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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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. Some FED watchers looking for two governors to descend for the first time since nineteen ninety three, the former Send Lewis FED President Jim Bullard telling us previously, I think that the Fed could resume its normalization process. September would be a natural focal point for that. Jim joined us now for more. Jim, welcome back, sir. Just how compelling is the case for lower interest rates today?
I think the policy rates a little bit high for the current environment, and so I do think that the Committee could set up a September rate cut at this meaning, I think the risk for the chair is probably that that gets priced in even more than it already is, and he can't preserve enough optionality going into September. But I'm sure he'll do a good job on that part. So I think the committee's in pretty good shape here.
Do you think that it's good to see descent? That that's actually healthy and important right now?
I've always felt that sents show in some circumstances, they just show that there's a lively debate and that various points of view of being heard, and that can be helpful to the chair.
I think sometimes you get this, we get if that gets criticized for all sides.
And sometimes when it's always unanimous, you get criticized for that as well. Too much group think, So I think dessense can be valuable.
A lot of people are watching today's meeting and press conference for any clues of what type of pressure President Trump seems to be exerting, at least psychologically.
On the FED.
I wonder how much of a cloud you think that is. As a former FED member, I know you're probably going to say it doesn't factor into their mentality, et cetera, et cetera.
At the same time, the rest.
Of the market is perceiving it that way and is taking everything that happens on the FMC as Oh, this person is running to be the next FED chair. Oh this person is just trying to show their defiance to the President's discussion.
Yeah, I don't know.
I don't think the committee pays too much attention. There's a lot of data, a lot of analysis. That's the way the meeting works. It's a big formal meeting, and you know, I think every member takes their role extremely seriously, and if they feel like the data is pointing up in one direction or another, they make the callumn that's that. So I don't really think the theater effects that part of the discussion.
So, Jim, let's talk about the data and where we are. By the time we get to September seventeenth, two more CPI reports, two more payrolls reports. And there's an assumption right now from some that they've got to wait, and they've got to wait because they need to see the tariff pass through to consumers. How much will we see and once they've seen it, to what degree will it hang around, to what degree will it actually be transitory
or will it be sticky? Jim's two CPI reports enough to drain any conclusions on that.
They're going to want to see that data going into September, and that'll be the that'll carry the day here today. I think they'll, you know, who knows, you can always get surprised by the day. You've also got jobs reports in there, so they'll want to see that before they make a decision, and that'll be the basic idea. But I think the notion is that they've already put the.
Recalibration policy on pause.
For the first six months of twenty twenty five, waiting to see what the policy would be and whether it we'd feed through to inflation.
They don't really get anything out.
Of that, and that's why the policy rate's sitting a little bit high compared to inflation readings and unemployment readings right now.
And James, do you think that, Jim, do you think that it's fair to think that next year you're going to see some pretty significant rate cuts, not just because of the new FED chair, but because you think it could be appropriate based on potentially ongoing disinflation.
I think it is going to be appropriate.
And I think if they make two rate cuts this year September and December, and then they follow that up in the first half of twenty twenty six, they would start to get to the neutral rate. What the Committee thinks the neutral rate is maybe three percent or three in a quarter or somewhere in there, and that would be the exact rate that you should be at if inflation continues to decline toward two SAM and unemployment continues to be in the low four percent range.
Hey, Jim, I appreciate you as always, Sair the former San Lewis FED President Jim pull that wank in on the decision. Later on the soufternoon, Jeb Amata of Newberger Berman, writing macroeconomic policy supports a self lending scenario as inflationary pressures continue to selfen, we believe the FED has more flexibility to ease policy. Jude John just now for more Chack and Mornic goodcrding how much flexibility does a shaman have?
Later on the southnoon, Well, he's got a couple of his team members who are dissenting, so that that puts I think him in a little bit more of an awkward spot. But I think the FED has been in a process to normalize rates over the course of the last period of time, and it got derailed a bit by, of course, the tariff announcement, So I think there's still a movement toward toward that normalization process, which we think
they're going to be back on track on. We think think there'll probably be a couple of cuts this year, not today, of course, but probably in September and later in the year, reflecting the fact that inflation, while edging up a bit, has still been under control, and the labor market, while again solid, still showing some signs of weakening. The number coming in Friday is going to be one of the lower numbers we've had over the course of the last number of months.
How much just a bullishness in risk asset's predicated on this idea that there will be two rate cuts from the Federal Reserve in twenty twenty five.
I don't know that broad market bullishness has got to be driven by ray cuts. I think you have within the internals if you think about small caps, So small caps I think do need to see a movement toward lower rates and rate cuts, and that historically has been sort of a catalyst for small caps to rally. But I think what we've seen over the last number of months is the hard data has held up well broadly.
We've gotten some good news on taris off, of course the panicky early April announcements, and I think the markets reacted to that, and many businesses are are responding quite dynamically to this issue of tariffs in maintaining margins. We're going to see a little bit of margin pressure in this second quarter.
The margins are still at pretty high.
Levels, remarkably because tariff's been in place for a number of months now.
So it raises the question about earlier this year, how so many people wrote off the United States as being the biggest loser from some of these tariffs, and suddenly people are coming around to this idea that maybe that was too fast. Do you think that sort of the FED is a side show to really the crux of who is going to bear the brunt of it? In our US company is showing in all of these earnings reports time and again they're doing just fine, better in fact than those in Europe.
I don't think the Fed's ever a side show, but as it relates to it might be today the notion of tariffs.
You have three ways again go right.
You either put price increases to customers and they eat it. You put a little you know, you eat it as a company, and pressure of margins or suppliers eat it. So it probably ends up being in combination that we've seen inflation tick up a little bit. Signs of that right in the last inflation report, particularly around things like
apparel and home furnishings. You see the margin pressure I referenced, and then you know, we don't really have transparency to supplier income statements per se, but you know there's probably some pressure going on there as well. And remember goods are only a portion of the inflation CPI number, it's not the full number. And like you referenced just before, our right services have been softer than expected.
I think Lisa was attempting to get you to defend your rowight in European ecquencies. So let's be more direct the broadening defendquacy exact.
We've moved.
We've moved early in the year to a theme of broadening out. Right US certainly had you know, it was the major driver of markets over the course the last number of years, but we did think there'd be a broadening out, and that broadening out would include small caps value non US right we're very bullish on Japan.
Europe.
We think with fiscal stimulus, particularly out of Germany, I think is going to show improvement and the relative valuations we're attractive. So we we upgraded our developed markets outside the US, which would include of course Europe in.
Japan, so we're sticking with that. We didn't.
We're not underweight US because US still has so many competitive strengths, particularly the tech sector.
If you look at this.
Second quarter earnings S and P five hundred earnings, X tech will be flat text up seventeen percent. Yeah, but what's zup blends to up seven whatever the number.
Well, what's Europe's tech? It's not weight loss drugs anymore. Artist.
Europe is a more cyclical economy.
So if you get higher nominal growth rate spurred by they have lower rates, you get some fiscal stimulus, the cyclical nature of Europe's economy will improve, and you have the relative value differential from evaluation to the point to me, it's not necessarily a long term, secular or strategic allocation per se. It was more of I don't want to call it a trade, but it was more intermediate term.
Opportunity, which is one thing that we've seen with respect to the dollar, and sudden strengthening on the back of some of the announcement that we've heard with the EU and European Union and how the teriff agreement kind of got tied, and suddenly this realization maybe there'll be a little pain in Europe. And I just wonder if you see a cheapening in European assets at this point, is that a buying opportunity or is that a sign that this trade is over?
Well, I think I think it represents a buying opportunity. You know, we're not we're not looking for opportunities that last a month or two right in the context of allocating into clients, so we're looking for something that has some legs to it.
We still we think there.
