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Randy Kreisner, former FED comfnor, now professor of economics at the University of Chicago, let's talk about it. Randy, your first reaction to this one.
So, as we were saying before, I think the FED focuses a lot on wage growth, and we've seen wage growth above expectations. I think it's really clear that the Fed is going to be waiting a while before it starts cutting rates because the labor market is still quite strong, the wage growth is still quite strong, and we just the key thing that then feed into services as well as manufacturing inflation, not.
The simple arithmetic of a real way, but almost as a cultural and societal note.
Do you see here wage.
Growth being beneficial across America and that people will have more inflation adjusted cash in their pockets.
Oh, it's super great to have real wage growth. Finally, I mean we had even though nominal wages were growing very rapidly, they weren't growing as fast as inflation, and so people were feeling left behind. And they were left behind because they wanted to put food on the table for their families, and the food was a heck of a lot more expensive than it was before. Now they started to earn a bit more than inflation, which is great for them.
But I think what that's going to mean over.
Time is that, well, when it was great to be hiring people, when labor was relatively cheap in real terms, Now I think you're going to start to see a little bit of softening the labor market because it's just not going.
To be as.
Worthwhile for firms to be hiring when workers are more we're relatively more expensive.
Randy, Why is it that we've seen so many downward revisions of the prior months. Does that mean that we can expect a significant downward revision of this upside surprise come the data that we get in February.
Well, this gets back to what Tom was talking about before. The Saner deviation has gotten wider, so there's a lot more noise that's in there. I don't think you can take something specific out that it's always going to be downwardly revised. I think we just know that they're going to be some substantial revisions.
Hey, Randy, appreciate the update. Some revisions some forecast as well for rake cuts maybe after this one, for anyone penciling in March. I think there's a rethink following that, especially if we get another one of these for this month next month. Really place to say that joining us now is built down to late Bloomberg opinion columnist and former New York FED president. But you've had the benefit of about set seventeen minutes to go over some of this. What's your reaction to it?
I think it just reinforces the notion that the FED is not going to be in a rush to cut rates. So the last couple of weeks there's been a sort of change of view that the FED great cuts might materialize a little bit more slowly with less force.
And I think that this just reinforces that Kami's still doing pretty well.
It looks like we're going to have growth in the fourth quarter of two percent plus financial conditions have eased a lot over the last couple of months, So I think that risks are that the Fed's going to keep rates higher for longer.
Bill an unfair question. Why is the economy doing well? Is productivity? Is it a follow on a pandemic stimulus? What's the why of what we saw in Q three?
What Atlanta GDP says about.
Q four, and maybe a few people optimistic about the first half of two thousand and four twenty twenty four.
Well, I think the biggest thing is that there were such large fiscal transfers that occurred during the pandemic that households and businesses are actually in pretty good financial shape for this late and economic cycle, and so people have the ability to continue to spend.
This is unusual. I Typically what happens is people get.
Over their skis, they're overextended, FED tightens and that actually bites quite a bit on economic activity. This time, I don't think people are as overextended, and so the FED rate hikes have it had less restraint on the economy.
Given that Bill, and especially since you said the Fed's not going to be in a rush to cut rates, do you think that the market is still pricing in too great of a chance of March rate cuts. If they're talking about a fifty percent chance right now, Yeah.
I do, I do. I think, I mean, I think May is more likely.
I mean, if the Fed wants to cut rates, I mean, they've made it pretty clear that they knew that as inflation falls Maitrey, policy is being tightened, and so that they need to follow inflation down. But to do that, they also have to get some signs that the economy is slowing sufficiently so that there's enough slack in the economy to bring inflation all the way down to two percent and keep it there. You know, the wage trend,
obviously is something that's going to concern them. If wages are rising faster than four percent a year, that's probably not considering percent inflation in the medium term.
Given that, and given the fact that we are seeing the rate cuts being priced into the market more than you think is warranted by the Federal Reserve, how.
Much do you think it set them back?
The Fed officials that the markets did rally as much as they did into year end, how much do you think that I'm going to ask you the same question I asked Alan Ruskin, how many. How much do you think that turbo charged the US economy.
I don't think it turbo charged US economy that much.
I mean, the easier financial conditions just haven't been in place for that long.
It's really only been a couple of months.
But I do think the FED is a little frustrated by the fact that the market always must be more dubbish than the FED wants, because that makes the Fed's job more or more difficult. Because as the market rallies, that eases financial conditions, that adds impetus to the economy, which means that then that there's more for the FED to.
Do rather than less. So I think they're a little bit frustrated.
Powell was asked about this in his press last Breast conference, and he basically said yes, at the end of the day, though that you know, these things have to come to.
What the FED does ultimately determines where the FED markets are going to end up. And so the FED does hold the whipping and they'll get their way.
And I think the way they get their way is they'll just be slower than what the market expects.
Bill Dudley, I've got to do an acclaimed surveillance audible, and look at the celebration by you and the New York Fed over doctor Masellam joining the Saint Louis FED.
Bullard was always with great respect.
To the gentleman from Indiana University, an outlier. His doc plot was always unique. What kind of dot plot are we going to generate with Alberto Mussolam taking over at the venerable Saint Louis FED.
I don't have a really strong view that Alberto it's going to, you know, be dubbish or hawkish.
I think he's going to take the information as he sees it and respond accordingly. I think what he brings to the Federal Reserve though, is the fact that he not only is he a really good economist, but he also understands markets really deeply. Uh So, that combination of macroeconomic knowledge and also market experience. I think it's you know, pretty rare in the Federal Reserve system. So he brings really a good, great tool set to the FED.
I look Bill Dudley also, just within the crush of the jobs report, we have to look at your really spirited essay, not the fragility of our banking system, but just the idea of where we're going in twenty twenty four and shoring up the supervision of our banks. Are you optimistic we could get that important job done.
Well.
I think that is pretty clear based on events that happened last last March, that their supervision needs to do better. They need to be more forceful in forcing banks to remedy problems more quickly. But one way I think that to do that, though, is to actually release some of these supervisory findings.
That currently are secret.
If you knew that the supervirus advisory finers were going to come out with a lag of say sponsors, so that creates huge incentives on bank managements and banks boards to get going to remedy the problems. Right now, a lot of these problems are not known people in the marketplace, and I think that makes it easier for the banks to sort of delay and not proceed as quickly as they need to do to remedy their problems.
Bill, fantastic column they came out from you earlier this week. Appreciate it.
Bill.
I just wanted to squeeze one further question in if I can, But we've been ahead of the curve big time on how far this FED would have to go. Do you think there is still a risk that they have to move again, that another height could be in our future.
I think it's pretty unlikely.
I think that the bard to raising rates again would be, you know, they have to totally reevaluate.
Their whole framework.
I think more likely the story is that if things turn out to be stronger, they'll just keep rates higher.
For longer before they actually start to reduce stream. So I think the barer raising rates again is pretty high at this point.
Bill Dudley, thank you, sir, appreciate it, and Happy New Year. The brilliant built out Lee former New York Fed President Annam Ruskin's world. The dollar is stronger, the euro is weaker. We've broken one O nine. Want to wait ninety six? Anam Ruskin at Deutsche Bank joined us. Now, Ana, good morning, Happy New Year morning, let's get straight into it. What do you think of that one?
Yeah, well, certainly good news as far as growth is concerned. A little bit more worrying as far as the underlying inflation picture, with wage inflation in particular. I think one thing the market should take into consideration is that the state of the economy in December was reflecting tightening financial conditions from months earlier, probably more reflective of a bond market at said tenure to five percent healed than a
four percent held. So there's a lot of stimulation that's still going to come through that's going to be supportive for the employment reports coming forward. In Q one and Q two.
We're misguessing GDP third quarter was a shock five maybe now revised under four point x percent. We're hearing that for quarter maybe the same, We're diminished, but still the same. Are we just miss guessing the strength of the American economy office jobs report? Is it just simply better than we expect?
I think it's been simply better than we've expected for more than a year. I mean, you just look at the employment report misses. There are very very few downside misses in terms of the forecasting. So there's a pattern here of underestimating the strength of the US economy. I don't think that this is that different. Really, the now cast Q four GDP numbers are close to two and
a half percent. Certainly, when we're looking at the data, we're anticipating that if there's going to be genuine weakness, it's got to start showing up in the first half of this year, and that's the highest probability in terms of negative growth.
Are we misjudging two week a dollar that seems to be the zeitgeist. Now, I know you're pushing.
Against that, but yeah, yeah, no, I think that's certainly true in terms of the short term. Think what we're seeing for twenty twenty four so far is this pushback in terms of rate cuts for the first half of these year, second half of the year as well, and the dollar is just a reflection of that, and we're seeing some pretty big moves.
Now.
I think the biggest question mark is really over dollar yen. A lot of people have anticipated in that this is the year of the yen. I don't think going to be the year of the yen, at least in the first half of the year.
Well, we can talk more about beg of Japan policy another time. I am curious though, with respect to rate cuts, you were forecasting quite a few in the back half of the year, not necessarily starting in March. If this continues you said, we have to see weakness in the first half of the year, when do you revise your call and maybe don't call for as many rate cuts and actually get incredibly bullish on the dollar versus the euro and a whole host of other currencies.
Yeah, so, I mean there'd be something that in my colleagues, Matt Lazette in particular, would revise in terms of any sort of reconsideration. I think if you had the first quarter generally put up some solid numbers, these kinds of numbers, you'd really have to question whether the economy is slowing down materially at all. And I think the Fed's bias has still been in the very short term. They could store high grates that could still come back on the table.
I think, you know, that's leaping ahead a long way, but certainly taking back rate cuts is a relatively easy core. As for what John said in terms of March, I think looks you know, that two thirds probability of a rate cut that we had effectively before this data looks exaggerated.
To see you mentioned some of the big moves were saying, I just wonder whether we're learning more about market positioning than we are the US economy. Which one is it.
I think a lot of what we saw in November and December looked like a real squeeze of positioning in an exaggerated move in relatively thin mind. People obviously wanted to judge and jump on a what is seen as a sea change, you know, move from rates no longer going up, and I think that made sense. But then the market just got ahead of itself and now we're in retreat.
It can I ask you, and particularly off the back of data like this, I think it's worth asking. I have no idea where we're going, get absolutely no idea, But I think the overwhelming consensus is not just cuts. Even the people who don't think you get cuts anytime soon, they think this FED is absolutely done. Is there a chance they need to hike interest rates again? Based on information like this?
I would say that if you were flatlining consistently and you still had wage inflation running at these kinds of levels, then the FED would have to think in terms of whether they could get inflation all the way down to two percent in a reasonable timeframe. But I think we're quite a long way away from that sort of reconsideration of rate hikes. But it's not totally without you know, out of the realms of possibility.
Well, what John said that I want to pick up on this idea that are we learning more about market positioning than the economy, especially at a time where every month the previous month's data gets revised so significantly, and you have seen that sort of gap increase over time. Does that make you less confident in these numbers? Do you sort of not look at these numbers as much as you do the three month rolling average that looks perhaps less rosy than this one.
Yeah, I think you've got to take a very holistic view of all the data as such. So it's not obviously not just the employment reporter that I would still say it's the number one release. Absolutely, look at the two month, three month, four month moving averages, Look at things like the diffusion index, which has shown that the breadth of employment growth is narrowed over time. I would
still say the labor market is slowing. That all the underlying dynamics that we've seen in things like the quick rate for example, the opening's data to some degree as well, does suggest that the breadth of employment is weakening.
Just real quick here. Do you think that the accommodation that we saw in the market that actually effectively gave a rate cut to the market over the past couple of months, Do you think that that turbo charged the economy. On the margins, I think.
It's gained to turbo charge the economy, and I would say it's much more than one rate cut. You know, if you have one hundred basis point reduction in the ten uere heel, that's going to equate to one hundred and fifty basis points at the outside two hundred basis points of Fed funds rate cuts. So there's a lot of potential stimulus that's going to kick in and obviously spilt over to other financial conditions as well. So the equity market is going to keep that wealth effect on
the consumer side buzzing as well. So there's a lot of stimulus there.
What a start to twenty twenty four. And thank you, thanks, pretty good to see you. Anam Roskin of Deutsche Bank.
Tifferiting wild In to give common sense to a job report today. This was green on the screen right now, markets of reverse nicely to a more constructed tone off of five days of challenges here, three days whatever it is of twenty twenty four. Tiffany Allen Ruskin was on from Deutsche Bank and he said, you know what, job formation is a good thing. Why are we upset if we're creating two hundred x x thousand jobs, it just doesn't make sense to me.
No, I agree with you, and thanks for having me on. I mean, today's report was a pretty solid report, you know, two hundred and sixteen thousand perils per month, and I think we're kind of close to that in terms of the average for this year. I mean, that's that's a
very good outcome for the US economy, you know. I think what is a little bit more concerning for the FED and for monetary policy, though, is that if you look at average hourly earnings or wage inflation, you know, that does appear, you know, at higher levels, higher than levels that would be consistent with their two percent inflation target. It doesn't really appear to be moderating.
So I've been pauling your travels. I mean, the bottom line is we're seeing a buoyant America.
I get it.
Bankruptcies are terrible, and there's a lot of worry out there and restriction and the real rate in that.
But the answer is it's pretty good GDP. It's pretty full. This report.
It seems like pretty good GDP. I mean, it's so, I guess, Tiffany, the issue is when you look out at twenty twenty four, how do you think this economy is going to unfold?
Here?
I mean, I think the consensus building in that, you know, the last ten weeks of last year was what soft landing looks like? The smart bet here?
Does that ring true to you?
Yeah, I mean, I definitely think the odds of a soft landing have increased more recently, you know, just because you've seen the subtle reserve that is, I guess now more clearly communicating you know that that cuts could come because inflation has moderated so much, you know, and one of the I think the main reasons why the markets were so you know, we're more worried about a hard landing risk was because you had a central bank that was very focused on inflation, you know, and there was
potentially maybe willing to, you know, to sacrifice the economy in order to get inflation down. So now that that rhetoric has changed, I definitely think the soft landing odds have gone up, you know. But nevertheless, we're not out of the woods yet. You know, the Fed still has
to balance the fact that the economy is strong. You could get inflation that reaccelerates you know, obviously again some of the downside risks that monetary policy lags, you know, start to kick in more meaningfully next year.
I mean, it feels like for a lot of folks the inflation rate is coming down, but the reality is, for I guess, if we talked to the folks out there, I'm paying a lot more for a lot of things than I did two or three years ago, and that still hurts. But I mean, I guess the issue is the inflation rate is in fact coming down, so that's all the FED can really work towards.
I guess, yeah, And I mean I think I think that's the issue. You know, that's kind of the issue with why wage inflation is still so appears to be so sticky here, although price inflation is coming down, and the reason is because you know, wages haven't fully caught up the wage level, you know, with the price level adjustment that we've see. So although prices are high, you know, inflation is coming down, but prices are still higher than the one where they were a couple of years ago.
You know, in wages, the wage level adjustment that we've seen hasn't really caught up with that, you know, So you know, Our view has been that wage inflation is probably going to continue to be sticky because people can catch up, labor markets are tight.
Is the fed restrictive?
Now?
I have had a number of indews matsu Cline with a real sharp tweet out really wonderful economists, matsu Cline saying, look, at the end of the day, we're restrictive now off the two year real rate, are we?
You know?
So I think it's obviously this is something that the federerserve has to probe for. It gets to this idea of there being some neutral rate in the economy, a level of interest rates that the economy can kind of handle and is neither accelerating or decelerating, and where that is, and obviously that's very uncertain.
You know.
We think the economy is or the monetary policy is restrictive. And one of the reasons why you haven't seen that so clearly is just because of the amazing amount of fiscal policy stimulus that we got after the pandemic, and you had that fiscal policy that was still sloshing around
in the economy. You know, consumers still have elevated savings, you know, but eventually all of that will normalize, and once it does, once people spin down that savings, what you're going to be left with is tight monetary policy, you know, and we think that that becomes more obvious in twenty twenty four in terms of the growth drags, you know, assuming you know, the Futteral Reserve doesn't aggressively cut rates, which which we don't think that they necessarily will.
What's the number one question the bond managers of Pimpco.
Ask you, Well, you know, I mean, I think understanding how fast essentral banks have cut rates historically, even in non recessionary cutting cycles, you know, has been an important you know, sort of historical benchmark to think about market pricing. And when we do that analysis, we look across fourteen developed markets. You know, it's about two hundred basis points on average in the first year after cuts that central banks tend to cut. Now that's a pretty fast pace.
That's twice that that's baked into the Federal Reserve forecat. But nevertheless, the markets are kind of there, you know, the front end is actually getting kind of close to that, you know, so when we look at you know, value, at least in the front end of the you know, the bond market, the short short interest rates. You know, we don't see as much value there now, you know, just because the market's already pricing in a pretty decent
cutting cycle. That would be more consistent with what we've seen in the past.
So, Tiffany, I'm looking at the w I RP function, the interest rate forecast function on the Bloomberg terminal BLOY, the bond market, the Fed's fund the FED funds market really aggressive talking about it. I don't know, five maybe six rate cuts this year? Is that even? Is that something that Fed has ever done before?
Yeah, I mean so so certainly in there. You know, usually central banks they usually cut when they are pretty certain that we're in recession. In other words, usually they don't have the foresight monetary policy work through lags, right, They usually don't have the foresight to see the weakness ahead of time, So they're usually late in cutting, and
they're cutting when they're pretty sure that we're in recession. Nevertheless, there's a handful of cycles historically where they've cut and we haven't had a recession, you know, And I think if you if you think recession risks have receded more recently, you know, I think those are the cutting cycles that are more interesting here. And even in those cycles, the Central Bank has cut about two hundred basis points in the first year that they started cutting. But again that's
kind of close. We're kind of there in terms of market pricing. So I think you really need data to suggest that recession risks are higher at this point, you know, to get the markets to price in more, you know, and I think the risks to inflation accelerating are there as well. So you know, in terms of the front end pricing, you know, it seems pretty fair to us.
So you do it. Giving me a Newport Beach GDP.
Now statistic like Atlanta that we've got solid two percent economic growth and we're distant from a recession.
I mean, the labor market data today, you know, the data that we've seen, the kind of current activity indicators that we look at would suggest we're still kind of at two percent. So we're really not seeing the real you know, real activity. We're not seeing it decelerate like many people thought it would into the year end.
Tiffany, Thank you so much, Tiffany. Well to the pymicle there. Ellen Walld is definitive with her one volume on Saudi and on Saudi Arabia and the Soud family.
We're thrilled that she could join us.
Right now, Senior fellow at the Atlantic Council, Ellen, just let me begin with a blunt instrument.
Why hasn't the price of oil really moved?
Well?
That that is a very good question, and I think that the answer is mostly US production is very very high, has been very very high, and we're not seeing any kind of significant disruption in terms of supply getting to where it has to go because the the oil can be transported on these very large crude carriers which actually can't even go through the Suez Canal. So I think we're we've definitely got disruption or potential disruption to the oil trade, but it's it's not as bad, I think
as people might have hoped. However, I do think that the potential for risk to oil supplies is growing basically every day.
If we can shut down the Red Sea, let's go, I believe it's east. Can we shut down the Arabian or Persian Gulf.
I'm not sure that that would be quite as easy, but we can definitely threaten threaten the safety of shipping in that area. And so I do think that this is almost a case study or a very important inflection point to see what is the international community which depends on on safety in the waters. I mean, we're talking about global international shipping. We're not just talking about what goes through the Red Sea, what goes through the US Canal.
But these actions that the Huthis are taking are having reverberations all around international shipping.
I mean, rates are up.
Eighty eight percent pre pandemic simply because of what we're seeing in the Red Sea. So this isn't just a local or isolated issue. This is having large scale reverberations.
