Surveillance: A Data Dependent Fed With Citi's Mann

Fed's made a mistake? Why, well, I do. I don't think there's any real data from the real world that actually justifies this. I think the other thing guys right, that the data looks quite good. But actually oftentimes at times like this, the data revisions of what gets you excuse me, run cold. Um, that's what happened into than an age. And I've challenged people for quite a long time. Obviously, the data, the GDP data is relatively strong, driven a lot by the stimulus, but these rate rises take a

while to work their way through. So yes, the data may be strong, but the question is what are the rate rise affects being? And well, it will take us a while to know. And I think the evidence is that actually that the fundamental belief they have that the narrows around Born a half is wrong. There's no doubt in my mind that that's wrong. They have no explanation as to why there's weak wage growth. So I think this these rate rises, that the eight of them, with

a slowing global economy, will kill off growth. So I think you have to sit there and say, what, what data from the real world actually justifies this. There's no inflation, Inflation expectations are pretty well anchored. They have no explanation for weak wage growth in a slowing global economy. It just seems to the Chairman is understating the importance of the inflation mandate, and he seems to be focused on what is going to happen with financial imbalances, or potentially

with financial imbalances. And we hear that from the Chairman again and again and again. Are you saying that's wrong? Well, I'm not sure that actually dealing with it through sets of interest rate increases maybe wrong. I mean, and one possibility is you could have just held back on the interest rate increases and perhaps have shrunk the size of the balance sheet rather more. I mean, they'll deal with that way. If you're worried about imbalances and financial stability

deal with it with financial stability measures. It's not clear that you know using your mallet. If you're the only thing you have, a mallet of the interest rate will solve your problem for you, it'll kill off the real economy. Um. And I think your point is very good. That pal has kind of vacillated from one place to the other, and that's brought the President of the United States on his back, and so I think that sort of threatens the very independence of the bank. Are they making decisions

to just sort of show themselves to be independent? But I think the marketsin Guy was right, The markets don't really believe them. I don't think they're doing right. A large number of other people think that this is an error, and recoveries end very often because the FED makes an error. In reason soon, the global economy is slowing. And when I was looking a couple of days ago in Germany and Italy both both had negative courses in the last quarter.

So the global economy is weakening and it will take a while for us to work out where we are now. And in all probability, the US economy is slowing now, Danny. The real reaction from the market yesterday came at the point that the FED was talking about power, was talking about the balance sheet. Is the Fed underestimating a the effect that this this kind of balance sheet runoff on rails is having on sentiments and be the effect that

it's having on liquidity, because that seems to be. The market was kind of okay with the other stuff, it seems, but it was kind of when we started talking about that that you've got this real downdraft, particularly in equities. Well, I think probably that's right. I mean, I think that the story is having sat in room I and and boted on these things, my memory is that we really had very little idea what the effect of the asset

buying was gonna be as we bought it. We also had absolutely no idea what the effects would be once you started to sell them off. And I think that in a way, the right way to think of it was do it a little, be cautious, try and sit and think about what the effects would be. Just to believe that the FED knows what the effects on liquidity and other things of these of these assets sales would know is living in dream world. They have absolutely no idea.

There's no economics to tell you this. So the potential is that these are having effects that they're unaware of and the market and it's given the market digitis. So I think we should be in caution mode raising rates in this in this stream without really knowing what's going on, I think is what's generating the concern in the markets. Right. Always great to catch up with you to talk about the world of central banking. Danny Blanche Dalnmouth University fessor, Danny,

when's the book out? Thank you? He's not gonna tell us, No, he's not. Is it a secret? Is it a secret? Guy? He's gone though, hasn't he He's not gonna tell us. I think it's going to be called it's the labor market stupid or something like that. At least that's what he told me twelve months ago. That could have been the working title. Oh okay, let's get a take from Howard Ward. Now give belly fund seat I oh of growth aqulties, he joins us. Now, how did the FED

make a mistake yesterday? I think the big mistake was in uh somewhat dismissing the role of quantitative tightening the balance sheet reduction. Um I think that's important. That's fifty billion dollars a month rolling off the FED balance sheet, the six billion dollars a year of liquidity being sucked out of the economy. I think that's important, and I

don't think that Powell gave that it's due consideration. I also think that tightening eight times over the course of two years is uh too rapid a move, given the eighteen month lag that's associated with monetary policy changes in terms of having the full impact on the economy. So we've had five or six increases in the pipeline that really have yet to be fully digested by the economy.

So I do think that given the lack of inflation, and given the behavior of the global capital markets and the housing market here in the It's days, I think the Fed very easily could have justified taking a pause. Uh So, I think they struck the wrong tone, and I think the dismissal of quantitative tightening was a big mistake. And so, I you know, the market is in a down trend and I don't think the Fed's comments yesterday are very helpful. So what happens now the market has

learned what from this? Well, I think the market has learned that the so called FED put is is no more. I think it's UH. I for one, went into this meeting feeling that the FED got it, that the FED had heard the markets. And I say that because a couple of weeks ago, Richard Clarda, the vice chairman of the FED, came out and walked back some of Powell's earlier comments which seemed to indicate a robotic approach to

raising rates. And not only that, but James buellerd just a couple of days ago, the head of the St. Louis FED, came out and said maybe the FED shouldn't raise rates at all in December, which is of course the yesterday's meeting. And so I think that gave the market some indication that the FED was more dovish than

it turns out they actually are. And to see the eleven the eleven of the sixteen members felt that you might need to raise rates UH at least twice next year, and you had five or six or seven thought maybe three times or more. I find that astonishing when I look around the world and see what's happening to global

growth the FED. The old saying is the FED always tightens until something breaks and I think we are on that pathway right now, although there's still time for for the Fed to limit the damage that they've already done. And I say that because a slowdown is baked into the economy for the next year, and it would be baked in even if the Fed had done nothing yesterday. And that's again because of the lagged impact of monetary policy.

The FED admitted as much when they lowered their own GDP forecast for next year from to five to two three, and that number will probably be lower than that. At this point, Howard sentiment is totally shot. Just watching this feed on itself yesterday was incredible. I mean a full perc move from the highs to when the day where we ended the day. Where are we going to get some comfort? Where do the bulls find comfort? Here? Is it in the dates through the endings in quell and

where does it come from? Well, I mean it's a very good point. I think that Dow had a reversal of about seven and thirty points yesterday from peak to close. And uh, interestingly enough, if you looked at the American Association of Individual Investor sentiment data on the market from last week, it was the largest increase in barysh sentiment

UH in a number of years. In fact, the barry sentiment was forty eight point nine percent, that's the highest reading since April of two thousand and thirteen, and the bullish sentiment was at twenty point nine percent, which was the weakest reading since May of two thousand and sixteen. Now, typically when you have extreme sentiment like that that's negative, that's a good sign the markets do for a bounce, and therefore I find it all the more interesting that

the market really didn't bounce. The market had quite a reversal yesterday and declined, and so I do think that I'm going to follow the general rule of technicians, which is that the deeper the decline and the wider the range of stocks that are declining, the longer it takes to stage a real recovery in the market. And so we've done a lot of damage to the stock market. I think it's gonna take a while for us to recover to the point of new highs. But it's going

to take a series of things. It's gonna take good earnings, good guidance. It's gonna need a resolution of the trade problem with China UH and I'm not that optimistic that there's anything other than a short term fix for that, but that would be helpful. But the Fed is gonna have to play a role here too. Howard, you've given us so much time on Bloomberg TV and Bloomberg Radio today and we really appreciate your insight. Thank you very much,

not just for today but throughout. Howard would give Belly fund c io of Growth Equity. I want to bring in Catherine Man, City Global chief Economist who joins us in New York studio. Katherine, your thoughts on that subject? How important is it what is happening right now for

the Federal Reserve? Well, we have to look at a broad measure of financial conditions, and when we look at that where they're actually still accommodative, there are still accommodative and so what you know, what we need to do is sort of pass through how these different components of financial conditions, whether it be equities, whether it be high yield, whether it be credit, regular credit, uh, the dollar, these follow through and affect businesses in different ways across different sectors.

And yes, I do agree that we have to be concerned about the technicals becoming the fundamentals. But once we pass through these, for example uh an equity crash, how does that affect the real economy? Well, it might affect the real economy through the wealth effect and consumption spending. But in fact, since wealth is so concentrated and held directly of very few people in the US actually hold direct stocks directly UM, that has statistically very little impact

on consumption. People who hold wealth in four oh one case UM or mutual funds. Turns out they don't feel richer when the stock market went up, they don't feel poorer when it goes down. So the consumption effect through that channel is relatively low. And now think about high yield, Well, you know, there were a bunch of um. That's a

narrow market. It's not. It's a much bigger than it used to be, of course, but it is it is still a narrow market relative to the path you know, the span of businesses that are engaged in employing people, paying them wages and producing product. So a vast swath of the of the U S economy, and this is

true for for Europe as well. Are you know they are plain vanilla borrowers and some of them actually don't even borrow right, So those those are on a pathway and and they're they're selling that they're feeling pretty good about the way the economies are running right now. Leverage LANs is a bigger market than high yield. The triple base part of investment right is a big bigger than high yield. This is a big, big market and all of them are kind of coming undepression right now, Catherine, Well,

but they should be. They should be. I mean, we've had ten years worth of quantitative easing, which was designed to narrow risk spreads, which it did do uh, and it's now time to move towards the normal risk spreads. And that is associated with restrictions on credit UH and a broad arrange of valuations. But again, when we look at financial conditions on a on a on a broad basis, not just narrowly on a couple of one segment versus

another segment, we are still in a common dative territory. Catherine, what's the lag? Where are we with this with this story? Because I keep hearing this argument time and time again this morning that the Fed has made a mistake and policy acts with a lag. I kind of put that into context for me from your from your research. Well, yes, policy acts with a lag, that's for sure. Now the Fed making a mistake. Um. You know, they could have died until next year to see um a little bit

more about how the digestion and the financial markets was doing. Um. But you know, they had to weigh the UM way the concerns that the financial markets might be more concerned if they didn't move, because after all, the expectations were that the Fed was going to move in December, and if they didn't move, then, in fact, the markets might say, Wow, the Fed knows more than we do. In fact, the economy is much slower than we think, and so that could have caused the market to tank even more than

than we observed in yesterday's session. So um, you know they're in a they're in a data dependent mode. The data that they are looking at is both the real side of the economy and the financial side of the economy. And there is quite a divorce right now between the data when you look at the data for the real economy, uh, and the data that you look at for the financial markets.

There's a huge divergence between those two right now. And we do worry about self fulfilling prophecies the financial markets being ultimately the decider for the real economy. We do worry about that a lot, which is why we focus on these financial condition indexes, which give us some guidance for not just the delta on how much you know where we are with the equity markets, for example, but also the level. These are both important indicators, not just

not just how much things change, but what is the level. Okay, so you've got two different things going on here, um, and two different aspects which will affect the real economy and what kind of happens next. So so is your view currently that the FED is is making a mistake and I'm being very black and white about this, or is the market making a mistake in its assessment of what is happening here, because, as you say, they're very

different things happening here in terms of the messages they're communicating. Well, if I had to, I mean, I just wrote about this saying that that there's these two is a big divergence between the financial markets assessment of the real economy and the data in the real economy's assessment and measure and signal about what's going on in the real economy, and and I say, the divorces is dramatic right now.

And the question is, um, if we if we pars down a little bit deeper, UH and we look at which parts of the real economy are the ones that are the strongest UH. It is the parts of the economy that basically doesn't engage deeply with Wall Street and doesn't really engage deeply with the global economy. In other words, the trade war doesn't matter too much to these to these businesses, and they are a vast swath of the U. S economy, and they all are actually a vast swath

of the European economy as well. And we can see that, for example, in in the German data where we look at the small businesses um UH valuations relative to the large businesses, valuations of small businesses are actually doing better. So you know, that is an important distinction that I think is important when we think about the potential channels through which financial market turbulence might affect the real economy.

The channels are limited. Now, on top of all this, we haven't I've mentioned at once, but you know, we can't kind of ignore this trade war issue, which is a material risk for growth in the global economy, for the U. S economy and of course for others as well. We spent the year waiting for the global softening in the economy and the markets, the feedback into the United States. The US market was resilient for a while until the

previous three months. Then bangets happened. Now the concern is that the feedback loop comes from the global economy into the U. S. Economy. Just as a final question, Catherine, is we look ahead to nineteen, do you see the global economy economy becoming much more of a headwind to US growth next year? Well, we do have a down We did write down based on what we've already seen in terms of the trade war having an impact on

on on economies. UM, you know for the US or what we have for is we still actually have a lot of fiscal impetus coming through the US economy from the from the original budget spending bill from last year. A lot of it shows up in UM. And then we also actually have a fair degree of domestic investment resilience because we also expect the fiscal cliff that is associated with the budget caps in twenty to actually be kicked the can down the road. Uh, we've We've observed

that happening in previous kind of election years. So we have a profile for the US growth rate that is a more modest uh profile that moves um deterioration and growth further out. Now there is a deceleration. We do have a deceleration, but we're not talking about a deceleration to below two percent, So you know, we're still pretty strong. Catherine Maunt always quite a catch shop with you, and we've got to thank you for everything this year as well.

Catherine Man, City's global chief of a missed on a fascinating couple of days from New York City for our audience worldwide. This is Bloomberg Surveillance with Guy Johnson stepping in for Tom Keen. Tomp Keens at home, Guy Johnson out of London. I'm Jonathan Faroe in New York. Let's get you some economic data, shall, where your indicators brought

to you as always common Towe our financial network. The number one are a broker dealer that j D paris named hiest an Independent Advice and Satisfaction among financial investment firms five times in a row lettle More at Commonwealth dot Com. Let's get some economic data, Shall, we here's Finnish je Jonathan and Guy. Good morning. Well, the data on the labor market suggested still solid. Jobless claims up a bit to two fourteen thousand last week, but that's

still close to a half century low. The report generally in line with forecast the prior week two hundred six thousand. We also have figures coming up the index of Leading Economic Indicators from November, a gauge or where we may be three to six months from now. Economist surveyed by Bloomberg looking for that index to whole steady stall. If you're a pessimist, We'll see the Fed says the economy is healthy. Let's see what the l E I says. I'm Vinny del Judas, Bloomberg Radio. Let's go back to

new work in London. Hey, Vinny, thank you very much. In Guy, this data just speaks to the problem the Federal Reserve has. The data is okay. The market it's like, yeah, I know it's okay, but show me. That's a tough thing to to do right now. The market and the

Fed just seems to be on completely different pages. Um, and I guess if you sort of take a step back and look at this from thirty thou feet John, you can understand why we are going through a readjustment that has never really been attempted before, and everybody is kind of bumping their way across the darkened room trying to understand this this process. Let's try and get a little bit of clarity now on kind of what is

going on. Marianna Coach Lakota, University of Rochester professor of economics and former Federal Reserve Bank of Minneapolis President, and bloom Both View columnist joins us. Now, good morning. The thing that everybody, the well, the market seemed to react to yesterday, Marianna, was this was this idea that the chair said, basically that the Fed is going to keep QUT on autopilots and use rates to manage the situation. And it was that statement that the market seemed to

react to. We didn't talk about the balance sheet in the run up to this, and a great it's sort of a great deal. Are you surprised that that is what the market reacted to? Yeah, thanks for all for having me on. I am quite surprised by that because, uh, you know, central communication uh is remains an art rather than a science. But I thought that was a point of the FED ha been very clear about UM that

they were planning to use. The balance sheet was going to be on autopilot, and the tool choice during the UH in terms of reacting a shock now was going to be the path of short term interest rates. So I am surprised by that that market somehow thought that the FED was going to back away from that. UM. Honestly, if the FED were ever to back away from that, which I do not expect, it would take a long time from the reach that stage, they would have to

telegraph it through speeches, through UM, through the minutes. UM. It was not gonna happen yesterday. You aren't afraid of putting your hand up and saying this is bad policy. Would you have dissented yesterday? Yes? I I would have, UM. I Earlier in the year I spoke about UM. How I remained concerned about recessionary risks, not so much in terms of there being very high probability, but really in terms of what kind of tool kit that FED had

had available to deal with those. Arguably we those recessory risks have, isn't UM? You know that maybe a singing the old cake from markets and when you're close as close to the zero brown as the FED remains. Um. The rule of thumb is you want to keep rates low in order to keep the economy healthy. There's this there's this meme out there that the said wants to race stor rate so they can lower them during during a recession. That that is not correct. Um. You want

to keep them low to keep the patient healthy. Should we get rid of the dots um? You know? I was never a fan of the dots um, you know. I I I'm not sure if that's out yet, but I was never a fan of the dots on I uh. Um, So I would say, yes, we should, but we will not. I I just think it's very once you release a piece of communication, very difficult to to back away from it. I do not know any of the communication changes FED makes. We were all is aware. You're stuck with them forever, professor.

Just as a final question, is the playbook a useful guide to what we're going through right now or is it really different two years later? That's a great question. Um, you know, I think because I think it highlights the movements and markets that I find more concerning than what's going on in equities. Which is it receives more of the attention. You know, I think that the decline in tips break evens is something I would be tracking very carefully, was if I was in the committee, and that feels

to me more like early um. You know, want you want to keep watching and see what's going on. If I continued to see declines in that, I would expect that the Fed would would want to take account of that in their policy decision. Notana Coach of the COTA. Great to catch up with you as always, University of Rochester Professor of Economics and of course, former Federal Reserve Bank of Minneapolis President and Bloomberg View columnists. Thanks for

listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio