Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you,
Speaker 1: along with my co host Lisa Brahma wits. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Or we'll have a FED Chairman
Speaker 1: j Pal speaking in front of Congress today. We already
Speaker 1: got his comments released earlier this morning, saying essentially that
Speaker 1: the FED policy is in a good place right now,
Speaker 1: but there are risks out there. To get a preview
Speaker 1: what we might hear from FED Chairman Power, we welcome
Speaker 1: Diane swamp Grant Thornton, Chief Economist. Diane, thanks so much
Speaker 1: for joining us here. You've got to look at some
Speaker 1: of the comments from FED Chairman Poal. What do you
Speaker 1: think we might hear from him? Well, the key issue
Speaker 1: is one they're on the sidelines until they see a
Speaker 1: major change in the outlook for growth, and that could
Speaker 1: be anything from an escalation of the trade war with
Speaker 1: China to some kind of escalation in geopolitical tensions like
Speaker 1: what's going on in Hong Kong. Depending on that plays out,
Speaker 1: that could have an economic impact as well, and that's
Speaker 1: something that they're watching closely. Was interesting that he talked
Speaker 1: so much about fiscal policy in his prepared remarks, warning
Speaker 1: that you know, we're gonna need that fiscal space down
Speaker 1: the road because the said doesn't have a lot of
Speaker 1: tools to counter a recession should we get there. And
Speaker 1: this is something that other FED chairman have constantly sort
Speaker 1: of gone on. He's joined the band legon of other
Speaker 1: FED chairman on this talking about fiscal policy, the need
Speaker 1: for um sustainable fiscal policy, and also the need to
Speaker 1: provide help when the economy does falter. This is something
Speaker 1: we only saw in the early stages in the post
Speaker 1: crisis period. In fact, then fiscal policy became a hurdle
Speaker 1: for the economy as all the burden was shifted on
Speaker 1: to the shoulders of the subtle reserve. And they know
Speaker 1: the dangers of that. They've already experienced the dangers of that,
Speaker 1: and they're worried also about the unintended consequences of too
Speaker 1: low rates for too long, and that's something he mentioned
Speaker 1: as well in his prepared remarks. And that's corporate at
Speaker 1: He's concerned about the lofty levels of debt were now
Speaker 1: taking on and that that may be a threat to
Speaker 1: the economy when we have a downturn, making any downturn
Speaker 1: worse than it otherwise. Would be the headline though, is J.
Speaker 1: Powell makes no news? He's successful, right? I mean that's
Speaker 1: going to be the headline today. Artful dodger, Yes, the
Speaker 1: artful dodger. Okay, that's that's in Washington. Would you want
Speaker 1: to make news today if you're the Fed chairman? I
Speaker 1: don't think. And you know what, he has competition. He
Speaker 1: has competition. So it's so he's in a good spot
Speaker 1: right now. I am wondering, though about the CPI data
Speaker 1: that we got today showing that without energy and food
Speaker 1: it actually is decelerating. How concerning is that to you? Well,
Speaker 1: I think it's really hard as the unevenness of inflation
Speaker 1: for the Federal Reserve. What we're seeing is, you know,
Speaker 1: you've got a lot of inflation and medical care costs
Speaker 1: and medical services that's a over five percent from a
Speaker 1: year ago now where you've got a deceleration and many
Speaker 1: other categories. There's a big drop in apparel prices. That's
Speaker 1: been something that's ongoing. We also saw the reversal and
Speaker 1: new and used car prices, and this is something that
Speaker 1: you know, the FED for the moment has sort of
Speaker 1: sidelined a bit and said, hey, you know, we were
Speaker 1: worried about inflation being too low. We're gonna wait on
Speaker 1: the legs on these three rate cuts we saw and
Speaker 1: see if that pushes inflation up gets a little more
Speaker 1: heat in the economy. They're certainly willing to take that
Speaker 1: in terms of wages, and if that translates into more inflation,
Speaker 1: that would be welcome news for the Federal Reserve. That said,
Speaker 1: this ongoing stickiness in the low inflation environment, although it's
Speaker 1: high for some people, those people who are on fixed
Speaker 1: incomes and have to pay for medical costs more as
Speaker 1: a larger show of their budget, they're really screaming right now.
