Kocherlakota: Fed Needs to Target Employment, Not Inflation

and Bloomberg Opinion colums. He's also professor of economics at the University of Rochester. Uh Nariana, thanks so much for joining us. We really appreciate you coming on today. It's gonna be a busy day for FED watchers today. We've got the statement at two pm Wall Street time, and then FED Chairman pals Uh press conference at two thirty.

What do you expect to hear most notably from Chairman Pal's comments, Well, I think what we're waiting to hear is largely about, um, what was the FED talking about of the meeting? And you know, this has a meeting where the FED is going to be talking about what's going to happen in the future. I don't expect much change in terms of monetary policy or in the statement

UM at this time. But I think that the FED probably spent day a couple of a couple of days of very spotful reflection on what are their tools, how can they best use them? And UM, I'm hoping that Chair Arman Powell will give us a little bit of heads up about how that all those conversations went. What might be done about forward guidance? Arianna, Well, UM, I think vannie to that. I think for guidance is UM

something that the FED used during the last recovery. I think they were buying large pleas with how it went. But I think that the FED tried out what was called calendar based guidance, where they talked about keeping rates full low for a particular fixed period of time. I doubt we're gonna see that UM coming down the pike because the problem that is you get is you get new information, you get to change that guidance, and changing

it is it turns out to be pretty challenging. So what I think the FIT is likely to aim for is UM what we we we call and said, state based guidance, where they talk about the conditions under which they're likely to to raise rates. Now, I don't to be clear, I don't think anyone expects a rate increase becoming certainly any time even the next calendar one and and and probably not even in throughout two. So but I think it's the reason this matters is UH, it

affects the path of medium term interest rates. So UM, if the Fed says it's going to keep rates flow um until say, inflation returns to well about two that feeds into something different in terms of of of the power of medium term interest rates and that that can help stimulate the economy. Marianna, you're out with a column recently the entitled the FED needs to focus on employment. How do you believe they should focus on employment? Yeah, Paul,

I think that, UM. A lot of the discussion that you'll hear among FED watchers is UH, and from FED communication as well, is that they're talking about and thinking about communicating through the inflation rate. So as saying as I just articulated that they're UM their way, they way you formula for guidances, We're gonna keep rates low intil inflation has returned to two percent in the sustainable way, or or maybe we've relying for an over food. I

understand why they're doing that. Um. I think that will communicate that they're keeping rates lower for longer than maybe than people would expect. At the same time, inflation is a challenging marker for for households to figure out. They might not think of their ways being able to keep up with higher inflation, and so there's a lot of

evidence is on that is very mixed. I would say in the economics literature about will hire inflation signing higher inflation and lead people to cut back on spending or lead them to spend more. Whereas saying you're going to be focusing on employment, We're going to keep rates low until unemployment returns to let's say four UM, that will tell people, Okay, the FED is there until the recovery is really complete and UM, and a low unemployment is

obviously UM something that everyone associates with with positive economic news. Norianna, what kind of fiscal stimulus would help to maybe have the economy avoids some of the structural employment that we are definitely going to see. Yeah, I think that, UM, there's I should think there should be more of a sense that this is likely to be a long, longer term issue. Um. You know, and I think you see some of them in gry eucratic side, that you have

some recognition along those line. I think we should. There should be a recognition as well that the problem the economy is not uh, people feeling flushed with that six dollars um extra benefit and so when they're staying home and not well, not willing to work. The problem of the economy is not enough demand. That that low demand

is because of public health concerns UM. And so the role of government, I think in the situation is to try to stimulate demand, and the best way to do that, I think is by keeping unemployment insurance UM, extending those benefits, extending the extra benefits. So that's interesting. I mean, you get a sense that there's appetite in Washington, given what you've heard and read and folks you've spoken to, that

there is that support for more stimulus. Here appears this around appears to be much much more political than the most recent or third round where we got the three trillion dollars. So you know, I was answering that should not the will part of the question, um, what will happen? You know, politics not my forte, but I agree with you completely. We've see a lot of polarization here. Um, I think that you're you're gonna you're hearing more of

the concerns about boy, the dead is getting big. This is just the wrong time to have those concerns and continues to be a time of very high unemployment and that highnemployment. I think the challenge for a lot of people on the on the Republican side of the aisles they see the unemployment is coming from the fact that UM unplay insurance benefits are really high, and so that is encouraging people in want to work, Whereas I think it remains clear that the problem facing the economy is

that there's not enough demand out there. And um, if there were more demand, there would be more hiring and uh, and we'd have, you know, we'd have better, better economic conditions going forward. Uh. But that's where we were reverted, I think, unfortunately to the discussions we had in Congress in in the latter part of out None twenty eleven, where the debt um, the overhang of the of large apparently large government debt um really forestalled a lot of

needed stimulus. So Marianna, I mean you can't stimulate demand in a pandemic if people don't want to go outside. Therefore, and I'm making, you know, a second jump here, should politicians be worried about, you know, spending fiscally at times like this or or or or you know, is the GOP position correct that you can't you know, bankrupt and economy. So so the as a lot of interest rates remain low, and as long as people expect interest rates to remain low,

you're not close to bankrupting the economy. So the right always, I think the right way to be thinking about government debt is through the lens of prices and not quantities. And so as long as we have such demand for government debt as we see out there, you know, real yields or mean is ridiculously low as they are, we're not seeing a situation government is too high. I think, Um, there's a very nice paper um economist Guel Lauren Zone,

Ronica Gary Eri would big Straw and von Burying. They make it clear that the way they think about this is we've got multiple sectors in the economy, and by stimulating demand, what we can stimulate the demand for the goods in the services that people can go out and buy Nrianna Colt Lakota, thank you, Bloomberg opinion columnist, a little bit of news to bring you. Boeing says that it is going to lay off nineteen thousand people. That's almost ten percent of its workforce, well between eight and

nine percent right now, but yeah, it's a wow number. Pole. Nineteen thousand jobs is what is expecting. It had given a range of around sixteen thousand. But I guess you know, it's what are you going to do if your planes aren't being bought and if they can't even get up in the air in this environment, you can't exactly keep paying people, I suppose. Yeah, that's what we heard from Brooks Sutherland and even Daniel DeMartino Booth talking about that.

And now the job losses are starting to hit the white collar workers and they have just proportionate share of consumer spend, and so that kind of dovetails into the conservative economic out look, another data point for the Fed. Yeah, and it really speaks to structural unemployment because of Boeing is eliminating nineteen thousand jobs this year. How many of those jobs that had been created in the economy will ever come back? All right, let's move to big tech.

Maybe there's hope in big tech, but today, at least we were moving to big tech because we're going to talk about the congressional hearing that's beginning in about ten minutes. We'll have four of the big CEOs, including Jeff Bezos, who's never testified in front of Congress before, and of course Tim Coke of Apple, Alphabets, Sounder, Phi, and Mark Zuckerberg of Facebook appearing before the committee. Let's bring in Jen Reid to talk to us about what we might

expect out of today. She's senior Litigation and idolst at Bloomberg Intelligence. Jen, from what angle can be ex like the most you know attacks on these CEOs? You know, I think it'll be different for each CEO because the issues that each company has, at least in the antitrust world are really different and their businesses are quite different. Um,

So getting into the nitty gritty, it'll be different. But Bonnie, I think overall, there's a lot of concern about data and the amount of data that are in the hands of these companies and what they do with that data, um, and how that data allows them to maintain their position and maybe keep rivals down, and so that could be one overall you know, overriding theme or something that they

really grill these companies on. And I also think it's gonna be a little bit different depending on who's doing the questioning, you know, I think that Democrats are a little bit more focused here on anti trust and market power and harm to consumers, whereas I think some of the Republicans at least are a little bit more focused on whether or not these companies are biased and whether they're censoring conservative content, which isn't an anti trust issue,

but I think will come up. So, Jen, I mean, you're right, these are different companies of different profiles, but they're all huge in terms of market capitalization, in terms of front of mind for consumers, for investors, and now for potentially regulators. Do you have a sense that which companies might be more or less at risk here from

just overall regulatory oversight? Absolutely, I think by far it's Google and Facebook, um, whether it be regulatory oversight, whether it be some sort of a challenge from the FTC or d o j UM. You know, Google, we've already seen has been fined in Europe several times for anti competitive behavior and it could amount to anti competitive behavior here as well, the same conduct. Um, we do understand that Bill Barr and the d o J is likely to bring some sort of action against Google this year.

So I think the risk is highest for Google. And then on Facebook. Um, you know, it just seems, at least from the outside observer, that they really have had a strategy of going out of the years and acquiring nascent competitors. And I think there's all there is a lot of scrutiny on that kind of conduct and what would have come happened with what's happened with Instagram had Facebook not acquired these companies. Um, and and so I think that Facebook is also at risk. I think Amazon

would be next, and then Apple last. I don't see Apple having a lot of risk here. No, I mean Facebook, let's deal with that for a moment. How much will Zuckerberg be questioned about, you know, fact checking political ads and how they refused to do it and that it's not really because of free speech, it's more a business decision.

And William R. John scathed as he and all of the other tex CEOs newly always do you know, Vinny, I absolutely think he will be questioned on that again, even though this is meant to be an anti trust

hearing and that isn't an anti trust issue. I think it will be probably a big part of his UH, his answers to questions and his answers in UM this here ring With respect to coming out unscathed UM, you know, they generally do, and I think they will in this instance as well, because one, I just don't know how effective UM it can be when it's set up the way it is, with five minutes of questioning of each

of these CEOs. UH. Usually these hearings in the past have tended to be more partisan speechmaking UM and and sort of grandstanding than they have been productive or casting any of these companies in a bad light. UM. So I don't I don't see any of them coming out of this fearing damaged. Is there any realistic threat frond of these companies from a breakup standpoint? That's just to me. They just seems so big and so entrenched in the

economy and in people's lives. It just seems difficult. But I still hear people calling for it, you know, Paul, I think the biggest risk to them is actually le legislation. And I say that because to try to achieve the breakup of one of these companies in court, which is what the FDC or DJ would have to do if

that's what they're seeking, is extremely hard. I mean, it might even be hard just to hold these companies liable for illegal monopolization because the way our antitrust laws have developed, the precedents that the judges would have to follow make it actually very difficult for a plaintiff to proves that

proved their case in this area. So not only do they have to prove their case, but to get that kind of a remedy, which would absolutely be considered the most drastic remedy that could be imposed by a judge, I think would be incredibly difficult. You know, we saw that it failed years ago with Microsoft, and I have to say that in that case, Microsoft was a blatant

and egregious violator of the antitrust laws. You know, they were engaging in anti competitive conduct that was clearly anti competitive, with very little legitimate pro competitive business justification for what they're doing. I don't think that will be the case for these companies. So even though it's possible that it it will be launched by the d J, r FDC to try to seek a breakup or divestiture. I don't see it as having a likelihood of success in court. Interesting, Jenry,

thanks so much for joining us. We always appreciate your thoughts. You have that unique and experienced viewpoint of antitrust law, and it's certainly gonna be front and center today as the tech titans appear before Congress. Jennifer Ree, she's a senior antitrust litigation analysts for Bloomberg Intelligence. In a real ace up our sleep and I think is a backstage in Congress pol Yeah, like, are they all in the corridors right now to try to wipe the sweat off there? Well,

I think they're all gonna be virtual today, right. I think there will be virtual appearances by good points, so you know it would be interesting. So the a's actually break, I would say. But anyway, Amazon's Jeff Bezos, Apples, Tim Cook, Alphabet Sundar Pinchai, and Facebook Mark Zuckerberg. They are testifying before the House Subcommittee on Antitrust, Commercial and Administrative Law

that is at twelve noon. Bloomberg Radio will bring that to live, so it'll be very interesting for the technology sector here. So off to see how they play out. So that'll be very interesting. So we'll have to see, you know, we'll have to see that the stocks have done great. I mean, the stocks aren't worried about Vannie, so they keep powering along. They're leading this economy. Uh and that is kind of the leading the stock market certainly so. But it'll be very interesting to see how

they perform in front of Congress. Will bring that to you. Time to talk bonds now fixed income more broadly, so, the tenure hasn't really moved from its range. It's at about fifty eight basis points as we await the FED. But really the tenure just doing nothing. But if you look at measures of credit risk, they're easing today on prospects for a FED reiterating that it's going to be doublished for a long time. Let's bring in someone who

knows all about these things. Stephen Kane is a group managing director and portfolio manager at TCW Fixed Income two five billion dollars in firm wide assets under management, and Stephen joins us. Now, Stephen, why should credit risk be easing when we're really not going to hear anything new from the Federal Reserve today? I think what you're seeing is really just an ongoing um flood of liquidity you know,

in the marketplace. So it's nothing new today. It's not really built upon anything that the credit markets are expecting from the FED, but really an ongoing comfort, if you will, that the FED is going to be accommodative, You're going to get fiscal um, some sort of fiscal package um, and that you'll get ongoing liquidity coming into the marketplace. So, Steve, I knowe you folks at TCW generally a very conservative view here. There was initially during this pandemic talk about

a v shaped recovery. That does not seem to be the case. Well, what are your thoughts? Well, um, I mean I think there was hope going back a couple of months that um, you know, the virus could be dealt with through you know, social distancing and other preventative measures and companies could you know, the economy could begin to reopen and you could get companies rehiring again. Obviously

that's not been the case. Um. We think that this is going to be a very challenging recovery and it's not simply that the viruses is uh appears to be with US UM and a threat for some period of time. It's really that UM the disruption that that the closing down the economy has caused, meaning that you've had a number of industries UM suffer significant UM impacts, travel, hospitality,

most service businesses, restaurants, et cetera. And that UM in turn leads to job loss and bankruptcies and and things that are going to lead, we think, to a fairly deep procession and fairly elevated levels of unemployment for a prolonged period of time. So even when we get through this virus, even if we're able to UM you know, have a vaccine and relatively short order, the after effects of the procession and the impact on service industries is

going to be rather permanent UM. And we think that's going to be a fundamental headwind for the economy. So why worry about adding to the deficit and the dead Ultimately? Should we be worried about that? Will it hurt the US bond markets, the US credit rating? You know, the US dollar is a reserve currency. Or is it more

important to fix the economy right now? Well? I think UM certainly policymakers and I think are doing what they have to do meaning UM, I think supporting the economy through UM through stimulus is what's necessary to keep this recession from becoming even deeper or even you know, potentially a depression. So you know, you have to solve the problem today before it becomes too big to solve down the road, and so they're doing what they have to now.

The long term implications are unknown at this point, but certainly, UM, I think you're seeing weakness in the dollar is partly reflecting the fact that UM in the U S is running large deficits and printing huge sums of money, have very sizeable monetary growth and UM and and that's certainly weighing on the dollar. I think longer term, it's possible

you could see inflation. You've seen some modest drift up in inflation expectations, and I think certainly if the government continues to support the demand side side of the economy with the supply side of the economy being impaired, UM,

you know, you could see inflation. UM. In terms of the US credit rating, I think that's an issue far down the road, in terms of whether you know the markets, UH, the U S dollar you loses its reserve currency status and you begin to see you know, default risk being priced into the US market. I think that's that's far down the roof, Steve, given your relatively cautious outlook, where do you see opportunities or value in a fixing come

markets right here? Well, it's getting more and more challenging. As as we've mentioned in the past. UH, the markets were a lot more interesting a few months ago when we were really adding risk uh aggressively. But now that you've kind of retraced UM spreads, you've got investment grade spreads into into the mid one twenties and high yield back to five hundred off after being you know, well north of a thousand. We're seeing less and less value

in credit and we've we've been trimming now. Having said that, UM, there's still some opportunities out there and still some areas of value, beginning with the agency mortgage UM sector, which is obviously being directly supported by the FED through forty billion of purchases monthly. And that's not only keeping valuations steady and stable, but providing attractive carry and return, particularly

in the in the forward market. In the agency mortgage tv A market UM, there's areas of the investment grade corporate market that look interesting, money center banks, consumer noncyclicals, food and beverage. UM spreads are still reasonably attractive there. And you know these are businesses generally speaking, with strong balance sheets and uh you know his ability through a

very difficult economic environment. So UM in terms of high yield, you have to be very careful, UM in terms of treading in that area, and we are definitely being you know, cautious and trimming exposure is UM as valuations UH go higher. Steve Kane, thanks so much for joining us. Aways appreciate your comments. Steve Kane, Group managing director and portfolio managed for tc W fixed Income. They've got two billion and firm wide assets under management, so they know their way

around the fixed income markets here. Again, cautious view out of tc W. That's been pretty consistent, and I think, you know, you think about that V shape recovery. I don't hear people talking about that much anymore as this pandemic hangs on and we see resurgence in certain key markets in the US and abroad. Busy, busy earnings day. We have some industrial companies today, Boeing reboarding earnings, GE

also reported earnings. Both of those stocks are off in trading today, suggesting that infestors were a little disappoint Let's break down the numbers from those two giants. We can do that with Brooks Sutherland, she's Deals and industrials columns for Bloomberg Opinion, joins us on the phone from the center of this country in Kansas. Brook Thanks so much for joining us here. What are your takeaways from some

of these bell Weather industrial names. Yeah, I mean, I think for both of them, the key focus was on cash flow, and the numbers did come in, you know, a bit better than what analy hadn't been expecting. But you're still looking at a pretty bleak situation here with g burning, you know, more than two billion boings burning more than five billion UM. It's rough out there in

the arrow space sector. And I think you know, what you're hearing from these companies is what we've heard from the other aviation companies that are when is so far there is not you know, a turnaround that's just around the bend. I mean, you know, the g E CEO Larry Cole pointed to some positive signs, mostly um, you know, in China around a pick up and travel there. But of course that is all domestic you're not seeing the

international lives come back. UM. And in the US, where we have been seeing early signs of our recovery, that's now taking a step back on this resurgence in coronavirus cases UM. And So you know, I think what investors are sort of possibly rightly concluding here is that this is still a very tough slog and if you were hoping for glimmers of hope, you're not really going to

find it. UM. And the announcements from Bowing and ge today, who are bowing you that seven thirty seven Max problems, we are going to be outdone by other problems in what is the story with the seven thirty seven Max. I mean it kind of somehow saves Bowling in the end. Yeah, I I would be very skeptical of that UM notion. So you know, at this point, signals from regulators look like this may be allowed back in the sky UM

in sort of the early fourth quarter. But of course, the issue now for Bowing is not whether regulators approved it. It's whether anybody wants the plane once they're able to take deliveries. That begins. The Southwest is the biggest operator of the Max, and CEO Gary Kelly was very clear last week that he is not interested in taking any max jets, any new max jets. Let's just say this year they already have about thirty four that are parked.

That's going to be about all they can handle to bring back, you know, at a time when obviously airlines are looking to take planes out of the circulation to deal with the drop off in demand. Um So, you know, there's some skepticism among analysts that Boeing is not going far enough and dialing back productions forty seven Max. It did take that down again today, saying it expects to get to thirty one a month by early two, which

is pushed back from an earlier time frame one. But that may not be going far enough because they still got about four and a shifty planes that are parts that they haven't been able to deliver. And you know the question is who's going to take them on what

time frames? Four planes that are just part that's extraordinary, And it just kind of goes wow, and it just goes to the I guess, as you've been talking about, Brooke, the lack of demand from the airline customers for for ge, is this a story of just cutting cost cutting, cost cutting costs until things turn around. I don't see any other kind of growth driver there. I know people focus on the power business, but I can't imagine that demand

there is very good either. It's not, no, I mean, and this has really been a step back to the Power division, which was showing you know, some stability and sort of you know, it's not as pros, you know, maybe being left of the drags for GE, and that of course has been set back. You know, they are still optimistic about a turnaround in power, but the timeline

has just been delayed. They are being very aggressive about cost cut um I speak with Larry Cold just a little bigger and act and you know if they would follow down going and increasing their job sets that it's premature to think about anything like that at this time. In aviation, they are cutting about I count there. So that is the aggressive toss move on their front. You know, I will say that in terms of a recovery, g will probably see that before Boeing, just because of the

nature of their business. So GE benefits by points coming back into service UM and needing maintenance work, meeting repairs their parts, that kind of thing. So you will see that come back faster than you'll see demand for new things. But you know, for both of these companies, you're looking at a pretty protracted timeline very basically book any comments on China either of them, uh, you know, in terms of what travel uh they are seeing you know, a

little bit of a recovery. They're just immenentally, but you're not really seeing that international demands. Of course, many travel bands remain in this place. There wasn't really any discussion at this point on seriffs UM. You know, I think that has sort of moved out of the minds of CEOs at this point. Is we're dealing with um, you know, these sort of catastrophic declines in demand for air travel. I don't know that that's necessarily quite a top of mind was it was in but certainly an issue UM

in the background. There. Brook Sutherland always encyclopedia of knowledge when it comes to the industrials. She covers them for Bloomberg Opinion and for Bloomberg more generally. We'll be awaiting her columns on both Ge and Boeing, among others this earning season. It's a book. Thank you and Paul. It is interesting that you know, orders down thirty for ge, but the stock actually reacts positively because that's how you know wasn't as bad as anticipated. I mean, it is

down four percent, but it hasn't completely tamped. 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 Paul Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio m