WEBVTT - William Lee on the Fed (Radio)

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<v Speaker 1>Let's get to our guest, Bill Lee, chief economist at

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<v Speaker 1>Milken Institute. So given that that's those are the headlines, Bill,

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<v Speaker 1>let me paint a slightly different picture here, that it's

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<v Speaker 1>different this time and two very interesting dynamics. One, inflation

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<v Speaker 1>maybe stickier than what we're used to, particularly because of

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<v Speaker 1>all these bottlenecks we see in supply and a lot

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<v Speaker 1>of things like Ukraine that are outside the Fed's control.

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<v Speaker 1>And secondly, the recession might be very different too, in that,

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<v Speaker 1>if indeed we are going into it, it's with a

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<v Speaker 1>lot stronger job market than we're used to, and maybe

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<v Speaker 1>maybe that means we can weather it better. Your thoughts, absolutely, Brian,

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<v Speaker 1>I mean that that picture is exactly the picture that

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<v Speaker 1>I have in my mind. Uh, this about of stipulation

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<v Speaker 1>echoes the seventies, but it's nowhere near where what it

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<v Speaker 1>was like before. It's going to take the FED quite

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<v Speaker 1>a bit of effort to get rid of the inflation

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<v Speaker 1>because it's we've been hit by so much on the

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<v Speaker 1>supply side. The study from the San Francisco FET shows

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<v Speaker 1>that about half of the inflation can be attributed to

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<v Speaker 1>supply and about half from them demand. Actually a third

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<v Speaker 1>a third and in between a third that's sort of mixed.

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<v Speaker 1>And and because of these supply side elements that continue

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<v Speaker 1>to get worse. I mean, after all, here we have

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<v Speaker 1>shoot food shortages being caused by the cutoff of the

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<v Speaker 1>wheat exports from the Ukraine. We just had an agreement

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<v Speaker 1>that said, oh, we could resume food exports, especially to

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<v Speaker 1>the starving emerging markets, and then all of a sudden,

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<v Speaker 1>the port facilities in Odessa are bombed. Now that kind

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<v Speaker 1>of supply shock, you know, you go crazy trying to

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<v Speaker 1>forecast what's gonna happen to food inflation, um and similarly

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<v Speaker 1>for for energy. So so I think these continued bounds

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<v Speaker 1>of supply constraints, the fact that China doesn't really open

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<v Speaker 1>because it keeps playing around with zero COVID policies, uh

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<v Speaker 1>makes the the forecast of inflation for sure more persistent

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<v Speaker 1>than anybody would have expected. And I think the FED

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<v Speaker 1>causes so committed right now to putting inflation back to

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<v Speaker 1>his two percent target, or at least on a clear

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<v Speaker 1>path to two percent. It has to deal with the

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<v Speaker 1>demand side. It has to weaken demand so much that

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<v Speaker 1>it compensates for these continued supply side shocks. So Bill,

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<v Speaker 1>that leads into the fact that we are expecting seventy

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<v Speaker 1>five basis points this week. But what happens after that?

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<v Speaker 1>In there forward guidance, did they continue with these really

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<v Speaker 1>aggressive hikes or do they pull back? Well, Juliet I

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<v Speaker 1>would have said, prior to the spring, because the FED

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<v Speaker 1>has had become so wokeish and and and and emphasize

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<v Speaker 1>so much the the spread of employment benefits, I would

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<v Speaker 1>have said, they might blink. But right now the FED

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<v Speaker 1>noses behind the curve. The FED knows as credibility is

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<v Speaker 1>on the line, and it's going to go out of

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<v Speaker 1>its way to to to keep policies tight and perhaps

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<v Speaker 1>even tighter. I think a hundred basis points can be

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<v Speaker 1>on the table. Um if inflation persists and and and

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<v Speaker 1>gets even worse, and I think that's something that the

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<v Speaker 1>markets are not ready for. I mentioned two parts. Um.

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<v Speaker 1>You address the first part rather well, but the second part.

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<v Speaker 1>It was basically that we have so many people employed,

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<v Speaker 1>and we have more jobs than we have people to

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<v Speaker 1>stick in them, that that maybe we're stronger and we

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<v Speaker 1>handle it better this time. Do you want to refute

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<v Speaker 1>that or not at all? Brian Bryant, If I would

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<v Speaker 1>say double up on that. UM, I have never seen

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<v Speaker 1>a recession start with the unemployment rate is three and

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<v Speaker 1>a half percent UM. And not only that, I mean

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<v Speaker 1>Paul talks about so many vacancies out for for the

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<v Speaker 1>number of unemployed, and despite those vacancies, firms are not

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<v Speaker 1>increasing the pace of hiring UM because they're looking for

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<v Speaker 1>better workers. So there's a sort of like a micro

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<v Speaker 1>economic dislocation in that labor market. People are are up

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<v Speaker 1>upping the quality and and and and the workers themselves

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<v Speaker 1>are looking for better jobs. So so I think everyone

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<v Speaker 1>is looking for higher wage jobs and higher proctivity jobs.

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<v Speaker 1>And I think the tightening by the FED may not

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<v Speaker 1>result in the kind of pain and angst that we

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<v Speaker 1>had in previous sessions because people are looking for better jobs,

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<v Speaker 1>they're qualified for better jobs, and and and companies have

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<v Speaker 1>invested in technology and changed their business models in a

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<v Speaker 1>way that would allow workers to be more productive. So

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<v Speaker 1>I think the combination of these factors makes the next

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<v Speaker 1>recession much less painful than would have been in the past.

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<v Speaker 1>And people have money to spend. I mean every where

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<v Speaker 1>you go, and that's globally. Airports are packed. Restaurants are

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<v Speaker 1>packed too, so in that sense of the consumer. How

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<v Speaker 1>much does that custion a deeper recession. Well, Juliet, I

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<v Speaker 1>think that shows sort of the huge split in our

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<v Speaker 1>in our economy, the dual economies that we have a

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<v Speaker 1>lot of people in the middle class and upper middle

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<v Speaker 1>class have so much to spend. I mean, don't forget

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<v Speaker 1>during during COVID, there was a shortage of pelotons. Now

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<v Speaker 1>that a peloton, I'm sorry, is not a necessity of life,

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<v Speaker 1>but there are so many people who are poor, uh,

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<v Speaker 1>struggling day to day to try to make ends beat

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<v Speaker 1>by buying gasoline and food and then asking myself, am

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<v Speaker 1>I gonna be able to pay today this month's rent

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<v Speaker 1>because the rent increase just came through. Um So, So

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<v Speaker 1>I think that the dual economy shows that that the

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<v Speaker 1>pain is being felt by a lot of people, even

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<v Speaker 1>because even now because of these high prices and we

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<v Speaker 1>don't have any layoffs yet. But but you're right, a

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<v Speaker 1>lot of people have a lot of money to spend. Yeah,

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<v Speaker 1>And I think the scenario that we've been talking about

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<v Speaker 1>for most of this interview is it's sort of augers

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<v Speaker 1>for muddling through. And if we're actually able to muddle through. Okay,

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<v Speaker 1>then there's too much negativity around. Oh. In the financial markets,

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<v Speaker 1>no doubt, and especially in the equity markets. If you

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<v Speaker 1>look at the bond markets, I would say the Fed

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<v Speaker 1>has regained his credibility. The break evens now are down

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<v Speaker 1>to about two and a half five year break evens

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<v Speaker 1>or two and a half percent, down from three and

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<v Speaker 1>a half percent several months ago. So the bond markets

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<v Speaker 1>are I think I have pricing in the belief that

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<v Speaker 1>we are going to come back to target inflation fairly quickly.

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<v Speaker 1>Now it could be because of the recession, but regardless

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<v Speaker 1>that pricing in the kind of stability and inflation in

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<v Speaker 1>a fairly rapid period of time. Equity markets have not

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<v Speaker 1>gotten the message yet because we're well below where we

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<v Speaker 1>were before. And in terms of what we kind of

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<v Speaker 1>see with people trying to position what this kind of

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<v Speaker 1>downturn will be, where do you see potential upside moves

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<v Speaker 1>for equity mon It has to be in these high

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<v Speaker 1>growth companies that have been so hard hit because of

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<v Speaker 1>this fear of inflation, fear of high interest rates, and

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<v Speaker 1>the fear that these companies would not be able to

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<v Speaker 1>raise prices and have revenues in line with cost increases,

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<v Speaker 1>I think of the coverage like Tesla have have shown

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<v Speaker 1>over and over again they can raise prices as much

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<v Speaker 1>as they want and and and maintain their profit margins. Now,

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<v Speaker 1>the things that could kill them would be another shutdown

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<v Speaker 1>in China which would completely shut off their production, and

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<v Speaker 1>that they would have no revenues because they don't have

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<v Speaker 1>any production, not because they don't have any ability to

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<v Speaker 1>raise prices. All right, Bill, thanks very much for joining us.

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<v Speaker 1>We've got to get you back here to Hong Kong

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<v Speaker 1>sometime soon. Be sure to come into our studios when

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<v Speaker 1>you do. Bill Lead, chief economists at Milken Institute, with

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<v Speaker 1>us live here on Bloomberg Daybreak Asia