WEBVTT - Bloomberg Surveillance TV: May 26th, 2026 (Podcast) 0:00:02.400 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.680 --> 0:00:15.480 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.720 with Lisa Bromwitz and Ameri Hordert. Join us each day 0:00:18.760 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.880 from our global headquarters in New York City. We are 0:00:24.960 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.319 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.360 Terminal and the Bloomberg Business app. So here's the LASiS 0:00:37.400 --> 0:00:40.120 this morning. FEN share Kevin Walsh, preparing for his first 0:00:40.120 --> 0:00:42.919 week leading the Central Bank. Has investors price in higher 0:00:43.000 --> 0:00:45.680 for longer rates, the former New York Fed President Bill 0:00:45.720 --> 0:00:48.040 down The writing, the prevailing wisdom is that the Fed 0:00:48.080 --> 0:00:51.279 will tighten monetary policy later this year. Bill joined us 0:00:51.280 --> 0:00:53.840 now for more, but welcome to the program. I enjoyed 0:00:53.840 --> 0:00:55.560 the piece. I just want to get to one important 0:00:55.560 --> 0:00:58.280 line in there. Whether it's credible for this Federal Reserve 0:00:58.360 --> 0:01:01.640 to say the monetary policy is indeed still restrictive. 0:01:01.640 --> 0:01:01.840 Bill? 0:01:01.880 --> 0:01:02.760 What should time kilm that? 0:01:04.000 --> 0:01:05.640 I do think you have to look at the commedy's 0:01:05.640 --> 0:01:07.479 performers over the last few years we've been at this 0:01:07.760 --> 0:01:10.160 level of interest rates are higher since November of I 0:01:10.200 --> 0:01:12.800 think twenty twenty two, and yet the E commedy is 0:01:13.160 --> 0:01:16.400 continue to grow. We're still at full employment. So where's 0:01:16.400 --> 0:01:19.000 the evidence that mantre policy has actually been restrictive. If 0:01:19.000 --> 0:01:20.920 it'd been restrictive, the commoye should have slowed down, the 0:01:21.000 --> 0:01:24.000 uneployment rate should have risen. So I think the case 0:01:24.040 --> 0:01:25.839 for cutting rates now is actually very. 0:01:25.760 --> 0:01:27.680 Very weak given that bill. 0:01:27.760 --> 0:01:30.680 There's a real question here about the housing disinflation that 0:01:30.720 --> 0:01:33.800 people point to as well as we haven't seen wage 0:01:33.840 --> 0:01:36.520 inflation accelerate. In fact, you've seen it decelerate. We've seen 0:01:36.760 --> 0:01:39.440 the worker not participate as much as companies in terms 0:01:39.600 --> 0:01:42.360 of just their profit margins. At what point does the 0:01:42.400 --> 0:01:45.199 FED have a right to keep looking at that rather 0:01:45.240 --> 0:01:47.280 than the overlying GDP growth. 0:01:48.240 --> 0:01:49.720 I think you have a right to look at that. 0:01:49.760 --> 0:01:51.520 I mean, I think the big question is is if 0:01:51.680 --> 0:01:54.800 is the tax refunds that have boosted people's disposable income 0:01:54.800 --> 0:01:56.960 over the last few months the key driver. And as 0:01:56.960 --> 0:02:00.520 we get to July August, September, we'll consumer spending turnover 0:02:01.120 --> 0:02:03.440 or is the fact that financial conditions are so easy. 0:02:03.560 --> 0:02:05.600 Is that going to be the dominant influence in terms 0:02:05.600 --> 0:02:08.840 of supporting consumption and economic activity. I think the wage 0:02:08.880 --> 0:02:11.960 trend is something that is positive in terms of those 0:02:12.000 --> 0:02:14.400 who think that inflation can come back down to two. 0:02:14.200 --> 0:02:16.000 Percent, but that could turn. 0:02:16.680 --> 0:02:18.320 I think the problem here is that we've been above 0:02:18.360 --> 0:02:21.760 the Fed's inflation target for more than five years, and 0:02:21.800 --> 0:02:25.040 there is a risk that inflation expectations do finally become unanchored. 0:02:25.080 --> 0:02:29.640 In the University of Michigan primary result last week showed 0:02:29.680 --> 0:02:33.160 that the five to ten year inflation expectations did tick 0:02:33.240 --> 0:02:37.160 up quite marketly. Chris Wallers focused on the two year 0:02:37.320 --> 0:02:41.560 inflation outlook two years two years forward that's also moved up. 0:02:41.840 --> 0:02:45.280 So I think the FED is concerned that they're starting 0:02:45.320 --> 0:02:47.400 to lose credibility because they haven't been able to get 0:02:47.400 --> 0:02:48.799 inflation back down to two percent. 0:02:49.040 --> 0:02:51.399 How much is this Fed sort of conditioned by the 0:02:51.440 --> 0:02:54.400 pre pandemic reality of low rates in a way that 0:02:54.440 --> 0:02:57.240 has made them overly dubbish to meet the moment and 0:02:57.280 --> 0:03:02.040 frankly having to reconcile their over dubbish dance with fundamentally 0:03:02.120 --> 0:03:05.720 stick your inflation as a reality I agree with that. 0:03:05.760 --> 0:03:07.239 I mean, I think that if you look at the 0:03:07.360 --> 0:03:11.000 level of real rates prior to two thousand and seven, 0:03:11.560 --> 0:03:13.639 the real rate embodied in the tailor roll, for example, 0:03:13.639 --> 0:03:17.160 it's two percent the fence. Assuming today that the level 0:03:17.200 --> 0:03:20.239 of real rates adjusted for two percent inflation is one percent. 0:03:20.600 --> 0:03:23.639 So it's very possible that you know, matre policy today 0:03:23.720 --> 0:03:28.080 is not restrictive at all because real rates are higher, 0:03:28.120 --> 0:03:30.440 and there was a reason to think that real rates 0:03:30.480 --> 0:03:33.720 are higher. Look at the investment spending boom caused by 0:03:33.760 --> 0:03:37.800 the AI that's raising real interest rates because of increasing 0:03:37.920 --> 0:03:39.440 the investment demand in the economy. 0:03:39.960 --> 0:03:41.600 The fiscal path. 0:03:41.400 --> 0:03:43.920 Of the US is also raising real rates because it's 0:03:44.000 --> 0:03:47.120 diminishing the supply of savings available for investments. So I 0:03:47.160 --> 0:03:48.800 think there are reasons. There are good reasons to think 0:03:48.840 --> 0:03:50.840 that real rates are higher than they have been in 0:03:50.880 --> 0:03:51.640 the recent past. 0:03:52.080 --> 0:03:54.880 When you have Christopher Waller saying that his current policy 0:03:54.920 --> 0:03:56.760 position is to hold rate study for the near term 0:03:56.760 --> 0:03:59.960 because policy risks have changed, do you find it interesting? 0:04:00.000 --> 0:04:02.640 And he was able to look through the potential tariff 0:04:02.680 --> 0:04:05.680 impact on inflation, but he's not when it comes to 0:04:05.960 --> 0:04:06.720 the oil shock. 0:04:08.520 --> 0:04:10.680 Well, I think they're really the same in terms of 0:04:11.080 --> 0:04:14.160 both being likely to be transitory. The real question though, 0:04:14.200 --> 0:04:17.000 is how does it get bodied in inflation expectations? And 0:04:17.080 --> 0:04:18.839 I just think the FED is sort of pushing the 0:04:18.880 --> 0:04:21.720 limits of their credibility to claim that trust us that 0:04:21.720 --> 0:04:23.400 we're going to get inflation back down in two percent 0:04:23.440 --> 0:04:24.640 when we haven't been able to do it for the 0:04:24.760 --> 0:04:28.200 last five years. So I think he's getting nervous that 0:04:28.320 --> 0:04:30.440 they can't sustain this. There's also a big risk here. 0:04:30.440 --> 0:04:32.600 I mean, Kevin watsh is coming in. The President wants 0:04:32.640 --> 0:04:34.599 lower interest rates, so you can see all the elements 0:04:34.600 --> 0:04:37.719 in place where the FED should know titan rates sometime 0:04:37.800 --> 0:04:41.120 later this year, and they don't because of the pressure 0:04:41.160 --> 0:04:44.240 from the President. So the questions about the Fed's independence, 0:04:44.600 --> 0:04:47.200 how willing Kevin Wortsch would be willing to buck the 0:04:48.640 --> 0:04:51.960 desires of the President also way into this situation. So 0:04:52.000 --> 0:04:54.640 I think that if the Fed's independence was what wasn't 0:04:54.720 --> 0:04:57.640 under question, then they'd be more likely that inflation expectations 0:04:57.640 --> 0:04:58.600 would stay well anchored. 0:04:58.760 --> 0:05:01.400 So I buildre's an all tension flation expectations right now. 0:05:01.400 --> 0:05:03.800 Consumers don't trust them, haven't for a while. You see 0:05:03.800 --> 0:05:06.159 that in the recent survey. They're expecting inflation to be 0:05:06.240 --> 0:05:09.520 way above their particular target for a significant period of time. 0:05:09.720 --> 0:05:14.320 But market based inflation expectations, does the market trust them well? 0:05:14.360 --> 0:05:16.760 I think if you look at the very longer term expectations, 0:05:16.760 --> 0:05:19.239 for example, like if you look at the treasury inflation 0:05:19.320 --> 0:05:23.840 protected securities market versus nominal treasuries five years out, that 0:05:23.920 --> 0:05:26.520 looks fine. I think the issue is that an accurate 0:05:26.560 --> 0:05:29.200 measure of what households and businesses think today. And I 0:05:29.240 --> 0:05:31.880 think that's why Waller brought up what's inflation going to 0:05:31.920 --> 0:05:34.320 be two years from now for the next two years, 0:05:34.440 --> 0:05:36.400 and that is started to tick up, so that's not 0:05:36.520 --> 0:05:38.600 so far over the horizon. Five years is a pretty 0:05:38.640 --> 0:05:40.560 long time, Yeah, I can trust if that's going to 0:05:40.560 --> 0:05:43.280 get inflation down to two percent in five years? Are 0:05:43.279 --> 0:05:45.520 they going to get it down to two percent by 0:05:45.520 --> 0:05:46.600 the end of twenty twenty seven? 0:05:46.800 --> 0:05:49.400 Is this a recent problem or a problems persistive for 0:05:49.520 --> 0:05:51.080 some time under chairman Power. 0:05:52.360 --> 0:05:54.839 I think it's a more recent problem in the sense 0:05:54.880 --> 0:05:58.200 that the credibility that monetary policy is restrictive it's really 0:05:58.240 --> 0:06:00.760 started to finish as e Communist continued to perform. Well, 0:06:01.279 --> 0:06:04.280 so that's really the you know, if the policy thesis 0:06:04.360 --> 0:06:06.880 was correct, the policy was restricted, then the Ecomomoyas should have 0:06:06.880 --> 0:06:08.599 slowed more in the unterplan ratios and. 0:06:08.640 --> 0:06:09.720 More stay with us. 0:06:10.040 --> 0:06:22.240 More Bloomberg surveillance coming up after this, the US at 0:06:22.240 --> 0:06:24.719 Iram clashing near the Straight of Homers, even as both 0:06:24.760 --> 0:06:27.479 sides to have progress on a peace deal. Stephen Kirk 0:06:27.520 --> 0:06:30.080 of the Council on Foreign Relations right in, the Iranians 0:06:30.279 --> 0:06:33.000 will not give up their right to enrich uranium, and 0:06:33.040 --> 0:06:36.760 they want management over the straight Offormers. Steven joined us 0:06:36.760 --> 0:06:39.160 now for more, Stephen, welcome to the program. Let's run 0:06:39.200 --> 0:06:41.640 with those two points. They want to carry on and 0:06:41.680 --> 0:06:44.039 they want the right to enrich uranium, and they want 0:06:44.240 --> 0:06:47.320 to manage the Strait of Hollmers. How do we strike 0:06:47.360 --> 0:06:50.080 a deal with them not backing away from those two things. 0:06:50.839 --> 0:06:53.480 Well, that's exactly the point is that the Iranians had 0:06:53.480 --> 0:06:56.960 remained firm that they have a right to enrich uranium. 0:06:57.600 --> 0:06:59.640 They had not given on that at all. 0:06:59.720 --> 0:07:02.359 Every time the President has said that the Iranians have 0:07:02.400 --> 0:07:07.160 agreed to something along these lines, the Iranians contradict those statements. 0:07:07.279 --> 0:07:11.800 It seems quite unlikely that they will give up their 0:07:11.880 --> 0:07:12.559 right to enrich. 0:07:12.640 --> 0:07:13.880 There might be some way to. 0:07:14.680 --> 0:07:18.600 Fudge a situation in which they enrich to lower levels 0:07:18.640 --> 0:07:23.679 than before they enrich. They move enriched uranium outside the country, 0:07:23.680 --> 0:07:26.480 but they will maintain that right to enrich. And then 0:07:26.520 --> 0:07:29.800 when it comes to the Straight of Homus, Luckily for them, 0:07:29.920 --> 0:07:32.920 the President launched a war on February twenty eighth, and 0:07:32.960 --> 0:07:36.040 they now have control or partial control over the Straight 0:07:36.080 --> 0:07:38.640 of Hormus in a way that they never could have 0:07:38.720 --> 0:07:41.560 dreamed of before. It seems unlikely that they're going to 0:07:41.600 --> 0:07:43.760 give it up. They said that there would be no 0:07:43.960 --> 0:07:46.680 tolling of the Straight of Homus, but there certainly would 0:07:46.720 --> 0:07:50.119 be fees for service for shipping going through the strait. 0:07:50.280 --> 0:07:53.360 So I don't think we're as close as the President 0:07:53.440 --> 0:07:57.840 and others would suggest without either the President capitulating and 0:07:58.120 --> 0:08:00.520 or the Iranians capitulating. And it doesn't reckoned that the 0:08:00.560 --> 0:08:02.840 Iranians are in a position or willing to capitulate. 0:08:03.320 --> 0:08:06.280 So basically, steve the same thing, just different branding. Would 0:08:06.320 --> 0:08:09.720 you assess that this morning we are still in a ceasefire? 0:08:11.480 --> 0:08:14.000 Well, I think the President and others would like you 0:08:14.040 --> 0:08:16.720 to believe that we are still in a ceasefire, but Obviously, 0:08:16.760 --> 0:08:19.880 the United States in Iran are on a hair trigger here. 0:08:20.360 --> 0:08:22.720 The Iranians apparently threatened. 0:08:22.400 --> 0:08:25.200 US forces and even fired on US forces, and the. 0:08:25.280 --> 0:08:26.600 United States responded. 0:08:26.880 --> 0:08:28.880 But this is not a return to the kind of 0:08:28.960 --> 0:08:34.360 high intensity combat that we saw throughout throughout March. Clearly, 0:08:35.040 --> 0:08:39.120 the President is shying away from a major escalation and 0:08:39.280 --> 0:08:41.319 is looking for a diplomatic way out, but. 0:08:41.280 --> 0:08:43.240 The Iranians aren't going to let him do that. 0:08:43.800 --> 0:08:46.520 They have an enormous amount of patients, and they have 0:08:47.160 --> 0:08:50.880 inflicted a lot of pain on their population, and they're 0:08:50.880 --> 0:08:53.760 willing to continue to inflict that pain in order to 0:08:53.800 --> 0:08:56.200 push the President into a humiliating capitulation. 0:08:56.600 --> 0:08:58.600 What was interesting over the weekend is in one very 0:08:58.600 --> 0:09:01.320 long truth social post, the pro talked about sat Arabia 0:09:01.360 --> 0:09:04.240 and Cutter and how these countries should be joining the 0:09:04.240 --> 0:09:07.760 Abraham Accords. Is there any room for that to wrap 0:09:07.880 --> 0:09:09.079 up this conflict. 0:09:09.679 --> 0:09:12.560 It seems like the President is aware of the criticism 0:09:12.600 --> 0:09:14.280 of the deal that's on the table, at least what 0:09:14.320 --> 0:09:16.360 we believed the deal on the table might be, and 0:09:16.520 --> 0:09:18.800 is trying to make it look better by saying that 0:09:18.840 --> 0:09:21.920 it will simultaneously come with an expansion of the Abraham Accords, 0:09:21.960 --> 0:09:24.520 but the Saudis have held firm and said that they 0:09:24.559 --> 0:09:27.600 will not normalize relations with Israel until there is an 0:09:27.679 --> 0:09:31.560 irreversible path towards a Palestinian state. The cut Thuries have 0:09:31.600 --> 0:09:33.880 said that they will deal with the Israelis, but only 0:09:33.960 --> 0:09:38.200 in terms of resolving the Israeli Palestinian conflict. So it 0:09:38.240 --> 0:09:41.680 doesn't seem to me that normalization is actually on the table. 0:09:41.840 --> 0:09:44.720 The President is just trying to sell this deal in 0:09:44.760 --> 0:09:48.400 a way that will make it more palatable for the 0:09:48.920 --> 0:09:51.400 Republicans in the Senate and others. But I don't think 0:09:51.400 --> 0:09:53.959 anybody really believes this normalization is on the table. 0:09:54.000 --> 0:09:57.520 Sevid, you said they're more palatable to Republicans. This is 0:09:57.520 --> 0:09:59.960 what's interesting to me is that part of the issue 0:10:00.160 --> 0:10:02.280 is it more palatable to Israel. How much is the 0:10:02.320 --> 0:10:05.520 break between both President Trump and the Republicans in his 0:10:05.640 --> 0:10:08.600 party as well as Natanyahu in Israel. 0:10:09.080 --> 0:10:11.840 Well, it seems that there's a rather significant break between 0:10:12.360 --> 0:10:14.840 Israel and the United States. That's to suggest that the 0:10:15.040 --> 0:10:17.360 Prime Minister has come to the conclusion that there's really 0:10:17.360 --> 0:10:20.440 nothing that he can do with regard to the presidence 0:10:20.559 --> 0:10:23.880 positions on Iran, and that Israel will have to take 0:10:23.920 --> 0:10:27.240 matters into its own hands. It has consistently said that 0:10:27.679 --> 0:10:30.280 whatever sees fire the United States, or whatever agreement the 0:10:30.400 --> 0:10:34.360 United States and Iran come up with, Israel will not 0:10:34.480 --> 0:10:36.120 necessarily be a party to it. 0:10:36.200 --> 0:10:38.640 With regard to the Lebanese. 0:10:38.160 --> 0:10:40.800 Front and his Ballad, the Israelis have been taking a 0:10:40.840 --> 0:10:44.400 lot of fire from his Belah has been using these 0:10:44.480 --> 0:10:47.000 wire guided drones to which the Israelis have very little 0:10:47.000 --> 0:10:51.760 response or defense. So you're seeing Israeli soldiers killed day 0:10:51.800 --> 0:10:53.920 in and day out. The Israels just can't give. 0:10:53.800 --> 0:10:54.319 It up there. 0:10:55.120 --> 0:10:58.200 When it comes to the Republicans in the Senate, there's 0:10:58.200 --> 0:11:03.480 been a lot of criticism from from those senators because 0:11:03.559 --> 0:11:07.640 the deal looks like it gives the Iranians very significant 0:11:07.640 --> 0:11:11.760 sanctions relief, the ability to sell oil, which removes a 0:11:11.800 --> 0:11:14.320 significant amount of leverage when it comes to trying to 0:11:14.360 --> 0:11:16.800 press them to end their nuclear program. 0:11:16.840 --> 0:11:19.280 The more you talk Steven, the more I'm a sort 0:11:19.320 --> 0:11:21.959 of cognitive distance between the two Steves. This morning, we 0:11:22.000 --> 0:11:23.880 had one Steve coming on saying if it can't happen, 0:11:23.960 --> 0:11:25.760 it won't. It's not going to be an issue in 0:11:25.760 --> 0:11:27.480 a couple of months. Everybody needs a straight or from 0:11:27.480 --> 0:11:30.800 moves open. Then you come on and you're saying essentially 0:11:31.120 --> 0:11:33.719 that it seems like we're pretty far apart. How do 0:11:33.760 --> 0:11:36.760 you reconcile where the market is and where negotiators are. 0:11:37.280 --> 0:11:40.760 Well, I heard I heard your interview before I came on, 0:11:40.880 --> 0:11:42.680 and I think this is something that's been happening in 0:11:42.679 --> 0:11:44.960 the markets from the very beginning, is that there is 0:11:44.960 --> 0:11:49.360 a belief that there's some magic formula that's going to 0:11:49.400 --> 0:11:51.239 open the straight or for moves. 0:11:51.640 --> 0:11:52.559 I was on with you. 0:11:52.559 --> 0:11:55.480 All in April at the time of the IMF World 0:11:55.480 --> 0:11:57.440 Bank meetings. Then I think there was an expectation that 0:11:57.480 --> 0:11:59.360 the Strait were to be open in a matter of days. 0:12:00.160 --> 0:12:02.440 I hated to throw cold water on that at the time, 0:12:02.520 --> 0:12:06.320 but it was going to be months before this issue 0:12:06.360 --> 0:12:10.520 is resolved. Perhaps the President Will as a result of 0:12:10.600 --> 0:12:13.760 these strikes, Will had instilled a little bit of flexibility 0:12:13.760 --> 0:12:16.439 in the Iranians, but so far the Iranians are hanging 0:12:16.520 --> 0:12:17.000 quite tough. 0:12:17.480 --> 0:12:18.120 Stay with us. 0:12:18.440 --> 0:12:31.000 Mulblinderg surveillance coming up after this, So I'm desire Franklin 0:12:31.040 --> 0:12:33.600 Semples and writing with the Energy Shark feeding into headline. 0:12:33.600 --> 0:12:36.640 Inflation rate cuts are off the table, so I'll join 0:12:36.720 --> 0:12:38.559 the snaff for more, So now welcome to the program. 0:12:38.559 --> 0:12:41.480 If rate cuts are off the table, rate hikes on 0:12:41.600 --> 0:12:42.080 the table. 0:12:43.160 --> 0:12:45.760 So hi John, thanks for having me here. But I 0:12:45.760 --> 0:12:49.160 would say that raid hikes are on the table in 0:12:49.800 --> 0:12:55.000 certain circumstances. I think four percent headline innovation at this 0:12:55.120 --> 0:12:57.840 point is almost baked in the cake for this year, 0:12:58.120 --> 0:13:02.640 just because of where oil prices and the elasticities associated 0:13:02.679 --> 0:13:05.200 with it. But I think were if we were to 0:13:05.240 --> 0:13:09.360 see headline inflation actually start veering not towards four but 0:13:09.400 --> 0:13:11.959 close it a five year, I think great hikes are 0:13:12.000 --> 0:13:14.160 on the table. I don't think that happens this year. 0:13:14.200 --> 0:13:15.839 By the way, it was funny, So no, when do 0:13:15.840 --> 0:13:16.760 you think that will happen. 0:13:18.160 --> 0:13:21.600 If it happens, it depends on how long this these 0:13:21.640 --> 0:13:24.839 oil prices remain in place, And if it were to happen, 0:13:24.880 --> 0:13:28.240 it would be next year. I think this year. I 0:13:28.280 --> 0:13:32.040 think that even if the conflict were to resolve in 0:13:32.120 --> 0:13:35.120 the next week or two weeks, I still don't think 0:13:35.160 --> 0:13:38.880 that oil prices come down significantly below something like say 0:13:38.960 --> 0:13:42.400 eighty and that's enough to get headline up towards four. 0:13:42.960 --> 0:13:45.240 So now an increasing number of people are questioning whether 0:13:45.240 --> 0:13:49.040 we actually are a neutral or above neutral. Michael Darda 0:13:49.120 --> 0:13:51.400 from Roth Capital Partners over the weekend, what if the 0:13:51.440 --> 0:13:54.360 FED is actually below neutral? Mount Lazeti of Deutsche Bank 0:13:54.440 --> 0:13:56.800 coming out with a piece called over and Short, where 0:13:56.800 --> 0:13:58.880 we talked about one hundred and seventy five basis points 0:13:58.880 --> 0:14:01.880 of Rayka saying maybe they went too far. How much 0:14:01.920 --> 0:14:03.720 are you sympathetic with these views? 0:14:04.280 --> 0:14:06.599 Well, I've been saying that the neutral rate is it 0:14:06.720 --> 0:14:09.160 closer a four than the three for about two or 0:14:09.160 --> 0:14:11.720 three years now, so I'm happy to see more people 0:14:11.760 --> 0:14:14.400 coming around to this view. But I completely agree. 0:14:14.480 --> 0:14:15.160 I think J. 0:14:15.400 --> 0:14:22.200 Powell has described policy repeatedly as being moderately contractionary, and 0:14:22.320 --> 0:14:25.560 I would see it as being moderately expansionary. And I 0:14:25.600 --> 0:14:28.560 think four percent is probably closer to when neutral is 0:14:28.720 --> 0:14:33.360 between productivity growth and the Fed's own inflation target. I 0:14:33.400 --> 0:14:34.760 don't think you get to three percent. 0:14:35.280 --> 0:14:37.880 If that's the case, and all, then you might want 0:14:37.960 --> 0:14:40.200 to buy the long end of the yield curve if 0:14:40.200 --> 0:14:42.080 you believe that the FED is actually going to respond 0:14:42.240 --> 0:14:45.040 to some of this pressure with a great hike. Is 0:14:45.040 --> 0:14:46.960 a signal that you're taking from the market that there 0:14:46.960 --> 0:14:48.520 isn't a whole lot of faith that there will be 0:14:48.560 --> 0:14:51.800 some sort of hiking cycle even if inflation remains elevated. 0:14:52.920 --> 0:14:55.680 So here's the thing. Inflation has been elevated for three 0:14:55.760 --> 0:14:58.440 years now, the FED has been fifty percent above its 0:14:58.440 --> 0:15:01.680 inflation target, and the FED s cut over that period 0:15:01.720 --> 0:15:04.880 of time close to two hundred basis points. And therefore 0:15:05.120 --> 0:15:10.120 we actually have a very dubbish FED, and I think 0:15:10.400 --> 0:15:15.080 the market is perhaps coming around to that viewpoint. Regardless 0:15:15.080 --> 0:15:17.520 of who the FED chair is, I think we have 0:15:18.200 --> 0:15:21.320 a very very dubbish FED. We've always had one, and 0:15:21.600 --> 0:15:25.160 I would say that if we look forward, I don't 0:15:25.160 --> 0:15:29.280 think the market currently is pricing in realistically what long 0:15:29.400 --> 0:15:31.480 end yules would be. I think four seventy five to 0:15:31.600 --> 0:15:34.720 five is probably closer to fair value. I think this 0:15:34.800 --> 0:15:39.000 is not yet the time to go all in on 0:15:39.120 --> 0:15:41.440 long end yuels. I think we're going to arrange trade 0:15:41.480 --> 0:15:45.520 a little bit. But the drift over the next several years, 0:15:45.560 --> 0:15:48.360 I would say is probably upwards, if it's not downwards. 0:15:48.560 --> 0:15:50.440 So that's a great point because many people probably argue 0:15:50.440 --> 0:15:54.240 that actually J. Powell, who was another Trump appointee, could 0:15:54.280 --> 0:15:57.920 be even seen historically more dvors than Kevin Wharsh. Kevin 0:15:57.960 --> 0:16:00.960 Wharsh when he was signing his swearing in on Friday 0:16:01.000 --> 0:16:02.520 and then also gave a little bit of a speech, 0:16:02.680 --> 0:16:05.000 said he's going to lead quote with energy and purpose, 0:16:05.240 --> 0:16:08.040 just the way Chairman Greenspan did. Can you glean out 0:16:08.040 --> 0:16:11.280 what kind of wash FED we're going to say? 0:16:11.400 --> 0:16:13.800 I think an orthodox one. I hope to see an 0:16:13.920 --> 0:16:17.280 orthodox one. It's been close to twenty years we've had 0:16:17.400 --> 0:16:20.920 completely unorthodox policy from the FED. The first go to 0:16:21.440 --> 0:16:26.520 is quantitative easy. That is very very unorthodox monetary policy. 0:16:26.520 --> 0:16:29.240 The FED should not be engaging in the long end 0:16:29.280 --> 0:16:33.160 of the yield curve outside true crisis, and it is 0:16:33.200 --> 0:16:35.600 true that they've come in several times when there was 0:16:35.640 --> 0:16:38.840 a crisis, but they remained in for much longer than 0:16:38.880 --> 0:16:43.240 any crisis would indicate they should. Therefore, I think, if 0:16:43.320 --> 0:16:47.680 I think about green Spans FED, green Span sped FED 0:16:48.400 --> 0:16:52.240 tried to push markets into valuing risk more appropriately. The 0:16:52.280 --> 0:16:55.240 FED did not bail us out if long end yields 0:16:55.240 --> 0:16:58.480 were surprisingly low over the green Span era. I think 0:16:58.520 --> 0:16:59.920 it had a lot more to do with what was 0:17:00.120 --> 0:17:03.640 going on in China, petro dollars, the savings glut, and 0:17:04.200 --> 0:17:08.480 since the since the crisis, the global financial crisis. What 0:17:08.520 --> 0:17:12.760 we've actually seen is a FED which is almost led 0:17:12.800 --> 0:17:15.159 by markets. Everything that's gone on on the long end 0:17:15.200 --> 0:17:17.840 of the yield curve seems to be driven less by 0:17:17.840 --> 0:17:22.119 the economy and much much more by FED action, intervention, 0:17:22.640 --> 0:17:24.800 and a part of the yield curve it actually shouldn't 0:17:24.800 --> 0:17:25.320 be present. 0:17:25.880 --> 0:17:28.040 Some people might say the twothpaste is out of the tube. 0:17:28.280 --> 0:17:29.959 Do you say it differently? Do you think we can 0:17:30.040 --> 0:17:31.399 go back to what we used to be. 0:17:32.320 --> 0:17:34.200 No, I don't think we can go all the way 0:17:34.240 --> 0:17:37.160 back near tom but I do think over the next 0:17:37.200 --> 0:17:39.840 four years, I don't think Kevin Walsh is coming in 0:17:39.960 --> 0:17:42.240 and he's going to and I don't think see him 0:17:42.280 --> 0:17:45.639 shaking up markets by immediately trying to reduce the size 0:17:45.680 --> 0:17:48.200 of the FED balance sheet. But over the next four years, 0:17:48.320 --> 0:17:50.560 I don't think we'll see a more sustained move in 0:17:50.600 --> 0:17:54.200 that direction. In the direction of reducing the size of 0:17:54.240 --> 0:17:57.200 the FED balance sheet, it is enormous. I don't think 0:17:57.240 --> 0:18:00.160 that he's looking for the financial instability that an overnight 0:18:00.280 --> 0:18:02.399 to return to. 0:18:02.720 --> 0:18:04.760 But let's say he goes in that direction. I'm not 0:18:04.840 --> 0:18:06.320 saying we get back to that place, but let's say 0:18:06.320 --> 0:18:08.320 it goes in that direction, Do you want to own 0:18:08.400 --> 0:18:10.520 those assets on that bound. 0:18:10.320 --> 0:18:15.040 Strey on that so you know, eventually yes, but before 0:18:15.119 --> 0:18:17.960 that we're only talking about Montreal policy and isolation. We 0:18:18.040 --> 0:18:20.200 need to see what's going on with fiscal policy here, 0:18:20.480 --> 0:18:24.080 and that's another piece of this puzzle, and it's not 0:18:24.119 --> 0:18:26.399 a good one. And that's part of the reason that 0:18:26.520 --> 0:18:29.040 I would not be jumping in to buy long end 0:18:29.119 --> 0:18:34.320 bonds at this point. I think between inflation, between a 0:18:34.400 --> 0:18:39.280 return to hopefully more orthodox Mantor policy, and a continued 0:18:39.720 --> 0:18:44.080 fiscal profligacy in the US, I don't see a reason 0:18:44.160 --> 0:18:47.000 to go all in there and own long end bonds. 0:18:47.080 --> 0:18:50.240 I think you could opportunistically go in and come out, 0:18:50.920 --> 0:18:54.200 but I think over a medium term, long en yuels 0:18:54.200 --> 0:18:54.919 are going higher. 0:18:56.040 --> 0:18:59.560 This is the Bloomberg's Events podcast, bringing you the best 0:18:59.560 --> 0:19:02.679 in market it's economics, and geopolitics. You can watch the 0:19:02.680 --> 0:19:05.720 show live on Bloomberg TV weekday mornings from six am 0:19:05.840 --> 0:19:09.000 to nine am Eastern. Subscribe to the podcast on Apple, 0:19:09.280 --> 0:19:12.119 Spotify or anywhere else you listen, and as always on 0:19:12.119 --> 0:19:14.640 the Bloomberg Terminal and the Bloomberg Business app.