Let's get to our guest, Bill Lee, chief economist at Milken Institute. So given that that's those are the headlines, Bill, let me paint a slightly different picture here, that it's different this time and two very interesting dynamics. One, inflation maybe stickier than what we're used to, particularly because of all these bottlenecks we see in supply and a lot of things like Ukraine that are outside the Fed's control.
And secondly, the recession might be very different too, in that, if indeed we are going into it, it's with a lot stronger job market than we're used to, and maybe maybe that means we can weather it better. Your thoughts, absolutely, Brian, I mean that that picture is exactly the picture that I have in my mind. Uh, this about of stipulation echoes the seventies, but it's nowhere near where what it
was like before. It's going to take the FED quite a bit of effort to get rid of the inflation because it's we've been hit by so much on the supply side. The study from the San Francisco FET shows that about half of the inflation can be attributed to supply and about half from them demand. Actually a third a third and in between a third that's sort of mixed. And and because of these supply side elements that continue
to get worse. I mean, after all, here we have shoot food shortages being caused by the cutoff of the wheat exports from the Ukraine. We just had an agreement that said, oh, we could resume food exports, especially to the starving emerging markets, and then all of a sudden, the port facilities in Odessa are bombed. Now that kind of supply shock, you know, you go crazy trying to forecast what's gonna happen to food inflation, um and similarly
for for energy. So so I think these continued bounds of supply constraints, the fact that China doesn't really open because it keeps playing around with zero COVID policies, uh makes the the forecast of inflation for sure more persistent than anybody would have expected. And I think the FED causes so committed right now to putting inflation back to his two percent target, or at least on a clear path to two percent. It has to deal with the demand side. It has to weaken demand so much that
it compensates for these continued supply side shocks. So Bill, that leads into the fact that we are expecting seventy five basis points this week. But what happens after that? In there forward guidance, did they continue with these really aggressive hikes or do they pull back? Well, Juliet I would have said, prior to the spring, because the FED has had become so wokeish and and and and emphasize so much the the spread of employment benefits, I would
have said, they might blink. But right now the FED noses behind the curve. The FED knows as credibility is on the line, and it's going to go out of its way to to to keep policies tight and perhaps even tighter. I think a hundred basis points can be on the table. Um if inflation persists and and and gets even worse, and I think that's something that the markets are not ready for. I mentioned two parts. Um. You address the first part rather well, but the second part.
It was basically that we have so many people employed, and we have more jobs than we have people to stick in them, that that maybe we're stronger and we handle it better this time. Do you want to refute that or not at all? Brian Bryant, If I would say double up on that. UM, I have never seen a recession start with the unemployment rate is three and
a half percent UM. And not only that, I mean Paul talks about so many vacancies out for for the number of unemployed, and despite those vacancies, firms are not increasing the pace of hiring UM because they're looking for better workers. So there's a sort of like a micro economic dislocation in that labor market. People are are up upping the quality and and and and the workers themselves
are looking for better jobs. So so I think everyone is looking for higher wage jobs and higher proctivity jobs. And I think the tightening by the FED may not result in the kind of pain and angst that we had in previous sessions because people are looking for better jobs, they're qualified for better jobs, and and and companies have invested in technology and changed their business models in a
way that would allow workers to be more productive. So I think the combination of these factors makes the next recession much less painful than would have been in the past. And people have money to spend. I mean every where you go, and that's globally. Airports are packed. Restaurants are packed too, so in that sense of the consumer. How
much does that custion a deeper recession. Well, Juliet, I think that shows sort of the huge split in our in our economy, the dual economies that we have a lot of people in the middle class and upper middle class have so much to spend. I mean, don't forget
during during COVID, there was a shortage of pelotons. Now that a peloton, I'm sorry, is not a necessity of life, but there are so many people who are poor, uh, struggling day to day to try to make ends beat by buying gasoline and food and then asking myself, am I gonna be able to pay today this month's rent
because the rent increase just came through. Um So, So I think that the dual economy shows that that the pain is being felt by a lot of people, even because even now because of these high prices and we don't have any layoffs yet. But but you're right, a lot of people have a lot of money to spend. Yeah, And I think the scenario that we've been talking about for most of this interview is it's sort of augers for muddling through. And if we're actually able to muddle through. Okay,
then there's too much negativity around. Oh. In the financial markets, no doubt, and especially in the equity markets. If you look at the bond markets, I would say the Fed has regained his credibility. The break evens now are down to about two and a half five year break evens or two and a half percent, down from three and a half percent several months ago. So the bond markets are I think I have pricing in the belief that we are going to come back to target inflation fairly quickly.
Now it could be because of the recession, but regardless that pricing in the kind of stability and inflation in a fairly rapid period of time. Equity markets have not gotten the message yet because we're well below where we
were before. And in terms of what we kind of see with people trying to position what this kind of downturn will be, where do you see potential upside moves for equity mon It has to be in these high growth companies that have been so hard hit because of this fear of inflation, fear of high interest rates, and the fear that these companies would not be able to raise prices and have revenues in line with cost increases, I think of the coverage like Tesla have have shown
over and over again they can raise prices as much as they want and and and maintain their profit margins. Now, the things that could kill them would be another shutdown in China which would completely shut off their production, and that they would have no revenues because they don't have any production, not because they don't have any ability to raise prices. All right, Bill, thanks very much for joining us. We've got to get you back here to Hong Kong
sometime soon. Be sure to come into our studios when you do. Bill Lead, chief economists at Milken Institute, with us live here on Bloomberg Daybreak Asia