WEBVTT - Match of the Day 0:00:03.880 --> 0:00:07.240 Welcome to Bloomberg Opinion. I'm Bonnie Quinn. FED Chair Jerome 0:00:07.280 --> 0:00:10.319 Powell announced a fifty basis point move higher in rates 0:00:10.400 --> 0:00:12.520 this week. We have raised interest rates by four and 0:00:12.560 --> 0:00:16.240 a quarter percentage points this year. We continue to anticipate 0:00:16.239 --> 0:00:18.599 that ongoing increases in the target range for the federal 0:00:18.640 --> 0:00:21.560 funds rate will be appropriate in order to attain a 0:00:21.600 --> 0:00:25.560 stance of monetary policy that is sufficiently restrictive to return 0:00:25.600 --> 0:00:28.400 inflation to two percent over time. A week where markets 0:00:28.480 --> 0:00:32.200 also saw a more benign CPI report, it showed headline 0:00:32.240 --> 0:00:35.760 inflation slowing, albeit still at a seven point one percent rate. 0:00:36.400 --> 0:00:39.400 Markets went on a little ramble during Powell's news conferences 0:00:39.440 --> 0:00:42.680 has become the pattern. I asked nuomerg Opinions Jonathan Levin 0:00:42.840 --> 0:00:45.880 to parse the f O m C statement and signals. 0:00:46.280 --> 0:00:50.360 So Jonathan, the Fed chair seemed extraordinarily hawkish throughout the statement, 0:00:50.360 --> 0:00:52.800 but then the market seized on what the potential for 0:00:52.880 --> 0:00:56.600 a change in the mandate. Perhaps yeah, I mean, I think, 0:00:56.600 --> 0:00:58.720 to be fair, my take is that he really didn't 0:00:58.800 --> 0:01:01.880 change much. The markets tried to change without him in 0:01:01.920 --> 0:01:05.240 the dovish tens, right, and so what we saw at 0:01:05.280 --> 0:01:08.000 the outset was first and foremost. They come out with 0:01:08.080 --> 0:01:10.319 this statement, and if you want evidence that they really 0:01:10.360 --> 0:01:13.200 didn't change at all, just take a look at the statement. 0:01:13.240 --> 0:01:16.360 They didn't change a word. Actually, to be more precise, 0:01:16.440 --> 0:01:20.080 they changed two words, which for our purposes were completely 0:01:20.160 --> 0:01:23.839 immaterial in terms of the broader inflation fight. The press 0:01:23.840 --> 0:01:26.880 conference starts, you, uh, you get a little bit of 0:01:26.920 --> 0:01:30.639 a sense of reality seeping in. There was that moment 0:01:30.680 --> 0:01:33.720 where the chair came out and said, we think we're 0:01:33.720 --> 0:01:37.680 getting close to the level of restrictive or sufficiently restrictive, 0:01:38.000 --> 0:01:41.039 and you did see stocks come back for a little bit. 0:01:41.319 --> 0:01:43.920 But the big takeaway here is the market tried to 0:01:43.959 --> 0:01:47.360 get optimistic after this cp I. I gotta say I 0:01:47.400 --> 0:01:51.120 was feeling pretty optimistic after the c p I. But 0:01:51.480 --> 0:01:53.960 the story is we've done a complete round trip. We're 0:01:53.960 --> 0:01:56.120 exactly back where we were on Monday, as if the 0:01:56.160 --> 0:01:58.640 CPI had never happened. You get that in a minute, hopefully. 0:01:58.640 --> 0:02:00.280 But Preston wants to talk to you about the dots 0:02:00.400 --> 0:02:03.040 to some real economic projections. What did it tell you, 0:02:03.120 --> 0:02:05.720 because it does seem like there's a lot of let's 0:02:05.760 --> 0:02:09.040 call it unanimity in the very near future, but really 0:02:09.120 --> 0:02:12.200 none as you go out further. Yeah, it's interesting. So 0:02:12.560 --> 0:02:15.520 I think in terms of three that the doubts are 0:02:15.560 --> 0:02:19.240 not particularly surprising. A very simple rule of thumb in 0:02:19.320 --> 0:02:22.200 terms of how I think many on the committee are 0:02:22.280 --> 0:02:27.240 sort of thinking about what is sufficiently restrictive is very simple. 