Bloomberg Audio Studios, Podcasts, radio news.
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. Let's turn to the economic policy fed shared Jay Powell and for Size, and the Central Bank is in wait and see mode pending trade negotiations. Noria Rabini of NYU Stern is saying, no pain, no gain. American democracy will survive the show, and after an initial period of pain, the US economy will thrive. Noria joins us now for more nor how good to see you.
You're often created.
As Doom and Gloom, the big Bear, But I've spent many a time with you, and we've had conversations where you're constructive, and it feels like this is that moment. What are the factors that lead to that constructive view for you.
Well, and recently said that tech Trump stariffs, and what I mean is that US is really number one in many of the technologies of the future AI, machine learning, robotic automation, semi fusion, quantum defence, tech, green tech, arc tech, fintech, you un nem it, and I expect that actually US potential growth because of that could increase from the current two percent towards four percent by the end of the decade. So that's the two undred business points increase potential growth.
Even tariffs and there'll be some of the escalation and re stixtion migration. Best estimates that they could reduce potential growth by fifty business points. You have two hundred on the plus fifty on the minus. So is the ratio between four to one. So I think that that's why that over the medium term, the fact that the US is very innovative implies that whatever Trump does doesn't matter.
So tech trumpstariff, Tech trumps Trap two, and the traders of course trump Trump and they forced him to back down to market discipline. The most powerful people in the world that the Bombagilantes. So I think it's Box team. There'll be the escalation, We'll still have an inflation rate. I expect that the trade imply that for most of the world you have tartists between ten to fifteen percent.
On China sixty. But even with ten and sixty, that is what actually Trump was announcing in the campaign trail. You get inflation core PC towards four percent by the end of the year. Let's say to a disposable income, you have a weekending of consumer and business sentiment, you get a shortened shallow recession by Q four. It's going to be shortened shallow because then the FED is going to cut rights since inflation expectations are the young chort
but well, we'll have a shortened shallow recession. But that's poorly highly likely.
Can I jump on that point?
What gives you the confidence the FED can respond to that, because there are some people who are worried about the inflation that might pick up and the fact that might constrain the FED stablished bias.
No, you're right, That's why are people already saying they should have cut in May or in June or July.
I don't think it's going to happen before September, because, as Powell said, yesterday, inflation will be higher, unemployment is going to be higher. Last time around, they made a mistake. They thought that increase in inflation was temporary and was not, and then they had to catch up on it and
so on. So this time around, you can make the argument that since inflation expectations are anchored, since the Fed is not winding out, and for being forced by the White House to cut rates right now, when inflation arises, going to be a level effect rather than the.
Rate of inflation.
If inflation expectation remains anchored, if you don't have second round effects, then once unemployment goes higher that week as the labor market, then effects are going to feel comfortable to cut rates. But right now they have to stay on hold exactly because they need to cut once then the economy we can significantly.
People have been talking about styflationary like scenarios. The growth is slowing, and as you acknowledge that would probably happen to some degree in the near term, and that inflation was going to main higher, some of the trade or means get readjusted. Why is that not a significant concern for you at a time? Or even the Fed seems to not have clarity on whether that's going to be the predominant theme.
It's circulationary growth is going to be lower, neuro sexeal inflation is going to be higher. I think the difference between now and said in nineteen seventies, when you're the old shock of seventy three or seventy nine, was the inflation was already high in rising and the FED was behind the curve, and then you had the uncording of inflation expectation. This time around, I think they have shown some credibility in uncoding.
Inflation inflation expectation.
You're right, however, that you never know second round effects may occur. You have not only the impact of the tariff now the dollars weakening. That's another impact on import prices. That's why the FED has to wait until the hard data show that there is the beginning of or a session. If they start cutting great earlier, then you have the uncording and inflation expectation, and that's going to be a problem.
How much of the Fed's hands tied because the long end of the yield curve is not necessarily anchored to FED policy in the same way, especially given some of the deficit concerns. And I know that that congress member wanted to talk about what was going to happen with the total pool of debt, not the debt GP. But I'm actually curious about how they issue that debt and just what that does to some of the yield premium going forward.
Well, the long it.
Depends on the FED in terms of inflation expectation and the fences. As you point out this premium or term premium on fiscal policy. I think the administration is sensitive to the idea that if you'll have a very large deficit, eventually bondiles can go higher, they can further crowd out economic recovery. And we'll see the results of these fiscal plans. Some of the stuff they're doing and increase the deficit.
Some of it like.
Tariffs or reduction in highris subsidies, medicaid, those cuts will reduce the deficit. I think they'll be quite sensitive not to have a headline number for deficit next year higher this year, because then bodiles will go much higher and that's going to hurt further the economy. But because you're going to have a physical drug I think most likely next year than the FED as zoom for using a little bit more now they want to start all so
manipulating the long end of the bonding curve. You know, I wrote this paper with Steve Miran criticizing what Yaren was doing by reducing the supply of long debt and issue more of the short one.
But this time I run is not just the ratio between the two.
They're talking about buybacks literally buying more of the long term to get the outBut.
Marketution more of the short term.
That is doubling down on these itthei policy just doing more of it actually rather less of it.
No, there's only one person I know with more rare moles than you, and it's our friend muhammadal Aian. You travel the world a ton, have attitudes towards US assets changed? Have the conversation shifted in the past few months.
They've shifted, But I would say there's going to be a difference between fixing come investors. Many of them can be solving either central banks or SOMN wealth funds. These folks are worried about the deficit, are worried about us having damage the creability of the United States.
That's why you had higher bond deals and weakening dollars.
So that trend may be continuing because they're going to have to be doubt and the rivals of the US, like China, they have to get out of dollar assets probably got to go into the gold in terms of that sort. But my view is that since there will be an investment boom driven by this increasing productivity, capex in the units is going to be much higher. The current account divers is going to become larger even even with the tariffs, just because investment is going to be higher.
As a shut GDP savings are going to remain low because private and public say below. So our current account dets are going to be wider, but the influence financing is going to be both FDI and portfolio investment into equity market. So you have actually more even overweight in US equity assets over time because of the increasing cycle large.
Which is say on that this is really important.
So we've been depending there for a number of months apout whether this was a cycle level shock or a system level shock. The policy announcement at the last month, and we wanted whether that structure long into the US dollar, which is a system level story, would be disrupted. Are you saying that will stay the same that you just see this flood of money keep coming in to the United States into US assets.
As I said in fixing.
Income, maybe people are going to try to get out, especially if the death is are larger, unless bond years are much higher. But I see an investment moving in the United States, an increasing productivity, secular.
Boom and therefore being overweight in usycut.
Is going to become the story over the next two years, and that's going to compensate any exit out of fixing come assets. So the dollar is going to weakend, that's going to weekend gradually, and there's a currency role of the dollar is going to be dented, but not damage to any signing extent.
So we can live in a world in which actually the US.
Current account deft is going to be much larger, but driven more by booming investment rather than week into sublic savings. The dollar remains strong, and we're going to live with that because there'll be strong economic growth.
You mentioned some of the divers I find that you could see a wife from the dollar to things like gold, any of the thoughts somewhere that money might go beyond just gold.
Well, you know, if your arrival at the US, say China, if you dump your treasury first, you have a market to market loss on the value of those things. If you sell treasury in by RMB, you appreciate the RMB.
Something you don't want to do.
If you sell dollar instead of buying r mvu by yen and euro, you appreciate the yen and you and you upset the Japanese the Europeans. You want to have good relations, So what do you do. The best thing you can do is to sell treasuries.
And buy gold. And that's why gold has been going.
Higher, because the goal is the only reserve asset that cannot be seized. Because we've seen the actual Ukraine that even yeah and euro Swiss frank palents can be seized. So I would see gold being the biggest winner now. Over time, of course, the Chinese want to have a new rail of payment systems, that is bypassing the US dollar and swift, and they are now technology that gradually over time they're going to allow them to do so.
But the thing is going to be a very gradual.
Process, so the dollars going to remain meaningful global reserve currency.
Are super thoughtful. As always, it's going to say thanks to dropping buy no repny that of n Yu Starnel, emphasizing a waiting see approach as a growing chorus on Wall Street lifts recession onds citing tariff related stankflation concerns. Johning us now to discuss is the former Kansas City Fed President Esther George as the welcome back to the program. It is the central bankers dilemma, the prospect of higher inflation, higher unemployment, and decelerating economic growth.
It's a challenge.
What did you make of the chairman's ability to rise to that challenge in yesterday's news conference?
Well, I thought, based on what I heard in the market reaction, he stuck to the story that he's been telling, which is we're holding these rates until we can get more clarity about the policy mix. And I also heard in his comments something interesting. He certainly highlighted tariffs that's been the topic of the day, but he also mentioned we have to think about the impact of immigration policy changes, fiscal policy changes, and this emerging prospect of how regulation
might change around this. So that is a pretty big dynamic to try to play out when you're judging the appropriate stance of monetary policy.
Es, do do you have a better sense of what the reaction function is when it comes to looking at different indicators, whether it's soft data or hard data, and understanding how the FED would prioritize certain readings, how they would respond to, say, an increase in unemployment if also it came in tandem with increasing inflation.
So I think, Lisa, the soft data is really important right now, and you do see the FED looking at that. You see that come through in the Reserve banks.
Beayes, book data.
You know they are out there really just combing the landscape to hear from different parts of the economy what they expect. And I think what they're hearing right now
is we're not sure we are pausing, We're waiting. The FED knows that even pausing has a negative impact on the economy, and I think for the US, we've come into this at a time of strength in that economy, and judging how much will come off of growth, how much will hit the employment numbers, and certainly watching inflation expectations at a time like this are a dynamic that just takes time, I think to figure out.
Yesterday on Bloomberg TV, Abob Michael of JPMorgan Asset Management noted that the word transitory was used as recently as the March nineteenth meeting, the last time the Federal Reserve met. Do you think that it was a mistake for them to say that it was notably absent from yesterday in reference to any kind of inflationary impact from the tariffs that have been put on.
Well, I think it probably was intentional to drop that word. It has taken on some very negative connotations, maybe rightly so. But the truth is, we know that these kinds of shocks can be a one time price level shock. I think what we can't know right now is the fact that we already have elevated inflation relative to the Fed's target.
We know that certain measures of inflation expectations are moving in ways that flash caution, and so I think you can't know how this dynamic unfolds with inflation without a little more sense of when these policies get a better able to be quantified and put into the models that the Fed's looking at to know. Not if I think this is a FED that is clear we are on a cutting path, we've taken a pause. It's really a question of when.
How do you know as to the difference between the two, Because clearly the committee struggled with what was trying to trie and what wasn't coming out of the pandemic. So how would they know the difference this time around, the difference between inflation being short lived and more persistent.
Do you just have to wait, wait a long long time. How do you know the difference?
Well, you absolutely cannot know the difference, and that is really the crux of uncertainty for a policy maker is to read into this whether you will continue a disinflationary path that underlying sense of inflation where we were and really watching inflation expectations. So for me, I think keeping an eye on those inflation expectations will tell the committee a lot about what they're dealing with relative to a one time versus a more permanent impact to inflation.
And that's just a double down on that.
Do you put more weight on survey based expectations or market based expectations?
Well, I think you have to look at both, and normally you might say that some of these household survey measures and other things are not so definitive around where inflation is going. I think what's gotten my attention this time is how dramatically they are moving and so that in and of itself tells you that the volatility you're dealing with has to give you some pause. And I think it's right for the FID to pay attention here to how these dynamics are unfolding.
And that's certainly what they're doing. As to appreciate your take. As always the former Kansas City FED President Esther George on the challenge this feder Reserve faces.
We are all in wait and see mode, including the FED chair J. Powell.
Claudia Sam of New Century Advice is right in the following. I agree with the first decision to hold rates and flank the risk of higher unemployment and inflation. However, it was a missed opportunity to lay out how it plans to decide whether the tariff induced inflation is temporary. Claudia joint is now for more. Claudia, welcome to the program. Let's build on some of that. What would you have liked to hear, specifically from the chairman in that news conference.
I like to hear their framework, what kind of data they're looking at, how they're going to move back into some forecasting, right, what is it they're going to use to But it's It's clear that the FED, or at least Powell, has not They're not embracing this. It's the textbook case inflation when it's because of tariffs. It's temperate. Now we do do your Governor Waller making that case. We got to be brave and it's temper. We need more than that, right, Like what are they looking at
in the data? And this is where I think, I you know, looking more broadly, not just the CPI, the labor report, but how are they using all these services of business or surveys of businesses, the surveys of consumers, that soft data that seems somewhat maligned, Like what are they going to use to make that decision? And I just I mean, I know they must be doing that work.
It's just I think sharing more of that before we actually get to the position where the dual mand data is in conflict would really be helpful as a guide.
Claudia, do you agree with FED Shair J.
Powell that there isn't that big of a cost to waiting.
I mean, the FEDCE tools work with a lag, so like there are costs to waiting now I agree that at this moment too, it's too fluid, right, and this is a historic shock that is facing the economy and businesses are just starting to work through it, and it could go in a lot of different directions. So again I understand why this is a moment where you know, holding makes sense and yet like there are costs to waiting.
And I think one of the issues I really took in the press commerce was how you know reinforcing Well, but the data are fine. You know, the inflation's fine, the unemployment's fine. Like the data are not fine. Right if we look at say into the first quarter GDP, that surge and imports, that is telling us this is a really big shock that's coming at the economy. This is out of expectations. Businesses are pulling in, rushing imports,
probably building inventories. That all comes at a cost. And remember what we thought in the first quarter was going to be the tarif increase, It's actually worse now. So like it's already here, people are changing behavior. No it's not in CPI, No, it's not in the unemployment rate yet, but it's coming. So you know, prepare, You can wait, but you really need to be prepared.
There was another aspect of this press conference that I found particularly interesting, and it was when fedcher J. Powell said that the twenty twenty four rate cuts were not preemptive. If anything, it was a little late, And of course this is referring to the unemployment rate that had increased by a half a percentage point, as the som rule dictates your rule, and they did respond and then some.
Of that data was revised upward.
Actually, what did you make of that, that comment that, if anything, we were a bit late.
I don't think they anticipated going straight up with fifty basis points. I think the fifty basis points was a ketchup that they should have started one meeting earlier. I think that's the late and it's because they weren't. They weren't reacting to the bottom falling out. It was a we don't want to see further weakening. So I think the FED probably would have preferred to have had that in, you know, more spread out, in like twenty five basis
point increments. But I think that's where it came from. But that's such a fine point on timing, so I can understand whether that's a little seems a little modeled.
I think it's important to go back over it, though Lisa I'm place you brought it up. We've had somebody guests say this Fed it's willing to be late, and we're all struggling to defind what latest to the FED reserve. If last year was late, I think the market would take that.
Is that late?
One hundred basis points in the summer, little drift, tire and unemployment.
Yeah, if that's late, that is the most dubvish message you possibly send, because that means that being late means being on time for a lot of other people.
That seems to be my take.
Claudia, you're one of the best, always clinical. Appreciate your time. Claudia, sound there of New Century Advisors. Councy Barrow of JP Morgan Asset Management righting this, we expect the FED to look through Tarif related inflation so long as it is perceived to be a one time price level reset. This will take time to determine CAUSI joins is now for more Cassie, good monic, good morning. Ask my question, how long does it take to understand whether this is short
lived or persistent? What defines that?
Yeah, it's a difficult question.
And tera Powell was asked that exact question, and he didn't give a lot of guidance on that. I don't think he ruled out a cut in June, or I don't think he ruled out really anything. He created max optionality for himself, which he's become very good at doing. I mean, if anything, I look at the reaction of the bond market to the meeting, and I think it's thought on exactly what he wanted, which is very little
movement at all. So kudos to him. Let the policy and the shifts and policy drive the bond market, not the Fed right now, because just like the market, the Fed is waiting for more guidance on what's coming next.
It's build on that. You went to the bond market. What's it signal about that debate about whether it's short lived or whether it's more persistent, or are different ways to gage inflation expectation, survey methods, market based expectations. What's the market signal to us?
It's pretty clear the market is signaling that this is going to be short lived. And the repricing within the inflation market tips break evens falls inflation swaps has been very efficient efficient, meaning that the inflation per of the inflation impact is really concentrated to the next twelve to twenty four months, and then beyond that you're seeing very little impact. If anything, the market is pricing in a probability that beyond the next twelve to twenty four months,
inflation actually falls below target. Because ultimately, what we're thinking about here is what are tariffs. Ultimately their attacks on the consumer. They reduce demand, and ultimately that's something that weekends economy weekends prices, not the other way around.
I'm looking at the cuts that other central banks around the world have made since the middle of last year, the ECB one hundred and seventy five base points, the Bank of Canada two hundred and twenty five basis points. After this morning, the expectation is the Bank of inngend will have done one hundred basis points, like the Federal Reserve. Is there a world in which it could be disinflationary these tariffs for the entirety of the developed world, but not the United States In.
The short term probably, But in the longer term. I do think that you are going to see the negative demand impulse overwhelm the short term impact of tariffs. But I think it's really interesting what you just said highlighting that other central banks around the world are continuing with their easing policy. I was just checking before I came on today what the return on the global bond Index.
Is year to date.
So the USAG is up about two and a half percent, pretty respectable given them volatilities to still working as a diversifier in your portfolio. The global AAG is up five and a half percent year to date, right. I think people really underappreciate that that there's quite a lot of opportunity outside the US in terms of developed bond market, government bond markets, and also other central banks. The tradeoff
is much much less ambiguous. It's much more clear both the growth aspect and the inflation aspect are telling them to continue to cut rates, which is.
What we expect the BOE to do at seven am. This is the reason why the wait and see for FED Powell FED Chair J.
Powell is a reason that.
A number of investors around the world are increasingly looking elsewhere other than the United States, because wait and see is not a good strategy for investors in a lot of ways. Steve major Over at HSBC said this morning, we prefer taking duration exposure in the US and stay neutral on US treasuries as they wait for some of the policy uncertainties to subside.
Do you agree with that?
Is that kind of what you're thinking.
Yeah, so, I would say.
In general, I think longer dated yields are somewhat range found here. We've had a range for the ten year treasury of around three seventy five to four fifty, so we're on the higher end of that range. And what that means is that there is some asymmetry there. For example, you know, if we did see an increase in initial jobless claims at eight point thirty this morning, we would expect, you know, there is significant room for yields to move lower, for the market to price in a more aggressive fed
cutting cycle. But in the near term, you know, I think that the market has been fairly US stable. It's been consolidating in a narrower and narrower range, and ultimately what's going to break us out of that is going to be an indication on policy, whether it be fiscal policy or trade policy. I think that one of the things that is going to become more of a focus. So far, trade policy, we had the escalation aspect of it,
and then when is the escalation going to stop. We got peak escalation, then we are on the de escalation train. What I think people need to start focusing on is where are we going to end up? What is that effective terif rate that we're going to settle at. The negotiations to with the UK are going to do essentially nothing to change that effective terror freiate. It is still on track to be extraordinarily high. So while maybe this is good news, I'm not necessarily sure it's a roadmap
for the rest of the world. And really what we'll be driving sentiment in the market as we turn to the next week will probably be more likely the negotiations with China over the weekend.
Kelsey, I appreciate the update and the reaction. Calsie Barrow at JP Morgan Asset Management framing things I think quite well.
This is the.
Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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.