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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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.
Begin this hour with stocks rising and bond heels falling after Kevin Worsh made it clear the Central Bank will not tolerate high inflation. Ed yourd any of your Denny research, calling Worsh a quote hawk in Dove's clothing, writing we thought he was a dove who favored lowering the federal funds rate. Instead, he hammered home a strict orthodox message on inflation with a strong commitment to price stability and.
Joins us now for more at great to see. Thank you for being here.
So is this more of an Alan Greenspan rather than say and Alan Burns.
I really can't answer that because I have a test force working on that. We all it's very green span. I mean, it's you know, not a lot of information, a lot of ambiguity, and you know, occasionally some surprises. So he started right off the bat with the surprise. You know, it's kind of like he had an interview with the President Trump and yes, told him everything that he wanted. Yes, we're going to lower interest rates, SAI
is created, creating productivity. Then as soon as he got the job, it's like the old worsh concerned about price stability. He mentioned price stability over and over again. Not only that, but he pretty much committed to two percent. He didn't finagel that too much at all.
Mike readif RBC said, by their account, inflation was mentioned by Kevin Walsh nineteen times. The character four times where he mentioned the labor market is this, and the labor market is looking right exactly. There is no mention mandate or a sense that maybe there's some weakness there in conflict in the dual mandate.
Is this all talk and not action?
Right?
I Mean, if you.
Were skeptical, you would say this is somebody who wants to job on the market. You're seeing the move that he wanted in the flattening of the yield curve, and then he won't necessarily.
I think he's hoping that he'll be lucky because so far, so good. I mean, the price of oils coming down, as you mentioned, the price of gasolines coming down. We are going to see the headline inflation used coming down substantially. And if he's lucky and the recent inflation surge doesn't spread into the rest of the inflation numbers, then he may very well just kind of sit back and let that all happen, and then he'll say, well, look, things
are going in the right direction. We don't have to do anything, and at the same time signal that down the road, maybe the productivity story will come back as a reason to lower rates, but right now it may be do nothing fed for a while.
What if we see a labor market does weaken, Now, what's his reactionary function going to be?
Well, he kind of locked himself in. I mean, you know, he didn't say very much except on price stability. He said that over and over again, and I think that if you get a weaker labor market, he's going to be called on. If he suddenly becomes very liberal, you know, in the mandate and said, well, people are getting hurt.
We've got to focus on the unemployment rate. He basically said that in order to have a healthy economy, in order to have a healthy labor market, you have to have a price stability, which, by the way, is deja vu all over again, because that's what Powell had been saying for quite some time.
Do you think he was the one that threw out the proposal of discussing a rate cut at the meeting just so he can, you know, when he has breakfast with the Treasury Secretary say, look I threw it out there and I was pushed back.
We don't know.
I mean, you know, it's a good conspiracy.
Theory, right, could work.
It makes sense. You know. You can go back to the President said, hey, I was the one who you know well, but he said he didn't vote on the dutlot, so you know, I don't know where he is on all that.
So when you take a look at some of the projections coming out of a number of different Wall Street houses, some have been raising their expectations for a rate hike this year. You saw that with Deutsche Bank saying that with less communication, they can be more nimble and rate hike rates sooner, even City Group, which has been on the more dubbish side pushing back the potential for a rate cut. If there are rate hikes, does that curtail the Roaring twenty twenties and some of the enthusiasm.
That we're seeing in equities?
Yes your story, yeah, so does it does affect?
And last time I was here, I think John mentioned that we were six years into the Roaring twenty twenties. If you just counted, we're actually seven years into the Roaring twenty twenties. And so if I get this year right, I only have three more to go. And every year there's you know, it's a roller coaster ride. You get all sorts of things to worry about. Maybe that's the
next worry is something we're worrying that. You know, if the FED actually has to raise interest rates, then I won't that spoiled the Roaring twenty twenties the party we're in, And I don't think so. I think I think the economy has demonstrated its resilience. People have been kind of getting all bent out of shape about the bond yld being back up. It's back to four and a hare percent, that's kind of normal. I think the bondial is normalized.
I think FED policy is normalized. I mean, I think, you know, worsh can just kind of leave things alone here for a while because the economy is performing just fine.
Those are two different things, though, leaving it alone versus hiking rates two different things, and understandably people are watching what he does, not what he actually says. At the same time, if you do think about hiking two times this year, which even Bob Michael of JPMorgan was talking about yesterday, how much does that in fact look potentially some of what we're saying.
