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Terminal and the Bloomberg Business app. Bruce Casman of JP Morgan writes in the following Elevated inflation suggests that the removal of downside growth risks would make it unlikely that the Fed will deliver the substantial easing expected through the end of next year. Bruce joins us now for more. Bruce has been too long, my friend, Welcome to the program. July thirtieth was the last time we heard from Chairman Power.
It was in the news conference in Washington, d C. How dated do you think they're his views?
It's clearly dated because we've had important information both on growth with the weak labor report and also on inflation. However, I think it's important to look at what we got from that meeting, both in terms of Palell's description of the labor market is solid, as well as the committee minutes that showed that a majority of members still thought inflation risks were more important than growth US at that time. So we're starting with a committee that I think has
a somewhat hawkish bias around easing. I don't think from what you've heard so far from members that there's a consensus to ease. And I think whatever we get from Powell today, he clearly can't tell us what the September meeting is going to do. Having said that, I do think the weak labor market report is important.
It does send a stall speed signal.
I think the Fed traditionally has an asymmetric bias to being sensitive to recession risk. And I think he is going to tilt somewhat here in the direction and moving away from his description of the labor market is solid to tell us that the door is open for and easing that hasn't been decided at the September meeting.
So Bruce, he opens the door, But to what degree do you think he would introduce that two way risk, that two sided risk, and try to maybe coax the market away from leading as heavily as it is now to a rate cut in September.
I think right now the market is decided that there's almost certainly going to be a rate cut. I think by opening the door but not saying we're going to walk through it, that does reflect the two sided risks. So this is not a chair that's going to do what he did last year and basically promise a rate cut at the September meeting. But I think he has to reflect the rising risk. He has to reflect the shift in his own thinking. He has to tell us
that September is alive meeting. If he does that, I think the market will pretty much stay where it is on the September call, Bruce.
If we also get some discussion about the frame work, which we are expecting to and you hear Powell talk about turning away from flexible average inflation targeting, if you sort of emphasize that, is there any signal in that alone or is that more just details that matter not from your term policy but policy down.
The road, I think the reality is the effects flexible inflation targeting regime never really took off, and I think there are some problems with the way it was described in the last framework review. I think Powell will basically tell us we're moving back, but I don't think it has any implications for how the FED is going to set policy, not in September and not going forward from there.
It'll be interesting color, but not impactful.
Their understanding of the labor market will be impactful. I want your understanding of the labor market first, and then we can talk about whether there's any dayline between how you think the FED reach things. What do you think is going on here? So we've obviously had a step down in payrolls growth, and let's just run with the numbers we've got so far, because they might change. I've got no idea, and I imagine you don't either, But let's just run with these numbers. We've seen a step
down in payroll growth. Bruce, can you put more emphasis on the demands side or supply side, a cyclical turn or a structural shift?
Oh?
I think labor demand is the key issue here, and I think in an economy that has slowed sharply in the first half of the year, what we're also seeing is a family, substantial downshift within the breath and the magnitude of labor demand. I am concerned that when we see private barrel slow to the pace we've seen in the last few months, that that's a warning signal.
I call it a stall speed alert.
But at the same time, we haven't seen businesses start to retrench. There's nothing suggesting layoffs have picked up. And there's also, I think importantly, no signs that the slowing and labor demand has really hit labor income, as wages have picked up somewhat in the last few months and hours have held up. So we have an economy that is downshifted. It's sending a risk signal, but it's not by any means breaking, And of course we do have
the flip side on inflation to worry about. I think you have to look at the FED as responding to these asymmetric the recession risk when it starts to pick up, becomes a dominant factor in their thinking. And as I said, I think it's enough to get you a couple of eases, maybe three, it's not enough to get you one hundred and thirty basis points. So the market's pricing in over the next eighteen months.
Bruce, Governor wall is in your camp without a doubt. But as you pointed out, the counter point to all of this is that measures of slack of being quite stable, and you pointed to wages, wages are still okay. So you might get a few people on the Committee who say this is more about labor supply and that we've got a real risk care that we might get pushed in one direction when perhaps we should be looking in
the other. Bruce, how do you think that debate is going to plan on the Committee in September?
You could clearly see that in the minutes this week. And I am very much win Waller's camp and being concerned about labor demand. But I'm not with him, and I think most of the Committee is not with him in the way he's reading the inflation data.
And that's the.
Tough part of this call, because there is inflation pressure building. I don't think underlying signals are telling us US score and inflation is below three percent at this point. If it wasn't for a risk issue, I don't think the Fed would have a case for eezing. I do think there's a legitimate risk issue, and I do think it's appropriate to respond to that with modest easing as we go through the next two or three meetings, Bruce, how.
Important is it where we've come from, the fact that this has been four and a half years of inflation consistently above target, the fact that you have scars of twenty twenty two still really fresh. Does that in itself push back against some of the waller thinking that he might be right in normal times, but this time around the risk of inflation is different.
I think that's right, And I think if we were sitting in a world where you didn't feel there was a heightened risk of a labor market break, you're not supposed to be easing even as you see growth having slowed. But we do know that recessions are quite disruptive. We do know they're they're quite disinflationary. We also can see that so far the FED hasn't lost its anchor the
longer end on inflation credibility. So I think in the balancing act here, if you are concerned about inflation recession risk, you're supposed to respond to it. If I could put another point in here, I do think the FED is politically vulnerable as an institution here, and I think the
risk that they fail to respond to a downturn. Taking hold here would create a pretty substantial backlash, which I think does weigh on their minds in terms of how they're going to think about things as they go into the September meeting.
But it's just built on that vulnerable as an institution.
What does that really mean?
Well, I think what it means is if you listen to Stephen Moran, if you listen to Bessent, there's talk about the FED being reevaluated as an institution. This is not about who leads the FED. This is not about firing members of the board. This is about do we have a reevaluation of the Federal Reserve Act?
At some point?
Here is the FED as an institution going to be changed by this administration. They're certainly pointing in that direction. And I think the more the FED behind the curve, the more the FED puts itself in a position where it's not sensitive to growth rists that are realized, the more those risks increase. The FED understands that the FED is a political institution, and I think it accommodates when it is under pressure.
It's a marginal issue.
I think it won't make the FED ease when there's not a good case for it, but when decisions are marginal, I think it leans in the dubbsh direction. I think that's exactly where we're going to sit at the September meeting.
Stay with us, Mulblinpex Savanna's coming up after this. Jean Barvan of Blackcroff with this to say, we would still lean against the market pricing of multiple FED rate cuts over the next year. Jonas with us in a studio Monta John, Good morning. Why would you push back?
Well, I think the situation is very murky and it remains very much so. Yes, the peril number that came out the last one was an important one, and we are close attention. I think it leads to even more of an easy bias. But the inflation story is far from clear. We have many more prints. I don't think it's even the next too. I mean it's the next many before we get a real handle and that situation, and you know, you get inflation and row going in
the opposite direction. How they're going to balance that is is far from clear.
From how do you put it in a speech?
In one Amazonia, I think I think you're careful to guide the market too much, especially since the more the market is I think By you don't want to lug this in I don't think so.
I think you.
I think there's a big story in inflation that needs to be spelled out. The labor market is a very very unusual dynamic. It's I think it's very interesting that the topic of the conference is really about, you know, employment, labor market demographics, which are big structural forces that are making the labor market very murky. And I think you you emphasize that, and I think I think President Goalsby is right that the service on inflation is really puzzling.
And I think, you know, it's important to remember that going into this year, if we hadn't had this kind of surprise weakness in service inflation would be more like three percent inflation right now. And there's not a real explanation for this weakness in service inflation because it doesn't really line up with the labor market and wage dynamic that we're saying. So so I think the jury is
very much held on inflation. And unless you get convinced that recession risk is very real, then it's going to be tough to deliver those cuts.
So is this, then, Powell that introduces two way risk into this market in his speech today?
Yeah, I think this is this is very hard to do, but I think by emphasizing some of the inflation story that is not resolve and recession. It's one data point on the payroll, right, I mean we could get like, you know, a pretty strong one next one. We believe that you know, sixty forty to sixty thousand job is kind of what we need to keep inflation stable. So that's easy to achieve in the next payroll numbers, and that would not be screaming recession.
So I don't know, making those.
Kinds of points I think pushes a bit against one hundred percent price and cut.
And Look, you're not.
The only one to say this. I think a lot of people have come around this table this week have said that before four right, maybe for the past month two months, we can go back further saying that they're stuck between a hard place.
It's not a market that's saying.
That, though, John, So, how vulnerable are we at this moment to having a FED that will push back and a powel that will push back against current market pricing.
I think this is an environment that is very as a result, very volatile. We keep telling clients and you know investors that this is an environment where we have more scenarios that are possible in the table than usual. You cannot bank on one being one hundred percent. Things are not binary, and as a result, we think that creates a lot of alpha or you know, investment opportunities.
The fact that it's price one hundred percent and there might be room for some surprise will create some you know, near term opportunities, and I think that creates a pretty interesting trading.
Environment for for investors. What you like right now?
We we we like UH risk in general because I mean, no matter what happens with the communication today, and even if there was like a surprise, how kishness coming out and the market work to react. Adversely, we think there's pretty strong under need uh, you know, support for risk assets. So we like we like equities, We like US equities
in particular. We would be you know, a bit more careful on on on the rate side of things and fix income for like what we're just discussing here, and in the context where the dollar has been you know, behaving the way it has this year, Uh, there are pockets of interest in emerging market that continues to be to be there for us and ai UH is UH is certainly something that despite the ongoing debate and so on, you know, we think it's a pretty powerful force.
Let's just sit on that.
You've talked about this as a team, the lack of macro anchors right now to focus on other things. Can you build out that just a little bit more?
Yeah, I think you know, there's this environment since twenty twenty. It's ironic they're going to be reviewing their framework now five years and that five years was exactly for us where we moved to a completely different regime. It used to be all about demand and risk of inflation, under shooting and targets. Now we think it's all shaped by supply.
It's a transformation, it's a real transformation. There's a lot of mega forces that play AI is one in particular, and that means that you know where we're going to be ending up in.
Two, three, five years.
I think it's a lot more clear than any point in the four years prior to twenty twenty. Are we going to get three percent growth? Are we going to get like on a sustained basis, which would be like, you know, a speed up or would we be the one percent world? These are very different world, very likely that we could be in both, but we just don't know so to be ready for that. And then inflation, we are debating the near term, but we have big deficits.
We have, you know, big debts.
How this is going to play out, How these trade off will be navigator of the next five years is very unclear, And as a result, I think it's very difficult to build out a scenario five years out for strategic asset allocation and say this is like a reasonable basis where I can navigate around. Instead, I think you need to be a lot more tactical and instead of looking at this macro anchor, I think we want to
look to these megapce anchor and AI. There are many macro scenaris, but we think AI will power through many of them, and as a result, is a better way to kind of shape portfolios.
Stay with US multile impact surveillance coming up after this. The former us A Labor Department Chief economist Betsy Stevenson, writing in The New York Times, the following the fact is looking at job numbers without a real understanding of what our current steady state job growth should be. Betsy joined us now for more, Betsy, thanks for giving us some time. I want to give you some space just to explain that. What's your understanding of the current situation?
Yeah, thank you for giving me a chance to give the context, because the context is important there.
Why do we not really know what the steady state should be?
And the reason is that when we're looking at those job numbers, what we're trying to think about is how many workers.
Are employers trying to hire.
But on the other side of that is how many workers are there available for them to hire, and how much hiring does it take to keep our employment steady so that we're at full employment.
What we have right now is.
A big decline in immigration, and that is clouding these numbers because with people exiting, that's labor supply contracting. We definitely need fewer jobs being added each month, but the question is how many fewer? What's that steady state rate of growth On the flip side, you know, in twenty twenty four, twenty twenty three, a lot of people were worried that the economy was overheating because they were adding
so many jobs per month. And it felt like where could they be getting these workers while we were seeing a resurgence of immigration as we now know, and that resurgence of immigration was giving the labor's supply that employers needed to be able to keep hiring at that very rapid clip.
Well to that point, Betsy, the most recent reporting from the Journal does suggest that there will be a change from j. Powell when he speaks today about the framework about not just inflation but employment as well, and how they view this labor market. Given what you're talking about and really the clouds and the unknowingness of how exactly this labor market is forming, how should the framework change, how should they be approaching this labor market?
Well, I think what they need to be right now is just incredibly data driven. And that's going to mean looking at lots of sources of data, because they're trying to at not just how many jobs are added, what's the unemployment rate, but what is the pressure in the labor market that could spark inflation? And so that's going to mean digging in and looking more granularly at unemployment rates for different groups of people. But remember they have
a dual mandate. They do want to keep employment at full employment, but they've also got to try to get that inflation back to their target of two percent. You know, we had hit it and then it's sort of bounced up a little bit, and we might not think that inflations it's not out of control, but it's certainly not where they want it to be. And it looks like inflation might be about to.
Tick up even further. So what they're going to be.
Looking at is what's happening to inflation expectations.
How tough do they have to.
Be to keep that inflationary pressure down? And then they got to balance that with you know, is this slow down in the labor market we're seeing is this driven by employers just you know, not having enough oom? Are we starting to see a recession where we're going to have a bunch of resources, which are workers and people, but also capital equipment that's just laying around and doing nothing.
That's what a recession is all about. We don't want a.
Recession, but we also don't want to see us demanding more than we can supply, and particularly with reducing our supply channels from overseas, that means that they're going to have to be a little bit careful to try to make sure that those reductions and supply don't lead.
To higher prices.
I think this is the toughest position the FED is basically you know I've ever been in in my lifetime at least.
Well Bessie just describing you describing the state of things. It seems like labor market unknown, signals unclear. But what is known is that inflation is still with us. In fact, it's higher than it was this time last year at Jackson Hole. How can the FED be cutting that next month?
I think that's a big question.
I think that's why you're hearing a lot from members of the Board of Governors and you know, the FOMC that you know it's not clear that they should cut. They're really really going to have to be data dependent. What does that mean? That means that they shouldn't have made up their minds right now what they're going to do in September. There's data that's going to come in between now and then, and they're going to have to
react to it. I will say, keep in mind that we want the FED to react before we.
See a big problem.
The FED does the best think about coming into COVID. You know, the FED could see the writing on the wall with COVID because it was a pandemic and we had to help data before we had the economic data, and they were able to work to stimulate the economy to cut rates before we saw the problems of COVID, and I think that really helped us have a less
bad economic experience with COVID and recover quickly. But they kept rates too low too long, and we had that surge of inflation, so that it's a tough balancing act for them and they're going to have to be looking forward using.
The best data they can.
And then they're facing a data crisis in the federal government, which is firing workers, cutting back staffing, which is making it so that the data is cloudier and it's taking longer for accurate data to come out.
Stay with us. Mulblindog. Savannah's coming up after this. Let's have that conversation with Alex and Arista of the Cato Institute. Alex intervention has consequences, Does it have unintended consequences?
It absolutely does.
The long term problems and even the short term problems of the government trying to take these equity stakes and some of the most productive and innovative companies in the world.
Is disastrous, and investors and firms are going to look at this and they are going to start to make investment decisions based on what makes politicians happy and on what favors they think they can make, rather than the profitability of these investments, which will eventually undermine a lot of the productivity gains that we get from these firms.
I mean, we saw this back in the financial crisis, where the government took stakes and companies, temporary stakes, big bailouts and companies and auto companies and then made investment decisions for them. This was not good for the auto industry, it wasn't good for the United States, and I fear that the effect of doing this with some of the most advanced chip makers in the world will be even more destructive.
Let's work through this, alex So.
Let's say GFC was about distressed assets connected to the employment of thousands upon thousands of people in this country. The government found like they had a role to play. Let's talk about this one. It feels unique. Here's the situation. The government doesn't believe that the freehanded the market is going to allow them to build out domestic foundry capacity and they need to for national security purposes. What is the free market solution to making that happen.
Well, I think the major free market solution for a lot of this is if the government thinks that it needs to have certain components in order to fight a war at some point, stockpiling is a good way to do that.
Relying on exports from a lot of our allies is a good way to do this.
I mean, if that was really the justification, the United States government would not be putting.
Tariffs on other countries.
That are our allies, would be increasing trade flows with these countries and away from the potential adversary.
So the Trump administration is trying to.
Have every side of every argument in this debate over trade and ships and equity stakes in these companies. But these arguments are all contradicting than each other, contradicting themselves. And as a result, a lot of investors at a lot of these companies they don't know which way to turn, They don't know what types of investments to make, and they don't know what the administration or the next administration is going to do on this.
It is not a stable environment.
To that point, alex Often building up these types of things take longer than four years. It will take longer than this presidential cycle, is your estimation then that companies won't commit. We've already gotten a lot of investment promises from a variety of tech companies.
Do those get.
Followed through if there is this concern of what happens after four years.
The history of industrial policy in the US and handing out subsidies for firms to do this is that oftentimes firms upfront will say yes, I'll do this, and then they pull back their investments. We saw this for Foxcron in places like Wisconsin, other states in Midwest. We've seen
it with companies throughout the country. Basically going back to long periods of time that they will make a politically favorable judgment to make the current politicians look good, and then they'll back when they notice that they can't make the economics work, they can't make the investment and profitable, and ultimately that's probably a better situation than them investing
tens of billions of dollars in projects that won't ultimately work. Listen, companies know what they're doing, they understand the rent secret environment that they're in they understand this administration pretty well and they are just trying to run it out without doing too much damage to themselves, to their investors, and to their to their share price.
They understand what the US is doing, Alex. To what degree do companies understand and are able to navigate what China is doing with AMD in Nvidia? The latest being that China seemingly pushing back on allowing companies to buy H twenty chips. How does an Nvidia navigate that?
I mean that, I mean that right there is a you know, the trillion dollar question. The Chinese government has long been inscrutable to a lot of investors around the world. The Trumpet administration's decisions seem crazy to a lot of them.
So they're really stuck between a rock and.
A hard place in terms of the investments that they want to make. But I mean, it's just going to be very, very difficult for them to navigate this. I mean, we have a budding geopolitical conflict between China and the United States that a lot of people try to compare it to the Cold War, but it is radically different because there are enormous and valuable trade flows between these
companies Chinese companies. Chinese firms of Chinese government has long demanded payments of intellectual property from American companies to be able to operate in their markets. I think we're going to see a diversification where the Chinese government is going to continue to nickel and dio American firms and demand bigger and bigger concessions, just like the US government is demanding from American firms in the form of equity stakes.
So basically, the big loser in all this geopolitical conflict is going to be some of the most innovative American companies.
In the world, no matter which government is doing the pressure.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geo politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.