Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
Speaker 2: geopolitics from our global headquarters in New York City. We
Speaker 2: are live on Bloomberg Television weekday mornings from six to
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Speaker 2: or anywhere else you listen, and as always on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Peter Roppenheimer of
Speaker 2: Goldman Sax, writing, while US fundamentals remain solid, the valuation
Speaker 2: premium is increasingly difficult to justify. Peter joins us now
Speaker 2: for more. Peter, Welcome to the program sir. Let's talk
Speaker 2: about the valuation fredium and the why. The data this
Speaker 2: week is good. The errings have been okay, We've got
Speaker 2: an FMC slowly leaning towards a rake cut.
Speaker 3: What's not to like?
Speaker 4: Well, John, this is a relative rather than an absolute story.
Speaker 4: You're right if interest rates are coming down, and we
Speaker 4: think they are, and the economy continues to grow, if
Speaker 4: even at a more moderate rate. Generally, that's a good
Speaker 4: backdrop for risk assets and for equities, and the US
Speaker 4: is no exception, particularly as it's increasingly again dominated by
Speaker 4: its biggest tech stocks, which are generating really strong earnings growth.
Speaker 4: But it's really the relative premium against other markets which
Speaker 4: has reached a record high, which is harder to justify
Speaker 4: when other markets are beginning to see their own tailwinds. Europe,
Speaker 4: for example, is enjoying stronger growth. You know, we think
Speaker 4: about last year, the US economy was growing at only
Speaker 4: three percent, Germany was stagnant. By next year they'd likely
Speaker 4: be growing at relatively similar rates, and yet the valuation
Speaker 4: gaps are extremely wide, and that's an opportunity we think
Speaker 4: to diversify.
Speaker 3: It is a question of.
Speaker 5: Where you diversify given the fact that a lot of
Speaker 5: people are expressing it through the currency, and the currency
Speaker 5: is having a balancing effect in so many ways, Given
Speaker 5: the fact that it might actually be a tailwind for
Speaker 5: US corporate earnings and a headwind for European ones, how
Speaker 5: do you factor that into this equation.
Speaker 4: That's a very good point and absolutely right, and particularly
Speaker 4: for the dominant tech stocks, which are very global in
Speaker 4: terms of their revenue streams, and they have very strong
Speaker 4: balance sheets. A week of dollar will help them.
Speaker 3: So that is.
Speaker 4: Good indeed for the dominant companies in the US, and
Speaker 4: from an earning translation perspective, it's a headwind in Europe
Speaker 4: or indeed Asia. But on the other hand, in terms
Speaker 4: of flows, what we're beginning to see is more appetite
Speaker 4: for US investors to spread their risks, to diversify, to
Speaker 4: benefit from some currency gains that they may get in
Speaker 4: cheaper markets like Europe or emerging markets for example. And
Speaker 4: indeed it's also an increase incentive for investors in Europe
Speaker 4: to keep more of their funds at home. So from
Speaker 4: an earning translation perspective, it's a headwind in Europe, it's
Speaker 4: a tailwind in the US. But from a diversification perspective
Speaker 4: for investors, I think this is likely to encourage a
Speaker 4: broader spread of assets than we've generally seen over the
Speaker 4: last decade.
Speaker 5: How interest rate sensitive is a story at a time
Speaker 5: where some people are talking about possibly an ECB cutting
Speaker 5: rates more quickly than a FED, and then a question
Speaker 5: of whether maybe the FED will cut rates just as
Speaker 5: quickly in perhaps a different composition at the FED.
Speaker 4: Well we're more mature through the interest rate cycle in Europe,
Speaker 4: at least in the euro Zone, we're expecting one more
Speaker 4: rate cut getting policy rates down to one on three quarters.
Speaker 4: We think we have a series of rate cuts to
Speaker 4: look forward to in the US to get policy rates
Speaker 4: down to three to three in a quarter. What I
Speaker 4: think is worth also emphasizing, though, is that while there
Speaker 4: are prospects for bigger rate cuts from a higher level
Speaker 4: in the US than perhaps in Europe, long term interest
Speaker 4: rates are not really coming down, and that's a reflection,
Speaker 4: of course, of concerns about debt sustainability and debt financing,
Speaker 4: not just in the US but in other countries as well.
Speaker 4: Bear in mind, in Germany, while we're getting these policy
Speaker 4: rate cuts, long term interest rates are actually edging up
Speaker 4: as it also finally increases its borrowing and fiscal spending,
Speaker 4: which is good for growth, good for the ecty market,
Speaker 4: but of course puts upward pressure on long term interest rates.
Speaker 1: Peter, speaking of Germany, the Bundesbank president, today came out
Speaker 1: and said that challenges to FED independence, which he calls
Speaker 1: in the DNA the autonomy of good central banking, would
Speaker 1: resonate beyond the shores of the United States. What kind
Speaker 1: of impact could we see if we were to see
Speaker 1: the President of United States get rid of Jpowe and
Speaker 1: fire him in Europe or inside Asia and emerging markets.
Speaker 4: Well, look, we shouldn't forget that independent central banks have
Speaker 4: not always been the norm throughout history, and this was
Speaker 4: something that really gained prominence in the nineteen nineties and beyond,
Speaker 4: and of course that has helped both to bring down inflation,
Speaker 4: to bring down inflation risk premia as investors have become
Speaker 4: more confident instability, and we've brought down risk premia and
Speaker 4: the cost of capital in general. I think anything that
Speaker 4: challenges the independence of the central bank will be reflected
Speaker 4: in high risk premia. But I think we're a long
Speaker 4: way away from that. And as you've been saying in
Speaker 4: your report, the conditions in the US are favoring interest
Speaker 4: rate cuts. Anyway, we're getting into a more benign phase
Speaker 4: of the cycle. After the big inflation rises that we
Speaker 4: saw following the pandemic, unemployments edging up a little bit,
Speaker 4: and there is room to cut rates. That's true in
Speaker 4: the US, it's true across Europe, the UK and other
Speaker 4: areas as well. And by the way, some weakness in
Speaker 4: the dollar and interest rates coming down in the US
Speaker 4: will resonate and be positive. I think beyond US shores
Speaker 4: very beneficial, for example, for emerging markets also, which have
Speaker 4: tended to lag behind over a long period of time.
Speaker 4: So I think there's a long way. We're a long
Speaker 4: way away yet from people really worrying about central bank independence.
Speaker 2: Let's hope you're right, sir, it's going to catch out.
Speaker 2: With Peter Roppenheimer, I've gone as SANX making the case
Speaker 2: for a raid cup Fed Governor Chris Waller tannag an
Speaker 2: audience here in New York. Looking across the soft and
Speaker 2: hard data, I get a picture of a labor market
Speaker 2: on the edge joining us now here in New York City,
Speaker 2: the Federal Reserve Governor Chris Waller, Governor Walla.
Speaker 6: Good Monica, say, Henry, nice to be here.
Speaker 2: It's good to see you, sir. Let's talk about why
Speaker 2: we're losing the luxury of white sink. Have we lost
Speaker 2: that already?
Speaker 6: No? I think we have.
Speaker 7: Like I said last night, the headline numbers for the
Speaker 7: lay remark what we're seeing are okay, But it's like
Speaker 7: when you get underneath and start looking at the data,
Speaker 7: the private sector is not doing as well as everybody thinks.
Speaker 7: It is, like most of the half of the employment
Speaker 7: growth we saw last month was in the public sector,
Speaker 7: and that means the private sector is not doing particularly well.
Speaker 7: So I was just joking that, you know, if you're
Speaker 7: walking on a lake and the ice is frozen and
Speaker 7: sound safe, but when you start hearing cracks, and that's
Speaker 7: what I feel like, it's too late once you go
Speaker 7: through the ice. So you've got to start prepping in
Speaker 7: advance before you have that happen.
Speaker 2: How do you squan that with what we've had from
Speaker 2: Corporate America so far, what Coporate America has told Lisa
Speaker 2: sitting down with Skull Kebby, if you United headlines talking
Speaker 2: about a rebound in the second half, what we've had
Speaker 2: from the big banks so far this week, how do
Speaker 2: you scamb what you'll see in the data, what we're
Speaker 2: hearing from CEOs.
Speaker 7: Yeah, I mean when I talked to CEOs, I get
Speaker 7: the same thing. We're in just hold pattern in terms
Speaker 7: of certainly the labor market. They're not hiring, they're not firing,
Speaker 7: they're just watching. And that's kind of what you see
Speaker 7: in this underlying private sector data. There's not much happening,
Speaker 7: so it wouldn't take much sort of tippet.
Speaker 6: Now, could I be wrong? Absolutely?
Speaker 7: I mean last year we got a couple of week
Speaker 7: labor market reports allowed us to cut in September, and
Speaker 7: then everything kind of reversed and went back up.
Speaker 6: So I'm not saying that couldn't happen again.
Speaker 7: But it's just we've constantly seen little bits of day
Speaker 7: continually coming down the page book. Yesterday came out some
Speaker 7: other stuff that we get out of the Joelts quits.
Speaker 6: Rates, hiring rates.
Speaker 7: So these things are not indicating a super healthy private
Speaker 7: sector labor market.
Speaker 2: As you know, you're facing potentially and I stress, potentially
Speaker 2: negative supply shels on both sides of the mandate. I
Speaker 2: want to say, on the labor market, just for one
Speaker 2: further night, immigration, how are you thinking about that when
Speaker 2: you look at a labor market at the moment when
Speaker 2: we have people coming on the program on Blindbecks event
Speaker 2: and some bloomback TV every single morning six till nine
Speaker 2: coming on here and saying look at the data, unemployment
Speaker 2: could stand these levels even with jump gains of fifty
Speaker 2: to one hundred thousand because of tightst immigration. How does
Speaker 2: that factor into your thinking as you look at the
Speaker 2: US slip amoun kit.
Speaker 7: Well, yeah, the labor market doesn't necessarily have to be
Speaker 7: affected by it because if workers flow in and they
Speaker 7: get jobs at roughly the same rate as the existing workers,
Speaker 7: the unemployment rate doesn't change even though the labor force
Speaker 7: is higher. And when they go back out, the same
Speaker 7: thing happens. If they leave the employment and leave the
Speaker 7: labor force, you don't see a big change. The inflationing
Speaker 7: now can potentially affect the break even rate that.
Speaker 6: You would need to have the market going well.
Speaker 7: And that's why we're still trying to kind of get
Speaker 7: a sense of because you basically brought five years of
Speaker 7: immigration forward and you know, of that eight or nine million,
Speaker 7: most of them haven't disappeared. So they're still here somewhere,
Speaker 7: whether they're going to work, they're not going to work,
Speaker 7: but they're still here. I don't where I think the
Speaker 7: immigration stuff. If immigration it was a big factory, you'd
Speaker 7: be seeing shortages and you might see some in you know,
Speaker 7: some industries. But like I pointed out that if you
Speaker 7: look at the new college graduate unemployment rate, it's seven percent, it's.
Speaker 6: Much higher than it has These are not.
Speaker 7: Jobs are being opened up because immigrants are not coming in.
Speaker 7: That it should be just the opposite, if immigrants are
Speaker 7: leaving and these jobs are open, and then the ounemployment
Speaker 7: right should go the other way. So that unemployment rate,
Speaker 7: to me, is telling me the immigration is not the
Speaker 7: source of the problem.
Speaker 6: Firms are just.
Speaker 7: Holding off on hiring decisions even if their earnings are
Speaker 7: doing well.
Speaker 6: That's That's just what I'm saying they're doing on the
Speaker 6: labor side.
Speaker 3: I wanted to sign as a mutual friend of Oance.
Speaker 2: That feels like he's missing out this morning, so I
Speaker 2: wanted to catch show with you as well.
Speaker 7: Now he's out Victor Idom always having a good time,
Speaker 7: isn't it.
Speaker 3: My McKay joined us now, Good one to Mike.
Speaker 8: Good morning John, and good morning Governor Waller. I would say,
Speaker 8: I'm sorry I'm not there with you, But I bet
Speaker 8: you're sorry you're not here with me. I know you
Speaker 8: got it.
Speaker 6: I've been there before. It's a nice place.
Speaker 8: You've made the case now a couple of times for
Speaker 8: a July rate cut, But how committed are you? Are
Speaker 8: you willing to dissent at this meeting if the majority
Speaker 8: votes the other way.
Speaker 7: Well, I never want to commit to an action before
Speaker 7: the meeting. Otherwise, if everybody committed before, you don't even
Speaker 7: need to have the meeting have a discussion. So the
Speaker 7: goal is to always go to the meeting, sit down,
Speaker 7: listen to all sides.
Speaker 6: People will try to convince me of their view.
Speaker 7: I'll try to convince some of my views, and in
Speaker 7: the end of the day, you make the decisions on
Speaker 7: what you think is the right outcome and the right data,
Speaker 7: how the data is coming in and right now I
Speaker 7: laid out my case last I don't think I could
Speaker 7: be any more clear, I hope, as to what my
Speaker 7: position is and why I think we need to do this.
Speaker 7: It's just how I read the data and how I
Speaker 7: think about going forward. How you respond to anything that
Speaker 7: involves tariffs.
Speaker 8: There's a lot of politics in this decision coming up,
Speaker 8: more than usual, and I'm wondering. Governor Bowman has also
Speaker 8: suggested she would prefer a rate cut in July. If
Speaker 8: two of you vote for a rate cut, if two
Speaker 8: of you were to descend, would you worry about the
Speaker 8: market reaction to that?
Speaker 6: You know.
Speaker 7: One of the things that has always bothered me since
Speaker 7: I took this job is the criticism that we are
Speaker 7: nothing but group think. All the meanings are the same,
Speaker 7: nobody does sense, nobody does anything, And I think this
Speaker 7: is healthy. I think this is a turning point in
Speaker 7: the way we want to think about policy. Some people
Speaker 7: don't want to cut, some do want to cut, but
Speaker 7: coming out and making the case either side, that's good
Speaker 7: healthy debate. Otherwise, if we're always going to do the same,
Speaker 7: the joke is, why don't you just have one person
Speaker 7: set policy and some of the other eighteen FMC members home.
Speaker 7: So this is healthy. I think this is what you
Speaker 7: want to see in a democracy. You want to see
Speaker 7: policy makers have serious, open discussion about where policies should go.
Speaker 7: It doesn't mean anything about politics or anything else. Is
Speaker 7: make the economic argument and then see if you can
Speaker 7: convince others to go along with you.
Speaker 6: And that's all I'm trying to do.
Speaker 2: We totally agree with you for the re code. We
Speaker 2: was sick of the grief think and it's good to
Speaker 2: have descent, you know. Mike essentially is asking if you
Speaker 2: will descent at the end of this month. Is there
Speaker 2: value and dissentic on the f web site.
Speaker 7: Well, I mean it's it's often the case that you dissent,
Speaker 7: if you make it very clear you think, at this
Speaker 7: moment in time, this is an important thing to do.
Speaker 7: If you were to go in and do kind of
Speaker 7: a jihadist I'm gonna dissent at every single meeting no
Speaker 7: matter what happens.
Speaker 6: Then you don't even have to show up. Everybody knows
Speaker 6: what you're gonna do.
Speaker 7: So it is important to make sure that if you dissent,
Speaker 7: you do it carefully and you have the right reasons,
Speaker 7: and it's not gonna turn into a serial dissenting potential case.
Speaker 7: I mean, that's how I take my job seriously and responsibly,
Speaker 7: so I only would think about doing this. I dissented
Speaker 7: on the balance sheet slowed down earlier this year because
Speaker 7: I felt like that was not needed. And that's kind
Speaker 7: of the situation we're in now.
Speaker 8: Uh, if you do cut, the markets will go one way.
Speaker 8: If you don't, they'll go another. Perhaps, are how critical
Speaker 8: is it to get to a rate cut fairly quickly?
Speaker 8: You've mentioned the danger to the labor market, But if
Speaker 8: you do wait till September, is that going to be
Speaker 8: too late?
Speaker 7: Well that's kind of the debate. What does it mean
Speaker 7: to wait six weeks. Is it that critical? And the
Speaker 7: answer is probably not. It could be, but it's also
Speaker 7: the reverse. Why wait till September? If it's just six weeks,
Speaker 7: that's exactly the thing. It doesn't kind of matter. Just
Speaker 7: start thinking about do I want to wait and risk
Speaker 7: something happening. This is what we saw last summer. By
Speaker 7: the way we left July, we left rates and then boom,
Speaker 7: we got a very weak bad labor market. Reports and
Speaker 7: unemployment rate jumped two tenths. Payrolls were way down from
Speaker 7: where they were, and people were screaming at us last August.
Speaker 7: You guys should have cut in July. So one month?
Speaker 7: Can it always is one month? Just remember that it's
Speaker 7: just one month. But we live in a world in
Speaker 7: which we have to respond to real time data to
Speaker 7: kind of sense of where the economy is going. And
Speaker 7: I've always said, if you worry about long and variable lags,
Speaker 7: which everybody always talks about, the whole point of that is.
Speaker 6: To get ahead of it, not wait for it to happen.
Speaker 7: And then hike a policy action that takes quarters or
Speaker 7: months down the road to actually.
Speaker 6: Have any impact.
Speaker 2: The new worries tariffs, We've just had a six minute
Speaker 2: conversation with you at that month. As your policy if
Speaker 2: built a case for lot of interest rights and no
Speaker 2: one's talked about trade or inflation. Two assumptions in your
Speaker 2: speech yesterday, and I think they are important assumptions. A
Speaker 2: large share of tariff increases won't be past threates consumers.
Speaker 2: Any increase would fink over the next yeeroside. What data
Speaker 2: underpinds that conclusion.
Speaker 7: Well, one, it's just first, it's just economic theory. So
Speaker 7: you put on a care as long as it's a
Speaker 7: one time tariff, and that's it. That's a one time
Speaker 7: price effect. I mean, this is economic theory. You could
Speaker 7: not get in any serious economic model persistent inflation from that.
Speaker 7: You would have to look up some other amplification mechanisms,
Speaker 7: and that's what people talk about. Wages will start going
Speaker 7: up and everything will get out of control.
Speaker 6: You're not seeing that at all.
Speaker 7: This is just not those kind of amplification mechanism there.
Speaker 7: Wage price spirals aren't happening. Tariffs are attacks, and in
Speaker 7: public finance you learn that you may levy attacks on
Speaker 7: a firm, but who bears the incidents?
Speaker 6: The burden of that tax.
Speaker 7: Can be a group of people or one person, not
Speaker 7: shore of the firm. So this is what I've heard
Speaker 7: from a lot of firms. If there's a ten percent tax,
Speaker 7: they'll force their suppliers to eat some of that cost
Speaker 7: workers meet some of that costs in terms of less
Speaker 7: hiring and things like that. The firm will take it
Speaker 7: out of their profit margins, and then lastly, some of
Speaker 7: it will get passed on. And as I mentioned last night,
Speaker 7: I've heard this for months now. Like the rule is
Speaker 7: ten percent, it's sorefully rule. If i'mb is a third
Speaker 7: to third a third suppliers of late to third firms
Speaker 7: lead to third consumer is going to eat a third
Speaker 7: of that tariff. So if you eat a third of it,
Speaker 7: and that's ten percent, like I've been arguing, this is
Speaker 7: like three tenths of a in three basic three tenths
Speaker 7: on the inflation rate for a few months, and that's it,
Speaker 7: and it'll persist. If you do twelve month over twelve month,
Speaker 7: that base effect will not go away for a while
Speaker 7: and then it'll just drop off a cliff. So that's
Speaker 7: why I've been arguing, you want to look at like
Speaker 7: three months and six months to see if these tariff effects.
Speaker 6: Pop up, and then go away, and so that's more
Speaker 6: than critical. We're looking at twelve month.
Speaker 8: Yes, but the way the president is putting these tariffs
Speaker 8: on might not match up with theory. Chris, the smooth
Speaker 8: hol attacks was passed and came into effect on a
Speaker 8: certain date. The president is not yet put on most
Speaker 8: of these tarffs they're in. Theory is still coming and
Speaker 8: we still haven't seen the Section two thirty two tariffs
Speaker 8: for the most part, the National defense tariffs that he
Speaker 8: wants to put on semiconductors and pharmaceuticals, et cetera. So
Speaker 8: if the process is stretched out, consumers could be hit
Speaker 8: by a series an ongoing series of tariff increases. And
Speaker 8: given what they've just been through, isn't there danger that
Speaker 8: inflation psychology starts to seep in?
Speaker 6: Well, that's exactly the point.
Speaker 7: All my example has been is if you put the
Speaker 7: ten percent uniform tariff on and keep it roughly in
Speaker 7: that range, than what I've described as will happen. If
Speaker 7: there's constantly a sequence of higher and higher and higher tariffs,
Speaker 7: then you are going to get this rolling potential impact
Speaker 7: on prices.
Speaker 6: That's true.
Speaker 7: If it's still just a question of delaying it, that
Speaker 7: doesn't change my argument. Whether you see the spike in
Speaker 7: July or it happens in June or Army, August or September.
Speaker 7: When it happens is irrelevant for the economics.
Speaker 6: That's a non start of an argument.
Speaker 7: Firms could also just spread it out in smaller increments
Speaker 7: over several months. The total effects still ends of being
Speaker 7: the same. They just get there in a later fashion
Speaker 7: and it'll be smaller amounts. So the bigger thing is
Speaker 7: if we just continually get another wave of tariffs, another
Speaker 7: wave of tariffs and other waves of tariffs, that's when
Speaker 7: things has become more problematic thinking about what's going to
Speaker 7: happen with the inflation.
Speaker 2: You don't think the feder was a should wait, I
Speaker 2: just want to talk about the experience of last year.
Speaker 2: I think LESA has done a fantastic job of covering
Speaker 2: this over the last six seven eight months. The move
Speaker 2: we saw last year one hundred basis point reduction in
Speaker 2: interest rates on Fed funds, and then we saw a
Speaker 2: corresponding move one hundred basis points higher at the long
Speaker 2: end of the yield curve. Yields down did not happen.
Speaker 2: It was yields up and mortgage costs up as well.
Speaker 2: How do you think one informed the other and how
Speaker 2: might that shape your approach to kind of interest rates
Speaker 2: this time around?
Speaker 7: Well, I think last September there was a lot of
Speaker 7: Remember the long term rates were going down through August
Speaker 7: in early September. This was not any contradiction of what
Speaker 7: we were doing. It's just after the September meeting that
Speaker 7: data just came back and the opposite way growth was
Speaker 7: productivity was employment suddenly took back off, and then you
Speaker 7: have real growth expectations being much higher. We were seeing
Speaker 7: productivity growth and GDP growth are close to three percent.
Speaker 7: So in that case, long rates go up anyway, So
Speaker 7: it's not necessarily there was some counter reaction to what
Speaker 7: we were doing. I never saw inflation expectations adjust. It
Speaker 7: caused all that.
Speaker 2: You don't think it was a market questioning you'll commitment
Speaker 2: to the inflation mandate.
Speaker 7: If it would have been, you're just seeing in inflation
Speaker 7: expectations in the market, not the Michigan thing.
Speaker 6: But we didn't see it.
Speaker 7: I mean, inflation expectations stayed praily anchored all through this rise.
Speaker 7: So I think the increase the longer it was just
Speaker 7: all the data was coming in for a better, stronger economy.
Speaker 7: Then we thought it was going to be in September.
Speaker 7: That's fine with me, you know. I sometimes you're going
Speaker 7: to do these things taking a shot that I want
Speaker 7: to make sure we don't have.
Speaker 6: A hard landing.
Speaker 7: And as I said, with any kind of an insurance cut,
Speaker 7: sometimes you don't need the insurance.
Speaker 6: It didn't work.
Speaker 7: Out, But that doesn't mean you go back and say, oh,
Speaker 7: that was a stupid decision.
Speaker 2: To make market bysed expectations of inflation. Let's say on
Speaker 2: this there are clear and obvious threats to the central
Speaker 2: banks independence right now, every single down this program, we're
Speaker 2: quoting the President, quoting the chairman too late and govern
Speaker 2: off the lower interest rights. Kaway that you and I
Speaker 2: can have this conversation without addressing those those coasts directly
Speaker 2: is to think about what's happening with inflection expectations. Did
Speaker 2: these threats threats into deanca market based inflection expectations? And
Speaker 2: it's not something even the Committee might become increasingly sensitive
Speaker 2: too in the months to come.
Speaker 7: Well, like I said, I look at the after the
Speaker 7: tariffs coming on, everybody was worried about de anchoring the expectations,
Speaker 7: particularly after some of these Michigan surveys came out. When
Speaker 7: I always look at the market based expectation because money
Speaker 7: people have money in the game, firms are making decisions
Speaker 7: or what they're cheap economists are saying, and if those
Speaker 7: things are wrong, they're gonna lose a lot of money.
Speaker 6: So I've always paid more attention.
Speaker 7: I haven't seen much in the way of market expectations
Speaker 7: being unanchored in any ways you want to measure them
Speaker 7: any forwarder.
Speaker 6: Now.
Speaker 7: In the near term, of course, they might go up
Speaker 7: because you would see inflation in the short term, but
Speaker 7: in the longer term ones I'm not seeing it. So
Speaker 7: either the market is just dismissing all of this as
Speaker 7: chattering noise, or at some point is something happens such
Speaker 7: that it becomes much more serious than you might see
Speaker 7: a discreete jump, and then that's gonna be a problem
Speaker 7: for everybody.
Speaker 8: One of the questions that we get all the time, Chris,
Speaker 8: from people on Wall Street is or one of the
Speaker 8: posits they make is that all this criticism of the
Speaker 8: FED is hurting FED credibility, and that the next chairman
Speaker 8: is going to have a tough job because there are
Speaker 8: going to be expectations for the next chairman set by
Speaker 8: the White House rather than by the economy. Do you
Speaker 8: feel that inside the building now?
Speaker 6: To be absolutely honest, we just do our job.
Speaker 7: Every day I go in, I just focus on my
Speaker 7: work on monetary policy, payments.
Speaker 6: And oversight of the reserve banks. That's what I do.
Speaker 7: I let this stuff go and then just try to
Speaker 7: focus on my job. And I think that's how all
Speaker 7: of us are proceeding with this. I mean, at the
Speaker 7: end of the day, the president winning whoever they you're
Speaker 7: going to have to have somebody has credibility with the
Speaker 7: markets or you will see as Jonathan was just talking about,
Speaker 7: and you're going to see inflation expectations bike. You will
Speaker 7: not get lower interest rates, you will get higher interest rates.
Speaker 6: This is well known.
Speaker 7: We've seen this everywhere around the world when this happens,
Speaker 7: and I know Scott Doson knows this, So this is
Speaker 7: not something that is lost on anybody.
Speaker 2: You've been nominated by this president for the seat on
Speaker 2: the board. Yes, you were a previously director of research
Speaker 2: for Jim Bill out White back then. Is it a
Speaker 2: position you would like is it something you would like
Speaker 2: to do in the future.
Speaker 7: Look in twenty nineteen, the President contact me and say
Speaker 7: would you serve?
Speaker 6: And I said yes. If the President contacted me and
Speaker 6: so I want you to serve, I would do it.
Speaker 6: But he's not contacting me.
Speaker 3: What say he does.
Speaker 7: If he says, Chris, I want you to do the job,
Speaker 7: I'll say yes.
Speaker 6: But he's not talking to me. So that's it.
Speaker 7: That much hypothetical that.
Speaker 3: That might change. It's going to see it.
Speaker 2: We appreciate your time, all right, I've been very generous
Speaker 2: with Thank you very much. The Federal Reserve governor there,
Speaker 2: Christopher Waller, Mike McKee, thanks as well to you, sir.
Speaker 2: As always, Congress passing the first federal legislation to regulate
Speaker 2: stable coins in a major win for the crypto market.
Speaker 2: Joining us now, I'm really pleased to say, for a
Speaker 2: first time here on Bloomberg TV, on Bloomberg surveyment's the
Speaker 2: SEC Chairman, Paul Adkins.
Speaker 3: Chair Atkins. Welcome to the program, sir. It's good to
Speaker 3: see it.
