Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Abramowitz Jailey, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. We get informed
Speaker 1: by a gentleman from the Richmond Fed. Jeffrey Lacker, came
Speaker 1: out at University Wisconsin, Madison and had to step into
Speaker 1: maybe the biggest shoes and biggest cultural moment in Fed America,
Speaker 1: and that was all of the heritage and the conservative
Speaker 1: ethos of the Richmond Fed. Dr Lacker joins us this morning,
Speaker 1: the former Richmond FED president, Jeff Just a perfect time
Speaker 1: to speak to you as well. If I walked down
Speaker 1: my hallway at home and I threw half my books out, Jeff,
Speaker 1: because I'm blind, like years ago, I kept all the textbooks.
Speaker 1: There's man Que, there's Abel Bernanke, there's CARLN. Saski's there's
Speaker 1: all these great books, including what you studied in one
Speaker 1: on one at Wisconsin. Is any of this Fed moment,
Speaker 1: this theory, this framework, is any of this fed process
Speaker 1: in the textbooks. I think so. I think that the
Speaker 1: empirical record of the Federal Reserve over the last a
Speaker 1: hundred years or more that they've been around shows repeated
Speaker 1: instances of them pivoting from a concern about promoting demand
Speaker 1: and growth to a concern about trying to fight inflation. UM.
Speaker 1: Their record is UM not that great. I think less
Speaker 1: than half of the time have they done it without successfully,
Speaker 1: that is, reduced inflation without successfully without pushing the UM
Speaker 1: economy into a recession by overdoing it. It's hard to
Speaker 1: do because the lags involved. And they've set out a
Speaker 1: course for themselves this year, and they've they've got a
Speaker 1: tough job this year for sure. Are they going to
Speaker 1: move forward and do you have confidence they can move
Speaker 1: forward and recalibrate and adjust with stability or do you
Speaker 1: suggest there is instability risk. I think they're threading a
Speaker 1: needle UM. I think they have to tighten UM rapidly
Speaker 1: enough to ease demand and ease inflation. UM cooler and inflation.
Speaker 1: But I think that they UM are going to be
Speaker 1: mindful of not going too fast and pushing the economy
Speaker 1: into the recession. I think they're all going to be
Speaker 1: mindful of Psalms rule. This is this impure, amazingly consistent
Speaker 1: vehicle regularity that the unemployment rate never rises more than
Speaker 1: five tenths of a percentage point without rising two or
Speaker 1: three percentage points. So you know, without the economy to
Speaker 1: begin to inflate into a recession. So they're gonna be
Speaker 1: They're going to be on egg shells this year. Jeff,
Speaker 1: what would it take to slow things down? I just
Speaker 1: want to understand that from your perspective, because clearly that
Speaker 1: number is shifted in the last ten years and shifted
Speaker 1: quite a lot. And clearly it's different with inflation at
Speaker 1: seven percent compared to say inflation down it. So what
Speaker 1: do you think it would take, um, So they have
Speaker 1: to get the real rate positive, perhaps to one or
Speaker 1: two percent, and if they got inflation down to two percent,
Speaker 1: that would take obviously three or four percent nominal rate
Speaker 1: on the Fed Funds rate. Don't have to get there overnight,
Speaker 1: can get there in a year or two, but to
Speaker 1: lay out the expectations so that markets understand it. That's
Speaker 1: about where the Fed Funds rate is likely to be
Speaker 1: at the end of three I think that's what it's
Speaker 1: going to take that's well north of where the dolt
Speaker 1: pot is. As you know, I wonder, Jeff, how you
Speaker 1: would think that the bannet sheet reduction would play into
Speaker 1: that as well as that's something that complements that effort,
Speaker 1: something that replaces it, What would it mean? And so
Speaker 1: I've been in the camp for a while of thinking
Speaker 1: that the balance sheet is kind of small beer relative
Speaker 1: to funds rates um increases. So I don't think the
Speaker 1: balance I think they ought to roll off the balance sheet,
Speaker 1: and they ought to get about it rapidly and soon.
Speaker 1: But I don't think that that's the major determined the
Speaker 1: stance of montery right policy right now sort of a
Speaker 1: marginal pact um. So, um, yeah, I think they need to, um,
Speaker 1: you know, focus on the funds rate and getting that going.
