Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brawmowitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg terminal. It's somewhat comforting
Speaker 1: to know that is Mr Bostick, past economics and Harvard.
Speaker 1: He also took a degree in psychology. That's perhaps helpful
Speaker 1: at this moment. Very happy to say. Sitting alongside Olympex,
Speaker 1: Mike mccag and morn to Mike, good morning to you John.
Speaker 1: You guys are really depressing today. So maybe we'll ask
Speaker 1: Rafael to use his psychiatric degree to try and cheer
Speaker 1: you up or something. Rafael Bostic, President of the Atlanta
Speaker 1: Fat thank you for joining us this morning. Wall Street
Speaker 1: also depressed, as you heard there with the numbers that
Speaker 1: they were just giving us. The question of two questions,
Speaker 1: and everybody on Wall Street wants to know is how
Speaker 1: far how fast? Uh? And so let me start with that.
Speaker 1: Get the good stuff out of the way here. Um
Speaker 1: is seventy basis points really off the table is fifty
Speaker 1: fifty and maybe another fifty going to be good enough?
Speaker 1: And then how high do you think you end up going.
Speaker 1: First of all, good to see you, Mike. It's good
Speaker 1: to have you here at our conference. It's it's always
Speaker 1: a great time to be together. And when I think
Speaker 1: about our policy, the first thing that is on my
Speaker 1: mind is that inflation is too high and we need
Speaker 1: to act definitively and purposefully to to try to get
Speaker 1: that under control. And I think if you look at
Speaker 1: what we've what we've done so far in the last
Speaker 1: two meetings, we've really started that process. For me, fifty
Speaker 1: basis points from over the last twenty years, you know,
Speaker 1: as already pretty aggressive move I don't think we need
Speaker 1: to be be moving even more aggressively. I think we
Speaker 1: can stay at this, at this pace and as cadence
Speaker 1: and really see how the markets evolve. My expectation and
Speaker 1: hope really is that as we move closer to our
Speaker 1: neutral levels UH and far away from our accommodative stands,
Speaker 1: that we're gonna start to see a lot of the
Speaker 1: tightness and the tension the economy start to moderate, which
Speaker 1: can then give us options and choices as to sort
Speaker 1: of what we do after that point. How far do
Speaker 1: you go? Where do you think you'll be by say,
Speaker 1: the end of the year, by the end of Well,
Speaker 1: you know, that's a very good question. I really think
Speaker 1: we need to be getting somewhere into the neutral range.
Speaker 1: And as you know, um, different people have different ideas
Speaker 1: about what that looks like. For me, I'm looking at
Speaker 1: somewhere between two and two and a half percent as
Speaker 1: our neutral range. Uh. And then then let's just wait
Speaker 1: and see what's happening. Um. You know, in the in
Speaker 1: the intro to the segment, a lot of discussions about
Speaker 1: uncertainty or seth Carpenter reference reference. He's going to be here.
Speaker 1: I'm really excited about that, uh saying it, there's a
Speaker 1: lot of volatili a lot of stuff that's gonna play out.
Speaker 1: So once we get to that neutral level, I think
Speaker 1: that'll be fine. Um, we're gonna from my view, we're
Speaker 1: gonna move a couple of times, maybe two, maybe three times.
Speaker 1: See what happens, see how the economy responds, see if
Speaker 1: inflation continues to move closer to our two percent target,
Speaker 1: and then we can really take a pause, I think
Speaker 1: and look at how things are going, well, take a pause.
Speaker 1: What does that mean not move at a meeting or
Speaker 1: would just be just a rolling decision as you go along.
Speaker 1: So for me, I think all options are on the
Speaker 1: table at every meeting. So depending on how the economy
Speaker 1: is responding. It could be that the economy responding strongly,
Speaker 1: so we don't need to do anything. It could be
Speaker 1: that the economy is responding, uh, maybe a little less strong,
Speaker 1: so we might move to twenty five basis points, or
Speaker 1: we may stay at fifty. So I'm really going to
Speaker 1: keep my mind open. I'm going to observe what happens
Speaker 1: in the economy and then adapt my idea about what
Speaker 1: appropriate policy looks like based on a knowledge A lot
Speaker 1: of economists and many of your colleagues have said, you're
Speaker 1: going to have to go beyond neutral, uh, to restrictive.
Speaker 1: If you had a four percent inflation rate and a
Speaker 1: three pent Fed funds rate, you've still got a negative
Speaker 1: real Fed funds rate. Uh. Why don't you think that
Speaker 1: you're going to have to do that? Well, my hope
Speaker 1: is that a lot of the things that are really
Speaker 1: out of our control, things like supply chain disruptions and
Speaker 1: the like, are going to start to get to a
Speaker 1: better place. We're gonna see how the labor market responds.
