly your FED president, said this was a

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Speaker 1: big gamble, this apparent pivot. You've said the market shouldn't

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Speaker 1: be being bullied, or rather, the market shouldn't bully the Fed. Now,

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Speaker 1: can you explain to me just that headline on the

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Speaker 1: market bullying the Fed?

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Speaker 3: How is the market bullying the Fed?

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Speaker 2: So what the market has done and we saw it

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Speaker 2: in January of twenty nineteen, we saw it happen, in

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Speaker 2: April of twenty twenty, we saw it happened in November

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Speaker 2: of twenty twenty one, is that every time the FED

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Speaker 2: goes towards the market, because there's a decoupling, the market

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Speaker 2: runs a way further from the Fed, and the market

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Speaker 2: has understood that it can drag the FED along, and

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Speaker 2: that's got to stop, John, because we get overshoots, and

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Speaker 2: then we've got to pay for the consequences of those overshoots.

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Speaker 1: Later on, in the piece of the Financial Times that

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Speaker 1: you wrote earlier this way, there was a quote at

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Speaker 1: the very top of the article. It read as follows,

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Speaker 1: it turns out that inflation was transitory after all. That's

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Speaker 1: some of the language being used out there at the moment. Muhammad,

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Speaker 1: Why is that the wrong conclusion?

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Speaker 2: Yeah, so I used that quote and then push back

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Speaker 2: on it immediately, saying, not only is it analytically incorrect,

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Speaker 2: but it is dangerous. Why is it analytically incorrect? A

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Speaker 2: transitory phenomenon is temporary, it is reversible, and therefore you

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Speaker 2: look through it, you don't change your behavior. Massive behavioral

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Speaker 2: changes have resulted over the last few years from inflation

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Speaker 2: that was too high, starting from the FED itself having

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Speaker 2: to tighten. But we've seen also the banking issues, We've

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Speaker 2: seen what's happening to commercial real estate. There has been

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Speaker 2: major changes. So to call inflation transitory after all is

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Speaker 2: to ignore that the landscape has changed because of inflation.

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Speaker 2: It's also dangerous, John because it opens the door to

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Speaker 2: this notion that we're going back to a wag structure

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Speaker 2: that is very artificial.

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Speaker 3: We're not.

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Speaker 2: We're going to settle at a higher average level of

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Speaker 2: yields than we did after the Global financial crisis, and

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Speaker 2: we shouldn't fuel this notion that we're going back to

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Speaker 2: what followed the global financial crisis. We are living in

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Speaker 2: a world of inflexible supply side. What's happening in the

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Speaker 2: Red Sea is another illustration of that, and we've got

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Speaker 2: to recognize that we're no longer in a world of

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Speaker 2: insufficient demand, in a world of insufficient supply.

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Speaker 1: We'll get to the Red Sea and the so it's

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Speaker 1: can out a little bit later in the hour. Let's

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Speaker 1: just pick out one part of the economy, Mohammad, together,

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Speaker 1: let's go to the labor market. Haven't we learned from

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Speaker 1: this cycle so far that this labor market, the characteristics

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Speaker 1: of it, aren't a threat to price pressure.

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Speaker 2: Yes, because the supply site has been responding. It took time,

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Speaker 2: but it's lovely to see people going back into the

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Speaker 2: labor force. Having said that, John, we're still in the

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Speaker 2: middle innings of the labor market. So let's wait and

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Speaker 2: see how that evolves. But the good news, and we

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Speaker 2: should all be encouraging this, is that more people have

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Speaker 2: entered the labor force.

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Speaker 1: You think it's wrong to assume that supply site led

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Speaker 1: improvement rebalancing we've seen won't continue.

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Speaker 2: I think there's a real question about skill mismatches. There's

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Speaker 2: a real question about how far you can increase labor

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Speaker 2: force participation. My hope is that it will continue, but

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Speaker 2: you need to wait and see.

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Speaker 1: So we've had massive eating financial markets financial conditions over

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Speaker 1: the last months, both inequities, credit and also in the

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Speaker 1: bond market as well. Yields aggressively lower. What's the price

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Speaker 1: we're going to pay for that? Do you think the

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Speaker 1: most we've seen in just the last two months?

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Speaker 3: Yeah? I mean, And first, the easing has been historic.

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Speaker 2: Lisa put out a tweet before chair Pal turbocharger this

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Speaker 2: whole thing, showing that financial conditions were looser today than

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Speaker 2: they were when the Fed started hiking, and then they've

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Speaker 2: loosen significantly since then because of the way the market

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Speaker 2: interpreted what Chair Pow has said.

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Speaker 3: What's the risk? John?

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Speaker 2: The risk is that they're loosening too quickly and too much,

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Speaker 2: and that in itself will mean that the last mile

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Speaker 2: of the inflation battle was complicated to begin with, gets

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Speaker 2: even more complicated.

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Speaker 1: Why does it have to be complicated? We've heard from

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Speaker 1: many people who think maybe the half work is behind us.

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Speaker 1: Jan Haasis Goldman Sachs talked about that and his outlooked

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Speaker 1: for twenty twenty four, and I guess I think we're

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Speaker 1: hearing that from FED officials as well. Yeah, I have

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Speaker 1: this last month doesn't have to be that difficult, Secretary Yellow,

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Speaker 1: even when you know as well, why do you disagree

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Speaker 1: with them?

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Speaker 2: So, first of all, it depends how you define the

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Speaker 2: last mile. If you define the last mile, how I'd

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Speaker 2: like them to define the last mile, which is de

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Speaker 2: facto or implicitly target a high inflation rate. It doesn't

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Speaker 2: need to be difficult. And if that's what they're thinking,

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Speaker 2: is I very much applaud that because there's no need

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Speaker 2: to sacrifice the real economy in order to get to

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Speaker 2: an inflation target that's not suited for the world we

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Speaker 2: live in today. So if that's the interpretation, then I'm

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Speaker 2: with them. It doesn't need to be complicated, it doesn't

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Speaker 2: need to create damage. If the interpretation is we're going

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Speaker 2: to get to two percent without causing problems. I just

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Speaker 2: don't see it. Look at the inflation dynamic, look at

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Speaker 2: what's happening. You would need service this inflation to massively

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Speaker 2: accelerate because outright goods deflation is going to stop at

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Speaker 2: some point, and it's very difficult to get service inflation

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Speaker 2: down using interest rate policy alone.

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Speaker 1: So do you get the sense this FED is accepting

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Speaker 1: two points something for inflation and not two point zero.

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Speaker 2: I think they're heading that way, John, Yes, I do.

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Speaker 2: I think they're heading their weight. They're never going to

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Speaker 2: say it, but I think they're recognizing and the new

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Speaker 2: emphasis you're starting to hear, and you heard it today

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Speaker 2: from very Daily, the president of San Francisco FED, saying basically,

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Speaker 2: we don't need to sacrifice the real side of the economy.

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Speaker 1: Mohamed, Let's build on that just a little bit. Yeah.

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Speaker 1: I think it's a massive home bus right now in

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Speaker 1: the United States. Growth is okay, inflation is coming down,

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Speaker 1: rake cut seemingly are just around the corner. Why wouldn't

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Speaker 1: you stay here? Why would you go abroad right now?

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Speaker 3: Because there's more value abroad.

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Speaker 2: You've seen this in local currency in them. The acid

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Speaker 2: class has been abandoned by quite a few investors. As

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Speaker 2: I mentioned speaking to Monica, it continues to suffer outflaws

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Speaker 2: when other acid classes have SOFTAED influence. I mean, we

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Speaker 2: say we call it the every thing rally, and EM

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Speaker 2: has rallied, but it hasn't changed the technical dynamics. So

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Speaker 2: I find it quite interesting. There's a lot of conversation

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Speaker 2: going on. Is its structurally damage? Is it the way

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Speaker 2: EM is managed? But if you compare like for like,

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Speaker 2: there's a valuation advantage that it isn't being exploited enough

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Speaker 2: in them.

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Speaker 1: We'll see if ray cuts are a catalyst to change

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Speaker 1: a change of attitudes towards emerging markets in the year

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Speaker 1: to come up. Let's build on that just a little bit, YM.

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Speaker 1: I think it's a massive home bus right now here

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Speaker 1: in the United States. Growth is okay, inflation's coming down.

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Speaker 1: Raycuts seemingly are just around the corner. Why wouldn't you

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Speaker 1: stay here? Why would you go abroad right now?

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Speaker 3: Because there's more value abroad.

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Speaker 2: You've seen this in local currency in EM. The acid

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Speaker 2: class has been abandoned by quite a few investors. As

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Speaker 2: I mentioned speaking to Monika, it continues to suffer outflaws

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Speaker 2: when other acid classes have softened influence. I mean we

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Speaker 2: say we call it the every thing rally and EM

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Speaker 2: has rallied, but it hasn't changed the technical dynamics. So

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Speaker 2: I find it quite interesting. There's a lot of conversation

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Speaker 2: going on. Is it' structurally damage? Is it the way

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Speaker 2: EM is managed? But if you compare like for like,

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Speaker 2: there's a valuation advantage that isn't being exploited enough in

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Speaker 2: the EM.

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Speaker 1: We'll save ray cuts or a canalyst to change a

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Speaker 1: change of attitudes towards emerging markets in the year to come.

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Speaker 1: Just a final word with Mohammed Aera Muhammed looking back

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Speaker 1: on twenty three, looking ahead to twenty twenty four. One

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Speaker 1: big last thing for you, what's the big risk for

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Speaker 1: next year from your perspective?

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Speaker 2: I think it's both a risk and an opportunity, which

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Speaker 2: is volatility that causes more dispersion. You know, John, we've

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Speaker 2: banked early the major supportive top town factor, and that

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Speaker 2: is that the FED will pivot to loosening and considerable loosening.

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Speaker 3: Well, we've banked that.

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Speaker 2: That is what's pushing us and what continues to push

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Speaker 2: us for a while. What next, It's not going to

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Speaker 2: be a top down factor. It's going to be bottom up,

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Speaker 2: so more volatility and more dispersion.

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Speaker 1: Mohammed, thank you for today and for the whole of

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Speaker 1: twenty twenty three. Thank you, sir,