Surveillance: Dudley Supports 2nd Powell Term

to speak to William Dudley. He's a former president of the New York Fellow Reserve, the interesting mandate after New York fed Bloomberg opinion columnists and doing so much for Bloomberg Economics as a senior advisor. Bill Dudley a virtual Jackson Hole. You and I have been there. There's a you know, the central bankers go out, they wave at the moose, at the split rail fans. They're not going

to do that this year. How does it change if Jackson Hall is virtual, Well, it eliminates all the side conversations at the luncheons on the hikes, So there isn't a kind of back channel kind of communication that you might get otherwise. I mean, there's a number of things that I would love to talk to that participants about that I have nothing to do with. Entrey policy. You know, what do they plan to do on payments and cydewere uh,

cryptocurrencies and digital currencies? What's their add to about climate change? So there's a lot of things to talk about. And if you don't have those opportunities at lunch and dinner, you don't you can't talk about those things from the fractious FED development, you know, not to make it a history lesson, but the panic of OH seven out to mcchesley Martin in the early nineteen fifties out to now, where is the FED mandate to consider climate change? How

do they do that? How do they affect that? I think they certainly have a mandate to consider climate change from a financial stability perspective, to the extent that climate change induces worst outcomes on the macro economy, it's the disasters defect This the extent that affects the value of assets that banks lend against that does threaten the individual, could potentially threatened individual institutions and the financial system. And

the FED has responded to that. They've set up two committees, one to address the overall financials deblay risk and another to address risk at individual institutions and they're pushing these individual institutions to develop data uh and processes to evaluate climate risk and how they make their lending and other

business banking decisions. I think it's completely appropriate. Entrey policy is a lot more difficult, right, because Entrey policy is really about what's going to happen in the next year or two, not what's gonna happen in the next one year thirty years. So even if you think climate change is an existential threat to the US global economy, which I think it is, it's not clear how you would incorporate climate change risk into the near term monetary policy decisions.

And that's where the Fed's getting some criticism of from people who say that it's not doing enough on climate change. I just think it's difficult to take the Monterrey policy mandate and say, well, that really expands to the climate change issue and bill It also, though, goes to the question of policy drift. Has the FED gotten too far from their main goals of trying to control inflation and

support the labor market? I mean, when their labor market goals are a lot less defined and perhaps and they have been in the past, and then you have also other goals like climate change and broader other goals and initiatives that feel more like policy. How much is the FED risking allowing some of their main goals, namely inflation, to get out of control as it focuses on some

of these other goals. I think this is why Tripole hasn't gone that far in the climate change direction from the Monterrey policy perspective, compared to say, like the European Central Bank. The understands that there is a risk of being criticized and going too far. That said, the financial stability party is certainly part of the sense mandate because without financial stability, the FED can't achieve its goals on inflation on employment. So I think that the FED is

taking the right course. That they're taking climate change seriously, but they're focusing on it from a financial stability and safety and soundness proposition. Well, you mentioned some of the criticism that the FED has not gotten has gotten for not acting on this in a more aggressive way. A lot of that comes from the progressives who may we would like to see someone else at the helm, but

we had. Janet Yellen reportedly over the weekend telling White House advisors that she should supports Powell for a second term. Just how significant is that. I think Treasure Secretary Yellen's endorsement is important because she knows what is needed to be the chair of the Fed Reserve, and she's very well respected both inside the administration and outside the administration. So I think her endorsement is very, very important. I think also, when you think about it, Chair Pole really

is the path of least resistance. He's already shown that he's very capable, and he has support on both sides of the political aisle. If you that progressives got their way and nominated someone someone that was consistent with what they want, then I think it'd be a lot higher to get that person confirmed because tony Republican voters, would you get you know? Tom asked a question earlier today, and given FED share, Powell is likely to remain at

the HELM. What inflation is he looking at most closely? And is it changing in terms of the nature of price increases where it is occurring. In terms of how they evaluated at the FED, well, I think they've focused on the notion of is this transitory or is this going to be more persistent? For tamp persistent inflation, Really

two things have to happen. One you have to have you have to run on labor and have pressure on wages, and that weight pressure on wages gets into prices, and too you have to have a rise in inflation expectations.

So far it looks like there's still some slack in the labor market uh and and inflation expectations they've risen a little bit, really two levels more consistent with what the Fed wants rather than higher than we So at this point, the Fed view is that the inflation pressures that we're having our transitory probably they're gonna be uh more persistent than one would like for transitory pressures. In otherwise, the inflation rate will probably stay above the FEDS target

for a while. But they're they're really focused on what's having the labor market and what's having the inflationations and all those things. As as long as those things are open in terms of their inflation signal, and the Federal Reserve will be pretty comfortable with with where inflation is right now. Dr Dudley, as did Secretary Yellen. Can you tell us this morning that you would actively support the renomination the reappointment of Chairman Powell. Absolutely absolutely, He's a

done a terrific job. He has the whole EONC behind him. I think he's articulated what the feds of policy UH is in a very clear, inconsistent way. So I don't see any reason why you wouldn't be Really. Bill Dudley, thank you so much for joining us this morning, former president of the New York Federal Reserve and senior advisor to Bloomberg Economics. Right now, Laura Calvacino with us RBC Capital Markets. Laurie, it is a resilient market, is it a market that can break out to new highs? So

thanks for having me, Tom, Thanks for having me, Lisa. Look, we're still in the camp that things will get a decent sized pull back before the end of the year. So we've got a target on the S and P and Look, I think what was interesting in the price action last week it felt like we had a bit of a growth skirmish to start the week. We saw the index faulter and we saw defensive sectors leading the charge. When that ends up happening, the market really can't sustain

this move um to the upside. Now, what we saw towards the end of the week is that those jitters did calmed down a little bit, tech started working. We started to see just some stability in the index return. But when you have fear seep in markets really can't climb. When you have sort of that nervousness and that shift to high quality, markets can climb that wall of WORI, but it's a very delicate balance in front. Didn't work for most of last week. Well, but honestly, how big

is this wall of Rory Laurie. If we have the FED that is backing the market, if we have the potential a greater potential frankly for federal fiscal stimulus, if the slowdown does persist, I mean, doesn't policy support sort of completely cancel out slowdowns that might otherwise come up.

I think that's one of the reasons why over the last you know, sort of a few months, we've seen a lot of nervousness in the work in the market just sort of expressed through well, I'm in certain I'm going to go to high quality, I'm not going to go to defensives. I think that that, you know, has helped bolster that case for moving to the secular growers. But we do know that we're starting to wind down some of these programs or we can sort of see

the light at the end of the tunnel. So I think the power of that to sort of bolster markets going forward at least has a diminished impact, even if you're not pulling the rug out from the market all at once. But we have seen also under performance of small caps. We have seen a rotation out of cyclicals. Can we glean any confidence in equity valuations based on this discretion that we're seeing on the part of fund managers? Look, I think that you know, there are a couple of

different questions I think baked in there. I think it's a great question. But I think in terms of small cap, you know, I think that we've seen so many worries manifest and the dramatic underperformance of small cap since March. I think at first it was the impact of inflation on profit margins, which really didn't end up coming through um, but I think worries were expressed there. Investors have threaded about the negative feedback that you'll get on demand from inflation.

That's also been expressed in small cap. And now I think sort of you mentioned the softening and the high frequency indicators. I think some of the short term you know, sort of economic damage from the delta variant. I think that's manifest in small cap UM. But small caps have you know, at the end of the day not completely collapsed. We haven't seen them go into bear market territory. So there's you know a little bit of that resilience that we will be able to turn the corner still showing

up in that data set. Is it time to get more defensive within your equity allocation? Though, Lorie, you know we essentially did that, Kaylee. We actually have been aisling down the cyclicality. I don't make sector recommendation changes all that often, but a few weeks ago we actually did pull down materials, which was our least favorite of the cyclicals. Were sticking with financials and energy, UM, but we did

actually boost the tech sector. The proper tech sector doesn't include the Internet stuff, UM, but we did pull that up to and overweight from a market weight, and we basically said, going forward, if we're thinking about the next twelve months or so, we want to be very balanced between sort of the defensiveness of secular growth and the cyclical oriented sectors. So we did actually make that that

sort of shift on the dial. So you're looking out twelve months, I'm looking out the next you know, three months in change and wondering if in one we will see a five percent draw down at any point in this equity market, what would be the catalyst for that. So I think we got a little bit of a hint of it last week with concerns on the growth outlook.

And look, I'm not saying that anybody is anticipating we're going to have a recession or anything like that, but I do think there have been some complacency on the economic data that investors had, or some deterioration on the economic data, and there have been frankly complacency about the impact of this delta variant from market participants. So I think that was a little bit of a wake up call, a little bit of period of digestion we had to have.

And but let's just zoom out a little bit. What was that, you know, sort of reaction to the delta variant all about? It was an unanticipated bit of bad news that hit the market and really challenged investors assumptions of what they thought going forward. So I think the answer in their keylie, it's probably something that the market is not able to anticipate with valuations where they are. What sentiment is stretched as it is, This is not a market that has a lot of room to absorb

bad news. When we do get it, thank you so much, greatly appreciate it. This is a joy. Let's get right to it with Michael Dardo with m KM Partners are chief economist and market strategy Mark. Michael, you go right at the media gloom crew. You just taram shreds in your note and you say, look, there's a lot of labor data which shows a more employed America. There is high frequency data that shows a pretty good, maybe not mint set of data as well. What's the gloom crew

get wrong? Well, Tom, I think that the gloom crew is focused on the variant and and that news has been bad and there are risks. All of that said, if we do look at the highest frequency economic data, that should tell us if the economy is rolling over, that still looks good for the most part. So this past week with such jobless claims hit a new post pandemic blow. So at least so far, you know, the labor market looks fairly undisturbed and unperturbed um by this

delta shock that could change in the future. But so far, you know, high frequency labor market data looking good. Also, your weekly confidence numbers that come out on on Thursday have actually held up pretty well. And it's a critical point because the University of Michigan data that totally fell out of bed in August. I think really scared along with people, and in the risk with the variant is

really twofold. One would be if there are actually explicit directed shutdowns, which doesn't seem to be happening on a large scale. The other risk would be that households consumers just simply get scared and pulled back, and so that's why there was a lot of concern with that number. Yet the weekly confidence data over the last four weeks is increased each week and it's almost back at a

you know, essentially is matching a post pandemic high. So if that continues, I think we're in in pretty good shape. If not, then we'll have to worry more. So that's my that's my right. Michael Darter SPX level four four or five two, DOWT thousand to nineteen. The markets share of the streets gloom, don't they? Why is there a bid? Two stocks free reasons? Tom Uh, we have high equity prices, earnings are very high and have been doing very well

record sup by hundred earnings and expectations are high. Still low discount rates, so the tenure yield is moving up a little bit, but very low, lower than most people thought at the beginning of the year. And high liquidity, so you have to disturb one of those three supports or equity prices, high liquidity, high earnings, low discount rates. Our view with the strong recovery is that discount rates should be moving up over time and and that will be a headwind two pe ratios if it plays out.

It's not really playing out, you know, we've had a little bit of a movement northward. Real rates do seem like they're starting to move up now, stir up about twenty basis points since early August. That will be something to keep an eye on, you know, as we move into Jackson Hold this week and potentially hear more plans about UH potential tapering from the feed mike. We talk about Jackson Hole, but we really ought to call it

a zoom event. I don't know, a zoom fab. It's just really kind of an interesting UH shift to all remote for a second year. What is a bigger risk to markets coming out of the Jackson Hole remote con fab Is it the potential for a more hawkish FED chair Powell, someone who actually makes news, or perhaps somebody who holds the stance and raises the specter of higher

than expected inflation down the line. Should the delta variant prove to be a passing a viral strain, yeah, I think you know, Paul is going to try not to make big waves on Friday. All of that said, it's pretty clear now based on recent speeches in the recent Seed minutes at the center of intellectual gravity on the Feed is definitely moving towards announcing a taper uh this here, and probably commencing the taper before year end provided the labor market bold stuff. So this is all going to

be dated dependent. The BEDS operating assumption at this point is that the delta variant is not going to dramatically throw the recovery off course. If that proves to be false, then they're gonna end up waiting longer. UM. But as I mentioned before, with those high frequency indicators UM suggesting

that we're still in pretty good shape. I think the FED, I think what how how will hint at is what we already know that you know that the taper will be announced likely this fall, and by the winter the Fed will be pulling the trigger on it. What high frequency data points are you paying the most attention to, Mike, Well, aside from claims and confidence to come out weekly, I'm really you know, watching the anatomy of this bond market. So is yields move up and down? You know, we're

watching what is driving that? Is it real rates or inflation expectations. You also have the estimated term premium in there and against that foliage, what's happening in metals market and in markets and in risky credit right, So what we need to be on the lookout for is if real rates start to spike and you have inflation expectations crashing, credit spreads blowing out, you know, that would not be what we want to see. Uh. So far, that's you know,

that's not really playing out. We've got a modest correction in commodities taking shape, credit spreads have lightened some, um but you know, but so far that really doesn't look like there's anything malignant taking place in in credit markets, Mike, Is this a market that has already positioned for the taper and therefore we will get no tantrum. Yeah. I think that's a good point. Um. You know, what's happening in the bond market doesn't look anything like two thousand

thirteen so far. So in that episode, we had a really big surge in real rates, Inflation expectations fell pretty considerably, and at least temporarily, we you know, we had some serious upward pressure on credit risk spreads, the big commodity uh fall off as well. Um, and then you know, in the run up to the two thousand and fifteen rate even even more severe on the much more severe on the commodity side. UH. So this is not playing out in the same way at least so far, and

it's been very very well telegraphed. And so maybe the focus on the potential taper tantrum means that it simply doesn't play out in the two thousands thirteen fashion this time. So if it's well telegraphed, it maybe doesn't present that large of a downside risk. So what could be the potential biggest downside catalyst for this market? I I do think that the downside catalyst for the market would probably

be on the valuation side. I don't think we're going to see a big liquidity shock, and I think earnings are going to be okay as long as the economy stays relatively strong. But in a strong economy scenario where the Titans you still could have you know, upward pressures on on rates. It might not come as a sudden shock, but you know, over time, I think, you know, the tenure Deald is right, We're gonna be gravitating North word and you know, and that should put downward pressure on

UH stock market multiples. Earnings could make for some of that, but you know, we're sort of overdue here with the broad into indicies for some kind of at least period. Michael, Let's go back to University of Wisconsin microeconomics. One O. One. Let's look at the supply curve dynamics. We have a supply shock folded into a labor market right now. All sorts of theories here shifts this that the other thing.

Do you believe that there's a suppleness to the American economy where we will adapt and adjust and get back to normal supply dynamics. I think we are adjusting, h Tom It It doesn't happen overnight, UM, But the labor market is on the rebound now. Obviously, we still do have these supply side dislocations that are ahead wind. You know, we can certainly see that anyone that's and out there and dealing with the services industries knows that the labor

shortage problems are still their services flow. And you know it's difficult to hold onto employees help wanted signs all over the place, UM, and the delta variant certainly does not help that. But you know, we're going to get to the delta variants and the economy is going to stay relatively open. Uh as school starts up. That should ease some of these concerns about childcare, the extended jobless benefits. I know there's a debate about the impact, but those

are you going to wrap up this fall? Um? And you know that means the labor market is going to continue to be on the upswing here, both in terms of job games and labor force increases. What's your twelve lon's GDP call? I mean, we've got people coming down six and a half percent, maybe even some gloomy or the Fed obviously much more cautious. What is your call? On GDP twelve buns forward. Yeah, our our call is

solidly above end for next year. So keep in mind that, you know, trend growth that the US is fully employed is only going to be about two real four nominal, So we're gonna we're gonna be at least a few inter faces points above that straight in the next year and maybe even beyond, depending on, you know, the timing magnitude of FED tightening. So above trend growth means the labor market continues to tighten, and it likely means some upward pressure on long term interest rates, at least from

from where we are now. So that's that's the call without giving you a spastic pointy solidly above trend. Michael Darter, stay dry, Michael Darter caught in the rain this weekend? Really right in the heart? Is it? Henry or on release? Yeah? Okay, right now, she's not a vice ADMOI we'll talk with sober Klein. Michael biology us to JOHNS Hopkins in the

course of the Bloomberg School of Public Health. So we're just we're thrilled to have you on today, and I need to go to your wheelhouse, which is the differences and all these things these bacteria and these viruses between male and female. You are world acclaimed on that does COVID treat women different than men? It does, so women tend to be less likely to be hospitalized and to die from COVID nineteen UM, at least among unvaccinated individuals.

We also have growing bodies of literature showing us that women are mounting greater immune responses and may have more durable immunity to the COVID nineteen vaccines than men. How is delta variant change things? I mean, for everything we do in economics, financial investment, it's this huge overlay. But over the weekend, how did you settle out where the delta variant is is right now? I think where the delta variant right now it is spreading and I am

probably most concerned about pregnant women and children. So if we start with pregnant women, there is definitely some vaccine hesitancy being reported around the country among women who are either trying to get pregnant or who are pregnant. And I think the CDC has come out quite clearly that all available data suggests that pregnant women are at increased risk of miscarriage and preterm birth if they become infected

with COVID nineteen. There is absolutely no indication that the COVID nineteen vaccines, any of the platforms that are being approved or already are approved by the FDA in the United States, that these vaccines caught have posed any safety risk for a pregnant woman or her developing vit us. In the meantime, of course, we do have questions around the efficacy of the vaccines non presented preventing hospitalizations but preventing infection from the delta variant and transmission. Everything I

read is so confusing. What's the latest on the likelihood of contracting the variant if you've been fully vaccinated? So we we the likelihood is still low, but there is an increased likelihood that we could become infected, meaning people who are fully vaccinated can become infected with this delta variant.

It is more infectious, it's more readily transmissible. But the evidence so far suggests that we are still significantly less likely to be hospitalized or to die, and that includes people who are immunocompromised or ummuno sinest based on age. But but but Dr Kleinen and and forgive me for for interrupting. There is a question though, from a public public health standpoint, and even if you are not going to the hospital, you are a note of transmission, even

as a vaccinating individual, if you contract the virus. And so there's a question about booster shots how much my public health perspective, do they lower the curve? Do they basically bring down the circulating viral load in the community and get us out of this pandemic faster. I think it's going to be a combination. I think it's gonna be a combination of the booster but also interventions like mask wearing, like social distancing, so we really can bring

that number down to zero. As you suggest, I think we are asking vaccines to do something that we have never asked them to do before. You know, there is a distinction between vaccines preventing disease and and protecting us from being hospitalized and dying versus protecting us from becoming infected.

And this this new level of scrutiny and and need for reducing infection is really I think what's driving all out of the discussion around boosters, which in the United States will begin more broadly in September Of course, the conversation around boosters really started because it seems at least there are in suggestions that you have waning immunity eight

months out after you get your shot. But we have, but we have to consider the people who got their shots first, people who already were immuno compromised, the older population. Could that be a factor, and why the effect seems to be waning? Such a fantastic observation. Yes, that really could be. Um Our data thus far suggests that among younger, healthy adults, while there is some waning, it's not to the degree that we see in either older adults or

compromised individuals. So yeah, I just want to you know, I just want to say, Kaylie, that the reason that was a fantastic question is she's playing a Southern card. She's out of the Georgia schools. You're out of the Virginia schools, and she's treating me in Lisa like garbage. Continue. That was not my incenton. Wow, but you had a fantastic question, Lisa. I get another fantastic question. Speak to the doctor from Georgia. All right, see the doctor from Georgia,

doctor sopper Clin. My other question is if you have already had COVID nineteen if you tested positive, it doesn't matter or do the variants mean that you can continue to get it again and again and again. So it does appear that that this delta variant, we can get this delta variant even if we had been infected UM with that initial um stars covie too, that that started

this pandemic. So again, I think even if you've been infected, there is some evidence that that immunity does wane UM and and much of that will depend on when you became infected. But I do think boosters are are going to be recommended regardless of whether you have been infected previously. Dr Cline, don't be a stranger. Thank you so much for joining us today, Superclin. You've got an A plus and a CREB cycle. Unlike some of us with Johns Hopkins, no I went I took the exam of the crab

cycle and Lise I went down to the Franks. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg.