Bloomberg Audio Studios, Podcasts, radio news.
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. We begin this out with stocks turning lower on renewed tensions in the Middle East. Ross Mayfield of bad writing, the US blockade is working, but we'll take time to force around's hand. The question is does the market hold up in the face of this risk? Ross joins us now for more. Russ Good morning, sir, Answer your own question. Do you think it does hold out?
I think the risk is that the administration takes the market at all time highs as a vote of confidence in a longer you know stand off dis blockade being the main way that that goes about, and that if it goes for you know, another month, there will be economic gramifications in the second half of the year that are hard to see right now. So I think you
can hold up if we're a week away. I think if we're talking weeks or months, it's a much bigger question for an economy that's already you know, fairly narrow and being propped up in a lot of ways by AI spend and not the strength of the consumer, which is obviously had some trouble in the phase.
Of wells last the debate right now economic ramification, so we see the consequences of nature. They're on the horizon, if not the reality right now on the ground in Europe. For the US, the US has got a lot going for it right now, seven hundred billion dollars of campas coming from just a handful of companies. More than that if you include o US. The radcount's already the pipeline from the end of last year, the tax refunds hitting bank accounts already at the moment coming into this quart.
Can that stand up to the risk out it can?
I mean, I think it's the main reason, along with corporate earnings, which've been robust, that the market is back at all time highs despite what is so clearly a very live war in the Middle East, in despite oil that has now been over one hundred dollars a barrel both Brandon WTI for a lot of the last two months. So there is a lot working for the economy. But there are two things that the economy can't stand up in the face of, which is higher for longer oil
or really higher for longer rates. If we continue down this path, we run the risk of a little bit of both. If we put the FED in such a bind because of higher oil prices.
Well, let's go with the right story. So we're at four basis points at the front end of the curve on TUESDA today at around three ninety two, not far off the highest of the year. At the front end on tens, we're basically there. Likewise, on thirties RUSS what does a five percent thirty year four forty ten year, let's call it four percent two year due to eanquities.
We've seen over this pullmarket, you know, particularly the ten year, when it pushes past four fifty and starts to move towards five. That's really the like red zone for risk on equities, you know, the thirty I think the market cares a little bit less about but that four point fifty on the ten year.
Is a really key level.
So obviously market watchers and investors will be allaised on that for the next couple of weeks.
Here, you know, on the front end of the curve.
I think it's representative of a FED that is going to have its hand force. And I don't think we're talking hikes yet, but certainly it would be surprising to see a cut. In particular, following the descents from a handful of governors last week.
When you say it.
Has its hands force, that basically just mean you think the FED is on hold for the rest of the year.
Yes, I think so.
I think it would be really hard, even if worsh makes a convincing AI productivity case, to build consensus to get a rate cut, unless we're talking about maybe a rake cut in December, if we can get past I ran, you know, in a timely order. But yeah, I think a base case should be a hold for the remainder of the year.
Well, so, if you're watching the market, what would it take for the FED you think to have to actually hike It's.
Core inflation, right, So I think the FED is rightfully saying all the right things about looking through an energy shock. But we've also seen some pressure in core services inflation. We know the labor market is really tight in terms of you know, we're not adding jobs. The labor force is probably even shrinking. So if you started to see wage pressure, if you started to see housing and rent's bottom and turn back up, then the FED is forced
to reconsider where we're at. The problem is the labor market doesn't look strong enough to stomach many heights.
So we'll keep an eye on core services inflation.
But I think the FED is again kind of caught between a rock and a hard place here, which maybe makes their job easier in some ways.
And so what kind of FED reserve do you think that Kevin Walsh is inheriting when he steps into the big seat in June.
Obviously very split FED.
I mean, we haven't seen so many descents in a couple of decades at least. I think it's going to be really hard to build consensus towards a view that AI productivity merits rate cuts. Now, I think you might get a little bit more consensus on winding down the balance sheet a little bit maybe on some of the banking regulation issues that the FED has a hand in.
But I think it's going to be really hard to build consensus, even if the economic argument is sound, because of all of the other noise from Iran, from the labor market, and from what AI might.
Do to jobs.
Stay with us. More Bloomberg surveillance coming up after this. So here's the links this this morning, the President announcing the US will have ships transit the strate of form, Mercer run warning US forces will be attacked if they enter the waterway. Norman role of csis right in the following. There is still no evidence that either Washington or ten Round is prepared to make the concessions necessary for a near term settlement, nor I'm joined us now for more
non Welcome to the program. Things feel a little bit tense coming into this week. How frangile is this true? Still?
Good morning?
Well, we have two countries that are each uninterested in starting hostilities, but neither ours are interested in making the concessions that would bring about a settlement. As I mentioned earlier the piece, the talks do remain ongoing, and that is a good thing and are likely to continue. And I think we're watching with Washington with the Project Freedom is to test the environment to see how far Ron is willing to go to change the atmosphere of the region.
So the next couple of days will be quite important.
But norm Project Freedom, it sounds like electronic guiding of ships through the strait of her moves. Is that actually possible? Do these ships actually need a naval escort?
Well, they don't need a naval escort per se. But just because we're providing electronic guidance doesn't mean that we wouldn't be also having radar, perhaps air surveillance, and if they were to come under attack, that doesn't mean that we wouldn't be able to provide.
Assistance if that decision.
Were to be made, and we would be able to do so, but presumably from aircraft for example, if that were needed. Now, when you're talking about how the ships are moving, it's conceivable that they could be moving through Omani waters. So let's pull this issue apart. We've watched the Iranians in the last few weeks use their own waters to move ships from the north of the Persian
Gulf to Pakistan. It could be that what is being considered is just to allow ships to move through Omani waters through the straight up hor Moos and then to exits to the Arabian Sea. So in essence, it's a reverse of what the Iranians themselves are doing. And then if the Iranians were to attack, they would be an essence attacking into Omani territory. The Omani's would have given the US permission to conduct operations. We would be providing
defensive support. All of that would be legal under international law. So again that is a hypothetical scenario, but that is something that might be possible.
Around this morning, is announcing a new control zone of the Strait of Hormuz. Is there any evidence that they're going to allow the US to have such operation, Well.
There's no evidence that the Iranians are going to say anything that the US will care about him, and the Iranians are going to make a number of statements exerting their control over the straight orfor moves, but the US doesn't recognize that because they have no legal authority to control an international waterway. So this is just another statement by the Iranian government, and their parliament has made a number of statements making such claims.
So this is just one more and a long line of such statements.
Normal when do you think the Iranian oil industry will start to see shut ins and really be forced to potentially have a little bit more of an economic collapse in the oil industry. The Treasury Secretary yesterday said next week, although two weeks ago he said it was just a matter of days. We are seeing the Iranians use alternative roots, like putting some oil by rail to China. At what point do you think we see really economic collapse.
Well, we're that this Treasury secretary was correct. Within some days, the Iranian system was facing severe problems. They started to use old ships that they had in storage to store oil, and they are indeed sending some oil out through land routes through Pakistan reportedly, but this does not relieve them of their problem. But the question really becomes that once they start shutting oil fields, does this really change their decision making?
And so there's a question of.
Why will they feel economic pain and will the pain be sufficient to actually matter in terms of the diplomatic negotiations. So, yes, they will start feeling pain significant increase, probably in about a week to two weeks, but it's going to be some time after that before they actually reach a point where it starts to grade ier GC revolutionary Guard operations and government operations to the point where the government fields that have to make changes. That could be some time,
but we should be upfront. The Iranian government is losing hundreds of millions of dollars a day because of their decision making, and that is certainly impacting the debate within their decision making. However, as we've seen over the weekend, it has not changed their diplomatic positions, which essentially remained unchanged from the beginning of the war.
The President will be heading to China soon. At what moment could China potentially play a bigger role to making sure the Iranians actually show up to the table and have a negotiation with the United States.
No country has significant influence over Iranian decision making. The Iranians, however, do use the number of countries as doorways to diplomatic exits when they wish to do so. In China, Russia, Pakistan could be those doorways when necessary, But we should be clear China does not have significant influence over the Supreme Council for National Security in Iran, or they would
have stopped this war some time ago. We should recall that China was a facilitator for the Saudi Iranian Peace of Court March twenty twenty three, and that obviously.
Didn't mean it didn't mean anything.
Where do you think talks stand right now? Because the President yesterday announced this operation to guide ships or the straightup removes, also said that there have been positive discussions with the Iranians.
Well, talks are underway indirectly through the Pakistanis, which indicates that the diplomatic process does exist, and that's a good thing, and it shows that a process exists vice a move towards hostilities. So as long as that trend continues, we're moving in the right directions. At the same time, the President has a good history of showing that when he feels his time has been wasted, he will move to
military action. And we do have two aircraft carrier task forces in the region, and those military personnel are prepared to initiate operations to clear the straight of removes, which of course would mean operations against the billistic missiles and dernes in mainland Iran were that to order be given.
Stay with us more Bloomberg surveillance coming up. After this, Three FED officials single in caution about the Central Bank's path forward. The former New York Fed President Bill Dudley, seeing no good reason for Kevin Walsh to allow interest rates, writing his latest rustionale that inflationary pressures are subsiding is no more convincing than its predecessors. Bill joined us now
for more. Bill, Welcome to the program, Sir. What is the strongest argument against not cunning interest rates right now?
Well?
I think two things.
Number One, the risks of inflation have increased, obviously because of the team rise and energy prices. And number two that the liver market seems to be pretty stable. We're not seeing a lot of job growth, but we're seeing enough job growth to keep the unemployment rate from rising. So I think that the balance of risk is actually shifting more or to the inflation side away from the
libor market side. Second thing is that there's not a real evidence that monetary policy is actually restrictive right now. We've had Bodally a restrictive manitary policy for quite some time.
Yet the economy is operating at.
Full employment and inflation is well above the Pedes two percent objective. So the evidence that the Mandrey policy is actually holding back the economy, I think it's pretty weak in the current environment.
But what do you make at the AI argument. It wasn't something that was articulated in the hearing, but it's something we've heard from Kevin Walsh before in the lead up to its confirmation that ultimately will lead to lower prices and will give them room to reduce interest rates. What's the pushback to that.
I think the pushback to that is twofold number one.
AI in the short term is actually increasing investment demand, so that's actually pushing upward pressure on interest rates. Number two. There's a lot of uncertainly about how fast the AI protivity benefits will materialize, and it's not really clear whether that will you know, what will dominate the downward effect on inflation or the upward effect on the demand for capital,
and that effect of that on interest rates. There was a poll of a comust that basically found that over eighty percent of the economist said no, I would not recommend cutting rates now prospectively on the basis of an AI productivity boom. The other weakness of the argument is Kevin Wirsch has cited the green span experience in the late nineteen nineties is a reason to cut well The reality is Greenspan did not cut in the ninety nineteen nineties. He just didn't raise interest rates, and.
Interest rates at the time we're well about where they are today.
Bill. Do you think that's just a sequencing problem. What's your ultimate view? Your personal view on the matter is that a sequencing gets you that is expensive up front, It pushes up costs, there's a climate to buy all kinds of things, and then later on costs for well.
I think AI, if we do get a productivity surge, it's going to be good for the outlook for inflation.
I think it's less clear what that means for interest rates.
Because if AI results in a you know, obsoletes lot of the capital stopping, you need to sort of build a new capital to take full benefits of the AI.
If you can actually see continued upward pressure on real interest.
Rates, no good races account rights. That was the title of your pace right now, Bill, you echo that in this conversation. It does bank the question why is the current FED chair and the committee maintaining an easing bias?
I think they can start with the presumption that number one entre policy is restrictive, which I don't really agree with and number two that they're concerned about the downside risks of the labor market. I think those downside risks of the labor market were probably pretty relevant, you know, a few months ago, but the labor market seems to have stabilized. Look at the level of initial unemployment claims and total unemploymable cains. They're really basically as low as
they've been in many, many years. So there really is very little evidence that the liver market's falling apart at this point.
Well, what do you make of Chair j Powell staying on for longer than many have anticipated, given he will be a former FED chair at the next meeting.
Well, it's clearly unusual, but not without president. And you know, for the people that are criticizing, you know, Jay Powell for staying on, I think that's not really fair.
I mean, he didn't start this whole situation.
You know, the FED has been under merciful attack, merciless attack from the President, and the FED independence is under question, and I think Paul thinks that by staying on the FED, that's going to actually bolster of the FEDS the perception of the Fed's independence. So I think it makes sense for him to day on if he's willing to do so.
I believe over the weekend the Treasury Secretary called it an overreaching shadow FED chair. Do you believe that this will be confusing for financial markets to have what some might think to co chairs.
Well, I think Paul has made it very clear that he's going to keep a very low profile.
So I don't think you're going to see Paul going out and giving.
A lot of speeches about the economic outlook and the implications for monetary policy. But obviously around the committee, when you have the actual fmc meing, it's going to be pretty relevant what Chair Powell says about the economic outlook that people are certainly going to continue to listen to him.
Well, obviously the incoming FED chair is going to want to do it his own way. What kind of changes would you advocate for in communication? Whatever it might be, a fewer speeches, the dot plot, what would you change?
I think there are a lot of things that they could change and improve. I mean I think that number one, you need a framework for quantitative easing and quantitative tightening. They don't have one right now. When you do it, how do you do it? How do you exit from it, how do you evaluate the cost and benefits of it? Number two, I think they really do need to improve their communications. And I think what I would recommend, and this is something that Ben Bernanke recommended, is to actually
publish a staff forecast with scenarios, alternative scenarios. Scenario analysis right now is so relevant in an environment where we don't know how long oil prices, how high oil presses are going to go, or how long they're going to stay high. So having different scenarios that basically say how you respond if things turn out differently than you expect is very helpful information to guide markets.
So I think, you know the ECB does this.
I had a conversation with Christine Lagard a couple weeks ago about this. You know, they have three scenarios baseline, adverse scenario, and severe and she basically said, every day that the situation in Ron stays the way it is today, we're taking one more step away from the baseline scenario towards the adverse one. So having alternative scenarios I think to help people think better about the monetary policy.
But is it harder when you have a dual mandate?
I don't think so. I mean, I think the dual mandate.
I think people overestimate the tension in the dual mandate at the end of the day. I mean, I think the Fed's view is we need to keep inflation at two percent because that's actually going to help us more easily achieve our employment objectives. So the two are not quite as much tension in the long run their intention in the short runs at times, but the long run, you really need to keep inflation at two percent of you're actually going to achieve your objective in terms of employment.
This is the Bloomberg Survendments podcast, bringing you the best in markets, economics, and gio politics. 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.