Surveillance: Fed Decision With Hatzius

former president of New York FED. There was Dudley uh and McKelvey at Goldben Sacks and had this guy out of Germany via Wisconsin, Madison and Oxford and I was like, uh, okay, and then he stopped the US market economy world with mortgage equity withdrawal. That's how he first came to my attention. Yea Nazis has gone on to Acclaim at Golden Sex, not only running economics but providing a view over investment research for the Acclaimed firm. And we're thrilled he could

join us today in our studios. Yeah, and I want to go right to the time continuum OM investors really looking this is well. The X axis out for any FED chairman is always a challenge. What's the challenge for Chairman Powell right now is he looks out to two thousand twenty three. Well, I think there is a number

of decisions that have to be made before that. When do they start to tap our QUEI they've said that they are not going to high grates until that process has has concluded or that is strongly implied it And that's also going to then determine what do you think when rates are going to start start rising at the moment, as you know, the dot plot is basically saying no hikes until the end of two thousand twenty three. But that's going to be on the table today and I

think it's a close call. It's all the best guesses that they stick with what they said, with the message they're sending, but it could move forward. There's your b exlusive banner, folks, HOTSI has predicts boring meeting. Okay, forget about that. It's Latin, it's ex anti, it's ex post. After the fact, I'm Matt Besler with a really important question.

Maybe he'll be in the press conference as well. Matt Bosler making very very clear that this is about the present base effect analysis versus the truly ex post inflation expectation game, which is it is this analysis of base effect dynamics or is it truly traditional FED analysis of inflation expectations? You mean, what what happens into the mystery of how we get out there to this in this new theory. I think that's going to be driven more by what you think about how type the labor market is,

and really the traditional stuff, the neo charm. Inflation increases partly base effect, it's partly reopening effects, and of course it's these bottlenecks, which which which which Michael just talked about. Yeah, and before we get into just the granularity of inflation, I want to understand the granularity of tapering. People talk about it as though it's a monolith, and yet is it, as Michael Collins said, the FED getting to zero, getting to no bond purchases at all before they hike rates.

That's our assumption. I mean, they haven't said that explicitly, but I would guess that they're going to get to zero and then there will be some time that will elapse before they start moving rates higher. And obviously that's going to depend on the data, but I would be surprised or not. Maybe shocked, but surprised if they were still planning to buy say twenty or forty billion dollars

per month in perpetuity. It's not our expectations. So yeah, I guess I'm kind of struggling with the idea that they're buying the Federal Service buying more than a trillion dollars a year in its base case for continuing a monetary accommodation as it currently is laid out, it's it's balance she currently almost eight trillion dollars. It removes this accommodation. Do you really see that it's feasible for it to do so without disrupting financial markets in a way that

stymies its effort to ever raise rates. I think there could certainly be some hiccups, especially if you're also seeing a slowdown in growth next year that's driven by the removal of some of the fiscal support. I do think that two thousand twenty two is going to be substantially

slower on a fourth quarter to fourth quarter basis. We think basically two and a half percent after a real banner year of you know, seven point seven percent Q four to Q four in two thousand and twenty one, and So if that interacts with an environment in which the FED is is tapering bond purchases, you know, I think that could result in a in a growth scare. Yes, I do think we probably are going to have some

nervousness in that environment. Well, let's talk a little bit more about some of the fiscal policies here, yeh, Because I mean, obviously there's a multi chillion dollar propos z all down at Washington sitting on someone's desk. It may not go anywhere, or it may end up being a lot smaller than, of course what the President proposed. But I'm wondering how much of that has to factor in right now to the glide path at the FIT is

trying to chart out here. So I think the baseline should be that something gets past, maybe not the whole thing, but something large in terms of the headline number. But I think the key point is that this is a very different type of spending program relative to the American Rescue Plan Act that was very front loaded one point nine trillion dollars basically over a year or a little over a year, whereas this, uh, this this plan is going to be over ten years or whatever number you see.

You have to divide them by ten and that's still going to me in a significant amount of fiscal drag in two thousand and twenty two. Right, that's a great point. It also means, of course, there's still got to be some additional treasury issuance. It does mean, of course there's a potential here for changes in tax policy as well.

Yeahn how do you factor that in? I think that strengthens that point that it's not going to be as stimulative because, as you say, a significant part of the spending increase is going to be offset by tax increases. And you know, I think it would be somewhat simulative, but you know, much less so than the than the headline number, both because of the tenure horizon and because of the tax increases. I'm Bloomberg Radio and Bloomberg Television worldwide.

Yeh us with us with Golden sex Or, chief economist and head of investment Research on this day before an important FED meeting. Young. Your your statistics there on the slowing of the American economy under three percent is really really important. I would suggest a huge body of Americans are not prepared for that. If we slow from a boom to a hot CEUs under three economy. We've never done that before. I mean, you and I remember the

we've studied the fifties yearly fifties deflation. Do you anticipate such a shock there in GDP dynamics that we could get to a deflationary dynamic that Eisenhower new? I don't view it so negatively. I mean the right now, we're still a long ways away from full employment. There's still a lot of slack in the in the labor market. Despite the near term labor supply issues and strong growth this year is going to get to get us to something like full employment by two thousand and twenty two.

At that point, you want to see slower growth because otherwise the economy is going to overheat. You do have to worry a lot more about persistent inflation, and ultimately that's not going to be a good environment. So I think you'll need to see a slowdown. I don't worry about deflation, but at the same time, I think the current inflation is probably largely transfer so much as a

new economy in the overlay of technology on it. We partition it into goods dynamics inflation and service dynamic inflation. Parts the difference now is we look at a service sector dominant and goods producing as well, those inflation dynamics for our inflation expectations. Well, I think the surprise in two thousand and twenty one really has been on the good side. The acceleration and COVID sensitive sectors, that was very much expected. The base effects were very much expected.

I think six months ago most economists would have been really surprised with the enormous surge in used car prices and other other durable goods like that, and that's really been been the key driver. They are outliers relative to the overall distribution of prices. Core PC is above three percent, probably will be above three percent for most of the

rest of the year. But the if you if you look at trim mean measures or median measures that really capture more the distribution of prices, those are still pretty well behaved. So to me, that that screams uh, screams transitory. What about wages? That way just have been going up in particular sectors that have been more in demand, especially with the reopening husticky is that well, I think we've seen wage increases, especially at the bottom end of the

pay scale leisure and hospitality in particular. I think the evidence suggests that the remaining COVID effects around fear of the pandemic, and maybe it's some childcare issues, but also the three dollar unemployment top up have weighed on labor supply. That's going to be true probably for a few months longer, but in the fall, I think we'll see a big increase in labor supply, and I think that's also probably going to lead to reduced wage increases in some of

these sectors. Jhanna, we've got a headline at the FENS. J. Powell is planning to discuss the pandemic emergency lending program as well as the economic recovery at a House hearing on June twenty two. I am wondering about how concerned you are about the increasingly political nature of the Federal Reserve, not saying that they are political, but that they're getting increasing pressure to be political to finance the US debt and deficit, especially as the US plans to increase its

deficit by so much. I think the there's always been political pressure and Congress congressional oversight, and you know, obviously jaw boning of Fed officials. I mean, if you go back to President Trump, there was a lot more overt pressure on the FED than than what we're seeing now. I think now we're more in a more normal historical environment where there was always, you know, always hearings like

this and strong opinions expressed. But in the end, I think the FED is committed to the to the mandate, and the mandate obviously looks somewhat different now after the after the changes of last summer, but I don't think it's a dramatically different from where we've been over the long term. Well, but at least his point as well, though, it's sort of the shift in that mandate, or at least the tweaking of it, does sort of open the

door for greater criticism here. As much as a fit will will, of course try to remain independent and preserve the perceptions of independence here, does the political landscape shift enough here, Yan or maybe that undermines some of the messaging. Look, I think the way that the mandate is being interpreted looks a little different. I think for for good reasons, it does make sense to try to average two percent.

I don't think one point seven percent, which was the average before, is drammatically different from from two percent, So I don't think it's a it's a massive shift. But I do think that the changes that took place last summer at Jackson Hole, you know, do make sense. Is that going to be something that will you know, maybe raise more more questions, uh, and including questions from from

policymakers on and electric officials. Probably, But I do think the the mandate is reasonably clear and we, you know, should over time find out more about exactly how it gets interpreted. NAIs, thank you for joining us today, greatly appreciate it. With Golden sex, very generous conversation here right now. We are absolutely honored to bring it from the Cannon Institute, their deputy director, William Palmerans in the United States of America.

He is truly our expert on law in Russia, truly going back to Peter the Great in his important book of a few years ago. Professor Palmerence, thank you so much for joining us today. If you were to write a long telegram from Geneva today about this summit, what would you say or is there not enough to say? So it would be a Pomerans short telegram. I think it would be a very short telegram because we still need to see what actually the two leaders agree upon.

We don't have any preliminary agreements, we have any preliminary agenda. So I think a lot will depend on the communication between the two leaders and what comes out of this meeting. UH. It is much heightened. It is recognized that the relations between the United States and Russia are at a low ebb um. But this is not the Cold War. I don't anticipate Mr Putin arriving like Mr Gobatrov and UH aving a surprise. I think it will be a business like,

work in like meeting. UH. They'll agree to disagree on a lot of things, and they'll try to see where they can cooperate. Professor Primary, it's very importantly here and I think of the Soviet Union. How much of the Soviet Union tone or diplomacy is represented by Mr Putin or is Russia completely moved on from the legacy that you're expert in. I think that the deemer Putin does have certain Soviet tendencies. UH. In terms of international relations.

He is not interested in joining the global order as it were. UH. He is interested in sovereignty and Russia's ability to x to UH, to a certain sovereignty in domestically and overseas. So I think that this is really the important aspect of Putin's foreign policy. UH. It's not overly ideological. UH. It is just to make sure that Russia is respected and has its sphere of influence. And this is not only a Soviet tendency. This goes back

hundreds of years. William. Before this summit, a President Biden met with the allies and asked for their input about how to handle this meeting. I'm wondering how much is Biden talking to Vladimir Putin and how much is he talking to the allies in terms of supporting how they want their relationship with Russia to develop. I think coming out of the EU and the NATO summit, we have seen a resurgence in the role of the United States of the global leader, and its ability to talk and

communicate with its allies. So I think that going into this UH the summit, UH, President Biden has listened to his allies. There were some important achievements UH out of the EU and NATO summits, both in terms of dealing with China and with dealing with Russia. And I think that one of the real victories forged Joseph Biden happened before the summit with Putin, and that is that he reasserted global leadership and reasserted the relationship and with with

with our traditional allies. William we are expecting President Biden to arrive at this summit any minute, his motorcade on the way. There is a question though President Biden is toggling between a harder stance that domesticly is politically popular and then internationally is much more delicate. Given some of the trade relationships between Europe and Russia, and given the geographic proximity of those regions. How is President Biden toggling this?

How much has the European view and frankly the US domestic political vision of Russia having a hardening line diverging at this point? I think leading up to the summit UH, President Biden has uh given Europe a tremendous victory in the sense that we have the United States is not going to sanction the owners of the North Stream to pipeline and that that is now going to most likely

be completed. So in terms of listening to the United States and the European allies, I think President Biden has said, has demonstrated that he wants this relationship ship with our European allies, and he has decided that that is acceptable, even to the point of not fulfilling Congresses wishes to sanction owners of the North Stream two pipeline. So I think listening to European leaders, I think that they're trying

to present the United Front. It's always difficult to unify Europe on foreign policy issues, but I think President Biden went a long way to healing the riffs that occurred during the Trump administration. Absolutely, And of course William though, I mean, we've been here before. We're actually watching on screen right now. I believe that is the motorcada of President Biden working its way through Geneva here, Uh Biden

of Coors going into this meeting. But of course we've been here before, here with Trump, with Obama, with Bush. There's been a lot of attempts to sort of restart re kick off the relationship between the US and Russia. Here, is there any reason why outside observers looking at this should be more hopeful that this time around the outcome going to be different. In one word, now, um, I think President Putin has decided to go it alone in

terms of international um for policy and geopolitical objectives. UH. So I think that there is not going to be a reset or anything like that. And Biden has asserted that he's not looking for a reset. UH. We are looking for ways to which to tone down the rhetoric. We are trying to identify areas where we can cooperate, which sounds like the reset. But I don't think his ambitious as a reset. I don't think that President Putin UH is going to change his political stripes and his

geo political goals. UH. He has a go at alone strategy. He and he has asserted that both politically, geopolitically and UH. He has introduced various policies such as import substitution UH say acians UH, counter sanctions on food, on food, et cetera. That suggests that he's not interested in becoming part of the international global order. That Russia really believes that it needs to go it alone, and that is UM. That is the policy of the demur Putin. Well, let me

reset here. Mr Palmeranson will come back to you in a moment. On radio and television. We we sat this morning. We welcome all of you worldwide and across this nation. William Palmerance with us with the Kennon Institute, their deputy director, absolutely honored that he could give us perspective here this morning on television the nineteenth century actually eighteenth century building, Villa Lagrange, where Mr Putin awaits the arrival of the

President of the United States and rude. My major observation is the US motorcave was maybe going at a faster speed than the Russian motorc Yeah, Professor palmerans, Um, I think very important. Only here is what we've observed over the last number of days and many John Muirscheimer, Chicago. Richard has at the Council on Foreign Relations suggesting a NATO overreach. Did NATO reset in the last number of days their overreach of adding countries over the recent end

of Cold War years? Was there a reset Tornato which could be in discussion today? Um, I don't think there's a reset to NATO. Obviously there is the addition in the communication of dealing with China, although there isn't really overwhelming agreement on how that should be done. So I

don't think that we've had overreach uh in NATO. The second important reason why I don't think we have overreach is that President Biden yesterday issued a very strong statement that NATO is not going to have Ukraine joined it anytime soon. That Ukraine has to deal with it's domestic policies, it has to deal with corruption before it gets an action plan before it becomes a part of NATO, and

that is an important objective of the deemer Putin. Putin does not want Ukraine to become a member of NATO. Uh and it appears now that Ukraine won't anytime soon become a member. So I don't see overreach. I see trying to deal with a post Cold War world. We're trying to play a bigger role. But I don't see that we're over that NATO is overreaching, And I think the best evidence of that is that it's going very slow in terms of inviting Ukraine to become a member.

President Biden pulling up to Villa Grange and waiting here the Swiss authorities of waiting to greet the President of the United States, and I believe in side Mr Putin, and we'll get an image of the two leaders here in a number of minutes. William Pomer It's just so importantly to any of us is this word that the President of the United States you his autocrat. When we see that within the media, when we see that within international relations, how do you define the autocrat that Joseph

Biden sees. I think that when we talk about an autocrat, and especially in the Russian sense, we deal with a leader who doesn't have to address uh domestic politics as a word, that Putin's word is the final word. Now, he has different issues that he has to deal with, but he doesn't have a legislature that is opposed to him. He doesn't have a judiciary that overrules him. Indeed, in the aftermath of all the constitutional amendments, this Putin has

solidified his power. So when we talk about an autocrat, it's someone who doesn't have to really deal with the vicstitudes of politics. Power is is always in the hands of the autocrat, and in Russia's case, uh Putin's degrees, Putin's word can become law. So this is obviously very different from the American system of checks and balances and and separation of powers. But this is what the advantage of ladieber Putin is. He doesn't have to address Congress Uh,

he doesn't have to address other consistencies. His word becomes law. William palmerans thank you this morning for joining us with the Kennon Institute. Just a spectacular brief there on this moment for Russia and the United States right now with global strategy off of this moment and certainly off the FED moment. This afternoon, we're thrilled that Brian Levin could join us. He's with Investco and their global market strategist. Brian, just a perfect day to speak to you as well.

How does Investco reset it midyear? I don't know if we necessarily reset. I mean, I think the reality is it's an economy that's starting to move from recovery into an expansion phase. So from the large story, a better economic backdrop of FED that's on hold, it's still an environment that you want to favor stocks over bonds, you want to favor credit over treasuries. I think to the extent that you reset in an expansion phase is that you start to see more of the growth oriented parts

of the market participate again. And so we had this pretty big value move, uh, from the fall of last year at the beginning of this year, and I think that continues in an improving economic backdrop, but you tend to see in the expansion phase your big growth stocks also start to perform quite well. Bryan, it will be a bigger surprise to markets today if the Fed does not bring forward their rate high expectations based on the

dots to three, or if the Fed does. I think a bigger surprise to the market would be if they do bring it forward. I think that we're still going to be talking about a very gradual path of normalization, and so my expectation from the FED is to focus more on what they're gonna do with their asset purchases. I think the message is going to be, we're gonna start talking about talking about tapering asset purchases at some point, will bring forward. At some point we'll we'll move towards

where rate expectations are going to be. But the reality is, this is a FED that's telegraphed this pretty well, and I think so far has done quite a good job, particularly if you look at inflation expectations three and five year out which are very much near their comfort zone, and so um I think the FED is going to continue on a gradual path. It's it's a supportive backdrop for markets, and you know, invest you should note even these early moves and FED policy tend to not be

what ends the cycle. They may create some volatility along the way, but it's really the last rate hikes that matter, and we're a long ways away from that. Brian, Where do you see us right now in the economic cycle here, and particularly at that sort of dovetails with the positioning that we've seen in equity markets, that rotation two cyclicals and now over the past couple of weeks away from cyclicals. Well, it's a critical question, and I would say that we're

still very early in the economic cycle. And the reason I say that, try and say that forcefully, is because I hear a lot of questions of is it ending soon? Is it too is there too much access? Is it too inflationary? Remember, we had a disastrous outcome. We're digging out of that outcome. If you look at it from a real GDP perspective, we're getting back to where we were at the end of But if you look at past cycles in the United States, you find that cycles

have lasted on average around seven years. With the cumulative increase in real GDP so this idea that we're a year in and only just getting back to where we otherwise would have been suggested. It's very early in the cycle now that to me favors risk assets until it looks like the economy is going to roll over. The next question is directionally, where are we. We just had a great recovery phase with all the implications for markets. Now we move into a more expansion phase and an

expansion phase. Um, you shouldn't expect interest rates up as much as they were. I think the dollar is still somewhat weaker. Commodity should continue to do well, Equity should do well within equities again shifting more to growth stocks. I got about eight ways to go here, Brian. Hey, having you on for what you're on for forty five minutes today, we need to get you on for three hours here. But you know, you know I'm gonna go here to what you just said, which is horse and cart.

Is a week dollar the horse or is a week dollar the cart. Well, the weak dollar is a is a by product of a We're coming out of a very um strong dollar environment, where now in an environment where growth around the world maybe a bit more synchronized than it was in the aftermath of the global financial crisis, there's been a lot of policy support in the United States and the FEDS telling us that they're going to

be on hold. So whether it's a horse or a card, I think what you're asking is, does that start to unlock some of the value that exists around the world.

And I suspect that it does that. The challenge that investors had investing internationally over the last number yere has been a strong dollar environment, to the extent that the FEDS on hold policies relatively accommodative, and the rest of the world starts to participate more in this expansion than the dollars should be stable a weaker and international markets should perform well. Brian, let it thank you so much

with invest Go today just really well timed. We're still degree the engineer Sean Donovan who's engineering a New York City mayoral candidacy looking for victory, and I haven't done this show, and I'm thrilled to have yon today because the most unusual vote of New York where second or third is a viable alternative. All of a sudden it is upon us explain how your day is different each because maybe nobody's trying to be number one, but they're trying to be number two or even number three in

this ranked voting. Well, Tom, you're exactly right. This is a historic election because we're using rank choice voting for the first time in New York City, and that means you have to be able to get more than fifty

of New Yorkers supporting you all across this city. And what it means is, and we've seen this in other places around the country, that rather than the kind of political attacks we've seen the mud slinging from the other candidates going into the final debate tonight, what really New Yorkers want at this moment is somebody that instead of politics,

is talking about plans. And that's I think the thing that separates me in this election is I bring real change from the status quo of the last eight years New York has been headed in the wrong direction. But I also bring deep experience in the moments of crisis that have hit our city. Nine eleven, Sandy, the Great Recession, all of those I helped to rebuild New York from, and now is a moment you talked about the excitement of reopening, but it's as if we've just been hit

by the hurricane. Now the hard work begins. We still have more than five hundred thousand New Yorkers out of work, and we need a mayor who really can lead the scene forward and has the experience in these moments of christis Sean. Let's dovetail the reality of the ranked voting and maybe a move to a centrist dialogue with what's clearly become the theme, which is crime in the New

York Police Department. How do you dovetail a centrist vote with the responsibility of all constituencies and the New York Police Department. Tom's such an important question, And you know, if we step back and think about the work we did under Mayor Bloomberg that really helped to make New York City the leading city in the world in so

many areas that rebuild growth in this city. It was really centered around the idea that in the modern economy, talent decides where to live and companies in capital follow. So quality of life, safe streets, clean streets, all of the things that make New York a good place to live are central to the economic success of the city. And so we need a mayor who really understands how to keep New York safe. Part of that is getting guns off the street. Having a mayor who can work

with President Biden, with other mayors and governors. I have those relationships, we could stop guns coming into our city. We also have to recognize though we're seeing a mental health epidemic playing out on our streets. Homelessness is exploded. We're seeing people pushed on our subways. UH. Knife attacks, anti Asian hate crimes all connected to this epidemic of

mental health. And that's work I've done for thirty years is breaking that cycle, providing housing, getting folks off our streets, in addition to the work I've done on public safety and policing that we need to bring those together under the next mayor to help New York City start growing again and to put those more than five thousand folks back to work. Okay, and of course, in addition to safety, here sean a lot of folks UH also looking at affordability,

housing affordability. This is a tough city to live in for a lot of folks. You are UH, basically housing affordability nerds. You've spent a good portion of your career doing this here. What's the solution though for New York City, because a lot of people have tried to address this before and have failed spectacularly. Look, the first thing we need to do is help keep people in their homes. New York City was the hardest hit city in the world a year ago. We still have more than half

a million hours. We're on the verge of the worst eviction crisis our lifetimes. And instead of having a mayor who will demonize and divide us go after the private sector. We need to bring billions of dollars of aid that's available right now, get it quickly to our renters, but also to our landlords to keep them afloat and make sure that we avoid that crisis. Second, we need a mayor who can work effectively between public sector and private sector to grow our economy and to create more housing.

We have a desperate shortage of housing that is pushing up prices all across the city. And so what I would do is, just as I did when I was Housing Commissioner, work to make more housing affordable, to grow New York City, but also to make sure we're using all of our tools to create a lot more affordability, and one of those is homeownership. You know, we've learned that the best way to stop people being pushed out of their neighborhoods is give them a piece of the pie,

help them own. And that's kind of the forgotten strategy in affordable housing in New York City the last day years. I would bring that back and make sure that we're creating wealth and growing opportunity in the city for affordable housing. We're out of time, valuable time, it has been Seawn Donovan. Thank you so much, New York City, Mayor of Canneda.

This is the Bloomberg Surveillance Podcast. Thanks for listen. 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