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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am 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. Lisa Chanlett joins
us now of Morgan Stantley, joining us around the table. Lisa, it's good see you, as always great to see you. Is anxiety about tariff distracting from fundamentals? It's a point you've made recently. Do you think it is.
I think it absolutely is, And I think tariff's are probably the single biggest thing that are just that is distracting everybody. But I think the pace and the chaotic nature right of the announcements are distracting to everyone. And look, we know markets love certainty, they love predictability. We don't have that at the minute.
Is it a justified distraction and other fundamental is good enough to stay commits it and stay the course and stay bullish US equities.
I think.
So, you know, our perspective has been to pick and choose your spots, and that expectations are key here, you know, our preferences to go where you know, we think companies can beat expectations, and one of the expectations haven't gotten to ahead of themselves.
And to you know, Frawdy, you made a point that I thought was fascinating.
We talked about the long and variable lags when it came to the FED hiking benchmark rates. We don't talk about the long and variable lags of them cutting by one hundred basis points starting in September of last year. Just how much is that driving some of the optimism and the deal making and the activity that everyone's expecting from corporate America this year.
Well, you know, one of the things that's interesting is I think, you know, the rate cuts are certainly driving the animal spirits. Actually haven't seen a year to date the level of deal making that I think a lot of people were hoping for, and that's still a bit on the come. And so you know, I think that certainly the hundred basis points helps. It's getting you know,
sentiment juiced. Right. So, we saw small business optimism right sore following the election, and I think part of that was, Hey, I'm going to get some rate cuts and I'm going to get you know, some pro growth policy out of Washington. But it remains to be seen, and I think, you know, to Jonathan's point, some of the chaos and the headlines is starting to cool.
Some of those expectations.
We saw, you know, that small business optimism come off the boil a little bit yesterday. We've seen some of the CEOs, including the Ford CEO, say, you know, whoa whoa, whoa. You know, let's let's let's you know, cool our debts, folks.
There's a tension here between whether there needs to be some rate cuts, additional rate cuts for the broaden out story to really make sense, or whether the one hundred basis points that we got late last year actually was plenty to get this sector driving.
Which is it?
So I think it's I think it's interesting. You know, our thesis has been that we're in a bifurcated economy for the most part the large cap universe, the megacap universe hasn't needed any rate cuts, right because they've locked and loaded their cost to capital, you know, back in twenty twenty one. I fundamentally believe that the mid cap, smaller cap companies, the lower end the venture capital, some of the private equity portfolio companies do need more than
one hundred basis points. So we're going to see, We're going to see where this goes.
I know you're watching for a rotation of stock in disease, and you like the idea of cyclicals, energy, domestic manufacturers, But what about the fact that that uncertainty of tariff's just still lingers. Aren't those the ones that are going to be the most hurt.
So it's interesting the megacap and large caps are so
much more exposed to the tariff conversation. I mean, this is where you know, the mid caps and the small caps actually can get life if in fact the rate cuts, do you know, flow back to them, If in fact we get bank lending in more the regional banking system to accelerate to those pools of companies, I think that they can actually, you know, kind of have a better year relative to mega and large cap companies who are going to have to struggle with their China exposure, with
their exposure to global trade, and to dealing with some of the constraints of tariffs and the costs of restructuring supply chains. If it comes to that, something else, you like, right now, a lot of people are hiding out even central bank's gold.
Are you adding to that position?
We are adding to gold, you know.
Our Our perspective is that what's going on with gold very much has to do with folks around the world questioning the primacy of the United States dollar, right, and I think central banks around the world have begun to diversify their reserves. I think that's been one element. I think a lot of the enthusiasm, believe it or not, around cryptocurrencies is also, uh, you know, made people think about, well, you know, what is you know, if this is digital gold,
what is you know, hard gold? And maybe I need some of that too. So, you know, our perspective is that, you know, given where we are with debts and deficits, given the extreme bifurcation of global FX markets, UH, that that gold will continue to outperform into.
A third year.
You're even wearing something to represent the strong filing goal, my goal, the gold blazer. I am curious about whether you see that sort of questioning of the primacy of the dollar shifting into some of the overweight that you might see we have seen over the beginning of this year anyway, in European equi ease as well as Chinese equities actually, which have really peaked up.
Are you leaning into that or learning against it?
We are one hundred percent leaning into this, you know, mean reversion trade.
Uh.
The massive underperformance of non US uh equities we believe has has reached extremes. Uh. Our best gas is that you know, the the current administration isn't helping, right, you know, in many ways. While it's great to pursue in America first policy, if you're in America, if you're not in America, Uh, there's all kinds of incentives to.
Find ways to uh protect yourself.
And that mean may mean uh, you know, creating you know trade arrangements with other countries and each other, uh, where America gets locked out. So you know, our perspective is that, you know, this is a time when not only the combination of valuation extraordinarily low expectations for or you know, regions like Europe potentially, like China, the potential to surprise on the upside, and the potential for some of these countries to actually stimulate, to have more proactive
uh central banks. I mean you you know, Lisa, you talked about the fact that the Fed may only cut one or two times this year. It's highly likely that the ECB goes more frequently than that. It's possible that some of the central banks in you know, Latin America, uh, you know, where inflation had run hot, are going to go more more often than that. And those are the kinds of things that kind of create this relative catch up trade we.
Told about this last week. It might push these countries to do things that might be good for them. Let's see if that happens. Lisa Shanon to Mokeen standy, Lisa, thank you. West tends to phone exchange foming New York Fed President Bill Duntley making the for king dollar in its latest Bloomberg opinion piece right in the following, America derives immense benefits from the dollars dominance, a position the countries such as China and Russia are seeking to contest
by addressing the problem of cross border payments. The US could boost the global economy and cement its central role therein Bill joined US Now for more, but welcome to the program. Lots of topics to count. Let's kick off with this one right here. You start it with a premise, so let's talk about it. The immense benefits from the dollars dominance. Let's start there. But what are they?
I think the dollar is a glunchpin of global financial markets, so we get what's called the exorbitant privilege of people wanting to hold dollar denominated assets. So that makes the cost of funding in the United States less than if the dollar was not viewed as the key currency in the global economy. But that's not necessarily for dain forever, and there are steps we can do to make that
more more likely to be sustained in the future. And one thing is to make some progress on cross border payments. Across border are extremely expensive, especially for small retail payments like remittances. They cost maybe as much as six to seven percent. This could be called we could be brought down tremendously if we had if we developed instant payment systems nationally and then link them together. A number of countries have good instant payment systems Brazil, India, for example,
The US is basically lower. We have two systems, but nobody uses them. Everybody uses cards and debit cards, benbo or PayPal. So we need to do something to revigorate the US instant payment systems, and then once we have that, we need to start to take steps to link it together with other instant payment systems around the world. If we do that, we can actually lower the cost of payments dramatically and cement the dollar as a key reserve currency.
Do you see the FED actually getting on this in any capacity in the near term, considering that they have their hands full with their mandate and a lot of controversy around it.
Well, I think you need some support from the administration in Congress. The countries that have been successfu well in this have basically had mandates. They basically said, you need to actually offer this service to your banking customers. In the United States, it's completely voluntary. And since it's completely voluntary, the two instant payment systems we have FED now and Artichs are basically not used by virtually anybody.
So they exist. But if they're not used, then.
How can you how can that be advantageous to link that into an international regime.
Well, well, hopefully we can continue to catch up on this as it progresses, if it does progress this year. In the meantime, they focus very much on inflation and just how the Fed's going to be responding at a time where we're going to get CPI potentially at zero point three percent month over month, which would be the fifth out of the six latest readings at zero point.
Three percent or above. How concerned are.
You about this stickiness and does it surprise you that we're still not seeing the disinflation that so many people were expecting.
I think it's very clear that the last mile is pretty sticky. And one reason is sticky is because we're operating at full employment. You know, there's gonna be a lot of downward pressure on inflation when economy is operating at a very high level of resource utilization, which is where we are today. I think the other thing is something that to Cheer Polty touched on yesterday. It looks like Maentre policy is a lot closer to neutral than what a lot of people.
Thought a few months ago.
You know, the fact that the economy continues to grow at a trend growth rate at a time where the federal funds rates you know, higher than four percent, tells you that maybe mandre policy doesn't really you know, isn't actually very restrictive at all. And so I think the prospect for further rate cuts has diminished considerably for the.
Rest of the year, potentially, especially given the political uncertainty.
Well potentially, I mean.
The other issue we have, obviously is we have a lot of you know, uncertainty about policy. We have uncertainty about what's going to happen to terrorists, we have uncertainty about deportations, we have uncertainty about fiscal policy. And so the FED is also going to be reluctant to take big steps when they don't really know what the policy. See a mix is going going to be in the second half of the year and into twenty twenty six.
But we might not know what the policy is going to be the entire year. It might be like this for four years. So what does the FED do just stay on pause forever?
Well poll basically said that the that the FED would cut if either if the ecmomy slowed sharply or if inflation came down. I think I think it may not be quite that simple. It may be that you only cut if the economy slows down. You know, I could see inflation moderating further, the e commedy is staying strong. And in that situation, what's the what's the motivation for
cutting rates at that point? So I think this, you know, one or the other might turn out to be that you actually need not just a following inflation, but you also need a substantial slowing of the economy.
Well, I'm also curious about the X axis. At a time we're talking about inflation expectations over the next two and five years creeping higher, even though inflation expectations over the next ten years are actually going down. This idea that of the longer term it will suppress growth.
How does the FED respond to.
That, given that they have been patient with the idea of inflation taking a longer time to get to that two percent, But at a certain point, a long time becomes forever.
Well, you're absolutely right.
I mean, every year you spend above two percent, there's more risks that inflation expectations, which have been well behaved up to now, finally start to become an anchor. And I think when the FED looks at the effects on terrifts on the economy. They are going to be very focused on whether those higher prices caused by higher terroriffs are actually feeding into inflation expectations. If they do, they'll make the FED more cautious.
If they don't, the FED will be focused on the.
Growth impacts of higher terrifts slowing down the economy. So I think whether the FACT can look through the tariff increases in terms of their effect on prices will depend very importantly on what happens to inflation expectations over the next year.
Hi, Bill, thanks for your time this morning. Looking forward to that second dance hastimately a little bit like to this morning as well. Be former New York FED President built up on the night, saystem with this surrounded table. Bebe Kelly at JP Morgan Asset Management. David, you've had five minutes. What jumps out for you.
It's not as bad as it looks at first glance, because the things that the things that bumped higher are three of the flakiest numbers in the CPI. One of them was that shelter increased at four tenser percent. We saw a lodging of one point four percent. If you actually look at only's equivalent rent and rent they were up three tens, so it was a big increase in lodging one. That's not a big deal in April, but
it just bounces a lot. If you look at airline affairs, they were up I think it was one point four percent. That's part of the core CPI issue. And then our old favorite auto insurance suddenly jumps two percent. And those three numbers are very bald. The government does not measure them very well. So I don't think that changes the overall thesis that inflation is basically under control. But I certainly agree with the analysis that this is no reason
for the Fed to move an interest rate. It says nothing in this report which says we need to have lower interest rates.
Just cham and have the luxury of making the same argument in about ninety minutes time on Capitol Hell, he should.
You know, you should stand your ground for honest analysis. I know it's easy to come up with a bumper sicuret that inflation is high, but good economists, good central banking, requires you to analyze the numbers. And when he does look at this, he'll say, look, there are some special factors here, and I you know, don't throw things at me. There are some special factors which bumped up the number this month and a few months times, maybe even next month.
You'll get a flip on the airlines and the hotels, and suddenly you get a better than expected number. They shouldn't overreact to this. But at the same time, you say, there's nothing here which says it inflation is cooling.
I hepe thinking about Steve Rashudo and how he talks about how you can exclude this and exclude that.
You guys tend to fight over this, but.
At the end of the day, it really is a rate that has been very sticky. Are you saying it's okay for it to be a little bit sticky if it's at three percent not nine percent, and it's okay to just sort of accept a somewhat higher benchmark inflation rate.
Yes, because if you look at it at the shelter issue really is very important. The owner's equivalent grant your shelter is still I'm not sure it's only this one. It's a four point four percent. Your review was four point six and so it's coming down, but it's coming down so slowly, but we know it's going to keep coming down. So always we know it's eventually, this is the core of the inflation rates eventually going to come down from three percent to two percent. We know that's
going to happen. Didn't happen this month, and there's no reason for the Fed to to move quickly, particularly given all the policy uncertainty.
David, appreciate your time as always. David Kenlly, the of JP Morgan Asset Management, joining us now to extend the conversation. Mohammed al Aaron of Queen's College, Cambridge on the latest inflation data with Equity's lower and bond yo hire Muhammed. First question to use, sir, just how high is the hurdle to hike interest rates at the federal serve? And does this conversation get started after a print like that?
So I think it will get started in certain segments of the market, it will not get started within the Fed. And you know what, You've heard me say this over and over again, John, if their inflation target is truly two percent, then we would be talking about hikes. We wouldn't be talking about postponing cuts. No, there's three things that are very clear from these numbers. Taking that face value, I'm going to come back to the face value qualification.
One day, are hotter than what the FED seems to expect giving it signals, and they're getting hotter second, and this is where I differ with David a little bit. They are consistent with the whole host of other data points. This is not some outlayer. They are consistent with what we've seen in other places. And also they are consistent with the hypothesis that companies and other segments of the population are much more sensitive now to actual and expect.
The cost increases.
This is not a repeat of twenty twenty one, where you have an unanticipated inflation and people don't adjust quickly.
This is a different economy.
So Mohammedan, you're suggesting that this economy is more inflation prone now than it was several years ago, more.
Inflation sensitive now than it was before.
But well, agree with David, And this is a conversation that the FED doesn't want to have, is that it's okay to have slightly higher inflation for now. You don't want to pull their work from under us exceptionalism. There's
already a lot of uncertainty in the environment. Finally, John, the face value qualification was important because not only, as Mike pointed out, do we have the annual updates to all sorts of measuring things, but we also have the impact of the wildfire, and we simply don't know what the net net effect is. But at face value, this is certainly not good use for the Fed and the bond market, and.
The equity market is reacting accordingly.
Mohammed, there are two aspects to this.
On one hand, you can say this truly is a more inflation prone market, and especially with companies more able and willing like Coca Cola to pass along price increases, you could see a spike upward, so you should respond as a federal reserve to.
Tamp down that inflationary pressure.
On the other hand, you're saying that the Fed should be patient because three percent inflation might be okay as long as it keeps going downward.
Which is it? What is it appropriate to respond?
So it goes back to two issues, one that Powell is finally willing to talk about and the second one that he doesn't want to talk about.
The first one is what is the neutral rate? And he said yesterday that the neutral rate had meaningfully moved higher.
The other one is what is the right inflation target, and that's the one he doesn't want to talk about. You know, my hope is that this FED will understand that if it could, and I understand why it couldn't, if we could talk about what is the right inflation target for an economy going to massive structural change, it would not be so obsessed with two percent.
It would be flexible, It would target a range. Look, Lisa, it can be both.
It can be that you should tolerate slightly hotter inflation prints, assuming that expectations remain relatively stable, and then you should promise us.
Two percent down the road. But please don't target two percent for anytime soon.
Mohamed, I'm struggling with the idea that the average inflation might be three percent, but Enory's eggs are fifteen percent higher. Or you know, you go to get to fly to a popular route and suddenly it's twenty percent higher. That there are select pockets of inflation where companies see they have the ability to kick up prices in a way that maybe they weren't at a time five years ago
when this was a less inflation prone market. Does that raise concerns about longer term how much this could affect consumer confidence, especially at the lower end of the consumer scale.
So I think there's two things.
Eggs is, like David said, that is a supply shop, very different from higher prices for something where the demand is very high and the supply is an elastic So you know, these two things are happening, but they're economically very different in terms of attributes. And that's the reality of an average inflation rate is you have things going
up very high and things going very low. The key thing to remember, at least what I look at, is the bet that the FED and others we're making is that service inflation would come down fast enough to upset goods inflation.
That is no longer going down, no longer going negative. Now what we're seeing is goods.
Inflation is starting to pick up, and service inflation hasn't come down fast enough. And I think that is a nature of the economy that we're functioning in right now.
If that's the nature of where we are right now, was it an error, a policy error for the FED to cut one hundred basis points.
And I believe that this FED has no strategic anchoring.
It is a ridiculous sequence that we've had in July there's no need for a cut. In September there's need for a jumble cut of fifty basis points, and not much has changed in between. Then we come to the next two and we are recalibrating, meaning we're getting down to the twenty five regular twenty five. Now suddenly there's a huge discussion. Are we skipping? Are we pausing? There is no meaningful forward policy guidance coming from this FED, and that is the mistake, that is the big, big mistake,
is that they are just incapable. It seems certainly unwilling, but but it seems incapable of taking a strategic view of where the economy is going. They have been so burned by their huge mistake in twenty twenty one, where they did take a strategic view, but they took the wrong strategy view, that they don't want to take any strategy view. So look for the FED policy not to act as an anchor for this economy, but to fuel
volatility further. And I think that is the basic problem we have right now with this fetter reserve.
Muhammad though, is this the Fed's fault in terms of what's going on right now? Or is it just because they're dealing with a tremendous amount of uncertainty extent of clarity on some big policy issues in Washington.
Well, what I just said predated the great uncertainty in Washington. It predated it. So the FED has a problem. But you would hope that when you would look around and companies look around about in this uncertain world, that they at least think that there's one bit that provides the anchor.
And the FED is not doing that.
So whatever volatility is in the system right now, the FED will amplify it. And that's not what it should be doing, and that's not what forward politic cadence is all about. But if you are excessively data dependent, you will amplify it.
Mohammed Adam Posen the Peterson Institute thinks the next move is a hike. Tilson Slock Apollo has made the argument on this program a number of times. Things potentially the next move is a hike. When you think about the next move and you know what the next question is going to be, is the next move still a cup or is it a hike?
If they believe in that two percent inflation target, the next move would.
Be a hike.
I think they will tolerate high inflation without telling us they're doing so, they're just going to keep on promising us that everything's going to be fine. And I think that we are going to be pausing. The pause button is going to be on a lot longer than what the market has been expecting.
Do you think that should be a feature of today's conversation of day two on Capitol Hill in front of the House Financial Services Committee? Is this committee tacitly accepting a higher inflation rate, an inflation rate that they shouldn't be targeting.
This committee should be having a very detailed talk about monetary policy, and it should be talking about the different scenarios that are facing the economy right now and what is the role of monetary policy.
That is what it should it should do. But you know, depending on your.
Sports chair, pal is in the game of either sidelining difficult question or punting on difficult questions, or ducking and weaving on deficult questions. He doesn't want to make news. He already made some news yesterday that I don't think he was comfortable making. So even if you get the questions, you're not going to get the answers.
Mohammed putting together what you're saying.
If this FED does want to tolerate a higher inflation rate, is this neutral? Not necessarily any distance at all from neutral.
So you've heard me say this again, and that's because I focus on the structural element of this economy.
We are very near neutral. We may be at neutral already.
The economy has fundamentally changed from what it was in the last decade, and that's because the supply side has fundamentally changed.
So yes, I've been saying this for a while.
Okay, we are very close, if not at neutral. And and I heard Chair Powi yesterday say that for the first time he said this, that the neutral rate has moved out meaningfully since.
In the last few years.
Somehowm it just to find a question then without of mind, And that has implications for the front end of the curve. What would this mean from your perspective for the bond market going forward from here? The shape of the curve, how things look compared to how they looked a decade ago.
So the front end and up to about you know, four or five years is easier for me than the long end. And it's easier for me because I think the market is going to it's going to move to the expectation that we're not going to get a cut for quite a while.
The long end, John, is really hard.
You have a massive tug of war right now in the Big five the irregulation fiscal both both on the expenditure sign the revenue side, trade, immigration, and watch the fifth and I'm missing a fifth one I think of it in a minute. So those Big five drawn are not clear how they're going to net out yet, and that's going to impact the long end in a meaningful fashion.
Muhammed, this was a clinic, it always is. We appreciate your time, sir. Thank you. Mohammed Al Aaron There of Queen's College, Cambridge on the latest inflation print. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern.
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