Surveillance: Fed & Inflation with Rogoff (Podcast)

is the former I m F Chief. Economis are far far more than that, truly, one of our thinkers of this moment we're in. I mentioned Professor Rogoff to Geita Gopinath when I was at the I m F a number of weeks ago about this moment with foreign exchange and linking it into our greater global economy and of course our central banks. Kenn thank you so much for joining Surveillance. UH this morning, cannot want to go to

a quote from twenty years ago. I remember this paper the Carnegie mel and the Freshwater School, Bennett McCollum and the team the ones dominant I s LM framework from mecro Economic analysis been sharply criticized excel A on of it and the rest of it. Nevertheless, most undergraduate mecro economics textbooks continue to feature I s LM models. Can take us from John Hicks N. Nine through what you and I were weaned on to where we are now.

Does any central bank have a convection a conventional theory in two thousand twenty two, Well, they still teach I s l M analysis and modern versions of it. But central banks, of course, we're not expecting this inflation. They hadn't seen inflation for a long time. They didn't know what would cause it. They had some thoughts, and I think, if you're honest about the academic literature, there was tremendous uncertainty about the Phillips curve, about the long run neutral

rate of interest. So there's just massive uncertainty. And then you get hit by the pandemic and now the war in Ukraine, and the uncertainty is bigger than ever. It was so important here, folks, and I speak of projects Syndicate, I can't say enough. As a font of wisdom, led by Kinneth Rogoff, the Laureate Michael Spence and Steve wrote many many others. But Kenna roof you right in your essay there on this synchronized global economy. How synchronized are we?

How synchronized is America with China and with Europe? Well, I mean, I think the risks of having a perfect storm, where Europe is in recession because of the war, China is in recession because of a failed COVID lockdown policy, in the United States, because the Fed tightens too much too fast, or you know, however we judge it in response to inflation, and those all feed on each other.

I mean, if China has a supply recession, which is really what we're talking about, that's going to feed inflation, it's going to hurt demand in Europe. Obviously, if the United States goes into recession and hits financial markets all over the world, I would say the risks have risen palpably that this might happen. We could get you know, things could work out well, and that there's a lot of uncertainty. But it's not hard to see all of

these risks. I mean, I admit in China it's hard to see what's going on, but I feel they might already be bordering on recession. So Ken, do you think that already that the risk has gotten too much, the FED moving too far too fast, at a time when a significant proportion of those on Wall Street think it's the opposite, that perhaps they're poised to be overly devish and not respond enough to inflation that surprises again and again to the upside. Well, I don't think we'll know

for a while what they're gonna do. Because they can raise interest right, it's a lot before they raise them too much. I mean, the idea at this well, I think the idea that just to three percent would be enough really unlikely. I think they're going to have to raise interest rates to four or five percent to bring inflation down to two and a half or three percent. And I don't know if that is something they're going to decide to do. I'm not even saying that's something

they should do. We really have to see what's going on. You know, how deep the recession is. They there's they've dug a hole, or to be precise, the huge stimulus in March. And I think a lot of the pressures on the fet and uncertainty from academics and research as dug a hole. And it's not easy to get out of. I mean, there's no pretty picture here, Kenn. Let's sit

on that for a minute. That you think that in order to get down to a two and a half or two percent inflation rate, they would have to raise rates four or five per sent. You don't know whether they should do that. When will we know whether they should be opting for getting back down to that kind of target at some point in the next few years. Well, I mean, you know, it depends on what's going on, what the costs are. They could get lucky and some of the inflation turns out to be transitory enough so

that they get a gentle landing. It is not impossible, but they're you know, clearly a lot of things still that could go wrong. Escalation in Europe, China, you know, getting worse, and it's irrational, COVID lockdowns, and there's just a lot of uncertainty. So I'm not you know, I'm not gonna like to say I know exactly what needs to be done, but it's clear that things are way out of control. Can Rogoff, you are part of our

global interior. Confidence in the dollar. From Moundell Fleming to Jacob Frankel to her work, Morris Hopsfeld and the rest and on Rudy Dornbush and on. We come to a new point. Is the dollars study availue now or is its secondary to what it used to be? Oh? I think the dollars more powerful than it ever was. And yes, central bank reserves have been dir diversified a bit, although a lot into currencies that are sort of pegging against

the dollar. Uh. The dollar is dominant in trade, in voicing, it's dominant in uh financial markets, It's dominant and uh, you know all kinds of transactions. Uh, it's surprising. I think it's actually, by many measures, more dominant than it was in the fifties when it was supposed to be the global currency. Well in the fifties. And let me digress then, Ken, this is so important on Germany right now in Europe? Is Germany held back by a memory

of atmar issuing economics and such? Mean? Is Germany reticent with the war in Ukraine? From another time in place? Is the dollar from another time in place? I'm not quite sure what you're asking, Tom, I mean, you know, are you asking? Is Germany not moving more aggressively in Ukraine because it's concerned about Dafa sits. I don't think so. I think it's much more, you know, the concern about escalation. How much do you push Putin to push him over

a cliff? I think that's actually a very tough call, and the Germans don't see it the same way that the American administration does. Yeah, I'm sorry my question there wasn't all that clear. I fail everyone. I failed Ken when the Red Sox are in last place, So I'm failing right right now Ken on Germany, then in the euro the challenge for Christine Leguard given what I'm gonna call the German reticence, how difficult a moment is this

for the politician Leguard? Well, I think the toughest spot is that they seem to have connected politically raising interest rates, which they need to do, and scaling back on quantitative easing, which is a different animal in Europe. It's really a subsidy from north to south. If they start scaling back on quantitative easing, given all the fragilities, we could see spikes and interest rates in the in the south, in

Italy and Portugal and Spain. So they need to raise interest rates, but they've really been painted into a corner by becoming the de facto euro Treasury, and they're backing the South. So it's a difficult political position. I think that's the most difficult part, not so much navigating deficits. Professor wonderful to catch up with you, sir, Professor Ken Rogoff of Harvard. Let's get to market out of the head of US right strategy a BF A global research mark.

Let's get the Bank of America view. It will be hard for the Fed to out haulke the market tomorrow run us through it. Yeah, that's right. We think, Look, the market is pricing right now two d basis points

of rate hikes over the next four meetings. It is pricing in around fifty five or fifty seven basis points for the Fed in June, So some notable odds of a seventy five basis point rate increase at that time, and we think that, look, the Fed's gonna deliver fifty They're gonna try and be noncommittal on the rate guidance thereafter, and then they're gonna do QT. Now, what the market is going to care about the most is what are the odds of seventy five? And again we think that

Powell is not necessarily gonna fan those flames. He's gonna say, we're data dependent, We're gonna go meeting by meeting, and if we need to hike faster, we will very similar message to what he delivered at the last meeting that, given how much is priced for, the FED may end up looking a little bit dubbish or at least neutral

to slightly dubbish. Mank where is the consensus at the FED, and more importantly, where is the devision and how will this cham and navigate that deficsion in that news conference. This is a fit that's highly uncertain um. It's a fent that's been willing to provide concrete forward guidance because they just don't know how the world's gonna evolve. The most importantly, they don't know how the inflation outlook is

going to evolve. So it seems like the consensus agrees that the FED needs to be at least at the fed's nominal neutral rate, which they believe is around two and a quarter to two and a half by the end of the year. But then there's a wide range of views around where the FED goes from there. Some want to be much higher in rate by the end of the year, while others, it seems, are a little less certain that the FED needs to be outright restrictive.

So over the near term, look, the Feed is going to deliver a string of fifty basis point rate hikes we think three, the markets pricing something closer to four. But after that it's really gonna be data dependent, and we think the Fed would like to provide forward guidance. It's just that they're still very uncertain at this point

in time. So j Pal is going to give his press conference, he's going to answer questions, and then he's gonna walk off, and he's gonna check markets, probably and get a sense of what the reaction was to what he said. What will he be pleased by? In other words, if the markets are calm, will that be a positive result for him? I think so. I think that the

FED wants to stop being a source of volatility. Typically, over the last three rate hiking cycles, what you've seen is that you've seen implied rates fall come down as the FED height This cycle is very different. Implied rates fall has gone up, and with that markets have just become a bit more volatile, and they're swinging around a little bit more. I don't know that that's necessarily the role that the FED wants to play. The FED doesn't

typically like to shock or surprise the market. They like to have their intentions well known in advance and then to follow through on them. And we think that that's ultimately what they're going to be trying to achieve here as they move closer to neutral, So calm market reaction, a limited market reaction is probably going to be seen as a win for Chair Power when he walks off

that stage tomorrow. Mark is keeping calm a policy error at a time when some people are basically are saying that they need to shock and awe a market that is enabling the inflation rate to be and remain as high as it is. Yeah, I don't think that they necessarily believe that we need to shock and surprise the market. They know that they need to tighten financial conditions, and by many accounts, they've already been successful given the forward guidance.

Some of the market is priced to this point in time. But do they necessarily need to be swinging around the market um and create a lot of uncertainty. I think that they would say that that's probably a step too far for them. And look, if they want a surprise, they'll keep going fifties and not stop by the end of this year. That would certainly help tighten financial conditions.

But I don't know that the Fed is ready to commit to that yet, nor do I think that they really want to try and again create a bunch of volatility in this already very uncertain marketplace. Markovna awesome as a wife of bank americt level research right now a really interesting person to speak to of this uproar off of the leaked February draft of the legal aspects of the Supreme Court on abortion. And our guest is the Attorney General for Delaware. But what is so important about

Kathy Jennings is her prosecutorial expertise. This is someone who didn't You didn't get Kathy. You didn't get the job as attorney general at a country club over cocktails, did you? No? You did not with all of your prosecutor experience on this. What is the importance of what the Supreme Court will do? Is it permanent or as a president said moments ago, he's going to do this, this and this given that,

what what's the trend here? The timeline from this uproar to whatever the Supreme Court decides, and the then what after that? How do you see that? Well, first of all, good morning, and here's the hard truth. If this draft opinion and becomes the law of our country, it is the death blow to a constitutional right that has protected

women's access to abortion for nearly half a century. That is what some would suggest the conservative justice of the Court and their supporters desire is well again on the process, Attorney General, the idea of where we are with this draft leakage to whatever the Court decides. As you mentioned, you say a death blow, and then I want to know what the then what is after the death blow? Sure, it will then be up to each state in the country to determine whether there should remain legal and safe

access to abortion. What has protected women for almost fifty years is the constitutional requirement that no state could enact a law that took away the right to abortion. When a fetus is not viable, that gets tossed out the window. And so it is going to be a state led effort to ensure that women can access abortion in the states. Were there is that? Where is that? Where we were in nineteen seventy seventy two before nineteen seventy three. Is it just as simple as we go back to what

was there one week before Roe v. Wade. It's as simple as that. If abortion was a crime prior to Roe v. Wade in nineteen seventy three, and a lot of states still have that law on their books, then abortion becomes a crime again and there is no constitutional protection for women. Cathey, the political angles here are just

you know, uh, just vast and broad here. How do you think this if it is in fact the ruling, if it is the report that we've seen is is correct, what do you think Washington is going to do as it relates to mid term elections? Well, I can tell you this. This is a wake up call for all of us, for everyone, whether you are running for federal office,

whether you're running for statewide office. It's a wake up call for voters everywhere to know that if you want to protect what we have taken for granted as a constitutional right, then you need to get to the ballot box and you need to vote for attorneys general across

this country who are protecting abortion access. Because it will be up to each state, and each states votes count, and elections count Attorney General moments ago, publishing we think our our wonderful top Live people for this and Anthony Lynn are legal editor this morning. Lawrence Tribe, of course a noted scholar. Clearly I'm going to say as a

general statement for cocktail conversation to the left. Uh. Lawrence Tribe goes on to say, it will enable a GOP Congress to enact a nationwide band an abortion and contraception. So that's where I wanted to go. If we get a Supreme Court ruling, whatever it is, a given party can enact something in Congress later, as Tribe says, a nationwide band, or can it go the other way where the president can front run the legal case as he alluded to twenty minutes ago in a release from the

White House. Sure Congress could certainly try to enact a nationwide band. And once again, that's why this upcoming election is so critically important to women everywhere, because we cannot let that happen. I'm gonna have to leave it there. Kathy Jennings, thank you so much for joining us. We hope to speak against soon. Is the Attorney General of the state of Delaware. Right now on the international moment, in Ukraine. Elena Polo Covid Joins is now President CEO

of Center for European Policy Analysis. Elena, forty years ago today the Falkland exo set, the Sheffield went down, the Russian ship went down. It seems like Ukraine can do the big dramatic event like the Moskva and the rest of it. How are they doing, as you describing your note, with conventional warfare and particularly establishing a no fly zone. Well, Ukraine is certainly outperforming all expectations, just as the Russian

military has been underperforming all expectations. But right now Ukraine has very little control of its air space, and that's been the case for our probably big inning of this whole thing. So what they really need now is the ability to be able to prevent the missile attacks, the bombs that have been decimating Ukrainian cities now for three months.

But in terms of their on the ground military operations with massive weapons supplies now coming from the West, especially from the US, they're doing incredibly well and slowing down the Russian offensive in the east. What's the truth here, a Lena, in terms of just how poorly Russia is doing. There are some reports about morale being a real issue about there being a real fear and unwillingness to experience

the casualties that the Russian troops have been experiencing. How much is that the actuality versus a more tense battle with more progress in the down Pass region than some people let on. Well, the Russian military has an incredible ability to adapt and learn with seem this now for years with their offensive and Syria many years ago in two thousand eight in Georgia, so they tried, uh, this very aggressive approach to take over the capital key of

that failed and they've learned from that. Now they have a much better understanding of Ukraine's capabilities. They know the weapons they have, and they're adapting, and they're certainly putting some of their top forces on the line here. Uh Many Russian generals in a shocking number of Russian generals have been killed during this war, a huge number that we don't see modern warfare anymore. But they are adapting, they're putting more on the line. But certainly, you know,

if you're Ukraining, you're defending your home, your family. You're going to fight for that until the last breath. And the Russian soldiers they don't really know what they're fighting for except that they're there and they're being given order. Some morale has been a huge issue, um in terms of getting done what they want to get done militarily. What's been the most accurate read you've gotten, Elina on

the casualty at numbers out of Russia. It's so hard to tell because of course, everything the Russian government puts out there is going to be much lower than the reality. Uh. You know, we're assuming that tens of thousands of Russian soldiers have either been killed or injured beyond the ability

to fight. Some of the estimates suggest it could be up to sixty thousand at this point, but it's really really hard to know because of course the Russian government, Uh, the estimates there are somewhere around fifteen hundreds still, so that gap is huge. So I'm guessing the truth is somewhere in between. But certainly the losses have been high. With all your skill and scholarship, are the Russians tramped

in Ukraine? There's certainly not going to pull back. I mean Mr Putin's entire regime, his ability to stay in power, his survival really depends on a win in Ukraine, and he knows that, and he's not going to pull back. So I think the war will last, unfortunately much much longer than I think we had originally anticipated. But there's

no backing down for Prutin. He knows if he loses, and he's seen as a loser in Russia, that's really the end of him and the end of his regime and potentially the end of his life, because that's how brutal Russian politics are these days. Lena, what do you know about his health? Because there have been so many reports around that over the last couple of days. How on earth do we get a read on that? And this is always the big question with dictators, you know,

always speculating about their health and their illness. We know that Mr Putin is certainly during COVID became quite isolated, very paranoid. Uh, he doesn't feel comfortable people around him. People have to look warranting before they even allowed to see him. So we know that he's very concerned about himself,

just based on how we see him in public. And there's been many reports that he has a crew of physicians that travel with him everywhere, and there's even a joke in Russia that says we know Putin is coming to a meeting because the ambulances arrived first. I mean, we don't know, but certainly you know he's a man now approaching seventy you know, right, life expectancy in Russia for men his age is much much lower. So it's just hard to know what his health actually is. But

the speculation has certainly accelerated. Elena. Thank you for your time and perspective this morning, and public cover that of the Center for European Policy and NASSAS. David Rubinstein Bloomberg Wealth looked for that tonight at nine pm and Mr

Rubinstein joins us this morning. Of course, this is not all that well known, you know, coming out of the Baltimore combine that basketball scholarship you got to Duke University years ago, that worked out right, Um, I was the last person whoever I get a basketball scholarship to Duke, and I went to Duke on a scholarship, but it was not a basketball it was not a basketball scholarship.

