WEBVTT - Esther George Talks Energy Shock, Rates

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news send back to our

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<v Speaker 1>top story. Surging oil prices sending bond your tire across

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<v Speaker 1>the globe. Investors raising bet central banks will keep rates

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<v Speaker 1>on hold. The former Kansas City Fed president es the George, writing,

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<v Speaker 1>with oil prices surging over one hundred dollars a barrel,

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<v Speaker 1>inflation is sure to move higher. The Fed will want

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<v Speaker 1>to look through this price pressure, but it will likely

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<v Speaker 1>stay their hand for entering rate cuts or entertaining red cuts.

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<v Speaker 1>The former Fed president joins us now for more Es, So,

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<v Speaker 1>welcome to the program. Let's just get to that statement

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<v Speaker 1>and your experience too. I always want to lean on that.

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<v Speaker 1>You lift the twenty two energy shark. Can you frame

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<v Speaker 1>for our audience the similarities the differences between this moment

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<v Speaker 1>and that one.

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<v Speaker 2>Well, good morning, Jonathan, Yeah. I think I think the

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<v Speaker 2>uncertainty that we've talked about for some time is one

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<v Speaker 2>of the characteristics here that we have to remember. We

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<v Speaker 2>have been relying heavily on a consumer that has faced

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<v Speaker 2>significant price shock coming out of the pandemic. This is

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<v Speaker 2>a consumer that has felt the impact of the tariffs,

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<v Speaker 2>and they also have felt the uncertainty associated with a

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<v Speaker 2>job market that has shifted significantly, and so when we

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<v Speaker 2>rely on the consumer, as we do here in the US,

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<v Speaker 2>that becomes a real focal point. I think for trying

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<v Speaker 2>to understand now we have added a new shock, this

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<v Speaker 2>gasoline price at the pump. We understand that diesel prices

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<v Speaker 2>will be affected, which of course will feed into the

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<v Speaker 2>cost of transportation and other things. And I think it

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<v Speaker 2>creates a real point not just of uncertainty, but I

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<v Speaker 2>think heightened risk around consumer spending and growth as we

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<v Speaker 2>look ahead.

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<v Speaker 1>When you were at the Federalserve through the twenty two shock,

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<v Speaker 1>household balance sheets arguably much stronger and the labor market

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<v Speaker 1>was much tighter. Do you think differently about how this

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<v Speaker 1>price shock or the energy market will work its way

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<v Speaker 1>through the economy.

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<v Speaker 2>Yeah, I think you hear a lot about the K

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<v Speaker 2>shaped economy, and I think that will come into the

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<v Speaker 2>four now. We have really been relying on a group

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<v Speaker 2>of consumers that can power through this. But you can

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<v Speaker 2>only stress weaker household balance sheets that have again had

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<v Speaker 2>the benefit of having jobs. That has been really I

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<v Speaker 2>think one of the tailwinds here. But there is a

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<v Speaker 2>breaking point, I think, and so I think the FED

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<v Speaker 2>will have to be particularly focused on thinking about how

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<v Speaker 2>that consumer is going to be positioned today to be

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<v Speaker 2>able to look through this kind of additional price pressure.

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<v Speaker 3>As so, they could go one or two ways. On

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<v Speaker 3>one hand, you can make an argument for easing policy

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<v Speaker 3>to try to give lower income consumers a better scenario,

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<v Speaker 3>a better backdrop to meet this price shock. On the

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<v Speaker 3>other hand, you could say the FED has a role

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<v Speaker 3>to play to combat inflation. Which side of the equation

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<v Speaker 3>do you fit on?

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<v Speaker 1>Well?

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<v Speaker 2>The FED has been focusing on the labor market and

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<v Speaker 2>on weakness at I think the risk of inflation even

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<v Speaker 2>before this oil price shock. Now I think the FED

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<v Speaker 2>and you hear them increasingly talking about the risk of inflation.

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<v Speaker 2>They have allowed it to extend out for a period

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<v Speaker 2>of time. That now puts them in a very very

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<v Speaker 2>difficult position, I think, and understanding how they're going to

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<v Speaker 2>weigh their policy risk, whether they continue to think they

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<v Speaker 2>are as well balanced coming into this March meeting, I

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<v Speaker 2>think is going to be something to listen for here,

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<v Speaker 2>because you are going to have headline inflation. For sure,

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<v Speaker 2>we'll be getting more numbers than this week to see that.

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<v Speaker 2>And I think the calculus around keeping those inflation expectations

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<v Speaker 2>in the long run anchored is going to be a

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<v Speaker 2>point worth talking about rates.

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<v Speaker 3>Traders are pricing in rate hikes over at the ECB

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<v Speaker 3>as well as the Bank of England. Do you think

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<v Speaker 3>that as this progresses, if it does continue for a

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<v Speaker 3>longer period of time, that that's going to be a

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<v Speaker 3>scenario that's reflected in how the Federal Reserve is being priced.

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<v Speaker 2>Well. I think obviously a little bit different for the

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<v Speaker 2>US to think about that in the FED as it

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<v Speaker 2>contemplates its updated dot plots, But I do think it

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<v Speaker 2>stays their hand on being able to suggest that they

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<v Speaker 2>are looking to rate cuts, but maybe in a pause mode.

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<v Speaker 2>I think this kind of environment will really remind them

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<v Speaker 2>that inflation target has to be credible and they have

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<v Speaker 2>to keep focused on that, even if their tools right

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<v Speaker 2>now are in conflict. They are looking at a job

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<v Speaker 2>market that may be stable but has shown signs of weakness,

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<v Speaker 2>while they have been looking at inflation that continues not

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<v Speaker 2>only to be persistent, but as we've been talking about,

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<v Speaker 2>is now going to show some upward pressure.

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<v Speaker 1>Would you describe this lave and market as stable?

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<v Speaker 2>I consider it stable in the sense when you step

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<v Speaker 2>back and look at the unemployment rate, which is our

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<v Speaker 2>best gauge. I think of how that labor market looks,

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<v Speaker 2>it does mask what is underneath that surface of a

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<v Speaker 2>lot of moving parts. I think we're beginning to see

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<v Speaker 2>the real impact of some of the immigration policy hits here.

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<v Speaker 2>We're beginning to see the uncertainty, I would argue, play

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<v Speaker 2>out where businesses are happy to hire for positions they

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<v Speaker 2>feel confident about, but they're not going to move hard

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<v Speaker 2>and fast relative to the growth levels that we've seen.

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<v Speaker 2>So I think it's a tentative labor market in my view,

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<v Speaker 2>even though we continue to enjoy a relatively low unemployment rate.

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<v Speaker 1>That's the George always appreciate your time, thanks for jumping

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<v Speaker 1>on for us. The former Kansas City Fed president, an

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<v Speaker 1>individual who lived the Nagy Shelka twenty two at the

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<v Speaker 1>Federal Reserve talking about this Federal Reserve and a meeting

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<v Speaker 1>that takes place on the eighteenth. That's a week away

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<v Speaker 1>next Wednesday. That feels like a lifetime away. And if

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<v Speaker 1>this conflict is still on going with no sign of

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<v Speaker 1>an off ramp or the escalation, all bets are off

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<v Speaker 1>for the next nine months.