Surveillance: Fed Expectations with Hatzius

at Government Sex. Yeah, let's talk about it. China GDP forecast over at Goldman now three for the year, you're at base case for pretty much everybody. They enter recession. Yeah. Where on Earth does that leave the US economy? I think the US doesn't have quite the same degree of headwinds as as both China and Europe. And China obviously you have zero COVID policy and the property market downtown which is a multi year development. In Europe, you've got

the gas issue. There's nothing quite to the same degree that we have in the US. But it's going to be a slow growth environment below trend. The FED wants the lord trend. That's why financial conditions are where they are, because it it's tightening for the aggressively. And you've got the fiscal drags or plenty of headwinds for sure, but I don't think it's quite as bad as in as in China or the your area. How do you expect cham and Pound to navigate that on this Friday. I

think he'll be balancing between two things. One, I think he will lay out a case, as he did at the last press conference, as they did in the minutes, for slowing the pace of increases. We have to seventy five basis point moves. Our expectation would be, barring significant

data surprises, that the September move is fifty. I think he'll you know, I don't think he'll be specific about the number, but I do think he'll be saying, you know, there is a risk of overtightening, and therefore it makes sense to go a little bit more slowly than these really outsized increases. But at the same time, he'll he'll make make clear that the job is not yet done. Inflation is way too high. They're very committed to bringing inflation back down to two percent or or thereabouts. So

I think it will be a balancing act. Yeah, and there's a mix here of themes and one of those what we just saw from Macy's where Bloomingdale's in the haves do well and Macy's in the have not really a struggling Or it could be John Taylor Stanford visiting with Bloomberg in the last twenty four hours saying sustain, sustain, sustain a higher yield environment. Are we getting our time, our extra excess wrong right now? Do we need to look out two years, three years, or five years of

elevated inflation? I think a year from now, two years from now, inflation will be much lower because there are some you know, some some drivers. I mean, commodity prices are clear the good sector in general, I do think that's going to come off a lot. The risk is more on the services side, where we've seen less of an indication that things are slowing, especially rents are still growing very quickly. So I think that's still going to be well above normal, you know, into two thousand and

twenty three, and maybe even maybe even beyond. So I do think that there there are going to be improvements, but not everywhere. Should we have a more nominal GDP nominal inflation analysis? Witness the haves and they have not, they have not are getting crushed minute by minute should

we switch to a more nominal study. Well, I think what you're suggesting is that we look at the distribution of incomes and spending, and you clearly see some big, big differences there, and I think you know Macy's versus nord Strom's is a good example. You can look at

in real income at the top end. At the bottom of the income distribution, there's been a much bigger pullback at the bottom end, in part because the fiscal support was so much more important there and that's come off, and in part because at the bottom end you see more of an impact from gas prices and inflation generally at the margin. The dropping gas prices obviously is helping somewhat more at the bottom end, but that's only a

small part of the previous deterioration. There is, however, yah at least with physical goods, a bit of a disinflationary pressure, whether it comes to inventories or some of the commodity

prices that have come off. Is it enough to achieve a soft landing if you actually improved some of your forecasts about what the FED has to do and the outcome in the US economy, I think it's certainly helpful and we've you know, continued to be in the softish landing camp um in part because of the expectation that some of the goods pressure pressures would abate. The most

important factor, though, is adjustment in the labor market. That's something that they need to pull off, and I think we've seen some encouraging indicators, in particular the one point one million decline in job openings that we've seen in the Jolts data, which is probably still underway. We'll probably see some further significant declines there. That is starting to

bring the labor market into better balance. Still early days, we still have a large gap between between jobs and workers, but at least we're moving in the right direction there and I think that's going to be key to sustain it. Do you think that the market right now is not reflecting what still has to be done though from the federal reserve in order to achieve that. And this is something that we've heard about throughout the morning. The theme of the day has been at stocks need to wake

up to it. That is the bearish tilt. Do you agree with that that right now they are not accounting for the pain? I think the terminal rate pricing doesn't look too low. I mean it's sort of three, you know, three and a half or a little bit more. I think that that is sufficient relative to our forecast. Uh maybe even a little bit more than sufficient. Where I would disagree more with market pricing is the pricing for significant rate cuts. I think that you know, certainly could happen.

It would happen if you went into a recession. But I think in a slow growth environment where the FED is trying to squeeze inflation lower, I think they'll be very resistant to to rate cuts. So I do think that those cuts are probably somewhat excessive from a market pricing perspective. It's a raisin hold strategy. In the words of San Francisco FED president Mary daily Young. If you've got any idea of how you think they will hold rates at that kind of level for how long? Is

it too early? Too premature to add that conversation. Oh, I think it could be a couple of years. I mean, really get to the You get to them, you know, mid trees or or maybe even a little bit higher, and then then you stay there. Because I think while inflation will look a lot better a year from now, I think it will still be significantly above the target, and ultimately they do want to get back down to pretty close to two person. Yeah, and that is totally

at a consensus. How much pushback do you get from clients when you bring that up. I think it's away from market pricing. I don't know if it's as out of consensus. In terms of what forecasters are saying. I think there are quite a lot of forecasters and FED officials. I mean you you just mentioned President Daily, FED officials who are saying that this is a reasonable baseline. John Screeze, one more question in here, because the bottom line here is simple. This is the theme of Jackson Hall. This

is the difficulty. This is the theme. Yeah. Three, If you're gonna held rate to that kind of level, and it could be a stress you said could be a couple of years, what is the soft lending fit into that kind of profile, that kind of race profile. Well, I think that is a soft landing kind of kind of assumption. If it wasn't a soft landing, if you went into a recession, then I think you would get cuts.

But if growths days at one percent one and a half percent, labor market continues to adjust, inflation gradually comes down and the FED in that environment keeps the funds rate relatively high. You know, I think that is a

soft landing, Absolutely fascinating. It will continue this conversation, GOM, Yeah, great to catch up set exceptionally strong set of conversations today, Young Hots of Goldman Sex joining us and we continue strong now with Stephen Rashido to say he's chief US economist at Missouri Securities barely describes their desk with dominic constant. Stephen Rashida folds in a massive macro view, including a

calculus of g d P in America. Stephen Shuto, when you talk to Dominique and the two of you get together, are we in recession? Uh? The NBA will not classified a recession to me. You know, two quarters of consecutive negative GDP reports, you know, implies your inner recession. The problem for people is going to be that this is gonna be a very shallow, very long recession. It's not going to be the typical recessionary environment that we've seen

UM in since nineteen nine, which were credit cycles. Nor is it going to be the typical inflation cycle that we've experienced in the post war period up to the nineteen nineties. It's a very very different cycle. It's a long, shallow cyde well within that, and this has been the theme for the day. Stephen Shudo, if if you have a long show of cycle, does that mean the real message from Paula Jackson Hole will be a more sustained view of interest rate strategy and not the foolishness of

the when the rates come down. That's exactly been our call all along in here, that we're basically looking at a dynamic of a pause, not a pivot. Uh. The question that we're still debating is it four percent er? Is it's something north of four percent? I think we have to get to at least four percent. And last time I was on we were talking about it, we were pricing three and a half. Now we're pricing something in between the three and a half and the four.

I think we'll get to the four and you know, hopefully that will be the end, but it may not be the end of this scenario. This is the rice and hope to base state if we caught up with the unhanceus of Goldman, take a listen to what you have to say. Where I would disagree more with market pricing is the pricing for significant rate cuts. I think

it could be a couple of years. I mean, really get to the you get to them, you know, mid trees or or maybe even a little bit higher, and then then you stay there because I think while inflation will look a lot better a year from now, I think it will still be significantly above the target. Right to what and hold for how long? Right to three or three and a half percent? And hold for a company is stafe? What do you think of that? Well, I think we're gonna keep on moving higher than that.

I don't think three and a half is the top in order. I think necessarily we're gonna hold it for several years. I think there's clearly an argument to be made that we're gonna hold it through three. But where we go in is a very very different um animal altogether, because you have to look at what's happening in the currency, and you have to look at what's happening with supply chain related issues, and then you have to look at

the demographics in the labor market environment. And it's this tug of war that we're going to see from a stronger currency, supply chains easing up versus the wage related pressures that are being dominated by the demographic issues, in particular the reduction in the number of workers from the millennials to the Generation Z which is now entering the

labor force. So we might wind up in an environment where the Federal Reserve has to sustain higher rates on a longer basis than we've seen in here for quite some time. But again, what the starting point is is still an open book. What's the advantage of steven for the Fed raising rates beyond three and a half percent? What's the end target and why, especially if they planned then take them down to something lower over a longer term. Well, again, do they plan to take it down to something lower

over the longer term? The real question is how does this labor market dynamic play out. You can make a very very strong demographic argument that the labor market stays tight throughout the entire period in here, and therefore you are as going a sustained higher level of interest rates going forward. The question always is going to be what

level of rates will that be sustained at? But a quick return back to the near zero interest rate environment that we've been anticipating is going where that people have been someone anticipating is going to require some kind of credit event to unfold in the economy. And when you look at the underlying credit quality of the economy in general, there are some pockets where we are concerned, but an aggregate,

the balance sheets are still very, very healthy. So what is your top federate that you're kind of penciling in here? How is that evolved over the past few months. Well, it's evolved a lot, I mean over the entire period of two but but I do think four percent is the near term target um and I think once we get to four percent, we will pause for a time, whether or not that's a pause to go higher or a pause to continue to hold that level on an

ongoing basis. That's where my thought process is. Stevens side baseball. If we've got China with subpart China growth, the dynamic of exports minus imports, how does it change and what does that mean for Chairman Paul? Well, again, that comes right back to the currency story, because it's the supply chain dynamic. You have a slower global GDP environment. Clearly what's happening in Europe is creating a wider GDP output

gap globally. You have a strong currency, which will allow us to import those products on a more on a more competitive basis, which will wind up dampening domestic inflationary pressures. And then you wind up with when as the services dominate over the goods portion of the equation. And I think this is the reason why inflation is going to come down. Whether it will get as quickly as the Fed would like to see back to their target or not,

I think it will get there. I think it'll get there. Probably, I don't think it'll get there. In my first exercise this morning was to look at the Bloomberg Financial Conditions Index for the United States and for Europe, and the note back over thirty years that this is the first time they've diverged so sharply. Now, obviously there's a war in Ukraine, which is uh dealt to this. What does Bailey say to Powell or Powell say to Bailey on

this immense transatlantic divide. Well, I mean, I think, you know, the situation is the reverse of what we experienced in the nineties seventies, where the you know, the Federal Reserve chairman at the time, Paul Ulcer, came back from an I M. F meeting UH and was forced to change monetary policy abruptly and cause, you know, one of the worst macro recessions, inflation recessions we've seen in our history.

And I think all of the problems on the currency side of the equation are really European problems um and Europe has to address its issues. We can't fix its problem for them. And that's pretty much the same message that you know, Paul Volker got in reverse when he came back from the I m F meeting in ninety nine, which was basically, you have a problem with your currency. That's why your currency is going down. You have to fix your problem. And I think Powell has to push

it right back on them. You've got a problem, you have to fix it. We can't fix it for you. And this is the different kind of FX wall, Lisa, we've been talking about through much of this year. This is a big problem for Europe. And it's kind of strange because ten years ago this is exactly what they were trying to engineer. A week of euro. They couldn't get one, they couldn't buy one, and now they've got one, a dramatically weaker euro at a time that they aren't.

We don't want one absolutely important inflation how much though, is also a problem for the US, and we haven't really talked about that, John, but this was something that you had discussed earlier in terms of the Edyard Denny note, which is how much of oppression will this be on the balance sheets of companies that sell into Europe that have to deal with the headwinds from a stronger dollar. I don't think people have gained that out sufficiently. Well.

The multinationals are going to have a problem, aren't they. But that's a cool a profit story. What it means for the broader economy. The other rest of that we've got here as well. Steve Thomas, an important question, what does Governor Bailey say to Chairman Powell. Governor Bailey is seeing economic weakness right now in a more pronounced way than Chairman Powell is. And Governor Bailey hasn't seen the year of a year peak in inflation. You've got him

forecasting something close to percent. You've got City saying it might be eighteen percent. Steve, isn't that the bigger difference right now? The Transatlantic divide is that the US may be able to take some very very small amount of comfort from this idea. We might have seen peak year other year inflation for Europe and the UK. Is it

still in their future? Well, again, this comes down to the fact that you remember the way we broke the back of inflation here was not just a monetary policy scenario. You know, the supply side revolution failed in terms of many things, but by breaking the back of labor through firing air traffic controllers, we did a lot in terms of changing the labor market dynamic, which was our problem back then. So again you have to push the blame

back just not on central bankers. Central bankers have to push blame back on politicians and say you have to correct what you've done from a policy standpoint that has put us into this position, and it is your responsibility now to take the steps that are necessary. You can't expect central banks to solve all of the world's problems. Of missoua, Steve, thank you, sir. The character of surveillance is simply we want to talk to the best people we can find, and we're honored when they come on

on short notice. He interrupts this morning with Standard Charter Bank, their global head of G ten FX research, Stephen Englander joins us on your foreign exchange space. Steve, let me cut to the chase. What is the character the nature of this historic bout of euro weakness. Well, I agree that it's largely the natural gas story. I mean, you've seemed in recent days and recent weeks move pretty much together with the euro. Uh, there's a broader global story

that the market is panicking about. What that your power will say at Jackson Bull and so you know euro has two strikes against it and which is why it went through parody so quickly. Stave is d e CP got a roll supply head Um, you know, like in a Greek tragedy, there's just not that much that they can do. There's destin me that's approaching. Um. You know, the economy is weak. You know when we talk about supply chain disruptions, we're not getting our exercise bikes. When

they talk about it, they're not able to heat their homes. Um, that's really weighing on sentiments in your own The ECB doesn't have a tool to address it. The UK inflation numbers last week kind of you know, I think lead people in the market to say, why is Europe different and what can ECB do about it and and the market. Then what you see the way Sterling is trading and Euro is trading, markets really punishing currencies that belong to central banks that have an inflation problem but are really

ambivalent about how they're going to approach it. Steve, how do you think they should approach it? What's the optimal way to approach the situation the UK is in at the moment, the situation the CP is in, it's a it's a very tough situation. I think that when so much as supply shocks, you you know, if you're a central bank, you want to try and smoothe your response. Um the you know, when you don't know what the duration of the supply shock is going to be, you're

really working in the dark. So I think they'll probably hype less than they should. Next year, if you know, they come out of the winter and the energy situation is more clear, they'll probably hype faster and that could actually give the Euros some some legs in three. But this year I think it's moving very cautiously. Step. When you were talking about how supply chain disruptions have caused the people in the U S to worry about when they get their exercise equipment, but in your up but

worried about how to heat your homes. At what point does the US start to experience something more similar to the European angst? And this goes to this idea of divergence. How far the US economy can diverge from the European fate. Well, in so far as it's related to a particular commodity as cnatural gas, that divergence can extend for a long time. Um, we might have to pay more for our energy, but we're going to have it. Um. I think the European situation.

If it's a very cold winter and if the accommodation to increase supply uh doesn't occur, it could happen. You know, it could be an extended divergence. It's not our baseline that it certainly is a risk. If there is an extet of divergence, what does that mean for how disruptive dollar strength could become if it could escalate beyond where people are currently expecting. Well, you know you're seeing different currencies react differently, like you know, ausy week last week.

You know they've done worthy like everybody else, not so terribly. Um, they don't have that kind of exposure. You have the end that's done reasonably well. Again, you know, they're they're benefiting from oil prices going down, you know the natural gas situation. Isn't this dire for them? I think it's horses for courses. And then you have a set of currencies like you know, Mexico, Brazil, some of the em currencies where interest rates are high. So there's a buffer

against Fed hawkishness. So I don't think, you know, I think if the Fed is hawkish, it's going to be a broad dollar move. We think it's gonna be limited. Um. But you know, I think they are different, Um. You know, circles of currencies that will respond differently depending on their vulnerabilities and in some cases their strengths. Steve, if you had to take about on the next three percent on your dollar higher or lower, week is stronger, what would

you place it? I think the risk is to the downside. Um. But if you're asking me that question in January and probably say to the upside state. Also to catch up, Stephen standed shot at on the fracture of international relations in Europe and the unspoken Tina Fordham joins us right now found in Geopolitical Strategist at Fordham Global uh Foresight. I looked tein at where we are in the bombing in Moscow and all that, and there seems to be an unraveling in our world. It is the parabola of

energy prices. In your world, it's something like Ms. Maloney in Italy with not fascist but certainly very austere tendencies like what we see in Hungary. How unsettled is Europe

given the energy price overlay. Well, Tom, you've highlighted some of the themes that are to woven really in the in the global political risk outlook, where those high energy prices you mentioned, of course are being driven by the continuation of the Russian invasion of Ukraine, which shows no sign of abating, plus the longstanding Kremlin policy of intervening in in European politics. It's not illegal first of all for European political parties to actually take funding from from

other countries and um. Furthermore, this is long documented. Orban's victor Orban's connection to the Kremlin. Matteo Salvini, who's on the record today from the Lega Nord party in Italy saying that perhaps sanctions against Russia aren't working. So while policymakers and markets are you know, rightly focused on the kind of harrowing inflation outlook UM, which is taking up the reaction function and the attention. These these cracks, UM

are are really concerning. And the September elections in Italy are going to put a prime minister in office who um is uncomfortably close to fascist tendencies and with you know, connections to Russia. I mean, the shock of the pricing is so tangible. There's got to be my reading of history here and maybe onto whatever, you can pick your point of gloom. But the fact is this pricing leads to international relation and political adjustment. What would you suggest

that adjustment will be. Well, at the first level, it's going to lead to enormous household distress. And I see that through the lens of what's happening here in the UK with the leadership contest for the for the Tory Party and the talk about the energy price cap. You we're talking about households seeing a quintuckling in their energy bills. A normal household ping you know, over a thousand pounds a month for electricity. UM, it's it's a shock that

is not going to be able to be absorbed. So first of all, it's going to I think there's gonna be mass non payment um. And if you look at the dynamics of the tour leadership contest, it's all about getting those hundred and sixty thousand Conservative Party voters. It's a different platform. Um. So this government is going to be reactive. By contrast, Macron and France has been more proactive, saying it's basically the patriotic duty to kind of deal with it, um. And we have to stay strong in

the in the face of Russia. I think that Europe's resolve when it comes to supporting Ukraine will continue. Um. But there's going to be a lot of pain. This is going to hurt. And what you asked with the kind of policy response is going to be people look at the pandemic and they're going to expect government support. How we get there is very hard to say, um. But the public won't be able to absorb price increases

of these proportions. Tina, you went where I wanted to go, which is you said that the resolve will remain strong to support Ukraine to battle Russia and that the European people will continue with that message. When does that fray, especially as power costs rise and there is an increasing chorus of people saying perhaps some of the sanctions and some of the measures taken against Russia or as penalizing to the Western nations as anyone else. Well, I mean

it's always a question right of what's the alternative. And there's no going back to Russia as an energy supplier. Um, those days are over and the substitution of supply is already happening. Um. We are, however, looking at a very difficult winter here, one that people aren't used to. You know, in the old days, at least you had a fireplace and you can shop firewood. Um. Now it's central heating, which means people are going to have to turn it off.

So um, it's going to be incredibly difficult. But what you do see in Europe is an increasing sense that Ukraine has to win this conflict. Um. And uh, there isn't going to be a turning back from that. But I guess what I'm trying to say is that maintaining that position of support and the sacrifice that it's going to entail for households means you have to accelerate the green transition. You've got to keep those nuclear power plants going, which is a huge turnaround for German policy. And that's

happening rather quickly. Um. Not quickly enough to alleviate paying this this winter, um, but I think quickly enough. And and again we can't go back to Russia as a as a dependence upon Russia as an energy supplier. It's not a dependable source. These are huge, huge changes we need to try and adapt to. Tinaford Affordham Global Force sign Lisa Browwinson, Tom Keane with Mr Rubinstein now and a guy David John Doer. Intel was three thousand employees

when he joined. It's now well over a hundred thousand, even with the challenges that they have. And what I find so interesting David Rubenstein is this is a guy that's lived the boom of the young Turks of Silicon Valley and now they have to make a generational shift. What did he say about the challenges of a generational

shift in our tech wonders? Well, he did uh incredible things in the Internet era, and he was an early backer of Google and an early backer of Amazon, and a result of that he has been able to make recently the largest gift in Stanford's history, one point one billion dollars to create a sustainability school. And that is the result of his really smart investment decisions during the Internet era. Now he's focused on climate change, and that's

just in soul investment focus as well. He's giving a lot of money for philanthropically there, but also he's now making investments in all kinds of UH companies that are likely to have some impact on climate change. What is he's saying about the people that literally he birthed. I'm absolutely fascinated the shifted Amazon, the shifts at Google, and on and on. How did he address this generational challenge of people who think they're different than Colgate palmal or

John dear Well. Clearly, people in Silicon Valley who get money u from firms like Kleiner Perkins John Doer's firm obviously have large egos and think that they're going to change the world. In some cases they do, in some cases they don't. Um he is unusual in that he really really spends enormous amount of time trying to figure out how he can help these companies. He doesn't just give them money, but he's willing to work around the

clock to make sure these companies succeed. And that's what he did with Amazon and Google and had a big impact on them. Now he's doing the same in the climate change era. And I would say that he was motivated to do us in part because when his daughter, one of his two daughters, watched Inconvenient Truth about the climate change problem. His daughter said to him, you, your generation screwed up this country and screwed up the world. What are you gonna do about fixing it? And so

it motivated him to actually do something about it. And now that's what he's really dedicating the rest of his life to do. Over the past year, we've seen a little bit of a reversal in some of the efforts towards the greenification of the energy supply. We've seen a reversion back to coal fossil fuels in the wake of some of the shortages and the and the Russian invasion

of Ukraine. Did he talk at all about the willingness to invest even more at a time when there is more of a question about the importance of fossil fuels and not discounting them. Well, his view is we don't really have a choice right now on the planet is not going to be able to be survivable if we don't make changes in the way we generate energy for people on the face of the earth. So he doesn't

really think there's a choice. He does recognize that because of the war in Ukraine, many will have uh probably said, well, climate change is something we can worry about in the future, and we don't have to worry about conversion to renewable right now. But that's not his view. He thinks it's more urgent than ever, and he has a very elaborate plan how we can convert our efforts now and using energy from carbon to renewable sources. And he's quite passionate

about it. And that comes to in the interview the passion versus the profits, and that has been something that a lot of people have been trying to discern, especially with the E s G focus that hasn't always delivered in terms of the returns. How does he sort of parse this out? I understand the ideological drive that he has towards some of these causes, but where does he look for the returns to come? Well, remember, he's looking the back small companies that are going to grow into

the Amazons and Googles in the climate change area. So when he backs the company, it's going to take four or five six years or so before it might be a parent whether it's going to work or not. But he thinks we really don't have a choice because if we keep doing what we're doing, ultimately the planet won't be survived b bibble. And so he's very passionate about it,

more passionate than he probably was about the Internet. David Rubinstein in the day to day grind of David Rubenstein over the years, why doesn't Europe have a John Door? Why doesn't Asia have a John Door? Of course the backdrop here is a tobacco soft bank. But why is it just about America that we have a John Door? Well, clearly America is more entrepreneurial, I think, than Asia, and

more entrepreneur than Europe. We have a much more bigger venture capital world than either Europe or Asia, and I think John Dor is the personification of of what our venture capital world can do. It has a very talented people who have been trained as engineers as as John Dor was, but now are committed to doing other things. And you know, John dor is probably the best known of the venture capitalist in the United States right now

because of his success over the years. But there are many other people like him, and you're correct in pointing out there aren't similar people. Are not very many of them in Europe or in China. David think is so much congratulations, So this important interview tonight com PM David Rubinstein with Mr Dori Planner Perk. It's really looking forward to that. 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