0:02:27.280 --> 0:02:30.160 They're looking at where they think we're PC is going 0:02:30.200 --> 0:02:33.360 to be, and they're looking at getting a real rate 0:02:33.400 --> 0:02:36.160 on the Fed funds rate of something like one point 0:02:36.200 --> 0:02:39.360 five one point six percent above that. So that's been 0:02:39.440 --> 0:02:42.520 sort of consistent. Actually, if you look at where we 0:02:42.520 --> 0:02:45.680 were on the September step, they were also looking to 0:02:45.760 --> 0:02:48.360 get to a real rate of about one point five 0:02:48.440 --> 0:02:51.320 percent on the Fed funds for twenty three. The only 0:02:51.360 --> 0:02:55.760 thing that's changed is that those inflation expectations got notched 0:02:55.840 --> 0:02:59.720 up a little bit. Is really interesting, and it shows 0:03:00.000 --> 0:03:02.800 a complicated time this is, and of course how difficult 0:03:02.800 --> 0:03:05.639 and complex it is to forecast in an environment like this, 0:03:06.080 --> 0:03:10.320 because the dispersion going off memory is really all over 0:03:10.360 --> 0:03:13.000 the place. On those on those projections, you're looking at 0:03:13.000 --> 0:03:15.760 a spread of like two percentage points, which you know, 0:03:15.880 --> 0:03:18.840 frankly is huge, huge, and it's not even that far out. 0:03:18.880 --> 0:03:22.320 We're only talking about another twelve months plus. So policymakers 0:03:22.440 --> 0:03:25.440 right now projecting rates when next year at five that's 0:03:25.480 --> 0:03:28.000 the media and forecast before being cut to four point 0:03:28.000 --> 0:03:32.960 one four, that's still higher than previously indicated. How close 0:03:33.000 --> 0:03:36.920 are we too sticky invlation expectations? Yeah, I think the 0:03:36.960 --> 0:03:41.640 Brookings Institution speech from Powell last month was very important 0:03:41.680 --> 0:03:45.560 in that he essentially broke inflation down into three pillars. 0:03:46.120 --> 0:03:48.840 Actually I saw four pillars right, So number one he 0:03:48.880 --> 0:03:52.240 wants to see that the economy is going below potential. 0:03:52.560 --> 0:03:55.360 Number two he wants to see those core goods prices 0:03:55.440 --> 0:03:58.400 coming down, and he's actually getting that right. A lot 0:03:58.440 --> 0:04:02.400 of the supply chains have become unclogged, and we're not 0:04:02.440 --> 0:04:06.680 just getting core goods this inflation. We're getting core goods deflation. 0:04:06.720 --> 0:04:09.400 If you look at the past couple of prints. Housing 0:04:09.560 --> 0:04:11.840 is a little bit tricky. There are all these funky 0:04:11.880 --> 0:04:15.040 methodological things going on here, but it's clear from pal 0:04:15.240 --> 0:04:19.000 zone remarks that he expects housing to come in based 0:04:19.040 --> 0:04:22.440 on the forward looking indicators on like market rents and 0:04:22.480 --> 0:04:25.760 so forth. So it all really comes back, at least 0:04:25.800 --> 0:04:30.359 for PAL to this sector of core services and especially 0:04:30.440 --> 0:04:35.720 core services X shelter and PAL seems very much convinced 0:04:35.880 --> 0:04:39.960 that that's just going to keep chugging along unless you're 0:04:40.000 --> 0:04:43.000 able to do something about this tightness in the labor market. 0:04:43.440 --> 0:04:46.400 If you go back a few big reports before this, 0:04:46.520 --> 0:04:49.480 to the last jobs report, there was a ton of 0:04:49.560 --> 0:04:53.360 debate about how to read the latest print on average 0:04:53.400 --> 0:04:57.720 hourly earnings, and I totally get that average hourly earnings 0:04:57.760 --> 0:05:02.080 can be particularly volatile. There can be some questions about 0:05:02.160 --> 0:05:06.680 whether the makeup of that indicator is representative, so absolutely 0:05:06.680 --> 0:05:09.880 take that with a grain of salt. However, we've also 0:05:09.960 --> 0:05:14.040 seen previous months revised up on the average hourly earnings, 0:05:14.240 --> 0:05:17.000 So even if you're sort of generous in your interpretation, 0:05:17.120 --> 0:05:19.680 we have trend wage growth in this country of about 0:05:19.760 --> 0:05:22.960 five and there's no way that we're going to see 0:05:23.000 --> 0:05:26.040 the Fed get comfortable with that until it looks something 0:05:26.080 --> 0:05:28.280 more like three and a half percent. The forecast for 0:05:28.360 --> 0:05:31.320 unemployment is a rise of point nine percent and then 0:05:31.400 --> 0:05:34.560 GDP growth of point five percent. Does that seem like 0:05:34.600 --> 0:05:38.040 recessionary territory to you. Yeah, it's really tricky. I mean, 0:05:38.160 --> 0:05:42.960 I think ultimately, an interesting thing the chair said was, look, 0:05:43.120 --> 0:05:45.160 a lot of analysts, a lot of economists think that 0:05:45.240 --> 0:05:48.320 the natural rate of unemployment has moved up this atmosphere. 0:05:48.400 --> 0:05:51.880 So what you're seeing in the SEP is not necessarily 0:05:52.200 --> 0:05:55.800 an indication that we're expecting disaster, but better said, that 0:05:55.880 --> 0:05:59.640 people are expecting the israels to converge with a rate 0:05:59.640 --> 0:06:02.880 of on employment that people actually think is sustainable and 0:06:02.960 --> 0:06:08.200 non inflationary. In practice, we all know that unemployment tends 0:06:08.240 --> 0:06:12.640 to snowball. It rarely moves up in uh tiny increments. 0:06:12.680 --> 0:06:17.000 This is of course the famous some rule um and 0:06:17.279 --> 0:06:20.600 so you know, it would be a huge historic anomaly 0:06:20.800 --> 0:06:23.760 for the FED to be able to thread this needle 0:06:23.880 --> 0:06:27.479 and move unemployment up just a little bit without causing 0:06:27.520 --> 0:06:30.039 things to go off the rails and cause an honest 0:06:30.040 --> 0:06:32.520 to goodness recession. Knew. I just Ban Emmons has pointed 0:06:32.520 --> 0:06:34.520 out that the real FED funds rate, so the rate 0:06:34.560 --> 0:06:38.280 adjusted for core pc e X shelter, is just now 0:06:38.440 --> 0:06:41.640 at zero percent. So FED policy has just got restrictive, 0:06:41.920 --> 0:06:44.680 but not restrictive enough. What was your feeling on how 0:06:44.720 --> 0:06:48.040 restrictive power things policy is right now? Yeah, I mean 0:06:48.279 --> 0:06:51.279 it totally depends if I'm just going off of said 0:06:51.320 --> 0:06:54.240 funds for end of two. In other words, where we 0:06:54.360 --> 0:06:59.000 just got to versus where the committee think core PC 0:07:00.320 --> 0:07:03.440 and the year. In other words, the core PC print 0:07:03.480 --> 0:07:07.440 that we get in January, the implication is actually that 0:07:07.720 --> 0:07:10.720 the real FED funds rate might be slightly negative. So 0:07:10.840 --> 0:07:14.240 there's no question on a historic basis that we're just 0:07:14.400 --> 0:07:18.440 now getting to the territory of restrictive and you know, 0:07:18.600 --> 0:07:21.679 I expect that that is very much what is behind 0:07:21.840 --> 0:07:25.120 this attitude of the Committee to keep on going. I 0:07:25.160 --> 0:07:28.000 think what we heard from pal is that there's no 0:07:28.080 --> 0:07:31.880 indication unless they really get some shocking data in the 0:07:31.920 --> 0:07:34.040 next month or so, that they're not going to hike 0:07:34.080 --> 0:07:36.840 again when they meet for the first meeting in February, 0:07:36.960 --> 0:07:39.760 and then consensus is that they'll keep on going with 0:07:39.840 --> 0:07:41.800 at least one or two more. So what you're thinking, 0:07:41.840 --> 0:07:43.640 haven't listened to everything in Jonathan, Do we see another 0:07:43.680 --> 0:07:46.120 fifty and then twenty five or maybe we're already at 0:07:46.160 --> 0:07:48.520 twenty five and what will we plateau at next year 0:07:48.640 --> 0:07:51.200 for the rest of the year, presumably, you know, I 0:07:51.200 --> 0:07:54.560 don't think that this really changes the base case for 0:07:54.600 --> 0:07:57.240 a lot of people. As I said, I think if 0:07:57.280 --> 0:08:00.120 the FED got together and strategized and they said, what 0:08:00.240 --> 0:08:02.560 is the one message that we want to put out here. 0:08:02.760 --> 0:08:05.920 I think that that message was probably consistency, right, So 0:08:06.000 --> 0:08:08.600 if you're taking the FED at their word, you probably 0:08:08.640 --> 0:08:12.400 aren't going back to the drawing board and completely rethinking 0:08:12.600 --> 0:08:16.080 your path for the FED funds. I think our own 0:08:16.120 --> 0:08:20.240 team at Bloomberg Economics and along has nailed this. Ever 0:08:20.320 --> 0:08:23.520 since the summer, they've been calling for a five percent 0:08:23.680 --> 0:08:26.400 terminal rate, and that