Inflation Objectives Unlikely if Tightening Accelerates, Riccadonna Says

the market live to live and direct. Yeah, sure is. Yeah. I think it's fair to call this obviously a dovish surprise from Janet Yellen's testimony today. Um, the remarks about the uncertainty surrounding the inflation outlook. Just to be clear, this is from the statement that was previously released, right right, the remarks, the prepared remarks that she'll uh, she'll deliver to the house soon. Um. You know, obviously missing is

the word transitory. Uh that inflation is uh, you know, the declines and inflation are are based on transitory factors, and the word on certainties uh, sort of replacing it, you know, makes people obviously think she's being a little bit more doublish than perhaps the market was positioned going into it, and the reaction in the stock market is pretty textbook. You've got real state companies in the lead, financials at the back, so the rate sensitive banks are underperforming.

The companies that do well with lower interest rates, real state utilities, telecom, that sort of thing are all doing well. And UH obviously a big move, So you know, it's safe to say this was a decent surprise for the markets. You know, one thing that I thought was interesting, and Tom Keene alluded to it earlier. He was saying, you know, talking about the yield curve, right, and and it's sort of interesting that across the yield curve you're seeing something different.

So in the two and thirty yield curved, the difference between thirty year yields and two year yields, you're seeing a bit of a flattening, but you're seeing a pretty significant steepening in the gap between five year and thirty year treasury yields as well as UH ten and thirty years.

Just in the office to to let us know what his take is, Carra Kadona, chief US economist for Bloomberg Intelligence, UH carl is This market response indicating that many bond traders believe that Janet Allen in the Federal Reserve will allow inflation to pick up more than they had previously been expecting, given her more devish comments. I don't think that that's really the case here. I think the markets are in the last few weeks have been responding to

this drag taper tantrum. I think this will ultimately prove to be short lived, but the markets are expressing doubts about how much the Fed is going to ultimately move compared to what they're signaling in their summary of economic projections. When you say move, you mean raise in terms of ring, because she basically said we're almost done, I mean in so many words. Well, she said that we're almost to neutral, but neutral will move higher as the economy continues to improve.

So she is kind of steeking with the FED plan that the terminal rate, or the at least a neutral rate, will ultimately move closer to two and a half or three percent. I gotta say, I feel like I'm in a game of scrabble and someone has just shaken up the entire board. Neutral moves higher. Can we just understand what this is are they looking for more reasons to lower rate to keep rates low, or they're looking for reasons to keep to move rates higher, So they want

to be moving rates higher. But this goes back to the notion that's going to give you a headache when I say it or star So the neutral uh interest rate, and so they have indicated that that was depressed after the financial crisis. It's moving higher, uh, and it will move higher still. But as the Fed funds rate is moving higher than it's closing the gap with new how many how many rate increases is Bloomberg Economy Economics forecasting for this year? Well, Uh, currently we are looking for

one more this year. But it's really going to depend on the inflation number. So the Fed is uh potentially potentially even less inflation is backsliding. The Fed is ramping up the pace of normalization at the same time that inflation is moving in the wrong direction one point four percent on the core PC deflator, they're trying to hit two percent. So with that backsliding, uh, they really risk their inflation credibility because they have underperformed on that objective

for the last several years. So you're saying currently we're on tap for one rate increase, but all of this, how about for next year? Uh three? But again I'm going to say the risk. The risk is to the downside, and the fundamental reason behind that. I don't think we have a clear sense of what the reaction and the exchange rate is going to be when the balance sheet unwind starts. But when Kueie was initiated, the trade weighted

dollar fell to a three decade low. When you throw that engine into reverse, I think it's a big mistake to assume that we won't see dollar strengthening. Although recent FED comments, including Governor Brainerd's speech yesterday, tried to make the case that this will not be a significant UH driver of a strong who saw what happened, it's a very good point to make, because of course, this is

what happened in Canada just recently. Absolutely, currency levels when you absolutely matter, and it matters to a lot more than just the export sector. Well you know, so right now we're seeing it yields down across the board, where people, basically because of Yelling's UH generally perceived to be debbish stance. But I have to wonder, Mike Reagan, how much this is a continuation of a play to safety or a flight to safety, and an expectation that growth will slow

because of grid luck in Washington. That we saw really take hold yesterday in the wake of the release of emails from Donald Trump Jr. That seemed to show his uh full understanding of who he was meeting with, that he was going to be getting information that could be harmful to Hillary Clinton's campaign from the Russians. Yeah, there was a brief spasm of flight to safety yesterday after the those emails came out, after Trump Junior twitted them

in fact himself. But looking at the equity market now, dal averages up hundred and sixty points above its record close, So it's hard to really, uh, you know, say there's a flight to safety going on. And and to be clear, I'm not saying that people are worried that the Roman is going to fall apart. But Dan Ivanson of PIMCO put it eloquently when he said, look, this just makes it even harder for Congress to push through their proposals that could potentially help growth. This goes to your point,

Carl about inflation. How can inflation pick up without that fiscal stimulus that people were expecting that would only come with some kind of agreement and some kind of leadership in Washington, right. I mean this is all playing into the outlook for growth. Now. Ultimately, inflation will be a reaction to the pace of growth in the economy. So if we are meandering along at two percent growth like we have for most of the current economic cycle, then

we should see similar types of inflation results. Uh. So you can get past two percent if you keep rates really accommodative, if you have a fiscal stimulus package, but neither of those seemed to be transpiring. So it's it doesn't make sense to me that policymakers are confident we're going to hit their inflation objective if they are dramatically accelerating the pace of tightening. Uh, in an economy that has yet to show any evidence that it is bucking

the trend that has prevailed for eight years running. Good, very good point. Carb DNA, please stay with us because that we really kind of elevated the discussion to another point. You really made some interesting comments. And I want to bring in Chris Condon. He's our fed reporter for Bloomberg and um he's also here to talk a little bit about Gary Cohen, right, I mean he might be a

candidate to replace Janet Yellen as FED share next year. UM. Gary Cohen currently National Economic Council Director, Chris maybe just if you can just take a leaf from from Carl's book here and and Mike Regan, I want to thank you if you want to hang out, we love you, but I know you actually have to go do some work. I better go write some blog posts there you go at m Live go on the Bloomberg. Uh. You know, Chris call made the point that we are in a

point where maybe we're making a very big mistake. Does anybody else feel that that is more important to discuss than uh, you know what we're going to hear today about a short term move and interest rate or so sure him. There are many people concerned about that sort of a longer term direction of the FED and how it's going to deal with this whole riddle surrounding unemployment

and inflation. Um. And on top of that, as you know that there's a big question over who will be the next FED chair if Jennie Ollen is not going to continue, and that yeah, well we can connects directly to that question. Well, yeah, and We saw a political story out yesterday, UH saying that the leading candidate to replace Chair Yelling is drumroll please, Gary Cone, the current chief economic advisor to President Trump, former Goldman Sachs chief

operating officer. So, Carl, what's the take on him? Well, he's an administration pick for the NYC, so, uh, you know, they raises questions about the political independence of the FED if you're having one of your own now moving into the role of FED chair. It's hard to see Cone being a policy hawk and raising rates aggressively or tightening policy aggressively, which would then hurt economic performance and run contrary to the objectives of the administration. I just can't

see that the optics are not particularly great. It'd be better to be someone who is a little bit more distant from the administration. Well, and Gary Kohene is not an economist either, Chris, I'd love to get your take on the process, uh, that President Trump would have to go through to get Gary Khane to be the head of the FED, because my understanding is that any FED chair has to be appointed from sitting UH FED members, So he is not currently a FED member. How would

this work? Well, you have to be a governor to be selected to be chair of the Board of Governors or in chair of the Federal Reserve System. But given that there are vacancies on the board, the president could select anyone he wished, assuming that'd be approved in the Senate to become a governor and be elevated to the position of chair simultaneously. So that's not exactly unless he were to fill up the three vacancies with other people and then assume, yeah, Chris, and I'm sorry, we're gonna

have to leave it there. Chris connin fed, reporter for Bloomberg cawork down a Chief US economists for Bloomberg Intelligence. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.