Speaker 1: On the other side of it, we're not seeing the
Speaker 1: wage games you really want for workers, and that's what
Speaker 1: the FED is really striving for. So, Diane, we've seen
Speaker 1: really over the last year developed a scenario where the
Speaker 1: consumer increasingly is carrying this economy as we see weakness
Speaker 1: and manufacturing sector business investment. How long do you think
Speaker 1: that trend can continue, well, you know something's got to
Speaker 1: of either business sector has to come back a bit
Speaker 1: and show up the foundation of growth going forward, so
Speaker 1: we get some productivity gains, we get some movement up
Speaker 1: in that or consumers are going to take it on
Speaker 1: the chain if businesses pull back more and have the
Speaker 1: second shooting drop, and that is actual cuts in hiring.
Speaker 1: And that's something we're really watching closely because there really
Speaker 1: was a very important shift that went on this summer
Speaker 1: and in this year, and that was a slowdown in
Speaker 1: payroll growth, but also the overall job openings are down
Speaker 1: four months in a row from a year ago, still
Speaker 1: at lofty levels. That's great. Firms are reporting it's easier
Speaker 1: to higher than it was um earlier in the cycle.
Speaker 1: All of a sudden, that loosening of the labor markets
Speaker 1: to the exact opposite that we want this late at
Speaker 1: a game, at the stage in the business cycle. We
Speaker 1: want to see a little more heat and less fragility
Speaker 1: in the business cycle in terms of the labor market.
Speaker 1: And that's what so far has been really holding consumers
Speaker 1: up is the fact the labor market is still there,
Speaker 1: not as many wage gains and in raises as they like,
Speaker 1: but frankly, low prices at the pump compared to a
Speaker 1: year ago are helping them out. Huge sentiment shift in
Speaker 1: the market right now from bearished bullish, with a feeling
Speaker 1: that the disinflation, the deflationary trade is overdone. Do you
Speaker 1: think that there is data to support that. I think
Speaker 1: the disinflationary trade, it's not clear that that's overdone yet.
Speaker 1: We've got to see the effects of tar of sound
Speaker 1: consumer products. That's still in the pipeline. But I think
Speaker 1: more importantly though, is we've got a global situation that's
Speaker 1: still weak, and the market seems to trade on you know,
Speaker 1: yes or no answers. Is the global economy slowing further
Speaker 1: at the moment? No, um, but it could. It looks
Speaker 1: like it's plateau ing at the bottom or bottoming out
Speaker 1: in some areas, But we don't know if there's another
Speaker 1: step down or if it's going to step up. My
Speaker 1: own concerns is that we're very limited in how much
Speaker 1: stimulus we can provide, and that China remains a real
Speaker 1: wild card, not only with the trade agreement but just
Speaker 1: growth itself. In China. It continues to weaken and surprise
Speaker 1: on the downside, and that's something it seems to be
Speaker 1: discounted in financial markets. This isn't like the japan trade
Speaker 1: war in the China is the second largest economy in
Speaker 1: the world with tentacles and almost every other economy in
Speaker 1: the world. So the ripple effects may not be through
Speaker 1: what we worry about in financial markets directly, but indirectly
Speaker 1: through growth. Dian Swank, thank you so much for being
Speaker 1: with us. Diane Swonk as Grant Thornton Chief Economist. Well,
Speaker 1: there's a really cool article on the terminal today that
Speaker 1: really caught my eye. The title in particular, the FED
Speaker 1: is losing its grip on US interest rates once again.
Speaker 1: I thought the Fed was doing a great job. Alex
Speaker 1: Harris covers all things effects and rates for Bloomberg News.
Speaker 1: What's going on here? I was about to give the
Speaker 1: big pat on the back to the Fed for getting
Speaker 1: is nice offt Landing. Well, I mean, here's the thing,
Speaker 1: you know, so there's like policy tool kit that the
Speaker 1: works with to sort of keep the FED funds rate
Speaker 1: within that band, which is right now one and a
Speaker 1: half percent to one in three quarters per cent um.
Speaker 1: But you know, part of the unintended consequence with you know,
Speaker 1: these liquidity injections, these repo operations, treasury bill purchases, is
Speaker 1: that it's helped push the FED funds rate a bit
Speaker 1: lower than it might otherwise be. And so now, like
Speaker 1: you know, with the previous adjustments, you know, when FED
Speaker 1: funds was too close to the top of the range, Well,
Speaker 1: now we're at a point where it's a little too
Speaker 1: close to the bottom of the range. Now people are wondering,
Speaker 1: while if they were making adjustments to interest on excess
Speaker 1: reserves rate, which is one of their tools and the toolkit,
Speaker 1: you know, when we're getting so close to the top,
Speaker 1: can we expect something similar in the bottom to ensure
Speaker 1: that Fed funds, you know, doesn't risk breaching that bottom,
Speaker 1: that bottom boundary, and instead, you know stage okay, hold
Speaker 1: on a second. So for people who don't necessarily count
Speaker 1: themselves as interest rate wonks, the larger takeaway here as
Speaker 1: I listened to you, maybe again going back to the
Speaker 1: repot issues and going back to this question, is the
Speaker 1: Fed's balance sheet too small considering how big the market
Speaker 1: for US treasuries has gotten. It's a really good question,
Speaker 1: and it's whether or not there's enough liquidity and you know,
Speaker 1: some people would say, no, there's no risk of that
Speaker 1: breach on the lower boundary because there's not enough liquidity
Speaker 1: back in the system. And I think Powell also brought
Speaker 1: this up at the very end of his written testimony
Speaker 1: that will hear shortly UM is that no, we're fine,
Speaker 1: We're working on getting our reserves back into the system. Um.
Speaker 1: But you know there's still liquidity. Too much. Liquidity is
Speaker 1: not the issue yet. There is a question heading into
Speaker 1: year end, are we going to see another repo market
Speaker 1: disruption akin to what we saw in September. Given the
Speaker 1: fact that we haven't come up with a permanent solution yet,
Speaker 1: I think we'll see some sort of disruption. I think
Speaker 1: that's being anticipated. Part of the reason is you have
Speaker 1: these regulatory factors at the end of the year of
Speaker 1: search arges for the big banks know where repo, which
Speaker 1: can be punitive for these scoring forces them to pull back.
Speaker 1: So we are going to get a pull back. Do
Speaker 1: I see repo at ten percent? Again, probably not, but
Speaker 1: definitely elevated. I think already year end is trading somewhere
Speaker 1: above three percent, which you're relative to where repo is
Speaker 1: now on a daily basis. Somewhere around one sixty. Yeah,
Speaker 1: that's quite a move. Um. You know, I don't know
Speaker 1: what permanent facility they can put in place right now
Speaker 1: that would alleviate, you know, some of these issues. I
Speaker 1: think there's little things that they can do to address it,
Speaker 1: mainly how you know, they treat the repo operations, because
Speaker 1: part of the issue is going to be is, Okay,
Speaker 1: you have the repo operations and they stay with the dealers,
Speaker 1: and that cash does not get out to the rest
Speaker 1: of the market, and it's the rest of the market
Speaker 1: that needs that funding. So I mean, that's one of
Speaker 1: the reasons why we're going to have issues. And I
Speaker 1: think the FED just philosophically doesn't know what they should
Speaker 1: be doing if they put a standing repo or a
Speaker 1: permanent repo facility in place. Quite yet. Have we seen
Speaker 1: this repo problem BEF, I don't recall it at being
Speaker 1: this long and duration. No. I mean the thing is that,
Speaker 1: you know, post finance, you know, the financial crisis was
Speaker 1: a completely different animal, and so post crisis, you know,
Speaker 1: all these regulations went into place that sort of kept
Speaker 1: a lid on on funding rates essentially so to avoid
Speaker 1: scenarios like this. But now, I think you have an
Speaker 1: interesting intersection between you know, regulatory changes in the last
Speaker 1: decade plus, you know, shifting monetary policy, and you know
Speaker 1: QUEI which we never had had before. And I think
Speaker 1: that's creating some of these pressures. And that's why I
Speaker 1: think everyone's a little confused as to how to confront
Speaker 1: this and what tools we have at our disposal, because
Speaker 1: I don't necessarily think it's just monetary tools. I think,
Speaker 1: you know, we have to look at this from a
Speaker 1: fiscal standpoint, a market structure standpoint. So there's a lot
Speaker 1: of interesting issues with this. The incredible irony of banks
Speaker 1: having so much cash on their books that they can't
Speaker 1: put the cash back into the system, but they're forced
Speaker 1: to have that cash in the books in order to
Speaker 1: meet their sort of risk requirements. And Alex you said
Speaker 1: this that banks are going to be de risking into
Speaker 1: year end. How close are they to doing that, because
Speaker 1: we're hearing they're de risking, and that is part of
Speaker 1: the reason why you've seen volatility in some risky debt.