Look, when the apparel numbers came out real strong, we kind of reiterate at our position that there was not going to be any rate cuts this year and that the FED would probably switch to a tightening bias at this meeting, which is exactly what happened. They didn't go from easy an easy bias in April to a neutral bias. They went right to a tightening bias. And so we got that right. And but the thing that really surprised
me is how hawkish that a worsh came across. If the FED were in a position where they had to raise rates. It'd be a quarter fifty basis points. It wouldn't be a big deal in my humble opinion, and the bond market might actually rally on that. Back in twenty twenty four, then the fedal overer the Fed funds right by one hundred basis points. I said, you know, I think you're making a mistake here because the economy is resilient and you haven't gotten down to two percent.
And the bond market agreed with me, my bond vigilanti friends. The bond yal went up one hundred basis points. And even last year they cut sertenty five basis points on the Fed funds rate in the bond yield, where is it any four and a half percent? So they haven't accomplished anything. So lowering rates hasn't helped, but they may conclude. Look, the thing that really came across to me is that,
and he said it. Wor said, look, we haven't we haven't gotten down to our two percent inflation target in over five years. And he said he committed the committee to get down to get inflation down to two percent, So you know, how are you going to do that without raising interest rates. So I think the market's got it right now when we thought that there would be a tightening bias and there could be an increase. If the FED really wants to get it down to two percent, that may be necessary.
But what about the FED policy on the housing market, because he said that's one area he does think it's restrictive.
Well, at the same time he's talking about reducing the balance sheet and particularly focusing on fed's been talking for a while about reducing the mortgage backed securities down to zero. That's not going to help, uh, the housing market. I don't think they've got an answer for that, you know. I mean, it's it's a shotgun, it's not a rifle. They there, there's and there's only so much the FED
can do. I'm a believer that, you know, if the FED is not in our face as much as it was when Palell was around, I mean, I really don't mind less less communication. I finally finally had been calling in the Federal Open Mouth Committee.
Are you on the task force? As this is my first question, Eroyd, are you on a task force? Which one stay with us?
Mulple Impex surviance coming up after this.
My whole life is all about deals.
That's all I if it did is make deals.
If they don't honor the agreements, who will probably go back to bombing them.
Here's the latest, President Donald Trump signing an interim peace deal with Iran last night. Norman rule of csis writing the reported US or on deal is best understood as a high value pause in the current military phase of the conflict, not a durable strategic settlement. The deal buys time, it does not by trust. Norman joins us now from more Norman, wonderful to get your perspective.
Can you just elaborate on that.
Why do you think that this fourteen point deal is simply a placeholder and not necessarily a roadmap for what's to come?
Good morning. The deal certainly has drawn a fair amount of criticism from both opponents and supporters of the administration for its language, but it provides a mechanism for the administration to transfer the process from a military conflict which had no longer provided options for a low cost way to restore access to the straight and to achieve its
previous goals, into a diplomatic process. Now, the diplomatic process may not offer any optimism for its success, but the diplomatic process immediately relieves pressure on the World Energy Mark and the world economies and sort of reshuffles the deck of options for the administration. Now, in terms of what the Iranians will get out of this, absolutely they will get some financial relief. But in fairness, the three hundred
billion dollar fund is described as a plan. There's absolutely no reason to believe that anyone in their right mind will donate money to this, given the fact that money will be hostage to Iran's policy future sanctions, and that Gulf states have been victims of Iranian attacks and are
devoting most of their investments to their own economies. And my last point that I would make on this is that this process itself is tenuous, and the President and the administration will need to improve early on that this process is narrow, it is a reversible and it is achieving something besides giving the Iranians additional liquidity Norman.
Given the fact that it is narrow, what happened to the president's own red lines that he's spoken about for years?
Well, his red lines that he mentioned again in the press conference yesterday will remain threefold. First, and ron cannot have a pathway to a nuclear weapon that remains part of this process, and indeed that's the primary effort of upcoming talks. Now we've talked about missiles, and his statement yesterday is that Ron can have a normal complement of
missiles that any country in the world might have. That's not an ICBM, that's not an intermediate range ballistic missiles, but that would be a defensive compliment that any country would have, and that's got to be worked out with its neighbors. And last day, Ron's got to do something about its militias that it can't have a process. The sense is that there's conversations that are going on on the side of the steel that will work that out.
But that's a complicated regional diplomatic issue that they don't want to put in the same basket as their initial discussions with the already very hard nuclear issues.
The vice president, he was making the rounds doing some interviews, as the reporter said that Ron's regen is quote a much different group of people for whom quote something has fundamentally transformed norm Do you see any evidence that this is really a new regime.
Well, they're a new generation. They were raised in a different world of post two thousand and three worldview, So certainly they have a different perspective. But there's no evidence whatsoever that they believe that Uron should not be a regional Hegemen, that they don't believe that they have a right to and a reason to run malicious such as Hezbollah and the who theis, and that they won't remain
a threat to their neighbors in the near term. But clearly there are conversations going on between the administration and some elements in the Iranian government that have given the administration reason to believe this may be the case. The trick is the administration needs to demonstrate somewhat early on in the process that this process is proving that is, that possibility may be realized.
Norm do you think that this realigns the US in the region. It seems like the Gulf nations are happy that the kinetic conflict will at least cease for now. At the same time, Israel is pretty upset because of their.
Goals have not been reached. Do you think this.
Aligns the US more closely with Gulf nations and further away from Israel.
Well, let's look at Israel's goals. Iran's nuclear program has been devastated. Iran's missile program has been severely damaged. Now at the same time, the regime remains in place. The militias are no more active than they were prior to this. The question I think for Israel is how long would that conflict continue? And there are people in Israel and the United States would like this conflict to continue, and
that's an ideological position. Now within the Gulf, they're paying the price for that conflict with the missile striking their population. There's no evidence the Gulf States as a group oppose the deal the President is put forward, and the United States is seen as the indispensable security partner of the GCC. It may not be sufficient to be the only partner, but it is the indispensable partner, and it leaves this conflict much closer to all of these of the GCC states.
Do you think that buying time means sixty days or do you think that buying time means till the end of the year.
Yes, I think the answer is it could be either, but it's going to depend upon events. And that's important because all it takes would be some sort of high casualty event. It might take place. God forbid in Lebanon, which remains a separate arena from this. Neither Israel nor the Lebanese has below or parties to this agreement, although
Lebanon is mentioned in the agreement. And some sort of event could take place during the discussions which could take these conversations out of joint and move this into a different sort of dynamic. But the administration is going to look for some way to show that the Iranians are moving in the right direction, and that will take time. Remember, nothing moves fast and talks with Iran no matter which
administration is dealing with him. And these issues are issues that every administration has spent years struggling to work with Iran. So it would be unfair to have to expect that the Trump administration could achieve any of this quickly.
Stay with US MULTILINPEX diviance.
Coming up off to this, Claudia sam of New Century Advisors, writing, I think it was a mistake by Warsh not to participate in the statement of economic projections Orshe is leaving huge blanks in his communication. The dot plots days may be numbered, but it was critical for credibility. Claudia joins US now for more Claudia, great to see you always love getting your perspective.
Let's start there. Why was it a mistake not to put a dot on that plot?
Right?
Well, I think this statement ended with a very forceful this committee will deliver price stability, which leads to a natural question of how are you going to do that?
Right?
But how are you going to deliver? And then summary of economic projections. It is not perfect. It's often misunderstood, but that is actually the exercise of the dot plot. It's actually each individual is like the FOMC there, what is the appropriate path for federal funds rate? What's the right monetary policy to get us to the dual mandate that price stability? You know, two percent is where all
those forecasts end in twenty twenty eight. That's because of they're working their way towards price stability and they adjust their federal funds rate to get there. So they're like putting together plans individually. And Kevin Worrish didn't participate in that exercise, and he didn't flesh out in the press conference his views of what a plan could be of how to get to that price stability.
And this is partly by design, right, I mean He talked about how he wanted the market to be one of the key metrics that they.
Do look at, and that the market.
He wants to have clarity, a focus on the data without trying to interpret how the FED would look at the data.
And then respond to the Fed's response to the And what do you make of that argument?
I think it's going to be a tough sell. And honestly, I can you know set aside. He doesn't want to talk about plans, he doesn't want to talk about the future. Okay, that's a debate to have about communication. But what was really striking is he didn't want to talk about the decision they made this week. I mean, they say they want price stability. They voted unanimously to hold rate steady. How is that in service of price stability?
Are you saying he didn't think they should have hiked this meeting?
No, I think they should have explained why they chose to hold rate steady. I agree with that decision, but it is it's like totally pointless that I agree with it. I want to hear what the FED chair thinks about it, what the committee thinks about it. Why was that the right decision? We know from the summary of economic projections that many of them think it's going to be appropriate to raise rates later. Many of them don't think it will be like, tell me about why you decided to
do what you did today. It's communications also about accountability, understanding who these people are that are making these big decisions. Don't They don't have a crystal ball, but I really do expect them to explain what they're doing right now and show their work.
Is it potentially that Kevin Morris views as a slippery slope to then be an individual that's up there on the podium giving forward guidance which he doesn't agree with.
Again, I don't, you know, don't tell me about the future, but I feel like there's some hiding behind the dargon. And I will say, first press conference right like this, you know, unevenness out of the gate, totally understandable. But I do think there's room for adjustment. And if you just want to talk about the decision that was made today, fine,
but do talk about that. And yes, I think it's important, you know, the slippery slope, okay, fine, but the service of accountability is important and we do need to I think, have some insights onto the discussions that they're having and how they're weighing the data and what they're thinking about, because honestly, right now, monetary policy is tough, right, so we should have some insights into the debate that they're having about those policies we did.
We're going to get more information about how they plan to communicate going forward. What's the potential consequence of this approach in markets?
Is it more volatility?
Is it just more uncertainty expressed in other ways? How do you filter this into being potentially pernicious in a way that maybe people don't understand.
Markets are going to fill in the blanks, right, They're going to try to come up with some views. That's going to mean we're going to have more uncertainty about what the Federal Reserve is going to do, which is going to lead to potentially more volatility and interest rates and investors are going to want to be compensated for that uncertainty, right, So it does come at a cost, and so you know, there's no free lunch here in
terms of how the Fed interacts with markets. And you know, I just we had a FED long ago that liked to surprise markets and didn't give a lot of information and the recent regime may not be perfect, but we moved away from that. The FED surprising markets for a lot of good reasons, and I think backtracking into that is could cause a lot of problems down the road.
We did learn something pretty crucial and this added to the hawkish message that the market took from the statement and frankly the statement of economic projections in particular, which is that nine of the eighteen members of the FBC saw the next move as a hike later this year. That's new and that's significant. How do you interpret that? Do you think that that's the appropriate stance?
Right?
And what those individuals are saying is not necessarily expect hikes, but they think that's appropriate. That is going to be necessary to get us back to price stability. That's a really important statement. Again, I think we here speeches will get this fleshed out with individuals thinking. But they also said in the statement that you know a big part of what's happening with inflation are supply shocks related to energy. The textbook is or in energy supply shocks, the FED
should look through it. The FED shouldn't be raising rates into that. So it's telling you something to have a group of FED officials say, you know what, we've had enough of these supply shocks. It's spread out over time. We need to be raising rates to rain this. And even if it goes against you know, the textbook response to one supply shock individually, that is a big shift in monitor policy. And it was a very divided committee. You had the other half not going down that route.
So there's a lot going on in the committee in these debates, and you know, it would be nice to understand a little bit more about what what the exact debates are. The dots are hard to read from the outside.
Speaking of the SEP though, And I know you think it was a mistake for Warsh not to participate. Do you think it's a signal that potentially the dot plock go away one day?
Oh?
It could, but the you know you need I think the tool, the communication is important. There may be a better way to do it, you know, I think it's it's very helpful to get a sense of, you know, how how candy members react to data, how they think about weighing inflation or unemployment. Maybe the dot plot is not the best way to do this. I think the committee in their Framework review. We're clear there are some
flaws with it, but nobody had a better idea. I think that's the thing is that, you know, you just deleting information. Deleting tools is not going to be very satisfying. Improving them is going to be awesome. So if Kevin Oworsh can lead to real improvements, I think that'd be something to be excited about. But that's going to take time, and this committee has really thought hard about the issue.
It's not simple to answer these questions. But we'll see where the task force and then the Committee how they weigh the ideas that the task force come up with.
Claudia, do you think that Jerome Powell will stay on for longer due to some of the scope of changes that are currently underway?
So I take Jerome Powell at his word that he is, you know, his decision to stay on is very much tied with these concerns about independence, concerns about the building, the review of the building renovation, and so when he feels like, you know, those issues have been resolved to his satisfaction, then I would expect him to go. I didn't see anything in this is like a protest vote of Kevin worsh I mean, it sounded like everyone on the committee is really trying to set the new chair up for success.
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