1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 2 00:00:08,760 --> 00:00:11,520 Speaker 1: Along with my co host Lisa Abramowitz. Each day we 3 00:00:11,640 --> 00:00:15,120 Speaker 1: bring you the most important, noteworthy, and useful interviews for 4 00:00:15,200 --> 00:00:17,840 Speaker 1: you and your money, whether you're at the grocery store 5 00:00:17,960 --> 00:00:20,720 Speaker 1: or the trading floor. Find the Bloomberg P M L 6 00:00:20,840 --> 00:00:32,680 Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Mike Reagan, 7 00:00:32,760 --> 00:00:35,559 Speaker 1: he is our Bloomberg Stocks editor and the blogger at 8 00:00:35,720 --> 00:00:40,280 Speaker 1: M live. He's really live, He's always live. It is 9 00:00:40,320 --> 00:00:44,320 Speaker 1: the market live to live and direct. Yeah, sure is. Yeah. 10 00:00:44,479 --> 00:00:47,080 Speaker 1: I think it's fair to call this obviously a dovish 11 00:00:47,240 --> 00:00:51,640 Speaker 1: surprise from Janet Yellen's testimony today. Um, the remarks about 12 00:00:51,800 --> 00:00:56,280 Speaker 1: the uncertainty surrounding the inflation outlook. Just to be clear, 13 00:00:56,320 --> 00:00:59,360 Speaker 1: this is from the statement that was previously released, right right, 14 00:00:59,440 --> 00:01:03,440 Speaker 1: the remarks, the prepared remarks that she'll uh, she'll deliver 15 00:01:03,520 --> 00:01:08,600 Speaker 1: to the house soon. Um. You know, obviously missing is 16 00:01:08,640 --> 00:01:12,000 Speaker 1: the word transitory. Uh that inflation is uh, you know, 17 00:01:13,000 --> 00:01:16,679 Speaker 1: the declines and inflation are are based on transitory factors, 18 00:01:16,800 --> 00:01:20,759 Speaker 1: and the word on certainties uh, sort of replacing it, 19 00:01:21,160 --> 00:01:24,399 Speaker 1: you know, makes people obviously think she's being a little 20 00:01:24,400 --> 00:01:28,000 Speaker 1: bit more doublish than perhaps the market was positioned going 21 00:01:28,000 --> 00:01:30,600 Speaker 1: into it, and the reaction in the stock market is 22 00:01:30,840 --> 00:01:33,720 Speaker 1: pretty textbook. You've got real state companies in the lead, 23 00:01:34,400 --> 00:01:39,280 Speaker 1: financials at the back, so the rate sensitive banks are underperforming. 24 00:01:39,920 --> 00:01:43,240 Speaker 1: The companies that do well with lower interest rates, real 25 00:01:43,360 --> 00:01:46,920 Speaker 1: state utilities, telecom, that sort of thing are all doing well. 26 00:01:46,959 --> 00:01:49,960 Speaker 1: And UH obviously a big move, So you know, it's 27 00:01:49,960 --> 00:01:53,360 Speaker 1: safe to say this was a decent surprise for the markets. 28 00:01:53,520 --> 00:01:55,200 Speaker 1: You know, one thing that I thought was interesting, and 29 00:01:55,440 --> 00:01:58,640 Speaker 1: Tom Keene alluded to it earlier. He was saying, you know, 30 00:01:58,680 --> 00:02:01,080 Speaker 1: talking about the yield curve, right, and and it's sort 31 00:02:01,120 --> 00:02:04,240 Speaker 1: of interesting that across the yield curve you're seeing something different. 32 00:02:04,280 --> 00:02:08,040 Speaker 1: So in the two and thirty yield curved, the difference 33 00:02:08,080 --> 00:02:10,560 Speaker 1: between thirty year yields and two year yields, you're seeing 34 00:02:10,760 --> 00:02:13,079 Speaker 1: a bit of a flattening, but you're seeing a pretty 35 00:02:13,120 --> 00:02:17,200 Speaker 1: significant steepening in the gap between five year and thirty 36 00:02:17,280 --> 00:02:21,600 Speaker 1: year treasury yields as well as UH ten and thirty years. 37 00:02:21,639 --> 00:02:24,800 Speaker 1: Just in the office to to let us know what 38 00:02:25,040 --> 00:02:28,560 Speaker 1: his take is, Carra Kadona, chief US economist for Bloomberg Intelligence, 39 00:02:29,000 --> 00:02:33,680 Speaker 1: UH carl is This market response indicating that many bond 40 00:02:33,680 --> 00:02:37,280 Speaker 1: traders believe that Janet Allen in the Federal Reserve will 41 00:02:37,320 --> 00:02:41,239 Speaker 1: allow inflation to pick up more than they had previously 42 00:02:41,320 --> 00:02:45,639 Speaker 1: been expecting, given her more devish comments. I don't think 43 00:02:45,680 --> 00:02:48,679 Speaker 1: that that's really the case here. I think the markets 44 00:02:48,760 --> 00:02:52,400 Speaker 1: are in the last few weeks have been responding to 45 00:02:52,560 --> 00:02:56,919 Speaker 1: this drag taper tantrum. I think this will ultimately prove 46 00:02:57,000 --> 00:03:00,440 Speaker 1: to be short lived, but the markets are expressing doubts 47 00:03:00,440 --> 00:03:03,960 Speaker 1: about how much the Fed is going to ultimately move 48 00:03:04,080 --> 00:03:08,239 Speaker 1: compared to what they're signaling in their summary of economic projections. 49 00:03:08,360 --> 00:03:11,000 Speaker 1: When you say move, you mean raise in terms of ring, 50 00:03:11,280 --> 00:03:13,960 Speaker 1: because she basically said we're almost done, I mean in 51 00:03:14,000 --> 00:03:18,720 Speaker 1: so many words. Well, she said that we're almost to neutral, 52 00:03:18,880 --> 00:03:22,880 Speaker 1: but neutral will move higher as the economy continues to improve. 53 00:03:23,080 --> 00:03:26,120 Speaker 1: So she is kind of steeking with the FED plan 54 00:03:26,240 --> 00:03:29,560 Speaker 1: that the terminal rate, or the at least a neutral rate, 55 00:03:29,960 --> 00:03:32,520 Speaker 1: will ultimately move closer to two and a half or 56 00:03:32,560 --> 00:03:35,400 Speaker 1: three percent. I gotta say, I feel like I'm in 57 00:03:35,440 --> 00:03:38,680 Speaker 1: a game of scrabble and someone has just shaken up 58 00:03:38,720 --> 00:03:44,120 Speaker 1: the entire board. Neutral moves higher. Can we just understand 59 00:03:44,160 --> 00:03:46,800 Speaker 1: what this is are they looking for more reasons to 60 00:03:46,840 --> 00:03:49,120 Speaker 1: lower rate to keep rates low, or they're looking for 61 00:03:49,200 --> 00:03:52,560 Speaker 1: reasons to keep to move rates higher, So they want 62 00:03:52,600 --> 00:03:55,440 Speaker 1: to be moving rates higher. But this goes back to 63 00:03:55,480 --> 00:03:57,040 Speaker 1: the notion that's going to give you a headache when 64 00:03:57,080 --> 00:04:02,240 Speaker 1: I say it or star So the neutral uh interest rate, 65 00:04:02,400 --> 00:04:06,360 Speaker 1: and so they have indicated that that was depressed after 66 00:04:06,400 --> 00:04:10,560 Speaker 1: the financial crisis. It's moving higher, uh, and it will 67 00:04:10,560 --> 00:04:13,240 Speaker 1: move higher still. But as the Fed funds rate is 68 00:04:13,280 --> 00:04:15,720 Speaker 1: moving higher than it's closing the gap with new how 69 00:04:15,720 --> 00:04:22,160 Speaker 1: many how many rate increases is Bloomberg Economy Economics forecasting 70 00:04:22,200 --> 00:04:25,279 Speaker 1: for this year? Well, Uh, currently we are looking for 71 00:04:25,520 --> 00:04:28,440 Speaker 1: one more this year. But it's really going to depend 72 00:04:28,440 --> 00:04:32,640 Speaker 1: on the inflation number. So the Fed is uh potentially 73 00:04:33,320 --> 00:04:39,160 Speaker 1: potentially even less inflation is backsliding. The Fed is ramping 74 00:04:39,240 --> 00:04:41,840 Speaker 1: up the pace of normalization at the same time that 75 00:04:41,880 --> 00:04:45,200 Speaker 1: inflation is moving in the wrong direction one point four 76 00:04:45,240 --> 00:04:47,320 Speaker 1: percent on the core PC deflator, they're trying to hit 77 00:04:47,360 --> 00:04:51,520 Speaker 1: two percent. So with that backsliding, uh, they really risk 78 00:04:51,640 --> 00:04:55,960 Speaker 1: their inflation credibility because they have underperformed on that objective 79 00:04:56,040 --> 00:05:00,160 Speaker 1: for the last several years. So you're saying currently we're 80 00:05:00,160 --> 00:05:03,240 Speaker 1: on tap for one rate increase, but all of this, 81 00:05:03,760 --> 00:05:07,000 Speaker 1: how about for next year? Uh three? But again I'm 82 00:05:07,000 --> 00:05:10,040 Speaker 1: going to say the risk. The risk is to the downside, 83 00:05:10,160 --> 00:05:14,279 Speaker 1: and the fundamental reason behind that. I don't think we 84 00:05:14,360 --> 00:05:16,440 Speaker 1: have a clear sense of what the reaction and the 85 00:05:16,480 --> 00:05:19,840 Speaker 1: exchange rate is going to be when the balance sheet 86 00:05:19,920 --> 00:05:24,720 Speaker 1: unwind starts. But when Kueie was initiated, the trade weighted 87 00:05:24,720 --> 00:05:28,880 Speaker 1: dollar fell to a three decade low. When you throw 88 00:05:28,920 --> 00:05:31,760 Speaker 1: that engine into reverse, I think it's a big mistake 89 00:05:31,800 --> 00:05:35,279 Speaker 1: to assume that we won't see dollar strengthening. Although recent 90 00:05:35,320 --> 00:05:39,680 Speaker 1: FED comments, including Governor Brainerd's speech yesterday, tried to make 91 00:05:39,720 --> 00:05:42,800 Speaker 1: the case that this will not be a significant UH 92 00:05:43,160 --> 00:05:45,280 Speaker 1: driver of a strong who saw what happened, it's a 93 00:05:45,360 --> 00:05:47,080 Speaker 1: very good point to make, because of course, this is 94 00:05:47,080 --> 00:05:51,280 Speaker 1: what happened in Canada just recently. Absolutely, currency levels when 95 00:05:51,279 --> 00:05:53,520 Speaker 1: you absolutely matter, and it matters to a lot more 96 00:05:53,560 --> 00:05:56,240 Speaker 1: than just the export sector. Well you know, so right 97 00:05:56,279 --> 00:05:59,919 Speaker 1: now we're seeing it yields down across the board, where people, 98 00:06:00,120 --> 00:06:05,560 Speaker 1: basically because of Yelling's UH generally perceived to be debbish stance. 99 00:06:05,640 --> 00:06:08,320 Speaker 1: But I have to wonder, Mike Reagan, how much this 100 00:06:08,360 --> 00:06:12,400 Speaker 1: is a continuation of a play to safety or a 101 00:06:12,400 --> 00:06:15,080 Speaker 1: flight to safety, and an expectation that growth will slow 102 00:06:15,120 --> 00:06:18,080 Speaker 1: because of grid luck in Washington. That we saw really 103 00:06:18,120 --> 00:06:21,640 Speaker 1: take hold yesterday in the wake of the release of 104 00:06:21,800 --> 00:06:26,000 Speaker 1: emails from Donald Trump Jr. That seemed to show his 105 00:06:26,520 --> 00:06:30,800 Speaker 1: uh full understanding of who he was meeting with, that 106 00:06:30,920 --> 00:06:32,680 Speaker 1: he was going to be getting information that could be 107 00:06:32,720 --> 00:06:35,480 Speaker 1: harmful to Hillary Clinton's campaign from the Russians. Yeah, there 108 00:06:35,600 --> 00:06:39,359 Speaker 1: was a brief spasm of flight to safety yesterday after 109 00:06:39,440 --> 00:06:43,280 Speaker 1: the those emails came out, after Trump Junior twitted them 110 00:06:43,279 --> 00:06:46,640 Speaker 1: in fact himself. But looking at the equity market now, 111 00:06:47,640 --> 00:06:51,320 Speaker 1: dal averages up hundred and sixty points above its record close, 112 00:06:51,400 --> 00:06:54,599 Speaker 1: So it's hard to really, uh, you know, say there's 113 00:06:54,720 --> 00:06:57,279 Speaker 1: a flight to safety going on. And and to be clear, 114 00:06:57,360 --> 00:07:00,240 Speaker 1: I'm not saying that people are worried that the Roman 115 00:07:00,320 --> 00:07:03,400 Speaker 1: is going to fall apart. But Dan Ivanson of PIMCO 116 00:07:03,560 --> 00:07:06,600 Speaker 1: put it eloquently when he said, look, this just makes 117 00:07:06,640 --> 00:07:10,720 Speaker 1: it even harder for Congress to push through their proposals 118 00:07:10,720 --> 00:07:13,600 Speaker 1: that could potentially help growth. This goes to your point, 119 00:07:13,680 --> 00:07:17,600 Speaker 1: Carl about inflation. How can inflation pick up without that 120 00:07:17,600 --> 00:07:20,960 Speaker 1: fiscal stimulus that people were expecting that would only come 121 00:07:21,040 --> 00:07:24,280 Speaker 1: with some kind of agreement and some kind of leadership 122 00:07:24,320 --> 00:07:26,840 Speaker 1: in Washington, right. I mean this is all playing into 123 00:07:27,480 --> 00:07:31,400 Speaker 1: the outlook for growth. Now. Ultimately, inflation will be a 124 00:07:31,480 --> 00:07:34,520 Speaker 1: reaction to the pace of growth in the economy. So 125 00:07:34,560 --> 00:07:38,360 Speaker 1: if we are meandering along at two percent growth like 126 00:07:38,480 --> 00:07:42,200 Speaker 1: we have for most of the current economic cycle, then 127 00:07:42,240 --> 00:07:46,320 Speaker 1: we should see similar types of inflation results. Uh. So 128 00:07:46,760 --> 00:07:49,040 Speaker 1: you can get past two percent if you keep rates 129 00:07:49,200 --> 00:07:53,040 Speaker 1: really accommodative, if you have a fiscal stimulus package, but 130 00:07:53,160 --> 00:07:57,440 Speaker 1: neither of those seemed to be transpiring. So it's it 131 00:07:57,480 --> 00:08:01,080 Speaker 1: doesn't make sense to me that policymakers are confident we're 132 00:08:01,120 --> 00:08:04,400 Speaker 1: going to hit their inflation objective if they are dramatically 133 00:08:04,560 --> 00:08:08,560 Speaker 1: accelerating the pace of tightening. Uh, in an economy that 134 00:08:08,720 --> 00:08:11,320 Speaker 1: has yet to show any evidence that it is bucking 135 00:08:11,520 --> 00:08:14,320 Speaker 1: the trend that has prevailed for eight years running. Good, 136 00:08:14,680 --> 00:08:17,040 Speaker 1: very good point. Carb DNA, please stay with us because 137 00:08:17,040 --> 00:08:20,640 Speaker 1: that we really kind of elevated the discussion to another point. 138 00:08:20,680 --> 00:08:23,280 Speaker 1: You really made some interesting comments. And I want to 139 00:08:23,280 --> 00:08:27,640 Speaker 1: bring in Chris Condon. He's our fed reporter for Bloomberg 140 00:08:28,360 --> 00:08:31,680 Speaker 1: and um he's also here to talk a little bit 141 00:08:31,680 --> 00:08:34,560 Speaker 1: about Gary Cohen, right, I mean he might be a 142 00:08:34,720 --> 00:08:39,240 Speaker 1: candidate to replace Janet Yellen as FED share next year. UM. 143 00:08:39,360 --> 00:08:44,680 Speaker 1: Gary Cohen currently National Economic Council Director, Chris maybe just 144 00:08:44,960 --> 00:08:47,280 Speaker 1: if you can just take a leaf from from Carl's 145 00:08:47,440 --> 00:08:49,520 Speaker 1: book here and and Mike Regan, I want to thank 146 00:08:49,559 --> 00:08:51,280 Speaker 1: you if you want to hang out, we love you, 147 00:08:51,360 --> 00:08:53,520 Speaker 1: but I know you actually have to go do some work. 148 00:08:54,200 --> 00:08:56,200 Speaker 1: I better go write some blog posts there you go 149 00:08:56,280 --> 00:08:59,400 Speaker 1: at m Live go on the Bloomberg. Uh. You know, 150 00:09:00,160 --> 00:09:02,560 Speaker 1: Chris call made the point that we are in a 151 00:09:02,679 --> 00:09:05,880 Speaker 1: point where maybe we're making a very big mistake. Does 152 00:09:05,920 --> 00:09:09,400 Speaker 1: anybody else feel that that is more important to discuss 153 00:09:09,440 --> 00:09:13,120 Speaker 1: than uh, you know what we're going to hear today 154 00:09:13,160 --> 00:09:16,400 Speaker 1: about a short term move and interest rate or so 155 00:09:17,280 --> 00:09:20,640 Speaker 1: sure him. There are many people concerned about that sort 156 00:09:20,679 --> 00:09:24,560 Speaker 1: of a longer term direction of the FED and how 157 00:09:24,559 --> 00:09:28,960 Speaker 1: it's going to deal with this whole riddle surrounding unemployment 158 00:09:29,160 --> 00:09:33,160 Speaker 1: and inflation. Um. And on top of that, as you 159 00:09:33,200 --> 00:09:37,520 Speaker 1: know that there's a big question over who will be 160 00:09:37,640 --> 00:09:39,760 Speaker 1: the next FED chair if Jennie Ollen is not going 161 00:09:39,800 --> 00:09:43,320 Speaker 1: to continue, and that yeah, well we can connects directly 162 00:09:43,400 --> 00:09:45,439 Speaker 1: to that question. Well, yeah, and We saw a political 163 00:09:45,480 --> 00:09:49,800 Speaker 1: story out yesterday, UH saying that the leading candidate to 164 00:09:49,880 --> 00:09:55,280 Speaker 1: replace Chair Yelling is drumroll please, Gary Cone, the current 165 00:09:56,040 --> 00:10:01,520 Speaker 1: chief economic advisor to President Trump, former Goldman Sachs chief 166 00:10:01,559 --> 00:10:07,840 Speaker 1: operating officer. So, Carl, what's the take on him? Well, 167 00:10:07,880 --> 00:10:14,520 Speaker 1: he's an administration pick for the NYC, so, uh, you know, 168 00:10:14,640 --> 00:10:17,920 Speaker 1: they raises questions about the political independence of the FED 169 00:10:18,000 --> 00:10:20,520 Speaker 1: if you're having one of your own now moving into 170 00:10:20,640 --> 00:10:23,640 Speaker 1: the role of FED chair. It's hard to see Cone 171 00:10:23,720 --> 00:10:28,520 Speaker 1: being a policy hawk and raising rates aggressively or tightening 172 00:10:28,520 --> 00:10:35,040 Speaker 1: policy aggressively, which would then hurt economic performance and run 173 00:10:35,200 --> 00:10:38,839 Speaker 1: contrary to the objectives of the administration. I just can't 174 00:10:38,880 --> 00:10:42,640 Speaker 1: see that the optics are not particularly great. It'd be 175 00:10:42,640 --> 00:10:45,480 Speaker 1: better to be someone who is a little bit more 176 00:10:45,520 --> 00:10:48,400 Speaker 1: distant from the administration. Well, and Gary Kohene is not 177 00:10:48,440 --> 00:10:50,760 Speaker 1: an economist either, Chris, I'd love to get your take 178 00:10:50,800 --> 00:10:54,560 Speaker 1: on the process, uh, that President Trump would have to 179 00:10:54,600 --> 00:10:57,400 Speaker 1: go through to get Gary Khane to be the head 180 00:10:57,400 --> 00:11:00,839 Speaker 1: of the FED, because my understanding is that any FED 181 00:11:00,920 --> 00:11:04,920 Speaker 1: chair has to be appointed from sitting UH FED members, 182 00:11:04,960 --> 00:11:07,840 Speaker 1: So he is not currently a FED member. How would 183 00:11:07,840 --> 00:11:11,480 Speaker 1: this work? Well, you have to be a governor to 184 00:11:11,559 --> 00:11:14,199 Speaker 1: be selected to be chair of the Board of Governors 185 00:11:14,880 --> 00:11:17,839 Speaker 1: or in chair of the Federal Reserve System. But given 186 00:11:17,840 --> 00:11:21,080 Speaker 1: that there are vacancies on the board, the president could 187 00:11:21,160 --> 00:11:25,040 Speaker 1: select anyone he wished, assuming that'd be approved in the 188 00:11:25,080 --> 00:11:29,040 Speaker 1: Senate to become a governor and be elevated to the 189 00:11:29,080 --> 00:11:33,560 Speaker 1: position of chair simultaneously. So that's not exactly unless he 190 00:11:33,600 --> 00:11:37,160 Speaker 1: were to fill up the three vacancies with other people 191 00:11:37,679 --> 00:11:41,720 Speaker 1: and then assume, yeah, Chris, and I'm sorry, we're gonna 192 00:11:41,720 --> 00:11:43,720 Speaker 1: have to leave it there. Chris connin fed, reporter for 193 00:11:43,880 --> 00:11:46,800 Speaker 1: Bloomberg cawork down a Chief US economists for Bloomberg Intelligence. 194 00:11:49,360 --> 00:11:51,880 Speaker 1: Thanks for listening to the Bloomberg P and L podcast. 195 00:11:52,240 --> 00:11:56,120 Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, 196 00:11:56,240 --> 00:11:59,720 Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm 197 00:11:59,720 --> 00:12:03,280 Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa 198 00:12:03,320 --> 00:12:06,280 Speaker 1: Abramo wits one. Before the podcast, you can always catch 199 00:12:06,360 --> 00:12:08,079 Speaker 1: us worldwide on Bloomberg Radio.