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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each

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Speaker 2: day for insight from the best in markets, economics, and

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Speaker 2: geopolitics from our global headquarters in New York City. We

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Speaker 2: are live on Bloomberg Television weekday mornings from six to

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Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify

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Speaker 2: or anywhere else you listen, and as always on the

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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. David Libertz of

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Speaker 2: JP Morgan writing this, as inflation gradually moves lower, so

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Speaker 2: too should the federal funds rate. We still expect two

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Speaker 2: cuts this year. The biggest risks are at reacceleration in

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Speaker 2: wage growth or some sort of government policy that reignites inflation.

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Speaker 2: David joins us now from More David, Good morning, Maren.

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Speaker 2: How excited can we get about the last twenty four hours?

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Speaker 3: So?

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Speaker 4: I think it was more of a market breathing asside

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Speaker 4: of relief as opposed to new information. I mean, what

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Speaker 4: we're seeing is that we're making progress on inflation, but

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Speaker 4: it's the services component. That's particularly sticky. And when you

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Speaker 4: break that down even further, where the heat is really

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Speaker 4: coming through is in shelter and then transportation services.

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Speaker 1: It feels like the auto.

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Speaker 4: Insurance issue is in the process of running its course.

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Speaker 4: Shelter should continue to soften. Where that leaves us is

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Speaker 4: the biggest risk being that if wage growth begins to reaccelerate,

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Speaker 4: that's going to show up in things like food away

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Speaker 4: from home, that's going to show up in services more broadly,

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Speaker 4: And that's really the risk to the Fed adopting a

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Speaker 4: significantly more hawkish tone than they have up until this point.

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Speaker 2: Yesterday, both stocks and bonds rallied. Do you want to

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Speaker 2: chase either?

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Speaker 4: So the positive correlation thing is tricky, and we spend

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Speaker 4: a lot of time talking about that because in a

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Speaker 4: perfect world we'd end the year with stocks higher and

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Speaker 4: rates lower. How much lower can we really go on

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Speaker 4: rates given where the FED is and given where inflation is.

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Speaker 4: I think that's the big question. You know, we're definitely

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Speaker 4: leaning more into the risk side of the trade as

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Speaker 4: opposed to the duration side of the trade. But I

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Speaker 4: will say with the curve now you know positively sloping,

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Speaker 4: you're getting a little bit of carry for being long

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Speaker 4: duration doesn't look quite as problematic from a portfolio construction

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Speaker 4: standpoint as it had been when the curve was inverted

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Speaker 4: and you were basically having to pay to be longer

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Speaker 4: out on the curve.

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Speaker 3: Can I ask in.

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Speaker 5: The curve and the shape that it's doing and getting

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Speaker 5: more steep. There's been a lot of commentary that it's

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Speaker 5: people concerned about fiscal deficits, that it's concerned about the economy.

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Speaker 5: But to some degree, David, this is just normal. This

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Speaker 5: is how things were before the GSC. Is there any

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Speaker 5: element of what we're seeing actually a good thing and

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Speaker 5: a return to some sort of normalization in the yield curve?

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Speaker 4: So I mean fundamentally, having a positively sloped yield curve

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Speaker 4: and having a base rate that isn't zero I think

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Speaker 4: is very healthy for economies broadly. What I think is

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Speaker 4: particularly interesting about where we are today and the move

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Speaker 4: that we've seen in long rates over the past couple

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Speaker 4: of weeks, is really that it is being driven by

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Speaker 4: those concerns around fiscal policy. If you look at the

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Speaker 4: relationship between the ten year yield and the economic policy

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Speaker 4: Uncertainty index, if you look at what's been going on

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Speaker 4: with the term premium. Right, all of these are moving

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Speaker 4: higher together, and what that says to me is that

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Speaker 4: the bond market is concerned about something more than the

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Speaker 4: expected path of FED policy. If we get one cut

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Speaker 4: this year, you know, four sixty five four to seventy

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Speaker 4: five on the ten year is pretty much fair value.

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Speaker 4: We would need to see the Fed engage with hikes

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Speaker 4: to get to that five percent number, or we need

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Speaker 4: to see something on the fiscal front that just causes

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Speaker 4: that concern amongst bond investors.

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Speaker 5: So some of that is the uncertainty premium. As you

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Speaker 5: watch things like Scott Beson's nomination hearing, as we go

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Speaker 5: through the inauguration, and you get different executive actions put

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Speaker 5: in place, what is actually tradable and what just leads

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Speaker 5: to more uncertainty.

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Speaker 4: So I think it's a question of signal and noise,

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Speaker 4: and I think that the order of operations is going

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Speaker 4: to matter quite a bit here. I mean, my sneaking

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Speaker 4: suspicion is that when President Trump comes into office next week,

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Speaker 4: the first thing he's going to do is unwind a

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Speaker 4: lot of the things that the Biden administration had put

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Speaker 4: into place. So that's step one, step two. As he

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Speaker 4: moves on and begins to pursue his own agenda. We

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Speaker 4: do think he's going to lead with immigration and tariffs,

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Speaker 4: so we may get some of the more stuff first,

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Speaker 4: But on immigration, I think it's going to be a

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Speaker 4: little bit more thoughtful than people are currently expecting. And

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Speaker 4: on trade, I think that this is the beginning of

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Speaker 4: a great negotiation. You know, the news that's come out

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Speaker 4: around tariffs kind of ebbs and flows, and you know,

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Speaker 4: somebody says one thing and then it gets walked back.

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Speaker 4: I think that that tells us a lot about what

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Speaker 4: we should expect in terms of the evolution of trade

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Speaker 4: policy going forward.

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Speaker 6: So it's used as bluster to get shijingping Basley to

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Speaker 6: the table with this MAXIMALUS approach, but maybe he actually

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Speaker 6: won't fall through on the MAXIMALUS approach.

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Speaker 1: Is that your base case exactly?

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Speaker 4: I mean, if you look at where the United States

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Speaker 4: gets the majority of its consumer electronics from, it's China.

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Speaker 4: We're not going to put a sixty percent tariff on

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Speaker 4: consumer electronics. Half the reason that Trump's going to be

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Speaker 4: in the White House is because the Biden administration oversaw

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Speaker 4: a period of elevated inflation, and so you have to

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Speaker 4: kind of weigh those forces together and get a sense

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Speaker 4: of I think he's going to shoot it pretty straight

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Speaker 4: down the middle, but there's going to be a lot

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Speaker 4: of volatility along the way. And that's what we're trying

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Speaker 4: to remind our clients.

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Speaker 6: That idea keeps coming up in a lot of conversations

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Speaker 6: I have that inflation is really important for this incoming

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Speaker 6: administration and to make sure they're getting down and that's

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Speaker 6: partially why they won this election. But there is potential

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Speaker 6: that some of what Trump is talking about is inflationary.

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Speaker 6: And you still have two cuts priced in for twenty

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Speaker 6: twenty five and the team, how do you weigh both

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Speaker 6: of those?

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Speaker 4: So I think, first of all, it's important not to

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Speaker 4: put the cart before the horse. And you know, it

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Speaker 4: wasn't only it was just what four or five months

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Speaker 4: ago when we were triggering the Psalm rule and the

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Speaker 4: economies going into recession. So we had six Yeah, markets

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Speaker 4: are still, markets are still somewhat twitchy. I think the

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Speaker 4: reality is that the broader trend in inflation is lower,

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Speaker 4: and the FED clearly views the current level of the

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Speaker 4: Fed funds rate as being restrictive, so they remain on

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Speaker 4: a path of more easing. How quickly that easing materializes,

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Speaker 4: to me is the bigger question. You know, people were

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Speaker 4: talking about March and June and then done. I think

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Speaker 4: we might see first half, second half done, but we're

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Speaker 4: not going to cross that second cut out until we

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Speaker 4: have information that inflation isn't coming down the way that

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Speaker 4: the FED would like to see. With respect to the

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Speaker 4: interaction with the policies coming out of the White House,

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Speaker 4: tariffs are a one time level shift, and so we

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Speaker 4: don't really view that unless it becomes truly tit for

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Speaker 4: tat as being a source of inflation. That the FED

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Speaker 4: is going to focus on. Immigration could be somewhat inflationary,

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Speaker 4: but I think that that takes time to play out.

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Speaker 4: If you look historically, inflation does come in waves. You know,

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Speaker 4: it tends to be a first wave, a pause, and

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Speaker 4: a second wave. To me, if we get that second

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Speaker 4: wave of inflation, and I think it's still a big

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Speaker 4: if much more of a twenty twenty sixth story than

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Speaker 4: a twenty twenty five story. When you have those tax

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Speaker 4: cuts coming through, when you have more progress on deregulation,

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Speaker 4: and when you have some of these inflationary policies finally

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Speaker 4: working their way through the system and beginning to show

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Speaker 4: up in that.

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Speaker 2: Absent a breakdown of the labor market. Should the FED

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Speaker 2: spas just be the waight? Why would they cut a

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Speaker 2: toll given everything you've just said.

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Speaker 4: So, I think that the reason that they should cut

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Speaker 4: is because, again, you know, if you look at the

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Speaker 4: real FED funds rate, it is somewhat punitive.

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Speaker 3: Also, when you look.

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Speaker 4: At a broad mosaic of labor market data, the two

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Speaker 4: fifty payroll game we got last week doesn't exactly line

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Speaker 4: up with a lot.

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Speaker 2: Of the idea. I'm buying the fifty.

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Speaker 4: I'm not buying the two fifty. I'm buying the fact

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Speaker 4: that the quits rate has been stable and relatively low.

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Speaker 4: And I think that that tells.

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Speaker 3: You everything you need to know.

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Speaker 4: Because if you're not able to walk out the door

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Speaker 4: of your building, go across the street and get paid

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Speaker 4: twenty percent more to do the same job, that tells

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Speaker 4: you a lot about the state of the labor market. So, look,

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Speaker 4: the labor market's healthy, four percent unemployment, four percent wage growth.

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Speaker 4: This is all really good stuff. But I do think

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Speaker 4: on the fringes you're seeing that softening, and that is

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Speaker 4: what is causing the FED a bit of concern in them.

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Speaker 2: If you had to take your bet, if you were

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Speaker 2: thinking about how this labor market might break a reacceleration

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Speaker 2: or a real deceleration, are you betting on the latter?

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Speaker 3: Another former, I do think that.

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Speaker 4: The risk is still to the upside. You know, this

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Speaker 4: is a very healthy economy. Real income growth remains positive.

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Speaker 4: We have the prospect if we get this deregulation, if

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Speaker 4: you get you know, more favorable tax treatment, you could

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Speaker 4: see capex begin to tick higher. And that's one of

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Speaker 4: the more cyclical parts of the economy. And so you know,

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Speaker 4: the engine of the car being the consumer looks completely fine.

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Speaker 4: Is it going to get turbocharged by some of these policies.

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Speaker 4: I think that that's probably a risk that we can't dismiss.

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Speaker 5: I find it really notable that the thing that continues

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Speaker 5: to be consistent is that quits are lower, it's getting

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Speaker 5: harder to find new work, and you're seeing wage growth stagnant.

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Speaker 5: If you don't trust the headline data, should we just

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Speaker 5: continue to look at that? Does that need to be

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Speaker 5: our guiding star in this economy?

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Speaker 4: So that's why I was so surprised on Friday, and

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Speaker 4: everybody was freaking out two hundred and fifty thousand jobs.

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Speaker 4: I'm like, guys, wage growth is coming down. I mean,

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Speaker 4: isn't that what really matters when it comes to inflation.

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Speaker 4: It's not the number of jobs you're creating, it's the

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Speaker 4: amount of money that's going into people's pockets. And furthermore,

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Speaker 4: the data from the Atlanta Fed yesterday that breaks down

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Speaker 4: wage growth by income quartile showed that those lower income

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Speaker 4: individuals are finally seeing wage growth begin to slow. And

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Speaker 4: that's important because those are the individuals with a higher

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Speaker 4: marginal propensity to consume. They spend every dollar that comes

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Speaker 4: into their pockets. So that's really what can cause the

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Speaker 4: delta when it comes to things like growth and inflation.

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Speaker 5: Peter Shearer of Academy Securities made this exact same point

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Speaker 5: the other day, but he went on to say that

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Speaker 5: his concern is that the FED is paying attention to

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Speaker 5: the headline data, that the FED is reacting to data

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Speaker 5: points that might be skewed.

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Speaker 1: Do you share that concern.

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Speaker 4: I think that the Fed a very good job of

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Speaker 4: looking at a broad mosaic. I mean, they have a

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Speaker 4: staff of economists that are spending time on all of

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Speaker 4: this stuff. Yes, they're not going to fade the two

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Speaker 4: fifty number because it could be there could be a signal,

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Speaker 4: but it could also be noise. And so I think

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Speaker 4: they'll continue to just look at what the data more

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Speaker 4: broadly is telling them and try to square that with

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Speaker 4: their own forecasts when coming up with the appropriate trajectory

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Speaker 4: for monetary policy.

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Speaker 6: If the data is so noisy, should we just do

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Speaker 6: what Mohammad Alarian told me to do ages ago, which

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Speaker 6: isn't to the CEOs this morning, BP cutting five percent

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Speaker 6: of the workforce. Yesterday we had headlined from Microsoft from

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Speaker 6: Meta from Southwest.

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Speaker 1: Are these idiosyncratic or is their trend?

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Speaker 4: I think for the time being, it's somewhat idiosyncratic. You know,

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Speaker 4: the calendar turns beginning of the year, a little bit

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Speaker 4: of cleaning out the closet, if you will. But I

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Speaker 4: think we need to watch these these developments quite closely.

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Speaker 4: And again, you know, coming back to the quits rate.

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Speaker 4: Part of what gives me comfort about the labor market

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Speaker 4: is that the quits rate is low, but the layoff

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Speaker 4: rate is also low. And if we begin to see

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Speaker 4: that trend higher in a more material type of way,

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Speaker 4: that's when I think you may see the FED begin

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Speaker 4: to express a bit more concern about the growth side

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Speaker 4: of the equation and fade some of the inflationary pressure.

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Speaker 2: We won't discussed for cent to office policy. Don't worry, David,

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Speaker 2: Let's see David Levitz, the j F Morgan, David, thank you.

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Speaker 2: Let's speak to americ can settle things down. The form

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Speaker 2: of FED Vice Chair Richard Cloud. It joins us now

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Speaker 2: for more Rich Good morning.

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Speaker 7: Glad to be here, Good to see you, sir.

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Speaker 2: Let's start with the economics eights, and not just this morning,

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Speaker 2: but at the last twenty four rounds. Does it changed

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Speaker 2: much for you?

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Speaker 8: Well, you'd like to get some good news on inflation.

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Speaker 8: Occasionally we've had some negative prints, and so.

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Speaker 3: I think it was a positive.

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Speaker 8: You know, inflation is still running I think hot, but

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Speaker 8: the FED will be looking for a return to getting

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Speaker 8: on that bumpy road down to two percent.

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Speaker 2: Do you think the trend is uncomfortable or are you

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Speaker 2: comfortable with the trend right now?

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Speaker 3: I'd be a little bit nervous.

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Speaker 8: You know, the FED put a lot of weight on

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Speaker 8: the fact of seasonals a year ago. Well, we have

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Speaker 8: three bad months of data, the last two or three

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Speaker 8: months of twenty twenty four.

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Speaker 3: The data wasn't going in the right direction.

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Speaker 8: So I do think we're on a path to two percent,

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Speaker 8: but the road may be bump here than folks thought

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Speaker 8: a couple months ago.

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Speaker 5: To that point, it's been this narrative whip saw.

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Speaker 9: It's been back and forth.

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Speaker 5: It feels like we're either scared it's going to be

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Speaker 5: a recession or the economy is running too hot. Do

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Speaker 5: you believe that the economic data is actually that uneven

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Speaker 5: that we can have such different turns in the narrative

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Speaker 5: just one month apart, or is something else going on?

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Speaker 3: I think it's both.

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Speaker 8: I think we've been through a very unusual period. You know,

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Speaker 8: we've had a lot of aftershocks from the pandemic, including inflation.

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Speaker 8: We've had a lot of good news in the US,

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Speaker 8: very strong productivity growth, a big increase in wealth, and

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Speaker 8: obviously the Fed is happy that inflation has come down.

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Speaker 8: So I think there is sensitivity and probably a little

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Speaker 8: bit about what to expect for fiscal policy and how

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Speaker 8: will the FED react to that point.

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Speaker 5: Should we be looking all this data at this moment

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Speaker 5: just as a starting point, just as a starting point

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Speaker 5: of what we might get from policy that might add

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Speaker 5: to inflation, might change growth dynamics. Is that the right

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Speaker 5: lens of you everything we're getting, I do.

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Speaker 3: Think it is.

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Speaker 8: You know, initial conditions are important, and so you know,

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Speaker 8: beginning of the year the economy is growing above trend

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Speaker 8: three percent, low unemployment rate, and so I think putting

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Speaker 8: policy uncertainty in the context of where the economy is is.

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Speaker 3: I think where the markets need.

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Speaker 1: To be should be what the FED is doing.

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Speaker 8: As well, of course, oh everywhere and always about the

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Speaker 8: FED right.

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Speaker 1: Well to that point, how forthcoming should they be?

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Speaker 5: And that's their estimation that they're looking at the current

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Speaker 5: data and saying, we understand where it is, but we

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Speaker 5: need to preempt where it's going because of fiscal policy.

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Speaker 7: Yeah, great question, and I do think that j.

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Speaker 8: Powell made the case, especially in November, that they're not

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Speaker 8: inclined to get too far ahead. There's a lot of

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Speaker 8: uncertainty on the details tariffs, taxes, immigration policy, and I

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Speaker 8: think we are a delicate point for the FED because

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Speaker 8: the minutes revealed they did start to incorporate some views

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Speaker 8: on that, but I don't think they'll get too preemptive

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Speaker 8: in this environment.

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Speaker 3: I don't think that would be worthwhile.

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Speaker 6: Well, in November, Powell said, we don't assume, don't speculate,

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Speaker 6: we don't get Yeah, but then in December members did,

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Speaker 6: so how are we supposed to understand this?

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Speaker 8: Well, the minutes were very revealing, and more so than usual,

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Speaker 8: I think, because in fact, if you read carefully, as

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Speaker 8: I'm sure you all did, not only did participants on

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Speaker 8: the committee began to pencil in some views, but the

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Speaker 8: staff briefings also looked at scenarios for trade, tariff, immigration policy,

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Speaker 8: but also incorporated some of that into the baseline. So

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Speaker 8: they're already starting to try to factor that into the forecast.

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Speaker 8: But I think with a great deal of humility.

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Speaker 1: You talk about how uncertainty is the only thing certain.

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Speaker 10: Yeah, what are you most uncertain about when it comes

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Speaker 10: to Trump two point zero?

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Speaker 8: Well, I think you look at the three priorities of

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Speaker 8: the administration. What are the details on tariffs? You know,

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Speaker 8: is it a bargaining chip, is it a battering ram?

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Speaker 8: Immigration policy? I think by person support, we need to

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Speaker 8: fix our immigration system, but the details will be important.

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Speaker 3: And then the budget.

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Speaker 8: Obviously, I think everyone agrees, including PEMCO, the twenty seventeen

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Speaker 8: tax cuts are going to be extended, but will there

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Speaker 8: be additional tax cuts will there be paid for? Is

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Speaker 8: how much of the Biden agendator Biden agenda will be reversed?

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Speaker 8: And so I think you need to look at all

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Speaker 8: three of those.

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Speaker 2: You're in the perfect seat because the other question is

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Speaker 2: one is whether this bond market will constrain the ambitions

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Speaker 2: of Washington, d C. How are you in the team

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Speaker 2: thinking about those forces.

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Speaker 7: It's very important.

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Speaker 8: You know, we're having some conversation before I came on

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Speaker 8: about the bond market vigilantes. You know the idea that

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Speaker 8: if Washington's running an irresponsible fiscal policy, you push up rates,

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Speaker 8: you push up term premium.

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Speaker 3: And I think that'll be a very important part.

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Speaker 8: Of of the calculation. Now, bond yields can go up

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Speaker 8: not just because of budgets, because of strong growth and

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Speaker 8: optimism about productivity, So the Fed will have to do

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Speaker 8: some signal extraction. But I think importantly, if yields sell

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Speaker 8: off because Washington's running an irresponsible physical policy, then.

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Speaker 7: That's part of the way the economy needs to adjust.

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Speaker 2: Do you think the rump and bond yields more recently

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Speaker 2: has been about the data or the incoming administration.

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Speaker 8: Well, I'm going to be the proverbial two handed economists.

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Speaker 8: I think there's an element of both. I think that

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Speaker 8: there's optimism about growth, about deregulation, I think that's certainly

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Speaker 8: an element of it. But there's also, I think concerns

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Speaker 8: about fiscal policy, and we saw that a year ago

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Speaker 8: and we could be seeing some of that right now.

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Speaker 5: But you've been writing that bonds are better positioned in

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Speaker 5: twenty twenty five and other asset classes.

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Speaker 9: Does that mean that run up and yields reverses.

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Speaker 5: Is there going to be a catalyst to help bring

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Speaker 5: us back closer to the ground.

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Speaker 3: Yeah.

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Speaker 8: So our thinking is that bond yields obviously have been

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Speaker 8: in a range. They've been fluctuating, but we saw bond

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Speaker 8: yields reach five percent about fourteen months.

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Speaker 3: Ago and then they retraced down.

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Speaker 8: We do think there is an enormous global appetite for

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Speaker 8: treasuries and there will be a certain level of yields.

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Speaker 8: Last time it was around five percent where you start

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Speaker 8: to get a lot of foreign demand. And so one

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Speaker 8: of the reasons that we're bullish on bonds in addition

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Speaker 8: to being pimp CO, is that starting yields are historically

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Speaker 8: the best single predictor of your return on a quality

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Speaker 8: bond portfolio, and starting yields now are attractive and obviously

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Speaker 8: have room to adjust lower under the right circumstances.

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Speaker 10: John and I have been talking about this hour how

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Speaker 10: it's getting the notice of not just individuals that are

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Speaker 10: part of Trump's economic policy team.

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Speaker 1: Jd. Vance talked about the ten year yield twice.

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Speaker 10: Over the weekend in an interview that wasn't even financial

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Speaker 10: supposed to be financially focused. Is there a level that

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Speaker 10: you think, and I mean, you know Donald Trump, that

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Speaker 10: really starts to unnerve him.

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Speaker 8: Oh my goodness, Well I would I wouldn't speculate on that.

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Speaker 3: What I would say that markets would be focused on.

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Speaker 8: Let's sort of simplify it is, you know, the peak

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Speaker 8: in tenure yields so far in this cycle has been

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Speaker 8: four point nine to nine percent. I think maybe for

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Speaker 8: a minute, we got above five. So certainly if ten

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Speaker 8: year yields broke above and stayed above five, that would

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Speaker 8: get a lot of attention around the globe, in the

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Speaker 8: White House and at the Fed, and in market.

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Speaker 2: Can you hand me with something, because I've got a

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Speaker 2: little bit of a dilemma. I'm trying to figure this

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Speaker 2: out you were on the feder reserve back in the

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Speaker 2: early twenties. So the end of twenty one, twenty one,

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Speaker 2: I've got the minutes in front of me. I've got

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Speaker 2: the SEP in front of me too. December twenty one,

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Speaker 2: the outlook for the FED funds rate the medium for

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Speaker 2: twenty two was point nine zero point nine, and you

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Speaker 2: ended up hiking interest rates all the way up to

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Speaker 2: four percent at the end of twenty two. And this

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Speaker 2: was after President Biden had already unleashed stimulus into a

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Speaker 2: supply constrained economy. This was after even inflation was climbing

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Speaker 2: up to five percent. The Fed sat there at the

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Speaker 2: end of twenty one and said, maybe rates get to

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Speaker 2: one percent. And look at the range of estimates as

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Speaker 2: well on the FMC. It's really narrow too. It's anywhere

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Speaker 2: from point four to one point one. So it's not

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Speaker 2: like there was some outline there pricing in a policy

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Speaker 2: change in Washington. Why does it feel different this time

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Speaker 2: with Trump coming back into power. Why was the Fed

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Speaker 2: a reserve and some officials more willing to adapt their

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Speaker 2: out look at just their outlook on policy changes from

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Speaker 2: Donald Trump when they were unwilling to change even though

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Speaker 2: they'd seen what was coming from Biden. What explains that.

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Speaker 7: Rich, Well, look in my own writings and on this show.

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Speaker 8: I've talked about you know, we at least I was

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Speaker 8: thinking in real time, and certainly by that point in

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Speaker 8: twenty twenty one, the FED had realized that it needed

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Speaker 8: to begin to end quey, to start signaling rate hikes.

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Speaker 8: I think there was also an assessment as well about

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Speaker 8: you know, on the committee, and a range of views

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Speaker 8: on the committee. I'll leave it at that about about

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Speaker 8: you know, how transitory inflation would turn out to be.

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Speaker 3: So there's no doubt that.

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Speaker 8: In retrospect, the FED would have been better off beginning

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Speaker 8: to high rates in the fall of twenty twenty one.

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Speaker 8: I think what you need to look at is September

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Speaker 8: versus March.

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Speaker 3: Of twenty twenty two.

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Speaker 8: You need to look at the result and well anchored

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Speaker 8: inflation expectation. But it was a challenging time, John, not

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Speaker 8: just for the FED, but also for central banks around

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Speaker 8: the world. The pandemic, the shocks, and the policy response.

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Speaker 8: It was it was difficult to navigate through.

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Speaker 2: I think we all just want to be sure that

442
00:19:08,920 --> 00:19:12,640
Speaker 2: it was just as analytical mistake and not a consequence

443
00:19:12,640 --> 00:19:13,399
Speaker 2: of political bias.

444
00:19:13,880 --> 00:19:17,960
Speaker 8: I'm certainly not in my judgment of consequence of political bias.

445
00:19:17,600 --> 00:19:19,960
Speaker 2: Because it is odd that in November the Chairman says

446
00:19:19,960 --> 00:19:22,280
Speaker 2: one thing, and then the December he has to say another.

447
00:19:22,720 --> 00:19:24,840
Speaker 2: And I'm still trying to struggling to explain to people

448
00:19:24,920 --> 00:19:26,600
Speaker 2: just what changed in between.

449
00:19:26,960 --> 00:19:30,760
Speaker 8: Well, again, it was a rapidly evolving, rapidly evolving situation

450
00:19:30,920 --> 00:19:32,800
Speaker 8: in terms of the data and in terms of the

451
00:19:32,840 --> 00:19:36,960
Speaker 8: assessment of the economy. And again, you know, the FED

452
00:19:37,040 --> 00:19:39,439
Speaker 8: only meets eight times a year, so a lot happens

453
00:19:39,440 --> 00:19:40,760
Speaker 8: in between meetings as well.

454
00:19:40,960 --> 00:19:43,880
Speaker 2: Rich appreciated time. It was fantastic to catch up Richard County.

455
00:19:43,920 --> 00:19:57,280
Speaker 2: The former FED Vice Chad Francis Donald of MBC disagree,

456
00:19:57,359 --> 00:20:00,359
Speaker 2: writing MBC Economics is no longer cooling for any more

457
00:20:00,440 --> 00:20:02,760
Speaker 2: rate cuts in twenty five and the reason is simple.

458
00:20:03,040 --> 00:20:05,159
Speaker 2: In our base case, the data simply won't give the

459
00:20:05,240 --> 00:20:08,600
Speaker 2: Fed enough justification the further racing, Francis joins is now

460
00:20:08,640 --> 00:20:11,600
Speaker 2: for more. Francis, good morning, good morning. Did CPI yesterday

461
00:20:11,800 --> 00:20:13,520
Speaker 2: change the story at all for you and a team?

462
00:20:13,960 --> 00:20:18,320
Speaker 11: No, inflation is going to move downwards, but it's not

463
00:20:18,640 --> 00:20:22,840
Speaker 11: going to get below the Fed's target, and more problematically,

464
00:20:22,960 --> 00:20:25,400
Speaker 11: what is the balance of risks in the later part

465
00:20:25,480 --> 00:20:27,680
Speaker 11: of this Here everything I've heard about in the last

466
00:20:27,720 --> 00:20:31,760
Speaker 11: twenty four hours. Oh, the CPI was marginally below consensus.

467
00:20:31,840 --> 00:20:32,840
Speaker 11: It's a game changer.

468
00:20:32,920 --> 00:20:35,120
Speaker 9: First of all, the data was not a massive game

469
00:20:35,240 --> 00:20:37,520
Speaker 9: changer in and of itself. But here's the issue.

470
00:20:37,600 --> 00:20:37,760
Speaker 4: John.

471
00:20:38,080 --> 00:20:40,720
Speaker 11: If we were just looking at a normal economic cycle,

472
00:20:40,840 --> 00:20:43,120
Speaker 11: that would be one thing. We'd say, Oh, the economy's

473
00:20:43,240 --> 00:20:46,000
Speaker 11: behaving like it's mid cycle. This is the trend in

474
00:20:46,119 --> 00:20:49,520
Speaker 11: jobs and inflation. But we know, we know that there

475
00:20:49,560 --> 00:20:52,520
Speaker 11: are these exogenous shocks that are going to disrupt the

476
00:20:52,600 --> 00:20:55,480
Speaker 11: cycle that we're currently in. We don't know the probability

477
00:20:55,600 --> 00:20:57,399
Speaker 11: and we don't know the size of them, but we

478
00:20:57,560 --> 00:21:00,280
Speaker 11: know that they are coming. So where we are in

479
00:21:00,359 --> 00:21:03,159
Speaker 11: December or January or February is far less important to

480
00:21:03,200 --> 00:21:05,800
Speaker 11: the FED call or the longer term market call than

481
00:21:05,840 --> 00:21:08,400
Speaker 11: anything we find out next week when President Trump takes

482
00:21:08,480 --> 00:21:10,480
Speaker 11: office and we start to get more of a sense

483
00:21:10,520 --> 00:21:12,760
Speaker 11: of the sequence of his policy, the size and the

484
00:21:12,840 --> 00:21:14,000
Speaker 11: scope of the policies ahead.

485
00:21:14,080 --> 00:21:16,439
Speaker 2: We've set a repeated on the show with guests with yourself,

486
00:21:16,640 --> 00:21:19,160
Speaker 2: the most important data point this month, perhaps this year,

487
00:21:19,520 --> 00:21:22,959
Speaker 2: is Monday, it's inauguration. When you think about sources of inflation,

488
00:21:23,119 --> 00:21:27,200
Speaker 2: we have this conversation, yes down the show labor, energy, goods, services,

489
00:21:27,960 --> 00:21:29,919
Speaker 2: where we sets up right now? Where do you think

490
00:21:29,960 --> 00:21:31,879
Speaker 2: we are most inflation prone when you start to think

491
00:21:31,920 --> 00:21:32,959
Speaker 2: about policy changes.

492
00:21:33,240 --> 00:21:35,879
Speaker 9: So the inflation story is actually fairly simple. Goods are

493
00:21:36,000 --> 00:21:37,440
Speaker 9: no longer going to be deflating.

494
00:21:37,640 --> 00:21:40,639
Speaker 11: We know that housing is short on supply, so that

495
00:21:40,840 --> 00:21:43,840
Speaker 11: oeer number is going to keep a floor underneath it.

496
00:21:44,040 --> 00:21:45,560
Speaker 11: And we got a heck of a ton of fiscal

497
00:21:45,600 --> 00:21:48,440
Speaker 11: spending and the lagged defects of prior fiscal spending. That's

498
00:21:48,480 --> 00:21:51,800
Speaker 11: going to keep services alive. The labor market just doesn't

499
00:21:51,840 --> 00:21:54,440
Speaker 11: have enough people. It'll have even fewer people moving forward.

500
00:21:54,640 --> 00:21:56,520
Speaker 9: So that's the state of play where we are now.

501
00:21:56,760 --> 00:21:58,720
Speaker 9: Now the challenge is some of the policies that we

502
00:21:58,880 --> 00:21:59,480
Speaker 9: know could.

503
00:21:59,320 --> 00:22:03,800
Speaker 11: Be coming forward word actually are disinflationary, things like deregulation

504
00:22:04,119 --> 00:22:07,680
Speaker 11: or any policies that help you increase productivity, But things

505
00:22:07,760 --> 00:22:13,320
Speaker 11: like tariffs and immigration reform, those policies actually will increase inflation.

506
00:22:13,600 --> 00:22:15,680
Speaker 11: And the magnitude depends on things like how does the

507
00:22:15,800 --> 00:22:18,840
Speaker 11: US dollar move and other factors surrounding it. So the

508
00:22:19,000 --> 00:22:22,200
Speaker 11: sequencing of effect. We've talked about this before, the sequencing.

509
00:22:22,280 --> 00:22:25,440
Speaker 11: Do we get the disinflationary ones first or the inflationary

510
00:22:25,520 --> 00:22:27,920
Speaker 11: ones next. That's going to be really important for twenty

511
00:22:28,000 --> 00:22:31,280
Speaker 11: twenty five. But looming over this more normal cycle that

512
00:22:31,359 --> 00:22:33,800
Speaker 11: we're entering for the FED is the threat of these

513
00:22:33,880 --> 00:22:36,560
Speaker 11: disruptors are coming through, and on balance we see them

514
00:22:36,600 --> 00:22:39,520
Speaker 11: as being more problematic for upsides to inflation than downsides.

515
00:22:39,600 --> 00:22:42,480
Speaker 5: Well, we know some number of FED officials take that

516
00:22:42,680 --> 00:22:45,080
Speaker 5: into account. How willing do you think the FED is

517
00:22:45,119 --> 00:22:48,000
Speaker 5: going to be to be not reactionary but be preemptive

518
00:22:48,080 --> 00:22:51,840
Speaker 5: when we understand some of the policies coming from Donald Trump, Well, historically.

519
00:22:51,480 --> 00:22:52,600
Speaker 1: They've told us we don't do that.

520
00:22:52,720 --> 00:22:55,560
Speaker 11: We wait for the actualized policy to come through, and

521
00:22:55,680 --> 00:22:57,960
Speaker 11: Sair Powell has been very clear we actually want to

522
00:22:58,000 --> 00:23:02,160
Speaker 11: see realized data and how terrifts filter through into the economy.

523
00:23:02,320 --> 00:23:04,680
Speaker 9: We're still learning. We got a little bit of experience.

524
00:23:04,760 --> 00:23:07,040
Speaker 11: You know, economists know a lot about washing machines from

525
00:23:07,119 --> 00:23:07,840
Speaker 11: twenty eighteen.

526
00:23:07,920 --> 00:23:09,840
Speaker 9: We know about steel and aluminum.

527
00:23:09,400 --> 00:23:11,879
Speaker 11: Tariffs, and we know that some of the currency can

528
00:23:11,960 --> 00:23:15,359
Speaker 11: actually provide an offset and how retaliatory Other countries are

529
00:23:15,440 --> 00:23:16,440
Speaker 11: also matters as well.

530
00:23:16,680 --> 00:23:18,399
Speaker 9: So there are too many factors when.

531
00:23:18,240 --> 00:23:20,960
Speaker 11: It comes to modeling how a tariff impacts inflation for

532
00:23:21,040 --> 00:23:22,360
Speaker 11: the FED to respond proactively.

533
00:23:22,600 --> 00:23:25,400
Speaker 9: But we've already heard them. We've already heard them through

534
00:23:25,440 --> 00:23:27,520
Speaker 9: their Balance of risks and the SEP.

535
00:23:27,480 --> 00:23:30,280
Speaker 11: Through some of them already incorporating that they know the

536
00:23:30,440 --> 00:23:32,920
Speaker 11: risk of a tariff is not that it creates deflation,

537
00:23:33,040 --> 00:23:36,880
Speaker 11: but that it creates inflation. Meanwhile, the labor market, it's

538
00:23:36,920 --> 00:23:39,480
Speaker 11: looking kind of tight, even though there are some particularities

539
00:23:39,640 --> 00:23:42,320
Speaker 11: like layoffs are very low, but hiring is also very low.

540
00:23:42,400 --> 00:23:45,359
Speaker 11: There's some really interesting things happening there. And this is

541
00:23:45,359 --> 00:23:47,280
Speaker 11: a FED that's going to be very aware the market

542
00:23:47,359 --> 00:23:49,000
Speaker 11: needs to get up on this, that this is going

543
00:23:49,040 --> 00:23:51,480
Speaker 11: to be a supply constrained labor market, so you're not

544
00:23:51,600 --> 00:23:54,479
Speaker 11: going to have a significant increase in the unemployment rate

545
00:23:54,640 --> 00:23:56,720
Speaker 11: even though there are may be some interesting factors under

546
00:23:56,720 --> 00:23:57,360
Speaker 11: the surface there.

547
00:23:57,480 --> 00:23:59,719
Speaker 6: Personnel is policy, and today we're going to hear from

548
00:24:00,040 --> 00:24:03,640
Speaker 6: key personnel from the Trump administration in coming to administration.

549
00:24:03,640 --> 00:24:05,320
Speaker 1: That'scott Bessting. What do you want to learn from him

550
00:24:05,359 --> 00:24:07,520
Speaker 1: as an economist, Well, I want.

551
00:24:07,400 --> 00:24:10,600
Speaker 11: To understand the magnitude around some of these themes. So

552
00:24:10,960 --> 00:24:14,320
Speaker 11: are we talking about things like twenty five percent across

553
00:24:14,359 --> 00:24:17,840
Speaker 11: the board tariffs or are we talking about selected industries?

554
00:24:18,000 --> 00:24:20,119
Speaker 11: And this is really important if you're trying to model

555
00:24:20,400 --> 00:24:22,320
Speaker 11: these types of developments, because we're trying to figure out

556
00:24:22,400 --> 00:24:24,280
Speaker 11: what are the primary industries that are hit and then

557
00:24:24,320 --> 00:24:27,119
Speaker 11: what are the secondary knockoffs. We're probably not going to

558
00:24:27,160 --> 00:24:29,840
Speaker 11: get that detailed policy, and this is the really core

559
00:24:29,920 --> 00:24:31,840
Speaker 11: component to the uncertainty tax.

560
00:24:31,720 --> 00:24:33,720
Speaker 9: That will weigh on the US in the next few months.

561
00:24:34,000 --> 00:24:36,320
Speaker 11: One thing that I do expect is a combination of

562
00:24:36,440 --> 00:24:39,720
Speaker 11: uncertainty really slowing a lot of decisions, but then also

563
00:24:39,840 --> 00:24:42,879
Speaker 11: some inventory hoarding. We saw that before, when you expect

564
00:24:42,920 --> 00:24:44,679
Speaker 11: the price of something to go up, or you're an

565
00:24:44,720 --> 00:24:47,560
Speaker 11: industry that suspects maybe I'm at risk here could actually

566
00:24:47,680 --> 00:24:51,040
Speaker 11: see inventory's rides. So there are so many underlying factors.

567
00:24:51,080 --> 00:24:54,400
Speaker 11: And what's so critical is these are not typical cyclical developments,

568
00:24:54,440 --> 00:24:58,159
Speaker 11: So your typical cyclical economic model is not helping you here.

569
00:24:58,240 --> 00:25:00,480
Speaker 11: You're making an excessive amount of a sumptions that.

570
00:25:00,480 --> 00:25:01,120
Speaker 9: Are coming through.

571
00:25:01,520 --> 00:25:03,159
Speaker 11: We have to do some element of that, and that's

572
00:25:03,200 --> 00:25:05,239
Speaker 11: why a lot of these base case forecasts that went

573
00:25:05,280 --> 00:25:08,719
Speaker 11: out in the twenty twenty five outlooks, including ours appropriate

574
00:25:08,880 --> 00:25:11,840
Speaker 11: modal forecasts, But to stay wetted to them right now,

575
00:25:12,000 --> 00:25:13,800
Speaker 11: I think is too dangerous just to.

576
00:25:13,800 --> 00:25:16,240
Speaker 5: Put a bow on this because the inflation, the stickiness

577
00:25:16,280 --> 00:25:17,679
Speaker 5: that we have seen a lot of it has been

578
00:25:17,720 --> 00:25:20,320
Speaker 5: because of demand that the consumer is still spending, the

579
00:25:20,440 --> 00:25:24,080
Speaker 5: labor market is still robust. Does that shift is what

580
00:25:24,160 --> 00:25:27,879
Speaker 5: you're describing a supply shock? Is that the form of

581
00:25:28,000 --> 00:25:29,960
Speaker 5: inflation that will take? And what does that mean for

582
00:25:30,040 --> 00:25:32,119
Speaker 5: the Fed's ability to fight it, in our ability to

583
00:25:32,160 --> 00:25:32,600
Speaker 5: cope with it?

584
00:25:32,920 --> 00:25:33,800
Speaker 9: Beautiful question.

585
00:25:33,960 --> 00:25:36,159
Speaker 11: And this is the most important macro theme for me

586
00:25:36,240 --> 00:25:38,840
Speaker 11: for twenty twenty five, and talked about a bo Let's

587
00:25:38,840 --> 00:25:41,880
Speaker 11: put ten bos on this. The US economy is moving

588
00:25:42,080 --> 00:25:44,639
Speaker 11: from a demand led economy, the one that we all

589
00:25:44,720 --> 00:25:47,680
Speaker 11: learned about in our economic textbooks, the one that created

590
00:25:47,760 --> 00:25:50,480
Speaker 11: a federal reserve that says inflation is too hot, let's

591
00:25:50,480 --> 00:25:53,080
Speaker 11: slow the economy with higher interest rates, to one that

592
00:25:53,320 --> 00:25:55,400
Speaker 11: is much more similar to a lot of the things

593
00:25:55,400 --> 00:25:58,080
Speaker 11: we experienced during COVID. A labor market that doesn't have

594
00:25:58,280 --> 00:26:01,720
Speaker 11: enough people, enough of the skills, qualifications to fill health,

595
00:26:02,080 --> 00:26:04,879
Speaker 11: enough of the immigration to fuel the retail, leisure, and

596
00:26:04,920 --> 00:26:08,200
Speaker 11: accommodation area. This is going to be important to labor,

597
00:26:08,280 --> 00:26:10,879
Speaker 11: and then on industry and manufacturing. It's not going to

598
00:26:10,920 --> 00:26:13,960
Speaker 11: be about can we get or do we want to

599
00:26:14,040 --> 00:26:16,440
Speaker 11: have those intermediary goods. It's going to be can we

600
00:26:16,600 --> 00:26:19,800
Speaker 11: actually access them? So some of the lessons from COVID

601
00:26:19,840 --> 00:26:22,040
Speaker 11: with different magnitudes are going to be very relevant here.

602
00:26:22,359 --> 00:26:24,359
Speaker 11: And what's really critical for us is how does the

603
00:26:24,440 --> 00:26:26,920
Speaker 11: Federal Reserve respond not just in the next three months

604
00:26:27,000 --> 00:26:29,040
Speaker 11: or six months, but in the coming years to an

605
00:26:29,080 --> 00:26:31,440
Speaker 11: economy that is more supply led and dare I say

606
00:26:31,640 --> 00:26:34,840
Speaker 11: less interest rate sensitive, little bit of an existential crisis

607
00:26:35,040 --> 00:26:37,600
Speaker 11: for central banks. I think we'll see as we go

608
00:26:37,720 --> 00:26:40,159
Speaker 11: along another area of uncertainty, not just what will the

609
00:26:40,280 --> 00:26:42,119
Speaker 11: data do, but how will the FED respond to it?

610
00:26:42,520 --> 00:26:44,359
Speaker 9: Lots of clouds and fog happening right now.

611
00:26:44,480 --> 00:26:46,040
Speaker 2: What do you think of how they've managed the message

612
00:26:46,040 --> 00:26:48,840
Speaker 2: over the previous two meetings around the incoming administration.

613
00:26:49,680 --> 00:26:52,919
Speaker 11: Well, the challenge is when I'm looking at a SEP

614
00:26:53,080 --> 00:26:55,440
Speaker 11: or I'm trying to understand the Fed's decision making function,

615
00:26:55,640 --> 00:26:57,560
Speaker 11: which her POW will explain to us, is that they're

616
00:26:57,600 --> 00:27:01,160
Speaker 11: all taking different approaches within the Federal so we don't

617
00:27:01,200 --> 00:27:03,280
Speaker 11: really have a lot of clarity there. One of the

618
00:27:03,359 --> 00:27:05,400
Speaker 11: challenges for the Federal Reserve is they've been very clear

619
00:27:05,480 --> 00:27:07,560
Speaker 11: we are data dependent. We want to see what the

620
00:27:07,640 --> 00:27:10,359
Speaker 11: data does month to month. So then you get these huge,

621
00:27:10,480 --> 00:27:13,800
Speaker 11: outsized moves around things like CPI because of a decimal

622
00:27:13,880 --> 00:27:16,520
Speaker 11: point off on the month over month, and then guess

623
00:27:16,560 --> 00:27:19,199
Speaker 11: what we get revisions. We find out that there are

624
00:27:19,320 --> 00:27:22,480
Speaker 11: seasonality distortions. Now we're going to go into January and

625
00:27:22,600 --> 00:27:25,960
Speaker 11: we have a massive weather event, a horrible tragedy in

626
00:27:26,000 --> 00:27:29,119
Speaker 11: California that's going to disrupt all my January data. So

627
00:27:29,640 --> 00:27:31,960
Speaker 11: there is a little bit of danger with the data

628
00:27:32,000 --> 00:27:36,040
Speaker 11: dependence comment in an era where we know seasonality revisions,

629
00:27:36,080 --> 00:27:39,000
Speaker 11: low response rates, and a myriad of other problems create

630
00:27:39,119 --> 00:27:40,640
Speaker 11: less clarity around the month to month.

631
00:27:41,400 --> 00:27:44,920
Speaker 2: This is the Bloomberg Sevenance podcast, bringing you the best

632
00:27:45,000 --> 00:27:48,280
Speaker 2: in markets, economics, an giopolitics. You can watch the show

633
00:27:48,359 --> 00:27:51,280
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634
00:27:51,440 --> 00:27:55,160
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635
00:27:55,359 --> 00:27:57,560
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636
00:27:57,600 --> 00:27:59,920
Speaker 2: Bloomberg Terminal and the Bloomberg Business Amp.

637
00:28:00,080 --> 00:28:00,560
Speaker 4: She to