WEBVTT - Why the Fed Must Move Fast to Tame Inflation 0:00:00.400 --> 0:00:04.160 Welcome to the Internal Revenue Service. You can also visit 0:00:04.240 --> 0:00:15.080 us that wu wu W dot i RS. Don't guard Hello, 0:00:15.200 --> 0:00:18.080 and don't worry. You haven't just called the inn Revenue Service. 0:00:18.160 --> 0:00:21.160 You're listening to Stephanomics, the podcast that brings the global 0:00:21.200 --> 0:00:23.520 economy to you. But if you were trying to get 0:00:23.560 --> 0:00:25.919 through to the hard working folks who helped to collect 0:00:25.920 --> 0:00:30.280 America's taxes, you'd have a long time to wait. Keep 0:00:30.320 --> 0:00:34.000 listening to hear about the extreme lengths that American taxpayers 0:00:34.040 --> 0:00:36.960 and accountants are going to get through to the i 0:00:37.120 --> 0:00:40.640 R S. First, though, I wanted to play you part 0:00:40.640 --> 0:00:43.640 of a webinar we held this week featuring the latest 0:00:43.680 --> 0:00:47.320 insights on the road ahead for the US economy, China, 0:00:47.720 --> 0:00:50.919 and the US Central Bank, featuring some of the brightest 0:00:50.960 --> 0:00:55.120 minds of Bloomberg Economics. It started naturally enough with a 0:00:55.120 --> 0:00:59.279 great introduction by me. There does seem to be an 0:00:59.360 --> 0:01:03.240 unusually wide gap right now between where we are and 0:01:03.280 --> 0:01:06.200 where economists expect us to end up in a year 0:01:06.280 --> 0:01:08.760 or two time. I mean, the leading assumption when you 0:01:08.800 --> 0:01:12.800 look at the forecast for twenty three or four is 0:01:12.840 --> 0:01:15.319 that we're kind of heading back to normal in the 0:01:15.360 --> 0:01:19.880 global economy by by that time, probably by midy three. 0:01:20.080 --> 0:01:23.040 And that's fine, that's a traditional assumption that economists makes, 0:01:23.040 --> 0:01:25.959 sort of reversion to the mean. But you look around 0:01:26.000 --> 0:01:28.559 you and you think, wow, we're an awfully long way 0:01:28.680 --> 0:01:30.960 away from normal right now. You know, we've got a 0:01:31.000 --> 0:01:33.640 large chunk of the workforce isolating at home, maybe due 0:01:33.640 --> 0:01:37.600 to omicron. We have energy bills soaring in large parts 0:01:37.600 --> 0:01:41.400 of Europe, and for many American households, millions of workers 0:01:41.480 --> 0:01:46.240 missing from the labor market supply chain, still in a 0:01:46.360 --> 0:01:48.680 in a very troubled state. I mean, it all seems 0:01:48.840 --> 0:01:52.520 very out of whack. So, although it's probably always the 0:01:52.560 --> 0:01:54.640 case that economists are better at telling you where you're 0:01:54.640 --> 0:01:57.120 going to end up than how you're going to get there, 0:01:57.560 --> 0:02:00.160 I think this year that path from a to be 0:02:00.880 --> 0:02:05.920 from now to normal seems particularly hazardous and uncertain, and 0:02:06.000 --> 0:02:08.600 I think the potential role of central banks in that 0:02:09.480 --> 0:02:13.840 also feels particularly challenging. So I'm especially glad that we're 0:02:13.880 --> 0:02:17.720 focusing today on the downside and upside risks that we're 0:02:17.720 --> 0:02:21.000 seeing in the global economy. Um, and I'm also very 0:02:21.000 --> 0:02:22.560 glad that we're going to spend a bit of extra 0:02:22.639 --> 0:02:26.400 time talking about how the US Central Bank is positioned 0:02:26.600 --> 0:02:30.120 for this year with one of the former leaders of 0:02:30.160 --> 0:02:33.960 the Federal Reserve, the former Federals New York Federals President 0:02:33.960 --> 0:02:37.120 Bill Dudley. So that's all to come, but first I 0:02:37.160 --> 0:02:40.839 think we should set the scene with our chief US Economist, 0:02:40.919 --> 0:02:46.880 Anna Wall and how things looking, Thank you, Stephanie. So 0:02:47.480 --> 0:02:50.480 a big question heading into this year for US is 0:02:50.680 --> 0:02:54.840 when will the Fed begin to raise rates? And a 0:02:54.960 --> 0:02:58.040 March rate hike had looked uncertain when we were just 0:02:58.280 --> 0:03:01.480 entering into this year because omicron has swept through the 0:03:01.600 --> 0:03:07.040 US like wildfire and cost widespread workers absentaism. There were 0:03:07.120 --> 0:03:11.800 lots of anecdotes of temporary business closures. So we developed 0:03:11.840 --> 0:03:15.040 a daily GDP tracker to allow us to better track 0:03:15.120 --> 0:03:19.160 the disruption of Omicron, and it had pointed to a 0:03:19.200 --> 0:03:22.120 big plunge in activity in the first week of this year, 0:03:22.440 --> 0:03:25.440 and using this daily activity index as a tool, we 0:03:25.560 --> 0:03:27.800 forecast out what GDP would look like at the end 0:03:27.840 --> 0:03:31.280 of the quarter, and the model forecast the recovery would 0:03:31.320 --> 0:03:35.800 be in full swing by March and in a reassuring sign, indeed, 0:03:35.880 --> 0:03:39.880 our daily trecker is already showing signs of improvement in 0:03:40.040 --> 0:03:42.760 the second week of this year, So this is why 0:03:42.800 --> 0:03:45.360 we now believe that a March rate hike is in 0:03:45.440 --> 0:03:48.720 the cards. So then the next question is how many 0:03:48.800 --> 0:03:52.600 hikes will there be this year, and the FED future 0:03:52.800 --> 0:03:57.320 market currently expect four hikes, but that forecast is contingent 0:03:57.480 --> 0:04:02.560 on inflation and unemployment rate evolving as we have written down, 0:04:03.160 --> 0:04:07.440 and our baseline currently is for inflation to peak in 0:04:07.560 --> 0:04:12.880 February at seven point two and thereafter we expect it 0:04:12.920 --> 0:04:17.040 will slow to an average of three. In the labor market, 0:04:17.200 --> 0:04:20.640 we expect it to continue to show signs of being 0:04:20.800 --> 0:04:25.640 very tight. Wage growth is now at the highest in 0:04:25.640 --> 0:04:31.279 the early nineties. There's one point six open jobs for 0:04:31.640 --> 0:04:36.000 every unemployed person out there UM, and we project unemployment 0:04:36.080 --> 0:04:39.799 rate to fall to three point five percent or lower 0:04:40.040 --> 0:04:43.080 by the end of the second quarter. But let me 0:04:43.120 --> 0:04:46.600 emphasize that our forecast for the inflation is subject to 0:04:46.839 --> 0:04:50.600 a lot of uncertainty, and we see two non trivial 0:04:51.200 --> 0:04:54.080 risks in the near term that could push it much higher. 0:04:54.440 --> 0:04:58.160 So first, um, with China hosting the Winter Olympics in 0:04:58.240 --> 0:05:01.360 early February and for the s time really open its 0:05:01.480 --> 0:05:05.280 borders to international visitors, there could be a risk that 0:05:05.440 --> 0:05:10.480 Amochron will infiltrate into China and with their zero COVID policy, 0:05:11.040 --> 0:05:14.839 this could um disrupt the production there and re intensify 0:05:14.920 --> 0:05:18.880 supply chains. And the second risk is that there is 0:05:18.880 --> 0:05:22.000 a risk of port strikes in June of this year 0:05:22.000 --> 0:05:24.520 and the along the ports along the West Coast in 0:05:24.720 --> 0:05:31.360 US as the contract expires between the port workers longshoremen 0:05:31.520 --> 0:05:35.120 and the ports. So overall we think that the risk 0:05:35.200 --> 0:05:37.680 are on the upside for more hikes in store than 0:05:37.720 --> 0:05:40.760 what the market currently expects. But for this year and 0:05:41.040 --> 0:05:43.640 next year, thank you, Anna, there's a lot there. But 0:05:43.680 --> 0:05:47.960 I'm interested in what you said about wage growth picking 0:05:48.040 --> 0:05:51.080 up and also the potential for us to hear from 0:05:51.080 --> 0:05:53.880 from some union activity or at least in the sort 0:05:53.880 --> 0:05:56.520 of crucial deal at the ports. And I think power 0:05:56.560 --> 0:06:00.960 workers have also got potentially a dispute coming down the track. 0:06:01.040 --> 0:06:02.919 I mean, are we are we going to see a 0:06:03.040 --> 0:06:06.760 very different kind of US labor market this year than 0:06:06.800 --> 0:06:09.720 we've seen in recent years? Or is this with more 0:06:10.279 --> 0:06:16.520 with workers actually um able to extract real wage increases, 0:06:16.760 --> 0:06:19.200 or is this really just about trying to catch up 0:06:19.320 --> 0:06:23.120 with with the very high level of inflation. I think 0:06:23.160 --> 0:06:26.279 that when the labor market is tight as you you're 0:06:26.360 --> 0:06:28.440 we are seeing right now, as I was saying, one 0:06:28.440 --> 0:06:31.760 point six open jobs for every unemployed person out there. 0:06:32.560 --> 0:06:36.120 Just the threat of um you know, your workers quitting. 0:06:36.600 --> 0:06:41.400 It's that latent threat there that can cause um um 0:06:41.440 --> 0:06:45.400 employers to raise the wage and you know, submit to 0:06:45.800 --> 0:06:49.120 request of the workers. And when it comes to the 0:06:49.200 --> 0:06:53.960 port workers in historically, whenever there's uh where where the 0:06:54.000 --> 0:06:58.679 port workers are up for renegotiating their UM wages, there 0:06:58.720 --> 0:07:02.560 has been significant slow down in ports. It happened in, 0:07:03.520 --> 0:07:09.080 It happened in and at a time when these port 0:07:09.120 --> 0:07:12.080 workers had been asked to work twenty four hours per 0:07:12.160 --> 0:07:15.520 day by the by the Biden administration. I think they're 0:07:15.560 --> 0:07:19.880 fed up, and uh so, the likelihood of that is high. 0:07:20.000 --> 0:07:23.000 But but back to the you know, to to the 0:07:23.160 --> 0:07:26.480 your question, I do think that the labor market now 0:07:26.720 --> 0:07:29.239 is different than what we have seen in the last 0:07:29.240 --> 0:07:33.160 ten years, just because um there's just just this latent 0:07:33.400 --> 0:07:37.240 threat of quitting, quitting, which gives a lot of bargaining 0:07:37.240 --> 0:07:40.800 powers to workers. Those missing workers. We have that the 0:07:41.320 --> 0:07:45.280 several million workers who as far as we could tell, 0:07:45.400 --> 0:07:50.320 we were in jobs before COVID struck and maybe lost 0:07:50.360 --> 0:07:53.160 their jobs during the recession but have not gone back. 0:07:53.800 --> 0:07:56.040 Is there any sign of of some of those coming 0:07:56.040 --> 0:08:00.520 back into the picture? Yeah? So you had a estimated 0:08:00.600 --> 0:08:04.400 how much workers have in their bank by income destiles, 0:08:04.840 --> 0:08:09.720 and our expectation is that um, the workers which are 0:08:09.760 --> 0:08:14.360 in shortage there their savings give them enough about to 0:08:14.720 --> 0:08:20.000 two months of runway to cover their spending. And UM, 0:08:20.160 --> 0:08:22.560 we were expecting that there would be a flood of 0:08:23.080 --> 0:08:27.679 labor supply starting this year because of that estimate. And 0:08:28.240 --> 0:08:31.440 I do see signs of the labor market loosening, but 0:08:31.800 --> 0:08:35.959 that is right before omicron hit. Okay, so we've got 0:08:35.960 --> 0:08:39.079 a good picture on the state of the economy and 0:08:39.080 --> 0:08:40.440 as far as we can see it, and we can 0:08:40.480 --> 0:08:44.280 see a bit better with those high frequency indicators. But 0:08:44.360 --> 0:08:46.600 clearly there's the center of a lot of the debate, 0:08:46.640 --> 0:08:49.320 and certainly what financial markets are focused on is what's 0:08:49.360 --> 0:08:51.400 the Fed gonna do? Is it going to do too 0:08:51.520 --> 0:08:55.600 much or too little UM this year? Having now resolved 0:08:55.600 --> 0:08:59.120 to raise interest rates UM several times in two And 0:08:59.160 --> 0:09:02.200 it's great to have a versation with Bill Dudley about 0:09:02.240 --> 0:09:05.000 these things, former chief economists for Goldman Sex and former 0:09:05.040 --> 0:09:07.680 President of the New York Federal Reserve now a senior 0:09:07.679 --> 0:09:12.880 adviser to Bloomberg Economics and Bloomberg Opinion columnists. Um, Bill, 0:09:13.360 --> 0:09:15.360 if we just stepped back briefly, I mean, there's a 0:09:15.360 --> 0:09:17.080 lot to talk about. But if we think about the 0:09:17.120 --> 0:09:19.640 FEDS handling of the past two years of the pandemic, 0:09:20.120 --> 0:09:22.360 did they win the war but lose the piece? You 0:09:22.400 --> 0:09:24.319 have a lot of people in the peanut gallery now 0:09:24.679 --> 0:09:29.840 critiquing their view all through