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Thank you so much for joining us on this special edition of Bloomberg Daybreak. US markets are closed for the Martin Luther King Junior Day holiday. I'm Nathan Hager, and coming up this hour, we'll look ahead to the federal reserves first policy decision of the year, what's in store for interest rates after last week's key reports on inflation, Plus streaming behemoth Netflix gets set to report earnings. We'll have a special Bloomberg Intelligence roundtable with media analyst KEITHA.
Ronganathan and senior credit analyst Stephen Flynn. But first we begin with politics because this is not only MLK Day in a rare occurrence, it is also Inauguration Day, as Donald Trump officially begins his second term as president. So what will the next four years hold in store with Trump back as commander in chief. We're pleased to welcome Wendy Schiller, director of the Alfred Taubman Center for American Politics and Policy at Brown University. Great to speak with
you on this inauguration Day. Wendy, thanks for being here, And of course we saw plenty of dramatic moves in the first hundred days of the first Trump administration, how could the second first one hundred days be different?
Hello Nathan, and happy inauguration Day to you too. You know, there's just a question mark, you know, will the second Trump administration learn from some of the stumbles of the first Trump administration, things like the travel band, things like you know, sweeping immigration and deportation actions. This time, I think the rollout will be much smoother, and I do think that the Trump administration is planning ahead for things like lawsuits or public challenges to some of the actions
that's going to take. Clearly it will use more security and immigration as some of its pillar foundations in the early part of the administration. But politically, you know, the Trump administration, led by incoming President Trump, is very focused on getting a tax cut bill and certainly making sure the debt ceiling gets extended. And so those are the things that the Trump administration wants to get done earlier in sort of the congressional legislative season. Then we typically see I do.
Want to get to the plans for tax policy. But you mentioned the possibility or at least the preparation for potential legal challenges to some of what President Trump may have in store here. How prepared is the next president for what could be coming in terms of the flurry of executive orders that he has said he wants to enact on day one.
This is all are very much dependent on the Justice Department. You know, should the Attorney I'll be confirmed fairly, smoothly, and then what happens to career Justice Department lawyers? Do they stay or do they go? How much of an exotus will there be in the executive branch for people who are still service and who are either fearful of served you projects twenty twenty five, or you know, any
kind of other attempt to cut or eliminate positions. But even that, they don't want to carry out Trump administration policies. So you know, if you get a hollowing out of.
The Justice Department.
I'm not suggesting that there will be a hollowing out, but there could be. Then when groups that are gearing up that are already prepared to challenge some of these executive orders go to court, you know, who's going to defend the Trump administration. That's where I think the opponent may have a head start, depending on what the staff situation looks like in the executive branch. So at the same time you want, you know, elon Musk and then go almost want me to clean up and limit and
trim government. He's going to need those people to implement his policy.
Do you think we're going to see the kind of sea change that President Trump has talked about if it does produce some kind of backlash from the electorate, if some of these things are seen as not popular, if they come into drastically.
Well, Nadan, this is a really important part of the federal government that a lot of people sort of overlook. It is deeply embedded in every American's daily life. Everything we do, the safety, the food we eat, the healthcare system, the roads, which of course you know up in New England we complain about all the time. Every single thing we do is absolutely affected by the federal government. And you need people to be implementing those policies and conducting
oversight of how they're going on the ground level. So if you want to gut or trim or eliminate, people will feel that. And so the big question is how many of those people will be in Republican leading districts and whether the House of Representatives they very slim Republican majority react to the things that are happening on the
ground in their districts. So this is the big thing that I'm watching for, and we may not see it till this summer, but those of those who know history go way back to nineteen ninety five and New Cambridge to have got out of the gate very fast, very successfully in the Republican House, and then by the summer the impact of some of those decisions are being self and districts and the party started to really fight with itself.
So we have to see how they roll it out, where they roll it out, and what they're actually going to cut.
Of course, it's not just you know, the Department of Government efficiency that we've been looking forward to, but there's been a lot of talk as well about plans to really rain in immigration, boosting border security, a lot of executive orders expected there as well. How could the rollout of a border policy be different from where it was the last time around, when, as you mentioned, it was facing a lot of challenges under the first Trump administration.
Well, Nathan, when you think about the border policy and shotainly what outcome President Biden did and many argues far too late, But you know understanding that if you are seeking asylum, and then refugees are different from assyl leads for different kinds of reasons. You know, can you cross the border and make the claim and then stay in the United States while the claim is being processed. Certainly that was the Biden administration policy, and we had millions
of people come over the border. The Trump administration will not have that policy used to be called stay in Mexico. But what they're going to say is you cannot come here if you are not legally permitted to do so. If you don't have legal permanent residents, you cannot come and stay. And that will be disruptive to those people who are currently have being allowed by the bidenmistration to come here stay here. Will the Trump administration force all
those people to return to their home countries. That's a lot of people, So when we think about undocumented, it's a very long range of people. But certainly these sylum seekers are probably going to be the first target after what they view as the criminals. Those people are irrestively hard to find, and that will be a steady stream of women and children being shown to being deported. And we saw last time that did not go overwhel with
the American public, So they're even disconnecting voters' minds. They want border security, they want limited on document and immigration. Of course, on the other hand, they don't like the images of seeing women and children, you know, forcibly deported from the United States.
We're speaking with Wendy Schiller, director of the Alfred Taubman Center for American Politics and Policy at Brown University. Of course, the policy that markets are looking for in terms of the rollout is tax cuts and the potential for expanded tariffs, not just on adversaries but potentially on allies as well.
When it comes to the tax cut piece, how much of a difficulty is the new president going to face when the margins in Congress are so much tighter than they were when the twenty seventeen tax cuts were passed the last time around.
Well, I mean, you know, the Democrats and Republicans will vote for a renewal of some version of the original trop tax cuts. Congress rarely meets the tax cut. They don't want to pay us. And that's true across the
aisle political aisle. Question is what are the specifics of the you know, what are we going to do with corporations, what about repatriation coming back to the United States, you know, or everything capital gains, particularly you know, the state and local tax possession fault, which disproportionately affects a Democrat or blue leaning state. These are the sort of nuts and bolts of the bill that will bog it down, and you'll see very strong differences I think, between the House
and the Senate based on geography. You know, a district's impact from some of this stuff is not the same as the space impact, so you know you're going to see that. And at the same time, if you see tariffs negatively affecting particular industries geographically, that's also going to be something that the GOP has to manage internally within its caucus. That's where I see the biggest difficulties in
the response to any kind of sweeping Trump tariffs. You know, Pennsylvania went for Trump right like it's starting to lean Republican. You start throwing tariff on things, does that affect manufacturing in Pennsylvania? So we will see that local nature of Congress rear its head, I think, particularly in the Republican CLOCKUS in response to.
What Trump does in terms of the herding of cats on Capitol Hill. How do you see President Trump dealing with the congressional leadership. Of course, you've got House Speaker Mike Johnson and a brand new majority leader in the Senate in John Thynne.
No President denpawn Republican, loved Congress go all aback to George Washington is constantly complaining about Congress even before he was President of United States. They don't like it. They think they got elected their president. They also be able to do what they want to do, and the party is you know, a trifecta. But Trump will get frustrated very quickly if things don't go his way. We've seen Mike Johnson even do some small things like you know,
raising the flags and inauguration around the Capitol. You know, we have a period of morning for Jimmy Carter, usually supposed to be a half step, they'll be raised because Trump complained about it. It may seem small, but if it's an indication of the President's influence and House of Representatives in the Senate, Johnson's a pretty healthy majority, so
he doesn't really have to trade away too much. But he's got people with Lisa Murkowski, sus and Collins, who may not go along with everything, You've still got some leeway there. So I think Soon and Trump may have a so smoother relationship because soone can deliver in ways that Mike Johnson's gonna have very difficult time doing.
As we get into this new administration, Wendy, we're returning to unified government in Washington. We have a Republican president and Republican majorities on both sides of Capitol Hill. How do Democrats regroup after President Trump's win?
People think about regrouping politically, these broader teams moving to the center. I do see it that way. In the first year of the Trump administration. You're going to twenty
twenty six, which are midterm elections more locally focused. It's really hammering home if it happens negative impacts from the Trump administration policies on local constituents have to go back to their retail routes and really sort of lead bigger issues I think on the table probably leading up to twenty eight, but for twenty six, it's how are these benefiting you or hurting you? And we are the party that tries to help you, and this is what we're
trying to do. And a consistent message. Chancy Pelosi was very good at this in two thousand and six, consistent message across district about the way that Trump policies are hurting voters where they live, where their kids go to school, where they work. And that's sort of the key for Democrats to regain their footing, and they have a very good chance of taking the House back in twenty and
twenty six. The Republicans are well aware of that, so focusing local, focusing on the things they can stop or obstruct, and if they can't, focusing on the negative impact of their constituents, you know, focusing on the national I don't think it's going to get a very cost And.
In terms of the focus for President Trump, do you see him being focused on policy, implementing an agenda or how much do you think he's going to be focusing on on retribution in the first one hundred days.
Well, predicting President Trump is a risky business. I think he could derail his agenda if he focuses too much on retribution. And I think that's where the Democrats may have their singular national issue is if he looks like his abusing presidential power to go after personal enemies and sort of personal grudges. That's going to derail things. It's hard for Congress that to send that. It's harder soon
and Mike Johnson to actually publicly defend that behavior. So I think his advisor is going to say, don't do that. We play the long game. Got four years. Let's focus on wins. And I think the president wants to keep his very high approval rating highest he's never had. It's comparable for Reagan and Clinton at the end of their administrations. He's going to want to keep that and stay popular.
So he'll want win after win after win. But I think he's less concerned with the actual policy and more concernable with the outfix of winning.
Really good to have you with us on what happens to be an inauguration day on a federal holiday. Wendy Schiller there, Director of Brown Universities, Alfred Taubman Center from American Politics and Policy, and up next, we're going to preview earnings tomorrow from Netflix and a special Bloomberg Intelligence roundtable, So stay with us for that. I'm Nathan Hager, and
this is Bloomberg. Welcome back to this special edition of Bloomberg daybreak, markets are closed from the Martin Luther King holiday. I'm Nathan Hager, and Wall Street gets back to work tomorrow with a key earnings report on the docket. After the close of trading, we get the latest quarterly numbers from Netflix. So what should we expect from the streaming behemoth.
Let's find out with a special Bloomberg Intelligence roundtable. Joining us now Bloomberg Intelligence Media analyst Geeta Ranganathan and BI Senior credit analyst Stephen Flint. Great to have both of you with us as we wait for these results. And as I recall, Githa, Netflix had a pretty solid quarter last time around, So what are we expecting now?
Yeah, they've had solid multiple quarters, Nathan, and I think we're going to continue to see that play out again for the fourth quarter when they report results. So you know, it's actually been this perfect moment for them because they've had one of the strongest content cycles ever in their history. They've made this very big foray into live events. We had two huge live events that they streamed on their
service actually in the fourth quarter. One was the big Mike Tyson Versus Jake Paul boxing event, which happened in November and then in December, on Christmas Day, you had two NFL games, and both those along with the release of their biggest hit ever, which was Quid Game Season two on December twenty sixth, is believed to have really
kind of boosted those subscriber numbers. So we're expecting roughly about eleven million or so subscriber editions will make, you know, one of their biggest years ever in terms of adding subscribers.
And Stephen, in terms of the numbers that you look at on the credit side, what are your expectations. Yeah, well, Netflix's.
Credit profile is very strong and we believe it's likely to stay that way given the companies capital allocation priorities and its ability to generate significant free cash flow. The company has a pretty conservative approach to cash and debt and I don't see that changing.
When it comes to that cash flow. Githa, Is it all about the subscriber numbers? Is it about the advertising revenue that they're starting to generate now with these new ads supported tiers? What are you looking at?
It's a little bit of everything, Nathan. So remember after this report, they will stop disclosing subscriber metrics, So you know, Netflix of course, we all kind of think and we know highly anticipate the subscriber numbers when they come out every quarter, but they will no longer be providing those metrics.
So really this is kind of almost this watershed moment for Netflix because investors have to kind of really refocus how they think about Netflix, and so the metrics that we are really going to be focusing on is revenue growth, is operating income growth, as well as operating margins. And if you just kind of see the profile for Netflix over the next few years, you're absolutely right. Advertising is going to be a significant portion driving that revenue growth.
So we're expecting obviously ten plus percent revenue growth for the next few years, as well as operating margin, and all of those actually then factor into free cash flow because remember Netflix, along with increasing its revenue as well as subscribers, has also really been very disciplined when it comes to costs, and that has really helped fuel free cash flow pretty dramatically.
Gud, you reminded me about the end of subscriber number reporting, because Steven raises the question for you about what kind of metrics you're going to be looking at in terms of gauging the ongoing health of this company.
Yeah, so from the credit side, we look at a lot of the traditional credit metrics. We look at free cash flow, what the company is doing with the free cash flow. Obviously leverage. Netflix's leverage is very low. Net leverages less than one times, and it should remain around the one times area going forward. I mean compare that to companies like very highly rated Disney or Comcast. They each have a net leverage ratio about two point four times,
so Netflix is very conservative relative to them. Netflix has no plans to add debt to its balance sheet to fund dividend or fund buybacks, so they're very conservative. We'd like to keep a couple of billion dollars of cash on hands. We look at a lot of those metrics going forward, and Netflix's credit profile looks very strong.
Another way even to look.
At it is if you look at Netflix's debt versus its equity market cap, it shows you how conservative they are. The company has about sixteen billion dollars at debt right now and the market cap is, you know, over three hundred and fifty billion dollars, so it's a very conservative profile.
And Githa. When it comes to then you mentioned some of the live events and the scripted content that Netflix is expected to put out. What more are you looking for when it comes to the type of content that Netflix is putting out there and how it could stack up to some of its competitors.
It stacks up really, really well, Nate than compared to its competitors, And we are actually going to see Netflix make a deeper and deeper foray into live events, especially as it looks to build that advertising business. So we talked a little bit about, you know, the Jake Paul Mike Tyson event, we talked a little bit about the NFL games, but the real big move happened actually a few weeks back when Netflix really started streaming WWE's raw
content every Monday. So that's live on Netflix globally, and we're going to see you know, Netflix actually make I think, bigger investments, you know, and MLB and NFL rights may be available in the next few years, you know, we think. And Netflix definitely obviously gained in terms of both subscribers as well as made good advertising money as well on the Christmas Day games, and so I think this is going to definitely become a bigger portion of their content strategy.
Going forward. Along with that, of course, we do have you know, all the usual hits in terms of scripted content. So if you just kind of look at the slate for twenty twenty five, it's once again it's a blockbuster slate. So you have you know, hit shows like Stranger Things, Wednesday, Squid Game, you Cobraki, So it's just endless. So again, the content cycle looks extremely strong for the next twelve months.
And Stephen, when we think about those kinds of investments, not just in the scripted content but live events, how could that affect the balance sheet for Netflix?
Well, Netflix has plenty of cash flow to handle that. It's very interesting you think about the history of Netflix. For many, many years, it was a high yield rated company that would borrow to invest in its business, and it had pretty significant free cash flow losses every year. But they were able to finance that in the bond market until they got to the point where they got scale and they were able to flip that to pause
a free cash flow. And the credit has significantly improved over the past couple of years, and so they have plenty of cash, plenty of cash on hand, plenty of free cash flow coming in the future to invest in their business, and the company could even easily borrow to invest, but there's no need for them to do that, and they seem to have no desire to do that.
Speaking with Steven Flynn, Senior credit analyst for Bloomberg Intelligence along with Bimedia analyst Githa Rongganathan, as we look ahead to Netflix earnings this week. Githa, we've been talking about content, subscribers, advertising. How is the advertising environment right now? Do you see advertisers willing to spend to be on Netflix, particularly with some of these live events.
I absolutely think so. So advertisers are going to go wherever eyeballs go, and we are seeing more and more content move to streaming. So we've seen this big shift away NASAN from linear TV into what is known as connected TV. Linear TV is know was a sixty sixty five billion market, but connect to TV has been really growing at a very very rapid pace and advertisers are kind of really scrambling to make sure that they reach their audiences. We've seen some pretty hefty numbers in terms
of viewership for all of these Netflix events. So if you look at those Christmas Day games, for instance, we had an average twenty seven million people you tune into those games. That compares very nicely to broadcast television. So they were able to kind of gain the same amount of reach that broadcast TV has had, which means that they should be very easily able to command the same amount of advertising revenue.
And how do you see the ad environment, Steven, not just for Netflix, but for the streaming and a linear industream more broadly.
Yeah, well, obviously linear has its challenges with subscribers moving from linear television to streaming services or just you know, cutting the cord completely. I think overall advertising is going to be better in twenty twenty five, giving a stronger underlying economic environment.
And for subscriber churn Githa, We've talked about that in the past, you know, customers canceling, renewing depending on how they can handle it. How do things look for Netflix when it comes to that now that we do have these ads supported tiers as well.
So churn actually has been historically pretty low for Netflix, and we think it will continue to trend downwards. And that's really mainly a factor of industry dynamics nation. So we've seen you know, obviously the streaming wars were very intense at one point of time, but we've seen kind of Netflix really cement its dominance. They've they've kind of become the go to TV viewing options, so they are
the undisputed leader right now in streaming. So not a lot of cancelations right now as we see, you know, for Netflix, and then if in the future, you know, obviously one of the main triggers for chure and for subscriber cancelations are price sikes. And even if Netflix does decide to high prices in the near future, they obviously do have that the AD tier, which can handle that because it's a much more cheaper economic option that people could kind of defall to.
And Stephen, you've mentioned how much cash on hand Netflix has. Do you see a need for the company to raise rates at any point?
Well, they have the power to do it, but I don't think they would need to do it for generating enough cash. Company does generate a lot of cash.
KEITHA. Where do you see the stock price going for Netflix? The last time I looked at the A and R function on the Bloomberg terminal, there are a lot of buys for the stock, not very many cells and a pretty wide range in terms of price targets. After we get these earnings, do you expect a lot of change in terms of how Wall Street looks at this company?
Valuation is definitely very, very demanding for Netflix. It currently trades at about twenty nine times forward but about forty two times forward PE. And just for context there, Nathan Disney, for instance, trades about twenty times forward PE. So definitely rich valuation. But I think it has definitely grown into those metrics, and you know, after it reports, I think what investors are really going to look for is color on advertising and how it can potentially be a driver
off that double digit revenue growth. So we're seeing fifteen percent revenue growth in twenty twenty four. The question is can it sustain that same level for the next few years, And if they do provide some color would suggest that advertising is going to ramp significantly. We think that those levels of valuation can be supported.
And not to put either of you on the spot here in our last minute, but are there shows coming up on Netflix or any of the other streamers that you're particularly excited about? Steven, I'll start with you.
I have talked to my wife. She tells me about that.
Okay, Gita, you mentioned quite a few What are you looking for Love Blind? Oh my goodness, Really tell me more about why you look forward to Love is Blind.
That's interesting. It's the perfect show. And you know it's interesting because it's reality television. They have actually Love is Blind now and you know they're running so many different shows across different parts of the university. You know, you have Love is Blind US, you have Japan, you have Brazil, and it's so interesting to see the difference in cultures. I think it's one of the most fascinating watches on Netflix.
Well, you know, there is a lot more reality TV across all these streaming services. It just goes to show you how the landscape has changed. Used to see it on cable. Now, like everything else, it's moved on to streaming. Thanks for this roundtable. Really appreciate you having you both on with us today. That's Githa Ranganathan, media analysts for Bloomberg Intelligence, and BI Senior credit analyst Stephen Flynn, head
of the Netflix earnings this week. Up next, we'll take a look at the fed's first interest rate decision of the year. We'll speak with Bloomberg International Economics and Policy correspondent Michael McKee. I'm Nathan Hager, and this is S Blimberg. We're just over a week away from the Federal reserves first policy decision of twenty twenty five. How many rate cuts are in store after the latest reports on inflation and employment?
For more.
We're joined by Bloomberg International Economics and Policy correspondent Michael McKee. Great to speak with you, Mike, But before we get to you, here's what Chair Powell had to say. The last time the Fed cut rates.
We reduced our policy rate now by one hundred basis points, were significantly closer to neutral at four point three percent and change. We believe policy is still meaningfully restrictive. But as for additional cuts, we're going to be looking for further progress on inflation, as well as continued strength in the labor market.
That was just over a month ago, and here we are with a dip in core consumer prices and the paper market sure looks strong. Is there room for the Fed to start thinking about thinking about cutting again?
Mike.
I suppose there's room to start thinking about thinking about but there's no room for them to actually start cutting. Why not January I know, I'm the party pooper here. The FED has basically said they're going to be on hold, and the underlying reason, which they won't say out loud, is Donald Trump and the fact that he's now president and what's he going to do. They don't know the impact that his policies are going to have on the economy, so better to wait and see a lot of the
policies he's talked about could be inflationary. You've heard that before, the tariffs and deportations and things. But until we know what the details are, is no way to tell. So right now, the Fed's on hold in January. The real question is what are they going to do in March, and that'll depend in part on what Trump proposes and in part on how inflation develops between now and then.
So does this mean that the FED is moving from a data dependent FED to a Trump dependent FED or is it a combination of the two or what.
Well, it's a combination of the two, because they won't move up or down if the data don't support it. But if they're thinking about what the Trump administration may do, they have to look forward because it takes maybe a year to get a rate move into the markets and into the loans that people actually take out in the economy, and so they got to think about what's going to
be happening going forward. Obviously President Trump can propose something immediately, how long is that going to take to get done. You've got all the Washington analysts saying extending the tax cuts to the extent they do, that won't happen until
the fall. Yes, there's going to be a certain eyes cast at what the administration proposes, but it also has to be that inflation is continuing to fall towards two percent and unemployment doesn't go down too much more for the Fed to consider cutting again.
So is there some thinking in the market that that could be why investors have dialed back their expectations for the number of cuts they're expecting from the Fed this year, something like one for the whole year, just because it could take some time for not just Trump policies to take effect, but for Trump policies to get passed.
I think the investors are more looking at the inflation outlook and the fact that the economy has been growing faster than anticipated, and we haven't got the fourth quarter numbers yet, but when we do, it's expected to suggest that the economy grew as strongly or a little more than in the third quarter. So for the year, things were pretty good and it sets us up for a
good beginning to twenty and twenty five. That means that you're more likely to have in some inflationary pressures because demand stays high, and so that's kind of what the markets are looking at, and then they're trying to combine that with well, what could Trump mean for all of this. I think that's why you have seen because there's this uncertainty, all these jitters in markets, and for the last week
or two we've seen incredible volatility in bonds. Yields went way up ahead of the data that we got at the end of last week. The middle of last week, CPI came out and everybody changed their mind again because they thought inflation's under control. It's hard to know exactly where the markets are going to come down on all this, but for right now they don't have to worry about the FED through the end of the month, just.
To put policy uncertainty aside. I know that's a big ask because it's so important to the market, but based on the data that we've seen so far on inflation cooling last month and the labor market still showing signs of strength. What would that say for the Fed? Again putting Trump policy uncertainty.
Aside, I think you have to wait. You have to wait, and I know it is the problem if you're just looking at it in a world minus and administration. I don't say by style Trump, but if Joe Biden wasn't there either, you would be looking at an economy that is moving in the right direction but still very strong, and so you have that underlying possibility of inflation. But inflation is coming down from where it was, and we've had a lot of idiosyncratic reasons for inflation to go higher.
We had the hurricanes ripped through the southeast, destroyed many many people's cars. They got to get to work, so they go out and buy a new used car. That pushes up the prices of used cars, and that tends to fade out, so then there'll be something else. End of the year, we saw airfares go up significantly and that will probably not continue. It'll sort of level out. So it just depends on how strong the economy is and whether some of these idiosyncratic moves start to level off.
We did see housing in the CPI continue its lower move. It went up a tenth of a percent on a rounding basis, But in general, housing prices have started to do what the Fed's been waiting for them to do, which has come down. And if that continues, that continue to put downward pressure on inflation, and hopefully if inflation gets closer to two percent, if then can say, well, all right, we need to continue cutting rates to get back to whatever we think normal might be.
Speaking with Mike McKee, international economics and policy correspondent for a Bloomberg News and I wanted to pick your brain on that just a little bit, Mike, because it feeds into the debate about out whether FED policy is as restrictive as the FED has said it feels like it is when we continue to see these signs of economic strength.
Is there a debate going on within the Fed, not just in the markets, but within the FED about whether policy is restrictive, whether we have to think about a new neutral rate.
Well, we do have to think about a new neutral rate, because we never know exactly what the neutral rate is. You can only observe it in the past tense. But it does seem that the economy is stronger right now. So for the short term, I think you get a lot of agreement with members of the FED that we
do need higher rates right now. Maybe not. They may disagree about whether we need to be at four and a quarter to four and a half percent could be a little lower, but they're not going down to three percent that quickly until they see signs that the economy may have cooled off. So on a short run basis, yes, we get a higher neutral rate, but on a longer term basis, that's going to depend on the way productivity develops.
We do know that the number of people who are entering the labor force has been strong because of immigration, illegal or not, and if that goes down, then productivity is the way you get stronger growth, and productivity could go up because of AI things like that. So there's a lot of uncertainty about that at this point, but I think most people think on the FED there within striking distance of neutral for right now. A year from now that may be different.
Still quite a bit of a ways of striking distance from the fed's two percent inflation target. And there's an ongoing debate in the market as well about whether the FED can reach that anytime soon. Is a two percent inflation target realistic, particularly when I bring back the idea of Trump policy uncertainty.
Well, unfortunately, whether it's realistic or not, it's what you got. The FED is looking at its framework for Monetary policy, reviewing it this year, but jay Pole has already said we're not going to change the two percent target. The thing the FED worries about is that if you move the goalposts, then the markets will always expect you to
move the goalposts. And if we have another bout of inflation, the FED might say, well, we'll do three percent target, and then inflation doesn't come down as much and people lose confidence in the FED. So they're saying they're going to leave it at two percent at this point.
And in terms of the data we've gotten most recently obviously producer consumer prices, how does it all feed into the Fed's preferred measure of inflation? What are the expectations there?
Well, that's a good question because the PPI has more categories that feed into the PCE, and it suggested that we would see a higher PCE than people anticipated. CPI also has a few things that feed into it that were lower than anticipated. So the general feeling now is that PCEE will come in maybe about where people thought
it was, which is little changed on the month. But there's a risk either way because we're in this world now where we go out to three descperate places to measure inflation, and then it becomes a rounding issue.
In the time we have left. Now that we are getting a new administration, we've got to think about how the Federal Reserve is preparing for that. We heard during the campaign President Trump talking about how presidents should have a say when it comes to monetary policy. Are you going to be watching for challenges to FED independence as we embark on this second Trump administration.
We'll be watching for it, But there is a kind of growing feeling that maybe for the time being they won't do anything because we saw Michael Barr, the Vice chair for Supervision, resigned that post on the FED. But the regulatory clash that we might have expected could be avoided. And then when you think about it, Jay Powell is going to be gone in May as chair in May
of next year. Is it worth it to the new Trump administration to start a fight now and end up in court and all the things that you end up having to do to fight that out if he's going to leave right away, and so they may hold off for a little bit on that.
So do you think this idea that President Trump could challenge the Fed's independence? Is it something that's kind of been a little overblown by critics or is it something really worth watching?
Probably a little overblown, but it depends on what you mean by challenge. Does he really try to fire J Powell? I don't think so. Does he go on social media and say bad things about him?
Oh?
Of course he does that about everybody, and so I would expect, especially with the FED on hold instead of cutting rates, I would expect some nasty comments.
Appreciate this, Mike, always good speaking with you. That's Bloomberg International Economics and Policy correspondent Michael McKee with us on this special edition of Bloomberg Daybreak. Thanks as well to a Bloomberg intelligence analyst, get the Ranganathan and Stephen Flynn, along with Brown University political scientist Wendy Schuller. And we'd like to thank you, of course as well for listening.
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You enjoy this MLK and Inauguration Day. I'm Nathan Hager, and this is Bloomberg