Speaker 1: Do you think, Jeff, that FED chair j Powell has
Speaker 1: been a good communicator through all this, you know, yeah,
Speaker 1: given the handy has been dealt in terms of what
Speaker 1: to communicate by the committee. Yeah, But I think, um,
Speaker 1: there's got to be a lot of my former colleagues,
Speaker 1: um on the FED I feel bad for who are
Speaker 1: looking back at the last year and feeling as if
Speaker 1: the FED didn't play its hand very well that Jeff
Speaker 1: no no, I apologize for how to off, but can
Speaker 1: you elaborate on which aspects, which moves they made that
Speaker 1: you think in retrospect were big mistakes and sort of
Speaker 1: site two or three things. First, they they hamstrung themselves
Speaker 1: by placing them under this tactical constraint of UM, giving
Speaker 1: the market a huge amount of notice before they started tapering.
Speaker 1: So Powell said, you know, we're not even talking about
Speaker 1: talking about tapering. Well, that means you got to talk
Speaker 1: about it, and then so on. I think that delayed
Speaker 1: their reaction, and they felt compelled to go through this
Speaker 1: steady march of releasing discussions in the minutes before they
Speaker 1: started tapering, and they put on their themselves the constraint
Speaker 1: that they were going to raise rates until they stopped UM,
Speaker 1: that they stopped purchases. So I think that set them
Speaker 1: back materially. And I think you can see, like around
Speaker 1: August and September they realized they needed to start raising rates.
Speaker 1: They could have done it in October November, but they
Speaker 1: were on this sort of tapering thing. The second, because continue, Jeff, continue, sure.
Speaker 1: The second Well, the second thing is the way they
Speaker 1: think about maximum employment. I mean they think of it
Speaker 1: the way as three point five percent unemployment and labor
Speaker 1: force participation rate backup to trend. And I think that
Speaker 1: caused them to misinterpret inflation in the first half of
Speaker 1: last year. I think they assumed, well, we must there's
Speaker 1: a lot of slack in the economy. It can't be um,
Speaker 1: you know, a persistent inflation search And they were wrong
Speaker 1: because maximum employment last year was about where it was
Speaker 1: about where actual employment was. We got to maximum employment
Speaker 1: MAXI employment various over time. It depends on all sorts
Speaker 1: of develop continue economy. I don't think they take it
Speaker 1: on board. Jeff, this is a delicate question because we
Speaker 1: speak to all these people with immense, immense respect. But
Speaker 1: I'm suggested Laquers never heard me say this. Krugman and
Speaker 1: lacquer are on the same page that we've got to
Speaker 1: go back to a much more traditional economics. And Jeff,
Speaker 1: for you, that's Wisconsin nine economics, which is one of
Speaker 1: the leading departments in the world at the time. Is
Speaker 1: the is the regret of the Fed looking at John
Speaker 1: Williams Richard Claire that one of the founders of ds
Speaker 1: GE that the Feds getting to Mathey and they've got
Speaker 1: to get more conceptual about the real economy. So this
Speaker 1: idea about maximum employment varying over the cycle, I mean,
Speaker 1: that's been around a while. There's been some new empirical
Speaker 1: work on it by Robert Hall and Marianna Goodly Act,
Speaker 1: But I don't think of that as as a new idea.
Speaker 1: What I think they ought to go back to is
Speaker 1: before the last framework revision. I think the last framework
Speaker 1: was a mistake. It essentially took preemptive rate increases off
Speaker 1: the table, and I think, in hindsight last year would
Speaker 1: have been the ideal time UH to engage in that
Speaker 1: in the second half of the year, nudge, nudge the
Speaker 1: rate up a bit, just to hedge your bets about
Speaker 1: whether inflations persistent in transitory rather than putting all your
Speaker 1: eggs in the transitory basket. But I think that the
Speaker 1: framework that took preemptive rises a rate increases off the table,
Speaker 1: I think that was a big mistake. So Jeff, just finally,
Speaker 1: is this a failure of expost monetary policy? After all
Speaker 1: that effort to shift in that direction, you're saying gets
Speaker 1: failed and we should go back to what we used
Speaker 1: to do. I don't think that the new framework was
Speaker 1: a constructive step forward. I think that people took for
Speaker 1: granted the price stability we had from on, and I
Speaker 1: don't think they appreciated the extent to which, you know,
Speaker 1: small preemptive moves were really going to established the credibility
Speaker 1: of the fact. Jeff, this is this is fiery language.
