WEBVTT - Surveillance: Fed's Path with Mester 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.280 with Jonathan Faroe and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:30.600 the Bloomberg Terminal, and the Bloomberg Business App. Everyone will 0:00:30.600 --> 0:00:33.440 get out there Newtonian calculus today to look at that, 0:00:33.520 --> 0:00:36.159 to your Yale, they'll go to logs. Michael McKee and 0:00:36.159 --> 0:00:39.080 I really, well, we really don't do that. Bramo doesn't 0:00:39.120 --> 0:00:42.199 really do that. But someone that can go to logs 0:00:42.200 --> 0:00:44.960 and look at the rates of change of our economy 0:00:45.479 --> 0:00:49.600 is Lorettemester of the Cleveland Fed. She is definitive in 0:00:49.720 --> 0:00:53.520 mathematics out of Columbia and Princeton and joins our Michael 0:00:53.600 --> 0:00:57.760 McKee here at our world headquarters. Michael, thank you very much, Tom, 0:00:57.800 --> 0:01:00.600 and we'd like to welcome Cleveland Fed President or Atemester, 0:01:00.720 --> 0:01:06.080 to our viewers and listeners worldwide here on Bloomberg. Tom said, 0:01:06.200 --> 0:01:09.480 you're the math expert. You look at the ADP numbers, 0:01:09.520 --> 0:01:11.200 we might as well. Start with that because it's just 0:01:11.240 --> 0:01:14.800 out one hundred forty five thousand. I know there's questions 0:01:14.800 --> 0:01:17.360 about their methodology or what it means, but what do 0:01:17.440 --> 0:01:19.360 you take away from it? Well, we have to look 0:01:19.400 --> 0:01:21.560 at all the data, So that's a data point that 0:01:21.560 --> 0:01:23.000 we're going to look at. We're going to get the 0:01:23.040 --> 0:01:25.640 employment report on Friday, so there's just a lot of 0:01:25.720 --> 0:01:27.560 data coming in and we're going to use that to 0:01:27.600 --> 0:01:31.160 assess not only where the economy has been, but where 0:01:31.160 --> 0:01:34.160 it's going, because, as you know, it's about where the 0:01:34.160 --> 0:01:38.280 economy is going. That's really important for setting monetary policy. Well, 0:01:38.280 --> 0:01:39.880 that was one of the questions that they were just 0:01:40.000 --> 0:01:45.800 asking me in the surveillance studio. How do you know 0:01:46.640 --> 0:01:49.960 what you're looking for when the data are in the 0:01:50.000 --> 0:01:53.080 rearview mirror. Well, you know, the data and the rear 0:01:53.080 --> 0:01:56.040 immunal is important because it tells you something about where 0:01:56.080 --> 0:01:58.720 the economy is going. So you don't throw that data away. 0:01:59.080 --> 0:02:01.000 But you also have to do a lot of other 0:02:01.080 --> 0:02:03.560 kind of reconnaissance. So you know, the nice thing about 0:02:03.560 --> 0:02:05.920 having feder reserve banks across the country is that we 0:02:05.920 --> 0:02:09.560 can talk to contacts in our districts. You know, whether 0:02:09.600 --> 0:02:13.240 it be labor market contacts or business contacts to really 0:02:13.240 --> 0:02:15.960 find out what's happening on the ground at the moment, 0:02:16.320 --> 0:02:20.160 and that information, anecdotal information is very helpful as well. 0:02:20.400 --> 0:02:23.240 And then we do surveys and other kinds of work 0:02:23.400 --> 0:02:27.360 timely information. So all of that goes into sort of 0:02:27.400 --> 0:02:31.680 formulating monetary policy. So I think it's wrong to think like, oh, 0:02:31.720 --> 0:02:34.359 we're looking only in the rearview mirror at data that's 0:02:34.440 --> 0:02:37.359 from a month ago or two months ago. That data 0:02:37.480 --> 0:02:40.639 is actually helpful for looking at trends. And then we 0:02:40.680 --> 0:02:43.880 also augment that with other data about what's really happening 0:02:43.880 --> 0:02:46.600 on the ground on main street for businesses that have 0:02:46.639 --> 0:02:49.960 to cope with this economy, Well, what's happening on main street? 0:02:51.200 --> 0:02:53.680 It kind of two parts in general, what are you 0:02:53.720 --> 0:02:56.120 hearing and then what are you hearing from bankers in 0:02:56.160 --> 0:02:59.959 your district about credit quality? Right, so credit quality is 0:03:00.120 --> 0:03:03.440 still fine. Bankers are telling us that that isn't really 0:03:03.680 --> 0:03:07.399 a problem. It might have ticked up a tad, but 0:03:07.600 --> 0:03:11.120 it certainly is still low, very low by historical standards, 0:03:11.160 --> 0:03:15.200 So that isn't a focus. Now the bankers have, you know, 0:03:15.639 --> 0:03:20.920 struggled with retaining deposits storing the March tensions in the 0:03:20.960 --> 0:03:25.720 banking industry, but that has stabilized since then in terms 0:03:25.720 --> 0:03:29.000 of credit quality, in terms of credit standards. You know, 0:03:29.080 --> 0:03:32.400 they had already been tightening credit standards as interest rates 0:03:32.400 --> 0:03:35.280 went up, so they're continuing to do that. They're continuing 0:03:35.280 --> 0:03:40.080 to monitor, you know, their customers, they're continuing to monitor 0:03:40.240 --> 0:03:43.400 going forward in terms of making sure that their well 0:03:43.440 --> 0:03:47.400 positioned for the economy with higher industrates. In terms of 0:03:47.400 --> 0:03:52.120 the businesses themselves, of course, they are preparing right for 0:03:52.880 --> 0:03:56.000 I would say some slowdown in the economy, but a 0:03:56.000 --> 0:03:58.520 lot of the firms are still telling us that their 0:03:58.720 --> 0:04:02.360 conditions are still pretty good. They're worried about the economy 0:04:02.400 --> 0:04:05.480 in general, and so they're being a little defensive now, 0:04:06.840 --> 0:04:11.040 some pullback in some of their investments spending. But again, 0:04:11.400 --> 0:04:14.640 it doesn't feel like everyone thinks that we're going to 0:04:14.720 --> 0:04:16.760 have a deep recession. It's just they're trying to be 0:04:16.880 --> 0:04:20.160 more cautious so that they're well prepared for whatever happens 0:04:20.680 --> 0:04:23.839 in the economy in the future. Well, the recession argument 0:04:23.839 --> 0:04:25.640 that a lot of people are making sort of depends 0:04:25.640 --> 0:04:28.479 on the idea that the full weight of all the 0:04:28.600 --> 0:04:32.800 cumulative weight of your rate increases hasn't hit the economy yet. 0:04:32.920 --> 0:04:35.800 Plus we throw in the banking maybe tightening credit standards 0:04:35.839 --> 0:04:38.760 a little more. Are you worried about the second half 0:04:38.760 --> 0:04:41.520 of the year. Well, I do think that growth this 0:04:41.680 --> 0:04:44.200 year is going to be well below trend. And you're 0:04:44.279 --> 0:04:48.920 right the banking tensions certainly. Typically when you see that happening, 0:04:49.320 --> 0:04:54.039 you do see banks pullback on their credit standards and 0:04:54.080 --> 0:04:58.120 tightening their tightened their credit standards. We don't know right 0:04:58.160 --> 0:05:02.000 now either the ration of those effects from what happened 0:05:02.000 --> 0:05:05.599 in March or how strong those effects will be. So 0:05:06.000 --> 0:05:08.760 we do expect that to happen, but right now we're 0:05:08.760 --> 0:05:11.720 in that time where we're assessing, talking to the bankers, 0:05:11.839 --> 0:05:15.880 looking at things like the SLUICE, which is the Senior 0:05:15.920 --> 0:05:19.159 Loan Officer Opinion Survey, to get a really good sense 0:05:19.279 --> 0:05:23.440 of where bankers are. As I said, even before the 0:05:23.480 --> 0:05:27.320 March tensions in the industry, banking industry, you know, the 0:05:27.360 --> 0:05:30.240 banks were pulling back and tightening credit standards, and that's 0:05:30.320 --> 0:05:33.680 kind of normal. That's the normal flow of monetary policy 0:05:33.760 --> 0:05:36.760 tightening throughout the economy. That's one of the ways it 0:05:36.800 --> 0:05:40.560 gets pushed down into the economy. So that's fine. That's 0:05:40.680 --> 0:05:43.120 kind of what we are intending in terms of making 0:05:43.160 --> 0:05:46.000 sure that we can slow down demand so that we 0:05:46.120 --> 0:05:49.040 get a better balance between demand and supply and reduce 0:05:49.120 --> 0:05:53.120 those price pressures. And now we're assessing whether the tensions 0:05:53.120 --> 0:05:56.039 in the banking industry have augmented that, and that's part 0:05:56.040 --> 0:05:58.440 of what the evaluation will be as we go in 0:05:58.480 --> 0:06:02.600 to the next FOMC meeting. In terms of calibrating monetary policy. Well, 0:06:02.600 --> 0:06:05.280 you're in New York. All the big trading guests are 0:06:05.279 --> 0:06:09.080 only a few blocks away from us, and they're calibrating 0:06:09.080 --> 0:06:11.400 recession right now, and that you're going to be cutting 0:06:11.480 --> 0:06:14.839 rates not once, two or three times before times by 0:06:15.000 --> 0:06:20.800 next January. How do you process that view versus yours? Well, 0:06:20.839 --> 0:06:24.200 you know, we've seen periods where the markets have one 0:06:24.279 --> 0:06:25.960 view of what's going to happen in the economy and 0:06:26.000 --> 0:06:29.480 the FED has another view, and you know, we certainly 0:06:29.560 --> 0:06:33.200 take information from that. You know, we see what they're 0:06:33.240 --> 0:06:36.679 doing and we're saying, Okay, that's their view, what's happening. 0:06:36.680 --> 0:06:39.280 We have our own forecast. We just put out forecasts 0:06:39.279 --> 0:06:41.800 at the last of home C meeting, and if you 0:06:41.839 --> 0:06:44.520 look at those, we did say that growth this year 0:06:44.800 --> 0:06:49.120 was going to be very much below trend growth, and 0:06:49.200 --> 0:06:51.920 so I think we see things a little bit differently 0:06:51.920 --> 0:06:55.159 in terms of what the appropriate monetary policy is given 0:06:55.839 --> 0:06:58.839 where the economy is and where it's going. We certainly 0:06:58.839 --> 0:07:02.880 are focused on in and making sure that inflation gets 0:07:02.920 --> 0:07:05.359 back down to two percent over time. Well as the 0:07:05.440 --> 0:07:08.799 idea of four rate cuts in the next year crazy, well, 0:07:08.839 --> 0:07:11.920 it certainly isn't my policy path. I mean, I think 0:07:11.960 --> 0:07:13.680 we're going to have to go a little bit higher 0:07:13.720 --> 0:07:17.520 from where we are a little bit more and then 0:07:17.600 --> 0:07:20.679 hold there for some time in order to make sure 0:07:20.760 --> 0:07:24.239 that inflation is on that sustainable downward path to two percent. 0:07:24.560 --> 0:07:27.600 That doesn't mean we're going to continue to raise rates 0:07:27.720 --> 0:07:30.400 until inflation gets back to two percent. We're going to 0:07:30.520 --> 0:07:34.600 be sort of calibrating in order to see that inflation 0:07:34.680 --> 0:07:36.800 is going to move down. In my own forecast is 0:07:36.840 --> 0:07:39.240 that it will take some time to get inflation back down, 0:07:39.640 --> 0:07:41.360 but I you know, I think we're going to make 0:07:41.400 --> 0:07:45.120 some appreciable progress this year and then continue to make 0:07:45.160 --> 0:07:48.080 progress next year and then hit two percent in twenty 0:07:48.160 --> 0:07:53.680 twenty five. What's your trajectory for inflation? Where can we 0:07:53.800 --> 0:07:56.320 end the year and how fast would we get there. Yeah, 0:07:56.360 --> 0:08:00.320 so I'm about three and three quarters percent by the 0:08:00.400 --> 0:08:03.840 end of this year, continued progress next year, maybe two 0:08:03.880 --> 0:08:06.280 and three quarters, and then two percent in twenty twenty five. 0:08:06.360 --> 0:08:09.520 And I think that's a good progress. But you got 0:08:09.520 --> 0:08:12.480 to remember we've been at high inflation, well over two 0:08:12.480 --> 0:08:15.480 percent for quite some time, and that's why it's imperative 0:08:15.480 --> 0:08:18.160 that we continue to make progress and then we continue 0:08:18.200 --> 0:08:21.360 on this path. Now, we're going to be judicious about it. 0:08:21.400 --> 0:08:24.040 We're not going to, you know, you throw the baby 0:08:24.080 --> 0:08:26.320 out with the bathwater, as they say. We're going to 0:08:26.400 --> 0:08:29.280 make sure that we're making good judgments along the way. 0:08:29.520 --> 0:08:32.800 But it is crucial that we get inflation back down 0:08:32.960 --> 0:08:36.120 in a timely way to two percent. Well, you're talking 0:08:36.160 --> 0:08:38.480 about throwing the baby out with the bathwater. But the 0:08:38.520 --> 0:08:41.640 old adage is the Fed titans until something breaks. What 0:08:41.720 --> 0:08:44.840 would you say the balance of risks is now between 0:08:45.400 --> 0:08:50.120 something breaking on the growth side and unemployment side and inflation. Yeah, Well, 0:08:50.160 --> 0:08:53.360 I'm hoping we don't tighten until something breaks. I don't 0:08:53.360 --> 0:08:56.079 think that's the strategy that I would like to follow. 0:08:56.480 --> 0:08:58.800 I think we've got to be judicious about and try 0:08:58.800 --> 0:09:02.000 to calibrate our policy in the correct way. I mean, 0:09:02.040 --> 0:09:04.040 we've made a lot of progress in terms of where 0:09:04.080 --> 0:09:06.920 we started. When we started raising rates, we were at 0:09:07.000 --> 0:09:09.800 zero right, and we've come a long way. So we're 0:09:09.840 --> 0:09:12.640 making progress on getting to where we need to get to. 0:09:12.880 --> 0:09:14.920 And my own view is that we're going to have 0:09:14.960 --> 0:09:17.840 to go a little bit further, but we're certainly well 0:09:18.360 --> 0:09:20.040 on the way of where we need to get to. 0:09:20.120 --> 0:09:23.040 And then we hold for a while, and yes, we 0:09:23.080 --> 0:09:26.480 can recalibrate our policy if the economy evolves differently than 0:09:26.559 --> 0:09:30.319 we're anticipating, and that's the nature of monetary policy making. 0:09:30.440 --> 0:09:32.439 You want to be able to take all the information 0:09:32.520 --> 0:09:36.680 in set a policy path that is consistent with getting 0:09:36.720 --> 0:09:41.080 back to full employment, maximum employment and price stability. And 0:09:41.120 --> 0:09:44.559 then if the economy evolves differently than you anticipate, then 0:09:44.559 --> 0:09:46.640 you might have to adjust your policy path and you 0:09:46.679 --> 0:09:49.120 need to be open to that, and especially in a 0:09:49.880 --> 0:09:53.440 situation like this where there is high uncertainty. There were 0:09:52.960 --> 0:09:57.000 high uncertainty and the economy before we had the tensions 0:09:57.000 --> 0:09:59.840 in the banking system. That tension in the banking sy 0:10:00.080 --> 0:10:02.760 some of the stresses in the bank in those banks 0:10:03.120 --> 0:10:05.720 has added more uncertainty, and so you've got to be 0:10:05.800 --> 0:10:08.360 willing to sort of take in more information, look at 0:10:08.440 --> 0:10:12.120 it and reassess if need be in terms of where 0:10:12.200 --> 0:10:14.440 policy needs to get to. Well, you say we should 0:10:14.480 --> 0:10:18.760 do a little more. The consensus median dot was five 0:10:18.760 --> 0:10:21.520 point one, which would be one more rate move. Are 0:10:21.559 --> 0:10:23.959 you in the group that was above that? How far 0:10:24.000 --> 0:10:26.960 do you think? Well, I see a little more inflation 0:10:27.000 --> 0:10:32.079 pressures than the median in the SAP from the December 0:10:32.280 --> 0:10:34.920 sep so I probably am a little bit higher than 0:10:35.360 --> 0:10:38.920 the median dot. But again, I'm open to making sure 0:10:39.000 --> 0:10:42.439 that we're setting policy to get inflation back down to 0:10:42.480 --> 0:10:45.080 two percent. So I'm open in terms of let's take 0:10:45.120 --> 0:10:47.880 in what the economy is telling us about where it's going. 0:10:48.480 --> 0:10:51.559 Let's make sure that we get inflation on that sustainable 0:10:51.600 --> 0:10:54.760 downward path. So I'm not you know, we've made a 0:10:54.760 --> 0:10:57.080 lot of progress, and I'm willing to sort of let's 0:10:57.120 --> 0:10:59.480 take it in and look at where the economy is going. 0:11:00.040 --> 0:11:02.640 Own view is that we'll have to go above five percent, 0:11:03.000 --> 0:11:06.440 but exactly how much, precisely how much, and precisely how 0:11:06.440 --> 0:11:08.560 long it has to stay above. We've got to be 0:11:08.600 --> 0:11:12.480 open to allowing the economy to tell us is great 0:11:12.520 --> 0:11:15.760 increase on May third, a certainty basically locked in at 0:11:15.760 --> 0:11:20.040 this point too soon. I heard the promo before you're right. 0:11:20.080 --> 0:11:21.520 I'm going to tell you that we have a lot 0:11:21.600 --> 0:11:24.920 more data to get to and we'll see as we 0:11:24.960 --> 0:11:27.720 get there what's happening in the economy. Again, the economy 0:11:27.800 --> 0:11:30.160 is going to tell us where it wants us to 0:11:30.200 --> 0:11:33.839 get to. Well, Loretta Mester says, I'm right, and so 0:11:33.880 --> 0:11:36.240 that's a great place to stop the interview. Thank you 0:11:36.400 --> 0:11:40.320 very much for joining us today here in New York, 0:11:40.360 --> 0:11:43.280 and we'll look on May third to see if I'm 0:11:43.280 --> 0:11:46.480 still right. I'll send it back to you, Michael McKee, 0:11:46.480 --> 0:11:49.040 thank you so much. We are here in our studios 0:11:49.040 --> 0:11:52.480 looking at markets on the move off that ADP report, 0:11:52.559 --> 0:11:55.959 maybe even off what we heard from doctor Mester as well. 0:11:56.120 --> 0:11:59.200 My major takeaway there I heard elements of dragging is 0:11:59.240 --> 0:12:03.280 Loretta Mester are confidently looked out to twenty twenty five, 0:12:03.880 --> 0:12:06.400 a longer timeline than maybe what we would see for 0:12:06.520 --> 0:12:20.120 many One of the great joys of speaking with Claudia 0:12:20.200 --> 0:12:23.320 Sam Yes a former FED economist and Sam consulting and 0:12:23.360 --> 0:12:26.960 writing for Bloomberg Opinion and always controversial. I got eight 0:12:26.960 --> 0:12:29.160 ways to go here, folks, and I'm gonna go to 0:12:29.240 --> 0:12:32.840 the sam you don't know which is she voraciously reads 0:12:33.520 --> 0:12:37.480 top flight fed research. Claudia, Sam, you go to San 0:12:37.520 --> 0:12:41.560 Francisco and Adam Shapiro, and you say his mix of 0:12:41.600 --> 0:12:45.120 what is driving this inflation is something we need to 0:12:45.160 --> 0:12:49.040 focus on, and that is the part of inflation off 0:12:49.040 --> 0:12:53.120 of the plant pandemic that is supply driven or supply side. 0:12:53.440 --> 0:12:57.800 Explain that. I think a big mistake that we're making 0:12:57.800 --> 0:13:00.600 at this point is acting like we can use past 0:13:00.640 --> 0:13:03.720 relationships in the economy to tell us what to do. 0:13:04.960 --> 0:13:09.120 The pandemic was extremely disruptive, and we see that across 0:13:09.160 --> 0:13:12.720 many of our peer countries. Set aside monetary policy, set 0:13:12.720 --> 0:13:16.440 aside fiscal policy, and I'm concerned as time passes that 0:13:16.440 --> 0:13:18.440 that gets pushed to the side. And that's why I 0:13:18.480 --> 0:13:20.760 go to Adam Shapiro's research. I think he is one 0:13:20.800 --> 0:13:24.640 of many who is carefully trying to figure out that 0:13:24.800 --> 0:13:28.240 supply that demand. The theme that I'm seeing into the 0:13:28.280 --> 0:13:31.880 IMF and World Bank meetings in my conversation Claudia tomorrow 0:13:31.880 --> 0:13:36.679 with doctor Georgieva at the IMF is that the analysis 0:13:36.800 --> 0:13:41.920 now like I've never seen, is linking monetary policy with 0:13:42.040 --> 0:13:46.040 our fiscal debt and our fiscal dynamics as well. Can 0:13:46.040 --> 0:13:50.640 we meld together monetary and fiscal analysis, whether we agree 0:13:50.800 --> 0:13:56.160 or agree to disagree, There are definitely some connections. I'm 0:13:56.200 --> 0:13:59.199 not sure the ones that we're making in terms of 0:13:59.320 --> 0:14:02.760 financing the fiscal debt. I mean that is a direct 0:14:02.760 --> 0:14:06.080 effect of these interest rates going up so quickly. I 0:14:06.120 --> 0:14:09.160 have pushed for and I think you're seeing some signs 0:14:09.160 --> 0:14:12.280 of it, particularly in Europe, understanding we cannot let the 0:14:12.320 --> 0:14:15.760 FED go it alone on inflation. The tools they use 0:14:15.840 --> 0:14:18.480 are going to cause a lot of pain, and there 0:14:18.520 --> 0:14:22.000 are things that fiscal authorities can do. It's just we 0:14:22.000 --> 0:14:24.280 don't have a lot of practice at that. Claudia, have 0:14:24.320 --> 0:14:27.000 you been surprised by how resilient the economic data has 0:14:27.000 --> 0:14:31.200 been up until this point. I've been very thankful. I mean, 0:14:31.240 --> 0:14:35.840 the Fed is trying to get a slow path back 0:14:35.920 --> 0:14:39.360 to inflation down, so no recession, no severe recession. That's 0:14:39.400 --> 0:14:42.560 where markets disagree with them. And the only way the 0:14:42.600 --> 0:14:44.960 Fed gets that done with the kind of rate increases 0:14:45.000 --> 0:14:49.120 they've had is if the consumers keep coming back, right 0:14:49.160 --> 0:14:52.160 and if the jobs remain there, even if it slows 0:14:52.280 --> 0:14:55.400 down like we are starting from a position of strength 0:14:55.440 --> 0:14:58.120 that has never been the case going into one of 0:14:58.120 --> 0:15:01.560 these cycles. How high should the Barbie Claudia for the 0:15:01.600 --> 0:15:04.680 Fed to cut rates, given that they still do have 0:15:05.000 --> 0:15:11.720 the issue of inflation very much front and center. Again, 0:15:11.760 --> 0:15:14.280 we have this disagreement about what kind of recession, if 0:15:14.320 --> 0:15:16.280 any were faced. I think if we go into a 0:15:16.320 --> 0:15:19.240 severe recession and the Fed holds on to this, we 0:15:19.480 --> 0:15:22.840 must stay the course no matter what, that would be 0:15:22.880 --> 0:15:26.920 a big mistake, you know. But I take them at 0:15:26.960 --> 0:15:29.120 their word, I really do. They are going to keep 0:15:29.160 --> 0:15:32.280 at this until inflation is moving down two percent. Whether 0:15:32.360 --> 0:15:35.120 I agree with that or not. Tell me about the 0:15:35.160 --> 0:15:38.360 speeds that were worth right now? Geta gopinath that the 0:15:38.360 --> 0:15:41.040 IMF talks about this about. I think it's like a 0:15:41.160 --> 0:15:46.200 general policy English if you will, for Notonian calculus. The 0:15:46.360 --> 0:15:49.440 rates of change right now, including the huge surgery saw 0:15:49.440 --> 0:15:52.720 on interest rates, has to be front and center. What 0:15:52.880 --> 0:15:56.520 are those speeds right now that we're seeing in interest 0:15:56.600 --> 0:16:01.440 rates as it folds into Fed policy. This is one 0:16:02.000 --> 0:16:04.640 contention I have with how the Fed thinks about the 0:16:04.680 --> 0:16:08.000 interest rates. They're very focused on the level, like getting 0:16:08.040 --> 0:16:13.320 the inflation adjusted function above and it's like, come on, 0:16:13.480 --> 0:16:16.200 like you raised interest rates so quickly, we know interest 0:16:16.320 --> 0:16:18.720 rate risk is there. That if we don't learn any 0:16:18.800 --> 0:16:21.600 lesson from Silicon Valley Bank in terms of the interest 0:16:21.680 --> 0:16:25.840 rate risk and monetary policy, that isn't absolutely missed opportunity. 0:16:26.040 --> 0:16:31.080 And as Lauretta Mester was saying, we see the effects 0:16:31.080 --> 0:16:34.600 in the standards, lending standards. It is there, it's coming. 0:16:34.720 --> 0:16:37.600 The last place it shows up is inflation, right, you 0:16:37.800 --> 0:16:40.400 know it's in train. I want to cite this carefully 0:16:40.400 --> 0:16:42.520 off of Gopenf's work. We'll be talking with gy to 0:16:42.560 --> 0:16:45.320 gopen Ff here next week at the IMF gy to 0:16:45.360 --> 0:16:49.280 Gopenef talking about the speed effects that are out there. 0:16:49.640 --> 0:16:53.240 What would be the effect doctor, some of lower rates 0:16:53.400 --> 0:16:56.680 or a pause? Dare I say how about pause? Pause? Pause? 0:16:57.160 --> 0:17:02.120 Would our world fall apart? No? I think it would 0:17:02.160 --> 0:17:04.640 give the world a chance to catch up with what 0:17:04.680 --> 0:17:07.720 the FED has been doing. J. Powell has been very 0:17:07.720 --> 0:17:11.960 clear we have started a disinflationary cycle. We know it's 0:17:12.000 --> 0:17:15.080 coming in housing that that just is a LaGG Just 0:17:15.680 --> 0:17:18.439 let everybody catch up. This is a speed issue. The 0:17:18.480 --> 0:17:20.959 FED went really fast. There is an argument for it. 0:17:21.920 --> 0:17:25.280 Just let it work right, have some faith in what 0:17:25.320 --> 0:17:28.880 you've done so far, and that's why pushing harder it 0:17:28.920 --> 0:17:32.080 could go to a very bad I can't say how 0:17:32.160 --> 0:17:35.600 controversial the tone is there from doctor some within the 0:17:35.720 --> 0:17:38.639 economics now she is just saying, there's a school of Thunnis. 0:17:38.720 --> 0:17:42.960 Would everyone just calm down, stop listening and watching bluebird 0:17:43.040 --> 0:17:46.760 surveillance and just slow down and breathe that's out there 0:17:47.080 --> 0:17:50.000 and analyze what exactly has happened to change the labor 0:17:50.040 --> 0:17:53.320 market really kind of fundamentally since the pandemic, Claudia, can 0:17:53.359 --> 0:17:56.040 you make sense of this? There was a recent study 0:17:56.040 --> 0:17:59.080 that came out that showed Americans are spending substantially less 0:17:59.080 --> 0:18:02.080 time working and they were pre pandemic about about half 0:18:02.080 --> 0:18:05.200 an hour, which doesn't sound like a lot. But this 0:18:05.280 --> 0:18:08.000 is adding to the constraints in the labor market. How 0:18:08.080 --> 0:18:11.800 much is the FED taking into consideration some pretty profound 0:18:11.840 --> 0:18:14.480 structural changes when they look to what they need to 0:18:14.520 --> 0:18:17.280 see with respect to unemployment rates as well as wages. 0:18:18.520 --> 0:18:21.800 So not enough, But this is not a criticism of 0:18:21.840 --> 0:18:25.679 the Fed. Again, we are in some uncharted territory and 0:18:25.880 --> 0:18:28.160 just because we get a study last week doesn't mean 0:18:28.160 --> 0:18:30.680 they were able to integrate it in the rate decision 0:18:30.680 --> 0:18:32.879 in January. Right, this is there are a lot of 0:18:32.920 --> 0:18:36.480 pieces coming together, whether it's work from home, whether it's 0:18:36.680 --> 0:18:40.000 getting the retirement done. They're just a lot going on. 0:18:40.080 --> 0:18:42.679 And I have a lot of concern that when they 0:18:42.680 --> 0:18:46.240 are doing the forecasting, those models are based on past 0:18:46.320 --> 0:18:50.399 relationships and they're not able to integrate what community members 0:18:50.440 --> 0:18:52.800 are telling them. I mean, I saw this. That's really 0:18:52.840 --> 0:18:55.480 hard to bring in in real time. It's really hard 0:18:55.480 --> 0:18:58.240 to bring research in. The bar is high to use 0:18:58.280 --> 0:19:02.080 these things in policymaking. Claudias, well, we'll have to leave it. 0:19:02.080 --> 0:19:04.120 There are out of time, Claudia. But doctor Sam, thank 0:19:04.160 --> 0:19:05.919 you so much for joining us today, of course her 0:19:06.000 --> 0:19:14.720 work with a fed Claudia sim Consulting. Joining us now 0:19:14.960 --> 0:19:17.280 is Khaki Chountry, the head of I Shares Investment Strategy 0:19:17.320 --> 0:19:19.480 Americas at black Rock. Khaki, wanderful to catch up with 0:19:19.480 --> 0:19:21.639 you and good to see you as always, Ghak. I 0:19:21.640 --> 0:19:23.320 think we all want to know just how much demand 0:19:23.440 --> 0:19:26.200 is they're still for treasuries based on what you're saying, 0:19:27.880 --> 0:19:31.120 Good morning, guys, great to be here, and a tremendous 0:19:31.160 --> 0:19:33.439 amount of demand is what I'm going to say. So 0:19:33.600 --> 0:19:37.080 just looking at ETF flows for the first quarter of 0:19:37.160 --> 0:19:41.040 the seventy four odd billion that came into all ETFs, 0:19:41.080 --> 0:19:45.400 about seventy percent of that within fixed income. And more specifically, 0:19:45.440 --> 0:19:47.760 what I thought that these was really interesting was that 0:19:47.920 --> 0:19:52.760 investors gravitated towards the highest quality parts of the fixed 0:19:52.800 --> 0:19:57.119 income market. So you were seeing investors move towards government bonds, 0:19:57.160 --> 0:19:59.560 towards treasuries to at the very front end of the 0:19:59.600 --> 0:20:02.320 treasury curve, and then the belly. So the seven to 0:20:02.400 --> 0:20:05.600 ten year something like the IF which gives you exposure 0:20:05.640 --> 0:20:07.200 to the ten year part of the curve had its 0:20:07.320 --> 0:20:12.640 biggest inflow ever. So investors definitely want fixed income here, 0:20:12.720 --> 0:20:15.440 they want the highest quality fixed income and they want 0:20:15.480 --> 0:20:19.000 treasuries at these well, not great yields, but better yields 0:20:19.000 --> 0:20:21.960 than it was about a year ago. So gegy, within 0:20:22.080 --> 0:20:26.320 crisis and within fear, we need to find courage. What 0:20:26.560 --> 0:20:29.920 part of the ETF world is the courage need to 0:20:29.960 --> 0:20:33.720 be applied? Where should we be investing away from our 0:20:33.720 --> 0:20:38.400 full faith and credit fears? Sure term, you're absolutely right, 0:20:38.440 --> 0:20:41.560 I think investors need to stay invested. I think one 0:20:41.560 --> 0:20:44.480 thing we've learned, especially when we look at the price 0:20:44.520 --> 0:20:47.800 action in both January as well as March, where we 0:20:47.880 --> 0:20:51.240 wouldn't have necessarily expected the S and P to be 0:20:51.359 --> 0:20:53.280 up or the NAZ that to be up as much 0:20:53.320 --> 0:20:56.119 as it was. So now where should investors go in 0:20:56.160 --> 0:20:58.800 this slightly volatile environment. We look at that in our 0:20:58.840 --> 0:21:02.040 second quarter outlook that we just came out with. Number one, 0:21:02.440 --> 0:21:05.720 think about quality in the equity markets and the fixed 0:21:05.760 --> 0:21:08.960 and come markets. So within the equity market, that looks 0:21:09.000 --> 0:21:13.640 at companies that have strong cash flows, high margins, and 0:21:13.760 --> 0:21:17.119 really have the ability to have strong balance streets. So 0:21:17.240 --> 0:21:21.119 looking at quality as well as looking at growth companies, 0:21:21.600 --> 0:21:24.920 not just STACK, but all growth companies that are at 0:21:24.960 --> 0:21:27.679 a reasonable price and that can be taxed something like 0:21:27.680 --> 0:21:31.400 an X and but also can be global energy companies 0:21:31.400 --> 0:21:34.199 like an I X. So that's the equity side, and 0:21:34.240 --> 0:21:36.359 then on the fixed and come side, you guys know this. 0:21:36.440 --> 0:21:38.760 I've talked about this on your show a bunch. We 0:21:38.880 --> 0:21:42.520 think that the new regime is one of you should 0:21:42.560 --> 0:21:45.480 be buying every backup in yels. I think we're in 0:21:45.520 --> 0:21:50.400 a generational opportunity for investors to get really high quality 0:21:50.520 --> 0:21:53.479 income in the fixed and come markets. Today's yield levels 0:21:53.720 --> 0:21:56.159 not fantastic. I think the FED is not going to 0:21:56.160 --> 0:21:58.760 cut two and a half times by the end of 0:21:58.760 --> 0:22:02.760 this year. But retan we get a backup by bonds 0:22:02.880 --> 0:22:05.040 by the front end and when we get to about 0:22:05.080 --> 0:22:08.640 four percent by the agg and gargie. Certainly, index strategies 0:22:08.720 --> 0:22:12.080 work very well when you're talking about broad bond indexes. 0:22:12.320 --> 0:22:15.680 But does index based investing allow for the stock specific 0:22:15.720 --> 0:22:18.000 type of analysis that you're talking about. Do you see 0:22:18.040 --> 0:22:23.240 investors starting to shift away from equity index strategies as 0:22:23.240 --> 0:22:28.040 they start to shift toward greater quality. It's a great question, Lisa, 0:22:28.160 --> 0:22:30.480 So I'd say that obviously, I mean, this was a 0:22:30.520 --> 0:22:34.720 great month. March was a great month for influence, inter 0:22:34.880 --> 0:22:37.879 qua l quality pickers. And if we look at broad 0:22:38.000 --> 0:22:41.640