Bill Dudley: Why Markets Should Worry About Inflation

Today we are joined by Bill Dudley. He's a senior research scholar at Princeton University Center for Economic Policy Studies and obviously also former president of the Federal Reserve Bank of New York based in Princeton, New Jersey. Bill, thanks so much for joining us here. Love to chat with you kind of about your column about inflation. I think the Federal Reserve would like to see some inflation come back into this marketplace, but the signs really aren't there.

What are your thoughts on that. Well, the first thing is that people are of the view that it's not going to come back. And so if you look at the spread between normal treasuries and inflation protected treasuries, spread it on a tenure basis is one point nine. That's on a CPI basis, So that translates to UH you know, core PC deflator of about one point six So basically, market participants are saying the Fed's not going to succeed in their goal of pushing inflation not just back to

two percent, but above two. I've set the missages that we've had in recent years, so market participants are very, very confident that inflations will stay low in definitely, and I think that just a little bit too optimistic and assessment. There are some indicators though maybe I do that. What about the five year five year forward which has been creeping up and is at what two point nearly three

percent at this point. Yeah, we've had some movement in the last week, so people are finally, I think, is taking this on board. But there are a number of reasons why I think inflation is a greater risk and what's pricing from markets. The first is base effects. So last April, March and April we saw a big decline in the COREPC deflator because the onset of the pandemic. When we get to May and those numbers drop out of the UH year over year statistics, all sudden inflation

will look a little bit firmer. Second, I think that as we as we get an economic recovery in the second half of the year, which I fully anticipate, I think you're going to see more pricing power in those areas that were hurt most by the pandemic, things like hospitality and leisure, especially given the fact that that we probably actually are gonna have a shortage of capacity in some of those areas, given business failures that have occurred

over the intermediate period. Third, you know, the other issue, of course, is we know the fens will be very patient. The fat is basically said they're not going to raise short term interest rate until they until maximum employment gets until we get the maximum employment, until we get to two percent inflation, and the fattest confident inflation is going to go above a two percent for some period of time, So the FED is gonna be slow rather than fast.

And then uh, I think the final thing that makes me more more worried about inflation is fiscal policy. There's a pretty strong consensus developing that that if economies we use fiscal policy, there's not a lot of worry anymore about uh, that sustainability over the medium to longer term. So fiscal policy is a lever that can be used

more aggressively than before. If you remember back during the last economic cycle, fiscal policy restraint was one reason why we had a subpar recovery in two thousand and twelve without fourtune well bill, just like on that last point, and maybe this is just political positioning, um, but we're actually starting to hear some Republicans say, whoa, whoa, whoa, let's put the brakes on some of the fiscal stimulus that we're talking about. Three trillion UH is way too

big the number. We're thinking something less than a trillion for example, just on the discussion this latest fiscal stimulus, do you believe that after years of supporting higher and higher spending, that the Republicans have any stomach for kind of reining it in. Well, historically the Republicans have been uh for fiscal consolidation when Democrats are in the White House and not so much when Republicans. Certain way, I

think they'll I think they'll continue that that pattern. The important thing on the fiscal size, it looks like we're going to get another round of physical stimuls. If there's nine billion dollar proposal goes forward, it seems more likely than not at this point that I think is sufficient to provide a bridge to the recovery that we're going

to see late spring uh an early summer bill. So we definitely will see price increases in perhaps places like services, which make up about there all c p I and the core measures. So I could see where you would get inflation. But if we have slack in the labor force, which were likely to have for some time, won't that offset that kind of inflation at least for the federal reserve? Well, I think it. I think the question is how long is that slack in the liver market actually going to persist?

And the other issue I think is, you know, people talk about the scarring of the economic caused by the pandemic, but the scarring isn't just about you know, workers being unemployed. It's also about businesses. They are just going under so capacity is also suffering. I mean, in my hometown Cranford, New Jersey, to two of the major restaurants have gone

out of business. So when demand comes back, there's gonna be a lot more pricing power for those that have survived this, this this pandemic bill, how do you view the labor market here? We get you know, a week after week we get this really really sobering jobless claims, and of course we had some of the jobs data on Friday. Here, how do you view the labor market and the resiliency of the labor market as we come onto the back side of this pandemic arguably beginning maybe

you know sometime next year. Well, it's not as good as the employment statistics suggests. For example, looking at the unemployer rate of six point seven percent. The our reason that as low as six point seven percent is a whole bunch of people have dropped out of the labor force. You're only counted as unemployed in the United States if you're actively looking for work. The labor force participation rates

dropped by nearly two percentage points since February. So there's a lot more people unemployed than suggested by the current labor market, and that's certainly going to hold inflation back for a while. But I do think the recovery in the second half the years quite powerful. Once you get people vaccinated and the risk of pandemic goes down from a health perspective, social distancing land, you'll have an opening up. And so I think there's a lot of pen of demand.

I mean, you look at the savings rate, the stavings rate right now, it's really high, even though we've gone through a very bumpy economy. So it seems to me like there are resources, especially among higher income people to go out and spend. So, Bill, if you don't mind taking us through it very slowly for some of us who may may maybe you know, less quick of thought than you. Take that restaurant example that you just gave

us in your hometown to have closed. The others will have pricing power when people come back and start eating out properly. But how long will it take before those businesses or new businesses open to take that pricing power away, to employ some of the people that haven't been employed, that were in the services sector, and that then you know, contribute to the labor market becoming sort of full again full employment. Well, I wish I knew the answer to

that question. I mean, we've never gone through anything quite like this before, and the burden of course has fallen, you know, disproportionately on leisure and hospitality and especially on a lot of small businesses. You know, if you look at the share of you know, demand, it's it's gone

disproportionately towards the larger, large, larger stores, larger businesses. You know, Walmart's is able to stay open because they sell super sell sell groceries, or while follower smaller stores that specialize in things that Walmart sells, maybe you know, don't don't have as much much business. So I think, you know, I think you're right that you know, there will be you know, a small business creation. But then that's about you know, mobilizing capital and being credit worthy, and so

I think that's going to take some time. Hey, Bill, thanks so much for joining us. We appreciate that. Bill Dudley, former year FED president and senior researcher at Prince University, and Vonnie, that's a big, big issue I think for some of these small businesses, the you know, the how quickly they can come back, or maybe a new entrepreneur comes in and starts a new restaurant in that old old space. Well that's just it. And you know, to me, in some senses, that might be the critical question how

long does that take? Because that's when we're going to see those indicators move around, the inflation indicator, the employment indicator, and it's how they all sort of interact that you know, decides whether we suffer from too much inflation, or whether the FED needs to do something about the FED folds back and so on, so many questions to resolve that

was built only former Fed Reserve. New York billion dollar and logistics company d h L has just released its annual Global Connectedness Index, which it does in conjunction with n y U Stern School of Business, and the report highlights key developments in international flows of capital, trade, information, and people. Joining us now with the conclusion from the report that globalization is far from dead is the CEO of the America's of dhl Express America's Mike Power and

thanks for joining Mike. So my globalization may not be dead according to the report, but what are the flows showing us. Are we dealing with other countries as much as we did a peak globalization? Well, good morning, Bonnie and Paul, and thanks for having us. Yeah, I mean the report in itself, uh, there there weren't big surprises.

So obviously people flows, if you've seen the report, people flows suffered an unpreceded decline in We expected that based on what was happening during the pandemic um capital flows were hit a bit harder, but they are rebounding UM. And that is positive, as you know, with governments and central banks having stabilized the markets and helping to do that. But the one that came out that we're actually excited

about his international trade. It's rebounded uh strongly. And people ask us all the time, is this a U shape and L shape? Uh? It's a rather narrow V shape recovery that we have seen. UM. Our lowest point at DHL this year was in April. Uh. If you think about when we found out about the pandemic UH in Wuhan and where it started, we started flowing from the

US to China ppe equipment UH. And then it turned around in March April and you started the c PP equipment that started to flow from China to the world into the United States. UH. So really what we've seen is the world remains connected. UH. International trade UH is key, and globalization has been more resilient uh than expected. So

it's far away from coming to a standstill. Yeah, Mike, that's interesting to hear your perspective because folks at DHL, obviously it just has a bird's eye view of kind of global trade. Here one of the concerns that some folks have is, uh the trade war between the US and China, and not so much the tariffs and maybe the method in which the Trump administration carried out some of its trade policies with China, tariffs and so on, but just the general belief that the world needs to

get tougher with China. Does that uh throw some roadblocks into the globalization story at all? I would say at the beginning, Paul, I think there was a lot of speculation, a lot of anecdotes that went out there. There is always gonna be a change in the world, especially for US when we're dealing in two d and twenty countries and territories globally. What we have seen is China continues to be one of our biggest trade lanes for US

at DHL China, US and a p US. I think when you take a look at it, Uh, they're firing in all cylinders right now, China and Asia Pacific to Europe in the United States. So what I would say is, uh, you know, the things that took place this past year, whether it be the U S m c A deal and the revision of NaSTA, which by the way, was needed, some form of revision was needed, but there are biggest trading partners now as well, UH and China. There needed to be a reset from that perspective as well. But

there's been no slowing down at all. Mike. What have you done in terms of changing routes, re prioritizing routes, putting stuff on certain routes and so on in order to deal with the changes the last year or two. Yeah, it's thank you for that, UM, because we've been in peak season, as I said, since early June, and as a result of that, we've been adding jobs. So we took a decision in the month of March that we would not furlough one single employee UH. And all we've

been doing is adding jobs. So we're over three thousand new added jobs and growing in the United States as an example, over six thousand when you take into account Canada. UH. In Mexico, we've added additional capacity as a reduction as a result of reduction in airline capacity UH, and that is coming back slow. As you can imagine some of the recent announcement of further restriction, further lockdown. From a commercial airline perspective, we had to supplement that with additional

capacity in the air. So we've added additional flights that of Asia, China into Europe and into the United States, intra United States, into Canada, into Mexico, uh, down south into Central South America. UH. And that has been ongoing for us really since the month of June. Uh And again, don't see that slowing down anytime soon. Uh. And really we've seen growth in eat commerce. UH so more and

more people, maybe like yourselves. I don't know about yourself, but my wife's shops everything online, have gone to shopping online. You you all the results of Black Friday and Cyber Monday, some of the biggest ever online shopping numbers, uh in the history of the United States. We saw greater than a fift uh in a very short period of time. And I get asked. I got asked the other day, Mike, is this gonna slow down? I don't see it slowing down. And we basically saw ten years of e commerce in

in a in a six month period of time. Wow. Yeah, just extraordinary how consumer behaviors change. E commerce has just been accelerated. I'm sure you see that clearer than just about anyone. Mike Parrott, Thanks so much for joining us. We really appreciated Mike Parrott, chief Executive Officer for the Americas for d h L Express America's joining us on

the phone from Plantation, Florida. Just extraordinary. They're seeing the recovery uh, you know in Asia, in China more specifically, uh, and then a broad recovery in terms of traffic just across the board. Amazing. We just got word that the call between Prime Minister Boris Johnson and the US vander Lyon has finished. Desperate to know what actually happened, because this was the call during which talks could collapse or

they could actually find a solution. So let's bring in to as Raphael to let us know what she knows. Torez a Booberg opinion editor and is based in London. Tores what do we know anything more about the call except that is over? Yeah, I'm sorry to say we don't know. Um, we don't have any detailed readout at that call. It was a crucial one, as you said, because uh, the talks are at an impast. This week is considered, you know, if not the last week, then

pretty close to it. Given the European Council meet on Thursday. Um, and Uh, the UK is due to leave its transition period at the end of the month, and there's a lot that needs to happen before that in terms of legally scrubbing and translating and getting approval for any deal. Um. There needs to be a political solution at this point.

I think that much is clear, and that's why we have Boris Johnson and Slavander Lai and the European Commission President speaking directly now whether they can unlock things, I think we're unlikely to hear um the announcement of a deal, for example, tonight. But what we I think, what what everyone is waiting to hear is whether they're going to keep talking at least another couple of days. Sores talk to us about fishing. Why is fishing such a big thing?

I just don't get it when I read headlines of thousands of jobs, finance jobs leaving London, billions of dollars of capital leaving. Okay, I get that's an issue, But fishing, Yeah, it's It's actually much simpler than it sounds. Uh. The whole you know, Brexit was was thought on the one very basic central idea, and that is that Britain would take control of its borders, its laws, its money. And when you look at the map of Britain, right, it's an island and there's water and and their fish in

that water. And to you know, to to to the common person's mind, well, if we control our borders, we also control our water. And why should the EU have the automatic right to fish? Uh to to claim you know, very large share of the fish in British water. So that's that's the simple assertion that the UK makes. It's not so simple in reality, because um, EU fishermen have been fishing those waters for you know, generations and more. Uh. The fish are spawned in EU water, some of them

and then mature and are caught in British waters. It's very complicated. Most of what Britain catches it sells into the EU. So it's a very it's one of these small issues that has the potential to blow things up.

That said that, the word out over the weekend was that they were pretty close to agreeing a deal on fish and that things were really hung up over these what are called level playing field issues, you know, UH, state aid subsidies for industry, labor, and environmental standards and that sort of things, and those are pretty um, you know, pretty important too to Boris Johnson and his party because they signify how much the UK can divert from the

rest of Europe, which is again another you know, fundamental reason why they're leaving the EU. But this fisheries issue TOAs it's important on its own, but it's also sort of symbolic of the whole thing, right because it will decide what stands either parties take on things like creep mission creeping and what gets decided for the past versus what gets decided for the future in terms of what

companies can do. The Europeans don't want the British to have the right to sort of change mandates over time, right, Yes, So that's that's the level playing field a side of this, and it's really stuck because the EU, from the used perspective, what they don't want is a is a you know, medium to large size economy right on their doorstep, having the ability to undercut European companies in all sorts of ways and yet having access to EU market. So they're

negotiating position is quite clear. Uh, if you want access to the single markets, which is a euro terrfzuro quota deal. Then you need to agree not to undercut European UM countries with through regulations and different standards on labor markets for example, UM and the UK's position as well, we've left the single market, we've left the EU, why should we follow your rules still, UM, we've left for the

very purpose of diverging. So that has created, you know, the impass And as with all of these things, there is a solution, but it would require concessions and political will, and that's what we haven't seen up to now. We haven't seen either side being willing to give enough to get to a deal. So tres It's so it's fair to assume by some that no deal will be reached if there's a kind of a no deal here at this last minute. What is crashing out of the EU

at your end really mean? Well, the first thing it means is that there are a whole load of terror that come into play. So right now there's free movement of good services, capital, labor, that's what the single market means. Suddenly you have teriffs. So for example, UM, sheep meet the EU. UH that thirty percent of the UK sheep meat goes into EU markets and terrorists would um add about I think it's something like six ad belorum you know, per year on that and there's a whole host of terrorits.

It would make British farming, um it would. It would price it out of the European market. It would have a huge impact on the automotive sector because of all of the input, the intermediate goods, the supply chain that involves EU part It also means a whole lot of non tariff barriers. And by the way, this happens even if there's a deal, So we we tend to think of a deal as kind of you know, releasing all

of the pressure that's built up. But even with the deal, we see a lot of non tariff barriers and those are things like customs checks, rules of origin, where did this product have to originate from? How do you certify that? Uh, food safety standards and those kinds of certification. For a British citizen who wants to take their dog to provounce in the summer, you will need a special pet passport, You'll need to get a vet to certify it. All of these things become more complicated if you have a

second home in the South of France or Spain. You will only be able to use it for I think it's ninety days and a eighty day period um, whereas now you can spend as much time as you want there. So this is all sorts of implications. Some of them are you know, seem quite you know, sort of small hassles, and others are quite significant. But we're talking about, you know, potentially a six percent loss of GDP compared to staying

in the EU. Uh GDP growth compared to what it would be staying in the EU, according to the Office of Budget Responsibility. So it's it's it's significant whether brigons will feel it from day one, um, that remains to be seen, but I think it's it's a sea change on a lot of levels, and no deal most of all means that the relationship between Britain and it's its closest trading partner, it's geographical neighbor um are put on on very sort of um, you know, not not a

good place. Yeah, terrible place, boyd dress. I remember when we used to speak to you you on a daily basis pre pandemic. But the it looks like we're finally getting to the short strokes here. For Brexit uh winner or lose thres Raphael Bloomberg, opinion editor covering the politics and economics of Europe, joining us on a Brexit update. Just looking at the d X Y Spot Dollar index trading right now at about nineties spots seven five. That's done

about ten percent from just March. Here. As we think about the Federal Reserve and uh FED Chairman Pale talking about lower rates for longer, let's get a sense of what's going on in the currency markets relative to the dollar. We welcome Wolfgang Coaster, senior strategy officer for Kiriba uh Wolfgang, thanks what for joining us here. So we have had this pullback in the dollar and again summer calling for maybe some continued weakness. What are your thoughts? My thoughts

Good morning everybody. Um My thoughts are that while we've had some weakening here and certainly significant, the bigger issue for corporations is really the volatility. Sometimes it's uptront as it's down. We all know that we've had some we've seen those continuous strength, we see some repriets. They're clear with all the global economic things that are going on that we're going to continue to see. One thing, which

is volatility. And the problem with the volatility is that it doesn't just happen on day one and day nine d of the quarter. It happens every single day. And there are lots of corporations who if they are negative to the impact of that forn exchange, its impacts their cash and it's all about liquidity right now, as we all know. So what we're helping companies was just trying to make that as agnostic as possible and not worry about whether dolls going up or down, but reality run

their business as I was a constant dollar business. Yeah, just for context, let's let everybody know that the dollar index today is at ninety point seven five nine zero point seven five is you know, thanks to you know, factor is beyond the dollars control as well, of course, like euro strength and I mean not the British pounds hurt nay, because that's been weakening too. So well, King,

I know you're particularly concerned about airbnbs currency problem. What does the likes of AIRBND that's dealing with all sorts of currencies all the time do, So what companies like that should do is really understand where all their exposers come from. And then manage it to a point that it becomes immaterial. Lots of companies around the world do that today. It looks like in the statements from Airbnb that they recognize they have an issue. They actually mentioned

in their opening documents their currency sixty nine times. They're in forty countries. Um they mentioned euro and Sterling is the two largest exposures, which is a little bit of setting right now. But overall, what what what investors will be looking at is how they actually manage this and what they're showing in their two thousand twenty results so far as a sixty three million dollar hit due to

four exchange. That's sixty three million dollars worth of cash that they do not have, and that is over ten of their overall net losses. So they would have ten less losses if they've managed that to a level where it becomes immaterial. And lots of companies, as I said, like the Googles of the world and others who have the same problem, manage this. Just to follow, if you

don't mind, are they not hedging? It looks like they're doing some hedging, but it doesn't seem to be as effective as it could be, So they look like they're doing from what they're saying, they are using their product to partially manage this. How exactly they're doing it don't know, But what I do know is that they have that they have very material losses that they shouldn't be having. So what's gotting up to last let's call it years? As the global commony global economy has become much more

global uh and internationalism has uh, you know, increased. From your perspective, how are companies today managing their currency exposure risk? It still seems like when I listen to earnings calls, I hear big, big numbers of currency swings, hits and or gains to the earnings. Yeah, so that's absolutely correct. Unfortunately, because we try to help companies make sure that that

doesn't happen. We we do actually a quarterly report where we do were last quarter we had losses of in eight hundred North American companies by exceeding seventeen billion dollars, which is a lot of money. So you have to answer your question. You have two camps. You have the camps of companies will really understand it, understand their exposure

and actually fully automate that management. Today it is automated all it is, and it is not expensive to do, and especially relative to the losses that that we're seeing companies have. And then you see the ones who kind of think that this is a zero sum game and

practice it is not a zero sum game. You may have ops, you may have downs, but they hit you every single day during your business, and you may well be losing lots of money in times when you need it and so during for example, this these tough times. U does is it really good for Airbnb to lose another sixty million dollars due to this? I think not

and it's not necessary to there. Now, what's impressive about Airbnb is still they're doing a great job through these through this economy quite frankly, still having some nice revenues of two and a half a billion dollars. So fundamentally they have a lot of things going for for them. But the financial risk management, it looks like it's in that they unfortunately are a little bit more in the camp of could improve. All right, then, well that's that's

telling them. Volcang. Let us know if they if they get back to you and put a strategy in place, we'd love to hear about it. All Going a Coaster is senior strategy officer at Kiriba, based there in downtown New York, New York Plaza. Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever a podcast platform you prefer. I'm Bonnie Quinn, I'm on Twitter at Bonnie Quinn, and I'm

Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio