Blinder Expects Up to Four Fed Rate Hikes This Year

Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg First Billy joined us here in our Bloomberg eleven FIE Studios in New York, managing director and head of North American Economics at City. Give us a sense of how you've processed all of the FED speak this week, all of the comments from various meapories of of the Federal Reserve. You know, I think that's probably the best example of the success of FED Talk, right.

I mean, they were out of the picture with probabilities of like twenty thirty it's just about a week or two weeks ago, and now with this chorus of people

talking things up. Um. And what's remarkable about is that doing it without hard data, right, that they're basing almost all of this up upbeat stuff on the prospect of physical policy, which we learned nothing about their in speech, right, and the fact that sentiment data is on a high and we have a divergence between sentiment data and real data. So my real question is has the FED changes policy rule?

Is it really basing monstrey policy now on sentiment data or putting at least putting more weight on it, and somehow deep saying that sediment data is a good predictor of real data. That's a whole new economy model. And if that's the case, they should start to show us some research that says, you know, the world should look at sentiment data and that I have yet to see.

What did you make of that speech on on Tuesday night, our colleague Michael McKee uh saying, when we look at the markets, when you look at what's happening here with with FED funds features, you can attribute all of that to what's been happening with with these FED policy makers, not with what the press and had to say. You agree with that. I think that what the President showed was a very thematic speech and that was great for

his audience. But what scared me as an analyst and as an economist, is where are the plans that we're supposed to get for corporate tax rate maybe fift What what are you gonna do to pay for it? Those details are not appropriate for that kind of sweech, but at least a hint to say, here's the framework that

we're gonna try to sell you coming up. I think what it shows that there's a lot of dissensions within Republican Party and that makes me worried that the timetable for corporate tax reform and all of the so called fiscal reforms may actually be pushed back to even beyond um And that's what scares me. If I'm a FED policy maker, I'm looking at the buffet of economic data before me. What's missing, what's not on the table? What, what's what could possibly keep them from raising grades here March?

How about inflation? All right? I mean you're supposed to say I'm worried about inflation, but the latest PC reading was what exactly one point seven year on year, and has that changed. It's been the same one point seven for the last six months. So so to say, wow, we are behind a curvel worried that we should normalize policy on a at a at at least a more accelerated pace than what the market thought just a few few weeks ago. Then you gotta say, what has changed

in my mind? What has changed my assessment? And the hard data are not giving it to help young Gera. And I'll put this chart out, folks, billy, help young Gera. Within the era where all we ever said was measured, we were measured, we were safe, we were measured. Alan Greenspan said we were measured. Boy, that got us in trouble. Why can't we just do one and done? I Arthur Burns would have done one and done. Now we're measured. We have vector's help because we we went to the

bad place. Um and and yes we had to get to a bad place. Means zero rates because of the crisis. But now how much how much? How long has it been since the crisis? A decade and we're still at near zero rates. That's why we can't do one and done. So we should be at two, maybe even two and a half to three. So you're saying five and well we should, we should be at a higher place, but we can't get there because of the way the measure

pace that they've taken. And they told us we're data dependent, So now how do we get from here to there? And the review for our pop quiz here At the end of the show, Bill Lee of City Group just told us they have soft data but not hard data, right exactly. I know that the employment data we're gonna get here comes to you don't have to take you don't have to take that scribble my notes here to to get that. All fats get out of it. Really, I know we get this this jobs report perilously close

to when we're gonna get this FED decision. Does that matter? How much does it matter the proximity of these two, these two events, and and well it's because in the quiet period they can't talk about it, right, But let's face it, if you let one data point push you around, that's not the FED that I know, that's not the FED that has the credibility to say that we're we're analyzing the data and looking at the trends and not the noise. And and besides, the data in the labor

market has actually been very good. We'll be getting much higher employment number that would be consistent with a low growth regime, which says, what we've got crappy productivity, right and and so so in that world, right we we we can't just start moving markets because of sentiment and feelings data. It really has been based on what has changed in our our projection of inflation trajectory to justify pulling forward to But even at the level of PC

is nowhere near Cleveland CPI. We showed that chart yesterday, folks, I promise I'll do it tomorrow on television and I will get it out on Twitter. It's a great CPI chart. But do these people manage to the data point, the present data point, or do they manage to the vector the inertial force of inflation? You like this physics statement physics Thursday and and and you can't get a nerdy engineer like me started on this talk. But but if you start managing to the data point, then you have

to be moved around by the data. You have to manage the underlying process. You've gotta manage to the process and the and what has happened to the process. Nothing. Yes, we have improvements, Yes we have more confidence. We're going to get there, But are we going to get there faster? What's your run rate on GDP right now, frame that forces we got a wide dispersion here. Right now the GDP now accounting estimates are showing first quarter at below two. Yeah,

but what about twelve months forward? We we are at the two and a quarter to a quarter gloomy day. Well, that's pretty good considering we where we don't have a one handle right, but certainly for next year we're anticipating a two six to seven because we're expected anticipating a half point pop from fiscal policy. Now, as we said earlier, given the speech that we just heard and no plan inside, that timing may actually be pushed back. Now, what are

the markets reacting to? That's what I'm curious about. Why is the stock market at historic new highs? Well, they see the regulation, I see that too, right, And they see the prospect of corporate text reform, the timing of which is uncertain. But is it gonna result in capex investment or is it gonna be dividend stuff? Back? So I think it's dividends to interrupt David, but I'm gonna but do they also see new animal spirits and a

higher nominal GDP than the gloomsters at City Group? Look Hey, you know, the gloomsters are looking at the real data. And if I wear a sentiment kind of guy, I'd say, Wow, my animal spirits are gonna be pushing things up, and I'd be raised my forecast. But lesson learn from modeling too for too long the sentiment data or not could predictors of real data and the economy itself. I mean, I would love to be you know, I think my

sentiment says I want to be rich and thin. I'm neither right, and I can't spend radio we're all rich, and I can't spend unless I have a paycheck to meet my expenses. So so that's that's the key. We'll come back, we'll talk about tax from we'll talk about the regulation. But let me ask you just about your your purview here is North America, but fold this into

a global context. I really intended to watch the webcast if Governor Branard yesterday, but I crashed hard after staying up so late to watch the president speech the night before. Read the read the remarks though, and she talks about how she's happy with what's happening in Japan and Europe. What's your sense of how that folds into into your Let me put back my I m F had where I did have a global perspective. You know, the global economy is improving. Even the emerging markets have have pushed

up the growth rates. But half the increasing emerging market growth is coming about because of the of of two countries Russia and Brazil coming out of recession. The rest of emerging markets, it's kind of me Andrey along and when we look at Europe and say, oh my god, Europe has improved so much, we're still talking one handles. We're talking one as opposed to one point two percent or maybe zero point nine. Now that's a massive improvement, yes, but by my books, that's not the kind of growth

that it spurs us or anybody. That's how we love to have you on state that again. The e M enthusiasm now, the dr BRAINERD sees and others is mostly from Brazil and Russia's cyclical recovery. They're coming out of recession and so emerging markets. But the rest of the emergint it's not the Philippines, it's not in Mexico, it's not They are along in the same pace slightly better because because the commodity world has come back a little bit right, but really the key there is China. Where

are you gonna get this? Folks? The inside of Bill Lee is sitting group that was brilliant Brazil and Russia plus physics Thursday. I mean it's just David. It's enough to put David. It's enough to run back to my desk and get the calculator. You know why A you Yen's in there producing and I think he's not nonfer sleep right now with us is William Lee for years at the International Monetary Fund. Now it's City Group. And Bill, you've done six pages on the border tax. What's your

value add in the executive summary? What part of the debate is what we need to focus on so that we can determine the value of an import tax. I'm trying to take the debate out of the academic pinhead world of instantaneous adjustments. Because the border type has been sold as a good source of revenue for paying for tax for tax cuts and and tax reform in general. So why don't we use it? Well, it's because it's

the storting. It's gonna mess up the the imports and exports, subsidizing exports, uh, shutting off imports, But the the advocates like Feldstein, our Back and Holds It can say, don't worry because that dollar is just gonna pop up just like that and offset the distortion, and we're gonna cut the same world that we have. Now, what an awful way to sell something to the President Trump instead should tell him in the real world that exchange rate takes

about four to five years to adjust. And even if you hold Montrey policy unchanged, that's still we're gonna take three years to adjust. So for three to five years, you've got a situation where you can actually shut down imports a bid, promote exports, concentrate production here in the US, get the jobs you want that make America better again. Now, isn't that the line you should be using our President

Trump instead of the hour Back holds Its lines. That's saying, no, nothing's gonna change, but you get to get more money. But and President Trump says, I don't love it because it's way too complex. No, Kidden, Not only is it complex, it doesn't work that way. It works in a textbook. And when I used teacher Columbia, I talked about incipient increases in the in the balance of payments that cause an instantaneously stagery jump. We no longer have that. We

have FX desks, we have importers, we have exporters. We have not one good, but a lot of goods with different price elasticities. What on earth makes you think that that textbook model is the one you should be used to sell the president on a very important policy move like this. How integral to tax reform is this borderjustment tax? We didn't here to mention in the speech last night. When you look at how you might pay for all this stuff, it seems so important. Could you get tax

reform without having it involved? We at City actually have our forecast um going into without a border tax. But in order to do that and not let the budget blow out to like two, three or four or five percent of GDP, we had to assume that the tax cuts on the corporate side will go down to maybe not twenty, not fifteen. And we had to go to every cat and dog expense and and and deduction we could find to shut things down because quite frankly, that that tax going down to fift will cost about one

point a trillion dollars. The border tax gives you more than a chillion, and almost pays for all of that. Let's take two different businesses. Mark Fields has a small car shop called Ford Motor Company. There's a guy named Michael Dell in Austin. I what's he doing? Is he gonna buy the Rangers this year? I don't know what Michael Dell is doing. Two different worlds. They're all affected by the border tax. What is the price elasticity? What is the responsive thing they should focus on in the

next two years? Of course, for the one thing about autists who know is that they they make stuff and they export stuff in order to get to the final product of that car. That final product maybe here located here in the US, or maybe located in Mexico. But there's a lot of interest insity trade. How on earth are you going to be taxing and subsidizing that imports and exports of these of these firms, Right, So they're

gonna have a nightmare of an accounting about now. Now Michael Dell, Right, I used to buy his Dell computers when I was in college. I don't know what he's got into now, but he certainly is in the high tech industry, which is very very important intensive for parts. Right, and Mexico, but Asia, Asia, and and and export intensive

or intellectual property. So so we're gonna subsidize this intellectual property, which kind of means that even by the way, a law firm, every law firm is gonna have a server in Denmark because they're gonna say, I'm an exporting industry, I shouldn't have to pay for my legal services, even though you can get stuff here in the well said, but on Michael Dell, the assumption is he can raise prices. I don't think he got that memo. Can he can?

Can a Michael Dell raise price? If he does, his competitor called the you know, the Taiwanese and and and even the Chinese manufacturers are gonna say, we're gonna sell things and undercut you. So don't you even dare raised David his competitors Wayne Last from another complies my my wish that prevent me. Billy, thank you so much. With City Group UM this morning on the border text, we

protect the copyright of all of our guests. We're not going to send you out his um lovely, lovely six page dissertation in the Border tex Get that through your city bank representative as well. We were doing physics earlier. David Gura, it's very good to do Thursday physics. We're doing vectors in inertial momentum, so let's do something more boring.

Fanny Freddy, wouldn't that be good? Why don't you bring in our esteem guest, Yeah, spring Jim Milstein, here's the chief of former Chief Restructuring Officer at the U S Department of the Treasury, and joins us here in our bloomboog lemon studios. Go ahead, what the hell is the chief We're gonna get that last out of there's one of my house. Yeah, on personal retainer. Describe briefly what

you did what that role does within the Treasury Department. Well, during the financial crisis, the Treasury was responsible for the administration of the TARP program and we made a number of significant investments in various institutions in the financial sector to make sure that it didn't collapse. And when we after those investments were made, somebody had to figure out

a way to get out of them. And the short straw was drawn by and I had there was a meeting the Treasury in the Secretary's office and uh, and somebody somebody has to do with A I G. And the guys who had been there like three days longer than need all took a step back, and I was left in the front room. I've got six jokes to make. Steve Rattner was with this yesterday, but forget about the jokes. A I G. Showed up and the tone in the room changed. There were all these issues. I mean, I

get it. You had to buy a building in New York City to get Jamie Diamond to take up. You know, we all know the history, but the key thing for guys like you is A I G. Walked in the

room and it was a different conversation. What was that like the you know, the difference with I mean the Lehman Brothers file for bankruptcy on you know, Monday, Monday, September fift I think A I G was downgraded that day and as a consequence, um all of its derivatives book changed in its character overnight because they have been relying on the credit rating of the parent company to provide their collateral for their derivatives, and so when the

downgrade occurred, they had a massive cash call, a cash call that you know, really no institution, uh their size, with their size derivative book could meet without help from their friends, and their friends were all reeling. Uh. So a private credit facility couldn't of the size needed, couldn't be put together. And there was really two choices. Uh. The Fed could have uh said I don't know who

you are, don't darken my door. Uh, you're on your own, or the Fed did could do what it did, which has stepped in with an emergency loan to en sure that they could perform their obligations in the ordinary course of business. Tom brings up g SCS. Have we heard much in the way of a plan for what the government plans to do with the Fanny and Freddy? Um? You know there were hints of it, uh during right

after Munition was nominated. I think one of the first things he said was we're going to think about recapitalizing Fannie and Freddy and ending the Conservatives ships. He dialed that back a little bit during his confirmation hearings Um and said he wants to work with the Senate in the House on on reform. But you know, the Senate in the House tried this three years ago. UH, serious effort led by the you know, with the Treasury Department.

Then Obama Treasury Department, and the topic just proved too complicated because there are lots of puts and takes. Right there, there's a the implied government guarantee, and you know, if you're gonna make that explicit, so it was to ensure that we're actually paid for the privilege of guaranteeing all

of that mortgage debt um. Then you know, the quid o quo is that, well, if the government's involved and putting its balance sheet behind the credit of various homeowner mortgages, then that's a program that should be made widely available to all homeowners. It shouldn't just be rich people with great credit. Uh. And so you're constantly in a tug of war between the affordable housing folks who say, hey, if we're using the balance sheet to the federal government,

there should be a program with public benefit. Because of time and we could talk with Mr Milstein folks four to five hours and just alone to wander through Pan American Airlines, the Disney restructuring of of of euro Disney and all that. Your worker clearly gotlie but Lazard, et cetera. But I gotta jump forward to how you interpret the regulatory and restructuring zeal of this new administration. I mean,

I mean, you're you're not a constitutional law guy. You're you're more in the regulation realm, but interpret force what you presume is to come. Yeah. So, UM, you know,

there's a playbook that UM. The Heritage Foundation, funded by the Koch brothers, has um published that many of the bills coming out of the House, whether it's the Choice Act from Hencer Lank, the tax reform proposals, and healthcare proposals pushed by Speaker Ryan are following and it is a you know it, it's a it's a limited government libertarian philosophy. UM. And the real question is, you know, in a much more complicated economy than we had in

the nineteenth century. I found it interesting that President Trump and his speech to Other Night cited Lincoln defending for protectionist policies. It's defending a protectionist policy. We were an agricultural society back in the nineteenth century. You know, it wasn't. It wasn't. Number one of the Chicago Convention was no. But but we were. We were running a merkel untilist policy. We were in a global power. Then we're a small little you should paint the pictures, folks. I'm sitting in

our studio here. It's fifty nine in Lexington, and I'm in my usual turret. David sits across from me. Mr Milstein is sitting to my right. David's left in the chair to my left sat one of the major hitters of your world. The day they renigged on the agreements on Chrysler, you were directly involved in those transactions. Moving forward with the Trump administration, are we going to get the rule of law in the rule of contract or

are we going to get some form of Chrysler like chaos. Well, listen, you know, the government of the United States, the Congress of the United States, and the President have the power to change the law, uh, and to alter the playing field. UH. And so you know, one man's one man's abdication of

the rule of law is another man's reform. And so you know, I think that you always have to understand which side of that argument people are on, because there's behind that argument is usually an economic interest that's being

or promoted or gored. Uh. You went from from Lazard to government, and as we talk about this moment, and we talked with numerous guests within government, who have been in government about the deficit when it comes to personnel at the deputy level at a lot of these institutions, at Treasury, at State. Has it become harder for the government to entice people like you from the private sector

to work for them. Is there's something particular to this administration or is it something more endemic that that that it's it's it's harder to make that case when it comes to doing the confirmation hearing is making the move. Is it less attractive to move from the private sector to the public sector? Yeah, So if you're if you're up for a position for confirmation, which constitutes you know,

the top three levels of every cabinet department. UM. You know, you're you have to be willing to expose your entire life, your financial situation, your affiliation to your associations, the things you've written to public scrutiny, and UM. The process has become quite uncivil because of the partisanship on the hill. Uh. You know, often an individual's candidacy is sacrificed on some pet peeve between two senators that they had nothing to

do with. UM. And I think that process of confirm, the confirmation procedent is clearly broken and needs to be fixed if we're going to get high quality people to go back into the government. So I think that's one of the problems. I think the other problem is I think the president has been it's very unclear what the president stands for. Um, there are a couple of things that he stands for that, you know, some people find troubling, some people find um, you know, worthy of support. But

you know he's stands for, you know, titaned immigration. He stands for more protection to straight policy to promote manufacturing a very relatively small part of the U. S economy today. Um, you know, he stands for tax cuts, you know, to whom distributed unclear. So with the lack of clarity and policy, very hard to know what you're signing up for, right.

So I think that's the other problem. I think until the administration really lays its cards on the table and announce his clear policy directions and how they want to implement him, it's very hard to get the soldiers to carry the water. We are out of time. We beg you to come back. There's so much we didn't even get to Puerto Rico, and it's and it's happening right now, and really it's being a restructure and it's and it's

happening in real time. Jim Millstone, thank you so much, greatly appreciate it most any company this morning with his work on Wall Street in public service for years, brought you by Bank of America, Mary Lynch. Dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world. That's the power of global connections. Mary Lynch, Pierce, Feeder and Smith Incorporated member s I p C. You know,

joining us Michael Mayo's securities analysts. For those of you not up to speed, Mr Mayo is an esteemed seal side bank analysts. He's been doing it for a few years and he was let go by his firm the other day. There was no ill will there. You didn't like, steal the the whiskey or something out of the time. There was no like, you know, Mike, you destinately person. Right, that's correct. Okay, here's the here's the history here, folks, and we're gonna talk about the state of global Wall

Street and securities and analysts right now. In our next section, Mr Mayo, we'll talk about the banks your office now is eleven seventeen Lexington Avenue, the Starbucks up there. Mrs Mayo has seen this a few times. I remember the day you were fired at Credit Suites and the entire industry was outraged that you were shown, uh the door. This is a recurring habit. Can you explain to us the state of the securities analysis business now and where it's going to be in two years? Well, well, Tom,

I think I'm ahead of the game. I've been fired about three times, but I've resigned five times, so I'm a little above you know. But are your kid's gonna be in this Are my kids gonna be in this business? I don't want my kids to be in this business. They don't want to be in this business, So that part's fine surprising. When I was fired in two thousand is you know, you know, I had a huge negative call on the bank stocks. The bank stocks went down,

and I was fired. Anyway, The difference this time is, I thought, I think we've had the most bullish call on the banks over the last year, and the banks have led the stock market to record highs, and I get fired along with the US Research Group. But back in two thousand, the silver lining was I could hang out with my then infant daughter, I'd go to mommy and me classes. But my wife has seen this movie

before seventeen years ago. She's like, um, well, we went to coffee bars in the East Village in the afternoon and saw movies. So she read me the Riot Act yesterday saying I'm not going to coffee bars, I'm not going to movie. I'm not going to take a walk around in Central Park at lunchtime with you. I have my own life and circle and process. Okay, but but within this is the tumult in the United Kingdom over how securities UH sell side analysts are gonna get paid.

You've got Abby Abbey, not not Abbie, Joseph Cohlan, Addie Johnson. Its fidelity going to four dollars portrayed she's doing a massive layoff of fossils like you and me within a fidelity. Where is the business in twenty four months, because it appears to me with c ls A, nobody's making money. Well, I think the twenty rule always applies. So you know, of the top performers provide eight percent of the value.

So I think there's always room for those who are good at their job, And so what what I've been proud of is holding truth to power, you know, holding managements accountable, especially now that you're pulling back regulation regulation overall market, especially in the banking industry that's going to transpire. Then we collectively, especially investors, need to hold corporations there may edgements and their boards of directors more accountable. So there will always be a need for what I do.

Does anybody care anymore that you've got a fireplace mantle of i I awards or is that just you and me waxing philosophical about the year two thousand? People absolutely care. I've gotten tons of you know, emails and phone calls. You want to announce a new company you're working for today, it only takes you like twenty four hours. Well I got a new job. I think the right perspective is I will listen to anything. This is. Look, but this

is a reminder about how Wall Street works. I mean, you're in one day and literally over the course of three hours, you're out. So the rough and tumble world of Wall Street remains. David, what's charming about Mike as he still uses an HP twelve scene both of you guys, Has it gotten more difficult to speak truth, pout in the way that you do, to be a reverend, to to to to go to these meetings and make the cases that you make. I don't really think it's changed.

I'm proud of being the only analyst who testified to Congress, and too and two as part of the star Bans actually talked about conflicts of interest on Wall Street and the retribution for being aggressive with managements and holding them accountable. And if you're nice to the companies, you get all sorts of perks. They return your phone calls and they you know, they go on the road with you and

you're there like bff um. And if you're aggressive with them, sometimes they don't return phone calls, you don't have meetings, they aren't nice to you. So I think it's hasn't really changed as much as it should have. But we should learn a lesson for the financial crisis. The issue then is nobody was mining the store. The regulators weren't doing their job, and investors weren't doing their job. And

since that time, regulation has come very heavy handed. If you're gonna pull that back, investors need to step up and hold them account On the Bloomberg there are thirty analysts covering City group. I'll ask you the same question I want to ask you in two thousands. Do we need thirty opinions on Fortress Corbett rule? So I agree that I mean so, I mean in any industry, you're gonna have those who do a good job, and then

there's gonna be fro dead weight. Are you gonna be up at the Starbucks on Alex Engineer at about you know? When are we off? David ten Oclock, can we get an orange mocha frappuccino with you? I'm going to check with my wife and assuming I don't actually I think she's busy. So I'm opening this little The former vice chairman of the Federal Reserve System with Princeton University, Alan Blinder,

joining us in our studios Michael McKee, Professor Blinder. I'm gonna ask a question and Michael will jump in here. The perspective is the capitulation of those uh saying that a FED will wait. Ellen Zentner Morgan Stanley shifts her call to march right now, do you agree that a FED should consider three rate hikes this year and then four in two thousand eighteen? Well, that's a little specific. First of all, I do think they're gonna go up soon,

and soon probably means this month, UM three verse. I think of the three versus four questions, and that's the right place to put it. Now, you know, it wasn't that long ago people were debating one to three. I think three verses four, given the state of the economy, is the right place to put the debate. I put the question this year, UM three or four. This year, who knows about next year? The economy is looking very strong.

We're staring in the face although it looks to be delayed of a large fiscal stimulus to a country, to an economy that doesn't need a fiscal stimulus, and the FED is going to have to offset some of it. Well, that there's a dynamics, Michael McKee, that you're so good at in your different interviews, including James Bullard and the idea of a regime change. Michael McKee jump in here

with Professor Blinder. Well, the thing that struck me Alan, and I've been saying this for a while is we've criticized the FED a lot over the last couple of years for missing an opportunity when they had a chance to raise rates, and you've got the potential of a government shutdown on April, You've got the French presidential vote out there, and I'm just wondering if a lot of what might be going on in these FEDE officials minds is we've got a shot in March. Why not do it?

Why not avoid things that could complicate our lives? If we feel the level of economic activity is such that it justifies a rate increase anyway, Yeah, no, I agree with I think the level of activity definitely justifies a rate increase more than one uh in fact. And furthermore, what I did, I don't think the FEDS are all worried about at least they shouldn't be worried about a government shutdown. Republicans only do that when a Democrat as

the president. Have No, I put a zero probability on that. But what's happened recently, so to speak, is that the likely date when we're gonna know the size of the fiscal stimulus has been pushed back, so that I think it was rational for the Fed to wait a bit for the clouds to disappear. And let's get a view of what the Trump fiscal policies accident. It will look like at this point, if you're sitting on the Fed, you're saying, how long do we have to wait for this?

We know it's going to be there. We don't know the size, we don't know the qualitative dimensions, but we know it's going to be there, and uh, and we don't need it, and we are to stop waiting. David, what are you going to be listening for tomorrow from the FED chair when she speaks in Chicago and light of the groundwork we've seen late here by Dudley and Brainerd in caplan this week, Well, I don't actually expect

her to to move the ball very much. I think given what Janet Yellen has already said and what Dudley and others have said, they have succeeded in moving the market expectation in favor of, you know, to well over fifty odds of a rate hike in March. They don't like to rate raise rates when the market probability is like and shocked the markets, but they have to be pretty content with the market thinking is right now, they

still got a couple of weeks to go. We could, for example, have a catastrophically bad jobs report of for February coming out in before the f MC meeting. I don't expect I certainly don't expect that, but if that would happen, they probably want to postpone. Define catastrophically bad for us here, pardon me, define catastrophically bad? What what would be? Something five thous No, No, I'd say, well under well under a hundred thousand, like fifty thou jobs

or something like that. I don't expect to see a number like that. Neither do they, But I think they want to leave enough flexibility that if something wild happens, uh, they don't go. So I don't think she wants to say anything that won't basically lock the FED in. The big question is surrounding all this is what's happening with inflation.

And we did see PC rise the last month and we're just under two right now, but a lot of that is because energy prices went back up, and there's always the dispute about how much weight you put on that. So it we've talked a lot about the path the fact there seems to be an underlying difference to the dynamic of inflation. Is there enough inflation danger that they

feel like they have to move. I think there is now the key thing Mike is moved, how much there's not so much inflation danger that the Fed fields we get to get this fund right up a hundred a hundred fifty basis pointing quickly. It's nothing like that. They're still into gradualism, which is but Janet the Ellen's mantra for a long time now. But there is an inflation danger. Uh, you know a small you know, I used the word danger, and well you use this. Let's do that. Let's let's

put words in the vice chair. We'll come back with Professor Blinder. Michael McKee, why don't you pick it up with Alan Blinder. And of course the backdrop here is a September crowd shifts to March. And we just saw that with Morgan Stanley an hour ago. Yeah, Ellen set there and Matt hornback from Morgan Stanley shifting their call

major change for them. One of the things Alan, that they suggest will will be a result of a faster FED tightening cycle is more quick they will get to bringing the balance sheet down, addressing the balance sheet more quick Lea. They think the beginning of two thousand eighteen, there's a lot of debate about how important that is going to be and how much market disruption there's going to come from addressing the balance sheet. What do you think.

I think it's importance is easy to exaggerate. And the thing I'm most sure about is there will be minimal market disruption. And the reason for that is really simple. The Fed is going to do handstands not to pull any surprises on anybody. This balance sheet, when they're ready, is going to be drawn down on a regular, preannounced

schedule that everybody in the market knows about. They'll know it's coming, so to speak, auction by auction UH and markets are pretty good at digesting things like that, even if the sums are large. These are huge markets. Remember, the key thing is not to surprise anybody, and that's the last thing the FED is going to want to do.

Interesting point that Ellen and Matt made in an earlier note a week or so ago they don't think the Fed has to do anything to the treasury part of the balance sheet because there if you once you take out the mortgages and the stuff that expires right away, you're not that much bigger than what a normal balance sheet size would be. For this size of the economy that you would grow into it very quickly. Do you agree with that? Yeah, I think that could be right.

I mean the FED has still not unless they're they've actually made a decision. They're keeping it under wraps, but I think they still have not come close to deciding how large the balance sheet they want to wind up with. You may recalled Ben Burnank blogged the other day for the other week about you know, a pretty big balance sheet at the end, much bigger than it was before Lehman Brothers crashed. So so yes, the the draw down

may not be that huge. We're still probably talking about a couple of trillion, but this is a very big market and it will happen slowly, not rapidly. Well, Brennard saying that yesterday at Harvard near term risks to United States who have brought appear to have diminished full what we're seeing here in the US into the global context for us. If you would, Professor the blinder, how much is this FED paying attention to what's going on overseas

at this point? Well, they always pay attention, but frankly, we elite UH usually exaggerate how important the rest of the world is. To the Federal reserves decisions. I mean it does. If it's a big deal coming from abroad, then of course it's a consideration in the Fed's policy. But things are happening in other countries all the time just as they are here, and for the most part, their impact on the US economy and therefore on what the FED wants to with monetary policy is quite small.

So I don't think there's anything right now that's a big, big deal on the friends on the FEDS radar screen. When we get closer to the date, they're gonna be watching the French election the way they were watching the Brexit vote. And the Brexit vote turned out to be no big deal for the FIT, a very big deal for England, but no big deal for the FITS. Uh. Something like that could easily happen again with France. For example, if if Janet Yellen were here, she would probably be

boxing our ears. She would be saying and this, and I would include you ll that you guys are focusing on when you're gonna we're gonna raise rates, and we should be focusing on when we're gonna stop what the terminal rate is. Do you think the idea that you know they want to go in March. Uh, and the level of economic activity we have seen indicates any real steeper trajectory or higher terminal rate, higher neutral rate, or is it just a question of this is the time

that's available for them to act. I think it's more a steeper trajectory than a higher neutral rate. I don't know if defendn't seen anything in recent months suggesting that the neutral rate is higher than they thought two months ago. I'm not aware of it, and I don't know what it would be. So I don't think the so called terminal rate we don't want to call it, has moved

very much. But I think the speed, the likely speed, has uh change because of the strength of the economy, and as I said before, because of the prospects for fiscal stimulus. Look, we went through something like this in a grand, grand scale with Reagan and Vulker. You guys may remember that couples you know, young people don't, but a serious collide. That was a really serious collision with

monetary and fiscal policy. I think we're looking at a smaller scale version of that, Okay, but within the model that's in blind your Bamba blinder, in your classic textbook. Where we are right now? Is that I s l M aggregate supplied demand Euclidean model. Is that in place right now? Or are you guys flying blind? Theoretically? I think frankly that model has done decently. I think it's

done least well on inflation. I think according to that, if I may call a textbook model, we should probably be looking at higher inflation rates now, not super high, but higher than they are now. But inflation is rising, wage inflation is especially rising, and uh, you know, just in general, I think as a at not as a literal description, but as a framework for thinking about things. I think that model has survived, uh this recovery modestly. Well, okay, Uh, professor,

thank you so much for being with us today. He is a former vice chairman of the Photo Reserve System, Alan Blinder of Princeton. And for those union need to pick up a textbook, was it like eight other pages? Michael? The four thousandth edition of It's sort of like the hap Bible. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene.

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