We're making news this morning, Mr last three, and it's great and because there's so many people in successful in business who do the sports thing. But it's really worked out for him with his small team up in Milwaukee's tall team. I should say, what has he learned or how does he link in lessons from basketball into the investment world. Mark Lazarie is a basketball player. He played in high school, played one year in college. He loves

Basketball's kids and grandkids love basketball. And he had a chance to buy the Milwaukee Bucks for a price that seemed very expensive at the time, but now seems very cheap. I think he paid about five fifty million dollars. Today these teams are worth about two billion dollars. So while he has a distressed debt business, that's very good. I think he's very passionate as well. But his basketball team, and they won the NBA championship last year. What did

he say about distressed desk? You know, with all they Ken Rogoff just done from Harvard making clear of the algebraic function the epsilon, we've never seen before this uncertainty. What did he say? Well, Mark Lazarie has been a big distress debt investor for decades, but in the last couple of years he's really gotten out of that business because there hasn't been that much distress that he's been

going into lending business a bit, but he's hoping. I guess that there will be more distressed debt opportunities as interest rates go up, and some companies aren't able to do what they thought they were going to do well, and these two ideas dove tailed together. The idea of owning a sports team and alternative assets not necessarily being as fruitful as they have been in the past is because of the incredib demand and how how high valuations

have gone. How much is that a common discussion among owners of alternative investment firms that sports really is a frontier that hasn't been fully tapped. It does seem that if you own an alternative investment firm, you're not really feeling complete unless you also own a basketball team or some kind of sports franchise. Uh So many of my friends seem to own these teams, and they seem to be doing quite well because when Steve Bomber came in and paid two billion dollars for the l A Clippers,

everybody's prices went up. And now we're reading about the football teams in London maybe going for four to five billion dollars and NFL teams going for four to five billion dollars. So it seems to be no limit to how much you can price these teams at and so you kind of feel left out if you don't own a sports team anymore. But is it a vanity project

versus an investment? And this is actually a crucial question for a lot of people who are actually trying to get returns at a time when there has been so much overvaluation in many parts of the market. Well, no one really has lost money buying sports teams, and in decades, I think it's very rare to find somebody's lost money buying a sports team. You make your money typically selling, not on the day to day cash flow on us

you're in the NFL or something like that. But generally, I think most people who are in the alternative investment world still are focused on the alternative investment world is a better way to consistently make money on year in, year out. Sports teams are have other advantages, but they're not really being bought by people principally to make money. I think they want to have some enjoyment out of

owning it. You're a student of this, and the rap is the rich guys are using the public system, the public trough tax dollars and such, and indeed law depreciation of different assets within a sports complex to get this done is a law rigged so the rich guys can own the Chicago White Sox or whatever names named the team. Well throughout history, UH, wealthy people have had advantages over people that are not wealthy, There's no doubt about it.

In the sports world probably plays to that. On the other hand, UM voters can vote these UH we just in the causes them over the Buffalo bills, but they're not people protesting in the streets. We don't see people rioting in the streets against these sports deals, so yes, they probably do favor the owners. But on the other hand, the voters can vote the UH officials out who support these deals, and we don't seem that happening, So yes,

there's criticism that might be justified. On the other hand, I think the general public wants to see the sports teams be as good as they can. Let me get back to Mr Lessie, what did you learn about what he's learned about investment through three once in a lifetime events, global financial crisis, a modern pandemic, and now this war in Ukraine. What's a lesson. Well, the lesson is this is not good for the economy. It's not good for people who want to see investments go up. Obviously, he

believes that we could be in intercession. We're not in one now, and I think the combination of high energy prices, war in Ukraine and the higher interest rates now is not a good prescription for UH steady H investment pays. I think a lot of people who are distressed that investors are now looking their chops saying that in the next year or so there's gonna be at opportunities. So

how are they creating the liquidity ahead of that? Do you hear from people who are getting large piles of cash on hand in order to deploy it if there is a more severe downturn. Yes, there's a lot of cash on the sidelines. A lot of people are waiting to see what the opportunities are. And I do think that people are will think in the next year or two they're going to be distressed that opportunities and the

markets are chopping. There's no doubt about it. It's very rare to have interest rates go up on a consistent basis, as the FED seems to be doing without having some economic slowdown. We've seen that in the nineteen sixty on. Every time federal of the Federal Reserve races interest rates in a consistent way, it does produce an economic slowdown, and it does reduce inflation. It just takes a while. David, thank you so much for joining today, David Rubinstein. Of course,

the Carlin a full interview with Mark last year. Looked for that Bloomberg Well tonight at nine pm. Really interesting and I believe they touched on a basketball team that has won four in a row, including crushing the Boston Celtics and the Milwaukee Books. 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