Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six 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. We begin this out with the S and P five hundred, coming off its biggest one day lost since August, the Fed delivering a twenty five basis point ray cup but dining bad expectations for cuts next year. Jim Bianco of Bianco Research writing, cutting rates and leaving the door open to more is inviting higher inflation expectations, and that is what the market
is reacting to. Jim joins us now for more. Jim, We've got a lot to get through your early reaction to yesterday's news conference.
You know, you have.
To see it as a continuation of what we've seen since September when the Fed cut in September, we were at three point sixty on the ten yure note, and yields have been going higher and higher and higher. Chairman Paul has been asked about this and he's not answered the question. He said, they go up, they go down, and then he come to yesterday's meeting, which we're referring to as.
A hawkish cut. Let's call it what it is.
He made a very good case the raise rates yesterday, but instead they cut rates. And I think the market at every step has been worried about inflation and has been rejecting these moves by having yields go up and up on the long end of the curve. Why, because the economy is growing at its potential. We've got massive stimulus coming with the Trump administration. Monetary ease is unnecessary.
All it's going to do is raise inflation expectations. So every time they can cut or talk about cutting, you see higher long term yields.
Jim, what do you think the next move is no move? Is it a count a hike?
I think the next move you're right, is, first of all, it.
Should be no move.
Even though Chairman Paul talked about a pause, meaning that there's going to be moves in the future, it probably should be a hike because if we're talking about where neutral is, where is the rate that does not, you know, restrain or stimulate the economy. You can make the case we arrived at it yesterday and that the amount of restraint, as Chairman Paul calls it, doesn't really exist. So therefore the next move should probably be a hike. But that's
going to be intensely political. President Trump wants to fire poll President Trump would go crazy if he saw the FED raise rates, So they're trying to thread this needle from a political standpoint, in my opinion, and they're coming up with an answer that is satisfying nobody.
Jim, do you have a really clear sense And I know that you just gave a reason for why the market responded the way that it did, But how much do you think it had to do with the idea that there is this conn about stickiness of inflation And how much is it the flipping and the flopping and the lack of direction and the lack of understanding what models are driving any further FED decisions.
Oh, I think that you're right that it is a flipping and a flopping. We're not exactly sure where they are going. We remember in the summer, we got all worried about the unemployment rate. As you pointed out, that was the basis of the Jackson Hole speech. I happen to think that that was all driven by the some rule getting triggered, and that that scared the FED and that's what got us the fifty basis points. And right after that the labor market rebounded, and now we're back to inflation.
So there is no real consensus.
Add to that, as you've pointed out, there were potentially four dissenters at this meeting, although officially there's only been one because four of them listed their twenty twenty four dots is being unchanged.
And this is a bed.
That is probably deeply divided, that don't have a clear idea among themselves what they should be doing next.
And when Chairman Pod.
Goes out there and tries to tell us that here's the policy, there is no policy. There is just you know, kind of questions, and there's dissent all over the place, and that is showing up in the market.
In some ways, the fedput has been taken away the comfort that at some point the default for this FED will be the recalibration to lower rates, because it seems like they're very close to that neutral rate. I just wonder going forward how much this is a FED that welcomes the weakness that we saw yesterday in the market, so it actually welcomes some of the sell off that takes a bit of the pockets of frosts down a notch.
Oh. I think that they probably do welcome the idea that these frothy markets, especially in post election, especially in the more speculative markets like crypto, have been worrisome for them and they would like to see them pull down. But I don't think they like the idea that these frothiness is coming away because everybody's screaming they just made au and that's why the frothiness is coming away. But yes, I think that in the long run they would probably
like that. But again, that puts them at odds with incoming President Trump because he values or he views his success of his administration by rising stock prices, and the FED is now probably saying, well, at least we got stock prices down and got some of the frost out of the market.
So it's going to be a very tumultuous twenty twenty five. If we continue down.
This path no doctor of Renmac said it. Immediately after the news conference yesterday, Jim nol Kim on the program and said, this FED is on a collision course with the incoming administration. Jim, how do you think that plays out through the next twelve months?
Oh, I think it's it's going to play out, you know, not well at all, because I'm going to take Scott Bessett, the incoming Treasury Secretary, as his word that there's probably going to be a shadow FED. That is the idea that they're probably going to nominate Kevin Walsh.
Early like this summer.
So we're going to have a FED chairman, we're going to have a future FED chairman, and we're going to have two people to kind of listen to and that we'll add to the confusion as well. So this is not going to be something where they're just going to clash with the administration. It's going to be open warfare and we're going to have probably a potentially a future FED chairman to sit there and question what the current FED chairman is doing.
Jim.
That will not be music to the ears of people in Brazil to people in Japan, and by people I mean policymakers Dolly Yen right now briefly through one point fifty seven. In Brazil, they've got fiscal issues. These issues don't help them. In fact, high yields beget high yields. Jim, there are certain places in financial markets around the world
where they feel really stretched. We had someone come on the program yesterday Jilly and Manuel have ever Core, a man you know well, and he talked about the peak in the US dollar being really important to financial markets. We've been asking the question how much oxygen is left up here for the US dollar?
Jim?
How much more stretch can this get?
Oh?
I You know, the one thing I've learned about currencies is they can go a lot further than people think. And as long as US rates continue higher on this back of that, the FED is not dealing with an inflation problem, or worse, fostering it by continuing to talk about cutting rates when.
It's not necessary.
Higher interest rates in the US will just continue to foster a higher dollar. Now, a higher dollar, you're right, means lower emerging market currencies, which means lower developed currencies like the end and puts.
More and more pressure on them.
And look at what's happening in the global economy X the US. You've got countries like Germany, You've got countries like China. You got countries like Japan that are already struggling right now. Germany might be in recession right now. Japan might be in recession right now. China might have some of the lowest growth that we've seen in forty years. The US is humming along great, But the problem is is that as the US hums along, it gets higher
rates and sucks the dollar in higher. It puts the rest of the world under further pressure.
Jim putting this all together, the rest of the world and further pressure the idea that a stronger dollar is probably going to inhibit exports from the US potentially the growth in certain areas. Did this meeting and the reaction to it by the Federal Reserve and buy the markets increase the chance of some sort of negative growth shock next year despite some of the incoming policies.
It can.
I mean, you know, if you go back and you look at recent history. Six years ago today was the day that Paul had another press conference where there was a very bad reaction in the market. That was when he announced QT and it was going to be like watching pain try, and the market thought it wasn't going to be like watching pain try, and it had a
very toxic reaction to it. Two weeks later we got the poll pivot when he went to Atlanta and at the NABE conference and basically pulled a piece of paper out of his pocket and said, Okay, those policies announced two weeks ago, we're going to completely reverse them. So maybe we see something like that in the next couple of weeks out of him. It would be there's a
precedent for it that he changes the policy. But if he doesn't change the policy, and they continue to talk about weakness, worry about the labor market, that they might have to cut rates even more next year in the face of just raising their inflation expectations, I think we're going to see a rocky ride.
In the markets.
Jim enjoyed it. Looking forward to covering this with you, Jimpianco Bianco Research, and Jim, thanks for everything. In twenty twenty four, Francis Donald of RBC writing there is no consensus, no conviction in this FMC, so trying to decipher their perspective slash bias as a whole is probably a fall's errand I'm pleased to say that Francis is with us around a table. Francis, good morning.
Good morning.
No consensus. Does that make it pretty tricky for the Chairman to offer any particular view for twenty.
Five, very difficult to give his view of what will happen. But not only is there not consensus from the Fed about what is happening right now and what's going on, but where will we be in twelve months. No forecast or public or private knows where we're going to be in twelve months. We don't know what policies are coming through, their magnitudes they're timing, but we do know the direction of where things will go, and that is that incremental
policies will be inflationary and probably drag on growth. And this is why I think is this is the problem for the Federal Reserve. It's not higher on inflation. The Fed is not afraid of high inflation. They know what to do. You hike rates or you keep them stable.
They're not even.
Afraid of weaker employment, you lower rates. What they're afraid of is a stagflationary environment. And if inflation heads upwards or is sticky for factors they cannot control supply side and the unemployment rate rises, or there's weakness underlying that labor market, maybe it doesn't show up in the unemployment rate. That is the big problem for the Federal Reserve heading into the next twelve month.
What do they do if that environment did materialize? What's the approach to that?
Well, they'll have to make some big decisions. So we heard from fedhair Powell. Hey, we did work heading back in twenty eighteen as to the type of inflation we should look through, giving themselves some optionality. But this is a FED that's going to have to ask itself questions over what type of inflation it does respond to supply
side shocks, geopolitical fragility. These are not interstrate sensitive. So a Federal Reserve that talks a lot more about the type of inflation they would look through is one that might be airing on the growth side. For now, they don't have to make that choice because it's really the inflation side of the picture. As we just heard, The growth side looks on the surface at least to be well. I wouldn't be surprised if the FED is also paying
attention to the unevenness that exists under this economy. We talk about K shape with income's high income folks really doing a lot better than low income folks shows up in that retail sales data. But there's also that K shape happening with manufacturing data and services data. This is not a simple economy. It's probably not a simple policy response. This, I think is underscoring some of that confusion we're hearing from the FED chair.
It raises this question of what kind of goals they have. I don't have a clear sense of what the goals are in terms of how quickly to get inflation down to two percent, terms of how to weigh both the inflation reading and the unemployment reading, and what would trigger them to make a change. Did you have a clear sense of that.
Well, from their sep or those dots, they say it's okay if we wait several years to get back to neutral. Okay if we wait several years to get back to two percent, And that seems to be okay by them. One of the challenges, I think is this unevenness that exists under the surface. That unemployment rate is going to stay mechanically lower even as the labor market softens. This
is a demographics story. And if we see deportations on masks, that could also contribute to the unemployment rate looking a lot better than the health of the underlying labor market. So this is a FED that's going to have to look beyond its simple mandate price stability and low and stable on employment and start asking questions about whether they're targeting the right numbers or at least expanding the numbers that they're looking at in a more formal setting.
Does it make you more nervous to own risk, to buy risk, to take risk at a time of this much uncertainty and a real confusion or at least disagreement above FED members, It will make anybody nervous to take risk.
It will be more difficult for businesses to action on plans that they're going to take, or even for households to know what will interest rate policy look like moving forward. We're talking a lot about the market reaction and the idea that there you know, the market has moved to
two or one cut for next year. That's fine, But how many business owners in the United States and globally incorporated a tenure above four percent, and we're incorporating the idea that actually rate hikes could become part of the conversation.
I don't believe that this is part of America's planning, and more importantly, I don't think it's part of the globes plan because let's not forget this week, we have China yields collapsing, we have three out of seven g seven countries have governments that went through sizable periods of problems, and we have, as you know to John, really serious geopolitical fragility. This is not a global economy that can withstand for five percent rates the same way the US
economy can. And while the FED will say we're focused on our own domestic economy, unfortunately the rest of the world is going to be receivers of that FED policy as well, and they are not in the same position as the American exceptionalists.
So that in emerging markets yesterday, that's for sure, in foreign exchange in the m I'd love your thoughts on this whole debate around neutral. Head of this decision, Governor Waller came out and said we were some way off neutral.
We could keep on kind of interest rates.
I'm paraphrasing but that was the essence of a message from the governor. When do you think we are relative to neutral and where are they? Because I was pretty confused by some of the commentary in the news conference.
Well, there's certainly this new concept of short term neutral versus long term neutral. So where we should be in the short term is different than where we should be in the long term. I think that's really being fueled by the surprisingly massive amount of fiscal spending we I think in the general consensus are downplaying just how impactful the most amount of spending per GDP that we have seen outside of a recession in American history, and this
is massive, and it's distorting data. And when we talk about American exceptionalism, yes we have productivity and AI because what a lot of other countries could be growing at three percent if they were spending as much as the US was spending on the government side as well. So that's really distorting short term neutral. But there's a lot of concepts being thrown around. In my senses as I listen to this, this is a lot of trying to
find reasons why they can stay on hold. This is a fed that wants to stay on hold until they get some sort of crack in the data in one direction or another, this is probably where they're going to stay.
Francis is good to say. Always fantastic. Thank you, Francis don A.
Welcome to our audience on Bloomberg Radio and bloomber Television worldwide. Mister secretary, thank you very much for being here with you. Many ways we could go here, but let's start with Syria. And you've described this moment as one of both promise and peril.
That's right.
You have what seems like a de facto government that is a designated terrorist group, and you've said that the US has spent in contact with HTS. What specifically have they said, I know there are other groups operating in the country as well. What have they said about how they might govern? If this is how it all shakes out.
What we've heard them say is positive. The question is what are they actually going to do. We brought together with Jordan, countries from around the region last week. We had Turkey, we had Iraq, we had the Gulf States, Jordan, Egypt,
European partners, and we came together to set expectations. What is the international community, what are the neighbors looking for as this transition takes place in Syria, and we all agreed, we want to see something that's inclusive, that's non sectarian, that respects minorities, women, that deals with any chemical weapons that may be remaining in Syria, that doesn't aly with ISIS or any of the terrorist groups that are there.
And the reason that's so important is we want to make it clear to HTS and all of the emerging authorities that the recognition that they seek, the support that they seek and need from the international community, well, there's certain expectations that come along with that. And as I said, we've heard positive statements coming from mister Jilani, the leader of HDS, but what everyone is focused on is what's actually happening on the ground.
What are they doing.
Are they looking to build a transition in Syria that brings everyone in. If they do that, and if they meet some of these other tests that the international community is looking for them to meet, then I think you can see something very positive. And here's what it is.
For the first time in decades, the people of Syria can go forward without a dictator, without a terrorist group dominating their lives, without one sect or one group running things at the exclusion of others and without foreign power calling all the shots. That's the opportunity, but it really requires HTS and other groups that are there to move forward in this inclusive way.
You've said that the US wants to help, and I look at this country that has a lot of sanctions that are residual, A lot of sanctions have been in place for decades.
On Syria.
Senator Chris Murphy of Connecticut has called for a temporary suspension of sanctions. Is that something that you would be ammittable to and would that be effective and helping you have more engagement with what may be this new government.
So we're looking at all the authorities we have.
We're looking at all of the sanctions, not only our own. The United Nations has sanctions on HTS, it's leader.
And I think what we need to see.
Is actual concrete steps building an inclusive, non sectarian government, a transition eventually getting to an election. As we see these steps taken, then I think we'll be able to respond, others will be able to respond. That's what we'd like to do, But we need to see concrete action, not simply positive declarations.
The EUS Chief Diplomat has said, she's sending a senior representative to Damascus to talk to this new group, talk to this government. Is that something that you would want to do, that you can do? Indeed, given the terrorist designation the sanctions there, we've.
Actually been in direct contact with HTS on the ground. I can just tell you we've been in direct contact. And we're also looking at getting people on the ground in Syria. I think it's important to have direct communication. It's important to speak as clearly as possible, to listen, to make sure that we understand as best we can where.
They're going and where they want to go. So we'll be looking at pursuing that in the coming days.
Pull back and ask another question about the region. And there's been a lot of speculation that a ceasefire deal could come together. When President Biden spoke about the deal between Israel and Hesbella, and he was asked at the end, do you think you can get a ceasefire deal by the end of your tenure?
So he's hoping and praying.
Is there anything that's happened that gives more grounds for hope and prayer going forward?
Here?
There is and the reality is we should logically be able to get this. And I say that with all the caution that comes with that statement, because you know, we've been very close before, and we've had these Lucy in the football moments where you're just ready to kick the football and Lucy pulls it away. But what's changed is this, Hamas knows that the cavalryes are not coming
to the rescue. For months and months and months, it hoped it would get a wider war with Hezbollah, with Iran, with Iranian aligned groups coming in and creating more problems from Israel on more fronts and helping Hamas endor Now, no, that's not happening. They know it's not happening because of the very important work that was done with us and with others dealing with the unprecedented Iranian attacks on Israel, dealing with Heswelah. So I think that's concentrated minds among Hamas on the.
Need to complete the steal.
Having said that, you know, it's always incredibly fraud and it's very hard to get decisions made, it's hard to communicate, and for all of those reasons, even as close as it is, you know it can still move in the other direction.
But we have we've all been.
We've all been fanning out, working with all of the different partners who can make a difference and who may have some leverage with communications with Hamas, whether it's Cutter, whether it's Egypt, whether it's Turkey.
Where I was just last week.
The fundamental question right now is is Hamas finally prepared to say yes? And if it does, we get the hostages back, we get a cease fire, we get an immediate dramatic improvement in the lives of Palestinian children, women and men who've been caught in this horrible crossfire since October seventh, off a masses making.
If they really purport to care.
About the Palestinian people, they will say yes and do it.
Now.
Let me ask you about that horrible crossfire, and it's something that you've written about in a recent essay for Foreign Affair, is the fact that millions have been displaced, tens of thousands have been killed. Gaza has been kind of reduced to rubble. You've made twelve trips to the region. How much regret do you have that kind of sustained level of humanitarian aid hasn't made it into Gaza over the course of this conflict.
You know, from day one.
We've tried to do several things going back to October seventh. First to stand resolute with there's real to try to make sure that October seventh would never happen again. Second, to prevent this war from going wider, because if that happened, if other fronts opened up, whether it was with Iran, whether it was with Hezbollah, these other groups, more death, more destruction, and it would probably prolong what was going on, not in Gaza.
And three to do whatever we could to make sure.
That people in Gaza were getting the assistance they need, We're getting the protections they need, and we have been on this virtually every single day, and we've seen moments when more assistance was getting through. Then we've seen moments where where it's ebbed and flowed. But this has a dramatic effect on the lives and livelihoods of people in Gaza. The last week or ten days there has been a noticeable improvement, but we've seen that before and then we've
seen it fall off. The best way to finally deal with the needs of the people would be down in the conflict, would be to get the ceasefire, to get the hostages home. That's the best play because you have an environment that is unique. You have a population that's trapped in Gaza, it doesn't have anywhere to go. In most other conflicts, people they can become refugees. That's not a good thing, but it's better than being caught in the middle of a hot war.
And also you have an enemy in the case of Amas, that's.
Fully enmeshed with the civilian population living in and underbuildings, apartment buildings.
Schools, mosques, hospitals.
That doesn't obviate at all the responsibility that Israel has to try to ensure that assistance gets to people who need it and that people are protected as best possible, and we've been pushing on that every single day. We've also seen what's possible if there's real sustained focus on this. There was a polio vaccination campaign to make sure that little children in Gaza got these vaccines, and it was
very successful until there's an end of the conflict. What we've been trying to impress upon the Israelis is the need to bring that same focus in a sustained way on getting assistance to people who need it.
Ask your last question just about the transition that's underway, and you've said of this new administration, you want to pass the baton to them so they can get off and running. Forgive me, but it does seem like they are off and running. You had President Electrump meeting in France with President Zelensky, President Matcron, He's met with Prime Minister Trudeau in Florida. His destiny to be the Special Onboard in the Middle East has been in the region
as well. Does that complicate the work that you are doing, having that sort of separate voice, separate foreign policy for lack of a better word, in the region while you're trying to do your work.
There's one president of time, one administration at a time. But we're in very close contact with the incoming administration.
I spent a couple of hours feld novel though, and we used to talk about the logan actions. It does feel like these are different circumstances.
Look, I think there are few things. I think there are a few things going on.
First, as I said, we've been in very close contact with the incoming administration. I've spent a lot of time with Senat Rubio and Jake Salton, the National Security Advisor, with Mike Waltz, his successor. We've had very good not only conversations, but we're trying to make sure that we're as coordinated as possible so that they know what we're looking at doing in the remaining time that we have.
I want to be able to hand off to the incoming administration the best possible hand to play in all of these areas, in all of these challenges, because the world doesn't stop just because we're in a political transition. It's also normal that countries around the world want to hear from the incoming administration. They want to know what they can expect and so they can get ready for that.
As long as we're communicating closely, which we are, and as long as we're working to again try to make this handoff as effective as possible so that they can get moving on the run because there's really no time to wait. Then I think that's a good thing and look on the Middle East, just to stick with that quickly.
We've been working very hard to make sure that as best we can we put in we actually start to implement plans for a better future for the regent or if we don't have time to fully do that, to be able to hand them off not just getting the hostage and cease fire deal, but having a clear plan for what follows, a day after plan for Gaza so that there's no vacuum that Hamas can refill, that Israel can pull out, and you can have Gaza stand up
for its people. Administration, Security reconstruction, we have done an extraordinary amount of work carrying through what President Trump started with the Abraham Boards to get a normalization between Israel and Saudi Arabia, which would be the biggest game changer in the region. And those plans are there and are in place and ready to go if we get an end to Gaza a conflict there. We've done a lot of work on what a pathway to Palestinian state would
look like. When people are ready for that conversation, they're not now. At some point they're going to have to be. All of that is ready to be handed over to the new administration, and hopefully they'll carry the.
Ball forward very quickly.
Before I let you go, you mentioned that normalization deal. It was something this administration invested a lot in before October seventh. Clear that the conversations has been going on, there has been reporting that we're close to a breakthrough there is there. Can you shed any lightn serve where those conversations stand today.
So one of the things I look.
Back on is on October tenth, a year ago, I was supposed to go to Saudi Arabia and to Israel to work on the Palestinian component of this normalization deal.
And of course that trip didn't happen because of October seven.
But even with Gaza, we've continued these conversations. We've continued this work, and in terms of the agreements that are needed between the United States in Saudi.
Arabia, they're pretty much ready to go.
And that would then trigger the normalization between Israel and Saudi Arabia. But two things are required to actually get that done. One is an end to the conflict in Gaza, and two is having a credible pathway toward a Palestinian state. As I said, all of the work's been done, and hopefully we'll get to that end of conflict in Gaza. They'll have to engage the conversation on the answering the Palestinian question, but the work is there, and if that happens, this transforms the region.
You have Israel that's integrated in the region, there's.
A common security architecture to deal with Iran. We saw that something we put together embryonically. When Iran attacked Israel in an unprecedented way direct attack, we not only for the first time participated in Israel's active defense, we brought other countries, including countries in the region, into that defense.
So you can see what's possible in the future.
But it requires an end to the conflict in Gaza, and it requires moving forward on the Palestinians.
As your secretary, thank you very much. That's a Anthony Blnkoln Secretary stage.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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.