I mean, the amount of fiscal stimulus that's going to go into the ground in Germany is massive relative to the size of that economy, in the European economy, we haven't seen that in a long long time, So I think that does have some legs to it in terms
of the opportunity. The dollar took a very significant pullback, so that's rare to see that that, you know, move that fast, that that much We still think the dollar will grind lower over time, but because US hard data is held up and rates have probably stayed up higher a little longer than expected, the dollar has come back.
Are you expending any any adverse developments in bone markets in Europe that might hold back that I could story?
We do?
You worry a bit about that? Right?
You know, if you look at the fiscal situations of different countries in Europe, While Germany has lots of room to stimulate, there are other countries in the region that don't you know, from in terms of what their local bond markets are. So we're watching that closely in terms of the spreads in whether it's you know, Italian bonds versus buns or versus treasuries.
Or what have you. But I think they have enough room right now to stimulate.
So how do you play the European story? At the moment, someone might look at this situation and say, okay, up on etf this tracks the eurostocks fifty. Is that the way to do it? Or is there a better way to do this?
Well, you were an active manager, so we have strategies that manage you know, European stocks or what have you. So we're looking at high quality global companies that happen to be domiciled in Europe, that have flexibility. We'll get some benefit from a local economy being stimulated, but you know, we're still looking for quality companies that have global.
Reach away of course Japan and Europe. Not on India. This just dropping from the President of the United States just moments ago. India will be paying a tariff of twenty five percent. This just dropping from the President just moments ago.
A huge disappointment from Narentromodi, given the fact that they were looking for something closer to that nineteen percent that we saw from Thailand.
It raises this issue.
That we were talking about earlier. What were the main sticking points that ended up with a tariff agreement that was substantially higher than the region expected And frankly something that a lot of retailers in particular are going to have to factor in if they move their manufacturing there and produced a lot of textiles in particular.
This from the President, the statement just dropping just moments ago. Remember, while India is our friend, we have over the years done relatively little business with them because their tariffs are far too high. The President goes on to say, among the highest in the world, and they have the most strenuous and obnoxious non monetary trade barriers of any country. A twenty five percent tariff for India.
Yeah.
He also went on to mention Russia and saying that India has always bought a vast majority of their military equipment from Russia. They also are some big energy buyers from Russia. Suddenly, this goes back to what we were talking about earlier. This is a key negotiating tool, the geopolitical positioning, what the relationship is with different countries in Russia, how much they are going to connect with China. That is all part of the tariff negotiation in a very different.
Way than it but then previous years. That's the leasis on trade. This morning, Joey's got to see you. Thanks for dropping by. Thank you, Sir Joe Marta of Newberger, Burma. To extend the conversation, Haidi Krebo Redika of the Council on FIGN Relations, Heidi, welcome to the program. I just want to pick up on two lines that came from the Treasury Secretary scombson we don't want to decouple, we
just need to d risk. Is that the more diplomatic way of saying, we want to decouple, but we're not in a position too until we d risk.
I think you hit the nail on the head. I mean decoupling is actually I'm not so sure that that's the best final objective anyway. I mean, the de risking is really because we have vulnerabilities where we have put all our eggs in one basket, particularly when it comes to Rare Earth's Rare Earth magnets and the related technology and some critical minerals, some other products as well, But China really dominates that space. And we're trying to de risk in the US, but it's in our allies as well,
but it's very, very very difficult. China has the choke hold on those particular commodities, and I think they're going to continue to use them whether or not USTR Career ever wants to talk about them ever again or not.
How much Heidi, has the US gotten more leverage when it comes to getting some sort of coalition of willing coalition of trade partners to work on tamping down on the threats that some of the perceive is coming from China right now? Do you think that they are in a stronger position if there is yet another ninety day delay.
So first I think as to the ninety day delay, if it if it is what happens, I think that is the very best option right now. And the coalition of the willing is, you know, to look at both
the offense and defense. The offense meaning you want to be able to to make the investments in, you know, in all of the areas collectively that protect economic security from weaponization from China, the you know, the the You also want to make sure that if you're going to rattle the saber of Russian secondary tariffs or secondary sanctions, however you want to categorize them, you know that you have to be prepared if you impose those on China
that they're probably going to, you know, reinstate some of those export control restrictions because that is literally their chow point right now.
How much do you get a sense that that has been the crux of a lot of the discussions, particularly with the European Union, but also Japan and certainly is Southeast Asia, which has been a conduit for a lot of Chinese goods into the United States through those nations. How much has that been one of the main discussion points and part of the negotiations versus just sort of an ancillary part oh.
I think critical minerals and mirrors have been key the all the other issues that that Secretary besn't mentioned on over capacity that affects everybody. You know, you have both developed and developing countries that are feeling the brunt of the the auto you know, the the you know, excuse the use of tsunami on a daylight today, but the sumant tsunami of of of Chinese auto exports, flooding, flooding
markets everywhere from the EU to UH to Brazil. But I think, you know, the one caveat is that because we have proven ourselves, unfortunately to be the most trustworthy trading partner, and one of Trump's big objectives is really to upend both the trading and the security system the architecture. I think there's not a lot of trust out there, and one thing that you really need when you're dealing with the coalition and building a coalition is you need
trusted partners. So we need to make sure that we don't lose that trust along the way in order to be able to implement collectively some of the things that we want to do on economic coercion, Hadi.
It makes me think of Canada, supposedly a North American friend of the United States of America, left out in the cold. And I've been surprised. I know you are too, that the two key issues really that are left on the table put China to one side. It's Mexico and it's Canada, and we're not hearing enough. I don't think about what's about to happen. What do you think is about to happen?
So you know, you know, President Trump has been very dismissive of any deal being reached with Canada, and we traded more than nine billion in goods and services last year with Canada. They are the country to our north. It's not a small player. There are closest partner in
addressing many things, including our critical mineral challenge. We've you know, a lot of the investments that have been really for shared economic security have been together with Canada because we are so complementary in terms of what we can both extract and refine and produce together for on the critical minerals front. So I think, you know, I'm very worried about the fact that the Canada has not been more front and center in particular, Mexico has. I think it
comes with a different set of issues. They're connected, But you know, I think Canada in particular is one that I am truly worried about.
Honey.
Do you think that's because they just haven't focused on it or do you think that's just the natural consequence of the fact that we have USMCA and we can renego shad it next year. Which one do you think it is?
So, I mean, it's a good question. The you know, we do have the ability and obviously are going to renegotiate U s m c A. But at the same time, you know, the the feeling that that President Trump really likes to have the the like all the cards to play, and feels like Canada has very few cards to play
because they haven't diversified. They're they're so tied to the US economy and they're really trying to figure out how quickly they can diversify their energy exports, their critical mineral exports. They have very you know, a very comprehensive political backing for d risking from the United States right now. I think that's unhealthy. But I do also think that that the that the President is going to use whatever leverage
he has to strike the best deal he can. And but I do, I do, I do worry that he is probably more likely to be conducive to working with Mexico than he will be with Canada, and I just I'm worried about that.
Interesting, Heidi, thank you, appreciate your time. As always, Heidi Krebi Redica of the Council on Farm Relations for the Asum of New Century Advisor is writing, the possibility of two descents from Governess Waller and Bowman is notable in terms of Fed history, But policy moves on agreement. Claudia joints us Nophimore, Claudia, welcome to the program. What kind of agreement can we make today at the Federal Reserve? What can we agree on?
I think it'll be really interesting to see if the Committee is getting more comfortable having more conviction in their forecast that inflation may rise this year, but then you know, come back down. So I think a lot of this discussion on what are the risks of the persistently high inflation. We know from Governor Chris Waller that he sees those risks as very low, and that's why he's in favor of a cut, But is the committee moving in that direction of, you know, moderating those risks or is it
real still? Are they still very much demanding more data to get comfortable with the idea of rate cut.
Claudia, what do you think?
And it matters a lot what you think because the som roll is often pointed to. It is we certainly up pointed too at the end of last year for the hundred basis points of rate cuts in the second half. Do you see the same cracks that Chris Waller as seeing.
I don't see this like I can see the cracks that he's pointing to. Maybe don't draw as strong an imference as he does. I do think it's time for the Fed to really be pivoting to why are you waiting? You know, what are you looking for? And what do you need to see with inflation?
Right?
Like?
Focus on that as opposed to the well we can wait. We saw a lot of discussion at the last press conference about well, the economy is solid, the labor market is solid, so we can wait and get more data. And I think there are sufficient signs of weakening and some of the softening the risk and the labor market. They've been with us for a while, Like, these are not new. The low hiring rate paired with the low layoff rate, this is not new, and yet we do
see signs of demand so softening. We saw some of this looking at first half GDP numbers and hiring concentrate, like there are just a lot of signs that this is not a labor market that will hold up, you know, indefinitely, and so the FED needs to back off some using that as a safety blanket in terms of waiting for
more data and recognize those risks are out there. We hear a lot about the risk to the inflation outlook, we should be hearing some more about the risk to the labor market outlook as well.
There have been a number of people who have speculated that Fed char Ja Bowell might take an even more hawkish approach to policy, might signal that the labor economy is in a good place and that they're balanced roughly in their mandates in order to avoid accusations of political interference that he's getting vulloid by President Trump. Do you ascribe to any of those ideas or do you think that that's a bit speculative.
The best way for the FED to stay out of the politics as much as it can is to put its head down part through the data be transparent, right, the data don't speak for themselves. We need to hear how is the FMC interpreting the data? What are they looking for? Like, that's the message. He needs to stick with it. They're not going to win. The FED will not win if it plays politics like that's just not the game that it is well suited for, nor should
it be doing it. So I think we should just get a lot more of their thinking and just lay it out there. That's part of the transparency. That's part of the accountability that comes with the FED being the ones that make the decisions about interest rates.
So Clodia, let's found the data. I just wonder if two CPI reports is enough between now in September to draw conclusions about how much tariff pastory will get and how much of that tariff past Thory is going to stick around.
Two more CPI prints could give us information both on the tariff past through I mean the terifs working they were through the comment. This is going to take time and we could see you know, ever rising tariff effects as we go into the to the September meetings, So I mean they're gonna have to have a real explanation of how you would cut into a rising inflation environment. But we have also seen, you know, months of the outside of the tariffs, look at the housing services, look
at the non housing services. We've had some really encouraging numbers. A few more months of that, could you know, really strengthen the case that underlying inflation set those tariffs aside, underlying inflation.
Is really moving back down to target and that that is a really important piece and two more months of data in that direction can can help bolster the case for rate cut based on the inflation risks are less.
Do you think they're in a position today and through the summer to keep on saying the labor market is solid, so we have the luxury of whiting. Can they write that in the statement once again this afternoon?
They can write whatever they want to write in the statement. I think it would be misguided. I mean, we again, we have seen various pieces of information about the labor market that point to some weakening. And also if you are running an economy with below trend growth and that's you know, focusing on consumer spending, business, fixed investment kind
of the core of it. You know, that weakness does eventually show up in the labor market and the FED itself it's baseline forecast so shows some weakening in the labor market this year. So it seems completely appropriate to at least be pointing to the risk, pointing to that outlook.
I mean, that's, you know, a very reasonable thing to be pointed out, and I think they'll be a little flat footed if they just keep hanging on to the labor market is doing just fine, economic activities doing just fine, because that's really I think that's a pretty one sided reading of the.
Data right now.
We'll see if we get that change. It's if you have Mason time, Claudia. I appreciate it as olwise, Clodia, sound that New Century advises. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV week wrings 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
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