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Speaker 2: this morning. FEN share Kevin Walsh, preparing for his first
Speaker 2: week leading the Central Bank. Has investors price in higher
Speaker 2: for longer rates, the former New York Fed President Bill
Speaker 2: down The writing, the prevailing wisdom is that the Fed
Speaker 2: will tighten monetary policy later this year. Bill joined us
Speaker 2: now for more, but welcome to the program. I enjoyed
Speaker 2: the piece. I just want to get to one important
Speaker 2: line in there. Whether it's credible for this Federal Reserve
Speaker 2: to say the monetary policy is indeed still restrictive.
Speaker 3: Bill?
Speaker 2: What should time kilm that?
Speaker 4: I do think you have to look at the commedy's
Speaker 4: performers over the last few years we've been at this
Speaker 4: level of interest rates are higher since November of I
Speaker 4: think twenty twenty two, and yet the E commedy is
Speaker 4: continue to grow. We're still at full employment. So where's
Speaker 4: the evidence that mantre policy has actually been restrictive. If
Speaker 4: it'd been restrictive, the commoye should have slowed down, the
Speaker 4: uneployment rate should have risen. So I think the case
Speaker 4: for cutting rates now is actually very.
Speaker 3: Very weak given that bill.
Speaker 5: There's a real question here about the housing disinflation that
Speaker 5: people point to as well as we haven't seen wage
Speaker 5: inflation accelerate. In fact, you've seen it decelerate. We've seen
Speaker 5: the worker not participate as much as companies in terms
Speaker 5: of just their profit margins. At what point does the
Speaker 5: FED have a right to keep looking at that rather
Speaker 5: than the overlying GDP growth.
Speaker 4: I think you have a right to look at that.
Speaker 4: I mean, I think the big question is is if
Speaker 4: is the tax refunds that have boosted people's disposable income
Speaker 4: over the last few months the key driver. And as
Speaker 4: we get to July August, September, we'll consumer spending turnover
Speaker 4: or is the fact that financial conditions are so easy.
Speaker 4: Is that going to be the dominant influence in terms
Speaker 4: of supporting consumption and economic activity. I think the wage
Speaker 4: trend is something that is positive in terms of those
Speaker 4: who think that inflation can come back down to two.
Speaker 3: Percent, but that could turn.
Speaker 4: I think the problem here is that we've been above
Speaker 4: the Fed's inflation target for more than five years, and
Speaker 4: there is a risk that inflation expectations do finally become unanchored.
Speaker 4: In the University of Michigan primary result last week showed
Speaker 4: that the five to ten year inflation expectations did tick
Speaker 4: up quite marketly. Chris Wallers focused on the two year
Speaker 4: inflation outlook two years two years forward that's also moved up.
Speaker 4: So I think the FED is concerned that they're starting
Speaker 4: to lose credibility because they haven't been able to get
Speaker 4: inflation back down to two percent.
Speaker 5: How much is this Fed sort of conditioned by the
Speaker 5: pre pandemic reality of low rates in a way that
Speaker 5: has made them overly dubbish to meet the moment and
Speaker 5: frankly having to reconcile their over dubbish dance with fundamentally
Speaker 5: stick your inflation as a reality I agree with that.
Speaker 4: I mean, I think that if you look at the
Speaker 4: level of real rates prior to two thousand and seven,
Speaker 4: the real rate embodied in the tailor roll, for example,
Speaker 4: it's two percent the fence. Assuming today that the level
Speaker 4: of real rates adjusted for two percent inflation is one percent.
Speaker 4: So it's very possible that you know, matre policy today
Speaker 4: is not restrictive at all because real rates are higher,
Speaker 4: and there was a reason to think that real rates
Speaker 4: are higher. Look at the investment spending boom caused by
Speaker 4: the AI that's raising real interest rates because of increasing
Speaker 4: the investment demand in the economy.
Speaker 3: The fiscal path.
Speaker 4: Of the US is also raising real rates because it's
Speaker 4: diminishing the supply of savings available for investments. So I
Speaker 4: think there are reasons. There are good reasons to think
Speaker 4: that real rates are higher than they have been in
Speaker 4: the recent past.
Speaker 1: When you have Christopher Waller saying that his current policy
Speaker 1: position is to hold rate study for the near term
Speaker 1: because policy risks have changed, do you find it interesting?
Speaker 1: And he was able to look through the potential tariff
Speaker 1: impact on inflation, but he's not when it comes to
Speaker 1: the oil shock.
Speaker 4: Well, I think they're really the same in terms of
Speaker 4: both being likely to be transitory. The real question though,
Speaker 4: is how does it get bodied in inflation expectations? And
Speaker 4: I just think the FED is sort of pushing the
Speaker 4: limits of their credibility to claim that trust us that
Speaker 4: we're going to get inflation back down in two percent
Speaker 4: when we haven't been able to do it for the
Speaker 4: last five years. So I think he's getting nervous that
Speaker 4: they can't sustain this. There's also a big risk here.
Speaker 4: I mean, Kevin watsh is coming in. The President wants
Speaker 4: lower interest rates, so you can see all the elements
Speaker 4: in place where the FED should know titan rates sometime
Speaker 4: later this year, and they don't because of the pressure
Speaker 4: from the President. So the questions about the Fed's independence,
Speaker 4: how willing Kevin Wortsch would be willing to buck the
Speaker 4: desires of the President also way into this situation. So
Speaker 4: I think that if the Fed's independence was what wasn't
Speaker 4: under question, then they'd be more likely that inflation expectations
Speaker 4: would stay well anchored.
Speaker 2: So I buildre's an all tension flation expectations right now.
Speaker 2: Consumers don't trust them, haven't for a while. You see
Speaker 2: that in the recent survey. They're expecting inflation to be
Speaker 2: way above their particular target for a significant period of time.
Speaker 2: But market based inflation expectations, does the market trust them well?
Speaker 4: I think if you look at the very longer term expectations,
Speaker 4: for example, like if you look at the treasury inflation
Speaker 4: protected securities market versus nominal treasuries five years out, that
Speaker 4: looks fine. I think the issue is that an accurate
Speaker 4: measure of what households and businesses think today. And I
Speaker 4: think that's why Waller brought up what's inflation going to
Speaker 4: be two years from now for the next two years,
Speaker 4: and that is started to tick up, so that's not
Speaker 4: so far over the horizon. Five years is a pretty
Speaker 4: long time, Yeah, I can trust if that's going to
Speaker 4: get inflation down to two percent in five years? Are
Speaker 4: they going to get it down to two percent by
Speaker 4: the end of twenty twenty seven?
Speaker 2: Is this a recent problem or a problems persistive for
Speaker 2: some time under chairman Power.
Speaker 4: I think it's a more recent problem in the sense
Speaker 4: that the credibility that monetary policy is restrictive it's really
Speaker 4: started to finish as e Communist continued to perform. Well,
Speaker 4: so that's really the you know, if the policy thesis
Speaker 4: was correct, the policy was restricted, then the Ecomomoyas should have
Speaker 4: slowed more in the unterplan ratios and.
Speaker 3: More stay with us.
Speaker 2: More Bloomberg surveillance coming up after this, the US at
Speaker 2: Iram clashing near the Straight of Homers, even as both
Speaker 2: sides to have progress on a peace deal. Stephen Kirk
Speaker 2: of the Council on Foreign Relations right in, the Iranians
Speaker 2: will not give up their right to enrich uranium, and
Speaker 2: they want management over the straight Offormers. Steven joined us
Speaker 2: now for more, Stephen, welcome to the program. Let's run
Speaker 2: with those two points. They want to carry on and
Speaker 2: they want the right to enrich uranium, and they want
Speaker 2: to manage the Strait of Hollmers. How do we strike
Speaker 2: a deal with them not backing away from those two things.
Speaker 6: Well, that's exactly the point is that the Iranians had
Speaker 6: remained firm that they have a right to enrich uranium.
Speaker 3: They had not given on that at all.
Speaker 6: Every time the President has said that the Iranians have
Speaker 6: agreed to something along these lines, the Iranians contradict those statements.
Speaker 6: It seems quite unlikely that they will give up their
Speaker 6: right to enrich.
Speaker 3: There might be some way to.
Speaker 6: Fudge a situation in which they enrich to lower levels
Speaker 6: than before they enrich. They move enriched uranium outside the country,
Speaker 6: but they will maintain that right to enrich. And then
Speaker 6: when it comes to the Straight of Homus, Luckily for them,
Speaker 6: the President launched a war on February twenty eighth, and
Speaker 6: they now have control or partial control over the Straight
Speaker 6: of Hormus in a way that they never could have
Speaker 6: dreamed of before. It seems unlikely that they're going to
Speaker 6: give it up. They said that there would be no
Speaker 6: tolling of the Straight of Homus, but there certainly would
Speaker 6: be fees for service for shipping going through the strait.
Speaker 6: So I don't think we're as close as the President
Speaker 6: and others would suggest without either the President capitulating and
Speaker 6: or the Iranians capitulating. And it doesn't reckoned that the
Speaker 6: Iranians are in a position or willing to capitulate.
Speaker 1: So basically, steve the same thing, just different branding. Would
Speaker 1: you assess that this morning we are still in a ceasefire?
Speaker 6: Well, I think the President and others would like you
Speaker 6: to believe that we are still in a ceasefire, but Obviously,
Speaker 6: the United States in Iran are on a hair trigger here.
Speaker 3: The Iranians apparently threatened.
Speaker 6: US forces and even fired on US forces, and the.
Speaker 3: United States responded.
Speaker 6: But this is not a return to the kind of
Speaker 6: high intensity combat that we saw throughout throughout March. Clearly,
Speaker 6: the President is shying away from a major escalation and
Speaker 6: is looking for a diplomatic way out, but.
Speaker 3: The Iranians aren't going to let him do that.
Speaker 6: They have an enormous amount of patients, and they have
Speaker 6: inflicted a lot of pain on their population, and they're
Speaker 6: willing to continue to inflict that pain in order to
Speaker 6: push the President into a humiliating capitulation.
Speaker 1: What was interesting over the weekend is in one very
Speaker 1: long truth social post, the pro talked about sat Arabia
Speaker 1: and Cutter and how these countries should be joining the
Speaker 1: Abraham Accords. Is there any room for that to wrap
Speaker 1: up this conflict.
Speaker 6: It seems like the President is aware of the criticism
Speaker 6: of the deal that's on the table, at least what
Speaker 6: we believed the deal on the table might be, and
Speaker 6: is trying to make it look better by saying that
Speaker 6: it will simultaneously come with an expansion of the Abraham Accords,
Speaker 6: but the Saudis have held firm and said that they
Speaker 6: will not normalize relations with Israel until there is an
Speaker 6: irreversible path towards a Palestinian state. The cut Thuries have
Speaker 6: said that they will deal with the Israelis, but only
Speaker 6: in terms of resolving the Israeli Palestinian conflict. So it
Speaker 6: doesn't seem to me that normalization is actually on the table.
Speaker 6: The President is just trying to sell this deal in
Speaker 6: a way that will make it more palatable for the
Speaker 6: Republicans in the Senate and others. But I don't think
Speaker 6: anybody really believes this normalization is on the table.
Speaker 5: Sevid, you said they're more palatable to Republicans. This is
Speaker 5: what's interesting to me is that part of the issue
Speaker 5: is it more palatable to Israel. How much is the
Speaker 5: break between both President Trump and the Republicans in his
Speaker 5: party as well as Natanyahu in Israel.
Speaker 6: Well, it seems that there's a rather significant break between
Speaker 6: Israel and the United States. That's to suggest that the
Speaker 6: Prime Minister has come to the conclusion that there's really
Speaker 6: nothing that he can do with regard to the presidence
Speaker 6: positions on Iran, and that Israel will have to take
Speaker 6: matters into its own hands. It has consistently said that
Speaker 6: whatever sees fire the United States, or whatever agreement the
Speaker 6: United States and Iran come up with, Israel will not
Speaker 6: necessarily be a party to it.
Speaker 3: With regard to the Lebanese.
Speaker 6: Front and his Ballad, the Israelis have been taking a
Speaker 6: lot of fire from his Belah has been using these
Speaker 6: wire guided drones to which the Israelis have very little
Speaker 6: response or defense. So you're seeing Israeli soldiers killed day
Speaker 6: in and day out. The Israels just can't give.
Speaker 3: It up there.
Speaker 6: When it comes to the Republicans in the Senate, there's
Speaker 6: been a lot of criticism from from those senators because
Speaker 6: the deal looks like it gives the Iranians very significant
Speaker 6: sanctions relief, the ability to sell oil, which removes a
Speaker 6: significant amount of leverage when it comes to trying to
Speaker 6: press them to end their nuclear program.
Speaker 5: The more you talk Steven, the more I'm a sort
Speaker 5: of cognitive distance between the two Steves. This morning, we
Speaker 5: had one Steve coming on saying if it can't happen,
Speaker 5: it won't. It's not going to be an issue in
Speaker 5: a couple of months. Everybody needs a straight or from
Speaker 5: moves open. Then you come on and you're saying essentially
Speaker 5: that it seems like we're pretty far apart. How do
Speaker 5: you reconcile where the market is and where negotiators are.
Speaker 6: Well, I heard I heard your interview before I came on,
Speaker 6: and I think this is something that's been happening in
Speaker 6: the markets from the very beginning, is that there is
Speaker 6: a belief that there's some magic formula that's going to
Speaker 6: open the straight or for moves.
Speaker 3: I was on with you.
Speaker 6: All in April at the time of the IMF World
Speaker 6: Bank meetings. Then I think there was an expectation that
Speaker 6: the Strait were to be open in a matter of days.
Speaker 6: I hated to throw cold water on that at the time,
Speaker 6: but it was going to be months before this issue
Speaker 6: is resolved. Perhaps the President Will as a result of
Speaker 6: these strikes, Will had instilled a little bit of flexibility
Speaker 6: in the Iranians, but so far the Iranians are hanging
Speaker 6: quite tough.
Speaker 3: Stay with us.
Speaker 2: Mulblinderg surveillance coming up after this, So I'm desire Franklin
Speaker 2: Semples and writing with the Energy Shark feeding into headline.
Speaker 2: Inflation rate cuts are off the table, so I'll join
Speaker 2: the snaff for more, So now welcome to the program.
Speaker 2: If rate cuts are off the table, rate hikes on
Speaker 2: the table.
Speaker 7: So hi John, thanks for having me here. But I
Speaker 7: would say that raid hikes are on the table in
Speaker 7: certain circumstances. I think four percent headline innovation at this
Speaker 7: point is almost baked in the cake for this year,
Speaker 7: just because of where oil prices and the elasticities associated
Speaker 7: with it. But I think were if we were to
Speaker 7: see headline inflation actually start veering not towards four but
Speaker 7: close it a five year, I think great hikes are
Speaker 7: on the table. I don't think that happens this year.
Speaker 2: By the way, it was funny, So no, when do
Speaker 2: you think that will happen.
Speaker 7: If it happens, it depends on how long this these
Speaker 7: oil prices remain in place, And if it were to happen,
Speaker 7: it would be next year. I think this year. I
Speaker 7: think that even if the conflict were to resolve in
Speaker 7: the next week or two weeks, I still don't think
Speaker 7: that oil prices come down significantly below something like say
Speaker 7: eighty and that's enough to get headline up towards four.
Speaker 5: So now an increasing number of people are questioning whether
Speaker 5: we actually are a neutral or above neutral. Michael Darda
Speaker 5: from Roth Capital Partners over the weekend, what if the
Speaker 5: FED is actually below neutral? Mount Lazeti of Deutsche Bank
Speaker 5: coming out with a piece called over and Short, where
Speaker 5: we talked about one hundred and seventy five basis points
Speaker 5: of Rayka saying maybe they went too far. How much
Speaker 5: are you sympathetic with these views?
Speaker 7: Well, I've been saying that the neutral rate is it
Speaker 7: closer a four than the three for about two or
Speaker 7: three years now, so I'm happy to see more people
Speaker 7: coming around to this view. But I completely agree.
Speaker 3: I think J.
Speaker 7: Powell has described policy repeatedly as being moderately contractionary, and
Speaker 7: I would see it as being moderately expansionary. And I
Speaker 7: think four percent is probably closer to when neutral is
Speaker 7: between productivity growth and the Fed's own inflation target. I
Speaker 7: don't think you get to three percent.
Speaker 5: If that's the case, and all, then you might want
Speaker 5: to buy the long end of the yield curve if
Speaker 5: you believe that the FED is actually going to respond
Speaker 5: to some of this pressure with a great hike. Is
Speaker 5: a signal that you're taking from the market that there
Speaker 5: isn't a whole lot of faith that there will be
Speaker 5: some sort of hiking cycle even if inflation remains elevated.
Speaker 7: So here's the thing. Inflation has been elevated for three
Speaker 7: years now, the FED has been fifty percent above its
Speaker 7: inflation target, and the FED s cut over that period
Speaker 7: of time close to two hundred basis points. And therefore
Speaker 7: we actually have a very dubbish FED, and I think
Speaker 7: the market is perhaps coming around to that viewpoint. Regardless
Speaker 7: of who the FED chair is, I think we have
Speaker 7: a very very dubbish FED. We've always had one, and
Speaker 7: I would say that if we look forward, I don't
Speaker 7: think the market currently is pricing in realistically what long
Speaker 7: end yules would be. I think four seventy five to
Speaker 7: five is probably closer to fair value. I think this
Speaker 7: is not yet the time to go all in on
Speaker 7: long end yuels. I think we're going to arrange trade
Speaker 7: a little bit. But the drift over the next several years,
Speaker 7: I would say is probably upwards, if it's not downwards.
Speaker 1: So that's a great point because many people probably argue
Speaker 1: that actually J. Powell, who was another Trump appointee, could
Speaker 1: be even seen historically more dvors than Kevin Wharsh. Kevin
Speaker 1: Wharsh when he was signing his swearing in on Friday
Speaker 1: and then also gave a little bit of a speech,
Speaker 1: said he's going to lead quote with energy and purpose,
Speaker 1: just the way Chairman Greenspan did. Can you glean out
Speaker 1: what kind of wash FED we're going to say?
Speaker 7: I think an orthodox one. I hope to see an
Speaker 7: orthodox one. It's been close to twenty years we've had
Speaker 7: completely unorthodox policy from the FED. The first go to
Speaker 7: is quantitative easy. That is very very unorthodox monetary policy.
Speaker 7: The FED should not be engaging in the long end
Speaker 7: of the yield curve outside true crisis, and it is
Speaker 7: true that they've come in several times when there was
Speaker 7: a crisis, but they remained in for much longer than
Speaker 7: any crisis would indicate they should. Therefore, I think, if
Speaker 7: I think about green Spans FED, green Span sped FED
Speaker 7: tried to push markets into valuing risk more appropriately. The
Speaker 7: FED did not bail us out if long end yields
Speaker 7: were surprisingly low over the green Span era. I think
Speaker 7: it had a lot more to do with what was
Speaker 7: going on in China, petro dollars, the savings glut, and
Speaker 7: since the since the crisis, the global financial crisis. What
Speaker 7: we've actually seen is a FED which is almost led
Speaker 7: by markets. Everything that's gone on on the long end
Speaker 7: of the yield curve seems to be driven less by
Speaker 7: the economy and much much more by FED action, intervention,
Speaker 7: and a part of the yield curve it actually shouldn't
Speaker 7: be present.
Speaker 2: Some people might say the twothpaste is out of the tube.
Speaker 2: Do you say it differently? Do you think we can
Speaker 2: go back to what we used to be.
Speaker 7: No, I don't think we can go all the way
Speaker 7: back near tom but I do think over the next
Speaker 7: four years, I don't think Kevin Walsh is coming in
Speaker 7: and he's going to and I don't think see him
Speaker 7: shaking up markets by immediately trying to reduce the size
Speaker 7: of the FED balance sheet. But over the next four years,
Speaker 7: I don't think we'll see a more sustained move in
Speaker 7: that direction. In the direction of reducing the size of
Speaker 7: the FED balance sheet, it is enormous. I don't think
Speaker 7: that he's looking for the financial instability that an overnight
Speaker 7: to return to.
Speaker 2: But let's say he goes in that direction. I'm not
Speaker 2: saying we get back to that place, but let's say
Speaker 2: it goes in that direction, Do you want to own
Speaker 2: those assets on that bound.
Speaker 7: Strey on that so you know, eventually yes, but before
Speaker 7: that we're only talking about Montreal policy and isolation. We
Speaker 7: need to see what's going on with fiscal policy here,
Speaker 7: and that's another piece of this puzzle, and it's not
Speaker 7: a good one. And that's part of the reason that
Speaker 7: I would not be jumping in to buy long end
Speaker 7: bonds at this point. I think between inflation, between a
Speaker 7: return to hopefully more orthodox Mantor policy, and a continued
Speaker 7: fiscal profligacy in the US, I don't see a reason
Speaker 7: to go all in there and own long end bonds.
Speaker 7: I think you could opportunistically go in and come out,
Speaker 7: but I think over a medium term, long en yuels
Speaker 7: are going higher.
Speaker 2: This is the Bloomberg's Events podcast, bringing you the best
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