Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The bond market especially fascinating in the last twenty four
Speaker 2: hours in the aftermath of the first FED decision made
Speaker 2: under the new chair Kevin Walsh. The market clearly was
Speaker 2: expecting something a little bit more dubbish than what it received,
Speaker 2: in the form of a dot plot in which about
Speaker 2: half of the members of the FMC suggested they would
Speaker 2: like to see or expect to see a rate hike
Speaker 2: this year. That's why we saw the two year yield
Speaker 2: yesterday jump to the highest level since April of twenty
Speaker 2: twenty five. But of course, as Charlie mentioned, we are
Speaker 2: seeing yields a bit lower today, including on the two year,
Speaker 2: by about three basis points. Of course, as I reference
Speaker 2: that dot plot we got yesterday, Kevin worsh himself did
Speaker 2: not contribute a dot as we know, and as he
Speaker 2: discussed in the press conference, he isn't really a fan
Speaker 2: of the FED providing forward guidance. He also seems to
Speaker 2: suggest that financial markets shouldn't need forward guidance from the FED.
Speaker 2: Maybe the guiding should be going in the other direction.
Speaker 2: Let's remind ourselves of what the chairman said at the
Speaker 2: press conference yesterday.
Speaker 1: The more that markets are paying attention to what's happening
Speaker 1: in the real economy, deciding what's good data and what's
Speaker 1: less good data, the more financial markets can price what
Speaker 1: they believe is the most likely. Financial market prices are
Speaker 1: probably the most important source of information to guide central bankers.
Speaker 1: But when all the financial markets are doing is reflecting
Speaker 1: back what we've said, then we're taking the most important
Speaker 1: source of information and we're being blind to it.
Speaker 2: So let's talk to one for central banker. The former
Speaker 2: vice chair of the Federal Reserve in fact, and the
Speaker 2: former director of the National Economic Council under the Biden administration,
Speaker 2: Lael Brainerd is joining us now on Bloomberg TV and radio.
Speaker 2: She's now Distinguished Fellow at the Georgetown Saras Center for
Speaker 2: Financial Markets and Policy. Welcome back to Bloomberg. Director. It's
Speaker 2: good to see you. I wonder what you made overall
Speaker 2: of Kevin worsh and his first press conference yesterday.
Speaker 3: Did he surprise you well, it was a very interesting
Speaker 3: press conference. He stayed true to his vow not to
Speaker 3: really communicate his own views about policy or any sense
Speaker 3: of where policy might be going. The result of that
Speaker 3: was he really let the summary of economic projections do
Speaker 3: all the talking, and I think the markets really reacted
Speaker 3: because you had half of those projections didn't include his projection,
Speaker 3: but half of those projections saying that inflation is going
Speaker 3: to be a lot higher this year, ending the year
Speaker 3: at three point three percent core, and that would warrant
Speaker 3: one or more rate hikes, and that's why you saw
Speaker 3: that big move in the two year. The other thing
Speaker 3: that was notable is that both in the statement and
Speaker 3: in his discussion, he really emphasized price stability and made
Speaker 3: it sound like a one mandate central banks. So those
Speaker 3: were the things that I think moved the direction of
Speaker 3: the market in a very hawk as shift. That's not
Speaker 3: actually what his comments, the sort of subtext suggested, but
Speaker 3: those were the main messages.
Speaker 2: Well, so talk about his comments on what we just
Speaker 2: heard him say about financial markets receiving guidance from the
Speaker 2: FED in particular, I wonder if you have sympathy with
Speaker 2: the view that maybe the markets should be the one
Speaker 2: interpreting data on their own rather than interpreting the Fed's
Speaker 2: interpretation of said data.
Speaker 3: Well, I think the difficulty here is that the market
Speaker 3: needs to and the public need to understand not forward
Speaker 3: guidance in the sense that I think he is objecting to,
Speaker 3: which is suggesting, here's what our action will be if
Speaker 3: inflation and unemployment come in at these levels. But at
Speaker 3: least a sense of how the Fed's policy is seeing
Speaker 3: current inflation unemployment, and that gives both the markets and
Speaker 3: the public a sense of where policy might be heading.
Speaker 3: So what was interesting yesterday is he really didn't even
Speaker 3: want to provide a sense of what a lot of
Speaker 3: people call a reaction function, but his own biases seemed
Speaker 3: to be a sort of subtext in some of his comments.
Speaker 3: He noted that half of the people who did submit
Speaker 3: projections didn't see a rate hike this year. He said
Speaker 3: there was no cruel choice between inflation and the labor market.
Speaker 3: So there were a few things that he said that
Speaker 3: might have pushed back in the other direction.
Speaker 2: Well, and of course, as we consider what it said
Speaker 2: or what will be said going forward, we know there's
Speaker 2: going to be a whole task force on communications, There's
Speaker 2: going to be a lot of tax forces under this
Speaker 2: new chairman. Has he asked you to sit on any
Speaker 2: of them? He said, was still making calls.
Speaker 1: No.
Speaker 3: I think what was interesting about the task forces we
Speaker 3: knew there would be a review of balance sheet policy,
Speaker 3: we knew there would be a review of communications. But
Speaker 3: I think what was interesting is the task forces on
Speaker 3: data sources, the task forces on the inflation framework, and
Speaker 3: the task forces on productivity all could be ways that,
Speaker 3: even while emphasizing price stability, he tries to move the
Speaker 3: committee in a more dubvish direction. So those were the
Speaker 3: areas that I think we just don't know where he's headed.
Speaker 3: But what we do know is that half of the
Speaker 3: committee is very worried about inflation, and that is consistent
Speaker 3: with the data we've seen.
Speaker 2: So let's talk about that inflation framework. Because he was
Speaker 2: asked specifically whether the FED is going to be reconsidering
Speaker 2: the two percent target, and while he reiterated he's more
Speaker 2: focused on the two not what comes after the decimal point,
Speaker 2: he also said he sees no reason to change from
Speaker 2: two percent right now. Do you anticipate he could get there?
Speaker 3: So what was interesting is that there are a number
Speaker 3: of things he said which suggest that he may not
Speaker 3: wish to stick with core PCEE as the inflation target.
Speaker 3: He's talked about trim mean inflation when he is now
Speaker 3: referencing a task force on the inflation framework that two
Speaker 3: provides some wiggle room for potentially moving away from getting
Speaker 3: core PCE back down to two percent, and his comments
Speaker 3: on what's on the left side of the decimal point
Speaker 3: suggested that anything from two point five down to two
Speaker 3: might be acceptable. So all of those gave some suggestion
Speaker 3: that he might be looking for wiggle room. And that
Speaker 3: is not what we saw from half of the members
Speaker 3: who submitted projections where they saw inflation core inflation still
Speaker 3: at three point three percent at the end of this year,
Speaker 3: sixth year in a row of inflation well above target,
Speaker 3: new inflation pressures coming not just from oil but now
Speaker 3: from AI, and saw the case for a right hike
Speaker 3: or more.
Speaker 2: Well so on those inflation pressures. We obviously now have
Speaker 2: at least the beginnings of the reopening of the straight
Speaker 2: of wour moves via this memorandum of understanding between the
Speaker 2: US and Iran. The US naval wil Kate is now
Speaker 2: officially over, and Iran is supposed to allow the toll
Speaker 2: free of transit of vessels over the next sixty days.
Speaker 2: How quickly is that able to translate into lower energy
Speaker 2: prices that we have seen bleeding into other core inflation metrics.
Speaker 3: So I think the question is when will consumers really
Speaker 3: see it at the pump, because that has a huge
Speaker 3: effect on consumers perceptions of the economy, and right now
Speaker 3: consumer sentiment is at rock bottom because they are so
Speaker 3: unhappy with high inflation. It will take some time buffers
Speaker 3: have really been used up during this transitional period. It
Speaker 3: will take time for production to come back online, for
Speaker 3: that strait of horror moves to fully clear, and so
Speaker 3: how much it still is going to move and lift
Speaker 3: core inflation. I think there's still some sense that core
Speaker 3: inflation could be given an uplift from oil for at
Speaker 3: least several months. And of course we now have inflation
Speaker 3: coming from AI in electronics. We heard Apple's announcement, and
Speaker 3: so these are successive waves of inflation that are really
Speaker 3: likely to keep core inflation high through the end of
Speaker 3: the year.
Speaker 2: I do want to ask you about AI, but the
Speaker 2: way you're talking about inflation right now lends me to
Speaker 2: believe you might have been one of those dots that
Speaker 2: sees a rate hike by the end of this year.
Speaker 1: Yesterday? Is that the case?
Speaker 3: So I believe that conditions have really changed. Then we
Speaker 3: saw when the FEDS started doing its easing cycle back
Speaker 3: in the fall. We've seen a tightening in the labor market.
Speaker 3: But what is really noticeable is that core inflation was
Speaker 3: actually rising before the oil shock, and we are now
Speaker 3: seeing new sources of core inflation from the AI data boom.
Speaker 3: And that's on the demand side. And so for all
Speaker 3: those reasons, given that we've had five years of above
Speaker 3: two percent inflation, I would probably be quite cautious about
Speaker 3: insisting that the Federal Reserve has to get inflation back
Speaker 3: to two percent.
Speaker 2: So on AI. And we are actually going to speak
Speaker 2: with the chair of firk Up next on this program
Speaker 2: about data centers connecting to the grid what it will
Speaker 2: all mean for rate payers. Are you in the camp
Speaker 2: that sees AI firmly as inflationary because of higher energy
Speaker 2: costs because of the actual infrastructure build out we are seeing,
Speaker 2: or that it eventually will be disinflationary because of increased productivity.
Speaker 2: Worsh's answer yesterday was I have a task force for that.
Speaker 3: So both I think are likely to be the case.
Speaker 3: It's clear today that AI is pulling forward demand for
Speaker 3: this just incredible data center build out, levels of investment
Speaker 3: that are equal to total fixed investment non residential in
Speaker 3: past years devoted to data centers, and of course that
Speaker 3: means chips, and those are chips that would otherwise have
Speaker 3: been going into electronics and other parts of the economy.
Speaker 3: So because it's really pulling forward demand, we're seeing a
Speaker 3: near term inflationary impulse and that is likely to lift
Speaker 3: core inflation on the back half of this year. That's
Speaker 3: fully consistent with AI becoming a disinflationary force as business
Speaker 3: models really transform and the broader economy starts to really
Speaker 3: become more productive as a result of using generative AI.
Speaker 2: In our final thirty seconds here, we're also obviously seeing
Speaker 2: AI help bolster stock market and therefore the wealth of
Speaker 2: people who find themselves at the upper end of the K.
Speaker 2: What happens if these market gains start to dissipate at some.
Speaker 3: Point, Well, AI is really driving the stock market. There's
Speaker 3: a lot of credit in the AI space, there's a
Speaker 3: lot of leverage, and so if we see a really
Speaker 3: big piece of data that suggests that revenues are not
Speaker 3: going to justify these valuations, you could see a pretty
Speaker 3: big correction