Surveillance: Bullard on a Soft Landing

This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Now in conversation with James Bullard, the former Saint Louis FED President, R.

Michael McKee, Well, thank you all very much, and we'd like to thank Jim Bullard for coming in and joining us today. I would have called you mister President, but now why do we call you Dean Bullard?

I guess you can call you Jim will.

Jim is the dean of the Daniels School of Business now at Purdue University, and we thank you for joining us today. I want to start with the dot plot. I think we have a picture of the dot plot that we can put up for those of you on radio. You can look up the dot plot on the fed's website. But basically, in June, the last time we put out a forecast, there was one lonely dot way at the top, saying six and a quarter percent. You left that dot's gone.

I thought this was a pretty good decision on the part of the Fed here. The higher for longer message I think is consistent with the rhetoric we've been hearing from the Committee.

Earlier this year.

There was widespread prediction that there would be a recession, and in the second half of twenty twenty three that recession isn't materializing.

So to the extent you thought that.

A recession would produce extra downward pressure on inflation that had to be taken back out, so you got you ended up with a higher for longer message here.

I think that makes a lot of sense.

So we don't need higher rates at this point.

Well, the Committee left the additional rate hike this year in the dot plot. I think that may be a good thing to do as insurance to make sure that core inflation, especially continues to come down at an appropriate pace so that the Committee can get back to two percent inflation and a reasonable timeframe.

I think the risks are building.

That inflation could hang up at a higher level or even go higher based on the idea of a reacceleration in the US economy. So you have to take account of that probability when you're making policy.

I think the Committee has done that here.

Well.

One of the interesting questions is about the forecast.

John was just talking about it.

You've got the Fed saying their growth forecast has doubled, their unemployment forecasts been cut significantly, and yet they're also predicting that PCEE core inflation is going to go down.

How does that work?

Well, I think you will get disinflation with you know, that's the base case. The question is how fast will that disinflation occur. If it's a very slow disinflation, you're going to want to keep policy rate higher in order to put more pressure on so you get back to two percent sooner. And there's a little bit of probability that inflation would distallup completely at the current levels, which would be unacceptable. It's you know, core inflation has a

FEDS target.

So you've got a long ways to go here, and I think you want insurance on the side of making sure that you get back to two percent inflation. On the real side of the economy, things look pretty good. You've got summary acceleration the third quarter here it looks like we've talked about it before, and unemployment still with the three handle looking very good.

Jay Powell wouldn't say the words, but it looks like the forecast is saying soft landing.

Yeah.

I think the prospects for soft landing are very good. But you haven't landed until you get inflation back to two percent, So you're only part way through this process, but prospects are looking good.

If that's the case, then the question becomes higher for longer?

How much longer? The Fed took away.

Fifty basis points of cuts from their forecast for next year, But how long do you think you need to lean against inflation to have an effect.

Well, it'll be data dependent on that, but I think this idea that you'd have five percent policy rate or higher over the next eighteen months or so, I think that's significant and shows you resolve on the part of Chair Powell and the rest of the committee to get inflation lower.

So that's quite a while.

I think once you get out beyond that the end of twenty four, you get into twenty twenty five.

Nobody knows at this point.

Well, that raises the question of lags and how long the legs might be if he takes eighteen months to bring it down.

Yeah, I don't know. I haven't liked the long and variable lags story for the modern era as much. I think a lot of the transmissional monetary policy occurs pretty rapidly through financial markets in a way that was not the case in the nineteen sixties and fifties that when Friedman was talking about long and variable legs. So I

Been in.

The sixties and fifties. So I think.

You should look for impact today, or more impact today than you would have in that earlier era. And so by keeping the policy rate high right now, I think you can get disinflation to happen now, it's not really so much two years from now.

Well, what kind of economy will we have two years from now? We get the pandemic distortions in the economy out supply and demand maybe come back into better balance. But do we have a new economy do we have an old economy?

Where do you think neutral is We're going back into a rate regime that is higher than we were used to in the two thousands.

Yeah, I think we've talked about it before. But one of the historical examples that you want to look at here is the nineteen ninety four tightening cycle, which was not as big as this one, but set up the US economy for a stellar second half of the nineteen nineties, one of the best periods in US macroeconomic history. So if you can get inflation to continue to come down here with a pretty strong economy, you could set the economy up for a productivity boom and a very strong

What happens.

We'll have only about one question left here, but what happens with the labor market going forward? Are we going to see ongoing wage pressures because there just aren't enough people to fill the jobs out there.

Yeah, I think the labor supply is somewhat diminished from where it would have been a pre pen pandemic or earlier. I think you have older workers less willing to come back into the workforce, so they're kind of a marginal worker type and they're not coming in as much. Their nest eggs are pretty pretty robust here with high housing prices and relatively high equity prices.

So I also think.

Daycare has been kind of decimated by the pandemic, so this has.

Changed arrangements for parents with young children.

And so you just have a subdued labor supply compared to what you would have had pre pandemic, and this is leading to continued tightness in the labor market.

Well, we thank you for coming in.

We're going to send you back now Tode to graduate some more engineers so.

We can fill those empty labor slots. Jim Bullard, thank you for joining us today. We'll send it back to you in London.

He Mike, can you just squeeze one extra question?

Then?

Can you ask Jim if there's no value in the forecast why they still producing them after that performance from Sham and Pow yesterday.

Can you ask him quickly, Mike.

Sure, John is asking if there's no value in the forecast, then why do they keep producing them?

Well, it's what we do, I think.

Yeah, you know, forecasts are useful, but only up to a point.

There's a certain amount of ambient noise in the economy.

You can't get away from that. But so you you know, you can't live with them and you can't live without them.

I guess that's the way you would say that.

Thank you very much, John. I hope that answers your question.

Thanks Mike, just about Mike, appreciate it, buddy, fantastic work, just one of the best as always, and bringing performance in the news conference from Mike McKay yesterday as well, sitting down with the foremast and Lewis FED President Jim billat.

With Aberdeen SRI Coach of Govidian joins us this morning, your senior research economists. The growth issue there is just absolutely tangible and Germaine into a shop like Aberdeen as well. Are you calling for a recession when you see the split of that, the tension of a five to four decision.

I think that's right. We are looking for a recession later this year, actually in one that continues well into next year, possibly the first two quarters as well. Now, if we look at the data that we've seen recently, obviously there can be some revisions in the GDP data. We saw quite a contraction in July. Now we are expecting perhaps there are some quirks in the data that we haven't seen as much industrial action recently, and there

Let's talk about the market response.

You are seeing a weaker pound in response to this, as many people expected it would. At what point are they between ahurakh and a hard place at the Bank of England if they don't hike the pound weekends it increases in FLA and even as growth slows, how much is this going to be a real consideration for them going forward?

I think Obviously imported prices are going to be a consideration. But what we saw earlier this yesterday in terms of the inflation data was very promising, and I think one of the key metrics that they focus on what really changed was that core services data. We saw a deceleration there as well, but I think it's still very elevated. We are still seeing another key metric of wages are still very high, and hence this signaling through the split

What is the signal right from the split other than they're just divided. It is a difficult moment. What is the signal that you can take away as an economist coming up with your own projections.

I think really what we're seeing is they are worried about the recession, They are worried about weaker growth, and they think that perhaps going into the rest of this year, inflation is likely to continue to decelerate. So what we say is the lagged impact of fairly aggressive monetary tightening really starting to bite and they're probably thinking right that here is a time to pause, but we don't want

Sree help us understand the bond market move in the guilt market right now, Tenure guilt yields higher on the session near session highs, up about seven basis points.

Does that stack up for you?

I think it's a knee jerk reaction. Perhaps you know there is the hawkish signal there is really being the focus, I think, But what we will say is, even though we are very close to the peak, we do expect rates to remain elevated, and we're thinking more matter horn rather sorry, more table mountain than matter horn. Really so really on hold elevated for a long period of time, well into next day.

Off for an explanation, do you think to some extent this might be a Bank of England that's starting to become more concerned about growth over inflation and a bond market is starting to pick up on the scent of that.

I think there is a shift.

I was.

It was a very very close call, and I think that information number really sort of tipped tip this decision. There are some other disinflationary pressures with food prices are likely to continue to drag down inflations a year end, but as you say, we're still nowhere near targets and I think that growth, the growth priority has started to pick up.

You Beck, your work at Queen Mary in London. Do you find it more beneficial to have a highly visible dissenting nuance to split vote like at the Bank of England or is it more Are you more able to make theory and forward looking views over the we are the world, We're all in it together view of the Fed.

I think the split is part of the signaling. I think that's actually quite a useful single and I can see that in the bomb markets they're taking this as a hawkish pause and that's actually what is necessary in a sense in order to continue on this path of disinflation. We need to unfortunately, we need a recession to really correct some of those imbalances that are quite particular to the UK economy.

No change isn't boring TK in London. No change is not boring.

Full split.

I'm fascinated by it, and you know, to know the heritage of Catherine Mann at MIT and Megan Green at Oxford. And these are huge decisions, folks. This is not a small matter. And I go back to the real yield is Kit Jukes is all over that in this morning note as well.

So thank you Streektch you Governdant of Aberdeen.

An expert on Saudi Araba. Edward Morris holds court at City Group, Global head of Commodity Research and always takes a geopolitical look. He has been brilliant over the last two years of saying everyone calmed down, we're going to see law. There were oil prices, more sustained seventy eighty dollars prices, and then things have changed. At Morse what changed to elevate oil to one hundred dollars a barrel?

It was quite simple. A bunch of countries that had a lot of surplus capacity decided to rein it in and pull back. If you look at the oil market, there is no more market. There's no more oversupplied market

All Right, we were making fun and just of the orb and that is of course President Trump visiting Saudi Arabia. What is the US relationship now with oil producing Saudi Arabia changed?

Yes, it certainly has changed, and it's changed dramatically. Part of the change relates to the geopolitics of the area. We saw one element of the change at the G twenty meeting when a number of countries that in India include countries in the Middle East, including Israel, include the European Union decided to build the physical you know, their own Belton Road initiative, and they excluded China and the excluded Russia from it. But the US is very much

Ed earlier in the year you are the lone caller for some sort of lower oil pricing.

You were absolutely correct.

Now you're coming out and pushing against people who are really upgrading their forecasts for oil in light of some of the Saudi Arabian production cuts. How can you be so sure this time around if this is essentially Saudi Arabia searching for ninety to one hundred dollars a barrel of oil for their financial wellbeing.

Sure well, I think there are three or four factors just overwhelming. One of them happens to be what we call the Fragile Five countries. They are Iran, A, rat Libya, Nigerian, Nigeria, and Venezuela. Their countries out in nineteen ninety eight were growing really rapidly in their production. People thought they were going to be adding a million barrels a day a year. Five years after nineteen ninety eight, they were producing less

Just quickly here ed in the interest of time.

What you basically said is that China's building its own spr that's much bigger than the US, as the US was trading their own their own spr How much is Saudi Arabia going to keep production low simply because they know China is not going to be a big buyer.

You know, I don't know. I don't know how to read the she leaves on it. There was an article in Arab News involving a conversation between the Crown Prince and the Prime Minister of India at the G twenty meeting, and the Crown Prince is quoted in a Saudi newspaper. Therefore, its intentional that if oil sustains above a certain level, they'll be putting more oil back in the market, or they are good chances of it. That was not an accidental story, So we don't know what the pressure point is.

I like ninety.

They don't like eighty or seventy as much as I like ninety, and they're fearful of what happens at one hundred ED.

Thank you sir for the update. Off the desk over as city at most not as bulicious sum.

Right now the interview of the day. This is a scheduled six to seven minute interview. It ought to be two hours. Kit Chooks joins as Chief Foreign Exchange Strategists to Society General and he let his research note today with what I was looking at early this morning, and that is the change up there. And the change is a US real yield back to where it was in late winter of two thousand and eight.

Kit, things are moving.

Where are we going to be a month from now? We're we're going to be a three months from now.

To itself, and I think in three months time we're going to have potentially still higher really odds in the US. Keeping on this guy, It's gonna stop at some point, I mean part of the discussion is the political one.

Right.

The big difference between the United States and Europe is that we're all raising rates because we have an inflation problem, but we have to tighten fiscal policy. John just said it. We can't spend this money. We spend so much money on COVID, a war in Ukraine. We have no money, and so we're in a difficult place. The United States can spend money because it's the United States unless the

We've seen in the last forty eight hours, and as John mentions Bank of Japan as a hat trick tomorrow, do we see with what's moving yen goes through one week or yen where all of a sudden the Bank of Japan is overcome by Powell and Bailey events.

They have to do something extraordinary at the Bank of Japan to stand in the way of this tide of rising yields in the US. So they'll have to raise rates or intervene. You know, jaw boning is not going to get us much further than we are today.

So no change in the Fellow Reserve, no change in the Bank of England. We expecting any changes from the BIJ not tomorrow, but this year.

So he hinted at you know, I heard someone else on the Bank of Japan board sort of row that back a little bit and saying he was talking to the foreign exchange market. They can't just talk to the foreign exchange market. They have to decide what they want to do with monetary policy, and it's a tough decision given their challenge. But this is so like a baby nineteen eighty four or eighty five. I mean, it's somewhere in that.

If you can imagine for those who were babies in the mid eighties, kick, can you explain what a baby nineteen eighty four.

I don't want to say.

I don't want to say that Jay Powell is Paul Vulcan, and I don't want to say that Joe Biden is Ronald Reagan. But it's this ability to push the dollar higher than you could imagine. I was in my first I know, everything I thought about fair value for currencies, anything I'd learned at the school was blown out of the water before we got to plaza. This can you know, trying to guess how far you can go at the sort of the pointy end of this piece of the cycle is really crazy.

So we don't know how far you can go.

But we do know that some people are expecting, including GP Morgan's chief equity strategist over in Japan, they expect that the Bank of Japan will leave yield curve control next year and negative rates possibly but even later this year, if not early next year. Do we have an understanding of what the knock on effects would be, not just from a currency perspective but from a rate regime globally.

I think from generally, you know, they're so far behind everybody else that it's possible that it doesn't completely rock all the boats in the world.

Right this is this is a.

Country where what that would do would start the process of Japanese investors buying jgbs again at higher yields instead of buying foreign assets. So it has a knock effect in the currency market, but they're not as big or as an important as a player on a flow basis as they were thirty years ago, so it doesn't have to be So it doesn't necessarily have to start a new long, dramatic rise in global bond yields. But it causes waves because it tightens global monetary policy one step

You know, we're talking about a stronger dollar and how far that can go at a time where as you were saying the US can be exceptional as long as lawmakers allow it to be, so, how far can it go before it becomes substantially problematic for the rest of the world, in particular the UK, in particular Europe.

I think it's already problematic. I mean you already see the Chinese. The Chinese, who usually have complete control over things like their currency, don't like the uan weakness. The Japanese don't like it. That don't like it there. If you send US fields higher on the dollar stronger, you know, you could reverse some of the wonderful progress that's been made in Latin America in the last few years. So we're not far away from people howling about what this

To me, what's really important here is the analysis of a difference between section fourteen Emirates versus section sixty. I mean, you really need the elevation to see the Spurs. Was it Saturday or Sunday, johnt you see the elevation of a section sixty or should you go lower at section fourteen?

It's a bit noisier downstairs, but I like to be able to see both ends of the pitch at the same time. I like to look diagonally across the pitch so that I can see.

This is when the Spurs beat Arsenal.

And I'm very glad I've hidden the way up in the nice seats.

Kit and I have watched the North London Derby together many years ago. I think maybe nine years ago, something like that, maybe ten years ago.

It was a good time.

I think Arsenal absolutely rush Tottenham back then. I think Walcut was there.

He was still there.

Harry Kane was there as well.

How come Arsenal has us ownership that's successful and the other selected teams.

D A kid, do you want to explain that when you say selected teams, you sang Chelsea, I'm going to go.

With I'm going to go with. It took a while for them to get good at it, but that they have a heritage and a history in owning football clubs in that family sports.

Talking about here, Yeah, what about the Saudi money, I mean, the Petro dollar money coming in? Is that going to change Arsenal and the rest of the sport?

It changes all sports everywhere to have Saudi money coming in until the thing levels itself out. And so the problem with sport, I mean in that sense, there's there's an enormous amount of money that changes it for the average fan, recognizes the fact that the economics of sport has changed, which we could talk about for a whole day, and and then does does a bunch of things to in the short term to the politicization of sport, which

Yeah, Mcalarteta.

As we mentioned the Tottenham chairman Daniel Levy revealing he'd be open to sending a stake in the club, quote for the right person, I sat down with Levy for a wide ranging interview on the club, including the recent sale of star Harry Kane to buy Munich.

Take a listen.

So Harry was willing to stay, but he wasn't willing this summer to sign a new contract. He didn't say that to me that he wants to leave. He didn't say that he would never sign a new contract. He wouldn't commit this summer, And of course we were in a very difficult position, had one year on his contract, and as a club, as I said, with self sufficient, we couldn't live in a dream that he would sign

You've since disclosed there is a buy back clause that's getting a lot of attention and a lot of fans excited. Can we talk about the terms of that buy back clause?

What is it?

If I'm honest, I think you know the actual precise detail of the contract with Bayern Munich should remain confidential. All I would say is if Harry one day wants to come back to the Premier League and he wants to come to top them, we would have the ability to a purchase him.

We talked a lot about Saudi Arabia and the disruption and this summer transfer window, not just for English football, for the whole European football. Are you getting players knocking the door now saying I've seen nay Maas contract in the newspaper and I want a slice of that.

Has this changed things for you?

I think you have to look at the Saldi Arabia situation. As you know, it gave a huge influx of money into the market. The market is particularly tough out side of the UK at the moment, and I don't see that what's happening in Saudi Arabia is going to have any direct bearing in terms of player contracts in Europe.

What do you expect it will change?

Well, it's another market for players to look to. Not every player will want to go to South Arabia, but just as not every player.

Wants to go to Germany or France or or whoever.

Joe Lewis has got his own legal problems. He's transferred his hold in the football club to family trust. We understand that dynamic and how things have changed in the last couple of years on that front. Technically that means you no longer have that big billionaire backer.

Do you need one to succeed? Is that something that Tottenham needs?

Well, firstly, you know, the ownership of Tottenham has been of no relevance for the operations of Tottenham for the last twenty plus years. It's always been self sufficient as far as you know, very wealthy people owning football clubs.

As I said, the new rules.

Now are going to be engineered to such an extent that hopefully you don't need to be a very wealthy owner in order to have a successful club.

Would you be up into selling a steak?

I've always my answer that question has always been the same for twenty three years. We have thirty thousand shareholders, yeah, who own approxibly thirteen and a half percent. We run this club as if it's a public company. If anyone wants to make a serious proposition to the border of Tottenham, we will consider it along with our advisors, and if we felt it was in the interest of the club, we would be open to anything.

Has anyone made an offer over.

The years, Many people have made offers, but there's never been an offer that's been.

Well, give us an idea of what those officers have looked like. Where'd they come from?

All parts of the world, the Far East, the Middle East, America. But nothing has been put on our table that we felt it has been in the interest of shareholders.

The stadium has been a big project for you and clearly that's right for the club and other people are starting to copy you as well. How big of initiative has that been for Tottenham Football Club? And how do you think it's going to really underpin the success and not just years to come, but potentially decades.

I think people don't realize how big a project building a stadium is. You know that project took us probably about seventeen eighteen years and start to finish. I think you've got to take a very very long term view. I think that it obviously has a major impact on the club, positive and negative.

Because you know, you don't build a.

Stadium for nothing, a multi purpose stadium as well. It's not just about football anymore. Is it's music, concerts, It's about everything about everything else and all above.

Well, that was done for two reasons.

One is, you know, when you look at the cost of building a stadium is talking about such huge sums of money. In our case it was one of the quarter of billion pounds. I think today it would be over two billion.

Wow.

And you have to find ways of paying for that asset and just having football club football games is not enough of income to.

So what does music bring in?

Daniel, give me an idea of what a Taylor Swift Beyonce music concert brings in for Tottenham?

How much money can you make from something like that?

Well, every concert's different every so it's not just concerts, it's boxing, rugby, all all sorts of events. You're not going to justify spending the money by all those other events. What they do that they make a contribution to the capital costs. I would say that you know, over a four year we may make twenty thirty million pounds of additional revenue as result in it.

And what's the gate receipts look like just in terms of football over a season. How does that compare? How does that stack up?

Well, our gate receipts now over over one hundred million pounds.

Big ange has come after Antonio Conte and Jose Mourinho. Can we talk about dealing with difficult characters? What was it like dealing with Antonio Conte near the end.

Do you know I had a good relationship with both, with both, with both Jose and Antonio, they're different. And you know, as I said to my and for them a couple last night, I said to them, you know, I made a mistake the stake. They are great managers, they were just not right for this club. And you know, the way they want to win is different really for how we need to win.

What does that mean? They're proven winners? What does that mean?

So I think there's a couple of things.

I think our style of football that our fans prave for is we want attacking football and if that means winning four.

To three, then so be it.

Whereas I think their style of football is, you know, they don't mind being defensive and winning one nil, And we were in a situation where we were so desperate to win. I think at that moment in time, when I go back, you know, four or five years ago, I think we would have one taken any way of winning.

But we didn't win.

And therefore, when you don't win, you get a very disgust grunt a fan base.

With our fans, Where did the pressure come from to begin with, to hire names like that. I was listening to the recent fans forum you did, and you mentioned that certain players wanted a certain kind of manager. You alluded to that, I'm paraphrasing to some extent. Were there certain players that wanted that kind of name Jose Mouridio and Antonio Conte.

Do they come and knock the door and ask for that?

It wasn't It wasn't about the name. It was about they wanted to win just as much as I did. And then we'd got we'd come so close with Maritzo, who was a great a great manager, and he did fantastic things for this football club, and we we got we got frustrated, and I think we went through a phase where we said, well, let's try something different and it didn't work.

Define success for this season, Let's finish there. What is success for you this year?

That's a difficult one for me to answer, because then I think I'd be putting an unfair.

Pressure on my on my new coach.

Honestly, I think for us, though, we want to play football where we're entertained. We want to come to a game where we're looking forward to coming to the game where we believe we have a really good chance of We just want to entertain our fans, entertain and win, course, win, but win with style.

Daniel Levy the to him Chairman.

We'll put out the full conversation over the next week or so, but a pretty extensive conversation with the longest serving chairman of a Premier League football club.

Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg