WEBVTT - Inflation Objectives Unlikely if Tightening Accelerates, Riccadonna Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P M L 0:00:20.840 --> 0:00:32.680 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Mike Reagan, 0:00:32.760 --> 0:00:35.559 he is our Bloomberg Stocks editor and the blogger at 0:00:35.720 --> 0:00:40.280 M live. He's really live, He's always live. It is 0:00:40.320 --> 0:00:44.320 the market live to live and direct. Yeah, sure is. Yeah. 0:00:44.479 --> 0:00:47.080 I think it's fair to call this obviously a dovish 0:00:47.240 --> 0:00:51.640 surprise from Janet Yellen's testimony today. Um, the remarks about 0:00:51.800 --> 0:00:56.280 the uncertainty surrounding the inflation outlook. Just to be clear, 0:00:56.320 --> 0:00:59.360 this is from the statement that was previously released, right right, 0:00:59.440 --> 0:01:03.440 the remarks, the prepared remarks that she'll uh, she'll deliver 0:01:03.520 --> 0:01:08.600 to the house soon. Um. You know, obviously missing is 0:01:08.640 --> 0:01:12.000 the word transitory. Uh that inflation is uh, you know, 0:01:13.000 --> 0:01:16.679 the declines and inflation are are based on transitory factors, 0:01:16.800 --> 0:01:20.759 and the word on certainties uh, sort of replacing it, 0:01:21.160 --> 0:01:24.399 you know, makes people obviously think she's being a little 0:01:24.400 --> 0:01:28.000 bit more doublish than perhaps the market was positioned going 0:01:28.000 --> 0:01:30.600 into it, and the reaction in the stock market is 0:01:30.840 --> 0:01:33.720 pretty textbook. You've got real state companies in the lead, 0:01:34.400 --> 0:01:39.280 financials at the back, so the rate sensitive banks are underperforming. 0:01:39.920 --> 0:01:43.240 The companies that do well with lower interest rates, real 0:01:43.360 --> 0:01:46.920 state utilities, telecom, that sort of thing are all doing well. 0:01:46.959 --> 0:01:49.960 And UH obviously a big move, So you know, it's 0:01:49.960 --> 0:01:53.360 safe to say this was a decent surprise for the markets. 0:01:53.520 --> 0:01:55.200 You know, one thing that I thought was interesting, and 0:01:55.440 --> 0:01:58.640 Tom Keene alluded to it earlier. He was saying, you know, 0:01:58.680 --> 0:02:01.080 talking about the yield curve, right, and and it's sort 0:02:01.120 --> 0:02:04.240 of interesting that across the yield curve you're seeing something different. 0:02:04.280 --> 0:02:08.040 So in the two and thirty yield curved, the difference 0:02:08.080 --> 0:02:10.560 between thirty year yields and two year yields, you're seeing 0:02:10.760 --> 0:02:13.079 a bit of a flattening, but you're seeing a pretty 0:02:13.120 --> 0:02:17.200 significant steepening in the gap between five year and thirty 0:02:17.280 --> 0:02:21.600 year treasury yields as well as UH ten and thirty years. 0:02:21.639 --> 0:02:24.800 Just in the office to to let us know what 0:02:25.040 --> 0:02:28.560 his take is, Carra Kadona, chief US economist for Bloomberg Intelligence, 0:02:29.000 --> 0:02:33.680 UH carl is This market response indicating that many bond 0:02:33.680 --> 0:02:37.280 traders believe that Janet Allen in the Federal Reserve will 0:02:37.320 --> 0:02:41.239 allow inflation to pick up more than they had previously 0:02:41.320 --> 0:02:45.639 been expecting, given her more devish comments. I don't think 0:02:45.680 --> 0:02:48.679 that that's really the case here. I think the markets 0:02:48.760 --> 0:02:52.400 are in the last few weeks have been responding to 0:02:52.560 --> 0:02:56.919 this drag taper tantrum. I think this will ultimately prove 0:02:57.000 --> 0:03:00.440 to be short lived, but the markets are expressing doubts 0:03:00.440 --> 0:03:03.960 about how much the Fed is going to ultimately move 0:03:04.080 --> 0:03:08.239 compared to what they're signaling in their summary of economic projections. 0:03:08.360 --> 0:03:11.000 When you say move, you mean raise in terms of ring, 0:03:11.280 --> 0:03:13.960 because she basically said we're almost done, I mean in 0:03:14.000 --> 0:03:18.720 so many words. Well, she said that we're almost to neutral, 0:03:18.880 --> 0:03:22.880 but neutral will move higher as the economy continues to improve. 0:03:23.080 --> 0:03:26.120 So she is kind of steeking with the FED plan 0:03:26.240 --> 0:03:29.560 that the terminal rate, or the at least a neutral rate, 0:03:29.960 --> 0:03:32.520 will ultimately move closer to two and a half or 0:03:32.560 --> 0:03:35.400 three percent. I gotta say, I feel like I'm in 0:03:35.440 --> 0:03:38.680 a game of scrabble and someone has just shaken up 0:03:38.720 --> 0:03:44.120 the entire board. Neutral moves higher. Can we just understand 0:03:44.160 --> 0:03:46.800 what this is are they looking for more reasons to 0:03:46.840 --> 0:03:49.120 lower rate to keep rates low, or they're looking for 0:03:49.200 --> 0:03:52.560 reasons to keep to move rates higher, So they want 0:03:52.600 --> 0:03:55.440 to be moving rates higher. But this goes back to 0:03:55.480 --> 0:03:57.040 the notion that's going to give you a headache when 0:03:57.080 --> 0:04:02.240 I say it or star So the neutral uh interest rate, 0:04:02.400 --> 0:04:06.360 and so they have indicated that that was depressed after 0:04:06.400 --> 0:04:10.560 the financial crisis. It's moving higher, uh, and it will 0:04:10.560 --> 0:04:13.240 move higher still. But as the Fed funds rate is 0:04:13.280 --> 0:04:15.720 moving higher than it's closing the gap with new how 0:04:15.720 --> 0:04:22.160 many how many rate increases is Bloomberg Economy Economics forecasting 0:04:22.200 --> 0:04:25.279 for this year? Well, Uh, currently we are looking for 0:04:25.520 --> 0:04:28.440 one more this year. But it's really going to depend 0:04:28.440 --> 0:04:32.640 on the inflation number. So the Fed is uh potentially 0:04:33.320 --> 0:04:39.160 potentially even less inflation is backsliding. The Fed is ramping 0:04:39.240 --> 0:04:41.840 up the pace of normalization at the same time that 0:04:41.880 --> 0:04:45.200 inflation is moving in the wrong direction one point four 0:04:45.240 --> 0:04:47.320 percent on the core PC deflator, they're trying to hit 0:04:47.360 --> 0:04:51.520 two percent. So with that backsliding, uh, they really risk 0:04:51.640 --> 0:04:55.960 their inflation credibility because they have underperformed on that objective 0:04:56.040 --> 0:05:00.160 for the last several years. So you're saying currently we're 0:05:00.160 --> 0:05:03.240 on tap for one rate increase, but all of this, 0:05:03.760 --> 0:05:07.000 how about for next year? Uh three? But again I'm 0:05:07.000 --> 0:05:10.040 going to say the risk. The risk is to the downside, 0:05:10.160 --> 0:05:14.279 and the fundamental reason behind that. I don't think we 0:05:14.360 --> 0:05:16.440 have a clear sense of what the reaction and the 0:05:16.480 --> 0:05:19.840 exchange rate is going to be when the balance sheet 0:05:19.920 --> 0:05:24.720 unwind starts. But when Kueie was initiated, the trade weighted 0:05:24.720 --> 0:05:28.880 dollar fell to a three decade low. When you throw 0:05:28.920 --> 0:05:31.760 that engine into reverse, I think it's a big mistake 0:05:31.800 --> 0:05:35.279 to assume that we won't see dollar strengthening. Although recent 0:05:35.320 --> 0:05:39.680 FED comments, including Governor Brainerd's speech yesterday, tried to make 0:05:39.720 --> 0:05:42.800 the case that this will not be a significant UH 0:05:43.160 --> 0:05:45.280 driver of a strong who saw what happened, it's a 0:05:45.360 --> 0:05:47.080 very good point to make, because of course, this is 0:05:47.080 --> 0:05:51.280 what happened in Canada just recently. Absolutely, currency levels when 0:05:51.279 --> 0:05:53.520 you absolutely matter, and it matters to a lot more 0:05:53.560 --> 0:05:56.240 than just the export sector. Well you know, so right 0:05:56.279 --> 0:05:59.919 now we're seeing it yields down across the board, where people, 0:06:00.120 --> 0:06:05.560 basically because of Yelling's UH generally perceived to be debbish stance. 0:06:05.640 --> 0:06:08.320 But I have to wonder, Mike Reagan, how much this 0:06:08.360 --> 0:06:12.400 is a continuation of a play to safety or a 0:06:12.400 --> 0:06:15.080 flight to safety, and an expectation that growth will slow 0:06:15.120 --> 0:06:18.080 because of grid luck in Washington. That we saw really 0:06:18.120 --> 0:06:21.640 take hold yesterday in the wake of the release of 0:06:21.800 --> 0:06:26.000 emails from Donald Trump Jr. That seemed to show his 0:06:26.520 --> 0:06:30.800 uh full understanding of who he was meeting with, that 0:06:30.920 --> 0:06:32.680 he was going to be getting information that could be 0:06:32.720 --> 0:06:35.480 harmful to Hillary Clinton's campaign from the Russians. Yeah, there 0:06:35.600 --> 0:06:39.359 was a brief spasm of flight to safety yesterday after 0:06:39.440 --> 0:06:43.280 the those emails came out, after Trump Junior twitted them 0:06:43.279 --> 0:06:46.640 in fact himself. But looking at the equity market now, 0:06:47.640 --> 0:06:51.320 dal averages up hundred and sixty points above its record close, 0:06:51.400 --> 0:06:54.599 So it's hard to really, uh, you know, say there's 0:06:54.720 --> 0:06:57.279 a flight to safety going on. And and to be clear, 0:06:57.360 --> 0:07:00.240 I'm not saying that people are worried that the Roman 0:07:00.320 --> 0:07:03.400 is going to fall apart. But Dan Ivanson of PIMCO 0:07:03.560 --> 0:07:06.600 put it eloquently when he said, look, this just makes 0:07:06.640 --> 0:07:10.720 it even harder for Congress to push through their proposals 0:07:10.720 --> 0:07:13.600 that could potentially help growth. This goes to your point, 0:07:13.680 --> 0:07:17.600 Carl about inflation. How can inflation pick up without that 0:07:17.600 --> 0:07:20.960 fiscal stimulus that people were expecting that would only come 0:07:21.040 --> 0:07:24.280 with some kind of agreement and some kind of leadership 0:07:24.320 --> 0:07:26.840 in Washington, right. I mean this is all playing into 0:07:27.480 --> 0:07:31.400 the outlook for growth. Now. Ultimately, inflation will be a 0:07:31.480 --> 0:07:34.520 reaction to the pace of growth in the economy. So 0:07:34.560 --> 0:07:38.360 if we are meandering along at two percent growth like 0:07:38.480 --> 0:07:42.200 we have for most of the current economic cycle, then 0:07:42.240 --> 0:07:46.320 we should see similar types of inflation results. Uh. So 0:07:46.760 --> 0:07:49.040 you can get past two percent if you keep rates 0:07:49.200 --> 0:07:53.040 really accommodative, if you have a fiscal stimulus package, but 0:07:53.160 --> 0:07:57.440 neither of those seemed to be transpiring. So it's it 0:07:57.480 --> 0:08:01.080 doesn't make sense to me that policymakers are confident we're 0:08:01.120 --> 0:08:04.400 going to hit their inflation objective if they are dramatically 0:08:04.560 --> 0:08:08.560 accelerating the pace of tightening. Uh, in an economy that 0:08:08.720 --> 0:08:11.320 has yet to show any evidence that it is bucking 0:08:11.520 --> 0:08:14.320 the trend that has prevailed for eight years running. Good, 0:08:14.680 --> 0:08:17.040 very good point. Carb DNA, please stay with us because 0:08:17.040 --> 0:08:20.640 that we really kind of elevated the discussion to another point. 0:08:20.680 --> 0:08:23.280 You really made some interesting comments. And I want to 0:08:23.280 --> 0:08:27.640 bring in Chris Condon. He's our fed reporter for Bloomberg 0:08:28.360 --> 0:08:31.680 and um he's also here to talk a little bit 0:08:31.680 --> 0:08:34.560 about Gary Cohen, right, I mean he might be a 0:08:34.720 --> 0:08:39.240 candidate to replace Janet Yellen as FED share next year. UM. 0:08:39.360 --> 0:08:44.680 Gary Cohen currently National Economic Council Director, Chris maybe just 0:08:44.960 --> 0:08:47.280 if you can just take a leaf from from Carl's 0:08:47.440 --> 0:08:49.520 book here and and Mike Regan, I want to thank 0:08:49.559 --> 0:08:51.280 you if you want to hang out, we love you, 0:08:51.360 --> 0:08:53.520 but I know you actually have to go do some work. 0:08:54.200 --> 0:08:56.200 I better go write some blog posts there you go 0:08:56.280 --> 0:08:59.400 at m Live go on the Bloomberg. Uh. You know, 0:09:00.160 --> 0:09:02.560 Chris