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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the
Bloomberg Terminal and the Bloomberg Business app. Former Kansas City Fed President es the George, expecting the Fed to stay on hold right in the following, although inflation is not accelerating, it remained sticky and appropriately ties the Fed's hands on further rate adjustments. Esther joint us now for more and Esther for someone who used to lead the Jackson Hole Symposium.
I apologize for Lisa. Just ignore everything.
Lisa to Yes, I love it, I love the forum, and I love seeing you over there.
Okay, can I just say no, I'm not gonna part because I'm just going to say I love it, I love the experience, I love the land.
I'm a big proposent.
I'm staying longer so that I can go tour around and takes to carry at leisure.
Yes, there is convinced.
Yes, I thank you.
So let's start with that quote.
It's an important one.
Do you believe the labor market is strong enough to wait to see what happens with inflation?
Well we're going to find out, obviously with this week's report how the labor market is faring. We have seen the labor market first kind of come into better balance, if you will. The number of job openings has come down. We do hear anecdotally that businesses are hanging onto people in some cases. We'll see whether they're shutting people. What the labor force looks like itself with all of the
policy changes that have been going on there. So I think there's a lot to watch for in this particular report that could begin to give us a sense of how the labor market's doing.
You know, as you're just to build on the Jacksonville Symposium this year, it's talking about the changing nature of the labor market and how difficult it is to really measure it. To pair that with a number that we get on Thursday, there's this belief that it's going to be lower than many people have become accustomed to, but that still is healthy. How do we gauge a market and its health that is so influx, both in the policy perspective and the technological perspective.
Yeah, it's especially hardly so because I think we have come off a period that was I'm going to call it unusual to have an unemployment rate in the neighborhood of three and a half percent. And trying to diagnose what are the characteristics that are shaping that labor market is essential to how the FED really calibrates.
It's in.
Well's see you think about both sides of our calculation here that we have seen the bottom line number around who's in the workforce, we have seen the hiring numbers, and trying to really assess that in a time of great uncertainty is one of the fit's' biggest challenges.
There's a big debate right now on Wall Street in the push pull of is this market albeit not strong, not overly weak, just weakening, whether it's still healthy enough or whether it potentially is showing real cracks, like Neil Detta has pointed out of a renaissance macro, especially given the fact that the hiring rate is so low and people are staying on the unemployment rules for longer.
Do you have a take for that? Do you think that there should.
Be more emphasis placed in one thesis than the other.
So I don't think you can wait one or the other. We know that the dynamics in our economy today are pushing in both directions. We've seen an economy that's beginning to slow, it's being hit by policy changes that businesses are trying to digest here, and so I think you really have to not lock into a particular narrative here, but be watching how those dynamics are unfolding. Remember, today, the economy is still in forward motion. It is still
operating in a way that we see growth. Obviously, that can change with any particular data point or news announcement that we see. But I think the fundamentals here suggests that we shouldn't read too much into any particular narrative at this stage.
If aight pril second hadn't happened, I'd love to explore this with you if it hadn't happened. Given the downside surprises we've had from core CPI over the last I think four months and the uplift we've seen in continuing claims, which on the market is slightly concerning. Which you have voted for a rake cup based on that alone.
You know, Jonathan, I don't think so. And here's why. I view price stability as a prerequisite for sustained growth, for a healthy labor market in the long run, which is what the Fed's mandate really is is looking to the long run. And so I think when you see fiscal policy on the path that it's been on, it would be by itself. I think reason to be cautious right now in an environment where the FED is not
yet hit its inflation target. So I don't want to take anything away from the fact that we have made progress, but I would also want to be careful in that risk management scenario that you're not putting too much promise yet on a state of inflation that has yet to be achieved.
Speaking of risk management, if we get an announcement from the President in October, even earlier September, of who the next FED chair is going to be, who his pick is, well that blur the lines of the FED its independence and who's really leading the institution.
Well, I don't think so. As long as the current FED chair is in his seat, He's been very clear, and I think he has every incentive to be focused on policies that achieve the Fed's mandate. Does it complicate communication, does it create a lot of noise? Of course it could, But I think any FED chair is going to understand that their obligation to meeting their congressionally assigned mandate is really the priority. And in the end, you're doing that
on behalf of the American public. You're not serving just one part of the government.
As to always appreciate your take on things, the clinic has always as the George that the former Kansas City FED President Terry Hynes of Pangaea Policy, John, just now, Terry, in your opinion, is this real authentic resistance or just a little bit of theater before the ultimate inevitable lights of this weekend?
Good morning, John. I'm in the theater category, I think today and I enjoy theater, but it is theater.
They you know, you.
Political bodies always wrangle around for votes, and this is a situation where there are fifty three votes that absolutely matter and they're jockeying for the most they can get in a situation. But at the end of the day, here they come together, and if anything, the weekend saga with Senator Tillis is a pre foreshadows that because you've got a situation where you know, there was so much pressure put on him, he's decided not to run for reelection.
These guys all like their seats and they they're probably gonna want to stay.
Terry when it comes to who has the leverage right now when they're competing factions in the Senate, which group is it?
Fundamentally, I think it's the people that are kind of the harder core versus the softer they're for. I mean, obviously there's more of them number one, number two there. They're pushing as hard as they can to get this thing done. They will make whatever smaller accommodations they have to to the other fashion to get some things done. But don't look for the Senate to automatically morph into kind of flip over to the soft side wholesale.
When it comes to how this legislation, this process all comes together. What is going on with the bird rule? Do you think we're setting up a president now where any party can come in and basically set policy and extend that policy within the next ten years.
Oh, I think that's been going on for sixty years through the reconciliation process. Frankly, let me also say on the Bird rule. The Bird rule is as a Germanist rule, by which I mean, you know whether or not it should be, you know, some provision ought to be in a budget bill or not, whether it has budget impact at all, and you know, those are rules of the Senate.
And you know, I know there's all this kerfuffle about Liz MacDonough the parliamentarian, but what she's doing is faithfully executing her job as a staffer parliamentarian to interpret and finalize rules that the Senate itself has put into place. So this is not a situation where you know, the staff's hijacking some process, you know, and it's a terrible thing for any elected official to blame a staffer for
that sort of thing. This is a situation where you know, the rules governing the particular budget process are in play. But back to your point, though, both parties have been gaming this system for sixty years and I expect that to continue.
Yes, Terry, you said initially that you do think this is more theater than actual fissure in the Republican Party that could style of this bill. And yet we're all playing the numbers game over the weekend that the senator is the Congressional the Republican senators can only afford to lose three votes, and currently there are four that are
on the line. There's Ron Paul, Lisa Murkowski, Susan Collins, and now Tom Tillis, who isn't running for reelection, is isn't necessarily constrained by potentially being primaried.
Who cames on that front?
Why do you see this is still getting over the finish line.
Because of the sequence of votes. Generally speaking, I think what Senator Murkowski Senator Collins get is a little bit of softening on Medicaid provisions, maybe some other things that they're interested in. Senator Murkowski is always standing up for our last energy and as she should, and she'll work
on that. And at the end of the day, what you're going to have then, once those accommodations are made, then you're going to have a situation where you have fifty two on one side and Ran Paul on the other and they will vote for final passage. There.
So we spent a lot of time ringing our hands earlier this year talking about the increasing budget deficit in the United States and how this is going to cause some sort of bond vigilante moment where you get real pushback in the bond market. We just had the best month for the bond market in terms of performance going
back to February. At the same time of the Committee for a Responsible Federal budok it says that this current iteration of the One Big Beautiful Bill is going to add three point nine trillion dollars to the deficit over the next decade.
Which is it.
Do you think that people are being a little overly sanguine about what this does to the deficit or do you think, like we heard from Steve Chivon, that they're going to be real offsets that we haven't accounted for.
Well, two things. One, whoever's doing the interview with Secretary Best and I hope they'll acknowledge that he was absolutely correct on the on how he thought markets would react in the medium and long term here, both on both on equities and in bonds. He called that, and a lot of people didn't. The Secondly, seguine, I don't know the uh you know the rules by which the CBO and outside groups you know, cancoct their CANCCT. Their views are artificial and they exclude lots of things like the
like the impact of tariffs and growth. Frankly, so yeah, I'm on teams Steve on this one.
I think Terry when it comes to how this actually gets to the President's desk, what's going to happen in the House is the freedom call is just fold like they did in twenty seventeen.
I've been for three months now been in the been advising markets that this thing was going to happen on or around July fourth, and now here we are. And I've also for probably a couple of months now had been advising that the whole purpose here is the Senate's going to jam the House, and the Senate bill will be the final bill. And I still think that. And Frankly, if you listen, I mean, this is that buzz is
kind of bubbling under right now. But if you listen to what the House people say publicly, they expect that, you know, there's all kinds of talk about, you know, how we've accommodated the House and how we've been working together and all the rest. What that is is a signal that we're going to end up having to take whatever the Senate does, and the President's going to have to come in and put the hammer down on some people.
Hey, Terry, it's going to catch very with it this Monday morning. Good morning's sir, Terry Hanks there of Pangaea policy. Michael Kutschmer of Morgan Stanley believes we're currently in a sweet spot for markets. Doesn't feel like one, but we have the unemployment report, budget negotiations, tariff dead blinds all coming up over the next two weeks or so. Michael joins us now for more. Michael, good mornch Good morning.
It hasn't felt like a sweet spot for markets. I guess if you're away from all this and you see the start market of record highs, it might feel good. But if you've been in it, the last three months has been brutal, hasn't it.
Absolutely.
I really talk about the sweet spot from all the worries that we had just a couple of weeks ago. All the negative things which could happen have disappeared, you know, at least for the time being. But we've got this calendar coming up this week and next couple of weeks through July there are quite impressively potentially volatile, but like the digital service tax we canna yesterday, again positive news at the margin, just dripping it back into the market to reduce the intensity of worry.
And in November when the election happened, we were wondering whether this bond market would push back what would be the biggest constraint on this particular bill down in Washington, d C. And here we are and this bond market is not pushing back it.
So why I think it's the confidence that rates are going to be cut, that the deterioration and the labor market is going to continue, and that continuation of labor market and the idea of the Fed policy being a balance between employment and inflation as employment drifts weaker relative to inflation. Inflation has been good the last couple of months, but again it's been good seasonally the last couple of years.
As well into the summer.
That's why they cut rates less less September is it can deteriorate the next couple of months. But if inflation deteriorate, I mean, if the unemployment deteriorates, I think the Fed will will react to that, it seems.
As though the bond market and stock market are getting excited about different things. Stock markets getting excited about AI and the potential for things to be sort of muddle along enough to allow companies to keep innovating and possible regulatory roll back. The bond market's getting excited about enough weakening that the Fed can cut, but not too much weakening that will fall off a cliff. Is that basically where we're at?
Exactly the rate cuts in a still growing economy is perfect? Are the economies forecast will deteriorate, you know, one percent growth and back to trend growth next year as the Fed cut rates?
How good a combination is this?
So why are we not talking about the Fed cutting rates at a time where the economy is still moving forward, to use Ester George's phrase, with a budget that is getting more deficit driven and those fears still here, the dollar being sold, Institutional investors overseas real questions about how much they will be the incremental buyer of treasuries. Why are we no longer talking about that whole dynamic? At the long end, we.
Still think there's gonna be a steepening buyers For that reason, I think about all in terms of back ten year heels are longer that we had to see a glut in the old days and a shortage of safe assets. The budget deficits were shrinking in Europe, the United States shortage of safe assets. Now we have an explosion of safe assets, and that's going to put demandual. For demand to be substandard relative to the supply of longer term
government bonds. Whether it's European, whether it's US or other countries, pressures on budgets will continue, which again gets back to the point that why is the Fed going to be cutting rates aggressively one hundred base points in the next twelve months when fiscal policy is where it is and inflation is still problematic.
Is this dollar weakness trend you think here to stay?
I think it is, and mostly it's valuation and the underpinnings of the strong dollar are slowly eroding, not collapsing, but the eroding.
It's a marginal change.
If US is not going to maintain a multi percentage point growth differentials, the rest of the world just going.
To narrow a bit.
Given valuations where the dollar is, it's likely to fall. Fiscal policies be more expansionary outside the United States than maybe inside the United States.
This has been talking with this idea how the bond vigilantes maybe are absent right now from this three point three trillion dollar to the deficit.
The CBO says, this bill is going to.
Cost, but maybe they're taking it out when it comes to unwinding in the dollar dollar dumpers.
Is that what it is now?
I think that's potentially it that the world is overweight dollar assets and for a good reason, and the dollars acted as a good hedge for those assets. So the S and P went down, the dollar went up.
That was good.
It balanced the risks of owning US assets. As that changes that there's been more dollar hedging going on. So maybe not selling dollar assets, BUTU look where equities are with why are we worried but the dollar?
Maybe we should be hedging? Are US assets going?
Where are you comfortable taking generation risks right now? The whole world's on the menu, by the way, Where are you comfortable taking that risk?
I think it's sort of in shorter intermediate maturities, unless so to the ounces one. Yeah, well, well, well this huge rally we've had, well not huge, but really big rally into your notes down to three seventy five with FED funds still four and a half. But you have to have i know, a hound baselins of right cuts in the next nine to twelve months. They current pricing,
which is justifiable if it does happen. Tame thing with ten year treasuries is potentially okay if we do deliver one hundred base points of ray cuts.
If we do deliver one hundred basis points of rate cuts at a time where the economy is still strong, what happens to the yield curve?
Though?
And this really does ultimately go to a question John asked earlier, which is a really important one. Is there a lesson from what we saw last year from the Fed as one hundred basis point rate cut and what that could mean for this one?
Exactly the last time we had rake cuts last year, the minute they finished rate cuts ten your treasure went up and yield the same thing.
That's because same thing happened again.
I'm not sure FED rate cuts help mortgage rates.
What's the President going to say when that happens that's precisely what happened last year.
I don't know, I mean, what does he say does he blame the FED chair, does he try to keep Powell in there to try to blame him. Does he say they should stare quantitative easing and essentially monetize the debt which is sort of the worst case scenario for the dollar. How do you job own this one? Or do you just say rates are too high? Cut more?
I mean, really, it's really unclear how you message this when it's a very simple message of get rates lower, facing off with a very complicated economic reality of which rate you're talking.
About a ladder?
It's not enough cut.
More So, that brings in the lights of risk, which means a new FED chair lights around in twenty twenty five.
What does all that mean to you?
It means that monetary policy is going to be more uncertain next year. But I'm not sure that a FED chair of the candidates that being bandied about or that wildly different than what we've got today.
It's a board of governors, it's a committee. If you get Kevin.
Worsh one of these other gentlemen or women that are being proposed, will not radically change monetary policy. If if we get conditions such that the economy is weakening, we'll get bigger rate.
Explore this with me.
What if it was the NEC director, what if it was Kevin hasse to someone in the administration now works closely with the president. When the President has said very very clearly what he wants from manage your policy, and then selects someone from within the team, within the White House, within the westwast it's.
Going to be a little unprecedented.
I think its going to be sound bonds and sound the dollar that monarch.
It would be interesting to see.
How the board works, how the FMC works.
I want to know what the market would do beforehand. I think it would be worried.
The vote would be to sell bonds, sell effects. Yeah, that's the big risk. That's why we keep saying the market is going to get a vote on this long before the Senate.
And that's the reason why it's sort of interesting that right now the market saying, Okay, keep going, because right now, if you look at the bond market, you're not seeing any sign of real worry given the fact that we just had the best rally going back it's a February. Not the same kind of message they're coming from the dollar.
And not great music for the ears of Kevin Hassett either over at the NEC who some people might think would do a great job over at the Federal Reserve. But the problem is the perception of the market right now, how the market would perceive a move like that, and whether we would just sell bonds and sound the US dollar in the face of that decision.
If you're worried about institutional credibility and you put the person who is in charge of orchestrating the Trump agenda in charge of the Federal Reserve, that independence gets challenged in a very obvious and public way.
Michael, good to see its credit catch up as always, Michael Chrishmer there of Morgan Stanley, Let's get back to tride God will trade partners look at to strike a deal before President Trump's self impost deadline. On July ninth, the former senior White House Trade advisor Kelly an Shaw right in the following I'm expecting to see most tariffs land between ten to twenty five percent, Kelly and joins us now for more, Kelly, I'm Micael to the program.
What leads you to that conclusion, Kelly Ann ten to twenty five.
Thank you so much for having me, and I do agree with Amrie. I think July ninth is feeling less like a deadline and more like a mindset in terms of how I expect to see some of these relationships roll out.
I think the ten percent is the safe zone.
That's where the President has kept us for the last almost ninety days, and twenty five percent is a really high tariff. So I expect after all of these negotiations that the countries you get the best deal, like the UK, will end up with a ten percent baseline tariff, and my expectation is that for everybody else, twenty five percent
is probably the upper range. Plus we have some of these sectoral tariffs, and we're getting some of those indications from administration officials who are signaling that to the private sector as well.
I like that it's a mindset. So in this negotiation of mindsets with all these countries, what is the order, the pecking order of who gets a deal first?
Well, I think we're likely to see a mix of countries, and clearly the administration has been targeting our biggest trading partners, those with whom we have the largest trade deficit, as the prime targets for the President's trade policy, Because if you get that right, everything else can flow through there. But what I expect to see is actually a mix. I think we'll see some large trading partners. I'm actually starting to put the European Union in that bucket.
The presidents talked about India.
We could see some Asian countries as well, Latin American countries, other European countries like Switzerland. Maybe we see Brazil, Argentina and countries like Israel in there.
And then the president.
Is going to assign a teriff rate to everyone else and give them the opportunity to come back and to renegotiate if they want something lower.
So I think we'll see all of the above.
So it feels like he'll just be negotiating for his entire term. Is that how you take it?
Well, if it's anything like Trump one point zero, then yes, I think this is a perpetual negotiation that we'll continue to see unfold.
But here's what I really think.
We'll see that over the next couple of days, starting with July fourth and rolling into July ninth, we'll see a series of deals announced and these will effectively be like agreements in principle over some core obligations, and then the details of those deals will need to be further negotiated, and Secretary Besson has talked about Labor Day as a potential target date for finishing up some of those negotiations, and I think we'll see more stability in the market
from there. But this is continually a moving target, and I think countries who want a better deal six months two years from now will have the opportunity to get that.
So let me get the straight kellym. We're talking about July nine soft deadline for concepts and then for some more details, we're talking about labor day. What do companies do with all of this? I mean, are they paying the de facto tariffs at any given time? How do they sort of follow rules that have not yet been codified.
Yeah, I think those are really great questions. And I do think that we'll start to see a lay of the land come July ninth, and I think we'll see a greater lay of the land come this summer fall. And that's where I really think the private sector is going to have more certainty as to what some of these tariff rates are likely going to be for the long haul.
But I don't think we'll ever get that.
Certainty certainty because we also have these sectoral tariffs that the administration is continuing to roll out. We've heard that they have six or seven more investigations in the hopper of different products and sectors. So I think we'll continue to see this evolving, but I do think we'll get more certainty through the summer.
So there's been this theory out there that we'll see some of the trade negotiations and the trade deals that we've been discussing trickle into the economic data and trickle into earnings as soon as the next few weeks. Do you think that's feasible given the fact that companies don't have certainty and aren't willing to make big moves on either a supply chain level or even on a pricing level before they have that clarity.
Yeah.
And I think the other thing that's in play right now is the one big, beautiful tax bill. And so what the administration would say, of course, is that it's not just our tariff policy, our trade policy, but you have to look at our tax policy, deregulations, energy diversity, all of these things to get the full picture. As you're taking steps to invest in the United States and set up some of those supply chains. But I think for some of these sectoral tariffs, those are going to
be stickier. So companies who are and steel, aluminum, automotive, semiconductors, pharmaceutical products, I think they'll see some.
More certainties sooner.
But I do think for everyone else, if you can sort of bake in an estimate of a ten to twenty five percent tariff depending on where you're importing from, that's probably a good estimation of where things are going to land. And that's what I'm telling my clients an entire trade conversation.
We haven't talked about China yet, Kelly, and just what's the next steps when it comes to this relationship between Beijing and Washington following the Geneva and London talks.
Yeah, I think things are going very slowly at the moment, and so right now we are working on implementing that original Geneva deal through the London framework, and so all eyes are focused on some of these export controls the Chinese side, rare earths and rare earth magnets, in particular, on the US side, some of the countermeasures that we're taken.
The President mentioned yesterday that the choke hold the US has is on China's aircraft and aerospace industry and that they need us for that the same way we need them for rare earth magnets. So I think we need to see a d escalation with these two sectors.
Right now, in the next few weeks.
And at that point, that August twelfth deadline was supposed to be the date where we saw a broader set of economic commitments being negotiated between the United States and China. But I do think the focus of August twelfth is going to be relatively narrow, both on implementation and maybe seeing Phase one roll out. But this is going to be a difficult relationship, and I think we're going to see this play out over the next year or two, not just the next couple of weeks.
Kelly An, I see more years of this. Can't wait? Can I? I'm sure?
The former senior Trump trade advisor. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, an giopolitics. 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.