Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg P M L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Mike Reagan,
Speaker 1: he is our Bloomberg Stocks editor and the blogger at
Speaker 1: M live. He's really live, He's always live. It is
Speaker 1: the market live to live and direct. Yeah, sure is. Yeah.
Speaker 1: I think it's fair to call this obviously a dovish
Speaker 1: surprise from Janet Yellen's testimony today. Um, the remarks about
Speaker 1: the uncertainty surrounding the inflation outlook. Just to be clear,
Speaker 1: this is from the statement that was previously released, right right,
Speaker 1: the remarks, the prepared remarks that she'll uh, she'll deliver
Speaker 1: to the house soon. Um. You know, obviously missing is
Speaker 1: the word transitory. Uh that inflation is uh, you know,
Speaker 1: the declines and inflation are are based on transitory factors,
Speaker 1: and the word on certainties uh, sort of replacing it,
Speaker 1: you know, makes people obviously think she's being a little
Speaker 1: bit more doublish than perhaps the market was positioned going
Speaker 1: into it, and the reaction in the stock market is
Speaker 1: pretty textbook. You've got real state companies in the lead,
Speaker 1: financials at the back, so the rate sensitive banks are underperforming.
Speaker 1: The companies that do well with lower interest rates, real
Speaker 1: state utilities, telecom, that sort of thing are all doing well.
Speaker 1: And UH obviously a big move, So you know, it's
Speaker 1: safe to say this was a decent surprise for the markets.
Speaker 1: You know, one thing that I thought was interesting, and
Speaker 1: Tom Keene alluded to it earlier. He was saying, you know,
Speaker 1: talking about the yield curve, right, and and it's sort
Speaker 1: of interesting that across the yield curve you're seeing something different.
Speaker 1: So in the two and thirty yield curved, the difference
Speaker 1: between thirty year yields and two year yields, you're seeing
Speaker 1: a bit of a flattening, but you're seeing a pretty
Speaker 1: significant steepening in the gap between five year and thirty
Speaker 1: year treasury yields as well as UH ten and thirty years.
Speaker 1: Just in the office to to let us know what
Speaker 1: his take is, Carra Kadona, chief US economist for Bloomberg Intelligence,
Speaker 1: UH carl is This market response indicating that many bond
Speaker 1: traders believe that Janet Allen in the Federal Reserve will
Speaker 1: allow inflation to pick up more than they had previously
Speaker 1: been expecting, given her more devish comments. I don't think
Speaker 1: that that's really the case here. I think the markets
Speaker 1: are in the last few weeks have been responding to
Speaker 1: this drag taper tantrum. I think this will ultimately prove
Speaker 1: to be short lived, but the markets are expressing doubts
Speaker 1: about how much the Fed is going to ultimately move
Speaker 1: compared to what they're signaling in their summary of economic projections.
Speaker 1: When you say move, you mean raise in terms of ring,
Speaker 1: because she basically said we're almost done, I mean in
Speaker 1: so many words. Well, she said that we're almost to neutral,
Speaker 1: but neutral will move higher as the economy continues to improve.
Speaker 1: So she is kind of steeking with the FED plan
Speaker 1: that the terminal rate, or the at least a neutral rate,
Speaker 1: will ultimately move closer to two and a half or
Speaker 1: three percent. I gotta say, I feel like I'm in
Speaker 1: a game of scrabble and someone has just shaken up
Speaker 1: the entire board. Neutral moves higher. Can we just understand
Speaker 1: what this is are they looking for more reasons to
Speaker 1: lower rate to keep rates low, or they're looking for
Speaker 1: reasons to keep to move rates higher, So they want
Speaker 1: to be moving rates higher. But this goes back to
Speaker 1: the notion that's going to give you a headache when
Speaker 1: I say it or star So the neutral uh interest rate,
Speaker 1: and so they have indicated that that was depressed after
Speaker 1: the financial crisis. It's moving higher, uh, and it will
Speaker 1: move higher still. But as the Fed funds rate is
Speaker 1: moving higher than it's closing the gap with new how
Speaker 1: many how many rate increases is Bloomberg Economy Economics forecasting
Speaker 1: for this year? Well, Uh, currently we are looking for
Speaker 1: one more this year. But it's really going to depend
Speaker 1: on the inflation number. So the Fed is uh potentially
Speaker 1: potentially even less inflation is backsliding. The Fed is ramping
Speaker 1: up the pace of normalization at the same time that
Speaker 1: inflation is moving in the wrong direction one point four
Speaker 1: percent on the core PC deflator, they're trying to hit
Speaker 1: two percent. So with that backsliding, uh, they really risk
Speaker 1: their inflation credibility because they have underperformed on that objective
Speaker 1: for the last several years. So you're saying currently we're
Speaker 1: on tap for one rate increase, but all of this,
Speaker 1: how about for next year? Uh three? But again I'm
Speaker 1: going to say the risk. The risk is to the downside,
Speaker 1: and the fundamental reason behind that. I don't think we
Speaker 1: have a clear sense of what the reaction and the
Speaker 1: exchange rate is going to be when the balance sheet
Speaker 1: unwind starts. But when Kueie was initiated, the trade weighted
Speaker 1: dollar fell to a three decade low. When you throw
Speaker 1: that engine into reverse, I think it's a big mistake
Speaker 1: to assume that we won't see dollar strengthening. Although recent
Speaker 1: FED comments, including Governor Brainerd's speech yesterday, tried to make
Speaker 1: the case that this will not be a significant UH
Speaker 1: driver of a strong who saw what happened, it's a
Speaker 1: very good point to make, because of course, this is
Speaker 1: what happened in Canada just recently. Absolutely, currency levels when
Speaker 1: you absolutely matter, and it matters to a lot more
Speaker 1: than just the export sector. Well you know, so right
Speaker 1: now we're seeing it yields down across the board, where people,
Speaker 1: basically because of Yelling's UH generally perceived to be debbish stance.
Speaker 1: But I have to wonder, Mike Reagan, how much this
Speaker 1: is a continuation of a play to safety or a
Speaker 1: flight to safety, and an expectation that growth will slow
Speaker 1: because of grid luck in Washington. That we saw really
Speaker 1: take hold yesterday in the wake of the release of
Speaker 1: emails from Donald Trump Jr. That seemed to show his
Speaker 1: uh full understanding of who he was meeting with, that
Speaker 1: he was going to be getting information that could be
Speaker 1: harmful to Hillary Clinton's campaign from the Russians. Yeah, there
Speaker 1: was a brief spasm of flight to safety yesterday after
Speaker 1: the those emails came out, after Trump Junior twitted them
Speaker 1: in fact himself. But looking at the equity market now,
Speaker 1: dal averages up hundred and sixty points above its record close,
Speaker 1: So it's hard to really, uh, you know, say there's
Speaker 1: a flight to safety going on. And and to be clear,
Speaker 1: I'm not saying that people are worried that the Roman
Speaker 1: is going to fall apart. But Dan Ivanson of PIMCO
Speaker 1: put it eloquently when he said, look, this just makes
Speaker 1: it even harder for Congress to push through their proposals
Speaker 1: that could potentially help growth. This goes to your point,
Speaker 1: Carl about inflation. How can inflation pick up without that
Speaker 1: fiscal stimulus that people were expecting that would only come
Speaker 1: with some kind of agreement and some kind of leadership
Speaker 1: in Washington, right. I mean this is all playing into
Speaker 1: the outlook for growth. Now. Ultimately, inflation will be a
Speaker 1: reaction to the pace of growth in the economy. So
Speaker 1: if we are meandering along at two percent growth like
Speaker 1: we have for most of the current economic cycle, then
Speaker 1: we should see similar types of inflation results. Uh. So
Speaker 1: you can get past two percent if you keep rates
Speaker 1: really accommodative, if you have a fiscal stimulus package, but
Speaker 1: neither of those seemed to be transpiring. So it's it
Speaker 1: doesn't make sense to me that policymakers are confident we're
Speaker 1: going to hit their inflation objective if they are dramatically
Speaker 1: accelerating the pace of tightening. Uh, in an economy that
Speaker 1: has yet to show any evidence that it is bucking
Speaker 1: the trend that has prevailed for eight years running. Good,
Speaker 1: very good point. Carb DNA, please stay with us because
Speaker 1: that we really kind of elevated the discussion to another point.
Speaker 1: You really made some interesting comments. And I want to
Speaker 1: bring in Chris Condon. He's our fed reporter for Bloomberg
Speaker 1: and um he's also here to talk a little bit
Speaker 1: about Gary Cohen, right, I mean he might be a
Speaker 1: candidate to replace Janet Yellen as FED share next year. UM.
Speaker 1: Gary Cohen currently National Economic Council Director, Chris maybe just
Speaker 1: if you can just take a leaf from from Carl's
Speaker 1: book here and and Mike Regan, I want to thank
Speaker 1: you if you want to hang out, we love you,
Speaker 1: but I know you actually have to go do some work.
Speaker 1: I better go write some blog posts there you go
Speaker 1: at m Live go on the Bloomberg. Uh. You know,
Speaker 1: Chris call made the point that we are in a
Speaker 1: point where maybe we're making a very big mistake. Does
Speaker 1: anybody else feel that that is more important to discuss
Speaker 1: than uh, you know what we're going to hear today
Speaker 1: about a short term move and interest rate or so
Speaker 1: sure him. There are many people concerned about that sort
Speaker 1: of a longer term direction of the FED and how
Speaker 1: it's going to deal with this whole riddle surrounding unemployment
Speaker 1: and inflation. Um. And on top of that, as you
Speaker 1: know that there's a big question over who will be
Speaker 1: the next FED chair if Jennie Ollen is not going
Speaker 1: to continue, and that yeah, well we can connects directly
Speaker 1: to that question. Well, yeah, and We saw a political
Speaker 1: story out yesterday, UH saying that the leading candidate to
Speaker 1: replace Chair Yelling is drumroll please, Gary Cone, the current
Speaker 1: chief economic advisor to President Trump, former Goldman Sachs chief
Speaker 1: operating officer. So, Carl, what's the take on him? Well,
Speaker 1: he's an administration pick for the NYC, so, uh, you know,
Speaker 1: they raises questions about the political independence of the FED
Speaker 1: if you're having one of your own now moving into
Speaker 1: the role of FED chair. It's hard to see Cone
Speaker 1: being a policy hawk and raising rates aggressively or tightening
Speaker 1: policy aggressively, which would then hurt economic performance and run
Speaker 1: contrary to the objectives of the administration. I just can't
Speaker 1: see that the optics are not particularly great. It'd be
Speaker 1: better to be someone who is a little bit more
Speaker 1: distant from the administration. Well, and Gary Kohene is not
Speaker 1: an economist either, Chris, I'd love to get your take
Speaker 1: on the process, uh, that President Trump would have to
Speaker 1: go through to get Gary Khane to be the head
Speaker 1: of the FED, because my understanding is that any FED
Speaker 1: chair has to be appointed from sitting UH FED members,
Speaker 1: So he is not currently a FED member. How would
Speaker 1: this work? Well, you have to be a governor to
Speaker 1: be selected to be chair of the Board of Governors
Speaker 1: or in chair of the Federal Reserve System. But given
Speaker 1: that there are vacancies on the board, the president could
Speaker 1: select anyone he wished, assuming that'd be approved in the
Speaker 1: Senate to become a governor and be elevated to the
Speaker 1: position of chair simultaneously. So that's not exactly unless he
Speaker 1: were to fill up the three vacancies with other people
Speaker 1: and then assume, yeah, Chris, and I'm sorry, we're gonna
Speaker 1: have to leave it there. Chris connin fed, reporter for
Speaker 1: Bloomberg cawork down a Chief US economists for Bloomberg Intelligence.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
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Speaker 1: Abramo wits one. Before the podcast, you can always catch
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