call made the point that we are in a 0:09:02.679 --> 0:09:05.880 point where maybe we're making a very big mistake. Does 0:09:05.920 --> 0:09:09.400 anybody else feel that that is more important to discuss 0:09:09.440 --> 0:09:13.120 than uh, you know what we're going to hear today 0:09:13.160 --> 0:09:16.400 about a short term move and interest rate or so 0:09:17.280 --> 0:09:20.640 sure him. There are many people concerned about that sort 0:09:20.679 --> 0:09:24.560 of a longer term direction of the FED and how 0:09:24.559 --> 0:09:28.960 it's going to deal with this whole riddle surrounding unemployment 0:09:29.160 --> 0:09:33.160 and inflation. Um. And on top of that, as you 0:09:33.200 --> 0:09:37.520 know that there's a big question over who will be 0:09:37.640 --> 0:09:39.760 the next FED chair if Jennie Ollen is not going 0:09:39.800 --> 0:09:43.320 to continue, and that yeah, well we can connects directly 0:09:43.400 --> 0:09:45.439 to that question. Well, yeah, and We saw a political 0:09:45.480 --> 0:09:49.800 story out yesterday, UH saying that the leading candidate to 0:09:49.880 --> 0:09:55.280 replace Chair Yelling is drumroll please, Gary Cone, the current 0:09:56.040 --> 0:10:01.520 chief economic advisor to President Trump, former Goldman Sachs chief 0:10:01.559 --> 0:10:07.840 operating officer. So, Carl, what's the take on him? Well, 0:10:07.880 --> 0:10:14.520 he's an administration pick for the NYC, so, uh, you know, 0:10:14.640 --> 0:10:17.920 they raises questions about the political independence of the FED 0:10:18.000 --> 0:10:20.520 if you're having one of your own now moving into 0:10:20.640 --> 0:10:23.640 the role of FED chair. It's hard to see Cone 0:10:23.720 --> 0:10:28.520 being a policy hawk and raising rates aggressively or tightening 0:10:28.520 --> 0:10:35.040 policy aggressively, which would then hurt economic performance and run 0:10:35.200 --> 0:10:38.839 contrary to the objectives of the administration. I just can't 0:10:38.880 --> 0:10:42.640 see that the optics are not particularly great. It'd be 0:10:42.640 --> 0:10:45.480 better to be someone who is a little bit more 0:10:45.520 --> 0:10:48.400 distant from the administration. Well, and Gary Kohene is not 0:10:48.440 --> 0:10:50.760 an economist either, Chris, I'd love to get your take 0:10:50.800 --> 0:10:54.560 on the process, uh, that President Trump would have to 0:10:54.600 --> 0:10:57.400 go through to get Gary Khane to be the head 0:10:57.400 --> 0:11:00.839 of the FED, because my understanding is that any FED 0:11:00.920 --> 0:11:04.920 chair has to be appointed from sitting UH FED members, 0:11:04.960 --> 0:11:07.840 So he is not currently a FED member. How would 0:11:07.840 --> 0:11:11.480 this work? Well, you have to be a governor to 0:11:11.559 --> 0:11:14.199 be selected to be chair of the Board of Governors 0:11:14.880 --> 0:11:17.839 or in chair of the Federal Reserve System. But given 0:11:17.840 --> 0:11:21.080 that there are vacancies on the board, the president could 0:11:21.160 --> 0:11:25.040 select anyone he wished, assuming that'd be approved in the 0:11:25.080 --> 0:11:29.040 Senate to become a governor and be elevated to the 0:11:29.080 --> 0:11:33.560 position of chair simultaneously. So that's not exactly unless he 0:11:33.600 --> 0:11:37.160 were to fill up the three vacancies with other people 0:11:37.679 --> 0:11:41.720 and then assume, yeah, Chris, and I'm sorry, we're gonna 0:11:41.720 --> 0:11:43.720 have to leave it there. Chris connin fed, reporter for 0:11:43.880 --> 0:11:46.800 Bloomberg cawork down a Chief US economists for Bloomberg Intelligence. 0:11:49.360 --> 0:11:51.880 Thanks for listening to the Bloomberg P and L podcast. 0:11:52.240 --> 0:11:56.120 You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, 0:11:56.240 --> 0:11:59.720 or whatever podcast platform you prefer. I'm pim Fox. I'm 0:11:59.720 --> 0:12:03.280 on Twitter at pim Fox. I'm on Twitter at Lisa 0:12:03.320 --> 0:12:06.280 Abramo wits one. Before the podcast, you can always catch 0:12:06.360 --> 0:12:08.079 us worldwide on Bloomberg Radio.