last year that inflation was 0:09:29.880 --> 0:09:32.560 going to be transitory. I think Muhammad al Arian has 0:09:32.600 --> 0:09:35.680 called it probably the worst inflation call in the history 0:09:35.679 --> 0:09:38.360 of the Federal Reserve, wasn't it. Well. I think they 0:09:38.400 --> 0:09:40.440 did a great job at the early stages of the 0:09:40.440 --> 0:09:44.760 pandemic in terms of their interventions to restore market function. Uh, 0:09:44.880 --> 0:09:47.880 these financial conditions push into tras to zero. So I 0:09:47.960 --> 0:09:49.920 give them, you know, a plus, you know, back in 0:09:50.000 --> 0:09:53.960 March two thousand, twenty April two thy But since then, 0:09:54.000 --> 0:09:56.640 I think they've made a number of errors. And some 0:09:56.679 --> 0:09:59.360 of the errors are related to how they implement monetary policy, 0:09:59.600 --> 0:10:02.520 and some the ears are just bad forecasting. On the 0:10:02.559 --> 0:10:07.120 monterary policy implementation side, they operationalize their two percent average 0:10:07.120 --> 0:10:10.760 inflation target regime by essentially tying their hands and saying 0:10:10.760 --> 0:10:13.360 we cannot lift off, we cannot raise short term rates 0:10:13.600 --> 0:10:18.000 until three conditions are satisfied. Inflation at two expected to 0:10:18.000 --> 0:10:20.080 be above two percent for some time in the future, 0:10:20.600 --> 0:10:23.840 and we've also have to achieve our estimate of maximum 0:10:23.880 --> 0:10:27.640 sustainable employment. So what that meant was the FED was 0:10:27.640 --> 0:10:31.079 gonna have policy extremely easy even as the economy reach 0:10:31.120 --> 0:10:33.840 full employment, so be a big gap between where the 0:10:33.840 --> 0:10:37.160 FED needed to be versus where the FED was completely 0:10:37.280 --> 0:10:40.560 self induced er on their part. The second thing that 0:10:40.600 --> 0:10:42.840 was self induces they were so worried about a taper 0:10:42.840 --> 0:10:46.040 tantrum that they were very slow to actually taper the 0:10:46.160 --> 0:10:49.080 rate of asset purchases. So we've ended up in this 0:10:49.200 --> 0:10:52.400 odd situation today where everyone's talking about FED tightening, but 0:10:52.440 --> 0:10:54.960 the FED even as we speak, is still buying assets 0:10:55.040 --> 0:10:58.360 adding accommodation. The other two areas they made I think 0:10:58.360 --> 0:11:00.880 our heart heart, you know, I would give them less 0:11:01.640 --> 0:11:06.040 grief about because they were forecasting errors. The first forecasting error, 0:11:06.080 --> 0:11:08.719 which was significant, was that the inflation shock turned out 0:11:08.760 --> 0:11:12.640 to be much bigger and lasted much longer than they 0:11:12.640 --> 0:11:15.920 were anticipating. Nobody was expecting at the beginning of two thousand, 0:11:16.400 --> 0:11:18.800 uh and and and twenty that we were going to 0:11:18.840 --> 0:11:23.079 see seven percent CPI inflation by the end of one 0:11:23.720 --> 0:11:26.880 and so that was a surprise to them. The supply 0:11:26.960 --> 0:11:31.400 chain disruption just lasted longer than they expected. The second surprise, 0:11:31.480 --> 0:11:34.440 and it wasn't all completely a bad surprise, is that 0:11:34.480 --> 0:11:37.800 the labor market tightened much faster than they expected. UH. 0:11:37.920 --> 0:11:42.200 As you went through and twenty the first part of FETE, 0:11:42.200 --> 0:11:45.520 officials were focused on the shortfall of employment relative to 0:11:45.520 --> 0:11:48.760 where it was in February and pointing to the fact 0:11:48.760 --> 0:11:50.839 that there's still a lot of We're still a lot 0:11:50.840 --> 0:11:53.679 of jobs short from where we were in February. Well, 0:11:53.679 --> 0:11:56.000 that's still the case today. We're still three million jobs 0:11:56.040 --> 0:11:59.040 short of where we were in February. But that ignored 0:11:59.080 --> 0:12:01.240 the fact that there a lot of people that left 0:12:01.360 --> 0:12:04.599 the labor forces, and pointed out the labor force participate 0:12:04.880 --> 0:12:08.000 participation rate did not come back like the FETE expected. 0:12:08.320 --> 0:12:10.920 There are retirements, There are people that didn't want to 0:12:10.920 --> 0:12:13.640 work because of COVID risk. Uh there are people who 0:12:13.640 --> 0:12:16.280 are still sick because of COVID long COVID and all 0:12:16.320 --> 0:12:18.600 those things. They have made the labor market tighten much 0:12:18.640 --> 0:12:21.160 faster than what the FETE expect. Now, be fine if 0:12:21.160 --> 0:12:23.599 the labor market tighten faster than the FETE expected and 0:12:23.640 --> 0:12:26.680 the FED responded by tightening Monterrey policy. But we're in 0:12:26.720 --> 0:12:28.960 a situation today where the labor market is very, very 0:12:29.040 --> 0:12:33.280 very tight and monetary policy is is still extraordinarily easy. 0:12:33.320 --> 0:12:35.600 So the Fed is late. They're trying to catch up, 0:12:35.960 --> 0:12:38.560 and they'll start to catch up in March when they 0:12:38.600 --> 0:12:41.240 tightened at the March of Home c meeting. So what's 0:12:41.280 --> 0:12:44.280 the road from here? Do you think the Fed's gonna 0:12:44.440 --> 0:12:46.679 end up having to raise interest rates much more than 0:12:46.720 --> 0:12:49.319 people currently expect. Yeah, I think they are gonna have 0:12:49.360 --> 0:12:51.520 to do more than people expect, because you know, if 0:12:51.520 --> 0:12:54.199 you look at the Federal Reserves forecast, it's a incredibly 0:12:54.240 --> 0:12:58.440 benign forecast. If you look at their forecast twenty four 0:12:58.440 --> 0:13:01.760 in the Summary of Economic Projection, what they show is 0:13:01.840 --> 0:13:04.600 that inflation is going to magically melt away two point 0:13:04.679 --> 0:13:07.520 six this year, two point three percent next year two 0:13:07.559 --> 0:13:11.280 point on. The Federal funds rate is not gonna go 0:13:11.360 --> 0:13:13.480 very high two point one percent by the end of 0:13:15.120 --> 0:13:17.600 uh and the uneplanyer rate is gonna even even as 0:13:17.679 --> 0:13:21.160 the undeployer rate is persistently below beyond full employment, So 0:13:21.400 --> 0:13:24.079 it's not obvious how the FED forecast works. Why does 0:13:24.120 --> 0:13:28.320 inflation fall if the economy is operating below beyond full 0:13:28.320 --> 0:13:31.400 employment for three years and monetary policy never gets to 0:13:31.400 --> 0:13:33.719 a tight setting. So I think the FED hasn't you know, 0:13:33.800 --> 0:13:35.800 they've they've been in the bullet partly in the sense 0:13:35.840 --> 0:13:37.760 that they've admitted that they're behind the curve, and then 0:13:37.760 --> 0:13:41.240 so they're speeding up the pace of removing monetary policy accommodation, 0:13:41.720 --> 0:13:43.959 but they haven't gotten to the situation place where they 0:13:44.080 --> 0:13:47.520 actually recognize that they have to actually make monetary policy tight. 0:13:48.040 --> 0:13:51.240 And I think the last couple of weeks, our market 0:13:51.280 --> 0:13:54.480 is starting to come to the uh conclusion that monetary 0:13:54.520 --> 0:13:56.280 policy at some point the cycle is gonna have to 0:13:56.320 --> 0:13:58.600 be tight. It's not there yet, but we're moving in 0:13:58.600 --> 0:14:02.600 that direction. And just to continue that thought, I mean, 0:14:02.920 --> 0:14:05.839 some are suggesting that in order to indicate that it's 0:14:05.880 --> 0:14:09.640 taking inflation more seriously, the Fed could go for a 0:14:09.720 --> 0:14:13.400 half a percentage point increase the first time they raise 0:14:13.480 --> 0:14:16.960 interest rates, rather than this very gradual path people are 0:14:17.000 --> 0:14:19.840 expecting of a quarter of a percentage point each time 0:14:20.320 --> 0:14:23.200 do you think that's something that they should be thinking about. Well, 0:14:23.240 --> 0:14:25.360 I'm certainly certainly worth thinking about it, but I'd be 0:14:25.440 --> 0:14:27.680 very surprised if they did that. I mean, this FED 0:14:27.760 --> 0:14:31.120 has tried to be very predictable, you know, in terms 0:14:31.120 --> 0:14:34.440 of how they communicate and how they act following their communications. 0:14:34.440 --> 0:14:37.360 So you know, a fifty basis point rate hike, which 0:14:37.440 --> 0:14:40.960 which certainly you know you could argue it's appropriate, would 0:14:40.960 --> 0:14:42.640 be a huge shock to markets, and I think it 0:14:42.680 --> 0:14:46.240 goes very much against you know, everything that Powell has 0:14:46.640 --> 0:14:49.200 told us over the last eight months. I think would 0:14:49.200 --> 0:14:51.200 be a huge surprise, and I'd be very surprised if 0:14:51.200 --> 0:14:55.240 they actually do that. Smiling because I'm remembering I think 0:14:55.240 --> 0:14:58.240 it was was it Paul Volca in the early eighties 0:14:58.240 --> 0:15:00.600 who just decided on a Sunday night to raise interest 0:15:00.680 --> 0:15:03.520 rates by two percentage points and to help with the 0:15:03.640 --> 0:15:06.280 markets or what they were expecting. You just can't imagine 0:15:06.280 --> 0:15:09.400 a FED chair doing that these days. Goodness, Stephanie on 0:15:09.480 --> 0:15:11.920 that is that the markets still have quite a bit 0:15:11.920 --> 0:15:14.080 of confidence in the FED. You know, if we have 0:15:14.200 --> 0:15:17.360 a tight labor market, we have higher wages, but inflation 0:15:17.400 --> 0:15:20.440 expectations are still pretty well anchored, and I think if 0:15:20.480 --> 0:15:24.080 if inflation expectations were to become unanchored, that would be 0:15:24.360 --> 0:15:26.840 a science. The markets were losing conference in the FED, 0:15:27.160 --> 0:15:28.880 and that's why I think we pushed the FED into 0:15:28.880 --> 0:15:40.160 having to be more aggressive. Well, Bill, we're going to 0:15:40.240 --> 0:15:41.920 run out of time. But I think there is one 0:15:42.000 --> 0:15:47.680 big question I was interested in your answer to you 0:15:47.720 --> 0:15:49.240 have to bet that by the end of this year, 0:15:49.280 --> 0:15:52.480 the chances are policymakers will either have done too much 0:15:52.760 --> 0:15:56.560 to tame inflation or too little. And we've had many 0:15:56.640 --> 0:15:59.880 years where the assumption has been that you should air 0:16:00.080 --> 0:16:04.120 on the side of of having policy be too loose 0:16:04.480 --> 0:16:08.960 rather than too tight. The risks of of not giving 0:16:09.040 --> 0:16:11.520 enough support for the economy but much greater than the 0:16:11.640 --> 0:16:15.760 risks of doing too much. Has that changed. Are we 0:16:15.840 --> 0:16:19.600 now looking at a situation where the FED should be 0:16:19.680 --> 0:16:23.960 more concerned about not doing enough to tame inflation. Well, 0:16:24.040 --> 0:16:27.040 I think that's that's that's absolutely correct because last cycle 0:16:27.480 --> 0:16:30.920 inflation was too low for most of the cycle, so 0:16:30.960 --> 0:16:33.480 the federers are could actually try to see how far 0:16:33.600 --> 0:16:35.440 they can how tight they can make the labor market 0:16:35.440 --> 0:16:38.640 without any really big risk of that as a consequence, 0:16:38.920 --> 0:16:41.080 this time we're starting from a point that inflation is 0:16:41.120 --> 0:16:43.840 too high, it's above what the FEDS objective is, and 0:16:43.880 --> 0:16:46.360 the labor market is already very very tight. So I 0:16:46.400 --> 0:16:49.640 think using the last economic cycle as a template for 0:16:49.680 --> 0:16:52.960 this cycle, I think it is a very very poor choice. Uh. 0:16:53.040 --> 0:16:55.160 This cycle is very different in terms of where we're 0:16:55.200 --> 0:16:58.560 starting in terms of inflation and the unimplant rate. And 0:16:58.560 --> 0:17:00.960 it's also a very different cycle where we're starting in 0:17:01.040 --> 0:17:04.720 terms of household balance sheets. Household balance sheets, death service 0:17:04.760 --> 0:17:07.680 costs are really low, households have a lot of savings. 0:17:08.040 --> 0:17:11.119 Last cycle, we had lots of damage caused by the 0:17:11.119 --> 0:17:14.320 Great Financial Crisis. So people who are using the last 0:17:14.320 --> 0:17:16.280 cycle as a template for this secle, I think are 0:17:16.280 --> 0:17:20.560 going to be disappointed. Thanks very much for that, Bill Dudley. Now, 0:17:20.600 --> 0:17:23.840 we're not trying to cover everything in this webinar, everything 0:17:23.840 --> 0:17:25.960 that's going on in the global economy. We're just trying 0:17:25.960 --> 0:17:29.199 to zero in on some of the key risks that 0:17:29.280 --> 0:17:31.959 people are thinking about, and I think the top of 0:17:31.960 --> 0:17:35.200 that list is China. So we're going to hear now 0:17:35.240 --> 0:17:40.240 from our chief global economist, frequent participant on Stephanomics, Tom Olig, 0:17:40.520 --> 0:17:43.520 who also spent eleven years in Beijing and has written 0:17:43.520 --> 0:17:47.359 two books about the Chinese economy. Tom Thanks, Stephanie Um. 0:17:47.880 --> 0:17:51.159 So if we were having this conversation a year or 0:17:51.200 --> 0:17:54.960 so ago, there would be a pretty positive story to 0:17:55.080 --> 0:17:59.600 tell about how China had weathered the COVID storm. From 0:17:59.600 --> 0:18:01.880 where we are at the start of twenty two, though, 0:18:02.240 --> 0:18:07.200 and there's some pretty significant risks and obstacles which China 0:18:07.359 --> 0:18:12.640 now faces, in particular the Evergrand property slump. It's difficult 0:18:12.640 --> 0:18:18.119 to disagree with Beijing's strategy here. The property sector is 0:18:18.240 --> 0:18:22.720 over built and over leaver Ridge, and the entire rickety 0:18:22.840 --> 0:18:27.000 structure rests on a foundation of moral hazard. An ever 0:18:27.119 --> 0:18:31.760 Grand in many ways is the poster child for those problems, 0:18:31.800 --> 0:18:36.080 so allowing ever Grand to default and go into restructuring 0:18:36.480 --> 0:18:40.680 absolutely makes sense. The trouble is that with so many 0:18:40.880 --> 0:18:44.520 other developers in a similar position to ever Grand in 0:18:44.640 --> 0:18:47.960 terms of their leverage levels, and with property such an 0:18:47.960 --> 0:18:51.480 important driver of growth across the economy as a whole, 0:18:52.280 --> 0:18:56.439 even making that modest down payment on addressing the problem 0:18:56.520 --> 0:19:01.040 of moral hazard comes with some significant costs attached. There's 0:19:01.080 --> 0:19:05.159 confidence in the sector ebbs away, We're seeing sales and 0:19:05.280 --> 0:19:10.200 investment weekend, and with property directly and indirectly driving about 0:19:10.240 --> 0:19:14.680 a quarter of China's overall GDP. That has to come 0:19:14.960 --> 0:19:18.399 at a cost to growth in the year ahead. The 0:19:18.440 --> 0:19:22.960 second big risk for China looking forward is what happens 0:19:23.040 --> 0:19:29.760 when the omicron variant hits. Now in China's COVID strategy 0:19:29.880 --> 0:19:34.400 was brutally effective. It saves lives, It provided the basis 0:19:34.400 --> 0:19:38.119 for a V shaped recovery in g d P, But 0:19:38.200 --> 0:19:42.119 now they face some new and some difficult questions, in particular, 0:19:42.520 --> 0:19:47.000 what's the end game for their strategy. That strategy works 0:19:47.000 --> 0:19:49.960 in terms of keeping the population healthy, but it does 0:19:50.040 --> 0:19:54.560 come at a cost of growth. Lockdown's hit consumption. We 0:19:54.600 --> 0:19:58.239 saw that last summer when retail sales stumbled in the 0:19:58.240 --> 0:20:01.560 face of the Delta outbreak, and as we heard from Anna, 0:20:02.000 --> 0:20:06.520 in a nightmare scenario with widespread lockdowns, factories and ports 0:20:06.560 --> 0:20:10.360 closing down, we could see China contributing to the global 0:20:10.440 --> 0:20:14.800 supply crunch. We don't think that's the baseline scenario. China 0:20:14.920 --> 0:20:17.520 so far has done a good job at keeping production 0:20:17.880 --> 0:20:22.520 on track, but certainly, as cases in the Chian outbreak rise, 0:20:22.920 --> 0:20:25.919 it's a risk which is worth keeping in mind. So 0:20:25.960 --> 0:20:29.040 if we pull those pieces together our base case for 0:20:29.119 --> 0:20:32.640 China's GDP this year is actually pretty positive. We think 0:20:32.920 --> 0:20:36.080 growth could come in above five for the year, but 0:20:36.320 --> 0:20:40.440 risks to that outlook from Evergrand from the omicron variant 0:20:40.800 --> 0:20:44.199 affirmly to the downside, and a much lower number is 0:20:44.240 --> 0:20:47.879 certainly possible. With all that in mind, it's no surprise 0:20:47.960 --> 0:20:51.359 that the People's Bank of China has already moved towards stimulus. 0:20:51.760 --> 0:20:54.520 So just coming back to the question of the property risk, 0:20:55.400 --> 0:20:59.159 obviously everyone's had to learn the name ever Grand and 0:20:59.200 --> 0:21:03.159 even think about how to pronounce it. Apart from these 0:21:03.400 --> 0:21:06.240 monetary policy tools you've talked about, are there any specific 0:21:06.359 --> 0:21:10.240 policies that China has for managing the boom and bust 0:21:10.280 --> 0:21:13.920 of the property cycle and maybe getting to a situation 0:21:13.920 --> 0:21:16.800 where they're not so dependent on property for driving the 0:21:17.080 --> 0:21:21.200 driving the growth of the economy. Yes, you're you're completely right, Stephanie, 0:21:21.240 --> 0:21:23.520 and I should have gone with the more flamboyant ever 0:21:23.600 --> 0:21:27.720 Grandy pronunciation, which which I hear in Hong Kong is 0:21:27.720 --> 0:21:31.840 a little bit more fun um. So, what China can't 0:21:31.880 --> 0:21:36.240 do is control the kind of the fundamental problem in 0:21:36.240 --> 0:21:39.520 the property sector. They can't they can't get away from 0:21:39.560 --> 0:21:43.200 the problem, that there's massive overbuilding, that the country is 0:21:43.280 --> 0:21:47.199 littered with ghost towns, the developers have borrowed too much money. 0:21:47.280 --> 0:21:51.080 That sort of fundamental characteristics of the problem they can't change. 0:21:51.440 --> 0:21:54.679 What they do have, though, is a very refined and 0:21:54.760 --> 0:21:57.639 granular set of tools that they can try and use 0:21:57.720 --> 0:22:01.080 to manage the problem down. So they can They don't 0:22:01.119 --> 0:22:06.560 just set interest rates. They set interest rates for mortgages specifically, 0:22:06.960 --> 0:22:09.080 and they can set them at different rates for first 0:22:09.080 --> 0:22:11.960 time buyers and second time buyers and third time buyers. 0:22:12.480 --> 0:22:16.240 They can change down payment requirements city by city and 0:22:16.400 --> 0:22:19.399 change down payment requirements for first time buyers and second 0:22:19.400 --> 0:22:22.520 time buyers and third time buyers. They can open the 0:22:22.560 --> 0:22:28.119 credit taps for real estate developers in different ways for 0:22:28.200 --> 0:22:33.119 different categories of developer. So they can't magically make the 0:22:33.160 --> 0:22:36.040 problem go away. But what they've done over the last 0:22:36.080 --> 0:22:40.439 decade is developed this rather precise set of tools for 0:22:40.560 --> 0:22:43.640 managing it, and I expect we'll see those coming into 0:22:43.680 --> 0:22:47.840 play in the months ahead. And finally, Tom sh Jingping, 0:22:47.840 --> 0:22:51.960 we've seen him become more and more powerful as a 0:22:52.080 --> 0:22:56.560 Chinese president, leader of the Chinese Communist Party, and he's 0:22:56.600 --> 0:23:00.880 also through that increased the hold of the party over 0:23:01.560 --> 0:23:06.240 um the economy. We're now seeing him seek a third 0:23:06.400 --> 0:23:10.280 term as leader, maybe even leadership for life, as someone 0:23:10.359 --> 0:23:14.360 calling it. What are the economic implications of that? Yes, 0:23:14.480 --> 0:23:19.119 so she has been moving the sort of pieces into 0:23:19.160 --> 0:23:23.280 place to ensure that he can have a third term 0:23:23.320 --> 0:23:26.359 as president and as general secretary of the Communist Party, 0:23:27.200 --> 0:23:31.199 and that process will sort of reach its endgame at 0:23:31.200 --> 0:23:34.640 the end of this year, and very likely she will succeed. 0:23:34.960 --> 0:23:37.080 So there are some short term and some long term 0:23:37.160 --> 0:23:42.240 implications of that. The short term implication is, well, China 0:23:42.520 --> 0:23:45.679 in the best of times, has very little tolerance for 0:23:45.720 --> 0:23:49.320 bad news in the run up to big political events, 0:23:49.760 --> 0:23:52.600