Speaker 1: Right now, I think you're getting close. I mean, you know,
Speaker 1: the other thing is someone had said it's not just
Speaker 1: going to be de leveraging you know, across repo it's
Speaker 1: going to also be deleveraging some of their derivatives positions
Speaker 1: and onminding those as well. So there is a risk
Speaker 1: you're gonna see this. I think we're getting close to figure.
Speaker 1: You know, once we get nearer to Thanksgiving, you should
Speaker 1: start seeing some of this happened. Definitely, December could be
Speaker 1: a little bit bumpier than people expect because this isn't
Speaker 1: just going to be a last week of December kind
Speaker 1: of thing. They're going to start closing up shop, you know,
Speaker 1: and pulling back sooner rather than later. So there is
Speaker 1: no per se permit solution for the FED that we've
Speaker 1: seen at the short end of the curve and that
Speaker 1: repot market is it. So it is the kind of
Speaker 1: the fact those just to kind of let the balance
Speaker 1: she grow a little bit. I think that's what they're
Speaker 1: intending to do. You know, Lorie Logan, who's um de
Speaker 1: facto how to the markets group right now at the
Speaker 1: New York FED, she spoke I believe it was last
Speaker 1: week she addressed the Primary Dealer annual meeting, and you know,
Speaker 1: they seem to acknowledge that, Look, we understand when there
Speaker 1: are pressures we're going to be coming in, so and
Speaker 1: they know that there are gonna be times where reserves
Speaker 1: are gonna shrink and they're gonna need to combat that
Speaker 1: by by doing something more. Either it's more REPO operations,
Speaker 1: more treasury bill buying, um, you know, so they know
Speaker 1: they know that they needed, like there's gonna be times
Speaker 1: where it's offset and they're going to have to keep
Speaker 1: doing more. You know, there's a lot of outstanding questions
Speaker 1: to this though, and one of the things is how
Speaker 1: long is this really going to go on? Because people
Speaker 1: are thinking this is going to go beyond the second quarter?
Speaker 1: And how do you contend with the treasury that has
Speaker 1: seasonal issues with treasury bills where you actually get negative
Speaker 1: issuance and treasury bills so you have to think about
Speaker 1: a scarcity risk now in me as well. So you know,
Speaker 1: there's a lot of competing forces, and and you know,
Speaker 1: it seems like the more the Fed steps in, the
Speaker 1: more complicated things get for them. So it's going to
Speaker 1: be interesting to keep watching. And I should just note
Speaker 1: that fields on treasuries right now heading lower after the
Speaker 1: disappointing CPI data. Alex just real quickly here thirty seconds
Speaker 1: what may we hear from fed CHURJ. Powell today in
Speaker 1: about five minutes about this issue in particular. You know,
Speaker 1: I don't think you know, he has a paragraph at
Speaker 1: the end, you know, offer a word on it. We're
Speaker 1: trying to get back to ample reserves. We see it
Speaker 1: as a level somewhere where we were in early September.
Speaker 1: You'll be interesting to see what kind of questioning we
Speaker 1: get about this from the Joint Economic Committee. I think
Speaker 1: a lot of questions probably are going to center around
Speaker 1: regulation and what do you do from that standpoint to
Speaker 1: fix it, because you know, you have Elizabeth Lawrence letter
Speaker 1: to Steve Manutian, you know, last month, who was saying, hey,
Speaker 1: we you know, don't use this as an excuse to
Speaker 1: roll back rags here, you know. So I think this
Speaker 1: is going to be one of the big issues for
Speaker 1: and then we'll see what else they come up with.
Speaker 1: We'll see what else they come up with. I have
Speaker 1: a feeling it probably will be less repo, more political
Speaker 1: in nature. Alex Harris, thank you so much for being
Speaker 1: with us. Alex is of course covering all things interest rates,
Speaker 1: UH and bonds related for us at Bloomberg News. We're
Speaker 1: going to hear from J Powell testifying in front of Congress,
Speaker 1: but currently Uh there are other testimonies going on, in
Speaker 1: particular the first public impeachment hearings in front of the
Speaker 1: House of Representatives. Ari Natter has been following them. He's
Speaker 1: a Bloomberg News reporter covering all things regulatory and Washington,
Speaker 1: d c Ari joining us from the nation's capital. Ari,
Speaker 1: what are you looking for from these hearings that you
Speaker 1: think will be the most notable takeaway? Right? Well, today
Speaker 1: it's historic and peace hearings give the American people their
Speaker 1: first chance to see west been playing out until now
Speaker 1: behind closed doors and decide for themselves whether Donald Trump
Speaker 1: committed to impeachable offenses and his actions towards Ukraine. House
Speaker 1: Democrats are hoping to use the hearings to bring to
Speaker 1: life thousands of pages of closed door testimony and make
Speaker 1: the case that Trump abuse his office and should be
Speaker 1: impeached for pressuring Ukraine to investigate Biden, his political rival,
Speaker 1: and withholding AID until that happened. So, Ari, what is
Speaker 1: the fundamental Republican strategy here as he's hearing to begin?
Speaker 1: Is it simply to say it was no big deal? Right? So,
Speaker 1: these hearings did give Republicans their first high profile chance
Speaker 1: to defend the president. I think their defense is is
Speaker 1: multi pronged. In one hand, there arguing that Trump has
Speaker 1: done nothing wrong in calling for the investigations and that
Speaker 1: his objective was not was the root out corruption in
Speaker 1: Ukraine rather than to bolster his own political fortunes. They're
Speaker 1: also saying, um, you know, if he did anything, it's
Speaker 1: it's not an impeachable offense. Uh So, I think I
Speaker 1: think we'll hear that. And um, already we've heard Republicans
Speaker 1: called this a smear campaign orchestrated by Democrats and the
Speaker 1: quote unquote corrupt media. Uh so there's a kind of
Speaker 1: a window into the Republican defense. Markets don't care. That
Speaker 1: seems to be the takeaway when there are developments in
Speaker 1: the impeachment hearings. Who are these four? Is anyone paying
Speaker 1: attention outside of the Beltway? That's a good question. Um,
Speaker 1: I believe this hearing is going to be televised across
Speaker 1: the nation. I mean, it's really is historic event. Is
Speaker 1: only the third time in history that impeachment hearings have
Speaker 1: been conducted. But to your point, Um, you know, even
Speaker 1: if the House does vote to impeach Trump, that begins
Speaker 1: a Senate trial. H and Republicans control the Senate, they're
Speaker 1: not expected, uh to you know, convict him, So you know,
Speaker 1: this could be a political theater. But again, you know,
Speaker 1: if the House impeaches Trump and the Senate really system,
Speaker 1: that will make it election issue. And I think that's
Speaker 1: that's part of the strategy here. All Right, what do
Speaker 1: you think is a a win here for the Democrats
Speaker 1: or those you know moving towards impeachment. Is it simply
Speaker 1: too just air all publicly everything that's kind of already
Speaker 1: been testified about, right. I think what they're trying to
Speaker 1: do is move public opinion, and support for impeachment has
Speaker 1: grown but stabilized. We've seen an NBC Wall Street Journal
Speaker 1: poll recently that found four nine uh favorits Trump impeachment
Speaker 1: removed from office. A win for them would be to
Speaker 1: really move the needle to the point where you know,
Speaker 1: standard Republicans don't have a choice or you know, actually, um,
Speaker 1: you know, vote to impeach Trump. What's the timeline here?
Speaker 1: Uh So Democrats in the House want to wrap this
Speaker 1: up by Christmas, which if they vote to impeach Trump,
Speaker 1: then um, that immediately kicks off a Senate trial, which
Speaker 1: would happen election year, which presents, you know, it's own
Speaker 1: complications considering that many of the dun senators are running
Speaker 1: for president and presumably you need to stop campaigning and
Speaker 1: come back to Washington, Uh, you know, for impeachment. So
Speaker 1: in a Senate hearing, what's the time frame for that?
Speaker 1: I can't remember the last time we've had one of those.
Speaker 1: We haven't gotten to the Senate hearing, right, Um, So
Speaker 1: what I know is that if the House does vote
Speaker 1: to impeach Trump, then the Senate immediately begins a trial
Speaker 1: with the Chief Justice presiding, and Mr McConnell is that
Speaker 1: he doubts so that Trump will not be convicted. Thank
Speaker 1: you so much for being with us. Ari and Nat
Speaker 1: are covering all things at regulatory in Washington, d C.
Speaker 1: For us coming to us from our Bloomberg n No
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