Speaker 6: Well, good to see you. Thank you very much for
Speaker 6: having me.
Speaker 3: Well, thank you for being here.
Speaker 2: Before we get into it, I wanted to offer you
Speaker 2: the opportunity, sir, to talk about your philosophy in this
Speaker 2: seed versus what came before you and the difference maybe
Speaker 2: between deregulation and just innovation.
Speaker 6: Well, well, thank you very much.
Speaker 9: We are out to, you know, obviously, change direction at
Speaker 9: the SEC, and I think we've already done that here
Speaker 9: in my first two and a half or so.
Speaker 6: Months of the agency. But we're moving away from.
Speaker 9: Regulation through enforcement and uncertainty in the markets, especially with
Speaker 9: respect to cryptocurrencies and digital assets in general, and we're
Speaker 9: looking to set firm clear rules of the road for
Speaker 9: people who are operating in that environment so that innovators
Speaker 9: can innovate. They can rely on their advisors to tell them,
Speaker 9: you know, which is the right direction and how they
Speaker 9: can build.
Speaker 6: On solid ground.
Speaker 1: Regulators, though, can step in without explicit action from Congress.
Speaker 1: So when it comes to cryptocurrencies in the SEC, what
Speaker 1: actually comes next?
Speaker 6: What are your plans?
Speaker 9: Well, so even before I got to the SEC, Hester Purse,
Speaker 9: who's one of the commissioners and she used to be
Speaker 9: my counsel when I was a commissioner back in.
Speaker 6: To one thousand and two to two thousand and eight,
Speaker 6: was in.
Speaker 9: Charge of a crypto task force that we're calling it,
Speaker 9: and they are focusing on.
Speaker 6: Making clear rules for the industry.
Speaker 9: So for example, things like mean coins and stable coins
Speaker 9: that was just the subject of the bill that was
Speaker 9: passed yesterday are not securities, and before that was not
Speaker 9: necessarily clear. And so that's an example of how we're
Speaker 9: trying to put people at ease in the marketplace so
Speaker 9: that they can innovate and they can move forward with
Speaker 9: their plans and not have to look over their shoulder.
Speaker 1: When you were talking to reporters yesterday after the passing
Speaker 1: of this legislation, I believe you'll be at the White
Speaker 1: House today with the President when he signs it. You said,
Speaker 1: the SEC is considering a quote innovative exemption from regulations
Speaker 1: to incentifize tokenization. What does that exactly mean innovated exemption
Speaker 1: and how long does this process take?
Speaker 9: Well, it'll be an iterative process.
Speaker 6: And right now we are working on setting forth.
Speaker 9: Different things that can again make it clear for people
Speaker 9: in the marketplace, you know, which way is the true
Speaker 9: north for them. Let's just say so that they don't
Speaker 9: have to worry about falling off the ditch and you know,
Speaker 9: falling into the ditch and getting in trouble with the regulators.
Speaker 9: And so part of that will be working with our
Speaker 9: colleagues of the other regulators and especially the Commodity Futures
Speaker 9: Training Commission. But let's just say that as we go
Speaker 9: forth and as we interact with the marketplace, we've had
Speaker 9: five roundtables now looking at various aspects of the digital
Speaker 9: asset space. So we are working hard at coming up
Speaker 9: with guidance and rules and we'll use every tool in
Speaker 9: our toolbox to help people understand what is you know,
Speaker 9: how to stay out of trouble.
Speaker 5: Basically, Jack's one of the big concern is that a
Speaker 5: number of the stable coin issue are are not going
Speaker 5: to have the sufficient number of hard currency reserves on
Speaker 5: hand to really back those notes in a way that
Speaker 5: is as advertised. How are you prepared to really counter that?
Speaker 5: Is that something that's in your list of concerns? If
Speaker 5: the sec is going to be monitoring.
Speaker 9: Well, one thing that I think the new to be
Speaker 9: signed a bill into law makes clear is that these
Speaker 9: are not securities and the whole it's the banking regulators
Speaker 9: who are going to be looking after them. And I
Speaker 9: think that's appropriate because of the role that stable coins
Speaker 9: play and I think will play in the future. Because
Speaker 9: part of the role promise I think digital of a
Speaker 9: distributed ledger technology is immediate payment as part of the
Speaker 9: process of transactions, so settlement coming down to in effect
Speaker 9: almost heapless zero and to do it on the trade date,
Speaker 9: and that will make things much more efficient in the marketplace,
Speaker 9: save money, reduced to risk in our financial system.
Speaker 6: So this stable coins.
Speaker 9: Are in the realm of the bank regulators and they
Speaker 9: will look after to make sure that there is adequate
Speaker 9: and as advertise, adequate backing.
Speaker 6: To the stable coins.
Speaker 5: Suakins just sort of switching gears a little bit. There's
Speaker 5: been a lot of discussion around Congress and the President
Speaker 5: passing legislation that would open the door for people to
Speaker 5: take their money from the four to one case and
Speaker 5: put it into private assets, in particular private equity. How
Speaker 5: do you plan to oversee and make sure that that's
Speaker 5: done in a way that isn't potentially punitive for people
Speaker 5: who are retiring at ages where they need a lot
Speaker 5: more money for.
Speaker 6: A lot longer.
Speaker 9: Well, on that issue, we've heard a lot of input
Speaker 9: from both the investors who want access to private the
Speaker 9: private markets and to those sorts of products, and obviously
Speaker 9: from the people who are producing the products who are
Speaker 9: about to meet that demand. So but we have to
Speaker 9: do it carefully, I think, because of course the private
Speaker 9: markets are a lot different than the public markets.
Speaker 6: Their liquidity is not the same.