looks like what we're on pace for. 0:08:26.680 --> 0:08:29.520 You know, it could be five point to five at 0:08:29.520 --> 0:08:33.400 the upper extreme. If everything goes great, maybe they just 0:08:33.559 --> 0:08:36.840 do another twenty five basis points and they stopped, so 0:08:36.960 --> 0:08:40.640 four point seven five. But you know, we're really debating 0:08:40.840 --> 0:08:45.600 essentially small increments here compared to where we've come from. Yeah, 0:08:45.720 --> 0:08:48.760 that's for sure. John Authors used the word reassuring about 0:08:48.760 --> 0:08:52.280 the CPI report. Is that what it was to you? Reassuring? Yeah? 0:08:52.360 --> 0:08:54.920 I do think it was reassuring. I mean, you know, 0:08:55.000 --> 0:08:57.440 as I say, I was encouraged by that. I was 0:08:57.480 --> 0:09:00.720 clearly more encouraged than the FED was. But understand their 0:09:00.800 --> 0:09:03.120 note of caution. I think that they are right that 0:09:03.280 --> 0:09:05.880 the main thing that we have to be focusing on 0:09:06.120 --> 0:09:11.920 here is core services X shelter and look, where is 0:09:12.000 --> 0:09:16.160 that the move in core services x shelter in the 0:09:16.240 --> 0:09:21.040 most recent report implies an annualized pace of just one 0:09:21.120 --> 0:09:24.160 point five per cent, But that was one report. I'm 0:09:24.160 --> 0:09:28.840 extrapolating annualizing from one report. If you smooth out the 0:09:28.960 --> 0:09:32.320 three months average, we're at a trend pace in that 0:09:32.440 --> 0:09:36.720 particular category of around five. So that's clearly not going 0:09:36.760 --> 0:09:39.520 to be there yet. For Jerome Powell, if you believe 0:09:39.600 --> 0:09:43.760 that five is the real rate, that's not really moving down. 0:09:43.960 --> 0:09:47.800 It's sort of moving sideways since this summer, and he's 0:09:47.800 --> 0:09:49.680 going to want to see some real, honest to goodness 0:09:49.720 --> 0:09:53.320 directionality in that particular metric. Yes. In response to a 0:09:53.400 --> 0:09:57.840 question about the two average inflatient Monday's Powell sort of 0:09:57.840 --> 0:10:00.120 brushed it away, but then he mentioned that maybe there 0:10:00.160 --> 0:10:02.080 might be a longer term goal about looking at this. 0:10:02.600 --> 0:10:04.520 Did he mean that, is there the potential for the 0:10:04.520 --> 0:10:06.600 Fed to start looking at whether an average to percent 0:10:06.600 --> 0:10:10.040 inflation rate should be their mandate? I think there is. 0:10:10.320 --> 0:10:12.640 I don't think that he should have answered that question 0:10:12.679 --> 0:10:15.240 in the way that he did. I think he sort 0:10:15.280 --> 0:10:18.920 of tried to correct himself subsequently, and I think that 0:10:18.920 --> 0:10:22.280 that was the right thing to do. The bottom line is, yes, 0:10:22.400 --> 0:10:25.240 We all know that two is just a number. It's 0:10:25.240 --> 0:10:29.040 a completely arbitrary number. There is nothing magical about two 0:10:29.040 --> 0:10:33.840 percent inflation on the PC. But one thing is for sure. 0:10:34.160 --> 0:10:38.280 If this inflation fight is all about maintaining credibility, we 0:10:38.360 --> 0:10:41.040 can't be moving the ball in the middle of this fight. 0:10:41.120 --> 0:10:43.079 And I think that that is a message that Jerome 0:10:43.120 --> 0:10:45.240 pal is trying to convey, and he was right to 0:10:45.240 --> 0:10:49.440 do so. Bloomberg Opinions Jonathan Livin stay tuned a reaction 0:10:49.480 --> 0:10:52.200 to the week next from Opinions, John als Or, Is 0:10:52.280 --> 0:10:55.960 this is Bloomberg Opinion? You're listening to Bloomberg Opinion? I'm 0:10:56.040 --> 0:10:58.760 Vonnie Quinn. Well, the markets were on red alert this 0:10:58.800 --> 0:11:01.640 week for the CPI and lation data, followed by an 0:11:01.679 --> 0:11:04.640 f o MC decision which delivered a slowdown and interest 0:11:04.760 --> 0:11:08.920 rate increases and many questions for Q one historical record 0:11:08.960 --> 0:11:13.040 cautions strongly against prematurely loosening policy. We will stay the 0:11:13.080 --> 0:11:15.920 course until the job is done. Markets and