I saw your comments on this, Ellen earlier this morning on Twitter or x however you want to call it, or basically you're saying freedom of the seas is a global issue and that the who the these actions are going to have pretty broad based ramifications. Given that, Ellen, why aren't we seeing Saudi Arabia cutter get on board with the United States to try to prevent these Houthia attacks.
The short answer is it's complicated, and the relationship between Saudi Arabia and Huthis and the UAE and who these is very complicated and is much deeper, and I think we haven't heard a lot about it unless you're really zooming in on the Middle East. I mean, the conflict between Saudi Arabia and Yuei and the Houthis has been going on for a very long time. I mean there were troops involved. Yue and Saudi were sending troops into
Yemen for quite some time. There were missiles that the Houthis were shooting at Riod and that we're finding locations there. We had RIOD using some of the missile systems from the US to counteract these missiles, and then eventually they kind of reached a I don't know if you call it maybe a daytont where everything kind of cooled down, and I think that the Saudis and the Amoradis are
really loath to re engage in that conflict. Now, if the Houthis do threaten any kind of Saudi shipping or Amoradi shipping in the area, then I think the pressure would be on them to get involved. And Saudi Arabia is particularly at risk because they have ports in the Red Sea between where the Houthis are and the Suez Canal, and those are pretty important ports and pretty important areas for them. So if the houthis are able to threaten those ports, then I think that we would see them
get involved on the side of the United States. But I think until that happens, they're pretty strong reasons keeping them out of this conflict.
Given all of these complications, which are dizzying to think about when you zoom out, how do you put this genie back in the bottle? And if you can't, doesn't that mean that even with US production, hydrocarbon costs have to go up really materially if not only shipping is interrupted, but also the shipping of those hydrocarbons.
Yeah, exactly.
And we're not just talking about hydrocarbons that go through the Suez. We're also talking about hydrocarbons that go through the Siumed pipeline, because unless they're coming from Saudi Arabia, they've got to go through that Red Sea point to even get to the Siumed pipeline. That's basically a workaround for the Suez Canal. So it's more than just transit
through the Suez Canal. I do think Europe is going to see the biggest effects of this because they're getting a lot more of their oil from the Middle East right now, and they're going to be affected by much longer shipping times and higher rates as these ships are going around around Africa. And I don't think we're going to see shortages, but there's definitely potential for higher costs, and if we see oil prices getting higher, then that
will compound these issues. I do think that the United States is going to have to make a decision whether this is purely a defensive operation or they're going to go on the offensive to some extent and actually frighten the Hoho thies and show that there are real consequences.
Ellen, you've been stuttying the Middle East for years and years, you're ate the book on Saudi Arabia. A lot of people look to you for your insight about the kingdom and about the region, and I'm just wondering, based on everything that you've seen over the past couple of weeks, how much have the chances of an escalation really increased for your vantage point.
I do think that the chances are higher than we're seeing priced into the market right now. I think there are still very strong deterrences to seeing the conflict spread. Saudi Arabia does not want to get involved. It's not good for business to, you know, get started in a war in the Middle East. It's not good for you know, the oil business to start any kind of conflict with Iran. But at the same time, we are seeing escalation that may not be able to be quell unless some offensive
action is taken by parties that aren't just Israel. Particularly if Israel starts to escalate the conflict into Lebanon, into something against Hezbola, then we're likely to see just greater tension, greater potential for terrorism across the Middle East. We already have seen things happening in Iraq and in Iran, and so I do think that we're definitely at a higher higher risk of conflict than we were even in October.
With that in mind, just put a bow on it. Ellen, how long would you expect this options in the Red Sea to continue for?
I'd say they can continue for the foreseeable future unless unless this coalition decides to go on the offensive. This is a very low cost, high return event for the Hoothies, and so unless their supply of weapons is cut off or someone higher up in Iran tells them to cut it out, I don't think that there's any real sign that they're going to stop.
Isaac Allen, thank you. I appreciate the insight and I'm well with that the Atlantic Council and the situation in the Red Sea.
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