Speaker 9: There are all sorts of things for people who are
Speaker 9: not aware of the rules of the road where they
Speaker 9: could get hurt. And so we will work very closely
Speaker 9: with our counterparts of the Department of Labor who have
Speaker 9: oversighted Ovarissa accounts to make sure that you know that
Speaker 9: we have appropriate guidelines around these various products. And they're
Speaker 9: really for of course long term investment, especially private equity
Speaker 9: and things like that.
Speaker 6: So we have to do this in a smart way so.
Speaker 9: That individual investors are not inadvertently into something that they
Speaker 9: didn't realize what they were getting into.
Speaker 1: Speaking of, for one, okay, retirement plans, would you allow
Speaker 1: crypto into retirement plans?
Speaker 6: Because the Financial Times is reporting that.
Speaker 1: We could see an executive order from the administration as
Speaker 1: soon as today allowing alternative investments into retirement plans.
Speaker 9: Well, again, you know, I think that you know, disclosure
Speaker 9: is key and that people need to know what they're
Speaker 9: getting into. So things like that are not for everybody,
Speaker 9: and and so especially in retirement plans.
Speaker 6: So we are I look forward.
Speaker 9: To whatever may come out from the President as far
Speaker 9: as direction goes, but we are we need to address
Speaker 9: it because there is a demand out there for these
Speaker 9: sorts of products, and the government should not stand as
Speaker 9: a blocking agent for those sorts of things. But we
Speaker 9: need to enable it in the proper way, with proper
Speaker 9: guidelines and in proper disclosures.
Speaker 1: Sir Atkins, you run an independent agency.
Speaker 4: So to J.
Speaker 1: Powell, I would love to know, are you under any
Speaker 1: pressure from this White House? And what would be your
Speaker 1: advice to J. Powell because it seems like you have
Speaker 1: a better relationship with President Trump.
Speaker 6: Well, I think so.
Speaker 9: I've been at the SEC now this is a third time.
Speaker 9: I was there in the early nineties and the Richard
Speaker 9: Breeden and Arthur Levitt, and then again from two to
Speaker 9: eight and now here in twenty and twenty five. So, frankly,
Speaker 9: I don't see really any difference in operation from back
Speaker 9: then to now.
Speaker 6: I know there's been a lot.
Speaker 9: Of coverage of that, but you know, we are working
Speaker 9: hand in glove with our counterparts in the administration and
Speaker 9: at the Office of Management and Budget and OIRA as
Speaker 9: far as talking to them about rules and other things
Speaker 9: that we are going to be publishing, so you know,
Speaker 9: keeping them up to date, taking.
Speaker 6: Their comments, which are all very good.
Speaker 9: So I don't see any real difference, frankly in the
Speaker 9: ambit of maneuver that we have at the agency. So
Speaker 9: I'll look forward to achieving a lot in the time
Speaker 9: that we have. And because there is so much to do,
Speaker 9: this is what I like to call deferred maintenance.
Speaker 6: That we have to address.
Speaker 9: And so we are moving I think a very quick pace,
Speaker 9: and so the rest of this year I think will
Speaker 9: be churning things out in moving in a different direction.
Speaker 2: Hopefully this is a start of an ongoing conversation. I
Speaker 2: appreciate your time, Chair Ratkins. Thank you, sir, the SEC
Speaker 2: Chair Paul Adkins there down in Washington, d C. So
Speaker 2: I'm desire Franklin Templeton writing. The FMC is already envisioning
Speaker 2: several fifty basis points of rate cuts this year, followed
Speaker 2: by more next. I happen to disagree with the policy,
Speaker 2: but I also think this confirms that the FED already
Speaker 2: has a Dubvish bias. So I'll joined us now for more.
Speaker 2: So now I just want to get into your thoughts
Speaker 2: and why you stand on this rightcout debate at the moment,
Speaker 2: Why don't you think a rate cut currently at least
Speaker 2: is warranted?
Speaker 10: Okay, before I get to that, that statement misstated what
Speaker 10: I was saying. And the FY and c OR sees
Speaker 10: fifty basis points of rate cuts this year and several
Speaker 10: rate cuts next still, and I think that is probably
Speaker 10: not warranted. And really because the economy is kind of
Speaker 10: doing fine. We've talked about this several clients in the past.
Speaker 10: I happen to think that the neutral FED funds rate
Speaker 10: is between four and four twenty five. We've talked about
Speaker 10: this before, to and a quarter of inflation one point
Speaker 10: seventy five or so of for productivity gains. Unless it
Speaker 10: looks like recession is imminent, it's not clear to me
Speaker 10: why the Fed should be cutting rates all the way
Speaker 10: down to close to three percent in this environment. We
Speaker 10: have become used to extremely low rates, and prior to
Speaker 10: the global financial crisis, we had decades of rates being
Speaker 10: more normalized, and that's why I don't think it's needed.
Speaker 5: So that said, a lot of people do expect the
Speaker 5: FED to cut to that level that you're talking about,
Speaker 5: and you're not seeing an unmoored level of inflation expectations
Speaker 5: baked into the market, As Governor Chris Waller was just saying, so,
Speaker 5: do you think that the market right now is underpricing
Speaker 5: the potential for future inflation.
Speaker 10: I think it is, probably, And the point is the
Speaker 10: future inflation that I see is probably not associated. Let
Speaker 10: me be clear with tariffs for a number of reasons.
Speaker 10: It's not just that they're one off. Frankly, tariffs don't
Speaker 10: impact enough with the CPI basket to have a meaningful
Speaker 10: impact on overall inflation. The real reason is fiscal policy
Speaker 10: remains very loose, Monetary policy is not particularly tight, and
Speaker 10: we aren't seeing unemployment do terrible things. Wages aren't doing
Speaker 10: terrible things. This is an economy which remains in relatively
Speaker 10: rude good health right now. And that's why I think
Speaker 10: we aren't seeing the pressures what brings inflation down. Let
Speaker 10: me turn it on its head and say, from its
Speaker 10: current lets, which by the way, are fifty percent higher
Speaker 10: than where the Fed needs needs inflation to be, what
Speaker 10: brings inflation down? Well, I don't see very many factors.
Speaker 5: One thing that people argue is you are seeing I
Speaker 5: don't know if it's cracks in a libor market, but
Speaker 5: a sign that private employment really is coming down, and
Speaker 5: you saw that really in the last lownfarm payrolls report,
Speaker 5: which is.
Speaker 6: What Governor Roller was talking about.
Speaker 5: But you're hearing companies say this as well, that they
Speaker 5: don't have the same kind of pricing power that they
Speaker 5: did in the direct aftermath of the pandemic. So at
Speaker 5: what point will that pushback that you're seeing from the
Speaker 5: consumer act as a check and something that really is
Speaker 5: consistent with what we're hearing from corporate executives.
Speaker 10: Once we see some more once we can hang a
Speaker 10: bit more meat to that particular story, I'd say I
Speaker 10: would agree. So far, it's a data point. It's a
Speaker 10: few data points, and actually we've seen some very decent
Speaker 10: corporate turnings as well. We've got yesterday's retail sales reads on.
Speaker 10: So I really don't know that we're at the cusp
Speaker 10: of something dramatic happening to this economy and getting clarity
Speaker 10: on the fiscal front. Whether you like the bill or
Speaker 10: hate the bill, we do have clarity from the bill
Speaker 10: that actually is a corporate tail wind, not a headwind.
Speaker 10: So I'm not yet prepared to say that we're getting
Speaker 10: to a point of significant weakening of this economy.
Speaker 5: So does that mean to know that you're all in
Speaker 5: on a high yield and you're shorting the thirty year.
Speaker 10: No, I'm aggresivebly neutral on rates in general, and I
Speaker 10: am looking at if I think about all the different
Speaker 10: factors which come into play, I think fair value for
Speaker 10: you as ten years is actually probably around four seventy
Speaker 10: five to five. Do we get there? It's not completely clear.
Speaker 10: Weirdly enough, actually, after being concerned about fiscal for so long,
Speaker 10: I think something that people might be underpricing is that
Speaker 10: if tariffs go through anywhere close to the level we've
Speaker 10: seen so far this year, we actually have an additional
Speaker 10: source of revenue which has not been factored into anybody's calculations,
Speaker 10: and it's quite substantial. Actually, you know, the clack of
Speaker 10: revenue is just coming in, so there are lots of
Speaker 10: fun and loans here. I think that the spreads we're
Speaker 10: seeing on high yield are extremely tight. That's very clear.
Speaker 10: I think you need to be very careful. So it's
Speaker 10: not that I'm all in and just looking at this
Speaker 10: and waiting for some volatility to continue to pick up interesting,
Speaker 10: interesting credits in interesting places. I don't think you can
Speaker 10: buy any indices, which you would do if you were
Speaker 10: all in and spreads were enormously attracted.
Speaker 1: So you also think the markets are just overhyped. When
Speaker 1: it comes to the controversy between Trump and Power, are
Speaker 1: you willing.
Speaker 6: To close that door?
Speaker 10: Then?
Speaker 1: About the White House and Trump potentially firing him, you
Speaker 1: just don't think it's going to happen at all.
Speaker 10: It's not a question of happening or not happening. I
Speaker 10: don't think it matters, is my point. You would get
Speaker 10: volatility if you fired fired Power for cause if some
Speaker 10: of the controversy current controversy results in something meaningful, which
Speaker 10: I'm doubtful about, but supposing it does, and supposing Powell
Speaker 10: is fired, I would just note, what exactly is it
Speaker 10: that we're all terrified about an enormously dubbish FED chair?
Speaker 10: Can I ask everyone on the program today who was
Speaker 10: our last hawkish FED chair? Let me tell you it
Speaker 10: was Paul Volker. You have to go back fifty years. Yeah,
Speaker 10: so let's not act as of getting a dukish Fed
Speaker 10: chair is something none of us have ever encountered. I
Speaker 10: give you Janet Yellen, I give you j Powell, who
Speaker 10: actually did preside together with a supremely dubbish FED over
Speaker 10: one of the biggest policy errors that we've seen in
Speaker 10: a very long time. That policy error was not to
Speaker 10: be overly hawkish, it was to be overly dubbish. So
Speaker 10: I think when I say it's being overhyped, it is
Speaker 10: this notion that somehow we're going to get someone truly
Speaker 10: beyond the peale who is going to come and not
Speaker 10: monetary policy completely. Of course, it's twelve members who get
Speaker 10: to dissent or not to descent. I think that the
Speaker 10: institution has a certain amount of credibility, and no incoming
Speaker 10: FED chair, who, by the way, survives this administration and
Speaker 10: whose term will run into the subsequent administration, would like
Speaker 10: to have his legacy all under that footnote that Arthur
Speaker 10: Burns has in the annals.
Speaker 3: Of the FED.
Speaker 2: You ever seen that scene of a bunch of football
Speaker 2: fans watching the game and they score, and then all
Speaker 2: the bears get thrown into the air. And now people
Speaker 2: have put a different video in that screen and then
Speaker 2: they throw the bears into the air.
Speaker 3: That was son old design. The big screen.
Speaker 2: Start's going on that run about a fat reserve. All
Speaker 2: the bears get thrown into the avone's going crazy.
Speaker 3: Yeah, that's very much.
Speaker 5: There was a fantastic, fantastic explanation and frankly history lesson.
Speaker 2: So now thank you someone designed there, Franklin, Sampertsent. This
Speaker 2: is the bloomberg S Events Cast, bringing you the best
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