the Fed 0:11:16.000 --> 0:11:19.160 locking horns. It seems I spoke with Bloomberg Opinions John 0:11:19.160 --> 0:11:21.719 Authors for some perspective. We got the FED decision the 0:11:21.760 --> 0:11:24.040 final one of the year. You wrote a column today 0:11:24.080 --> 0:11:26.760 Investors aren't supposed to fight the FED, but the conflict 0:11:26.800 --> 0:11:29.360 remains intense, and it really was quite stunning the market 0:11:29.360 --> 0:11:32.240 reaction yesterday. Powell came out and literally every single sentence 0:11:32.280 --> 0:11:36.080 and his statement was hawkish. That said, if you analyzed 0:11:36.120 --> 0:11:39.760 it really carefully, you could find a few places where 0:11:39.840 --> 0:11:43.000 if he really wanted to be more aggressive, he could 0:11:43.000 --> 0:11:48.000 have been. And I guess there was a lot of 0:11:48.120 --> 0:11:52.800 wishful thinking involved as well. People we're looking for weakness, 0:11:53.320 --> 0:11:57.440 we're looking for flaws in the armor. And decided that 0:11:57.960 --> 0:12:01.800 the fact that he was obviously signaling the possibility of 0:12:01.880 --> 0:12:05.480 hiking in small increments and that he wasn't prepared to 0:12:05.480 --> 0:12:09.680 talk down the stock market suggested that he wasn't actually 0:12:10.559 --> 0:12:13.800 really as tough as he was trying to make out. Extraordinarily, 0:12:13.840 --> 0:12:18.880 because there was this unified call from across the FOMC 0:12:19.200 --> 0:12:22.600 that we should all prepare for rates above five by 0:12:22.600 --> 0:12:27.320 the end of next year, rates are down since that 0:12:27.480 --> 0:12:32.280 came out, which is very very odd. Is it the 0:12:32.320 --> 0:12:34.840 idea that it looks more likely that we're going into 0:12:34.920 --> 0:12:38.480 recession because the FED chairs suggested a half percent growth 0:12:38.480 --> 0:12:40.720 and that's really as small as you can get without 0:12:40.720 --> 0:12:42.840 actually calling for a recession which the FED chair isn't 0:12:42.840 --> 0:12:46.400 going to do well. He's some other central banks, notably 0:12:46.600 --> 0:12:49.199 the Bank of England, have said in as many words, yes, 0:12:49.200 --> 0:12:51.959 we're going to have a recession, and ahead of the 0:12:52.000 --> 0:12:54.559 Central Bank of New Zealand has just said in as 0:12:54.559 --> 0:12:57.280 many words, yes, we expect it to be a recession 0:12:57.320 --> 0:13:01.000 because we want one. Just being very candid that that 0:13:01.000 --> 0:13:03.560 that you need to reset to avoid inflation in the future. 0:13:04.520 --> 0:13:10.440 I think the market skepticism is partly an honest almost 0:13:10.679 --> 0:13:14.240 like a version of an academic dispute. Depending on the 0:13:14.280 --> 0:13:19.280 models you use. There are sensible models that suggest that, yes, 0:13:19.440 --> 0:13:24.240 inflation really can come down pretty quickly now for everybody 0:13:24.240 --> 0:13:27.520 with all that, but there's a lot to discuss. But yes, 0:13:27.559 --> 0:13:29.920 there is a sensible argument for that. There's also a 0:13:29.960 --> 0:13:35.079 sensible argument, particularly if you're concerned about expectations about whether 0:13:35.120 --> 0:13:38.440 there is inflation, psychology can allow inflation to take grout. 0:13:39.200 --> 0:13:43.040 There's ample argument that in fact inflation is likely to 0:13:43.080 --> 0:13:46.720 be pretty durable, and that's why the FED will have 0:13:46.800 --> 0:13:50.280 no choice but to really call some pain before it's done. 0:13:51.160 --> 0:13:55.440 So that's that is where there is this critical difference 0:13:55.480 --> 0:13:58.040 of opinion. I mean to talk about things like average 0:13:58.080 --> 0:14:00.000 already earnings and how they weren't seeing what they were 0:14:00.040 --> 0:14:02.120 hoping that they would see by now an average or learning. 0:14:02.160 --> 0:14:04.040 So he sort of did tiptoe around the idea that 0:14:04.080 --> 0:14:08.559 the labor market might see pain. Yes, it has to 0:14:08.600 --> 0:14:11.000 see more pain than it's currently suffering for inflation to 0:14:11.000 --> 0:14:14.000 come down. I don't I don't see a way around 0:14:14.040 --> 0:14:17.880 that point nine percent labor market growth. Is that enough? Well, 0:14:18.080 --> 0:14:23.360 I mean it's it's if you look at, um, the 0:14:23.520 --> 0:14:27.080 kind of change in unit labor costs, if you if 0:14:27.120 --> 0:14:31.360 you look at what kind of percentage, what what kind 0:14:31.400 --> 0:14:36.480 of percentage pay rises people are demanding, and what kind 0:14:36.520 --> 0:14:41.080 of productivity gains can be made elsewhere in the process. 0:14:40.840 --> 0:14:45.720 It's I'm not saying people shouldn't demand a wage that 0:14:45.760 --> 0:14:47.920 will keep them up with inflation. They absolutely should. I 0:14:47.920 --> 0:14:51.560 don't like getting sub inflation pay rises whenever that happens. 0:14:51.760 --> 0:14:58.600 It's but that is a condition where um, you're making 0:14:58.760 --> 0:15:03.080 your you're spending more money to make the same product, 0:15:03.440 --> 0:15:06.720 which means it's price will ultimately be higher. It's very 0:15:06.720 --> 0:15:11.520 clearly directly inflationary. When you talk about this intense conflict 0:15:11.560 --> 0:15:13.440 between the Fed and the market, I mean, does the 0:15:13.480 --> 0:15:17.600 market ever win if it's going up against the Federal Reserve, well, 0:15:17.640 --> 0:15:20.920 this is the I mean, it can definitely, I'm sure 0:15:21.120 --> 0:15:25.120 impact some decision making by impacting data and financial conditions 0:15:25.120 --> 0:15:27.240 and so on. But I mean that's a very roundabout 0:15:27.280 --> 0:15:28.880 way of doing something. The FED a reserve can just 0:15:28.920 --> 0:15:31.640 come out and say something. Yes, there, I suppose there's 0:15:33.160 --> 0:15:36.840 there are two schools of thoughts here. I guess one is, yes, 0:15:37.320 --> 0:15:39.640 the idea of don't fight the Fed. There is no 0:15:39.680 --> 0:15:44.600 institution more powerful than the Federal Reserve the global economy period, 0:15:45.520 --> 0:15:48.920 ridiculous to try to argue otherwise. But there is also 0:15:49.320 --> 0:15:53.359 the suggestion that one of the quote from Bill Clinton's 0:15:53.360 --> 0:15:57.000 political guru James Carville, which I must have cited dozens 0:15:57.000 --> 0:15:59.240 of times in my career, that when he comes back, 0:15:59.280 --> 0:16:01.400 if he ever gets incarnated, he wants to come back 0:16:01.440 --> 0:16:05.320 as the bond market because the bond market can terrorize people, 0:16:06.040 --> 0:16:09.600 and there is that fact that those two things do 0:16:09.760 --> 0:16:14.560 have some kind of a symbiotic relationship, and that the 0:16:14.600 --> 0:16:18.920 bond market does have the power to change the Fed's 0:16:19.160 --> 0:16:24.000 reality if it comes to that. I would say, however, 0:16:24.120 --> 0:16:29.400 that the logic behind don't fight the Fed certainly ought 0:16:29.440 --> 0:16:34.000 to make sense, but I would my suspicion is that 0:16:34.200 --> 0:16:38.240 people are responding to a very long period in which 0:16:38.360 --> 0:16:44.120 the FED bails when the market gets ugly. Moral hazard 0:16:44.160 --> 0:16:46.440 would be your technical term for it. That that and 0:16:47.040 --> 0:16:52.040 um I would argue that the bailout of long term 0:16:52.080 --> 0:16:57.640 capital management this very Yes, that was I think the 0:16:57.800 --> 0:17:02.080 critical moment. Up until then, you'd had the Vulcan experience 0:17:02.120 --> 0:17:05.840 and green Spanner created a bare market in bonds in 0:17:07.400 --> 0:17:09.960 he'd had his irrationally zubrant speech trying to talk down 0:17:10.000 --> 0:17:12.679 the stock market that you know, the FED was still 0:17:13.000 --> 0:17:18.119 until that point plainly antagonistic to anything that looked like 0:17:18.160 --> 0:17:22.800 market excess. And after LTCM, which incidentally, as far as 0:17:22.800 --> 0:17:26.160 I can see, was the only time Paul Vulca ever 0:17:26.240 --> 0:17:29.679 publicly criticized his successor, he said, I wouldn't have done that, 0:17:30.760 --> 0:17:33.840 And I think I think now in retrospect we can't 0:17:33.880 --> 0:17:35.920 know the count factual, but I think he was probably right. 0:17:36.680 --> 0:17:39.160 Since then, you've had the concept of the green span 0:17:39.280 --> 0:17:42.840 put like nobody would have mentioned such a thing in 0:17:43.800 --> 0:17:48.800 when he really did surprise people by hiking aggressively. By 0:17:48.880 --> 0:17:52.240 the time he left, it seemed a perfectly reasonable concept. 0:17:52.280 --> 0:17:55.920 You could do graphs that, Yeah, when the SMP goes down, 0:17:56.520 --> 0:17:59.480 FED funds are follows it down, and vice versa. Once 0:17:59.520 --> 0:18:02.119 the market is safely going up, then the FED feels 0:18:02.119 --> 0:18:05.560 it's okay to raise bed funds. And obviously the Great 0:18:05.560 --> 0:18:09.280 Financial Crisis and the various fun and games with with 0:18:09.440 --> 0:18:14.200 the quee and with J. Powell's attempt to tighten things 0:18:14.280 --> 0:18:16.680 up which led to the pal There's been a succession 0:18:16.720 --> 0:18:22.159 of incidents which have ingrained in people's minds that the 0:18:22.240 --> 0:18:26.360 FED may say something, but you can bully it into 0:18:26.400 --> 0:18:31.119 submission if you're a critical market, if you're a systemic market. 0:18:31.560 --> 0:18:35.280 And I think I'm not sure that's true anymore, because 0:18:35.520 --> 0:18:39.000 ever since ninety eight, for reasons that go beyond what 0:18:39.080 --> 0:18:43.639 central banks are doing, inflation hasn't been a risk, and 0:18:43.680 --> 0:18:47.639 it certainly hasn't taken off. That isn't true anymore, and 0:18:47.640 --> 0:18:50.720 I'm therefore not sure at all that the moral hazard 0:18:51.400 --> 0:18:56.359 argument still stands. You also mentioned I want to quote this. 0:18:56.480 --> 0:18:57.760 If the FED is going to make a mistake, it 0:18:57.800 --> 0:19:00.080 will be raising weights too high, not too little, and 0:19:00.160 --> 0:19:02.639 everyone should work on that assumption. So you're warning the 0:19:02.680 --> 0:19:05.480 market in the market participants, I may well be wrong, 0:19:05.920 --> 0:19:09.520 but it's my job to try to you know, it's 0:19:09.560 --> 0:19:12.160 my job to try to come up with some sensible guidance. 0:19:13.160 --> 0:19:16.639 It seems to me that j. Powell has said in 0:19:16.680 --> 0:19:21.399 as many words that he's more prepared to overtighten than undertighten. 0:19:22.320 --> 0:19:24.640 He doesn't want to go down like the Fed chairs 0:19:24.680 --> 0:19:28.080 of the seventies who eased rates too soon and let 0:19:28.160 --> 0:19:31.399 inflation take off in a big way. Again. I would 0:19:31.840 --> 0:19:35.280 believe him he's more likely to overtighten and undertighten, and 0:19:35.359 --> 0:19:39.280 people should allocate their assets on that assumption. Bloomberg Opinions, 0:19:39.359 --> 0:19:43.000 John Authors stay tuned. Another major development this week the 0:19:43.040 --> 0:19:46.520 success of a fusion experiment for the first time, in 0:19:46.560 --> 0:19:50.760 simple terms, more energy out than in Bloomberg Opinions. David 0:19:50.800 --> 0:19:54.440 Fickling explains the chemistry and why we should celebrate the achievement. 0:19:54.720 --> 0:19:57.720 If not quite a shift in the energy outlook just yet. 0:19:57.960 --> 0:20:02.040 This is Bloomberg Opinion. You're listening to Bloomberg Opinion. I'm 0:20:02.080 --> 0:20:07.200 Vonnie Quinn. This week, US scientists accomplished something never before done. 0:20:07.560 --> 0:20:11.119 They managed to carry out a fusion reaction which generated 0:20:11.160 --> 0:20:14.159 more power than they put in. It was hailed as 0:20:14.200 --> 0:20:17.439 a so called b f D literally the phrase of 0:20:17.440 --> 0:20:20.399 the U S Energy Secretary, and the US is spending 0:20:20.480 --> 0:20:22.960 hundreds of millions of dollars into the billions when you 0:20:23.000 --> 0:20:27.240 include public private partnerships to research and potentially build out 0:20:27.320 --> 0:20:30.240 this form of power generation. But how much of a 0:20:30.280 --> 0:20:32.919 breakthrough was it this week and how much closer does 0:20:32.960 --> 0:20:35.560 it bring us to fusion power being a substitute for 0:20:35.640 --> 0:20:39.800 a less clean electricity, I asked Bloomberg Opinions David Fickling 0:20:39.880 --> 0:20:43.560 in Sydney. So, David, we've spoken several times about nuclear 0:20:43.640 --> 0:20:46.879 energy and about the future of hydrocarbons and fossil fuels 0:20:46.880 --> 0:20:48.760 and net zero and so on. Then we have this 0:20:48.840 --> 0:20:52.160 breakthrough this week. Just how big of a development is it? Well, 0:20:52.440 --> 0:20:55.199 I think it's very significant when you consider the longest 0:20:55.240 --> 0:20:57.600 true fish Remember, like nutly a fusion research is almost 0:20:57.600 --> 0:21:00.159 as old as nuclear ficion research. You know, the the 0:21:00.280 --> 0:21:02.919 first nuclear fusion designs with sort of theorized in the fifties, 0:21:02.960 --> 0:21:04.919 which was, you know, only sort of less than a 0:21:04.960 --> 0:21:08.080 decade after the first you know, the Chicago Pile one, 0:21:08.400 --> 0:21:11.760 the first nuclear fission plant um or the first nuclear 0:21:11.760 --> 0:21:14.600 fission reaction, I should say, So it's been a long 0:21:14.640 --> 0:21:18.320 time since then, and they've so far failed to clear 0:21:18.320 --> 0:21:21.160 the most basic hurdle, which is that you should generate 0:21:21.200 --> 0:21:23.840 more electricity from a reaction than you put into it. 0:21:24.480 --> 0:21:26.600 So what's significant about this is that they did generate 0:21:26.800 --> 0:21:29.880 more electricity than they put into it. Essentially, about two 0:21:29.960 --> 0:21:33.280 mega jews of energy was put in and three just 0:21:33.320 --> 0:21:35.920 over three mega jews of output came out. That's that's 0:21:35.920 --> 0:21:37.840 not a lot of electricity. That's equivalent to about the 0:21:37.880 --> 0:21:42.240 energy in in half a pizza. Doesn't sound like a lot, 0:21:42.440 --> 0:21:44.680 but you know, let's bear in mind Chicago Pile one 0:21:44.760 --> 0:21:49.000 that the first nuclear fission reaction synthetic nuclear action in 0:21:50.240 --> 0:21:53.000 nuclear fist Enrico Suffermi did that. That produced half a 0:21:53.080 --> 0:21:56.040 what of electricity, So that power that's less than you'd 0:21:56.040 --> 0:21:59.520 get from hearing a battery. So the first prone is 0:21:59.520 --> 0:22:02.159 always going to first trial, and you would hope that 0:22:02.240 --> 0:22:05.440 things could improve further from beyond that. But but having 0:22:05.520 --> 0:22:09.880 said this, there are enormous engineering problems ahead of nuclear 0:22:09.880 --> 0:22:13.480 fusion research before it becomes anywhere close to commercial viability. 0:22:13.600 --> 0:22:15.480 I think the biggest thing is that the way this 0:22:15.680 --> 0:22:18.720 fusion reaction works is essentially firing a bunch of lasers 0:22:19.000 --> 0:22:22.359 at a golden crucible containing a tiny pellet of fuel. 0:22:22.920 --> 0:22:26.320 Now those lasers, the ones that they were using the 0:22:26.440 --> 0:22:29.520 Lawrence Lives More laboratory, those are less than one percent 0:22:29.600 --> 0:22:33.439 efficient um. And of course what's actually happening in a 0:22:33.680 --> 0:22:36.320 fusion reactor, if you built it, is something that like 0:22:36.440 --> 0:22:39.119 James what would recognize that the inventor of the steam engine, 0:22:39.280 --> 0:22:41.800 It's produces heat and then the heat heats up a 0:22:41.840 --> 0:22:44.560 liquid in a bunch of pipelines, and the pipes go 0:22:44.640 --> 0:22:47.040 around and turn a turbine, and that produces electricity. It's 0:22:47.040 --> 0:22:49.040 a it's the same thing as you'd have in a 0:22:49.040 --> 0:22:51.639 certainly efficionary actor, but also like a cold cold plant 0:22:51.720 --> 0:22:54.960 or a gas plant, and the thermal efficiency of that process, 0:22:55.160 --> 0:22:56.639 you know, the amount of heat that comes out of 0:22:56.680 --> 0:22:59.879 the reactor less than fifty percent or round about fisture 0:23:00.000 --> 0:23:02.560 then typically ends up with electricity in a sort of 0:23:02.560 --> 0:23:04.800 cold plant or a gas plant or efficient plant. So 0:23:04.840 --> 0:23:06.919 if you add all that together, we talked at the 0:23:06.960 --> 0:23:09.840