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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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. This from Axios in the last twenty four hours on Treasury Secretary Scott Beston, here's the quote. The Secretary isn't happy. He let the President know.
This is something that people keep talking about. His concern was that it was going to royal markets, it would be counterproductive, and they would actually make it more difficult for them to nominate someone who would be more Trump friendly to the Federal Reserve, which seems to be exactly what is happening.
Joining us nas Patrick mccanry, the former chat the House Financial Service Committee. Patrick, Welcome to the program. This pursuit of the feder Reserve, does it introduce some financial stability risk.
Clearly, and this is the reason why you're reporting. We just heard about Secretary Best and telling the present directly is displeasure. Look, the substance of the question here is whether or not the Chair of the Federal Reserve lined before Congress. And what I would tell you is, having experienced multiple dozens of testimonies by various FED chairs, the FED chair coming to Congress is the most brief person that appears before Congress period. The briefing book is really
the question here, not the FED chair. Was the briefing book appropriately written to answer members of Congress questions about the building project? I believe it was, And the amount of discipline the FED puts into ensuring they have an accurate briefing book for the FED, for any FED chair, and I think that's the missing nuance of this story.
But there is no nuance here.
The President's flooding the zone on economic issues to open the year. We're going to see a whole lot more of this in the coming weeks. But he's coming out guns of blazing with both progressive, populist and conservative and market shaking ideas all in one week.
Buttrick you spent a ton of time with the FED Chair. Actually, he has a ton of political capital on the Capitol. He spent a lot of time with Republicans and Democrats. Do you think that that's what we're seeing played out right now? All those meetings he has taken all the political capital he put into going into meeting senators and
meeting House members. When you hear senator like Kennedy saying we need this like we need a hole in the head, it sounds like they are upset with what the DOJ is doing.
Yes, and that is exactly what you're seeing.
Is this is why we got to listen and watch Bloomberg because this is the type of nuance you need to understand. The FED Chair puts an enormous amount of time each week into ensuring his relationships around Washington.
D C.
I'm the beneficiary of that with the last four FED Chairs in my service in Congress, and it means that if there's a jump ball, you give them the benefit of the doubt because you have a relationship with them and you know them.
That's the goal.
It doesn't always work, the outreach doesn't always work. Doesn't mean you have a good relationship, but at the very least. The FED chair and all FED chairs have put a lot of effort into ensuring they have relationships on the hill that they have they have a political capital in the tank so that when times get sideways or bad, they will they will defend you or be helpful to you.
And this is a moment where you see that Japal has put an enormous amount of equity that he's built up on the hill in both the House and Senate side.
Both with Republicans and Democrats.
Some market participants say that because of what is going on, he's going to stay on the Federal reserve in his governor's seat till twenty twenty eight. If he were to do that, do you think Republicans will actually view that move as him being basically not withholding up to the independence of the FED. Because it's very non traditional for a FED chair to do so well.
It's a term of office number one and number two a tradition that former chairs roll off the FED board. It's a good practice for former FED chairs to roll off the board. It allows their successor of the time and runway to get up to speed. But in this case, these are I would say this phase threats to counterbalance the president in the Department of Justices threats here, and that shows that JPAL is not powerless in the situation. The FAILL Reserve is not powerless in this situation. That's
one element of it. The other element of it is that is clearly saying to the White House, think of your nominees. Think of your nominees that have to go before Capitol Hill in this context. And I think this means that the President's first nominee to be share of the Fileral Reserve is going to have one heck of a time dealing with members of Congress given this context of duj intervention.
Stay with us. More Bloomberg surveillance coming up after this. So here's the latest. This morning. US productivity accelerating at its fastest paced than two years, fueling hopes for further AI driven gains. Norrian Rabini is the chairman of Rabini Macro associate to me, writes the following, The US remains at the center of a technology driven positive supply shock, the racist growth and lowest inflation over time. Norrian joint is now for more neurial Good morning, good to see you,
good seeing you. Fantastic to catch up with you, sir, you polish not just for a year ahead, but three to twenty thirty. Can you flash that out for us a little bit more?
Yes, I mean everybody's talking about AI, J and AI, but this is only one of the fifteen technology of the future.
They're allreated to AI.
But is AI semiconductor by medical research, quantum fusion, defence tech, fintech, new material science, you name it. And it's a race between US and China. I don't think it's a zero sum game. US is going to do well, China's going to do well. But my estimate is that the US potential growth is estimated today to be only one point eighty percent, could be as i's four percent by the end of the decade. And I've done a bit of
a bottom LP analysis. And by the way, the data productivity after the gfc I was a productivity between two thousand and nine and nineteen was only one percent. Since twenty nineteen, in spite of the deep during COVID, that's doubled to almost two percent one point nine in twenty twenty four was two point four percent, and the number
from Q three suggests was almost five percent. And by the way, the Atlanta Fed no cast for Q four GDPs today is five point one percent, probably too high, but given that one, given the job number, you'll have another high PRODUCTIVY growth.
Now I don't think the product.
Growth is four percent or five percent, but there's definitely an acceleration.
Jobs is key. Is a jobless growth so called jobless growth?
Yeah, well, it's a jobless growth. There are three stories.
One is that the GDP number are wrong and the GDP number are going to be revised.
Towards the weaker labor numbers.
The other one is that now the gp growth is strong and you're going to have some adjustment upward of the revised data. I think the third explanation is the more correct one. You can have strong GDP growth and having weak labor growth because we're having a productivity revolution.
If you're looking, for example, at the revenue real revenue per worker of SMP five hundred firms since the launch of CHAD GPT in November twenty twenty two, the average has increased for SMP five hundred firms by fifteen percent in the last three years, so it's almost five percent per year.
And if you look at the bisector, of.
Course, a lot of it is closer to twenty percent in tech and communications services, but it's very large also across the board. So both at the micro data level SMPFA and the firms and the macro one number, we're seeing a productive revolutionary in the numbers.
I'm kind of dealing with whiplash right now because we just had the Roy Metel CEO on defense sector in Europe booming for all the wrong reasons, this idea that he's more worried about the state of the world than ever before. And here doctor doom is coming on to tell us about how productivity boom is going to bring everything to a better place. Why are you less concerned about this overlay of rearmament and militarization that is also coming in tandem with its productivity boom.
Well, there are geopolitical risk in the world, and I'm aware of them. The question is whether I have a significant economic and market effect. Look at the biggest one, the two well day were between Easily and Iran last June. All prices went up a little bit, stock markets wobbled, and then given the Dran did not attack the old facility of the Gulfies or blocked the street of hormos. It went away, and that was a big, big deal Venezuela. You know, we can discuss that length, but the macro
and market implication are close to zero. It's just less than a million barrels a day. Russia Ukraine is a mess, but it's not going to have an impact on global market.
Economy the way it did in twenty twenty two.
So and US China, they are of course in a competitive strategic competition, but right now the trade tension for all the reasons we know, are some limited. So every time there is a geopoliga risk, people say stuff could happen, But so far those that we've seen in the last few decades, living aside the seventies with the shocks of Young Kippur and the a Islamic Revolution have not a market effect.
Do you think, though, that the United States is going to lose some of its luster as an investment haven in terms of the ongoing conflict between the US and traditional allies like Europe.
Have you seen anything like that or do you think that's overstaid in productivity really is.
Going to rule the rust.
You know, I've been saying since last year that tech trump stariffs because I think that the upside coming from tech is two hundred business points. Well, if you add all the impacts of the bad circulationary policies of Trump trade, the restrictions of migration, physical definity, trying to affect the independence of the FED, the rule of law, the maximum From an empedia point of view, it could be a
negative fifty business points downside to potential growth. So you have an upside of two hundred from technology, you have a downside of fifty. Is a ratio four to one, So tech Trump starff. So the stuff that is technology is first or everything else including geopolitics is second or older.
Is this why the AI trade the market pretty much shrugged off at independence yesterday as a serious concern.
You know, I believe that you know there is some fraudiness of course in the AI sector. But if you talk to all these companies, I think that they would all argue that we are maybe to worst five years away or best three years away from AGI. However you want to define it. Now, if we are achieving artificial general intelligence, the valuation of the say, not every of the mark seven is going to reach AGI, but maybe three or four will.
So the value of a firm that.
Is going to be having AGI is going to be five xs of its current value.
So that's the RaSE.
So if you think of it this way, yeah, there is some fraudings, there can be a correction. But with US growth at two percent for the last few decades, the average return on SMP five hundred was twelve percent including dividends of Nasdaq was sixteen percent, and was with two percent. Suppose growth is not two three, let alone three and a half four. American exceptionalism has to become even stronger, because if it was American exception it's with
one point eight percent road. With higher roads, it has to be better than that on average. Now there'll be winners and losers. But within the publicly traded firms, all the carn ecolomy, and among the startups, many of them are going to go bust. But if you're looking at the medium the horizon with higher growth, you've got to have higher returns. And we're seeing based on the data on real revenue growth for a segreef Avander firms, then most of those productivity grains are gotten by the firms.
Real wages are growing less than productivity. In liberal costs are falling. That's why there is my least, that's why people are worrying about affordability. But from a profitability point of view, the corporate sector is doing great.
Stay with us more Bloomberg surveillance coming up after this. Tifinitely wanting a pincoat joined us no more, Tifinitely welcome to the program. We'd love you if you on one. The data we just go up. But so the outlook for inflation, is there a better story to tell?
Yeah, well, I mean it sounds like it was a very mixed bag, as Mike McKee just described. You know, it seems like the softer than expected numbers came really from the good side, and even on the good side, it was it was very much a mixed picture. So you have TERRIORF related passed through that's happening at a very uneven paced depending on industries. So you had electronic products, you know, that appeared prices were down quite a bit,
but other things like apparel were up. So it's a pretty it looks like a pretty confusing number, quite frankly, you know. And on top of that, you did have government related distortions because of the shutdown, you know, so I think the FED will have to parse through this. You know, the way that we read the you know, the Tea leaves more recently is that after seventy five basis points of cuts that they've implemented in the second half of twenty twenty five, they're much closer to neutral.
They're on the higher end of their own range estimated range for neutral, and as a result of that, with the labor market stable, they they're pretty comfortable pausing here to just get more information and see what happens.
It was quite a confusing number is an evergreen statement for the past twelve months and probably the next twelve lots of data that we're about to get. Tiffany, I just wonder when do you think that we will get a number that is not confusing, that gives us a little bit more information, given the fact that this is a muddied economy with slow hires, slow fire, the idea that maybe you're getting disinflation, you're not getting a job's recovery, but at the same time you're getting growth.
Yeah, yeah, I mean so, I do think that you know, we we've heard from from various you know, companies and other industry sources that the holiday shopping season was was going to be a key season where they were trying to hold prices, you know, maybe even you know, elevate discounts in order to gain market share, and then more potential tariff passed through would be likely in the first part of next year. You know, we also had an inventory story. You had a bunch of stocking ahead of tariffs.
You know, companies were holding higher inventories, you know, and some of that was probably getting them through the holiday season. So I think it's really going to be a little bit of a test, you know, early next year, you know, to see how companies react to this new regime.
You know.
The other part of this, of course, is that we have a Supreme Court decision coming out that will have implications for tariffs. The administration has talked about rebuilding the current regime even if the Supreme Court strikes down you know, the tariffs on legal issues, so that adds are wrinkled to this, you know. And then the final thing that you know, we'll have material implications is that we do have offsetting fiscal stimulus that's coming. This will be one
of the biggest refund tax seasons in recent memories. So the economy overall doing strong, they're winners and losers under the surface, you know. And on top of that, we are getting some fiscal stimulus, so we'll have to see how inflation evolves amid all those factors. We think early next year, which sector of the really year, excuse me, which sector.
Of the economy, Tiffany, do you think is going to drive inflation given the fact that people don't think it's going to come from housing, and so far it hasn't really come from manufacturing.
Yeah, well so, I mean, I I think that the labor market as well, is not really a place that you're seeing inflationary pressures. It's really it's really the wealth effect right now that appears to be driving you know, elevated domestic demand, more resilient consumption than I think anyone
was expecting. You know, we're tracking consumption growth in the second half of the year, you know, two and a half percent, and that's in a time when you have real label real labor income growth at one So you're clearly getting a wealth effect here that's keeping demand elevated, you know, So that appears to be the source of demand and some potential inflationary pressures, you know, and just
how that comes out in the data. Again, it's a winners and losers economy, and that that should be reflected in the CPI as well. The housing side has been a relative loser here. It does look like to us that rents will moderate, you know, quite dramatically. We think they could be below a pre pandemic trend. But on the other side of that, you're you are still getting some of this TERRAF related pass through that's keeping core good is elevated. You know, that should peak in the
first part of this year and moderate there after. But but in the meantime we are we are still getting it.
Given this latest data, do you think it opens the door for the Fed maybe not to cut, but to be dubvish.
I mean, I think that the Fed will, you know, I think I think they certainly will, you know, they will, uh they they will say that inflation, you know it does has looked better than expected, and I think I think that's absolutely right, you know. So with that, you know, I think there's certainly reason for them to have an outlook of continued interest rate cuts towards their estimates of neutral.
So I think the conversation you know, from Federal Reserve officials is throughout this year is really going to shift from you know, where do we think neutral interest rate policy really is at this point? You know, I think post you know, after the teriff related price adjustments happened. You know, underlying inflation you know, does look pretty good here. And so when you have inflation that's getting close to target and a labor market that's stable, you know, you
really need to think about where is neutral policy. So that's the conversation we think they'll be having in twenty twenty six.
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. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app