Speaker 1: Can they catch up and be preemptive at two pm
Speaker 1: this afternoon? I think, Um, I think they can. And
Speaker 1: it's going to play out over a couple of meetings,
Speaker 1: but I think, um, you know they're there. At the
Speaker 1: next meeting, they'll release Summari economic projections that will have
Speaker 1: dot a new dot uh, and that's an opportunity for
Speaker 1: them to spell out that, you know, they anticipate a
Speaker 1: more aggressive UM path. I think they could be more
Speaker 1: realistic in that in that some reveection on the actions
Speaker 1: about their inflation forecast. I don't think two point six
Speaker 1: percent is at all plausible at this point. I think
Speaker 1: inflation is likely to be four percent or north of
Speaker 1: that is that calendar year, UM, and I think they
Speaker 1: can spell out the extent to which they're gonna how
Speaker 1: they're gonna respond incoming data. Are they gonna discount blips
Speaker 1: one way or another. Are they gonna get on top
Speaker 1: of um inflation and and move the great path up
Speaker 1: if inflation comes in stronger than expected the first half
Speaker 1: of the year. Jeffrey Laca, formerly of the Richmond Fed,
Speaker 1: Jeff fantastic to catch up with you, Bob Michael. He
Speaker 1: is chief investment Officer and ahead of Global Fixed Income,
Speaker 1: Currency and Commodities of JP Morgan John. That means he's
Speaker 1: senior vice president Headaches and Estimates for all of JP
Speaker 1: Morgan John. Why don't you kick it off? I think
Speaker 1: that makes he's busier than you and I. We're going
Speaker 1: to talk about a football lights above, So let's start
Speaker 1: with this one. Why do you want to sit in
Speaker 1: cash in this market with this backdrop? Well, I think
Speaker 1: there are a number of things going on. First, let
Speaker 1: me say I think the Fed has played this month
Speaker 1: perfectly and given all the chaos, that may seem to
Speaker 1: be a conundrum to a lot of people, but think
Speaker 1: about it. Uh, they got last year wrong. Inflation got
Speaker 1: away from them. They walked in this year, they admitted
Speaker 1: they got it wrong, went out there all the f
Speaker 1: O m C members talked about all their tools were
Speaker 1: in play, then went into their quiet period and let
Speaker 1: us in the market hash it out. So they come
Speaker 1: into the day's meeting knowing what the median expectations are
Speaker 1: March liftoff for rate hikes, q E n's in Mar
Speaker 1: and some conversation about q T at the end of
Speaker 1: the year. They didn't have that information two weeks ago,
Speaker 1: so they are now playing it, I think very smartly.
Speaker 1: My concern is those things won't be enough the inflation
Speaker 1: genius out of the bottle. They're going to try to
Speaker 1: thread the needle and go with the market consensus. I
Speaker 1: think we heard them from Waller. They don't want to
Speaker 1: surprise the markets. They got enough for this meeting, but
Speaker 1: we think down the road they're going to have to
Speaker 1: accelerate a number of things, including rate hikes. We think
Speaker 1: they're going to have to go to every meeting twenty
Speaker 1: five basis points and QT. We hope that's the Jackson
Speaker 1: whole conversation that may be pulled forward, and then you
Speaker 1: have to watch the caps. Let's get into it before
Speaker 1: we get to the caps on banant reduction, it's really
Speaker 1: really important, really nuance, we need to spend some time
Speaker 1: on that. You're looking at potentially at a hike at
Speaker 1: every single meeting balance sheet reduction that could come earlier,
Speaker 1: maybe totally in one point five trilli and through the
Speaker 1: end it's twenty And you think that's what it's going
Speaker 1: to take to get inflation down, Bob, What does the
Speaker 1: market look like if they deliver everything you just said, John,
Speaker 1: You have to understand, central banks broke a thirty year
Speaker 1: promise to us. They told us the one mistake they
Speaker 1: would never make is to let inflation get away from them,
Speaker 1: and it has in every part of the world, in
Speaker 1: every economy. And now you listen to the Fed at
Speaker 1: the start of this month, they're back on their heels
Speaker 1: and they've got to fight ahead of them because inflation
Speaker 1: is getting entrenched. It's in the price of shelter, it's
Speaker 1: it's an employment They've got a couple of tough months
Speaker 1: ahead to look at inflation data. So we think that
Speaker 1: the inflation battle is much bigger than either they're estimating
Speaker 1: or admitting. So yes, they should bring forward those fights, John.
Speaker 1: If they do for rate hikes this year, a year
Speaker 1: from now, we're looking at a one percent FED funds
Speaker 1: rate deflate that by the inflation that's going on today,
Speaker 1: that's minus six a lot of people actually buy into
Speaker 1: the transitory idea at least that this will be a
Speaker 1: passing surgeon inflation. That's actually the market expectation if you
Speaker 1: look at FED funds futures, if you look at some
Speaker 1: of those forward indicators in terms of break even rates,
Speaker 1: what's the market getting wrong? What data points should traders
Speaker 1: be looking at to confirm the view that you put
Speaker 1: out there. They've been brainwashed by the last twenty years
Speaker 1: that inflation never goes higher than two two and a
Speaker 1: half percent. So I agree, it's all transitory. Things will
Speaker 1: slow down, Inflation will come down, But where will the
Speaker 1: economy slow down to? Still above trent? You've already closed
Speaker 1: the output gap, so you've got that inflationary pressure working
Speaker 1: as well. We're inflation. Will inflation slowed down to two
Speaker 1: and a half percent? I don't think so. I think
Speaker 1: over three percent. And by the way, the oil shocks
Speaker 1: in the seventies those proved to be transitory too, but
Speaker 1: it took an awful lot of central bank ammunition to
Speaker 1: contain them. Can they stay on a measured dialogue, a
Speaker 1: measured cadence, a measured set of speeches, or do they
Speaker 1: say as you just stated, Bob we're gonna move up
Speaker 1: for rate hikes, but along the way, we're going to
Speaker 1: monitor and adjust and change if we have to. Why
Speaker 1: can't they say that? Well, I think they will, but
Speaker 1: I think today's meeting would be a lost opportunity if
Speaker 1: they just did that, because the next couple of months
Speaker 1: of inflation data are going to put them back on
Speaker 1: their heels again before it starts to slow down. So
Speaker 1: I'll give you that. So why not do something? Why
Speaker 1: not at least come in today and say, you know what,
Speaker 1: we've put out the schedule of large scale asset purchases
Speaker 1: to five fifteen, that's the last one, and then that
Speaker 1: a month early. That's kind of halfway priced into the market.
Speaker 1: Go with the four rate hikes, but leave the option
Speaker 1: anality there um to to go to every meeting. Fifth,
Speaker 1: I've heard a lot of discussion about fifty basis points
Speaker 1: at a conversation with client yesterday. UM, and I think
Speaker 1: fifty basis points is pretty destructive. That reminds me of
Speaker 1: the end of the tightening regime. But can we just
Speaker 1: finished on the technical stuff because you did mention it
Speaker 1: and I promised you some time on it. The banas
Speaker 1: sheet reduction that a lot of people expect now it's
Speaker 1: about one point five trillion from the middle of this
Speaker 1: year to the back end of twenty three. As you
Speaker 1: know on the Banish at the moment there's a ton
Speaker 1: of tea bills. But you mentioned the word caps. How
Speaker 1: do you think they managed the roll off well? When
Speaker 1: they were doing quantitative tightening previously they had caps at
Speaker 1: at fifty billion per month. We think that's a good
Speaker 1: starting point, but ultimately they should go to a billion
Speaker 1: in caps because the balance sheet is is a lot
Speaker 1: bigger and they actually don't belong in meddling in the
Speaker 1: markets to the extent that they have. They don't belong
Speaker 1: owning as much of the mortgage market and the treasury
Speaker 1: market as they have. That should be left to free
Speaker 1: market participants like myself to price, not to the Fed.
Speaker 1: Not in a recovery. But Michael, conviction trade right now?
Speaker 1: What is it? So my conviction? There's there's been a
Speaker 1: lot of repricing in the market, um, but I'm still
Speaker 1: a seller of rallies. Can I also just ask I
Speaker 1: heard that Bill Dudley is going to be on later.
Speaker 1: I think the question you have to ask him is
Speaker 1: he brought financial conditions in disease to the FED, which
Speaker 1: is really a private markets concept. Of course us in
Speaker 1: the markets love them, but is that really something that
Speaker 1: belongs at the Fed? Is that how they missed inflation
Speaker 1: because they were too concerned about people like me throwing
Speaker 1: our toys out of the baby carriage? And a question
Speaker 1: for Tom, Tom, I know you around when vulcar raised
Speaker 1: rates from five to can you imagine I was there? Also?
Speaker 1: Can you imagine if if he looked at financial conditions indicators?
Speaker 1: What do you think he would have said and done?
Speaker 1: I think this really important question. This goes back to
Speaker 1: the landmark work of Michael Rosenberg, a Bloomberg folks who
Speaker 1: put together it's wonderful indusseries. I agree with you, Bob,
Speaker 1: it's been. It's been a new certitude with these indusseries
Speaker 1: that doesn't work in crisis or pivot points. And I
Speaker 1: love Bill Dudley, I've known him for years. Brilliant. She
Speaker 1: slipped that one in. That's goods. She's running the interview too, now, Bob,
Speaker 1: do you want a final comment? And you're beloved Liverpool
Speaker 1: as well. They're coming, They're coming on strong and I'd
Speaker 1: be proud for them to have the David Ortie's number
Speaker 1: fly during their next match. Okay, Bob Michael, thank you sir,
Speaker 1: it's going to catch up my as a ways, JP
Speaker 1: Morgan Asset Management's Bob Michael, I'm fixing, come now quickly.
Speaker 1: Maryland Watson joins ahead of Global Fundamental Fixing Come strategy
Speaker 1: at black Rock. What would your own power due to
Speaker 1: your bonds space this afternoon? Well, I think that he's
Speaker 1: going to try to convey a very very measured approach
Speaker 1: um as you as you just noticed, I mean, the
Speaker 1: market has been extremely volatile over the past few days.
Speaker 1: I think it maybe got a bit of ahead of
Speaker 1: itself in terms of what some market commentators are expecting
Speaker 1: in terms of great rises and quantat to tightening. But
Speaker 1: I think they're going to basically try to outline a
Speaker 1: very measured path in terms of first of all ending QUEWI,
Speaker 1: which should be in March, and then potentially we could
Speaker 1: see also a lift off in March. There is some
Speaker 1: speculation around whether they might start to signal when quantitative
Speaker 1: tightening might start to happen. I think that's maybe a
Speaker 1: little bit premature for today, but I think certainly as
Speaker 1: well they're going to acknowledge that you know, the employment
Speaker 1: levels are maybe consistent with maximum employment in the economy,
Speaker 1: Inflation remain is very high, so there is a need
Speaker 1: to continue to withdraw this very very loose munty policy,
Speaker 1: to withdraw the stimulus and start to move towards normalization.
Speaker 1: What does black Rock as a general statement doing with duration,
Speaker 1: I mean, is it is it a micro analysis? Are
Speaker 1: you looking at first second derivative analysis of duration? What
Speaker 1: are you doing on the X axis? Yes, so in
Speaker 1: terms of duration, obviously we are starting to go a
Speaker 1: bit closer to home in terms of um the interest
Speaker 1: rate sensitivity around our portfolios. So for example, where we
Speaker 1: had been short or underweight in the treasury, for example,
Speaker 1: we are now a little bit closer to neutral. I
Speaker 1: think at this stage, given the uncertainty in the market,
Speaker 1: given the uncertainty around the path of growth, that we
Speaker 1: do expect growth to remain you know, robust and strong,
Speaker 1: but there are increasing headwinds at the moment. There is,
Speaker 1: as you mentioned, more certainty around issues with Ukraine. There
Speaker 1: are more uncertainty has just given the slowdowns in various areas,
Speaker 1: given on chron and different aspects. So I do think
Speaker 1: that in terms of duration we are a little bit
Speaker 1: closer to home and we are keeping it relatively like
Speaker 1: right right, John, and important research this morning always out
Speaker 1: of Hong Kong with Mr Major. I thought it was
Speaker 1: a real clarification of that camp, like Steve Englander as well.
Speaker 1: Let's look at the major note right now. It's real simple.
Speaker 1: The conventional wisdom is that changing patterns of Central bank
Speaker 1: bond by means yields will go up. We beg to differ.
Speaker 1: Can't get clearer than that, John, The complex interactions, et cetera.
Speaker 1: The q T teaser is not solved by just looking
Speaker 1: at one side. Let's get into the q T t
Speaker 1: so a little bit more Man. I spoke to Bob
Speaker 1: Bob Miller of black Rock, a good friend of colleague
Speaker 1: if yours and Rick Rada recently, and they've talked about
Speaker 1: the importance of that balant sheep reduction. Deutsche Bank coming
Speaker 1: out with huge numbers one trillion for twenty three five
Speaker 1: and sixty billion for the back end of this year,
Speaker 1: does that necessarily mean high yields? That's what Steve Majores
Speaker 1: getting into for HSBC is the translation. That's simple. No,
Speaker 1: it doesn't necessarily mean particularly higher yields. I think as
Speaker 1: you do start to see the you know, the balance production,
Speaker 1: whether it begins um, you know, in the second half
Speaker 1: of this year or you know, and progresses into three
Speaker 1: or beyond UM. I think Steven Major is right and
Speaker 1: that you do see it's more complex than that, because
Speaker 1: on the one hand, you do have obviously the market
Speaker 1: is already pricing um, you know, maybe overpricing the level
Speaker 1: of interest rates that this year it's pricing in four
Speaker 1: hikes that might be a little bit excessive. I think
Speaker 1: also when you get into q T as well, then
Speaker 1: that we might actually start to see that we've seen
Speaker 1: the back end. Actually it's almost inverted if you look
Speaker 1: at the twenties and thirties a part of the curve
Speaker 1: as well. So I don't think it necessarily means HIW
Speaker 1: you or they do think it's a lot more nuance.
Speaker 1: I completely agree. And taking a look at that nuances
Speaker 1: the yield curve and how much do you think that
Speaker 1: the market is overpriced or underpriced projections for longer term
Speaker 1: growth at this point, Yes, the projections for longer term growth.
Speaker 1: I mean we do have and continue to have a
Speaker 1: pretty positive view on growth going forward and notwithstanding that,
Speaker 1: you know, the headwinds and stunty that we see. So
Speaker 1: I think at the momentum projections around growth they have
Speaker 1: been revised down by their meth and various different organizations,
Speaker 1: but we actually think that they are you know, it
Speaker 1: does remain on a picture of bus path, and so
Speaker 1: we think it's pretty fair in terms of what either
Speaker 1: the the you know, the dots are projecting or you know,
Speaker 1: what the market projecting as well. We think that the
Speaker 1: growth will remain picture of us and what's in there
Speaker 1: of black Rock. Marilyn as always, thank you very much
Speaker 1: right now helping us. Bruce Chasman, chief Economists, had a
Speaker 1: global economic research at JP Morgan. Bruce, I want to
Speaker 1: go back to the foundational mandate here, which is economic
Speaker 1: growth and the ability to create jobs. You mentioned in
Speaker 1: your note a hiccup of activity. How hiccup E is
Speaker 1: the hiccup right now? Um, we think it's pretty sharp
Speaker 1: as you move into the new year. We're looking for
Speaker 1: the U s economy to post a seven percent gain
Speaker 1: in Q four and and something the low close to
Speaker 1: one percent in the first quarter of the year. So
Speaker 1: that's a pretty dramatic downward move. I think you're gonna
Speaker 1: see a big drop in consumption in December when we
Speaker 1: get the report later this week, and I think January
Speaker 1: is going to be a pretty weak month. The hope, though,
Speaker 1: of course, is that O Macron hits hard, it hits fast,
Speaker 1: but it also leaves fast, and that we're moving out
Speaker 1: towards the end of the quarter. We're starting to see
Speaker 1: this reverse get get Earth momentum ab if we go
Speaker 1: from seven to one or whatever the number is for
Speaker 1: always pretty good at this to three digits. But Bruce,
Speaker 1: if we execute that deceleration, how does a central bank
Speaker 1: react other than to say we need to wait for
Speaker 1: the next round of data. Well, I think generally the
Speaker 1: FED has made the decision that it's pretty far behind
Speaker 1: the curve. I think it's also made the decision that
Speaker 1: it's looking at the economy very much the way I
Speaker 1: just described, which is gonna get it's going to get
Speaker 1: hit by something pretty sharp, but it's going to also
Speaker 1: be pretty short lived. We think by the time you
Speaker 1: get to the March meeting, the FED will be able
Speaker 1: to see signs that that slowdown is starting to turn around.
Speaker 1: And that's I think can abort. Reason why is we
Speaker 1: go to this meeting. We don't think the FED is
Speaker 1: going to lose its optionality about what it does in March.
Speaker 1: It's gonna tell us it's scheduled to start hiking in March,
Speaker 1: but it's gonna not give us a sense of how
Speaker 1: fast that basis at this point in time. Bruce, you
Speaker 1: said something in your research that really stuck out to
Speaker 1: me that there is a risk you think it's about
Speaker 1: one and four that the FED completely stops buying bonds,
Speaker 1: buying any assets by February. I assume this to me,
Speaker 1: not even reinvesting, allowing the balance sheet to really shrink
Speaker 1: much more quickly. What does that look like in terms
Speaker 1: of economic ramifications and the reasoning behind it. Well, I
Speaker 1: think there's a risk that they stop, that they move
Speaker 1: the tapering forward one month and they end the purchases.
Speaker 1: I don't think that they're gonna uh start winding down
Speaker 1: the balance sheet as we move into March. And I
Speaker 1: think the the issue here is how strong the signal
Speaker 1: do they want to send. They know they're behind the curve,
Speaker 1: do they really need to keep going here? I say
Speaker 1: it's one in four in the sense that they haven't
Speaker 1: guided us towards that and actually doing that would be
Speaker 1: a stronger signal that they're going to get more aggressive here.
Speaker 1: And as I said, I think at this point they
Speaker 1: still want to keep their optionality, recognizing that they're gonna
Speaker 1: start raising rates in March, and that's still two months away. Bruce,
Speaker 1: how do you view the balance sheet in terms of
Speaker 1: a policy tool? I mean some people are trying to
Speaker 1: game out how many rate hikes. It's equivalent to what's
Speaker 1: your view on how the Fed is using this? Well?
Speaker 1: I think how the Fed is going to use it
Speaker 1: is easy. How it's going to impact financial conditions is complicated.
Speaker 1: I think the Fed is gonna say we need to
Speaker 1: get going. We need to get going faster, both because
Speaker 1: we want to adjust financial conditions and also because the
Speaker 1: balance sheet has been so bloated. Uh we. As I said,
Speaker 1: I think we're gonna put it on a pace that
Speaker 1: the caps are going to be set um at at
Speaker 1: when it gets to the peak at a hundred billion
Speaker 1: or so a month. But and I think the important
Speaker 1: thing here is that's gonna put it on an automatic pilot,
Speaker 1: which is to say they are gonna let the balance
Speaker 1: sheet run off. They're gonna watch how both the balance
Speaker 1: sheet and rate moves affect financial conditions, but it's going
Speaker 1: to be the rate movements that are gonna adjust if
Speaker 1: they're surprised that they either get too little or too
Speaker 1: much response in terms of what um we're seeing in
Speaker 1: terms of financial conditions and and their their goals on
Speaker 1: hitting inflation and and growth. Bruce your shop and I'm
Speaker 1: gonna go back eight years, if not ten years, led
Speaker 1: by Michael Faroli, lead with an analysis of what the
Speaker 1: terminal rate of various economic indicators were, which was just
Speaker 1: stunning in folks. To cut to the chase, the vision
Speaker 1: of a potential g d P in the vicinity of
Speaker 1: two percent or even lower. Recalibrate right now the correct
Speaker 1: terminal inflation rate? Is it above four percent? Which is frightening?
Speaker 1: Is it? And an Adam post in three sent where
Speaker 1: you suggest we need a new level of inflation or
Speaker 1: do we go back to something on the edge of Feroli, Well,
Speaker 1: I guess there's two issues here, terminal inflation and where
Speaker 1: the Fed needs to go on rates to to make
Speaker 1: sure we we kind of stay it in that zone.
Speaker 1: I would start with the idea that the FEDS tolerance
Speaker 1: level for inflation is probably in the two to three
Speaker 1: percent range. And I think what they're gonna do is
Speaker 1: set policy uh to kind of be comfortable that inflation
Speaker 1: stays above two. But if they feel like it's moving
Speaker 1: above three on a sustained basis going forward, then they're
Speaker 1: gonna get more aggressive. What is the FED going to
Speaker 1: need to do? I think their view of neutral right
Speaker 1: now is two and a half. Um. I think it's
Speaker 1: gonna be hard to contain inflation just getting to two
Speaker 1: and a half. And I think, actually, even though I
Speaker 1: think the supply side of the economy looks weak right now,
Speaker 1: I think the ability to generate credit is much stronger
Speaker 1: than it was earlier. I think we're gonna see you're
Speaker 1: in and feel a need to have higher interest rates
Speaker 1: to get the same amount of restraint. And I we
Speaker 1: think our perceptions of our star over time, you're actually
Speaker 1: gonna gonna tilt up. So I would I would suggest
Speaker 1: the Fed ultimately is going to have to get well
Speaker 1: above what it currently perceives as neutral at two and
Speaker 1: a half before this cycle is over. Are they measured?
Speaker 1: Are they a green span measure shop? As your own
Speaker 1: apologist ripping and page out of green Span one on one, Um, Well,
Speaker 1: I think we're not going to get that message today. Certainly,
Speaker 1: green Span and both yell And at the starts of
Speaker 1: the previous cycles in fifteen and oh four said they're
Speaker 1: going to move in a measured gradual way. I don't
Speaker 1: think the FED is going to guarantee that at all,
Speaker 1: and I think there's a very reasonable chance that, um,
Speaker 1: we start to feel like green Span ninety four in
Speaker 1: terms of the way the FED begins to adjust here
Speaker 1: if we can't get inflation down and the economy is
Speaker 1: as we're expecting, rebounding pretty strongly into the middle part
Speaker 1: of the year. Bruce, based on a recent experience with
Speaker 1: the sell off that we've seen the correction in US equities,
Speaker 1: how high do you think tenure yields now can get
Speaker 1: before something breaks Well, I, first of all, I would
Speaker 1: just emphasize the equity market correction if it continued, could
Speaker 1: be a problem. But there's a very big difference when
Speaker 1: equity markets are correcting because people are repricing the FED,
Speaker 1: and equity markets are correcting because we have an overhanging
Speaker 1: housing or we have an economy that has got problems otherwise.
Speaker 1: So I do think you can see equity markets correct
Speaker 1: without it doing undue damage or even really driving the
Speaker 1: FED to change it's um its path. Um our view
Speaker 1: is the tenure yiels are going to end the year
Speaker 1: two and a quarter. You know, one of the issues
Speaker 1: on the balance sheet is the balance sheet will clearly
Speaker 1: put duration in the market and put upward pressure on
Speaker 1: on rates, but it's also gonna change people's perceptions of
Speaker 1: how fast and how far the Fed's going to go.
Speaker 1: And I think there's an attention here which is not
Speaker 1: at all clear. I'm comfortable with our forecast we get
Speaker 1: above two percent, but we don't see a real spiking
Speaker 1: and tenure yields as we go through the year. Bruce,
Speaker 1: wonderful as always, Bruce Cassman, that of ja Q Morgan.
Speaker 1: Thank you said. This is the Bloomberg Surveillance Podcast. Thanks
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