Let's get to our guest, William Lee, chief economist at Milken Institute. Bill, thanks very much for joining us. I wonder if you agree that we we may be entering a period here where the market will focus more on what the FED does than what the FED says. So you had very hawkish commentary from j Pal today, but investors haven't completely gotten on board yet with his new guidance that calls for rates over five percent next year.
So do we need to let the data do the talking? Well, Brian, it's really amazing that for the last several months since Jackson Hole, the markets have insisted on wanting to hear a message that the FED is not telling them. It's almost like a ChEls and child, you know, tell me what I want to hear and not what I don't
want to hear. And and and I think what we we have to see is that this time the dog plots show that the FED is really very clear and almost unanimous and saying we're gonna be raising rates to about five percent. In fact, seventeen out of nineteen and form see members said we're going to push rates up and we're gonna keep it there as long as it takes to bring inflation back to two and we're willing to take the cost of higher unemployment and slower growth.
Now that message is something that the markets are insisting on not hearing. Yeah, yeah, yeah, Then how restrictive does policy need to stay, you know where they are now built? Or how much higher? Because you know Pols have talked about it's not about whether rates he hit the peak, but really the duration, how long and how high that hold is going to be? How long do you think it has to be? So leve on and and and
that's really the key to Paul's many messages. He's telling everyone, Look, I'm gonna have to channel Volcer because you guys are not believing me. Volker had the toughest time in the world because he had unbelievable period of unanchored inflation spectations where no one believed inflation would ever get back to anywhere near single digits. Uh, And so he had to raise rates up to very high levels and keep them there.
And and Paul saying, I'm gonna have to do that if you guys don't believe me, so actually take into account what I say and start to behave that way, stop spending as much as you are doing um slow down in in in your spending so that we can bring supply and demand back into balance, especially in services. Your ease up on your vacation. Right That overpriced airplane ticket and the overcrowded airports are things that you don't have to put up with. And if you don't put
up with it, the prices will come down. And that's his message. And more importantly to the wage setting people. You know, if you're setting wages at five and six percent, you know that's not sustainable given a two percent inflation world, given the productivity we've seen. So ease up on the wage demands and and and and ease up on on
the labor market tightness that we've been seeing. They don't see inflation getting back to around two percent until and if it's if it's true that we have high rates for the next three years, that must not be good for equities, right, particularly given that they're also only expecting growth at a half percent, And that that was one of Paul's key messages today. He said Montrey policy transmission works through financial conditions, and equity market is part of
financial conditions. He even said, if we find equity markets uh easing up and rising in anticipation of our pivot, We're going to have to raise rates even more to compensate. So I don't think he could be any clearer to equity market investors to say that we are not going to be happy to see equity markets rally anytime soon until inflation comes down again. But he also gave us the one one character to say, if inflation does come down more quickly, we will ease up on our tightning
more quickly. And that really is the key. It was interesting when the questions were asked about whether the US can actually avoid a recession. He seemed to think that, you know, the strong jobs market can can really keep the US out of a recession. If you take a look at you know, the dots at five point one percent for next year, the medium forecast four point six percent unemployment rate is does that does that work out
the map for you? Can the US still avoid a recession? Well, this forecast is a lot better than what we saw in March, where we had this immaculate disinflation where no movement in the unemployment rate brought the inflation rate down. Um, this one is a lot more realistic and and again, it depends on how spending behaves in the economy over time.
If people ease up on their spending, inflation pressures will ease off, wage demands will ease off, and we will see a disinflation much more rapid than before, and we may not even see the four four point unemployment they're projecting for the next three years. But I think they can go very easily the other way. We can go to five percent or above five percent unemployment if we see wages and prices recalcitrant and not behaving the way the FIT is hoping it would. Bill, Let's talk a
little bit about China, because they are actually linked. It's possible that if China opens fast and things go a certain direction, that that adds to the inflation problem. But I'd rather not focus on that so much at the moment. One of our other headlines stories today is is the comments from the CEO of a s m L about how his company has already done enough in terms of restricting exports to China. It seems like it's setting up a little bit of a battle between the Netherlands government,
the company, and the US. How do you see this moving? Yeah, this is this is one of the biggest problems facing the Biden administration is to get our allies to be on the side of putting pressure on China and be more competitive with China and trying to preserve intellectual property rights uh and and and because the Europeans are so dependent on China trade, especially the Germans and and A SML in particular, really needs to have very effective trade
relations with Taiwan, the main the main customer for their equipment, and China right now is the main customer for a lot of the advanced chips made by t SMC so, so the bind administration is working very hard to get Netherlands, Germany and all of the European allies to be on our side. Unfortunately, their pocketbooks are pulling them towards China. And that's attention when I can see resolve very quickly.
And you add that to what is looking to be an increasingly bumpy sort of reopening story in China as well. I mean we have, you know, government meetings that are sometimes on sometimes I've given the COVID spikes and whatnot. Should I just assume that supply chain log jams and all that are going to continue for next year that's
my presumption. Actually, I I think the first thing we will see in China is what we're already seeing is a huge outbreak in cases of COVID and that will essentially, you know, put workers out of out of work for quite some time, and the supply chains will not be restored as quickly as we are anticipating. What what also we're not going to see is much help from China in terms of helping the global economy as a locomotive
for growth the way was before. China is growth may a register of five or six percent growth domestic demand, but their demand for imports I think will be very limited. Um and their ability to help on the inflation front by fixing supply chains, as you say, because of these often on kind of kind of events, but we would
also be limited. But Bill, let's finish on a positive note. Uh, It seems to be a positive that we we have some evidence now that the Chinese government is really listening to the people and that they got the message that people were not comfortable with these tight restrictions on COVID. And this is really the most hopeful development I've seen in almost a decade of the CP rule. I mean, the fact that they are responding in a way that is not similar to how they respond to the Hong
Kong is a huge, uh improvement. But what I'm suspicious of is there the other back handed way of improving relations with the Soviet With Putin Um, you know, it's almost a one hand giveth and one hand to take it away. A As long as he is trying to supports Putin, the difficulties that eurofaces with the war and the shortages caused by the war are going to persist, and that will just keep the inflation problem even worse for Europe and the rest of the world. Bill thanks
very much for joining us. Always a pleasure, William Lee, chief economist at Milkin Institute,