1 00:00:10,119 --> 00:00:14,240 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,320 --> 00:00:18,200 Speaker 1: I'm Joe and I'm Tracy. Allow Tracy, It's been a 3 00:00:18,239 --> 00:00:21,440 Speaker 1: while since we've just sort of had a macro state 4 00:00:21,480 --> 00:00:23,599 Speaker 1: of the Economy episode, but I think now is a 5 00:00:23,680 --> 00:00:26,360 Speaker 1: very good time for it. Yeah. Absolutely, So we are 6 00:00:26,400 --> 00:00:32,400 Speaker 1: recording this on December literally two hours after the fed's 7 00:00:32,440 --> 00:00:35,720 Speaker 1: latest decision in which they hiked by fifty basis points. 8 00:00:35,760 --> 00:00:39,159 Speaker 1: That was widely expected. But what wasn't as expected was 9 00:00:39,280 --> 00:00:42,000 Speaker 1: the CPI number that we got just yesterday which came in. 10 00:00:42,080 --> 00:00:44,520 Speaker 1: I think the headline figure was seven point one percent, 11 00:00:44,640 --> 00:00:48,960 Speaker 1: which was lower than expected. Right, so a pretty big week, 12 00:00:49,000 --> 00:00:52,360 Speaker 1: I mean, the story the big macro stories. Everyone's waiting 13 00:00:52,400 --> 00:00:57,040 Speaker 1: for some clear sign of inflation deceleration. Everybody is trying 14 00:00:57,080 --> 00:00:58,680 Speaker 1: to figure out, you know, is the FED going to 15 00:00:58,760 --> 00:01:01,440 Speaker 1: pivot and what PIVO even means, which I think is 16 00:01:01,440 --> 00:01:04,800 Speaker 1: a contested word. And so I would say a pretty 17 00:01:04,800 --> 00:01:07,560 Speaker 1: big leak because, as you say, we got an inflation report, 18 00:01:07,959 --> 00:01:11,280 Speaker 1: of FED announcement, press conference, all of that, and so 19 00:01:11,360 --> 00:01:15,119 Speaker 1: I think a good moment to take stock of where 20 00:01:15,120 --> 00:01:17,520 Speaker 1: we are in these stories, Right, Is this a turning 21 00:01:17,600 --> 00:01:20,920 Speaker 1: point in these sort of high inflation, interest rate hiking 22 00:01:21,080 --> 00:01:23,520 Speaker 1: cycle narrative that we've had for some time, and the 23 00:01:23,560 --> 00:01:25,600 Speaker 1: fact that I've said turning point means that, and the 24 00:01:25,600 --> 00:01:27,440 Speaker 1: fact that we're doing an episode on this means that 25 00:01:27,520 --> 00:01:29,840 Speaker 1: it's probably going to amount to nothing. And I've cursed it, 26 00:01:30,040 --> 00:01:34,280 Speaker 1: but you never know. We keep the setting ourselves up 27 00:01:34,280 --> 00:01:36,399 Speaker 1: for the jinks right now, so we have all of 28 00:01:36,400 --> 00:01:38,640 Speaker 1: our bases covered. But anyway, I think we should just 29 00:01:38,640 --> 00:01:40,679 Speaker 1: get right into it because we have two great guests, 30 00:01:40,959 --> 00:01:43,120 Speaker 1: two of the people we most like to turn to 31 00:01:43,640 --> 00:01:47,880 Speaker 1: on these big macro questions. We've spoken to them many 32 00:01:47,920 --> 00:01:50,200 Speaker 1: times over the years. We're gonna be speaking with two guests. 33 00:01:50,280 --> 00:01:53,000 Speaker 1: Tim Dewey is the chief US economist at s g 34 00:01:53,200 --> 00:01:55,960 Speaker 1: H Macro Advisors as well as the Professor of Practice 35 00:01:55,960 --> 00:01:59,400 Speaker 1: in Economics at the University of Oregon. And John Turk, 36 00:01:59,480 --> 00:02:02,600 Speaker 1: the founder of j ST Advisors and the author of 37 00:02:02,640 --> 00:02:06,240 Speaker 1: The Cheap Convexity substag, which is a must read. Tim 38 00:02:06,280 --> 00:02:09,320 Speaker 1: and John, thank you both for coming on. Well, thank 39 00:02:09,360 --> 00:02:13,520 Speaker 1: you for having us. Thank you absolutely so. Why don't 40 00:02:13,639 --> 00:02:16,080 Speaker 1: you know, I'll throw a question out for both of you, 41 00:02:16,160 --> 00:02:20,079 Speaker 1: but like really simple, we just uh, just as we're talking, 42 00:02:20,200 --> 00:02:23,840 Speaker 1: wrapped up Powell's press conference. Why do you sort of 43 00:02:24,120 --> 00:02:27,760 Speaker 1: give us your summary? You know, you start with Tim, 44 00:02:27,800 --> 00:02:29,680 Speaker 1: but both of you can go of, like, what did 45 00:02:29,720 --> 00:02:34,280 Speaker 1: we just learn from Powell? Well that's a okay, So 46 00:02:35,760 --> 00:02:39,000 Speaker 1: what did we learn from Paul? Uh? So, No, No, 47 00:02:39,160 --> 00:02:41,519 Speaker 1: you know, I think, you know, I think the main 48 00:02:41,560 --> 00:02:43,720 Speaker 1: thing that that we really learned from Paul is that 49 00:02:43,760 --> 00:02:46,240 Speaker 1: they are very much committed to this idea that they 50 00:02:46,280 --> 00:02:49,240 Speaker 1: need to hold rates, you know, at a at a 51 00:02:49,240 --> 00:02:52,760 Speaker 1: restrictive level for for an extended period of time. Uh. 52 00:02:52,760 --> 00:02:55,640 Speaker 1: And then we also know that they're closing in on 53 00:02:56,040 --> 00:02:59,320 Speaker 1: what they think that level is. And and so you know, 54 00:03:00,520 --> 00:03:03,119 Speaker 1: what this seems to be coming down to is causing 55 00:03:03,160 --> 00:03:06,320 Speaker 1: you deliberately causing something that that looks very much like 56 00:03:06,360 --> 00:03:09,679 Speaker 1: a recession, although Paul Paul always say that it's it's 57 00:03:09,680 --> 00:03:13,799 Speaker 1: something in the forecast. Which is interesting now because it's 58 00:03:13,800 --> 00:03:18,760 Speaker 1: gonna create some questions given this disinflationary trend we're seeing 59 00:03:18,800 --> 00:03:22,160 Speaker 1: in the data. It's really gonna people are gonna start asking, well, 60 00:03:22,760 --> 00:03:27,600 Speaker 1: why do you need to create a recession here? Right? John? Yeah? 61 00:03:27,639 --> 00:03:29,840 Speaker 1: I mean, for me, I think of it that I 62 00:03:29,919 --> 00:03:32,720 Speaker 1: took away three key things from today. I mean, I 63 00:03:32,760 --> 00:03:37,040 Speaker 1: think that one is that they are kind of transitioning 64 00:03:37,160 --> 00:03:41,480 Speaker 1: from this where is terminal to how long to stay 65 00:03:41,520 --> 00:03:45,160 Speaker 1: their stage, And I think that that really was I 66 00:03:45,160 --> 00:03:47,400 Speaker 1: think most put forward by the fact of policy very 67 00:03:47,440 --> 00:03:51,320 Speaker 1: open to going in intervals starting at the February next 68 00:03:51,400 --> 00:03:54,200 Speaker 1: FOMC meeting, so that, you know, along with the commentary 69 00:03:54,200 --> 00:03:56,600 Speaker 1: of the press, commerce doesn't make it seem like they're 70 00:03:56,640 --> 00:03:59,800 Speaker 1: in the ballpark of what they deemed to be so 71 00:04:00,000 --> 00:04:03,720 Speaker 1: fficiently restrictive. I think the second thing is that they 72 00:04:04,040 --> 00:04:06,960 Speaker 1: are seemingly looking at this at least ex anti as 73 00:04:07,000 --> 00:04:11,720 Speaker 1: that they want to stay at five around five percent 74 00:04:11,760 --> 00:04:14,320 Speaker 1: FED funds for a while. And then third, I think 75 00:04:14,360 --> 00:04:17,039 Speaker 1: the interesting thing from the dots to me. You know, 76 00:04:17,240 --> 00:04:21,120 Speaker 1: obviously one can point to an interesting PC number, but 77 00:04:21,120 --> 00:04:23,560 Speaker 1: I think, you know, most interesting to me is that 78 00:04:23,600 --> 00:04:25,520 Speaker 1: if you look at the real rates for twenty three 79 00:04:25,520 --> 00:04:29,839 Speaker 1: and twenty four using FED funds and their core PC projection, 80 00:04:30,400 --> 00:04:33,280 Speaker 1: it's a hundred sixty basis points for both years. So 81 00:04:33,320 --> 00:04:36,520 Speaker 1: I think in terms of defining what sufficiently restrictive this 82 00:04:36,600 --> 00:04:40,120 Speaker 1: sort of vague maybe dynamic term means, I think they 83 00:04:40,120 --> 00:04:42,560 Speaker 1: gave you a pretty good insight into the level that 84 00:04:42,640 --> 00:04:45,520 Speaker 1: they seemingly are going to be targeting. That's you know, 85 00:04:45,560 --> 00:04:49,000 Speaker 1: equates to inflation back and target over the medium term. 86 00:04:49,040 --> 00:04:51,200 Speaker 1: So this is something that I wanted to ask both 87 00:04:51,240 --> 00:04:52,880 Speaker 1: of you. But I feel like there are a lot 88 00:04:52,920 --> 00:04:56,480 Speaker 1: of terms that you know, we throw around now without 89 00:04:56,600 --> 00:04:59,919 Speaker 1: really like digging into them very much. I mean, transitor 90 00:05:00,240 --> 00:05:02,480 Speaker 1: inflation was one of them from last year, and now 91 00:05:02,520 --> 00:05:06,400 Speaker 1: we're talking about transitory deflation, which is kind of amazing. 92 00:05:06,800 --> 00:05:10,640 Speaker 1: But can we talk about restrictive, Like, what exactly do 93 00:05:10,760 --> 00:05:13,359 Speaker 1: we mean when we talk about the FED moving to 94 00:05:13,960 --> 00:05:22,280 Speaker 1: a restrictive policy that can be for either of you? No, Well, well, 95 00:05:22,920 --> 00:05:26,279 Speaker 1: it's it's unfortunate that the FED doesn't doesn't seem to 96 00:05:26,440 --> 00:05:29,320 Speaker 1: entirely know when when they're going to be restrictive, right, So, 97 00:05:29,320 --> 00:05:31,240 Speaker 1: so how are they going to figure this out? And 98 00:05:31,279 --> 00:05:34,599 Speaker 1: it's it's the case that they're looking for this this 99 00:05:34,880 --> 00:05:38,840 Speaker 1: rate that they think we'll create downward pressure on the 100 00:05:38,920 --> 00:05:42,280 Speaker 1: labor market, sustained downward pressure on the labor market, and 101 00:05:42,400 --> 00:05:45,600 Speaker 1: the desire is to get wage growth down in order 102 00:05:45,640 --> 00:05:49,600 Speaker 1: to really reduce the inflationary pressures that they think are 103 00:05:49,600 --> 00:05:53,320 Speaker 1: going to persist if if unemployement stays this low. But 104 00:05:53,320 --> 00:05:55,719 Speaker 1: but but what is that rate? Uh, you know, I 105 00:05:55,720 --> 00:05:57,960 Speaker 1: think the best way to think about is is maybe, 106 00:05:58,000 --> 00:06:00,040 Speaker 1: like like John was saying that maybe it's a a 107 00:06:00,160 --> 00:06:03,359 Speaker 1: rate of a hundred sixty basis points, but but I 108 00:06:03,360 --> 00:06:05,560 Speaker 1: don't know if we should have a lot of conviction 109 00:06:05,720 --> 00:06:09,120 Speaker 1: in that number. Yeah, you know, I think that it 110 00:06:09,279 --> 00:06:11,960 Speaker 1: is sort of this you know, feel your way around, 111 00:06:12,160 --> 00:06:14,400 Speaker 1: you know, even in the context of what I know 112 00:06:14,400 --> 00:06:17,400 Speaker 1: a message I took away from the SEP today. You know, 113 00:06:17,440 --> 00:06:20,240 Speaker 1: I think that what I think Loretta Mester actually set 114 00:06:20,279 --> 00:06:23,560 Speaker 1: up a decent way of thinking about it and sort 115 00:06:23,600 --> 00:06:26,240 Speaker 1: of these like broad Stokes and in my notes the 116 00:06:26,279 --> 00:06:28,600 Speaker 1: Climes that kind of called it like the Themester roadmap. 117 00:06:28,680 --> 00:06:32,360 Speaker 1: But it's basically this idea is that once the FED 118 00:06:32,440 --> 00:06:36,120 Speaker 1: gets to a rate that has, as Tim says, you know, 119 00:06:36,760 --> 00:06:39,360 Speaker 1: sustained downward pressure on the labor markets stain down and 120 00:06:39,440 --> 00:06:43,000 Speaker 1: pressure on economic activity, they can basically tee off this 121 00:06:43,520 --> 00:06:46,720 Speaker 1: handoff from below trend growth to slowing wage growth to 122 00:06:46,760 --> 00:06:49,360 Speaker 1: slowing inflation. And I think that is sort of the 123 00:06:49,480 --> 00:06:52,520 Speaker 1: sequencing is that they're trying to achieve, and they can 124 00:06:52,560 --> 00:06:55,960 Speaker 1: only really know which level is doing that in real time. 125 00:06:56,279 --> 00:06:58,600 Speaker 1: Of course, they'll have model estimates that will guide them, 126 00:06:58,880 --> 00:07:01,640 Speaker 1: and we'll, you know, we'll sure we'll see a Coshari blog, 127 00:07:01,880 --> 00:07:04,360 Speaker 1: you know, following this meeting on what that looks like. 128 00:07:04,800 --> 00:07:07,560 Speaker 1: But I think that you know, broadly speaking, it's going 129 00:07:07,600 --> 00:07:10,120 Speaker 1: to be very much informed by the data. And this 130 00:07:10,200 --> 00:07:13,080 Speaker 1: is something that I think, you know, a takeaway from 131 00:07:13,080 --> 00:07:16,760 Speaker 1: me from this meeting is that you know, sufficiently restrictive 132 00:07:16,880 --> 00:07:19,880 Speaker 1: is not a you know, it's it's not an absolute level, 133 00:07:19,920 --> 00:07:22,160 Speaker 1: it's a it's a dynamic level. And I think, you know, 134 00:07:22,240 --> 00:07:26,000 Speaker 1: going into you know, the next two years, staying still 135 00:07:26,240 --> 00:07:29,000 Speaker 1: may actually include moving, but we can get into that. 136 00:07:31,600 --> 00:07:34,280 Speaker 1: Let me back up a little bit, because set Us 137 00:07:34,280 --> 00:07:37,360 Speaker 1: had the FED, let's talk about the day before. On Tuesday, 138 00:07:37,400 --> 00:07:40,080 Speaker 1: we got that CPI report that Tracy mentioned in the beginning. 139 00:07:40,800 --> 00:07:44,400 Speaker 1: Core cp I on a month over month basis came 140 00:07:44,440 --> 00:07:48,040 Speaker 1: into just point two percent headline, obviously influenced a lot 141 00:07:48,040 --> 00:07:50,000 Speaker 1: by the plunge and oil prices which can only go 142 00:07:50,080 --> 00:07:53,160 Speaker 1: so far. I guess just zero point one person, Tim, 143 00:07:53,200 --> 00:07:55,520 Speaker 1: is this like, when you look at this report, are 144 00:07:55,520 --> 00:07:58,680 Speaker 1: you optimistic? Are the reasons to be optimistic that this 145 00:07:58,760 --> 00:08:00,720 Speaker 1: is the start of a sustain in a bold trend 146 00:08:00,880 --> 00:08:05,040 Speaker 1: or is this noise. Yeah, certainly when I look at 147 00:08:05,040 --> 00:08:07,840 Speaker 1: the report, I had to be sort of honest to uh, 148 00:08:07,880 --> 00:08:10,640 Speaker 1: you know the approach I was taking last year, earlier 149 00:08:10,680 --> 00:08:13,280 Speaker 1: this year. And you know, when when I saw this 150 00:08:13,400 --> 00:08:16,120 Speaker 1: inflation numbers started to rise and I saw what I 151 00:08:16,160 --> 00:08:20,520 Speaker 1: call super core inflation, right, uh, core inflation minus housing 152 00:08:20,560 --> 00:08:23,520 Speaker 1: and autos, you know, I really started to say, you know, 153 00:08:23,880 --> 00:08:27,480 Speaker 1: we can't ignore you know, this inflation is transitory. And 154 00:08:27,800 --> 00:08:29,880 Speaker 1: I'm kind of the same position as right now is 155 00:08:29,920 --> 00:08:32,200 Speaker 1: that we've seen a lot of improvement in that super 156 00:08:32,200 --> 00:08:36,040 Speaker 1: core and narrowing of of some inflationary pressures. And so 157 00:08:36,200 --> 00:08:39,240 Speaker 1: it does seem to me like there has been a change. 158 00:08:39,320 --> 00:08:42,000 Speaker 1: Now whether or not that's persistent will we'll find out. 159 00:08:42,000 --> 00:08:43,480 Speaker 1: But I do think you kind of have to have 160 00:08:43,600 --> 00:08:46,160 Speaker 1: to take the number face value and saying, yeah, there 161 00:08:46,240 --> 00:08:49,240 Speaker 1: seemed to be a few of the lessening of inflationary pressures, 162 00:08:49,240 --> 00:08:51,959 Speaker 1: at least in the near term here. So one of 163 00:08:52,000 --> 00:08:55,240 Speaker 1: the things that Pal said today was, you know, he 164 00:08:55,360 --> 00:08:59,040 Speaker 1: was talking about how there's this expectation that services inflation 165 00:08:59,360 --> 00:09:01,959 Speaker 1: is going to be tough to bring down because the 166 00:09:02,040 --> 00:09:04,880 Speaker 1: labor market is so strong and wage growth is still 167 00:09:04,920 --> 00:09:08,160 Speaker 1: relatively high. And that's the thing that kind of feeds 168 00:09:08,280 --> 00:09:12,520 Speaker 1: into overall prices. I mean that implies that the FED 169 00:09:12,640 --> 00:09:15,840 Speaker 1: is explicitly going to be targeting like a softening of 170 00:09:15,920 --> 00:09:18,680 Speaker 1: the labor market. Right. I was thinking that this is 171 00:09:18,679 --> 00:09:21,320 Speaker 1: a way you can sort of tell that the fetish 172 00:09:21,400 --> 00:09:24,839 Speaker 1: hawk is right, is that they're they're they're very much 173 00:09:24,880 --> 00:09:28,760 Speaker 1: focused on getting inflation down, even at the at the 174 00:09:28,840 --> 00:09:32,559 Speaker 1: cost of getting unimplanted higher, you know, considerably higher. And 175 00:09:32,840 --> 00:09:36,240 Speaker 1: you know that's that's I think, you know that we're 176 00:09:36,360 --> 00:09:41,120 Speaker 1: definitely trying to achieve here. So inflation is starting to 177 00:09:41,200 --> 00:09:44,280 Speaker 1: come down. But for the past year or so, we've 178 00:09:44,320 --> 00:09:46,880 Speaker 1: been told that the reason the FED needs to be 179 00:09:47,000 --> 00:09:51,520 Speaker 1: so aggressive is because they're worried about expectations becoming embedded. 180 00:09:51,920 --> 00:09:55,560 Speaker 1: They're worried about a wage price spiral. But the fact 181 00:09:55,600 --> 00:09:59,280 Speaker 1: that core seems to be beginning to come down, does 182 00:09:59,320 --> 00:10:03,160 Speaker 1: that suggest that maybe those concerns were overblown. That's gonna 183 00:10:03,200 --> 00:10:05,800 Speaker 1: be the question that people start to ask. If core 184 00:10:06,000 --> 00:10:09,360 Speaker 1: is coming down and the FED sort of backing down 185 00:10:09,400 --> 00:10:11,720 Speaker 1: to this argument that that we really need to get 186 00:10:11,760 --> 00:10:17,559 Speaker 1: this this lower level of core inflation services minus x 187 00:10:17,640 --> 00:10:21,360 Speaker 1: housing down, it's going to cause some some concern about, well, 188 00:10:21,360 --> 00:10:26,120 Speaker 1: why why is that now the measure of underlying inflation. 189 00:10:26,360 --> 00:10:28,800 Speaker 1: Why should we be focused on that and not in 190 00:10:28,840 --> 00:10:33,280 Speaker 1: fact the idea that maybe we can return to type 191 00:10:33,320 --> 00:10:37,000 Speaker 1: of environment and the FED doesn't hasn't changed the narrative 192 00:10:37,040 --> 00:10:40,000 Speaker 1: to to to allow that to happen yet, So I 193 00:10:40,040 --> 00:10:43,720 Speaker 1: think it's going to be a question that's increasingly important 194 00:10:44,120 --> 00:10:47,600 Speaker 1: as overall cored inflation if it remains low. I like 195 00:10:47,679 --> 00:10:51,000 Speaker 1: two things on this. I think that, like Tim said, 196 00:10:51,000 --> 00:10:53,800 Speaker 1: it's absolutely right, you know, I think that they're really 197 00:10:53,840 --> 00:10:58,559 Speaker 1: like two reasons for why, you know, this rendition won't 198 00:10:58,600 --> 00:11:02,560 Speaker 1: just be the reciprocal of sort of the you know, 199 00:11:02,600 --> 00:11:07,080 Speaker 1: inflation rising period of late last year early this year. 200 00:11:07,480 --> 00:11:09,280 Speaker 1: I think one, and this is why I think the 201 00:11:09,400 --> 00:11:12,400 Speaker 1: FED is so emphatic on showing us that they're going 202 00:11:12,440 --> 00:11:15,560 Speaker 1: to be looking at you know, services XO er sort 203 00:11:15,559 --> 00:11:18,800 Speaker 1: of this like core labor market trend is because the 204 00:11:18,840 --> 00:11:23,480 Speaker 1: FED knows that the labor market is not a tail 205 00:11:23,559 --> 00:11:27,440 Speaker 1: when to achieving their goals. It's a headwind. So given 206 00:11:27,520 --> 00:11:30,800 Speaker 1: the state of where nominal wage growth is, it's much 207 00:11:30,880 --> 00:11:35,240 Speaker 1: harder to have you know, conviction that inflation is going 208 00:11:35,280 --> 00:11:38,360 Speaker 1: to settle back at two percent when nominal wage growth 209 00:11:38,400 --> 00:11:40,560 Speaker 1: is five and a half. Whereas we flip it to 210 00:11:40,600 --> 00:11:43,839 Speaker 1: where the FED was, you know, in late last year 211 00:11:43,920 --> 00:11:47,760 Speaker 1: early this year, it was it was becoming pretty obvious 212 00:11:47,800 --> 00:11:51,079 Speaker 1: that you know, inflation would be even if there were 213 00:11:51,200 --> 00:11:54,880 Speaker 1: transitory factors, it had this structural tail when from a 214 00:11:54,960 --> 00:11:58,040 Speaker 1: very robust labor market. So you know, in terms of 215 00:11:58,080 --> 00:12:01,560 Speaker 1: comparing then to now, I think it's it makes sense 216 00:12:01,880 --> 00:12:04,640 Speaker 1: for at least like in terms of a range of outcomes, 217 00:12:04,640 --> 00:12:08,400 Speaker 1: for the FED to be more hesitant into embracing this 218 00:12:08,520 --> 00:12:13,760 Speaker 1: trend disinflation versus them accepting trend higher inflation because the 219 00:12:13,800 --> 00:12:17,480 Speaker 1: labor market dynamic is feeding into one and not the other. 220 00:12:17,840 --> 00:12:19,719 Speaker 1: And I think the second thing is, you know, on 221 00:12:19,840 --> 00:12:23,120 Speaker 1: inflation expectations, you know such a big part of it. 222 00:12:23,120 --> 00:12:24,960 Speaker 1: And this is something I think that you know, Powell 223 00:12:25,040 --> 00:12:27,240 Speaker 1: has been really pounding the table on really I think 224 00:12:27,280 --> 00:12:30,760 Speaker 1: since June when they made their initial rise to seventy five, 225 00:12:31,760 --> 00:12:34,680 Speaker 1: is that he said that above target inflation in terms 226 00:12:34,679 --> 00:12:38,400 Speaker 1: of expectations is not only about trend, but it's about level. 227 00:12:38,800 --> 00:12:40,880 Speaker 1: And then from there it's like a ticking clock in 228 00:12:41,000 --> 00:12:44,199 Speaker 1: terms of in terms of its feet through two inflation expectations, 229 00:12:44,360 --> 00:12:47,240 Speaker 1: whereas if you allow inflation to remain above target for 230 00:12:47,320 --> 00:12:50,000 Speaker 1: three or four years, even though it's headed in the 231 00:12:50,080 --> 00:12:53,200 Speaker 1: right direction, that level can be a nuisance in terms 232 00:12:53,200 --> 00:12:55,800 Speaker 1: of inflation expectations and making sure that inflation is anchoring 233 00:12:55,800 --> 00:12:58,720 Speaker 1: a two percent So I think that you know, there 234 00:12:58,760 --> 00:13:02,400 Speaker 1: are you know, similarities to playing that this is the 235 00:13:02,400 --> 00:13:04,320 Speaker 1: reciprocal of the bull had been goods. This is the 236 00:13:04,320 --> 00:13:08,760 Speaker 1: reciprocal to the bull with rents. But at the margin 237 00:13:08,800 --> 00:13:10,880 Speaker 1: there are more factors for the FED to be hesitant 238 00:13:10,920 --> 00:13:14,000 Speaker 1: in this full embrace of the early signs that they meaning, 239 00:13:14,840 --> 00:13:17,480 Speaker 1: especially because they got burned on that last year too, 240 00:13:17,600 --> 00:13:20,640 Speaker 1: So you know, that's there there. This has always been 241 00:13:20,679 --> 00:13:23,280 Speaker 1: I think, you know, I'm not a risk, is not 242 00:13:23,400 --> 00:13:25,840 Speaker 1: a risk the likelihood that the FED was going to, 243 00:13:26,400 --> 00:13:29,600 Speaker 1: you know, was going to hold hold the line here 244 00:13:29,720 --> 00:13:33,479 Speaker 1: for longer than than than maybe market participants thought appropriate, 245 00:13:33,720 --> 00:13:37,120 Speaker 1: simply because they thought the risk of budding in flesh 246 00:13:37,120 --> 00:13:40,520 Speaker 1: and get uncontrol and and Paul reidered that, reiterated that 247 00:13:40,559 --> 00:14:00,560 Speaker 1: today it was just simply too hot. So I want 248 00:14:00,559 --> 00:14:03,160 Speaker 1: to talk more about labor and tim This is a 249 00:14:03,440 --> 00:14:06,840 Speaker 1: question for you. So right now, the unemployment rate is 250 00:14:06,960 --> 00:14:11,000 Speaker 1: three point seven percent, And in the press conference, I 251 00:14:11,000 --> 00:14:14,240 Speaker 1: don't think like Paul like specifically talked about a soft 252 00:14:14,360 --> 00:14:17,079 Speaker 1: landing per se. I don't know if you used that term, 253 00:14:17,120 --> 00:14:19,600 Speaker 1: but he did seem to express some hope that we 254 00:14:19,640 --> 00:14:22,200 Speaker 1: need to see some weakening of the labor market, but 255 00:14:22,200 --> 00:14:23,920 Speaker 1: that maybe you could just be a little because all 256 00:14:23,960 --> 00:14:26,640 Speaker 1: you know, the labor markets really tighten his view, there's 257 00:14:26,680 --> 00:14:30,280 Speaker 1: all these unfilled job openings, there's a structural shortage of workers. 258 00:14:30,600 --> 00:14:32,720 Speaker 1: So maybe we just need a little bit of tilt. 259 00:14:33,160 --> 00:14:36,280 Speaker 1: What does history say, Can we just get a modest 260 00:14:36,880 --> 00:14:39,680 Speaker 1: increase in the unemployment rate to like the low floors, 261 00:14:40,360 --> 00:14:42,640 Speaker 1: or if we start to see that pick up in 262 00:14:42,680 --> 00:14:45,680 Speaker 1: the unemployment rate, does history say it's going to go 263 00:14:45,760 --> 00:14:49,080 Speaker 1: up substantially more than that? Yeah, I would say that 264 00:14:49,080 --> 00:14:51,720 Speaker 1: that the history is is not the Fed's favor here, 265 00:14:52,480 --> 00:14:55,280 Speaker 1: that that you really can't guide the unemployment rate, you know, 266 00:14:55,600 --> 00:14:59,560 Speaker 1: three tents or or five tents of the percentage point higher, 267 00:14:59,640 --> 00:15:04,360 Speaker 1: let alo point nine right brains higher. So uh, you know, 268 00:15:04,400 --> 00:15:08,120 Speaker 1: I I just don't think that this sort of soft 269 00:15:08,240 --> 00:15:12,760 Speaker 1: lending idea is a likely outcome here. Um. I would 270 00:15:12,800 --> 00:15:16,000 Speaker 1: like it to be right, but to me, it seems 271 00:15:16,040 --> 00:15:21,080 Speaker 1: to be screaming against what we've seen in the past. Yeah, Tracy, 272 00:15:21,120 --> 00:15:23,720 Speaker 1: I'm just looking at the FEDS set the Summary of 273 00:15:23,760 --> 00:15:28,760 Speaker 1: Economic Projections, and it anticipates the unemployment rate peaking at like, 274 00:15:28,800 --> 00:15:30,960 Speaker 1: you know, hitting four orth three point seven now, going 275 00:15:31,000 --> 00:15:33,520 Speaker 1: to four point six next year and the year after that, 276 00:15:33,880 --> 00:15:36,520 Speaker 1: and then going down a bit. So there's like this 277 00:15:36,560 --> 00:15:38,560 Speaker 1: idea that we just get a little bit. You know, 278 00:15:38,680 --> 00:15:41,560 Speaker 1: one person is not nothing, especially the people who have 279 00:15:41,640 --> 00:15:44,440 Speaker 1: lost their jobs. But you know, the story the Fed 280 00:15:44,560 --> 00:15:47,720 Speaker 1: is telling is that the unemployment rate will be contained. Well, 281 00:15:47,840 --> 00:15:50,120 Speaker 1: this is something else I wanted to ask about, which is, 282 00:15:50,240 --> 00:15:52,960 Speaker 1: you know, we hear comments from the FED a lot 283 00:15:53,000 --> 00:15:57,160 Speaker 1: now about how monetary policy operates with a lag, and 284 00:15:57,320 --> 00:16:00,280 Speaker 1: that to me seems like as big a question shin 285 00:16:00,640 --> 00:16:04,080 Speaker 1: as the transitory inflation question that we were discussing, you know, 286 00:16:04,200 --> 00:16:06,160 Speaker 1: a year or two ago, like how long is the 287 00:16:06,200 --> 00:16:08,640 Speaker 1: inflation going to last? How long is it actually going 288 00:16:08,640 --> 00:16:12,160 Speaker 1: to take interest rate hikes to have an effect? Do 289 00:16:12,240 --> 00:16:15,760 Speaker 1: we have like a good sense of that, Like the 290 00:16:16,280 --> 00:16:20,160 Speaker 1: fact that we've saw cp I come in less than 291 00:16:20,240 --> 00:16:24,920 Speaker 1: expected yesterday, is that the a sign that monetary policy 292 00:16:25,000 --> 00:16:27,920 Speaker 1: is working, is a sign that monetary policy has the 293 00:16:27,920 --> 00:16:32,120 Speaker 1: potential to overshoot, and you know, cause the recession that 294 00:16:32,160 --> 00:16:36,440 Speaker 1: everyone seems to be worried about. I think that, you know, broadly, 295 00:16:36,480 --> 00:16:41,240 Speaker 1: the long and variable lack question is just very hard 296 00:16:41,360 --> 00:16:43,920 Speaker 1: to answer. I don't think there is a clean one. 297 00:16:44,600 --> 00:16:47,760 Speaker 1: I think that there is this assumption that the FED 298 00:16:47,880 --> 00:16:50,560 Speaker 1: is like talking in central banks broadly, are talking about 299 00:16:50,600 --> 00:16:53,760 Speaker 1: about long and variable lags in the sense of, you know, well, 300 00:16:53,800 --> 00:16:56,160 Speaker 1: we should slow down and then wait six months and 301 00:16:56,200 --> 00:16:59,320 Speaker 1: you'll have more apparent evidence. And you have seen it 302 00:16:59,360 --> 00:17:01,800 Speaker 1: across the I mean, the Bank of Canada is recently 303 00:17:01,840 --> 00:17:05,240 Speaker 1: transitioned from saying that you can feel the monetary policy 304 00:17:05,320 --> 00:17:08,080 Speaker 1: tightening and just the interest rate sense of sectors and 305 00:17:08,119 --> 00:17:10,439 Speaker 1: the economy, and now the whole economy is starting to 306 00:17:10,480 --> 00:17:14,000 Speaker 1: feel it. So I think there's like, conceptually it makes 307 00:17:14,000 --> 00:17:15,840 Speaker 1: a lot of sense. I don't think that there's like 308 00:17:15,880 --> 00:17:20,040 Speaker 1: a strong empirical approach to say, okay, you know T 309 00:17:20,240 --> 00:17:22,520 Speaker 1: minus nine months, this is when we'll start to feel 310 00:17:22,560 --> 00:17:24,640 Speaker 1: the whole thing. I think that the way the FED 311 00:17:24,760 --> 00:17:26,840 Speaker 1: is thinking about long variable aggs, and maybe I'll be 312 00:17:26,880 --> 00:17:31,160 Speaker 1: more specific to the leadership is I think the way 313 00:17:31,160 --> 00:17:33,440 Speaker 1: the FED things about long variable aggs as you kind 314 00:17:33,440 --> 00:17:38,560 Speaker 1: of hope to engineer this, this handoff to pro cyclical tightening. 315 00:17:38,560 --> 00:17:41,000 Speaker 1: And what I mean by that is that basically you 316 00:17:41,119 --> 00:17:46,080 Speaker 1: let the disinflation that's occurring basically raise your real effective funds, right, 317 00:17:46,480 --> 00:17:48,720 Speaker 1: And I think that the FED is now at the 318 00:17:48,800 --> 00:17:52,320 Speaker 1: point where the long and variable lags is that now 319 00:17:52,359 --> 00:17:54,600 Speaker 1: you're starting to see the data at least begin to 320 00:17:54,640 --> 00:17:57,800 Speaker 1: cooperate with them. There has been some softening, not a lot, 321 00:17:57,840 --> 00:17:59,760 Speaker 1: but there has been some softening in the labor market. 322 00:18:00,040 --> 00:18:03,240 Speaker 1: There's definitely less churn, as we can see from continuing claims. 323 00:18:03,680 --> 00:18:06,280 Speaker 1: Jolts have come down a lot, the inflation data starting 324 00:18:06,320 --> 00:18:08,480 Speaker 1: to look a lot better than it did three months ago. 325 00:18:09,000 --> 00:18:11,320 Speaker 1: And now I think from the FEDS long and variable 326 00:18:11,359 --> 00:18:14,920 Speaker 1: lags quote unquote perspective is it's about, you know, exerting 327 00:18:15,480 --> 00:18:18,880 Speaker 1: real positive policy rates across the curve and letting that 328 00:18:18,960 --> 00:18:21,879 Speaker 1: sort of service. This that the new form or or 329 00:18:21,960 --> 00:18:25,320 Speaker 1: anchored form of tightening more than you know now what 330 00:18:25,400 --> 00:18:27,760 Speaker 1: we've been doing now, which is ratings. I want to 331 00:18:27,800 --> 00:18:31,680 Speaker 1: go back to the theoretical question about whether some sort 332 00:18:31,680 --> 00:18:34,880 Speaker 1: of immaculate disinflation is possible, or whether we can have 333 00:18:34,920 --> 00:18:38,280 Speaker 1: inflation return to trend without a big jump in the 334 00:18:38,480 --> 00:18:41,840 Speaker 1: unemployment rate. I mean again, just going back to the 335 00:18:41,960 --> 00:18:44,320 Speaker 1: last few weeks, so we gotta you know, pretty a 336 00:18:44,359 --> 00:18:49,159 Speaker 1: good November CPI report. We also had that hot wage 337 00:18:49,160 --> 00:18:53,280 Speaker 1: growth number from the recent Non Firm Perils Report. I 338 00:18:53,280 --> 00:18:56,280 Speaker 1: mean again, we're pulling out of just very few data points. 339 00:18:56,280 --> 00:18:58,160 Speaker 1: Like you, I don't think you could tell a tremendous 340 00:18:58,160 --> 00:19:01,840 Speaker 1: story from one CPR report, two CPR reports and one 341 00:19:01,880 --> 00:19:05,040 Speaker 1: wage number in the Non farm Perils Report. But I 342 00:19:05,080 --> 00:19:07,680 Speaker 1: don't know. It looks to me like you can have both. 343 00:19:07,720 --> 00:19:10,639 Speaker 1: That you can have this period where wages are growing robustly, 344 00:19:11,119 --> 00:19:15,280 Speaker 1: where the unemployment rate is low, and some sort of rollover. 345 00:19:15,480 --> 00:19:18,000 Speaker 1: What would it take for the FED? I guess my 346 00:19:18,080 --> 00:19:20,960 Speaker 1: question would be to say, you know what, maybe it's possible, 347 00:19:21,000 --> 00:19:23,080 Speaker 1: maybe we don't need to induce a recession, or maybe 348 00:19:23,080 --> 00:19:25,159 Speaker 1: we don't need to see much of an increase in 349 00:19:25,200 --> 00:19:28,399 Speaker 1: the unemployment rate at all. What would it take for 350 00:19:28,440 --> 00:19:30,560 Speaker 1: the FED to look at you know, how many more 351 00:19:30,560 --> 00:19:33,280 Speaker 1: of these cool CPR reports would it need to be 352 00:19:33,280 --> 00:19:36,359 Speaker 1: before maybe the FED started believing in the possibility of 353 00:19:36,359 --> 00:19:39,520 Speaker 1: a soft landing. That's a that's a big question. I 354 00:19:39,520 --> 00:19:42,960 Speaker 1: asked myself a lot exactly That reason is you have 355 00:19:43,119 --> 00:19:46,280 Speaker 1: seen some improvement in the inflation numbers, and it seems 356 00:19:46,280 --> 00:19:49,359 Speaker 1: like it's almost premature. Right, we had been expecting, and 357 00:19:49,400 --> 00:19:52,320 Speaker 1: the FED had been expecting, that that improvement would really 358 00:19:52,359 --> 00:19:55,640 Speaker 1: follow the labor market, and it's coming, you know, it's 359 00:19:55,640 --> 00:19:58,320 Speaker 1: coming ahead of you know what we see as any 360 00:19:58,359 --> 00:20:01,680 Speaker 1: any significant loose sing remarket and that the FED is 361 00:20:01,720 --> 00:20:04,520 Speaker 1: going to be worried, and I think rightly so that 362 00:20:04,880 --> 00:20:09,160 Speaker 1: you know, persistently high inflation excuse me, persistently high wage growth, 363 00:20:09,480 --> 00:20:15,440 Speaker 1: if not matched by sufficiently high productivity growth, is over 364 00:20:15,560 --> 00:20:19,480 Speaker 1: time going to lead to upward pressure on inflation and 365 00:20:19,560 --> 00:20:23,399 Speaker 1: upper pressure on inflation expectations. Uh. And that that basically 366 00:20:23,440 --> 00:20:26,440 Speaker 1: the argument that that wages and inflation are are tied 367 00:20:26,480 --> 00:20:28,960 Speaker 1: together in the long run, and we could be seen 368 00:20:29,000 --> 00:20:32,159 Speaker 1: in the short run is all the slippages that that 369 00:20:32,200 --> 00:20:34,639 Speaker 1: can happen. So you could think of uh, you know, 370 00:20:34,720 --> 00:20:38,600 Speaker 1: higher wages being resolved through lower margins, right margin compression. 371 00:20:39,000 --> 00:20:42,640 Speaker 1: So you know, I think, as you said, it's really 372 00:20:42,640 --> 00:20:45,719 Speaker 1: hard to make anything any clear decisions off of just 373 00:20:45,800 --> 00:20:48,320 Speaker 1: a couple of months of data. But you know, the 374 00:20:48,320 --> 00:20:51,280 Speaker 1: FED will have I think a hardard time selling that 375 00:20:51,359 --> 00:20:55,480 Speaker 1: story going forward again, If if inflation continues a lot, 376 00:20:55,680 --> 00:21:00,639 Speaker 1: especially if if the core services inflation numbers starts softened 377 00:21:00,680 --> 00:21:03,440 Speaker 1: more than that's, that's gonna be something. It's it's gonna 378 00:21:03,480 --> 00:21:06,480 Speaker 1: be harder to explain. When did we start calling it 379 00:21:06,560 --> 00:21:10,280 Speaker 1: immaculate disinflation? I don't know this. Who came up with that? 380 00:21:10,440 --> 00:21:13,080 Speaker 1: I think like the earliest mentioned. I was curious because 381 00:21:13,080 --> 00:21:15,159 Speaker 1: this is the second or third time I've heard it 382 00:21:15,280 --> 00:21:17,800 Speaker 1: just today, But the earliest I can find is actually 383 00:21:17,800 --> 00:21:21,080 Speaker 1: Matt Klein in his newsletter. Um, it sounds like a 384 00:21:21,119 --> 00:21:26,720 Speaker 1: summer's thing, I feel like, right, So I wanted to 385 00:21:26,760 --> 00:21:29,959 Speaker 1: ask about financial conditions as well, because I mean, this 386 00:21:30,040 --> 00:21:32,480 Speaker 1: is something that has come up. Neil Kashkari talked about 387 00:21:32,480 --> 00:21:34,800 Speaker 1: it on on this podcast, talking about how he was 388 00:21:34,840 --> 00:21:37,840 Speaker 1: happy to see the fall in stocks which fed into 389 00:21:37,840 --> 00:21:41,320 Speaker 1: a tightening of financial conditions. And of course, monetary policy 390 00:21:41,400 --> 00:21:45,679 Speaker 1: is supposed to work through either loosening or tightening financial conditions. 391 00:21:45,920 --> 00:21:49,399 Speaker 1: But in recent weeks we've seen those conditions start to 392 00:21:49,480 --> 00:21:54,520 Speaker 1: loosen again as bonds are rallying. Stocks have been rallying 393 00:21:54,600 --> 00:21:57,439 Speaker 1: up until today, it looks like that is down a 394 00:21:57,440 --> 00:22:01,520 Speaker 1: bit after the FED meeting. But John, this is for 395 00:22:01,560 --> 00:22:03,640 Speaker 1: you in particular because I know you were very very 396 00:22:03,640 --> 00:22:07,439 Speaker 1: focused on the stronger dollar over the summer, and you 397 00:22:07,480 --> 00:22:10,240 Speaker 1: had argued that the strong dollar would end up doing 398 00:22:10,359 --> 00:22:13,120 Speaker 1: some of the Fed's work when it comes to tightening 399 00:22:13,160 --> 00:22:16,520 Speaker 1: financial conditions for it. But now that the dollar in 400 00:22:16,560 --> 00:22:20,840 Speaker 1: particular is softening and financial conditions in general are loosening, 401 00:22:21,320 --> 00:22:24,199 Speaker 1: does the FED need to be concerned about that? Do 402 00:22:24,280 --> 00:22:28,000 Speaker 1: they need to try to move to offset that? That's 403 00:22:28,000 --> 00:22:31,680 Speaker 1: a good question. I don't think so. Um, And I 404 00:22:31,720 --> 00:22:33,880 Speaker 1: think that you know, from the FETs perspective, at least, 405 00:22:33,880 --> 00:22:37,200 Speaker 1: you know, looking at it in dollar terms or US 406 00:22:37,280 --> 00:22:41,679 Speaker 1: dollar terms, is it really almost was job done? I mean, 407 00:22:41,760 --> 00:22:44,720 Speaker 1: we can, of course, you know, add in that China 408 00:22:44,760 --> 00:22:46,920 Speaker 1: being effectively shut down for a lot of the years 409 00:22:46,960 --> 00:22:49,200 Speaker 1: certainly helped com under pressure come off. We can also 410 00:22:49,240 --> 00:22:52,200 Speaker 1: added that the spr a tremendous amount of relief to 411 00:22:52,359 --> 00:22:55,000 Speaker 1: oil markets. But you know, I think in terms of 412 00:22:55,040 --> 00:22:59,679 Speaker 1: the commodity supercycle that was being pitched, the dollar did 413 00:22:59,800 --> 00:23:02,439 Speaker 1: new or a lot of the right tail in you know, 414 00:23:02,480 --> 00:23:04,800 Speaker 1: the broader commodity complex and just looking at you know, 415 00:23:04,800 --> 00:23:08,320 Speaker 1: the Bloomberg Commodity Index it's all from material amount from 416 00:23:08,320 --> 00:23:11,760 Speaker 1: its highs. So I think in those terms, the FED 417 00:23:11,840 --> 00:23:14,720 Speaker 1: has achieved a lot um. I think, you know, thinking 418 00:23:14,720 --> 00:23:17,720 Speaker 1: about the financial conditions question, and this is one I actually, 419 00:23:18,160 --> 00:23:19,919 Speaker 1: you know, get a lot because we have had a 420 00:23:19,960 --> 00:23:22,600 Speaker 1: non trivial move and you know, and looking at something 421 00:23:22,600 --> 00:23:26,120 Speaker 1: like a Goldman f CIS basket over the last few weeks. 422 00:23:26,520 --> 00:23:28,240 Speaker 1: I think the way to think about it, and I 423 00:23:28,240 --> 00:23:30,639 Speaker 1: think the way the FIT is broadly thinking about it, 424 00:23:30,680 --> 00:23:32,560 Speaker 1: is that f c I s are sort of this 425 00:23:32,560 --> 00:23:36,480 Speaker 1: this relative term. They're relative to the spot labor market 426 00:23:36,560 --> 00:23:39,560 Speaker 1: data and this spot inflation data. And if f c 427 00:23:39,760 --> 00:23:43,360 Speaker 1: i s were loosening in the context of the inflation 428 00:23:43,440 --> 00:23:47,080 Speaker 1: data getting worse or the unemployment or the employment stuff 429 00:23:47,119 --> 00:23:50,240 Speaker 1: getting better, I think that would be at odds with 430 00:23:50,359 --> 00:23:53,159 Speaker 1: something that the FED is looking for. But you know, 431 00:23:53,280 --> 00:23:55,560 Speaker 1: a point that I've been making over the last few weeks, 432 00:23:55,560 --> 00:23:57,240 Speaker 1: if the f c I s have sort of been 433 00:23:57,480 --> 00:24:01,600 Speaker 1: quote unquote earned in terms of a slight improvement in 434 00:24:01,640 --> 00:24:04,040 Speaker 1: the labor market and more than slight improvement in the 435 00:24:04,040 --> 00:24:06,359 Speaker 1: inflation data, even though it's only the last two months, 436 00:24:06,800 --> 00:24:10,720 Speaker 1: then I think that's something that it's not necessarily equals 437 00:24:10,760 --> 00:24:12,880 Speaker 1: like the FED is going to fight where you're going 438 00:24:12,960 --> 00:24:15,720 Speaker 1: to It requires Powell to sound like he did at 439 00:24:15,800 --> 00:24:18,000 Speaker 1: jackson All. I mean, I think the pretty telling thing 440 00:24:18,760 --> 00:24:21,240 Speaker 1: for me was when Powell came out in Brookings and 441 00:24:21,280 --> 00:24:23,359 Speaker 1: everyone was expecting him to, you know, beat the hammer 442 00:24:23,440 --> 00:24:27,240 Speaker 1: on financial conditions, assuming that they loosened too much. He didn't, 443 00:24:27,720 --> 00:24:30,160 Speaker 1: And I think that part of the reason he didn't 444 00:24:30,320 --> 00:24:32,800 Speaker 1: is that this is different than it was in July 445 00:24:32,880 --> 00:24:36,960 Speaker 1: and August, when there wasn't really any compelling evidence that 446 00:24:37,040 --> 00:24:40,040 Speaker 1: inflation was following. We actually saw two months of point 447 00:24:40,080 --> 00:24:44,040 Speaker 1: six is after and the claims moved from that when 448 00:24:44,160 --> 00:24:46,760 Speaker 1: saw you initial claims reached k W back to two 449 00:24:46,840 --> 00:24:49,440 Speaker 1: ten basically over the course of a month. And then 450 00:24:49,480 --> 00:24:51,880 Speaker 1: it was more of a reaction function question how serious 451 00:24:51,960 --> 00:24:53,439 Speaker 1: is the FED? Is the FED willing to do what 452 00:24:53,480 --> 00:24:55,160 Speaker 1: it takes? And then Powell came out and Jackson All 453 00:24:55,240 --> 00:24:58,040 Speaker 1: told you we're gonna do what it takes. That's not 454 00:24:58,160 --> 00:25:01,400 Speaker 1: really the question. Now the market is full said we'll 455 00:25:01,440 --> 00:25:03,399 Speaker 1: do what it takes, looking at you know, either for 456 00:25:03,640 --> 00:25:06,880 Speaker 1: inflation stops or break even rates. The question now is 457 00:25:06,880 --> 00:25:10,480 Speaker 1: is how much earned financial conditions can you loosening? Can 458 00:25:10,520 --> 00:25:12,639 Speaker 1: you have? And that is I think data dependent, and 459 00:25:12,680 --> 00:25:14,760 Speaker 1: I think that that's I think that's going to be 460 00:25:14,800 --> 00:25:17,400 Speaker 1: the way that shakes out over the next few months. 461 00:25:17,440 --> 00:25:20,440 Speaker 1: So just on this note, and this can be for 462 00:25:20,480 --> 00:25:23,959 Speaker 1: either of you, But looking at the market reaction today, 463 00:25:24,000 --> 00:25:26,320 Speaker 1: you know, stocks went up a bit right after the 464 00:25:26,359 --> 00:25:29,680 Speaker 1: decision was announced and they've come back down since then. 465 00:25:30,480 --> 00:25:33,400 Speaker 1: But in terms of the market reaction as the as 466 00:25:33,480 --> 00:25:36,560 Speaker 1: the data, assuming the data starts to change and evolve, 467 00:25:36,640 --> 00:25:40,320 Speaker 1: and we do see sustained deflation and maybe maybe even 468 00:25:40,359 --> 00:25:43,800 Speaker 1: a little bit of weakness in the labor market, is 469 00:25:43,840 --> 00:25:48,040 Speaker 1: the FED going to be able to continue to convince 470 00:25:48,119 --> 00:25:51,800 Speaker 1: the market that it is in fact hawkish because that 471 00:25:51,880 --> 00:25:53,719 Speaker 1: seems to be what it's trying to do, right. It 472 00:25:53,720 --> 00:25:58,439 Speaker 1: needs to maintain expectations, put pressure on financial conditions and 473 00:25:58,440 --> 00:26:00,439 Speaker 1: things like that. But is it going to be able 474 00:26:00,480 --> 00:26:04,240 Speaker 1: to do that as the data starts to change. I 475 00:26:04,280 --> 00:26:07,159 Speaker 1: think it gets to to John's point, is that that 476 00:26:07,480 --> 00:26:10,280 Speaker 1: if the if the data is moving in a disinflationary direction, 477 00:26:10,359 --> 00:26:12,840 Speaker 1: the market is going to go with that because they're 478 00:26:12,880 --> 00:26:14,639 Speaker 1: gonna assume that. Sooner or later, the FED is going 479 00:26:14,720 --> 00:26:18,040 Speaker 1: to catch up to that approach. And it's it's really 480 00:26:18,640 --> 00:26:21,119 Speaker 1: more problematic for the FED if if the market is 481 00:26:21,160 --> 00:26:23,800 Speaker 1: just not getting the FEDS reaction function right. You know, 482 00:26:23,880 --> 00:26:27,920 Speaker 1: where again there could be some tension here is if 483 00:26:27,920 --> 00:26:30,240 Speaker 1: the FED is excuse me, the markets are looking at 484 00:26:30,560 --> 00:26:33,240 Speaker 1: core inflation and the FEDS looking at this you know, 485 00:26:33,720 --> 00:26:38,680 Speaker 1: this services x housing component would be would be more 486 00:26:38,720 --> 00:26:40,800 Speaker 1: interesting in a space where there could be you know, 487 00:26:40,920 --> 00:26:45,000 Speaker 1: room for for confusion. But I think you know, once 488 00:26:45,040 --> 00:26:47,879 Speaker 1: the data turns, or the markets starts to sense the 489 00:26:47,960 --> 00:26:50,359 Speaker 1: data is starting, the FEDS is going to have a 490 00:26:50,400 --> 00:26:53,240 Speaker 1: hard time you know, selling selling that story. It cuts 491 00:26:53,280 --> 00:26:56,560 Speaker 1: both ways to if the data firms here, lower prices 492 00:26:56,960 --> 00:27:01,000 Speaker 1: cause consumer spending to rise um for example, or real terms, 493 00:27:01,000 --> 00:27:04,159 Speaker 1: in real terms, they could sort of tighten back up 494 00:27:04,200 --> 00:27:07,200 Speaker 1: financial conditions. Well I joked about this over the weekend, 495 00:27:07,240 --> 00:27:08,960 Speaker 1: but I don't know, you know, it's kind of only 496 00:27:09,000 --> 00:27:12,119 Speaker 1: half a joke or half a troll about you know, 497 00:27:12,200 --> 00:27:15,359 Speaker 1: we've had this big plunging gasoline prices and maybe because 498 00:27:15,359 --> 00:27:17,520 Speaker 1: of that, maybe some of that is softening demand. I 499 00:27:17,560 --> 00:27:20,160 Speaker 1: don't know, But for some people that's like a huge 500 00:27:20,200 --> 00:27:22,920 Speaker 1: financial shot in the arm. I mean, that's like a lot, 501 00:27:23,080 --> 00:27:25,840 Speaker 1: you know, that's more money left in the wallet each 502 00:27:25,920 --> 00:27:28,560 Speaker 1: week and so you know, I think what could cause 503 00:27:28,640 --> 00:27:33,440 Speaker 1: the data to firm. Maybe it's falling gasoline prices. But 504 00:27:33,680 --> 00:27:35,520 Speaker 1: sim I want to you know, I want to go 505 00:27:35,560 --> 00:27:37,480 Speaker 1: back to something you said. You know, you think about, Okay, 506 00:27:37,520 --> 00:27:40,639 Speaker 1: what are some ways we could have like a soft landing, 507 00:27:41,119 --> 00:27:43,399 Speaker 1: And one of them would be if we got some 508 00:27:43,440 --> 00:27:45,639 Speaker 1: period of like catch up productivity. And we know that 509 00:27:45,720 --> 00:27:49,040 Speaker 1: productivity I think has been pretty bad. What's your story 510 00:27:49,119 --> 00:27:51,879 Speaker 1: for why productivity has been bad? And is there a 511 00:27:51,880 --> 00:27:56,400 Speaker 1: possibility that whatever cause that could flip in some way 512 00:27:56,400 --> 00:27:58,920 Speaker 1: and then we get a big spike in productivity. Yeah, 513 00:27:58,960 --> 00:28:02,920 Speaker 1: so to you're measured as a residual you know of 514 00:28:02,920 --> 00:28:06,360 Speaker 1: of GDP growth and unemployment. So you know, how how 515 00:28:06,560 --> 00:28:09,160 Speaker 1: how um you know how confident we are of that number? 516 00:28:09,200 --> 00:28:10,800 Speaker 1: Should it should always be in question? But it does 517 00:28:10,880 --> 00:28:13,920 Speaker 1: look like productivity has been weaker this year. And you know, 518 00:28:14,160 --> 00:28:17,200 Speaker 1: I don't know that anyone has some some hugely great 519 00:28:17,240 --> 00:28:19,399 Speaker 1: explanation for this. I think that when you kind of 520 00:28:19,480 --> 00:28:22,640 Speaker 1: run the economy too hot, you run it inefficiently. And 521 00:28:22,800 --> 00:28:25,199 Speaker 1: that seems to be to me what was going on. 522 00:28:25,280 --> 00:28:26,879 Speaker 1: You have to you have a lot of turn in 523 00:28:26,880 --> 00:28:29,800 Speaker 1: the labor market. Maybe you've got some new new employees, 524 00:28:29,800 --> 00:28:32,159 Speaker 1: some younger employees, and they're just not as efficient, you know, 525 00:28:32,240 --> 00:28:35,520 Speaker 1: and and they're struggling against stronger demand, so that that 526 00:28:35,600 --> 00:28:39,160 Speaker 1: eroades your your relative productivity. So I think I think 527 00:28:39,240 --> 00:28:42,880 Speaker 1: that's a reasonable story. And then theory could could you know, 528 00:28:43,200 --> 00:28:45,600 Speaker 1: ease back up if if people got some really breathing 529 00:28:45,680 --> 00:28:48,680 Speaker 1: room on demand? Right, So, I think you know that's 530 00:28:48,680 --> 00:28:50,760 Speaker 1: something that goes on to me. If you want a 531 00:28:50,800 --> 00:28:54,240 Speaker 1: soft landing, the most important thing is is getting the 532 00:28:54,360 --> 00:28:57,520 Speaker 1: FED to believe that you can have a soft landing. Um, 533 00:28:57,560 --> 00:28:59,680 Speaker 1: you know right right now that that's I mean, they're 534 00:28:59,680 --> 00:29:02,080 Speaker 1: saying you can have a soft landing. But again we 535 00:29:02,400 --> 00:29:05,880 Speaker 1: can debate whether or not the rise in unemployment that 536 00:29:05,920 --> 00:29:09,840 Speaker 1: they have penciled in is consistent with that alcohol and 537 00:29:09,840 --> 00:29:12,840 Speaker 1: I would say say no. But you know what I'd 538 00:29:12,840 --> 00:29:15,200 Speaker 1: like to see for soft landing is for the FED 539 00:29:15,240 --> 00:29:17,640 Speaker 1: to book to believe you fully, they just do not 540 00:29:18,720 --> 00:29:21,280 Speaker 1: have to keep hiking rates and can cut them sooner 541 00:29:21,280 --> 00:29:24,160 Speaker 1: than they anticipated. Tim, I want to ask you about 542 00:29:24,160 --> 00:29:27,120 Speaker 1: this as well. So, setting aside the prospect of a 543 00:29:27,160 --> 00:29:31,040 Speaker 1: soft landing, which has now been rebranded as immaculate disinflation, 544 00:29:31,800 --> 00:29:36,280 Speaker 1: it feels like the big concern or fear for the 545 00:29:36,280 --> 00:29:41,440 Speaker 1: FED would be significant stagflation, So inflation combined with you know, 546 00:29:41,560 --> 00:29:46,720 Speaker 1: negative economic growth. What would they do in that scenario. 547 00:29:47,400 --> 00:29:51,480 Speaker 1: Paul has Has has said the objective here would be 548 00:29:51,520 --> 00:29:54,200 Speaker 1: to bring inflation back down to trend. You know, I 549 00:29:54,200 --> 00:29:57,560 Speaker 1: think that if you had a real stagflationary episode, how 550 00:29:57,600 --> 00:30:00,000 Speaker 1: the FED dependent would really depend upon what they thought 551 00:30:00,120 --> 00:30:04,000 Speaker 1: was happening with inflation expectations. So if you had, you know, 552 00:30:04,080 --> 00:30:08,120 Speaker 1: elevated inflation this year going going into this suppose elevated 553 00:30:08,120 --> 00:30:12,280 Speaker 1: inflation was was something we're still experienced, and then suddenly 554 00:30:12,320 --> 00:30:15,120 Speaker 1: the unemployment got rate was rising, you know, the FED 555 00:30:15,120 --> 00:30:17,800 Speaker 1: would start to think, well, you know, higher unemployment rate 556 00:30:17,840 --> 00:30:22,240 Speaker 1: should pull down these inflation numbers. And so so the 557 00:30:22,640 --> 00:30:24,520 Speaker 1: key in there would be what would have what would 558 00:30:24,520 --> 00:30:28,200 Speaker 1: be happening with inflation expectations. If the FED could could 559 00:30:28,200 --> 00:30:31,160 Speaker 1: be confident that that that they can focus on the 560 00:30:31,160 --> 00:30:35,120 Speaker 1: employment mandate without worrying so much about the inflation mandate 561 00:30:35,160 --> 00:30:37,520 Speaker 1: because they thought that was going down, then they could 562 00:30:37,560 --> 00:30:40,360 Speaker 1: you know, pursue an easier policy. But if they saw 563 00:30:40,400 --> 00:30:45,200 Speaker 1: inflation expectations rising, um, they would they would pursue a 564 00:30:45,240 --> 00:30:48,720 Speaker 1: more aggressive policy John. You know, one of the things 565 00:30:48,720 --> 00:30:51,200 Speaker 1: that Paul was asked about was, you know, we're talking 566 00:30:51,200 --> 00:30:53,560 Speaker 1: about how many more hikes, but he was asked about cuts. 567 00:30:53,680 --> 00:30:56,840 Speaker 1: And there still seems to be this tension between what 568 00:30:56,920 --> 00:30:59,680 Speaker 1: the Fed officials have said and what market pricing have said. 569 00:30:59,800 --> 00:31:02,880 Speaker 1: And so you know, all year the fetish like what 570 00:31:02,920 --> 00:31:04,760 Speaker 1: do you guys even talk about We're not anywhere close 571 00:31:04,800 --> 00:31:07,000 Speaker 1: to thinking about cuts, or at least that's basically my 572 00:31:07,080 --> 00:31:08,840 Speaker 1: summary of like it's like, we're not, you know, we're 573 00:31:08,840 --> 00:31:11,880 Speaker 1: not We're nowhere closed, and yet the market seems to 574 00:31:11,920 --> 00:31:16,080 Speaker 1: be pricing in rate cuts and not even very far out. 575 00:31:16,200 --> 00:31:18,440 Speaker 1: In fact, you have an inversion of the three month 576 00:31:18,520 --> 00:31:22,520 Speaker 1: to year curve, which means, you know, rates in the 577 00:31:23,200 --> 00:31:26,040 Speaker 1: fairly short next couple of years lower than they are 578 00:31:26,680 --> 00:31:28,960 Speaker 1: right now or over the next three months. In some way, 579 00:31:29,080 --> 00:31:31,560 Speaker 1: like what do you make of this divergence, because it's 580 00:31:31,600 --> 00:31:33,800 Speaker 1: been a story, I think for several months, this gap 581 00:31:33,880 --> 00:31:38,200 Speaker 1: between rhetoric and market pricing. Right right now, it's a 582 00:31:38,200 --> 00:31:41,360 Speaker 1: good point, and I think that there's there's two parts 583 00:31:41,400 --> 00:31:44,640 Speaker 1: to it. I think that that the and I'll talk 584 00:31:44,640 --> 00:31:46,880 Speaker 1: about it in stage terms, and the first stage of 585 00:31:46,920 --> 00:31:50,120 Speaker 1: this was really the middle two q three of this year. 586 00:31:50,200 --> 00:31:53,120 Speaker 1: Part where the market kept saying is like, Okay, they're 587 00:31:53,120 --> 00:31:55,520 Speaker 1: going to be cuts in X amount of time. And 588 00:31:55,560 --> 00:31:58,760 Speaker 1: I think that was really a byproduct of the market's 589 00:31:58,760 --> 00:32:01,640 Speaker 1: assumption that given all of this fix think of volatility, 590 00:32:01,640 --> 00:32:04,320 Speaker 1: given the rapid increases in the federal funds, right that 591 00:32:04,440 --> 00:32:06,600 Speaker 1: something was going to break, whether it be the labor market, 592 00:32:06,840 --> 00:32:09,160 Speaker 1: whether it be a financial accident as we saw in 593 00:32:09,200 --> 00:32:11,800 Speaker 1: the UK, something of that nature would break and the 594 00:32:11,800 --> 00:32:14,000 Speaker 1: FED would have to unwind some of the things that 595 00:32:14,080 --> 00:32:16,480 Speaker 1: it did. And that's why we always, even you know, 596 00:32:16,680 --> 00:32:19,880 Speaker 1: looking as far back as June, we always kind of 597 00:32:19,920 --> 00:32:23,240 Speaker 1: assumed that cuts couldn't be more than nine to twelve 598 00:32:23,240 --> 00:32:27,400 Speaker 1: months away. Um. And I think what is happening now, 599 00:32:27,520 --> 00:32:31,200 Speaker 1: which is different than that first stage, and I think 600 00:32:31,320 --> 00:32:34,720 Speaker 1: is actually a little bit more sustainable, is the FED 601 00:32:34,840 --> 00:32:39,280 Speaker 1: is basically not officially, but you can glean into the 602 00:32:39,280 --> 00:32:42,560 Speaker 1: fact that the cycle is almost over. And from the 603 00:32:42,560 --> 00:32:46,800 Speaker 1: market's perspective, once the market months the FED convinced conveys 604 00:32:46,840 --> 00:32:50,120 Speaker 1: to the market that palace preferences probably for twenty five 605 00:32:50,160 --> 00:32:52,680 Speaker 1: in February, then the market has to trade with a 606 00:32:52,720 --> 00:32:56,240 Speaker 1: percentage chance that marches a pause a very reasonable percentage 607 00:32:56,280 --> 00:33:00,240 Speaker 1: chance given what is seemingly the trend of you know, 608 00:33:00,280 --> 00:33:03,920 Speaker 1: disinflation at least through key one UM and then from 609 00:33:03,960 --> 00:33:06,280 Speaker 1: there the weighting game, the market is always going to 610 00:33:06,360 --> 00:33:11,680 Speaker 1: trade the skew that either hard landing or soft landing 611 00:33:11,720 --> 00:33:14,640 Speaker 1: will happen, and in both of those cases, the feed 612 00:33:14,760 --> 00:33:17,680 Speaker 1: isn't at five percent forever. You know. The way I've 613 00:33:17,760 --> 00:33:19,680 Speaker 1: kind of looked at it is is that there's three 614 00:33:19,680 --> 00:33:23,040 Speaker 1: potentials for next year. There's the no landing, the soft landing, 615 00:33:23,080 --> 00:33:25,280 Speaker 1: and the hard landing. The no landing is sort of 616 00:33:25,320 --> 00:33:27,280 Speaker 1: we find ourselves in a similar world to where we 617 00:33:27,320 --> 00:33:31,200 Speaker 1: are now, or inflation is to not convincingly on its 618 00:33:31,200 --> 00:33:34,160 Speaker 1: way back to two nominal wage growth is still five 619 00:33:34,200 --> 00:33:36,120 Speaker 1: and a half percent, and the FED is just kind 620 00:33:36,160 --> 00:33:38,920 Speaker 1: of stuck. The soft landing is that you sort of 621 00:33:38,920 --> 00:33:43,800 Speaker 1: get into this twenty nineteen world where the immaculate disinflation 622 00:33:44,000 --> 00:33:47,840 Speaker 1: does somewhat take place, and then you could see yourself 623 00:33:47,880 --> 00:33:50,360 Speaker 1: as you know, Goldman Sacks Q four forecast for you know, 624 00:33:50,400 --> 00:33:52,920 Speaker 1: CORPC next year is two point nine, and the FED 625 00:33:52,960 --> 00:33:55,640 Speaker 1: could feel at two point nine the five five and 626 00:33:55,800 --> 00:33:57,880 Speaker 1: change is a bit too high in terms of the 627 00:33:58,080 --> 00:34:00,600 Speaker 1: know how restrictive policy needs to be and that could 628 00:34:00,680 --> 00:34:02,560 Speaker 1: lead to cuts. And then in the hard landing scenario, 629 00:34:02,600 --> 00:34:04,680 Speaker 1: we obviously know that they cut a lot. So from 630 00:34:04,720 --> 00:34:07,400 Speaker 1: the market's perspective, once you told them that there's really 631 00:34:07,440 --> 00:34:11,840 Speaker 1: not that many more hikes left, maybe just fifty basis points, 632 00:34:12,080 --> 00:34:14,600 Speaker 1: the market is going to lean into the skew cuts. 633 00:34:14,680 --> 00:34:17,479 Speaker 1: It's just a faction of the time. M Yeah, there's 634 00:34:17,520 --> 00:34:19,600 Speaker 1: there's really nothing that the FED I think can can 635 00:34:19,680 --> 00:34:41,359 Speaker 1: do about that at a certain at a certain point. So, 636 00:34:42,239 --> 00:34:45,080 Speaker 1: you know, we've been focused on the FED for obvious reasons. 637 00:34:45,120 --> 00:34:48,160 Speaker 1: But John, I know you've been in particular looking at 638 00:34:48,200 --> 00:34:51,040 Speaker 1: some other central banks, and you refer to the Central 639 00:34:51,040 --> 00:34:53,759 Speaker 1: Bank of New Zealand the Reserve Bank over there as 640 00:34:53,920 --> 00:34:56,680 Speaker 1: something of a north star in terms of the read 641 00:34:56,719 --> 00:34:59,640 Speaker 1: across to other major central banks. You know, it was 642 00:34:59,680 --> 00:35:03,080 Speaker 1: one of the first to actually start hiking rates. Can 643 00:35:03,120 --> 00:35:05,560 Speaker 1: you maybe talk a little bit about what we've learned 644 00:35:05,960 --> 00:35:10,040 Speaker 1: from the experience of central banks x U S. Yeah, No, 645 00:35:10,120 --> 00:35:12,200 Speaker 1: I mean I think that you know there there there's 646 00:35:12,239 --> 00:35:15,480 Speaker 1: been a few interesting examples. I would say over the 647 00:35:15,560 --> 00:35:17,719 Speaker 1: last few months. I would say that the rbn Z 648 00:35:18,000 --> 00:35:20,279 Speaker 1: sort of in both ways either in terms of their 649 00:35:20,320 --> 00:35:23,359 Speaker 1: policy trajectory has been sort of this north star, as 650 00:35:23,400 --> 00:35:25,160 Speaker 1: you said. But I also think that you know, for 651 00:35:25,200 --> 00:35:29,480 Speaker 1: me sort of like thinking about the trajectory of the 652 00:35:29,520 --> 00:35:32,520 Speaker 1: cycle and you know, what is the sort of the 653 00:35:32,560 --> 00:35:36,680 Speaker 1: next phase of you know, of trading interest rates. Um. 654 00:35:36,760 --> 00:35:38,840 Speaker 1: You know, I think the RBNC in November was a 655 00:35:38,880 --> 00:35:42,040 Speaker 1: pretty telling meeting in terms of how the market is 656 00:35:42,080 --> 00:35:46,080 Speaker 1: digesting this potential inflection point in the cycle. Because with 657 00:35:46,120 --> 00:35:48,520 Speaker 1: the happen of the RBNZ in November is that they 658 00:35:48,600 --> 00:35:52,279 Speaker 1: accelerated their hiking pace from fifty to seventy five from 659 00:35:52,280 --> 00:35:55,040 Speaker 1: a place that was already restricted. And then in their 660 00:35:55,360 --> 00:35:58,239 Speaker 1: monetary policy statement and there you know, their forecasts for 661 00:35:58,320 --> 00:36:00,239 Speaker 1: the economy over the next few years, they said that 662 00:36:00,239 --> 00:36:02,359 Speaker 1: they see the terminal rate in New Zealand being close 663 00:36:02,400 --> 00:36:05,200 Speaker 1: to six percent. So this was a very big rerate 664 00:36:05,200 --> 00:36:09,400 Speaker 1: in terms of both the actual hiking actual hikes that 665 00:36:09,440 --> 00:36:12,160 Speaker 1: they did, and in terms of the hiking cycle in 666 00:36:12,200 --> 00:36:15,840 Speaker 1: its totality and the market's reaction to that, which for 667 00:36:15,960 --> 00:36:18,000 Speaker 1: most of this year would have been you know, rates 668 00:36:18,000 --> 00:36:21,320 Speaker 1: at the very front of the curve ratchet higher, actually 669 00:36:21,680 --> 00:36:25,040 Speaker 1: rates you know, yields increased on the day, but actually 670 00:36:25,120 --> 00:36:27,359 Speaker 1: didn't make a new higher relative to where they were 671 00:36:27,960 --> 00:36:31,720 Speaker 1: in October and September, even though given there's new marginal 672 00:36:31,760 --> 00:36:34,239 Speaker 1: information and the arbanc he was much more hawkish, and 673 00:36:34,280 --> 00:36:36,680 Speaker 1: I think many market participants thought of so I think, 674 00:36:36,680 --> 00:36:40,800 Speaker 1: you know, in terms of where you know, using these 675 00:36:41,040 --> 00:36:43,400 Speaker 1: leading hours, but also getting a feel for sort of 676 00:36:43,440 --> 00:36:46,520 Speaker 1: what the distribution is in terms of markets. I think 677 00:36:46,520 --> 00:36:48,880 Speaker 1: the RBNZ was very telling in terms of, you know, 678 00:36:49,080 --> 00:36:52,080 Speaker 1: how the cycle, at least the hiking cycle towards the 679 00:36:52,160 --> 00:36:54,480 Speaker 1: end of hiking cycle is going to be traded. And 680 00:36:54,520 --> 00:36:59,040 Speaker 1: I think that you know, broadly speaking, you know central 681 00:36:59,080 --> 00:37:01,839 Speaker 1: banks around the world now, is that there were going 682 00:37:01,880 --> 00:37:05,480 Speaker 1: to be in this divergence period where you know, there 683 00:37:05,520 --> 00:37:07,759 Speaker 1: are central banks they're going to see very clear and 684 00:37:07,800 --> 00:37:11,080 Speaker 1: obvious signs of growth deceleration, and they're going to be 685 00:37:11,160 --> 00:37:14,000 Speaker 1: central banks that don't. And I would probably put the 686 00:37:14,000 --> 00:37:17,759 Speaker 1: Fed in the don't camp, whereas it's not obvious to 687 00:37:17,840 --> 00:37:20,880 Speaker 1: me that you know, GDP next year is on track 688 00:37:20,920 --> 00:37:23,440 Speaker 1: to run it as the FED thanks zero point five percent. 689 00:37:23,760 --> 00:37:25,680 Speaker 1: You know, I think, as Joe was sort of cheekly 690 00:37:25,719 --> 00:37:29,400 Speaker 1: alluding to earlier, is that you know, there's some pretty 691 00:37:29,440 --> 00:37:32,719 Speaker 1: decent impulse for growth, given that the composition ship is 692 00:37:32,719 --> 00:37:35,399 Speaker 1: getting a lot more healthier in real terms, and if 693 00:37:35,440 --> 00:37:37,520 Speaker 1: you can sort of get a little bit less financial 694 00:37:37,520 --> 00:37:41,680 Speaker 1: market volatility, you can maintain some decent real income growth, 695 00:37:41,680 --> 00:37:44,719 Speaker 1: which we have sort of scene now since July. Then 696 00:37:44,760 --> 00:37:47,520 Speaker 1: I think the economy can do you know, pretty well. 697 00:37:47,560 --> 00:37:51,600 Speaker 1: Whereas you know, places like the UK, even Canada, places 698 00:37:51,640 --> 00:37:55,160 Speaker 1: with you know, very high you know, private debt levels 699 00:37:55,200 --> 00:37:57,760 Speaker 1: relative to GDP and have a lot of or intense 700 00:37:58,120 --> 00:38:00,879 Speaker 1: you know, floating rate mortgage exposure, you know that those 701 00:38:00,880 --> 00:38:03,319 Speaker 1: places are going to feel growth in a very different way. 702 00:38:03,320 --> 00:38:05,400 Speaker 1: In those central banks I think will be quicker to 703 00:38:05,560 --> 00:38:07,759 Speaker 1: be like listening, we have to be a little bit 704 00:38:07,760 --> 00:38:10,279 Speaker 1: more two way in terms of, you know, how we 705 00:38:11,080 --> 00:38:13,120 Speaker 1: approach the cycle. So I think it's gonna be. I 706 00:38:13,160 --> 00:38:15,680 Speaker 1: think there are still north start. I think we're entering 707 00:38:15,719 --> 00:38:19,360 Speaker 1: a period of pretty meaningful Divergence's interesting. I think the 708 00:38:19,400 --> 00:38:22,320 Speaker 1: economic performance is going to be just very different across 709 00:38:22,440 --> 00:38:25,399 Speaker 1: the world. So Tim, I have I have one last 710 00:38:25,520 --> 00:38:29,600 Speaker 1: question aimed at you, but you know this idea and 711 00:38:29,600 --> 00:38:31,719 Speaker 1: you sort of hinted at it, which is that if 712 00:38:31,719 --> 00:38:34,040 Speaker 1: you if we were to get more data points like 713 00:38:34,080 --> 00:38:37,239 Speaker 1: the November CPI report, they indicate, Okay, it looks like 714 00:38:37,280 --> 00:38:40,960 Speaker 1: there's a meaningful slowdown. Then regardless of what happens on 715 00:38:41,040 --> 00:38:44,680 Speaker 1: the labor market, the FED might start to believe it 716 00:38:44,760 --> 00:38:47,279 Speaker 1: that something is real. But just how are you thinking 717 00:38:47,280 --> 00:38:49,440 Speaker 1: about the next few months, So we don't have another 718 00:38:49,840 --> 00:38:52,400 Speaker 1: decision again until February than in one in March, like 719 00:38:52,680 --> 00:38:55,240 Speaker 1: just like what you talk of through like your sketch 720 00:38:55,320 --> 00:38:57,680 Speaker 1: for how you're thinking about you know, the first quarter 721 00:38:57,719 --> 00:39:01,280 Speaker 1: of the first half of next year, right, So I'm 722 00:39:01,360 --> 00:39:04,080 Speaker 1: expecting a twenty five basis point right hike at the 723 00:39:04,480 --> 00:39:09,600 Speaker 1: February meeting. Uh, and then beyond that, you know, getting 724 00:39:09,600 --> 00:39:12,920 Speaker 1: to you know, the Fed's current terminal rate involves you know, 725 00:39:13,280 --> 00:39:16,400 Speaker 1: rate hikes of that magnitude in in March, March and 726 00:39:16,520 --> 00:39:21,200 Speaker 1: May as well. And at this juncture, I'm finding increasingly 727 00:39:21,239 --> 00:39:24,360 Speaker 1: difficult to see that. First, you know, if the inflation 728 00:39:24,440 --> 00:39:27,920 Speaker 1: numbers are sticking, you know, sticking on the downside here, Uh, 729 00:39:27,960 --> 00:39:30,920 Speaker 1: you know, the it's going to be much more problematic 730 00:39:31,000 --> 00:39:34,560 Speaker 1: for for the FED to continue raising rates. And then 731 00:39:34,600 --> 00:39:36,520 Speaker 1: if we you know, over that period of time, we 732 00:39:36,520 --> 00:39:39,719 Speaker 1: can see some some labor markets softening. Now the interesting 733 00:39:39,800 --> 00:39:42,719 Speaker 1: question to me now is to help what extent the 734 00:39:42,840 --> 00:39:45,640 Speaker 1: firming we're going to see in this data over rides 735 00:39:46,000 --> 00:39:48,920 Speaker 1: any any softening we're seeing in labor markets right now. 736 00:39:48,960 --> 00:39:51,799 Speaker 1: And John John mentioned some of those signs earlier. And 737 00:39:51,880 --> 00:39:54,120 Speaker 1: if those signs stick, I mean, if we are getting 738 00:39:54,160 --> 00:39:56,600 Speaker 1: a job growth down to you know, uh, you know, 739 00:39:56,719 --> 00:40:00,359 Speaker 1: closer to a hundred thousand a month, as and as 740 00:40:00,400 --> 00:40:03,040 Speaker 1: the economy firms, then I think the FED is going 741 00:40:03,080 --> 00:40:05,480 Speaker 1: to be a hard press to keep keep raising rates 742 00:40:05,560 --> 00:40:10,080 Speaker 1: after after certainly after March. And that's that's the kind 743 00:40:10,080 --> 00:40:13,240 Speaker 1: of setup that I'm looking for, is that we see 744 00:40:13,280 --> 00:40:16,680 Speaker 1: some of these continued evidence of labor market softening that 745 00:40:16,719 --> 00:40:19,839 Speaker 1: gives the FED sum room to pause. But they're gonna 746 00:40:19,840 --> 00:40:22,120 Speaker 1: want to be confident that that that softening is going 747 00:40:22,160 --> 00:40:24,319 Speaker 1: to continue. So I do think they're gonna want to 748 00:40:24,360 --> 00:40:28,879 Speaker 1: see the economy slowing uh, and and that the it's 749 00:40:29,040 --> 00:40:32,760 Speaker 1: it's it's not evident to me that's that's going to happen. 750 00:40:33,280 --> 00:40:36,319 Speaker 1: So this is a similar question, but directed to both 751 00:40:36,360 --> 00:40:40,400 Speaker 1: of you. What's the one number or economic indicator that 752 00:40:40,440 --> 00:40:44,080 Speaker 1: you're watching for signs of a soft landing that will 753 00:40:44,120 --> 00:40:47,200 Speaker 1: allow the FED to potentially ease up on rate hikes, 754 00:40:48,440 --> 00:40:54,600 Speaker 1: and please don't just say inflation. I'll go with one. 755 00:40:54,680 --> 00:40:56,719 Speaker 1: I mean I think that you know I'll go with 756 00:40:56,880 --> 00:40:59,439 Speaker 1: I'll go with the C I because I think that 757 00:40:59,440 --> 00:41:02,360 Speaker 1: that's the way. How will sort of categorize how he 758 00:41:02,440 --> 00:41:05,720 Speaker 1: sees a soft landing in Brookings? I think the interesting 759 00:41:05,760 --> 00:41:09,080 Speaker 1: thing about Brookings and I think if you juxtapose Brookings 760 00:41:09,120 --> 00:41:11,880 Speaker 1: with the SEP is you kind of get to glean 761 00:41:11,920 --> 00:41:15,520 Speaker 1: into what the FED wants versus what the FED feels 762 00:41:15,560 --> 00:41:17,440 Speaker 1: they need to say. And I think the SEP is 763 00:41:17,440 --> 00:41:20,279 Speaker 1: more reflection of the FET things they need to say 764 00:41:20,440 --> 00:41:23,480 Speaker 1: in terms of commitment and credibility versus If you listen 765 00:41:23,520 --> 00:41:25,920 Speaker 1: to Powell's talk at Brookings, you don't get the sense 766 00:41:26,000 --> 00:41:29,480 Speaker 1: that he truly believes that he needs the unemployment rate 767 00:41:29,520 --> 00:41:32,720 Speaker 1: to go to four point six to get inflation closer 768 00:41:32,760 --> 00:41:35,520 Speaker 1: to target. And I think for the FED, the question 769 00:41:35,600 --> 00:41:38,040 Speaker 1: is going to be at five and a half percent 770 00:41:38,320 --> 00:41:40,879 Speaker 1: or close to six percent nonimal wage growth. The FED 771 00:41:40,920 --> 00:41:44,720 Speaker 1: does not believe that that is consistent with two percent inflation. 772 00:41:45,160 --> 00:41:50,160 Speaker 1: So to me, the feds chances of a self lending 773 00:41:50,600 --> 00:41:54,279 Speaker 1: will be to me very dependent on how the inflation 774 00:41:54,440 --> 00:41:57,680 Speaker 1: data evolves post a lot of this, you know, more 775 00:41:57,760 --> 00:42:01,719 Speaker 1: transitory noise in in the goods and rent side to 776 00:42:01,800 --> 00:42:04,960 Speaker 1: some extent. But also, you know, what does wage growth 777 00:42:05,000 --> 00:42:07,120 Speaker 1: look like in the middle of next year? And I 778 00:42:07,120 --> 00:42:09,319 Speaker 1: think that will sort of set the stage not necessarily 779 00:42:09,360 --> 00:42:12,719 Speaker 1: for how long how many more hikes there are, but 780 00:42:12,840 --> 00:42:15,360 Speaker 1: how long they stay at this very elevated level of 781 00:42:15,560 --> 00:42:20,000 Speaker 1: its tim Yeah, I would actually, I mean I don't 782 00:42:20,080 --> 00:42:21,719 Speaker 1: I don't want to repeat the same thing, but I 783 00:42:21,719 --> 00:42:26,000 Speaker 1: do think you know, the clearer evidence that that John 784 00:42:26,040 --> 00:42:28,359 Speaker 1: is right. I mean, in theory, if if wages were 785 00:42:28,360 --> 00:42:30,960 Speaker 1: to come down, wage growth was to decelerate, and so 786 00:42:31,360 --> 00:42:33,520 Speaker 1: you know what what work could we see that other 787 00:42:33,560 --> 00:42:36,799 Speaker 1: than just the e c I number. So you know 788 00:42:36,880 --> 00:42:39,319 Speaker 1: one place that could be somewhere it shows up is 789 00:42:39,760 --> 00:42:43,960 Speaker 1: and it's already declining. Is the quits right, So you know, 790 00:42:44,000 --> 00:42:47,439 Speaker 1: presume Blue and Paople, you know, quidded job or another job, 791 00:42:47,480 --> 00:42:49,920 Speaker 1: that the next job has a higher, higher wage. And 792 00:42:49,960 --> 00:42:52,360 Speaker 1: so even if you've got the quicks right down, you 793 00:42:52,480 --> 00:42:56,280 Speaker 1: probably you know, get get wage growth decelerated, and something 794 00:42:56,400 --> 00:42:59,359 Speaker 1: like that could help convince the Fed that they did 795 00:42:59,400 --> 00:43:04,080 Speaker 1: not need a recession. Right. So so the theme here is, 796 00:43:04,719 --> 00:43:06,799 Speaker 1: you know what does the FET need to see to 797 00:43:06,880 --> 00:43:10,040 Speaker 1: believe they don't need, you know, unemployment at at four 798 00:43:10,080 --> 00:43:12,800 Speaker 1: and a half or center for four point seven percent, 799 00:43:13,280 --> 00:43:16,360 Speaker 1: and the answer is is probably, you know, wage growth 800 00:43:16,520 --> 00:43:18,279 Speaker 1: would be the most likely place that we can help 801 00:43:18,400 --> 00:43:22,200 Speaker 1: see that. John and Tim, thank you so much for 802 00:43:22,320 --> 00:43:25,319 Speaker 1: coming on the podcast. It's always great talking to you 803 00:43:25,800 --> 00:43:29,440 Speaker 1: and particularly timely conversation to understand what I think is 804 00:43:29,640 --> 00:43:32,720 Speaker 1: a pretty important moment, a pretty important week in this story. 805 00:43:32,760 --> 00:43:35,359 Speaker 1: So thank you both for coming on outline. Thank you, 806 00:43:35,719 --> 00:43:38,120 Speaker 1: thank you a good for having us. Yeah, thanks so much, guys, 807 00:43:37,960 --> 00:43:53,719 Speaker 1: it's great that great, always great to talk with John 808 00:43:53,760 --> 00:43:56,160 Speaker 1: and Tim. I mean, I think that last point from 809 00:43:56,400 --> 00:43:58,520 Speaker 1: Tim is sort of the key thing, and it's still 810 00:43:58,560 --> 00:44:01,800 Speaker 1: sort of the big question, which is will other signs 811 00:44:02,040 --> 00:44:05,359 Speaker 1: emerge that convinced the FED that there can be some 812 00:44:05,400 --> 00:44:10,920 Speaker 1: sort of durable decline in inflation without a meaningful jumping unemployment. 813 00:44:10,960 --> 00:44:13,520 Speaker 1: So maybe it's a decline in the quits rate, maybe 814 00:44:13,560 --> 00:44:17,680 Speaker 1: it's other measures of wages. Maybe maybe it's something with 815 00:44:17,960 --> 00:44:21,280 Speaker 1: job openings, etcetera. Maybe it's just the employment cost index. 816 00:44:21,520 --> 00:44:24,080 Speaker 1: But it does feel like those are the things to 817 00:44:24,120 --> 00:44:26,799 Speaker 1: watch because look, the soft landing can't be as long 818 00:44:26,840 --> 00:44:29,399 Speaker 1: as unemployment rate is at three point seven, you can't 819 00:44:29,440 --> 00:44:32,919 Speaker 1: rule out the soft landing scenario. Yeah. Absolutely. The other 820 00:44:32,960 --> 00:44:35,160 Speaker 1: thing that I thought was interesting was the idea of 821 00:44:35,200 --> 00:44:38,719 Speaker 1: the sort of discrepancy potentially between what the market's looking 822 00:44:38,760 --> 00:44:42,480 Speaker 1: at versus the FED. Yeah, because that seems like, you know, 823 00:44:42,600 --> 00:44:46,200 Speaker 1: today might be kind of an example of it, where 824 00:44:46,280 --> 00:44:49,360 Speaker 1: the FED came out pretty hawkish and the initial reaction 825 00:44:49,400 --> 00:44:52,520 Speaker 1: at least was stocks went up. They've since gone down, 826 00:44:53,040 --> 00:44:56,600 Speaker 1: But like you do, wonder as the data starts to change, 827 00:44:56,760 --> 00:44:59,160 Speaker 1: whether or not that's going to become more of a theme, 828 00:44:59,239 --> 00:45:01,160 Speaker 1: and whether or not it's going to complicate some of 829 00:45:01,160 --> 00:45:03,360 Speaker 1: what the FED is trying to do here. I really 830 00:45:03,400 --> 00:45:07,480 Speaker 1: liked John's explanation of this sort of seeming, you know, 831 00:45:07,520 --> 00:45:10,880 Speaker 1: speak of market divergence, of you have FED officials saying, no, 832 00:45:11,000 --> 00:45:13,000 Speaker 1: we're not talking about rate cuts at all, we're not 833 00:45:13,000 --> 00:45:14,920 Speaker 1: even done with the hiking cycle, and yet the market 834 00:45:14,960 --> 00:45:17,680 Speaker 1: is priced, you know, on some level of the market 835 00:45:17,760 --> 00:45:21,080 Speaker 1: pricing rate cuts before too long. And I like, you know, 836 00:45:21,160 --> 00:45:24,880 Speaker 1: the sketch of the three the no landing, the soft landing, 837 00:45:24,960 --> 00:45:27,640 Speaker 1: and the hard landing, and if you sort of like 838 00:45:28,440 --> 00:45:31,320 Speaker 1: figure that, okay, the hiking cycle is sort of maybe 839 00:45:31,320 --> 00:45:33,719 Speaker 1: coming to an end, probably right, we're not that far 840 00:45:33,800 --> 00:45:38,080 Speaker 1: from the final hike, maybe Fibruary and Marcher something like that. 841 00:45:38,560 --> 00:45:41,200 Speaker 1: Then at some point, you know, there is some chance 842 00:45:41,440 --> 00:45:44,880 Speaker 1: the spread that we go into hard landing scenario and 843 00:45:44,920 --> 00:45:48,000 Speaker 1: that the FED would have to cut. Yeah, I mean, 844 00:45:48,040 --> 00:45:50,799 Speaker 1: there are like these kind of weird discrepancies that are 845 00:45:50,800 --> 00:45:55,040 Speaker 1: starting to emerge from the forecast. So like the PC 846 00:45:55,640 --> 00:45:59,560 Speaker 1: forecast I think went up, but like the growth forecast 847 00:45:59,640 --> 00:46:03,160 Speaker 1: when down where it seems strange. I do feel like 848 00:46:03,280 --> 00:46:05,359 Speaker 1: we talked a lot about the past year is being 849 00:46:05,400 --> 00:46:08,440 Speaker 1: like difficult for central banks, but I actually think next 850 00:46:08,520 --> 00:46:10,839 Speaker 1: year could be even more difficult, just because you have 851 00:46:10,880 --> 00:46:12,920 Speaker 1: all these different moving parts. And I know you were 852 00:46:12,960 --> 00:46:17,320 Speaker 1: joking about gas prices putting money back into people's pockets. 853 00:46:17,360 --> 00:46:21,400 Speaker 1: But like it does seem that as these trends start 854 00:46:21,520 --> 00:46:24,439 Speaker 1: to change, and you know, maybe services inflation is still 855 00:46:24,440 --> 00:46:28,040 Speaker 1: going up but consumer goods inflation starts to fall, there 856 00:46:28,160 --> 00:46:32,720 Speaker 1: is like a weird interaction that could start to happen 857 00:46:32,920 --> 00:46:35,200 Speaker 1: where like you know, maybe people who work in the 858 00:46:35,200 --> 00:46:38,479 Speaker 1: services industry are getting more money and so they start 859 00:46:38,520 --> 00:46:42,040 Speaker 1: spending more on consumer goods again. Landing scenario. Well, there's 860 00:46:42,080 --> 00:46:44,920 Speaker 1: like a real possibility. There are so many moving parts, 861 00:46:45,280 --> 00:46:47,640 Speaker 1: you know. I was glad that you asked that question 862 00:46:47,880 --> 00:46:51,480 Speaker 1: about international central banks because I thought that was John's 863 00:46:51,520 --> 00:46:54,000 Speaker 1: you know, the year of divergence. You know, all the 864 00:46:54,040 --> 00:46:56,279 Speaker 1: central banks have been sort of like rowing in the 865 00:46:56,320 --> 00:46:58,000 Speaker 1: same direction, so to speak. This you know, they're all 866 00:46:58,000 --> 00:47:01,880 Speaker 1: on inflation fighting mode, but in on this point, you know, 867 00:47:01,960 --> 00:47:05,080 Speaker 1: you have these other countries where the economy is super 868 00:47:05,160 --> 00:47:07,920 Speaker 1: rate sensitive because so many people have adjustable rate mortgages 869 00:47:08,000 --> 00:47:11,560 Speaker 1: and so, like, you know, you could imagine Canada and 870 00:47:11,840 --> 00:47:14,680 Speaker 1: the UK said, really economies really get hit by higher rates. 871 00:47:14,920 --> 00:47:17,239 Speaker 1: But if you have this situation like you're you know, 872 00:47:17,320 --> 00:47:19,600 Speaker 1: you just sort of described or actually the U S 873 00:47:19,640 --> 00:47:21,880 Speaker 1: consumer hangs in there pretty well because they're all getting 874 00:47:21,920 --> 00:47:25,120 Speaker 1: a price cut on gasoline and there isn't really that 875 00:47:25,160 --> 00:47:28,120 Speaker 1: pass through from rates to mortgages the way there is here, 876 00:47:28,560 --> 00:47:30,280 Speaker 1: and so you have weakness the rest of the world. 877 00:47:30,360 --> 00:47:32,040 Speaker 1: It also made me wonder it's like, well, does that 878 00:47:32,080 --> 00:47:33,680 Speaker 1: mean the dollars get a rise. We don't really talk 879 00:47:33,760 --> 00:47:36,319 Speaker 1: markets much, but that would sort of possibly be an 880 00:47:36,320 --> 00:47:38,719 Speaker 1: implication of other central banks feel like they have to 881 00:47:38,800 --> 00:47:41,879 Speaker 1: cut rates or slow then faster while the feed is saying, look, 882 00:47:42,000 --> 00:47:44,319 Speaker 1: us consumers are doing all right anyway, all kinds of 883 00:47:44,320 --> 00:47:47,640 Speaker 1: interesting possibilities for there. Well. I also think the big 884 00:47:47,680 --> 00:47:50,200 Speaker 1: wild card is what China does here because we've seen 885 00:47:50,280 --> 00:47:53,960 Speaker 1: such a huge pivot on COVID nineteen restrictions. Are they 886 00:47:54,000 --> 00:47:57,080 Speaker 1: going to pivot when it comes to monetary policy and 887 00:47:57,120 --> 00:48:00,160 Speaker 1: fiscal stimulus as well? Like right, and then the question is, 888 00:48:00,239 --> 00:48:03,319 Speaker 1: you know, the reopening we have as of right now, 889 00:48:04,200 --> 00:48:09,520 Speaker 1: West Texas oil seventy seven. Last Friday it was around seventy, 890 00:48:09,600 --> 00:48:12,120 Speaker 1: so we you know, we're trying to reopening and the 891 00:48:12,160 --> 00:48:14,960 Speaker 1: gas cut, will that cause oil prices to go plenty 892 00:48:14,960 --> 00:48:17,239 Speaker 1: of plenty of moving parts to the mac. Yeah, I 893 00:48:17,280 --> 00:48:20,239 Speaker 1: was gonna say the theme of this episode is moving parts. Moving. 894 00:48:20,960 --> 00:48:23,439 Speaker 1: The world is a complicated place, very much, So shall 895 00:48:23,440 --> 00:48:25,239 Speaker 1: we leave it there? Let's leave it there. This has 896 00:48:25,280 --> 00:48:28,680 Speaker 1: been another episode of the All Thoughts Podcast. I'm Tracy Alloway. 897 00:48:28,760 --> 00:48:31,160 Speaker 1: You can follow me on Twitter at Tracy Alloway and 898 00:48:31,200 --> 00:48:34,239 Speaker 1: I'm Joe Wisn'tal. You can follow me on Twitter at 899 00:48:34,280 --> 00:48:37,640 Speaker 1: the Stalwart. Follow our guests on Twitter. Tim Dewey, He's 900 00:48:37,719 --> 00:48:41,600 Speaker 1: at Tim Dewey. John Turrek he's at j Turk eighteen. 901 00:48:42,000 --> 00:48:45,480 Speaker 1: Follow our producers Carmen Rodriguez at Carmen Armon and Dash 902 00:48:45,520 --> 00:48:49,080 Speaker 1: Bennett at Dashbot, and check out all of our podcasts 903 00:48:49,080 --> 00:48:53,520 Speaker 1: at Bloomberg under the handle at podcasts and from more 904 00:48:53,520 --> 00:48:57,160 Speaker 1: odd Lots content. Go to bloomberg dot com slash odd Lots, 905 00:48:57,160 --> 00:49:00,520 Speaker 1: where we push the transcripts of the episode Tracy an blog. 906 00:49:00,880 --> 00:49:03,280 Speaker 1: We even have a newsletter that comes out each Friday. 907 00:49:03,600 --> 00:49:06,080 Speaker 1: Should go there and subscribe. Thanks for listening.