Speaker 1: There's uh, there was a story just last week about
Speaker 1: retirees coming back into the workplace. Those are things that
Speaker 1: might relieve some of the tension that we're seeing in
Speaker 1: labor markets and allow producers to start to increase the
Speaker 1: supply there's supply of products that then reduces the imbalance
Speaker 1: between demanded supply, because all of this inflation is about
Speaker 1: an imbalance between the high demand and the low supply.
Speaker 1: This out there. So if we can start to see
Speaker 1: movement on the supply side, um, that means we'll have
Speaker 1: to push less on demand and so that inflation I'm
Speaker 1: hoping will come down. Now how fast we'll have to see,
Speaker 1: and that will really determine whether we have to get
Speaker 1: into restrictive territory, and if we do, how far. But
Speaker 1: I'm totally open to that. But you know, I'll just say,
Speaker 1: we've been doing surveys throughout the entire pandemic. Everyone has
Speaker 1: come with predictions that have turned out not to be
Speaker 1: the case. So I'm gonna trying to be as humble
Speaker 1: as I can be, really just true to being in
Speaker 1: the moment and trying not to anticipate too many steps
Speaker 1: out in advance because there's just a lot of stuff
Speaker 1: that's gonna happen. You heard the markets at the top
Speaker 1: of the show. Does it worry you that we're seeing
Speaker 1: such a rapid sell off and that market rates are
Speaker 1: going up so quickly? So those are two different things.
Speaker 1: So one, I think the moving market rates is actually
Speaker 1: quite interesting because we've not moved very far in terms
Speaker 1: of our policy rate, but the markets have responded extremely fast,
Speaker 1: and uh, that I think is uh, that's really positive
Speaker 1: from my view in the sense that they're taking on
Speaker 1: board the policies that we've signaled and now we've just
Speaker 1: got to deliver on that, and I think we're going
Speaker 1: to do that. In terms of the volatility and equity markets,
Speaker 1: you know. Uh, the one one of the things that
Speaker 1: I found to be very interesting is as I talked
Speaker 1: to a number of people, the range of forecasts about
Speaker 1: what's going to happen over the next six months and
Speaker 1: next twelve months has just really broadened considerably and that
Speaker 1: will translate into I think higher volatility, and I think
Speaker 1: some of what we're seeing right now has to do
Speaker 1: with that. What would it take for you to have
Speaker 1: to rescue the markets. A lot of people say, let's
Speaker 1: just say the economy, not the markets. That you get
Speaker 1: to two thousand twenty three, you might start cutting rates again. Well, look,
Speaker 1: there's a lot of momentum in the economy right now.
Speaker 1: We just had a job of support over four hundred
Speaker 1: thousand jobs in the month. That kind of performance, uh
Speaker 1: and the before times would have been a reason for
Speaker 1: for celebration. So I think we can ride out a
Speaker 1: lot of that more momentum even as we are raising rates.
Speaker 1: And my hope is that we'll get to a place
Speaker 1: where where we don't start to see breakdowns in labor
Speaker 1: markets or other parts of the economy, so that we
Speaker 1: won't have to worry about that. But just to be clear, look,
Speaker 1: we are we are paying and I am paying attention,
Speaker 1: and if necessary, we'll do whatever it takes to make
Speaker 1: sure the economy stays on a solid path. Well, I know,
Speaker 1: if I ask you about the recession probability, your job
Speaker 1: is to say, no, I don't think that's going to
Speaker 1: happen because you're at the Federal Reserve. But a lot
Speaker 1: of your former colleagues, including Bill Dudley, UM and uh
Speaker 1: Don Cone have said you cannot do this without inducing
Speaker 1: a recession. Well, you know, I was interviewing Roger Ferguson
Speaker 1: just last night and he said the same thing. So
Speaker 1: so yes, I am hearing all of that, and I
Speaker 1: understand that. I actually think that the thing we have
Speaker 1: to just be mindful of is that this is it.
Speaker 1: This context is nothing like we've ever seen in our
Speaker 1: in my lifetime, in my my policy space, the pandemic
Speaker 1: driven disruptions, we of a warren Ukraine. There are a
Speaker 1: lot of things that are intersecting in ways that I
Speaker 1: think make it really hard to know with any kind
Speaker 1: of certainty where the economy is likely to go. So
Speaker 1: I'm keeping my mind open. I'm I'm an optimist, but
Speaker 1: a worried optimist. I worry all the time. And uh,
Speaker 1: and so I'm just gonna pay attention to see where
Speaker 1: things go. One last very quick question, and that is
Speaker 1: it's an election year. Uh, there's a lot going on.
Speaker 1: Do you feel any political pressure. I'm not feeling any pressure. Look,
Speaker 1: we we have a clear job to do and that's
Speaker 1: that's meet our dual mandate today. And the labor market
Speaker 1: is doing fine. Inflation is where we really have a challenge,
Speaker 1: and so we just need to do whatever it takes
Speaker 1: to get that inflation under control. Raphael Bustick, thank you
Speaker 1: very much for joining us this morning from the Financial
Speaker 1: Markets Conference at Amelia Island, Florida, where everybody is back
Speaker 1: together for the first time in a couple of years.
Speaker 1: John and I hate it's beautiful to Mike, which is
Speaker 1: why you're so happy and not so clue me because
Speaker 1: you don't have to follow this market aid. Mike McKay,
Speaker 1: Thank you, buddy. Right now we will migrate to Washington. Well, yeah,
Speaker 1: did Emma joins us US Deputy Secretary of the Treasury
Speaker 1: and far more someone who knows the minutia of sanctus. Well,
Speaker 1: I want to cut to the chase, and not the broader,
Speaker 1: bigger picture, but the details of the Office of Foreign
Speaker 1: Assets Control. This goes back to Albert Gallatin the War
Speaker 1: of eighteen twelve, and we drag it forward to some
Speaker 1: two employees in the Office of Foreign Assets Control. What
Speaker 1: are what does that office doing in Treasury to defeat
Speaker 1: Mr Prutin, Well, thank you for asking about the career
Speaker 1: civil servants who work in the Office of Foreign Assing
Speaker 1: Control and today what they're doing is they're working to
Speaker 1: target the Russian military industrialized complex. They've taken a number
Speaker 1: of steps all ready to go after the Russian financial
Speaker 1: system and we've seen their economy is contract contracting by
Speaker 1: more than ten percent and due to that, and now
Speaker 1: we're focused on making sure that any money that remains
Speaker 1: in Russia can't be used to further build out their
Speaker 1: military industrialized complex and be able to fight the war
Speaker 1: in Ukraine today because the actions the Office of the
Speaker 1: Foretnance of Control has taken, the two top tank makers
Speaker 1: in Russia aren't functioning because they can't get access to
Speaker 1: the goods and the services they need to do the
Speaker 1: work that they're doing. And yesterday we sanctioned some of
Speaker 1: their top military companies as well. Well, what's so important
Speaker 1: here is we you know, the media is there's a yacht,
Speaker 1: it's Mr Prutin's yacht, or it's somebody else's yacht, and
Speaker 1: we've got all the silliness about boats flowing floating around
Speaker 1: in that office. Did they call up, say a manufacturer
Speaker 1: in Poland and say, wait, you can't do that, or
Speaker 1: are they just domiciled in America? So what we've done
Speaker 1: is that not only have we taken actions by talking
Speaker 1: directly to the financial system and making sure that they're
Speaker 1: aware that they can't provide services to the people who
Speaker 1: helped build those yachts or help fuel those But we've
Speaker 1: done this action in collaboration coordination with our allies and partners.
Speaker 1: So not only can you not domassile your yacht in
Speaker 1: the United States, but across the G seven, across thirty
Speaker 1: countries have taken these actions. And what we've also said
Speaker 1: is that if you happen to get your off to
Speaker 1: another country and in that country, you're able to find
Speaker 1: a company that will provide you with services. If that
Speaker 1: company provides you with material support, we're also going to
Speaker 1: sanction them as well. Well. We we're at a time
Speaker 1: we're we're dealing with the idea of sanctions on Russia,
Speaker 1: but also the idea of incredible inflation and possibly removing
Speaker 1: certain Trump era tariffs on China in order to reduce
Speaker 1: those inflationary pressures. How actively is the Treasury Department discussing
Speaker 1: some of those types of removals at a time when
Speaker 1: people are wondering about the U. S. China relationship in
Speaker 1: light of what's happening with Russia. So our goal is
Speaker 1: always to make sure that we're making trade policy in
Speaker 1: a manner that's consistent with our overarching goals. And what
Speaker 1: we're doing is working closely with the U. S. Trade
Speaker 1: Representative and the rest of the President's Cabinet to make
Speaker 1: sure that we have an approach with China that um
Speaker 1: puts front and center of America's interest and not just
Speaker 1: America's interest. When you look at the issues we have
Speaker 1: with China, there issues that other countries have as well.
Speaker 1: So working closely, as the President said, with our allies
Speaker 1: and partners, as we think about our China strategy going forward,
Speaker 1: what do you think is going to be uh the
Speaker 1: next step with respect to additional pressure put on Russia,
Speaker 1: especially given some of the inflation that we're seeing, the
Speaker 1: reality is the one you think about what Russia is
Speaker 1: doing in Ukraine. It is a key contributor to some
Speaker 1: of the price increases that we're seeing both in energy
Speaker 1: and in food. Today, Russia and ships are blocking the
Speaker 1: ability of food to get out of Ukraine because of
Speaker 1: Russia's actions. You've seen energy prices rise because the geopolitical uncertainty.
Speaker 1: So what we're trying to do with our sanctions is
Speaker 1: to end that invasion as quickly as possible. And what
Speaker 1: we're gonna go next is we're going to continue to
Speaker 1: put pressure on their financial system. We're gonna go after
Speaker 1: their military industrialized complex so that Russia doesn't have the
Speaker 1: arms they need to continue the war in Ukraine, but
Speaker 1: also so they can't project power into the future and
Speaker 1: continue to destabilize the region in the world. We've got
Speaker 1: reports on the Bloomberg terminal wally that Russia is seeing
Speaker 1: at twelve contraction. Do you have any idea or can
Speaker 1: you model out what form of contraction you visualize? Can
Speaker 1: it be negative eighteen percent? Can we get there? So
Speaker 1: what we know today based on what the IMATH and
Speaker 1: what others have told us, is that Russia has lost
Speaker 1: about fifth the last fifteen years of economic growth due
Speaker 1: to the sanctions we've imposed on them today. And that's
Speaker 1: not even talking about the inflation that is going through
Speaker 1: their economy. The truth is that Russia now has to
Speaker 1: make choices, and that's exactly what we want them to do,
Speaker 1: to have to choose between using their resources to prop
Speaker 1: up their economy or to fight their war in Ukraine,
Speaker 1: and we want to continue to make that choice even
Speaker 1: harder by continuing to level sanctions until the invasion ends
Speaker 1: from you as always come back soon. Well at Yama Dad,
Speaker 1: the U S Deputy Secretary of the tracery. Right now,
Speaker 1: what we're gonna do here is look at what is
Speaker 1: in Michael Rosenberg's absolutely classic textbook Currency Forecasting. If you'd
Speaker 1: like to buy it, it's two hardcover edition, if you
Speaker 1: can find a copy out on Amazon, out on eBay. George,
Speaker 1: Sarah Ellis knows Michael Rosenberg is one of the founding
Speaker 1: heroes of current currency forecasting, and Sarah Ellis goes all Rosenberg, George,
Speaker 1: I'm absolutely thunderstruck by your behavioral analysis right now, and
Speaker 1: now it folds into FX. Explain the behavior you're studying
Speaker 1: that gets you to a call on euro, that gets
Speaker 1: you to a call on dollar. So I think, Tom,
Speaker 1: we just need to start from the global growth environment,
Speaker 1: and that's really what's been driving the market over the
Speaker 1: last few weeks. And you have a perfect storm of
Speaker 1: weakening global growth in all regions. So in the U
Speaker 1: S you have this huge idiosyncratic tightening off my for conditions.
Speaker 1: In Europe we have the war, and I think what
Speaker 1: broke um the straw that broke the camel's back, so
Speaker 1: to speak, was the China COVID lockdowns Shanghai UM now
Speaker 1: potentially in Beijing. So you have all of the three
Speaker 1: world's biggest economies suffering from these shocks at the same time,
Speaker 1: and the market's bringing down growth expectations. And that's really
Speaker 1: what's what's driving things at the moment, including the US dollar,
Speaker 1: because you have the situation of lower global growth, but
Speaker 1: at the same time US real rate arising very significantly,
Speaker 1: and that's what's been supporting the stronger dollar over the
Speaker 1: last few weeks. If we're thinking about what would change that,
Speaker 1: we need to see an inflection in either of those
Speaker 1: three dynamics, So either China, Europe or the US to
Speaker 1: change the current market environment and narrative, George, if you
Speaker 1: change the eurodolloical at the moment, I'm actually still keeping
Speaker 1: my optimistic euro forecast because I think John, the market
Speaker 1: is too pessimistic on Europe looking out through the next
Speaker 1: three to six months. If you take a look at
Speaker 1: and there's a number of things the market's underestimating. The
Speaker 1: first one is fiscal policy. Everyone's talking about this big
Speaker 1: income shock in Europe which is bringing incomes down, but
Speaker 1: if you crunch the numbers, more than half of the
Speaker 1: income shock is being offset because Europe is easing fiscal
Speaker 1: um and that's not what's going on in the rest
Speaker 1: of the world, and it will continue to do so
Speaker 1: through next year. Then you've got the reopening dynamic. Europe
Speaker 1: never reopened after the omicron wave. The services sector never reopened,
Speaker 1: and that's exactly why. If you look at the services
Speaker 1: p MZ, they're holding up much better than expected. And
Speaker 1: then finally you've got the labor market. Um. The European
Speaker 1: labor market is actually stronger than the US, the unemployment
Speaker 1: rates that record lows, So we think the ECB goes
Speaker 1: in July. I think the market has become too pessimistic
Speaker 1: and growth expectations. If you look at equity earnings globally
Speaker 1: over the last few weeks, Europe has actually got the
Speaker 1: best forward earnings guidance out there, much better than the US,
Speaker 1: much better than e m UM. So I think that
Speaker 1: euro will end up rebounding by the end of the
Speaker 1: year in the second half. What's the catalyst, George, Given
Speaker 1: it all of what you're saying is already known, So
Speaker 1: I think it's interesting because if you look at price action,
Speaker 1: you are starting to see the Euro turn across a
Speaker 1: number of other currencies. So for example, it's a risk
Speaker 1: of environment, but euro Swiss is now up on the year.
Speaker 1: You're a sterling is starting to turn, so you are
Speaker 1: under the hood, so to speak, starting to see euro
Speaker 1: out performance. I think you need a couple of catalysts
Speaker 1: to get that translated into the dollar. Firstly, the ECB
Speaker 1: coming interview, actually starting to high rate UM. The market
Speaker 1: has been responding with lags to Montree policy re pricings.
Speaker 1: So if you think about the dollar strength, we've known
Speaker 1: the Fed is titening with known defects doing QT for
Speaker 1: quite a while, but it's really now that the dollars responded,
Speaker 1: and I think you can see some of that lack
Speaker 1: of response in Europe. So the ECB coming interview, UM,
Speaker 1: and partectually just some easing in all these shot downward
Speaker 1: shifts to growth expectations that are supporting the dollar. George,
Speaker 1: this has been a really tough trade. I really appreciate
Speaker 1: if we could catch up again in the next couple
Speaker 1: of weeks, just to reset ahead of the e CP
Speaker 1: in about a month's time, because this one has been
Speaker 1: really difficult for a lot of people. George Santa velis
Speaker 1: there of Deutsche Bank. In Shepherdson passes the American economy
Speaker 1: like No One's chief economists of Pantheon macro Economics and
Speaker 1: enjoins us for a recalibration this morning. Ian, we just
Speaker 1: spoke to Raphael Bostic, who gave us the FED line
Speaker 1: from Atlanta of the good news out there were in control,
Speaker 1: we have options. How much in control are our central bankers? Well,
Speaker 1: maybe a bit more than markets think. Actually, of course,
Speaker 1: you know, they would always say they're in control because
Speaker 1: if there's anything else and all, and the last few
Speaker 1: months have been the last thing must have been very
Speaker 1: difficult for them, you know, inflation hitting some really big spikes.
Speaker 1: But we're probably hit the peak. And my guess is
Speaker 1: when we get CPI numbers later this week, they're going
Speaker 1: to look significantly better year of a year, maybe month
Speaker 1: to month as well, and then the next few months
Speaker 1: that good news should continue. So I think they're going
Speaker 1: to be able to tell a story later in the
Speaker 1: summer of hey, you know what we've done is working.
Speaker 1: Of course, what's actually happening is a very favorable base
Speaker 1: effects are kicking in and that will bring inflation down.
Speaker 1: Then I think they're hoping that the downshift that we
Speaker 1: seem to be getting in the wage numbers in the
Speaker 1: last few months will persist and that will help them
Speaker 1: through the end of the year with some some genuine
Speaker 1: downshifting services inflation still some big question marks there, but
Speaker 1: the last few months data i'm guessing have been better
Speaker 1: than they expected. How important to the late summer into
Speaker 1: the end of the year view is escaping the Chinese lockdown? Well,
Speaker 1: you know that's that's a big deal for some small sectors.
Speaker 1: You know, the the U s c p I is
Speaker 1: primarily as domestic service price index with a few goods
Speaker 1: in it. Now quite a lot of those goods are
Speaker 1: China sensitive, so things like clothing, footwear, furniture, appliances, household electronics.
Speaker 1: But you add those things together and you're still looking
Speaker 1: at less than a tenth of the index. So if
Speaker 1: we're getting some meaningful disinflation in in some of those
Speaker 1: other components that I think will offset the supply disruption story.
Speaker 1: Plus we've got some extremely favorable based effects in the
Speaker 1: in the vehicle component, which will be pretty much a
Speaker 1: done deal to be a big downward shove to the
Speaker 1: year of a year numbers. So actually the China thing
Speaker 1: is not helpful, But I don't think it's a game
Speaker 1: changer as long as it doesn't get completely out of control.
Speaker 1: And we're teasing out your view here. Let's really highlight it.
Speaker 1: A lot of people that can census for you, because
Speaker 1: FED chair Jpal basically clarified it fifty at the next meeting,
Speaker 1: fifty after that. Have you got any doubt around that
Speaker 1: second fifty and if you have, can you explain it? Yeah?
Speaker 1: I mean the first fifty in June I think is
Speaker 1: have done. You're borrowing some sort of sky falling in moment.
Speaker 1: But July, you know, by July will have had three
Speaker 1: CPI reports, all of which will show inflation dropping by
Speaker 1: about half a point per month. We'll have also seen
Speaker 1: three more months of housing data. And this is where
Speaker 1: I have a really big gripe with the media narrative
Speaker 1: that the US housing market is still booming, because it isn't.
Speaker 1: Mortgage demand is absolutely cratering. I mean rates have gone
Speaker 1: from three to five and a quarter. There's no way
Speaker 1: the market could take that. And every week we get
Speaker 1: mortgage applications numbers and they're terrible. I mean, applications fell
Speaker 1: in April alone, no sign of a bottom. There's still
Speaker 1: haven't fully responded to the peak in rates yet. And
Speaker 1: my guess is over the next few months of springing
Speaker 1: into the summer, we're going to see people some really
Speaker 1: startlingly weak numbers on home sales, suggesting that the market
Speaker 1: has really roll them over. I just wonder in July
Speaker 1: whether the Fed will have the stomach after three good
Speaker 1: inflation reports as well to do another fifty, and whether
Speaker 1: the market will want them to do another fifty against
Speaker 1: that backdrop. So there's a lot to play for over
Speaker 1: the next few months. But but I do think that
Speaker 1: two of those very important things, inflation and housing, are
Speaker 1: going to be telling the FED. Maybe you know, you
Speaker 1: can switch back the twenty a bit sooner. Are you
Speaker 1: questioning the journey to to to fifty? Are you questioning
Speaker 1: the ultimate destination of getting to to to fifty? Here? Ian, No,
Speaker 1: I'm not. I mean my beef with markets, as they've
Speaker 1: got far too aggressive on the speed that the FED
Speaker 1: needs to go. I'm not certainly, I'm not arguing at
Speaker 1: all with the idea that race need to be significantly higher.
Speaker 1: And I actually think they'll be raising rates again in
Speaker 1: twenty three and twenty four because the neutral rate will
Speaker 1: be rising on the back of stronger productivity. And that's
Speaker 1: a different story to raising rates because you've got behind
Speaker 1: and inflation is rampant and everyone's panicking. That's that's this
Speaker 1: year's story. But next year story, you know, I could
Speaker 1: see rates going significantly higher really across the whole curve.
Speaker 1: So my my beef with markets has been maybe too
Speaker 1: aggressive for the short term and not thinking enough about
Speaker 1: what might happen next year as well, a different glide path.
Speaker 1: But but nonetheless, you know, a rising rate environment, a
Speaker 1: normalization if you like, after such a long period new
Speaker 1: decades of falling rates are real rates across the whole curve,
Speaker 1: Maybe we're moving back to something recognizable normal. And I'm
Speaker 1: wrapping my head around the scenario that you're portraying. We're
Speaker 1: basically wages start decelerating, and that is actually one of
Speaker 1: the key drivers in addition to housing that causes a
Speaker 1: deceleration in inflation. Is this a good thing? Does this
Speaker 1: lead to something that is positive for the foot or
Speaker 1: something that sounds stagflationary because we still have the base
Speaker 1: effects of what's going on with supply supply chain disruptions. Yeah.
Speaker 1: I mean, from the first perspective, the wage numbers that
Speaker 1: we saw last summer, when they were running annualized above
Speaker 1: six percent, that was not sustainable. That's scared the pants
Speaker 1: off them, you know. Chap how said that very clearly.
Speaker 1: Where we are now in the last few months, it
Speaker 1: looks as so tentatively, wedge growth could be settling down
Speaker 1: at something like four or maybe the high threes. Now,
Speaker 1: that is faster than we saw at any point in
Speaker 1: the last cycle, but that was a very unusual cycle.
Speaker 1: Wage growth at that pace would be normal for previous
Speaker 1: cycles and would be consistent with the inflation target if
Speaker 1: productivity growth just picks up a little bit. So it's
Speaker 1: kind of a sweet spot if we can engineer it
Speaker 1: against this drop of chaos from China and all the
Speaker 1: other stuff that's going on as well. But if I
Speaker 1: were at the FED thinking about inflation, you know, one
Speaker 1: to two years down the line, I would be thinking,
Speaker 1: if wage growth settles at three and a half to
Speaker 1: four percent, I'd be really pretty happy, because it's not
Speaker 1: what I was imagining three months ago. I was thinking
Speaker 1: of five plus, and that's a much more scary place
Speaker 1: to be. So it's it's it's a plausible, applausible end point,
Speaker 1: but it's not yet certain. I apologize to Harp on this,
Speaker 1: But is it the absolute number or is it real wages?
Speaker 1: This idea? I hear Tom laughing, But this to me,
Speaker 1: it's sort of a relative kind of equation here in
Speaker 1: terms of wage gains versus the cost of goods. Because
Speaker 1: if you're only getting a three percent wage increase but
Speaker 1: the cost of goods are surging at ten percent, this
Speaker 1: isn't looking very good for the American public, and it
Speaker 1: doesn't necessarily look good in terms of consumer dynamism. Well,
Speaker 1: you gotta remember that the US household sector is sitting
Speaker 1: on three and a half trillion dollars of cash that
Speaker 1: it accumulated during COVID, which is about fourteen percent of
Speaker 1: GDP cash. That's not taking account of the rising home
Speaker 1: prices or the rising in other asset prices like stocks
Speaker 1: and everything else. That's a gigantic cushion when you set
Speaker 1: against you know, having to spend a couple of hundred
Speaker 1: billion dollars a year more on on food and energy.
Speaker 1: So the overall the household sector is in pretty great shape.
Speaker 1: There are some questions of distribution, who has this money,
Speaker 1: who doesn't have it, But overall the household sectors in
Speaker 1: really good shape. And of course, remember if the CPI
Speaker 1: numbers are going to moderate too to core prints a
Speaker 1: point two or point three over the next few months,
Speaker 1: then real way to growth stops falling more or less immediately.
Speaker 1: I mean, for example, this week the CPI is going
Speaker 1: to be a point more or a point two at
Speaker 1: the headline level well wage growth this month there's going
Speaker 1: to be a point three or a point four. So
Speaker 1: we're past the worst of it. It's not great, and
Speaker 1: the year of year it's down, a real income growth
Speaker 1: is down, but we're moving into i think, a better position.
Speaker 1: And we do have this gigantic cushion of accumulated savings
Speaker 1: and the transfers of the federal government made under COVID,
Speaker 1: and that makes this income squeeze from food and energy
Speaker 1: prices very different to previous experience when that cushion just
Speaker 1: wasn't there. And take your optimism and this has been
Speaker 1: hugely beneficial within the loom. Chake your optimism over an
Speaker 1: export in import dynamics for America, well, we've seen some
Speaker 1: insane import numbers over the last few months, which was
Speaker 1: a big drag on growth in the first quarter. But
Speaker 1: but I'm I'm I'm guessing, and looking at the data,
Speaker 1: it seems pretty clear that this is substantially because domestic retailers,
Speaker 1: domestic wholesales are rebuilding inventry after really struggling during the
Speaker 1: peak good spending frenzy of COVID. So this won't last
Speaker 1: for much longer. I mean, we've seen record trade deficits
Speaker 1: in the last few months. That's completely unsustainable, and my
Speaker 1: guess is that the trade numbers will be a lot
Speaker 1: quieter over the next few months. That's on the import side.
Speaker 1: On the export side, we're going to struggle for the
Speaker 1: foreseeable future because the dollar has shot to the moon,
Speaker 1: Europe teetering on the edge of recession, China's in chaos. Yes,
Speaker 1: it's not a great environment to be an exporter. But again,
Speaker 1: remember the U S economy overall is primarily a domestic
Speaker 1: services economy that applies to growth just as much as
Speaker 1: it applies to inflation. You know, I'd like to see
Speaker 1: strong exports, but it's not the end of the world
Speaker 1: if they don't happen, And certainly for the next few months.
Speaker 1: It's going to be difficult. And we did this whole
Speaker 1: interview with that talking about Newcastle United. We did. Wasn't
Speaker 1: that a beautiful thing? Tom? I think he owes us
Speaker 1: for that. Did you watch that game t K yesterday?
Speaker 1: That was special fancy Not so much for Newcastle United.
Speaker 1: Special summer maybe coming up in the transfer market. And
Speaker 1: we'll leave it there. We'll catch up soon in Shepherds
Speaker 1: and there of pantheons economies. Now from the College of
Speaker 1: the Holy Cross, Cynthia Whoper joins Director of Russian and
Speaker 1: European Studies with some terrific work out of the Harvard
Speaker 1: Princeton Combine on Russia and on over the years. Cynthia,
Speaker 1: this from the great leader today, you're defending what our fathers,
Speaker 1: grandfathers and great grandfathers fought for. The bottom line is
Speaker 1: there is a conflation here rhetorically of the Nazis and
Speaker 1: a special military operation. What is next in this resurrection
Speaker 1: of the Nazis of World War Two? Well, watching UM
Speaker 1: Russia's Victory Day celebrations earlier this morning, as I'm in
Speaker 1: Germany right now, UM, I was just struck by Putin's
Speaker 1: speech to the troops because of some astonishing things that
Speaker 1: he said that maybe American audiences wouldn't pick up on immediately,
Speaker 1: but certainly are very clear to Russian domestic audiences and
Speaker 1: to Europeans. Um. Above all, Putin actually drew an implicit
Speaker 1: comparison between UH, the Nazi regime under the Third Reich
Speaker 1: in their ideology of racial superiority, and the United States
Speaker 1: after with what Putin claimed was its ideology of political
Speaker 1: and economic exceptionality. And Putin acts actually said that the
Speaker 1: United States has been humiliating the rest of the world
Speaker 1: and even its own European allies who have to lap
Speaker 1: up this rhetoric of superiority and um and. Putin also
Speaker 1: went on to um assure his domestic audience that Russia
Speaker 1: in nineteen forty five and again today is acting only
Speaker 1: in self defense. He said that UH that actually Russia
Speaker 1: had approached the United States wanted to talk about global security.
Speaker 1: Ben rejected, and that Russian intelligence had discovered that the
Speaker 1: United States was planning an invasion, so Russia had no
Speaker 1: choice but to invade the heritage of Holy Cross. Besides
Speaker 1: giving us dr fauci is to put put religion within
Speaker 1: the calculus of our international relations. We've talked very little
Speaker 1: Dr Hooper about this idea of the Greek Orthodox Church,
Speaker 1: the Eastern Church, if you will, the Church of Kiev,
Speaker 1: in the Church of Moscow. How does religion fold into
Speaker 1: the framework that Mr Putin has in his mind. Well,
Speaker 1: if you talked to the Ukrainian Church, they would stress
Speaker 1: that there's actually a significan can schism between Ukrainian and
Speaker 1: Russian Orthodoxy. But again, Putin his speech today listed a
Speaker 1: whole number of cities that he started courageously resisted the Nazis,
Speaker 1: and these cities are located in what today are Russia,
Speaker 1: Ukraine and Belarussia. And Putin referred to a spiritual unity
Speaker 1: that binds these places together, which he implied is much
Speaker 1: stronger than any kinds of contemporary ideas of national sovereignty.
Speaker 1: In the meantime, what we see some sort of spiritual
Speaker 1: unity at least when it comes to trade between Russia
Speaker 1: and China. How does that nexus fit into what you're
Speaker 1: talking about? Well, um Putin is emphasizing actually that Russia
Speaker 1: is right now standing for UH together with the majority
Speaker 1: of the world's population in resisting United States domination. And
Speaker 1: so he talks a lot about um UH, China, but
Speaker 1: also India and Africa not supporting say actions against Russia.
Speaker 1: He stresses that that is where the majority of the
Speaker 1: world's population lives. And he also emphasizes, just as he
Speaker 1: did in two thousand fourteen um when Russia first occupied
Speaker 1: the Crimea, that if Europe is going to um uh
Speaker 1: cut Russia off with sanctions, Russia doesn't need to worry
Speaker 1: about that. Russia can make new alliances with developing nations
Speaker 1: the brick countries and particularly look used for towards China.
Speaker 1: Do you have a sense of what the popular opinion
Speaker 1: is at a time when there is a growing sense
Speaker 1: that people are trying to get news through VPNs and
Speaker 1: not necessarily through the traditional mainstream of the Kremlin controlled
Speaker 1: media in Russia. Yeah, great question. It's very hard to
Speaker 1: gauge popular support for Putin right now. The current polls
Speaker 1: do show his popularity rising when most recent number was
Speaker 1: eighty one point five percent, but there's reason to be
Speaker 1: skeptical about such figures. And also um Western analytics say
Speaker 1: that fully one heard of Russia's Internet users have downloaded
Speaker 1: at least one VPN, which allows them to, you know,
Speaker 1: act as if they're logging in from another country and
Speaker 1: thus evade Russian um government restrictions on internet usage. UM. Also,
Speaker 1: according to whatever statistics you look at, somewhere between three
Speaker 1: hundred thousand to one million Russians have left the country
Speaker 1: because they don't want to be accused of collaborating with
Speaker 1: the Putin regime, and these are college educated professionals. Um.
Speaker 1: At the same time, I think that many many Russians
Speaker 1: who are left in the country, all the ones that
Speaker 1: I know that remain in the country, which is a
Speaker 1: decreasing number, they're kind of doing what a lot of
Speaker 1: Germans did during the days of the Hitler regime before
Speaker 1: World War Two. Actually um uh started. They're retreating into
Speaker 1: the private sphere. One thing that you didn't see on
Speaker 1: Russian TV during these Victory Day celebrations, where a lot
Speaker 1: of pictures of huge crowds outside Red Square, and all
Speaker 1: the people I know have actually taken the last two
Speaker 1: weekends or long weekends in Russia, the May holidays, as
Speaker 1: a chance to go to their dodges. They're honkering down.
Speaker 1: They're trying to plant on small land plots any kind
Speaker 1: of vegetables they can UM, trying to anticipate rising food
Speaker 1: prices h winter. That could be hard if this war
Speaker 1: goes on and Russia continues to be the target of
Speaker 1: sanctions and they're trying to sort of figure out how
Speaker 1: they and their family can hunker down and survive and
Speaker 1: try to remove themselves from the regime. Well perhaps not
Speaker 1: uh openly resisting it. Cynthia valuable insight and perspective this morning.
Speaker 1: Thank you, Cynthia Hoopo as the College of the Hotty Cross.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg h